# BRADY CORP (BRC) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from BRADY CORP's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/746598/000074659822000067/brc-20220731.htm
Accession: 0000746598-22-000067
Filing date: 2022-09-01
Report date: 2022-07-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/BRC/
All MD&A years: /company/BRC/mda/
Previous year: /company/BRC/mda/fy2021/ (FY 2021)
Next year: /company/BRC/mda/fy2023/ (FY 2023)

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, identification and compliance products. Approximately 50% of our total sales are derived outside of the United States. Foreign sales within the IDS and WPS segments are approximately 40% and 75%, respectively.

Impact of the COVID-19 Pandemic and other Global Geopolitical Events on Our Business

The Company has experienced, and expects to continue to experience, increased freight and input material cost inflation as a result of disruptions caused by COVID-19 and government-mandated actions in response to COVID-19, the conflict in the Ukraine, as well as labor shortages. The Company has taken and will continue to take actions to mitigate inflation issues, but thus far has not fully offset the impact of these trends partially due to advance notice requirements of certain distributors related to any pricing changes. As a result, these trends have negatively impacted the Company's gross profit margin during fiscal 2022.

We believe we have the financial strength to continue to invest in organic sales growth opportunities including sales, marketing, and research and development ("R&D") and inorganic sales opportunities including acquisitions, while continuing to drive sustainable efficiencies and automation in our operations and selling, general and administrative ("SG&A") functions. At July 31, 2022, we had cash of $114.1 million, as well as a credit facility with $103.4 million available for future borrowing, which can be increased up to $303.4 million at the Company's option and subject to certain conditions, for total available liquidity of $417.5 million.

We believe that our financial resources and liquidity levels including the remaining undrawn amount of the credit facility and our ability to increase that credit line as necessary are sufficient to manage the continuing impact of geopolitical events including supply chain disruptions as a result of the conflict in the Ukraine as well as the lasting impacts of the COVID-19 pandemic, including the spread of variants that could result in additional government actions around the world to contain the virus or prevent further spread which may result in reduced sales, reduced net income, and reduced cash provided by operating activities. Refer to Risk Factors, included in Part I, Item 1A of this Annual Report on Form 10-K for the year ended July 31, 2022, for further discussion of the possible impact of the COVID-19 pandemic and other global geopolitical events on our business.

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Results of Operations

The comparability of the operating results for the year ended July 31, 2022 to the years ended July 31, 2021 and July 31, 2020 has been impacted by the following acquisitions:

[[GREPCENT_TABLE]]
[["Acquisitions","","Segment","","Date Completed"],["Magicard Holdings Limited (\"Magicard\")","","IDS","","May 2021"],["Nordic ID Oyj (\"Nordic ID\")","","IDS","","May 2021"],["The Code Corporation (\"Code\")","","IDS","","June 2021"]]
[[/GREPCENT_TABLE]]

A comparison of results of operating income for the years ended July 31, 2022, 2021, and 2020 is as follows:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","2022","","% Sales","","2021","","% Sales","","2020","","% Sales"],["Net sales","","$","1,302,062","","","","","$","1,144,698","","","","","$","1,081,299"],["Gross margin","","631,552","","","48.5","%","","561,446","","","49.0","%","","528,565","","","48.9","%"],["Operating expenses:"],["Research and development","","58,548","","","4.5","%","","44,551","","","3.9","%","","40,662","","","3.8","%"],["Selling, general and administrative","","379,992","","","29.2","%","","349,768","","","30.6","%","","336,059","","","31.1","%"],["Impairment charges","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","13,821","","","1.3","%"],["Total operating expenses","","438,540","","","33.7","%","","394,319","","","34.4","%","","390,542","","","36.1","%"],["Operating income","","$","193,012","","","14.8","%","","$","167,127","","","14.6","%","","$","138,023","","","12.8","%"]]
[[/GREPCENT_TABLE]]

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our audited consolidated financial statements and the notes to those statements (Item 8) in this Annual Report on Form 10-K. The following discussion is intended to help the reader understand the results of operations and financial condition of the Company for the year ended July 31, 2022 compared to the year ended July 31, 2021.

