Standex International Corp

NYSE:SXI

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the Standex Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. [Operator Instructions] Thank you.

I will now turn the conference over to Mr. David Calusdian. Please go ahead.

[David Calusdian, IR, Sharon Merrill Associates]

Thank you, Crystal. 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 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 EBITDA, which is earnings before interest, taxes, depreciation and amortization; adjusted EBITDA, which is EBITDA excluding restructuring, purchase accounting, acquisition related expenses and one-time items. We will also refer to non-GAAP net income, non-GAAP income from operations, non-GAAP net income from continuing operations, 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 in Standex's fourth 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 I turn the call over to David.

[David Dunbar, Chairman, President & CEO]

Thank you, David.

We ended the fiscal year with a strong fourth quarter and I first want to be sure to thank the hardworking, innovative and agile employees of Standex around the world. It's a pleasure to come to work every morning and face our world together.

Overall, revenues increased 4.8% to $227.5 million, with organic sales up 1.2% and acquisitions up 1.8%. We had backlog worth of 10.3% and strength across our end markets. Operating income was up 28.2% in Q4 and adjusted operating income increased 11%. GAAP EPS was $0.99 per share while adjusted EPS grew 14.3% to $1.60 a share. We had a net debt position of $84.2 million at the end of Q4. We delivered topline organic growth in electronics, engraving and hydraulics businesses as we advanced growth laneways, capitalized on the Piazza Rosa and Standex Electronics Japan acquisitions, and supported broad-based growth in our end markets.

We continue to advance our restructuring initiatives in the cooking and refrigeration business which helps deliver a 70 basis points improvement to food service margins in Q4, even with a softer topline growth in the segment. Although Engineering Technology sales and margins were challenged in Q4 as expected due to the anticipated aviation ramp delay, we are optimistic that the operational improvements we made in the business are beginning to yield results and position Standex to capitalize on the long-term growth potential in the business. And finally, hydraulics as expected had another solid quarter as we leveraged our strong backlog and capitalized on improving market conditions at all sectors.

Please turn to Slide 4. On a full year basis, sales were up 15% reflecting double-digit organic growth for the engraving, electronics and hydraulics business and strong contributions from acquisitions as we benefited from a full year of Standex Electronics Japan, and nearly a full year of Piazza Rosa. As our business mix with such a higher margin businesses and we improved performance in lower margin businesses, our adjusted operating income grew 17.8% and adjusted EPS grew 13.6%.

We are entering 2019 with great momentum with visibility into a diverse set of growing end markets, strong performance across our growth businesses, and restructuring improvements that are beginning to read through. Our team is making excellent progress deploying the Standex value creation system across the organizations and we are confident that we're on the right path to deliver on our long-term financial targets. We are fulfilling our mission for Standex via best-in-class operating company that delivers sustainable shareholder value.

With that, Tom will review our fourth quarter results. Tom?

[Tom DeByle, CFO]

Thank you, David, and good morning, everyone.

Slide 5 shows our historical trend of adjusted earnings per share and sales on a GAAP basis, as well as on an adjusted basis. On a full year basis, GAAP earnings per share were $2.86 for fiscal year 2018 which compares with $3.65 for fiscal 2017. Our adjusted earnings per share for fiscal 2018 were $5.17 versus $4.55 in the prior year period, which is a 13.6% increase. It's worth noting that this is the first time in Standex's history that the Company adjusted EPS has been greater than $5. As shown at the bottom of the slide, our revenue and earnings performance this quarter were consistent with our historical seasonal trends.

Please turn to Slide 6 which details our revenue changes by segment. Overall, organic growth was up 4.8% in Q4 with three of our five businesses demonstrating organic growth, namely; Engraving, Electronics and Hydraulics. On a full year basis, four of the segments demonstrated organic growth. The acquisitions of Horizon Scientific, Standex Electronics Japan, and Piazza Rosa contributed 7.9% to our full year sales growth.

Although foreign exchange had a positive impact of 1.9% contribution in fiscal 2018, we expect FX to be a headwind in 2019 given the strength of the U.S. dollar.

