Standex International (NYSE:SXI)
Q1 2014 Earnings Call
November 07, 2013 9:00 am ET
David M. Reichman - Vice President
Roger L. Fix - Chief Executive Officer, President, Executive Director and Member of Executive Committee
Thomas D. DeByle - Chief Financial Officer, Vice President and Treasurer
Elizabeth Murphy Lilly - Gabelli Funds, LLC
Good morning. My name is Letricia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Standex International Q1 2014 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Mr. David Reichman of Sharon Merrill. Please go ahead, sir.
David M. Reichman
Thank you. Please note that the presentation accompanying management's remarks can be found on Standex's Investor Relations website, www.standex.com.
Please see Standex's Safe Harbor passage on Slide 2. Matters that Standex management will discuss on today's conference call include predictions, estimates, expectations and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially. You should refer to Standex's recent SEC filings and public announcements for a detailed list of risk factors.
In addition, I would like to remind you that today's discussion will include references to EBITDA, which is earnings before interest, taxes, depreciation and amortization; adjusted EBITDA, which is EBITDA excluding restructuring expenses and onetime items; non-GAAP net income; non-GAAP income from operations; non-GAAP net income from continuing operations; and free operating cash flow. These non-GAAP financial measures are intended to serve as a complement to results provided in accordance with accounting principles generally accepted in the United States. Standex believes that such information provides an additional measurement and consistent historical comparison of the company's performance. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in Standex's first quarter news release.
On the call today is Standex Chief Executive Officer, Roger Fix; and Chief Financial Officer, Tom DeByle.
I'd now like to turn the call over to Roger.
Roger L. Fix
Thank you, David, and good morning, everyone. Please turn to Slide 3. Our revenues and non-GAAP EPS for the first quarter of fiscal 2014 were both flat with Q1 last year. It was a disappointing quarter in Food Service. But our other 4 businesses performed well, especially given the economic conditions. Slightly lower organic sales for the quarter were offset by a 0.5% positive foreign currency exchange effect.
We ended the quarter with a modest net debt position of $4 million and our balance sheet is very well positioned to support future investments in organic growth, as well as acquisitions. We're continuing to see soft demand in several end-user segments. But overall, our strategy for the business is working well. Our bottom line results for the quarter reflected some nonrecurring items in the Food Service group that we're now putting behind us.
As you can see on Slide 4, our trailing 12 months EPS is $3.70, up 9% from full year fiscal 2012 and up 25% from full year fiscal 2011. Although, market conditions in Food Service remain softer than we would like, we're continuing to take cost out of the business and launching a numbers of new products that we believe will be very successful in expanding our competitiveness in addressable market in the near term. I have more to say about the performance and outlook at each of our business segments after Tom takes you through the financials. Tom?
Thomas D. DeByle
Thank you, Roger, and good morning, everyone. Please turn to Slide 5, which summarizes our first quarter results. As Roger mentioned, net sales for the first quarter of fiscal 2014 were essentially flat with the fiscal quarter last year at $183.6 million. Excluding special items from both periods, non-GAAP operating income was $17.8 million compared with $19.3 million for the first quarter of fiscal 2013.
Slide 6 is a quarterly bridge that illustrates the tax affected impact to special items on net income from continuing operations. These items include tax affected $2.7 million restructuring charges, $0.2 million of nonrecurring tax benefit and $0.1 million of nonrecurring management transition expense in the first quarter of fiscal 2014. In the comparable period of fiscal 2013, there were $2.2 million of tax affected restructuring charges and $1 million of acquisition-related costs.
Excluding special items from both periods, non-GAAP net income from continuing operations was $13.1 million or $1.02 per diluted share compared with $13.1 million or $1.02 per diluted share in the first quarter of fiscal 2013.
Turning to Slide 7. You can see our trailing 12-month performance. We reported a 6.5% increase in sales, non-GAAP operating income grew 3.8% to $67.1 million and adjusted EBITDA grew 5.3% to $82.9 million.
On Slide 8, we had a reconciliation of net income from continuing operations to non-GAAP net income from continuing operations for the trailing 12-month period. Excluding special items, non-GAAP net income from continuing operations was up 5.5% to $47.2 million or $3.70 per diluted share.
Turning to Slide 9. Net working capital at the end of the first quarter was $132.5 million compared with $117.4 million at the end of the fourth quarter of fiscal 2013 and $131.2 million at the end of Q1 last year. Working capital turns were 5.5 in the first quarter of fiscal 2014.
