Standex International Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the three and nine months ended March 31, 2013 (fiscal 2013 third quarter), not 2012 Q3. Figures below are unaudited and in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
Standex operates five reportable groups: Food Service Equipment, Engraving, Engineering Technologies, Electronics Products, and Hydraulics Products. The filing reflects the July 2012 acquisition of Meder electronic and the prior-year sale of Air Distribution Products (ADP), reported as discontinued operations.
Key financial results
| Metric | Three months ended March 31, 2013 | Nine months ended March 31, 2013 |
|---|---|---|
| Net sales | $166.0 million, up 10.2% | $518.0 million, up 11.4% |
| Gross margin | 31.7%, versus 32.0% | 32.4%, versus 32.5% |
| Operating income | $11.7 million, down 24.7% | $45.6 million, down 1.0% |
| Income from continuing operations | $9.7 million, versus $11.5 million | $32.6 million, versus $33.4 million |
| Net income | $9.6 million, versus $9.1 million | $32.4 million, versus $17.0 million |
| Diluted EPS | $0.75, versus $0.71 | $2.53, versus $1.33 |
Quarterly diluted EPS improvement reflects lower discontinued-operation losses and a lower tax provision, despite lower operating income. Nine-month net income benefited substantially from the prior-year ADP discontinued-operation loss. Backlog was $120.0 million at March 31, up 1.1% year over year.
Cash flow, debt, and liquidity
- Nine-month cash from operations was $16.4 million, including $19.4 million from continuing operations, down from $20.6 million and $23.1 million, respectively, in the prior-year periods.
- Investing cash outflow was $52.4 million, including $39.6 million net cash spent on Meder and $12.4 million of capital expenditures. Financing activities provided $11.1 million; the company repurchased $8.3 million of shares and paid $2.9 million in dividends.
- Cash was $30.2 million at March 31, 2013, versus $54.7 million at June 30, 2012. Debt totaled $70.9 million, compared with $50.0 million; reported net debt was $40.7 million, versus net cash of $4.7 million.
- The $225 million unsecured revolver expires January 2017; $144.5 million remained available. The reported interest rate on outstanding facility borrowings was 3.29%. Interest coverage was 26.6x and leverage was 0.96x, compared with covenant limits of minimum 3.0x and maximum 3.5x, respectively.
- Current assets were $250.7 million and current liabilities $100.5 million at March 31. The company said existing liquidity sources should cover required pension contributions.
Material changes versus the prior comparable period
- Meder contributed $14.0 million of quarterly sales and $41.2 million over nine months; reported sales growth was therefore primarily acquisition-driven. Organic sales increased 1.0% in the quarter and 3.1% year to date; foreign exchange reduced sales by $0.2 million and $2.5 million, respectively.
- Electronics Products Group sales rose sharply with Meder, while legacy electronics sales softened in the quarter. Food Service Equipment and Engraving quarterly sales declined slightly; Engineering Technologies and Hydraulics sales increased.
- Operating income was lower in the quarter, including because the prior-year period included a $4.8 million real-estate sale gain. Current-quarter results also included litigation and restructuring charges, partly offset by a retiree-benefit settlement credit.
- Gross margin was slightly lower year to date, partly reflecting $1.5 million of non-cash Meder purchase-accounting expense in the first quarter.
Outlook, management commentary, and risks
- Management cited slower organic growth in the quarter, two fewer selling days than the prior-year quarter, soft European conditions, and market-specific weakness. It expected many delayed Food Service Equipment construction projects to complete in the fourth quarter, and anticipated some further Brazilian relocation costs in the fourth quarter, with Engraving results expected to normalize in fiscal 2014.
- Management expected $2.0–$3.0 million of capital expenditures for the remainder of fiscal 2013. It also expected additional Electronics consolidation costs of about $0.3 million in the fourth quarter. No consolidated earnings or revenue guidance was provided.
- Key stated risks include economic weakness in served markets, foreign-exchange movements, raw-material and component costs, customer and project timing, competition, execution of restructuring and acquisition synergies, pension funding requirements, and potential supply constraints.
- The company settled the Ultra Pure litigation during the quarter for $6.0 million total, of which it paid $2.6 million and insurers paid $3.4 million; the settlement admits no fault. It recorded the company-paid amount in SG&A. Separately, discontinuing a retiree life-insurance benefit generated a $2.3 million credit. The quarterly effective tax rate was 11.0%, principally due to the retroactive R&D credit and reversal of a deferred tax liability; the nine-month rate was 25.3%.
- Other disclosed exposures include $3.5 million of aggregate obligations related to ADP leases, with $1.8 million recorded as a liability, and $1.0 million of potential Berean lease obligations not recorded based on management’s assessment of loss likelihood. Management did not expect other existing legal matters to materially affect the financial statements.
Important facts for investors to verify
- How much reported growth and future earnings depend on Meder, and whether expected cost and procurement synergies are being achieved.
- Whether organic growth, segment margins, and backlog develop as expected, particularly in Food Service Equipment and Engraving.
- How working-capital needs, pension contributions, capital spending, and share repurchases affect cash generation and net debt.
- Whether litigation, restructuring, acquisition integration, and other unusual items recur or create additional costs.
- The effect of market weakness, foreign exchange, input-cost changes, and pension obligations on margins and liquidity.