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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) 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 the exchange rates and
the inability to repatriate foreign cash, general and international recessionary
economic conditions, including the impact, length and degree of the current
recessionary 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 and the failure by the purchaser of our
former Berean bookstore chain to satisfy its obligations under those leases
where the Company remains an obligor. 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 market segments. We have five reportable segments:
Food Service Equipment Group, Engraving Group, Engineering Technologies Group,
Electronics Products Group, and the Hydraulics Products Group. Our ongoing
"Focused Diversity" strategy is to deliver superior returns and greater
shareholder value through the identification of and investment in businesses
that provide value-added and technology-driven customer solutions.
As part of this ongoing strategy, the Company divested its Air Distribution
Products ("ADP") business unit, which was previously reported as a stand-alone
segment, in 2012. We determined that as a more commodity-like product, ADP was
not well aligned with our strategic objectives. At the beginning of 2013, we
further executed our strategy by acquiring Meder electronic Group ("Meder"),
which substantially broadens our global footprint, product line offerings, and
end-user markets in the Electronics Products segment.
Since the beginning of the 2008 macroeconomic recession, we have reduced our
cost structure through company-wide and targeted headcount reductions, low cost
manufacturing initiatives, plant consolidations, procurement savings, and
improved productivity in all aspects of our operations. To mitigate the impact
of commodity inflation that a number of our business units have experienced
since 2008, we have initiated a number of price increases in the marketplace in
order to at least partially offset these raw material cost increases. These
efforts have allowed the Company to significantly improve margins and
profitability even though sales have only recently returned to pre-recession
levels. In addition to the focus on improving our cost structure, we continue
to focus on the Company's liquidity through improved working capital management,
the sale of excess land and buildings, and the disposal of ADP. This additional
liquidity to pursue acquisitive growth initiatives is evidenced by the four
strategic acquisitions during 2011 and the acquisition of Meder in 2013. We
ended 2012 in a net cash position, and our net debt to capital ratio at December
31, 2012 was 9.8% even after spending over $40 million to acquire Meder in July.
We also continue to concentrate our attention on driving market share gains in
what we expect will be a highly competitive, low-growth environment in our
end-user markets. Each of our business units has developed a series of top-line
initiatives that we believe will provide opportunities for market share gains.
These growth initiatives include new product introductions, expansion of
product offerings through private labeling and sourcing agreements, geographic
expansion of sales coverage and the use 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.
As we advanced our strategy into 2013, we expected to face headwinds, including
a soft European economy, negative year over year foreign exchange comparisons,
and increased expense associated with our legacy defined benefit pension plan in
the U.S. The impact of the latter two items during the first half of 2013 was a
$2.3 million decrease in sales due to foreign exchange and $1.5 million
reduction to income from operations as a result of the pension expense. At the
same time, our ongoing activities in continuation of Focused Diversity position
us well to offset the effect that these factors may have on our results.
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. Because we serve niche markets, each of our
individual business units may be subject to specific, unique trends which could
impact their performance. These trends, where applicable, are in addition to
general business conditions and conditions at the macroeconomic level. Our
business 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.
Results from Continuing Operations
Three Months Ended Six Months Ended
December 31, December 31,
(Dollar amounts in thousands) 2012 2011 2012 2011
Net sales $ 168,629 $154,868 $ 352,015 $314,174
Gross profit margin 33.4% 32.5% 32.8% 32.8%
Income from operations 16,268 14,376 33,894 30,490
Backlog as of December 31 121,834 113,932 121,834 113,931
Net Sales
Three Months Ended Six Months Ended
(In thousands) December 31, 2012 December 31, 2012
Net sales, prior period $ 154,868 $ 314,174Components of change in sales:
Effect of exchange rates (145) (2,267)
Effect of acquisitions 13,216 27,187
Organic sales change 690 12,921
Net sales, current period $ 168,629 $ 352,015
Net sales for the second quarter of 2013 increased $13.8 million, or 8.9 %, when
compared to the same period of 2012. This change was due to organic sales
increases of $0.7 million, or 0.5%, the impact of the Meder acquisition of $13.2
million, or 8.5%, and unfavorable foreign exchange impact of $0.1 million, or
0.1%.