Slide 10 illustrates our debt management. As Roger discussed earlier, we ended the first quarter in a net debt position of approximately $4 million. This compares with net debt position of $35 million at the end of Q1 last year. We define net debt as funded debt less cash.
Our balance sheet leverage ratio of net debt to capital was 1.3% at the end of the quarter compared with 12.1% a year ago.
Our strong balance sheet is well positioned to meet our needs. We continue to have ample financial flexibility to fund growth, acquisitions and other strategic initiatives.
One other item that happened during the quarter related to our previously discontinued ADP business, the company recorded a $1.2 million pretax expense as a result of obligations triggered under a guarantee provided to the buyers. The obligation is related to a withdrawal from a multi-employer pension plan, which the company previously participated.
With that, I'll turn the call back to Roger.
Roger L. Fix
Thank you, Tom. Please turn to Slide 12, Food Service Equipment Group, and I'll begin our segment overview. Sales in Food Service decreased 3.6% from Q1 last year and operating income was down 34%. Overall, the lower sales year-over-year reflected soft demand in several large chains, including several quick-serve restaurants and drugstores, as well as a tough comparison with Q1 of fiscal 2013, when we had several large product rollouts.
The year-over-year decrease in profitability of $4.6 million was due to 2 issues: First, lower volume of $4 million resulted in roughly a $1 million reduction in profit; and second, we incurred a number of operational issues at the custom products business, which had a negative impact on profitability of $3.6 million. The operational issues at the custom products business revolved around unfavorable sales mix, machine downtime associated with a laser-cutting machine and an inventory write-down. We believe these are onetime issues at our custom products business and will not repeat going forward. We have put in place a number of corrective actions at the custom products business, which we believe will address the performance issues incurred during the first quarter. We've installed a state-of-the-art CNC laser, powered-metal cutting machine that is now up and running.
In addition, we're working to migrate this part of the business away from its heavy reliance on a customization model, which relies on producing very complex customized serving and merchandising counters and displays for one-off projects and towards a business model that relies more on standard products that are modified for specific applications and chain work, which are more repeatable and more standard in nature. We believe this transition in the business will improve our ability to execute on a profitable basis.
As we implement this strategy, we should see steady sequential margin improvement from quarter to quarter through the rest of fiscal 2014.
Turning to Slide 13. We're also making progress on our longer-term margin improvement initiatives in Food Service. The consolidation of our Cheyenne, Wyoming, cooking solution facility is moving ahead on schedule. We expect to substantially complete the production transfer to Mexico, South Carolina and Tennessee by the end of fiscal 2014 and to begin to realize $4 million of annualized cost savings at the beginning of fiscal 2015. We expect to record restructuring charges in fiscal 2014 in the range of $7.5 million to $8 million, about $3 million of which was a noncash impairment from the Cheyenne building recorded as planned during Q1.
At the same time, our work on the new finished goods distribution center for cooking solutions in Dallas also remains on track, refitting of the building, as we speak, and we expect the facility to be open in the second quarter of fiscal 2014.
On the top line in Food Service, the bright spot this quarter were the dollar store segment and the dealer channel in our refrigeration business. Sales in these segments were up from Q1 last year. However, margins are typically a bit lower in these segments as compared to those in the QSR, drugstore and convenience store segments. So product mix was a negative factor for us in refrigeration this quarter.
Looking at the refrigeration business longer term, the retail market is putting a heavier emphasis on the use of upright merchandising and endless display cabinets. Our key growth strategy in refrigeration is aimed at capitalizing on these opportunities.
As we discussed on past calls, our current merchandising cabinet strategy is aimed at expanding our business in the more cost-sensitive dollar store and convenience stores segments, as well as the dealer channel. We're doing this by lowering our price points through value engineering the designs and using lean manufacturing techniques on the shop floor and by adding features and capabilities that are attractive to customers in these markets.
We continue to be successful in executing on this strategy in Q1. We've had good response to our upright glass door merchandising cabinet line, in both the dollar store and drugstore chains.
It takes time for the chains to go through the necessary testing and evaluation of new products, but we're encouraged by the early positive response that we're seeing in the marketplace.
Looking forward, we're working to be more competitive in the refrigerated cabinet products we sell into the QSR, drugstore and convenience store segments by value engineering those lines as well.
