UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended December 31, 2002 Commission File Number 1-7233 STANDEX INTERNATIONAL CORPORATION (Exact name of Registrant as specified in its Charter) DELAWARE 31-0596149 (State of incorporation) (I.R.S. Employer Identification No.) 6 MANOR PARKWAY, SALEM, NEW HAMPSHIRE 03079 (Address of principal executive office) (Zip Code) (603) 893-9701 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12.b-2). YES X NO The number of shares of Registrant's Common Stock outstanding on December 31, 2002 was 11,998,935. STANDEX INTERNATIONAL CORPORATION I N D E X Page No. PART I. FINANCIAL INFORMATION: Item 1. Condensed Statements of Consolidated Income for the Three and Six Months Ended December 31, 2002 and 2001 2 Condensed Consolidated Balance Sheets, December 31, 2002 and June 30, 2002 3 Condensed Statements of Consolidated Cash Flows for the Six Months Ended December 31, 2002 and 2001 4 Notes to Condensed Consolidated Financial Statements 5-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 Item 4. Controls and Procedures 20 PART II. OTHER INFORMATION: Item 4. Submission of Matters to a Vote of Security Holders 21 Item 6. Exhibits and Reports on Form 8-K 21 PART I. FINANCIAL INFORMATION <TABLE> <CAPTION> STANDEX INTERNATIONAL CORPORATION Condensed Statements of Consolidated Income (In thousands, except per share data) Three Months Ended Six Months Ended December 31 December 31 2002 2001 2002 2001 <S> <C> <C> <C> <C> Net sales $149,205 $149,927 $296,389 $293,637 Cost of sales 99,041 97,416 199,579 195,213 Gross profit 50,164 52,511 96,810 98,424 Operating Expenses: Selling, general and administrative expenses 41,370 40,344 77,845 74,293 Other expense, net 1,306 - 1,306 - Restructuring cost 115 - 1,029 - Total operating expenses 42,791 40,344 80,180 74,293 Income from operations 7,373 12,167 16,630 24,131 Interest expense (1,831) (2,101) (3,471) (4,549) Other, net 169 308 (9) 44 Income before income taxes 5,711 10,374 13,150 19,626 Provision for income taxes 2,170 3,996 4,997 7,750 Income before cumulative effect of a change in accounting principle 3,541 6,378 8,153 11,876 Cumulative effect of a change in accounting principle - - - (3,779) Net income $ 3,541 $ 6,378 $ 8,153 $ 8,097 Earnings per share: (before cumulative effect of a change in accounting principle): Basic $ .29 $ .53 $ .67 $ .98 Diluted $ .29 $ .52 $ .67 $ .97 Earnings per share: (after cumulative effect of a change in accounting principle): Basic $ .29 $ .53 $ .67 $ .67 Diluted $ .29 $ .52 $ .67 $ .66 Cash dividends per share $ .21 $ .21 $ .42 $ .42 See notes to condensed consolidated financial statements. </TABLE> <TABLE> <CAPTION> STANDEX INTERNATIONAL CORPORATION Condensed Consolidated Balance Sheets (In thousands) December 31 June 30 2002 2002 ASSETS <S> <C> <C> Current assets Cash and cash equivalents $ 10,929 $ 8,092 Receivables, net 85,330 93,219 Inventories 91,231 92,931 Prepaid expenses 10,435 4,570 Total current assets 197,925 198,812 Property, plant and equipment 278,884 273,630 Less accumulated depreciation 168,504 160,738 Property, plant and equipment, net 110,380 112,892 Other assets Prepaid pension cost 48,281 47,405 Goodwill, net 36,525 36,250 Other 17,931 10,680 Total other assets 102,737 94,335 Total $411,042 $406,039 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term borrowings and current portion of long-term debt $ 1,851 $ 82,221 Accounts payable 36,680 35,209 Income taxes 2,689 1,221 Accrued expenses 39,956 36,128 Total current liabilities 81,176 154,779 Long-term debt (less current portion included above) 118,531 50,087 Deferred income taxes and other liabilities 27,255 22,741 Stockholders' equity Common stock 41,976 41,976 Additional paid-in capital 12,465 12,075 Retained earnings 387,632 384,589 Unamortized value of restricted stock (107) (655) Accumulated other comprehensive loss (4,698) (8,473) Treasury shares (253,188) (251,080) Total stockholders' equity 184,080 178,432 Total $411,042 $406,039 See notes to condensed consolidated financial statements. </TABLE> <TABLE> <CAPTION> STANDEX INTERNATIONAL CORPORATION Condensed Statements of Consolidated Cash Flows (In thousands) Six Months Ended December 31 2002 2001 Cash flows from operating activities: <S> <C> <C> Net income $ 8,153 $ 8,097 Cumulative effect of a change in accounting principle 3,779 Depreciation and amortization 6,844 6,604 Net changes in operating assets and liabilities 5,667 2,167 Net cash provided by operating activities 20,664 20,647 Cash flows from investing activities: Expenditures for property and equipment (4,041) (7,227) Expenditures for acquisitions (1,559) - Proceeds from sale of real estate 5,293 - Other (59) 48 Net cash used for investing activities (366) (7,179) Cash flows from financing activities: Repayment of debt (36,925) (7,373) Proceeds from additional borrowings 25,000 5,598 Cash dividends paid (5,110) (5,069) Reacquisition of shares-open market - (22) Reacquisition of shares-stock incentive programs and employees (3,237) (3,286) Other, net 2,068 1,332 Net cash used for financing activities (18,204) (8,820) Effect of exchange rate changes on cash 743 (6) Net change in cash and cash equivalents 2,837 4,642 Cash and cash equivalents at beginning of year 8,092 8,955 Cash and cash equivalents at December 31 $ 10,929 $ 13,597 Supplemental disclosure of cash flow information: Cash paid during the six months for: Interest $ 3,333 $ 5,293 Income taxes $ 3,529 $ 5,874 See notes to condensed consolidated financial statements. </TABLE> NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Management Statement The financial statements as reported in this Form 10-Q reflect all adjustments (including those of a normal recurring nature) which are, in the opinion of management, necessary to a fair statement of results for the three and six months ended December 31, 2002 and 2001. These financial statements should be read in conjunction with the Annual Report on Form 10-K, and in particular the audited financial statements, for the fiscal year ended June 30, 2002. Accordingly, footnote disclosures that would substantially duplicate the disclosures contained in the latest audited financial statements have been omitted from this filing. 