NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 2019, 2018 and 2017
(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, accounts payable, accrued liabilities and short-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 12 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 $5,005 and $4,471 as of July 31, 2019 and 2018, respectively. No single customer comprised more than 10% of the Company’s consolidated net sales in fiscal 2019, 2018, or 2017, or 10% of the Company’s consolidated accounts receivable as of July 31, 2019 or 2018. 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 net realizable value. Cost has been determined using the last-in, first-out (“LIFO”) method for certain inventories in the U.S. (13.4% of total inventories at July 31, 2019, and 15.0% of total inventories at July 31, 2018) 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 $7,259 and $7,015 as of July 31, 2019 and 2018, respectively.
Inventories consist of the following as of July 31:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Finished products
|
$
|
77,532
|
|
|
$
|
73,133
|
|
Work-in-process
|
20,515
|
|
|
19,903
|
|
Raw materials and supplies
|
21,990
|
|
|
20,035
|
|
Total inventories
|
$
|
120,037
|
|
|
$
|
113,071
|
|
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, 2019, 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, 2019.
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 2019, 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
|
Property, plant and equipment consist of the following as of July 31:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Land
|
$
|
9,752
|
|
|
$
|
6,994
|
|
Buildings and improvements
|
99,685
|
|
|
96,245
|
|
Machinery and equipment
|
266,991
|
|
|
270,989
|
|
Construction in progress
|
7,500
|
|
|
4,495
|
|
Property, plant and equipment—gross
|
383,928
|
|
|
378,723
|
|
Accumulated depreciation
|
(273,880
|
)
|
|
(280,778
|
)
|
Property, plant and equipment—net
|
$
|
110,048
|
|
|
$
|
97,945
|
|
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 $18,023, $19,009, and $20,190 for the years ended July 31, 2019, 2018 and 2017, 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, 2019 and 2018, $5,617 and $6,154, respectively, of prepaid catalog costs were included in "Prepaid expenses and other current assets" in the accompanying Consolidated Balance Sheets.
Revenue Recognition — The majority of the Company’s revenue relates to the sale of identification solutions and workplace safety products to customers. Prior to August 1, 2018, the Company's policy was to recognize revenue when title to the product and risk of loss had transferred to the customer, persuasive evidence of an arrangement existed, and collection of the sales proceeds was reasonably assured, most of which occurred upon shipment of goods to customers. Effective August 1, 2018, the Company’s policy is to recognize revenue when control of the product or service transfers to the customer in an amount that represents the consideration expected to be received in exchange for those products and services. The Company considers control to have transferred when legal title, physical possession, and the significant risks and rewards of ownership of the asset have transferred to the customer and the collection of the transaction price is reasonably assured, most of which occur upon shipment or delivery of goods to customers. Given the nature of the Company’s business, revenue recognition practices do not contain estimates that materially affect the results of operations, with the exception of estimated customer returns and credit memos. The Company records an allowance for estimated product returns and credit memos using the expected value method based on historical experience, which is recognized as a deduction from net sales at the time of sale. As of July 31, 2019 and 2018, the Company had a reserve for estimated product returns and credit memos of $5,796 and $4,546, respectively.
Sales Incentives — The Company accounts for cash consideration (such as sales incentives, rebates, and cash discounts) given to its customers or resellers as a reduction of revenue. Sales incentives for the years ended July 31, 2019, 2018, and 2017 were $40,811, $40,671, and $37,134, 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, 2019, 2018, and 2017 was $62,454, $67,429, and $68,268, respectively.
Stock-Based Compensation — 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, net of estimated forfeitures, of all share-based awards 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' Equity” 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 net unrealized gains and losses from cash flow hedges, the unamortized gain on defined-benefit pension plans net of their related tax effects, and foreign currency translation adjustments, which include net investment hedge and long-term intercompany loan translation adjustments,.
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.
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 income 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 Income as "Investment and other income" 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.
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 income. The amount of hedge ineffectiveness was not material for the fiscal years ended July 31, 2019, 2018, and 2017.
See Note 13, "Derivatives and Hedging Activities" for more information regarding the Company’s derivative instruments and hedging activities.
New Accounting Standards — In August 2017, the Financial Accounting Standards Board ("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 adopted ASU 2017-12 effective August 1, 2019, which did not 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. The Company has not adopted this guidance, which will only impact the Company's consolidated financial statements if there is a future impairment of goodwill.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which changes the impairment model for most financial instruments. Current guidance requires the recognition of credit losses based on an incurred loss impairment methodology that reflects losses once the losses are probable. Under ASU 2016-13, the Company will be required to use a current expected credit loss model ("CECL") that will immediately recognize an estimate of credit losses that are expected to occur over the life of the financial instruments that are in the scope of this update, including trade receivables. The CECL model uses a broader range of reasonable and supportable information in the development of credit loss estimates. This guidance becomes effective for interim periods in fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact that the adoption of this ASU will have on the consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" ("ASC 842"), 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 and disclose key information about leasing arrangements. In July 2018, the FASB issued ASU 2018-11 "Leases (Topic 842): Targeted Improvements," which provides, among other items, an additional transition method allowing a cumulative effect adjustment to the opening balance of retained earnings during the period of adoption. ASC 842 is effective for interim periods in fiscal years beginning after December 15, 2018.
The Company adopted ASU 2016-02 (and related updates) effective August 1, 2019, using the optional transition method provided in ASU 2018-11 to apply this guidance to the impacted lease population at the date of initial application. Results for reporting periods beginning after August 1, 2019, will be presented under ASU 2016-02, while comparative prior period amounts
will not be restated and continue to be presented under accounting standards in effect during those periods. The Company elected the package of practical expedients permitted within the new standard, which among other things, allows the Company to carryforward the historical lease accounting of expired or existing leases with respect to lease identification, lease classification and accounting treatment for initial direct costs as of the adoption date. The Company also elected the practical expedient related to lease versus nonlease components, allowing the Company to recognize lease and nonlease components as a single lease. Lastly, the Company elected the hindsight practical expedient, allowing the Company to use hindsight in determining the lease term and assessing impairment of right-of-use assets when transitioning to ASC 842. The Company has made a policy election not to capitalize leases with an initial term of 12 months or less.
