Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 31, 2002 Commission File Number 1-7233
STANDEX INTERNATIONAL CORPORATION
(Exact name of Registrant as specified in its Charter)
DELAWARE 31-0596149
(State of incorporation) (I.R.S. Employer Identification No.)
6 MANOR PARKWAY, SALEM, NEW HAMPSHIRE 03079
(Address of principal executive office) (Zip Code)
(603) 893-9701
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. YES X
NO
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12.b-2).
YES X NO
The number of shares of Registrant's Common Stock outstanding on
December 31, 2002 was 11,998,935.
STANDEX INTERNATIONAL CORPORATION
I N D E X
Page No.
PART I. FINANCIAL INFORMATION:
Item 1.
Condensed Statements of Consolidated Income for
the Three and Six Months Ended December 31,
2002 and 2001 2
Condensed Consolidated Balance Sheets,
December 31, 2002 and June 30, 2002 3
Condensed Statements of Consolidated Cash Flows
for the Six Months Ended December 31, 2002 and
2001 4
Notes to Condensed Consolidated Financial
Statements 5-10
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-19
Item 3.
Quantitative and Qualitative Disclosures About
Market Risk 20
Item 4.
Controls and Procedures 20
PART II. OTHER INFORMATION:
Item 4.
Submission of Matters to a Vote of Security
Holders 21
Item 6.
Exhibits and Reports on Form 8-K 21
PART I. FINANCIAL INFORMATION
STANDEX INTERNATIONAL CORPORATION
Condensed Statements of Consolidated Income
(In thousands, except per share data)
Three Months Ended Six Months Ended
December 31 December 31
2002 2001 2002 2001
Net sales $149,205 $149,927 $296,389 $293,637
Cost of sales 99,041 97,416 199,579 195,213
Gross profit 50,164 52,511 96,810 98,424
Operating Expenses:
Selling, general and
administrative expenses 41,370 40,344 77,845 74,293
Other expense, net 1,306 - 1,306 -
Restructuring cost 115 - 1,029 -
Total operating
expenses 42,791 40,344 80,180 74,293
Income from operations 7,373 12,167 16,630 24,131
Interest expense (1,831) (2,101) (3,471) (4,549)
Other, net 169 308 (9) 44
Income before income taxes 5,711 10,374 13,150 19,626
Provision for income taxes 2,170 3,996 4,997 7,750
Income before cumulative
effect of a change in
accounting principle 3,541 6,378 8,153 11,876
Cumulative effect of a change
in accounting principle - - - (3,779)
Net income $ 3,541 $ 6,378 $ 8,153 $ 8,097
Earnings per share: (before
cumulative effect of a
change in accounting
principle):
Basic $ .29 $ .53 $ .67 $ .98
Diluted $ .29 $ .52 $ .67 $ .97
Earnings per share: (after
cumulative effect of a
change in accounting
principle):
Basic $ .29 $ .53 $ .67 $ .67
Diluted $ .29 $ .52 $ .67 $ .66
Cash dividends per share $ .21 $ .21 $ .42 $ .42
See notes to condensed consolidated financial statements.
STANDEX INTERNATIONAL CORPORATION
Condensed Consolidated Balance Sheets
(In thousands)
December 31 June 30
2002 2002
ASSETS
Current assets
Cash and cash equivalents $ 10,929 $ 8,092
Receivables, net 85,330 93,219
Inventories 91,231 92,931
Prepaid expenses 10,435 4,570
Total current assets 197,925 198,812
Property, plant and equipment 278,884 273,630
Less accumulated depreciation 168,504 160,738
Property, plant and equipment, net 110,380 112,892
Other assets
Prepaid pension cost 48,281 47,405
Goodwill, net 36,525 36,250
Other 17,931 10,680
Total other assets 102,737 94,335
Total $411,042 $406,039
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings and current portion
of long-term debt $ 1,851 $ 82,221
Accounts payable 36,680 35,209
Income taxes 2,689 1,221
Accrued expenses 39,956 36,128
Total current liabilities 81,176 154,779
Long-term debt (less current portion
included above) 118,531 50,087
Deferred income taxes and other liabilities 27,255 22,741
Stockholders' equity
Common stock 41,976 41,976
Additional paid-in capital 12,465 12,075
Retained earnings 387,632 384,589
Unamortized value of restricted stock (107) (655)
Accumulated other comprehensive loss (4,698) (8,473)
Treasury shares (253,188) (251,080)
Total stockholders' equity 184,080 178,432
Total $411,042 $406,039
See notes to condensed consolidated financial statements.
STANDEX INTERNATIONAL CORPORATION
Condensed Statements of Consolidated Cash Flows
(In thousands)
Six Months Ended
December 31
2002 2001
Cash flows from operating activities:
Net income $ 8,153 $ 8,097
Cumulative effect of a change in accounting
principle 3,779
Depreciation and amortization 6,844 6,604
Net changes in operating assets and liabilities 5,667 2,167
Net cash provided by operating activities 20,664 20,647
Cash flows from investing activities:
Expenditures for property and equipment (4,041) (7,227)
Expenditures for acquisitions (1,559) -
Proceeds from sale of real estate 5,293 -
Other (59) 48
Net cash used for investing activities (366) (7,179)
Cash flows from financing activities:
Repayment of debt (36,925) (7,373)
Proceeds from additional borrowings 25,000 5,598
Cash dividends paid (5,110) (5,069)
Reacquisition of shares-open market - (22)
Reacquisition of shares-stock incentive
programs and employees (3,237) (3,286)
Other, net 2,068 1,332
Net cash used for financing activities (18,204) (8,820)
Effect of exchange rate changes on cash 743 (6)
Net change in cash and cash equivalents 2,837 4,642
Cash and cash equivalents at beginning of year 8,092 8,955
Cash and cash equivalents at December 31 $ 10,929 $ 13,597
Supplemental disclosure of cash flow information:
Cash paid during the six months for:
Interest $ 3,333 $ 5,293
Income taxes $ 3,529 $ 5,874
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Management Statement
The financial statements as reported in this Form 10-Q reflect all
adjustments (including those of a normal recurring nature) which are, in
the opinion of management, necessary to a fair statement of results for
the three and six months ended December 31, 2002 and 2001.
