Standex International Corporation (SXI) Q3 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing-by, and welcome to the Standex International Third Quarter Fiscal Year 2015 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to David Calusdian of Sharon Merrill. Sir, you may begin your conference.

Thank you. Please note that the presentation accompanying management’s remarks can be found on Standex’s Investor Relations website, www.standex.com. Please see Standex’s Safe Harbor passage on Slide 2. Matters that Standex management will discuss on today’s conference call include predictions, estimates, expectations and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially. You should refer to Standex’s recent SEC filings and public announcements for a detailed list of risk factors. In addition, I would like to remind you that today’s discussion will include references to EBITDA, which is Earnings Before Interest, Taxes, Depreciation and Amortization; adjusted EBITDA, which is EBITDA excluding restructuring expenses and onetime items; non-GAAP net income; non-GAAP income from operations; non-GAAP net income from continuing operations; and free operating cash flow. These non-GAAP financial measures are intended to serve as a complement to results provided in accordance with accounting principles generally accepted in the United States. Standex believes that such information provides an additional measurement and consistent historical comparison of the company’s performance. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in Standex’s news release. On the call today is Standex President and Chief Executive Officer, David Dunbar; and Chief Financial Officer, Tom DeByle. Please turn to Slide 3, as I turn the call over to David.

Thank you, David, and good morning. I would like to welcome those listening to today’s earnings call. We reported a solid Q3 and overall we’re pleased with the results, especially given the headwinds from foreign exchange, and oil and gas markets. Total sales grew 3.9% from Q3 last year. Netting out acquisitions, we grew 1.5% organically. Foreign exchange had a negative effect of 3.7%. We saw good demand across most of our businesses with the exception of Engineering Technologies which was affected by the decline in oil and gas. Food Service, Engraving, and Hydraulics, posted strong top line, while sales in electronics were down as a result of a difficult year-over-year comparison in North America. On the bottom line, third quarter non-GAAP EPS was a record $1.02 per share or up 9.7% from the third quarter of 2014. Operating income was up 10% and we had a net debt position of $45.8 million at the end of Q3. During today’s call Tom will discuss our financial results for the third quarter and I’ll be reviewing the key drivers of our business segments and our primary focus areas for each. First, I would like to take a moment to provide a high-level overview of how we run the business through Standex Value Creation System, a set of standard tools and processes to drive performance in the business and couple operational plans with strategic priorities. Our objective is to build strategic platforms by growing our business profitably and efficiently. Please turn to Page 4 to describe how we operate to achieve our business objectives. The first and oldest pillar is the Balanced Performance Plan process. This is our process to set annual goals, review progress and manage our business throughout the year. It assures alignment between corporate goals through to our operating units. The Balanced Performance Plan process develops annual operating plans that support our long-term and short-term targets. It has been in place for years. The second pillar, which we built in the past 12 months due to Standex Growth Disciplines and it’s designed to make growth a result of skill and planning rather than the game of chess. It is a set of standard tools our business has used to map their markets, prioritize growth opportunities, and define growth laneways. It starts with an understanding of how each business competes and wins, and ends with investment plans to reinforce our competitive advantage with new products, channel strategies and acquisition targets. The third pillar of the Value Creation System is Standex Operational Excellence which we launched this past quarter. It is based on deploying a standard lean enterprise tools throughout the businesses to focus on customer value and eliminate waste to increase efficiency. After implementing the growth disciplines in the last 12 months, we always intended to add this important element. Together they form a powerful tandem to grow the top line on the one hand and continuously improve operating performance on the other. We have rolled out a complete toolkit to all of our business teams. All of our businesses will have transformation plans for FY 2016 and begin deploying the tools throughout the year. Though I have high expectations for the results of the program, I do not expect to see impacts in operating performance until the latter half of our FY 2016. The fourth element of our Value Creation System is Talent Management. As we execute our strategy to build significant strategic platforms, we need to develop our leaders equipping them to grow their businesses profitably. Standex is a unique company with a unique culture and we will be more successful as we grow our own talent from within. We have developed a leadership competency model and have deployed assessment tools to help create development plans for our leaders. With this brief summary, you can see that the elements of the value creation system together give us the tools to lead Standex to achieve our vision. With that I’ll turn the call over to Tom to discuss our results for the third quarter. Tom?