2. Non-U.S. Adjustment In July 2002, the Company conformed the year end of its non-U.S. operations which had previously reported on a one month lag. Total additional sales as a result of this conformation of year end were $4.4 million for the six months. The impact to net income was not significant. 3. Inventories Inventories at December 31 and June 30, 2002 are comprised of (in thousands): December 31 June 30 Raw materials $ 33,215 $ 33,257 Work in process 18,335 21,779 Finished goods 39,681 37,895 Total $ 91,231 $ 92,931 4. Debt Debt is comprised of (in thousands): December 31 June 30 2002 2002 Bank credit agreements $ 45,189 $ 74,732 Institutional investors 5.94% to 7.13% (due 2003-2012) 71,428 53,571 Other 3.0% to 4.85% (due 2003-2018) 3,765 4,005 Total 120,382 132,308 Less current portion 1,851 82,221 Total long-term debt $118,531 $ 50,087 The Company's loan agreements contain a limited number of provisions relating to the maintenance of certain financial ratios and restrictions on additional borrowings and investments. The most restrictive of these provisions requires that the Company maintain a minimum ratio of earnings to fixed charges, as defined, on a trailing four quarters basis. In October 2002, the Company completed a private placement of $25 million aggregate principal amount of 5.94% Senior Notes due October 17, 2012. The Notes are unsecured and carry an average life of approximately seven years. Proceeds were used to repay debt and for general working capital purposes. On February 7, 2003, the Company entered into a 3-year, $130 million revolving credit facility (RCF) replacing the existing facility which was to expire in May 2003. Proceeds under the agreement may be used for general corporate purposes or to provide financing for acquisitions. The agreement contains certain covenants including limitations on indebtedness and liens. Borrowings under the agreement bear interest at a rate equal to the sum of a base rate or a Eurodollar rate, plus an applicable percentage based on the Company's consolidated leverage ratio, as defined by the agreement. The effective interest rate would have been 2.4% if there had been borrowings under the agreement on the date the agreement was signed. Borrowings under the agreement are not collateralized. The facility will expire in February 2006. The Company has $43,700,000 in unsecured short-term borrowings. Since these may be refinanced by the Company on a long-term basis under the new revolving credit agreement, the short-term borrowings, which are not expected to be paid within a year, are classified as long-term debt. Debt is due as follows by fiscal year: 2003, $1,595,000; 2004, $7,502,000; 2005, $7,143,000; 2006, $50,842,000; 2007, $3,571,000; and thereafter, $49,729,000. 5. U.S. Pension Plan Credits In the fiscal year ended June 30, 2002, the Company recorded a net pension credit of $2.9 million for its defined benefit U.S. pension plans. The Company expects to report a pension credit of approximately $770,000 in the current fiscal year. 6. Earnings Per Share Calculation The following table sets forth the computation of basic and diluted earnings per share (in thousands): Three Months Ended Six Months Ended December 31 December 31 2002 2001 2002 2001 Income before cumulative effect of a change in accounting principle $3,541 $6,378 $ 8,153 $11,876 Cumulative effect of a change in accounting principle - - - (3,779) Net income $3,541 $6,378 $ 8,153 $8,097 Basic - Average Shares Outstanding 12,072 12,129 12,080 12,142 Effect of Dilutive Securities- Stock Options 154 161 161 165 Diluted - Average Shares Outstanding 12,226 12,290 12,241 12,307 Earnings per share (before cumulative effect of a change in accounting principle): Basic $ .29 $ .53 $ .67 $ .98 Diluted $ .29 $ .52 $ .67 $ .97 Earnings per share (after cumulative effect of a change in accounting principle): Basic $ .29 $ .53 $ .67 $ .67 Diluted $ .29 $ .52 $ .67 $ .66 Cash dividends per share have been computed based on the shares outstanding at the time the dividends were paid. The shares (in thousands) used in this calculation for the three and six months ended December 31, 2002 and 2001 were as follows: 2002 2001 Quarter 12,038 12,035 Year-to-date 12,167 12,069 7. Adoption of SFAS Nos. 144, 145 and 146 Effective July 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) Nos. 144, 145 and 146. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," creates one accounting model, based on the framework established in SFAS No. 121, to be applied to all long-lived assets including discontinued operations. The impact of the adoption of SFAS No. 144 was not significant. SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, amendment to FASB Statement No. 13, and Technical Corrections," among other things, restricts the classification of gains and losses from extinguishment of debt as extraordinary to only those transactions that are unusual and infrequent in nature as defined by APB Opinion No. 30 as extraordinary. There was no impact from the adoption of this SFAS. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs To Exit an Activity (including Certain Costs Incurred in a Restructuring)." The SFAS requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. The Company announced in October 2002 that restructuring charges in the range of $11 to $12 million (pre-tax) would be recorded over the next 18 months (see below). If this SFAS had not been adopted, a significant portion of these charges would have been recorded in the current six month period instead of the $1.0 million (pre tax) which has been recorded. 8. Other Expenses, Net During the current quarter, the Chief Executive Officer and the Executive Vice President/Operations elected early retirement. As participants in certain executive life insurance plans, they were entitled to certain plan-specified benefits. The charges related to these benefits include costs that previously were being amortized to an anticipated retirement age of 65, the net present value of a conversion feature and a retirement bonus. The majority of these benefits will be paid over the next ten years, and, accordingly, the total benefits have been discounted to their present value of $5.6 million, which is included in the caption "Other expenses, net" in the Condensed Statements of Consolidated Income. Also included in this caption is a gain ($4.3 million) on the sale of a manufacturing facility of a UK subsidiary which was completed in October, 2002. The sale is part of the Company's realignment strategy. 