These financial statements should be read in conjunction with the Annual
Report on Form 10-K, and in particular the audited financial statements,
for the fiscal year ended June 30, 2002. Accordingly, footnote
disclosures that would substantially duplicate the disclosures contained
in the latest audited financial statements have been omitted from this
filing.
2. Non-U.S. Adjustment
In July 2002, the Company conformed the year end of its non-U.S.
operations which had previously reported on a one month lag. Total
additional sales as a result of this conformation of year end were
$4.4 million for the six months. The impact to net income was not
significant.
3. Inventories
Inventories at December 31 and June 30, 2002 are comprised of (in
thousands):
December 31 June 30
Raw materials $ 33,215 $ 33,257
Work in process 18,335 21,779
Finished goods 39,681 37,895
Total $ 91,231 $ 92,931
4. Debt
Debt is comprised of (in thousands):
December 31 June 30
2002 2002
Bank credit agreements $ 45,189 $ 74,732
Institutional investors
5.94% to 7.13% (due 2003-2012) 71,428 53,571
Other 3.0% to 4.85%
(due 2003-2018) 3,765 4,005
Total 120,382 132,308
Less current portion 1,851 82,221
Total long-term debt $118,531 $ 50,087
The Company's loan agreements contain a limited number of provisions
relating to the maintenance of certain financial ratios and restrictions
on additional borrowings and investments. The most restrictive of these
provisions requires that the Company maintain a minimum ratio of
earnings to fixed charges, as defined, on a trailing four quarters
basis.
In October 2002, the Company completed a private placement of $25
million aggregate principal amount of 5.94% Senior Notes due October 17,
2012. The Notes are unsecured and carry an average life of
approximately seven years. Proceeds were used to repay debt and for
general working capital purposes.
On February 7, 2003, the Company entered into a 3-year, $130 million
revolving credit facility (RCF) replacing the existing facility which
was to expire in May 2003. Proceeds under the agreement may be used for
general corporate purposes or to provide financing for acquisitions.
The agreement contains certain covenants including limitations on
indebtedness and liens. Borrowings under the agreement bear interest at
a rate equal to the sum of a base rate or a Eurodollar rate, plus an
applicable percentage based on the Company's consolidated leverage
ratio, as defined by the agreement. The effective interest rate would
have been 2.4% if there had been borrowings under the agreement on the
date the agreement was signed. Borrowings under the agreement are not
collateralized. The facility will expire in February 2006.
The Company has $43,700,000 in unsecured short-term borrowings. Since
these may be refinanced by the Company on a long-term basis under the
new revolving credit agreement, the short-term borrowings, which are not
expected to be paid within a year, are classified as long-term debt.
Debt is due as follows by fiscal year: 2003, $1,595,000; 2004,
$7,502,000; 2005, $7,143,000; 2006, $50,842,000; 2007, $3,571,000; and
thereafter, $49,729,000.
5. U.S. Pension Plan Credits
In the fiscal year ended June 30, 2002, the Company recorded a net
pension credit of $2.9 million for its defined benefit U.S. pension
plans. The Company expects to report a pension credit of approximately
$770,000 in the current fiscal year.
6. Earnings Per Share Calculation
The following table sets forth the computation of basic and diluted
earnings per share (in thousands):
Three Months Ended Six Months Ended
December 31 December 31
2002 2001 2002 2001
Income before
cumulative effect of a
change in accounting
principle $3,541 $6,378 $ 8,153 $11,876
Cumulative effect of a
change in accounting
principle - - - (3,779)
Net income $3,541 $6,378 $ 8,153 $8,097
Basic - Average Shares
Outstanding 12,072 12,129 12,080 12,142
Effect of Dilutive Securities-
Stock Options 154 161 161 165
Diluted - Average Shares
Outstanding 12,226 12,290 12,241 12,307
Earnings per share (before
cumulative effect of a change
in accounting principle):
Basic $ .29 $ .53 $ .67 $ .98
Diluted $ .29 $ .52 $ .67 $ .97
Earnings per share (after
cumulative effect of a
change in accounting
principle):
Basic $ .29 $ .53 $ .67 $ .67
Diluted $ .29 $ .52 $ .67 $ .66
Cash dividends per share have been computed based on the shares
outstanding at the time the dividends were paid. The shares (in
thousands) used in this calculation for the three and six months ended
December 31, 2002 and 2001 were as follows:
2002 2001
Quarter 12,038 12,035
Year-to-date 12,167 12,069
7. Adoption of SFAS Nos. 144, 145 and 146
Effective July 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) Nos. 144, 145 and 146. SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets,"
creates one accounting model, based on the framework established in SFAS
No. 121, to be applied to all long-lived assets including discontinued
operations. The impact of the adoption of SFAS No. 144 was not
significant.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, amendment
to FASB Statement No. 13, and Technical Corrections," among other
things, restricts the classification of gains and losses from
extinguishment of debt as extraordinary to only those transactions that
are unusual and infrequent in nature as defined by APB Opinion No. 30 as
extraordinary. There was no impact from the adoption of this SFAS.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs To Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The SFAS
requires that a liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. The Company
announced in October 2002 that restructuring charges in the range of $11
to $12 million (pre-tax) would be recorded over the next 18 months (see
below). If this SFAS had not been adopted, a significant portion of
these charges would have been recorded in the current six month period
instead of the $1.0 million (pre tax) which has been recorded.
