NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended
July 31, 2017
,
2016
and
2015
(In thousands, except share and per share amounts)
1. Summary of Significant Accounting Policies
Nature of Operations —
Brady Corporation is a global manufacturer and supplier of identification solutions and workplace safety products that identify and protect premises, products and people. The ability to provide customers with a broad range of proprietary, customized, and diverse products for use in various applications, along with a commitment to quality and service, a global footprint, and multiple sales channels, have made Brady a world leader in many of its markets.
Principles of Consolidation —
The accompanying consolidated financial statements include the accounts of Brady Corporation and its subsidiaries, all of which are wholly-owned. All intercompany accounts and transactions have been eliminated in consolidation.
Discontinued Operations —
The results of operations of the Die-Cut businesses have been reported as discontinued operations for the year ended July 31, 2015. In accordance with the authoritative literature, the Company has elected to not separately disclose the cash flows related to discontinued operations. See Note 13 for additional information about the Company's discontinued operations.
Use of Estimates —
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments —
The Company believes the carrying amount of its financial instruments (cash and cash equivalents, accounts receivable and accounts payable) is a reasonable estimate of the fair value of these instruments due to their short-term nature. See Note 6 for more information regarding the fair value of long-term debt and Note 11 for fair value measurements.
Cash Equivalents —
The Company considers all highly-liquid investments with original maturities of three months or less when acquired to be cash equivalents, which are recorded at cost.
Accounts Receivables —
Accounts receivables are stated net of allowances for doubtful accounts of
$4,629
and
$5,144
as of
July 31, 2017
and
2016
, respectively. No single customer comprised more than
10%
of the Company’s consolidated net sales in fiscal
2017
or
2016
, or
10%
of the Company’s consolidated accounts receivable as of
July 31, 2017
or
2016
. Specific customer provisions are made during review of significant outstanding amounts, in which customer creditworthiness and current economic trends may indicate that collection is doubtful. In addition, provisions are made for the remainder of accounts receivable based upon the age of the accounts receivable and the Company’s historical collection experience.
Inventories —
Inventories are stated at the lower of cost or market. Cost has been determined using the last-in, first-out (“LIFO”) method for certain inventories in the U.S. (
13.5%
of total inventories at
July 31, 2017
, and
14.0%
of total inventories at
July 31, 2016
) and the first-in, first-out (“FIFO”) or average cost methods for other inventories. Had all inventories been accounted for on a FIFO basis instead of on a LIFO basis, the carrying value of inventories would have increased by
$6,807
and
$6,929
as of
July 31, 2017
and
2016
, respectively.
Goodwill —
Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company completes impairment reviews for its reporting units using a fair-value method based on management's judgments and assumptions. The fair value represents the amount at which a reporting unit could be bought or sold in a current transaction between market participants on an arms-length basis. In estimating the fair value, the Company utilizes a discounted cash flow model and market multiples approach. The estimated fair value is compared with the carrying amount of the reporting unit, including goodwill. The annual impairment testing performed on May 1,
2017
, in accordance with ASC 350, "Intangibles - Goodwill and Other" ("Step One") indicated that all reporting units with remaining goodwill had a fair value substantially in excess of its carrying value. No goodwill impairment charges were recorded during the year ended July 31,
2017
.
Long-Lived and Other Intangible Assets —
The cost of intangible assets with determinable useful lives is amortized to reflect the pattern of economic benefits consumed on a straight-line basis, over the estimated periods benefited. Intangible assets with indefinite useful lives as well as goodwill are not subject to amortization. These assets are assessed for impairment annually or more frequently as deemed necessary.
The Company evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived and other finite-lived intangible assets may warrant revision or that the remaining balance of an asset may not be recoverable. If impairment is determined to exist, any related impairment loss is calculated by comparing the fair value of the asset to its carrying value. In fiscal
2017
, long-lived and other intangible assets were analyzed for potential impairment. As a result of the analysis, no material impairment charges were recorded. Refer to Note 2, "Goodwill and Other Intangible Assets" for further information.
Property, Plant, and Equipment —
Property, plant, and equipment are recorded at cost. The cost of buildings and improvements, computer systems, and machinery and equipment are depreciated over their estimated useful lives using primarily the straight-line method for financial reporting purposes. The estimated useful lives range from 3 to 33 years as shown below.
|
|
|
|
Asset Category
|
|
Range of Useful Lives
|
Buildings & Improvements
|
|
10 to 33 Years
|
Computer Systems
|
|
5 Years
|
Machinery & Equipment
|
|
3 to 10 Years
|
Fully depreciated assets are retained in property and accumulated depreciation accounts until disposal. Upon disposal, assets and related accumulated depreciation are removed from the accounts and the net amount, less any proceeds from disposal, is charged or credited to operations. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life of the respective asset. Depreciation expense was
$20,190
,
$23,375
, and
$27,355
for the years ended
July 31, 2017
,
2016
and
2015
, respectively.
Catalog Costs and Related Amortization —
The Company accumulates all direct costs incurred, net of vendor cooperative advertising payments, in the development, production, and circulation of its catalogs on its balance sheet until such time as the related catalog is mailed. The catalog costs are subsequently amortized into selling, general, and administrative expense over the expected sales realization cycle, which is one year or less. Consequently, any difference between the estimated and actual revenue stream for a particular catalog and the related impact on amortization expense is realized within a period of one year or less. The estimate of the expected sales realization cycle for a particular catalog is based on the Company’s historical sales experience with similar catalogs, and an assessment of prevailing economic conditions and various competitive factors. The Company tracks subsequent sales realization, reassesses the marketplace, and compares its findings to the previous estimate, and adjusts the amortization of future catalogs, if necessary. At
July 31, 2017
and
2016
,
$7,299
and
$8,290
, respectively, of prepaid catalog costs were included in prepaid expenses and other current assets.
Revenue Recognition —
Revenue is recognized when it is both earned and realized or realizable. The Company’s policy is to recognize revenue when title to the product and risk of loss have transferred to the customer, persuasive evidence of an arrangement exists, and collection of the sales proceeds is reasonably assured, most of which occur upon shipment of goods to customers. The majority of the Company’s revenue relates to the sale of inventory to customers, and revenue is recognized when title and the risks and rewards of ownership pass to the customer. Given the nature of the Company’s business and the applicable rules guiding revenue recognition, the Company’s revenue recognition practices do not contain estimates that materially affect the results of operations, with the exception of estimated returns and credit memos. The Company provides for an allowance for estimated product returns and credit memos which is recognized as a deduction from net sales at the time of the sale. As of
July 31, 2017
and
2016
, the Company had a reserve for estimated product returns and credit memos of
$3,873
and
$3,713
, respectively.
Sales Incentives —
The Company accounts for cash consideration (such as sales incentives and cash discounts) given to its customers or resellers as a reduction of revenue rather than an operating expense. Sales incentives for the years ended
July 31, 2017
,
2016
, and
2015
were
$37,134
,
$36,084
, and
$36,591
, respectively.
Shipping and Handling Fees and Costs —
Amounts billed to a customer in a sale transaction related to shipping and handling fees are reported as net sales and the related costs incurred for shipping and handling are reported as cost of goods sold.
Advertising Costs —
Advertising costs are expensed as incurred, except catalog and mailing costs as outlined previously. Advertising expense for the years ended
July 31, 2017
,
2016
, and
2015
was
$68,268
,
$74,204
, and
$86,090
, respectively.
Stock-Based Compensation —
The Company has an incentive stock plan under which the Board of Directors may grant nonqualified stock options to purchase shares of Class A Nonvoting Common Stock, restricted stock units ("RSUs"), or restricted and unrestricted shares of Class A Nonvoting Common Stock to employees and non-employee directors. Certain awards may be subject to pre-established performance goals.
The options issued under the plan have an exercise price equal to the fair market value of the underlying stock at the date of grant and generally vest over a three-year service period, with one-third becoming exercisable one year after the grant date and one-third additional in each of the succeeding two years. Options issued under the plan, referred to herein as “service-based” stock options, generally expire 10 years from the date of grant.
Restricted and unrestricted shares and RSUs issued under the plan have a grant date fair value equal to the fair market value of the underlying stock at the date of grant. Shares issued under the plan are referred to herein as either "service-based" or "performance-based" restricted shares and RSUs. The service-based RSUs granted under the plan generally vest over a three-year service period, with one-third becoming exercisable one year after the grant date and one-third additional in each of the succeeding two years. The performance-based RSUs granted under the plan vest at the end of a three-year service period provided specified company financial performance metrics are met.
In accordance with ASC 718 "Compensation - Stock Compensation," the Company measures and recognizes the compensation expense for all share-based awards made to employees and directors based on estimated grant-date fair values. The Black-Scholes option valuation model is used to determine the fair value of stock option awards on the date of grant. 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.
The Black-Scholes model requires the use of assumptions which determine the fair value of stock-based awards. The Company uses historical data regarding stock option exercise behaviors to estimate the expected term of options granted based on the period of time that options granted are expected to be outstanding. Expected volatilities are based on the historical volatility of the Company’s stock. The expected dividend yield is based on the Company’s historical dividend payments and historical yield. The risk-free interest rate is based on the U.S. Treasury yield curve in effect on the grant date for the length of time corresponding to the expected term of the option. The market value is calculated as the average of the high and the low stock price on the date of the grant.
The Company includes as part of cash flows from financing activities the benefits of tax deductions in excess of the tax-effected compensation of the related stock-based awards for options exercised and restricted shares and RSUs vested during the period. See Note 7 “Stockholders' Investment” for more information regarding the Company’s incentive stock plans.
Research and Development —
Amounts expended for research and development are expensed as incurred.
Other Comprehensive Income
—
Other comprehensive income consists of foreign currency translation adjustments, net investment hedge and long-term intercompany loan translation adjustments, net unrealized gains and losses from cash flow hedges, and the unamortized gain on defined-benefit pension plans net of their related tax effects.
Foreign Currency Translation —
Foreign currency assets and liabilities are translated into United States dollars at end of period rates of exchange, and income and expense accounts are translated at the average rates of exchange for the period. Resulting translation adjustments are included in other comprehensive income.
Risk Management Activities —
The Company does not hold or issue derivative financial instruments for trading purposes.
Income Taxes —
The Company accounts for income taxes in accordance with ASC 740 "Income Taxes", which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. The Company recognizes the effect of income tax positions only if sustaining those positions is more likely than not. Changes in recognition or measurement are reflected in the period in which a change in judgment occurs.
