Company Quick10K Filing
Brady
Price53.44 EPS3
Shares54 P/E21
MCap2,872 P/FCF18
Net Debt-244 EBIT169
TEV2,628 TEV/EBIT16
TTM 2019-10-31, in MM, except price, ratios
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BRC 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 6. Exhibits
EX-31.1 brc-20190430xex311.htm
EX-31.2 brc-20190430xex312.htm
EX-32.1 brc-20190430xex321.htm
EX-32.2 brc-20190430xex322.htm

Brady Earnings 2019-04-30

Balance SheetIncome StatementCash Flow
1.81.41.10.70.40.02012201420172020
Assets, Equity
0.40.30.20.0-0.1-0.22012201420172020
Rev, G Profit, Net Income
0.20.1-0.0-0.2-0.3-0.42012201420172020
Ops, Inv, Fin

10-Q 1 brc-20190430x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
 
FORM 10-Q
 
 
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 30, 2019
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)
 
(Zip Code)
(414) 358-6600
(Registrant’s telephone number, including area code)
 
 
 
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  þ    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  þ    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
 
þ
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  þ
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
As of May 21, 2019, there were 49,284,372 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.



FORM 10-Q
BRADY CORPORATION
INDEX
 

2


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
 
April 30, 2019
 
July 31, 2018
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
238,432

 
$
181,427

Accounts receivable—net
162,094

 
161,282

Inventories
119,895

 
113,071

Prepaid expenses and other current assets
18,746

 
15,559

Total current assets
539,167

 
471,339

Property, plant and equipment—net
99,491

 
97,945

Goodwill
412,378

 
419,815

Other intangible assets
38,135

 
42,588

Deferred income taxes
7,068

 
7,582

Other
19,638

 
17,662

Total
$
1,115,877

 
$
1,056,931

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
64,584

 
$
66,538

Wages and amounts withheld from employees
52,849

 
67,619

Taxes, other than income taxes
7,886

 
8,318

Accrued income taxes
4,378

 
3,885

Other current liabilities
48,169

 
44,567

Total current liabilities
177,866

 
190,927

Long-term obligations
50,303

 
52,618

Other liabilities
63,164

 
61,274

Total liabilities
291,333

 
304,819

Stockholders’ equity:
 
 
 
Class A nonvoting common stock—Issued 51,261,487 shares, and outstanding 49,284,372 and 48,393,617 shares, respectively
513

 
513

Class B voting common stock—Issued and outstanding, 3,538,628 shares
35

 
35

Additional paid-in capital
330,051

 
325,631

Retained earnings
612,474

 
553,454

Treasury stock—1,977,115 and 2,867,870 shares, respectively, of Class A nonvoting common stock, at cost
(50,083
)
 
(71,120
)
Accumulated other comprehensive loss
(68,446
)
 
(56,401
)
Total stockholders’ equity
824,544

 
752,112

Total
$
1,115,877

 
$
1,056,931


See Notes to Condensed Consolidated Financial Statements.

3


BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts, Unaudited)
 
Three months ended April 30,
 
Nine months ended April 30,
 
2019
 
2018
 
2019
 
2018
Net sales
$
289,745

 
$
298,421

 
$
865,367

 
$
876,352

Cost of goods sold
143,996

 
147,339

 
433,269

 
435,513

Gross margin
145,749

 
151,082

 
432,098

 
440,839

Operating expenses:
 
 
 
 
 
 
 
Research and development
11,437

 
11,678

 
33,837

 
33,512

Selling, general and administrative
94,691

 
101,695

 
281,988

 
299,411

Total operating expenses
106,128

 
113,373

 
315,825

 
332,923

Operating income
39,621

 
37,709

 
116,273

 
107,916

Other income (expense):
 
 
 
 
 
 
 
Investment and other income
2,065

 
31

 
3,425

 
1,303

Interest expense
(708
)
 
(761
)
 
(2,137
)
 
(2,453
)
Income before income taxes
40,978

 
36,979

 
117,561

 
106,766

Income tax expense
6,197

 
10,979

 
22,916

 
50,657

Net income
$
34,781

 
$
26,000

 
$
94,645

 
$
56,109

Net income per Class A Nonvoting Common Share:
 
 
 
 
 
 
 
Basic
$
0.66

 
$
0.50

 
$
1.80

 
$
1.09

Diluted
$
0.65

 
$
0.49

 
$
1.78

 
$
1.07

Dividends
$
0.21

 
$
0.21

 
$
0.64

 
$
0.62

Net income per Class B Voting Common Share:
 
 
 
 
 
 
 
Basic
$
0.66

 
$
0.50

 
$
1.79

 
$
1.07

Diluted
$
0.65

 
$
0.49

 
$
1.76

 
$
1.05

Dividends
$
0.21

 
$
0.21

 
$
0.62

 
$
0.61

Weighted average common shares outstanding (in thousands):
 
 
 
 
 
 
 
Basic
52,766

 
51,747

 
52,499

 
51,628

Diluted
53,480

 
52,729

 
53,215

 
52,610

See Notes to Condensed Consolidated Financial Statements.

