Standex International Corporation (SXI) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Standex International's Third Quarter 2019 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Gary Farber with Affinity Growth Advisors to begin.

Thank you, operator and good morning. Please note that the presentation accompanying management's remarks can be found on Standex' Investor Relations website, www.standex.com. Please refer to Standex' Safe Harbor statement 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' most recent SEC filings and public announcements for a detailed list of risk factors. In addition, I'd like to remind you that today's discussion will include references to the non-GAAP measures of EBITDA, which is earnings before interest, taxes, depreciation and amortization; adjusted EBITDA, which is EBITDA excluding restructuring, purchase accounting, acquisition-related expenses, and one-time items; EBITDA margin; and adjusted EBITDA margin. We will also refer to other non-GAAP measures, including adjusted net income, adjusted income from operations, adjusted net income from continuing operations, adjusted earnings per share, adjusted operating margin, free operating cash flow, and pro forma net debt to EBITDA. 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. On the call today is Standex Chairman, President, and Chief Executive Officer, David Dunbar; and Chief Financial Officer, Tom DeByle. Please turn to slide 3, and I will turn the call over to David now.

Thank you, Gary. We began working with Affinity this quarter. We look forward to a good working relationship. Let me start with an overview of our fiscal third quarter results and progress in executing our long-term strategy, focused on driving higher growth, profitability, and return on investment. Despite growth in several of our business units and significant strategic accomplishments, we faced several headwinds this quarter, which we currently anticipate will continue into the fourth quarter. I'll provide greater detail in my discussion of the individual segments' performance later in the call. Even with the challenges in the quarter, we had several significant accomplishments in our business segments that the company will continue to leverage and benefit as we enter fiscal year 2020. We continue to see strength at our Engineering Technologies, Hydraulics and Scientific businesses. At the Engineering segment, our increased focus and investment in the aviation end market is delivering strong results. We began nearly three years ago with the launch of a new plant outside Milwaukee to support our aviation customers. Sales in Q3 exceeded $4 million this quarter as production ramps up on the A320 program. Standex also continues to make progress on our growth laneways. At the Engraving segment, new offerings generated an approximately 39% year-over-year increase to $9.9 million. The GS Engineering acquisition announced last night builds out one of those laneways, soft surface tools. We also began production at our new Electronics facility in India this quarter, which will further strengthen our global engineering and manufacturing footprint as well as add to our India sales presence. And on April 1st, we successfully completed the divestiture of our Cooking Solutions Group for $105 million, in line with our originally communicated timeline and price range. Our focus on improved cash management resulted in increased cash flows of $9.5 million in the quarter. The proceeds from the Cooking divestiture combined with positive free cash flow trends in the quarter further strengthened our balance sheet and financial flexibility to pursue a strong set of organic and inorganic growth opportunities. However, as I stated earlier, these successes are tempered by macroeconomic headwinds at several of our businesses as well as the impact from timing of automotive-related rollouts in the Engraving segment, all of which are expected to continue for the fourth quarter of 2019. As a result, our performance for the third quarter was disappointing to us and we've quickly begun implementing several initiatives to restructure where appropriate. We've taken actions in both Electronics and Engraving segments that we expect to complete by the second quarter of 2020 and generate $3.8 million in annual savings. Turning to slide 4, while total revenue increased by 0.8%, our adjusted EPS decreased by 35.6% year-on-year. Tom will go through the quarterly financial results in greater detail later in the call. Let's move to slide 5 so that we can provide additional insight on our acquisition of GS Engineering Company, which we were very excited to announce last night. GS is a privately-held company based in Maumee, Ohio with two talented founding partners, Grigoriy Grinberg and Matthew Shade, who will join Standex and lead the business. They have built the company into a leading provider of cutting-edge proprietary technology for the production of in-mold grained tools. We expect the acquisition for which we paid $30 million, to be immediately accretive to our earnings per share, excluding any adjustments for purchase accounting. To promote successful rollout of this technology throughout our global platform, we have included in the underlying agreement an earn-out opportunity for the founders based on aggressive growth targets. Moving to slide 6. The acquisition of GS provides several benefits: First, it is an excellent strategic fit with our Engraving Group and provides us a comprehensive offering in the soft surface tool market that we can expand globally. From a technology standpoint, the company's proprietary process for in-mold graining shells results in shells that can be produced more quickly than those of other industry providers. Additionally, the ability of GS to produce master molds moves an important capability in-house for Standex, something we have previously sourced externally, which will improve our cost position. GS is also favorably aligned with several key industry trends. There's been a shift in the auto industry toward increased focus on the interior comfort of vehicles with skin materials offering superior aesthetic and tactile properties. From an environmental and fuel economy perspective, soft skin materials and components are favorably positioned and GS helps us become a leading player