Business context and reporting period
Standex International Corporation filed this unaudited Form 10-Q for the quarter ended December 31, 2013, the second quarter of fiscal 2014, and the six months then ended. The company operates five segments: Food Service Equipment, Engraving, Engineering Technologies, Electronics Products, and Hydraulics.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2013 | Six months ended Dec. 31, 2013 |
|---|---|---|
| Net sales | $172.2 million | $355.8 million |
| Gross margin | 33.4% | 32.8% |
| Operating income | $15.3 million | $29.2 million |
| Income from continuing operations | $10.6 million | $20.8 million |
| Net income | $10.5 million | $19.6 million |
| Diluted EPS | $0.82 | $1.54 |
For the six months, continuing-operations operating cash flow was $20.2 million, versus $24.7 million a year earlier. Capital expenditures were $8.0 million; total cash provided by operating activities, including discontinued operations, was $17.4 million. Cash was $48.1 million at December 31, compared with $51.1 million at June 30, 2013, as shown in the cash flow and liquidity disclosures. Long-term debt was $46.1 million, down from $50.1 million; the company reported net cash of $2.0 million. Its $225 million revolving facility had $168.2 million available to borrow, after $45.0 million of borrowings and $10.8 million of letters of credit. Covenant ratios were well within limits: interest coverage was 27.0:1 and leverage was 0.71:1.
Working capital items included inventory of $97.1 million, up from $85.0 million at June 30, and accounts receivable of $90.0 million, down from $102.3 million. Of the $48.1 million cash balance, $41.8 million was held by foreign subsidiaries; management said it did not expect to repatriate permanently reinvested cash for domestic needs.
Material changes versus prior comparable periods
- Quarterly sales rose 2.1% year over year, comprising $2.9 million of organic growth and $0.7 million favorable foreign exchange. Six-month sales rose 1.1%.
- Quarterly operating income fell 6.1%; six-month operating income fell 14.0%. The six-month decline primarily reflected $4.1 million of restructuring costs associated with the Cheyenne facility closure.
- Gross margin was unchanged from the prior-year comparable period in both the quarter and six-month period. SG&A increased to $43.6 million for the quarter, or 25.3% of sales, from $39.0 million, or 23.1%; management cited $2.1 million of CEO transition costs and increased development spending.
- Quarterly segment results were mixed: Engraving sales rose 20.0% and operating income rose 30.0%; Electronics sales rose 6.3% and operating income rose 7.1%; Hydraulics sales rose 12.4% and operating income rose 10.0%. Food Service Equipment sales fell 2.9% and operating income fell 23.4%. Engineering Technologies sales fell 3.9% and operating income fell 32.6%, partly reflecting a prior-year customer contract settlement.
- Six-month discontinued-operations loss was $1.2 million, compared with $0.2 million a year earlier, including a $1.2 million charge related to the guarantee arising from the previously divested Air Distribution Products business. The obligation was settled in the second quarter.
Outlook, management commentary, risks and unusual items
- Management expects the Cheyenne, Wyoming, consolidation to be completed by fiscal year-end. It forecasts $7.5–$8.0 million of fiscal 2014 pre-tax restructuring charges, including a $3.3 million non-cash impairment, and expects approximately $4.0 million of annual savings. Management anticipated realizing about 75% of the savings rate in the first half of fiscal 2015 and the full annualized rate in the second half.
- Fiscal 2014 capital expenditure expectations increased to approximately $23–$24 million, including replacement of a damaged machining center and spending for Engineering Technologies customer contracts. Management estimated depreciation of $13–$14 million and amortization of $2–$3 million.
- Backlog realizable within one year was $124.9 million, up 2.5% from $121.8 million a year earlier. Management cited expected strength in Engraving mold-texturizing demand, Engineering Technologies aerospace and oil-and-gas opportunities, and Hydraulics demand from refuse-truck markets; Food Service Equipment faced weak customer capital spending in some markets.
- A catastrophic failure of an Engineering Technologies machining center generated $3.0 million of insurance proceeds, offset by a $1.0 million write-off, for a $2.0 million net operating gain. A replacement machine costing about $2.9 million was expected to be operational early in fiscal Q4; management expected related incremental outsourcing, procurement, and installation costs to be reimbursed by insurance.
- Interest-rate swaps fixed the rate on $45.0 million of debt at a weighted average 2.40% base rate; the effective borrowing rate including swaps was 3.86%. Key risks identified include economic and market weakness, raw-material cost increases, foreign-exchange movements, execution of restructuring and acquisition benefits, pension funding requirements, and supply constraints. Management said existing legal matters were not expected to materially affect financial position, results, or cash flow.
- The company remained liable for $3.0 million of leases related to the former ADP business, with $1.5 million recorded as a liability. ADP gave notice it intended to end its Philadelphia sublease obligation beginning April 2014; Standex expected to sublet the space at market rates.
Important facts for investors to verify
- Whether Food Service Equipment demand and margins stabilize, and whether the Cheyenne consolidation achieves its stated completion schedule, charges, and savings.
- Whether projected fiscal 2014 capital expenditures and insurance reimbursement for the damaged machine remain on plan.
- Whether the company’s foreign-held cash is accessible for intended uses without material tax or capital-control effects.
- Whether backlog converts to sales and the cited segment growth opportunities, including the Airbus A-320 awards, deliver expected results.
- How the former ADP lease exposure, pension obligations, and other discontinued-operation matters develop.