4


BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands, Unaudited)

 
Three months ended April 30,
 
Nine months ended April 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
34,781

 
$
26,000

 
$
94,645

 
$
56,109

Other comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(7,337
)
 
(12,834
)
 
(10,641
)
 
(3,549
)
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
Net gain recognized in other comprehensive loss
220

 
657

 
377

 
119

Reclassification adjustment for (gains) losses included in net income
(292
)
 
264

 
(579
)
 
446

 
(72
)
 
921

 
(202
)
 
565

Pension and other post-retirement benefits:
 
 
 
 
 
 
 
Net (loss) gain recognized in other comprehensive loss

 

 
(169
)
 
592

Actuarial gain amortization
(124
)
 
(163
)
 
(423
)
 
(434
)
 
(124
)
 
(163
)
 
(592
)
 
158

 
 
 
 
 
 
 
 
Other comprehensive loss, before tax
(7,533
)
 
(12,076
)
 
(11,435
)
 
(2,826
)
Income tax expense related to items of other comprehensive loss
(348
)
 
(980
)
 
(610
)
 
(638
)
Other comprehensive loss, net of tax
(7,881
)
 
(13,056
)
 
(12,045
)
 
(3,464
)
Comprehensive income
$
26,900

 
$
12,944

 
$
82,600

 
$
52,645

See Notes to Condensed Consolidated Financial Statements.


5


BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands, Unaudited)
 
Nine months ended April 30,
 
2019
 
2018
Operating activities:
 
 
 
Net income
$
94,645

 
$
56,109

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
17,836

 
19,047

Non-cash portion of stock-based compensation expense
10,311

 
7,581

Deferred income taxes
3,796

 
26,501

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
332

 
(10,710
)
Inventories
(9,254
)
 
(7,790
)
Prepaid expenses and other assets
(2,204
)
 
480

Accounts payable and other liabilities
(19,176
)
 
(133
)
Income taxes
616

 
(1,863
)
Net cash provided by operating activities
96,902

 
89,222

 
 
 
 
Investing activities:
 
 
 
Purchases of property, plant and equipment
(17,528
)
 
(14,755
)
Other
(1,810
)
 
(197
)
Net cash used in investing activities
(19,338
)
 
(14,952
)
 
 
 
 
Financing activities:
 
 
 
Payment of dividends
(33,488
)
 
(32,110
)
Proceeds from exercise of stock options
20,333

 
10,011

Proceeds from borrowing on credit facilities
13,637

 
17,439

Repayment of borrowing on credit facilities
(13,568
)
 
(69,012
)
Other
(5,185
)
 
(3,622
)
Net cash used in financing activities
(18,271
)
 
(77,294
)
 
 
 
 
Effect of exchange rate changes on cash
(2,288
)
 
(17
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
57,005

 
(3,041
)
Cash and cash equivalents, beginning of period
181,427

 
133,944

 
 
 
 
Cash and cash equivalents, end of period
$
238,432

 
$
130,903


See Notes to Condensed Consolidated Financial Statements.

6


BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended April 30, 2019
(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 April 30, 2019 and July 31, 2018, its results of operations and comprehensive income for the three and nine months ended April 30, 2019 and 2018, and cash flows for the nine months ended April 30, 2019 and 2018. The condensed consolidated balance sheet as of July 31, 2018, 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, 2018.
NOTE B — New Accounting Pronouncements
In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-12 "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," which simplifies and reduces the complexity of the hedge accounting requirements and better aligns an entity's financial reporting for hedging relationships with its risk management activities. The guidance is effective for interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. This new guidance will require a modified retrospective adoption approach to existing hedging relationships as of the adoption date. The Company is currently evaluating the impact of this update on its consolidated financial statements and disclosures.

In 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 February 2016, the FASB issued ASU 2016-02, "Leases," which replaces the current lease accounting standards. The update requires, among other items, lessees to recognize the assets and liabilities that arise from most leases on the balance sheet and disclose key information about leasing arrangements. This guidance is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The ASU allows for either a full-retrospective or a modified-retrospective approach and early adoption is permitted. In July 2018, the FASB approved an optional transition method to allow companies to apply the new lease standard as of the adoption date and recognize a cumulative-effect adjustment to beginning retained earnings in the period of adoption.
 
The Company has formed a team to implement the new lease standard and has implemented a third-party software program to track and store its leases. The implementation team has been evaluating the Company’s global lease portfolio, determining the reporting requirements of the new standard, and is in the process of implementing changes to its processes and internal controls to support lease accounting and disclosure requirements. The Company expects to record right-of-use assets and lease liabilities as a result of the new lease standard; however, it is still evaluating the magnitude of the impact on its consolidated financial statements. The Company plans to adopt the new standard effective August 1, 2019 using the optional transition method.


