NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended
April 30, 2016
(Unaudited)
(In thousands, except share and per share amounts)
NOTE A — Basis of Presentation
The condensed consolidated financial statements included herein have been prepared by Brady Corporation and subsidiaries (the "Company," "Brady," "we," or "our") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, the foregoing statements contain all adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial position of the Company as of
April 30, 2016
and
July 31, 2015
, its results of operations and comprehensive income (loss) for the three and
nine months ended April 30, 2016
and
2015
, and cash flows for the
nine months ended April 30, 2016
and
2015
. The consolidated balance sheet as of
July 31, 2015
has been derived from the audited consolidated financial statements of that date. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts therein. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from the estimates.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to rules and regulations of the Securities and Exchange Commission. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statement presentation. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest annual report on Form 10-K for the year ended
July 31, 2015
.
The results of operations of the Company's Die-Cut business have been reported as discontinued operations within the condensed consolidated statements of earnings for the
nine months ended April 30, 2015
. A portion of the Die-Cut business was divested in fiscal 2014 and the remainder was divested in the first quarter of fiscal 2015. In accordance with the authoritative literature, the Company has elected to not separately disclose the cash flows or other comprehensive income related to discontinued operations. Refer to Note J, "Discontinued Operations" for further discussion regarding the business.
NOTE B — Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the
nine months ended April 30, 2016
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IDS
|
|
WPS
|
|
Total
|
Balance as of July 31, 2015
|
$
|
382,786
|
|
|
$
|
50,413
|
|
|
$
|
433,199
|
|
Translation adjustments
|
4,128
|
|
|
(1,136
|
)
|
|
$
|
2,992
|
|
Balance as of April 30, 2016
|
$
|
386,914
|
|
|
$
|
49,277
|
|
|
$
|
436,191
|
|
Goodwill at
April 30, 2016
and
July 31, 2015
included
$118,637
and
$209,392
of accumulated impairment losses within the Identification Solutions ("IDS") and Workplace Safety ("WPS") segments, respectively, for a total of
$328,029
. There were no impairment charges recorded during the
nine months ended April 30, 2016
. The increase in the carrying amount of Goodwill as of
April 30, 2016
compared to
July 31, 2015
was due to the effect of currency fluctuations during the nine-month period.
Other intangible assets include patents, trademarks, 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 Company also has unamortized indefinite-lived trademarks that are classified as other intangible assets. The net book value of these assets was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2016
|
|
July 31, 2015
|
|
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
|
|
$
|
12,218
|
|
|
$
|
(10,989
|
)
|
|
$
|
1,229
|
|
|
5
|
|
$
|
12,073
|
|
|
$
|
(10,641
|
)
|
|
$
|
1,432
|
|
Trademarks and other
|
5
|
|
14,459
|
|
|
(13,713
|
)
|
|
746
|
|
|
5
|
|
14,375
|
|
|
(12,471
|
)
|
|
1,904
|
|
Customer relationships
|
7
|
|
137,520
|
|
|
(100,621
|
)
|
|
36,899
|
|
|
7
|
|
136,693
|
|
|
(94,537
|
)
|
|
42,156
|
|
Non-compete agreements and other
|
4
|
|
9,184
|
|
|
(9,168
|
)
|
|
16
|
|
|
4
|
|
9,076
|
|
|
(9,032
|
)
|
|
44
|
|
Unamortized other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
N/A
|
|
23,370
|
|
|
—
|
|
|
23,370
|
|
|
N/A
|
|
23,352
|
|
|
—
|
|
|
23,352
|
|
Total
|
|
|
$
|
196,751
|
|
|
$
|
(134,491
|
)
|
|
$
|
62,260
|
|
|
|
|
$
|
195,569
|
|
|
$
|
(126,681
|
)
|
|
$
|
68,888
|
|
The increase in the gross carrying amount of other intangible assets as of
April 30, 2016
compared to
July 31, 2015
was primarily due to the effect of currency fluctuations during the nine-month period.
Amortization expense on intangible assets was
$1,838
and $
2,900
for the
three months ended April 30, 2016
and
2015
, respectively, and
$7,066
and
$9,251
for the
nine months ended April 30, 2016
and
2015
, respectively. The amortization expense over each of the next five fiscal years is projected to be $
8,881
, $
7,175
, $
6,471
, $
6,181
and $
5,628
for the fiscal years ending July 31,
2016
,
2017
,
2018
,
2019
and
2020
, respectively.
