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Standex International Corp  (NYSE:SXI)
Q2 2019 Earnings Conference Call
Jan. 31, 2019, 10:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning, and welcome to the Standex International's Q2 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to turn the call over to David Calusdian, from Sharon Merrill. Please go ahead.

David Calusdian -- Sharon Merrill -- Analyst

Thank you, Stephanie. Please note that the presentation accompanying management's remarks can be found on Standex's Investor Relations website, www.standex.com.

Please see Standex's Safe Harbor statement on Slide 2. Matters that Standex management will discuss on today's conference call include predictions, estimates, expectations and other forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially. You should refer to Standex's most recent SEC filings and public announcements for a detailed list of risk factors.

In addition, I would like to remind you that today's discussion will include references to the non-GAAP measures and EBITDA, which is earnings before interest, taxes, depreciation and amortization; adjusted EBITDA, which is EBITDA excluding restructuring, purchase accounting, acquisition-related expenses and onetime items, EBITDA margin and adjusted EBITDA margin.

We will also refer to other non-GAAP measures, including adjusted net income, adjusted income from operations, adjusted net income from continuing operations, adjusted operating margin and free operating cash flow. These non-GAAP financial measures are intended to serve as a complement to results provided in accordance with accounting principles generally accepted in the United States.

Standex believes that such information provides an additional measurement and consistent historical comparison of the company's performance. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available on Standex's second quarter news release. On the call today is Standex's Chairman, President and Chief Executive Officer, David Dunbar; and Chief Financial Officer, Tom DeByle.

Please turn to Slide 3, as l turn the call over to David.

David Dunbar -- President and Chief Executive Officer

Thank you, David. Before turning to our slides, let me make a few introductory comments. We're in the middle innings of a strategic transformation of this company from a broadly diversified portfolio company to a more focused industrial operating company. There are still many moving pieces here at Standex, and I want to point out the factors that we look to as indicators of whether we're making good progress.

Our core objective is to evolve the company's sales to higher growth markets with businesses that deliver higher quality earnings. We accomplished this through portfolio moves and organic initiatives. We acquired Tenibac and Agile, over this summer and announced the divestiture of cooking solutions in October.

We continue to drive organic sales growth through our value creation system and new sales from growth laneways grew 42% to $14.5 million in the quarter. The mix toward stronger businesses positions us to better face the headwinds and setbacks in other businesses and is reading through in our results this quarter. Despite the headwinds we faced in the quarter we grew 5.3% and increase our adjusted EBITDA margin by 76 basis points.

Now, let's turn to Q2 performance highlights on Slide 3. In Q2 overall revenues increased 5.3% to $195.5 million with organic sales up 1.6% in acquisitions delivering 5.1%. Operating income was up 117 basis points in Q2 and adjusted operating income was up 38 basis points. EPS on both the GAAP and adjusted basis was $0.98 a share. As a result of corporate financing decisions affecting interest and tax.

We had a net debt position of $196.5 million at the end of Q2. During the quarter we opportunistically bought back $17.1 million of stock.

In business highlights, we delivered strong organic growth in our Electronics, Engineering Technologies, Scientific and Hydraulics businesses. And I mentioned sales of new offerings grew 42% to $14.5 million in the quarter, principally in Electronics and Engraving.

In Engineering Technologies, after several years of hard work and targeted investments, we're beginning to see profitability improvement as we delivered another sequential quarter of increased margins. This further reaffirms our expectations for the business to deliver strong sales and margin improvement in the second half of our fiscal year, as we capitalize on increased demand in the Aviation, Space, Energy and Defense markets.

On the portfolio front, I'm pleased to say that the Tenibac and Agile integrations are proceeding well. And the Cooking Solutions Group divestiture is also proceeding well, and in line with the expectations we communicated previously.

Our Q2 performance was impacted by several headwinds, including the ongoing softness in the North American refrigeration market that impacted revenue by $5 million in EBIT by $1.7 million. We continue to take actions to better align the refrigeration business with current market demand, so that we can better leverage the benefits of the restructuring actions that were completed last year. Softness in China is affecting our Electronics and Engraving businesses and material inflation is a headwind for Electronics.

In addition, our team remains focused on deploying our operating model, Standex value creation system. To continuously improve our organic performance, as we also continue to make portfolio moves that further improve the profile of the company.

Please turn to Slide 4. Here is a high level look at the key signposts in our financial performance. Overall sales growth 5.3% was accompanied by an increase in quality of earnings as reflected in increases in gross profit, operating income and 76 basis point improvement in EBITDA margin. You can also see the significant effect that interest in tax had on net income resulting in EPS flat to last year. These effects are temporary and masked the underlying performance strength of the company overall.

When I began here five years ago, we communicated that we would target an EBITDA margin of 15%. You can see in the upper right graph that in the past five years our EBITDA margin has increased from 12.5% to 15.5%. This is a key reference point for us and one we uses as we evaluate internal investments and the attractiveness of acquisitions. We have since raised our target to 17% that's communicated previously. We are confident that we're taking the necessary actions to drive our transformation forward and look forward to keeping our shareholders updated as we deliver on key milestones in advance on our journey.

