Standex International Corporation (NYSE:SXI)
F2Q09 (Qtr End 12/31/08) Earnings Call
January 29, 2009 10:00 AM ET
David Calusdian - Executive Vice President, Sharon Merrill Associates
Roger L. Fix - President and Chief Executive Officer
Thomas DeByle - Chief Financial Officer
Good day, ladies and gentlemen and welcome to the 2nd Quarter 2009 Standex International Corporation's Earnings Conference call. My name is Michelle and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.
And I would now like to turn the call over to your host for today, Mr. David Calusdian, Executive Vice President with Sharon Merrill Associates. Please proceed.
Thank you Michelle. Please see Standex's safe-harbor passage on slide two. Matters Standex's 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; non-GAAP net income; non-GAAP income from operations; non-GAAP net income from continuing operations and free cash flow. These are non-GAAP financial measures are intended to serve as a complement to results provided in accordance with the 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 second quarter news release.
On the call today is Standex's 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
Thanks, David and good morning everyone. Let's just start by providing a brief look at our revenue and profit performance in Q2 and then review the actions we're taking to address the global economic recession that had such a sudden and significant impact on our financial performance in the quarter.
After Tom reviews the financials, I'll be back on to provide to some prospective on each business segment.
Please turn to slide three. In terms of revenues, we were down 9.7% compared with the year ago, reporting a 155.5 million in sales. Our Engineered Products Group reported a marginal year-over-year gain in sales, while Hydraulics and ADP continue to be affected by industry slowdowns.
Food service sales were affected by lower demand for our products, related to economic conditions and Engraving was affected by the general downturn as well as automotive platforms cyclicality. GAAP operating income was 6 million in the quarter, compared to 11.3 million a year ago. Non GAAP operating income, excluding the $1.1 million charge was 7.1 million.
ADP was up year-over-year while the other operating groups had negative comparisons. I will discuss each group in more detail after Tom reviews our financial results for the quarter.
Consistent with our historical focus on working capital management, we succeeded generating $17.4 million in free cash flow during the quarter. Let's outline the actions we are taking to respond to the economic slowdown that we all are dealing with right now.
Turn to slide four. Right now there's obviously a great deal of uncertainty about the global economy and companies like ours are trying to understand how our end markets will react to the economic downturn in 2009 and the impact it will have on our businesses.
With this uncertainty we are focused on the two things that we can control, cost and cash. So we are started seeing the initial but significant upsides of the economic downturn in early November we acted very quickly and aggressively to cut costs. While we are certainly not immune to the economy this quarter and our financial results are definitely not where we want them to be, we have taken the necessary steps to maximize near term profitability and enhance liquidity as weak economic conditions persist.
We are focused on five areas in order to align our cost structure with the downturn in market demand. These include-work force reductions, plant consolidations, material cost reductions and working capital management. But do note that the main manufacturing journey that we've been on over the past several years have given us the tools and flexibility to implement these actions.
First, let me address our work force reductions. Since the beginning of this fiscal year, we have reduced our U.S. based salaried staffing level by more than 190 positions or 20% of the salaried work force. About 75% of these reductions took place in December. We expect annualized savings of approximately $11 million from reduction in our salaried work force. At the same time, we've reduced the size of our direct labor by a similar percentage to align the size of the production workforce with the lower sales volumes we're experiencing.
In addition, we've announced a general hiring freeze and all non-union employee salaries will be frozen for at least 12 months. Several businesses have also implemented alternative work schedules.
On our last call, we discussed the consolidation of our Bartonville, Illinois plant into other ADP locations. Since then we've taken further actions to improve our utilization of our manufacturing infrastructure. During the second quarter we closed our Bessemer Alabama Hydraulics Group facility, consolidated these operations into our Haysville Ohio plant.
After the close of the second quarter we announced the consolidation of three additional manufacturing locations; our Food Service Group will be closing a cooking solutions facility located in New York and moving production to our operations in Mexico and Wyoming.
In our Engraving group, we have consolidated the mold texturizing production from our Detroit facility into our plant located in Canada. In our Engineered Products Group we have consolidated production from our remaining Canadian operation into existing facilities in Mexico and China.
We expect to complete the relocation of production for these consolidations during the second half of this fiscal year. The annualized savings from these consolidations will be in the range of 3.8 to $4.5 million. We expect to fully realize the benefits from this savings, beginning with the first quarter of fiscal 2010.