7


In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" ("Topic 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 Topic 606, while comparative prior period amounts have not been restated and continue to be presented under accounting standards in effect in those periods.
The results of applying Topic 606 were not material to 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-type warranties are recognized, as required per Topic 606.
Refer to Note C "Revenue Recognition" for additional information and required disclosures under the new standard.
NOTE C — Revenue Recognition
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. The Company considers the purchase orders, which in some cases are governed by master sales or distributor agreements, to be its contracts with customers. For each contract, the Company considers the commitment to transfer products, each of which is distinct, to be its identified performance obligations.
Timing
The majority of the Company's revenue is earned and recognized at a point in time through ship-and-bill performance obligations, when control of the product is transferred to the customer, which typically occurs upon shipment or delivery to the customer, depending on freight terms. To determine when control has transferred, the Company considers if there is a present right to payment; and if legal title, physical possession, and the significant risks and rewards of ownership of the asset has transferred to the customer. Once a product has shipped or has been delivered, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from, the asset.
Measurement
Revenue is measured as the amount of consideration the Company expects to be entitled to in exchange for the transfer of product, which is generally the price stated in the contract specific for each item sold, adjusted for the value of expected returns, discounts, rebates, or other allowances offered to the Company's customers as a reduction of the transaction price. Certain discounts and price assurances are fixed and known at the time of sale. Expected returns and other allowances are variable and are estimated using the expected value method based upon historical experience. Rebates offered to customers are retrospective and typically defined in the master sales or distributor agreements, and therefore are recorded using the most likely amount method based on the terms of the contract. Estimated amounts are included in 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.
Payment Terms
    
While the Company’s standard payment terms are net 30 days, the specific payment terms and conditions in its customer contracts vary. In some cases, customers pay for their goods at time of shipment or upon delivery; in other cases, after appropriate credit evaluation, an open credit line is granted and payment is due in arrears. Contracts with payment in arrears are recognized in the condensed consolidated balance sheet as accounts receivable.

Warranties

The Company offers standard warranty coverage on substantially all products that it sells, and accounts for this standard warranty coverage as an assurance warranty. As such, no transaction price is allocated to the standard warranty, and the Company records a liability for product warranty obligations at the time of sale to a customer based upon historical warranty experience.
The Company also sells extended warranty coverage for certain products, which it accounts for as service warranties. In most cases, the extended service warranty is included with the purchase of the product. In applying Topic 606, the Company considers the extended service warranty to be a separate performance obligation in the contract and allocates a portion of the transaction

8


price to the service warranty based on the estimated stand-alone selling price. Under Topic 606, the extended warranty transaction price is initially recorded as deferred revenue on the consolidated balance sheet and 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. The balance of contract liabilities as of April 30, 2019, was $2,791. This also represents the amount of unsatisfied performance obligations related to contracts that extend beyond one year. Of this amount, the Company expects to recognize 48% by the end of fiscal 2020, an additional 25% by the end of fiscal 2021, and the balance thereafter. Upon adoption of Topic 606, at the beginning of fiscal 2019, the contract liability balance was $2,796. The current portion of contract liabilities and the non-current portion are included in “Other current liabilities” and “Other liabilities," respectively, on the consolidated balance sheet. During the three and nine months ended April 30, 2019, the Company recognized revenue of $315 and $937, respectively, that was included in the contract liability balance at the beginning of the period, which was from the amortization of extended service warranties.
Practical Expedients
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.
As the Company’s product sale contracts and standard payment terms have a duration of less than one year, it uses the practical expedient applicable to such contracts and does not consider the time value of money.
Sales, use, value-add and other similar taxes assessed by governmental authorities and collected concurrent with revenue-producing activities are excluded from revenue.
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 expensed in "Selling, general, and administrative expenses" on the condensed consolidated statements of income.

Refer to Note H, "Segment Information," for the Company's disaggregated revenue disclosure.
NOTE D — Additional Balance Sheet Information
Inventories
Inventories as of April 30, 2019, and July 31, 2018, consisted of the following:
 
April 30, 2019
 
July 31, 2018
Finished products
$
76,117

 
$
73,133

Work-in-process
22,240

 
19,903

Raw materials and supplies
21,538

 
20,035

Total inventories
$
119,895

 
$
113,071

Property, plant and equipment
Property, plant and equipment is presented net of accumulated depreciation in the amount of $274,476 and $280,778 as of April 30, 2019, and July 31, 2018, respectively.

NOTE E — Other Intangible Assets
Other intangible assets include patents, trademarks, and customer relationships 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.

9


The net book value of these assets was as follows:
 
April 30, 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
8
 
$
52,203

 
$
(33,487
)
 
$
18,716

 
9
 
$
61,944

 
$
(38,872
)
 
$
23,072

Unamortized other intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks
N/A
 
19,419

 

 
19,419

 
N/A
 
19,516

 

 
19,516

Total
 
 
$
71,622

 
$
(33,487
)
 
$
38,135

 
 
 
$
81,460

 
$
(38,872
)
 