NOTE C — Other Comprehensive Income (Loss)
Other comprehensive income (loss) ("OCI") consists of foreign currency translation adjustments, unrealized gains and losses from cash flow hedges and net investment hedges, and the unamortized gain on post-retirement plans, net of their related tax effects.
The following table illustrates the changes in the balances of each component of accumulated other comprehensive loss, net of tax, for the
nine months ended April 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on cash flow hedges
|
|
Unamortized gain on post-retirement plans
|
|
Foreign currency translation adjustments
|
|
Accumulated other comprehensive loss
|
Beginning balance, July 31, 2015
|
$
|
9
|
|
|
$
|
3,438
|
|
|
$
|
(48,481
|
)
|
|
$
|
(45,034
|
)
|
Other comprehensive (loss) income before reclassification
|
(368
|
)
|
|
(2
|
)
|
|
4,634
|
|
|
4,264
|
|
Amounts reclassified from accumulated other comprehensive loss
|
(106
|
)
|
|
(1,520
|
)
|
|
—
|
|
|
(1,626
|
)
|
Ending balance, April 30, 2016
|
$
|
(465
|
)
|
|
$
|
1,916
|
|
|
$
|
(43,847
|
)
|
|
$
|
(42,396
|
)
|
The decrease in accumulated other comprehensive loss as of
April 30, 2016
compared to
July 31, 2015
was primarily due to the depreciation of the U.S. dollar against certain other currencies during the nine-month period. The foreign currency translation adjustments column in the table above includes the impact of foreign currency translation, foreign currency translation on intercompany notes, and the settlements of net investment hedges, net of tax. Of the total
$1,626
in amounts reclassified from accumulated other comprehensive loss, the
$106
gain on cash flow hedges was reclassified into cost of products sold, and the
$1,520
gain on post-retirement plans was reclassified into selling, general and administrative expenses ("SG&A") on the condensed consolidated statement of earnings for the
nine months ended April 30, 2016
.
The changes in accumulated other comprehensive income (loss) by component, net of tax, for the
nine months ended April 30, 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on cash flow hedges
|
|
Unamortized gain on post-retirement plans
|
|
Foreign currency translation adjustments
|
|
Accumulated other comprehensive income (loss)
|
Beginning balance, July 31, 2014
|
$
|
(12
|
)
|
|
$
|
4,854
|
|
|
$
|
59,314
|
|
|
$
|
64,156
|
|
Other comprehensive income (loss) before reclassification
|
927
|
|
|
1,639
|
|
|
(57,296
|
)
|
|
(54,730
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
(337
|
)
|
|
(2,331
|
)
|
|
(34,697
|
)
|
|
(37,365
|
)
|
Ending balance, April 30, 2015
|
$
|
578
|
|
|
$
|
4,162
|
|
|
$
|
(32,679
|
)
|
|
$
|
(27,939
|
)
|
The decrease in accumulated other comprehensive income (loss) as of
April 30, 2015
compared to
July 31, 2014
was primarily due the appreciation of the U.S. dollar against other currencies, most of which was realized during the six month period ended January 31, 2015. The decrease was also attributable to the accumulated foreign currency translation gains in the China Die-Cut businesses, which were reclassified into net earnings upon the completion of the second phase of the Die-Cut divestiture during the three months ended October 31, 2014. The foreign currency translation adjustments column in the table above includes the impact of foreign currency translation, foreign currency translation on intercompany notes, and the settlements of net investment hedges, net of tax. Of the total
$37,365
in amounts reclassified from accumulated other comprehensive income (loss), the
$34,697
gain was reclassified to the net loss on the sale of the Die-Cut business, the
$337
gain on cash flow hedges was reclassified into cost of products sold, and the
$2,331
gain due to curtailment of the post-retirement medical benefit plan was reclassified into SG&A on the condensed consolidated statement of earnings for the
nine months ended April 30, 2015
.