8. Other Expenses, Net
During the current quarter, the Chief Executive Officer and the
Executive Vice President/Operations elected early retirement. As
participants in certain executive life insurance plans, they were
entitled to certain plan-specified benefits. The charges related to
these benefits include costs that previously were being amortized to an
anticipated retirement age of 65, the net present value of a conversion
feature and a retirement bonus. The majority of these benefits will be
paid over the next ten years, and, accordingly, the total benefits have
been discounted to their present value of $5.6 million, which is
included in the caption "Other expenses, net" in the Condensed
Statements of Consolidated Income.
Also included in this caption is a gain ($4.3 million) on the sale of a
manufacturing facility of a UK subsidiary which was completed in
October, 2002. The sale is part of the Company's realignment strategy.
9. Restructuring
In October 2002 the Company announced it was incurring restructuring
charges over the next eighteen months in the amount of $11 to $12
million before taxes. The restructuring plan involves the (1) disposal,
closing or elimination of certain under-performing and unprofitable
operating plants, product lines, manufacturing processes and businesses;
(2) realignment and consolidation of certain marketing and distribution
activities; and (3) other cost containment actions, including selective
personnel reductions. The charges will be recorded in the Condensed
Statements of Consolidated Income under the caption "Restructuring
costs." The components of the total estimated charges include
involuntary employee severance and benefits costs totaling $4,772,000,
asset impairments of $1,773,000 and shutdown costs of $4,812,000.
The Company has early adopted SFAS No. 146 (described above), and,
accordingly, these charges will be recorded generally when a liability
is incurred or a severance plan is initiated. A summary of the charges
is as follows (in thousands):
Three Months Ended December 31, 2002
Involuntary
Employee
Severance and Asset Shutdown
Benefits Costs Impairment Costs Total
Cash expended $ 314 - $ 115 $ 429
Accrued (314) - - (314)
Total expense $ - - $ 115 $ 115
Six Months Ended December 31, 2002
Involuntary
Employee
Severance and Asset Shutdown
Benefits Costs Impairment Costs Total
Cash expended $ 323 - $ 224 $ 547
Accrued 482 - - 482
Total expense $ 805 - $ 224 $ 1,029
10. Contingencies
The Company is a party to various claims and legal proceedings related
to environmental and other matters generally incidental to its business.
Management has evaluated each matter based, in part, upon the advice of
its independent environmental consultants and in-house counsel and has
recorded an appropriate provision for the resolution of such matters in
accordance with SFAS No. 5, "Accounting for Contingencies." Management
believes that such provision is sufficient to cover any future payments,
including legal costs, under such proceedings.
11. Accumulated Other Comprehensive Loss
The change in accumulated other comprehensive loss is as follows (in
thousands):
Three Months Ended Six Months Ended
December 31 December 31
2002 2001 2002 2001
Accumulated other
comprehensive loss -
beginning $(6,522) $(8,717) $(8,473) $(10,134)
Foreign currency
translation adjustment 1,687 (1,824) 3,537 (302)
Change in fair market value
of interest rate swap
agreements 137 325 238 220
Accumulated other
comprehensive loss at
December 31 $(4,698) $(10,216) $(4,698) $(10,216)
12. Income Taxes
A reconciliation of the U.S. Federal income tax rate to the effective
income tax rate is as follows:
Three Months Ended Six Months Ended
December 31 December 31
2002 2001 2002 2001
Statutory tax rate 35.0% 35.0% 35.0% 35.0%
Non-US 1.1% 0.8% 0.8% 1.3%
State taxes 3.2% 2.4% 3.0% 2.6%
Other including change in
contingency (1.3)% 0.3% (0.8)% 0.6%
Effective income tax rate 38.0% 38.5% 38.0% 39.5%
13. Industry Segment Information
The Company is composed of three business segments. Net sales include
only transactions with unaffiliated customers and include no
intersegment sales. Operating income by segment excludes general
corporate expenses, and interest expense and income.
Net Sales
Three Months Ended Six Months Ended
December 31 December 31
Segment 2002 2001 2002 2001
Food Service $ 32,589 $ 32,581 $ 70,559 $ 68,954
Industrial 85,740 82,976 173,650 167,483
Consumer 30,876 34,370 52,180 57,200
Total $149,205 $149,927 $296,389 $293,637
Income From Operations
Three Months Ended Six Months Ended
December 31 December 31
Segment 2002 2001 2002 2001
Food Service $ 1,536 $ 1,956 $ 4,742 $ 5,239
Industrial 10,576 10,160 20,894 20,443
Consumer 309 2,858 513 3,989
Restructuring (115) - (1,029) -
Other expense, net (1,306) - (1,306) -
Corporate (3,627) (2,807) (7,184) (5,540)
Total $ 7,373 $12,167 $ 16,630 $24,131
14. Derivative Instruments and Hedging Activities
Standex manages its debt portfolio by using interest rate swaps to
achieve an overall desired position of fixed and floating rate debt to
reduce certain exposures to interest rate fluctuations. Standex
designates its interest rate swaps as cash flow hedge instruments, whose
recorded value in the consolidated balance sheet approximates fair
market value. The Company assesses the effectiveness of its hedge
instruments on a quarterly basis. For the quarter ended December 31,
2002, the Company completed an assessment of the cash flow hedge
instruments and determined these hedges to be highly effective. The
Company also determined the fair market value of its interest rate swap.
