Standex International Corporation — Form 10-Q
Reporting period: Three and six months ended December 31, 2014 (fiscal 2015); unaudited. Unless stated otherwise, amounts are in millions of dollars. Comparisons are with the corresponding periods ended December 31, 2013.
Business context
Standex operates five reportable groups: Food Service Equipment, Engraving, Engineering Technologies, Electronics Products and Hydraulics Products. Its strategy emphasizes organic growth, complementary acquisitions and operational improvements. During the quarter, the company acquired Enginetics, an aircraft-engine-components producer, for approximately $55.0 million in cash. Ultrafryer, acquired in June 2014, also contributed to current-period results. American Foodservice, divested in June 2014, is reported as discontinued operations.
Financial performance
- Second-quarter revenue: $189.3 million, up 13.7%. Management attributed the change to 9.1% organic growth and 6.5% acquisition contribution, partly offset by a 1.9% foreign-exchange decline.
- Second-quarter earnings: Operating income was $15.9 million versus $15.1 million; continuing-operations income was $11.3 million versus $10.5 million. Net income was $11.2 million versus $10.5 million. Diluted EPS was $0.87 versus $0.82, including a $0.01 loss from discontinued operations.
- Six-month results: Revenue was $391.4 million, up 13.5%; operating income was $37.1 million versus $32.2 million; continuing-operations income was $26.2 million versus $22.8 million. Net income was $25.7 million versus $19.6 million, and diluted EPS was $2.00 versus $1.54. The prior-year period included a larger discontinued-operations loss.
- Margins: Gross margin fell to 31.1% from 33.6% for the quarter and to 31.9% from 33.7% for six months. Management cited unfavorable mix, higher discounts and rebates, Cooking Solutions operating inefficiencies, and acquisition-related inventory step-up costs. Second-quarter operating margin was approximately 8.4%, compared with 9.1% a year earlier.
- Cash flow: Six-month operating cash flow from continuing operations was $11.8 million, down from $19.8 million. Net cash used in investing was $69.9 million, primarily for the Enginetics acquisition and capital spending. Capital expenditures were $14.0 million. Financing provided $72.2 million, including net borrowings of $80.8 million. Cash ended at $82.6 million.
- Debt and liquidity: Long-term debt was $125.8 million, versus $45.1 million at June 30, 2014; net debt was $43.3 million, compared with net cash of $29.2 million at fiscal year-end. The December 2014 amended revolving facility has a $400 million limit, with $265.8 million available to borrow at quarter-end. Reported covenant ratios were 34.69x interest coverage and 1.28x leverage, against minimum 3.0x and maximum 3.5x, respectively. Current assets were $320.2 million and current liabilities $123.9 million.
- Other measures: Backlog realizable within one year was $147.3 million, up 24.8%, primarily reflecting acquisitions. The quarterly dividend was $0.12 per share, versus $0.10. The company repurchased 21,269 shares during the quarter.
Material changes and segment trends
- Food Service Equipment revenue increased 12.8% in the quarter, but operating income declined 5.2%; discounts, freight, labor and production inefficiencies weighed on results.
- Engraving revenue declined 6.2% in the quarter, partly due to currency and weaker roll, plate and machinery markets; six-month operating income increased 21.7%.
- Engineering Technologies revenue rose 53.6% in the quarter, substantially reflecting acquisitions, while operating margin declined to 12.1% from 14.2%, including purchase-accounting costs.
- Electronics Products revenue and operating income increased 5.1% and 7.9%, respectively. Hydraulics Products revenue and operating income increased 39.3% and 37.1%, respectively.
- Other comprehensive loss was $5.6 million for the quarter and $13.1 million for six months, driven mainly by foreign-currency translation. Accumulated other comprehensive loss reached $68.9 million at December 31.
Outlook, risks and unusual items
- Management described end markets as generally strong, but expected oil-and-gas markets to remain soft and identified the weak euro and possible slowdowns in Europe and China as risks. Lower fuel prices could support automotive and food-service demand. No specific revenue or earnings guidance was provided.
- Management expected fiscal 2015 capital expenditures of $25–$27 million, depreciation of $14–$15 million and amortization of $2.5–$3.0 million. It expected $1.6 million of pension contributions during fiscal 2015; mandatory U.S. defined-benefit-plan contributions were not expected before 2020.
- Restructuring costs were $1.1 million for the quarter and $2.0 million for six months. Fiscal 2015 restructuring expense was expected to total $3.8 million. Initiatives included closing the U.K. Food Service Equipment office and consolidating Food Service production; the company continued to address Mexico facility inefficiencies.
- The second-quarter effective tax rate was 26.2%, versus 28.2%, primarily due to retroactive reinstatement of the R&D tax credit. The six-month rate was 27.5%, versus 27.7%.
- Foreign subsidiaries held $72.6 million of the $82.6 million cash balance; management intended to reinvest foreign earnings. Repatriation could result in U.S. tax or be subject to capital controls.
- For leases retained after the ADP divestiture, the company reported aggregate obligations of $2.2 million, with $1.0 million recorded as a liability. The Philadelphia subtenant ended its obligation in September 2014; the company was marketing the facility for sublease. Management did not expect additional changes related to these obligations.
- Management said existing legal matters, including environmental claims, were not expected to have a material impact. Risks disclosed include currency movements, raw-material prices and supply, demand and product mix, pension funding, acquisition integration, and whether restructuring and productivity savings are achieved.
Important facts for investors to verify
- Whether gross-margin pressure and Cooking Solutions inefficiencies improve, and whether restructuring delivers expected savings.
- How much reported growth is sustainable organically versus acquisition-driven, and the final Enginetics purchase-price allocation, which was preliminary.
- Whether operating cash flow recovers after working-capital changes, while acquisition spending and capital expenditures continue.
- Facility borrowing availability, covenant headroom and the effect of higher borrowings on interest expense and net debt.
- Exposure to foreign-currency translation, foreign cash repatriation, oil-and-gas softness, raw-material costs and retained lease obligations.