$
42,588

Amortization expense of intangible assets was $1,443 and $1,620 for the three months ended April 30, 2019 and 2018, respectively, and $4,314 and $4,930 for the nine months ended April 30, 2019 and 2018, respectively. The amortization over each of the next five fiscal years is projected to be $5,708, $5,183, $5,144, $5,002 and $2,025 for the fiscal years ending July 31, 2019, 2020, 2021, 2022 and 2023, respectively.
NOTE F — Accumulated Other Comprehensive Loss
Other comprehensive loss consists of foreign currency translation adjustments, unrealized gains and losses from cash flow hedges and net investment 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 nine months ended April 30, 2019:
 
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
233

 
(169
)
 
(11,252
)
 
(11,188
)
Amounts reclassified from accumulated other comprehensive loss
(434
)
 
(423
)
 

 
(857
)
Ending balance, April 30, 2019
$
662

 
$
2,710

 
$
(71,818
)
 
$
(68,446
)
The increase in accumulated other comprehensive loss as of April 30, 2019, compared to July 31, 2018, was primarily due to the appreciation of the U.S. dollar against certain other currencies during the nine-month period. The foreign currency translation adjustments column in the table above includes the impact of foreign currency translation, including foreign currency translation on long-term intercompany notes and net investment hedges, net of tax. Of the total $857 in amounts reclassified from accumulated other comprehensive loss, the $434 gain on cash flow hedges was reclassified into cost of goods sold, and the $423 gain on post-retirement plans was reclassified into investment and other income on the condensed consolidated statement of income for the nine months ended April 30, 2019.
The changes in accumulated other comprehensive loss by component, net of tax, for the nine months ended April 30, 2018, 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, 2017
$
109

 
$
2,620

 
$
(47,411
)
 
$
(44,682
)
Other comprehensive (loss) income before reclassification
(124
)
 
414

 
(3,630
)
 
(3,340
)
Amounts reclassified from accumulated other comprehensive loss
310

 
(434
)
 

 
(124
)
Ending balance, April 30, 2018
$
295

 
$
2,600

 
$
(51,041
)
 
$
(48,146
)
The increase in accumulated other comprehensive loss as of April 30, 2018, compared to July 31, 2017, was primarily due to the appreciation of the U.S. dollar against certain other currencies during the nine-month period. The foreign currency translation adjustments column in the table above includes the impact of foreign currency translation, including foreign currency translation on long-term intercompany notes and net investment hedges, net of tax. Of the total $124 in amounts reclassified from accumulated

10


other comprehensive loss, the $310 loss on cash flow hedges was reclassified into cost of goods sold, and the $434 gain on post-retirement plans was reclassified into selling, general and administrative expenses ("SG&A") on the condensed consolidated statement of income for the nine months ended April 30, 2018.
The following table illustrates the income tax expense on the components of other comprehensive loss for the three and nine months ended April 30, 2019 and 2018:
 
Three months ended April 30,
 
Nine months ended April 30,
 
2019
 
2018
 
2019
 
2018
Income tax expense related to items of other comprehensive loss:
 
 
 
 
 
 
 
Cash flow hedges
$
38

 
$
(262
)
 
$

 
$
(379
)
Pension and other post-retirement benefits

 

 

 
(178
)
Other income tax adjustments and currency translation
(386
)
 
(718
)
 
(610
)
 
(81
)
Income tax expense related to items of other comprehensive loss
$
(348
)
 
$
(980
)
 
$
(610
)
 
$
(638
)
NOTE G — 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 April 30,
 
Nine months ended April 30,
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
Income (Numerator for basic and diluted Class A Nonvoting Common Share)
$
34,781

 
$
26,000

 
$
94,645

 
$
56,109

Less:
 
 
 
 
 
 
 
Preferential dividends

 

 
(815
)
 
(799
)
Preferential dividends on dilutive stock options

 

 
(13
)
 
(16
)
Numerator for basic and diluted income per Class B Voting Common Share
$
34,781

 
$
26,000

 
$
93,817

 
$
55,294

Denominator: (in thousands)
 
 
 
 
 
 
 
Denominator for basic income per share for both Class A and Class B
52,766

 
51,747

 
52,499

 
51,628

Plus: Effect of dilutive stock options and restricted stock units
714

 
982

 
716

 
982

Denominator for diluted income per share for both Class A and Class B
53,480

 
52,729

 
53,215

 
52,610

Net Income per Class A Nonvoting Common Share:
 
 
 
 
 
 
 
Basic
$
0.66

 
$
0.50

 
$
1.80

 
$
1.09

Diluted
$
0.65

 
$
0.49

 
$
1.78

 
$
1.07

Net Income per Class B Voting Common Share:
 
 
 
 
 
 
 
Basic
$
0.66

 
$
0.50

 
$
1.79

 
$
1.07

Diluted
$
0.65

 
$
0.49

 
$
1.76

 
$
1.05

Options to purchase 269,606 and 675,329 shares of Class A Nonvoting Common Stock for the three months ended April 30, 2019 and 2018, respectively, and 407,477 and 705,843 shares for the nine months ended April 30, 2019 and 2018, respectively, were not included in the computation of diluted net income per share because the option exercise price was greater than the average market price of the common shares and, therefore, the effect would have been anti-dilutive.

NOTE H — Segment Information
The Company is organized and managed on a global basis within three operating segments, Identification Solutions, Workplace Safety, 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 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.