The following table illustrates the income tax expense on the components of other comprehensive income (loss) for the three and
nine months ended April 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30,
|
|
Nine months ended April 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Income tax benefit (expense) related to items of other comprehensive income (loss):
|
|
|
|
|
|
|
|
Net investment hedge translation adjustments
|
$
|
1,456
|
|
|
$
|
(158
|
)
|
|
$
|
75
|
|
|
$
|
(8,125
|
)
|
Long-term intercompany loan settlements
|
—
|
|
|
(61
|
)
|
|
—
|
|
|
489
|
|
Cash flow hedges
|
(126
|
)
|
|
352
|
|
|
428
|
|
|
(245
|
)
|
Pension and other post-retirement benefits
|
25
|
|
|
—
|
|
|
27
|
|
|
—
|
|
Other income tax adjustments and currency translation
|
(42
|
)
|
|
117
|
|
|
(52
|
)
|
|
151
|
|
Income tax benefit (expense) related to items of other comprehensive income (loss)
|
$
|
1,313
|
|
|
$
|
250
|
|
|
$
|
478
|
|
|
$
|
(7,730
|
)
|
NOTE D — Net Earnings per Common Share
Reconciliations of the numerator and denominator of the basic and diluted per share computations for the Company’s Class A and Class B common stock are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30,
|
|
Nine months ended April 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Numerator: (in thousands)
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
$
|
20,981
|
|
|
$
|
17,213
|
|
|
$
|
54,974
|
|
|
$
|
44,296
|
|
Less:
|
|
|
|
|
|
|
|
Preferential dividends
|
—
|
|
|
—
|
|
|
(783
|
)
|
|
(794
|
)
|
Preferential dividends on dilutive stock options
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
Numerator for basic and diluted earnings from continuing operations per Class B Voting Common Share
|
$
|
20,981
|
|
|
$
|
17,213
|
|
|
$
|
54,190
|
|
|
$
|
43,501
|
|
Denominator: (in thousands)
|
|
|
|
|
|
|
|
Denominator for basic earnings from continuing operations per share for both Class A and Class B
|
50,251
|
|
|
51,301
|
|
|
50,602
|
|
|
51,275
|
|
Plus: Effect of dilutive stock options
|
254
|
|
|
149
|
|
|
145
|
|
|
95
|
|
Denominator for diluted earnings from continuing operations per share for both Class A and Class B
|
50,505
|
|
|
51,450
|
|
|
50,747
|
|
|
51,370
|
|
Earnings from continuing operations per Class A Nonvoting Common Share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.42
|
|
|
$
|
0.34
|
|
|
$
|
1.09
|
|
|
$
|
0.86
|
|
Diluted
|
$
|
0.42
|
|
|
$
|
0.33
|
|
|
$
|
1.08
|
|
|
$
|
0.86
|
|
Earnings from continuing operations per Class B Voting Common Share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.42
|
|
|
$
|
0.34
|
|
|
$
|
1.07
|
|
|
$
|
0.85
|
|
Diluted
|
$
|
0.42
|
|
|
$
|
0.33
|
|
|
$
|
1.07
|
|
|
$
|
0.85
|
|
Loss from discontinued operations per Class A Nonvoting Common Share:
|
|
|
|
|
|
|
|
Basic
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.03
|
)
|
Diluted
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.03
|
)
|
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
|
$
|
0.42
|
|
|
$
|
0.34
|
|
|
$
|
1.09
|
|
|
$
|
0.83
|
|
Diluted
|
$
|
0.42
|
|
|
$
|
0.33
|
|
|
$
|
1.08
|
|
|
$
|
0.83
|
|
Net earnings per Class B Voting Common Share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.42
|
|
|
$
|
0.34
|
|
|
$
|
1.07
|
|
|
$
|
0.81
|
|
Diluted
|
$
|
0.42
|
|
|
$
|
0.33
|
|
|
$
|
1.07
|
|
|
$
|
0.81
|
|
Options to purchase approximately
2,480,000
and
2,836,000
shares of Class A Nonvoting Common Stock for the
three months ended April 30, 2016
and
2015
, respectively, and
3,525,000
and
3,531,000
shares for the
nine months ended April 30, 2016
and
2015
, respectively, were not included in the computation of diluted net earnings or loss per share because the option exercise price was greater than the average market price of the common shares and, therefore, the effect would have been anti-dilutive.
NOTE E — Segment Information
The Company is organized and managed on a global basis within three business platforms, ID Solutions, Workplace Safety, and People Identification ("PeopleID"), which aggregate into two reportable segments: IDS and WPS.
