Standex Earnings 2019-04-29

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-7233

STANDEX INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).             YES [X]     NO [  ]

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

Large accelerated filer [ X ]                  

       Accelerated filer [  ]                    

Non-accelerated filer [  ]   (Do not check if a smaller reporting company)      Smaller Reporting Company [  ]

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 number of shares of Registrant's Common Stock outstanding on April 27, 2019 was 12,651,101.

STANDEX INTERNATIONAL CORPORATION

INDEX

Page No.

PART I.

FINANCIAL INFORMATION:

Item 1.

Condensed Consolidated Balance Sheets as of

March 31, 2019 (unaudited) and June 30, 2018

2

Condensed Consolidated Statements of Operations for the

Three and Nine Months Ended March 31, 2019 and 2018 (unaudited)

3

Condensed Consolidated Statements of Comprehensive Income for the

Three and Nine Months Ended March 31, 2019 and 2018 (unaudited)

4

Condensed Consolidated Statement of Stockholders’ Equity for the Three

and Nine Months Ended March 31, 2019 and 2018 (unaudited)

5

Condensed Consolidated Statements of Cash Flows for the

Nine Months Ended March 31, 2019 and 2018 (unaudited)

7

Notes to Unaudited Condensed Consolidated Financial Statements

8

Item 2.

Management's Discussion and Analysis of Financial Condition and

Results of Operations

30

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

42

Item 4.

Controls and Procedures

43

PART II.

OTHER INFORMATION:

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

Item 6.

Exhibits

44

PART I.  FINANCIAL INFORMATION
ITEM 1
STANDEX INTERNATIONAL CORPORATION
Condensed Consolidated Balance Sheets
(In thousands, except per share data)		March 31, 2019 (unaudited)			June 30, 2018
ASSETS
Current Assets:
Cash and cash equivalents		$	96,041			$	109,602
Accounts receivable, net of reserve for doubtful accounts of			115,782				119,783
$1,777 and $2,184 at March 31, 2019 and June 30, 2018
Inventories			103,383				104,300
Prepaid expenses and other current assets			27,115				10,255
Income taxes receivable			3,320				2,348
Current assets- Discontinued Operations			106,863				37,671
Total current assets			452,504				383,959
Property, plant, and equipment, net			139,432				136,934
Intangible assets, net			111,505				84,938
Goodwill			260,443				211,751
Deferred tax asset			9,645				7,447
Other non-current assets			29,812				29,749
Long-term assets-Discontinued Operations			-				62,159
Total non-current assets			550,837				532,978
Total assets		$	1,003,341			$	916,937
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable		$	61,358			$	78,947
Accrued liabilities			61,147				57,679
Income taxes payable			4,762				6,050
Current liabilities-Discontinued Operations			2,561				18,665
Total current liabilities			129,828				161,341
Long-term debt			291,725				193,772
Accrued pension and other non-current liabilities			102,171				110,979
Non-current liabilities-Discontinued Operations			-				50
Total non-current liabilities			393,896				304,801
Stockholders' equity:
Common stock, par value $1.50 per share, 60,000,000
shares authorized, 27,984,278 issued, 12,531,735 and
12,705,562 outstanding at March 31, 2019 and June 30, 2018			41,976				41,976
Additional paid-in capital			63,774				61,328
Retained earnings			808,417				761,430
Accumulated other comprehensive loss			(124,417)				(121,859)
Treasury shares: 15,452,543 shares at March 31, 2019
and 15,278,716 shares at June 30, 2018			(310,133)				(292,080)
Total stockholders' equity			479,617				450,795
Total liabilities and stockholders' equity		$	1,003,341			$	916,937
See notes to unaudited condensed consolidated financial statements

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STANDEX INTERNATIONAL CORPORATION
Unaudited Condensed Consolidated Statements of Cash Flows
		Nine Months Ended
		March 31,
(In thousands)		2019			2018
Cash flows from operating activities
Net income		$	55,521		$	23,994
Income from discontinued operations			21,450			3,940
Income from continuing operations			34,071			20,054
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			22,794			19,632
Stock-based compensation			2,680			3,775
Non-cash portion of restructuring charge			(81)			(1,187)
Deferred repatriation tax			-			11,465
Disposal of real estate and equipment			-			(433)
Contributions to defined benefit plans			(751)			(808)
Net changes in operating assets and liabilities			(33,753)			(25,608)
Net cash provided by operating activities - continuing operations			24,960			26,890
Net cash (used in) operating activities - discontinued operations			617			1,829
Net cash provided by operating activities			25,577			28,719
Cash flows from investing activities
Expenditures for property, plant, and equipment			(17,844)			(20,207)
Expenditures for acquisitions, net of cash acquired			(96,768)			(10,397)
Proceeds from life insurance policies			-			2,217
Proceeds from sales of real estate and equipment			2,898			1,949
Other investing activity			(377)			(397)
Net cash provided by (used in) investing activities- continuing operations			(112,091)			(26,835)
Net cash provided by (used in) investing activities- discontinued operations			2,925			(1,184)
Net cash provided by (used in) investing activities			(109,166)			(28,019)
Cash flows from financing activities
Borrowings on revolving credit facility			206,650			134,500
Payments of revolving credit facility			(107,650)			(124,788)
Contingent consideration payment			(910)			-
Activity under share-based payment plans			952			774
Purchases of treasury stock			(19,239)			(2,007)
Cash dividends paid			(7,331)			(6,600)
Net cash provided by financing activities			72,472			1,879
Effect of exchange rate changes on cash and cash equivalents			(2,444)			5,179
Net change in cash and cash equivalents			(13,561)			7,758
Cash and cash equivalents at beginning of year			109,602			88,566
Cash and cash equivalents at end of period		$	96,041		$	96,324
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest		$	7,574		$	4,518
Income taxes, net of refunds		$	8,027		$	17,720
See notes to unaudited condensed consolidated financial statements

2

STANDEX INTERNATIONAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1)

Management Statement

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the results of operations and changes in stockholder’s equity for the three and nine months ended March 31, 2019 and 2018, the cash flows for the nine months ended March 31, 2019 and 2018 and the financial position of Standex International Corporation (“Standex”, the “Company”, “we”, “us”, or “our”), at March 31, 2019.  The interim results are not necessarily indicative of results for a full year.  The following unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the company believes that the disclosures made are adequate to make the information not misleading.  The unaudited condensed consolidated financial statements and notes do not contain information which would substantially duplicate the disclosures contained in the audited annual consolidated financial statements and notes for the year ended June 30, 2018.  The condensed consolidated balance sheet at June 30, 2018 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.  The financial statements contained herein should be read in conjunction with the Annual Report on Form 10-K and in particular the audited consolidated financial statements for the year ended June 30, 2018.  Certain prior period amounts have been reclassified to conform to the current period presentation.  Unless otherwise noted, references to years are to the Company’s fiscal years.

The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.  We evaluated subsequent events through the date and time our unaudited condensed consolidated financial statements were issued.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements.  In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842) Targeted Improvements”.  The updated guidance provides an optional transition method, which allows for the application of the standard as of the adoption date with no restatement of prior period amounts.  We plan to adopt the standard on July 1, 2019 under the optional transition method described above.  We have selected a lease accounting software package and are completing the accumulation of existing lease data as well as assessing the impact that the new standard will have on our Consolidated Financial Statements, which will consist primarily of a balance sheet gross up of our operating leases to show equal and offsetting lease assets and lease liabilities.  Due to the materiality of the underlying leases subject to the new guidance, we anticipate the adoption will have a material impact on the Company’s consolidated financial statements, however we are unable to quantify that effect until our analysis is complete.  