The change in value, adjusted for any inefficiency, was recorded to
other comprehensive income and the related derivative liability. For
the quarter ended December 31, 2002 the increase in value totaled
$137,000 and the ineffective portion of the hedge was immaterial.
15. Acquisitions
The Company purchased, as of September 30, 2002, substantially all the
assets of Cincinnati, Ohio-based CIN-TRAN, Inc. a manufacturer of
custom UL/CSA approved low-frequency transformers. In December, 2002
Millennium Molds, a repairer of injection molds, was acquired. The
combined purchase price of these acquisitions was $1.6 million, and
their combined revenues totaled approximately $4.3 million. The first
acquisition will be fully integrated with Standex Electronics, and the
latter acquisition will become part of Standex Engraving. Both
acquisitions are part of the Company's Focused Diversity strategy to
seek bolt-on acquisitions for growth platform companies.
STANDEX INTERNATIONAL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Statements contained in the following "Management's Discussion and
Analysis" 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 "may," "will," "expect," "believe,"
"estimate," "anticipate," "assume," "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 uncertainties in competitive pricing pressures or marketing
of new products, failure to achieve the Company's acquisition, disposition
and restructuring goals in the anticipated timeframe, unforeseen volatility
in financial markets, general domestic and international business and
economic conditions, significant changes in domestic and international
fiscal policies or tax legislation and market demand.
MATERIAL CHANGES IN FINANCIAL CONDITION
Cash Flow
During the first six months of fiscal 2003 operating activities generated
$20.7 million in cash flow, almost identical to the $20.6 million for the
comparable period in fiscal 2002. The Company redeployed those resources
by investing $4.0 million in plant and capital equipment while returning
$5.1 million to shareholders through cash dividends and reducing net debt
by $14.8 million. Capital expenditures declined by $3.2 million as
compared to the first six months of last year as the Company reacted to the
downturn in the economy. Capital expenditures are expected to total less
than $10 million for the current fiscal year.
In addition to measuring the cash flow generation or usage based upon
operating, investing, and financing classifications included in the
Condensed Consolidated Statement of Cash Flows, the Company also measures
free cash flow. Free cash flow is defined as cash flow from operating
activities less capital expenditures and acquisitions. The Company
generated free cash flow of $15.1 million in the first six months of fiscal
2003 compared with $13.4 million in the same period of fiscal 2002.
Capital Structure
The following table sets forth the Company's capitalization at December 31
and June 30, 2002:
December 31 June 30
Short-term debt $ 1,851 $ 82,221
Long-term debt 118,531 50,087
Total Debt 120,382 132,308
Less cash 10,929 8,092
Total net debt 109,453 124,216
Stockholders' equity 184,080 178,432
Total capitalization $293,533 $302,648
The Company's net debt decreased by $14.8 million to $109.5 million at
December 31, 2002. The Company's net debt to capital percentage is 37.3%
at December 31, 2002 down from 41.0% at June 30, 2002.
In October 2002, the Company completed a private placement of $25 million
aggregate principal amount of 5.94% Senior Notes due October 17, 2012. The
Notes are unsecured and carry an average life of approximately seven years.
Proceeds were used to repay debt and for general working capital purposes.
In February 2003 the Company entered into a 3-year, $130 million revolving
credit facility (RCF) replacing the existing facility which was to expire
in May 2003. Proceeds under the agreement may be used for general
corporate purposes or to provide financing for acquisitions. The agreement
contains certain covenants including limitations on indebtedness and liens.
Borrowings under the agreement bear interest at a rate equal to the sum of
a base rate or a Eurodollar rate, plus an applicable percentage based on
the Company's consolidated leverage ratio, as defined by the agreement.
Borrowings under the agreement are not collateralized. The facility will
expire in February 2006.
The Company has $43.7 million in unsecured short-term borrowings. Since
these may be refinanced by the Company on a long-term basis under the new
revolving credit agreement, the short-term borrowings, which are not
expected to be paid within a year, are classified as long-term debt.
OPERATIONS
Quarter Ended December 31, 2002
As compared to the Quarter Ended December 31, 2001
Summary
Net sales for the quarter ended December 31, 2002 were $149.2 million,
essentially the same amount as the same quarter in fiscal 2002. The
effect, on net sales, of changes in the average foreign exchange rates was
not significant.
Net earnings of $3.5 million were down 44% from the comparable quarter in
fiscal 2002. Negatively impacting earnings were several one-time charges
which included the costs associated with the restructuring and realignment
program and the expenses associated with the retirement of two senior
executives. These were partially off-set by the sale of a manufacturing
facility in the UK. The effective tax rate for the quarter was 38.0%
versus 38.5% last year.