With that, I will turn the call to Tom to review our second quarter results. Tom?

Thomas DeByle -- Vice President, Chief Financial Officer, and Treasurer

Thank you, David, and good morning, everyone. Slide 5 shows our historical trend of adjusted earnings per share and failed on a GAAP basis as well as on an adjusted basis. GAAP earnings per share was $0.98 for Q2 FY'19 which compares to a loss of $0.34 for the year ago quarter. Our adjusted earnings per share for Q2 FY'19 was also $0.98, which was flat versus the prior year despite the fact that sales were up 5.3%.

As David noted, adjusting EPS was impacted by higher interest expense, a higher tax rate year-over-year. Interest expense was up versus the prior year based upon three key elements: First, borrowing for acquisitions; second, higher working capital needs; and third, stock repurchases during the quarter. We anticipate interest expense is come down in the fourth quarter as we complete the sale of cooking solutions and the repatriation of cash.

The tax rate was higher as the planned repatriation of cash is subject to foreign withholding, which is in our blended rate for the quarter.

As shown on the bottom of Slide, our revenue and earnings performance this quarter was consistent with our historical seasonal trends.

Please turn to Slide 6 which details our revenue changes by segment. Overall Q2 organic growth was up 1.6% with three of our five businesses: Engineering Technologies, Electronics and Hydraulics demonstrating organic growth. Our scientific business included in our Food Service numbers that strong organic sales growth of 11.3%, however, did not offset the decline in sales from the refrigeration business. Acquisitions of Tenibac in Engraving and Agile and Electronics contributed 5.1% to our Q2 growth while foreign exchange had an unfavorable 1.4% contribution.

Please turn to Slide 7, which summarizes our second quarter results on a GAAP and adjusted basis. Operating margin was up 117 basis points on a GAAP basis and 38 basis points on a non-GAAP basis. Earnings per share in Q2 FY'19 was $0.98, on a GAAP basis and non-cash basis. EPS with a loss of $0.34 in the prior year period on a GAAP basis due to the impact of the then recently passed US tax law in $0.98 on our non-GAAP basis last year.

As mentioned earlier, business unit performance was up. However, EPS was impacted by the higher interest expense and tax rates in the quarter versus prior year. We anticipate lower interest expense in our fourth quarter fiscal '19.

Please turn to Slide 8, which is a bridge that illustrates the impact of special items on net income from continuing operations for the quarter. The current quarter reflects the benefit of lower restructuring costs offset by higher interest costs and higher tax rates. More specifically, tax affected special items in Q2 FY'19 include $0.1 million of restructuring charges, $0.6 million of acquisition related costs offset by $0.8 million of discrete tax items.

Q2 2019 GAAP net income was $12.5 million compared to a net loss of $4.3 million for the same quarter last year. Adjusted net income of $12.5 million was flat with the same quarter last year.

Turning to Slide 9. Networking capital at the end of the second quarter of fiscal '19 was $164.9 million compared with $142.5 million in the prior year quarter. Working capital turns decreased to 4.7 from 5.2 in the year ago period.

Two items impacted working capital turns. First, the new accounting standard ASC 606 for revenue recognition decreased working capital turns by 0.3 turns in the current quarter. This relates to the larger manufacturing processes at our Engineering Technology segment.

Second, in the prior year, we had higher accounts payable related to the cabinet moved from our Hudson, Wisconsin to New Albany, Mississippi facility causing a 0.2 improvements working capital turns in the prior year. If you were to restate both periods, working capital turns would be five in both periods.

Acquisitions do not have a material impact on working capital turns. However, it did increase working capital by $8.1 million versus the prior year.

Slide 10 illustrates our debt management. We closed the quarter with net debt to find us funded debt less cash of approximately $196.5 million compared with $190.2 million at the end of the first quarter.

Our ratio of net debt to capital was 30.3% at the end of Q2 compared with 29.2% at the end of the first quarter and EBITDA to funded debt was 2.08 times compared to 2.35 times at the end of Q1. During the quarter, we renewed our credit facility, increasing the facility from $400 million to $500 million with favorable terms. We continue to expect to repatriate the $50 million in fiscal 2019. At the end of the second quarter we had repatriated only $5.6 million. The repatriation process in many locations involves approval from Foreign governments, statutory audits and other approvals that length in the repatriation cycle. We continue to work through these requirements in multiple jurisdictions in order to achieve our repatriation targets and we expect to be completed early in Q4.

To wrap up where we are on debt. We completed -- we will complete the sale of our Cooking Solutions Group and repatriation of foreign cash before our fiscal year end. We will apply the proceeds in line with our capital allocation approach. We will use the new credit facility and lower leverage to strengthen our higher growth operating businesses through strategic organic growth investments and acquisitions.

Please turn to Slide 11. Overall, capital spending in Q2 came in at $7.6 million. During the quarter, key investments were made to add additional Laser and Nickel Shell capacity and engraving. In addition, we made productivity and facility investments in our Electronics segment.

Looking ahead, we continue to project our capital spending in fiscal 2019 in the range of $35 million to $36 million to support our growth initiatives and operational excellence initiatives. We expect depreciation to be about $23 million and amortization to be about $9 million.

