NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended
July 31, 2018
,
2017
and
2016
(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.
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, notes payable, accounts payable, accrued liabilities and short-term and long-term debt) 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
$4,471
and
$4,629
as of
July 31, 2018
and
2017
, respectively. No single customer comprised more than
10%
of the Company’s consolidated net sales in fiscal
2018
,
2017
, or
2016
, or
10%
of the Company’s consolidated accounts receivable as of
July 31, 2018
or
2017
. 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. (
15.0%
of total inventories at
July 31, 2018
, and
13.5%
of total inventories at
July 31, 2017
) 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
$7,015
and
$6,807
as of
July 31, 2018
and
2017
, 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,
2018
, 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,
2018
.
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
2018
, 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 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
$19,009
,
$20,190
, and
$23,375
for the years ended
July 31, 2018
,
2017
and
2016
, 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, 2018
and
2017
,
$6,154
and
$7,299
, 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, 2018
and
2017
, the Company had a reserve for estimated product returns and credit memos of
$4,546
and
$3,873
, 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, 2018
,
2017
, and
2016
were
$40,671
,
$37,134
, and
$36,084
, 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, 2018
,
2017
, and
2016
was
$67,429
,
$68,268
, and
$74,204
, 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 “time-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 "time-based" or "performance-
based" restricted shares and RSUs. The time-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 operating 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 R&D 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)" or as a component of Accumulated Other Comprehensive Income ("AOCI") in the accompanying Consolidated Balance Sheets and in the Consolidated Statements of Comprehensive Income, 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, 2018
,
2017
, and
2016
.
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 Income, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining portion of its foreign exchange contracts are not designated as hedge transactions, and accordingly, the mark-to-market impact of these derivative contracts is recorded each period in current 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. 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.
See Note 12 "Derivatives and Hedging Activities" for more information regarding the Company’s derivative instruments and hedging activities.
New Accounting Standards —
In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2018-02, "Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax effects from Accumulated Other Comprehensive Income," which allows for reclassification of stranded tax effects on items resulting from the Tax Reform Act from AOCI to retained earnings. The guidance is effective for interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. The Company elected to early adopt this standard and during the three months ended July 31, 2018, the Company recorded an increase in AOCI and a decrease in retained earnings of
$1,869
, which was a result of reduced future tax benefits from the reduction in the U.S. federal corporate tax rate. Refer to Note 3 "Other Comprehensive (Loss) Income" for more information regarding the impact to the individual components of AOCI.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," which simplifies and reduces the complexity of the hedge accounting requirements and better aligns an entity's financial reporting for hedging relationships with its risk management activities. The guidance is effective for interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. This new guidance will require a modified retrospective adoption approach to existing hedging relationships as of the adoption date. The Company is currently evaluating the impact of this update on its consolidated financial statements and disclosures.
In March 2017, the FASB issued ASU 2017-07, "Compensation-Retirement Benefits (Topic 715): Improving the presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which requires entities to present the service cost component of net periodic pension cost and net periodic postretirement benefit cost in the income statement line items where they report compensation cost. Entities will present all other components of net benefit cost outside operating income, if this subtotal is presented. The amendment only impacts where those costs are reflected within the income statement. In addition, only the service cost component of net benefit cost is eligible for capitalization. This guidance is effective for annual periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company does not expect the adoption of this update to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, "Goodwill and Other, Simplifying the Test for Goodwill Impairment," which simplifies the accounting for goodwill impairment. The new guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. This guidance is effective for annual periods beginning after December 15, 2019, and interim periods thereafter. However, early adoption is permitted for any impairment tests performed after January 1, 2017. This guidance will only impact the Company's consolidated financial statements if there is a future impairment of goodwill.
In February 2016, the FASB issued ASU 2016-02, "Leases," which replaces the current lease accounting standards. The update requires, 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 allows for either a full retrospective or a modified retrospective approach and early adoption is permitted. The Company expects the new lease standard to increase its total assets and liabilities; however, it is evaluating the magnitude of the impact on its consolidated financial statements. The Company has formed a team to implement the new lease standard and has selected a third-party software program to track and store its leases.
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 reflecting the payment to which a company expects to be entitled in exchange for those goods or services.
The Company adopted the new revenue standard on August 1, 2018, and assessed all potential impacts of this standard. The Company determined key factors from the five-step process to recognize revenue as prescribed by the new standard that may be applicable to each of the Company's operating businesses that roll up into its two segments. Significant customers and contracts were identified and the Company completed the review of these contracts. The Company's assessment determined certain transactions with customers will require a change in the timing of when revenue and related expense is recognized. The standard allows for either a full retrospective or a modified retrospective adoption approach. The Company has elected the modified retrospective method which will require a cumulative adjustment to retained earnings instead of retrospectively adjusting prior periods. The impact of the cumulative adjustment is a reduction of
$2,850
to retained earnings in fiscal 2019.
2. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill by reportable segment for the years ended
July 31, 2018
and
2017
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IDS
|
|
WPS
|
|
Total
|
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
|
|
Translation adjustments
|
(6,340
|
)
|
|
(1,487
|
)
|
|
(7,827
|
)
|
Current year divestiture
|
—
|
|
|
(10,055
|
)
|
|
(10,055
|
)
|
Balance as of July 31, 2018
|
$
|
385,524
|
|
|
$
|
34,291
|
|
|
$
|
419,815
|
|
Goodwill at
July 31, 2018
and
2017
, 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 2018. The decrease of
$17,882
in the carrying amount of goodwill as of
July 31, 2018
, compared to
July 31, 2017
, was primarily due to the sale of our Runelandhs business within the WPS segment in May 2018 and the effect of currency fluctuations during the fiscal year.
