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.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
The following table illustrates the changes in the balances of each component of accumulated other comprehensive loss, net of tax, for the sixthree months ended JanuaryOctober 31, 2018:2022:
The changes in accumulated other comprehensive loss by component, net of tax, for the sixthree months ended JanuaryOctober 31, 2017,2021, were as follows:
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:
The Company is organized and managed on a global basis within three operating segments, Identification Solutions ("IDS"), Workplace Safety ("WPS"), and People Identification ("PeopleID"PDC"), which aggregate into two reportable segments that are organized around businesses with consistent products and services: IDS and WPS. The Identification SolutionsIDS and PeopleIDPDC operating segments aggregate into the IDS reporting segment, while the WPS reporting segment is comprised solely of the Workplace Safety operating segment.
|
| | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
| 2018 | | 2017 | | 2018 | | 2017 |
Sales to External Customers | | | | | | | |
ID Solutions | $ | 206,432 |
| | $ | 190,962 |
| | $ | 416,137 |
| | $ | 392,226 |
|
Workplace Safety | 81,348 |
| | 77,039 |
| | 161,794 |
| | 155,951 |
|
Total Company | $ | 287,780 |
| | $ | 268,001 |
| | $ | 577,931 |
| | $ | 548,177 |
|
Segment Profit | | | | | | | |
ID Solutions | $ | 34,088 |
| | $ | 28,961 |
| | $ | 69,925 |
| | $ | 62,035 |
|
Workplace Safety | 7,055 |
| | 6,059 |
| | 13,500 |
| | 12,504 |
|
Total Company | $ | 41,143 |
| | $ | 35,020 |
| | $ | 83,425 |
| | $ | 74,539 |
|
The following is a reconciliation of segment profit to earningsincome before income taxes for the three and six months ended JanuaryOctober 31, 20182022 and 2017:2021:
| | | | | | | | | | | |
| Three months ended October 31, |
| 2022 | | 2021 |
Total profit from reportable segments | $ | 57,903 | | | $ | 51,109 | |
Unallocated amounts: | | | |
Administrative costs | (6,517) | | | (6,774) | |
Investment and other (expense) income | (157) | | | 543 | |
Interest expense | (894) | | | (182) | |
Income before income taxes | $ | 50,335 | | | $ | 44,696 | |
|
| | | | | | | | | | | | | | | |
| 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 FI – Stock-Based Compensation
Incentive Stock Plans
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"), performance-based restricted stock units ("PRSUs"), 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 majority of the Company’s annual share-based awards are granted in the first quarter of the fiscal year.
Total stock-based compensation expense recognized during the three months ended October 31, 2022 and 2021 was $2,958 and $4,129, respectively. The total income tax benefit recognized in the condensed consolidated statements of income was $192 and $199 during the three months ended October 31, 2022 and 2021, respectively.
Stock Options
The stock options issued under the plan have an exercise price equal to the fair market valueprice of the underlyingCompany's stock at the date of the grant and generally vest ratably over a three-year service period,three years, with one-third becoming exercisable one year after the grant date and one-third additional in each of the succeeding two years. Options issued under the plan, referred to herein as “service-based” stock“time-based” options, generally expire 10ten years from the date of grant.
Restricted and unrestricted shares and RSUs issued under the plan have a grant date fair value equal to the fair market value of the underlying stock at the date of grant. Shares issued under the plan are referred to herein as either "service-based" or "performance-based" restricted shares and RSUs. The service-based RSUs granted under the plan generally vest over a three-year service period, with one-third becoming exercisable one year after the grant date and one-third additional in each of the succeeding two years. The performance-based RSUs granted under the plan generally vest at the end of a three-year service period provided specified company financial performance metrics are met.
As of January 31, 2018, the Company has reserved 3,341,296 shares of Class A Nonvoting Common Stock for outstanding stock options, RSUs, and restricted shares and 4,014,866 shares of Class A Nonvoting Common Stock remain for future issuance of stock options, RSUs, and restricted and unrestricted shares under the plan. The Company uses treasury stock or will issue new Class A Nonvoting Common Stock to deliver shares under the plan.
The Company recognizes the compensation cost of all share-based awards at the time it is deemed probable the award will vest. This cost is recognized on a straight-line basis over the vesting period of the award. If it is determined that it is unlikely the award will vest, the expense recognized to date for the award is reversed in the period in which this is evident and the remaining expense is not recorded. Total stock-based compensation expense recognized by the Company during the three months ended January 31, 2018 and 2017, was $2,153 ($1,614 net of taxes) and $2,238 ($1,387 net of taxes), respectively. Expense recognized during the six months ended January 31, 2018 and 2017, was $5,897 ($4,423 net of taxes) and $5,394 ($3,344 net of taxes), respectively.
As of January 31, 2018, total unrecognized compensation cost related to stock-based compensation awards was $14,492 pre-tax, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of 1.9 years.
The Company has estimated the grant date fair value of its service-based stocktime-based option awards granted during the sixthree months ended JanuaryOctober 31, 20182022 and 2017,2021, 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, | | Three months ended October 31, |
Black-Scholes Option Valuation Assumptions | | 2018 | | 2017 | Black-Scholes Option Valuation Assumptions | | 2022 | | 2021 |
Expected term (in years) | | 6.07 |
| | 6.11 |
| Expected term (in years) | | 5.7 | | 6.1 |
Expected volatility | | 26.52 | % | | 29.43 | % | Expected volatility | | 29.6 | % | | 30.0 | % |
Expected dividend yield | | 2.72 | % | | 2.70 | % | Expected dividend yield | | 2.0 | % | | 2.3 | % |
Risk-free interest rate | | 1.96 | % | | 1.26 | % | Risk-free interest rate | | 3.7 | % | | 1.0 | % |
Weighted-average market value of underlying stock at grant date | | $ | 36.85 |
| | $ | 35.13 |
| |
Weighted-average exercise price | | $ | 36.85 |
| | $ | 35.13 |
| |
Weighted-average fair value of options granted during the period | | $ | 7.96 |
| | $ | 7.56 |
| |
The Company uses historical data regarding stock option exercise behaviors to estimate the expected term of options granted based on the period of time that options granted are expected to be outstanding. Expected volatilities are based on the historical volatility of the Company’s stock. The expected dividend yieldfollowing 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.
Aa summary of stock option activity under the Company’s share-based compensation plans for the sixthree months ended JanuaryOctober 31, 2018, is presented below:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Time-Based Options | | Options Outstanding | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value |
Outstanding at July 31, 2022 | | 1,591,525 | | $ | 41.57 | | | | | |
Granted | | 147,629 | | 43.50 | | | | | |
Exercised | | (22,494) | | 30.48 | | | | | |
Forfeited | | (10,247) | | 45.41 | | | | | |
Outstanding at October 31, 2022 | | 1,706,413 | | $ | 41.86 | | | 6.4 | | $ | 9,729 | |
Exercisable at October 31, 2022 | | 1,270,763 | | $ | 40.67 | | | 5.4 | | $ | 8,851 | |
|
| | | | | | | | | | | | |
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 1,962,475The weighted-average grant date fair value of options granted during the three months ended October 31, 2022 and 2,037,018 options exercisable with a weighted average exercise price of $26.612021 was $12.06 and $28.67 at January 31, 2018 and 2017,$11.29, respectively. The total intrinsic value of stock options exercised during the sixthree months ended JanuaryOctober 31, 20182022 and 2017, based upon the average market price at the time of exercise during the period,2021 was $2,935$364 and $6,719,$319, respectively. The total fair value of stock options vested during the sixthree months ended JanuaryOctober 31, 20182022 and 2017,2021 was $3,004$2,458 and $2,890,$2,446, respectively.
