10-K 1 10k.htm

 

UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

 

 

 

 

FORM 10-K

 

 

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the fiscal year ended June 30, 2018

Commission File Number 1-7233

 

 

 

STANDEX INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its Charter)

 

 

 

DELAWARE

31-0596149

(State of incorporation)

(I.R.S. Employer Identification No.)

 

 

11 KEEWAYDIN DRIVE, SALEM, NEW HAMPSHIRE

03079

(Address of principal executive offices)

(Zip Code)

 

 

 

(603) 893-9701

(Registrant’s telephone number, including area code)

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE

SECURITIES EXCHANGE ACT OF 1934:

 

 

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, Par Value $1.50 Per Share

 

New York Stock Exchange

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.YES [X]     NO [  ] 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.YES [   ]     NO [X] 

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 website, 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 [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

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 definition 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 __                  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 aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant at the close of business on December 29, 2017 was approximately $1,288,543,257.  Registrant’s closing price as reported on the New York Stock Exchange for December 29, 2017 was $101.85 per share.

The number of shares of Registrant's Common Stock outstanding on August 22, 2018 was 12,826,411 .

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Registrant’s 2018 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference into Part III of this report.


1



Forward Looking Statement

 

Statements contained in this Annual Report on Form 10-K 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,” “intend,” “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 that may cause the actual results of operations in future periods to differ materially from those currently expected or anticipated.  These factors include, but are not limited to: materially adverse or unanticipated 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; domestic and international economic conditions, including the impact, length and degree of economic downturns on the customers and markets we serve and more specifically conditions in the food service equipment, automotive, construction, aerospace, energy, oil and gas, transportation, consumer appliance and general industrial markets; lower-cost competition; the relative mix of products which impact margins and operating efficiencies 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 including effective completion of plant consolidations, cost reduction efforts 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 global sourcing of raw materials and diversification efforts in emerging markets; the impact on cost structure and on economic conditions as a result of actual and threatened increases in trade tariffs; the inability to attain expected benefits from strategic alliances or acquisitions and the inability to effectively consummate and integrate such acquisitions and achieve synergies envisioned 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; and potential 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.

 

 

PART I

 

Item 1.  Business

 

Standex International Corporation was incorporated in 1975 and is the successor of a corporation organized in 1955.  As used in this report, the terms “we,” “us,” “our,” the “Company” and “Standex” mean Standex International Corporation and its subsidiaries.  We have paid dividends each quarter since Standex became a public corporation in November 1964.  

 

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

 

We are a leading manufacturer of a variety of products and services for diverse commercial and industrial markets.  We have 12 operating business units, aggregated and organized for reporting purposes into five segments:  Food Service Equipment, Engraving, Engineering Technologies, Electronics and Hydraulics.  Overall management, strategic development and financial control are led by the executive staff at our corporate headquarters in Salem, New Hampshire.

 

Our long-term strategy is to enhance shareholder value by building larger, more profitable 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 Standex Value Creation System employs four components: Balanced Performance Plan, Standex Growth Disciplines, Standex Operational Excellence, and Standex Talent Management.  The Balanced Performance Plan process aligns annual goals throughout the business and provides a standard reporting, management and review process.  It is focused on setting and


2



meeting annual and quarterly targets that support our short and long-term goals.  The Standex Growth Disciplines use a set of tools and processes including market maps, growth laneways, 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.  We seek to 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 look to drive continuous improvement within our core business platforms, accelerate growth and improve margins.  We have a particular focus on identifying and investing in opportunities that complement our products and will increase the global presence and capabilities of our businesses.  From time to time, we have divested, and likely will continue to divest, businesses that we feel are not strategic or do not meet our growth and return expectations. 

 

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 solve problems for our customers or otherwise meet their needs.  This relationship generally provides us with the ability to identify new sales opportunities with our customers, increase profit over time and 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 productivity in both the shop floor and back-office. 

 

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, maintenance of our capital assets and to return cash to our shareholders through the payment of dividends and stock buybacks. 

 

Please visit our website at www.standex.com to learn more about us or to review our most recent SEC filings.  The information on our website is for informational purposes only and is not incorporated into this Annual Report on Form 10-K.

 

Description of Segments

 

Food Service Equipment

 

Food Service Equipment is a provider of refrigeration, cooking, display merchandising and component pumps for the Commercial Food Service and Life Sciences markets.

 

Our products are used throughout the entire commercial food service process – from storage, to preparation, to cooking and to display.  We focus on the challenges of enabling retail and food service establishments to provide food and beverages that are fresh and appealing while at the same time providing for food safety, and energy efficiency.  In the scientific markets, our product portfolio is used to control the temperatures of critical health care products, medicines and laboratory samples.

 

In recent years, much of this segment has experienced head winds and operational challenges—especially with regard to standard products.  We have invested in order to improve margin performance in these standard products businesses.  At the same time, we plan to invest in further growing our differentiated products businesses through new product development, geographic expansion and selective acquisitions.


3



Food Service Locations

 

Food Service Equipment and Scientific products are manufactured in Hudson, WI; New Albany, MS; Summerville, SC; Nogales, Mexico; Simpsonville, SC; San Antonio, TX; Belleville, WI; and Mountmellick, Ireland. In addition, we have our culinary demonstration center in Allen, TX where we work with customers on design and use of select products.

 

Markets and Applications

 

The commercial food service equipment that we design and manufacture is utilized in restaurants, convenience stores, quick-service restaurants, supermarkets, drug stores and institutions such as hotels, hospitals, and school cafeterias. The life science equipment that we design and manufacture is used in hospitals, pharmacies, clinical laboratories, reference laboratories, physicians’ offices and other clinical testing facilities.

 

Brands

 

NorLake®, Master-Bilt®, Lab Research products (LRP), American BioTech Supply (ABS), Cryosafe, CryoGuard, NorLake Scientific®, APW Wyott®, Bakers Pride®, Tri-Star, BKI®, Barbecue King, Ultrafryer®, Federal and Procon®.

 

Products

 

refrigerated reach-in and under counter refrigerated cabinets, cases, display units, walk-in coolers and freezers; 

cold storage equipment for use in the life sciences  

commercial ovens, char broilers, ranges, griddles, toasters, warmers, roller grills and countertop merchandisers used in cooking, toasting, warming and merchandising food; 

commercial cook and hold units, rotisseries, pressure fryers, ovens and baking equipment; 

commercial deep fryers for restaurant and commercial installations; 

merchandizing display cases for bakery, deli and confectionary products; and 

pump systems used in beverage and industrial fluid handling applications. 

 

Customers

 

Food Service Equipment products are sold to end-users, dealers, buying groups, consultants, government agencies and manufacturers.

 

Engraving

 

Standex Engraving Mold-Tech creates textures and surface finishes on tooling to enhance the beauty and function of a wide range of consumer goods and automotive products.  Standex Engraving Mold-Tech focuses on continuing to meet the needs of a changing marketplace by offering experienced craftsmanship while investing in the latest technology. Our growth strategy is to continue to expand our capacity to service our customers both organically and inorganically across our global market and to innovate new technologies to enhance the functionalization of surface textures. We are one company operating in 27 countries using the same approach to service of our customers to guarantee harmony on global programs.

 

Markets and Applications

 

Standex Engraving Mold-Tech has become the global leader by offering a full range of services to Original Equipment Manufacturers (OEM) markets. From start to finish, these services include the design of bespoke textures, the verification of the texture on a prototype, engraving the mold, enhancing and polishing it, and then offering on-site try-out support with ongoing tool maintenance and texture repair capabilities.

 

Specialized Standex Engraving Mold-Tech companies and brands also include:

 

Piazza Rosa and World Client Services which offer laser engraving and tool finishing in Europe and Mexico. 

Innovent, located in North America and Europe, is a specialized supplier of tools and machines used to produce diapers and products that contain absorbent materials between layers of non-woven fabric. This engineering and manufacturing company provides innovative solutions to hygiene, aerospace and various industrial clients around the world.  


4



Products and Services

 

Laser Engraving offers superior features previously unavailable on products, such as multiple gloss levels, the elimination of paint and optimized scratch performance, including the ability to create nano-finishes to enhance function.

 

Chemical Engraving produces carefully designed textures and finishes without seams or distortion. Exclusive to Standex Engraving Mold-Tech, Digital Transfer Technology guarantees consistency, pattern integrity and texture harmony around the world.

 

Architexture Design Studio uses proprietary technology with proven expertise to create and test custom textures. An original texture is designed to offer beauty and function, then a graphic hybrid of the texture is wrapped on digital 3D forms using Fit-to-Form technology. The texture is printed out using Rapid Texture Prototype technology to create a large-format skin that can be wrapped on a model for testing. This verification process is called Model-Tech® which is exclusive to Standex Engraving Mold-Tech.

 

Tool Enhancement services increase the wear resistance of the mold. Processes include Primeform anti-scratch, laser hardening in localized areas, Tribocoat® and Release Coat.

 

Tool Finishing and ongoing support allows customers to achieve outstanding quality while saving valuable time. These services include laser micro-welding, polishing and lapping, laser cladding to accommodate engineering changes, mold assembly, tool management, maintenance, texture repair and on-site support. Zero Parting Line is an exclusive Standex Engraving Mold-Tech process that eliminates the appearance of matched-insert parting lines.

 

Nickel Shell Molds are specifically designed to withstand extreme production conditions and extend the life of the mold. Slush molds, IMG molds, IMGL molds and IMC molds are also produced. Standex Engraving Mold-Tech is the only nickel shell supplier in three global locations: Portugal, USA and China.

 

Customers

 

This division has become the global leader by offering a full range of services to Original Equipment Manufacturers (OEM), product designers, Tier One Suppliers and Toolmakers all around the world.

 

Engineering Technologies

 

The Engineering Technologies Group, “ETG”, is a provider of innovative, turnkey metal-formed solutions for OEM and Tier-1 manufacturers on their advanced engineering designs.

ETG solutions seek to reduce input weight and material cost, lower part count, and reduce complexity for unique customer design challenges often involving exotic materials, large dimensions, large thicknesses or thin-wall construction, complex shapes and contours, and/or single-piece construction requirements. We devise and manufacture these cost-effective components and assemblies by combining a portfolio of best-in-class forming technologies, vertically integrated manufacturing processes, proven forming technical experience, and on-site technical and design assistance.

We plan to grow Engineering Technologies Group by identifying new cutting-edge solutions for our metal-forming capabilities in existing and adjacent markets via customer and research collaborations, as well as by increasing market share within strategic relationships in priority market segments through customer intimacy and technical education initiatives.

Our segment is comprised of two businesses including Spincraft, with locations in North Billerica, MA, New Berlin, WI, and Newcastle upon Tyne in the U.K, as well as Enginetics, located in Huber Heights, OH.

Markets and Applications

Engineering Technologies Group products serve applications within the space, aviation, defense, energy, medical, and general industrial markets.

-The space market we serve is comprised of components for space launch systems,  

-Our aviation market includes a large portfolio of components and assemblies for OEM turbine engines,  

-The defense market we serve covers a wide spectrum of metal applications, 

-The energy market includes components and assemblies for new and MRO gas turbines, as well as solutions for oil & gas exploration operations. 


5



Brands

This business unit’s names are Spincraft and Enginetics.

Products

-fuel tanks, tank domes, combustion liners, nozzles, and crew vehicle structures 

-seals, heat shields, and combustor elements, as well as aerostructures, including air intake lipskins 

-missile nose cones and fabrications, large dimension exhaust systems, navy-nuclear propulsion, and others 

-components and assemblies for new and MRO gas turbines, as well as solutions for oil & gas exploration operations 

-MRI scanner vessel ends, shields, and centrifuge bowls 

 

Customers

Engineering Technologies components are sold directly to large space, aviation, defense, energy and medical companies, or suppliers to those companies.

Electronics

 

Electronics is a global component and value-added solutions provider of custom magnetic sensing and power conversion components and assemblies.  We are focused on designing, engineering, and manufacturing innovative electro-magnetic solutions, components and assemblies to solve our customers’ application needs with an absolute commitment to a customer first attitude through the Partner/Solve/Deliver® approach.  

We continue to expand this business through organic growth with current customers, new customers, developing new products and technologies, geographic expansion, and inorganic growth through strategic acquisitions.

Components are manufactured in plants located in the USA, Mexico, the U.K., Germany, Japan and China.

Markets and Applications

The diverse products and vertically integrated manufacturing capabilities offered for engineered solutions are vital to an array of markets for providing safe and efficient power transformation, current monitoring, isolation, as well as sensors to monitor systems for function and safety.  The end-user is typically an OEM industrial equipment manufacturer.  End-user markets include, but are not limited to transportation, smart-grid, alternative energy, appliances, HVAC, security, military, medical, aerospace, test and measurement, power distribution, and general industrial applications.

Brands

Business unit names are Standex Electronics, Standex-Meder Electronics, Northlake Engineering, Standex Electronics Japan, and world renown reed switch product brands of MEDER, KENT, and KOFU switches.  

Products

The magnetic sensing products employ technologies such as reed switch, Hall Effect, inductive, conductive and other technologies.  Sensing based solutions include a complete portfolio of reed relays, fluid level, proximity, motion, flow, HVAC condensate, hydraulic pressure differential as well as custom electronics sensors containing these technologies. The magnetics or power conversion products include custom wound transformers and inductors for low and high frequency applications, current sense technology, advanced planar transformer technology, value added assemblies, and mechanical packaging.

Customers

The business sells to a wide variety of automotive, industrial, medical, power and consumer goods customers globally through a direct sales force, regional sales managers, and field applications engineers, commissioned agents, representative groups, and distribution channels.  

Hydraulics

 

The Hydraulics segment is a leading global manufacturer of mobile hydraulic cylinders and complete hydraulic systems for the heavy off-road construction and refuse markets.


6



We are focused on custom designs and manufacturing of products that meet customer specific requirements or applications. Our in house custom design abilities and responsiveness to our customers’ needs drive our continuous top line growth opportunities. We leverage our full line of products for the dump truck and trailer market and deep expertise in their application to expand into new markets, targeting the most challenging custom applications. Our flexible design capability, global supply chain and speed to market enable us to be successful in our expansion efforts. Our team is dedicated to superior customer service through our technical engineering support and on-time delivery.  

 

We plan to grow Hydraulics by expanding our cylinder offering, completing the hydraulics system with wet kits and sensors.

 

We manufacture our cylinders in Hayesville, OH and Tianjin, China. 

 

Markets and Applications

 

Industries that use our products are construction equipment, refuse, airline support, mining, oil and gas, and other material handling applications. Our products are utilized by OEMs on vehicles such as dump trucks, dump trailers, bottom dumps, garbage trucks (both recycling and rear loader), container roll off vehicles, hook lift trucks, liquid waste handlers, vacuum trucks, compactors, balers, airport catering vehicles, container handling equipment for airlines, lift trucks, yard tractors, and underground mining vehicles.  

 

Brands

 

Our products are marketed through the Custom Hoists® brand.  

 

Products

 

Products include single and double acting telescopic and piston rod hydraulic cylinders. Additionally, we manufacture specialty pneumatic cylinders and promote complete wet line kits, which are complete hydraulic systems that include a pump, valves, hoses and fittings. 

 

Customers

Our products are sold directly to OEMs, as well as distributors, dealers, and aftermarket repair outlets primarily in North America with some sales in South America and Asia.   

 

Working Capital

 

Our primary source of working capital is the cash generated from continuing operations.  No segments require any special working capital needs outside of the normal course of business.  

 

Competition

 

Standex manufactures and markets products many of which have achieved a unique or leadership position in their market.  However, we encounter competition in varying degrees in all product groups and for each product line.  Competitors include domestic and foreign producers of the same and similar products.  The principal methods of competition are product performance and technology, price, delivery schedule, quality of services, and other terms and conditions.

 

International Operations

 

We have international operations in all of our business segments.  International operations are conducted at 60 locations, in Europe, Canada, China, Japan, India, Southeast Asia, Korea, Australia, Mexico, Brazil, and South Africa.  See the Notes to Consolidated Financial Statements for international operations financial data.  Our net sales from international operations increased from 31% in 2017 to 32% in 2018.  International operations are subject to certain inherent risks in connection with the conduct of business in foreign countries including, exchange controls, price controls, limitations on participation in local enterprises, nationalizations, expropriation and other governmental action, restrictions of repatriation of earnings, and changes in currency exchange rates.  

 

Research and Development

 

Developing new and improved products, broadening the application of established products, continuing efforts to improve our methods, processes, and equipment continues to drive our success.  However, due to the nature of our manufacturing operations and the types of products manufactured, expenditures for research and development are not significant to any


7



individual segment or in the aggregate.  Research and development costs are quantified in the Notes to Consolidated Financial Statements.  We develop and design new products to meet customer needs in order to offer enhanced products or to provide customized solutions for customers.  

 

Environmental Matters

 

Based on our knowledge and current known facts, we believe that we are presently in substantial compliance with all existing applicable environmental laws and regulations and do not anticipate (i) any instances of non-compliance that will have a material effect on our future capital expenditures, earnings or competitive position or (ii) any material capital expenditures for environmental control facilities.  

 

Financial Information about Geographic Areas

 

Information regarding revenues from external customers attributed to the United States, all foreign countries and any individual foreign country, if material, is contained in the Notes to Consolidated Financial Statements for “Industry Segment Information.”  

 

Number of Employees

 

As of June 30, 2018, we employed approximately 5,600 employees of which approximately 2,100 were in the United States.  About 270 of our U.S. employees were represented by unions. Approximately 42% of our production workforce is situated in low-cost manufacturing regions such as Mexico and Asia.  

 

Executive Officers of Standex

 

The executive officers of the Company as of June 30, 2018 were as follows:

 

Name

Age

Principal Occupation During the Past Five Years

David Dunbar

56

President and Chief Executive Officer of the Company since January 2014.  President of the Valves and Controls global business unit of Pentair Ltd from 2009 through 2013.

Thomas D. DeByle

58

Vice President and Chief Financial Officer of the Company since March 2008.

Alan J. Glass

54

Vice President, Chief Legal Officer and Secretary of the Company since April 2016.  Vice President, General Counsel and Secretary of CIRCOR International, Inc. from 2000 through 2016.