The annual impairment testing performed on May 1,
2018
, 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, 2018
|
|
July 31, 2017
|
|
Weighted
Average
Amortization
Period
(Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Weighted
Average
Amortization
Period
(Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
Amortized other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
5
|
|
$
|
1,448
|
|
|
$
|
(942
|
)
|
|
$
|
506
|
|
|
5
|
|
$
|
1,358
|
|
|
$
|
(471
|
)
|
|
$
|
887
|
|
Tradenames and other
|
9
|
|
4,497
|
|
|
(4,395
|
)
|
|
102
|
|
|
9
|
|
4,528
|
|
|
(4,229
|
)
|
|
299
|
|
Customer relationships
|
9
|
|
55,999
|
|
|
(33,535
|
)
|
|
22,464
|
|
|
8
|
|
60,759
|
|
|
(31,909
|
)
|
|
28,850
|
|
Unamortized other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
N/A
|
|
19,516
|
|
|
—
|
|
|
19,516
|
|
|
N/A
|
|
23,040
|
|
|
—
|
|
|
23,040
|
|
Total
|
|
|
$
|
81,460
|
|
|
$
|
(38,872
|
)
|
|
$
|
42,588
|
|
|
|
|
$
|
89,685
|
|
|
$
|
(36,609
|
)
|
|
$
|
53,076
|
|
The decrease in the gross carrying amount of other intangible assets as of July 31, 2018, compared to July 31, 2017, was primarily due to the elimination of
$7,360
in certain intangible assets related to the sale of the Runelandhs business in the year ended July 31, 2018. The remaining decrease was due to the effect of currency translations during the fiscal year.
Amortization expense on intangible assets during the fiscal years ended July 31,
2018
,
2017
, and
2016
was $
6,433
, $
7,113
and $
9,056
, respectively. Amortization expense over each of the next five fiscal years is projected to be $
5,724
, $
5,198
, $
5,157
, $
5,009
and $
2,025
for the fiscal years ending July 31,
2019
,
2020
,
2021
,
2022
and
2023
, respectively.
3. Other Comprehensive (Loss) Income
Other comprehensive (loss) 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.
The following table illustrates the changes in the balances of each component of accumulated other comprehensive 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, 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
|
)
|
Other comprehensive income (loss) before reclassification
|
465
|
|
|
382
|
|
|
(14,242
|
)
|
|
(13,395
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
383
|
|
|
(576
|
)
|
|
—
|
|
|
(193
|
)
|
Adoption of accounting standard ASU 2018-02
|
$
|
(94
|
)
|
|
$
|
876
|
|
|
$
|
1,087
|
|
|
1,869
|
|
Ending balance, July 31, 2018
|
$
|
863
|
|
|
$
|
3,302
|
|
|
$
|
(60,566
|
)
|
|
$
|
(56,401
|
)
|
The increase in accumulated other comprehensive loss as of
July 31, 2018
, compared to
July 31, 2017
, was primarily due to the appreciation of the U.S. dollar against certain other currencies during the fiscal year. This was partially offset by the impact of early adopting ASU 2018-02 during the three months ended July 31, 2018, in which stranded tax effects from items related to the Tax Reform Act were reclassified from AOCI to retained earnings. 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 the
$193
reclassified from AOCI, the
$383
loss on cash flow hedges was reclassified into cost of products sold, and the
$576
net gain on post-retirement plans was reclassified into selling, general, and administrative expense on the Consolidated Statement of Earnings in fiscal
2018
.
The following table illustrates the income tax benefit (expense) on the components of other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Income tax benefit (expense) related to items of other comprehensive (loss) income:
|
|
|
|
|
|
|
Net investment hedge translation adjustments
|
|
$
|
(55
|
)
|
|
$
|
1,170
|
|
|
$
|
(1,804
|
)
|
Cash flow hedges
|
|
(669
|
)
|
|
705
|
|
|
192
|
|
Pension and other post-retirement benefits
|
|
(64
|
)
|
|
(4
|
)
|
|
738
|
|
Other income tax adjustments
|
|
(512
|
)
|
|
550
|
|
|
(2,154
|
)
|
Adoption of accounting standard ASU 2018-02
|
|
1,869
|
|
|
—
|
|
|
—
|
|
Income tax benefit (expense) related to items of other comprehensive (loss) income
|
|
$
|
569
|
|
|
$
|
2,421
|
|
|
$
|
(3,028
|
)
|
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 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, 2018
and
2017
. The following table provides a reconciliation of the changes in the Plan’s accumulated benefit obligation during the years ended July 31:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Obligation at beginning of fiscal year
|
|
$
|
3,390
|
|
|
$
|
3,800
|
|
Interest cost
|
|
79
|
|
|
89
|
|
Benefit payments
|
|
(449
|
)
|
|
(499
|
)
|
Obligation at end of fiscal year
|
|
$
|
3,020
|
|
|
$
|
3,390
|
|
As of
July 31, 2018
and
2017
, amounts recognized as liabilities in the accompanying Consolidated Balance Sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Current liability
|
|
$
|
377
|
|
|
$
|
449
|
|
Non-current liability
|
|
2,643
|
|
|
2,941
|
|
|
|
$
|
3,020
|
|
|
$
|
3,390
|
|
As of
July 31, 2018
and
2017
, pre-tax amounts recognized in accumulated other comprehensive loss in the accompanying Consolidated Balance Sheets consist of net actuarial gains of
$4,984
and
$5,504
, respectively.
Net periodic benefit gain for the Plan for fiscal years ended July 31,
2018
,
2017
, and
2016
, includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Net periodic postretirement benefit gain included the following components:
|
|
|
|
|
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9
|
|
Interest cost
|
|
79
|
|
|
89
|
|
|
114
|
|
Amortization of prior service credit
|
|
—
|
|
|
—
|
|
|
(1,035
|
)
|
Amortization of net actuarial gain
|
|
(520
|
)
|
|
(544
|
)
|
|
(646
|
)
|
Periodic postretirement benefit gain
|
|
$
|
(441
|
)
|
|
$
|
(455
|
)
|
|
$
|
(1,558
|
)
|
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
$497
. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Weighted average discount rate used in determining accumulated postretirement benefit obligation
|
|
2.50
|
%
|
|
2.50
|
%
|
|
2.50
|
%
|
Weighted average discount rate used in determining net periodic benefit cost
|
|
2.50
|
%
|
|
2.50
|
%
|
|
3.00
|
%
|
Assumed health care trend rate used to measure accumulated postretirement benefit obligation at July 31
|
|
7.00
|
%
|
|
7.25
|
%
|
|
7.50
|
%
|
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
|
|
|
2024
|
|
|
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, 2018
|
|
17
|
|
|
(18
|
)
|
The following benefit payments are expected to be paid during the years ending July 31:
|
|
|
|
|
|
|
2019
|
$
|
377
|
|
2020
|
359
|
|
2021
|
339
|
|
2022
|
309
|
|
2023
|
289
|
|
2024 through 2028
|
1,140
|
|
The Company sponsors statutory 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, 2018
and
2017
, the accumulated pension obligation related to these plans was
$5,383
and
$6,075
, respectively. As of
July 31, 2018
and
2017
, pre-tax amounts recognized in accumulated other comprehensive loss in the accompanying Consolidated Balance Sheets were losses of
$194
and
$641
, respectively. The net periodic benefit cost for these plans was
$341
,
$665
, and
$795
during the years ended
July 31, 2018
,
2017
and
2016
, respectively.