Net sales for the first half of 2013 increased $37.8 million, or 12.0 %, when
compared to the same period of 2012. This change was due to organic sales
increases of $12.9 million, or 4.1%, the impact of the Meder acquisition of
$27.2 million, or 8.7%, and unfavorable foreign exchange impact of $2.3 million,
or 0.7%.
Gross Profit Margin
Our gross profit margin increased from 32.5% to 33.4% in the second quarter of
2013 as compared to the same quarter of last year as gross margins increased
across all segments.
Our gross profit margin for the first half of 2013 was flat at 32.8% when
compared to the first half of 2012, as gross margins in the first quarter of
2013 reflected the impact of $1.5 million of non-cash expense associated with
the write-up of backlog and inventory ("purchase accounting adjustments") for
Meder included in cost of sales, which will not repeat going forward. The
purchase accounting adjustments incurred in the first quarter offset the
aforementioned gross margin improvement in the second quarter.
Selling, General, and Administrative Expenses
Selling, General, and Administrative Expenses for the second quarter of 2013
were $39.0 million, or 23.1% of sales, compared to $35.2 million, or 22.7% of
sales, reported for the same period a year ago. For the six months ended
December 31, 2012, Selling, General and Administrative Expenses were $80.4
million, or 22.8% of sales, compared to $71.3 million, or 22.7% of sales for the
six months ended December 31, 2011. The Meder acquisition increased SG&A costs
by $2.3 million in the second quarter and by $4.6 million in the first half of
the year. While we continue our efforts to tightly control expenses and to
maintain a lean headcount profile, our costs have also been impacted by
increased expense related to our legacy defined benefit plans relative to last
year.
Income from Operations
Income from operations for the second quarter of 2013 was $16.3 million,
compared to $14.4 million reported for the same period a year ago, an increase
of 13.2%. This increase is largely attributable to our acquisition of Meder at
the beginning of the year.
Income from operations for the first half of 2013 was $33.9 million, compared to
$30.5 million reported for the same period a year ago, an increase of 11.2%.
This increase is also primarily attributable to Meder, but was negatively
impacted by the inclusion of $1.5 million of purchase accounting adjustments in
the first quarter of 2013.
Interest Expense
Interest expense for the second quarter of 2013 increased 34.3%, from $428,000
to $575,000, and interest expense for the six months ended December 31, 2012
increased 36.2% from $900,000 to $1.2 million. Our new credit facility entered
into in January 2012 has a higher spread over the base LIBOR rate than the
facility it replaced.
Income Taxes
The Company's effective tax rate for the three months ended December 31, 2012
was 30.5% compared with 28.2% for same period last year. The lower effective
tax rate during the prior year is primarily due to the benefit of the
retroactive extension of the R&D credit recorded during the second quarter of
2012. The Company's effective tax rate for the six months ended December 31,
2012 was 30.0% compared with 26.7% for same period last year. The lower
effective tax rate during the prior year includes the impact of a decrease in
the statutory tax rate in the United Kingdom on deferred tax liabilities
recorded in prior periods due to a change in U.K. tax law enacted in the quarter
ended September 30, 2011.
Under the American Taxpayer Relief Act of 2012, signed into law on January 2,
2013, the federal research and development credit was retroactively extended for
amounts paid or incurred after December 31, 2011 through December 31, 2013. The
effects of the change in the tax law will be recognized in the third quarter of
2013, the period in which the law was enacted.
Backlog
Backlog increased $7.9 million, or 6.9%, to $121.8 million at December 31, 2012,
from $113.9 million at December 31, 2011. The overall increase is attributable
to bookings from the newly-acquired Meder operation in the Electronics Products
Group, higher backlog in the Food Service Equipment Group, partially offset by a
decrease in Engineering Technologies.