Please turn to Slide 7, which summarizes our fourth quarter results on a GAAP and adjusted basis. Q4 operating margin was up 210 basis points on a GAAP basis and up 70 basis points on a non-GAAP basis. Earnings per share was down 10.8% on a GAAP basis, this was primarily driven by the impact of the new tax law relating to foreign withholding taxes on repatriation of foreign cash. On a non-GAAP basis EPS was up 14.3%.

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. Tax-affected special items included restructuring charges of $1 million, acquisition-related costs of $0.6 million and discrete tax item of $6.3 million related to the new tax law as mentioned on the previous slide. GAAP net income was down 10.7% and adjusted net income was up 14.4%.

Please turn to Slide 9, which summarizes our fiscal 2018 results on a GAAP and adjusted basis. 2018 operating margin was up 110 basis points on a GAAP basis and up 30 basis points on a non-GAAP basis. Earnings per share was down 21.6% on a GAAP basis driven by the effect of the new tax law. Adjusted earnings per share was up 13.6% on a GAAP basis.

The next slide is Slide 10, which is a bridge that illustrates the impact of special items on net income from continuing operations for the full year. Tax-affected special items include restructuring charges of $5.7 million, acquisition-related costs of $2.8 million, discrete tax items of $20.8 million related to the new tax law, and $0.2 million of purchase accounting. GAAP net income for fiscal 2018 was down 21.3% and adjusted net income was up 13.9%.

Turning to Slide 11, net working capital at the end of the fourth quarter of fiscal 2018 was $171.7 million compared with $150 million in the prior year. Working capital turns decreased to 5.3 from 5.8 in the year ago period due to working capital needs from sales growth and changes in business mix.

Slide 12 illustrates our debt management. We ended Q4 in a net debt position of approximately $84.2 million, a decrease of $24.2 million since the third quarter. We defined net debt as funded debt less cash. Our ratio of net debt to capital was 15.7% compared to net debt to capital of 19.5% last quarter.

Please turn to Slide 13. Overall capital spending in 2018 came in at $26 million, slightly below our expectations of $28 million due to the timing of projects. Looking ahead, we are committed to increasing our capital spending in 2019 to the range of $35 million to $36 million to support our strategic priorities including $5 million for the new electronics plant in Cincinnati. We expect our depreciation in the range of $22 million to $23 million and the amortization in the range of $8 million to $9 million.

Slide 14 details a reconciliation of operating cash to free cash flow on a non-GAAP basis. Conversion of free operating cash flow was 198% for the quarter and 77.1% for the fiscal year. The adjustment to free operating cash flow for the quarter and year was $5.5 million for a voluntary pension contribution made during the quarter at a higher tax rate to take advantage of the benefits available during the transition to the new tax rates. The adjustments in net income included a $6.3 million for the quarter and a $20.8 million for the year related to the new tax law.

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

[David Dunbar, Chairman, President & CEO]

Thank you, Tom.

Please turn to Slide 16 and I'll begin our segment overview with Food Service Equipment Group which as a reminder, includes five independently run P&Ls that each address unique markets, customers, buyers and competitors. Revenues for this segment decreased 2.4% in Q4. Our scientific and specialties solutions businesses achieved double-digit growth as we capitalized the new product rollouts and new business opportunities. However, this growth was more than offset by lighter refrigeration order volumes from dollar stores and chain customers, as well as lower customer rollouts in our cooking business and a slower than expected ramp of sales to dealers from our Nogales plant. Despite the topline decline, operating income grew 70 basis points as we began to realize the benefits from the restructuring efforts in our cooking and refrigeration businesses.

Looking ahead, we remained focused on factors that we can control; these include growing differentiated products through expanded market tests, NBRs [ph], growth laneways, and capitalizing on the improved productivity in our refrigeration and Nogales plants to deliver continued margin improvements. We anticipate continued growth in the specialty solutions business led by strong new business opportunities for espresso and display merchandising. The scientific refrigeration outlook is also strong due to new product rollouts, backlog and order intake; note that the tariffs could have accelerated demand in the fourth quarter and we are closely monitoring those dynamics.