9. Restructuring In October 2002 the Company announced it was incurring restructuring charges over the next eighteen months in the amount of $11 to $12 million before taxes. The restructuring plan involves the (1) disposal, closing or elimination of certain under-performing and unprofitable operating plants, product lines, manufacturing processes and businesses; (2) realignment and consolidation of certain marketing and distribution activities; and (3) other cost containment actions, including selective personnel reductions. The charges will be recorded in the Condensed Statements of Consolidated Income under the caption "Restructuring costs." The components of the total estimated charges include involuntary employee severance and benefits costs totaling $4,772,000, asset impairments of $1,773,000 and shutdown costs of $4,812,000. The Company has early adopted SFAS No. 146 (described above), and, accordingly, these charges will be recorded generally when a liability is incurred or a severance plan is initiated. A summary of the charges is as follows (in thousands): Three Months Ended December 31, 2002 Involuntary Employee Severance and Asset Shutdown Benefits Costs Impairment Costs Total Cash expended $ 314 - $ 115 $ 429 Accrued (314) - - (314) Total expense $ - - $ 115 $ 115 Six Months Ended December 31, 2002 Involuntary Employee Severance and Asset Shutdown Benefits Costs Impairment Costs Total Cash expended $ 323 - $ 224 $ 547 Accrued 482 - - 482 Total expense $ 805 - $ 224 $ 1,029 10. Contingencies The Company is a party to various claims and legal proceedings related to environmental and other matters generally incidental to its business. Management has evaluated each matter based, in part, upon the advice of its independent environmental consultants and in-house counsel and has recorded an appropriate provision for the resolution of such matters in accordance with SFAS No. 5, "Accounting for Contingencies." Management believes that such provision is sufficient to cover any future payments, including legal costs, under such proceedings. 11. Accumulated Other Comprehensive Loss The change in accumulated other comprehensive loss is as follows (in thousands): Three Months Ended Six Months Ended December 31 December 31 2002 2001 2002 2001 Accumulated other comprehensive loss - beginning $(6,522) $(8,717) $(8,473) $(10,134) Foreign currency translation adjustment 1,687 (1,824) 3,537 (302) Change in fair market value of interest rate swap agreements 137 325 238 220 Accumulated other comprehensive loss at December 31 $(4,698) $(10,216) $(4,698) $(10,216) 12. Income Taxes A reconciliation of the U.S. Federal income tax rate to the effective income tax rate is as follows: Three Months Ended Six Months Ended December 31 December 31 2002 2001 2002 2001 Statutory tax rate 35.0% 35.0% 35.0% 35.0% Non-US 1.1% 0.8% 0.8% 1.3% State taxes 3.2% 2.4% 3.0% 2.6% Other including change in contingency (1.3)% 0.3% (0.8)% 0.6% Effective income tax rate 38.0% 38.5% 38.0% 39.5% 13. Industry Segment Information The Company is composed of three business segments. Net sales include only transactions with unaffiliated customers and include no intersegment sales. Operating income by segment excludes general corporate expenses, and interest expense and income. Net Sales Three Months Ended Six Months Ended December 31 December 31 Segment 2002 2001 2002 2001 Food Service $ 32,589 $ 32,581 $ 70,559 $ 68,954 Industrial 85,740 82,976 173,650 167,483 Consumer 30,876 34,370 52,180 57,200 Total $149,205 $149,927 $296,389 $293,637 Income From Operations Three Months Ended Six Months Ended December 31 December 31 Segment 2002 2001 2002 2001 Food Service $ 1,536 $ 1,956 $ 4,742 $ 5,239 Industrial 10,576 10,160 20,894 20,443 Consumer 309 2,858 513 3,989 Restructuring (115) - (1,029) - Other expense, net (1,306) - (1,306) - Corporate (3,627) (2,807) (7,184) (5,540) Total $ 7,373 $12,167 $ 16,630 $24,131 14. Derivative Instruments and Hedging Activities Standex manages its debt portfolio by using interest rate swaps to achieve an overall desired position of fixed and floating rate debt to reduce certain exposures to interest rate fluctuations. Standex designates its interest rate swaps as cash flow hedge instruments, whose recorded value in the consolidated balance sheet approximates fair market value. The Company assesses the effectiveness of its hedge instruments on a quarterly basis. For the quarter ended December 31, 2002, the Company completed an assessment of the cash flow hedge instruments and determined these hedges to be highly effective. The Company also determined the fair market value of its interest rate swap. The change in value, adjusted for any inefficiency, was recorded to other comprehensive income and the related derivative liability. For the quarter ended December 31, 2002 the increase in value totaled $137,000 and the ineffective portion of the hedge was immaterial. 15. Acquisitions The Company purchased, as of September 30, 2002, substantially all the assets of Cincinnati, Ohio-based CIN-TRAN, Inc. a manufacturer of custom UL/CSA approved low-frequency transformers. In December, 2002 Millennium Molds, a repairer of injection molds, was acquired. The combined purchase price of these acquisitions was $1.6 million, and their combined revenues totaled approximately $4.3 million. The first acquisition will be fully integrated with Standex Electronics, and the latter acquisition will become part of Standex Engraving. Both acquisitions are part of the Company's Focused Diversity strategy to seek bolt-on acquisitions for growth platform companies. STANDEX INTERNATIONAL CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations Statements contained in the following "Management's Discussion and Analysis" that are not based on historical facts are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terminology such as "may," "will," "expect," "believe," "estimate," "anticipate," "assume," "continue," or similar terms or variations of those terms or the negative of those terms. There are many factors that affect the Company's business and the results of its operations and may cause the actual results of operations in future periods to differ materially from those currently expected or