The performance of the Industrial and Food Service Segments were flat as
compared to the prior year. However, the Consumer segment was negatively
impacted by weak consumer demand, softer than expected holiday sales and
higher marketing expenses required to launch a new product and to
strengthen mailing lists. The Consumer Segment shortfall depressed
operating income by $2.5 million.
Industrial Segment
Sales for the Industrial Segment were $85.7 million versus $83.0 million
last year. The improvement was the result of strengthening in the
engraving business due to an increase in orders from automotive customers,
a good performance from the aerospace and energy businesses and continued
level of activity in the HVAC business. However, the capital equipment-
related products continued to experience weak demand.
The gross profit margin remained steady at 31%, and overhead expenses were
in line with the sales increase. Operating income rose four percent.
Backlog, an important indicator of the future of this group, was 20% higher
than last year.
Food Service Segment
Sales were flat for this segment for the second fiscal quarter at $32.6
million. Early signs have appeared that the markets for the food service
industry have begun to firm up. The Company believes that several
drugstore and quick-service restaurant customers, which are supplied by the
Food Service Segment, have begun to plan for an increased number of new
store openings in the next twelve months. However, some customers continue
to be cautious about increasing their capital expenditures.
A decline from 30% to 26% in gross profit margin was experienced by this
group due to a change in product mix to lower-margin products and to the
disruption and duplicate expenses related to the transfer of USECO's
manufacturing operations to the Master-Bilt facility. Cost cutting
partially off-set the gross margin decrease, and resulted in a reduction in
operating income of over $400,000.
Backlog for the group is up over 20% versus prior year. Historically the
second and third quarters are the slowest for this segment. The first and
fourth fiscal quarters are the prime construction periods for many
customers. The market activity at that time will lead to a better
assessment of the recovery of the food service industry and its ability to
grow.
Consumer Segment
Sales for this segment were down ten percent ($30.9 million versus $34.4
million), while operating income dropped by almost $2.5 million. The
results of the mail order business were negatively impacted by weak
consumer demand and the shorter holiday gift season; higher marketing
expenses were incurred to reach new customers, but did not yield the
expected results. The bookstore and publishing businesses also experienced
weak consumer and church customer demand through-out the quarter.
Additionally, marketing expenses increased in the publishing unit due to
the launch of a new product.
The sales volume decline registered a $1.6 million drop in gross profit, a
decrease in gross margin of $350,000 and increased overhead expenses
(primarily marketing) of $550,000 resulted in a fall in operating income of
$2.5 million.
Increased cost reduction activity is being reviewed for implementation
beginning in the third quarter.
Restructuring
The restructuring program is progressing on plan. Expenses for the quarter
were $115,000 reflecting the completion of the integration of USECO
manufacturing activities into the Master-Bilt operations during the
quarter. This represents the first significant step of the restructuring
program and is expected to yield savings due to lower labor costs and
leveraging of fixed cost infrastructure. In addition, the electronics
division has initiated the consolidation of the recent CIN-TRAN, Inc.
acquisition by relocating manufacturing activities to Mexico and Canada.
Other Expense, Net
During the current quarter, the Chief Executive Officer and the Executive
Vice President/Operations elected early retirement. As participants in
certain executive life insurance plans, they were entitled to certain plan-
specified benefits. The charges related to these benefits include costs
that previously were being amortized to an anticipated retirement age of
65, the net present value of a conversion feature and a retirement bonus.
The majority of these benefits will be paid over the next ten years, and,
accordingly, the total benefits have been discounted to their present
value of $5.6 million, which is included in the caption "Other expenses,
net" in the Condensed Statements of Consolidated Income.
Also included in this caption is a gain ($4.3 million) on the sale of a
manufacturing facility of a UK subsidiary which was completed in October,
2002. The sale is part of the Company's realignment strategy.
Corporate
This segment increased its expenses by $820,000 for the quarter. This
included several items such as one time duplicate salaries of $350,000, the
cost of the annual Management Conference ($228,000) which was not held last
year due to the September 11th terrorists' attack and net divisional
expenses intentionally not allocated to the divisions ($148,000).
Six Months Ended December 31, 2002
As compared to the Six Months Ended December 31, 2001
Summary
Net sales for the current six months of $296.4 million were slightly more
(1%) than the same period in the prior year primarily due to an extra month
of European sales of approximately $4.4 million. The inclusion of the
extra month's sales was due to an accounting change whereby the Company
conformed the accounting year of its non-U. S. operations to the Standex
June 30th fiscal year end. Excluding the extra month's sales, sales
decreased marginally by one-half of one percent. The effect on net sales
of changes in the average foreign exchange rates was not significant.
Net earnings of $8.2 million as compared to the prior year's $11.9 million
(before a cumulative effect of a change in accounting principle) reflects
the comments noted above in the discussion of the second quarter and the
inclusion of one million dollars in restructuring charges. A combination
of more income in lower taxed countries (particularly in the first quarter)
and the Company's tax strategies in the current fiscal year yielded a
somewhat lower effective tax rate of 38.0% versus 39.5% last year.
As indicated above, the Company recorded a charge of $3.8 million in the
prior year representing the cumulative effect of a change in accounting
principle. The change related to the Company's adoption of Statement of
Financial Accounting Standard (SFAS) No.142 effective July 1, 2001.
Industrial Segment
The Industrial Segment sales for the latest six-month period were $6.2
million higher than the comparable period last year. The impact of the
extra month's sales ($3.3 million) for this segment's European divisions
and the improvement noted above in the quarter's discussion accounted for
the increase. Gross profit margins were about the same as the prior year,
and expenses were in line with the sales increase. Operating income
increased by just over two percent.
