UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30,December 31, 2005

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 a large accelerated filer, an accelerated filer, (as definedor a non-accelerated filer.  See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act).  Act.  (Check one):  

YESLarge accelerated filer __   Accelerated filer X  NONon-accelerated filer __

Indicate by check mark whether the Registrant is a shell filer (as defined in Rule 12b-2 of the Exchange Act).

YES [  ]___     NO [X]   X

The number of shares of Registrant's Common Stock outstanding on November 4, 2005January 26, 2006 was 12,425,954.12,412,952.

STANDEX INTERNATIONAL CORPORATION

I N D E X

Page No.

PART I.

FINANCIAL INFORMATION:

Item 1.

CondensedStatements of Consolidated Income for the Three and

Six Months Ended September 30,December 31, 2005

and 2004 (Unaudited)

2

Condensed Consolidated Balance Sheets, September 30,December 31, 2005 and

June 30, 2005 (Unaudited)

3

Condensed Statements of Consolidated Cash Flows for the ThreeSix Months Ended

September 30,December 31, 2005 and 2004 (Unaudited)

4

Notes to Condensed Consolidated Financial Statements (Unaudited)

5-105

Item 2.

Management's Discussion and Analysis of Financial Condition and

Results of Operations

11-1713

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

18-1922

Item 4.

Controls and Procedures

1923

PART II.

OTHER INFORMATION:

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

2024

Item 4.

Submission of Matters to a Vote of Security Holders

24

Item 6.

Exhibits and Reports on Form 8-K

25

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.

Management Statement

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the results of operations, cash flows and comprehensive income for the three months and six months ended September 30,December 31, 2005 and 2004 and the financial position at September 30,December 31, 2005.  The interim results are not necessarily indicative of results for a full year.  The condensed consolidated financial statements and notes do not contain information which would substantially duplicate the disclosure contained in the audited annual consolidated financial statements and notes for the year ended June 30, 2005.  The condensed consolidated balance sheet at June 30, 2005 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.  The financial statements contained hereinher ein should be read in conju nctionconjunction with the Annual Report on Form 10-K and in particular the audited consolidated financial statements for the year ended June 30, 2005.  

2.

Significant Accounting Policies

The significant accounting policies have not changed since the 2005 Form 10-K was filed.

Stock Based Compensation Policy:  Stock options and awards have been issued to officers and other management employees under the Company’s various incentive compensation programs.  The stock options generally vest over a five-year period and have a maturity of seven to ten years from the issuance date.  Prior to July 1, 2005, the Company accounted for employee stock option grants and awards using the intrinsic value method in accordance with Accounting Principles Board (APB) Option No. 25 “Accounting for Stock Issued to Employees” and related interpretations.  Accordingly, compensation expense was measured as the excess of the underlying stock price over the exercise price on the date of the grant for options and awards.  The Company accounted for performance based awards based on the probability of the achievement of the performance goal measured at the then current prices of the underlyingunderlyi ng stock.  &nbs p;Prior to July 1, 2005, the Company used the nominal vesting period approach for retirement eligible employees.  Under this approach, the Company recognized compensation expense over the stated vesting period and, if an employee retired before the end of the vesting period, recognized any remaining unrecognized compensation cost at the date of retirement.

Commencing July 1, 2005, the Company adopted Statement of Financial Accounting Standard No. 123R, “Share Based Payments” (SFAS No. 123R), which requires the recognition of compensation expense associated with stock options and awards based on their fair values.  The Company elected to adopt SFAS NO.No. 123R using the modified prospective-transition method.  Under that method, compensation cost recognized in the first quarter of fiscal 2006 includes a ratable portion of compensation cost for all share-based payments not yet vested as of June 30, 2005, and a ratable portion of compensation cost for all share-based payments granted subsequent to June 30, 2005, based on the grant-date fair value.  As a resultDuring the first quarter of the terms included in new awards,fiscal 2006, the Company changed ourits approach for recognizing compensation cost for retirement eligible employees.  The stated vesting period is considered non-substantive for those employees thatempl oyees who are retirement eligible.  During the first quarter of fiscal 2006, an additional $531,000 was recognized as compensation expense for those employees that met the definition of retirement eligible for any shares not yet vested as of June 30, 2005 and any new awards granted in fiscal 2006.  During the first quarter of 2006,six months ended December 31, 2005, we recognized an additional $70,000$160,000 of compensation expense as a result of the adoption of SFAS No. 123R reflecting the fair value of unvested stock options.

Restricted stock

Equity awards granted during the first quartersix months of fiscal 2006 had a weighted average grant date fair value of $13.36.$15.96.  The fair value of awards on the grant date was measured using the Black-Scholes option-pricing model.  Key assumptions used to apply this pricing model as follows:

The total intrinsic value of options exercised during the six months ended December 31, 2005 was approximately $402,000.  Changes in the Company's stock optionsequity awards for the firstsecond quarter of fiscal 2006 were as follows:

New Pronouncements:  

In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations.  Interpretation No. 47 further clarifies when an entity should recognize a liability in connection with the sale, abandonment or disposal of tangible long-lived assets when this liability is conditional on a future event.  Interpretation No. 47 is effective no later than the end of fiscal years ending after December 15, 2005.  The Company is still evaluating the impact that the adoption will have but does not believe the adoption will have a material effect to the consolidated financial position, results of operations or cash flows.

On November 29, 2004, the FASB issued Statement No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. Statement 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material.  The Company adopted Statement No. 151 July 1, 2005.  The adoption of this standard did not have a material effect on its consolidated financial position, results of operations or cash flows.

3.

Acquisitions

During the second quarter ended December 31, 2005, the Company completed two acquisitions.  Substantially all the assets of Three Star Manufacturing, Inc. (dba Kool Star) (“Kool Star”) were purchased in an all cash transaction.  Kool Star, with estimated annual sales of $9.0 million, is a manufacturer of walk-in cold storage units serving primarily the West Coast and southwest portions of the United States.  This bolt-on acquisition will expand the Company's refrigerated walk-in cooler and freezer product line by providing improved access to the growing southwestern U.S. market where the Company's presence has not been strong.  Immediately after completion of the acquisition, the Company closed the manufacturing facility in California and began relocating the manufacturing assets to its Mexico manufacturing facility.  The Company has not yet completed the valuation of intangibles.  The Company ex pects to complete this valuation during the third quarter of fiscal 2006.  Kool Star will be integrated into the Food Service Equipment Segment.  