A discussion regarding our financial condition and results of operations for fiscal 2021 compared to fiscal 2020 can be found under Item 7 in our Annual Report on Form 10-K for the year ended July 31, 2021, filed with the SEC on September 2, 2021, which is available on the SEC's website at www.sec.gov and our corporate website at www.bradyid.com/corporate/investors and such information is incorporated by reference herein. References in this Annual Report on Form 10-K to “organic sales” refer to sales calculated in accordance with U.S. GAAP, excluding the impact of foreign currency translation and sales recorded from acquired companies prior to the first anniversary date of their acquisition which, for the periods reported in this Form 10-K, includes each of Magicard, Nordic ID and Code. The Company’s organic sales disclosures exclude the effects of foreign currency translation as foreign currency translation is subject to volatility that can obscure underlying business trends. Management believes that the non-GAAP financial measure of organic sales is meaningful to investors as it provides them with useful information to aid in identifying underlying sales trends in our businesses and facilitating comparisons of our sales performance with prior periods.

Net sales increased 13.7% to $1,302.1 million in fiscal 2022, compared to $1,144.7 million in fiscal 2021, which consisted of organic sales growth of 9.4% and growth from acquisitions of 6.9%, partially offset by a decrease from foreign currency translation of 2.6%. Organic sales grew 12.8% in the IDS segment and were flat at 0.0% in the WPS segment.

The COVID-19 pandemic had a significant impact on organic sales with the impact varying between the IDS and WPS segments. In the first quarter of fiscal 2021, the IDS business began to recover from a decline in sales due to the impacts of both the COVID-19 pandemic and the overall global economy, while the WPS segment realized strong organic sales growth due to increased sales of personal protective equipment and other pandemic-related products. As a result, the recovery from the COVID-19 pandemic had a significant impact on organic sales through fiscal 2022, with the impact varying between the IDS and WPS businesses due to sales patterns realized during the height of the pandemic in fiscal 2021.

Gross margin increased 12.5% to $631.6 million in fiscal 2022, compared to $561.4 million in fiscal 2021. As a percentage of net sales, gross margin decreased to 48.5% in fiscal 2022, compared to 49.0% in fiscal 2021. The decrease in gross margin as a percentage of net sales was primarily due to an increase in the cost of materials, labor and freight, which was partially mitigated by our ongoing efforts to increase prices, streamline manufacturing processes and drive sustainable operational efficiencies.

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R&D expenses increased 31.4% to $58.5 million in fiscal 2022, compared to $44.6 million in fiscal 2021. As a percentage of net sales, R&D expenses increased to 4.5% in fiscal 2022, compared to 3.9% in fiscal 2021. The increase in R&D spending in fiscal 2022 was primarily due to the acquisitions of Code and Nordic ID, as these companies operate with a greater amount of R&D spend as a percentage of net sales compared to Brady's organic business. In addition, the R&D headcount increased in the IDS business. The Company remains committed to investing in new product development to increase sales within our IDS and WPS businesses. Investments in new printing systems, materials and the build out of a comprehensive industrial track and trace solution were the primary focus of R&D expenditures in fiscal 2022.

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 increased 8.6% to $380.0 million in fiscal 2022 compared to $349.8 million in fiscal 2021. As a percentage of net sales, SG&A expense decreased to 29.2% in fiscal 2022, compared to 30.6% in fiscal 2021. The increase in SG&A expenses in fiscal 2022 was primarily due to the acquisitions of Code, Magicard and Nordic ID, and to a lesser extent an increase in sales personnel in the IDS business, which was partially offset by a decrease due to foreign currency translation. The decrease in SG&A expense as a percentage of net sales from the prior year was due to ongoing efficiency activities throughout SG&A.

Operating income increased 15.5% to $193.0 million in fiscal 2022, compared to $167.1 million in fiscal 2021. The increase in operating income in fiscal 2022 was primarily due to the increase in segment profit in the IDS segment as a result of organic sales growth and to a lesser extent, positive earnings from the acquisitions completed in the fourth quarter of fiscal 2021.