The cash received from the exercise of stock options during the three months ended JanuaryOctober 31, 20182022 and 2017,2021 was $6,699$349 and $5,846,$151, respectively. The cash receivedtax benefit from the exercise of stock 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 JanuaryOctober 31, 20182022 and 2017,2021 was $512$91 and $353,$80, respectively.
As of October 31, 2022, total unrecognized compensation cost related to stock options was $2,898 pre-tax, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of 2.1 years.
RSUs
RSUs issued under the plan have a grant date fair value equal to the market price of the Company's stock at the date of grant and generally vest ratably over three years, with one-third vesting one year after the grant date and one-third additional in each of the succeeding two years.
The tax benefit on options exercised duringfollowing is a summary of RSU activity for the sixthree months ended JanuaryOctober 31, 2018 and 2017, was $895 and $1,453, respectively.2022:
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 |
|
| | | | | | | | | | | | | | |
| | Number of Shares | | Weighted Average Grant Date Fair Value |
Non-vested RSUs as of July 31, 2022 | | 173,230 | | | $ | 47.45 | |
Granted | | 62,197 | | | 44.70 | |
Vested | | (61,316) | | | 47.50 | |
Forfeited | | (2,585) | | | 45.03 | |
Non-vested RSUs as of October 31, 2022 | | 171,526 | | | $ | 46.47 | |
The service-based RSUs granted during the sixthree months ended JanuaryOctober 31, 2017,2021 had a weighted-average grant date fair value of $35.12.$49.85. The total fair value of service-based RSUs vested during the sixthree months ended JanuaryOctober 31, 20182022 and 2017,2021 was $5,002$2,608 and $3,853,$3,380, respectively.
As of October 31, 2022, total unrecognized compensation cost related to RSUs was $5,029 pre-tax, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of 2.2 years. |
| | | | | | | |
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 |
|
PRSUsPRSUs are contingent on the achievement of predetermined market and performance targets. The performance-based RSUsPRSUs granted under the plan vest at the end of a three-year performance period provided the specified market and performance targets are met. For the PRSUs granted during the sixthree months ended JanuaryOctober 31, 2017,2022 and 2021, the vesting criteria for 50% of the grant is based upon the Company's total shareholder return ("TSR") relative to the S&P 600 SmallCap Industrials Index over a three-year performance period, and the vesting criteria for the other 50% of the grant is based upon Company revenue targets. All other previously granted non-vested PRSUs vest based upon the Company's TSR relative to the S&P 600 SmallCap Industrials Index.
The Company calculates the fair value of each component of the applicable PRSUs individually. The fair value of the revenue target metric, which is a performance condition, is equal to the average of the high and low stock price on the grant date. The fair value of the TSR metric, which is a market condition, is determined using a Monte Carlo valuation model. The assumptions used in the Monte Carlo valuation model are reflected in the following table:
| | | | | | | | | | | | | | |
| | Three months ended October 31, |
Monte Carlo Valuation Assumptions | | 2022 | | 2021 |
Expected volatility | | 34.8 | % | | 34.7 | % |
Risk-free interest rate | | 2.8 | % | | 0.3 | % |
The following is a summary of PRSU activity for the three months ended October 31, 2022:
| | | | | | | | | | | | | | |
| | Number of Shares | | Weighted Average Grant Date Fair Value |
Non-vested PRSUs as of July 31, 2022 | | 79,134 | | | $ | 66.79 | |
Granted | | 44,110 | | | 55.77 | |
Vested | | (18,959) | | | 75.00 | |
Forfeited | | (16,332) | | | 71.99 | |
Non-vested PRSUs as of October 31, 2022 | | 87,953 | | | $ | 58.63 | |
The PRSUs granted during the three months ended October 31, 2021 had a weighted-average grant date fair value of $32.03.$61.76. The aggregate intrinsictotal fair value of unvested service-basedPRSUs vested during three months ended October 31, 2022 and performance-based RSUs outstanding at January2021 was $889 and $4,098, respectively.
As of October 31, 2018, and expected2022, total unrecognized compensation cost related to vestPRSUs was $21,304.$2,889 pre-tax, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of 2.4 years.
NOTE GJ — 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 October 31, |
| 2022 | | 2021 |
Numerator (in thousands): | | | |
Net income (Numerator for basic and diluted income per Class A Nonvoting Common Share) | $ | 39,441 | | | $ | 35,046 | |
Less: | | | |
Preferential dividends | (769) | | | (803) | |
Preferential dividends on dilutive stock options | (4) | | | (8) | |
Numerator for basic and diluted income per Class B Voting Common Share | $ | 38,668 | | | $ | 34,235 | |
Denominator (in thousands): | | | |
Denominator for basic income per share for both Class A and Class B | 49,868 | | | 51,973 | |
Plus: Effect of dilutive equity awards | 222 | | | 463 | |
Denominator for diluted income per share for both Class A and Class B | 50,090 | | | 52,436 | |
Net income per Class A Nonvoting Common Share: | | | |
Basic | $ | 0.79 | | | $ | 0.67 | |
Diluted | $ | 0.79 | | | $ | 0.67 | |
Net income per Class B Voting Common Share: | | | |
Basic | $ | 0.78 | | | $ | 0.66 | |
Diluted | $ | 0.77 | | | $ | 0.65 | |
Potentially dilutive securities attributable to outstanding stock options and restricted stock units were excluded from the calculation of diluted earnings per share where the combined exercise price and average unamortized fair value were greater than the average market price of the Company's Class A Nonvoting Common Stock because the effect would have been anti-dilutive. The amount of anti-dilutive shares were 583,533 and 479,602 for the three months ended October 31, 2022 and 2021, respectively.
NOTE K — Fair Value Measurements
In accordance with fair value accounting guidance, the Company’s assets and liabilities measured atCompany 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 in one ofinto the following categories:hierarchy:
Level 1 — Assets or liabilities for which fair value is based on unadjustedUnadjusted quoted prices in active markets for identical instruments that are accessible as of the reporting date.
Level 2 — Assets or liabilities for which fair value is based on otherOther significant pricing inputs that are either directly or indirectly observable.
Level 3 — Assets or liabilities for which fair value is based on significantSignificant 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 withintable summarizes the fair value hierarchy ourCompany's financial assets and liabilities that were accounted for at fair value on a recurring basis at JanuaryOctober 31, 20182022 and July 31, 2017, according to the valuation techniques the Company used to determine their fair values.2022:
|
| | | | | | | | | | | | | |
| 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 |
| | |
| | | | | | | | | | | | | | | | | |
| October 31, 2022 | | July 31, 2022 | | Fair Value Hierarchy |
Assets: | | | | | |
Deferred compensation plan assets | $ | 16,072 | | | $ | 18,037 | | | Level 1 |
Foreign exchange contracts | 1,138 | | | 489 | | | Level 2 |
Liabilities: | | | | | |
Foreign exchange contracts | — | | | 32 | | | Level 2 |
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Trading securities:Deferred compensation plan assets: The Company’s deferred compensation investments consist of investments in mutual funds.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 H,L, “Derivatives and Hedging Activities,” for additional information.
