NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended October 31, 2020
(Unaudited)
(In thousands, except share and per share amounts)
NOTE A — Basis of Presentation
The condensed consolidated financial statements included herein have been prepared by Brady Corporation and subsidiaries (the "Company," "Brady," "we," or "our") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, the foregoing statements contain all adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial position of the Company as of October 31, 2020 and July 31, 2020, its results of operations and comprehensive income for the three months ended October 31, 2020 and 2019, and cash flows for the three months ended October 31, 2020 and 2019. The condensed consolidated balance sheet as of July 31, 2020, has been derived from the audited consolidated financial statements as of that date. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts therein. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from the estimates.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to rules and regulations of the Securities and Exchange Commission. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statement presentation. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2020.
NOTE B — New Accounting Pronouncements
Adopted Standards
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. Prior guidance required the recognition of credit losses based on an incurred loss impairment methodology that reflected losses once the losses were probable. Under ASU 2016-13, the Company is required to use a current expected credit loss model ("CECL") that immediately recognizes 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. The guidance is effective for interim periods in fiscal years beginning after December 15, 2019. The Company adopted ASU 2016-13 effective August 1, 2020, 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." The new guidance removes Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment is now 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 remains largely unchanged. The guidance is effective for interim periods in fiscal years beginning after December 15, 2019. The Company adopted ASC 2017-04 effective August 1, 2020. This guidance only impacts the Company's consolidated financial statements if there is a future impairment of goodwill.
Standards not yet adopted
In December 2019, the FASB issued ASU 2019-12, "Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740)." The new guidance removes certain exceptions to the general principles in ASC 740 such as recognizing deferred taxes for equity investments, the incremental approach to performing intraperiod tax allocation and calculating income taxes in interim periods. The standard also simplifies accounting for income taxes under U.S. GAAP by clarifying and amending existing guidance, including the recognition of deferred taxes for goodwill, the allocation of taxes to members of a consolidated group and requiring that an entity reflect the effect of enacted changes in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. This guidance is effective for annual periods beginning after December 15, 2020, and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on the consolidated financial statements and related disclosures.
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." Subject to meeting certain criteria, the new guidance provides optional expedients and exceptions to applying contract modification accounting under existing U.S. GAAP, to address the expected phase out of the London Inter-bank Offered Rate ("LIBOR") by the end of 2021. This guidance is effective upon issuance and allows application to contract changes as early as January 1, 2020. Some of the Company's contracts with respect to its borrowing agreements already contain comparable alternative reference rates that would automatically take effect upon the phasing out of LIBOR. The Company is in the process of reviewing its bank facilities and commercial contracts that utilize LIBOR as the reference rate and is currently evaluating the potential impact that the adoption of this ASU will have on the consolidated financial statements and related disclosures.
NOTE C — Additional Balance Sheet Information
Inventories
Inventories as of October 31, 2020, and July 31, 2020, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2020
|
|
July 31, 2020
|
Finished products
|
$
|
74,933
|
|
|
$
|
85,547
|
|
Work-in-process
|
20,815
|
|
|
24,044
|
|
Raw materials and supplies
|
24,472
|
|
|
26,071
|
|
Total inventories
|
$
|
120,220
|
|
|
$
|
135,662
|
|
Property, plant and equipment
Property, plant and equipment is presented net of accumulated depreciation in the amount of $269,510 and $276,248 as of October 31, 2020, and July 31, 2020, respectively.
NOTE D — Other Intangible Assets
Other intangible assets as of October 31, 2020, and July 31, 2020, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2020
|
|
July 31, 2020
|
|
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
|
Definite-lived other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships and tradenames
|
9
|
|
$
|
45,346
|
|
|
$
|
(33,986)
|
|
|
$
|
11,360
|
|
|
9
|
|
$
|
45,385
|
|
|
$
|
(32,670)
|
|
|
$
|
12,715
|
|
Indefinite-lived other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
N/A
|
|
9,550
|
|
|
—
|
|
|
9,550
|
|
|
N/A
|
|
9,619
|
|
|
—
|
|
|
9,619
|
|
Total
|
|
|
$
|
54,896
|
|
|
$
|
(33,986)
|
|
|
$
|
20,910
|
|
|
|
|
$
|
55,004
|
|
|
$
|
(32,670)
|
|
|
$
|
22,334
|
|
The change in the gross carrying amount of other intangible assets as of October 31, 2020 compared to July 31, 2020 was due to the effect of currency fluctuations during the three-month period.
