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.

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

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):

	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 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

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):

	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