For cooking in the coming quarters, we expect to see growth from our speed oven [ph], as well as several BKI offerings. We have also been pleased with our early traction for our recently introduced 14-inch fryer where orders are already tracking ahead of plan. A key focus for cooking is to recapture business lost during the operational performance problems stemming from the plant relocation. These new product rollouts are expected to improve our year-over-year comparisons in first half of FY19. The softness in refrigeration dollar stores however is anticipated to continue to impact Q1 with a recovery expected in the second half of fiscal year 2019.

Turning to Slide 17, Engraving. Sales increased 28.6% driven by demand for new technologies including laser, tool finishing and nickel shell. Sales of new technologies grew 169% and contributed $6.1 million of $8 million year-over-year sales increase. We reported strong growth across all geographies with sales from new automotive platforms for major OEMs. Finally, our Piazza Rosa acquisition also contributed to sales growth as we spread the technology across all our geographic regions. Operating income in engraving was up 36.1% with a margin of 21.6%. Looking ahead, we continue to focus on capitalizing on growth from laser, tool finishing and nickel shell technologies and expect to spend approximately $10 million on capital investments to support these new technologies. New model rollouts should remain robust for the foreseeable future.

Earlier this month we closed on the acquisition of Michigan based, Tenibac-Graphion, a provider of chemical and laser texturing services, tool repair services and prototype parts primarily for automotive customers. By bringing on Tenibac-Graphion suite of Mold-on [ph] tool texturing services, we are expanding our offerings and accessing a highly skilled workforce that will be essential to our rollout of new offerings in North America.

Please turn to Slide 18, Engineering Technologies. Sales were down 14.9% with softness as expected across most end markets. Space sales were down $2.8 million or 29.5% due to customer delayed shipments into the first month of the fiscal year, common in this business. Aviation was down slightly as programs have been delayed as anticipated, aviation volume should increase in the second half of fiscal 2019 that we anticipate another soft quarter. Operating income was down 32% with margins of 10.4% as a result of market mix and lower volume leverage. On the positive side, as we exited this quarter we saw early signs of improved profitability, our backlog was up 21% from the prior year, demand is building in this business. Going forward, we are focused on leveraging the investments we have made to support the upcoming aviation ramp, delivering on the growing backlog for critical engine parts [indiscernible] in executing on our operational excellence initiatives to improve operating efficiencies.

Please turn to Slide 19, Electronics. Electronics sales increased 15.4%, and backlog is up 13.1% with double-digit growth in all regions and solid performance across all end markets and in all product categories. Standex Electronics Japan continues to perform exceptionally well and contributed to the strong performance this quarter. Operating income was up 29.1% and we reported a margin of 26.2%. We have improved [indiscernible] profitability through the sharing of best practices across our plants in driving process efficiencies.

Looking ahead, we expect strong growth to continue across all regions and our total backlog billable under one year is up $7.4 million or 13.1%. Request for quotations are increasing and there is a solid funnel of new business opportunities. At the same time, components and material lead times continue to stretch out and challenge [ph]. We anticipate a $13 million capital investments in electronics, including $5 million for a new plant and headquarters in Cincinnati.

Please turn to Slide 20, Hydraulics. The 19.5% sales increase in Hydraulics was driven by strength across all sectors including major refuse customers, new applications and dump trailer sell interest. Orders were strong and we exited the quarter with backlog that was more than double the prior year on a period. In addition, overall operating margins were back to normal levels at 17% and operating income increased by 16% as we began to realize the benefits from proactive pricing actions and capital investments earlier in the year. We remain optimistic about the future of this segment as we continue to leverage the strong environment and pursue market tests to grow the business. We expect robust demand for the remainder of calendar 2018 and the refuse, dump trailer and aftermarket as conditions in construction, housing and infrastructure remains strong.

Turning through it's key concern however and even effect for the full year were increased costs in the range of $2 million to $3 million in FY2019. We believe we will be able to pass-through much of this cost. In addition, steel pricing continues to rise and could be a bit of a headwind which we will mitigate with capital investments, operating efficiencies and pricing actions.

