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 December 31, 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 December 31, 1998 was 13,005,165. STANDEX INTERNATIONAL CORPORATION I N D E X Page No. PART I. FINANCIAL INFORMATION: Item 1. Statements of Consolidated Income for the Three and Six Months Ended December 31, 1998 and 1997 2 Consolidated Balance Sheets, December 31, 1998 3 and June 30, 1998 Statements of Consolidated Cash Flows for the Six Months Ended December 31, 1998 and 1997 4 Notes to Financial Information 5-6 Item 2. Management's Discussion and Analysis 7-9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 10 PART II. OTHER INFORMATION: Item 4. Submission of Matters to a Vote of Security Holders 11 Item 6. Exhibits and Reports on Form 8-K 11 PART I. FINANCIAL INFORMATION <TABLE> STANDEX INTERNATIONAL CORPORATION Statements of Consolidated Income (000 Omitted) <CAPTION> Three Months Ended Six Months Ended December 31 December 31 1998 1997 1998 1997 <S> <C> <C> <C> <C> Net Sales $171,171 $168,090 $328,548 $309,151 Cost of Products Sold 112,560 111,309 220,020 206,505 Gross Profit Margin 58,611 56,781 108,528 102,646 Selling, General and Administrative Expenses 40,351 40,640 74,568 72,113 Income from Operations 18,260 16,141 33,960 30,533 Other Income/(Expense): Interest Expense (2,946) (2,878) (5,803) (4,970) Interest Income 126 106 227 225 Other Income/(Expense) - net (2,820) (2,772) (5,576) (4,745) Income Before Income Taxes 15,440 13,369 28,384 25,788 Provision for Income Taxes 6,036 5,047 11,023 9,807 Net Income $ 9,404 $ 8,322 $17,361 $15,981 Earnings Per Share: Basic $ .72 $ .64 $ 1.33 $ 1.22 Diluted $ .72 $ .63 $ 1.33 $ 1.21 Cash Dividends Per Share $ .19 $ .19 $ .38 $ .38 </TABLE> <TABLE> STANDEX INTERNATIONAL CORPORATION Consolidated Balance Sheets (000 Omitted) <CAPTION> December 31 June 30 1998 1998 ASSETS CURRENT ASSETS: <S> <C> <C> Cash and cash equivalents $ 5,065 $ 9,256 Receivables, net of allowances for doubtful accounts 102,517 98,531 Inventories (approximately 45% finished goods, 20% work in process, and 35% raw materials and supplies) 125,641 122,950 Prepaid expenses 7,719 4,493 Total current assets 240,942 235,230 PROPERTY, PLANT AND EQUIPMENT 256,776 252,349 Less accumulated depreciation 152,521 149,376 Property, plant and equipment, net 104,255 102,973 OTHER ASSETS: Goodwill, net 32,759 33,149 Prepaid pension cost 32,430 30,255 Other 10,837 9,635 Total other assets 76,026 73,039 TOTAL $421,223 $411,242 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of debt $ 4,791 $ 2,995 Accounts payable 38,344 37,748 Income taxes 8,131 5,755 Accrued expenses 39,976 39,789 Total current liabilities 91,242 86,287 LONG-TERM DEBT (less current portion included above) 155,069 163,448 DEFERRED INCOME TAXES AND OTHER LIABILITIES 15,867 15,310 STOCKHOLDERS' EQUITY: Common stock 41,976 41,976 Additional paid-in capital 8,835 8,517 Retained earnings 336,533 324,130 Accumulated other comprehensive income (802) (2,729) Less cost of treasury shares (227,497) (225,697) Total stockholders' equity 159,045 146,197 TOTAL $421,223 $411,242 </TABLE> <TABLE> STANDEX INTERNATIONAL CORPORATION <CAPTION> STATEMENTS OF CONSOLIDATED CASH FLOWS (000 OMITTED) Six Months Ended December 31 1998 1997 Cash Flows from Operating Activities: <S> <C> <C> Net income $17,361 $15,981 Depreciation and amortization 7,506 6,771 Net changes in assets and liabilities (8,394) (8,758) Net Cash Provided by Operating Activities 16,473 13,994 Cash Flows from Investing Activities: Expenditures for property and equipment (8,658) (8,428) Expenditures for acquisitions (439) (46,769) Other 1,188 (6) Net Cash Used for Investing Activities (7,909) (55,203) Cash Flows from Financing Activities: Proceeds from additional borrowings 26,804 56,150 Net payments of debt (33,387) (343) Cash dividends paid (4,958) (4,968) Purchase of treasury stock (2,514) (6,130) Other, net 1,032 1,728 Net Cash Provided by/(Used for) Financing Activities (13,023) 46,437 Effect of Exchange Rate Changes on Cash 268 (16) Net Change in Cash and Cash Equivalents (4,191) 5,212 Cash and Cash Equivalents at Beginning of Year 9,256 6,149 Cash and Cash Equivalents at December 31 $ 5,065 $11,361 Supplemental Disclosure of Cash Flow Information: Cash paid during the six months for: Interest $ 5,471 $ 4,596 Income taxes $ 8,646 $ 7,483 </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 and six months ended December 31, 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 Six Months Ended December 31 December 31 1998 1997 1998 1997 Basic - Average Shares <S> <C> <C> <C> <C> Outstanding 13,005 13,050 13,030 13,080 Effect of Dilutive Securities: Stock Options 68 187 68 174 Diluted - Average Shares Outstanding 13,073 13,237 13,098 13,254 </TABLE> 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 and six months ended December 31, 1998 and 1997: 1998 1997 Quarter 13,012 13,033 Year-to-date 13,047 13,074 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 foreign currency translation adjustments. For the six months ended December 31, 1998 and 1997, comprehensive income (net of taxes) totaled approximately $18,517,000 and $16,168,000 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. As part of this restructuring the Company sold its Christmas Tree Stand product line in the second quarter and its SXI Technologies division in January 1999 for cash and notes. <TABLE> The