UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549FORM 10-Q |
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þ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended January 31, 2018
OR2020, 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
BRADY CORPORATIONCORPORATION (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.) |
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| | |
6555 West Good Hope Road |
Milwaukee, Wisconsin | Wisconsin | 53223 |
(Address of principal executive offices) | | (offices and Zip Code) |
(414) 358-6600
(414) 358-6600
(Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:
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| | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
Class A Nonvoting Common Stock, par value $0.01 per share | BRC | New York Stock Exchange |
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. Yesþ☑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). Yesþ☑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 ¨☐Noþ☑
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, 2018,18, 2020, there were 48,208,28149,811,300 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) | | | | | | | January 31, 2020 | | July 31, 2019 |
| January 31, 2018 | | July 31, 2017 | (Unaudited) | | |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 115,327 |
| | $ | 133,944 |
| $ | 289,803 |
| | $ | 279,072 |
|
Accounts receivable—net | 164,400 |
| | 149,638 |
| 151,511 |
| | 158,114 |
|
Inventories: | | | | |
Finished products | 72,629 |
| | 69,760 |
| |
Work-in-process | 19,472 |
| | 18,117 |
| |
Raw materials and supplies | 21,344 |
| | 19,147 |
| |
Total inventories | 113,445 |
| | 107,024 |
| |
Inventories | | 120,788 |
| | 120,037 |
|
Prepaid expenses and other current assets | 20,950 |
| | 17,208 |
| 18,889 |
| | 16,056 |
|
Total current assets | 414,122 |
| | 407,814 |
| 580,991 |
| | 573,279 |
|
Other assets: | | | | |
Property, plant and equipment—net | | 112,782 |
| | 110,048 |
|
Goodwill | 443,873 |
| | 437,697 |
| 410,455 |
| | 410,987 |
|
Other intangible assets | 50,131 |
| | 53,076 |
| 33,580 |
| | 36,123 |
|
Deferred income taxes | 9,899 |
| | 35,456 |
| 7,120 |
| | 7,298 |
|
Other | 18,579 |
| | 18,077 |
| |
Property, plant and equipment: | | | | |
Cost: | | | | |
Land | 7,535 |
| | 7,470 |
| |
Buildings and improvements | 98,256 |
| | 98,228 |
| |
Machinery and equipment | 265,640 |
| | 261,192 |
| |
Construction in progress | 6,176 |
| | 4,109 |
| |
| 377,607 |
| | 370,999 |
| |
Less accumulated depreciation | 279,826 |
| | 272,896 |
| |
Property, plant and equipment—net | 97,781 |
| | 98,103 |
| |
Operating lease assets | | 49,117 |
| | — |
|
Other assets | | 21,753 |
| | 19,573 |
|
Total | $ | 1,034,385 |
| | $ | 1,050,223 |
| $ | 1,215,798 |
| | $ | 1,157,308 |
|
LIABILITIES AND STOCKHOLDERS’ INVESTMENT | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Current liabilities: | | | | | | |
Notes payable | $ | 585 |
| | $ | 3,228 |
| |
Accounts payable | 64,365 |
| | 66,817 |
| $ | 51,233 |
| | $ | 64,810 |
|
Wages and amounts withheld from employees | 49,679 |
| | 58,192 |
| |
Accrued compensation and benefits | | 38,561 |
| | 62,509 |
|
Taxes, other than income taxes | 7,997 |
| | 7,970 |
| 7,703 |
| | 8,107 |
|
Accrued income taxes | 6,085 |
| | 7,373 |
| 6,075 |
| | 6,557 |
|
Current operating lease liabilities | | 14,901 |
| | — |
|
Other current liabilities | 42,961 |
| | 43,618 |
| 48,590 |
| | 49,796 |
|
Current maturities on long-term debt | | 49,627 |
| | 50,166 |
|
Total current liabilities | 171,672 |
| | 187,198 |
| 216,690 |
| | 241,945 |
|
Long-term obligations | 70,615 |
| | 104,536 |
| |
Long-term operating lease liabilities | | 36,993 |
| | — |
|
Other liabilities | 60,125 |
| | 58,349 |
| 62,191 |
| | 64,589 |
|
Total liabilities | 302,412 |
| | 350,083 |
| 315,874 |
| | 306,534 |
|
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 49,810,101 and 49,458,841 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 |
| 329,263 |
| | 329,969 |
|
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 | | 685,758 |
| | 637,843 |
|
Treasury stock—1,451,386 and 1,802,646 shares, respectively, of Class A nonvoting common stock, at cost | | (43,155 | ) | | (46,332 | ) |
Accumulated other comprehensive loss | (35,090 | ) | | (44,682 | ) | (72,490 | ) | | (71,254 | ) |
Total stockholders’ investment | 731,973 |
| | 700,140 |
| |
Total stockholders’ equity | | 899,924 |
| | 850,774 |
|
Total | $ | 1,034,385 |
| | $ | 1,050,223 |
| $ | 1,215,798 |
| | $ | 1,157,308 |
|
See Notes to Condensed Consolidated Financial Statements.
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGSINCOME
(Dollars in Thousands, Except Per Share Amounts, Unaudited)
| | | Three months ended January 31, | | Six months ended January 31, | Three months ended January 31, | | Six months ended January 31, |
| 2018 | | 2017 | | 2018 | | 2017 | 2020 | | 2019 | | 2020 | | 2019 |
Net sales | $ | 287,780 |
| | $ | 268,001 |
| | $ | 577,931 |
| | $ | 548,177 |
| $ | 276,665 |
| | $ | 282,426 |
| | $ | 563,612 |
| | $ | 575,622 |
|
Cost of products sold | 144,088 |
| | 133,843 |
| | 288,174 |
| | 273,661 |
| |
Cost of goods sold | | 137,538 |
| | 142,616 |
| | 283,080 |
| | 289,273 |
|
Gross margin | 143,692 |
| | 134,158 |
| | 289,757 |
| | 274,516 |
| 139,127 |
| | 139,810 |
| | 280,532 |
| | 286,349 |
|
Operating expenses: | | | | | | | | | | | | | | |
Research and development | 11,314 |
| | 9,481 |
| | 21,834 |
| | 18,627 |
| 10,517 |
| | 11,074 |
| | 21,484 |
| | 22,400 |
|
Selling, general and administrative | 97,582 |
| | 94,715 |
| | 197,716 |
| | 192,719 |
| 87,366 |
| | 92,706 |
| | 176,913 |
| | 187,297 |
|
Total operating expenses | 108,896 |
| | 104,196 |
| | 219,550 |
| | 211,346 |
| 97,883 |
| | 103,780 |
| | 198,397 |
| | 209,697 |
|
Operating income | 34,796 |
| | 29,962 |
| | 70,207 |
| | 63,170 |
| 41,244 |
| | 36,030 |
| | 82,135 |
| | 76,652 |
|
Other income (expense): | | | | | | | | | | | | | | |
Investment and other income | 1,056 |
| | 596 |
| | 1,272 |
| | 107 |
| 1,760 |
| | 1,377 |
| | 3,140 |
| | 1,360 |
|
Interest expense | (829 | ) | | (1,458 | ) | | (1,692 | ) | | (3,190 | ) | (647 | ) | | (717 | ) | | (1,348 | ) | | (1,429 | ) |
Earnings before income taxes | 35,023 |
| | 29,100 |
| | 69,787 |
| | 60,087 |
| |
Income before income taxes | | 42,357 |
| | 36,690 |
| | 83,927 |
| | 76,583 |
|
Income tax expense | 30,750 |
| | 3,803 |
| | 39,678 |
| | 12,237 |
| 8,804 |
| | 7,463 |
| | 12,876 |
| | 16,719 |
|
Net earnings | $ | 4,273 |
| | $ | 25,297 |
| | $ | 30,109 |
| | $ | 47,850 |
| |
Net earnings per Class A Nonvoting Common Share: | | | | | | | | |
Net income | | $ | 33,553 |
| | $ | 29,227 |
| | $ | 71,051 |
| | $ | 59,864 |
|
Net income per Class A Nonvoting Common Share: | | | | | | | | |
Basic | $ | 0.08 |
| | $ | 0.50 |
| | $ | 0.58 |
| | $ | 0.94 |
| $ | 0.63 |
| | $ | 0.56 |
| | $ | 1.33 |
| | $ | 1.14 |
|
Diluted | $ | 0.08 |
| | $ | 0.49 |
| | $ | 0.57 |
| | $ | 0.93 |
| $ | 0.62 |
| | $ | 0.55 |
| | $ | 1.32 |
| | $ | 1.13 |
|
Dividends | $ | 0.21 |
| | $ | 0.21 |
| | $ | 0.42 |
| | $ | 0.41 |
| $ | 0.22 |
| | $ | 0.21 |
| | $ | 0.44 |
| | $ | 0.43 |
|
Net earnings per Class B Voting Common Share: | | | | | | | | |
Net income per Class B Voting Common Share: | | | | | | | | |
Basic | $ | 0.08 |
| | $ | 0.50 |
| | $ | 0.57 |
| | $ | 0.93 |
| $ | 0.63 |
| | $ | 0.56 |
| | $ | 1.32 |
| | $ | 1.13 |
|
Diluted | $ | 0.08 |
| | $ | 0.49 |
| | $ | 0.56 |
| | $ | 0.91 |
| $ | 0.62 |
| | $ | 0.55 |
| | $ | 1.31 |
| | $ | 1.11 |
|
Dividends | $ | 0.21 |
| | $ | 0.21 |
| | $ | 0.40 |
| | $ | 0.39 |
| $ | 0.22 |
| | $ | 0.21 |
| | $ | 0.42 |
| | $ | 0.41 |
|
Weighted average common shares outstanding (in thousands): | | | | | | | | |
Weighted average common shares outstanding: | | | | | | | | |
Basic | 51,698 |
| | 51,054 |
| | 51,569 |
| | 50,844 |
| 53,320 |
| | 52,532 |
| | 53,232 |
| | 52,366 |
|
Diluted | 52,719 |
| | 51,954 |
| | 52,551 |
| | 51,721 |
| 53,827 |
| | 53,206 |
| | 53,781 |
| | 53,082 |
|
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 January 31, | | Six months ended January 31, |
| 2020 | | 2019 | | 2020 | | 2019 |
Net income | $ | 33,553 |
| | $ | 29,227 |
| | $ | 71,051 |
| | $ | 59,864 |
|
Other comprehensive (loss) income: | | | | | | | |
Foreign currency translation adjustments | (1,009 | ) | | 5,486 |
| | (959 | ) | | (3,304 | ) |
| | | | | | | |
Cash flow hedges: | | | | | | | |
Net gain recognized in other comprehensive (loss) income | 363 |
| | 537 |
| | 559 |
| | 157 |
|
Reclassification adjustment for gains included in net income | (105 | ) | | (240 | ) | | (486 | ) | | (287 | ) |
| 258 |
| | 297 |
| | 73 |
| | (130 | ) |
Pension and other post-retirement benefits: | | | | | | | |
Net loss recognized in other comprehensive (loss) income | (309 | ) | | (169 | ) | | (309 | ) | | (169 | ) |
Actuarial gain amortization | (105 | ) | | (144 | ) | | (210 | ) | | (299 | ) |
| (414 | ) | | (313 | ) | | (519 | ) | | (468 | ) |
| | | | | | | |
Other comprehensive (loss) income, before tax | (1,165 | ) | | 5,470 |
| | (1,405 | ) | | (3,902 | ) |
Income tax (expense) benefit related to items of other comprehensive (loss) income | (42 | ) | | 196 |
| | 169 |
| | (262 | ) |
Other comprehensive (loss) income, net of tax | (1,207 | ) | | 5,666 |