The Company expects the adoption of ASC 842 to result in the recording of additional lease assets and liabilities of approximately $60,000 based on the present value of the remaining lease payments as of August 1, 2019, and does not expect the cumulative effect adjustment to the opening balance of retained earnings to be material due to the package of practical expedients elected. As the adoption of ASC 842 is non-cash in nature, the Company does not anticipate the standard will have a material impact on its cash flows or operations.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" ("ASC 606"), which eliminates the transaction and industry-specific revenue recognition guidance and replaced 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. The Company adopted ASU 2014-09 (and related updates) effective August 1, 2018 using the modified retrospective method to apply this guidance to all contracts at the date of initial application. Results for reporting periods beginning after August 1, 2018 are presented under ASC 606, while comparative prior period amounts have not been restated and continue to be presented under accounting standards in effect in those periods.
The adoption of ASC 606 did not have a material effect on the Company's consolidated financial condition, results of operations, cash flows, business processes, controls, or systems. Upon adoption, the Company recorded a cumulative adjustment to the opening balance of retained earnings as of August 1, 2018, which resulted in a decrease to retained earnings of $2,137, net of tax. The adjustment was primarily due to a change in timing of when revenue and the related costs for certain extended service warranties are recognized, as required per ASC 606.
See Note 8, "Revenue Recognition" for additional information and required disclosures under the new standard.
2. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill by reportable segment for the years ended July 31, 2019 and 2018, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IDS
|
|
WPS
|
|
Total
|
Balance as of July 31, 2017
|
$
|
391,864
|
|
|
$
|
45,833
|
|
|
$
|
437,697
|
|
Translation adjustments
|
(6,340
|
)
|
|
(1,487
|
)
|
|
(7,827
|
)
|
Divestiture
|
—
|
|
|
(10,055
|
)
|
|
(10,055
|
)
|
Balance as of July 31, 2018
|
$
|
385,524
|
|
|
$
|
34,291
|
|
|
$
|
419,815
|
|
Translation adjustments
|
(6,519
|
)
|
|
(2,309
|
)
|
|
(8,828
|
)
|
Balance as of July 31, 2019
|
$
|
379,005
|
|
|
$
|
31,982
|
|
|
$
|
410,987
|
|
The annual impairment testing performed on May 1, 2019, 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, 2019
|
|
July 31, 2018
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships and other
|
9
|
|
$
|
46,595
|
|
|
$
|
(29,343
|
)
|
|
$
|
17,252
|
|
|
9
|
|
$
|
61,944
|
|
|
$
|
(38,872
|
)
|
|
$
|
23,072
|
|
Unamortized other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
N/A
|
|
18,871
|
|
|
—
|
|
|
18,871
|
|
|
N/A
|
|
19,516
|
|
|
—
|
|
|
19,516
|
|
Total
|
|
|
$
|
65,466
|
|
|
$
|
(29,343
|
)
|
|
$
|
36,123
|
|
|
|
|
$
|
81,460
|
|
|
$
|
(38,872
|
)
|
|
$
|
42,588
|
|
The decrease in the gross carrying amount of other intangible assets as of July 31, 2019, compared to July 31, 2018, was primarily due to the effect of currency translations during the fiscal year.
Amortization expense on intangible assets during the fiscal years ended July 31, 2019, 2018, and 2017 was $5,776, $6,433 and $7,113, respectively. Amortization expense over each of the next five fiscal years is projected to be $5,166, $5,165, $4,896, $2,025, and $0 for the fiscal years ending July 31, 2020, 2021, 2022, 2023, and 2024 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, 2017
|
$
|
109
|
|
|
$
|
2,620
|
|
|
$
|
(47,411
|
)
|
|
$
|
(44,682
|
)
|
Other comprehensive income 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
|
)
|
Other comprehensive income (loss) before reclassification
|
630
|
|
|
67
|
|
|
(14,195
|
)
|
|
(13,498
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
(786
|
)
|
|
(569
|
)
|
|
—
|
|
|
(1,355
|
)
|
Ending balance, July 31, 2019
|
$
|
707
|
|
|
$
|
2,800
|
|
|
$
|
(74,761
|
)
|
|
$
|
(71,254
|
)
|
The increase in accumulated other comprehensive loss as of July 31, 2019, compared to July 31, 2018, was primarily due to the appreciation of the U.S. dollar against certain other currencies during the fiscal year. The foreign currency translation adjustments column in the table above includes the impact of foreign currency translation, foreign currency translation on intercompany notes, and settlements of net investment hedges, net of tax. Of the $1,355 reclassified from AOCI, the $786 gain on cash flow hedges was reclassified into cost of goods sold, and the $569 net gain on post-retirement plans was reclassified into "Investment and other income" in the accompanying Consolidated Statements of Income in fiscal 2019.
The following table illustrates the income tax (expense) benefit on the components of other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Income tax (expense) benefit related to items of other comprehensive (loss) income:
|
|
|
|
|
|
|
Cash flow hedges
|
|
55
|
|
|
(669
|
)
|
|
705
|
|
Pension and other post-retirement benefits
|
|
164
|
|
|
(64
|
)
|
|
(4
|
)
|
Other income tax adjustments and currency translation
|
|
(972
|
)
|
|
(567
|
)
|
|
1,720
|
|
Adoption of accounting standard ASU 2018-02
|
|
—
|
|
|
1,869
|
|
|
—
|
|
Income tax (expense) benefit related to items of other comprehensive (loss) income
|
|
$
|
(753
|
)
|
|
$
|
569
|
|
|
$
|
2,421
|
|
4. Employee Benefit Plans
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 Company provides postretirement medical benefits (the “Plan”) for eligible regular full and part-time domestic employees (including spouses) who retired prior to January 1, 2016, as outlined by the Plan. The Plan is unfunded, and the liability, unrecognized gain, and associated income statement impact are immaterial for purposes of disclosure. The liability is recorded in the accompanying Consolidated Balance Sheets as of July 31, 2019 and 2018. The unrecognized gain is reported as a component of AOCI.
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, 2019 and 2018, the accumulated pension obligation related to these plans was $5,314 and $5,383, respectively. As of July 31, 2019 and 2018, pre-tax amounts recognized in "Accumulated other comprehensive loss" in the accompanying Consolidated Balance Sheets were losses of $329 and $194, respectively. The net periodic benefit cost for these plans was $418, $341, and $665 during the years ended July 31, 2019, 2018 and 2017, 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. The Company also has an additional 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, 2019 and 2018, $15,744 and $14,383, respectively, of deferred compensation was included in "Other 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 plan, based on income of the respective companies and employee contributions. Accrued retirement and profit-sharing contributions of $3,342 and $3,844 were included in "Other current liabilities" on the accompanying Consolidated Balance Sheets as of July 31, 2019 and 2018, respectively. The amounts charged to expense for these retirement and profit sharing plans were $14,158, $14,395, and $13,750 during the years ended July 31, 2019, 2018 and 2017, respectively.
