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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, 2003 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 12b-2 of the Exchange Act). YES X NO __
The number of shares of Registrant's Common Stock outstanding on September
30, 2003 was 12,204,498.
STANDEX INTERNATIONAL CORPORATION
I N D E X
Page No.
PART I. FINANCIAL INFORMATION:
ITEM 1.
Condensed Statements of Consolidated
Income for the Three Months Ended
September 30, 2003 and 2002 2
Condensed Consolidated Balance Sheets, September
30, 2003 and June 30, 2003 3
Condensed Statements of Consolidated Cash
Flows for the Three Months Ended September
30, 2003 and 2002 4
Notes to Condensed Consolidated Financial Statements 5-11
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12-16
ITEM 3.
Quantitative and Qualitative Disclosures About
Market Risk 17
ITEM 4.
Controls and Procedures 18
PART II. OTHER INFORMATION:
Not applicable 19
PART I. FINANCIAL INFORMATION
STANDEX INTERNATIONAL CORPORATION
Condensed Statements of Consolidated Income
(In thousands, except per share data)
THREE MONTHS ENDED
SEPTEMBER 30
2003 2002
Net sales $150,913 $145,498
Cost of sales (102,526) (98,134)
Gross profit 48,387 47,364
Operating Expenses:
Selling, general and administrative expenses (37,990) (37,273)
Other operating income, net 25 -
Restructuring (549) (914)
Total operating expenses (38,514) (38,187)
Income from operations 9,873 9,177
Interest expense (1,517) (1,878)
Other, net 71 68
Income before income taxes 8,427 7,367
Provision for income taxes (3,113) (2,797)
Income from continuing operations 5,314 4,570
Income/(loss) from discontinued operations, net of taxes (942) 42
Net income $ 4,372 $ 4,612
Basic earnings per share:
Income from continuing operations $0.44 $0.38
Income/(loss) from discontinued operations $(0.08) $ -
Total $0.36 $0.38
Diluted earnings per share:
Income from continuing operations $0.43 $0.38
Income/(loss) from discontinued operations $(0.08) $ -
Total $0.35 $0.38
Cash dividends per share $0.21 $0.21
See notes to condensed consolidated financial statements.
STANDEX INTERNATIONAL CORPORATION
Condensed Consolidated Balance Sheets
(In thousands)
SEPTEMBER 30 JUNE 30
2003 2003
ASSETS
Current assets
Cash and cash equivalents $10,181 $11,509
Receivables, net 91,597 91,714
Inventories 83,936 82,530
Prepaid expenses 12,569 5,343
Total current assets 198,283 191,096
Property, plant and equipment 274,925 278,458
Less accumulated depreciation 168,157 166,861
Property, plant and equipment, net 106,768 111,597
Other assets
Prepaid pension cost 26,166 25,923
Goodwill, net 49,537 50,002
Long-term deferred tax asset 3,359 3,359
Other 23,606 22,298
Total other assets 102,668 101,582
TOTAL $407,719 $404,275
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings and current
portion of long-term debt $1,372 $ 910
Accounts payable 44,263 41,241
Income taxes 5,164 2,508
Accrued expenses 40,361 40,640
Total current liabilities 91,160 85,299
Long-term debt (less current portion
included above) 105,128 109,019
Deferred pension and other liabilities 49,441 48,035
Stockholders' equity
Common stock 41,976 41,976
Additional paid-in capital 13,460 13,370
Retained earnings 390,404 388,593
Unamortized value of restricted stock (97) (100)
Accumulated other comprehensive loss (33,599) (31,818)
Treasury shares (250,154) (250,099)
Total stockholders' equity 161,990 161,922
TOTAL $407,719 $404,275
See notes to condensed consolidated financial statements.
