UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2014
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-7233
STANDEX INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
31-0596149
(State of incorporation)
(IRS Employer Identification No.)
11 KEEWAYDIN DRIVE, SALEM, NEW HAMPSHIRE
03079
(Address of principal executive offices)
(Zip Code)
(603) 893-9701
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ X ]
Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller Reporting Company [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
The number of shares of Registrant's Common Stock outstanding on January 28, 2014 was 12,772,022
INDEX
Page No.
PART I.
FINANCIAL INFORMATION:
Item 1.
Unaudited Condensed Consolidated Balance Sheets as of
December 31, 2014 and June 30, 2014
2
Unaudited Condensed Consolidated Statements of Operations for the
Three and Six Months Ended December 31, 2014 and 2013
3
Unaudited Condensed Consolidated Statements of Comprehensive Income for the
4
Unaudited Condensed Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 2014 and 2013
5
Notes to Unaudited Condensed Consolidated Financial Statements
6
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
18
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
29
Item 4.
Controls and Procedures
30
PART II.
OTHER INFORMATION:
Unregistered Sales of Equity Securities and Use of Proceeds
31
Item 6.
Exhibits
1
PART I. FINANCIAL INFORMATION
ITEM 1
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except per share data)
December 31, 2014
June 30,
2014
ASSETS
Current Assets:
Cash and cash equivalents
$
82,571
74,260
Accounts receivable, net of reserve for doubtful accounts of
$2,156 and $2,282 at December 31, 2014 and June 30, 2014
101,868
107,674
Inventories
113,221
97,065
Prepaid expenses and other current assets
6,488
7,034
Income taxes receivable
3,327
922
Deferred tax asset
12,676
12,981
Total current assets
320,151
299,936
Property, plant, and equipment, net
110,462
96,697
Intangible assets, net
39,320
31,490
Goodwill
154,764
125,965
910
878
Other non-current assets
24,943
23,194
Total non-current assets
330,399
278,224
Total assets
650,550
578,160
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable
67,849
85,206
Accrued expenses
48,398
51,038
Income taxes payable
7,643
4,926
Total current liabilities
123,890
141,170
Long-term debt
125,840
45,056
Accrued pension and other non-current liabilities
54,408
51,208
Total non-current liabilities
180,248
96,264
Stockholders' equity:
Common stock, par value $1.50 per share, 60,000,000 shares
authorized, 27,984,278 issued, 12,654,931 and 12,639,615
outstanding at December 31, 2014 and June 30, 2014
41,976
Additional paid-in capital
45,126
43,388
Retained earnings
606,929
584,014
Accumulated other comprehensive loss
(68,906)
(55,819)
Treasury shares: 15,329,347 shares at December 31, 2014
and 15,344,663 shares at June 30, 2014
(278,713)
(272,833)
Total stockholders' equity
346,412
340,726
Total liabilities and stockholders' equity
See notes to unaudited condensed consolidated financial statements
Unaudited Condensed Consolidated Statements of Operations
Three Months Ended
Six Months Ended
December 31,
2013
Net sales
189,337
166,540
391,364
344,680
Cost of sales
130,537
110,646
266,452
228,381
Gross profit
58,800
55,894
124,912
116,299
Selling, general, and administrative expenses
41,854
42,074
85,808
81,609
Restructuring costs
1,094
644
1,956
4,450
Other operating (income) expense, net
-
(1,962)
59
Total operating expenses
42,948
40,756
87,823
84,097
Income from operations
15,852
15,138
37,089
32,202
Interest expense
(788)
(592)
(1,431)
(1,152)
Other non-operating income (expense)
188
66
453
520
Income from continuing operations before income taxes
15,252
14,612
36,111
31,570
Provision for income taxes
3,989
4,120
9,921
8,730
Income from continuing operations
11,263
10,492
26,190
22,840
Income (loss) from discontinued operations, net of
income taxes
(79)
25
(454)
(3,241)
Net income (loss)
11,184
10,517
25,736
19,599
Basic earnings (loss) per share:
Continuing operations
0.89
0.83
2.07
1.81
Discontinued operations
(0.01)
(0.04)
(0.26)
Total
0.88
2.03
1.55
Diluted earnings (loss) per share:
0.82
2.04
1.79
(0.25)
0.87
2.00
1.54
Cash dividends per share
0.12
0.10
0.22
0.18
Unaudited Condensed Consolidated Statements of Comprehensive Income
(In thousands)
Other comprehensive income (loss):
Defined benefit pension plans:
Actuarial gains (losses) and other changes in
unrecognized costs
372
198
966
(758)
Amortization of unrecognized costs
1,174
1,100
2,359
2,523
Derivative instruments:
Change in unrealized gains and (losses)
(100)
(30)
(102)
(120)
Amortization of unrealized gains and (losses) into
interest expense
248
255
506
522
Foreign currency translation gains (losses)
(6,724)
443
(15,533)
4,972
Other comprehensive income (loss) before tax
(5,030)
1,966
(11,804)
7,139
Income tax provision (benefit):
(80)
(288)
467
(419)
(390)
(840)
(899)
38
11
39
45
(95)
(97)
(194)
(198)
Income tax provision (benefit) to other comprehensive
income (loss)
(556)
(576)
(1,283)
(585)
Other comprehensive income (loss), net of tax
(5,586)
1,390
(13,087)
6,554
Comprehensive income (loss)
5,598
11,907
12,649
26,153
Unaudited Condensed Consolidated Statements of Cash Flows
Cash flows from operating activities
Net income
(Income) loss from discontinued operations
454
3,241
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization
8,305
7,388
Stock-based compensation
1,669
2,319
Non-cash portion of restructuring charge
(74)
3,342
Gain from sale of real estate
925
Contributions to defined benefit plans
(491)
(733)
Net changes in operating assets and liabilities
(23,801)
(16,312)
Net cash provided by (used in) operating activities - continuing operations
11,798
19,769
Net cash provided by (used in) operating activities - discontinued operations
(657)
(2,367)
Net cash provided by (used in) operating activities
11,141
17,402
Cash flows from investing activities
Expenditures for property, plant, and equipment
(13,961)
(7,393)
Expenditures for acquisitions, net of cash acquired
(57,149)
Proceeds from sales of real estate and equipment
115
(3,482)
Other investing activity
1,128
Net cash (used in) investing activities - continuing operations
(69,867)
(10,875)
Net cash (used in) investing activities - discontinued operations
(570)
Net cash (used in) investing activities
(11,445)
Cash flows from financing activities
Borrowings on revolving credit facility
245,500
34,500
Payments of revolving credit facility
(164,700)
(38,500)
Activity under share-based payment plans
613
138
Excess tax benefit from share-based payment activity
1,644
1,423
Purchases of treasury stock
(8,067)
(5,106)
Cash dividends paid
(2,783)
(2,267)
Net cash provided by (used in) financing activities
72,207
(9,812)
Effect of exchange rate changes on cash and cash equivalents
(5,170)
851
Net change in cash and cash equivalents
8,311
(3,004)
Cash and cash equivalents at beginning of year
51,064
Cash and cash equivalents at end of period
48,060
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest
1,193
924
Income taxes, net of refunds
7,639
8,764
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 and six months ended December 31, 2014 and 2013, the cash flows for the six months ended December 31, 2014 and 2013 and the financial position of Standex International Corporation (“Standex” or the “Company”), at December 31, 2014. 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, 2014. The condensed consolidated balance sheet at June 30, 2014 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, 2014. There have been no changes to our Summary of Accounting Policies subsequent to June 30, 2014. Unless otherwise noted, references to years are to the Company’s fiscal years.