5. Income Taxes
Income before income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
2019
|
|
2018
|
|
2017
|
United States
|
|
$
|
55,077
|
|
|
$
|
48,903
|
|
|
$
|
43,561
|
|
Other Nations
|
|
109,567
|
|
|
103,112
|
|
|
83,071
|
|
Total
|
|
$
|
164,644
|
|
|
$
|
152,015
|
|
|
$
|
126,632
|
|
Income tax expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Current income tax expense:
|
|
|
|
|
|
|
United States
|
|
$
|
2,232
|
|
|
$
|
2,830
|
|
|
$
|
15,279
|
|
Other Nations
|
|
22,445
|
|
|
26,593
|
|
|
23,826
|
|
States (U.S.)
|
|
913
|
|
|
910
|
|
|
1,163
|
|
|
|
$
|
25,590
|
|
|
$
|
30,333
|
|
|
$
|
40,268
|
|
Deferred income tax expense (benefit):
|
|
|
|
|
|
|
United States
|
|
$
|
8,451
|
|
|
$
|
30,267
|
|
|
$
|
(8,173
|
)
|
Other Nations
|
|
(667
|
)
|
|
(1,462
|
)
|
|
(1,329
|
)
|
States (U.S.)
|
|
12
|
|
|
1,817
|
|
|
221
|
|
|
|
$
|
7,796
|
|
|
$
|
30,622
|
|
|
$
|
(9,281
|
)
|
Total income tax expense
|
|
$
|
33,386
|
|
|
$
|
60,955
|
|
|
$
|
30,987
|
|
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 reduced the U.S. federal corporate income tax rate from 35.0% to 21.0%, imposed a one-time tax on deemed repatriated income of foreign subsidiaries, eliminated the domestic manufacturing deduction and moved to a partial territorial system by providing a 100% dividend received deduction on certain qualified dividends from foreign subsidiaries.
The tax effects of temporary differences are as follows as of July 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2019
|
|
|
Assets
|
|
Liabilities
|
|
Total
|
Inventories
|
|
$
|
3,856
|
|
|
$
|
(1
|
)
|
|
$
|
3,855
|
|
Prepaid catalog costs
|
|
—
|
|
|
(631
|
)
|
|
(631
|
)
|
Employee compensation and benefits
|
|
7,021
|
|
|
(89
|
)
|
|
6,932
|
|
Accounts receivable
|
|
943
|
|
|
(233
|
)
|
|
710
|
|
Fixed assets
|
|
3,125
|
|
|
(6,869
|
)
|
|
(3,744
|
)
|
Intangible assets
|
|
1,432
|
|
|
(31,415
|
)
|
|
(29,983
|
)
|
Deferred and equity-based compensation
|
|
7,352
|
|
|
—
|
|
|
7,352
|
|
Postretirement benefits
|
|
2,659
|
|
|
(71
|
)
|
|
2,588
|
|
Tax credit and net operating loss carry-forwards
|
|
62,966
|
|
|
—
|
|
|
62,966
|
|
Less valuation allowance
|
|
(60,073
|
)
|
|
—
|
|
|
(60,073
|
)
|
Other, net
|
|
7,406
|
|
|
(7,961
|
)
|
|
(555
|
)
|
Total
|
|
$
|
36,687
|
|
|
$
|
(47,270
|
)
|
|
$
|
(10,583
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2018
|
|
|
Assets
|
|
Liabilities
|
|
Total
|
Inventories
|
|
$
|
3,095
|
|
|
$
|
(53
|
)
|
|
$
|
3,042
|
|
Prepaid catalog costs
|
|
—
|
|
|
(978
|
)
|
|
(978
|
)
|
Employee compensation and 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
|
)
|
Tax carry-forwards at July 31, 2019 are comprised of:
|
|
•
|
Foreign net operating loss carry-forwards of $100,335, of which $83,826 have no expiration date and the remainder of which expire within the next five years.
|
|
|
•
|
State net operating loss carry-forwards of $32,986, which expire from 2022 to 2038.
|
|
|
•
|
Foreign tax credit carry-forwards of $27,343, which expire from 2021 to 2029.
|
|
|
•
|
State R&D credit carry-forwards of $12,882, which expire from 2020 to 2034.
|
Rate Reconciliation
A reconciliation of the tax rate computed by applying the statutory U.S. federal income tax rate to income before income taxes to the total income tax expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Tax at statutory rate
|
|
21.0
|
%
|
|
26.9
|
%
|
|
35.0
|
%
|
State income taxes, net of federal tax benefit
|
|
0.3
|
%
|
|
1.6
|
%
|
|
1.0
|
%
|
International rate differential
|
|
2.2
|
%
|
|
(1.1
|
)%
|
|
(6.3
|
)%
|
Rate variances arising from foreign subsidiary distributions(1)
|
|
(0.4
|
)%
|
|
0.8
|
%
|
|
(5.9
|
)%
|
Foreign tax credit carryforward valuation allowance(2)
|
|
1.8
|
%
|
|
14.1
|
%
|
|
—
|
%
|
Divestiture of business(3)
|
|
—
|
%
|
|
(0.8
|
)%
|
|
—
|
%
|
Adjustments to tax accruals and reserves(4)
|
|
(3.6
|
)%
|
|
2.2
|
%
|
|
3.6
|
%
|
Non-deductible executive compensation(5)
|
|
2.3
|
%
|
|
0.5
|
%
|
|
—
|
%
|
Research and development tax credits and domestic manufacturer’s deduction
|
|
(1.6
|
)%
|
|
(2.0
|
)%
|
|
(1.8
|
)%
|
Deferred tax and other adjustments, net
|
|
(1.7
|
)%
|
|
(2.1
|
)%
|
|
(1.1
|
)%
|
Effective tax rate
|
|
20.3
|
%
|
|
40.1
|
%
|
|
24.5
|
%
|
|
|
(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 14, "Divestiture" for additional information.