The Company evaluates short-term segment performance based on segment profit or loss and customer sales. Segment profit or loss does not include certain administrative costs, such as the cost of finance, information technology, human resources, legal, and executive leadership, which are managed as global functions. Restructuring charges, impairment charges, equity compensation costs, interest expense, investment and other income (expense) and income taxes are also excluded when evaluating segment performance.
Each business platform has a President or Vice-President that reports directly to the Company's chief operating decision maker, its Chief Executive Officer. Each platform has its own distinct operations, which are managed locally by its own management team, maintains its own financial reports and is evaluated based on global segment profit. The Company has determined that these business platforms comprise its three operating segments, which aggregate into two reportable segments based on the information used by the Chief Executive Officer to allocate resources and assess performance.
The segment results have been adjusted to reflect continuing operations in all periods presented. The following is a summary of segment information for the three and
nine months ended April 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30,
|
|
Nine months ended April 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Sales to External Customers
|
|
|
|
|
|
|
|
ID Solutions
|
$
|
196,953
|
|
|
$
|
200,786
|
|
|
$
|
578,160
|
|
|
$
|
604,948
|
|
Workplace Safety
|
89,863
|
|
|
89,441
|
|
|
260,359
|
|
|
278,147
|
|
Total Company
|
$
|
286,816
|
|
|
$
|
290,227
|
|
|
$
|
838,519
|
|
|
$
|
883,095
|
|
Segment Profit
|
|
|
|
|
|
|
|
ID Solutions
|
$
|
46,445
|
|
|
$
|
41,614
|
|
|
$
|
123,451
|
|
|
$
|
120,800
|
|
Workplace Safety
|
13,759
|
|
|
12,292
|
|
|
43,818
|
|
|
40,607
|
|
Total Company
|
$
|
60,204
|
|
|
$
|
53,906
|
|
|
$
|
167,269
|
|
|
$
|
161,407
|
|
The following is a reconciliation of segment profit to earnings from continuing operations before income taxes for the three and
nine months ended April 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30,
|
|
Nine months ended April 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Total profit from reportable segments
|
$
|
60,204
|
|
|
$
|
53,906
|
|
|
$
|
167,269
|
|
|
$
|
161,407
|
|
Unallocated amounts:
|
|
|
|
|
|
|
|
Administrative costs
|
(29,420
|
)
|
|
(24,787
|
)
|
|
(82,794
|
)
|
|
(79,347
|
)
|
Restructuring charges
|
—
|
|
|
(4,834
|
)
|
|
—
|
|
|
(13,991
|
)
|
Investment and other income (expense)
|
721
|
|
|
434
|
|
|
(1,030
|
)
|
|
968
|
|
Interest expense
|
(1,838
|
)
|
|
(2,503
|
)
|
|
(6,119
|
)
|
|
(8,394
|
)
|
Earnings from continuing operations before income taxes
|
$
|
29,667
|
|
|
$
|
22,216
|
|
|
$
|
77,326
|
|
|
$
|
60,643
|
|
NOTE F – Stock-Based Compensation
The Company has an incentive stock plan under which the Board of Directors may grant nonqualified stock options to purchase shares of Class A Nonvoting Common Stock, restricted stock units ("RSUs"), or restricted and unrestricted shares of Class A Nonvoting Common Stock to employees and non-employee directors.
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.
RSUs issued under the plan have an issuance price equal to the fair market value of the underlying stock at the date of grant. The 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. Shares issued under the plan are referred to herein as "service-based" RSUs.
As of
April 30, 2016
, the Company has reserved
4,630,354
shares of Class A Nonvoting Common Stock for outstanding stock options, RSUs, and restricted shares and
2,368,731
shares of Class A Nonvoting Common Stock remain for future issuance of stock options, RSUs, and restricted and unrestricted shares under the active plan. The Company uses treasury stock or will issue new Class A Nonvoting Common Stock to deliver shares under the plan.
The Company recognizes the compensation cost of all share-based awards at the time it is deemed probable the award will vest. This cost is recognized on a straight-line basis over the vesting period of the award. If it is determined that it is unlikely the award will vest, the expense recognized to date for the award is reversed in the period in which this is evident and the remaining expense is not recorded. Total stock-based compensation expense recognized by the Company during the
three months ended April 30, 2016
and
2015
, was
$1,678
(
$1,040
net of taxes) and
$1,085
(
$673
net of taxes), respectively. Expense recognized during the
nine months ended April 30, 2016
and
2015
, was
$6,247
(
$3,873
net of taxes) and
$3,556
(
$2,205
net of taxes), respectively.
