Standex International Corporation (SXI)

FORM 10-K | Annual Report
STANDEX INTERNATIONAL CORP/DE/ (Form: 10-K, Received: 08/27/2019 16:37:27)

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT Pursuant to Section 13 or 15(d)

OF the Securities Exchange Act of 1934

 

For the fiscal year ended June 30, 2019

Commission File Number 001-07233

 

STANDEX INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its Charter)

 

Delaware

31-0596149

(State of incorporation)

(I.R.S. Employer Identification No.)

 

11 KEEWAYDIN DRIVE, Salem, New Hampshire

03079

(Address of principal executive offices)

(Zip Code)

 

(603) 893-9701

(Registrant’s telephone number, including area code)

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE

SECURITIES EXCHANGE ACT OF 1934:

 

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, Par Value $1.50 Per Share

SXI

New York Stock Exchange

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     YES [X]     NO [  ]

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES [  ]     NO [X]

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES [X]     NO [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES [X]     NO [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer X Accelerated filer       Non-accelerated filer __ Smaller Reporting Company __
      Emerging growth company __

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  __

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES]     NO [X]

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant at the close of business on December 31, 2018 was approximately $839,087,807. Registrant’s closing price as reported on the New York Stock Exchange for December 31, 2018 was $67.18 per share.

 

The number of shares of Registrant's Common Stock outstanding on August 13, 2019 was 12,454,640.

 

Documents incorporated by reference

 

Portions of the Proxy Statement for the Registrant’s 2019 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference into Part III of this report.

 

 

 

 

Forward Looking Statement

 

Statements contained in this Annual Report on Form 10-K that are not based on historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terminology such as “should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms or variations of those terms or the negative of those terms. There are many factors that affect the Company’s business and the results of its operations and that may cause the actual results of operations in future periods to differ materially from those currently expected or anticipated. These factors include, but are not limited to: materially adverse or unanticipated legal judgments, fines, penalties or settlements; conditions in the financial and banking markets, including fluctuations in exchange rates and the inability to repatriate foreign cash; domestic and international economic conditions, including the impact, length and degree of economic downturns on the customers and markets we serve and more specifically conditions in the food service equipment, automotive, construction, aerospace, energy, oil and gas, transportation, consumer appliance and general industrial markets; lower-cost competition; the relative mix of products which impact margins and operating efficiencies in certain of our businesses; the impact of higher raw material and component costs, particularly steel, petroleum based products and refrigeration components; an inability to realize the expected cost savings from restructuring activities including effective completion of plant consolidations, cost reduction efforts including procurement savings and productivity enhancements, capital management improvements, strategic capital expenditures, and the implementation of lean enterprise manufacturing techniques; the inability to achieve the savings expected from global sourcing of raw materials and diversification efforts in emerging markets; the impact on cost structure and on economic conditions as a result of actual and threatened increases in trade tariffs; the inability to attain expected benefits from strategic alliances or acquisitions and the inability to effectively consummate and integrate such acquisitions and achieve synergies envisioned by the Company; market acceptance of our products; our ability to design, introduce and sell new products and related product components; the ability to redesign certain of our products to continue meeting evolving regulatory requirements; the impact of delays initiated by our customers; and our ability to increase manufacturing production to meet demand; and potential changes to future pension funding requirements. In addition, any forward-looking statements represent management's estimates only as of the day made and should not be relied upon as representing management's estimates as of any subsequent date. While the Company may elect to update forward-looking statements at some point in the future, the Company and management specifically disclaim any obligation to do so, even if management's estimates change.

 

 

PART I

 

Item 1. Business

 

Standex International Corporation was incorporated in 1975 and is the successor of a corporation organized in 1955. As used in this report, the terms “we,” “us,” “our,” the “Company” and “Standex” mean Standex International Corporation and its subsidiaries. We have paid dividends each quarter since Standex became a public corporation in November 1964.

 

Unless otherwise noted, references to years are to fiscal years.

 

We are a leading manufacturer of a variety of products and services for diverse commercial and industrial markets. We have 9 operating business units, aggregated and organized for reporting purposes into five segments: Food Service Equipment, Engraving, Engineering Technologies, Electronics and Hydraulics. Overall management, strategic development and financial control are led by the executive staff at our corporate headquarters in Salem, New Hampshire.

 

Our long-term strategy is to enhance shareholder value by building larger, more profitable industrial platforms through a value creation system that assists management in meeting specific corporate and business unit financial and strategic performance goals in order to create, improve, and enhance shareholder value. The Standex Value Creation System is a standard methodology which provides consistent tools used throughout the company in order to achieve our organization’s goals. The Standex Value Creation System employs four components: Balanced Performance Plan, Standex Growth Disciplines, Standex Operational Excellence, and Standex Talent Management. The Balanced Performance Plan process aligns annual goals throughout the business and provides a standard reporting, management and review process. It is focused on setting and meeting annual and quarterly targets that support our short and long-term goals. The Standex Growth Disciplines use a set of tools and processes including market maps, growth laneways, and market tests to identify opportunities to expand the business organically and through acquisitions. Standex Operational Excellence employs a standard playbook and processes, including LEAN, to eliminate waste and improve profitability, cash flow and customer satisfaction. Finally, the Standex Talent Management process is an organizational development process that provides training, development, and succession planning for our employees throughout our worldwide organization. The Standex Value Creation System ties all disciplines in the organization together under a common umbrella by providing standard tools and processes to deliver our business objectives.

 

 

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It is our objective to grow larger and more profitable business units through both organic initiatives and acquisitions. We seek to identify and implement organic growth initiatives such as new product development, geographic expansion, introduction of products and technologies into new markets and applications, key accounts and strategic sales channel partners. Also, we have a long-term objective to create sizable business platforms by adding strategically aligned or “bolt on” acquisitions to strengthen the individual businesses, create both sales and cost synergies with our core business platforms, and accelerate their growth and margin improvement. We look to drive continuous improvement within our core business platforms, accelerate growth and improve margins. We have a particular focus on identifying and investing in opportunities that complement our products and will increase the global presence and capabilities of our businesses. From time to time, we have divested, and likely will continue to divest, businesses that we feel are not strategic or do not meet our growth and return expectations.

 

 

We create “Customer Intimacy” by collaborating with our customers in order to develop and deliver custom solutions or engineered components that solve problems for our customers or otherwise meet their needs. This relationship generally provides us with the ability to identify new sales opportunities with our customers, increase profit over time and provide operating margins that enhance shareholder returns. Further, we have made a priority of developing new sales channels and leveraging strategic customer relationships.

 

 

Standex Operational Excellence drives continuous improvement in the efficiency of our businesses. We recognize that our businesses are competing in a global economy that requires us to improve our competitive position. We have deployed a number of management competencies to drive improvements in the cost structure of our business units including operational excellence through lean enterprise, the use of low cost manufacturing facilities in countries such as Mexico and China, the consolidation of manufacturing facilities to achieve economies of scale and leveraging of fixed infrastructure costs, alternate sourcing to achieve procurement cost reductions, and capital improvements to increase productivity in both the shop floor and back-office.

 

 

The Company’s strong historical cash flow has been a cornerstone for funding our capital allocation strategy. We use cash flow generated from operations to fund the strategic growth programs described above, including acquisitions and investments for organic growth, maintenance of our capital assets and to return cash to our shareholders through the payment of dividends and stock buybacks.

 

Please visit our website at www.standex.com to learn more about us or to review our most recent SEC filings. The information on our website is for informational purposes only and is not incorporated into this Annual Report on Form 10-K.

 

Description of Segments

 

Engraving

 

Standex Engraving Mold-Tech creates textures and surface finishes on tooling to enhance the beauty and function of a wide range of consumer goods and automotive products. Standex Engraving Mold-Tech focuses on continuing to meet the needs of a changing marketplace by offering experienced craftsmanship while investing in new technologies. Our growth strategy is to continue to expand our capacity to service our customers both organically and inorganically across our global market and to innovate new technologies to enhance the functionalization of surface textures. We are one company operating in 27 countries using the same approach in service of our customers to guarantee harmony on global programs.

 

Markets and Applications

 

Standex Engraving Mold-Tech has become the global leader by offering a full range of services to Original Equipment Manufacturers (OEM) markets. From start to finish, these services include the design of bespoke textures, the verification of the texture on a prototype, engraving the mold, enhancing and polishing it, and then offering on-site try-out support with ongoing tool maintenance and texture repair capabilities.

 

Specialized Standex Engraving Mold-Tech companies and brands also include:

 

 

Piazza Rosa and World Client Services which offer laser engraving and tool finishing in Europe and Mexico.

 

Innovent, located in North America and Europe, is a specialized supplier of tools and machines used to produce diapers and products that contain absorbent materials between layers of non-woven fabric. This engineering and manufacturing company provides innovative solutions to hygiene, aerospace and various industrial clients around the world.

    Tenibac-Graphion provides additional texturizing and protyping capabilities in North America and China.
    GS Engineering provides us with cutting edge technology to rapidly produce molds for the creation of the soft-touch surfaces rapidly gaining favor with automotive manufacturers.

 

 

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Products and Services

 

Laser Engraving offers superior features previously unavailable on products, such as multiple gloss levels, the elimination of paint and optimized scratch performance, including the ability to create nano-finishes to enhance function.

 

Chemical Engraving produces carefully designed textures and finishes without seams or distortion. Exclusive to Standex Engraving Mold-Tech, Digital Transfer Technology guarantees consistency, pattern integrity and texture harmony around the world.

 

Architexture Design Studio uses proprietary technology with proven expertise to create and test custom textures. An original texture is designed to offer beauty and function, then a graphic hybrid of the texture is wrapped on digital 3D forms using Fit-to-Form technology. The texture is printed out using Rapid Texture Prototype technology to create a large-format skin that can be wrapped on a model for testing. This verification process is called Model-Tech® which is exclusive to Standex Engraving Mold-Tech.

 

Tool Enhancement services increase the wear resistance of the mold. Processes include advanced tool finishing services, anti-scratch, laser hardening in localized areas, Tribocoat® and Release Coat.

 

Tool Finishing and ongoing support allows customers to achieve outstanding quality while saving valuable time. These services include laser micro-welding, polishing and lapping, laser cladding to accommodate engineering changes, mold assembly, tool management, maintenance, texture repair and on-site support. Zero Parting Line is an exclusive Standex Engraving Mold-Tech process that eliminates the appearance of matched-insert parting lines.

 

Nickel Shell Molds are specifically designed to withstand extreme production conditions and extend the life of the mold. Slush molds, IMG molds, IMGL molds and IMC molds are also produced. Standex Engraving Mold-Tech is the leading nickel shell supplier in three global locations: Portugal, USA and China.

 

Customers

 

This division has become the global leader by offering a full range of services to Original Equipment Manufacturers (OEM), product designers, Tier One Suppliers and Toolmakers all around the world.

 

Electronics

 

Electronics is a global component and value-added solutions provider of custom magnetic sensing and power conversion components and assemblies. We are focused on designing, engineering, and manufacturing innovative electro-magnetic solutions, components and assemblies to solve our customers’ application needs with an absolute commitment to a customer first attitude through the Partner/Solve/Deliver® approach.

 

We continue to expand this business through organic growth with current customers, new customers, developing new products and technologies, geographic expansion, and inorganic growth through strategic acquisitions.

 

Components are manufactured in plants located in the USA, Mexico, the U.K., Germany, Japan, China and India.

 

Markets and Applications

 

The diverse products and vertically integrated manufacturing capabilities offered for engineered solutions are vital to an array of markets for providing safe and efficient power transformation, current monitoring, isolation, as well as sensors to monitor systems for function and safety. The end-user is typically an OEM industrial equipment manufacturer. End-user markets include, but are not limited to transportation, smart-grid, alternative energy, appliances, HVAC, security, military, medical, aerospace, test and measurement, power distribution, and general industrial applications.

 

Brands

 

Business unit names are Standex Electronics, Standex-Meder Electronics, Northlake Engineering, Agile Magnetics Standex Electronics Japan, and world renown reed switch product brands of MEDER, KENT, and KOFU switches.

 

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Products

 

The magnetic sensing products employ technologies such as reed switch, Hall Effect, inductive, conductive and other technologies. Sensing based solutions include a complete portfolio of reed relays, fluid level, proximity, motion, flow, HVAC condensate, hydraulic pressure differential as well as custom electronics sensors containing these technologies. The magnetics or power conversion products include custom wound transformers and inductors for low and high frequency applications, current sense technology, advanced planar transformer technology, value added assemblies, and mechanical packaging.

 

Customers

 

The business sells to a wide variety of automotive, industrial, medical, power and consumer goods customers globally through a direct sales force, regional sales managers, and field applications engineers, commissioned agents, representative groups, and distribution channels

 

Engineering Technologies

 

The Engineering Technologies Group, “ETG”, is a provider of innovative, turnkey metal-formed solutions for OEM and Tier-1 manufacturers on their advanced engineering designs.

 

ETG solutions seek to reduce input weight and material cost, lower part count, and reduce complexity for unique customer design challenges often involving exotic materials, large dimensions, large thicknesses or thin-wall construction, complex shapes and contours, and/or single-piece construction requirements. We devise and manufacture these cost-effective components and assemblies by combining a portfolio of best-in-class forming technologies, vertically integrated manufacturing processes, proven forming technical experience, and on-site technical and design assistance.

 

We plan to grow the Engineering Technologies Group by identifying new cutting-edge solutions for our metal-forming capabilities in existing and adjacent markets via customer and research collaboration. 

 

Our segment is comprised of two businesses including Spincraft, with locations in North Billerica, MA, New Berlin, WI, and Newcastle upon Tyne in the U.K, as well as Enginetics, located in Huber Heights, OH.

 

Markets and Applications

 

Engineering Technologies Group products serve applications within the space, aviation, defense, energy, medical, and general industrial markets.