| | (1,236 | ) | | (4,164 | ) |
Comprehensive income | $ | 32,346 |
| | $ | 34,893 |
| | $ | 69,815 |
| | $ | 55,700 |
|
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, | Six months ended January 31, |
| 2018 | | 2017 | 2020 | | 2019 |
Operating activities: | | | | | | |
Net earnings | $ | 30,109 |
| | $ | 47,850 |
| |
Net income | | $ | 71,051 |
| | $ | 59,864 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | 12,840 |
| | 14,102 |
| 11,672 |
| | 11,909 |
|
Non-cash portion of stock-based compensation expense | 5,897 |
| | 5,394 |
| |
Stock-based compensation expense | | 5,384 |
| | 7,805 |
|
Deferred income taxes | 26,028 |
| | (4,547 | ) | 1,272 |
| | 4,423 |
|
Other | | 1,664 |
| | 1,279 |
|
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | (10,945 | ) | | 3,407 |
| 6,209 |
| | 2,562 |
|
Inventories | (4,150 | ) | | 224 |
| (1,311 | ) | | (6,602 | ) |
Prepaid expenses and other assets | (3,153 | ) | | 220 |
| (2,621 | ) | | (2,310 | ) |
Accounts payable and other liabilities | (12,695 | ) | | (9,384 | ) | |
Accounts payable and accrued liabilities | | (39,777 | ) | | (35,334 | ) |
Income taxes | (1,471 | ) | | (3,932 | ) | (436 | ) | | 592 |
|
Net cash provided by operating activities | 42,460 |
| | 53,334 |
| 53,107 |
| | 44,188 |
|
| | | | | | |
Investing activities: | | | | | | |
Purchases of property, plant and equipment | (8,469 | ) | | (7,235 | ) | (13,100 | ) | | (12,127 | ) |
Other | (729 | ) | | 593 |
| (3,406 | ) | | (452 | ) |
Net cash used in investing activities | (9,198 | ) | | (6,642 | ) | (16,506 | ) | | (12,579 | ) |
| | | | | | |
Financing activities: | | | | | | |
Payment of dividends | (21,373 | ) | | (20,852 | ) | (23,136 | ) | | (22,263 | ) |
Proceeds from exercise of stock options | 9,948 |
| | 14,659 |
| 4,686 |
| | 18,498 |
|
Payments for employee taxes withheld from stock-based awards | | (7,733 | ) | | (3,362 | ) |
Proceeds from borrowing on credit facilities | 17,439 |
| | 144,533 |
| — |
| | 5,737 |
|
Repayment of borrowing on credit facilities | (57,314 | ) | | (195,002 | ) | — |
| | (5,688 | ) |
Income tax on equity-based compensation, and other | (2,342 | ) | | (640 | ) | |
Other | | 134 |
| | (2,973 | ) |
Net cash used in financing activities | (53,642 | ) | | (57,302 | ) | (26,049 | ) | | (10,051 | ) |
| | | | | | |
Effect of exchange rate changes on cash | 1,763 |
| | (5,410 | ) | 179 |
| | (776 | ) |
| | | | | | |
Net decrease in cash and cash equivalents | (18,617 | ) | | (16,020 | ) | |
Net increase in cash and cash equivalents | | 10,731 |
| | 20,782 |
|
Cash and cash equivalents, beginning of period | 133,944 |
| | 141,228 |
| 279,072 |
| | 181,427 |
|
| | | | | | |
Cash and cash equivalents, end of period | $ | 115,327 |
| | $ | 125,208 |
| $ | 289,803 |
| | $ | 202,209 |
|
See Notes to Condensed Consolidated Financial Statements.
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months EndedJanuary 31, 20182020
(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 January 31, 20182020 and July 31, 2017,2019, its results of operations and comprehensive income for the three and six months ended January 31, 20182020 and 2017,2019, and cash flows for the six months ended January 31, 20182020 and 2017.2019. The condensed consolidated balance sheet as of July 31, 2017,2019, 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, 2017.2019.
NOTE B — GoodwillNew Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" ("ASC 842"), which replaced the former lease accounting standards. The update requires, among other items, lessees to recognize the assets and Other Intangible Assets
Changes inliabilities that arise from most leases on the carrying amountbalance sheet and disclose key information about leasing arrangements. In July 2018, the FASB issued ASU 2018-11 "Leases (Topic 842): Targeted Improvements," which provides, among other items, an additional transition method allowing a cumulative effect adjustment to the opening balance 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 recordedretained earnings during the six months ended January 31, 2018.
Other intangible assets include patents, trademarks, and customer relationships with finite lives being amortizedperiod of adoption. ASC 842 is effective for interim periods 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,beginning after December 15, 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 intoadopted ASU 2016-02 (and related updates) effective August 1, 2019, using 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 profitoptional transition method provided in ASU 2018-11 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 equalapply this guidance to the fair market value of the underlying stockimpacted lease population at the date of grantinitial application. Results for reporting periods beginning after August 1, 2019, are presented under ASU 2016-02, while comparative prior period amounts have not been restated and generally vest over a three-year service period,continue to be presented under accounting standards in effect during those periods.
The Company elected the package of practical expedients permitted within the new standard, which among other things, allows the Company to carryforward the historical lease accounting of expired or existing leases with one-third becoming exercisable one year after the grant daterespect to lease identification, lease classification and one-third additional in eachaccounting treatment for initial direct costs as of the succeeding two years. Options issued underadoption date. The Company also elected the plan, referredpractical expedient related 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,lease versus nonlease components, allowing the Company has reserved 3,341,296 shares of Class A Nonvoting Common Stock for outstanding stock options, RSUs,to recognize lease 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 onnonlease components as 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 bysingle lease. Lastly, the Company duringelected 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, whichhindsight practical expedient, allowing the Company expects to recognize over a weighted-average perioduse hindsight in determining the lease term and assessing impairment of 1.9 years.
right-of-use assets when transitioning to ASC 842. 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 behaviorsmade a policy election not to estimate the expectedcapitalize leases with an initial term of options granted based on12 months or less.
Upon adoption of ASC 842, 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’sCompany recorded additional operating lease 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$55,984 and $58,544, respectively, as of the reporting date.
Level 2 — Assets or liabilities forAugust 1, 2019, 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 financialincluded operating lease assets and liabilities of $9,769 and $9,674, respectively, for leases 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 basedcommenced on the present valueadoption date of August 1, 2019. No cumulative effect adjustment to retained earnings was recognized upon adoption 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.
Therenew standard. Adoption of ASC 842 did not 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 thematerial 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 abilitycash flows or operating results. Refer to generate future foreign-source income. The provisional impact of the Tax Reform Act related to the remeasurement of deferred tax assetsNote E "Leases" for additional information 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”) enactedrequired disclosures 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.new standard.
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 UpdateASU 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 aThe Company adopted ASU 2017-12 effective August 1, 2019, using the required modified retrospective adoption
approach to apply this guidance to existing hedging relationships as of the adoption date.date, which did not have a material impact on its consolidated financial statements.
Standards not yet adopted
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which changes the impairment model for most financial instruments. Current guidance requires the recognition of credit losses based on an incurred loss impairment methodology that reflects losses once the losses are probable. Under ASU 2016-13, the Company will be required to use a current expected credit loss model ("CECL") that will immediately recognize an estimate of credit losses that are expected to occur over the life of the financial instruments that are in the scope of this update, including trade receivables. The CECL model uses a broader range of reasonable and supportable information in the development of credit loss estimates. This guidance becomes effective for interim periods in fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact that the adoption of this updateASU will have on itsthe consolidated financial statements and related disclosures.
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. ThisThe Company has not adopted this guidance, which will only impact the Company's consolidated financial statements if there is a future impairment of goodwill.