STANDEX INTERNATIONAL CORPORATION
Condensed Statements of Consolidated Cash Flows
(In thousands)
THREE MONTHS ENDED
SEPTEMBER 30
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $4,372 $4,612
Income/(loss) from discontinued operations (942) 42
Income from continuing operations 5,314 4,570
Adjustments to reconcile net income to net cash
provided by operating activities:
Asset impairment 1,881 -
Gain on sale of real estate (1,906) -
Depreciation and amortization 3,270 3,383
Non-cash portion of restructuring charge 54 796
Net changes in operating assets and liabilities (5,475) 1,802
Net cash provided by operating activities
from continuing operations 3,138 10,551
Net cash used for operating activities
from discontinued operations (82) (19)
Net cash provided by operating activities 3,056 10,532
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property and equipment (1,401) (2,342)
Expenditures for acquisitions - (1,538)
Proceeds from sale of real estate 2,817 -
Other 403 (13)
Net cash provided by/(used for) investing activities
from continuing operations 1,819 (3,893)
Net cash provided by/(used for) investing activities
from discontinued operations 195 (78)
Net cash provided by/(used for) investing activities 2,014 (3,971)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from additional borrowings 3,762 5,553
Payments of debt (7,191) (7,145)
Cash dividends paid (2,561) (2,582)
Reacquisition of shares - stock incentive program
and employees (705) (551)
Other, net 964 1,381
Net cash used for financing activities
from continuing operations (5,731) (3,344)
Net cash used for financing activities
from discontinued operations (284) (151)
Net cash used for financing activities (6,015) (3,495)
Effect of exchange rate changes on cash (383) 375
Net change in cash and cash equivalents (1,328) 3,441
Cash and cash equivalents at beginning of year 11,509 8,092
Cash and cash equivalents at end of period $10,181 $11,533
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid/(received) during the three months for:
Interest $1,188 $2,063
Income taxes $ (113) $(1,352)
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Management Statement
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly the results of operations, cash flows and comprehensive
income for the three months ended September 30, 2003 and 2002 and the
financial position at September 30, 2003 and 2002. The interim results are
not necessarily indicative of results for a full year. The condensed
financial statements and notes do not contain information which would
substantially duplicate the disclosure contained in the audited annual
consolidated financial statements and notes for the year ended June 30,
2003. The condensed consolidated balance sheet at June 30, 2003 was derived
from audited financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United States of
America. The financial statements contained herein should be read in
conjunction with the Annual Report on Form 10-K and in particular, the
audited consolidated financial statements for the year ended June 30, 2003.
In addition, certain prior year amounts have been reclassified to conform to
the current year's presentation. Prior to June 30, 2002, foreign operations
were consolidated based on a May 31 year end. Effective July 1, 2002
international operations have been consolidated using a June 30 year end.
This change resulted in reporting four months of international sales for the
three months ended September 30, 2002, or an additional $4.4 million of net
sales. The impact on net income of the additional month of international
operations was not significant.
2. Significant Accounting Policies
The significant accounting policies have not materially changed since the
2003 Form 10-K was filed.
3. Discontinued Operations
In September, the Company announced it was exiting the German business for
roll technology engraving products. The operation, which was part of the
Industrial Segment, had not been profitable for the past several years
largely because the business lacks the scale to compete effectively with
its two largest competitors in the European market, both of which are
headquartered in Germany. As a result of the decision to close the
business, a pretax charge of $1.1 million was included in discontinued
operations in the Condensed Consolidated Statements of Income for the
current quarter.
In fiscal 2003 the Company exited its H. F. Coors China Company (Food
Service) and National Metals (Industrial) businesses. The fiscal quarter
ended September 30, 2002 has been restated to reflect all three
discontinued operations.
2003 2002
Net sales $ 592 $3,105
Operating income/(loss) (1,512) 73
Earnings/(loss) from discontinued
operations, net of taxes (942) 42
4. Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the first in, first out method. Inventories at September 30, 2003 and
June 30, 2003 are comprised of the following (in thousands):
September 30 June 30
Raw materials $30,348 $28,954
Work in process 20,067 19,074
Finished goods 33,521 34,502
Total $83,936 $82,530
Distribution costs associated with the sale of inventory are recorded as a
component of selling, general and administrative expenses in the
accompanying Condensed Statements of Consolidated Income and were $6.1
million and $5.6 for the three-month periods ended September 30, 2003 and
2002, respectively.