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 preliminarily 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 $32.8 million is not deductible for income tax purposes due to the nature of the transaction. The Company anticipates finalizing the purchase price allocation upon receipt of the sellers’ final tax return during the quarter ended March 31, 2015.
The components of the fair value of the Enginetics acquisition, including the preliminary allocation of the purchase price at December 31, 2014, are as follows (in thousands):
Enginetics
Preliminary Allocation
Adjustments
Allocation at December 31, 2014
Fair value of business combination:
Cash payments
55,021
Less: cash acquired
(113)
54,908
Identifiable assets acquired and liabilities assumed:
Current Assets
12,350
(36)
12,314
Property, plant, and equipment
8,881
Identifiable intangible assets
10,600
32,797
15
32,812
158
Liabilities assumed
(2,826)
(32)
(2,858)
Deferred taxes
(7,052)
53
(6,999)
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. This investment complements our Food Service Equipment Group’s product line and allows us to provide broader solutions to restaurant chains and commercial food service installations.
The Company paid $23.0 million in cash for 100% of the stock of Ultrafryer and has recorded intangible assets of $7.6 million, consisting of $2.4 million of trademarks which are indefinite-lived, $4.9 million of customer relationships, and $0.3 million of other intangible assets which are expected to be amortized over a period of fifteen and three to five years, respectively. Acquired goodwill of $11.0 million is not deductible for income tax purposes due to the nature of the transaction.
The components of the fair value of the Ultrafryer acquisition, including the preliminary allocation of the purchase price and subsequent measurement periods adjustments, related to the purchase of land and building, at December 31, 2014, are as follows (in thousands):
Ultrafryer
Final
20,745
2,241
22,986
(20)
20,725
22,966
5,871
50
5,921
1,259
2,100
3,359
7,612
10,930
91
11,021
(1,733)
(3,214)
3)
Discontinued Operations
In pursuing our business strategy we have divested certain businesses and recorded activities of these businesses as discontinued operations.
In June 2014, the Company divested the American Foodservice Company (“AFS”), a manufacturer of custom design and fabrication of counter systems and cabinets, in our Food Service Equipment Group segment.
Discontinued operations for the three and six months ended December 31, 2014 and 2013 are as follows (in thousands):
5,712
11,175
Pre-tax earnings
(126)
(50)
(647)
(4,686)
(Provision) benefit for taxes
47
75
193
1,445
Net earnings (loss) from discontinued operations
In connection with the divestiture of ADP in March 2012, the Company remained an obligor under a lease that was assumed in full by the buyer on a facility in Portland, OR. Pursuant to the transaction, the Company received a $3.0 million promissory note from the buyer. The note is secured by a mortgage on the ADP real
7
estate sold in the transaction in Detroit Lakes, MN and Medina, NY and contains a cross-default provision against the lease. 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 beginning September 2014. We are actively marketing this facility for subleases and expect to sublet this building. Our aggregate obligation with respect to both the Portland and Philadelphia leases is $2.2 million, of which $1.0 million was recorded as a liability at December 31 2014. We do not expect to record additional changes related to these obligations.
Assets and liabilities related to discontinued operations appear in the condensed consolidated balance sheets are as follows (in thousands):
Current assets
62
199
3,014
1,424
2,340
1,374
1,791
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.
During the three and six months ended December 31, 2014, there were no transfers of assets or liabilities between level 1 and level 2 of the fair value measurement hierarchy. 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 December 31, 2014 and June 30, 2014 consisted of the following(in thousands):
8
Level 1
Level 2
Level 3
Assets
Marketable securities - deferred compensation plan
2,196
Foreign exchange contracts
735
Liabilities
Interest rate swaps
656
832
June 30, 2014
3,114
356
1,061
1,552
5)
Inventories are comprised of the following (in thousands):
Raw materials
52,084
44,273
Work in process
29,087
24,551
Finished goods
32,050
28,241
Distribution costs associated with the sale of inventory are recorded as a component of selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations were $6.1 million and $12.5 million for the three and six months ended December 31, 2014, respectively and $5.1 million and $10.6 million for the three and six months ended December 31, 2013, respectively.
6)
Changes to goodwill during the six months ended December 31, 2014 were as follows (in thousands):
Acquisitions
Translation Adjustment
Food Service Equipment Group
56,731
(9)
56,813
Engraving Group
20,716
(285)
20,431
Engineering Technologies Group
12,188
(1,080)
43,920
Electronics Products Group
33,272
(2,730)
30,542
Hydraulics Products Group
3,058
32,903
(4,104)
9
7)
Intangible Assets
Intangible assets consist of the following (in thousands):
Customer Relationships
Trademarks
Other
Cost
43,957
15,720
4,041
63,718
Accumulated amortization
(21,676)
(2,722)
(24,398)
Balance, December 31, 2014
22,281
1,319
36,145
14,508
4,061
54,714
(21,137)
(2,087)
(23,224)
Balance, June 30, 2014
15,008
1,974
Amortization expense for the three and six months ended December 31 2014 was $0.7 million and $1.4 million, respectively. Amortization expense for the three and six months ended December 31 2013 was $0.7 million and $1.3 million, respectively. At December 31, 2014, amortization expense is estimated to be $1.4 million for the remainder of 2015, $3.2 million in 2016, $3.2 million in 2017, $3.0 million in 2018, $2.7 million in 2019, and $10.1 million thereafter.