As of
April 30, 2016
, total unrecognized compensation cost related to stock-based compensation awards was
$17,206
pre-tax, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of
2.6
years.
The Company has estimated the fair value of its service-based stock option awards granted during the
nine months ended April 30, 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:
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended April 30,
|
Black-Scholes Option Valuation Assumptions
|
|
2016
|
|
2015
|
Expected term (in years)
|
|
6.11
|
|
|
6.06
|
|
Expected volatility
|
|
29.95
|
%
|
|
34.05
|
%
|
Expected dividend yield
|
|
2.59
|
%
|
|
2.48
|
%
|
Risk-free interest rate
|
|
1.64
|
%
|
|
1.91
|
%
|
Weighted-average market value of underlying stock at grant date
|
|
$
|
20.02
|
|
|
$
|
22.73
|
|
Weighted-average exercise price
|
|
$
|
20.02
|
|
|
$
|
22.73
|
|
Weighted-average fair value of options granted during the period
|
|
$
|
4.58
|
|
|
$
|
6.12
|
|
The Company uses historical data regarding stock option exercise behaviors to estimate the expected term of options granted based on the period of time that options granted are expected to be outstanding. Expected volatilities are based on the historical volatility of the Company’s stock. The expected dividend yield is based on the Company’s historical dividend payments and historical yield. The risk-free interest rate is based on the U.S. Treasury yield curve in effect on the grant date for the length of time corresponding to the expected term of the option. The market value is calculated as the average of the high and the low stock price on the date of the grant.
A summary of stock option activity under the Company’s share-based compensation plans for the
nine months ended April 30, 2016
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
Outstanding at July 31, 2015
|
|
3,500,951
|
|
$
|
29.64
|
|
|
|
|
|
New grants
|
|
881,744
|
|
20.02
|
|
|
|
|
|
Exercised
|
|
(28,782)
|
|
23.04
|
|
|
|
|
|
Forfeited or expired
|
|
(449,029)
|
|
30.90
|
|
|
|
|
|
Outstanding at April 30, 2016
|
|
3,904,884
|
|
$
|
27.37
|
|
|
5.7
|
|
$
|
7,963,025
|
|
Exercisable at April 30, 2016
|
|
2,679,527
|
|
$
|
30.09
|
|
|
4.2
|
|
$
|
1,483,578
|
|
There were
2,679,527
and
2,706,566
options exercisable with a weighted average exercise price of
$30.09
and
$30.84
at
April 30, 2016
and
2015
, respectively. The cash received from the exercise of options during the
three months ended April 30, 2016
and
2015
was
$610
and
$744
, respectively. The cash received from the exercise of options during the
nine months ended April 30, 2016
and
2015
was
$663
and
$1,591
, respectively. The tax benefit on options exercised during the
three months ended April 30, 2016
and
2015
was
$37
and
$35
, respectively. The tax benefit on options exercised during the
nine months ended April 30, 2016
and
2015
was
$40
and
$79
, respectively.
The total intrinsic value of options exercised during the
nine months ended April 30, 2016
and
2015
, based upon the average market price at the time of exercise during the period, was
$105
and
$202
, respectively. The total fair value of stock options vested during the
nine months ended April 30, 2016
and
2015
, was
$3,193
and
$3,909
, respectively.
The following table summarizes the RSU activity under the Company's share-based compensation plans for the
nine months ended April 30, 2016
:
|
|
|
|
|
|
|
|
|
Service-Based RSUs
|
|
Shares
|
|
Weighted
Average
Grant Date Fair Value
|
Outstanding at July 31, 2015
|
|
677,454
|
|
|
$
|
24.72
|
|
New grants
|
|
173,394
|
|
|
20.07
|
|
Vested
|
|
(72,164
|
)
|
|
25.12
|
|
Forfeited
|
|
(53,214
|
)
|
|
23.77
|
|
Outstanding at April 30, 2016
|
|
725,470
|
|
|
$
|
23.64
|
|
The service-based RSUs granted during the
nine months ended April 30, 2015
had a weighted-average grant date fair value of $
23.59
.
The aggregate intrinsic value of unvested RSUs expected to vest at
April 30, 2016
was
$19,218
. The total fair value of RSUs vested during the
nine months ended April 30, 2016
and
2015
, was $
1,471
and $
805
, respectively.