5. Debt
Debt is comprised of the following (in thousands):
September 30 June 30
2003 2003
Bank credit agreements $37,500 $34,200
Institutional investors
5.94% to 7.13% (due 2004-2012) 64,286 71,429
Other 3.0% to 4.85% (due 2004-2018) 3,880 3,928
Total 105,666 109,557
Less current portion 538 538
Total long-term debt $105,128 $109,019
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.
The Company has a three year, $130 million revolving credit facility which
expires in February 2006. At September 30, 2003, the Company had available
$91.4 million under this facility. 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 at September 30, 2003 was 2.2%. Borrowings under the
agreement are not collateralized.
Debt is due as follows by fiscal year (in thousands): 2004, $505; 2005,
$75; 2006, $51,786; 2007, $3,571; 2008, $3,571 and thereafter, $46,158.
At September 30, 2003, the Company was in compliance with all debt
covenants.
6. Pension Plan Expense
In the fiscal year ended June 30, 2003, the Company recorded a net pension
expense of $502,000. The Company expects to report a net pension expense of
approximately $5 million in the current fiscal year. Pension expense for
the three-month periods ending September 30, 2003 and 2002 was approximately
$1.4 million and $15,000, respectively.
7. Earnings Per Share
The following table sets forth a reconciliation of the number of shares (in
thousands) used in the computation of basic and diluted earnings per share:
Three Months Ended
September 30
2003 2002
Basic - Average shares outstanding 12,194 12,096
Effect of Dilutive Securities - Stock Options 129 168
Diluted - Average Shares Outstanding 12,323 12,264
Both basic and diluted income are the same for computing earnings per share.
Certain options were not included in the computation of diluted earnings per
share because to do so would have had an anti-dilutive effect.
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, 2003 and 2002 were
12,196 and 12,293, respectively.
8. Other Operating Income, Net
In the first quarter of fiscal 2004, the Company sold two manufacturing
facilities which generated a total gain of $1,906,000. The Company has
entered into a short-term leaseback for one of the buildings, and the
leaseback period is considered to be minor.
Also in the first quarter of fiscal 2004, the Company tested for
recoverability the long-lived assets and goodwill of one of its reporting
units based upon current facts and circumstances. In accordance with the
guidance provided by the Statement of Financial Accounting Standards (SFAS)
No. 142, "Goodwill and Other Intangible Assets," and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," the long-
lived assets and related goodwill were considered to be impaired and a
charge of $1,881,000, of which $235,000 was goodwill, was recorded
reflecting the estimated fair value of the reporting unit.
9. Restructuring
In October, 2002, the Company announced it was incurring restructuring
charges 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.
In accordance with SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities," 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 September 30, 2003
--------------------------------------------
Involuntary
Employee
Severance
and
Benefits Asset Shutdown
Costs Impairment Costs Total
Accrued Balances
Carry forward accrual balance $2,638 $ - $ 66 $2,704
Payments (404) - (66) (470)
Additional accrual 54 - 54
Ending accrual balance $2,288 $ - $ - $2,288
Expense
Cash expended $216 $ - $279 $495
Accrued/Non-Cash 54 - - 54
Total expense $270 $ - $279 $549
Three Months Ended September 30, 2002
--------------------------------------------
Involuntary
Employee
Severance
and
Benefits Asset Shutdown
Costs Impairment Costs Total
Cash expended $119 $ * $* $119
Accrued/Non-Cash 795 * * 795
Total expense $914 $ * $* $914
The restructuring costs related to the following segments at September 30:
Three Months Ended
September 30
2003 2002
Food Service $250 $914
Industrial 299 -
Total expense $549 $914
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. Management has
considered such matters, and believes that the ultimate resolution will be
not material to the Company's financial position or results of operations.