Segment Analysis
Food Service Equipment Group
Three Months Ended Six Months Ended
December 31, % December 31, %
2012 2011 Change 2012 2011 Change
Net sales $95,816 $95,962 -0.2% $205,139 $200,169 2.5%Income from operations 9,694 9,678 0.2% 23,042 22,084 4.3%
Operating income margin 10.1% 10.1% 11.2% 11.0%
Net sales in the second quarter of fiscal 2013 decreased $0.1 million, or 0.2%,
from the same period one year earlier. The Refrigerated Solutions business
experienced 2.6% growth in the quarter as strength in the quick serve and casual
dining markets segments overcame softness in the drug retail segment as new
store construction for major drug retailers has slowed. We saw some slowdown in
the dollar store segment that is attributable to timing, but expect these sales
to rebound in the third quarter. We also saw continued growth in the rack
refrigeration and ultra-low refrigeration product lines. The Cooking Solutions
business experienced a volume decline of nearly 10% in the quarter as North
American and UK retail grocery segment customers continued to curtail capital
spending. Growth of approximately 4% in our core segments of national quick
service chains and convenience stores was not sufficient to overcome the
softness in retail. Also, sales included a large nonrecurring oven rollout for
a major US retail grocery customer. The Custom Solutions businesses experienced
6.5% sales growth on a strong mix of institutional, convenience store, and
dealer business, offset by softness in the global beverage pump market.
Net sales in the six months ended December 31, 2012 increased $5.0 million, or
2.5%, from the same period one year earlier. The effect of foreign exchange
rates accounted for a sales decrease of $0.5 million. Refrigerated Solutions
experienced high single digit growth for the period due to strength in the quick
serve and casual dining segments, while Cooking Solutions experienced a
mid-single digit decline due to softness in the global grocery store segment.
Custom Solutions experienced slight growth as strength in merchandising
overcame softness in the global beverage market and a nonrecurring prior year
equipment rollout in the buffet and cafeteria market.
Income from operations for the second quarter of fiscal 2013 increased 0.2% from
the same period last year. Return on sales remained constant at 10.1% for the
quarter. Income from operations increased slightly compared to the prior year
quarter as the slight volume decrease was offset by efficiency improvements. We
continue to work aggressively on the cost front, and began an initiative during
the quarter to value engineer our major refrigerated upright merchandizing
cabinets and realign our shop floor in order to reduce costs and increase our
competitiveness in the drug retail market. Additionally, we have responded to
slowness in the retail sector at Cooking Solutions by reducing headcount in
anticipation of a prolonged recovery period.
Income from operations for the first half of fiscal 2013 increased $1.0 million,
or 4.3%, when compared to the same period one year earlier. The Group's return
on sales increased from 11.0% to 11.2% for the period, driven by volume
leverage.
Engraving Group
Three Months Ended Six Months Ended
December 31, % December 31, %
2012 2011 Change 2012 2011 Change
Net sales $23,663 $23,133 2.3% $47,019 $44,831 4.9%Income from operations 4,476 4,411 1.5% 9,028 8,288 8.9%
Operating income margin 18.9% 19.1% 19.2% 18.5%
Net sales in the second quarter increased $0.5 million or 2.3% when compared to
the same quarter in the prior year. Unfavorable foreign exchange impacted sales
for the quarter by $0.3 million. Sales increases, while small, continue to meet
our expectation of a slower 2013 and stronger 2014 as compared to 2012 in our
global mold texturizing business. Automotive OEM mold texturing remained strong
in Europe, in spite of the unfavorable foreign exchange impact. China continues
to show robust sales growth of 51% year over year as we increase our penetration
of the domestic auto manufacturers, who are improving the quality of their
automobile interior design and cosmetics in order to compete with non-Chinese
global OEMs. While North America mold texturizing slowed during the period, we
expect the current trend to reverse in the second half with stronger sales in
North America offset by somewhat slower demand in China and Europe based on
current production schedules. Our Roll, Plate and Machinery businesses and
Innovent business continue to steadily improve as the market for building
products recovers.