desired. These factors include uncertainties in competitive pricing pressures or marketing of new products, failure to achieve the Company's acquisition, disposition and restructuring goals in the anticipated timeframe, unforeseen volatility in financial markets, general domestic and international business and economic conditions, significant changes in domestic and international fiscal policies or tax legislation and market demand. MATERIAL CHANGES IN FINANCIAL CONDITION Cash Flow During the first six months of fiscal 2003 operating activities generated $20.7 million in cash flow, almost identical to the $20.6 million for the comparable period in fiscal 2002. The Company redeployed those resources by investing $4.0 million in plant and capital equipment while returning $5.1 million to shareholders through cash dividends and reducing net debt by $14.8 million. Capital expenditures declined by $3.2 million as compared to the first six months of last year as the Company reacted to the downturn in the economy. Capital expenditures are expected to total less than $10 million for the current fiscal year. In addition to measuring the cash flow generation or usage based upon operating, investing, and financing classifications included in the Condensed Consolidated Statement of Cash Flows, the Company also measures free cash flow. Free cash flow is defined as cash flow from operating activities less capital expenditures and acquisitions. The Company generated free cash flow of $15.1 million in the first six months of fiscal 2003 compared with $13.4 million in the same period of fiscal 2002. Capital Structure The following table sets forth the Company's capitalization at December 31 and June 30, 2002: December 31 June 30 Short-term debt $ 1,851 $ 82,221 Long-term debt 118,531 50,087 Total Debt 120,382 132,308 Less cash 10,929 8,092 Total net debt 109,453 124,216 Stockholders' equity 184,080 178,432 Total capitalization $293,533 $302,648 The Company's net debt decreased by $14.8 million to $109.5 million at December 31, 2002. The Company's net debt to capital percentage is 37.3% at December 31, 2002 down from 41.0% at June 30, 2002. In October 2002, the Company completed a private placement of $25 million aggregate principal amount of 5.94% Senior Notes due October 17, 2012. The Notes are unsecured and carry an average life of approximately seven years. Proceeds were used to repay debt and for general working capital purposes. In February 2003 the Company entered into a 3-year, $130 million revolving credit facility (RCF) replacing the existing facility which was to expire in May 2003. Proceeds under the agreement may be used for general corporate purposes or to provide financing for acquisitions. The agreement contains certain covenants including limitations on indebtedness and liens. Borrowings under the agreement bear interest at a rate equal to the sum of a base rate or a Eurodollar rate, plus an applicable percentage based on the Company's consolidated leverage ratio, as defined by the agreement. Borrowings under the agreement are not collateralized. The facility will expire in February 2006. The Company has $43.7 million in unsecured short-term borrowings. Since these may be refinanced by the Company on a long-term basis under the new revolving credit agreement, the short-term borrowings, which are not expected to be paid within a year, are classified as long-term debt. OPERATIONS Quarter Ended December 31, 2002 As compared to the Quarter Ended December 31, 2001 Summary Net sales for the quarter ended December 31, 2002 were $149.2 million, essentially the same amount as the same quarter in fiscal 2002. The effect, on net sales, of changes in the average foreign exchange rates was not significant. Net earnings of $3.5 million were down 44% from the comparable quarter in fiscal 2002. Negatively impacting earnings were several one-time charges which included the costs associated with the restructuring and realignment program and the expenses associated with the retirement of two senior executives. These were partially off-set by the sale of a manufacturing facility in the UK. The effective tax rate for the quarter was 38.0% versus 38.5% last year. The performance of the Industrial and Food Service Segments were flat as compared to the prior year. However, the Consumer segment was negatively impacted by weak consumer demand, softer than expected holiday sales and higher marketing expenses required to launch a new product and to strengthen mailing lists. The Consumer Segment shortfall depressed operating income by $2.5 million. Industrial Segment Sales for the Industrial Segment were $85.7 million versus $83.0 million last year. The improvement was the result of strengthening in the engraving business due to an increase in orders from automotive customers, a good performance from the aerospace and energy businesses and continued level of activity in the HVAC business. However, the capital equipment- related products continued to experience weak demand. The gross profit margin remained steady at 31%, and overhead expenses were in line with the sales increase. Operating income rose four percent. Backlog, an important indicator of the future of this group, was 20% higher than last year. Food Service Segment Sales were flat for this segment for the second fiscal quarter at $32.6 million. Early signs have appeared that the markets for the food service industry have begun to firm up. The Company believes that several drugstore and quick-service restaurant customers, which are supplied by the Food Service Segment, have begun to plan for an increased number of new store openings in the next twelve months. However, some customers continue to be cautious about increasing their capital expenditures. A decline from 30% to 26% in gross profit margin was experienced by this group due to a change in product mix to lower-margin products and to the disruption and duplicate expenses related to the transfer of USECO's manufacturing operations to the Master-Bilt facility. Cost cutting partially off-set the gross margin decrease, and resulted in a reduction in operating income of over $400,000. Backlog for the group is up over 20% versus prior year. Historically the second and third quarters are the slowest for this segment. The first and fourth fiscal quarters are the prime construction