11


Net sales by segment and geographic region for the three and nine months ended April 30, 2019 and 2018 is as follows:
 
Three months ended April 30,
 
Nine months ended April 30,
 
2019
 
2018
 
2019
 
2018
Net sales:
 
 
 
 
 
 
 
ID Solutions
 
 
 
 
 
 
 
Americas
$
143,557

 
$
139,061

 
$
427,671

 
$
412,271

Europe
48,984

 
51,248

 
145,094

 
147,623

Asia
21,438

 
21,845

 
68,518

 
68,397

Total
$
213,979

 
$
212,154

 
$
641,283

 
$
628,291

Workplace Safety
 
 
 
 
 
 
 
Americas
$
25,778

 
$
28,790

 
$
74,861

 
$
81,747

Europe
38,372

 
44,846

 
113,816

 
129,887

Australia
11,616

 
12,631

 
35,407

 
36,427

Total
$
75,766

 
$
86,267

 
$
224,084

 
$
248,061

Total Company
 
 
 
 
 
 
 
Americas
$
169,335

 
$
167,851

 
$
502,532

 
$
494,018

Europe
87,356

 
96,094

 
258,910

 
277,510

Asia-Pacific
33,054

 
34,476

 
103,925

 
104,824

Total
$
289,745

 
$
298,421

 
$
865,367

 
$
876,352

Segment profit for the three and nine months ended April 30, 2019 and 2018 is as follows:
 
Three months ended April 30,
 
Nine months ended April 30,
 
2019
 
2018
 
2019
 
2018
Segment profit:
 
 
 
 
 
 
 
ID Solutions
$
39,892

 
$
36,970

 
$
119,311

 
$
106,896

Workplace Safety
6,099

 
7,537

 
16,301

 
21,037

Total Company
$
45,991

 
$
44,507

 
$
135,612

 
$
127,933

The following is a reconciliation of segment profit to income before income taxes for the three and nine months ended April 30, 2019 and 2018:
 
Three months ended April 30,
 
Nine months ended April 30,
 
2019
 
2018
 
2019
 
2018
Total profit from reportable segments
$
45,991

 
$
44,507

 
$
135,612

 
$
127,933

Unallocated amounts:
 
 
 
 
 
 
 
Administrative costs
(6,370
)
 
(6,798
)
 
(19,339
)
 
(20,017
)
Investment and other income
2,065

 
31

 
3,425

 
1,303

Interest expense
(708
)
 
(761
)
 
(2,137
)
 
(2,453
)
Income before income taxes
$
40,978

 
$
36,979

 
$
117,561

 
$
106,766


12


NOTE I — Fair Value Measurements
In accordance with fair value accounting guidance, 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 reporting 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 tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis at April 30, 2019 and July 31, 2018, according to the valuation techniques the Company used to determine their fair values.
 
Inputs
Considered As
 
 
 
 
 
Quoted Prices in Active Markets for Identical
Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Fair Values
 
Balance Sheet Classifications
April 30, 2019
 
 
 
 
 
 
 
Trading securities
$
15,890

 
$

 
$
15,890

 
Other assets
Foreign exchange contracts

 
532

 
532

 
Prepaid expenses and other current assets
Total Assets
$
15,890

 
$
532

 
$
16,422

 
 
Foreign exchange contracts
$

 
$
10

 
$
10

 
Other current liabilities
Total Liabilities
$

 
$
10

 
$
10

 
 
July 31, 2018
 
 
 
 
 
 
 
Trading securities
$
14,383

 
$

 
$
14,383

 
Other assets
Foreign exchange contracts

 
1,077

 
1,077

 
Prepaid expenses and other current assets
Total Assets
$
14,383

 
$
1,077

 
$
15,460

 
 
Foreign exchange contracts
$

 
$
3

 
$
3

 
Other current liabilities
Total Liabilities
$

 
$
3

 
$
3

 
 
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Trading securities: The Company’s deferred compensation investments consist of investments in mutual funds. These investments were classified as Level 1 as the shares of these investments trade with sufficient frequency and volume to enable 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 J, “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 nine months ended April 30, 2019. In addition, the Company had no significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition during the nine months ended April 30, 2019.
The Company’s financial instruments, other than those presented in the disclosures above, include cash and cash equivalents, accounts receivable, accounts payable, and other liabilities. The fair values of these financial instruments approximated carrying values because of their short-term nature.
The estimated fair value of the Company’s short-term and long-term debt obligations based on the quoted market prices for similar issues and on the current rates offered for debt of similar maturities was $52,092 and $55,707 at April 30, 2019 and July 31, 2018, respectively, as compared to the carrying value of $50,303 and $52,618 at April 30, 2019 and July 31, 2018, respectively.

