UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549FORM 10-Q |
| |
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended JanuaryOctober 31, 2018
OR
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| |
¨
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number 1-14959
(Exact name of registrant as specified in its charter) |
| | |
Wisconsin | | 39-0178960 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
|
| | |
6555 West Good Hope Road, Milwaukee, Wisconsin | | 53223 |
(Address of principal executive offices) | | (Zip Code) |
(414) 358-6600
(Registrant’s telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| | | | | | | | |
Large accelerated filer | | þ | Accelerated filer | | ¨ | Emerging growth company | | ¨ |
Non-accelerated filer | | ¨ | Smaller reporting company | | ¨ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of February 20,November 13, 2018, there were 48,208,28148,937,041 outstanding shares of Class A Nonvoting Common Stock and 3,538,628 shares of Class B Voting Common Stock. The Class B Voting Common Stock, all of which is held by affiliates of the Registrant, is the only voting stock.
FORM 10-Q
BRADY CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Unaudited)Thousands) | | | | | | | October 31, 2018 | | July 31, 2018 |
| January 31, 2018 | | July 31, 2017 | (Unaudited) | | |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 115,327 |
| | $ | 133,944 |
| $ | 192,176 |
| | $ | 181,427 |
|
Accounts receivable—net | 164,400 |
| | 149,638 |
| 169,327 |
| | 161,282 |
|
Inventories: | | | | | | |
Finished products | 72,629 |
| | 69,760 |
| 71,092 |
| | 73,133 |
|
Work-in-process | 19,472 |
| | 18,117 |
| 20,734 |
| | 19,903 |
|
Raw materials and supplies | 21,344 |
| | 19,147 |
| 22,190 |
| | 20,035 |
|
Total inventories | 113,445 |
| | 107,024 |
| 114,016 |
| | 113,071 |
|
Prepaid expenses and other current assets | 20,950 |
| | 17,208 |
| 18,497 |
| | 15,559 |
|
Total current assets | 414,122 |
| | 407,814 |
| 494,016 |
| | 471,339 |
|
Other assets: | | | | | | |
Goodwill | 443,873 |
| | 437,697 |
| 415,129 |
| | 419,815 |
|
Other intangible assets | 50,131 |
| | 53,076 |
| 41,033 |
| | 42,588 |
|
Deferred income taxes | 9,899 |
| | 35,456 |
| 7,770 |
| | 7,582 |
|
Other | 18,579 |
| | 18,077 |
| 17,621 |
| | 17,662 |
|
Property, plant and equipment: | | | | | | |
Cost: | | | | | | |
Land | 7,535 |
| | 7,470 |
| 7,250 |
| | 6,994 |
|
Buildings and improvements | 98,256 |
| | 98,228 |
| 95,386 |
| | 96,245 |
|
Machinery and equipment | 265,640 |
| | 261,192 |
| 270,192 |
| | 270,989 |
|
Construction in progress | 6,176 |
| | 4,109 |
| 7,492 |
| | 4,495 |
|
| 377,607 |
| | 370,999 |
| 380,320 |
| | 378,723 |
|
Less accumulated depreciation | 279,826 |
| | 272,896 |
| 282,263 |
| | 280,778 |
|
Property, plant and equipment—net | 97,781 |
| | 98,103 |
| 98,057 |
| | 97,945 |
|
Total | $ | 1,034,385 |
| | $ | 1,050,223 |
| $ | 1,073,626 |
| | $ | 1,056,931 |
|
LIABILITIES AND STOCKHOLDERS’ INVESTMENT | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Current liabilities: | | | | | | |
Notes payable | $ | 585 |
| | $ | 3,228 |
| |
Accounts payable | 64,365 |
| | 66,817 |
| $ | 64,735 |
| | $ | 66,538 |
|
Wages and amounts withheld from employees | 49,679 |
| | 58,192 |
| 48,945 |
| | 67,619 |
|
Taxes, other than income taxes | 7,997 |
| | 7,970 |
| 8,377 |
| | 8,318 |
|
Accrued income taxes | 6,085 |
| | 7,373 |
| 4,937 |
| | 3,885 |
|
Other current liabilities | 42,961 |
| | 43,618 |
| 54,582 |
| | 44,567 |
|
Total current liabilities | 171,672 |
| | 187,198 |
| 181,576 |
| | 190,927 |
|
Long-term obligations | 70,615 |
| | 104,536 |
| 54,408 |
| | 52,618 |
|
Other liabilities | 60,125 |
| | 58,349 |
| 64,699 |
| | 61,274 |
|
Total liabilities | 302,412 |
| | 350,083 |
| 300,683 |
| | 304,819 |
|
Stockholders’ investment: | | | | |
Class A nonvoting common stock—Issued 51,261,487 and 51,261,487 shares, respectively, and outstanding 48,238,412 and 47,814,818 shares, respectively | 513 |
| | 513 |
| |
Stockholders’ equity: | | | | |
Class A nonvoting common stock—Issued 51,261,487 shares, and outstanding 48,918,974 and 48,393,617 shares, respectively | | 513 |
| | 513 |
|
Class B voting common stock—Issued and outstanding, 3,538,628 shares | 35 |
| | 35 |
| 35 |
| | 35 |
|
Additional paid-in capital | 325,733 |
| | 322,608 |
| 326,182 |
| | 325,631 |
|
Earnings retained in the business | 515,872 |
| | 507,136 |
| |
Treasury stock—3,023,075 and 3,446,669 shares, respectively, of Class A nonvoting common stock, at cost | (75,090 | ) | | (85,470 | ) | |
Retained earnings | | 570,858 |
| | 553,454 |
|
Treasury stock—2,342,513 and 2,867,870 shares, respectively, of Class A nonvoting common stock, at cost | | (58,414 | ) | | (71,120 | ) |
Accumulated other comprehensive loss | (35,090 | ) | | (44,682 | ) | (66,231 | ) | | (56,401 | ) |
Total stockholders’ investment | 731,973 |
| | 700,140 |
| |
Total stockholders’ equity | | 772,943 |
| | 752,112 |
|
Total | $ | 1,034,385 |
| | $ | 1,050,223 |
| $ | 1,073,626 |
| | $ | 1,056,931 |
|
See Notes to Condensed Consolidated Financial Statements.
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in Thousands, Except Per Share Amounts, Unaudited)
| | | Three months ended January 31, | | Six months ended January 31, | Three months ended October 31, |
| 2018 | | 2017 | | 2018 | | 2017 | 2018 | | 2017 |
Net sales | $ | 287,780 |
| | $ | 268,001 |
| | $ | 577,931 |
| | $ | 548,177 |
| $ | 293,196 |
| | $ | 290,151 |
|
Cost of products sold | 144,088 |
| | 133,843 |
| | 288,174 |
| | 273,661 |
| 146,657 |
| | 144,086 |
|
Gross margin | 143,692 |
| | 134,158 |
| | 289,757 |
| | 274,516 |
| 146,539 |
| | 146,065 |
|
Operating expenses: | | | | | | | | | | |
Research and development | 11,314 |
| | 9,481 |
| | 21,834 |
| | 18,627 |
| 11,326 |
| | 10,520 |
|
Selling, general and administrative | 97,582 |
| | 94,715 |
| | 197,716 |
| | 192,719 |
| 94,591 |
| | 100,134 |
|
Total operating expenses | 108,896 |
| | 104,196 |
| | 219,550 |
| | 211,346 |
| 105,917 |
| | 110,654 |
|
Operating income | 34,796 |
| | 29,962 |
| | 70,207 |
| | 63,170 |
| 40,622 |
| | 35,411 |
|
Other income (expense): | | | | | | | | |
Investment and other income | 1,056 |
| | 596 |
| | 1,272 |
| | 107 |
| |
Other (expense) income: | | | | |
Investment and other (expense) income | | (17 | ) | | 216 |
|
Interest expense | (829 | ) | | (1,458 | ) | | (1,692 | ) | | (3,190 | ) | (712 | ) | | (863 | ) |
Earnings before income taxes | 35,023 |
| | 29,100 |
| | 69,787 |
| | 60,087 |
| 39,893 |
| | 34,764 |
|
Income tax expense | 30,750 |
| | 3,803 |
| | 39,678 |
| | 12,237 |
| 9,256 |
| | 8,928 |
|
Net earnings | $ | 4,273 |
| | $ | 25,297 |
| | $ | 30,109 |
| | $ | 47,850 |
| $ | 30,637 |
| | $ | 25,836 |
|
Net earnings per Class A Nonvoting Common Share: | | | | | | | | | | |
Basic | $ | 0.08 |
| | $ | 0.50 |
| | $ | 0.58 |
| | $ | 0.94 |
| $ | 0.59 |
| | $ | 0.50 |
|
Diluted | $ | 0.08 |
| | $ | 0.49 |
| | $ | 0.57 |
| | $ | 0.93 |
| $ | 0.58 |
| | $ | 0.49 |
|
Dividends | $ | 0.21 |
| | $ | 0.21 |
| | $ | 0.42 |
| | $ | 0.41 |
| $ | 0.21 |
| | $ | 0.21 |
|
Net earnings per Class B Voting Common Share: | | | | | | | | | | |
Basic | $ | 0.08 |
| | $ | 0.50 |
| | $ | 0.57 |
| | $ | 0.93 |
| $ | 0.57 |
| | $ | 0.49 |
|
Diluted | $ | 0.08 |
| | $ | 0.49 |
| | $ | 0.56 |
| | $ | 0.91 |
| $ | 0.56 |
| | $ | 0.48 |
|
Dividends | $ | 0.21 |
| | $ | 0.21 |
| | $ | 0.40 |
| | $ | 0.39 |
| $ | 0.20 |
| | $ | 0.19 |
|
Weighted average common shares outstanding (in thousands): | | | | | | | | | | |
Basic | 51,698 |
| | 51,054 |
| | 51,569 |
| | 50,844 |
| 52,201 |
| | 51,440 |
|
Diluted | 52,719 |
| | 51,954 |
| | 52,551 |
| | 51,721 |
| 52,958 |
| | 52,383 |
|
See Notes to Condensed Consolidated Financial Statements.
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands, Unaudited)
|
| | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net earnings | $ | 4,273 |
| | $ | 25,297 |
| | $ | 30,109 |
| | $ | 47,850 |
|
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustments | 17,846 |
| | (2,292 | ) | | 12,461 |
| | (16,546 | ) |
| | | | | | | |
Net investment hedge and long-term intercompany loan translation adjustments | (2,005 | ) | | 1,984 |
| | (3,177 | ) | | 5,169 |
|
| | | | | | | |
Cash flow hedges: | | | | | | | |
Net loss recognized in other comprehensive income (loss) | (304 | ) | | (403 | ) | | (537 | ) | | (106 | ) |
Reclassification adjustment for losses included in net earnings | 158 |
| | 10 |
| | 182 |
| | 415 |
|
| (146 | ) | | (393 | ) | | (355 | ) | | 309 |
|
Pension and other post-retirement benefits: | | | | | | | |
Net gain recognized in other comprehensive income (loss) | 592 |
| | 72 |
| | 592 |
| | 72 |
|
Actuarial gain amortization | (141 | ) | | (136 | ) | | (271 | ) | | (272 | ) |
| 451 |
| | (64 | ) | | 321 |
| | (200 | ) |
| | | | | | | |
Other comprehensive income (loss), before tax | 16,146 |
| | (765 | ) | | 9,250 |
| | (11,268 | ) |
Income tax benefit (expense) related to items of other comprehensive income (loss) | 827 |
| | (535 | ) | | 342 |
| | (2,201 | ) |
Other comprehensive income (loss), net of tax | 16,973 |
| | (1,300 | ) | | 9,592 |
| | (13,469 | ) |
Comprehensive income | $ | 21,246 |
| | $ | 23,997 |
| | $ | 39,701 |
| | $ | 34,381 |
|
|
| | | | | | | |
| Three months ended October 31, |
| 2018 | | 2017 |
Net earnings | $ | 30,637 |
| | $ | 25,836 |
|
Other comprehensive loss: | | | |
Foreign currency translation adjustments | (5,395 | ) | | (5,383 | ) |
| | | |
Net investment hedge and long-term intercompany loan translation adjustments | (3,395 | ) | | (1,172 | ) |
| | | |
Cash flow hedges: | | | |
Net loss recognized in other comprehensive loss | (380 | ) | | (234 | ) |
Reclassification adjustment for (gains) losses included in net earnings | (47 | ) | | 24 |
|
| (427 | ) | | (210 | ) |
| | | |
Pension and other post-retirement benefits actuarial gain amortization | (155 | ) | | (130 | ) |
| | | |
Other comprehensive loss, before tax | (9,372 | ) | | (6,895 | ) |
Income tax expense related to items of other comprehensive loss | (458 | ) | | (485 | ) |
Other comprehensive loss, net of tax | (9,830 | ) | | (7,380 | ) |
Comprehensive income | $ | 20,807 |
| | $ | 18,456 |
|
See Notes to Condensed Consolidated Financial Statements.
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands, Unaudited)
| | | Six months ended January 31, | Three months ended October 31, |
| 2018 | | 2017 | 2018 | | 2017 |
Operating activities: | | | | | | |
Net earnings | $ | 30,109 |
| | $ | 47,850 |
| $ | 30,637 |
| | $ | 25,836 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | 12,840 |
| | 14,102 |
| 5,960 |
| | 6,564 |
|
Non-cash portion of stock-based compensation expense | 5,897 |
| | 5,394 |
| 4,965 |
| | 3,744 |
|
Deferred income taxes | 26,028 |
| | (4,547 | ) | 2,164 |
| | (1,168 | ) |
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | (10,945 | ) | | 3,407 |
| (6,709 | ) | | (4,807 | ) |
Inventories | (4,150 | ) | | 224 |
| (3,125 | ) | | (3,571 | ) |
Prepaid expenses and other assets | (3,153 | ) | | 220 |
| (2,197 | ) | | (2,005 | ) |
Accounts payable and other liabilities | (12,695 | ) | | (9,384 | ) | |
Accounts payable and accrued liabilities | | (14,070 | ) | | 7,799 |
|
Income taxes | (1,471 | ) | | (3,932 | ) | 1,193 |
| | 2,327 |
|
Net cash provided by operating activities | 42,460 |
| | 53,334 |
| 18,818 |
| | 34,719 |
|
| | | | | | |
Investing activities: | | | | | | |
Purchases of property, plant and equipment | (8,469 | ) | | (7,235 | ) | (6,009 | ) | | (3,802 | ) |
Other | (729 | ) | | 593 |
| 337 |
| | 974 |
|
Net cash used in investing activities | (9,198 | ) | | (6,642 | ) | (5,672 | ) | | (2,828 | ) |
| | | | | | |
Financing activities: | | | | | | |
Payment of dividends | (21,373 | ) | | (20,852 | ) | (11,096 | ) | | (10,639 | ) |
Proceeds from exercise of stock options | 9,948 |
| | 14,659 |
| 12,138 |
| | 3,249 |
|
Proceeds from borrowing on credit facilities | 17,439 |
| | 144,533 |
| 5,737 |
| | 10,901 |
|
Repayment of borrowing on credit facilities | (57,314 | ) | | (195,002 | ) | (2,269 | ) | | (22,894 | ) |
Income tax on equity-based compensation, and other | (2,342 | ) | | (640 | ) | (3,846 | ) | | (2,280 | ) |
Net cash used in financing activities | (53,642 | ) | | (57,302 | ) | |
Net cash provided by (used in) financing activities | | 664 |
| | (21,663 | ) |
| | | | | | |
Effect of exchange rate changes on cash | 1,763 |
| | (5,410 | ) | (3,061 | ) | | (1,935 | ) |
| | | | | | |
Net decrease in cash and cash equivalents | (18,617 | ) | | (16,020 | ) | |
Net increase in cash and cash equivalents | | 10,749 |
| | 8,293 |
|
Cash and cash equivalents, beginning of period | 133,944 |
| | 141,228 |
| 181,427 |
| | 133,944 |
|
| | | | | | |
Cash and cash equivalents, end of period | $ | 115,327 |
| | $ | 125,208 |
| $ | 192,176 |
| | $ | 142,237 |
|
See Notes to Condensed Consolidated Financial Statements.Statements
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SixThree Months Ended JanuaryOctober 31, 2018
(Unaudited)
(In thousands, except share and per share amounts)
NOTE A — Basis of Presentation
The condensed consolidated financial statements included herein have been prepared by Brady Corporation and subsidiaries (the "Company," "Brady," "we," or "our") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, the foregoing statements contain all adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial position of the Company as of JanuaryOctober 31, 2018 and July 31, 2017,2018, its results of operations and comprehensive income for the three and six months ended JanuaryOctober 31, 2018 and 2017,, and cash flows for the sixthree months ended JanuaryOctober 31, 2018 and 2017.2017. The condensed consolidated balance sheet as of July 31, 2017,2018 has been derived from the audited consolidated financial statements as of that date. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts therein. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from the estimates.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to rules and regulations of the Securities and Exchange Commission. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statement presentation. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the year ended July 31, 2017.2018.
