UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended October 31, 2020April 30, 2021
OR
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☐ | 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 |
6555 West Good Hope Road Milwaukee, Wisconsin 53233 (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.
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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 November 17, 2020,May 18, 2021, there were 48,475,60048,524,455 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
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands) | | | | | | | | | | | |
| October 31, 2020 | | July 31, 2020 |
| (Unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 256,333 | | | $ | 217,643 | |
Accounts receivable, net of allowance for credit losses of $7,704 and $7,157, respectively | 156,735 | | | 146,181 | |
Inventories | 120,220 | | | 135,662 | |
Prepaid expenses and other current assets | 11,489 | | | 9,962 | |
Total current assets | 544,777 | | | 509,448 | |
Property, plant and equipment—net | 119,960 | | | 115,068 | |
Goodwill | 412,718 | | | 416,034 | |
Other intangible assets | 20,910 | | | 22,334 | |
Deferred income taxes | 8,976 | | | 8,845 | |
Operating lease assets | 41,013 | | | 41,899 | |
Other assets | 27,353 | | | 28,838 | |
Total | $ | 1,175,707 | | | $ | 1,142,466 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 62,907 | | | $ | 62,547 | |
Accrued compensation and benefits | 55,410 | | | 41,546 | |
Taxes, other than income taxes | 8,497 | | | 8,057 | |
Accrued income taxes | 10,707 | | | 8,652 | |
Current operating lease liabilities | 16,097 | | | 15,304 | |
Other current liabilities | 51,343 | | | 49,782 | |
Total current liabilities | 204,961 | | | 185,888 | |
Long-term operating lease liabilities | 29,951 | | | 31,982 | |
Other liabilities | 60,394 | | | 61,524 | |
Total liabilities | 295,306 | | | 279,394 | |
Stockholders’ equity: | | | |
Class A nonvoting common stock—Issued 51,261,487 shares, and outstanding 48,497,649 and 48,456,954 shares, respectively | 513 | | | 513 | |
Class B voting common stock—Issued and outstanding, 3,538,628 shares | 35 | | | 35 | |
Additional paid-in capital | 332,121 | | | 331,761 | |
Retained earnings | 726,546 | | | 704,456 | |
Treasury stock—2,763,838 and 2,804,533 shares, respectively, of Class A nonvoting common stock, at cost | (109,146) | | | (107,216) | |
Accumulated other comprehensive loss | (69,668) | | | (66,477) | |
Total stockholders’ equity | 880,401 | | | 863,072 | |
Total | $ | 1,175,707 | | | $ | 1,142,466 | |
| | | | | | | | | | | |
| April 30, 2021 | | July 31, 2020 |
| (Unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 321,801 | | | $ | 217,643 | |
Accounts receivable, net of allowances for credit losses of $7,551 and $7,157, respectively | 163,381 | | | 146,181 | |
Inventories | 122,847 | | | 135,662 | |
Prepaid expenses and other current assets | 13,032 | | | 9,962 | |
Total current assets | 621,061 | | | 509,448 | |
Property, plant and equipment—net | 121,126 | | | 115,068 | |
Goodwill | 422,091 | | | 416,034 | |
Other intangible assets | 18,528 | | | 22,334 | |
Deferred income taxes | 8,334 | | | 8,845 | |
Operating lease assets | 37,622 | | | 41,899 | |
Other assets | 31,415 | | | 28,838 | |
Total | $ | 1,260,177 | | | $ | 1,142,466 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 72,234 | | | $ | 62,547 | |
Accrued compensation and benefits | 69,621 | | | 41,546 | |
Taxes, other than income taxes | 9,207 | | | 8,057 | |
Accrued income taxes | 2,711 | | | 8,652 | |
Current operating lease liabilities | 16,197 | | | 15,304 | |
Other current liabilities | 51,145 | | | 49,782 | |
Total current liabilities | 221,115 | | | 185,888 | |
Long-term operating lease liabilities | 25,841 | | | 31,982 | |
Other liabilities | 61,595 | | | 61,524 | |
Total liabilities | 308,551 | | | 279,394 | |
Stockholders’ equity: | | | |
Class A nonvoting common stock—Issued 51,261,487 shares, and outstanding 48,524,455 and 48,456,954 shares, respectively | 513 | | | 513 | |
Class B voting common stock—Issued and outstanding, 3,538,628 shares | 35 | | | 35 | |
Additional paid-in capital | 336,957 | | | 331,761 | |
Retained earnings | 771,797 | | | 704,456 | |
Treasury stock—2,737,032 and 2,804,533 shares, respectively, of Class A nonvoting common stock, at cost | (109,128) | | | (107,216) | |
Accumulated other comprehensive loss | (48,548) | | | (66,477) | |
Total stockholders’ equity | 951,626 | | | 863,072 | |
Total | $ | 1,260,177 | | | $ | 1,142,466 | |
See Notes to Condensed Consolidated Financial Statements.
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts, Unaudited)
| | | | | | | | | | | |
| Three months ended October 31, |
| 2020 | | 2019 |
Net sales | $ | 277,227 | | | $ | 286,947 | |
Cost of goods sold | 141,799 | | | 145,542 | |
Gross margin | 135,428 | | | 141,405 | |
Operating expenses: | | | |
Research and development | 10,203 | | | 10,967 | |
Selling, general and administrative | 83,037 | | | 89,547 | |
Total operating expenses | 93,240 | | | 100,514 | |
Operating income | 42,188 | | | 40,891 | |
Other income (expense): | | | |
Investment and other income | 155 | | | 1,380 | |
Interest expense | (106) | | | (701) | |
Income before income taxes and losses of unconsolidated affiliate | 42,237 | | | 41,570 | |
Income tax expense | 8,582 | | | 4,072 | |
Income before losses of unconsolidated affiliate | 33,655 | | | 37,498 | |
Equity in losses of unconsolidated affiliate | (174) | | | 0 | |
Net income | $ | 33,481 | | | $ | 37,498 | |
Net income per Class A Nonvoting Common Share: | | | |
Basic | $ | 0.64 | | | $ | 0.71 | |
Diluted | $ | 0.64 | | | $ | 0.70 | |
Dividends | $ | 0.22 | | | $ | 0.22 | |
Net income per Class B Voting Common Share: | | | |
Basic | $ | 0.63 | | | $ | 0.69 | |
Diluted | $ | 0.62 | | | $ | 0.68 | |
Dividends | $ | 0.20 | | | $ | 0.20 | |
Weighted average common shares outstanding: | | | |
Basic | 52,021 | | | 53,143 | |
Diluted | 52,292 | | | 53,736 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended April 30, | | Nine months ended April 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net sales | $ | 295,503 | | | $ | 265,943 | | | $ | 838,568 | | | $ | 829,555 | |
Cost of goods sold | 146,656 | | | 136,416 | | | 424,771 | | | 419,496 | |
Gross margin | 148,847 | | | 129,527 | | | 413,797 | | | 410,059 | |
Operating expenses: | | | | | | | |
Research and development | 11,305 | | | 9,814 | | | 31,384 | | | 31,298 | |
Selling, general and administrative | 90,817 | | | 83,223 | | | 256,088 | | | 260,136 | |
Impairment charges | 0 | | | 13,821 | | | 0 | | | 13,821 | |
Total operating expenses | 102,122 | | | 106,858 | | | 287,472 | | | 305,255 | |
Operating income | 46,725 | | | 22,669 | | | 126,325 | | | 104,804 | |
Other income (expense): | | | | | | | |
Investment and other income | 1,181 | | | 112 | | | 3,372 | | | 3,252 | |
Interest expense | (131) | | | (628) | | | (288) | | | (1,976) | |
Income before income taxes and losses of unconsolidated affiliate | 47,775 | | | 22,153 | | | 129,409 | | | 106,080 | |
Income tax expense | 10,229 | | | 8,520 | | | 27,017 | | | 21,396 | |
Income before losses of unconsolidated affiliate | 37,546 | | | 13,633 | | | 102,392 | | | 84,684 | |
Equity in losses of unconsolidated affiliate | (255) | | | 0 | | | (760) | | | 0 | |
Net income | $ | 37,291 | | | $ | 13,633 | | | $ | 101,632 | | | $ | 84,684 | |
Net income per Class A Nonvoting Common Share: | | | | | | | |
Basic | $ | 0.72 | | | $ | 0.26 | | | $ | 1.95 | | | $ | 1.60 | |
Diluted | $ | 0.71 | | | $ | 0.26 | | | $ | 1.94 | | | $ | 1.58 | |
Dividends | $ | 0.22 | | | $ | 0.22 | | | $ | 0.66 | | | $ | 0.65 | |
Net income per Class B Voting Common Share: | | | | | | | |
Basic | $ | 0.72 | | | $ | 0.26 | | | $ | 1.94 | | | $ | 1.58 | |
Diluted | $ | 0.71 | | | $ | 0.26 | | | $ | 1.93 | | | $ | 1.57 | |
Dividends | $ | 0.22 | | | $ | 0.22 | | | $ | 0.64 | | | $ | 0.64 | |
Weighted average common shares outstanding: | | | | | | | |
Basic | 52,050 | | | 52,607 | | | 52,030 | | | 53,023 | |
Diluted | 52,449 | | | 52,972 | | | 52,341 | | | 53,512 | |
See Notes to Condensed Consolidated Financial Statements.
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands, Unaudited)
| | | | | | | | | | | |
| Three months ended October 31, |
| 2020 | | 2019 |
Net income | $ | 33,481 | | | $ | 37,498 | |
Other comprehensive loss: | | | |
Foreign currency translation adjustments | (4,192) | | | 50 | |
| | | |
Cash flow hedges: | | | |
Net gain recognized in other comprehensive loss | 697 | | | 196 | |
Reclassification adjustment for losses (gains) included in net income | 211 | | | (381) | |
| 908 | | | (185) | |
| | | |
Pension and other post-retirement benefits actuarial gain amortization | (106) | | | (105) | |
| | | |
Other comprehensive loss, before tax | (3,390) | | | (240) | |
Income tax benefit related to items of other comprehensive loss | 199 | | | 211 | |
Other comprehensive loss, net of tax | (3,191) | | | (29) | |
Comprehensive income | $ | 30,290 | | | $ | 37,469 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended April 30, | | Nine months ended April 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net income | $ | 37,291 | | | $ | 13,633 | | | $ | 101,632 | | | $ | 84,684 | |
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustments | 2,891 | | | (17,424) | | | 17,773 | | | (18,383) | |
| | | | | | | |
Cash flow hedges: | | | | | | | |
Net gain (loss) recognized in other comprehensive income (loss) | 118 | | | (1,751) | | | 1,266 | | | (1,192) | |
Reclassification adjustment for gains included in net income | (292) | | | (293) | | | (21) | | | (779) | |
| (174) | | | (2,044) | | | 1,245 | | | (1,971) | |
Pension and other post-retirement benefits: | | | | | | | |
Net loss recognized in other comprehensive income (loss) | 0 | | | 0 | | | (32) | | | (309) | |
Net actuarial gain amortization | (105) | | | (105) | | | (306) | | | (315) | |
| (105) | | | (105) | | | (338) | | | (624) | |
| | | | | | | |
Other comprehensive income (loss), before tax | 2,612 | | | (19,573) | | | 18,680 | | | (20,978) | |
Income tax benefit (expense) related to items of other comprehensive income (loss) | 301 | | | (179) | | | (751) | | | (10) | |
Other comprehensive income (loss), net of tax | 2,913 | | | (19,752) | | | 17,929 | | | (20,988) | |
Comprehensive income (loss) | $ | 40,204 | | | $ | (6,119) | | | $ | 119,561 | | | $ | 63,696 | |
See Notes to Condensed Consolidated Financial Statements.
