NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended October 31, 2021
(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, 2021 and July 31, 2021, its results of operations and comprehensive income for the three months ended October 31, 2021 and 2020, and cash flows for the three months ended October 31, 2021 and 2020. The condensed consolidated balance sheet as of July 31, 2021, 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, 2021.
NOTE B — New Accounting Pronouncements
Adopted Standards
In December 2019, the Financial Accounting Standards Board ("FASB") issued ASU 2019-12, "Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740)." This 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. The Company adopted ASC 2019-12 effective August 1, 2021, which did not have a material impact on its consolidated financial statements or disclosures.
Standards not yet adopted
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, this 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. The Company does not expect a material impact to the financial statements or disclosures from the adoption of this standard.
NOTE C — Additional Balance Sheet Information
Inventories
Inventories as of October 31, 2021 and July 31, 2021, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2021
|
|
July 31, 2021
|
Finished products
|
$
|
96,034
|
|
|
$
|
87,489
|
|
Work-in-process
|
22,099
|
|
|
20,189
|
|
Raw materials and supplies
|
34,162
|
|
|
28,429
|
|
Total inventories
|
$
|
152,295
|
|
|
$
|
136,107
|
|
Property, plant and equipment
Property, plant and equipment is presented net of accumulated depreciation in the amount of $280,696 and $277,246 as of October 31, 2021 and July 31, 2021, respectively.
NOTE D — Other Intangible Assets
Other intangible assets as of October 31, 2021 and July 31, 2021, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2021
|
|
July 31, 2021
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
3
|
|
$
|
1,814
|
|
|
$
|
(530)
|
|
|
$
|
1,284
|
|
|
3
|
|
$
|
1,821
|
|
|
$
|
(356)
|
|
|
$
|
1,465
|
|
Customer relationships
|
9
|
|
110,615
|
|
|
(42,152)
|
|
|
68,463
|
|
|
9
|
|
110,950
|
|
|
(39,069)
|
|
|
71,881
|
|
Technology
|
5
|
|
9,533
|
|
|
(832)
|
|
|
8,701
|
|
|
5
|
|
9,578
|
|
|
(335)
|
|
|
9,243
|
|
Unamortized other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
N/A
|
|
9,771
|
|
|
—
|
|
|
9,771
|
|
|
N/A
|
|
9,745
|
|
|
—
|
|
|
9,745
|
|
Total
|
|
|
$
|
131,733
|
|
|
$
|
(43,514)
|
|
|
$
|
88,219
|
|
|
|
|
$
|
132,094
|
|
|
$
|
(39,760)
|
|
|
$
|
92,334
|
|
The change in the gross carrying amount of other intangible assets as of October 31, 2021 compared to July 31, 2021 was due to the effect of currency fluctuations during the three-month period. Amortization expense on intangible assets was $3,807 and $1,351 for the three months ended October 31, 2021 and 2020, respectively.
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, 2021, the Company did not have any finance leases.
Operating lease expense was $4,765 and $4,073 for the three months ended October 31, 2021 and 2020, 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, 2021 and 2020.
Supplemental cash flow information related to the Company's operating leases for the three months ended October 31, 2021 and 2020, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended October 31,
|
|
2021
|
|
2020
|
Operating cash flows from operating leases
|
$
|
4,999
|
|
|
$
|
4,297
|
|
Operating lease assets obtained in exchange for new operating lease liabilities (1)
|
(868)
|
|
|
2,936
|
|
(1) During the three months ended October 31, 2021, the Company purchased two buildings which were previously leased. This resulted in an overall decrease in operating lease assets obtained in exchange for lease liabilities for the period as the remaining lease assets and liabilities were removed from the condensed consolidated balance sheets.