The Company also completed the acquisition of substantially all of the assets of the Innovent Special Products Group (“Innovent”) in an all cash transaction.  With manufacturing facilities in Peabody, MA and Venray, Netherlands, Innovent manufactures processing tooling critical to the manufacture of absorbent cores for child/adult diapers, feminine hygiene products and medical underpads.  Innovent provides the Company access to complementary markets where the products and technology of its Engraving Group can be adapted.  The Innovent Special Products Group is expected to generate more than $8 million in revenue.  The Innovent Special Products Group will be integrated into the Engraving Group.  The Company has not yet completed the valuation of identified intangibles and the acquired machinery and equipment.  The Company expects to complete the valuations during the third quarter of fiscal 2006.   

The total purchase price for the two acquisitions was $16.9 million.  Unallocated purchase price of $14.4 million is included in the caption Goodwill as of December 31, 2005.  The Company does not expect that the finalization of the purchase price will have any material impact on the reported results of operations.

The results of operations of Kool Star and Innovent have been included in the consolidated statement of income for the quarter ended December 31, 2005 from the dates of the acquisitions, respectively.  The results of operations of Kool Star and Innovent were not material to the results of operations for the quarter ended December 31, 2005 and are not expected to be material to the Company's consolidated results of operations in future periods.

4.

Discontinued Operations

The Company entered into a tentative agreement to sell certain land and property in France.  This building was previously part of the Keller-Dorian Graveurs operations which were sold in fiscal 2001.  In addition to several other conditions precedent to consummation of the sale, the Company is contractually and legally obligated to complete a full environmental study of the premises.  During the second quarter ended December 31, 2005, the Company incurred a charge in connection with the results of an environmental study completed on a building located in France of $360,000.  The amount represents the estimate, at this time, of remediation costs associated with the property.  

In September 2004, the Company completed the sale of substantially all the assets of James Burn International global operations (JBI) in an all cash transaction with a closely held Virginia corporation owned by two financial buyers.  This transaction represented the last major step in the Company-wide restructuring and realignment program that the Company began in October 2002.  

As previously reported, the divestiture was estimated to result in an after-tax, non-cash impairment charge of approximately $7.5 million, or $0.61 per share, which was reflected in discontinued operations in the fourth quarter of fiscal year 2004.  As a result of the final agreement reached, the Company recorded an additional $498,000 loss, or $0.04 per share, after tax, associated with the lower than expected sales price, changes in the underlying assets sold and a reduction in the expected tax benefit from the loss.  This amount was included in discontinued operations in the quarter ended September 30, 2004.

The following summarizes the activities associated with discontinued operations (in thousands):  

The major classes of discontinued assets and liabilities included in the Consolidated Balance Sheets are as follows in thousands:

4.5.

Goodwill

Changes to goodwill during the current fiscal year were as follows (in thousands):

During the second quarter ended December 31, 2005, the Company completed two acquisitions as discussed in Note 3.  The Company has not yet completed the purchase price allocation for these two acquisitions.  The Company expects that the purchase price allocation will be completed by the end of the third quarter of fiscal 2006.  Included in the goodwill balance above is the unallocated purchase price associated with the acquisition of substantially all the assets of Kool Star and substantially all the assets of Innovent.  The Company accounts for goodwill in accordance with SFAS No. 142,Goodwill and Other Intangible Assets.  Under SFAS No. 142, the Company does not amortize goodwill and intangible assets that have indefinite lives.  SFAS No. 142 also requires that the Company assess goodwill and intangible assets with indefinite lives for impairment at least annually, or on an interim basis if events or circumstances indicate, based on the fair value of the related reporting unit or intangible asset.  The Company performs its annual impairment assessment in the fourth quarter of each year.

5.6.

Inventories

Inventories are valued at the lower of cost or market.  Cost is determined using the first in, first out method.  Inventories at September 30,December 31, 2005 and June 30, 2005 are comprised of the following (in thousands):

Distribution costs associated with the sale of inventory are recorded as a component of selling, general and administrative expenses in the accompanying Condensed Statements of Consolidated Income and were $7.8 million and $6.8 millionas follows for the three month periodthree- and six-month periods ended September 30,December 31, 2005 and 2004, respectively.2004:

6.7.

Debt

Debt is comprised of the following (in thousands):

The Company’s loan agreements contain certain provisions relating to

During the maintenance of certain financial ratios and restrictions on additional borrowings and investments.  The most restrictive of these provisions requires thatsecond quarter ended December 31, 2005, the Company maintainentered into a minimum ratio of earnings to fixed charges, as defined, on a trailing four quarters basis.

The Company has a threenew 5 year $130$150 million revolving credit facility (the facility) with nine participating banks.  The facility replaced the existing facility which expireswas to expire in February 2006.  At September 30, 2005,Proceeds under the facility may be used for general corporate purposes or to provide financing for acquisitions.  The Company had available $71.9 million under thisincurred debt issuance costs of approximately $450,000, which will be recognized over the term of the facility.  The agreement contains certain covenants including limitations on indebtedness and liens.  Borrowings under the agreement bear interest at a rate equal to the sum of a base rate or a Eurodollar rate, plus an applicable percentage based on the Company’s consolidated leverage ratio, as defined by the agreement.  The effective interest rate at September 30,December 31, 2005 was 4.81%5.375%.  Borrowings under the agreement are not collateralized.  As of December 31, 2005, the Company had the ability to borrow an additional $77.4 million.

The revolving credit facility is scheduledCompany’s loan agreements contain certain provisions relating to expire in February 2006.  As such,the maintenance of certain financial ratios and restrictions on additional borrowings outstanding under this facility have been classified as current in the Condensed Consolidated Balance Sheet.  During the quarter,and investments.  The most restrictive of these provisions requires that the Company continued discussions with membersmaintain a minimum ratio of the current revolving credit facilityearnings to enter intofixed charges, as defined, on a new facility by December 2005.  trailing four quarters basis.

Debt is due as follows by fiscal year (in thousands):  2006, $55,707;$529; 2007, $5,921;$3,571; 2008, $3,571; 2009, $28,571; 2010, $3,571$75,571 and thereafter, $14,016.

At September 30,December 31, 2005, the Company was in compliance with all debt covenants.

7.8.

Retirement Benefits

In the fiscal year ended June 30, 2005, the Company recorded a net pension expense of $7.4 million.  The Company expects to report a net pension expense of approximately $7.8 million in the current fiscal year.  Pension and other post-retirement expense for the three-month periodthree- and six-month periods ending September 30,December 31, 2005 and 2004 were as follows (in thousands):

U.S. Plans:

Foreign Plans:

Contributions to pension plans in the first threesix months of fiscal 2006 were approximately $158,000.$3.4 million.  Contributions based on current actuarial evaluations are expected to total $3.5$4.0 million for all of fiscal 2006, including any planned voluntary contributions.  Cash contributions in subsequent years will depend upon a number of factors including the investment performance of the plan assets and changes in employee census data affecting the Company’s projected benefit obligations.  

