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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 December 31, 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
December 31, 2003 was 12,224,096.
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, 2003 and 2002 2
Condensed Consolidated Balance Sheets,
December 31, 2003 and June 30, 2003 3
Condensed Statements of Consolidated Cash Flows
for the Six Months Ended December 31, 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 12-19
Item 3.
Quantitative and Qualitative Disclosures About Market Risk 20
Item 4.
Controls and Procedures 21
PART II. OTHER INFORMATION:
Item 4.
Submission of Matters to a Vote of Security Holders 22
Item 6.
Exhibits and Reports on Form 8-K 22
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
2003 2002 2003 2002
Net sales $148,674 $132,438 $ 284,703 $ 260,770
Cost of sales (98,228) (85,103) (188,643) (171,034)
Gross profit 50,446 47,335 96,060 89,736
Operating Expenses:
Selling, general and administrative
expenses (40,732) (39,261) (76,860) (72,963)
Other operating (expense)/income, net - (1,306) 41 (1,306)
Restructuring (197) (115) (746) (1,029)
Total operating expenses (40,929) (40,682) (77,565) (75,298)
Income from operations 9,517 6,653 18,495 14,438
Interest expense (1,424) (1,831) (2,941) (3,471)
Other, net (28) 200 43 27
Income before income taxes 8,065 5,022 15,597 10,994
Provision for income taxes (3,107) (1,879) (5,759) (4,090)
Income from continuing operations 4,958 3,143 9,838 6,904
Income/(loss) from discontinued
operations, net of taxes (1,392) 398 (1,900) 1,249
Net income $3,566 $3,541 $7,938 $8,153
Basic earnings per share:
Income from continuing operations $.40 $.26 $.80 $.57
Income/(loss) from discontinued
operations $(.11) $.03 $(.15) $.10
Total $.29 $.29 $.65 $.67
Diluted earnings per share:
Income from continuing operations $.40 $.26 $.79 $.57
Income/(loss) from discontinued
operations $(.11) $.03 $(.15) $.10
Total $.29 $.29 $.64 $.67
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
2003 2003
ASSETS
Current assets
Cash and cash equivalents $14,954 $11,509
Receivables, net of allowances of
$6,600 at 12/31/03 and $5,100
at 6/30/03 87,598 91,714
Inventories 85,980 82,530
Prepaid expenses 9,785 5,343
Total current assets 198,317 191,096
Property, plant and equipment 261,338 278,458
Less accumulated depreciation 150,150 166,861
Property, plant and equipment, net 111,188 111,597
Other assets
Prepaid pension cost 26,893 25,923
Goodwill 62,752 50,002
Long-term deferred tax asset 3,359 3,359
Other 24,801 22,298
Total other assets 117,805 101,582
Total $427,310 $404,275
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings and current
portion of long-term debt $1,375 $910
Accounts payable 41,615 41,241
Income taxes 2,145 2,508
Accrued expenses 48,336 40,640
Total current liabilities 93,471 85,299
Long-term debt (less current portion
included above) 114,799 109,019
Deferred pension and other liabilities 53,272 48,035
Stockholders' equity
Common stock 41,976 41,976
Additional paid-in capital 15,477 13,370
Retained earnings 391,392 388,593
Unamortized value of restricted stock (94) (100)
Accumulated other comprehensive loss (29,466) (31,818)
Treasury shares (253,517) (250,099)
Total stockholders' equity 165,768 161,922
Total $427,310 $404,275
See notes to condensed consolidated financial statements.