Amortization expense on intangible assets was $1,351 and $1,291 for the three months ended October 31, 2020 and 2019, respectively. Amortization expense over each of the next five fiscal years is projected to be $5,404, $5,116, and $2,191 for the fiscal years ending July 31, 2021, 2022, and 2023, respectively. No amortization expense for intangible assets is projected after July 31, 2023.
NOTE E — Leases
The Company leases certain manufacturing facilities, warehouses and office space, computer equipment, and vehicles accounted for as operating leases. Lease terms typically range from one year to ten years. As of October 31, 2020, the Company did not have any finance leases.
Operating lease expense was $4,073 and $5,405 for the three months ended October 31, 2020 and 2019, respectively, which was recognized in either "Cost of goods sold" or "Selling, general and administrative expenses" in the condensed consolidated statements of income, based on the nature of the lease. Short-term lease expense, variable lease expenses, and sublease income was immaterial to the condensed consolidated statements of income for the three months ended October 31, 2020 and 2019.
Supplemental cash flow information related to the Company's operating leases for the three months ended October 31, 2020 and 2019, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended October 31,
|
|
2020
|
|
2019
|
Operating cash flows from operating leases
|
$
|
4,297
|
|
|
$
|
4,010
|
|
Operating lease assets obtained in exchange for new operating lease liabilities
|
2,936
|
|
|
9,952
|
|
NOTE F – Stockholders' Equity
The following table illustrates the changes in the balances of each component of stockholders' equity for the three months ended October 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-In Capital
|
|
Retained Earnings
|
|
Treasury Stock
|
|
Accumulated Other Comprehensive Loss
|
|
Total
Stockholders' Equity
|
Balances at July 31, 2020
|
|
$
|
548
|
|
|
$
|
331,761
|
|
|
$
|
704,456
|
|
|
$
|
(107,216)
|
|
|
$
|
(66,477)
|
|
|
$
|
863,072
|
|
Net income
|
|
—
|
|
|
—
|
|
|
33,481
|
|
|
—
|
|
|
—
|
|
|
33,481
|
|
Other comprehensive loss, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,191)
|
|
|
(3,191)
|
|
Issuance of shares of Class A Common Stock under stock plan
|
|
—
|
|
|
(3,246)
|
|
|
—
|
|
|
790
|
|
|
—
|
|
|
(2,456)
|
|
Tax benefit and withholdings from deferred compensation distributions
|
|
—
|
|
|
32
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32
|
|
Stock-based compensation expense
|
|
—
|
|
|
3,574
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,574
|
|
Repurchase of shares of Class A Common Stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,720)
|
|
|
—
|
|
|
(2,720)
|
|
Cash dividends on Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A — $0.22 per share
|
|
—
|
|
|
—
|
|
|
(10,671)
|
|
|
—
|
|
|
—
|
|
|
(10,671)
|
|
Class B — $0.20 per share
|
|
—
|
|
|
—
|
|
|
(720)
|
|
|
—
|
|
|
—
|
|
|
(720)
|
|
Balances at October 31, 2020
|
|
$
|
548
|
|
|
$
|
332,121
|
|
|
$
|
726,546
|
|
|
$
|
(109,146)
|
|
|
$
|
(69,668)
|
|
|
$
|
880,401
|
|
The following table illustrates the changes in the balances of each component of stockholders' equity for the three months ended October 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-In Capital
|
|
Retained Earnings
|
|
Treasury Stock
|
|
Accumulated Other Comprehensive Loss
|
|
Total
Stockholders' Equity
|
Balances at July 31, 2019
|
|
$
|
548
|
|
|
$
|
329,969
|
|
|
$
|
637,843
|
|
|
$
|
(46,332)
|
|
|
$
|
(71,254)
|
|
|
$
|
850,774
|
|
Net income
|
|
—
|
|
|
—
|
|
|
37,498
|
|
|
—
|
|
|
—
|
|
|
37,498
|
|
Other comprehensive loss, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(29)
|
|
|
(29)
|
|
Issuance of shares of Class A Common Stock under stock plan
|
|
—
|
|
|
(6,410)
|
|
|
—
|
|
|
2,553
|
|
|
—
|
|
|
(3,857)
|
|
Tax benefit and withholdings from deferred compensation distributions
|
|
—
|
|
|
64
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
64
|
|
Stock-based compensation expense
|
|
—
|
|
|
3,618
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,618
|
|
Repurchase of shares of Class A Common Stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cash dividends on Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A — $0.22 per share
|
|
—
|
|
|
—
|
|
|
(10,822)
|
|
|
—
|
|
|
—
|
|
|
(10,822)
|
|
Class B — $0.20 per share
|
|
—
|
|
|
—
|
|
|
(711)
|
|
|
—
|
|
|
—
|
|
|
(711)
|
|
Balances at October 31, 2019
|
|
$
|
548
|
|
|
$
|
327,241
|
|
|
$
|
663,808
|
|
|
$
|
(43,779)
|
|
|
$
|
(71,283)
|
|
|
$
|
876,535
|
|
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. The majority of the Company’s annual share-based awards are granted in the first quarter of the fiscal year.
