Standex International Corporation — Form 10-Q Summary
Period clarification: The filing covers the three and nine months ended March 31, 2018 (fiscal 2018 third quarter), not 2017 Q3 as stated in the request. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and reporting period
Standex is a diversified manufacturer and services provider with five reportable segments: Food Service Equipment, Engraving, Engineering Technologies, Electronics, and Hydraulics. The unaudited filing compares fiscal 2018 results with the periods ended March 31, 2017. Management cautions that interim results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $216.7 vs. $184.7; up 17.3% | $640.9 vs. $538.2; up 19.1% |
| Gross profit margin | 34.0% vs. 33.2% | 34.2% vs. 33.4% |
| Income from operations | $19.3 vs. $11.4; up 69.0% | $57.7 vs. $44.4; up 29.7% |
| Net income | $12.8 vs. $7.7 | $24.0 vs. $32.4 |
| Diluted EPS | $1.00 vs. $0.60 | $1.88 vs. $2.54 |
Quarterly sales growth reflected organic growth of 5.7%, acquisitions of 8.5%, and favorable currency effects of 3.1%. Year to date, growth comprised organic growth of 6.7%, acquisitions of 10.4%, and favorable currency effects of 2.0%. Gross margin improved in both comparisons, primarily due to sales mix. Quarterly operating income benefited from higher volume, improved margins, acquisition performance, and lower pre-acquisition costs; increased selling and administrative expenses and restructuring costs were offsets.
The nine-month net income decline, despite higher sales and operating income, was principally associated with $14.6 million of net discrete tax-reform charges. The nine-month effective tax rate was 54.4%, compared with 24.1%; the quarterly rate was 23.4%, compared with 27.3%. Interest expense increased to $2.3 million for the quarter and $5.8 million year to date, reflecting higher acquisition-related borrowings and higher interest rates.
For the quarter, segment sales and operating income were: Food Service Equipment $95.5 and $6.8; Engraving $33.7 and $7.0; Engineering Technologies $23.4 and $1.1; Electronics $51.2 and $11.2; and Hydraulics $12.9 and $1.7. Electronics and Engraving delivered strong growth; Engineering Technologies operating income weakened materially, and Food Service Equipment operating income declined.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $28.7, down from $31.0. Working-capital changes used $29.5; management also reported $59.2 generated from income-statement activities and $25.4 used to fund working-capital increases.
- Investing activities used $28.0, including $21.4 of capital expenditures and $10.4 for acquisitions, partly offset by asset-sale and life-insurance proceeds.
- Financing activities provided $1.9, including $9.7 of net borrowings, offset in part by $6.6 of dividends and share-related payments.
- Cash was $96.3 at March 31, 2018, including $87.3 held by foreign subsidiaries. Long-term debt was $204.7; net debt was $108.4. Debt increased from $192.0 at June 30, 2017.
- The $400 million revolving facility expires in December 2019. The company reported $186.1 of borrowing availability and $8.9 of standby letters of credit. Its interest coverage ratio was 11.97:1 and leverage ratio was 1.84:1, within stated covenant limits.
- Cash dividends were $0.18 per share for the quarter and $0.52 year to date. The company paid $5.5 after quarter-end into its U.S. defined benefit plan.
Material changes, outlook, and risks
- Acquisitions: Standex acquired Italy-based Piazza Rosa during fiscal 2018 Q1 for net cash consideration of approximately $10.1 million. It added $4.6 million of goodwill and is reported in Engraving. Standex Electronics Japan, acquired in fiscal 2017, continued to contribute substantially to Electronics growth.
- Restructuring: Nine-month restructuring charges were $6.3 million. Initiatives include Food Service Equipment realignment and headcount reductions, exiting an unprofitable Brazilian Engraving business, and Engineering Technologies footprint optimization. Management expects another $1.5–$2.0 million of charges in the remainder of fiscal 2018.
- Spending outlook: Fiscal 2018 capital expenditures were expected to be $28–$30 million. Management estimated fiscal 2018 depreciation of $21–$22 million and amortization of $8–$9 million.
- Segment commentary: Management anticipated continued Electronics growth based on backlog and quoting activity; continued Engraving growth across regions; and positive Hydraulics demand tied to construction, infrastructure, and market-share gains. Food Service Equipment was expected to improve in Q4 as seasonal momentum builds. Engineering Technologies customer delays were expected to persist in Q4, with program ramp-ups anticipated from fiscal 2019 Q1.
- Key risks: Engineering Technologies faced customer timing delays, lower energy demand, legacy aviation pricing pressure, and unfavorable mix. Rising material costs and proposed tariffs on certain China-manufactured products could pressure Hydraulics earnings. Broader risks include commodity prices, foreign exchange, economic and end-market conditions, acquisition integration and synergy delivery, restructuring savings, pension funding, and credit-facility covenant compliance.
- Tax and accounting items: Tax reform produced provisional estimates and significant year-to-date discrete tax charges; the company said some calculations and guidance remained incomplete. It early adopted ASU 2018-02 and reclassified $17.2 million of stranded tax effects from accumulated other comprehensive income to retained earnings. The company expected revenue-standard adoption on July 1, 2018; identified potential changes to Food Service Equipment rebates and certain Engineering Technologies contracts, but had not finalized the impact. It also expected lease-standard adoption to have a material balance-sheet impact, not yet quantified.
- Management said existing legal matters were not expected to materially affect financial position, results, or cash flow. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether organic growth, acquisition contributions, and improved gross margins persist, particularly in Electronics and Engraving.
- Whether Engineering Technologies can recover margins and whether delayed customer programs ramp as forecast.
- Whether working-capital use moderates and operating cash flow converts reported earnings into cash.
- The final tax-reform impact, including any changes to the provisional estimates and the drivers of the elevated year-to-date tax rate.
- Restructuring execution, expected remaining charges, and whether savings improve Food Service Equipment and consolidated profitability.
- Debt, interest-rate exposure, and liquidity, including foreign-held cash, facility availability, and covenant headroom.
- The eventual financial effects of revenue and lease accounting changes and the contingent acquisition-related payments, which could reach $8.4 million if specified criteria are met.