The Company also has two deferred compensation plans, the Executive Deferred Compensation Plan and the Director Deferred Compensation Plan which 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. Additionally, the Company has a non-qualified deferred compensation plan, the Brady Restoration Plan, which allows an equivalent benefit to the Matched 401(k) Plan and the Funded Retirement Plan for executives' income exceeding the IRS limits of participation in a qualified 401(k) plan. At
July 31, 2018
and
2017
,
$14,383
and
$14,121
, respectively, of deferred compensation was included in other long-term liabilities in the accompanying Consolidated Balance Sheets.
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
$3,844
and
$3,327
were included in other current liabilities on the accompanying Consolidated Balance Sheets as of
July 31, 2018
and
2017
, respectively. The amounts charged to expense for these retirement and profit sharing plans were
$14,395
,
$13,750
, and
$10,407
during the years ended
July 31, 2018
,
2017
and
2016
, respectively.
5. Income Taxes
Earnings before income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
2018
|
|
2017
|
|
2016
|
United States
|
|
$
|
48,903
|
|
|
$
|
43,561
|
|
|
$
|
61,349
|
|
Other Nations
|
|
103,112
|
|
|
83,071
|
|
|
47,996
|
|
Total
|
|
$
|
152,015
|
|
|
$
|
126,632
|
|
|
$
|
109,345
|
|
Earnings before income taxes in the United States increased to
$48,903
in fiscal
2018
from
$43,561
in fiscal
2017
primarily due to increased organic sales and expense management in the U.S. The increase in earnings before income taxes in Other Nations to
$103,112
in fiscal
2018
from
$83,071
in fiscal
2017
was primarily due to increased organic sales and improved profitability in fiscal
2018
in both the Company's European and Asian-based businesses.
The decrease in earnings 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 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 before income taxes by
$21,003
, as well as improved profitability in fiscal
2017
in both the Company's European and Asian-based businesses.
Income tax expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Current income tax expense:
|
|
|
|
|
|
|
United States
|
|
$
|
2,830
|
|
|
$
|
15,279
|
|
|
$
|
5,048
|
|
Other Nations
|
|
26,593
|
|
|
23,826
|
|
|
19,929
|
|
States (U.S.)
|
|
910
|
|
|
1,163
|
|
|
1,348
|
|
|
|
$
|
30,333
|
|
|
$
|
40,268
|
|
|
$
|
26,325
|
|
Deferred income tax (benefit) expense:
|
|
|
|
|
|
|
United States
|
|
$
|
30,267
|
|
|
$
|
(8,173
|
)
|
|
$
|
3,946
|
|
Other Nations
|
|
(1,462
|
)
|
|
(1,329
|
)
|
|
(1,387
|
)
|
States (U.S.)
|
|
1,817
|
|
|
221
|
|
|
351
|
|
|
|
$
|
30,622
|
|
|
$
|
(9,281
|
)
|
|
$
|
2,910
|
|
Total income tax expense
|
|
$
|
60,955
|
|
|
$
|
30,987
|
|
|
$
|
29,235
|
|
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted. Among the significant changes to the U.S. Internal Revenue Code, the Tax Reform Act reduces the U.S. federal corporate income tax rate from
35.0%
to
21.0%
, imposes a one-time tax on deemed repatriated earnings of foreign subsidiaries, eliminates the domestic manufacturing deduction and moves to a partial territorial system by providing a 100% dividend received deduction on certain qualified dividends from foreign subsidiaries. As the Company has a July 31 fiscal year end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal income tax rate of
26.9%
for the fiscal year ended July 31, 2018, and
21.0%
for subsequent fiscal years.
The tax effects of temporary differences are as follows as of July 31,
2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2018
|
|
|
Assets
|
|
Liabilities
|
|
Total
|
Inventories
|
|
$
|
3,095
|
|
|
$
|
(53
|
)
|
|
$
|
3,042
|
|
Prepaid catalog costs
|
|
—
|
|
|
(978
|
)
|
|
(978
|
)
|
Employee benefits
|
|
3,772
|
|
|
(91
|
)
|
|
3,681
|
|
Accounts receivable
|
|
828
|
|
|
(1
|
)
|
|
827
|
|
Fixed assets
|
|
2,959
|
|
|
(4,911
|
)
|
|
(1,952
|
)
|
Intangible assets
|
|
1,073
|
|
|
(29,630
|
)
|
|
(28,557
|
)
|
Deferred and equity-based compensation
|
|
10,656
|
|
|
—
|
|
|
10,656
|
|
Postretirement benefits
|
|
3,280
|
|
|
—
|
|
|
3,280
|
|
Tax credit and net operating loss carry-forwards
|
|
64,348
|
|
|
—
|
|
|
64,348
|
|
Less valuation allowance
|
|
(56,866
|
)
|
|
—
|
|
|
(56,866
|
)
|
Other, net
|
|
8,548
|
|
|
(8,962
|
)
|
|
(414
|
)
|
Total
|
|
$
|
41,693
|
|
|
$
|
(44,626
|
)
|
|
$
|
(2,933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
Deferred and equity-based 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
|
|
12,630
|
|
|
(10,798
|
)
|
|
1,832
|
|
Total
|
|
$
|
83,677
|
|
|
$
|
(53,482
|
)
|
|
$
|
30,195
|
|
Tax carry-forwards at
July 31, 2018
are comprised of:
|
|
•
|
Foreign net operating loss carry-forwards of
$108,540
, of which
$88,197
have no expiration date and the remainder of which expire within the next
five years
.
