FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 1998 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 offices) (Zip Code) (603) 893-9701 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X . NO . The number of shares of Registrant's Common Stock outstanding on September 30, 1998 was 12,992,083. STANDEX INTERNATIONAL CORPORATION I N D E X Page No. PART I. FINANCIAL INFORMATION: Item 1. Statements of Consolidated Income for the Three Months Ended September 30, 1998 and 1997 2 Consolidated Balance Sheets, September 30, 1998 and June 30, 1998 3 Statements of Consolidated Cash Flows for the Three Months Ended September 30, 1998 and 1997 4 Notes to Financial Information 5-6 Item 2. Management's Discussion and Analysis 7-8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 9 PART II. OTHER INFORMATION: Item 6. Exhibits and Reports on Form 8-K 10 <TABLE> PART I. FINANCIAL INFORMATION STANDEX INTERNATIONAL CORPORATION <CAPTION> Statements of Consolidated Income (000 Omitted) Three Months Ended September 30 1998 1997 <S> <C> <C> Net Sales $157,377 $141,061 Cost of Products Sold 107,460 95,196 Gross Profit Margin 49,917 45,865 Selling, General & Administrative Expenses 34,217 31,473 Income from Operations 15,700 14,392 Other Income/(Expense): Interest Expense (2,857) (2,092) Interest Income 101 119 Other Income/(Expense) - net (2,756) (1,973) Income Before Income Taxes 12,944 12,419 Provision for Income Taxes 4,987 4,760 Net Income $ 7,957 $ 7,659 Earnings Per Share: Basic $ .61 $ .58 Diluted $ .61 $ .58 Cash Dividends Per Share $ .19 $ .19 </TABLE> <TABLE> <CAPTION> STANDEX INTERNATIONAL CORPORATION Consolidated Balance Sheets (000 Omitted) September 30 June 30 1998 1998 ASSETS CURRENT ASSETS: <S> <C> <C> Cash and cash equivalents $ 4,601 $ 9,256 Receivables net of allowances for doubtful accounts 102,577 98,531 Inventories (approximately 45% finished goods, 20% work in process, and 35% raw materials and supplies) 122,976 122,950 Prepaid expenses 11,534 4,493 Total current assets 241,688 235,230 PROPERTY, PLANT AND EQUIPMENT 251,371 252,349 Less accumulated depreciation 148,052 149,376 Property, plant and equipment, net 103,319 102,973 OTHER ASSETS: Goodwill, net 32,853 33,149 Prepaid pension cost 30,769 30,255 Other 10,220 9,635 Total other assets 73,842 73,039 TOTAL $ 418,849 $411,242 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current portion of long-term debt $ 4,145 $ 2,995 Accounts payable 38,994 37,748 Income taxes 8,738 5,755 Accrued expenses 36,127 39,789 Total current liabilities 88,004 86,287 LONG-TERM DEBT (less current portion included above) 165,887 163,448 DEFERRED INCOME TAXES AND OTHER LIABILITIES 15,496 15,310 STOCKHOLDERS' EQUITY: Common stock 41,976 41,976 Additional paid-in capital 8,693 8,517 Retained earnings 329,601 324,130 Cumulative translation adjustment (3,199) (2,729) Less cost of treasury shares (227,609) (225,697) Total stockholders' equity 149,462 146,197 TOTAL $ 418,849 $411,242 </TABLE> <TABLE> STANDEX INTERNATIONAL CORPORATION <CAPTION> STATEMENTS OF CONSOLIDATED CASH FLOWS (000 OMITTED) Three Months Ended September 30 1998 1997 Cash Flows from Operating Activities: <S> <C> <C> Net income $ 7,957 $ 7,659 Depreciation and amortization 3,690 3,262 Net changes in assets and liabilities (12,001) (11,386) Net Cash Used for Operating Activities (354) (465) Cash Flows from Investing Activities: Expenditures for property and equipment (4,103) (2,319) Other 552 (10) Net Cash Used for Investing Activities (3,551) (2,329) Cash Flows from Financing Activities: Proceeds from additional borrowings 3,626 9,437 Net payments of debt (37) (135) Cash dividends paid (2,486) (2,492) Purchase of treasury stock (2,270) (1,417) Other, net 533 521 Net Cash (Used for)/Provided by Financing Activities (634) 5,914 Effect of Exchange Rate Changes on Cash (116) (352) Net Change in Cash and Cash Equivalents (4,655) 2,768 Cash and Cash Equivalents at Beginning of Year 9,256 6,149 Cash and Cash Equivalents at September 30 $ 4,601 $ 8,917 Supplemental Disclosure of Cash Flow Information: Cash paid during the three months for: Interest $ 3,541 $ 3,011 Income taxes $ 2,003 $ 752 </TABLE> NOTES TO FINANCIAL INFORMATION 1. Management Statement The financial statements as reported in Form 10-Q reflect all adjustments (including those of a normal recurring nature) which are, in the opinion of management, necessary to a fair statement of results for the three months ended September 30, 1998 and 1997. These financial statements should be read in conjunction with the audited financial statements as of June 30, 1998. Accordingly, footnote disclosures that would substantially duplicate the disclosures contained in the latest audited financial statements have been omitted from this filing. 2. Per Share Calculation <TABLE> The following table sets forth the number of shares (in thousands) used in the computation of basic and diluted earnings per share: <CAPTION> Three Months Ended September 30 1998 1997 Basic - Average Shares <S> <C> <C> Outstanding 13,046 13,117 Effect of Dilutive Securities: Stock Options 67 161 Diluted - Average Shares Outstanding 13,113 13,278 Both basic and diluted incomes are the same for computing earnings per share. 