8.9.

Earnings Per Share

The following table sets forth a reconciliation of the number of shares (in thousands) used in the computation of basic and diluted earnings per share:

Both basic and diluted incomes are the same for computing earnings per share.  Certain optionsOptions to purchase 72,470 and 100,220 shares of common stock were not included in the computation of diluted earnings per share because to do so would have had an anti-dilutive effect.

Cash dividends per share have been computed based on the shares outstanding at the time the dividends were paid.  The shares (in thousands) used in this calculation for the three months ended September 30,December 31, 2005 and 2004, arerespectively. Options to purchase 77,470 and 113,920 shares of common stock were not included in the computation of diluted earnings per share for the six months ended December 31, 2005 and 2004, respectively. Such options have been excluded because the options’ exercise prices were greater than the average market price of the common stock on those dates and, as follows:a result, their inclusion would have been antidilutive.

9.10.

Restructuring

The Company periodically incurs costs associated with activities to close underutilized facilities, relocate operations or other exit related activities.  In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, these charges are recorded generally when a liability was incurred or a severance plan was initiated.  A summary of the charges is as follows (in thousands):

The restructuring costs related to the following segments:

10.11.

Contingencies

The Company is a party to a number of actions filed or has been given notice of potential claims and legal proceedings related to environmental, commercial disputes, employment matters and other matters generally incidental to its business.  Liabilities are recorded when the amount can be reasonably estimated and the liability is likely to arise.  Management has evaluated each matter based, in part, upon the advice of its independent environmental consultants and in-house personnel.  Management has considered such matters and believes the ultimate resolution will not be material to the Company's financial position, results of operations or cash flows.

The Company entered into a tentative agreement to sell certain land and property in France.  In addition to several other conditions precedent to consummation of the sale, the Company is contractually and legally obligated to complete a full environmental study of the premises.  The Company has engaged a third party to complete this study, the results of which are expected in the second quarter of fiscal 2006.  The Company is unable to estimate the cost, if any, of environmental remediation that may be required as a result of this study.

11.12.

Accumulated Other Comprehensive LossIncome

The change in accumulated otherTotal comprehensive loss isincome and its components for the three and six months ended December 31, 2005 and 2004 were as follows (in thousands):

The components of accumulated other comprehensive losses are as follows (in thousands):

12.13.

Income Taxes

The provision for income taxes for continuing operations differs from that computed using Federal income tax rates for the following reasons:

13.14.

Industry Segment Information

The Company is composed of five business segments.  Net sales include only transactions with unaffiliated customers and include no intersegment sales.  Operating income by segment below excludes interest expense and income (in thousands).

ITEM 2

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 arenot 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 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, but are not limited to general and international economic conditions, specific business conditions in one or more of the industriesindu stries served by the Company, lower-cost competition, both domestic and foreign, in certain of our businesses, the impact of higher raw material costs, uncertainty in the mergers and acquisitions market generally, an inability to realize the expected cost savings from the implementation of lean enterprise manufacturing techniques, the failure to continue timely start upexpansion of the manufacturing operations at the Company's new plant in Mexico, and the inability to achieve the savings expected from the sourcing of raw materials from China.  In addition, any forward-looking statements represent management's estimates only as of the day made and should not be relied upon as representing management's estimates as of any subsequent date.  While the Company may elect to update forward-looking statements at some point in the future, the Company and management specifically disclaim any obligation to do so, even if management's estimates change.

Overview

Standex International Corporation (the “Company” or “we”) is a leading producer of a variety of products and services for diverse market segments.  The Company has five reporting segments:  Food Service Equipment Group, Air Distribution Products (ADP) Group, Engraving Group, Engineered Products Group, and Consumer Products Group.  Because these segments serve different markets, the performance of each is affected by different external and economic factors.  

The Company believes that its diversification has helped to reduce the earnings cyclicality that affects many companies that focus principally on only one or two market segments.  Therefore, it intends to continue to operate in selected market segments that may not directly relate to one another.  However, the Company does believe that the performance of its individual businesses can be enhanced if operational synergies can be leveraged across all of its businesses.  Therefore, the Company intends to focus its resources on those of its businesses where such synergies can be realized.  Consistent with this strategy, the Company has announced that it has retained an investment banker to identify potential buyers for its Consumer Products Group businesses.  These businesses include Standard Publishing, Berean Christian Stores and Standex Direct.  The Company has concluded that these businesses offer the Company little ability tot o leverage syn ergiessynergies among the portfolio of businesses.  

The disposal of the Consumer Products Group will result in the reallocation of the Company's capital resources to those of its remaining businesses that offer the Company greater opportunities for profitable growth.  To accomplish this, the Company will seek bolt-on acquisitions that both increase its presence in existing markets and broaden the reach of its products and technology into complementary markets.  During the second quarter of fiscal 2006, the Company took several steps in furthering this strategy.  The Company acquired substantially all the assets of Kool Star, a manufacturer of walk-in refrigeration units located in California.  This bolt-on acquisition will expand the Company's refrigerated walk-in cooler and freezer product line by providing improved access to the growing southwestern U.S. market where the Company's presence has not been strong.  The Company is relocating the Kool Star manufacturing to Mexico. &nb sp;The Company also completed the purchase of substantially all the assets of Innovent Specialty Products, a programmanufacturer of processing tooling with locations in Massachusetts and the Netherlands.  Innovent provides the Company access to identifycomplementary markets where the products and technology of its Engraving Group can be adapted.  

The Company continues to aggressively pursue other acquisition candidatesopportunities in areas that have been determined to be most strategically significant to its business portfolio, such as food service, engineered products and engraving products.  In addition to using traditional in-house merger and acquisition resources, we areportfolio.  The Company is working with several investment bankers to conduct searches on ourits behalf for larger companies with sales in excess of $30 million.  

In addition to its strategic objectives,

During the second quarter, the Company continuestook several steps in connection with its expansion into Mexico.  Its new manufacturing facility was substantially completed during the quarter.  Its completion enabled the Company to focus on improvingclose its margins through continued implementationProcon Products plant in Tennessee during the quarter and one ADP plant in Colorado in the fourth quarter of lean enterprise throughout itsfiscal 2005 and relocate manufacturing operations to Mexico where production facilities, the rationalization of its manufacturing capacity, and the launching of efforts to source products and materials from and manufacture productscommenced in lower cost countries such as Mexico and China.January 2006.  The Company recorded restructuring costs of approximately $614,000 during the quarter in connection with the closure and especially its Food Service Equipmentrelocation of these operations.  The Company completed the sale of the properties in Colorado and Engineered Products Groups, is aggressively implementingTennessee during the sourcingquarter, resulting in a gain of materials from China and has identified significant savings of 20 to 30 percent from Chinese procurement sources.  Purchases from China are expected to reach at least $5 million in fiscal 2006.approximately $662,000, more than offsetting the restructuring costs incurred.  