NOTE B — Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the six months ended January 31, 2018, were as follows:
|
| | | | | | | | | | | |
| IDS | | WPS | | Total |
Balance as of July 31, 2017 | $ | 391,864 |
| | $ | 45,833 |
| | $ | 437,697 |
|
Translation adjustments | 4,110 |
| | 2,066 |
| | 6,176 |
|
Balance as of January 31, 2018 | $ | 395,974 |
| | $ | 47,899 |
| | $ | 443,873 |
|
Goodwill at January 31, 2018 and July 31, 2017, included $118,637 and $209,392 of accumulated impairment losses within the Identification Solutions ("IDS") and Workplace Safety ("WPS") segments, respectively, for a total of $328,029. There were no impairment charges recorded during the six months ended January 31, 2018.
Other intangible assets include patents, trademarks, and customer relationships with finite lives being amortized in accordance with the accounting guidance for other intangible assets. The Company also has unamortized indefinite-lived trademarks that are classified as other intangible assets. The net book value of these assets was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| January 31, 2018 | | July 31, 2017 |
| Weighted Average Amortization Period (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | Weighted Average Amortization Period (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
Amortized other intangible assets: | | | | | | | | | | | | | | | |
Patents | 5 | | $ | 1,441 |
| | $ | (697 | ) | | $ | 744 |
| | 5 | | $ | 1,358 |
| | $ | (471 | ) | | $ | 887 |
|
Trademarks and other | 9 | | 4,654 |
| | (4,469 | ) | | 185 |
| | 9 | | 4,528 |
| | (4,229 | ) | | 299 |
|
Customer relationships | 8 | | 61,501 |
| | (35,545 | ) | | 25,956 |
| | 8 | | 60,759 |
| | (31,909 | ) | | 28,850 |
|
Unamortized other intangible assets: | | | | | | | | | | | | | | | |
Trademarks | N/A | | 23,246 |
| | — |
| | 23,246 |
| | N/A | | 23,040 |
| | — |
| | 23,040 |
|
Total | | | $ | 90,842 |
| | $ | (40,711 | ) | | $ | 50,131 |
| | | | $ | 89,685 |
| | $ | (36,609 | ) | | $ | 53,076 |
|
The increase in the gross carrying amount of other intangible assets as of January 31, 2018, compared to July 31, 2017, was due to the effect of currency fluctuations during the six-month period.
Amortization expense of intangible assets was $1,617 and $1,688 for the three months ended January 31, 2018 and 2017, respectively, and $3,310 and $3,583 for the six months ended January 31, 2018 and 2017, respectively. The amortization over each of the next five fiscal years is projected to be $6,578, $6,223, $5,217, $5,174 and $5,017 for the fiscal years ending July 31, 2018, 2019, 2020, 2021 and 2022, respectively.
NOTE C — Other Comprehensive Loss
Other comprehensive loss consists of foreign currency translation adjustments, unrealized gains and losses from cash flow hedges and net investment hedges, and the unamortized gain on post-retirement plans, net of their related tax effects.
The following table illustrates the changes in the balances of each component of accumulated other comprehensive loss, net of tax, for the six months ended January 31, 2018:
|
| | | | | | | | | | | | | | | |
| Unrealized gain (loss) on cash flow hedges | | Unamortized gain on post-retirement plans | | Foreign currency translation adjustments | | Accumulated other comprehensive loss |
Beginning balance, July 31, 2017 | $ | 109 |
| | $ | 2,620 |
| | $ | (47,411 | ) | | $ | (44,682 | ) |
Other comprehensive (loss) income before reclassification | (598 | ) | | 382 |
| | 9,953 |
| | 9,737 |
|
Amounts reclassified from accumulated other comprehensive loss | 126 |
| | (271 | ) | | — |
| | (145 | ) |
Ending balance, January 31, 2018 | $ | (363 | ) | | $ | 2,731 |
| | $ | (37,458 | ) | | $ | (35,090 | ) |
The decrease in accumulated other comprehensive loss as of January 31, 2018, compared to July 31, 2017, was primarily due to the depreciation of the U.S. dollar against certain other currencies during the six-month period. The foreign currency translation adjustments column in the table above includes the impact of foreign currency translation, including foreign currency translation on intercompany notes and net investment hedges, net of tax. Of the total $145 in amounts reclassified from accumulated other comprehensive loss, the $126 loss on cash flow hedges was reclassified into cost of products sold, and the $271 gain on post-retirement plans was reclassified into selling, general and administrative expenses ("SG&A") on the condensed consolidated statement of earnings for the six months ended January 31, 2018.
The changes in accumulated other comprehensive loss by component, net of tax, for the six months ended January 31, 2017, were as follows:
|
| | | | | | | | | | | | | | | |
| Unrealized loss on cash flow hedges | | Unamortized gain on post-retirement plans | | Foreign currency translation adjustments | | Accumulated other comprehensive loss |
Beginning balance, July 31, 2016 | $ | (857 | ) | | $ | 2,236 |
| | $ | (56,124 | ) | | $ | (54,745 | ) |
Other comprehensive (loss) income before reclassification | (80 | ) | | 72 |
| | (13,442 | ) | | (13,450 | ) |
Amounts reclassified from accumulated other comprehensive loss | 253 |
| | (272 | ) | | — |
| | (19 | ) |
Ending balance, January 31, 2017 | $ | (684 | ) | | $ | 2,036 |
| | $ | (69,566 | ) | | $ | (68,214 | ) |
The increase in accumulated other comprehensive loss as of January 31, 2017, compared to July 31, 2016, was primarily due the appreciation of the U.S. dollar against certain other currencies during the six-month period. The foreign currency translation adjustments column in the table above includes the impact of foreign currency translation, including foreign currency translation on intercompany notes and net investment hedges, net of tax. Of the total $19 in amounts reclassified from accumulated other comprehensive loss, the $253 loss on cash flow hedges was reclassified into cost of products sold, and the $272 gain on post-retirement plans was reclassified into SG&A on the condensed consolidated statement of earnings for the six months ended January 31, 2017.
The following table illustrates the income tax benefit (expense) on the components of other comprehensive income (loss) for the three and six months ended January 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
| 2018 | | 2017 | | 2018 | | 2017 |
Income tax benefit (expense) related to items of other comprehensive income (loss): | | | | | | | |
Net investment hedge translation adjustments | $ | 1,029 |
| | $ | (556 | ) | | $ | 694 |
| | $ | (2,125 | ) |
Cash flow hedges | 78 |
| | (8 | ) | | (117 | ) | | (137 | ) |
Pension and other post-retirement benefits | (209 | ) | | — |
| | (209 | ) | | — |
|
Other income tax adjustments and currency translation | (71 | ) | | 29 |
| | (26 | ) | | 61 |
|
Income tax benefit (expense) related to items of other comprehensive income (loss) | $ | 827 |
| | $ | (535 | ) | | $ | 342 |
| | $ | (2,201 | ) |
NOTE D — Net Earnings per Common Share
Reconciliations of the numerator and denominator of the basic and diluted per share computations for the Company’s Class A and Class B common stock are summarized as follows:
|
| | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
| 2018 | | 2017 | | 2018 | | 2017 |
Numerator: (in thousands) | | | | | | | |
Earnings (Numerator for basic and diluted Class A Nonvoting Common Share) | $ | 4,273 |
| | $ | 25,297 |
| | $ | 30,109 |
| | $ | 47,850 |
|
Less: | | | | | | | |
Preferential dividends | — |
| | — |
| | (799 | ) | | (788 | ) |
Preferential dividends on dilutive stock options | — |
| | — |
| | (16 | ) | | (14 | ) |
Numerator for basic and diluted earnings per Class B Voting Common Share | $ | 4,273 |
| | $ | 25,297 |
| | $ | 29,294 |
| | $ | 47,048 |
|
Denominator: (in thousands) | | | | | | | |
Denominator for basic earnings per share for both Class A and Class B | 51,698 |
| | 51,054 |
| | 51,569 |
| | 50,844 |
|
Plus: Effect of dilutive stock options and restricted stock units | 1,021 |
| | 900 |
| | 982 |
| | 877 |
|
Denominator for diluted earnings per share for both Class A and Class B | 52,719 |
| | 51,954 |
| | 52,551 |
| | 51,721 |
|
Net earnings per Class A Nonvoting Common Share: | | | | | | | |
Basic | $ | 0.08 |
| | $ | 0.50 |
| | $ | 0.58 |
| | $ | 0.94 |
|
Diluted | $ | 0.08 |
| | $ | 0.49 |
| | $ | 0.57 |
| | $ | 0.93 |
|
Net earnings per Class B Voting Common Share: | | | | | | | |
Basic | $ | 0.08 |
| | $ | 0.50 |
| | $ | 0.57 |
| | $ | 0.93 |
|
Diluted | $ | 0.08 |
| | $ | 0.49 |
| | $ | 0.56 |
| | $ | 0.91 |
|
Options to purchase 705,069 and 768,617 shares of Class A Nonvoting Common Stock for the three months ended January 31, 2018 and 2017, respectively, and 721,100 and 770,010 shares for the six months ended January 31, 2018 and 2017, respectively, were not included in the computation of diluted net earnings per share because the option exercise price was greater than the average market price of the common shares and, therefore, the effect would have been anti-dilutive.
NOTE E — Segment Information
The Company is organized and managed on a global basis within three operating segments, Identification Solutions, Workplace Safety, and People Identification ("PeopleID"), which aggregate into two reportable segments that are organized around businesses with consistent products and services: IDS and WPS. The Identification Solutions and PeopleID operating segments aggregate into the IDS reporting segment, while the WPS reporting segment is comprised solely of the Workplace Safety operating segment. The Company evaluates short-term segment performance based on segment profit and customer sales. Interest expense, investment and other income, income taxes, and certain corporate administrative expenses are excluded when evaluating segment performance.
The following is a summary of segment information for the three and six months ended January 31, 2018 and 2017: |
| | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
| 2018 | | 2017 | | 2018 | | 2017 |
Sales to External Customers | | | | | | | |
ID Solutions | $ | 206,432 |
| | $ | 190,962 |
| | $ | 416,137 |
| | $ | 392,226 |
|
Workplace Safety | 81,348 |
| | 77,039 |
| | 161,794 |
| | 155,951 |
|
Total Company | $ | 287,780 |
| | $ | 268,001 |
| | $ | 577,931 |
| | $ | 548,177 |
|
Segment Profit | | | | | | | |
ID Solutions | $ | 34,088 |
| | $ | 28,961 |
| | $ | 69,925 |
| | $ | 62,035 |
|
Workplace Safety | 7,055 |
| | 6,059 |
| | 13,500 |
| | 12,504 |
|
Total Company | $ | 41,143 |
| | $ | 35,020 |
| | $ | 83,425 |
| | $ | 74,539 |
|
The following is a reconciliation of segment profit to earnings before income taxes for the three and six months ended January 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
| 2018 | | 2017 | | 2018 | | 2017 |
Total profit from reportable segments | $ | 41,143 |
| | $ | 35,020 |
| | $ | 83,425 |
| | $ | 74,539 |
|
Unallocated amounts: | | | | | | | |
Administrative costs | (6,347 | ) | | (5,058 | ) | | (13,218 | ) | | (11,369 | ) |
Investment and other income | 1,056 |
| | 596 |
| | 1,272 |
| | 107 |
|
Interest expense | (829 | ) | | (1,458 | ) | | (1,692 | ) | | (3,190 | ) |
Earnings before income taxes | $ | 35,023 |
| | $ | 29,100 |
| | $ | 69,787 |
| | $ | 60,087 |
|
NOTE F – Stock-Based Compensation
The Company has an incentive stock plan under which the Board of Directors may grant nonqualified stock options to purchase shares of Class A Nonvoting Common Stock, restricted stock units ("RSUs"), or restricted and unrestricted shares of Class A Nonvoting Common Stock to employees and non-employee directors. Certain awards may be subject to pre-established performance goals.
The options issued under the plan have an exercise price equal to the fair market value of the underlying stock at the date of grant and generally vest over a three-year service period, with one-third becoming exercisable one year after the grant date and one-third additional in each of the succeeding two years. Options issued under the plan, referred to herein as “service-based” stock options, generally expire 10 years from the date of grant.
Restricted and unrestricted shares and RSUs issued under the plan have a grant date fair value equal to the fair market value of the underlying stock at the date of grant. Shares issued under the plan are referred to herein as either "service-based" or "performance-based" restricted shares and RSUs. The service-based RSUs granted under the plan generally vest over a three-year service period, with one-third becoming exercisable one year after the grant date and one-third additional in each of the succeeding two years. The performance-based RSUs granted under the plan generally vest at the end of a three-year service period provided specified company financial performance metrics are met.
As of January 31, 2018, the Company has reserved 3,341,296 shares of Class A Nonvoting Common Stock for outstanding stock options, RSUs, and restricted shares and 4,014,866 shares of Class A Nonvoting Common Stock remain for future issuance of stock options, RSUs, and restricted and unrestricted shares under the plan. The Company uses treasury stock or will issue new Class A Nonvoting Common Stock to deliver shares under the plan.
The Company recognizes the compensation cost of all share-based awards at the time it is deemed probable the award will vest. This cost is recognized on a straight-line basis over the vesting period of the award. If it is determined that it is unlikely the award will vest, the expense recognized to date for the award is reversed in the period in which this is evident and the remaining expense is not recorded. Total stock-based compensation expense recognized by the Company during the three months ended January 31, 2018 and 2017, was $2,153 ($1,614 net of taxes) and $2,238 ($1,387 net of taxes), respectively. Expense recognized during the six months ended January 31, 2018 and 2017, was $5,897 ($4,423 net of taxes) and $5,394 ($3,344 net of taxes), respectively.