NOTE F – Stockholders' Equity
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"), performance-based restricted stock units ("PRSUs"), 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, 2021 and 2020 was $4,129 and $3,574, respectively. The total income tax benefit recognized in the condensed consolidated statements of income was $199 and $274 during the three months ended October 31, 2021 and 2020, respectively. As of October 31, 2021, total unrecognized compensation cost related to share-based awards was $12,919 pre-tax, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of 1.7 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 three years, 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 ten 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, 2021 and 2020, 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
|
|
2021
|
|
2020
|
Expected term (in years)
|
|
6.14
|
|
6.21
|
Expected volatility
|
|
29.98
|
%
|
|
30.71
|
%
|
Expected dividend yield
|
|
2.29
|
%
|
|
2.49
|
%
|
Risk-free interest rate
|
|
0.96
|
%
|
|
0.38
|
%
|
The following is a summary of stock option activity for the three months ended October 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-Based Options
|
|
Options Outstanding
|
|
Weighted Average Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic Value
|
Outstanding at July 31, 2021
|
|
1,474,068
|
|
$
|
38.45
|
|
|
|
|
|
New grants
|
|
241,297
|
|
49.79
|
|
|
|
|
|
Exercised
|
|
(14,652)
|
|
29.30
|
|
|
|
|
|
Forfeited or expired
|
|
—
|
|
—
|
|
|
|
|
|
Outstanding at October 31, 2021
|
|
1,700,713
|
|
$
|
40.14
|
|
|
6.8
|
|
$
|
19,961
|
|
Exercisable at October 31, 2021
|
|
1,189,747
|
|
$
|
37.30
|
|
|
5.8
|
|
$
|
17,317
|
|
The total fair value of stock options vested during the three months ended October 31, 2021 and 2020 was $2,446 and $2,371, respectively. The weighted-average grant date fair value of options granted during the three months ended October 31, 2021 and 2020 was $11.29 and $8.65, respectively. The total intrinsic value of stock options exercised during the three months ended October 31, 2021 and 2020, based upon the average market price at the time of exercise during the period, was $319 and $373, respectively.
The cash received from the exercise of stock options during the three months ended October 31, 2021 and 2020 was $151 and $160, respectively. The tax benefit from the exercise of stock options during the three months ended October 31, 2021 and 2020 was $80 and $93, 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 and generally vest ratably over three years, with one-third vesting one year after the grant date and one-third additional in each of the succeeding two years.
The following is a summary of RSU activity for the three months ended October 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Grant Date Fair Value
|
Non-vested RSUs as of July 31, 2021
|
|
156,466
|
|
|
$
|
45.40
|
|
Granted
|
|
60,876
|
|
|
49.85
|
|
Vested
|
|
(67,116)
|
|
|
45.49
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Non-vested RSUs as of October 31, 2021
|
|
150,226
|
|
|
$
|
47.17
|
|
The RSUs granted during the three months ended October 31, 2020 had a weighted-average grant date fair value of $39.92. The total fair value of RSUs vested during three months ended October 31, 2021 and 2020 was $3,380 and $2,572, respectively.
PRSUs
PRSUs are contingent on the achievement of predetermined market and performance targets. The PRSUs granted under the plan vest at the end of a three-year performance period provided the specified market and performance targets are met. For the PRSUs granted during the three months ended October 31, 2021, the vesting criteria for 50% of the grant is based upon the Company's total shareholder return ("TSR") relative to the S&P 600 SmallCap Industrials Index over a three-year performance period, and the vesting criteria for the other 50% of the grant is based upon Company revenue targets. All other previously granted non-vested PRSUs vest based upon the Company's TSR relative to the S&P 600 SmallCap Industrials Index.
The following is a summary of PRSU activity for the three months ended October 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Grant Date Fair Value
|
Non-vested PRSUs as of July 31, 2021
|
|
119,281
|
|
|
$
|
61.05
|
|
Granted (1)
|
|
76,743
|
|
|
61.76
|
|
Vested (1)
|
|
(76,885)
|
|
|
50.70
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Non-vested PRSUs as of October 31, 2021
|
|
119,139
|
|
|
$
|
65.18
|
|
(1) Includes 44,350 shares granted and vested during the three months ended October 31, 2021, resulting from the payout of PRSUs granted in fiscal year 2019 due to achievement of performance metrics exceeding the target payout.