There have been no transfers of assets or liabilities between the fair value hierarchy levels outlined above during the six months ended January 31, 2018. In addition, the Company had no significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition during the six months ended January 31, 2018.
The Company’s financial instruments, other than those presented in the disclosures above, includefair values of cash and cash equivalents, accounts receivable, notes payable, accounts payable, and other liabilities. The fair values of these financial instrumentsliabilities approximated carrying values because ofdue to 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 HL — 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 aton a future date, with maturities of less than 18 months,, which qualify as cash flow hedges or net investment hedges under the accounting guidance for derivative instruments and hedging activities. The primary objective of the Company’s foreign currency exchange risk management program is to minimize the impact of currency movements due to transactions in other than the respective subsidiaries’ functional currency and to minimize the impact of currency movements on the Company’s net investment denominated in a currency other than the U.S. dollar. To achieve this objective, the Company hedges a portion of known exposures using forward foreign exchange currency contracts. As of January 31, 2018 and July 31, 2017, the notional amount of outstanding forward exchange contracts was $18,236 and $81,195, respectively.
The Company hedges a portion of known exposures using forward exchange contracts. Main foreign currency exposures are related to transactions denominated in the British Pound, Euro, Canadian dollar, Australian dollar, Mexican Peso, Chinese Yuan, Malaysian Ringgit and Mexican peso.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.
Hedge effectiveness is determined by how closely the changes in fair valueThe U.S. dollar equivalent notional amounts 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.outstanding forward exchange contracts were as follows:
| | | | | | | | | | | |
| October 31, 2022 | | July 31, 2022 |
Designated as cash flow hedges | $ | 18,967 | | | $ | 25,276 | |
Non-designated hedges | 4,190 | | | 4,057 | |
Total foreign exchange contracts | $ | 23,157 | | | $ | 29,333 | |
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 OCIother comprehensive income ("OCI") and reclassified into earningsincome in the same period or periods during which the hedged transaction affects earnings.income. As of JanuaryOctober 31, 20182022 and 2017,July 31, 2022, unrealized lossesgains of $856$1,352 and $451$1,040 have been included in OCI, respectively. Balances are reclassified from OCI
The following table summarizes the amount of pre-tax gains and losses related 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.cash flow hedging instruments:
Non-Designated Hedges | | | | | | | | | | | |
| Three months ended October 31, |
| 2022 | | 2021 |
Gains (losses) recognized in OCI | $ | 893 | | | $ | (26) | |
Gains reclassified from OCI into cost of goods sold | 581 | | | 568 | |
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:
| | | | | | | | | | | | | | | | | | | | | | | |
| October 31, 2022 | | July 31, 2022 |
| Prepaid expenses and other current assets | | Other current liabilities | | Prepaid expenses and other current assets | | Other current liabilities |
Derivatives designated as hedging instruments: | | | | | | | |
Foreign exchange contracts (cash flow hedges) | $ | 1,135 | | | $ | — | | | $ | 489 | | | $ | 30 | |
Derivatives not designated as hedging instruments: | | | | | | | |
Foreign exchange contracts (non-designated hedges) | 3 | | | — | | | — | | | 2 | |
Total derivative instruments | $ | 1,138 | | | $ | — | | | $ | 489 | | | $ | 32 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 —M – 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 corporateThe income tax rate from 35.0% to 21.0%, imposes a one-time tax on deemed repatriated earnings of foreign subsidiaries, eliminateswas 21.6% for the domestic manufacturing deductionthree months ended October 31, 2022 and moves to a partial territorial system by providing a 100% dividend received deduction on certain qualified dividends from foreign subsidiaries. As the2021. The Company has a July 31 fiscal year end, the lower corporateexpects its ongoing annual 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,approximately 20% based on its current global business mix and changes thebased on tax laws and statutory U.S. federal tax from 35.0% to 26.9% for the entire year ending July 31, 2018. Additionally, the Company established a valuation allowance for deferred tax assets related to foreign tax credits, primarily related to the impact of the Tax Reform Act on the Company's ability to generate future foreign-source income. The provisional impact of the Tax Reform Act related to the remeasurement of deferred tax assets and liabilities, the impact on the Company’s fiscal 2018 earnings from the reduced tax rate, and the establishment of the valuation allowance discussed above resultedrates currently in income tax expense of $18,832 for the three and six-month periods ended January 31, 2018.effect.
The Company continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”), foreign derived intangible income ("FDII") and base erosion anti-abuse tax (“BEAT”) enacted under the Tax Reform Act, which are not effective until fiscal year 2019. The condensed consolidated financial statements for the three and six month periods ended January 31, 2018, do not include a provisional estimate associated with either GILTI, FDII or BEAT.
As a result of the Tax Reform Act, the Company expects that it will repatriate certain historical and future foreign earnings periodically, which in certain jurisdictions may be subject to withholding and income taxes. These additional withholding and income taxes are being recorded as a deferred tax liability associated with the basis difference in such jurisdictions. During the three and six-month periods ended January 31, 2018, the Company recorded a provisional income tax expense of $1,826 related to the recording of a deferred tax liability for future withholding and income taxes on the distribution of foreign earnings. The uncertainty related to the taxation of such withholding and income taxes on distributions under the Tax Reform Act and the finalization of future cash repatriation plans make the deferred tax liability a provisional amount.
The final enactment impacts of the Tax Reform Act may differ from the above estimates due to changes in interpretation, legislative action to address questions that arise, changes in accounting standards for income taxes or related interpretations in response to the Tax Reform Act, or any updates or changes to information the Company has utilized to develop the estimates, including impacts from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries. The U.S. Securities and Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Reform Act to finalize the recording of the related tax impacts.
NOTE J — New Accounting Pronouncements
In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2017-12 "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"), 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 beginning after December 15, 2018, with early adoption permitted. This new guidance will require a modified retrospective adoption approach to existing hedging relationships as of the adoption date. The Company is currently evaluating the impact of this update on its consolidated financial statements and disclosures.
In January 2017, the FASB issued ASU 2017-04, "Goodwill and Other, Simplifying the Test for Goodwill Impairment," which simplifies the accounting for goodwill impairment. The new guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. This guidance is effective for annual periods beginning after December 15, 2019, and interim periods thereafter; however, early adoption is permitted for any impairment tests performed after January 1, 2017. This guidance will only impact the Company's consolidated financial statements if there is a future impairment of goodwill.
In February 2016, the FASB issued ASU 2016-02, "Leases," which replaces the current lease accounting standard. The update will require, among other items, lessees to recognize the assets and liabilities that arise from most leases on the balance sheet. This guidance is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The ASU must be adopted using a modified retrospective approach and early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," which eliminates the transaction-and industry-specific revenue recognition guidance under current GAAP and replaces it with a principles-based approach for determining revenue recognition. The new guidance requires revenue recognition when control of the goods or services transfers to the customer, replacing the existing guidance which requires revenue recognition when the risks and rewards transfer to the customer. Under the new guidance, companies should recognize revenues in amounts that reflect the payment to which a company expects to be entitled in exchange for those goods or services.
ASU 2014-09 (and related updates) is effective 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 approach for the adoption of the standard. The Company's efforts to evaluate the impact and to prepare for its adoption on August 1, 2018 are underway as the Company has reviewed representative forms of agreements with customers globally and is in the process of evaluating the impact of the new standard on its consolidated financial statements. The Company is also assessing its process for accumulating the required information for enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue under the new standard. The Company currently anticipates applying the modified retrospective approach when adopting this guidance.
