NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended
January 31, 2017
(Unaudited)
(In thousands, except share and per share amounts)
NOTE A — Basis of Presentation
The condensed consolidated financial statements included herein have been prepared by Brady Corporation and subsidiaries (the "Company," "Brady," "we," or "our") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, the foregoing statements contain all adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial position of the Company as of
January 31, 2017
and
July 31, 2016
, its results of operations and comprehensive income for the three and
six months ended January 31, 2017
and
2016
, and cash flows for the
six months ended January 31, 2017
and
2016
. The consolidated balance sheet as of
July 31, 2016
has been derived from the audited consolidated financial statements as of that date. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts therein. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from the estimates.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to rules and regulations of the Securities and Exchange Commission. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statement presentation. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the year ended
July 31, 2016
.
NOTE B — Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the
six months ended January 31, 2017
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IDS
|
|
WPS
|
|
Total
|
Balance as of July 31, 2016
|
$
|
384,529
|
|
|
$
|
45,342
|
|
|
$
|
429,871
|
|
Translation adjustments
|
(4,751
|
)
|
|
(263
|
)
|
|
(5,014
|
)
|
Realignment of businesses between segments
|
2,490
|
|
|
(2,490
|
)
|
|
—
|
|
Balance as of January 31, 2017
|
$
|
382,268
|
|
|
$
|
42,589
|
|
|
$
|
424,857
|
|
Goodwill at
January 31, 2017
and
July 31, 2016
, included
$118,637
and
$209,392
of accumulated impairment losses within the Identification Solutions ("IDS") and Workplace Safety ("WPS") segments, respectively, for a total of
$328,029
. There were no impairment charges recorded during the
six months ended January 31, 2017
.
As further discussed in Note E - 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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 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
|
|
$
|
12,283
|
|
|
$
|
(11,278
|
)
|
|
$
|
1,005
|
|
|
5
|
|
$
|
12,252
|
|
|
$
|
(11,063
|
)
|
|
$
|
1,189
|
|
Trademarks and other
|
5
|
|
14,252
|
|
|
(13,720
|
)
|
|
532
|
|
|
5
|
|
14,359
|
|
|
(13,709
|
)
|
|
650
|
|
Customer relationships
|
7
|
|
134,209
|
|
|
(102,539
|
)
|
|
31,670
|
|
|
7
|
|
135,795
|
|
|
(100,830
|
)
|
|
34,965
|
|
Non-compete agreements and other
|
4
|
|
9,118
|
|
|
(9,118
|
)
|
|
—
|
|
|
4
|
|
9,153
|
|
|
(9,142
|
)
|
|
11
|
|
Unamortized other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
N/A
|
|
22,773
|
|
|
—
|
|
|
22,773
|
|
|
N/A
|
|
22,991
|
|
|
—
|
|
|
22,991
|
|
Total
|
|
|
$
|
192,635
|
|
|
$
|
(136,655
|
)
|
|
$
|
55,980
|
|
|
|
|
$
|
194,550
|
|
|
$
|
(134,744
|
)
|
|
$
|
59,806
|
|
The decrease in the gross carrying amount of other intangible assets as of
January 31, 2017
, compared to
July 31, 2016
, was due to the effect of currency fluctuations during the six-month period.
The gross carrying amount of goodwill and other intangible assets in the condensed consolidated balance sheet at
January 31, 2017
differs from the value assigned to them in the original allocation of purchase price due to impairments and the effect of currency fluctuations between the date of acquisition and
January 31, 2017
.
Amortization expense on intangible assets was
$1,688
and $
2,595
for the
three months ended January 31, 2017
and
2016
, respectively, and
$3,583
and
$5,228
for the
six months ended January 31, 2017
and
2016
, respectively. The amortization over each of the next five fiscal years is projected to be $
7,356
, $
6,680
, $
6,412
, $
5,909
and $
5,864
for the fiscal years ending July 31,
2017
,
2018
,
2019
,
2020
and
2021
, respectively.
NOTE C — Other Comprehensive Loss
Other comprehensive loss consists of foreign currency translation adjustments, unrealized gains and losses from cash flow hedges and net investment hedges, and the unamortized gain on post-retirement plans, net of their related tax effects.
