Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. BRADY CORP (746598) 10-Q published on May 23, 2019 at 7:07 am
Reporting Period: Apr 29, 2019
In February 2016, the FASB issued ASU 2016-02, "Leases," which replaces the current lease accounting standards. The update requires, among other items, lessees to recognize the assets and liabilities that arise from most leases on the balance sheet and disclose key information about leasing arrangements. This guidance is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The ASU allows for either a full-retrospective or a modified-retrospective approach and early adoption is permitted. In July 2018, the FASB approved an optional transition method to allow companies to apply the new lease standard as of the adoption date and recognize a cumulative-effect adjustment to beginning retained earnings in the period of adoption.
The Company has formed a team to implement the new lease standard and has implemented a third-party software program to track and store its leases. The implementation team has been evaluating the Company’s global lease portfolio, determining the reporting requirements of the new standard, and is in the process of implementing changes to its processes and internal controls to support lease accounting and disclosure requirements. The Company expects to record right-of-use assets and lease liabilities as a result of the new lease standard; however, it is still evaluating the magnitude of the impact on its consolidated financial statements. The Company plans to adopt the new standard effective August 1, 2019 using the optional transition method.
The Company also sells extended warranty coverage for certain products, which it accounts for as service warranties. In most cases, the extended service warranty is included with the purchase of the product. In applying Topic 606, the Company considers the extended service warranty to be a separate performance obligation in the contract and allocates a portion of the transaction
price to the service warranty based on the estimated stand-alone selling price. Under Topic 606, the extended warranty transaction price is initially recorded as deferred revenue on the consolidated balance sheet and recognized on a straight-line basis over the life of the service warranty period. The deferred revenue is considered a contract liability as the Company has a right to payment at the time the product with the related extended service warranty is shipped or delivered and therefore, payment is received in advance of the Company's performance. The balance of contract liabilities as of April 30, 2019, was $2,791. This also represents the amount of unsatisfied performance obligations related to contracts that extend beyond one year. Of this amount, the Company expects to recognize 48% by the end of fiscal 2020, an additional 25% by the end of fiscal 2021, and the balance thereafter. Upon adoption of Topic 606, at the beginning of fiscal 2019, the contract liability balance was $2,796. The current portion of contract liabilities and the non-current portion are included in “Other current liabilities” and “Other liabilities," respectively, on the consolidated balance sheet. During the three and nine months ended April 30, 2019, the Company recognized revenue of $315 and $937, respectively, that was included in the contract liability balance at the beginning of the period, which was from the amortization of extended service warranties.
R&D expenses for the three months ended April 30, 2019, decreased 2.1% to $11.4 million, compared to $11.7 million in the same period of the prior year. The decrease in the three-month period was due to the timing of expenditures related to ongoing new product development projects. R&D expenses for the nine months ended April 30, 2019, remained essentially flat at $33.8 million, compared to $33.5 million in the same period of the prior year. The Company remains committed to investing in new product development in connection with our focus on increasing new product sales within our IDS and WPS businesses. Investments in new software and printer updates continue to be the primary focus of R&D expenditures.
WPS sales decreased 12.2% for the three months ended April 30, 2019, which consisted of an organic sales decline of 1.6%, a decrease from foreign currency translation of 5.3%, and a decrease from a divestiture of 5.3%, compared to the same period in the prior year. Sales through the digital channel decreased slightly due to the performance of the Americas business, while sales through the catalog channel decreased in the low-single digits for the three-month period. WPS sales decreased 9.7% for the nine months ended April 30, 2019, which consisted of an organic sales declined of 0.2%, a decrease from foreign currency translation of 3.7%, and a decrease from a divestiture of 5.8%, compared to the same period in the prior year. Sales through the digital channel grew in the low-single digits while sales through the catalog channel declined in the low-single digits for the nine-month period.
Organic sales in the Americas decreased approximately 10% for the three months ended April 30, 2019 and decreased in the high-single digits for the nine months ended April 30, 2019, compared to the same periods in the prior year. WPS Americas continued to experience the negative impact from the digital platform implemented in the prior year and realized a decline in sales for both the three and nine-month periods. The business transitioned to a new digital platform toward the end of the three months ended January 31, 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 from last year. Catalog channel sales declined in the mid-single digits for both the three and nine-month periods due to lower response rates to catalog promotions.