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test.  Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.  ASU 2017-04 also clarifies the requirements for excluding and allocating foreign currency translation adjustments to reporting units related to an entity's testing of reporting units for goodwill impairment.  It further clarifies that an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.  ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.  The Company is currently assessing the potential impact of the adoption of ASU 2017-04 on our goodwill impairment testing procedures and our consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815), Targeting Improvements to Accounting for Hedging Activities, which improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and to make certain targeted improvements to simplify the application of hedge accounting guidance.  The new guidance requires additional disclosures including cumulative basis adjustments for fair value hedges and the effect of hedging on individual income statement line items along with providing new alternatives for applying hedge accounting to additional hedging strategies and measuring the hedged item in fair value hedges of interest rate risk.  This guidance is effective for fiscal years beginning after December 15, 2018 (fiscal 2020 for the Company), and interim periods within those fiscal years.  The amendment is to be applied prospectively.  Given the improvements made to the application of hedge accounting under the guidance, the Company decided to early adopt the ASU during the second quarter of fiscal year 2019.

2)  

Acquisitions

The Company’s recent acquisitions are strategically significant to the future growth prospects of the Company.  At the time of the acquisition and March 31, 2019, the Company evaluated the significance of each acquisition on a standalone basis and in aggregate, considering both qualitative and quantitative factors.  

Agile Magnetics

On the last business day of the first quarter of fiscal year 2019, the Company acquired Regional Mfg. Specialists, Inc. (now named Agile Magnetics).  The New Hampshire based, privately held company is a provider of high-reliability magnetics to customers in the semiconductor, military, aerospace, healthcare, and general industrial industries.  The Company has included the results of Agile in its Electronics segment in the condensed consolidated financial statements.

The Company paid $39.2 million in cash for all of the issued and outstanding equity interests of Agile.  The preliminary purchase price was allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed based on a preliminary estimate of their fair values on the closing date.  The Company has commenced a formal valuation of the acquired assets and liabilities and has updated the preliminary intangible asset based on the preliminary valuation results.  Goodwill recorded from this transaction is attributable to expanded capabilities of the combined organization which will allow for improved responsiveness to customer demands via a larger pool of engineering resources and local manufacturing.  

Intangible assets of $18.2 million are preliminarily recorded, consisting of $14.3 million of customer relationships, $3.8 million for trademarks, and $0.1 million for a non-compete arrangement.  The goodwill of $15.6 million preliminarily recorded in connection with the transaction is deductible for income tax purposes.  The Company’s assigned fair values are preliminary as of March 31, 2019 until such time as the valuation can be finalized.  

The components of the fair value of the Agile acquisition, including the preliminary allocation of the purchase price at March 31, 2019, are as follows (in thousands):

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Tenibac-Graphion Inc.

During August of fiscal year 2019, the Company acquired Tenibac-Graphion Inc. (“Tenibac”).  The Michigan based privately held company is a provider of chemical and laser texturing services for the automotive, medical, packaging, and consumer products markets.  The Company has included the results of Tenibac in its Engraving segment in the condensed consolidated financial statements.

The Company paid $57.3 million in cash for all of the issued and outstanding equity interests of Tenibac.  The preliminary purchase price was allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values on the closing date.  Goodwill recorded from this transaction is attributable to the complimentary services that the combined business can now offer to our customers, through increased responsiveness to customer demands, and providing innovative approaches to solving customer needs by offering a full line of mold and tool services to customers.  

Intangible assets of $16.9 million are preliminarily recorded, consisting of $11.3 million of customer relationships to be amortized over a period of nine years, $4.2 million for trademarks, and $1.4 million of other intangibles assets.  The Company’s assigned fair values are preliminary as of March 31, 2019 until reviewed closing financial statements, including U.S. 338(h)10 elections, can be prepared by an independent accountant and agreed to by both parties as required by the stock purchase agreement.  The goodwill of $33.8 million created by the transaction is deductible for income tax purposes.

The components of the fair value of the Tenibac acquisition, including the preliminary allocation of the purchase price at March 31, 2019, are as follows (in thousands):

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