The Company remains on track to expand its operations in Mexico throughAs has been stated previously, the construction of a new facility.  The facility will allow the Company both to take advantagecost of the lower operating costs in Mexico, which it expects will permit an improvement in profit margins on high volume, labor intensive products, and to better reach potential new customers and markets in California and the southwestern United States.  The Company expects to spend approximately $7 million relating to theMexican facility, in fiscal 2006, including initial capital improvements.  The construction is expected toimprovements, will be completed by the end of the second quarter of fiscal year 2006.approximately $7 million.  The Company alsoincurred start up costs of approximately $238,000 during the quarter in connection with the hiring of personnel, training costs and other related costs.  The Company expects that the costs to bring the facility to full capacity will be dilutive to earnings by approximately $700,000 to $1 million in fiscal 2006.  The facility is expected to be of particular benefit to the Food Service Equipment, Engineered Products and Air Distribution Products Gro ups.  The Company anticipates that once the facility is fully operational, which it expects will occur by the end of fiscal 2007, annual savings in the range of $2 million to $2.5 million will be realized.

There are a number of key external factors other than general business and economic conditions that can impact the performance of the businesses of the Company.  The key factors affecting each business are described below.below in the segment analysis.

The Company monitors a number of key performance indicators including net sales, gross profit margin, income from operations, capital expenditures backlog and gross profit margin.backlog.  A discussion of these key performance indicators is included within the discussion below.  Unless otherwise noted, references to years are to fiscal years.

Consolidated Results from Continuing Operations

Net Sales

Net sales for the quarter ended September 30, 2005 increased $9.6of $167.4 million or 6.0%, when compared towere substantially unchanged from the $167.9 million reported for the same period last year.  Acquisitions added $1.7 million in sales during the quarter, while exchange rates resulted in decreased sales of approximately $715,000.  After taking these into consideration, organic sales decreased by approximately one year earlier.  The increased sales were substantially all organic.  Organic sales are defined as sales from businesses which were includedpercent over the second quarter of last year.  Revenue decreases in the Company’s resultsADP and Engineered Products Groups offset improvements in each of the Company's three other business groups.  A further discussion by segment follows.  

Net sales for both the current reporting period andsix months ended December 31, 2005 increased $9.1 million over the same period of the previous year, and include thefiscal 2004, a 2.8% increase.  The effect of price changes.  Price increases accountedacquisitions for approximately 10% of the six-month period was the same as that noted for the quarter above, while organic sales growth whilefrom existing businesses resulted in the remainder was due to volume improvements.  The increaseremaining $7.4 million in sales was primarily ledincreased sales.  Revenue

decreases in the Consumer Products and Engineered Products Groups were largely offset by the Food Service Equipment and Engraving Groups.  These positive performances were partially offset by a sales decline of $1.7 million or 8.3% within our Consumer Products Group.in the Company’s other business groups.  A more detailedfurther discussion by segment follows.

Gross Profit Margin

The Company’s consolidated gross profit margin decreased to 30.2%31.9% for the quarter ended September 30,December 31, 2005, versus 32.4%32.7% in the same quarter of last year.  TheA decline was experienced by all of our segments.  The most significant decline was in the Engineered Products Group.  The firstGroup whose 2005 second quarter performance last year was favorably impacted by a large paymentone-time contract adjustment from a major aerospace manufacturer representing payment for access to our facilities.  The decline also resulted from acustomer.  A combination of sales growth in lower margin businesses and higher raw materials costs.  The Company will attempt to mitigate the impact of higher material costs through product price increasesalso contributed to the extent attainable under competitive market conditions,decline in gross profit margins.  

Consolidated gross profit margins for the six months ended December 31, 2004 was 31.1% versus 32.5% in the same period in fiscal 2005.  The Engraving, Consumer Products and Food Service Equipment Groups experienced margin declines period over period.  The declines are attributable primarily to product mix factors and inefficiencies associated with the alternative sourcingrelocation of materials through efforts such ascertain manufacturing activities to Mexico.  Margins for the sourcing initiatives in China discussed above.Air Distribution Products and Engineered Products Groups remained flat with the same period one year earlier.  

Other Operating Expenses and Restructuring

The Company includes restructuring charges and certain other operating expenses and income as separate line items.  “Other Operating Income” typicallyExpense” includes gains or losses on the sale of assets.  A restructuring and realignment program announced in fiscal year 2003 was completed inDuring the firstsecond quarter of fiscal 2005.2006, the Company recorded a gain of approximately $670,000 associated with the sale of two properties.  The Company also incurred restructuring charges of $614,000, largely in connection with the relocation of the manufacturing operations of those two facilities to Mexico.  For the threesix months ended September 30,December 31, 2005, the Company incurred restructuring costs of $174,000,$788,000, pre-tax, compared to $799,000 one year earlier.  

Income from Operations

For the three months ended September 30,December 31, 2005, income from operations decreased $2.7$1.2 million, a 22.1%10.3% decrease from the same period in fiscal 2005.  Improvements in income from operations occurred in the Food Service EquipmentADP and EngravingConsumer Products Groups, but these were more than offset by decreases in the Food Service Equipment, Engineered Products Consumer Products and ADPEngraving Groups.  In addition, Corporate expenses increasedA detailed explanation by more than 27% when compared tosegment follows.  

For the six months ended December 31, 2005, income from operations decreased $3.9 million, a 16.3% decrease from the same period one year earlier.  A detailedThis decrease occurred in all of the Groups except ADP.  The decrease was partially offset by a reduction in Corporate and Other operating expenses.   See further explanation by segment follows.  below.

Income Taxes

The Company’s effective income tax rate for the three months ended September 30,December 31, 2005 was 34.7%34.4%, a decreasean increase of .9%1% from 35.6%33.3% in the same period in fiscal 2005.  This decrease can be attributed toThe current quarter rate is consistent with the lower performance in34.6% rate for the current year.six-month period.

Backlog

For the period ended September 30,December 31, 2005, backlog increased $1.9$1.6 million, a 1.9%1.6% increase from the same period one year earlier.  All of our segments reported better backlog for the current year first quarter, with the exception of ADP.the ADP and Engraving Groups.  The backlog reflects the strength of many of the core markets served by the Company's segments.

