UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

FORM 10-Q

 

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

For the quarterly period ended September 30, 2017March 31, 2018

 

[  ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

Commission File Number 1-7233

 

STANDEX INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).            YES [X]     NO [  ] 

 

DELAWARE

 

 

 

31-0596149

(State of incorporation)

 

 

 

(IRS Employer Identification No.)

 

11 KEEWAYDIN DRIVE, 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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 

 

Large accelerated filer [ X ]Accelerated filer [  ]                    

Non-accelerated filer [  ]   (Do not check if a smaller reporting company)      Smaller Reporting Company [  ]

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES [  ]     NO [X] 

 

The number of shares of Registrant's Common Stock outstanding on October 29, 2017April 26, 2018 was 12,788,078.12,831,505. 




STANDEX INTERNATIONAL CORPORATION

INDEX

Page No. 

PART I.FINANCIAL INFORMATION: 

Item 1.

Unaudited Condensed Consolidated Balance Sheets as of 

September 30, 2017March 31, 2018 (unaudited) and June 30, 20172 

Unaudited CondensedConsolidatedStatements of Operations for the  

Three and Nine Months Ended September 30,March 31, 2018 and 2017 and 2016(unaudited)3 

Unaudited CondensedConsolidatedStatements of Comprehensive Income for the  

Three and Nine Months Ended September 30,March 31, 2018 and 2017 and 2016(unaudited)4 

Unaudited Condensed Consolidated Statements of Cash Flows for the  

ThreeNine Months Ended September 30,March 31, 2018 and 2017 and 2016(unaudited)5 

Notes to Unaudited Condensed Consolidated Financial Statements6 

Item 2.

Management's Discussion and Analysis of Financial Condition and  

Results of Operations2125 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk3135 

Item 4.

Controls and Procedures3237 

PART II.OTHER INFORMATION: 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds3237 

Item 6.

Exhibits3339 


1


PART I.  FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1

 

 

 

 

 

 

 

 

 

 

 

 

 

STANDEX INTERNATIONAL CORPORATION

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

(In thousands, except per share data)

 

September 30, 2017

(unaudited)

June 30,

2017

ASSETS

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

75,270

 

$

   88,566

Accounts receivable, net of reserve for doubtful accounts of

 

 

134,996

 

 

  127,060

$2,752 and $2,406 at September 30, 2017 and June 30, 2017

 

 

 

 

 

 

Inventories

 

 

  123,366

 

 

  119,401

Prepaid expenses and other current assets

 

 

9,321

 

 

      8,397

Income taxes receivable

 

 

1,798

 

 

    2,469

Deferred tax asset

 

 

-

 

 

14,991

Total current assets

 

 

344,751

 

 

  360,884

Property, plant, and equipment, net

 

 

143,021

 

 

   133,160

Intangible assets, net

 

 

104,401

 

 

102,503

Goodwill

 

 

248,557

 

 

242,690

Deferred tax asset

 

 

12,779

 

 

1,135

Other non-current assets

 

 

26,431

 

 

    27,304

Total non-current assets

 

 

535,189

 

 

506,792

Total assets

 

$

879,940

 

$

  867,676

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

Accounts payable

 

$

79,513

 

$

96,487

Accrued liabilities

 

 

59,350

 

 

     58,694

Income taxes payable

 

 

5,081

 

 

4,783

Total current liabilities

 

 

143,944

 

 

159,964

Long-term debt

 

 

205,896

 

 

191,976

Accrued pension and other non-current liabilities

 

 

103,676

 

 

107,072

Total non-current liabilities

 

 

309,572

 

 

299,048

Stockholders' equity:

 

 

 

 

 

 

Common stock, par value $1.50 per share, 60,000,000

 

 

 

 

 

 

shares authorized, 27,984,278 issued, 12,700,882 and

 

 

 

 

 

 

12,662,661 outstanding at September 30, 2017 and June 30, 2017

 

 

     41,976

 

 

    41,976

Additional paid-in capital

 

 

57,974

 

 

56,783

Retained earnings

 

 

728,553

 

 

716,605

Accumulated other comprehensive loss

 

 

(111,055)

 

 

(115,938)

Treasury shares: 15,283,396 shares at September 30, 2017

 

 

 

 

 

 

and 15,321,617 shares at June 30, 2017

 

 

(291,024)

 

 

 (290,762)

Total stockholders' equity

 

 

426,424

 

 

408,664

Total liabilities and stockholders' equity

 

$

879,940

 

$

867,676

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements

 

 

 


PART I.FINANCIAL INFORMATION 

 

 

 

 

 

 

ITEM 1

 

 

 

 

 

 

 

 

 

 

 

 

 

STANDEX INTERNATIONAL CORPORATION

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

(In thousands, except per share data)

 

March 31, 2018

(unaudited)

June 30,

2017

ASSETS

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

96,325

 

$

   88,566

Accounts receivable, net of reserve for doubtful accounts of

 

 

132,505

 

 

  127,060

$2,534 and $2,406 at March 31, 2018 and June 30, 2017

 

 

 

 

 

 

Inventories

 

 

131,589

 

 

  119,401

Prepaid expenses and other current assets

 

 

10,154

 

 

      8,397

Income taxes receivable

 

 

1,301

 

 

    2,469

Deferred tax asset

 

 

-

 

 

14,991

Total current assets

 

 

371,874

 

 

  360,884

Property, plant, and equipment, net

 

 

147,782

 

 

   133,160

Intangible assets, net

 

 

103,052

 

 

102,503

Goodwill

 

 

254,703

 

 

242,690

Deferred tax asset

 

 

10,234

 

 

1,135

Other non-current assets

 

 

28,631

 

 

    27,304

Total non-current assets

 

 

544,402

 

 

506,792

Total assets

 

$

916,276

 

$

  867,676

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

Accounts payable

 

$

82,621

 

$

96,487

Accrued liabilities

 

 

63,539

 

 

     58,694

Income taxes payable

 

 

2,820

 

 

4,783

Total current liabilities

 

 

148,980

 

 

159,964

Long-term debt

 

 

204,726

 

 

191,976

Accrued pension and other non-current liabilities

 

 

116,163

 

 

107,072

Total non-current liabilities

 

 

320,889

 

 

299,048

Stockholders' equity:

 

 

��

 

 

 

Common stock, par value $1.50 per share, 60,000,000

 

 

 

 

 

 

shares authorized, 27,984,278 issued, 12,710,243 and

 

 

 

 

 

 

12,662,661 outstanding at March 31, 2018 and June 30, 2017

 

 

     41,976

 

 

    41,976

Additional paid-in capital

 

 

60,031

 

 

56,783

Retained earnings

 

 

751,136

 

 

716,605

Accumulated other comprehensive loss

 

 

(115,267)

 

 

(115,938)

Treasury shares: 15,274,035 shares at March 31, 2018

 

 

 

 

 

 

and 15,321,617 shares at June 30, 2017

 

 

(291,469)

 

 

 (290,762)

Total stockholders' equity

 

 

446,407

 

 

408,664

Total liabilities and stockholders' equity

 

$

916,276

 

$

867,676

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements

 

 

 


2


STANDEX INTERNATIONAL CORPORATION

Unaudited Condensed Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

September 30,

(In thousands, except per share data)

 

 

 

 

 

2017

 

2016

Net sales

 

 

 

 

 

 

 

$

   214,379

 

$

179,600

Cost of sales

 

 

 

 

 

 

 

 

140,198

 

 

 117,824

    Gross profit

 

 

 

 

 

 

 

 

74,181

 

 

   61,776

Selling, general, and administrative expenses

 

 

 

 

 

 

 

 

      50,026

 

 

  41,612

Restructuring costs

 

 

 

 

 

 

 

 

       3,004

 

 

     394

Acquisition related expenses

 

 

 

 

 

 

 

 

1,005

 

 

-

    Total operating expenses

 

 

 

 

 

 

 

 

      54,035

 

 

  42,006

Income from operations

 

 

 

 

 

 

 

 

      20,146

 

 

  19,770

Interest expense

 

 

 

 

 

 

 

 

    (1,721)

 

 

      (697)

Other non-operating income (expense)

 

 

 

 

 

 

 

 

           604

 

 

       434

Income from continuing operations before income taxes

 

 

 

 

 

 

 

 

19,029

 

 

  19,507

Provision for income taxes

 

 

 

 

 

 

 

 

5,030

 

 

5,163

Income from continuing operations

 

 

 

 

 

 

 

 

13,999

 

 

  14,344

Income (loss) from discontinued operations, net of

   income taxes

 

 

 

 

 

 

 

 

(1)

 

 

 

(50)

Net income (loss)

 

 

 

 

 

 

 

$

13,998

 

$

  14,294

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

     Continuing operations

 

 

 

 

 

 

 

$

          1.10

 

$

     1.13

     Discontinued operations

 

 

 

 

 

 

 

 

              -   

 

 

              -   

          Total

 

 

 

 

 

 

 

$

          1.10

 

$

     1.13

Diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

     Continuing operations

 

 

 

 

 

 

 

$

          1.10

 

$

      1.12

     Discontinued operations

 

 

 

 

 

 

 

 

              -   

 

 

              -   

          Total

 

 

 

 

 

 

 

$

          1.10

 

$

     1.12

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per share

 

 

 

 

 

 

 

$

     0.16

 

$

      0.14

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements

 

 

 

 

 

 

 

 

 


 

STANDEX INTERNATIONAL CORPORATION

Unaudited Condensed Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

March 31,

 

March 31,

(In thousands, except per share data)

 

2018

 

2017

 

2018

 

2017

Net sales

 

$

216,743

 

$

184,715

 

$

640,873

 

$

538,169

Cost of sales

 

 

142,971

 

 

123,367

 

 

421,394

 

 

358,152

    Gross profit

 

 

73,772

 

 

61,348

 

 

219,479

 

 

180,017

Selling, general, and administrative expenses

 

 

51,854

 

 

43,472

 

 

152,559

 

 

125,578

Acquisition related costs

 

 

1,254

 

 

5,422

 

 

2,962

 

 

6,925

Restructuring costs

 

 

1,337

 

 

   1,019

 

 

   6,307

 

 

3,077

    Total operating expenses

 

 

54,445

 

 

49,913

 

 

161,828

 

 

135,580

Income from operations

 

 

19,327

 

 

11,435

 

 

57,651

 

 

 44,437

Interest expense

 

 

 (2,286)

 

 

    (953)

 

 

(5,800)

 

 

(2,499)

Other non-operating income, net

 

 

     (293)

 

 

     52

 

 

764

 

 

      819

Income from continuing operations before income taxes

 

 

16,748

 

 

10,534

 

 

52,615

 

 

42,757

Provision for income taxes

 

 

3,928

 

 

2,874

 

 

28,599

 

 

10,311

Net income from continuing operations

 

 

12,820

 

 

7,660

 

 

24,016

 

 

32,446

Income (loss) from discontinued operations, net of

   income taxes

 

(20)

 

 

          1

 

 

 

   (22)

 

 

 

   (43)

Net income

 

$

12,800

 

$

7,661

 

$

23,994

 

$

  32,403

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

     Continuing operations

 

$

    1.01

 

$

    0.60

 

$

     1.89

 

$

     2.56

     Discontinued operations

 

 

         -   

 

 

         -   

 

 

         -   

 

 

         -   

          Total

 

$

1.01

 

$

0.60

 

$

    1.89

 

$

    2.56

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

     Continuing operations

 

$

    1.00

 

$

    0.60

 

$

    1.88

 

$

    2.54

     Discontinued operations

 

 

         -   

 

 

         -   

 

 

         -   

 

 

         -   

          Total

 

$

1.00

 

$

0.60

 

$

    1.88

 

$

    2.54

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per share

 

$

    0.18

 

$

    0.16

 

$

     0.52

 

$

     0.46

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements

 

 

 

 

 

 

 

 

 


3


STANDEX INTERNATIONAL CORPORATION

Unaudited Condensed Consolidated Statements of Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

September 30,

(In thousands)

 

 

 

 

 

2017

 

 

2016

Net income

 

 

 

 

 

 

$

13,998

 

$

14,294

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

  Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

 

 

     Actuarial gains (losses) and other changes in

         unrecognized costs

 

 

 

 

 

 

$

 

(250)

 

$

 

115

     Amortization of unrecognized costs

 

 

 

 

 

 

 

1,365

 

 

1,440

  Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

     Change in unrealized gains and (losses)

 

 

 

 

 

 

 

774

 

 

61

     Amortization of unrealized gains and (losses) into

         interest expense

 

 

 

 

 

 

 

 

151

 

 

 

221

  Foreign currency translation gains (losses)

 

 

 

 

 

 

 

3,414

 

 

(1,166)

Other comprehensive income (loss) before tax

 

 

 

 

 

 

$

5,454

 

$

671

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision (benefit):

 

 

 

 

 

 

 

 

 

 

 

  Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

 

 

     Actuarial gains (losses) and other changes in

         unrecognized costs

 

 

 

 

 

 

$

 

52

 

$

 

90

     Amortization of unrecognized costs

 

 

 

 

 

 

 

(478)

 

 

(506)

  Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

     Change in unrealized gains and (losses)

 

 

 

 

 

 

 

(109)

 

 

(23)

     Amortization of unrealized gains and (losses) into

        interest expense

 

 

 

 

 

 

 

 

(36)

 

 

 

(84)

Income tax provision (benefit) to other comprehensive

        income (loss)

 

 

 

 

 

 

$

 

(571)

 

$

 

(523)

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

4,883

 

 

148

Comprehensive income (loss)

 

 

 

 

 

 

$

18,881

 

$

14,442

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements

 

 

 

 

 

 

 

 

 


 

STANDEX INTERNATIONAL CORPORATION

Unaudited Condensed Consolidated Statements of Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

March 31,

 

March 31,

(In thousands)

2018

 

2017

 

 

2018

 

 

2017

Net income

$

12,800

 

$

7,661

 

$

23,994

 

$

32,403

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

  Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

 

 

     Actuarial gains (losses) and other changes in

         unrecognized costs

$

 

(285)

 

$

 

(128)

 

$

 

(623)

 

$

 

503

     Amortization of unrecognized costs

 

1,378

 

 

1,427

 

 

4,114

 

 

4,294

  Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

     Change in unrealized gains (losses)

 

(316)

 

 

(3,445)

 

 

(1,893)

 

 

(2,891)

     Amortization of unrealized gains and into

         interest expense

 

 

2,363

 

 

 

80

 

 

3,427

 

 

 

384

  Foreign currency translation gains (losses)

 

11,694

 

 

4,498

 

 

14,148

 

 

(7,109)

Other comprehensive income (loss) before tax

$

14,834

 

$

2,432

 

$

19,173

 

$

(4,819)

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision (benefit):

 

 

 

 

 

 

 

 

 

 

 

  Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

 

 

     Actuarial gains (losses) and other changes in

         unrecognized costs

$

 

(348)

 

$

 

29

 

$

 

129

 

$

 

(105)

     Amortization of unrecognized costs

 

(329)

 

 

(503)

 

 

(1,134)

 

 

(1,511)

  Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

     Change in unrealized gains and (losses)

 

(127)

 

 

1,311

 

 

(231)

 

 

1,100

     Amortization of unrealized (losses) into

        interest expense

 

 

(7)

 

 

 

(30)

 

 

 

(51)

 

 

 

(146)

Income tax provision (benefit) to other comprehensive

        income (loss)

$

 

(811)

 

$

 

807

 

$

 

(1,287)

 

$

 

(662)

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive gain (loss), net of tax

 

14,023

 

 

3,239

 

 

17,886

 

 

(5,481)

Comprehensive income

$

26,823

 

$

10,900

 

$

41,880

 

$

26,922

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements

 

 

 

 

 

 

 

 

 


4


STANDEX INTERNATIONAL CORPORATION

Unaudited Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

September 30,

(In thousands)

 

2017

 

2016

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

13,998

 

$

       14,294

(Income) loss from discontinued operations

 

 

1

 

 

             50

Income from continuing operations

 

 

      13,999

 

 

14,344

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation and amortization

 

 

         6,869

 

 

         4,373

Stock-based compensation

 

 

       1,164

 

 

       1,365

Non-cash portion of restructuring charge

 

 

516

 

 

        (19)

Contributions to defined benefit plans

 

 

        (264)

 

 

        (246)

Net changes in operating assets and liabilities

 

 

   (27,739)

 

 

   (18,368)

Net cash provided by (used in) operating activities - continuing operations

(5,455)

 

 

1,449

Net cash provided by (used in) operating activities - discontinued operations

(39)

 

 

        (82)

Net cash provided by (used in) operating activities

 

 

(5,494)

 

 

1,367

Cash flows from investing activities

 

 

 

 

 

 

Expenditures for property, plant, and equipment

 

 

     (8,856)

 

 

     (7,121)

Expenditures for acquisitions, net of cash acquired

 

 

(10,397)

 

 

-

Proceeds from life insurance policies

 

 

2,217

 

 

-

Other investing activity

 

 

(78)

 

 

712

Net cash (used in) investing activities - continuing operations

 

 

     (17,114)

 

 

     (6,409)

Net cash provided by investing activities - discontinued operations

 

 

-

 

 

-

Net cash (used in) investing activities

 

 

(17,114)

 

 

(6,409)

Cash flows from financing activities

 

 

 

 

 

 

Borrowings on revolving credit facility

 

 

     63,000

 

 

     29,500

Payments of revolving credit facility

 

 

  (52,788)

 

 

  (17,500)

Activity under share-based payment plans

 

 

1,042

 

 

           366

Purchases of treasury stock

 

 

     (1,277)

 

 

     (5,678)

Cash dividends paid

 

 

     (2,026)

 

 

     (1,774)

Net cash provided by (used in) financing activities

 

 

7,951

 

 

        4,914

Effect of exchange rate changes on cash and cash equivalents

 

 

1,361

 

 

(607)

Net change in cash and cash equivalents

 

 

(13,296)

 

 

(735)

Cash and cash equivalents at beginning of year

 

 

88,566

 

 

121,988

Cash and cash equivalents at end of period

 

$

75,270

 

$

121,253

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

Interest

 

$

1,447

 