|
|
|
(4)
|
The years ended July 31, 2018 and 2017, include increases in uncertain tax positions, while the year ended July 31, 2019, includes reductions of uncertain tax positions resulting from the closure of audits and lapses in statutes of limitations.
|
|
|
(5)
|
The years ended July 31, 2019 and 2018, include non-deductible compensation such as salaries, bonuses, and other equity compensation of the Company's executives (as defined in Internal Revenue Service Code Section 162(m)).
|
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, 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
|
|
Additions based on tax positions related to the current year
|
2,518
|
|
Additions for tax positions of prior years
|
612
|
|
Reductions for tax positions of prior years
|
(378
|
)
|
Lapse of statute of limitations
|
(8,140
|
)
|
Cumulative Translation Adjustments and other
|
(201
|
)
|
Balance as of July 31, 2019
|
$
|
14,841
|
|
Of the $14,841 of unrecognized tax benefits, if recognized, $12,037 would affect the Company's income tax rate. The Company has classified $10,218 and $13,238, excluding interest and penalties, of the reserve for uncertain tax positions in "Other liabilities" on the Consolidated Balance Sheets as of July 31, 2019 and 2018, respectively. The Company has classified $4,623 and $7,192, excluding interest and penalties, as a reduction of long-term deferred income tax assets on the accompanying Consolidated Balance Sheets as of July 31, 2019 and 2018, 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 a decrease of $1,013, an increase of $556, and an increase of $674 in interest expense during the years ended July 31, 2019, 2018, and 2017, respectively. There was a $2,357 decrease to the reserve for uncertain tax positions for penalties during the year ended July 31, 2019, an increase of $83 during the year ended July 31, 2018, and an increase of $218 during the year end July 31, 2017. These amounts are net of reversals due to reductions for tax positions of prior years, statute of limitations, and settlements. At July 31, 2019 and 2018, the Company had $1,740 and $2,762, 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, 2019 and 2018, the Company had $663 and $3,027, 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 Income.
The Company estimates that it is reasonably possible that the unrecognized tax benefits may be reduced by $5,429 within 12 months as a result of the resolution of worldwide tax matters, tax audit settlements, amended tax filings, and/or the expiration of statute of limitations, all of which, if recognized, would result in an income tax benefit in the Consolidated Statements of Income.
During the year ended July 31, 2019, the Company recognized $9,797 of tax benefits (including interest and penalties) associated with the lapse of statutes of limitations. The Company also recognized $568 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’16 — F’19
|
6. Debt
On August 1, 2019, the Company and certain of its subsidiaries entered into an unsecured $200,000 multi-currency revolving loan agreement with a group of five banks that replaced and terminated the Company's previous $300,000 revolving credit agreement that had been entered into on September 25, 2015. Refer to Item 8, Note 16, "Subsequent Events" for information regarding the Company's new revolving loan agreement.
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 had a final maturity date of September 25, 2020, the Company had 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 could have been increased from $300,000 up to $450,000. The maximum amount outstanding on the Company's revolving loan agreement during the fiscal year ended July 31, 2019 was $7,901. As of July 31, 2019, there were no borrowings outstanding on the credit facility. There was $296,729 available for future borrowing under the credit facility, which can be increased to $446,729 at the Company's option, subject to certain conditions. The revolving loan agreement had a final maturity date of September 25, 2020.
On May 13, 2010, the Company completed a private placement of €75,000 aggregate principal amount of senior unsecured notes to accredited institutional investors. The €75,000 of senior notes consisted of €30,000 aggregate principal amount of 3.71% Series 2010-A Senior Notes, which were repaid during fiscal 2017, and €45,000 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. The borrowing is included in "Current maturities on long-term debt" and "Long-term obligations" in the accompanying Consolidated Balance Sheets as of July 31, 2019 and 2018, respectively.
The Company’s old debt agreements required 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). The Company’s new 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 3.50 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, 2019, 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 71.9 to 1.0.
Total debt consists of the following as of July 31:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Euro-denominated notes payable in 2020 at a fixed rate of 4.24%
|
|
$
|
50,166
|
|
|
$
|
52,618
|
|
The Company had outstanding letters of credit of $3,271 and $3,043 at July 31, 2019 and 2018, respectively.
The estimated fair value of the Company’s long-term obligations, including current maturities, was $51,566 and $55,707 at July 31, 2019 and 2018, respectively, as compared to the carrying value of $50,166 and $52,618 at July 31, 2019 and 2018, 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.
Maturities on long-term debt are as follows:
|
|
|
|
|
Years Ending July 31,
|
|
2020
|
$
|
50,166
|
|
Total
|
$
|
50,166
|
|
7. Stockholders' Equity
Information as to the Company’s capital stock at July 31, 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2019
|
|
July 31, 2018
|
|
|
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 $0.01665 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’ equity for the fiscal years ended July 31, 2019, 2018, and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Compensation
|
|
Shares Held in Rabbi Trust, at cost
|
|
Total
|
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
|
|
|
|
Sale of shares at cost
|
|
$
|
(928
|
)
|
|
$
|
928
|
|
|
$
|
—
|
|
Purchase of shares at cost
|
|
1,212
|
|
|
(1,212
|
)
|
|
—
|
|
Balances at July 31, 2019
|
|
$
|
8,506
|
|
|
$
|
(8,506
|
)
|
|
$
|
—
|
|
Shares at July 31, 2019
|
|
285,533
|
|
|
285,533
|
|
|
|
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 into other investment funds. Both the Director Deferred Compensation Plan and the Executive Deferred Compensation Plan disallow transfers from other investment funds into or out of the Company's Class A Nonvoting Common Stock.
At July 31, 2019, the deferred compensation balance in stockholders’ equity 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, 2019, the Company has reserved 1,941,764 shares of Class A Nonvoting Common Stock for outstanding stock options, RSUs and restricted shares and 3,682,157 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, 2019, 2018, and 2017, was $12,092 ($10,628 net of taxes), $9,980 ($7,485 net of taxes), and $9,495 ($5,887 net of taxes), respectively. As of July 31, 2019, total unrecognized compensation cost related to share-based compensation awards that are expected to vest was $9,652 pre-tax, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of 1.8 years.