OPERATING INCOME TO NET INCOME

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","2022","","% Sales","","2021","","% Sales","","2020","","% Sales"],["Operating income","","$","193,012","","","14.8","%","","$","167,127","","","14.6","%","","$","138,023","","","12.8","%"],["Other income (expense):"],["Investment and other income","","244","","","\u2014","%","","4,333","","","0.4","%","","5,079","","","0.5","%"],["Interest expense","","(1,276)","","","(0.1)","%","","(437)","","","\u2014","%","","(2,166)","","","(0.2)","%"],["Income before income taxes and losses of unconsolidated affiliate","","191,980","","","14.7","%","","171,023","","","14.9","%","","140,936","","","13.0","%"],["Income tax expense","","42,001","","","3.2","%","","35,610","","","3.1","%","","28,321","","","2.6","%"],["Income before losses of unconsolidated affiliate","","149,979","","","11.5","%","","135,413","","","11.8","%","","112,615","","","10.4","%"],["Equity in losses of unconsolidated affiliate","","\u2014","","","\u2014","%","","(5,754)","","","(0.5)","%","","(246)","","","\u2014","%"],["Net income","","$","149,979","","","11.5","%","","$","129,659","","","11.3","%","","$","112,369","","","10.4","%"]]
[[/GREPCENT_TABLE]]

Investment and other income was $0.2 million in fiscal 2022 compared to $4.3 million in fiscal 2021. The decrease in investment and other income in fiscal 2022 was primarily due to a decrease in the market value of securities held in deferred compensation plans.

Interest expense increased to $1.3 million in fiscal 2022 compared to $0.4 million in fiscal 2021. The increase in interest expense in fiscal 2022 was due to increased borrowing on our credit facility and an increase in interest rates compared to fiscal 2021.

The Company's income tax rate was 21.9% in fiscal 2022. Refer to Note 11, "Income Taxes" for additional information on the Company's income tax rates.

Equity in losses of unconsolidated affiliate represented the Company's 23% equity interest in React Mobile, Inc. ("React Mobile"), an employee safety software and hardware company based in the United States. During fiscal 2021, React Mobile's financial position deteriorated due to a decline in the hospitality industry from the COVID-19 pandemic, which represents its entire customer base, and increased competitive pressures from new entrants in the marketplace. As a result, management performed an analysis to determine whether the loss in value of the investment was other than temporary and recognized an other-than-temporary impairment charge of $5.0 million. The Company's equity interest in React Mobile's losses was $0.8 million in fiscal 2021 and $0.2 million in fiscal 2020.

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Business Segment Operating Results

The Company evaluates short-term segment performance based on segment profit and customer sales. Impairment charges, interest expense, investment and other income, income tax expense, equity in losses of unconsolidated affiliate, and certain corporate administrative expenses are excluded when evaluating segment performance.

Following is a summary of segment information for the years ended July 31:

[[GREPCENT_TABLE]]
[["","","2022","","2021","","2020"],["SALES GROWTH INFORMATION"],["ID Solutions"],["Organic","","12.8","%","","3.7","%","","(8.0)","%"],["Acquisitions","","9.4","%","","1.5","%","","\u2014","%"],["Currency","","(2.1)","%","","2.0","%","","(1.1)","%"],["Total","","20.1","%","","7.2","%","","(9.1)","%"],["Workplace Safety"],["Organic","","0.0","%","","(3.8)","%","","2.3","%"],["Currency","","(4.0)","%","","6.0","%","","(2.6)","%"],["Total","","(4.0)","%","","2.2","%","","(0.3)","%"],["Total Company"],["Organic","","9.4","%","","1.6","%","","(5.4)","%"],["Acquisitions","","6.9","%","","1.1","%","","\u2014","%"],["Currency","","(2.6)","%","","3.2","%","","(1.4)","%"],["Total","","13.7","%","","5.9","%","","(6.8)","%"],["SEGMENT PROFIT AS A PERCENT OF NET SALES"],["ID Solutions","","19.5","%","","20.1","%","","19.2","%"],["Workplace Safety","","8.0","%","","7.5","%","","7.1","%"],["Total","","16.9","%","","16.8","%","","15.9","%"]]
[[/GREPCENT_TABLE]]

ID Solutions

IDS net sales increased 20.1% to $1,010.9 million in fiscal 2022, compared to $841.5 million in fiscal 2021. The net sales increase consisted of organic sales growth of 12.8%, growth from acquisitions of 9.4% and a decrease from foreign currency translation of 2.1%.