Net sales for the six months ended December 31, 2011 increased $2.2 million or
4.9% when compared to the first half of the prior year. Unfavorable foreign
exchange impacted sales by $1.7 million. The overall increase was driven by
strong China and Europe sales for automotive OEM platform work.
Income from second quarter operations increased by $0.1 million or 1.5% when
compared to the same period one year ago. Mold texturing results in North
America were hurt by unfavorable product mix. The introduction of new
technologies, expansion efforts, and the relocation of our Brazil facility added
costs during the period, but overall operating margin for the group remained
solid at 18.9%. Our focus on emerging economies remains strong - we opened our
Korea facility during the quarter which has begun taking orders and we have
broken ground on a fourth facility in India. We are also moving our Mold-Tech
facility in Mexico to a larger facility in the Queretaro region, where the
automotive industry is seeing rapid growth.
Income for the first half of 2013 increased by $0.7 million, or 8.9%, when
compared to the first half of the prior year. Leverage on the increased sales
was strong at all businesses except for mold texturing in North America due to
the unfavorable product mix described above.
Engineering Technologies Group
Three Months Ended Six Months Ended
December 31, % December 31, %
2012 2011 Change 2012 2011 Change
Net sales $18,027 $18,012 0.1% $33,757 $32,650 3.4%Income from operations 3,644 3,679 -1.0% 5,337 6,258 -14.7%
Operating income margin 20.2% 20.4%
15.8% 19.2%
Net sales of $18.0 million were virtually even with the second quarter of 2012.
Sales increased in the aerospace and energy segments of the Spincraft business,
but were offset by reductions at Metal Spinners, the Group's subsidiary in the
United Kingdom. Sales to the Oil and Gas segment at Metal Spinners were down
due to a difficult comparison to the prior year quarter, where we had a large
number of deliveries related to offshore platform builds. Based on our customer
forecasts for energy, we expect continued improvement in the second half at
Spincraft for the land based turbine business. In addition, the order backlog
in the Aerospace segment, particularly with United Launch Alliance and Boeing
remains strong.
Year to date sales increased by $1.1 million, or 3.4%, compared to the prior
year. The increase is primarily due to improvements in the aerospace and energy
segments at Spincraft, partially offset by lower sales at Metal Spinners.
Income from operations of $3.6 million in the second quarter was down 1.0% when
compared to the second quarter of fiscal 2012. Improved results at Spincraft
were offset by lower income at Metal Spinners. Spincraft results were bolstered
by $0.7 million of income from operations resulting from a retrospective payment
by a space sector customer related to incremental costs recorded in cost of
sales in prior periods which were attributable to customer-supplied materials.
Year to date operating income is down 14.7% compared to the prior year primarily
due to volume reductions and product mix at Metal Spinners, as offset by
operating income from the retrospective payment.
Electronics Products Group
Three Months Ended Six Months Ended
December 31, % December 31, %
2012 2011 Change 2012 2011 Change
Net sales $24,894 $11,188 122.5% $52,733 $22,878 130.5%Income from operations 4,101 1,807 127.0% 7,189 3,933 82.8%
Operating income margin 16.5% 16.2% 13.6% 17.2%
Electronics Group sales increased $13.7 million or 122.5% in the second quarter
of 2013 when compared to the prior year quarter. This increase includes the
impact of $13.2 million from the acquisition of Meder electronic and $0.5
million from our legacy Electronics business. The growth in the legacy business
was the result of a ramp-up of a number of new programs primarily within the
sensor product line as well as tooling on new upcoming programs. While the reed
switch business remains soft in China and the Asia-Pacific region, our overall
base business remains strong, and we continue to nurture a healthy pipeline of
new products and customer programs.