The third area we are attacking is achieving cost reductions from our major suppliers, including those who provide inventory items as well as MRO and services. We continue to work with our supplier base and expect these resulting savings will begin during the current third quarter and will continue to ramp up throughout the fourth quarter.
We are targeting to achieve a minimum run rate of 5 to $6 million of annual savings by the end of the fourth quarter of fiscal 2009, compared with our cost structure that was in place during the first half of the fiscal year.
Fourth, we are continuing to focus on lean manufacturing as an important tool to drive cost reductions and productivity across our ongoing operations. Our final initiative is to continue our strong focus on working capital management and cash flow generation. Our goal is to improve liquidity and make additional payments to our revolving credit facility. Additional borrowing capacity provides the financial flexibility we need in the event of a prolonged economic downturn.
As part of this initiative, we are restricting capital expenditures as appropriate. It's very important to know that these restrictions are not at the expense of driving innovation. We see innovation as a way to both improve efficiency as well accelerate growth in each of our businesses. We are also taking advantage of new ways to repatriate foreign cash.
So you can see we are very serious about getting our cost aligned with the economic realties we are facing in the near term. We expect approximately $20 million in annual cost reductions to be in place by the beginning of fiscal year 2010.
With that I will turn the call over to Tom. I will be back to review each of the operating segments in more detail later.
Good morning everyone and thanks for joining us today. Let's turn to slide five in our quarterly results.
As Roger discussed overall economic and market conditions posed a challenge to our businesses this quarter. In the second quarter of fiscal 2009, net sales were down 9.7% to 155.5 million from 172.2 million last year. This includes a negative foreign exchange impact of 2% or 3.5 million.
Turn to slide six please. Second quarter income from operations on a GAAP basis was 6 million compared with 11.3 million in the same period last year. Our second quarter income from operations this year includes a 1.1 million pretax restructuring expense, primarily related to severance expenses and facility closure. Including the second quarter charge, non-GAAP income from operations was 7.9 million in the second quarter of fiscal 2009, compared with 11.3 million in the second quarter of fiscal 2008. Due to the lower borrowings and a lower effective interest rate, interest expense for the quarter was 1.8 million compared with 2.7 million in the prior year.
Second quarter net income from continuing operations, as you can see on slide seven was 3.5 million or $0.28 per diluted share. Net income from continuing operations, excluding tax effect and restructuring charge of 708,000 was 4.2 million or $0.34 per share. This compares with 5.5 million or $0.45 per diluted share in the second quarter of fiscal 2008.
Our 2009 second quarter net income from continuing the operations reflects the tax rate of 20.8%. This compares with the tax rate of 33.5 % in the corresponding quarter of last. Second quarter fiscal 2009 net income from continuing operations benefited from a lower tax rate to a retroactive extension of the U.S. research and development tax credit.
Net income from cont... for the second quarter of fiscal 2009 was 2.1 million or $0.17 per diluted share. This compares with net income of 5.5 million or $0.45 per diluted share a year ago. Net income for the second quarter of fiscal 2009 includes the aforementioned restructuring charge as well as the 1.3 million, net of tax expense charged for discontinued operations.
Included in the discontinued operation is a charge associated with leases to the divesture of the Berean Christian Bookstores. This was partially offset by a benefit from the latest remediation estimate for the clean up site in Cleveland
You may remember that we divested Berean Christian Bookstores in 2006 as part of our Focused Diversity strategy. We sold Berean to a private equity group. In spite of the divestiture, Standex remains a guarantor of the original leases for the stores.
During the quarter, we determined that Berean is in financial distress. Although Berean continues to operate, we have decided to book an accrual for the exposure on those eight leases because we have sufficient concerns regarding their financial condition. As of today, the total exposure to the eight leases is about $8.2 million. However, the leases have a sublease provision whereby Standex can sub lease the property. Based upon our analysis of market conditions at each of the locations, the impairment of those leases would be approximately $2.9 million.
Partially offsetting the charge for Berean leases we have the benefit related to our estimate of Standex participation in remediation activities at the Cleveland. You may remember that our estimate last quarter put the cost of clean up at 5 million. As we are nearly complete with the remediation of the site we are much better positioned to provide a cost estimate and as a result have reduced our estimate to $ 3.9 million.
