STANDEX INTERNATIONAL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1)
Management Statement
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the results of operations for the three months endedSeptember 30, 2015 and 2014, the cash flows for the three months ended September 30, 2015 and 2014 and the financial position of Standex International Corporation (“Standex”, the “Company”, “we”, “us”, or “our”), at September 30, 2015. The interim results are not necessarily indicative of results for a full year. The unaudited condensed consolidated financial statements and notes do not contain information which would substantially duplicate the disclosures contained in the audited annual consolidated financial statements and notes for the year ended June 30, 2015. The condensed consolidated balance sheet at June 30, 2015 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The financial statements contained herein should be read in conjunction with the Annual Report on Form 10-K and in particular the audited consolidated financial statements for the year ended June 30, 2015. Certain prior period amounts have been reclassified to conform to the current period presentation. Unless otherwise noted, references to years are to the Company’s fiscal years.
During the first quarter of 2016, we retrospectively adopted accounting standard update ASU 2015-3,Simplifying the Presentation of Debt Issuance Cost. The adoption of this update has reclassed debt issuance cost from Other non-current assets to Long-term debt. There have been no other significant changes in our reported financial position or results of operations and cash flows as a result of the adoption of new accounting pronouncements or to our significant accounting policies that were disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015 that have had a significant impact on our consolidated financial statements or notes herein.
The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. We evaluated subsequent events through the date and time our unaudited condensed consolidated financial statements were issued.
2)
Acquisition
On September 4, 2014, the Company acquired Enginetics Corporation (“Enginetics”), a leading producer of aircraft engine components for all major aircraft platforms. This investment complements our Engineering Technologies Group and allows us to provide broader solutions to the aviation market.
The Company paid $55.0 million in cash for 100% of the outstanding stock of MPE Aeroengines, Inc., of which Enginetics is a wholly owned subsidiary and has recorded intangible assets of $10.6 million, consisting of $9.1 million of customer relationships which are expected to be amortized over a period of fifteen years and $1.5 million of trademarks which are indefinite-lived. Acquired goodwill of $34.8 million is not deductible for income tax purposes due to the nature of the transaction. The Company finalized the purchase price allocation during the fourth quarter ended June 30, 2015.
The components of the fair value of the Enginetics acquisition, are as follows (in thousands):
| | | | |
Enginetics | | | Final |
Fair value of business combination: | | | |
| Cash payments | | $ | 55,021 |
| Less: cash acquired | | | (113) |
| Total | | $ | 54,908 |
Identifiable assets acquired and liabilities assumed: | | | |
| Current Assets | | $ | 12,134 |
| Property, plant, and equipment | | | 8,808 |
| Identifiable intangible assets | | | 10,600 |
| Goodwill | | | 34,790 |
| Other non-current assets | | | 158 |
| Liabilities assumed | | | (5,449) |
| Deferred taxes | | | (6,133) |
| Total | | $ | 54,908 |
On June 20, 2014, the Company acquired all of the outstanding stock of Ultrafryer Systems, Inc. (“Ultrafryer”), a producer of commercial deep fryers for restaurant and commercial installations. During the quarter ended September 30, 2014, the Company made a subsequent $2.2 million disbursement related to the Ultrafryer acquisition to purchase the land and building associated with the business.
The Company’s recent acquisitions are strategically significant to the future growth prospects of the Company, however at the time of the acquisition and June 30, 2015, we concluded, that historical results of the acquired Companies both individually and in the aggregate, were immaterial to the Company’s consolidated financial results and therefore additional proforma disclosures are not presented.
3)
Discontinued Operations
In pursuing our business strategy we have divested certain businesses and recorded activities of these businesses as discontinued operations.
Discontinued operations for the three months ended September 30, 2015 and 2014 are as follows (in thousands):
| | | | | | | |
| | Three Months Ended | |
| | September 30, | |
| | 2015 | | 2014 | |
Net sales | | $ | - | | $ | - | |
Pre-tax earnings | | | (248) | | | (521) | |
(Provision) benefit for taxes | | | 88 | | | 146 | |
Net earnings (loss) from discontinued operations | $ | (160) | | $ | (375) | |
On March 30, 2012, Air Distribution Products Group, (“ADP”) was sold to a private equity buyer for consideration of $16.1 million consisting of $13.1 million in cash and a $3.0 million promissory note from the buyer. The note was secured by a mortgage on the ADP real estate sold in the transaction in Detroit Lakes, MN, Medina, NY, and Powder Springs, GA. During the first quarter 2016, the private equity buyer of ADP sold one of the facilities securing the note. The Company released all mortgages on the properties and accepted an advanced payment of $2.8 million during October 2015 in order to reduce repayment risk and settle all obligations under the note. The Company recorded a $0.2 million loss in discontinued operations during the first quarter 2016 related to this transaction.
The Company remained the obligor of ADP’s Philadelphia, PA facility and administrative offices, and sublet space to the buyer after the divestiture. The buyer terminated their obligation under the Philadelphia sublease in September 2014. On February 4, 2015 we entered into a one year renewable sublease agreement with a third party for this space. Our net obligation with respect to the lease is $1.1 million, of which $0.8 million was recorded as a liability at September 30, 2015. We do not expect to record additional charges related to these obligations.
