Standex International Corporation — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2014, ended March 31, 2014. Comparisons are with the corresponding 2013 periods. The filing is unaudited; interim results may not indicate full-year performance.
Business context and results
Standex manufactures products and provides services across five segments: Food Service Equipment, Engraving, Engineering Technologies, Electronics Products, and Hydraulics Products.
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $178.8 million, up 7.7% | $534.6 million, up 3.2% |
| Gross profit margin | 32.8%, versus 31.7% | 32.8%, versus 32.4% |
| Income from operations | $14.2 million, up 22.2% | $43.4 million, down 4.8% |
| Net income | $13.2 million, versus $9.6 million | $32.8 million, versus $32.4 million |
| Diluted EPS | $1.04, versus $0.75 | $2.57, versus $2.53 |
| Backlog realizable within one year | $146.5 million at March 31, up 22.0% year over year |
Quarterly sales growth was primarily organic across the segments; currency contributed $0.8 million. Nine-month sales growth included $2.4 million of favorable currency impact. Quarterly operating income benefited from higher volume and resolved prior-year performance issues. Nine-month operating income fell mainly because restructuring charges increased by $3.5 million.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow from continuing operations was $35.8 million, compared with $19.4 million a year earlier. Total operating cash flow, including discontinued operations, was $33.9 million.
- Capital expenditures were $16.3 million for the nine months. Investing cash outflow was $15.7 million. Financing cash outflow was $12.2 million, including $5.0 million of net revolving-credit repayments, $3.5 million of dividends, and $5.5 million of treasury-stock purchases.
- Cash was $57.5 million at March 31, 2014, including $50.5 million held by foreign subsidiaries. Long-term debt was $45.1 million, leaving net cash of $12.4 million.
- The $225 million unsecured revolving facility expires in January 2017; $168.7 million was available to borrow. The company reported a 30.9:1 interest coverage ratio and a 0.65:1 leverage ratio against covenant minimum and maximum thresholds, respectively. Effective borrowing cost was 3.85%; swaps fixed the base rate on $45 million of debt at a weighted average 2.40%.
- Total assets were $541.3 million and stockholders’ equity was $329.1 million. Current assets were $280.7 million and current liabilities $118.6 million.
Segments and notable changes
- Food Service Equipment: Third-quarter sales rose 2.6% and operating income rose 35.6%; nine-month sales fell 1.5% and operating income fell 17.4%, reflecting lower volume and unfavorable mix. Management cited softness or delayed spending in certain customer channels.
- Engraving: Sales and operating income increased 14.5% and 77.0% in the quarter, supported by automotive model launches and improved Brazilian operations. Nine-month sales rose 13.9%.
- Engineering Technologies: Quarterly sales rose 14.1% and operating income 25.9%, including strong oil-and-gas activity and an Airbus A320 contract award. A year-to-date comparison was affected by a prior-year customer settlement.
- Electronics Products: Quarterly sales increased 10.4%; nine-month operating income increased 23.8%, benefiting from volume, procurement savings, facility consolidation, and the absence of a prior-year Meder inventory step-up expense.
- Hydraulics: Quarterly sales grew 17.8%, but operating income rose only 2.8%; management cited investment in sales and marketing and lower-margin competitive markets.
Outlook, risks, and unusual items
- Management expected the Cheyenne, Wyoming cooking-solutions consolidation to be substantially complete by fiscal year-end and projected $4.0 million in annual savings once complete. It expected total fiscal 2014 restructuring charges of $7.5–$8.0 million, including a $3.3 million non-cash impairment; $5.8 million had been recorded in the first nine months.
- Fiscal 2014 capital expenditures were projected at approximately $23–$24 million, partly for a replacement machine damaged by a catastrophic failure. Management expected the replacement to be operational in the latter half of the first quarter of fiscal 2015 and said related additional costs were expected to be reimbursed by insurance.
- Quarterly other non-operating income included a $3.4 million life-insurance gain following the death of a former executive. Nine-month other operating income included a $2.0 million net insurance gain for the damaged machine. These items boosted reported results and should be distinguished from recurring operations.
- Discontinued operations included a $1.2 million charge related to a guarantee triggered by withdrawal from a multi-employer pension plan; the obligation was settled in the second quarter. Nine-month discontinued-operations loss was $1.1 million.
- Management identified risks including economic and end-market weakness, competition, product mix, raw-material and component costs, currency movements, pension funding, and the ability to realize restructuring savings and acquisition synergies. It reported no currently existing legal matter expected to materially affect consolidated results, and stated disclosure controls were effective.
- No specific consolidated revenue or earnings forecast was provided. Segment commentary included expectations for continued automotive launches at Engraving, ongoing new-program demand at Electronics, and good near-term Hydraulics demand.
Important facts for investors to verify
- Whether Food Service Equipment stabilizes after its nine-month sales and operating-income declines, and whether the Cheyenne consolidation delivers the stated savings on schedule.
- How much of reported earnings and operating improvement is recurring, given the life-insurance gain, machinery insurance recovery, restructuring costs, management-transition costs, and prior-year comparison items.
- Whether backlog converts to sales and cash, and whether working-capital movements continue to support operating cash flow.
- Progress on machine replacement and insurance reimbursement, and the effect of remaining capital spending on cash and liquidity.
- Foreign-cash availability and potential tax consequences of repatriation, along with compliance with credit-facility covenants and future pension funding requirements.