in regard to these market trends. Finally, soft surface tooling and the in-mold graining sub-segment of soft surface tooling are growing markets. The soft surface market is estimated to have an approximately $200 million global addressable market projected to grow at an estimated 11% CAGR over the next five years, the fastest growing segment in the automotive texture markets that we serve with in-mold graining a sub-segment, estimated to be increasing at 16% annually. So the strategic fit combined with the potential growth of this market makes this a very attractive acquisition for Standex. Now let's review the segments beginning with Engraving on slide 7. Sales increased 10% year-over-year, driven in large part by our Tenibac acquisition and growth in the Asia Pacific region partially offset by FX. Our growth laneways in Engraving continue to be successful and grew 39% year-on-year in the third quarter with new technology sales from nickel shell, laser and tool finishing. However, profitability at the operating level decreased 37.7% with an operating margin of 12.1%. Our profitability was impacted by lower volume in more profitable programs, which resulted in significant deleverage in North America. Uncertainty in Europe and tariffs in China also impacted volume and profitability. We've immediately acted to strengthen our management structure and operations on several fronts. We will spend $3.6 million for restructuring activities, which should be completed by the second quarter of fiscal 2020. We expect this will generate $2.7 million in cost savings on an annual basis upon completion. We are also converting two North American facilities into Center of Excellence focused on specific technologies, which will strengthen our operating leverage for the scheduled ramp in customer automotive product launches in fiscal year 2020. This consolidation is expected to generate an additional $1 million in savings. Additionally, on a global basis, we will be converting several smaller production sites into sales offices as certain locations are no longer strategic to supporting OEM toolmakers. We expect Engraving fourth quarter results will increase sequentially, benefiting from our laneway initiatives, but will be impacted by the timing of North American automotive programs, which are scheduled to rebound strongly in the first and second quarters of 2020. Slide 8, Electronics. Revenue decreased 2% and operating income declined 16% year-over-year. The sales decline primarily resulted from lower global automotive component demand. We expect fourth quarter revenue to be at a similar level to third quarter. Our profitability in third quarter was impacted by the lower sales as well as material inflation. We were able to offset some of this impact through price increases and operating efficiency initiatives and are confident we can recover the balance over the next few quarters. Additionally, in our past couple of calls, we have discussed the significant increase in the cost of rhodium. We now have developed innovative process improvements to reduce our usage of rhodium and permanently improve the cost position of our high-quality and market-leading reed switches. Looking ahead, besides cost improvement projects underway in Europe and Asia, we have a very strong funnel of new business opportunities and growth laneways in automotive, industrial and telecom. We also began limited production in our new facility in India in Q3 and expect it to ramp up in Q4, which will provide us global engineering and manufacturing capability as well as the opportunity to further increase sales locally. Turning to slide 9, Engineering Technologies. We successfully leveraged demand with revenues increasing 17% and operating income more than doubling. Strength in our end markets included energy, defense and aviation. Backlog to be delivered in under one year grew 15% and orders rose 54% versus the year ago quarter. As I noted at the beginning of the call, we have made significant investments to support platforms such as aviation and are pleased with the results as these platforms ramp up to full production volume. Aviation, space and defense will remain strong in the fourth quarter and we expect to benefit from the continued A320 ramp. Turn to Hydraulics on slide 10. The 17% increase in sales was from continued strong demand in North American refuse, construction and infrastructure end markets with refuse sales increasing 62% year-on-year in large part from roll-offs and pack eject cylinder applications. Third quarter operating margin of 14.8% increase compared to 13.6% a year ago and 14% in the second quarter of 2019. We expect Hydraulics to experience a strong fourth quarter as backlog remains solid and we see continued demand from construction and infrastructure end markets. Now let's move to slide 11, Food Service Equipment Group. Revenue declined to 9.9% year-over-year in the quarter. Scientific sales continue to be strong and grew 13%, benefiting from increases in upright refrigeration, under-counters and cryo tanks. However, this was offset by the 17% decline in refrigeration due to weakness in retail and dealer network sales, combined with weather-related delays. Operating income decreased 35.8%, due to lower volume and a higher mix of low-margin dealer business. Looking ahead, we expect a sequential seasonal revenue increase in Food Service for Q4, but the weakness in refrigeration will continue. Besides implementing productivity measures, we are actively pursuing several revenue growth opportunities. In Scientific, we have seen favorable customer reaction to our new offerings, including the Black Diamond and White Diamond Nor-Lake Scientific cabinet line launched in December 2018, which contains several innovative look and control features. The Procon pump business continues to see strength with its nitro coffee and eSyruPro pump products. We also have several large opportunities in refrigeration and are actively working to bring them in. Our federal display and merchandising business is introducing several new products to enhance revenue growth. Together with operational improvements, we anticipate a recovery in profits for this business during the second half of calendar year 2019. With that, I will turn the call over to Tom to discuss the financial results in more detail. Tom?