8)
Warranties
The expected cost associated with warranty obligations on our products is recorded when the revenue is recognized. The Company’s estimate of warranty cost is based on contract terms and historical warranty loss experience that is periodically adjusted for recent actual experience. Since warranty estimates are forecasts based on the best available information, claims costs may differ from amounts provided. Adjustments to initial obligations for warranties are made as changes in the obligations become reasonably estimable.
The changes in warranty reserve, which are recorded as a component of accrued liabilities, for the six months ended December 31, 2014 and year ended June 30, 2014 were as follows (in thousands):
Balance at beginning of year
6,941
6,782
274
Warranty expense
2,937
3,937
Warranty claims
(2,560)
(4,052)
Balance at end of period
7,318
9)
Debt
As of December 31, 2014, the Company’s debt is due as follows (in thousands):
Fiscal Year
2015
$ 7
2016
13
2017
2018
2019
Thereafter
125,800
$ 125,840
10
Bank Credit Agreements
On December 19, 2014 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. The facility amends and restates a previously existing $225 million revolving credit agreement, which was scheduled to expire in January 2017. As of December 31, 2014 the Company has used $8.4 million against the letter of credit sub-facility and had the ability to borrow $265.8 million under the facility.
At December 31, 2014, the carrying value of the current borrowings under the facility approximates fair value.
10)
Derivative Financial Instruments
Interest Rate Swaps
From time to time as dictated by market opportunities, the Company enters into interest rate swap agreements designed to manage exposure to interest rates on the Company’s variable rate indebtedness. The Company recognizes all derivatives on its balance sheet at fair value. The Company has designated its interest rate swap agreements, including those that are forward-dated, as cash flow hedges, and changes in the fair value of the swaps are recognized in other comprehensive income until the hedged items are recognized in earnings. Hedge ineffectiveness, if any, associated with the swaps will be reported by the Company in interest expense.
The Company’s effective swap agreements convert the base borrowing rate on $75 million of debt due under our revolving credit agreement from a variable rate equal to LIBOR to a weighted average fixed rate of 1.99% at December 31, 2014. The fair value of the swaps recognized in accrued expenses and in other comprehensive income is as follows (in thousands, except percentages):
Fair Value
Effective Date
Notional Amount
Fixed Rate
Maturity
June 1, 2010
5,000
2.495%
May 24, 2015
(49)
(108)
June 8, 2010
10,000
2.395%
May 26, 2015
(94)
(206)
June 9, 2010
2.340%
(46)
June 18, 2010
2.380%
(47)
(103)
September 21, 2011
1.595%
September 22, 2014
(18)
March 15, 2012
2.745%
March 15, 2016
(295)
(418)
December 19, 2014
20,000
1.180%
December 19, 2017
(31)
1.200%
(11)
December 19, 2015
2.005%
December 19, 2019
(34)
(656)
(1,061)
The Company reported no losses for the three and six months ended December 31, 2014, as a result of hedge ineffectiveness. Future changes in these swap arrangements, including termination of the agreements, may result in a reclassification of any gain or loss reported in accumulated other comprehensive income (loss) into earnings as an adjustment to interest expense. Accumulated other comprehensive income (loss) related to these instruments is being amortized into interest expense concurrent with the hedged exposure.
Foreign Exchange Contracts
Forward foreign currency exchange contracts are used to limit the impact of currency fluctuations on certain anticipated foreign cash flows, such as foreign sales, foreign purchases of materials, and loan payments to and from subsidiaries. The Company enters into such contracts for hedging purposes only. For hedges of intercompany loan payments, the Company has not elected hedge accounting due to the general short-term nature and predictability of the transactions, and records derivative gains and losses directly to the statement of operations. At December 31, 2014 and June 30, 2014, the Company had outstanding forward contracts related to hedges of intercompany loans with net unrealized (losses) of ($0.1) million and ($1.2) million, respectively, which approximate the unrealized gains and losses on the related loans. The notional amounts of the Company’s forward contracts, by currency, are as follows:
(in native currency)
Currency
Euro
19,779,460
24,289,064
British Pound Sterling
1,290,646
3,600,000
Canadian Dollar
3,975,192
The table below presents the fair value of derivative financial instruments as well as their classification on the balance sheet (in thousands):
Asset Derivatives
Derivative designated as
Balance
hedging instruments
Sheet
Line Item
Other Assets
Liability Derivatives
Accrued Liabilities
1,488
2,613
The table below presents the amount of gain (loss) recognized in comprehensive income on our derivative financial instruments (effective portion) designated as hedging instruments and their classification within comprehensive income for the periods ended (in thousands):
The table below presents the amount reclassified from accumulated other comprehensive income (loss) to Net Income for the periods ended (in thousands):
Details about Accumulated
Other Comprehensive
Affected line item
Income (Loss) Components
in the Statements
of Operations
12
11)
Retirement Benefits
The Company has defined benefit pension plans covering certain current and former employees both inside and outside of the U.S. The Company’s pension plan for U.S. employees is frozen for substantially all participants and has been replaced with a defined contribution benefit plan.
Net Periodic Benefit Cost for the Company’s U.S. and Foreign pension benefit plans for the three and six months ended December 31, 2014 and 2013 consisted of the following components (in thousands):
U.S. Plans
Non-U.S. Plans
Service cost
49
Interest cost
2,619
2,810
409
430
Expected return on plan assets
(3,489)
(3,378)
(371)
(382)
Recognized net actuarial loss
986
923
189
204
Amortization of prior service cost
14
(14)
Net periodic benefit cost
183
418
225
264
106
134
24
23
5,238
5,620
840
844
(6,977)
(6,756)
(763)
(752)
1,973
2,095
389
400
27
(28)
367
1,122
462
515
The Company expects to pay $1.6 million in contributions to its defined benefit plans during fiscal 2015. Contributions of $0.2 million and $0.5 million were made during the three and six months ended December 31, 2014. Required contributions of $1.0 million will be paid to the Company’s U.K. defined benefit plan during 2015. The Company also expects to make contributions of $0.2 million and $0.4 million to its unfunded defined benefit plans in the U.S. and Germany respectively during the current fiscal year.
12)
Income Taxes
The Company's effective tax rate from continuing operations for the second quarter of 2015 was 26.2% compared with 28.2% for the prior year quarter. The lower effective tax rate in 2015 is primarily due to a discrete tax benefit in the quarter related to the retroactive reinstatement of the research and development (“R&D”) credit as part of the Tax Increase Prevention Act of 2014 that was signed into law on December 19, 2014.
The Company's effective tax rate from continuing operations for the six months ended December 31, 2014 was 27.5% compared with 27.7% for the prior year. The Company’s effective tax rate has decreased slightly from the prior year. The decrease is due to the reinstatement of the R&D credit as that is partially offset by an increase in the jurisdictional mix of income where more income is being taxed in the US at a higher tax rate.
13)
Earnings Per Share
The following table sets forth a reconciliation of the number of shares (in thousands) used in the computation of basic and diluted earnings per share:
Basic - Average shares outstanding
12,656
12,634
12,655
12,598
Effect of dilutive securities:
Unvested stock awards
146
163
165
Diluted - Average shares outstanding
12,802
12,768
12,818
12,763
Earnings available to common stockholders are the same for computing both basic and diluted earnings per share. No options to purchase common stock were excluded as anti-dilutive from the calculation of diluted earnings per share for the three and six months ended December 31, 2014 and 2013, respectively.
Performance stock units of 28,597 and 35,514 for the six months ended December 31, 2014 and 2013, respectively, are excluded from the diluted earnings per share calculation as the performance criteria have not been met.
14)
Comprehensive Income (Loss)
The components of the Company’s accumulated other comprehensive loss are as follows (in thousands):
Foreign currency translation adjustment
(5,733)
9,800
Unrealized pension losses, net of tax
(62,771)
(64,968)
Unrealized losses on derivative instruments, net of tax
(402)
(651)
15)
Contingencies
From time to time, the Company is subject to various claims and legal proceedings, including claims related to environmental remediation, either asserted or unasserted, that arise in the ordinary course of business. While the outcome of these proceedings and claims cannot be predicted with certainty, the Company’s management does not believe that the outcome of any of the currently existing legal matters will have a material impact on the Company’s consolidated financial position, results of operations or cash flow. The Company accrues for losses related to a claim or litigation when the Company’s management considers a potential loss probable and can reasonably estimate such potential loss.
16)
Industry Segment Information
The Company has determined that it has five reportable segments organized around the types of product sold:
•
Food Service Equipment Group – an aggregation of seven operating segments that manufacture and sell commercial food service equipment.
Engraving Group – provides mold texturizing, roll engraving and process machinery for a number of industries.
Engineering Technologies Group – provides customized solutions in the fabrication and machining of engineered components for the aerospace, energy, aviation, medical, oil and gas, and general industrial markets.
Electronics Products Group – manufacturing and selling of electronic components for applications throughout the end-user market spectrum.
Hydraulics Products Group – manufacturing and selling of single- and double-acting telescopic and piston rod hydraulic cylinders.
Net sales and income (loss) from continuing operations by segment for the three months ended December 31, 2014 and 2013 were as follows (in thousands):
Three Months Ended December 31,
Net Sales
Income from Operations
Segment:
98,533
87,370
6,912
7,294
26,625
28,384
5,947
5,820
26,605
17,323
3,218
2,456
27,823
26,461
4,738
4,392
9,751
7,002
1,452
1,059
(1,094)
(644)
Other operating income (expense), net
1,962
Corporate
(5,321)
(7,201)
Sub-total
Other non-operating income
Six Months Ended December 31,
212,366
187,281
18,585
19,263
54,713
53,411
12,890
10,593
46,724
34,588
5,438
4,538
57,293
54,605
10,284
9,530
20,268
14,795
3,174
2,233
(1,956)
(4,450)
(59)
(11,267)
(11,467)
Net sales include only transactions with unaffiliated customers and include no intersegment sales. Income (loss) from operations by segment excludes interest expense and other non-operating income (expense).
The Company’s identifiable assets at December 31, 2014 and June 30, 2014 are as follows (in thousands):
214,434
214,674
100,155
101,106
144,871
75,591
98,569
103,699
17,923
16,410
Corporate & Other
74,598
66,680
17)
Restructuring
The Company has undertaken cost reduction and facility consolidation initiatives that have resulted in severance, restructuring, and related charges. A summary of charges by initiative is as follows (in thousands):
Fiscal 2015
Involuntary Employee Severance and Benefit Costs
Restructuring initiatives
299
795
333
798
1,131
Prior year initiatives
125
700
825
458
1,498
December 31, 2013
Fiscal 2014
184
460
535
3,843
4,378
72
607
2015 Restructuring Initiatives
The Company continues to focus on our efforts to reduce cost and improve productivity across our businesses, particularly through headcount reductions and facility closures. During the quarter, the Company announced the closure of our Food Service Equipment U.K. office 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. We incurred severance and non-cash lease impairment costs of $0.6 million associated with these activities during the quarter. Restructuring expense related to the 2015 initiatives is expected to be $3.8 million, of which $1.1 million was incurred for the period ending December 31, 2014.
Activity in the reserves related to fiscal year 2015 restructuring initiatives is as follows (in thousands):
Restructuring liabilities at June 30, 2014
Additions and adjustments
342
1,442
1,784
Payments
(342)
(1,028)
(1,370)
Restructuring liabilities at December 31, 2014
414
16
Prior Year Initiatives
The Company previously announced a consolidation of our Food Service Equipment Group Cheyenne, Wyoming plant into its Mexico facility. During the first quarter of fiscal year 2014 we record a non-cash expense of $3.3 million related to the impairment of long-lived assets in Cheyenne. During fiscal year 2015, restructuring expenses related to this initiative are expected to be $0.8 million, of which $0.8 million was recorded during the six months of fiscal year 2015. The cumulative expense related to this initiative is expected to be $10.8 million.
Activity in the reserve related to the prior year restructuring initiatives is as follows (in thousands):
555
(512)
67
The Company’s total restructuring expenses by segment are as follows (in thousands):
736
789
167
1,297
1,464
61
64
219
278
230
428
September 30, 2013
Food Service
Equipment Group
256
468
724
3,796
4,070
(99)
(8)
(107)
(1)
145
187
48
235
17
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 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 business objective has several primary components.
·
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 utilize strategically aligned or “bolt on” acquisitions 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 partnering with our customers in order to develop and deliver customer solutions or engineered products that provide higher levels of value-added 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 in developing new sales channels and leveraging strategic customer relationships.
We focus on operational excellence through continuous improvement in the cost structure of our businesses and 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 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 to reflect the measure of quality from the earnings that we generate over time.