As of January 31, 2018, total unrecognized compensation cost related to stock-based compensation awards was $14,492 pre-tax, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of 1.9 years.
The Company has estimated the grant date fair value of its service-based stock option awards granted during the six months ended January 31, 2018 and 2017, using the Black-Scholes option valuation model. The weighted-average assumptions used in the Black-Scholes valuation model are reflected in the following table:
|
| | | | | | | | |
| | Six months ended January 31, |
Black-Scholes Option Valuation Assumptions | | 2018 | | 2017 |
Expected term (in years) | | 6.07 |
| | 6.11 |
|
Expected volatility | | 26.52 | % | | 29.43 | % |
Expected dividend yield | | 2.72 | % | | 2.70 | % |
Risk-free interest rate | | 1.96 | % | | 1.26 | % |
Weighted-average market value of underlying stock at grant date | | $ | 36.85 |
| | $ | 35.13 |
|
Weighted-average exercise price | | $ | 36.85 |
| | $ | 35.13 |
|
Weighted-average fair value of options granted during the period | | $ | 7.96 |
| | $ | 7.56 |
|
The Company uses historical data regarding stock option exercise behaviors to estimate the expected term of options granted based on the period of time that options granted are expected to be outstanding. Expected volatilities are based on the historical volatility of the Company’s stock. The expected dividend yield is based on the Company’s historical dividend payments and historical yield. The risk-free interest rate is based on the U.S. Treasury yield curve in effect on the grant date for the length of time corresponding to the expected term of the option. The market value is calculated as the average of the high and the low stock price on the date of the grant.
A summary of stock option activity under the Company’s share-based compensation plans for the six months ended January 31, 2018, is presented below:
|
| | | | | | | | | | | | |
Options | | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value |
Outstanding at July 31, 2017 | | 2,879,801 | | $ | 27.40 |
| | | | |
New grants | | 364,046 | | 36.85 |
| | | | |
Exercised | | (397,402) | | 31.01 |
| | | | |
Forfeited or expired | | (62,125) | | 32.25 |
| | | | |
Outstanding at January 31, 2018 | | 2,784,320 | | $ | 28.01 |
| | 6.3 | | $ | 28,850 |
|
Exercisable at January 31, 2018 | | 1,962,475 | | $ | 26.61 |
| | 5.3 | | $ | 23,097 |
|
There were 1,962,475 and 2,037,018 options exercisable with a weighted average exercise price of $26.61 and $28.67 at January 31, 2018 and 2017, respectively. The total intrinsic value of options exercised during the six months ended January 31, 2018 and 2017, based upon the average market price at the time of exercise during the period, was $2,935 and $6,719, respectively. The total fair value of stock options vested during the six months ended January 31, 2018 and 2017, was $3,004 and $2,890, respectively.
The cash received from the exercise of options during the three months ended January 31, 2018 and 2017, was $6,699 and $5,846, respectively. The cash received from the exercise of options during the six months ended January 31, 2018, and 2017 was $9,948 and $14,659, respectively. The tax benefit on options exercised during the three months ended January 31, 2018 and 2017, was $512 and $353, respectively. The tax benefit on options exercised during the six months ended January 31, 2018 and 2017, was $895 and $1,453, respectively.
The following table summarizes the RSU activity under the Company's share-based compensation plans for the six months ended January 31, 2018:
|
| | | | | | | |
Service-Based RSUs | | Shares | | Weighted Average Grant Date Fair Value |
Outstanding at July 31, 2017 | | 517,108 |
| | $ | 25.61 |
|
New grants | | 86,032 |
| | 36.68 |
|
Vested | | (137,237 | ) | | 24.73 |
|
Forfeited | | (23,423 | ) | | 26.92 |
|
Outstanding at January 31, 2018 | | 442,480 |
| | $ | 27.97 |
|
The service-based RSUs granted during the six months ended January 31, 2017, had a weighted-average grant date fair value of $35.12. The total fair value of service-based RSUs vested during the six months ended January 31, 2018 and 2017, was $5,002 and $3,853, respectively.
|
| | | | | | | |
Performance-Based RSUs | | Shares | | Weighted Average Grant Date Fair Value |
Outstanding at July 31, 2017 | | 58,206 |
| | $ | 32.03 |
|
New grants | | 56,290 |
| | 33.12 |
|
Vested | | — |
| | — |
|
Forfeited | | — |
| | — |
|
Outstanding at January 31, 2018 | | 114,496 |
| | $ | 32.57 |
|
The performance-based RSUs granted during the six months ended January 31, 2017, had a weighted-average grant date fair value of $32.03. The aggregate intrinsic value of unvested service-based and performance-based RSUs outstanding at January 31, 2018, and expected to vest was $21,304.
NOTE G — Fair Value Measurements
In accordance with fair value accounting guidance, the Company’s assets and liabilities measured at fair market value are classified in one of the following categories:
Level 1 — Assets or liabilities for which fair value is based on unadjusted quoted prices in active markets for identical instruments that are accessible as of the reporting date.
Level 2 — Assets or liabilities for which fair value is based on other significant pricing inputs that are either directly or indirectly observable.
Level 3 — Assets or liabilities for which fair value is based on significant unobservable pricing inputs to the extent little or no market data is available, which result in the use of management's own assumptions.
The following tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis at January 31, 2018 and July 31, 2017, according to the valuation techniques the Company used to determine their fair values.
|
| | | | | | | | | | | | | |
| Inputs Considered As | | | | |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Fair Values | | Balance Sheet Classifications |
January 31, 2018 | | | | | | | |
Trading securities | $ | 14,726 |
| | $ | — |
| | $ | 14,726 |
| | Other assets |
Foreign exchange contracts | — |
| | 379 |
| | 379 |
| | Prepaid expenses and other current assets |
Total Assets | $ | 14,726 |
| | $ | 379 |
| | $ | 15,105 |
| | |
Foreign exchange contracts | $ | — |
| | $ | 1,054 |
| | $ | 1,054 |
| | Other current liabilities |
Total Liabilities | $ | — |
| | $ | 1,054 |
| | $ | 1,054 |
| | |
July 31, 2017 | | | | | | | |
Trading securities | $ | 13,994 |
| | $ | — |
| | $ | 13,994 |
| | Other assets |
Foreign exchange contracts | — |
| | 1,354 |
| | 1,354 |
| | Prepaid expenses and other current assets |
Total Assets | $ | 13,994 |
| | $ | 1,354 |
| | $ | 15,348 |
| | |
Foreign exchange contracts | $ | — |
| | $ | 1,577 |
| | $ | 1,577 |
| | Other current liabilities |
Total Liabilities | $ | — |
| | $ | 1,577 |
| | $ | 1,577 |
| | |
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Trading securities: The Company’s deferred compensation investments consist of investments in mutual funds. These investments were classified as Level 1 as the shares of these investments trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.
Foreign exchange contracts: The Company’s foreign exchange contracts were classified as Level 2 as the fair value was based on the present value of the future cash flows using external models that use observable inputs, such as interest rates, yield curves and foreign exchange rates. See Note H, “Derivatives and Hedging Activities,” for additional information.
There have been no transfers of assets or liabilities between the fair value hierarchy levels outlined above during the six months ended January 31, 2018. In addition, the Company had no significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition during the six months ended January 31, 2018.
The Company’s financial instruments, other than those presented in the disclosures above, include cash and cash equivalents, accounts receivable, notes payable, accounts payable, and other liabilities. The fair values of these financial instruments approximated carrying values because of their short-term nature.
The estimated fair value of the Company’s short-term and long-term debt obligations, excluding notes payable, based on the quoted market prices for similar issues and on the current rates offered for debt of similar maturities was $74,668 and $109,303 at January 31, 2018 and July 31, 2017, respectively, as compared to the carrying value of $70,624 and $104,536 at January 31, 2018 and July 31, 2017, respectively.
NOTE H — Derivatives and Hedging Activities
The Company utilizes forward foreign exchange currency contracts to reduce the exchange rate risk of specific foreign currency denominated transactions. These contracts typically require the exchange of a foreign currency for U.S. dollars at a fixed rate at a future date, with maturities of less than 18 months, which qualify as cash flow hedges or net investment hedges under the accounting guidance for derivative instruments and hedging activities. The primary objective of the Company’s foreign currency exchange risk management program is to minimize the impact of currency movements due to transactions in other than the respective subsidiaries’ functional currency and to minimize the impact of currency movements on the Company’s net investment denominated in a currency other than the U.S. dollar. To achieve this objective, the Company hedges a portion of known exposures using forward foreign exchange currency contracts. As of January 31, 2018 and July 31, 2017, the notional amount of outstanding forward exchange contracts was $18,236 and $81,195, respectively.
The Company hedges a portion of known exposures using forward exchange contracts. Main exposures are related to transactions denominated in the Euro, Canadian dollar, and Mexican peso. Generally, these risk management transactions will involve the use of foreign currency derivatives to minimize the impact of currency movements on non-functional currency transactions.
Hedge effectiveness is determined by how closely the changes in fair value of the hedging instrument offset the changes in the fair value or cash flows of the hedged item. Hedge accounting is permitted only if the hedging relationship is expected to be highly effective at the inception of the hedge and on an on-going basis. Gains or losses on the derivative related to hedge ineffectiveness are recognized in current earnings.
Cash Flow Hedges
The Company has designated a portion of its foreign exchange contracts as cash flow hedges and recorded these contracts at fair value on the condensed consolidated balance sheets. For these instruments, the effective portion of the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. As of January 31, 2018 and 2017, unrealized losses of $856 and $451 have been included in OCI, respectively. Balances are reclassified from OCI to earnings when the hedged transactions impact earnings. For the three months ended January 31, 2018 and 2017, the Company reclassified losses of $158 and $10 from OCI into earnings, respectively. For the six months ended January 31, 2018 and 2017, the Company reclassified losses of $182 and gains of $415 from OCI into earnings, respectively. At January 31, 2018, the U.S. dollar equivalent of these outstanding forward foreign exchange contracts totaled $15,043, including contracts to sell Euros, Canadian dollars, and U.S. dollars.
Net Investment Hedges
As of April 30, 2017, €45 million of Euro-denominated senior unsecured notes were designated as net investment hedges to hedge portions of its net investment in European operations. The Company’s foreign denominated debt obligations are valued under a market approach using publicized spot prices.
Non-Designated Hedges
For the three and six months ended January 31, 2018, the Company recognized losses of $2 and gains of $20, respectively, in “Investment and other income” on the condensed consolidated statements of earnings related to non-designated hedges. For the three and six months ended January 31, 2017, the Company recognized losses of $3,313 and $5,046, respectively.
Fair values of derivative instruments in the condensed consolidated balance sheets were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives |
| January 31, 2018 | | July 31, 2017 | | January 31, 2018 | | July 31, 2017 |
| Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
Derivatives designated as hedging instruments | | | | | | | | | | | | | | | |
Cash flow hedges | | | | | | | | | | | | | | | |
Foreign exchange contracts | Prepaid expenses and other current assets | | $ | 377 |
| | Prepaid expenses and other current assets | | $ | 1,067 |
| | Other current liabilities | | $ | 1,046 |
| | Other current liabilities | | $ | 1,569 |
|
Net investment hedges | | | | | | | | | | | | | | | |
Foreign currency denominated debt | Prepaid expenses and other current assets | | — |
| | Prepaid expenses and other current assets | | — |
| | Long term obligations, less current maturities | | 55,800 |
| | Long term obligations, less current maturities | | 53,280 |
|
Total derivatives designated as hedging instruments | | | $ | 377 |
| | | | $ | 1,067 |
| | | | $ | 56,846 |
| | | | $ | 54,849 |
|
Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | |
Foreign exchange contracts | Prepaid expenses and other current assets | | $ | 2 |
| | Prepaid expenses and other current assets | | $ | 287 |
| | Other current liabilities | | $ | 8 |
| | Other current liabilities | | $ | 7 |
|
Total derivatives not designated as hedging instruments | | | $ | 2 |
| | | | $ | 287 |
| | | | $ | 8 |
| | | | $ | 7 |
|
NOTE I — Income Taxes
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted. Among the significant changes to the U.S. Internal Revenue Code, the Tax Reform Act reduces the U.S. federal corporate income tax rate from 35.0% to 21.0%, imposes a one-time tax on deemed repatriated earnings of foreign subsidiaries, eliminates the domestic manufacturing deduction and moves to a partial territorial system by providing a 100% dividend received deduction on certain qualified dividends from foreign subsidiaries. As the Company has a July 31 fiscal year end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal income tax rate of 26.9% for the fiscal year ending July 31, 2018 and 21.0% for subsequent fiscal years.
As part of the transition to the partial territorial tax system, the Tax Reform Act imposes a one-time tax on the mandatory deemed repatriation of historical earnings of foreign subsidiaries. Companies can claim certain credits for foreign taxes deemed paid on foreign earnings subject to the mandatory deemed repatriation. The Company’s provisional calculations resulted in an income tax charge of $402 related to the deemed repatriation of the historical earnings of foreign subsidiaries during the three and six-month periods ended January 31, 2018. Existing foreign tax credit carryforwards can be used to offset this tax and, as a result, no cash payments will be required related to this charge.
The reduction in the U.S. federal income tax rate requires the Company to remeasure its U.S. deferred tax assets and liabilities to the income tax rate at which the deductible or taxable event is expected to be realized, and changes the statutory U.S. federal tax from 35.0% to 26.9% for the entire year ending July 31, 2018. Additionally, the Company established a valuation allowance for deferred tax assets related to foreign tax credits, primarily related to the impact of the Tax Reform Act on the Company's ability to generate future foreign-source income. The provisional impact of the Tax Reform Act related to the remeasurement of deferred tax assets and liabilities, the impact on the Company’s fiscal 2018 earnings from the reduced tax rate, and the establishment of the valuation allowance discussed above resulted in income tax expense of $18,832 for the three and six-month periods ended January 31, 2018.
The Company continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”), foreign derived intangible income ("FDII") and base erosion anti-abuse tax (“BEAT”) enacted under the Tax Reform Act, which are not effective until fiscal year 2019. The condensed consolidated financial statements for the three and six month periods ended January 31, 2018, do not include a provisional estimate associated with either GILTI, FDII or BEAT.
As a result of the Tax Reform Act, the Company expects that it will repatriate certain historical and future foreign earnings periodically, which in certain jurisdictions may be subject to withholding and income taxes. These additional withholding and income taxes are being recorded as a deferred tax liability associated with the basis difference in such jurisdictions. During the three and six-month periods ended January 31, 2018, the Company recorded a provisional income tax expense of $1,826 related to the recording of a deferred tax liability for future withholding and income taxes on the distribution of foreign earnings. The uncertainty related to the taxation of such withholding and income taxes on distributions under the Tax Reform Act and the finalization of future cash repatriation plans make the deferred tax liability a provisional amount.
The final enactment impacts of the Tax Reform Act may differ from the above estimates due to changes in interpretation, legislative action to address questions that arise, changes in accounting standards for income taxes or related interpretations in response to the Tax Reform Act, or any updates or changes to information the Company has utilized to develop the estimates, including impacts from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries. The U.S. Securities and Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Reform Act to finalize the recording of the related tax impacts.