13


NOTE J — 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 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 currency contracts. As of April 30, 2019 and July 31, 2018, the notional amount of outstanding forward exchange contracts was $10,231 and $32,667, respectively.
The Company hedges a portion of known exposures using forward exchange contracts. Main exposures are related to transactions denominated in the Euro, Canadian dollar, and Mexican peso. Generally, these risk management transactions will involve the use of foreign currency derivatives to minimize the impact of currency movements on non-functional currency transactions.
Hedge effectiveness is determined by how closely the changes in fair value of the hedging instrument offset the changes in the fair value or cash flows of the hedged item. Hedge accounting is permitted only if the hedging relationship is expected to be highly effective at the inception of the hedge and on an on-going basis. Gains or losses on the derivative related to hedge ineffectiveness are recognized in current income.
Cash Flow Hedges
The Company has designated a portion of its 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 earnings. As of April 30, 2019 and 2018, unrealized gains of $815 and $65 have been included in OCI, respectively. Balances are reclassified from OCI to income when the hedged transactions impact income. For the three months ended April 30, 2019 and 2018, the Company reclassified gains of $292 and losses of $264 from OCI into income, respectively. For the nine months ended April 30, 2019 and 2018, the Company reclassified gains of $579 and losses of $446 from OCI into income, respectively. At April 30, 2019, the U.S. dollar equivalent of these outstanding forward foreign exchange contracts totaled $6,823, including contracts to sell Euros and contracts to buy Mexican pesos.
Net Investment Hedges
The Company has designated €45 million of Euro-denominated senior unsecured notes as net investment hedges to hedge portions of the Company's net investment in European operations. The Company’s foreign denominated debt obligations are valued under a market approach using publicized spot prices.
Non-Designated Hedges
The Company recognized losses of $6 and $49 for the three and nine months ended April 30, 2019, respectively, and gains of $9 and $29 for the three and nine months ended April 30, 2018, respectively, in “Investment and other income” on the condensed consolidated statements of income related to non-designated hedges.

14


Fair values of derivative instruments in the condensed consolidated balance sheets were as follows: 
 
Asset Derivatives
 
Liability Derivatives
 
April 30, 2019
 
July 31, 2018
 
April 30, 2019
 
July 31, 2018
  
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Prepaid expenses and other current assets
 
$
528

 
Prepaid expenses and other current assets
 
$
1,076

 
Other current liabilities
 
$

 
Other current liabilities
 
$

Net investment hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency denominated debt
Prepaid expenses and other current assets
 

 
Prepaid expenses and other current assets
 

 
Long term obligations
 
50,332

 
Long term obligations
 
52,668

Total derivatives designated as hedging instruments
 
 
$
528

 
 
 
$
1,076

 
 
 
$
50,332

 
 
 
$
52,668

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Prepaid expenses and other current assets
 
$
4

 
Prepaid expenses and other current assets
 
$
1

 
Other current liabilities
 
$
10

 
Other current liabilities
 
$
3

Total derivatives not designated as hedging instruments
 
 
$
4

 
 
 
$
1

 
 
 
$
10

 
 
 
$
3



15


NOTE K – Stockholders' Equity
The following table illustrates the changes in the balances of each component of stockholders' equity for the three months ended April 30, 2019:
 
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Total Stockholders' Equity
Balances at January 31, 2019
 
$
548

 
$
328,978

 
$
588,918

 
$
(54,498
)
 
$
(60,565
)
 
$
803,381

Net income
 

 

 
34,781

 

 

 
34,781

Other comprehensive loss, net of tax
 

 

 

 

 
(7,881
)
 
(7,881
)
Issuance of shares of Class A Common Stock under stock plan
 

 
(1,433
)
 

 
4,415

 

 
2,982

Stock-based compensation expense
 

 
2,506

 

 

 

 
2,506

Cash dividends on Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
Class A — $0.21 per share
 

 

 
(10,473
)
 

 

 
(10,473
)
Class B — $0.21 per share
 

 

 
(752
)
 

 

 
(752
)
Balances at April 30, 2019
 
$
548

 
$
330,051

 
$
612,474

 
$
(50,083
)
 
$
(68,446
)
 
$
824,544


The following table illustrates the changes in the balances of each component of stockholders' equity for the nine months ended April 30, 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
 

 

 
94,645

 

 

 
94,645

Other comprehensive loss, net of tax
 

 

 

 

 
(12,045
)
 
(12,045
)
Issuance of shares of Class A Common Stock under stock plan
 

 
(6,100
)
 

 
24,219

 

 
18,119

Tax benefit and withholdings from deferred compensation distributions
 

 
209

 

 

 

 
209

Stock-based compensation expense
 

 
10,311

 

 

 

 
10,311

Purchase of shares of Class A Common Stock
 

 

 

 
(3,182
)
 

 
(3,182
)
Cumulative adjustment for ASU 2014-09, net of tax (Note B)
 

 

 
(2,137
)
 

 

 
(2,137
)
Cash dividends on Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
Class A — $0.64 per share
 

 

 
(31,291
)
 

 

 
(31,291
)
Class B — $0.62 per share
 

 

 
(2,197
)
 

 

 
(2,197
)
Balances at April 30, 2019
 
$
548

 
$
330,051

 
$
612,474

 
$
(50,083
)
 
$
(68,446
)
 