1.Accumulated Other Comprehensive Loss
The change in accumulated other comprehensive loss is as follows (in
thousands):
Three Months Ended
September 30
2003 2002
Accumulated other comprehensive loss - June 30 $(31,818) $(8,473)
Foreign currency translation adjustment (1,781) 1,850
Change in fair market value of interest
rate swap agreements - 101
Accumulated other comprehensive loss - September 30 $(33,599) $(6,522)
11. Income Taxes
The provision for income taxes for continuing operations differs from that
computed using Federal income tax rates for the following reasons:
Three Months Ended
September 30
2003 2002
Statutory tax rate 35.0% 35.0%
Non-U.S. (0.1) 0.6
State taxes 4.8 2.8
Other including change in contingency (2.8) (0.4)
Effective income tax rate 36.9% 38.0%
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.
Three Months Ended
September 30
(In thousands)
Income from
Net Sales Operations
2003 2002 2003 2002
SEGMENT
Food Service $42,496 $38,100 $4,962 $3,170
Consumer 20,748 21,506 412 204
Industrial 87,669 85,892 8,577 10,281
Restructuring (549) (914)
Other income, net 25 -
Corporate (3,554) (3,564)
Total $150,913 $145,498 $9,873 $9,177
13. Derivative Instruments and Hedging Activities
Standex manages its debt portfolio by periodically using interest rate swaps
to achieve an overall desired position of fixed and floating rate debt to
reduce certain exposures to interest rate fluctuations. These interest
swaps are generally designated as cash flow hedge instruments, and reported
at fair market value. Changes in fair value of the interest rate swaps
designated as cash flow hedges are recorded in other comprehensive income.
The effectiveness of outstanding interest rate swaps are measured on a
quarterly basis. There were no outstanding interest rate swaps at September
30, 2003, and one contract was outstanding for a notional value of $10
million at September 30, 2002.
Forward foreign currency exchange contracts are periodically used to limit
the impact of currency fluctuations on certain anticipated foreign cash
flows, such as dividends and loan repayments from subsidiaries. The Company
does not hold or issue derivative instruments for trading purposes. There
were no outstanding forward currency exchange contracts at September 30,
2003 or 2002.
14. Stock Compensation Plans
The Company accounts for stock based compensation using the intrinsic
method. Under the intrinsic method, the compensation cost of stock options
and awards are measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the option or award price
and is charged to operations over the vesting period.
The following table illustrates the effect on net earnings and earnings per
share if the Company had applied the fair value recognition provisions of
SFAS No. 123 to its stock option plans and employee stock purchase plan:
Three Months Ended
September 30
2003 2002
Net income, as reported $4,372 $4,612
Less: Total stock-based compensation,
net of income taxes 218 213
Proforma net income $4,154 $4,399
Proforma earnings per share:
Basic - as reported $0.36 $0.38
Basic - proforma $0.34 $0.36
Diluted - as reported $0.35 $0.38
Diluted - proforma $0.34 $0.36
The fair value of options at date of grant was estimated using the Black-
Scholes option pricing model.
15. Subsequent Event
In October, 2003, the Company announced the tentative decision to close its
printing operation and cease its commercial printing business. The
termination of operations is expected to be concluded by the end of March,
2004 and are expected to cost from $1.0 million to $1.5 million. If this
tentative decision is implemented, it will be part of the Company's Focused
Diversity restructuring and realignment program which began in fiscal 2001.
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," "could," "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
Our primary source of liquidity is cash flows from continuing operating
activities and the revolving credit facility with eight banks. For the three
months ended September 30, 2003, continuing operations generated cash flow of
$3.1 million compared to $10.6 million in the comparable period last year. The
decrease was the result of a $5.5 million change in operating assets and
liabilities. This change is primarily attributable to a $7.2 million increase
in prepaid assets offset by a $1.7 million decrease in net working capital.