In February 2016,December 2019, the FASB issued ASU 2016-02, "Leases,2019-12, "Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740)," which replacessimplifies the current lease accounting standard.for income taxes. The update will require, among other items, lesseesnew guidance removes certain exceptions to recognize the assetsgeneral principles in ASC 740 such as recognizing deferred taxes for equity investments, the incremental approach to performing intraperiod tax allocation and liabilitiescalculating income taxes in interim periods. The standard also simplifies accounting for income taxes under U.S. GAAP by clarifying and amending existing guidance, including the recognition of deferred taxes for goodwill, the allocation of taxes to members of a consolidated group and requiring that arise from most leases onan entity reflect the balance sheet.effect of enacted changes in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. This guidance is effective for annual periods beginning after December 15, 2018,2020, and interim periods within those annual periods. The ASU must be adopted using a modified retrospective approach andthereafter; however, early adoption is permitted. The Company is currently evaluating the impact that the adoption of this updateASU will have on itsthe consolidated financial statements.statements and related disclosures.
NOTE C — Additional Balance Sheet Information
Inventories
Inventories as of January 31, 2020, and July 31, 2019, consisted of the following:
|
| | | | | | | |
| January 31, 2020 | | July 31, 2019 |
Finished products | $ | 77,951 |
| | $ | 77,532 |
|
Work-in-process | 21,477 |
| | 20,515 |
|
Raw materials and supplies | 21,360 |
| | 21,990 |
|
Total inventories | $ | 120,788 |
| | $ | 120,037 |
|
Property, plant and equipment
Property, plant and equipment is presented net of accumulated depreciation in the amount of $280,961 and $273,880 as of January 31, 2020, and July 31, 2019, respectively.
NOTE D — Other Intangible Assets
Other intangible assets include customer relationships, patents, and trademarks 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:
In May 2014, |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| January 31, 2020 | | July 31, 2019 |
| 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: | | | | | | | | | | | | | | | |
Customer relationships and other | 9 | | $ | 46,561 |
| | $ | (31,897 | ) | | $ | 14,664 |
| | 9 | | $ | 46,595 |
| | $ | (29,343 | ) | | $ | 17,252 |
|
Unamortized other intangible assets: | | | | | | | | | | | | | | | |
Trademarks | N/A | | 18,916 |
| | — |
| | 18,916 |
| | N/A | | 18,871 |
| | — |
| | 18,871 |
|
Total | | | $ | 65,477 |
| | $ | (31,897 | ) | | $ | 33,580 |
| | | | $ | 65,466 |
| | $ | (29,343 | ) | | $ | 36,123 |
|
The change in the FASB issued ASU 2014-09, "Revenuegross carrying amount of other intangible assets as of January 31, 2020 compared to July 31, 2019 was due to the effects of currency fluctuations during the six-month period.
Amortization expense of intangible assets was $1,291 and $1,434 for the three months ended January 31, 2020 and 2019, respectively, and $2,582 and $2,870 for the six months ended January 31, 2020 and 2019, respectively. The amortization over each of the next five fiscal years is projected to be $5,163, $5,163, $4,894, $2,025 and $0 for the fiscal years ending July 31, 2020, 2021, 2022, 2023 and 2024, respectively.
NOTE E — Leases
The Company leases certain manufacturing facilities, warehouses and office space, computer equipment, and vehicles accounted for as operating leases. Lease terms typically range from Contractsone year to fifteen years. As of January 31, 2020, the Company did not have any finance leases.
The Company determines whether an arrangement contains a lease at contract inception. The contract is considered to contain a lease if it provides the Company with Customers,"the right to direct the use of and the right to obtain substantially all of the economic benefits from an identified asset in exchange for consideration. The Company recognizes a right-of-use (“ROU”) asset and a lease liability at the lease commencement date based on the present value of the future lease payments over the expected lease term. Additionally, the ROU asset includes any lease payments made on or before the commencement date, initial direct costs incurred, and is reduced by any lease incentives received.
Some of the Company’s leases include options to extend the lease agreement. The exercise of an extension is at the Company’s sole discretion. The majority of renewal options are not included in the calculation of ROU assets and liabilities as they are not reasonably certain to be exercised. Some of the Company's lease agreements include rental payments that are adjusted periodically for inflation or the change in an index or rate, which eliminatesare considered to be variable lease payments. Due to the transaction-and industry-specificnature of the Company’s variable lease payments, they are generally excluded from the initial measurement of the ROU asset and lease liability and are recognized in the period in which the obligation for those payments is incurred. The Company has lease agreements that include both lease and non-lease components, which the Company has elected to account for as a single lease component. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Generally, the discount rate implicit within the Company’s leases cannot be readily determined, and therefore the Company uses its incremental borrowing rate to determine the present value of the future lease payments. The incremental borrowing rate is estimated based on the sovereign credit rating for the countries in which the Company has its largest operations, adjusted for several factors, such as internal credit spread, lease terms and other market information available at the lease commencement date.
Operating leases are reflected in “Operating lease assets,” “Current operating lease liabilities,” and “Long-term operating lease liabilities” on the Company's condensed consolidated balance sheets.
Short-term lease expense, variable lease expenses, and sublease income was immaterial to the condensed consolidated statements of income for the three and six months ended January 31, 2020.
The following table summarizes lease expense recognized for the three and six months ended January 31, 2020:
|
| | | | | | | | | |
| | | Three months ended | | Six months ended |
| Condensed Consolidated Statements of Income Location | | January 31, 2020 | | January 31, 2020 |
Operating lease cost | Cost of goods sold | | $ | 2,092 |
| | $ | 4,962 |
|
Operating lease cost | Selling, general, and administrative expenses | | 2,182 |
| | 4,716 |
|
The following table summarizes the maturity of the Company's lease liabilities as of January 31, 2020:
|
| | | |
Years ended July 31, | Operating Leases |
Remainder of 2020 | $ | 8,426 |
|
2021 | 15,780 |
|
2022 | 12,797 |
|
2023 | 9,427 |
|
2024 | 5,580 |
|
Thereafter | 3,268 |
|
Total lease payments | $ | 55,278 |
|
Less interest | (3,384 | ) |
Present value of lease liabilities | $ | 51,894 |
|
The weighted average remaining lease terms and discount rates for the Company's operating leases as of January 31, 2020 were as follows:
|
| | |
| January 31, 2020 |
Weighted average remaining lease term (in years) | 3.9 |
|
Weighted average discount rate | 3.4 | % |
Supplemental cash flow information related to the Company's operating leases for the six months ended January 31, 2020, were as follows: |
| | | |
| Six months ended |
| January 31, 2020 |
Operating cash outflows from operating leases | $ | 8,216 |
|
Operating lease assets obtained in exchange for new operating lease liabilities | 10,637 |
|
Operating lease assets obtained in exchange for new operating lease liabilities include $9,769 of operating lease assets related to leases that commenced on August 1, 2019, which were included in the adoption impact of the new lease accounting standard.
The following table summarizes future minimum lease payments under operating leases as of July 31, 2019: |
| | | |
Years ended July 31, | Operating Leases |
2020 | $ | 18,450 |
|
2021 | 16,132 |
|
2022 | 13,439 |
|
2023 | 10,065 |
|
2024 | 5,656 |
|
Thereafter | 3,502 |
|
Total lease payments | $ | 67,244 |
|
NOTE F – Stockholders' Equity
The following table illustrates the changes in the balances of each component of stockholders' equity for the three months ended January 31, 2020:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
Balances at October 31, 2019 | | $ | 548 |
| | $ | 327,241 |
| | $ | 663,808 |
| | $ | (43,779 | ) | | $ | (71,283 | ) | | $ | 876,535 |
|
Net income | | — |
| | — |
| | 33,553 |
| | — |
| | — |
| | 33,553 |
|
Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | — |
| | (1,207 | ) | | (1,207 | ) |
Issuance of shares of Class A Common Stock under stock plan | | — |
| | 187 |
| | — |
| | 624 |
| | — |
| | 811 |
|
Tax benefit and withholdings from deferred compensation distributions | | — |
| | 69 |
| | — |
| | — |
| | — |
| | 69 |
|
Stock-based compensation expense | | — |
| | 1,766 |
| | — |
| | — |
| | — |
| | 1,766 |
|
Cash dividends on Common Stock | | | | | | | | | | | | |
Class A — $0.22 per share | | — |
| | — |
| | (10,833 | ) | | — |
| | — |
| | (10,833 | ) |
Class B — $0.22 per share | | — |
| | — |
| | (770 | ) | | — |
| | — |
| | (770 | ) |
Balances at January 31, 2020 | | $ | 548 |
| | $ | 329,263 |
| | $ | 685,758 |
| | $ | (43,155 | ) | | $ | (72,490 | ) | | $ | 899,924 |
|
The following table illustrates the changes in the balances of each component of stockholders' equity for the six months ended January 31, 2020: |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
Balances at July 31, 2019 | | $ | 548 |