NOTE KN — Subsequent Events
On February 20, 2018,November 14, 2022, the Company and certain of its subsidiaries entered into a Second Amendment to Credit Agreement (“Amendment No. 2”) with a group of six banks, which amends the original credit agreement dated as of August 1, 2019. Amendment No. 2 amends the credit agreement to, among other items, (a) increase the lending commitments by $100,000 for total lending commitments of $300,000 (b) extend the final maturity date to November 14, 2027, (c) increase the interest rate on certain borrowings by 0.125%, and (d) increase the available amount under the credit agreement, at the Company's option and subject to certain conditions, from $300,000 up to (i) an amount equal to the incremental borrowing necessary to bring the Company's consolidated net debt-to-EBITDA ratio to 2.5 to 1.0 plus(ii) $200,000. Borrowings under Amendment No. 2 remain unsecured and are guaranteed by certain of the Company's domestic subsidiaries. The credit agreement (as amended by Amendment No. 2) continues to contain various financial covenants, including a consolidated net debt-to-EBITDA ratio of 3.5 to 1.0 and a consolidated interest coverage ratio of 3.0 to 1.0.
On November 16, 2022, 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$0.23 per share payable on April 30, 2018,January 31, 2023, to shareholders of record at the close of business on April 9, 2018.January 10, 2023.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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 safetymanufactures a broad range of stock and compliancecustom identification products halfand sells a broad range of which are internally manufactured and half 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.resale products.
The ability to provide customers with a vast arraybroad range of proprietary, customized and diverse products for use in various applications across multiple customersindustries and geographies, along with a commitment to quality and service, have made Brady a leader in many of its markets. TheBrady's long-term sales growth and profitability of our segments will depend not only on improved demand in end markets and the overall economic environment and our ability to successfully navigate changes in the macro environment, but also on our ability to continuously improve operational excellence, focus on the customer, develop and market innovative new products, and todeliver a high level of customer service, advance our digital capabilities.capabilities, and continuously improve the efficiency of our global operations. In our 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 effectivenessthe development of the researchtechnologically advanced, innovative and development ("R&D") function.proprietary products. In our WPS business, our strategy for growth includes a focus on workplace safety critical industries, innovative newstreamlining our product offerings, compliance expertise, customization expertise, improving the overall customer experience, and increased investment inimproving our digital capabilities.
The Company is targeting the following are key initiatives supporting our strategy in fiscal 2018:2023:
Enhancing•Investing in organic growth by enhancing our innovationresearch and development process and the speedutilizing customer feedback and observations to deliver high-value,develop innovative new products that align with our target markets.solve customer needs and improve environmental sustainability.
Driving operational excellence and providing•Providing our customers with the highest level of customer service.
Executing•Expanding and enhancing our sales capabilities through an improved digital presence and the use of data-driven marketing automation tools.
•Maintaining profitability through pricing mechanisms to mitigate the impacts of supply chain disruptions and inflationary pressures while ensuring prices are market competitive.
•Investing in acquisitions that enhance our strategic position and accelerate long-term sales growth.
•Driving operational excellence and executing sustainable efficiency gains throughout our global operations as well aswithin our selling, general and administrative structures.
Expanding our digital presence.
Growing through focused salesstructures and marketing efforts in selected vertical markets and strategic accounts.
Enhancingwithin our global operations including insourcing of critical products and manufacturing activities while reducing our environmental footprint and managing working capital.
•Building on our culture of diversity, equity and inclusion to increase employee engagement and enhance recruitment and retention practices in order to drive differentiated performance and execute our strategy.
Impact of the COVID-19 Pandemic and other Global Geopolitical Events on Our Business
The Company has experienced, and expects to continue to experience, increased freight and input material cost inflation as a result of increased global demand, disruptions caused by COVID-19 and government-mandated actions in response to COVID-19, the conflict in the Ukraine, as well as labor shortages. The Company has taken and will continue to take actions to mitigate inflation issues, but thus far has not fully offset the impact of these trends through pricing actions. As a result, these trends have negatively impacted the Company's gross profit margin.
We believe we have the financial strength to continue to invest in organic sales growth opportunities including sales, marketing, and research and development process("R&D") and inorganic sales opportunities including acquisitions, while continuing to attractdrive sustainable efficiency gains and retain key talent.automation in our operations and selling, general and administrative ("SG&A") functions. At October 31, 2022, we had cash of $114.5 million, as well as a credit facility with $99.4 million available for future borrowing, which can be increased up to $299.4 million at the Company's option and subject to certain conditions, for total available liquidity of $413.9 million.
We believe that our financial resources and liquidity levels including the remaining undrawn amount of the credit facility and our ability to increase that credit line as necessary are sufficient to manage the continuing impact of geopolitical events which may result in reduced sales, reduced net income, and reduced cash provided by operating activities. Refer to Risk Factors, included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended July 31, 2022, for further discussion of the possible impact of the COVID-19 pandemic and other global geopolitical events on our business.
Results of Operations
A comparison of results of operating income for the three and six months ended JanuaryOctober 31, 20182022 and 2017,2021 is as follows:
| | | Three months ended January 31, | | Six months ended January 31, | | Three months ended October 31, |
(Dollars in thousands) | 2018 | | % Sales | | 2017 | | % Sales | | 2018 | | % Sales | | 2017 | | % Sales | (Dollars in thousands) | 2022 | | % Sales | | 2021 | | % Sales |
Net sales | $ | 287,780 |
| | | | $ | 268,001 |
| | | | $ | 577,931 |
| | | | $ | 548,177 |
| | | Net sales | $ | 322,569 | | | | | $ | 321,475 | | | |
Gross margin | 143,692 |
| | 49.9 | % | | 134,158 |
| | 50.1 | % | | 289,757 |
| | 50.1 | % | | 274,516 |
| | 50.1 | % | Gross margin | 155,264 | | | 48.1 | % | | 154,988 | | | 48.2 | % |
Operating expenses: | | | | | | | | | | | | | | | | Operating expenses: | |
Research and development | 11,314 |
| | 3.9 | % | | 9,481 |
| | 3.5 | % | | 21,834 |
| | 3.8 | % | | 18,627 |
| | 3.4 | % | Research and development | 13,933 | | | 4.3 | % | | 13,907 | | | 4.3 | % |
Selling, general and administrative | 97,582 |
| | 33.9 | % | | 94,715 |
| | 35.3 | % | | 197,716 |
| | 34.2 | % | | 192,719 |
| | 35.2 | % | Selling, general and administrative | 89,945 | | | 27.9 | % | | 96,746 | | | 30.1 | % |
Total operating expenses | 108,896 |
| | 37.8 | % | | 104,196 |
| | 38.9 | % | | 219,550 |
| | 38.0 | % | | 211,346 |
| | 38.6 | % | Total operating expenses | 103,878 | | | 32.2 | % | | 110,653 | | | 34.4 | % |
Operating income | $ | 34,796 |
| | 12.1 | % | | $ | 29,962 |
| | 11.2 | % | | $ | 70,207 |
| | 12.1 | % | | $ | 63,170 |
| | 11.5 | % | Operating income | $ | 51,386 | | | 15.9 | % | | $ | 44,335 | | | 13.8 | % |
References in this Form 10-Q to “organic sales” refer to sales calculated in accordance with U.S. GAAP, excluding the impact of foreign currency translation.translation and sales recorded from acquired companies prior to the first anniversary date of their acquisition. 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.