Organic sales grew in all three regions in fiscal 2022. Organic sales in the Americas and Asia increased nearly 12% and organic sales in Europe grew approximately 15%. Organic sales grew in all major product lines with the strongest growth in the wire identification and product identification product lines. Approximately one-third of the organic sales growth in IDS was driven by price increases with the remainder of the growth resulting from volume.

Segment profit increased to $197.1 million in fiscal 2022 from $169.2 million in fiscal 2021, an increase of $27.9 million or 16.5%. The increase in segment profit was primarily due to organic sales growth in fiscal 2022. As a percent of net sales, segment profit decreased to 19.5% in fiscal 2022 compared to 20.1% in fiscal 2021. The decrease in segment profit as a percentage of net sales was primarily due to gross margin compression resulting from an increase in the cost of materials, labor and freight, as well as incremental amortization expense of $7.9 million in fiscal 2022, which was partially offset by pricing actions.

Workplace Safety

WPS sales decreased 4.0% to $291.2 million in fiscal 2022 compared to $303.2 million in fiscal 2021, all of which was due to foreign currency translation. The WPS business realized organic sales growth during the height of the pandemic at the end of fiscal 2020 and the beginning of fiscal 2021 due to increased sales of personal protective equipment and other pandemic-related products, which resulted in challenging comparable results during the first half of fiscal 2022. Sales of core safety and identification products continued to recover through fiscal 2022 but were offset by a decline in sales of COVID-19 related products in the first half of the year, resulting in an organic sales decline which was offset by organic sales growth in the second half of the year, finishing the year with flat organic sales in the WPS business. Organic sales consisted of a low-single digit decrease in catalog channel sales and low single-digit growth in digital sales in fiscal 2022 compared to fiscal 2021.

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Organic sales in Europe and Australia increased slightly, while organic sales in North America decreased in the low-single digits in fiscal 2022 compared to fiscal 2021. The trend noted above was applicable to each region within the WPS business with challenging comparable results during the first half of fiscal 2022 due to decreased demand for pandemic-related products, which was offset by an increase in sales of core safety and identification products. Digital sales increased in the mid-single digits in both North America and Europe and increased in the low-single digits in Australia. This growth was offset by a mid-single digit decline in catalog sales in North America, while catalog sales were essentially flat in Europe and Australia in fiscal 2022 compared to fiscal 2021.

Segment profit increased to $23.2 million in fiscal 2022 compared to $22.8 million in fiscal 2021, an increase of $0.5 million or 2.1%. As a percentage of net sales, segment profit increased to 8.0% in fiscal 2022 compared to 7.5% in fiscal 2021. The increase in segment profit was primarily due to actions taken during the third quarter of the fiscal year to reduce the cost structure, including reductions in headcount and advertising expenses. As a result, the entire increase in segment profit occurred during the second half of fiscal 2022.

Financial Condition

Liquidity & Capital Resources

The Company's cash balances are generated and held in numerous locations throughout the world. At July 31, 2022, approximately 94% of the Company's cash and cash equivalents were held outside the United States. The Company's organic and inorganic growth has historically been funded by a combination of cash provided by operating activities and debt financing. The Company believes that its cash flow from operating activities and its borrowing capacity are sufficient to fund its anticipated requirements for working capital, capital expenditures, research and development, and dividend payments for the next 12 months. Although the Company believes these sources of cash are currently sufficient to fund domestic operations, annual cash needs could require repatriation of cash to the U.S. from foreign jurisdictions, which may result in additional tax payments.

Cash Flows

Cash and cash equivalents were $114.1 million at July 31, 2022, a reduction of $33.3 million from July 31, 2021. The following summarizes the cash flow statement for the years ended July 31:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","2022","","2021","","2020"],["Net cash flow provided by (used in):"],["Operating activities","$","118,449","","","$","205,665","","","$","140,977"],["Investing activities","(43,071)","","","(268,592)","","","(36,119)"],["Financing activities","(102,089)","","","(12,324)","","","(163,520)"],["Effect of exchange rate changes on cash","(6,555)","","","4,943","","","(2,767)"],["Net decrease in cash and cash equivalents","$","(33,266)","","","$","(70,308)","","","$","(61,429)"]]
[[/GREPCENT_TABLE]]

Net cash provided by operating activities was $118.4 million during fiscal 2022, compared to $205.7 million in fiscal 2021. The decrease was primarily due to cash outflows for inventory purchases in order to reduce the risk of supply chain disruption. In addition, annual incentive compensation payments were higher in the current fiscal year than they were in the prior year.

