# BRADY CORP (BRC) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from BRADY CORP's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/746598/000074659823000058/brc-20230731.htm
Accession: 0000746598-23-000058
Filing date: 2023-09-05
Report date: 2023-07-31
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/fy2022/ (FY 2022)
Next year: /company/BRC/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Brady Corporation is a global manufacturer and supplier of identification solutions and workplace safety products that identify and protect premises, products and people. Effective February 1, 2023, the Company is organized and managed on a geographic basis with two reportable segments: Americas & Asia and Europe & Australia. As such, all segment-related data has been recast to reflect our new reportable segments in the Management's Discussion and Analysis of Financial Condition and Results of Operations section. Prior to February 1, 2023, the Company operated two former segments: IDS and WPS. IDS products include high-performance and innovative identification and healthcare products that are designed, manufactured, and distributed within the Company's value chain. WPS products include a broad range of stock and custom identification products that the Company manufactures, as well as a wide variety of products that the Company purchases and resells as a distributor.

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, 2023 compared to the year ended July 31, 2022 and the year ended July 31, 2022 compared to the year ended July 31, 2021.

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, sales recorded from divested companies up to the first anniversary of their divestiture and sales recorded from acquired companies prior to the first anniversary date of their acquisition. 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.

Macroeconomic Conditions and Trends

The Company has experienced, and expects to continue to experience, inflationary pressures and supply chain and other business disruptions. The Company has taken and will continue to take actions to mitigate inflation issues through pricing actions and the execution of sustainable efficiency gains.

We believe we have the financial strength to continue to invest in organic sales growth opportunities including sales, marketing, R&D and inorganic sales opportunities including acquisitions, while continuing to drive sustainable efficiency gains and automation in our operations and selling, general and administrative ("SG&A") functions and return capital to our shareholders in the form of dividends and share repurchases. At July 31, 2023, we had cash of $151.5 million, as well as a credit agreement with $248.3 million available for future borrowing, which can be increased up to $1,068.3 million at the Company's option and subject to certain conditions, for total available liquidity of $1,219.8 million.

We believe that our financial resources and liquidity levels including the remaining undrawn amount of the credit agreement and our ability to increase that credit line as necessary are sufficient to manage the continuing impact of economic or geopolitical events which may result in reduced sales, net income, or 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, 2023, for further discussion of the possible impact of global economic or 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 year ended July 31, 2021 has been impacted by the following acquisitions: Magicard Holdings Limited ("Magicard") and Nordic ID Oyj ("Nordic ID") which were completed in May 2021, and The Code Corporation ("Code") which was completed in June 2021. All three acquisitions operate within both of our reportable segments. In addition, in March 2023 the Company divested the PremiSys business which impacted the Americas & Asia reportable segment.

A comparison of results of operating income for the years ended July 31, 2023, 2022, and 2021 is as follows:

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Fiscal 2023 Compared to Fiscal 2022

Net sales increased 2.3% to $1,331.9 million in fiscal 2023 compared to $1,302.1 million in fiscal 2022, which consisted of organic sales growth of 5.5%, partially offset by a decrease from foreign currency translation of 3.0% and a decrease of 0.2% due to the divestiture of a business. Organic sales grew 4.4% in the Americas & Asia segment and 7.6% in the Europe & Australia segment.

Gross margin increased 4.1% to $657.3 million in fiscal 2023 compared to $631.6 million in fiscal 2022. As a percentage of net sales, gross margin increased to 49.4% in fiscal 2023 from 48.5% in fiscal 2022. The increase in gross margin as a percentage of net sales was primarily due to operating efficiencies resulting from investment in process automation and reductions in freight expense, partially offset by an increase in material costs due to inflationary pressures.

R&D expenses increased 4.8% to $61.4 million in fiscal 2023 compared to $58.5 million in fiscal 2022. As a percentage of net sales, R&D expenses increased to 4.6% in fiscal 2023 compared to 4.5% in fiscal 2022. The increase in R&D spending in fiscal 2023 was primarily due to increased headcount as well as increased project spend. The Company remains committed to investing in new product development to increase sales within our businesses. Investments in new printing systems, materials and the build out of industrial track and trace solutions were the primary focus of R&D expenditures in fiscal 2023.

SG&A expenses include selling and administrative costs directly attributed to the Americas & Asia and Europe & Australia segments, as well as certain other corporate administrative expenses including finance, information technology, human resources and other administrative expenses. SG&A expenses decreased 2.4% to $370.7 million in fiscal 2023 compared to $380.0 million in fiscal 2022. As a percentage of net sales, SG&A expense decreased to 27.8% in fiscal 2023 compared to 29.2% in fiscal 2022. The decrease in SG&A expenses in fiscal 2023 was due to foreign currency translation. The decrease in SG&A expenses as a percentage of sales in fiscal 2023 was primarily due to reduced headcount, lower advertising spend and a decrease in amortization expense of $3.2 million, which was partially offset by costs associated with the change to a regional reporting structure.

