Standex International Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2012 (fiscal 2013 second quarter and first half). Dollar amounts are in millions unless otherwise noted. The interim statements are unaudited.
Business context
Standex operates five reportable groups: Food Service Equipment, Engraving, Engineering Technologies, Electronics Products, and Hydraulics Products. The company describes its strategy as “Focused Diversity,” emphasizing value-added, technology-driven businesses. It sold its Air Distribution Products business in March 2012 and acquired German electronics manufacturer Meder in July 2012.
Financial highlights
| Metric | Quarter ended Dec. 31, 2012 | Quarter ended Dec. 31, 2011 | Six months ended Dec. 31, 2012 | Six months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Net sales | $168.6 | $154.9 | $352.0 | $314.2 |
| Gross profit margin | 33.4% | 32.5% | 32.8% | 32.8% |
| Income from operations | $16.3 | $14.4 | $33.9 | $30.5 |
| Income from continuing operations | $11.0 | $10.1 | $23.0 | $21.9 |
| Net income (loss) | $11.0 | $(4.1) | $22.8 | $7.8 |
| Diluted EPS | $0.86 | $(0.32) | $1.78 | $0.61 |
- Revenue and margins: Quarterly sales grew 8.9%; management attributed $13.2 million of the increase to Meder, $0.7 million to organic growth, and $0.1 million to unfavorable currency. First-half sales rose 12.0%, including $27.2 million from Meder, $12.9 million of organic growth, and a $2.3 million foreign-exchange headwind. First-half gross margin was unchanged, partly because of $1.5 million of noncash Meder purchase-accounting charges in the first quarter.
- Profit comparison: Continuing-operations income increased in both periods. The prior-year net loss reflected a $14.2 million discontinued-operations loss; the current-period discontinued-operations loss was $0.1 million for the quarter and $0.2 million for the half-year.
- Cash flow: Cash from continuing operations was $24.7 million for the first half, versus $9.0 million a year earlier. Total operating cash flow, including discontinued operations, was $23.2 million versus $6.6 million. Investing activities used $49.2 million, principally $39.6 million net cash paid for Meder and $9.7 million of capital expenditures. Cash declined $21.6 million to $33.1 million.
- Debt and liquidity: Long-term debt was $62.1 million at December 31, compared with $50.0 million at June 30; cash was $33.1 million, leaving net debt of $28.9 million. The $225 million unsecured revolving facility matures in January 2017, with $152.2 million available to borrow. The company reported covenant ratios of 26.9:1 for interest coverage and 0.85:1 for leverage, against minimum and maximum thresholds of 3:1 and 3.5:1, respectively.
- Other metrics: Backlog rose 6.9% year over year to $121.8 million. Cash dividends were $0.08 per share for the quarter and $0.15 for the half-year. The effective tax rate was 30.5% for the quarter and 30.0% for the half-year, above prior-year rates of 28.2% and 26.7%.
Material changes and segment performance
- Electronics Products sales more than doubled, primarily from Meder; the group reported quarterly operating income of $4.1 million versus $1.8 million. Meder was described as accretive and meeting expectations.
- Food Service Equipment quarterly sales were nearly flat, with weakness in grocery-related Cooking Solutions partly offset by growth in Refrigerated and Custom Solutions. First-half sales increased 2.5%.
- Engraving sales rose 2.3% for the quarter and 4.9% for the half-year. Engineering Technologies sales were nearly flat for the quarter, while first-half operating income declined 14.7%, reflecting lower volume and product mix at Metal Spinners.
- Hydraulics quarterly sales fell 5.2%, but operating income increased 23.3%, supported by cost containment, efficiency improvements, and China operations.
- Quarterly operating income increased 13.2%; management attributed much of the improvement to Meder. Interest expense rose 34.3% for the quarter, which the company attributed to a higher spread on its newer credit facility.
Outlook, commentary, risks, and unusual items
- Management cited a soft European economy, unfavorable foreign-exchange comparisons, and increased legacy U.S. pension expense as headwinds. It reported that currency reduced first-half sales by $2.3 million and pension expense reduced operating income by $1.5 million.
- No formal earnings or revenue guidance is provided. Management expected capital expenditures of approximately $9–10 million for the remainder of fiscal 2013 and estimated remaining-year depreciation and amortization of approximately $7.8 million and $1.4 million, respectively.
- Management expected Meder integration benefits over the following year, including $0.5 million of purchased-material savings and $1.0–$1.5 million from facility rationalizations; it said sales synergies would take longer to develop.
- The company recorded $1.2 million of restructuring charges for the first half, including European headcount reductions and the relocation of its Brazil engraving facility. It also cited retail-sector weakness, uncertain capital-equipment demand, commodity and component cost volatility, foreign-exchange exposure, pension costs, and the risk that restructuring or acquisition benefits may not be realized.
- A Louisiana lawsuit concerning alleged defects in Master-Bilt ice merchandisers was remanded to trial, scheduled for the third quarter of fiscal 2013. The company said it believes it has defenses but could not estimate a possible loss; management did not consider a loss probable or reasonably estimable at the filing date.
- The company remains an obligor on certain leases associated with divested businesses, including $3.7 million of aggregate ADP-related lease obligations (with $2.0 million recorded as a liability) and $1.1 million of potential obligations related to former Berean bookstore leases, most of which was not recorded.
- The American Taxpayer Relief Act retroactively extended the federal R&D credit; the company said the effect would be recognized in the third quarter of fiscal 2013. Disclosure controls were reported effective, although the evaluation excluded Meder’s internal control over financial reporting during the permitted post-acquisition period.
Important facts for investors to verify
- How much of reported growth and future earnings depends on Meder, and whether expected integration savings and synergies are achieved.
- Whether organic growth, segment margins, and backlog remain resilient amid the cited market weakness and currency headwinds.
- Cash conversion and working-capital trends, particularly given higher inventory and lower cash after the acquisition and capital spending.
- Debt capacity, covenant compliance, interest-rate exposure, and the effect of pension funding and expense on cash and earnings.
- Developments and potential financial exposure in the Master-Bilt litigation and obligations on divested-business leases.