Assets and liabilities related to discontinued operations appear in the condensed consolidated balance sheets are as follows (in thousands):
| | | | | | |
| | | September 30, 2015 | | | June 30, 2015 |
Current assets | | $ | 39 | | $ | 23 |
Other non-current assets | | | 2,816 | | | 3,014 |
Accrued expenses | | | 1,386 | | | 1,383 |
Accrued pension and other non-current liabilities | | | 344 | | | 896 |
4)
Fair Value Measurements
The financial instruments shown below are presented at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models may be applied.
Assets and liabilities recorded at fair value in the consolidated balance sheet are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities and the methodologies used in valuation are as follows:
Level 1 – Quoted prices in active markets for identical assets and liabilities. The Company’s deferred compensation plan assets consist of shares in various mutual funds (for the deferred compensation plan, investments are participant-directed) which invest in a broad portfolio of debt and equity securities. These assets are valued based on publicly quoted market prices for the funds’ shares as of the balance sheet dates.
Level 2 – Inputs, other than quoted prices in an active market, that are observable either directly or indirectly through correlation with market data. For foreign exchange forward contracts and interest rate swaps, the Company values the instruments based on the market price of instruments with similar terms, which are based on spot and forward rates as of the balance sheet dates. The Company has considered the creditworthiness of counterparties in valuing all assets and liabilities.
Level 3 – Unobservable inputs based upon the Company’s best estimate of what market participants would use in pricing the asset or liability.
There were no transfers of assets or liabilities between level 1 and level 2 of the fair value measurement hierarchy at September 30, 2015 and June 30, 2015. The Company’s policy is to recognize transfers between levels as of the date they occur.
Cash and cash equivalents, accounts receivable, and accounts payable are carried at cost, which approximates fair value.
Items presented at fair value at September 30, 2015 and June 30, 2015 consisted of the following (in thousands):
Prior Year Initiatives
The Company previously announced closure of our Food Service Equipment U.K. facility and entered into a distribution agreement with a U.K. based partner to reduce channel costs and enhance profitability, expand and strengthen, our U.K. Food Service Equipment group’s presence for all of our brands.
Activity in the reserve related to the prior year restructuring initiatives is as follows (in thousands):
| | | | | | | | | |
| | Involuntary Employee Severance and Benefit Costs |
Other | |
Total |
Restructuring liabilities at June 30, 2015 | | $ | 82 | | $ | 301 | | $ | 383 |
Additions and adjustments | | | 39 | | | 1,388 | | | 1,427 |
Payments | | | (116) | | | (1,464) | | | (1,580) |
Restructuring liabilities at September 30, 2015 | | $ | 5 | | $ | 225 | | $ | 230 |
The Company’s total restructuring expenses by segment are as follows (in thousands):
| | | | | | | | | | |
| | Three Months Ended | |
| | September 30, 2015 | |
| | Involuntary Employee Severance and Benefit Costs |
Other | |
Total | |
Food Service Equipment Group | $ | - | | $ | 1,360 | | $ | 1,360 | |
Engraving Group | | 2 | | | - | | | 2 | |
Engineering Technologies Group | | 34 | | | - | | | 34 | |
Electronics Products Group | | 35 | | | 88 | | | 123 | |
| | $ | 71 | | $ | 1,448 | | $ | 1,519 | |
| | | | | | | | | | |
| | Three Months Ended | |
| | September 30, 2014 | |
| | Involuntary Employee Severance and Benefit Costs |
Other | |
Total | |
Food Service Equipment Group | $ | 114 | | $ | 561 | | $ | 675 | |
Engraving Group | | | 34 | | | 3 | | | 37 | |
Electronics Products Group | | 11 | | | 139 | | | 150 | |
| | $ | 159 | | $ | 703 | | $ | 862 | |
We incurred severance and other costs of $1.5 million associated with these activities during the three months ended September 30, 2015, which includes $1.2 million of non-cash expenses to reduce the net book value of a closed facility to its net realizable value. Restructuring expense is expected to be $2.9 million for fiscal year 2016, of which $1.5 million was incurred for the period ending September 30, 2015.
18)
Subsequent Events
On October 1, 2015, the Company acquired Wisconsin-based Northlake Engineering, Inc., (“Northlake”), a highly respected designer, manufacturer and distributor of high reliability electromagnetic products and solutions serving the North America power distribution and medical equipment markets for approximately $13.9 million in cash. Northlake will report to our Electronics Products Group.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements contained in this Quarterly Report on Form 10-Q that are not based on historical facts are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terminology such as “should,” “could,” "may," “will,” “expect," "believe," "estimate," "anticipate," ”intends,” "continue," or similar terms or variations of those terms or the negative of those terms. There are many factors that affect the Company’s business and the results of its operations and may cause the actual results of operations in future periods to differ materially from those currently expected or desired. These factors include, but are not limited to material adverse or unforeseen legal judgments, fines, penalties or settlements, conditions in the financial and banking markets, including fluctuations in exchange rates and the inability to repatriate foreign cash, general and international recessionary economic conditions, including the impact, length and degree of the current slow growth conditions on the customers and markets we serve and more specifically conditions in the oil and gas, food service equipment, automotive, construction, aerospace, energy, transportation and general industrial markets, lower-cost competition, the relative mix of products which impact margins and operating efficiencies, both domestic and foreign, in certain of our businesses, the impact of higher raw material and component costs, particularly steel, petroleum based products and refrigeration components, an inability to realize the expected cost savings from restructuring activities, effective completion of plant consolidations, cost reduction efforts, restructuring including procurement savings and productivity enhancements, capital management improvements, strategic capital expenditures, and the implementation of lean enterprise manufacturing techniques, the inability to achieve the savings expected from the sourcing of raw materials from and diversification efforts in emerging markets, the inability to attain expected benefits from strategic alliances or acquisitions and the inability to achieve synergies contemplated by the Company. Other factors that could impact the Company include changes to future pension funding requirements. In addition, any forward-looking statements represent management's estimates only as of the day made and should not be relied upon as representing management's estimates as of any subsequent date. While the Company may elect to update forward-looking statements at some point in the future, the Company and management specifically disclaim any obligation to do so, even if management's estimates change.