Net cash used in investing activities was $43.1 million during fiscal 2022, compared to $268.6 million in the prior year. The decrease in cash used in investing activities was primarily due to the acquisitions of Code, Magicard and Nordic ID which were closed during the fourth quarter of fiscal 2021.

Net cash used in financing activities was $102.1 million during fiscal 2022, which primarily consisted of share repurchases of $109.2 million and dividend payments of $45.9 million, which was partially offset by $57.0 million of net borrowing on the credit facility. Net cash used in financing activities of $12.3 million during fiscal 2021 primarily consisted of dividend payments of $45.7 million and share repurchases of $3.6 million, which was partially offset by net borrowing on the credit facility of $38.0 million to finance a portion of the purchase price of Code in the fourth quarter of fiscal 2021.

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Material Cash Requirements

Our material cash requirements for known contractual obligations include capital expenditures, borrowings on credit facilities and lease obligations, each of which are discussed in more detail throughout this section. We believe that net cash provided by operating activities will continue to be adequate to meet our liquidity and capital needs for these items over the short-term in the next 12 months and in the long-term beyond the next 12 months. We also have cash requirements for purchase orders and contracts for the purchase of inventory and other goods and services, which are based on current and anticipated customer needs and are fulfilled by our suppliers within short time horizons. We do not have significant agreements for the purchase of inventory or other goods or services specifying minimum order quantities. In addition, we may have liabilities for uncertain tax positions, but we do not believe that the cash requirements to meet any of these liabilities will be material. A discussion of income taxes is contained in Note 11 of the Notes to Consolidated Financial Statements.

Credit Facilities and Covenant Compliance

Refer to Item 8, Note 6, "Debt" for information regarding the Company's credit facilities and covenant compliance.

Subsequent Events Affecting Financial Condition

Refer to Item 8, Note 16, "Subsequent Events" for information regarding the Company's subsequent events affecting financial condition.

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 custom products 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 different 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 laws including a tax case ruling or legislative guidance; or (iii) there is an expiration of the statute of limitations. The liability for unrecognized tax benefits, excluding interest and penalties, was $20.6 million and $21.9 million as of July 31, 2022 and 2021, respectively. If recognized, $17.8 million and $18.7 million of unrecognized tax benefits as of July 31, 2022 and 2021, respectively, would reduce the Company's income tax rate. Accrued interest and penalties related to unrecognized tax benefits were $4.8 million and $4.4 million as of July 31, 2022 and 2021, respectively. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense on the Consolidated Statements of

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Income. The Company believes it is reasonably possible that the amount of gross unrecognized tax benefits could be reduced by up to $3.9 million in the next 12 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 as an income tax benefit in the Consolidated Statements of Income.

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 $47.3 million and $51.1 million as of July 31, 2022 and 2021, 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. If the actual results differ from these estimates, it could result in an impairment of intangible assets and goodwill or require acceleration of the amortization expense of finite-lived intangible assets. In addition, goodwill and other indefinite-lived intangible assets must be tested for impairment at least annually. If circumstances or 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 eight reporting units within its two reportable segments, IDS and WPS, with the following goodwill balances as of July 31, 2022: IDS Americas and Europe, $286.9 million; PDC, $93.3 million; WPS Europe, $30.7 million; Code Corporation, $138.6 million; and Magicard, $37.3 million. The IDS Asia, WPS North America, and WPS Australia reporting units each have a goodwill balance of zero. The Company believes that the discounted cash flow model and the market approach 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, the Company would recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds the fair value. If necessary, the Company may consult valuation specialists to assist with the assessment of the estimated fair value of the reporting unit.

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, 2022, in accordance with ASC 350, “Intangibles - Goodwill and Other” indicated that each of the reporting units had a fair value substantially in excess of its carrying value.

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Other Indefinite-Lived Intangible Assets

Other indefinite-lived intangible assets, which consists of tradenames, are tested for impairment in accordance with the Company's policy outlined above using the income approach. Fair value is estimated using the income approach based upon current sales projections applying the relief from royalty method. If the carrying value of the indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. As a result of the analysis performed on May 1, 2022, all indefinite-lived tradenames had fair value in excess of carrying value.

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.

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