|
|
|
•
|
State net operating loss carry-forwards of
$35,231
, which expire from
2022 to 2038
.
|
|
|
•
|
Foreign tax credit carry-forwards of
$25,115
, which expire from
2021 to 2027
.
|
|
|
•
|
State R&D credit carry-forwards of
$11,448
, which expire from
2019 to 2033
.
|
The reduction in the U.S. federal income tax rate as a result of the Tax Reform Act requires the Company to remeasure its U.S. deferred tax assets and liabilities to the income tax rate at which the deductible or taxable event is expected to be realized. The Tax Reform Act also changes the statutory U.S. federal tax rate from
35.0%
to
26.9%
for the entire year ended July 31, 2018. Additionally, the Company established a valuation allowance against its deferred tax assets related to foreign tax credit carryforwards, primarily related to the impact of the Tax Reform Act on the Company's ability to utilize these foreign tax credit carryforwards. The provisional impact of the Tax Reform Act related to the remeasurement of deferred tax assets and liabilities, the impact on the Company’s fiscal 2018 earnings from the reduced tax rate, and the establishment of the valuation allowance discussed above resulted in net income tax expense of
$16,761
for the year ended July 31, 2018.
The valuation allowance increased by $18,303 during the fiscal year ended July 31, 2018, primarily due to the establishment of a valuation allowance on a significant portion of foreign tax credit carryforwards as a result of the Tax Reform Act. The net increase was partially offset by valuation allowance decreases in China, India, Sweden, Brazil, and South Africa primarily due to the utilization of net operating loss carryforwards that had valuation allowances applied to them. 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,
|
|
|
2018
|
|
2017
|
|
2016
|
Tax at statutory rate
|
|
26.9
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal tax benefit
|
|
1.6
|
%
|
|
1.0
|
%
|
|
0.8
|
%
|
International rate differential
|
|
(1.1
|
)%
|
|
(6.3
|
)%
|
|
0.4
|
%
|
Rate variances arising from foreign subsidiary distributions
(1)
|
|
0.8
|
%
|
|
(5.9
|
)%
|
|
0.5
|
%
|
Foreign tax credit carryforward valuation allowance
(2)
|
|
14.1
|
%
|
|
—
|
%
|
|
—
|
%
|
Divestiture of business
(3)
|
|
(0.8
|
)%
|
|
—
|
%
|
|
—
|
%
|
Adjustments to tax accruals and reserves
(4)
|
|
2.2
|
%
|
|
3.6
|
%
|
|
(3.7
|
)%
|
Research and development tax credits and domestic manufacturer’s deduction
|
|
(2.0
|
)%
|
|
(1.8
|
)%
|
|
(3.6
|
)%
|
Deferred tax and other adjustments, net
|
|
(1.6
|
)%
|
|
(1.1
|
)%
|
|
(2.7
|
)%
|
Effective tax rate
|
|
40.1
|
%
|
|
24.5
|
%
|
|
26.7
|
%
|
|
|
(1)
|
The year ended July 31, 2017, includes the generation of foreign tax credit carryforwards from cash repatriations that occurred during the fiscal year.
|
|
|
(2)
|
The year ended July 31, 2018, includes the establishment of a valuation allowance against foreign tax credit carryforwards as a result of the Tax Reform Act.
|
|
|
(3)
|
The year ended July 31, 2018, includes the divestiture of the Company's Runelandhs business based in Sweden. Refer to Note 13 - Divestitures for additional information.
|
|
|
(4)
|
The years ended July 31, 2018 and 2017, 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.
|
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, 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
|
|
Additions based on tax positions related to the current year
|
2,467
|
|
Additions for tax positions of prior years
|
1,586
|
|
Reductions for tax positions of prior years
|
(23
|
)
|
Lapse of statute of limitations
|
(489
|
)
|
Settlements with tax authorities
|
(1,277
|
)
|
Cumulative Translation Adjustments and other
|
(196
|
)
|
Balance as of July 31, 2018
|
$
|
20,430
|
|
The
$20,430
of unrecognized tax benefits, if recognized, would affect the Company's effective income tax rate. The Company has classified
$13,238
and
$11,725
, excluding interest and penalties, of the reserve for uncertain tax positions in Other Liabilities on the Consolidated Balance Sheets as of
July 31, 2018
and
2017
, respectively. The Company has classified
$7,192
and
$6,637
, excluding interest and penalties, as a reduction of long-term deferred income tax assets on the Consolidated Balance Sheets as of
July 31, 2018
and
2017
, 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
$556
, an increase of
$674
, and an increase of
$3
in interest expense during the years ended
July 31, 2018
,
2017
, and
2016
, respectively. There was an
$83
increase to the reserve for uncertain tax positions for penalties during the year ended
July 31, 2018
, an increase of
$218
during the year ended July 31,
2017
, and an increase of
$66
during the year end July 31,
2016
. These amounts are net of reversals due to reductions for tax positions of prior years, statute of limitations, and settlements. At
July 31, 2018
and
2017
, the Company had
$2,762
and
$2,239
, 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. At
July 31, 2018
and
2017
, the Company had
$3,027
and
$2,948
, respectively, accrued for penalties on unrecognized tax benefits. Interest expense and penalties are recorded as a component of income tax expense in the Consolidated Statements of Earnings.
The Company estimates that it is reasonably possible that the unrecognized tax benefits may be reduced by
$9,686
within 12 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
$9,686
during the next twelve months.
During the year ended
July 31, 2018
, the Company recognized
$675
of tax benefits (including interest and penalties) associated with the lapse of statutes of limitations. The Company also recognized
$1,742
of tax benefits (including interest and penalties) associated with the reduction of tax positions for prior years due to the closure of certain 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’18
|
France
|
|
F’15 — F’18
|
Unremitted Earnings
As part of the transition to the partial territorial tax system, the Tax Reform Act imposes a one-time tax on the mandatory deemed repatriation of historical earnings of foreign subsidiaries. Companies can claim certain credits for foreign taxes deemed paid on foreign earnings subject to the mandatory deemed repatriation. The Company’s provisional calculations resulted in an income tax charge of
$3,327
related to the deemed repatriation of the historical earnings of foreign subsidiaries during the year ended July 31, 2018. Existing foreign tax credit carryforwards were used to fully offset this tax, resulting in no cash payments related to this charge.