Foreign Currency Hedging —
The objective of the Company’s foreign currency exchange risk management is to minimize the impact of currency movements on non-functional currency transactions and minimize the foreign currency translation impact on the Company’s foreign operations. While the Company’s risk management objectives and strategies are driven from an economic perspective, the Company attempts, where possible and practical, to ensure that the hedging strategies it engages in qualify for hedge accounting and result in accounting treatment where the earnings effect of the hedging instrument provides substantial offset (in the same period) to the earnings effect of the hedged item. Generally, these risk management transactions will involve the use
of foreign currency derivatives to protect against exposure resulting from transactions in a currency differing from the respective functional currency.
The Company recognizes derivative instruments as either assets or liabilities in the accompanying Consolidated Balance Sheets at fair value. Changes in the fair value (i.e., gains or losses) of the derivatives are recorded in the accompanying Consolidated Statements of Earnings as "Investment and other income (expense) - net" or as a component of Accumulated Other Comprehensive Income ("AOCI") in the accompanying Consolidated Balance Sheets and in the Consolidated Statements of Comprehensive Income (Loss), as discussed below.
The Company utilizes forward foreign exchange currency contracts to reduce the exchange rate risk of specific foreign currency denominated transactions. These contracts typically require the exchange of a foreign currency for U.S. dollars at a fixed rate at a future date, with maturities of less than
18 months
. These instruments may or may not qualify as hedges under the accounting guidance for derivative instruments and hedging activities based upon the intended objective of the contract. Hedge effectiveness is determined by how closely the changes in the fair value of the hedging instrument offset the changes in the fair value or cash flows of the hedged item. Hedge accounting is permitted only if the hedging relationship is expected to be highly effective at the inception of the hedge and on an on-going basis. Gains or losses on the derivative related to hedge ineffectiveness are recognized in current earnings. The amount of hedge ineffectiveness was not material for the fiscal years ended
July 31, 2017
,
2016
, and
2015
.
The Company has designated a portion of its foreign exchange contracts as cash flow hedges. For these instruments, the effective portion of the gain or loss on the derivative is reported as a component of AOCI and in the cash flow hedge section of the Consolidated Statements of Comprehensive Loss, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
The Company also utilizes Euro-denominated debt designated as a hedge instrument to hedge portions of the Company’s net investments in Euro-denominated foreign operations. For net investment hedges that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded as cumulative translation within AOCI and are included in the net investment hedge section of the Consolidated Statements of Comprehensive Income (Loss). Any ineffective portions are to be recognized in earnings. Recognition in earnings of amounts previously recorded in cumulative translation is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation.
The Company also enters into foreign exchange contracts to create economic hedges to manage foreign exchange risk exposure. The Company has not designated these derivative contracts as hedge transactions, and accordingly, the mark-to-market impact of these derivative contracts is recorded each period in current earnings.
See Note 12 "Derivatives and Hedging Activities" for more information regarding the Company’s derivative instruments and hedging activities.
New Accounting Standards —
In January 2017, the Financial Accounting Standards Board ("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 March 2016, the FASB issued ASU 2016-09, "Stock Compensation: Improvements to Employee Share-Based Payment Accounting," which will simplify several aspects of accounting for share-based payment transactions. The update will require, among other items, that all excess tax deficiencies or benefits be recorded as income tax expense or benefit in the statement of earnings, and not in additional paid-in capital. This guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption of the ASU is permitted and the prospective transition method should be applied. The Company does not expect the adoption of this update to have a material impact on the financial statements of the Company.
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 and disclosures.
In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory," which requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. Inventory measured using last-in, first-out (“LIFO”) is not impacted by the new standard. This guidance is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted and the prospective transition method should be applied. The Company does not expect the adoption of this update to have a material impact 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.
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 samples of contracts and other 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 currently anticipates applying the modified retrospective approach when adopting this guidance.
2. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill by reportable segment for the years ended
July 31, 2017
and
2016
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IDS
|
|
WPS
|
|
Total
|
Balance as of July 31, 2015
|
$
|
382,786
|
|
|
$
|
50,413
|
|
|
$
|
433,199
|
|
Translation adjustments
|
1,743
|
|
|
(5,071
|
)
|
|
(3,328
|
)
|
Balance as of July 31, 2016
|
$
|
384,529
|
|
|
$
|
45,342
|
|
|
$
|
429,871
|
|
Translation adjustments
|
4,845
|
|
|
2,981
|
|
|
7,826
|
|
Realignment of businesses between segments
|
$
|
2,490
|
|
|
$
|
(2,490
|
)
|
|
$
|
—
|
|
Balance as of July 31, 2017
|
$
|
391,864
|
|
|
$
|
45,833
|
|
|
$
|
437,697
|
|
Goodwill at
July 31, 2017
and
2016
, is net of
$118,637
and
$209,392
of accumulated impairment losses within the IDS and WPS segments, respectively, for a total of
$328,029
. There were no impairment charges recorded during fiscal 2017. The increase of
$7,826
in the carrying amount of goodwill as of
July 31, 2017
, compared to
July 31, 2016
, was due to the effect of currency fluctuations during the fiscal year.
As further discussed in Note 8 - Segment Information, the Company realigned certain businesses between the WPS and IDS reportable segments effective August 1, 2016. In accordance with ASC 350, "Intangibles - Goodwill and Other," the Company completed a relative fair value calculation of the businesses that were realigned and moved the corresponding goodwill balance of
$2,490
between the two reportable segments.
The annual impairment testing performed on May 1,
2017
, in accordance with ASC 350, “Intangibles - Goodwill and Other” (“Step One”) indicated that all of the reporting units with remaining goodwill (IDS Americas & Europe, People ID, and WPS Europe) passed Step One of the goodwill impairment test as each had a fair value substantially in excess of its carrying value.
Other Intangible Assets
Other intangible assets include patents, tradenames, customer relationships, non-compete agreements and other intangible assets with finite lives being amortized in accordance with the accounting guidance for other intangible assets. The net book value of these assets was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2017
|
|
July 31, 2016
|
|
Weighted
Average
Amortization
Period
(Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Weighted
Average
Amortization
Period
(Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
Amortized other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
5
|
|
$
|
1,358
|
|
|
$
|
(471
|
)
|
|
$
|
887
|
|
|
5
|
|
$
|
12,252
|
|
|
$
|
(11,063
|
)
|
|
$
|
1,189
|
|
Tradenames and other
|
9
|
|
4,528
|
|
|
(4,229
|
)
|
|
299
|
|
|
5
|
|
14,359
|
|
|
(13,709
|
)
|
|
650
|
|
Customer relationships
|
8
|
|
60,759
|
|
|
(31,909
|
)
|
|
28,850
|
|
|
7
|
|
135,795
|
|
|
(100,830
|
)
|
|
34,965
|
|
Non-compete agreements and other
|
N/A
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
9,153
|
|
|
(9,142
|
)
|
|
11
|
|
Unamortized other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
N/A
|
|
23,040
|
|
|
—
|
|
|
23,040
|
|
|
N/A
|
|
22,991
|
|
|
—
|
|
|
22,991
|
|
Total
|
|
|
$
|
89,685
|
|
|
$
|
(36,609
|
)
|
|
$
|
53,076
|
|
|
|
|
$
|
194,550
|
|
|
$
|
(134,744
|
)
|
|
$
|
59,806
|
|
Fully amortized definite-lived intangible assets have historically been retained in gross asset and accumulated amortization accounts. In the fourth quarter of fiscal 2017, the Company made an accounting policy election to remove the gross carrying amount and accumulated amortization of the fully amortized intangible assets from these accounts as the period of economic benefit related to these assets has lapsed and the assets have either been abandoned, have expired, or have lost their value over time. The gross carrying amount and accumulated amortization of the fully amortized intangibles that were removed was
$107,741
. The decrease in the gross carrying amount as of
July 31, 2017
, compared to
July 31, 2016
, was partially offset by the positive effect of currency fluctuations during the year.
Amortization expense on intangible assets during the fiscal years ended July 31,
2017
,
2016
, and
2015
was $
7,113
, $
9,056
and $
12,103
, respectively. Amortization expense over each of the next five fiscal years is projected to be $
6,456
, $
6,199
, $
5,201
, $
5,160
and $
5,010
for the fiscal years ending July 31,
2018
,
2019
,
2020
,
2021
and
2022
, respectively.
3. Other Comprehensive Income (Loss)
Other comprehensive income (loss) consists of foreign currency translation adjustments, net investment hedge and long-term intercompany loan translation adjustments, net unrealized gains and losses from cash flow hedges, and the unamortized gain on defined-benefit pension plans net of their related tax effects.
The following table illustrates the changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on cash flow hedges
|
|
Gain on postretirement plans
|
|
Foreign currency translation adjustments
|
|
Accumulated other comprehensive loss
|
Ending balance, July 31, 2015
|
$
|
9
|
|
|
$
|
3,438
|
|
|
$
|
(48,481
|
)
|
|
$
|
(45,034
|
)
|
Other comprehensive (loss) income before reclassification
|
(986
|
)
|
|
445
|
|
|
(7,643
|
)
|
|
(8,184
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
120
|
|
|
(1,647
|
)
|
|
—
|
|
|
(1,527
|
)
|
Ending balance, July 31, 2016
|
$
|
(857
|
)
|
|
$
|
2,236
|
|
|
$
|
(56,124
|
)
|
|
$
|
(54,745
|
)
|
Other comprehensive income before reclassification
|
670
|
|
|
867
|
|
|
8,713
|
|
|
10,250
|
|
Amounts reclassified from accumulated other comprehensive loss
|
296
|
|
|
(483
|
)
|
|
—
|
|
|
(187
|
)
|
Ending balance, July 31, 2017
|
$
|
109
|
|
|
$
|
2,620
|
|
|
$
|
(47,411
|
)
|
|
$
|
(44,682
|
)
|
The decrease in accumulated other comprehensive loss as of
July 31, 2017
, compared to
July 31, 2016
, was primarily due to the depreciation of the U.S. dollar against certain other currencies during the fiscal year. The foreign currency translation
adjustments column in the table above includes foreign currency translation, foreign currency translation on intercompany notes and the impact of settlements of net investment hedges, net of tax. Of
$187
reclassified from AOCI,
$296
loss on cash flow hedges was reclassified into cost of products sold, and the
$483
net gain on post-retirement plans was reclassified into SG&A on the Consolidated Statement of Earnings in fiscal
2017
.