 

 

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The space market we serve is comprised of components for space launch systems,

 

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Our aviation market includes a large portfolio of components and assemblies for OEM turbine engines,

 

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The defense market we serve covers a wide spectrum of metal applications,

 

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The energy market includes components and assemblies for new and MRO gas turbines, as well as solutions for oil & gas exploration operations.

 

Brands

 

This business unit’s names are Spincraft and Enginetics.

 

Products

 

 

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fuel tanks, tank domes, combustion liners, nozzles, and crew vehicle structures

 

-

seals, heat shields, and combustor elements, as well as aerostructures, including air intake lipskins

 

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missile nose cones and fabrications, large dimension exhaust systems, navy-nuclear propulsion, and others

 

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components and assemblies for new and MRO gas turbines, as well as solutions for oil & gas exploration operations

 

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MRI scanner vessel ends, shields, and centrifuge bowls

 

Customers

 

Engineering Technologies components are sold directly to large space, aviation, defense, energy and medical companies, or suppliers to those companies.

 

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Hydraulics

 

The Hydraulics segment is a leading global manufacturer of mobile hydraulic cylinders and complete hydraulic systems for the heavy off-road construction and refuse markets.

 

We are focused on custom designs and manufacturing of products that meet customer specific requirements or applications. Our in house custom design abilities and responsiveness to our customers’ needs drive our top line growth opportunities.  We leverage our full line of products for the dump truck and trailer market and deep expertise in their application to expand into new markets, targeting the most challenging custom applications.  Our flexible design capability, global supply chain and speed to market enable us to be successful in our expansion efforts.  Our team is dedicated to superior customer service through our technical engineering support and on-time delivery.  

 

We plan to grow Hydraulics by expanding our cylinder offering, completing the hydraulics system with wet kits and sensors.

 

We manufacture our cylinders in Hayesville, OH and Tianjin, China. 

 

Markets and Applications

 

Industries that use our products are construction equipment, refuse, airline support, mining, oil and gas, and other material handling applications.  Our products are utilized by OEMs on vehicles such as dump trucks, dump trailers, bottom dumps, garbage trucks (both recycling and rear loader), container roll off vehicles, hook lift trucks, liquid waste handlers, vacuum trucks, compactors, balers, airport catering vehicles, container handling equipment for airlines, lift trucks, yard tractors, and underground mining vehicles.  

 

Brands

 

Our products are marketed through the Custom Hoists® brand.  

 

Products

 

Products include single and double acting telescopic and piston rod hydraulic cylinders. Additionally, we manufacture specialty pneumatic cylinders and promote complete wet line kits, which are complete hydraulic systems that include a pump, valves, hoses and fittings. 

 

Customers

 

Our products are sold directly to OEMs, as well as distributors, dealers, and aftermarket repair outlets primarily in North America with some sales in South America and Asia.   

 

Food Service Equipment
 
Food Service Equipment is a provider of refrigeration, display merchandising and component pumps for the Commercial Food Service and Life Sciences markets.
 
Our products are used throughout the entire commercial food service process – from storage, to preparation, and to display. We focus on the challenges of enabling retail and food service establishments to provide food and beverages that are fresh and appealing while at the same time providing for food safety, and energy efficiency. In the scientific markets, our product portfolio is used to control the temperatures of critical health care products, medicines and laboratory samples.
 
In recent years, much of this segment (with the exception of Scientific) has experienced head winds and operational challenges—especially with regard to standard products. We have invested in order to improve margin performance in these standard products businesses. At the same time, we plan to invest in further growing our differentiated products businesses through new product development, geographic expansion and selective acquisitions.
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Food Service Locations
 
Food Service Equipment and Scientific products are manufactured in Hudson, WI; New Albany, MS; Summerville, SC; Belleville, WI; and Mountmellick, Ireland.

 

Markets and Applications

 

The commercial food service equipment that we design and manufacture is utilized in restaurants, convenience stores, quick-service restaurants, supermarkets, drug stores and institutions such as hotels, hospitals, and school cafeterias. The life science equipment that we design and manufacture is used in hospitals, pharmacies, clinical laboratories, reference laboratories, physicians’ offices and other clinical testing facilities.
 

Brands

 

NorLake®, Master-Bilt®, Lab Research products (LRP), American BioTech Supply (ABS), Cryosafe, CryoGuard, NorLake Scientific®, Federal and Procon®.

 

Products

 

 

refrigerated reach-in and under counter refrigerated cabinets, cases, display units, walk-in coolers and freezers;

 

cold storage equipment for use in the life sciences

 

merchandizing display cases for bakery, deli and confectionary products; and

 

pump systems used in beverage and industrial fluid handling applications.

 

Customers

 

Food Service Equipment products are sold to end-users, dealers, buying groups, consultants, government agencies and manufacturers.

 

Working Capital

 

Our primary source of working capital is the cash generated from continuing operations. No segments require any special working capital needs outside of the normal course of business.

 

Competition

 

Standex manufactures and markets products many of which have achieved a unique or leadership position in their market, however, we encounter competition in varying degrees in all product groups and for each product line. Competitors include domestic and foreign producers of the same and similar products. The principal methods of competition are product performance and technology, price, delivery schedule, quality of services, and other terms and conditions.

 

International Operations

 

We have international operations in all of our business segments. International operations are conducted at 69 locations, in Europe, Canada, China, Japan, India, Southeast Asia, Korea, Mexico, Brazil, and South Africa. See the Notes to Consolidated Financial Statements for international operations financial data. Our net sales from continuing international operations decreased from 36% in 2018 to 34% in 2019. International operations are subject to certain inherent risks in connection with the conduct of business in foreign countries including, exchange controls, price controls, limitations on participation in local enterprises, nationalizations, expropriation and other governmental action, restrictions of repatriation of earnings, and changes in currency exchange rates.

 

Research and Development

 

We develop and design new products to meet customer needs in order to offer enhanced products or to provide customized solutions for customers. Developing new and improved products, broadening the application of established products, and continuing efforts to improve our methods, processes, and equipment continues to drive our success. However, due to the nature of our manufacturing operations and the types of products manufactured, expenditures for research and development are not significant to any individual segment or in the aggregate. Research and development costs are quantified in the Notes to Consolidated Financial Statements. 

 

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Environmental Matters

 

Based on our knowledge and current known facts, we believe that we are presently in substantial compliance with all existing applicable environmental laws and regulations and do not anticipate (i) any instances of non-compliance that will have a material effect on our future capital expenditures, earnings or competitive position or (ii) any material capital expenditures for environmental control facilities.

 

Financial Information about Geographic Areas

 

Information regarding revenues from external customers attributed to the United States, all foreign countries and any individual foreign country, if material, is contained in the Notes to Consolidated Financial Statements,“Industry Segment Information.”

 

Number of Employees

 

As of June 30, 2019, we employed approximately 5,000 employees of which approximately 2,200 were in the United States.About 393 of our U.S. employees were represented by unions. Approximately 35% of our production workforce is situated in low-cost manufacturing regions such as Mexico and Asia.

 

Executive Officers of Standex

 

The executive officers of the Company as of June 30, 2019 were as follows:

 

Name

Age

Principal Occupation During the Past Five Years

     

David Dunbar

57

President and Chief Executive Officer of the Company since January 2014. President of the Valves and Controls global business unit of Pentair Ltd from 2009 through 2013.

     

Thomas D. DeByle

59

Vice President and Chief Financial Officer of the Company since March 2008.

     

Alan J. Glass

55

Vice President, Chief Legal Officer and Secretary of the Company since April 2016. Vice President, General Counsel and Secretary of CIRCOR International, Inc. from 2000 through 2016.

     

Sean Valashinas

48

Chief Accounting Officer and Assistant Treasurer of the Company since October 2007.

     

Paul Burns

46

Vice President of Strategy and Business Development since July 2015, Director of Corporate Development and Global Mergers & Acquisitions at General Motors from 2013 through 2015.

     
Annemarie Bell 55 Vice President of Human Resources since June 2019, Interim Vice President of Human Resources from October 2018 through June 2019; Vice President of Human Resources for four of Standex business units from October 2015 through October 2018, Director of Human Resources and Human Resources Business Partner at PerkinElmer from 2007 through 2015.

 

The executive officers are elected each year at the first meeting of the Board of Directors subsequent to the annual meeting of stockholders, to serve for one-year terms of office. There are no family relationships among any of the directors or executive officers of the Company.

 

Long-Lived Assets

 

Long-lived assets are described and discussed in the Notes to Consolidated Financial Statements under the caption “Long-Lived Assets.”

 

Available Information

 

Standex’s corporate headquarters are at 11 Keewaydin Drive, Salem, New Hampshire 03079, and our telephone number at that location is (603) 893-9701.

 

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The U.S. Securities and Exchange Commission (the “SEC”) maintains an internet website at www.sec.gov that contains our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements, and all amendments thereto. All reports that we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Information about the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Standex’s internet website address is www.standex.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements, and all amendments thereto, are available free of charge on our website as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. In addition, our code of business conduct, our code of ethics for senior financial management, our corporate governance guidelines, and the charters of each of the committees of our Board of Directors (which are not deemed filed by this reference), are available on our website and are available in print to any Standex shareholder, without charge, upon request in writing to “Chief Legal Officer, Standex International Corporation, 11 Keewaydin Drive, Salem, New Hampshire, 03079.”

 

The certifications of Standex’s Chief Executive Officer and Chief Financial Officer, as required by the rules adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, are filed as exhibits to this Form 10-K.

 

Item 1A. Risk Factors

 

An investment in the Company involves various risks, including those mentioned below and those that are discussed from time to time in our other periodic filings with the Securities and Exchange Commission. Investors should carefully consider these risks, along with the other information filed in this report, before making an investment decision regarding the Company. Any of these risks could have a material adverse effect on our financial condition, results of operations and/or value of an investment in the Company.

 

A deterioration in the domestic and international economic environment could adversely affect our operating results, cashflow and financial condition.

 

Recessionary economic conditions, with or without a tightening of credit, could adversely impact major markets served by our businesses, including cyclical markets such as automotive, aviation, energy and power, heavy construction vehicle, general industrial, consumer appliances and food service. An economic recession could adversely affect our business by:

 

 

reducing demand for our products and services, particularly in markets where demand for our products and services is cyclical;

 

causing delays or cancellations of orders for our products or services;

 

reducing capital spending by our customers;

 

increasing price competition in our markets;

 

increasing difficulty in collecting accounts receivable;

 

increasing the risk of excess or obsolete inventories;

 

increasing the risk of impairment to long-lived assets due to reduced use of manufacturing facilities;

 

increasing the risk of supply interruptions that would be disruptive to our manufacturing processes; and

 

reducing the availability of credit and spending power for our customers.

 

We rely on our credit facility to provide us with sufficient capital to operate our businesses and to fund acquisitions.

 

We rely on our revolving credit facility, in part along with operating cash flow, to provide us with sufficient capital to operate our businesses and to fund acquisitions. The availability of borrowings under our revolving credit facility is dependent upon our compliance with the covenants set forth in the facility, including the maintenance of certain financial ratios. Our ability to comply with these covenants is dependent upon our future performance, which is subject to economic conditions in our markets along with factors that are beyond our control. Violation of those covenants could result in our lenders restricting or terminating our borrowing ability under our credit facility, cause us to be liable for covenant waiver fees or other obligations, or trigger an event of default under the terms of our credit facility, which could result in acceleration of the debt under the facility and require prepayment of the debt before its due date. Even if new financing is available, in the event of a default under our current credit facility, the interest rate charged on any new borrowing could be substantially higher than under the current credit facility, thus adversely affecting our overall financial condition. If our lenders reduce or terminate our access to amounts under our credit facility, we may not have sufficient capital to fund our working capital needs and/or acquisitions or we may need to secure additional capital or financing to fund our working capital requirements or to repay outstanding debt under our credit facility or to fund acquisitions.

 

 

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Our credit facility contains covenants that restrict our activities.

 

Our revolving credit facility contains covenants that restrict our activities, including our ability to:

 

 

incur additional indebtedness;

 

make investments, including acquisitions;

 

create liens;

 

pay cash dividends to shareholders unless we are compliant with the financial covenants set forth in the credit facility; and

 

sell material assets.

 

Our global operations subject us to international business risks.

 

We operate in 69 locations outside of the United States in Europe, Canada, China, Japan, India, Singapore, Korea, Mexico, Brazil, Turkey, Malaysia, and South Africa. If we are unable to successfully manage the risks inherent to the operation and expansion of our global businesses, those risks could have a material adverse effect on our results of operations, cashflow or financial condition. These international business risks include:

 

 

fluctuations in currency exchange rates;

 

changes in government regulations;

 

restrictions on repatriation of earnings;

 

import and export controls;

 

political, social and economic instability;

 

potential adverse tax consequences;

 

difficulties in staffing and managing multi-national operations;

 

unexpected changes in zoning or other land-use requirements;

 

difficulties in our ability to enforce legal rights and remedies; and

 

changes in regulatory requirements.

 

Failure to achieve expected savings and synergies could adversely impact our operating profits and cash flows.

 

We focus on improving profitability through LEAN enterprise, low cost sourcing and manufacturing initiatives, improving working capital management, developing new and enhanced products, consolidating factories where appropriate, automating manufacturing processes, diversification efforts and completing acquisitions which deliver synergies to stimulate sales and growth. If we are unable to successfully execute these programs, such failure could adversely affect our operating profits and cash flows. In addition, actions we may take to consolidate manufacturing operations to achieve cost savings or adjust to market developments may result in restructuring charges that adversely affect our profits.

 

Violation of anti-bribery or similar laws by our employees, business partners or agents could result in fines, penalties, damage to our reputation or other adverse consequences.

 

We cannot assure that our internal controls, code of conduct and training of our employees will provide complete protection from reckless or criminal acts of our employees, business partners or agents that might violate United States or international laws relating to anti-bribery or similar topics. A violation of these laws could subject us to civil or criminal investigations that could result in substantial civil or criminal fines and penalties and which could damage our reputation.

