SXI
#Well, thank you, <UNK>, and good morning and thank you, everybody, for joining us this morning.
Our third quarter fiscal 2017 sales increased 4.1% to $184.7 million from a year ago, with organic sales increasing 2.9%.
We saw demand increase across most of our businesses while growth laneway initiatives in Electronics, Engraving and Engineering Technologies delivered top line sales increases.
As we anticipated, orders and backlog increased in Refrigeration.
Unfortunately, sales declined in that business as our Wisconsin plant experienced operational difficulties, changing over production to a new foam formulation.
GAAP operating income was down 33.4% while adjusted operating income was up 3.3% on the higher sales and adjusted EPS grew 6.8%.
We ended the third quarter with a net debt position of $127 million, reflecting the OKI Sensor Device acquisition, which we completed in the quarter.
We have renamed this business Standex Electronics Japan.
The integration is proceeding according to plan and we are excited by the potential of this business to accelerate our global growth plans in Electronics.
Our investment in growth laneways is beginning to deliver sales growth in Electronics, Engraving and Engineering Technologies.
As anticipated, Refrigeration demand increased as seen in the orders and backlog, which should deliver solid sales growth in Q4.
Finally, Horizon Scientific, acquired in October 2016, continues to outperform our expectations.
I'll touch more on our achievements in each business when I go through our segment review.
First, Tom will review our third quarter results.
Tom.
Good morning.
Slide 4 shows our historical trend of adjusted earnings per share and sales on a GAAP basis as well as an adjusted basis without the U.S. Roll, Plate and Machinery business or RPM business.
On a trailing 12-month adjusted basis, earnings per share were $4.42 through March 31, 2017 versus $4.58 in the 12 months ended March 31, 2016, which is a 3.5% decrease.
Looking at sales on a trailing 12-month basis, adjusted sales were $728 million versus $739 million in the prior year period.
Please turn to Slide 5, which details our revenue changes by segment.
Overall, organic growth was 2.9%.
The acquisition of Horizon Scientific contributed 4.3% to our sales growth while the divestiture of RPM and foreign exchange had negative impacts of 2.3% and 0.9%, respectively.
During the quarter, Engraving, Engineering Technologies and Electronics reported positive organic sales growth.
We anticipate these businesses to continue to grow in the fourth quarter.
Slide 6 summarizes our third quarter results on a GAAP and adjusted basis.
Sales growth was 4.1% on a GAAP and 6.5% on an adjusted basis.
Operating income was down 350 basis points and 30 basis points on a GAAP and non-GAAP basis, respectively.
GAAP income from operations was impacted by $6.5 million of acquisition-related and restructuring costs.
Earnings per share was down 34.1% on a GAAP basis and up 6.5% on a non-GAAP basis.
Please turn to Slide 7, which is a bridge that illustrates the impact of special items on net income from continuing operations.
Tax-affected special items included restructuring charges of $0.7 million and acquisition-related costs of $4.1 million.
On the slide, you can see the breakdown of pretax acquisition costs in the quarter.
The majority of the costs are related to Standex Electronics Japan acquisition, which was strategic and complex, requiring substantial in-country expertise to assist in due diligence.
GAAP net income was down 33.9% and adjusted net income was up 5.9%.
Turn to Slide 8.
Adjusted net working capital was $149 million at the end of the third quarter.
This compared to $141.3 million on an adjusted basis in the prior year.
Net working capital in both years have been adjusted for acquisition and disposition results.
In the quarter, results exclude $10.1 million related to the OKI acquisition.
In the prior year, we excluded $3.3 million of working capital related to RPM.
Working capital turns improved slightly, excluding the items previously mentioned, to 5 turns compared with 4.9 a year earlier.
Slide 9 illustrates our debt management.
We ended Q3 in a net debt position of approximately $127 million, reflecting the OKI acquisition, compared with the net cash position of approximately $7.4 million a year earlier.
We define net debt as funded debt less cash.
Our balance sheet leverage ratio of net debt to capital was 24.7% compared with a net debt to capital of a negative 2% a year ago.
We financed the OKI acquisition using approximately $63 million of foreign cash and $73 million from our existing credit facility.
Slide 10 summarizes our capital spending, depreciation and amortization trends.
We expect our capital spending to be between $6 million and $7 million in the fourth quarter.
Total capital spending for the year will be in the range of $24 million to $25 million.
Slide 11 details our reconciliation of operating cash to free cash flow.
Mix of business profitability, along with acquisition transaction costs and higher capital spending, resulted in lower free cash flow conversion this year.
We expect improvement in free cash flow conversion during our Q4.
With that, I'll turn the call back to <UNK>.
Thank you, Tom.
Please turn to Slide 13, and I'll begin our segment overview with the Food Service Equipment Group.
Sales increased 5.4% in the quarter, including a $7.7 million contribution from the Horizon Scientific acquisition.
As anticipated, we are seeing a strong increase in demand for Refrigeration products as national accounts begin to ramp up spending.