SalesNet sales for the three months ended JanuaryOctober 31, 2018,2022, increased 7.4%0.3% to $287.8$322.6 million, compared to $268.0$321.5 million in the same period of the prior year, which consisted of organic sales growth of 3.2% and a positive currency impact 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. The increase consisted of organic sales growth of 6.9% partially offset by a decrease from foreign currency translation of 6.6%. Organic sales grew 4.7%8.6% in the IDS segment and declined 0.5%grew 1.2% in the WPS segment during the three months ended JanuaryOctober 31, 2018, compared to the same period in the prior year. The IDS segment realized sales growth in the Product ID, Wire ID, and Safety and Facility ID product lines, partially offset by a decline in 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 when2022, compared to the same period in the prior year.
Sales forGross margin increased 0.2% to $155.3 million in the sixthree months ended JanuaryOctober 31, 2018, increased 5.4% to $577.9 million,2022, compared to $548.2$155.0 million in the same period ofin the prior year, which consistedyear. As a percentage of organicnet sales, growth of 2.4% and a positive currency impact of 3.0%. Organic sales grew 3.8% in the IDS segment and declined 1.0% in the WPS segment during the six months ended January 31, 2018,gross margin decreased to 48.1% compared to 48.2% in the same period in the prior year. The IDS segment realized sales growthdecrease in the Product ID, Wire ID, and Safety and Facility ID product lines, partially offset by a decline in the Healthcare ID product line. Catalog channel sales in the WPS segment declined, but were partially ofsset by digital channel sales growth when compared to the same period in the prior year.
Grossgross margin 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, compared to $274.5 million in the same period of the prior year. Asas a percentage of net sales gross margin decreased to 49.9% for the three months ended January 31, 2018 from 50.1% in the same period of the prior year,was primarily due to an increase in the cost of materials and labor, which was partially mitigated by price reductions inincreases as well as our Workplace Safety business. As a percentage of sales, gross margin remained flat at 50.1% for the six months ended January 31, 2018, compared to the same period of the prior year. On-goingongoing efforts continue to streamline manufacturing processes and drive sustainable operational efficiencies in manufacturing facilities are offsetting increases in costs.
efficiencies.
R&D expenses forwere consistent at $13.9 million and 4.3% of sales in the three months ended JanuaryOctober 31, 2018, increased 19.3%2022 and 2021. The Company remains committed to $11.3 million, comparedinvesting in new product development to $9.5 millionincrease sales within our IDS and WPS businesses. Investments in new printing systems, materials and the same periodbuild out of a comprehensive industrial track and trace solution remain the prior year, and increased 17.2% to $21.8 millionprimary focus of R&D expenditures for the six months ended January 31, 2018, compared to $18.6 million in the same periodremainder of the prior year. The increases in both the threefiscal 2023.
SG&A expenses include selling and six month periods were primarily due to increased investments in several new software and printer updates within the IDS segment.
Selling, general and administrative expenses ("SG&A") include selling costs directly attributed to the IDS and WPS segments, as well as certain other corporate administrative expenses including finance, information technology, human resources, and other administrative expenses. SG&A increased 3.0%expenses decreased 7.0% to $97.6$89.9 million in the three months ended October 31, 2022, compared to $96.7 million in the same period in the prior year. As a percentage of sales, SG&A decreased to 27.9% for the three months ended JanuaryOctober 31, 2018,2022, compared to 30.1% in the same period in the prior year. The decrease in SG&A expenses was primarily due to foreign currency translation and 2.6% to $197.7a lesser extent, reductions in catalog advertising expenses within the WPS segment.
Operating income increased 15.9% to $51.4 million forin the sixthree months ended JanuaryOctober 31, 2018,2022, compared to $94.7 million and $192.7$44.3 million in the same periods ofperiod in 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.year. The increase in the three and six month periods were primarilyoperating income was due to increased salesan increase in the IDS segment reduced selling expenseprofit in the WPS business due to actions taken last fiscal year to reduce the cost structure along with ongoing reductions in catalog advertising expenses, as well as an increase in IDS segment and the positive impactprofit resulting from organic sales growth.
OPERATING INCOME TO NET EARNINGSINCOME
| | | Three months ended January 31, | | Six months ended January 31, | | Three months ended October 31, |
(Dollars in thousands) | 2018 | | % Sales | | 2017 | | % Sales | | 2018 | | % Sales | | 2017 | | % Sales | (Dollars in thousands) | 2022 | | % Sales | | 2021 | | % Sales |
Operating income | $ | 34,796 |
| | 12.1 | % | | $ | 29,962 |
| | 11.2 | % | | $ | 70,207 |
| | 12.1 | % | | $ | 63,170 |
| | 11.5 | % | Operating income | $ | 51,386 | | | 15.9 | % | | $ | 44,335 | | | 13.8 | % |
Other income (expense): | | | | | | | | | | | | | | | | |
Investment and other income | 1,056 |
| | 0.4 | % | | 596 |
| | 0.2 | % | | 1,272 |
| | 0.2 | % | | 107 |
| | — | % | |
Other (expense) income: | | Other (expense) income: | |
Investment and other (expense) income | | Investment and other (expense) income | (157) | | | 0.0 | % | | 543 | | | 0.2 | % |
Interest expense | (829 | ) | | (0.3 | )% | | (1,458 | ) | | (0.5 | )% | | (1,692 | ) | | (0.3 | )% | | (3,190 | ) | | (0.6 | )% | Interest expense | (894) | | | (0.3) | % | | (182) | | | (0.1) | % |
Earnings before income tax | 35,023 |
| | 12.2 | % | | 29,100 |
| | 10.9 | % | | 69,787 |
| | 12.1 | % | | 60,087 |
| | 11.0 | % | |
Income before income taxes | | Income before income taxes | 50,335 | | | 15.6 | % | | 44,696 | | | 13.9 | % |
Income tax expense | 30,750 |
| | 10.7 | % | | 3,803 |
| | 1.4 | % | | 39,678 |
| | 6.9 | % | | 12,237 |
| | 2.2 | % | Income tax expense | 10,894 | | | 3.4 | % | | 9,650 | | | 3.0 | % |
Net earnings | $ | 4,273 |
| | 1.5 | % | | $ | 25,297 |
| | 9.4 | % | | $ | 30,109 |
| | 5.2 | % | | $ | 47,850 |
| | 8.7 | % | |
Net income | | Net income | $ | 39,441 | | | 12.2 | % | | $ | 35,046 | | | 10.9 | % |
Investment and other incomeexpense was $1.1$0.2 million forin the three months ended JanuaryOctober 31, 2018, and was $1.3 million for the six months ended January 31, 2018,2022, compared to investment and other income of $0.6 million and $0.1$0.5 million in the same periods ofperiod in the prior year, respectively. These changes during the three and six month periods wereyear. The change was primarily due to an increasea decrease in the market value of securities held in deferred compensation plans as well as increased interest income.
Interest expense decreased to $0.8 million from $1.5 million forduring the three months ended JanuaryOctober 31, 2018, and decreased2022.