$

         589

Income taxes, net of refunds

 

$

5,264

 

$

       3,832

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements

 

 

 


STANDEX INTERNATIONAL CORPORATION

Unaudited Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

March 31,

(In thousands)

 

2018

 

2017

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

23,994

 

$

       32,403

Income from discontinued operations

 

 

(22)

 

 

              (43)

Income from continuing operations

 

 

      24,016

 

 

       32,446

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation and amortization

 

 

21,464

 

 

         13,824

Stock-based compensation

 

 

       3,775

 

 

         3,915

Non-cash portion of restructuring charge

 

 

(1,187)

 

 

              227

      Deferred repatriation tax

 

 

11,465

 

 

-

Disposal of real estate and equipment

 

 

(433)

 

 

-

Contributions to defined benefit plans

 

 

        (808)

 

 

         (962)

Net changes in operating assets and liabilities

 

 

   (29,509)

 

 

      (17,974)

Net cash provided by operating activities - continuing operations

28,783

 

 

31,476

Net cash (used in) operating activities - discontinued operations

(62)

 

 

        (458)

Net cash provided by operating activities

 

 

28,721

 

 

31,018

Cash flows from investing activities

 

 

 

 

 

 

Expenditures for property, plant, and equipment

 

 

     (21,391)

 

 

      (17,824)

Expenditures for acquisitions, net of cash acquired

 

 

(10,397)

 

 

     (153,815)

Proceeds from life insurance policies

 

 

2,217

 

 

-

Proceeds from sales of real estate and equipment

 

 

1,949

 

 

129

Other investing activity

 

 

(397)

 

 

158

Net cash (used in) investing activities

 

 

(28,019)

 

 

(171,352)

Cash flows from financing activities

 

 

 

 

 

 

Borrowings on revolving credit facility

 

 

134,500

 

 

     250,000

Payments of revolving credit facility

 

 

  (124,788)

 

 

    (127,000)

Activity under share-based payment plans

 

 

774

 

 

            715

Purchases of treasury stock

 

 

     (2,007)

 

 

        (7,406)

Cash dividends paid

 

 

     (6,600)

 

 

        (5,826)

Net cash provided by financing activities

 

 

1,879

 

 

110,483

Effect of exchange rate changes on cash and cash equivalents

 

 

5,178

 

 

(4,184)

Net change in cash and cash equivalents

 

 

7,759

 

 

      (34,035)

Cash and cash equivalents at beginning of year

 

 

88,566

 

 

     121,988

Cash and cash equivalents at end of period

 

$

96,325

 

$

     87,953

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

Interest

 

$

4,518

 

$

2,010

Income taxes, net of refunds

 

$

17,720

 

$

10,400

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements

 

 

 


5



STANDEX INTERNATIONAL CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1)Management Statement 

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the results of operations for the three and nine months endedSeptember 30,March 31, 2018 and 2017, and 2016, the cash flows for the threenine months ended September 30,March 31, 2018 and 2017 and 2016 and the financial position of Standex International Corporation (“Standex”, the “Company”, “we”, “us”, or “our”), at September 30, 2017.March 31, 2018.  The interim results are not necessarily indicative of results for a full year.  The following unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the company believes that the disclosures made are adequate to make the information not misleading.  The unaudited condensed consolidated financial statements and notes do not contain information which would substantially duplicate the disclosures contained in the audited annual consolidated financial statements and notes for the year ended June 30, 2017.  The condensed consolidated balance sheet at June 30, 2017 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.  The financial statements contained herein should be read in conjunction with the Annual Report on Form 10-K and in particular the audited consolidated financial statements for the year ended June 30, 2017.  Certain prior period amounts have been reclassified to conform to the current period presentation.  Unless otherwise noted, references to years are to the Company’s fiscal years.

There have been no significantOn December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was passed which resulted in the Company recording provisional estimates related to foreign earnings and changes in our reported financial position, resultsthe revaluation of operations, cash flows or to our critical accounting policies that were discloseddeferred taxes in our Annual Report on Form 10-K forconsolidated financial statements.  Other changes implemented by the Act will not impact the Company until the fiscal year endedending June 30, 2017 that have had a significant impact on our consolidated financial statements or notes herein.

2019.  The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.  We evaluated subsequent events through the date and time our unaudited condensed consolidated financial statements were issued.

 

During the fourth quarter of fiscal 2017, we adopted Accounting Standards Update (ASU) 2016-09 requiring the recognition of excess tax benefits as a component of income tax expense which were historically recognized in equity. As required, our first quarter ofThe fiscal results for the three months ended March 31, 2017 were recast to include an immaterial tax benefit.  The results for the nine months ended March 31, 2017 have been recast to include $0.4 milliona tax benefit of tax benefit.  $0.6 million.  In addition, the ASU requires a prospective update to the treasury method of calculating weighted average diluted shares outstanding resulting in the inclusion of additional shares in our first quarter of fiscal 2017 diluted EPS calculation.calculation for the three and nine months ended March 31, 2017.

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the Financial Accounts Standards Board ("FASB") issued Accounting Standards BoardUpdate (“FASB”ASU”) and the International Accounting Standards Board jointly issued a comprehensive new revenue recognition standard, ASUNo. 2014-09,Revenue “Revenue from ContractContracts with Customers (Topic 606), that will supersede nearly all” which amends most of the existing revenue recognition guidance, including industry-specific guidance.  ASU 2014-09 establishes a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers. Under ASU No. 2014-09, an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.In early 2016, the FASB issued additional updates: ASU No. 2016-10, 2016-11 and2016-12. These updates provide further guidance and clarification on specific items within the previously issued update.The Company anticipates it will adopt Topic 606 under US GAAPthe modified retrospective method and IFRS.  The Company is currently performing a detailed reviewwill only apply this method to contracts that are not completed as of the new guidancedate of adoption.


6



Application of this method will result in a cumulative effect of initially applying the standard as comparedan adjustment to our revenue recognition practicesthe opening balance of retained earnings at the date of initial application for eachany open contracts as of our revenue streams.  the adoption date.  

The Company has established an implementation teama global steering committee with a project plan to assist with its assessment ofanalyze the impact of this standard. The assessment phase of the newproject plan is on-going and includes identifying the various revenue guidance on its operations, consolidated financial statementsstreams, initiating contract reviews and related disclosures.reviewing current accounting policies and practices to identify potential differences that would result from the application of the standard. This assessment is expected to includeincludes (1) utilizing questionnaires to assist with the identification of revenue streams, (2) performing sample contract analyses for each revenue stream identified, (3) assessing the noted differences in recognition and measurement that may result from adopting this new standard, (4) performing detailed analyses of contracts with larger customers, and (5) developing plans to test transactions for consistency with contract provisions that affect revenue recognition.  After

As part of the analysis phase, the committee has been analyzing the impact of the standard on its contract portfolio by reviewing a sample of its contracts to identify potential differences that would result from applying the requirements of the new standard. The committee also has been analyzing the impact of requirements for combining contracts, performance obligations, and variable consideration.

Based on procedures performed to date, the committee has identified two areas that would likely be impacted by application of the new revenue standard.  In the Food Service Equipment segment, the Company bases volume-related rebate accruals on the achievement of certain pre-defined tiers.  The new guidance requires the Company to calculate the rebate accrual on anticipated sales for the rebate period, rather than measurement of actual achievement of specific tiers.  The Company expects to record a one-time catch up adjustment for this change upon adoption of the new standard, however the analysis of the impact is still on-going.  In Engineering Technologies, the committee is analyzing certain long-term contracts, currently recognizing revenue utilizing the point-in-time method, to determine if any of the three criteria in ASC 606-10-25-27 are being met which would require revenue to be recognized over time under the new standard.

The global steering committee is apprising both management and the audit committee of project status on a recurring basis.  The Company has not yet finalized its assessment of the impact of Topic 606.  Following the completion of the assessment phase, is complete, the Company will commence conversion activities including identifying potential impacts on revenue recognition across all segments, establishinginitiate efforts to redesign impacted processes, policies, controls and designing internal controls.  The new standard requires


6


comprehensive qualitative and quantitative disclosures, relating to the nature, amount, timing and uncertainty of revenue arising from contracts with customers, including significant judgments and estimates used when applying the guidance.as necessary. The Company will be unableexpects to quantify the effect on our consolidated financial statements and related disclosures until the final phase of the project has been completed.  The ASU is effectiveadopt this standard, as required, for the Company’s interim and annual reporting periods beginning July 1, 2018, and is to be adopted using either a full retrospective or modified retrospective transition method.2018. The Company does not expect to early adopt.

 

In November 2015, the FASB issued ASC Update 2015-17,Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,as part of its simplification initiatives. This update requires deferred tax liabilities and assets to be classified as non-current on the consolidated condensed balance sheet for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted.  An entity can elect adoption prospectively or retrospectively to all periods presented.  We have adopted ASU 2015-17 prospectively.  As a result, we have presented all deferred tax assets and liabilities as noncurrent on our consolidated balance sheet as of September 30, 2017,March 31, 2018, but have not reclassified current deferred assets and liabilities on our consolidated balance sheet as of June 30, 2017.  There was no impact on our results of operations as a result of the adoption of ASU 2015-17.

 

In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842).  ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements.  A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.  For leases with a term orof twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities.  ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. DueWhile we are continuing to assess the materialityeffect of the underlyingadoption, we currently believe the most significant potential changes relate to (i) recognition of right-of-use assets and lease liabilities on our balance sheet for equipment and real estate operating leases, subject toand (ii) the new guidance, we anticipatederecognition of existing assets and liabilities for certain


7



sale-leaseback transactions that currently do not qualify for sale accounting.  The Company anticipates the adoption will have a material impact on the Company’s consolidated financial statements due to the materiality of the underlying leases subject to the new guidance, however are unable to quantify that effect until our analysis is complete. 

 

In January 2017, the FASB issued ASU 2017-04,Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. ASU 2017-04 also clarifies the requirements for excluding and allocating foreign currency translation adjustments to reporting units related to an entity's testing of reporting units for goodwill impairment.  It further clarifies that an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently assessing the potential impact of the adoption of ASU 2017-04 on our consolidated financial statements.

 

In March 2017, the FASB issued ASU 2017-07,Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which changes how employers that sponsor defined benefit pension or other postretirement benefit plans present the net periodic benefit cost in the income statement. The new guidance requires the service cost component of net periodic benefit cost to be presented in the same income statement line items as other employee compensation costs arising from services rendered during the period. Other components of the net periodic benefit cost are to be stated separately from service cost and outside of operating income. This guidance is effective for fiscal years beginning after December 15, 2017 (fiscal 2019 for the Company) and interim periods within those annual periods. The amendment is to be applied retrospectively. The provisions of the new standard will impact the classification. The Company is continuing to evaluate the impact of the adoption of ASU 2017-07 on the consolidated financial statements and disclosures and expects to adopt this standard, as required, for interim and annual reporting periods beginning July 1, 2018.

In August 2017, the FASB issued ASU 2017-12,Derivatives and Hedging (Topic 815); Targeting Improvements to Accounting for Hedging Activities, which improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and to make certain targeted improvements to simplify the application of hedge accounting guidance.  The new guidance requires additional disclosures including cumulative basis adjustments for fair value hedges and the effect of hedging on individual income statement line items.  This guidance is effective for fiscal years beginning after December 15, 2018 (fiscal 2020 for the Company), and interim periods within those fiscal years.  The amendment is to be applied prospectively.  The Company is in the preliminary stages of assessing the potential impact of the adoption of ASU 2017-072017-12 on our consolidated financial statements.

 

In February 2018, the FASB issued ASU 2018-02,Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which will allow a reclassification from accumulated other comprehensive income to retained earnings for the tax effects resulting from "An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018" (the "Act") that are stranded in accumulated other comprehensive income. This standard also requires certain disclosures about stranded tax effects. This ASU, however, does not change the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations. ASU 2018-02 is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. It must be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Act is recognized. We elected to early adopt this ASU for the period ended March 31, 2018. The amount of the reclassification was $17.2 million.


8



2)ACQUISITIONS 

2.  ACQUISITIONS


7


The Company’s recent acquisitions are strategically significant to the future growth prospects of the Company.  At the time of the acquisition and September 30, 2017,March 31, 2018, the Company evaluated the significance of each acquisition on a standalone basis and in aggregate, considering both qualitative and quantitative factors.

 

Piazza Rosa Group

 

During the first quarter of fiscal year 2018, the Company acquired the Piazza Rosa Group.  The Italy-based privately held company is a leading provider of mold and tool treatment and finishing services for the automotive and consumer products markets. We have included the results of the Piazza Rosa Group in our Engraving segment in our Condensed Consolidated Financial Statements.

 

The Company paid $10.1 million in cash, net of a $2.8 million payment to satisfy debt of the entity at the time of acquisition, for all of the issued and outstanding equity interests of the Piazza Rosa Group. The final purchase price is subject to net asset value adjustments that have not yet been finalized. The preliminary purchase price was allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values on the closing date.  Goodwill recorded from this transaction is attributable to potential revenue increases from the combined competencies with Standex Engraving’s worldwide presence and Piazza Rosa Group’s texturizing capabilities.  The combined companies create a global tool finishing service leader and open additional opportunities in the broader surface engineering market.

 

Intangible assets of $4.1 million were preliminarily recorded, consisting of $2.3 million of customer relationships to be amortized over a period of eight years, $1.6 million for trademarks, and $0.2 million of other intangibles assets.  Since the preliminary valuation, the Company adjusted goodwill by $1.6 million primarily as a result of identification of other identifiable assets.  The goodwill of $6.2$4.6 million created by the transaction is not deductible for income tax purposes.

 

The components of the fair value of the Piazza Rosa Group acquisition, including the preliminary allocation of the purchase price at September 30, 2017,March 31, 2018, are as follows (in thousands):

 

 

Preliminary Allocation

 

Preliminary Allocation

 

 

Adjustments

 

Adjusted Allocation

 

September 30, 2017

 

September 30, 2017

 

 

 

March 31, 2018

Fair value of business combination:

 

 

 

 

Cash payments

 

$

12,889

 

$

12,889

 

$

                -   

 

$

12,889

Less: cash paid to satisfy acquired debt

 

  (2,833)

 

 

  (2,833)

 

 

                -   

 

 

  (2,833)

Total

 

$

10,056

 

$

10,056

 

$

                -   

 

$

10,056

Identifiable assets acquired and liabilities assumed:

 

 

 

 

 

 

 

 

Other acquired assets

 

$

2,678

 

$

2,678

 

$

1,664   

 

$

4,342

Inventories

 

637

 

 

637

 

 

(2)

 

635

Property, plant, and equipment

 

5,005

 

 

5,005

 

 

                -   

 

5,005

Identifiable intangible assets

 

4,087

 

 

4,087

 

 

(1)      

 

4,086

Goodwill

 

6,218

 

 

6,218

 

 

(1,643)   

 

4,575

Liabilities assumed

 

(7,387)

 

 

(7,387)

 

 

                -   

 

(7,387)

Deferred taxes

 

(1,182)

 

 

(1,182)

 

 

(18)

 

 

(1,200)

Total

 

$

10,056

 

$

10,056

 

$

                -   

 

$

10,056

 

 

 

 

 

 

 


9



OKI Sensor Device Corporation

 

During the third quarter of fiscal year 2017, the Company acquired all of the outstanding shares of OKI Sensor Device Corporation from OKI Electric Industry Co., Ltd.  Located in Kofu City, Japan, OKI Sensor Device Corporation is the world’s leading designer and supplier of magnetic reed switches.  Now named Standex Electronics Japan Corporation (“Standex Electronics Japan”), the acquisition enhances the Company’s access to


8


important Asian markets and enables the Company to offer a world class suite of reed switches and related magnetic solutions while continuing to serve Standex Electronics Japan’s diverse distribution channels.  We have included the results of Standex Electronics Japan in our Electronics segment in our Condensed Consolidated Financial Statements.  

 

The Company paid $129.2 million in cash, net of cash acquired, for 100% of the outstanding stock of Standex Electronics Japan. While the final purchase price is subject to cash and net working capital adjustments that have not yet been finalized, no such adjustment is anticipated. The preliminary purchase price was allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values on the closing date.  Goodwill recorded from this transaction is attributable to potential revenue increases from enhanced access to our Asian markets and synergies created from the vertical integration with a key supplier.  

 

Intangible assets of $53.8$51.4 million were preliminarily recorded, consisting of $50.1$47.8 million of developed technology to be amortized over a period of 10-20 years, $3.6$3.4 million of customer relationships to be amortized over a period of fifteen years, and $0.1$0.2 million of product order backlog which was amortized during fiscal year 2017.  Since the preliminary valuation, the Company adjusted goodwill by $1.6$3.4 million as a result of tax adjustments, a pension adjustment of $1.9 million and purchase accounting changes including a decrease in the fair value of developed technology, fixed assets, and customer relationships of $2.3 million, $0.2 million, and $0.2 million, respectively, and an additional $0.1 million of product order backlog which was amortized during fiscal year 2017.  The goodwill of $77.6$79.4 million created by the transaction is not deductible for income tax purposes.

 

The components of the fair value of the Standex Electronics Japan acquisition, including the preliminaryfinal allocation of the purchase price at September 30, 2017,March 31, 2018, are as follows (in thousands):

 

 

 

 

 

Preliminary Allocation

 

 

Adjustments

 

 

Adjusted Allocation

 

 

 

March 31, 2017

 

 

 

 

September 30, 2017

Fair value of business combination:

 

 

 

 

 

 

 

 

 

Cash payments

 

$

137,676

 

$

                -   

 

$

137,676

Less: cash acquired

 

 

  (8,521)

 

 

                -   

 

 

  (8,521)

Total

 

$

129,155

 

$

                -   

 

$

129,155

Identifiable assets acquired and liabilities assumed:

 

 

 

 

 

 

 

 

 

Other acquired assets

 

$

12,497

 

$

(366)   

 

$

12,131

Inventories

 

 

7,387

 

 

815

 

 

8,202

Property, plant, and equipment

 

 

12,703

 

 

   5,750

 

 

18,453

Identifiable intangible assets

 

 

53,800

 

 

(2,400)      

 

 

51,400

Goodwill

 

 

75,985

 

 

1,646   

 

 

77,631

Liabilities assumed

 

 

(10,811)

 

 

(8,405)   

 

 

(19,216)

Deferred taxes

 

 

(22,406)

 

 

2,960

 

 

(19,446)

Total

 

$

129,155

 

$

                -   

 

$

129,155

 

 

 

 

 

 

 

 

 

 

The initial allocation of the purchase price is based upon a preliminary valuation, and accordingly, our estimates and assumptions are subject to change as we obtain additional information during the measurement period. The Company anticipates finalizing the purchase price allocation during the current calendar year.