Thank you, David, and good morning, everyone. Please turn to Slide 5. Three of our five segments reported organic growth for the quarter. On the chart, you can see the contributions from acquisitions and the currency effect of each segment. Overall, organic growth was 1.5% with acquisitions contributing 6.1% versus Q3 last year due to the Enginetics acquisition in Engineering Technologies and Ultrafryer in Food Service. Currency had a negative effect of 3.7%, which results in an overall growth of 3.9% for the quarter. Year-to-date organic growth was 6.8%, acquisitions contributed 5.3%, and currency had a negative effect of 1.8% for a total growth for the nine months period of 10.3%. Please turn to Slide 6. On a trailing 12-month basis adjusted earnings-per-share were $4.49 till March 31, 2015 versus $3.99 in the 12 months ended March 31, 2014, a 12.5% increase. Sales were $770 million, on a trailing 12-month basis as of March 31, 2015 versus $695 million in the prior year. Please turn to Slide 7, which summarizes our third quarter results. Net sales increased 3.9% to $181 million from $174.2 million in the third quarter of fiscal 2014. Excluding special items operating income grew 6% to $18.2 million from $17.2 million a year ago. Adjusted EBITDA grew 8% to $22.6 million or 12.5% of sales compared with $20.9 million, 12% of sales in Q3 last year. Please turn to Slide 8, which is our quarterly bridge that illustrates the impact of special items on net income from continuing operations. For the third quarter of fiscal 2015 these items included tax affected $292,000 of restructuring charges primarily related to the facility closure and cleanup expenses in our Electronics Mexico and UK Food Service businesses. In the comparable period of fiscal 2014, there $983,000 of tax affected restructuring charges. $976,000 in non-recurring management transition expenses, and a tax affected gains related to the life insurance benefit of $3.4 million. Turning to Slide 9, net working capital at the end of the third quarter of fiscal 2015 was $149.5 million, compared with $128.2 million a year earlier. The increase in working capital related to the recent acquisitions of Ultrafryer and Enginetics. Working capital turns were 4.8 compared with 5.4 a year earlier. Slide 10 illustrates our debt management. We ended Q3 in a net debt position of approximately $45.8 million. This compares with a net cash position of $12.4 million a year earlier. We defined net debt as funded debt less cash. The increase in debts is primarily related to the acquisitions of Ultrafryer and Enginetics during the calendar year 2014. Our balance sheet leverage ratio of net debt to capital of 11.7% compared with the net cash to capital of 3.9% a year-ago. Please turn to Slide 11. Capital spending for the quarter was $4.8 million. Spending is in line with our fiscal 2015 estimates and supports our growth initiatives and current factory automation efforts. Slide 11, illustrates some of our recent capital equipment purchases. The new equipments is one way that we are driving productivity, safety, quality and efficiencies in our factories. The fiber laser increased its production capacity by improving its throughput, reducing scrap and decreasing maintenance costs. The water jet machine reduces subcontracting work and provides for additional in-house capabilities. The automated welding cell pictured here allows for improved weld and lowered cycle time. The panel bender is designed to increase capacity, reduce scrap and improve safety. These capital improvements are spread across our segments and are examples of capital spending to support organic growth programs, lower costs, drive productivity and improve quality. We continue to expect our capital spend to in the range of $25 million to $27 million through all of fiscal 2015 including recent acquisitions. Slide 12, details our free cash flow performance for the third quarter. Net cash provided by operating activities was $23.1 million, on a year-to-date basis free cash flow was impacted by increases in working capital associated with higher organic sales volumes, inventory build to support backlogs and factory consolidations, and increased capital spending for sales growth program and factory automation. With that, I’ll turn the call back to David.