 

We face significant competition in our markets and, if we are not able to respond to competition in our markets, our net sales, profits and cash flows could decline.

 

Our businesses operate in highly competitive markets. To compete effectively, we must retain long standing relationships with significant customers, offer attractive pricing, maintain product quality, meet customer delivery requirements, develop enhancements to products that offer performance features that are superior to our competitors and which maintain our brand recognition, continue to automate our manufacturing capabilities, continue to grow our business by establishing relationships with new customers, diversify into emerging markets and penetrate new markets. In addition, many of our businesses experience sales churn as customers seek lower cost suppliers. We attempt to offset this churn through our continual pursuit of new business opportunities. However, if we are unable to compete effectively or succeed in our pursuit of new business opportunities, our net sales, profitability and cash flows could decline. Pricing pressures resulting from competition may adversely affect our net sales and profitability.

 

9

 

 

If we are unable to successfully introduce new products and product enhancements, our future growth could be impaired.

 

Our ability to develop new products and innovations to satisfy customer needs or demands in the markets we serve can affect our competitive position and often requires significant investment of resources. Difficulties or delays in research, development or production of new products and services or failure to gain market acceptance of new products and technologies may significantly reduce future net sales and adversely affect our competitive position.

 

Increased prices or significant shortages of the commodities that we use in our businesses could result in lower net sales, profits and cash flows.

 

We purchase large quantities of steel, aluminum, refrigeration components, freight services, foam insulation and other metal commodities for the manufacture of our products. We also purchase significant quantities of relatively rare elements used in the manufacture of certain of our electronics products. Historically, prices for commodities and rare elements have fluctuated, and we are unable to enter into long term contracts or other arrangements to hedge the risk of price increases in many of these commodities. Significant price increases for these commodities and rare elements could adversely affect our operating profits if we cannot timely mitigate the price increases by successfully sourcing lower cost commodities or rare elements or by passing the increased costs on to customers. Shortages or other disruptions in the supply of these commodities or rare elements could delay sales or increase costs.

 

Current and threatened tariffs on components and finished goods from China and other countries could result in lower net sales, profits and cash flows and could impair the value of our investments in our Chinese operations.

 

As part of our low-cost country sourcing strategy, we (i) maintain manufacturing facilities in China and (ii) import certain components and finished goods from our own facilities and third-party suppliers in China. Many of the components and finished goods we import from China are subject to tariffs recently enacted by the United States government as well as additional proposed tariffs. While we attempt to pass on these additional costs to our customers, competitive factors (including competitors who import from other countries not subject to such tariffs) may limit our ability to sustain price increases and, as a result, may adversely impact our net sales, profits and cash flows. The maintenance of such tariffs over the long-term also could impair the value of our investments in our Chinese operations. In addition, the imposition of tariffs may influence the sourcing habits of certain end users of our products and services which, in turn, could have a direct impact on the requirements of our direct customers for our products and services. Such an impact could adversely affect our net sales, profits and cash flows.

 

An inability to identify or complete future acquisitions could adversely affect our future growth.

 

As part of our growth strategy, we intend to pursue acquisitions that provide opportunities for profitable growth for our businesses and enable us to leverage our competitive strengths. While we continue to evaluate potential acquisitions, we may not be able to identify and successfully negotiate suitable acquisitions, obtain financing for future acquisitions on satisfactory terms, obtain regulatory approval for certain acquisitions or otherwise complete acquisitions in the future. An inability to identify or complete future acquisitions could limit our future growth.

 

We may experience difficulties in integrating acquisitions.

 

Integration of acquired companies involves several risks, including:

 

 

inability to operate acquired businesses profitably;

 

failure to accomplish strategic objectives for those acquisitions;

 

unanticipated costs relating to acquisitions or to the integration of the acquired businesses;

 

difficulties in achieving planned cost savings synergies and growth opportunities; and

 

possible future impairment charges for goodwill and non-amortizable intangible assets that are recorded as a function of acquisitions.

 

Additionally, our level of indebtedness may increase in the future if we finance acquisitions with debt, which would cause us to incur additional interest expense and could increase our vulnerability to general adverse economic and industry conditions and limit our ability to service our debt or obtain additional financing. We cannot assure that future acquisitions will not have a material adverse effect on our financial condition, results of operations and cash flows.

 

Impairment charges could reduce our profitability.

 

We test goodwill and our other intangible assets with indefinite useful lives for impairment on an annual basis or on an interim basis if a potential impairment factor arises that indicates the fair value of the reporting unit may fall below its carrying value. Various uncertainties, including continued adverse conditions in the capital markets or changes in general economic conditions, could impact the future operating performance at one or more of our businesses which could significantly affect our valuations and could result in additional future impairments. The recognition of an impairment of a significant portion of goodwill would negatively affect our results of operations.

 

10

 

 

Materially adverse or unforeseen legal judgments, fines, penalties or settlements could have an adverse impact on our profits and cash flows.

 

We are and may, from time to time, become a party to legal proceedings incidental to our businesses, including, but not limited to, alleged claims relating to product liability, environmental compliance, patent infringement, commercial disputes and employment and regulatory matters. In accordance with United States generally accepted accounting principles, we establish reserves based on our assessment of contingent liabilities. Subsequent developments in legal proceedings may affect our assessment and estimates of loss contingencies, recorded as reserves, which could require us to record additional reserves or make material payments which could adversely affect our profits and cash flows. Even the successful defense of legal proceedings may cause us to incur substantial legal costs and may divert management's time and resources away from our businesses.

 

The costs of complying with existing or future environmental regulations, and of correcting any violations of these regulations, could impact our profitability.

 

We are subject to a variety of environmental laws relating to the storage, discharge, handling, emission, generation, use and disposal of chemicals, hazardous waste and other toxic and hazardous materials used to manufacture, or resulting from the process of manufacturing, our products. We cannot predict the nature, scope or effect of regulatory requirements to which our operations might be subject or the manner in which existing or future laws will be administered or interpreted. We are also exposed to potential legacy environmental risks relating to businesses we no longer own or operate. Future regulations could be applied to materials, products or activities that have not been subject to regulation previously. The costs of complying with new or more stringent regulations, or with more vigorous enforcement of these or existing regulations, could be significant.

 

In addition, properly permitted waste disposal facilities used by us as a legal and legitimate repository for hazardous waste may in the future become mismanaged or abandoned without our knowledge or involvement. In such event, legacy landfill liability could attach to or be imposed upon us in proportion to the waste deposited at any disposal facility.

 

Environmental laws require us to maintain and comply with a number of permits, authorizations and approvals and to maintain and update training programs and safety data regarding materials used in our processes. Violations of these requirements could result in financial penalties and other enforcement actions. We could be required to halt one or more portions of our operations until a violation is cured. Although we attempt to operate in compliance with these environmental laws, we may not succeed in this effort at all times. The costs of curing violations or resolving enforcement actions that might be initiated by government authorities could be substantial.

 

The costs of complying with existing or future regulations applicable to our products, and of correcting any violations of such regulations, could impact our profitability.

 

Certain of our products are subject to regulations promulgated by administrative agencies such as the Department of Energy, Occupational Health and Safety Administration and the Food and Drug Administration. Such regulations, among other matters, specify requirements regarding energy efficiency and product safety. Regulatory violations could result in financial penalties and other enforcement actions. We could be required to halt production of one or more products until a violation is cured. Although we attempt to produce our products in compliance with these requirements, the costs of curing violations or resolving enforcement actions that might be initiated by administrative agencies could be substantial.

 

Our results could be adversely affected by natural disasters, political crises, or other catastrophic events.

 

Natural disasters, such as hurricanes, tornadoes, floods, earthquakes, and other adverse weather and climate conditions; political crises, such as terrorist attacks, war, labor unrest, and other political instability; or other catastrophic events, such as disasters occurring at our suppliers' manufacturing facilities, whether occurring in the United States or internationally, could disrupt our operations or the operations of one or more of our suppliers. Certain of our key manufacturing facilities are located in geographic areas with a higher than nominal risk of earthquake and flood. To the extent any of these events occur, our operations and financial results could be adversely affected.

 

We depend on our key personnel and the loss of their services may adversely affect our business.

 

We believe that our success depends on our ability to hire new talent and the continued employment of our senior management team and other key personnel. If one or more members of our senior management team or other key personnel were unable or unwilling to continue in their present positions, our business could be seriously harmed. In addition, if any of our key personnel joins a competitor or forms a competing company, some of our customers might choose to use the services of that competitor or those of a new company instead of our own. Other companies seeking to develop capabilities and products or services similar to ours may hire away some of our key personnel. If we are unable to maintain our key personnel and attract new employees, the execution of our business strategy may be hindered and our growth limited.

 

11

 

 

Strategic divestitures and contingent liabilities from businesses that we sell could adversely affect our results of operations and financial condition.

 

From time to time, we have sold and may continue to sell business that we consider to be either underperforming or no longer part of our strategic vision. The sale of any such business could result in a financial loss and/or write-down of goodwill which could have a material adverse effect on our results for the financial reporting period during which such sale occurs. In addition, in connection with such divestitures, we have retained, and may in the future retain responsibility for some of the known and unknown contingent liabilities related to certain divestitures such as lawsuits, tax liabilities, product liability claims, and environmental matters.

 

The trading price of our common stock has been volatile, and investors in our common stock may experience substantial losses.

 

The trading price of our common stock has been volatile and may become volatile again in the future. The trading price of our common stock could decline or fluctuate in response to a variety of factors, including:

 

 

our failure to meet the performance estimates of securities analysts;

 

changes in financial estimates of our net sales and operating results or buy/sell recommendations by securities analysts;

 

fluctuations in our quarterly operating results;

 

substantial sales of our common stock;

 

changes in the amount or frequency of our payment of dividends or repurchases of our common stock;

 

general stock market conditions; or

 

other economic or external factors.

 

Decreases in discount rates and actual rates of return could require an increase in future pension contributions to our pension plans which could limit our flexibility in managing our Company.

 

The discount rate and the expected rate of return on plan assets represent key assumptions inherent in our actuarially calculated pension plan obligations and pension plan expense. If discount rates and actual rates of return on invested plan assets were to decrease significantly, our pension plan obligations could increase materially. Although our pension plans have been frozen, the size of future required pension contributions could require us to dedicate a greater portion of our cash flow from operations to making contributions, which could negatively impact our financial flexibility.

 

Our business could be negatively impacted by cybersecurity threats, information systems and network interruptions, and other security threats or disruptions.

 

Our information technology networks and related systems are critical to the operation of our business and essential to our ability to successfully perform day-to-day operations. Cybersecurity threats are persistent, evolve quickly, and include, but are not limited to, computer viruses, ransomware, attempts to access information, denial of service and other electronic security breaches. These events could disrupt our operations or customers and other third-party IT systems in which we are involved and could negatively impact our reputation among our customers and the public which could have a negative impact on our financial conditions, results of operations, or liquidity.

 

We are subject to increasing regulation associated with data privacy and processing, the violation of which could result in significant penalties and harm our reputation.

 

Regulatory scrutiny of privacy, data protection, collection, use and sharing of data is increasing on a global basis. Like all global companies, we are subject to a number of laws, rules and directives (“privacy laws”) relating to the collection, use, retention, security, processing and transfer (“processing”) of personally identifiable information about our employees, customers and suppliers (“personal data”) in the countries where we operate. The most notable of these privacy laws is the EU’s General Data Protection Regulation (“GDPR”), which came into effect in 2018. GDPR extends the scope of the EU data protection law to all foreign companies processing data of EU residents and imposes a strict data protection compliance regime with severe penalties for non-compliance of up to the greater of 4% of worldwide turnover and €20 million. While we continue to strengthen our data privacy and protection policies and to train our personnel accordingly, a determination that there have been violations of GDPR or other privacy or data protection laws could expose us to significant damage awards, fines and other penalties that could, individually or in the aggregate, materially harm our results of operations and reputation.

 

12

 

 

Various restrictions in our charter documents, Delaware law and our credit agreement could prevent or delay a change in control that is not supported by our board of directors.

 

We are subject to several provisions in our charter documents, Delaware law and our credit facility that may discourage, delay or prevent a merger, acquisition or change of control that a stockholder may consider favorable. These anti-takeover provisions include:

 

 

maintaining a classified board and imposing advance notice procedures for nominations of candidates for election as directors and for stockholder proposals to be considered at stockholders' meetings;

 

a provision in our certificate of incorporation that requires the approval of the holders of 80% of the outstanding shares of our common stock to adopt any agreement of merger, the sale of substantially all of the assets of the Company to a third party or the issuance or transfer by the Company of voting securities having a fair market value of $1 million or more to a third party, if in any such case such third party is the beneficial owner of 10% or more of the outstanding shares of our common stock, unless the transaction has been approved prior to its consummation by all of our directors;

 

requiring the affirmative vote of the holders of at least 80% of the outstanding shares of our common stock for stockholders to amend our amended and restated by-laws;

 

covenants in our credit facility restricting mergers, asset sales and similar transactions; and

 

the Delaware anti-takeover statute contained in Section 203 of the Delaware General Corporation Law.

 

Section 203 of the Delaware General Corporation Law prohibits a merger, consolidation, asset sale or other similar business combination between the Company and any stockholder of 15% or more of our voting stock for a period of three years after the stockholder acquires 15% or more of our voting stock, unless (1) the transaction is approved by our board of directors before the stockholder acquires 15% or more of our voting stock, (2) upon completing the transaction the stockholder owns at least 85% of our voting stock outstanding at the commencement of the transaction, or (3) the transaction is approved by our board of directors and the holders of 66 2/3% of our voting stock, excluding shares of our voting stock owned by the stockholder.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

We have a total of 108 facilities, of which we operate 91 manufacturing plants and warehouses located throughout the United States, Europe, Canada, Southeast Asia, Korea, Japan, China, India, Brazil, South Africa, and Mexico. The Company owns 22 of the facilities and the balance are leased. For the year ended June 30, 2019 the approximate building space utilized by each segment is as follows:

 

           

Area in Square Feet (in thousands)

 

Segment location

 

Number of Facilities

   

Leased

   

Owned

   

Total

 

Asia Pacific

    17       328       -       328  

EMEA(1)

    21       362       36       398  

Other Americas

    6       89       -       89  

United States

    11       142       134       276  

Engraving

    55       921       170       1,091  

Asia Pacific

    11       77       29       106  

EMEA(1)

    5       34       66       100  

Other Americas

    2       5       56       61  

United States

    5       100       30       130  

Electronics

    23       216       181       397  

EMEA(1)

    3       80       -       80  

United States

    6       243       171       414  

Engineering Technologies

    9       323       171       494  

Asia Pacific

    2       76       -       76  

Other Americas

    1       1       -       1  

United States

    5       15       101       116  

Hydraulics

    8       92       101       193  

EMEA(1)

    1       13       -       13  

United States

    11       378       597       975  

Food Service Equipment

    12       391       597       988  

United States

    1       12       -       12  

Corporate & Other

    1       12       -       12  

Total

    108       1,955       1,220       3,175  

 

(1) EMEA consists Europe, Middle East and S. Africa.

 

13

 

 

In general, the buildings are in sound operating condition and are considered to be adequate for their intended purposes and current uses.

 

We own substantially all of the machinery and equipment utilized in our businesses.

 

Item 3. Legal Proceedings

 

Discussion of legal matters is incorporated by reference to Part II, Item 8, Note 12, “CONTINGENCIES,” in the Notes to the Consolidated Financial Statements.

 

Item 4. Mine Safety Disclosures

 

Not Applicable

 

PART II

 

Item 5. Market for Standex Common Stock

 

Related Stockholder Matters and Issuer Purchases of Equity Securities

 

The principal market in which the Common Stock of Standex is traded is the New York Stock Exchange under the ticker symbol “SXI”. The high and low sales prices for the Common Stock on the New York Stock Exchange and the dividends paid per Common Share for each quarter in the last two fiscal years are as follows:

 

 

   

Common Stock Price Range

   

Dividends Per Share

 
   

2019

   

2018

                 

Year Ended June 30

 

High

   

Low

   

High

   

Low

   

2019

   

2018

 

First quarter

  $ 114.20     $ 99.95     $ 109.30     $ 89.70     $ 0.18     $ 0.16  

Second quarter

    109.77       62.02       110.00       98.38       0.20       0.18  

Third quarter

    83.18       66.02       106.90       93.15       0.20       0.18  

Fourth quarter

    76.78       62.79       106.40       89.40       0.20       0.18  

 

 

The approximate number of stockholders of record on July 31, 2019 was 1,625.

 

Additional information regarding our equity compensation plans is presented in the Notes to Consolidated Financial Statements under the caption “Stock-Based Compensation and Purchase Plans” and Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

 

14

 

 

Issuer Purchases of Equity Securities (1)

                               

Quarter Ended June 30, 2019

                               

Period

 

(a) Total Number of Shares (or units) Purchased

   

(b) Average Price Paid per Share (or unit)

   

(c) Total Number of Shares (or units) Purchased as Part of Publicly Announced Plans or Programs

   

(d) Maximum Number (or Appropriate Dollar Value) of Shares (or units) that May Yet Be Purchased Under the Plans or Programs

 

April 1 - April 30, 2019

    -     $ -       -     $ 67,834,396  

May 1 - May 31, 2019

    202,216       69.93       202,216       53,693,431  

June 1 - June 30, 2019

    150       90.26       150       53,679,892  

TOTAL

    202,366     $ 69.95       202,366     $ 53,679,892  

 

(1) The Company has a Stock Buyback Program (the “Program”) which was originally announced on January 30, 1985 and most recently amended on April 26, 2016. Under the Program, the Company is authorized to repurchase up to an aggregate of $100 million of its shares. Under the program, purchases may be made from time to time on the open market, including through 10b5-1 trading plans, or through privately negotiated transactions, block transactions, or other techniques in accordance with prevailing market conditions and the requirements of the Securities and Exchange Commission. The Board’s authorization is open-ended and does not establish a timeframe for the purchases. The Company is not obligated to acquire a particular number of shares, and the program may be discontinued at any time at the Company’s discretion.

 

15

 

 

The following graph compares the cumulative total stockholder return on the Company’s Common Stock as of the end of each of the last five fiscal years, with the cumulative total stockholder return on the Standard & Poor’s Small Cap 600 (Industrial Segment) Index and on the Russell 2000 Index, assuming an investment of $100 in each at their closing prices on June 30, 2014 and the reinvestment of all dividends.

 

 

 

 

 

 

 

Click to enlarge

 

 

 

16

 

 

 

Item 6. Selected Consolidated Financial Data

 

Selected financial data for the five years ended June 30, is as follows:

 

See Item 7 for discussions on comparability of the below.

 

   

2019

   

2018

   

2017

   

2016

   

2015

 

SUMMARY OF OPERATIONS (in thousands)

                                       

Net sales

                                       
Engraving   $ 149,693     $ 136,275     $ 105,943     $ 124,120     $ 110,781  
Electronics     204,073       196,291       136,689       118,319       114,196  
Engineering Technologies     105,270       90,781       90,506       82,235       97,018  
Hydraulics     53,943       48,169       41,150       45,045       41,441  

Food Service Equipment

    278,600       298,936       273,597       262,705       290,085  

Total

    791,579       770,452       647,885       632,424       653,521  
Gross profit   $ 268,060     $ 269,602     $ 215,553     $ 210,191     $ 214,554  

Operating income (loss)

                                       
Engraving   $ 23,996     $ 29,618     $ 26,139     $ 30,214     $ 24,996  
Electronics     41,227       45,501       27,855       21,323       21,143  
Engineering Technologies     11,169       6,506       9,758       8,328       13,165  
Hydraulics     8,891       7,398       6,802       8,047       7,139  

Food Service Equipment

    22,773       28,131       23,633       28,242       35,067  
Restructuring (1)     (1,635 )     (6,964 )     (5,761 )     (2,064 )     (869 )
Acquisition related expenses     (3,075 )     (3,749 )     (7,843 )     -       -  
Other operating income (expense), net     (500 )     -       -       (7,067 )     473  
Corporate and Other     (24,729 )     (26,430 )     (23,664 )     (23,829 )     (20,499 )
Total   $ 78,117     $ 80,011     $ 56,919     $ 63,194     $ 80,615  
Interest expense     (10,760 )     (8,029 )     (4,043 )     (2,871 )     (3,161 )
Other non-operating (loss) income     (1,744 )     (1,735 )     (1,917 )     (2,113 )     (1,642 )
Provision for income taxes     (18,424 )     (38,904 )     (11,822 )     (13,784 )     (21,081 )
Income from continuing operations     47,189       31,343       39,137       44,426       54,731  
Income/(loss) from discontinued operations     20,725       5,261       7,408       7,630       12  
Net income   $ 67,914     $ 36,604     $ 46,545     $ 52,056     $ 54,743  

 

(1) See discussion of restructuring activities in Note 16 of the consolidated financial statements.

 

   

2019

   

2018

   

2017

   

2016

   

2015

 

PER SHARE DATA

                                       

Basic

                                       

Income from continuing operations

  $ 3.75     $ 2.47     $ 3.09     $ 3.50     $ 4.32  

Income/(loss) from discontinued operations

    1.65       0.41       0.59       0.61       0.01  

Total

  $ 5.40     $ 2.88     $ 3.68     $ 4.11     $ 4.33  
                                         

Diluted

                                       

Income from continuing operations

  $ 3.74     $ 2.45     $ 3.07     $ 3.48     $ 4.27  

Income/(loss) from discontinued operations

    1.64       0.41       0.58       0.60       0.00  

Total

  $ 5.38     $ 2.86     $ 3.65     $ 4.08     $ 4.27  
                                         

Dividends declared

  $ 0.78     $ 0.70     $ 0.62     $ 0.54     $ 0.46  

 

 

 

17

 

 

 

   

2019

   

2018

   

2017

   

2016

   

2015

 

BALANCE SHEET (in thousands)

                                       

Total assets

  $ 921,889     $ 916,937     $ 867,676     $ 690,457     $ 659,063  
                                         

Accounts receivable

    119,589       119,783       114,219       88,878       93,865  

Inventories

    88,645       104,300       96,085       81,402       84,696  

Accounts payable

    72,603       78,947       82,146       61,820       68,544  

Goodwill

    281,503       211,751       202,679       117,343       114,721  
                                         

Long-term debt

  $ 197,610     $ 193,772     $ 191,976     $ 92,114     $ 101,753  

Total debt

    197,610       193,772       191,976       92,114       101,753  

Less cash

    93,145       109,602       88,566       121,988       96,128  

Net debt (cash)

  $ 104,465     $ 84,170     $ 103,410     $ (29,874 )   $ 5,625  
                                         

Stockholders' equity

  $ 464,313     $ 450,795     $ 408,664     $ 369,959     $ 348,570  

 

KEY STATISTICS

 

2019

   

2018

   

2017

   

2016

   

2015

 

Gross profit margin

    33.9 %     35.0 %     33.3 %     33.2 %     32.8 %

Operating income margin

    9.9 %     10.4 %     8.8 %     10.0 %     12.3 %

 

 

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

We are a leading manufacturer of a variety of products and services for diverse commercial and industrial markets.  We have nine operating business units, aggregated and organized for reporting purposes into five reportable segments:  Engraving, Electronics, Engineering Technologies, Hydraulics and Food Service Equipment.  Overall management, strategic development and financial control are led by the executive staff at our corporate headquarters located in Salem, New Hampshire.

 

Our long-term strategy is to build larger industrial platforms through a value creation system that assists management in meeting specific corporate and business unit financial and strategic performance goals in order to create, improve, and enhance shareholder value.  The Standex Value Creation System is a standard methodology which provides consistent tools used throughout the company in order to achieve our organization’s goal of transforming from its historic roots as a holding company to an efficient operating company.  The Standex Value Creation System employs four components: Balanced Performance Plan, Standex Growth Disciplines, Standex Operational Excellence, and Standex Talent Management.  The Balanced Performance Plan process aligns annual goals throughout the business and provides a standard reporting, management and review process.  It is focused on setting and meeting annual and quarterly targets that support our short and long term goals.  The Standex Growth Disciplines use a set of tools and processes including market maps, growth laneways, and market tests to identify opportunities to expand the business organically and through acquisitions.  Standex Operational Excellence employs a standard playbook and processes, including LEAN, to eliminate waste and improve profitability, cash flow and customer satisfaction.  Finally, the Standex Talent Management process is an organizational development process that provides training, development, and succession planning for our employees throughout our worldwide organization.  The Standex Value Creation System ties all disciplines in the organization together under a common umbrella by providing standard tools and processes to deliver our business objectives. Through the use of our Standex Value Creation System, we have developed a balanced approach to value creation.  While we intend to continue investing acquisition capital in high margin and growth segments such as Electronics and Engraving, we will continue to support all of our businesses as they enhance value through deployment of our GDP+ and OpEx playbooks. 

 

 

It is our objective to grow larger and more profitable business units through both organic initiatives and acquisitions.  We seek to identify and implement organic growth initiatives such as new product development, geographic expansion, introduction of products and technologies into new markets and applications, key accounts and strategic sales channel partners.  Also, we have a long-term objective to create sizable business platforms by adding strategically aligned or “bolt on” acquisitions to strengthen the individual businesses, create both sales and cost synergies with our core business platforms, and accelerate their growth and margin improvement.  We look to create both sales and cost synergies within our core business platforms, accelerate growth and improve margins.  We have a particular focus on identifying and investing in opportunities that complement our products and will increase the global presence and capabilities of our businesses.  From time to time, we have divested, and likely will continue to divest, businesses that we feel are not strategic or do not meet our growth and return expectations.

 

 

 

18

 

 

As part of our ongoing strategy:

 

 

o

During the first quarter of 2019, the Company decided to divest its Cooking Solutions Group, which consisted of three operating segments, Associated American Industries, BKI, and Ultrafryer, and a minority interest investment.  We completed this divestiture during the third quarter of 2019 and received proceeds for the sale on the first day of the fourth quarter.  In connection with the divestiture efforts, we also sold our minority interest in a European oven manufacturer back to the majority owners.  Results of the Cooking Solutions Group in current and prior periods have been classified as discontinued operations in the Consolidated Financial Statements.

 

 

o

In April 2019, we acquired Ohio-based Genius Solutions Engineering Company (d/b/a GS Engineering), a provider of specialized “soft surface” skin texturized tooling, primarily serving the automotive end market. GS Engineering brings us critical proprietary technologies that offer significant advantages in creating tools for “soft surface” components which are used increasingly in vehicle interiors. The tooling for soft surface products offered by GS is highly complementary to our current industry-leading capabilities in texturing molds and tools used to create “hard surface” components. This technology also complements and enables us to improve our existing nickel shell technology that produces soft surface tooling. We intend to immediately introduce the GS technology across our global production footprint which will enable customers worldwide to benefit from a combined offering for harmonized designs across a variety of surfaces and materials. GS operates one facility in Ohio and its results are reported within our Engraving segment.

 

 

o

In September 2018, we acquired New Hampshire-based Regional Mfg. Specialists, Inc. (now named Agile Magnetics, Inc.), a provider of high-reliability magnetics.  The addition of Agile Magnetics is an important step forward in building out the high reliability magnetics business of Standex Electronics. As a result of this combination, we have broadened our exposure to several high-growth end-markets and added a valuable manufacturing and sales base in the Northeast. Additionally, we can now offer complementary products from Standex’s broader portfolio to Agile’s customer base.  Agile Magnetics products include transformers, inductors and coils for mission critical applications for blue chip OEMs in the semiconductor, military, aerospace, healthcare, and industrial markets. Agile operates one manufacturing facility in New Hampshire and its results are reported within our Electronics segment.