 

 

 

 

Preliminary Allocation

 

 

 

 

 

Final Allocation

 

 

 

March 31, 2017

 

Adjustments

 

 

March 31, 2018

Fair value of business combination:

 

 

 

 

 

 

 

 

 

Cash payments

 

$

137,676

 

$

                -   

 

$

137,676

Less: cash acquired

 

 

  (8,521)

 

 

                -   

 

 

  (8,521)

Total

 

$

129,155

 

$

                -   

 

$

129,155

Identifiable assets acquired and liabilities assumed:

 

 

 

 

 

 

 

 

 

Other acquired assets

 

$

12,497

 

$

(2,158)   

 

$

10,339

Inventories

 

 

7,387

 

 

816

 

 

8,203

Property, plant, and equipment

 

 

12,703

 

 

   5,503

 

 

18,206

Identifiable intangible assets

 

 

53,800

 

 

(2,400)      

 

 

51,400

Goodwill

 

 

75,985

 

 

3,449

 

 

79,434

Liabilities assumed

 

 

(10,811)

 

 

(8,468)   

 

 

(19,279)

Deferred taxes

 

 

(22,406)

 

 

3,258

 

 

(19,148)

Total

 

$

129,155

 

$

                -   

 

$

129,155

 

 

 

 

 

 

 

 

 

 

 

The following table reflects the unaudited pro forma operating results of the Company for the quartersthree and nine months ended September 30,March 31, 2018 and 2017, and 2016, which give effect to the acquisition of Standex Electronics Japan as if it had occurred at the beginning of each period presented. The pro forma information combines the historical financial results of the Company and Standex Electronics Japan, adjusted for changes in foreign exchange rates.


10



The pro


9


forma results are not necessarily indicative of the operating results that would have occurred had the acquisition been effective at the beginning of each period, nor are they intended to be indicative of results that may occur in the future. The pro forma information does not include the effects of any synergies related to the Standex Electronics Japan acquisition, transactions between the entities prior to acquisition, or the pre-acquisition impact of other businesses acquired by the Company during this period as they were not material to the Company’s historical results of operations.

 

(Unaudited Pro Forma)

(Unaudited Pro Forma)

(Unaudited Pro Forma)

For quarters ended 
 September 30,

Three Months ended 
 March 31,

Nine Months Ended

March 31,

In thousands

2017

 

2016

2018

 

2017

2018

 

2017

Net Sales

$

214,379

 

 

$

197,277

 

$

216,743

 

 

$

200,423

 

$

640,873

 

 

$

587,496

Net Income

$

14,185

 

 

$

15,029

 

$

12,820

 

 

$

12,944

 

$

24,191

 

 

$

41,653

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

$

1.12

 

 

$

1.19

 

$

1.01

 

 

$

1.02

 

$

1.91

 

 

$

3.29

Diluted

$

1.11

 

 

$

1.17

 

$

1.00

 

 

$

1.01

 

$

1.89

 

 

$

3.26

 

*  Fiscal year 2017 unaudited pro-forma results have been recast as a result of the adoption of Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting.

 

Pro forma earnings during the quarternine months ended September 30, 2017March 31, 2018 were adjusted to exclude tax-affected acquisition-related costs incurred during the first quarter of $0.2 million.

 

Pro forma earnings during the quarterthree months ended September 30, 2016March 31, 2017 were adjusted to include expense of $0.7$0.6 million for amortization of intangible assets recognized at fair value, depreciation expense of $0.3$0.4 million for the fair value adjustment of the acquired fixed assets, and $0.4$0.3 million of interest expense associated with incremental borrowings under the Company’s Credit Facility.  Pro forma earnings were also adjusted to exclude non-recurring acquisition-related costs of $3.1 million.

 

Horizon Scientific

During the second quarter of fiscal year 2017, the Company acquired Horizon Scientific, a supplier of laboratory refrigerators and freezers, as well as cryogenic equipment for the scientific, bio-medical and pharmaceutical markets. We believe the acquisition of Horizon Scientific enhances Standex’s penetration of the refrigeration markets in the growing scientific sector. We have included the operating results of Horizon Scientific in our Food Service Equipment segment in our Condensed Consolidated Financial Statements.

The Company paid $24.7 million in cash, net of cash acquired, for 100% of the outstanding stock of Horizon Scientific. The purchase price was subject to cash and net working capital adjustments of $0.3 million which was paidPro forma earnings during the quarter along with deferred compensationnine months ended March 31, 2017 were adjusted to include expense of up to $8.4 million. The purchase price was allocated to the net tangible and identifiable$1.8 million for amortization of intangible assets acquired and liabilities assumed based on theirrecognized at fair values on the closing date.  

Intangible assetsvalue, depreciation expense of $16.2$1.1 million have been recorded, consisting of $14.5 million of customer relationships which are expected to be amortized over a period of fifteen years, $1.4 million of trademarks which are indefinite lived, and $0.3 million of product order backlog which amortized during the current fiscal year. The goodwill of $6.7 million created by the transaction is not deductible for income tax purposes.

The components of the fair value adjustment of the Horizon Scientific acquisition, including the allocationacquired fixed assets, and $0.8 million of the purchase price at June 30, 2017, are as follows (in thousands):

Final


10


Fair value of business combination:

 

 

 

 

Cash payments

 

 

$

26,457

Identified cash and net working capital adjustment

 

 

 

341

Less: cash acquired

 

 

 

  (1,797)

Total

 

 

$

25,001

Identifiable assets acquired and liabilities assumed:

 

 

 

 

Current assets

 

 

$

  4,863

Inventories

 

 

 

4,470

Property, plant, and equipment

 

 

 

1,616

Identifiable intangible assets

 

 

 

16,150

Goodwill

 

 

 

6,660

Liabilities assumed

 

 

 

(2,374)

Deferred taxes

 

 

 

(6,384)                    

Total

 

 

$

25,001

 

 

 

 

 

The Company finalized the purchase price allocation during fiscal year 2017.  Transaction costsinterest expense associated with this acquisitionincremental borrowings under the Company’s Credit Facility.  Pro forma earnings were immaterial.  All transactionalso adjusted to exclude non-recurring acquisition-related costs were recorded as general and administrative expense during the year ended June 30, 2017.

of $3.6 million.

 

Acquisition-Related Costs

 

Acquisition-related costs include costs related to acquired businesses and other pending acquisitions. These costs consist of (i) deferred compensation and (ii) acquisition-related professional service fees and expenses, including financial advisory, legal, accounting, and other outside services incurred in connection with acquisition activities, and regulatory matters related to acquired entities.  These costs do not include the amortization of the acquired intangible assets, and also do not include purchase accounting expenses, which we define as acquired backlog and the step-up of inventory to fair value, or the amortization of the acquired intangible assets.value.

 

Deferred compensation costs relate to payments due to the Horizon Scientific seller of $2.8 million on the second anniversary and $5.6 million on the third anniversary of the closing date of the purchase.  For the three and nine months ended September 30, 2017,March 31, 2018, we recorded deferred compensation costs of $0.7 million for estimated deferred compensation earned by the Horizon Scientific seller to date.date of $0.7 million and $2.1 million, respectively. The payments are contingent on the seller remaining an employee of the Company with limited exceptions at each anniversary date.

 

Acquisition related expenses consist of miscellaneous professional service fees and expenses for our recent acquisitions.


11



The components of acquisition-related costs are as follows (dollars in thousands):

 

 

 

Three Months Ended

 

 

September 30,

 

 

2017

 

2016

Deferred compensation arrangements

 

$

             703   

 

$

             -   

Acquisition-related costs

 

 

302

 

 

            -   

Total

$

1,005

 

$

-


11


3)Discontinued Operations

In pursuing our business strategy, we have divested certain businesses and recorded activities of these businesses as discontinued operations.

Assets and liabilities related to our discontinued operations appear in the condensed consolidated balance sheets are as follows (in thousands):

 

 

 

September 30,   , 2017

 

 

June 30,

2017

Other non-current assets

 

$

               14

 

$

14

Accrued expenses

 

 

747

 

 

786

 

 

Three Months Ended

 

Nine Months Ended

 

 

March 31,

 

March 31,

 

 

2018

 

2017

 

2018

 

2017

Deferred compensation arrangements

 

$

             702   

 

$

             703   

 

$

2,108   

 

$

1,405   

Acquisition-related costs

 

 

589

 

 

4,719

 

 

891

 

 

5,520

Other

 

 

(37)

 

 

-

 

 

(37)

 

 

-

Total

$

1,254

 

$

5,422

         

$

2,962

 

$

6,925

 

 

4)3)Fair Value Measurements 

 

The financial instruments shown below are presented at fair value.  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters.  Where observable prices or inputs are not available, valuation models may be applied.

 

Assets and liabilities recorded at fair value in the consolidated balance sheet are categorized based upon the level of judgment associated with the inputs used to measure their fair values.  Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities and the methodologies used in valuation are as follows:

 

Level 1 – Quoted prices in active markets for identical assets and liabilities.  The Company’s deferred compensation plan assets consist of shares in various mutual funds (for the deferred compensation plan, investments are participant-directed) which invest in a broad portfolio of debt and equity securities.  These assets are valued based on publicly quoted market prices for the funds’ shares as of the balance sheet dates.

 

Level 2 – Inputs, other than quoted prices in an active market, that are observable either directly or indirectly through correlation with market data.  For foreign exchange forward contracts and interest rate swaps, the Company values the instruments based on the market price of instruments with similar terms, which are based on spot and forward rates as of the balance sheet dates.  The Company has considered the creditworthiness of counterparties in valuing all assets and liabilities.

 

Level 3 – Unobservable inputs based upon the Company’s best estimate of what market participants would use in pricing the asset or liability.

 

There were no transfers of assets or liabilities between any levels of the fair value measurement hierarchy at September 30, 2017March 31, 2018 and June 30, 2017. The Company’s policy is to recognize transfers between levels as of the date they occur.

 

Cash and cash equivalents, accounts receivable, and accounts payable are carried at cost, which approximates fair value.

 

Items presented at fair value at September 30, 2017March 31, 2018 and June 30, 2017 consisted of the following (in thousands):

 

 

 

September 30, 2017

Total

Level 1

Level 2

Level 3

Assets

March 31, 2018


12


Marketable securities - deferred compensation plan

 

$

     2,212

 

$

    2,212

 

$

           -   

 

$

           -   

Foreign exchange contracts

 

 

1,436

 

 

          -   

 

 

1,436

 

 

           -   

Interest rate swaps

 

 

3,686

 

 

-

 

 

3,686

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

3,741

 

$

          -   

 

$

3,741

 

$

           -   

Interest rate swaps

 

 

3,573

 

 

          -   

 

 

3,573

 

 

          -   

Contingent acquisition payments(a)

 

 

2,810

 

 

-

 

 

-

 

 

2,810


 

 

Total

 

Level 1

 

Level 2

 

Level 3

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities - deferred compensation plan

 

$

     2,399

 

$

    2,399

 

$

           -   

 

$

           -   

Foreign exchange contracts

 

 

1,794

 

 

          -   

 

 

1,794

 

 

           -   

Interest rate swaps

 

 

1,107

 

 

-

 

 

1,107

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

7,877

 

$

          -   

 

$

7,877

 

$

           -   

Interest rate swaps

 

 

          -   

 

 

          -   

 

 

          -   

 

 

          -   

Contingent acquisition payments(a)

 

 

4,216

 

 

-

 

 

-

 

 

4,216

 

 

 

June 30, 2017

 

 

Total

 

Level 1

 

Level 2

 

Level 3

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities - deferred compensation plan

 

$

     2,397

 

$

     2,397

 

$

           -   

 

$

         -   

Foreign exchange contracts

 

 

399

 

 

          -   

 

 

      399

 

 

          -   

Interest rate swaps

 

 

3,777

 

 

-

 

 

3,777

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

3,232

 

$

          -   

 

$

    3,232

 

$

          -   

Interest rate swaps

 

 

    3,958

 

 

         -   

 

 

3,958

 

 

          -   

Contingent acquisition payments(a)

 

 

2,108

 

 

         -   

 

 

         -   

 

 

2,108

(a)  The fair value of our contingent consideration arrangement is determined based on our evaluation as to the probability and amount of any deferred compensation that has been earned to date.

 

Our financial liabilities based upon Level 3 inputs include a contingent consideration arrangement relating to our acquisition of Horizon Scientific. We are contractually obligated to pay contingent consideration payments based on the criteria of continued employment of the seller on the second and third anniversary of the closing date of the acquisition. We will update our assumptions each reporting period based on new developments and record such amounts at fair value based on the revised assumptions until the consideration is paid.

 

Contingent acquisition payment liabilities are scheduled to be paid in periods through fiscal year 2020. As of September 30, 2017,March 31, 2018, we could be required to pay up to $8.4 million for contingent consideration arrangements if specific criteria are achieved. We have determined the fair value of the liabilities for the contingent consideration based on a probability-weighted discounted cash flow analysis. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The fair value of the contingent consideration liability associated with future payments was based on several factors, the most significant of which are continued employment of the seller and the risk-adjusted discount rate for the fair value measurement.  As of September 30, 2017,March 31, 2018, neither the amount recognized for the contingent consideration arrangement, nor the range of outcomes or the assumptions used to develop the estimate had changed.

 

5)4)Inventories 

 

Inventories are comprised of the following (in thousands):

 

 

March 31, 2018

 

June 30,

2017

Raw materials

 

$

61,485

 

$

53,313

Work in process

 

 

          33,992

 

 

28,110

Finished goods

 

 

36,112

 

 

37,978

Total

 

$

        131,589

 

$

119,401


13


 

 

September 30, 2017

 

June 30,

2017

Raw materials

 

$

          54,043

 

$

53,313

Work in process

 

 

          31,759

 

 

28,110

Finished goods

 

 

          37,564

 

 

37,978

Total

 

$

        123,366

 

$

119,401


Distribution costs associated with the sale of inventory, which are recorded as a component of selling, general and administrative expenses in the accompanying unaudited condensed consolidated statementsUnaudited Condensed Consolidated Statements of operationsOperations, were$5.9 $7.1 million and $5.0$18.6 million for the three and nine months ended September 30,March 31, 2018, respectively, and $4.9 million and $14.5 million for the three and nine months ended March 31, 2017, and 2016, respectively.

 

6)5)Goodwill 

 

Changes to goodwill during the period ended September 30, 2017March 31, 2018 were as follows (in thousands):

 

 

June 30,

2017

 

 

Acquisitions

 

Translation Adjustment

September 30, 2017

Food Service Equipment

$

63,464

 

$

-

 

$

             -

 

$

63,464

Engraving

 

   20,000

 

 

6,218

 

 

238

 

 

       26,456

Engineering Technologies

 

   44,120

 

 

-

 

 

263

 

 

        44,383

Electronics

 

   112,047

 

 

(1,270)

 

 

      418

 

 

111,195

Hydraulics

 

     3,059

 

 

-

 

 

               -   

 

 

         3,059

Total

$

 242,690

 

$

4,948

 

$

919

 

$

248,557

 

June 30,

2017

 

 

Acquisitions

 

Translation Adjustment

March 31, 2018

Food Service Equipment

$

63,464

 

$

-

 

$

             -

 

$

63,464

Engraving

 

   20,000

 

 

4,575

 

 

461

 

 

       25,036

Engineering Technologies

 

   44,120

 

 

-

 

 

695

 

 

        44,815

Electronics

 

   112,047

 

 

533

 

 

      5,749

 

 

118,329

Hydraulics

 

     3,059

 

 

-

 

 

               -   

 

 

         3,059

Total

$

 242,690

 

$

5,108

 

$

6,905

 

$

254,703

 

7)6)Intangible Assets 

 

Intangible assets consist of the following (in thousands):

 

 

 

 

Tradenames

 

 

 

 

 

 

 

 

 

Tradenames

 

 

 

 

 

 

 

Customer Relationships

 

(Indefinite-lived)

 

Developed Technology

 

Other

 

Total

 

Customer Relationships

 

(Indefinite-lived)

 

Developed Technology

 

Other

 

Total

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

Cost

$

66,868

 

$

       20,413

 

$

47,533

 

$

4,855

 

$

139,669

$

67,727

 

$

20,451

 

$

50,313

 

$

4,951

 

$

143,442

Accumulated amortization

 

(30,083)

 

 

                   -   

 

(1,855)

 

(3,330)

 

 

(35,268)

 

(33,046)

 

 

                   -   

 

 

(3,926)

 

(3,418)

 

 

(40,390)

Balance, September 30, 2017

$

  36,785

 

$

         20,413

 

$

45,678

 

$

1,525

 

$

 104,401

Balance, March 31, 2018

$

  34,681

 

$

         20,451

 

$

46,387

 

$

1,533

 

$

 103,052

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost

$

  64,247

 

$

       18,715

 

$

47,586

 

$

4,503

 

$

135,051

$

  64,247

 

$

       18,715

 

$

47,586

 

$

4,503

 

$

135,051

Accumulated amortization

 

(28,764)

 

 

                   -   

 

(826)

 

(2,958)

 

 

(32,548)

 

(28,764)

 

 

                   -   

 

 

(826)

 

(2,958)

 

 

(32,548)

Balance, June 30, 2017

$

  35,483

 

$

         18,715

 

$

46,760

 

$

1,545

 

$

 102,503

$

  35,483

 

$

         18,715

 

$

46,760

 

$

1,545

 

$

 102,503

 

Amortization expense for the three months ended September 30,March 31, 2018 and 2017 and 2016 was $2.2 million and $0.9$1.1 million, respectively.  Amortization expense for the nine months ended March 31, 2018 and 2017 was $6.7 million and $3.1 million, respectively.  At September 30, 2017,March 31, 2018, amortization expense of current intangible assets areis estimated to be $7.0$2.4 million for the remainder of fiscal year 2018, $9.0$9.2 million in 2019, $8.4$8.7 million in 2020, $7.9$8.1 million in 2021, $7.4$7.6 million in 2022 and $44.5$46.5 million thereafter.