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands, Unaudited)
| | | | | | | | | | | |
| Three months ended October 31, |
| 2020 | | 2019 |
Operating activities: | | | |
Net income | $ | 33,481 | | | $ | 37,498 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 5,635 | | | 5,634 | |
Stock-based compensation expense | 3,574 | | | 3,618 | |
Deferred income taxes | (1,175) | | | 1,009 | |
Equity in losses of unconsolidated affiliate | 174 | | | 0 | |
Other | (266) | | | 1,533 | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | (11,371) | | | (4,362) | |
Inventories | 14,758 | | | 249 | |
Prepaid expenses and other assets | (1,398) | | | (1,404) | |
Accounts payable and accrued liabilities | 17,363 | | | (5,193) | |
Income taxes | 2,063 | | | 266 | |
Net cash provided by operating activities | 62,838 | | | 38,848 | |
| | | |
Investing activities: | | | |
Purchases of property, plant and equipment | (9,321) | | | (7,724) | |
Other | 119 | | | 527 | |
Net cash used in investing activities | (9,202) | | | (7,197) | |
| | | |
Financing activities: | | | |
Payment of dividends | (11,391) | | | (11,533) | |
Proceeds from exercise of stock options | 160 | | | 3,411 | |
Payments for employee taxes withheld from stock-based awards | (2,617) | | | (7,269) | |
Purchase of treasury stock | (2,720) | | | 0 | |
Other | 17 | | | 65 | |
Net cash used in financing activities | (16,551) | | | (15,326) | |
| | | |
Effect of exchange rate changes on cash and cash equivalents | 1,605 | | | (304) | |
| | | |
Net increase in cash and cash equivalents | 38,690 | | | 16,021 | |
Cash and cash equivalents, beginning of period | 217,643 | | | 279,072 | |
| | | |
Cash and cash equivalents, end of period | $ | 256,333 | | | $ | 295,093 | |
| | | | | | | | | | | |
| Nine months ended April 30, |
| 2021 | | 2020 |
Operating activities: | | | |
Net income | $ | 101,632 | | | $ | 84,684 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 17,240 | | | 17,731 | |
Stock-based compensation expense | 8,003 | | | 7,180 | |
Deferred income taxes | (3,957) | | | (309) | |
Impairment charges | 0 | | | 13,821 | |
Equity in losses of unconsolidated affiliate | 760 | | | 0 | |
Other | (1,186) | | | 1,698 | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | (13,247) | | | 9,019 | |
Inventories | 15,210 | | | (7,439) | |
Prepaid expenses and other assets | (2,584) | | | (5,653) | |
Accounts payable and accrued liabilities | 39,244 | | | (26,609) | |
Income taxes | (6,207) | | | 1,790 | |
Net cash provided by operating activities | 154,908 | | | 95,913 | |
| | | |
Investing activities: | | | |
Purchases of property, plant and equipment | (21,411) | | | (21,616) | |
Other | 2,567 | | | (4,419) | |
Net cash used in investing activities | (18,844) | | | (26,035) | |
| | | |
Financing activities: | | | |
Payment of dividends | (34,290) | | | (34,447) | |
Proceeds from exercise of stock options | 1,612 | | | 5,212 | |
Payments for employee taxes withheld from stock-based awards | (2,772) | | | (7,832) | |
Purchase of treasury stock | (3,593) | | | (64,113) | |
Other | (231) | | | 133 | |
Net cash used in financing activities | (39,274) | | | (101,047) | |
| | | |
Effect of exchange rate changes on cash | 7,368 | | | (9,023) | |
| | | |
Net increase (decrease) in cash and cash equivalents | 104,158 | | | (40,192) | |
Cash and cash equivalents, beginning of period | 217,643 | | | 279,072 | |
| | | |
Cash and cash equivalents, end of period | $ | 321,801 | | | $ | 238,880 | |
See Notes to Condensed Consolidated Financial Statements.
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ThreeNine Months Ended October 31, 2020April 30, 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, 2020April 30, 2021 and July 31, 2020, its results of operations and comprehensive income for the three and nine months ended October 31,April 30, 2021 and 2020, and 2019, and cash flows for the threenine months ended October 31, 2020April 30, 2021 and 2019.2020. The condensed consolidated balance sheet as of July 31, 2020, has been derived from the audited consolidated financial statements as of that date. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts therein. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from the estimates.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to rules and regulations of the Securities and Exchange Commission. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statement presentation. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2020.
NOTE B — New Accounting Pronouncements
Adopted Standards
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which changes the impairment model for most financial instruments. Prior guidance required the recognition of credit losses based on an incurred loss impairment methodology that reflected losses once the losses were probable. Under ASU 2016-13, the Company is required to use a current expected credit loss model ("CECL") that immediately recognizes an estimate of credit losses that are expected to occur over the life of the financial instruments that are in the scope of this update, including trade receivables. The CECL model uses a broader range of reasonable and supportable information in the development of credit loss estimates. The guidance is effective for interim periods in fiscal years beginning after December 15, 2019. The Company adopted ASU 2016-13 effective August 1, 2020, which did not have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, "Goodwill and Other, Simplifying the Test for Goodwill Impairment." The new guidance removes Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment is now the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance remains largely unchanged. The guidance is effective for interim periods in fiscal years beginning after December 15, 2019. The Company adopted ASC 2017-04 effective August 1, 2020. This guidance only impacts the Company's consolidated financial statements if there is a future impairment of goodwill.
Standards not yet adopted
In December 2019, the FASB issued ASU 2019-12, "Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740)." The new guidance removes certain exceptions to the general principles in ASC 740 such as recognizing deferred taxes for equity investments, the incremental approach to performing intraperiod tax allocation and calculating income taxes in interim periods. The standard also simplifies accounting for income taxes under U.S. GAAP by clarifying and amending existing guidance, including the recognition of deferred taxes for goodwill, the allocation of taxes to members of a consolidated group and requiring that an entity reflect the effect of enacted changes in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. This guidance is effective for annual periods beginning after December 15, 2020, and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on the consolidated financial statements and related disclosures.
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." Subject to meeting certain criteria, the new guidance provides optional expedients and exceptions to applying contract modification accounting under existing U.S. GAAP, to address the expected
phase out of the London Inter-bank Offered Rate ("LIBOR") by the end of 2021. This guidance iswas effective upon issuance and allows application to contract changes as early as January 1, 2020. Some of the Company's contracts with respect to its borrowing agreements already contain comparable alternative reference rates that would automatically take effect upon the phasing out of LIBOR. The Company is indoes not expect a material impact to the process of reviewing its bank facilities and commercial contracts that utilize LIBOR as the reference rate and is currently evaluating the potential impact that the adoption of this ASU will have on the consolidated financial statements and relatedor disclosures.
NOTE C — Additional Balance Sheet Information
Inventories
Inventories as of October 31, 2020,April 30, 2021, and July 31, 2020, consisted of the following:
| | | October 31, 2020 | | July 31, 2020 | | April 30, 2021 | | July 31, 2020 |
Finished products | Finished products | $ | 74,933 | | | $ | 85,547 | | Finished products | $ | 78,484 | | | $ | 85,547 | |
Work-in-process | Work-in-process | 20,815 | | | 24,044 | | Work-in-process | 20,886 | | | 24,044 | |
Raw materials and supplies | Raw materials and supplies | 24,472 | | | 26,071 | | Raw materials and supplies | 23,477 | | | 26,071 | |
Total inventories | Total inventories | $ | 120,220 | | | $ | 135,662 | | Total inventories | $ | 122,847 | | | $ | 135,662 | |
Property, plant and equipment
Property, plant and equipment is presented net of accumulated depreciation in the amount of $269,510$274,961 and $276,248 as of October 31, 2020,April 30, 2021, and July 31, 2020, respectively.
NOTE D — Other Intangible Assets
Other intangible assets as of October 31, 2020,April 30, 2021 and July 31, 2020, consisted of the following:
| | | October 31, 2020 | | July 31, 2020 | | April 30, 2021 | | July 31, 2020 |
| | Weighted Average Amortization Period (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | Weighted Average Amortization Period (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | Weighted Average Amortization Period (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | Weighted Average Amortization Period (Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
Definite-lived other intangible assets: | Definite-lived other intangible assets: | | | | | | | | | | | | | | | | Definite-lived other intangible assets: | | | | | | | | | | | | | | | |
Customer relationships and tradenames | Customer relationships and tradenames | 9 | | $ | 45,346 | | | $ | (33,986) | | | $ | 11,360 | | | 9 | | $ | 45,385 | | | $ | (32,670) | | | $ | 12,715 | | Customer relationships and tradenames | 9 | | $ | 45,497 | | | $ | (36,783) | | | $ | 8,714 | | | 9 | | $ | 45,385 | | | $ | (32,670) | | | $ | 12,715 | |
Indefinite-lived other intangible assets: | Indefinite-lived other intangible assets: | | Indefinite-lived other intangible assets: | |
Tradenames | Tradenames | N/A | | 9,550 | | | — | | | 9,550 | | | N/A | | 9,619 | | | — | | | 9,619 | | Tradenames | N/A | | 9,814 | | | — | | | 9,814 | | | N/A | | 9,619 | | | — | | | 9,619 | |
Total | Total | | $ | 54,896 | | | $ | (33,986) | | | $ | 20,910 | | | $ | 55,004 | | | $ | (32,670) | | | $ | 22,334 | | Total | | $ | 55,311 | | | $ | (36,783) | | | $ | 18,528 | | | $ | 55,004 | | | $ | (32,670) | | | $ | 22,334 | |
The change in the gross carrying amount of other intangible assets as of October 31, 2020April 30, 2021 compared to July 31, 2020 was due to the effect of currency fluctuations during the three-monthnine-month period.
Amortization expense onof intangible assets was $1,351$1,352 and $1,291$1,290 for the three months ended October 31,April 30, 2021 and 2020, respectively, and 2019,$4,056 and $3,872 for the nine months ended April 30, 2021 and 2020, respectively. Amortization expense over each of the next fivethree fiscal years is projected to be $5,404, $5,116,$5,408, $5,121, and $2,191$2,241 for the fiscal years ending July 31, 2021, 2022, and 2023, respectively.2023. No amortization expense for intangible assets is projected after July 31, 2023.
NOTE E — Leases
The Company leases certain manufacturing facilities, warehouses and office space, computer equipment, and vehicles accounted for as operating leases. Lease terms typically range from one year to ten years. As of October 31, 2020,April 30, 2021, the Company did not have any finance leases.
Operating lease expense was $4,073$4,714 and $5,405$4,219 for the three months ended October 31,April 30, 2021 and 2020, respectively, and 2019, respectively, which$12,956 and $13,897 for the nine months ended April 30, 2021 and 2020, respectively. Operating lease expense was recognized in either "Cost of goods sold" or "Selling, general and administrative expenses"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 and nine months ended October 31, 2020April 30, 2021 and 2019.2020.
Supplemental cash flow information related to the Company's operating leases for the threenine months ended October 31,April 30, 2021 and 2020, and 2019was, was as follows: | | | | | | | | | | | |
| Three months ended October 31, |
| 2020 | | 2019 |
Operating cash flows from operating leases | $ | 4,297 | | | $ | 4,010 | |
Operating lease assets obtained in exchange for new operating lease liabilities | 2,936 | | | 9,952 | |
| | | | | | | | | | | |
| Nine months ended April 30, |
| 2021 | | 2020 |
Operating cash outflows from operating leases | $ | 13,965 | | | $ | 12,469 | |
Operating lease assets obtained in exchange for new operating lease liabilities | 5,832 | | | 10,637 | |
NOTE F – Stockholders' Equity
The following table illustrates the changes in the balances of each component of stockholders' equity for the three months ended October 31, 2020:April 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
Balances at July 31, 2020 | | $ | 548 | | | $ | 331,761 | | | $ | 704,456 | | | $ | (107,216) | | | $ | (66,477) | | | $ | 863,072 | |
Net income | | — | | | — | | | 33,481 | | | — | | | — | | | 33,481 | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (3,191) | | | (3,191) | |
Issuance of shares of Class A Common Stock under stock plan | | — | | | (3,246) | | | — | | | 790 | | | — | | | (2,456) | |
Tax benefit and withholdings from deferred compensation distributions | | — | | | 32 | | | — | | | — | | | — | | | 32 | |
Stock-based compensation expense | | — | | | 3,574 | | | — | | | — | | | — | | | 3,574 | |
Repurchase of shares of Class A Common Stock | | — | | | — | | | — | | | (2,720) | | | — | | | (2,720) | |
Cash dividends on Common Stock: | | | | | | | | | | | | |
Class A — $0.22 per share | | — | | | — | | | (10,671) | | | — | | | — | | | (10,671) | |
Class B — $0.20 per share | | — | | | — | | | (720) | | | — | | | — | | | (720) | |
Balances at October 31, 2020 | | $ | 548 | | | $ | 332,121 | | | $ | 726,546 | | | $ | (109,146) | | | $ | (69,668) | | | $ | 880,401 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
Balances at January 31, 2021 | | $ | 548 | | | $ | 334,077 | | | $ | 745,960 | | | $ | (109,789) | | | $ | (51,461) | | | $ | 919,335 | |
Net income | | — | | | — | | | 37,291 | | | — | | | — | | | 37,291 | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 2,913 | | | 2,913 | |
Issuance of shares of Class A Common Stock under stock plan | | — | | | 348 | | | — | | | 661 | | | — | | | 1,009 | |
Stock-based compensation expense | | — | | | 2,532 | | | — | | | — | | | — | | | 2,532 | |
Cash dividends on Common Stock: | | | | | | | | | | | | |
Class A — $0.2200 per share | | — | | | — | | | (10,675) | | | — | | | — | | | (10,675) | |
Class B — $0.2200 per share | | — | | | — | | | (779) | | | — | | | — | | | (779) | |
Balances at April 30, 2021 | | $ | 548 | | | $ | 336,957 | | | $ | 771,797 | | | $ | (109,128) | | | $ | (48,548) | | | $ | 951,626 | |
The following table illustrates the changes in the balances of each component of stockholders' equity for the nine months ended April 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
Balances at July 31, 2020 | | $ | 548 | | | $ | 331,761 | | | $ | 704,456 | | | $ | (107,216) | | | $ | (66,477) | | | $ | 863,072 | |
Net income | | — | | | — | | | 101,632 | | | — | | | — | | | 101,632 | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 17,929 | | | 17,929 | |
Issuance of shares of Class A Common Stock under stock plan | | — | | | (2,839) | | | — | | | 1,681 | | | — | | | (1,158) | |
Tax benefit and withholdings from deferred compensation distributions | | — | | | 32 | | | — | | | — | | | — | | | 32 | |
Stock-based compensation expense | | — | | | 8,003 | | | — | | | — | | | — | | | 8,003 | |
Repurchase of shares of Class A Common Stock | | — | | | — | | | — | | | (3,593) | | | — | | | (3,593) | |
Cash dividends on Common Stock: | | | | | | | | | | | | |
Class A — $0.6600 per share | | — | | | — | | | (32,013) | | | — | | | — | | | (32,013) | |
Class B — $0.6434 per share | | — | | | — | | | (2,278) | | | — | | | — | | | (2,278) | |
Balances at April 30, 2021 | | $ | 548 | | | $ | 336,957 | | | $ | 771,797 | | | $ | (109,128) | | | $ | (48,548) | | | $ | 951,626 | |
The following table illustrates the changes in the balances of each component of stockholders' equity for the three months ended October 31, 2019:April 30, 2020:
| | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
Balances at July 31, 2019 | | $ | 548 | | | $ | 329,969 | | | $ | 637,843 | | | $ | (46,332) | | | $ | (71,254) | | | $ | 850,774 | | |
Balances at January 31, 2020 | | Balances at January 31, 2020 | | $ | 548 | | | $ | 329,263 | | | $ | 685,758 | | | $ | (43,155) | | | $ | (72,490) | | | $ | 899,924 | |
Net income | Net income | | — | | | — | | | 37,498 | | | — | | | — | | | 37,498 | | Net income | | — | | | — | | | 13,633 | | | — | | | — | | | 13,633 | |
Other comprehensive loss, net of tax | Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (29) | | | (29) | | Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (19,752) | | | (19,752) | |
Issuance of shares of Class A Common Stock under stock plan | Issuance of shares of Class A Common Stock under stock plan | | — | | | (6,410) | | | — | | | 2,553 | | | — | | | (3,857) | | Issuance of shares of Class A Common Stock under stock plan | | — | | | (91) | | | — | | | 517 | | | — | | | 426 | |
Tax benefit and withholdings from deferred compensation distributions | | — | | | 64 | | | — | | | — | | | — | | | 64 | | |
Stock-based compensation expense | Stock-based compensation expense | | — | | | 3,618 | | | — | | | — | | | — | | | 3,618 | | Stock-based compensation expense | | — | | | 1,796 | | | — | | | — | | | — | | | 1,796 | |
Repurchase of shares of Class A Common Stock | Repurchase of shares of Class A Common Stock | | — | | | — | | | — | | | 0 | | | — | | | 0 | | Repurchase of shares of Class A Common Stock | | — | | | — | | | — | | | (64,113) | | | — | | | (64,113) | |
Cash dividends on Common Stock: | Cash dividends on Common Stock: | | Cash dividends on Common Stock: | |
Class A — $0.22 per share | | — | | | — | | | (10,822) | | | — | | | — | | | (10,822) | | |
Class B — $0.20 per share | | — | | | — | | | (711) | | | — | | | — | | | (711) | | |
Balances at October 31, 2019 | | $ | 548 | | | $ | 327,241 | | | $ | 663,808 | | | $ | (43,779) | | | $ | (71,283) | | | $ | 876,535 | | |
Class A — $0.2175 per share | | Class A — $0.2175 per share | | — | | | — | | | (10,542) | | | — | | | — | | | (10,542) | |
Class B — $0.2175 per share | | Class B — $0.2175 per share | | — | | | — | | | (770) | | | — | | | — | | | (770) | |
Balances at April 30, 2020 | | Balances at April 30, 2020 | | $ | 548 | | | $ | 330,968 | | | $ | 688,079 | | | $ | (106,751) | | | $ | (92,242) | | | $ | 820,602 | |
The following table illustrates the changes in the balances of each component of stockholders' equity for the nine months ended April 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
Balances at July 31, 2019 | | $ | 548 | | | $ | 329,969 | | | $ | 637,843 | | | $ | (46,332) | | | $ | (71,254) | | | $ | 850,774 | |
Net income | | — | | | — | | | 84,684 | | | — | | | — | | | 84,684 | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (20,988) | | | (20,988) | |
Issuance of shares of Class A Common Stock under stock plan | | — | | | (6,314) | | | — | | | 3,694 | | | — | | | (2,620) | |
Tax benefit and withholdings from deferred compensation distributions | | — | | | 133 | | | — | | | — | | | — | | | 133 | |
Stock-based compensation expense | | — | | | 7,180 | | | — | | | — | | | — | | | 7,180 | |
Repurchase of shares of Class A Common Stock | | — | | | — | | | — | | | (64,113) | | | — | | | (64,113) | |
Cash dividends on Common Stock: | | | | | | | | | | | | |
Class A — $0.6525 per share | | — | | | — | | | (32,197) | | | — | | | — | | | (32,197) | |
Class B — $0.6359 per share | | — | | | — | | | (2,251) | | | — | | | — | | | (2,251) | |
Balances at April 30, 2020 | | $ | 548 | | | $ | 330,968 | | | $ | 688,079 | | | $ | (106,751) | | | $ | (92,242) | | | $ | 820,602 | |
Incentive Stock Plans
The Company has an incentive stock plan under which the Board of Directors may grant nonqualified stock options to purchase shares of Class A Nonvoting Common Stock, restricted stock units ("RSUs"), or restricted and unrestricted shares of Class A Nonvoting Common Stock to employees and non-employee directors. Certain awards may be subject to pre-established performance goals. The majority of the Company’s annual share-based awards are granted in the first quarter of the fiscal year.
Total stock-based compensation expense recognized during the three months ended October 31, 2020 and 2019, was $3,574 ($3,300 net of taxes) and $3,618 ($3,089 net of taxes), respectively. As of October 31, 2020, total unrecognized compensation cost related to share-based awards was $14,460 pre-tax, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of 2.2 years.
Stock Options
The stock options issued under the plan have an exercise price equal to the fair market value of the underlying stock at the date of grant and generally vest ratably over a three-year period, with one-third becoming exercisable one year after the grant date and one-third additional in each of the succeeding two years. Options issued under the plan, referred to herein as “time-based” options, generally expire 10 years from the date of grant.
The Company has estimated the fair value of its time-based option awards granted during the three months ended October 31, 2020 and 2019, using the Black-Scholes option valuation model. The weighted-average assumptions used in the Black-Scholes valuation model are reflected in the following table:
| | | | | | | | | | | | | | |
| | Three months ended October 31, |
Black-Scholes Option Valuation Assumptions | | 2020 | | 2019 |
Expected term (in years) | | 6.21 | | 6.20 |
Expected volatility | | 30.71 | % | | 25.85 | % |
Expected dividend yield | | 2.49 | % | | 2.63 | % |
Risk-free interest rate | | 0.38 | % | | 1.64 | % |
Weighted-average market value of underlying stock at grant date | | $ | 39.92 | | | $ | 54.05 | |
Weighted-average exercise price | | $ | 39.92 | | | $ | 54.05 | |
Weighted-average fair value of options granted during the period | | $ | 8.65 | | | $ | 10.63 | |
The following is a summary of stock option activity for the three months ended October 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Time-Based Options | | Options Outstanding | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value |
Outstanding at July 31, 2020 | | 1,273,382 | | $ | 37.84 | | | | | |
New grants | | 303,052 | | 39.92 | | | | | |
Exercised | | (22,300) | | 29.10 | | | | | |
Forfeited or expired | | 0 | | 0 | | | | | |
Outstanding at October 31, 2020 | | 1,554,134 | | $ | 38.37 | | | 7.2 | | $ | 5,410 | |
Exercisable at October 31, 2020 | | 1,004,641 | | $ | 34.88 | | | 6.1 | | $ | 5,410 | |
The total fair value of stock options vested during the three months ended October 31, 2020 and 2019, was $2,371 and $2,537, respectively. The total intrinsic value of stock options exercised during the three months ended October 31, 2020 and 2019, based upon the average market price at the time of exercise during the period, was $373 and $10,225, respectively.
The cash received from the exercise of stock options during the three months ended October 31, 2020 and 2019, was $160 and $3,411, respectively. The tax benefit from the exercise of stock options during the three months ended October 31, 2020 and 2019, was $93 and $2,541, respectively.
RSUs
RSUs issued under the plan have a grant date fair value equal to the fair market value of the underlying stock at the date of grant. Shares issued under the plan are referred to herein as either "time-based" or "performance-based" RSUs. The time-based RSUs issued under the plan generally vest ratably over a three-year period, with one-third vesting one year after the grant date
and one-third additional in each of the succeeding two years. The performance-based RSUs granted under the plan vest at the end of a three-year service period provided specified financial performance metrics are met.
The following tables summarize the RSU activity for the three months ended October 31, 2020:
| | | | | | | | | | | | | | |
Time-Based RSUs | | Shares | | Weighted Average Grant Date Fair Value |
Outstanding at July 31, 2020 | | 154,960 | | | $ | 47.39 | |
New grants | | 75,352 | | | 39.92 | |
Vested | | (63,339) | | | 44.85 | |
Forfeited | | 0 | | | 0 | |
Outstanding at October 31, 2020 | | 166,973 | | | $ | 44.98 | |
The time-based RSUs granted during the three months ended October 31, 2019, had a weighted-average grant date fair value of $54.10.
| | | | | | | | | | | | | | |
Performance-Based RSUs | | Shares | | Weighted Average Grant Date Fair Value |
Outstanding at July 31, 2020 | | 126,060 | | | $ | 50.61 | |
New grants (1) | | 64,634 | | | 60.73 | |
Vested (1) | | (71,413) | | | 33.12 | |
Forfeited | | 0 | | | 0 | |
Outstanding at October 31, 2020 | | 119,281 | | | $ | 61.05 | |
(1) Includes 23,805 shares granted and vested during the three months ended October 31, 2020, resulting from the payout of performance-based RSUs granted in fiscal year 2018 due to achievement of performance metrics exceeding the target payout.
The performance-based RSUs granted during the three months ended October 31, 2020, had a weighted-average grant-date fair value determined by a third-party valuation involving the use of a Monte Carlo simulation. The performance-based RSUs granted during the three months ended October 31, 2019, had a weighted-average grant date fair value of $75.00.
The aggregate intrinsic value of time-based and performance-based RSUs vested during the three months ended October 31, 2020 and 2019, was $5,844 and $8,708, respectively.
NOTE G — Accumulated Other Comprehensive Loss
Other comprehensive loss consists of foreign currency translation adjustments which includes the settlements of net investment hedges, unrealized gains and losses from cash flow hedges, and the unamortized gain on post-retirement plans, net of their related tax effects.
The following table illustrates the changes in the balances of each component of accumulated other comprehensive loss, net of tax, for the threenine months ended OctoberApril 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | 1,189 | | | (23) | | | 16,848 | | | 18,014 | |
Amounts reclassified from accumulated other comprehensive loss | (16) | | | (69) | | | 0 | | | (85) | |
Ending balance, April 30, 2021 | $ | 973 | | | $ | 2,089 | | | $ | (51,610) | | | $ | (48,548) | |
The decrease in accumulated other comprehensive loss as of April 30, 2021 compared to July 31, 2020, was primarily due to the depreciation of the U.S. dollar against certain other currencies during the nine-month period.
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, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized (loss) gain on cash flow hedges | | Unamortized gain on post-retirement plans | | Foreign currency translation adjustments | | Accumulated other comprehensive loss |
Beginning balance, July 31, 2020 | $ | (200) | | | $ | 2,181 | | | $ | (68,458) | | | $ | (66,477) | |
Other comprehensive income (loss) before reclassification | 701 | | | — | | | (4,185) | | | (3,484) | |
Amounts reclassified from accumulated other comprehensive loss | 159 | | | 134 | | | — | | | 293 | |
Ending balance, October 31, 2020 | $ | 660 | | | $ | 2,315 | | | $ | (72,643) | | | $ | (69,668) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized gain (loss) 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 loss before reclassification | (1,363) | | | (216) | | | (18,510) | | | (20,089) | |
Amounts reclassified from accumulated other comprehensive loss | (584) | | | (315) | | | 0 | | | (899) | |
Ending balance, April 30, 2020 | $ | (1,240) | | | $ | 2,269 | | | $ | (93,271) | | | $ | (92,242) | |
The increase in accumulated other comprehensive loss as of October 31,April 30, 2020, compared to July 31, 2020,2019, was primarily due to the appreciation of the U.S. dollar against certain other currencies during the three-month period.
The changes in accumulated other comprehensive loss by component, net of tax, for the three months ended October 31, 2019, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized gain on cash flow hedges | | Unamortized gain on post-retirement plans | | Foreign currency translation adjustments | | Accumulated other comprehensive loss |
Beginning balance, July 31, 2019 | $ | 707 | | | $ | 2,800 | | | $ | (74,761) | | | $ | (71,254) | |
Other comprehensive income before reclassification | 136 | | | — | | | 226 | | | 362 | |
Amounts reclassified from accumulated other comprehensive loss | (286) | | | (105) | | | — | | | (391) | |
Ending balance, October 31, 2019 | $ | 557 | | | $ | 2,695 | | | $ | (74,535) | | | $ | (71,283) | |
The increase in the accumulated other comprehensive loss as of October 31, 2019, compared to July 31, 2019, was negligible primarily due to the stability of the U.S. dollar against certain other currencies during the three-monthnine-month period.
Of the amounts reclassified from accumulated other comprehensive loss during the threenine months ended October 31,April 30, 2021 and 2020, and 2019, unrealized (losses) gains on cash flow hedges were reclassified to "Cost of goods sold" and net unamortized gains on post-retirement plans waswere reclassified into "Investment and other income" on the condensed consolidated statements of income.
The following table illustrates the income tax benefit (expense) on the components of other comprehensive lossincome (loss) for the three and nine months ended October 31, 2020April 30, 2021 and 2019:2020:
| | | Three months ended October 31, | | Three months ended April 30, | | Nine months ended April 30, |
| | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
Income tax benefit related to items of other comprehensive loss: | | | | |
Income tax benefit (expense) related to items of other comprehensive income (loss): | | Income tax benefit (expense) related to items of other comprehensive income (loss): | | | | | | | |
Cash flow hedges | Cash flow hedges | $ | (48) | | | $ | 35 | | Cash flow hedges | $ | (71) | | | $ | (6) | | | $ | (72) | | | $ | 24 | |
Pension and other post-retirement benefits | Pension and other post-retirement benefits | 240 | | | — | | Pension and other post-retirement benefits | 0 | | | 0 | | | 246 | | | 93 | |
Other income tax adjustments and currency translation | Other income tax adjustments and currency translation | 7 | | | 176 | | Other income tax adjustments and currency translation | 372 | | | (173) | | | (925) | | | (127) | |
Income tax benefit related to items of other comprehensive loss | $ | 199 | | | $ | 211 | | |
Income tax benefit (expense) related to items of other comprehensive income (loss) | | Income tax benefit (expense) related to items of other comprehensive income (loss) | $ | 301 | | | $ | (179) | | | $ | (751) | | | $ | (10) | |
NOTE H — Revenue Recognition
The Company recognizes revenue when control of the product or service transfers to the customer at an amount that represents the consideration expected to be received in exchange for those products and services. The Company’s revenues are primarily from the sale of identification solutions and workplace safety products that are shipped and billed to customers. All revenue is from contracts with customers and is included in “Net sales” on the condensed consolidated statements of income. See Note I, “Segment Information,” for the Company’s disaggregated revenue disclosure.
The Company offers extended warranty coverage that is included in the sales price of certain products, which it accounts for as service warranties. The Company accounts for the deferred revenue associated with extended service warranties as a contract liability. The balance of contract liabilities associated with service warranty performance obligations was $2,552$2,567 and $2,559 as of October 31, 2020April 30, 2021 and July 31, 2020, respectively. The current portion and non-current portion of contract liabilities are included in “Other current liabilities” and “Other liabilities," respectively, on the condensed consolidated balance sheets. The Company recognized revenue of $297$291 and $315$317 during the three months ended October 31,April 30, 2021 and 2020, respectively, and 2019,$882 and $948 during the nine months ended April 30, 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, 2020,April 30, 2021, the Company expects to recognize 32%11% by the end of fiscal 2021, an additional 31%38% by the end of fiscal 2022, and the remaining balance thereafter.
NOTE I — Segment Information
The Company is organized and managed on a global basis within three operating segments, Identification Solutions ("IDS"), Workplace Safety ("WPS"), and People Identification ("PDC"), which aggregate into two reportable segments that are organized around businesses with consistent products and services: IDS and WPS. The IDS and PDC operating segments aggregate into the IDS reporting segment, while the WPS reporting segment is comprised solely of the Workplace Safety operating segment.
The following is a summary of net sales by segment and geographic region for the three and nine months ended October 31, 2020April 30, 2021 and 2019:2020:
| | | Three months ended October 31, | | Three months ended April 30, | | Nine months ended April 30, |
| | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
Net sales: | Net sales: | | | | Net sales: | | | | | | | |
ID Solutions | ID Solutions | | ID Solutions | |
Americas | Americas | $ | 133,267 | | | $ | 149,363 | | Americas | $ | 143,348 | | | $ | 131,169 | | | $ | 401,585 | | | $ | 418,440 | |
Europe | Europe | 42,582 | | | 43,381 | | Europe | 50,416 | | | 41,183 | | | 137,038 | | | 129,884 | |
Asia | Asia | 22,343 | | | 22,243 | | Asia | 24,301 | | | 20,817 | | | 71,861 | | | 65,194 | |
Total | Total | $ | 198,192 | | | $ | 214,987 | | Total | $ | 218,065 | | | $ | 193,169 | | | $ | 610,484 | | | $ | 613,518 | |
Workplace Safety | Workplace Safety | | | | Workplace Safety | | | | | | | |
Americas | Americas | $ | 24,031 | | | $ | 24,303 | | Americas | $ | 21,425 | | | $ | 21,456 | | | $ | 65,656 | | | $ | 69,395 | |
Europe | Europe | 41,266 | | | 36,026 | | Europe | 42,491 | | | 37,567 | | | 123,922 | | | 110,594 | |
Australia | Australia | 13,738 | | | 11,631 | | Australia | 13,522 | | | 13,751 | | | 38,506 | | | 36,048 | |
Total | Total | $ | 79,035 | | | $ | 71,960 | | Total | $ | 77,438 | | | $ | 72,774 | | | $ | 228,084 | | | $ | 216,037 | |
Total Company | Total Company | | | | Total Company | | | | | | | |
Americas | Americas | $ | 157,298 | | | $ | 173,666 | | Americas | $ | 164,773 | | | $ | 152,625 | | | $ | 467,241 | | | $ | 487,835 | |
Europe | Europe | 83,848 | | | 79,407 | | Europe | 92,907 | | | 78,750 | | | 260,960 | | | 240,478 | |
Asia-Pacific | Asia-Pacific | 36,081 | | | 33,874 | | Asia-Pacific | 37,823 | | | 34,568 | | | 110,367 | | | 101,242 | |
Total | Total | $ | 277,227 | | | $ | 286,947 | | Total | $ | 295,503 | | | $ | 265,943 | | | $ | 838,568 | | | $ | 829,555 | |
The following is a summary of segment profit for the three and nine months ended October 31, 2020April 30, 2021 and 2019:2020:
| | | Three months ended October 31, | | Three months ended April 30, | | Nine months ended April 30, |
| | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
Segment profit: | Segment profit: | | | | Segment profit: | | | | | | | |
ID Solutions | ID Solutions | $ | 40,279 | | | $ | 42,443 | | ID Solutions | $ | 47,539 | | | $ | 36,401 | | | $ | 126,818 | | | $ | 119,499 | |
Workplace Safety | Workplace Safety | 7,988 | | | 5,157 | | Workplace Safety | 5,656 | | | 4,379 | | | 17,107 | | | 14,991 | |
Total Company | Total Company | $ | 48,267 | | | $ | 47,600 | | Total Company | $ | 53,195 | | | $ | 40,780 | | | $ | 143,925 | | | $ | 134,490 | |
The following is a reconciliation of segment profit to income before income taxes and losses of unconsolidated affiliate for the three and nine months ended October 31, 2020April 30, 2021 and 2019:2020:
| | | Three months ended October 31, | | Three months ended April 30, | | Nine months ended April 30, |
| | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
Total profit from reportable segments | Total profit from reportable segments | $ | 48,267 | | | $ | 47,600 | | Total profit from reportable segments | $ | 53,195 | | | $ | 40,780 | | | $ | 143,925 | | | $ | 134,490 | |
Unallocated amounts: | Unallocated amounts: | | Unallocated amounts: | |
Administrative costs | Administrative costs | (6,079) | | | (6,709) | | Administrative costs | (6,470) | | | (4,290) | | | (17,600) | | | (15,865) | |
Impairment charges | | Impairment charges | 0 | | | (13,821) | | | 0 | | | (13,821) | |
Investment and other income | Investment and other income | 155 | | | 1,380 | | Investment and other income | 1,181 | | | 112 | | | 3,372 | | | 3,252 | |
Interest expense | Interest expense | (106) | | | (701) | | Interest expense | (131) | | | (628) | | | (288) | | | (1,976) | |
Income before income taxes and losses of unconsolidated affiliate | Income before income taxes and losses of unconsolidated affiliate | $ | 42,237 | | | $ | 41,570 | | Income before income taxes and losses of unconsolidated affiliate | $ | 47,775 | | | $ | 22,153 | | | $ | 129,409 | | | $ | 106,080 | |
NOTE J — Net Income per Common Share
ReconciliationsThe following table summarizes the computation of the numerator and denominator of the basic and diluted net income per share computations for the Company’s Class A and Class B common stock are summarized as follows:stock:
| | | Three months ended October 31, | | Three months ended April 30, | | Nine months ended April 30, |
| | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
Numerator (in thousands): | Numerator (in thousands): | | | | Numerator (in thousands): | | | | | | | |
Net income (Numerator for basic and diluted income per Class A Nonvoting Common Share) | $ | 33,481 | | | $ | 37,498 | | |
Net Income (Numerator for basic and diluted income per Class A Nonvoting Common Share) | | Net Income (Numerator for basic and diluted income per Class A Nonvoting Common Share) | $ | 37,291 | | | $ | 13,633 | | | $ | 101,632 | | | $ | 84,684 | |
Less: | Less: | | Less: | |
Preferential dividends | Preferential dividends | (808) | | | (828) | | Preferential dividends | 0 | | | 0 | | | (808) | | | (828) | |
Preferential dividends on dilutive stock options | Preferential dividends on dilutive stock options | (4) | | | (10) | | Preferential dividends on dilutive stock options | 0 | | | 0 | | | (4) | | | (10) | |
Numerator for basic and diluted income per Class B Voting Common Share | Numerator for basic and diluted income per Class B Voting Common Share | $ | 32,669 | | | $ | 36,660 | | Numerator for basic and diluted income per Class B Voting Common Share | $ | 37,291 | | | $ | 13,633 | | | $ | 100,820 | | | $ | 83,846 | |
Denominator: (in thousands) | Denominator: (in thousands) | | | | Denominator: (in thousands) | | | | | | | |
Denominator for basic income per share for both Class A and Class B | Denominator for basic income per share for both Class A and Class B | 52,021 | | | 53,143 | | Denominator for basic income per share for both Class A and Class B | 52,050 | | | 52,607 | | | 52,030 | | | 53,023 | |
Plus: Effect of dilutive equity awards | Plus: Effect of dilutive equity awards | 271 | | | 593 | | Plus: Effect of dilutive equity awards | 399 | | | 365 | | | 311 | | | 489 | |
Denominator for diluted income per share for both Class A and Class B | Denominator for diluted income per share for both Class A and Class B | 52,292 | | | 53,736 | | Denominator for diluted income per share for both Class A and Class B | 52,449 | | | 52,972 | | | 52,341 | | | 53,512 | |
Net income per Class A Nonvoting Common Share: | Net income per Class A Nonvoting Common Share: | | | | Net income per Class A Nonvoting Common Share: | | | | | | | |
Basic | Basic | $ | 0.64 | | | $ | 0.71 | | Basic | $ | 0.72 | | | $ | 0.26 | | | $ | 1.95 | | | $ | 1.60 | |
Diluted | Diluted | $ | 0.64 | | | $ | 0.70 | | Diluted | $ | 0.71 | | | $ | 0.26 | | | $ | 1.94 | | | $ | 1.58 | |
Net income per Class B Voting Common Share: | Net income per Class B Voting Common Share: | | Net income per Class B Voting Common Share: | |
Basic | Basic | $ | 0.63 | | | $ | 0.69 | | Basic | $ | 0.72 | | | $ | 0.26 | | | $ | 1.94 | | | $ | 1.58 | |
Diluted | Diluted | $ | 0.62 | | | $ | 0.68 | | Diluted | $ | 0.71 | | | $ | 0.26 | | | $ | 1.93 | | | $ | 1.57 | |
Potentially dilutive securities attributable to outstanding stock options and restricted stock units were excluded from the calculation of diluted earningsnet income per share where the combined exercise price and average unamortized fair value were greater than the average market price of Brady's Class A Nonvoting Common Stock because the effect would have been anti-dilutive. The amount of anti-dilutive shares were 740,745was 239,707 and 323,719488,932 for the three months ended October 31,April 30, 2021 and 2020, respectively, and 2019,603,356 and 353,752 for the nine months ended April 30, 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, 2020April 30, 2021 and July 31, 2020:
| | | October 31, 2020 | | July 31, 2020 | | Fair Value Hierarchy | | April 30, 2021 | | July 31, 2020 | | Fair Value Hierarchy |
Assets: | Assets: | | | | | | Assets: | | | | | |
Trading securities | Trading securities | $ | 17,434 | | | $ | 18,606 | | | Level 1 | Trading securities | $ | 20,169 | | | $ | 18,606 | | | Level 1 |
Foreign exchange contracts | Foreign exchange contracts | 1,017 | | | 594 | | | Level 2 | Foreign exchange contracts | 724 | | | 594 | | | Level 2 |
Liabilities: | Liabilities: | | Liabilities: | |
Foreign exchange contracts | Foreign exchange contracts | 449 | | | 777 | | | Level 2 | Foreign exchange contracts | 252 | | | 777 | | | Level 2 |
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Trading securities: The Company’s deferred compensation investments consist of investments in mutual funds, which are included in "Other assets" on the condensed consolidated balance sheets. These investments were classified as Level 1 as the shares of these investments trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.
Foreign exchange contracts: The Company’s foreign exchange contracts were classified as Level 2 as the fair value was based on the present value of the future cash flows using external models that use observable inputs, such as interest rates, yield curves and foreign exchange rates. See Note L, “Derivatives and Hedging Activities,” for additional information.
The fair values of cash and cash equivalents, accounts receivable, accounts payable, and other liabilities approximated carrying values due to their short-term nature.
NOTE L — Derivatives and Hedging Activities
The Company utilizes forward foreign exchange currency contracts to reduce the exchange rate risk of specific foreign currency denominated transactions. These contracts typically require the exchange of a foreign currency for U.S. dollars at a fixed rate onat a future date, with maturities of less than 18 months, which qualify as cash flow hedges or net investment hedges under the accounting guidance for derivative instruments and hedging activities. The primary objective of the Company’s foreign currency exchange risk management program is to minimize the impact of currency movements due to transactions in other than the respective subsidiaries’ functional currency and to minimize the impact of currency movements on the Company’s net investment denominated in a currency other than the U.S. dollar. To achieve this objective, the Company hedges a portion of known exposures using forward foreign exchange currency contracts.
Main foreign currency exposures are related to transactions denominated in the British Pound, Euro, Canadian dollar, Australian dollar, Mexican Peso, Chinese Yuan, Malaysian Ringgit and Singapore dollar. Generally, these risk management transactions will involve the use of foreign currency derivatives to minimize the impact of currency movements on non-functional currency transactions.
The U.S. dollar equivalent notional amounts of outstanding forward exchange contracts were as follows:
| | | October 31, 2020 | | July 31, 2020 | | April 30, 2021 | | July 31, 2020 |
Designated as cash flow hedges | Designated as cash flow hedges | $ | 19,247 | | | $ | 24,600 | | Designated as cash flow hedges | $ | 6,150 | | | $ | 24,600 | |
Non-designated hedges | Non-designated hedges | 3,242 | | | 3,107 | | Non-designated hedges | 3,495 | | | 3,107 | |
Total foreign exchange contracts | Total foreign exchange contracts | $ | 22,489 | | | $ | 27,707 | | Total foreign exchange contracts | $ | 9,645 | | | $ | 27,707 | |
Cash Flow Hedges
The Company has designated a portion of its forward foreign exchange contracts as cash flow hedges and recorded these contracts at fair value on the condensed consolidated balance sheets. For these instruments, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income ("OCI") and reclassified into income in the same period or periods during which the hedged transaction affects income. As of October 31, 2020April 30, 2021 and July 31, 2020, unrealized gains of $523$860 and losses of $385 have been included in OCI, respectively.
The following table summarizes the amount of pre-tax gains and losses related to foreign exchange contracts designated as cash flow hedging instruments:
| | | | | | | | | | | |
| Three months ended October 31, |
| 2020 | | 2019 |
Gains recognized in OCI | $ | 697 | | | $ | 196 | |
(Losses) gains reclassified from OCI into cost of goods sold | (211) | | | 381 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended April 30, | | Nine months ended April 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Gains (losses) recognized in OCI | $ | 118 | | | $ | (1,751) | | | $ | 1,266 | | | $ | (1,192) | |
Gains reclassified from OCI into cost of goods sold | 292 | | | 293 | | | 21 | | | 779 | |
Fair values of derivative instruments in the condensed consolidated balance sheets were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| October 31, 2020 | | July 31, 2020 |
| Prepaid expenses and other current assets | | Other current liabilities | | Prepaid expenses and other current assets | | Other current liabilities |
Derivatives designated as hedging instruments: | | | | | | | |
Foreign exchange contracts (cash flow hedges) | $ | 1,017 | | | $ | (434) | | | $ | 588 | | | $ | 761 | |
Derivatives not designated as hedging instruments: | | | | | | | |
Foreign exchange contracts (non-designated hedges) | 0 | | | (15) | | | 6 | | | 16 | |
Total derivative instruments | $ | 1,017 | | | $ | (449) | | | $ | 594 | | | $ | 777 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| April 30, 2021 | | July 31, 2020 |
| Prepaid expenses and other current assets | | Other current liabilities | | Prepaid expenses and other current assets | | Other current liabilities |
Derivatives designated as hedging instruments: | | | | | | | |
Foreign exchange contracts (cash flow hedges) | $ | 724 | | | $ | 242 | | | $ | 588 | | | $ | 761 | |
Derivatives not designated as hedging instruments: | | | | | | | |
Foreign exchange contracts (non-designated hedges) | 0 | | | 10 | | | 6 | | | 16 | |
Total derivative instruments | $ | 724 | | | $ | 252 | | | $ | 594 | | | $ | 777 | |
NOTE M –— Income Taxes
The effective income tax rate for the three and nine months ended October 31, 2020April 30, 2021, was 21.4% and 2019 was 20.3% and 9.8%20.9%, respectively. The Company expects its ongoing annual effective income tax rate to be approximatelyapproximate 20% over the long-term based on its current global business mix.mix and based on current tax laws and statutory tax rates in effect. However, quarterly tax rates could vary substantially based on the respective facts and circumstances at that point in time.
The effective income tax rate for the three and nine months ended April 30, 2020, was 38.5% and 20.2%, respectively. The effective income tax rate for the three months ended October 31, 2019April 30, 2020 was lowerhigher than the expected income tax rate due to an increase in the favorable settlementvaluation allowance against foreign tax credit carryforwards resulting from a decrease in the Company's expectations of a domestic income tax audit and tax benefits from stock-based compensation.future foreign source income.
NOTE N — Subsequent Events
On November 17, 2020,May 19, 2021, the Board of Directors declared a quarterly cash dividend to shareholders of the Company’s Class A and Class B Common Stock of $0.22 per share payable on January 29,July 30, 2021, to shareholders of record at the close of business on January 8, 2020.July 9, 2021.
On May 19, 2021, the results of the Company’s cash tender offer for all of the outstanding, publicly-held shares of Nordic ID Oyj (“Nordic ID”) were finalized. According to the final results of the cash tender offer, the shares of Nordic ID that were validly tendered represent 92.9% of all outstanding shares and votes of Nordic ID. The Company intends to complete the cash tender offer on or about May 21, 2021, following which the Company intends to acquire all of the remaining outstanding shares of Nordic ID and cause Nordic ID to apply for delisting of its shares from Nasdaq First North Growth Market Finland. The cash consideration offered for each Nordic ID Share validly tendered in the Tender Offer is EUR 3.30 per share, which equates to a total equity purchase of EUR 8.1 million (USD 9.9 million), plus the assumption of debt of approximately USD 3 million.
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 safety, identification and healthcare products. The WPS segment provides workplace safety, identification and compliance products, approximately half of which are internally manufactured and half of which are externally sourced.
The ability to provide customers with a broad range of proprietary, customized and diverse products for use in various applications across multiple industries and geographies, along with a commitment to quality and service, have made Brady a leader in many of its markets. 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 the efficiency of our global operations, deliver a high level of customer service, develop and market innovative new products, and to advance our digital capabilities. In our IDS business, our strategy for growth includes an increased focus on certain industries and products, a focus on improving the customer buying experience, and the development of technologically advanced, innovative and proprietary products. In our WPS business, our strategy for growth includes a focus on workplace safety critical industries, innovative new product offerings, compliance expertise, customization expertise, and improving our digital capabilities.
The following are key initiatives supporting our strategy in fiscal 2021:
•Investing in organic growth by enhancing our research and development process and utilizing customer feedback to develop innovative new products.
•Investing in acquisitions that enhance our strategic position and accelerate sales growth.
•Providing our customers with the highest level of customer service.
•Expanding and enhancing our sales capabilities through an improved digital presence and the use of data-driven marketing automation tools.
•Driving operational excellence and executing sustainable efficiency gains within our global operations and within our selling, general and administrative structures.structures and within our global operations including insourcing of critical products and manufacturing activities.
•Building on our culture of diversity and inclusion to increase employee engagement and enhance recruitment and retention practices.
Impact of the COVID-19 Pandemic on Our Business
The impact of the COVID-19 pandemic on the global economic environment has resulted in reduced demand across the majority of our end markets. In the near-term, the COVID-19 pandemic is expected to continue to have adverse effects on our sales, overall profitability, and cash provided by operating activities. As of the date of this filing, significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic.
Brady Corporation is deemed an essential business under the majority of local government orders. Our products support first responders, healthcare workers, food processing companies, and many other critical industries. During the quarterthree and nine months ended October 31, 2020,April 30, 2021, our facilities were operating globally with enhanced safety protocols designed to protect the health and safety of our employees.
We have taken actions throughout our business to reduce controllable costs, including actions to reduce labor costs, eliminatingeliminate non-essential travel, and reducingreduce discretionary spend. We believe we have the financial strength to continue to invest in organic sales growth opportunities, inorganic sales opportunities, and research and development ("R&D"), while continuing to drive sustainable efficiencies and automation in our operations and selling, general and administrative expenses ("SG&A") functions. At October 31, 2020,April 30, 2021, we had cash of $256.3$321.8 million, an undrawn credit facility of $200 million, which can be increased up to $400 million at the Company's option and subject to certain conditions, and outstanding letters of credit of $3.5$3.6 million, for total available liquidity of approximately $653$718 million.
Due to the speed with which the COVID-19 pandemic developed and the resulting uncertainty, including the depth and duration of any disruptions to customers and suppliers, its future effect on our business, results of operations, and financial condition cannot be predicted. Despite this uncertainty, weWe believe that our financial resources, liquidity levels and debt-free status along with various contingency plans to reduce costs are sufficient to manage the impact of the COVID-19 pandemic, which may result in reduced sales, reduced net income, and reduced cash provided by operating activities. Refer to Risk Factors, included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended July 31, 2020, along with Risks Factors, included in Part II, Item IA of this Quarterly Report on Form 10-Q for the period ended April 30, 2021, for further discussion of the possible impact of the COVID-19 pandemic on our business.
Results of Operations
A comparison of results of operating income for the three and nine months ended October 31,April 30, 2021 and 2020, and 2019 is as follows:
| | | Three months ended October 31, | | Three months ended April 30, | | Nine months ended April 30, |
(Dollars in thousands) | (Dollars in thousands) | 2020 | | % Sales | | 2019 | | % Sales | (Dollars in thousands) | 2021 | | % Sales | | 2020 | | % Sales | | 2021 | | % Sales | | 2020 | | % Sales |
Net sales | Net sales | $ | 277,227 | | | | | $ | 286,947 | | | | Net sales | $ | 295,503 | | | | | $ | 265,943 | | | | | $ | 838,568 | | | | | $ | 829,555 | | | |
Gross margin | Gross margin | 135,428 | | | 48.9 | % | | 141,405 | | | 49.3 | % | Gross margin | 148,847 | | | 50.4 | % | | 129,527 | | | 48.7 | % | | 413,797 | | | 49.3 | % | | 410,059 | | | 49.4 | % |
Operating expenses: | Operating expenses: | | Operating expenses: | |
Research and development | Research and development | 10,203 | | | 3.7 | % | | 10,967 | | | 3.8 | % | Research and development | 11,305 | | | 3.8 | % | | 9,814 | | | 3.7 | % | | 31,384 | | | 3.7 | % | | 31,298 | | | 3.8 | % |
Selling, general and administrative | Selling, general and administrative | 83,037 | | | 30.0 | % | | 89,547 | | | 31.2 | % | Selling, general and administrative | 90,817 | | | 30.7 | % | | 83,223 | | | 31.3 | % | | 256,088 | | | 30.5 | % | | 260,136 | | | 31.4 | % |
Impairment charges | | Impairment charges | — | | | — | % | | 13,821 | | | 5.2 | % | | — | | | — | % | | 13,821 | | | 1.7 | % |
Total operating expenses | Total operating expenses | 93,240 | | | 33.6 | % | | 100,514 | | | 35.0 | % | Total operating expenses | 102,122 | | | 34.6 | % | | 106,858 | | | 40.2 | % | | 287,472 | | | 34.3 | % | | 305,255 | | | 36.8 | % |
Operating income | Operating income | $ | 42,188 | | | 15.2 | % | | $ | 40,891 | | | 14.3 | % | Operating income | $ | 46,725 | | | 15.8 | % | | $ | 22,669 | | | 8.5 | % | | $ | 126,325 | | | 15.1 | % | | $ | 104,804 | | | 12.6 | % |
References in this Form 10-Q to “organic sales” refer to sales calculated in accordance with GAAP, excluding the impact of foreign currency translation. 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 our businesses and facilitating comparisons of our sales performance with prior periods.
Net sales for the three months ended October 31, 2020, decreased 3.4%April 30, 2021, increased 11.1% to $277.2$295.5 million, compared to $286.9$265.9 million in the same period of the prior year. The increase consisted of an organic sales growth of 6.5% and a positive currency impact of 4.6% due to the weakening of the U.S. Dollar against certain other currencies as compared to the same period in the prior year. The decrease consisted of an organic sales decline of 4.9% and an increase from foreign currency translation of 1.5%. Organic sales declined 8.4%grew 9.8% in the IDS segment and grew 5.5%declined 2.2% in the WPS segment during the three months ended October 31, 2020,April 30, 2021, compared to the same period in the prior year.
The most significant impact on organic sales due to the COVID-19 pandemic started in the second half of fiscal 2020 when varied government responses to the pandemic impacted a large demographic of our customers and the overall global economy. The IDS segment realized reduced demand across all major product lines beginning in the third quarter fiscal 2020, while the WPS segment realized essentially flat organic sales in the third quarter in fiscal 2020 primarily due to increased sales of personal protective equipment and other pandemic-related products which offset decreased demand in other core products. For the three months ended April 30, 2021, the COVID-19 pandemic continued to affect sales in the IDS and WPS segments, although to a much lesser extent compared to the same period in the prior year.
Net sales for the nine months ended April 30, 2021, increased 1.1% to $838.6 million, compared to $829.6 million in the same period of the prior year. The increase consisted of an organic sales decline of 1.7% and a positive currency impact of 2.8%. Organic sales declined 2.1% in the IDS segment and declined 0.5% in the WPS segment during the nine months ended April 30, 2021, compared to the same period in the prior year. The COVID-19 pandemic had a significant impact on organic sales during the threenine months ended October 31, 2020,April 30, 2021, with the impact varying between the IDS and WPS segments. The IDS segment realized reduced demand across all major product lines, while the WPS segment realized increased demand globally for personal protective equipment and other pandemic-related safety and identification products during this same period.
Gross margin forincreased 14.9% to $148.8 million in the three months ended October 31, 2020, decreased 4.2% to $135.4 million,April 30, 2021, compared to $141.4$129.5 million in the same period in the prior year. As a percentage of net sales, gross margin increased to 50.4% compared to 48.7% in the same period in the prior year. The increase was due to the increase in sales volumes in our IDS business, which was partially offset by a decrease in gross margin in our WPS business due to product mix. Gross margin increased 0.9% to $413.8 million for the nine months ended April 30, 2021, compared to $410.1 million in the same period in the prior year. As a percentage of net sales, gross margin decreased to 48.9% for the three months ended October 31, 2020, from 49.3% compared to 49.4% in the same period in the prior year. The decrease in gross margin as a percentage of net salesduring the nine-month period was primarily due to the decline inreduced sales volumes in theboth IDS segment resulting from the economic slowdown caused by the COVID-19 pandemicand WPS as well as product mix in our WPS segment, which was partially mitigated by our ongoing efforts to streamline manufacturing processes and drive sustainable operational efficiencies.business.
R&D expenses increased 15.2% to $11.3 million and increased 0.3% to $31.4 million for the three and nine months ended October 31, 2020, declined 7.0% to $10.2 million,April 30, 2021, respectively, compared to $11.0$9.8 million and $31.3 million in the same periodperiods in the prior year. As a percentage of sales, R&D expenses declined slightly to 3.7%remained essentially flat for both the three and nine months ended October 31, 2020,April 30, 2021, compared to 3.8% in the same period inperiods of the prior year. The decreaseincrease in R&D spending for both the three and nine-month periods was primarily due to an increase in incentive-based compensation, which was partially offset by a decrease in headcount, improved efficiency, and the timing of expenditures related to ongoing new product development costs compared to the same periodperiods in the prior year. The Company remains committed to investing in new product development to increase sales within our IDS and WPS businesses. Investments in new printers and materials continue to be the primary focus of R&D expenditures.
SG&A expenses include selling and administrativeadministration 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 expenses declined 7.3%increased 9.1% to $83.0$90.8 million forin the three months ended October 31, 2020,April 30, 2021, compared to $89.5$83.2 million in the same period in the prior year. As a percentage of net sales, SG&A decreased to 30.7% compared to 31.3% in the same period in the prior year. The increase in SG&A expenses was 30.0%primarily due to increased incentive compensation compared to the lower than normal incentive compensation in the prior year, and foreign currency translation. The decrease as a percentage of net sales was due to a reduction in the SG&A cost structure and a reduction in discretionary spend including a decrease in travel for our sales people when compared to the same period in the prior year.
SG&A expenses decreased 1.6% to $256.1 million for the threenine months ended October 31, 2020,April 30, 2021, compared to 31.2%$260.1 million in the same period in the prior year. As a percentage of net sales, SG&A decreased to 30.5% from 31.4% in the same period in the prior year. The decrease in both SG&A expenses and SG&A expenses as a percentage of net sales from the same period of the prior year was primarily due to ongoing efficiency gains, a reduction in the SG&A cost structure along withand a reduction in discretionary spend including a decrease in travel for our sales people when compared to the same period in the prior year, which was partially offset by the impact ofan increase in incentive compensation and foreign currency translation.
As a result of the global economic slowdown that began during the three months ended April 30, 2020 due to the COVID-19 pandemic, management evaluated whether indicators of impairment of intangible assets and other long-lived assets existed. Management concluded that the COVID-19 pandemic resulted in indicators of impairment in certain businesses within the WPS and IDS segments, and performed an interim impairment analysis. As a result of the analysis, impairment charges of $13.8 million related to other intangible and long-lived assets, primarily in the WPS segment, were recorded during the three months ended April 30, 2020.
Operating income increased 3.2%106.1% to $42.2$46.7 million and increased 20.5% to $126.3 million for the three and nine months ended October 31, 2020,April 30, 2021, respectively, compared to $40.9$22.7 million and $104.8 million in the same periodperiods in the prior year. The increase in operating income in both the three and nine-month periods was primarily due to increasedthe increase in segment profit in the WPSIDS segment as a result of organic sales growth as well as a reduction inand the SG&A cost structure in both segments.
impairment charge recognized during the period ended April 30, 2020. OPERATING INCOME TO NET INCOME
| | | Three months ended October 31, | | Three months ended April 30, | | Nine months ended April 30, |
(Dollars in thousands) | (Dollars in thousands) | 2020 | | % Sales | | 2019 | | % Sales | (Dollars in thousands) | 2021 | | % Sales | | 2020 | | % Sales | | 2021 | | % Sales | | 2020 | | % Sales |
Operating income | Operating income | $ | 42,188 | | | 15.2 | % | | $ | 40,891 | | | 14.3 | % | Operating income | $ | 46,725 | | | 15.8 | % | | $ | 22,669 | | | 8.5 | % | | $ | 126,325 | | | 15.1 | % | | $ | 104,804 | | | 12.6 | % |
Other income (expense): | Other income (expense): | | Other income (expense): | |
Investment and other income | Investment and other income | 155 | | | 0.1 | % | | 1,380 | | | 0.5 | % | Investment and other income | 1,181 | | | 0.4 | % | | 112 | | | — | % | | 3,372 | | | 0.4 | % | | 3,252 | | | 0.4 | % |
Interest expense | Interest expense | (106) | | | — | % | | (701) | | | (0.2) | % | Interest expense | (131) | | | — | % | | (628) | | | (0.2) | % | | (288) | | | — | % | | (1,976) | | | (0.2) | % |
Income before income tax and losses of unconsolidated affiliate | Income before income tax and losses of unconsolidated affiliate | 42,237 | | | 15.2 | % | | 41,570 | | | 14.5 | % | Income before income tax and losses of unconsolidated affiliate | 47,775 | | | 16.2 | % | | 22,153 | | | 8.3 | % | | 129,409 | | | 15.4 | % | | 106,080 | | | 12.8 | % |
Income tax expense | Income tax expense | 8,582 | | | 3.1 | % | | 4,072 | | | 1.4 | % | Income tax expense | 10,229 | | | 3.5 | % | | 8,520 | | | 3.2 | % | | 27,017 | | | 3.2 | % | | 21,396 | | | 2.6 | % |
Income before losses of unconsolidated affiliate | Income before losses of unconsolidated affiliate | 33,655 | | | 12.1 | % | | 37,498 | | | 13.1 | % | Income before losses of unconsolidated affiliate | 37,546 | | | 12.7 | % | | 13,633 | | | 5.1 | % | | 102,392 | | | 12.2 | % | | 84,684 | | | 10.2 | % |
Equity in losses of unconsolidated affiliate | Equity in losses of unconsolidated affiliate | (174) | | | (0.1) | % | | — | | | — | % | Equity in losses of unconsolidated affiliate | (255) | | | (0.1) | % | | — | | | — | % | | (760) | | | (0.1) | % | | — | | | — | % |
Net income | Net income | $ | 33,481 | | | 12.1 | % | | $ | 37,498 | | | 13.1 | % | Net income | $ | 37,291 | | | 12.6 | % | | $ | 13,633 | | | 5.1 | % | | $ | 101,632 | | | 12.1 | % | | $ | 84,684 | | | 10.2 | % |
Investment and other income was $0.2$1.2 million and $0.1 million for the three months ended October 31,April 30, 2021 and 2020, compared to $1.4 million for the same periodrespectively. The increase in the prior year. The decreasethree-month period was primarily due to reducedan increase in the market value of securities held in deferred compensation plans, which was partially offset by a decrease in interest income as a result ofdue to the decline in interest rates. Investment and other income was consistent at $3.4 million and $3.3 million for the nine months ended April 30, 2021 and 2020, respectively.
Interest expense decreased to $0.1 million and $0.3 million for the three and nine months ended October 31, 2020,April 30, 2021, respectively, compared to $0.7$0.6 million forand $2.0 million in the same periodperiods in the prior year. The decrease in interest expense for both the three and nine-month periods was due to the repayment of the Company's remaining principal balance under its private placement debt agreement during the fourth quarter of the fiscal year ended July 31, 2020.
The Company’sCompany's income tax rate was 20.3%21.4% and 38.5% for the three months ended October 31,April 30, 2021 and 2020, compared to 9.8% inand the same period inincome tax rate was 20.9% and 20.2% for the prior year.nine months ended April 30, 2021 and 2020, respectively. Refer to Note M, "Income Taxes" for additional information on the Company's effective income tax rate.rates.
Equity in losses of unconsolidated affiliate of $0.2$0.3 million and $0.8 million for the three and nine months ended October 31, 2020April 30, 2021, respectively, represented the Company's proportionate share of the loss in its equity interest in React Mobile, Inc., an employee safety software and hardware company based in the United States.
Business Segment Operating Results
The Company evaluates short-term segment performance based on segment profit and customer sales. Interest expense, investment and other income, income tax expense, equity in losses of unconsolidated affiliate, and certain corporate administrative expenses are excluded when evaluating segment performance.
The following is a summary of segment information for the three and nine months ended October 31, 2020April 30, 2021, and 2019:2020:
| | | | | | | | | | | |
| Three months ended October 31, |
| 2020 | | 2019 |
SALES GROWTH INFORMATION | | | |
ID Solutions | | | |
Organic | (8.4) | % | | (0.2) | % |
Currency | 0.6 | % | | (1.2) | % |
Total | (7.8) | % | | (1.4) | % |
Workplace Safety | | | |
Organic | 5.5 | % | | (0.8) | % |
Currency | 4.3 | % | | (3.4) | % |
Total | 9.8 | % | | (4.2) | % |
Total Company | | | |
Organic | (4.9) | % | | (0.4) | % |
Currency | 1.5 | % | | (1.7) | % |
Total | (3.4) | % | | (2.1) | % |
SEGMENT PROFIT AS A PERCENT OF NET SALES | | | |
ID Solutions | 20.3 | % | | 19.7 | % |
Workplace Safety | 10.1 | % | | 7.2 | % |
Total | 17.4 | % | | 16.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended April 30, | | Nine months ended April 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
SALES GROWTH INFORMATION | | | | | | | |
ID Solutions | | | | | | | |
Organic | 9.8 | % | | (8.2) | % | | (2.1) | % | | (3.2) | % |
Currency | 3.1 | % | | (1.5) | % | | 1.6 | % | | (1.1) | % |
Total | 12.9 | % | | (9.7) | % | | (0.5) | % | | (4.3) | % |
Workplace Safety | | | | | | | |
Organic | (2.2) | % | | 0.2 | % | | (0.5) | % | | (0.5) | % |
Currency | 8.6 | % | | (4.1) | % | | 6.1 | % | | (3.1) | % |
Total | 6.4 | % | | (3.9) | % | | 5.6 | % | | (3.6) | % |
Total Company | | | | | | | |
Organic | 6.5 | % | | (6.0) | % | | (1.7) | % | | (2.5) | % |
Currency | 4.6 | % | | (2.2) | % | | 2.8 | % | | (1.6) | % |
Total | 11.1 | % | | (8.2) | % | | 1.1 | % | | (4.1) | % |
SEGMENT PROFIT AS A PERCENT OF NET SALES | | | | | | | |
ID Solutions | 21.8 | % | | 18.8 | % | | 20.8 | % | | 19.5 | % |
Workplace Safety | 7.3 | % | | 6.0 | % | | 7.5 | % | | 6.9 | % |
Total | 18.0 | % | | 15.3 | % | | 17.2 | % | | 16.2 | % |
ID Solutions
IDS net sales decreased 7.8%increased 12.9% to $218.1 million for the three months ended October 31,April 30, 2021, compared to the same period in the prior year, which consisted of organic sales growth of 9.8% and an increase from foreign currency translation of 3.1%. The economic slowdown caused by the COVID-19 pandemic had a significant impact on organic sales trends in the three months ended April 30, 2021 and 2020. Organic sales recovered in all major product lines with growth in the safety and facility identification, healthcare identification, product identification, and wire identification product lines in the three months ended April 30, 2021. Demand increased in most end markets as economic activity improved following the disruption caused by the COVID-19 pandemic during the second half of fiscal 2020 and the first half of fiscal 2021.
IDS net sales declined 0.5% to $610.5 million for the nine months ended April 30, 2021, compared to the same period in the prior year, which consisted of an organic sales decline of 8.4%2.1% and an increase from foreign currency translation of 0.6%1.6%. TheOrganic sales declined in the nine-month period due to reduced demand during the first half of the fiscal year resulting from the economic slowdown caused by the COVID-19 pandemic had a significant impact onpandemic. Organic sales declined in the safety and facility identification and healthcare identification product lines, which was partially offset by organic sales duringgrowth in the quarter, which resultedproduct identification and wire identification product lines.
Organic sales in organic sales declines across all major product linesthe Americas increased in the high-single digits for the three months ended October 31, 2020.April 30, 2021, compared to the same period in the prior year. Organic sales grew in all major product lines with growth in the wire identification, safety and facility identification, product identification, and healthcare identification product lines. Organic sales grew in the high-single digits in the United States and grew approximately 20% in the remainder of the Americas region for the three months ended April 30, 2021.
Organic sales in the Americas declined in the high-singlelow-single digits for the threenine months ended October 31, 2020,April 30, 2021, compared to the same period in the prior year. Organic sales declined across all majorin the healthcare identification and safety and facility identification product lines due to reduced demand during the first half of the fiscal year resulting from the economic slowdown caused by the COVID-19 pandemic. OrganicThis was partially offset by organic sales declined by approximately 10%growth in the United Statesproduct identification and wire identification product lines. Organic sales declined in the low-single digits in the United States and grew in the mid-single digits in the remainder of the Americas region.region for the nine months ended April 30, 2021.
Organic sales in Europe increased in the low-double digits for the three months ended April 30, 2021, compared to the same period in the prior year. Organic sales grew in the safety and facility identification, product identification, and wire identification product lines. Organic sales growth was broad-based throughout both Western Europe and businesses based in emerging geographies primarily due to increased economic activity following the disruption caused by the COVID-19 pandemic.
Organic sales in Europe declined in the mid-singlelow-single digits for the threenine months ended October 31, 2020, asApril 30, 2021, compared to the same period in the prior year. Organic sales declined across all majorin the healthcare identification product linesline primarily due to reduced demand from the economic slowdown caused by the COVID-19 pandemic. Thepandemic, which was partially offset by organic sales decline was broad-basedgrowth in the product identification, safety and facility identification, and wire identification product lines. Organic sales declined throughout Western Europe which was partially offset by mid-single digit organic sales growth for certain businesses based in emerging geographies.geographies during the nine-month period.
Organic sales in Asia declinedincreased in the low-singlelow-double digits for the three months ended October 31, 2020, asApril 30, 2021, and increased in the mid-single digits for the nine months ended April 30, 2021, compared to the same periodperiods in the prior year. Organic sales growth in the safety and facility identification and wire identification product linesboth periods was offsetprimarily driven by an organic sales declinegrowth in the product identification product line. Theline, and to a lesser extent growth in the wire identification and safety and facility identification product lines due to increased demand for industrial identification products. Organic sales in China grew in the low-single digit decline was broad-baseddigits in both periods. Organic sales grew nearly 20% throughout Asia.the rest of Asia for the three-month period and grew in the high-single digits for the nine-month period ended April 30, 2021.
Segment profit decreased 5.1%increased 30.6% to $40.3$47.5 million for the three months ended October 31, 2020,April 30, 2021, compared to $42.4$36.4 million in the same period in the prior year. Segment profit increased 6.1% to $126.8 million for the nine months ended April 30, 2021, compared to $119.5 million for the same period in the prior year. As a percentage of net sales, segment profit was 20.3%increased to 21.8% from 18.8% for the three monthsthree-month period, and segment profit increased to 20.8% from 19.5% for the nine-month period ended October 31, 2020,April 30, 2021 compared to 19.7% in the same periodperiods in the prior year. The increase in segment profit as a percentage ofprofitability was due to increased sales was primarily driven byvolumes and an overall reduction in the reduced cost structure throughout the IDS segment and a reduction in discretionary spending in response to the decline in revenue from the impact of the COVID-19 pandemic.segment.
Workplace Safety
WPS net sales increased 9.8%6.4% to $77.4 million for the three months ended October 31, 2020,April 30, 2021, compared to the same period in the prior year, which consisted of an organic sales growthdecline of 5.5%2.2% and an increase from foreign currency translation of 4.3%8.6%. Sales throughThe economic effect of the digital channel increased inCOVID-19 pandemic had a significant impact on organic sales trends during the mid-teens and sales through the traditional catalog channel increased in the low-single digits.second half of fiscal 2020. The WPS business realized increasedrefined its digital marketing efforts to focus on the increase in demand globally for personal protective equipment and other social distancing signage and floor markings resulting from the COVID-19 pandemic. These actions resulted in a significant increase in sales in these product categories while sales of core safety and otheridentification products declined due to the economic disruption caused by the pandemic. WPS continues to sell COVID-19 pandemic-related products.
Organicproducts, but there was reduced demand for these products and sales did not replace the decline in Europe increaseddemand for core safety and identification products in the high-single digits for the three months ended October 31, 2020,April 30, 2021 compared to the same period in the prior year. Sales through
WPS net sales increased 5.6% to $228.1 million for the digital channel increasednine months ended April 30, 2021, compared to the same period in the mid-teens,prior year, which was driven byconsisted of an organic sales decline of 0.5% and an increase from foreign currency translation of 6.1%. Due to the increased digital marketing campaigns emphasizingefforts around demand for personal protective equipment and other social distancing signage and floor markings resulting from the COVID-19 pandemic, the business realized organic sales growth in the first half of fiscal 2021. WPS continues to sell COVID-19 pandemic-related products. Salesproducts, but the demand for these products has declined and sales did not replace the decline in demand for core safety and identification products in the nine months ended April 30, 2021 compared to the same period in the prior year.
Organic sales in Europe increased in the low-single digits for the three and nine months ended April 30, 2021, compared to the same periods in the prior year. Digital sales increased in the mid-single digits in the three months and increased in the high-single digits in the nine months ended April 30, 2021, while sales through the traditional catalog channel increased in the mid-single digits.low-single digits in both periods. Organic sales growth in Europe was led by businesses in France, followed by growth in Norway and the U.K., which was partially offset by a decline in organic sales in Germany.throughout the remainder of Western Europe.
Organic sales in North America declined in the low-single digits for the three months ended October 31, 2020,April 30, 2021, compared to the same period in the prior year. This decreaseDue to the increased digital marketing efforts around demand for personal protective
equipment and other social distancing signage and floor markings resulting from the COVID-19 pandemic, the business realized increased sales of these products during the second half of fiscal 2020. Demand for these products declined and COVID-19 pandemic-related product sales did not replace the decline in demand for core safety and identification products in the three months ended April 30, 2021 compared to the same period in the prior year. Digital sales increased in the high-single digits and sales through the catalog channel decreased in the low-single digits in the three months ended April 30, 2021.
Organic sales in North America declined in the mid-single digits for the nine months ended April 30, 2021, compared to the same period in the prior year. The decline was driven by one of our businesses in the United States that sells primarily to small companies, which resulted in a low-single digitsignificant decline in traditional catalog sales which was partially offset by low-single digit growthat the beginning of the COVID-19 pandemic and has only recently annualized the significant sales declines realized in the prior year. Digital sales increased in the mid-single digits and sales through the catalog channel decreased in the high-single digits in the nine months ended April 30, 2021.
Organic sales in Australia declined in the high-teens for the three months ended April 30, 2021, compared to the same period in the prior year. The WPS Australia business refined its digital channel. Themarketing efforts to focus on the increase in digitaldemand for personal protective equipment and other social distancing signage and floor markings resulting from the COVID-19 pandemic. These actions resulted in significant organic sales was primarily duegrowth in Australia in the second half of fiscal 2020 and the first half of fiscal 2021. The business continues to increased sales ofsell COVID-19 pandemic-related products including personal protective equipment, social distancing signage and floor markings, and other COVID-19 pandemic-related products.but demand has decreased significantly compared to the organic sales growth of nearly 30% that the business generated in the three months ended April 30, 2020.
Organic sales in Australia increased just over 10%declined in the mid-single digits for the threenine months ended October 31, 2020,April 30, 2021, compared to the same period of the prior year. Digital channel sales grew approximately 40% over the same period in the prior year, which was driven by digital marketing campaigns emphasizing personal protective equipment along with floor markingsyear. Organic sales growth from COVID-19 pandemic-related products began to slow during the second quarter of fiscal 2021, while demand for core safety and signage related to social distancing and personal hygiene. Sales throughidentification products did not replace the traditional catalog channeldecrease in sales of COVID-19 pandemic-related products. Organic sales increased in the mid-single digits. Our Australian business generated increased saleshigh-single digits in a variety of product categories related to mitigating the COVID-19 pandemic, including various types of personal protective equipment and other healthcare supplies.nine months ended April 30, 2020.
Segment profit increased 29.2% to $8.0$5.7 million for the three months ended October 31, 2020, compared to $5.2from $4.4 million in the same period of the prior year. Asand as a percentage of net sales, segment profit increased to 10.1%7.3% from 6.0% for the three months ended October 31, 2020,April 30, 2021, compared to 7.2% in the same period in the prior year. Segment profit increased 14.1% to $17.1 million from $15.0 million and as a percentage of net sales, segment profit increased to 7.5% from 6.9% for the nine months ended April 30, 2021, compared to the same period in the prior year. The increase in segment profit in both the three and nine-month periods was primarily driven bydue to increased organic sales volumes combined within the reduced SG&Acurrent year and the additional costs incurred in the prior year to address our cost structure, and to a lesser extent foreign currency translation.structure.
Liquidity and Capital Resources
The Company's cash balances are generated and held in numerous locations throughout the world. At October 31, 2020,April 30, 2021, approximately 66%70% of the Company's cash and cash equivalents were held outside the United States. The Company's growth has historically been funded by a combination of cash provided by operating activities and debt financing. The Company believes that its cash flow from operating activities and its borrowing capacity are sufficient to fund its anticipated requirements for working capital, capital expenditures, research and development, common stock repurchases, and dividend payments for the next 12 months. Although the Company believes these sources of cash are currently sufficient to fund domestic operations, annual cash needs could require repatriation of cash to the U.S. from foreign jurisdictions, which may result in additional tax payments.
Cash Flows
Cash and cash equivalents were $256.3$321.8 million at October 31, 2020,April 30, 2021, an increase of $38.7$104.2 million from July 31, 2020. The significant changes were as follows:
| | | Three months ended October 31, | | Nine months ended April 30, |
(Dollars in thousands) | (Dollars in thousands) | 2020 | | 2019 | (Dollars in thousands) | 2021 | | 2020 |
Net cash flow provided by (used in): | Net cash flow provided by (used in): | | | | Net cash flow provided by (used in): | | | |
Operating activities | Operating activities | $ | 62,838 | | | $ | 38,848 | | Operating activities | $ | 154,908 | | | $ | 95,913 | |
Investing activities | Investing activities | (9,202) | | | (7,197) | | Investing activities | (18,844) | | | (26,035) | |
Financing activities | Financing activities | (16,551) | | | (15,326) | | Financing activities | (39,274) | | | (101,047) | |
Effect of exchange rate changes on cash | Effect of exchange rate changes on cash | 1,605 | | | (304) | | Effect of exchange rate changes on cash | 7,368 | | | (9,023) | |
Net increase in cash and cash equivalents | $ | 38,690 | | | $ | 16,021 | | |
Net increase (decrease) in cash and cash equivalents | | Net increase (decrease) in cash and cash equivalents | $ | 104,158 | | | $ | (40,192) | |
Net cash provided by operating activities was $62.8$154.9 million for the threenine months ended October 31, 2020,April 30, 2021, compared to $38.8$95.9 million in the same period of the prior year. The increase was primarily due to an increase in net income and an increase in cash
provided by working capital. Inventory levels were reduced which resulted in the majority of thean increase in cash provided by operating activities, which was due to a planned reduction in inventory following a period of increased balancesinventory levels to reduce the risk of supply chain disruption resulting from the COVID-19 pandemic. In addition, annual incentive compensation payments were lower in the timing of accounts payable and other compensation-related withholding increased cash provided by working capital, whichcurrent nine-month period compared to the same period in the prior year. This was partially offset by a decrease in cash provided by accounts receivable due to increasingincreased sequential sales during the quarter.nine months ended April 30, 2021.
Net cash used in investing activities was $9.2$18.8 million for the threenine months ended October 31, 2020,April 30, 2021, compared to $7.2$26.0 million used in the same period of the prior year. The increasedecrease in net cash used in investing activities relates was primarily driven by an increase in capital expenditures fordue to the purchaseproceeds received from the sale of a facility upgrades and manufacturing equipment in Europe,during the United States, and Mexico.nine months ended April 30, 2021.
Net cash used in financing activities was $16.6$39.3 million during the threenine months ended October 31, 2020,April 30, 2021, compared to $15.3$101.0 million used in the same period of the prior year. The increasedecrease in cash used in financing activities was primarily driven by $2.7 million of share repurchases anddue to a decrease in cash proceedsused for share repurchases from $64.1 million in the exercise of stock options, which was largely offset by a decreasenine months ended April 30, 2020 to $3.6 million in cash payments for employee taxes withheld from stock-based awards.the nine months ended April 30, 2021.
Credit Facilities
On August 1, 2019, the Company and certain of its subsidiaries entered into an unsecured $200 million multi-currency revolving loan agreement with a group of five banks that replaced and terminated the Company’s previous loan agreement that had been entered into on September 25, 2015. Under the new revolving loan agreement, the Company has the option to select either a Eurocurrency rate loan that bears interest at the LIBOR rate plus a margin based on the Company's consolidated net leverage ratio or a base interest rate (based upon the higher of the federal funds rate plus 0.5%, the prime rate of the Bank of Montreal plus a margin based on the Company’s consolidated net leverage ratio, or the Eurocurrency base rate at the LIBOR rate plus a margin based on the Company’s consolidated net leverage ratio plus 1%). At the Company's option, and subject to certain conditions, the available amount under the revolving loan agreement may be increased from $200 million to $400 million. The maximum amount outstanding on the Company's revolving loan agreement during the threenine months ended October 31, 2020April 30, 2021 was $10.6 million. As of October 31, 2020,April 30, 2021, there were no borrowings outstanding on the credit facility. The Company had letters of credit outstanding under the loan agreement of $3.5$3.6 million as of October 31, 2020April 30, 2021 and there was $196.5$196.4 million available for future borrowing, which can be increased to $396.5$396.4 million at the Company's option, subject to
certain conditions. The revolving loan agreement has a final maturity date of August 1, 2024, as such, any borrowing would be classified as long-term on the accompanying condensed consolidated balance sheets.
Covenant Compliance
The Company'sCompany’s revolving loan agreement requires it to maintain certain financial covenants, including a ratio of debt to the trailing twelve months EBITDA, as defined in the debt agreements, of not more than a 3.5 to 1.0 ratio (leverage ratio) and the trailing twelve months EBITDA to interest expense of not less than a 3.0 to 1.0 ratio (interest expense coverage)coverage ratio). As of October 31, 2020,April 30, 2021, the Company was in compliance with these financial covenants.
Off-Balance Sheet Arrangements
The Company does not have material off-balance sheet arrangements. The Company is not aware of factors that are reasonably likely to adversely affect liquidity trends, other than the risk factors described in this Quarterly Report and its other Company filings.filings with the Securities and Exchange Commission. However, the following additional information is provided to assist those reviewing the Company’s financial statements.
Purchase Commitments - The Company has purchase commitments for materials, supplies, services, and property, plant and equipment as part of the ordinary conduct of its business. In the aggregate, such commitments are not in excess of current market prices and are not material to the financial position of the Company. Due to the proprietary nature of many of the Company’s materials and processes, certain supply contracts contain penalty provisions for early termination. The Company does not believe a material amount of penalties will be incurred under these contracts based upon historical experience and current expectations.
Other Contractual Obligations - The Company does not have material financial guarantees or other contractual commitments that are reasonably likely to adversely affect liquidity.
Forward-Looking Statements
In this quarterly report on Form 10-Q, statements that are not reported financial results or other historic information are “forward-looking statements.” These forward-looking statements relate to, among other things, the Company's future financial
position, business strategy, targets, projected sales, costs, income, capital expenditures, debt levels and cash flows, and plans and objectives of management for future operations.
The use of words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “should,” “project” or “plan” or similar terminology are generally intended to identify forward-looking statements. These forward-looking statements by their nature address matters that are, to different degrees, uncertain and are subject to risks, assumptions, and other factors, some of which are beyond Brady's control, that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For Brady, uncertainties arise from:
•Adverse impacts of the novel coronavirus ("COVID-19") pandemic or other pandemics
•Decreased demand for the Company's products
•Ability to compete effectively or to successfully execute its strategy
•Ability to develop technologically advanced products that meet customer demands
•Raw material and other cost increases
•Difficulties in protecting websites, networks, and systems against security breaches
•Extensive regulations by U.S. and non-U.S. governmental and self-regulatory entities
•Risks associated with the loss of key employees
•Divestitures, contingent liabilities from divestitures and the failure to identify, integrate, and grow acquired companies
•Litigation, including product liability claims
•Foreign currency fluctuations
•Potential write-offs of goodwill and other intangible assets
•Changes in tax legislation and tax rates
•Differing interests of voting and non-voting shareholders
•Numerous other matters of national, regional and global scale, including major public health crises and government responses thereto and those of a political, economic, business, competitive, and regulatory nature contained from time to time in Brady's U.S. Securities and Exchange Commission filings, including, but not limited to, those factors listed in the “Risk Factors” section set forth in this report and within Item 1A of Part I of Brady's Form 10-K for the year ended July 31, 2020.
These uncertainties may cause Brady's actual future results to be materially different than those expressed in its forward-looking statements. Brady does not undertake to update its forward-looking statements except as required by law.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to the Company’s annual reportAnnual Report on Form 10-K for the year ended July 31, 2020. There has been no material change in this information since July 31, 2020.
ITEM 4. CONTROLS AND PROCEDURES
Brady Corporation maintains a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports filed by the Company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports the Company files under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of its management, including its President and Chief Executive Officer and its Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, the Company’s President & Chief Executive Officer and Chief Financial Officer and Treasurer concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report.
There were no changes in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company's most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
The Company’s business, results of operations, financial condition, and cash flows are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors” of Brady's Annual Report on Form 10-K for the year ended July 31, 2020. Other than as set forth below, there have been no material changes from the risk factors set forth in the 2020 Form 10-K.
Our results ofThe COVID-19 pandemic has significantly impacted worldwide economic conditions and could continue to have a material adverse effect on our operations have been and willbusiness.
The ongoing COVID-19 pandemic initially impacted our operations in the future bethird quarter of fiscal 2020, and may continue to affect our business, particularly if conditions worsen and government authorities impose new or expanded mandatory closures, work-from-home orders or social distancing protocols, seek voluntary facility closures or impose other restrictions. Such actions could adversely impacted byaffect our ability to adequately staff and maintain our operations and negatively impact our financial results. The effects of the COVID-19 pandemic also may include restrictions on our employees’ ability to visit customers as well as disruptions or other pandemics, and the duration and extenttemporary closures of our facilities.
In response to which it will impact our business and financial results remains uncertain.
The global spread of COVID-19 has resulted in significant economic disruption, has negatively impacted our financial results, and significantly increased future uncertainty. The extent to which the COVID-19 pandemic, we have enabled remote working arrangements, which may create increased vulnerability to cybersecurity incidents, including breaches of information systems security. Such incidents could damage our reputation and commercial relationships, disrupt operations, increase costs or decrease revenues, and expose us to claims from customers, suppliers, financial institutions, regulators, payment card associations, employees and others.
While we attempt to maintain sufficient inventory levels in order to meet rapidly shifting customer demand patterns and supplier lead time requirements, we cannot be certain we will continuebe able to accurately predict demand or lead times, which may cause us to be unable to service customer demand or expose us to risks of product shortages, or result in excess inventory, which could lead to additional inventory carrying costs and inventory obsolescence.
The duration and ultimate impact of the COVID-19 pandemic on our business, results of operations and financial condition, including liquidity, capital and financing resources, will depend on numerous evolving factors and future developments, which are highly uncertain and cannot be predicted at this time.developments. Such factors and developments may include the geographic spread, severity and duration of the COVID-19 pandemic, including whether there are periods of increased COVID-19 cases or other variants, disruption to our operations resulting from employee illnesses, the developmentavailability and availabilityadministration of effective treatment or vaccines, as well as vaccination rates, the extent and duration of the impact on the U.S. orand global economy, including the pace and extent of recovery whenas the pandemic subsides, and the actions that have been andor may be taken by various governmental authorities in response to the outbreak, including current and future health and safety measures, such as mandatory facility closures of non-essential businesses, stay-at-home orders or similar restrictions, allsocial distancing mandates and travel bans, and import and export restrictions, which could disrupt our relationship with customers. If we are unable to respond to and manage the impact of which may continue to effect our customers and customers' demand for our services and products, reduce demand for healthcare services, impact our suppliers or cause disruptions in the global supply chain, and impact our ability to sell and manufacture our products. Certain jurisdictions have begun lifting stay-at-home orders only to impose further restrictions in the wake of increases in new COVID-19 cases. As such, there is considerable uncertainty regarding how current and future health and safety measures implemented in response to the COVID-19 pandemic will impact our business. In addition, the deterioration of macroeconomic conditions may impact the proper functioning of financial and capital markets, foreign currency exchange rates, commodity and energy prices, and interest rates. Even after the COVID-19 pandemic subsides, we may continue to experience adverse impacts tothese events, our business and financial results due to any economic recession or depression that has occurred, and due to any major public health crises thatof operations may occur in the future.be adversely affected.
Although our current accounting estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could differ from our expectations, which could materially affect our results of operations and financial position. In particular, a number of estimates have been and will continue to be affected by the ongoing COVID-19 pandemic. The severity, magnitude and duration, as well as the economic consequences of the COVID-19 pandemic, are uncertain, rapidly changing and difficult to predict. As a result, our accounting estimates and assumptions may change over time in response to COVID-19. Such changes could result in future impairments of goodwill, intangible assets, long-lived assets, incremental credit losses on accounts receivable, excess and obsolete inventory, or a decrease in the carrying amount of our deferred tax assets. Any of these events could amplify the other risks and uncertainties described in our Annual Report on Form 10-K for the fiscal year ended July 31, 2020 and could have an adverse effect on our business and financial results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company has a share repurchase program for the Company's Class A Nonvoting Common Stock. The plan may be implemented by purchasing shares in the open market or in privately negotiated transactions, with repurchased shares available for use in connection with the Company's stock-based plans and for other corporate purposes. On February 16, 2016, the Company's Board of Directors authorized a share repurchase program of 2,000,000 shares. As of October 31, 2020, 369,142 shares remained authorized to purchase in connection with this share repurchase program.
The following table provides information with respect to the purchase of Class A Nonvoting Common Stock during the three months ended October 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans | | Maximum Number of Shares That May Yet Be Purchased Under the Plans |
August 1, 2020 - August 31, 2020 | | — | | | $ | — | | | — | | | 461,796 | |
September 1, 2020 - September 30, 2020 | | 62,364 | | | 39.11 | | | 62,364 | | | 399,432 | |
October 1, 2020 - October 31, 2020 | | 30,290 | | | 38.10 | | | 30,290 | | | 369,142 | |
Total | | 92,654 | | | $ | 38.78 | | | 92,654 | | | 369,142 | |
ITEM 6. EXHIBITS
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Exhibit No. | | Exhibit Description |
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2.1 | | |
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31.1 | | |
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31.2 | | |
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32.1 | | |
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32.2 | | |
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101.INS | | XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.) |
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101.SCH | | XBRL Taxonomy Schema Document |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | XBRL Taxonomy Presentation Label Linkbase Document |
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104 | | Cover Page Inline XBRL data (contained in Exhibit 101) |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
SIGNATURES | | | | | | | | | | | | | | | | | | | | |
| | | | | | BRADY CORPORATION |
| | | |
Date: November 19, 2020May 20, 2021 | | | | | | /s/ J. MICHAEL NAUMAN |
| | | | | | J. Michael Nauman |
| | | | | | President and Chief Executive Officer |
| | | | | | (Principal Executive Officer) |
| | | | | | |
| | | | | | |
Date: November 19, 2020May 20, 2021 | | | | | | /s/ AARON J. PEARCE |
| | | | | | Aaron J. Pearce |
| | | | | | Chief Financial Officer and Treasurer |
| | | | | | (Principal Financial Officer) |