| | $ | 329,969 |
| | $ | 637,843 |
| | $ | (46,332 | ) | | $ | (71,254 | ) | | $ | 850,774 |
|
Net income | | — |
| | — |
| | 71,051 |
| | — |
| | — |
| | 71,051 |
|
Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | — |
| | (1,236 | ) | | (1,236 | ) |
Issuance of shares of Class A Common Stock under stock plan | | — |
| | (6,223 | ) | | — |
| | 3,177 |
| | — |
| | (3,046 | ) |
Tax benefit and withholdings from deferred compensation distributions | | — |
| | 133 |
| | — |
| | — |
| | — |
| | 133 |
|
Stock-based compensation expense | | — |
| | 5,384 |
| | — |
| | — |
| | — |
| | 5,384 |
|
Cash dividends on Common Stock | | | | | | | | | | | | |
Class A — $0.44 per share | | — |
| | — |
| | (21,655 | ) | | — |
| | — |
| | (21,655 | ) |
Class B — $0.42 per share | | — |
| | — |
| | (1,481 | ) | | — |
| | — |
| | (1,481 | ) |
Balances at January 31, 2020 | | $ | 548 |
| | $ | 329,263 |
| | $ | 685,758 |
| | $ | (43,155 | ) | | $ | (72,490 | ) | | $ | 899,924 |
|
The following table illustrates the changes in the balances of each component of stockholders' equity for the three months ended January 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
Balances at October 31, 2018 | | $ | 548 |
| | $ | 326,182 |
| | $ | 570,858 |
| | $ | (58,414 | ) | | $ | (66,231 | ) | | $ | 772,943 |
|
Net income | | — |
| | — |
| | 29,227 |
| | — |
| | — |
| | 29,227 |
|
Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | — |
| | 5,666 |
| | 5,666 |
|
Issuance of shares of Class A Common Stock under stock plan | | — |
| | (162 | ) | | — |
| | 5,235 |
| | — |
| | 5,073 |
|
Tax benefit and withholdings from deferred compensation distributions | | — |
| | 118 |
| | — |
| | — |
| | — |
| | 118 |
|
Stock-based compensation expense | | — |
| | 2,840 |
| | — |
| | — |
| | — |
| | 2,840 |
|
Purchase of shares of Class A Common Stock | | — |
| | — |
| | — |
| | (1,319 | ) | | — |
| | (1,319 | ) |
Cash dividends on Common Stock | | | | | | | | | | | | |
Class A — $0.21 per share | | — |
| | — |
| | (10,415 | ) | | — |
| | — |
| | (10,415 | ) |
Class B — $0.21 per share | | — |
| | — |
| | (752 | ) | | — |
| | — |
| | (752 | ) |
Balances at January 31, 2019 | | $ | 548 |
| | $ | 328,978 |
| | $ | 588,918 |
| | $ | (54,498 | ) | | $ | (60,565 | ) | | $ | 803,381 |
|
The following table illustrates the changes in the balances of each component of stockholders' equity for the six months ended January 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 income | | — |
| | — |
| | 59,864 |
| | — |
| | — |
| | 59,864 |
|
Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | — |
| | (4,164 | ) | | (4,164 | ) |
Issuance of shares of Class A Common Stock under stock plan | | — |
| | (4,667 | ) | | — |
| | 19,804 |
| | — |
| | 15,137 |
|
Tax benefit and withholdings from deferred compensation distributions | | — |
| | 209 |
| | — |
| | — |
| | — |
| | 209 |
|
Stock-based compensation expense | | — |
| | 7,805 |
| | — |
| | — |
| | — |
| | 7,805 |
|
Purchase of shares of Class A Common Stock | | — |
| | — |
| | — |
| | (3,182 | ) | | — |
| | (3,182 | ) |
Adoption of ASU 2014-09, "Revenue from Contracts with Customers" | | — |
| | — |
| | (2,137 | ) | | — |
| | — |
| | (2,137 | ) |
Cash dividends on Common Stock | | | | | | | | | | | | |
Class A — $0.43 per share | | — |
| | — |
| | (20,818 | ) | | — |
| | — |
| | (20,818 | ) |
Class B — $0.41 per share | | — |
| | — |
| | (1,445 | ) | | — |
| | — |
| | (1,445 | ) |
Balances at January 31, 2019 | | $ | 548 |
| | $ | 328,978 |
| | $ | 588,918 |
| | $ | (54,498 | ) | | $ | (60,565 | ) | | $ | 803,381 |
|
NOTE G — Accumulated Other Comprehensive Loss
Other comprehensive loss consists of foreign currency translation adjustments which includes net investment hedges, unrealized gains and losses from cash flow 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, 2020:
|
| | | | | | | | | | | | | | | |
| Unrealized gain on cash flow hedges | | Unamortized gain on post-retirement plans | | Foreign currency translation adjustments | | Accumulated other comprehensive loss |
Beginning balance, July 31, 2019 | $ | 707 |
| | $ | 2,800 |
| | $ | (74,761 | ) | | $ | (71,254 | ) |
Other comprehensive income (loss) before reclassification | 468 |
| | (216 | ) | | (913 | ) | | (661 | ) |
Amounts reclassified from accumulated other comprehensive loss | (365 | ) | | (210 | ) | | — |
| | (575 | ) |
Ending balance, January 31, 2020 | $ | 810 |
| | $ | 2,374 |
| | $ | (75,674 | ) | | $ | (72,490 | ) |
The increase in accumulated other comprehensive loss as of January 31, 2020, compared to July 31, 2019, was primarily due to 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 and the settlements of net investment hedges, net of tax. Of the total $575 in amounts reclassified from accumulated other comprehensive loss, the $365 gain on cash flow hedges was reclassified into cost of goods sold, and the $210 gain on post-retirement plans was reclassified into investment and other income on the condensed consolidated statements of income for the six months ended January 31, 2020.
The changes in accumulated other comprehensive loss by component, net of tax, for the six months ended January 31, 2019, were as follows:
|
| | | | | | | | | | | | | | | |
| 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 income (loss) before reclassification | 47 |
| | (169 | ) | | (3,528 | ) | | (3,650 | ) |
Amounts reclassified from accumulated other comprehensive loss | (215 | ) | | (299 | ) | | — |
| | (514 | ) |
Ending balance, January 31, 2019 | $ | 695 |
| | $ | 2,834 |
| | $ | (64,094 | ) | | $ | (60,565 | ) |
The increase in accumulated other comprehensive loss as of January 31, 2019, compared to July 31, 2018, was primarily due to 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, foreign currency translation on intercompany notes and the settlements of net investment hedges, net of tax. Of the total $514 in amounts reclassified from accumulated other comprehensive loss, the $215 gain on cash flow hedges was reclassified into cost of goods sold, and the $299 gain on post-retirement plans was reclassified into “Investment and other income” on the condensed consolidated statements of income for the six months ended January 31, 2019.
The following table illustrates the income tax expense on the components of other comprehensive loss for the three and six months ended January 31, 2020 and 2019:
|
| | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
| 2020 | | 2019 | | 2020 | | 2019 |
Income tax (expense) benefit related to items of other comprehensive (loss) income: | | | | | | | |
Cash flow hedges | $ | (5 | ) | | $ | 61 |
| | $ | 30 |
| | $ | (38 | ) |
Pension and other post-retirement benefits | 93 |
| | — |
| | 93 |
| | — |
|
Other income tax adjustments and currency translation | (130 | ) | | 135 |
| | 46 |
| | (224 | ) |
Income tax (expense) benefit related to items of other comprehensive (loss) income | $ | (42 | ) | | $ | 196 |
| | $ | 169 |
| | $ | (262 | ) |
NOTE H — Revenue Recognition
The Company recognizes 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 goodsproduct or servicesservice transfers to the customer replacingat an amount that represents 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 expectsconsideration expected to be entitledreceived in exchange for those goods orproducts and services. The Company’s revenues are primarily from the sale of identification 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 condensed consolidated statements of income. See Note I “Segment Information” for the Company’s disaggregated revenue disclosure.
ASU 2014-09 (and related updates)The Company’s contracts with customers consist of purchase orders, which in some cases are governed by master supply or distributor agreements. The majority of the Company's revenue is effectiveearned and recognized at a point in time through ship-and-bill performance obligations where the customer typically obtains control of the product upon shipment or delivery, depending on freight terms.
The Company offers extended warranty coverage that is included in the sales price of certain products, which it accounts for annual 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 approachas service warranties. The Company accounts for the adoptiondeferred revenue associated with extended service warranties as a contract liability. At the time of sale, the extended warranty transaction price is recorded as deferred revenue and is recognized on a straight-line basis over the life of the standard. service warranty period.
The Company's effortsbalance of contract liabilities associated with service warranty performance obligations was $2,797 and $2,782 as of January 31, 2020 and July 31, 2019, respectively. This also represents the amount of unsatisfied performance obligations related to evaluatecontracts that extend beyond one year. The current portion and non-current portion of contract liabilities are included in “Other current liabilities” and “Other liabilities," respectively, on the impactcondensed consolidated balance sheets. The Company recognized revenue of $316 and to prepare for its adoption on August 1, 2018 are underway as$631 during the three and six months ended January 31, 2020, respectively, that was included in the contract liability balance at the beginning of the period from the amortization of extended service warranties. Of the contract liability balance outstanding at January 31, 2020, the Company has reviewed representative formsexpects to recognize 22% by the end of agreements with customers globallyfiscal 2020, an additional 34% by the end of fiscal 2021, and is in the process of evaluating the impact of the new standard on its consolidated financial statements. remaining balance thereafter.