Turn to slide eight please. Second quarter fiscal 2009 EBITDA, including restructuring charge as I mentioned, was 10.1 million. Excluding the charges EBITDA was 11.2 million. This compares with EBITDA of 15.2 million in the second quarter of fiscal 2008.
We demonstrated strong free cash flow generation this quarter. On slide nine you can see that free cash flow was 17.4 million in the quarter. Excluding the pre-tax 1.1 million restructuring charge, cash flow was 18.5 million, compared with 6.5 million in Q2 of last year.
Turning to slide 10. You can see that we decreased working capital in the second quarter versus the first quarter of fiscal 2009. Net working capital was $126.3 million at December 31, 2008 compared with $135.8 million at September 30, 2008. The decrease is primarily due to DSO as a result of aggressive management of our accounts receivable. We define working capital as accounts receivable plus inventories plus accounts payable. Working capital turns decreased to 4.9 turns from 5.1 turns in the prior quarter, primarily due to lower sale volume.
Turn to slide 11. Our net debt which we define as short term debt plus long term debt less cash increased slightly to $114.5 million at December 31, 2008 from 106 million at June 30, 2008. The company's balance sheet leveraged ratio of net debt-to-capital was 35.1% at the end of the quarter compared with 32.2% at June 30, 2008.
In the first half of the year, depreciation and amortization expense was 8.1 million, essentially flat with the prior year. Reflecting our efforts to restrict capital expenditures going forward, we anticipate our CapEx for the second half of the year to range from 2 million to 2.5 million.
As Roger mentioned in his introduction, we continue to focus on working capital management and cash flow generation with the goal of improving liquidity and making additional payments on our company's revolving credit facility. For example as part of our ongoing working capital management efforts we are taking actions such as studying of routine working capital calls with our Division manager to analyze actions, they are taking to improve DSO and inventory churns at each manufacturing occasion.
We'll also be restricting capital expenditures throughout the second half of fiscal 2009 while being very careful to maintain our investments in innovation that will be so critical to the future growth of our company. We are also working on repatriating foreign cash by taking advantage of the new IRS rule.
Operationally and financially we are doing every thing we can to ensure that Standex continues to generate cash and maintains strong liquidity.
So with that I'll turn the call back to Roger and you turn to slide 12.
Thank, Tom. Let me take you through how each of our operating groups performed in the quarter and discuss what we see ahead of us.
Let's start with Food Service and you can turn to slide 13 please.
Food Service Equipment's second quarter revenues fell by 7.3% year-over-year as the economic downturn led to cutbacks in industry spending on new food service equipment, especially on the hot side of the business. Operating income was down 35.7% year-over-year primarily due to lower sales volume and an unfavorable sales mix.
Two factors caused the unfavorable sales mix. First, we saw lower sales of our higher margin Cooking Solution Group products. Second, on the cold side we had fewer sales of a higher margin Food Service reach-in cabinets and scientific sales and during the prior year quarter we shipped a very large scientific walk-in project that did not repeat in the current quarter.
We currently affected our end user market segments to very different extents. For example, our Cooking Solutions business which includes the APW Wyott, Bakers Pride, BevLes and BKI Brands felt the impact more so than our Refrigerated Solutions Group because a significant percentage of the sale in the hot side of our Food Service Group are to individual restaurant operators, such as pizza houses, single store restaurants and also the smaller stocking dealers.
As you can expect, these businesses tend to cut back more quickly at the sign of an economic downturn. On the other side of the spectrum from the small amount of top type restaurants have large chains that we sell to. These include well known quick service restaurants such as Yum! Brands and McDonald's.
Another example of where we have not experienced significant sales slowdowns is in the retail chains such as drug stores. These type of chains have more financial flexibility and their expansion plans tend to be more consistent over time, although not immune to modification.
We continue to see good sales volume at quick serve restaurant business. For example we have an ongoing contract to modify the grills on a large number of Taco Bell restaurants which we expect to be a nine to twelve month project for us.
One highlight for the quarter in food service is that growth we're seeing in the institutional side of our business. As we've shared with you on past calls, one market we sell into is the large institutional food service providers, that sell to stadiums as well as University and hospital cafeterias. These institutions have long-term plans and budgets. And as a result their expansion plans are not as exposed to the economy as some others are.