The following table illustrates the changes in the balances of each component of accumulated other comprehensive loss, net of tax, for the
six months ended January 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on cash flow hedges
|
|
Unamortized gain on post-retirement plans
|
|
Foreign currency translation adjustments
|
|
Accumulated other comprehensive loss
|
Beginning balance, July 31, 2016
|
$
|
(857
|
)
|
|
$
|
2,236
|
|
|
$
|
(56,124
|
)
|
|
$
|
(54,745
|
)
|
Other comprehensive loss before reclassification
|
(80
|
)
|
|
72
|
|
|
(13,442
|
)
|
|
(13,450
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
253
|
|
|
(272
|
)
|
|
—
|
|
|
(19
|
)
|
Ending balance, January 31, 2017
|
$
|
(684
|
)
|
|
$
|
2,036
|
|
|
$
|
(69,566
|
)
|
|
$
|
(68,214
|
)
|
The increase in accumulated other comprehensive loss as of
January 31, 2017
, compared to
July 31, 2016
, was primarily due to the appreciation of the U.S. dollar against certain other currencies during the six month period. The foreign currency translation adjustments column in the table above includes the impact of foreign currency translation, foreign currency translation on intercompany notes, and the settlements of net investment hedges, net of tax. Of the total
$19
in amounts reclassified from accumulated other comprehensive loss, the
$253
loss on cash flow hedges was reclassified into cost of products sold, and the
$272
gain on post-retirement plans was reclassified into selling, general and administrative expenses ("SG&A") on the condensed consolidated statement of earnings for the
six months ended January 31, 2017
.
The changes in accumulated other comprehensive loss by component, net of tax, for the
six months ended January 31, 2016
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on cash flow hedges
|
|
Unamortized gain on post-retirement plans
|
|
Foreign currency translation adjustments
|
|
Accumulated other comprehensive loss
|
Beginning balance, July 31, 2015
|
$
|
9
|
|
|
$
|
3,438
|
|
|
$
|
(48,481
|
)
|
|
$
|
(45,034
|
)
|
Other comprehensive loss before reclassification
|
(141
|
)
|
|
—
|
|
|
(15,613
|
)
|
|
(15,754
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
(209
|
)
|
|
(1,358
|
)
|
|
—
|
|
|
(1,567
|
)
|
Ending balance, January 31, 2016
|
$
|
(341
|
)
|
|
$
|
2,080
|
|
|
$
|
(64,094
|
)
|
|
$
|
(62,355
|
)
|
The increase in accumulated other comprehensive loss as of
January 31, 2016
, compared to
July 31, 2015
, was primarily due the appreciation of the U.S. dollar against certain other currencies during the six-month period. The foreign currency translation adjustments column in the table above includes the impact of foreign currency translation, foreign currency translation on intercompany notes, and the settlements of net investment hedges, net of tax. Of the total
$1,567
in amounts reclassified from accumulated other comprehensive loss, the
$209
gain on cash flow hedges was reclassified into cost of products sold, and the
$1,358
gain on post-retirement plans was reclassified into SG&A on the condensed consolidated statement of earnings for the
six months ended January 31, 2016
.
The following table illustrates the income tax expense on the components of other comprehensive loss for the three and
six months ended January 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended January 31,
|
|
Six months ended January 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Income tax expense related to items of other comprehensive loss:
|
|
|
|
|
|
|
|
Net investment hedge translation adjustments
|
$
|
(556
|
)
|
|
$
|
(1,042
|
)
|
|
$
|
(2,125
|
)
|
|
$
|
(1,381
|
)
|
Cash flow hedges
|
(8
|
)
|
|
56
|
|
|
(137
|
)
|
|
554
|
|
Other income tax adjustments and currency translation
|
29
|
|
|
7
|
|
|
61
|
|
|
(8
|
)
|
Income tax expense related to items of other comprehensive loss
|
$
|
(535
|
)
|
|
$
|
(979
|
)
|
|
$
|
(2,201
|
)
|
|
$
|
(835
|
)
|
NOTE D — Net Earnings per Common Share
Reconciliations of the numerator and denominator of the basic and diluted per share computations for the Company’s Class A and Class B common stock are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended January 31,
|
|
Six months ended January 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator: (in thousands)