Sales for the six months ended December 31, 2012 increased $29.9 million, or
130.5% when compared to the prior year first half. This increase includes the
impact of $27.2 million from the acquisition of Meder electronic. The growth in
the legacy business was again driven by new programs, partially offset by
softening of reed switch sales in the China and Asia-Pacific markets.
Income from operations increased $2.3 million compared to the prior year
quarter. The Meder acquisition continues to meet expectations as the
acquisition continued to be accretive to earnings. The increase also includes
an improvement in the legacy Electronics business earnings in line with the
sales improvement. The integration of the acquisition continued throughout the
second quarter and encompassed all aspects of the business. Over the next year
we expect to realize further cost savings including $0.5 million in purchased
materials and $1.0 to $1.5 million from facility rationalizations. While sales
synergies require a longer maturity time, results to date are in line with our
initial expectations.
Income from operations for the six months ended December 31, 2012 increased $3.3
million compared to the prior year first half. Meder was accretive to earnings
inclusive of purchase accounting adjustments in the first quarter totaling $1.5
million. The increase also includes an improvement in the legacy Electronics
business earnings again in line with the sales improvement.
Hydraulics Products Group
Three Months Ended Six Months Ended
December 31, % December 31, %
2012 2011 Change 2012 2011 Change
Net sales $ 6,229 $ 6,573 -5.2% $13,367 $13,646 -2.0%
Income from operations 963 781 23.3% 1,934 1,457 32.7%
Operating income margin 15.5% 11.9% 14.5% 10.7%
Net sales decreased by $0.3 million, or 5.2%, for the three months ended
December 31, 2012 when compared with the three months ended December 31, 2011.
The downturn in the North American dump markets continued into the second
quarter with many of the OEM's reducing production by over 50%. A portion of
this downturn is due to the continued uncertainty in purchases of major capital
equipment. On the positive side, sales into the North American refuse and
materials handling OEM markets continue to grow. Several new applications are
now contributing to our top line and others are being developed for future
growth. Our operation in Tianjin, China continues to expand as we have won new
business for both rod and telescopic cylinders for global customers based in
North America, South America Thailand, Australia, and Mexico. Sales from the
China factory during the three months ending December 31, 2012 increased by over
50% as compared to the same period in 2011.
For the six months ended December 31, 2012, net sales for the Hydraulics Group
decreased $0.3 million or 2.0% when compared to the same period last year under
similar circumstances to the quarter.
Income from operations during the quarter increased $0.2 million or 23.3% for
the three months ended December 31, 2012 versus the same period in 2011. This
increase in quarterly income from operations can be attributed to cost
containment, operational efficiencies at the facilities and the profitable sales
contribution from the Tianjin, China facility. Custom Hoists continues to take
very aggressive steps to profitably increase market share on a global basis by
utilizing a strategy to promote both telescopic and rod cylinder products to
multiple industries.
For the six months ended December 31, 2012, income from operations increased
$0.5 million, or 32.7% from the six months ended December 31, 2011.
Corporate and Other
Three Months Ended Six Months Ended
December 31, % December 31, %
2012 2011 Change 2012 2011 Change
Income (loss) from
operations:
Corporate $(5,625) $(5,279) 6.6% $(11,416) $(10,307) 10.8%
Restructuring $ (985) $ (701) 40.5% $ (1,220) $ (1,223) -0.2%
Corporate expenses of $5.6 million in the second quarter of 2013 increased $0.3
million, or 6.6% compared to 2012. This increase was driven entirely by an
increase in pension expense during the period related to our legacy defined
benefit plans. For the first half of 2013, corporate expenses increased $1.1
million, or 10.8%, as compared to the prior year period, also driven by
increased pension expense. Approximately half of the participants in our US
defined benefit pension plans are employees of operations since discontinued or
divested by the Company.