Thank you, Tom. Please turn to Slide 14 and I’ll begin our segment overview with Food Service Equipment Group. Sales in Food Service increased 8.1% from Q3 last year. We saw strength in all of our businesses in this group, with the exception of the decline in our specialty pumps business, which we expect to improve in Q4. Operating income was down 13.1%, due to continued operational inefficiencies in Cooking Solutions, reduced sales to national chains and refrigeration. And lower volume with the specialty pumps business. In refrigeration, high single-digit year-over-year growth was driven by drug retail and dollar stores as well as sales through dealers. Small footprint retail customers continue to perform well providing positive momentum into Q4. Scientific and industrial refrigeration products also had a very good quarter. We did see declines in sales to national chains, which is offset by growth in lower margin sales through our dealer network. We’ve been focused on enhancing cross-selling between food service businesses and are beginning to see the fruits of those efforts. For example, our refrigeration business has been successfully selling products from a specialty display case business. Cooking Solutions was profitable quarter in the quarter and sales increased by approximately 20% year-over-year including the Ultrafryer acquisition. Our Ultrafryer integration in sales performance remains on plan. Excluding the acquisition, Cooking Solutions sales increased 4.3%. It is also important to note that we saw sequential margin improvement from Q2 to Q3 indicating that the business has begun to turn the corner in terms of profitability improvement, pricing improved, freight costs are coming down and plant productivity remains solid. Performance improvement efforts to Cooking Solutions are now focusing on warranty costs and distribution center performance. We also took a step to better align our organization in the Food Service Equipment Group. As I had mentioned before, we have seven P&Ls in this business, stemming from a history of acquisition without integration. This results in a number of inefficiencies from duplicative positions and also complicates collaboration across silos. We have streamlined the refrigeration and cooking solutions group each into single P&L, reducing by two the number of P&Ls. Turning to Slide 15, Engraving Group’s sales grew organically 8.1%, but with 9.5% negative FX, declined 1.4% year-over-year. Order roll outs remained strong both in Europe and China. Our Mold Tech business grew at a mid-double-digit rate in China, as we saw demand from both automotive and non-automotive customers. We also grew sales in Europe, despite the negative currency effect. North America was down due to a difficult year-over-year comparison, but orders were strong. We obtained a new automotive account in North America, which will provide us future growth opportunities. On the non-automotive side, we texturized molds for the charger shell, packaging and logo for a new luxury watch model demonstrating our position as the premier mold texturizing service leader. Sales generated by our design hub in Manchester, England and the new hub in Detroit were solid. These hubs recently branded as architexture [ph] provide auto-OEM design teams with rapid prototyping of their future automotive interior textures. They are proving to be a differentiated concept in our business and we are continuing with global rollout. In our Roll, Plate and Machinery business, sales increased year-over-year due to a large project win from a major tissue and towel maker. Market conditions continue to be weak in Brazil. North American backlog grew during the quarter as a result of improvement in the construction and consumer markets. Looking forward, we will continue to capitalize on the momentum that built late in the third quarter into Mold Tech, Roll Plate and Machinery, and Innovent businesses, and our expectation is that Q4 will be strong. Also we will continue to implement operational excellence initiatives in Roll Plate and Machinery and actively market new design hubs in North America and Asia. Please turn to Slide 16, our Engineering Technologies Group. Sales for the quarter were up 10% year-over-year or down 18.6% when you exclude the acquisition of Enginetics. The decline was due to significantly weaker sales for the oil and gas market, which often carries high margins. Oil and gas had 14% and 30% negative impact on sales in earnings respectively. We’ve reduced our cost structures in response to market condition. Medical sales also were weak and defense was soft compared with last year, due to a major project that they do on piece [ph]. Space launch vehicles remained steady and we continue to pursue new opportunities in that part of the business. Aviation is trending in the right direction. The higher sales in the market are not enough over come headwinds in other end markets. We continue to ramp-up capacity to support recent awards in aviation. We were contracted to begin production on our Airbus award by the end of calendar 2015 and we are exploring various options to further expand capacity in either existing facilities on a greenfield site. We continue to be very excited by our Enginetics acquisition, which remains on track in terms of both integration and performance. Enginetics will be our first focus within Engineering Technologies, regarding the operational excellence program I spoke about at the onset of the call. Profitability in Engineering Technologies was down 14.9%, excluding purchase accounting for Enginetics acquisition. The decline of profitability was due to the weakness on oil and gas markets and medical market. Looking forward, we remain concerned about the slowdown in oil and gas. We expect that this market will be soft for the foreseeable future. And we will continue to proactively adjust our cost structure to align with market conditions. At the same time, we’re excited about our Enginetics acquisition in aviation business, as we continue to invest capital and install capacity for the ramp up of the aviation long-term agreement. Please turn to Slide 17, Electronics. Electronic sales decreased organically 1.2% and including FX declined 8.7% year-over-year. Sales in Q3 were negatively affected by foreign exchange and a difficult year-over-year comparison due to large project shipment timing in North America. Electronics like Engraving had a strong quarter in local currency. However, foreign exchange had a significant impact on the results. Europe grew due to shipments of new sensor programs with key customers. This is an indication of the strength of our business model and the fact that we’ve been able to grow as a niche each player in larger markets. Operating income was essentially flat, despite the decline in revenue, as a result of successful operational improvement and cost reduction program. While we’re disappointed and we didn’t see more top line growth in Q3, we see there’s a function of project timing and remain confident about Electronics going forward. We also have a mature operational excellence program within Electronics as evidenced by the operating margin improvement. Looking forward in Electronics, we plan to continue to deliver an increased backlog in Q4, relating to Europe and Asia. And we plan to capitalize on new business opportunities to drive sales growth and profitability. In addition, we will be at the EDS show in Las Vegas in May and the Sensors show in Long Beach in June. Finally, our hydraulics group, as you can see on Slide 18, continues to perform very well. Sales were up 8.4% year-over-year and operating income was up 16.7%. We experienced strong demand across our dump truck, dump trailer and refuse markets. Our share of the refuse market continues to grow and we recently won contracts for new OEM applications on garbage trucks, container roll off, and compactor platforms. Our facility in China is helping to strengthen our global competitive advantage by enabling us to bundle telescopic cylinders from North America with rod cylinders from China. We are shipping and booking orders at record levels at the China plant, leading to continued strength across the business. In fact, we are seeing double-digit production increases at both our U.S. and China location. Looking ahead, we are focused on capitalizing on strong customer demand in our end markets and leveraging operational excellence and Kaizen events to increase throughput. We’re also focused on turning customer product designs around rapidly in our core markets and exploring opportunities for expansion in new markets. Please turn to Slide 19. In summary, we’re pleased with our performance in Q3 on this top and bottom line. Looking ahead, we’re well-positioned, although we have some caution due to the macroeconomic environment, oil and gas, the eurozone and foreign exchange. Our markets for the most part remain firm. We have initiated the Standex value creation system across all segments to drive sales and operating efficiencies, and we’re executing on our planned investments to support increased demand. The financial performance of our recent acquisitions is demonstrating the success of our acquisition strategy and we have a healthy active pipeline of additional prospect. To support both organic and acquisition growth, we have a strong balance sheet. We will continue to execute against our strategic plan, control costs, and focus on our operational excellence initiatives, as we move to business forward. With that, we would be pleased to take your questions. Operator?