NOTE G – Employee Benefit Plans
The components of net periodic postretirement benefit cost for the three and nine months ended April 30, 2016 and 2015 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 30,
|
|
Nine months ended April 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Components of net periodic postretirement benefit cost:
|
|
|
|
|
|
|
|
Service cost
|
$
|
2
|
|
|
$
|
40
|
|
|
$
|
6
|
|
|
$
|
203
|
|
Interest cost
|
29
|
|
|
35
|
|
|
86
|
|
|
177
|
|
Amortization of prior service credit
|
—
|
|
|
(40
|
)
|
|
(1,035
|
)
|
|
(202
|
)
|
Amortization of net actuarial gain
|
(161
|
)
|
|
(106
|
)
|
|
(484
|
)
|
|
(540
|
)
|
Curtailment gain
|
—
|
|
|
(4,296
|
)
|
|
—
|
|
|
(4,296
|
)
|
Net periodic postretirement benefit cost
|
$
|
(130
|
)
|
|
$
|
(4,367
|
)
|
|
$
|
(1,427
|
)
|
|
$
|
(4,658
|
)
|
In March 2015, the Company announced the elimination of 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 liability of
$4,490
and a curtailment gain of
$4,296
. The curtailment gain was recognized in SG&A on the condensed consolidated statements of earnings, during the three months ended April 30, 2015.
NOTE H — Fair Value Measurements
In accordance with fair value accounting guidance, the Company’s assets and liabilities measured at fair market value are classified in one of the following categories:
Level 1
— Assets or liabilities for which fair value is based on unadjusted quoted prices in active markets for identical instruments that are accessible as of the reporting date.
Level 2
— Assets or liabilities for which fair value is based on other significant pricing inputs that are either directly or indirectly observable.
Level 3
— Assets or liabilities for which fair value is based on significant unobservable pricing inputs to the extent little or no market data is available, which result in the use of management's own assumptions.
The following tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis at
April 30, 2016
and
July 31, 2015
, 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
|
April 30, 2016
|
|
|
|
|
|
|
|
Trading securities
|
$
|
13,567
|
|
|
$
|
—
|
|
|
$
|
13,567
|
|
|
Other assets
|
Foreign exchange contracts
|
—
|
|
|
855
|
|
|
855
|
|
|
Prepaid expenses and other current assets
|
Total Assets
|
$
|
13,567
|
|
|
$
|
855
|
|
|
$
|
14,422
|
|
|
|
Foreign exchange contracts
|
$
|
—
|
|
|
$
|
802
|
|
|
$
|
802
|
|
|
Other current liabilities
|
Total Liabilities
|
$
|
—
|
|
|
$
|
802
|
|
|
$
|
802
|
|
|
|
July 31, 2015
|
|
|
|
|
|
|
|
Trading securities
|
$
|
15,356
|
|
|
$
|
—
|
|
|
$
|
15,356
|
|
|
Other assets
|
Foreign exchange contracts
|
—
|
|
|
685
|
|
|
685
|
|
|
Prepaid expenses and other current assets
|
Total Assets
|
$
|
15,356
|
|
|
$
|
685
|
|
|
$
|
16,041
|
|
|
|
Foreign exchange contracts
|
$
|
—
|
|
|
$
|
1,280
|
|
|
$
|
1,280
|
|
|
Other current liabilities
|
Total Liabilities
|
$
|
—
|
|
|
$
|
1,280
|
|
|
$
|
1,280
|
|
|
|
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 with observable inputs, such as interest rates, yield curves and foreign exchange rates. See Note I, “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
nine months ended April 30, 2016
and
2015
. In addition, the Company had no significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition during the
nine months ended April 30, 2016
.
During fiscal 2015, goodwill with carrying amounts of
$26,246
and
$10,866
in the WPS APAC and WPS Americas reporting units, respectively, was written off entirely, resulting in impairment charges of
$37,112
. In order to arrive at the implied fair value of goodwill, the Company calculated the fair value of all of the assets and liabilities of the reporting unit as if it had been acquired in a business combination. After assigning fair value to the assets and liabilities of the reporting unit, it was determined there was no excess fair value of the reporting units over the implied fair value of goodwill and thus, the remaining goodwill balances were impaired in fiscal 2015. The goodwill balances represented a Level 3 asset measured at fair value on a nonrecurring basis subsequent to their original recognition.