The following table illustrates the income tax benefit (expense) on the components of other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Income tax benefit (expense) related to items of other comprehensive income (loss):
|
|
|
|
|
|
|
Net investment hedge translation adjustments
|
|
$
|
1,170
|
|
|
$
|
(1,804
|
)
|
|
$
|
(8,450
|
)
|
Cash flow hedges
|
|
705
|
|
|
192
|
|
|
(308
|
)
|
Pension and other post-retirement benefits
|
|
(4
|
)
|
|
738
|
|
|
949
|
|
Other income tax adjustments
|
|
550
|
|
|
(2,154
|
)
|
|
(415
|
)
|
Income tax benefit (expense) related to items of other comprehensive income (loss)
|
|
$
|
2,421
|
|
|
$
|
(3,028
|
)
|
|
$
|
(8,224
|
)
|
4. Employee Benefit Plans
The Company provides postretirement medical benefits (the “Plan”) for eligible regular full and part-time domestic employees (including spouses) who retired prior to January 1, 2016, as outlined by the Plan. The Plan was amended effective March 16, 2015, to eliminate postretirement medical benefits for eligible domestic employees retiring on or after January 1, 2016. This amendment resulted in a decrease in the accumulated postretirement benefit obligation of
$4,490
and recognition of a curtailment gain of
$4,296
during the fiscal year ended July 31, 2015. The curtailment gain was recorded in SG&A on the Consolidated Statements of Earnings.
The accounting guidance on defined benefit pension and other postretirement plans requires full recognition of the funded status of defined benefit and other postretirement plans on the balance sheet as an asset or a liability. The guidance also requires that unrecognized prior service costs/credits, gains/losses, and transition obligations/assets be recorded in AOCI, thus not changing the income statement recognition rules for such plans.
The Plan is unfunded and recorded as a liability in the accompanying Consolidated Balance Sheets as of
July 31, 2017
and
2016
. The following table provides a reconciliation of the changes in the Plan’s accumulated benefit obligation during the years ended July 31:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Obligation at beginning of year
|
|
$
|
3,800
|
|
|
$
|
4,135
|
|
Service cost
|
|
—
|
|
|
9
|
|
Interest cost
|
|
89
|
|
|
114
|
|
Actuarial gain
|
|
—
|
|
|
(38
|
)
|
Benefit payments
|
|
(499
|
)
|
|
(420
|
)
|
Obligation at end of fiscal year
|
|
$
|
3,390
|
|
|
$
|
3,800
|
|
As of
July 31, 2017
and
2016
, amounts recognized as liabilities in the accompanying Consolidated Balance Sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Current liability
|
|
$
|
449
|
|
|
$
|
499
|
|
Non-current liability
|
|
2,941
|
|
|
3,301
|
|
|
|
$
|
3,390
|
|
|
$
|
3,800
|
|
As of
July 31, 2017
and
2016
, pre-tax amounts recognized in accumulated other comprehensive loss in the accompanying Consolidated Balance Sheets consist of net actuarial gains of
$5,504
and
$6,048
, respectively.
Net periodic benefit gain for the Plan for fiscal years ended July 31,
2017
,
2016
, and
2015
includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Net periodic postretirement benefit gain included the following components:
|
|
|
|
|
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
210
|
|
Interest cost
|
|
89
|
|
|
114
|
|
|
222
|
|
Amortization of prior service credit
|
|
—
|
|
|
(1,035
|
)
|
|
(1,169
|
)
|
Amortization of net actuarial gain
|
|
(544
|
)
|
|
(646
|
)
|
|
(804
|
)
|
Curtailment gain
|
|
—
|
|
|
—
|
|
|
(4,296
|
)
|
Periodic postretirement benefit gain
|
|
$
|
(455
|
)
|
|
$
|
(1,558
|
)
|
|
$
|
(5,837
|
)
|
The estimated net actuarial gain that will be amortized from accumulated other comprehensive income into net periodic postretirement benefit cost over the next fiscal year is
$520
. No prior service credit remains due to the plan amendment to eliminate post-retirement benefits for employees retiring after January 1, 2016.
The following assumptions were used in accounting for the Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Weighted average discount rate used in determining accumulated postretirement benefit obligation
|
|
2.50
|
%
|
|
2.50
|
%
|
|
3.00
|
%
|
Weighted average discount rate used in determining net periodic benefit cost
|
|
2.50
|
%
|
|
3.00
|
%
|
|
3.41
|
%
|
Assumed health care trend rate used to measure accumulated postretirement benefit obligation at July 31
|
|
7.25
|
%
|
|
7.50
|
%
|
|
7.00
|
%
|
Rate to which cost trend rate is assumed to decline (the ultimate trend rate)
|
|
5.50
|
%
|
|
5.50
|
%
|
|
5.50
|
%
|
Fiscal year the ultimate trend rate is reached
|
|
2024
|
|
|
2018
|
|
|
2018
|
|
A one-percentage point change in assumed health care cost trend rates would have the following effects on the Plan:
|
|
|
|
|
|
|
|
|
|
|
|
One-Percentage
Point Increase
|
|
One-Percentage
Point Decrease
|
Effect on future service and interest cost
|
|
$
|
4
|
|
|
$
|
(5
|
)
|
Effect on accumulated postretirement benefit obligation at July 31, 2017
|
|
18
|
|
|
(19
|
)
|
The following benefit payments are expected to be paid during the years ending July 31:
|
|
|
|
|
|
|
2018
|
$
|
449
|
|
2019
|
377
|
|
2020
|
359
|
|
2021
|
339
|
|
2022
|
309
|
|
2023 through 2027
|
1,241
|
|
The Company sponsors defined benefit pension plans that are primarily unfunded and provide an income benefit upon termination or retirement for certain of its international employees. As of
July 31, 2017
and
2016
, the accumulated pension obligation related to these plans was
$6,075
and
$7,120
, respectively. As of
July 31, 2017
and
2016
, pre-tax amounts recognized in accumulated other comprehensive loss in the accompanying Consolidated Balance Sheets were losses of
$641
and
$1,161
, respectively. The net periodic benefit cost for these plans was
$665
,
$795
, and
$724
during the years ended
July 31, 2017
,
2016
and
2015
, respectively.
The Company has retirement and profit-sharing plans covering substantially all full-time domestic employees and certain employees of its foreign subsidiaries. Contributions to the plans are determined annually or quarterly, according to the respective plans, based on earnings of the respective companies and employee contributions. Accrued retirement and profit-sharing
contributions of
$3,327
and
$3,380
were included in other current liabilities on the accompanying Consolidated Balance Sheets as of
July 31, 2017
and
2016
, respectively. The amounts charged to expense for these retirement and profit sharing plans were
$13,750
,
$10,407
, and
$9,912
during the years ended
July 31, 2017
,
2016
and
2015
, respectively.
The Company also has two deferred compensation plans, the Executive Deferred Compensation Plan and the Director Deferred Compensation Plan. Both plans allow for compensation to be deferred into either the Company's Class A Nonvoting Common Stock or in other investment funds. Neither plan allows funds to be transferred between the Company's Class A Nonvoting Common Stock and the other investment funds. At
July 31, 2017
and
2016
,
$14,121
and
$18,758
, respectively, of deferred compensation was included in other long-term liabilities in the accompanying Consolidated Balance Sheets.
5. Income Taxes
Earnings from continuing operations before income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
2017
|
|
2016
|
|
2015
|
United States
|
|
$
|
43,561
|
|
|
$
|
61,349
|
|
|
$
|
(582
|
)
|
Other Nations
|
|
83,071
|
|
|
47,996
|
|
|
25,577
|
|
Total
|
|
$
|
126,632
|
|
|
$
|
109,345
|
|
|
$
|
24,995
|
|
The decrease in earnings from continuing operations before income taxes in the United States to
$43,561
in fiscal
2017
from
$61,349
in fiscal
2016
was primarily due to intercompany royalty transactions that occurred in fiscal
2016
which increased U.S. earnings before income taxes by
$21,003
. The increase in earnings from continuing operations before income taxes in Other Nations to
$83,071
in fiscal
2017
from
$47,996
in fiscal
2016
was primarily due to intercompany royalty transactions that occurred in fiscal
2016
which decreased earnings in other nations before income taxes by
$21,003
, as well as improved profitability in fiscal
2017
in both our European and Asian-based businesses.
The increase in earnings from continuing operations before income taxes in the United States to
$61,349
in fiscal
2016
from a loss of
$582
in fiscal
2015
was primarily due to impairment and restructuring charges of
$24,574
recognized in fiscal
2015
, as well as intercompany royalty transactions that occurred in fiscal
2016
which increased U.S. earnings before income taxes by
$21,003
. The increase in earnings from continuing operations before income taxes in Other Nations to
$47,996
in fiscal
2016
from
$25,577
in fiscal
2015
was primarily due to impairment and restructuring charges of
$39,114
recognized in fiscal
2015
, as well as intercompany royalty transactions that occurred in fiscal
2016
which decreased earnings before income taxes by
$21,003
.
Income tax expense from continuing operations consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Current income tax expense (benefit):
|
|
|
|
|
|
|
United States
|
|
$
|
15,279
|
|
|
$
|
5,048
|
|
|
$
|
9,075
|
|
Other Nations
|
|
23,826
|
|
|
19,929
|
|
|
18,806
|
|
States (U.S.)
|
|
1,163
|
|
|
1,348
|
|
|
(352
|
)
|
|
|
$
|
40,268
|
|
|
$
|
26,325
|
|
|
$
|
27,529
|
|
Deferred income tax (benefit) expense:
|
|
|
|
|
|
|
United States
|
|
$
|
(8,173
|
)
|
|
$
|
3,946
|
|
|
$
|
(5,906
|
)
|
Other Nations
|
|
(1,329
|
)
|
|
(1,387
|
)
|
|
(1,868
|
)
|
States (U.S.)
|
|
221
|
|
|
351
|
|
|
338
|
|
|
|
$
|
(9,281
|
)
|
|
$
|
2,910
|
|
|
$
|
(7,436
|
)
|
Total income tax expense
|
|
$
|
30,987
|
|
|
$
|
29,235
|
|
|
$
|
20,093
|
|
Deferred income taxes result from temporary differences in the recognition of revenues and expenses for financial statement and income tax purposes.