NOTE I — Segment Information
The Company is also assessing its process for accumulatingorganized and managed on a global basis within three operating segments, Identification Solutions, Workplace Safety, and People Identification ("PDC"), which aggregate into two reportable segments that are organized around businesses with consistent products and services: IDS and WPS. The Identification Solutions and PDC operating segments aggregate into the required information for enhanced disclosures regardingIDS reporting segment, while the nature, amount, timing and uncertaintyWPS reporting segment is comprised solely of revenue under the new standard.Workplace Safety operating segment. The Company currently anticipates applyingevaluates 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 net sales by segment and geographic region for the modified retrospective approach when adopting this guidance.three and six months ended January 31, 2020 and 2019 is as follows:
|
| | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
| 2020 | | 2019 | | 2020 | | 2019 |
Net sales: | | | | | | | |
ID Solutions | | | | | | | |
Americas | $ | 137,909 |
| | $ | 138,324 |
| | $ | 287,271 |
| | $ | 284,114 |
|
Europe | 45,319 |
| | 47,282 |
| | 88,701 |
| | 96,110 |
|
Asia | 22,134 |
| | 23,599 |
| | 44,377 |
| | 47,080 |
|
Total | $ | 205,362 |
| | $ | 209,205 |
| | $ | 420,349 |
| | $ | 427,304 |
|
Workplace Safety | | | | | | | |
Americas | $ | 23,636 |
| | $ | 24,332 |
| | $ | 47,939 |
| | $ | 49,083 |
|
Europe | 37,002 |
| | 37,788 |
| | 73,027 |
| | 75,444 |
|
Australia | 10,665 |
| | 11,101 |
| | 22,297 |
| | 23,791 |
|
Total | $ | 71,303 |
| | $ | 73,221 |
| | $ | 143,263 |
| | $ | 148,318 |
|
Total Company | | | | | | | |
Americas | $ | 161,545 |
| | $ | 162,656 |
| | $ | 335,210 |
| | $ | 333,197 |
|
Europe | 82,321 |
| | 85,070 |
| | 161,728 |
| | 171,554 |
|
Asia-Pacific | 32,799 |
| | 34,700 |
| | 66,674 |
| | 70,871 |
|
Total | $ | 276,665 |
| | $ | 282,426 |
| | $ | 563,612 |
| | $ | 575,622 |
|
Segment profit for the three and six months ended January 31, 2020 and 2019 is as follows:
|
| | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
| 2020 | | 2019 | | 2020 | | 2019 |
Segment profit: | | | | | | | |
ID Solutions | $ | 40,655 |
| | $ | 37,857 |
| | $ | 83,098 |
| | $ | 79,419 |
|
Workplace Safety | 5,455 |
| | 4,661 |
| | 10,612 |
| | 10,202 |
|
Total Company | $ | 46,110 |
| | $ | 42,518 |
| | $ | 93,710 |
| | $ | 89,621 |
|
The following is a reconciliation of segment profit to income before income taxes for the three and six months ended January 31, 2020 and 2019:
|
| | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
| 2020 | | 2019 | | 2020 | | 2019 |
Total profit from reportable segments | $ | 46,110 |
| | $ | 42,518 |
| | $ | 93,710 |
| | $ | 89,621 |
|
Unallocated amounts: | | | | | | | |
Administrative costs | (4,866 | ) | | (6,488 | ) | | (11,575 | ) | | (12,969 | ) |
Investment and other income | 1,760 |
| | 1,377 |
| | 3,140 |
| | 1,360 |
|
Interest expense | (647 | ) | | (717 | ) | | (1,348 | ) | | (1,429 | ) |
Income before income taxes | $ | 42,357 |
| | $ | 36,690 |
| | $ | 83,927 |
| | $ | 76,583 |
|
NOTE J — Net Income 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, |
| 2020 | | 2019 | | 2020 | | 2019 |
Numerator (in thousands): | | | | | | | |
Income (Numerator for basic and diluted income per Class A Nonvoting Common Share) | $ | 33,553 |
| | $ | 29,227 |
| | $ | 71,051 |
| | $ | 59,864 |
|
Less: | | | | | | | |
Preferential dividends | — |
| | — |
| | (828 | ) | | (815 | ) |
Preferential dividends on dilutive stock options | — |
| | — |
| | (10 | ) | | (13 | ) |
Numerator for basic and diluted income per Class B Voting Common Share | $ | 33,553 |
| | $ | 29,227 |
| | $ | 70,213 |
| | $ | 59,036 |
|
Denominator: (in thousands) | | | | | | | |
Denominator for basic income per share for both Class A and Class B | 53,320 |
| | 52,532 |
| | 53,232 |
| | 52,366 |
|
Plus: Effect of dilutive equity awards | 507 |
| | 674 |
| | 549 |
| | 716 |
|
Denominator for diluted income per share for both Class A and Class B | 53,827 |
| | 53,206 |
| | 53,781 |
| | 53,082 |
|
Net income per Class A Nonvoting Common Share: | | | | | | | |
Basic | $ | 0.63 |
| | $ | 0.56 |
| | $ | 1.33 |
| | $ | 1.14 |
|
Diluted | $ | 0.62 |
| | $ | 0.55 |
| | $ | 1.32 |
| | $ | 1.13 |
|
Net income per Class B Voting Common Share: | | | | | | | |
Basic | $ | 0.63 |
| | $ | 0.56 |
| | $ | 1.32 |
| | $ | 1.13 |
|
Diluted | $ | 0.62 |
| | $ | 0.55 |
| | $ | 1.31 |
| | $ | 1.11 |
|
Stock-based awards to purchase 248,604 and 272,922 shares of Class A Nonvoting Common Stock for the three months ended January 31, 2020 and 2019, respectively, and 286,161 and 476,412 shares for the six months ended January 31, 2020 and 2019, respectively, were not included in the computation of diluted net income per share because the effect would have been anti-dilutive.
NOTE K — Fair Value Measurements
In accordance with fair value accounting guidance, the Company determines fair value based on the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The inputs used to measure fair value are classified into the following hierarchy:
Level 1 — Unadjusted quoted prices in active markets for identical instruments that are accessible as of the reporting date.
Level 2 — Other significant pricing inputs that are either directly or indirectly observable.
Level 3 — Significant unobservable pricing inputs, which result in the use of management's own assumptions.
The following table summarizes the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis at January 31, 2020 and July 31, 2019, according to the valuation techniques the Company used to determine their fair values.
|
| | | | | | | | | |
| January 31, 2020 | | July 31, 2019 | | Fair Value Hierarchy |
Assets: | | | | | |
Trading securities | $ | 18,143 |
| | $ | 15,744 |
| | Level 1 |
Foreign exchange contracts | 740 |
| | 474 |
| | Level 2 |
Liabilities: | | | | | |
Foreign exchange contracts | 33 |
| | 5 |
| | Level 2 |
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, which are included in "Other assets" on the condensed consolidated balance sheets. 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 L, “Derivatives and Hedging Activities,” for additional information.
There have been no transfers between fair value hierarchy levels during the six months ended January 31, 2020.
The fair values of cash and cash equivalents, accounts receivable, inventories, accounts payable, and other liabilities approximated carrying values due to their short-term nature.
The following table summarizes the estimated fair value of the Company’s current maturities on its long-term debt obligations, at January 31, 2020 and July 31, 2019, which was based on the quoted market prices for similar issues and on the current rates offered for debt of similar maturities.
|
| | | | | | | | | | | | | | | |
| January 31, 2020 | July 31, 2019 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Current maturities on long-term debt | $ | 49,627 |
| | $ | 50,127 |
| | $ | 50,166 |
| | $ | 51,566 |
|
NOTE L — 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.
The Company hedges a portion of known exposures using forward exchange contracts. Main exposures are related to transactions denominated in the British Pound, Euro, Canadian dollar, Australian dollar, Mexican Peso, Chinese Yuan, Malaysian Ringgit and Singapore dollar. 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.
The U.S. dollar equivalent notional amounts of outstanding forward exchange contracts were as follows:
|
| | | | | | | |
| January 31, 2020 | | July 31, 2019 |
Designated as cash flow hedges | $ | 13,046 |
| | $ | 26,013 |
|
Non-designated hedges | 3,483 |
| | 3,376 |
|
Total foreign exchange contracts | $ | 16,529 |
| | $ | 29,389 |
|
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 income in the same period or periods during which the hedged transaction affects income. As of January 31, 2020 and July 31, 2019, unrealized gains of $878 and $805 have been included in OCI, respectively.
Net Investment Hedges
The Company has designated certain third party-foreign currency denominated debt instruments as net investment hedges. On May 13, 2010, the Company completed the private placement of €75,000 aggregate principal amount of senior unsecured notes consisting of €30,000 aggregate principal amount of 3.71% Series 2010-A Senior Notes, which were repaid during fiscal 2017, and €45,000 aggregate principal amount of 4.24% Series 2010-A Senior Notes, due May 13, 2020. This Euro-denominated debt obligation was designated as a net investment hedge to selectively hedge portions of the Company's net investment in European foreign operations. The Company’s foreign denominated debt obligations are valued under a market approach using publicized spot prices, and the net gains or losses attributable to the changes in spot prices are recorded as cumulative translation within AOCI and are included in the foreign currency translation adjustments section of the condensed consolidated statements of comprehensive income. As of January 31, 2020 and July 31, 2019, the cumulative balance recognized in accumulated other comprehensive income were gains of $12,994 and $12,440, respectively, on the Euro-denominated debt obligations.
The following table summarizes the amount of pre-tax gains and losses related to derivatives designated as hedging instruments:
|
| | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
| 2020 | | 2019 | | 2020 | | 2019 |
Gains (losses) recognized in OCI: | | | | | | | |
Foreign exchange contracts (cash flow hedges) | $ | 363 |
| | $ | 537 |
| | $ | 559 |
| | $ | 157 |
|
Foreign currency denominated debt (net investment hedges) | 531 |
| | (598 | ) | | 553 |
| | 1,022 |
|
Gains reclassified from OCI into cost of goods sold: | | | | | | | |
Forward exchange contracts (cash flow hedges) | 105 |
| | 240 |
| | 486 |
| | 287 |
|
Non-Designated Hedges
The Company recognized losses of $20 and $28 for the three and six months ended January 31, 2020, respectively, and losses of $10 and $43 for the three and six months ended January 31, 2019, respectively, in “Investment and other income” on the condensed consolidated statements of income related to non-designated hedges.
Fair values of derivative instruments in the condensed consolidated balance sheets were as follows: |
| | | | | | | | | | | | | | | | | | | | | | | |
| January 31, 2020 | | July 31, 2019 |
| Prepaid expenses and other current assets | | Other current liabilities | | Current maturities on long-term obligations | | Prepaid expenses and other current assets | | Other current liabilities | | Current maturities on long-term obligations |
Derivatives designated as hedging instruments: | | | | | | | | | | | |
Foreign exchange contracts (cash flow hedges) | $ | 727 |
| | — |
| | — |
| | $ | 472 |
| | — |
| | — |
|
Foreign currency denominated debt (net investment hedges) | — |
| | — |
| | 49,635 |
| | — |
| | — |
| | 50,189 |
|
Derivatives not designated as hedging instruments: | | | | | | | | | | | |
Foreign exchange contracts | 13 |
| | 33 |
| | — |
| | 2 |
| | 5 |
| | — |
|
Total derivative instruments | $ | 740 |
| | $ | 33 |
| | $ | 49,635 |
| | $ | 474 |
| | $ | 5 |
| | $ | 50,189 |
|
NOTE M — Income Taxes
The effective income tax rate for the three and six months ended January 31, 2020, was 20.8% and 15.3%, respectively. The Company expects its ongoing annual effective income tax rate to be approximately 20% based on its current global business mix. The effective income tax rate for the six months ended January 31, 2020, was lower than the expected income tax rate due to the favorable settlement of a domestic income tax audit and tax benefits from stock-based compensation.