Net working capital is defined as accounts receivable plus inventories less
accounts payable. In addition, the sale of certain real estate generated $2.8
million of incremental cash during the period. We redeployed those resources
by investing $1.4 million in capital expenditures. In addition, we returned
$2.6 million to shareholders through cash dividends. The remaining cash flow
from continuing operating activities was used to reduce net debt by $2.1
million.
We believe that cash flows from continuing operating activities in fiscal 2004
will be sufficient to cover capital expenditures, restructuring activities,
operating lease payments, pension contributions and mandatory debt payments.
We expect to spend between $9 million and $11 million on capital expenditures
in fiscal 2004. In addition, we regularly evaluate acquisition opportunities.
Any cash needed for future acquisition opportunities would be obtained through
a combination of any remaining cash flows from continuing operations and
borrowing under the revolving credit facility. In the event that cash flows
from continuing operating activities would not be sufficient, we have available
borrowing capacity under various agreements of up to $91 million as of
September 30, 2003.
CAPITAL STRUCTURE
The following table sets forth the Company's capitalization at September 30,
2003 and June 30, 2003:
September 30 June 30
Short-term debt $ 1,372 $ 910
Long-term debt 105,128 109,019
Total Debt 106,500 109,929
Less cash 10,181 11,509
Total net debt 96,319 98,420
Stockholders' equity 161,990 161,922
Total capitalization $258,309 $260,342
The Company's net debt decreased by $2.1 million to $96.3 million at September
30, 2003. The Company's net debt to capital percentage improved to 37.3% at
September 30, 2003 compared to 37.8% at June 30, 2003.
The Company has an insurance program for certain key executives. The
underlying policies have a cash surrender value of $19.2 million and are
reported net of loans of $13.3 million for which the Company has the legal
right of offset. These policies have been purchased to fund supplemental
retirement income benefits for certain executives. The aggregate present value
of future obligations was approximately $5.4 million and $5.6 million at
September 30, 2003 and June 30, 2003, respectively.
The Company is contractually obligated under various operating leases for real
property. As discussed elsewhere, in July, 2004, the Company sold a facility
and entered into a short-term leaseback of the building. The lease is
considered minor. No other leases were consummated in the first quarter of
fiscal 2004 which were not in the ordinary course of the Company's business.
The Company sponsors a number of both defined benefit plans and defined
contribution plans. We have evaluated the current and long-term cash
requirements of these plans. As noted above, the operating cash flows from
continuing operations is expected to be sufficient to cover required
contributions under ERISA and other governing rules.
QUARTER ENDED SEPTEMBER 30, 2003
AS COMPARED TO QUARTER ENDED SEPTEMBER 30, 2002
Summary
The first quarter of fiscal 2004 reflected a continuation of the positive trend
in bookings and sales that began during the fourth quarter of fiscal 2003. As
a result, the Company started the new fiscal year with a very solid performance
in its first quarter. Sales were up four percent and income from continuing
operations rose 16% versus the first quarter of last year.
In the first quarter, the Company reported net sales of $150.9 million compared
to $145.5 million for the prior year quarter, an increase of four percent. The
prior year included an extra month of sales from the European divisions due to
the Company's decision to conform the accounting year of those units to the
rest of the Corporation. Also, the current quarter was favorably impacted by
the effect of changes in average exchange rates which added an additional $2.2
million in sales on a comparable basis.
Gross profit margins were relatively stable at 32.1% for the current quarter
versus 32.6% for the same quarter in the prior year. The small decline
reflects the substitution of lower margin sales in the Food Service and
Industrial segments for higher margin sales in the Consumer Segment. Interest
expense was $360,000 lower than the prior year, a reflection of lower interest
rates and a decrease in average borrowing levels.