Before we go to questions, let me leave you with a few key thoughts as shown on Slide 21. First, we reported organic growth in 1.2% for the fourth quarter and 5.2% for the year with double-digit organic growth in engraving, electronics and hydraulics with fiscal year. Second, we are taking actions to continue improving margins. Food Service margins have improved during the fourth quarter and we expect positive momentum as we progress in fiscal 2019. The emerging new platform ramp in aviation will grow volume of higher margin parts in engineering technologies. Third, our recent acquisitions are performing well including a nice contribution from Piazza Rosa in Q4 and we are excited about our recent addition of Tenibac-Graphion to the Engraving Group. And finally, with a strong balance sheet we are well positioned to invest in both organic and M&A growth.

We are proud of the hard work of the Standex team across the organization and appreciative of our shareholders. We look forward to keeping you updated as we continue to execute against the Standex value creation system and position Standex to fulfill our mission to become best-in-class operating company. We're entering 2019 with strong momentum at our backs and we remain excited for the opportunities ahead at Standex.

And with that, we'd be happy to take your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Chris Moore with CJS Securities.

[Chris Moore, CJS Securities]

Maybe we can start just with the acquisition. Can you talk maybe a little bit further about how it's complimentary to the existing engraving business? Is there much customer overlap and those types of things.

[David Dunbar, Chairman, President & CEO]

The users in the auto industry, they have some different relationships than we do although we serve different programs and different customers, and we serve different programs and some of the same customers. Our out-primary interest in this business is essentially long-term having access to the skilled workforce they bring, so we can train them in new rollouts we've been taking about for the last year; nickel shell, our laser engraving, tool finishing in particular. So I think this positions us to increase share of wallet in the Detroit based OEMs.

[Chris Moore, CJS Securities]

Have you given -- what was the purchase price at this point?

[David Dunbar, Chairman, President & CEO]

We're going to file an 8-K today, so it's about $58 million.

[Chris Moore, CJS Securities]

Staying on electronics just for a second, I mean looking at the sales mix, with switches and sensors being in high 30s, magnetics in the mid-teens and relays in the balance; what -- looking out maybe two to three years, do you see that mix changing significantly and what is the margin implication on that?

[David Dunbar, Chairman, President & CEO]

We see similar -- if you just think about organically, if you just lock on the business we have today, we think the sensors and the reed switch business has slightly higher growth end markets. But we're talking about half a point for a point faster than the magnetics business; so overtime I wouldn't expect organically for that mix to change. Now we have communicated in the past that we're quite interested in working in acquisitions funnel to build up our magnetics business. We think there is an opportunity to make that a more global business and expand our reach into other industries. So if there is a change in the mix that would come from acquisitions tomorrow, magnetics businesses.

[Chris Moore, CJS Securities]

And with that if -- some of it was on the magnetic side, does that have a significant impact on the overall margin for the segment?

[David Dunbar, Chairman, President & CEO]

Well, first of all, this quarter was fantastic for this business. The 26% EBIT -- so we're very pleased with that but in the past we've communicated that with the launch of expectations for this is in the low 20s, 21%, 22%, 23%, 24% is when we expect this business to be overtime and that would include growth in our magnetics, as well as our sensor and switch business.

[Chris Moore, CJS Securities]

Let me just switch to engineering for a second. So given where you are from a platform standpoint; what would have to happen for engineering margins in fiscal '19 to be in that 12% to 13% range. Is that too aggressive from where you're sitting today or is that possible?

[David Dunbar, Chairman, President & CEO]

Well, I'd assume a little further and say what we have communicated, we believe when we see this in this business that as aviation ramps up, this business can deliver consistently EBITs above 15%. And much of that is dependent on the pace of the ramp of the aviation or these new parts or aviation, some of the new engine parts. So fiscal year '19 will be a step in that direction but we'll have to be at full volume in the ramp for those new parts which is coming into calendar '19 to '20.

[Operator]

Our next question comes from the line of Chris McGinnis with Sidoti & Company.

[Chris McGinnis, Sidoti & Company]

Can you maybe just talk a little bit about the improvement in food service on the margin side, what you did specifically and where you expect the rest of the margin profile to come from overtime?