With the 24% increase in backlog during the quarter, we expect good sales growth in Refrigeration during Q4.
Despite the backlog increase, organic sales declined 3.2%, largely due to operational difficulties in our Wisconsin refrigeration plant as it introduced a new foam formulation into production.
We estimate that we experienced sales declines between $1.4 million and $3.8 million from that issue during the quarter.
The issue is behind us and, in April, we returned to normal production.
In addition to volume deleveraging, income from operations was affected by increased freight, lower productivity and higher material costs related to the delayed product introduction in Refrigeration as well as expenses associated with exhibiting at the biennial NAFEM trade show.
Horizon Scientific, acquired in October 2016, had a strong quarter with Standex and has, thus far, performed above our expectations.
The integration plan remains on track and we are leveraging synergies between Horizon and our Nor-Lake Scientific brand.
We expect this momentum to continue into the fourth quarter.
As I mentioned on last quarter's call, we brought in a new President to run our Refrigeration group in February.
Kevin Fink is off to a great start and has had an immediate impact on the business.
Moving on to Cooking Solutions.
Sales were down approximately 8.5%, primarily as a result of nonrecurring prior year rollouts, proactive rationalization of low margin products and slower sales to select major dealers.
Our operational performance in Nogales has stabilized in the past year.
However, we are learning that it is taking longer to win back business lost during the plant move from Cheyenne, Wyoming.
Even with the top line softness, gross margin was flat versus the prior year due to our continued focus on operational improvements.
We have seen early success and have received positive feedback about our new combi and mini oven and speed oven.
We remain encouraged by the growth in our Specialty Solutions business, which was up 4.9% year-over-year.
Our beverage pump business grew year-over-year for the fifth consecutive quarter as it builds momentum.
We remain excited by new pump products that will provide our customers with opportunities to offer innovative carbonated beverages, enhanced CO2 safety and lower maintenance costs.
Looking forward in Food Service, we anticipate improved sales and profitability in the fourth quarter as we convert on our Refrigeration backlog and recover from the production delays in our Wisconsin plant.
We will also be focused on growing sales with the large national chains and executing the ramp-up of new applications in our beverage pump business, specifically for Nitro Beverages.
Turning to Slide 14, Engraving.
Adjusted sales were up 5.5% organically, excluding RPM.
We saw an increase in mold texturizing demand in North America as new auto platform launches occurred as anticipated.
In addition, sales in Asia grew double digits due to increased automotive launches and a strong demand for nonautomotive services in Korea and China.
Europe was up modestly versus the prior year.
Our growth laneways, including architecture design centers and nickel shell and laser technologies, continued to be well-received, contributing $3 million to revenues in Q3.
We expect them to have an increasing contribution to revenues.
During the quarter, we were awarded contracts to develop the texturization of the interior molds for the iconic London taxicabs through an Asian manufacturer.
We also were awarded a contract for a major American automaker who is moving some tooling source into China to support an expedited program timeline.
Because of our global presence, capabilities and flexibility, Standex is the only company that could meet this automaker's changing needs by supporting them seamlessly in China and North America.
Looking ahead, we anticipate continued momentum into the fourth quarter with growth in new nonautomotive and automotive programs and increased demand for all technologies, including lasers, nickel shells, architecture, traditional chemical etching and weld and polishing.
Please turn to Slide 15, our Engineering Technologies Group.
We saw good growth across most of Engineering Technologies' end markets in the third quarter, including the continued ramp-up of long-term aviation deliveries.
Overall, sales increased 22.3%.
Sales in the space market increased by $2.2 million from the prior year quarter due to demand in the unmanned segment of the market.
Energy market sales increased by $2.8 million compared with the prior year quarter due to improved market conditions in both power generation and oil and gas.
Aviation sales increased by $0.8 million from the prior year due to higher sales for engine components and structural hardware.
Sales in the defense market were down $1.2 million due to project timing for deliverables in the nuclear market.
During the quarter, we announced the closure of our East Lake Enginetics plant, which was a redundant facility with low utilization.
This move will result in annualized savings between $2.5 million and $3 million.
And $0.5 million of the third quarter restructuring charge that Tom mentioned was from this closure.
The key growth laneway in this business is aviation, and our production ramp-up is on schedule to fulfill customer needs.
We remain on track to meet the increase in Airbus production by the end of calendar '17.
This is a growth platform for engine parts from Enginetics as well ---+ as well as for our lipskins from Spincraft.
Going forward, we are focusing on ramping up to deliver on long-term aviation programs for next-generation aircraft and completing facility consolidation and manufacturing layout redesign to improve efficiencies.
We also continued to drive operational excellence, increase throughput and margin enhancement programs.
We anticipate continued strong growth in the fourth quarter in both the space and aviation markets.
Please turn to Slide 16, Electronics.
We are driving excellent operating leverage from good sales growth in the Electronics segment.
Sales in North America increased 6.6%, driven by sensors and transformers.
In Europe, sales were up 10.7% due to automotive and electric utility applications.
