Goodwill and Intangible Assets

9 Months Ended

Apr. 30, 2012

Goodwill and Intangible Assets [Abstract]

Goodwill and Intangible Assets

NOTE B — Goodwill and Intangible Assets

In order to better allocate resources to align with sales growth initiatives, the Company reorganized its management reporting structure within the EMEA and Asia-Pacific operating segments. As a result of the reorganization and in accordance with ASC 350, “Intangibles – Goodwill and Other,” the Company’s reporting units for purposes of goodwill impairment testing were updated during the quarter ended April 30, 2012. In the EMEA operating segment, the Emerging Platforms reporting unit was consolidated into the Brady EMEA and Direct Marketing EMEA reporting units. In the Asia-Pacific operating segment, the North/South Asia reporting unit was divided into Brady North/South Asia and Die-Cut Asia. Further, Brady North/South Asia has been aggregated with Australia as part of the Brady Asia reporting unit. There were no changes to the management structure within the Americas operating segment.

The Company performed the required initial (“Step One”) impairment test over the new reporting units by preparing a discounted cash flow model taking into account current projections, estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, projections of revenue growth, operating earnings, discount rates, terminal growth rates, and required capital for the reporting unit. Due to the inherent uncertainty involved in making these estimates, actual results could differ materially from the estimates. The estimated fair value of the reporting units was compared to the carrying amount including goodwill, and the results of the analysis indicated that there was no impairment as a result of the reorganization. Due to the reorganization, the Company has identified six reporting units within its three reporting segments for purposes of the annual goodwill impairment analysis: Brady Americas, Direct Marketing Americas, Brady EMEA, Direct Marketing EMEA, Brady Asia, and Die-Cut Asia.

Prior to the reorganization effective April 1, 2012, the Company had identified seven reporting units within its three reporting segments for purposes of the annual goodwill impairment analysis: Brady Americas, Direct Marketing Americas, Brady Europe, Direct Marketing Europe, Emerging Platforms Europe, North/South Asia, and Australia. The Company’s goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The Company performs impairment reviews for its reporting units using the discounted cash flow model and market multiples model, as these methods provide a reasonable and meaningful fair value estimate based on 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 are based on both past performance and the projections and assumptions used in the Company’s current and long-range operating plans. The Company’s estimates can be materially impacted by factors such as significant negative industry or economic trends, disruptions to the Company’s business, competitive forces, or changes in significant customers.

In the quarter ended January 31, 2012, the former North/South Asia reporting unit experienced a sales decline and margin erosion due in large part to a major customer’s loss of market share within the mobile handset industry. The impact of this sales decline was partially offset by additional opportunities within the mobile handset and other computing devices markets, but these sales were achieved at a lower gross margin percentage than was previously realized.

The Company’s plans to fill capacity and absorb overhead with these additional sales opportunities were partially successful; however, increased competition from local competitors drove down unit prices. While the Company continued to capture similar dollar value of sales, the gross margins were less than what was anticipated. The Company placed increased focus on cost reduction and material procurement strategies to reduce cost of goods sold; however, these efforts were not enough to return the reporting unit to previous levels of profitability. Based upon the economic environment within the mobile handset market, management determined that the events were not temporary and gross margins in the mobile handset market were not likely to improve materially in the near term.

Due to the convergence of these events, in connection with a reforecast of expected fiscal 2012 financial results completed during the quarter ended January 31, 2012, the Company determined the foregoing circumstances to be indicators of potential impairment under the guidance of ASC 350, “Intangibles – Goodwill and Other.” The Company completed the required initial (“Step One”) impairment test for the former North/South Asia reporting unit by preparing a discounted cash flow model taking into account updated projections, estimates and assumptions. These estimates and assumptions primarily included, but are not limited to, projections of revenue growth, operating earnings, discount rates, terminal growth rates, and required capital for the reporting unit. Due to the inherent uncertainty involved in these estimates, actual results could differ materially from the estimates. The Company evaluated the significant assumptions used to determine the fair value of the reporting unit with the assistance of a third party valuation firm and concluded that they were reasonable.

The estimated fair value of the reporting unit was compared to the carrying amount including goodwill, and the results of the analysis indicated that the former North/South Asia reporting unit was potentially impaired. Therefore, the Company proceeded to measure the amount of the potential impairment (“Step Two”) with the assistance of a third party valuation firm. In Step Two of the goodwill impairment test, the Company determined the implied fair value of the goodwill and compared it to the carrying value of the goodwill. The Company allocated the fair value of the former North/South Asia reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination. The excess fair value of the reporting unit over the fair value of its identifiable assets and liabilities was the implied fair value of goodwill. Upon completion of the assessment, the Company recognized a goodwill impairment charge of $115,688 during the quarter ended January 31, 2012.

The changes in the carrying amount of goodwill by reportable segment for the nine months ended April 30, 2012, are as follows:

	Americas			Europe			Asia-Pacific			Total
Balance as of July 31, 2011	$	425,578		$	171,238		$	203,527		$	800,343
Current year acquisitions		—			1,227			—			1,227
Translation adjustments		(5,409	)		(10,521	)		(3,529	)		(19,459	)
Impairment charge		—			—			(115,688	)		(115,688	)
Balance as of April 30, 2012	$	420,169		$	161,944		$	84,310		$	666,423

Goodwill decreased $133,920 during the nine months ended April 30, 2012. Of the $133,920 decrease, $115,688 was due to the goodwill impairment charge recognized on the former North/South Asia reporting unit, and $19,459 was due to foreign currency translation. The decrease was partially offset by an increase of $1,227 from the acquisition of Grafo Wiremarkers Africa (Proprietary) Limited (“Grafo”) during the third quarter of fiscal 2012. Refer to Note L, “Acquisitions and Divestitures” for further discussion.

Other intangible assets include patents, trademarks, customer relationships, non-compete agreements and other intangible assets with finite lives being amortized in accordance with accounting guidance for goodwill and other intangible assets. The net book value of these assets was as follows:

	April 30, 2012									July 31, 2011
	Weighted									Weighted
	Average									Average
	Amortization		Gross							Amortization		Gross
	Period		Carrying		Accumulated			Net Book		Period		Carrying		Accumulated			Net Book
	(Years)		Amount		Amortization			Value		(Years)		Amount		Amortization			Value
Amortized other intangible assets:
Patents		5	$	10,215	$	(8,945	)	$	1,270		5	$	9,784	$	(8,556	)	$	1,228
Trademarks and other		7		9,298		(7,156	)		2,142		7		9,448		(6,559	)		2,849
Customer relationships		7		160,748		(127,764	)		32,984		7		165,566		(119,977	)		45,589
Non-compete agreements and other		4		15,945		(15,499	)		446		4		16,432		(15,760	)		672
Unamortized other intangible assets:
Trademarks		N/A		39,418		—			39,418		N/A		39,623		—			39,623
Total			$	235,624	$	(159,364	)	$	76,260			$	240,853	$	(150,892	)	$	89,961

The value of goodwill and other intangible assets in the Condensed Consolidated Balance Sheet at April 30, 2012, differs from the value assigned to them in the allocation of purchase price due to amortization, impairment charges, and the effect of fluctuations in the exchange rates used to translate financial statements into the United States Dollar between the date of acquisition and April 30, 2012. The acquisition completed during the nine months ended April 30, 2012, increased the customer relationships by $961. Refer to Note L, “Acquisitions and Divestitures” for further discussion.

Amortization expense on intangible assets was $3,944 and $5,117 for the three-month periods ended April 30, 2012 and 2011, respectively, and $12,102 and $15,387 for the nine-month periods ended April 30, 2012 and 2011, respectively. Annual amortization expense is projected to be $16,205, $10,381, $5,466, $5,128 and $4,058 for the years ending July 31, 2012, 2013, 2014, 2015 and 2016, respectively. The amount of amortization expense recognized in the periods indicated will differ due to acquisitions, divestitures, impairment charges, and the effect of fluctuations in the exchange rates used to translate financial statements into the United States Dollar.