Business context and reporting period
Standex International Corporation’s unaudited Form 10-Q covers the three months ended September 30, 2012, the first quarter of fiscal 2013—not calendar 2012 Q1. Comparatives are for the three months ended September 30, 2011. Standex reports five product-based segments: Food Service Equipment, Engraving, Engineering Technologies, Electronics Products, and Hydraulics Products. The company had sold its Air Distribution Products business in March 2012 and reports it as discontinued operations.
Financial performance and liquidity
Unless otherwise noted, amounts are in millions of dollars. Continuing-operations revenue rose 15.1% to $183.4 million. Operating income increased 9.4% to $17.6 million; net income was $11.8 million versus $12.0 million, and diluted EPS was $0.92 versus $0.94.
| Metric | Quarter ended Sept. 30, 2012 | Prior-year quarter |
|---|---|---|
| Revenue | $183.4 million | $159.3 million |
| Gross profit margin | 32.3% | 33.1% |
| Operating income | $17.6 million | $16.1 million |
| Income from continuing operations | $11.9 million | $11.8 million |
| Net income | $11.8 million | $12.0 million |
| Diluted EPS | $0.92 | $0.94 |
| Continuing-operations operating cash flow | $9.5 million | Use of $2.7 million |
| Cash and cash equivalents at period end | $31.8 million | $54.7 million at June 30, 2012 |
| Total debt at period end | $66.8 million | $50.0 million at June 30, 2012 |
Gross margin fell 80 basis points, including $1.5 million of noncash Meder acquisition-related inventory and backlog purchase-accounting expense. The effective tax rate was 29.6%, compared with 25.4%; the prior-year rate benefited from a UK statutory tax-rate change. Backlog increased 9.4% year over year to $126.3 million.
Operating cash flow from continuing operations was $9.5 million; investing activities used $43.4 million, including $38.5 million net cash paid for Meder, and capital expenditures were $4.9 million. Financing activities provided $11.5 million, including $16.0 million net revolving-credit borrowings. The company ended the quarter with $34.99 million of net debt. Its $225 million revolving facility, expiring in January 2017, had $147.4 million of borrowing capacity available. The reported interest-coverage ratio was 28.3:1 and leverage ratio 0.93:1, against limits of at least 3:1 and no more than 3.5:1, respectively. The company had $50 million of debt effectively fixed through swaps at a weighted average 2.29% base rate.
Material changes versus the prior comparable period
- Revenue increased $24.1 million: $14.0 million from acquisitions, $12.2 million organic growth, partly offset by $2.1 million of unfavorable foreign exchange.
- In July 2012, Standex acquired German electronics manufacturer Meder for $42.1 million cash. Meder contributed about 8.2% of quarterly consolidated revenue. Purchase-price allocation remains subject to measurement-period adjustments; acquired goodwill of $11.1 million is not tax deductible.
- Segment results were mixed. Electronics Products revenue rose to $27.8 million, substantially reflecting Meder, while its operating margin declined to 11.1% from 18.2%, including purchase-accounting effects. Engineering Technologies operating income fell 34.4% to $1.7 million, with lower high-margin oil-and-gas business and low-margin aerospace development shipments cited as factors. Food Service Equipment, Engraving, and Hydraulics reported higher operating income.
- Cash declined and debt increased compared with June 30, 2012, principally in the context of the Meder acquisition and related financing. Continuing-operations operating cash flow improved from the prior-year quarter.
- Net income includes a $0.1 million loss from discontinued operations, versus $0.1 million income in the prior-year quarter. Residual discontinued-operation assets and liabilities remain on the balance sheet.
Outlook, commentary, risks, and unusual items
- Management described expected headwinds in fiscal 2013, including a soft European economy, unfavorable foreign-exchange comparisons, and increased legacy U.S. pension expense. In the quarter, foreign exchange reduced sales by $2.1 million and pension expense reduced operating income by $0.8 million.
- Management forecast Meder to be accretive by $0.13–$0.20 per share in fiscal 2013. It expected $14–$15 million of capital expenditures during the remainder of fiscal 2013. The filing provides no general revenue or earnings guidance.
- Management cited market-share initiatives, new products, geographic expansion, cost reductions, and productivity improvements as strategic priorities. It also noted exposure to low-growth or soft end markets, competition, raw-material inflation, and uncertainty over realizing acquisition synergies and restructuring savings.
- Standex is defending litigation concerning alleged defects in Master-Bilt ice merchandisers. An appeals court reversed an earlier dismissal; Standex appealed, and a decision on whether the state supreme court would hear the matter was expected in the second quarter of fiscal 2013. Management said a possible loss was neither probable nor reasonably estimable; an unfavorable outcome could affect results, cash flows, and financial position.
- The company remained an obligor on certain leases connected with the ADP sale, with aggregate obligations of $3.9 million and $2.1 million recorded. It also remained responsible for up to $1.3 million on certain former Berean bookstore leases in the event of default; $1.2 million was unrecorded based on management’s loss assessment.
- New European Engraving headcount reductions and a Brazil facility move generated $0.2 million of restructuring expense; management expected total costs of approximately $0.7 million and $0.4 million, respectively. The filing also notes defined-benefit pension funding exposure, commodity and foreign-exchange risks, and uncertainty in customer markets.
Most important facts for investors to verify
- Whether Meder integration, final purchase-price allocation, and the $0.13–$0.20 per-share accretion forecast are achieved, and how recurring margins develop after the nonrecurring $1.5 million purchase-accounting charge.
- Whether organic revenue growth and backlog convert to sustainable sales and earnings, particularly given the Engineering Technologies decline and weakness cited in some markets.
- Cash generation, working-capital trends, acquisition-related borrowing, available credit, and compliance with revolving-facility covenants.
- Developments in the Master-Bilt litigation and the potential exposure from retained ADP and Berean lease obligations.
- Future pension expense and funding requirements, alongside foreign-exchange and raw-material cost effects.