As part of this ongoing strategy, during the first quarter of fiscal year 2015, we 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. During June of 2014, we also acquired Ultrafryer Systems, Inc., (“Ultrafryer”), a manufacturer of high quality commercial deep fryers. This investment expanded our Food Service Equipment Group’s cooking product line capabilities in restaurant chains and commercial food service institutions.
We continue to focus on our efforts to reduce cost and improve productivity across our businesses, particularly in the Food Service Equipment Group with the previously announced Cooking Solutions consolidation of operations located in the Cheyenne, Wyoming plant into its Mexico facility. We continue to evaluate our products and production processes and expect to execute similar cost reductions and restructuring programs on an ongoing basis.
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.
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 uses 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 within 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.
19
Results from Continuing Operations
(Dollar amounts in thousands)
Gross profit margin
31.1%
33.6%
31.9%
33.7%
Backlog (realizable within 1 year)
147,307
118,004
Net sales, prior period
$ 166,540
$ 344,680
Components of change in sales:
Effect of exchange rates
(3,066)
(2,785)
Effect of acquisitions
10,748
16,962
Organic sales change
15,115
32,507
Net sales, current period
$ 189,337
$ 391,364
Net sales for the second quarter of 2015 increased $22.8 million, or 13.7%, when compared to the prior year quarter. This change was due to organic sales increases of 9.1% and sales generated by acquisitions of 6.5% primarily from Ultrafryer and Enginetics, partially offset by an exchange rate decline of 1.9%. 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 growth in the automotive and food service equipment markets as a result of lower gas prices could offset some of the negative impact we expect to see from our oil and gas exposure. The weak euro presents a headwind to our businesses. Though our sales in Europe and China had good momentum in the second quarter, a slowdown in those markets could impact the second half of our fiscal year.
Net sales in the six months ended December 31, 2014 increased $46.7 million, or 13.5%, when compared to the prior year. This change was due to organic sales increases at all segments and sales generated by the acquisitions of Ultrafryer and Enginetics partially offset by an exchange rate decline of 0.8%.
Gross Profit Margin
Our gross margin for the second quarter of 2015 was 31.1% compared to the prior year quarter of 33.6%. Margin is down in all divisions except Engraving. The decrease is driven by purchase accounting expenses of $0.9 million, or 0.5% related to inventory step up, unfavorable sales mix, increased operational costs that included higher discounts and rebates, and operational inefficiencies at our Cooking Solutions Group. We will continue to focus on increasing our margins and profitability through productivity and efficiency improvements.
Our gross margin in the six months ended December 31, 2014 was 31.9% for the second quarter of 2015 compared to the prior year quarter of 33.7%. The decrease is driven by operational costs that included higher discounts and rebates, operational inefficiencies at our Cooking Solutions Group, unfavorable sales mix, and purchase accounting expenses of $1.7 million, or 0.4%, related to inventory step up.
Selling, General, and Administrative Expenses
Selling, General, and Administrative Expenses (“SG&A”) for the second quarter of 2015 were $41.9 million, or 22.1% of sales, compared to $42.1 million, or 25.3% of sales, during the prior year quarter. The expense decrease was due to $2.1 million of management transition expense recorded in the prior year partially offset by $1.4 million of SG&A expenses associated with the recent acquisitions, and increased spending in distribution and selling expenses due to the 13.7% increase in sales volume.
20
Selling, General, and Administrative Expenses for the six months ended December 31, 2014 was $85.8 million, or 21.9% of sales, compared to $81.6 million, or 23.7% of sales, during the prior year. The expense increase was driven by increased spending in distribution and selling expenses due to the 13.5% increase in sales volume, along with $2.8 million of ongoing, base SG&A expenses associated with the recent acquisitions which were not a component of fiscal 2014 SG&A expenses, partially offset by $2.2 million of management transition expense from the prior year.
Other Operating Income, net
Other operating income, net in the second quarter of fiscal year 2014 and six months ended December 31, 2013 is comprised of a $2.0 million net gain from insurance proceeds related to a catastrophic failure of a large vertical machining center located at our Engineering Technologies facility in Massachusetts. Insurance proceeds of $3.0 million were partially offset by the write-off of the net book value of the machine of $1.0 million.
Income from operations for the second quarter of 2015 was $15.9 million compared to $15.1 million during the prior year quarter. The change is due to increased sales volume in the current year partially offset by a $2.0 million net gain from insurance proceeds recorded during the second quarter of 2014, and increased restructuring expense of $0.4 million.
Income from operations for the six months ended December 31, 2014 was $37.1 million compared to $32.2 million during the prior year. The change is due to increased sales volume in the current year partially offset by a $1.9 million net gain from insurance proceeds recorded during the second quarter of 2014, and a $2.5 million reduction in restructuring expense as compared to the prior year.
Interest Expense
Interest expense for the second quarter of 2015 was $0.8 million compared to $0.6 million during the prior year quarter. The increase is primarily due to higher average borrowings outstanding during the quarter as a result of the Enginetics and Ultrafryer acquisitions.
Interest expense for the six months ended December 31, 2014 was $1.4 million compared to $1.2 million during the prior year. The increase is primarily due to higher average borrowings outstanding during the year as a result of the Enginetics and Ultrafryer acquisitions.
The Company's effective tax rate from continuing operations for the second quarter of 2015 was 26.2% compared with 28.2% for the prior year quarter. The lower effective tax rate in 2015 is primarily due to a discrete tax benefit related to the retroactive reinstatement of the research and development (“R&D”) credit as part of the Tax Increase Prevention Act of 2014 that was signed into law on December 19, 2014.
The Company's effective tax rate from continuing operations for the six months ended December 31, 2014 was 27.5% compared with 27.7% for the prior year. The lower effective tax rate in 2015 is due to the reinstatement of the R&D credit as that is partially offset with an increase in the jurisdictional mix of income where more income is being taxed in the US at a higher tax rate.
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,
21
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 increased $29.3 million, or 24.8%, to $147.3 million at December 31, 2014 from $118.0 million at December 31, 2013. The increase is primarily from our recent acquisitions.
Segment Analysis
%
(In thousands, except percentages)
Change
$ 98,533
$ 87,370
12.8%
$ 212,366
$ 187,281
13.4%
-5.2%
-3.5%
Operating income margin
7.0%
8.3%
8.8%
10.3%
Net sales in the second quarter of fiscal 2015 increased $11.2 million, or 12.8%, when compared to the prior year quarter. Organic growth was 9.1%, acquisitions contributed 4.3% growth, partially offset by a foreign exchange decrease of 0.6%. Refrigeration Solutions sales grew 4.6% in the quarter due to increase from dollar store customers and general dealer markets. Cooking Solutions grew organically 11.4% driven by growth in international sales, chains, and parts sales. Specialty Solutions experienced 8.6% growth driven by sales to large chain customers and dealer channel.
