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[February 01, 2013]
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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