NOTE J — New Accounting Pronouncements
In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-12 "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"),Activities," which simplifies and reduces the complexity of the hedge accounting requirements and better aligns an entity's financial reporting for hedging relationships with its risk management activities. The guidance is effective for interim and annual periods in fiscal years beginning after December 15, 2018, with early adoption permitted. This new guidance will require a modified retrospective adoption approach to existing hedging relationships as of the adoption date. The Company is currently evaluating the impact of this update on its consolidated financial statements and disclosures.
In March 2017, the FASB issued ASU 2017-07, "Compensation-Retirement Benefits (Topic 715): Improving the presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which requires entities to present the service cost component of net periodic pension cost and net periodic postretirement benefit cost in the income statement line items where they report compensation cost. Entities will present all other components of net benefit cost outside operating income, if this subtotal is presented. The amendment only impacts where those costs are reflected within the income statement. In addition, only the service cost component of net benefit cost is eligible for capitalization. The Company adopted ASU 2017-07 effective August 1, 2018 and elected the practical expedient to use the components of cost disclosed in prior years as a basis for the retrospective application of the new income statement presentation. The impact of the adoption on the Company's condensed consolidated financial statements was not significant for the three months ended October 31, 2018 and 2017. Refer to Note 4 "Employee Benefit Plans" in our annual report on Form 10-K for the year ended July 31, 2018.
In January 2017, the FASB issued ASU 2017-04, "Goodwill and Other, Simplifying the Test for Goodwill Impairment," which simplifies the accounting for goodwill impairment. The new guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. This guidance is effective for annual periods beginning after December 15, 2019, and interim periods thereafter; however, early adoption is permitted for any impairment tests performed after January 1, 2017. This guidance will only impact the Company's consolidated financial statements if there is a future impairment of goodwill.
In February 2016, the FASB issued ASU 2016-02, "Leases," which replaces the current lease accounting standard.standards. The update will require,requires, among other items, lessees to recognize the assets and liabilities that arise from most leases on the balance sheet. This guidance is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The ASU must be adopted usingallows for either a full retrospective or a modified retrospective approach and early adoption is permitted. The Company expects the new lease standard to increase its total assets and liabilities; however, it is currently evaluating the magnitude of the impact of this update on
its consolidated financial statements.
The Company has formed a team to implement the new lease standard, has selected a third-party software program to track and store its leases, and has accumulated data pertaining to its global lease obligations.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers,"Customers" ("Topic 606"), which eliminates the transaction-andtransaction and industry-specific revenue recognition guidance under current GAAP and replaces it with a principles-based approach for determining revenue recognition. The new guidance requires revenue recognition when control of the goods or services transfers to the customer, replacing the existing guidance which requires revenue recognition when the risks and rewards transfer to the customer. Under the new guidance, companies should recognize revenues in amounts that reflect the payment to which a company expects to be entitled in exchange for those goods or services.
The Company adopted ASU 2014-09 (and related updates) is effective August 1, 2018 using the modified retrospective method to apply this guidance to all contracts at the date of initial application. Results for annualreporting periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted for annual periods beginning after December 15, 2016. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the standard. The Company's efforts to evaluate the impact and to prepare for its adoption on August 1, 2018 are underwaypresented under Topic 606, while comparative prior period amounts have not been restated and continue to be presented under accounting standards in effect in those periods.
The results of applying Topic 606 were insignificant and did not have a material impact on the Company's consolidated financial condition, results of operations, cash flows, business processes, controls, or systems. Upon adoption, the Company recorded a cumulative adjustment to the opening balance of retained earnings as of August 1, 2018, which resulted in a decrease to retained earnings of $2,137, net of tax. The adjustment was primarily due to a change in timing of when revenue and the related costs for certain extended service-type warranties are recognized, as required per Topic 606.
Refer to Note C "Revenue Recognition" for additional information and required disclosures under the new standard.
NOTE C — Revenue Recognition
The Company’s revenues are primarily from the sale of identification solutions and workplace safety products that are shipped and billed to customers. All revenue is from contracts with customers and is included in "Net sales" on the consolidated statements of earnings. The Company considers the purchase orders, which in some cases are governed by master sales or distributor agreements, to be its contracts with the customers. For each contract, the Company considers the commitment to transfer products, each of which is distinct, to be its identified performance obligations.
Timing
The majority of the Company's revenue is earned and recognized at a point in time through ship-and-bill performance obligations, when control of the product is transferred to the customer, which typically occurs upon shipment or delivery to the customer, depending on freight terms. To determine when control has transferred, the Company considers if there is a present right to payment; and if legal title, physical possession, and the significant risks and rewards of ownership of the asset has transferred to the customer. Once a product has shipped or has been delivered, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from, the asset.
Measurement
Revenue is measured as the amount of consideration the Company expects to be entitled to in exchange for the transfer of product, which is generally the price stated in the contract specific for each item sold, adjusted for the value of expected returns, discounts, rebates, or other allowances offered to the Company's customers as a reduction of the transaction price. Certain discounts and price assurances are fixed and known at the time of sale. Expected returns and other allowances are variable and are estimated using the expected value method based upon historical experience. Rebates offered to customers are retrospective and typically defined in the master sales or distributor agreements, and therefore are recorded using the most likely amount method based on the terms of the contract. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.
Payment Terms
While the Company’s standard payment terms are net 30 days, the specific payment terms and conditions in its customer contracts vary. In some cases, customers pay for their goods at time of shipment or upon delivery; in other cases, after appropriate credit evaluation, an open credit line is granted and payment is due in arrears. Contracts with payment in arrears are recognized in the condensed consolidated balance sheet as accounts receivable.
Warranties
The Company offers standard warranty coverage on substantially all products that it sells, and accounts for this standard warranty coverage as an assurance warranty. As such, no transaction price is allocated to the standard warranty, and the Company records a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience.
The Company also sells extended warranty coverage for certain products, which it accounts for as service warranties. In most cases, the extended service warranty is included with the purchase of the product. In applying Topic 606, the Company considers the extended service warranty to be a separate performance obligation in the contract and allocates a portion of the transaction price to the service warranty based on the estimated stand-alone selling price. Under Topic 606, the extended warranty transaction price is initially recorded as deferred revenue on the consolidated balance sheet and recognized on a straight-line basis over the life of the service warranty period. The deferred revenue is considered a contract liability as the Company has reviewed representative formsa right to payment at the time the product with the related extended service warranty is shipped or delivered and therefore, payment is received in advance of agreements with customers globallythe Company's performance. The balance of contract liabilities as of October 31, 2018, was $2,800. This also represents the amount of unsatisfied performance obligations related to contracts that extend beyond one year. Of this amount, the Company expects to recognize 34% as revenue by the end of fiscal 2019, an additional 37% by the end of fiscal 2020, and isthe balance thereafter. Upon adoption of Topic 606, at the beginning of fiscal 2019, the contract liability balance was $2,796. The current portion of contract liabilities and the non-current portion are included in “Other current liabilities” and “Other liabilities," respectively, on the consolidated balance sheet. During the three months ended October 31, 2018, the Company recognized revenue of $308 that was included in the processcontract liability balance at the beginning of the period, which was from the amortization of extended service warranties.
Practical Expedients
With the exception of the performance obligations related to the extended service warranties, the Company's contracts have an original expected duration of one year or less. As a result, the Company has elected to use the practical expedient to not disclose its remaining performance obligations for contracts that have an original expected length of one year or less.
The Company applied the portfolio approach to its ship-and-bill contracts that have similar characteristics as it reasonably expects that the effects on the financial statements of applying this guidance to the portfolio of contracts would not differ materially from applying this guidance to the individual contracts within the portfolio.
As the Company’s product sale contracts and standard payment terms have a duration of less than one year, it uses the practical expedient applicable to such contracts and does not consider the time value of money.
Sales, use, value-add and other similar taxes assessed by governmental authorities and collected concurrent with revenue-producing activities are excluded from revenue.
The Company accounts for shipping and handling activities that occur after control of the related products transfers to the customer as fulfillment activities and are therefore recognized as revenue at time of shipping.
The Company expenses incremental direct costs of obtaining a contract (e.g., sales commissions) when incurred because the amortization period is generally twelve months or less. Contract costs are expensed in "Selling, general, and administrative expenses" on the consolidated statements of earnings.
Refer to Note G, "Segment Information," for the Company's disaggregated revenue disclosure.
NOTE D — Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the three months ended October 31, 2018, were as follows:
|
| | | | | | | | | | | |
| IDS | | WPS | | Total |
Balance as of July 31, 2018 | $ | 385,524 |
| | $ | 34,291 |
| | $ | 419,815 |
|
Translation adjustments | (3,569 | ) | | (1,117 | ) | | (4,686 | ) |
Balance as of October 31, 2018 | $ | 381,955 |
| | $ | 33,174 |
| | $ | 415,129 |
|
Goodwill is presented net of accumulated impairment losses, with the most recent impairment charge being incurred in fiscal 2015. There were no impairment charges recorded during the three months ended October 31, 2018.
Other intangible assets include patents, trademarks, and customer relationships with finite lives being amortized in accordance with the accounting guidance for other intangible assets. The Company also has unamortized indefinite-lived trademarks that are classified as other intangible assets. The net book value of these assets was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| October 31, 2018 | | July 31, 2018 |
| Weighted Average Amortization Period (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | Weighted Average Amortization Period (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
Amortized other intangible assets: | | | | | | | | | | | | | | | |
Patents | 5 | | $ | 1,448 |
| | $ | (1,069 | ) | | $ | 379 |
| | 5 | | $ | 1,448 |
| | $ | (942 | ) | | $ | 506 |
|
Trademarks and other | 9 | | 4,416 |
| | (4,332 | ) | | 84 |
| | 9 | | 4,497 |
| | (4,395 | ) | | 102 |
|
Customer relationships | 9 | | 55,559 |
| | (34,418 | ) | | 21,141 |
| | 9 | | 55,999 |
| | (33,535 | ) | | 22,464 |
|
Unamortized other intangible assets: | | | | | | | | | | | | | | | |
Trademarks | N/A | | 19,429 |
| | — |
| | 19,429 |
| | N/A | | 19,516 |
| | — |
| | 19,516 |
|
Total | | | $ | 80,852 |
| | $ | (39,819 | ) | | $ | 41,033 |
| | | | $ | 81,460 |
| | $ | (38,872 | ) | | $ | 42,588 |
|
The decrease in the gross carrying amount of other intangible assets as of October 31, 2018 compared to July 31, 2018 was due to the effects of currency fluctuations during the three-month period.
Amortization expense on intangible assets was $1,436 and $1,693 for the three months ended October 31, 2018 and 2017, respectively. Amortization expense over each of the next five fiscal years is projected to be $5,713, $5,187, $5,148, $5,004 and $2,025 for the fiscal years ending July 31, 2019, 2020, 2021, 2022 and 2023, respectively.
NOTE E — Other Comprehensive Loss
Other comprehensive loss consists of foreign currency translation adjustments, unrealized gains and losses from cash flow hedges and net investment hedges, and the unamortized gain on post-retirement plans, net of their related tax effects.
The following table illustrates the changes in the balances of each component of accumulated other comprehensive loss, net of tax, for the three months ended October 31, 2018:
|
| | | | | | | | | | | | | | | |
| Unrealized gain on cash flow hedges | | Unamortized gain on post-retirement plans | | Foreign currency translation adjustments | | Accumulated other comprehensive loss |
Beginning balance, July 31, 2018 | $ | 863 |
| | $ | 3,302 |
| | $ | (60,566 | ) | | $ | (56,401 | ) |
Other comprehensive loss before reclassification | (491 | ) | | — |
| | (9,149 | ) | | (9,640 | ) |
Amounts reclassified from accumulated other comprehensive loss | (35 | ) | | (155 | ) | | — |
| | (190 | ) |
Ending balance, October 31, 2018 | $ | 337 |
| | $ | 3,147 |
| | $ | (69,715 | ) | | $ | (66,231 | ) |
The increase in the accumulated other comprehensive loss as of October 31, 2018, compared to July 31, 2018, was primarily due to the appreciation of the U.S. dollar against certain other currencies. The foreign currency translation adjustments column in the table above includes the impact of foreign currency translation, foreign currency translation on intercompany notes, and the settlements of net investment hedges, net of tax. Of the total $190 in amounts reclassified from accumulated other comprehensive loss, the $35 gain on cash flow hedges was reclassified into cost of goods sold and the $155 gain on post-retirement plans was reclassified into selling, general and administrative expenses ("SG&A") on the Condensed Consolidated Statements of Earnings for the three months ended October 31, 2018.
The changes in accumulated other comprehensive loss by component, net of tax, for the three months ended October 31, 2017, were as follows:
|
| | | | | | | | | | | | | | | |
| Unrealized gain (loss) on cash flow hedges | | Unamortized gain on post-retirement plans | | Foreign currency translation adjustments | | Accumulated other comprehensive loss |
Beginning balance, July 31, 2017 | $ | 109 |
| | $ | 2,620 |
| | $ | (47,411 | ) | | $ | (44,682 | ) |
Other comprehensive loss before reclassification | (419 | ) | | — |
| | (6,846 | ) | | (7,265 | ) |
Amounts reclassified from accumulated other comprehensive loss | 15 |
| | (130 | ) | | — |
| | (115 | ) |
Ending balance, October 31, 2017 | $ | (295 | ) | | $ | 2,490 |
| | $ | (54,257 | ) | | $ | (52,062 | ) |
The increase in accumulated other comprehensive loss as of October 31, 2017, compared to July 31, 2017, was primarily due to the appreciation of the U.S. dollar against certain other currencies. The foreign currency translation adjustments column in the table above includes the impact of foreign currency translation, foreign currency translation on intercompany notes, and the settlements of net investment hedges, net of tax. Of the total $115 in amounts reclassified from accumulated other comprehensive loss, the $15 loss on cash flow hedges was reclassified into cost of goods sold and the $130 gain on post-retirement plans was reclassified into SG&A on the Condensed Consolidated Statements of Earnings for the three months ended October 31, 2017.
The following table illustrates the income tax expense on the components of other comprehensive loss for the three months ended October 31, 2018 and 2017:
|
| | | | | | | |
| Three months ended October 31, |
| 2018 | | 2017 |
Income tax expense related to items of other comprehensive loss: | | | |
Net investment hedge translation adjustments | $ | (405 | ) | | $ | (301 | ) |
Cash flow hedges | (100 | ) | | (195 | ) |
Other income tax adjustments and currency translation | 47 |
| | 11 |
|
Income tax expense related to items of other comprehensive loss | $ | (458 | ) | | $ | (485 | ) |
NOTE F — Net Earnings per Common Share
Reconciliations of the numerator and denominator of the basic and diluted per share computations for the Company’s Class A and Class B common stock are summarized as follows:
|
| | | | | | | |
| Three months ended October 31, |
| 2018 | | 2017 |
Numerator: | | | |
Earnings (Numerator for basic and diluted Class A Nonvoting Common Share) | $ | 30,637 |
| | $ | 25,836 |
|
Less: | | | |
Preferential dividends | (815 | ) | | (799 | ) |
Preferential dividends on dilutive stock options | (13 | ) | | (16 | ) |
Numerator for basic and diluted earnings per Class B Voting Common Share | $ | 29,809 |
| | $ | 25,021 |
|
Denominator: (in thousands) | | | |
Denominator for basic earnings for both Class A and Class B | 52,201 |
| | 51,440 |
|
Plus: Effect of dilutive stock options | 757 |
| | 943 |
|
Denominator for diluted earnings per share for both Class A and Class B | 52,958 |
| | 52,383 |
|
Net earnings per Class A Nonvoting Common Share: | | | |
Basic | $ | 0.59 |
| | $ | 0.50 |
|
Diluted | $ | 0.58 |
| | $ | 0.49 |
|
Net earnings per Class B Voting Common Share: | | | |
Basic | $ | 0.57 |
| | $ | 0.49 |
|
Diluted | $ | 0.56 |
| | $ | 0.48 |
|
Options to purchase 679,902 and 737,132 shares of Class A Nonvoting Common Stock for the three months ended October 31, 2018 and 2017, respectively, were not included in the computation of diluted net earnings per share because the option exercise price was greater than the average market price of the common shares and, therefore, the effect would have been anti-dilutive.