[Operator Instructions] Your first question comes from the line of Schon Williams of BB&T Capital Markets.

Hi. Good morning, Dave and Tom.

Good morning, Schon.

Hi, Schon.

I’m wondering if we could maybe just start with the value creation system. Can you just talk about who is actually going to be leading that initiative? I mean, is that something that’s essentially each of the unit presidents will be driving their one individual, that’s maybe coordinating that effort across the business, could you just talk about that? And then maybe also address, what are the standards that - managers will be measured against to some extent whether - were compensation be tied to the value creation system?

Yes, great questions. So first of all, the ownership, if you think in the four components, each one has a different owner. So the BPP process is really owned by Tom, Tom runs that. The growth disciplines process is owned by VP of Business Development, the gentlemen named Steven Brown, who reports to me. The Operational Excellence program is owned by Don Clark, a new hire, who joined the company in January and brings with him complete toolkit of processes and great experience as a consultant and employee of large industrial firms in deploying lean program. And the fourth element Talent is owned by Mike Pattison, our Corporate HR leader. In terms of targets and how we’ll measure, these are all embedded. The output of these processes is embedded in our annual budget and the budget strength bonus. So from the Standex growth discipline, every business will have, at least, two growth laneways identified, that have been developed using the growth disciplines will be tracked and managed separately, and will be in the sales bridges of every business and part of their bonus plan. The Operational Excellence program at the beginning of every year as the assess the transformation plan site by site will embed material savings, nonmaterial productivity saving in their operating plan, reflected in the gross margin, which will, of course, be the bonuses are paid in part on their - on the margin performance. So we think we have it all tied together, clear leadership leads to developments, standard work, clear expectations that are embedded in our annual plan for every business.