|
|
|
|
|
|
|
|
Earnings (Numerator for basic and diluted Class A Nonvoting Common Share)
|
$
|
25,297
|
|
|
$
|
15,290
|
|
|
$
|
47,850
|
|
|
$
|
33,993
|
|
Less:
|
|
|
|
|
|
|
|
Preferential dividends
|
—
|
|
|
—
|
|
|
(788
|
)
|
|
(783
|
)
|
Preferential dividends on dilutive stock options
|
—
|
|
|
—
|
|
|
(14
|
)
|
|
(1
|
)
|
Numerator for basic and diluted earnings per Class B Voting Common Share
|
$
|
25,297
|
|
|
$
|
15,290
|
|
|
$
|
47,048
|
|
|
$
|
33,209
|
|
Denominator: (in thousands)
|
|
|
|
|
|
|
|
Denominator for basic earnings per share for both Class A and Class B
|
$
|
51,054
|
|
|
$
|
50,527
|
|
|
$
|
50,844
|
|
|
$
|
50,778
|
|
Plus: Effect of dilutive stock options and restricted stock units
|
900
|
|
|
120
|
|
|
877
|
|
|
90
|
|
Denominator for diluted earnings per share for both Class A and Class B
|
$
|
51,954
|
|
|
$
|
50,647
|
|
|
$
|
51,721
|
|
|
$
|
50,868
|
|
Net earnings per Class A Nonvoting Common Share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.50
|
|
|
$
|
0.30
|
|
|
$
|
0.94
|
|
|
$
|
0.67
|
|
Diluted
|
$
|
0.49
|
|
|
$
|
0.30
|
|
|
$
|
0.93
|
|
|
$
|
0.67
|
|
Net earnings per Class B Voting Common Share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.50
|
|
|
$
|
0.30
|
|
|
$
|
0.93
|
|
|
$
|
0.65
|
|
Diluted
|
$
|
0.49
|
|
|
$
|
0.30
|
|
|
$
|
0.91
|
|
|
$
|
0.65
|
|
Options to purchase
768,617
and
3,923,000
shares of Class A Nonvoting Common Stock for the
three months ended January 31, 2017
and
2016
, respectively, and
770,010
and
4,048,000
shares for the
six months ended January 31, 2017
and
2016
, 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 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 segment 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 taxes, 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.
The following is a summary of segment information for the three and
six months ended January 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended January 31,
|
|
Six months ended January 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Sales to External Customers
|
|
|
|
|
|
|
|
ID Solutions
|
$
|
190,962
|
|
|
$
|
189,780
|
|
|
$
|
392,226
|
|
|
$
|
390,800
|
|
Workplace Safety
|
77,039
|
|
|
78,850
|
|
|
155,951
|
|
|
160,903
|
|
Total Company
|
$
|
268,001
|
|
|
$
|
268,630
|
|
|
$
|
548,177
|
|
|
$
|
551,703
|
|
Segment Profit
|
|
|
|
|
|
|
|
ID Solutions
|
$
|
28,961
|
|
|
$
|
23,056
|
|
|
$
|
62,035
|
|
|
$
|
48,487
|
|
Workplace Safety
|
6,059
|
|
|
6,296
|
|
|
12,504
|
|
|
15,678
|
|
Total Company
|
$
|
35,020
|
|
|
$
|
29,352
|
|
|
$
|
74,539
|
|
|
$
|
64,165
|
|
The following is a reconciliation of segment profit to earnings before income taxes for the three and
six months ended January 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended January 31,
|
|
Six months ended January 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Total profit from reportable segments
|
$
|
35,020
|
|
|
$
|
29,352
|
|
|
$
|
74,539
|
|
|
$
|
64,165
|
|
Unallocated amounts:
|
|
|
|
|
|
|
|
Administrative costs
|
(5,058
|
)
|
|
(5,763
|
)
|
|
(11,369
|
)
|
|
(10,474
|
)
|
Investment and other income (expense)
|
596
|
|
|
(992
|
)
|
|
107
|
|
|
(1,751
|
)
|
Interest expense
|
(1,458
|
)
|
|
(2,130
|
)
|
|
(3,190
|
)
|
|
(4,281
|
)
|
Earnings before income taxes
|
$
|
29,100
|
|
|
$
|
20,467
|
|
|
$
|
60,087
|
|
|
$
|
47,659
|
|
NOTE F – Stock-Based Compensation
The Company has an incentive stock plan under which the Board of Directors may grant nonqualified stock options to purchase shares of Class A Nonvoting Common Stock, restricted stock units ("RSUs"), or restricted and unrestricted shares of Class A Nonvoting Common Stock to employees and non-employee directors. Certain awards may be subject to pre-established performance goals.
The options issued under the plan have an exercise price equal to the fair market value of the underlying stock at the date of grant and generally vest over a three-year service period, with one-third becoming exercisable one year after the grant date and one-third additional in each of the succeeding two years. Options issued under the plan, referred to herein as “service-based” stock options, generally expire 10 years from the date of grant.
Restricted and unrestricted shares and RSUs issued under the plan have a grant date fair value equal to the fair market value of the underlying stock at the date of grant. Shares issued under the plan are referred to herein as either "service-based" or "performance-based" restricted shares and RSUs. The service-based RSUs granted under the plan generally vest over a three-year service period, with one-third becoming exercisable one year after the grant date and one-third additional in each of the succeeding two years. The performance-based RSUs granted under the plan generally vest at the end of a three-year service period provided specified company financial performance metrics are met.
As of
January 31, 2017
, the Company has reserved
3,784,771
shares of Class A Nonvoting Common Stock for outstanding stock options, RSUs, and restricted shares and
4,477,197
shares of Class A Nonvoting Common Stock remain for future issuance of stock options, RSUs, and restricted and unrestricted shares under the plan. The Company uses treasury stock or will issue new Class A Nonvoting Common Stock to deliver shares under the plan.
The Company recognizes the compensation cost of all share-based awards at the time it is deemed probable the award will vest. This cost is recognized on a straight-line basis over the vesting period of the award. If it is determined that it is unlikely the award will vest, the expense recognized to date for the award is reversed in the period in which this is evident and the remaining expense is not recorded. Total stock-based compensation expense recognized by the Company during the
three months ended January 31, 2017
and
2016
, was
$2,238
(
$1,387
net of taxes) and
$1,973
(
$1,223
net of taxes), respectively. Expense recognized during the
six months ended January 31, 2017
and
2016
, was
$5,394
(
$3,344
net of taxes) and
$4,569
(
$2,833
net of taxes), respectively.
As of
January 31, 2017
, total unrecognized compensation cost related to stock-based compensation awards was
$17,455
pre-tax, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of
2.3
years.
The Company has estimated the grant date fair value of its service-based stock option awards granted during the
six months ended January 31, 2017
and
2016
, using the Black-Scholes option valuation model. The weighted-average assumptions used in the Black-Scholes valuation model are reflected in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended January 31,
|
Black-Scholes Option Valuation Assumptions
|
|
2017
|
|
2016
|
Expected term (in years)
|
|
6.11
|
|
|
6.11
|
|
Expected volatility
|
|
29.43
|
%
|
|
29.95
|
%
|
Expected dividend yield
|
|
2.70
|
%
|
|
2.59
|
%
|
Risk-free interest rate
|
|
1.26
|
%
|
|
1.64
|
%
|
Weighted-average market value of underlying stock at grant date
|
|
$
|
35.13
|
|
|
$
|
20.02
|
|
Weighted-average exercise price
|
|
$
|
35.13
|
|
|
$
|
20.02
|
|
Weighted-average fair value of options granted during the period
|
|
$
|
7.56
|
|
|
$
|
4.58
|
|
The Company uses historical data regarding stock option exercise behaviors to estimate the expected term of options granted based on the period of time that options granted are expected to be outstanding. Expected volatilities are based on the historical volatility of the Company’s stock. The expected dividend yield is based on the Company’s historical dividend payments and historical yield. The risk-free interest rate is based on the U.S. Treasury yield curve in effect on the grant date for the length of time corresponding to the expected term of the option. The market value is calculated as the average of the high and the low stock price on the date of the grant.
A summary of stock option activity under the Company’s share-based compensation plans for the
six months ended January 31, 2017
, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
Outstanding at July 31, 2016
|
|
3,714,039
|
|
$
|
27.34
|
|
|
|
|
|
New grants
|
|
378,015
|
|
35.13
|
|
|
|
|
|
Exercised
|
|
(699,866)
|
|
26.65
|
|
|
|
|
|
Forfeited or expired
|
|
(292,529)
|
|
35.55
|
|
|
|
|
|
Outstanding at January 31, 2017
|
|
3,099,659
|
|
$
|
27.67
|
|
|
6.2
|
|
$
|
26,084,674
|
|
Exercisable at January 31, 2017
|
|
2,037,018
|
|
$
|
28.67
|
|
|
4.7
|
|
$
|
15,296,818
|
|
There were
2,037,018
and
2,723,184
options exercisable with a weighted average exercise price of
$28.67
and
$30.00
at
January 31, 2017
and
2016
, respectively. The total intrinsic value of options exercised during the
six months ended January 31, 2017
and
2016
, based upon the average market price at the time of exercise during the period, was
$6,719
and
$7
, respectively. The total fair value of stock options vested during the
six months ended January 31, 2017
and
2016
, was
$2,890
and
$3,131
, respectively.
The cash received from the exercise of options during the
three months ended January 31, 2017
and
2016
, was
$5,846
and
$53
, respectively. The cash received from the exercise of options during the
six months ended January 31, 2017
, and
2016
was
$14,659
and
$53
, respectively. The tax benefit on options exercised during the
three months ended January 31, 2017
and
2016
, was
$353
and
$3
, respectively. The tax benefit on options exercised during the
six months ended January 31, 2017
and
2016
, was
$1,453
and
$3
, respectively.
The following table summarizes the RSU activity under the Company's share-based compensation plans for the
six months ended January 31, 2017
:
|
|
|
|
|
|
|
|
|
Service-Based RSUs
|
|
Shares
|
|
Weighted
Average
Grant Date Fair Value
|
Outstanding at July 31, 2016
|
|
678,381
|
|
|
$
|
23.57
|
|
New grants
|
|
93,161
|
|
|
35.12
|
|
Vested
|
|
(109,687
|
)
|
|
22.60
|
|
Forfeited
|
|
(34,949
|
)
|
|
24.33
|
|
Outstanding at January 31, 2017
|
|
626,906
|
|
|
$
|
25.41
|
|
The service-based RSUs granted during the
six months ended January 31, 2016
, had a weighted-average grant date fair value of $
20.07
. The total fair value of service-based RSUs vested during the
six months ended January 31, 2017
and
2016
, was $
3,853
and $
1,471
, respectively.
|
|
|
|
|
|
|
|
|
Performance-Based RSUs
|
|
Shares
|
|
Weighted
Average
Grant Date Fair Value
|
Outstanding at July 31, 2016
|
|
—
|
|
|
$
|
—
|
|
New grants
|
|
58,206
|
|
|
32.03
|
|
Vested
|
|
—
|
|
|
—
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Outstanding at January 31, 2017
|
|
58,206
|
|
|
$
|
32.03
|
|
No performance-based RSUs were granted during the
six months ended January 31, 2016
. The aggregate intrinsic value of unvested service-based and performance-based RSUs outstanding at
January 31, 2017
, and expected to vest, was
$24,904
.
NOTE G — Fair Value Measurements
In accordance with fair value accounting guidance, the Company’s assets and liabilities measured at fair market value are classified in one of the following categories:
Level 1
— Assets or liabilities for which fair value is based on unadjusted quoted prices in active markets for identical instruments that are accessible as of the reporting date.
Level 2
— Assets or liabilities for which fair value is based on other significant pricing inputs that are either directly or indirectly observable.
Level 3
— Assets or liabilities for which fair value is based on significant unobservable pricing inputs to the extent little or no market data is available, which result in the use of management's own assumptions.
The following tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis at
January 31, 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
|
January 31, 2017
|
|
|
|
|
|
|
|
Trading securities
|
$
|
13,254
|
|
|
$
|
—
|
|
|
$
|
13,254
|
|
|
Other assets
|
Foreign exchange contracts
|
—
|
|
|
427
|
|
|
427
|
|
|
Prepaid expenses and other current assets
|
Total Assets
|
$
|
13,254
|
|
|
$
|
427
|
|
|
$
|
13,681
|
|
|
|
Foreign exchange contracts
|
$
|
—
|
|
|
$
|
941
|
|
|
$
|
941
|
|
|
Other current liabilities
|
Total Liabilities
|
$
|
—
|
|
|
$
|
941
|
|
|
$
|
941
|
|
|
|
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
|
|
|
|
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Trading securities:
The Company’s deferred compensation investments consist of investments in mutual funds. These investments were classified as Level 1 as the shares of these investments trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.
Foreign exchange contracts:
The Company’s foreign exchange contracts were classified as Level 2 as the fair value was based on the present value of the future cash flows using external models that use observable inputs, such as interest rates, yield curves and foreign exchange rates. See Note H, “Derivatives and Hedging Activities,” for additional information.
There have been no transfers of assets or liabilities between the fair value hierarchy levels outlined above during the
six months ended January 31, 2017
. In addition, the Company had no significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition during the
six months ended January 31, 2017
.
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
$162,711
and
$218,977
at
January 31, 2017
and
July 31, 2016
, respectively, as compared to the carrying value of
$157,223
and
$211,982
at
January 31, 2017
and
July 31, 2016
, respectively.
NOTE H — Derivatives and Hedging Activities
The Company utilizes forward foreign exchange currency contracts to reduce the exchange rate risk of specific foreign currency denominated transactions. These contracts typically require the exchange of a foreign currency for U.S. dollars at a fixed rate at a future date, with maturities of less than
18 months
, which qualify as cash flow hedges or net investment hedges under the accounting guidance for derivative instruments and hedging activities. The primary objective of the Company’s foreign currency exchange risk management program is to minimize the impact of currency movements due to transactions in other than the respective subsidiaries’ functional currency and to minimize the impact of currency movements on the Company’s net investment denominated in a currency other than the U.S. dollar. To achieve this objective, the Company hedges a portion of known exposures using forward foreign exchange currency contracts. As of
January 31, 2017
and
July 31, 2016
, the notional amount of outstanding forward exchange contracts was $
104,540
and
$186,093
, 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
January 31, 2017
and
2016
, unrealized losses of
$451
and
$608
have been included in OCI, respectively. Balances are reclassified from OCI to earnings when the hedged transactions impact earnings. For the
three months ended January 31, 2017
and
2016
, the Company reclassified losses of
$10
and
$115
from OCI into earnings, respectively. For the
six months ended January 31, 2017
and
2016
, the Company reclassified losses of
$415
and gains of
$342
from OCI into earnings, respectively. At
January 31, 2017
, the U.S. dollar equivalent of these outstanding forward foreign exchange contracts totaled $
17,284
, 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
January 31, 2017
, 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
six months ended January 31, 2017
, the Company recognized losses of $
3,313
and
$5,046
respectively, in “Investment and other income” on the condensed consolidated statements of earnings related to non-designated hedges. For the three and
six months ended January 31, 2016
, the Company recognized losses of
$100
and gains of
$513
, respectively.
Fair values of derivative instruments in the condensed consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
January 31, 2017
|
|
July 31, 2016
|
|
January 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
|
|
$
|
425
|
|
|
Prepaid expenses and other current assets
|
|
$
|
265
|
|
|
Other current liabilities
|
|
$
|
803
|
|
|
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
|
|
111,440
|
|
|
Long term obligations, less current maturities
|
|
116,888
|
|
Total derivatives designated as hedging instruments
|
|
|
$
|
425
|
|
|
|
|
$
|
265
|
|
|
|
|
$
|
112,243
|
|
|
|
|
$
|
117,558
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
2
|
|
|
Prepaid expenses and other current assets
|
|
$
|
1,873
|
|
|
Other current liabilities
|
|
$
|
138
|
|
|
Other current liabilities
|
|
$
|
68
|
|
Total derivatives not designated as hedging instruments
|
|
|
$
|
2
|
|
|
|
|
$
|
1,873
|
|
|
|
|
$
|
138
|
|
|
|
|
$
|
68
|
|
NOTE I — Income Taxes
During the three months ended January 31, 2017, the Company recorded a
$5,908
tax benefit for the repatriation of
$126,948
of cash. This non-cash tax benefit was primarily due to foreign tax credits generated as a result of the cash repatriation that occurred during the three months ended January 31, 2017.
NOTE J — New Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, "Leases," which replaces the current lease accounting standard. The update will require, among other items, lessees to recognize the assets and liabilities that arise from most leases on the balance sheet. This guidance is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The ASU must be adopted using a modified retrospective approach and early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," which eliminates the transaction-and industry-specific revenue recognition guidance under current GAAP and replaces it with a principles-based approach for determining revenue recognition. The new guidance requires revenue recognition when control of the goods or services transfers to the customer, replacing the existing guidance which requires revenue recognition when the risks and rewards transfer to the customer. Under the new guidance, companies should recognize revenues in amounts that reflect the payment to which a company expects to be entitled in exchange for those goods or services.
ASU 2014-09 (and related updates) is effective for interim and 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. The Company intends to adopt this standard beginning August 1, 2018. 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 assessing the new guidance and whether to adopt using a full retrospective or a modified retrospective approach. Management will conduct surveys of its various business units and analyze contracts and agreements during fiscal 2017 to ensure that all components of the new guidance are appropriately considered for the impact on its consolidated financial statements and disclosures upon adoption.
NOTE K — Subsequent Events
On February 22, 2017, the Board of Directors declared a quarterly cash dividend to shareholders of the Company’s Class A and Class B Common Stock of
$0.2050
per share payable on April 28, 2017, to shareholders of record at the close of business on April 7, 2017.