The tax effects of temporary differences are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2017
|
|
|
Assets
|
|
Liabilities
|
|
Total
|
Inventories
|
|
$
|
4,516
|
|
|
$
|
(1
|
)
|
|
$
|
4,515
|
|
Prepaid catalog costs
|
|
—
|
|
|
(1,107
|
)
|
|
(1,107
|
)
|
Employee benefits
|
|
8,932
|
|
|
—
|
|
|
8,932
|
|
Accounts receivable
|
|
1,141
|
|
|
(11
|
)
|
|
1,130
|
|
Fixed assets
|
|
2,819
|
|
|
(3,884
|
)
|
|
(1,065
|
)
|
Intangible assets
|
|
1,187
|
|
|
(37,681
|
)
|
|
(36,494
|
)
|
Capitalized R&D expenditures
|
|
570
|
|
|
—
|
|
|
570
|
|
Deferred compensation
|
|
16,743
|
|
|
—
|
|
|
16,743
|
|
Postretirement benefits
|
|
4,144
|
|
|
—
|
|
|
4,144
|
|
Tax credit and net operating loss carry-forwards
|
|
70,128
|
|
|
—
|
|
|
70,128
|
|
Less valuation allowance
|
|
(38,563
|
)
|
|
—
|
|
|
(38,563
|
)
|
Other, net
|
|
12,060
|
|
|
(10,798
|
)
|
|
1,262
|
|
Total
|
|
$
|
83,677
|
|
|
$
|
(53,482
|
)
|
|
$
|
30,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2016
|
|
|
Assets
|
|
Liabilities
|
|
Total
|
Inventories
|
|
$
|
5,142
|
|
|
$
|
(153
|
)
|
|
$
|
4,989
|
|
Prepaid catalog costs
|
|
—
|
|
|
(1,577
|
)
|
|
(1,577
|
)
|
Employee benefits
|
|
6,347
|
|
|
—
|
|
|
6,347
|
|
Accounts receivable
|
|
1,619
|
|
|
(15
|
)
|
|
1,604
|
|
Fixed assets
|
|
2,847
|
|
|
(2,695
|
)
|
|
152
|
|
Intangible assets
|
|
1,144
|
|
|
(31,777
|
)
|
|
(30,633
|
)
|
Capitalized R&D expenditures
|
|
855
|
|
|
—
|
|
|
855
|
|
Deferred compensation
|
|
20,549
|
|
|
—
|
|
|
20,549
|
|
Postretirement benefits
|
|
4,152
|
|
|
—
|
|
|
4,152
|
|
Tax credit and net operating loss carry-forwards
|
|
56,790
|
|
|
—
|
|
|
56,790
|
|
Less valuation allowance
|
|
(37,992
|
)
|
|
—
|
|
|
(37,992
|
)
|
Other, net
|
|
10,918
|
|
|
(15,173
|
)
|
|
(4,255
|
)
|
Total
|
|
$
|
72,371
|
|
|
$
|
(51,390
|
)
|
|
$
|
20,981
|
|
Tax loss carry-forwards at
July 31, 2017
are comprised of:
|
|
•
|
Foreign net operating loss carry-forwards of
$126,423
, of which
$99,077
have no expiration date and the remainder of which expire within the next
five years
.
|
|
|
•
|
State net operating loss carry-forwards of
$35,875
, which expire from
2022 to 2034
.
|
|
|
•
|
Foreign tax credit carry-forwards of
$27,022
, which expire from
2021 to 2027
.
|
|
|
•
|
State research and development credit carry-forwards of
$11,028
, which expire from
2018 to 2033
.
|
The valuation allowance increased by
$571
during the fiscal year ended
July 31, 2017
, primarily due to the application of valuation allowances to the generation of current year net operating losses in Brazil, United Kingdom and Sweden. These increases were partially offset by decreases in the valuation allowance in China, India, and Wisconsin due to the utilization of net operating loss carry-forwards that had valuation allowances applied to them. If reversed in future periods, substantially all of the valuation allowance would impact the income tax rate.
The valuation allowance decreased by
$1,930
during the fiscal year ended
July 31, 2016
, primarily due to the appreciation of the U.S. Dollar against the Swedish Krona and the utilization of net operating loss carry-forwards that had valuation allowances applied to them in China and India. These decreases were partially offset by the increase in valuation allowances in Brazil due to the application of valuation allowances to the generation of net operating losses during fiscal 2016. If reversed in future periods, substantially all of the valuation allowance would impact the income tax rate.
Rate Reconciliation
A reconciliation of the tax computed by applying the statutory U.S. federal income tax rate to earnings from continuing operations before income taxes to the total income tax expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Tax at statutory rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Impairment charges (1)
|
|
—
|
%
|
|
—
|
%
|
|
55.8
|
%
|
State income taxes, net of federal tax benefit
|
|
1.0
|
%
|
|
0.8
|
%
|
|
1.6
|
%
|
International rate differential
|
|
(6.3
|
)%
|
|
0.4
|
%
|
|
(2.2
|
)%
|
Rate variances arising from foreign subsidiary distributions (2)
|
|
(5.9
|
)%
|
|
0.5
|
%
|
|
(0.3
|
)%
|
Adjustments to tax accruals and reserves (3)
|
|
3.6
|
%
|
|
(3.7
|
)%
|
|
17.8
|
%
|
Research and development tax credits and section 199 manufacturer’s deduction
|
|
(1.8
|
)%
|
|
(3.6
|
)%
|
|
(3.9
|
)%
|
Non-deductible divestiture fees and account write-offs
|
|
(0.6
|
)%
|
|
(0.4
|
)%
|
|
(4.8
|
)%
|
Deferred tax and other adjustments (4)
|
|
(0.6
|
)%
|
|
(1.4
|
)%
|
|
(21.1
|
)%
|
Other, net
|
|
0.1
|
%
|
|
(0.9
|
)%
|
|
2.5
|
%
|
Effective tax rate
|
|
24.5
|
%
|
|
26.7
|
%
|
|
80.4
|
%
|
|
|
(1)
|
For the year ended July 31, 2015,
$39.8 million
of the total impairment charge of $
46.9 million
recorded was nondeductible for income tax purposes.
|
|
|
(2)
|
The year ended July 31, 2017, includes the generation of foreign tax credit carry-forwards from cash repatriations that occurred during the fiscal year.
|
|
|
(3)
|
The years ended July 31, 2017 and 2015, include increases in current year uncertain tax positions, while the year ended July 31, 2016, includes reductions of uncertain tax positions resulting from the closure of audits and lapses in statutes of limitations.
|
|
|
(4)
|
The year ended July 31, 2015, includes the generation
$5.0 million
of foreign tax credit carry-forwards from the fiscal 2014 U.S. tax return.
|
Uncertain Tax Positions
The Company follows the guidance in ASC 740, "Income Taxes" regarding uncertain tax positions. The guidance requires application of a more likely than not threshold to the recognition and de-recognition of income tax positions. A reconciliation of unrecognized tax benefits (excluding interest and penalties) is as follows:
|
|
|
|
|
Balance at July 31, 2014
|
$
|
17,849
|
|
Additions based on tax positions related to the current year
|
5,862
|
|
Additions for tax positions of prior years
|
—
|
|
Reductions for tax positions of prior years
|
(280
|
)
|
Lapse of statute of limitations
|
(805
|
)
|
Settlements with tax authorities
|
(221
|
)
|
Cumulative Translation Adjustments and other
|
(1,272
|
)
|
Balance as of July 31, 2015
|
$
|
21,133
|
|
Additions based on tax positions related to the current year
|
3,093
|
|
Additions for tax positions of prior years
|
1,290
|
|
Reductions for tax positions of prior years
|
(9,369
|
)
|
Lapse of statute of limitations
|
(344
|
)
|
Settlements with tax authorities
|
(456
|
)
|
Cumulative Translation Adjustments and other
|
(53
|
)
|
Balance as of July 31, 2016
|
$
|
15,294
|
|
Additions based on tax positions related to the current year
|
2,500
|
|
Additions for tax positions of prior years
|
1,124
|
|
Reductions for tax positions of prior years
|
(62
|
)
|
Lapse of statute of limitations
|
(663
|
)
|
Settlements with tax authorities
|
(118
|
)
|
Cumulative Translation Adjustments and other
|
287
|
|
Balance as of July 31, 2017
|
$
|
18,362
|
|
The
$18,362
of unrecognized tax benefits, if recognized, would affect the Company's effective income tax rate. The Company has classified
$11,725
and
$9,304
, excluding interest and penalties, of the reserve for uncertain tax positions in Other Liabilities on the Consolidated Balance Sheets as of
July 31, 2017
and
2016
, respectively. The Company has classified
$6,637
and
$5,990
, excluding interest and penalties, as a reduction of long-term deferred income tax assets on the Consolidated Balance Sheets as of
July 31, 2017
and
2016
, respectively.
Interest expense is recognized on the amount of potentially underpaid taxes associated with the Company's tax positions, beginning in the first period in which interest starts accruing under the respective tax law and continuing until the tax positions are settled. The Company recognized an increase of
$674
, an increase of
$3
and a decrease of
$157
in interest expense during the years ended
July 31, 2017
,
2016
, and
2015
, respectively. There was a
$218
increase to the reserve for uncertain tax positions for penalties during the year ended
July 31, 2017
, an increase of
$66
during the year ended July 31,
2016
, and no changes during the year end July 31,
2015
. These amounts are net of reversals due to reductions for tax positions of prior years, statute of limitations, and settlements. At
July 31, 2017
and
2016
, the Company had
$2,239
and
$1,530
, respectively, accrued for interest on unrecognized tax benefits. Penalties are accrued if the tax position does not meet the minimum statutory threshold to avoid the payment of a penalty. Interest expense and penalties are recorded as a component of income tax expense in the Consolidated Statements of Earnings.
At
July 31, 2017
and
2016
, the Company had
$2,948
and
$2,730
, respectively, accrued for penalties on unrecognized tax benefits.
The Company estimates that it is reasonably possible that the unrecognized tax benefits may be reduced by
$1,748
within twelve months as a result of the resolution of worldwide tax matters, tax audit settlements, amended tax filings, and/or statute expirations. The maximum amount that would be recognized in the Consolidated Statements of Earnings as an income tax benefit is
$1,748
during the next twelve months.
During the year ended
July 31, 2017
, the Company recognized
$726
of tax benefits (including interest and penalties) associated with the lapse of statutes of limitations. The Company also recognized
$320
of tax benefits (including interest and penalties) associated with the reduction of tax positions for prior years due to the closure of tax audits.
The Company and its subsidiaries file income tax returns in the U.S., various state, and foreign jurisdictions. The following table summarizes the open tax years for the Company's major jurisdictions:
|
|
|
|
Jurisdiction
|
|
Open Tax Years
|
United States — Federal
|
|
F’15 — F’17
|
France
|
|
F’14 — F’17
|
Germany
|
|
F’09 — F’17
|
United Kingdom
|
|
F’16 — F’17
|
Unremitted Earnings
The Company does not provide for U.S. deferred taxes on cumulative earnings of non-U.S. affiliates and associated companies that have been reinvested indefinitely. These earnings relate to ongoing operations and at
July 31, 2017
, were approximately
$244,123
. These earnings have been reinvested in non-U.S. business operations, and the Company does not intend to repatriate these earnings to fund U.S. operations if doing so would result in incremental tax expense. It is not practicable to determine the income tax liability that would be payable if such earnings were not indefinitely reinvested. At
July 31, 2017
,
$94,861
of the total
$133,944
in cash and cash equivalents was held outside of the U.S.