 

8)7)Warranties 


14


The expected cost associated with warranty obligations on our products is recorded as a component of cost of sales when the revenue is recognized.  The Company’s estimate of warranty cost is based on contract terms and historical warranty loss experience that is periodically adjusted for recent actual experience. Since warranty estimates are forecasts based on the best available information, claims costs may differ from amounts provided.  Adjustments to initial obligations for warranties are made as changes in the obligations become reasonably estimable.

 

The changes in warranty reserve, which are recorded as a component of accrued liabilities, for the three months ended September 30, 2017as of March 31, 2018 and year ended June 30, 2017 were as follows (in thousands):


14



 

March 31, 2018

 

June 30,

2017

Balance at beginning of year

$

9,243

 

$

9,085

Acquisitions and other

 

(20)   

 

 

301

Warranty expense

 

6,872

 

 

9,203

Warranty claims

 

(6,762)

 

 

 (9,346)

Balance at end of period

$

9,333

 

$

       9,243

 

 

September 30, 2017

 

June 30,

2017

Balance at beginning of year

$

9,243

 

$

9,085

Acquisitions and other

 

8   

 

 

301

Warranty expense

 

1,570

 

 

9,203

Warranty claims

 

(1,350)

 

 

 (9,346)

Balance at end of period

$

9,471

 

$

       9,243

 

9)8)Debt 

 

Long-term debt is comprised of the following (in thousands):

 

September 30, 2017

 

June 30, 2017

March 31, 2018

 

June 30,

2017

Bank credit agreements

$

205,500

 

$

     192,500

$

204,975

 

$

     192,500

Other

 

832

 

 

           6

 

-

 

 

           6

Total funded debt

 

206,332

 

 

     192,506

 

204,975

 

 

     192,506

Issuance Cost

 

       (436)

 

 

       (530)

 

       (249)

 

 

       (530)

Total long-term debt

$

205,896

 

$

    191,976

$

204,726

 

$

    191,976

 

The Company’s debt payments are due as follows (in thousands):

 

Fiscal Year

 

September 30, 2017

 

March 31, 2018

2018

 

$

199

 

$

-

2019

 

 

109

 

 

-

2020

 

 

205,612                     

 

 

204,975

2021

 

 

114                    

 

 

-

2022

 

 

117

 

 

-

Thereafter

 

 

181

 

 

-

Total Debt

 

 

206,332

 

 

204,975

Issuance cost

 

 

(436)

 

 

(249)

Debt net of issuance cost

 

$

205,896

 

$

204,726

 

Bank Credit Agreements

 

During fiscal year 2015, the Company entered into an Amended and Restated Credit Agreement (“Credit Facility”, or “facility”).  This five-year Credit Facility expires in December 2019 and has a borrowing limit of $400 million, which can be increased by an amount of up to $100 million, in accordance with specified conditions contained in the agreement.  The facility also includes a $10 million sublimit for swing line loans and a $30 million sublimit for letters of credit.  


15


At September 30, 2017,March 31, 2018, the Company had standby letters of credit outstanding, primarily for insurance purposes, of $8.9 million and had the ability to borrow $176.9$186.1 million under the facility.  At September 30, 2017,March 31, 2018, the carrying value of the current borrowings under the facility approximates fair value.


15

Other

The Company incurred additional debt related primarily to a Piazza Rosa construction project that was completed in October 2017.  



10)9)Derivative Financial Instruments 

 

Interest Rate Swaps

 

From time to time as dictated by market opportunities, the Company enters into interest rate swap agreements designed tomanage exposure to interest rates on the Company’s variable rate indebtedness.  The Company recognizes all derivatives on its balance sheet at fair value. The Company has designated its interest rate swap agreements, including those that are forward-dated, as cash flow hedges, and changes in the fair value of the swaps are recognized in other comprehensive income until the hedged items are recognized in earnings. Hedge ineffectiveness, if any, associated with the swaps will be reported by the Company in interest expense.  

 

The Company’s effective swap agreements convert the base borrowing rate on $100$75 million of debt due under our revolving credit agreement from a variable rate equal to LIBOR to a weighted average fixed rate of 1.60%1.74% at September 30, 2017.March 31, 2018.  The fair value of the swaps, recognized in accrued expenses and in other comprehensive income, is as follows (in thousands, except percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective Date

 

Notional Amount

Fixed Interest Rate

Maturity

 

September 30,

2017

 

June 30,

2017

Effective Date

 

Notional Amount

Fixed Interest Rate

Maturity

 

March 31,

2018

 

June 30,

2017

December 19, 2014

 

     20,000

1.18%

December 19, 2017

$

4

 

$

8

December 19, 2014

 

     20,000

1.18%

December 19, 2017

$

-

 

$

8

December 19, 2014

 

       5,000

1.20%

December 19, 2017

 

(1)

 

 

1

December 19, 2014

 

       5,000

1.20%

December 19, 2017

 

-

 

 

1

December 18, 2015

 

    15,000

1.46%

December 19, 2018

 

5

 

 

(1)

December 18, 2015

 

    15,000

1.46%

December 19, 2018

 

66

 

 

(1)

December 19, 2015

 

     10,000

2.01%

December 19, 2019

 

83

 

 

(106)

December 19, 2015

 

     10,000

2.01%

December 19, 2019

 

49

 

 

(106)

May 24, 2017

 

25,000

1.88%

April 24, 2022

 

35

 

 

(60)

May 24, 2017

 

25,000

1.88%

April 24, 2022

 

618

 

 

(60)

May 24, 2017

 

25,000

1.67%

May 24, 2020

 

(13)

 

 

(23)

May 24, 2017

 

25,000

1.67%

May 24, 2020

 

374

 

 

(23)

 

 

 

 

$

113

 

$

(181)

 

 

 

 

$

1,107

 

$

(181)

 

The Company reported no losses for the three and nine months ended September 30, 2017,March 31, 2018, as a result of hedge ineffectiveness. Future changes in these swap arrangements, including termination of the agreements, may result in a reclassification of any gain or loss reported in accumulated other comprehensive income (loss) into earnings as an adjustment to interest expense.  Accumulated other comprehensive income (loss) related to these instruments is being amortized into interest expense concurrent with the hedged exposure.

 

Foreign Exchange Contracts

 

Forward foreign currency exchange contracts are used to limit the impact of currency fluctuations on certain anticipated foreign cash flows, such as collections from customers and loan payments between subsidiaries.  The Company enters into such contracts for hedging purposes only.  The Company has designated certain of these currency contracts as hedges, and changes in the fair value of these contracts are recognized in other comprehensive income until the hedged items are recognized in earnings.  Hedge ineffectiveness, if any, associated with these contracts will be reported in net income.  At September 30, 2017March 31, 2018 and June 30, 2017, the Company had outstanding forward contracts related to hedges of intercompany loans with net unrealized gain (losses) of $(2.3)$(6.0) million and $(2.8) million, respectively, which approximate the unrealized gains and losses on the related loans.  The contracts have maturity dates ranging from 2018-2023, which correspond to the related intercompany loans.  The notional amounts of the Company’s forward contracts, by currency, are as follows:

Currency

 

March 31, 2018

 

June 30,

2017

USD

 

64,558

 

73,000

Euro

 

21,300

 

21,335

Pound Sterling

 

6,750

 

      6,962

Peso

 

54,000

 

54,000

Canadian

 

20,600

 

20,600


16


Currency

 

September 30, 2017

 

June 30,

2017

USD

 

69,000

 

73,000

Euro

 

   21,323

 

21,335

Pound Sterling

 

6,750

 

      6,962

Peso

 

54,000

 

54,000

Canadian

 

20,600

 

20,600


The table below presents the fair value of derivative financial instruments as well as their classification on the balance sheet (in thousands):

 

Asset Derivatives

Asset Derivatives

September 30, 2017

 

June 30, 2017

March 31, 2018

 

June 30, 2017

Derivative designated

Balance

 

 

 

 

Balance

 

 

 

Balance

 

 

 

 

Balance

 

 

 

as hedging instruments

Sheet

 

 

 

 

Sheet

 

 

 

Sheet

 

 

 

 

Sheet

 

 

 

Line Item

 

 

Fair Value

 

Line Item

 

 

Fair Value

Line Item

 

 

Fair Value

 

Line Item

 

 

Fair Value

Interest rate swaps

Other Assets

 

$

113

 

Other Assets

 

$

-

Other Assets

 

$

1,107

 

Other Assets

 

$

-

Foreign exchange contracts

Other Assets

 

 

1,436

 

Other Assets

 

 

-

Other Assets

 

 

1,794

 

Other Assets

 

 

-

 

 

$

1,549

 

 

 

$

-

 

 

$

2,901

 

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability Derivatives

Liability Derivatives

September 30, 2017

 

June 30, 2017

March 31, 2018

 

June 30, 2017

Derivative designated

Balance

 

 

 

 

Balance

 

 

 

Balance

 

 

 

 

Balance

 

 

 

as hedging instruments

Sheet

 

 

 

 

Sheet

 

 

 

Sheet

 

 

 

 

Sheet

 

 

 

Line Item

 

 

Fair Value

 

Line Item

 

 

Fair Value

Line Item

 

 

Fair Value

 

Line Item

 

 

Fair Value

Interest rate swaps

Accrued Liabilities

$

-

 

Accrued Liabilities

$

181

Accrued Liabilities

$

-

 

Accrued Liabilities

$

181

Foreign exchange contracts

Accrued Liabilities

 

3,729

 

Accrued Liabilities

 

2,833

Accrued Liabilities

 

7,877

 

Accrued Liabilities

 

2,833

 

 

$

3,729

 

 

 

$

        3,014

 

 

$

7,877

 

 

 

$

        3,014

 

The table below presents the amount of gain (loss) recognized in comprehensive income on our derivative financial instruments (effective portion) designated as hedging instruments and their classification within comprehensive income for the periods ended (in thousands):

 

 

 

 

Three Months Ended

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

March 31,

 

March 31,

 

 

 

 

 

2017

 

2017

 

2018

 

2017

 

2018

 

2017

Interest rate swaps

 

 

 

 

 

 

 

$

286

 

$

163

 

$

513

 

$

(3,445)

 

$

930

 

$

(2,817)

Foreign exchange contracts

 

 

 

 

 

 

 

 

488

 

 

(102)

 

 

(829)

 

 

-

 

 

(2,823)

 

 

     (74)

 

 

 

 

 

 

 

$

774

 

$

 61

 

$

(316)

 

$

 (3,445)

 

$

(1,893)

 

$

(2,891)

 

The table below presents the amount reclassified from accumulated other comprehensive income (loss) to Net Income for the periods ended (in thousands):

 

Details about Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive

 

 

 

Three Months Ended

 

Affected line item

Income (Loss) Components

 

 

September 30,

 

in the Statements

 

 

 

 

 

 

2017

 

2016

 

of Operations

Interest rate swaps

 

 

 

 

 

 

 

$

151

 

$

 119

 

Interest expense

Foreign exchange contracts

 

 

 

 

 

 

 

 

-

 

 

102

 

Cost of Sales

 

 

 

 

 

 

 

 

$

151

 

$

221

 

 


Details about Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Affected line item

Other Comprehensive

 

Three Months Ended

 

 

Nine Months Ended

 

in the Unaudited

Income (Loss) Components

March 31,

 

 

March 31,

 

Condensed Statements

 

 

2018

 

2017

 

 

2018

 

2017

 

of Operations

Cross currency swaps

 

$

2,363

 

$

80

 

 

$

3,427

 

$

309

 

Interest expense

Foreign exchange contracts

 

 

-

 

 

-

 

 

    

-

 

 

75

 

Cost of Sales

 

 

$

2,363

 

$

80

 

 

$

3,427

 

$

384

 

 

17


11)10)Retirement Benefits 

 

The Company has defined benefit pension plans covering certain current and former employees both inside and outside of the U.S.  The Company’s pension plan for U.S. employees is frozen for substantially all participants and has been replaced with a defined contribution benefit plan.

 

Net Periodic Benefit Cost for the Company’s U.S. and Foreign pension benefit plans for the three and nine months ended September 30,March 31, 2018 and 2017 and 2016 consisted of the following components (in thousands):


17



 

U.S. Plans

 

Non-U.S. Plans

 

Three Months Ended

 

Three Months Ended

 

March 31,

 

March 31,

 

2018

 

2017

 

2018

 

2017

Service cost

$

             1

 

$

             1

 

$

              9

 

$

             9

Interest cost

 

        2,520

 

 

        2,613

 

 

          269

 

 

          250

Expected return on plan assets

 

      (3,354)

 

 

      (3,440)

 

 

        (244)

 

 

         (282)

Recognized net actuarial loss

 

      1,145

 

 

      1,190

 

 

          242

 

 

           249

Amortization of prior service cost

 

                -

 

 

                -

 

 

          (9)

 

 

          (12)

Net periodic benefit cost

$

           312

 

$

           364

 

$

           267

 

$

          214

 

U.S. Plans

 

Non-U.S. Plans

U.S. Plans

 

Non-U.S. Plans

Three Months Ended

 

Three Months Ended

Nine Months Ended

 

Nine Months Ended

September 30,

 

September 30,

March 31,

 

March 31,

2017

 

2016

 

2017

 

2016

2018

 

2017

 

2018

 

2017

Service cost

$

             1

 

$

             1

 

$

              9

 

$

              9

$

3

 

$

2

 

$

27

 

$

28

Interest cost

 

        2,520

 

        2,613

 

          254

 

          264

 

7,560

 

7,838

 

783

 

764

Expected return on plan assets

 

      (3,354)

 

      (3,440)

 

        (231)

 

        (297)

 

(10,061)

 

(10,321)

 

(710)

 

(861)

Recognized net actuarial loss

 

      1,145

 

      1,190

 

          229

 

          262

 

3,435

 

3,571

 

705

 

760

Amortization of prior service cost

 

                -

 

                -

 

          (8)

 

          (12)

 

-

 

-

 

(26)

 

(36)

Net periodic benefit cost

$

           312

 

$

           364

 

$

           253

 

$

           226

$

937

 

$

1,090

 

$

779

 

$

655

 

The Company expects to pay $1.4$6.9 million in contributions to its defined benefit plans during fiscal 2018. Contributions of $0.3 million and $0.8 million were made during the three and nine months ended September 30, 2017March 31, 2018 compared to $0.2$0.3 million and $1.0 million during the three and nine months ended September 30, 2016.March 31, 2017, respectively. Required contributions of $0.8$0.9 million will be paid to the Company’s U.K. defined benefit plan during 2018. The Company also expects to make contributions during the current fiscal year of $0.2 million and $0.3 million to its unfunded defined benefit plans in the U.S. and Germany respectively. Subsequent to the end of the third quarter, the Company made a $5.5 million contribution to its defined benefit plan in the U.S. to accelerate tax benefits afforded to the Company by recent tax law changes.

 

12)11)Income Taxes 

On December 22, 2017, the Tax Cuts and Jobs Act was passed which, among other things, reduces the federal corporate tax rate to 21.0% effective for taxable years starting on or after January 1, 2018.  The Company is using a blended federal rate of 28.0% for the year ending June 30, 2018.  During the quarter ended December 31, 2017, the Company reported provisional amounts for toll/transition tax and the change in the U.S. deferred tax.  Pursuant to SEC guidance provided in Staff Accounting Bulletin No. 118, the Company is utilizing the measurement period approach for the income tax effects of tax reform for which the accounting is incomplete.  During the current quarter ending March 31, 2018, the Company updated the impact of the tax law as follows:

The Company has discretely recorded an additional charge of approximately $178 thousand to its provision for income taxes for the quarter ending March 31, 2018 due to a revaluation of the Company's estimated deferred tax assets as of December 31, 2017. The increase was a result of a change in the estimated current year activity from the prior quarter for a total year-to date impact of approximately $1.4 million.  As in the prior quarter, the impact is based on estimated amounts for the current quarter. 

The Company has discretely recorded a tax benefit of approximately $633 thousand to its provision for income taxes for the quarter ending March 31, 2018 related to a mandatory deemed repatriation of foreign earnings. The benefit was the result of updating the calculation based on the federal tax return filed in the quarter that was partially offset by an estimated tax provision for state taxes on the impact of the deemed repatriation for a total year-to date impact of approximately $13.1 million.  The Company is still using an estimate because the calculation involves data from a future period (June 30, 2018) and  


18



the Company is awaiting further guidance from the tax authorities regarding the technical application of the rules. Under the Act, the Company is permitted to pay this tax over an eight-year period commencing with the due date of the 2018 tax return.   

Since these provisions during the quarter are still based on estimates, the Company will continue to measure the impact of these areas and record any changes in subsequent quarters when information and guidance become available.  

Other law changes implemented by the Act such as the repeal of the Section 199 manufacturing deduction, changes to the calculation for Section 162(m) executive compensation deduction, interest deduction limitation and Global Intangible Low Taxed Income (GILTI), and others will not have any impact on the Company until the fiscal year ending June 30, 2019. The Company will continue to monitor guidance regarding these changes for how it will impact the financial statements in later periods.

 

The Company's effective tax rate from continuing operations for the firstthird quarter of 2018 was 26.4%23.4% compared with 26.5%27.3% for the prior year quarter. The effective tax rate in 2018 was impacted inhigher due to both periods by the following items: (i) benefitsan approximately $0.5 million discrete tax benefit related to the R&DUS tax reform and foreigna higher benefit related to a true-up for the filed tax credits,return recorded in the period and (ii) a benefitnot in the prior year quarter.

The Company's effective tax rate from continuing operations for the nine months ended March 31, 2018 was 54.4% compared with 24.1% for the prior year. The effective tax rate for the year to date was higher due to net discrete tax reform charges of $14.6 million recorded in the mix of income earnedcurrent year and not in jurisdictions with beneficial tax rates.the prior year.

 

13)12)Earnings Per Share 

 

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

 

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

 

March 31,

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

Basic - Average shares outstanding

 

 

12,709

 

 

12,664

 

 

12,695

 

 

12,667

Dilutive effect of unvested, restricted stock awards

 

 

     88

 

 

     94

 

 

89

 

 

105

Diluted - Average shares outstanding

 

 

12,797

 

 

12,758

 

 

12,784

 

 

12,772

 

 

 

 

 

Three Months Ended

 

 

 

 

September 30,

 

 

 

 

 

 

2017

 

2016

Basic - Average shares outstanding

 

 

 

 

 

12,676

 

12,674

Effect of dilutive securities:

 

 

 

 

 

 

 

 

  Unvested, restricted stock awards

 

 

 

 

 

       92

 

120

Diluted - Average shares outstanding

 

 

 

 

 

    12,768

 

    12,794

During the fourth quarter of fiscal 2017, the Company adopted Accounting Standards Update (ASU) 2016-09 which required a prospective update to the treasury method of calculating weighted average diluted shares outstanding resulting in the inclusion of additional shares in diluted EPS calculation for the three and nine months ended March 31, 2017.

 

Earnings available to common stockholders are the same for computing both basic and diluted earnings per share.  No options to purchase common stock were excluded as anti-dilutive from the calculation of diluted earnings per share for the three and nine months ended September 30,March 31, 2018 and 2017, and 2016, respectively.

 

Performance stock units of 54,89351,270 and 29,607 for the threenine months ended September 30,March 31, 2018 and 2017, and 2016, respectively, are excluded from the diluted earnings per share calculation as the performance criteria have not been met.


1819



14)13)Comprehensive Income (Loss) 

 

The components of the Company’s accumulated other comprehensive income (loss) are as follows (in thousands):

 

September 30, 2017

 

June 30,

2017

 

March 31, 2018

 

June 30,

2017

Foreign currency translation adjustment

 

$

  (21,693)

 

$

     (25,107)

 

$

  (10,959)

 

$

     (25,107)

Unrealized pension losses, net of tax

 

 

 (85,957)

 

 

     (86,646)

 

 

 (101,375)

 

 

     (86,646)

Unrealized losses on derivative instruments, net of tax

 

 

  (3,405)

 

 

          (4,185)

 

 

  (2,933)

 

 

          (4,185)

Total

 

$

   (111,055)

 

$

   (115,938)

Accumulated other comprehensive loss(1)

 

$

   (115,267)

 

$

   (115,938)

 

(1)Reflects stranded tax effects from the change in tax rate as a result of the early adoption of ASU 2018-02 in the amount of $17.2 million which has been reclassified to retained earnings. 

15)14)Contingencies 

 

From time to time, the Company is subject to various claims and legal proceedings, including claims related to environmental remediation, either asserted or unasserted, that arise in the ordinary course of business. While the outcome of these proceedings and claims cannot be predicted with certainty, the Company’s management does not believe that the outcome of any of the currently existing legal matters will have a material impact on the Company’s consolidated financial position, results of operations or cash flow. The Company accrues for losses related to a claim or litigation when the Company’s management considers a potential loss probable and can reasonably estimate such potential loss.  

 

16)15)Industry Segment Information 

 

The Company has determined that it has five reportable segments organized around the types of product sold:

 

Food Service Equipment – an aggregation of eight operating segments that manufacture and sell commercial food service equipment; 

Engraving – provides mold texturizing, slush molding tools, project management and design services, roll engraving,tool finishing, hygiene product tooling, low observation vents for stealth aircraft, and process machinery for a number of industries; 

Engineering Technologies – provides net and near net formed single-source customized solutions in the manufacture of engineered components for the aviation, aerospace, defense, energy, industrial, medical, marine, oil and gas, and manned and unmanned space markets. 

Electronics – manufacturing and selling of electronic components for applications throughout the end-user market spectrum; and 

Hydraulics – manufacturing and selling of single and double-acting telescopic and piston rod hydraulic cylinders. 


20



Net sales and income (loss) from continuing operations by segment for the three months ended
September 30, March 31, 2018 and 2017 and 2016 were as follows (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Net Sales

 

Income from Operations

 

 

2017

 

2016

 

2017

 

2016

Segment:

 

 

 

 

 

 

 

 

 

 

 

 

Food Service Equipment

 

$

103,064

 

$

    92,651

 

$

10,424

 

$

        9,488

Engraving

 

 

32,829

 

 

   26,730

 

 

7,420

 

 

        7,398

Engineering Technologies

 

 

20,267

 

 

    18,721

 

 

1,167

 

 

        1,496

Electronics

 

 

46,816

 

 

    30,651

 

 

10,236

 

 

        6,473

Hydraulics

 

 

11,403

 

 

    10,847

 

 

1,851

 

 

        2,129

Restructuring costs

 

 

 

 

 

 

 

 

(3,004)

 

 

(394)

Corporate

 

 

 

 

 

 

 

 

(6,943)

 

 

(6,820)


 

 

Three Months Ended March 31,

 

 

Net Sales

 

Income from Operations

 

 

2018

 

2017

 

2018

 

2017

Segment:

 

 

 

 

 

 

 

 

 

 

 

 

Food Service Equipment

 

$

95,482

 

$

92,730

 

$

6,785

 

$

       7,418

Engraving

 

 

33,749

 

 

25,492

 

 

7,030

 

 

       6,003

Engineering Technologies

 

 

23,426

 

 

23,678

 

 

1,140

 

 

       2,442

Electronics

 

 

51,208

 

 

32,308

 

 

11,173

 

 

       6,499

Hydraulics

 

 

12,878

 

 

10,507

 

 

1,728

 

 

       1,674

Restructuring costs

 

 

 

 

 

 

 

 

(1,337)

 

 

(1,019)

Corporate

 

 

 

 

 

 

 

 

(5,938)

 

 

(6,160)

Acquisition-related costs

 

 

 

 

 

 

 

 

(1,254)

 

 

(5,422)

Sub-total

 

$

216,743

 

$

184,715

 

$

19,327

 

$

  11,435

Interest expense

 

 

 

 

 

 

 

 

(2,286)

 

 

     (953)

Other non-operating income

 

 

 

 

 

 

 

 

(293)

 

 

            52

Income from continuing operations before income taxes

 

 

 

$

16,748

 

$

10,534

19


 

Nine Months Ended March 31,

 

Net Sales

 

Income from Operations

 

2018

 

2017

 

2018

 

2017

Segment:

 

 

 

 

 

 

 

 

Food Service Equipment

 

$

295,796

 

$

277,582

 

$

25,051

 

$

24,112

Engraving

 

100,457

 

78,084

 

21,246

 

19,910

Engineering Technologies

 

65,621

 

60,948

 

3,836

 

5,815

Electronics

 

144,030

 

91,455

 

31,628

 

19,064

Hydraulics

 

34,969

 

30,100

 

5,076

 

4,782

Restructuring costs

 

 

 

 

 

(6,307)

 

(3,077)

Corporate

 

 

 

 

 

(19,917)

 

(19,244)

Acquisition-related costs

 

 

 

 

 

 

 

 

(1,005)

 

 

-

 

 

 

 

 

(2,962)

 

(6,925)

Sub-total

 

$

214,379

 

$

179,600

 

$

20,146

 

$

19,770

 

$

640,873

 

$

538,169

 

$

57,651

 

$

44,437

Interest expense

 

 

 

 

 

 

 

 

(1,721)

 

 

(697)             

 

 

 

 

 

(5,800)

 

(2,499)

Other non-operating income

 

 

 

 

 

 

 

 

604

 

 

434                 

 

 

 

 

 

764

 

819

Income from continuing operations before income taxes

Income from continuing operations before income taxes

 

 

 

$

19,029

 

$

19,507

Income from continuing operations before income taxes

 

 

 

$

52,615

 

$

   42,757

 

Net sales include only transactions with unaffiliated customers and include no intersegment sales.  Income (loss) from operations by segment excludes interest expense and other non-operating income (expense).

 

The Company’s identifiable assets at September 30, 2017March 31, 2018 and June 30, 2017 are as follows (in thousands):

 

 

September 30, 2017

   June 30, 2017

 

March 31, 2018

   June 30, 2017

Food Service Equipment

 

$

250,595

 

$

 243,414

 

$

249,716

 

$

 243,414

Engraving

 

 

          138,265

 

 

 115,664

 

 

148,844

 

 

 115,664

Engineering Technologies

 

 

146,715

 

 

 150,805

 

 

141,314

 

 

 150,805

Electronics

 

 

          284,201

 

 

 292,776

 

 

320,271

 

 292,776

Hydraulics

 

 

22,761

 

 

   21,405

 

 

25,062

 

   21,405

Corporate & Other

 

 

37,403

 

 

   43,612

 

 

31,069

 

   43,612

Total

 

$

          879,940

 

$

867,676

 

$

         916,276

 

$

867,676


21



17)16)Restructuring 

 

The Company has undertaken cost reduction and facility consolidation initiatives that have resulted in severance, restructuring, and related charges.  A summary of charges by initiative is as follows (in thousands):

 

 

Three Months Ended

 

Three Months Ended

 

Nine Months Ended

 

September 30, 2017

 

March 31, 2018

 

March 31, 2018

Fiscal 2018

 

Involuntary Employee Severance and Benefit Costs

 

 

 

Other

 

 

 

 

Total

 

Involuntary Employee Severance and Benefit Costs

 

 

 

 

Other

 

 

 

 

 

Total

 

Involuntary Employee Severance and Benefit Costs

 

 

 

 

Other

 

 

 

 

 

Total

Restructuring initiatives

Restructuring initiatives

$

1,682

 

$

547

 

$

2,229

Restructuring initiatives

$

344

 

$

953

 

$

1,297

 

$

2,254

 

$

2,953

 

$

5,207

Prior year initiatives

Prior year initiatives

 

42

 

 

733

 

 

775

Prior year initiatives

 

7   

 

 

33   

 

 

40   

 

 

161

 

 

939

 

 

1,100

 

$

1,724

 

$

1,280

 

$

3,004

 

$

       351

 

$

986

 

$

   1,337

 

$

           2,415

 

$

3,892

 

$

  6,307

 

 

 

Three Months Ended

 

 

September 30, 2016

Fiscal 2017

 

Involuntary Employee Severance and Benefit Costs

 

 

 

Other

 

 

 

 

Total

Restructuring initiatives

$

23

 

$

      283

 

$

306

Prior year initiatives

 

6   

 

 

82   

 

 

88   

 

 

$

           29

 

$

365

 

$

   394

 

 

Three Months Ended

 

Nine Months Ended

 

 

March 31, 2017

 

March 31, 2017

Fiscal 2017

 

Involuntary Employee Severance and Benefit Costs

 

 

 

 

Other

 

 

 

 

 

Total

 

Involuntary Employee Severance and Benefit Costs

 

 

 

 

Other

 

 

 

 

 

Total

Restructuring initiatives

$

222

 

$

823

 

$

1,045

 

$

1,368

 

$

   1,651

 

$

3,019

Prior year initiatives

 

           -   

 

 

(26)   

 

 

(26)   

 

 

-

 

 

58

 

 

58

 

 

$

       222

 

$

797

 

$

   1,019

 

$

           1,368

 

$

1,709

 

$

  3,077

 

2018 Restructuring Initiatives

 

The Company continues to focus on our efforts to reduce cost and improve productivity across our businesses, particularly through headcount reductions, facility closures, and consolidations.  During the first quarter of fiscal yearnine months ended March 31, 2018, we incurred restructuring expenses from 2018 initiatives related to three restructuring programs that are intended to improve profitability, streamline production and enhance capacity to support future growth:  (1) the realignment of management functions at the Food Service Equipment Group level;  (2) headcount reduction and


20


plant realignment with regard to the standard products businesses within Food Service Equipment; and (3) the exit of an unprofitable Engraving business in Brazil.

 

 

 

Involuntary Employee Severance and Benefit Costs

 

 

Other

 

 

 

Total

 

Restructuring liabilities at June 30, 2017

 

$

-

 

$

-   

 

$

-   

 

Additions and adjustments

 

 

1,682

 

 

547

 

 

2,229

 

Payments

 

 

(1,276)

 

 

(547)

 

 

(1,823)

 

Restructuring liabilities at September 30, 2017

 

$

406  

 

$

-                

 

$

406              

 

 

 

Involuntary Employee Severance and Benefit Costs

 

 

Other

 

 

 

Total

 

Restructuring liabilities at June 30, 2017

 

$

-

 

$

-   

 

$

-   

 

Additions and adjustments

 

 

2,435

 

 

2,945

 

 

5,380

 

Payments

 

 

(2,204)

 

 

(2,913)

 

 

(5,117)

 

Restructuring liabilities at March 31, 2018

 

$

231  

 

$

32               

 

$

263              

 

 

Prior Year Initiatives

 

The prior year initiatives yet to be completed are primarily the finalization of the manufacturing footprint consolidation within our Enginetics business in the Engineering Technology segment.


22



Activity in the reserve related to the prior year restructuring initiatives is as follows (in thousands):

 

 

 

Involuntary Employee Severance and Benefit Costs

 

 

Other

 

 

 

Total

Restructuring liabilities at June 30, 2017

 

$

506   

 

$

1,238   

 

$

1,744   

Additions and adjustments

 

 

42

 

 

752

 

 

794

Payments

 

 

               (532)

 

 

       (1,662)

 

 

    (2,194)

Restructuring liabilities at September 30, 2017

 

$

16

 

$

328

 

$

344

 

 

Involuntary Employee Severance and Benefit Costs

 

 

Other

 

 

 

Total

Restructuring liabilities at June 30, 2017

 

$

839   

 

$

906   

 

$

1,745   

Additions and adjustments

 

 

163

 

 

937

 

 

1,100

Payments

 

 

               (710)

 

 

       (1,843)

 

 

    (2,553)

Restructuring liabilities at March 31, 2018

 

$

292

 

$

-

 

$

292

 

The Company’s total restructuring expenses by segment are as follows (in thousands):

 

 

Three Months Ended

 

 

Three Months Ended

 

Three Months Ended

 

 

Nine Months Ended

 

September 30, 2017

 

 

September 30, 2016

 

March 31, 2018

 

 

March 31, 2018

 

Involuntary Employee Severance and Benefit Costs

 

 

 

 

Other

 

 

 

 

 

Total

 

Involuntary Employee Severance and Benefit Costs

 

 

 

 

Other

 

 

 

 

 

Total

 

Involuntary Employee Severance and Benefit Costs

 

 

 

Other

 

 

 

 

Total

 

Involuntary Employee Severance and Benefit Costs

 

 

 

Other

 

 

 

 

Total

Food Service Equipment

Food Service Equipment

$

835  

 

$

427

 

$

1,262

 

  $

12

 

$

75

 

$

87

Food Service Equipment

$

80

 

$

945

 

$

        1,025

 

$

829   

 

 $

2,505

 

 $

3,334

Engraving

 

 

715                 

 

 

94

 

 

809            

 

 

6

 

 

-

 

 

6

 

 

186   

 

 

2   

 

 

188   

 

 

925

 

 

345   

 

 

1,270

Engineering Technologies

 

 

42

 

 

724

 

 

766

 

 

-

 

 

185

 

 

185

 

 

8

 

 

18   

 

 

26

 

 

161

 

 

900   

 

 

1,061

Electronics Products

 

 

132

 

 

26

 

 

158

 

 

11

 

 

98

 

 

109

Hydraulics

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

Electronics

 

 

77

 

 

7

 

 

84

 

 

209

 

 

90

 

 

299

Corporate

 

 

            -

 

 

9

 

 

9

 

 

-

 

 

7

 

 

7

 

 

-

 

 

14   

 

 

14

 

 

291

 

 

52   

 

 

343

 

$

1,724

 

$

1,280

 

$

3,004

 

$

29

 

$

365

 

$

394

 

$

351

 

$

986

 

$

    1,337

 

$

       2,415

 

$

3,892

 

$

6,307

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

March 31, 2017

 

 

March 31, 2017

 

 

Involuntary Employee Severance and Benefit Costs

 

 

 

Other

 

 

 

 

Total

 

Involuntary Employee Severance and Benefit Costs

 

 

 

Other

 

 

 

 

Total

Food Service Equipment

$

-

 

$

    7

 

$

        7

 

$

1,129   

 

 $

85

 

 $

1,214

Engraving

 

 

-

 

 

-   

 

 

-

 

 

6

 

 

        -   

 

 

6

Engineering Technologies

 

 

222

 

 

730   

 

 

952

 

 

222

 

 

1,164   

 

 

1,385

Electronics

 

 

-

 

 

86

 

 

        86

 

 

11

 

 

455

 

 

467

Corporate

 

 

-

 

 

(26)   

 

 

(26)

 

 

-

 

 

5

 

 

5

 

 

$

222  

 

$

 797

 

$

    1,019

 

$

       1,368

 

$

1,709

 

$

3,077

During the third quarter of fiscal year 2018, we incurred restructuring expenses of $1.3 million primarily related to two restructuring programs that are intended to improve profitability, streamline production and enhance capacity to support future growth including headcount reduction and plant realignment with regard to the standard products businesses within Food Service Equipment and the exit of an unprofitable Engraving business in Brazil.

Restructuring expenses for the nine months ended March 31, 2018 were $6.3 million as a result of the forgoing initiatives and footprint optimization of the Engineering Technologies segment.  

 

We incurred severance and otherexpect to incur additional restructuring costs of $3.0between $1.5 million and $0.4$2.0 million associated with these activities during the three months ended September 30, 2017 and 2016, respectively. Restructuring expense is expected to be between $5.0 million and $6.0 million for the remainder of fiscal year 2018.

 


23



ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

 

Statements contained in this Quarterly Report on Form 10-Q that are not based on historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-


21


lookingForward-looking statements may be identified by the use of forward-looking terminology such as “should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intends,” “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 material adverse or unforeseen legal judgments, fines, penalties or settlements, conditions in the financial and banking markets, including fluctuations in exchange rates and the inability to repatriate foreign cash, general and international recessionary economic conditions, including the impact, length and degree of the currentdownturns or slow growth conditions on the customers and markets we serve and more specifically conditions in the oil and gas, food service equipment, automotive, construction, aerospace, energy, transportation and general industrial markets, lower-cost competition, the relative mix of products which impact margins and operating efficiencies, both domestic and foreign, in certain of our businesses, the impact of higher raw material and component costs(including the impact of any protective tariffs), particularly steel, petroleum based products and refrigeration components, an inability to realize the expected cost savings from restructuring activities, effective completion of plant consolidations, cost reduction efforts, restructuring including procurement savings and productivity enhancements, capital management improvements, strategic capital expenditures, and the implementation of lean enterprise manufacturing techniques, the inability to achieve the savings expected from the sourcing of raw materials from and diversification efforts in emerging markets, the inability to attain expected benefits from strategic alliances or acquisitions and the inability to achieve synergies contemplated by the Company. Other factors that could impact the Company include changes to future pension funding requirements.requirements and the impact of recently passed tax reform legislation in the United States. For further information on these and other risk factors, please see the section “Risk Factors” in Company’s Annual Report on Form 10-K.  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

 

We are a leading manufacturer of a variety of products and provide services for diverse commercial and industrial markets.  We have twelve operating segments, aggregated and organized for reporting purposes into five reportable segments:  Food Service Equipment, Engraving, Engineering Technologies, Electronics and Hydraulics.  Overall management, strategic development and financial control are maintained by the executive staff from our corporate headquarters located in Salem, New Hampshire.

 

Our long-term strategy is to build larger industrial platforms through a value creation system that assists management in meeting specific corporate and business unit financial and strategic performance goals in order to create, improve, and enhance shareholder value.  The Standex Value Creation System is a standard methodology which provides consistent tools used throughout the company in order to achieve our organization’s goal of transforming from its historic roots as a holding company to an efficient operating company.  The Standex Value Creation System employs four components: Balanced Performance Plan, Standex Growth Disciplines, Standex Operational Excellence, and Standex Talent Management.  The Balanced Performance Plan process aligns annual goals throughout the business and provides a standard reporting, management and review process.  It is focused on setting and meeting annual and quarterly targets that support our short and long-term goals.  The Standex Growth Disciplines use a set of tools and processes including market maps, growth lane ways, and market tests to identify opportunities to expand the business organically and through acquisitions.  Standex Operational Excellence employs a standard playbook and processes, including LEAN, to eliminate waste and improve profitability, cash flow and customer satisfaction.  Finally, the Standex Talent Management process is an organizational development process that provides training, development, and succession planning for our


24



employees throughout our worldwide organization.  The Standex Value Creation System ties all disciplines in the organization together under a common umbrella by providing standard tools and processes to deliver our business objectives.Through the use of our Standex Value Creation System, we have developed a balanced approach to value creation.  While we intend to continue investing acquisition capital in high growth segments such as Electronics and Engraving, we will continue to support all of our businesses as they enhance value through deployment of our GDP+ and OpEx playbooks.

 

It is our objective to grow larger and more profitable business units through both organic initiatives and acquisitions.  We seek to identify and implement organic growth initiatives such as new product


22


development, geographic expansion, introduction of products and technologies into new markets and applications, key accounts and strategic sales channel partners.  Also, we have a long-term objective to create sizable business platforms by adding strategically aligned or “bolt on” acquisitions to strengthen the individual businesses, create both sales and cost synergies with our core business platforms, and accelerate their growth and margin improvement.  We look to create both sales and cost synergies within our core business platforms, accelerate growth and improve margins.  We have a particular focus on identifying and investing in opportunities that complement our products and will increase the global presence and capabilities of our businesses.  From time to time, we have divested, and likely will continue to divest, businesses that we feel are not strategic or do not meet our growth and return expectations.

As part of our ongoing strategy, we acquired Italy-based Piazza Rosa Group (“Piazza Rosa”).  The privately held company is a leading provider of mold, tool treatment and finishing services for the automotive and consumer products markets.The combination of these competencies with Standex Engraving’s worldwide presence and texturizing capabilities creates a global tool finishing service leader.  The acquisition also opens additional opportunities in the broader surface engineering market.  The Piazza Rosa Group’s results are reported within our Engraving segment. 

During our third quarter of fiscal year 2017, we acquired all of the outstanding shares of Oki Sensor Device Corporation from Oki Electric Industry Co., Ltd.  Located in Kofu City, Japan, Oki Sensor Device Corporation is the world’s leading designer and supplier of magnetic reed switches.  Now named Standex Electronics Japan Corporation, (“Standex Electronics Japan”) the acquisition enhances the Company’s access to important Asian markets and enables the Company to offer a world class suite of reed switches and related magnetic solutions while continuing to serve Standex Electronics Japan’s diverse distribution channels.  Standex Electronics Japan’s results are reported within our Electronics segment.   

During our second quarter of fiscal year 2017, we acquired Horizon Scientific, Inc., (“Horizon Scientific”) a South Carolina-based supplier of laboratory refrigerators and freezers, as well as cryogenic equipment for the scientific, bio-medical and pharmaceutical markets.  We have included the operating results of Horizon Scientific in our Food Service Equipment segment in our Condensed Consolidated Financial Statements.  Horizon Scientific expands our access to higher-margin refrigeration markets in the growing scientific sector that provides solutions for exacting temperature storage requirements.  Horizon Scientific’s products complement the scientific offerings in our Nor-Lake division.   

During the first quarter of fiscal year 2017, we sold our U.S. Roll Plate and Machinery (“RPM”) business, as it was not strategic, and did not meet our growth and return expectations.  This divestiture also allows our Engraving management to focus on higher growth and better return businesses within the segment.   

We createdevelop “Customer Intimacy” by utilizing the Standex Growth Disciplines to partner with our customers in order to develop and deliver custom solutions or engineered components.  By partnering with our customers during long-term product development cycles, we become an extension of their development teams.  Through this Partner, Solve, Deliver® methodology, we are able to secure our position as a preferred long-term solution provider for our products, services and components.  This strategy results in increased sales and operating margins that enhance shareholder returns. 

Standex Operational Excellence drives continuous improvement in the efficiency of our businesses, both on the shop floor and in the office environment.  We recognize that our businesses are competing in a global economy that requires us to improve our competitive position.  We have deployed a number of management competencies to drive improvements in the cost structure of our business units including operational excellence through lean enterprise, the use of low cost manufacturing facilities in countries


23


such as Mexico and China, the consolidation of manufacturing facilities to achieve economies of scale and leveraging of fixed infrastructure costs, alternate sourcing to achieve procurement cost reductions, and capital improvements to increase productivity.


25



The Company’s strong historical cash flow has been a cornerstone for funding our capital allocation strategy.  We use cash flow generated from operations to fund the strategic growth programs described above, including acquisitions and investments for organic growth, investments in capital assets to improve productivity and lower costs and to return cash to our shareholders through payment of dividends and stock buybacks. 

Restructuring expenses reflect costs associated with the Company’sour efforts ofto continuously improvingimprove operational efficiency and expandingexpand globally in order to remain competitive in the end-user markets we serve.  The Company incursWe incur costs for actions to size itsour businesses to a level appropriate for current economic conditions, improve itsour cost structure, enhance our competitive position and increase operating margins.  Such expenses may include costs for moving facilities to locations that allow for lower fixed and variable costs, external consultants who provide additional expertise, starting up plants after relocation, downsizing operations because of changing economic conditions, and other costs resulting from asset redeployment decisions.  Shutdown costs include severance, benefits, stay bonuses, lease and contract terminations, asset write-downs, costs of moving fixed assets, and moving and relocation costs. Vacant facility costs include maintenance, utilities, property taxes and other costs.

 

Because of the diversity of the Company’s businesses, end user markets and geographic locations, management does not use specific external indices to predict the future performance of the Company, other than general information about broad macroeconomic trends.  Each of our individual business units serves niche markets and attempts to identify trends other than general business and economic conditions which are specific to its business and which could impact their performance.  Those units report pertinent information to senior management, which uses it to the extent relevant to assess the future performance of the Company.  A description of any such material trends is described below in the applicable segment analysis.

 

We monitor a number of key performance indicators (“KPIs”) including net sales, income from operations, backlog, effective income tax rate, gross profit margin, and operating cash flow.  A discussion of these KPIs is included below.  We may also supplement the discussion of these KPIs by identifying the impact of foreign exchange rates, acquisitions, and other significant items when they have a material impact on a specific KPI.  

We believe the discussion of these items provides enhanced information to investors by disclosing their impact on the overall trend which provides a clearer comparative view of the KPI, as applicable.  For discussion of the impact of foreign exchange rates on KPIs, the Company calculates the impact as the difference between the current period KPI calculated at the current period exchange rate as compared to the KPI calculated at the historical exchange rate for the prior period.  For discussion of the impact of acquisitions, we isolate the effect on the KPI amount that would have existed regardless of our acquisition.  Sales resulting from synergies between the acquisitionour acquisitions and existing operations of the Company are considered organic growth for the purposes of our discussion.

Unless otherwise noted, references to years are to fiscal years.

 

Results from Continuing Operations

 

 

 

 

Three Months Ended

(Dollar amounts in thousands, except

 

 

September 30,

   percentages)

 

 

2017

 

 

2016

Net sales

 

$

214,379

 

$

179,600

Gross profit margin

 

 

34.6%

 

 

34.4%

Income from operations

 

 

20,146

 

 

  19,770

Three Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

March 31,

 

 

March 31,

(In thousands, except percentages)

 

2018

 

 

2017

 

 

2018

 

 

2017

Net sales

$

216,743

 

$

184,715

 

$

640,873

 

$

538,169

Gross profit margin

 

34.0%

 

 

33.2%

 

 

34.2%

 

 

33.4%

Income from operations

 

19,327

 

 

11,435

 

 

57,651

 

 

44,437

 

 

 

 

 

 

 

 

 

 

 

 


2426


(In thousands)

September 30, 2017

Net sales, prior year period

$

         179,600

Components of change in sales:

   Organic sales change

10,339

   Effect of acquisitions

22,869

   Effect of exchange rates

1,571

Net sales, current period

$

        214,379


 

 

Three Months Ended

 

 

Nine Months Ended

(In thousands)

 

March 31, 2018

 

 

March 31, 2018

Net sales, prior year period

$

184,715

 

$

         538,169

Components of change in sales:

 

 

 

 

 

   Organic sales change

 

10,619

 

 

36,271

   Effect of acquisitions

 

15,706

 

 

55,897

   Effect of exchange rates

 

5,703

 

 

10,536

Net sales, current period

$

        216,743

 

$

640,873

 

Net sales for the firstthird quarter of 2018 increased $34.8$32.0 million, or 19.4%17.3%, when compared to the prior year period.  Organic sales increased by $10.3$10.6 million, or 5.8%5.7%, with each of the five businesses contributing to the overall increasedriven primarily by organic growth in the quarter.Engraving, Electronics, and Hydraulics.  Acquisitions also contributed 12.7%8.5% to the overall growth in the quarter.  Foreign currency was favorable and contributed to 0.9%3.1% to the sales increase.

Net sales in the nine months ended March 31, 2018 increased $102.7 million, or 19.1%, when compared to the prior year.  The increase in net sales was driven by organic growth across all segments of $36.3 million, or 6.7%, incremental sales from acquisitions of $55.9 million, or 10.4%, and favorable currency contributions of $10.5 million, or 2.0%.  We discuss our outlook for each segment below.

 

Gross Profit Margin

 

Our gross margin for the firstthird quarter of 2018 was 34.6%34.0%, compared to the prior year quarter of 34.4%33.2%.  Gross margin increased slightly 0.2%by 0.8% primarily due to sales mix.  

Our gross margin in the nine months ended March 31, 2018 was 34.2%, compared to the prior year of 33.4%.  Gross margin also increased year to date due to sales mix.  

 

Selling, General, and Administrative Expenses

Selling, General, and Administrative Expenses (“SG&A”) for the firstthird quarter of 2018 were $50.0$51.9 million, or 23.3%23.9% of sales, compared to $41.6$43.5 million, or 23.2%23.6% of sales, during the prior year quarter.  The increase in SG&A expenses during the quarter was driven by higher sales volume which resultedwere impacted by: i) on-going SG&A expenses related to our recent acquisitions of $3.9 million, ii) an increase in increased distribution and selling expenses of $1.0$1.9 million, iii) and an increase in administrative expenses primarily related to investments to support our recent acquisitions and growth laneways.

SG&A for the nine months ended March 31, 2018 were $152.6 million, or 23.8% of sales, compared to $125.6 million, or 23.3% of sales, during the prior year quarter.  SG&A expenses were impacted by:  i) on-going SG&A expenses related to our recent acquisitions of $10.6 million, ii) an increase in distribution and selling expenses of $5.5 million, iii) and an increase in administrative expenses primarily related to investments to support our recent acquisitions and growth laneways.

Restructuring Charges

During the third quarter of fiscal year 2018, we incurred restructuring expenses of $1.3 million primarily related to two restructuring programs that are intended to improve profitability, streamline production and enhance capacity to support future growth including headcount reduction and plant realignment with regard to the standard products businesses within Food Service Equipment and the exit of an unprofitable Engraving business in Brazil.

Restructuring expenses for the nine months ended March 31, 2018 were $6.3 million as wella result of the forgoing initiatives and footprint optimization of the Engineering Technologies segment.  We expect to incur additional restructuring costs between $1.5 million and $2.0 million during the remainder of fiscal year 2018.


27



Acquisition Related Expenses

During the third quarter of fiscal year 2018, we incurred acquisition-related expenses of $1.3 million comprised primarily of acquisition expenses for the Horizon Scientific acquisition including $0.7 million for deferred compensation earned by the Horizon Scientific seller during the quarter. The payments are contingent on the seller remaining an employee of the Company and are therefore treated as incremental costscompensation expense.  

Acquisition related expenses for the nine months ended March 31, 2018 were $3.0 million comprised primarily of $5.2 from$2.1 million for deferred compensation earned by the recent acquisitions.  Horizon Scientific seller during the year, and other acquisition expenses related to Standex Electronics Japan and Piazza Rosa.

Income from Operations

 

Income from operations for the firstthird quarter of 2018 was $20.1$19.3 million, compared to $19.8$11.4 million during the prior year quarter.  The increase of $0.3$7.9 million, or 1.9%69.0%, is primarily due to higher sales volume, and improved gross margin, performance of our recent acquisitions, and lower pre-acquisition expenses, partially offset by incrementalincreased selling, administrative and distribution expenses related to overall increased sales volumeand higher restructuring expenses related to on-going initiatives to improve profitability.

Income from operations for the nine months ended March 31, 2018 was $57.7 million, compared to $44.4 million during the prior year.  The increase of $13.2 million, or 29.7%, is primarily due to higher sales volume, improved gross margin, and a lesser amount of purchase accounting incurred in prior year as a result of our recent acquisitions.acquisitions, partially offset by increased selling, administrative and distribution expenses related to increased sales volumeand higher restructuring expenses related to on-going initiatives to improve profitability.

 

Interest Expense

 

Interest expense for the firstthird quarter of 2018 was $1.7$2.3 million, compared to $0.7$1.0 million during the prior year quarter.  The increase is due to higher borrowings associated with the recent acquisitions in addition to an increase in our effective interest rate of 2.98% as of March 31, 2018, as compared to prior year.1.76% as of March 31, 2017.Interest expense for the nine months ended March 31, 2018 and March 31, 2017 were $5.8 million and $2.5 million, respectively.

 

Income Taxes

The Company's effective tax rate from continuing operations for the firstthird quarter of 2018 was 26.4%23.4% compared with 26.5%27.3% for the prior year quarter. The effective tax rate in 2018 was impacted in both periods by the following items: (i) benefits related to the R&D and foreign tax credits, and (ii) a benefitlower due to the miximpact of income earnedthe US tax reform including a $0.5 million favorable adjustment to our previous estimate of the impact of the new tax legislation.

The Company's effective tax rate from continuing operations for the nine months ended March 31, 2018 was 54.4% compared with 24.1% for the prior year. The effective tax rate for the year to date was higher due to net discrete tax reform charges of $14.6 million recorded in jurisdictions with beneficial tax rates.the current year.

See Note 1, “Management Statement” and Note 11, “Income Taxes” in the Notes to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for further discussion on the impact of the Tax Cuts and Jobs Act and Staff Accounting Bulletin No. 118.

Backlog

 

Backlog includes all active or open orders for goods and services that have a firm fixed customer purchase order with defined delivery dates.services.  Backlog also includes any future deliveries based on executed customer contracts, so long as such deliveries are based on agreed upon delivery schedules.  Backlog is not generally a significant factor in the Company’s businesses because of our relatively short delivery periods and rapid inventory turnover with the exception of Engineering Technologies.  Backlog orders are not


28



necessarily an indicator of future sales levels because of variations in lead times and customer production demand pull systems. Customers may delay delivery of products or cancel orders prior to shipment, subject to possible cancellation penalties.  Due to the nature of long term agreements in the Engineering Technologies group, the timing of orders and delivery dates can vary considerably resulting in significant backlog


25


changes from one period to another.  In general, the vast majority of net realizable backlog beyond one year comes from the Engineering Technologies Group.

 

 

As of March 31, 2018

 

 

As of March 31, 2017

 

 

Total Backlog

 

Backlog under 1 year

 

 

Total * Backlog

 

Backlog * under 1 year

Food Service Equipment

$

39,242

$

35,914

 

$

46,479

$

43,441

Engraving

 

22,194

 

22,194

 

 

17,094

 

17,094

Engineering Technologies

 

93,646

 

72,961

 

 

87,952

 

61,705

Electronics

 

72,046

 

68,097

 

 

43,351

 

40,552

Hydraulics

 

10,610

 

10,604

 

 

5,364

 

5,364

         Total

$

237,738

$

209,770

 

$

200,240

$

168,156

* The Company continually evaluates backlog based on changes in customer delivery schedules and other manufacturing considerations.  For comparability reasons, we have revised backlog in our Engraving segment as of March 31, 2017 from amounts previously reported to better reflect backlog based on agreed upon delivery schedules at that point in time.

 

 

 

As of September 30, 2017

 

 

As of September 30, 2016

 

 

Total Backlog

 

Backlog under 1 year

 

 

Total Backlog

 

Backlog under 1 year

Food Service Equipment

$

48,486

$

45,706

 

$

38,852

$

36,976

Engraving

 

22,364

 

22,364

 

 

13,716

 

13,630

Engineering Technologies

 

93,279

 

67,342

 

 

89,897

 

65,682

Electronics

 

53,710

 

49,413

 

 

43,557

 

37,950

Hydraulics

 

6,503

 

6,503

 

 

4,267

 

4,267

         Total

$

224,342

$

191,328

 

$

190,289

$

158,505

BacklogTotal backlog realizable withinunder one year increased $32.8$41.6 million, or 20.7%24.7%, to $191.3$209.8 million at September 30, 2017March 31, 2018 from $158.5$168.2 million at September 30, 2016.March 31, 2017.  

 

Organic backlog under one year increased $21.6$30.0 million, or 13.5% due to strong demand in all segments,17.9%, while acquisitions contributed an additional $9.9$11.6 million.  

 

Segment Analysis

 

Food Service Equipment Group

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

September 30,

 

%

March 31,

 

%

 

March 31,

 

%

(In thousands, except percentages)

 

2017

 

2016

 

Change

2018

 

2017

 

Change

 

2018

 

2017

 

Change

Net sales

 

$    103,065

 

$     92,651

 

11.3%

$     95,482

 

$     92,730

 

3.0%

 

$   295,796

 

    $ 277,582

 

6.6%

Income from operations

 

$10,424

 

         9,488

 

9.9%

         6,785

 

         7,418

 

(8.5%)

 

       25,051

 

         24,112

 

3.9%

Operating income margin

 

10.1%

 

10.2%

 

 

7.1%

 

8.0%

 

 

 

8.5%

 

8.7%

 

 

Net sales in the firstthird quarter of fiscal year 2018 increased $10.4$2.8 million, or 11.3%3.0%, when compared to the prior year quarter.  The increase was primarily through organic sales growth, up $2.1 million or 2.3%.  Refrigeration Solutions sales were up 7.0% on strong sales growth in the drug retail, dollar store, and quick serve restaurant (“QSR”) chains. Cooking Solutions sales decreased 7.5% in the quarter primarily driven by product rationalization and slower sales to select major dealers.  Our Specialty Solutions sales increased by 8.5% with strong volume in our beverage and merchandising segments, particularly in the European market.  Overall, Food Service Equipment sales showed continued improvement toward the latter part of the quarter and we anticipate this trend to continue over the next quarter as seasonal momentum builds.

Net sales in the nine months ended March 31, 2018 increased $18.2 million, or 6.6%, when compared to the prior year.  Organic sales contributed growth of $7.5 million, or 2.7%, while acquisitions added $9.5 million, or 3.4%. Refrigeration organic sales increased on growth in drug retail, dollar store, and QSR chains. Cooking sales were down due to product rationalization and slower sales to select major dealers. Specialty Solutions sales increased by 9.1%, driven by general market growth, partially offset by foreign exchange declines.


29



Income from operations in the third quarter of fiscal 2018 decreased by $0.6 million, or 8.5%, when compared to the prior year quarter, as on-going process improvements were more than offset by increased freight costs and product mix. Looking forward, we believe our restructuring efforts will lead to better operating results in the fourth quarter and into the next fiscal year.

Income from operations in the nine months ended March 31, 2018 increased $0.9 million, or 3.9%, when compared to the prior year. Current year increases were primarily a result of the absence of purchase accounting expenses in the prior year of $1.1 million.  

Engraving Group

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

March 31,

 

%

 

March 31,

 

%

(In thousands, except percentages)

2018

 

2017

 

Change

 

2018

 

2017

 

Change

Net sales

$ 33,749

 

$  25,492

 

32.4%

 

$ 100,457

 

$ 78,084

 

28.7%

Income from operations

7,030

 

   6,003

 

17.1%

 

21,246

 

19,910

 

6.7%

Operating income margin

20.8%

 

23.5%

 

 

 

21.1%

 

25.5%

 

 

Net sales for the third quarter of 2018 increased by $8.3 million, or 32.4%, when compared to the prior year quarter. Organic sales growth was 2.3%, while acquisitions added 8.7%, and foreignincreased $2.4 million, or 9.3%.  Acquisitions contributed $3.3 million, or 13.1%.  Foreign exchange contributedhad a positive 0.3%impact of $2.5 million, or 9.9%.  Overall Refrigerated SolutionsSales in the North American market increased 8.4% as new auto platform launches accelerated as anticipated in the quarter.  Sales in Asia grew 5.0%, but were offset by decreases in the European markets due to project timing.  Backlog increased mainly due to OEM program shifting.

Net sales for the nine months ended March 31, 2018 increased by $11.3$22.4 million, or 23.2%28.7%, when compared to the prior year. The Piazza Rosa acquisition contributed $9.3 million, or 11.9%. Organic refrigeration salesForeign exchange had a positive impact of 6.1%, or $4.8 million. New services, including tool finishing, had a positive impact on organic growth.  Together with increased by $3.2 million driven by higher demand from large chains.  The October 2016 acquisition of Horizon Scientific contributed an additional $8.1 million in Refrigeration growth.  

Cooking Solutions sales fell 8.7% in the quarter, primarily dueautomotive and non-automotive markets, we expect to shipment delays which were a result of the implementation of a new ERP system.  We anticipate shipments to return to more normalized levels during Q2 as the ERP system issues are resolved.  

Specialty Solutions business sales were up $1.6 million, or 9.9%, with strongsee continued growth in both the beverage and merchandising businesses.all regions next quarter.

Income from operations for the third quarter of 2018 increased by $1.0 million, or 17.1%, when compared to the prior year. This increase primarily resulted from sales volume and the impact of the Piazza Rosa acquisition.  Engraving has made substantial investments in promoting new technologies such as nickel shell, Architexture, laser engraving, and tool finishing which are critical to the long-term growth of this segment.

Income for the nine months ended March 31, 2018 increased by $1.3 million, or 6.7%.  Year-to-date income was impacted by $0.2 million of purchase accounting expenses and costs associated with the new technology investments.  

Engineering Technologies Group

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

March 31,

 

%

 

March 31,

 

%

(In thousands, except percentages)

2018

 

2017

 

Change

 

2018

 

2017

 

Change

Net sales

$     23,426

 

$     23,678

 

     (1.1%)

 

$     65,621

 

$     60,948

 

7.7%

Income from operations

         1,140

 

2,442

 

(53.3%)

 

3,836

 

5,815

 

   (34.1%)

Operating income margin

4.9%

 

10.3%

 

 

 

5.8%

 

9.5%

 

 

Net sales in the firstthird quarter of fiscal 2017 increased $0.9year 2018 decreased by $0.3 million, or 9.9%1.1%, when compared to the prior year quarter.  Operating income margin was 10.1%.  The non-standard product businesses, Scientific, Beverage, Merchandising and specialized productsAviation sales increased by $1.0 million compared to the prior period due to the sales ramp on the General Electric LEAP engine programs, offset by customer initiated timing delays due to issues in turbo fan programs. Sales in the defense market were up $0.9 million due to contract awards received in the missile segment of the market.  Sales in the energy market decreased by $2.7 million due to reductions in demand. Looking forward, we expect customer delays will continue to do well with operating margin growth exceeding sales growth.  Restructuring efforts relatedimpact the fourth quarter; however, based on current customer forecasts, we anticipate these programs to this segment are discussedramp-up starting in the Corporate and Other section below.

Engraving Groupfirst quarter of 2019.


2630


 

 

Three Months Ended

 

 

 

 

September 30,

 

%

(In thousands, except percentages)

 

2017

 

2016

 

Change

Net sales

 

$ 32,829

 

$  26,730

 

22.8%

Income from operations

 

7,420

 

   7,398

 

0.3%

Operating income margin

 

22.6%

 

27.7%

 

 


Net sales for the firstnine months ended March 31, 2018 increased by $4.7 million, or 7.7%, when compared to the prior year. Aviation sales increased by 22.9% due to increased customer demand.  Total launch vehicle sales were up by 4.6% due to an increase in the development programs for the manned launch segment. Energy related sales were down $3.6 million due to lower power generation demand. Defense related sales improved by $1.0 million from the prior year due to increased sales to the defense markets.

Income from operations in the third quarter of 2018 increaseddecreased by $6.1$1.3 million, or 22.8%53.3%, when compared to the prior year quarter. Mold texturizing sales increased $4.6 million with strength from all geographic regions, while the acquisition of Piazza Rosa Group contributed $2.5 millionMargins were negatively impacted by lower volume in incremental sales.  These gains were partially offset by a decrease of $1.1 millionboth oil and gas and aviation, lower margins on development programs in sales from our Innovent business due to a prior year roll-out that did not repeat. Exchange rates contributed a positive impact of $0.7 millionspace and margin pressure on sales.legacy aviation engine programs.

 

Income from operations was flat year overfor the nine months ended March 31, 2018 decreased by $2.0 million, or 34.0%, when compared to the prior year.  Margins were down from prior yearThe decrease in operating income is due the acquisition costs related to Piazza Rosa, Innovent business volume, investmentslegacy aviation pricing pressures and unfavorable changes in new technologies and lumpy delivery schedules of automotive programs worldwide.product mix.

 

We expect sales growth in the remainder of fiscal year 2018 due to new technologies of architexture, laser, nickel shell and tool finishing, increased sales from automotive platform launches and capitalizing on synergies associated with our Piazza Rosa acquisition.

Engineering TechnologiesElectronics Group

 

Three Months Ended

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

September 30,

 

%

March 31,

 

%

 

March 31,

 

%

(In thousands, except percentages)

 

2017

 

2016

 

Change

2018

 

2017

 

Change

 

2018

 

2017

 

Change

Net sales

 

$      20,267

 

$      18,721

 

8.3%

$ 51,208

 

$  32,308

 

58.5%

 

$ 144,030

 

$  91,455

 

57.5%

Income from operations

 

1,167

 

    1,496

 

(22.0%)

11,173

 

6,499

 

71.9%

 

31,628

 

19,064

 

65.9%

Operating income margin

 

5.8%

 

8.0%

 

 

21.8%

 

20.1%

 

 

 

22.0%

 

20.8%

 

 

 

Net sales in the firstthird quarter of fiscal year 2018 increased by $1.5$18.9 million, or 8.3%, compared to the prior year quarter. Sales distribution by market for the quarter was as follows: 49% aviation, 31% space, 7% energy, 6% medical, 7% other markets. Sales in the aviation market were up 20.5% compared to the prior year primarily due to increases in the aircraft structures segment. Space sales improved by 20.2% driven by increases in development programs. Energy sales were down $0.6 million due to lower sales into the project based Oil and Gas segment.  We anticipate continued growth in the aviation and space markets in fiscal 2018.

Income from operations decreased by $0.3 million, or 22.0%, when compared to the prior year quarter.  The decrease was a result of a price concession in the Aviation engine market segment that was implemented ahead of expected cost reductions on the long-term program. In addition, the prior year included a favorable contract adjustment that did not repeat in the first quarter of fiscal 2018.

Electronics Group

 

 

Three Months Ended

 

 

 

 

September 30,

 

%

(In thousands, except percentages)

 

2017

 

2016

 

Change

Net sales

 

$    46,825

 

$    30,651

 

52.8%

Income from operations

 

  10,236

 

  6,473

 

58.1%

Operating income margin

 

21.9%

 

21.1%

 

 

Net sales in the first quarter fiscal year 2018 increased by $16.2 million, or 52.8%58.5%, when compared to the prior year quarter.  Organic sales growth was $3.3increased $4.3 million, or 10.6%13.3%.  North America sales were higher with improvements in power distribution and other markets. The organicEurope business continued to be strong with increasing demand across most markets. Asia sales increased with strong demand for sensor product applications. Exchange rates positively impacted sales by $2.2 million, or 6.9%. Sales increased $12.4 million, or 38.2%, due to the Standex Electronics Japan acquisition.

Net sales for the nine months ended March 31, 2018 increased $52.6 million, or 57.5%, when compared to the prior year.  Organic sales increased by $11.5 million, or 12.5%. Organic growth came from improvement


27


occurred in all major geographic regions. Organicareas. Foreign exchange rates positively affected sales by $4.0 million, or 4.4%. Sales increased $37.1 million, or 40.6%, due to the Standex Electronics Japan acquisition.  Looking forward, existing backlog combined with the strength of quoting activity on new business opportunities leads us to anticipate continued growth was particularly strong in the sensor and reed switch product lines as a result of strong global market demand and new product launches. Acquisition sales growth was $12.3 million, or 40.1%, during thefourth quarter.  Foreign exchange contributed to a 2.0% increase in sales.

 

Income from operations in the third quarter of fiscal year 2018 increased by $3.8$4.7 million, or 58.1%71.9%, when compared to the prior year quarter. Operating income wasEarnings improvements for the quarter were due to the higher because of the Standex Electronics Japan acquisition, leverage from sales mix and organic sales as well as the acquisition impact and operational cost efficiencies.  Due to the strategic significance of this segment, we continue to invest in automation and projects to increase capacity to meet growth combined with operating cost savings initiatives.expectations.

 

Looking forward, we are optimistic regardingIncome from operations for the prospects fornine months ended March 31, 2018 increased $12.6 million, or 65.9%, when compared to the prior year.  The increase in operating income is due to the higher organic sales, the acquisition impact and continued growth in all regions.  We have a strong funnel of new business opportunities and backlog.  However, two of our key customers were impacted by Hurricane Maria which could negatively impact North American sales.  We expect to realize further synergies related to our Standex Electronics Japan acquisition.operational cost improvements.

 

Hydraulics Group

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

March 31,

 

%

 

March 31,

 

%

(In thousands, except percentages)

2018

 

2017

 

Change

 

2018

 

2017

 

Change

Net sales

$  12,878    

 

$  10,507

 

22.6%

 

$  34,969

 

$   30,100

 

16.2%

Income from operations

     1,728

 

1,674

 

3.2%

 

5,076

 

     4,782

 

6.1%

Operating income margin

13.4%

 

15.9%

 

 

 

14.5%

 

15.9%

 

 


31

 

 

Three Months Ended

 

 

 

 

September 30,

 

%

(In thousands, except percentages)

 

2017

 

2016

 

Change

Net sales

 

$    11,403

 

$    10,847

 

5.1%

Income from operations

 

1,851

 

    2,129

 

(13.1)%

Operating income margin

 

16.2%

 

19.6%

 

 



Net sales in the third quarter of fiscal year 2018 increased $0.6$2.4 million, or 5.1%22.6%, when compared to the prior year quarter. The increase is primarily due to strong demand from OEM’s in revenue during the quarter was primarily driven by strong sales torefuse space and solid orders from the North American dump markets. New products and applications in both the refuse and dump trailermarkets also contributed to the growth. Specifically, our new pack eject cylinder for front end loading garbage trucks and others has achieved market acceptance by OEMs.

Net sales for the nine months ended March 31, 2018 increased $4.9 million, or 16.2%, when compared to the prior year.  Similar to the trending for the quarter, the increase is due to market share gains in the refuse OEM marketplace and steady growth in the North American dump markets. Aftermarket sales were also strong. LookingMoving forward we are optimistic about continued growth as our backlog is up 52.4% andanticipate demand in our end markets to remain strong.

positive due to construction and infrastructure projects. We expect additional market share gains at the OEM level and aftermarket distribution partners.

Income from operations decreased $0.3in the third quarter of fiscal year 2018 increased $0.1 million, or 13.1%3.2%, when compared to the prior year quarter. This decrease is primarily dueStrong top line growth and efficiency gains in the Tianjin China factory were mostly offset by material cost increases.  We have implemented price increases which should partially offset material price increases.  However, proposed tariffs on certain products we manufacture in China and import into the US could have a negative impact on earnings.

Income from operations for the nine months ended March 31, 2018 increased $0.3 million, or 6.1%, when compared to product mix and higher than expected rawthe prior year. The operating income increase was driven by the revenue growth during the first nine months were partially offset by material costs.

 

Corporate and Other

 

Three Months Ended

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

September 30,

 

%

March 31,

 

%

 

March 31,

 

%

(In thousands, except percentages)

 

2017

 

2016

 

Change

2018

 

2017

 

Change

 

2018

 

2017

 

Change

Income (loss) from operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

$     (6,943)

 

$     (6,820)

 

1.8%

$ (5,938)

 

$  (6,160)

 

(3.6%)

 

$ (19,917)

 

$ (19,244)

 

3.5%

Acquisition-related costs

 

(1,005)

 

-

 

100%

(1,254)

 

(5,422)

 

(76.9%)

 

(2,962)

 

(6,925)

 

(57.2%)

Restructuring

 

 (3,004)

 

 (394)

 

662.4%

(1,337)

 

(1,019)

 

31.2%

 

 (6,307)

 

 (3,077)

 

105.0%

 

Corporate expenses in the firstthird quarter of fiscal year 2018 increaseddecreased by $0.1$0.2 million, or 1.8%3.6%, when compared to the prior year quarter.quarter primarily due to the costs of a legal settlement of $0.8 million in the prior year.  

 

DuringCorporate expenses for the first quarter of fiscal yearnine months ended March 31, 2018, we incurred restructuring expenses of $3.0increased by $0.7 million, primarily relatedor 3.5%, when compared to four restructuring programs that are intended to improve profitability, streamline production and enhance capacitythe prior year.  The increase costs to support future growth:  (1) the realignment of management functions at the Food Service Equipment Group level;  (2) headcount reductionour transition from a holding to an operating company.

The restructuring and plant realignment with regard to the standard products businesses within Food Service Equipment; (3) the exit of an unprofitable Engraving business in Brazil;  and (4) the finalization of the manufacturing footprint consolidation within our Enginetics businessacquisition-related costs have been discussed above in the Engineering Technology segment.  We expect to incur additional restructuring costs between $5.0 million and $6.0 million throughout the remainder of fiscal year 2018.  Company Overview.