Total stock-based compensation expense recognized during the three months ended October 31, 2020 and 2019, was $3,574 ($3,300 net of taxes) and $3,618 ($3,089 net of taxes), respectively. As of October 31, 2020, total unrecognized compensation cost related to share-based awards was $14,460 pre-tax, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of 2.2 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 option awards granted during the three months ended October 31, 2020 and 2019, using the Black-Scholes option valuation model. The weighted-average assumptions used in the Black-Scholes valuation model are reflected in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended October 31,
|
Black-Scholes Option Valuation Assumptions
|
|
2020
|
|
2019
|
Expected term (in years)
|
|
6.21
|
|
6.20
|
Expected volatility
|
|
30.71
|
%
|
|
25.85
|
%
|
Expected dividend yield
|
|
2.49
|
%
|
|
2.63
|
%
|
Risk-free interest rate
|
|
0.38
|
%
|
|
1.64
|
%
|
Weighted-average market value of underlying stock at grant date
|
|
$
|
39.92
|
|
|
$
|
54.05
|
|
Weighted-average exercise price
|
|
$
|
39.92
|
|
|
$
|
54.05
|
|
Weighted-average fair value of options granted during the period
|
|
$
|
8.65
|
|
|
$
|
10.63
|
|
The following is a summary of stock option activity for the three months ended October 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-Based Options
|
|
Options Outstanding
|
|
Weighted Average Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic Value
|
Outstanding at July 31, 2020
|
|
1,273,382
|
|
$
|
37.84
|
|
|
|
|
|
New grants
|
|
303,052
|
|
39.92
|
|
|
|
|
|
Exercised
|
|
(22,300)
|
|
29.10
|
|
|
|
|
|
Forfeited or expired
|
|
—
|
|
—
|
|
|
|
|
|
Outstanding at October 31, 2020
|
|
1,554,134
|
|
$
|
38.37
|
|
|
7.2
|
|
$
|
5,410
|
|
Exercisable at October 31, 2020
|
|
1,004,641
|
|
$
|
34.88
|
|
|
6.1
|
|
$
|
5,410
|
|
The total fair value of stock options vested during the three months ended October 31, 2020 and 2019, was $2,371 and $2,537, respectively. The total intrinsic value of stock options exercised during the three months ended October 31, 2020 and 2019, based upon the average market price at the time of exercise during the period, was $373 and $10,225, respectively.
The cash received from the exercise of stock options during the three months ended October 31, 2020 and 2019, was $160 and $3,411, respectively. The tax benefit from the exercise of stock options during the three months ended October 31, 2020 and 2019, was $93 and $2,541, 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 vesting 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 three months ended October 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-Based RSUs
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
Outstanding at July 31, 2020
|
|
154,960
|
|
|
$
|
47.39
|
|
New grants
|
|
75,352
|
|
|
39.92
|
|
Vested
|
|
(63,339)
|
|
|
44.85
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Outstanding at October 31, 2020
|
|
166,973
|
|
|
$
|
44.98
|
|
The time-based RSUs granted during the three months ended October 31, 2019, had a weighted-average grant date fair value of $54.10.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-Based RSUs
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
Outstanding at July 31, 2020
|
|
126,060
|
|
|
$
|
50.61
|
|
New grants (1)
|
|
64,634
|
|
|
60.73
|
|
Vested (1)
|
|
(71,413)
|
|
|
33.12
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Outstanding at October 31, 2020
|
|
119,281
|
|
|
$
|
61.05
|
|
(1) Includes 23,805 shares granted and vested during the three months ended October 31, 2020, resulting from the payout of performance-based RSUs granted in fiscal year 2018 due to achievement of performance metrics exceeding the target payout.
The performance-based RSUs granted during the three months ended October 31, 2020, 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 three months ended October 31, 2019, had a weighted-average grant date fair value of $75.00.