I think that’s helpful. And then I wondered if we can just focus a bit on food equipment and the restructuring going on there within cooking solutions. I know Anne’s only been on few months at this point, but I mean, can you talk about what are so maybe some of the early wins that you’re seeing and where do we stand in terms of the Nogales turnaround?

Yes, early wins, I would say the - with continued progress and look out, as I mentioned, well, first of all, the business was profitable in the quarter, which is a change from previous quarter. And we continue to see a decline in those, as you recall the story of close Cheyenne move to Nogales, and in the course of that move pined in our orders, we discovered that it’s moving the production in a lot of malls in operators heads, that impacted quality and performance in Nogales, which resulted in the need for premium freight expedite shipments to catch up ambassadors, there’s also some quality issues, some inefficiencies. While we are seeing all of those things trend in the right direction and bringing in Don Clark to run our Operational Excellence couple with Anne and her experience, in the quarter, we’ve already conducted various pre-mapping in our distribution center and in Nogales. We are driving Kaizen in both of those sides. So we confirm we’re on the right track. We’re executing proven process improvement activities in both of those areas. And I would say it’s early win for me, although, you don’t see it in results yet, but over time, I think the streamlining of your organization, which we work through with Anne is also an important move, and we’ll create an organization that is faster, more agile and has less friction between the different silos.

That’s helpful. And then maybe just in terms of the demand picture kind of Q4 versus Q3, I mean, it sounds like, I guess, possibly an engraving and maybe electronic, you are talking about some possible, like an acceleration and deliveries are some backlog that’s built. Is it reasonable to assume that we would see kind of sequential improvement in those two units based off of your commentary?

Yes. I think I mentioned recently. We saw momentum and we momentum in all of the businesses except engineering and technology is where the softness in oil and gas, and medical is holding them back, so in the other four, yes, sequential improvement.

Okay. Perfect. I’ll get back in the queue. Thanks, guys.

Thank you, Schon.

Your next question comes from Jason Ursaner of CJS Securities.

Good morning.

Good morning, Jason.

Hi, Jason.

Just first looking at outside of the business operations, your corporate expense came down significantly, just wondering if there were any reversals and accruals or anything atypical on that kind of assuming probably shouldn’t be thinking of that as a run rate going forward, but give us some thoughts?

Jason, good question. As you - as we saw in our bridge, the management transition expenses from Roger to David and a change in fee, that was a large expense in that reported results. We’ve backed that out on the bridge in the adjusted operating income.

From last year or this year?

From last year. So I mean, last year should be higher than this year, and that’s why it sequentially decreased by that to $983,000 of the…

Okay. So would this be an okay run rate in terms of you got to go with that.

Yes, this is a reasonable run rate, yes.

Okay. And in food service, you mentioned decline to sales of national chains. Just wondering, was there any pressure on the market share in that vertical, or was it just more of an overall challenging period, given your issues with store openings and weather and…?

Yes, it’s a very good question. It’s not a question of share losses, it’s more of a question of slower activity and expansion plans with some of the larger chain, there are fewer store openings and retrofits.

Okay. And on organic growth, it slowed down a little bit from the past couple of quarters, and it was fairly balanced between the refrigeration in cooking solutions business? Maybe just talk about future growth expectations for each line and do you see them continuing on a similar trajectory going forward?

Well, we are - our expectations for growth, for the moment, we tied to market there. We’ve got our business focused on fixing some internal issues, getting margin rates up, and could be efficiencies. So the expectation we’d said would be North American Food Equipment Manufacturing Association said, it’s a margin of 4% to 5% growth market, and we would say that’s a reasonable expectation on both - for both Refrigeration and the Cooking Solutions business.

Okay. And on margins it kind of sounds like this could be the trough period with flushing through kind of some of the final changes there with Cheyenne and everything. Just when you look at the 7% margin for this quarter and maybe where do you see that trending over the next few quarters in a seasonally stronger environment and possibly reconcile it with some of the longer term targets and the 200 basis point improvement in terms of what base that’s off from?

