Standex International Corporation — Form 10-Q Summary
Period: Fiscal third quarter and nine months ended March 31, 2015; comparative periods ended March 31, 2014. The filing covers fiscal 2015 Q3, notwithstanding the request metadata’s “2014 Q3.” Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. Statements are unaudited.
Business context
Standex operates five reportable groups: Food Service Equipment, Engraving, Engineering Technologies, Electronics Products, and Hydraulics Products. The company’s strategy emphasizes organic growth, acquisitions, operational improvement, and capital investment. During the period it acquired Enginetics, an aircraft-engine-components business, for approximately $55.0 million in cash; the purchase-price allocation remained preliminary. The June 2014 Ultrafryer acquisition also contributed to comparisons. American Foodservice was divested in June 2014 and is reported as discontinued operations.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales, 2015 / 2014 | $181.0 / $174.2; up 3.9% | $572.4 / $518.8; up 10.3% |
| Gross margin, 2015 / 2014 | 31.6% / 33.1% | 31.8% / 33.5% |
| Operating income, 2015 / 2014 | $17.8 / $14.4; up 23.4% | $54.9 / $46.7; up 17.7% |
| Continuing-operations income, 2015 / 2014 | $12.8 / $13.3 | $39.0 / $36.1 |
| Net income, 2015 / 2014 | $12.6 / $13.2 | $38.4 / $32.8 |
| Diluted EPS, 2015 / 2014 | $0.99 / $1.04 | $2.99 / $2.57 |
Quarterly sales growth reflected $10.7 million from acquisitions and $2.6 million of organic growth, partly offset by a $6.4 million foreign-exchange impact. Nine-month growth reflected $27.5 million from acquisitions and $35.2 million of organic growth, partly offset by a $9.2 million currency impact. Gross margin declined due to unfavorable mix, operating costs, rebates, discounts and Cooking Solutions inefficiencies; nine-month margin also reflected $1.7 million of acquisition-related inventory purchase accounting expense. SG&A was $39.0 million, or 21.6% of sales, in the quarter versus $41.7 million, or 24.0%, a year earlier.
Quarterly diluted EPS fell despite higher operating income, in part because other non-operating income was $0.1 million versus $3.5 million in the prior-year quarter, and interest expense rose to $0.9 million from $0.6 million. Nine-month interest expense was $2.4 million versus $1.7 million. Discontinued operations produced losses of $0.1 million for the quarter and $0.6 million year to date, compared with losses of $0.05 million and $3.3 million in the comparable periods.
Cash flow and liquidity: For the nine months, operating cash flow was $21.3 million, including $23.1 million from continuing operations, down from $33.9 million and $35.2 million, respectively. Management attributed the continuing-operations decline mainly to a $13.8 million increase in net working capital supporting higher sales. Investing activities used $74.8 million, including $54.9 million for Enginetics and $18.8 million in capital expenditures. Financing activities provided $73.0 million, including $84.8 million in net revolving-credit borrowings. Cash at March 31 was $84.0 million, of which $73.3 million was held by foreign subsidiaries.
Long-term debt was $129.8 million, compared with $45.1 million at June 30, 2014; net debt was $45.8 million versus net cash of $29.2 million. The new five-year revolving facility, expiring December 2019, has a $400 million limit, expandable by up to $100 million subject to conditions. The company had $210.3 million of borrowing capacity at quarter-end and an effective borrowing rate of 1.29%. Reported leverage and interest-coverage ratios were 1.34:1 and 29.37:1, against maximum leverage of 3.5:1 and minimum coverage of 3.0:1. A $90 million swap position fixed the base rate on that debt at a weighted-average 1.91%.
Current assets were $324.4 million and current liabilities $120.4 million at March 31, 2015. Inventory increased to $115.5 million from $97.1 million at June 30, 2014. The company paid $4.3 million in dividends over nine months; quarterly and year-to-date dividends per share were $0.12 and $0.34.
Material changes and segment trends
- Food Service Equipment sales increased 8.1% in the quarter, but operating income fell 13.1% to $6.4 million and margin declined to 7.0% from 8.7%, primarily due to manufacturing-consolidation costs. Nine-month sales rose 11.8%, while operating income declined 6.2%.
- Engraving quarterly sales and operating income declined 1.4% and 3.4%, respectively, with foreign exchange a significant sales headwind. Nine-month operating income increased 12.7%.
- Engineering Technologies quarterly sales rose 10.0%, largely due to acquisitions, while organic sales fell 18.6%; operating income declined 14.9%. Oil and gas and defense demand were weak. Nine-month sales rose 25.3%, but operating income increased only 2.9%, including $1.1 million of purchase-accounting expense.
- Electronics Products quarterly sales fell 8.7%, while operating income was nearly flat; nine-month sales were essentially unchanged and operating income increased 5.2%.
- Hydraulics Products quarterly sales and operating income increased 8.4% and 16.7%; nine-month increases were 25.7% and 32.0%, respectively.
- Backlog realizable within one year was $164.6 million, up 17.4% from $140.2 million a year earlier; management said acquisitions were the primary driver. Engineering Technologies backlog remained affected by oil-and-gas softness.
Outlook, risks, and unusual items
Management said most segments had positive momentum entering the fourth quarter and expected that momentum to continue through the remainder of fiscal 2015. It anticipated improved fourth-quarter results from Cooking Solutions after cost and production improvements, and expected sales momentum to build in Electronics and continue in Hydraulics. These are forward-looking statements, not guarantees. Management expected capital expenditures of $25–27 million for fiscal 2015 and depreciation and amortization of $14–15 million and $2.5–3.0 million, respectively.
Risks cited include a weak euro and other currency effects, continued oil-and-gas weakness, market and product-mix changes, raw-material and component cost increases, competitive pricing, supply availability, and execution of restructuring, acquisitions, and expected synergies. The company intends to reinvest foreign earnings; repatriation could trigger U.S. taxes or be subject to capital controls. Foreign-currency translation reduced nine-month other comprehensive income, with a $27.7 million translation loss before tax. Management reported no expected material effect from currently existing legal matters; it recorded a $0.9 million liability for obligations associated with leases retained after prior divestitures and did not expect further charges. Three U.S. union contracts were due to expire in fiscal fourth quarter 2015, with preliminary discussions underway.
Restructuring expense was $2.4 million for the nine months, versus $5.8 million a year earlier. Fiscal 2015 initiatives included U.K. Food Service facility closure and other cost actions; management estimated total expense for those initiatives at $2.3 million, of which $1.5 million had been incurred by March 31. The prior-year Cheyenne consolidation initiative was substantially complete.
Key facts for investors to verify
- Whether margin recovery in Cooking Solutions and expected fourth-quarter segment momentum materialized.
- How much reported growth and backlog depended on acquisitions, and the final Enginetics purchase-price allocation and integration results.
- Whether working-capital investment converts into operating cash flow, given lower year-to-date operating cash flow and higher inventory.
- Debt, borrowing capacity, covenant compliance, and exposure to interest rates and foreign exchange; assess the concentration of cash held outside the United States.
- Progress on restructuring costs and savings, and the effect of persistent oil-and-gas, defense, currency, and input-cost pressures.