 

 

o

In August 2018, we acquired Michigan-based Tenibac-Graphion, Inc., a provider of chemical and laser texturing services.  The combination of Tenibac and Standex Engraving will expand services available to customers, increase responsiveness to customer demands, and drive innovative approaches to solving customer needs.  The combined customer base now has access to the full line of mold and tool services, such as the Architexture design consultancy,chemical and laser engraving, tool finishing, and tool enhancements.  Tenibac serves automotive, packaging, medical and consumer products customers, and operates three facilities, two in Michigan and one in China. The Tenibac results are reported within our Engraving segment.

 

 

o

We acquired Italy-based Piazza Rosa Group (“Piazza Rosa”) in July 2017.  The privately held company is a leading provider of mold, tool treatment and finishing services for the automotive and consumer products markets.  The combination of these competencies with Standex Engraving’s worldwide presence and texturizing capabilities creates a global tool finishing service leader and provides additional opportunities in the broader surface engineering market. The Piazza Rosa Group’s results are reported within our Engraving segment.

 

 

We develop “Customer Intimacy” by utilizing the Standex Growth Disciplines to partner with our customers in order to develop and deliver custom solutions or engineered components.  By partnering with our customers during long-term product development cycles, we become an extension of their development teams.  Through this Partner, Solve, Deliver ® methodology, we are able to secure our position as a preferred long-term solution provider for our products and components.  This strategy results in increased sales and operating margins that enhance shareholder returns. 

 

 

Standex Operational Excellence drives continuous improvement in the efficiency of our businesses, both on the shop floor and in the office environment.  We recognize that our businesses are competing in a global economy that requires us to improve our competitive position.  We have deployed a number of management competencies to drive improvements in the cost structure of our business units including operational excellence through lean enterprise, the use of low cost manufacturing facilities, the consolidation of manufacturing facilities to achieve economies of scale and leveraging of fixed infrastructure costs, alternate sourcing to achieve procurement cost reductions, and capital improvements to increase productivity.

 

19

 

 

 

The Company’s strong historical cash flow has been a cornerstone for funding our capital allocation strategy.  We use cash flow generated from operations to fund the strategic growth programs described above, including acquisitions and investments for organic growth, investments in capital assets to improve productivity and lower costs and to return cash to our shareholders through payment of dividends and stock buybacks.

 

Restructuring expenses reflect costs associated with the Company’s efforts of continuously improving operational efficiency and expanding globally in order to remain competitive in our end-user markets.  We incur costs for actions to size our businesses to a level appropriate for current economic conditions, improve our cost structure, enhance our competitive position and increase operating margins.  Such expenses include costs for moving facilities to locations that allow for lower fixed and variable costs, external consultants who provide additional expertise starting up plants after relocation, downsizing operations because of changing economic conditions, and other costs resulting from asset redeployment decisions.  Shutdown costs include severance, benefits, stay bonuses, lease and contract terminations, asset write-downs, costs of moving fixed assets, and moving and relocation costs. Vacant facility costs include maintenance, utilities, property taxes and other costs.

 

Because of the diversity of the Company’s businesses, end user markets and geographic locations, management does not use specific external indices to predict the future performance of the Company, other than general information about broad macroeconomic trends.  Each of our individual business units serves niche markets and attempts to identify trends other than general business and economic conditions which are specific to its business and which could impact their performance.  Those units report pertinent information to senior management, which uses it to the extent relevant to assess the future performance of the Company.  A description of any such material trends is described below in the applicable segment analysis.

 

We monitor a number of key performance indicators (“KPIs”) including net sales, income from operations, backlog, effective income tax rate, gross profit margin, and operating cash flow.  A discussion of these KPIs is included below.  We may also supplement the discussion of these KPIs by identifying the impact of foreign exchange rates, acquisitions, and other significant items when they have a material impact on a specific KPI. 

 

We believe the discussion of these items provides enhanced information to investors by disclosing their impact on the overall trend which provides a clearer comparative view of the KPI, as applicable.  For discussion of the impact of foreign exchange rates on KPIs, the Company calculates the impact as the difference between the current period KPI calculated at the current period exchange rate as compared to the KPI calculated at the historical exchange rate for the prior period.  For discussion of the impact of acquisitions, we isolate the effect on the KPI amount that would have existed regardless of our acquisition.  Sales resulting from synergies between the acquisition and existing operations of the Company are considered organic growth for the purposes of our discussion.

 

Unless otherwise noted, references to years are to fiscal years.

 

Consolidated Results from Continuing Operations (in thousands):

 

   

2019

   

2018

   

2017

 

Net sales

  $ 791,579     $ 770,452     $ 647,885  

Gross profit margin

    33.9 %     35.0 %     33.3 %

Restructuring costs

    (1,635 )     (6,964 )     (5,761 )

Acquisition related expenses

    (3,075 )     (3,749 )     (7,843 )

Income from operations

    78,117       80,011       56,919  
                         

Backlog (realizable within 1 year)

  $ 205,175     $ 204,683     $ 185,180  

 

   

2019

   

2018

   

2017

 

Net sales

  $ 791,579     $ 770,452     $ 647,885  

Components of change in sales:

                       

Effect of acquisitions

    29,122       59,855       38,498  

Effect of exchange rates

    (12,041 )     14,394       (6,195 )

Effect of business divestitures

    -       -       (17,446 )

Organic sales growth

    4,046       48,318       608  

 

Net sales for the fiscal year 2019 increased by $21.1 million, or 2.7%, when compared to the prior year.  Incremental sales from our recent acquisitions accounted for $29.1 million or 3.8% of the increase, while organic sales gains accounted for $4.0 million or 0.5%.  Changes in foreign exchange rates contributed to sales declines of $12.0 million or 1.6%. The organic sales increases occurred in all of our segments except the Food Service Equipment Group.

 

 

20

 

 

Net sales for the fiscal year 2018 increased by $122.6 million, or 18.9%, when compared to the prior year. Incremental sales increases from our recent acquisitions accounted for $59.9 million or 9.2%, while increased organic sales accounted for $48.3 million or 7.5%. We also recognized sales growth of $14.4 million or 2.2% related to favorable foreign exchange impacts. The organic sales increases occurred in all segments except Engineering Technologies.

 

Gross Profit Margin

 

Gross margin in 2019 declined to 33.9% as compared to 35.0% in 2018 as a result of incremental purchase accounting,  material and wage inflation, manufacturing inefficiencies, country specific site performance and an asset impairment charge. Gross Margins are anticipated to improve in FY 20 as cost reduction activities have been put in place along with the non-repeating onetime items.

 

During 2018, gross margin increased to 35.0% as compared to 33.3% in 2017. Gross margin increases during fiscal year 2018 were primarily driven by the leverage on our 7.5% organic sales increase.

 

Restructuring Charges and Acquisition Related Expenses

 

During fiscal year 2019, we incurred restructuring expenses of $1.6 million primarily related to restructuring efforts that are intended to improve profitability, streamline production and enhance capacity to support future growth. These efforts include approximately $0.6 million related to headcount reductions and the closure of an unprofitable European Engraving site.

 

Acquisition related expenses in fiscal year 2019 were $3.6 million. These expenses were comprised primarily of $2.8 million for deferred compensation earned by the Horizon Scientific seller during the year. Because these payments are contingent on the seller remaining an employee of the Company, they are treated as compensation expense. Other acquisition related expenses consist of due diligence and valuation expenses incurred during the acquisition of Tenibac, Agile, and GS Engineering. 

 

Selling, General, and Administrative Expenses

 

Selling, general, and administrative expenses, (“SG&A”) for the fiscal year 2019 were $184.7 million, or 23.3% of sales compared to $178.9 million, or 23.2% of sales during the prior year. SG&A expenses were impacted by on-going expenses related to our fiscal year 2019 acquisitions of $7.4 million partially offset by a decrease in distribution and selling expenses of $2.0 million due to sales mix, and a $1.7 million reduction in corporate expenses.

 

Selling, general, and administrative expenses, (“SG&A”) for the fiscal year 2018 were $178.9 million, or 23.2% of sales compared to $145.0 million, or 22.4% of sales during the prior year. SG&A expenses were impacted by: (i) on-going SG&A expenses related to our recent acquisitions of $7.8 million, (ii) an increase in distribution and selling expenses of $10.2 million, (iii) an increase in administrative expenses related to investments to support our recent acquisitions and growth laneways and (iv) a $3.1 million increase in administrative compensation costs due to improved performance.

 

Income from Operations

 

Income from operations for the fiscal year 2019 was $78.1 million, compared to $80.0 million during the prior year. The $1.9 million decrease, or 2.4%, is primarily due to material and wage inflation, and business mix, partially offset by lower restructuring costs. 

 

Income from operations for the fiscal year 2018 was $80.0 million, compared to $56.9 million during the prior year. The $23.1 million increase, or 40.6%, is primarily due to increased sales volume, including 7.5% organic sales growth and 9.2% growth attributed to our recent acquisitions. The increase in operating income is also partially due to the reduction in acquisition related expenses of $4.1 million as compared to fiscal year 2017.

 

Discussion of the performance of each of our reportable segments is fully explained in the segment analysis that follows.  

 

Interest Expense

 

Interest expense for the fiscal year 2019 was $10.8 million, an increase of $2.7 million as compared to the prior year.  Increased interest expense was a result of higher borrowing costs and an increase in average outstanding borrowings for the year, primarily to fund acquisition activity.  Our effective interest rate of 3.88% was 59 basis points or 18% higher than the 2018 effective interest rate of 3.29%.

 

Interest expense for fiscal year 2018 was $8.0 million, an increase from $4.0 million in fiscal year 2017. The increase is due to higher borrowings associated with the recent acquisitions, in addition to working capital increases to support increased sales activity. In addition, we incurred $0.9 million of charges associated with derivative activity related to the Standex Electronics Japan acquisition.

 

 

21

 

 

Income Taxes

 

The Company's income tax provision from continuing operations for fiscal year 2019 was $18.4 million, or an effective rate of 28.1% compared to $38.9 million, or an effective rate of 55.4% for fiscal year 2018, and $11.8 million, or an effective rate of 23.2% for the year ended June 30, 2017. Changes in the effective tax rate from period to period may be significant as they depend on many factors including, but not limited to, the amount of the Company's income or loss, the mix of income earned in the U.S. versus in foreign jurisdictions, the effective tax rate in each of the countries in which we earn income, and any one-time tax issues which occur during the period.

 

The Company's income tax provision from continuing operations for the fiscal year ended June 30, 2019 was impacted by the following items: (i) $2.1 million of expenses related to expected foreign withholding taxes on cash repatriation (ii) a tax expense of $0.3 million related to the elimination of the performance based compensation exception for executive compensation under Sec. 162(m) of the Internal Revenue Code, offset by (iii) a tax benefit of $0.8 million related to the impact of the Sec. 965 toll tax.

 

During the second quarter of fiscal year 2019, the Company recorded a tax benefit of approximately $0.8 million to its provision for income taxes related to a mandatory deemed repatriation of foreign earnings and considers the toll tax calculation to be complete. 

 

The provision for fiscal year ending June 30, 2019 was impacted by several law changes implemented by the Act such as the repeal of the Section 199 manufacturing deduction, changes to the calculation for Section 162(m) executive compensation deduction, interest deduction limitation and the Global Intangible Low Taxed Income (GILTI) provision.  As allowed under US GAAP, the Company has elected to treat any taxes due on future U.S. inclusions in taxable income under the GILTI provision as a current-period expense when incurred.  The Company will continue to monitor guidance regarding these changes for any impacts that the changes might have on future period financial statements.

 

The Company's income tax provision from continuing operations for the fiscal year ended June 30, 2018 was impacted by the following items: (i) a tax expense of $11.7 million related to the impact of the Sec. 965 toll tax, (ii) a tax expense of $1.3 million related to a revaluation of deferred taxes due to the federal rate reduction, and (iii) a tax expense of $7.8 million related to expected foreign withholding taxes on cash repatriation.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act” or “TCJA”) was passed which, among other things, reduced the federal corporate tax rate to 21.0% effective for taxable years starting on or after January 1, 2018.  For transition year ending June 30, 2018, the Company recorded federal taxes using a blended federal rate of 28.0%.  For the year ending June 30, 2019, the Company recorded federal taxes at a federal rate of 21.0%. 

 

Capital Expenditures

 

Capital spending is focused on growth initiatives, cost reduction, and upgrades to extend the capabilities of our capital assets.  In general, we anticipate our capital expenditures over the long term will be approximately 3% to 4% of net sales. 

 

During 2019, capital expenditures increased to $34.5 million or 4.4% of net sales, as compared to $25.6 million, or 3.3%, of net sales in the prior year.  Capital spending in 2019 included $5.8 million for a new Electronics facility in Cincinnati which replaced a legacy facility sold in fiscal year 2018.  We expect 2020 capital spending to be between $33 million and $34 million which includes $2.0 million allocated to begin construction for a new Electronics facility in Germany to replace a legacy facility sold in fiscal year 2019.

 

Backlog

 

Backlog includes all active or open orders for goods and services.  Backlog also includes any future deliveries based on executed customer contracts, so long as such deliveries are based on agreed upon delivery schedules.  With the exception of our Engineering Technologies group, backlog is not generally a significant factor in the Company’s businesses because of our relatively short delivery periods and rapid inventory turnover.  Backlog orders are not necessarily an indicator of future sales levels because of variations in lead times and customer production demand pull systems. Customers may delay delivery of products or cancel orders prior to shipment, subject to possible cancellation penalties.  Due to the nature of long term agreements in the Engineering Technologies group, the timing of orders and delivery dates can vary considerably resulting in significant backlog changes from one period to another.  In general, the majority of net realizable backlog beyond one year comes from the Engineering Technologies Group. 