The effective income tax rate for the three and six months ended January 31, 2019, was 20.3% and 21.8%, respectively.
NOTE N — Subsequent Events
On February 20, 2018,19, 2020, 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$0.2175 per share payable on April 30, 2018,2020, to shareholders of record at the close of business on April 9, 2018.2020.
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, approximately 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 theinvesting 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, customization expertise, and increased investment inimproving our digital capabilities.
The Company is targeting the following are key initiatives supporting the strategy in fiscal 2018:2020:
Enhancing our innovationresearch and development process and improving the speedtime to deliverlaunch high-value, innovative products that alignin alignment with our target markets.
Driving operational excellence and providingProviding our customers with the highest level of customer service.
ExecutingDriving operational excellence and executing sustainable efficiency gains throughoutwithin our global operations as well asand within our selling, general and administrative structures.
Expanding and enhancing our sales capabilities through an improved digital presence.presence and increased sales resources.
Growing through focused sales and marketing effortsactions in selected vertical markets and strategic accounts.
Enhancing our global employee development process to create an engaged workforce and to attract and retain key talent.
Results of Operations
A comparison of results of operating income for the three and six months ended January 31, 20182020 and 2017,2019, is as follows:
| | | Three months ended January 31, | | Six months ended January 31, | Three months ended January 31, | | Six months ended January 31, |
(Dollars in thousands) | 2018 | | % Sales | | 2017 | | % Sales | | 2018 | | % Sales | | 2017 | | % Sales | 2020 | | % Sales | | 2019 | | % Sales | | 2020 | | % Sales | | 2019 | | % Sales |
Net sales | $ | 287,780 |
| | | | $ | 268,001 |
| | | | $ | 577,931 |
| | | | $ | 548,177 |
| | | $ | 276,665 |
| | | | $ | 282,426 |
| | | | $ | 563,612 |
| | | | $ | 575,622 |
| | |
Gross margin | 143,692 |
| | 49.9 | % | | 134,158 |
| | 50.1 | % | | 289,757 |
| | 50.1 | % | | 274,516 |
| | 50.1 | % | 139,127 |
| | 50.3 | % | | 139,810 |
| | 49.5 | % | | 280,532 |
| | 49.8 | % | | 286,349 |
| | 49.7 | % |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Research and development | 11,314 |
| | 3.9 | % | | 9,481 |
| | 3.5 | % | | 21,834 |
| | 3.8 | % | | 18,627 |
| | 3.4 | % | 10,517 |
| | 3.8 | % | | 11,074 |
| | 3.9 | % | | 21,484 |
| | 3.8 | % | | 22,400 |
| | 3.9 | % |
Selling, general and administrative | 97,582 |
| | 33.9 | % | | 94,715 |
| | 35.3 | % | | 197,716 |
| | 34.2 | % | | 192,719 |
| | 35.2 | % | 87,366 |
| | 31.6 | % | | 92,706 |
| | 32.8 | % | | 176,913 |
| | 31.4 | % | | 187,297 |
| | 32.5 | % |
Total operating expenses | 108,896 |
| | 37.8 | % | | 104,196 |
| | 38.9 | % | | 219,550 |
| | 38.0 | % | | 211,346 |
| | 38.6 | % | 97,883 |
| | 35.4 | % | | 103,780 |
| | 36.7 | % | | 198,397 |
| | 35.2 | % | | 209,697 |
| | 36.4 | % |
Operating income | $ | 34,796 |
| | 12.1 | % | | $ | 29,962 |
| | 11.2 | % | | $ | 70,207 |
| | 12.1 | % | | $ | 63,170 |
| | 11.5 | % | $ | 41,244 |
| | 14.9 | % | | $ | 36,030 |
| | 12.8 | % | | $ | 82,135 |
| | 14.6 | % | | $ | 76,652 |
| | 13.3 | % |
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. 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 January 31, 2018, increased 7.4%2020, decreased 2.0% to $287.8$276.7 million, compared to $268.0$282.4 million in the same period of the prior year, whichyear. The decrease consisted of an organic sales growthdecline of 3.2%1.2% and a positivedecrease from foreign currency impacttranslation of 4.2% due to the weakening of the U.S. Dollar against certain other currencies as compared to the same period in the prior year.0.8%. Organic sales grew 4.7%declined 1.3% in the IDS segment and declined 0.5%1.0% in the WPS segment during the three 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 compared to the prior year. The WPS segment realized growth in the digital channel, but was offset by a decline in traditional catalog channel sales when2020, compared to the same period in the prior year.
Sales for the six months ended January 31, 2018, increased 5.4%2020, decreased 2.1% to $577.9$563.6 million, compared to $548.2$575.6 million in the same period of the prior year, whichyear. The decrease consisted of an organic sales growthdecline of 2.4%0.8% and a positivedecrease from foreign currency impacttranslation of 3.0%1.3%. Organic sales grew 3.8%declined 0.7% in the IDS segment and declined 1.0%0.9% 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 when2020, compared to the same period in the prior year.
Gross margin decreased 0.5% to $139.1 million and decreased 2.0% to $280.5 million for the three months ended January 31, 2018, increased 7.1% to $143.7 million, compared to $134.2 million in the same period of the prior year, and increased 5.6% to $289.8 million for the six months ended January 31, 2018,2020, respectively, compared to $274.5$139.8 million and $286.3 million in the same periodperiods of the prior year. As a percentage of net sales, gross margin increased to 50.3% and 49.8% for the three and six months ended January 31, 2020, respectively, compared to 49.5% and 49.7% in the same periods of the prior year. The increase in gross margin as a percentage of net sales was primarily due to our ongoing efforts to streamline manufacturing processes and drive operational efficiencies, including increased automation in our manufacturing facilities, which were partially offset by increased input costs such as personnel and freight costs, along with reduced sales volume.
R&D expenses decreased 5.0% to $10.5 million and decreased 4.1% to $21.5 million for the three and six months ended January 31, 2020, respectively, compared to $11.1 million and $22.4 million in the same periods of the prior year. As a percentage of sales, gross margin decreased to 49.9%R&D expenses remained consistent 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 theand six months ended January 31, 2018,2020, 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 million in the same periodperiods of the prior year. The increasesdecrease in R&D spending for both the three and six monthsix-month periods werewas primarily due to increased investmentsthe timing of expenditures related to ongoing new product development projects. The Company remains committed to investing in several new softwareproduct development to increase sales within our IDS and printer updates withinWPS businesses. Investments in new printers and materials continue to be the IDS segment.primary focus of R&D expenditures.
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 administrative expenses including finance, information technology, human resources, and other administrative expenses. SG&A decreased 5.8% to $87.4 million and decreased 5.5% to $176.9 million for the three and six months ended January 31, 2020, respectively, compared to $92.7 million and $187.3 million in the same periods of the prior year. As a percentage of sales, SG&A was 31.6% and 31.4% for the three and six months ended January 31, 2020, respectively, compared to 32.8% and 32.5% in the same periods of the prior year. Approximately one-fourth of the decrease in both the three and six-month periods was due to the impact of foreign currency translation, and the remainder was due to ongoing efficiency gains and lower compensation expense.
Operating income increased 3.0%14.5% to $97.6$41.2 million for the three months ended January 31, 2018,2020, and 2.6%7.2% to $197.7$82.1 million for the six months ended January 31, 2018,2020, compared to $94.7$36.0 million and $192.7$76.7 million in the same periods of the prior year, respectively. The increases in both the three and six month periods were primarily due to the impact of the weakening U.S. dollar on the translation of foreign 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 million 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 January 31, 2018, compared to $63.2 million for the six months ended January 31, 2017, resulting in an 11.1% increase. The increase in the three and six monthsix-month periods were primarily due to increased sales insegment profit within both the IDS segment,and WPS businesses along with reduced selling expense in the WPS segment, and the positive impact of foreign currency fluctuations; partially offset by increased R&Dcorporate administrative expenses.