Thank you, David. Turning to slide 12, which details our revenue by segment. On a consolidated basis, total revenue increased 0.8% for the fiscal third quarter versus the prior year. Engraving, Engineering Technologies and Hydraulics all grew double-digit with Engineering Technologies and Hydraulics both posting over 17% organic growth. However, given some of the headwinds previously discussed in David's commentary, organic growth was essentially flat. Recent acquisitions, Agile and Tenibac, in total added 4% to growth, while the impact of foreign exchange had a negative 2.3% impact. Please turn to slide 13, which includes our third quarter results on a GAAP and adjusted basis. Gross margin was 31.9% compared to 34.4% in the prior year, driven by material inflation, wage increases and weather related plant shutdowns. Operating margins decreased in the current quarter by 200 basis points on a GAAP basis and 250 basis points on a non-GAAP basis, reflecting the lower gross margins. Earnings per share was $0.58 on a GAAP basis and $0.65 on an adjusted basis. Our earnings per share was also impacted by increased interest expense associated with borrowings related to recent acquisitions and a higher tax rate due to the mix of income from the U.S. and abroad. Our pro forma tax rate in the quarter was 30.8%, compared to 26.1% in the third quarter of 2018. Let's go to slide 14, which provides a bridge between reported GAAP EPS and adjusted EPS. Tax-affected special items in the quarter were restructuring charges of $0.4 million and acquisition-related expenses of $0.6 million. Compared to prior year, we incurred $0.7 million less in restructuring and acquisition-related expenses. Slide 15 shows our cash flow for the quarter and year-to-date. We generated free cash flow of $9.5 million in the third quarter of 2019, compared to a negative free cash flow of $3.5 million in the third quarter of 2018. The increase in cash flow was partially a result of improved working capital management as we continue to drive our cash collection efforts as well as the success of our supply chain management initiatives. Year-to-date, the company has generated $7.2 million in free cash flow, compared to $6.7 million for the nine months ended fiscal 2018. Turning to slide 16. Net working capital at the end of the fiscal third quarter was $157.8 million compared to $154.7 million at the end of the third quarter in the prior year, an increase of $3 million. Excluding acquisitions in the current year, working capital was $151.5 million, a decrease of $3.2 million. Improvements in working capital were driven from focused accounts receivable collection efforts and better inventory management. Slide 17 summarizes our capital spending, depreciation and amortization trends. Capital expenditures were approximately $3.8 million compared to $5.4 million in the third quarter of 2018. We are anticipating heavier capital spending in the fourth quarter due to a number of initiatives. Engraving will spend CapEx during the quarter to optimize our Michigan site, install new laser machines around the world and add additional capacity in tool finishing. We are spending this CapEx in order to prepare for the higher automotive rollouts in Q1 and Q2 of fiscal 2020. Electronics will also have higher capital spending in Q4 as they will move into the new Cincinnati facility and expand the KT relay line. Finally, Engineering Technologies will be installing a new larger-capacity heat treat furnace to take on the volume increases in lip-skins as the A320 and A350 programs ramp. The company has spent approximately $18 million year-to-date and remains on track with previous guidance to spend between $35 million and $36 million in fiscal 2019. Slide 18 illustrates our capitalization on a pro forma basis. We received the Cooking Solutions proceeds on April 1st and paid down long-term debt. After the payment, our pro forma net debt decreased to $91 million compared with $197.8 million at December 31st, 2018. Year-to-date, Standex has repatriated $43.2 million in cash and expects to repatriate $50 million in total by the end of the fiscal year, from foreign subsidiaries. As a result, our leverage statistics are strong. The pro forma net debt-to-EBITDA ratio is 1.1 times compared to two times at 12/31/18. This places us in a very favorable position to pursue our growth initiatives and balance capital allocation. With that, I'll turn the call back to David.