following schedule reflects the Company's restructuring activities (in thousands) for the six months ended December 31, 1998: <CAPTION> Involuntary Employee Severance and Asset Shutdown Benefit Costs Impairment Costs Total <S> <C> <C> <C> <C> Reserve Beginning Balance $1,665 $10,061 $1,032 $12,758 Expended: Cash 927 0 413 1,340 Non Cash (disposals and write-offs) 0 4,607 0 4,607 Committed 846 3,290 400 4,536 Expected Additional Expenditures 0 2,025 250 2,275 Change in Estimates (108) 139 (31) 0 </TABLE> 6.Senior Unsecured Notes In October, the Company negotiated unsecured loan agreements with two institutional lenders in the amount of $25 million. The loans have a fixed interest rate of 6.8% and are repayable in lump-sum payments in October 2008. The financial covenants of the new loan agreements are similar to those under the Company's revolving credit agreement. The proceeds were used to refinance existing short-term indebtedness and for general corporate purposes. STANDEX INTERNATIONAL CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations Statements contained in the following "Management 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," "continue," or similar terms or variations of those terms or 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, general domestic and international business and economic conditions and market demand. MATERIAL CHANGES IN FINANCIAL CONDITION During the first six months of fiscal 1999, the Company invested $8.7 million in plant and equipment, purchased $2.5 million of the Company's Common Stock, paid down $33.4 million in debt and paid out $5 million in cash dividends to the Company's shareholders. To fund these expenditures, the Company utilized $26.8 million in proceeds from additional borrowings and $16.5 million in net operating cash flows. In October, the Company negotiated unsecured loan agreements with two institutional lenders in the amount of $25 million. The agreements have fixed interest rates of 6.8% and are repayable in lump-sum payments in October 2008. These unsecured notes are more fully described in the Notes to Financial Information. 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 fiscal 1998 Annual Report. This charge and the reserve activity are discussed in the Notes to Financial Information. As part of this restructuring the Company sold its Christmas Tree Stand product line in the second quarter and its SXI Technologies division in January for cash and notes. 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. As of December 31, 1998 the Company's systems have either been appropriately modified and tested or have been replaced with software that is Year 2000 compliant. The only exceptions are the final implementations of new systems at two relatively small foreign units scheduled for the second half of fiscal 1999. Management believes that any delays or failure to complete this final stage of its Year 2000 program will not have a material impact on the Company's operations or its financial position. The total cost of modifying and testing all programs, which has been charged to expense (primarily in fiscal year 1998), was approximately $600,000. The Company has also communicated with key suppliers, financial institutions and others with which it does 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, and 132 and Statement of Position No. 98-1) have been adopted as of July 1, 1998 and concern comprehensive income, segment reporting, pension and other post retirement benefit disclosures, 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 (Reporting Comprehensive Income) is more fully described in the Notes to Financial Information. SFAS, No. 133 (Accounting for Derivative Instruments and Hedging Activities) will be adopted in the next fiscal year and is not expected to have a material effect on the Company's consolidated financial statements. OPERATIONS Quarter Ended December 31, 1998 As compared to the Quarter Ended December 31, 1997 For the second quarter ended December 31, 1998, Net Sales increased by $3.1 million as compared to the second quarter of the prior year. The effect of changes in the average foreign exchange rates from December 31, 1997 to December 31, 1998 on Net Sales for the quarter was not significant. Net Sales in the Food Service and Industrial Segments were flat as compared to the prior year due to several factors, none of which were significant. The Consumer Segment's Net Sales increased by $2.7 million when compared to the prior year due to a high demand for air distribution ducting from the Standex Air Distribution Products division and increased consumer demand at the Company's Berean Christian Stores. The Gross Profit Margin Percentage (GPMP) increased to 34.2%, as compared to the prior year's percentage of 33.8%. The GPMP reported by the Consumer and Industrial Segments increased slightly from the previous year's percentages; however, none of the changes were individually significant. The Food Service Segment reported an increase in GPMP from 29.2% last year to 31.3% in the current year as a result of productivity gains and reduced costs at several divisions. For the three months ended December 31, 1998 Selling, General and Administrative Expenses decreased by $289,000, or 0.7%. None of the fluctuations reported by the Company's three segments were individually significant. In the second quarter of fiscal 1999, Interest Expense remained approximately the same as reported in the prior year. While the Company incurred moderately higher average interest rates as compared to the prior year, average borrowings were lower for the same period. The above factors resulted in a $2.1 million increase in Income Before Income Taxes as compared to the prior year. The effective tax rate in the first quarter rose to 39.1% from 37.8% reported in the second quarter of the prior year due mainly to reduced foreign tax credits. As a result of the above activity, Net Income for the second quarter of fiscal 1999 increased by $1.1 million, or 13.0%, over the same period in the prior year. Six Months Ended December 31, 1998 As compared to the Six Months Ended December 31, 1997 Net Sales for the first six months of fiscal 1998 increased $19.4 million as compared to the same period in the prior year. The majority of this increase came 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 customer demand. In addition, although changes in the average foreign exchange rates from December 31, 1997 to December 31, 1998 have had a negative impact on Net Sales, the total effect was not significant. For the six months ended December 31, 1998, both the Food Service and Industrial Segments reported minor decreases in Net Sales as compared to the prior year. The reduction in the Industrial Segment was caused by the absence of sales due to the disposition of the Doubleday Bros. product lines in the second half of fiscal 1998. The decline in the Food Service Segment is attributed to several factors, none of which was material. The Consumer Segment's Net Sales increased by $22.1 million when compared to last year due to the acquisition of ACME and improved demand, as noted above. The Gross Profit Margin Percentage (GPMP) for the six months ended December 31, 1998 remained the same (at approximately 33%) for both current and prior year. The Food Service Segment reported a GPMP of 30.8%, as compared to the prior year percentage of 28.9% resulting from production efficiencies and reduced costs at several companies. The GPMP reported in the Consumer Segment fell to 34.6%, a decline from the previous year's percentage of 35.8% due to lower initial margins at ACME. The Industrial Segment's GPMP remained flat at 32.4% in fiscal 1998 versus 32.6% last year. Selling, General and Administrative Expenses (SG&A) increased by $2.5 million when compared to the same period in the prior year. The majority of this increase ($2.2 million) was from the additional SG&A expenses of ACME. None of the remaining fluctuations reported by the Company's three segments were individually significant and corresponded with the changes in Net Sales discussed above. Interest Expense increased by 16.8%, or $833,000, when compared to the first six months of fiscal 1998, due to increased borrowings ($45 million) to finance the ACME acquisitions and moderately higher average interest rates. In the current year, the Company recorded six months of interest charges on the increased borrowings related to the ACME acquisition as compared to three months in the prior year. The above factors resulted in a $2.6 million increase in Income Before Taxes as compared to the same period of the prior year. The effective tax rate increased slightly from 38% in fiscal 1998 to 38.8% in fiscal 1999 for the same reasons described above in the discussion of quarterly results. Due to the factors described above, Net Income for the six months ended December 31, 1998 increased $1.4 million, or 8.6%, when compared to the same period of the prior year. 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 December 31, 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 4. Submission of Matters to a Vote of Security Holders (a) The annual meeting of stockholders of the Company was held on October 27, 1998. Four matters were voted upon at the meeting: the election of directors, the adoption of a long term incentive plan, an amendment to the Certificate of Incorporation of the Company 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 1 (Election of Directors) Nominee For Withheld Thomas L. King 10,752,014 191,760 Edward F. Paquette 10,661,162 282,613 Sol Sackel 10,737,241 206,533 Proposal 2 (Adoption of 1998 Long Term Incentive Plan) For Against No Vote Abstain 8,931,992 853,046 1,009,275 149,161 Proposal 3 (Amendment to Certificate of Incorporation increasing the Common Stock authorized for Issuance to 60,000,000 shares) For Against Abstain 9,401,454 1,454,042 88,278 Proposal 4 (Appointment of Auditors) For Against Abstain 10,880,758 21,067 41,949 ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 3(i) Amendment to Restated Certificate of Incorporation approved by Stockholders on October 27, 1998. 10. 1998 Long Term Incentive Plan approved by Stockholders and effective on October 27, 1998. 27. Financial Data Schedule. (b) Reports on Form 8-K The Company filed a report on Form 8-K with the Securities and Exchange Commission during the quarter ended December 31, 1998. The item reported was the adoption of a Stockholders' Rights Agreement. The date on which the report was filed was December 18, 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: February 11, 1999 /s/ Robert R. Kettinger Robert R. Kettinger Corporate Controller Date: February 11, 1999 /s/ Edward F. Paquette Edward F. Paquette Vice President/CFO