Stock Options
The stock options issued under the plan have an exercise price equal to the fair market value of the underlying stock at the date of grant and generally vest ratably over a three-year period, with one-third becoming exercisable one year after the grant date and one-third additional in each of the succeeding two years. Options issued under the plan, referred to herein as “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, 2019, 2018, and 2017, 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
|
|
2019
|
|
2018
|
|
2017
|
Expected term (in years)
|
|
6.20
|
|
|
6.07
|
|
|
6.11
|
|
Expected volatility
|
|
26.05
|
%
|
|
28.19
|
%
|
|
29.55
|
%
|
Expected dividend yield
|
|
2.71
|
%
|
|
2.72
|
%
|
|
2.70
|
%
|
Risk-free interest rate
|
|
3.01
|
%
|
|
1.96
|
%
|
|
1.26
|
%
|
Weighted-average market value of underlying stock at grant date
|
|
$
|
43.96
|
|
|
$
|
36.85
|
|
|
$
|
35.14
|
|
Weighted-average exercise price
|
|
$
|
43.96
|
|
|
$
|
36.85
|
|
|
$
|
35.14
|
|
Weighted-average fair value of options granted during the period
|
|
$
|
9.70
|
|
|
$
|
7.96
|
|
|
$
|
7.56
|
|
The following is a summary of stock option activity for the fiscal year ended July 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Price
|
|
Options Outstanding
|
|
Weighted Average Exercise Price
|
Balance as of July 31, 2018
|
|
$
|
19.96
|
|
—
|
$38.83
|
|
2,504,633
|
|
|
$
|
28.23
|
|
Options granted
|
|
41.70
|
|
—
|
43.98
|
|
276,238
|
|
|
43.96
|
|
Options exercised
|
|
19.96
|
|
—
|
36.85
|
|
(1,154,343
|
)
|
|
27.03
|
|
Options canceled
|
|
20.95
|
|
—
|
43.98
|
|
(31,812
|
)
|
|
37.95
|
|
Balance as of July 31, 2019
|
|
$
|
19.96
|
|
—
|
$43.98
|
|
1,594,716
|
|
|
$
|
31.63
|
|
The total fair value of options vested during the fiscal years ended July 31, 2019, 2018, and 2017, was $2,864, $3,006, and $2,911, respectively. The total intrinsic value of options exercised during the fiscal years ended July 31, 2019, 2018, and 2017, was $20,969, $6,208, and $7,901, respectively.
There were 1,025,811, 1,722,229, and 1,859,959 options exercisable with a weighted average exercise price of $27.06, $26.82, and $28.20 at July 31, 2019, 2018, and 2017, respectively. The cash received from the exercise of stock options during the fiscal years ended July 31, 2019, 2018, and 2017, was $23,466, $12,099, and $19,728, respectively. The tax benefit on options exercised during the fiscal years ended July 31, 2019, 2018, and 2017, was $5,242, $1,893, and $3,002, respectively.
The following table summarizes information about stock options outstanding at July 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Outstanding and Exercisable
|
Range of Exercise Prices
|
|
Number of Shares
Outstanding at
July 31, 2019
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
Weighted
Average
Exercise
Price
|
|
Shares
Exercisable
at July 31,
2019
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
Weighted
Average
Exercise
Price
|
$19.96 - $26.99
|
|
476,603
|
|
|
5.9
|
|
$
|
20.64
|
|
|
476,603
|
|
|
5.9
|
|
$
|
20.64
|
|
$27.00 - $32.99
|
|
285,513
|
|
|
2.8
|
|
29.71
|
|
|
285,150
|
|
|
2.8
|
|
29.71
|
|
$33.00 - $43.98
|
|
832,600
|
|
|
8.1
|
|
38.58
|
|
|
264,058
|
|
|
7.5
|
|
35.77
|
|
Total
|
|
1,594,716
|
|
|
6.5
|
|
$
|
31.63
|
|
|
1,025,811
|
|
|
5.4
|
|
$
|
27.06
|
|
As of July 31, 2019, 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 $31,955 and $25,246, respectively.
RSUs
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" 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 financial performance metrics are met.
The following tables summarize the RSU activity for the fiscal year ended July 31, 2019:
|
|
|
|
|
|
|
|
|
Time-Based RSUs
|
|
Shares
|
|
Weighted Average Grant Date
Fair Value
|
Balance as of July 31, 2018
|
|
342,856
|
|
|
$
|
29.05
|
|
New grants
|
|
84,231
|
|
|
44.20
|
|
Vested
|
|
(212,788
|
)
|
|
26.73
|
|
Forfeited
|
|
(25,661
|
)
|
|
31.07
|
|
Balance as of July 31, 2019
|
|
188,638
|
|
|
$
|
38.15
|
|
The time-based RSUs granted during the fiscal year ended July 31, 2018, had a weighted-average grant-date fair value of $36.80. The total fair value of time-based RSUs vested during the years ended July 31, 2019 and 2018, was $9,859 and $8,237, respectively.
|
|
|
|
|
|
|
|
|
Performance-Based RSUs
|
|
Shares
|
|
Weighted Average Grant Date
Fair Value
|
Balance as of July 31, 2018
|
|
108,097
|
|
|
$
|
32.57
|
|
New grants
|
|
50,313
|
|
|
50.70
|
|
Balance as of July 31, 2019
|
|
158,410
|
|
|
$
|
38.33
|
|
The performance-based RSUs granted during the fiscal year ended July 31, 2019, had a weighted-average grant-date fair value determined by a third-party valuation involving the use of a Monte Carlo simulation. The performance-based RSUs granted during the fiscal year ended July 31, 2018, had a weighted-average grant-date fair value of $33.12. The aggregate intrinsic value of unvested time-based and performance-based RSUs outstanding at July 31, 2019 and 2018, and expected to vest, was $17,953 and $17,249, respectively.
8. Revenue Recognition
The Company recognizes revenue when control of the product or service transfers to the customer at an amount that represents the consideration expected to be received in exchange for those products and services.
Nature of Products
The Company’s revenues are primarily from the sale of identification solutions and workplace safety products that are shipped and billed to customers. All revenue is from contracts with customers and is included in “Net sales” on the Consolidated Statements of Income. See Note 9 “Segment Information” for the Company’s disaggregated revenue disclosure.
Performance Obligations
The Company’s contracts with customers consist of purchase orders, which in some cases are governed by master supply or distributor agreements. For each contract, the Company considers the commitment to transfer tangible products, which are generally capable of being distinct, to be separate performance obligations.