STANDEX INTERNATIONAL CORPORATION
Condensed Statements of Consolidated Cash Flows
(In thousands)
Six MonthsEnded
December 31
2003 2002
Cash flows from operating activities
Net income $7,938 $8,153
Income/(loss) from discontinued operations (1,900) 1,249
Income from continuing operations 9,838 6,904
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,819 5,663
Net changes in operating assets and liabilities 7,288 7,259
Net cash provided by operating activities from
continuing operations 22,945 19,826
Net cash provided by/(used for) operating activities
from discontinued operations (5,089) 838
Net cash provided by operating activities 17,856 20,664
Cash flows from investing activities
Expenditures for property and equipment (3,762) (3,404)
Expenditures for acquisitions (34,783) (1,559)
Proceeds from sale of real estate - 5,293
Other 109 (59)
Net cash provided by/(used for) investing activities
from continuing operations (38,436) 271
Net cash provided by/(used for) investing activities
from discontinued operations 23,944 (637)
Net cash used for investing activities (14,492) (366)
Cash flows from financing activities
Proceeds from additional borrowings 33,734 25,000
Repayments of debt (27,489) (36,925)
Cash dividends paid (5,140) (5,110)
Reacquisition of shares - stock incentive
program and employees (1,266) (3,237)
Other, net ( 101) 2,068
Net cash used for financing activities
from continuing operations (262) (18,204)
Net cash used for financing activities
from discontinued operations - -
Net cash used for financing activities (262) (18,204)
Effect of exchange rate changes on cash 343 743
Net change in cash and cash equivalents 3,445 2,837
Cash and cash equivalents at beginning of year 11,509 8,092
Cash and cash equivalents at end of period $14,954 $10,929
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $3,152 $3,333
Income taxes $4,841 $3,529
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 six months ended December 31, 2003 and 2002 and the financial
position at December 31, 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 seven months of international sales for the six months ended
December 31, 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. Acquisitions
In December 2003, the Company completed two acquisitions. Substantially all
of the assets of Magnetico, Inc. and its affiliate, Trans American
Transformer, Inc., were purchased in an all cash transaction. The affiliated
companies, with combined estimated annual sales of $3.2 million, custom
design and manufacture high-reliability, flight-critical magnetic components
for U.S. military and the aerospace and avionics industries. This business
unit will become part of Standex Electronics in the Industrial Segment. Also
in December 2003, all of the outstanding shares of Nor-Lake, Incorporated
were acquired in an all cash transaction. This business unit will be treated
as a stand alone division in the Food Service Segment. Nor-Lake is one of
the nation's largest suppliers of walk-in coolers and freezers to the food
service and scientific industries, with annual net sales of $54.4 million.
The fair value estimate of assets acquired and liabilities are expected to be
finalized by June 30, 2004. The resulting goodwill will not be deductible
for tax purposes.
The total purchase price (net of cash acquired) for the two acquisitions was
$34.8 million, and was allocated to the fair value of the assets purchased
and liabilities assumed. The acquisitions resulted in the recognition of
goodwill of approximately $13.6 million.
4. Discontinued Operations
As part of the October, 2002, announced realignment plan, the Company sold
its Jarvis Caster Group (included in the Industrial Segment) in November,
2003. The caster market in the United States has been impacted by the
influx of product from Asia Pacific and from excess global capacity. These
market conditions led the Company to divest itself of a business which did
not offer sales and earnings growth potential which the Company felt aligned
with shareholder expectations.
The Jarvis Group recorded sales of $56.3 million in the fiscal year ended
June 30, 2003. The results of operations of the Group, together with a
first quarter reported gain from the sale of real estate, have been
reclassified to discontinued operations. Also reclassified was an
impairment charge, related to the Group, of $1.9 million recorded in the
first quarter of the current fiscal year.
During the current quarter, the Company made the decision to close its
printing operation (included in the Consumer Segment) and cease its
commercial printing business. This business unit had net sales of
$6.8 million in fiscal 2003. The termination of operations is expected to
be concluded by the end of March, 2004 and is expected to cost $1.3 million,
pre-tax.
In September 2003, the Company announced it was exiting the German business
for roll technology engraving products which had net sales of $1.9 million
in fiscal 2003. 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 in the first quarter of fiscal 2004. In
fiscal 2003 the Company exited its H. F. Coors China Company (Food Service)
and National Metals (Industrial) businesses.
The three and six months ended December 31, 2002 have been restated to
reflect all discontinued operations (in thousands).
