Standex International Corporation — Form 10-Q
Reporting period: Second quarter and first six months of fiscal 2016, ended December 31, 2015. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. Standex operates five groups: Food Service Equipment, Engraving, Engineering Technologies, Electronics Products, and Hydraulics Products.
Financial performance
| Metric | Three months ended Dec. 31, 2015 | Six months ended Dec. 31, 2015 | Prior-year comparison |
|---|---|---|---|
| Net sales | $181.9 | $380.3 | Down 3.9% and 2.8%, respectively |
| Gross margin | 32.0% | 33.3% | Up from 31.1% and 31.9% |
| Operating income | $16.1 | $39.2 | Up 1.3% and 5.6% |
| Continuing-operations income | $12.4 | $28.6 | Up from $11.3 and $26.2 |
| Net income | $12.4 | $28.4 | Up from $11.2 and $25.7 |
| Diluted EPS | $0.96 total; $0.97 continuing operations | $2.22 total; $2.24 continuing operations | Prior-year total: $0.87 and $2.00 |
Sales declined because of unfavorable currency effects and lower organic sales, partly offset by acquisitions. Gross-margin improvement was attributed mainly to Engraving’s higher-margin sales mix. Operating income also benefited from cost actions; restructuring costs were $1.5 million for the quarter and $3.0 million year to date. The effective tax rate on continuing operations fell to 20.3% for the quarter and 25.3% year to date, from 26.2% and 27.5%, respectively, reflecting international income mix and the reinstated U.S. R&D tax credit.
Segment trends
- Food Service Equipment: Quarterly sales fell 7.7%; operating income fell 3.0%. Lower sales to major chains and dollar stores, product rationalization, and currency weighed on results; productivity and cost controls partly offset the decline.
- Engraving: Quarterly sales rose 19.9% and operating income 25.2%, with growth across Mold-Tech, roll/plate/machinery, and Innovent businesses. Currency was a material headwind.
- Engineering Technologies: Quarterly sales fell 22.2% and operating income 35.0%, principally due to a sharp contraction in energy markets and timing of space programs. Aviation demand increased.
- Electronics Products: Quarterly sales rose 1.9%, including Northlake acquisition sales; operating income fell 4.5%, partly due to $0.4 million of Northlake purchase-accounting expense.
- Hydraulics Products: Quarterly sales rose 2.7% and operating income 4.6%, supported by North American trailer and dump-truck demand.
Cash flow, liquidity, and debt
For the six months, cash from continuing operations was $30.9 million, versus $11.8 million a year earlier; management cited improved working-capital cash generation and higher income. Capital expenditures were $8.7 million and Northlake acquisition spending was $13.5 million. Cash increased to $104.2 million from $96.1 million at June 30, 2015. Of period-end cash, $99.0 million was held by foreign subsidiaries.
Long-term debt was $108.9 million net of issuance costs; funded debt was $110.0 million. Net debt was $4.7 million after cash. The $400 million revolving facility expires in December 2019, with $247.2 million available at period end and $7.7 million of letters of credit outstanding. The company reported covenant ratios of 27.94x interest coverage and 1.13x leverage, against minimum and maximum thresholds of 3.0x and 3.5x. The effective borrowing rate was 1.64%; swaps fixed the rate on $60 million of debt at a weighted average 1.65% base rate.
Outlook, risks, and unusual items
- Management expected foreign-exchange pressure to lessen in the second half, but anticipated continued softness in oil and gas markets; that exposure represented about 1% of first-half sales. The filing gives no consolidated revenue or earnings guidance.
- Management forecast fiscal 2016 capital expenditures of $26–$28 million and depreciation and amortization of $16–$17 million and $2.5–$3.5 million, respectively. It expected fiscal 2016 restructuring expense of $3.7 million, of which $3.0 million had been recorded by December 31.
- Engineering Technologies management expected to exit fiscal Q4 at a mid-teen operating margin, citing aviation sales and easier year-over-year energy comparisons. Electronics management expected new sensor programs to support growth over the next 12 months; Hydraulics cited higher orders and backlog. These are management expectations, not guarantees.
- Northlake was acquired October 1 for $13.5 million net of acquired cash. Its purchase-price allocation, including $7.8 million of goodwill, remained preliminary.
- Risks include weak end markets, foreign exchange, commodity and component costs, competition, execution of restructuring and acquisition synergies, pension funding, and possible limits or tax costs on repatriating foreign cash. The company noted its fiscal third quarter is typically its lowest-activity period.
- Discontinued operations included a $0.2 million loss related to settlement of the Air Distribution Products buyer note. A remaining facility lease obligation was $1.0 million, with $0.7 million accrued; management did not expect further charges.
Important facts for investors to verify
- Whether organic demand stabilizes, especially in Food Service and Engineering Technologies, and whether Engraving’s growth and margins persist.
- Whether announced cost reductions, facility consolidation, and the Northlake acquisition deliver expected savings and returns.
- Cash availability and potential tax consequences: $99.0 million of cash was held by foreign subsidiaries and the company intended to reinvest foreign earnings abroad.
- Progress against restructuring estimates, acquisition accounting, covenant headroom, and pension funding needs.
- The sustainability of lower tax rates, which benefited from geographic earnings mix and the R&D credit.