Yes, right, so, first off, it’s kind of the longer term picture. I mean, you know and I think anyone who’s been following Standex knows that we believe that this business has the profit potential to over the course of years get to the upper teens. In the short-term we have put out an indication that we can exit this year 200 basis points above where we were a year ago. And the trends that I discussed earlier are critical in making that this quarter. But the longer term story, there are five basic pieces to getting to those upper teens, so first is consolidating capacity which is largely done. Those Cheyenne savings are in our business. They were massed by some of these transition costs that we talked about before, the premium freight and the efficiencies and the warranty. The second is the pure operational improvement. And we’re seeing improvement now in Nogales. We brought down Clark in to dive a common standard way of improving process moving tools. Third element is looking at the organization about the leadership and structure. So we mentioned the reported moves on that front this quarter. Now that new leadership team needs to sit back and look at some of the longer term questions and look at the pockets of strength and decide who we are going to date, where we’re going to compete and win, where do we invest, and then take another look at some portfolio positioning. Last year, we sold to AFS, which is a business which is losing money for us. We acquired Ultrafryer. That was a great combination of moves. There are probably some other products we’ll be exiting, and future acquisitions in longer term in Food Service. That analysis will also result in some new product development and as those gets launched in the outer years you’ll start see that new position of us in the right segment. So the longer term picture, it’s really is a question of years, not months. But the action that we taken this year positioned us to show that year-on-year improvement we’ve been talking about the last few quarters.

Okay. I appreciate all those details and as well in the prepared remarks. I’ll give others a chance to ask a question there. Thanks, David. Thanks, Tom.

Thank you, Jason.

[Operator Instructions] Your next question comes from Chris McGinnis of Sidoti & Company.

Good morning. Thanks for taking my question.

Hello, Chris.

Hi, Chris.

I guess, just to kind of follow-up on Jason’s question on the Nogales. And maybe the prior target of exiting at 12% is that still on board you think or is that being pushed out maybe to midpoint in next year?

Well, needless to say right now, the primary issue to the through the year into Cooking Solutions is that the problems we’ve been talking about for last few quarters, we really do see that we’re beginning to turn the corner at last performing well, prices firming up, premium freight is coming down. The warranty is still high and that going to be stubborn in the longer tale, so that’s the cost that will take a little more time to come down. We did see a positive trend in the business from Q2 to Q3. Coupled with that the refrigeration mix to have more dealer sales than national chain, that’s a mix down in margin where dealer sales are lower margin than of national chains. And then the pump slow was also a mix now. What I say is, if the trends in the Cooking Solutions continue then we expect to high the price of premium freights and plant performance, and the refrigeration mix moves back to more national chains which is typical for fourth quarter. You will get there in the quarter, but it will be a photo-finish. So maybe it will slip a bit but we got a - we have our sights on the right issues to get there.

Sure, so all right, so the - so maybe you do get the full benefit next year and I guess the additional cost savings from - David said, implementation could be more so on the back-half of 2016 from what you’re saying.

From the…

From like probably your initiatives and…

Oh, yes, absolutely right. Yes, I think citing my experience is you start to lean, you do this, you do the Kaizen, you put a place to calm down, whatever process improvement, it takes a few quarters for the cumulative effect to roll though this. I wouldn’t - and I think once we - we’re going through a bunch of process now and as we set those budget on we’ll start to have better expectations of what we can - what we’ll see this next year. But I think, it’s safe to say that, back-half of the year is when we’ll see impact.

Sure. And then, I guess, basically the decline in the oil, the pressure there, have you seen a steeper following Q3 or in line?

No, I think it’s going to bottom down. It’s bubbling along at a very low level in this quarter.

Great. All right, thank you very much for your time.

Thank you, Chris.

[Operator Instructions] Your next question comes from Jason Ursaner of CJS Securities.

Thanks for taking the follow-up. Just in the Electronics business. Wondering if there was any noticeable difference in growth between the standard products, basic reed switches versus some of the value-added assemblies and more complex transformer products, and just the higher value strategy, I’m wondering if there was still positive growth in the quarter.