Slide 12 details a reconciliation of free operating cash flows, which were $7.7 million for the quarter. As you can see on the graph, our free operating cash flow followed seasonal patterns for the quarter. We expect the free operating cash flow to improve throughout the remainder of the fiscal year and continued to target 100% of net income on an average over three year to five year planning horizon.

With that, I'll turn the call back to David.

David Dunbar -- President and Chief Executive Officer

Thank you, Tom. Please turn to Slide 14. And I'll begin our segment overview with the Food Service Equipment Group. In Q2 revenues from continuing operations decreased 6.2% in operating income decreased 13% compared to prior year.

Scientific sales were up 11.3% as we benefited from new equipment rollout at major drug retail customers. This was more than offset by the double digit sales decline in refrigeration where we experienced ongoing soft demand from Drug Retail, Dollar Stores and Quick Service Restaurants in line with national industrywide levels.

Looking ahead, we remain focused on continuing to grow differentiated products through the promotion and introduction of new offerings in the scientific, merchandising and specialty pump businesses. Including our new innovative scientific Diamond series products shown on the slide. In addition, we will be displaying several new products at NAFEM Show in Florida in February. We also are implementing additional productivity and operational excellence actions to better align the refrigeration business with current market conditions, and to better position are well-established NorLake and Master Bilt brands to capitalize when the markets recover.

Turning to Slide 15. Engraving sales increased 13.6% driven primarily by the addition of the Tenibac-Graphion business that we acquired last summer. Though global sales into auto markets increase organic sales decrease due to headwinds from a decline in Chinese exports due to the impact of tariffs on Chinese toolmakers.

Reduction and texturizing sales to consumer products toolmakers and the push out of an Innovent drum order. Engraving operating income decline 5.2% due to three distinct items: outsourcing expenses related to laser capacity, a tariff-related program cancellation, and increased investment in Tool Finishing and Nickel Shell growth laneways programs.

Looking ahead, we remain focused on completing the Tenibac integration which is progressing well. In addition, we will continue to execute on growth laneways like Architexture, Nickel Shell, Laser and performance surfaces that position Standex to capitalize on robust automotive program roll outs and the proliferation of Electric vehicles.

We anticipate lower volumes in Q3 as tariff-related headwinds are expected to continue. However, we expect volumes to begin to recover as we move into Q4.

Please turn to Slide 16. Engineering Technologies. Sales grew 7.5% year-over-year due to strength in space and energy, which is partially offset by lower aviation components sales. Orders increased in Aviation lipskin components, defense in space markets. For the second quarter in a row, ETG's operating income increased sequentially, with operating income margin growing to 8.7%. Demonstrating that the hard work our team has been putting in is driving improved profitability.

Development work on a key space program lowered overall margins in the quarter. However, once developed and put into production the program is expected to drive higher margins.

Going forward, we are focused on delivering sales and margin improvement in the second half of our fiscal year as we capitalize on increased demand in the Aviation, Space, Energy and Defense markets. In addition, we are completing the productivity improvements to increase machine uptime and reduced setup times. The benefits of this program are expected to flow through by the end of the fiscal year.

Please turn to Slide 17, Electronics. Electronics sales increased 14.5% year-over-year with double digit growth and sensors, switches, relays and planar technologies. This was partially offset by tariff-related demand slowdown in Asia. Adjusted operating income was up 4.1% year-over-year. The Agile acquisition contributed to overall electronic sales growth and was impacted by a slowdown in the semiconductor equipment market. The switch business also experienced $1.1 million of material inflation.

During the quarter, we opened our first electronics factory in India to serve as a global source and provide better support to a growing customer base in India. Looking ahead, we are focused on following up on new business leads and accelerating new business opportunities, such as battery management systems and electric vehicles, machine safety and medical sensor programs to counter softer market conditions. In addition, we continue to advance the integration of Agile magnetics to further enhance our ability to service the high-reliability, mission-critical and custom-designed magnetics market.

Please turn to Slide 18, hydraulics. Hydraulics sales increased by 13.4% with orders and backlog increasing double digits as well. This was driven by robust market strength and the container handling aftermarket and refuse markets. Operating income grew 27.2% year-over-year, with operating margin of 15.9% reflecting the favorable elimination of section 301 Tariffs on certain products from our Chinese subsidiary, as well as productivity improvements due to CNC machine uptime.

We remain optimistic about the Hydraulics Segment as we continue to leverage the benefits of these productivity improvements. A strong market environment and the anticipated softening of metal prices in the next few quarters. Before we go to questions, let me leave you with a few key thoughts as shown on Slide 19. First, despite the market headwinds we face during the quarter, we deliver top line growth to 5.3%, we grew gross profit, operating income and EBITDA margins. And we had very strong performance as Electronics, Engineering Technologies, Scientific and Hydraulics.

Second, the actions we've taken to transform our portfolio continue to evolve the company to higher quality mix of businesses. In the past 12 months we acquired Tenibac and Agile and moved Cooking to discontinued operations. This supported 76 basis point increase in EBITDA as a percent of sales in the quarter.

Third, as we turn to the second half of 2019, although we expect to face certain headwinds we are positioned to capitalize on several catalysts. These include expected strong second half performances by Scientific, Hydraulics and Engineering Technologies, and new business opportunities in all businesses. In addition, as we complete the sale of Cooking and wind down our repatriation program we expect to improve our leverage ratio versus the prior year and add more dry powder to our balance sheet.

Fourth, we continue to focus on investments on our large funnel of organic initiatives and acquisitions that enhance our high return platforms, such as Electronics and Engraving. With a strong balance sheet we are well positioned to invest in the platforms where we see the greatest opportunity to enhance shareholder value. We are confident that we're taking the actions necessary to aligned business with market demand while also positioning Standex to deliver on our long-term financial targets and fulfill our mission to become a best-in-class operating company. We are excited for the opportunities ahead and thank our employees customers and shareholders for your support. We look forward to keeping you updated.

Now with that, we'll take your questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from Chris Moore of CJS Securities.

Chris Moore -- CJS Securities, Inc -- Analyst

Hi, good morning, guys.

David Dunbar -- President and Chief Executive Officer

Good morning.

Thomas DeByle -- Vice President, Chief Financial Officer, and Treasurer

Hi, Chris.

Chris Moore -- CJS Securities, Inc -- Analyst

Good morning. Maybe we could start with Electronics. Just, could you maybe provide a little bit more detail in terms of the tariff-related demand slowdown in China and maybe your kind of best guess in terms of, kind of, the outlook and how that could possibly -- timing in terms of potential resolution things like that.

David Dunbar -- President and Chief Executive Officer

Yes, many of our Electronics in China are sold to OEMs that then export from China and there -- they may have been impacted by the tariffs. We expect that to continue this quarter. Beyond that I guess, your guess is probably as good as mine. So our -- with some confidence, we see continued softness in Asia in Q3.

Chris Moore -- CJS Securities, Inc -- Analyst

Got you. On the Engraving side, any different conversations there in terms of China.

David Dunbar -- President and Chief Executive Officer

No, no, really there is different pockets of toolmakers in China. And then in Southwest China, many of those toolmakers export. They were the ones that were hit. And it actually came as a bit of a surprise to us. We actually had a large job on our floor in our Engraving side in the Dongguan and it was canceled as we were starting to do the texturizing and they decide to sources those tools. It was the most amazing thing, we've ever seen that happened before. So that So that caught us a bit off guard. That will likely continue also through this quarter, and we'll see how that the macro level negotiations between China and the US go and tariffs.

Chris Moore -- CJS Securities, Inc -- Analyst

Got it. On Refrigeration side it sounds like you talked about additional productivity operational excellence. So there's additional restructuring within refrigeration or how should we kind of look at this.

David Dunbar -- President and Chief Executive Officer

No. I think its more continuous improvement. The shame is, if we look at the internal metrics of our plants, the plants are operating better than they have in prior years. The restructuring we did last year -- we modify the cost structure, but we also put in a lot of process improvements in both the plants and that's reading through right in the first time measures, quality, productivity. And we continue to roll out those events cell-by-cell through the plant to continue or continue improvements. But -- the comment about continued productivity improvements was in that way, in continuous improvement, we did not expect in a more significant restructuring in that business.

Chris Moore -- CJS Securities, Inc -- Analyst

Got you. And, so let me just jump back to Engraving real quick. So you talked about expecting Q3 volumes to be a bit lower, and then Q4 kind of recovering a little bit. What's the assumption behind the pickup in Q4?

David Dunbar -- President and Chief Executive Officer

Just that new customer OEM -- the OEM new model release schedule supports a pickup in Q4.

Chris Moore -- CJS Securities, Inc -- Analyst

Got it. All right. Appreciate it. We come back in (inaudible).

Operator

Your next question comes from George Godfrey with CLK.

George Godfrey -- CL King & Associates, Inc -- Analyst

Thank you. Good morning, Dave and Tom.

David Dunbar -- President and Chief Executive Officer

Good Morning, George.

Thomas DeByle -- Vice President, Chief Financial Officer, and Treasurer

Good morning, George.

George Godfrey -- CL King & Associates, Inc -- Analyst

I wanted to ask about the inflation class you call out on the Electric -- Electronics segment. Of those cost will you be able to push through to the customers over time?

David Dunbar -- President and Chief Executive Officer

So that's kind of an interesting very specific commodity. Reed switches, we tip our reed switches with rhodium is well known in the industry. Different reed switch manufacturers use different noble elements. We use rhodium on a line of our switches in Japan. And it's rhodium prices that have accelerated quickly this last year. We have been able to pass some of that through to the market. And we're looking at other ways to mitigate that in the future. But in the -- it was a rapid pickup in the quarter and this last quarter $1 million. We anticipate being able to mute that in the future with price and also some innovations at the operations believe they can bring to be more efficient with our rhodium.

George Godfrey -- CL King & Associates, Inc -- Analyst

Got it. And then, maybe also call out offset slowness in the semiconductor market in the Electronics segment. And as I look at the year-over-year margin compression is about 360 basis points for Electronics. Is there a revenue mix shift combined in that semiconductor products that maybe they're more profitable than other pieces of that business?

David Dunbar -- President and Chief Executive Officer

Well, the semiconductor mix shift really was -- is like the Agile acquisition. That's one of the reasons we're attracted to Agile, it was in very good position in semiconductor equipment and you're -- soon after we acquired Agile that business began to soften, so that really hasn't been in the business long enough that we could call out a mix shift.

George Godfrey -- CL King & Associates, Inc -- Analyst

Okay. And then, last question for me is you called out China weakness for both Electronics and Engraving. I thought I heard you expect some recovery there in Q4, but then, later in your commentary, I thought you're kind of backtracking that. You're guess is as good as mine. So I just want to be clear that Engraving you expect to come back in China and Electronics, no you do not or you're uncertain at this time? Or do I pull it at that level?

David Dunbar -- President and Chief Executive Officer

That's probably fair, it doesn't -- maybe you worded a little differently I'd say Q4 based on our current customer schedules in Engraving. We see comeback in Q4. Based on the visibility we have with our Electronics customers, we don't see that pickup in Q4, but I have to say our visibility somewhat limited. We're confident in softer Q3 for Electronics and Q4 will depend on some macro effects between the US and China negotiations and your market activity in Asia and Europe.

George Godfrey -- CL King & Associates, Inc -- Analyst

Got it. Thank you very much.

David Dunbar -- President and Chief Executive Officer

Thank you. George.

Operator

Your next question is from Chris McGinnis with Sidoti & Company.

Chris McGinnis -- Sidoti & Company -- Analyst

Good morning. Thanks for taking my questions. Can you maybe just feed -- just on the tariff impact to maybe just give a little bit of color on how much of a percentage those products are that you're serving China that are being impacted. Is there a large portion of that portfolio or is it a small portion and how much color you can give us?

David Dunbar -- President and Chief Executive Officer

Let's take your turn, we back into that. So it's really this toolmakers in southwest China that really got impacted, so the impact in the quarter in order magnitude about $1 million. And our China business is very profitable too, Chris. So...

Chris McGinnis -- Sidoti & Company -- Analyst

Okay. The small -- larger because of the impact on the margin side?

David Dunbar -- President and Chief Executive Officer

Yes. Right.

Chris McGinnis -- Sidoti & Company -- Analyst

And then just, I guess, on the Food Service -- on the Refrigeration. Any -- and if you said that I apologize, just any, maybe a positive outlook would given. I know you've talked about the subway and some other bigger customers coming back. Any visibility on that offer that should help benefit over the next year? Or how we look in there?

David Dunbar -- President and Chief Executive Officer

We're still well positioned for that and some other opportunities, if they go ahead. With that and other opportunities there discussions between the corporate and franchise owners of how much to invest in the individual shops which is delaying those roll-outs.

Chris McGinnis -- Sidoti & Company -- Analyst

Okay. And then lastly, you just talked about a space program that weighed on the margin in the quarter. But then, you think going forward should be more profitable. Can you just maybe provide a little bit more detail on that? Thanks.

David Dunbar -- President and Chief Executive Officer

Tom, on our magnitude there?

Thomas DeByle -- Vice President, Chief Financial Officer, and Treasurer

Yeah, it probably depressed our margin rate 200 basis points.

Chris McGinnis -- Sidoti & Company -- Analyst

All right. And then what happened -- what changes going forward that, that improves like that (inaudible).

David Dunbar -- President and Chief Executive Officer

As soon as they get into production. You know these are development programs that work over 18 months and we're getting toward the end of it and they're making good progress.

Chris McGinnis -- Sidoti & Company -- Analyst

Great. Okay. Thanks for that. I appreciate that. Thanks. Good luck in Q and Q3.

David Dunbar -- President and Chief Executive Officer

Thank you, Chris.

Operator

Our next question comes from DeForest Hinman with Walthausen & Company.

DeForest Hinman -- Walthausen & Company -- Analyst

Hi. Thanks for taking my question. Just so I'm kind of beating a dead horse here on the tariffs, but just so we understand. I thought we had kind of a localized Engraving texturization business, we sell the product in the market it's demanded. So how is the business impacted by Chinese or US tariffs on the Chinese exports?

David Dunbar -- President and Chief Executive Officer

Yeah. Let me rewind the clock a few months. When we talked in prior quarters about tariff impact, we knew it was affecting the Hydraulics business. We also know it was affecting our scientific business, but they're in the same budget on the competitors, they were able to pass the costs through. In the quarter, DeForest, we learned that, as I mentioned in Southwest China, a number of our toolmakers primarily serve in export markets and the manufacturing tools in China they send into our shop for texturizing, the toolmaker takes it back and then exports. And it's that niche of Chinese toolmakers that have been impacted by tariff.

And so, we did not call that out this last -- last quarter when we spoke with you, because we didn't have visibility to that effect at the time.

DeForest Hinman -- Walthausen & Company -- Analyst

Okay. So, it's just kind of the way it moves around versus pass directly exporting the product to the US.

David Dunbar -- President and Chief Executive Officer

Yeah. We do not export the product. We provide the services to toolmakers in the regions where we participate. And it was their ability to compete globally with the tariffs that was impacted.

DeForest Hinman -- Walthausen & Company -- Analyst

Okay. And then on the Engraving we called out the three items you're calling them discrete. Can we get a dollar number on each of those outsourcing expenses on laser program cancellation? Did we eat that and then the delayed drum?

David Dunbar -- President and Chief Executive Officer

Yes. On the order of magnitude, the last one -- within the Engraving business, we have this business called -- with the brand name Innovent. That makes drums that go into production lines for diapers and incontinence pads and things. It's about $12 million business year in year out.

In the quarter, they had a program pushed out, it's about $1 million in sales in very high gross margins. So $1 millions of sales and over 50% gross margins. The -- older the laser outsourcing is $600,000 of cost and that had to do with some lasers that were down and just it took awhile and recalibrated up and running again in that time they were down to satisfy customer demand, we outsource that work to other other companies that lasers -- that reduce the margins.

And then the third one was the...

Thomas DeByle -- Vice President, Chief Financial Officer, and Treasurer

It was the cancellation of the program in China. About $800,000 in sales we didn't get it at a high margin.

DeForest Hinman -- Walthausen & Company -- Analyst

And you said, it sound like that was on the floor and they canceled it. So we have to eat some (inaudible).

David Dunbar -- President and Chief Executive Officer

The toolmaker get, but we didn't have to eat anything. We just...

Thomas DeByle -- Vice President, Chief Financial Officer, and Treasurer

We didn't collect the sales and the margin that was in our forecast or expectation.

DeForest Hinman -- Walthausen & Company -- Analyst

Okay. So this $600,000 of out source laser costs that you -- should we think about that is being onetime in nature?

Thomas DeByle -- Vice President, Chief Financial Officer, and Treasurer

Yes. Yes.

DeForest Hinman -- Walthausen & Company -- Analyst

And the Innovent drum -- is that still loss or let's just push to...

David Dunbar -- President and Chief Executive Officer

No no. We received yet pushed out a quarter.

DeForest Hinman -- Walthausen & Company -- Analyst

That's helpful. And then -- we've had a lot of commentary changes global with auto production in terms of a shift toward more SUVs from domestic auto manufacturers. And then from the global numbers changing in terms of outlook. It sounds like we have a little bit of a drop in the third quarter on Engraving. And then a pickup in the fourth quarter. In the past you talk about visibility in your Engraving business based on platform ramps as like that. Should we still be anticipating a positive organic growth outlook on next 12 month basis for that business?

David Dunbar -- President and Chief Executive Officer

Yes. The industry data we key up IHS -- data from IHS. We compare it to input from all of our sites and that data supports growth over the next 12 months. And moving to SUVs was a good move for us. We make -- there is more invested in interior aesthetics in an SUV, they're higher in cars -- higher in vehicles than other cars. So think we stick by that, we just hit. We have good visibility to these OEM schedules. So we can comment on the Q3 softness and have confidence about Q4 pickup.

DeForest Hinman -- Walthausen & Company -- Analyst

Then when we think about the margins for this business, I have to do the math more closely, but there's some onetime things in there. This is the lowest margin we've had in the segments -- long time. Then we look back at 2018 and 2017 obviously it was very strong year. Where should we be thinking about where the margins for this business could go and we've made some investments in new technologies and things like that, but should we fundamentally be seeing a improvement in margin going forward based on new technology, new programs and higher revenue outlook on an organic basis?

David Dunbar -- President and Chief Executive Officer

Yeah. We look at the gross margins of the jobs we deliver, both traditional and new technologies continue to support our view that this is a low 20% margin. So if you anchor yourself for 22% EBIT, as we've seen in the past that's in line with our expectations.

DeForest Hinman -- Walthausen & Company -- Analyst

Okay. And then on the rhodium prices going up. Are we -- do we have any long term contracts with that or are we buying in the spot market when we are purchasing a product?

Thomas DeByle -- Vice President, Chief Financial Officer, and Treasurer

It's a mix of product market. It's definitely is the spot market for us.

DeForest Hinman -- Walthausen & Company -- Analyst

Okay. And I know we've been working on some stuff either reduce rhodium or switch to alternative metals. I mean, how far along are we potentially achieving. Is this still a ways out or is that more of a near-term opportunity?

David Dunbar -- President and Chief Executive Officer

We have some switches that use other -- like resonium. Those are growing. Some applications are -- the specific switch with rhodium is approved. So that will be -- it can be a longer process to change that. The longer-term solution for rhodium is process efficiency, efficiency which we're looking at which -- if things go well sometime in the next few quarters and we hope to introduce some efficiency measures that would reduce our rhodium usage.

DeForest Hinman -- Walthausen & Company -- Analyst

And there is still targeted at -- long 20% operating margin in that business?

David Dunbar -- President and Chief Executive Officer

Yes.

DeForest Hinman -- Walthausen & Company -- Analyst

And we've spoken about previously.

David Dunbar -- President and Chief Executive Officer

Yes.

DeForest Hinman -- Walthausen & Company -- Analyst

And then on the engineered business, we'll talk about a bright spot, axing out that space cost that you just talked about. It looks like that business is moving toward that double digit operating profit margin level which would be a big change versus where that segments been previously. Should we be anticipating double digit sales growth, double digit operating margins in the second half of this year?

David Dunbar -- President and Chief Executive Officer

Yes. Yes.

DeForest Hinman -- Walthausen & Company -- Analyst

Okay.

David Dunbar -- President and Chief Executive Officer

Yeah. Very strong backlog. And this is a business that has great visibility out several quarters to their volume. I mentioned in the text that they've been investing efforts in setup time improvements change over time reduction they need that to expand the capacity for the backlog they have coming at them.

DeForest Hinman -- Walthausen & Company -- Analyst

Okay. And then strong back to Electronics, I forgot to ask this. Where is the backlog number in that business right now?

David Dunbar -- President and Chief Executive Officer

(inaudible).

DeForest Hinman -- Walthausen & Company -- Analyst

Okay. And then while you getting that. Can you just give us an update in terms of where we are with Cooking Solutions that transaction. Anything you can tell us in terms of the interests number of people we're talking to, NDAs, and we did disclose that one small transaction. Should we read into that the transaction happened sooner rather than later, given our June 2019 target of selling that business?

David Dunbar -- President and Chief Executive Officer

Yeah. I would just say this that when we first announced this in October and then in subsequent communications at their conference, we communicated that there is a lot of interest in the business what we're pleased with the interest both from strategics and NPEs. We communicated we anticipated a closed during this current quarter, and we're still -- we're still on track to meet those expectations.

DeForest Hinman -- Walthausen & Company -- Analyst

Okay. And then on the share repurchase...

Thomas DeByle -- Vice President, Chief Financial Officer, and Treasurer

Then the backlokg -- DeForest, the backlogs were up -- backlogs for under a year were up $8 million year-over-year, but of course, some of that is Agile. And you'll see it in the queue later today or tomorrow.

DeForest Hinman -- Walthausen & Company -- Analyst

Okay. Sure. Can you just give us update on capital deployment priorities. I see the repurchase activity in the second quarter, it's looking at trailing metrics, it's the biggest repurchase we've done in over a decade...

David Dunbar -- President and Chief Executive Officer

In a long, long time. Yes.

DeForest Hinman -- Walthausen & Company -- Analyst

So should we -- well, first can you give us an update on how you're allocating capital allocation priorities?

David Dunbar -- President and Chief Executive Officer

Yes. Our capital allocation model hasn't changed. We look at -- we keep the lights on, and then we prioritize strategic investments for growth with our organic businesses with a floor. We look at cash on cash returns 15% IRR. We have a good -- a good list of investment opportunities in our growing businesses we intend to fund. We then look at acquisitions with attractive returns I tell you, we have a good funnel. We have some very attractive acquisitions out there that would reinforce our growth businesses. And then we get into a evaluation of a serious buyback.

And in this last quarter, as we looked at, and we just compared if we take $10 million and put it into a capital investment one of our businesses that's a return to 15% higher or knowing the EBITDA the business generates. And what we believe the business is worth what creates more value for the shareholders buyback or CAPEX. And there was a period in this last quarter after our last earnings release that math was favorable to doing a buyback. So we'll continue to take an opportunistic view of our buyback.

We have $100 million authorization from the board we announced a few years ago. So we've used just about $2 million to $20 million in total. So I'd say there's nothing has changed in our priority or the approach to capital allocation. We have the authorization and are able to execute it when need it.

Thomas DeByle -- Vice President, Chief Financial Officer, and Treasurer

$33 million used.

David Dunbar -- President and Chief Executive Officer

Okay. We used $33 million (inaudible) . Okay.

DeForest Hinman -- Walthausen & Company -- Analyst

And could you repeat that certainly, could you repeat that $33 million has been used of the $100 million authorization.

David Dunbar -- President and Chief Executive Officer

Yeah. We also use that to overcome dilution from executive comp. So we've used $33 million of the $100 million authorization.

DeForest Hinman -- Walthausen & Company -- Analyst

Okay. And it looks like your share price is down and it's below the level. I think that you disclosed you were buying. So that's math. I guess once again it's favorable terms as -- whether or not we should be buying stock is (inaudible).

David Dunbar -- President and Chief Executive Officer

Correct. We have to run the analysis, but directionally -- makes sense.

Operator

Your next question comes from John Cumming with Copeland capital.

John Cumming -- Copeland capital -- Analyst

Hi, guys. Thanks for taking the question. Just one question on Agile. Was that business actually down year-over-year in sales. And I'm just trying to understand more about the exposure there to the semiconductor industry.

David Dunbar -- President and Chief Executive Officer

I believe so. I believe they are down year-on-year.

John Cumming -- Copeland capital -- Analyst

And then their exposure in fsemi, I'm just trying to understand exactly, is it all exposed to semiconductor market and in which areas?

David Dunbar -- President and Chief Executive Officer

No, no. We have a good military aerospace component to have semis, that was 30% of their business in semi. And then the other industrial applications.

John Cumming -- Copeland capital -- Analyst

Okay. And what about the margins of that business versus the overall Electronics. How does they compare?

David Dunbar -- President and Chief Executive Officer

From an EBITDA standpoint, if you look at our Electronics business we've got our switches and sensors which is our highest margin segment or high reliability magnetics is something below that EBITDA -- In the low 20s. So probably a couple of 100 basis points lower than the sensor business but in line with the overall.

