SXI

Business Context and Reporting Period

Company: Standex International Corp.
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2010 (Third Quarter of Fiscal Year 2010)
Business Overview: Standex is a leading manufacturer of products and services for diverse commercial and industrial market segments. The company operates through five reportable segments: Food Service Equipment, Air Distribution Products, Engraving, Engineering Technologies, and Electronics and Hydraulics.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Net sales increased 3.4% ($4.4 million) in the quarter compared to the prior year, driven by organic growth of $2.2 million and favorable foreign exchange of $2.2 million. For the nine-month period, sales decreased 8.7% ($40.8 million) due to recession-related volume declines.
• Profitability: Operating income improved significantly to $6.7 million in the quarter from a loss of $19.9 million in the prior year. The prior year loss included a $21.3 million goodwill impairment charge. Excluding this charge, operating income increased $5.3 million year-over-year.
• Margins: Gross profit margin expanded to 30.5% in the quarter (from 24.4% last year) and 31.7% for the nine months (from 28.8%), attributed to cost reduction initiatives and the absence of the prior year's inventory write-downs.
• Debt Reduction: Long-term debt decreased from $94.3 million at June 30, 2009, to $64.8 million at March 31, 2010. The company reduced debt by approximately $44.8 million over the past year.
• Restructuring: Restructuring costs were $0.7 million for the quarter and $3.7 million for the nine months, down from $1.4 million and $6.8 million in the prior year periods, respectively.

Guidance, Outlook, and Risks

• Outlook: Management expects challenging market conditions to persist in the near term, particularly in construction, automotive, and housing markets. However, the impact of the global recession appears to be stabilizing.
• Cost Reduction: The company has implemented cost reduction initiatives expected to yield $36 million in annualized savings (with $20.5 million to be realized in 2010). Further restructuring in 2010 is expected to yield an additional $4 million in annual savings.
• Liquidity: The company maintains a $150 million revolving credit facility with $88.5 million available as of March 31, 2010. Management believes operating cash flow and available credit provide sufficient liquidity.
• Risks: Key risks include continued recessionary conditions, lower-cost competition, rising raw material costs (steel, petroleum), and the inability to realize expected cost savings from plant consolidations.
• Unusual Items: The prior year was significantly impacted by a $21.3 million goodwill impairment. The current period included a $1.4 million gain on the sale of the corporate headquarters building.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the Interest Coverage Ratio (9.46:1) and Leverage Ratio (1.2:1) against the facility requirements (3:1 and 3.5:1, respectively).
• Segment Performance: Review the divergence between the Engineering Technologies Group (sales up 13.9%) and the Air Distribution Products Group (sales down 29.6% YTD) to assess exposure to housing market volatility.
• Restructuring Progress: Confirm the realization of the projected $20.5 million in cost savings for fiscal 2010 and the status of facility consolidations.
• Discontinued Operations: Note the $2.5 million recovery from insurance regarding environmental remediation costs, which impacted discontinued operations results.
• Backlog: Monitor the backlog of $92.6 million, which decreased 3.2% year-over-year, as an indicator of future revenue visibility.