We recently secured a few large deals in this area, such as the new Twins Baseball Stadium (ph), and the New Dallas Cowboys Stadium and a large cafeteria project at Birmingham University.
As we look to the second half of the year and beyond, we are focusing on achieving market share gains and cost reductions across our Food Service Group even as the economy continues to have affect on this business.
Turn to slide 14. You can see that the Engraving Group sales decreased by 15.8% year-over-year and operating income was up 38.1%. We are actually feeling more positive about this business than our numbers might indicate. During the quarter we saw a significantly less mold texturizing automotive work internationally and a decrease in North American automotive OEM sales as well. Most of the reduced automotive sales we experienced during the second quarter are associated with the normal cyclicality we have historically experienced in this market segment, although, we have seen some automotive projects delayed as well.
The turmoil in that industry right now should lead to a reorganization of product lines, including revamping of older models and the introduction of new models. Over the long term, this will drive demand for the mold texturizing we provide for tooling necessary to support the new platform launches by automotive OEM customers.
One bright prospect for Engraving Group is the work we have been doing in developing new technologies for our premium automotive customers in Europe. We recently introduced two new technologies that enables Spandex Engraving to offer our customers the ability to texturize all of the exposed surfaces in the interior of their premium models; from the dashboards and upholstery to the instrument panel and synthetic leather, passenger seats. Instead of going to three or more different suppliers, OEMs can now have all their engraving needs met through Standex. These premium processes create superior finishes to the interiors of automobiles and it should create solid long term growth opportunities for the Engraving group.
Looking ahead we have good backlog in the North American Private Engraving group going into the second half of the year. However we expect international sales to continue to be weak due to the lack of the automotive platform work in the second half of fiscal '09. Although the non automotive markets will continue to struggle due to the economy, we are pleased with the progress we have been making in taking market share into those markets.
For example we have recently started to work on two contracts, both of which was ship in the second half of fiscal 2009. The first is from a leading U.S. residential flooring manufacturer and the second is a contract of machinery and rolls for a consumer goods packaging company in Mexico. On a related note our Engraving group's Innovent business performed very well in the second quarter due to a success in diversifying its product line and expanding it's geographic sales penetration into emerging countries. So while there's definitely an uncertainty regarding economic and market conditions that our engraving business units will face in the second half of the fiscal year, we expect that our expansions in new markets and geographies along with introduction of new technologies will be strong growth drivers in the future.
Turn to slide 15 please. Our Engineered Products Group reported 15% year-over-year decline in operating profitability on flat sales. Spincraft reported steady revenue growth in the quarter as we continue to see good demand from our energy, aerospace and aviation end markets. However year-over-year operating income comparisons continue to be challenged by contract milestone payments related to two non-recurring contracts that were recorded in the second quarter of fiscal 2008.
During the second quarter, we continued work on the aerospace contracts we secured last quarter with the Boeing Lockheed ULA joint venture for the Delta IV and Atlas V rockets. Hardware will be shipped over the next several years.
Turing to Electronics business, sales were down year-over-year as softness in the housing, automotive sectors offset any gains we've made in industrial and aviation aerospace markets. Despite the low year-over-year sales we reported double-digit operating income growth from electronics as result of plant consolidations, material substitutions, favorable commodity pricing and favorable currency exchange rates in the quarter.
On slide 16, we discuss the Hydraulics group. Hydraulics Products Group revenues in the quarter declined by 32% year-over-year and we posted an operating loss in Q2. The downturn in the U.S. off-road heavy construction vehicle market was exacerbated by liquidity and capital constraints in the second quarter.
As available capital dried up manufacturing activities stalled for both our traditional truck building OEMs and export sales as well. In response to difficult economic environment we streamlined our workforce across the Hydraulics operation by closing one manufacturing facility in Alabama, consolidating its operations into our main Hydraulic Product Group plant in Haysville, Ohio.
During the quarter we continued to make progress in opening our new manufacturing facility in Tianjin, China and expect to export our first shipments of telescopic hoists to Europe and Korea in the current third quarter. This facility should be profitable in fiscal 2010 and beyond.
In addition to broadening our geographic presence we've been more aggressive in diversifying sales beyond our established strongholds, the dump-truck and dump-trailer construction equipment market. We just begun to sell our product into a number of applications for our high performing cylinders. For example, our mobile hydraulic cylinders can be used to raise and lower turbines during maintenance operations and that our chip compacters (ph) for raising and lowering coal derricks (ph).