Food Service Segment
Net sales of this segment were $1.6 million more than in the six months
ended December 31, 2001. The extra month's European sales of $1.1 million
accounted for the majority of the increase. A small decline in gross
profit margin reflects the comments in the quarterly discussion above.
Also as noted above, cost cutting partially off-set the gross margin
decrease, and resulted in a $500,000 reduction in operating income.
Consumer Segment
A decrease in sales of almost nine percent (to $52.2 million) in this
segment reflects the comments noted above in the second quarter discussion.
Although the gross profit margin was unchanged from the prior year, the
volume decline and increased expenses, as detailed above, reduced operating
income by $3.5 million as compared to the same six month period last year.
Restructuring and Other expense, net
As noted above restructuring charges totaled one million dollars to date in
the fiscal year. The Company's restructuring program is progressing on
plan.
Also as noted above, the caption "Other expense, net" includes retirement
charges of $5.6 million and the gain on the sale of UK property of $4.3
million.
Corporate
The Corporate Segment incurred $1.6 million more in expenses in the current
six months than in the same period last year. Similar to the current
quarter's expenses noted above, these included many items some of which
were duplicate salaries of $400,000, a reduction in the Corporate pension
credit of $343,000, the cost of the annual Management Conference ($269,000)
which was not held last year due to the September 11th terrorists' attack
and net divisional expenses of $203,000 intentionally not allocated to the
divisions.
Other Matters
Inflation - Certain of the Company's expenses, such as wages and benefits,
occupancy costs and equipment repair and replacement, are subject to normal
inflationary pressures.
Environmental Matters - The Company is party to various claims and legal
proceedings, generally incidental to its business and has recorded an
appropriate provision for the resolution of such matters. As explained
more fully in the Notes to the Consolidated Financial Statements, the
Company does not expect, at this time, the ultimate disposition of these
matters to have a material adverse effect on its financial statements.
Seasonality - Increased consumer spending during the holiday season
results in a higher level of activity in the Consumer Segment in the second
quarter of the fiscal year and lower activity in the remaining quarters.
The Industrial Segment experiences higher activity levels in the fiscal
quarters ending September 30, December 31 and June 30 of each year and
decreased activity in the quarter ending March 31, generally due to the
effects of weather conditions on the construction industry.
ACQUISITIONS
The Company purchased, as of September 30, 2002, substantially all the
assets of Cincinnati, Ohio-based CIN-TRAN, Inc. a manufacturer of custom
UL/CSA approved low-frequency transformers. In December, 2002 Millennium
Molds, a repairer of injection molds, was acquired. The combined
purchase price of these acquisitions was $1.6 million, and their combined
revenues totaled approximately $4.3 million. The first acquisition will
be fully integrated with Standex Electronics, and the latter acquisition
will become part of Standex Engraving. Both acquisitions are part of the
Company's Focused Diversity strategy to seek bolt-on acquisitions for
growth platform companies.
CRITICAL ACCOUNTING POLICIES
Presented below is a discussion about the Company's application of critical
accounting policies that requires assumptions about matters that are
uncertain at the time the accounting estimate is made, and where different
estimates that reasonably could have been used in the current period, or
changes in the accounting estimate that are reasonably likely to occur from
period to period, have a material impact on the presentation of the
Company's financial condition, changes in financial condition or results of
operations. Management has identified the following accounting estimates
as critical for the Company, and will discuss them separately below;
allowance for bad and doubtful accounts; inventory obsolescence provision;
income tax accruals; workers' compensation accruals; environmental
liabilities; goodwill impairment; and pension and other postretirement
benefits.
Allowance for Bad and Doubtful Accounts
The Company's recognition of revenue from sales to its customer base is
impacted by the financial viability of its customers. At the time the
Company recognizes revenue, upon product shipment, measurement of those
sales are reduced by an estimate of customer non-payment, and the
measurement of accounts receivable is also reduced by the same amount.
Currently, the net accounts receivables balance of $85.3 million is about
21% of total assets, and the reserve of $5.7 million is about 6.3% of gross
accounts receivable.
For each of the Company's divisions, a historical correlation exists
between the amount of sales made and the amount of bad debt. The greater
sales level, the more bad debt is expected. For each of the Company's
divisions, the Company monitors the levels of sales and receivables
turnover and aging as part of its effort to reach an appropriate accounting
estimate for bad debts. In estimating a bad debt reserve, the Company
analyzes historical write-offs, current credit sales aging, current
economic trends, changes in customer base, and recovery of bad debts.
In recent years, as a result of a combination of the factors described
above, the bad debt reserve has been increased to reflect the estimated
valuation of gross receivables. It is possible that a large customer could
default; however, no customer represents more than 3% of receivables.
Estimating an allowance for doubtful accounts requires significant
management judgment. In addition, different reserve estimates that
reasonably could have been used would have had a material impact on
reported receivable balances and thus have had a material impact on the
presentation of the results of operations. For those reasons, since
receivables balances are a material part of its balance sheet, and the
majority of its sales are on a credit basis, the Company believes that the
accounting estimate related to bad debts is a critical accounting estimate.
