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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 September 30, 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
The number of shares of Registrant's Common Stock outstanding on
September 30, 2002 was 12,112,747.
STANDEX INTERNATIONAL CORPORATION
I N D E X
Page No.
PART I. FINANCIAL INFORMATION:
Item 1.
Statements of Consolidated Income for the
Three Months Ended September 30, 2002 and
2001 2
Consolidated Balance Sheets, September 30, 2002
and June 30, 2002 3
Statements of Consolidated Cash Flows for the
Three Months Ended September 30, 2002 and 2001 4
Notes to Condensed Consolidated Financial
Statements 5-8
Item 2.
Management's Discussion and Analysis 9-15
Item 3.
Quantitative and Qualitative Disclosures About
Market Risk 16
Item 4.
Controls and Procedures 16
PART II. OTHER INFORMATION:
Item 6.
Exhibits and Reports on Form 8-K 17-20
PART I. FINANCIAL INFORMATION
STANDEX INTERNATIONAL CORPORATION
Statements of Consolidated Income
(In thousands, except per share data)
Three Months Ended
September 30
2002 2001
Net sales $147,184 $143,710
Cost of sales 100,538 97,797
Gross profit 46,646 45,913
Selling, general and administrative expenses 36,483 34,059
Restructuring cost 914 -
Income from operations 9,249 11,854
Interest expense, net (1,810) (2,602)
Income before income taxes 7,439 9,252
Provision for income taxes 2,827 3,754
Income before cumulative effect of a
change in accounting principle 4,612 5,498
Cumulative effect of a change in
accounting principle - (3,779)
Net income $ 4,612 $1,719
Earnings per share (before cumulative
effect of a change in accounting
principle):
Basic $ .38 $ .45
Diluted $ .38 $ .45
Earnings per share (after cumulative
effect of a change in accounting
principle):
Basic $ .38 $ .14
Diluted $ .38 $ .14
Cash dividends per share $ .21 $ .21
See notes to condensed consolidated financial statements.
STANDEX INTERNATIONAL CORPORATION
Consolidated Balance Sheets
(In thousands)
September 30 June 30
2002 2002
ASSETS
Current assets
Cash and cash equivalents $11,533 $ 8,092
Receivables, net 91,459 93,219
Inventories 90,524 92,931
Prepaid expenses 14,509 4,570
Total current assets 208,025 198,812
Property, plant and equipment 278,326 273,630
Less accumulated depreciation 165,409 160,738
Property, plant and equipment, net 112,917 112,892
Other assets
Prepaid pension cost 47,754 47,405
Goodwill, net 36,241 36,250
Other 11,944 10,680
Total other assets 95,939 94,335
Total $416,881 $406,039
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings and current portion
of long-term debt $ 87,774 $82,221
Accounts payable 38,533 35,209
Income taxes 5,400 1,221
Accrued expenses 35,165 36,128
Total current liabilities 166,872 154,779
Long-term debt (less current portion
included above) 42,941 50,087
Deferred income taxes and other liabilities 23,978 22,741
Stockholders' equity
Common stock 41,976 41,976
Additional paid-in capital 12,421 12,075
Retained earnings 386,619 384,589
Unamortized value of restricted stock (544) (655)
Accumulated other comprehensive loss (6,522) (8,473)
Less cost of treasury shares (250,860) (251,080)
Total stockholders' equity 183,090 178,432
Total $416,881 $406,039
See notes to condensed consolidated financial statements.
STANDEX INTERNATIONAL CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In thousands)
Three Months Ended
September 30
2002 2001
Cash flows from operating activities
Net income $4,612 $1,719
Cumulative effect of a change in accounting principle - 3,779
Depreciation and amortization 3,510 3,402
Net changes in operating assets and liabilities 2,410 (3,991)
Net cash provided by operating activities 10,532 4,909
Cash flows from investing activities
Expenditures for property and equipment (2,420) (4,432)
Expenditures for acquisition (1,538) -
Other (13) 95
Net cash used for investing activities (3,971) (4,337)
Cash flows from financing activities
Repayment of long-term debt (7,145) (7,146)
Net proceeds from additional borrowings 5,553 12,248
Cash dividends paid (2,582) (2,541)
Reacquisition of shares-open market - (22)
Reacquisition of shares-stock incentive
programs and employees (551) (2,728)
Other, net 1,230 559
Net cash (used for) provided by
financing activities (3,495) 370
Effect of exchange rate changes on cash 375 272
Net change in cash and cash equivalents 3,441 1,214
Cash and cash equivalents at beginning of year 8,092 8,955
Cash and cash equivalents at September 30 $11,533 $10,169
Supplemental disclosure of cash flow information
Cash paid (received) during the three months for:
Interest $2,063 $2,895
Income taxes $(1,352) $ 852
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 months ended September 30, 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
During the three months ended September 30, 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. The impact to net income
was not significant.