Three Months Ended Six Months Ended
December 31 December 31
2003 2002 2003 2002
Net sales $8,306 $18,187 $23,783 $38,458
Operating income/(loss) (2,564) 728 (3,181) 2,192
Earnings/(loss) from discontinued
operations, net of taxes (1,392) 398 (1,900) 1,249
The major classes of discontinued assets and liabilities included in the
Consolidated Balance Sheets are as follows in thousands:
2004 2003
Assets:
Current assets $3,362 $ 6,786
Non-current assets 4,149 4,869
Total assets of discontinued operations $7,511 $11,655
Liabilities:
Current liabilities $4,809 $662
Total liabilities of discontinued operations $4,809 $662
5. Stock Compensation Plans
The Company accounts for stock based compensation using the intrinsic value
method as proscribed by APB No. 25. Under the intrinsic value 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 Six Months Ended
December 31 December 31
2003 2002 2003 2002
Net income, as reported $3,566 $3,541 $7,938 $8,153
Add: Total stock-based compensation,
included in reported income,
net of income taxes 81 959 161 1,029
Less: Total stock-based compensation,
net of income taxes, fair value method (299) (1,230) (597) (1,513)
Proforma net income $3,348 $3,270 $7,502 $7,669
Proforma earnings per share:
Basic - as reported $.29 $.29 $.65 $.67
Basic - proforma $.27 $.27 $.61 $.63
Diluted - as reported $.29 $.29 $.64 $.67
Diluted - proforma $.27 $.27 $.60 $.63
The fair value of options at date of grant was estimated using the Black-
Scholes option pricing model.
6. Goodwill
Changes to goodwill during the current fiscal year were (in thousands):
Balance at June 30, 2003 $50,002
Additions (See Footnote #3) 13,571
Impairments/dispositions (See Footnote #4) (1,258)
Other adjustments 437
Balance at December 31, 2003 $62,752
7. Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the first in, first out method. Inventories at December 31, 2003 and
June 30, 2003 are comprised of the following (in thousands):
December 31 June 30
Raw materials $29,298 $28,954
Work in process 18,107 19,074
Finished goods 38,575 34,502
Total $85,980 $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 for the three- and six-
month periods ended December 31, 2003 and 2002:
2003 2002
Quarter 7,032 6,603
Year-to-date 13,120 12,148
8. Debt
Debt is comprised of the following (in thousands):
December 31 June 30
2003 2003
Bank credit agreements $ 47,200 $34,200
Institutional investors -
note purchase agreements
5.94% to 7.13% (due 2004-2012) 64,286 71,429
Other 3.0% to 4.85% (due 2004-2018) 3,582 3,928
Total 115,068 109,557
Less current portion 269 538
Total long-term debt $114,799 $109,019
The Company's loan agreements contain certain 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 December 31, 2003, the Company had available
$81.5 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 December 31, 2003 was 2.19%. Borrowings under the agreement
are not collateralized.
Debt is due as follows by fiscal year (in thousands): 2004, $207; 2005, $75;
2006, $61,486; 2007, $3,571; 2008, $3,571 and thereafter, $46,158.
At December 31, 2003, the Company was in compliance with all debt covenants.
9. 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 in
excess of $5 million in the current fiscal year. Pension expense for the
three- and six-month periods ending December 31, 2003 and 2002 was
approximately (in thousands):
2003 2002
Quarter $1,411 $236
Year-to-date $2,822 $251
Contributions to its pension plans in fiscal 2004 were $2.4 million and $3.6
million for the last three month and six month periods, respectively.
Contributions are expected to total $6.8 million for all of fiscal 2004.
10.
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 Six Months Ended
December 31 December 31
2003 2002 2003 2002
Basic - Average shares outstanding 12,213 12,072 12,203 12,080
Effect of Dilutive Securities -
Stock Options 161 154 145 161
Diluted - Average Shares Outstanding 12,374 12,226 12,348 12,241
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 and six months ended December 31, 2003 and 2002.
2003 2002
Quarter 12,281 12,038
Year-to-date 12,238 12,167
11. 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 December 31 Six MonthsEnded December 31
Involuntary Involuntary
Employee Employee
Severance Severance
and Benefit Asset Shutdown and Benefit Asset Shutdown
Costs Impairment Costs Total Costs Impairment Costs Total
Expense - Fiscal 2004
Cash expended $105 $- $92 $197 $210 $- $350 $560
Accrual/non-cash - - - - 186 - - 186
Total expense $105 $- $92 $197 $396 $- $350 $746
Expense - Fiscal 2003
Cash expended $314 $- $115 $429 $323 $- $224 $547
Accrual/non-cash (314) - - (314) 482 - - 482
Total expense $- $- $115 $115 $805 $- $224 $1,029
Involuntary
Employee
Severance
and Benefit Asset Shutdown
Costs Impairment Costs Total
Accrued Balances -
Fiscal 2004
Balance at 6/30/03 $2,704 $- $- $2,704
Payments (1,303) - - (1,303)
Additional accrual 186 186
Balance at 12/31/03 $1,587 $- $- $1,587
The restructuring costs related to the following segments:
Three Months Ended Six Months Ended
December 31 December 31
2003 2002 2003 2002
Food Service $ 43 $115 $293 $1,029
Industrial 154 - 453 -
Total expense $197 $115 $746 $1,029
1.