NOTE G — Segment Information
The Company is organized and managed on a global basis within three operating segments, Identification Solutions ("IDS"), Workplace Safety ("WPS"), and People Identification ("People ID"), which aggregate into two reportable segments that are organized around businesses with consistent products and services: IDS and WPS. The Identification Solutions and People ID operating segments aggregate into the IDS reporting segment, while the WPS reporting segment is comprised solely of the Workplace Safety operating segment. The Company evaluates short-term segment performance based on segment profit and customer sales. Interest expense, investment and other income (expense), income taxes, and certain corporate administrative expenses are excluded when evaluating segment performance.
The following is a summary of net sales by segment and geographic region for the three months ended October 31, 2018 and 2017: |
| | | | | | | |
| Three months ended October 31, |
| 2018 | | 2017 |
Net sales: | | | |
ID Solutions | | | |
Americas | $ | 145,791 |
| | $ | 139,404 |
|
Europe | 48,828 |
| | 47,131 |
|
Asia | 23,481 |
| | 23,170 |
|
Total | $ | 218,100 |
| | $ | 209,705 |
|
Workplace Safety | | | |
Americas | $ | 24,751 |
| | $ | 26,488 |
|
Europe | 37,655 |
| | 41,384 |
|
Australia | 12,690 |
| | 12,574 |
|
Total | $ | 75,096 |
| | $ | 80,446 |
|
Total Company | | | |
Americas | $ | 170,542 |
| | $ | 165,892 |
|
Europe | 86,483 |
| | 88,515 |
|
Asia-Pacific | 36,171 |
| | 35,744 |
|
Total | $ | 293,196 |
| | $ | 290,151 |
|
Segment profit for the three months ended October 31, 2018 and 2017 is as follows: |
| | | | | | | |
| Three months ended October 31, |
| 2018 | | 2017 |
Segment profit: | | | |
ID Solutions | $ | 41,562 |
| | $ | 35,837 |
|
Workplace Safety | 5,541 |
| | 6,445 |
|
Total Company | $ | 47,103 |
| | $ | 42,282 |
|
The following is a reconciliation of segment profit to earnings before income taxes for the three months ended October 31, 2018 and 2017:
|
| | | | | | | |
| Three months ended October 31, |
| 2018 | | 2017 |
Total profit from reportable segments | $ | 47,103 |
| | $ | 42,282 |
|
Unallocated amounts: | | | |
Administrative costs | (6,481 | ) | | (6,871 | ) |
Investment and other (expense) income | (17 | ) | | 216 |
|
Interest expense | (712 | ) | | (863 | ) |
Earnings before income taxes | $ | 39,893 |
| | $ | 34,764 |
|
NOTE H – Stock-Based Compensation
The Company has an incentive stock plan under which the Board of Directors may grant nonqualified stock options to purchase shares of Class A Nonvoting Common Stock, restricted stock units ("RSUs"), or restricted and unrestricted shares of Class A Nonvoting Common Stock to employees and non-employee directors. Certain awards may be subject to pre-established performance goals.
The options issued under the plan have an exercise price equal to the fair market value of the underlying stock at the date of grant and generally vest over a three-year service period, with one-third becoming exercisable one year after the grant date and one-third additional in each of the succeeding two years. Options issued under the plan, referred to herein as “service-based” stock options, generally expire 10 years from the date of grant.
Restricted and unrestricted shares and RSUs issued under the plan have a grant date fair value equal to the fair market value of the underlying stock at the date of grant or as determined using a Monte Carlo simulation. Shares issued under the plan are referred to herein as either "service-based" or "performance-based" restricted shares and RSUs. The service-based RSUs granted under the plan generally vest over a three-year service period, with one-third becoming exercisable one year after the grant date and one-third additional in each of the succeeding two years. The performance-based RSUs granted under the plan vest at the end of a three-year service period provided specified financial performance metrics are met.
As of October 31, 2018, the Company has reserved 2,682,634 shares of Class A Nonvoting Common Stock for outstanding stock options, RSUs, and restricted shares and 3,655,246 shares of Class A Nonvoting Common Stock remain for future issuance of stock options, RSUs, and restricted and unrestricted shares under the active plan. The Company uses treasury stock or will issue new Class A Nonvoting Common Stock to deliver shares under the plan.
The Company recognizes the compensation cost of all share-based awards at the time it is deemed probable the award will vest. This cost is recognized on a straight-line basis over the vesting period of the award. If it is determined that it is unlikely the award will vest, the expense recognized to date for the award is reversed in the period in which this is evident and the remaining expense is not recorded. Total stock-based compensation expense recognized by the Company during the three months ended October 31, 2018 and 2017, was $4,965 ($4,319 net of taxes) and $3,744 ($2,321 net of taxes), respectively.
As of October 31, 2018, total unrecognized compensation cost related to stock-based compensation awards was $16,245 pre-tax, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of 2.1 years.
The Company has estimated the fair value of its service-based stock option awards granted during the three months ended October 31, 2018 and 2017, using the Black-Scholes option valuation model. The weighted-average assumptions used in the Black-Scholes valuation model are reflected in the following table:
|
| | | | | | | | |
| | Three months ended October 31, |
Black-Scholes Option Valuation Assumptions | | 2018 | | 2017 |
Expected term (in years) | | 6.20 |
| | 6.07 |
|
Expected volatility | | 25.83 | % | | 28.19 | % |
Expected dividend yield | | 2.71 | % | | 2.72 | % |
Risk-free interest rate | | 3.01 | % | | 1.96 | % |
Weighted-average market value of underlying stock at grant date | | $ | 43.96 |
| | $ | 36.85 |
|
Weighted-average exercise price | | $ | 43.96 |
| | $ | 36.85 |
|
Weighted-average fair value of options granted during the period | | $ | 9.70 |
| | $ | 7.96 |
|
The Company uses historical data regarding stock option exercise behaviors to estimate the expected term of options granted based on the period of time that options granted are expected to be outstanding. Expected volatilities are based on the historical volatility of the Company’s stock. The expected dividend yield is based on the Company’s historical dividend payments and historical yield. The risk-free interest rate is based on the U.S. Treasury yield curve in effect on the grant date for the length of time corresponding to the expected term of the option. The market value is calculated as the average of the high and the low stock price on the date of the grant.
A summary of stock option activity under the Company’s share-based compensation plans for the three months ended October 31, 2018, is presented below:
|
| | | | | | | | | | | | |
Service-Based Options | | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value |
Outstanding at July 31, 2018 | | 2,504,633 | | $ | 28.23 |
| �� | | | |
New grants | | 276,238 | | 43.96 |
| | | | |
Exercised | | (551,919) | | 26.88 |
| | | | |
Forfeited or expired | | (5,407) | | 36.24 |
| | | | |
Outstanding at October 31, 2018 | | 2,223,545 | | $ | 30.50 |
| | 6.5 | | $ | 23,842 |
|
Exercisable at October 31, 2018 | | 1,621,317 | | $ | 27.06 |
| | 5.6 | | $ | 22,340 |
|
There were 1,621,317 and 2,229,350 options exercisable with a weighted average exercise price of $27.06 and $27.39 at October 31, 2018 and 2017, respectively. The total fair value of stock options vested during the three months ended October 31, 2018 and 2017, was $2,798 and $2,974, respectively.
The cash received from the exercise of options during the three months ended October 31, 2018 and 2017, was $12,138 and $3,249. The tax benefit from the exercise of options during the three months ended October 31, 2018 and 2017, was $2,356 and $478, respectively. The total intrinsic value of options exercised during the three months ended October 31, 2018 and 2017, based upon the average market price at the time of exercise during the period, was $9,423 and $1,257, respectively.
The following tables summarize the RSU activity under the Company's share-based compensation plans for the three months ended October 31, 2018:
|
| | | | | | | |
Service-Based RSUs | | Shares | | Weighted Average Grant Date Fair Value |
Outstanding at July 31, 2018 | | 342,856 |
| | $ | 29.05 |
|
New grants | | 76,356 |
| | 44.04 |
|
Vested | | (111,194 | ) | | 28.15 |
|
Forfeited | | (7,339 | ) | | 29.97 |
|
Outstanding at October 31, 2018 | | 300,679 |
| | $ | 33.16 |
|
The service-based RSUs granted during the three months ended October 31, 2017, had a weighted-average grant date fair value of $35.14. The total fair value of service-based RSUs vested during the three months ended October 31, 2018 and 2017, was $4,795 and $4,736, respectively.
|
| | | | | | | |
Performance-Based RSUs | | Shares | | Weighted Average Grant Date Fair Value |
Outstanding at July 31, 2018 | | 108,097 |
| | $ | 32.57 |
|
New grants | | 50,313 |
| | 50.70 |
|
Vested | | — |
| | — |
|
Forfeited | | — |
| | — |
|
Outstanding at October 31, 2018 | | 158,410 |
| | $ | 38.33 |
|
The performance-based RSUs granted during the three months ended October 31, 2017, had a weighted-average grant date fair value of $33.12. The aggregate intrinsic value of unvested service-based and performance-based RSUs outstanding at October 31, 2018 and expected to vest was $18,497.
NOTE I — Fair Value Measurements
In accordance with fair value accounting guidance, the Company’s assets and liabilities measured at fair market value are classified in one of the following categories:
Level 1 — Assets or liabilities for which fair value is based on unadjusted quoted prices in active markets for identical instruments that are accessible as of the reporting date.
Level 2 — Assets or liabilities for which fair value is based on other significant pricing inputs that are either directly or indirectly observable.
Level 3 — Assets or liabilities for which fair value is based on significant unobservable pricing inputs to the extent little or no market data is available, which result in the use of management's own assumptions.
The following tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis at October 31, 2018 and July 31, 2018, according to the valuation techniques the Company used to determine their fair values.
|
| | | | | | | | | | | | | |
| Inputs Considered As | | | | |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Fair Values | | Balance Sheet Classifications |
October 31, 2018 | | | | | | | |
Trading securities | $ | 14,060 |
| | $ | — |
| | $ | 14,060 |
| | Other assets |
Foreign exchange contracts | — |
| | 891 |
| | 891 |
| | Prepaid expenses and other current assets |
Total Assets | $ | 14,060 |
| | $ | 891 |
| | $ | 14,951 |
| | |
Foreign exchange contracts | $ | — |
| | $ | 505 |
| | $ | 505 |
| | Other current liabilities |
Total Liabilities | $ | — |
| | $ | 505 |
| | $ | 505 |
| | |
July 31, 2018 | | | | | | | |
Trading securities | $ | 14,383 |
| | $ | — |
| | $ | 14,383 |
| | Other assets |
Foreign exchange contracts | — |
| | 1,077 |
| | 1,077 |
| | Prepaid expenses and other current assets |
Total Assets | $ | 14,383 |
| | $ | 1,077 |
| | $ | 15,460 |
| | |
Foreign exchange contracts | $ | — |
| | $ | 3 |
| | $ | 3 |
| | Other current liabilities |
Total Liabilities | $ | — |
| | $ | 3 |
| | $ | 3 |
| | |
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Trading securities: The Company’s deferred compensation investments consist of investments in mutual funds. These investments were classified as Level 1 as the shares of these investments trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.
Foreign exchange contracts: The Company’s foreign exchange contracts were classified as Level 2 as the fair value was based on the present value of the future cash flows using external models that use observable inputs, such as interest rates, yield curves and foreign exchange rates. See Note J, “Derivatives and Hedging Activities,” for additional information.
There have been no transfers of assets or liabilities between the fair value hierarchy levels, outlined above, during the three months ended October 31, 2018. In addition, the Company had no significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition during the three months ended October 31, 2018.
The Company’s financial instruments, other than those presented in the disclosures above, include cash and cash equivalents, accounts receivable, notes payable, accounts payable, accrued liabilities and short-term and long-term debt. The fair values of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximated carrying values because of the short-term nature of these instruments.
The estimated fair value of the Company’s short-term and long-term debt obligations based on the quoted market prices for similar issues and on the current rates offered for debt of similar maturities was $57,047 and $55,707 at October 31, 2018 and July 31, 2018, respectively, as compared to the carrying value of $54,408 and $52,618 at October 31, 2018 and July 31, 2018, respectively.
NOTE J — Derivatives and Hedging Activities
The Company utilizes forward foreign exchange currency contracts to reduce the exchange rate risk of specific foreign currency denominated transactions. These contracts typically require the exchange of a foreign currency for U.S. dollars at a fixed rate at a future date, with maturities of less than 18 months, which qualify as cash flow hedges or net investment hedges under the accounting guidance for derivative instruments and hedging activities. The primary objective of the Company’s foreign currency exchange risk management program is to minimize the impact of currency movements due to transactions in other than the respective subsidiaries’ functional currency and to minimize the impact of currency movements on the Company’s net investment denominated in a currency other than the U.S. dollar. To achieve this objective, the Company hedges a portion of known exposures using forward foreign exchange currency contracts. As of October 31, 2018 and July 31, 2018, the notional amount of outstanding forward exchange contracts was $23,619 and $32,667, respectively.
The Company hedges a portion of known exposures using forward exchange contracts. Main exposures are related to transactions denominated in the Euro, Canadian dollar, and Mexican peso. Generally, these risk management transactions will involve the use of foreign currency derivatives to minimize the impact of currency movements on non-functional currency transactions.
Hedge effectiveness is determined by how closely the changes in fair value of the hedging instrument offset the changes in the fair value or cash flows of the hedged item. Hedge accounting is permitted only if the hedging relationship is expected to be highly effective at the inception of the hedge and on an on-going basis. Gains or losses on the derivative related to hedge ineffectiveness are recognized in current earnings.
Cash Flow Hedges
The Company has designated a portion of its forward foreign exchange contracts as cash flow hedges and recorded these contracts at fair value on the Condensed Consolidated Balance Sheets. For these instruments, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income ("OCI") and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. As of October 31, 2018 and 2017, unrealized gains of $590 and losses of $710 were included in OCI, respectively. Balances are reclassified from OCI to earnings when the hedged transactions impact earnings. For the three months ended October 31, 2018 and 2017, the Company reclassified gains of $47 and losses of $24 from OCI into earnings, respectively. At October 31, 2018, the U.S. dollar equivalent of these outstanding forward foreign exchange contracts totaled $20,398, including contracts to sell Euros and Canadian dollars, and contracts to buy Mexican pesos.