6. Debt
On September 25, 2015, the Company and certain of its subsidiaries entered into an unsecured
$300,000
multi-currency revolving loan agreement with a group of six banks. Under this revolving loan agreement, which has a final maturity date of September 25, 2020, the Company has the option to select either a base interest rate (based upon the higher of the federal funds rate plus one-half of 1%, the prime rate of Bank of America plus a margin based on the Company’s consolidated leverage ratio, or the one-month LIBOR rate plus 1%) or a Eurocurrency interest rate (at the LIBOR rate plus a margin based on the Company’s consolidated leverage ratio). At the Company’s option, and subject to certain conditions, the available amount under the revolving loan agreement may be increased from
$300,000
up to
$450,000
. During fiscal
2017
, the Company repaid
$60,666
of its revolving loan agreement and the maximum amount outstanding throughout the year was
$112,000
. As of
July 31, 2017
, the outstanding balance on the credit facility was
$51,334
and the Company had outstanding letters of credit under the revolving loan agreement of
$4,067
. There was
$244,599
available for future borrowing under the credit facility, which can be increased to
$394,599
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 Consolidated Balance Sheets.
The Company has a multi-currency line of credit in China with capacity of
$10,000
. This line of credit supports USD-denominated or CNY-denominated borrowing to fund working capital and operations for the Company's Chinese entities and is due on demand. The borrowings under this facility may be made for a period up to one year from the date of borrowing with interest on the USD-denominated borrowings incurred equal to U.S. dollar LIBOR on the date of borrowing plus a margin based upon duration and on the CNY-denominated borrowings incurred equal to the local China rate based upon duration. There is no ultimate maturity on the facility and it is subject to periodic review and repricing. The Company is not required to comply with any financial covenants as part of this agreement. The maximum amount outstanding on this facility was
$5,691
and the Company repaid
$1,700
during fiscal
2017
. As of
July 31, 2017
, the aggregate outstanding balance on this line of credit in China was
$3,228
and there was
$6,772
available for future borrowings. Due to the short-term nature of this credit facility, the borrowings are classified as "Notes payable" within current liabilities in the accompanying Consolidated Balance Sheets.
On May 13, 2010, the Company completed a private placement of
€75.0 million
aggregate principal amount of senior unsecured notes to accredited institutional investors. The
€75.0 million
of senior notes consisted of
€30.0 million
aggregate principal amount of
3.71%
Series 2010-A Senior Notes, which were repaid during fiscal 2017, and
€45.0 million
aggregate principal amount of
4.24%
Series 2010-A Senior Notes, due May 13, 2020, with interest payable on the notes semiannually. This private placement was exempt from the registration requirements of the Securities Act of 1933. The notes have been fully and unconditionally guaranteed on an unsecured basis by the Company’s domestic subsidiaries.
During fiscal 2006 and 2007, the Company completed two private placement note issuances totaling
$350 million
in ten-year fixed rate notes with varying maturity dates to institutional investors at interest rates varying
from 5.30% to 5.33%
. The notes must be repaid equally over seven years, with interest payable on the notes due semiannually on various dates throughout the year. The private placements were exempt from the registration requirements of the Securities Act of 1933. The notes were not registered
for resale and may not be resold absent such registration or an applicable exemption from the registration requirements of the Securities Act of 1933 and applicable state securities laws. The notes have certain prepayment penalties for repaying them prior to the maturity date. Under the debt agreement, the Company made scheduled principal payments of
$42.5 million
in fiscal years 2016 and 2015, respectively. The final principal payment for the 2006 series of notes was made during fiscal 2016, while the final principal payment for the 2007 series of notes was made during fiscal 2017.
The Company’s debt agreements require it to maintain certain financial covenants, including a ratio of debt to the trailing twelve months EBITDA, as defined in the debt agreements, of not more than a 3.25 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
July 31, 2017
, the Company was in compliance with these financial covenants, with the ratio of debt to EBITDA, as defined by the agreements,
equal to 0.7 to 1.0
and the interest expense coverage ratio
equal to 30.6 to 1.0
.
Total debt consists of the following as of July 31:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Euro-denominated notes payable in 2017 at a fixed rate of 3.71%
|
|
$
|
—
|
|
|
$
|
33,459
|
|
Euro-denominated notes payable in 2020 at a fixed rate of 4.24%
|
|
53,202
|
|
|
50,188
|
|
USD-denominated notes payable through 2017 at a fixed rate of 5.33%
|
|
—
|
|
|
16,335
|
|
USD-denominated borrowing on revolving loan agreement at a weighted average rate of 1.94% and 1.31% as of July 31, 2017 and 2016, respectively
|
|
16,998
|
|
|
112,000
|
|
EUR-denominated borrowing on revolving loan agreement at a weighted average rate of 0.75% as of July 31, 2017
|
|
34,336
|
|
|
—
|
|
CNY-denominated borrowing on China revolving loan agreement at a weighted average rate of 3.92% and 4.00% as of July 31, 2017 and 2016, respectively
|
|
2,228
|
|
|
4,928
|
|
USD-denominated borrowing on China revolving loan agreement at a weighted average rate of 2.63% as of July 31, 2017
|
|
1,000
|
|
|
—
|
|
|
|
$
|
107,764
|
|
|
$
|
216,910
|
|
Less notes payable
|
|
(3,228
|
)
|
|
(4,928
|
)
|
Total long-term debt
|
|
$
|
104,536
|
|
|
$
|
211,982
|
|
The Company had outstanding letters of credit of
$4,067
and
$4,261
at
July 31, 2017
and
2016
, respectively.
The estimated fair value of the Company’s long-term obligations was
$109,303
and
$218,977
at
July 31, 2017
and
2016
, respectively, as compared to the carrying value of
$104,536
and
$211,982
at
July 31, 2017
and
2016
, respectively. The fair value of the long-term obligations, which was determined using the market approach based upon the interest rates available to the Company for borrowings with similar terms and maturities, was determined to be Level 2 under the fair value hierarchy. Due to the short-term nature and variable interest rate pricing of the Company's revolving debt in China, it is determined that the carrying value of the debt equals the fair value of the debt.
Maturities on long-term debt are as follows:
|
|
|
|
|
Years Ending July 31,
|
|
2018
|
$
|
—
|
|
2019
|
—
|
|
2020
|
53,202
|
|
2021
|
51,334
|
|
2022
|
—
|
|
Total
|
$
|
104,536
|
|
7. Stockholders' Investment
Information as to the Company’s capital stock at
July 31, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2017
|
|
July 31, 2016
|
|
|
Shares
Authorized
|
|
Shares
Issued
|
|
(thousands)
Amount
|
|
Shares
Authorized
|
|
Shares
Issued
|
|
(thousands)
Amount
|
Preferred Stock, $.01 par value
|
|
5,000,000
|
|
|
|
|
|
|
5,000,000
|
|
|
|
|
|
Cumulative Preferred Stock:
6% Cumulative
|
|
5,000
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
1972 Series
|
|
10,000
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
1979 Series
|
|
30,000
|
|
|
|
|
|
|
30,000
|
|
|
|
|
|
Common Stock, $.01 par value: Class A Nonvoting
|
|
100,000,000
|
|
|
51,261,487
|
|
|
$
|
513
|
|
|
100,000,000
|
|
|
51,261,487
|
|
|
$
|
513
|
|
Class B Voting
|
|
10,000,000
|
|
|
3,538,628
|
|
|
35
|
|
|
10,000,000
|
|
|
3,538,628
|
|
|
35
|
|
|
|
|
|
|
|
$
|
548
|
|
|
|
|
|
|
$
|
548
|
|
Before any dividend may be paid on the Class B Common Stock, holders of the Class A Common Stock are entitled to receive an annual, noncumulative cash dividend of
$.01665
per share. Thereafter, any further dividend in that fiscal year must be paid on each share of Class A Common Stock and Class B Common Stock on an equal basis.
Other than as required by law, holders of the Class A Common Stock are not entitled to any vote on corporate matters, unless, in each of the three preceding fiscal years, the
$.01665
preferential dividend described above has not been paid in full. Holders of the Class A Common Stock are entitled to one vote per share for the entire fiscal year immediately following the third consecutive fiscal year in which the preferential dividend is not paid in full. Holders of Class B Common Stock are entitled to one vote per share for the election of directors and for all other purposes.
Upon liquidation, dissolution or winding up of the Company, and after distribution of any amounts due to holders of Preferred Stock, if any, holders of the Class A Common Stock are entitled to receive the sum of
$0.835
per share before any payment or distribution to holders of the Class B Common Stock. Thereafter, holders of the Class B Common Stock are entitled to receive a payment or distribution of
$0.835
per share. Thereafter, holders of the Class A Common Stock and Class B Common Stock share equally in all payments or distributions upon liquidation, dissolution or winding up of the Company.
The preferences in dividends and liquidation rights of the Class A Common Stock over the Class B Common Stock will terminate at any time that the voting rights of Class A Common Stock and Class B Common Stock become equal.