OPERATING INCOME TO NET EARNINGSINCOME
| | | Three months ended January 31, | | Six months ended January 31, | Three months ended January 31, | | Six months ended January 31, |
(Dollars in thousands) | 2018 | | % Sales | | 2017 | | % Sales | | 2018 | | % Sales | | 2017 | | % Sales | 2020 | | % Sales | | 2019 | | % Sales | | 2020 | | % Sales | | 2019 | | % Sales |
Operating income | $ | 34,796 |
| | 12.1 | % | | $ | 29,962 |
| | 11.2 | % | | $ | 70,207 |
| | 12.1 | % | | $ | 63,170 |
| | 11.5 | % | $ | 41,244 |
| | 14.9 | % | | $ | 36,030 |
| | 12.8 | % | | $ | 82,135 |
| | 14.6 | % | | $ | 76,652 |
| | 13.3 | % |
Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment and other income | 1,056 |
| | 0.4 | % | | 596 |
| | 0.2 | % | | 1,272 |
| | 0.2 | % | | 107 |
| | — | % | 1,760 |
| | 0.6 | % | | 1,377 |
| | 0.5 | % | | 3,140 |
| | 0.6 | % | | 1,360 |
| | 0.2 | % |
Interest expense | (829 | ) | | (0.3 | )% | | (1,458 | ) | | (0.5 | )% | | (1,692 | ) | | (0.3 | )% | | (3,190 | ) | | (0.6 | )% | (647 | ) | | (0.2 | )% | | (717 | ) | | (0.3 | )% | | (1,348 | ) | | (0.2 | )% | | (1,429 | ) | | (0.2 | )% |
Earnings before income tax | 35,023 |
| | 12.2 | % | | 29,100 |
| | 10.9 | % | | 69,787 |
| | 12.1 | % | | 60,087 |
| | 11.0 | % | |
Income before income tax | | 42,357 |
| | 15.3 | % | | 36,690 |
| | 13.0 | % | | 83,927 |
| | 14.9 | % | | 76,583 |
| | 13.3 | % |
Income tax expense | 30,750 |
| | 10.7 | % | | 3,803 |
| | 1.4 | % | | 39,678 |
| | 6.9 | % | | 12,237 |
| | 2.2 | % | 8,804 |
| | 3.2 | % | | 7,463 |
| | 2.6 | % | | 12,876 |
| | 2.3 | % | | 16,719 |
| | 2.9 | % |
Net earnings | $ | 4,273 |
| | 1.5 | % | | $ | 25,297 |
| | 9.4 | % | | $ | 30,109 |
| | 5.2 | % | | $ | 47,850 |
| | 8.7 | % | |
Net income | | $ | 33,553 |
| | 12.1 | % | | $ | 29,227 |
| | 10.3 | % | | $ | 71,051 |
| | 12.6 | % | | $ | 59,864 |
| | 10.4 | % |
Investment and other income was $1.1$1.8 million and $3.1 million for the three months ended January 31, 2018, and was $1.3 million for the six months ended January 31, 2018,2020, respectively, compared to investment and other income of $0.6 million and $0.1$1.4 million in each of the same periods of the prior year, respectively. These changes duringyear. The increases in both the three and six monthsix-month periods were primarily due to an increase in the market value of securities held in deferred compensation plans as well as increasedand an increase in interest income.
Interest expense decreased to $0.8 million from $1.5 million for the three months ended January 31, 2018, and decreased to $1.7 million from $3.2 million for the six months ended January 31, 2018,income when compared to the same periods in the prior year. For both
Interest expense remained essentially flat at $0.6 million and $1.3 million for the three and six-monthsix months ended January 31, 2020, respectively, compared to $0.7 million and $1.4 million in the same periods of the decreaseprior year, as there was minimal change in interest expense was due to the Company's declining principal balance under its outstanding debt agreements.
The Company’sCompany's income tax rate was 87.8%20.8% for the three months ended January 31, 2018,2020, compared to 13.1%20.3% for the same period in the prior year. The income tax rate was 56.9%15.3% for the six months ended January 31, 2018,2020, compared to 20.4%21.8% for the same period ofin 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 IM - Income Taxes for additional details regardinginformation on the Company's 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"), 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 tax expense, 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, 2018,2020, and 2017:2019:
| | | Three months ended January 31, | | Six months ended January 31, | 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 |
| |
| | 2020 | | 2019 | | 2020 | | 2019 |
SALES GROWTH INFORMATION | | | | | | | | | | | | | | |
ID Solutions | | | | | | | | | | | | | | |
Organic | 4.7 | % | | 1.9 | % | | 3.8 | % | | 1.3 | % | (1.3 | )% | | 3.6 | % | | (0.7 | )% | | 4.6 | % |
Currency | 3.4 | % | | (1.3 | )% | | 2.3 | % | | (0.9 | )% | (0.5 | )% | | (2.3 | )% | | (0.9 | )% | | (1.9 | )% |
Total | 8.1 | % | | 0.6 | % | | 6.1 | % | | 0.4 | % | (1.8 | )% | | 1.3 | % | | (1.6 | )% | | 2.7 | % |
Workplace Safety | | | | | | | | | | | | | | |
Organic | (0.5 | )% | | (0.2 | )% | | (1.0 | )% | | (1.3 | )% | (1.0 | )% | | (0.9 | )% | | (0.9 | )% | | 0.6 | % |
Currency | 6.1 | % | | (2.1 | )% | | 4.7 | % | | (1.8 | )% | (1.6 | )% | | (3.3 | )% | | (2.5 | )% | | (2.9 | )% |
Divestitures | | — | % | | (5.8 | )% | | — | % | | (6.0 | )% |
Total | 5.6 | % | | (2.3 | )% | | 3.7 | % | | (3.1 | )% | (2.6 | )% | | (10.0 | )% | | (3.4 | )% | | (8.3 | )% |
Total Company | | | | | | | | | | | | | | |
Organic | 3.2 | % | | 1.3 | % | | 2.4 | % | | 0.5 | % | (1.2 | )% | | 2.3 | % | | (0.8 | )% | | 3.5 | % |
Currency | 4.2 | % | | (1.5 | )% | | 3.0 | % | | (1.1 | )% | (0.8 | )% | | (2.6 | )% | | (1.3 | )% | | (2.2 | )% |
Divestitures | | — | % | | (1.6 | )% | | — | % | | (1.7 | )% |
Total | 7.4 | % | | (0.2 | )% | | 5.4 | % | | (0.6 | )% | (2.0 | )% | | (1.9 | )% | | (2.1 | )% | | (0.4 | )% |
SEGMENT PROFIT | | | | | | | | |
SEGMENT PROFIT AS A PERCENT OF NET SALES | | | | | | | | |
ID Solutions | $ | 34,088 |
| | $ | 28,961 |
| | $ | 69,925 |
| | $ | 62,035 |
| 19.8 | % | | 18.1 | % | | 19.8 | % | | 18.6 | % |
Workplace Safety | 7,055 |
| | 6,059 |
| | 13,500 |
| | 12,504 |
| 7.7 | % | | 6.4 | % | | 7.4 | % | | 6.9 | % |
Total | $ | 41,143 |
| | $ | 35,020 |
| | $ | 83,425 |
| | $ | 74,539 |
| 16.7 | % | | 15.1 | % | | 16.6 | % | | 15.6 | % |
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 |
|
ID Solutions
Approximately 70% ofIDS net sales decreased 1.8% in the IDS segment were generated in the Americas region, 20% in Europe and 10% in Asia. IDS sales increased 8.1% to $206.4 million for the three months ended January 31, 2018,2020, compared to $191.0 million for the same period in the prior year, which consisted of an organic sales growthdecline of 4.7%1.3% and a positivedecrease from foreign currency impacttranslation of 3.4%0.5%. Organic sales in the three-month period were essentially flat in the Safety and Facility ID and Product ID product lines while the Healthcare ID and Wire ID product lines declined compared to the prior year. IDS net sales increased 6.1% to $416.1 million fordecreased 1.6% in the six months ended January 31, 2018,2020, compared to $392.2 million forthe same period in the prior year, which consisted of an organic sales decline of 0.7% and a decrease from foreign currency translation of 0.9%. Organic sales in the six-month period grew in the Safety and Facility ID product line, remained essentially flat in the Product ID product line, and declined in the Healthcare ID and Wire ID product lines compared to the same period in the prior year.
Organic sales in the Americas decreased slightly in the three months ended January 31, 2020, compared to the same period in the prior year. Organic sales in the three-month period were essentially flat in the Safety and Facility ID and Product ID product lines while the Healthcare ID and Wire ID product lines declined compared to the same period in the prior year due to reduced demand in end markets. Organic sales were flat in the United States and declined in the low-single digits in the rest of the Americas in the three-month period. Organic sales in the Americas increased 3.8% and currency fluctuations increased sales by 2.3% duringin the low-single digits for the six months ended January 31, 2018.2020, compared to the same period in the prior year. Organic sales in the six-month period grew in the Safety and Facility ID product line, remained essentially flat in the Product ID product line, and declined in the Healthcare ID and Wire ID product lines compared to the same period in the prior year due to reduced demand in end markets. Organic sales grew in the low-single digits in the United States and declined in the low-single digits in the rest of the Americas in the six-month period.
Organic sales in the Americas grewEurope decreased in the low-single digits in the three months ended January 31, 2020, compared to the same period in the prior year. Slight organic sales growth in the Safety and Facility ID product line was more than offset by declines in the Product ID and Wire ID product lines in the three-month period. The organic sales decline in the three-month period was driven by certain businesses based in Western Europe due to a decline in economic activity. Organic sales in Europe decreased in the mid-single digits for the six months ended January 31, 2020, compared to the same period in the prior year, which was driven by a decline in all product lines. The organic sales decline in the six-month period was driven by certain businesses based in emerging geographies and in Western Europe due to a decline in economic activity.
Organic sales in Asia decreased in the mid-single digits in both the three and six months ended January 31, 2018, compared to the same periods in the prior year. Organic growth in the IDS Americas region for the three and six-month periods was led by the 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 the Healthcare ID product line due to continued pricing pressures within certain product categories resulting from the consolidation of group purchasing organizations, 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 periods 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, 2018,2020, compared to the same periods in the prior year. Organic sales growth in the Wire ID product line was ledmore than offset by our businesses baseddeclines in western Europe,the Safety and Facility ID and Product ID product lines in particular, increases in sales through the Company's distribution channels for both the three and six-month periods.
Organic sales in Asia grewwithin China declined approximately 10% and declined in the high-single digits in the three and six-month periods, respectively, partially due to the direct and indirect impact of tariffs and overall economic weakness. Organic sales were essentially flat and declined slightly in the rest of Asia in the three and six-month periods, respectively.
Segment profit increased to $40.7 million and $83.1 million for the three and six months ended January 31, 2020, respectively, compared to $37.9 million and $79.4 million for the same periods in the prior year. As a percentage of net sales, segment profit increased to 19.8% for both the three and six months ended January 31, 2018, compared to2020, from 18.1% and 18.6% for the same periods in the prior year. The IDS Asia region realized organic sales growth in the Original Equipment Manufacturer ("OEM") category, which was partially offset by decreases in the Maintenance, Repair, and Overhaul ("MRO") category driven by the weakening of the utility market in China for the three months ended January 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 processesefficiency gains throughout SG&A in all regions.