 

 

22

 

 

 

Backlog orders in place at June 30, 2019 and 2018 are as follows (in thousands): 

 

   

As of June 30, 2019

   

As of June 30, 2018

 
   

Total

   

Backlog under

   

Total

   

Backlog under

 
   

Backlog

   

1 year

   

Backlog

   

1 year

 

Engraving

  $ 22,160     $ 22,160     $ 19,279     $ 19,269  

Electronics

    62,381       56,243       69,059       64,180  

Engineering Technologies

    113,714       79,062       98,289       74,199  

Hydraulics

    13,440       13,440       14,481       14,377  

Food Service Equipment

    37,724       34,270       36,130       32,658  

Total

  $ 249,419     $ 205,175     $ 237,238     $ 204,683  

 

Backlog realizable within one year increased $0.5 million, or 0.2% to $205.2 million at June 30, 2019 from $204.7 million at June 30, 2018.

 

Segment Analysis (in thousands)

 

Engraving

   

2019 compared to 2018

   

2018 compared to 2017

 

(in thousands except

                 

%

                   

%

 

percentages)

 

2019

   

2018

   

Change

   

2018

   

2017

   

Change

 

Net sales

  $ 149,693     $ 136,275       9.8 %   $ 136,275     $ 105,943       28.6 %

Income from operations

    23,996       29,618       (19.0 )%     29,618       26,139       13.3 %

Operating income margin

    16.0 %     21.7 %             21.7 %     24.7 %        

 

Net sales for fiscal year 2019 increased by $13.4 million or 9.8% compared to the prior year. Growth was driven by two acquisitions which contributed $19.8 million or 14.5%.  Organic sales were nearly flat as compared to prior year while currency negatively impacted sales by 4.8%.  We expect sales growth in fiscal year 2020 due to an increase in the number of new automotive launches along with the introduction of soft skin and tool finishing offerings throughout our global sales network.

 

Net sales for fiscal year 2018 increased by $30.3 million or 28.6% compared to the prior year with an organic growth rate of 10.2%.  The Piazza Rosa Group acquisition contributed sales $13.2 million or 12.5%. Sales in our Mold-Tech businesses grew due to launches of new automotive models in the current year. New technologies sales of Architexture, laser, nickel shell, finishing and treatment grew by $17.8 million or 139% during the year.

 

Income from operations in fiscal year 2019 decreased by $5.6 million, or 19.0%, when compared to the prior year. The decrease was primarily due to an unfavorable geographic mix, lower automotive sales in North America, reduced demand at our higher profit China facilities due to concerns regarding trade conflicts, and the increased costs associated with the integration process following the Tenibac acquisition. Based on a strategic analysis, we have decided to close underperforming sites and reduce administrative headcount. In fiscal 2020, we expect positive results from organic growth, returns from acquisitions and a positive impact from the reorganization efforts. Upon completion, we anticipate that these actions will save $2.7 million on an annual basis by the end of the second quarter in fiscal 2020.

 

Income from operations in fiscal year 2018 increased by $3.5 million, or 13.3%, when compared to the prior year. While overall operating income improved due to our new product offerings, these offerings required up-front investments which negatively impacted operating income margins for the year.

 

Electronics

   

2019 compared to 2018

   

2018 compared to 2017

 

(in thousands except

                 

%

                   

%

 

percentages)

 

2019

   

2018

   

Change

   

2018

   

2017

   

Change

 

Net sales

  $ 204,073     $ 196,291       4.0 %   $ 196,291     $ 136,689       43.6 %

Income from operations

    41,227       45,501       (9.4 )%     45,501       27,855       63.3 %

Operating income margin

    20.2 %     23.2 %             23.2 %     20.4 %        

 

 

23

 

 

Net sales in fiscal year 2019 increased $7.8 million, or 4.0%, when compared to the prior year with organic sales growth contributing $2.6 million, or 1.3%. The sales impact of the Agile Magnetics acquisition was $9.3 million and foreign exchange rates unfavorably affected sales by $4.2 million or 2.1%. We anticipate a sales volume decline in the first half of fiscal year 2020 due to customer inventory corrections, trade war impacts, and lower automotive market demand followed by a modest recovery in the second half of the fiscal year.

 

Net sales in the fiscal year 2018 increased $59.6 million, or 43.6%, when compared to the prior year.  Organic sales growth was $16.6 million, or 12.1%. The sales impact of the Standex Electronics Japan (“SEJ”) reed switch operation, acquired March 31, 2017, as compared to the prior year was $37.1 million. Foreign exchange rates favorably affected sales by $5.9 million for the year.  Organic sales growth was strong in all major geographic areas and all major product lines with particular strength in sensors and reed switches.

 

Income from operations in the fiscal year 2019 decreased $4.3 million, or 9.4%, when compared to the prior year. The operating income decline was due to government mandated wage increases in our Mexico operation, platinum group metal material increases, acquisition purchase accounting of $0.3 million, and India facility start-up costs, partially offset by cost saving initiatives.

 

Income from operations in the fiscal year 2018 increased $17.6 million, or 63.3%, when compared to the prior year.  The operating improvements were a result of the acquisition of SEJ reed switch business, along with operating efficiencies, product mix and higher organic sales growth in our base business, and the absence of $2.3 million of purchase accounting expenses from the prior year.

 

Engineering Technologies

   

2019 compared to 2018

   

2018 compared to 2017

 

(in thousands except

                 

%

                   

%

 

percentages)

 

2019

   

2018

   

Change

   

2018

   

2017

   

Change

 

Net sales

  $ 105,270     $ 90,781       16.0 %   $ 90,781     $ 90,506       0.3 %

Income from operations

    11,169       6,506       71.7 %     6,506       9,758       (33.3 )%

Operating income margin

    10.6 %     7.2 %             7.2 %     10.8 %        

 

Net sales in the fiscal year 2019 increased $14.5 million or 16.0% when compared to the prior year. Sales distribution by market in 2019 was as follows: 46% aviation, 26% space, 13% oil and gas, 8% defense, 5% medical, and 2% other markets. Aviation sales grew 9.0% from the prior year due to sales on new aircraft and engine platforms. Space market sales increased 13.5% from the prior year driven by higher sales in the manned space segment on new development programs.  Growth in 2019 was also driven by increased sales in the oil and gas and defense markets.  While we anticipate sales growth in fiscal 2020, we expect our first quarter will show a sales decline due to project timing.

 

Net sales in the fiscal year 2018 increased $0.3 million or 0.3% when compared to the prior year. Sales distribution by market in 2018 was as follows: 50% aviation, 27% space, 11% oil and gas, 5% medical, and 7% other markets. aviation sales grew 14.3% from the prior year due to sales on new aircraft and engine platforms, including the Airbus A320 NEO and Boeing 737 Max platforms. Space market sales decreased 7.9% from the prior year driven by lower sales in the satellite launch vehicle segment, partially offset by an increase in the manned space segment. Defense and oil and gas market sales also declined in fiscal 2018.

 

Income from operations in fiscal 2019 increased $4.7 million or 71.7% when compared to the prior year. The increase in operating income was driven by higher sales volume, improved manufacturing efficiencies on production programs, and price increases in the Aviation segment, partially offset by an asset impairment charge of $1.2M due to a customer contract termination.  Looking forward, we anticipate improved margins as aviation programs continue to ramp to higher production rates in calendar year 2020.

 

Income from operations in fiscal 2018 decreased $3.3 million or 33.3% when compared to the prior year. The decrease in operating income was due to delays in major aircraft programs, decreased spending on development programs in the space and aviation markets, and pricing pressure on legacy aircraft parts.

 

Hydraulics

   

2019 compared to 2018

   

2018 compared to 2017

 

(in thousands except

                 

%

                   

%

 

percentages)

 

2019

   

2018

   

Change

   

2018

   

2017

   

Change

 

Net sales

  $ 53,943     $ 48,169       12.0 %   $ 48,169     $ 41,150       17.1 %

Income from operations

    8,891       7,398       20.2 %     7,398       6,802       8.8 %

Operating income margin

    16.5 %     15.4 %             15.4 %     16.5 %        

 

 

24

 

 

Net sales increased $5.8 million, or 12.0%, when compared to the prior year.  The increase is due to new product introductions during the year and market share gains in the refuse OEM marketplace.  Moving forward we anticipate demand in our end markets to remain positive due to construction and infrastructure projects. We also expect additional market share gains at the OEM level in the refuse market.

 

Net sales in fiscal year 2018 increased by $7.0 million, or 17.1% compared to the prior year. Sales distribution by channel in 2018 was as follows: 37% dump trailer and truck, 26% refuse, 25% after-market, 5% export, and 7% other markets. The majority of the increase in sales was from strong demand in the refuse and dump markets. Additionally, several new OEM cylinder applications on front-end loading garbage trucks and container handlers were secured during the year.

 

Income from operations increased $1.5 million, or 20.2%, when compared to the prior year.  The operating income increase was driven by the revenue growth in the refuse market partially offset by higher material costs and higher manufacturing overhead as a result of sales volume.  The group received tariff relief on both rod and telescopic cylinders, but this relief is scheduled to end in the third quarter of fiscal year 2020.  We can not be certain if the tariff relief will be extended by the U.S. government.

 

Income from operations in fiscal year 2018 increased $0.6 million or 8.8% when compared to the prior year. Operating income margins in fiscal 2018 were impacted by material cost increases, however, we implemented price increases in the latter half of the fiscal year to mitigate some of these material price increases.

 

Food Service Equipment

   

2019 compared to 2018

   

2018 compared to 2017

 

(in thousands except

                 

%

                   

%

 

percentages)

 

2019

   

2018

   

Change

   

2018

   

2017

   

Change

 

Net sales

  $ 278,600     $ 298,936       (6.8 )%   $ 298,936     $ 273,597       9.3 %

Income from operations

    22,773       28,131       (19.0 )%     28,131       23,633       19.0 %

Operating income margin

    8.2 %     9.4 %             9.4 %     8.6 %        

 

Net sales for fiscal year 2019 decreased $20.3 million, or 6.8% when compared to the prior year.  The Refrigeration group experienced a 12.8% sales decline in fiscal year 2019 primarily due to slow market conditions in buying group markets, increased competition in the cabinet market space, and reduced sales to regional retail chains as a result of customer financial constraints. Additionally, pump business sales decreased 8.6% compared to prior year due to a decline in the European espresso and carbonated beverage markets. The sales declines in the Refrigeration and pump businesses were partially offset by a 10.6% sales increase in our Scientific group. The increased volume in the Scientific group was due to increased sales to retail pharmacy customers and national clinical distributors. During June, fire destroyed a third party warehouse leased by the Refrigeration group.  We anticipate that Refrigeration Group sales will be lower in the first half of fiscal year 2020 as we rebuild our finished goods inventory levels in order to meet customer demand. 

 

Net sales for fiscal year 2018 increased $25.3 million, or 9.3% when compared to the prior year. Organic sales increased $14.2 million or 5.2% while the acquisition of Horizon Scientific contributed $9.5 million or 3.5% and foreign exchange added $1.6 million or 0.6%. Refrigeration Solutions sales increased by 9.4%, which included organic sales increases of 5.2% and acquisition growth of 4.2%. Refrigeration sales increased in the scientific and food service markets while the dealer, direct, and retail food service markets recovered from prior year declines. Specialty Solutions sales increased 9.4% with solid volume from the beverage market and strong growth in merchandising.

 

Income from operations for fiscal year 2019 decreased $5.4 million, or 19.0%, when compared to the prior year, and operating income margin decreased by 1.2%. Decreased sales volume and manufacturing inefficiencies in our Refrigeration Group locations were the primary cause of the decline in income from operations.

 

Income from operations for fiscal year 2018 increased $4.5 million, or 19.0%, when compared to the prior year, and operating income margin increased from 8.6% to 9.4%.  The realignment of the Refrigeration plant operations was largely completed in 2018 and drove operating income improvements for the year.

 

 

25

 

 

Corporate, Restructuring and Other

   

2019 compared to 2018

   

2018 compared to 2017

 

(in thousands except

                 

%

                   

%

 

percentages)

 

2019

   

2018

   

Change

   

2018

   

2017

   

Change

 

Corporate

  $ (24,729 )   $ (26,430 )     6.4 %   $ (26,430 )   $ (23,664 )     (11.7 )%

Restructuring

    (1,635 )     (6,964 )     76.5 %     (6,964 )     (5,761 )     (20.9 )%

Other Operating Expenses

    (3,575 )     (3,749 )     4.6 %     (3,749 )     (7,843 )     52.2 %

 

Corporate expenses declined by 6.4% in fiscal 2019 primarily due to reduced incentive compensation expenses.

 

Corporate expenses increased by 11.7% in fiscal 2018 due to increases in administrative compensation costs as a result of improved performance along with additional investments to support the Standex Value Creation System.

 

The restructuring and acquisition-related costs have been discussed above in the Company Overview.