Segment Analysis

Net Sales

The following table presents net sales by business segment (in thousands):

Food Service Equipment Group

Net sales for the Group increased $8.2$1.3 million, or 13.7%2.2%, when compared to the same period one year earlier.  This increase was largely driven by a 23% increase in sales is attributableof our Nor-Lake branded refrigeration products, due to several factors.  First, this increase was driven by market share gains as the result of market channel development efforts, greaterincreased penetration of dealer buyerlarge buying groups and sales growth atkey national accounts.  Second, the sales performance in our rotisserie and combi-oven products increased over 5% when compared to the prior year.  This increase is being fueled by a large roll-out of combi-ovens by a supermarket chain in the United Kingdom that is expected to be completed sometime in the second quarter of fiscal 2006.  These improvements were partially offset by decreased revenues within our meal delivery systems business.business and our Procon line of fluid dispensing and circulating pumps.   In the firstsecond quarter of last year, sales of our rethermalization systems for meal deliveries to government institutions were approximately $4.0$2.0 million higher than sales in the current quarter.  The lower sales performance was attributable to thea decrease in government spending in the program served by our systems.  Product improvements are underwaySales of Procon pumps were down approximately 14% when compared to lower the costsame period one year earlier.  The closure and introduce these productsrelocation to newer markets.Mexico of the Ten nessee manufacturing operations disrupted sales during the quarter.  This disruption is not expected to continue.  

Net sales for the segment for the first half of fiscal 2006 increased $9.5 million, or 8.0% over the same period one year earlier.  Organic sales for the six months ended December 31, 2005 increased $8.4 million, or 2.6%.  Similar to the factors which led to the improvement in sales for the current quarter, sales of refrigerated cases and walk-in units sales have increased largely due to the sales channel efforts noted above.  These positive gains were offset by decreases in sales of Procon fluid dispensing and circulating pumps and the USECO line of thermal reheating systems.  

Air Distribution Products Group

Sales increaseddecreased $1.2 million, or 3.4%3.6%, when compared tofrom the firstsecond quarter of fiscal 2005.  The increased sales performancedecrease is attributable to improvementa slowdown in the core new home construction in the principal markets served by ADP.  ADP began manufacturing products from the Company's new facility in Mexico in January 2006 and expects to better serve the fast-growing Southwestern U.S. market from that location.

Net sales for ADP’s products.  Sales performance was not affectedADP remained constant at $67.7 million for the six months ended December 31, 2005 when compared to the same period one year earlier.  Small gains in volume were largely offset by the closure of one of the Group's seven manufacturing facilities at the end of the fourth quarter of fiscal 2005, as productionprice concessions resulting from other facilities met the needs of that location's customers.lower steel prices.  

Engraving Group

Net sales inof the Engraving Group increased by $1.5 million,$390,000, or 8.4%2.1%, when compared to the firstsecond quarter in fiscal 2005.  This increased sales performance was most noticeable within ourled by the Group's international operations in the mold texturization products. The remainder of the sales across all of which increased 14.7% period over period.  The improved sales are attributable to increased demand within the Group'sGroup’s core product offerings, including mold texturization, rollrolls and plate engraving, and embossing equipment businesses.businesses were largely unchanged when compared to the same period in fiscal 2005 with some decreases in domestic operations.  

Net sales for the six months ended December 31, 2005 increased $1.9 million, a 5.1% increase from the first six months of fiscal 2005.  Improved sales of its rolls and plate engraving products and the Group’s international operations provided much of the growth in net sales when compared to the same period in fiscal 2005.  Domestic sales of mold texturization products were down when compared to the same period one year earlier largely due to decreased activity in the automotive market.  

Engineered Products Group

Net sales of the Engineered Products Group increased $475,000,decreased $1.7 million, or 1.6%5.6%, when compared to the same period one year earlier.  The hydraulics business unit reported a year over year sales increase of over 24%approximately 35%.  This was largely offset by a decrease in sales of approximately 26%31% in our metal spinning businesses.  ThatThe bulk of the decline was due to the fact that the unit's revenue in the firstsecond quarter of fiscal 2005 revenues included a large, one-time paymentfavorable contract adjustment from a major aerospace manufacturer in connection with the adjustment of a long-term supply agreement.  Excluding the effectsagreement that is likely to result in a reduction in quantity of this payment, sales for the unit were up slightly, due in large part to increased sales to the energy industry.  This represents a positive movement in the plan to diversify and broaden its customer base beyond its traditional aerospace customers.products shipped.  Sales of our electronics businesses were largely unchangeddecreased approximately 8% period over period.period as a result of automotive sensor business declines.

Net sales for the six months ended December 31, 2005 decreased $1.2 million, or 2.0%, over the same period one year earlier.  Revenue declines in the Company’s metal spinning and electronics businesses offset the strong positive performance of its hydraulics business.

Consumer Products Group

Sales of the Consumer Products Group decreased $1.7 million,increased $648,000, or 8.3%2.4%, when compared to the same period one year earlier.  The decreaseincrease was primarily attributable to the sales performance of ourthe Company’s publishing and religious bookstore businesses.  A strong holiday season coupled with the performance of its new curriculum products led to the increased sales performance within the publishing business.  DuringThe religious bookstore business benefited from a strong holiday season coupled with the quarter,fact that it opened a large customer transitioned from direct buyingnew store in Phoenix, Arizona before closing its existing store in that city.  Having duplicate stores open during the holiday season helped to increase sales.  The new store was the first to incorporate the unit's updated store format which is to provide a smaller, more efficient store, and indications are that customers are receptive to the use of consigned inventory, which adversely affected yearformat.  It is intended that the new format will be implemented at other store locations over year comparisons.  The sales decline was also attributable to product offerings to large secular retail customers and productivity issues at a third-party sales representative firm.  Sales of our Christian retail store business also decreased.  The decline was in line with that experienced throughout the Christian bookseller industry, and was due in part due to difficult comparisons with last year's first quarter, when sales were positively impacted by the release of a major Christian-themed movie.time.  Sales within our mail order business were consistent with those noted in the same period one year earlier.

Net sales for the six months ended December 31, 2005 decreased $1.0 million, or 2.2%, when compared to the same period one year earlier.  Decreased sales in the publishing business, resulting from a one-time first quarter reduction in sales from a major customer who transitioned from direct buying to the use of consignment inventory were not offset by improved sales in the religious bookstore business during the first six months of this year.  Sales within the mail order unit were constant with those of the prior year period.  