Workplace Safety
Approximately 50% ofWPS net sales decreased 2.6% 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, 2018,2020, compared to the same period in the prior year, which consisted of an organic sales decline of 1.0% and 3.7% to $161.8 million fora decrease from foreign currency translation of 1.6%. WPS net sales decreased 3.4% in the six months ended January 31, 2018,2020, compared to $77.0 millionthe same period in the prior year, which consisted of an organic sales decline of 0.9% and $156.0 million, respectively, fora decrease from foreign currency translation of 2.5%. Sales through the digital channel grew in the mid-single digits while sales through the catalog channel declined in the low-single digits in both the three and six-month periods.
Organic sales in Europe were effectively flat in the three months and increased modestly in the six months ended January 31, 2020, compared to the same periods in the prior year. Organic sales growth in France was largely offset by a decline in sales in Germany due to reduced demand for industrial products. Sales through the digital channel grew approximately 10% while sales through the catalog channel declined 0.5%in the low-single digits in both the three and 1.0%six-month periods.
Organic sales in the Americas decreased in the low-single digits in both the three and six months ended January 31, 2018,2020, respectively, compared to the same periods in the prior year. Foreign currency translationCatalog channel sales declined in the low-single digits due to lower response rates to catalog promotions in both the three and six-month periods. Digital sales declined in the low-single digits in both the three and six-month periods. This business continued to experience a negative impact on sales from a digital platform that was implemented toward the end of fiscal 2018. In order to address this decline, the business transitioned to a new digital platform mid-way through fiscal 2019. The functionality of the new digital platform has improved compared to the former digital platform. However, sales have not yet returned to the level experienced prior to the initial platform change in fiscal 2018.
Organic sales in Australia were effectively flat in the three months ended January 31, 2020, compared to the same period in the prior year. Digital channel sales increased nearly 12% during the three-month period ended January 31, 2020, which was largely offset by a low-single digit decline in catalog channel sales. Organic sales decreased in the low-single digits in the six months ended January 31, 2020, compared to the same period in the prior year. Low-single digit organic growth in digital sales was offset by 6.1%a low-single digit decline in catalog sales in the six-month period. We continue to experience reduced demand in primary end markets, which include non-residential construction and 4.7%industrial manufacturing.
Segment profit increased to $5.5 million and $10.6 million 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 in France and due to improvements in website functionality, growth in new customers, and key account management. We experienced high-single digit growth in digital sales, partially offset by a slight decline in traditional catalog channel during the three and six months ended January 31, 2018, compared to the same periods in the prior year.
Organic sales in the Americas declined in the low-single digits and mid-single digits for the three and six months ended January 31, 2018,2020, respectively, compared to the same periods in the prior year. This decrease was primarily due to lower response rates to catalog promotions$4.7 million and continued pricing pressures in industrial end markets. Catalog channel sales decreased in the low-single digits and mid-single digits during 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 transition 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.
Organic sales in Australia grew in the low-single digits for the three and six months ended January 31, 2018, compared to the same periods in the prior year. The WPS business diversified its product offering to many different industries in 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 as addressing its cost structure to improve profitability.
Segment profit increased to $7.1 million from $6.1$10.2 million for the three months ended January 31, 2018, and to $13.5 million from $12.5 million for the six months ended January 31, 2018, compared to the same periods in the prior year. As a percentage of net sales, segment profit increased to 8.7% from 7.9%7.7% and 7.4% for the three months ended January 31, 2018, and to 8.3% from 8.0% for
the six months ended January 31, 2018,2020, respectively, compared to 6.4% and 6.9% for the same periods in the prior year. The increaseincreases in segment profit was primarilywere due to efficiency opportunitiesgains throughout our manufacturing processesSG&A, which were partially offset by the decrease in organic sales and our selling, general, and administrative cost structure.foreign currency translation.
Financial Condition
Cash and cash equivalents decreased by $18.6were $289.8 million and $16.0 million during the six months endedat January 31, 2018 and 2017, respectively.2020, an increase of $10.7 million from July 31, 2019. The significant changes were as follows:
| | | Six months ended January 31, | Six months ended January 31, |
(Dollars in thousands) | 2018 | | 2017 | 2020 | | 2019 |
Net cash flow provided by (used in): | | | | | | |
Operating activities | $ | 42,460 |
| | $ | 53,334 |
| $ | 53,107 |
| | $ | 44,188 |
|
Investing activities | (9,198 | ) | | (6,642 | ) | (16,506 | ) | | (12,579 | ) |
Financing activities | (53,642 | ) | | (57,302 | ) | (26,049 | ) | | (10,051 | ) |
Effect of exchange rate changes on cash | 1,763 |
| | (5,410 | ) | 179 |
| | (776 | ) |
Net decrease in cash and cash equivalents | $ | (18,617 | ) | | $ | (16,020 | ) | |
Net increase in cash and cash equivalents | | $ | 10,731 |
| | $ | 20,782 |
|
Net cash provided by operating activities decreased to $42.5was $53.1 million for the six months ended January 31, 2018,2020, compared to $53.3$44.2 million in the same period of the prior year. The decrease in cash provided by operating activities of $9.3 millionincrease 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 includingincome adjusted for non-cash items as well as a decrease in the current six-month period compared to the same period in the prior year.cash used for working capital.
Net cash used in investing activities was $9.2$16.5 million for the six months ended January 31, 2018,2020, compared to $6.6$12.6 million in the same period of the prior year. The increase in cash used in investing activities of $2.6 million includedwas primarily driven by investment purchases to fund deferred compensation plans, and to a lesser extent by an increase in capital expenditures for the purchase of manufacturing equipment and facility upgrades in Europe, the United States, and Europe.Mexico.
Net cash used in financing activities was $53.6$26.0 million during the six months ended January 31, 2018,2020, compared to $57.3$10.1 million 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 in net cash provided by operating activitiesproceeds from the exercise of stock options and an increase in cash payments for employee taxes withheld from stock-based awards in the current six-month period.
The effect of fluctuations in exchange rates increased cash balances by $7.2 million during the six months ended January 31, 2018, primarily due to cash balances held in currencies that appreciated against the U.S. dollar.
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,August 1, 2019, the Company and certain of its subsidiaries entered into an unsecured $300$200 million multi-currency revolving loan agreement with a group of six banks.five banks that replaced and terminated the Company’s previous loan agreement that had been entered into on September 25, 2015. Under the new revolving loan agreement, the Company has the option to select either a base interest rate (based upon the higher of the federal funds rate plus one-half of 1% or the prime rate of the Bank of Montreal plus a margin based on the Company’s consolidated net leverage ratio), or the Eurocurrency interest rate (at the LIBOR rate plus a margin based on the Company’s consolidated net leverage ratio) plus 1%. At the Company's option, and subject to certain conditions, the available amount under the revolving loan agreement may be increased from $300$200 million to $450$400 million. As of January 31, 2018, the2020, there were no borrowings outstanding balance on the credit facility, and there was $14.9 million, and the maximumno outstanding balancebalances during the six months ended January 31, 2018, was $51.3 million.2020. The Company also had letters of credit outstanding under the loan agreement of $3.2$3.3 million as of January 31, 2018,2020 and there was $281.9$196.7 million available for future borrowing, which can be increased to $431.9$396.7 million at the Company's option, subject to certain conditions. The revolving loan agreement has a final maturity date of September 25, 2020. AsAugust 1, 2024, as such, theany borrowing is included in "Long-term obligations"would be classified as long-term on the 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 January 31, 2018,2020, the Company
was in compliance with these financial covenants, with the leverage ratio, as defined by the agreements, equal to 0.40.0 to 1.0 and the interest expense coverage ratio equal to 44.075.7 to 1.0.
The Company's cash balances are generated and held in numerous locations throughout the world. At January 31, 2018,2020, approximately 87%47% 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 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,income, 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 ourits strategy
Brady's ability to develop technologically advanced products that meet customer demands
Difficulties in protecting our websites, networks, and systems against security breaches
Decreased demand for the Company's products
Brady's ability to retain large customersRaw material and other cost increases
Extensive regulations by U.S. and non-U.S. governmental and self regulatoryself-regulatory entities
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 and the failure to properly identify, integrate, and grow acquired companies
Litigation, including product liability claims
Foreign currency fluctuations
The impact of the Tax Reform Act and any other changesChanges 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.
Numerous other matters of national, regional and global scale, including major public health issues and 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, 2019.
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, 2017.2019. There has been no material change in this information since July 31, 2017.
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 FACTORS
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-K 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, audits by taxing authorities could result in tax payments for prior periods.
We are subject to income taxes in the U.S. and in many non-U.S. jurisdictions. As such, our earnings are subject to risk due to changing tax laws and tax rates around 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”). The changes included in the Tax Reform Act are broad and complex. The final transition impacts 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 the three months ended January 31, 2018, we recorded a provisional valuation allowance of $22.1 million against previously recorded foreign tax credit carryforwards as a result of 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.
ITEM 6. EXHIBITS
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Exhibit No. | | Exhibit Description |
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31.1 | | |
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31.2 | | |
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32.1 | | |
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32.2 | | |
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101101.INS | Interactive Data File | XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.) |
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101.SCH | | XBRL Taxonomy Schema Document |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | XBRL Taxonomy Presentation Label Linkbase Document |
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104 | | Cover Page Inline XBRL data (contained in Exhibit 101) |
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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
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| | | | | | BRADY CORPORATION |
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Date: February 22, 201820, 2020 | | | | | | /s/ J. MICHAEL NAUMAN |
| | | | | | J. Michael Nauman |
| | | | | | President and Chief Executive Officer |
| | | | | | (Principal Executive Officer) |
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Date: February 22, 201820, 2020 | | | | | | /s/ AARON J. PEARCE |
| | | | | | Aaron J. Pearce |
| | | | | | Chief Financial Officer and Treasurer |
| | | | | | (Principal Financial Officer) |