Interest expense increased to $1.7$0.9 million from $3.2 million for the six months ended January 31, 2018, compared to the same periods in the prior year. For both the three and six-month periods, the decrease in interest expense was due to the Company's declining principal balance under its outstanding debt agreements.
The Company’s income tax rate was 87.8% for the three months ended JanuaryOctober 31, 2018,2022, compared to 13.1% for$0.2 million in the same period in the prior year. The income tax rate was 56.9% for the six months ended January 31, 2018, compared to 20.4% for the same period of the prior year. The increase in the income tax rates in both the three and six-month periods ended January 31, 2018,interest expense was primarily due to an increase in interest rates in the enactment ofCompany's revolving loan agreement and partially due to an increase in outstanding borrowings on the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) which resultedCompany's revolving loan agreement compared to the same period in $21.1 million of additional tax expense. In the prior three and six-month periods ended January 31, 2017, theyear.
The Company’s income tax rate was reduced from its historical average in21.6% for the high-20% range due to foreign tax credits generated from a cash repatriation to the U.S.three months ended October 31, 2022 and 2021. Refer to Note I - Income TaxesM "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 (expense) 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 JanuaryOctober 31, 2018,2022 and 2017:2021:
| | | | | | | | | | | |
| Three months ended October 31, |
| 2022 | | 2021 |
SALES GROWTH INFORMATION | | | |
IDS | | | |
Organic | 8.6 | % | | 13.2 | % |
Currency | (5.5) | % | | 0.6 | % |
Acquisitions | — | % | | 11.6 | % |
Total | 3.1 | % | | 25.4 | % |
WPS | | | |
Organic | 1.2 | % | | (8.6) | % |
Currency | (10.3) | % | | 0.8 | % |
Total | (9.1) | % | | (7.8) | % |
Total Company | | | |
Organic | 6.9 | % | | 7.0 | % |
Currency | (6.6) | % | | 0.7 | % |
Acquisitions | — | % | | 8.3 | % |
Total | 0.3 | % | | 16.0 | % |
SEGMENT PROFIT | | | |
IDS | $ | 51,525 | | | $ | 48,816 | |
WPS | 6,378 | | | 2,293 | |
Total | $ | 57,903 | | | $ | 51,109 | |
SEGMENT PROFIT AS A PERCENT OF NET SALES | | | |
IDS | 20.1 | % | | 19.6 | % |
WPS | 9.6 | % | | 3.1 | % |
Total | 18.0 | % | | 15.9 | % |
|
| | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
(Dollars in thousands) | 2018 | | 2017 | | 2018 | | 2017 |
SALES TO EXTERNAL CUSTOMERS | | | | | | | |
ID Solutions | $ | 206,432 |
| | $ | 190,962 |
| | $ | 416,137 |
| | $ | 392,226 |
|
Workplace Safety | 81,348 |
| | 77,039 |
| | 161,794 |
| | 155,951 |
|
Total | $ | 287,780 |
| | $ | 268,001 |
| | $ | 577,931 |
| | $ | 548,177 |
|
SALES GROWTH INFORMATION | | | | | | | |
ID Solutions | | | | | | | |
Organic | 4.7 | % | | 1.9 | % | | 3.8 | % | | 1.3 | % |
Currency | 3.4 | % | | (1.3 | )% | | 2.3 | % | | (0.9 | )% |
Total | 8.1 | % | | 0.6 | % | | 6.1 | % | | 0.4 | % |
Workplace Safety | | | | | | | |
Organic | (0.5 | )% | | (0.2 | )% | | (1.0 | )% | | (1.3 | )% |
Currency | 6.1 | % | | (2.1 | )% | | 4.7 | % | | (1.8 | )% |
Total | 5.6 | % | | (2.3 | )% | | 3.7 | % | | (3.1 | )% |
Total Company | | | | | | | |
Organic | 3.2 | % | | 1.3 | % | | 2.4 | % | | 0.5 | % |
Currency | 4.2 | % | | (1.5 | )% | | 3.0 | % | | (1.1 | )% |
Total | 7.4 | % | | (0.2 | )% | | 5.4 | % | | (0.6 | )% |
SEGMENT PROFIT | | | | | | | |
ID Solutions | $ | 34,088 |
| | $ | 28,961 |
| | $ | 69,925 |
| | $ | 62,035 |
|
Workplace Safety | 7,055 |
| | 6,059 |
| | 13,500 |
| | 12,504 |
|
Total | $ | 41,143 |
| | $ | 35,020 |
| | $ | 83,425 |
| | $ | 74,539 |
|
SEGMENT PROFIT AS A PERCENT OF SALES | | | | | | | |
ID Solutions | 16.5 | % | | 15.2 | % | | 16.8 | % | | 15.8 | % |
Workplace Safety | 8.7 | % | | 7.9 | % | | 8.3 | % | | 8.0 | % |
Total | 14.3 | % | | 13.1 | % | | 14.4 | % | | 13.6 | % |
IDSThe 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 in the IDS segment were generated in the Americas region, 20% in Europe and 10% in Asia. IDS sales increased 8.1%3.1% to $206.4$256.4 million forin the three months ended JanuaryOctober 31, 2018,2022, compared to $191.0$248.6 million forin the same period in the prior year, which consisted of organic sales growth of 4.7%8.6% and a positivedecrease from foreign currency impacttranslation of 3.4%5.5%. IDSOrganic sales increased 6.1% to $416.1 million forgrew in all major product lines with the six months ended January 31, 2018, compared to $392.2 million for the same periodmost significant growth in the prior year. Organic sales increased 3.8%safety and currency fluctuations increased salesfacility identification product line, followed by 2.3% duringgrowth in the six months ended January 31, 2018.
product identification, wire identification and healthcare identification product lines.
Organic sales in the Americas grewincreased in the low-singlemid-single digits, for both the three and six months ended January 31, 2018, compared to the same periodsorganic sales in Europe increased in the prior year. Organic growth in the IDS Americas region for the threemid-teens, 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, compared to the same periods in the prior year. Organic sales growth was led by our businesses based in western Europe, in particular, increases in sales through the Company's distribution channels for both the three and six-month periods.
Organic sales in Asia grewincreased in the high-singlemid-single digits for both the three and six months ended January 31, 2018, compared to 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 JanuaryOctober 31, 2018,2022 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 5.5% to $34.1$51.5 million forin the three months ended JanuaryOctober 31, 2018,2022, compared to $29.0$48.8 million in the same period in the prior year. As a percentage of net sales, segment profit increasedwas 20.1% compared to 16.5% from 15.2%19.6% in the same period of the prior year. Segment profit increased to $69.9 million from $62.0 million for the six months ended January 31, 2018, compared to the same period in the prior year. As a percentage of sales, segment profit increased to 16.8% from 15.8% for same period in the prior year. The increase in segment profit for both the three and six-month periods was primarily driven by sales growth and operational efficiencies in our manufacturing processes in all regions.
Workplace Safety
Approximately 50% of net sales in the WPS segment were generated in Europe, 35% in the Americas and 15% in Australia. WPS sales increased 5.6% to $81.3 million for the three months ended January 31, 2018, and 3.7% to $161.8 million for the six months ended January 31, 2018, compared to $77.0 million and $156.0 million, respectively, for the same periods in the prior year. Organic sales declined 0.5% and 1.0% in the three and six months ended January 31, 2018, respectively, compared to the same periods in the prior year. Foreign currency translation increased sales by 6.1% and 4.7% for the three and six months ended January 31, 2018, respectively, due to the weakening of the U.S. dollar against certain other major currencies as compared to the same periods in the prior year.
