Standex International Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended December 31, 2011, Standex’s fiscal 2012 second quarter and first half. Standex operates four continuing reportable groups: Food Service Equipment, Engraving, Engineering Technologies, and Electronics and Hydraulics. In December 2011, it decided to sell its Air Distribution Products (ADP) business and classified it as discontinued operations.
Financial results and liquidity
Dollar amounts are in millions, except per-share data.
| Metric | Three months ended Dec. 31, 2011 | Prior-year quarter | Six months ended Dec. 31, 2011 | Prior-year six months |
|---|---|---|---|---|
| Continuing net sales | $154.9 | $142.1 | $314.2 | $285.4 |
| Gross profit margin | 32.5% | 33.7% | 32.8% | 33.8% |
| Income from operations | $14.4 | $13.4 | $30.5 | $31.6 |
| Income from continuing operations | $10.1 | $9.3 | $21.9 | $21.2 |
| Discontinued-operations loss | $(14.2) | $(0.3) | $(14.1) | $(1.2) |
| Net income (loss) | $(4.1) | $9.0 | $7.8 | $20.0 |
| Diluted EPS | $(0.32) | $0.71 | $0.61 | $1.57 |
- Quarterly continuing sales rose 9.0%: $8.0 million organic growth and $4.7 million from acquisitions, with negligible currency impact. First-half sales rose 10.1%, including $15.6 million organic growth, $11.0 million from acquisitions, and $2.3 million from currency.
- For the quarter, operating income increased 7.5%. For the half, it declined 3.4%, partly because the prior-year period included a $3.4 million gain on a real-estate sale. SG&A was 22.7% of quarterly sales versus 24.2% a year earlier.
- Backlog was $113.9 million at December 31, up 17.2% from $97.2 million a year earlier; management attributed much of the increase to acquired Metal Spinners orders.
- Continuing-operations operating cash flow was $9.0 million in the first half versus $24.7 million. Management cited working-capital use, including higher inventories and lower accounts payable. Consolidated operating cash flow was $6.6 million, including discontinued operations.
- Capital expenditures were $5.1 million. Cash and equivalents were $26.7 million, versus $14.4 million at June 30. Debt was $64.3 million, including $61.0 million of revolving borrowings and $3.3 million of industrial revenue bonds; net debt was $37.6 million. The company reported net debt to capital of 13.3%.
- At quarter-end, $89.0 million remained available under the existing $150 million revolving facility. On January 5, 2012, Standex replaced it with a five-year, $225 million unsecured facility, with a $100 million accordion feature, subject to covenants including funded debt/EBITDA of no more than 3.5:1 and interest coverage of at least 3:1.
Material changes and management commentary
- ADP’s planned divestiture resulted in $19.9 million of non-cash impairment charges: $14.9 million against goodwill and $5.0 million against fixed assets. ADP’s net loss was $14.2 million for the quarter. A sale was expected within 12 months, but no definitive agreement had been signed by the filing date.
- Management said the ADP sale could involve an additional $3.6 million to $4.6 million of charges, including expected transaction-related costs. Sale proceeds were intended to support growth in the remaining businesses.
- Segment performance was mixed. Engraving quarterly sales increased 11.2% and operating income 30.4%; Engineering Technologies sales increased 33.5%, largely due to Metal Spinners, while its margin fell to 20.4% from 24.0%. Food Service Equipment sales rose 4.3%, but operating income declined 2.7% amid adverse mix and consolidation inefficiencies. Electronics and Hydraulics sales rose 12.4% and operating income 14.8%, driven particularly by Hydraulics.
- Management described a cautious outlook: sales had increased for eight consecutive quarters, but remained below pre-recession levels; it expected gradual improvement while noting housing-related weakness and a competitive, low-growth environment. Energy-market sales were expected to improve sequentially in the second half, but remain below historical levels.
- Management expected fiscal 2012 restructuring expenses of $2.0 million to $2.5 million and capital expenditures of $5 million to $7 million for the remainder of fiscal 2012. No specific consolidated revenue or earnings guidance was provided.
Risks, contingencies, and other items
- Risks cited include uncertain economic conditions in served markets, housing weakness, competition, product mix, higher steel and other input costs, execution of restructuring and facility consolidations, foreign exchange, and pension funding requirements. Management said price increases may not fully offset cost inflation.
- The IRS was auditing U.S. tax returns for fiscal 2009 and 2010; management did not expect a material financial-position impact, though the outcome was not yet determinable. Management did not expect existing legal matters to have a material adverse effect.
- Standex remained an obligor on certain leases associated with the former Berean bookstore business. Potential obligations in the event of default were $2.0 million, of which $1.5 million was not recorded as a liability based on management’s loss assessment.
- The company had $40 million of effective interest-rate swaps at a weighted average base rate of 2.17%, plus a $10 million forward swap due to become effective in March 2012. It said a hypothetical 10% currency move would not materially affect operations, financial position, or cash flows.
- Disclosure controls were deemed effective at December 31, 2011, and the filing reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether ADP’s sale closes within the expected timeframe, the ultimate proceeds, and whether additional divestiture charges fall within or exceed the estimated $3.6 million to $4.6 million.
- Whether organic sales growth and backlog convert into sustained revenue and profit, particularly given lower gross margins and uneven segment performance.
- Whether working-capital demands normalize and continuing-operations cash generation recovers.
- Compliance with the new credit facility’s leverage and interest-coverage covenants, and the company’s debt and cash position after the refinancing.
- Whether restructuring delivers expected savings and whether input-cost increases can be offset by pricing, productivity, and mix.
- Developments in pension funding, the IRS audit, and the contingent Berean lease exposure.