Standex International Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2021, three months ended September 30, 2020. This is the quarter identified as 2020 Q1 in the request. Results are unaudited; comparisons are with the quarter ended September 30, 2019 unless otherwise noted. Standex is a diversified industrial manufacturer with five reportable segments: Electronics, Engraving, Scientific, Engineering Technologies, and Specialty Solutions.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales from continuing operations | $151.3 million | $156.0 million | Down 3.0% |
| Gross profit | $54.7 million | $58.2 million | Down 6.0% |
| Gross margin | 36.2% | 37.3% | Down 1.1 percentage points |
| Income from operations | $14.4 million | $15.9 million | Down 9.4% |
| Continuing-operations income | $10.3 million | $10.6 million | Down 2.1% |
| Net income, including discontinued operations | $9.7 million | $12.4 million | Down 21.9% |
| Diluted EPS | $0.79 | $1.00 | Down $0.21 |
| Continuing-operations effective tax rate | 20.7% | 27.8% | Down 7.1 percentage points |
Management attributed the lower gross margin to Renco purchase-accounting amortization and higher Electronics material costs. Operating income also reflected COVID-19-related volume declines and material inflation, partly offset by cost reductions and productivity improvements. Lower interest expense and a lower tax rate helped limit the decline in continuing-operations income.
Cash, liquidity and debt
- Cash and cash equivalents were $93.7 million at September 30, 2020, down from $118.8 million at June 30, 2020. Cash included $75.7 million held by foreign subsidiaries.
- Operating cash flow was $11.4 million including discontinued operations; continuing-operations operating cash flow was $9.2 million, compared with $9.4 million a year earlier. Capital expenditures were $4.8 million.
- Investing activities used $32.0 million, primarily reflecting $27.4 million of acquisition spending for Renco. Financing activities used $7.1 million, including $5.1 million of share repurchases and $2.7 million of dividends.
- Long-term debt, net of issuance costs, was $199.9 million; reported funded debt was $200.7 million, including $0.7 million of debt assumed with Renco. Net debt was $106.2 million, versus $80.3 million at June 30, 2020.
- The $500 million revolving facility had $206.4 million of additional borrowing capacity. The company reported a 1.45:1 leverage ratio against a 3.5:1 maximum and a 9.98:1 interest coverage ratio against a 2.75:1 minimum; it was compliant with its covenants.
Material changes and segment results
Organic sales fell $12.8 million (8.2%); Renco contributed $5.9 million and foreign exchange added $2.2 million. Renco, acquired during the quarter for $30.4 million including contingent consideration, is reported in Electronics. Its purchase-price allocation remains preliminary.
| Segment | Sales change | Operating income change | Key context |
|---|---|---|---|
| Electronics | Up 18.6% | Up 5.4% | Growth included Renco; material inflation and purchase-accounting costs weighed on margin. |
| Engraving | Down 5.3% | Down 10.2% | Lower organic sales mainly reflected timing of automotive projects. |
| Scientific | Up 13.0% | Up 10.0% | Growth in retail pharmacy, clinical laboratory and academic markets. |
| Engineering Technologies | Down 28.4% | Down 86.0% | Aviation and engine-part demand weakened; defense and unmanned space sales partly offset declines. |
| Specialty Solutions | Down 19.7% | Down 30.8% | COVID-related weakness affected beverage, food service and OEM equipment markets. |
Backlog realizable within one year was $151.9 million, down 12.3% from $173.1 million a year earlier, with the largest weakness in Engineering Technologies. The former Refrigerated Solutions Group was classified as discontinued operations following its divestiture. It had no sales in the current quarter and recorded a $0.6 million net loss; the comparable prior-year quarter included $40.5 million of sales and $1.9 million of net income.
Outlook, risks and unusual items
- Management gave no consolidated full-year revenue or earnings guidance in the provided filing text. Segment outlook was mixed: Electronics revenue expected slightly higher sequentially in Q2 and to improve in the second half; Scientific expected sequential growth; Engineering Technologies expected similar sequential revenue; Specialty Solutions expected a slight sequential decline; and Engraving anticipated improvement from new automotive launches and cost actions.
- Fiscal 2021 capital spending was expected to be $25–$28 million. The company expected approximately $1.7 million of additional restructuring expense during the remainder of the fiscal year; 2021 restructuring initiatives were expected to conclude by 2022.
- Management cited pandemic uncertainty, customer demand and backlog volatility, supply-chain and raw-material cost exposure, foreign exchange, and risks in aviation, food service, industrial and other end markets. It said available liquidity and financing were sufficient for its plans. The company deferred certain U.S. pension contributions under the CARES Act.
- Interest-rate swaps fixed the rate on $200 million of borrowings at a weighted average 1.27% base rate; the reported effective borrowing rate was 2.57%. The filing states a 25-basis-point rate increase would not change annual interest expense while the debt is hedged.
- Management did not believe existing legal matters, including environmental claims, would materially affect financial position, results or cash flow. The filing also describes contingent acquisition payments, including a recorded $3.0 million Renco liability and potential future payments tied to performance targets.
- Other notable items included a $9.5 million favorable foreign-currency translation adjustment in other comprehensive income and a lower tax rate influenced by tax-planning items, foreign tax credits, a loss carryback benefit and earnings mix. Management said COVID-19 effects remain uncertain.
Most important facts for investors to verify
- Whether organic demand, especially in aviation, Specialty Solutions and European Electronics markets, stabilizes or improves as management anticipated.
- Renco’s subsequent operating contribution, integration progress, and final purchase-price allocation and contingent consideration.
- Cash conversion, working-capital requirements, and the planned use of foreign-held cash and available revolving-credit capacity.
- Whether restructuring and productivity actions offset lower volumes and material-cost inflation without impairing growth or margins.
- Progress on backlog conversion, pension contributions, and achievement of segment outlook and capital-spending plans.