Inventory Obsolescence
A significant portion of the Company's assets (about 22%) are in the form
of inventories in the various industries in which it operates. The
Company's profitability and viability is highly dependent on the demand for
products in the food service, consumer and industrial segments. An
imbalance between purchasing, production levels and sales, could cause
obsolescence and loss of competitive price advantage and market share. The
Company's diversity and the various markets in which it participates
somewhat mitigates this risk. The Company reduces its inventory valuation
by its estimate of the portion which might remain unsold, and recognizes an
expense of this same amount which is classified within cost of sales in the
statement of operations.
For its products, a historical correlation exists between the rate of
inventory turnover and the levels of inventory. For each of its products,
the Company monitors the levels of product sales and inventory at the
division level as part of its effort to reach an appropriate accounting
estimate of obsolescence reserves. In estimating impairment, the Company
analyzes historical returns, current inventory levels, current economic and
industry trends, changes in consumer demand, introduction of new competing
products and acceptance of its products. As a result of a combination of
the factors described above, the reserves for inventory obsolescence were
materially increased in the last fiscal year. In addition, different
reserve estimates that the Company reasonably could have used would have
had a material impact on reported net inventory and cost of sales, and thus
have had a material impact on the presentation of the results of
operations. For those reasons, the Company believes that the accounting
estimate related to inventory obsolescence is a critical accounting
estimate.
Income Taxes
The Company's estimate of current year tax expense and accrual, and
recognition of a deferred tax liability ($19 million at December 31, 2002)
follows the provisions of SFAS No. 109.
The Company provides for potential tax contingencies arising from routine
audits by revenue taxing agencies. Its estimate is based on historical
evidence as well as expert advice from its tax advisors. It is reasonably
possible to assume that actual amounts payable as a result of such audits
could differ from that accrued in the financial statements.
Workers' Compensation Accrual
The Company is self-insured for workers' compensation at the majority of
its divisions, and evaluates its accrual on a monthly basis. The accrual
is adjusted monthly based on actual claims experience. Management
believes, and past experience has confirmed, that total service fee savings
for the Company outweigh certain financial risks incurred by self-insurance
of workers' compensation. Accounting standards require that a related loss
contingency be recognized as part of the Company's financial position. The
accrual as of December 31, 2002, was $5.5 million, of which approximately
$3.7 million relates to the future liability for incidents which have
already occurred but not yet reported.
The Company believes that the accounting estimate related to the assessment
of future liability for current work-related injuries is a critical
accounting estimate because it is highly susceptible to change from period
to period due to the requirement that Company management make assumptions
about future costs of claims based on historical costs.
Environmental Liabilities
At several of its divisions, the Company's operations utilize materials
defined under federal and state regulations as "hazardous." On occasion,
the Company has incurred costs both in connection with environmental
remediation of its facilities (whether ongoing operations or facilities
being sold) and disposal of waste at licensed, third party disposal
facilities. A recorded liability for potential future environmental
remediation reflects the Company's estimate of the potential future costs
of possible remediation based primarily on experience with properties of
that type, consultation with independent environmental consultants and
previous environmental involvement. The Company believes the accounting
estimate related to remediation expenses is a critical accounting estimate
because legal requirements related to any remediation could affect net
income. However, a number of contingencies could affect the Company's
future exposure in connection with this item including, but not limited to,
changes in legislation and unforeseen incidents which could occur at the
Company's divisions. The forecasting of environmental remediation costs is
highly uncertain and requires a large degree of judgment. However, based
upon the Company's experience with environmental issues, the Company
believes the recorded liability is appropriate. Further, the charges
related to environmental remediation in the past three years have been
insignificant.
Goodwill Impairment
The Company adopted SFAS No. 142, "Goodwill and Other Intangibles"
effective July 1, 2001. In accordance with this SFAS, the Company
evaluated its carrying value of goodwill on a division by division basis at
both December 31, 2001 and June 30, 2002. As a result of the initial
evaluation an impairment charge of $3.8 million was recorded in fiscal
2002. The Company's carrying value of goodwill at December 31, 2002, was
$36.5 million and relates to several divisions and industries. All of
these divisions and industries are subject to changes in markets, processes
and products which could impact the carrying value of the division and its
goodwill. The valuation of these divisions is a critical accounting policy
since the reduction in value in any one division could have a significant
impact on the financial statements of the Company.
Pension and Other Postretirement Benefits
The Company records pension and other postretirement benefit costs in
accordance with SFAS No. 87, "Employers' Accounting for Pensions," and SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions." Under these accounting standards, assumptions are made
regarding the valuation of benefit obligations and performance of plan
assets. The primary assumptions relate to discount rate, expected return
on plan assets, rate of compensation increase, health care cost trend, and
amortization of gains and (losses). While the Company believes that the
assumptions used are appropriate, significant differences in the actual
experience or significant changes in the assumptions may have a material
impact on its results of operations and financial position.
Adoption of SFAS Nos. 144, 145 and 146
Effective July 1, 2002, the Company adopted SFAS Nos. 144, 145 and 146.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" creates one accounting model, based on the framework established in
SFAS No. 121, to be applied to all long-lived assets including discontinued
operations. The impact of the adoption of SFAS No. 144 was not
significant.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, amendment to
FASB Statement No. 13, and Technical Corrections," primarily restricts the
classification of gains and losses from extinguishment of debt as
extraordinary to only those transactions that are unusual and infrequent in
nature as defined by APB Opinion No. 30 as extraordinary. There was no
impact from the adoption of this SFAS.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The SFAS requires that a liability
for cost associated with an exit or disposal activity be recognized when
the liability is incurred. The Company announced in October 2002, that
restructuring charges in the range of $11 to $12 million (pre tax) would be
recorded over the next 18 months (see below). If this SFAS had not been
adopted, these charges would have been recorded in full in the current six
month period instead of the $1.0 million (pre tax) which was recorded.