3. Inventories
Inventories at September 30 and June 30, 2002 are comprised of (in
thousands):
September 30 June 30
Raw materials $ 33,543 $33,257
Work in process 19,083 21,779
Finished goods 37,898 37,895
Total $90,524 $92,931
4. Debt
Debt is comprised of (in thousands):
September 30 June 30
2002 2002
Bank credit agreements $ 80,285 $ 74,732
Institutional investors
6.8% to 7.13% (due 2003-2008) 46,428 53,571
Other 3.0% to 4.85% (due 2003-2018) 4,003 4,005
Total 130,716 132,308
Less current portion 87,774 82,221
Total long-term debt $ 42,942 $ 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.
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
$700,000 in the current fiscal year. The majority of the change is
related to the increase in the projected benefit obligation and change
in the fair value of plan assets.
6. Earnings Per Share Calculation
The following table sets forth the computation of basic and diluted
earnings per share (in thousands):
Three Months Ended
September 30
2002 2001
Income before cumulative effect
of a change in accounting principle $ 4,612 $ 5,498
Cumulative effect of a change in
accounting principle - (3,779)
Net income $ 4,612 $ 1,719
Basic - Average Shares Outstanding 12,096 12,154
Effect of Dilutive Securities-Stock Options 168 168
Diluted - Average Shares Outstanding 12,264 12,322
Earnings per share (before cumulative effect
of a change in accounting principle):
Basic $ .38 $.45
Diluted $ .38 $.45
Earnings per share (after cumulative effect
of a change in accounting principle):
Basic $ .38 $.14
Diluted $ .38 $.14
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 months ended
September 30, 2002 and 2001 were 12,293 and 12,102 respectively.
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," which
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,"
which, 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 fiscal quarter
instead of the $914,000 (pre tax) which was recorded.
8. 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 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 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 September 30, 2002,
$914,000 of these charges had been recorded.
9. 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 Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies." Management believes that such provision
is sufficient to cover any future payments, including legal costs, under
such proceedings.
10. Accumulated other Comprehensive Loss
The change in accumulated other comprehensive loss is as follows:
Three Months Ended
September 30
2002 2001
Accumulated other comprehensive loss at June 30 $(8,473) $(10,134)
Foreign currency translation adjustment 1,850 1,522
Change in fair market value of interest
rate swap agreements 101 (105)
Accumulated other comprehensive loss
at September 30 $(6,522) $(8,717)
11. Income Taxes
A reconciliation of the U.S. Federal income tax rate to the effective
income tax rate is as follows:
September 30
2002 2001
Statutory tax rate 35.0% 35.0%
Non-U.S. 0.6% 1.8%
State taxes 2.8% 2.9%
Other including change in contingency (0.4)% 0.9%
Effective income tax rate 38.0% 40.6%
12. 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.
(In Thousands)
Income
Net Sales From Operations
Segment 2002 2001 2002 2001
Food Service $37,970 $36,373 $2,292 $3,283
Industrial 87,910 84,507 10,318 10,283
Consumer 21,304 22,830 204 1,131
Corporate (3,565) (2,843)
Total $147,184 $143,710 $9,249 $11,854
13. 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 September 30,
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 September 30, 2002 the change in value totaled
$101,000 and the ineffective portion of the hedge was immaterial.
14. Subsequent Event
Subsequent to September 30, 2002, the Company sold the real estate
facility of one of its divisions for $5.3 million as part of its
realignment strategy. Terms of the sale included a provision whereby
the division can leaseback the property for a period of up to 24 months.
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, 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 quarter of fiscal 2003 operating activities generated
$10.5 million in cash flow. The Company redeployed those resources by
investing $2.4 million in plant and capital equipment while returning $2.6
million to shareholders through cash dividends and reducing net debt by
$5.0 million. Capital expenditures declined by $2 million from the first
quarter of last year as the Company reacted to the downturn in the economy.
Capital expenditures are expected to be $10 - $12 million for the current
fiscal year. Every year in the quarter ended September 30th, the Company
renews its insurance policies for the fiscal year and incurs marketing
expenses for its holiday season sales. Prepaid expenses in the balance
sheet reflect these charges in the amount of approximately $4.6 million for
insurance premiums and $4.1 million for marketing costs.
In addition to measuring the cash flow generation or usage based upon
operating, investing, and financing classifications included in the
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. The Company generated free cash flow of $6.6
million in the first quarter of fiscal 2003 compared with $500,000 in the
same quarter of fiscal 2002.
Capital Structure
The following table sets forth the Company's capitalization at September 30
and June 30, 2002:
September 30 June 30
Short-term debt $ 87,774 $82,221
Long-term debt 42,941 50,087
Total Debt 130,715 132,308
Less cash 11,533 8,092
Total net debt 119,182 124,216
Stockholders' equity 183,090 178,432
Total capitalization $ 302,272 $302,648
The Company's net debt decreased by $5.0 million to $119.2 million at
September 30, 2002. The Company's net debt to capital percentage is 39.4%
at September 30, 2002 down from 41.0% at June 30, 2002.
On October 16, 2002, the Company successfully completed a private placement
of $25 million aggregate principal amount of 5.94% Senior Notes due October
17, 2012. Purchasers of the Notes were Metropolitan Life Insurance Company
and Allstate Insurance Company. The Notes are unsecured and carry an
average life of approximately seven years. Proceeds will be used to repay
debt and for general working capital purposes.
At September 30, 2002, the Company had a $175.0 million revolving credit
agreement with eight banks which is scheduled to expire in May 2003. The
Company expects to complete negotiation of a replacement agreement during
the third quarter of fiscal 2003.
OPERATIONS
Quarter Ended September 30, 2002
As compared to the Quarter Ended September 30, 2001
Net sales for the quarter ended September 30, 2002 were $147.2 million
which included 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 Standex conformed the accounting year of its non-U.S.
operations to the Standex June 30 fiscal year end. Excluding the extra
month's sales, sales decreased slightly (0.6%) from the quarter ended
September 30, 2001. The effect, on net sales, of changes in the average
foreign exchange rates was not significant.
Net sales in the Food Service Segment were $38.0 million. After excluding
approximately $1.1 million of extra month European sales, segment sales
were $36.9 million or $500,000 more than the prior year. Both the Master-
Bilt and Procon divisions were the main contributors to this improvement.
Master-Bilt continued to expand its chain pharmacy installations, and
Procon's carbonated pump sales have improved.
Consumer Segment net sales decreased by 6.6% to $21.3 million from the
prior year's $22.8 million. The decline can be attributed to volume
decreases resulting from the effects of the struggling economy,
particularly in the retail religious materials sector, on what has
historically been a weak quarter for the Consumer Segment.
Industrial Segment net sales were $87.9 million versus $84.5 million in
fiscal 2002. Excluding $3.3 million of extra month European sales, segment
sales increased slightly by $100,000. The continuing strong housing sector
of the US economy positively impacted the Standex Air Distribution
division. This was off-set by softness in the Company's engraving business
which services the automobile, electronic and telecommunications
industries, all of which have incurred softness in customer demands.
Additionally, over the last several months, some of the customers of the
Spincraft division have deferred their sales orders.
The Company's gross profit margin percentage ("GPMP") remained stable at
32%. A small decrease in the Food Service Segment GPMP was offset by a
slight increase in the Industrial Segment GPMP. These changes were not
significant. Management has achieved this performance by ensuring that our
products are priced appropriately and competitively in the market place,
continually monitoring and increasing control over costs, and investing in
newer, more efficient technology. The Company has begun to incur price
increases in steel products it uses in its manufacturing processes due to
the steel tariffs which were implemented in the US this past Spring.
Although management believes it can pass substantially all of these price
increases on to its customers, there is no assurance that the Company will
be able to fully recover the majority of them from its customers.
Consolidated selling, general and administrative expenses increased as a
percent of net sales to approximately 24.8% compared to 23.7% in the prior
year. The increase is primarily attributable to the sales decrease in the
Consumer group, as discussed above, as opposed to any significant increases
in items of expenditure. It has been the Company's strategy to maintain
current staffing levels and capacity as far as economically possible to
facilitate future growth plans and keep the Company well positioned for the
expected up-turn in the economy.
In addition, in the current quarter the Company recorded a restructuring
charge of $914,000 related to its Food Service Segment. The charge is more
fully discussed in the Notes to the Condensed Consolidated Financial
Statements.
Interest expense for the current quarter decreased $800,000 versus the same
quarter in the previous fiscal year due to a decrease in interest rates (a
decline of 16.5%) and a $25.9 million (16.6%) decrease in average
borrowings.
As a result of the above, pre-tax income was $7.4 million compared to $9.3
million in the prior year. The effective tax rate of 38.0% in the current
period decreased from the prior year's 40.6%. A larger portion of the
Company's income this quarter was generated in lower taxed countries. The
Company's tax strategies in the current fiscal year also contributed to
this decrease.
Income before the cumulative effect of a change in accounting principle was
$4.6 million as compared to $5.5 million last year. In the prior year, the
Company recorded a charge of $3.8 million representing the cumulative
effect of a change in accounting principle. The change related to the
Company's adoption of SFAS No. 142 effective July 1, 2001.
The resultant net income for the quarter ended September 30, 2002 was $4.6
million compared to $1.7 million for the quarter ended September 30, 2001.
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.
ACQUISITION
The Company purchased, as of September 30, 2002, substantially all of the
assets of Cincinnati, Ohio-based CIN-TRAN, Inc. a manufacturer of custom
UL/CSA approved low-frequency transformers. CIN-TRAN, which had annual
revenues of approximately $4 million, will be part of the Company's Standex
Electronics Group. The acquisition, which expands the Standex Electronics
transformer product line, is 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 customers. At the time we recognize
revenue, upon shipment of our products, we reduce our measurements of those
sales by our estimate of customer non-payment, and we also reduce our
measurements of accounts receivable by the same amount. Currently, our net
accounts receivables balance of $91.5 million is about 22% of our total
assets, and the reserve of $5.0 million is about 5% of gross accounts
receivable.
For each of our divisions, a historical correlation exists between the
amount of sales made and the amount of bad debt. The greater our sales
levels, the more bad debt we expect. For each of our divisions, we monitor
the levels of sales and receivables turnover and aging as part of our
effort to reach an appropriate accounting estimate for bad debt. In
estimating a bad debt reserve, we analyze historical write-offs, current
credit sales aging, current economic trends, changes in our customer base,
and recovery of bad debts.
In recent years, as a result of a combination of the factors described
above, we have increased our bad debt reserve to reflect our estimated
valuation of gross receivables. It is also possible that bad debt write-
off could increase significantly in the future. Estimating an allowance
for doubtful accounts requires significant management judgment. In
addition, different reserve estimates that we reasonably could have used
would have had a material impact on our reported receivable balance and
thus have had a material impact on the presentation of the results of
operations. For those reasons, since our receivables balance is a material
part of our balance sheet, and the majority of our sales are on a credit
basis, we believe 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 we operate. Our
Company's profitability and viability is highly dependent on the demand for
our 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. We
consider that the Company's diversity and the various markets in which it
participates somewhat mitigates this risk. We reduce our inventory
valuation by our estimate of the portion which might remain unsold, and we
recognize an expense of this same amount which is classified within cost of
sales in the statement of operations.
For our products, a historical correlation exists between the rate of
inventory turnover and the levels of inventory. For each of our products,
we monitor levels of product sales and inventory at the division level as
part of our effort to reach an appropriate accounting estimate of
obsolescence reserves. In estimating impairment, we analyze historical
returns, current inventory levels, current economic and industry trends,
changes in consumer demand, introduction of new competing products and
acceptance of our products. Within the last year, as a result of a
combination of the factors described above, we have materially increased
the reserves for inventory obsolescence. In addition, different reserve
estimates that we reasonably could have used would have had a material
impact on our 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, we believe 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 September 30, 2002)
follows the provisions of SFAS No. 109.
The Company provides for potential tax contingencies arising from routine
audits by revenue taxing agencies. Our estimate is based on historical
evidence as well as expert advice from our 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 September 30, 2002, was $6.2 million, of which approximately
$4 million relates to the future liability for incidents which have already
occurred but not yet reported.
We believe 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 September 30, 2002, was
$36.2 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 our results of operations and financial position.
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," 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
fiscal quarter instead of the $914,000 (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 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 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 September 30, 2002, $914,000
(pre tax) of the charges had been incurred.
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
September 30, 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 September 30,
2002.
ITEM 4. CONTROLS AND PROCEDURES
The management of the Company including Mr. Edward J. Trainor 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 Commissions 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 November
1, 2002, 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
November 1, 2002, the date of the conclusion of the evaluation of
disclosure controls and procedures.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99 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 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 no reports on Form 8-K with the Securities and
Exchange Commission during the quarter ended September 30, 2002.
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: November 13, 2002 /s/Robert R. Kettinger
Robert R. Kettinger
Corporate Controller
Date: November 13, 2002 /s/Christian Storch
Christian Storch
Vice President/CFO
CERTIFICATION
I, Edward J. Trainor, 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: November 13, 2002 /s/Edward J. Trainor
Edward J. Trainor
Chairman of the Board/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: November 13, 2002 /s/Christian Storch
Christian Storch
Vice President/CFO