Ross McGovern

40

Vice President, Chief Human Resources Officer of the Company since August 2015.  Director of Human Resources of Keurig Green Mountain 2015, Vice President of Human Resources of Datacolor from 2012 through 2015, and Global Human Resources Manager of R&D GE Healthcare, Medical Diagnostics, a subsidiary of General Electric from 2009 through 2011.

Sean Valashinas

47

Chief Accounting Officer and Assistant Treasurer of the Company since October 2007.

 

Paul Burns

45

Vice President of Strategy and Business Development since July 2015, Director of Corporate Development and Global Mergers & Acquisitions at General Motors from 2013 through 2015, Director of Strategy and Business Development at Tyco Flow Control from 2011 through 2013.

The executive officers are elected each year at the first meeting of the Board of Directors subsequent to the annual meeting of stockholders, to serve for one-year terms of office.  There are no family relationships among any of the directors or executive officers of the Company.

 

Long-Lived Assets

 

Long-lived assets are described and discussed in the Notes to Consolidated Financial Statements under the caption “Long-Lived Assets.”  

 

Available Information

 

Standex’s corporate headquarters are at 11 Keewaydin Drive, Salem, New Hampshire 03079, and our telephone number at that location is (603) 893-9701.


8



The U.S. Securities and Exchange Commission (the “SEC”) maintains an internet website at www.sec.gov that contains our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements, and all amendments thereto.  All reports that we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Information about the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Standex’s internet website address is www.standex.com.  Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements, and all amendments thereto, are available free of charge on our website as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC.  In addition, our code of business conduct, our code of ethics for senior financial management, our corporate governance guidelines, and the charters of each of the committees of our Board of Directors (which are not deemed filed by this reference), are available on our website and are available in print to any Standex shareholder, without charge, upon request in writing to “Chief Legal Officer, Standex International Corporation, 11 Keewaydin Drive, Salem, New Hampshire, 03079.”

 

The certifications of Standex’s Chief Executive Officer and Chief Financial Officer, as required by the rules adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, are filed as exhibits to this Form 10-K.  

 

Item 1A.  Risk Factors

 

An investment in the Company involves various risks, including those mentioned below and those that are discussed from time to time in our other periodic filings with the Securities and Exchange Commission.  Investors should carefully consider these risks, along with the other information filed in this report, before making an investment decision regarding the Company.  Any of these risks could have a material adverse effect on our financial condition, results of operations and/or value of an investment in the Company.

 

A deterioration in the domestic and international economic environment could adversely affect our operating results, cashflow and financial condition.

 

Recessionary economic conditions, with or without a tightening of credit, could adversely impact major markets served by our businesses, including cyclical markets such as automotive, aviation, energy and power, heavy construction vehicle, general industrial, consumer appliances and food service.  An economic recession could adversely affect our business by:

 

reducing demand for our products and services, particularly in markets where demand for our products and services is cyclical; 

causing delays or cancellations of orders for our products or services; 

reducing capital spending by our customers; 

increasing price competition in our markets; 

increasing difficulty in collecting accounts receivable; 

increasing the risk of excess or obsolete inventories; 

increasing the risk of impairment to long-lived assets due to reduced use of manufacturing facilities;  

increasing the risk of supply interruptions that would be disruptive to our manufacturing processes; and 

reducing the availability of credit and spending power for our customers. 

 

We rely on our credit facility to provide us with sufficient capital to operate our businesses.

 

We rely on our revolving credit facility, in part along with operating cash flow, to provide us with sufficient capital to operate our businesses.  The availability of borrowings under our revolving credit facility is dependent upon our compliance with the covenants set forth in the facility, including the maintenance of certain financial ratios.  Our ability to comply with these covenants is dependent upon our future performance, which is subject to economic conditions in our markets along with factors that are beyond our control.  Violation of those covenants could result in our lenders restricting or terminating our borrowing ability under our credit facility, cause us to be liable for covenant waiver fees or other obligations, or trigger an event of default under the terms of our credit facility, which could result in acceleration of the debt under the facility and require prepayment of the debt before its due date.  Even if new financing is available in the event of a default under our current credit facility, the interest rate charged on any new borrowing could be substantially higher than under the current credit facility, thus adversely affecting our overall financial condition.  If our lenders reduce or terminate our access to amounts under our credit facility, we may not have sufficient capital to fund our working capital needs or we may need to secure additional capital or financing to fund our working capital requirements or to repay outstanding debt under our credit facility.


9



Our credit facility contains covenants that restrict our activities.

 

Our revolving credit facility contains covenants that restrict our activities, including our ability to:

 

incur additional indebtedness; 

make investments, including acquisitions; 

create liens; 

pay cash dividends to shareholders unless we are compliant with the financial covenants set forth in the credit facility; and 

sell material assets. 

 

Our global operations subject us to international business risks.

 

We operate in 60 locations outside of the United States in Europe, Canada, China, Japan, India, Singapore, Korea, Australia, Mexico, Brazil, Turkey, Malaysia, and South Africa.  If we are unable to successfully manage the risks inherent to the operation and expansion of our global businesses, those risks could have a material adverse effect on our results of operations, cashflow or financial condition.  These international business risks include:

 

fluctuations in currency exchange rates; 

changes in government regulations; 

restrictions on repatriation of earnings; 

import and export controls; 

political, social and economic instability;  

potential adverse tax consequences; 

difficulties in staffing and managing multi-national operations; 

unexpected changes in zoning or other land-use requirements; 

difficulties in our ability to enforce legal rights and remedies; and 

changes in regulatory requirements. 

 

Failure to achieve expected savings and synergies could adversely impact our operating profits and cash flows.

 

We focus on improving profitability through LEAN enterprise, low cost sourcing and manufacturing initiatives, improving working capital management, developing new and enhanced products, consolidating factories where appropriate, automating manufacturing processes, diversification efforts and completing acquisitions which deliver synergies to stimulate sales and growth.  If we are unable to successfully execute these programs, such failure could adversely affect our operating profits and cash flows.  In addition, actions we may take to consolidate manufacturing operations to achieve cost savings or adjust to market developments may result in restructuring charges that adversely affect our profits.

 

Violation of anti-bribery or similar laws by our employees, business partners or agents could result in fines, penalties, damage to our reputation or other adverse consequences.

 

We cannot assure that our internal controls, code of conduct and training of our employees will provide complete protection from reckless or criminal acts of our employees, business partners or agents that might violate United States or international laws relating to anti-bribery or similar topics.  A violation of these laws could subject us to civil or criminal investigations that could result in substantial civil or criminal fines and penalties and which could damage our reputation.

 

We face significant competition in our markets and, if we are not able to respond to competition in our markets, our net sales, profits and cash flows could decline.

 

Our businesses operate in highly competitive markets.  To compete effectively, we must retain long standing relationships with significant customers, offer attractive pricing, maintain product quality, develop enhancements to products that offer performance features that are superior to our competitors and which maintain our brand recognition, continue to automate our manufacturing capabilities, continue to grow our business by establishing relationships with new customers, diversify into emerging markets and penetrate new markets.  If we are unable to compete effectively, our net sales, profitability and cash flows could decline.  Pricing pressures resulting from competition may adversely affect our net sales and profitability.

 

If we are unable to successfully introduce new products and product enhancements, our future growth could be impaired.

 

Our ability to develop new products and innovations to satisfy customer needs or demands in the markets we serve can affect our competitive position and often requires significant investment of resources.  Difficulties or delays in research, development


10



or production of new products and services or failure to gain market acceptance of new products and technologies may significantly reduce future net sales and adversely affect our competitive position.

 

Increased prices or significant shortages of the commodities that we use in our businesses could result in lower net sales, profits and cash flows.

 

We purchase large quantities of steel, aluminum, refrigeration components, freight services, foam insulation and other metal commodities for the manufacture of our products.  Historically, prices for commodities have fluctuated, and we are unable to enter into long term contracts or other arrangements to hedge the risk of price increases in many of these commodities.  Significant price increases for these commodities could adversely affect our operating profits if we cannot timely mitigate the price increases by successfully sourcing lower cost commodities or by passing the increased costs on to customers.  Shortages or other disruptions in the supply of these commodities could delay sales or increase costs.

 

Current and threatened tariffs on components and finished goods from China and other countries could result in lower net sales, profits and cash flows and could impair the value of our investments in our Chinese operations.

 

As part of our low-cost country sourcing strategy, we (i) maintain manufacturing facilities in China and (ii) import certain components and finished goods from our own facilities and third-party suppliers in China.  Many of the components and finished goods we import from China are subject to tariffs recently enacted by the United States government as well as additional proposed tariffs.  While we attempt to pass on these additional costs to our customers, competitive factors (including competitors who import from other countries not subject to such tariffs) may limit our ability to sustain price increases and, as a result, may adversely impact our net sales, profits and cash flows.  In addition, the maintenance of such tariffs over the long-term could impair the value of our investments in our Chinese operations.

 

An inability to identify or complete future acquisitions could adversely affect our future growth.

 

As part of our growth strategy, we intend to pursue acquisitions that provide opportunities for profitable growth for our businesses and enable us to leverage our competitive strengths.  While we continue to evaluate potential acquisitions, we may not be able to identify and successfully negotiate suitable acquisitions, obtain financing for future acquisitions on satisfactory terms, obtain regulatory approval for certain acquisitions or otherwise complete acquisitions in the future.  An inability to identify or complete future acquisitions could limit our future growth.

 

We may experience difficulties in integrating acquisitions.

 

Integration of acquired companies involves several risks, including:

 

inability to operate acquired businesses profitably; 

failure to accomplish strategic objectives for those acquisitions; 

unanticipated costs relating to acquisitions or to the integration of the acquired businesses; 

difficulties in achieving planned cost savings synergies and growth opportunities; and 

possible future impairment charges for goodwill and non-amortizable intangible assets that are recorded due to acquisitions. 

 

Additionally, our level of indebtedness may increase in the future if we finance acquisitions with debt, which would cause us to incur additional interest expense and could increase our vulnerability to general adverse economic and industry conditions and limit our ability to service our debt or obtain additional financing.  We cannot assure that future acquisitions will not have a material adverse effect on our financial condition, results of operations and cash flows.

 

Impairment charges could reduce our profitability.

 

We test goodwill and our other intangible assets with indefinite useful lives for impairment on an annual basis or on an interim basis if a potential impairment factor arises that indicates the fair value of the reporting unit may fall below its carrying value.  Various uncertainties, including continued adverse conditions in the capital markets or changes in general economic conditions, could impact the future operating performance at one or more of our businesses which could significantly affect our valuations and could result in additional future impairments.  The recognition of an impairment of a significant portion of goodwill would negatively affect our results of operations.  


11



Materially adverse or unforeseen legal judgments, fines, penalties or settlements could have an adverse impact on our profits and cash flows.

 

We are and may, from time to time, become a party to legal proceedings incidental to our businesses, including, but not limited to, alleged claims relating to product liability, environmental compliance, patent infringement, commercial disputes and employment and regulatory matters.  In accordance with United States generally accepted accounting principles, we establish reserves based on our assessment of contingent liabilities.  Subsequent developments in legal proceedings may affect our assessment and estimates of loss contingencies, recorded as reserves, which could require us to record additional reserves or make material payments which could adversely affect our profits and cash flows.  Even the successful defense of legal proceedings may cause us to incur substantial legal costs and may divert management's time and resources away from our businesses.

 

The costs of complying with existing or future environmental regulations, and of correcting any violations of these regulations, could impact our profitability.

 

We are subject to a variety of environmental laws relating to the storage, discharge, handling, emission, generation, use and disposal of chemicals, hazardous waste and other toxic and hazardous materials used to manufacture, or resulting from the process of manufacturing, our products.  We cannot predict the nature, scope or effect of regulatory requirements to which our operations might be subject or the manner in which existing or future laws will be administered or interpreted.  We are also exposed to potential legacy environmental risks relating to businesses we no longer own or operate.  Future regulations could be applied to materials, products or activities that have not been subject to regulation previously.  The costs of complying with new or more stringent regulations, or with more vigorous enforcement of these or existing regulations, could be significant.

 

In addition, properly permitted waste disposal facilities used by us as a legal and legitimate repository for hazardous waste may in the future become mismanaged or abandoned without our knowledge or involvement.  In such event, legacy landfill liability could attach to or be imposed upon us in proportion to the waste deposited at any disposal facility.

 

Environmental laws require us to maintain and comply with a number of permits, authorizations and approvals and to maintain and update training programs and safety data regarding materials used in our processes.  Violations of these requirements could result in financial penalties and other enforcement actions.  We could be required to halt one or more portions of our operations until a violation is cured.  Although we attempt to operate in compliance with these environmental laws, we may not succeed in this effort at all times.  The costs of curing violations or resolving enforcement actions that might be initiated by government authorities could be substantial.

 

The costs of complying with existing or future regulations applicable to our products, and of correcting any violations of such regulations, could impact our profitability.

 

Certain of our products are subject to regulations promulgated by administrative agencies such as the Department of Energy, Occupational Health and Safety Administration and the Food and Drug Administration.  Such regulations, among other matters, specify requirements regarding energy efficiency and product safety.  Regulatory violations could result in financial penalties and other enforcement actions.  We could be required to halt production of one or more products until a violation is cured.  Although we attempt to produce our products in compliance with these requirements, the costs of curing violations or resolving enforcement actions that might be initiated by administrative agencies could be substantial.

 

Strategic divestitures and contingent liabilities from businesses that we sell could adversely affect our results of operations and financial condition.

 

From time to time, we have sold and may continue to sell business that we consider to be either underperforming or no longer part of our strategic vision.  The sale of any such business could result in a financial loss and/or write-down of goodwill which could have a material adverse effect on our results for the financial reporting period during which such sale occurs.  In addition, in connection with such divestitures, we have retained, and may in the future retain responsibility for some of the known and unknown contingent liabilities related to certain divestitures such as lawsuits, tax liabilities, product liability claims, and environmental matters.  

 

The trading price of our common stock has been volatile, and investors in our common stock may experience substantial losses.

 

The trading price of our common stock has been volatile and may become volatile again in the future.  The trading price of our common stock could decline or fluctuate in response to a variety of factors, including:


12



our failure to meet the performance estimates of securities analysts; 

changes in financial estimates of our net sales and operating results or buy/sell recommendations by securities analysts; 

fluctuations in our quarterly operating results; 

substantial sales of our common stock; 

changes in the amount or frequency of our payment of dividends or repurchases of our common stock; 

general stock market conditions; or 

other economic or external factors. 

 

Decreases in discount rates and actual rates of return could require an increase in future pension contributions to our pension plans which could limit our flexibility in managing our Company.

 

The discount rate and the expected rate of return on plan assets represent key assumptions inherent in our actuarially calculated pension plan obligations and pension plan expense.  If discount rates and actual rates of return on invested plan assets were to decrease significantly, our pension plan obligations could increase materially.  Although our pension plans have been frozen, the size of future required pension contributions could require us to dedicate a greater portion of our cash flow from operations to making contributions, which could negatively impact our financial flexibility.

 

Our business could be negatively impacted by cybersecurity threats, information systems and network interruptions, and other security threats or disruptions.

 

Our information technology networks and related systems are critical to the operation of our business and essential to our ability to successfully perform day-to-day operations.  Cybersecurity threats are persistent, evolve quickly, and include, but are not limited to, computer viruses, ransomware, attempts to access information, denial of service and other electronic security breaches.  These events could disrupt our operations or customers and other third-party IT systems in which we are involved and could negatively impact our reputation among our customers and the public which could have a negative impact on our financial conditions, results of operations, or liquidity.

 

We are subject to increasing regulation associated with data privacy and processing, the violation of which could result in significant penalties and harm our reputation.

 

Regulatory scrutiny of privacy, data protection, collection, use and sharing of data is increasing on a global basis. Like all global companies, we are subject to a number of laws, rules and directives (“privacy laws”) relating to the collection, use, retention, security, processing and transfer (“processing”) of personally identifiable information about our employees, customers and suppliers (“personal data”) in the countries where we operate.  The most notable of these privacy laws is the EU’s General Data Protection Regulation (“GDPR”), which came into effect in 2018.  GDPR extends the scope of the EU data protection law to all foreign companies processing data of EU residents and imposes a strict data protection compliance regime with severe penalties for non-compliance of up to the greater of 4% of worldwide turnover and €20 million.  While we continue to strengthen our data privacy and protection policies and to train our personnel accordingly, a determination that there have been violations of GDPR or other privacy or data protection laws could expose us to significant damage awards, fines and other penalties that could, individually or in the aggregate, materially harm our results of operations and reputation.

 

Various restrictions in our charter documents, Delaware law and our credit agreement could prevent or delay a change in control that is not supported by our board of directors.

 

We are subject to several provisions in our charter documents, Delaware law and our credit facility that may discourage, delay or prevent a merger, acquisition or change of control that a stockholder may consider favorable.  These anti-takeover provisions include:

 

maintaining a classified board and imposing advance notice procedures for nominations of candidates for election as directors and for stockholder proposals to be considered at stockholders' meetings; 

a provision in our certificate of incorporation that requires the approval of the holders of 80% of the outstanding shares of our common stock to adopt any agreement of merger, the sale of substantially all of the assets of the Company to a third party or the issuance or transfer by the Company of voting securities having a fair market value of $1 million or more to a third party, if in any such case such third party is the beneficial owner of 10% or more of the outstanding shares of our common stock, unless the transaction has been approved prior to its consummation by all of our directors; 

requiring the affirmative vote of the holders of at least 80% of the outstanding shares of our common stock for stockholders to amend our amended and restated by-laws; 

covenants in our credit facility restricting mergers, asset sales and similar transactions; and 


13



the Delaware anti-takeover statute contained in Section 203 of the Delaware General Corporation Law. 

 

Section 203 of the Delaware General Corporation Law prohibits a merger, consolidation, asset sale or other similar business combination between the Company and any stockholder of 15% or more of our voting stock for a period of three years after the stockholder acquires 15% or more of our voting stock, unless (1) the transaction is approved by our board of directors before the stockholder acquires 15% or more of our voting stock, (2) upon completing the transaction the stockholder owns at least 85% of our voting stock outstanding at the commencement of the transaction, or (3) the transaction is approved by our board of directors and the holders of 66 2/3% of our voting stock, excluding shares of our voting stock owned by the stockholder.

 

Item 1B.  Unresolved Staff Comments

 

None.

 

Item 2.  Properties

 

We have a total of 107 facilities, of which we operate 89 manufacturing plants and warehouses located throughout the United States, Europe, Canada, Australia, Southeast Asia, Korea, Japan, China, India, Brazil, South Africa, and Mexico. The Company owns 21 of the facilities and the balance are leased.  For the year ended June 30, 2018 the approximate building space utilized by each segment is as follows:  

 

 

 

Area in Square Feet (in thousands)

Segment location

Number of Facilities

Leased

Owned

Total

EMEA(1)

1

13

-

13

Other Americas

1

-

127

127

United States

16

441

790

1,231

Food Service Equipment

18

454

917

1,371

Asia Pacific

16

279

-

279

EMEA(1)

21

363

35

398

Other Americas

6

89

-

89

United States

6

76

99

175

Engraving

49

807

134

941

EMEA(1)

3

80

-

80

United States

6

243

171

414

Engineering Technologies

9

323

171

494

Asia Pacific

11

77

29

106

EMEA(1)

5

8

88

96

Other Americas

2

5

56

61

United States

4

61

30

91

Electronics

22

151

203

354

Asia Pacific

2

76

-

76

Other Americas

1

1

-

1

United States

5

15

101

116

Hydraulics

8

92

101

193

United States

1

12

-

12

Corporate & Other

1

12

-

12

Total

107

1,839

1,526

3,365

 

(1)   EMEA consists Europe, Middle East and S. Africa.

 

In general, the buildings are in sound operating condition and are considered to be adequate for their intended purposes and current uses.

 

We own substantially all of the machinery and equipment utilized in our businesses.

 

Item 3.  Legal Proceedings

 

Discussion of legal matters is incorporated by reference to Part II, Item 8, Note 12, “CONTINGENCIES,” in the Notes to the Consolidated Financial Statements.


14



Item 4.  Mine Safety Disclosures

 

Not Applicable

 

 

PART II

 

Item 5.  Market for Standex Common Stock

 

Related Stockholder Matters and Issuer Purchases of Equity Securities

 

The principal market in which the Common Stock of Standex is traded is the New York Stock Exchange under the ticker symbol “SXI”.  The high and low sales prices for the Common Stock on the New York Stock Exchange and the dividends paid per Common Share for each quarter in the last two fiscal years are as follows:

 

 

Common Stock Price Range

 

Dividends Per Share

 

2018

 

2017

 

 

 

Year Ended June 30

High

Low

 

High

Low

 

2018

2017

First quarter

$ 109.30

$   89.70

 

$   93.29

$     80.90

 

$        0.16

$        0.14

Second quarter

110.00

  98.38  

 

  97.55

   74.35

 

0.18

0.16

Third quarter

106.90

93.15

 

    101.24

   85.80

 

0.18

0.16

Fourth quarter

106.40

89.40

 

100.30

   84.30

 

0.18

0.16

 

The approximate number of stockholders of record on July 31, 2018 was 1,630.  

 

Additional information regarding our equity compensation plans is presented in the Notes to Consolidated Financial Statements under the caption “Stock-Based Compensation and Purchase Plans” and Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

 

Issuer Purchases of Equity Securities (1)

 

 

 

 

 

 

Quarter Ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Period

 

 

(a) Total Number of Shares (or units) Purchased

 

 

(b) Average Price Paid per Share (or unit)

 

(c) Total Number of Shares (or units) Purchased as Part of Publicly Announced Plans or Programs

(d) Maximum Number (or Appropriate Dollar Value) of Shares (or units) that May Yet Be Purchased Under the Plans or Programs

April 1 - April 30, 2018

 

-

 

$              -

 

 

      -

 

$                     87,718,229

May 1 - May 31, 2018

 

5,290

 

     99.27

 

 

5,290

 

87,193,091

June 1 - June 30, 2018

 

1,136

 

   105.20

 

 

1,136

 

                      87,073,584

    TOTAL

 

6,426

 

$    100.32      

 

 

6,426

 

$                    87,073,584

 

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


15



The following graph compares the cumulative total stockholder return on the Company’s Common Stock as of the end of each of the last five fiscal years, with the cumulative total stockholder return on the Standard & Poor’s Small Cap 600 (Industrial Segment) Index and on the Russell 2000 Index, assuming an investment of $100 in each at their closing prices on June 30, 2013 and the reinvestment of all dividends.

 

 

 

 

 


16



Item 6.  Selected Consolidated Financial Data

 

Selected financial data for the five years ended June 30, is as follows:

 

See Item 7 for discussions on comparability of the below.

 

 

 

2018

 

2017

 

2016

 

2015

 

2014

SUMMARY OF OPERATIONS (in thousands)

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

 

 

 

 

 

    Food Service Equipment

$

396,866

 

$     380,970

 

 $    381,867

 

$     408,706

 

$   377,848

    Engraving

 

136,275

 

105,943

 

   124,120

 

110,781

 

109,271

    Engineering Technologies

 

90,781

 

90,506

 

     82,235

 

97,018

 

79,642

    Electronics

 

196,291

 

136,689

 

  118,319

 

114,196

 

114,881

    Hydraulics

 

48,169

 

41,150

 

    45,045

 

41,441

 

34,538

         Total

$

868,382

 

$     755,258

 

$    751,586

 

$     772,142

 

$   716,180

Gross profit

 

301,801

 

$     252,754

 

$    252,253

 

$     247,486

 

$   238,269

Operating income (loss)

 

 

 

 

 

 

 

 

 

 

    Food Service Equipment

$

34,853

 

$       33,436

 

$     40,142

 

$      37,456

 

$    38,203

    Engraving

 

28,966

 

25,584

 

29,579

 

24,250

 

22,145

    Engineering Technologies

 

6,449

 

9,662

 

8,258

 

13,097

 

12,676

    Electronics

 

45,310

 

27,663

 

21,104

 

20,884

 

19,732

    Hydraulics

 

7,316

 

6,712

 

7,947

 

7,013

 

5,781

    Restructuring (1)

 

(7,594)

 

(5,825)

 

(4,232)

 

(3,443)

 

(10,077)

    Gain on sale of real estate

 

-

 

652

 

-

 

        -   

 

            -   

Acquisition related expenses

 

(3,749)

 

(7,843)

 

-

 

               -   

 

-   

    Other operating income (expense), net

 

-

 

                  -   

 

 

 

      (7,458)

 

 

438

 

       3,462

    Corporate and Other

 

(27,512)

 

(25,015)

 

(24,996)

 

(21,051)

 

(26,054)

         Total

 

84,039

 

65,026

 

$       70,344

 

$     78,644

 

$    65,868

Interest expense

 

(8,030)

 

(4,043)

 

(2,871)

 

(3,161)

 

(2,249)

Other non-operating (loss) income

 

1,243

 

949

 

1,052

 

634

 

4,184

Provision for income taxes

 

(40,620)

 

(15,355)

 

(16,295)

 

(20,874)

 

(18,054)

Income from continuing operations

 

36,632

 

46,577

 

52,230

 

55,243

 

49,749

Income/(loss) from discontinued operations

 

(28)

 

(32)

 

(174)

 

(500)

 

(6,883)

Net income

 

$       36,604

 

$       46,545

 

$      52,056

 

$    54,743

 

$    42,866

 

(1) See discussion of restructuring activities in Note 15 of the consolidated financial statements.

 

 

 

 

2018

 

2017

 

2016

 

2015

 

2014

PER SHARE DATA

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$        2.88

 

$        3.68

 

$          4.12

 

$       4.37

 

$        3.94

Income/(loss) from discontinued operations

-

 

-

 

(0.01)

 

(0.04)

 

(0.55)

         Total

 

$        2.88

 

$        3.68

 

$          4.11

 

$       4.33

 

$        3.39

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$        2.86

 

$        3.65

 

$         4.09

 

$       4.31

 

$        3.89

Income/(loss) from discontinued operations

-

 

-

 

(0.01)

 

(0.04)

 

(0.54)

         Total

 

$        2.86

 

$        3.65

 

$          4.08

 

$       4.27

 

$        3.35

 

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

$        0.70

 

$        0.62

 

$          0.54

 

$       0.46

 

$        0.38


17



 

 

2018

 

2017

 

2016

 

2015

 

2014

BALANCE SHEET (in thousands)

 

 

 

 

 

 

 

 

 

Total assets

 

$  916,937

 

$   867,676

 

$   690,457

 

$    659,063

 

$   577,785

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

134,228

 

127,060

 

103,974

 

110,478

 

107,674

Inventories

 

127,223

 

119,401

 

105,402

 

108,305

 

97,065

Accounts payable

 

89,707

 

96,487

 

77,099

 

80,764

 

85,206

Goodwill

 

251,762

 

242,690

 

157,354

 

154,732

 

125,965

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$  193,772

 

$     191,976

 

$     92,114

 

$    101,753

 

$      44,681

Total debt

 

193,772

 

191,976

 

92,114

 

    101,753

 

     44,681

Less cash

 

109,602

 

88,566

 

121,988

 

96,128

 

74,260

Net debt (cash)

 

$   84,170

 

$  103,410

 

$   (29,874)

 

$        5,625

 

$    (29,579)

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

$   450,795

 

$    408,664

 

$    369,959

 

$    348,570

 

$     340,726

 

 

 

 

 

 

 

 

 

 

 

KEY STATISTICS

 

2018

 

2017

 

2016

 

2015

 

2014

Gross profit margin

 

34.8%

 

33.5%

 

33.6%

 

32.1%

 

33.3%

Operating income margin

 

9.7%

 

8.6%

 

9.4%

 

10.2%

 

9.2%

 

 

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

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

 

Our long-term strategy is to build larger industrial platforms through a value creation system that assists management in meeting specific corporate and business unit financial and strategic performance goals in order to create, improve, and enhance shareholder value.  The Standex Value Creation System is a standard methodology which provides consistent tools used throughout the company in order to achieve our organization’s goal of transforming from its historic roots as a holding company to an efficient operating company.  The Standex Value Creation System employs four components: Balanced Performance Plan, Standex Growth Disciplines, Standex Operational Excellence, and Standex Talent Management.  The Balanced Performance Plan process aligns annual goals throughout the business and provides a standard reporting, management and review process.  It is focused on setting and meeting annual and quarterly targets that support our short and long term goals.  The Standex Growth Disciplines use a set of tools and processes including market maps, growth laneways, 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. Through the use of our Standex Value Creation System, we have developed a balanced approach to value creation.  While we intend to continue investing acquisition capital in high margin and growth segments such as Electronics and Engraving, we will continue to support all of our businesses as they enhance value through deployment of our GDP+ and OpEx playbooks.  

 

It is our objective to grow larger and more profitable business units through both organic initiatives and acquisitions.  We seek to identify and implement organic growth initiatives such as new product development, geographic expansion, introduction of products and technologies into new markets and applications, key accounts and strategic sales channel partners.  Also, we have a long-term objective to create sizable business platforms by adding strategically aligned or “bolt on” acquisitions to strengthen the individual businesses, create both sales and cost synergies with our core business platforms, and accelerate their growth and margin improvement.  We look to create both sales and cost synergies within our core business platforms, accelerate growth and improve margins.  We have a particular focus on identifying and investing in opportunities that complement our products and will  


18



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.

 

oAs part of our ongoing strategy, we acquired Italy-based Piazza Rosa Group (“Piazza Rosa”) in July 2017. The privately held company is a leading provider of mold, tool treatment and finishing services for the automotive and consumer products markets. The combination of these competencies with Standex Engraving’s worldwide presence and texturizing capabilities creates a global tool finishing service leader. The acquisition also opens additional opportunities in the broader surface engineering market. The Piazza Rosa Group’s results are reported within our Engraving segment. 

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

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

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

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

Standex Operational Excellence drives continuous improvement in the efficiency of our businesses, both on the shop floor and in the office environment.  We recognize that our businesses are competing in a global economy that requires us to improve our competitive position.  We have deployed a number of management competencies to drive improvements in the cost structure of our business units including operational excellence through lean enterprise, the use of low cost manufacturing facilities, the consolidation of manufacturing facilities to achieve economies of scale and leveraging of fixed infrastructure costs, alternate sourcing to achieve procurement cost reductions, and capital improvements to increase productivity. 

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

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


19



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.

 

Consolidated Results from Continuing Operations (in thousands):

 

 

 

2018

 

2017

 

2016

Net sales

$

868,382

$

755,258

$

    751,586

Gross profit margin

 

34.8%

 

33.5%

 

33.6%

Restructuring costs

 

7,594          

 

        5,825

 

        4,232

Other income/(expense) operating

 

(3,749)         

 

         (7,843)

 

         (7,458)

Income from operations

 

84,039

 

65,026

 

      70,344

 

 

 

 

 

 

 

Backlog (realizable within 1 year)

$

213,477     

$

    193,539

$

162,895

 

 

 

 

 

 

 

 

 

2018

 

2017

 

2016

Net sales

$

868,382

$

755,258

$

    751,586

 

Components of change in sales:

 

 

 

 

 

 

 

  Effect of acquisitions

 

59,855      

 

      38,498

 

      11,672

 

  Effect of exchange rates

 

14,394     

 

    (6,195)

 

    (15,011)

 

  Effect of business divestitures

 

-

 

(17,446)

 

2,791

 

  Organic sales growth

 

38,875     

 

    (11,185)

 

    (20,008)

 

 

Net sales for the fiscal year 2018 increased by $113.1 million, or 15.0%, when compared to the prior year.  Incremental sales increases from our recent acquisitions accounted for $59.9 million or 7.9%, while increased organic sales accounted for $38.9 million or 5.1%.  We also recognized sales growth of $14.4 million or 1.9% related to favorable foreign exchange impacts. The organic sales increases occurred in all of our segments except Engineering Technologies.

 

Net sales for the fiscal year 2017 increased by $3.7 million, or 0.5%, when compared to the prior year.  Incremental sales increases of $38.5 million from acquisitions were partially offset by organic sales declines of $11.2 million, or 1.5%, the impact of $17.4 million, or 2.3%, from the divestiture of the RPM business, and an unfavorable impact of $6.2 million, or 0.8%, due to the effect of exchanges rates.  The organic sales decrease was primarily driven by lower sales in the Refrigeration and Cooking Solutions business units within the Food Service Equipment segment.  

 

Gross Profit Margin

 

During 2018, gross margin increased to 34.8% as compared to 33.5% in 2017. Gross margin increases during fiscal year 2018 were primarily driven by the leverage on our 5.1% organic sales increase. The effects of purchase accounting reduced our gross margins by 40 basis points in the prior year.


20



During 2017, gross margin remained essentially flat at 33.5% as compared to 33.6% in 2016.  Excluding the effects of purchase accounting in both years, our gross margins increased 29 basis points compared to prior year.  During fiscal year 2017, we incurred $3.1 million of purchase accounting charges related to the Standex Electronics Japan and Horizon Scientific acquisitions as compared to charges of $0.4 million in the prior year for the Northlake acquisition.  

 

Restructuring Charges and Acquisition Related Expenses

 

During fiscal year 2018, we incurred restructuring expenses of $7.6 million primarily related to restructuring efforts that are intended to improve profitability, streamline production and enhance capacity to support future growth. These efforts include (i) approximately $4.1 million related to headcount reduction and plant realignment regarding the standard products businesses within Food Service Equipment; (ii) approximately $1.2 million in relation to the exit of an unprofitable Engraving business in Brazil; and (iii) approximately $1.1 million due to footprint optimization in the Engineering Technologies segment.

 

Acquisition related expenses in fiscal year 2018 were $3.8 million. These expenses were comprised primarily of $2.8 million for deferred compensation earned by the Horizon Scientific seller during the year. Since these payments are contingent on the seller remaining an employee of the Company, they are treated as compensation expense. Other acquisition related expenses related to Standex Electronics Japan and Piazza Rosa. Acquisition related expenses were approximately $4.0 million more in fiscal year 2017 due to the timing of the Standex Electronics Japan acquisition.

 

Selling, General, and Administrative Expenses

 

Selling, general, and administrative expenses, (“SG&A”) for the fiscal year 2018 were $206.4 million, or 23.8% of sales compared to $174.1 million, or 23.0% of sales during the prior year. SG&A expenses were impacted by: (i) on-going SG&A expenses related to our recent acquisitions of $7.8 million, (ii) an increase in distribution and selling expenses of $9.4 million, (iii) an increase in administrative expenses related to investments to support our recent acquisitions and growth laneways and (iv) a $3.1 million increase in administrative compensation costs due to improved performance.

 

Selling, general, and administrative expenses, (“SG&A”) for the fiscal year 2017 were $174.1 million, or 23.0%, of sales compared to $170.2 million, or 22.6%, of sales during the prior year.  The increase in SG&A was primarily due to $5.6 million and $2.6 million related to the Horizon Scientific and Standex Electronics Japan businesses, respectively, which were not in prior year.  These increases were partially offset by declines of $2.5 million from the divestiture of the RPM business, lower administrative compensation costs of $2.0 million, and lower variable expenses including commission and distribution costs.

 

Income from Operations

 

Income from operations for the fiscal year 2018 was $84.0 million, compared to $65.0 million during the prior year. The $19.0 million dollar increase, or 29.2%, is primarily due to increased sales volume, including 5.1% organic sales growth and 7.9% growth attributed to our recent acquisitions. The increase in operating income is also partially due to the reduction in acquisition related expenses of $4.1 million as compared to the prior year.

 

Income from operations for the fiscal year 2017 was $65.0 million, compared to $70.3 million during the prior year.  The decrease of $5.5 million was primarily due to acquisition related costs of $7.8 million, an increase in restructuring costs of $1.6 million, and overall organic sales volume declines.  These decreases were partially offset by the positive performance of our Horizon Scientific and Standex Electronic Japan acquisitions.

 

Discussion of the performance of each of our reportable segments is fully explained in the segment analysis that follows.   

 

Interest Expense

 

Interest expense for fiscal year 2018 was $8.0 million, an increase from $4.0 million in fiscal year 2017. The increase is due to higher borrowings associated with the recent acquisitions, in addition to working capital increases to support increased sales activity. Our effective interest rate of 3.29% as of June 30, 2018, increased 150 basis points as compared to 2.24% as of June 30, 2017. In addition, we incurred $0.9 million of charges associated with derivative activity related to the Standex Electronics Japan acquisition.

 

Interest expense for the fiscal year 2017 was $4.0 million, an increase of $1.2 million as compared to the prior year.  Interest expense increases were due to higher borrowing costs and an increase in outstanding borrowings, primarily to fund acquisition activity.


21



Income Taxes

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was passed which resulted in the Company recording provisional estimates related to US taxes on foreign earnings, changes in the revaluation of deferred taxes, and foreign withholding taxes on cash repatriation in our consolidated financial statements.  As a result of the Act, the Company recorded the following impacts for the year ending June 30, 2018:  

 

A $1.34 million tax provision for income taxes due to a revaluation of the Company's estimated deferred tax assets and liabilities.  

 

A $11.7 million tax provision related to a mandatory deemed repatriation of foreign earnings.   

 

Other changes implemented by the Act will not impact the Company until the fiscal year ending June 30, 2019.  These include several other technical provisions such interest expense deduction limitations on both unrelated and related party debt, new deemed foreign income inclusions under the Global Intangible Low-Taxed Income (GILTI) regime, the Foreign Derived Intangible Income (FDII) deduction for goods & services produced in the US and sold to foreign customers, the repeal of the Section 199 deduction, and the change to executive compensation deductions under Section 162(m).  

 

In addition, as a result of the Tax Reform change on US federal taxation on cash repatriation, the Company has changed its position on reinvestment of foreign earnings in several foreign jurisdictions. We recorded a $7.8 million tax provision related to the anticipated foreign withholding taxes and state taxes on future cash repatriation during the fourth quarter of 2018.  

 

The Company's income tax provision from continuing operations for the fiscal year ended June 30, 2018 was $40.6 million, or an effective rate of 52.6% compared to $15.4 million, or an effective rate of 24.8% for the year ended June 30, 2017, and $16.3 million, or an effective rate of 23.8% for the year ended June 30, 2016. Changes in the effective tax rates from period to period may be significant as they depend on many factors including, but not limited to, the amount of the Company's income or loss, the mix of income earned in the US versus outside the US, the effective tax rate in each of the countries in which we earn income, and any one-time tax issues which occur during the period.

 

Capital Expenditures

 

During 2018, capital expenditures increased to $26.5 million or 3.1% of net sales, as compared to $26.4 million, or 3.5%, of net sales in the prior year.  Capital spending is focused on growth initiatives, cost reduction, and upgrades to extend the capabilities of our capital assets.  In general, we anticipate our capital expenditures over the long term will be approximately 3% to 4% of net sales.  We expect 2019 capital spending to be approximately $36.0 million which includes $5.0 million allocated for a new Standex Electronics facility in Cincinnati, which replaces a legacy facility sold for $1.4 million in the third quarter of fiscal year 2018.

 

Backlog

 

Backlog includes all active or open orders for goods and services.  Backlog also includes any future deliveries based on executed customer contracts, so long as such deliveries are based on agreed upon delivery schedules.  Backlog is not generally a significant factor in the Company’s businesses because of our relatively short delivery periods and rapid inventory turnover with the exception of Engineering Technologies.  Backlog orders are not necessarily an indicator of future sales levels because of variations in lead times and customer production demand pull systems. Customers may delay delivery of products or cancel orders prior to shipment, subject to possible cancellation penalties.  Due to the nature of long term agreements in the Engineering Technologies group, the timing of orders and delivery dates can vary considerably resulting in significant backlog changes from one period to another.  In general, the majority of net realizable backlog beyond one year comes from the Engineering Technologies Group.  

 

Backlog orders in place at June 30, 2018 and 2017 are as follows (in thousands):  


22



 

 

As of June 30, 2018

 

 

As of June 30, 2017

 

 

Total Backlog

 

Backlog under 1 year

 

 

Total Backlog

 

Backlog under 1 year

Food Service Equipment

$

45,011

$

41,452

 

$

49,660

$

47,039

Engraving

 

19,279

 

19,269

 

 

21,584

 

21,584

Engineering Technologies

 

98,289

 

74,199

 

 

92,154

 

61,329

Electronics

 

69,059

 

64,180

 

 

60,092

 

56,741

Hydraulics

 

14,481

 

14,377

 

 

           6,846

 

6,846

         Total

$

246,119

$

213,477

 

$

230,336

$

193,539

 

Backlog realizable within one year increased $19.9 million, or 10.3% to $213.5 million at June 30, 2018 from $193.5 million at June 30, 2017. Backlog increases were realized at the Engineering Technologies group segment primarily as a result of increases in the space and aviation sectors.

 

Segment Analysis (in thousands)

 

Food Service Equipment

 

2018 compared to 2017

 

2017 compared to 2016

(in thousands except

 

 

 

 

%

 

 

 

 

 

%

percentages)

2018

 

2017

 

Change

 

2017

 

2016

 

Change

Net sales

$   396,866    

 

$   380,970

 

4.2%

 

$   380,970

 

$   381,867

 

(0.2%)

Income from operations

34,853         

 

       33,436

 

4.2%

 

       33,436

 

       40,142

 

(16.7%)

Operating income margin

8.8%

 

8.8%

 

 

 

8.8%

 

10.5%

 

 

 

 

Net sales for fiscal year 2018 increased $15.9 million, or 4.2% when compared to the prior year. Organic sales increased $4.8 million or 1.3%; the acquisitions contributed $9.5 million or 2.5% and foreign exchange added $1.6 million or 0.4%. Refrigeration Solutions sales increased by 9.4%, which included organic sales increases of 5.2% and acquisition growth of 4.2%. Refrigeration sales increased in the scientific and food service markets. The dealer, direct, and retail food service markets recovered from prior year declines. Sales in Cooking Solutions decreased by 8.8% year over year due to the timing of grocery and convenience store rollouts in the current year, continued product rationalization and the timing of new product introductions. Specialty Solutions sales increased 9.4% with solid volume from the beverage market and strong growth in merchandising. The Standard Products businesses increased sales by 1.6% during the year while our Differentiated Products businesses grew by 7.8%.  

 

Net sales for fiscal year 2017 decreased $0.9 million, or 0.2% when compared to the prior year.  The Horizon Scientific acquisition added $23.4 million or 6.1%, while organic sales declined by $24.2 million or 6.3%.  The organic sales decline was driven by a 7.4% decrease in Refrigeration Solutions and a 9.9% decrease in Cooking Solutions, partially offset by a 2.7% increase in Specialty Solutions.  Four factors contributed to the organic Refrigeration sales decline: (i) continued loss of market share into the dollar store market, (ii) delayed growth in the pharmacy sector due to merger delays, (iii) second half manufacturing issues which, in the short term, lengthened our delivery lead-times and (iv) the increasing importance of buying groups as a sales channel and their resultant lower margins.  Sales from the Cooking Solutions group decreased due to non-recurring rollouts in the supermarket channel, lower sales on rationalized low-margin products and lower sales to a few major dealers.  Specialty Solutions sales increased due to strong volume in our beverage segment and modest growth in merchandising.  

 

Income from operations for fiscal year 2018 increased $1.4 million, or by 4.2%, when compared to the prior year, and operating income margin was flat at 8.8%.  Margins were negatively impacted by higher commodity prices and the plant realignment in our Standard Products businesses. The realignment of the Refrigeration and Cooking Solutions plant operations was largely completed in 2018 and should show benefits in 2019. The Scientific and Specialty Solutions businesses had a positive impact on margins in fiscal year 2018.  Our focus in fiscal year 2019 is to continue to grow our Differentiated Products businesses and realize the savings from the operational improvements implemented this year in the Standard Products businesses.

 

Income from operations for fiscal year 2017 decreased $6.7 million, or 16.7%, when compared to the prior year, and operating income margin decreased from 10.5% to 8.8%.  Fiscal year results were primarily impacted by sales declines in the Refrigeration Solutions group due to the factors discussed above. 


23



Engraving

 

2018 compared to 2017

 

2017 compared to 2016

(in thousands except

 

 

 

 

%

 

 

 

 

 

%

percentages)

2018

 

2017

 

Change

 

2017

 

2016

 

Change

Net sales

$  136,275  

 

$  105,943

 

28.6%

 

$  105,943

 

$  124,120

 

(14.6%)

Income from operations

28,966       

 

     25,584

 

13.2%

 

     25,584

 

     29,579

 

(13.5%)

Operating income margin

21.3%

 

24.1%

 

 

 

24.1%

 

23.8%

 

 

 

 

Net sales for fiscal year 2018 increased by $30.3 million or 28.6%, compared to the prior year with an organic growth rate of 10.2%. The Piazza Rosa Group acquisition contributed $13.2 million or 12.5%. Sales in our Mold-Tech businesses grew due to launches of new automotive models in the current year. New technologies sales of Architexture, laser, nickel shell, finishing and treatment grew by $17.8 million or 139% during the year. We expect Engraving sales growth in all regions in fiscal year 2019 due to the increase in the number of new automotive launches and the expansion of our combined offerings to the tooling industry.

 

Net sales for fiscal year 2017 decreased by $18.2 million or 14.6%, compared to the prior year.  Excluding the impact of the end of prior year divesture of the Roll Plate and machinery business and foreign exchange, net sales grew $2.0 million or 1.6%.  Overall, Mold Tech increased its global market share for new automotive model introductions.  Asia Pacific and Europe sales grew $4.2 million in fiscal year 2017, partially offset by lower sales volume in North America, which was due to delayed new automotive launches.  

 

Income from operations in fiscal year 2018 increased by $3.4 million, or 13.2%, when compared to the prior year. While overall operating income improved due to our new product offerings, these offerings required up-front investments which negatively impacted operating income margins for the year. We expect operating income margin improvements as the investments produce expected returns. In fiscal 2018, we were also negatively impacted by lower margins in Brazil, Sweden, and Germany. We believe that we have made the necessary changes to improve profitability in those locations in fiscal 2019.

 

Income from operations in fiscal year 2017 decreased by $4.0 million, or 13.5%, when compared to the prior year.  Net of the Roll Plate and Machinery business, income from operations decreased by $2.8 million, or 9.8%.  The operating income decline was driven by decreased automotive volume in North America, the impact of a sales decline at the Innovent business unit, and increased investments in growth laneways and new technologies to fuel future opportunities.

 

 

Engineering Technologies

 

2018 compared to 2017

 

2017 compared to 2016

(in thousands except

 

 

 

 

%

 

 

 

 

 

%

percentages)

2018

 

2017

 

Change

 

2017

 

2016

 

Change

Net sales

$      90,781     

 

$      90,506

 

0.3%

 

$      90,506

 

$     82,235

 

10.1%

Income from operations

6,449

 

9,662

 

(33.3%)

 

9,662

 

       8,258

 

17.0%

Operating income margin

7.1%

 

10.7%

 

 

 

10.7%

 

10.0%

 

 

 

 

Net sales in the fiscal year 2018 increased $0.3 million or 0.3% when compared to the prior year. Sales distribution by market in 2018 was as follows: 50% aviation, 27% space, 11% oil and gas, 5% medical, and 7% other markets. Aviation sales grew 14.3% from the prior year due to sales on new aircraft and engine platforms, including the Airbus A320 NEO and Boeing 737 Max platforms. Space market sales decreased 7.9% from the prior year driven by lower sales in the satellite launch vehicle segment, partially offset by an increase in the manned space segment. Defense and oil and gas markets also declined in fiscal 2018. While we anticipate sales growth in fiscal 2019, we expect our first quarter sales will show a decline followed by increases in the remainder of the fiscal year.

 

Net sales in the fiscal year 2017 increased $8.3 million or 10.1% when compared to the prior year. Sales distribution by market in 2017 was as follows: 43% aviation, 29% space, 14% oil and gas, 5% medical, and 9% other markets. Although energy sales rebounded from historical lows, we continued our conversion of this business to an aviation focused business.  Aviation sales increased 2.8% from the prior year, despite delays experienced by key customers on new engine platforms. Space market sales increased 15.8% from the prior year driven by higher sales in both the satellite launch and vehicle markets.  Defense related sales improved 11.6% from the prior year.  Sales in the energy markets were up $4.6 million primarily due to contract awards


24



in the land based energy market.  We expect continued strong growth in the aviation market from the various platforms with nacelle lipskin & inlet duct products, along with aircraft engine components with the various OEM’s and Tier One customers.

 

Income from operations in fiscal 2018 decreased $3.2 million or 33.3% when compared to the prior year. The decrease in operating income was due to delays in major aircraft programs, decreased spending on development programs in the space and aviation markets, and pricing pressure on legacy aircraft parts. Looking forward, we do anticipate improved margins as the aviation programs ramp to full volume in calendar year 2020.

 

Income from operations in fiscal 2017 increased $1.4 million or 17.0% when compared to the prior year. The increase in operating income was due to higher sales volume and a favorable product mix in the Energy and Space segments compared to the prior year period.

 

 

Electronics

 

2018 compared to 2017

 

2017 compared to 2016

(in thousands except

 

 

 

 

%

 

 

 

 

 

%

percentages)

2018

 

2017

 

Change

 

2017

 

2016

 

Change

Net sales

$    196,291        

 

$  136,689

 

43.6%

 

$    136,689

 

$   118,319

 

15.5%

Income from operations

45,310        

 

27,663

 

63.8%

 

27,663

 

       21,104

 

31.1%

Operating income margin

23.1%

 

20.2%

 

 

 

20.2%

 

17.8%

 

 

 

Net sales in the fiscal year 2018 increased $59.6 million, or 43.6%, when compared to the prior year.  Organic sales growth was $16.6 million, or 12.1%. The sales impact of the Standex Electronics Japan (“SEJ”) reed switch operation, acquired March 31, 2017, as compared to the prior year was $37.1 million. Foreign exchange rates favorably affected sales by $5.9 million.  Organic sales growth was strong in all major geographic areas and all major product lines with particular strength in sensors and reed switches. Looking forward to our first quarter fiscal 2019, demand remains strong across all regions.

 

Net sales in the fiscal year 2017 increased $18.4 million, or 15.5%, when compared to the prior year.  Organic sales growth was $5.2 million, or 4.3%. The full year effect of the prior year Northlake acquisition added $2.7 million in sales. The March 31, 2017 acquisition of SEJ added $12.4 million. Foreign exchange rates adversely affected sales by $1.9 million.  Organic sales growth was particularly strong in Europe driven by volume increases in expanding sensor applications.  We also experienced modest growth in North America and Asia.   

 

Income from operations in the fiscal year 2018 increased $17.7 million, or 63.8%, when compared to the prior year.  The operating improvements were a result of the acquisition of SEJ reed switch business, along with operating efficiencies, product mix and higher organic sales growth in our base business, and the absence of $2.3 million of purchase accounting expenses from the prior year.

 

Income from operations in the fiscal year 2017 increased $6.6 million, or 31.1%, when compared to the same period in 2016.  The operating improvements were a result of operating efficiencies and product mix as well as higher organic sales growth. The prior year acquisition of SEJ reed switch business and prior year acquisition of Northlake Engineering also impacted the EBIT improvement. The purchase accounting related to the SEJ reed switch business totaled $2.0 million.

 

Hydraulics

 

2018 compared to 2017

 

2017 compared to 2016

(in thousands except

 

 

 

 

%

 

 

 

 

 

%

percentages)

2018

 

2017

 

Change

 

2017

 

2016

 

Change

Net sales

$   48,169   

 

$   41,150

 

17.1%

 

$   41,150

 

$   45,045

 

(8.6%)

Income from operations

7,316      

 

6,712       

 

9.0%

 

6,712       

 

     7,947

 

(15.5%)

Operating income margin

15.2%

 

16.3%

 

 

 

16.3%

 

17.6%

 

 

 

Net sales in fiscal year 2018 increased by $7.0 million, or 17.1% compared to the prior year. Sales distribution by channel in 2018 was as follows: 37% dump trailer and truck, 26% refuse, 25% after-market, 5% export, and 7% other markets. The majority of the increase in sales was from strong demand in the refuse and dump markets. Additionally, several new OEM cylinder applications on front-end loading garbage trucks and container handlers were secured during the year. We anticipate sales increases in the first half of fiscal year 2019 as the construction, housing and infrastructure markets remain robust. We also anticipate additional sales increases due to price increases we are implementing to partially offset the impact of newly imposed tariffs on product we import from our Chinese operations.


25



Net sales in fiscal year 2017 decreased $3.9 million, or 8.6% compared to the prior year. Sales distribution by channel in 2017 was as follows: 37% dump trailer and truck, 22% refuse, 24% after-market, 6% export, and 11% other markets. The decrease in sales primarily resulted from a significant reduction in demand from the traditional North American dump trailer and truck markets.

 

Income from operations in fiscal year 2018 increased $0.6 million when compared to the prior year. Margins were impacted in fiscal 2018 by material cost increases. However, we implemented price increases in the latter half of the fiscal year to mitigate some of these material price increases. Looking forward, some of our products are impacted by recently enacted and currently proposed tariffs on products manufactured by us in China. These tariffs will have a negative impact on margins in fiscal 2019, if fully implemented.

 

Income from operations in the fiscal year 2017 decreased $1.2 million or 15.5% when compared to the prior year due mostly to the reduction of volume requirements for cylinders in the North American dump trailer and truck markets.

 

Corporate, Restructuring and Other

 

2018 compared to 2017

 

2017 compared to 2016

(in thousands except

 

 

 

 

%

 

 

 

 

 

%

percentages)

2018

 

2017

 

Change

 

2017

 

2016

 

Change

 

Corporate

$ (27,512)

 

$ (25,015)

 

10.0%

 

$ (25,015)

 

$ (24,996)

 

0.1%

 

Restructuring

(7,594)         

 

      (5,825)

 

30.4%

 

      (5,825)

 

    (4,232)

 

37.6%

 

Other Operating Expenses

(3,749)

 

    (7,843)

 

(52.2%)

 

(7,843)

 

(7,458)

 

       5.2%

 

Corporate expenses increased by 10.0% in fiscal 2018 due to increases in administrative compensation costs as a result of improved performance along with additional investments to support the Standex Value Creation System.

 

During fiscal year 2017, Corporate expenses were flat when compared to the prior year.  

 

The restructuring and acquisition-related costs have been discussed above in the Company Overview.

 

Discontinued Operations

 

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

 

Liquidity and Capital Resources

 

At June 30, 2018, our total cash balance was $109.6 million, of which $101.8 million was held outside of the United States.  Beginning in 2019, we expect to repatriate approximately $50 million of our cash held outside of the United States.  During the fourth quarter of 2018, we recorded a $7.8 million tax provision related to the anticipated foreign withholding taxes and state taxes on future cash repatriation.  The amount and timing of cash repatriation during 2019 will be dependent upon each business unit’s operational needs including requirements to fund working capital, capital expenditure, and jurisdictional tax payments.  

 

Cash Flow

 

Net cash provided by continuing operating activities for the year ended June 30, 2018 was $65.0 million compared to net cash provided by continuing operating activities of $64.0 million in the prior year. We generated $76.2 million from income statement activities and used $19.6 million of cash to fund working capital increases.  Cash flow used in investing activities for the year ended June 30, 2018 totaled $32.3 million.  Uses of investing cash consisted primarily of capital expenditures of $26.5 million and $10.4 million for Piazza Rosa and other acquisition activities.  These uses of investing cash were partially offset by $2.1 million from proceeds of life insurance and $2.9 million from the net proceeds of the sale of a building in Cincinnati, Ohio.  We leased back the Cincinnati, Ohio building and, as a result of the transaction, recorded a $0.7 million deferred gain that will be amortized over the initial operating lease term which expires in May 2019.  Cash used by financing activities for the year ended June 30, 2018 were $11.9 million and included net borrowings of $1.3 million, cash paid for dividends of $8.9 million and stock repurchases of $2.7 million.  

 

Net cash provided by operating activities from continuing operations for the year ended June 30, 2017 was $64.0 million, compared to $81.2 million for the same period in 2016.  The decrease was primarily due to increases in accounts receivable and inventory as well as a decrease in net income from continuing operations of $5.7 million.  Net cash used for investing activities from continuing operations for the year ended June 30, 2017 was $179.1 million, consisting primarily of $26.4


26



million for capital expenditure and $153.8 million to acquire the Horizon Scientific and Standex Electronics Japan businesses.  Net cash used by financing activities for continuing operations for the year ended June 30, 2017 was $84.7 million, consisting of debt borrowings of $99.5 million, cash dividends of $7.9 million, and repurchased treasury stock of $7.8 million.

 

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

 

The fair value of the Company's U.S. defined benefit pension plan assets was $191.0 million at June 30, 2018, as compared to $195.3 million as of June 30, 2017.  During the fourth quarter of 2018, we made a $5.5 million voluntary contribution to the defined benefit plan in the U.S. to accelerate tax benefits afforded to the Company by recent tax law changes.

 

We participate in two multi-employer pension plans and sponsor five defined benefit plans including two in the U.S. and one in the U.K., Germany, and Ireland.  The Company’s pension plan is frozen for U.S. employees and participants in the plan ceased accruing future benefits.  Our primary U.S. defined benefit plan is not expected to be 100% funded under ERISA rules at June 30, 2018, but, as a result of past contributions, we do not expect to make mandatory contributions to the plan until 2020.  We expect to pay $1.4 million in prescribed contributions to our U.K. funded defined benefit plan and other unfunded defined benefit plans in the U.S. and Europe during fiscal year 2019.

 

We have evaluated the current and long-term cash requirements of our defined benefit and defined contribution plans as of June 30, 2018 and determined our operating cash flows from continuing operations and available liquidity are expected to be sufficient to cover the required contributions under ERISA and other governing regulations.  

 

We have an insurance program in place to fund supplemental retirement income benefits for five retired executives.  Current executives and new hires are not eligible for this program.  At June 30, 2018, the underlying policies had a cash surrender value of $17.3 million and are reported net of loans of $8.6 million for which we have the legal right of offset. These amounts are reported net on our balance sheet.

 

Capital Structure

 

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

 

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

 

Funds borrowed under the facility may be used for the repayment of debt, working capital, capital expenditures, acquisitions (so long as certain conditions, including a specified funded debt to EBITDA leverage ratio is maintained), and other general corporate purposes.  The facility contains customary representations, warranties and restrictive covenants, as well as specific financial covenants.  A significant drop in our adjusted earnings (as defined in our Credit Facility) would limit the amount of indebtedness that could be outstanding at the end of any fiscal quarter which could hinder our ability to make acquisitions or otherwise limit our long-term growth prospects.  Failure to comply with this covenant could result in an acceleration of the debt maturity.  As of June 30, 2018, the Company has used $7.9 million against the letter of credit sub-facility and had the ability to borrow $198.1 million under the facility based on our current trailing twelve-month EBITDA as defined in the Credit Agreement.  The Company’s current financial covenants under the facility are as follows:

 

Interest Coverage Ratio - The Company is required to maintain a ratio of Earnings Before Interest and Taxes, as Adjusted (“Adjusted EBIT per the Credit Facility”), to interest expense for the trailing twelve months of at least 3.0:1.  Adjusted EBIT per the Credit Facility specifically excludes extraordinary and certain other defined items such as cash restructuring and acquisition-related charges up to $7.5 million, and unlimited non-cash charges including purchase accounting and goodwill adjustments.  At June 30, 2018, the Company’s Interest Coverage Ratio was 11.32:1.

 

Leverage Ratio - The Company’s ratio of funded debt to trailing twelve month Adjusted EBITDA per the facility, calculated as Adjusted EBIT per the Credit Facility plus depreciation and amortization, may not exceed 3.5:1.  At June 30, 2018, the Company’s Leverage Ratio was 1.68:1.


27



As of June 30, 2018, we had borrowings under our facility of $193.8 million. In order to manage our interest rate exposure on these borrowings, we are party to $75.0 million of active floating to fixed rate swaps.  These swaps convert our interest payments from LIBOR to a weighted average rate of 1.74%.  The effective rate of interest for our outstanding borrowings, including the impact of the interest rate swaps, was 3.29%.  Our primary cash requirements in addition to day-to-day operating needs include interest payments, capital expenditures, acquisitions, share repurchases, and dividends.  Our primary sources of cash for these requirements are cash flows from continuing operations and borrowings under the facility.  We expect that fiscal year 2019 depreciation and amortization expense will be between $22.0 and $23.0 million and $9.0 and $10.0 million, respectively.

 

The following table sets forth our capitalization at June 30:

 

 

 

2018

 

 

2017

Long-term debt

$

                 193,772

 

$

191,976

Less cash and cash equivalents

 

109,602

 

 

88,566

       Net debt

 

84,170

 

 

103,410

Stockholders' equity

 

                 450,795

 

 

408,664

       Total capitalization

$

534,965

 

$

        512,074

 

 

Stockholders’ equity increased year over year by $42.1 million, primarily as a result of current year net income of $36.6 million and a favorable change of $8.7 million in unrealized pension losses, partially offset by $9.0 million for dividends declared.  The Company's net debt to capital percentage changed to 15.7% for the year ended June 30, 2018 from 20.2% net debt to capital for the year ended June 30, 2017.  The change in net debt to capital is primarily driven by cash generated through operations.  

 

Contractual obligations of the Company as of June 30, 2018 are as follows (in thousands):

 

 

 

Payments Due by Period

 

 

 

 

 

Less

 

 

 

 

 

 

 

 

More

 

 

 

 

 

than 1

 

 

1-3

 

 

3-5

 

 

than 5

Contractual Obligations

 

Total

 

 

Year

 

 

Years

 

 

Years

 

 

Years

Long-term debt obligations

$

194,000

 

$

-

 

$

194,000

 

$

-

 

$

-

Operating lease obligations

 

57,122

 

 

10,202

 

 

16,626

 

 

14,299

 

 

15,995

Estimated interest payments (1)

 

9,565

 

 

6,377

 

 

3,188

 

 

-

 

 

-

Post-retirement benefit payments (2)

33,920

 

 

1,324

 

 

12,967

 

 

16,732

 

 

2,897

    Total

$

294,607

 

$

17,903

 

$

226,781

 

$

31,031

 

$

18,892

 

(1)Estimated interest payments are based upon effective interest rates as of June 30, 2018, and exclude only those interest rate swaps which are assets to us.  See Item 7A for further discussions surrounding interest rate exposure on our variable rate borrowings.   

(2) Post-retirement benefits and pension plan contribution payments represents’ future pension payments to comply with local funding requirements.  Our policy is to fund domestic pension liabilities in accordance with the minimum and maximum limits imposed by the Employee Retirement Income Security Act of 1974 (“ERISA”), federal income tax laws and the funding requirements of the Pension Protection Act of 2006. 

 

At June 30, 2018, we had $2.6 million of non-current liabilities for uncertain tax positions.  We are not able to provide a reasonable estimate of the timing of future payments related to these obligations.

 

Off Balance Sheet Items

 

At June 30, 2018, and 2017, the Company had standby letters of credit outstanding, primarily for insurance and trade financing purposes, of $7.9 million and $8.9 million, respectively.

 

We had no other material off balance sheet items at June 30, 2018, other than the operating leases summarized above in the “Contractual obligations” table.


28



Other Matters

 

Inflation – Certain of our expenses, such as wages and benefits, occupancy costs and equipment repair and replacement, are subject to normal inflationary pressures.  Inflation for medical costs can impact both our reserves for self-insured medical plans as well as our reserves for workers' compensation claims.  We monitor the inflationary rate and make adjustments to reserves whenever it is deemed necessary.  Our ability to manage medical costs inflation is dependent upon our ability to manage claims and purchase insurance coverage to limit the maximum exposure for us.  Each of our segments is subject to the effects of changing raw material costs caused by the underlying commodity price movements.  In general, we do not enter into purchase contracts that extend beyond one operating cycle.  While Standex considers our relationship with our suppliers to be good, there can be no assurances that we will not experience any supply shortage.

 

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

 

Defined Benefit Pension Plans – We record expenses related to these plans based upon various actuarial assumptions such as discount rates and assumed rates of returns.  The Company’s pension plan was frozen for substantially all remaining eligible U.S. employees in 2015 and participants in the plan ceased accruing future benefits.

 

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

 

Seasonality – We are a diversified business with generally low levels of seasonality, however our fiscal third quarter is typically the period with the lowest level of activity.

 

Employee Relations – The Company has labor agreements with several union locals in the United States and several European employees belong to European trade unions.  

 

Critical Accounting Policies

 

The Consolidated Financial Statements include accounts of the Company and all of our subsidiaries.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Consolidated Financial Statements.  Although, we believe that materially different amounts would not be reported due to the accounting policies described below, the application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.  We have listed a number of accounting policies which we believe to be the most critical.  

 

The Company’s product sales are recorded when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable, and collectability is reasonably assured. For products that include installation, and if the installation meets the criteria to be considered a separate element, product revenue is recognized upon delivery, and installation revenue is recognized when the installation is complete.  Revenues under certain fixed price contracts are generally recorded when deliveries are made.

 

Sales and estimated profits under certain long-term contracts are recognized under the percentage-of-completion methods of accounting, whereby profits are recorded pro rata, based upon current estimates of costs to complete such contracts.  Losses on contracts are provided for in the period in which the losses become determinable.  Revisions in profit estimates are reflected on a cumulative basis in the period in which the basis for such revision becomes known. Any excess of the billings over cost and estimated earnings on long-term contracts is included in deferred revenue.

 

Collectability of Accounts Receivable – Accounts Receivable are reduced by an allowance for amounts that may become uncollectible in the future.  Our estimate for the allowance for doubtful accounts related to trade receivables includes evaluation of specific accounts where we have information that the customer may have an inability to meet its financial obligation together with a general provision for unknown but existing doubtful accounts.  

 

Realizability of Inventories – Inventories are valued at the lower of cost or market.  The Company regularly reviews inventory values on hand using specific aging categories, and records a provision for obsolete and excess inventory based on historical usage and estimated future usage.  As actual future demand or market conditions may vary from those projected by management, adjustments to inventory valuations may be required.


29



Realization of Goodwill – Goodwill and certain indefinite-lived intangible assets are not amortized, but instead are tested for impairment at least annually and more frequently whenever events or changes in circumstances indicate that the fair value of the asset may be less than its carrying amount of the asset. The Company’s annual test for impairment is performed using a May 31st measurement date.

 

We have identified our reporting units for impairment testing as our twelve operating segments, which are aggregated into our five reporting segments as disclosed in Note 17 – Industry Segment Information.  

 

The test for impairment is a two-step process. The first step compares the carrying amount of the reporting unit to its estimated fair value (Step 1). To the extent that the carrying value of the reporting unit exceeds its estimated fair value, a second step is performed, wherein the reporting unit’s carrying value is compared to the implied fair value (Step 2). To the extent that the carrying value exceeds the implied fair value, impairment exists and must be recognized.

 

As quoted market prices are not available for the Company’s reporting units, the fair value of the reporting units is determined using a discounted cash flow model (income approach).  This method uses various assumptions that are specific to each individual reporting unit in order to determine the fair value. In addition, the Company compares the estimated aggregate fair value of its reporting units to its overall market capitalization.

 

Our annual impairment testing at each reporting unit relied on assumptions surrounding general market conditions, short-term growth rates, a terminal growth rate of 2.5%, and detailed management forecasts of future cash flows prepared by the relevant reporting unit.  Fair values were determined primarily by discounting estimated future cash flows at a weighted average cost of capital of 10.04%.  During our annual impairment testing, we evaluated the sensitivity of our most critical assumption, the discount rate, and determined that a 200 basis point change in the discount rate selected would not have impacted the test results.  Additionally, the Company could reduce the terminal growth rate from its current 2.5% to 1.0% and the fair value of all reporting units would still exceed their carrying value.

 

While we believe that our estimates of future cash flows are reasonable, changes in assumptions could significantly affect our valuations and result in impairments in the future.  The most significant assumption involved in the Company’s determination of fair value is the cash flow projections of each reporting unit.  

 

As a result of our annual assessment, the Company determined that the fair value of the reporting units substantially exceeded their respective carrying values. Therefore, no impairment charges were recorded in connection with our annual assessment during 2018. 

 

Cost of Employee Benefit Plans – We provide a range of benefits to certain retirees, including pensions and some postretirement benefits.  We record expenses relating to these plans based upon various actuarial assumptions such as discount rates, assumed rates of return, compensation increases and turnover rates.  The expected return on plan assets assumption of 7.0% in the U.S. is based on our expectation of the long-term average rate of return on assets in the pension funds and is reflective of the current and projected asset mix of the funds and considers the historical returns earned on the funds.  We have analyzed the rates of return on assets used and determined that these rates are reasonable based on the plans’ historical performance relative to the overall markets as well as our current expectations for long-term rates of returns for our pension assets.  The U.S. discount rate of 4.4% reflects the current rate at which pension liabilities could be effectively settled at the end of the year.  The discount rate is determined by matching our expected benefit payments from a stream of AA- or higher bonds available in the marketplace, adjusted to eliminate the effects of call provisions.  We review our actuarial assumptions, including discount rate and expected long-term rate of return on plan assets, on at least an annual basis and make modifications to the assumptions based on current rates and trends when appropriate.  Based on information provided by our actuaries and other relevant sources, we believe that our assumptions are reasonable.

 

The cost of employee benefit plans includes the selection of assumptions noted above.  A twenty-five basis point change in the expected return on plan assets assumptions, holding our discount rate and other assumptions constant, would increase or decrease pension expense by approximately $0.5 million per year.  A twenty-five basis point change in our discount rate, holding all other assumptions constant, would have no impact on 2018 pension expense as changes to amortization of net losses would be offset by changes to interest cost.  In future years, the impact of discount rate changes could yield different sensitivities. See the Notes to the Consolidated Financial Statements for further information regarding pension plans.

 

Business Combinations - The accounting for business combinations requires estimates and judgments as to expectations for future cash flows of the acquired business and the allocation of those cash flows to identifiable intangible assets in determining the estimated fair values for assets acquired and liabilities assumed. The fair values assigned to tangible and intangible assets acquired and liabilities assumed, are based on management’s estimates and assumptions, as well as other information compiled


30



by management, including valuations that utilize customary valuation procedures and techniques. If the actual results differ from the estimates and judgments used in these fair values, the amounts recorded in the consolidated financial statements could result in a possible impairment of the intangible assets and goodwill, or require acceleration of the amortization expense of finite-lived intangible assets.

 

Allocations of the purchase price for acquisitions are based on estimates of the fair value of the net assets acquired and are subject to adjustment upon finalization of the purchase price allocation. During this measurement period, the Company will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date.  All changes that do not qualify as measurement period adjustments are included in current period earnings.

 

Recently Issued Accounting Pronouncements

 

See "Item 8. Financial Statements and Supplementary Data, Note 1. Summary of Accounting Policies” for information regarding the effect of recently issued accounting pronouncements on our consolidated statements of operations, comprehensive income, stockholders’ equity, cash flows, and notes for the year ended June 30, 2018.

 

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

 

Risk Management

 

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

 

Exchange Risk

 

We are exposed to both transactional risk and translation risk associated with exchange rates.  The transactional risk is mitigated, in large part, by natural hedges developed with locally denominated debt service on intercompany accounts.  We also mitigate certain of our foreign currency exchange rate risks by entering into forward foreign currency contracts from time to time.  The contracts are used as a hedge against anticipated foreign cash flows, such as loan payments, customer remittances, and materials purchases, and are not used for trading or speculative purposes.  The fair values of the forward foreign currency exchange contracts are sensitive to changes in foreign currency exchange rates, as an adverse change in foreign currency exchange rates from market rates would decrease the fair value of the contracts.  However, any such losses or gains would generally be offset by corresponding gains and losses, respectively, on the related hedged asset or liability.  At June 30, 2018 and 2017, the fair value, in the aggregate, of the Company’s open foreign exchange contracts was a liability of $2.8 million at the end of both periods.  

 

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

 

Interest Rate

 

The Company’s effective rate on variable-rate borrowings under the revolving credit agreement is 3.29% and 2.41% at June 30, 2018 and 2017, respectively.  Our interest rate exposure is limited primarily to interest rate changes on our variable rate borrowings. From time to time, we will use interest rate swap agreements to modify our exposure to interest rate movements.  At June 30, 2018, we have $75.0 million of active floating to fixed rate swaps with terms ranging from one to four years.  These swaps convert our interest payments from LIBOR to a weighted average rate of 1.74%.  At June 30, 2018 and 2017, the fair value, in the aggregate, of the Company’s interest rate swaps was an asset of $1.3 million and a liability of $0.2 million respectively. A 25 basis point increase in interest rates would increase our annual interest expense by $0.3 million.  


31



Concentration of Credit Risk

 

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

 

 

Commodity Prices

 

The Company is exposed to fluctuating market prices for all commodities used in its manufacturing processes.  Each of our segments is subject to the effects of changing raw material costs caused by the underlying commodity price movements.  In general, we do not enter into purchase contracts that extend beyond one operating cycle.  While Standex considers our relationship with our suppliers to be good, there can be no assurances that we will not experience any supply shortage.

 

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


32



Item 8.  Financial Statements and Supplementary Data

 

Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

 

Standex International Corporation and Subsidiaries

 

 

 

As of June 30 (in thousands, except share data)

2018

 

 

2017

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 Cash and cash equivalents

 

$

109,602

 

$

88,566

 Accounts receivable, net

 

 

134,228

 

 

                127,060

 Inventories

 

 

127,223

 

 

                119,401

 Prepaid expenses and other current assets

 

 

10,558

 

 

                    8,397

 Income taxes receivable

 

 

2,348

 

 

                    2,469

 Deferred tax asset

 

 

-

 

 

                  14,991

   Total current assets

 

 

383,959

 

 

                360,884

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

144,570

 

 

                133,160

Intangible assets, net

 

 

98,075

 

 

102,503

Goodwill

 

 

251,762

 

 

                242,690

Deferred tax asset

 

 

7,447

 

 

                  1,135

Other non-current assets

 

 

31,124

 

 

                  27,304

   Total non-current assets

 

 

                532,978

 

 

506,792

 

 

 

 

 

 

 

Total assets

 

$

916,937

 

$

        867,676

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

Current liabilities:

 

 

 

 

 

 

 Accounts payable

 

$

89,707

 

$

                  96,487

 Accrued liabilities

 

 

65,575

 

 

58,694

 Income taxes payable

 

 

6,059

 

 

                    4,783

   Total current liabilities

 

 

161,341

 

 

                159,964

 

 

 

 

 

 

 

Long-term debt

 

 

193,772

 

 

                  191,976

Deferred income taxes

 

 

26,816

 

 

                    24,986

Pension obligations

 

 

57,826

 

 

                  70,745

Other non-current liabilities

 

 

26,387

 

 

                  11,341

   Total non-current liabilities

 

 

304,801

 

 

                299,048

 

 

 

 

 

 

 

Commitments and Contingencies (Notes 11 and 12)

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 Common stock, par value $1.50 per share -

 

 

 

 

    60,000,000 shares authorized, 27,984,278

 

 

 

 

    issued, 12,705,562 and 12,662,661 shares

 

 

 

 

    outstanding in 2018 and 2017

 

 

41,976

 

 

                  41,976

 Additional paid-in capital

 

 

61,328

 

 

                  56,783

 Retained earnings

 

 

761,430

 

 

716,605

 Accumulated other comprehensive loss

 

 

(121,859)

 

 

         (115,938)

 Treasury shares (15,278,716 shares in 2018

 

 

 

 

 

 

    and 15,321,617 shares in 2017)

 

 

(292,080)

 

 

          (290,762)

 Total stockholders' equity

 

 

450,795

 

 

           408,664

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

$

916,937

 

$

                867,676

 

 

 

 

See notes to consolidated financial statements.

 

 

 


33



Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Standex International Corporation and Subsidiaries

 

 

 

 

 

 

 

 

 

For the Years Ended June 30

(in thousands, except per share data)

 

2018

 

 

2017

 

 

2016

Net sales

 

$

868,382

 

$

    755,258

 

$

    751,586

Cost of sales

 

 

(566,581)

 

 

 (502,504)

 

 

    (499,333)

Gross profit

 

 

301,801

 

 

    252,754

 

 

    252,253

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

206,419

 

 

174,060

 

 

  170,219

Restructuring costs

 

 

7,594

 

 

       5,825

 

 

        4,232

Acquisition related expenses

 

 

3,749

 

 

7,843

 

 

-

Other operating (income) expense, net

 

 

-

 

 

        -

 

 

        7,458

Income from operations

 

 

84,039

 

 

      65,026

 

 

      70,344

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

8,030

 

 

     4,043

 

 

     2,871

Other non-operating (income) expense, net

 

 

(1,243)

 

 

    (949)

 

 

    (1,052)

Total

 

 

6,787

 

 

     3,094

 

 

      1,819

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

 

77,252

 

 

     61,932

 

 

     68,525

Provision for income taxes

 

 

(40,620)

 

 

      (15,355)

 

 

      (16,295)

Income from continuing operations

 

 

36,632

 

 

    46,577

 

 

     52,230

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net of tax

 

 

(28)

 

 

        (32)

 

 

        (174)

 

 

 

 

 

 

 

 

 

 

Net income

 

$

36,604

 

$

    46,545

 

$

     52,056

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

2.88

 

$

        3.68

 

$

        4.12

Income (loss) from discontinued operations

 

 

-

 

 

      -

 

 

      (0.01)

Total

 

$

2.88

 

$

        3.68

 

$

         4.11

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

2.86

 

$

        3.65

 

$

         4.09

Income (loss) from discontinued operations

 

 

-

 

 

      -

 

 

       (0.01)

Total

 

$

2.86

 

$

        3.65

 

$

         4.08

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 


34



Consolidated Statements of Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Standex International Corporation and Subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Years Ended June 30, (in thousands)

 

2018

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

Net income (loss)

$

36,604

 

$

     46,545

 

$

52,056

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

  Defined benefit pension plans:

 

 

 

 

 

 

 

 

     Actuarial gains (losses) and other changes in unrecognized costs

$

6,159

 

$

3,689

 

$

(26,619)

     Amortization of unrecognized costs

 

5,485

 

 

5,729

 

 

 4,779

  Derivative instruments:

 

 

 

 

 

 

 

 

     Change in unrealized gains and (losses)

 

2,541

 

 

    (2,896)

 

 

(1,010)

     Amortization of unrealized gains and (losses) into interest expense

 

292

 

 

(462)

 

 

567

     Amortization of unrealized gains and (losses) into cost of goods sold

 

-

 

 

75

 

 

112

  Foreign currency translation gains (losses)

 

93

 

 

(472)

 

 

 (11,303)

Other comprehensive income (loss) before tax

$

14,570

 

$

5,663

 

$

(33,474)

 

 

 

 

 

 

 

 

 

Income tax (provision) benefit:

 

 

 

 

 

 

 

 

  Defined benefit pension plans:

 

 

 

 

 

 

 

 

     Actuarial gains (losses) and other changes in unrecognized costs

$

(1,436)

 

$

   (1,354)

 

$

10,075

     Amortization of unrecognized costs

 

(1,460)

 

 

  (2,012)

 

 

(1,685)

  Derivative instruments:

 

 

 

 

 

 

 

 

     Change in unrealized gains and (losses)

 

(339)

 

 

(80)

 

 

    384

     Amortization of unrealized gains and (losses) into interest expense

 

(43)

 

 

      (152)

 

 

   (216)

     Amortization of unrealized gains and (losses) into cost of goods sold

 

-

 

 

(28)

 

 

(42)

Income tax (provision) benefit to other comprehensive income (loss)

$

(3,278)

 

$

(3,626)

 

$

 8,516

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

11,292

 

 

2,037

 

 

  (24,958)

Comprehensive income (loss)

$

   47,896

 

$

48,582

 

$

27,098

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

 

 

 

 

 


35



 

Consolidated Statements of Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Standex International Corporation and Subsidiaries

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

Treasury Stock

 

For the Years Ended June 30

(in thousands, except as specified)

 

Common Stock

 

Additional

Paid-in Capital

 

 

Retained

Earnings

 

Comprehensive

Income (Loss)

 

 

Shares

 

 

 

Amount

Total

Stockholders’

Equity

Balance, June 30, 2015

$

   41,976

$

     47,254

$

  632,864

$

        (93,017)

15,333

$

(280,507)

$

  348,570

Stock issued for employee stock option and purchase plans, including related income tax benefit and other

 

 

 

 

 

 

31

 

 

 

 

 

 

 

(94)

 

 

 

 

1,725

 

 

 

 

1,756

Stock-based compensation

 

 

 

       5,089

 

 

 

 

 

 

 

 

5,089       

Treasury stock acquired

 

 

 

 

 

 

 

 

71

 

(5,636)

 

  (5,636)

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

52,056    

 

 

 

 

 

 

     52,056

Foreign currency translation adjustment

 

 

 

 

 

 

 

        

 (11,303)

 

 

 

 

 

  (11,303)

Pension and OPEB adjustments, net of tax of $8.4 million

 

 

 

 

 

 

 

           (13,450)

 

 

 

 

 

(13,450)

Change in fair value of derivatives, net of tax of $0.2 million

 

 

 

 

 

 

 

                 

 

 (205)

 

 

 

 

                   

 

(205)

Dividends declared ($0.54 per share)

 

 

 

 

 

 

  (6,918)

 

 

 

 

 

 

  

(6,918)

Balance, June 30, 2016

$

   41,976

$

     52,374

$

  678,002

$

      (117,975)

15,310

$

(284,418)

$

 369,959

Stock issued for employee stock option and purchase plans, including related income tax benefit and other

 

 

 

 

 

 

(614)

 

 

 

 

 

 

 

(78)

 

 

 

 

1,462

 

 

 

 

848

Stock-based compensation

 

 

 

       5,023

 

 

 

 

 

 

 

 

       5,023

Treasury stock acquired

 

 

 

 

 

 

 

 

90

 

(7,806)

 

  (7,806)

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

    46,545

 

 

 

 

 

 

     46,545

Foreign currency translation adjustment

 

 

 

 

 

 

 

        

 (472)

 

 

 

 

 

  (472)

Pension and OPEB adjustments, net of tax of $3.4 million

 

 

 

 

 

 

 

 

       6,052

 

 

 

 

 

6,052

Change in fair value of derivatives, net of tax of $0.3 million

 

 

 

 

 

 

 

                 

 

 (3,543)

 

 

 

 

                   

 

(3,543)

Dividends declared ($0.62 per share)

 

 

 

 

 

 

(7,942)

 

 

 

 

 

 

 

(7,942)

Balance, June 30, 2017

$

   41,976

$

     56,783

$

  716,605

$

      (115,938)

15,322

$

(290,762)

$

 408,664

Stock issued for employee stock option and purchase plans and other

 

 

 

(417)

 

 

 

 

(70)

 

1,334

 

917

Stock-based compensation

 

 

 

4,962

 

 

 

 

 

 

 

 

4,962

Treasury stock acquired

 

 

 

 

 

 

 

 

27

 

(2,652)

 

  (2,652)

Adoption of ASU 2018-02

 

 

 

 

 

17,215

 

(17,215)

 

 

 

 

-

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

    36,604

 

 

 

 

 

 

36,604

Foreign currency translation adjustment

 

 

 

 

 

 

 

        

 94

 

 

 

 

 

  94

Pension and OPEB adjustments, net of tax of $2.9 million

 

 

 

 

 

 

 

 

8,748

 

 

 

 

 

8,748

Change in fair value of derivatives, net of tax of $0.4 million

 

 

 

 

 

 

 

                 

 

 2,452

 

 

 

 

 

 

2,452

Dividends declared ($0.70 per share)

 

 

 

 

 

 

(8,994)

 

 

 

 

 

 

 

(8,994)

Balance, June 30, 2018

$

   41,976

$

61,328

$

  761,430

$

      (121,859)

15,279

$

(292,080)

$

450,795

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

 

 

 

 


36



Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Standex International Corporation and Subsidiaries

 

 

 

 

 

 

 

 

 

 

For the Years Ended June 30 (in thousands)

 

 

2018

 

 

2017

 

 

2016

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

 

 

Net income

 

$

36,604

 

$

       46,545

 

$

   52,056

 

Income (loss) from discontinued operations

 

 

(             (28)

 

 

             (32)

 

 

     (174)

 

Income (loss) from continuing operations

 

 

36,632

 

 

       46,577

 

 

   52,230

 

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

 

Depreciation and amortization

 

 

29,163

 

 

       20,315

 

 

17,953

 

Stock-based compensation

 

 

4,962

 

 

         5,023

 

 

   5,089

 

Deferred income taxes

 

 

7,391

 

 

     (121)

 

 

   (6,756)        

 

Non-cash portion of restructuring charge

 

 

(1,264)

 

 

         1,414

 

 

   2,323

 

Loss on assets held for sale

 

 

-

 

 

            -   

 

 

     7,267             

 

(Gain) loss on disposal of real estate and equipment

 

 

(655)

 

 

        (652)   

 

 

191            

 

Excess tax benefit from share-based payment activity

 

 

-

 

 

            -   

 

 

(795)

 

Increase/(decrease) in cash from changes in assets and liabilities, net of effects

   from discontinued operations and business acquisitions:

Accounts receivables, net

 

 

(3,440)

 

 

(6,013)

 

 

4,144

 

Inventories

 

 

(6,814)

 

 

    (3,796)

 

 

1,729

 

Contributions to defined benefit plans

 

 

(6,966)

 

 

   (1,443)

 

 

(1,320)

 

Prepaid expenses and other

 

 

1,786

 

 

   61

 

 

   1,092

 

Accounts payable

 

 

(9,326)

 

 

  4,552

 

 

(3,368)

 

Accrued payroll, employee benefits and other liabilities

12,444

 

 

  3,726

 

 

6,731

 

Income taxes payable

 

 

1,090

 

 

 (5,610)

 

 

   (5,289)

 

Net cash provided by operating activities from continuing operations

65,003

 

 

 64,033

 

 

 81,221

 

Net cash used for operating activities from discontinued operations

(78)

 

 

(594)

 

 

   (897)

 

Net cash provided by operating activities

 

 

64,925

 

 

 63,439

 

 

80,324

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

 

 

Expenditures for capital assets

 

 

(26,539)

 

 

(26,448)

 

 

(17,851)

 

Expenditures for acquisitions, net of cash acquired

 

 

(10,397)

 

 

(153,815)

 

 

(13,700)

 

Expenditures for executive life insurance policies

 

 

(310)

 

 

    (377)

 

 

    (417)

 

Proceeds from sale of real estate and equipment

 

 

2,852

 

 

1,106

 

 

383

 

Other investing activity

 

 

2,129

 

 

   483

 

 

   -

 

Net cash (used for) investing activities from continuing operations

(32,265)

 

 

(179,051)

 

 

(31,585)

 

Net cash provided by investing activities from discontinued operations

-

 

 

              -

 

 

2,803

 

Net cash provided by (used for) investing activities

 

 

(32,265)

 

 

(179,051)

 

 

(28,782)

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

163,500

 

 

263,700

 

 

  65,000

 

Payments of debt

 

 

(164,788)

 

 

(164,200)

 

 

(75,000)

 

Stock issued under employee stock option and purchase plans

 

 

915

 

 

       848

 

 

       942

 

Excess tax benefit from share-based payment activity

 

 

-

 

 

       -

 

 

       795

 

Purchase of treasury stock

 

 

(2,652)

 

 

  (7,806)

 

 

  (5,636)

 

Cash dividends paid

 

 

(8,888)

 

 

  (7,852)

 

 

  (6,846)

 

Net cash provided by (used for) financing activities

 

 

(11,913)

 

 

84,690

 

 

(20,745)

 

Effect of exchange rate changes on cash

 

 

289

 

 

   (2,500)

 

 

   (4,937)

 

Net change in cash and cash equivalents

 

 

21,036

 

 

   (33,422)

 

 

   25,860

 

Cash and cash equivalents at beginning of year

 

 

88,566

 

 

   121,988

 

 

   96,128

 

Cash and cash equivalents at end of year

 

$

109,602

 

$

88,566

 

$

121,988

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

 

 

 

       Interest

 

$

6,178

 

$

    3,258

 

$

    2,351

 

       Income taxes, net of refunds

 

$

     22,145

 

$

20,413

 

$

  24,769

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

STANDEX INTERNATIONAL CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


37



1.  SUMMARY OF ACCOUNTING POLICIES

 

Basis of Presentation and Consolidation

 

Standex International Corporation (“Standex” or the “Company”) is a diversified manufacturing company with operations in the United States, Europe, Asia, Africa, and Latin America.  The accompanying consolidated financial statements include the accounts of Standex International Corporation and its subsidiaries and are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  All intercompany accounts and transactions have been eliminated in consolidation.

 

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 consolidated financial statements were issued.  

 

Accounting Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires the use of estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements and for the period then ended.  Estimates are based on historical experience, actuarial estimates, current conditions and various other assumptions that are believed to be reasonable under the circumstances.  These estimates form the basis for making judgments about the carrying values of assets and liabilities when they are not readily apparent from other sources.  These estimates assist in the identification and assessment of the accounting treatment necessary with respect to commitments and contingencies.  Actual results may differ from these estimates under different assumptions or conditions.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include highly liquid investments purchased with a maturity of three months or less.  These investments are carried at cost, which approximates fair value.  At June 30, 2018 and 2017, the Company’s cash was comprised solely of cash on deposit.

 

Trading Securities

 

The Company purchases investments for its non-qualified defined contribution plan for employees who exceed certain thresholds under our traditional 401(k) plan.  These investments are classified as trading and reported at fair value.  The investments generally consist of mutual funds, are included in other non-current assets and amounted to $2.4 million at June 30, 2018 and $2.4 million at June 30, 2017.  Gains and losses on these investments are recorded as other non-operating income (expense), net in the Consolidated Statements of Operations.

 

Accounts Receivable Allowances

 

The Company has provided an allowance for doubtful accounts reserve which represents the best estimate of probable loss inherent in the Company’s account receivables portfolio. This estimate is derived from the Company’s knowledge of its end markets, customer base, products, and historical experience.

 

The changes in the allowances for uncollectible accounts during 2018, 2017, and 2016 were as follows (in thousands):

 

 

 

2018

 

 

2017

 

 

2016

Balance at beginning of year

$

2,406

 

$

       2,119

 

$

       2,226

Acquisitions and other

 

(169)

 

 

52

 

 

              3

Provision charged to expense

 

870

 

 

416

 

 

              8

Write-offs, net of recoveries

 

(137)

 

 

       (181)

 

 

       (118)

Balance at end of year

$

2,970

 

$

2,406

 

$

       2,119

 

 

Inventories


38



Inventories are stated at the lower of (first-in, first-out) cost or market.  Inventory quantities on hand are reviewed regularly, and provisions are made for obsolete, slow moving, and non-saleable inventory, based primarily on management’s forecast of customer demand for those products in inventory.

 

Long-Lived Assets

 

Long-lived assets that are used in operations, excluding goodwill and identifiable intangible assets, are tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.  Recognition and measurement of a potential impairment loss is performed on assets grouped with other assets and liabilities at the lowest level where identifiable cash flows are largely independent of the cash flows of other assets and liabilities.  An impairment loss is the amount by which the carrying amount of a long-lived asset (asset group) exceeds its estimated fair value. Fair value is determined based on discounted cash flows or appraised values, depending upon the nature of the assets.

 

Property, Plant and Equipment

 

Property, plant and equipment are reported at cost less accumulated depreciation. Depreciation is recorded on assets over their estimated useful lives, generally using the straight-line method. Lives for property, plant and equipment are as follows:

 

Buildings

40 to 50 years

Leasehold improvements

Lesser of useful life or term, unless renewals are deemed to be reasonably assured

Machinery and equipment

8 to 15 years

Furniture and Fixtures

3 to 10 years

Computer hardware and software

3 to 7 years

 

Routine maintenance costs are expensed as incurred. Major improvements are capitalized. Major improvements to leased buildings are capitalized as leasehold improvements and depreciated over the lesser of the lease term or the life of the improvement.

 

Amortization of computer hardware and software of $1.4 million, $0.6 million, and $0.6 million is included as a component of depreciation expense for the years ended June 30, 2018, 2017, and 2016, respectively.

 

Goodwill and Identifiable Intangible Assets

 

All business combinations are accounted for using the acquisition method.  Goodwill and identifiable intangible assets with indefinite lives, are not amortized, but are reviewed annually for impairment or more frequently if impairment indicators arise. Identifiable intangible assets that are not deemed to have indefinite lives are amortized over the following useful lives:  

 

Customer relationships

5 to 16 years

Patents

12 years

Non-compete agreements

5 to 10 years

Other

10 years

Developed technology

10-20 years

Trade names

Indefinite life

 

See discussion of the Company’s assessment of impairment in Note 5 – Goodwill and Note 6 – Intangible Assets.

 

Fair Value of Financial Instruments

 

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.  When observable prices or inputs are not available, valuation models may be applied.

 

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

 

Level 1 – Quoted prices in active markets for identical assets and liabilities.  The Company’s deferred compensation plan assets consist of shares in various mutual funds (for the deferred compensation plan, investments are participant-


39



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.  For pension assets (see Note 16 – Employee Benefit Plans), securities are valued based on quoted market prices for securities held directly by the trust.

 

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.  For pension assets held in commingled funds (see Note 16 – Employee Benefit Plans), the Company values investments based on the net asset value of the funds, which are derived from the quoted market prices of the underlying fund holdings. 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.

 

We did not have any transfers of assets and liabilities among Levels of the fair value measurement hierarchy during the years ended June 30, 2018 or 2017.

 

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

 

The fair values of our financial instruments at June 30, 2018 and 2017 were (in thousands):

 

 

 

 

2018

 

 

Total

 

Level 1

 

Level 2

 

Level 3

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities - deferred compensation plan

$

2,362

 

$

2,362

 

$

-

 

$

-

 

Foreign exchange contracts

 

1,357

 

 

-

 

 

1,357

 

 

-

 

Interest rate swaps

 

1,325

 

 

-

 

 

1,325

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

$

4,204

 

$

-

 

$

4,204

 

$

-

 

Interest rate swaps

 

-

 

 

-

 

 

-

 

 

-

 

Contingent acquisition payments (a)

 

7,535

 

 

-

 

 

-

 

 

7,535

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

Total

 

Level 1

 

Level 2

 

Level 3

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities - deferred compensation plan

$

     2,397

 

$

     2,397

 

$

           -   

 

$

           -   

 

Foreign exchange contracts

 

       399

 

 

           -

 

 

        399

 

 

           -   

  

Interest rate swaps

 

3,777

 

 

-

 

 

3,777

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

$

    3,232

 

$

           -   

 

$

   3,232

 

$

           -   

 

Interest rate swaps

 

   3,958

 

 

           -   

 

 

3,958     

 

 

           -   

      Contingent acquisition payments(a)      2,108 - -        2,108 

 

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

 

Our financial liabilities based upon Level 3 inputs include contingent consideration arrangements relating to our acquisition of Horizon Scientific or Piazza Rosa. We are contractually obligated to pay contingent consideration payments to the Sellers of these businesses based on the achievement of certain criteria.

 

Contingent consideration payable to the Horizon seller is based on continued employment of the seller on the second and third anniversary of the closing date of the acquisition. Contingent acquisition payment liabilities are scheduled to be paid in periods through fiscal year 2020. As of June 30, 2018, we could be required to pay up to $8.0 million for contingent consideration arrangements if specific criteria are achieved.


40



Contingent consideration payable to the Piazza Rosa sellers is based on the achievement of certain revenue targets of each of the first three years following the acquisition.  Contingent acquisition payments are payable in euros and can be paid in periods through fiscal year 2021.  As of June 30, 2018, we could be required to pay up to $1.7 million for contingent consideration arrangements if the revenue targets are met.  

 

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 June 30, 2018, neither the amount recognized for the contingent consideration arrangement, nor the range of outcomes or the assumptions used to develop the estimate had changed.

 

Concentration of Credit Risk

 

The Company is subject to credit risk through trade receivables and short-term cash investments.  Concentration of risk with respect to trade receivables is minimized because of the diversification of our operations, as well as our large customer base and our geographical dispersion.  No individual customer accounts for more than 5% of revenues or accounts receivable in the periods presented.

 

Short-term cash investments are placed with high credit-quality financial institutions.  The Company monitors the amount of credit exposure in any one institution or type of investment instrument.  

 

Revenue Recognition

 

The Company’s product sales are recorded when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable, and collectability is reasonably assured. For products that include installation, and if the installation meets the criteria to be considered a separate element, product revenue is recognized upon delivery, and installation revenue is recognized when the installation is complete.  Revenues under certain fixed price contracts are generally recorded when deliveries are made.

 

Sales and estimated profits under certain long-term contracts are recognized under the percentage-of-completion methods of accounting, whereby profits are recorded pro rata, based upon current estimates of costs to complete such contracts.  Losses on contracts are fully recognized in the period in which the losses become determinable.  Revisions in profit estimates are reflected on a cumulative basis in the period in which the basis for such revision becomes known. Any excess of the billings over cost and estimated earnings on long-term contracts is included in deferred revenue.

 

Cost of Goods Sold and Selling, General and Administrative Expenses

 

The Company includes expenses in either cost of goods sold or selling, general and administrative categories based upon the natural classification of the expenses.  Cost of goods sold includes expenses associated with the acquisition, inspection, manufacturing and receiving of materials for use in the manufacturing process.  These costs include inbound freight charges, purchasing and receiving costs, inspection costs, internal transfer costs as well as depreciation, amortization, wages, benefits and other costs that are incurred directly or indirectly to support the manufacturing process.  Selling, general and administrative includes expenses associated with the distribution of our products, sales effort, administration costs and other costs that are not incurred to support the manufacturing process.  The Company records distribution costs associated with the sale of inventory as a component of selling, general and administrative expenses in the Consolidated Statements of Operations.  These expenses include warehousing costs, outbound freight charges and costs associated with distribution personnel.  Our gross profit margins may not be comparable to those of other entities due to different classifications of costs and expenses.

 

The Company purchased $2.4 million, $2.4 million, and $3.3 million from a 20% owned equity interest during the years ended June 30, 2018, 2017, and 2016 respectively. The inventory was purchased under customary terms and conditions and sold to customers in the ordinary course of business. Earnings from this investment are not material and are accounted for under the equity method.

 

Our total advertising expenses, which are classified under selling, general, and administrative expenses are primarily related to trade shows, and totaled $4.3 million, $5.1 million, and $4.3 million for the years ended June 30, 2018, 2017, and 2016, respectively.

 

Research and Development


41



Research and development expenditures are expensed as incurred.  Total research and development costs, which are classified under selling, general, and administrative expenses, were $6.1 million, $5.5 million, and $4.9 million for the years ended June 30, 2018, 2017, and 2016, respectively.

 

Warranties

 

The expected cost associated with warranty obligations on our products is recorded 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 continuing operations warranty reserve, which are recorded as accrued liabilities, during 2018, 2017, and 2016 were as follows (in thousands):

 

 

2018

 

 

2017

 

 

2016

Balance at beginning of year

$

9,243

 

$

9,085

 

$

       7,436

Acquisitions and other charges

 

(138)

 

 

301

 

 

           (5)

Warranty expense

 

9,223

 

 

9,203

 

 

     13,503

Warranty claims

 

(8,972)

 

 

 (9,346)

 

 

 (11,849)

Balance at end of year

$

9,356

 

$

       9,243

 

$

       9,085

 

 

The decrease in warranty expense during 2017 compared to 2016 is primarily due to the conclusion of the warranty period for potential claims arising from production and manufacturing issues experienced in the Cooking Solutions business when the Company transitioned from the Cheyenne plant to Nogales in fiscal year 2015.  Additional warranty expense changes were due to the decline in sales volume for warrantable products which reduced the potential for future claims.  

 

Stock-Based Compensation Plans

 

Restricted stock awards generally vest over a three-year period.  Compensation expense associated with these awards is recorded based on their grant-date fair values and is generally recognized on a straight-line basis over the vesting period except for awards with performance conditions, which are recognized on a graded vesting schedule.  Compensation cost for an award with a performance condition is based on the probable outcome of that performance condition.  The stated vesting period is considered non-substantive for retirement eligible participants.  Accordingly, the Company recognizes any remaining unrecognized compensation expense upon participant reaching retirement eligibility.

 

Foreign Currency Translation

 

The functional currency of our non-U.S. operations is generally the local currency.  Assets and liabilities of non-U.S. operations are translated into U.S. Dollars on a monthly basis using period-end exchange rates. Revenues and expenses of these operations are translated using average exchange rates.  The resulting translation adjustment is reported as a component of comprehensive income (loss) in the consolidated statements of stockholders’ equity and comprehensive income.  Gains and losses from foreign currency transactions are included in results of operations and were not material for any period presented.

 

Derivative Instruments and Hedging Activities

 

The Company recognizes all derivatives on its balance sheet at fair value.

 

Forward foreign currency exchange contracts are periodically used to limit the impact of currency fluctuations on certain anticipated foreign cash flows, such as foreign purchases of materials and loan payments from subsidiaries.  The Company enters into such contracts for hedging purposes only.  The Company has designated certain of these currency contracts as hedges, and changes in the fair value of these contracts are recognized in other comprehensive income until the hedged items are recognized in earnings.  Hedge ineffectiveness, if any, associated with these contracts will be reported in net income.  

 

The Company also uses interest rate swaps to manage exposure to interest rates on the Company’s variable rate indebtedness.  The Company values the swaps based on contract prices in the derivatives market for similar instruments.  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.


42



The Company does not hold or issue derivative instruments for trading purposes.

 

Income Taxes

 

The Company's income tax provision from continuing operations for the fiscal year ended June 30, 2018 was $40.6 million, or an effective rate of 52.6%, compared to $15.4 million, or an effective rate of 24.8% for the year ended June 30, 2017, and $16.3 million, or an effective rate of 23.8% for the year ended June 30, 2016. Changes in the effective tax rates from period to period may be significant as they depend on many factors including, but not limited to, the amount of the Company's income or loss, the mix of income earned in the US versus outside the US, the effective tax rate in each of the countries in which we earn income, and any one-time tax issues which occur during the period.

 

The Company's income tax provision from continuing operations for the fiscal year ended June 30, 2018 was impacted by the following items: (i) a tax provision related to the impact of the Sec. 965 toll tax of $11.7 million, (ii) a tax provision related to a revaluation of deferred taxes due to the federal rate reduction of $1.3 million, and (iii) a tax provision related to expected foreign withholding taxes on cash repatriation of $7.8 million.

 

The Company's income tax provision from continuing operations for the fiscal year ended June 30, 2017 was impacted by the following items: (i) a provision of $0.4 million related to non-deductible transaction costs, (ii) a benefit of $0.6 million related to the R&D tax credit, and (iii) a benefit of $5.3 million due to the mix of income earned in jurisdictions with beneficial tax rates.

 

The Company's income tax provision from continuing operations for the fiscal year ended June 30, 2016 was impacted by the following items: (i) a net benefit of $0.9 million related to a bargain-sale of idle property to a charitable organization, and (ii) a benefit of $0.7 million related to the R&D tax credit, and (iii) a benefit of $4.9 million due to the mix of income earned in jurisdictions with beneficial tax rates.

 

Earnings Per Share

 

(share amounts in thousands)

 

2018

 

2017

 

2016

Basic – Average Shares Outstanding

 

12,698

 

12,666

 

12,682

Effect of Dilutive Securities – Stock Options and

 

 

 

 

 

  Restricted Stock Awards

 

90

 

102

 

102

Diluted – Average Shares Outstanding

 

12,788

 

12,768

 

12,784

 

Both basic and dilutive income is the same for computing earnings per share.  There were no outstanding instruments that had an anti-dilutive effect at June 30, 2018, 2017 and 2016.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounts Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which amends most of the existing revenue recognition guidance, including industry-specific guidance.  ASU 2014-09 establishes a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers. Under ASU No. 2014-09, an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In early 2016, the FASB issued additional updates: ASU No. 2016-10, 2016-11 and 2016-12. These updates provide further guidance and clarification on specific items within the previously issued update.  The Company will adopt Topic 606 under the modified retrospective method and will only apply this method to contracts that are not completed as of the date of adoption. Application of this method will result in a cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings at the date of initial application for any open contracts as of the adoption date.  

 

The Company established a global steering committee with a project plan to analyze the impact of this standard. The assessment phase of the project plan, which included identifying the various revenue streams, initiating contract reviews and reviewing current accounting policies and practices to identify potential differences that would result from the application of the standard is complete. This assessment included (1) utilizing questionnaires to assist with the identification of revenue streams, (2) performing sample contract analyses for each revenue stream identified, (3) assessing the noted differences in


43



recognition and measurement that may result from adopting this new standard, (4) performing detailed analyses of contracts with larger customers, and (5) developing plans to test transactions for consistency with contract provisions that affect revenue recognition.  

 

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

 

Based on procedures performed, the committee has identified two areas that will be impacted by application of the new revenue standard.  In the Food Service Equipment segment, the Company bases volume-related rebate accruals on the achievement of certain pre-defined tiers.  The new guidance requires the Company to calculate the rebate accrual on anticipated sales for the rebate period, rather than measurement of actual achievement of specific tiers.  The Company expects to record a one-time catch up adjustment for this change, upon adoption of the new standard during the quarter ending September 30, 2018, of $1.5 million. In Engineering Technologies, the committee analyzed certain long-term contracts, currently recognizing revenue utilizing the point-in-time method, to determine if any of the three criteria in ASC 606-10-25-27 are being met which would require revenue to be recognized over time under the new standard.

 

It was determined that $0.7 million in net sales will be moved from point in time to overtime. The net change for Engineering Technologies will be approximately $0.1 million after cost of sales of $0.6 million. The net impact will be reflected as a reduction to retained earnings in our quarterly report for the quarter ending September 30, 2018.

 

The Company is also evaluating the disclosure requirements under the new standard that are effective in the first quarter of fiscal year 2019. The Company will continue to evaluate these disclosure requirements and incorporate the collection of relevant data into its reporting process in the first quarter of fiscal year 2019.

 

During the first quarter of fiscal year 2019, the Company will continue to analyze the adoption impact and disclose the final impact in our September 30 2018 10Q.

 

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

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements.  A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.  For leases with a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities.  ASU 2016-02 is effective for fiscal years beginning after December 15, 2018.  While we are continuing to assess the effect of the adoption, we currently believe the most significant potential changes relate to (i) recognition of right-of-use assets and lease liabilities on our balance sheet for equipment and real estate operating leases, and (ii) the derecognition of existing assets and liabilities for certain sale-leaseback transactions that currently do not qualify for sale accounting. The Company anticipates the adoption will have a material impact on the Company’s consolidated financial statements due to the materiality of the underlying leases subject to the new guidance, however are unable to quantify that effect until our analysis is complete.  

 

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


44



In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which changes how employers that sponsor defined benefit pension or other postretirement benefit plans present the net periodic benefit cost in the income statement. The new guidance requires the service cost component of net periodic benefit cost to be presented in the same income statement line items as other employee compensation costs arising from services rendered during the period. Other components of the net periodic benefit cost are to be stated separately from service cost and outside of operating income. This guidance is effective for fiscal years beginning after December 15, 2017 (fiscal 2019 for the Company) and interim periods within those annual periods. The amendment is to be applied retrospectively. The provisions of the new standard will impact the classification of pension expense in the Statement of Operations and will impact both current and historical operating income and Other Expense – Non Operating beginning in the first quarter of fiscal year 2019.

 

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

 

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

 

2.  ACQUISITIONS

 

Each of the Company’s recent acquisitions are strategically significant to the future growth prospects of the Company.  The Company evaluated the significance of each acquisition on a standalone basis and in aggregate, considering both qualitative and quantitative factors.

 

Piazza Rosa Group

 

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

 

The Company paid $10.1 million in cash for all of the issued and outstanding equity interests of the Piazza Rosa Group and also paid $2.8 million subsequent to closing in order to satisfy assumed debt of the entity at the time of acquisition. The Company has estimated that total cash consideration will be adjusted by $2.6 million based upon achievement of certain revenue metrics over the next three years.

 

The preliminary purchase price was allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values on the closing date.  Goodwill recorded from this transaction is attributable to potential revenue increases from the combined competencies with Standex Engraving’s worldwide presence and Piazza Rosa Group’s texturizing capabilities. The combined companies create a global tool finishing service leader and open additional opportunities in the broader surface engineering market.

 

Intangible assets of $4.1 million were preliminarily recorded, consisting of $2.3 million of customer relationships to be amortized over a period of eight years, $1.6 million for trademarks, and $0.2 million of other intangibles assets.  Since the preliminary valuation, the Company adjusted goodwill by $0.5 million primarily as a result of identification of other identifiable assets.  


45



The Company will finalize its purchase accounting for this acquisition in the first quarter of fiscal year 2019, and will record an approximate $1.5 million reduction to identified intangible assets with a corresponding increase to goodwill.  The goodwill of $6.6 million created by the transaction is not deductible for income tax purposes.

 

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

 

 

 

 

 

Preliminary Allocation

 

 

Adjustments

 

 

Preliminary Allocation

 

 

 

September 30, 2017

 

 

 

 

June 30, 2018

Fair value of business combination:

 

 

 

 

 

 

 

 

 

Total cash consideration

 

$

10,056

 

$

                -   

 

$

10,056

Fair value of contingent consideration

 

 

  -

 

 

              2,617   

 

 

  2,617

Total

 

$

10,056

 

$

              2,617  

 

$

12,673

Identifiable assets acquired and liabilities assumed:

 

 

 

 

 

 

 

 

 

Other acquired assets

 

$

2,678

 

$

1,664   

 

$

4,342

Inventories

 

 

637

 

 

(2)

 

 

635

Property, plant, and equipment

 

 

5,005

 

 

                558  

 

 

5,563

Identifiable intangible assets

 

 

4,087

 

 

(1)      

 

 

4,086

Goodwill

 

 

6,218

 

 

416   

 

 

6,634

Liabilities assumed

 

 

(7,387)

 

 

          -  

 

 

(7,387)

Deferred taxes

 

 

(1,182)

 

 

(18)

 

 

(1,200)

Total

 

$

10,056

 

$

              2,617  

 

$

12,673

 

 

 

 

 

 

 

 

 

 

OKI Sensor Device Corporation

 

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

 

The Company paid $129.2 million in cash, net of cash acquired, for 100% of the outstanding stock of Standex Electronics Japan.  The preliminary purchase price was allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values on the closing date.  Goodwill recorded from this transaction is attributable to potential revenue increases from enhanced access to our Asian markets and synergies created from the vertical integration with a key supplier.  

 

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

 

The components of the fair value of the Standex Electronics Japan acquisition, including the final allocation of purchase price are as follows (in thousands):


46



 

 

 

 

 

Final Allocation

Fair value of business combination:

 

 

 

 

 

Cash payments

 

 

 

$

137,676

Less: cash acquired

 

 

 

 

  (8,521)

Total

 

 

 

$

129,155

Identifiable assets acquired and liabilities assumed:

 

 

 

 

 

Other acquired assets

 

 

 

$

10,339

Inventories

 

 

 

 

8,203

Property, plant, and equipment

 

 

 

 

18,206

Identifiable intangible assets

 

 

 

 

51,400

Goodwill

 

 

 

 

79,434

Liabilities assumed

 

 

 

 

(19,279)

Deferred taxes

 

 

 

 

(19,148)

Total

 

 

 

$

129,155

 

The Company finalized the purchase price allocation during the quarter ended March 31, 2018.

 

The following table reflects the unaudited pro forma operating results of the Company for the years ended June 30, 2018 and 2017, which give effect to the acquisition of Standex Electronics Japan as if it had occurred at the beginning of each period presented.  The pro forma information combines the historical financial results of the Company and Standex Electronics Japan, adjusted for changes in foreign exchange rates.  The pro forma results are not necessarily indicative of the operating results that would have occurred had the acquisition been effective at the beginning of each period, nor are they intended to be indicative of results that may occur in the future.  The pro forma information does not include the effects of any synergies related to the Standex Electronics Japan acquisition, transactions between the entities prior to acquisition, or the pre-acquisition impact of other businesses acquired by the Company during this period as they were not material to the Company’s historical results of operations.

 

 

(Unaudited Pro Forma)

 

For the year ended

June 30,

In thousands

2018

 

2017

Net Sales

$

868,382

 

 

$

805,235

Net Income

$

36,823

 

 

$

57,810

Earnings per share:

 

 

 

Basic

$

2.90

 

 

$

4.56

Diluted

$

2.88

 

 

$

4.53

 

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

 

Pro forma earnings during the year ended June 30, 2018 were adjusted to exclude tax-affected acquisition-related costs incurred during the first quarter of $0.2 million.

 

Pro forma earnings during the year ended June 30, 2017 were adjusted to include expense of $1.8 million for amortization of intangible assets recognized at fair value, depreciation expense of $0.9 million for the fair value adjustment of the acquired fixed assets, and $0.8 million of interest expense associated with incremental borrowings under the Company’s Credit Facility.  Pro forma earnings were also adjusted to exclude non-recurring acquisition-related costs of $4.2 million.

 

Horizon Scientific

 

During the second quarter of fiscal year 2017, the Company acquired Horizon Scientific, a supplier of laboratory refrigerators and freezers, as well as cryogenic equipment for the scientific, bio-medical and pharmaceutical markets. We believe the


47



acquisition of Horizon Scientific enhances Standex’s penetration of the refrigeration markets in the growing scientific sector. We have included the operating results of Horizon Scientific in our Food Service Equipment segment in our Condensed Consolidated Financial Statements.

 

The Company paid $24.7 million in cash, net of cash acquired, for 100% of the outstanding stock of Horizon Scientific. The purchase price was subject to cash and net working capital adjustments of $0.3 million which was paid in fiscal year 2018 along with deferred compensation of up to $8.0 million. The 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.  

 

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

 

The components of the fair value of the Horizon Scientific acquisition including the allocation of the purchase price are as follows (in thousands):

 

 

 

 

 

Final Allocation

Fair value of business combination:

 

 

 

 

 

Cash payments

 

 

 

$

26,457

Identified cash and net working capital adjustment

 

 

 

 

341

Less: cash acquired

 

 

 

 

  (1,797)

Total

 

 

 

$

25,001

Identifiable assets acquired and liabilities assumed:

 

 

 

 

 

Current assets

 

 

 

$

  4,863

Inventories

 

 

 

 

4,470

Property, plant, and equipment

 

 

 

 

1,616

Identifiable intangible assets

 

 

 

 

16,150

Goodwill

 

 

 

 

6,660

Liabilities assumed

 

 

 

 

(2,374)

Deferred taxes

 

 

 

 

(6,384)                    

Total

 

 

 

$

25,001

 

 

 

 

 

 

Transaction costs associated with this acquisition were immaterial.  All transaction costs were recorded as general and administrative expense during the year ended June 30, 2017.

 

Northlake

 

On October 1, 2015, 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 at June 30, 2016, are as follows (in thousands):


48



 

 

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)

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 the amortization of the acquired intangible assets or purchase accounting expenses, which we define as acquired backlog and the step-up of inventory to fair value.

 

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

 

Acquisition related costs of $5.7 million in 2017 consisted of $2.7 million of investment banker fees for services provided in connection with the Standex Electronics Japan transaction and $3.0 million for third-party due diligence expenses also related to Standex Electronics Japan and other acquisitions.

 

 

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

 

 

 

June 30,

2018   

June 30, 2017

Deferred compensation arrangements

 

$

 

2,810

$     2,108              

Acquisition-related costs

 

 

939

5,735

Total

$

3,749

$     7,843

 

3.  INVENTORIES

 

Inventories are comprised of (in thousands):

 

June 30

 

2018

 

 

2017

Raw materials

$

58,878

 

$

53,313

Work in process

 

33,507

 

 

28,110

Finished goods

 

34,838

 

 

37,978

    Total

$

127,223

 

$

119,401

 

Distribution costs associated with the sale of inventory are recorded as a component of selling, general and administrative expenses and were $ 25.5 million, $20.4 million, and $20.1 million in 2018, 2017, and 2016, respectively.


49



4.  PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consist of the following (in thousands):

 

June 30

 

 

2018

 

 

2017

    Land, buildings and

 

 

 

 

 

 

      leasehold improvements

 

$

83,459

 

$

        78,048

    Machinery, equipment and other

 

 

217,749

 

 

      199,419

    Total

 

 

301,208

 

 

      277,467

    Less accumulated depreciation

 

 

156,638

 

 

       144,307

Property, plant and equipment - net

 

$

144,570

 

$

       133,160

 

Depreciation expense for the years ended June 30, 2018, 2017, and 2016 totaled $18.8 million, $14.7 million, and $13.7 million, respectively.

 

5.  GOODWILL

 

Goodwill and certain indefinite-lived intangible assets are not amortized, but instead are tested for impairment at least annually and more frequently whenever events or changes in circumstances indicate that the fair value of the asset may be less than its carrying amount. The Company’s annual test for impairment is performed using a May 31st measurement date.

 

The Company has identified our reporting units for impairment testing as its twelve operating segments, which are aggregated into five reporting segments as disclosed in Note 17 – Industry Segment Information.  

 

As quoted market prices are not available for the Company’s reporting units, the fair value of the reporting units is determined using a discounted cash flow model (income approach).  This method uses various assumptions that are specific to each individual reporting unit in order to determine the fair value. In addition, the Company compares the estimated aggregate fair value of its reporting units to its overall market capitalization.

 

While the Company believes that estimates of future cash flows are reasonable, changes in assumptions could significantly affect valuations and result in impairments in the future.  The most significant assumption involved in the Company’s determination of fair value is the cash flow projections of each reporting unit.  If the estimates of future cash flows for each reporting unit may be insufficient to support the carrying value of the reporting units, the Company will reassess its conclusions related to fair value and the recoverability of goodwill.

 

We completed our annual impairment testing as of May 31, 2018, and determined that the fair value of each of its reporting units substantially exceeded each unit’s respective carrying value, therefore, no impairment charges were recorded in connection with our testing and assessment during 2018 and 2017.

 

Changes to goodwill during the years ended June 30, 2018 and 2017 are as follows (in thousands):

 

 

 

2018

 

 

2017

Balance at beginning of year

$

260,629

 

$

     175,293

Accumulated impairment losses

 

17,939

 

 

     17,939

Balance at beginning of year, net

 

242,690

 

 

   157,354

Acquisitions

 

7,655

 

 

85,561

Foreign currency translation

 

1,417

 

 

    (225)

Balance at end of year

$

251,762

 

$

   242,690

 


50



6.  INTANGIBLE ASSETS

 

Intangible assets consist of the following (in thousands):

 

 

 

 

 

 

Tradenames

 

 

 

 

 

 

 

 

 

 

 

Customer Relationships

 

 

(Indefinite-lived)

 

 

Developed Technology

 

 

Other

 

 

Total

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost

$

66,802

 

$

20,396

 

$

48,281

 

$

4,927

 

$

140,406

Accumulated amortization

 

(33,917)

 

 

-

 

 

(4,709)

 

 

(3,705)

 

 

(42,331)

Balance, June 30, 2018

$

32,885

 

$

20,396

 

$

43,572

 

$

1,222

 

$

98,075

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost

$

        64,247

 

$

       18,715

 

$

47,586

 

$

4,503

 

$

135,051

Accumulated amortization

 

      (28,764)

 

 

                   -   

 

 

(826)

 

 

(2,958)

 

 

(32,548)

Balance, June 30, 2017

$

       35,483

 

$

         18,715

 

$

46,760

 

$

1,545

 

$

 102,503

 

Amortization expense from continuing operations for the years ended June 30, 2018, 2017, and 2016 totaled $9.0 million, $5.0 million, and $3.6 million, respectively. At June 30, 2018, aggregate amortization expense is estimated to be $9.0 million in fiscal 2019, $8.5 million in fiscal 2020, $7.9 million in fiscal 2021, $7.4 million in fiscal 2022, $6.7 million in fiscal 2023, and $38.2 million thereafter.

 

7.  DEBT

 

Long-term debt is comprised of the following at June 30 (in thousands):

 

 

2018

 

 

2017

Bank credit agreements

$

194,000

 

$

     192,500

Other

 

-

 

 

           6

     Total funded debt

 

194,000

 

 

     192,506

Issuance Cost

 

(228)

 

 

       (530)

     Total long-term debt

$

193,772

 

$

    191,976

 

Long-term debt is due as follows (in thousands):  

2019

$

-

2020 (matures December 2019)

 

194,000                  

2021

 

-

2022

 

                 -

2023

 

                 -

Thereafter

 

                 -

    Funded Debt

 

       194,000

Issuance costs

 

          (228)

Debt, net issuance cost

$

193,772

 

 

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.  The facility amends and restates a previously existing $225 million revolving credit agreement, which was scheduled to expire in January 2017.

 

Under the terms of the Credit Agreement, we will pay a variable rate of interest and a commitment fee on borrowed amounts as well as a commitment fee on unused amounts under the facility.  The amount of the commitment fee will depend upon both the undrawn amount remaining available under the facility and the Company’s funded debt to EBITDA (as defined in


51



the agreement) ratio at the last day of each quarter.  As our funded debt to EBITDA ratio increases, the commitment fee will increase.  

 

Funds borrowed under the facility may be used for the repayment of debt, working capital, capital expenditures, acquisitions (so long as certain conditions, including a specified funded debt to EBITDA leverage ratio is maintained), and other general corporate purposes.  As of June 30, 2018, the Company had the ability to borrow $198.1 million under the facility based on our current EBITDA.  The facility contains customary representations, warranties and restrictive covenants, as well as specific financial covenants which the Company was compliant with as of June 30, 2018.  The Company’s current financial covenants under the facility are as follows:

 

Interest Coverage Ratio - The Company is required to maintain a ratio of Earnings Before Interest and Taxes, as Adjusted (“Adjusted EBIT per the Credit Agreement”), to interest expense for the trailing twelve months of at least 3.0:1.  Adjusted EBIT per the Credit Agreement specifically excludes extraordinary and certain other defined items such as cash restructuring and acquisition-related charges up to $7.5 million, and unlimited non-cash charges including gains or losses on sale of property and goodwill adjustments.  At June 30, 2018, the Company’s Interest Coverage Ratio was 11.40:1.   

 

Leverage Ratio - The Company’s ratio of funded debt to trailing twelve month Adjusted EBITDA per the credit agreement, calculated as Adjusted EBIT per the Credit Agreement plus depreciation and amortization, may not exceed 3.5:1. At June 30, 2018 the Company’s Leverage Ratio was 1.67:1.

 

As of June 30, 2018, we had borrowings under our facility of $194 million and the effective rate of interest for outstanding borrowings under the facility was 3.29%.  Our primary cash requirements in addition to day-to-day operating needs include interest payments, capital expenditures, and dividends.  Our primary sources of cash for these requirements are cash flows from continuing operations and borrowings under the facility.  

 

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

 

Other Long-Term Borrowings

 

At June 30, 2018, and 2017, the Company had standby letter of credit sub-facility outstanding, primarily for insurance and trade financing purposes of $7.9 million and $8.9 million, respectively.

 

8.  ACCRUED LIABILITIES

 

Accrued expenses recorded in our Consolidated Balance Sheets at June 30, consist of the following (in thousands):

 

 

 

2018

 

 

2017

Payroll and employee benefits

$

31,749

 

$

28,522

Workers' compensation

 

2,728

 

 

       2,399

Warranty

 

9,356

 

 

       9,243

Fair value of derivatives

 

2,853

 

 

3,014

Other

 

18,889

 

 

     15,516

 Total

$

65,575

 

$

    58,694

 

The increase in other liabilities during 2018 compared to 2017 is primarily due to the inclusion of $1.2 million of other liabilities from acquired entities.

 

 

9.  DERIVATIVE FINANCIAL INSTRUMENTS

 

Interest Rate Swaps

In order to manage our interest rate exposure, we are party to $75.0 million of active floating to fixed rate swaps.  These swaps convert our interest payments from LIBOR to a weighted average rate of 1.74% at June 30, 2018.


52



The fair value of the swaps recognized in accrued liabilities and in other comprehensive income (loss) at June 30, 2018 and 2017 is as follows (in thousands):

 

 

 

 

 

 

 

 

Fair Value at June 30,

Effective Date

 

Notional Amount

Fixed Interest Rate

Maturity

 

 

2018

 

 

 

2017

December 19, 2014

 

     20,000

1.18%

December 19, 2017

$

-

 

$

8

December 19, 2014

 

       5,000

1.20%

December 19, 2017

 

-

 

 

1

December 18, 2015

 

    15,000

1.46%

December 19, 2018

 

55

 

 

(1)

December 19, 2015

 

     10,000

2.01%

December 19, 2019

 

74

 

 

(106)

May 24, 2017

 

25,000

1.88%

April 24, 2022

 

764

 

 

(60)

May 24, 2017

 

25,000

1.67%

May 24, 2020

 

432

 

 

(23)

 

 

 

 

 

$

1,325

 

$

(181)

 

The Company reported no losses for the years ended June 30, 2018, 2017, and 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 purchases of materials and loan payments between subsidiaries.  The Company enters into such contracts for hedging purposes only.  The Company has designated certain of these currency contracts as hedges, and changes in the fair value of these contracts are recognized in other comprehensive income until the hedged items are recognized in earnings.  Hedge ineffectiveness, if any, associated with these contracts will be reported in net income.  At June 30, 2018 and 2017, the Company had outstanding forward contracts related to hedges of intercompany loans with net unrealized gain / (losses) of $(2.9) million and $(2.8) million, respectively, which approximate the unrealized gains or losses on the related loans.  The contracts have maturity dates ranging from 2018-2023, which correspond to the related intercompany loans.  The notional amounts of these instruments, by currency in thousands, are as follows:

 

Currency

 

2018

 

2017

USD

 

64,558

 

73,000

Euro

 

21,300

 

21,335

Pound Sterling

 

6,826

 

      6,962

Peso

 

54,000

 

54,000

Canadian

 

20,600

 

20,600

 

The table below presents the fair value of derivative financial instruments as well as their classification on the balance sheet at June 30, (in thousands):

 

 

Asset Derivatives

 

2018

 

2017

Derivative designated as

Balance

 

 

 

 

Balance

 

 

 

hedging instruments

Sheet

 

 

 

 

Sheet

 

 

 

 

Line Item

 

 

Fair Value

 

Line Item

 

 

Fair Value

Interest rate swaps

Other Assets

 

$

1,325

 

Accrued Liabilities

 

$

-

Foreign exchange contracts

Other Assets

 

 

1,357

 

Accrued Liabilities

 

 

-

 

 

 

$

2,682

 

 

 

$

  -


53



 

Liability Derivatives

 

2018

 

2017

Derivative designated as

Balance

 

 

 

 

Balance

 

 

 

hedging instruments

Sheet

 

 

 

 

Sheet

 

 

 

 

Line Item

 

 

Fair Value

 

Line Item

 

 

Fair Value

Interest rate swaps

Accrued Liabilities

 

$

-

 

Accrued Liabilities

 

$

      181

Foreign exchange contracts

Accrued Liabilities

 

 

          4,204

 

Accrued Liabilities

 

 

2,833

 

 

 

$

4,204

 

 

 

$

  3,014

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

 

 

 

 

2018

 

 

2017

 

 

2016

Interest rate swaps

 

$

1,367

 

$

        282

 

$