Yes. We did see more growth in the sensors I mentioned that with European - and Europe actually grew 5% in local currency. That was almost all of the high value sensors. And that continues to be globally a higher percent of the business.

And longer term, the strategy is to keep growing in that value-add part or the niche products were you got to need to acquire like a small provider of it or you could do that internally?

That’s complementary. I mean, we have organic growth programs to continue to go after new applications, and develop and deliver higher end sensors, but we also indentified adjacent sensing technologies that we could add to the sensors. I think we spoken in the past about many of our customers are beginning to ask us in a sensor assembly, now that - maybe just measured one parameter, can we begin measuring others, index, speed, or temperature or pressure. So we are looking at adjacent technologies to expand it horizontally if you will.

Okay. And for Engineering Technologies, just following up on Chris’s question about the oil and gas with the platforms, and the impact on margin, are those products that much higher margin than the segment average or is some of the EBIT decline versus sales just general under absorption that they might look similar if any product line have that kind of abrupt decline?

It’s both. I mean it is a - the gross margins are higher in that business. And in those plans that to ship those products there has been some under absorption factors.

Okay. And just long-term segment margin profile there, how does that look maybe after Enginetics begins to produce some other parts for next fiscal year?

We would stick with what we said in the past that with the 16%, 17% margin loan long-term as aviation ramps-up and we’ll get into full production. That’s a reasonable expectation with this business.

Okay. Thanks, guys. I appreciate it.

Thank you.

Thank you.

Your next question comes from Schon Williams of BB&T Capital Markets.

Hi, thanks, guys. I’m wondering if you could just address maybe uses of cash here, I mean, balance sheet is still fairly flexible. Can you maybe just talk about what your priorities are? And also maybe - I know it may be a bit early, but I just wanted to see if you may give some guidance around CapEx for next year. I would anticipate that maybe some of the CapEx dollars would actually dull back given that Nogales is kind of behind you at this point, just maybe some early thoughts on CapEx for next fiscal year?

Okay. So, your first question is the uses of cash for the remaining part of the year, is that it, Schon?

Yes. So just where is the priority for this year? And then certainly maybe talking about what the acquisition pipeline, I’d like to get an update there. And then, as we move into next year, what does CapEx look like and certainly if you want to address other opportunities, I’d be open to that as well.

Okay. So, I mean the priority for cash, I mean, our working capital turns were down for this past quarter, and that’s based on basically an inventory build. But we see that improving some more of a fixed turns by the end of the - our fiscal year in June. So primarily we - and the third quarter is our lowest quarter. So we - what we can do is, we leveled all the productions and then to support fourth quarter shipments. So that we don’t have to run as much overtime, hire many talents and improved quality. So that’s kind of embedded in that lower working capital turns. Our capital spending for the time, we still say that we’re going to spend $25 million to $27 million this year and we’re on track to do that with additional capital we’ve had plan on spending in the fourth quarter. And for next year, we are just going through the process of putting together our capital plans together and, I mean, I would imagine, it’s going to be about 2% plus to support our growth initiatives. But we don’t really give guidance on that right now, as we get through the budget process, and the board has to approve it. We’ll give further guidance when we’re done with it. Regarding acquisitions, David, do you want to talk about that?

So we have an active pipeline. And if you were pulled back to the previous presentations we’ve shown of our capital allocation over the past three years is split between acquisitions, CapEx, and share buybacks, dividends, we said we - as a rough guide and think that that’s probably a fair assessment or expectation for the coming years, and I think we still think that’s the case, given the acquisition pipeline, their activity here.

Okay. And then is working capital improvement, it that a goal as part of the new value creation system?

Yes. Yes absolutely.

Okay.

If you just look at, yes - your lean tools are all about taking waste out of the system and anything that’s waiting, that’s sitting and waiting whether it is raw material or wood is waste. And the first Kaizens that are being done are focusing on improving the flow and one of the consequences of producing the inventory.

Okay. Thanks, guys.

Thank you.

Thank you.

This concludes the question-and-answer session of today’s conference. I would now like to turn back floor - back over to Mr. David Dunbar for any closing remarks.

All right. I want to thank everybody for joining the call for your interest in Standex, and we look forward to continuing to communicate with you about the business.

Thank you. This concludes your conference. You may now disconnect.