Operating income increased 16.7% to $225.2 million in fiscal 2023 compared to $193.0 million in fiscal 2022. The increase in operating income in fiscal 2023 was primarily due to the increase in segment profit in the Americas & Asia segment as a result of organic sales growth, improved gross profit margin primarily due to reductions in freight costs as well as price increases, and operational efficiencies throughout the region.

Fiscal 2022 Compared to Fiscal 2021

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 10.3% in the Americas & Asia segment and 7.9% in the Europe & Australia segment.

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

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a percentage of net sales was primarily due to an increase in the cost of materials, labor and freight, which was partially mitigated by pricing actions and operational efficiencies including streamlining manufacturing processes.

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 Americas & Asia segment. 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 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, 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 Americas & Asia 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

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[[/GREPCENT_TABLE]]

Fiscal 2023 Compared to Fiscal 2022

Investment and other income was $4.0 million in fiscal 2023 compared to $0.2 million in fiscal 2022. The increase in investment and other income in fiscal 2023 was primarily due to an increase in the market value of securities held in deferred compensation plans and an increase in interest income.

Interest expense increased to $3.5 million in fiscal 2023 compared to $1.3 million in fiscal 2022. The increase in interest expense in fiscal 2023 was primarily due to an increase in benchmark interest rates compared to fiscal 2022.

The Company's income tax rate was 22.5% in fiscal 2023. Refer to Note 11, "Income Taxes" for additional information on the Company's income tax rates.

Fiscal 2022 Compared to Fiscal 2021

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 agreement 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.

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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.

Business Segment Operating Results

The Company evaluates short-term segment performance based on segment profit and customer sales. 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.

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

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[[/GREPCENT_TABLE]]

Fiscal 2023 Compared to Fiscal 2022

Americas & Asia

Americas & Asia net sales increased 3.2% to $888.9 million in fiscal 2023 compared to $861.1 million in fiscal 2022. The net sales increase consisted of organic sales growth of 4.4% and decreases from foreign currency translation of 0.9% and the sale of the PremiSys business of 0.3%.

Organic sales in the Americas increased in the mid-single digits in fiscal 2023. The increase in organic sales was primarily due to organic sales growth in IDS products with strongest growth in the safety and facility identification, healthcare identification and wire identification product lines, which was partially offset by an organic sales decline in the product identification product line. Organic growth in IDS products was partially offset by a mid-single digit decline in WPS products.

Organic sales in Asia declined in the low-single digits in fiscal 2023. The organic sales decline was primarily driven by decreased volume in China and Malaysia, which was partially offset by increased volume in India and Japan. The organic sales decline in China was due to the spread of COVID-19 primarily during the second quarter of fiscal 2023.

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Segment profit increased 14.7% to $180.5 million in fiscal 2023 from $157.3 million in fiscal 2022. As a percent of net sales, segment profit increased to 20.3% in fiscal 2023 from 18.3% in fiscal 2022. The increase in segment profit was primarily due increased sales volumes in the Americas, reductions in freight costs, as well as ongoing efforts to streamline processes to drive operational efficiencies, which were partially offset by an increase in material costs due to inflationary pressures.

Europe & Australia

Europe & Australia sales increased 0.5% to $443.0 million in fiscal 2023 compared to $441.0 million in fiscal 2022. The net sales increase consisted of organic sales growth of 7.6% and a decrease from foreign currency translation of 7.1%.

Organic sales in Europe increased in the mid-single digits in fiscal 2023 which was driven by mid-single digit growth in both IDS and WPS products. Organic growth was strongest in the safety and facility identification and product identification product lines, followed by the wire identification product line. The increase in organic sales in Europe was primarily driven by a mid-single digit increase in Western Europe, partially offset by a single-digit decline in the Nordic region. Organic sales growth was approximately 21% across Eastern Europe, the Middle East and Africa. Organic sales in WPS products was driven by digital sales growth of nearly 13% from improvement in digital capabilities.

Organic sales in Australia increased in the low-teens in fiscal 2023. Organic sales growth was driven by volume in the safety and facility identification product line. Price increases implemented in the second half of fiscal 2022 and the first quarter of fiscal 2023 represented the remainder of the organic sales growth.

Segment profit increased 4.3% to $65.7 million in fiscal 2023 compared to $63.1 million in fiscal 2022. As a percentage of net sales, segment profit increased to 14.8% in fiscal 2023 compared to 14.3% in fiscal 2022. The increase in segment profit was primarily due to actions taken during fiscal 2022 to reduce the cost structure as well as pricing actions implemented throughout fiscal 2023.

Fiscal 2022 Compared to Fiscal 2021

Americas & Asia

Americas & Asia net sales increased 17.1% to $861.1 million in fiscal 2022 compared to $735.6 million in fiscal 2021. The net sales increase consisted of organic sales growth of 10.3%, growth from acquisitions of 6.9% and a decrease from foreign currency translation of 0.1%.

Organic sales in the Americas increased approximately 10% in fiscal 2022. The increase in organic sales was primarily due to organic sales growth in IDS products of nearly 12%. Organic sales grew in all major product lines with the strongest growth in the wire identification and safety and facility identification product lines, which was partially offset by a low-single digit sales decline in WPS products.