In accordance with the Company's continued efforts to evaluate its divisions in
terms of restructuring and realignment, a net operating income amount of
$25,000 and a restructuring charge of $549,000 were recorded in the current
quarter. These items are more fully described below and in the Notes to
Condensed Consolidated Financial Statements. However, the Company will
continue to evaluate its divisions for potential acquisitions and divestures.
Income from continuing operations for the first quarter was $5.3 million, or
43{cent} per diluted share, an increase of 16% from the prior year's comparable
income from continuing operations of $4.6 million, or 38{cent} per share.
Food Service Segment
The most significant improvement in year over year first quarter performance
was delivered by the Food Service Segment. Sales increased 12% to $42.5
million from $38.1 million a year earlier. The sales growth was primarily
organic and was attributable to market share gains and some improvement in
market conditions. The prior year included an extra month of non-U.S. sales
($1.1 million), described above, which was partially off-set by favorable
average exchange rates ($400,000) in the current year.
Master-Bilt, BKI and USECO each achieved double digit top line growth leading
several other businesses in this group that also increased sales. Operating
income for the group climbed 57% to $5.0 million from $3.2 million in the
comparable quarter last year, while operating profit margin increased to 12%
from eight percent in the prior year. All of the businesses in this segment
reported improved profitability for the current quarter, with the improved
profit performance at USECO clearly resulting from the restructuring activities
completed during the past year. Overall, bookings remained strong as the
backlog for this group at the end of the quarter was up slightly even after
strong shipments during the quarter.
Industrial Segment
First quarter sales in this segment increased two percent to $87.7 million from
$85.9 million in the prior year first quarter. Operating income for the group
declined 17% to $8.6 as compared to $10.3 million last year. The reduction in
operating income for the group was primarily attributable to higher metal
prices that negatively impacted profits at the Standex Air Distribution
division. The strongest revenue gains in the Industrial group were achieved by
the Standex Engraving division which benefited from increased organic sales and
from the acquisitions of I R International and Dornbusch. The prior year
included an extra month of non-U.S. sales ($3.3 million), described above,
which was partially off-set by favorable average exchange rates ($1.8 million)
in the current year.
Other divisions which demonstrated strong sales performance included Custom
Hoists which reported a ten percent revenue increase after encountering
significantly depressed markets over the past two years. Sales in the
Electronics and Air Distribution divisions held strong for the current quarter
as well. The overall backlog for the Industrial Segment was up appreciably at
the end of the quarter as compared to last year.
Consumer Segment
The Consumer Segment recorded a four percent decrease in sales for the first
quarter registering $20.8 million this year versus $21.5 million for the prior
year quarter. However, despite the small decrease in revenues, operating
income for the group doubled to $412,000 from $204,000 last year. The Consumer
Segment has successfully implemented cost reduction measures and rationalized
their businesses to the point that they are able to generate profits at the
lower sales volumes they are currently experiencing.
Other Operating Income, Net
In the first quarter of fiscal 2004, the Company sold two manufacturing
facilities which generated a total gain of $1,906,000. These gains are
included in this caption.
Also in the first quarter of fiscal 2004, the Company tested for recoverability
the long-lived assets and goodwill of one of its reporting units based upon
current facts and circumstances. In accordance with the guidance provided by
the Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets," and SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," the long-lived assets and related goodwill were
considered to be impaired and a charge of $1,881,000 was recorded reflecting
the estimated fair value of the reporting unit.
Restructuring
During the quarter $549,000 of restructuring charges were recorded, primarily
for the USECO and Standex Air Distribution divisions. The Company has sold
four facilities. With the proceeds from these sales and the gains in operating
profit achieved by selling/closing under-performing businesses, the Company
believes it has more than off-set all of the restructuring expenses incurred to
date. The restructuring and realignment program remains on schedule and is
meeting the expectations established at its onset.
Corporate
The net change in this segment quarter to quarter operating expense was only
$10,000. There was no significant change in the expenses of this segment.