[David Dunbar, Chairman, President & CEO]

You may remember, I think last year in this call -- last year we announced $3.5 million restructuring in food service. So we've viewed it -- I don't think you've been to our Nogales plant but if you had walked through the Nogales plant a year ago and today you'd see the layout has completely changed, we've got con-bound [ph] inventory and almost all the work sales -- we have much less work in process, less raw material, we've improved the flow through that plant and we did that with a series of very aggressive improvement events. We leveraged the next facilitator to help us do that.

On the refrigeration side, we did -- we conducted similar events in both our New Albany and our Hudson plant but we also moved our cabinet production from our Hudson Wisconsin plant to New Albany. So our New Albany plant now does all of our cabinets for the refrigeration business, our Hudson plant is a walk-in focused plant. And so that was significant restructuring in this past year, so we -- on both of those fronts, despite the fact that volume was down we saw the margin flow-through as we expected.

[Chris McGinnis, Sidoti & Company]

And I guess just thinking about that business overall for the next year; is there an opportunity maybe on the scientific side more so than obviously, there were components but on the acquisition side -- is there some healthy opportunities within that to grow that pieces of business?

[David Dunbar, Chairman, President & CEO]

We have been investigating and looking at related business in that scientific business. We like that scientific space, it's very dynamic, there is a lot of opportunity for innovation, our own scientific refrigeration businesses continues for rollout of new products. So we are looking at -- not necessarily other scientific refrigeration businesses but other scientific product or component businesses that maybe we can leverage our channel relationships and increase our exposure to that market.

[Operator]

[Operator Instructions] And our next question comes from the line of Liam Burke with B.Riley FBR.

[Liam Burke, B.Riley FBR]

David, staying on FSEG [ph], could you give us the sense as to the progress you're making on adjusting the product line in terms of eliminating on profitable product and coming out with the strategically the best margin product to the market?

[David Dunbar, Chairman, President & CEO]

That actually was within color; this last year there is still with some rationalization in cooking as we continue to trim that product line, we're nearing the end of that -- maybe a few million dollars more left in that. We did call out that in cooking we've got this new 14-inch fryer, multi-fryer that's really off to a good start, the speed oven, there is some promising opportunity with speed oven with new products. And the improvements in the Nogales based products have merged with the operational improvements in the factory improving delivery and their throughput there.

So to answer your question about reaching the product line in cooking; I think we're about -- it's about sales and volume and getting the new products into new -- out of the test kitchens into rollouts and also giving that volume back from the dealers in Nogales business, that plant is operating well. The scientific business is rolling out in new product line for the NorLake scientific business, our legacy scientific business in September, we're very excited about that. And -- so it's really in the standard businesses, the refrigeration and cooking where that's been an issue. So I think I've covered the key product categories there.

[Liam Burke, B.Riley FBR]

And on engineering, how is the energy business then? I mean, I know you pretty much outlined it as a critical mass, it's where it should be in relation to the rest of the revenues but you're seeing any lift there?

[David Dunbar, Chairman, President & CEO]

I'd say modestly. We are getting somewhat increase but we'll stick -- we're still sticking with the expectation that it will kind of ride about at the level that's at engineering technology business. Despite that potential [ph] -- nearly $70 here in the U.S., we are not seeing a corresponding pickup in that energy business.

[Liam Burke, B.Riley FBR]

And then Tom, real quickly -- I know you have a maximum debt-to-EBITDA ratio of 3.5, you're well below that. Plenty of liquidity for acquisitions but all things being equal what is a comfortable leverage ratio for you on the balance sheet?

[Tom DeByle, CFO]

That varies but you know, we don't want to go up above 3 basically, that would be getting a little bit over our skies but between 2 and 3 we're comfortable with.

[Operator]

[Operator Instructions] And our next question comes from the line of [indiscernible].

[Unidentified Analyst]

Just help us with the big picture understanding of the electronics reed switches, I mean just really fantastic results there. I know you said the margins potentially moderate overtime but maybe help us understand why were the margins so good in the fourth quarter?