And in Asia, sales increased 21.1% as a result of strong demand for home appliance sensors.
Operating margin was a strong 21% due to cost savings activities, operating efficiencies and the continued shift of our product mix to include higher-margin sensors.
Income from operations increased 23.5%, primarily due to the higher sales base, operational cost efficiencies and favorable earnings impact from foreign exchange.
As noted previously, we closed on the OKI Sensor Device acquisition, now named Standex Electronics Japan, at the end of March and the integration is proceeding well.
I was in Japan at the facility for the first week of operations to meet with our employees and customers and I'm happy to say that they are excited to be a part of the Standex team and are off to a great start.
Looking forward, we anticipate growth in the fourth quarter due to strong momentum in all geographic regions.
Investments in growth take time, but we are beginning to see the initial results of our growth laneways and expect continued success.
We remain focused on accelerating the integration of Standex Japan and expanding field engineers in Asia to drive specialized sensor sales.
We are quite optimistic about the prospects for growth out of that business and are making an investment to add 3 additional machines, which will increase capacity by 5%.
Please turn to Slide 17, Hydraulics.
The 10% sales decrease in Hydraulics is primarily the result of softness in the North American dump truck and dump trailer markets.
While the lower revenue had a deleveraging effect on operating income, we maintained a strong EBIT margin of 15.9% as a result of our operational excellence initiatives.
Looking ahead, we anticipate a pickup in the dump truck and dump trailer markets as we enter the spring construction season.
As plans for infrastructure investments become clear, we anticipate additional new demand.
In addition, our new pack eject cylinder product has been gaining traction with our customers and we expect this to contribute to sales growth in the refuse market.
Before we go to questions, let me give you a few key thoughts.
First, we are bullish on our recent acquisition of the OKI Sensor Device Corporation.
We have a team on the ground working diligently on the integration and capturing near-term synergies.
Secondly, we saw organic growth in Q3 in 3 of our 5 businesses, including Engraving, Electronics and Engineering Technologies.
And we expect continued momentum in the fourth quarter.
These 3 businesses have done an excellent job of using our growth discipline process to identify attractive growth opportunities and develop programs to capture them.
It takes time to ramp-up an organic growth engine and I am pleased to see these businesses now benefit from their hard work.
Third, demand is increasing for Refrigeration and we should see higher year-over-year Refrigeration sales in the fourth quarter as a result of increasing orders and backlog conversion in that business.
And finally, as we look at the future, our balance sheet is well-positioned to fund CapEx, organic growth and acquisitions as we continue to deploy the Standex value-creation system.
And with that, I'll be happy to take your questions.
Well, if you go back to press releases that we have released at some of the major [awards], we said we'd ramp up to full volume by the end of this calendar year with the pushouts of the gear turbofans, I think that moves into maybe middle '18.
But if you add up the numbers, we're talking about an annualized volume, $13 million to $15 million, in sales.
So we expect to be there in this time next year.
Of course, there will be amortization.
It's a distribution model so there is a lower step up.
So we don't ---+ the costs for the majority this quarter and you'll have some costs in the fourth quarter.
About $1.7 million I believe.
$1.7 million, yes.
$1.7 million, step up.
Well, if you take where we're at as a base line and look forward, we begin to get back some customers progressively through this year, that delivers some growth.
Retail rollouts, probably a couple of quarters away for grocery.
And then, new products, that's longer, that's 1.5 years or 2 years.
But I think based on the performance of the Cooking business, we ought to see some of that business come back and grow kind of in line with the market.
It was, you know the energy markets peaked between the offshore and the land-based turbines, peaked about $32 million annualized sales.
It dropped to a run rate ---+ a low run rate of $4 million to $5 million.
We did over $2 million last quarter.
So it was really ---+ it was a big quarter, but it's very choppy.
We don't expect that to be a consistent run rate.
We are still kind of setting our expectations and it remains at that kind of $5 million annualized level.
We're not that heavily exposed to energy.
So we don't ---+ we think the best position for us is to be kind of conservative about it.
However, we are ---+ we're well-positioned if the market comes back.
I think in a previous call, we mentioned that the manufacturer of the land-based turbines that we sold to out of our Wisconsin plants has moved production for some of those turbines to Europe.
Well, we are able to produce those products in our English plant.
So we're talking with that manufacturer.
If they ramp up production in Europe, we think we have a good shot at getting that business.
If the plants in North America come back, we're well-positioned to take that.
And the plants that produce those products are also producing aviation.
So from a plant loading standpoint, the cost position is still good.
So we still think we're competitive and well-positioned for it.
However, we have low expectations about its return.
That's ---+ for the fourth quarter, that will be the purchase accounting.
You got Horizon Scientific in there.
Yes, Horizon Scientific, is what <UNK> <UNK> said.
Yes.
All right.
I want to thank everybody for joining us.
Thank you for your interest in Standex.
Thank you, operator, for joining us this morning.
We look forward to updating you on our business next quarter.
Thank you.