The following is a summary of other activity in stockholders’ investment for the fiscal years ended
July 31, 2017
,
2016
, and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Compensation
|
|
Shares Held in Rabbi Trust, at cost
|
|
Total
|
Balances at July 31, 2014
|
|
$
|
7,789
|
|
|
$
|
(9,948
|
)
|
|
$
|
(2,159
|
)
|
Shares at July 31, 2014
|
|
338,711
|
|
|
423,415
|
|
|
|
Sale of shares at cost
|
|
$
|
(2,325
|
)
|
|
$
|
2,235
|
|
|
$
|
(90
|
)
|
Purchase of shares at cost
|
|
220
|
|
|
(1,035
|
)
|
|
(815
|
)
|
Balances at July 31, 2015
|
|
$
|
5,684
|
|
|
$
|
(8,748
|
)
|
|
$
|
(3,064
|
)
|
Shares at July 31, 2015
|
|
252,261
|
|
|
362,025
|
|
|
|
Sale of shares at cost
|
|
$
|
(1,238
|
)
|
|
$
|
1,278
|
|
|
$
|
40
|
|
Purchase of shares at cost
|
|
178
|
|
|
(1,017
|
)
|
|
(839
|
)
|
Balances at July 31, 2016
|
|
$
|
4,624
|
|
|
$
|
(8,487
|
)
|
|
$
|
(3,863
|
)
|
Shares at July 31, 2016
|
|
201,418
|
|
|
347,081
|
|
|
|
Sale of shares at cost
|
|
$
|
(1,247
|
)
|
|
$
|
1,288
|
|
|
$
|
41
|
|
Purchase of shares at cost
|
|
315
|
|
|
(925
|
)
|
|
(610
|
)
|
Effect of plan amendment
|
|
4,432
|
|
|
—
|
|
|
4,432
|
|
Balances at July 31, 2017
|
|
$
|
8,124
|
|
|
$
|
(8,124
|
)
|
|
$
|
—
|
|
Shares at July 31, 2017
|
|
314,082
|
|
|
314,082
|
|
|
|
Deferred Compensation Plans
The Company has two deferred compensation plans, the Executive Deferred Compensation Plan and the Director Deferred Compensation Plan. Both plans allow for compensation to be deferred into either the Company's Class A Nonvoting Common Stock or in other investment funds. On February 21, 2017, the Director Deferred Compensation Plan was amended to disallow the transfer of other investment funds into the Company’s Class A Nonvoting Common Stock. The Executive Deferred Compensation Plan also disallows transfers from other investment funds into the Company's Class A Nonvoting Common Stock.
At
July 31, 2017
, the deferred compensation balance in stockholders’ investment represents the investment at the original cost of shares held in the Company’s Class A Nonvoting Common Stock for the deferred compensation plans. The balance of shares held in the Rabbi Trust represents the investment in the Company’s Class A Nonvoting Common Stock at the original cost of all the Company’s Class A Nonvoting Common Stock held in deferred compensation plans.
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"), 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.
As of
July 31, 2017
, the Company has reserved
4,487,690
shares of Class A Nonvoting Common Stock for outstanding stock options, RSUs and restricted shares and
3,455,115
shares of Class A Nonvoting Common Stock remain for future issuance of stock options, RSUs and restricted and unrestricted shares under the active plans. The Company uses treasury stock or will issue new Class A Nonvoting Common Stock to deliver shares under these plans.
Total stock-based compensation expense recognized by the Company during the years ended
July 31, 2017
,
2016
, and
2015
, was
$9,495
(
$5,887
net of taxes),
$8,154
(
$5,056
net of taxes), and
$4,471
(
$2,772
net of taxes), respectively. As of
July 31, 2017
, total unrecognized compensation cost related to share-based compensation awards that are expected to vest was
$13,054
pre-tax, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of
1.8 years
.
Stock options
The stock options issued under the plan have an exercise price equal to the fair market value of the underlying stock at the date of grant and generally vest ratably over a
three
-year period, with one-third becoming exercisable one year after the grant date and one-third additional in each of the succeeding two years. Options issued under the plan, referred to herein as “service-based” options, generally expire
10 years
from the date of grant.
The Company has estimated the fair value of its service-based stock option awards granted during the years ended
July 31, 2017
,
2016
, and
2015
, using the Black-Scholes option valuation model. The weighted-average assumptions used in the Black-Scholes valuation model are reflected in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Black-Scholes Option Valuation Assumptions
|
|
2017
|
|
2016
|
|
2015
|
Expected term (in years)
|
|
6.11
|
|
|
6.11
|
|
|
6.05
|
|
Expected volatility
|
|
29.55
|
%
|
|
29.95
|
%
|
|
34.01
|
%
|
Expected dividend yield
|
|
2.70
|
%
|
|
2.59
|
%
|
|
2.48
|
%
|
Risk-free interest rate
|
|
1.26
|
%
|
|
1.64
|
%
|
|
1.90
|
%
|
Weighted-average market value of underlying stock at grant date
|
|
$
|
35.14
|
|
|
$
|
20.02
|
|
|
$
|
22.76
|
|
Weighted-average exercise price
|
|
$
|
35.14
|
|
|
$
|
20.02
|
|
|
$
|
22.76
|
|
Weighted-average fair value of options granted during the period
|
|
$
|
7.56
|
|
|
$
|
4.58
|
|
|
$
|
6.12
|
|
The following is a summary of stock option activity for the fiscal year ended
July 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Price
|
|
Options Outstanding
|
|
Weighted Average Exercise Price
|
Balance as of July 31, 2016
|
|
$
|
19.96
|
|
—
|
$38.31
|
|
3,708,706
|
|
|
$
|
27.34
|
|
Options granted
|
|
32.83
|
|
—
|
38.83
|
|
378,939
|
|
|
35.14
|
|
Options exercised
|
|
19.96
|
|
—
|
38.31
|
|
(874,128
|
)
|
|
27.81
|
|
Options cancelled
|
|
19.96
|
|
—
|
38.31
|
|
(333,716
|
)
|
|
34.29
|
|
Balance as of July 31, 2017
|
|
$
|
19.96
|
|
—
|
$38.83
|
|
2,879,801
|
|
|
$
|
27.40
|
|
The total fair value of options vested during the fiscal years ended
July 31, 2017
,
2016
, and
2015
, was
$2,911
,
$3,203
, and
$3,950
, respectively. The total intrinsic value of options exercised during the fiscal years ended
July 31, 2017
,
2016
, and
2015
, was
$7,901
,
$811
, and
$208
, respectively.
There were
1,859,959
,
2,488,527
, and
2,642,955
options exercisable with a weighted average exercise price of
$28.20
,
$30.18
, and
$30.88
at
July 31, 2017
,
2016
, and
2015
, respectively. The cash received from the exercise of stock options during the fiscal years ended
July 31, 2017
,
2016
, and
2015
, was
$19,728
,
$5,246
, and
$1,644
, respectively. The tax benefit on options exercised during the fiscal years ended
July 31, 2017
,
2016
, and
2015
, was
$3,002
,
$308
, and
$79
, respectively.
The following table summarizes information about stock options outstanding at
July 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Outstanding and Exercisable
|
Range of Exercise Prices
|
|
Number of Shares
Outstanding at
July 31, 2017
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
Weighted
Average
Exercise
Price
|
|
Shares
Exercisable
at July 31,
2017
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
Weighted
Average
Exercise
Price
|
$19.96 - $26.99
|
|
1,091,151
|
|
|
7.7
|
|
$
|
21.28
|
|
|
435,311
|
|
|
7.3
|
|
$
|
20.89
|
|
$27.00 - $32.99
|
|
1,205,146
|
|
|
4.1
|
|
29.14
|
|
|
1,201,652
|
|
|
4.1
|
|
29.14
|
|
$33.00 - $38.83
|
|
583,504
|
|
|
6.1
|
|
37.37
|
|
|
222,996
|
|
|
1.2
|
|
37.37
|
|
Total
|
|
2,879,801
|
|
|
5.9
|
|
$
|
27.83
|
|
|
1,859,959
|
|
|
4.5
|
|
$
|
28.20
|
|
As of
July 31, 2017
, the aggregate intrinsic value (defined as the amount by which the fair value of the underlying stock exceeds the exercise price of an option) of options outstanding and the options exercisable was
$18,442
and
$10,144
, respectively.
Restricted Shares and RSUs
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 issued under the plan generally vest ratably over a
three
-year period, with one-third becoming exercisable one year after the grant date and one-third additional in each of the succeeding two years. The performance-based RSUs granted under the plan vest at the end of a three-year service period provided specified company financial performance metrics are met.
The following tables summarize the RSU and restricted share activity for the fiscal year ended
July 31, 2017
:
|
|
|
|
|
|
|
|
|
Service-Based RSUs and Restricted Shares
|
|
Shares
|
|
Weighted Average Grant Date
Fair Value
|
Balance as of July 31, 2016
|
|
678,381
|
|
|
$
|
23.57
|
|
New grants
|
|
96,137
|
|
|
35.15
|
|
Vested
|
|
(187,532
|
)
|
|
23.56
|
|
Forfeited
|
|
(69,878
|
)
|
|
24.47
|
|
Balance as of July 31, 2017
|
|
517,108
|
|
|
$
|
25.61
|
|
The service-based RSUs granted during the fiscal year ended
July 31, 2016
, had a weighted-average grant-date fair value of
$20.07
. The total fair value of service-based RSU's vested during the twelve months ended
July 31, 2017
and
2016
, was
$6,512
and
$2,797
, respectively.
|
|
|
|
|
|
|
|
|
Performance-Based RSUs
|
|
Shares
|
|
Weighted Average Grant Date
Fair Value
|
Balance as of July 31, 2016
|
|
—
|
|
|
$
|
—
|
|
New grants
|
|
58,206
|
|
|
32.03
|
|
Vested
|
|
—
|
|
|
—
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Balance as of July 31, 2017
|
|
58,206
|
|
|
$
|
32.03
|
|
No performance-based RSUs were granted during the twelve months ended July 31,
2016
. The aggregate intrinsic value of unvested service-based and performance-based RSU's outstanding at
July 31, 2017
, and expected to vest, was
$19,100
.
8. Segment Information
The Company is organized and managed on a global basis within three operating segments, Identification Solutions ("IDS"), Workplace Safety ("WPS"), and People Identification ("People ID"), which aggregate into two reportable segments that are organized around businesses with consistent products and services: IDS and WPS. The Identification Solutions and People ID operating segments aggregate into the IDS reporting segment, while the WPS reporting segment is comprised solely of the Workplace Safety operating segment.
Effective August 1, 2016, the Company changed its internal measure of segment profit and loss that is reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing its performance. Prior to August 1, 2016, certain administrative costs were excluded from the measure of segment profit and loss. Effective August 1, 2016, a portion of these administrative costs have been included within the IDS and WPS segments, which includes the cost of finance, information technology, human resources, and certain other administrative costs. Interest expense, investment and other income (expense), income tax expense, and certain corporate administrative expenses continue to be excluded when evaluating segment performance.
Also effective August 1, 2016, the Company realigned certain businesses between the WPS and IDS reportable segments, resulting in increased revenues and segment profit in the IDS segment and equal and offsetting declines in revenues and segment profit in the WPS segment. The Company's accompanying segment information has been restated to reflect the change in measurement of segment profit and loss and the realignment of businesses.