Overview
We are a leading manufacturer of a variety of products and services for diverse commercial and industrial markets. We have five reportable segments: Food Service Equipment Group, Engraving Group, Engineering Technologies Group, Electronics Products Group, and the Hydraulics Products Group.
Our long term strategy is to build larger industrial platforms through a value creation system that assists management in meeting specific corporate and business unit financial and strategic performance goals in order to create and sustain shareholder value. The Standex Value Creation System has four components. The Balanced Performance Plan process aligns annual goals throughout the business and provides a standard reporting, management and review process. It is focused on setting and meeting annual and quarterly targets that support our short term and long term goals. The Standex Growth Disciplines are a standard set of tools and processes to grow our businesses organically and through acquisitions. Standex Operational Excellence employs LEAN processes to eliminate waste, improve profitability, cash flow and customer satisfaction. Finally, the Standex Talent Management process provides training, development, and succession planning for our employees. The value creation system provides standard tools and processes throughout Standex to deliver our business objectives:
·
It is our objective to grow larger and more profitable business units through both organic initiatives and acquisitions. On an ongoing basis we identify and implement organic growth initiatives such as new product development, geographic expansion, introduction of products and technologies into new markets and applications, key accounts and strategic sales channel partners. Also, we have a long-term objective to create sizable business platforms by adding strategically aligned or “bolt on” acquisitions to strengthen the individual businesses, to create both sales and cost synergies with our core business platforms, to accelerate their growth and margin improvement. There is a particular focus on identifying and investing in opportunities that complement our products and will increase the global presence and capabilities of our businesses. From time to time we have divested businesses that we felt were not strategic or did not meet our growth and return expectations.
·
We create “Customer Intimacy” by utilizing the Standex Growth Disciplines to partner with our customers in order to develop and deliver custom solutions or engineered products that provide technology-driven solutions to our customers. This relationship generally provides us with the ability to sustain sales and profit growth over time and provide operating margins that enhance shareholder returns. Further, we have made a priority of developing new sales channels and leveraging strategic customer relationships.
·
Standex Operational Excellence drives continuous improvement in the efficiency of our businesses. We recognize that our businesses are competing in a global economy that requires that we constantly strive to improve our competitive position. We have deployed a number of management competencies including operational excellence through lean enterprise, the use of low cost manufacturing facilities in countries such as Mexico, and China, the consolidation of manufacturing facilities to achieve economies of scale and leveraging of fixed infrastructure costs, alternate sourcing to achieve procurement cost reductions, and capital improvements to increase shop floor productivity, which drives improvements in the cost structure of our business units.
·
Our capital allocation strategy is to use cash flow generated from operations to fund the strategic growth programs described above, including acquisitions, dividends, and capital investments for organic growth and cost reductions. We recognize that cash flow is fundamental to our ability to invest in organic and acquisitive growth for our business units and return cash to our shareholders in the form of dividends.
As part of this ongoing strategy, immediately after the close of the quarter we acquired Northlake Engineering, Inc., a highly respected designer, manufacturer and distributor of high reliability magnetics serving the North American power distribution and medical equipment markets. This investment complements our Electronics Group and allows us to provide broader solutions to our customers.
Our business units are actively engaged in initiating new product introductions, expansion of product offerings through private labeling and sourcing agreements, geographic expansion of sales coverage, the development of new sales channels, leveraging strategic customer relationships, development of energy efficient products, new applications for existing products and technology, and next generation products and services for our end-user markets.
We continue to focus on our efforts to reduce cost and improve productivity across our businesses. Our businesses that serve the oil and gas industry have been negatively impacted by reduced spending by our customers. We have and will continue to implement appropriate cost reductions to align our costs to appropriate sales levels. We continue to evaluate our products and production processes and expect to execute similar cost reductions and restructuring programs on an ongoing basis.
Restructuring expenses reflect costs associated with the Company’s efforts to continuously improve operational efficiency and expand globally in order to remain competitive in the end-user markets we serve. Each year the Company incurs costs for actions to size its businesses to a level appropriate for current economic conditions and to improve its cost structure to enhance our competitive position and operating margins. Such expenses include costs for moving facilities to low-cost locations, starting up plants after relocation, or downsizing operations because of changing economic conditions, and other costs resulting from asset redeployment decisions. Shutdown costs include severance, benefits, stay bonuses, lease and contract terminations, asset write-downs, costs of moving fixed assets, moving, and relocation costs. Vacant facility costs include maintenance, utilities, property taxes, and other costs.