During fiscal 2015, management evaluated other indefinite-lived intangible assets for recoverability using the income approach. The valuation was based upon current sales projections and profitability for each asset group, and the relief from royalty method was applied. Management evaluated other finite-lived intangible assets for recoverability using an undiscounted cash flow analysis based upon current sales projections and profitability for each asset group. This analysis resulted in an amount that was less than the carrying value of certain finite-lived intangible assets. Management measured the impairment loss of both indefinite and finite-lived intangible assets as the amount by which the carrying amount of the assets exceeded their fair value. As a result, other intangible assets with a carrying amount of
$26,194
were written down to their estimated fair value of
$19,543
. These represented Level 3 assets measured at fair value on a nonrecurring basis subsequent to their original recognition. These items resulted in a total impairment charge of
$6,651
in fiscal 2015.
The Company’s financial instruments, other than those presented in the disclosures above, include cash and cash equivalents, accounts receivable, notes payable, accounts payable, and other liabilities. The fair values of these financial instruments approximated carrying values because of their short-term nature.
The estimated fair value of the Company’s short-term and long-term debt obligations, excluding notes payable, based on the quoted market prices for similar issues and on the current rates offered for debt of similar maturities was
$243,800
and
$252,254
at
April 30, 2016
and
July 31, 2015
, respectively, as compared to the carrying value of
$236,310
and
$243,288
at
April 30, 2016
and
July 31, 2015
, respectively.
NOTE I — Derivatives and Hedging Activities
The Company utilizes forward foreign exchange currency contracts to reduce the exchange rate risk of specific foreign currency denominated transactions. These contracts typically require the exchange of a foreign currency for U.S. dollars at a fixed rate at a future date, with maturities of less than
18 months
, which qualify as cash flow hedges or net investment hedges under the accounting guidance for derivative instruments and hedging activities. The primary objective of the Company’s foreign currency exchange risk management program is to minimize the impact of currency movements due to transactions in other than the respective subsidiaries’ functional currency and to minimize the impact of currency movements on the Company’s net investment denominated in a currency other than the U.S. Dollar. To achieve this objective, the Company hedges a portion of known exposures using forward foreign exchange currency contracts. As of
April 30, 2016
and
July 31, 2015
, the notional amount of outstanding forward exchange contracts was $
127,105
and
$139,300
, respectively.
The Company hedges a portion of known exposures using forward exchange contracts. Main exposures are related to transactions denominated in the British Pound, the Euro, Canadian Dollar, Australian Dollar, Mexican Peso, 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 foreign exchange contracts as cash flow hedges and recorded these contracts at fair value on the condensed consolidated balance sheets. For these instruments, the effective portion of the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. As of
April 30, 2016
and
2015
, unrealized losses of
$605
and unrealized gains of
$813
have been included in OCI, respectively. Balances are reclassified from OCI to earnings when the hedged transactions impact earnings. For the
three months ended April 30, 2016
and
2015
, the Company reclassified losses of
$169
and gains of
$457
from OCI into earnings, respectively. For the
nine months ended April 30, 2016
and
2015
, the Company reclassified gains of
$174
and
$552
from OCI into earnings, respectively. At
April 30, 2016
, the U.S. dollar equivalent of these outstanding forward foreign exchange contracts totaled $
42,850
, including contracts to sell Euros, Canadian Dollars, Australian Dollars, and U.S. Dollars.
Net Investment Hedges
The Company has also designated intercompany and third party foreign currency denominated debt instruments as net investment hedges. At
April 30, 2016
, the Company designated £
25,036
of intercompany loans as net investment hedges to hedge portions of its net investment in British foreign operations. On May 13, 2010, the Company completed the private placement of
€75
million aggregate principal amount of senior unsecured notes to accredited institutional investors. This Euro-denominated debt obligation was designated as a net investment hedge to selectively hedge portions of its net investment in European operations. The Company’s foreign denominated debt obligations are valued under a market approach using publicized spot prices.
Non-Designated Hedges
For the three and
nine months ended April 30, 2016
, the Company recognized gains of $
1,410
and
$897
respectively, in “Investment and other income” on the condensed consolidated statements of earnings related to non-designated hedges. For the three and
nine months ended April 30, 2015
, the Company recognized losses of
$667
and gains of
$1,287
, respectively.