As a result of the Tax Reform Act, the Company expects that it will repatriate certain historical and future foreign earnings periodically, which in certain jurisdictions may be subject to withholding and income taxes. These additional withholding and income taxes are recorded as a deferred tax liability associated with the basis difference in such jurisdictions. During the year ended July 31, 2018, the Company recorded a provisional income tax expense of
$984
related to the recording of a deferred tax liability for future withholding and income taxes on the distribution of foreign earnings. The uncertainty related to the taxation of such withholding and income taxes on distributions under the Tax Reform Act and the finalization of future cash repatriation plans make the deferred tax liability a provisional amount.
Provisional Disclosure
The Company continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”), foreign derived intangible income ("FDII") and base erosion anti-abuse tax (“BEAT”) enacted under the Tax Reform Act, which are not effective until fiscal year 2019. The consolidated financial statements for the year ended July 31, 2018, do not include a provisional estimate associated with either GILTI, FDII or BEAT.
The final enactment impacts of the Tax Reform Act may differ from the above estimates due to changes in interpretation, legislative action to address questions that arise, changes in accounting standards for income taxes or related interpretations in response to the Tax Reform Act, or any updates or changes to information the Company has utilized to develop the estimates, including impacts from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries. The U.S. Securities and Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Reform Act to finalize the recording of the related tax impacts.
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
2018
, the Company repaid
$51,941
of its revolving loan agreement and the maximum amount outstanding throughout the year was
$57,235
. As of
July 31, 2018
, there were no borrowings outstanding on the credit facility. There was
$296,957
available for future borrowing under the credit facility, which can be increased to
$446,957
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
$3,228
and the Company repaid
$3,257
during fiscal
2018
. As of
July 31, 2018
, there were no borrowings outstanding on this line of credit in China and
there was
$10,000
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%
. Under the terms of the notes, the notes were required to 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 had certain prepayment penalties for repaying them prior to the maturity date. Under the debt agreement, the Company made scheduled principal payments of $16.4 million and
$42.5 million
in fiscal years 2017 and 2016, 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, 2018
, the Company was in compliance with these financial covenants, with the ratio of debt to EBITDA, as defined by the agreements,
equal to 0.3 to 1.0
and the interest expense coverage ratio
equal to 58.7 to 1.0
.
Total debt consists of the following as of July 31:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Euro-denominated notes payable in 2020 at a fixed rate of 4.24%
|
|
$
|
52,618
|
|
|
$
|
53,202
|
|
USD-denominated borrowing on revolving loan agreement at a weighted average rate of 0.00% and 1.94% as of July 31, 2018 and 2017, respectively
|
|
—
|
|
|
16,998
|
|
EUR-denominated borrowing on revolving loan agreement at a weighted average rate of 0.00% and 0.75% as of July 31, 2018 and 2017, respectively
|
|
—
|
|
|
34,336
|
|
CNY-denominated borrowing on China revolving loan agreement at a weighted average rate of 0.00% and 3.92% as of July 31, 2018 and 2017, respectively
|
|
—
|
|
|
2,228
|
|
USD-denominated borrowing on China revolving loan agreement at a weighted average rate of 0.00% and 2.63% as of July 31, 2018 and 2017, respectively
|
|
—
|
|
|
1,000
|
|
|
|
$
|
52,618
|
|
|
$
|
107,764
|
|
Less notes payable
|
|
—
|
|
|
(3,228
|
)
|
Total long-term debt
|
|
$
|
52,618
|
|
|
$
|
104,536
|
|
The Company had outstanding letters of credit of
$3,043
and
$4,067
at
July 31, 2018
and
2017
, respectively.
The estimated fair value of the Company’s long-term obligations was
$55,707
and
$109,303
at
July 31, 2018
and
2017
, respectively, as compared to the carrying value of
$52,618
and
$104,536
at
July 31, 2018
and
2017
, 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,
|
|
2019
|
$
|
—
|
|
2020
|
52,618
|
|
Total
|
$
|
52,618
|
|
7. Stockholders' Investment
Information as to the Company’s capital stock at
July 31, 2018
and
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2018
|
|
July 31, 2017
|
|
|
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
$0.01665
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, 2018
,
2017
, and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Compensation
|
|
Shares Held in Rabbi Trust, at cost
|
|
Total
|
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
|
|
|
|
Sale of shares at cost
|
|
$
|
(977
|
)
|
|
$
|
977
|
|
|
$
|
—
|
|
Purchase of shares at cost
|
|
1,075
|
|
|
(1,075
|
)
|
|
—
|
|
Balances at July 31, 2018
|
|
$
|
8,222
|
|
|
$
|
(8,222
|
)
|
|
$
|
—
|
|
Shares at July 31, 2018
|
|
299,916
|
|
|
299,916
|
|
|
|
Deferred Compensation Plans
The Company has two deferred compensation plans, the Executive Deferred Compensation Plan and the Director Deferred Compensation Plan that allow for compensation to be deferred into either the Company's Class A Nonvoting Common Stock or in other investment funds. Both the Director Deferred Compensation Plan and the Executive Deferred Compensation Plan disallow transfers from other investment funds into the Company's Class A Nonvoting Common Stock.
At
July 31, 2018
, 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, 2018
, the Company has reserved
2,955,586
shares of Class A Nonvoting Common Stock for outstanding stock options, RSUs and restricted shares and
4,049,563
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, 2018
,
2017
, and
2016
, was
$9,980
(
$7,485
net of taxes),
$9,495
(
$5,887
net of taxes), and
$8,154
(
$5,056
net of taxes), respectively. As of
July 31, 2018
, total unrecognized compensation cost related to share-based compensation awards that are expected to vest was
$10,898
pre-tax, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of
1.6 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 “time-based” options, generally expire
10 years
from the date of grant.