During the second quarter of 2013, the Company incurred $1.0 million of
restructuring expense. Approximately $0.8 million of these costs were primarily
related to ongoing headcount reductions in our European operations and the
relocation of our Brazil facility during the period. The remaining costs
occurred in the Food Service Equipment Group, where we are reducing headcount in
response to slowed grocery store sector sales, and in Electronics, where we are
eliminating redundant positions due to the Meder acquisition. During the second
quarter of 2012, the Company incurred restructuring expenses of $0.7 million,
including $0.4 million of severance expense in our European Engraving operations
and $0.3 million in the Food Service Equipment Group, where we completed two
facility consolidations. During the six months ended December 31, 2012, the
Company incurred $1.2 million of restructuring expense, $1.1 million of which
was in the Engraving Group for ongoing headcount reductions in our European
operations and the relocation of our Brazil facility. Restructuring expenses
during the six months ended December 31, 2011 consisted of $0.5 million for
headcount reduction in the Engraving Group and at Corporate, and $0.8 million
related to facility and production line consolidation in the Food Service
Equipment Group.
Discontinued Operations
In December 2011, the Company entered into a plan to divest its Air Distribution
Products ("ADP") business unit in order to allow the Company to focus its
financial assets and managerial resources on its remaining portfolio of
businesses. On March 30, 2012, the Company completed the sale of the ADP
business. As a result of these actions, the Company is reporting ADP as a
discontinued operation for all periods presented in accordance with ASC 205-20.
Results of the ADP business in current and prior periods have been classified
as discontinued in the Condensed Consolidated Financial Statements to exclude
the results from continuing operations. Activity related to ADP and other
discontinued operations for the three and six months ended December 31, 2012 and
2011 is as follows (amounts in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
2012 2011 2012 2011
Net sales $ - $ 14,842 $ - $ 30,229
Pre-tax earnings (98) (22,302) (243) (22,099)
(Provision) benefit for
taxes 33 8,109 83 8,045
Net loss from discontinued
operations $ (65) $ (14,193) $ (160) $ (14,054)
Liquidity and Capital Resources
Cash generated from continuing operations for the six months ended December 31,
2012, was $24.7 million compared to $9.0 million for the same period last year.
The primary contributor to positive cash flow in the period is a reduction in
cash out for working capital, where cash inflows from accounts payable increased
by $15.6 million compared to the prior year period. Cash flow from investing
activities consisted primarily of the Meder acquisition, where we spent $39.6
million, net of cash acquired. Cash capital expenditures for the period were
$9.7 million. We had net borrowings of $11.3 million, paid dividends of $1.9
million and purchased $8.0 million of stock, consisting exclusively of
management and employee stock repurchases.
The Company has in place a $225 million unsecured Revolving Credit Facility
("Credit Agreement", "the facility"), which expires in January 2017 and includes
a letter of credit sub-facility with a limit of $30 million and a $100 million
accordion feature. The Credit Agreement 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
Agreement"), to interest expense for the trailing twelve months of at least 3:1.
Adjusted EBIT per the Credit Agreement specifically excludes extraordinary and
certain other defined items such as non-cash restructuring and
acquisition-related charges up to $2.0 million, and goodwill impairment. At
December 31, 2012, the Company's Interest Coverage Ratio was 26.9:1.
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, 2012, the Company's Leverage Ratio was 0.85:1.
As of December 31, 2012, we had borrowings under the new facility of $62.0
million. As of December 31, 2012, the effective rate of interest for
outstanding borrowings under the new facility was 3.19%. We also utilize an
uncommitted money market credit facility to help manage daily working capital
needs. No amounts were outstanding under this facility at December 31, 2012 and
June 30, 2012, respectively.
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.
Our primary cash requirements in addition to day-to-day operating needs include
interest payments, capital expenditures, 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 approximately $9-10 million
on capital expenditures during the remainder of 2013, and expect that
depreciation and amortization expense for the remainder of the year will be
approximately $7.8 million and $1.4 million, respectively.
In order to manage our interest rate exposure, we are party to $50.0 million of
floating to fixed rate swaps. These swaps convert our interest payments from
LIBOR to a weighted average rate of 2.29%.