Net Investment Hedges
As of April 30, 2017, €45 million of Euro-denominated senior unsecured notes were designated as net investment hedges to hedge portions of the Company's net investment in European operations. The Company’s foreign denominated debt obligations are valued under a market approach using publicized spot prices.
Non-Designated Hedges
For the three months ended October 31, 2018 and 2017, the Company recognized losses of $33 and gains of $22, respectively, in “Investment and other (expense) income” on the Condensed Consolidated Statements of Earnings related to non-designated hedges.
Fair values of derivative instruments in the Condensed Consolidated Balance Sheets were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives |
| October 31, 2018 | | July 31, 2018 | | October 31, 2018 | | July 31, 2018 |
| Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
Derivatives designated as hedging instruments | | | | | | | | | | | | | | | |
Cash flow hedges | | | | | | | | | | | | | | | |
Foreign exchange contracts | Prepaid expenses and other current assets | | $ | 871 |
| | Prepaid expenses and other current assets | | $ | 1,076 |
| | Other current liabilities | | $ | 452 |
| | Other current liabilities | | $ | — |
|
Net investment hedges | | | | | | | | | | | | | | | |
Foreign currency denominated debt | Prepaid expenses and other current assets | | — |
| | Prepaid expenses and other current assets | | — |
| | Long term obligations, less current maturities | | 51,048 |
| | Long term obligations, less current maturities | | 52,668 |
|
Total derivatives designated as hedging instruments | | | $ | 871 |
| | | | $ | 1,076 |
| | | | $ | 51,500 |
| | | | $ | 52,668 |
|
Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | |
Foreign exchange contracts | Prepaid expenses and other current assets | | $ | 20 |
| | Prepaid expenses and other current assets | | $ | 1 |
| | Other current liabilities | | $ | 52 |
| | Other current liabilities | | $ | 3 |
|
Total derivatives not designated as hedging instruments | | | $ | 20 |
| | | | $ | 1 |
| | | | $ | 52 |
| | | | $ | 3 |
|
NOTE K – Stockholders' Equity
The following table illustrates the changes in the balances of each component of stockholders' equity for the three months ended October 31, 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
Balances at July 31, 2018 | | $ | 548 |
| | $ | 325,631 |
| | $ | 553,454 |
| | $ | (71,120 | ) | | $ | (56,401 | ) | | $ | 752,112 |
|
Net earnings | | — |
| | — |
| | 30,637 |
| | — |
| | — |
| | 30,637 |
|
Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | — |
| | (9,830 | ) | | (9,830 | ) |
Issuance of shares of Class A Common Stock under stock plan | | — |
| | (4,505 | ) | | — |
| | 14,569 |
| | — |
| | 10,064 |
|
Tax benefit and withholdings from deferred compensation distributions | | — |
| | 91 |
| | — |
| | — |
| | — |
| | 91 |
|
Stock-based compensation expense (Note H) | | — |
| | 4,965 |
| | — |
| | — |
| | — |
| | 4,965 |
|
Purchase of shares of Class A Common Stock | | — |
| | — |
| | — |
| | (1,863 | ) | | — |
| | (1,863 | ) |
Cumulative adjustment for ASU 2014-09, net of tax (Note B) | | — |
| | — |
| | (2,137 | ) | | — |
| | — |
| | (2,137 | ) |
Cash dividends on Common Stock | | | | | | | | | | | | |
Class A — $0.21 per share | | — |
| | — |
| | (10,403 | ) | | — |
| | — |
| | (10,403 | ) |
Class B — $0.20 per share | | — |
| | — |
| | (693 | ) | | — |
| | — |
| | (693 | ) |
Balances at October 31, 2018 | | $ | 548 |
| | $ | 326,182 |
| | $ | 570,858 |
| | $ | (58,414 | ) | | $ | (66,231 | ) | | $ | 772,943 |
|
The following table illustrates the changes in the balances of each component of stockholders' equity for the three months ended October 31, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
Balances at July 31, 2017 | | $ | 548 |
| | $ | 322,608 |
| | $ | 507,136 |
| | $ | (85,470 | ) | | $ | (44,682 | ) | | $ | 700,140 |
|
Net earnings | | — |
| | — |
| | 25,836 |
| | — |
| | — |
| | 25,836 |
|
Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | — |
| | (7,380 | ) | | (7,380 | ) |
Issuance of shares of Class A Common Stock under stock plan | | — |
| | (3,863 | ) | | — |
| | 5,086 |
| | — |
| | 1,223 |
|
Tax benefit and withholdings from deferred compensation distributions | | — |
| | 168 |
| | — |
| | (422 | ) | | — |
| | (254 | ) |
Stock-based compensation expense (Note H) | | — |
| | 3,744 |
| | — |
| | — |
| | — |
| | 3,744 |
|
Cash dividends on Common Stock | | | | | | | | | | | | |
Class A — $0.21 per share | | — |
| | — |
| | (9,964 | ) | | — |
| | — |
| | (9,964 | ) |
Class B — $0.19 per share | | — |
| | — |
| | (675 | ) | | — |
| | — |
| | (675 | ) |
Balances at October 31, 2017 | | $ | 548 |
| | $ | 322,657 |
| | $ | 522,333 |
| | $ | (80,806 | ) | | $ | (52,062 | ) | | $ | 712,670 |
|
NOTE L – Income Taxes
The effective income tax rate for the three months ended October 31, 2018 and 2017 was 23.2% and 25.7%, respectively. The decrease in the income tax rate was primarily due to a reduction of the U.S. federal corporate tax rate as a result of the Tax Cuts and Jobs Act (the "Tax Reform Act") passed in December 2017 and tax benefits from equity-based compensation activity in the current period.
The U.S. Securities and Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Reform Act to finalize the recording of the related tax impacts. Provisional adjustments have been recorded in the Company’s consolidated financial statements; however, the final enactment impacts of the Tax Reform Act may differ from the estimate due to changes in interpretation, legislative action to address questions that arise, changes in accounting
standards for income taxes or related interpretations in response to the Tax Reform Act, or any updates or changes to information the Company has utilized to develop the estimates, including impacts from changes to earnings estimates and foreign exchange rates of foreign subsidiaries. No significant adjustments to the provisional amounts recorded during the year ended July 31, 2018, have been recognized for the three months ended October 31, 2018. For further discussion on the impact of the new standardTax Reform Act, refer to Note 5 “Income Taxes” of the Annual Report on its consolidated financial statements. The Company is also assessing its processForm 10-K for accumulating the required information for enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue under the new standard. The Company currently anticipates applying the modified retrospective approach when adopting this guidance.year ended July 31, 2018.
NOTE KM — Subsequent Events
On February 20,November 13, 2018, the Board of Directors declared a quarterly cash dividend to shareholders of the Company’s Class A and Class B Common Stock of $0.2075$0.2125 per share payable on April 30, 2018,January 31, 2019, to shareholders of record at the close of business on April 9, 2018.January 10, 2019.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Overview
Brady Corporation is a global manufacturer and supplier of identification solutions and workplace safety products that identify and protect premises, products and people. The IDS segment is primarily involved in the design, manufacture, and distribution of high-performance and innovative identification and healthcare products. The WPS segment provides workplace safety and compliance products, half of which are internally manufactured and half of which are externally sourced. Approximately 45% of our total sales are derived outside of the United States. Foreign sales within the IDS and WPS segments are approximately 35% and 65%, respectively.
The ability to provide customers with a vast array of proprietary, customized and diverse products for use in various applications across multiple customers and geographies, along with a commitment to quality and service, have made Brady a leader in many of its markets.
The long-term sales growth and profitability of our segments will depend not only on improved demand in end markets and the overall economic environment, but also on our ability to continuously improve operational excellence, focus on the customer, develop and market innovative new products, and to advance our digital capabilities. In our IDSIdentification Solutions ("ID Solutions" or "IDS") business, our strategy for growth includes an increased focus on key customers,certain industries and products, anda focus on improving the efficiencycustomer buying experience, and effectiveness of theincreasing investment in research and development ("R&D") function.to develop new products. In our WPSWorkplace Safety ("WPS") business, our strategy for growth includes a focus on workplace safety critical industries, innovative new product offerings, compliance expertise, and increased investment inimproving our digital capabilities.
The Company is targeting the following are key initiatives supporting the strategy in fiscal 2018:2019:
Enhancing our innovation development process and the speed to deliver high-value, innovative products that alignin alignment with our target markets.
Driving operational excellence and providing our customers with the highest level of customer service.
Executing sustainable efficiency gains throughout our global operations as well aswithin our selling, general, and administrative structures.structures as well as throughout our global operations by making investments in equipment and machinery to drive automation.
Expanding and enhancing our digital presence.
Growing through focused sales and marketing effortsactions in selected vertical markets and strategic accounts.
Enhancing our global employee development process to attract and retain key talent.
Results of Operations
A comparison of results of operating incomeOperating Income for the three and six months ended JanuaryOctober 31, 2018 and 2017 is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
(Dollars in thousands) | 2018 | | % Sales | | 2017 | | % Sales | | 2018 | | % Sales | | 2017 | | % Sales |
Net sales | $ | 287,780 |
| | | | $ | 268,001 |
| | | | $ | 577,931 |
| | | | $ | 548,177 |
| | |
Gross margin | 143,692 |
| | 49.9 | % | | 134,158 |
| | 50.1 | % | | 289,757 |
| | 50.1 | % | | 274,516 |
| | 50.1 | % |
Operating expenses: | | | | | | | | | | | | | | | |
Research and development | 11,314 |
| | 3.9 | % | | 9,481 |
| | 3.5 | % | | 21,834 |
| | 3.8 | % | | 18,627 |
| | 3.4 | % |
Selling, general and administrative | 97,582 |
| | 33.9 | % | | 94,715 |
| | 35.3 | % | | 197,716 |
| | 34.2 | % | | 192,719 |
| | 35.2 | % |
Total operating expenses | 108,896 |
| | 37.8 | % | | 104,196 |
| | 38.9 | % | | 219,550 |
| | 38.0 | % | | 211,346 |
| | 38.6 | % |
Operating income | $ | 34,796 |
| | 12.1 | % | | $ | 29,962 |
| | 11.2 | % | | $ | 70,207 |
| | 12.1 | % | | $ | 63,170 |
| | 11.5 | % |
|
| | | | | | | | | | | | | |
| Three months ended October 31, |
(Dollars in thousands) | 2018 | | % Sales | | 2017 | | % Sales |
Net Sales | $ | 293,196 |
| | | | $ | 290,151 |
| | |
Gross Margin | 146,539 |
| | 50.0 | % | | 146,065 |
| | 50.3 | % |
Operating Expenses: | | | | | | | |
Research and Development | 11,326 |
| | 3.9 | % | | 10,520 |
| | 3.6 | % |
Selling, General and Administrative | 94,591 |
| | 32.3 | % | | 100,134 |
| | 34.5 | % |
Total operating expenses | 105,917 |
| | 36.1 | % | | 110,654 |
| | 38.1 | % |
Operating Income | $ | 40,622 |
| | 13.9 | % | | $ | 35,411 |
| | 12.2 | % |
References in this Form 10-Q to “organic sales” refer to sales calculated in accordance with U.S. GAAP, excluding the impact of foreign currency translation.translation and divestitures. The Company's organic sales disclosures exclude the effects of foreign currency translation as foreign currency translation is subject to volatility that can obscure underlying business trends. Management believes that the non-GAAP financial measure of organic sales is meaningful to investors as it provides them with useful information to aid in identifying underlying sales trends in our businesses and facilitating comparisons of our sales performance with prior periods.
Sales for the three months ended JanuaryOctober 31, 2018, increased 7.4%1.0% to $287.8$293.2 million, compared to $268.0$290.2 million in the same period of the prior year, whichyear. The increase in sales consisted of organic sales growth of 3.2% and4.7%, partially offset by a positivenegative foreign currency impact of 4.2%2.0% and a sales decline of 1.7% due to the weakeningdivestiture of the U.S. Dollar against certain other currencies as compared to the same period in the prior year.a business. Organic sales grew 4.7%by 5.7% in the IDS segment and declined 0.5%2.2% in the WPS segment during the three months ended JanuaryOctober 31, 2018, compared to the same period in the prior year. The IDS segment realized sales growth in the Product ID, Wire ID, and Safety and Facility ID, product lines, partially offset by a decline in theand Healthcare ID product line compared to the prior year. The WPS segment realized growth in thelines. Both digital channel, but was offset by a decline inand traditional catalog channel sales when compared to the same period in the prior year.
Sales for the six months ended January 31, 2018, increased 5.4% to $577.9 million, compared to $548.2 million in the same period of the prior year, which consisted of organic sales growth of 2.4% and a positive currency impact of 3.0%. Organic sales grew 3.8% in the IDS segment and declined 1.0% in the WPS segment during the six months ended January 31, 2018, compared to the same period in the prior year. The IDS segment realized sales growth in the Product ID, Wire ID, and Safety and Facility ID product lines, partially offset by a decline in the Healthcare ID product line. Catalog channel sales in the WPS segment declined, but were partially ofsset by digital channel sales growth when compared to the same period in the prior year.improved.
Gross margin for the three months ended JanuaryOctober 31, 2018, increased 7.1%0.3% to $143.7$146.5 million, compared to $134.2$146.1 million in the same period of the prior year, and increased 5.6%year. As a percentage of net sales, gross margin decreased to $289.8 million50.0% for the sixthree months ended JanuaryOctober 31, 2018, from 50.3% in the same period of the prior year. The decrease in gross margin as a percentage of net sales was primarily due to increased material, supplies, and freight costs which were partially mitigated by our on-going efforts to streamline manufacturing processes and drive operational efficiencies, including increased automation in our manufacturing facilities.
Research and development (“R&D”) expenses for the three months ended October 31, 2018, increased 7.7% to $11.3 million, compared to $274.5$10.5 million in the same period of the prior year. As a percentage of sales, gross margin decreased to 49.9%R&D expenses were 3.9% for the three months ended January 31, 2018 from 50.1% in the same period of the prior year, primarily due to price reductions in our Workplace Safety business. As a percentage of sales, gross margin remained flat at 50.1% for the six months ended JanuaryOctober 31, 2018, compared to the same period of the prior year. On-going efforts continue to streamline manufacturing processes and operational efficiencies in manufacturing facilities are offsetting increases in costs.
R&D expenses for the three months ended January 31, 2018, increased 19.3% to $11.3 million, compared to $9.5 million in the same period of the prior year, and increased 17.2% to $21.8 million for the six months ended January 31, 2018, compared to $18.6 million3.6% in the same period of the prior year. The increasesincrease in both the three and six month periods wereR&D expenses was primarily due to an increased investmentsnumber of R&D personnel and investment in several new softwareproduct development supporting our focus on increasing new product sales within our IDS and printer updates within the IDS segment.WPS businesses.
Selling, general and administrative expenses ("SG&A") include selling and administrative costs directly attributed to the IDS and WPS segments, as well as certain other corporate administrative expenses including finance, information technology, human resources, and other administrative expenses. SG&A increased 3.0%decreased 5.5% to $97.6$94.6 million for the three months ended January 31, 2018, and 2.6% to $197.7 million for the six months ended JanuaryOctober 31, 2018, compared to $94.7 million and $192.7$100.1 million in the same periodsperiod of the prior year, respectively. The increases in both the three and six month periods were primarily due to the impactyear. As a percentage of the weakening U.S. dollar on the translation of foreignsales, SG&A expenses, which were partially offset by reduced SG&A expenses due to efficiency gains.