periods for many customers. The market activity at that time will lead to a better assessment of the recovery of the food service industry and its ability to grow. Consumer Segment Sales for this segment were down ten percent ($30.9 million versus $34.4 million), while operating income dropped by almost $2.5 million. The results of the mail order business were negatively impacted by weak consumer demand and the shorter holiday gift season; higher marketing expenses were incurred to reach new customers, but did not yield the expected results. The bookstore and publishing businesses also experienced weak consumer and church customer demand through-out the quarter. Additionally, marketing expenses increased in the publishing unit due to the launch of a new product. The sales volume decline registered a $1.6 million drop in gross profit, a decrease in gross margin of $350,000 and increased overhead expenses (primarily marketing) of $550,000 resulted in a fall in operating income of $2.5 million. Increased cost reduction activity is being reviewed for implementation beginning in the third quarter. Restructuring The restructuring program is progressing on plan. Expenses for the quarter were $115,000 reflecting the completion of the integration of USECO manufacturing activities into the Master-Bilt operations during the quarter. This represents the first significant step of the restructuring program and is expected to yield savings due to lower labor costs and leveraging of fixed cost infrastructure. In addition, the electronics division has initiated the consolidation of the recent CIN-TRAN, Inc. acquisition by relocating manufacturing activities to Mexico and Canada. Other Expense, Net During the current quarter, the Chief Executive Officer and the Executive Vice President/Operations elected early retirement. As participants in certain executive life insurance plans, they were entitled to certain plan- specified benefits. The charges related to these benefits include costs that previously were being amortized to an anticipated retirement age of 65, the net present value of a conversion feature and a retirement bonus. The majority of these benefits will be paid over the next ten years, and, accordingly, the total benefits have been discounted to their present value of $5.6 million, which is included in the caption "Other expenses, net" in the Condensed Statements of Consolidated Income. Also included in this caption is a gain ($4.3 million) on the sale of a manufacturing facility of a UK subsidiary which was completed in October, 2002. The sale is part of the Company's realignment strategy. Corporate This segment increased its expenses by $820,000 for the quarter. This included several items such as one time duplicate salaries of $350,000, the cost of the annual Management Conference ($228,000) which was not held last year due to the September 11th terrorists' attack and net divisional expenses intentionally not allocated to the divisions ($148,000). Six Months Ended December 31, 2002 As compared to the Six Months Ended December 31, 2001 Summary Net sales for the current six months of $296.4 million were slightly more (1%) than the same period in the prior year primarily due to an extra month of European sales of approximately $4.4 million. The inclusion of the extra month's sales was due to an accounting change whereby the Company conformed the accounting year of its non-U. S. operations to the Standex June 30th fiscal year end. Excluding the extra month's sales, sales decreased marginally by one-half of one percent. The effect on net sales of changes in the average foreign exchange rates was not significant. Net earnings of $8.2 million as compared to the prior year's $11.9 million (before a cumulative effect of a change in accounting principle) reflects the comments noted above in the discussion of the second quarter and the inclusion of one million dollars in restructuring charges. A combination of more income in lower taxed countries (particularly in the first quarter) and the Company's tax strategies in the current fiscal year yielded a somewhat lower effective tax rate of 38.0% versus 39.5% last year. As indicated above, the Company recorded a charge of $3.8 million in the prior year representing the cumulative effect of a change in accounting principle. The change related to the Company's adoption of Statement of Financial Accounting Standard (SFAS) No.142 effective July 1, 2001. Industrial Segment The Industrial Segment sales for the latest six-month period were $6.2 million higher than the comparable period last year. The impact of the extra month's sales ($3.3 million) for this segment's European divisions and the improvement noted above in the quarter's discussion accounted for the increase. Gross profit margins were about the same as the prior year, and expenses were in line with the sales increase. Operating income increased by just over two percent. Food Service Segment Net sales of this segment were $1.6 million more than in the six months ended December 31, 2001. The extra month's European sales of $1.1 million accounted for the majority of the increase. A small decline in gross profit margin reflects the comments in the quarterly discussion above. Also as noted above, cost cutting partially off-set the gross margin decrease, and resulted in a $500,000 reduction in operating income. Consumer Segment A decrease in sales of almost nine percent (to $52.2 million) in this segment reflects the comments noted above in the second quarter discussion. Although the gross profit margin was unchanged from the prior year, the volume decline and increased expenses, as detailed above, reduced operating income by $3.5 million as compared to the same six month period last year. Restructuring and Other expense, net As noted above restructuring charges totaled one million dollars to date in the fiscal year. The Company's restructuring program is progressing on plan. Also as noted above, the caption "Other expense, net" includes retirement charges of $5.6 million and the gain on the sale of UK property of $4.3 million. Corporate The Corporate Segment incurred $1.6 million more in expenses in the current six months than in the same period last year. Similar to the current quarter's expenses noted above, these included many items some of which were duplicate