Because of the diversity of the Company’s businesses, end user markets and geographic locations, management does not use specific external indices to predict the future performance of the Company, other than general information about broad macroeconomic trends. Each of our individual business units serves niche markets and attempts to identify trends other than general business and economic conditions which are specific to their businesses and which could impact their performance. Those units report pertinent information to senior management, which use it to the extent relevant to assess the future performance of the Company. A description of any such material trends is described below in the applicable segment analysis.
We monitor a number of key performance indicators (“KPIs”) including net sales, income from operations, backlog, effective income tax rate, and gross profit margin. A discussion of these KPIs is included in the discussion below. We may also supplement the discussion of these KPIs by identifying the impact of foreign exchange rates, acquisitions, and other significant items when they have a material impact on the discussed KPI.
We believe that the discussion of these items provides enhanced information to investors by disclosing their consequence on the overall trend in order to provide a clearer comparative view of the KPI where applicable. For discussion of the impact of foreign exchange rates on KPIs, the Company calculates the impact as the difference between the current period KPI calculated at the current period exchange rate as compared to the KPI calculated at the historical exchange rate for the prior period. For discussion of the impact of acquisitions, we isolate the effect to the KPI amount that would have existed regardless of our acquisition. Sales resulting from synergies between the acquisition and existing operations of the Company are considered organic growth for the purposes of our discussion.
Unless otherwise noted, references to years are to fiscal years.
Results from Continuing Operations
| | | | | | |
| | Three Months Ended | |
| | September 30, | |
(Dollar amounts in thousands) | | 2015 | | | 2014 | |
Net sales | $ | 198,398 | | $ | 202,027 | |
Gross profit margin | | 34.6% | | | 32.7% | |
Income from operations | | 23,103 | | | 21,237 | |
Backlog (realizable within 1 year) | | 166,778 | | | 168,636 | |
| | | |
| Three Months Ended |
(In thousands) | | September 30, 2015 | |
Net sales, prior period | $ | 202,027 | |
Components of change in sales: | | | |
Effect of exchange rates | | (6,149) | |
Effect of acquisitions | | 4,137 | |
Organic sales change | | (1,617) | |
Net sales, current period | $ | 198,398 | |
Net sales for the first quarter of 2016 decreased $3.6 million, or 1.8%, when compared to the prior year quarter. This change was due to decreases in the exchange rates and organic sales of 3.0% and 0.8%, respectively partially offset by the increase of 2.0% related to the acquisition of Enginetics. Our end markets remain strong overall with the exception of oil and gas where we have less than a 5% exposure across all of our businesses. We expect that sales in our other businesses will offset some of the negative impacts from our foreign currency, and energy (oil and gas) exposure.
Gross Profit Margin
Our gross margin for the first quarter of 2016 was 34.6% compared to the prior year quarter of 32.7%. Gross margin increased or equaled prior year in all segments except Engineering Technologies. Gross margin increases are driven by favorable sales mix, decreased operational costs, and increased operational efficiencies. Engineering Technologies results were significantly impacted by reduced spending by our oil and gas customers.
Selling, General, and Administrative Expenses
Selling, General, and Administrative Expenses (“SG&A”) for the first quarter of 2016 were $43.9 million, or 22.1% of sales, compared to $44.0 million, or 21.8% of sales, during the prior year quarter. The increase in SG&A as a percentage of sales is primarily due to $0.6 million of incremental expenses as a result of the Enginetics acquisition.
Income from Operations
Income from operations for the first quarter of 2016 was $23.1 million compared to $21.2 million during the prior year quarter. The increase of $1.9 million or 8.8% is primarily due to improved operating performance in the Food Service Equipment Group of $2.4 million and increases of $3.0 million in the Engraving Group due to sales volume offset by sales volume and operating income declines in Engineering Technologies.
Interest Expense
Interest expense for the first quarter of 2016 was $0.6 million compared to $0.6 million during the prior year quarter.
Income Taxes
The Company's effective tax rate from continuing operations for the three months ended September 30, 2015 was 28.7% compared with 28.4% for the three months ended September 30, 2014. Changes in the effective tax rates from period to period may be significant as they depend on many factors including, but not limited to, the amount of the Company’s income, the effective tax rate in each of the countries in which we operate, and any one time tax issues which occur during the period.
Backlog
Backlog includes all active or open orders for goods and services that have a firm fixed customer purchase order with defined delivery dates. Backlog also includes any future deliveries based on executed customer contracts, so long as such deliveries are based on agreed upon delivery schedules. Backlog is not generally a significant factor in the Company’s businesses because of our relatively short delivery periods and rapid inventory turnover with the exception of Engineering Technologies.
Backlog realizable within one year decreased $1.9 million, or 1.1%, to $166.8 million at September 30, 2015 from $168.6 million at September 30, 2014. Backlog increases in the Engraving and Electronics Products Groups partially offset declines in the other segments.