In Cooking Solutions, the slower sales this quarter, year-over-year, again were do in part to the comparison with Q1 of fiscal 2013, when we had a large product rollout in this part of the business that did not repeat this past quarter. Sales of cooking equipment to the U.S. government were also slower this quarter. Although we continue to see early signs of strengthening in the U.S. retail or grocery store segment, this improvement was offset by further retail segment deterioration in the U.K.
In our Procon Pumps business, we're also continuing to be affected by the soft economy, particularly in Europe. But net sales in that business have stabilized at a level comparable to last year.
We're making progress on our strategy to drive revenue growth on the cooking side of the business by rolling out a number of great new products. We launched a new line of countertop griddles and charbroilers in Q1 that has been well received. We're also introducing a new Value Line deck oven in the current quarter, which we will think will be a good addition to our overall line.
Looking ahead, we plan to expand our portfolio of combi oven products by introducing a new Value Line combi oven and a mini combi in Q3 and the speed oven in Q4.
Overall, we continue to expect that the cost savings and growth initiatives that we're implementing in fiscal 2014 will have a significant long-term effect on our growth and profitability in the Food Service segment.
Please turn to Slide 14, the Standex Engraving Group, where sales were up 7.2% and operating income grew 4.9% from Q1 last year. We continue to see some profit drag from Brazil, which affected our profit leverage during the quarter. But we are encouraged that we're seeing sequential improvement in the performance of this business. Engraving reported improved top line performance year-over-year for the first time since the second quarter of fiscal 2013, driven by double-digit growth in mold texturizing sales on a global basis.
We did experience softness on the roll and plate engraving and machinery businesses, particularly in North America. Last quarter, we said there were signs of improvement in this part of the business as result of a housing rebound here in the U.S., but product demand for building application seems to have softened again. Based on current bookings and backlog, we anticipate that the roll engraving business will remain soft at least through Q3 of fiscal 2014.
On the other hand, we continue to believe that our mold texturizing business is very well positioned for continued growth the rest of fiscal '14, not only in North America, but in Europe and China as well. In particular, we saw the expected improvement in the North American mold texturizing bookings and backlog through the quarter, and we are very encouraged by the pipeline of future mold texturizing work in North America.
We're making good progress in ramping up the new mold texturizing facilities we opened for the last several quarters in Mexico and India. We're also seeing increased customer activity at our facilities in Korea and Brazil. At this early stage, most of this activity remains focused on running samples to the QA and accepting processes at the automotive OEMs, but we're being to see a ramp-up in production work at both locations. We continue to be very optimistic about our opportunities in both South Korea and Brazil going forward.
Strategically, we're continuing to invest in developing new mold texturizing technologies and production capabilities that expand our addressable market and differentiate Standex from our competitors. A prime example is the work we're doing to penetrate the slush molding tooling segment, an important advance versus injection molding in plastic parts manufacturing for the automotive market.
On the technology side, during the past couple of years, we've introduced next-generation nickel shell engraving methods for slush molding. This makes these techniques especially effective for producing the soft touch plastics that have recently become more popular in automotive interior design.
We're also developing advanced techniques to use lasers to directly engrave very large complex metal molds versus the traditional acid-etching techniques. From a production capability standpoint, although some of the other players in the mold texturizing business are working to develop comparable laser engraving techniques, the size of the molds we're able to texture and the quality and precision we're delivering for our customers are clearly superior to anything that our competitors can currently offer.
We currently have 2 laser engraving machines in Germany that we've been using for the past year that are generating some very good traction in the European marketplace. We have some -- we have 3 similar new machines on order. One will go into Germany, while the others will be located in North America and China.
Please turn to Slide 15, our Engineering Technologies Group. Engineering Technologies sales for the quarter grew 9.8% year-over-year, driven by strong sales in all of our end-user segments, with the exception of the spaceflight sector.
Operating income was up 23% reflecting stronger shipments and a result of cost reductions and improved productivity. The softness in the space sector reflected the lumpy nature of shipments in this part of the business. We have excellent prospects for growth on the manned spaceflight side in our development work for both NASA and our commercial customers, given the levels of quotation activity and the forward-looking signals we're seeing in those markets.
In addition, given the positive outlook for future reconnaissance and geographic positioning satellite launches, we expect to see good growth on the unmanned spaceflight side, with the Delta IV and Atlas V programs.