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.
Foreign Currency Translation - The Company's primary functional currencies used
by its non-U.S. subsidiaries are the Euro and the British Pound Sterling
(Pound). During the last twelve month period, both these currencies have
experienced increases relative to the U.S. dollar, particularly the Euro. From
September, 2002 to September, 2003 the Pound has appreciated three percent and
the Euro has risen 16%. These higher exchange values were used in translating
the appropriate non-U.S. subsidiaries' balance sheets into U.S. dollars at the
end of the current quarter.
Environmental Matters - The Company is party to various claims and legal
proceedings, generally incidental to its business. The Company does not expect
the ultimate disposition of these matters will have a material adverse effect
on its financial statements.
Seasonality - Typically, the second and fourth quarters have been the best
quarters for our consolidated financial results. Due to the gift-giving
holiday season, the Consumer Segment has experienced strong sales benefiting
the second quarter performance. The fourth quarter performance has been
enhanced by increased activity in the construction industry.
CRITICAL ACCOUNTING POLICIES
The Condensed Consolidated Financial Statements include accounts of the Company
and all its subsidiaries. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
of America requires us to make estimates and assumptions in certain
circumstances that affect amounts reported in the accompanying Condensed
Consolidated Financial Statements, giving due consideration to materiality.
Although we believe that materially different amounts would not be reported due
to the accounting policies described below, the application of these accounting
policies involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates. We have listed a number of accounting policies which we believe to
be the most critical, but we also believe that all of our accounting policies
are important to the reader.
Allowance for Doubtful Accounts - Accounts Receivables are reduced by an
allowance for amounts that may become uncollectible in the future. Our
estimate for the allowance for doubtful accounts related to trade receivables
includes evaluation of specific accounts where we have information that the
customer may have an inability to meet its financial obligation together with a
general provision for unknown but existing doubtful accounts. Actual
collection experience may improve or decline.
Inventories and Related Reserves for Obsolete and Excess Inventory -
Inventories are valued at the lower of cost or market and are reduced by a
reserve for excess and potentially obsolete inventories. The Company regularly
reviews inventory values on hand using specific aging categories, and records a
provision for obsolete and excess inventory based on historical usage and
estimated future usage. As actual future demand or market conditions may vary
from those projected by management, adjustments to inventory valuations may be
required.
Income Taxes - We account for income taxes in accordance with SFAS no. 109,
"Accounting for Income Taxes." Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax carry forwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. We recorded a valuation allowance that
represents foreign operating loss carry forwards for which utilization is
uncertain. Management judgment is required in determining our provision for
income taxes, deferred tax assets and liabilities, and the valuation allowance
recorded against our net deferred tax assets. No provision for U.S. income and
foreign withholding taxes has been made for substantially all unrepatriated
foreign earnings because it is expected that such earnings will be reinvested
indefinitely or the distribution of any remaining amount would be principally
offset by foreign tax credits.
Workers' Compensation Accrual - The Company is self-insured for workers'
compensation at the majority of its divisions. The accrual is evaluated
frequently based on our actual claim experience. Management judgment is
required in determining our expense and related contingency levels as actual
future claim experience may differ from the projected claim experience.
Projecting claims experience requires management to make assumptions about
future liabilities for incidents which have already occurred but have not yet
been reported and future health care cost trends.
Environmental Liabilities - Our global operations are regulated by laws
designed to foster the preservation of the environment. Under various
circumstances these laws may require remediation at sites where hazardous
substances have been released and are endangering the environment or human
health.
We have expended substantial resources to comply with the applicable
environmental laws and regulations. We believe we are in material compliance
with these laws and regulations and we maintain procedures designed to ensure
compliance. However, we have been and may in the future be subject, in the
normal course of business, to formal or informal enforcement actions or
proceedings regarding such laws or regulations regardless of whether the
Company is determined to be ultimately responsible for any alleged
noncompliance with applicable environmental regulations.