Operating income was $34.8 million during the three months ended January 31, 2018, compared to $30.0 million32.3% for the three months ended January 31, 2017, resulting in a 16.1% increase. Operating income was $70.2 million during the six months ended JanuaryOctober 31, 2018, compared to $63.234.5% in the same period of the prior year. Approximately half of the decrease in SG&A was due to a favorable impact of foreign currency translation and the impact of the sale of a business in the prior year. The remainder of the decrease was due to ongoing efficiency gains in SG&A.
Operating income was $40.6 million and $35.4 million for the sixthree months ended JanuaryOctober 31, 2018 and 2017, resulting in an 11.1% increase.respectively. The increase in the three and six month periods werewas primarily due to increased salessegment profit in the IDS segment and reduced selling expenseSG&A in the WPS segment, and the positive impact of foreign currency fluctuations; partially offset by increased R&D expenses.both segments.
OPERATING INCOME TO NET EARNINGS
| | | Three months ended January 31, | | Six months ended January 31, | Three months ended October 31, |
(Dollars in thousands) | 2018 | | % Sales | | 2017 | | % Sales | | 2018 | | % Sales | | 2017 | | % Sales | 2018 | | % Sales | | 2017 | | % Sales |
Operating income | $ | 34,796 |
| | 12.1 | % | | $ | 29,962 |
| | 11.2 | % | | $ | 70,207 |
| | 12.1 | % | | $ | 63,170 |
| | 11.5 | % | $ | 40,622 |
| | 13.9 | % | | $ | 35,411 |
| | 12.2 | % |
Other income (expense): | | | | | | | | | | | | | | | | |
Investment and other income | 1,056 |
| | 0.4 | % | | 596 |
| | 0.2 | % | | 1,272 |
| | 0.2 | % | | 107 |
| | — | % | |
Other (expense) income: | | | | | | | | |
Investment and other (expense) income | | (17 | ) | | — | % | | 216 |
| | 0.1 | % |
Interest expense | (829 | ) | | (0.3 | )% | | (1,458 | ) | | (0.5 | )% | | (1,692 | ) | | (0.3 | )% | | (3,190 | ) | | (0.6 | )% | (712 | ) | | (0.2 | )% | | (863 | ) | | (0.3 | )% |
Earnings before income tax | 35,023 |
| | 12.2 | % | | 29,100 |
| | 10.9 | % | | 69,787 |
| | 12.1 | % | | 60,087 |
| | 11.0 | % | 39,893 |
| | 13.6 | % | | 34,764 |
| | 12.0 | % |
Income tax expense | 30,750 |
| | 10.7 | % | | 3,803 |
| | 1.4 | % | | 39,678 |
| | 6.9 | % | | 12,237 |
| | 2.2 | % | 9,256 |
| | 3.2 | % | | 8,928 |
| | 3.1 | % |
Net earnings | $ | 4,273 |
| | 1.5 | % | | $ | 25,297 |
| | 9.4 | % | | $ | 30,109 |
| | 5.2 | % | | $ | 47,850 |
| | 8.7 | % | $ | 30,637 |
| | 10.4 | % | | $ | 25,836 |
| | 8.9 | % |
Investment and other incomeexpense was $1.1$0.0 million for the three months ended January 31, 2018, and was $1.3 million for the six months ended JanuaryOctober 31, 2018, compared to investment and other income of $0.6$0.2 million and $0.1 millionfor the same period in the same periods of the prior year, respectively. These changes during the three and six month periods wereyear. The decrease was primarily due to an increasea reduction in the market value of securities held in deferred compensation plans as well aspartially offset by increased interest income.income in the current period.
Interest expense decreased to $0.8 million from $1.5$0.7 million for the three months ended JanuaryOctober 31, 2018, and decreased to $1.7 million from $3.2$0.9 million for the six months ended January 31, 2018, compared to the same periodsperiod in the prior year. For both the three and six-month periods, theThis decrease in interest expense was due to the Company's declining principal balance under its outstanding debt agreements.
The Company’s income tax rate was 87.8%23.2% for the three months ended JanuaryOctober 31, 2018, compared to 13.1% for25.7% in the same period in the prior year. The income tax rate was 56.9% for the six months ended January 31, 2018, compared to 20.4% for the same period of the prior year. The increase in the income tax rates in both the three and six-month periods ended January 31, 2018, was primarily due to the enactment of the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) which resulted in $21.1 million of additional tax expense. In the prior three and six-month periods ended January 31, 2017, the Company’s income tax rate was reduced from its historical average in the high-20% range due to foreign tax credits generated from a cash repatriation to the U.S. Refer to Note I - Income TaxesL "Income Taxes" for additional details regardinginformation on the Company's effective income taxes.tax rate.
Business Segment Operating Results
The Company is organized and managed on a global basis within three operating segments, Identification Solutions, Workplace Safety, and People Identification ("PeopleID"People ID"), which aggregate into two reportable segments that are organized around businesses with consistent products and services: IDS and WPS. The Identification Solutions and PeopleIDPeople ID operating segments aggregate into the IDS reporting segment, while the WPS reporting segment is comprised solely of the Workplace Safety operating segment. The Company evaluates short-term segment performance based on segment profit and customer sales. Interest expense, investment and other (expense) income, income tax expense,taxes, and certain corporate administrative expenses are excluded when evaluating segment performance.
The following is a summary of segment information for the three and six months ended JanuaryOctober 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
(Dollars in thousands) | 2018 | | 2017 | | 2018 | | 2017 |
SALES TO EXTERNAL CUSTOMERS | | | | | | | |
ID Solutions | $ | 206,432 |
| | $ | 190,962 |
| | $ | 416,137 |
| | $ | 392,226 |
|
Workplace Safety | 81,348 |
| | 77,039 |
| | 161,794 |
| | 155,951 |
|
Total | $ | 287,780 |
| | $ | 268,001 |
| | $ | 577,931 |
| | $ | 548,177 |
|
SALES GROWTH INFORMATION | | | | | | | |
ID Solutions | | | | | | | |
Organic | 4.7 | % | | 1.9 | % | | 3.8 | % | | 1.3 | % |
Currency | 3.4 | % | | (1.3 | )% | | 2.3 | % | | (0.9 | )% |
Total | 8.1 | % | | 0.6 | % | | 6.1 | % | | 0.4 | % |
Workplace Safety | | | | | | | |
Organic | (0.5 | )% | | (0.2 | )% | | (1.0 | )% | | (1.3 | )% |
Currency | 6.1 | % | | (2.1 | )% | | 4.7 | % | | (1.8 | )% |
Total | 5.6 | % | | (2.3 | )% | | 3.7 | % | | (3.1 | )% |
Total Company | | | | | | | |
Organic | 3.2 | % | | 1.3 | % | | 2.4 | % | | 0.5 | % |
Currency | 4.2 | % | | (1.5 | )% | | 3.0 | % | | (1.1 | )% |
Total | 7.4 | % | | (0.2 | )% | | 5.4 | % | | (0.6 | )% |
SEGMENT PROFIT | | | | | | | |
ID Solutions | $ | 34,088 |
| | $ | 28,961 |
| | $ | 69,925 |
| | $ | 62,035 |
|
Workplace Safety | 7,055 |
| | 6,059 |
| | 13,500 |
| | 12,504 |
|
Total | $ | 41,143 |
| | $ | 35,020 |
| | $ | 83,425 |
| | $ | 74,539 |
|
SEGMENT PROFIT AS A PERCENT OF SALES | | | | | | | |
ID Solutions | 16.5 | % | | 15.2 | % | | 16.8 | % | | 15.8 | % |
Workplace Safety | 8.7 | % | | 7.9 | % | | 8.3 | % | | 8.0 | % |
Total | 14.3 | % | | 13.1 | % | | 14.4 | % | | 13.6 | % |
The following is a reconciliation of segment profit to earnings before income taxes for the three and six months ended January 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
| 2018 | | 2017 | | 2018 | | 2017 |
Total profit from reportable segments | $ | 41,143 |
| | $ | 35,020 |
| | $ | 83,425 |
| | $ | 74,539 |
|
Unallocated amounts: | | | | | | | |
Administrative costs | (6,347 | ) | | (5,058 | ) | | (13,218 | ) | | (11,369 | ) |
Investment and other income (expense) | 1,056 |
| | 596 |
| | 1,272 |
| | 107 |
|
Interest expense | (829 | ) | | (1,458 | ) | | (1,692 | ) | | (3,190 | ) |
Earnings before income taxes | $ | 35,023 |
| | $ | 29,100 |
| | $ | 69,787 |
| | $ | 60,087 |
|
|
| | | | | |
| Three months ended October 31, |
| 2018 | | 2017 |
SALES GROWTH INFORMATION | | | |
ID Solutions | | | |
Organic | 5.7 | % | | 2.9 | % |
Currency | (1.7 | )% | | 1.3 | % |
Total | 4.0 | % | | 4.2 | % |
Workplace Safety | | | |
Organic | 2.2 | % | | (1.4 | )% |
Currency | (2.6 | )% | | 3.3 | % |
Divestitures | (6.2 | )% | | — | % |
Total | (6.6 | )% | | 1.9 | % |
Total Company | | | |
Organic | 4.7 | % | | 1.7 | % |
Currency | (2.0 | )% | | 1.9 | % |
Divestitures | (1.7 | )% | | — | % |
Total | 1.0 | % | | 3.6 | % |
SEGMENT PROFIT AS A PERCENT OF NET SALES | | | |
ID Solutions | 19.1 | % | | 17.1 | % |
Workplace Safety | 7.4 | % | | 8.0 | % |
Total | 16.1 | % | | 14.6 | % |
ID Solutions
Approximately 70% of net sales in the IDS segment were generated in the Americas region, 20% in Europe and 10% in Asia. IDS sales increased 8.1%4.0% to $206.4$218.1 million for the three months ended JanuaryOctober 31, 2018, compared to $191.0$209.7 million for the same period in the prior year, which consisted of organic sales growth of 4.7% and a positive currency impact of 3.4%. IDS sales increased 6.1% to $416.1 million for the six months ended January 31, 2018, compared to $392.2 million for the same period in the prior year. Organic sales increased 3.8%5.7% and foreign currency fluctuations increaseddecreased sales by 2.3% during1.7% for the sixthree months ended JanuaryOctober 31, 2018.
2018, compared to the same period in the prior year.
Organic sales in the Americas grewincreased in the low-singlemid-single digits for both the three and six months ended JanuaryOctober 31, 2018, as compared to the same periodsperiod in the prior year. OrganicThe IDS Americas region realized organic sales growth in the IDS Americas region for the three and six-month periods was led by theProduct ID, Wire ID, product line, the Product ID product line, and, to a lesser extent, the Safety and Facility ID, product line. This organic growth was partially offset by a decline in theand Healthcare ID product line due to continued pricing pressures within certain product categories resulting fromlines. Organic sales grew in the consolidationmid-single digits in the United States and the rest of group purchasing organizations,the Americas grew in the high-single digits. Most end markets realized organic sales growth with the industrial sector realizing the strongest growth.
Organic sales in Europe grew in the mid-single digits for the three months ended October 31, 2018, as compared to the same periods in the prior year.
The IDS business in Europe realized high-single digit organic sales growth for the three and six months ended January 31, 2018, compared to the same periodsperiod in the prior year. The IDS Europe region realized organic sales growth in the Product ID, Wire ID, and Safety and Facility ID product lines for the three and six months ended January 31, 2018, compared to the same periods in the prior year.lines. Organic sales growth was led by ourbusinesses in emerging geographies and supplemented by businesses based in western Europe,Western Europe; in particular, increases inincreased printer sales throughthroughout the Company's distribution channels for bothregion drove the three and six-month periods.organic sales growth.
Organic sales in Asia grew in the high-singlelow-single digits for both the three and six months ended JanuaryOctober 31, 2018, as compared to the same periodsperiod in the prior year. The IDS Asia region realized organic sales growth in the Original Equipment Manufacturer ("OEM") category, which wasProduct ID and Wire ID product lines, partially offset by decreasesa decline in the Maintenance, Repair,Safety and Overhaul ("MRO") category drivenFacility ID product line. Organic sales were led by our businesses outside of China. Within China, organic sales were approximately flat when compared to the weakening ofsame period in the utility market in Chinaprior year.
Segment profit increased 16.0% to $41.6 million for the three months ended JanuaryOctober 31, 2018, compared to $35.8 million in the same period of the prior year. As a percentage of net sales, segment profit was 19.1% for the three months ended October 31, 2018, compared to 17.1% in the same period of the prior year. The increase in segment profit was primarily driven by increased organic sales and operational efficiencies in our SG&A structure in all regions.
Workplace Safety
WPS sales decreased 6.6% to $75.1 million from $80.4 million for the three months ended October 31, 2018 and 2017, respectively, which consists of organic sales growth of 2.2%, a negative foreign currency impact of 2.6%, and a sales decline of 6.2% due to the impact of divestitures. Both catalog and digital channel sales in the WPS segment realized low-single digit sales growth.
Europe realized mid-single digit organic sales growth for the three months ended October 31, 2018, compared to the same period in the prior year. Organic sales for the six months ended January 31, 2018, grew in both the OEM and MRO categories, compared to the same period in the prior year. Organic sales increased throughout Asia for the three and six-month periods and was led by China where sales increased in the high-single digits and double digits, respectively.
Segment profit increased to $34.1 million for the three months ended January 31, 2018, compared to $29.0 million in the same period in the prior year. As a percentage of sales, segment profit increased to 16.5% from 15.2% in the same period of the prior year. Segment profit increased to $69.9 million from $62.0 million for the six months ended January 31, 2018, compared to the same period in the prior year. As a percentage of sales, segment profit increased to 16.8% from 15.8% for same period in the prior year. The increase in segment profit for both the three and six-month periods was primarily driven by sales growth and operational efficiencies in our manufacturing processes in all regions.
Workplace Safety
Approximately 50% of net sales in the WPS segment were generated in Europe, 35% in the Americas and 15% in Australia. WPS sales increased 5.6% to $81.3 million for the three months ended January 31, 2018, and 3.7% to $161.8 million for the six months ended January 31, 2018, compared to $77.0 million and $156.0 million, respectively, for the same periods in the prior year. Organic sales declined 0.5% and 1.0% in the three and six months ended January 31, 2018, respectively, compared to the same periods in the prior year. Foreign currency translation increased sales by 6.1% and 4.7% for the three and six months ended January 31, 2018, respectively, due to the weakening of the U.S. dollar against certain other major currencies as compared to the same periods in the prior year.
The WPS business in Europe realized low-single digit organic sales growth for the three and six months ended January 31, 2018, compared to the same periods in the prior year. This growth was driven primarily by our businesses inthe U.K., Germany, and France and due to improvements in website functionality, growth in new customers, and key account management. WeWPS Europe experienced high-single digitover 10% growth in digital channel sales partially offset by a slight declineand low-single digit growth in traditional catalog channel during the three and six months ended January 31, 2018, compared to the same periods in the prior year.sales.