The WPS business in Europe realized low-single digit organic sales growth for the three and six months ended January 31, 2018, compared to the same periods in the prior year. This growth was driven primarily by our businesses 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, respectively, compared to the same periods in the prior year. This decrease was primarily due to lower response rates to catalog promotions 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 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 sales, segment profit increased to 8.7% from 7.9% for the three months ended January 31, 2018, and to 8.3% from 8.0% for
the six months ended January 31, 2018, compared to the same periods in the prior year. The increase in segment profit was primarily due to efficiency opportunities throughout our manufacturing processesincreased sales volumes in all regions and our selling, general, and administrative cost structure.all major product lines globally.
Financial Condition
Cash and cash equivalents decreased by $18.6WPS net sales declined 9.1% to $66.2 million and $16.0 million duringin the sixthree months ended JanuaryOctober 31, 20182022, compared to $72.9 million in the same period in the prior year, which consisted of an organic sales increase of 1.2% and 2017, respectively. Thea decrease from foreign currency translation of 10.3%. Organic digital sales increased by nearly 13% and organic catalog sales declined in the low-single digits in the three-month period.
Organic sales in Europe increased in the mid-single digits consisting of digital sales growth of approximately 10% and low-single digit catalog channel sales growth. Organic sales in North America declined by approximately 11% primarily due to actions taken to improve price competitiveness and simplify our product offering, which contributed to the significant changes were as follows:
|
| | | | | | | |
| Six months ended January 31, |
(Dollars in thousands) | 2018 | | 2017 |
Net cash flow provided by (used in): | | | |
Operating activities | $ | 42,460 |
| | $ | 53,334 |
|
Investing activities | (9,198 | ) | | (6,642 | ) |
Financing activities | (53,642 | ) | | (57,302 | ) |
Effect of exchange rate changes on cash | 1,763 |
| | (5,410 | ) |
Net decrease in cash and cash equivalents | $ | (18,617 | ) | | $ | (16,020 | ) |
Net cash providedimprovement in segment profit in the three-month period. Organic sales in Australia increased by operating activities decreased to $42.5 million forapproximately 11% in the sixthree months ended JanuaryOctober 31, 2018,2022 compared to $53.3the same period in the prior year consisting of high-single digit digital sales growth and catalog channel sales growth of approximately 12%.
Segment profit increased 178.2% to $6.4 million in the three months ended October 31, 2022, compared to $2.3 million in the same period of the prior year. The decrease in cash provided by operating activitiesAs a percentage of $9.3 million was primarily duenet sales, segment profit improved to increased accounts receivable of $14.4 million resulting from the timing of higher sales throughout the current six-month period9.6% 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 offset by an increase in net earnings including non-cash items in the current six-month period compared to the same period in the prior year.
Net cash used in investing activities was $9.2 million for the six months ended January 31, 2018, compared to $6.6 million3.1% in the same period of the prior year. The increase in cash used in investing activities of $2.6 million included an increase in capital expenditures for the purchase of manufacturing equipment and facility upgrades in the United States and Europe.
Net cash used in financing activitiessegment profit was $53.6 million during the six months ended January 31, 2018, compared to $57.3 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 the decrease in net cash provided by operating activities in the current 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 repaidactions taken during fiscal 2017,2022 to reduce the cost structure as well as ongoing reductions in catalog advertising expenses.
Liquidity and €45.0 million aggregate principal amount of 4.24% Series 2010-A Senior Notes, due May 13, 2020, with interest payable on the notes semiannually. This private placement was exempt from the registration requirements of the Securities Act of 1933. The notes have been fully and unconditionally guaranteed on an unsecured basis by the Company’s domestic subsidiaries.
On September 25, 2015, the Company and certain of its subsidiaries entered into an unsecured $300 million multi-currency revolving loan agreement with a group of six banks. At the Company's option, and subject to certain conditions, the available amount under the revolving loan agreement may be increased from $300 million to $450 million. As of January 31, 2018, the outstanding balance on the credit facility was $14.9 million, and the maximum outstanding balance during the six months ended January 31, 2018, was $51.3 million. The Company also had letters of credit outstanding under the loan agreement of $3.2 million as of January 31, 2018, and there was $281.9 million available for future borrowing, which can be increased to $431.9 million at the Company's option, subject to certain conditions. The revolving loan agreement has a final maturity date of September 25, 2020. As such, the borrowing is included in "Long-term obligations" 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, the Company
was in compliance with these financial covenants, with the leverage ratio, as defined by the agreements, equal to 0.4 to 1.0 and the interest expense coverage ratio equal to 44.0 to 1.0.
Capital Resources
The Company's cash balances are generated and held in numerous locations throughout the world. At JanuaryOctober 31, 2018,2022, approximately 87%95% of the Company's cash and cash equivalents were held outside the United States. The Company's organic and inorganic 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, research and development, common stock repurchases, scheduled debt repayments, and dividend payments for the next 12 months. Although the Company believes these sources of cash are currently sufficient to fund domestic operations, annual cash needs could require repatriation of cash to the U.S. from foreign jurisdictions, which may result in additional tax payments.
Off-Balance Sheet ArrangementsCash and cash equivalents were $114.5 million at October 31, 2022, an increase of $0.4 million from July 31, 2022. The significant changes were as follows:
| | | | | | | | | | | |
| Three months ended October 31, |
(Dollars in thousands) | 2022 | | 2021 |
Net cash flow provided by (used in): | | | |
Operating activities | $ | 27,999 | | | $ | 27,491 | |
Investing activities | (3,861) | | | (11,326) | |
Financing activities | (20,535) | | | (4,592) | |
Effect of exchange rate changes on cash | (3,201) | | | (1,355) | |
Net increase in cash and cash equivalents | $ | 402 | | | $ | 10,218 | |
Net cash provided by operating activities was $28.0 million in the three months ended October 31, 2022, compared to $27.5 million in the same period of the prior year. The Company doesuse of cash from working capital was reduced primarily due to a decrease in the amount of inventory purchases in the current quarter, which was offset by the annual cash incentive plan payment made in the current quarter compared to the second quarter of the prior year.
Net cash used in investing activities consisted of $3.9 million of capital expenditures in the three months ended October 31, 2022, compared to $11.3 million of capital expenditures in the same period of the prior year. Prior year capital expenditures were elevated due to the purchase of two facilities that were previously leased.
Net cash used in financing activities was $20.5 million in the three months ended October 31, 2022 compared to $4.6 million in the same period of the prior year. Net borrowings on the credit facility declined by $25.0 million primarily due to reduced capital expenditures and share repurchases in the three months ended October 31, 2022 compared to the same period in the prior year.
Material Cash Requirements
Our material cash requirements for known contractual obligations include capital expenditures, borrowings on credit facilities and lease obligations. We believe that net cash provided by operating activities will continue to be adequate to meet our liquidity and capital needs for these items over the short-term in the next 12 months and in the long-term beyond the next 12 months. We also have cash requirements for purchase orders and contracts for the purchase of inventory and other goods and services, which are based on current and anticipated customer needs and are fulfilled by our suppliers within short time horizons. We do not have significant agreements for the purchase of inventory or other goods or services specifying minimum order quantities. In addition, we may have liabilities for uncertain tax positions, but we do not believe that the cash requirements to meet any of these liabilities will be material.