Goodwill - We adopted SFAS No. 142, "Goodwill and Other Intangibles" effective
July 1, 2001. Under SFAS No. 142, goodwill is not amortized; however, goodwill
must be tested for impairment at least annually. Therefore, on an annual basis
we test for goodwill impairment by estimating the fair value of our reporting
units using the present value of future cash-flows method. In addition,
goodwill of a reporting unit is tested for impairment between annual tests if
an event occurs or circumstances change that would more likely than not reduce
the fair value of a reporting unit. An impairment loss is recognized if the
carrying amount exceeds the fair value. We are subject to financial statement
risk to the extent that goodwill becomes impaired.
Employee Benefit Plans - We provide a range of benefits to our employees,
including pensions and some post retirement benefits. We record expenses
relating to these plans based on calculations specified by U.S. GAAP, which
are dependent upon various actuarial assumptions such as discount rates,
assumed rates of return, compensation increases, turnover rates, and health
care cost trends. The expected return on plan assets assumption is based on
our expectation of the long-term average rate of return on assets in the
pension funds and is reflective of the current and projected asset mix of the
funds and considers the historical returns earned on the funds. We review our
actuarial assumptions on at least an annual basis and make modifications to the
assumptions based on current rates and trends when appropriate. Based on
information provided by our actuaries and other relevant sources, we believe
that our assumptions are reasonable.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Management
We are exposed to market risks from changes in interest rates, commodity prices
and changes in foreign currency exchange. To reduce these risks, we
selectively use, from time to time, financial instruments and other proactive
management techniques. We have internal policies and procedures that place
financial instruments under the direction of the Chief Financial Officer and
restrict all derivative transactions to those intended for hedging purposes
only. The use of financial instruments for trading purposes (except for
certain investments in connection with the KEYSOP Plan) or speculation is
strictly prohibited. The Company has no majority owned subsidiaries that are
excluded from the consolidated financial statements. Further, the Company has
no interests or relationships with any special purpose entities.
Exchange Risk
The Company is exposed to both transactional risk and translation risk
associated with exchange rates. Regarding transactional risk, the Company
mitigates certain of its foreign currency exchange rate risk by entering into
forward foreign currency contracts from time to time. These contracts are 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, 2003, the Company did not have any fair value exposure for
financial instruments.
Our primary translation risk was with the Euro and the British Pound Sterling.
We do not hedge our translation risk. As a result, fluctuations in currency
exchange rates can affect our stockholders' equity.
Interest Rate
The Company's interest rate exposure is limited primarily to interest rate
changes on its variable rate borrowings. From time to time, the Company will
use interest rate swap agreements to modify our exposure to interest rate
movements. At September 30, 2003, the Company has no outstanding interest rate
swap agreements.
The Company also has $64.3 million of long-term debt at fixed interest rates as
of September 30, 2003. There would be no immediate impact on the Company's
interest expense associated with its long-term debt due to fluctuations in
market interest rates. There has been no significant changes in the exposure
to changes in interest rates from June 30, 2003 to September 30, 2003.
The Company has a diversified customer base. As such, the risk associated with
concentration of credit risk is inherently minimized. The Company believes
that no one customer accounts for more than 4% of our outstanding receivables
or of our sales.
Commodity Prices
The Company is exposed to fluctuating market prices for commodities, primarily
steel. Each of our segments is subject to the effects of changing raw material
costs caused by the underlying commodity price movements. In general, we do
not enter into purchase contracts that extend beyond one operating cycle. We
do not believe that this exposure is material to the Company.
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 and 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 October 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 October 30, 2003,
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
(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 September 30, 2003. The Form 8-K was
filed on August 14, 2003, announcing earnings for the quarter ending June
30, 2003.
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 5, 2003 /s/ Robert R. Kettinger
Robert R. Kettinger
Corporate Controller
Date: November 5, 2003 /s/ Christian Storch
Christian Storch
Vice President/CFO