The following table sets forth our capitalization at December 31, 2012 and June
30, 2012:
December 31, June 30,
2012 2012
Long-term debt 62,073 50,000Less cash and cash equivalents (33,126) (54,749)
Net debt 28,947 (4,749)
Stockholders' equity 265,827 242,907
Total capitalization $ 294,774 $ 238,158
We sponsor a number of defined benefit and defined contribution retirement
plans. The Company's pension plan for U.S. salaried employees was frozen as of
January 2008. We have evaluated the current and long-term cash requirements of
these plans. 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. pension plan assets was $207.2 million at
December 31, 2012, as compared to $198.7 million at the most recent measurement
date, which occurred as of June 30, 2012. The next measurement date to
determine plan assets and benefit obligations will be on June 30, 2013. During
2012, we made a voluntary contribution of $6.0 million to the plan. In June
2012, the Moving Ahead for Progress in the 21st Century ("MAP 21") bill was
signed into law. Based on changes in pension funding provisions under MAP 21,
we made an additional $3.25 million contribution in July 2012 due to its
favorable treatment under the bill and retroactive treatment under the Pension
Protection Act ("PPA"). As a result of this additional contribution in
conjunction with the voluntary contribution made in 2012, the plan is 100%
funded under PPA rules, and we do not expect to make mandatory contributions to
the plan until 2016. We do not expect contributions to our other defined
benefit plans to be material in 2013. 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 certain retired executives. Current executives and new hires are
not eligible for this program. At December 31, 2012, the underlying policies
have a cash surrender value of $19.5 million, less policy loans of $11.1
million. As we have the legal right of offset, these amounts are reported net
on our balance sheet. The aggregate present value of future obligations was $0
and $0.2 million at December 31, 2012 and June 30, 2012, respectively.
In March 2012, the Company sold substantially all of the assets of the ADP
business. In connection with the divestiture, the Company remained the lessee
of ADP's Philadelphia, PA facility and administrative offices, with the
purchaser subleasing a fractional portion of the building at current market
rates. Additionally, the Company remained an obligor on an additional facility
lease that was assumed in full by the buyer. In connection with the
transaction, the Company recognized a lease impairment charge of $2.3 million
for the remaining Philadelphia rental expense. The Company's aggregate
obligation with respect to the leases is $3.7 million, of which $2.0 million was
recorded as a liability at December 31, 2012. With the exception of the
impaired portion of the Philadelphia lease, the Company does not expect to make
any payments with respect to these obligations. The buyer's obligations under
the respective sublease and assumed lease are secured by a cross-default
provision in the purchaser's promissory note for a portion of the purchase price
which is secured by mortgages on the ADP real estate sold in the transaction.
In connection with the sale of the Berean Christian Bookstores completed in
August 2006, we assigned all but one lease to the buyers. During June 2009, the
Berean business filed for bankruptcy protection under Chapter 11 of the U.S.
Bankruptcy Code. The Berean assets were subsequently resold under section 363
of the Code. The new owners of the Berean business have negotiated lower lease
rates and extended lease terms at certain of the leased locations. We remain an
obligor on these leases, but at the renegotiated rates and to the original term
of the leases. The aggregate amount of our obligations in the event of default
is $1.1 million at December 31, 2012, of which all but $0.1 million is not
recorded on our balance sheet as a liability based on management's assessment of
the likelihood of loss.
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 our maximum exposure.
Foreign Currency Translation - Our primary functional currencies used by our
non-U.S. subsidiaries are the Euro, British Pound Sterling, Canadian Dollar,
Mexican Peso, Australian Dollar and Chinese Yuan.
Environmental Matters - We are party to various other claims and legal
proceedings, generally incidental to our business. We do not expect the
ultimate disposition of these other matters will have a material adverse effect
on our financial statements.
Seasonality - We are a diversified business with generally low levels of
seasonality, however our third quarter is typically the period with the lowest
level of activity.
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, 2012 lists a number of accounting policies which we believe to be
the most critical.
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