Turn to slide 17 please. Air Distribution Product Group sales were down by 15.5% as a result of the continued severe downturn in the residential construction market. We are out performed in the market and we continued to penetrate new major HVAC wholesalers in targeted geographies. During the second quarter, we began selling products to several new HVAC customers in the Southeastern portion of the U.S.
We are pleased with the operating profitability ADP demonstrated this quarter. Price increases, favorable material cost and savings from plant consolidations very favorably impacts our bottom line. Although we know that this trend is not sustainable throughout the year.
As we look to the second half of fiscal '09 we are cautious about our outlook for ADP as a result of three trends we are seeing in the market. First, competitors are starting to drop their price. Second we have started to consume higher cost metal that we have currently have on hand. And third how the sales have continued to trend downward over the past several months.
Let's turn to our summary on slide 18. I will only give you three thoughts. First, our second quarter results were significantly affected by the worldwide economic downturn. Second, we took swift and aggressive actions to reduce our cost structure and focused on cash generation and maximizing profitability. We've reduced our US based salaried work force by 20% saving $11 million on an annualized basis. We've consolidated one facility in the second quarter and we'll complete three additional plant consolidations in the second half of fiscal 2009, generating annual savings between 3.8 and $4.5 million.
WE continue to make progress in reducing the cost of the materials and services we procure, which should give us an annualized savings between 5 and $6 million. With all these initiatives we will continue to aggressively focus on working capital management and cash flow generation with the intent of enhancing our liquidity.
And third, while visibility remains difficult, we expect that the world-wide economic slowdown will continue to have an effect on our financial results for the second half of the year. We anticipate this will be especially true in the third quarter which is historically seasonally slow for us.
We'll also report restructuring expense in the third quarter associated with the plant consolidations we discussed today. The cost reductions we've implemented will begin to take effect from the current third quarter and we expect to have approximately $20 million of cost savings in place by the beginning of fiscal 2010. As we manage Standex to maximize short term profitability, we will be innovating each of our businesses to expand our leadership position and capitalize on growth opportunities in each of our markets.
With that we are available to take your questions. Operator please?
(Operator Instructions). Your first question comes from the line of (inaudible). Please proceed.
Yes, good morning.
Hi, John how are you?
Real good, good. Couple of quick questions. And you have done a good job on the working capital but it appears that the inventory is a little bit on the high side. You mentioned with regard to the distribution business that you have some high cost inventory. Are there other segments where you have some high cost inventory that you have to work through? And can you talk about what you think as reasonable your total level of inventory should be, given these level of the business?
Sure, the issue on the inventory is really related to the suddenness with which our sales declined. We have really across our business units lead times on materials that may vary from anywhere from three or four weeks to as much as 12 weeks or more. And with the suddenness in the downturn we had a lot of material on order that began to continue to flow into our inventories that frankly we don't need at this current point in time. So the increase in inventories is almost exclusively in the raw area, about 6 to $7 million increase in raw. That's really an opportunity as we go forward. One of the things that we're doing is obviously changing our procurement activities to reflect a lower sales volume and we'd expect to burn that inventory off the next couple of quarters and get our inventory more in line with the volumes we're currently seeing.
The other question about the high cost of materials, we really don't have high cost materials in inventory in the other divisions. The reason for that is our ADP business buys direct from mills most of which are international with lead times that may be anywhere from three to five months.
So again we have a lead like phenomenon as far as inventory in that business. All of our other units are basically buying from domestic suppliers that are relatively well priced or we can make more rapid changes to our procurement patterns.
Okay and my other question was in this Food Service Business in your release you talked about the objective of both improving pricing and gaining market share. That almost seems like the unachievable objective in this environment. Can you talk about why you think that that might be achievable?
Well, we have more recently implemented price increases that haven't fully gone through our P&L. So what we are referring to there is that as we go through the 12 months and we lap our quarterly performance we should see the favorable benefit from pricing.
And you feel that it's ticking up in that industry?
At this point of time it's ticking.
Thank you, John.
(Operator Instructions) Gentlemen, we appear to have no further questions at this time.
If no further questions, thanks for your attention. We look forward to talking to you next quarter. Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.
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