Income from Operations

The following table presents income from operations by business segment (in thousands):

Food Service Equipment Group

Income from operations for the quarter ended September 30,December 31, 2005 increased $410,000,decreased $1.5 million, or 6.0%33.4% when compared to the same period one year earlier.  The percentage increase in operating incomeThis decrease is lower thanlargely attributable to product mix factors, as the percentage increase inincreased sales due to the fact that much of the sales increase was attributable to lower-margin products.  The Group has initiated steps to reduce its operating costs, including a plan to increase production atbusiness.  In addition, the Company's new facility in Mexico,acquisition of Kool Star and anticipates margin improvements as a resultsubsequent shutdown and relocation of its efforts.  The reductionmanufacturing operations to Mexico required the Company to temporarily manufacture Kool Star product in its Mississippi manufacturing facility, resulting in higher shipping, labor and other operating costs.  Lower sales of itsthe Group’s meal delivery systems and Procon pumps also adversely impacted operating income.  The performance of our Nor-Lake acquisitionbrands positively impacted operating income, due to a combination of cost reduction activities Lean Manufacturing disciplinesthrough procurement programs and increased sales levelslevels.  

Income from operations for the six months ended December 31, 2005 decreased $1.0 million, a 9.3% decrease over the same period one year earlier.  The same factors which led to the decrease in its core markets.the quarter also led to the decreases during the six-month period.  

Air Distribution Products Group

Income from operations of the ADP Group was relatively flatincreased $385,000, or 14.4% when compared with thatthe amount noted in the second quarter of the prior year, decreasing less than $100,000, or 2%.  Higher deliveryyear.  A combination of reduced costs for steel, a major raw material for this business, and the current quarter's sales mix adversely affected operating income period over period.  Steel pricing appearscontinued implementation of Lean Manufacturing disciplines led to have stabilized recently, even showing some downward pressure as more international sources of steel come on line.  However, increased competiveness in ADP's markets may preclude the Group from capitalizing on the reduction in material costs.  Going forward, the recentimprovement.  The closure of the Group's manufacturing facility in Colorado should havehas had a favorable impact on performance by reducing overall overheadoperating costs and enhancing the capacity utilization of the Group's remaining facilities, including Mexico where additional production is expected to benefitfacilities.  In addition, the Group, both becauseimproved ability of lower operating costs there, and because adding a geographic presence near the southwestern United States will enab le the Group to better penetrate the growing southwestern U.S. market and the lower shipping costs resulting from the close proximity of the Mexico plant to customers in that growing market.region are expected to enhance the earnings, as well as the sales performance of the Group.  

Income from operations for the six months ended December 31, 2005 increased $310,000, or 5.4%, when compared to the same period one year earlier.  The factors noted above in the quarter were also largely responsible for the improvements in income from operations for the six-month period.

Engraving Group

Income from operations increased $46,000,decreased $958,000, or 2.4%33.6%, when compared to the firstsame quarter in the prior year.  This improvementdecrease was due to pricing pressure from automotive customers in margins occurred as a result of improved sales performance, particularly in our mold-texturization businesses.  A combination ofNorth America, product mix and productivity issues resulting from excessive overtime and significant amounts of re-work.  The Group is taking aggressive steps to eliminate its productivity inefficiencies and will expand its use of digital technology as one measure to achieve improvements.  

Income from operations for the six months ended December 31, 2005 decreased $912,000, or 19.2%, when compared to the same period one year earlier.  The factors noted above in the quarter were also largely responsible for the primary factors causingdecrease in income from operations for the increase in operating income to lag behind the increase in sales.  six-month period.

Engineered Products Group

Income from operations decreased $1.4$1.1 million, or 29.2%23.6%, when compared to the same period one year earlier.  This decrease is primarily attributable to a large paymentfavorable contractual adjustment in the firstsame quarter of last year from a major aerospace manufacturer in connection with the amendment of a long term supply agreement, which represented incremental operating income in the prior year.  In addition, ourthe electronics unit experienced product mix issues combined with higher material costs,pricing pressures from automotive customers, resulting in a decrease in operating income when compared to the same period one year earlier.  The Group is taking steps to reduce costs further in the electronics business, including sourcing more components from China and locating certain assembly functions in China, both of  which are scheduled to commence in the fourth quarter of fiscal 2006.  These decreases were offset by the positive impact on operating income of the improvedi mproved sales performances of the hydraulics business, as well as a reduction in costs through the addition of more automated manufacturing equipment, offshore sourcing of components and saleslean activities in the hydraulics business.  

Income from operations for the six months ended December 31, 2005 decreased $2.5 million, or 26.5%, when compared to the energy industry bysame period one year earlier.  The factors noted above in the Spincraft business units.  quarter were also largely responsible for the decrease in income from operations for the six-month period.

Consumer Products Group

The Consumer Products Group lost $372,000 for the three months ended September 30, 2005Income from operations increased $739,000, or 43.9% when compared to income of $765,000 for the same period one year earlier.  The operating loss wasstrong sales performances of the publishing and the religious bookstore business contributed greatly to this improvement.  These businesses operate with high gross margins, which means that any increase in sales will tend to increase income from operations disproportionately.  

Income from operations for the six months ended December 31, 2005 decreased $398,000, or 16.3% when compared to the same period one year earlier.  This decrease is attributable to the lowerloss incurred in the first quarter of fiscal 2006 resulting from the matters discussed in sales performance for the publishing businessabove and sales mix within our retail stores.

Corporate and Other Operating Expenses

Corporate and other operating expenses increaseddecreased approximately $1.0$1.7 million, or 24.2%40.5%, when compared to the first quartersame period one year earlier.  This decrease is attributable to the gain on the sale of properties of approximately $670,000, as well as reductions in expenses, including professional fees associated with Sarbanes-Oxley compliance work, and fees incurred to conduct senior management recruitment efforts.  To meet the requirements of Section 404 of the Sarbanes-Oxley Act in the prior year.  This increaseyear, the Company incurred costs for additional manpower to supplement current staff levels within the Internal Audit function.  Those incremental costs did not occur in the current quarter.  The decrease is primarilyalso attributable to lower pension and healthcare costs in the current year due to a lower headcount at the Corporate office. These decreases were offset slightly by increased compensation expense associated with the adoption of Financial Accounti ng Standard No. 123R of approximately $82,000.

Corporate and other operating expenses for the six months ended December 31, 2005 decreased $568,000, or 6.6% when compared to the same period one year earlier.  This decrease is largely due to the factors noted above for the quarter offset by increased compensation expense associated with equity based compensation plans.  DuringIn the currentfirst quarter of fiscal 2006, the Company adopted Financial Accounting Standard No. 123R which prescribes accounting for equity-based compensation arrangements using fair value methods.  The adoptioneffect of adopting this standard on equity based compensation as well as an acceleration of restricted stock awards for retirement eligible employees contributed more than half of$700,000 in increased expense for the increase in expenses.  The remainder is due to increased professional fees associated with various corporate matters, including the establishment of the Mexico legal entity.six months ended December 31, 2005.  