The Company has estimated the fair value of its time-based stock option awards granted during the years ended
July 31, 2018
,
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Black-Scholes Option Valuation Assumptions
|
|
2018
|
|
2017
|
|
2016
|
Expected term (in years)
|
|
6.07
|
|
|
6.11
|
|
|
6.11
|
|
Expected volatility
|
|
28.19
|
%
|
|
29.55
|
%
|
|
29.95
|
%
|
Expected dividend yield
|
|
2.72
|
%
|
|
2.70
|
%
|
|
2.59
|
%
|
Risk-free interest rate
|
|
1.96
|
%
|
|
1.26
|
%
|
|
1.64
|
%
|
Weighted-average market value of underlying stock at grant date
|
|
$
|
36.85
|
|
|
$
|
35.14
|
|
|
$
|
20.02
|
|
Weighted-average exercise price
|
|
$
|
36.85
|
|
|
$
|
35.14
|
|
|
$
|
20.02
|
|
Weighted-average fair value of options granted during the period
|
|
$
|
7.96
|
|
|
$
|
7.56
|
|
|
$
|
4.58
|
|
The following is a summary of stock option activity for the fiscal year ended
July 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Price
|
|
Options Outstanding
|
|
Weighted Average Exercise Price
|
Balance as of July 31, 2017
|
|
$
|
19.96
|
|
—
|
$38.83
|
|
2,879,801
|
|
|
$
|
27.40
|
|
Options granted
|
|
36.85
|
|
—
|
36.85
|
|
364,046
|
|
|
36.85
|
|
Options exercised
|
|
19.96
|
|
—
|
38.31
|
|
(622,916
|
)
|
|
28.84
|
|
Options cancelled
|
|
19.96
|
|
—
|
38.31
|
|
(116,298
|
)
|
|
31.42
|
|
Balance as of July 31, 2018
|
|
$
|
19.96
|
|
—
|
$38.83
|
|
2,504,633
|
|
|
$
|
28.23
|
|
The total fair value of options vested during the fiscal years ended
July 31, 2018
,
2017
, and
2016
, was
$3,006
,
$2,911
, and
$3,203
, respectively. The total intrinsic value of options exercised during the fiscal years ended
July 31, 2018
,
2017
, and
2016
, was
$6,208
,
$7,901
, and
$811
, respectively.
There were
1,722,229
,
1,859,959
, and
2,488,527
options exercisable with a weighted average exercise price of
$26.82
,
$28.20
, and
$30.18
at
July 31, 2018
,
2017
, and
2016
, respectively. The cash received from the exercise of stock options during the fiscal years ended
July 31, 2018
,
2017
, and
2016
, was
$12,099
,
$19,728
, and
$5,246
, respectively. The tax benefit on options exercised during the fiscal years ended
July 31, 2018
,
2017
, and
2016
, was
$1,893
,
$3,002
, and
$308
, respectively.
The following table summarizes information about stock options outstanding at
July 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Outstanding and Exercisable
|
Range of Exercise Prices
|
|
Number of Shares
Outstanding at
July 31, 2018
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
Weighted
Average
Exercise
Price
|
|
Shares
Exercisable
at July 31,
2018
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
Weighted
Average
Exercise
Price
|
$19.96 - $26.99
|
|
846,353
|
|
|
6.7
|
|
$
|
20.84
|
|
|
611,735
|
|
|
6.5
|
|
$
|
21.16
|
|
$27.00 - $32.99
|
|
978,233
|
|
|
3.3
|
|
29.24
|
|
|
977,506
|
|
|
3.3
|
|
29.24
|
|
$33.00 - $38.83
|
|
680,047
|
|
|
8.4
|
|
35.97
|
|
|
132,988
|
|
|
7.2
|
|
35.13
|
|
Total
|
|
2,504,633
|
|
|
5.8
|
|
$
|
28.23
|
|
|
1,722,229
|
|
|
4.7
|
|
$
|
26.82
|
|
As of
July 31, 2018
, 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
$24,033
and
$18,945
, 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 "time-based" or "performance-based" restricted shares and RSUs. The time-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, 2018
:
|
|
|
|
|
|
|
|
|
Time-Based RSUs and Restricted Shares
|
|
Shares
|
|
Weighted Average Grant Date
Fair Value
|
Balance as of July 31, 2017
|
|
517,108
|
|
|
$
|
25.61
|
|
New grants
|
|
94,457
|
|
|
36.80
|
|
Vested
|
|
(219,389
|
)
|
|
24.76
|
|
Forfeited
|
|
(49,320
|
)
|
|
26.94
|
|
Balance as of July 31, 2018
|
|
342,856
|
|
|
$
|
29.05
|
|
The time-based RSUs granted during the fiscal year ended
July 31, 2017
, had a weighted-average grant-date fair value of
$35.15
. The total fair value of time-based RSU's vested during the years ended
July 31, 2018
and
2017
, was
$8,237
and
$6,512
, respectively.
|
|
|
|
|
|
|
|
|
Performance-Based RSUs
|
|
Shares
|
|
Weighted Average Grant Date
Fair Value
|
Balance as of July 31, 2017
|
|
58,206
|
|
|
$
|
32.03
|
|
New grants
|
|
56,290
|
|
|
33.12
|
|
Vested
|
|
—
|
|
|
—
|
|
Forfeited
|
|
(6,399
|
)
|
|
32.57
|
|
Balance as of July 31, 2018
|
|
108,097
|
|
|
$
|
32.57
|
|
The performance-based RSUs granted during the year ended July 31,
2017
, had a weighted-average grant-date fair value of
$32.03
. The aggregate intrinsic value of unvested time-based and performance-based RSU's outstanding at
July 31, 2018
and
2017
, and expected to vest, was
$17,249
and
$19,100
, respectively.
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.
The Company's internal measure of segment profit and loss reported to the chief operating decision maker for purposes of allocating resources to the segments and assessing performance includes certain administrative costs, such as the cost of finance, information technology, human resources, and certain other administrative costs. However, interest expense, investment and other income (expense), income tax expense, and certain corporate administrative expenses are excluded when evaluating segment performance.