12. 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 not be material to the Company's financial position,
results of operations or cash flows.
13. 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
2003 2002 2003 2002
Accumulated other comprehensive
loss - Beginning $(33,599) $(6,522) $(31,818) $(8,473)
Foreign currency translation
adjustment 4,133 1,687 2,352 3,537
Change in fair market value of
interest rate swap agreements - 137 - 238
Accumulated other comprehensive
loss - Ending $(29,466) $(4,698) $(29,466) $(4,698)
14. 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 Six Months Ended
December 31 December 31
2003 2002 2003 2002
Statutory tax rate 35.0% 35.0% 35.0% 35.0%
Non-U.S. 1.1 1.2 .5 1.0
State taxes 3.5 3.2 4.2 3.0
Other including change
in contingency (1.1) (2.0) (2.8) (1.8)
Effective income tax rate 38.5% 37.4% 36.9% 37.2%
15. 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).
Three Months Ended Six Months Ended
December 31 December 31
Income from Income from
Net Sales Operations Net Sales Operations
2003 2002 2003 2002 2003 2002 2003 2002
SEGMENT
Food Service $ 43,142 $32,780 $3,281 $1,619 $ 85,638 $70,880 $8,243 $4,789
Consumer 26,136 29,105 1,596 275 45,302 48,759 1,932 595
Industrial 79,396 70,553 7,975 9,816 153,763 141,131 15,946 18,606
Restructuring (197) (115) (746) (1,029)
Other income, net - (1,306) 41 (1,306)
Corporate (3,138) (3,636) (6,921) (7,217)
Total $148,674 $132,438 $9,517 $6,653 $284,703 $260,770 $18,495 $14,438
The acquisition of Nor-Lake, Inc. increased the total assets of the Food
Service Segment by $43.6 million, and the disposition of the Jarvis
Caster Group reduced total assets of the Industrial Segment by
$28.6 million.
16. 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 December 31, 2003, and one contract was
outstanding for a notional value of $10 million at December 31, 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 December 31, 2003 or 2002.
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 six
months ended December 31, 2003, continuing operations generated cash flow
of $22.9 million compared to $19.8 million in the comparable period last
year. The increase was the result of a $2.9 million increase in income
from continuing operations. In addition, the sale of certain real estate
generated $2.8 million of incremental cash during the period. We
redeployed those resources by investing $3.8 million in capital
expenditures. In addition, we returned $5.1 million to shareholders
through cash dividends.
During the second quarter, the Company completed two significant
transactions. The Company sold the Jarvis Caster Group and purchased Nor-
Lake, Inc. The net effect of these transactions was additional borrowings
of approximately $6 million. The Company used proceeds from the sale and
additional borrowings under its revolving credit facility to complete these
transactions. The Company also made pension contributions of $3.6 million
during the six months ended December 31, 2003. The Company expects
contributions to total $6.8 million in fiscal 2004.
Discontinued operations used approximately $5.1 million in cash for the six
months ended December 31, 2003. This compared to the generation of
$838,000 million in cash the prior period. The use of cash primarily came
from the $1.9 million dollar loss from discontinued operations and
increases in receivables of $4.8 million associated with the sale of the
Jarvis Caster business. This negative cash flow was positively impacted
by other changes in assets and liabilities associated with discontinued
operations.
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 $10 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 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 $81.5 million as of December 31, 2003.
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.
Capital Structure
The following table sets forth the Company's capitalization at December 31,
2003 and June 30, 2003:
December 31 June 30
Short-term debt $ 1,375 $ 910
Long-term debt 114,799 109,019
Total Debt 116,174 109,929
Less cash 14,954 11,509
Total net debt 101,220 98,420
Stockholders' equity 165,768 161,922
Total capitalization $266,988 $260,342
The Company's net debt increased by $2.8 million to $101.2 million at
December 31, 2003. The Company's net debt to capital percentage was 37.9%
at December 31, 2003 compared to 37.8% at June 30, 2003.
The Company has had an insurance program for certain key retired
executives; active employees are no longer eligible for this program which
has been terminated. The underlying policies have a cash surrender value
of $19.5 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
retired executives. The aggregate present value of future obligations was
approximately $5.2 million and $5.6 million at December 31, 2003 and June
30, 2003, respectively.