Thank you, Tom. Our formal remarks conclude on slide 19. Let me start by saying that while we expect that the fourth quarter will be sequentially stronger due primarily to seasonality, we will still face some of the same macroeconomic headwinds and customer program timing impact issues as we did in the third quarter, particularly in the automotive end market. As a result, fourth quarter results will be below the fiscal quarter of 2018. However, we will continue to implement our productivity initiatives and cost reduction efforts, which position us well heading into fiscal 2020, particularly as we expect a significant rebound in automotive programs beginning in the first quarter. By the end of the second quarter of fiscal 2020, we expect to be generating $3.8 million in cost savings on an annualized basis due to these actions. We'll continue to evaluate other measures as necessary. In addition, as the most recent quarter's accomplishments indicate, we continue to aggressively focus on higher growth and return opportunities and are well-capitalized to execute. We have a very robust funnel of new growth laneways and an active pipeline of inorganic opportunities that will further strengthen our customer value proposition and results. With that, we will open the call up to questions. Operator?

Thank you. [Operator Instructions] Our first question comes from the line of Chris Moore of CJS Securities.

Hey, good morning, guys.

Good morning, Chris.

Hi, Chris.

Good morning. Yes. Maybe just start maybe big picture. Now that CSG has been sold, can you give maybe kind of a reasonable expectation for annual organic growth over the next three to five years, given the current mix of businesses?

Yes. You almost have to go by -- kind of build it up from the bottom-up, if you look at the bigger businesses that are growing now. Engraving has -- through the cycle over time, has grown 6% to 7%. It's subject to project timing, but through the cycles, that's been pretty consistent. The Electronics business has grown just above GDP consistently. Now, this quarter, 30% of auto's -- of Electronics sales were in auto and that's down about 17%. So if you take that out, the rest of the business is growing, so, you kind of straight-line that out. ETG, as the Airbus A320 ramps. Now, it's at 40 units a month that will grow to 50 next year and their plan is to go to 60. So, we expect continued growth in ETG. Hydraulics has been growing kind of with construction in North America so call that GDP. And in the food business, the biggest change here maybe, Cooking had a faster growth profile than Refrigeration. In our Refrigeration business, as we've talked over the last few quarters, is going through kind of a readjustment in the market. The lower end cabinet business is becoming less attractive. We're focusing more on walk-ins and more differentiated cabinets. So, we're not expecting much growth there. It's more an improved mix and that's a pretty big business. So, if you assume Refrigeration is relatively steady, then the rest of the businesses in Food Service are going to grow at GDP with Scientific growing a couple of points faster than GDP. So, I know that's a lot of data points for you, but that's the raw material.