$
824,544










16


The following table illustrates the changes in the balances of each component of stockholders' equity for the three months ended April 30, 2018:
 
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Total Stockholders' Equity
Balances at January 31, 2018
 
$
548

 
$
325,733

 
$
515,872

 
$
(75,090
)
 
$
(35,090
)
 
$
731,973

Net income
 

 

 
26,000

 

 

 
26,000

Other comprehensive loss, net of tax
 

 

 

 

 
(13,056
)
 
(13,056
)
Issuance of shares of Class A Common Stock under stock plan
 

 
(16
)
 

 
77

 

 
61

Stock-based compensation expense
 

 
1,684

 

 

 

 
1,684

Purchase of shares of Class A Common Stock
 

 

 

 
(1,278
)
 

 
(1,278
)
Cash dividends on Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
Class A — $0.21 per share
 

 

 
(10,003
)
 

 

 
(10,003
)
Class B — $0.21 per share
 

 

 
(734
)
 

 

 
(734
)
Balances at April 30, 2018
 
$
548

 
$
327,401

 
$
531,135

 
$
(76,291
)
 
$
(48,146
)
 
$
734,647


The following table illustrates the changes in the balances of each component of stockholders' equity for the nine months ended April 30, 2018:
 
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Total Stockholders' Equity
Balances at July 31, 2017
 
$
548

 
$
322,608

 
$
507,136

 
$
(85,470
)
 
$
(44,682
)
 
$
700,140

Net income
 

 

 
56,109

 

 

 
56,109

Other comprehensive loss, net of tax
 

 

 

 

 
(3,464
)
 
(3,464
)
Issuance of shares of Class A Common Stock under stock plan
 

 
(3,001
)
 

 
10,879

 

 
7,878

Tax benefit and withholdings from deferred compensation distributions
 

 
213

 

 
(422
)
 

 
(209
)
Stock-based compensation expense
 

 
7,581

 

 

 

 
7,581

Purchase of shares of Class A Common Stock
 

 

 

 
(1,278
)
 

 
(1,278
)
Cash dividends on Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
Class A — $0.62 per share
 

 

 
(29,970
)
 

 

 
(29,970
)
Class B — $0.60 per share
 

 

 
(2,140
)
 

 

 
(2,140
)
Balances at January 31, 2018
 
$
548

 
$
327,401

 
$
531,135

 
$
(76,291
)
 
$
(48,146
)
 
$
734,647

NOTE L — Income Taxes
The effective income tax rates for the three and nine months ended April 30, 2019, were 15.1% and 19.5%, respectively. The Company expects its ongoing annual effective income tax rate to be in the mid-20 percent range based on its current global business mix. The effective income tax rates for the three and nine months ended April 30, 2019, were lower than the expected income tax rate due to the reversal of certain reserves for uncertain tax positions due to the favorable settlement of such foreign and domestic tax matters, partially offset by an increase in the valuation allowance against foreign tax credit carryforwards.

The effective income tax rates for the three and nine months ended April 30, 2018, were 29.7% and 47.4%, respectively. The income tax rates were significantly impacted by the recognition of additional tax expense of $21,060 primarily due to the enactment of the Tax Cuts and Jobs Act (the "Tax Reform Act") passed in December 2017.



17


NOTE M — Subsequent Events
On May 21, 2019, the Board of Directors declared a quarterly cash dividend to shareholders of the Company’s Class A and Class B Common Stock of $0.2125 per share payable on July 31, 2019, to shareholders of record at the close of business on July 10, 2019.

18


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Overview

Brady Corporation is a global manufacturer and supplier of identification solutions and workplace safety products that identify and protect premises, products and people. The IDS segment is primarily involved in the design, manufacture, and distribution of high-performance and innovative identification and healthcare products. The WPS segment provides workplace safety and compliance products, half of which are internally manufactured and half of which are externally sourced.

The long-term sales growth and profitability of our segments will depend not only on improved demand in end markets and the overall economic environment, but also on our ability to continuously improve operational excellence, focus on the customer, develop and market innovative new products, and to advance our digital capabilities. In our Identification Solutions ("ID Solutions" or "IDS") business, our strategy for growth includes an increased focus on certain industries and products, a focus on improving the customer buying experience, and increasing investment in research and development ("R&D") to develop new products. In our Workplace Safety ("WPS") business, our strategy for growth includes a focus on workplace safety critical industries, innovative new product offerings, compliance expertise, and improving our digital capabilities.

The following are key initiatives supporting the strategy in fiscal 2019:

Enhancing our innovation development process and the speed to deliver high-value, innovative products in alignment with our target markets.
Driving operational excellence and providing our customers with the highest level of customer service.
Executing sustainable efficiency gains within our selling, general, and administrative structures as well as throughout our global operations by making investments in equipment and machinery to drive automation.
Expanding and enhancing our digital presence.
Growing through focused sales and marketing actions in selected vertical markets and strategic accounts.
Enhancing our global employee development process to attract and retain key talent.