[David Dunbar, Chairman, President & CEO]

Well, volume was great. We certainly leverage our plans, we have a good product mix with switches and sensors and high margin rate. It is a historically high EBIT rate for us in the quarter, so we just think it was a combination of several things, great mix and rapid topline growth that we leverage.

[Unidentified Analyst]

And can you help us understand those end markets; I know broke down the components products but is it auto, is it appliances, is it something else, is it all those -- why is the organic growth so good?

[David Dunbar, Chairman, President & CEO]

It's all the green switches and the center to make all -- go into appliance, go into consumer goods into defense, aviation, medical. It poise -- you find them everywhere. So actually for that business we think GDP plus one or two is a good proxy for the overall market growth because it literally does went into nearly all end markets.

[Unidentified Analyst]

Were you clearly growing faster on that, so are we taking share through innovation; how are we getting those above market growth rates?

[David Dunbar, Chairman, President & CEO]

Two things; one is, we are moving up the value chain, so wherein the past we would sell say every switch for a dime where we're able to win the sense or we're able to sell a sensor for a dollar, going into the same application we just get a larger share of the wallet. Secondly, there is the global reed switch market is very close to capacity. So we have been selling it to the most attractive opportunities, so there is little bit of a mix up to the higher priced opportunities because we're filtering the new business opportunities that were pulling [ph].

[Unidentified Analyst]

And can you give us a little bit more color about the capacity addition in Cincinnati? How fast can that facility be completed and what type of return hurdle are you using on that investment?

[David Dunbar, Chairman, President & CEO]

The return hurdle for all of our investments or their acquisition or CapEx is 15% higher our -- we're looking at cash-on-cash returns with conservative assumptions. Now Cincinnati investment -- the Cincinnati plant actually is -- basically it's a magnetics business, we do high value machine critical magnetic parts there and it's also the headquarters for our global electronics business. The capacity discussion has more to do with reed switch and there we're adding capacity in a reed switch plants around the world, principally in Japan and also in Germany.

[Unidentified Analyst]

So these $15 million in total?

[David Dunbar, Chairman, President & CEO]

You're talking about the CapEx? We said $13 million CapEx for the business, $5 million of which is the Cincinnati plant and new headquarters.

[Unidentified Analyst]

And then on the acquisition front, I think you touched on a little bit but just to make sure we're clear on it; where is the focus that from a second perspective from the M&A front and what type of multiples are we seeing and what are we willing to pay?

[David Dunbar, Chairman, President & CEO]

I'll start with the segments. So last year -- I think last year in the same call we announced that we took different approach to acquisitions whereas Standex has always made -- steadily made acquisitions. We in the past -- we responded to opportunities in the market.

A year ago we dedicated a small team to look at electronics, first magnetics, then sensors; two, nor the trade shows, if the trade association membership roosters, profile of companies, create a universe of opportunities, reach out to owners and proactively create opportunities. So in magnetics in particular, there are lot of opportunities. There are fewer number of opportunities in sensors in electronics but electronics is an area with really large number of opportunities.

In engraving, it's such a unique business and a unique niche, there are relatively few opportunities. There are few out there and we're pursuing a fairly active funnel in engraving as well. We earlier got a question about the scientific business, we have looked at acquisition opportunities of scientific, as well as -- around our Procon pump business which is a custom-engineered pump. So in that order, that's where our internal activity is in building up the funnel in electronics, both magnetics and sensors engraving and in scientific and pumps.

[Unidentified Analyst]

Second part, what are the multiples looking like across those?

[David Dunbar, Chairman, President & CEO]

Multiples; on one or two calls ago for our investor presentation we showed that the last six deals we've done are average multiple with 7.6x trailing 12 in that range from low 7 to I think as high as 10. And depending on the specific deal we're looking at, they come in two categories; there are many opportunities we're pursuing where the privately held businesses where the owner is reaching an exit point, interested in finding a buyer. We have a great track record of buying businesses, giving them access to capital and channel and helping them grow, and that's kind of a typical acquisition. And I would say those are our traditional valuation metrics and multiple is a good expectation.