The Company is contractually obligated under various operating leases for
real property. No significant leases were consummated in the first half of
fiscal 2004 which were not in the ordinary course of the Company's
business.
Quarter Ended December 31, 2003
As Compared to Quarter Ended December 31, 2002
Summary
The second quarter of fiscal 2004 results showed continued improvement in
the financial performance of the Company while marking the achievement of
several milestones in the restructuring and realignment program. Net sales
increased 12% from $132.4 million for the second quarter of fiscal 2003 to
$148.7 million. Income from continuing operations continued its favorable
trend, with an increase of 58% for the second quarter of fiscal 2004 when
compared to the same period in fiscal 2003. Discussions by segment are
detailed below.
The Company has been undergoing a restructuring and realignment program for
the past 18 months. Part of this program has been to evaluate the current
portfolio of companies and produce a series of larger operating units to
achieve critical mass necessary to lead the markets they serve. In
connection with this program, the Company sold the Jarvis Caster business
to a strategic buyer in the second quarter of fiscal 2004. Shortly
thereafter, the Company reinvested the proceeds from the sale and completed
the all cash purchase of Nor-Lake, Inc., a manufacturer of commercial
refrigeration walk-ins and freezers. Nor-Lake will be operated as a
separate division in the Food Service segment. The Company also completed
the acquisition of Magnetico, Inc. in the current quarter, a manufacturer
of flight-critical magnetic components for the U.S. military. Magnetico
will be part of Standex Electronics in the Industrial Segment. The
restructuring and realignment charges are more fully described in the Notes
to Condensed Consolidated Financial Statements.
The Company discontinued the Commercial Printing operation at Standard
Publishing, and the Company incurred a charge of $1.2 million pre-tax
associated with the closure of this business in the second quarter. The
closure of the Commercial Printing business is expected to be completed by
the end of March 2004. The Company reported the results of this operation
in discontinued operations and has restated prior period amounts in
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." For all
discontinued operations, prior period amounts throughout the Management
Discussion and Analysis and financial statements have been restated.
During the quarter, a number of the Company's steel suppliers sent notices
with indications of price increases for upcoming periods. Although these
price increases have not yet affected the Company's performance, these
price increases, if they become effective, would impact the future
performance of both the Industrial and Food Service Segments.
The exchange rate environment continues to be volatile and the dollar
continued to weaken versus most major currencies during the quarter. As a
result, net sales for the quarter were positively impacted by the
fluctuations in the amount of $3.0 million. The exchange rate environment
has had some negative impact especially in the purchase of steel during the
quarter.
Income from continuing operations continues to improve when compared to the
prior quarter. Income from continuing operations for the second quarter
was $5.0 million, or $.40 per diluted share compared to $3.1 million or
$.26 per diluted share in the prior year.
Food Service Segment
The Food Service Segment continues to be the best performing segment year
over year. Net sales increased 32% to $43.1 million from $32.8 million a
year earlier. This increase included the favorable impact of the
acquisition of Nor-Lake in the quarter. Excluding the acquisition, organic
sales increased 17%.
This growth is evident particularly in the market share gains of the Master-
Bilt business, whose year over year sales increased 37%. Further, the
restructuring and realignment program helped both USECO and Procon to
significantly improve operating profit through cost reductions. USECO
sales increased 20% while operating income increased to $63,000 from a loss
of ($715,000) a year earlier. The combination of improved sales and cost
structures led to an increase in operating income twice the amount of the
prior year to $3.3 million from $1.6 million for the segment.
Industrial Segment
Net sales for the Industrial Segment increased 13% to $79.4 million from
$70.6 million a year earlier. The growth came from acquisitions completed,
favorable currency exchange rates and organic growth. Excluding
acquisitions and currency fluctuations, organic sales increased 4% when
compared to a year earlier. Standex Engraving, Standex Electronics and
Custom Hoists all reported double digit sales increases of 34%, 14% and
37%, respectively for the quarter.
Operating income for the Industrial Segment was down 19% to $8.0 million
from $9.8 million in the prior year. The prior year included a pre-tax
payment of $1.3 million made as a contract price adjustment to Spincraft.