The PRSUs granted during the three months ended October 31, 2020 had a weighted-average grant date fair value of $60.73. The total fair value of PRSUs vested during three months ended October 31, 2021 and 2020 was $4,098 and $3,272, 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, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on
cash flow hedges
|
|
Unamortized gain on post-retirement plans
|
|
Foreign currency
translation adjustments
|
|
Accumulated other
comprehensive loss
|
Beginning balance, July 31, 2021
|
$
|
729
|
|
|
$
|
1,888
|
|
|
$
|
(58,570)
|
|
|
$
|
(55,953)
|
|
Other comprehensive loss before reclassification
|
(273)
|
|
|
—
|
|
|
(3,913)
|
|
|
(4,186)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
(425)
|
|
|
(107)
|
|
|
—
|
|
|
(532)
|
|
Ending balance, October 31, 2021
|
$
|
31
|
|
|
$
|
1,781
|
|
|
$
|
(62,483)
|
|
|
$
|
(60,671)
|
|
The increase in accumulated other comprehensive loss as of October 31, 2021, compared to July 31, 2021, 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, 2020, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the 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.
Of the amounts reclassified from accumulated other comprehensive loss during the three months ended October 31, 2021 and 2020, unrealized gains (losses) 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 (expense) benefit on the components of other comprehensive loss for the three months ended October 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended October 31,
|
|
2021
|
|
2020
|
Income tax (expense) benefit related to items of other comprehensive loss:
|
|
|
|
Cash flow hedges
|
$
|
(104)
|
|
|
$
|
(48)
|
|
Pension and other post-retirement benefits
|
—
|
|
|
240
|
|
Other income tax adjustments and currency translation
|
5
|
|
|
7
|
|
Income tax (expense) benefit related to items of other comprehensive loss
|
$
|
(99)
|
|
|
$
|
199
|
|
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 $2,589 and $2,519 as of October 31, 2021 and July 31, 2021, 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 $289 and $297 during the three months ended October 31, 2021 and 2020, 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, 2021, the Company expects to recognize 32% by the end of fiscal 2022, an additional 31% by the end of fiscal 2023, 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, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended October 31,
|
|
2021
|
|
2020
|
Net sales:
|
|
|
|
ID Solutions
|
|
|
|
Americas
|
$
|
164,910
|
|
|
$
|
133,267
|
|
Europe
|
56,889
|
|
|
42,582
|
|
Asia
|
26,818
|
|
|
22,343
|
|
Total
|
$
|
248,617
|
|
|
$
|
198,192
|
|
Workplace Safety
|
|
|
|
Americas
|
$
|
21,142
|
|
|
$
|
24,031
|
|
Europe
|
38,022
|
|
|
41,266
|
|
Australia
|
13,694
|
|
|
13,738
|
|
Total
|
$
|
72,858
|
|
|
$
|
79,035
|
|
Total Company
|
|
|
|
Americas
|
$
|
186,052
|
|
|
$
|
157,298
|
|
Europe
|
94,911
|
|
|
83,848
|
|
Asia-Pacific
|
40,512
|
|
|
36,081
|
|
Total
|
$
|
321,475
|
|
|
$
|
277,227
|
|
The following is a summary of segment profit for the three months ended October 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended October 31,
|
|
2021
|
|
2020
|
Segment profit:
|
|
|
|
ID Solutions
|
$
|
48,816
|
|
|
$
|
40,279
|
|
Workplace Safety
|
2,293
|
|
|
7,988
|
|
Total Company
|
$
|
51,109
|
|
|
$
|
48,267
|
|
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, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended October 31,
|
|
2021
|
|
2020
|
Total profit from reportable segments
|
$
|
51,109
|
|
|
$
|
48,267
|
|
Unallocated amounts:
|
|
|
|
Administrative costs
|
(6,774)
|
|
|
(6,079)
|
|
Investment and other income
|
543
|
|
|
155
|
|
Interest expense
|
(182)
|
|
|
(106)
|
|
Income before income taxes and losses of unconsolidated affiliate
|
$
|
44,696
|
|
|
$
|
42,237
|
|
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,
|
|
2021
|
|
2020
|
Numerator (in thousands):
|
|
|
|
Net income (Numerator for basic and diluted income per Class A Nonvoting Common Share)
|
$
|
35,046
|
|
|
$
|
33,481
|
|
Less:
|
|
|
|
Preferential dividends
|
(803)
|
|
|
(808)
|
|
Preferential dividends on dilutive stock options
|
(8)
|
|
|
(4)
|
|
Numerator for basic and diluted income per Class B Voting Common Share
|
$
|
34,235
|
|
|
$
|
32,669
|
|
Denominator (in thousands):
|
|
|
|
Denominator for basic income per share for both Class A and Class B
|
51,973
|
|
|
52,021
|
|
Plus: Effect of dilutive equity awards
|
463
|
|
|
271
|
|
Denominator for diluted income per share for both Class A and Class B
|
52,436
|
|
|
52,292
|
|
Net income per Class A Nonvoting Common Share:
|
|
|
|
Basic
|
$
|
0.67
|
|
|
$
|
0.64
|
|
Diluted
|
$
|
0.67
|
|
|
$
|
0.64
|
|
Net income per Class B Voting Common Share:
|
|
|
|
Basic
|
$
|
0.66
|
|
|
$
|
0.63
|
|
Diluted
|
$
|
0.65
|
|
|
$
|
0.62
|
|
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 the Company's Class A Nonvoting Common Stock because the effect would have been anti-dilutive. The amount of anti-dilutive shares were 479,602 and 740,745 for the three months ended October 31, 2021 and 2020, 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, 2021 and July 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2021
|
|
July 31, 2021
|
|
Fair Value Hierarchy
|
Assets:
|
|
|
|
|
|
Trading securities
|
$
|
18,543
|
|
|
$
|
20,135
|
|
|
Level 1
|
Foreign exchange contracts
|
141
|
|
|
150
|
|
|
Level 2
|
Liabilities:
|
|
|
|
|
|
Foreign exchange contracts
|
124
|
|
|
51
|
|
|
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, 2021
|
|
July 31, 2021
|
Designated as cash flow hedges
|
$
|
23,052
|
|
|
$
|
30,724
|
|
Non-designated hedges
|
3,521
|
|
|
3,580
|
|
Total foreign exchange contracts
|
$
|
26,573
|
|
|
$
|
34,304
|
|
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, 2021 and July 31, 2021, unrealized gains of $73 and $770 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,
|
|
2021
|
|
2020
|
(Losses) gains recognized in OCI
|
$
|
(26)
|
|
|
$
|
697
|
|
Gains (losses) reclassified from OCI into cost of goods sold
|
568
|
|
|
(211)
|
|
Fair values of derivative instruments in the condensed consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2021
|
|
July 31, 2021
|
|
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)
|
$
|
141
|
|
|
$
|
104
|
|
|
$
|
150
|
|
|
$
|
51
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
Foreign exchange contracts (non-designated hedges)
|
—
|
|
|
20
|
|
|
—
|
|
|
—
|
|
Total derivative instruments
|
$
|
141
|
|
|
$
|
124
|
|
|
$
|
150
|
|
|
$
|
51
|
|
NOTE M – Income Taxes
The income tax rate for the three months ended October 31, 2021 and 2020 was 21.6% and 20.3%, respectively. The income tax rate for the three months ended October 31, 2021 was slightly higher than the expected income tax rate primarily due to a reduction in tax benefits from stock-based compensation compared to the three months ended October 31, 2020. The Company expects its ongoing annual income tax rate to be approximately 20% based on its current global business mix.
NOTE N — Subsequent Events
On November 17, 2021, the Board of Directors declared a quarterly cash dividend to shareholders of the Company’s Class A and Class B Common Stock of $0.225 per share payable on January 31, 2022, to shareholders of record at the close of business on January 10, 2022.