The aggregate intrinsic value of time-based and performance-based RSUs vested during the three months ended October 31, 2020 and 2019, was $5,844 and $8,708, respectively.
NOTE G — Accumulated Other Comprehensive Loss
Other comprehensive loss consists of foreign currency translation adjustments which includes the settlements of net investment hedges, unrealized gains and losses from cash flow hedges and the unamortized gain on post-retirement plans, net of their related tax effects.
The following table illustrates the changes in the balances of each component of accumulated other comprehensive loss, net of tax, for the three months ended October 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on
cash flow hedges
|
|
Unamortized gain on post-retirement plans
|
|
Foreign currency
translation adjustments
|
|
Accumulated other
comprehensive loss
|
Beginning balance, July 31, 2020
|
$
|
(200)
|
|
|
$
|
2,181
|
|
|
$
|
(68,458)
|
|
|
$
|
(66,477)
|
|
Other comprehensive income (loss) before reclassification
|
701
|
|
|
—
|
|
|
(4,185)
|
|
|
(3,484)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
159
|
|
|
134
|
|
|
—
|
|
|
293
|
|
Ending balance, October 31, 2020
|
$
|
660
|
|
|
$
|
2,315
|
|
|
$
|
(72,643)
|
|
|
$
|
(69,668)
|
|
The increase in accumulated other comprehensive loss as of October 31, 2020, compared to July 31, 2020, was primarily due to the appreciation of the U.S. dollar against certain other currencies during the three-month period.
The changes in accumulated other comprehensive loss by component, net of tax, for the three months ended October 31, 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on
cash flow hedges
|
|
Unamortized gain on post-retirement plans
|
|
Foreign currency
translation adjustments
|
|
Accumulated other
comprehensive loss
|
Beginning balance, July 31, 2019
|
$
|
707
|
|
|
$
|
2,800
|
|
|
$
|
(74,761)
|
|
|
$
|
(71,254)
|
|
Other comprehensive income before reclassification
|
136
|
|
|
—
|
|
|
226
|
|
|
362
|
|
Amounts reclassified from accumulated other comprehensive loss
|
(286)
|
|
|
(105)
|
|
|
—
|
|
|
(391)
|
|
Ending balance, October 31, 2019
|
$
|
557
|
|
|
$
|
2,695
|
|
|
$
|
(74,535)
|
|
|
$
|
(71,283)
|
|
The increase in the accumulated other comprehensive loss as of October 31, 2019, compared to July 31, 2019, was negligible primarily due to the stability of the U.S. dollar against certain other currencies during the three-month period.
Of the amounts reclassified from accumulated other comprehensive loss during the three months ended October 31, 2020 and 2019, unrealized (losses) gains on cash flow hedges were reclassified to "Cost of goods sold" and unamortized gains on post-retirement plans was reclassified into "Investment and other income" on the condensed consolidated statements of income.
The following table illustrates the income tax benefit on the components of other comprehensive loss for the three months ended October 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended October 31,
|
|
2020
|
|
2019
|
Income tax benefit related to items of other comprehensive loss:
|
|
|
|
Cash flow hedges
|
$
|
(48)
|
|
|
$
|
35
|
|
Pension and other post-retirement benefits
|
240
|
|
|
—
|
|
Other income tax adjustments and currency translation
|
7
|
|
|
176
|
|
Income tax benefit related to items of other comprehensive loss
|
$
|
199
|
|
|
$
|
211
|
|
NOTE H — 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. 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 condensed consolidated statements of income. See Note I, “Segment Information,” for the Company’s disaggregated revenue disclosure.
The Company offers extended warranty coverage that is included in the sales price of certain products, which it accounts for as service warranties. The Company accounts for the deferred revenue associated with extended service warranties as a contract liability. The balance of contract liabilities associated with service warranty performance obligations was $2,552 and $2,559 as of October 31, 2020 and July 31, 2020, respectively. The current portion and non-current portion of contract liabilities are included in “Other current liabilities” and “Other liabilities," respectively, on the condensed consolidated balance sheets. The Company recognized revenue of $297 and $315 during the three months ended October 31, 2020 and 2019, respectively, that was included in the contract liability balance at the beginning of the respective period from the amortization of extended service warranties. Of the contract liability balance outstanding at October 31, 2020, the Company expects to recognize 32% by the end of fiscal 2021, an additional 31% by the end of fiscal 2022, and the remaining balance thereafter.