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, 1998 and 1997 are 13,084 and 13,115, respectively. </TABLE> 3. Contingencies The Company is a party to various claims and legal proceedings related to environmental and other matters generally incidental to its business. Management has evaluated each matter based, in part, upon the advice of its independent environmental consultants and in-house counsel and has recorded an appropriate provision for the resolution of such matters in accordance with Statement of Financial Accounting Standards (SFAS) No. 5, "Accounting for Contingencies." Management believes that such provision is sufficient to cover any future payments, including legal costs, under such proceedings. 4. Comprehensive Income Effective July 1, 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive Income." Currently, in addition to net income, the only item, which would be included in comprehensive income, is accumulated translation adjustments. For the three months ended September 30, 1998 and 1997, comprehensive income totaled approximately $7,657,000 and $6,511,000 respectively. 5. Restructuring Charge In June 1998, the Company recorded a restructuring charge of $12,758,000 before taxes. This action was intended to close, dispose of, or liquidate certain small underperforming and unprofitable operating plants, product lines and businesses. The charge was recorded in the line item "Restructuring charge" on the Statements of Consolidated Income of the 1998 Annual Report. The components of the charge included involuntary employee severance and benefit costs totaling $1.7 million, asset impairments of $10.1 million and shutdown costs of $1.0 million. During the first quarter of fiscal 1999 the Company expended cash of $600,000 for employee severance and benefit costs and $300,000 for other costs reducing its unexpended reserve to $4.3 million. The current balance includes $1.3 million for involuntary employee severance and benefit costs, $2.3 million in disposition losses and $0.7 million in shutdown costs, all of which are expected to be realized in full by the end of the current fiscal year. STANDEX INTERNATIONAL CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations MATERIAL CHANGES IN FINANCIAL CONDITION During the quarter ended September 30, 1998, the Company invested $4.1 million in plant and equipment, purchased $2.3 million of the Company's Common Stock and paid out $2.5 million in cash dividends to the Company's shareholders. The Company utilized $3.6 million in proceeds from additional borrowings and its own cash resources to fund these activities. The Company's policy of using its funds to make acquisitions when conditions are favorable, invest in property, plant and equipment, pay dividends and purchase its Common Stock is expected to continue.* Restructuring Charge - In June of fiscal year 1998, the Company recorded a restructuring charge of $12.8 million before taxes. This action was intended to close, dispose of, or liquidate certain small underperforming and unprofitable operating plants, product lines and businesses. The charge was recorded in the line item "Restructuring Charge" on the Statements of Consolidated Income in the 1998 Annual Report. This change, and the resultant reserve, is more fully discussed in the Notes to Financial Information. Year 2000 Computer Issues - Under a program started in November 1997, the Company conducted a review of its computer systems and identified the programs and applications that were affected by the widely discussed software problems associated with the Year 2000. All systems have either been appropriately modified and tested or have been replaced with software that is Year 2000 compliant, except for (1) the necessary modifications to several purchased software packages that represent relatively small portions of the overall systems at certain of the Company's operating units, which have been delayed by the respective software vendors but are all expected to be completed by early calendar 1999; and (2) the final implementations, which are expected to be completed by June 30, 1999, of new Year 2000 compliant systems at two relatively small foreign units. Management believes that the failure or delays in completing the final stages of its Year 2000 program would not have a material impact on the Company's operations or its financial position.* The cost of modifying the programs, which has been and will be charged to expense (primarily in fiscal year 1998), is expected to aggregate approximately $600,000.* The Company has also communicated with key suppliers, financial institutions and others with which it and its various operating units do business, to assure that such third parties are also timely addressing and rectifying their "Year 2000" issues. However, the Company believes it has alternate vendors who could provide for the Company's needs if current vendors are negatively impacted.