Credit Facilities
On August 1, 2019, the Company and certain of its subsidiaries entered into an unsecured $200 million multi-currency revolving loan agreement with a group of five banks. At the Company's option, and subject to certain conditions, the available amount under the revolving loan agreement may be increased from $200 million to $400 million.
On December 21, 2021, the Company and certain of its subsidiaries entered into an amendment to the revolving loan agreement, which amends the revolving loan agreement dated August 1, 2019. The amendment amends the revolving loan agreement to, among other items, (a) change the interest rate under the revolving loan agreement for borrowings (i) denominated in British Pounds from the London Inter-bank Offered Rate ("LIBOR") to a daily simple SONIA-based rate, (ii) denominated in Euro from a LIBOR-based rate to a rate based on the Euro Interbank Offered Rate and (iii) denominated in Japanese Yen from a LIBOR-based rate to a rate based on the Tokyo Interbank Offered Rate, in each of the foregoing cases subject to certain adjustments specified in the revolving loan agreement; and (b) provide mechanics relating to a transition away from U.S. dollar LIBOR (with respect to borrowings denominated in U.S. dollars) and the designated benchmarks for the other eligible currencies as benchmark interest rates and the replacement of any such benchmark by a replacement benchmark rate. The amendment to the revolving loan agreement did not have a material off-balance sheet arrangements. The Company is not aware of factors that are reasonably likely to adversely affect liquidity trends, other thanimpact on the risk factors describedinterest rate or related balances in this and other Company filings. However, the following additional information is provided to assist those reviewing the Company’sCompany's consolidated financial statements.
Operating Leases -As of October 31, 2022, the outstanding balance on the Company's revolving loan agreement was $99.0 million. The leases generally are entered into for manufacturing facilities, warehouses and office space, computer equipment and Company vehicles.
Purchase Commitments -maximum amount outstanding on the credit facility during the three months ended October 31, 2022 was $101.0 million. The borrowings bear interest at 4.09% as of October 31, 2022. The Company had letters of credit outstanding under the loan agreement of $1.6 million as of October 31, 2022 and there was $99.4 million available for future borrowing, which can be increased to $299.4 million at the Company's option, subject to certain conditions. The revolving loan agreement has purchase commitmentsa final maturity date of August 1, 2024. As such, borrowings were classified as long-term on the Condensed Consolidated Balance Sheets.
Refer to Item 1, Note N, "Subsequent Events" for materials, supplies, services, and property, plant and equipment as partinformation regarding the Company's subsequent events affecting financial condition.
Covenant Compliance
The Company's revolving loan agreement requires it to maintain certain financial covenants, including a ratio of the ordinary conduct of its business. In the aggregate, such commitments are not in excess of current market prices and are not materialdebt to the trailing twelve months EBITDA, as defined in the debt agreements, of not more than a 3.5 to 1.0 ratio (leverage ratio) and the trailing twelve months EBITDA to interest expense of not less than a 3.0 to 1.0 ratio (interest expense coverage). As of October 31, 2022, the Company was in compliance with these financial positioncovenants, with a ratio of debt to EBITDA, as defined by the Company. Dueagreements, equal to 0.38 to 1.0 and the proprietary natureinterest expense coverage ratio equal to 125.1 to 1.0.
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:
•Increased cost of raw materials, labor and freight as well as raw material shortages and supply chain disruptions
Brady's ability•Adverse impacts of the novel coronavirus ("COVID-19") pandemic or other pandemics
•Decreased demand for the Company's products
•Ability to compete effectively or to successfully execute ourits strategy
Brady's ability•Ability to develop technologically advanced products that meet customer demands
•Ability to identify, integrate, and grow acquired companies, and to manage contingent liabilities from divested businesses
•Difficulties in protecting our websites, networks, and systems against security breaches and difficulties in preventing phishing attacks, social engineering or malicious break-ins.
Decreased demand for•Risks associated with the Company's productsloss of key employees
Brady's ability to retain large customers
•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 to properly identify, integrate, and grow acquired companies
•Foreign currency fluctuations
The impact•Potential write-offs of the Tax Reform Actgoodwill and any other changesintangible assets
•Changes in tax legislation and tax rates
Potential write-offs of Brady's substantial intangible assets
•Differing interests of voting and non-voting shareholders
Brady's ability to meet certain financial covenants required by our debt agreements.
•Numerous other matters of national, regional and global scale, including major public health crises and government responses thereto 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, 2022.
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, 2017.2022. There has been no material change in this information since July 31, 2017.2022.
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,The Company’s business, results of operations, financial condition, and cash flows are subject to various risks. The following risk factor is an addition to the risk factors discussedrisks and uncertainties, including those described in Part I, Item 1A, Risk Factors, in our“Risk Factors” of Company’s annual report on 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 taxes2022. There have been no material changes from the risk factors set forth 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 around2022 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company has a share repurchase program for 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 earningsCompany's Class A Nonvoting Common Stock. The plan 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 includedimplemented by purchasing shares in the Tax Reform Act are broadopen market or in privately negotiated transactions, with repurchased shares available for use in connection with the Company's stock-based plans and complex. The final transition impactsfor other corporate purposes. On May 24, 2022, the Company's Board of Directors authorized an increase in the Company's share repurchase program, authorizing the repurchase of up to $100.0 million of the Tax Reform Act may differ fromCompany's Class A Nonvoting Common Stock. As of October 31, 2022, there were $72.9 million worth of shares authorized to purchase remaining pursuant to the provisional estimates provided dueexisting share repurchase program.
The following table provides information with respect 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”) recommendedpurchases 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 unpredictabilityCompany 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. DuringClass A Nonvoting Common Stock during the three months ended JanuaryOctober 31, 2018, we recorded a provisional valuation allowance2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan (Dollars in Thousands) |
August 1, 2022 - August 31, 2022 | | — | | | $ | — | | | — | | | $ | 85,010 | |
September 1, 2022 - September 30, 2022 | | 255,814 | | | 43.30 | | | 255,814 | | | 73,932 | |
October 1, 2022 - October 31, 2022 | | 23,699 | | | 41.88 | | | 23,699 | | | 72,939 | |
Total | | 279,513 | | | $ | 43.18 | | | 279,513 | | | $ | 72,939 | |
ITEM 6. EXHIBITS
Exhibit Description |
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31.110.1 | | |
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10.2 | | |
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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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* | Management contract or compensatory plan or arrangement |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
| | | | | | | | | | | | | | | | | | | | |
| | | | | | BRADY CORPORATION |
| | | |
Date: November 17, 2022 | | | | | | /s/ RUSSELL R. SHALLER |
| | | | | | Russell R. Shaller |
| | | | | | President and Chief Executive Officer |
| | | | | | (Principal Executive Officer) |
| | | | | | |
| | | | | | |
Date: November 17, 2022 | | | | | | BRADY CORPORATION |
| | | |
Date: February 22, 2018 | | | | | | /s/ J. MICHAEL NAUMAN |
| | | | | | J. Michael Nauman |
| | | | | | President and Chief Executive Officer |
| | | | | | (Principal Executive Officer) |
| | | | | | |
| | | | | | |
Date: February 22, 2018 | | | | | | /s/ AARON J. PEARCE |
| | | | | | Aaron J. Pearce |
| | | | | | Chief Financial Officer and Treasurer |
| | | | | | (Principal Financial Officer) |