NOTE I — 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 ("PDC"), which aggregate into two reportable segments that are organized around businesses with consistent products and services: IDS and WPS. The IDS and PDC operating segments aggregate into the IDS reporting segment, while the WPS reporting segment is comprised solely of the Workplace Safety operating segment.
The following is a summary of net sales by segment and geographic region for the three months ended October 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended October 31,
|
|
2020
|
|
2019
|
Net sales:
|
|
|
|
ID Solutions
|
|
|
|
Americas
|
$
|
133,267
|
|
|
$
|
149,363
|
|
Europe
|
42,582
|
|
|
43,381
|
|
Asia
|
22,343
|
|
|
22,243
|
|
Total
|
$
|
198,192
|
|
|
$
|
214,987
|
|
Workplace Safety
|
|
|
|
Americas
|
$
|
24,031
|
|
|
$
|
24,303
|
|
Europe
|
41,266
|
|
|
36,026
|
|
Australia
|
13,738
|
|
|
11,631
|
|
Total
|
$
|
79,035
|
|
|
$
|
71,960
|
|
Total Company
|
|
|
|
Americas
|
$
|
157,298
|
|
|
$
|
173,666
|
|
Europe
|
83,848
|
|
|
79,407
|
|
Asia-Pacific
|
36,081
|
|
|
33,874
|
|
Total
|
$
|
277,227
|
|
|
$
|
286,947
|
|
The following is a summary of segment profit for the three months ended October 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended October 31,
|
|
2020
|
|
2019
|
Segment profit:
|
|
|
|
ID Solutions
|
$
|
40,279
|
|
|
$
|
42,443
|
|
Workplace Safety
|
7,988
|
|
|
5,157
|
|
Total Company
|
$
|
48,267
|
|
|
$
|
47,600
|
|
The following is a reconciliation of segment profit to income before income taxes and losses of unconsolidated affiliate for the three months ended October 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended October 31,
|
|
2020
|
|
2019
|
Total profit from reportable segments
|
$
|
48,267
|
|
|
$
|
47,600
|
|
Unallocated amounts:
|
|
|
|
Administrative costs
|
(6,079)
|
|
|
(6,709)
|
|
Investment and other income
|
155
|
|
|
1,380
|
|
Interest expense
|
(106)
|
|
|
(701)
|
|
Income before income taxes and losses of unconsolidated affiliate
|
$
|
42,237
|
|
|
$
|
41,570
|
|
NOTE J — Net Income per Common Share
Reconciliations of the numerator and denominator of the basic and diluted per share computations for the Company’s Class A and Class B common stock are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended October 31,
|
|
2020
|
|
2019
|
Numerator (in thousands):
|
|
|
|
Net income (Numerator for basic and diluted income per Class A Nonvoting Common Share)
|
$
|
33,481
|
|
|
$
|
37,498
|
|
Less:
|
|
|
|
Preferential dividends
|
(808)
|
|
|
(828)
|
|
Preferential dividends on dilutive stock options
|
(4)
|
|
|
(10)
|
|
Numerator for basic and diluted income per Class B Voting Common Share
|
$
|
32,669
|
|
|
$
|
36,660
|
|
Denominator: (in thousands)
|
|
|
|
Denominator for basic income per share for both Class A and Class B
|
52,021
|
|
|
53,143
|
|
Plus: Effect of dilutive equity awards
|
271
|
|
|
593
|
|
Denominator for diluted income per share for both Class A and Class B
|
52,292
|
|
|
53,736
|
|
Net income per Class A Nonvoting Common Share:
|
|
|
|
Basic
|
$
|
0.64
|
|
|
$
|
0.71
|
|
Diluted
|
$
|
0.64
|
|
|
$
|
0.70
|
|
Net income per Class B Voting Common Share:
|
|
|
|
Basic
|
$
|
0.63
|
|
|
$
|
0.69
|
|
Diluted
|
$
|
0.62
|
|
|
$
|
0.68
|
|
Potentially dilutive securities attributable to outstanding stock options and restricted stock units were excluded from the calculation of diluted earnings per share where the combined exercise price and average unamortized fair value were greater than the average market price of Brady's Class A Nonvoting Common Stock because the effect would have been anti-dilutive. The amount of anti-dilutive shares were 740,745 and 323,719 for the three months ended October 31, 2020 and 2019, respectively.
NOTE K — Fair Value Measurements
In accordance with fair value accounting guidance, the Company determines fair value based on the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The inputs used to measure fair value are classified into the following hierarchy:
Level 1 — Unadjusted quoted prices in active markets for identical instruments that are accessible as of the reporting date.