Following is a summary of segment information for the years ended
July 31, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Sales to External Customers:
|
|
|
|
|
|
|
ID Solutions
|
|
$
|
800,392
|
|
|
$
|
795,511
|
|
|
$
|
826,824
|
|
WPS
|
|
312,924
|
|
|
325,114
|
|
|
344,907
|
|
Total Company
|
|
$
|
1,113,316
|
|
|
$
|
1,120,625
|
|
|
$
|
1,171,731
|
|
Depreciation & Amortization:
|
|
|
|
|
|
|
ID Solutions
|
|
$
|
23,092
|
|
|
$
|
27,285
|
|
|
$
|
32,228
|
|
WPS
|
|
4,211
|
|
|
5,147
|
|
|
7,230
|
|
Total Company
|
|
$
|
27,303
|
|
|
$
|
32,432
|
|
|
$
|
39,458
|
|
Segment Profit:
|
|
|
|
|
|
|
ID Solutions
|
|
$
|
130,572
|
|
|
$
|
112,276
|
|
|
$
|
89,392
|
|
WPS
|
|
25,554
|
|
|
30,792
|
|
|
29,344
|
|
Total Company
|
|
$
|
156,126
|
|
|
$
|
143,068
|
|
|
$
|
118,736
|
|
Assets:
|
|
|
|
|
|
|
ID Solutions
|
|
$
|
761,448
|
|
|
$
|
748,408
|
|
|
$
|
789,924
|
|
WPS
|
|
154,827
|
|
|
154,321
|
|
|
158,397
|
|
Corporate
|
|
133,948
|
|
|
141,235
|
|
|
114,576
|
|
Total Company
|
|
$
|
1,050,223
|
|
|
$
|
1,043,964
|
|
|
$
|
1,062,897
|
|
Expenditures for property, plant & equipment:
|
|
|
|
|
|
|
ID Solutions
|
|
$
|
12,347
|
|
|
$
|
11,640
|
|
|
$
|
21,483
|
|
WPS
|
|
2,820
|
|
|
5,500
|
|
|
5,190
|
|
Total Company
|
|
$
|
15,167
|
|
|
$
|
17,140
|
|
|
$
|
26,673
|
|
Following is a reconciliation of segment profit to net earnings for the years ended
July 31, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
2017
|
|
2016
|
|
2015
|
Total profit from reportable segments
|
$
|
156,126
|
|
|
$
|
143,068
|
|
|
$
|
118,736
|
|
Unallocated costs:
|
|
|
|
|
|
Administrative costs
|
25,111
|
|
|
25,190
|
|
|
19,742
|
|
Restructuring charges
|
—
|
|
|
—
|
|
|
16,821
|
|
Impairment charges (1)
|
—
|
|
|
—
|
|
|
46,867
|
|
Investment and other (income) expense
|
(1,121
|
)
|
|
709
|
|
|
(845
|
)
|
Interest expense
|
5,504
|
|
|
7,824
|
|
|
11,156
|
|
Earnings from continuing operations before income taxes
|
$
|
126,632
|
|
|
$
|
109,345
|
|
|
$
|
24,995
|
|
(1) Of the total
$46,867
impairment charges in fiscal 2015,
$39,367
was in the WPS segment and
$7,500
was in the IDS segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues*
Years Ended July 31,
|
|
Long-Lived Assets**
As of July 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Geographic information:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
651,294
|
|
|
$
|
663,511
|
|
|
$
|
677,401
|
|
|
$
|
367,418
|
|
|
$
|
376,045
|
|
|
$
|
389,150
|
|
Other
|
|
521,791
|
|
|
519,579
|
|
|
559,649
|
|
|
221,458
|
|
|
216,076
|
|
|
224,151
|
|
Eliminations
|
|
(59,769
|
)
|
|
(62,465
|
)
|
|
(65,319
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Consolidated total
|
|
$
|
1,113,316
|
|
|
$
|
1,120,625
|
|
|
$
|
1,171,731
|
|
|
$
|
588,876
|
|
|
$
|
592,121
|
|
|
$
|
613,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Revenues are attributed based on country of origin.
|
** Long-lived assets consist of property, plant, and equipment, other intangible assets and goodwill.
|
9. Net Earnings per Common Share
Basic net earnings per common share is computed by dividing net earnings (after deducting the applicable preferential Class A Common Stock dividends) by the weighted average Common Shares outstanding of
51,056
for fiscal
2017
,
50,541
for fiscal
2016
, and
51,285
for fiscal
2015
. The Company utilizes the two-class method to calculate earnings per 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended July 31,
|
|
2017
|
|
2016
|
|
2015
|
Numerator (in thousands)
|
|
|
|
|
|
Earnings from continuing operations (Numerator for basic and diluted earnings from continuing operations per Class A Nonvoting Common Share)
|
$
|
95,645
|
|
|
$
|
80,110
|
|
|
$
|
4,902
|
|
Less:
|
|
|
|
|
|
Preferential dividends
|
(788
|
)
|
|
(783
|
)
|
|
(794
|
)
|
Preferential dividends on dilutive stock options
|
(14
|
)
|
|
(1
|
)
|
|
(1
|
)
|
Numerator for basic and diluted earnings from continuing operations per Class B Voting Common Share
|
$
|
94,843
|
|
|
$
|
79,326
|
|
|
$
|
4,107
|
|
Denominator (in thousands)
|
|
|
|
|
|
Denominator for basic earnings from continuing operations per share for both Class A and Class B
|
51,056
|
|
|
50,541
|
|
|
51,285
|
|
Plus: Effect of dilutive stock options
|
900
|
|
|
228
|
|
|
98
|
|
Denominator for diluted earnings from continuing operations per share for both Class A and Class B
|
51,956
|
|
|
50,769
|
|
|
51,383
|
|
Earnings from continuing operations per Class A Nonvoting Common Share:
|
|
|
|
|
|
Basic
|
$
|
1.87
|
|
|
$
|
1.59
|
|
|
$
|
0.10
|
|
Diluted
|
$
|
1.84
|
|
|
$
|
1.58
|
|
|
$
|
0.10
|
|
Earnings from continuing operations per Class B Voting Common Share:
|
|
|
|
|
|
Basic
|
$
|
1.86
|
|
|
$
|
1.57
|
|
|
$
|
0.08
|
|
Diluted
|
$
|
1.83
|
|
|
$
|
1.56
|
|
|
$
|
0.08
|
|
Loss from discontinued operations per Class A Nonvoting Common Share:
|
|
|
|
|
|
Basic
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.04
|
)
|
Diluted
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.04
|
)
|
Loss from discontinued operations per Class B Voting Common Share:
|
|
|
|
|
|
Basic
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.04
|
)
|
Diluted
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.04
|
)
|
Net earnings per Class A Nonvoting Common Share:
|
|
|
|
|
|
Basic
|
$
|
1.87
|
|
|
$
|
1.59
|
|
|
$
|
0.06
|
|
Diluted
|
$
|
1.84
|
|
|
$
|
1.58
|
|
|
$
|
0.06
|
|
Net earnings per Class B Voting Common Share:
|
|
|
|
|
|
Basic
|
$
|
1.86
|
|
|
$
|
1.57
|
|
|
$
|
0.04
|
|
Diluted
|
$
|
1.83
|
|
|
$
|
1.56
|
|
|
$
|
0.04
|
|
Options to purchase
669,036
,
3,172,755
, and
3,568,264
shares of Class A Nonvoting Common Stock for the fiscal years ended
July 31, 2017
,
2016
, and
2015
, respectively, were not included in the computation of diluted net earnings per share as the impact of the inclusion of the options would have been anti-dilutive.
10. Commitments and Contingencies
The Company has entered into various non-cancellable operating lease agreements. Rental expense charged to continuing operations on a straight-line basis was
$17,495
,
$17,253
, and
$19,029
for the years ended
July 31, 2017
,
2016
, and
2015
, respectively. Future minimum lease payments required under such leases in effect at
July 31, 2017
, were as follows:
|
|
|
|
|
Years ending July 31,
|
|
2018
|
$
|
17,456
|
|
2019
|
13,184
|
|
2020
|
8,971
|
|
2021
|
6,920
|
|
2022
|
6,155
|
|
Thereafter
|
7,899
|
|
|
$
|
60,585
|
|
In the normal course of business, the Company is named as a defendant in various lawsuits in which claims are asserted against the Company. In the opinion of management, the liabilities, if any, which may ultimately result from lawsuits are not expected to have a material effect on the consolidated financial statements of the Company.
11. Fair Value Measurements
The Company follows the guidance in ASC 820, "Fair Value Measurements and Disclosures" as it relates to its financial and non-financial assets and liabilities. The accounting guidance applies to other accounting pronouncements that require or permit fair value measurements, defines fair value based upon an exit price model, establishes a framework for measuring fair value, and expands the applicable disclosure requirements. The accounting guidance indicates, among other things, that a fair value measurement assumes that a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.
The accounting guidance on fair value measurements establishes a fair market value hierarchy for the pricing inputs used to measure fair market value. The Company’s assets and liabilities measured at fair market value are classified in one of the following categories:
Level 1 — Assets or liabilities for which fair value is based on unadjusted quoted prices in active markets for identical instruments that are accessible as of the measurement date.
Level 2 — Assets or liabilities for which fair value is based on other significant pricing inputs that are either directly or indirectly observable.
Level 3 — Assets or liabilities for which fair value is based on significant unobservable pricing inputs to the extent little or no market data is available, which result in the use of management's own assumptions.
The following table sets forth by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis at
July 31, 2017
and
July 31, 2016
, according to the valuation techniques the Company used to determine their fair values.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inputs
Considered As
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical
Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Fair Values
|
|
Balance Sheet Classifications
|
July 31, 2016
|
|
|
|
|
|
|
|
Trading securities
|
$
|
13,834
|
|
|
$
|
—
|
|
|
$
|
13,834
|
|
|
Other assets
|
Foreign exchange contracts
|
—
|
|
|
2,138
|
|
|
2,138
|
|
|
Prepaid expenses and other current assets
|
Total Assets
|
$
|
13,834
|
|
|
$
|
2,138
|
|
|
$
|
15,972
|
|
|
|
Foreign exchange contracts
|
$
|
—
|
|
|
$
|
738
|
|
|
$
|
738
|
|
|
Other current liabilities
|
Total Liabilities
|
$
|
—
|
|
|
$
|
738
|
|
|
$
|
738
|
|
|
|
July 31, 2017
|
|
|
|
|
|
|
|
Trading securities
|
$
|
13,994
|
|
|
$
|
—
|
|
|
$
|
13,994
|
|
|
Other assets
|
Foreign exchange contracts
|
—
|
|
|
1,354
|
|
|
1,354
|
|
|
Prepaid expenses and other current assets
|
Total Assets
|
$
|
13,994
|
|
|
$
|
1,354
|
|
|
$
|
15,348
|
|
|
|
Foreign exchange contracts
|
$
|
—
|
|
|
$
|
1,577
|
|
|
$
|
1,577
|
|
|
Other current liabilities
|
Total Liabilities
|
$
|
—
|
|
|
$
|
1,577
|
|
|
$
|
1,577
|
|
|
|
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Trading securities:
The Company’s deferred compensation investments consist of investments in mutual funds. These investments were classified as Level 1 as the shares of these investments trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.
