Acquisitions

The Company

’s recent acquisitions are strategically significant to the future growth prospects of the Company. At the time of the acquisition and

December 31, 2017,

the Company evaluated the significance of each acquisition on a standalone basis and in aggregate, considering both qualitative and quantitative factors.

Piazza Rosa Group

During the

first

quarter of fiscal year

2018,

the Company acquired

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

The Company paid $

10.1

million in cash, net of a

$2.8

million payment to satisfy debt of the entity at the time of acquisition, for all of the issued and outstanding equity interests of the Piazza Rosa Group. The final purchase price is subject to net asset value adjustments that have

not

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

Intangible assets of $

4.1

million were preliminarily recorded, consisting of

$2.3

million of customer relationships to be amortized over a period of

eight

years,

$1.6

million for trademarks, and

$0.2

million of other intangibles assets. Since the preliminary valuation, the Company adjusted goodwill by

$1.2

million primarily as a result of identification of other identifiable assets. The goodwill of

$5.1

million created by the transaction is

not

deductible for income tax purposes.

The components of the fair value of the

Piazza Rosa Group acquisition, including the preliminary allocation of the purchase price at

December 31, 2017,

are as follows (in thousands):

	Preliminary Allocation			Adjustments			Adjusted Allocation
	September 30, 2017						December 31, 2017
Fair value of business combination:
Cash payments	$	12,889		$	-		$	12,889
Less: cash paid to satisfy acquired debt		(2,833	)		-			(2,833	)
Total	$	10,056		$	-		$	10,056
Identifiable assets acquired and liabilities assumed:
Other acquired assets	$	2,678		$	1,176		$	3,854
Inventories		637			(2	)		635
Property, plant, and equipment		5,005			-			5,005
Identifiable intangible assets		4,087			(1	)		4,086
Goodwill		6,218			(1,155	)		5,063
Liabilities assumed		(7,387	)		-			(7,387	)
Deferred taxes		(1,182	)		(18	)		(1,200	)
Total	$	10,056		$	-		$	10,056

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 preliminarily 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

$3.2

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 and customer relationships of

$2.3

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

$79.2

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 allocation of the purchase price at

December 31, 2017,

are as follows (in thousands):

	Preliminary Allocation			Adjustments			Adjusted Allocation
	March 31, 2017						December 31 , 2017
Fair value of business combination:
Cash payments	$	137,676		$	-		$	137,676
Less: cash acquired		(8,521	)		-			(8,521	)
Total	$	129,155		$	-		$	129,155
Identifiable assets acquired and liabilities assumed:
Other acquired assets	$	12,497		$	(2,158	)	$	10,339
Inventories		7,387			816			8,203
Property, plant, and equipment		12,703			5,750			18,453
Identifiable intangible assets		53,800			(2,400	)		51,400
Goodwill		75,985			3,202			79,187
Liabilities assumed		(10,811	)		(8,468	)		(19,279	)
Deferred taxes		(22,406	)		3,258			(19,148	)
Total	$	129,155		$	-		$	129,155

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

The following table reflects the unaudited pro forma operating results of the Company for the

three

and

six

months ended

December 31, 2017

and

2016,

which give effect to the acquisition of Standex Electronics Japan as if it had occurred at the beginning of each period presented. The pro forma information combines the historical financial results of the Company and Standex Electronics Japan, adjusted for changes in foreign exchange rates. 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)					(Unaudited Pro Forma)
	Three Months ended December 31,					Six Months Ended December 31,
In thousands	2017			2016		2017		2016
Net Sales	$	209,751		$	189,796	$	424,130	$	387,060
Net Income	$	(2,804	)	$	12,217	$	11,020	$	27,134


Earnings per share:
Basic	$	(0.22	)	$	0.97	$	0.87	$	2.14
Diluted	$	(0.22	)	$	0.96	$	0.86	$	2.12

Pro forma earnings during

six

months ended

December 31, 2017

were adjusted to exclude tax-affected acquisition-related costs incurred during the

first

quarter of

$0.2

million.

Pro forma earnings during the

three

months ended

December 31, 2016

were adjusted to include tax-affected expense of

$0.7

million for amortization of intangible assets recognized at fair value, depreciation expense of

$0.3

million for the fair value adjustment of the acquired fixed assets,

$0.4

million of interest expense associated with incremental borrowings under the Company’s Credit Facility and

$0.2

million of acquisition-related costs.

Pro forma earnings during the

six

months ended

December 31, 2016

were adjusted to include

tax-affected expense of

$1.4

million for amortization of intangible assets recognized at fair value, depreciation expense of

$0.6

million for the fair value adjustment of the acquired fixed assets,

$0.7

million of interest expense associated with incremental borrowings under the Company’s Credit Facility and

$0.2

million of acquisition-related costs.

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 $

25.0

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 during the

first

quarter of fiscal year

2018

along with deferred compensation of up to

$8.4

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
Fair value of business combination:
Cash payments	$	26,457
Identified cash and net working capital adjustment		341
Less: cash acquired		(1,797	)
Total	$	25,001
Identifiable assets acquired and liabilities assumed:
Current assets	$	4,863
Inventories		4,470
Property, plant, and equipment		1,616
Identifiable intangible assets		16,150
Goodwill		6,660
Liabilities assumed		(2,374	)
Deferred taxes		(6,384	)
Total	$	25,001

The Company finalized the purchase price allocation during fiscal year

2017.

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

June 30, 2017.

Acquisition-Related Costs

Acquisition-related costs include costs related to acquired businesses and other pending acquisitions.

These costs consist of (i) deferred compensation and (ii) acquisition-related professional service fees and expenses, including financial advisory, legal, accounting, and other outside services incurred in connection with acquisition activities, and regulatory matters related to acquired entities. These costs do

not

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

Deferred compensation costs relate to payments due to the Horizon Scientific seller of

$2.8

million on the

second

anniversary and

$5.6

million on the

third

anniversary of the closing date of the purchase. For the

three

and

six

months ended

December 31, 2017,

we recorded deferred compensation costs for estimated deferred compensation earned by the Horizon Scientific seller to date of

$0.7

million and

$1.4

million, respectively. The payments are contingent on the seller remaining an employee of the Company with limited exceptions at each anniversary date.

Acquisition related expenses

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

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

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2017		2016		2017		2016

Deferred compensation arrangements	$	703	$	703	$	1,405	$	703
Acquisition-related costs		-		800		303		800
Total	$	703	$	1,503	$	1,708	$	1,503