10-K 1 brc-20190731x10k.htm 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                    
Commission file number 1-14959 
BRADY CORPORATION
(Exact name of registrant as specified in charter)
Wisconsin
 
39-0178960
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
6555 West Good Hope Road,
Milwaukee, WI
 
53223
(Address of principal executive offices)
 
(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 $.01 per share
BRC
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
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  ý    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  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
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 Act).    Yes  ¨    No  ý
The aggregate market value of the non-voting common stock held by non-affiliates of the registrant as of January 31, 2019, was approximately $2,066,417,510 based on the closing sale price of $44.71 per share on that date as reported for the New York Stock Exchange. As of September 3, 2019, there were 49,459,620 outstanding shares of Class A Nonvoting Common Stock (the “Class A Common Stock”), and 3,538,628 shares of Class B Common Stock. The Class B Common Stock, all of which is held by affiliates of the registrant, is the only voting stock.




INDEX
PART I
Page
PART II
 
PART III
 
PART IV
 

2


PART I
Item 1. Business
General Development of Business
Brady Corporation (“Brady,” “Company,” “we,” “us,” “our”) was incorporated under the laws of the state of Wisconsin in 1914. The Company’s corporate headquarters are located at 6555 West Good Hope Road, Milwaukee, Wisconsin 53223, and the telephone number is (414) 358-6600.
Brady Corporation is a global manufacturer and supplier of identification solutions and workplace safety products that identify and protect premises, products and people. The ability to provide customers with a broad range of proprietary, customized and diverse products for use in various applications, along with a commitment to quality and service, a global footprint, and multiple sales channels, have made Brady a leader in many of its markets.
The Company’s primary objective is to build upon its market position and increase shareholder value by enabling a highly competent and experienced organization to focus on the following key competencies:
Operational excellence — Continuous productivity improvement, automation, and product customization capabilities.
Customer service — Understanding customer needs and providing a high level of customer service.
Innovation advantage — Technologically-advanced, internally-developed proprietary products that drive revenue growth and sustain gross profit margins.
Global leadership position in niche markets.
Digital capabilities.
Compliance expertise.
The long-term sales growth and profitability of our segments will depend not only on improved demand in end markets and the overall economic environment, but also on our ability to continuously improve operational excellence, focus on the customer, develop and market innovative new products, and to advance our digital capabilities. In our Identification Solutions ("ID Solutions" or "IDS") business, our strategy for growth includes an increased focus on certain industries and products, a focus on improving the customer buying experience, and increasing investment in research and development ("R&D") to develop new products. In our Workplace Safety ("WPS") business, our strategy for growth includes a focus on workplace safety critical industries, innovative new product offerings, compliance expertise, customization expertise, and improving our digital capabilities.

The following were key initiatives supporting the strategy in fiscal 2019:
Enhancing our innovation development process and the speed to deliver high-value, innovative products in alignment with our target markets.
Driving operational excellence and providing our customers with the highest level of customer service.
Executing sustainable efficiency gains within our selling, general, and administrative structures as well as throughout our global operations by making investments in equipment and machinery to drive automation.
Expanding and enhancing our digital presence.
Growing through focused sales and marketing actions in selected vertical markets and strategic accounts.
Enhancing our global employee development process to attract and retain key talent.
Narrative Description of Business
Overview
The Company is organized and managed on a global basis within two reportable segments: Identification Solutions and Workplace Safety.
The IDS segment includes high-performance and innovative industrial and healthcare identification products manufactured under multiple brands, including the Brady brand. Industrial identification products are sold through distribution to a broad range of maintenance, repair, and operations ("MRO") and original equipment manufacturing ("OEM") customers and through other channels, including direct sales, catalog marketing, and digital. Healthcare identification products are sold direct and through distribution via group purchasing organizations ("GPO").
The WPS segment includes workplace safety and compliance products sold under multiple brand names primarily through catalog and digital channels to a broad range of MRO customers. Approximately half of the WPS business is derived from internally manufactured products and half is from externally sourced products.

3


Below is a summary of sales by reportable segment for the fiscal years ended July 31: 
 
 
2019
 
2018
 
2017
IDS
 
74.4
%
 
72.1
%
 
71.9
%
WPS
 
25.6
%
 
27.9
%
 
28.1
%
Total
 
100.0
%
 
100.0
%
 
100.0
%

ID Solutions
Within the ID Solutions segment, the primary product categories include:
Facility identification and protection, which includes safety signs, floor-marking tape, pipe markers, labeling systems, spill control products, lockout/tagout devices, and software and services for safety compliance auditing, procedure writing and training.
Product identification, which includes materials and printing systems for product identification, brand protection labeling, work in process labeling, and finished product identification.
Wire identification, which includes hand-held printers, wire markers, sleeves, and tags.
People identification, which includes name tags, badges, lanyards, and access control software.
Patient identification, which includes wristbands and labels used in hospitals for tracking and improving the safety of patients.
Custom wristbands used in the leisure and entertainment industry such as theme parks, concerts and festivals.
Approximately 67% of ID Solutions products are sold under the Brady brand. In the United States, identification products for the utility industry are marketed under the Electromark brand; spill-control products are marketed under the SPC brand; and security and identification badges and systems are marketed under the Identicard, PromoVision, and Brady People ID brands. Wire identification products are marketed under the Modernotecnica brand in Italy and lockout/tagout products are offered under the Scafftag brand in the U.K.; identification and patient safety products in the healthcare industry are available under the PDC Healthcare brand in the U.S. and Europe; and custom wristbands for the leisure and entertainment industry are available under the PDC brand in the U.S. and the B.I.G. brand in Europe.
The ID Solutions segment offers high quality products with rapid response and superior service to provide solutions to customers. The business markets and sells products through multiple channels including distributors, direct sales, catalog marketing, and digital. The ID Solutions sales force partners with end-users and distributors by providing technical application and product expertise.
This segment manufactures differentiated, proprietary products, most of which have been internally developed. These internally developed products include materials, printing systems, and software. IDS competes for business on several factors, including customer support, product innovation, product offering, product quality, price, expertise, production capabilities, and for multinational customers, our global footprint. Competition is highly fragmented, ranging from smaller companies offering minimal product variety, to some of the world's largest adhesive and electrical product companies offering competing products as part of their overall product lines.
ID Solutions serves customers in many industries, which include industrial manufacturing, electronic manufacturing, healthcare, chemical, oil, gas, automotive, aerospace, governments, mass transit, electrical contractors, leisure and entertainment and telecommunications, among others.
Workplace Safety
Within the Workplace Safety segment, the primary product categories include:
Safety and compliance signs, tags, and labels.
Informational signage.
Asset tracking labels.
First aid products.
Labor law and other compliance posters.

Products within the Workplace Safety segment are sold under a variety of brands including: safety and facility identification products offered under the Seton, Emedco, Signals, Safety Signs, SafetyShop, Signs & Labels and Pervaco brands; first aid supplies under the Accidental Health and Safety, Trafalgar, and Securimed brands; wire identification products marketed under the Carroll brand; and labor law and compliance posters under the Personnel Concepts and Clement Communications brands.

4


The Workplace Safety segment manufactures a broad range of stock and custom identification products, and also sells a broad range of related resale products. Historically, both the Company and many of our competitors focused their businesses on catalog marketing, often with varying product niches. Many of our competitors extensively utilize e-commerce to promote the sale of their products. A consequence of e-commerce is price transparency, as prices on non-proprietary products can be easily compared. Therefore, to compete effectively, we continue to build out our e-commerce capabilities and focus on developing unique or customized solutions, enhancing customer experience, and providing compliance expertise as these are critical to retain existing customers and convert new customers. Workplace Safety primarily sells to businesses and serves many industries, including manufacturers, process industries, government, education, construction, and utilities.
Research and Development
The Company focuses its R&D efforts on pressure sensitive materials, printing systems, software, and the development of other workplace safety related products. Although there is an increasing amount of R&D that supports the WPS segment, the majority of R&D spend supports the IDS segment. Material development involves the application of surface chemistry concepts for top coatings and adhesives applied to a variety of base materials. Systems design integrates materials, embedded software and a variety of printing technologies to form a complete solution for customer applications. In addition, the R&D team supports production and marketing efforts by providing application and technical expertise.
The Company owns patents and tradenames relating to certain products in the United States and internationally. Although the Company believes patents are a significant driver in maintaining its position for certain products, technology in the areas covered by many of the patents continues to evolve and may limit the value of such patents. The Company's business is not dependent on any single patent or group of patents. Patents applicable to specific products extend for up to 20 years according to the date of patent application filing or patent grant, depending upon the legal term of patents in the various countries where patent protection is obtained. The Company's tradenames are valid ten years from the date of registration, and are typically renewed on an ongoing basis.
The Company spent $45.2 million, $45.3 million, and $39.6 million on its R&D activities during the fiscal years ended July 31, 2019, 2018, and 2017, respectively. The marginal decrease in R&D spending in fiscal 2019 compared to the prior year was due to the timing of expenditures related to ongoing new product developments within the IDS and WPS segments. As of July 31, 2019, 249 individuals were engaged in R&D activities for the Company, which is essentially flat from 248 as of July 31, 2018.
Operations
The materials used in the products manufactured consist of a variety of plastic and synthetic films, paper, metal and metal foil, cloth, fiberglass, inks, dyes, adhesives, pigments, natural and synthetic rubber, organic chemicals, polymers, and solvents for consumable identification products in addition to electronic components, molded parts and sub-assemblies for printing systems. The Company operates coating facilities manufacturing bulk rolls of label stock for internal and external customers. In addition, the Company purchases finished products for resale.
The Company purchases raw materials, components and finished products from many suppliers. Overall, we are not dependent upon any single supplier for our most critical base materials or components; however, we have chosen in certain situations to sole source, or limit the sources of materials, components, or finished items for design or cost reasons. As a result, disruptions in supply could have an impact on results for a period of time, but we believe any disruptions would simply require qualification of new suppliers and the disruption would be modest. In certain instances, the qualification process could be more costly or take a longer period of time and in rare circumstances, such as a global shortage of critical materials or components, the financial impact could be material.

The Company carries working capital mainly related to accounts receivable and inventory. Inventory consists of raw materials, work in process and finished goods. Generally, custom products are made to order while an on-hand quantity of stock product is maintained to provide customers with timely delivery. Normal and customary payment terms range from net 10 to 90 days from date of invoice and vary by geography.
The Company has a broad customer base, and no individual customer represents 10% or more of total net sales.
Average time to fulfill customer orders varies from same-day to one month, depending on the type of product, customer request, and whether the product is stock or custom-designed and manufactured. The Company's backlog is not material, does not provide significant visibility for future business and is not pertinent to an understanding of the business.

5


Environment
Compliance with federal, state and local environmental protection laws during fiscal 2019 did not have a material impact on the Company’s business, financial condition or results of operations.
Employees
As of July 31, 2019, the Company employed approximately 6,100 individuals. Brady has never experienced a material work stoppage due to a labor dispute and considers its relations with employees to be good.
Information Available on the Internet
The Company’s Corporate Internet address is www.bradycorp.com. The Company makes available, free of charge, on or through its Internet website copies of its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to all such reports as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. The Company is not including the information contained on or available through its website as part of, or incorporating such information by reference into, this Annual Report on Form 10-K.
Item 1A. Risk Factors
Investors should carefully consider the risks set forth below and all other information contained in this report and other documents we file with the SEC. The risks and uncertainties described below are those that we have identified as material, but are not the only risks and uncertainties facing us. Our business is also subject to general risks and uncertainties that affect many other companies, such as market conditions, geopolitical events, changes in laws or accounting rules, fluctuations in interest rates, terrorism, wars or conflicts, major health concerns, natural disasters or other disruptions of expected economic or business conditions. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may impair our business and financial results.
Business Risks
Failure to compete effectively or to successfully execute our strategy may have a negative impact on our business and financial results.
We actively compete with companies that produce and market the same or similar products, and in some instances, with companies that sell different products that are designed for the same end user. Competition may force us to reduce prices or incur additional costs to remain competitive in an environment in which business models are changing rapidly. We compete on the basis of several factors, including customer support, product innovation, product offering, product quality, price, expertise, digital capabilities, production capabilities, and for multinational customers, our global footprint. Present or future competitors may develop and introduce new and enhanced products, offer products based on alternative technologies and processes, accept lower profit, have greater financial, technical or other resources, or have lower production costs or other pricing advantages. Any of these could put us at a disadvantage by threatening our share of sales or reducing our profit margins, which could adversely impact our business and financial results.
Additionally, throughout our global business, distributors and customers may seek lower cost sourcing opportunities, which could result in a loss of business that may adversely impact our business and financial results.
Our strategy is to expand into higher-growth adjacent product categories and markets with technologically advanced new products, as well as to grow our sales generated through the digital channel. While traditional direct marketing channels such as catalogs are an important means of selling our products, an increasing number of customers are purchasing products on the internet. Our strategy to increase sales through the digital channel is an investment in our internet sales capabilities. There is a risk that we may not continue to successfully implement this strategy, or if successfully implemented, not realize its expected benefits due to the continued levels of increased competition and pricing pressure brought about by the internet. Our failure to successfully implement our strategy could adversely impact our business and financial results.
Failure to develop technologically advanced products that meet customer demands, including price expectations, could adversely impact our business and financial results.
Development of technologically advanced new products is targeted as a driver of our organic growth and profitability. Technology is changing rapidly and our competitors are innovating quickly. If we do not keep pace with developing technologically advanced products, we risk product commoditization, deterioration of the value of our brand, and reduced ability to effectively compete. We must continue to develop innovative products, as well as acquire and retain the necessary intellectual property rights in these products. If we fail to innovate, or we launch products with quality problems, or if customers do not accept our products, then our business and financial results could be adversely affected.

6


Our failure or the failure of third-party service providers to protect our sites, networks and systems against security breaches, to protect our confidential information, or to facilitate our digital strategy, could adversely affect our business and financial results.
Our business systems collect, maintain, transmit and store data about our customers, vendors and others, including credit card information and personally identifiable information. We also employ third-party service providers that store, process and transmit proprietary, personal and confidential information on our behalf. We rely on encryption and authentication technology licensed from third parties in an effort to securely transmit confidential and sensitive information, including credit card numbers. Our security measures, and those of our third-party service providers, may not detect or prevent all attempts to hack our systems, denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or other similar disruptions that may jeopardize the security of information stored in or transmitted by our sites, networks and systems or that we or our third-party service providers otherwise maintain. We engage third-party service providers to assist with certain of our website and digital platform upgrades, which may result in a decline in sales when initially deployed, which could have an adverse effect on our business and financial results.
We and our service providers may not have the resources or technical sophistication to anticipate or prevent all types of attacks, and techniques used to obtain unauthorized access to or to sabotage systems change frequently and may not be known until launched against us or our third-party service providers. In addition, security breaches can also occur as a result of non-technical issues, including intentional or inadvertent breaches by our employees or by persons with whom we have commercial relationships. Although we maintain privacy, data breach and network security liability insurance, we cannot be certain that our coverage will be adequate or will cover liabilities actually incurred, or that insurance will continue to be available to us on economically reasonable terms, or at all. Any compromise or breach of our security measures, or those of our third-party service providers, could adversely impact our ability to conduct business, violate applicable privacy, data security and other laws, and cause significant legal and financial exposure, adverse publicity, and a loss of confidence in our security measures, which could have an adverse effect on our business and financial results.
Demand for our products may be adversely affected by numerous factors, some of which we cannot predict or control. This could adversely affect our business and financial results.
Numerous factors may affect the demand for our products, including:
Economic conditions of major markets served.
Consolidation in the marketplace allowing competitors to be more efficient and more price competitive.
Competitors entering the marketplace.
Decreasing product life cycles.
Changes in customer preferences.
Ability to achieve operational excellence.
If any of these factors occur, the demand for our products could suffer, and this could adversely impact our business and financial results.
Raw material and other cost increases could adversely affect our business and financial results.
We manufacture certain parts and components of our products and therefore require raw materials from suppliers, which could be interrupted for a variety of reasons, including availability and pricing. Prices for raw materials necessary for production have fluctuated in the past and significant increases could adversely affect our profit margins and results of operations. Changes in trade policies, the imposition of duties and tariffs and potential retaliatory countermeasures could adversely impact the price or availability of raw materials. In addition, labor shortages or an increase in the cost of labor could adversely affect our profit margins and results of operations. Due to pricing pressure or other factors, the Company may not be able to pass along increased raw material and component part costs to its customers in the form of price increases or its ability to do so could be delayed, which could adversely impact our business and financial results.
We are a global company headquartered in the United States. We are subject to extensive regulations by U.S. and non-U.S. governmental and self-regulatory entities at various levels of the governing bodies. Failure to comply with laws and regulations could adversely affect our business and financial results.
Our operations are subject to the risks of doing business domestically and globally, including the following:
Delays or disruptions in product deliveries and payments in connection with international manufacturing and sales.
Regulations resulting from political and economic instability and disruptions.

7


Imposition of new, or change in existing, duties, tariffs and trade agreements, which could have a direct or indirect impact on our ability to manufacture products, on our customers' demand for our products, or on our suppliers' ability to deliver raw materials.
Import, export and economic sanction laws.
Current and changing governmental policies, regulatory, and business environments.
Disadvantages from competing against companies from countries that are not subject to U.S. laws and regulations including the Foreign Corrupt Practices Act.
Local labor regulations.
Regulations relating to climate change, air emissions, wastewater discharges, handling and disposal of hazardous materials and wastes.
Regulations relating to product content, health, safety and the protection of the environment.
Specific country regulations where our products are manufactured or sold.
Regulations relating to compliance with data protection and privacy laws throughout our global business.
Laws and regulations that apply to companies doing business with the government, including audit requirements of government contracts related to procurement integrity, export control, employment practices, and the accuracy of records and recording of costs.
Further, these laws and regulations are constantly evolving and it is difficult to accurately predict the effect they may have upon our business and financial results.
We cannot provide assurance that our internal controls and compliance systems will always protect us from acts committed by employees, agents or business partners that would violate U.S. and/or non-U.S. laws, including the laws governing payments to government officials, bribery, fraud, anti-kickback and false claims rules, competition, export and import compliance, money laundering and data privacy. Any such improper actions could subject us to civil or criminal investigations in the U.S. and in other jurisdictions, lead to substantial civil or criminal, monetary and non-monetary penalties and related lawsuits by shareholders and others, damage our reputation, and adversely impact our business and financial results.
We depend on key employees and the loss of these individuals could have an adverse effect on our business and financial results.
Our success depends to a large extent upon the continued services of our key executives, managers and other skilled employees. We cannot ensure that we will be able to retain our key executives, managers and employees. The departure of key personnel without adequate replacement could disrupt our business operations. Additionally, we need qualified managers and skilled employees with technical and industry experience to operate our business successfully. If we are unable to attract and retain qualified individuals or our costs to do so increase significantly, our business and financial results could be adversely affected.
Divestitures, contingent liabilities from divested businesses and the failure to properly identify, integrate and grow acquired companies could adversely affect our business and financial results.
We continually assess the strategic fit of our existing businesses and may divest businesses that we determine do not align with our strategic plan, or that are not achieving the desired return on investment. Divestitures pose risks and challenges that could negatively impact our business. When we decide to sell a business or specific assets, we may be unable to do so on satisfactory terms and within our anticipated time-frame, and even after reaching a definitive agreement to sell a business, the sale is typically subject to pre-closing conditions which may not be satisfied. In addition, the impact of the divestiture on our revenue and net income may be larger than projected, which could distract management, and disputes may arise with buyers. We have retained responsibility for and have agreed to indemnify buyers against certain contingent liabilities related to several businesses that we have sold. The resolution of these contingencies has not had a material adverse impact on our financial results, but we cannot be certain that this favorable pattern will continue.
Our historical growth has included acquisitions, and our future growth strategy may include acquisitions. If our future growth strategy includes a focus on acquisitions, we may not be able to identify acquisition targets or successfully complete acquisitions due to the absence of quality companies in our target markets, economic conditions, or price expectations from sellers. Acquisitions place significant demands on management, operational, and financial resources. Future acquisitions will require integration of operations, sales and marketing, information technology, and administrative operations, which could decrease the time available to focus on our other growth strategies. We cannot assure that we will be able to successfully integrate acquisitions, that these acquisitions will operate profitably, or that we will be able to achieve the desired sales growth or operational success. Our business and financial results could be adversely affected if we do not successfully integrate the newly acquired businesses, or if our other businesses suffer due to the increased focus on the acquired businesses.

8


We are subject to litigation, including product liability claims that could adversely impact our business, financial results, and reputation.
We are a party to litigation that arises in the normal course of our business operations, including product liability and recall (strict liability and negligence) claims, patent and trademark matters, contract disputes and environmental, employment and other litigation matters. We face an inherent business risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in injury or other damage. In addition, we face an inherent risk that our competitors will allege that aspects of our products infringe their intellectual property or that our intellectual property is invalid, such that we could be prevented from manufacturing and selling our products or prevented from stopping others from manufacturing and selling competing products. To date, we have not incurred material costs related to these types of claims. However, while we currently maintain insurance coverage for certain types of claims that we believe is adequate, we cannot be certain that we will be able to maintain this insurance on acceptable terms or that this insurance will provide sufficient coverage against potential liabilities that may arise. Any claims brought against us, with or without merit, may have an adverse effect on our business, financial results and reputation as a result of potential adverse outcomes. The expenses associated with defending such claims and the diversion of our management’s resources and time may have an adverse effect on our business and financial results.
Financial/Ownership Risks
The global nature of our business exposes us to foreign currency fluctuations that could adversely affect our business and financial results.
Approximately 45% of our sales are derived outside the United States. Sales and purchases in currencies other than the U.S. dollar expose us to fluctuations in foreign currencies relative to the U.S. dollar, and may adversely affect our financial results. Increased strength of the U.S. dollar will increase the effective price of our products sold in currencies other than U.S. dollars into other countries. Decreased strength of the U.S. dollar could adversely affect the cost of materials, products, and services purchased overseas. Our sales and expenses are translated into U.S. dollars for reporting purposes, and the strengthening or weakening of the U.S. dollar could result in unfavorable translation effects, which occurred during fiscal years 2017 and 2019. In addition, certain of our subsidiaries may invoice customers in a currency other than its functional currency or may be invoiced by suppliers in a currency other than its functional currency, which could result in unfavorable translation effects on our business and financial results.
Changes in tax legislation or tax rates could adversely affect results of operations and financial statements. Additionally, audits by taxing authorities could result in tax payments for prior periods.
We are subject to income taxes in the U.S. and in many non-U.S. jurisdictions. As such, our income is subject to risk due to changing tax laws and tax rates around the world. Our tax filings are subject to audit by U.S. federal, state and local tax authorities and by non-U.S. tax authorities. If these audits result in payments or assessments that differ from our reserves, our future net income may be adversely impacted.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Reform Act”). The changes included in the Tax Reform Act are broad and complex, and regulations have been issued to address implementation of the Tax Reform Act which may have an adverse impact on our business and financial results. Additionally, longstanding international tax norms that determine each country’s jurisdiction to tax cross-border international trade are evolving as a result of the Base Erosion and Profit Shifting reporting requirements recommended by the G7, G20 and Organization for Economic Cooperation and Development. As these and other tax laws and related regulations change, our financial results could be materially impacted.
We review the probability of the realization of our deferred tax assets quarterly based on forecasts of taxable income in both the U.S. and foreign jurisdictions. As part of this review, we utilize historical results, projected future operating results, eligible carry-forward periods, tax planning opportunities, and other relevant considerations. Changes in profitability and financial outlook in both the U.S. and/or foreign jurisdictions, or changes in our geographic footprint may require modifications in the valuation allowance for deferred tax assets. During the year ended July 31, 2018, we recorded a valuation allowance of $21.4 million against our foreign tax credit carryforwards primarily due to the passage of the Tax Reform Act, which changed our ability to utilize foreign tax credits in future periods. At any point in time, there are a number of tax proposals at various stages of legislation throughout the globe. While it is impossible for us to predict whether some or all of these proposals will be enacted, many will likely have an impact on our business and financial results.

9


Failure to execute our strategies could result in impairment of goodwill or other intangible assets, which may negatively impact income and profitability.
We have goodwill of $411.0 million and other intangible assets of $36.1 million as of July 31, 2019, which represents 38.6% of our total assets. We evaluate goodwill and other intangible assets for impairment on an annual basis, or more frequently if impairment indicators are present, based upon the fair value of each respective asset. These valuations include management's estimates of sales, profitability, cash flow generation, capital structure, cost of debt, interest rates, capital expenditures, and other assumptions. Significant negative industry or economic trends, disruptions to our business, inability to achieve sales projections or cost savings, inability to effectively integrate acquired businesses, unexpected changes in the use of the assets, and divestitures may adversely impact the assumptions used in the valuations. If the estimated fair value of our goodwill or other intangible assets change in future periods, we may be required to record an impairment charge, which would reduce the income in such period.
Substantially all of our voting stock is controlled by two shareholders, while our public investors hold non-voting stock. The interests of the voting and non-voting shareholders could differ, potentially resulting in decisions that affect the value of the non-voting shares.
Substantially all of our voting stock is controlled by Elizabeth P. Bruno, one of our Directors, and William H. Brady III, both of whom are descendants of the Company's founder. All of our publicly traded shares are non-voting. Therefore, the voting shareholders have control in most matters requiring approval or acquiescence by shareholders, including the composition of our Board of Directors and many corporate actions, and their interests may not align with those of the non-voting shareholders. Such concentration of ownership may discourage a potential acquirer from making a purchase offer that our public shareholders may find favorable and it may adversely affect the trading price for our non-voting common stock because investors may perceive disadvantages in owning stock in companies whose voting stock is controlled by a limited number of shareholders. Additionally, certain mutual funds and index sponsors have implemented rules restricting ownership, or excluding from indices, companies with non-voting publicly traded shares.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company currently operates 39 manufacturing and distribution facilities across the globe and are split by reporting segment as follows:
IDS: Thirty manufacturing and distribution facilities are used for our IDS business. Six are located in China; five in the United States; four in Belgium; three each in Mexico and the United Kingdom; two in Brazil; and one each in Canada, India, Japan, Malaysia, Netherlands, Singapore, and South Africa.
WPS: Nine manufacturing and distribution facilities are used for our WPS business. Three are located in France; two are located in Australia; and one each in Germany, Norway, the United Kingdom, and the United States.
The Company believes that its equipment and facilities are modern, well maintained, and adequate for present needs.
Item 3. Legal Proceedings
The Company is, and may in the future be, party to litigation arising in the normal course of business. The Company is not currently a party to any material pending legal proceedings in which management believes the ultimate resolution would have a material effect on the Company’s consolidated financial statements.
Item 4. Mine Safety Disclosures
Not applicable.

10



PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a)
Market Information
Brady Corporation Class A Nonvoting Common Stock trades on the New York Stock Exchange under the symbol BRC. There is no trading market for the Company’s Class B Voting Common Stock.
(b)
Holders
As of August 31, 2019, there were approximately 1,100 Class A Common Stock shareholders of record and approximately 9,000 beneficial shareholders. There are three Class B Common Stock shareholders.
(c)
Dividends
The Company has historically paid quarterly dividends on outstanding common stock. Before any dividend may be paid on the Class B Common Stock, holders of the Class A Common Stock are entitled to receive an annual, noncumulative cash dividend of $0.01665 per share (subject to adjustment in the event of future stock splits, stock dividends or similar events involving shares of Class A Common Stock). Thereafter, any further dividend in that fiscal year must be paid on all shares of Class A Common Stock and Class B Common Stock on an equal basis. The Company believes that based on its historic dividend practice, this requirement will not impede it in following a similar dividend practice in the future.
During the two most recent fiscal years and for the first quarter of fiscal 2020, the Company declared the following dividends per share on its Class A and Class B Common Stock for the years ended July 31: 
 
 
2020
 
2019
 
2018
 
 
1st Qtr
 
1st Qtr
 
2nd Qtr
 
3rd Qtr
 
4th Qtr
 
1st Qtr
 
2nd Qtr
 
3rd Qtr
 
4th Qtr
Class A
 
$
0.2175

 
$
0.2125

 
$
0.2125

 
$
0.2125

 
$
0.2125

 
$
0.2075

 
$
0.2075

 
$
0.2075

 
$
0.2075

Class B
 
0.20085

 
0.19585

 
0.2125

 
0.2125

 
0.2125

 
0.19085

 
0.2075

 
0.2075

 
0.2075

(d)
Issuer Purchases of Equity Securities
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. The Company did not repurchase any shares during the three months ended July 31, 2019. As of July 31, 2019, there were 1,879,218 shares authorized to purchase in connection with this share repurchase program.


11


(e)
Common Stock Price Performance Graph
The graph below shows a comparison of the cumulative return over the last five fiscal years had $100 been invested at the close of business on July 31, 2014, in each of Brady Corporation Class A Common Stock, the Standard & Poor’s ("S&P") 500 Index, the S&P SmallCap 600 Index, and the Russell 2000 Index.
 a2019graph.jpg
 
 
2014
 
2015
 
2016
 
2017
 
2018
 
2019
Brady Corporation
 
$
100.00

 
$
92.89

 
$
131.35

 
$
138.92

 
$
163.60

 
$
225.38

S&P 500 Index
 
100.00

 
111.21

 
117.3

 
136.12

 
158.22

 
170.86

S&P SmallCap 600 Index
 
100.00

 
111.97

 
118.53

 
139.46

 
171.69

 
160.11

Russell 2000 Index
 
100.00

 
112.03

 
111.96

 
132.62

 
157.46

 
150.50


Copyright (C) 2019, Standard & Poor’s, Inc. and Russell Investments. All rights reserved.


12


Item 6. Selected Financial Data

CONSOLIDATED STATEMENTS OF INCOME AND SELECTED FINANCIAL DATA
Years Ended July 31, 2015 through 2019
 
 
2019
 
2018
 
2017
 
2016
 
2015
 
 
(In thousands, except per share amounts)
Operating data(1)
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,160,645

 
$
1,173,851

 
$
1,113,316

 
$
1,120,625

 
$
1,171,731

Gross margin
 
578,678

 
588,291

 
558,292

 
558,773

 
558,432

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Research and development
 
45,168

 
45,253

 
39,624

 
35,799

 
36,734

Selling, general and administrative(2)
 
371,082

 
390,342

 
387,653

 
405,096

 
422,704

Restructuring charges(3)
 

 

 

 

 
16,821

Impairment charges(4)
 

 

 

 

 
46,867

Total operating expenses
 
416,250

 
435,595

 
427,277

 
440,895

 
523,126

Operating income
 
162,428

 
152,696

 
131,015

 
117,878

 
35,306

Other income (expense):
 
 
 
 
 
 
 
 
 
 
Investment and other income (expense)
 
5,046

 
2,487

 
1,121

 
(709
)
 
845

Interest expense
 
(2,830
)
 
(3,168
)
 
(5,504
)
 
(7,824
)
 
(11,156
)
Net other income (expense)
 
2,216

 
(681
)
 
(4,383
)
 
(8,533
)
 
(10,311
)
Income from continuing operations before income taxes
 
164,644

 
152,015

 
126,632

 
109,345

 
24,995

Income tax expense(5)
 
33,386

 
60,955

 
30,987

 
29,235

 
20,093

Income from continuing operations
 
$
131,258

 
$
91,060

 
$
95,645

 
$
80,110

 
$
4,902

Loss from discontinued operations, net of income taxes(6)
 

 

 

 

 
(1,915
)
Net income
 
$
131,258

 
$
91,060

 
$
95,645

 
$
80,110

 
$
2,987

Income from continuing operations per Common Share— (Diluted):
 
 
 
 
 
 
 
 
 
 
Class A nonvoting
 
$
2.46

 
$
1.73

 
$
1.84

 
$
1.58

 
$
0.10

Class B voting
 
$
2.45

 
$
1.72

 
$
1.83

 
$
1.56

 
$
0.08

Loss from discontinued operations per Common Share - (Diluted):
 
 
 
 
 
 
 
 
 
 
Class A nonvoting
 
$

 
$

 
$

 
$

 
$
(0.04
)
Class B voting
 
$

 
$

 
$

 
$

 
$
(0.04
)
Cash Dividends on:
 
 
 
 
 
 
 
 
 
 
Class A common stock
 
$
0.85

 
$
0.83

 
$
0.82

 
$
0.81

 
$
0.80

Class B common stock
 
$
0.83

 
$
0.81

 
$
0.80

 
$
0.79

 
$
0.78

Balance Sheet at July 31:
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
1,157,308

 
$
1,056,931

 
$
1,050,223

 
$
1,043,964

 
$
1,062,897

Long-term obligations, less current maturities
 

 
52,618

 
104,536

 
211,982

 
200,774

Stockholders’ equity
 
850,774

 
752,112

 
700,140

 
603,598

 
587,688

Cash Flow Data:
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
$
162,211

 
$
143,042

 
$
144,032

 
$
138,976

 
$
93,348

Net cash used in investing activities
 
(34,463
)
 
(2,905
)
 
(15,253
)
 
(15,416
)
 
(14,365
)
Net cash used in financing activities
 
(27,628
)
 
(90,680
)
 
(136,241
)
 
(99,576
)
 
(32,152
)
Depreciation and amortization
 
23,799

 
25,442

 
27,303

 
32,432

 
39,458

Capital expenditures
 
(32,825
)
 
(21,777
)
 
(15,167
)
 
(17,140
)
 
(26,673
)
(1)
Operating data has been impacted by the reclassification of the Die-Cut businesses into discontinued operations in fiscal 2015. The Company has elected to not separately disclose the cash flows related to discontinued operations.

13


(2)
During fiscal 2018, the Company recognized a gain of $4.7 million on the sale of its Runelandhs Försäljnings AB business which was recorded as a reduction of selling, general and administrative expense.
(3)
Fiscal 2015 includes restructuring charges from a Company approved plan to consolidate facilities in the Americas, Europe, and Asia in order to enhance customer service, improve efficiency of operations, and reduce operating expenses executed in a prior year.
(4)
The Company recognized impairment charges of $46.9 million during the fiscal year ended July 31, 2015. The impairment charge primarily related to the WPS Americas and WPS APAC reporting units.
(5)
Fiscal 2018 was significantly impacted by the Tax Reform Act which resulted in total incremental tax expense of $21.1 million, which consisted of $1.0 million related to the recording of a deferred tax liability for future withholdings and income taxes on the distribution of foreign income, an income tax charge of $3.3 million related to the deemed repatriation of the historical income of foreign subsidiaries, and the impact of the Tax Reform Act on the revaluation of deferred tax assets and liabilities as well as the impact on the Company's fiscal 2018 income from the reduced tax rate was an additional income tax expense of $16.8 million. Fiscal 2015 was significantly impacted by the impairment charges of $46.9 million, of which $39.8 million was non-deductible for income tax purposes.
(6)
The Die-Cut business was sold in two phases. The second and final phase closed in the first quarter of fiscal 2015. The loss from discontinued operations in fiscal 2015 includes a $0.4 million net loss on the sale of the Die-Cut business, recorded during the three months ended October 31, 2014.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a global manufacturer and supplier of identification solutions and workplace safety products that identify and protect premises, products and people. The IDS segment is primarily involved in the design, manufacture, and distribution of high-performance and innovative identification and healthcare products. The WPS segment provides workplace safety and compliance products, approximately half of which are internally manufactured and half of which are externally sourced. Approximately 45% of our total sales are derived outside of the United States. Foreign sales within the IDS and WPS segments are approximately 40% and 70%, respectively.
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 increasing investments in R&D. 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.
Results of Operations
A comparison of results of operating income for the fiscal years ended July 31, 2019, 2018, and 2017 is as follows:
(Dollars in thousands)
 
2019
 
% Sales
 
2018
 
% Sales
 
2017
 
% Sales
Net sales
 
$
1,160,645

 


 
$
1,173,851

 


 
$
1,113,316

 


Gross margin
 
578,678

 
49.9
%
 
588,291

 
50.1
%
 
558,292

 
50.1
%
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
 
45,168

 
3.9
%
 
45,253

 
3.9
%
 
39,624

 
3.6
%
Selling, general and administrative
 
371,082

 
32.0
%
 
390,342

 
33.3
%
 
387,653

 
34.8
%
Total operating expenses
 
416,250

 
35.9
%
 
435,595

 
37.1
%
 
427,277

 
38.4
%
Operating income
 
$
162,428

 
14.0
%
 
$
152,696

 
13.0
%
 
$
131,015

 
11.8
%
A discussion regarding our financial condition and results of operations for fiscal 2018 compared to fiscal 2017 can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended July 31, 2018, filed with the SEC on September 13, 2018, which is available free of charge on the SEC's website at www.sec.gov and our corporate website at www.bradycorp.com. References in this Form 10-K to “organic sales” refer to net sales calculated in accordance with U.S. GAAP, excluding the impact of foreign currency translation and divestitures. The Company’s organic sales disclosures exclude the effects of foreign currency translation as

14


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. All analytical commentary within the Results of Operations section regarding the change in sales when compared to prior periods are in reference to organic sales unless otherwise noted.
Net sales decreased 1.1% to $1,160.6 million in fiscal 2019, compared to $1,173.9 million in fiscal 2018, which consisted of organic sales growth of 2.8%, offset by a decrease from foreign currency translation of 2.6% and a decrease from a divestiture of a business in the prior year of 1.3%. Organic sales grew 4.1% in the IDS segment and declined 0.7% in the WPS segment. The IDS segment realized sales growth in the Product ID, Wire ID, Safety and Facility ID, and Healthcare ID product lines. WPS segment digital sales were approximately flat while sales through the catalog channel declined in the low-single digits.
Gross margin decreased 1.6% to $578.7 million in fiscal 2019, compared to $588.3 million in fiscal 2018. As a percentage of net sales, gross margin decreased to 49.9% in fiscal 2019, compared to 50.1% in fiscal 2018. The decrease in gross margin as a percentage of net sales was primarily due to increased input costs such as freight and personnel costs which were partially mitigated by selected price increases and our ongoing efforts to streamline manufacturing processes and drive operational efficiencies, including increased automation in our manufacturing facilities.
R&D expenses decreased slightly to $45.2 million in fiscal 2019, compared to $45.3 million in fiscal 2018. The decrease in R&D spending in fiscal 2019 compared to the prior year was primarily due to the timing of expenditures related to ongoing new product development projects. The Company remains committed to investing in new product development in connection with our focus on increasing new product sales within our IDS and WPS businesses. Investments in new printers and materials continue to be the primary focus of R&D expenditures.
Selling, general and administrative ("SG&A") expenses include selling and administrative costs directly attributed to the IDS and WPS segments, as well as certain other corporate administrative expenses including finance, information technology, human resources, and other administrative expenses. SG&A expenses decreased 4.9% to $371.1 million in fiscal 2019 compared to $390.3 million in fiscal 2018. Additionally, SG&A expenses in fiscal 2018 include a gain of $4.7 million on the sale of Runelandhs. SG&A expense as a percentage of net sales was 32.0% in fiscal 2019 compared to 33.3% in fiscal 2018. The decrease in both SG&A expenses and SG&A expenses as a percentage of net sales from the prior year was due to the Company's ongoing efficiency gains and continued efforts to reduce selling, general and administrative costs and the impact of foreign currency translation.
OPERATING INCOME TO NET INCOME
(Dollars in thousands)
 
2019
 
% Sales
 
2018
 
% Sales
 
2017
 
% Sales
Operating income
 
$
162,428

 
14.0
 %
 
$
152,696

 
13.0
 %
 
$
131,015

 
11.8
 %
Other income and (expense):
 
 
 
 
 
 
 
 
 
 
 
 
         Investment and other income
 
5,046

 
0.4
 %
 
2,487

 
0.2
 %
 
1,121

 
0.1
 %
         Interest expense
 
(2,830
)
 
(0.2
)%
 
(3,168
)
 
(0.3
)%
 
(5,504
)
 
(0.5
)%
Income before income taxes
 
164,644

 
14.2
 %
 
152,015

 
13.0
 %
 
126,632

 
11.4
 %
Income tax expense
 
33,386

 
2.9
 %
 
60,955

 
5.2
 %
 
30,987

 
2.8
 %
Net income
 
$
131,258

 
11.3
 %
 
$
91,060

 
7.8
 %
 
$
95,645

 
8.6
 %

Investment and Other Income
Investment and other income was $5.0 million in fiscal 2019 compared to $2.5 million in fiscal 2018. The increase in investment and other income in 2019 was primarily due to an increase in interest income due to the Company's increase in cash and cash equivalents during fiscal 2019 and an increase in the market value of securities held in deferred compensation plans.
Interest Expense
Interest expense decreased to $2.8 million in fiscal 2019 compared to $3.2 million in fiscal 2018. The decrease in interest expense in 2019 compared to 2018 was due to the Company's declining principal balance under its outstanding debt agreements.
Income Tax Expense
The Company's effective income tax rate was 20.3% in fiscal 2019. The effective income tax rate was below the applicable U.S. statutory tax rate of 21.0% primarily due to adjustments to the reserve for uncertain tax positions and R&D tax credits, partially offset by non-deductible executive compensation and the tax rate differential on foreign income.

15


The Company's effective income tax rate was 40.1% in fiscal 2018. The effective income tax rate was significantly impacted by the U.S. Tax Reform Act enacted in fiscal 2018, which resulted in total incremental tax expense of $21.1 million during fiscal 2018. This incremental tax expense consisted of $1.0 million related to the recording of a deferred tax liability for future withholdings and income taxes on the distribution of foreign income, an income tax charge of $3.3 million related to the deemed repatriation of the historical income of foreign subsidiaries, and the impact of the Tax Reform Act on the revaluation of deferred tax assets and liabilities as well as the impact on the Company's fiscal 2018 income from the reduced tax rate was a net additional income tax expense of $16.8 million.
The Company’s effective income tax rate was 24.5% in fiscal 2017. The effective income tax rate was reduced from the applicable U.S. statutory tax rate of 35.0% due to the generation of foreign tax credits from cash repatriations that occurred during the year and geographic profit mix, partially offset by adjustments to the reserve for uncertain tax positions.
Business Segment Operating Results
The Company is organized and managed on a global basis within two reportable segments: ID Solutions and Workplace Safety. The Company's internal measure of segment profit and loss reported to the chief operating decision maker for purposes of allocating resources to the segments and assessing performance includes certain administrative costs, such as the cost of finance, information technology, human resources, and certain other administrative costs. However, interest expense, investment and other income, income tax expense, and certain corporate administrative expenses are excluded when evaluating segment performance.
Following is a summary of segment information for the fiscal years ended July 31:
 
 
2019
 
2018
 
2017
SALES GROWTH INFORMATION
 
 
 
 
 
 
ID Solutions
 
 
 
 
 
 
Organic
 
4.1
 %
 
3.4
 %
 
1.6
 %
Currency
 
(2.1
)%
 
2.3
 %
 
(1.0
)%
Total
 
2.0
 %
 
5.7
 %
 
0.6
 %
Workplace Safety
 
 
 
 
 
 
Organic
 
(0.7
)%
 
0.7
 %
 
(2.0
)%
Currency
 
(3.7
)%
 
4.6
 %
 
(1.7
)%
Divestitures
 
(4.8
)%
 
(0.6
)%
 
 %
Total
 
(9.2
)%
 
4.7
 %
 
(3.7
)%
Total Company
 
 
 
 
 
 
Organic
 
2.8
 %
 
2.6
 %
 
0.5
 %
Currency
 
(2.6
)%
 
3.0
 %
 
(1.2
)%
Divestitures
 
(1.3
)%
 
(0.2
)%
 
 %
Total
 
(1.1
)%
 
5.4
 %
 
(0.7
)%
SEGMENT PROFIT AS A PERCENT OF NET SALES
 
 
 
 
 
 
ID Solutions
 
19.1
 %
 
16.9
 %
 
16.3
 %
Workplace Safety
 
7.7
 %
 
9.7
 %
 
8.2
 %
Total
 
16.2
 %
 
14.9
 %
 
14.0
 %

ID Solutions
IDS net sales increased 2.0% to $863.1 million in fiscal 2019, compared to $846.1 million in fiscal 2018. The net sales increase consisted of organic sales growth of 4.1% and a decrease from foreign currency translation of 2.1% in fiscal 2019 compared to fiscal 2018.
Organic sales in the Americas grew in the mid-single digits in fiscal 2019 compared to fiscal 2018. The increase was primarily due to growth in the Product ID, Wire ID, Safety and Facility ID, and Healthcare ID product lines. Organic sales grew in the mid-single digits in the United States and the rest of the Americas. Growth was driven by an increase in printer and consumable sales throughout the region compared to the same period in the prior year.
Organic sales in Europe grew in the low-single digits in fiscal 2019 compared to fiscal 2018. The increase was primarily due to growth in the Wire ID, Product ID, and Safety and Facility ID product lines. Organic sales growth was led by businesses based in Western Europe and supplemented by businesses in emerging geographies. In particular, an increase in printer consumables and lockout/tagout device sales throughout the region drove the organic sales growth.

16


Organic sales in Asia grew in the low-single digits in fiscal 2019 compared to fiscal 2018. The increase was primarily due to growth in the Wire ID, Product ID, and Safety and Facility ID product lines. Organic sales increased throughout most of Asia, with organic sales increasing in the low-single digits in China and the mid-single digits in the rest of Asia.
Segment profit increased to $165.0 million in fiscal 2019 from $143.4 million in fiscal 2018, an increase of $21.5 million million or 15.0%. As a percent of net sales, segment profit increased to 19.1% in fiscal 2019, compared to 16.9% in the prior year. The increase in segment profit was primarily driven by organic sales growth and efficiency gains throughout SG&A.
Workplace Safety
WPS sales decreased 9.2% to $297.5 million in fiscal 2019, compared to $327.8 million in fiscal 2018. The decrease consisted of an organic sales decline of 0.7%, a decrease from foreign currency translation of 3.7%, and a decrease from a divestiture of a business in the prior year of 4.8%, compared to the same period in the prior year.
Organic sales in Europe grew in the low-single digits in fiscal 2019 compared to fiscal 2018. The growth in the region was driven primarily by businesses in France, Belgium, and Germany due to improvements in website functionality, growth in new customers, and key account management. WPS Europe experienced nearly 12% growth in digital channel sales, while catalog sales remained essentially flat during fiscal 2019 compared to fiscal 2018.
Organic sales in the Americas decreased in the high-single digits in fiscal 2019 compared to fiscal 2018. WPS Americas continued to experience the negative impact from the digital platform implemented in fiscal 2018 resulting in a decline in sales. The business transitioned to a new digital platform during fiscal 2019 to address this decline. The functionality of the new digital platform is improved compared to the former digital platform; however, sales have not yet returned to the level experienced prior to the initial platform change in fiscal 2018. Catalog channel sales declined in the mid-single digits due to lower response rates to catalog promotions.
Organic sales in Australia grew in the low-single digits in fiscal 2019 compared to fiscal 2018. The organic sales growth was driven by the digital and catalog channels as well as other direct channels. The Australian business is growing its customer base, and its diversified product offering continues to expand into additional target markets such as commercial and industrial construction.
Segment profit decreased to $23.0 million in fiscal 2019 from $31.7 million in fiscal 2018, a decrease of $8.7 million, or 27.4%. As a percentage of net sales, segment profit decreased to 7.7% in fiscal 2019 compared to 9.7% in the prior year. The decrease in segment profit was primarily due to the decrease in sales volume in the North American business, the divestiture of a business in the prior year, and foreign currency translation.
Liquidity & Capital Resources
Cash and cash equivalents were $279.1 million at July 31, 2019, an increase of $97.6 million from July 31, 2018. The following summarizes the cash flow statement for fiscal years ended July 31:
(Dollars in thousands)
2019
 
2018
 
2017
Net cash flow provided by (used in):
 
 
 
 
 
Operating activities
$
162,211

 
$
143,042

 
$
144,032

Investing activities
(34,463
)
 
(2,905
)
 
(15,253
)
Financing activities
(27,628
)
 
(90,680
)
 
(136,241
)
Effect of exchange rate changes on cash
(2,475
)
 
(1,974
)
 
178

Net increase (decrease) in cash and cash equivalents
$
97,645

 
$
47,483

 
$
(7,284
)
Net cash provided by operating activities was $162.2 million during fiscal 2019, compared to $143.0 million in the prior year. The increase was driven by growth in net income adjusted for non-cash items, while the impact of working capital was essentially flat between periods.
Net cash used in investing activities was $34.5 million during fiscal 2019, compared to $2.9 million in the prior year. The increase in cash used in investing activities of $31.6 million was driven by an increase in capital expenditures for the purchase of facility upgrades, primarily in WPS, and manufacturing equipment. Capital expenditures of $21.8 million during fiscal 2018 were partially offset by cash received in the amount of $19.1 million from the sale of a business.
Net cash used in financing activities was $27.6 million during fiscal 2019, compared to $90.7 million during the prior year. The change of $63.1 million was primarily due to a decrease of $55.3 million in net credit facility repayments and an increase of $11.4 million in proceeds from stock option exercises in fiscal 2019 when compared to the fiscal 2018.

17


The Company's cash balances are generated and held in numerous locations throughout the world. At July 31, 2019, approximately 52% 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, common stock repurchases, scheduled debt repayments, 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.
Refer to Item 8, Note 6, "Debt" and Note 16, "Subsequent Events" for information regarding the Company's debt holdings.
Subsequent Events Affecting Financial Condition
Refer to Item 8, Note 16, "Subsequent Events" for information regarding the Company's subsequent events affecting financial condition.
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 and other Company filings. However, the following additional information is provided to assist those reviewing the Company’s consolidated financial statements.
Operating Leases — The leases generally are entered into for investments in manufacturing facilities, warehouses, office space, equipment, and Company vehicles.
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.
Payments Due Under Contractual Obligations
The Company’s future commitments at July 31, 2019, for long-term debt, operating lease obligations, purchase obligations, interest obligations, and tax obligations are as follows (dollars in thousands):
 
 
Payments Due by Period
Contractual Obligations
 
Total
 
Less than
1 Year
 
1-3
Years
 
3-5
Years
 
More
than
5 Years
 
Uncertain
Timeframe
Long-term Debt Obligations
 
$
50,166

 
$
50,166

 
$

 
$

 
$

 
$

Operating Lease Obligations
 
67,244

 
18,450

 
29,571

 
15,721

 
3,502

 

Purchase Obligations(1)
 
10,547

 
10,467

 
80

 

 

 

Interest Obligations
 
2,128

 
2,128

 

 

 

 

Tax Obligations
 
14,841

 

 

 

 

 
14,841

Total
 
$
144,926

 
$
81,211

 
$
29,651

 
$
15,721

 
$
3,502

 
$
14,841

(1)
Purchase obligations include all open purchase orders as of July 31, 2019.

18


Inflation and Changing Prices
Essentially all of the Company’s revenue is derived from the sale of its products and services in competitive markets. Because prices are influenced by market conditions, it is not always possible to fully recover cost increases through pricing. Changes in product mix from year to year, timing differences in instituting price changes, and the large amount of part numbers make it impracticable to accurately define the impact of inflation on profit margins.
Critical Accounting Estimates
Management’s discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company bases these estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates and judgments.
The Company believes the following accounting estimates are most critical to an understanding of its financial statements. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) material changes in the estimates are reasonably likely from period to period. For a detailed discussion on the application of these and other accounting estimates, refer to Note 1 to the Company’s Consolidated Financial Statements.
Income Taxes
The Company operates in numerous taxing jurisdictions and is subject to regular examinations by U.S. federal, state and non-U.S. taxing authorities. Its income tax positions are based on research and interpretations of the income tax laws and rulings in each of the jurisdictions in which the Company does business. Due to the ambiguity of laws and rulings in each jurisdiction, the differences and interplay in tax laws between those jurisdictions, the uncertainty of how underlying facts may be construed and the inherent uncertainty in estimating the final resolution of complex tax audit matters, the Company's estimates of income tax liabilities may differ from actual payments or assessments.
While the Company has support for the positions it takes on tax returns, taxing authorities may assert interpretations of laws and facts and may challenge cross-jurisdictional transactions. The Company generally re-evaluates the technical merits of its tax positions and recognizes an uncertain tax benefit when (i) there is completion of a tax audit; (ii) there is a change in applicable tax law including a tax case ruling or legislative guidance; or (iii) there is an expiration of the statute of limitations. The gross liability for unrecognized tax benefits, excluding interest and penalties, was $14.8 million and $20.4 million as of July 31, 2019 and 2018, respectively. If recognized, $12.0 million and $20.4 million of unrecognized tax benefits as of July 31, 2019 and 2018, respectively, would affect the income tax rate. Accrued interest and penalties related to unrecognized tax benefits were $2.4 million and $5.8 million as of July 31, 2019 and 2018, respectively. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense on the Consolidated Statements of Income. The Company believes it is reasonably possible the amount of gross unrecognized tax benefits could be reduced by up to $5.4 million in the next twelve months as a result of the resolution of worldwide tax matters, tax audit settlements, amended tax filings, and/or statute expirations, which would be the maximum amount that would be recognized through the Consolidated Statements of Income as an income tax benefit.
The Company recognizes deferred tax assets and liabilities for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. The Company establishes valuation allowances for its deferred tax assets if it is more likely than not that some or all of the deferred tax asset will not be realized. This requires management to make judgments regarding: (i) the timing and amount of the reversal of taxable temporary differences, (ii) expected future taxable income or loss, and (iii) the impact of tax planning strategies. The Company recognized valuation allowances for its deferred tax assets of $60.1 million and $56.9 million as of July 31, 2019 and 2018, respectively, which were primarily related to foreign tax credit carryforwards and net operating loss carryforwards in its various tax jurisdictions.
Goodwill and Other Indefinite-lived Intangible Assets
The allocation of purchase price for business combinations requires management estimates and judgment as to expectations for future cash flows of the acquired business and the allocation of those cash flows to identifiable intangible assets in determining the estimated fair value for purchase price allocation purposes. If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the financial statements could result in a possible impairment of the intangible assets and goodwill or require acceleration of the amortization expense of finite-lived intangible assets. In addition, accounting guidance requires that goodwill and other indefinite-lived intangible assets be tested at least annually for impairment. If circumstances or

19


events prior to the date of the required annual assessment indicate that, in management's judgment, it is more likely than not that there has been a reduction of fair value of a reporting unit below its carrying value, the Company performs an impairment analysis at the time of such circumstance or event. Changes in management's estimates or judgments could result in an impairment charge, and such a charge could have an adverse effect on the Company's financial condition and results of operations.
The Company has identified six reporting units within its two reportable segments, IDS and WPS, with the following goodwill balances as of July 31, 2019: IDS Americas & Europe, $285.7 million; People ID, $93.3 million; and WPS Europe, $32.0 million. The IDS APAC, WPS Americas, and WPS APAC reporting units each have a goodwill balance of zero. The Company believes that the discounted cash flow model and market multiples model provide a reasonable and meaningful fair value estimate based upon the reporting units' projections of future operating results and cash flows and replicates how market participants would value the Company's reporting units. The projections of future operating results, which are based on both past performance and the projections and assumptions used in the Company's current and long range operating plans, are subject to change as a result of changing economic and competitive conditions. Significant estimates used by management in the discounted cash flows methodology include estimates of future cash flows based on expected growth rates, price increases, fluctuations in gross profit margins and SG&A expense as a percentage of sales, capital expenditures, working capital levels, income tax rates, and a weighted-average cost of capital reflecting the specific risk profile of the reporting unit being tested. Significant negative industry or economic trends, disruptions to the Company's business, loss of significant customers, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in use of the assets or in entity structure, and divestitures may adversely impact the assumptions used in the valuations.
The Company completes its annual goodwill impairment analysis on May 1 of each fiscal year and evaluates its reporting units for potential triggering events on a quarterly basis in accordance with ASC 350, "Intangibles - Goodwill and Other." In addition to the metrics listed above, the Company considers multiple internal and external factors when evaluating its reporting units for potential impairment, including (i) U.S. GDP growth, (ii) industry and market factors such as competition and changes in the market for the reporting unit's products, (iii) new product development, (iv) hospital admission rates, (v) competing technologies, (vi) overall financial performance such as cash flows, actual and planned revenue and profitability, and (vii) changes in the strategy of the reporting unit. In the event the fair value of a reporting unit is less than the carrying value, including goodwill, the Company would then perform an additional assessment that would compare the implied fair value of goodwill with the carrying amount of goodwill. The determination of the implied fair value of goodwill would require management to compare the fair value of the reporting unit to the estimated fair value of the assets and liabilities of the reporting unit. If necessary, the Company may consult valuation specialists to assist with the assessment of the estimated fair value of assets and liabilities for the reporting unit. If the implied fair value of the goodwill is less than the carrying value, an impairment charge would be recorded.
The Company considers a reporting unit’s fair value to be substantially in excess of its carrying value at 20% or greater. The annual impairment testing performed on May 1, 2019, in accordance with ASC 350, “Intangibles - Goodwill and Other” (“Step One”) indicated that all of the reporting units passed Step One of the goodwill impairment test, and each had a fair value substantially in excess of its carrying value.
Other Indefinite-Lived Intangible Assets
Other indefinite-lived intangible assets were analyzed in accordance with the Company's policy outlined above using the income approach. The valuation was based upon current sales projections and profitability for each asset group, and the relief from royalty method was applied. As a result of the analysis, an indefinite-lived tradename with a carrying amount of $2.1 million was written down to its estimated fair value of $1.6 million.
New Accounting Standards
The information required by this Item is provided in Note 1 of the Notes to Consolidated Financial Statements contained in Item 8 — Financial Statements and Supplementary Data.
Forward-Looking Statements
In this annual report on Form 10-K, 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

20


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:
Brady's ability to compete effectively or to successfully execute our strategy
Brady's ability to develop technologically advanced products that meet customer demands
Difficulties in protecting our sites, networks, and systems against security breaches
Decreased demand for the Company's products
Raw material and other cost increases
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
Changes in tax legislation and tax rates
Potential write-offs of Brady's substantial intangible assets
Differing interests of voting and non-voting shareholders
Numerous other matters of national, regional and global scale, including 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 within Item 1A of Part I of this Form 10-K.
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.
Risk Factors
Refer to the information contained in Item 1A - Risk Factors.

21


Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company’s business operations give rise to market risk exposure due to changes in foreign exchange rates. To manage that risk effectively, the Company enters into hedging transactions according to established guidelines and policies that enable it to mitigate the adverse effects of this financial market risk.
The global nature of the Company’s business requires active participation in the foreign exchange markets. As a result of investments, production facilities and other operations on a global scale, the Company has assets, liabilities and cash flows in currencies other than the U.S. dollar. The objective of the Company’s foreign currency exchange risk management is to minimize the impact of currency movements on non-functional currency transactions. To achieve this objective, the Company hedges a portion of known exposures using forward contracts. Main exposures are related to transactions denominated in the British Pound, the Euro, Canadian dollar, Australian dollar, Mexican Peso, the Malaysian Ringgit, the Chinese Yuan, and Singapore dollar. As of July 31, 2019, the notional amount of outstanding forward foreign exchange contracts designated as cash flow hedges was $26.0 million. The Company uses Euro-denominated debt of €45.0 million designated as a hedge instrument to hedge portions of the Company’s net investment in its Euro-denominated businesses. The Company's revolving credit facility allows it to borrow up to $150.0 million in currencies other than U.S. dollars under an alternative currency sub-limit. The Company has periodically borrowed funds in Euros and British Pounds under this sub-limit. Debt issued in currencies other than U.S. dollars acts as a natural hedge to the Company's exposure to the associated currency.
The Company also faces exchange rate risk from transactions with customers in countries outside the United States and from intercompany transactions between affiliates. Although the Company has a U.S. dollar functional currency for reporting purposes, it has manufacturing sites throughout the world and a significant portion of its sales are generated in foreign currencies. Costs incurred and sales recorded by subsidiaries operating outside of the United States are translated into U.S. dollars using exchange rates in effect during the respective period. As a result, the Company is exposed to movements in the exchange rates of various currencies against the U.S. dollar. In particular, the Company has more sales in European currencies than it has expenses in those currencies. Therefore, when European currencies strengthen or weaken against the U.S. dollar, operating profits are increased or decreased, respectively. Currency exchange rates decreased fiscal 2019 sales by 2.6% compared to fiscal 2018 as the U.S. dollar appreciated, on average, against other major currencies throughout the year.
The Company is subject to the risk of change in foreign currency exchange rates due to its operations in foreign countries. The Company has manufacturing facilities and sells and distributes its products throughout the world. As a result, the Company’s financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company manufactures, distributes and sells its products. The Company’s operating results are principally exposed to changes in exchange rates between the U.S. dollar and the Euro, the Australian dollar, the Canadian dollar, the Mexican Peso, the Singapore dollar, the British Pound, the Malaysian Ringgit, and the Chinese Yuan. Changes in foreign currency exchange rates for the Company’s foreign subsidiaries reporting in local currencies are generally reported as a component of stockholders’ equity. The Company’s currency translation adjustment recorded in fiscal 2019, 2018, and 2017 as a separate component of stockholders’ equity was unfavorable by $13.2 million, unfavorable by $13.7 million, and favorable by $7.2 million, respectively. As of July 31, 2019 and 2018, the Company’s foreign subsidiaries had net current assets (defined as current assets less current liabilities) subject to foreign currency translation risk of $192.9 million and $170.0 million, respectively. The potential decrease in net current assets as of July 31, 2019, from a hypothetical 10 percent adverse change in quoted foreign currency exchange rates would be approximately $19.3 million. This sensitivity analysis assumes a parallel shift in all major foreign currency exchange rates versus the U.S. dollar. Exchange rates rarely move in the same direction relative to the U.S. dollar due to positive and negative correlations of the various global currencies. This assumption may overstate the impact of changing exchange rates on individual assets and liabilities denominated in a foreign currency.
The Company could be exposed to interest rate risk through its corporate borrowing activities. The objective of the Company’s interest rate risk management activities is to manage the levels of the Company’s fixed and floating interest rate exposure to be consistent with the Company’s preferred mix. The interest rate risk management program allows the Company to enter into approved interest rate derivatives if there is a desire to modify the Company’s exposure to interest rates. As of July 31, 2019, the Company had no interest rate derivatives and no variable rate debt outstanding.

22


Item 8. Financial Statements and Supplementary Data
BRADY CORPORATION & SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS

23




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Brady Corporation
Milwaukee, Wisconsin

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Brady Corporation and subsidiaries (the "Company") as of July 31, 2019 and 2018, the related consolidated statements of earnings, comprehensive income, stockholders’ investment, and cash flows, for each of the three years in the period ended July 31, 2019, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of July 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of July 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 6, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Taxes - Valuation Allowance - Refer to Note 5 to the financial statements
Critical Audit Matter Description
The Company recognizes deferred income tax assets and liabilities for the estimated future tax effects attributable to temporary differences and carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized in the future. Future realization of deferred tax assets depends on the existence of sufficient taxable income within the carryback or carryforward period of the appropriate character under the relevant tax law. Sources of taxable income include future reversals of deferred tax assets and liabilities, future taxable income (exclusive of the reversals of deferred tax assets and liabilities), taxable income in prior carryback year(s) if permitted under the tax law, and tax planning strategies. The Company’s valuation allowance for deferred tax assets was $60 million as of July 31, 2019.
The Company’s determination of the valuation allowance involves estimates. Management’s primary estimate in determining whether a valuation allowance should be established is the projection of future sources of taxable income. Auditing management’s

24


estimate of future sources of taxable income, which affects the recorded valuation allowances, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our income tax specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to estimated future sources of taxable income included the following, among others:
We tested the effectiveness of management’s controls over the estimates of future sources of taxable income.
With the assistance of our income tax specialists, we considered relevant tax laws and regulations in evaluating the appropriateness of management’s estimates of future sources of taxable income.
We evaluated management’s ability to accurately estimate future sources of taxable income by comparing actual results to management’s historical estimates. Further, we evaluated the reasonableness of management’s estimates of future sources of taxable income by comparing the estimates to historical sources of taxable income or losses and minutes of the Board of Directors.
With the assistance of our income tax specialists, we evaluated whether the estimated future sources of taxable income were of the appropriate character to utilize the deferred tax assets under tax law.
We evaluated management’s assessment that it is more likely than not that sufficient taxable income will be generated in the future to utilize the net deferred tax assets.

/s/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
September 6, 2019

We have served as the Company's auditor at least since 1981; however, an earlier year cannot be reliably determined.

25



BRADY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, 2019 and 2018
 
2019
 
2018
 
(Dollars in thousands)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
279,072

 
$
181,427

Accounts receivable—net
158,114

 
161,282

Inventories
120,037

 
113,071

Prepaid expenses and other current assets
16,056

 
15,559

Total current assets
573,279

 
471,339

Property, plant and equipment—net
110,048

 
97,945

Goodwill
410,987

 
419,815

Other intangible assets
36,123

 
42,588

Deferred income taxes
7,298

 
7,582

Other
19,573

 
17,662

Total
$
1,157,308

 
$
1,056,931

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
64,810

 
$
66,538

Accrued compensation and benefits
62,509

 
67,619

Taxes, other than income taxes
8,107

 
8,318

Accrued income taxes
6,557

 
3,885

Other current liabilities
49,796

 
44,567

Current maturities on long-term debt
50,166

 

Total current liabilities
241,945

 
190,927

Long-term obligations, less current maturities

 
52,618

Other liabilities
64,589

 
61,274

Total liabilities
306,534

 
304,819

Stockholders’ equity:
 
 
 
Class A nonvoting common stock — Issued 51,261,487 shares at July 31, 2019 and 2018, respectively (aggregate liquidation preference of $42,803 at July 31, 2019 and 2018)
513

 
513

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

 
35

Additional paid-in capital
329,969

 
325,631

Retained earnings
637,843

 
553,454

Treasury stock —1,802,646 and 2,867,870 shares at July 31, 2019 and 2018, respectively, of Class A nonvoting common stock, at cost
(46,332
)
 
(71,120
)
Accumulated other comprehensive loss
(71,254
)
 
(56,401
)
Total stockholders’ equity
850,774

 
752,112

Total
$
1,157,308

 
$
1,056,931

See Notes to Consolidated Financial Statements.

26



BRADY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended July 31, 2019, 2018 and 2017

 
2019
 
2018
 
2017
 
(In thousands, except per share amounts)
Net sales
$
1,160,645

 
$
1,173,851

 
$
1,113,316

Cost of goods sold
581,967

 
585,560

 
555,024

Gross margin
578,678

 
588,291

 
558,292

Operating expenses:
 
 
 
 
 
Research and development
45,168

 
45,253

 
39,624

Selling, general and administrative
371,082

 
390,342

 
387,653

Total operating expenses
416,250

 
435,595

 
427,277

Operating income
162,428

 
152,696

 
131,015

Other income (expense):
 
 
 
 
 
Investment and other income
5,046

 
2,487

 
1,121

Interest expense
(2,830
)
 
(3,168
)
 
(5,504
)
Income before income taxes
164,644

 
152,015

 
126,632

Income tax expense
33,386

 
60,955

 
30,987

Net income
$
131,258

 
$
91,060

 
$
95,645

Net income per Class A Nonvoting Common Share:
 
 
 
 
 
Basic
$
2.50

 
$
1.76

 
$
1.87

Diluted
$
2.46

 
$
1.73

 
$
1.84

Dividends
$
0.85

 
$
0.83

 
$
0.82

Net income per Class B Voting Common Share:
 
 
 
 
 
Basic
$
2.48

 
$
1.75

 
$
1.86

Diluted
$
2.45

 
$
1.72

 
$
1.83

Dividends
$
0.83

 
$
0.81

 
$
0.80

Weighted average common shares outstanding:
 
 
 
 
 
Basic
52,596

 
51,677

 
51,056

Diluted
53,323

 
52,524

 
51,956

See Notes to Consolidated Financial Statements.


27



BRADY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended July 31, 2019, 2018 and 2017

 
2019
 
2018
 
2017
 
(Dollars in thousands)
Net income
$
131,258

 
$
91,060

 
$
95,645

Other comprehensive (loss) income:
 
 
 
 
 
Foreign currency translation adjustments
(13,223
)
 
(13,675
)
 
7,217

 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
Net gain (loss) recognized in other comprehensive (loss) income
837

 
966

 
(225
)
Reclassification adjustment for (gains) losses included in net income
(1,048
)
 
551

 
486

 
(211
)
 
1,517

 
261

Pension and other post-retirement benefits:
 
 
 
 
 
Net (loss) gain recognized in other comprehensive (loss) income
(97
)
 
446

 
647

Actuarial gain amortization
(569
)
 
(576
)
 
(483
)
 
(666
)
 
(130
)
 
164

 
 
 
 
 
 
Other comprehensive (loss) income, before tax
(14,100
)
 
(12,288
)
 
7,642

Income tax (expense) benefit related to items of other comprehensive (loss) income
(753
)
 
569

 
2,421

Other comprehensive (loss) income, net of tax
(14,853
)
 
(11,719
)
 
10,063

Comprehensive income
$
116,405

 
$
79,341

 
$
105,708

See Notes to Consolidated Financial Statements.


28



BRADY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended July 31, 2019, 2018 and 2017
 
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive (Loss)
Income
 
Other
 
 
(In thousands, except per share amounts)
Balances at July 31, 2016
 
$
548

 
$
317,001

 
$
453,371

 
$
(108,714
)
 
$
(54,745
)
 
$
(3,863
)
Net income
 

 

 
95,645

 

 

 

Other comprehensive loss, net of tax
 

 

 

 

 
10,063

 

Issuance of 1,061,660 shares of Class A Common Stock under stock plan
 

 
(5,868
)
 

 
23,591

 

 

Other (Note 7)
 

 
1,943

 

 
(347
)
 

 
3,863

Tax shortfall from exercise of stock options and deferred compensation distributions
 

 
37

 

 

 

 

Stock-based compensation expense (Note 7)
 

 
9,495

 

 

 

 

Cash dividends on Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
Class A — $0.82 per share
 

 

 
(39,037
)
 

 

 

Class B — $0.80 per share
 

 

 
(2,843
)
 

 

 

Balances at July 31, 2017
 
$
548

 
$
322,608

 
$
507,136

 
$
(85,470
)
 
$
(44,682
)
 
$

Net income
 

 

 
91,060

 

 

 

Other comprehensive income, net of tax
 

 

 

 

 
(11,719
)
 

Issuance of 842,305 shares of Class A Common Stock under stock plan
 

 
(7,171
)
 

 
16,234

 

 

Tax benefit and withholdings from deferred compensation distribution
 

 
214

 

 
(422
)
 

 

Stock-based compensation expense (Note 7)
 

 
9,980

 

 

 

 

Purchase of 40,694 shares of Class A Common Stock
 

 

 

 
(1,462
)
 

 

Adoption of ASU 2018-02
 

 

 
(1,869
)
 

 
 
 
 
Cash dividends on Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
Class A — $0.83 per share
 

 

 
(39,998
)
 

 

 

Class B — $0.81 per share
 

 

 
(2,875
)
 

 

 

Balances at July 31, 2018
 
$
548

 
$
325,631

 
$
553,454

 
$
(71,120
)
 
$
(56,401
)
 
$

Net income
 

 

 
131,258

 

 

 

Other comprehensive loss, net of tax
 

 

 

 

 
(14,853
)
 

Issuance of 1,367,131 shares of Class A Common Stock under stock plan
 

 
(7,963
)
 

 
27,970

 

 

Tax benefit and withholdings from deferred compensation distributions
 

 
209

 

 

 

 

Stock-based compensation expense (Note 7)
 

 
12,092

 

 

 

 

Purchase of 80,088 shares of Class A Common Stock
 

 

 

 
(3,182
)
 

 

Adoption of ASU 2014-09, "Revenue from Contracts with Customers" (Note 8)
 

 

 
(2,137
)
 

 

 

Cash dividends on Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
Class A — $0.85 per share
 

 

 
(41,784
)
 

 

 

Class B — $0.83 per share
 

 

 
(2,948
)
 

 

 

Balances at July 31, 2019
 
$
548

 
$
329,969

 
$
637,843

 
$
(46,332
)
 
$
(71,254
)
 
$

See Notes to Consolidated Financial Statements.

29



BRADY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended July 31, 2019, 2018 and 2017
 
2019
 
2018
 
2017
 
(Dollars in thousands)
Operating activities:
 
 
 
 
 
Net income
$
131,258

 
$
91,060

 
$
95,645

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
23,799

 
25,442

 
27,303

Non-cash portion of stock-based compensation expense
12,092

 
9,980

 
9,495

Gain on sale of business, net

 
(4,666
)
 

Deferred income taxes
7,825

 
33,656

 
(8,618
)
Other
2,347

 
(15
)
 
504

Changes in operating assets and liabilities (net of effects of business divestitures):
 
 
 
 
 
Accounts receivable
3,496

 
(16,612
)
 
766

Inventories
(9,922
)
 
(7,563
)
 
(5,687
)
Prepaid expenses and other assets
368

 
1,747

 
1,812

Accounts payable and accrued liabilities
(11,903
)
 
13,106

 
21,751

Income taxes
2,851

 
(3,093
)
 
1,061

Net cash provided by operating activities
162,211

 
143,042

 
144,032

Investing activities:
 
 
 
 
 
Purchases of property, plant and equipment
(32,825
)
 
(21,777
)
 
(15,167
)
Sale of business, net of cash transferred with business

 
19,141

 

Other
(1,638
)
 
(269
)
 
(86
)
Net cash used in investing activities
(34,463
)
 
(2,905
)
 
(15,253
)
Financing activities:
 
 
 
 
 
Payment of dividends
(44,732
)
 
(42,873
)
 
(41,880
)
Proceeds from exercise of stock options
23,466

 
12,099

 
19,728

Purchase of treasury stock
(3,182
)
 
(1,462
)
 

Proceeds from borrowing on credit facilities
13,637

 
23,221

 
180,320

Repayment of borrowing on credit facilities
(13,568
)
 
(78,419
)
 
(244,268
)
Principal payments on debt

 

 
(49,302
)
Other
(3,249
)
 
(3,246
)
 
(839
)
Net cash used in financing activities
(27,628
)
 
(90,680
)
 
(136,241
)
Effect of exchange rate changes on cash and cash equivalents
(2,475
)
 
(1,974
)
 
178

Net increase (decrease) in cash and cash equivalents
97,645

 
47,483

 
(7,284
)
Cash and cash equivalents, beginning of period
181,427

 
133,944

 
141,228

Cash and cash equivalents, end of period
$
279,072

 
$
181,427

 
$
133,944

Supplemental disclosures of cash flow information:
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
Interest
$
2,651

 
$
2,976

 
$
5,766

Income taxes
24,335

 
33,267

 
31,885

See Notes to Consolidated Financial Statements.

30



BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 2019, 2018 and 2017
(In thousands, except share and per share amounts)
1. Summary of Significant Accounting Policies
Nature of Operations — Brady Corporation is a global manufacturer and supplier of identification solutions and workplace safety products that identify and protect premises, products and people. The ability to provide customers with a broad range of proprietary, customized, and diverse products for use in various applications, along with a commitment to quality and service, a global footprint, and multiple sales channels, have made Brady a world leader in many of its markets.
Principles of Consolidation — The accompanying consolidated financial statements include the accounts of Brady Corporation and its subsidiaries, all of which are wholly-owned. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments — The Company believes the carrying amount of its financial instruments (cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term debt) is a reasonable estimate of the fair value of these instruments due to their short-term nature. See Note 6 for more information regarding the fair value of long-term debt and Note 12 for fair value measurements.
Cash Equivalents — The Company considers all highly-liquid investments with original maturities of three months or less when acquired to be cash equivalents, which are recorded at cost.
Accounts Receivables — Accounts receivables are stated net of allowances for doubtful accounts of $5,005 and $4,471 as of July 31, 2019 and 2018, respectively. No single customer comprised more than 10% of the Company’s consolidated net sales in fiscal 2019, 2018, or 2017, or 10% of the Company’s consolidated accounts receivable as of July 31, 2019 or 2018. Specific customer provisions are made during review of significant outstanding amounts, in which customer creditworthiness and current economic trends may indicate that collection is doubtful. In addition, provisions are made for the remainder of accounts receivable based upon the age of the accounts receivable and the Company’s historical collection experience.
Inventories — Inventories are stated at the lower of cost or net realizable value. Cost has been determined using the last-in, first-out (“LIFO”) method for certain inventories in the U.S. (13.4% of total inventories at July 31, 2019, and 15.0% of total inventories at July 31, 2018) and the first-in, first-out (“FIFO”) or average cost methods for other inventories. Had all inventories been accounted for on a FIFO basis instead of on a LIFO basis, the carrying value of inventories would have increased by $7,259 and $7,015 as of July 31, 2019 and 2018, respectively.
Inventories consist of the following as of July 31:
 
2019
 
2018
Finished products
$
77,532

 
$
73,133

Work-in-process
20,515

 
19,903

Raw materials and supplies
21,990

 
20,035

Total inventories
$
120,037

 
$
113,071

Goodwill — Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company completes impairment reviews for its reporting units using a fair-value method based on management's judgments and assumptions. The fair value represents the amount at which a reporting unit could be bought or sold in a current transaction between market participants on an arms-length basis. In estimating the fair value, the Company utilizes a discounted cash flow model and market multiples approach. The estimated fair value is compared with the carrying amount of the reporting unit, including goodwill. The annual impairment testing performed on May 1, 2019, in accordance with ASC 350, "Intangibles - Goodwill and Other" ("Step One") indicated that all reporting units with remaining goodwill had a fair value substantially in excess of its carrying value. No goodwill impairment charges were recorded during the year ended July 31, 2019.

31


Long-Lived and Other Intangible Assets — The cost of intangible assets with determinable useful lives is amortized to reflect the pattern of economic benefits consumed on a straight-line basis, over the estimated periods benefited. Intangible assets with indefinite useful lives as well as goodwill are not subject to amortization. These assets are assessed for impairment annually or more frequently as deemed necessary.
The Company evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived and other finite-lived intangible assets may warrant revision or that the remaining balance of an asset may not be recoverable. If impairment is determined to exist, any related impairment loss is calculated by comparing the fair value of the asset to its carrying value. In fiscal 2019, long-lived and other intangible assets were analyzed for potential impairment. As a result of the analysis, no material impairment charges were recorded. Refer to Note 2, "Goodwill and Other Intangible Assets" for further information.
Property, Plant and Equipment — Property, plant and equipment are recorded at cost. The cost of buildings and improvements, computer systems, and machinery and equipment are depreciated over their estimated useful lives using primarily the straight-line method for financial reporting purposes. The estimated useful lives range from 3 to 33 years as shown below.
Asset Category
  
Range of Useful Lives
Buildings & Improvements
  
10 to 33 Years
Computer Systems
  
5 Years
Machinery & Equipment
  
3 to 10 Years
Property, plant and equipment consist of the following as of July 31:
 
2019
 
2018
Land
$
9,752

 
$
6,994

Buildings and improvements
99,685

 
96,245

Machinery and equipment
266,991

 
270,989

Construction in progress
7,500

 
4,495

Property, plant and equipment—gross
383,928

 
378,723

Accumulated depreciation
(273,880
)
 
(280,778
)
Property, plant and equipment—net
$
110,048

 
$
97,945

Fully depreciated assets are retained in property and accumulated depreciation accounts until disposal. Upon disposal, assets and related accumulated depreciation are removed from the accounts and the net amount, less any proceeds from disposal, is charged to operations. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life of the respective asset. Depreciation expense was $18,023, $19,009, and $20,190 for the years ended July 31, 2019, 2018 and 2017, respectively.
Catalog Costs and Related Amortization — The Company accumulates all direct costs incurred, net of vendor cooperative advertising payments, in the development, production, and circulation of its catalogs on its balance sheet until such time as the related catalog is mailed. The catalog costs are subsequently amortized into selling, general, and administrative expense over the expected sales realization cycle, which is one year or less. Consequently, any difference between the estimated and actual revenue stream for a particular catalog and the related impact on amortization expense is realized within a period of one year or less. The estimate of the expected sales realization cycle for a particular catalog is based on the Company’s historical sales experience with similar catalogs and an assessment of prevailing economic conditions and various competitive factors. The Company tracks subsequent sales realization, reassesses the marketplace, and compares its findings to the previous estimate, and adjusts the amortization of future catalogs, if necessary. At July 31, 2019 and 2018, $5,617 and $6,154, respectively, of prepaid catalog costs were included in "Prepaid expenses and other current assets" in the accompanying Consolidated Balance Sheets.

32


Revenue Recognition — The majority of the Company’s revenue relates to the sale of identification solutions and workplace safety products to customers. Prior to August 1, 2018, the Company's policy was to recognize revenue when title to the product and risk of loss had transferred to the customer, persuasive evidence of an arrangement existed, and collection of the sales proceeds was reasonably assured, most of which occurred upon shipment of goods to customers. Effective August 1, 2018, the Company’s policy is to recognize revenue when control of the product or service transfers to the customer in an amount that represents the consideration expected to be received in exchange for those products and services. The Company considers control to have transferred when legal title, physical possession, and the significant risks and rewards of ownership of the asset have transferred to the customer and the collection of the transaction price is reasonably assured, most of which occur upon shipment or delivery of goods to customers. Given the nature of the Company’s business, revenue recognition practices do not contain estimates that materially affect the results of operations, with the exception of estimated customer returns and credit memos. The Company records an allowance for estimated product returns and credit memos using the expected value method based on historical experience, which is recognized as a deduction from net sales at the time of sale. As of July 31, 2019 and 2018, the Company had a reserve for estimated product returns and credit memos of $5,796 and $4,546, respectively.
Sales Incentives — The Company accounts for cash consideration (such as sales incentives, rebates, and cash discounts) given to its customers or resellers as a reduction of revenue. Sales incentives for the years ended July 31, 2019, 2018, and 2017 were $40,811, $40,671, and $37,134, respectively.
Shipping and Handling Fees and Costs — Amounts billed to a customer in a sale transaction related to shipping and handling fees are reported as net sales and the related costs incurred for shipping and handling are reported as cost of goods sold.
Advertising Costs — Advertising costs are expensed as incurred, except catalog and mailing costs as outlined previously. Advertising expense for the years ended July 31, 2019, 2018, and 2017 was $62,454, $67,429, and $68,268, respectively.
Stock-Based Compensation — In accordance with ASC 718 "Compensation - Stock Compensation," the Company measures and recognizes the compensation expense for all share-based awards made to employees and directors based on estimated grant-date fair values. The Black-Scholes option valuation model is used to determine the fair value of stock option awards on the date of grant. The Company recognizes the compensation cost, net of estimated forfeitures, of all share-based awards 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.
The Black-Scholes model requires the use of assumptions which determine the fair value of stock-based awards. 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.
The Company includes as part of cash flows from operating activities the benefits of tax deductions in excess of the tax-effected compensation of the related stock-based awards for options exercised and restricted shares and RSUs vested during the period. See Note 7, “Stockholders' Equity” for more information regarding the Company’s incentive stock plans.
Research and Development — Amounts expended for R&D are expensed as incurred.
Other Comprehensive Income Other comprehensive income consists of net unrealized gains and losses from cash flow hedges, the unamortized gain on defined-benefit pension plans net of their related tax effects, and foreign currency translation adjustments, which include net investment hedge and long-term intercompany loan translation adjustments,.
Foreign Currency Translation — Foreign currency assets and liabilities are translated into United States dollars at end of period rates of exchange, and income and expense accounts are translated at the average rates of exchange for the period. Resulting translation adjustments are included in other comprehensive income.
Income Taxes — The Company accounts for income taxes in accordance with ASC 740 "Income Taxes", which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. The Company recognizes the effect of income tax positions only if sustaining those positions is more likely than not. Changes in recognition or measurement are reflected in the period in which a change in judgment occurs.

33


Foreign Currency Hedging — The objective of the Company’s foreign currency exchange risk management is to minimize the impact of currency movements on non-functional currency transactions and minimize the foreign currency translation impact on the Company’s foreign operations. While the Company’s risk management objectives and strategies are driven from an economic perspective, the Company attempts, where possible and practical, to ensure that the hedging strategies it engages in qualify for hedge accounting and result in accounting treatment where the earnings effect of the hedging instrument provides substantial offset (in the same period) to the income effect of the hedged item. Generally, these risk management transactions will involve the use of foreign currency derivatives to protect against exposure resulting from transactions in a currency differing from the respective functional currency.
The Company recognizes derivative instruments as either assets or liabilities in the accompanying Consolidated Balance Sheets at fair value. Changes in the fair value (i.e., gains or losses) of the derivatives are recorded in the accompanying Consolidated Statements of Income as "Investment and other income" or as a component of Accumulated Other Comprehensive Income ("AOCI") in the accompanying Consolidated Balance Sheets and in the Consolidated Statements of Comprehensive Income, as discussed below.
Hedge effectiveness is determined by how closely the changes in the fair value of the hedging instrument offset the changes in the fair value or cash flows of the hedged item. Hedge accounting is permitted only if the hedging relationship is expected to be highly effective at the inception of the hedge and on an on-going basis. Gains or losses on the derivative related to hedge ineffectiveness are recognized in current income. The amount of hedge ineffectiveness was not material for the fiscal years ended July 31, 2019, 2018, and 2017.
See Note 13, "Derivatives and Hedging Activities" for more information regarding the Company’s derivative instruments and hedging activities.
New Acc