Excluding this one-time payment, operating income was down 6%. This
further decrease was attributable to the effect of steel prices on Standex
Air Distribution and operating inefficiencies encountered by Standex
Electronics as it upgrades and expands its Mexico facilities to accommodate
the integration of the operations relocated from Canada and the U.S.
Backlog for the Industrial Segment is up 20% even with a strong quarter of
shipments.
Consumer Segment
Sales were down 10% to $26.1 million from $29.1 million a year earlier.
The decrease in sales was offset by continued cost cutting measures
including the reduction of discretionary spending and reduced headcount to
bring the total expenditures in line with the current volume of sales.
These efforts have resulted in an increase of almost six times the prior
year operating income to $1.6 million from $275,000.
As previously stated, the Commercial Printing business at Standard
Publishing will be closed by the end of the third quarter. The Company
incurred a charge of $1.2 million in connection with this closure.
Standard Publishing management is developing new product offerings and
publications which are expected to benefit sales over the next 12 to 18
months. The Berean Bookstores continue to experience a lag in the recovery
for religious book and gift sales with sales down 5%. This decrease is
consistent with other participants in the religious book and gift store
market with reported sales down between 3% and 7% in the same period.
Standex Direct's sales were down 20% but operating income increased to
$795,000 from a loss of ($496,000) a year earlier. This improvement in
operating income is consistent with the strategy to maximize the return of
the Standex Direct business by reducing our investment in direct marketing
expenses this fiscal year. Backlog at Standex Direct was down 61% for the
quarter which lowered the overall segment backlog slightly compared to a
year earlier.
Corporate
Corporate expenses for the quarter decreased by approximately $500,000.
The decrease is attributable primarily to headcount reductions and an
overall reduction in discretionary spending. The Corporate segment
continues to reduce costs wherever possible through reduced reliance upon
outside professionals in all areas while, at the same time, absorbing
higher pension costs.
Other Operating (Expense)/Income, Net
In the second quarter of fiscal 2003, the caption "Other (expense)/income,
net" included retirement charges of $5.6 million and a gain on the sale of
U.K. property of $4.3 million.
Six Months Ended December 31, 2003
As Compared to Six Months Ended December 31, 2002
Summary
Net sales for the current six months of $284.7 million were 9% higher than
the same period in the prior year. The increase in sales was primarily
driven by better performance in its operations, the effect of acquisitions
and the favorable impact of currency exchange rates. Excluding these
items, organic sales grew 4.5%.
Income from continuing operations increased 42% to $9.8 million from $6.9
million, or $.79 per diluted share. During the first six months, the
Company has discontinued the German business for roll technology engraving
products, disposed of the Jarvis Caster Group to a strategic buyer and
announced the closure of the Commercial Printing business at Standard
Publishing. The first two were members of the Industrial Segment and the
latter the Consumer Segment. In fiscal 2003, the Company exited its H.F.
Coors China Company (Food Service Segment) and National Metals (Industrial
Segment) businesses. The Company reported the results of these operations
as discontinued in accordance SFAS No. 144. Prior period amounts
throughout this Management Discussion and Analysis and the financial
statements have been restated accordingly.
During the current six months, the Company also completed the acquisitions
of Nor-Lake and Magnetico as discussed above. Exchange rates for the
current six months positively impacted sales in the amount of $5.2 million
on a comparable basis. In accordance with the Company's continued efforts
to evaluate its divisions in terms of restructuring and realignment, a
restructuring charge of $746,000 was recorded in the current period. These
items are more fully described below and in the Notes to Condensed
Consolidated Financial Statements. The Company will continue to evaluate
its divisions for potential acquisitions and divestures.
Gross profit margins from continuing operations did not change at 34% for
the current and prior year six-month period. Interest expense was $530,000
lower than the prior year, a reflection of lower interest rates and a
decrease in average borrowing levels.
Food Service Segment
Net sales of this segment were up 21% to $85.6 million from $70.9 million.
This increase is the direct result of organic growth, an acquisition with
sales of $4.2 million and the favorable impact of exchange rates of
$860,000. A small increase in gross profit margins is attributable to
stronger margin performance from the Master-Bilt business, whose higher
sales have allowed for more absorption of overhead costs as well as the
strength of the Company's products. The USECO business margins improved
significantly in the current six month period when compared to a year
earlier. This improvement is attributed to the consolidation of
manufacturing facilities with Master-Bilt and higher sales volume.