We had a strong quarter in the land-based turbine business, primarily due to very strong sales to one of our large OEM customers. We've been working to diversify our customer base in this part of the business. As a result, we saw a modest growth in shipments to a couple of other OEMs in this quarter as well. Nonetheless, our visibility in the land-based turbine market is fairly limited. So we remain cautious in our outlook for this part of the business.
This is also a strong quarter in aviation, where our shipments of single-piece lipskins for engine nacelles and other engine components were up from Q1 last year.
Although, historically our lipskin business has been focused on regional jets, in recent quarters, we've been pursuing new opportunities in widebody aircraft. We reported last quarter on the progress we are making on signing a long-term lipskin contract for the new version of Airbus A320 passenger jet, which is scheduled for production ramp over the next couple of years. We continue to make progress on that contract in the first quarter.
On the internal engine component side of the business, we received production orders through sub-suppliers for components on a new GE aircraft engine, which are moving into the early stages of production.
In addition, we're well along in reviewing development efforts for engine component opportunities with Rolls-Royce in Europe. And we're optimistic about being able to move into production on products for those engines early next calendar year.
Our oil and gas business and Engineering Technologies was also up substantially on a year-over-year basis in quarter 1. This growth reflects the project-focused and lumpy nature of this part of the business, which is largely driven by the timing and funding of large offshore oil and gas production floating platforms. Looking forward, we're aware of a number of oil and gas projects that we believe will have a positive effect on our sales line through fiscal 2014 and into fiscal 2015, although the precise timing is difficult to pinpoint this far in advance.
Please turn to Slide 16, Electronics. Electronics sales for the first quarter were negatively affected by softness in Europe and up only 1.1% year-over-year. With all the increase due to foreign currency effect. Our operating income increased 66% from Q1 last year. Note that operating income in the prior year included approximately $1.5 million of purchase accounting. Excluding this amount, Q1 Electronics operating income was up 13%.
We are enthusiastic about a number of significant customer-specific new product platforms that we're launching beginning in the current second quarter and continuing to the rest of fiscal 2014. These new product launches are for magnetic devices in the medical end-user market, as well as sensors for appliance and automotive applications in both the U.S. and in Europe. We're also pleased that we're beginning to see traction on our new product customer programs for sales into the domestic Chinese market. This is a result of previous investments we made in adding sales and engineering resources in China to accelerate sales growth in the region.
During the first quarter, we began to see cost savings resulting from our fourth quarter consolidation of the Standex Electronics facility in Tianjin, China and the Meder Electronics sales office in Hong Kong into the Meder manufacturing facility located in Shanghai. We continue to see -- expect to see the savings from facility consolidations, as well as purchasing savings ramp up to a $4 million annual run rate by the end of this fiscal year.
Please turn to the Hydraulics Group on Slide 17. Hydraulic segment sales were up 9.2% and operating income was up 20.9% in the first quarter. We've continued to see good success as we work to penetrate the roll-off container truck refuse market. During the first quarter, we began to see modest signs of improvement in our traditional dump truck and dump trailer end-user segments in North America. Some of this growth was related to market share gains on our part and some was due to increased demand in line with the recovery in housing and the strength in the North America oil and gas market.
In addition, we're beginning to see some traction from our new products in the garbage truck market, and we're optimistic about future growth there as well.
We completed the capacity expansion of our Tianjin, China facility during the first quarter, as planned, for Hydraulics. This enables us to continue our efforts to gain market share by exploiting our low cost position in China for both telescopic and rod cylinders.
We have a solid backlog in place for the China operation, which bodes well for sales in that business as fiscal 2014 progresses.
Please turn to Slide 18. In summary, market conditions and onetime items at our Food Service business significantly affected our first quarter results. These onetime issues are now, for the most part, behind us. And although, market conditions in food service are not as favorable as we would like, we're making progress in driving growth and margin improvement not only in Food Service, but in all of our businesses.
In addition to driving organic growth through new products in new end markets and geographies, our strong balance sheet and liquidity position allows us to pursue acquisition-driven growth as well.
Highlighted by Meder, we have demonstrated a pattern of success in executing our acquisition strategy over the past several years. We're optimistic about the status of our acquisition pipeline as we begin fiscal 2014.
We look forward to reporting further progress in this initiatives next quarter. Despite continuing end market challenges, we believe that Standex is well positioned to leverage future sales growth into stronger profitability.
With that, Tom and I will be pleased to take your questions. Operator?
[Operator Instructions] Your first question comes from the line of Beth Lilly with Gabelli.