 

Discontinued Operations

 

In pursuing our business strategy, the Company continues to divest certain businesses and record activities of these businesses as discontinued operations. Results of the Cooking Solutions Group in current and prior periods have been classified as discontinued operations in the Consolidated Financial Statements and excluded from the results from continuing operations.  Activity related to the Cooking Solutions Group and other discontinued operations for twelve months ended June 30, 2019 and 2018 is as follows (in thousands):

 

Results of the Cooking Solutions Group in current and prior periods have been classified as discontinued operations in the Consolidated Financial Statements and excluded from the results from continuing operations.  Activity related to the Cooking Solutions Group and other discontinued operations for twelve months ended June 30, 2019 and 2018 is as follows (in thousands):

 

   

Year Ended June 30,

 
   

2019

   

2018

 

Net Sales

  $ 71,451     $ 97,930  
                 

Gain on Sale of Business

  $ 20,539     $ -  

Transaction Fees

    (4,397 )     -  

Income from Discontinued Operations

  $ 18,900     $ 6,136  

Non-operating Income (Expense)

    (364 )     826  

Profit Before Taxes

  $ 18,536     $ 6,962  

Benefit (Provision) for Taxes

    2,189       (1,701 )

Net income from Discontinued Operations

  $ 20,725     $ 5,261  

 

Liquidity and Capital Resources

 

At June 30, 2019, our total cash balance was $93.1 million, of which $86.2 million was held outside of the United States.  Due to changes in the U.S. tax law, we began repatriating foreign earnings in fiscal year 2019.  During the year, we returned $51.5 million of our cash previously held outside of the United States.  During fiscal year 2020, we anticipate returning an additional $30 million of foreign cash however, the amount and timing of cash repatriation during 2020 will be dependent upon each business unit’s operational needs including requirements to fund working capital, capital expenditure, and jurisdictional tax payments.  The repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences or be subject to capital controls; however, those balances are generally available without legal restrictions to fund ordinary business operations.

 

Cash Flow

 

Net cash provided by continuing operating activities for the year ended June 30, 2019 was $73.2 million compared to net cash provided by continuing operating activities of $60.4 million in the prior year. We generated $78.6 million from income statement activities and used $5.4 million of cash to fund working capital increases. Cash flow used in investing activities for the year ended June 30, 2019 totaled $159.5 million.  Uses of investing cash consisted primarily of capital expenditures of $34.4 million along with $127.9 million for the acquisition of Tenibac, Agile Magnetics, and GS Engineering. Cash used by financing activities for the year ended June 30, 2019 were $38.2 million and included cash paid for dividends of $9.8 million and stock repurchases of $33.4 million offset by net borrowings of $4.8 million.

 

26

 

 

Net cash provided by continuing operating activities for the year ended June 30, 2018 was $60.4 million. We generated $68.5 million from income statement activities and used $8.0 million of cash to fund working capital increases. Cash flow used in investing activities for the year ended June 30, 2018 totaled $32.3 million.  Uses of investing cash consisted primarily of capital expenditures of $25.3 million and $10.4 million for Piazza Rosa and other acquisition activities. These uses of investing cash were partially offset by $2.1 million from proceeds of life insurance and $2.9 million from the net proceeds of the sale of a building in Cincinnati, Ohio. We leased back the Cincinnati, Ohio building and, as a result of the transaction, recorded a $0.7 million deferred gain that will be amortized over the initial operating lease term which expires in May 2019. Cash used by financing activities for the year ended June 30, 2018 were $11.9 million and included net borrowings of $1.3 million, cash paid for dividends of $8.9 million and stock repurchases of $2.7 million.

 

We sponsor a number of defined benefit and defined contribution retirement plans.  The U.S. pension plan is frozen for all participants.  We have evaluated the current and long-term cash requirements of these plans, and our existing sources of liquidity are expected to be sufficient to cover required contributions under ERISA and other governing regulations.

 

The fair value of the Company's U.S. defined benefit pension plan assets was $186.2 million at June 30, 2019, as compared to $191.0 million as of June 30, 2018.  We participate in two multi-employer pension plans and sponsor six defined benefit plans including two in the U.S. and one in the U.K., Germany, Ireland, and Japan.  The Company’s pension plan is frozen for U.S. employees and participants in the plan ceased accruing future benefits.  Our primary U.S. defined benefit plan is not expected to be 100% funded under ERISA rules at June 30, 2019, and we expect to make mandatory contributions of $4.3 million to the U.S. defined benefit plan in the coming year.  Additionally, we expect to pay $1.1 million to our other defined benefit plans in the U.S. and Europe during fiscal year 2020.

 

We have evaluated the current and long-term cash requirements of our defined benefit and defined contribution plans as of June 30, 2019 and determined our operating cash flows from continuing operations and available liquidity are expected to be sufficient to cover the required contributions under ERISA and other governing regulations. 

 

We have an insurance program in place to fund supplemental retirement income benefits for five retired executives.  Current executives and new hires are not eligible for this program.  At June 30, 2019, the underlying policies had a cash surrender value of $18.0 million and are reported net of loans of $8.7 million for which we have the legal right of offset. These amounts are reported net on our balance sheet.

 

Capital Structure

 

During the second quarter of fiscal year 2019, the Company entered into a five-year Amended and Restated Credit Agreement (“credit agreement”, or “facility”). The facility has a borrowing limit of $500 million which is an increase of $100 million from the prior facility’s $400 million limit and can be increased by an amount of up to $250 million, in accordance with specified conditions contained in the agreement. The facility also includes a $10 million sublimit for swing line loans and a $35 million sublimit for letters of credit.

 

Under the terms of the Credit Facility, we will pay a variable rate of interest and a commitment fee on borrowed amounts as well as a commitment fee on unused amounts under the facility. The amount of the commitment fee will depend upon both the undrawn amount remaining available under the facility and the Company’s funded debt to EBITDA (as defined in the agreement) ratio at the last day of each quarter. As our funded debt to EBITDA ratio increases, the commitment fee will increase.

 

Funds borrowed under the facility may be used for the repayment of debt, working capital, capital expenditures, acquisitions (so long as certain conditions, including a specified funded debt to EBITDA leverage ratio is maintained), and other general corporate purposes. As of June 30, 2019, the Company has used $7.6 million against the letter of credit sub-facility and had the ability to borrow $253.4 million under the facility based on our current trailing twelve-month EBITDA. The facility contains customary representations, warranties and restrictive covenants, as well as specific financial covenants. The Company’s current financial covenants under the facility are as follows:

 

Interest Coverage Ratio - The Company is required to maintain a ratio of Earnings Before Interest and Taxes, as Adjusted (“Adjusted EBIT per the Credit Facility”), to interest expense for the trailing twelve months of at least 2.75:1, an improvement over the interest coverage ratio of 3.0:1 permitted under the previous agreement. Adjusted EBIT per the Credit Facility specifically excludes extraordinary and certain other defined items such as cash restructuring and acquisition-related charges up to the lower of $20.0 million or 10% of EBITDA, an increase from the prior agreement’s $7.5 million cap on restructuring and acquisition expenses. The new facility continues to allow unlimited non-cash charges including purchase accounting and goodwill adjustments. At June 30, 2019, the Company’s Interest Coverage Ratio was 7.73:1.

 

 

27

 

 

Leverage Ratio- The Company’s ratio of funded debt to trailing twelve month Adjusted EBITDA per the Credit Facility, calculated as Adjusted EBIT per the Credit Facility plus depreciation and amortization, may not exceed 3.5:1. Under certain circumstances in connection with a Material Acquisition (as defined in the Facility), the Facility allows for the leverage ratio to go as high as 4.0:1 for a four-fiscal quarter period. At June 30, 2019, the Company’s Leverage Ratio was 1.28:1.

 

As of June 30, 2019, we had borrowings under our facility of $198.8 million.  In order to manage our interest rate exposure on these borrowings, we are party to $85.0 million of active floating to fixed rate swaps.  These swaps convert our interest payments from LIBOR to a weighted average rate of 2.11%.  The effective rate of interest for our outstanding borrowings, including the impact of the interest rate swaps, was 3.88%.  Our primary cash requirements in addition to day-to-day operating needs include interest payments, capital expenditures, acquisitions, share repurchases, and dividends. 

 

Our primary sources of cash for these requirements are cash flows from continuing operations and borrowings under the facility.  We expect that fiscal year 2020 depreciation and amortization expense will be between $25.0 and $26.0 million and $11.0 and $12.0 million, respectively.

 

The following table sets forth our capitalization at June 30:

 

   

2019

   

2018

 

Long-term debt

  $ 197,610     $ 193,772  

Less cash and cash equivalents

    93,145       109,602  

Net debt

    104,465       84,170  

Stockholders' equity

    464,313       450,795  

Total capitalization

  $ 568,778     $ 534,965  

 

Stockholders’ equity increased year over year by $13.5 million, primarily as a result of current year net income of $67.9 million offset by $43.3 million of cash returned to shareholders in the form of dividends and stock repurchases and $12.2 million in unrealized pension losses.  The Company's net debt to capital percentage changed to 18.4% for as of June 30, 2019 from 15.7% in the prior year. 

 

Contractual obligations of the Company as of June 30,2019 are as follows (in thousands):

 

   

Payments Due by Period

 
           

Less

                   

More

 
           

than 1

    1-3     3-5    

than 5

 

Contractual Obligations

 

Total

   

Year

   

Years

   

Years

   

Years

 

Long-term debt obligations

  $ 198,800     $ -     $ -     $ 198,800     $ -  

Operating lease obligations

  $ 48,712       9,357       13,365       7,697       18,293  

Estimated interest payments (1)

  $ 35,158       7,820       15,642       11,696       -  

Post-retirement benefit payments (2)

  $ 42,546       5,360       17,556       16,687       2,943  

Total

  $ 325,216     $ 22,537     $ 46,563     $ 234,880     $ 21,236  

 

 

(1)

Estimated interest payments are based upon effective interest rates as of June 30, 2019, and exclude those interest rate swaps which are assets to us. See Item 7A for further discussions surrounding interest rate exposure on our variable rate borrowings.

 

 

(2)

Post-retirement benefits and pension plan contribution payments represents’ future pension payments to comply with local funding requirements. Our policy is to fund domestic pension liabilities in accordance with the minimum and maximum limits imposed by the Employee Retirement Income Security Act of 1974 (“ERISA”), federal income tax laws and the funding requirements of the Pension Protection Act of 2006.

 

At June 30, 2019, we had $10.6 million of non-current liabilities for uncertain tax positions. We are not able to provide a reasonable estimate of the timing of future payments related to these obligations.

 

Off Balance Sheet Items

 

At June 30, 2019, and 2018, the Company had standby letters of credit outstanding, primarily for insurance and trade financing purposes, of $7.6 million and $7.9 million, respectively.

 

We had no other material off balance sheet items at June 30, 2019, other than the operating leases summarized above in the “Contractual obligations” table.

 

28

 

 

Other Matters

 

Inflation – Certain of our expenses, such as wages and benefits, occupancy costs and equipment repair and replacement, are subject to normal inflationary pressures. Inflation for medical costs can impact both our employee benefit costs as well as our reserves for workers' compensation claims. We monitor the inflationary rate and make adjustments to reserves whenever it is deemed necessary. Our ability to control worker compensation insurance medical cost inflation is dependent upon our ability to manage claims and purchase insurance coverage to limit the maximum exposure for us. Each of our segments is subject to the effects of changing raw material costs caused by the underlying commodity price movements. In general, we do not enter into purchase contracts that extend beyond one operating cycle. While Standex considers our relationship with our suppliers to be good, there can be no assurances that we will not experience any supply shortage.

 

Foreign Currency Translation – Our primary functional currencies used by our non-U.S. subsidiaries are the Euro, British Pound Sterling (Pound), Japanese (Yen), and Chinese (Yuan).

 

Defined Benefit Pension Plans – We record expenses related to these plans based upon various actuarial assumptions such as discount rates and assumed rates of returns.  The Company’s pension plan was frozen for substantially all remaining eligible U.S. employees in 2015 and participants in the plan ceased accruing future benefits. 

 

Environmental Matters To the best of our knowledge, we believe that we are presently in substantial compliance with all existing applicable environmental laws and regulations and do not anticipate any instances of non-compliance that will have a material effect on our future capital expenditures, earnings or competitive position.

 

Seasonality – We are a diversified business with generally low levels of seasonality, however our fiscal third quarter is typically the period with the lowest level of activity.

 

Employee Relations – The Company has labor agreements with several union locals in the United States and several European employees belong to European trade unions. 

 

Critical Accounting Policies

 

The Consolidated Financial Statements include accounts of the Company and all of our subsidiaries.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Consolidated Financial Statements.  Although, we believe that materially different amounts would not be reported due to the accounting policies described below, the application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.  We have listed a number of accounting policies which we believe to be the most critical. 

 

Revenue Recognition – Effective July 1, 2018, the Company adopted accounting standard ASU No. 2014-09, “Revenue from Contracts with Customers" (ASC 606) using the modified retrospective method to contracts that were not completed as of June 30, 2018. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings, whereby the cumulative impact of all prior periods is recorded in retained earnings or other impacted balance sheet line items upon adoption. The comparative information has not been adjusted and continues to be reported under ASC 605. The impact on the Company’s consolidated income statements, balance sheets, equity or cash flows as of the adoption date as a result of applying ASC 606 have been reflected within those respective financial statements. The Company’s accounting policy has been updated to align with ASC 606. 

 

The adoption of ASC 606 represents a change in accounting principle that provides enhanced revenue recognition disclosures. Revenue is recognized when the control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. The Company recognizes all revenues on a gross basis based on consideration of the criteria set forth in ASC Topic 606-10-55, Principal versus Agent Considerations.

 

Most of the Company’s contracts have a single performance obligation which represents, the product or service being sold to the customer. Some contracts include multiple performance obligations such as a product and the related installation and/or extended warranty. Additionally, most of the Company’s contracts offer assurance type warranties in connection with the sale of a product to customers. Assurance type warranties provide a customer with assurance that the product complies with agreed-upon specifications. Assurance type warranties do not represent a separate performance obligation.

 

29

 

 

In general, the Company recognizes revenue at the point in time control transfers to their customer based on predetermined shipping terms. Revenue recognized under long-term contracts within the Engineering Technologies group for highly customized customer products that have no alternative use and in which the contract specifies the Company has a right to payment for its costs, plus a reasonable margin are recognized over time. For products recognized over time, the transfer of control is measured pro rata, based upon current estimates of costs to complete such contracts. Losses on contracts are fully recognized in the period in which the losses become determinable. Revisions in profit estimates are reflected on a cumulative basis in the period in which the basis for such revision becomes known.