Foreign exchange contracts:
The Company’s foreign exchange contracts were classified as Level 2, as the fair value was based on the present value of the future cash flows using external models that use observable inputs, such as interest rates, yield curves and foreign exchange rates. See Note 12, “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 fiscal years ended
July 31, 2017
and
July 31, 2016
.
The Company’s financial instruments, other than those presented in the disclosures above, include cash and cash equivalents, accounts receivable, notes payable, accounts payable, accrued liabilities and short-term and long-term debt. The fair values of cash and cash equivalents, accounts receivable, notes payable, accounts payable, and accrued liabilities approximated carrying values because of the short-term nature of these instruments. See Note 6 for information regarding the fair value of the Company's short-term and long-term debt.
12. Derivatives and Hedging Activities
The Company utilizes forward foreign exchange contracts to reduce the exchange rate risk of specific foreign currency denominated transactions. These contracts typically require the exchange of a foreign currency for U.S. dollars at a fixed rate at a future date, with maturities of less than
18 months
, which qualify as cash flow hedges or net investment hedges under the accounting guidance for derivative instruments and hedging activities. The primary objective of the Company’s foreign currency exchange risk management program is to minimize the impact of currency movements due to transactions in other than the respective subsidiaries’ functional currency and to minimize the impact of currency movements on the Company’s net investment denominated in a currency other than the U.S. dollar. To achieve this objective, the Company hedges a portion of known exposures using forward foreign exchange contracts. As of
July 31, 2017
and
2016
, the notional amount of outstanding forward foreign exchange contracts was $
81,195
and $
186,093
, respectively.
The Company hedges a portion of known exposures using forward foreign exchange contracts. Main exposures are related to transactions denominated in the British Pound, the Euro, Canadian dollar, Australian dollar, Mexican Peso, Chinese Yuan,
Malaysian Ringgit and Singapore dollar. Generally, these risk management transactions will involve the use of foreign currency derivatives to minimize the impact of currency movements on non-functional currency transactions.
Hedge effectiveness is determined by how closely the changes in fair value of the hedging instrument offset the changes in the fair value or cash flows of the hedged item. Hedge accounting is permitted only if the hedging relationship is expected to be highly effective at the inception of the hedge and on an on-going basis. Gains or losses on the derivative related to hedge ineffectiveness are recognized in current earnings.
Cash Flow Hedges
The Company has designated a portion of its forward foreign exchange contracts as cash flow hedges and recorded these contracts at fair value in the accompanying Consolidated Balance Sheets. For these instruments, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. At
July 31, 2017
and
July 31, 2016
, unrealized losses of $
500
and $
761
have been included in OCI, respectively. These balances are expected to be reclassified from OCI to earnings during the next
twelve months
when the hedged transactions impact earnings. For the years ended July 31,
2017
,
2016
, and
2015
, the Company reclassified losses of
$486
and
$199
, and gains of
$1,325
from OCI into cost of goods sold, respectively.
As of
July 31, 2017
and
2016
, the notional amount of outstanding forward foreign exchange contracts designated as cash flow hedges was
$30,016
and
$34,540
, respectively.
Net Investment Hedges
The Company has also designated certain third party-foreign currency denominated debt instruments as net investment hedges. On May 13, 2010, the Company completed the private placement of
€75.0 million
aggregate principal amount of senior unsecured notes to accredited institutional investors. The
€75.0 million
of senior notes consisted of
€30.0 million
aggregate principal amount of
3.71%
Series 2010-A Senior Notes, which were repaid during fiscal 2017, and
€45.0 million
aggregate principal amount of
4.24%
Series 2010-A Senior Notes, due May 13, 2020. This Euro-denominated debt obligation was designated as a net investment hedge to selectively hedge portions of the Company's net investment in European foreign operations. As of
July 31, 2017
and
2016
, the cumulative balance recognized in accumulated other comprehensive income were gains of
$9,348
and
$11,140
, respectively, on the Euro-denominated debt obligations. The changes recognized in other comprehensive income during the years ended
July 31, 2017
,
2016
and
2015
, were losses of
$1,792
,
$1,372
and gains of
$18,008
, respectively, on the Euro-denominated debt obligations. The Company’s foreign denominated debt obligations are valued under a market approach using publicized spot prices.
Non-Designated Hedges
During the fiscal years ended
July 31, 2017
and
2016
, the Company recognized losses of
$2,508
and gains of
$2,162
, respectively, in “Investment and other income (expense)” in the accompanying Consolidated Statements of Earnings related to non-designated hedges.
Fair values of derivative and hedging instruments in the accompanying Consolidated Balance Sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
July 31, 2017
|
|
July 31, 2016
|
|
July 31, 2017
|
|
July 31, 2016
|
|
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
|
|
$
|
1,067
|
|
|
Prepaid expenses and other current assets
|
|
$
|
265
|
|
|
Other current liabilities
|
|
$
|
1,569
|
|
|
Other current liabilities
|
|
$
|
670
|
|
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
|
|
$
|
53,280
|
|
|
Long term obligations, less current maturities
|
|
$
|
116,888
|
|
Total derivatives designated as hedging instruments
|
|
|
$
|
1,067
|
|
|
|
|
$
|
265
|
|
|
|
|
$
|
54,849
|
|
|
|
|
$
|
117,558
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
287
|
|
|
Prepaid expenses and other current assets
|
|
$
|
1,873
|
|
|
Other current liabilities
|
|
$
|
7
|
|
|
Other current liabilities
|
|
$
|
68
|
|
Total derivatives not designated as hedging instruments
|
|
|
$
|
287
|
|
|
|
|
$
|
1,873
|
|
|
|
|
$
|
7
|
|
|
|
|
$
|
68
|
|
13. Discontinued Operations
Discontinued operations include the Asia Die-Cut and European Die-Cut businesses ("Die-Cut"), which were announced as held for sale in the third and fourth quarters of fiscal 2013, respectively. In fiscal 2014, the Company entered into an agreement with LTI Flexible Products, Inc. (d/b/a Boyd Corporation) for the sale of Die-Cut. The first phase of the divestiture closed in the fourth quarter of fiscal 2014 and the second phase of the divestiture closed in the first quarter of fiscal 2015. The operating results of the second phase of the divestiture were reflected as discontinued operations in the consolidated statements of earnings for the year ended July 31, 2015.
The following table summarizes the operating results of discontinued operations for the fiscal year ended July 31, 2015:
|
|
|
|
|
|
|
|
2015
|
Net sales (1)
|
|
$
|
—
|
|
Loss from discontinued operations (2)
|
|
(1,201
|
)
|
Income tax expense
|
|
(288
|
)
|
Loss on sale of discontinued operations (3)
|
|
(487
|
)
|
Income tax benefit on sale of discontinued operations
|
|
61
|
|
Loss from discontinued operations, net of income tax
|
|
$
|
(1,915
|
)
|
|
|
(1)
|
The second and final phase of the Die-Cut divestiture closed on August 1, 2014. Thus, there were no sales from discontinued operations in fiscal 2015.
|
|
|
(2)
|
The loss from discontinued operations in fiscal 2015 primarily related to professional fees and restructuring charges associated with the divestiture.
|
|
|
(3)
|
The second and final phase of the Die-Cut divestiture closed on August 1, 2014. Thus, a loss on the sale was recorded in the three months ended October 31, 2014.
|
There were no assets or liabilities held for sale as of July 31, 2015, 2016, or 2017. In accordance with authoritative literature, accumulated other comprehensive income of
$34,697
was reclassified to the statement of earnings upon the closing of the second phase of the Die-Cut divestiture during the three months ended October 31, 2014.
14. Unaudited Quarterly Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
|
Fiscal 2016
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
283,073
|
|
|
$
|
268,630
|
|
|
$
|
286,816
|
|
|
$
|
282,106
|
|
|
$
|
1,120,625
|
|
Gross margin
|
|
139,349
|
|
|
132,892
|
|
|
145,443
|
|
|
141,089
|
|
|
558,773
|
|
Operating income
|
|
30,102
|
|
|
23,589
|
|
|
30,784
|
|
|
33,403
|
|
|
117,878
|
|
Net earnings
|
|
18,703
|
|
|
15,290
|
|
|
20,981
|
|
|
25,136
|
|
|
80,110
|
|
Net earnings per Class A Nonvoting Common Share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.37
|
|
|
$
|
0.30
|
|
|
$
|
0.42
|
|
|
$
|
0.50
|
|
|
$
|
1.59
|
|
Diluted
|
|
$
|
0.37
|
|
|
$
|
0.30
|
|
|
$
|
0.42
|
|
|
$
|
0.49
|
|
|
$
|
1.58
|
|
Fiscal 2017
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
280,176
|
|
|
$
|
268,001
|
|
|
$
|
275,927
|
|
|
$
|
289,212
|
|
|
$
|
1,113,316
|
|
Gross margin
|
|
140,358
|
|
|
134,158
|
|
|
139,909
|
|
|
143,867
|
|
|
558,292
|
|
Operating income
|
|
33,208
|
|
|
29,962
|
|
|
31,550
|
|
|
36,295
|
|
|
131,015
|
|
Net earnings
|
|
22,553
|
|
|
25,297
|
|
|
22,553
|
|
|
25,242
|
|
|
95,645
|
|
Net earnings per Class A Nonvoting Common Share:
|
|
|
|
|
|
|
|
|
|
|
Basic *
|
|
$
|
0.45
|
|
|
$
|
0.50
|
|
|
$
|
0.44
|
|
|
$
|
0.49
|
|
|
$
|
1.87
|
|
Diluted
|
|
$
|
0.44
|
|
|
$
|
0.49
|
|
|
$
|
0.43
|
|
|
$
|
0.48
|
|
|
$
|
1.84
|
|
* The sum of the quarters does not equal the year-to-date total for fiscal 2017 due to the quarterly changes in weighted-average shares outstanding.
15. Subsequent Events
On
September 6, 2017
, the Company announced an increase in the annual dividend to shareholders of the Company's Class A Common Stock, from
$0.82
to
$0.83
per share. A quarterly dividend of
$0.2075
will be paid on
October 31, 2017
, to shareholders of record at the close of business on
October 10, 2017
. This dividend represents an increase of
1.2%
and is the
32nd
consecutive annual increase in dividends.