Following is a summary of segment information for the years ended
July 31, 2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Sales to External Customers:
|
|
|
|
|
|
|
ID Solutions
|
|
$
|
846,087
|
|
|
$
|
800,392
|
|
|
$
|
795,511
|
|
WPS
|
|
327,764
|
|
|
312,924
|
|
|
325,114
|
|
Total Company
|
|
$
|
1,173,851
|
|
|
$
|
1,113,316
|
|
|
$
|
1,120,625
|
|
Depreciation & Amortization:
|
|
|
|
|
|
|
ID Solutions
|
|
$
|
22,075
|
|
|
$
|
23,092
|
|
|
$
|
27,285
|
|
WPS
|
|
3,367
|
|
|
4,211
|
|
|
5,147
|
|
Total Company
|
|
$
|
25,442
|
|
|
$
|
27,303
|
|
|
$
|
32,432
|
|
Segment Profit:
|
|
|
|
|
|
|
ID Solutions
|
|
$
|
143,411
|
|
|
$
|
130,572
|
|
|
$
|
112,276
|
|
WPS
|
|
31,712
|
|
|
25,554
|
|
|
30,792
|
|
Total Company
|
|
$
|
175,123
|
|
|
$
|
156,126
|
|
|
$
|
143,068
|
|
Assets:
|
|
|
|
|
|
|
ID Solutions
|
|
$
|
737,174
|
|
|
$
|
761,448
|
|
|
$
|
748,408
|
|
WPS
|
|
138,329
|
|
|
154,827
|
|
|
154,321
|
|
Corporate
|
|
181,428
|
|
|
133,948
|
|
|
141,235
|
|
Total Company
|
|
$
|
1,056,931
|
|
|
$
|
1,050,223
|
|
|
$
|
1,043,964
|
|
Expenditures for property, plant & equipment:
|
|
|
|
|
|
|
ID Solutions
|
|
$
|
17,283
|
|
|
$
|
12,347
|
|
|
$
|
11,640
|
|
WPS
|
|
4,494
|
|
|
2,820
|
|
|
5,500
|
|
Total Company
|
|
$
|
21,777
|
|
|
$
|
15,167
|
|
|
$
|
17,140
|
|
Following is a reconciliation of segment profit to earnings before income taxes for the years ended
July 31, 2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
2018
|
|
2017
|
|
2016
|
Total segment profit
|
$
|
175,123
|
|
|
$
|
156,126
|
|
|
$
|
143,068
|
|
Unallocated costs:
|
|
|
|
|
|
Administrative costs
|
27,093
|
|
|
25,111
|
|
|
25,190
|
|
Gain on sale of business
(1)
|
(4,666
|
)
|
|
—
|
|
|
—
|
|
Investment and other (income) expense
|
(2,487
|
)
|
|
(1,121
|
)
|
|
709
|
|
Interest expense
|
3,168
|
|
|
5,504
|
|
|
7,824
|
|
Earnings before income taxes
|
$
|
152,015
|
|
|
$
|
126,632
|
|
|
$
|
109,345
|
|
|
|
|
|
|
|
(1) Gain on sale of business relates to the WPS segment during the year ended July 31, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues*
Years Ended July 31,
|
|
Long-Lived Assets**
As of July 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
Geographic information:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
663,935
|
|
|
$
|
651,294
|
|
|
$
|
663,511
|
|
|
$
|
366,638
|
|
|
$
|
367,418
|
|
|
$
|
376,045
|
|
Other
|
|
573,652
|
|
|
521,791
|
|
|
519,579
|
|
|
193,710
|
|
|
221,458
|
|
|
216,076
|
|
Eliminations
|
|
(63,736
|
)
|
|
(59,769
|
)
|
|
(62,465
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Consolidated total
|
|
$
|
1,173,851
|
|
|
$
|
1,113,316
|
|
|
$
|
1,120,625
|
|
|
$
|
560,348
|
|
|
$
|
588,876
|
|
|
$
|
592,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* 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
51,677
for fiscal
2018
,
51,056
for fiscal
2017
, and
50,541
for fiscal
2016
. 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,
|
|
2018
|
|
2017
|
|
2016
|
Numerator (in thousands):
|
|
|
|
|
|
Earnings (Numerator for basic and diluted earnings per Class A Nonvoting Common Share)
|
$
|
91,060
|
|
|
$
|
95,645
|
|
|
$
|
80,110
|
|
Less:
|
|
|
|
|
|
Preferential dividends
|
(799
|
)
|
|
(788
|
)
|
|
(783
|
)
|
Preferential dividends on dilutive stock options
|
(14
|
)
|
|
(14
|
)
|
|
(1
|
)
|
Numerator for basic and diluted earnings per Class B Voting Common Share
|
$
|
90,247
|
|
|
$
|
94,843
|
|
|
$
|
79,326
|
|
Denominator (in thousands):
|
|
|
|
|
|
Denominator for basic earnings per share for both Class A and Class B
|
51,677
|
|
|
51,056
|
|
|
50,541
|
|
Plus: Effect of dilutive equity awards
|
847
|
|
|
900
|
|
|
228
|
|
Denominator for diluted earnings per share for both Class A and Class B
|
52,524
|
|
|
51,956
|
|
|
50,769
|
|
Net earnings per Class A Nonvoting Common Share:
|
|
|
|
|
|
Basic
|
$
|
1.76
|
|
|
$
|
1.87
|
|
|
$
|
1.59
|
|
Diluted
|
$
|
1.73
|
|
|
$
|
1.84
|
|
|
$
|
1.58
|
|
Net earnings per Class B Voting Common Share:
|
|
|
|
|
|
Basic
|
$
|
1.75
|
|
|
$
|
1.86
|
|
|
$
|
1.57
|
|
Diluted
|
$
|
1.72
|
|
|
$
|
1.83
|
|
|
$
|
1.56
|
|
Options to purchase
751,200
,
669,036
, and
3,172,755
shares of Class A Nonvoting Common Stock for the fiscal years ended
July 31, 2018
,
2017
, and
2016
, 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 operating expenses on a straight-line basis was
$15,938
,
$17,495
, and
$17,253
for the years ended
July 31, 2018
,
2017
, and
2016
, respectively. Future minimum lease payments required under such leases in effect at
July 31, 2018
, were as follows:
|
|
|
|
|
Years ending July 31,
|
|
2019
|
$
|
14,826
|
|
2020
|
10,270
|
|
2021
|
8,456
|
|
2022
|
7,419
|
|
2023
|
6,192
|
|
Thereafter
|
4,047
|
|
|
$
|
51,210
|
|
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, 2018
and
July 31, 2017
, according to the valuation techniques the Company used to determine their fair values.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inputs
Considered As
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical
Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Fair Values
|
|
Balance Sheet Classifications
|
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
|
|
|
|
July 31, 2018
|
|
|
|
|
|
|
|
Trading securities
|
$
|
14,383
|
|
|
$
|
—
|
|
|
$
|
14,383
|
|
|
Other assets
|
Foreign exchange contracts
|
—
|
|
|
1,077
|
|
|
1,077
|
|
|
Prepaid expenses and other current assets
|
Total Assets
|
$
|
14,383
|
|
|
$
|
1,077
|
|
|
$
|
15,460
|
|
|
|
Foreign exchange contracts
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
Other current liabilities
|
Total Liabilities
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
|
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 the Company 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, 2018
and
July 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, 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, 2018
and
2017
, the notional amount of outstanding forward foreign exchange contracts was $
32,667
and $
81,195
, 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, 2018
and
July 31, 2017
, unrealized gain of $
1,017
and loss of $
500
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,
2018
,
2017
, and
2016
, the Company reclassified losses of
$551
,
$486
, and
$199
from OCI into cost of goods sold, respectively.