New Accounting Pronouncements
In October 2002, the Financial Accounting Standards Board issued SFAS No.
147, "Acquisitions of Certain Financial Institutions." This SFAS will not
apply to the Company.
Restructuring
In October 2002 the Company announced it was incurring restructuring
charges over the next eighteen months in the amount of $11 to $12 million
before taxes. The restructuring plan involves the (1) disposal, closing or
elimination of certain under-performing and unprofitable operating plants,
product lines, manufacturing processes and businesses; (2) realignment and
consolidation of certain marketing and distribution activities; and (3)
other cost containment actions, including selective personnel reductions.
The charges will be recorded in the Condensed Statements of Consolidated
Income under the caption "Restructuring costs." The components of the
estimated charges include involuntary employee severance and benefits costs
totaling $4,772,000, asset impairments of $1,773,000 and shutdown costs of
$4,812,000.
The restructuring will consist of a series of initiatives that are expected
to yield significant savings and individual pay backs in the range of 12 to
24 months. In addition, the Company anticipates generating cash by selling
underutilized facilities to fund a significant portion of the
restructuring.
The Company has early adopted SFAS No. 146 (described above), and,
accordingly, these charges will be recorded generally when a liability is
incurred or a severance plan is initiated. At December 31, 2002,
$1.0 million (pre tax) of the charges had been incurred. See the notes to
condensed consolidated financial statements for details of these charges.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk associated with changes in foreign
currency exchange rates and interest rates. The Company mitigates certain
of its foreign currency exchange rate risk by entering into forward foreign
currency contracts. These contracts are primarily used as a hedge against
anticipated foreign cash flows, such as dividend and loan payments, and are
not used for trading or speculative purposes. The fair value of the
forward foreign currency exchange contracts is sensitive to changes in
foreign currency exchange rates, as an adverse change in foreign currency
exchange rates from market rates would decrease the fair value of the
contracts. However, any such losses or gains would generally be offset by
corresponding gains and losses, respectively, on the related hedged asset
or liability. Due to the absence of forward foreign currency contracts at
December 31, 2002, the Company did not have any fair value exposure.
There have been no significant changes in the exposure to changes in both
foreign currency and interest rates from June 30, 2002 to December 31,
2002.
ITEM 4. CONTROLS AND PROCEDURES
The management of the Company including Mr. Roger L. Fix as Chief
Executive Officer and Mr. Christian Storch as Chief Financial Officer have
evaluated the Company's disclosure controls and procedures. Under the
rules promulgated by the Securities Exchange Commission, disclosure
controls and procedures are defined as those "controls or other procedures
of an issuer that are designed to ensure that information required to be
disclosed by an issuer in the reports issued or submitted by it under the
Exchange Act are recorded, processed, summarized and reported within the
time periods specified in the Commission's rules and forms." Based on the
evaluation of the Company's disclosure controls and procedures, it was
determined that such controls and procedures were effective as of January
30, 2003 the date of the conclusion of the evaluation.
Further, there were no significant changes in the internal controls or in
other factors that could significantly affect these controls after January
30, 2003, the date of the conclusion of the evaluation of disclosure
controls and procedures.
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of stockholders of the Company was held on
October 29, 2002. Two matters were voted upon at the meeting: the
election of directors and the approval of the appointment of
independent auditors of the Company.
The name of each director elected at the meeting and the number of
votes cast as to each matter are as follows:
Proposal I (Election of Directors)
Nominee For Withheld
John Bolten, Jr. 7,938,935 2,464,934
Roger L. Fix 10,045,518 358,351
Daniel B. Hogan, Ph.D. 10,035,613 368,256
David R. Crichton 10,027,459 376,410
Proposal II (To Approve the Selection of Deloitte & Touche LLP as
Independent Auditors)
For Against Abstain No Vote
9,813,763 569,814 20,292 -0-
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 (a) Consulting Agreement between the Company and
Edward J. Trainor dated December 31, 2002*
10 (b) Consulting Agreement between the Company and
David R. Crichton dated December 31, 2002*
99 (a) Principal Executive Officer Certification Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99 (b) Principal Financial Officer Certification Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed one report on Form 8-K with the Securities and
Exchange Commission during the quarter ended December 31, 2002. The
Form 8-K was filed on October 24, 2002, announcing the Company's
strategic realignment and restructuring program.
* Management contract or compensatory plan or arrangement.
ALL OTHER ITEMS ARE INAPPLICABLE
STANDEX INTERNATIONAL CORPORATION
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
STANDEX INTERNATIONAL CORPORATION
Date: February 11, 2003 /s/Robert R. Kettinger
-----------------------
Robert R. Kettinger
Corporate Controller
Date: February 11, 2003 /s/Christian Storch
-----------------------
Christian Storch
Vice President/CFO
CERTIFICATION
I, Roger L. Fix, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Standex
International Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: February 11, 2003 /s/ Roger L. Fix
--------------------------
Roger L. Fix
President/CEO
CERTIFICATION
I, Christian Storch, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Standex
International Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
d. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
e. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: February 11, 2003 /s/ Christian Storch
--------------------------
Christian Storch
Vice President/CFO