Level 2 — Other significant pricing inputs that are either directly or indirectly observable.
Level 3 — Significant unobservable pricing inputs, which result in the use of management's own assumptions.
The following table summarizes the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis at October 31, 2020 and July 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2020
|
|
July 31, 2020
|
|
Fair Value Hierarchy
|
Assets:
|
|
|
|
|
|
Trading securities
|
$
|
17,434
|
|
|
$
|
18,606
|
|
|
Level 1
|
Foreign exchange contracts
|
1,017
|
|
|
594
|
|
|
Level 2
|
Liabilities:
|
|
|
|
|
|
Foreign exchange contracts
|
449
|
|
|
777
|
|
|
Level 2
|
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, which are included in "Other assets" on the condensed consolidated balance sheets. These investments were classified as Level 1 as the shares of these investments trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.
Foreign exchange contracts: The Company’s foreign exchange contracts were classified as Level 2 as the fair value was based on the present value of the future cash flows using external models that use observable inputs, such as interest rates, yield curves and foreign exchange rates. See Note L, “Derivatives and Hedging Activities,” for additional information.
The fair values of cash and cash equivalents, accounts receivable, accounts payable, and other liabilities approximated carrying values due to their short-term nature.
NOTE L — Derivatives and Hedging Activities
The Company utilizes forward foreign exchange currency contracts to reduce the exchange rate risk of specific foreign currency denominated transactions. These contracts typically require the exchange of a foreign currency for U.S. dollars at a fixed rate on a future date, with maturities of less than 18 months, which qualify as cash flow hedges or net investment hedges under the accounting guidance for derivative instruments and hedging activities. The primary objective of the Company’s foreign currency exchange risk management program is to minimize the impact of currency movements due to transactions in other than the respective subsidiaries’ functional currency and to minimize the impact of currency movements on the Company’s net investment denominated in a currency other than the U.S. dollar. To achieve this objective, the Company hedges a portion of known exposures using forward foreign exchange currency contracts.
Main foreign currency 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.
The U.S. dollar equivalent notional amounts of outstanding forward exchange contracts were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2020
|
|
July 31, 2020
|
Designated as cash flow hedges
|
$
|
19,247
|
|
|
$
|
24,600
|
|
Non-designated hedges
|
3,242
|
|
|
3,107
|
|
Total foreign exchange contracts
|
$
|
22,489
|
|
|
$
|
27,707
|
|
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 on the condensed consolidated balance sheets. For these instruments, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income ("OCI") and reclassified into income in the same period or periods during which the hedged transaction affects income. As of October 31, 2020 and July 31, 2020, unrealized gains of $523 and losses of $385 have been included in OCI, respectively.
The following table summarizes the amount of pre-tax gains and losses related to foreign exchange contracts designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended October 31,
|
|
2020
|
|
2019
|
Gains recognized in OCI
|
$
|
697
|
|
|
$
|
196
|
|
(Losses) gains reclassified from OCI into cost of goods sold
|
(211)
|
|
|
381
|
|
Fair values of derivative instruments in the condensed consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2020
|
|
July 31, 2020
|
|
Prepaid expenses and
other current assets
|
|
Other current liabilities
|
|
Prepaid expenses and
other current assets
|
|
Other current liabilities
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
Foreign exchange contracts (cash flow hedges)
|
$
|
1,017
|
|
|
$
|
(434)
|
|
|
$
|
588
|
|
|
$
|
761
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
Foreign exchange contracts (non-designated hedges)
|
—
|
|
|
(15)
|
|
|
6
|
|
|
16
|
|
Total derivative instruments
|
$
|
1,017
|
|
|
$
|
(449)
|
|
|
$
|
594
|
|
|
$
|
777
|
|
NOTE M – Income Taxes
The effective income tax rate for the three months ended October 31, 2020 and 2019 was 20.3% and 9.8%, respectively. The Company expects its ongoing annual effective income tax rate to be approximately 20% based on its current global business mix. The effective income tax rate for the three months ended October 31, 2019 was lower than the expected income tax rate due to the favorable settlement of a domestic income tax audit and tax benefits from stock-based compensation.
NOTE N — Subsequent Events
On November 17, 2020, the Board of Directors declared a quarterly cash dividend to shareholders of the Company’s Class A and Class B Common Stock of $0.22 per share payable on January 29, 2021, to shareholders of record at the close of business on January 8, 2020.