Fair values of derivative instruments in the condensed consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
April 30, 2016
|
|
July 31, 2015
|
|
April 30, 2016
|
|
July 31, 2015
|
|
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
|
|
$
|
327
|
|
|
Prepaid expenses and other current assets
|
|
$
|
518
|
|
|
Other current liabilities
|
|
$
|
668
|
|
|
Other current liabilities
|
|
$
|
737
|
|
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
|
|
121,705
|
|
|
Long term obligations, less current maturities
|
|
121,514
|
|
Total derivatives designated as hedging instruments
|
|
|
$
|
327
|
|
|
|
|
$
|
518
|
|
|
|
|
$
|
122,373
|
|
|
|
|
$
|
122,251
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
528
|
|
|
Prepaid expenses and other current assets
|
|
$
|
168
|
|
|
Other current liabilities
|
|
$
|
134
|
|
|
Other current liabilities
|
|
$
|
543
|
|
Total derivatives not designated as hedging instruments
|
|
|
$
|
528
|
|
|
|
|
$
|
168
|
|
|
|
|
$
|
134
|
|
|
|
|
$
|
543
|
|
NOTE J — Discontinued Operations
The Company entered into an agreement with LTI Flexible Products, Inc. (d/b/a Boyd Corporation) on February 24, 2014, for the sale of the Die-Cut business. The first phase of this divestiture closed on May 1, 2014 and included the Die-Cut businesses in Korea, Thailand and Malaysia, and the Balkhausen business in Europe. The remainder of the Die-Cut business was located in China and it was divested on August 1, 2014. The operating results have been reported as discontinued operations for the three and nine month periods ended
April 30, 2015
.
The following table summarizes the operating results of discontinued operations for the
nine months ended April 30, 2015
:
|
|
|
|
|
|
|
|
Nine months ended April 30, 2015
|
Net sales
|
|
$
|
—
|
|
Loss from operations of discontinued businesses
|
|
(1,201
|
)
|
Income tax expense
|
|
(288
|
)
|
Loss on sale of discontinued operations
|
|
(487
|
)
|
Income tax benefit on sale of discontinued operations
|
|
61
|
|
Loss from discontinued operations, net of income tax
|
|
$
|
(1,915
|
)
|
There were no assets or liabilities held for sale as of
April 30, 2016
or
July 31, 2015
. In accordance with authoritative literature, accumulated other comprehensive income of
$34,697
was reclassified to the condensed consolidated statements of earnings upon the closing of the second phase of the Die-Cut divestiture during the three months ended October 31, 2014.
NOTE K — New Accounting Pronouncements
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 (APIC). 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 is currently evaluating the impact of this update on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases," which replaces the current lease accounting standard. The update will require, among other items, lessees to recognize the assets and liabilities that arise from most leases on the balance sheet. This guidance is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The ASU must be adopted using a modified retrospective approach and early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes," which requires companies to classify deferred tax assets and liabilities as non-current on the balance sheet. This guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The ASU may be applied either prospectively or retrospectively and early adoption is permitted. The Company does not expect this update to have a meaningful 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. Under the new guidance, companies should recognize revenues in amounts that reflect the payment to which a company expects to be entitled in exchange for those goods or services.
In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers - Principal versus Agent Considerations (Reporting Revenue Gross versus Net)", which amends the principal-versus-agent implementation guidance in ASU 2014-09. ASU 2016-08 clarifies the principal-versus-agent guidance in ASU 2014-09 and requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on that designation.
In May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers - Narrow-Scope Improvements and Practical Expedients", which amends the transition, collectibility, and non-cash consideration guidance in ASU 2014-09. ASU 2016-08 clarifies clarify that, for a contract to be considered completed at transition, substantially all of the revenue must have been recognized under legacy GAAP. The amendments also clarify how an entity should evaluate the collectibility threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria.
ASU 2014-09 (and related updates) is effective for the Company beginning in fiscal 2019. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the standard. The Company is currently evaluating the impact of this update on its consolidated financial statements.
NOTE L — Subsequent Events
On May 18, 2016, the Board of Directors declared a quarterly cash dividend to shareholders of the Company’s Class A and Class B Common Stock of
$0.2025
per share payable on July 29, 2016, to shareholders of record at the close of business on July 8, 2016.