Now in electronics in particular, we've had a good track record integrating acquisitions, making estimates of synergies, both sales and cost, and we're looking at some opportunities where there is a process. Now the multiples in for deals, one of our process of course are higher and now we're running here at 9 to 12 and above. And so our guideline there is we've got to show a 15% IRR on the acquisition with conservative assumptions, and especially in electronics, we've got a track record that -- we're looking at some deals like that whereas in the past we -- Standex didn't go there.

[Unidentified Analyst]

Are you willing to walk away if it's below the 15 or will you go lower?

[David Dunbar, Chairman, President & CEO]

We've walked away just a couple of times in the last few months.

[Operator]

Our next question comes from the line of George Godfrey with C.L. King.

[George Godfrey, C.L. King]

I wanted to ask specifically about the -- and I apologize if you already covered this, I've been jumping forth on other calls. The total sales declined 13% due to lower rollouts; how much of that is the product mix or new products that you are bringing out or before versus now and how much of that is CapEx related or spending plans by customers? I just want to understand what is the slowdown there?

[David Dunbar, Chairman, President & CEO]

I put it in a few categories; the first is a grocery store rollouts, that's more CapEx related, that's simply end markets that the customer is not having to rollout. The second category which is significant is, we had an expectation that we'd start to see volumes ramping up in Nogales now their plant is -- plant performances really improving. That's been a little slower to come back is another cause for their decline. There was some remaining product rationalization of low margin ovens in particular that were competing against Asian imports, and we actually got that segment.

[Operator]

Our next question comes from the line of John Cummings with Copeland Capital.

[John Cummings, Copeland Capital]

Just a follow-up question on the electronics segment; I know you said the strong volume and the mix both helped the margin this quarter. Are you expecting the volume growth of the mix to kind of change going forward, I'm just trying to understand why you think the margins are not sustainable at this level?

[David Dunbar, Chairman, President & CEO]

Well, the first part, did we ever hit margins like that -- I wouldn't put ourselves out there. If you look historically at the margins and the business within 22, 23; that range in low 20s is a solid predictable range. We are increasing investments in this business, we're doing market test, we're doing laneways; and so we do want to put some of that growth and some of that margin back into further at future growth for this business. So a combination of those things would lead us to guide you to low 20s.

[John Cummings, Copeland Capital]

And then, I know you talked a little bit about the tariff impacts for hydraulics, but could you walk us through the effect of the tariffs in the other segments, I guess particularly food service and engineering technologies?

[David Dunbar, Chairman, President & CEO]

Really, the only business that we're directly impacted by tariff so far are hydraulics in the scientific refrigeration which imports cabinets from Asia and many other cabinets fall in a tariff category. In engineering technologies, our suppliers are U.S. based and in some cases we actually -- we purchase materials under the contract of our OEM and it's just a pure pass-through. So as in the technologies we see no impact, and in food service our -- we have not have tariff impact because we're not importing the final product. We've seen some lift on steel prices simply from price increases, both from just the industry trend of increased prices and I suppose also domestic manufacturers are increasing their prices as a result of the tariffs. But as we've announced in prior calls, we're passing those prices along and that's a little more of a bread and butter approach to handling material increases in food service business. So we really only called it out in those two business that are directly affected by tariffs, the Hydraulics and the Scientific.

[John Cummings, Copeland Capital]

And then last question on engineering technologies; I'm just curious if year-over-year or your outlook on the ramp there has changed at all since kind of -- since your Investor Day?

[David Dunbar, Chairman, President & CEO]

No, it hasn't. In fact we're seeing what we have -- we announced the backlog with 21% growth in the backlog. So what we announced at the Investor Day, we are seeing that the orders are being placed, the OEMs continue to communicate that they are on-track for their ramps.

[Operator]

At this time, there are no further questions. I will now turn the conference back to Mr. David Dunbar for closing remarks.

[David Dunbar, Chairman, President & CEO]

Again, thank you all for your interest in Standex. It's our pleasure to run this business. We look forward to coming back to you in the quarter to report on our Q1 FY19 results. Thank you.

[Operator]

This concludes today's conference call. You may now disconnect.