Operating Income for the Segment increased 72% to $8.2 million from
$4.8 million, consistent with the explanations noted above for the quarter.
Industrial Segment
The Industrial Segment sales for the latest six-month period were up 9% to
$153.8 million from $141.1 million a year earlier. This increase is a
combination of organic growth, acquisitions and favorable impact of
exchange rates of $4.3 million. Gross profit margins decreased slightly
from the prior year primarily due to increased steel costs in the Standex
Air Distribution business as discussed above. Changes in operating income
were consistent with those reasons noted in the quarter discussion.
Consumer Segment
For the current six-month period, sales decreased almost 7% to $45.3
million from $48.8 million a year earlier. This segment performance
reflects the comments noted above in the second quarter discussion.
Although sales have decreased, cost saving measures discussed in the
quarter results above has produced higher margins and operating income.
Segment operating income increased more than three times to $1.9 million
from $595,000 a year earlier.
Corporate
Corporate expenses for the six-month period decreased by approximately
$296,000. Much of this decrease is attributable to headcount reductions
and an increased focus on cost containment of discretionary spending. This
reduction in costs at Corporate allowed the segment to absorb increased
pension expense associated with the Company's pension plans.
Restructuring
As noted above, restructuring charges totaled $746,000 to date in the
fiscal year. The Company has sold four facilities under the current
restructuring and realignment program. With the proceeds from these sales
and the gains in operating profit achieved by selling and or closing under-
performing businesses, the Company believes that it has more than off-set
all of the restructuring expenses incurred to date. The restructuring and
realignment program remains on schedule and, as noted throughout this
discussion, is meeting the expectations established.
Other Operating (Expense)/Income, Net
During the first quarter of fiscal 2004, the Company sold two manufacturing
facilities. One of those facilities related to the Jarvis Group which gain
has been reclassified to discontinued operations consistent with SFAS No.
144. Also during the first quarter, the Company incurred an impairment
charge of $1.9 million associated with the Jarvis Group. This impairment
charge has also been reclassified to discontinued operations. The fiscal
2003 caption "Other expense, net" includes retirement charges of $5.6
million and the gain on the sale of U.K. property of $4.3 million.
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 December, 2002 to December, 2003 the Pound has
appreciated 11% and the Euro has risen 19.8%. 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.
Stock Based Compensation - The Company accounts for stock based
compensation using the intrinsic value method as proscribed by APB No. 25.
Under the intrinsic value 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.
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 December 31, 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 December 31, 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 December 31, 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
change in the exposure to changes in interest rates from June 30, 2003 to
December 31, 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 effectiveness of 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, and with the exception from this
evaluation set forth in the next paragraph, it was determined that such
controls and procedures were effective as of the end of the period covered
by this report.
At the end of the quarter covered by this report, the Company acquired the
stock of Nor-Lake, Inc., a privately held corporation. Due to the timing
of this acquisition, management did not have the opportunity to complete
an evaluation of the effectiveness of Nor-Lake's controls and procedures
in conjunction with the Company's internal policies and practices for its
consolidated controls and procedures. Management will complete this
evaluation during fiscal 2004.
Further, there were no significant changes in the internal controls
or in other factors that could significantly affect these controls
during the quarterly period ended December 31, 2003 that have
materially affected or are reasonably likely to materially affect
the Company's internal control over financial reporting.
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 28, 2003. 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
C. Kevin Landry 9,267,622 749,853
H. Nicholas Muller, III, Ph.D. 9,776,324 241,151
Edward J. Trainor 9,690,115 327,360
Proposal II (To Approve the Selection of Deloitte & Touche LLP as
Independent Auditors)
For Against Abstain No Vote
9,230,044 774,416 13,015 -0-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(ii) By-Laws of the Company as amended and restated on
October 28, 2003.
31.1 Principal Executive Officer's Certification Pursuant to
Rule 13a-14(a)/15d-14(a) and Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Principal Financial Officer's Certification Pursuant to
Rule 13a-14(a)/15d-14(a) and Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Principal Executive Officer and Principal Financial Officer
Certifications 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, 2003. The
Form 8-K was filed on January 22, 2004, announcing the Company's
earnings for the quarter ended December 31, 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: February 9, 2004 /s/ Robert R. Kettinger
Robert R. Kettinger
Corporate Controller
Date: February 9, 2004 /s/ Christian Storch
Christian Storch
Vice President/CFO