Standex International Corporation — Form 10-Q Summary
Reporting period: Three months ended September 30, 2013, the first quarter of fiscal 2014. Financial statements are unaudited; amounts below are in U.S. dollars. The comparable period is the three months ended September 30, 2012, except balance-sheet comparisons, which are to June 30, 2013.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $183.6 million | $183.4 million | Up 0.1% |
| Gross profit / margin | $59.1 million / 32.2% | $59.2 million / 32.3% | Margin down 0.1 percentage point |
| Operating income | $13.9 million | $17.6 million | Down 21.2% |
| Continuing-operations income | $10.1 million | $11.9 million | Down 15.2% |
| Net income | $9.1 million | $11.8 million | Down 23.2% |
| Diluted EPS | $0.71 | $0.92 | Down $0.21 |
| Operating cash flow, continuing operations | $1.3 million | $9.5 million | Down $8.2 million |
Sales were nearly unchanged: favorable foreign exchange added $0.9 million, offset by a $0.7 million organic decline. Operating income was pressured chiefly by $3.8 million of restructuring costs, including a $3.3 million non-cash impairment charge, and Food Service Equipment operating issues. The effective tax rate fell to 26.6% from 29.6%, primarily due to a U.K. statutory tax-rate reduction affecting deferred tax liabilities. Discontinued operations recorded a $1.0 million after-tax loss, versus a $0.1 million loss a year earlier.
Segments and material changes
- Food Service Equipment: Sales fell 3.6% to $105.3 million; operating income fell 34.1% to $8.8 million. Management cited softer markets, lower volume, unfavorable mix, machine downtime and an inventory write-down.
- Engraving: Sales rose 7.2% to $25.0 million and operating income rose 4.9% to $4.8 million, led by worldwide mold-texturizing demand; roll engraving and machinery were weaker.
- Engineering Technologies: Sales increased 9.8% to $17.3 million and operating income rose 23.0% to $2.1 million, supported by oil and gas, gas turbine and aviation-related demand.
- Electronics Products: Sales increased 1.1% to $28.1 million; operating income increased 66.4% to $5.1 million. The comparison benefited from prior-year Meder acquisition purchase-accounting costs; current results also reflected consolidation savings.
- Hydraulics: Sales rose 9.2% to $7.8 million and operating income rose 20.9% to $1.2 million.
Backlog realizable within one year increased 1.2% year over year to $127.8 million. Inventory rose to $89.8 million from $85.0 million at June 30.
Cash, debt and liquidity
- Cash was $46.1 million at September 30, down from $51.1 million at June 30. Total assets were $515.5 million and stockholders’ equity was $304.3 million.
- Long-term debt was $50.1 million; reported net debt was $4.0 million, compared with net cash of $1.0 million at June 30. The company had $164.1 million of borrowing capacity under its $225 million revolving facility, which expires in January 2017; $10.8 million of the $30 million letter-of-credit subfacility was used.
- Credit-agreement covenants were comfortably met: interest coverage was 27.7:1 against a 3:1 minimum, and leverage was 0.75:1 against a 3.5:1 maximum. The effective borrowing rate was 3.6%.
- Investing cash outflow was $4.2 million, primarily capital expenditures. Financing cash outflow was $2.5 million, including $3.0 million of treasury-stock purchases and $1.0 million of dividends. Operating cash flow weakened mainly because of a larger accounts-payable cash outflow than in the prior-year quarter.
- $45 million of debt was covered by interest-rate swaps at a weighted-average fixed base rate of 2.40%. Management reported no material effect on quarterly interest expense from a hypothetical rate increase due to the swaps.
Outlook, risks and unusual items
- The Cheyenne, Wyoming, Food Service Equipment plant is being consolidated into the company’s Mexico facility and other North American operations. Management expects the consolidation to finish by fiscal year-end, with approximately $7.5–$8.0 million of total fiscal 2014 pre-tax restructuring charges, including the impairment already recorded. Expected annual savings are approximately $4 million, with about 75% of the savings rate in the first half of fiscal 2015 and the full run rate in the second half.
- For Electronics, management expected facility-consolidation and purchasing savings to reach a $4 million annual run rate by the end of fiscal 2014. The filing provides no company-wide earnings or revenue guidance.
- Fiscal 2014 capital expenditures were expected to be approximately $17–$19 million. Management estimated depreciation of $13–$14 million and amortization of $2–$3 million.
- The U.S. pension plan was frozen for substantially all remaining participants effective July 31, 2013, with a defined-contribution plan replacing it. Management did not expect mandatory U.S. pension contributions until 2016, subject to future valuations.
- The company recorded an additional $1.2 million charge related to a guarantee associated with the divested Air Distribution Products business and a multi-employer pension withdrawal. It also remained responsible for certain facility lease obligations totaling $3.2 million, of which $1.6 million was recorded as a liability. In October 2013, the buyer gave notice it intended to end its Philadelphia sublease obligation beginning April 2014; management expected to sublet the space at market rates.
- Management identified risks including weak or changing end markets, raw-material and component cost increases, foreign exchange, pension funding, restructuring execution and potential failure to achieve anticipated savings. It said existing legal matters were not expected to have a material effect. Interim results may not indicate full-year performance.
Important facts for investors to verify
- Whether Food Service Equipment operational problems and inventory adjustments were temporary, as management expected, and whether its sales and margins recover.
- Progress, total cost and realized timing of the Cheyenne consolidation and the separate Electronics savings program.
- Drivers of the sharp year-over-year decline in operating cash flow and the increase in inventory.
- Developments in the ADP pension guarantee and lease obligations, including the planned sublease termination.
- Actual fiscal 2014 capital spending and pension funding needs against management’s estimates.