Standex International Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended June 30, 2013. The filing is an annual report, not a standalone fourth-quarter filing; FY2013 fourth-quarter results are noted below. Standex manufactures products across five reporting groups: Food Service Equipment, Engraving, Engineering Technologies, Electronics Products, and Hydraulics.
Financial performance and liquidity
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $701.3 million | $634.6 million | +10.5% |
| Gross profit / gross margin | $226.1 million / 32.2% | $208.5 million / 32.9% | Margin down 0.7 percentage points |
| Operating income / margin | $63.8 million / 9.1% | $64.6 million / 10.2% | Income down 1.2% |
| Continuing-operations income | $45.3 million | $46.9 million | Down 3.4% |
| Net income | $44.8 million | $30.9 million | Up 45.1% |
| Diluted EPS | $3.51 | $2.42 | Up 45.0% |
| Operating cash flow from continuing operations | $63.4 million | $47.4 million | Up $16.0 million |
Revenue growth included $55.1 million attributable to the Meder acquisition, $14.3 million of organic growth, and a $2.8 million unfavorable foreign-exchange impact. Net income benefited from the substantially smaller discontinued-operations loss in FY2013; continuing-operations income declined. Lower gross margin reflected $1.5 million of Meder purchase-accounting expense and weaker Engineering Technologies margins.
FY2013 fourth-quarter sales were $183.3 million, net income was $12.5 million, and diluted EPS was $0.98, compared with $169.8 million, $13.9 million, and $1.08, respectively, in FY2012’s fourth quarter.
Cash and equivalents were $51.1 million and debt was $50.1 million at year-end, leaving net cash of approximately $1.0 million. The $225 million unsecured revolving facility had $164.2 million available to borrow; leverage and interest-coverage ratios were 0.73:1 and 27.5:1, respectively, against limits of 3.5:1 maximum and 3:1 minimum. Cash declined $3.7 million year over year. FY2013 investing included $39.6 million net acquisition spending and $14.1 million of capital expenditures; dividends paid were $3.9 million. The quarterly dividend increased during the year, and annual dividends paid were $0.31 per share.
Material changes and segment trends
- Electronics: Sales rose 124.2% to $108.1 million, primarily from the Meder acquisition; operating income increased 85.3% to $16.1 million. Standex reported approximately $4.0 million of Meder cost synergies substantially implemented by year-end.
- Food Service Equipment: Sales increased 1.6% to $394.9 million, while operating income was nearly flat at $39.5 million. Cooking Solutions weakened, partly offset by refrigeration and specialty products.
- Engraving: Sales were essentially flat at $93.4 million; operating income fell 12.9% to $15.6 million, reflecting relocation and start-up costs and softer fourth-quarter North American demand.
- Engineering Technologies: Sales increased 1.0% to $74.8 million, but operating income fell 7.4% to $13.2 million, mainly because lower high-margin oil and gas sales offset aerospace and energy growth.
- Hydraulics: Sales increased 0.5% to $30.1 million and operating income rose 12.8% to $5.0 million, supported by cost and productivity improvements.
- Backlog realizable within one year increased 11.0% to $132.9 million, with growth principally in Electronics and Engineering Technologies. International operations represented approximately 26% of revenue, versus 23% in FY2012.
The strategic portfolio changed through the FY2012 sale of the Air Distribution Products business and the FY2013 acquisition of Meder. FY2012 included a $4.8 million real-estate sale gain that did not recur in FY2013. FY2013 restructuring costs were $2.7 million, versus $1.7 million in FY2012.
Outlook, risks, and unusual items
- Management expected a 28%–30% effective tax rate in FY2014, compared with 26.0% in FY2013, and forecast capital expenditures of $17–$19 million.
- Management expected FY2014 restructuring expense of $8–$9 million. Separately, the company announced consolidation of its Cheyenne, Wyoming plant, expecting a $7.5–$8.0 million FY2014 pre-tax charge, including approximately $3.0 million of non-cash impairment. The plant consolidation was expected to be substantially complete by fiscal year-end.
- Management projected a $2.6 million reduction in U.S. non-cash pension expense in FY2014 compared with FY2013, partly offset by costs of a replacement defined-contribution program. The company expected $1.5 million of pension contributions in FY2014 and no mandatory U.S. plan contributions until 2017 under then-current funding rules.
- In March 2013, Standex settled the Ultra Pure Water Technologies litigation. The company recorded and paid $2.6 million, with insurers paying $3.4 million of the $6.0 million settlement; the claims were dismissed with prejudice and no fault was admitted. Management’s discussion elsewhere describes $2.8 million of legal-settlement costs, so the figures merit reconciliation.
- Other stated risks include economic weakness in customer markets, competition and pricing pressure, commodity-cost and supply fluctuations, foreign-exchange and cash-repatriation exposure, execution and integration of acquisitions, pension assumptions, and potential restructuring or goodwill impairment. Standex reported no impairment from its FY2013 annual goodwill test. Management said existing legal matters were not expected to materially affect consolidated results or cash flows.
- The U.S. pension plan’s reported assets were $200.2 million against a $227.9 million projected benefit obligation at June 30, 2013. Pension funding, discount rates, investment returns, and future required contributions remain relevant sensitivities.
The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The control assessment excluded Meder, acquired in July 2012; Meder represented 8.5% of consolidated revenue and 9.5% of assets at year-end.
Important facts for investors to verify
- Separate the acquired Meder contribution from organic growth and assess whether the stated synergies and integration benefits persist.
- Reconcile the legal-settlement expense described as $2.6 million in the notes and legal proceedings with the $2.8 million reference in management’s discussion.
- Track FY2014 restructuring charges, including the Cheyenne consolidation, against the $8–$9 million outlook and evaluate expected savings and completion timing.
- Monitor margin recovery in Engraving and Engineering Technologies, Food Service Cooking Solutions demand, and backlog conversion.
- Review pension funding assumptions and obligations, borrowing availability and covenants, and the potential impact of currency, commodity prices, and overseas cash repatriation.
- Consider the prior-year discontinued ADP losses and real-estate gains when comparing reported net income and operating performance.