John Cumming -- Copeland capital -- Analyst

Okay. And then I guess -- I think when you announced that acquisition, you said, they did about 17 million in sales, I guess in their fiscal year. What's your expectation for I guess this next upcoming year, is that business even with what's happened. I mean, is that business going to grow or anything could be more flattish or down, is it down significantly, I'm just trying to get some sense of the number there?

David Dunbar -- President and Chief Executive Officer

Yeah, we are four months into it. First few weeks expected to be down, some 5% to 10% maybe on the year with that semiconductor push out. There's also some repair business for the navy that there was a slug last year. The next round of that business has been scheduled, but it will be in our next fiscal year. So first year probably down 5% to 10%. And then we see it picking back up.

John Cumming -- Copeland capital -- Analyst

Okay. Thanks. And then just one question on Refrigeration. I will say continued weakness there. Is there any reason you can get to this on a bigger picture reason why that whole industry is seeing such a decline this year.

David Dunbar -- President and Chief Executive Officer

Well, I would -- I did wake up this morning to realize when it's 22 below zero in most of the country, nobody wants to buy Refrigeration. But if you look long-term. If you look long-term, it is a business that has had an increasing number of low cost imports affecting a growing piece of the business. So there's been more price competition. We also showed a company a year or two ago. We showed how the channels have evolved in the marketplace to much more business is flowing through buying groups and dealers which is the lower margin channel and also kind of just intermediates manufacturers which we showed there is a couple of years ago, we showed that that effect a little was about a 400 basis point impact on our margin from 2013 to 2017. I think with the two numbers.

The final thing is the walk in part of the business is really tied to North American construction. Once you put a walk it becomes visible integral part of the building. And unless you do a significant remodel or store expansions you're not going to see much of a pickup in the market.

John Cumming -- Copeland capital -- Analyst

Okay. Thanks for the color. And then just one more follow up on Engraving you mentioned in the Chinese toolmakers being impacted. Understand where the end customer ends up going for that product. I guess some they don't buy it from the Chinese toolmaker and I'm guessing you guys are global and so I'm just wondering why I guess you're not getting it from and why you didn't benefit.

David Dunbar -- President and Chief Executive Officer

Yeah. You're exactly right. Our understanding is just this one program was canceled, I think it was canceled. That is not going to be done. And Tom was out there, so he may no ...

Thomas DeByle -- Vice President, Chief Financial Officer, and Treasurer

It was a large US OEM. And they canceled the program for the car. I mean a lot of the cars, so that the vans are getting cancelled and being replaced by SUV's and pickup trucks. So they try just crap that truly.

David Dunbar -- President and Chief Executive Officer

But you're right, John, in that, we do anticipate that for the programs that continue if we lose the order in China we'll pick it up somewhere else in the world maybe a quarter here or there ...

Thomas DeByle -- Vice President, Chief Financial Officer, and Treasurer

Maybe cancel that whole program.

David Dunbar -- President and Chief Executive Officer

In this case it was just outright.

Thomas DeByle -- Vice President, Chief Financial Officer, and Treasurer

Right.

John Cumming -- Copeland capital -- Analyst

All right. Thanks.

Operator

(Operator Instructions) Our next question is a follow up from George Godfrey with CLK.

George Godfrey -- CL King & Associates, Inc -- Analyst

Thank you. Just two questions, Tom. What are you using for the tax rate going forward in Q3 and Q4?

Thomas DeByle -- Vice President, Chief Financial Officer, and Treasurer

29%.

George Godfrey -- CL King & Associates, Inc -- Analyst

29%. And then you have really a target dollar amount for gross that at the end of the year?

Thomas DeByle -- Vice President, Chief Financial Officer, and Treasurer

No. We don't. No. I mean, we want to stay between now 1.5 times and 3 times leverage that we say is our capital allocation.

George Godfrey -- CL King & Associates, Inc -- Analyst

Got it. All right. Thank you very much.

Operator

Thank you. There are no further questions. I will now turn it back to management for any closing remarks.

David Dunbar -- President and Chief Executive Officer

I want to thank everybody for your participation. The good questions as you follow the business. There are a lot of moving pieces in Standex, and we don't -- we're not moving in a straight line, but I think we shared with you how we're thinking about how to allocate our cash regenerate our capital to continually move the business to higher quality earnings. If you look above the line or even EBITDA kind of about where we wanted them to the interest and the tax. In George's last question, interest and tax had a big effect on EPS and I think Tom did a nice job explaining that. So we look forward to go on a way running the business for another three months coming back and reporting to you next quarter. Thank you.

Operator

Thank you. That does conclude today's conference call. You may now disconnect.

Duration: 53 minutes

Call participants:

David Calusdian -- Sharon Merrill -- Analyst

David Dunbar -- President and Chief Executive Officer

Thomas DeByle -- Vice President, Chief Financial Officer, and Treasurer

Chris Moore -- CJS Securities, Inc -- Analyst

George Godfrey -- CL King & Associates, Inc -- Analyst

Chris McGinnis -- Sidoti & Company -- Analyst

DeForest Hinman -- Walthausen & Company -- Analyst

John Cumming -- Copeland capital -- Analyst

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