Net sales in the six months ended December 31, 2014 increased $25.1 million, or 13.4%, when compared to the prior year overall with organic growth of 9.6%, acquisitions contributed 4.0%, partially offset by a foreign exchange decrease of 0.2%. Refrigeration Solutions sales showed growth of 9.8% as dollar store and dealer channel sales growth continued. Cooking Solutions experienced a 4.7% organic sales gain, as strong shipments in second quarter overcame a slow start in first quarter. Specialty Solutions experienced a 7.6% year-to-date increase driven by key chain customers and strong dealer sales.
Income from operations in the second quarter of fiscal 2015 decreased by $0.4 million due to increased rebates, discounts, expedited freight costs, and operating inefficiencies including increased labor, overtime, and material costs. During the quarter, we experienced productivity improvements in our Mexico facility as throughput improved based on the work of a cross functional, focused team of the best LEAN experts, plant managers, engineers, information technology and finance employees from the Food Service Equipment Group (the “TIGER Team”).
Income from operations in the six months ended December 31, 2014 decreased $0.7 million, or 3.5%, when compared to the prior year due to increased rebates, discounts, expedited freight costs, and operating inefficiencies including increased labor, overtime, and material costs. We believe that we have addressed production output challenges; however the plant is still experiencing cost inefficiencies in order to achieve that output. We continue to aggressively address high cost inefficiency issues in our Mexico facility.
$ 26,625
$ 28,384
-6.2%
$ 54,713
$ 53,411
2.4%
2.2%
21.7%
22.3%
20.5%
23.6%
19.8%
22
Net sales for the second quarter of 2015 decreased by $1.8 million, or 6.2%, when compared to the prior year quarter. Foreign exchange impacts were unfavorable by $1.3 million or 4.6%. Original equipment manufacturers (“OEMs”) mold texturizing sales in the Group increased outside North America. While automotive roll outs remained strong, they lagged the significant growth we saw last year. This was substantially off-set by sales from our new design hubs in Manchester, England and Detroit, Michigan. The Group experienced a decline in the roll, plate, and machinery business in North America and Brazil of 27.0%, where market conditions continue to be sluggish. We did see growth in backlog for roll, plate and machinery business as a result of improvement in the construction and consumer markets. China showed robust mold texturizing sales growth of 16.0% year over year, and we are optimistic about our long term potential in China. Our Innovent business sales increased 27.0% as a result of good volume and product mix from major OEM diaper manufacturers.
Net sales for the six months ended December 31, 2014 increased $1.3 million or 2.4% when compared to the first half of the prior year. Unfavorable foreign exchange impacted sales $1.4 million, or 2.7% year to date. Our Mold-Tech operations in the Asia Pacific region continue to show strong growth over the prior year increasing by 22.5%. We continue to experience sales volume declines resulting from sluggish market conditions generally in our roll, plate, and machinery business on a year over year basis.
Income from operations for the second quarter of 2015 increased by $0.1 million, or 2.2%, when compared to the prior year quarter. Foreign exchange unfavorably impacted the operating income comparison by $0.3 million. Improved performance in the Mold-Tech businesses worldwide was offset, in part, by continued market sluggishness in the roll, plate and machinery business. We have experienced success with our recently opened design hub in Manchester, England to provide OEMs’ design teams with rapid prototyping of their future automotive interior designs.
Income from operations for the six months ended December 31, 2014 increased by $2.3 million, or 21.7%, when compared to the prior year. Strong performance and leverage of incremental sales by the mold texturing business was negatively affected by soft sales and reduced profit in the roll, plate and machinery business. Unfavorable exchange impacted operating profit by $ 0.3 million.
$ 26,605
$ 17,323
53.6%
$ 46,724
$ 34,588
35.1%
31.0%
12.1%
14.2%
11.6%
13.1%
Net sales in the second quarter of fiscal year 2015 increased by $9.3 million, or 53.6%, when compared to the prior year quarter. Organic sales increased by 14.5% or $2.5 million. Acquisitions contributed 39.6% or $6.9 million as foreign exchange losses contributed to the remainder. Strong demand in the Launch Vehicle and Defense segments drove double digit sales increases in the quarter. The Launch Vehicle segment is particularly active with a number of development programs. Legacy sales in the Aviation segment were up 35% compared to the prior year quarter as development programs moved into the production phase. We plan to begin production on our newest lipskin award by the end of calendar 2015. Sales in the oil and gas segment were down 25% compared to the prior year due to contract timing. We expect that the oil and gas market will remain soft in the foreseeable future, and we plan to take actions to align costs with demand.
Net sales for the six months ended December 31, 2014 increased by $12.1 million, or 35.1%, compared to the prior year. Organic sales increased by 8.0% or $2.8 million. Acquisitions contributed 26.4% or $9.1 million as foreign exchange gains contributed to the remainder. The organic sales improvement was primarily due to a significant increase in the Launch Vehicle segment, up over 90% compared to the prior year. Year-to-date sales
in the land-based gas turbine segment were down 8.2% due to decreased sales to one of our large OEM customers.
Income from operations in the second quarter of 2015 increased by $0.8 million, or 31%, when compared to the prior year quarter. Operating income results were negatively impacted by $0.8 million of purchase accounting expenses.
The organic operating income increase was primarily due to higher volume and an improved product mix.
Income from operations for the six months ended December 31, 2014 increased by $0.9 million compared to the prior year. Operating income results were negatively impacted by $1.1 million of purchase accounting expenses. Organic operating income increased 16.2% compared to the prior year. Volume, product mix improvements, and manufacturing efficiencies in the domestic operations were offset by lower margins in the U.K.
$ 27,823
$ 26,461
5.1%
$ 57,293
$ 54,605
4.9%
7.9%
17.0%
16.6%
17.9%
17.5%
Net sales in the second quarter of fiscal year 2015 increased $1.4 million, or 5.1%, when compared to the prior year quarter. Organic growth increased to 8.9% or $2.4 million. Acquisition growth accounted for a 0.6% or $0.2 million sales increase for the period. Sales decreased $4.4% or $1.2 million due to exchange rate declines. The volume increase is primarily the result of North American new business, particularly in the transportation market. We plan to continue our efforts to grow the sensor business and provide more complete value-added solutions to our customers.