Organic sales in the Americas declined in the low-single digits and mid-single digits for the three and six months ended JanuaryOctober 31, 2018, respectively, compared to the same periodsperiod in the prior year. This decrease was primarily in the U.S. due to lower response rates to catalog promotions and continued pricing pressures in industrial end markets.promotions. Catalog channel sales decreaseddeclined in the low-single digits and mid-single digits duringdigits. Additionally, we continue to experience the three and six months ended January 31, 2018, respectively, compared to the same periods in the prior year. Digital channel sales decreased during the three and six months ended January 31, 2018, compared to the same periods in the prior year. The decline in digital sales was caused by a transitionnegative impact of transitioning to a new digital sales platform during the three months ended January 31, 2018, which is expected to return to sales growth in the remainder of the year.prior fiscal period resulting in a decline in digital channel sales.
Organic sales in Australia grew more than 10% in both the low-single digitsdigital and traditional catalog channel for the three and six months ended JanuaryOctober 31, 2018, as compared to the same periods inperiod of the prior year. The WPSAustralian business is expanding its customer base and has diversified its product offering tointo many different industries inand target markets. WPS Australia as sales to the mining industry have become less significant over the past several years. The WPS business continues to focus on enhancing its expertise in these industries to drive sales growth, as well aswhile addressing its cost structure to improve profitability.
Segment profit increaseddecreased to $7.1 million from $6.1$5.5 million for the three months ended January 31, 2018, and to $13.5 million from $12.5 million for the six months ended JanuaryOctober 31, 2018, compared to $6.4 million in the same periods inperiod of the prior year. As a percentage of net sales, segment profit increaseddecreased to 8.7% from 7.9%7.4% for the three months ended January 31, 2018, and to 8.3% from 8.0% for
the six months ended JanuaryOctober 31, 2018, compared to 8.0% in the same periods inperiod of the prior year. The increasedecrease in segment profit was primarily due to efficiency opportunities throughout our manufacturing processesa combination of the divestiture of a business in the prior period, foreign currency translation, and our selling, general, and administrative cost structure.the decrease in sales volumes in the North American business.
Financial Condition
Cash and cash equivalents decreased by $18.6were $192.2 million and $16.0 million during the six months ended Januaryat October 31, 2018, and 2017, respectively.an increase of $10.7 million from July 31, 2018. The significant changes were as follows:
| | | Six months ended January 31, | Three months ended October 31, |
(Dollars in thousands) | 2018 | | 2017 | 2018 | | 2017 |
Net cash flow provided by (used in): | | | | | | |
Operating activities | $ | 42,460 |
| | $ | 53,334 |
| $ | 18,818 |
| | $ | 34,719 |
|
Investing activities | (9,198 | ) | | (6,642 | ) | (5,672 | ) | | (2,828 | ) |
Financing activities | (53,642 | ) | | (57,302 | ) | 664 |
| | (21,663 | ) |
Effect of exchange rate changes on cash | 1,763 |
| | (5,410 | ) | (3,061 | ) | | (1,935 | ) |
Net decrease in cash and cash equivalents | $ | (18,617 | ) | | $ | (16,020 | ) | |
Net increase in cash and cash equivalents | | $ | 10,749 |
| | $ | 8,293 |
|
Net cash provided by operating activities decreased to $42.5was $18.8 million for the sixthree months ended JanuaryOctober 31, 2018, compared to $53.3$34.7 million in the same period of the prior year. The decrease in cash provided by operating activities of $9.3 millionchange was primarily due to increased accounts receivable of $14.4 million resulting from the timing of higher sales throughout the current six-month period compared to the same period in the prior year. In addition, average days sales outstanding ("DSO") increased in both the Americas and Europe regions where sales were the strongest. Inventories increased during the current six-month period due to an increase in expected sales compared to the same period in the prior year, resulting in a cash outflow of $4.4 million. In addition, cash payments for annual incentive compensation increased in the current six-month period compared to the same period in the prior year. These decreases in cash provided by operating activities were partially offsetdriven by an increase in net earnings includingadjusted for non-cash items which was offset by the timing of incentive compensation payments and an increase in the current six-month periodcash used by working capital in support of growth when compared to the same period in the prior year.
Net cash used in investing activities was $9.2$5.7 million for the sixthree months ended JanuaryOctober 31, 2018, compared to $6.6$2.8 million used in the same period of the prior year. The increase in cash used in investing activities of $2.6 million includedwas primarily driven by an increase in capital expenditures for the purchase of manufacturing equipment and facility upgrades in the United States and Europe.
Net cash used inprovided by financing activities was $53.6$0.7 million during the sixthree months ended JanuaryOctober 31, 2018, compared to $57.3$21.7 million used in the same period of the prior year. The change of $3.7 million was due to lower net repayments on credit facilities primarily due to thea decrease of $15.5 million in net cash provided by operating activitiescredit
facility repayments and an increase of $8.9 million in proceeds from stock option exercises when compared to the same period in the current period.prior year.
The effect of fluctuations in exchange rates increaseddecreased cash balances by $7.2$3.1 million during the six months ended January 31, 2018, primarily due to cash balances held in currencies that appreciateddepreciated against the U.S. dollar.
dollar during three months ended October 31, 2018.
On May 13, 2010, the Company completed a private placement of €75.0 million aggregate principal amount of senior unsecured notes to accredited institutional investors. The €75.0 million of senior notes consisted of €30.0 million aggregate principal amount of 3.71% Series 2010-A Senior Notes, which were repaid during fiscal 2017, and €45.0 million aggregate principal amount of 4.24% Series 2010-A Senior Notes, due May 13, 2020, with interest payable on the notes semiannually. This private placement was exempt from the registration requirements of the Securities Act of 1933. The notes have been fully and unconditionally guaranteed on an unsecured basis by the Company’s domestic subsidiaries.
On September 25, 2015, the Company and certain of its subsidiaries entered into an unsecured $300 million multi-currency revolving loan agreement with a group of six banks. At the Company's option, and subject to certain conditions, the available amount under the revolving loan agreement may be increased from $300 million to $450 million. As of JanuaryOctober 31, 2018, the outstanding balance on the credit facility was $14.9$3.4 million, and the maximum outstanding balance during the sixthree months ended JanuaryOctober 31, 2018 was $51.3$5.7 million. The Company also had letters of credit outstanding under the loan agreement of $3.2$3.0 million as of JanuaryOctober 31, 2018 and there was $281.9$293.6 million available for future borrowing, which can be increased to $431.9$443.6 million at the Company's option, subject to certain conditions. The revolving loan agreement has a final maturity date of September 25, 2020. As such, the borrowing is included in "Long-term obligations"obligations, less current maturities" on the condensed consolidated balance sheets.Condensed Consolidated Balance Sheets.
The Company’s debt agreements require it to maintain certain financial covenants, including a ratio of debt to the trailing 12 months EBITDA, as defined in the debt agreements, of not more than a 3.25 to 1.0 ratio (leverage ratio) and the trailing 12 months EBITDA to interest expense of not less than a 3.0 to 1.0 ratio (interest expense coverage). As of JanuaryOctober 31, 2018, the Company
was in compliance with these financial covenants, with the leverage ratio of debt to EBITDA, as defined by the agreements, equal to 0.40.3 to 1.0 and the interest expense coverage ratio equal to 44.063.5 to 1.0.
The Company's cash balances are generated and held in numerous locations throughout the world. At JanuaryOctober 31, 2018, approximately 87%58% of the Company's cash and cash equivalents were held outside the United States. The Company's growth has historically been funded by a combination of cash provided by operating activities and debt financing. The Company believes that its cash flow from operating activities and its borrowing capacity are sufficient to fund its anticipated requirements for working capital, capital expenditures, common stock repurchases, scheduled debt repayments, and dividend payments for the next 12 months.
Off-Balance Sheet Arrangements
The Company does not have material off-balance sheet arrangements. The Company is not aware of factors that are reasonably likely to adversely affect liquidity trends, other than the risk factors described in this and other Company filings. However, the following additional information is provided to assist those reviewing the Company’s financial statements.
Operating Leases - The leases generally are entered into for investments in facilities such as manufacturing facilities, warehouses and office space, computer equipment and Company vehicles.
Purchase Commitments - The Company has purchase commitments for materials, supplies, services, and property, plant and equipment as part of the ordinary conduct of its business. In the aggregate, such commitments are not in excess of current market prices and are not material to the financial position of the Company. Due to the proprietary nature of many of the Company’s materials and processes, certain supply contracts contain penalty provisions for early termination. The Company does not believe a material amount of penalties will be incurred under these contracts based upon historical experience and current expectations.
Other Contractual Obligations - The Company does not have material financial guarantees or other contractual commitments that are reasonably likely to adversely affect liquidity.
Forward-Looking Statements
In this quarterly report on Form 10-Q, statements that are not reported financial results or other historic information are “forward-looking statements.” These forward-looking statements relate to, among other things, the Company's future financial position, business strategy, targets, projected sales, costs, earnings, capital expenditures, debt levels and cash flows, and plans and objectives of management for future operations.
The use of words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “should,” “project” or “plan” or similar terminology are generally intended to identify forward-looking statements. These forward-looking statements by their nature address matters that are, to different degrees, uncertain and are subject to risks, assumptions, and other factors, some of which are beyond Brady's control, that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For Brady, uncertainties arise from:
Brady's ability to compete effectively or to successfully execute our strategy
Brady's ability to develop technologically advanced products that meet customer demands
Difficulties in protecting our websites,sites, networks, and systems against security breaches
Decreased demand for the Company's products
Brady's ability to retain large customers
Extensive regulations by U.S. and non-U.S. governmental and self regulatory entities
Risks associated with the loss of key employees
Divestitures, contingent liabilities from divestitures and the failure to identify, integrate, and grow acquired companies
Litigation, including product liability claims
Brady's ability to execute facility consolidations and maintain acceptable operational service metrics
Litigation, including product liability claims
Risks associated with the loss of key employees
Divestitures and contingent liabilities from divestitures
Brady's ability to properly identify, integrate, and grow acquired companies
Foreign currency fluctuations
The impact of the U.S. Tax Reform Act and any other changes in tax legislation and tax rates
Potential write-offs of Brady's substantial intangible assets
Differing interests of voting and non-voting shareholders
Brady's ability to meet certain financial covenants required by our debt agreements.agreements
Numerous other matters of national, regional and global scale, including those of a political, economic, business, competitive, and regulatory nature contained from time to time in Brady's U.S. Securities and Exchange Commission
filings, including, but not limited to, those factors listed in the “Risk Factors” section within Item 1A of Part I of theBrady's Form 10-K filed withfor the SEC on September 13, 2017.year ended July 31, 2018.
These uncertainties may cause Brady's actual future results to be materially different than those expressed in its forward-looking statements. Brady does not undertake to update its forward-looking statements except as required by law.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to the Company’s annual report on Form 10-K for the year ended July 31, 2017.2018. There has been no material change in this information since July 31, 2017.2018.
ITEM 4. CONTROLS AND PROCEDURES
Brady Corporation maintains a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports filed by the Company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports the Company files under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of its management, including its President and Chief Executive Officer and its Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, the Company’s President and& Chief Executive Officer and Chief Financial Officer and Treasurer concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report.
There were no significant changes in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company's most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Our financial position, results of operations and cash flows are subject to various risks. The following risk factor is an addition to the risk factors discussed in Item 1A, Risk Factors, in our Form 10-KCompany has a share repurchase program for the fiscal year ended July 31, 2017.
Changes in tax legislation or tax rates could adversely affect results of operations and financial statements. Additionally, auditsCompany’s Class A Nonvoting Common Stock. The plan may be implemented by taxing authorities could result in tax payments for prior periods.
We are subject to income taxespurchasing shares in the U.S.open market or in privately negotiated transactions, with repurchased shares available for use in connection with the Company’s stock-based plans and in many non-U.S. jurisdictions. As such, our earnings are subject to risk due to changing tax laws and tax rates aroundfor other corporate purposes. On February 16, 2016, the world. Our tax filings are subject to audit by U.S. federal, state and local tax authorities and by non-U.S. tax authorities. If these audits result in payments or assessments that differ from our reserves, our future net earnings may be adversely impacted.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Act”).Company's Board of Directors authorized a share repurchase program of 2,000,000 shares. The changes included in the Tax Reform Act are broad and complex. The final transition impactsCompany repurchased 47,317 shares at an average price of the Tax Reform Act may differ from the provisional estimates provided due to changes in interpretations, any legislative action to address questions that arise, any changes in accounting standards for income taxes or related interpretations, or any updates or changes to estimates we have utilized to calculate the transition impacts. Additionally, longstanding international tax norms that determine each country’s jurisdiction to tax cross-border international trade are evolving as a result of the Base Erosion and Profit Shifting reporting requirements (“BEPS”) recommended by the G8, G20 and Organization for Economic Cooperation and Development (“OECD”). As these and other tax laws and related regulations change, our financial results change, our financial results could be materially impacted. Given the unpredictability of these possible changes and their potential interdependency, it is very difficult to assess whether the overall effect of such potential tax changes on our earnings and cash flow, but such changes could adversely impact our financial results.
We review the probability of the realization of our deferred tax assets quarterly based on forecasts of taxable income in both the U.S. and foreign jurisdictions. As part of this review, we utilize historical results, projected future operating results, eligible carry-forward periods, tax planning opportunities, and other relevant considerations. Adverse changes in profitability and financial outlook in both the U.S. and/or foreign jurisdictions, or changes in our geographic footprint may require changes in the valuation allowance for deferred tax assets. During$39.37 per share during the three months ended JanuaryOctober 31, 2018. As of October 31, 2018, we recorded a provisional valuation allowancethere were 1,911,989 shares authorized to purchase in connection with this share repurchase program.
The following table provides information with respect to the purchase of $22.1 million against previously recorded foreign tax credit carryforwards as a result ofClass A Nonvoting Common Stock during the passage of the Tax Reform Act, which modifies our ability to utilize foreign tax credits in future periods. At any point in time, there are a number of tax proposals at various stages of legislation throughout the globe. While it is impossible for us to predict whether some or all of these proposals will be enacted, it likely would have an impact on our results of operations and financial statements.three months ended October 31, 2018:
|
| | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price paid per share | | Total Number of Shares Purchased As Part of Publicly Announced Plans | | Maximum Number of Shares That May Yet Be Purchased Under the Plans |
August 1, 2018 - August 31, 2018 | | — |
| | $ | — |
| | — |
| | 1,959,306 |
|
September 1, 2018 - September 30, 2018 | | — |
| | — |
| | — |
| | 1,959,306 |
|
October 1, 2018 - October 31, 2018 | | 47,317 |
| | 39.37 |
| | 47,317 |
| | 1,911,989 |
|
Total | | 47,317 |
| | $ | 39.37 |
| | 47,317 |
| | 1,911,989 |
|
ITEM 6. EXHIBITS
|
| |
31.1 | |
| |
31.2 | |
| |
32.1 | |
| |
32.2 | |
| |
101 | Interactive Data File |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
|
| | | | | | |
| | | | | | BRADY CORPORATION |
| | | |
Date: February 22,November 15, 2018 | | | | | | /s/ J. MICHAEL NAUMAN |
| | | | | | J. Michael Nauman |
| | | | | | President and Chief Executive Officer |
| | | | | | (Principal Executive Officer) |
| | | | | | |
| | | | | | |
Date: February 22,November 15, 2018 | | | | | | /s/ AARON J. PEARCE |
| | | | | | Aaron J. Pearce |
| | | | | | Chief Financial Officer and Treasurer |
| | | | | | (Principal Financial Officer) |