 

Discontinued Operations


28


In pursuing our business strategy, we have divested certain businesses and recorded activities of these businesses as discontinued operations.  The amounts impacting the three months ended September 30, 2017 are immaterial to our condensed consolidated results.

 

Liquidity and Capital Resources

 

At September 30, 2017,March 31, 2018, our total cash balance was $75.3$96.3 million, of which $64.9$87.3 million was held by foreign subsidiaries. The repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences or be subject to capital controls; however, those balances are generally available without legal restrictions to fund ordinary business operations.  Our current plans are not expected to require a repatriation of cash to fund our U.S. operations and as a result, we intend to indefinitely reinvest our foreign earnings to fund our overseas growth.  If the undistributed earnings of our foreign subsidiaries are needed for operations in the United States we would be required to accrue and pay U.S. taxes upon repatriation.

 

Net cash usedprovided by continuing operating activities for the threenine months ended September 30, 2017,March 31, 2018, was $5.5$28.8 million compared to net cash provided by operating activities of $1.4$31.5 million in the prior year. During the quarter, weWe generated $22.5$59.2 million from income statement activities and used $25.0$25.4 million of cash to fund working capital increases.  Cash flow used in investing activities for the threenine months ended September 30, 2017, was $17.1 million andMarch 31, 2018, totaled $28.0 million.  Uses of investing cash consisted primarily of cash used for capital expenditures of $8.9$21.4 million $10.1and $10.4 million for the Piazza Rosa and other acquisition which wasactivities.  These uses of investing cash were partially offset by $2.2 million from proceeds of life insurance.insurance and $1.4 million from the net proceeds of the sale of a building in Cincinnati, Ohio.  We leased back the Cincinnati, Ohio building and, as a result of the transaction, recorded a $0.7 million deferred gain that will be


32



amortized over the initial operating lease term which expires in May 2019.  Cash inflows provided by financing activities for the threenine months ended September 30, 2017March 31, 2018 were $8.0$1.9 million and included net borrowings of $10.2$9.7 million, cash paid for dividends of $2.0$6.6 million and other stock based activity, including stock repurchases, of $1.3$1.2 million. 

 

The Company Amended its Credit Agreement (“Credit Facility”, or “facility”) in December 2014.  This five-year Credit Facility has a borrowing limit of $400 million, which can be increased by an amount of up to $100 million, in accordance with specified conditions.  The facility also includes a $10 million sublimit for swing line loans and a $30 million sublimit for letters of credit.

 

Under the terms of the Credit Facility, we will pay a variable rate of interest and a commitment fee on borrowed amounts as well as a commitment fee on unused amounts under the facility.  The amount of the commitment fee will depend upon both the undrawn amount remaining available under the facility and the Company’s funded debt to EBITDA (as defined in the agreement) ratio at the last day of each quarter.  As our funded debt to EBITDA ratio increases, the commitment fee will increase.  

 

Funds borrowed under the facility may be used for the repayment of debt, working capital, capital expenditures, acquisitions (so long as certain conditions, including a specified funded debt to EBITDA leverage ratio is maintained), and other general corporate purposes.  The facility contains customary representations, warranties and restrictive covenants, as well as specific financial covenants.  A significant drop in our adjusted earnings (as defined in our Credit Facility) would limit the amount of indebtedness that could be outstanding at the end of any fiscal quarter which could hinder our ability to make acquisitions or otherwise limit our long-term growth prospects.  Failure to comply with this covenant could result in an acceleration of the debt maturity.  As of September 30, 2017,March 31, 2018, the Company has used $8.9 million against the letter of credit sub-facility and had the ability to borrow $176.9$186.1 million under the facility based on our current trailing twelve monthtwelve-month EBITDA.  The facility contains customary representations, warranties and restrictive covenants, as well as specific financial covenants.  The Company’s current financial covenants under the facility are as follows:

 

Interest Coverage Ratio - The Company is required to maintain a ratio of Earnings Before Interest and Taxes, as Adjusted (“Adjusted EBIT per the Credit Facility”), to interest expense for the trailing twelve months of at least 3.0:1.  Adjusted EBIT per the Credit Facility specifically excludes extraordinary and certain other defined items such as cash restructuring and acquisition-related charges up to $7.5 million, and unlimited non-cash charges including gains or losses on sale of propertypurchase accounting and goodwill adjustments.  At September 30, 2017,March 31, 2018, the Company’s Interest Coverage Ratio was 17.13:11.97:1.

 

Leverage Ratio - The Company’s ratio of funded debt to trailing twelve month Adjusted EBITDA per the facility, calculated as Adjusted EBIT per the Credit Facility plus depreciation and amortization, may not exceed 3.5:1.  At September 30, 2017,March 31, 2018, the Company’s Leverage Ratio was 1.92:1.84:1.


29


As of September 30, 2017,March 31, 2018, we had borrowings under our facility of $205.5$205.0 million and the effective rate of interest for outstanding borrowings under the facility was 2.47%2.98%.  Our primary cash requirements in addition to day-to-day operating needs include interest payments, capital expenditures, acquisitions, share repurchases, and dividends.  Our primary sources of cash for these requirements are cash flows from continuing operations and borrowings under the facility.  We expect 2018 capital spending to be between $31.0$28.0 and $32.0$30.0 million which includes amounts not spent in 2017 and includes between $2.4 and $2.2 million for our recent acquisition in Italy.  We also expect that fiscal year 2018 depreciation and amortization expense will be between $19.0$21.0 and $20.0$22.0 million and $8.0 and $9.0 million, respectively.

 

In order to manage our interest rate exposure, we are party to $100.0$75.0 million of active floating to fixed rate swaps.  These swaps convert our interest payments from LIBOR to a weighted average rate of 1.60%1.74%.


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The following table sets forth our capitalization at September 30, 2017March 31, 2018 and June 30, 2017:

 

(In thousands)

 

September 30,

2017

 

 

June 30,

2017

 

March 31,

2018

 

 

June 30,

2017

Long-term debt

$

                 205,896

 

$

191,976

$

                 204,726

 

$

191,976

Less cash and cash equivalents

 

75,270

 

 

88,566

 

96,325

 

 

88,566

Net debt (cash)

 

130,626

 

 

103,410

 

108,401

 

 

103,410

Stockholders' equity

 

                 426,424

 

 

408,664

 

                 446,407

 

 

408,664

Total capitalization

$

557,050

 

$

        512,074

$

554,808

 

$

        512,074

 

We sponsor a number of defined benefit and defined contribution retirement plans.  The U.S. pension plan is frozen for substantially all participants.  We have evaluated the current and long-term cash requirements of these plans, and our existing sources of liquidity are expected to be sufficient to cover required contributions under ERISA and other governing regulations.

 

The fair value of the Company's U.S. defined benefit pension plan assets was $196.3$192.7 million at September 30, 2017,March 31, 2018, as compared to $195.3 million at the most recent measurement date, which occurred as of June 30, 2017. The next measurement date to determine plan assets and benefit obligations will be on June 30, 2018.

 

At September 30, 2017, we do not expect to make mandatory contributions to the plan until 2019.  The Company expects to pay $1.4$6.9 million in contributions to its defined benefit plans during fiscal 2018. Contributions of $0.3 million and $0.8 million were made during the three and nine months ended September 30, 2017March 31, 2018 compared to $0.2$0.3 million and $1.0 million during the three and nine months ended September 30, 2016.  We expectMarch 31, 2017, respectively. Required contributions of $0.8 million will be paid to pay $1.4 million in prescribed contributions to ourthe Company’s U.K. defined benefit plan and other unfunded defined benefit plans in both the U.S. and Europe during fiscal year 2018. The Company also expects to make contributions during the current fiscal year of $0.2 million and $0.3 million to its unfunded defined benefit plans in the U.S. and Germany respectively. Any subsequentSubsequent to the end of the third quarter, the Company made a $5.5 million contribution to its defined benefit plan contributions will depend onin the results of future actuarial valuations.U.S. to accelerate tax benefits afforded to the Company by recent tax law changes.

 

We have an insurance program in place to fund supplemental retirement income benefits for five retired executives.  Current executives and new hires are not eligible for this program.  At September 30, 2017,March 31, 2018, the underlying policies had a cash surrender value of $16.8$17.1 million and are reported net of loans of $8.4$8.6 million for which we have the legal right of offset, these amounts are reported net on our balance sheet.

 

Other Matters

 

Inflation – Certain of our 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.  We monitor the inflationary rate and make 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 us.  Each of our segments is subject to the effects of changing raw material costs


30


caused by the underlying commodity price movements.  In general, we do not enter into purchase contracts that extend beyond one operating cycle.  While Standex considers our relationship with our suppliers to be good, there can be no assurances that we will not experience any supply shortage.

 

Foreign Currency Translation – Our primary functional currencies used by our non-U.S. subsidiaries are the Euro, British Pound Sterling (Pound), Mexican (Peso), Japanese (Yen), and Chinese (Yuan).

 

Environmental Matters – To the best of our knowledge, we believe that we are presently in substantial compliance with all existing applicable environmental laws and regulations and do not anticipate any instances of non-compliance that will have a material effect on our future capital expenditures, earnings or competitive position.

 

Seasonality – We are a diversified business with generally low levels of seasonality, however our fiscal third quarter typically has a comparatively lower level of sales and profitability.


34



Employee Relations – The Company has labor agreements with several union locals in the United States and several European employees belong to European trade unions.  There were twoare three union contracts in the U.S. that expiredwill expire during fiscal year 2017, both of which have been successfully negotiated.2018.  We are currently negotiating one contract and are in the planning phase for other negotiations.

 

Critical Accounting Policies

 

The condensed consolidated financial statements include the accounts of Standex International Corporation and all of 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. Although we believe that materially different amounts would not be reported due to the accounting policies adopted, the application of certain 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.  Our Annual Report on Form 10-K for the year ended June 30, 2017 lists a number of accounting policies which we believe to be the most critical.

 

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 Treasurer 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 non-qualified defined contribution plan) or speculation is strictly prohibited.  The Company has no majority-owned subsidiaries that are excluded from the consolidated financial statements.  Further, we have no interests in or relationships with any special purpose entities.

 

Exchange Rate Risk

 

We are exposed to both transactional risk and translation risk associated with exchange rates.  Our overall transactional risk is mitigated, in large part, by natural hedges developed with locally denominated debt service on intercompany accounts.  In the threenine months ended September 30, 2017,March 31, 2018, net sales to external customers in our consolidated sales not transacted in functional currency totals 3.7% of our consolidated sales.were 3.6%.  We also mitigate certain of our foreign currency exchange rate risks by entering into forward foreign currency contracts from time to time.  The contracts are used as a hedge against anticipated foreign cash flows, such as dividend payments, loan payments, and materials purchases, and are not used for trading or speculative purposes.  The fair values of the forward foreign currency exchange contracts are 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


31


hedged asset or liability.  At September 30, 2017,March 31, 2018, the fair value, in the aggregate, of the Company’s open foreign exchange contracts was a liability of $2.3$6.0 million.  

 

Our primary translation risk is with the Euro, British Pound Sterling, Peso, Japanese Yen and Chinese Yuan.  A hypothetical 10% appreciation or depreciation of the value of any these foreign currencies to the U.S. Dollar at September 30, 2017,March 31, 2018, would not result in a material change in our operations, financial position, or cash flows.  We hedge our most significant foreign currency translation risks primarily through cross currency swaps and other instruments, as appropriate.


35



Interest Rate Risk

 

Our interest rate exposure is limited primarily to interest rate changes on our variable rate borrowings.  From time to time, we will use interest rate swap agreements to modify our exposure to interest rate movements.  The Company’s currently effective swap agreements convert our base borrowing rate on $100.0$75.0 million of debt due under our Credit Agreement from a variable rate equal to LIBOR to a weighted average rate of 1.60%1.74% at September 30, 2017.March 31, 2018.

 

The Company’s effective rate on variable-rate borrowings, including the impact of interest rate swaps, under the revolving credit agreement increased from 2.41% at June 30, 2017 to 2.47%2.98% at September 30, 2017.March 31, 2018.

 

Concentration of Credit Risk

 

We have a diversified customer base.  As such, the risk associated with concentration of credit risk is inherently minimized.  As of September 30, 2017,March 31, 2018, no one customer accounted for more than 5% of our consolidated outstanding receivables or of our sales.

 

Commodity Prices

 

The Company is exposed to fluctuating market prices for all commodities used in its manufacturing processes.  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.  While Standex considers our relationship with our suppliers to be good, there can be no assurances that we will not experience any supply shortage.

 

The Engineering Technologies, Food Service Equipment, Electronics, and Hydraulics Groups are all sensitive to price increases for steel products, other metal commodities and petroleum based products.  In the past year, we have experienced price fluctuations for a number of materials including steel, copper wire, other metal commodities, refrigeration components and foam insulation.  These materials are some of the key elements in the products manufactured in these segments.  Wherever possible, we will implement price increases to offset the impact of changing prices.  The ultimate acceptance of these price increases, if implemented, will be impacted by our affected divisions’ respective competitors and the timing of their price increases.

 

ITEM 4.CONTROLS AND PROCEDURES 

 

At the end of the period covered by this Report, the management of the Company, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)).  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2017March 31, 2018 in ensuring that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.


32


SEC guidance permits the exclusion of an evaluation of the effectiveness of a registrant's disclosureinternal controls and procedures as they relate to the internal control over financial reporting for an acquired business during the first year following such acquisition.  As discussed in Note 2 to the consolidated financial statements contained in this Report, the Company acquired all of the outstanding stock of the Piazza Rosa Group, Horizon Scientific, Inc.,Group.  This acquisition represents approximately 1.5% and Standex Electronics Japan in 2017.  These acquisitions represent approximately 10.7%1.4% of the Company's consolidated revenue for the three and nine months ended September 30, 2017,March 31, 2018, respectively, and approximately 16.1%1.8% of the Company's consolidated assets at September 30, 2017.March 31, 2018.  Management's evaluation and conclusion as to the effectiveness of the design and operation of the Company’s disclosureinternal controls and proceduresover financial


36



reporting as of September 30, 2017March 31, 2018 excludes any evaluation of the internal control over financial reporting of the Piazza Rosa Group, Horizon Scientific, Inc., or Standex Electronics Japan.Group.

 

There was no change in the Company's internal control over financial reporting during the quarterly period ended September 30, 2017March 31, 2018 that has materially affected or is reasonably likely to materially affect the Company's internal control over financial reporting.

 

PART II.  OTHER INFORMATION

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(c)The following table provides information about purchases by the Company of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act: 

 

Issuer Purchases of Equity Securities1

 

 

 

 

 

 

Quarter Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

Period

 

 

(a) Total number of shares (or units) purchased

 

 

(b) Average price paid per share (or unit)

(c) Total number of shares (or units) purchased as part of publicly announced plans or programs

(d) Maximum number (or appropriate dollar value) of shares (or units) that may yet be purchased under the plans or programs

July 1 - July 31, 2017

 

-

 

$               -

 

                     -

 

$               89,759,320

 

 

 

 

 

 

 

 

 

August 1 - August 31, 2017

 

      965

 

$        92.78

 

965

 

89,669,786

 

 

 

 

 

 

 

 

 

September 1 - September 30, 2017

 

     12,496

 

$        95.02

 

12,496

 

              88,482,467

 

 

 

 

 

 

 

 

 

       Total

 

     13,461

 

$        94.86

 

13,461

 

 $               88,482,467

Issuer Purchases of Equity Securities1

 

 

 

 

 

 

Quarter Ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

Period

 

 

(a) Total number of shares (or units) purchased

 

 

(b) Average price paid per share (or unit)

(c) Total number of shares (or units) purchased as part of publicly announced plans or programs

(d) Maximum number (or appropriate dollar value) of shares (or units) that may yet be purchased under the plans or programs

January 1 - January 31, 2018

 

416

 

$     104.50

 

                     416

 

$               87,757,997

 

 

 

 

 

 

 

 

 

February 1 – February 28, 2018

 

391

 

$      101.71

 

391

 

87,718,229

 

 

 

 

 

 

 

 

 

March 1 – March 31, 2018

 

     -

 

$                -

 

-

 

              87,718,229

 

 

 

 

 

 

 

 

 

       Total

 

     807

 

$       103.15

 

807

 

 $               87,718,229

 

(1)   The Company has a Stock Buyback Program (the “Program”) which was originally announced on January 30, 1985 and most recently amended on April 26, 2016.  Under the Program, the Company was authorized to repurchase up to an aggregate of $100 million of its shares.  Under the program, purchases may be made from time to time on the open market, including through 10b5-1 trading plans, or through privately negotiated transactions, block transactions, or other techniques in accordance with prevailing market conditions and the requirements of the Securities and Exchange Commission. The Board’s authorization is open-ended and does not establish a timeframe for the purchases. The Company is not obligated to acquire a particular number of shares, and the program may be discontinued at any time at the Company’s discretion.


33


ITEM 6.  EXHIBITS

 

(a)ITEM 6.EXHIBITS

(a)Exhibits 

 

31.1Principal Executive Officer’s Certification Pursuant to Rule 13a-14(a)/15d-14(a) and Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 

31.2Principal Financial Officer’s Certification Pursuant to Rule 13a-14(a)/15d-14(a) and Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.2002. 

32Principal Executive Officer and Principal Financial Officer Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 22002002.. 

101The following materials from this Quarterly Report on Form 10-Q, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements. 


37



ALL OTHER ITEMS ARE INAPPLICABLE

 

 

 

 

 

 

 

 

 

SIGNATURES

 

 

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:

NovemberMay 1, 20172018

/s/ THOMAS D. DEBYLE

 

 

Thomas D. DeByle

 

 

Vice President/Chief Financial Officer

 

 

(Principal Financial & Accounting Officer)

 

 

 

Date:

NovemberMay 1, 20172018

/s/ SEAN C. VALASHINAS

 

 

Sean C. Valashinas

 

 

Chief Accounting Officer/Assistant Treasurer

 

 

 


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