Net sales for the six months ended December 31, 2014 increased $2.7 million, or 4.9%, when compared to the prior year. Organic growth increased to 6.3% or $3.5 million. Acquisition growth accounted for a 0.7% or $0.4 million sales increase for the period. Sales decreased 2.1% or $1.1 million due to exchange rate declines. The volume increase is primarily due to North American new business, particularly in the transportation and industrial market.
Income from operations in the second quarter of fiscal year 2015 increased $0.3 million, or 7.9%, when compared to the prior year quarter. The increase is the result of the higher sales mostly in North America and a further consolidation of the magnetics business from the Tianjin, China facility to our Shanghai factory.
Income from operations for the six months ended December 31, 2014 increased $0.8 million, or 7.9%, when compared to the prior year. The operating income increase is substantially due to the higher sales, primarily in North America, further consolidation of the magnetics business from the Tianjin, China facility to our Shanghai facility as well as a number of operational improvements.
$ 9,751
$ 7,002
39.3%
$ 20,268
$ 14,795
37.0%
37.1%
42.1%
14.9%
15.1%
15.7%
Net sales in the second quarter of fiscal year 2015 increased $2.7 million, or 39.3%, when compared to the prior year quarter. Organic growth increased to 39.7% or $2.8 million. Foreign exchange accounted for a decline of 0.4%. The increase is primarily due to market share gains in the domestic U.S. refuse market and continued strengthening sales in our traditional North America dump truck and trailer markets. The market share gains in the refuse market are from new OEM applications on garbage trucks, container roll offs and compactor platforms. Recent customer wins in Australia and South America also contributed to the strong top line in the quarter. The factory expansion to add capacity at our Tianjin China plant is now complete. This strengthens our global competitive advantage for both telescopic and rod cylinders.
Net sales for the six months ended December 31, 2014 increased $5.5 million or 37.0% when compared to the prior year. Organic sales growth to 37.3% or $5.5 million and was offset slightly by unfavorable 0.3% of foreign exchange declines.
Income from operations in the first quarter of fiscal year 2015 increased $0.4 million, or 37.1%, when compared to the prior year quarter. The increase to income from operations during the second quarter is primarily due to sales volume increases at both the U.S. and China operations.
Income from operations for the six months ended December 31, 2014 increased $0.9 million or 42.1% when compared to the prior year. The increase to income from operations during the second quarter is primarily due to sales volume increases at both the U.S. and China operations.
Corporate and Other
Income (loss) from operations:
$ (5,321)
$ (7,201)
-26.1%
$(11,267)
$(11,467)
-1.7%
69.9%
-56.0%
-100.0%
-103.0%
Corporate expenses in the second quarter of fiscal year 2015 decreased by $1.9 million, or 26.1%, when compared to the prior year quarter. The decrease is partially due management transition cost of $2.1 million recorded in the prior year.
Corporate expenses for the six months ended December 31, 2014 were $11.3 million, essentially flat with prior year.
During the second quarter of fiscal year 2015, we incurred consolidated restructuring expenses of $1.1 million. During the quarter we announced the closure of our Food Service Equipment U.K. office 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. We incurred severance and non-cash lease impairment costs of $0.6 million associated with these activities during the quarter.
During the six months ended December 31, 2014 we incurred consolidated restructuring expenses of $2.0 million, which were primarily the result of restructuring initiatives in the U.K. and in other Standex businesses. In the six months ended December 31, 2013, we recorded a $4.1 million non-cash impairment charge associated with the closure of our Cheyenne, Wyoming, Food Service Equipment facility.
Other operating income, net in fiscal year 2014 is comprised of a $2.0 million net gain from insurance proceeds related to a catastrophic failure of a large vertical machining center located at our Engineering
Technologies facility in Massachusetts. Insurance proceeds of $3.0 million were partially offset by the write-off of the net book value of the machine of $1.0 million.
In pursuing our business strategy, we have divested certain businesses and recorded activities of these businesses as discontinued operations. In June 2014, the Company divested the American Foodservice Company, (“AFS”) a manufacturer of custom design and fabrication of counter systems and cabinets, in our Food Service Equipment Group segment.
Liquidity and Capital Resources
At December 31, 2014, our total cash balance was $82.6 million, of which $72.6 million was held by foreign subsidiaries. Our current plans are not expected to require a repatriation of cash to fund our U.S. operations. Our capital allocation strategy is to use cash flow generated from operations outside the US to fund strategic growth programs including foreign acquisitions, and capital investments in local countries, and as a result, we intend to indefinitely reinvest our foreign earnings to fund our overseas growth. 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. 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 six months ended December 31, 2014, was $11.8 million compared to cash provided by operations of $19.8 million the prior year. The decrease of $8.0 million in cash provided by operating activities is primarily due to changes associated with sales volume increases. Cash flow used in investing activities for the six months ended December 31, 2014, was $69.9 million and consisted primarily of cash used to fund the acquisition of Enginetics for $54.9 million, a subsequent $2.2 million disbursement related to the Ultrafryer acquisition to purchase real property associated with the transaction, and capital expenditures of $14.0 million. Cash inflows provided by financing activities for the six months ended December 31, 2014 were $72.2 million and included net borrowings of $80.8 million, cash paid for dividends of $2.8 million, and employee stock repurchases of $5.8 million.
On December 19, 2014, 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. The facility amends and restates a previously existing $225 million revolving credit agreement, which was scheduled to expire in January 2017. 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 December 31, 2014, the Company has used $8.4 million against the letter of credit sub-facility and had the ability to borrow $265.8 million under the facility. The facility contains
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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 Agreement”), to interest expense for the trailing twelve months of at least 3.0:1. Adjusted EBIT per the Credit Agreement 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 December 31, 2014, the Company’s Interest Coverage Ratio was 34.69:1.
Leverage Ratio - The Company’s ratio of funded debt to trailing twelve month Adjusted EBITDA per the credit agreement, calculated as Adjusted EBIT per the Credit Agreement plus depreciation and amortization, may not exceed 3.5:1. At December 31, 2014, the Company’s Leverage Ratio was 1.28:1.
As of December 31, 2014, we had borrowings under our facility of $125.8 million and the effective rate of interest for outstanding borrowings under the facility was 2.37%. Funds borrowed under the facility may be used for working capital, capital expenditures, acquisitions (so long as certain conditions, including a specified funded debt to EBITDA leverage ratio is maintained), repayment of debt, payment of dividends, stock repurchases, and other general corporate purposes.