Discontinued Operations

During the second quarter ended December 31, 2005, the Company incurred a charge in connection with the results of an environmental study completed on a building located in France.  This building was previously part of the Keller-Dorian Graveurs operations which were sold in fiscal 2001.  See the Notes to the Condensed Consolidated Financial Statements for additional information.  In June 2004, the Company’s Board of Directors approved a plan to divest of the James Burn International (JBI) subsidiary.  The Company proposed to sell the entirety of JBI business to one buyer in an all-cash transaction.  In connection with this authorization and based upon offers received by the Company, an impairment charge for the assets to be sold was recorded in the fourth quarter of fiscal 2004 of approximately $7.5 million, net of tax, including estimated costs to sell. The Company completed the sale effective September 1, 2004 and recorded an additional $498,000 net of tax losscharges in the first quarter.and second quarters of fiscal 2005 associated with this transaction.  

MATERIAL CHANGES IN FINANCIAL CONDITION

Cash Flows

ThreeSix Months Ended September 30,December 31, 2005

For the threesix months ended September 30,December, 2005, operating activities generated $936,000$8.7 million in cash, as compared to the usecash generated of $18.5$7.4 million in cash for the same period one year earlier.  The Improvementimprovement in cash generation from operating activities is attributable to several factors.  In the prior year quarter,period, discontinued operations used $6.1$5.4 million in cash.  Net working capital levels (defined as accounts receivable plus inventories less accounts payable) decreased $15.9increased $5.7 million when compared period over period.  Increases in inventory levels associated with the Company's relocation of several manufacturing activities to Mexico coupled with the effect of acquisitions increased net working capital levels.  The remainder of the use in operating cash flows can be attributed to the cash contributions made to the Company's defined benefit pension plans that were $1.6 million higher in the first six months of fiscal 2006 than in the first six months of last year.  A combination of the cash generated from operating activities, withproceeds from the sale of two properties of $3.4 million and net proceeds from additional borrowings of $5.8$20 million were used to fund capital expenditures of $5.1$10.2 million, acquisitions of $17.1 million and pay dividends of $2.6$5.2 million during the quarter.  

Liquidity and Capital Resources

Our primary cash requirements include working capital, interest and mandatory debt payments, capital expenditures, operating lease payments, pension plan contributions and dividends.  We expect to spend between $17 million and $19 million on capital expenditures in fiscal 2006.  The Company expects that depreciation will be approximately $12 million for fiscal year 2006.  The primary sources of cash for each of the Company’s requirements are cash flows from continuing operations and borrowings under our revolving credit facility.

In addition, we regularly evaluate acquisition opportunities.  We anticipate that any cash needed for future acquisition opportunities would be obtained from borrowings under the revolving credit facility.  We have available borrowing capacity under various agreements of up to $71.9$77.4 million as of September 30,December 31, 2005.

The Company sponsors a number of defined benefit plans and defined contribution retirement plans.  We have evaluated the current and long-term cash requirements of these plans.  As noted above, the operating cash flows from continuing operations are expected to be sufficient to cover required contributions under ERISA and other governing regulations.  

Borrowings under the revolving credit facility bear interest at a rate equal to the sum of a base rate or a Eurodollar rate plus an applicable margin, which is based on our consolidated total leverage ratio, as defined in the revolving credit facility.  The effective rate interest rates for borrowings outstanding were 4.71%5.375% and 4.23%, respectively, at September 30,December 31, 2005 and June 30, 2005.  The annual facility fee in effect on our Revolving Credit Facility at September 30,December 31, 2005 was 0.25%.175%.

The following table sets forth the Company’s capitalization at September 30,December 31, 2005 and June 30, 2005:

The Company’s net debt increased by $6.9$20.9 million at September 30,December 31, 2005.  The Company’s net debt to capital percentage was 33.1%35.4% at September 30,December 31, 2005 compared to 31.8% at June 30, 2005.

The Company has an insurance program in place for certain retired executives.  Current executives and new hires are not eligible for this program.  The underlying policies have a cash surrender value of $22.0$22.3 million and are reported net of loans of $12.5 million for which the Company has the legal right of offset.  These policies have been purchased to fund supplemental retirement income benefits for certain retired executives.  The aggregate value of future obligations was approximately $3.9$3.6 million and $4.0 million at September 30,December 31, 2005 and June 30, 2005, respectively.  

The revolving credit facility contains customary affirmative and negative covenants.  In general,During the covenants contained in the revolving credit facility are more restrictive than those of the Senior Notes due at various times.  Among other restrictions, these covenants require that the Company meet specified financial tests, including minimum levels of earnings from operations before interest, taxes, depreciation, and amortization (EBITDA), and various debt to EBITDA ratios.  These covenants also limit the Company’s ability to incur additional debt, make acquisitions, merge with other entities, create or become subject to liens and sell major assets.  At June 30, 2005 and September 30,quarter ended December 31, 2005, the Company was in compliance with these financial covenants, and based upon its current plans and outlook, believes that it will continue to be in compliance with these covenants during the upcoming twelve-month period.

Theentered into a new revolving credit agreement to refinance the previous facility, iswhich was scheduled to expire in February 2006.  The new agreement, in which nine banks are participating as lenders, provides the Company with the ability to borrow up to $150 million at competitive interest rates, with an option to the Company to increase the facility up to $225 million.  The agreement will expire in December 2010.  As such, borrowings outstanding under this facility have been classified as currentlong term liabilities.  During the quarter, the Company continued discussions with banks participating in the current revolving credit facility.  The Company has received proposed term sheets and expects that a new facility will be finalized in the second quarter of fiscal 2006.  In addition, the Company believes that it has adequate access to the private credit market.  Based on those discussions and the general bank credit market, the Company believes it can complete a new agreement sooner if the need arose.  The Company believes that these resources, along with the cash flow generated from operations, will be sufficient to meet its anticipated cash funding needs for the foreseeable future.  

The revolving credit facility contains customary affirmative and negative covenants.  The covenants are no more, and in fact, are less restrictive in some respects than the covenants contained in the previous facility.  Among other restrictions, they require that the Company meet specified financial tests, including minimum levels of earnings from operations before interest, taxes, depreciation, and amortization (EBITDA), and various debt to EBITDA ratios.  The

covenants also limit, but do not preclude, the Company’s ability to incur additional debt, merge with other entities, create or become subject to liens and sell major assets.  At June 30, 2005 and December 31, 2005, the Company was in compliance with the applicable financial covenants, and based upon its current plans and outlook, believes that it will continue to be in compliance with these covenants during the coming twelve-month period.

The Company is contractually obligated under various operating leases for real property.  No significant leases were consummated in the first threesix months of fiscal 2006.  