As of
July 31, 2018
and
2017
, the notional amount of outstanding forward foreign exchange contracts designated as cash flow hedges was
$27,150
and
$30,016
, 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, 2018
and
2017
, the cumulative balance recognized in accumulated other comprehensive income were gains of
$9,961
and
$9,348
, respectively, on the Euro-denominated debt obligations. The changes recognized in other comprehensive income during the years ended
July 31, 2018
,
2017
and
2016
, were gains of
$612
, losses of
$1,792
, and
$1,372
, 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, 2018
,
2017
, and
2016
, the Company recognized gains of
$24
, 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:
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
July 31, 2018
|
|
July 31, 2017
|
|
July 31, 2018
|
|
July 31, 2017
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
Derivatives designated as hedging instruments:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
1,076
|
|
|
Prepaid expenses and other current assets
|
|
$
|
1,067
|
|
|
Other current liabilities
|
|
$
|
—
|
|
|
Other current liabilities
|
|
$
|
1,569
|
|
Net investment hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency denominated debt
|
Prepaid expenses and other current assets
|
|
$
|
—
|
|
|
Prepaid expenses and other current assets
|
|
$
|
—
|
|
|
Long term obligations, less current maturities
|
|
$
|
52,668
|
|
|
Long term obligations, less current maturities
|
|
$
|
53,280
|
|
Total derivatives designated as hedging instruments
|
|
|
$
|
1,076
|
|
|
|
|
$
|
1,067
|
|
|
|
|
$
|
52,668
|
|
|
|
|
$
|
54,849
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
1
|
|
|
Prepaid expenses and other current assets
|
|
$
|
287
|
|
|
Other current liabilities
|
|
$
|
3
|
|
|
Other current liabilities
|
|
$
|
7
|
|
Total derivatives not designated as hedging instruments
|
|
|
$
|
1
|
|
|
|
|
$
|
287
|
|
|
|
|
$
|
3
|
|
|
|
|
$
|
7
|
|
13. Divestiture
On May 31, 2018, the Company sold Runelandhs Försäljnings AB (“Runelandhs”), a business based in Kalmar, Sweden. Runelandhs is a direct marketer of industrial and office equipment. Its products include lifting, transporting, and warehouse equipment; workbenches and material handling supplies; products for environmental protection; and entrance, reception, and office furnishings. The Runelandhs business was part of the Company’s WPS segment and its earnings were not material. The Company received proceeds of
$19,141
, net of cash transferred with the business. The transaction resulted in a pre-tax and after-tax gain of
$4,666
, which was included in SG&A expenses on the Consolidated Statements of Earnings for the year ended July 31, 2018. The divestiture of the Runelandhs business was part of the Company’s continued long-term growth strategy to focus the Company’s energies and resources on growth of the Company’s core businesses.
14. Unaudited Quarterly Financial Information
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|
|
Quarters
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
|
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
|
|
Fiscal 2018
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
290,151
|
|
|
$
|
287,780
|
|
|
$
|
298,421
|
|
|
$
|
297,499
|
|
|
$
|
1,173,851
|
|
Gross margin
|
|
146,065
|
|
|
143,692
|
|
|
151,082
|
|
|
147,452
|
|
|
588,291
|
|
Operating income
|
|
35,411
|
|
|
34,796
|
|
|
37,709
|
|
|
44,780
|
|
|
152,696
|
|
Net earnings
|
|
25,836
|
|
|
4,273
|
|
|
26,000
|
|
|
34,951
|
|
|
91,060
|
|
Net earnings per Class A Nonvoting Common Share:
|
|
|
|
|
|
|
|
|
|
|
Basic *
|
|
$
|
0.50
|
|
|
$
|
0.08
|
|
|
$
|
0.50
|
|
|
$
|
0.67
|
|
|
$
|
1.76
|
|
Diluted *
|
|
$
|
0.49
|
|
|
$
|
0.08
|
|
|
$
|
0.49
|
|
|
$
|
0.66
|
|
|
$
|
1.73
|
|
* The sum of the quarters does not equal the year-to-date total for fiscal 2017 or 2018 due to the quarterly changes in weighted-average shares outstanding.
15. Subsequent Events
On
September 12, 2018
, the Company announced an increase in the annual dividend to shareholders of the Company's Class A Common Stock, from
$0.83
to
$0.85
per share. A quarterly dividend of
$0.2125
will be paid on
October 31, 2018
, to shareholders of record at the close of business on
October 10, 2018
. This dividend represents an increase of
2.4%
and is the
33rd
consecutive annual increase in dividends.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.