salaries of $400,000, a reduction in the Corporate pension credit of $343,000, the cost of the annual Management Conference ($269,000) which was not held last year due to the September 11th terrorists' attack and net divisional expenses of $203,000 intentionally not allocated to the divisions. Other Matters Inflation - Certain of the Company's expenses, such as wages and benefits, occupancy costs and equipment repair and replacement, are subject to normal inflationary pressures. Environmental Matters - The Company is party to various claims and legal proceedings, generally incidental to its business and has recorded an appropriate provision for the resolution of such matters. As explained more fully in the Notes to the Consolidated Financial Statements, the Company does not expect, at this time, the ultimate disposition of these matters to have a material adverse effect on its financial statements. Seasonality - Increased consumer spending during the holiday season results in a higher level of activity in the Consumer Segment in the second quarter of the fiscal year and lower activity in the remaining quarters. The Industrial Segment experiences higher activity levels in the fiscal quarters ending September 30, December 31 and June 30 of each year and decreased activity in the quarter ending March 31, generally due to the effects of weather conditions on the construction industry. ACQUISITIONS The Company purchased, as of September 30, 2002, substantially all the assets of Cincinnati, Ohio-based CIN-TRAN, Inc. a manufacturer of custom UL/CSA approved low-frequency transformers. In December, 2002 Millennium Molds, a repairer of injection molds, was acquired. The combined purchase price of these acquisitions was $1.6 million, and their combined revenues totaled approximately $4.3 million. The first acquisition will be fully integrated with Standex Electronics, and the latter acquisition will become part of Standex Engraving. Both acquisitions are part of the Company's Focused Diversity strategy to seek bolt-on acquisitions for growth platform companies. CRITICAL ACCOUNTING POLICIES Presented below is a discussion about the Company's application of critical accounting policies that requires assumptions about matters that are uncertain at the time the accounting estimate is made, and where different estimates that reasonably could have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, have a material impact on the presentation of the Company's financial condition, changes in financial condition or results of operations. Management has identified the following accounting estimates as critical for the Company, and will discuss them separately below; allowance for bad and doubtful accounts; inventory obsolescence provision; income tax accruals; workers' compensation accruals; environmental liabilities; goodwill impairment; and pension and other postretirement benefits. Allowance for Bad and Doubtful Accounts The Company's recognition of revenue from sales to its customer base is impacted by the financial viability of its customers. At the time the Company recognizes revenue, upon product shipment, measurement of those sales are reduced by an estimate of customer non-payment, and the measurement of accounts receivable is also reduced by the same amount. Currently, the net accounts receivables balance of $85.3 million is about 21% of total assets, and the reserve of $5.7 million is about 6.3% of gross accounts receivable. For each of the Company's divisions, a historical correlation exists between the amount of sales made and the amount of bad debt. The greater sales level, the more bad debt is expected. For each of the Company's divisions, the Company monitors the levels of sales and receivables turnover and aging as part of its effort to reach an appropriate accounting estimate for bad debts. In estimating a bad debt reserve, the Company analyzes historical write-offs, current credit sales aging, current economic trends, changes in customer base, and recovery of bad debts. In recent years, as a result of a combination of the factors described above, the bad debt reserve has been increased to reflect the estimated valuation of gross receivables. It is possible that a large customer could default; however, no customer represents more than 3% of receivables. Estimating an allowance for doubtful accounts requires significant management judgment. In addition, different reserve estimates that reasonably could have been used would have had a material impact on reported receivable balances and thus have had a material impact on the presentation of the results of operations. For those reasons, since receivables balances are a material part of its balance sheet, and the majority of its sales are on a credit basis, the Company believes that the accounting estimate related to bad debts is a critical accounting estimate. Inventory Obsolescence A significant portion of the Company's assets (about 22%) are in the form of inventories in the various industries in which it operates. The Company's profitability and viability is highly dependent on the demand for products in the food service, consumer and industrial segments. An imbalance between purchasing, production levels and sales, could cause obsolescence and loss of competitive price advantage and market share. The Company's diversity and the various markets in which it participates somewhat mitigates this risk. The Company reduces its inventory valuation by its estimate of the portion which might remain unsold, and recognizes an expense of this same amount which is classified within cost of sales in the statement of operations. For its products, a historical correlation exists between the rate of inventory turnover and the levels of inventory. For each of its products, the Company monitors the levels of product sales and inventory at the division level as part of its effort to reach an appropriate accounting estimate of obsolescence reserves. In estimating impairment, the Company analyzes historical returns, current inventory levels, current economic and industry trends, changes in consumer demand, introduction of new competing products and acceptance of its products. As a result of a combination of the factors described above, the reserves for inventory obsolescence were materially increased in the last fiscal year. In addition, different reserve estimates that the Company reasonably could have used would have had a material impact on reported net inventory and cost of sales, and thus have had a material impact on the presentation of the results of operations. For those reasons, the Company believes that the accounting estimate related to inventory obsolescence is a critical accounting estimate. Income Taxes The Company's estimate of current year tax expense and accrual, and recognition of a deferred tax liability ($19 million at December 31, 2002) follows the provisions of SFAS No. 109. The Company provides for potential tax contingencies arising from routine audits by revenue taxing agencies. Its estimate is based on historical evidence as well as expert advice from its tax advisors. It is reasonably possible to assume that actual amounts payable as a result of such audits could differ from that accrued in the financial statements. Workers' Compensation Accrual The Company is self-insured for workers' compensation at the majority of its divisions, and evaluates its accrual on a monthly basis. The accrual is adjusted monthly based on actual claims experience. Management believes, and past experience has confirmed, that total service fee savings for the Company outweigh certain financial risks incurred by self-insurance of workers' compensation. Accounting standards require that a related loss contingency be recognized as part of the Company's financial position. The accrual as of December 31, 2002, was $5.5 million, of which approximately $3.7 million relates to the future liability for incidents which have already occurred but not yet reported. The Company believes that the accounting estimate related to the assessment of future liability for current work-related injuries is a critical accounting estimate because it is highly susceptible to change from period to period due to the requirement that Company management make assumptions about future costs of claims based on historical costs. Environmental Liabilities At several of its divisions, the Company's operations utilize materials defined under federal and state regulations as "hazardous." On occasion, the Company has incurred costs both in connection with environmental remediation of its facilities (whether ongoing operations or facilities being sold) and disposal of waste at licensed, third party disposal facilities. A recorded liability for potential future environmental remediation reflects the Company's estimate of the potential future costs of possible remediation based primarily on experience with properties of that type, consultation with independent environmental consultants and previous environmental involvement. The Company believes the accounting estimate related to remediation expenses is a critical accounting estimate because legal requirements related to any remediation could affect net income. However, a number of contingencies could affect the Company's future exposure in connection with this item including, but not limited to, changes in legislation and unforeseen incidents which could occur at the Company's divisions. The forecasting of environmental remediation costs is highly uncertain and requires a large degree of judgment. However, based upon the Company's experience with environmental issues, the Company believes the recorded liability is appropriate. Further, the charges related to environmental remediation in the past three years have been insignificant. Goodwill Impairment The Company adopted SFAS No. 142, "Goodwill and Other Intangibles" effective July 1, 2001. In accordance with this SFAS, the Company evaluated its carrying value of goodwill on a division by division basis at both December 31, 2001 and June 30, 2002. As a result of the initial evaluation an impairment charge of $3.8 million was recorded in fiscal 2002. The Company's carrying value of goodwill at December 31, 2002, was $36.5 million and relates to several divisions and industries. All of these divisions and industries are subject to changes in markets, processes and products which could impact the carrying value of the division and its goodwill. The valuation of these divisions is a critical accounting policy since the reduction in value in any one division could have a significant impact on the financial statements of the Company. Pension and Other Postretirement Benefits The Company records pension and other postretirement benefit costs in accordance with SFAS No. 87, "Employers' Accounting for Pensions," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." Under these accounting standards, assumptions are made regarding the valuation of benefit obligations and performance of plan assets. The primary assumptions relate to discount rate, expected return on plan assets, rate of compensation increase, health care cost trend, and amortization of gains and (losses). While the Company believes that the assumptions used are appropriate, significant differences in the actual experience or significant changes in the assumptions may have a material impact on its results of operations and financial position. Adoption of SFAS Nos. 144, 145 and 146 Effective July 1, 2002, the Company adopted SFAS Nos. 144, 145 and 146. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" creates one accounting model, based on the framework established in SFAS No. 121, to be applied to all long-lived assets including discontinued operations. The impact of the adoption of SFAS No. 144 was not significant. SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, amendment to FASB Statement No. 13, and Technical Corrections," primarily restricts the classification of gains and losses from extinguishment of debt as extraordinary to only those transactions that are unusual and infrequent in nature as defined by APB Opinion No. 30 as extraordinary. There was no impact from the adoption of this SFAS. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The SFAS requires that a liability for cost associated with an exit or disposal activity be recognized when the liability is incurred. The Company announced in October 2002, that restructuring charges in the range of $11 to $12 million (pre tax) would be recorded over the next 18 months (see below). If this SFAS had not been adopted, these charges would have been recorded in full in the current six month period instead of the $1.0 million (pre tax) which was recorded. New Accounting Pronouncements In October 2002, the Financial Accounting Standards Board issued SFAS No. 147, "Acquisitions of Certain Financial Institutions." This SFAS will not apply to the Company. Restructuring In October 2002 the Company announced it was incurring restructuring charges over the next eighteen months in the amount of $11 to $12 million before taxes. The restructuring plan involves the (1) disposal, closing or elimination of certain under-performing and unprofitable operating plants, product lines, manufacturing processes and businesses; (2) realignment and consolidation of certain marketing and distribution activities; and (3) other cost containment actions, including selective personnel reductions. The charges will be recorded in the Condensed Statements of Consolidated Income under the caption "Restructuring costs." The components of the estimated charges include involuntary employee severance and benefits costs totaling $4,772,000, asset impairments of $1,773,000 and shutdown costs of $4,812,000. The restructuring will consist of a series of initiatives that are expected to yield significant savings and individual pay backs in the range of 12 to 24 months. In addition, the Company anticipates generating cash by selling underutilized facilities to fund a significant portion of the restructuring. The Company has early adopted SFAS No. 146 (described above), and, accordingly, these charges will be recorded generally when a liability is incurred or a severance plan is initiated. At December 31, 2002, $1.0 million (pre tax) of the charges had been incurred. See the notes to condensed consolidated financial statements for details of these charges. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to market risk associated with changes in foreign currency exchange rates and interest rates. The Company mitigates certain of its foreign currency exchange rate risk by entering into forward foreign currency contracts. These contracts are primarily used as a hedge against anticipated foreign cash flows, such as dividend and loan payments, and are not used for trading or speculative purposes. The fair value of the forward foreign currency exchange contracts is sensitive to changes in foreign currency exchange rates, as an adverse change in foreign currency exchange rates from market rates would decrease the fair value of the contracts. However, any such losses or gains would generally be offset by corresponding gains and losses, respectively, on the related hedged asset or liability. Due to the absence of forward foreign currency contracts at December 31, 2002, the Company did not have any fair value exposure. There have been no significant changes in the exposure to changes in both foreign currency and interest rates from June 30, 2002 to December 31, 2002. ITEM 4. CONTROLS AND PROCEDURES The management of the Company including Mr. Roger L. Fix as Chief Executive Officer and Mr. Christian Storch as Chief Financial Officer have evaluated the Company's disclosure controls and procedures. Under the rules promulgated by the Securities Exchange Commission, disclosure controls and procedures are defined as those "controls or other procedures of an issuer that are designed to ensure that information required to be disclosed by an issuer in the reports issued or submitted by it under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms." Based on the evaluation of the Company's disclosure controls and procedures, it was determined that such controls and procedures were effective as of January 30, 2003 the date of the conclusion of the evaluation. Further, there were no significant changes in the internal controls or in other factors that could significantly affect these controls after January 30, 2003, the date of the conclusion of the evaluation of disclosure controls and procedures. PART II. OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders (a) The annual meeting of stockholders of the Company was held on October 29, 2002. Two matters were voted upon at the meeting: the election of directors and the approval of the appointment of independent auditors of the Company. The name of each director elected at the meeting and the number of votes cast as to each matter are as follows: Proposal I (Election of Directors) Nominee For Withheld John Bolten, Jr. 7,938,935 2,464,934 Roger L. Fix 10,045,518 358,351 Daniel B. Hogan, Ph.D. 10,035,613 368,256 David R. Crichton 10,027,459 376,410 Proposal II (To Approve the Selection of Deloitte & Touche LLP as Independent Auditors) For Against Abstain No Vote 9,813,763 569,814 20,292 -0- ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 10 (a) Consulting Agreement between the Company and Edward J. Trainor dated December 31, 2002* 10 (b) Consulting Agreement between the Company and David R. Crichton dated December 31, 2002* 99 (a) Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99 (b) Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K The Company filed one report on Form 8-K with the Securities and Exchange Commission during the quarter ended December 31, 2002. The Form 8-K was filed on October 24, 2002, announcing the Company's strategic realignment and restructuring program. * Management contract or compensatory plan or arrangement. ALL OTHER ITEMS ARE INAPPLICABLE STANDEX INTERNATIONAL CORPORATION S I G N A T U R E S Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STANDEX INTERNATIONAL CORPORATION Date: February 11, 2003 /s/Robert R. Kettinger ----------------------- Robert R. Kettinger Corporate Controller Date: February 11, 2003 /s/Christian Storch ----------------------- Christian Storch Vice President/CFO CERTIFICATION I, Roger L. Fix, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Standex International Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 11, 2003 /s/ Roger L. Fix -------------------------- Roger L. Fix President/CEO CERTIFICATION I, Christian Storch, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Standex International Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): d. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and e. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 11, 2003 /s/ Christian Storch -------------------------- Christian Storch Vice President/CFO