NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended
October 31, 2017
(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, 2017
and
July 31, 2017
, its results of operations and comprehensive income for the
three months ended October 31, 2017
and
2016
, and cash flows for the
three months ended October 31, 2017
and
2016
. The consolidated balance sheet as of
July 31, 2017
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, 2017
.
NOTE B — Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the
three months ended October 31, 2017
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IDS
|
|
WPS
|
|
Total
|
Balance as of July 31, 2017
|
$
|
391,864
|
|
|
$
|
45,833
|
|
|
$
|
437,697
|
|
Translation adjustments
|
(3,123
|
)
|
|
(870
|
)
|
|
(3,993
|
)
|
Balance as of October 31, 2017
|
$
|
388,741
|
|
|
$
|
44,963
|
|
|
$
|
433,704
|
|
Goodwill at
October 31, 2017
and
July 31, 2017
, was net of
$118,637
and
$209,392
of accumulated impairment losses within the ID Solutions ("IDS") and Workplace Safety ("WPS") segments, respectively, for a total of
$328,029
. There were no impairment charges recorded during the
three months ended October 31, 2017
.
Other intangible assets include patents, trademarks, and customer relationships with finite lives being amortized in accordance with the accounting guidance for other intangible assets. The Company also has unamortized indefinite-lived trademarks that are classified as other intangible assets. The net book value of these assets was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2017
|
|
July 31, 2017
|
|
Weighted
Average
Amortization
Period
(Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Weighted
Average
Amortization
Period
(Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
Amortized other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
5
|
|
$
|
1,395
|
|
|
$
|
(591
|
)
|
|
$
|
804
|
|
|
5
|
|
$
|
1,358
|
|
|
$
|
(471
|
)
|
|
$
|
887
|
|
Trademarks and other
|
9
|
|
4,485
|
|
|
(4,271
|
)
|
|
214
|
|
|
9
|
|
4,528
|
|
|
(4,229
|
)
|
|
299
|
|
Customer relationships
|
8
|
|
60,349
|
|
|
(33,045
|
)
|
|
27,304
|
|
|
8
|
|
60,759
|
|
|
(31,909
|
)
|
|
28,850
|
|
Unamortized other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
N/A
|
|
22,878
|
|
|
—
|
|
|
22,878
|
|
|
N/A
|
|
23,040
|
|
|
—
|
|
|
23,040
|
|
Total
|
|
|
$
|
89,107
|
|
|
$
|
(37,907
|
)
|
|
$
|
51,200
|
|
|
|
|
$
|
89,685
|
|
|
$
|
(36,609
|
)
|
|
$
|
53,076
|
|
The decrease in the gross carrying amount of other intangible assets as of
October 31, 2017
compared to
July 31, 2017
was due to the effects of currency fluctuations during the three-month period.
Amortization expense on intangible assets was $
1,693
and $
1,895
for the
three months ended October 31, 2017
and
2016
, respectively. The amortization expense over each of the next five fiscal years is projected to be $
6,445
, $
6,195
, $
5,196
, $
5,155
and $
5,008
for the fiscal years ending July 31,
2018
,
2019
,
2020
,
2021
and
2022
, respectively.
NOTE C — Other Comprehensive Loss
Other comprehensive loss consists of foreign currency translation adjustments, unrealized gains and losses from cash flow hedges and net investment hedges, and the unamortized gain on post-retirement plans, net of their related tax effects.
The following table illustrates the changes in the balances of each component of accumulated other comprehensive loss, net of tax, for the
three months ended October 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2017
|
$
|
109
|
|
|
$
|
2,620
|
|
|
$
|
(47,411
|
)
|
|
$
|
(44,682
|
)
|
Other comprehensive loss before reclassification
|
(419
|
)
|
|
—
|
|
|
(6,846
|
)
|
|
(7,265
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
15
|
|
|
(130
|
)
|
|
—
|
|
|
(115
|
)
|
Ending balance, October 31, 2017
|
$
|
(295
|
)
|
|
$
|
2,490
|
|
|
$
|
(54,257
|
)
|
|
$
|
(52,062
|
)
|
The increase in the accumulated other comprehensive loss as of
October 31, 2017
compared to
July 31, 2017
was primarily due to the appreciation of the U.S. dollar against certain other currencies. The foreign currency translation adjustments column in the table above includes the impact of foreign currency translation, foreign currency translation on intercompany notes, and the settlements of net investment hedges, net of tax. Of the total
$115
in amounts reclassified from accumulated other comprehensive loss, the
$15
loss on cash flow hedges was reclassified into cost of goods sold and the
$130
gain on post-retirement plans was reclassified into selling, general and administrative expenses ("SG&A") on the Condensed Consolidated Statements of Earnings for the
three months ended October 31, 2017
.
The changes in accumulated other comprehensive loss by component, net of tax, for the
three months ended October 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on cash flow hedges
|
|
Unamortized gain on post-retirement plans
|
|
Foreign currency translation adjustments
|
|
Accumulated other comprehensive loss
|
Beginning balance, July 31, 2016
|
$
|
(857
|
)
|
|
$
|
2,236
|
|
|
$
|
(56,124
|
)
|
|
$
|
(54,745
|
)
|
Other comprehensive income (loss) before reclassification
|
328
|
|
|
—
|
|
|
(12,608
|
)
|
|
(12,280
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
247
|
|
|
(136
|
)
|
|
—
|
|
|
111
|
|
Ending balance, October 31, 2016
|
$
|
(282
|
)
|
|
$
|
2,100
|
|
|
$
|
(68,732
|
)
|
|
$
|
(66,914
|
)
|
The increase in accumulated other comprehensive loss as of
October 31, 2016
compared to
July 31, 2016
was primarily due to the appreciation of the U.S. dollar against certain other currencies. The foreign currency translation adjustments column in the table above includes the impact of foreign currency translation, foreign currency translation on intercompany notes, and the settlements of net investment hedges, net of tax. Of the total
$111
in amounts reclassified from accumulated other comprehensive loss, the
$247
loss on cash flow hedges was reclassified into cost of goods sold and the
$136
gain on post-retirement plans was reclassified into SG&A on the Condensed Consolidated Statements of Earnings for the
three months ended October 31, 2016
.
The following table illustrates the income tax expense on the components of other comprehensive loss for the
three months ended October 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Three months ended October 31,
|
|
2017
|
|
2016
|
Income tax expense related to items of other comprehensive loss:
|
|
|
|
Net investment hedge translation adjustments
|
$
|
(301
|
)
|
|
$
|
(1,568
|
)
|
Cash flow hedges
|
(195
|
)
|
|
(128
|
)
|
Other income tax adjustments and currency translation
|
11
|
|
|
30
|
|
Income tax expense related to items of other comprehensive loss
|
$
|
(485
|
)
|
|
$
|
(1,666
|
)
|
NOTE D — Net Earnings per Common Share
Reconciliations of the numerator and denominator of the basic and diluted per share computations for the Company’s Class A and Class B common stock are summarized as follows:
|
|
|
|
|
|
|
|
|
|
Three months ended October 31,
|
|
2017
|
|
2016
|
Numerator: (in thousands)
|
|
|
|
Earnings (Numerator for basic and diluted Class A Nonvoting Common Share)
|
$
|
25,836
|
|
|
$
|
22,553
|
|
Less:
|
|
|
|
Preferential dividends
|
(799
|
)
|
|
(788
|
)
|
Preferential dividends on dilutive stock options
|
(16
|
)
|
|
(14
|
)
|
Numerator for basic and diluted earnings per Class B Voting Common Share
|
$
|
25,021
|
|
|
$
|
21,751
|
|
Denominator: (in thousands)
|
|
|
|
Denominator for basic earnings for both Class A and Class B
|
51,440
|
|
|
50,634
|
|
Plus: Effect of dilutive stock options
|
943
|
|
|
821
|
|
Denominator for diluted earnings per share for both Class A and Class B
|
52,383
|
|
|
51,455
|
|
Net earnings per Class A Nonvoting Common Share:
|
|
|
|
Basic
|
$
|
0.50
|
|
|
$
|
0.45
|
|
Diluted
|
$
|
0.49
|
|
|
$
|
0.44
|
|
Net earnings per Class B Voting Common Share:
|
|
|
|
Basic
|
$
|
0.49
|
|
|
$
|
0.43
|
|
Diluted
|
$
|
0.48
|
|
|
$
|
0.42
|
|
Options to purchase
737,132
and
772,334
shares of Class A Nonvoting Common Stock for the
three months ended October 31, 2017
and
2016
, respectively, were not included in the computation of diluted net earnings per share because the option exercise price was greater than the average market price of the common shares and, therefore, the effect would have been anti-dilutive.
NOTE E — Segment Information
The Company is organized and managed on a global basis within three operating segments, Identification Solutions, Workplace Safety, and People Identification ("PeopleID"), which aggregate into two reportable segments that are organized around businesses with consistent products and services: IDS and WPS. The Identification Solutions and PeopleID operating segments aggregate into the IDS reporting segment, while the WPS reporting segment is comprised solely of the Workplace Safety operating segment. The Company evaluates short-term segment performance based on segment profit and customer sales. Interest expense, investment and other income (expense), income taxes, and certain corporate administrative expenses are excluded when evaluating segment performance.
The following is a summary of segment information for the
three months ended October 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Three months ended October 31,
|
|
2017
|
|
2016
|
Net Sales:
|
|
|
|
ID Solutions
|
$
|
209,705
|
|
|
$
|
201,264
|
|
Workplace Safety
|
80,446
|
|
|
78,912
|
|
Total Company
|
$
|
290,151
|
|
|
$
|
280,176
|
|
Segment Profit:
|
|
|
|
ID Solutions
|
$
|
35,837
|
|
|
$
|
33,068
|
|
Workplace Safety
|
6,445
|
|
|
6,450
|
|
Total Company
|
$
|
42,282
|
|
|
$
|
39,518
|
|
The following is a reconciliation of segment profit to earnings before income taxes for the
three months ended October 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Three months ended October 31,
|
|
2017
|
|
2016
|
Total profit from reportable segments
|
$
|
42,282
|
|
|
$
|
39,518
|
|
Unallocated amounts:
|
|
|
|
Administrative costs
|
(6,871
|
)
|
|
(6,310
|
)
|
Investment and other income (expense)
|
216
|
|
|
(489
|
)
|
Interest expense
|
(863
|
)
|
|
(1,732
|
)
|
Earnings before income taxes
|
$
|
34,764
|
|
|
$
|
30,987
|
|
NOTE F – Stock-Based Compensation
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 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 over a three-year service 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 “service-based” stock options, generally expire 10 years from the date of grant.
Restricted and unrestricted shares and 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 "service-based" or "performance-based" restricted shares and RSUs. The service-based RSUs granted under the plan generally vest over a three-year service period, with one-third becoming exercisable 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 Company financial performance metrics are met.
As of
October 31, 2017
, the Company has reserved
3,672,332
shares of Class A Nonvoting Common Stock for outstanding stock options, RSUs, and restricted shares and
3,989,341
shares of Class A Nonvoting Common Stock remain for future issuance of stock options, RSUs, and restricted and unrestricted shares under the active plan. The Company uses treasury stock or will issue new Class A Nonvoting Common Stock to deliver shares under the plan.
The Company recognizes the compensation cost of all share-based awards at the time it is deemed probable the award will vest. This cost is recognized on a straight-line basis over the vesting period of the award. If it is determined that it is unlikely the award will vest, the expense recognized to date for the award is reversed in the period in which this is evident and the remaining expense is not recorded. Total stock-based compensation expense recognized by the Company during the
three months ended October 31, 2017
and
2016
, was
$3,744
(
$2,321
net of taxes) and
$3,155
(
$1,957
net of taxes), respectively.
As of
October 31, 2017
, total unrecognized compensation cost related to stock-based compensation awards was
$17,077
pre-tax, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of
2.1
years.
The Company has estimated the fair value of its service-based stock option awards granted during the
three months ended October 31, 2017
and
2016
, 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
|
|
2017
|
|
2016
|
Expected term (in years)
|
|
6.07
|
|
|
6.11
|
|
Expected volatility
|
|
28.19
|
%
|
|
29.43
|
%
|
Expected dividend yield
|
|
2.72
|
%
|
|
2.70
|
%
|
Risk-free interest rate
|
|
1.96
|
%
|
|
1.26
|
%
|
Weighted-average market value of underlying stock at grant date
|
|
$
|
36.85
|
|
|
$
|
35.14
|
|
Weighted-average exercise price
|
|
$
|
36.85
|
|
|
$
|
35.14
|
|
Weighted-average fair value of options granted during the period
|
|
$
|
7.96
|
|
|
$
|
7.56
|
|
The Company uses historical data regarding stock option exercise behaviors to estimate the expected term of options granted based on the period of time that options granted are expected to be outstanding. Expected volatilities are based on the historical volatility of the Company’s stock. The expected dividend yield is based on the Company’s historical dividend payments and historical yield. The risk-free interest rate is based on the U.S. Treasury yield curve in effect on the grant date for the length of time corresponding to the expected term of the option. The market value is calculated as the average of the high and the low stock price on the date of the grant.
A summary of stock option activity under the Company’s share-based compensation plans for the
three months ended October 31, 2017
, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service-Based Options
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
Outstanding at July 31, 2017
|
|
2,879,801
|
|
$
|
27.40
|
|
|
|
|
|
New grants
|
|
364,046
|
|
36.85
|
|
|
|
|
|
Exercised
|
|
(140,998)
|
|
28.02
|
|
|
|
|
|
Forfeited or expired
|
|
(10,719)
|
|
27.14
|
|
|
|
|
|
Outstanding at October 31, 2017
|
|
3,092,130
|
|
$
|
28.49
|
|
|
6.2
|
|
$
|
29,020
|
|
Exercisable at October 31, 2017
|
|
2,229,350
|
|
$
|
27.39
|
|
|
5.1
|
|
$
|
23,397
|
|
There were
2,229,350
and
2,616,609
options exercisable with a weighted average exercise price of
$27.39
and
$29.31
at
October 31, 2017
and
2016
, respectively. The total fair value of stock options vested during the
three months ended October 31, 2017
and
2016
, was
$2,974
and
$2,794
, respectively.
The cash received from the exercise of options during the
three months ended October 31, 2017
and
2016
, was
$3,249
and
$8,813
. The tax benefit received from the exercise of options during the
three months ended October 31, 2017
and
2016
, was
$478
and
$1,100
, respectively. The total intrinsic value of options exercised during the
three months ended October 31, 2017
and
2016
, based upon the average market price at the time of exercise during the period, was
$1,257
and
$2,894
, respectively.
The following tables summarize the RSU activity under the Company's share-based compensation plans for the
three months ended October 31, 2017
:
|
|
|
|
|
|
|
|
|
Service-Based RSUs
|
|
Shares
|
|
Weighted
Average
Grant Date Fair Value
|
Outstanding at July 31, 2017
|
|
517,108
|
|
|
$
|
25.61
|
|
New grants
|
|
83,388
|
|
|
36.65
|
|
Vested
|
|
(130,378
|
)
|
|
24.67
|
|
Forfeited
|
|
(4,412
|
)
|
|
26.28
|
|
Outstanding at October 31, 2017
|
|
465,706
|
|
|
$
|
27.84
|
|
The service-based RSUs granted during the
three months ended October 31, 2016
had a weighted-average grant date fair value of
$35.14
. The total fair value of service-based RSUs vested during the
three months ended October 31, 2017
and
2016
, was
$4,736
and
$5,079
, respectively.
|
|
|
|
|
|
|
|
|
Performance-Based RSUs
|
|
Shares
|
|
Weighted
Average
Grant Date Fair Value
|
Outstanding at July 31, 2017
|
|
58,206
|
|
|
$
|
32.03
|
|
New grants
|
|
56,290
|
|
|
33.12
|
|
Vested
|
|
—
|
|
|
—
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Outstanding at October 31, 2017
|
|
114,496
|
|
|
$
|
32.57
|
|
The performance-based RSUs granted during the
three months ended October 31, 2016
had a weighted-average grant date fair value of
$32.03
. The aggregate intrinsic value of unvested service-based and performance-based RSUs outstanding at
October 31, 2017
and expected to vest was
$22,077
.
NOTE G — Fair Value Measurements
In accordance with fair value accounting guidance, the Company’s assets and liabilities measured at fair market value are classified in one of the following categories:
Level 1
— Assets or liabilities for which fair value is based on unadjusted quoted prices in active markets for identical instruments that are accessible as of the reporting date.
Level 2
— Assets or liabilities for which fair value is based on other significant pricing inputs that are either directly or indirectly observable.
Level 3
— Assets or liabilities for which fair value is based on significant unobservable pricing inputs to the extent little or no market data is available, which result in the use of management's own assumptions.
The following tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis at
October 31, 2017
and
July 31, 2017
, according to the valuation techniques the Company used to determine their fair values.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inputs
Considered As
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical
Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Fair Values
|
|
Balance Sheet Classifications
|
October 31, 2017
|
|
|
|
|
|
|
|
Trading securities
|
$
|
13,020
|
|
|
$
|
—
|
|
|
$
|
13,020
|
|
|
Other assets
|
Foreign exchange contracts
|
—
|
|
|
175
|
|
|
175
|
|
|
Prepaid expenses and other current assets
|
Total Assets
|
$
|
13,020
|
|
|
$
|
175
|
|
|
$
|
13,195
|
|
|
|
Foreign exchange contracts
|
$
|
—
|
|
|
$
|
821
|
|
|
$
|
821
|
|
|
Other current liabilities
|
Total Liabilities
|
$
|
—
|
|
|
$
|
821
|
|
|
$
|
821
|
|
|
|
July 31, 2017
|
|
|
|
|
|
|
|
Trading securities
|
$
|
13,994
|
|
|
$
|
—
|
|
|
$
|
13,994
|
|
|
Other assets
|
Foreign exchange contracts
|
—
|
|
|
1,354
|
|
|
1,354
|
|
|
Prepaid expenses and other current assets
|
Total Assets
|
$
|
13,994
|
|
|
$
|
1,354
|
|
|
$
|
15,348
|
|
|
|
Foreign exchange contracts
|
$
|
—
|
|
|
$
|
1,577
|
|
|
$
|
1,577
|
|
|
Other current liabilities
|
Total Liabilities
|
$
|
—
|
|
|
$
|
1,577
|
|
|
$
|
1,577
|
|
|
|
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Trading securities:
The Company’s deferred compensation investments consist of investments in mutual funds. These investments were classified as Level 1 as the shares of these investments trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.
Foreign exchange contracts:
The Company’s foreign exchange contracts were classified as Level 2 as the fair value was based on the present value of the future cash flows using external models that use observable inputs, such as interest rates, yield curves and foreign exchange rates. See Note H, “Derivatives and Hedging Activities,” for additional information.
There have been no transfers of assets or liabilities between the fair value hierarchy levels, outlined above, during the
three months ended October 31, 2017
. In addition, the Company had no significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition during the
three months ended October 31, 2017
.
The Company’s financial instruments, other than those presented in the disclosures above, include cash and cash equivalents, accounts receivable, notes payable, accounts payable, accrued liabilities and short-term and long-term debt. The fair values of cash and cash equivalents, accounts receivable, notes payable, accounts payable, and accrued liabilities approximated carrying values because of the short-term nature of these instruments.
The estimated fair value of the Company’s short-term and long-term debt obligations, excluding notes payable, based on the quoted market prices for similar issues and on the current rates offered for debt of similar maturities was
$98,190
and
$109,303
at
October 31, 2017
and
July 31, 2017
, respectively, as compared to the carrying value of
$93,810
and
$104,536
at
October 31, 2017
and
July 31, 2017
, respectively.
NOTE H — Derivatives and Hedging Activities
The Company utilizes forward foreign exchange currency contracts to reduce the exchange rate risk of specific foreign currency denominated transactions. These contracts typically require the exchange of a foreign currency for U.S. dollars at a fixed rate at a future date, with maturities of less than
18 months
, which qualify as cash flow hedges or net investment hedges under the accounting guidance for derivative instruments and hedging activities. The primary objective of the Company’s foreign currency exchange risk management program is to minimize the impact of currency movements due to transactions in other than the respective subsidiaries’ functional currency and to minimize the impact of currency movements on the Company’s net investment denominated in a currency other than the U.S. dollar. To achieve this objective, the Company hedges a portion of known exposures using forward foreign exchange currency contracts. As of
October 31, 2017
and
July 31, 2017
, the notional amount of outstanding forward exchange contracts was $
25,638
and
$81,195
, respectively.
The Company hedges a portion of known exposures using forward exchange contracts. Main exposures are related to transactions denominated in the Euro, Canadian dollar, and Mexican Peso. Generally, these risk management transactions will involve the use of foreign currency derivatives to minimize the impact of currency movements on non-functional currency transactions.
Hedge effectiveness is determined by how closely the changes in fair value of the hedging instrument offset the changes in the fair value or cash flows of the hedged item. Hedge accounting is permitted only if the hedging relationship is expected to be highly effective at the inception of the hedge and on an on-going basis. Gains or losses on the derivative related to hedge ineffectiveness are recognized in current earnings.
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 earnings in the same period or periods during which the hedged transaction affects earnings. As of
October 31, 2017
and
2016
, unrealized losses of
$710
and
$58
were included in OCI, respectively. These balances are expected to be reclassified from OCI to earnings during the next twelve months when the hedged transactions impact earnings. For the
three months ended October 31, 2017
and
2016
, the Company reclassified losses of
$24
and
$405
from OCI into earnings, respectively. At
October 31, 2017
, the U.S. dollar equivalent of these outstanding forward foreign exchange contracts totaled $
22,538
, including contracts to sell Euros, Canadian dollars, and U.S. dollars.
Net Investment Hedges
As of April 30, 2017,
€45 million
of Euro-denominated senior unsecured notes were designated as net investment hedges to hedge portions of its net investment in European operations. The Company’s foreign denominated debt obligations are valued under a market approach using publicized spot prices.
Non-Designated Hedges
For the
three months ended October 31, 2017
and
2016
, the Company recognized gains of $
22
and losses of
$1,733
, respectively, in “Investment and other income (expense)” on the Condensed Consolidated Statements of Earnings related to non-designated hedges.
Fair values of derivative instruments in the Condensed Consolidated Balance Sheets were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
October 31, 2017
|
|
July 31, 2017
|
|
October 31, 2017
|
|
July 31, 2017
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
173
|
|
|
Prepaid expenses and other current assets
|
|
$
|
1,067
|
|
|
Other current liabilities
|
|
$
|
815
|
|
|
Other current liabilities
|
|
$
|
1,569
|
|
Net investment hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency denominated debt
|
Prepaid expenses and other current assets
|
|
—
|
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
Long term obligations, less current maturities
|
|
52,421
|
|
|
Long term obligations, less current maturities
|
|
53,280
|
|
Total derivatives designated as hedging instruments
|
|
|
$
|
173
|
|
|
|
|
$
|
1,067
|
|
|
|
|
$
|
53,236
|
|
|
|
|
$
|
54,849
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Prepaid expenses and other current assets
|
|
$
|
2
|
|
|
Prepaid expenses and other current assets
|
|
$
|
287
|
|
|
Other current liabilities
|
|
$
|
6
|
|
|
Other current liabilities
|
|
$
|
7
|
|
Total derivatives not designated as hedging instruments
|
|
|
$
|
2
|
|
|
|
|
$
|
287
|
|
|
|
|
$
|
6
|
|
|
|
|
$
|
7
|
|
NOTE I — New Accounting Pronouncements
In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2017-12 "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"), which simplifies and reduces the complexity of the hedge accounting requirements and better aligns an entity's financial reporting for hedging relationships with its risk management activities. The guidance is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. This new guidance will require a modified retrospective adoption approach to existing hedging relationships as of the adoption date. The Company is currently evaluating the impact of this update on its consolidated financial statements and disclosures.
In January 2017, the FASB issued ASU 2017-04, "Goodwill and Other, Simplifying the Test for Goodwill Impairment," which simplifies the accounting for goodwill impairment. The new guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. This guidance is effective for annual periods beginning after December 15, 2019, and interim periods thereafter; however, early adoption is permitted for any impairment tests performed after January 1, 2017. This guidance will only impact the Company's consolidated financial statements if there is a future impairment of goodwill.
In February 2016, the FASB issued ASU 2016-02, "Leases," which replaces the current lease accounting standard. The update will require, among other items, lessees to recognize the assets and liabilities that arise from most leases on the balance sheet. This guidance is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The ASU must be adopted using a modified retrospective approach and early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements and disclosures.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," which eliminates the transaction and industry-specific revenue recognition guidance under current GAAP and replaces it with a principles-based approach for determining revenue recognition. The new guidance requires revenue recognition when control of the goods or services transfers to the customer, replacing the existing guidance which requires revenue recognition when the risks and rewards transfer to the customer.
ASU 2014-09 (and related updates) is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted for annual periods beginning after December 15, 2016. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the standard. The Company's efforts to evaluate the impact and to prepare for its adoption on August 1, 2018 are underway as the Company has reviewed representative forms of agreements with customers globally and is in the process of evaluating the impact of the new standard on its consolidated financial statements. The Company is also assessing its process for accumulating the required information for enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue under the new standard. The Company currently anticipates applying the modified retrospective approach when adopting this guidance.
NOTE J — Subsequent Events
On November 14, 2017, the Board of Directors declared a quarterly cash dividend to shareholders of the Company’s Class A and Class B Common Stock of
$0.2075
per share payable on January 31, 2018, to shareholders of record at the close of business on January 10, 2018.