Organic sales in Asia increased nearly 12% in fiscal 2022. Sales growth was broad-based with a high-single digit increase in China and organic sales growth of approximately 15% within all other countries in the region.

Segment profit increased 15.1% to $157.3 million in fiscal 2022 compared to $136.6 million in fiscal 2021. The increase in segment profit was primarily due to organic sales growth in fiscal 2022 and positive earnings from acquisitions completed in the fourth quarter of fiscal 2021. As a percent of net sales, segment profit decreased to 18.3% in fiscal 2022 compared to 18.6% 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 $5.4 million in fiscal 2022, which was partially offset by pricing actions.

Europe & Australia

Europe & Australia net sales increased 7.8% to $441.0 million in fiscal 2022 compared to $409.1 million in fiscal 2021. The net sales increase consisted of organic sales growth of 7.9%, growth from acquisitions of 6.9% and a decrease from foreign currency translation of 7.0%.

Organic sales in Europe increased in the high-single digits in fiscal 2022. The increase in organic sales was primarily due to organic sales growth in IDS products of approximately 15%. Organic sales grew in all major IDS product lines with the strongest growth in the product identification product line, followed by the safety and facility identification and wire identification product lines. WPS product organic sales increased slightly during the year with mid-single digit growth from the digital channel, while sales from all other channels were essentially flat.

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Organic sales in Australia increased slightly in fiscal 2022. Digital sales increased in the low-single digits, and sales from all other channels were essentially flat.

Segment profit increased 13.9% to $63.1 million in fiscal 2022 compared to $55.4 million in fiscal 2021. As a percentage of net sales, segment profit increased to 14.3% in fiscal 2022 compared to 13.5% in fiscal 2021. The increase in segment profit was primarily due to organic sales growth, positive earnings from acquisitions completed in the fourth quarter of fiscal 2021, and actions taken to reduce the cost structure, including certain forms of advertising spend, which was partially offset by incremental amortization expense of $2.5 million in 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, 2023, approximately 98% 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, common stock repurchases, and dividend payments for the next 12 months and beyond. 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 $151.5 million at July 31, 2023, an increase of $37.5 million from July 31, 2022. The following summarizes the cash flow statement for the years ended July 31:

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Fiscal 2023 Compared to Fiscal 2022

Net cash provided by operating activities was $209.1 million during fiscal 2023 compared to $118.4 million in fiscal 2022. The increase in cash provided by operating activities was primarily due to improved profitability and reduced inventory purchases compared to elevated inventory purchases in the prior year to reduce the risk of supply chain disruption.

Net cash used in investing activities was $11.2 million during fiscal 2023, which consisted of capital expenditures of $19.2 million partially offset by proceeds of $8.0 million received from the sale of the PremiSys business. Net cash used in investing activities was $43.1 million in fiscal 2022, which was elevated due to the purchase of two facilities that were previously leased.

Net cash used in financing activities was $163.6 million during fiscal 2023 compared to $102.1 million in fiscal 2022. The increase in cash used in financing activities was primarily due to $102.3 million of net repayment activity on the credit agreement in fiscal 2023 compared to fiscal 2022, which was due to the increase in net cash provided by operating activities in fiscal 2023. This increase was partially offset by a decrease in share repurchases of $34.2 million in fiscal 2023 compared to fiscal 2022.

Fiscal 2022 Compared to Fiscal 2021

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 fiscal 2022 than they were in fiscal 2021.

Net cash used in investing activities was $43.1 million during fiscal 2022 compared to $268.6 million in fiscal 2021. 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.

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Net cash used in financing activities was $102.1 million during fiscal 2022 compared to $12.3 million in fiscal 2021. The increase in cash used in financing activities was primarily due to an increase in share repurchases of $105.6 million, which was partially offset by a $19.0 million increase in net borrowings on the credit agreement in fiscal 2022 compared to fiscal 2021.

Material Cash Requirements

Our material cash requirements for known contractual obligations include capital expenditures, borrowings on credit facilities and lease obligations. 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 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.

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 $20.9 million and $20.6 million as of July 31, 2023 and 2022, respectively. If recognized, $17.8 million of unrecognized tax benefits would reduce the Company's income tax rate as of both July 31, 2023 and 2022. Accrued interest and penalties related to unrecognized tax benefits were $5.3 million and $4.8 million as of July 31, 2023 and 2022, 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 that the amount of gross unrecognized tax benefits could be reduced by up to $2.6 million in

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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 $52.8 million and $47.3 million as of July 31, 2023 and 2022, 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 seven reporting units within its two reportable segments, Americas & Asia and Europe & Australia, with the following goodwill balances as of July 31, 2023: North America, $438.0 million; Europe, $151.2 million; and Latin America, $3.4 million. The other four identified 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) competing technologies, (v) overall financial performance such as cash flows, actual and planned revenue and profitability, and (vi) 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, 2023, 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, 2023, 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.