Elizabeth Murphy Lilly - Gabelli Funds, LLC
I wanted to get a little more insight to what's going on in your Food Service Equipment Group. Your revenues were down. And Middleby reported the other day and their revenues were up, on an organic basis, close to 12%. So the decline -- can you talk about the custom products group? The business generated about $105 million in revenue this quarter. What amount of that is custom? And then, I guess, as you look going forward, you've talked about getting these -- your Food Service Equipment margins, I think, to kind of 12%, 13%. So where are you on that path? And how long do you think it will take you to get there?
Roger L. Fix
Okay. A number of questions. On the top line, the custom business represents on the order of, say, 20% of our total revenues. But in general, our revenue issue in the first quarter was really related to what chains are we on versus what chains are we not on. And it was very, what I'll call spotty, as we look at -- for example, McDonald's was down about 25%, and we've confirmed through the channel that just about everybody that supplies them was down. US Foods was one of our larger accounts, was also down double digit. Yet people like Tim Hortons and Subway were up, again, double digits. So we're seeing some, what I call, spottiness as we look across, particularly in the QSR side of the business. We reported over the last several quarters that the drugstore chains, and here we're servicing Walgreens, CVS. In particular, they've fairly significantly reduced the number of new store openings. So the focus there has been on acquisitions in the case of Walgreens, where they go over and take over a small regional chain. And then we'll be involved in retrofitting those businesses or remodels. And again, that activity is just not as robust. So you're seeing us do, particularly in Food Services, to try to enhance our penetration in some of the other segments where we've been less penetrated, if you will, over the years. And we've identified both the convenience store channel as well as the dollar store segment as good opportunities, but it takes time. As I mentioned in the script, there we have a situation where the product portfolio and the cost position of those markets is different than our traditional markets. So we're really going through an evolution, if you will. And I think as you compare then our top line performance versus others in the market segment, we have some, I think, rather unique challenges that we have to address.
Elizabeth Murphy Lilly - Gabelli Funds, LLC
So would you say then -- I mean, if you look at your competitors, and the one in particular I was referencing, are they -- do they have such a dominant share that as the chains grow, their business grows and probably have this hand-and-glove growth relationship, is that why you're unable to grow your revenues at that same rate?
Roger L. Fix
I think the message is more that we have -- some of our other competitors are more exclusively focused on the QSR chains. And over the last several years, certainly that's been where the largest growth has been. Traditionally, we have exposure to other segments. Particularly in the drug store segment, we have a very dominant position, where a lot of our competitors traditionally haven't played. And yes, if you look just at Walgreens, historically over the last 10 years, in the time frame 10 to 5 years ago, they were building 400 to, say, 450 stores a year. They're down to 200. So we're having to transition away -- not away from them, but to transition to other new segments. And again, this takes time. So that's where the introduction of new products, bringing these new products into test stores and getting that kind of experience with these new segments is really where we try to focus over the last year or so.
Elizabeth Murphy Lilly - Gabelli Funds, LLC
Okay. And then what about your operating margin?
Roger L. Fix
Again, we haven't made any specific statements about any of our segments. But if you look at our online materials, we're saying that we need to get all of our business units north of 12%, and that would apply certainly to Food Service as well.
Elizabeth Murphy Lilly - Gabelli Funds, LLC
Okay. And so how long do you think it will take you to get there?
Roger L. Fix
Well, again, we haven't made any prediction in that regard. What we are trying to do is to help people understand where we're at and where we want to go. So again, we've said that the $3.6 million, which if you do the math, is a little over 3% of operating margin in the quarter, which is a one-off, and we've got that behind us. We've said that the Cheyenne operation consolidation is going to generate around $4 million of cost savings, which is about another point of margin. So -- and again, we've given you a time frame on that. So I'll just kind of have you think about what happened in the quarter. Again we lost 3.5 points of margin roughly. We've got another point of margin coming through the Cheyenne facility. We were saying that, that will be complete by the end of fiscal '15. And then, again, we've got to get some growth out of that business as well, which will give us some volume leverage and margin improvement as a result.
[Operator Instructions] There are no further questions at this time, I'll turn the conference back over to Mr. Roger Fix for any closing remarks.
Roger L. Fix
We thank everyone for participating in the call this morning, and we look forward to giving you an update again next quarter. Thanks very much.
Thank you for participating in today's conference call. You may now disconnect.
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