* Several new accounting pronouncements (Statement of Financial Accounting Standards (SFAS) Nos. 130, 131, 132, 133 and statement of position No. 98- 1) have been adopted as of July 1, 1998 concerning comprehensive income, segment reporting, pension and other post retirement benefit disclosures, derivatives instruments and hedging activities and cost of internally used computer software. The adoption of these pronouncements had no material effect on the Company's consolidated financial statements. SFAS No. 130 is more fully described in the Notes to Financial Information. OPERATIONS Quarter Ended September 30, 1998 as compared to the Quarter Ended September 30, 1997 For the first quarter ended September 30, 1998, Net Sales increased by $16.3 million as compared to the first quarter of the prior year. The majority of this increase came primarily from the added sales of ACME Manufacturing Company (ACME) which was acquired in early October, 1997. These added sales were partially offset by the absence of sales from the Doubleday Bros. Product lines which were disposed of in the prior year. Excluding the acquisition and dispositions, management believes the majority of fluctuations in Net Sales reported by each segment are a result of changes in unit volumes and consumer demand. In addition, changes in the average foreign exchange rates from September 30, 1997 to September 30, 1998 have had a relatively minor impact on Net Sales for the quarter. The Industrial Segment reported a reduction of $2.1 million in Net Sales as compared to the prior year as a result of the dispositions in the second half of fiscal 1998 noted above. Net Sales in the Food Service Segment decreased slightly as compared to the prior year due to several factors none of which was materially significant. The Consumer Segment's Net Sales increased by $19.4 million when compared to last year primarily due to the acquisition of ACME, as noted above. The Gross Profit Margin Percentage (GPMP) decreased to 31.7%, as compared to the prior year's percentage 32.5%. The GPMP reported in the Consumer Segment fell to 32%, a decline from the previous year's percentage of 35.3% due to lower initial margins at ACME. The GPMP reported in the Industrial Segment declined slightly from the previous year's percentage of 32.8% to 32%; however, none of the changes were individually significant. The Food Service Segment reported an increase in GPMP from 28.7% last year to 30.3% in the current year as a result of productivity gains, as well as the closure of an under-performing manufacturing facility. For the three months ended September 30, 1998 Selling, General and Administrative Expenses increased by $2.7 million, or 8.7%. Excluding the acquisition and dispositions noted above, none of the fluctuations reported by the Company's three segments were individually significant and corresponded to the changes in Net Sales discussed above. Interest Expense increased by 36.6%, or $765,000, as compared to the first quarter of fiscal 1998 as a result of increased borrowings to finance the ACME acquisition. The above factors resulted in a $525,000 increase in Income Before Income Taxes as compared to the same period of the prior year. The effective tax rate in the first quarter increased slightly from the rate in the comparable quarter in fiscal 1998. As a result of the above activity, Net Income for the first quarter of fiscal 1999 increased $298,000, or 3.9%, over the same period in the prior year. <F1> *These "forward looking" statements are necessarily dependent upon uncertainties in general domestic and international business and economic conditions and, where applicable, the accuracy of Year 2000 compliance representations from vendors and suppliers of the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to a number of market risks, primarily the effects of changes in foreign currency exchange rates and interest rates. Investments in foreign subsidiaries and branches, and their resultant operations, denominated in foreign currencies, create exposures to changes in exchange rates. The Company's use of its bank credit agreements creates an exposure to changes in interest rates. The effect of changes in exchange rates and interest rates on the Company's earnings has been relatively insignificant compared to other factors that also affect earnings, such as business unit sales and operating margins. The Company does not hold or issue financial instruments for trading, profit or speculative purposes. Based on historical foreign currency rate movements and the fair value of market-rate sensitive instruments at September 30, 1998, the Company does not believe that near term changes in foreign currency or interest rates will have a material impact on its future earnings, fair values or cash flows. PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 27. Financial Data Schedule (b) Reports on Form 8-K The Company filed no reports on Form 8-K with the Securities and Exchange Commission during the quarter ended September 30, 1998. ALL OTHER ITEMS ARE INAPPLICABLE STANDEX INTERNATIONAL CORPORATION S I G N A T U R E S Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STANDEX INTERNATIONAL CORPORATION Date: November 13, 1998 /s/ Robert R. Kettinger Robert R. Kettinger Corporate Controller Date: November 13, 1998 /s/ Edward F. Paquette Edward F. Paquette Vice President/CFO