Results of Operations

A comparison of results of operating income for the three and nine months ended April 30, 2019 and 2018, is as follows:
 
Three months ended April 30,
 
Nine months ended April 30,
(Dollars in thousands)
2019
 
% Sales
 
2018
 
% Sales
 
2019
 
% Sales
 
2018
 
% Sales
Net sales
$
289,745

 
 
 
$
298,421

 
 
 
$
865,367

 
 
 
$
876,352

 
 
Gross margin
145,749

 
50.3
%
 
151,082

 
50.6
%
 
432,098

 
49.9
%
 
440,839

 
50.3
%
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
      Research and development
11,437

 
3.9
%
 
11,678

 
3.9
%
 
33,837

 
3.9
%
 
33,512

 
3.8
%
Selling, general and administrative
94,691

 
32.7
%
 
101,695

 
34.1
%
 
281,988

 
32.6
%
 
299,411

 
34.2
%
 Total operating expenses
106,128

 
36.6
%
 
113,373

 
38.0
%
 
315,825

 
36.5
%
 
332,923

 
38.0
%
Operating income
$
39,621

 
13.7
%
 
$
37,709

 
12.6
%
 
$
116,273

 
13.4
%
 
$
107,916

 
12.3
%

References in this Form 10-Q to “organic sales” refer to sales calculated in accordance with U.S. GAAP, excluding the impact of foreign currency translation and divestitures. The Company's organic sales disclosures exclude the effects of foreign currency translation as foreign currency translation is subject to volatility that can obscure underlying business trends. Management believes that the non-GAAP financial measure of organic sales is meaningful to investors as it provides them with useful information to aid in identifying underlying sales trends in the Company's businesses and facilitating comparisons of sales performance with prior periods. All analytical commentary within the Results of Operations section regarding the change in sales when compared to prior periods are in reference to organic sales.


19


Sales for the three months ended April 30, 2019, decreased 2.9% to $289.7 million, compared to $298.4 million in the same period of the prior year, which consisted of organic sales growth of 2.4%, that was more than offset by a decrease from foreign currency translation of 3.8% and a divestiture impact of 1.5%. Organic sales grew 4.0% in the IDS segment and declined 1.6% in the WPS segment during the three months ended April 30, 2019, compared to the same period in the prior year. The IDS segment realized sales growth in the Safety and Facility ID, Product ID, and Wire ID product lines, partially offset by a slight decline in the Healthcare ID product line compared to the prior year. The WPS segment realized a slight decline in sales through the digital channel due to the performance of the business in the Americas. Digital sales increased in both Europe and Australia compared to the same period in the prior year. Sales through the catalog channel continued the trend of a low-single digit decline compared to the same period in the prior year.

Sales for the nine months ended April 30, 2019, decreased 1.3% to $865.4 million, compared to $876.4 million in the same period of the prior year, which consisted of organic sales growth of 3.1%, that was more than offset by a decrease from foreign currency translation of 2.8% and a divestiture impact of 1.6%. Organic sales grew 4.4% in the IDS segment and declined 0.2% in the WPS segment during the nine months ended April 30, 2019, compared to the same period in the prior year. The IDS segment realized sales growth in the Safety and Facility ID, Product ID, and Wire ID product lines, partially offset by a decline in the Healthcare ID product line compared to the prior year. The WPS segment realized growth in sales through the digital channel and a low-single digit decline in sales through the catalog channel when compared to the same period in the prior year.

Gross margin decreased 3.5% to $145.7 million for the three months ended April 30, 2019, and decreased 2.0% to $432.1 million for the nine months ended April 30, 2019, compared to $151.1 million and $440.8 million in the same periods of the prior year, respectively. As a percentage of net sales, gross margin decreased to 50.3% for the three months ended April 30, 2019, and 49.9% for the nine months ended April 30, 2019, from 50.6% and 50.3% in the same periods of the prior year, respectively. The decreases in gross margin as a percentage of net sales were primarily due to increased input costs such as freight and personnel costs which were partially mitigated by selected price increases and our ongoing efforts to streamline manufacturing processes and drive operational efficiencies, including increased automation in our manufacturing facilities.

R&D expenses for the three months ended April 30, 2019, decreased 2.1% to $11.4 million, compared to $11.7 million in the same period of the prior year. The decrease in the three-month period was due to the timing of expenditures related to ongoing new product development projects. R&D expenses for the nine months ended April 30, 2019, remained essentially flat at $33.8 million, compared to $33.5 million in the same period of the prior year. The Company remains committed to investing in new product development in connection with our focus on increasing new product sales within our IDS and WPS businesses. Investments in new software and printer updates continue to be the primary focus of R&D expenditures.

Selling, general and administrative expenses ("SG&A") include selling and administrative costs directly attributed to the IDS and WPS segments, as well as certain other corporate administrative expenses including finance, information technology, human resources, and other administrative expenses. SG&A decreased 6.9% to $94.7 million for the three months ended April 30, 2019, and 5.8% to $282.0 million for the nine months ended April 30, 2019, compared to $101.7 million and $299.4 million in the same periods of the prior year, respectively. As a percentage of net sales, SG&A decreased to 32.7% for the three months ended April 30, 2019