10-Q 1 f10q2q.htm FORM 10-Q

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 December 31, 2016


[  ]

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 January 30, 2017 was 12,749,065



1



STANDEX INTERNATIONAL CORPORATION

INDEX

Page No.

PART I.

FINANCIAL INFORMATION:

Item 1.

Unaudited Condensed Consolidated Balance Sheets as of

December 31, 2016 and June 30, 2016

2

Unaudited Condensed Consolidated Statements of Operations for the

Three and Six Months Ended December 31, 2016 and 2015

3

Unaudited Condensed Consolidated Statements of Comprehensive Income for the

Three and Six Months Ended December 31, 2016 and 2015

4

Unaudited Condensed Consolidated Statements of Cash Flows for the

Six Months Ended December 31, 2016 and 2015

5

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

Management's Discussion and Analysis of Financial Condition and

Results of Operations

20

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

32

Item 4.

Controls and Procedures

33

PART II.

OTHER INFORMATION:

Item 1a.

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 6.

Exhibits

34



PART I.  FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1

 

 

 

 

 

 

 

 

 

 

 

 

 

STANDEX INTERNATIONAL CORPORATION

Unaudited Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

(In thousands, except per share data)

 

December 31, 2016

June 30,

2016

ASSETS

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

121,301

 

$

    121,988

Accounts receivable, net of reserve of

 

 

 

 

 

 

$2,217 and $2,119 at December 31, 2016 and June 30, 2016

 

 

99,183

 

 

   103,974

Inventories

 

 

110,952

 

 

   105,402

Prepaid expenses and other current assets

 

 

6,318

 

 

       4,784

Income taxes receivable

 

 

5,674

 

 

     1,325

Deferred tax asset

 

 

14,607

 

 

     16,013

Assets held for sale

 

 

                -   

 

 

        2,363

Total current assets

 

 

358,035

 

 

   355,849

Property, plant, and equipment, net

 

 

     110,530

 

 

    106,686

Intangible assets, net

 

 

55,449

 

 

      40,412

Goodwill

 

 

   161,017

 

 

   157,354

Deferred tax asset

 

 

        2,663

 

 

    11,361

Other non-current assets

 

 

23,035

 

 

     18,795

Total non-current assets

 

 

352,694

 

 

    334,608

Total assets

 

$

    710,729

 

$

   690,457

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

Accounts payable

 

$

      60,140

 

$

     77,099

Accrued liabilities

 

 

      53,588

 

 

      50,785

Income taxes payable

 

 

        3,264

 

 

        4,695

Liabilities held for sale

 

 

            -

 

 

       1,528

Total current liabilities

 

 

    116,992

 

 

   134,107

Long-term debt

 

 

   124,295

 

 

      92,114

Accrued pension and other non-current liabilities

 

 

     90,744

 

 

     94,277

Total non-current liabilities

 

 

    215,039

 

 

    186,391

Stockholders' equity:

 

 

 

 

 

 

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

 

 

 

 

 

 

shares authorized, 27,984,278 issued, 12,664,281 and

 

 

 

 

 

 

12,674,458 outstanding at December 31, 2016 and June 30, 2016

 

 

      41,976

 

 

     41,976

Additional paid-in capital

 

 

     55,096

 

 

     52,374

Retained earnings

 

 

    698,327

 

 

   678,002

Accumulated other comprehensive loss

 

 

(126,694)

 

 

(117,975)

Treasury shares: 15,319,997 shares at December 31, 2016

 

 

 

 

 

 

and 15,309,820 shares at June 30, 2016

 

 

 (290,007)

 

 

  (284,418)

Total stockholders' equity

 

 

    378,698

 

 

   369,959                           

Total liabilities and stockholders' equity

 

$

    710,729

 

$

690,457

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements

 

 

 





STANDEX INTERNATIONAL CORPORATION

Unaudited Condensed Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

December 31,

 

December 31,

(In thousands, except per share data)

 

2016

 

2015

 

2016

 

2015

Net sales

 

$

173,854

 

$

181,948

 

$

353,454

 

$

380,346

Cost of sales

 

 

116,960

 

 

123,713

 

 

 234,784

 

 

 253,559

     Gross profit

 

 

56,894

 

 

  58,235

 

 

118,670

 

 

126,787

Selling, general, and administrative expenses

 

 

 40,493

 

 

 40,696

 

 

  82,105

 

 

  84,626

Acquisition related costs

 

 

1,503

 

 

          -   

 

 

1,503

 

 

          -   

Restructuring costs

 

 

    1,664

 

 

    1,477

 

 

    2,058

 

 

    2,996

     Total operating expenses

 

 

43,660

 

 

  42,173

 

 

85,666

 

 

   87,622

Income from operations

 

 

13,234

 

 

 16,062

 

 

  33,004

 

 

  39,165

Interest expense

 

 

     (850)

 

 

     (731)

 

 

(1,547)

 

 

(1,375)

Other non-operating income, net

 

 

      332

 

 

      294

 

 

       766

 

 

       484

Income from continuing operations before income taxes

 

 

12,716

 

 

 15,625

 

 

 32,223

 

 

 38,274

Provision for income taxes

 

 

2,458

 

 

   3,179

 

 

8,014

 

 

   9,687

Income from continuing operations

 

 

10,258

 

 

  12,446

 

 

24,209

 

 

  28,587

Income (loss) from discontinued operations, net of

    income taxes

 

           6

 

 

           (75)

 

 


    (44)

 

 


    (235)

Net income

 

$

10,264

 

$

 12,371

 

$

24,165

 

$

   28,352

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

      Continuing operations

 

$

     0.81

 

$

     0.98

 

$

      1.91

 

$

      2.26

      Discontinued operations

 

 

          -   

 

 

   (0.01)

 

 

          -   

 

 

   (0.02)

           Total

 

$

0.81

 

$

     0.97

 

$

     1.91

 

$

     2.24

Diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

      Continuing operations

 

$

     0.80

 

$

     0.97

 

$

     1.90

 

$

     2.24

      Discontinued operations

 

 

          -   

 

 

   (0.01)

 

 

          -   

 

 

    (0.02)

           Total

 

$

0.80

 

$

     0.96

 

$

     1.90

 

$

     2.22

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per share

 

$

     0.16

 

$

     0.14

 

$

      0.30

 

$

      0.26

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements

 

 

 

 

 

 

 

 

 










STANDEX INTERNATIONAL CORPORATION

Unaudited Condensed Consolidated Statements of Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

December 31,

 

December 31,

(In thousands)

2016

 

2015

 

 

2016

 

 

2015

Net income (loss)

$

10,264

 

$

12,371

 

$

24,165

 

$

28,352

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

   Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

 

 

      Actuarial gains (losses) and other changes in

          unrecognized costs

 $


516

 

 $


261

 

 $


631

 

 $


557

      Amortization of unrecognized costs

 

1,427

 

 

1,199

 

 

2,867

 

 

2,402

   Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

      Change in unrealized gains and (losses)

 

493

 

 

434

 

 

554

 

 

(44)

      Amortization of unrealized gains and into

          interest expense

 


83

 

 


107

 

 


304

 

 


227

   Foreign currency translation gains (losses)

 

(10,441)

 

 

(4,781)

 

 

(11,607)

 

 

(10,919)

Other comprehensive income (loss) before tax

$

(7,922)

 

$

(2,780)

 

$

(7,251)

 

$

(7,777)

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision (benefit):

 

 

 

 

 

 

 

 

 

 

 

   Defined benefit pension plans:

 

 

 

 

 

 

 

 

 

 

 

      Actuarial gains (losses) and other changes in

          unrecognized costs

 $


(224)

 

 $


(57)

 

 $


(134)

 

 $


(115)

      Amortization of unrecognized costs

 

(502)

 

 

(423)

 

 

(1,008)

 

 

(845)

   Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

      Change in unrealized gains and (losses)

 

(188)

 

 

(166)

 

 

(211)

 

 

16

      Amortization of unrealized gains and (losses) into

         interest expense

 


(32)

 

 


(40)

 

 


(116)

 

 


(86)

Income tax provision (benefit) to other comprehensive

         income (loss)

 $


(946)

 

 $


(686)

 

 $


(1,469)

 

 $


(1,030)

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of tax

 

(8,868)

 

 

(3,466)

 

 

(8,720)

 

 

(8,807)

Comprehensive income

$

1,396

 

$

8,905

 

$

15,445

 

$

19,545

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements

 

 

 

 

 

 

 

 

 









STANDEX INTERNATIONAL CORPORATION

Unaudited Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

December 31,

(In thousands)

 

2016

 

2015

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

        24,165

 

$

        28,352

Loss from discontinued operations

 

 

               44

 

 

             235

Income from continuing operations

 

 

        24,209

 

 

        28,587

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

Depreciation and amortization

 

 

          9,044

 

 

          8,804

Stock-based compensation

 

 

          2,843

 

 

         2,806

Non-cash portion of restructuring charge

 

 

               42

 

 

          1,941

Excess tax benefit from share-based payment activity

 

 

         (577)

 

 

          (809)

Contributions to defined benefit plans

 

 

          (624)

 

 

          (645)

Net changes in operating assets and liabilities

 

 

       (14,671)

 

 

       (9,817)

Net cash provided by operating activities - continuing operations

        20,266

 

 

       30,867

Net cash used in operating activities - discontinued operations

          (227)

 

 

         (652)

Net cash provided by operating activities

 

 

       20,039

 

 

       30,215

Cash flows from investing activities

 

 

 

 

 

 

Expenditures for property, plant, and equipment

 

 

       (13,029)

 

 

      (8,724)

Expenditures for acquisitions, net of cash acquired

 

 

       (24,660)

 

 

    (13,544)

Proceeds from sales of real estate and equipment

 

 

               24

 

 

            235

Disposition of a business

 

 

             652

 

 

                -   

Net cash used in investing activities - continuing operations

 

 

       (37,013)

 

 

     (22,033)

Net cash provided by investing activities - discontinued operations

 

-  

 

 

2,803

Net cash used in investing activities

 

 

       (37,013)

 

 

    (19,230)

Cash flows from financing activities

 

 

 

 

 

 

Borrowings on revolving credit facility

 

 

        73,000

 

 

       48,500

Payments of revolving credit facility

 

 

       (41,000)

 

 

    (41,500)

Activity under share-based payment plans

 

 

             618

 

 

             745

Excess tax benefit from share-based payment activity

 

 

             577

 

 

            809

Purchases of treasury stock

 

 

         (6,905)

 

 

        (3,053)

Cash dividends paid

 

 

         (3,798)

 

 

       (3,294)

Net cash provided by financing activities

 

 

        22,492

 

 

         2,207

Effect of exchange rate changes on cash and cash equivalents

 

 

         (6,205)

 

 

       (5,106)

Net change in cash and cash equivalents

 

 

            (687)

 

 

         8,086

Cash and cash equivalents at beginning of year

 

 

      121,988

 

 

        96,128

Cash and cash equivalents at end of period

 

$

      121,301

 

$

     104,214

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

Interest

 

$

          1,272

 

$

          1,094

Income taxes, net of refunds

 

$

        9,207

 

$

        14,925

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements

 

 

 



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 six months ended December 31, 2016 and 2015, the cash flows for the six months ended December 31, 2016 and 2015 and the financial position of Standex International Corporation (“Standex”, the “Company”, “we”, “us”, or “our”), at December 31, 2016.  The interim results are not necessarily indicative of results for a full year.  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, 2016.  The condensed consolidated balance sheet at June 30, 2016 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, 2016.  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 significant changes in our reported financial position, results of operations, cash flows or to our critical accounting policies that were disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016 that have had a significant impact on our consolidated financial statements or notes herein.

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.


RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS


In May 2014, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, its final standard on revenue from contracts with customers.  ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.  The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of 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.  In applying the revenue model to contracts within its scope, an entity identifies the contract(s) with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to the performance obligations in the contract, and recognizes revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers that are within the scope of other topics in the FASB Accounting Standards Codification.  ASU 2014-09 also requires significantly expanded disclosures about revenue recognition.  This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.  The Company is currently assessing the potential impact of the adoption of ASU 2014-09 on its consolidated financial statements.


In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes, to simplify the presentation of deferred income taxes. Under the new standard, both deferred tax liabilities and deferred tax assets are required to be classified as non-current on the consolidated balance sheet. ASU 2015-17 will become effective for fiscal years, and the interim periods within those years, beginning after December 15, 2016 with early adoption permitted.  The Company is currently assessing the potential impact of the adoption of ASU 2015-17 on its consolidated financial statements.


In February 2016, the FASB issued ASU 2016-02, Leases.  The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than twelve months.  Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.  The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  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.  The Company is currently assessing the potential impact of the adoption of ASU 2016-02 on its consolidated financial statements.


In March 2016, the FASB issued ASU 2016-09, Compensation–Stock Compensation (Topic 718).  The new standard simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.  Under this guidance, a company recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement.  This change eliminates the notion of the additional paid-in capital pool and reduces the complexity in accounting for excess tax benefits and tax deficiencies.  The new standard is effective for public companies for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods, however, early adoption is allowed.  The Company is currently assessing the potential impact of the adoption of ASU 2016-09 on its consolidated financial statements.


In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-15, Statement of Cash Flows (Topic 230): Classification of certain cash receipts and cash payments (a consensus of the emerging issues take force).  This standard is effective for fiscal years beginning after December 15, 2017.  The standard requires a retrospective application and early adoption is acceptable.  The Company is continuing to evaluate the impact of adopting ASU 2016-15 on its consolidated financial statements.


2)

Acquisitions


The Company’s recent acquisitions are strategically significant to the future growth prospects of the Company, however at the closing date of each acquisition and December 31, 2016, historical results of the acquired Companies both individually and in the aggregate, were immaterial to the Company’s consolidated financial results.  Pro forma results of operations have not been presented due to the immaterial impact the amounts would have had on the Company's historical results of operations.


Horizon Scientific


During the second quarter of fiscal year 2017, the Company acquired Horizon Scientific, Inc., (“Horizon”), 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 enhances Standex’s penetration of the refrigeration markets in the growing scientific sector. We have included the operating results of Horizon 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. The final purchase price is subject to cash and net working capital adjustments that have not yet been finalized along with deferred consideration of up to $8.4 million.  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 synergies with our existing customer base and channel partners.


Intangible assets of $17.6 million have been preliminarily recorded, consisting of $16.1 million of customer relationships which are expected to be amortized over a period of fifteen years, $1.2 million of trademarks which are indefinite lived, and $0.3 million of product order backlog which is expected to be amortized during the current fiscal year.  The goodwill of $5.5 million created by the transaction is not deductible for income tax purposes.


The components of the fair value of the Horizon acquisition, including the preliminary allocation of the purchase price at December 31, 2016, are as follows (in thousands):




 

 

Preliminary Allocation

Fair value of business combination:

 

 

 

 

Cash payments

 

$

26,457

 

Less: cash acquired

 

 

   (1,797)

 

Total

 

$

 24,660

 

Identifiable assets acquired and liabilities assumed:

 

 

 

 

Current assets

 

$

   4,863

 

Inventories

 

 

4,470

 

Property, plant, and equipment

 

 

1,616

 

Identifiable intangible assets

 

 

17,550

 

Goodwill

 

 

5,452

 

Liabilities assumed

 

 

 (2,374)

 

Deferred taxes

 

 

 (6,917)

 

Total

 

$

24,660

 

 

 

 

 

 



Transaction costs associated with this acquisition were immaterial.  All transaction costs have been recorded as general and administrative expense for the three and six months ended December 31, 2016.