The majority of the Company's revenue is earned and recognized at a point in time through ship-and-bill performance obligations where the customer typically obtains control of the product upon shipment or delivery, depending on freight terms. The Company considers control to have transferred if legal title, physical possession, and the significant risks and rewards of ownership of the asset have transferred to the customer and the Company has a present right to payment. In almost all cases, control transfers once a product is shipped or delivered, as this is when customer is able to direct and obtain substantially all of the remaining benefits associated with use of the asset.
Transaction Price and Variable Consideration
Revenue is measured as the amount of consideration the Company expects to be entitled to in exchange for the transfer of product to a customer. The transaction price is generally the price stated in the contract specific for each item sold, adjusted for all applicable variable considerations. Variable considerations generally include discounts, returns, credits, rebates, or other allowances that reduce the transaction price. Certain discounts and price assurances are fixed and known at the time of sale.
The Company estimates the amount of variable consideration and reduces the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The expected value method is used to estimate expected returns and allowances based on historical experience. The most likely amount method is used to estimate customer rebates, which are offered retrospective and typically defined in the master supply or distributor agreement.
Payment Terms
While the Company’s standard payment terms are net 30 days, the specific payment terms and conditions in its contracts with customers vary by type and location of the customer. Cash discounts may be offered to certain customers. The Company has payment terms in its contracts with customers of less than one year and has elected the practical expedient applicable to such contracts and does not consider the time value of money.
Warranties
The Company offers standard warranty coverage on substantially all products which provides the customer with assurance that the product will function as intended. This standard warranty coverage is accounted for as an assurance warranty and is not considered to be a separate performance obligation. The Company records a liability for product warranty obligations at the time of sale based on historical warranty experience that is included in cost of goods sold.
The Company also offers extended warranty coverage for certain products, which it accounts for as service warranties. In most cases, the extended service warranty is included in the sales price of the product and is not sold separately. The Company considers the extended service warranty to be a separate performance obligation and allocates a portion of the transaction price to the service warranty based on the estimated stand-alone selling price. At the time of sale, the extended warranty transaction price is recorded as deferred revenue on the Consolidated Balance Sheets and is recognized on a straight-line basis over the life of the service warranty period. The deferred revenue is considered a contract liability as the Company has a right to payment at the time the product with the related extended service warranty is shipped or delivered and therefore, payment is received in advance of the Company's performance.
Contract Balances
The balance of contract liabilities associated with service warranty performance obligations was $2,782 and $2,796 as of July 31, 2019 and 2018, respectively. This also represents the amount of unsatisfied performance obligations related to contracts that extend beyond one year. The current portion and non-current portion of contract liabilities are included in “Other current liabilities” and “Other liabilities," respectively, on the accompanying Consolidated Balance Sheets. During the fiscal year ended July 31, 2019, the Company recognized revenue of $1,163 that was included in the contract liability balance at the beginning of the period from the amortization of extended service warranties. Of the contract liability balance outstanding at July 31, 2019, the Company expects to recognize 41% by the end of fiscal 2020, an additional 28% by the end of fiscal 2021, and the balance thereafter.
Practical Expedients
The following is a summary of practical expedients the Company has elected to apply under ASC 606.
With the exception of the performance obligations related to the extended service warranties, the Company's contracts have an original expected duration of one year or less. As a result, the Company has elected to use the practical expedient to not disclose its remaining performance obligations for contracts that have an original expected length of one year or less.
The Company applied the portfolio approach to its ship-and-bill contracts that have similar characteristics as it reasonably expects that the effects on the financial statements of applying this guidance to the portfolio of contracts would not differ materially from applying this guidance to the individual contracts within the portfolio.
Sales and use tax, value-added tax, and other similar taxes assessed by governmental authorities and collected concurrent with revenue-producing activities are excluded from the transaction price.
The Company accounts for shipping and handling activities that occur after control of the related products transfers to the customer as fulfillment activities and are therefore recognized as revenue at time of shipping.
The Company expenses incremental direct costs of obtaining a contract (e.g., sales commissions) when incurred because the amortization period is generally twelve months or less. Contract costs are included in "Selling, general and administrative expense" on the Consolidated Statements of Income.
9. 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, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net sales:
|
|
|
|
|
|
|
ID Solutions
|
|
|
|
|
|
|
Americas
|
|
$
|
577,156
|
|
|
$
|
556,172
|
|
|
$
|
544,330
|
|
Europe
|
|
193,852
|
|
|
197,737
|
|
|
172,776
|
|
Asia
|
|
92,092
|
|
|
92,178
|
|
|
83,286
|
|
Total
|
|
$
|
863,100
|
|
|
$
|
846,087
|
|
|
$
|
800,392
|
|
Workplace Safety
|
|
|
|
|
|
|
Americas
|
|
$
|
98,788
|
|
|
$
|
106,910
|
|
|
$
|
109,176
|
|
Europe
|
|
150,480
|
|
|
170,265
|
|
|
155,957
|
|
Australia
|
|
48,277
|
|
|
50,589
|
|
|
47,791
|
|
Total
|
|
$
|
297,545
|
|
|
$
|
327,764
|
|
|
$
|
312,924
|
|
Total Company
|
|
|
|
|
|
|
Americas
|
|
$
|
675,944
|
|
|
$
|
663,082
|
|
|
$
|
653,506
|
|
Europe
|
|
344,332
|
|
|
368,002
|
|
|
328,733
|
|
Asia-Pacific
|
|
140,369
|
|
|
142,767
|
|
|
131,077
|
|
Total
|
|
$
|
1,160,645
|
|
|
$
|
1,173,851
|
|
|
$
|
1,113,316
|
|
Depreciation & amortization:
|
|
|
|
|
|
|
ID Solutions
|
|
$
|
21,387
|
|
|
$
|
22,075
|
|
|
$
|
23,092
|
|
WPS
|
|
2,412
|
|
|
3,367
|
|
|
4,211
|
|
Total Company
|
|
$
|
23,799
|
|
|
$
|
25,442
|
|
|
$
|
27,303
|
|
Segment profit:
|
|
|
|
|
|
|
ID Solutions
|
|
$
|
164,953
|
|
|
$
|
143,411
|
|
|
$
|
130,572
|
|
WPS
|
|
23,025
|
|
|
31,712
|
|
|
25,554
|
|
Total Company
|
|
$
|
187,978
|
|
|
$
|
175,123
|
|
|
$
|
156,126
|
|
Assets:
|
|
|
|
|
|
|
ID Solutions
|
|
$
|
740,437
|
|
|
$
|
737,174
|
|
|
$
|
761,448
|
|
WPS
|
|
137,799
|
|
|
138,329
|
|
|
154,827
|
|
Corporate
|
|
279,072
|
|
|
181,428
|
|
|
133,948
|
|
Total Company
|
|
$
|
1,157,308
|
|
|
$
|
1,056,931
|
|
|
$
|
1,050,223
|
|
Expenditures for property, plant & equipment:
|
|
|
|
|
|
|
ID Solutions
|
|
$
|
17,849
|
|
|
$
|
17,283
|
|
|
$
|
12,347
|
|
WPS
|
|
14,976
|
|
|
4,494
|
|
|
2,820
|
|
Total Company
|
|
$
|
32,825
|
|
|
$
|
21,777
|
|
|
$
|
15,167
|
|
Following is a reconciliation of segment profit to income before income taxes for the years ended July 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
2019
|
|
2018
|
|
2017
|
Total segment profit
|
$
|
187,978
|
|
|
$
|
175,123
|
|
|
$
|
156,126
|
|
Unallocated costs:
|
|
|
|
|
|
Administrative costs
|
25,550
|
|
|
27,093
|
|
|
25,111
|
|
Gain on sale of business(1)
|
—
|
|
|
(4,666
|
)
|
|
—
|
|
Investment and other income
|
(5,046
|
)
|
|
(2,487
|
)
|
|
(1,121
|
)
|
Interest expense
|
2,830
|
|
|
3,168
|
|
|
5,504
|
|
Income before income taxes
|
$
|
164,644
|
|
|
$
|
152,015
|
|
|
$
|
126,632
|
|
|
|
|
|
|
|
(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,
|
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Geographic information:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
674,924
|
|
|
$
|
663,935
|
|
|
$
|
651,294
|
|
|
$
|
365,205
|
|
|
$
|
366,638
|
|
|
$
|
367,418
|
|
Other
|
|
546,923
|
|
|
573,652
|
|
|
521,791
|
|
|
191,953
|
|
|
193,710
|
|
|
221,458
|
|
Eliminations
|
|
(61,202
|
)
|
|
(63,736
|
)
|
|
(59,769
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Consolidated total
|
|
$
|
1,160,645
|
|
|
$
|
1,173,851
|
|
|
$
|
1,113,316
|
|
|
$
|
557,158
|
|
|
$
|
560,348
|
|
|
$
|
588,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Revenues are attributed based on country of origin.
|
** Long-lived assets consist of property, plant and equipment, other intangible assets and goodwill.
|
10. Net Income per Common Share
Basic net income per common share is computed by dividing net income (after deducting the applicable preferential Class A Common Stock dividends) by the weighted average Common Shares outstanding of 52,596 for fiscal 2019, 51,677 for fiscal 2018, and 51,056 for fiscal 2017. The Company utilizes the two-class method to calculate income 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,
|
|
2019
|
|
2018
|
|
2017
|
Numerator (in thousands):
|
|
|
|
|
|
Income (Numerator for basic and diluted income per Class A Nonvoting Common Share)
|
$
|
131,258
|
|
|
$
|
91,060
|
|
|
$
|
95,645
|
|
Less:
|
|
|
|
|
|
Preferential dividends
|
(815
|
)
|
|
(799
|
)
|
|
(788
|
)
|
Preferential dividends on dilutive stock options
|
(13
|
)
|
|
(14
|
)
|
|
(14
|
)
|
Numerator for basic and diluted income per Class B Voting Common Share
|
$
|
130,430
|
|
|
$
|
90,247
|
|
|
$
|
94,843
|
|
Denominator (in thousands):
|
|
|
|
|
|
Denominator for basic income per share for both Class A and Class B
|
52,596
|
|
|
51,677
|
|
|
51,056
|
|
Plus: Effect of dilutive equity awards
|
727
|
|
|
847
|
|
|
900
|
|
Denominator for diluted income per share for both Class A and Class B
|
53,323
|
|
|
52,524
|
|
|
51,956
|
|
Net income per Class A Nonvoting Common Share:
|
|
|
|
|
|
Basic
|
$
|
2.50
|
|
|
$
|
1.76
|
|
|
$
|
1.87
|
|
Diluted
|
$
|
2.46
|
|
|
$
|
1.73
|
|
|
$
|
1.84
|
|
Net income per Class B Voting Common Share:
|
|
|
|
|
|
Basic
|
$
|
2.48
|
|
|
$
|
1.75
|
|
|
$
|
1.86
|
|
Diluted
|
$
|
2.45
|
|
|
$
|
1.72
|
|
|
$
|
1.83
|
|
Options to purchase 372,255, 751,200, and 669,036 shares of Class A Nonvoting Common Stock for the fiscal years ended July 31, 2019, 2018, and 2017, respectively, were not included in the computation of diluted net income per share as the impact of the inclusion of the options would have been anti-dilutive.
11. 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 $19,984, $15,938, and $17,495 for the years ended July 31, 2019, 2018, and 2017, respectively. Future minimum lease payments required under such leases in effect at July 31, 2019, were as follows:
|
|
|
|
|
Years ending July 31,
|
|
2020
|
$
|
18,450
|
|
2021
|
16,132
|
|
2022
|
13,439
|
|
2023
|
10,065
|
|
2024
|
5,656
|
|
Thereafter
|
3,502
|
|
|
$
|
67,244
|
|
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.
12. 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, 2019 and July 31, 2018, according to the valuation techniques the Company used to determine their fair values.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inputs
Considered As
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Fair Values
|
|
Balance Sheet Classifications
|
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
|
|
|
|
July 31, 2019
|
|
|
|
|
|
|
|
Trading securities
|
$
|
15,744
|
|
|
$
|
—
|
|
|
$
|
15,744
|
|
|
Other assets
|
Foreign exchange contracts
|
—
|
|
|
474
|
|
|
474
|
|
|
Prepaid expenses and other current assets
|
Total Assets
|
$
|
15,744
|
|
|
$
|
474
|
|
|
$
|
16,218
|
|
|
|
Foreign exchange contracts
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
Other current liabilities
|
Total Liabilities
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
|
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 13, “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, 2019 and July 31, 2018.