Segment Analysis
Food Service Equipment Group
| | | | | | |
| Three Months Ended | | | |
| September 30, | | % | |
(In thousands, except percentages) | 2015 | | 2014 | | Change | |
Net sales | $ 107,213 | | $ 113,833 | | -5.8% | |
Income from operations | 14,024 | | 11,673 | | 20.1% | |
Operating income margin | 13.1% | | 10.3% | | | |
Net sales in the first quarter of fiscal year 2016 decreased $6.6 million, or 5.8%, when compared to the prior year quarter. Sales in the Refrigerated Solutions Group declined as national chains have reduced purchasing activity sales. The Cooking Solutions Group sales grew 3.8% in the quarter, driven by strength in our traditional hot-side product sales, partly offset with the rationalization of lower margin products. The sales growth in the Cooking Group was driven by sales to the grocery market segment and a reduced past due backlog associated with the production ramp-up of our Mexico plant which enabled us to produce at market-required levels. Our Specialty Solutions Group sales decreased by 2.2%. Positive growth in merchandising of 2.7% was offset by exchange rate impacts and reduced volume in our pump business. We anticipate refrigeration sales to national chains will continue to remain weak in the near term due to seasonal slowdown, the strong U.S. dollar, and a reduction in spending by our customers.
Income from operations for the first quarter of fiscal year 2016 increased $2.4 million, or 20.1%, when compared to the prior year quarter. The positive impacts of price, material savings, operating expenditure reductions, portfolio rationalization, and organizational alignment helped impact operating income favorably across the group. The effects of purchase accounting related to the Ultrafryer acquisition had a $0.5 million negative impact on prior year quarterly earnings. The group posted over a 230 basis point increase to the operating income margins during the quarter. The disruptions in manufacturing experienced as a result of the prior year manufacturing consolidations are largely behind us, but we anticipate that warranty costs will remain at an elevated level and continue to trend down during the remainder of the fiscal year.
Engraving Group
| | | | | | |
| Three Months Ended | | | |
| September 30, | | % | |
(In thousands, except percentages) | 2015 | | 2014 | | Change | |
Net sales | $ 33,521 | | $ 28,088 | | 19.3% | |
Income from operations | 9,907 | | 6,943 | | 42.7% | |
Operating income margin | 29.6% | | 24.7% | | | |
Net sales for the first quarter of fiscal year 2016 increased by $5.4 million, or 19.3%, when compared to the prior year quarter. Organic sales increased $8.7 million or 30.8%, partially offset by unfavorable foreign exchange impacts of $3.2 million. Original equipment manufacturer (“OEM”) mold texturizing sales growth remained strong worldwide driven primarily by growth in North America and China. North American sales grew 31.6% while China grew sales by 50.0% year-over-year. Sales in North America improved in the first quarter as some automotive projects were pushed out from the fourth quarter. Improvement was also seen in the rolls, plates, and machinery business as sales grew by 25.4% resulting from several large OEM projects shipping in the quarter. Core forming sales increased 26.3% due to strong demand from major OEM diaper manufacturers. We expect sales growth in China to continue, but at a slower pace. Based on our strong backlog, we anticipate sales increases in the second quarter as compared to the prior year.
Income from operations for the first quarter of fiscal year 2016 increased by $3.0 million, or 42.7%, when compared to the prior year quarter. Operating income increased by $4.0 million, or 56.8%, offset by unfavorable foreign exchange impacts of $1.0 million, as the company leveraged increased sales with minimal cost increases. With the success of our design hubs in Manchester, England, and Fraser, Michigan,a third hub is launching in China to provide OEMs’ design teams with rapid prototyping of their future automotive interior designs
Engineering Technologies Group
| | | | | | |
| Three Months Ended | | | |
| September 30, | | % | |
(In thousands, except percentages) | 2015 | | 2014 | | Change | |
Net sales | $ 18,711 | | $ 20,119 | | -7.0% | |
Income from operations | 675 | | 2,220 | | -69.6% | |
Operating income margin | 3.6% | | 11.0% | | | |
Net sales for the first quarter of fiscal year 2016 decreased by $1.4 million, or 7.0%, when compared to the prior year quarter. Organic sales decreased by $5.3 million or 26.6%. Acquisitions contributed $4.1 million or 20.6% compared to the prior year quarter. Sales were down in energy $5.2 million, space $0.9 million, medical $0.5 million, partially offset increases in aviation of $4.7 million, including Enginetics, and defense $0.5 million. We anticipate no improvement in the oil and gas market for the foreseeable future. We are repositioning our business focus to pursuing more opportunities in aviation.
Income from operations for the first quarter of 2016 decreased by $1.5 million, or 69.6%, when compared to the prior year quarter. Organic operating income was down 79.9% due to the reduced volume in the energy market, certain relocation expenses and severance costs.
Electronics Products Group
| | | | | | |
| Three Months Ended | | | |
| September 30, | | % | |
(In thousands, except percentages) | 2015 | | 2014 | | Change | |
Net sales | $ 27,986 | | $ 29,470 | | -5.0% | |
Income from operations | 5,550 | | 5,546 | | 0.1% | |
Operating income margin | 19.8% | | 18.8% | | | |
Net sales in the first quarter fiscal year 2016 decreased by $1.5 million, or 5.0%, when compared to the prior year quarter. Foreign exchange had an unfavorable $1.9 million, or 6.5%, impact on sales. Organic sales growth was $0.4 million, or 1.5%. Much of the organic sales growth came from improvement in Europe and Asia offset some by softness in North America due to reduced stocking levels by our customers. In the second half of the fiscal year, we expect increased volume from the introduction of new products and increases in customer restocking requirements.
Income from operations in the first quarter fiscal year 2016 was mostly flat, or 0.1% higher, when compared to the prior year quarter. Income was flat as the margin on the higher organic sales base and various operating cost savings and synergies were offset by the impact of exchange among other increases. We anticipate that the continued focus on Operational Excellence, factory consolidation and procurement strategies will improve future performance.
Hydraulics Products Group
| | | | | | |
| Three Months Ended | | | |
| September 30, | | % | |
(In thousands, except percentages) | 2015 | | 2014 | | Change | |
Net sales | $ 10,967 | | $ 10,517 | | 4.3% | |
Income from operations | 1,976 | | 1,722 | | 14.8% | |
Operating income margin | 18.0% | | 16.4% | | | |
Net sales in the first quarter of fiscal year 2016 increased $0.5 million, or 4.3%, when compared to the prior year quarter. Much of the increase is primarily due to the strength in our traditional North America dump truck and trailer markets. Recent customer wins in Australia and South America also contributed to the top line growth in the quarter. We continue to pursue new business opportunities that require robust custom engineering designs where we can add value. We expect the refuse, dump body and dump trailer to continue to grow through the end of the fiscal year.
Income from operations in the first quarter of fiscal year 2016 increased $0.3 million, or 14.8%, when compared to the prior year quarter. The increase to income from operations during the first quarter is primarily due to leveraging sales growth along with cost containment. Additionally, the Tianjin plant continues to increase efficiencies with focus on operational improvements.
Corporate and Other
| | | | | | | |
| | Three Months Ended | | | |
| | September 30, | | % | |
(In thousands, except percentages) | 2015 | | 2014 | | Change | |
Income (loss) from operations: | | | | | | |
| Corporate | $ (7,510) | | $ (5,946) | | 26.3% | |
| Restructuring | (1,519) | | (862) | | 76.2% | |
| Other operating income (expense), net | - | | (59) | | -100.0% | |
Corporate expenses in the first quarter of fiscal year 2016 increased by $1.6 million, or 26.3%, when compared to the prior year quarter. The increase is primarily due to the realignment of corporate function $0.3 million, costs associated with the implementation of our Standex Value Creation System of $0.3 million, and increased stock compensation costs of $0.7 million.
During the first quarter of fiscal year 2016, we incurred consolidated restructuring expenses of $1.5 million related to previously announced initiatives, which includes $1.2 million of non-cash expenses to reduce the net book value of a closed facility to its net realizable value.
Discontinued Operations
In pursuing our business strategy, we have divested certain businesses and recorded activities of these businesses as discontinued operations. Discontinued operations for the three months ended September 30, 2015 and 2014 are as follows (in thousands):
| | | | | | | |
| | Three Months Ended | |
| | September 30, | |
| | 2015 | | 2014 | |
Net sales | | $ | - | | $ | - | |
Pre-tax earnings | | | (248) | | | (521) | |
(Provision) benefit for taxes | | | 88 | | | 146 | |
Net earnings (loss) from discontinued operations | $ | (160) | | $ | (375) | |
Liquidity and Capital Resources
At September 30, 2015, our total cash balance was $95.3 million, of which $89.8 million was held by foreign subsidiaries. The repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences or be subject to capital controls; however, those balances are generally available without legal restrictions to fund ordinary business operations. Our current plans are not expected to require a repatriation of cash to fund our U.S. operations and as a result, we intend to indefinitely reinvest our foreign earnings to fund our overseas growth. If the undistributed earnings of our foreign subsidiaries are needed for operations in the United States we would be required to accrue and pay U.S. taxes upon repatriation.
Net cash provided by operating activities from continuing operations for the three months ended September 30, 2015, was $7.9 million compared to cash used in operations of $11.0 million the prior year. The increase of $18.8 million in cash provided by operating activities is primarily due to a decrease in cash outflows for working capital of $18.2 million. Cash flow used in investing activities for the three months ended September 30, 2015, was $5.3 million and consisted primarily of capital expenditures of $5.3 million. Cash inflows provided by financing activities for the three months ended September 30, 2015 were $0.1 million and included net borrowings of $2.5 million, cash paid for dividends of $1.5 million, offset by employee stock repurchases of $1.0 million.
During fiscal year 2015, the Company entered into an Amended and Restated Credit Agreement (“Credit Facility”, or “facility”). This five-year Credit Facility expires in December 2019 and has a borrowing limit of $400 million, which can be increased by an amount of up to $100 million, in accordance with specified conditions contained in the agreement. The facility also includes a $10 million sublimit for swing line loans and a $30 million sublimit for letters of credit.
Under the terms of the Credit Facility, we will pay a variable rate of interest and a commitment fee on borrowed amounts as well as a commitment fee on unused amounts under the facility. The amount of the commitment fee will depend upon both the undrawn amount remaining available under the facility and the Company’s funded debt to EBITDA (as defined in the agreement) ratio at the last day of each quarter. As our funded debt to EBITDA ratio increases, the commitment fee will increase.
Funds borrowed under the facility may be used for the repayment of debt, working capital, capital expenditures, acquisitions (so long as certain conditions, including a specified funded debt to EBITDA leverage ratio is maintained), and other general corporate purposes. As of September 30, 2015, the Company has used $7.7 million against the letter of credit sub-facility and had the ability to borrow $247.6 million under the facility based on our current EBITDA. The facility contains customary representations, warranties and restrictive covenants, as well as specific financial covenants. The Company’s current financial covenants under the facility are as follows:
Interest Coverage Ratio - The Company is required to maintain a ratio of Earnings Before Interest and Taxes, as Adjusted (“Adjusted EBIT per the Credit Facility”), to interest expense for the trailing twelve months of at least 3.0:1. Adjusted EBIT per the Credit Facility specifically excludes extraordinary and certain other defined items such as cash restructuring and acquisition-related charges up to $7.5 million, and unlimited non-cash charges including gains or losses on sale of property and goodwill adjustments. At September 30, 2015, the Company’s Interest Coverage Ratio was 27.20:1.
Leverage Ratio - The Company’s ratio of funded debt to trailing twelve month Adjusted EBITDA per the facility, calculated as Adjusted EBIT per the Credit Facility plus depreciation and amortization, may not exceed 3.5:1. At September 30, 2015, the Company’s Leverage Ratio was 1.10:1.
As of September 30, 2015, we had borrowings under our facility of $105.5 million and the effective rate of interest for outstanding borrowings under the facility was 1.51%. Our primary cash requirements in addition to day-to-day operating needs include interest payments, capital expenditures, acquisitions, share repurchases, and dividends. Our primary sources of cash for these requirements are cash flows from continuing operations and borrowings under the facility. We expect to spend between $26.0 and $28.0 million on capital expenditures during 2016, and expect that depreciation and amortization expense will be between $16.0 and $17.0 million and $2.5 and $3.5 million, respectively.
In order to manage our interest rate exposure, we are party to $35.0 million of active floating to fixed rate swaps. These swaps convert our interest payments from LIBOR to a weighted average rate of 1.63%.
The following table sets forth our capitalization a September 30, 2015 and June 30, 2015:
| | | | | |
(In thousands) | | September 30, 2015 | | | June 30, 2015 |
Long-term debt | $ | 104,346 | | $ | 101,753 |
Less cash and cash equivalents | | 95,325 | | | 96,128 |
Net debt (cash) | | 9,021 | | | 5,625 |
Stockholders' equity | | 358,602 | | | 348,570 |
Total capitalization | $ | 367,623 | | $ | 354,195 |
We sponsor a number of defined benefit and defined contribution retirement plans. The U.S. pension plan is frozen for substantially all participants. We have evaluated the current and long-term cash requirements of these plans, and our existing sources of liquidity are expected to be sufficient to cover required contributions under ERISA and other governing regulations.
The fair value of the Company's U.S. defined benefit pension plan assets was $192.9 million at September 30, 2015, as compared to $204.7 million at the most recent measurement date, which occurred as of June 30, 2015. The next measurement date to determine plan assets and benefit obligations will be on June 30, 2016.
At September 30, 2015, we do not expect to make mandatory contributions to the U.S pension plan until at least 2018. The Company expects to pay $1.5 million in contributions to its defined benefit plans during fiscal 2016. Contributions of $0.3 million were made during the three months ended September 30, 2015 and 2014 respectively. Required contributions of $0.9 million will be paid to the Company’s U.K. defined benefit plan during 2016. The Company also expects to make contributions of $0.2 million and $0.3 million to its unfunded defined benefit plans in the U.S. and Germany, respectively during the current fiscal year. Any subsequent plan contributions will depend on the results of future actuarial valuations.
We have an insurance program in place to fund supplemental retirement income benefits for six retired executives. Current executives and new hires are not eligible for this program. At September 30, 2015 the underlying policies had a cash surrender value of $18.9 million and are reported net of loans of $10.0 million for which we have the legal right of offset, these amounts are reported net on our balance sheet.
On March 30, 2012, Air Distribution Products Group, (“ADP”) was sold to a private equity buyer for consideration of $16.1 million consisting of $13.1 million in cash and a $3.0 million promissory note from the buyer. The note was secured by a mortgage on the ADP real estate sold in the transaction in Detroit Lakes, MN, Medina, NY, and Powder Springs, GA. During the first quarter 2016, the private equity buyer of ADP sold one of the facilities securing the note. The Company released all mortgages on the properties and accepted an advanced payment of $2.8 million during October 2015 in order to reduce repayment risk and settle all obligations under the note. The Company recorded a $0.2 million loss in discontinued operations during the first quarter 2016 related to this transaction.
The Company remained the obligor of ADP’s Philadelphia, PA facility and administrative offices, and sublet space to the buyer after the divestiture. The buyer terminated their obligation under the Philadelphia sublease in September 2014. On February 4, 2015 we entered into a one year renewable sublease agreement with a third party for this space. Our net obligation with respect to the lease is $1.1 million, of which $0.8 million was recorded as a liability at September 30, 2015. We do not expect to record additional charges related to these obligations.
Other Matters
Inflation –Certain of our expenses, such as wages and benefits, occupancy costs and equipment repair and replacement, are subject to normal inflationary pressures. Inflation for medical costs can impact both our reserves for self-insured medical plans as well as our reserves for workers' compensation claims. We monitor the inflationary rate and make adjustments to reserves whenever it is deemed necessary. Our ability to manage medical costs inflation is dependent upon our ability to manage claims and purchase insurance coverage to limit the maximum exposure for us. Each of our segments is subject to the effects of changing raw material costs caused by the underlying commodity price movements. In general, we do not enter into purchase contracts that extend beyond one operating cycle. While Standex considers our relationship with our suppliers to be good, there can be no assurances that we will not experience any supply shortage.
Foreign Currency Translation – Our primary functional currencies used by our non-U.S. subsidiaries are the Euro, British Pound Sterling (Pound), Mexican (Peso), Chinese (Yuan) and Canadian dollar.
Environmental Matters – To the best of our knowledge, we believe that we are presently in substantial compliance with all existing applicable environmental laws and regulations and do not anticipate any instances of non-compliance that will have a material effect on our future capital expenditures, earnings or competitive position.
Seasonality – We are a diversified business with generally low levels of seasonality, however our fiscal third quarter is typically the period with the lowest level of activity.
Employee Relations – The Company has labor agreements with a number of union locals in the United States and a number of European employees belong to European trade unions. There are no U.S. union contracts expiring during fiscal year 2016.
Critical Accounting Policies
The condensed consolidated financial statements include the accounts of Standex International Corporation and all of its subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying condensed consolidated financial statements. Although we believe that materially different amounts would not be reported due to the accounting policies adopted, the application of certain accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Our Annual Report on Form 10-K for the year ended June 30, 2015 lists a number of accounting policies which we believe to be the most critical.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Management
We are exposed to market risks from changes in interest rates, commodity prices and changes in foreign currency exchange. To reduce these risks, we selectively use, from time to time, financial instruments and other proactive management techniques. We have internal policies and procedures that place financial instruments under the direction of the Treasurer and restrict all derivative transactions to those intended for hedging purposes only. The use of financial instruments for trading purposes (except for certain investments in connection with the non-qualified defined contribution plan) or speculation is strictly prohibited. The Company has no majority-owned subsidiaries that are excluded from the consolidated financial statements. Further, we have no interests in or relationships with any special purpose entities.
Exchange Rate Risk
We are exposed to both transactional risk and translation risk associated with exchange rates. The transactional risk is mitigated, in large part, by natural hedges developed with locally denominated debt service on intercompany accounts. We also mitigate certain of our foreign currency exchange rate risks by entering into forward foreign currency contracts from time to time. The contracts are used as a hedge against anticipated foreign cash flows, such as dividend payments, loan payments, and materials purchases, and are not used for trading or speculative purposes. The fair values of the forward foreign currency exchange contracts are sensitive to changes in foreign currency exchange rates, as an adverse change in foreign currency exchange rates from market rates would decrease the fair value of the contracts. However, any such losses or gains would generally be offset by corresponding gains and losses, respectively, on the related hedged asset or liability. At September 30, 2015, the fair value, in the aggregate, of the Company’s open foreign exchange contracts was an asset of $0.1 million.
Our primary translation risk is with the Euro, British Pound Sterling, Peso, and Chinese Yuan. A hypothetical 10% appreciation or depreciation of the value of any these foreign currencies to the U.S. Dollar at September 30, 2015, would not result in a material change in our operations, financial position, or cash flows. We do not hedge our translation risk. As a result, fluctuations in currency exchange rates can affect our stockholders’ equity.
Interest Rate Risk
Our interest rate exposure is limited primarily to interest rate changes on our variable rate borrowings. From time to time, we use interest rate swap agreements to modify our exposure to interest rate movements. The Company’s currently effective swap agreements convert our base borrowing rate on $35.0 million of debt due under our Credit Agreement from a variable rate equal to LIBOR to a weighted average rate of 1.63% at September 30, 2015.
The Company’s effective rate on variable-rate borrowings, including the impact of interest rate swaps, under the revolving credit agreement increased from 1.46% at June 30, 2015 to 1.51% at September 30, 2015.
Concentration of Credit Risk
We have a diversified customer base. As such, the risk associated with concentration of credit risk is inherently minimized. As of September 30, 2015, no one customer accounted for more than 5% of our consolidated outstanding receivables or of our sales.
Commodity Prices
The Company is exposed to fluctuating market prices for all commodities used in its manufacturing processes. Each of our segments is subject to the effects of changing raw material costs caused by the underlying commodity price movements. In general, we do not enter into purchase contracts that extend beyond one operating cycle. While Standex considers our relationship with our suppliers to be good, there can be no assurances that we will not experience any supply shortage.
The Engineering Technologies, Food Service Equipment, Electronics, and Hydraulics Groups are all sensitive to price increases for steel products, other metal commodities and petroleum based products. In the past year, we have experienced price fluctuations for a number of materials including steel, copper wire, other metal commodities, refrigeration components and foam insulation. These materials are some of the key elements in the products manufactured in these segments. Wherever possible, we will implement price increases to offset the impact of changing prices. The ultimate acceptance of these price increases, if implemented, will be impacted by our affected divisions’ respective competitors and the timing of their price increases.
ITEM 4.
CONTROLS AND PROCEDURES
At the end of the period covered by this Report, the management of the Company, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of
September 30, 2015 in ensuring that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There was no change in the Company's internal control over financial reporting during the quarterly period ended September 30, 2015 that has materially affected or is reasonably likely to materially affect the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c)
The following table provides information about purchases by the Company of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:
