QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended January 31, 2020, or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 1-14959
BRADY CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin
39-0178960
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
6555 West Good Hope Road
Milwaukee,
Wisconsin
53223
(Address of principal executive offices and Zip Code)
(414) 358-6600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Class A Nonvoting Common Stock, par value $0.01 per share
BRC
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☑No☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☑No☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☑
Accelerated filer
☐
Emerging growth company
☐
Non-accelerated filer
☐
Smaller reporting company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No☑
As of February 18, 2020, there were 49,811,300 outstanding shares of Class A Nonvoting Common Stock and 3,538,628 shares of Class B Voting Common Stock. The Class B Voting Common Stock, all of which is held by affiliates of the Registrant, is the only voting stock.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months EndedJanuary 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 January 31, 2020 and July 31, 2019, its results of operations and comprehensive income for the three and six months ended January 31, 2020 and 2019, and cash flows for the six months ended January 31, 2020 and 2019. The condensed consolidated balance sheet as of July 31, 2019, 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, 2019.
NOTE B — New Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" ("ASC 842"), which replaced the former 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, are presented under ASU 2016-02, while comparative prior period amounts have not been 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.
Upon adoption of ASC 842, the Company recorded additional operating lease assets and liabilities of $55,984 and $58,544, respectively, as of August 1, 2019, which included operating lease assets and liabilities of $9,769 and $9,674, respectively, for leases that commenced on the adoption date of August 1, 2019. No cumulative effect adjustment to retained earnings was recognized upon adoption of the new standard. Adoption of ASC 842 did not have a material impact on the Company's cash flows or operating results. Refer to Note E "Leases" for additional information and required disclosures under the new standard.
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. The Company adopted ASU 2017-12 effective August 1, 2019, using the required modified retrospective adoption
approach to apply this guidance to existing hedging relationships as of the adoption date, which did not have a material impact on its consolidated financial statements.
Standards not yet adopted
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 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 December 2019, the FASB issued ASU 2019-12, "Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740)," which simplifies the accounting for income taxes. 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; however, 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.
NOTE C — Additional Balance Sheet Information
Inventories
Inventories as of January 31, 2020, and July 31, 2019, consisted of the following:
January 31, 2020
July 31, 2019
Finished products
$
77,951
$
77,532
Work-in-process
21,477
20,515
Raw materials and supplies
21,360
21,990
Total inventories
$
120,788
$
120,037
Property, plant and equipment
Property, plant and equipment is presented net of accumulated depreciation in the amount of $280,961 and $273,880 as of January 31, 2020, and July 31, 2019, respectively.
NOTE D — Other Intangible Assets
Other intangible assets include customer relationships, patents, and trademarks with finite lives being amortized in accordance with the accounting guidance for other intangible assets. The Company also has unamortized indefinite-lived trademarks that are classified as other intangible assets. The net book value of these assets was as follows:
The change in the gross carrying amount of other intangible assets as of January 31, 2020 compared to July 31, 2019 was due to the effects of currency fluctuations during the six-month period.
Amortization expense of intangible assets was $1,291 and $1,434 for the three months ended January 31, 2020 and 2019, respectively, and $2,582 and $2,870 for the six months ended January 31, 2020 and 2019, respectively. The amortization over each of the next five fiscal years is projected to be $5,163, $5,163, $4,894, $2,025 and $0 for the fiscal years ending July 31, 2020, 2021, 2022, 2023 and 2024, 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 fifteen years. As of January 31, 2020, the Company did not have any finance leases.
The Company determines whether an arrangement contains a lease at contract inception. The contract is considered to contain a lease if it provides the Company with the right to direct the use of and the right to obtain substantially all of the economic benefits from an identified asset in exchange for consideration. The Company recognizes a right-of-use (“ROU”) asset and a lease liability at the lease commencement date based on the present value of the future lease payments over the expected lease term. Additionally, the ROU asset includes any lease payments made on or before the commencement date, initial direct costs incurred, and is reduced by any lease incentives received.
Some of the Company’s leases include options to extend the lease agreement. The exercise of an extension is at the Company’s sole discretion. The majority of renewal options are not included in the calculation of ROU assets and liabilities as they are not reasonably certain to be exercised. Some of the Company's lease agreements include rental payments that are adjusted periodically for inflation or the change in an index or rate, which are considered to be variable lease payments. Due to the nature of the Company’s variable lease payments, they are generally excluded from the initial measurement of the ROU asset and lease liability and are recognized in the period in which the obligation for those payments is incurred. The Company has lease agreements that include both lease and non-lease components, which the Company has elected to account for as a single lease component. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Generally, the discount rate implicit within the Company’s leases cannot be readily determined, and therefore the Company uses its incremental borrowing rate to determine the present value of the future lease payments. The incremental borrowing rate is estimated based on the sovereign credit rating for the countries in which the Company has its largest operations, adjusted for several factors, such as internal credit spread, lease terms and other market information available at the lease commencement date.
Operating leases are reflected in “Operating lease assets,” “Current operating lease liabilities,” and “Long-term operating lease liabilities” on the Company's condensed consolidated balance sheets.
Short-term lease expense, variable lease expenses, and sublease income was immaterial to the condensed consolidated statements of income for the three and six months ended January 31, 2020.
The following table summarizes lease expense recognized for the three and six months ended January 31, 2020:
Three months ended
Six months ended
Condensed Consolidated Statements of Income Location
The following table summarizes the maturity of the Company's lease liabilities as of January 31, 2020:
Years ended July 31,
Operating Leases
Remainder of 2020
$
8,426
2021
15,780
2022
12,797
2023
9,427
2024
5,580
Thereafter
3,268
Total lease payments
$
55,278
Less interest
(3,384
)
Present value of lease liabilities
$
51,894
The weighted average remaining lease terms and discount rates for the Company's operating leases as of January 31, 2020 were as follows:
January 31, 2020
Weighted average remaining lease term (in years)
3.9
Weighted average discount rate
3.4
%
Supplemental cash flow information related to the Company's operating leases for the six months ended January 31, 2020, were as follows:
Six months ended
January 31, 2020
Operating cash outflows from operating leases
$
8,216
Operating lease assets obtained in exchange for new operating lease liabilities
10,637
Operating lease assets obtained in exchange for new operating lease liabilities include $9,769 of operating lease assets related to leases that commenced on August 1, 2019, which were included in the adoption impact of the new lease accounting standard.
The following table summarizes future minimum lease payments under operating leases as of July 31, 2019:
The following table illustrates the changes in the balances of each component of stockholders' equity for the three months ended January 31, 2019:
Common Stock
Additional Paid-In Capital
Retained Earnings
Treasury Stock
Accumulated Other
Comprehensive Loss
Total Stockholders' Equity
Balances at October 31, 2018
$
548
$
326,182
$
570,858
$
(58,414
)
$
(66,231
)
$
772,943
Net income
—
—
29,227
—
—
29,227
Other comprehensive loss, net of tax
—
—
—
—
5,666
5,666
Issuance of shares of Class A Common Stock under stock plan
—
(162
)
—
5,235
—
5,073
Tax benefit and withholdings from deferred compensation distributions
—
118
—
—
—
118
Stock-based compensation expense
—
2,840
—
—
—
2,840
Purchase of shares of Class A Common Stock
—
—
—
(1,319
)
—
(1,319
)
Cash dividends on Common Stock
Class A — $0.21 per share
—
—
(10,415
)
—
—
(10,415
)
Class B — $0.21 per share
—
—
(752
)
—
—
(752
)
Balances at January 31, 2019
$
548
$
328,978
$
588,918
$
(54,498
)
$
(60,565
)
$
803,381
The following table illustrates the changes in the balances of each component of stockholders' equity for the six months ended January 31, 2019:
Common Stock
Additional Paid-In Capital
Retained Earnings
Treasury Stock
Accumulated Other
Comprehensive Loss
Total Stockholders' Equity
Balances at July 31, 2018
$
548
$
325,631
$
553,454
$
(71,120
)
$
(56,401
)
$
752,112
Net income
—
—
59,864
—
—
59,864
Other comprehensive loss, net of tax
—
—
—
—
(4,164
)
(4,164
)
Issuance of shares of Class A Common Stock under stock plan
—
(4,667
)
—
19,804
—
15,137
Tax benefit and withholdings from deferred compensation distributions
—
209
—
—
—
209
Stock-based compensation expense
—
7,805
—
—
—
7,805
Purchase of shares of Class A Common Stock
—
—
—
(3,182
)
—
(3,182
)
Adoption of ASU 2014-09, "Revenue from Contracts with Customers"
—
—
(2,137
)
—
—
(2,137
)
Cash dividends on Common Stock
Class A — $0.43 per share
—
—
(20,818
)
—
—
(20,818
)
Class B — $0.41 per share
—
—
(1,445
)
—
—
(1,445
)
Balances at January 31, 2019
$
548
$
328,978
$
588,918
$
(54,498
)
$
(60,565
)
$
803,381
NOTE G — Accumulated Other Comprehensive Loss
Other comprehensive loss consists of foreign currency translation adjustments which includes 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 six months ended January 31, 2020:
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 (loss) before reclassification
468
(216
)
(913
)
(661
)
Amounts reclassified from accumulated other comprehensive loss
(365
)
(210
)
—
(575
)
Ending balance, January 31, 2020
$
810
$
2,374
$
(75,674
)
$
(72,490
)
The increase in accumulated other comprehensive loss as of January 31, 2020, compared to July 31, 2019, was primarily due to the appreciation of the U.S. dollar against certain other currencies during the six-month period. The foreign currency translation adjustments column in the table above includes the impact of foreign currency translation and the settlements of net investment hedges, net of tax. Of the total $575 in amounts reclassified from accumulated other comprehensive loss, the $365 gain on cash flow hedges was reclassified into cost of goods sold, and the $210 gain on post-retirement plans was reclassified into investment and other income on the condensed consolidated statements of income for the six months ended January 31, 2020.
The changes in accumulated other comprehensive loss by component, net of tax, for the six months ended January 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, 2018
$
863
$
3,302
$
(60,566
)
$
(56,401
)
Other comprehensive income (loss) before reclassification
47
(169
)
(3,528
)
(3,650
)
Amounts reclassified from accumulated other comprehensive loss
(215
)
(299
)
—
(514
)
Ending balance, January 31, 2019
$
695
$
2,834
$
(64,094
)
$
(60,565
)
The increase in accumulated other comprehensive loss as of January 31, 2019, compared to July 31, 2018, was primarily due to the appreciation of the U.S. dollar against certain other currencies during the six-month period. The foreign currency translation adjustments column in the table above includes the impact of foreign currency translation, foreign currency translation on intercompany notes and the settlements of net investment hedges, net of tax. Of the total $514 in amounts reclassified from accumulated other comprehensive loss, the $215 gain on cash flow hedges was reclassified into cost of goods sold, and the $299 gain on post-retirement plans was reclassified into “Investment and other income” on the condensed consolidated statements of income for the six months ended January 31, 2019.
The following table illustrates the income tax expense on the components of other comprehensive loss for the three and six months ended January 31, 2020 and 2019:
Three months ended January 31,
Six months ended January 31,
2020
2019
2020
2019
Income tax (expense) benefit related to items of other comprehensive (loss) income:
Cash flow hedges
$
(5
)
$
61
$
30
$
(38
)
Pension and other post-retirement benefits
93
—
93
—
Other income tax adjustments and currency translation
(130
)
135
46
(224
)
Income tax (expense) benefit related to items of other comprehensive (loss) income
$
(42
)
$
196
$
169
$
(262
)
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 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’s contracts with customers consist of purchase orders, which in some cases are governed by master supply or distributor agreements. 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 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. At the time of sale, the extended warranty transaction price is recorded as deferred revenue and is recognized on a straight-line basis over the life of the service warranty period.
The balance of contract liabilities associated with service warranty performance obligations was $2,797 and $2,782 as of January 31, 2020 and July 31, 2019, 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 condensed consolidated balance sheets. The Company recognized revenue of $316 and $631 during the three and six months ended January 31, 2020, respectively, 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 January 31, 2020, the Company expects to recognize 22% by the end of fiscal 2020, an additional 34% by the end of fiscal 2021, 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, Workplace Safety, and People Identification ("PDC"), which aggregate into two reportable segments that are organized around businesses with consistent products and services: IDS and WPS. The Identification Solutions 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 Company evaluates short-term segment performance based on segment profit and customer sales. Interest expense, investment and other income, income taxes, and certain corporate administrative expenses are excluded when evaluating segment performance.
The following is a summary of net sales by segment and geographic region for the three and six months ended January 31, 2020 and 2019 is as follows: