Standex International Corporation — FY2019 Form 10-K
Period: Fiscal year ended June 30, 2019. The filing also provides unaudited fourth-quarter results. Amounts below are U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
Standex is a diversified manufacturer operating through five reporting segments: Engraving, Electronics, Engineering Technologies, Hydraulics, and Food Service Equipment. Its growth strategy combines organic initiatives, acquisitions, operational improvements, and shareholder returns.
During FY2019, the company acquired Tenibac-Graphion, Agile Magnetics, and GS Engineering. It also completed the sale of its Cooking Solutions Group, which is classified as discontinued operations. International operations generated 34% of continuing-operations sales, down from 36% in FY2018.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Continuing-operations sales | $791.6 | $770.5 |
| Gross profit / margin | $268.1 / 33.9% | $269.6 / 35.0% |
| Operating income / margin | $78.1 / 9.9% | $80.0 / 10.4% |
| Income from continuing operations | $47.2 | $31.3 |
| Net income, including discontinued operations | $67.9 | $36.6 |
| Diluted EPS | $5.38 | $2.86 |
| Cash from continuing operating activities | $73.2 | $60.4 |
| Capital expenditures | $34.4 | $25.3 |
| Cash / long-term debt / net debt at year-end | $93.1 / $197.6 / $104.5 | $109.6 / $193.8 / $84.2 |
| Current assets / current liabilities | $333.9 / $141.6 | $384.0 / $161.3 |
| Backlog realizable within one year | $205.2 | $204.7 |
FY2019 sales grew 2.7%; acquisitions contributed $29.1 million, organic growth $4.0 million, and foreign exchange reduced sales by $12.0 million. Net income included $20.7 million from discontinued operations, including a $20.5 million pretax sale gain less $4.4 million of transaction fees. The effective tax rate on continuing operations was 28.1%, versus 55.4% in FY2018, which included significant tax-reform and repatriation charges.
Fourth-quarter FY2019 sales were $209.2 million, gross profit $70.1 million, net income $12.4 million, and diluted EPS $0.99. In fourth-quarter FY2018, these were $203.5 million, $74.5 million, $12.6 million, and $0.99, respectively.
Material changes versus the prior comparable period
- Operating income declined 2.4% despite sales growth, and gross margin fell 1.1 percentage points. Management cited material and wage inflation, mix, manufacturing inefficiencies, acquisition purchase accounting, site performance, and an asset impairment charge.
- Segment results were mixed: Engineering Technologies sales rose 16.0% and operating income 71.7%; Hydraulics sales rose 12.0% and operating income 20.2%. Engraving operating income fell 19.0%, Electronics operating income fell 9.4%, and Food Service Equipment sales and operating income declined 6.8% and 19.0%, respectively.
- Operating cash flow increased $12.7 million, while acquisition spending rose substantially to $127.9 million. The company repurchased $33.4 million of stock, versus $2.7 million in FY2018, and paid $9.8 million in dividends.
- Net debt increased $20.3 million to $104.5 million. The company reported $198.8 million drawn on its revolving facility and $253.4 million of borrowing availability under the facility at year-end.
Outlook, risks, contingencies, and unusual items
- No consolidated FY2020 revenue or earnings guidance is provided. Management expects gross margins to improve in FY2020 as cost reductions take effect and certain one-time items do not recur. Planned FY2020 capital spending is $33–$34 million.
- Segment outlooks are uneven: Engraving expects growth and approximately $2.7 million of annualized savings from restructuring by the end of FY2020 Q2; Electronics anticipates a first-half sales decline followed by modest recovery; Engineering Technologies anticipates FY2020 growth but a first-quarter decline from project timing; Food Service Equipment expects lower Refrigeration sales in the first half; Hydraulics expects positive end-market demand.
- A June 2019 fire destroyed a leased warehouse and caused approximately $7 million of finished-goods damage and $1 million of equipment damage. The company recorded an insurance recovery asset, net of a $0.5 million deductible, and expects to pursue recovery for business interruption.
- Key risks include economic and end-market cyclicality, tariffs and trade conflicts, raw-material and wage inflation, competitive pricing, acquisition integration and goodwill impairment, foreign exchange and repatriation restrictions, pension funding, cybersecurity and privacy regulation, and legal or environmental claims. Management said existing legal matters were not expected to materially affect results; it also reported substantial compliance with environmental requirements.
- The credit facility matures in December 2023. Year-end covenant ratios were 7.73x interest coverage and 1.28x leverage, versus minimum coverage of 2.75x and maximum leverage of 3.5x. The company had $10.6 million of non-current uncertain-tax-position liabilities whose payment timing could not be reasonably estimated.
- The company adopted ASC 606 using the modified retrospective method; reported FY2019 sales were $8.6 million higher than they would have been without adoption. Adoption of the new lease standard was expected to add approximately $40–$45 million each to lease liabilities and right-of-use assets beginning July 1, 2019, with no expected material income-statement or cash-flow impact.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters included revenue recognized over time and goodwill impairment estimates. Controls over the three FY2019 acquisitions were excluded from management’s internal-control assessment.
Most important facts for investors to verify
- Whether margin recovery and the expected Engraving restructuring savings materialize, and how inflation and tariffs affect costs.
- Whether Food Service Equipment recovers after weak Refrigeration demand and the warehouse fire, including the timing and amount of insurance proceeds.
- Whether Electronics customer inventory corrections and automotive demand cause the forecast first-half decline, and whether recovery follows.
- Acquisition integration, final purchase-price allocations, contingent payments, and returns on the $127.9 million of FY2019 acquisition spending.
- Cash availability and debt capacity after acquisitions, repurchases, and the Cooking Solutions Group sale; also verify the impact of repatriating foreign cash and pension contributions.
- The effect of ASC 606 on comparability and the actual balance-sheet impact of lease-standard adoption.