Our primary cash requirements in addition to day-to-day operating needs include interest payments, capital expenditures, acquisitions, stock 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 $25.0 and $27.0 million on capital expenditures during 2015, and expect that depreciation and amortization expense will be between $14.0 and $15.0 million and $2.5 and $3.0 million, respectively.
In order to manage our interest rate exposure, we are party to $75.0 million of floating to fixed rate swaps. These swaps convert our interest payments from LIBOR to a weighted average interest rate of 1.99%.
The following table sets forth our capitalization a December 31, 2014 and June 30, 2014:
Less cash and cash equivalents
Net debt (cash)
43,269
(29,204)
Stockholders' equity
Total capitalization
389,681
311,522
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 $211.0 million at December 31, 2014, as compared to $216.0 million at the most recent measurement date, which occurred as of June 30, 2014. The next measurement date to determine plan assets and benefit obligations will be on June 30, 2015. At December 31, 2014, we do not expect to make mandatory contributions to the plan until 2020 and for our other defined benefit plans we expect to pay $1.6 million in prescribed contributions to our U.K. defined benefit plan and other unfunded defined benefit plans in both the U.S. and Europe during fiscal year 2015. 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 December 31, 2014, the
underlying policies have a cash surrender value of $18.2 million, less policy loans of $9.8 million. As we have the legal right of offset, these amounts are reported net on our balance sheet.
In connection with the divestiture of ADP in March 2012, the Company remained an obligor under a lease that was assumed in full by the buyer on a facility in Portland, OR. Pursuant to the transaction, the Company received a $3.0 million promissory note from the buyer. The note is secured by a mortgage on the ADP real estate sold in the transaction in Detroit Lakes, MN and Medina, NY and contains a cross-default provision against the lease. 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 beginning September 2014. We are actively marketing this facility for subleases and expect to sublet this building. Our aggregate obligation with respect to both the Portland and Philadelphia leases is $2.2 million, of which $1.0 million was recorded as a liability at December 31 2014. We do not expect to record additional changes 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 cost inflation is dependent upon our ability to manage claims and purchase insurance coverage to limit the maximum exposure to us.
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 three union contracts in the U.S expiring during fourth quarter of fiscal year 2015.
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, 2014 lists a number of accounting policies which we believe to be the most critical.
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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 risk by entering into forward foreign currency contracts from time to time. The contracts are used as hedges against anticipated foreign cash flows, such as dividends and loan payments, 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 December 31, 2014, the aggregate fair value of the Company’s open foreign exchange contracts is a liability of $0.1 million.
Our primary translation risk is with the Euro, British Pound Sterling, Canadian Dollar, and Chinese Yuan. A hypothetical 10% appreciation or depreciation of the value of any of these foreign currencies to the U.S. Dollar at December 31, 2014, 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 $75.0 million of debt due under our Credit Agreement from a variable rate equal to LIBOR to a weighted average rate of 1.99% at December 31, 2014.
The Company’s effective rate on variable-rate borrowings, including the impact of interest rate swaps, under the revolving credit agreement decreased from 3.87% at June 30, 2014 to 2.37% at December 31, 2014.
Concentration of Credit Risk
We have a diversified customer base. As such, the risk associated with concentration of credit risk is inherently low. As of December 31, 2014, 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 we consider 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 Products, and Hydraulics Products 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 December 31, 2014 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.
SEC guidance permits the exclusion of an evaluation of the effectiveness of a registrant's disclosure controls and procedures as they relate to the internal control over financial reporting for an acquired business during the first year following such acquisition. As discussed in Note 2 to the consolidated financial statements contained in this Report; (I) the Company acquired all of the outstanding stock of Ultrafryer Systems, Inc., (“Ultrafryer”) on June 20, 2014. Ultrafryer represents less than 2.5% of the Company's consolidated revenue for the six months ended December 31, 2014 and approximately 4.5% of the Company's consolidated assets at December 31, 2014. Management's evaluation and conclusion as to the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2014 excludes any evaluation of the internal control over financial reporting of Ultrafryer. (II) the Company acquired all of the outstanding stock of MPE Aeroengines, Inc. including its wholly owned subsidiary Enginetics Corporation, (“Enginetics”) on September 4, 2014. Enginetics represents 2.3% of the Company's consolidated revenue for the six month ended December 31, 2014 and approximately 9.9% of the Company's consolidated assets at December 31, 2014. Management's evaluation and conclusion as to the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2014 excludes any evaluation of the internal control over financial reporting of Enginetics.
There was no change in the Company's internal control over financial reporting during the quarterly period ended December 31, 2014 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:
Issuer Purchases of Equity Securities1
Quarter Ended December 31, 2014
Period
(a) Total number of shares (or units) purchased
(b) Average price paid per share (or unit)
c) Total number of shares (or units) purchased as part of publicly announced plans or programs
(d) Maximum number (or appropriate dollar value) of shares (or units) that may yet be purchased under the plans or programs
October 1 - October 31, 2014
8,572
$ 73.60
391,578
November 1 - November 30, 2014
10,501
80.05
381,077
December 1 - December 31, 2014
76.59
378,881
21,269
$ 77.09
(1) The Company has a Stock Buyback Program (the “Program”) which was originally announced on January 30, 1985. Under the Program, the Company may repurchase its shares from time to time, either in the open market or through private transactions, whenever it appears prudent to do so. The Program has no expiration date, and the Company from time to time may authorize additional increases of share increments for buyback authority so as to maintain the Program. On August 20, 2013, the Company authorized 0.5 million shares for repurchase pursuant to its Program. All previously announced repurchases have been completed.
ITEM 6. EXHIBITS
(a)
31.1
Principal Executive Officer’s Certification Pursuant to Rule 13a-14(a)/15d-14(a) and Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Principal Financial Officer’s Certification Pursuant to Rule 13a-14(a)/15d-14(a) and Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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Principal Executive Officer and Principal Financial Officer Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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The following materials from this Quarterly Report on Form 10-Q, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.
ALL OTHER ITEMS ARE INAPPLICABLE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date:
February 3, 2015
/s/ THOMAS D. DEBYLE
Thomas D. DeByle
Vice President/Chief Financial Officer
(Principal Financial & Accounting Officer)
/s/ SEAN C. VALASHINAS
Sean C. Valashinas
Chief Accounting Officer/Assistant Treasurer