Got it, okay. That helps. So, Electronics, it's expected to kind of -- sales remain at similar levels you said through this calendar year. But can we talk a little bit more about the longer term opportunity there? I know you said kind of GDP organically, but from an M&A standpoint, are there opportunities out there? Kind of where the focus might be? Is auto going to be more or less of a kind of focus on that side?

Yes. So, great question. We like this business a lot. It's a differentiated business, has a good position in its markets. I mentioned briefly the opportunities -- the new business opportunities the Electronics business is pursuing. The funnel of opportunities is as big as it's ever been both in total quantity, but also the number of individual opportunities that are above $1 million a year, which is a very big opportunity for us. And there are some auto opportunities in there but more than -- it's less than 30%. So, the mix of the future business will be less auto. And your question about acquisitions, we have a very active funnel. There are a few opportunities that are actionable in the short-term. And based on the markets we play in, they are relatively fragmented and we're confident that there will continue to be an attractive set of acquisition opportunities there. In terms of long-term growth, we still think this – the Electronics business is well positioned to grow faster than GDP. The impact on auto right now is big, that alone accounts for about five points of decline for the business. So as auto stabilizes, you'll see the rest of the business is growing with a good profile.

Got it. That's very helpful. Let me jump back in line. Appreciate it guys.

All right. Thanks.

Thanks.

Your next question comes from the line of Chris McGinnis of Sidoti & Company.

Good morning. Thanks for taking my question.

Good morning.

Hi, Chris.

Can we just maybe dig in a little bit more on the Engraving and just the businesses, or the assets that you are shutting down, what were they serving and how much will that help drive kind of improvement in that margin profile? And where do you think that margin profile ultimately sits? Thanks.

Yeah. Quick answer to the last one, we still think it's a 20% EBIT business through the cycle. It's proven that. So the first part of the question on the sites that we're closing, we've got 45 sites around the world. And the evolution of global tool making has made some of these less attractive than they were 5, 10, 15, 20 years ago. So there are a handful of sites that we plan to close the operations and convert them to sales offices. Two that we've announced already are – I'll just give you good examples here, Sweden and Australia. Australia used to be a good tool market. There used to be manufacturing there, auto manufacturing. Nobody is making cars in Australia anymore. But Ford has a design center, so we've closed that. We're focusing on sales and support of the design center. Same thing in Sweden, where there used to be more toolmakers in support of Volvo. The tool work is done elsewhere but there's design work done in Sweden. So there's another handful of sites like that. And we're constantly evaluating, what does the local market look like site-by-site and where do we need to be present to support the global OEMs. So in the text, I mentioned that, when we get through the closure of the operations that we've already identified, the annual value will be like $2.7 million in margin improvement.

Okay. I appreciate that. And then maybe just on the Food side. Can you maybe break out how much of the business is Refrigeration versus the Scientific at this point and any ability to drive better margins in that business? Or what's the holdback on the – if you could improve it? Thanks.

Yeah, I'm quickly doing the math here in my head. So the Refrigeration is about 60% of the sales of that Food group without Cooking. The other is scientific, federal and Procon, which are good businesses there. The Refrigeration business, as you recall last year, your other question was what we're doing to improve the margins there? If you recall a year ago, maybe four, five quarters ago, we announced that we were restructuring and consolidating. We have two plants in North America. We focused one plant on cabinets. We moved our cabinets from Wisconsin all down to our Mississippi plant and we continue to drive improvements in that plant. And the internal numbers in terms of the efficiency is improving. Throughput is improving, quality is improving. The internal KPIs are improving. That's masked a bit by the fairly-significant move in the marketplace at the lower end of that cabinet business to more and more import, and we talked about this in previous quarters, too. More and more of that market is being satisfied by imports. Many of the dealers, we sell-through are introducing private label under their own brand with imports. So continued improvements in Refrigeration and focus on the chain business and then where differentiated products like milk coolers and ice cream dipping cabinets and things will stabilize that business. And right now, it's kind of low single-digit EBITDA. With those moves over the next couple of years, it's not an overnight thing we can get into mid to upper single digit EBITDA for that commercial Refrigeration business.

Great. Thanks for taking my questions. And I'll jump back in the queue.

Thank you, Chris.

[Operator Instructions] Your next question comes from the line of DeForest Hinman of Walthausen & Company.

All right. Thanks for taking my questions. Just back to Electronics. My understanding was generally you didn't have a lot of ability to visibility in terms of sales in that business. And I just want to make sure I understand this. You talked about outlook for sales levels similar through the calendar year. And the way I read that, that would include June ending, September ending and December ending. Is that correct and if so why is that the case?

Well, yes, both of your statements are correct. I mean we do have limited visibility because quite a bit of our business comes through distribution channels. And it's -- the Electronics business has, in our order profile, we get more rapid swings sometimes. It -- back in 2008, 2009 when markets turned down, Electronics went down first. And our -- we have four to six weeks of backlog typically in that business. Our forecast is based on an expectation that the China tariff situation will remain in effect through the year. So, if that's lifted, that could provide some upside. It assumes that global auto will remain about where it's at. If that moves, that could change it. And so it's based on an assumption that macroeconomic conditions we serve will remain fairly steady. Now, we're not economists here. We try to be and do our best job at forecasts. But I would say there is some conservatism in that forecast and if there's any upside, if European growth improves a little bit, China tariffs are lifted, we could see some upside to those numbers.

And just digging into that a little further. I mean, a few minutes ago, we're talking about new business win opportunities, maybe some new verticals. How is that baked into that forecast or is it not baked into that forecast?

I'd say, it's baked into the forecast maybe again a little conservatively. But the way our business works, if we win an application, it takes several quarters for it to ramp up. And the large opportunities in our funnel, if they really hit on all cylinders, we would probably start to see that towards the end of the calendar year.

Okay. And then how do you feel about inventory levels in the channel? And I've spent a lot of time on this because it seemed like the outlook was reasonably good. We're adding capacity. I think we had commented that we're adding headcount, to some extent, which would lend itself more so to kind of a growth outlook and a pipeline of potential new business wins. And now in this period, we're talking about some headcount reductions.

Yes. So, I'd say there's three industries where we have reasonable confidence in what's happening with inventory levels. A year ago when we talked about this business, our reed switch plants were running at full capacity. The industry was at capacity and we now believe a lot of customers that bought last year were buying just to get their hands on reed switches and they put them into inventory. Now there's more capacity than demand. We think there's some inventory absorption in the reed switch business. In auto with the decline in SAAR, we think there's some inventory burn-off going on there. In our high-reliability magnetics business, we have some exposure to semiconductor fab equipment. That market has slowed. It's a great market to be in. It's slow now and will pick up later. So, those three we know, there's kind of a, call it, pause or correction that's going on.

Okay. And then on Engraving. Historically, a very, very good business, really good long-term margin profile. We've put up two quarters in a row, I think, probably in the last decade, these are among some of two lowest margin results in that business. We've spent some time talking about the second quarter 2019 results so we don't need to revisit that. But can you call out any one-time items in the Engraving business? You mentioned some of the restructuring. Can we talk about that and anything else that impacted that quarter?

Yes, we did mention today, we're going to close some sites. This is the first time we've announced that we're closing sites, first time we've closed sites since I've been here. And I would say that -- those sites in the past were good-sized profitable sites. But year-after-year, as some of the toolmakers in their markets closed, it's a little bit like the frog in the water kind of analogy that you wake up one day and realize, gosh, there's not enough market in this country anymore to support a business. And we've been carrying that declining profitability in those countries in recent years. So, getting a move on those and just regularly reviewing profitability and the local market capability is going to be very important. Continuous pruning activity for this Engraving business and I'd say that's a new direction. And just those moves that we anticipate to be done with by the end of this calendar year will add -- will take -- its $2.7 million improvement to the margins. There's a second category of country where we've had some issues and this has to do with some management changes. We had different variations of a theme, experienced successful manager retires, didn't get the right person in or we had changes -- we've had to make changes in three countries to just improve the management and we're seeing those turn and that's more just operational stuff. And then in our large plants, there was a one-time effect and that was the timing of projects in North America. This last quarter was a very soft quarter for North America. And as we look at the data, gosh, in the last 23 quarters, what was it, Tom? 6 -- in 6 of the quarters, there's like more than a 250 basis point swing in margin and when we get these significant swings in volume. We saw that in North America. And there was not corresponding strength in another region. So the margin impacts on -- in Engraving in the quarter were all site-specific. The basic offerings we have are good. The gross margins are good. All the new laneways are good, the tool finishing, laser, nickel shell we were happy with those. We just have to better manage it country by country profitability and try to give you an idea of the three different buckets. Q – DeForest Hinman Okay. So you talked about this business being a plus 20% EBIT business. Is it a plus 20% EBIT business in the fourth quarter? And if not, when is it a 20%-plus EBIT business?

Yes, based on what we see, I did mention, the second half of this calendar year is going to be very strong in North America with good -- good programs. So Q4, I think we called for sequential improvement. So giving it, let's call it, upper teens. And once we get to the end of the year with the programs that are scheduled to roll out -- and I can give you the lists of some names -- we expect it to be running at its historic levels.

Okay. So we should think about third quarter '19 as a trough level, then higher from there?

Yes. Yes.

Okay. And let's talk about the good performance. Engineering Technologies, starting to hit that double-digit level of operating profitability, you talked about ramping the A320 lip-skin program, I believe. When I look back when that business was doing or performing very strongly, maybe 2015, the fiscal level numbers were heading towards the teen operating profit margin level; obviously third quarter '19 results, huge improvement year-over-year. Where is that margin heading? Is it going to be low double digits or is it going to be moving towards the teens as we move into fiscal 2020?

Yes. Just to kind of set the stage and go back to the period you're referring to. In 2014, 2015, the business was performing upper teens. I think it had a quarter or two where it was low 20s. There was a lot of oil and gas business then, oil and gas and space, some medical and defense. The oil and gas has come down quite a bit. And what we've communicated consistently and still believe that as these new parts that we've won like the lip-skins and the more highly engineered engine parts on the new platforms ramp to full volume, this business will consistently deliver above 15% EBIT. Now, if there's a surge in oil and gas or energy business which we are not counting on, it could bump above that. But we think the base of the space and aviation business will carry this up above 15% EBIT.

Okay. So that's certainly encouraging. And then on the GS acquisition, $30 million purchase price, can you help us understand the trailing 12 months revenue and EBITDA of that business?

Yes. So the business is just under $10 million in sales, it's very profitable. The EBITDA multiple is about a 10. And this is a rapidly-growing segment, a rapidly-growing business. And it -- we've known of this business by reputation because they've really made a mark in the last few years, kind of coming out of nowhere with this proprietary process they have, but they lacked the contact with -- they lack the account relationships with global OEMs, which we have. They lack the ability to capitalize to expand their facilities. So we're very excited as we got to talk to them. They saw an opportunity for them -- the founders will stay with the business, drive this for us. They see an opportunity to realize the dreams they have for the business as part of the global network at Standex.

And when you talk about that opportunity, one of the things that stood out for me on the website was you talked about significantly expanding the life of the molds. Can you help us understand that? Is that really the secret sauce that they've developed? And how impactful can that be if it's rolled out over our entire network of 40-plus locations with that type of technology?