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.  Inflation for medical costs can impact both our reserves for self-insured medical plans as well as our reserves for workers' compensation claims.  The Company monitors the inflationary rate and makes adjustments to reserves whenever it is deemed necessary.  Our ability to manage medical costs inflation is dependent upon our ability to manage claims and purchase insurance coverage to limit the maximum exposure for the Company.  

Foreign Currency Translation – The Company’s primary functional currencies used by its non-U.S. subsidiaries are the Euro and the British Pound Sterling.  During the last three-month period, both these currencies have experienced increases relative to the U.S. dollar.  

Environmental Matters – The Company is party to various claims and legal proceedings, generally incidental to its business.  The Company does not expect the ultimate disposition of these matters will have a material adverse effect on its financial statements.  

Seasonality – Historically, the second and fourth quarters have been the best quarters for our consolidated financial results.  Due to the gift-giving holiday season, the Consumer Products Group has experienced strong sales benefiting the second quarter performance.  The fourth quarter performance of the Food Service Equipment, ADP and Consumer Products Groups have historically been enhanced by increased activity in the construction of food retail outlets, the home building industry, and seasonal publications used in summer programs, respectively.  

Critical Accounting Policies

The Condensed Consolidated Financial Statements include accounts of the Company and all its subsidiaries.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Condensed Consolidated Financial Statements, giving due consideration to materiality.  Although we believe that materially different amounts would not be reported due to the accounting policies adopted, the application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.  We have listed in our Annual Report on Form 10-K for the year ended June 30, 2005 a number of accounting policies which we believe to be the most critical.  Nothing has changed in respect to those discl osures.disclosures.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk Management

We are exposed to market risks from changes in interest rates, commodity prices and changes in foreign currency exchange.  To reduce these risks, we selectively use, from time to time, financial instruments and other proactive management techniques.  We have internal policies and procedures that place financial instruments under the direction of the Chief Financial Officer and restrict all derivative transactions to those intended for hedging purposes only.  The use of financial instruments for trading purposes (except for certain investments in connection with the KEYSOP plan) or speculation is strictly prohibited.  The Company has no majority owned subsidiaries that are excluded from the consolidated financial statements.  Further, the Company has no interests or relationships with any special purpose entities.  

Exchange Risk

The Company is exposed to both transactional risk and translation risk associated with exchange rates.  Regarding transactional risk, the Company mitigates certain of its foreign currency exchange rate risk by entering into forward foreign currency contracts from time to time.  These contracts are used as a hedge against anticipated foreign cash flows, such as dividend and loan payments, and are not used for trading or speculative purposes.  The fair value of the forward foreign currency exchange contracts is sensitive to changes in foreign currency exchange rates, as an adverse change in foreign currency exchange rates from market rates would decrease the fair value of the contracts.  However, any such losses or gains would generally be offset by corresponding gains and losses, respectively, on the related hedged asset or liability.  Due to the absence of forward foreign currency contracts at September 30, 2005, the Company did not have any f air value exposure for financial instruments.

Our primary translation risk was with the Euro and the British Pound Sterling.  We do not hedge our translation risk.  As a result, fluctuations in currency exchange rates can affect our stockholders’ equity.

Interest Rate

The Company's interest rate exposure is limited primarily to interest rate changes on its variable rate borrowings. From time to time, the Company will use interest rate swap agreements to modify our exposure to interest rate movements.  At September 30,December 31, 2005, the Company has no outstanding interest rate swap agreements.  A hypothetical 1% point increase in interest rates would cost the Company approximately $650,000$720,000 in additional interest expense on an annual basis.

The Company also has $53.3 million of long-term debt at fixed interest rates as of September 30,December 31, 2005.  There would be no immediate impact on the Company's interest expense associated with its long-term debt due to fluctuations in market interest rates.  There has been no significant change in the exposure to changes in interest rates from June 30, 2005 to September 30,December 31, 2005.

Concentration of Credit Risk

The Company has a diversified customer base.  As such, the risk associated with concentration of credit risk is inherently minimized.  As of September 30,December 31, 2005, no one customer accounted for more than 5% of our consolidated outstanding receivables or of our sales.  In certain segments, some customers represent greater than 5% of the segments' revenues.  In the Food Service Equipment Group, one customer accountstwo customers account for approximately 5%13.4% of estimated annual sales.  In our Engineered Products segment, one aerospace customer accounts for approximately 8.5%8.1% of segment annual revenues and one energy customer accounts for approximately 5.3%6.9% of estimated annual sales.  We have a long-term supply agreement with the aerospace customer.  Although we believe our relationship with this customer is good and will be ongoing, there can be no assurances that this will continue for the entire term of the supply agreement.  In our Food Service Equipme ntEquipment segment, many of our national accounts regularly review their selection of vendors.  Although our companies have historically prevailed and even gained market share under these circumstances, the outcome of future reviews cannot be predicted.  

Commodity Prices

The Company is exposed to fluctuating market prices for commodities, primarily steel.  Each of our segments is subject to the effects of changing raw material costs caused by the underlying commodity price movements.  In general, we do not enter into purchase contracts that extend beyond one operating cycle.  Recently, we have become aware that some

of our competitors have been put on allocation for key materials.  While Standex considers its relationship with its suppliers to be excellent and we have not been impacted, there can be no assurances that we will not experience any supply shortage.

In recent quarters, the ADP, Engineered Products and Food Service Equipment Groups experienced price increases for steel products, other metal commodities and petroleum based products.  Among those items impacted were the prices of galvanized steel strip, stainless steel and carbon steel sheet material, copper wire, refrigeration components and foam insulation.  These are key elements in the products manufactured in these segments.  Our affected divisions have implemented price increases intended on fully offsetting the increases in steel.  The implemented price increases in the Food Service Equipment Group did not fully offset the higher material costs and the price increases in ADP did not fully offset the steel price increases.  As a result, additional price increases are being implemented or planned to be implemented.  While these higher prices are expected to be accepted by our customers there can be no certainty that thet he price incre asesincreases implemented will in fact be accepted by our customers.  The ultimate acceptance of these price increases will be impacted by our affected divisions’ respective competitors and the timing of their price increases.  

ITEM 4.  CONTROLS AND PROCEDURES

The management of the Company including Roger L. Fix as Chief Executive Officer and Christian Storch as Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures.  Under the rules promulgated by the Securities and Exchange Commission, disclosure controls and procedures are defined as those “controls or other procedures of an issuer that are designed to ensure that information required to be disclosed by an issuer in the reports issued or submitted by it under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms.”  Based on the evaluation of the Company’s disclosure controls and procedures, it was determined that such controls and procedures were effective as of the end of the period covered by this report.

Further, there were no significant changes in the internal controls or in other factors that could significantly affect these controls during the quarterly period ended September 30,December 31, 2005 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.