 

Collectability of Accounts Receivable – Accounts Receivable are reduced by an allowance for amounts that may become uncollectible in the future.  Our estimate for the allowance for doubtful accounts related to trade receivables includes evaluation of specific accounts where we have information that the customer may have an inability to meet its financial obligation together with a general provision for unknown but existing doubtful accounts. 

 

Realizability of Inventories – Inventories are valued at the lower of cost or market.  The Company regularly reviews inventory values on hand using specific aging categories, and records a provision for obsolete and excess inventory based on historical usage and estimated future usage.  As actual future demand or market conditions may vary from those projected by management, adjustments to inventory valuations may be required.

 

Realization of Goodwill – Goodwill and certain indefinite-lived intangible assets are not amortized, but instead are tested for impairment at least annually and more frequently whenever events or changes in circumstances indicate that the fair value of the asset may be less than its carrying amount of the asset.  The Company’s annual test for impairment is performed using a May 31st measurement date.

 

We have identified our reporting units for impairment testing as our nine operating segments, which are aggregated into our five reporting segments as disclosed in Note 17 – Industry Segment Information. 

 

The test for impairment is currently a two-step process.  The first step compares the carrying amount of the reporting unit to its estimated fair value (Step 1).  To the extent that the carrying value of the reporting unit exceeds its estimated fair value, a second step is performed, wherein the reporting unit’s carrying value is compared to the implied fair value (Step 2). To the extent that the carrying value exceeds the implied fair value, impairment exists and must be recognized. During fiscal year 2020, the company will adopt ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairments by, among other things, eliminating step two from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

 

As quoted market prices are not available for the Company’s reporting units, the fair value of the reporting units is determined using a discounted cash flow model (income approach).  This method uses various assumptions that are specific to each individual reporting unit in order to determine the fair value.  In addition, the Company compares the estimated aggregate fair value of its reporting units to its overall market capitalization.

 

Our annual impairment testing at each reporting unit relied on assumptions surrounding general market conditions, short-term growth rates, a terminal growth rate of 2.5%, and detailed management forecasts of future cash flows prepared by the relevant reporting unit.  Fair values were determined primarily by discounting estimated future cash flows at a weighted average cost of capital of 9.66%.  During our annual impairment testing, we evaluated the sensitivity of our most critical assumption, the discount rate, and determined that a 200 basis point change in the discount rate selected would not have impacted the test results.  Additionally, the Company could reduce the terminal growth rate from its current 2.5% to 1.0% and the fair value of all reporting units would still exceed their carrying value.

 

While we believe that our estimates of future cash flows are reasonable, changes in assumptions could significantly affect our valuations and result in impairments in the future.  The most significant assumption involved in the Company’s determination of fair value is the cash flow projections of each reporting unit. 

 

As a result of our annual assessment, the Company determined that the fair value of the reporting units substantially exceeded their respective carrying values.  Therefore, no impairment charges were recorded in connection with our annual assessment during 2019. 

 

 

30

 

 

Cost of Employee Benefit Plans – We provide a range of benefits to certain retirees, including pensions and some postretirement benefits.  We record expenses relating to these plans based upon various actuarial assumptions such as discount rates, assumed rates of return, compensation increases and turnover rates.  The expected return on plan assets assumption of 7.0% in the U.S. is based on our expectation of the long-term average rate of return on assets in the pension funds and is reflective of the current and projected asset mix of the funds and considers the historical returns earned on the funds.  We have analyzed the rates of return on assets used and determined that these rates are reasonable based on the plans’ historical performance relative to the overall markets as well as our current expectations for long-term rates of returns for our pension assets.  The U.S. discount rate of 3.7% reflects the current rate at which pension liabilities could be effectively settled at the end of the year.  The discount rate is determined by matching our expected benefit payments from a stream of AA- or higher bonds available in the marketplace, adjusted to eliminate the effects of call provisions.  We review our actuarial assumptions, including discount rate and expected long-term rate of return on plan assets, on at least an annual basis and make modifications to the assumptions based on current rates and trends when appropriate.  Based on information provided by our actuaries and other relevant sources, we believe that our assumptions are reasonable.

 

The cost of employee benefit plans includes the selection of assumptions noted above.  A twenty-five basis point change in the U.S. expected return on plan assets assumptions, holding our discount rate and other assumptions constant, would increase or decrease pension expense by approximately $0.5 million per year.  A twenty-five basis point change in our discount rate, holding all other assumptions constant, would have no impact on 2019 pension expense as changes to amortization of net losses would be offset by changes to interest cost.  In future years, the impact of discount rate changes could yield different sensitivities.  See the Notes to the Consolidated Financial Statements for further information regarding pension plans.

 

Business Combinations - The accounting for business combinations requires estimates and judgments as to expectations for future cash flows of the acquired business and the allocation of those cash flows to identifiable intangible assets in determining the estimated fair values for assets acquired and liabilities assumed.  The fair values assigned to tangible and intangible assets acquired and liabilities assumed, are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. If the actual results differ from the estimates and judgments used in these fair values, the amounts recorded in the consolidated financial statements could result in a possible impairment of the intangible assets and goodwill, or require acceleration of the amortization expense of finite-lived intangible assets.

 

Allocations of the purchase price for acquisitions are based on estimates of the fair value of the net assets acquired and are subject to adjustment upon finalization of the purchase price allocation. During this measurement period, the Company will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date.  All changes that do not qualify as measurement period adjustments are included in current period earnings.

 

Recently Issued Accounting Pronouncements

 

See "Item 8. Financial Statements and Supplementary Data, Note 1. Summary of Accounting Policies” for information regarding the effect of recently issued accounting pronouncements on our consolidated statements of operations, comprehensive income, stockholders’ equity, cash flows, and notes for the year ended June 30, 2019.

 

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

 

Risk Management

 

We are exposed to market risks from changes in interest rates, commodity prices and changes in foreign currency exchange.  To reduce these risks, we selectively use, from time to time, financial instruments and other proactive management techniques.  We have internal policies and procedures that place financial instruments under the direction of the Treasurer and restrict all derivative transactions to those intended for hedging purposes only.  The use of financial instruments for trading purposes (except for certain investments in connection with the non-qualified defined contribution plan) or speculation is strictly prohibited.  The Company has no majority-owned subsidiaries that are excluded from the consolidated financial statements.  Further, we have no interests in or relationships with any special purpose entities. 

 

31

 

 

Exchange Risk

 

We are exposed to both transactional risk and translation risk associated with exchange rates.  The transactional risk is mitigated, in large part, by natural hedges developed with locally denominated debt service on intercompany accounts.  We also mitigate certain of our foreign currency exchange rate risks by entering into forward foreign currency contracts from time to time.  The contracts are used as a hedge against anticipated foreign cash flows, such as loan payments, customer remittances, and materials purchases, and are not used for trading or speculative purposes.  The fair values of the forward foreign currency exchange contracts are sensitive to changes in foreign currency exchange rates, as an adverse change in foreign currency exchange rates from market rates would decrease the fair value of the contracts.  However, any such losses or gains would generally be offset by corresponding gains and losses, respectively, on the related hedged asset or liability.  At June 30, 2019 and 2018, the fair value, in the aggregate, of the Company’s open foreign exchange contracts was a liability of $3.1 million and $2.8 million respectively. 

 

Our primary translation risk is with the Euro, British Pound Sterling, Peso, Japanese Yen and Chinese Yuan.  A hypothetical 10% appreciation or depreciation of the value of any these foreign currencies to the U.S. Dollar at June 30, 2019, would not result in a material change in our operations, financial position, or cash flows.  We hedge our most significant foreign currency translation risks primarily through cross currency swaps and other instruments, as appropriate.

 

Interest Rate

 

The Company’s effective rate on variable-rate borrowings under the revolving credit agreement was 3.88% and 3.29% at June 30, 2019 and 2018, respectively.  Our interest rate exposure is limited primarily to interest rate changes on our variable rate borrowings.  From time to time, we will use interest rate swap agreements to modify our exposure to interest rate movements.  At June 30, 2019, we have $85.0 million of active floating to fixed rate swaps with terms ranging from one to four years.  These swaps convert our interest payments from LIBOR to a weighted average rate of 2.11%.  At June 30, 2019 and 2018, the fair value, in the aggregate, of the Company’s interest rate swaps was a liability of $1.4 million and an asset of $1.3 million respectively. A 25 basis point increase in interest rates would increase our annual interest expense by $0.3 million. 

 

Concentration of Credit Risk

 

We have a diversified customer base.  As such, the risk associated with concentration of credit risk is inherently minimized.  As of June 30, 2019, no one customer accounted for more than 5% of our consolidated outstanding receivables or of our sales.

 

Commodity Prices

 

The Company is exposed to fluctuating market prices for all commodities used in its manufacturing processes.  Each of our segments is subject to the effects of changing raw material costs caused by the underlying commodity price movements.  In general, we do not enter into purchase contracts that extend beyond one operating cycle.  While Standex considers our relationship with our suppliers to be good, there can be no assurances that we will not experience any supply shortage.

 

The Engineering Technologies, Food Service Equipment, Electronics, and Hydraulics segments are all sensitive to price increases for steel products, other metal commodities and petroleum based products.  In the past year, we have experienced price fluctuations for a number of materials including steel, copper wire, other metal commodities, refrigeration components and foam insulation.  These materials are some of the key elements in the products manufactured in these segments.  Wherever possible, we will implement price increases to offset the impact of changing prices.  The ultimate acceptance of these price increases, if implemented, will be impacted by our affected divisions’ respective competitors and the timing of their price increases.

 

 

32

 

 

 

 

 

Item 8. Financial Statements and Supplementary Data

 

As of June 30 (in thousands, except share data)

 

2019

   

2018

 
                 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 93,145     $ 109,602  

Accounts receivable, net

    119,589       119,783  

Inventories

    88,645       104,300  

Prepaid expenses and other current assets

    30,872       10,255  

Income taxes receivable

    1,622       2,348  

Current assets-Discontinued Operations

    -       37,671  

Total current assets

    333,873       383,959  
                 

Property, plant and equipment, net

    148,024       136,934  

Intangible assets, net

    118,660       84,938  

Goodwill

    281,503       211,751  

Deferred tax asset

    14,140       7,447  

Other non-current assets

    25,689       29,749  
Long-term assets-Discontinued Operations     -       62,159  

Total non-current assets

    588,016       532,978  
                 

Total assets

  $ 921,889     $ 916,937  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities:

               

Accounts payable

  $ 72,603     $ 78,947  

Accrued liabilities

    62,648       57,679  

Income taxes payable

    5,744       6,050  
Current liabilities-Discontinued Operations     620       18,665  

Total current liabilities

    141,615       161,341  
                 

Long-term debt

    197,610       193,772  

Deferred income taxes

    22,824       26,816  

Pension obligations

    75,148       57,826  

Other non-current liabilities

    20,379       26,337  
Non-current liabilities-Discontinued Operations     -       50  

Total non-current liabilities

    315,961       304,801  
                 

Commitments and Contingencies (Notes 12 and 13)

               
                 

Stockholders' equity:

               

Common stock, par value $1.50 per share - 60,000,000 shares authorized, 27,984,278 issued, 12,334,607 and 12,705,562 shares outstanding in 2019 and 2018

    41,976       41,976  

Additional paid-in capital

    65,515       61,328  

Retained earnings

    818,282       761,430  

Accumulated other comprehensive loss

    (137,278 )     (121,859 )

Treasury shares (15,649,671 shares in 2019 and 15,278,716 shares in 2018)

    (324,182 )     (292,080 )

Total stockholders' equity

    464,313       450,795  
                 

Total liabilities and stockholders' equity

  $ 921,889     $ 916,937  

 

See notes to consolidated financial statements.

 

 

 

33

 

 

 

 

Consolidated Statements of Operations

 

Standex International Corporation and Subsidiaries

For the Years Ended June 30

                       

(in thousands, except per share data)

 

2019

   

2018

   

2017

 

Net sales

  $ 791,579     $ 770,452     $ 647,885  

Cost of sales

    (523,519 )     (500,850 )     (432,332 )

Gross profit

    268,060       269,602       215,553  
                         

Selling, general and administrative

    184,733       178,878       145,030  

Restructuring costs

    1,635       6,964       5,761  

Acquisition related expenses

    3,075       3,749       7,843  

Other operating (income) expense, net

    500       -       -  

Income from operations

    78,117       80,011       56,919  
                         

Interest expense

    10,760       8,029       4,043  

Other non-operating (income) expense, net

    1,744       1,735       1,917  

Total

    12,504       9,764       5,960  
                         

Income from continuing operations before income taxes

    65,613       70,247       50,959  

Provision for income taxes

    (18,424 )     (38,904 )     (11,822 )

Income from continuing operations

    47,189       31,343       39,137  
                         

Income (loss) from discontinued operations, net of tax

    20,725       5,261       7,408  
                         

Net income

  $ 67,914     $ 36,604     $ 46,545  
                         

Basic earnings per share:

                       

Income (loss) from continuing operations

  $ 3.75     $ 2.47     $ 3.09  

Income (loss) from discontinued operations

    1.65       0.41       0.59  

Total

  $ 5.40     $ 2.88     $ 3.68  
                         

Diluted earnings per share:

                       

Income (loss) from continuing operations

  $ 3.74     $ 2.45     $ 3.07  

Income (loss) from discontinued operations

    1.64       0.41       0.58  

Total

  $ 5.38     $ 2.86     $ 3.65  

 

See notes to consolidated financial statements.

 

 

34

 

 

 

 

 

Consolidated Statements of Comprehensive Income

 

Standex International Corporation and Subsidiaries

 

 

For the Years Ended June 30 (in thousands)

 

2019

   

2018

   

2017

 
                         

Net income (loss)

  $ 67,914     $ 36,604     $ 46,545  

Other comprehensive income (loss):

                       

Defined benefit pension plans:

                       

Actuarial gains (losses) and other changes in unrecognized costs

  $ (20,382 )   $ 6,159     $ 3,689