The Company’s financial instruments, other than those presented in the disclosures above, include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term and long-term debt. The fair values of cash and cash equivalents, accounts receivable, 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.
13. 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, 2019 and 2018, the notional amount of outstanding forward foreign exchange contracts was $29,389 and $32,667, 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, 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.
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 in the cash flow hedge section of the Consolidated Statements of Comprehensive Income, and reclassified into income in the same period or periods during which the hedged transaction affects income. At July 31, 2019 and 2018, unrealized gains of $805 and $1,017 have been included in OCI, respectively. These balances are expected to be reclassified from OCI to income during the next twelve months when the hedged transactions impact income. For the years ended July 31, 2019, 2018, and 2017, the Company reclassified gains of $1,048, losses of $552, and losses of $486 from OCI into cost of goods sold, respectively.
As of July 31, 2019 and 2018, the notional amount of outstanding forward foreign exchange contracts designated as cash flow hedges was $26,013 and $27,150, 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 €75,000 aggregate principal amount of senior unsecured notes consisting of €30,000 aggregate principal amount of 3.71% Series 2010-A Senior Notes, which were repaid during fiscal 2017, and €45,000 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. The Company’s foreign denominated debt obligations are valued under a market approach using publicized spot prices, and the net gains or losses attributable to the changes in spot prices are recorded as cumulative translation within AOCI and are included in the foreign currency translation adjustments section of the Consolidated Statements of Comprehensive Income. As of July 31, 2019 and 2018, the cumulative balance recognized in accumulated other comprehensive income were gains of $12,440 and $9,961, respectively, on the Euro-denominated debt obligations. The changes recognized in other comprehensive income during the years ended July 31, 2019, 2018 and 2017, were gains of $2,480, $612, and losses of $1,792, respectively, on the Euro-denominated debt obligations.
Non-Designated Hedges
During the fiscal years ended July 31, 2019, 2018, and 2017, the Company recognized losses of $52, gains of $24, and losses of $2,508, respectively, in “Investment and other income” in the accompanying Consolidated Statements of Income related to non-designated hedges.
Fair values of derivative and hedging instruments in the accompanying Consolidated Balance Sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2019
|
|
July 31, 2018
|
|
Prepaid expenses and other current assets
|
|
Other current liabilities
|
|
Current maturities on long-term obligations
|
|
Prepaid expenses and other current assets
|
|
Other current liabilities
|
|
Long-term obligations
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts (cash flow hedges)
|
$
|
472
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,076
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency denominated debt (net investment hedges)
|
—
|
|
|
—
|
|
|
50,189
|
|
|
—
|
|
|
—
|
|
|
52,668
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
2
|
|
|
5
|
|
|
—
|
|
|
1
|
|
|
3
|
|
|
—
|
|
Total derivative instruments
|
$
|
474
|
|
|
$
|
5
|
|
|
$
|
50,189
|
|
|
$
|
1,077
|
|
|
$
|
3
|
|
|
$
|
52,668
|
|
14. 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 income was 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 in the accompanying Consolidated Statements of Income 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.
15. Unaudited Quarterly Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
|
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 income
|
|
25,836
|
|
|
4,273
|
|
|
26,000
|
|
|
34,951
|
|
|
91,060
|
|
Net income 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
|
|
Fiscal 2019
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
293,196
|
|
|
$
|
282,426
|
|
|
$
|
289,745
|
|
|
$
|
295,278
|
|
|
$
|
1,160,645
|
|
Gross margin
|
|
146,539
|
|
|
139,810
|
|
|
145,749
|
|
|
146,580
|
|
|
578,678
|
|
Operating income
|
|
40,622
|
|
|
36,030
|
|
|
39,621
|
|
|
46,155
|
|
|
162,428
|
|
Net income
|
|
30,637
|
|
|
29,227
|
|
|
34,781
|
|
|
36,613
|
|
|
131,258
|
|
Net income per Class A Nonvoting Common Share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.59
|
|
|
$
|
0.56
|
|
|
$
|
0.66
|
|
|
$
|
0.69
|
|
|
$
|
2.50
|
|
Diluted
|
|
$
|
0.58
|
|
|
$
|
0.55
|
|
|
$
|
0.65
|
|
|
$
|
0.68
|
|
|
$
|
2.46
|
|
* The sum of the quarters does not equal the year-to-date total due to the quarterly changes in weighted-average shares outstanding.
16. Subsequent Events
On August 1, 2019, the Company entered into a $200,000 multi-currency revolving loan agreement with a group of five banks that replaced and terminated the Company's previous loan agreement that had been entered into on September 25, 2015. Under the new revolving loan agreement, which has a final maturity date of August 1, 2024, 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 Montreal plus a margin based on the Company’s consolidated net 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 net leverage ratio). At the Company’s option, and subject to certain conditions, the available amount under the revolving loan agreement may be increased from $200,000 up to $400,000. The new credit agreement is guaranteed by certain of the Corporation’s domestic subsidiaries and contains various financial covenants, including a debt-to-EBITDA ratio of 3.50-to-1.0 and an interest coverage ratio of 3.0-to-1.0.
On September 5, 2019, the Company announced an increase in the annual dividend to shareholders of the Company's Class A Common Stock, from $0.85 to $0.87 per share. A quarterly dividend of $0.2175 will be paid on October 31, 2019, to shareholders of record at the close of business on October 10, 2019. This dividend represents an increase of 2.4% and is the 34th consecutive annual increase in dividends.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures:
Brady Corporation maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports filed by the Company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports the Company files under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of its management, including its President and Chief Executive Officer and its Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, the Company’s President and Chief Executive Officer and Chief Financial Officer and Treasurer concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report.
Management’s Report on Internal Control Over Financial Reporting:
The management of Brady Corporation and its subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
With the participation of the President and Chief Executive Officer and Chief Financial Officer and Treasurer, management conducted an evaluation of the effectiveness of our internal control over financial reporting as of July 31, 2019, based on the framework and criteria established in Internal Control — Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment, management concluded that, as of July 31, 2019, the Company’s internal control over financial reporting is effective based on those criteria.
Because of the inherent limitations of internal control over financial reporting, misstatements may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s internal control over financial reporting, as of July 31, 2019, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
Changes in Internal Control Over Financial Reporting:
There were no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company’s most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.