Well, these guys are very innovative. They have a number of process innovations that we're anxious to put in place. But the very first one which is their -- really the strongest source of competitive advantage is they can deliver in a couple of weeks what competitors with traditional processes deliver in 8 to 10 weeks. So it's a lead time and a cost advantage at same quality that really differentiates them. I mean, it's true, they do have some other process and things we believe we can apply to other molds. But the extension of the life of the mold, that doesn't ring a bell here with GS.

That's helpful. And then can you give us an update on capital deployment priorities? We did the GS transaction. We may or may not have been in the blackout. We bought stock in the second quarter of 2019. But doesn't look like we were buying any stock in the third quarter of 2019. So just walk us through the buckets, please?

Yes. So the -- it hasn't changed. So every quarter, we put out a capital allocation philosophy. First, we keep the lights on and what's that number now, Tom?

$14 million.

$14 million, $15 million. And then we look at growth capital to invest in our organic growth opportunities. And you see in Engraving, we've been putting in lasers and investing in nickel shell electronics. We've invested in tooling for these new NBOs. We have a new headquarters in Electronics, the India plant. For all of that, we look for -- with conservative assumptions, we approve all of the capital here at headquarters. It's got to deliver more than 15% IRR. And we review these. In fact, at our recent Board meeting, we look at CapEx, individual CapEx with more than $200,000. We take a look at a dozen of them to see if they're paying off and delivering above that 15% threshold. We are confident we have a good process and we're delivering that. The next thing we'd look at is acquisitions. And again -- there again, we look at three different scenarios. We take the business case and understand what that return would be. Then we dial down our sales expectations. We dial down our margin expectations. We dial down synergy expectations to get to 15%. And if it looks like there's a conservative set of assumptions that deliver that 15%, then it looks like a good acquisition. A final case we do is a WACC case. And we say, if sales and margins and -- it further declines, how low can they go and still deliver us above our cost of capital? And if that looks like almost an asteroid scenario would have to happen for that to occur, then we have a green light with an acquisition. We go through all those scenarios with the Board when we review acquisitions. And underneath all of this, we're constantly looking at the -- our stock price relative to our long-range plan and the inherent value of the business. We have an authorization from the Board. I don't know what is left on it though, it was $100 million. It's probably $80-something million, $67 million left. So quarter-by-quarter, we look opportunistically where the market is at, but we compare that with our other investment, other uses of capital and buy back shares when it's the best use of that cash.

Okay. And final question, what is the commentary about the deal pipeline that might be something actionable in the short term? Where are we comfortable with having the debt-to-EBITDA currently if we did close a transaction, hypothetically? Where are we comfortable?

Oh, the debt-to-EBITDA?

Yes. As we say on our capital allocation slide, 1.5 to 3 times.

Which would leave about $280 million.

Yes. We have $282 million of dry powder right now.

Okay. Thank you.

Thank you.

Thank you, DeForest.

[Operator Instructions] Thank you. I will now return the call to David Dunbar for any additional or closing remarks.

All right, thank you. Yes, there are a lot of businesses at Standex, a lot of moving pieces sometimes so let me just kind of reset what happened in the quarter and what it means for us long term. Our -- the growth initiatives, our laneways are driving growth. We have a great NBO opportunity in Electronics. And the investments we started three years ago in Engineering Technologies are starting to pay off so we're confident about that GDP+ process we put in place. Secondly, the focus on operating discipline is starting to deliver. We're pleased with the cash management and the cash flow in the quarter. Third thing, this acquisition of GS positions us in a fast-growing market with very, very attractive margins in our Engraving business. Fourthly, the divestiture of Cooking Solutions. That was a big deal for us. It was complicated. We executed it in the time frame and got the value that we communicated. So we feel very good about that; that further focuses our portfolio. And finally, in the businesses that had margin trouble in the quarter, we're confident we have the actions in place to address them and get back on track to where they have been historically. So we look forward to coming back next quarter to report on our progress.

Thank you for participating in Standex International's Third Quarter 2019 Earnings Conference Call. You may now disconnect.

All right. Thank you.