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 and complete the valuation of intangible assets.  The Company anticipates finalizing the purchase price allocation during the current fiscal year.



Northlake


During the second quarter of fiscal year 2016, the Company acquired Northlake Engineering, Inc., (“Northlake”), a Wisconsin-based designer, manufacturer and distributor of high reliability electromagnetic products and solutions serving the North America power distribution and medical equipment markets.  Northlake reports to our Electronics segment.


The Company paid $13.7 million in cash for 100% of the outstanding stock of Northlake and has recorded intangible assets of $6.8 million, consisting of $4.1 million of customer relationships which primarily are expected to be amortized over a period of twelve and half years, $2.4 million of trademarks which are indefinite-lived and $0.3 million of non-compete which are expected to amortized over a period of five years.  Acquired goodwill of $5.1 million is deductible for income tax purposes.  The Company finalized the purchase price allocation during the quarter ending June 30, 2016.


The components of the fair value of the Northlake acquisition, including the allocation of the purchase price is as follows (in thousands):



 

Final

Fair value of business combination:

 

 

Cash payments

$

 14,015

Less: cash acquired

 

   (315)

Total

$

 13,700

Identifiable assets acquired and liabilities assumed:

 

 

Current assets

$

2,810

Property, plant, and equipment

 

1,407

Identifiable intangible assets

 

6,824

Goodwill

 

5,121

Other non-current assets

 

158

Liabilities assumed

 

(2,620)

Final payments

 

-

Total

$

13,700

 

 

 


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 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.


Deferred compensation costs relate to payments due to the Horizon seller of $2.8 million on the second anniversary and $5.6 million on the third anniversary of the closing date of the purchase.  The deferred compensation costs of $0.7 million recorded in the three and six months ended December 31, 2016 are the estimated deferred compensation earned by the Horizon seller to date.  The payments are contingent on the seller remaining an employee of the Company with limited exceptions at each anniversary date.


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



 

 

Three Months Ended

 

Six Months Ended

 

 

December 31,

 

December 31,

 

 

2016

 

2015

 

2016

 

2015

Deferred compensation arrangements

 

$

              703   

 

$

              -   

 

$

703   

 

$

             -   

Acquisition-related costs

 

 

        800

 

 

             -   

 

 

800

 

 

             -   

Total

$

1,503

 

$

-

          

$

1,503

 

$

-



3)

Discontinued Operations


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


Discontinued operations for the three and six months ended December 31, 2016 and 2015 are as follows (in thousands):


 

 

Three Months Ended

 

Six Months Ended

 

 

December 31,

 

December 31,

 

 

2016

 

2015

 

2016

 

2015

Net sales

 

$

              -   

 

$

              -   

 

$

             -   

 

$

             -   

Pre-tax earnings

 

 

        13

 

 

        (94)

 

 

        (49)

 

 

        (342)

(Provision) benefit for taxes

 

 

           (7)

 

 

            19

 

 

          5

 

 

          107

Net earnings (loss) from discontinued operations

$

6

 

$

         (75)

          

$

        (44)

 

$

     (235)


On March 30, 2012, Air Distribution Products Group, (“ADP”) was sold to a private equity buyer for consideration of $16.1 million consisting of $13.1 million in cash and a $3.0 million promissory note from the buyer.  The note was secured by a mortgage on the ADP real estate sold in the transaction in Detroit Lakes, MN, Medina, NY, and Powder Springs, GA.  During the first quarter 2016, the private equity buyer of ADP sold one of the facilities securing the note.  The Company released all mortgages on the properties and accepted an advanced payment of $2.8 million during October 2015 in order to reduce repayment risk and settle all obligations under the note.  The Company recorded a $0.2 million loss in discontinued operations during the first quarter 2016 related to this transaction.


Assets and liabilities related to discontinued operations appear in our Unaudited Condensed Consolidated Balance Sheets as follows (in thousands):


 

 

 

December 31,

2016

 

 

June 30,

2016

Other non-current assets

 

 

                14

 

 

         14

Accrued expenses

 

 

1,060

 

 

              1,204

Accrued pension and other non-current liabilities

 

 

              -    

 

 

              55


4)

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 Unaudited Condensed Consolidated Balance Sheets 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 level 1 and level 2 of the fair value measurement hierarchy at December 31, 2016 and June 30, 2016.  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 December 31, 2016 and June 30, 2016 consisted of the following (in thousands):



 

 

December 31, 2016

 

 

Total

 

Level 1

 

Level 2

 

Level 3

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities - deferred compensation plan

 

$

2,245

 

$

2,245

 

$

            -   

 

$

            -   

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

        70

 

$

           -   

 

$

       70

 

$

            -   

Interest rate swaps

 

 

     287

 

 

           -   

 

 

    287

 

 

           -   

Contingent acquisition payments (a)

 

 

703   

 

 

           -   

 

 

           -   

 

 

703   


 

 

June 30, 2016

 

 

Total

 

Level 1

 

Level 2

 

Level 3

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities - deferred compensation plan

 

$

     2,333

 

$

     2,333

 

$

            -   

 

$

          -   

Foreign exchange contracts

 

 

        11

 

 

           -   

 

 

11

 

 

           -   

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

    94

 

$

           -   

 

$

94

 

$

           -   

Interest rate swaps

 

 

1,038

 

 

          -   

 

 

1,038

 

 

           -   



(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.  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 December 31, 2016, 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 December 31, 2016, 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)

Inventories


Inventories are comprised of the following (in thousands):


 

 

December 31,

2016

 

June 30,

2016

Raw materials

 

$

49,624

 

$

     46,616

Work in process

 

 

28,527

 

 

           26,541

Finished goods

 

 

       32,801

 

 

           32,245

Total

 

$

     110,952

 

$

         105,402


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 Statements of Operations, were $4.6 million and $9.6 million for the three and six months ended December 31, 2016, respectively and $4.9 million and $10.6 million for the three and six months ended December 31, 2015, respectively.


6)

Goodwill


Changes to goodwill during the period ended December 31, 2016 were as follows (in thousands):


 


June 30, 2016

 


Acquisition

 

Translation Adjustment

 

December 31, 2016

Food Service Equipment

$

             56,804

 

$

5,452   

 

$

                -   

 

$

62,256

Engraving

 

             19,935

 

 

                -   

 

 

          (88)

 

 

             19,847

Engineering Technologies

 

             44,321

 

 

                -   

 

 

         (676)

 

 

             43,645

Electronics

 

             33,235

 

 

                -

 

 

       (1,025)

 

 

             32,210

Hydraulics

 

               3,059

 

 

                -   

 

 

                -   

 

 

               3,059

Total

$

           157,354

 

$

5,452

 

$

       (1,789)

 

$

           161,017


7)

Intangible Assets


Intangible assets consist of the following (in thousands):


 

 

Customer Relationships

 


Trademarks

 


Other

 


Total

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Cost

 

$

61,756

 

$

18,334

 

$

4,355

 

$

84,445

Accumulated amortization

 

 

 (26,234)

 

 

-   

 

 

 (2,762)

 

 

 (28,996)

Balance, December 31, 2016

 

$

35,522

 

$

18,334

 

$

1,593

 

$

   55,449

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Cost

 

$

46,297

 

$

        17,263

 

$

     4,471

 

$

   68,031

Accumulated amortization

 

 

        (24,892)

 

 

                -   

 

 

    (2,727)

 

 

 (27,619)

Balance, June 30, 2015

 

$

           21,405

 

$

         17,263

 

$

     1,744

 

$

  40,412


Amortization expense for the three months ended December 31, 2016 and 2015 was $1.1 million and $0.8 million, respectively.  Amortization expense for the six months ended December 31, 2016 and 2015 was $2.0 million and $1.6 million, respectively.  At December 31, 2016, amortization expense of current intangible assets is estimated to be $2.2 million for the remainder of fiscal year 2017, $4.6 million in 2018, $4.6 million in 2019, $4.1 million in 2020, $3.6 million in 2021 and $17.8 million thereafter.


8)

Warranties


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, as of December 31, 2016 and year ended June 30, 2016, were as follows (in thousands):


 

December 31, 2016

 

June 30, 2016

Balance at beginning of year

$

9,085

 

$

                7,436

Acquisitions and other

 

296   

 

 

                  (5)

Warranty expense

 

3,965

 

 

        13,503

Warranty claims

 

                  (4,481)

 

 

       (11,849)

Balance at end of period

$

8,865

 

$

               9,085



9)

Debt


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


 

December 31, 2016

 

June 30, 2016

Bank credit agreements

$

125,000

 

$

      93,000

Other

 

12

 

 

            18

      Total funded debt

 

125,012

 

 

      93,018

Issuance Cost

 

 (717)

 

 

        (904)

      Total long-term debt

$

124,295

 

$

     92,114



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


Fiscal Year

 

December 31, 2016

2017

 

$

6

2018

 

 

6

2019

 

 

 -

2020

 

 

125,000                    

2021

 

 

-

Thereafter

 

 

-

     Funded Debt

 

 

125,012

Issuance cost

 

 

(717)

Debt net of issuance cost

 

$

124,295



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.


At December 31, 2016, the Company had standby letters of credit outstanding, primarily for insurance purposes, of $8.4 million and had the ability to borrow $213.1 million based on the trailing twelve months EBITDA per the credit agreement.  At December 31, 2016, the carrying value of the current borrowings under the facility approximates fair value.


10)

Derivative Financial Instruments


Interest Rate Swaps


From time to time as dictated by market opportunities, the Company enters into interest rate swap agreements designed to manage 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 $50 million of debt due under our revolving credit agreement from a variable rate equal to LIBOR to a weighted average fixed rate of 1.43% at December 31, 2016.  The fair value of the swaps recognized in accrued expenses and in other comprehensive income is as follows (in thousands, except percentages):


 

 

 

 

 

 

 

 

 

Fair Value


Effective Date

 

Notional Amount

Fixed Rate


Maturity

 


December 31, 2016

 

June 30,  2016

December 19, 2014

 

 

  20,000

 

1.18%

 

December 19, 2017

 

$

                   (47)

 

$

(201)

December 19, 2014

 

 

    5,000

 

1.20%

 

December 19, 2017

 

 

                   (13)

 

 

(52)

December 18, 2015

 

 

  15,000

 

1.46%

 

December 19, 2018

 

 

                 (68)

 

 

(325)

December 19, 2015

 

 

   10,000

 

2.01%

 

December 19, 2019

 

 

                 (158)

 

 

(460)

 

 

 

 

 

 

 

 

 

$

                (286)

 

$

(1,038)


The Company reported no losses for the three and six months ended December 31, 2016, 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 foreign sales, foreign purchases of materials, and loan payments to and from subsidiaries.  The Company enters into such contracts for hedging purposes only.  For hedges of intercompany loan payments, the Company has not elected hedge accounting due to the general short-term nature and predictability of the transactions, and records derivative gains and losses directly to the Unaudited Condensed Consolidated Statements of Operations.  At December 31, 2016 and June 30, 2016, the Company had outstanding forward contracts related to hedges of intercompany loans with both net unrealized gain (losses) of $(0.1) million, which approximate the unrealized gains and losses on the related loans.  The notional amounts of the Company’s forward contracts, by currency, are as follows:


 

 

Notional Amount

 

 

(in native currency)

Currency

 

December 31, 2016

 

June 30, 2016

Euro

 

                    199,904

 

     2,476,683

British Pound Sterling

 

247,852

 

       593,799



The table below presents the fair value of derivative financial instruments as well as their classification on the Unaudited Condensed Consolidated Balance Sheets (in thousands):


 

Asset Derivatives

 

December 31, 2016

 

June 30, 2016

Derivative designated

Balance

 

 

 

 

Balance

 

 

 

as hedging instruments

Sheet

 

 

 

 

Sheet

 

 

 

 

Line Item

 

 

Fair Value

 

Line Item

 

 

Fair Value

Foreign exchange contracts

Other Assets

 

$

1

 

Other Assets

 

$

11



 

Liability Derivatives

 

December 31, 2016

 

June 30, 2016

Derivative designated

Balance

 

 

 

 

Balance

 

 

 

as hedging instruments

Sheet

 

 

 

 

Sheet

 

 

 

 

Line Item

 

 

Fair Value

 

Line Item

 

 

Fair Value

Interest rate swaps

Accrued Liabilities

$

286

 

Accrued Liabilities

$

       1,038

Foreign exchange contracts

Accrued Liabilities

 

        70

 

Accrued Liabilities

 

     94

 

 

 

$

356

 

 

 

$

1,132



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

 

Six Months Ended

 

 

December 31,

 

December 31,

 

 

2016

 

2015

 

2016

 

2015

Interest rate swaps

 

$

465

 

$

  307

 

$

628

 

$

  (245)

Foreign exchange contracts

 

 

28

 

 

127

 

 

(74)

 

 

201

 

 

$

  493

 

$

  434

 

$

554

 

$

  (44)



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

 

 

 

 

 

 

 

 

 

 

 

 

Affected line item

Other Comprehensive

 

Three Months Ended

 

 

Six Months Ended

 

in the Unaudited

Income (Loss) Components

December 31,

 

 

December 31,

 

Condensed Statements

 

 

2016

 

2015

 

 

2016

 

2015

 

of Operations

Interest rate swaps

 

$

110

 

$

  138

 

 

$

229

 

$

  266

 

Interest expense

Foreign exchange contracts

 

 

(27)

 

 

(31)

 

 

     

75

 

 

(39)

 

Cost of Sales

 

 

$

83

 

$

107

 

 

$

304

 

$

227

 

 



11)

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 six months ended December 31, 2016 and 2015 consisted of the following components (in thousands):




 

U.S. Plans

 

Non-U.S. Plans

 

Three Months Ended

 

Three Months Ended

 

December 31,

 

December 31,

 

2016

 

2015

 

2016

 

2015

Service cost

$

          1

 

$

             16

 

$

              9

 

$

               8

Interest cost

 

2,613

 

 

        2,873

 

 

           250

 

 

           363

Expected return on plan assets

 

    (3,440)

 

 

      (3,465)

 

 

          (282)

 

 

          (330)

Recognized net actuarial loss

 

1,190

 

 

           995

 

 

            249

 

 

            213

Amortization of prior service cost

 

               -

 

 

               3

 

 

           (12)

 

 

           (12)

Net periodic benefit cost

$

364

 

$

           422

 

$

           214

 

$

           242



 

U.S. Plans

 

Non-U.S. Plans

 

Six Months Ended

 

Six Months Ended

 

December 31,

 

December 31,

 

2016

 

2015

 

2016

 

2015

Service cost

$

2

 

$

34

 

$

19

 

$

              17

Interest cost

 

5,226

 

 

5,745

 

 

514

 

 

           734

Expected return on plan assets

 

(6,881)

 

 

 (6,932)

 

 

 (579)

 

 

         (667)

Recognized net actuarial loss

 

2,381

 

 

1,990

 

 

511

 

 

           430

Amortization of prior service cost

 

-

 

 

7

 

 

 (24)

 

 

           (24)

Net periodic benefit cost

$

728

 

$

844

 

$

441

 

$

           490


The Company expects to pay $1.3 million in contributions to its defined benefit plans during fiscal 2017.  Contributions of $0.4 million and $0.6 million were made during the three and six months ended December 31, 2016 compared to $0.3 million and $0.6 million during the three and six months ended December 31, 2015, respectively.  Required contributions of $0.7 million will be paid to the Company’s U.K. defined benefit plan during 2017.  The Company also expects to make contributions of $0.3 million to each of its unfunded defined benefit plans in the U.S. and Germany, respectively, during the remainder of the current fiscal year.



12)

Income Taxes

The Company's effective tax rate from continuing operations for the second quarter of 2017 was 19.3% compared with 20.3% for the prior year quarter.  The effective tax rate in 2017 was lower due to the jurisdictional mix of income where more income is being taxed outside of the U.S. at lower tax rates than in the prior year quarter.

The Company's effective tax rate from continuing operations for the six months ended December 31, 2016 was 24.9% compared with 25.3% for the prior year.  The effective tax rate for the year to date was lower due to the same jurisdictional mix.   



13)

Earnings Per Share


Basic earnings per common share is computed using the weighted average number of shares outstanding.  Diluted earnings per share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributable to unvested stock units outstanding, if dilutive.  



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

 

 

 

Six Months Ended

 

 

 

 

December 31,

 

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

Basic - Average shares outstanding

 

 

12,659

 

 

12,692

 

 

12,668

 

 

12,675

Dilutive effect of unvested, restricted stock awards

 

 

      95

 

 

        99

 

 

104

 

 

   102

Diluted - Average shares outstanding

 

 

12,754

 

 

12,791

 

 

12,772

 

 

 12,777


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 six months ended December 31, 2016 and 2015, respectively.


Performance stock units of 29,607 and 30,764 for the six months ended December 31, 2016 and 2015, respectively, are excluded from the diluted earnings per share calculation as the performance criteria have not been met.


14)

Comprehensive Income (Loss)


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

 

 

December 31, 2016

 

June 30, 2016

Foreign currency translation adjustment

 

$

             (36,242)

 

$

      (24,636)

Unrealized pension losses, net of tax

 

 

            (90,342)

 

 

      (92,698)

Unrealized losses on derivative instruments, net of tax

 

 

                  (110)

 

 

           (641)

Total

 

$

        (126,694)

 

$

    (117,975)


15)

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)

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, 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.


Net sales and income from continuing operations by segment for the three and six months ended December 31, 2016 and 2015 were as follows (in thousands):


 

 

Three Months Ended December 31,

 

 

Net Sales

 

Income from Operations

 

 

2016

 

2015

 

2016

 

2015

Segment:

 

 

 

 

 

 

 

 

 

 

 

 

Food Service Equipment

 

$

92,200

 

$

      90,936

 

$

7,206

 

$

      6,704

Engraving

 

 

25,861

 

 

      31,935

 

 

6,510

 

 

      7,443

Engineering Technologies

 

 

18,549

 

 

      20,711

 

 

1,877

 

 

      2,093

Electronics

 

 

28,497

 

 

       28,350

 

 

6,091

 

 

     4,525

Hydraulics

 

 

8,747

 

 

      10,016

 

 

979

 

 

     1,519

Restructuring costs

 

 

 

 

 

 

 

 

(1,664)

 

 

    (1,477)

Acquisition-related costs

 

 

 

 

 

 

 

 

(1,503)

 

 

-

Corporate

 

 

 

 

 

 

 

 

(6,262)

 

 

   (4,745)

Sub-total

 

$

173,854

 

$

   181,948

 

$

13,234

 

$

     16,062

Interest expense

 

 

 

 

 

 

 

 

        (850)

 

 

      (731)

Other non-operating income

 

 

 

 

 

 

 

 

       332

 

 

 294

Income from continuing operations before income taxes

 

 

 

$

     12,716

 

$

     15,625


 

 

Six Months Ended December 31,

 

 

Net Sales

 

Income from Operations

 

 

2016

 

2015

 

2016

 

2015

Segment:

 

 

 

 

 

 

 

 

 

 

 

 

Food Service Equipment

 

$

184,852

 

$

     198,149

 

$

16,694

 

$

     20,728

Engraving

 

 

52,591

 

 

       65,456

 

 

13,907

 

 

     17,350

Engineering Technologies

 

 

37,269

 

 

       39,422

 

 

3,372

 

 

       2,768

Electronics

 

 

59,148

 

 

       56,336

 

 

12,565

 

 

     10,075

Hydraulics

 

 

19,594

 

 

       20,983

 

 

3,108

 

 

       3,495

Restructuring costs

 

 

 

 

 

 

 

 

(2,058)

 

 

    (2,996)

Acquisition-related costs

 

 

 

 

 

 

 

 

(1,503)

 

 

-

Corporate

 

 

 

 

 

 

 

 

(13,081)

 

 

   (12,255)

Sub-total

 

$

353,454

 

$

     380,346

 

$

33,004

 

$

     39,165

Interest expense

 

 

 

 

 

 

 

 

(1,547)

 

 

    (1,375)

Other non-operating income

 

 

 

 

 

 

 

 

 766

 

 

          484

Income from continuing operations before income taxes

 

 

 

$

    32,223

 

$

    38,274


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


The Company’s identifiable assets at December 31, 2016 and June 30, 2016 are as follows (in thousands):


 

 

December 31, 2016

  June 30, 2016  *

Food Service Equipment

 

$

         231,946

 

$

  206,875

Engraving

 

 

         119,902

 

 

  117,026

Engineering Technologies

 

 

         146,527

 

 

  147,866

Electronics

 

 

         114,416

 

 

  114,001

Hydraulics

 

 

           18,642

 

 

    19,084

Corporate & Other

 

 

              79,296

 

 

    85,605

Total

 

$

710,729

 

$

  690,457


* The identified assets as of June 30, 2016 for certain segments have been revised from amounts previously reported due to certain immaterial allocation differences.


17)

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

 

Six Months Ended

 

 

December 31, 2016

 

December 31, 2016

Fiscal 2017

 

Involuntary Employee Severance and Benefit Costs





Other

 





Total

 

Involuntary Employee Severance and Benefit Costs





Other

 





Total

Restructuring initiatives

$

1,117

 

$

 492

 

$

1,609

 

$

1,146

 

$

    828

 

$

1,974

Prior year initiatives

 

            -   

 

 

55   

 

 

55   

 

 

-

 

 

   84

 

 

84

 

 

$

        1,117

 

$

547

 

$

    1,664

 

$

            1,146

 

$

912

 

$

   2,058


 

 

Three Months Ended

 

Six Months Ended

 

 

December 31, 2015

 

December 31, 2015

Fiscal 2016

 

Involuntary Employee Severance and Benefit Costs





Other

 





Total

 

Involuntary Employee Severance and Benefit Costs





Other

 





Total

Restructuring initiatives

$

696

 

$

 107

 

$

803

 

$

          730

 

$

    167

 

$

  897

Prior year initiatives

 

            22   

 

 

     652   

 

 

      674   

 

 

        59

 

 

   2,040

 

 

   2,099

 

 

$

        718

 

$

759

 

$

    1,477

 

$

789

 

$

2,207

 

$

2,996


2017 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.  The Company’s 2017 initiatives to date include a reduction of employees in our Food Service Equipment Group in response to the reduced sales volume from our larger customers and reductions of personnel and plant movement at our China Electronics division.  


 

 

Involuntary Employee Severance and Benefit Costs



Other

 



Total

 

Restructuring liabilities at June 30, 2016

 

$

                -   

 

$

                -   

 

$

              -   

 

Additions and adjustments

 

 

246                     

 

 

1,678

 

 

1,924

 

Payments

 

 

                   (83)

 

 

        (1,294)

 

 

     (1,377)

 

Restructuring liabilities at December 31, 2016

 

$

163   

 

$

                 384                 

 

$

547              

 


Prior Year Initiatives


The prior year initiatives yet to be completed include the movement of manufacturing from a legacy Canadian facility into the newly acquired Northlake facility, closure of a European facility within our Cooking division, and discontinuing of a product line at our Refrigeration group.


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, 2016

 

$

                    74

 

$

              256   

 

$

        330

Additions and adjustments

 

 

                      49

 

 

8   

 

 

57

Payments

 

 

                  (106)

 

 

        (124)   

 

 

     (230)

Restructuring liabilities at December 31, 2016

 

$

                       17   

 

$

         140   

 

$

         157   


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


 

 

Three Months Ended

 

 

Six Months Ended

 

 

December 31, 2016

 

 

December 31, 2016

 

 

Involuntary Employee Severance and Benefit Costs




Other

 




Total

 

Involuntary Employee Severance and Benefit Costs




Other

 




Total

Food Service Equipment

$

1,117

 

$

     3

 

 $

         1,120

 

$

1,129   

 

  $

78

 

  $

1,207

Engraving

 

 

-   

 

 

-   

 

 

-   

 

 

6

 

 

         -   

 

 

6

Engineering Technologies

 

 

-

 

 

249   

 

 

249

 

 

-

 

 

    433   

 

 

433

Electronics

 

 

              -

 

 

272

 

 

272

 

 

11

 

 

370

 

 

381

Corporate

 

 

-

 

 

23   

 

 

23

 

 

-

 

 

         31   

 

 

31

 

 

$

1,117

 

$

547

 

$

     1,664

 

$

        1,146

 

$

912

 

$

2,058



 

 

Three Months Ended

 

 

Six Months Ended

 

 

December 31, 2015

 

 

December 31, 2015

 

 

Involuntary Employee Severance and Benefit Costs




Other

 




Total

 

Involuntary Employee Severance and Benefit Costs




Other

 




Total

Food Service Equipment

$

              22  

 

$

     744

 

 $

         766

 

$

 22   

 

  $

2,104

 

  $

2,126

Engraving

 

 

          33

 

 

-   

 

 

         33

 

 

35

 

 

         -   

 

 

35

Engineering Technologies

 

 

126

 

 

        -   

 

 

126

 

 

160

 

 

    -   

 

 

160

Electronics

 

 

              409

 

 

        15

 

 

         424

 

 

444

 

 

103

 

 

547

Corporate

 

 

128

 

 

         -   

 

 

128

 

 

128

 

 

         -   

 

 

128

 

 

$

718

 

$

  759

 

$

     1,477

 

$

        789

 

$

  2,207

 

$

2,996


Restructuring expense is expected to be $6.7 million for the fiscal year 2017, of which $2.1 million was incurred for the six months ended December 31, 2016.


18)  

Disposal of a Business


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


During the fourth quarter of fiscal year 2016, the Company recorded a $7.3 million non-cash loss to adjust the net assets of the business to their net realizable value.  The expense is recorded as a component of Other Operating Income, net.  The sale of the business does not constitute a significant strategic shift that will have a major effect on the entity’s operations and financial results.


19)

 Subsequent Event


On February 2, 2017, the Company announced that it has entered into a definitive agreement with Japan-based Oki Electric Industry Co. Ltd. to acquire its wholly owned subsidiary, Oki Sensor Device Corporation (“Oki Sensor Device”).  Oki Sensor Device is the world’s leading designer and supplier of magnetic reed switches.  Oki Sensor Device recorded revenue of approximately ¥6.8 billion (approximately $56 million) for its most recently concluded fiscal year ended March 31, 2016 with approximately $12.9 million of this revenue comprised of sales to Standex Electronics.  The acquisition is anticipated to close on or about March 31, 2017, subject to required regulatory approvals.



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-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 current 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, 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; market acceptance of our products; our ability to design, introduce and sell new products and related product components; the ability to redesign certain of our products to continue meeting evolving regulatory requirements; the impact of delays initiated by our customers; and our ability to increase manufacturing production to meet demand.  Other factors that could impact the Company include changes to future pension funding requirements.  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 services for diverse commercial and industrial markets.  We have five reportable segments: Food Service Equipment, Engraving, Engineering Technologies, Electronics, and Hydraulics.

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 goals.  The value creation system has four components.  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 term 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 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:

·

    It is our objective to grow larger and more profitable business units through both organic initiatives and acquisitions.  On an ongoing basis, we identify and implement organic growth initiatives such as new product 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 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.

o

    As part of our ongoing strategy, during our second quarter of 2017, we acquired Horizon Scientific, Inc., (“Horizon”) 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 in our Food Service Equipment segment in our Condensed Consolidated Financial Statements.  Horizon expands our access to higher-margin refrigeration markets in the growing scientific sector that provides solutions for bio-medical and pharmaceutical temperature storage requirements.  Horizon’s products complement the scientific offerings in our Norlake division.  

o

    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.  In preparation for this sale during the fourth quarter of 2016, we adjusted the net assets of the business to their net realizable value.

·

     We create “Customer Intimacy” by utilizing the Standex Growth Disciplines to partner with our customers in order to develop and deliver custom solutions or engineered components that provide technology-driven solutions to our customers.  This relationship generally provides us with the ability to improve sales and grow profits over time to provide operating margins that enhance shareholder returns.  Further, we have made a priority of developing new sales channels and leveraging strategic customer relationships.

·

    Standex Operational Excellence drives continuous improvement in the efficiency of our businesses.  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 cost structure of our business units including operational excellence through lean enterprise, the use of low cost manufacturing facilities in countries 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 shop floor productivity.

·

    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, and to return cash to our shareholders through payment of dividends and stock buybacks.

Our business units are actively engaged in initiating new product introductions, expansion of product offerings through private labeling and sourcing agreements, geographic expansion of sales coverage, the development of new sales channels, leveraging strategic customer relationships, development of energy efficient products, new applications for existing products and technologies, and next generation products and services for our end-user markets.

Restructuring expenses reflect costs associated with the Company’s efforts of continuously improving operational efficiency and expanding globally in order to remain competitive in the end-user markets we serve.  Each year the Company incurs costs for actions to size its businesses to a level appropriate for current economic conditions and to both improve its cost structure to enhance our competitive position and operating margins.  Such expenses include costs for moving facilities to locations that allow for lower fixed and variable costs, 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 acquisition 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

 

 

Six Months Ended

 

 

December 31,

 

 

December 31,

(In thousands, except percentages)

 

2016

 

 

2015

 

 

2016

 

 

2015

Net sales

$

  173,854

 

$

  181,948

 

$

  353,454

 

$

  380,346

Gross profit margin

 

32.7%

 

 

32.0%

 

 

33.6%

 

 

33.3%

Income from operations

 

    13,234

 

 

    16,062

 

 

33,004

 

 

   39,165

 

 

 

 

 

 

 

 

 

 

 

 


 

Three Months Ended

 

Six Months Ended

(In thousands)

December 31, 2016

 

December 31, 2016

Net sales, prior period

 $                           181,948

 

 $                     380,346

Components of change in sales:

 

 

 

    Effect of exchange rates

                             (1,665)

 

                          (3,075)

    Effect of acquisitions

                             7,406

 

10,123

    Divesture of business

(4,866)

 

(9,142)

    Organic sales change

                             (8,969)

 

                           (24,798)

Net sales, current period

 $                           173,854

 

$                      353,454


Net sales for the second quarter of 2017 decreased $8.1 million, or 4.4%, when compared to the prior year quarter.  This change was due to exchange rate decrease of 0.9%, a 2.7% impact from the divesture of RPM business and organic sales decreases of 4.9% partially offset by incremental sales of 4.1% generated from our Horizon acquisition.  As further detailed below, we experienced declines in each of our segments other than Electronics.   


Net sales in the six months ended December 31, 2016 decreased $26.9 million, or 7.1%, when compared to the prior year.  The decline in net sales was due to exchange rate decreases of 0.8%, a 2.4% decrease due to the divesture of the RPM business, and organic sales decreases of 6.5%.  These declines were partially offset by sales increases of 2.7% from the Horizon and Northlake acquisitions.  We discuss our outlook for each segment below.  


Gross Profit Margin


Our gross margin for the second quarter of 2017 was 32.7%, compared to the prior year quarter of 32.0%.  Gross margin increased in four of our five segments during the quarter despite the overall sales decline.  


Our gross margin in the six months ended December 31, 2016 was 33.6%, compared to the prior year of 33.3%.  Gross margin increased slightly due to operational improvements.  


Selling, General, and Administrative Expenses


Selling, General, and Administrative Expenses (“SG&A”) for the second quarter of 2017 were $40.5 million, or 23.3% of sales, compared to $40.7 million, or 22.4% of sales, during the prior year quarter.  The increase in SG&A is primarily due to $1.6 million of on-going SG&A expenses related to the Horizon business.  These increases were partially offset by declines of $0.6 million from the divestiture of RPM and $1.0 million of variable expenses including sales commissions and distribution expenses.  


SG&A for the six months ended December 31, 2016 were $82.1 million, or 23.2% of sales, compared to $84.6 million, or 22.2% of sales, during the prior year quarter.  The decrease in SG&A is primarily due to volume-related decreases of $2.5 million and $1.1 million from the divestiture of RPM.  These decreases were partially offset by the $1.6 million in on-going SG&A expenses related to the Horizon business.

  

Income from Operations


Income from operations for the second quarter of 2017 was $13.2 million, compared to $16.1 million during the prior year quarter.  The decrease of $2.9 million, or 17.6%, is primarily due to the impact of sales volume declines and acquisition-related costs.


Income from operations for the six months ended December 31, 2016 was $33.0 million, compared to $39.2 million during the prior year.  The decrease of $6.2 million, or 15.7%, is primarily due to the impact of sales volume declines.


Interest Expense


Interest expense for the second quarter of 2017 was $0.9 million, compared to $0.7 million during the prior year quarter.  Interest expense for the six months ended December 31, 2016 and December 31, 2015 were $1.5 million and $1.4 million, respectively.


Income Taxes

The Company's effective tax rate from continuing operations for the second quarter of 2017 was 19.3% compared with 20.3% for the prior year quarter.  The effective tax rate in 2017 was lower due to the jurisdictional mix of income where more income is being taxed outside of the U.S. at lower tax rates than in the prior year quarter.

The Company's effective tax rate from continuing operations for the six months ended December 31, 2016 was 24.9% compared with 25.3% for the prior year.  The effective tax rate for the year to date was lower due to the same jurisdictional mix.   

  

Backlog


Backlog includes all active or open orders for goods and services that have a firm fixed customer purchase order with defined delivery dates.  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.  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 changes from one period to another.  In general, the vast majority of net realizable backlog beyond one year comes from the Engineering Technologies segment of our business.


Backlog realizable within one year increased $5.7 million, or 3.6%, to $164.1 million at December 31, 2016 from $158.4 million at December 31, 2015.  


The Backlog in Food Service Equipment Group has increased primarily due the impact of the acquired Horizon business and increases in the Procon Pump and Federal display merchandising businesses.  The decrease in the Engraving backlog is due to the divesture of the RPM business.  Engineering Technologies backlog has declined $3.0 million due to changes in customer schedules.


 

 

As of December 31,

(In thousands)

 

2016

 

 

2015

Food Service Equipment

$

44,884

 

$

37,181

Engraving

 

14,147

 

 

       19,395

Engineering Technologies

 

87,609

 

 

       90,565

Electronics

 

       42,148

 

 

       45,169

Hydraulics

 

         3,925

 

 

         5,286

        Total

 

192,713

 

 

197,596

Net realizable beyond one year

 

28,626

 

 

39,215

Net realizable within one year

$

164,087

 

$

158,381


Segment Analysis


Food Service Equipment


 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

December 31,

 

%

 

December 31,

 

%

(In thousands, except percentages)

2016

 

2015

 

Change

 

2016

 

2015

 

Change

Net sales

 $     92,200

 

 $     90,936

 

1.4%

 

 $   184,852

 

 $   198,149

 

        (6.7%)

Income from operations

          7,206

 

          6,704

 

7.5%

 

        16,694

 

        20,728

 

      (19.5%)

Operating income margin

7.8%

 

7.4%

 

 

 

9.0%

 

10.5%

 

 

Net sales in the second quarter of fiscal year 2017 increased $1.3 million, or 1.4%, when compared to the prior year quarter.  The acquisition of Horizon Scientific in mid-October added $7.4 million, or 8.1%, while organic sales growth for the segment was down by 6.7%.  Sales in the Refrigeration Group declined 8.2%, excluding sales from the Horizon business.  Weakness in the Dollar Store segment and in national chains continued, as anticipated, in the second quarter.  Beginning in the third quarter, we have lapped sales declines in the Dollar Stores, and these declines should have minimal impact on comparative sales in the coming quarters.  The quarter could also be impacted by the introduction of a new walk-in panel which is currently going through the testing and regulatory approval process.  We anticipate national chain sales activity will increase during the second half of the fiscal year.  Cooking Solutions sales decreased 9.7% due to non-recurring roll-outs in the supermarket channel that were fulfilled in the prior year coupled with declines due to the rationalization of lower margin products.  Our Specialty Solutions sales increased by 5.2% with strong volume in our beverage and merchandising markets.    

Net sales in the six months ended December 31, 2016, decreased $13.3 million, or 6.7%, when compared to the prior year.  Slower sales to major chains, lower sales at Dollar Stores, and the rationalization of less profitable products were the primary drivers of the sales decline.  Refrigeration sales declined 7.7% as the incremental sales from the Horizon acquisition and increased sales to the dealer channel was partially offset by slower growth in the Dollar Store market and key chains.  Cooking Solutions experienced a 10.4% sales decrease due to lower sales at major chains and slower dealer sales. Specialty Solutions sales were up 2.6% due to higher volume in our beverage market with the successful introduction of new products.

Income from operations in the second quarter of fiscal 2017 increased by $0.5 million, or 7.5%, when compared to the prior year quarter.  The operating income results were negatively impacted by $1.1 million of purchase accounting expense recorded during the quarter.  In addition, operating expenditure controls and portfolio rationalization contributed to the improved operating income performance.   

Income from operations in the six months ended December 31, 2016, decreased $4.0 million, or 19.5%, when compared to the prior year. Sales volume decreases and purchase accounting expense of $1.1 million were the primary causes of the decrease in operating income.    

Engraving

 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

December 31,

 

%

 

December 31,

 

%

(In thousands, except percentages)

2016

 

2015

 

Change

 

2016

 

2015

 

Change

Net sales

 $ 25,861

 

 $ 31,935

 

(19.0%)

 

 $ 52,591

 

 $ 65,456

 

(19.7%)

Income from operations

       6,510

 

       7,443

 

(12.5%)

 

     13,907

 

     17,350

 

(19.8%)

Operating income margin

25.2%

 

23.3%

 

 

 

26.4%

 

26.5%

 

 


Net sales for the second quarter of fiscal year 2017 decreased by $6.1 million, or 19.0%, when compared to the prior year quarter.  The majority of the sales decline was due to the divestiture of the RPM division, which resulted in a sales decline of 15.2% or $4.9 million.  Organic sales declined by 1.3%, or $0.4 million, and foreign exchange had a negative impact of 2.5%, or $0.8 million.  


Mold texturizing sales to original equipment manufacturers (“OEMs”) decreased in North America by 18%, increased by 6% in Asia, and were relatively flat in Europe. In North America, we expect launches of new automotive programs, which have been delayed, will become positive growth factors in the coming quarters.  We anticipate growth in both our Europe and Asia markets in the second half of the fiscal year.  The new technologies of Architexture, nickel shell and laser should also show improvements during the remainder of the fiscal year.


Net sales for the six months ended December 31, 2016, decreased by $12.9 million, or 19.7%, when compared to the prior year.  The majority of the sales decline was due to the divestiture of the RPM business, which resulted in a sales decline of 14.0% or $9.1 million.  Organic sales declined by 3.5%, or $2.3 million, and foreign exchange had a negative impact of 2.2%, or $1.5 million.  Sales volumes during the first half of the year were lower than the prior year due to model launch delays, however we anticipate sales volumes in the second half of the fiscal year to increase.  We expect the new technologies of Architexture, nickel shell and laser to positively impact sales during the remainder of the fiscal year.


Income from operations for the second quarter of fiscal year 2017 decreased by $0.9 million, or 12.5%, when compared to the prior year quarter. Organic sales declines, along with an unfavorable sales mix, contributed to the operating income declines during the quarter.  Operating income was further impacted by the divesture of RPM, which generated $0.2 million of operating income in the prior year quarter.    


Income for the six months ended December 31, 2016, decreased $3.4 million, or 19.8%, when compared to the prior year.  Similar to the quarter, organic sales declines, along with an unfavorable sales mix, contributed to the operating income declines during the quarter.  Operating income was further impacted by an unfavorable comparison due to the divesture of RPM, which generated $0.3 million of operating income in the six months ended December 31, 2015.  

   

Engineering Technologies


 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

December 31,

 

%

 

December 31,

 

%

(In thousands, except percentages)

2016

 

2015

 

Change

 

2016

 

2015

 

Change

Net sales

 $     18,549

 

 $     20,711

 

(10.4%)

 

 $     37,269

 

 $     39,422

 

(5.5%)

Income from operations

          1,877

 

          2,093

 

(10.3%)

 

          3,372

 

          2,768

 

         21.8%

Operating income margin

10.1%

 

10.1%

 

 

 

9.0%

 

7.0%

 

 


Net sales in the second quarter of fiscal year 2017 decreased by $2.2 million, or 10.4%, when compared to the prior year quarter.  Aviation sales decreased $1.6 million compared to the prior period primarily due to customer delays on select programs.  Sales to the space-launch vehicle market declined $1.4 million from the prior year quarter due to lower sales to the unmanned segment and timing of development programs in the manned space sector.  Sales in the energy market were up $1.7 million from the prior year as a result of higher power generation sales.  Foreign exchange impacts were unfavorable by $0.4 million, or 1.9%, when compared to prior year quarter.


Net sales for the six months ended December 31, 2016, decreased by $2.2 million, or 5.5%, when compared to the prior year.  Aviation sales decreased 6.2% due to reduced demand and customer scheduling changes.  Total launch vehicle sales were down 12.9% due to project timing in the manned sector with the NASA SLS and Crew Capsule vehicles.  Energy related sales were up $1.7 million due to higher power generation demand. Defense related sales improved $0.2 million from the prior year due to increased sales to project specific work in the Navy nuclear segment.  Medical sales were down $1.3 million primarily due to lower demand and a shift in product mix to lower cost products.  Our current focus for the second half of the year is to deliver on developmental programs in both space and aviation and to meet delivery schedules on long-term aviation agreements.


Income from operations in the second quarter of fiscal year 2017 decreased by $0.2 million, or 10.3%, when compared to the prior year quarter.  Operating income results were negatively impacted by lower sales volume and program delays associated with aviation engine contracts.

Income from operations for the six months ended December 31, 2016, increased by $0.6 million, or 21.8%, when compared to the prior year.  The increase in operating income was the result of a favorable product mix and the realization of benefits from the implementation of operational efficiencies.


Electronics


 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

December 31,

 

%

 

December 31,

 

%

(In thousands, except percentages)

2016

 

2015

 

Change

 

2016

 

2015

 

Change

Net sales

 $ 28,497

 

 $ 28,350

 

0.5%

 

 $ 59,148

 

 $ 56,336

 

5.0%

Income from operations

       6,091

 

       4,525

 

34.6%

 

  12,565

 

  10,075

 

24.7%

Operating income margin

21.4%

 

16.0%

 

 

 

21.2%

 

17.9%

 

 


Net sales in the second quarter of fiscal year 2017 increased $0.1 million, or 0.5%, when compared to the prior year quarter.  Organic growth and acquisitions contributed 2.2%, partially offset by a negative currency effect of 1.7%.  New programs within the transportation, appliance, power and contract manufacturers markets, among others, continue to drive growth.  New sensor and reed switch applications helped continue our growth in the European and Asian markets.  Sales were flat within the North American market.  


Net sales for the six months ended December 31, 2016, increased $2.8 million, or 5.0%, when compared to the prior year.  Sales increased $2.7 million, or 4.8%, due to the Northlake acquisition. Sales declined $0.8 million, or 1.4%, due to exchange rate declines.  Organic sales growth was $0.9 million, or 1.5% for the first half when compared to the prior year.  Organic sales results were impacted by new programs and continued solid growth in the European market, partially offset by slowdowns in North America and Asia.  


Income from operations in the second quarter of fiscal year 2017 increased $1.6 million, or 34.6%, when compared to the prior year quarter.  Much of the earnings improvement is due to favorable sales mix, operational cost improvements, and manufacturing footprint consolidation.  The results for the prior year quarter included $0.4 million of purchase accounting expense related to the Northlake acquisition.   


Income from operations for the six months ended December 31, 2016, increased $2.5 million, or 24.7%, when compared to the prior year.  The increase is due to favorable sales mix and operational efficiencies.  Note that prior year results include $0.4 million of purchase accounting expenses for the Northlake business that was acquired at the beginning of the second quarter last year.



Hydraulics



 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

December 31,

 

%

 

December 31,

 

%

(In thousands, except percentages)

2016

 

2015

 

Change

 

2016

 

2015

 

Change

Net sales

$   8,747

 

$   10,016

 

(12.7%)

 

$   19,594

 

$   20,983

 

(6.6%)

Income from operations

      979

 

      1,519

 

(35.5%)

 

      3,108

 

      3,495

 

(11.1%)

Operating income margin

11.2%

 

15.2%

 

 

 

15.9%

 

16.7%

 

 



Net sales in the second quarter of fiscal year 2017 decreased $1.3 million, or 12.7%, when compared to the prior year quarter.  The decrease is primarily the result of the North American dump markets downturn in the second quarter with many of the OEM’s reducing production by over 50%.  A portion of this downturn is normal seasonal adjustment of the business, however the demand is also being impacted by the macro economic uncertainty in the United States.  We experienced a slight increase in demand in December in the dump body market and anticipate further strength in this area as we move into the spring construction season.  


Net sales for the six months ended December 31, 2016, decreased $1.4 million, or 6.6%, when compared to the prior year. Similar to the quarter, the decrease is the result of slowdown in the traditional North America dump truck and trailer markets.  As we enter into 2017, we anticipate demand in our end markets to strengthen due to construction and infrastructure projects coming to fruition plus market share gains at several OEM’s and distribution aftermarket partners.


Income from operations in the second quarter of fiscal year 2017 decreased $0.5 million, or 35.5%, when compared to the prior year quarter.  Operating income was impacted by lower volume during the period.  


Income from operations for the six months ended December 31, 2016, decreased $0.4 million or 11.1%, when compared to the prior year.  The operating income decrease is being driven by the reduced sales volume from the dump truck and trailer markets.   





Corporate and Other


 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

December 31,

 

%

 

December 31,

 

%

(In thousands, except percentages)

2016

 

2015

 

Change

 

2016

 

2015

 

Change

Income (loss) from operations:

 

 

 

 

 

 

 

 

 

 

 

Corporate

$ (6,262)

 

$ (4,745)

 

32.0%

 

$ (13,081)

 

$ (12,255)

 

6.7%

Acquisition-related costs

(1,503)