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, 2019

and

2018

the C

ompany’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, 2019

and

$2.4

million at

June 30, 2018

ains 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

2019

2018

, and

2017

were as follows (in thousands):

	2019			2018			2017
Balance at beginning of year	$	2,184		$	1,571		$	1,363
Acquisitions and other		66			(169	)		52
Provision charged to expense		(267	)		783			316
Write-offs, net of recoveries		(532	)		(1	)		(160	)
Balance at end of year	$	1,451		$	2,184		$	1,571

Inventories

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 (years)	40	to	50
Leasehold improvements	Lesser of useful life or term, unless renewals are deemed to be reasonably assured
Machinery and equipment (years)	8	to	15
Furniture and Fixtures (years)	3	to	10
Computer hardware and software (years)	3	to	7

Routine maintenance costs are expensed as incurred. Major improvements, including those made to leased facilities, are capitalized.

Amortization of computer hardware and software of

$1.4

million,

$1.2

million, and

$0.5

million is included as a component of depreciation expense for the years ended

June 30,

2019

2018

, and

2017

, 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 (years)	5	to	15
Patents (years)	12
Non-compete agreements (years)	5
Other (years)	10
Developed technology (years)	10	to	20
Trade names	Indefinite life

See discussion of the Company’s assessment of impairment in Note

– Goodwill and Note

– 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

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

– Employee Benefit Plans), securities are valued based on quoted market prices for securities held directly by the trust.

Level

– 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

– 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

– 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,

2019

2018

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,

2019

and

2018

were (in thousands):

	2019
	Total		Level 1		Level 2		Level 3
Financial Assets
Marketable securities - deferred compensation plan	$	2,354	$	2,354	$	-	$	-
Interest rate swaps		52		-		52		-

Financial Liabilities
Foreign exchange contracts	$	3,052	$	-	$	3,052	$	-
Interest rate swaps		1,432		-		1,432		-
Contingent acquisition payments (a)		6,418		-		-		6,418

	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

(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

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, 2019

we could be required to pay up to

$5.6

million for contingent consideration arrangements if specific criteria are achieved.

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, 2019

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

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, 2019

the range of outcomes nor the assumptions used to develop the estimates had changed.

Concentration of Credit Risk

The Company is subject to credit risk through trade receivables. 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.

individual customer accounts for more than

of revenues or accounts receivable in the periods presented.

Revenue Recognition

In general, the Company recognizes revenue at the point in time control transfers to their customer based on predetermined shipping terms. Revenue recognized under long-term contracts within the Engineering Technologies group for highly customized customer products that have

alternative use and in which the contract specifies the Company has a right to payment for its costs, plus a reasonable margin are recognized over time. For products recognized over time, the transfer of control is measured 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.

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 salaried distribution personnel. Our gross profit margins

may

not

be comparable to those of other entities due to different classifications of costs and expenses.

Our total advertising expenses, which are classified under selling, general, and administrative expenses are primarily related to trade shows, and totaled

$3.6

million,

$3.4

million, and

$3.8

million for the years ended

June 30,

2019

2018

, and

2017

, respectively.

Research and Development

Research and development expenditures are expensed as incurred. Total research and development costs, which are classified under selling, general, and administrative expenses, were

$6.6

million,

$4.5

million, and

$4.0

million for the years ended

June

30,

2019

2018

, and

2017

, 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

2019

2018

, and

2017

were as follows (in thousands):

	2019			2018			2017
Balance at beginning of year	$	4,966		$	4,667		$	4,335
Acquisitions and other charges		(85	)		(138	)		302
Warranty expense		5,016			6,248			5,052
Warranty claims		(4,619	)		(5,811	)		(5,022	)
Balance at end of year	$	5,278		$	4,966		$	4,667

The decrease in warranty expense during

2019

compared to

2018

is primarily due to better warranty claim experience in the Standex Refrigeration Group.

Stock-Based Compensation Plans

Restricted stock awards, including performance based awards, generally vest over a

three

-year period. Compensation expense associated with these awards is recorded based on their grant-date fair value and is generally recognized on a straight-line basis over the vesting period. 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 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 monthly 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 any that

may

be forward-dated, as cash flow hedges, and changes in the fair value of the swaps are recognized in other comprehensive income until the hedged items are recognized in earnings. Hedge ineffectiveness, if any, associated with the swaps will be reported by the Company in interest expense.

The Company does

not

hold or issue derivative instruments for trading purposes.

Income Taxes

December 22, 2017,

the Tax Cuts and Jobs Act (the “Act” or “TCJA”) was passed which, among other things, reduces the federal corporate tax rate to

21.0%

effective for taxable years starting on or after

January 1, 2018.

For transition year ending

June 30, 2018,

the Company recorded federal taxes using a blended federal rate of

28.0%.

For the year ending

June 30, 2019,

the Company recorded federal taxes using a federal rate of

21.0%.

The provision for fiscal year ending

June 30, 2019

was impacted by several law changes implemented by the Act such as the repeal of the Section

199

manufacturing deduction, changes to the calculation for Section

162

(m) executive compensation deduction, interest deduction limitation and Global Intangible Low Taxed Income (GILTI). As allowed under US GAAP, the Company has elected to treat any taxes due on future U.S. inclusions in taxable income under the GILTI provision as a current-period expense when incurred. The Company will continue to monitor guidance regarding these changes and their impact on the financial statements in later periods.

Earnings Per Share

(share amounts in thousands)	2019		2018		2017
Basic – Average Shares Outstanding		12,574		12,698		12,666
Effect of Dilutive Securities – Stock Options and Restricted Stock Awards		59		90		102
Diluted – Average Shares Outstanding		12,633		12,788		12,768

Both basic and diluted income is the same for computing earnings per share. There were

outstanding instruments that had an anti-dilutive effect at

June 30,

2019

2018

and

2017

Recently Issued Accounting Pronouncements

February 2016,

the FASB issued ASU

2016

02,

Leases (Topic

842

). ASU

2016

requires lessees to recognize most lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. In

July 2018,

the FASB issued ASU

2018

11,

“Leases (Topic

842

) Targeted Improvements.” The guidance requires a modified retrospective adoption and this update provides for an optional transition method, which allows for the application of the standard as of the adoption date with

restatement of prior periods. We plan to use this option in utilizing the effective date as our date of initial application. Consequently, financial information will

not

be updated, and the disclosures required under the new standard will

not

be provided for dates and periods prior to

July 1, 2019.

The new standard provides a number of optional practical expedients in transition. The Company has elected to apply the ‘package of practical expedients’ which allow us to

not

reassess i) whether existing or expired arrangements contain a lease, ii) the lease classification of existing or expired leases, or iii) whether previous initial direct costs would qualify for capitalization under the new lease standard. In preparation for adoption of the standard, the Company is implementing a software solution and enhancing internal controls to enable the preparation of financial information including the assessment of the impact of the standard. While we are still assessing the impacts of the new standard, we currently expect the adoption to result in the recognition of additional lease liabilities of approximately

million to $

million, and right-of-use assets of approximately $

million to $

millio

n as of

July 1, 2019

on the Consolidated Balance Sheet as it relates to the Company’s operating leases. The Company does

not

currently expect that the new standard will have a material impact to the Company’s consolidated statement of operations or cash flows.

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

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

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

on our goodwill impairment testing procedures and our consolidated financial statements.

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 along with providing new alternatives for applying hedge accounting to additional hedging strategies and measuring the hedged item in fair value hedges of interest rate risk. 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. Given the improvements made to the application of hedge accounting under the guidance, the Company decided to early adopt the ASU during the

second

quarter of fiscal year

2019.

June 2018,

the FASB issued ASU

No.

2018

07,

Improvements to Nonemployee Share-Based Payment Accounting

. The amendments in ASU-

simplify several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic

718,

Compensation—Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after

December 15, 2018

with early adoption permitted. The company does

not

expect the adoption of this ASU to have a material impact on its Consolidated Financial Statements.

August 2018,

the FASB issued ASU

No.

2018

13,

Fair Value Measurement (Topic

820

): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement

. The amendments in ASU-

remove, modify and add various disclosure requirements around the topic in order to clarify and improve the cost-benefit nature of disclosures. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after

December 15, 2019

with early adoption permitted. The company does

not

expect the adoption of this ASU to have a material impact on its Consolidated Financial Statements.

August 2018,

the FASB issued ASU

No.

2018

14,

Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic

715

)

. The amendments in ASU-

December 15, 2020

with early adoption permitted. The amendments must be applied on a retrospective basis for all periods presented. The company is currently evaluating the impacts the adoption of this ASU will have on its Consolidated Financial Statements.

August 2018,

the FASB issued ASU

No.

2018

15,

Intangibles - Goodwill and Other - Internal-Use Software (Subtopic

350

)

. The amendments in ASU-

align the requirements for capitalizing implementation costs in a service contract hosting arrangement with those of developing or obtaining internal-use software. This ASU is effective for annual reporting periods, and interim periods with those reporting periods, beginning after

December 15, 2019

with early adoption permitted. The company does

not

expect the adoption of this ASU to have a material impact on its Consolidated Financial Statements.