For the Quarterly Period Ended January 31, 2017

OR

For the Transition Period from                     to                     

Commission File Number 1-14959

(414) 358-6600

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   ☑     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes   ☑     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   ☑

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

As of February 21, 2017, there were 47,615,579 outstanding shares of Class A Nonvoting Common Stock and 3,538,628 shares of Class B Voting Common Stock. The Class B Voting Common Stock, all of which is held by affiliates of the Registrant, is the only voting stock.

FORM 10-Q

BRADY CORPORATION

INDEX

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BRADY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

See Notes to Condensed Consolidated Financial Statements.

BRADY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Dollars in Thousands, Except Per Share Amounts, Unaudited)

See Notes to Condensed Consolidated Financial Statements.

BRADY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

See Notes to Condensed Consolidated Financial Statements.

BRADY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands, Unaudited)

See Notes to Condensed Consolidated Financial Statements

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended January 31, 2017

(Unaudited)

(In thousands, except share and per share amounts)

NOTE A - Basis of Presentation

The condensed consolidated financial statements included herein have been prepared by Brady Corporation and subsidiaries (the "Company," "Brady," "we," or "our") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, the foregoing statements contain all adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial position of the Company as of January 31, 2017 and July 31, 2016 , its results of operations and comprehensive income for the three and six months ended January 31, 2017 and 2016 , and cash flows for the six months ended January 31, 2017 and 2016 . The consolidated balance sheet as of July 31, 2016 has been derived from the audited consolidated financial statements as of that date. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts therein. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from the estimates.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to rules and regulations of the Securities and Exchange Commission. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statement presentation. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year ended July 31, 2016 .

NOTE B - Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill for the six months ended January 31, 2017 , were as follows:

Goodwill at January 31, 2017 and July 31, 2016 , included $118,637 and $209,392 of accumulated impairment losses within the Identification Solutions ("IDS") and Workplace Safety ("WPS") segments, respectively, for a total of $328,029 . There were no impairment charges recorded during the six months ended January 31, 2017 .

As further discussed in Note E - Segment Information, the Company realigned certain businesses between the WPS and IDS reportable segments effective August 1, 2016. In accordance with ASC 350, "Intangibles - Goodwill and Other," the Company completed a relative fair value calculation of the businesses that were realigned and moved the corresponding goodwill balance of $2,490 between the two reportable segments.

Other intangible assets include patents, trademarks, customer relationships, non-compete agreements and other intangible assets with finite lives being amortized in accordance with the accounting guidance for other intangible assets. The Company also has unamortized indefinite-lived trademarks that are classified as other intangible assets. The net book value of these assets was as follows:

The decrease in the gross carrying amount of other intangible assets as of January 31, 2017 , compared to July 31, 2016 , was due to the effect of currency fluctuations during the six-month period.

The gross carrying amount of goodwill and other intangible assets in the condensed consolidated balance sheet at January 31, 2017 differs from the value assigned to them in the original allocation of purchase price due to impairments and the effect of currency fluctuations between the date of acquisition and January 31, 2017 .

Amortization expense on intangible assets was $1,688 and $ 2,595 for the three months ended January 31, 2017 and 2016 , respectively, and $3,583 and $5,228 for the six months ended January 31, 2017 and 2016 , respectively. The amortization over each of the next five fiscal years is projected to be $ 7,356 , $ 6,680 , $ 6,412 , $ 5,909 and $ 5,864 for the fiscal years ending July 31, 2017 , 2018 , 2019 , 2020 and 2021 , respectively.

NOTE C - Other Comprehensive Loss

Other comprehensive loss consists of foreign currency translation adjustments, unrealized gains and losses from cash flow hedges and net investment hedges, and the unamortized gain on post-retirement plans, net of their related tax effects.

The following table illustrates the changes in the balances of each component of accumulated other comprehensive loss, net of tax, for the six months ended January 31, 2017 :

The increase in accumulated other comprehensive loss as of January 31, 2017 , compared to July 31, 2016 , was primarily due to the appreciation of the U.S. dollar against certain other currencies during the six month period. The foreign currency translation adjustments column in the table above includes the impact of foreign currency translation, foreign currency translation on intercompany notes, and the settlements of net investment hedges, net of tax. Of the total $19 in amounts reclassified from accumulated other comprehensive loss, the $253 loss on cash flow hedges was reclassified into cost of products sold, and the $272 gain on post-retirement plans was reclassified into selling, general and administrative expenses ("SG&A") on the condensed consolidated statement of earnings for the six months ended January 31, 2017 .

The changes in accumulated other comprehensive loss by component, net of tax, for the six months ended January 31, 2016 , were as follows:

The increase in accumulated other comprehensive loss as of January 31, 2016 , compared to July 31, 2015 , was primarily due the appreciation of the U.S. dollar against certain other currencies during the six-month period. The foreign currency translation adjustments column in the table above includes the impact of foreign currency translation, foreign currency translation on intercompany notes, and the settlements of net investment hedges, net of tax. Of the total $1,567 in amounts reclassified from accumulated other comprehensive loss, the $209 gain on cash flow hedges was reclassified into cost of products sold, and the $1,358 gain on post-retirement plans was reclassified into SG&A on the condensed consolidated statement of earnings for the six months ended January 31, 2016 .

The following table illustrates the income tax expense on the components of other comprehensive loss for the three and six months ended January 31, 2017 and 2016 :

NOTE D - Net Earnings per Common Share

Reconciliations of the numerator and denominator of the basic and diluted per share computations for the Company's Class A and Class B common stock are summarized as follows:

Options to purchase 768,617 and 3,923,000 shares of Class A Nonvoting Common Stock for the three months ended January 31, 2017 and 2016 , respectively, and 770,010 and 4,048,000 shares for the six months ended January 31, 2017 and 2016 , respectively, were not included in the computation of diluted net earnings or loss per share because the option exercise price was greater than the average market price of the common shares and, therefore, the effect would have been anti-dilutive.

NOTE E - Segment Information

The Company is organized and managed on a global basis within three operating segments, Identification Solutions ("IDS"), Workplace Safety ("WPS"), and People Identification ("People ID"), which aggregate into two reportable segments that are organized around businesses with consistent products and services: IDS and WPS. The Identification Solutions and People ID operating segments aggregate into the IDS reporting segment, while the WPS reporting segment is comprised solely of the Workplace Safety operating segment.

Effective August 1, 2016, the Company changed its internal measure of segment profit and loss that is reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segment and assessing its performance. Prior to August 1, 2016, certain administrative costs were excluded from the measure of segment profit and loss. Effective August 1, 2016, a portion of these administrative costs have been included within the IDS and WPS segments, which includes the cost of finance, information technology, human resources, and certain other administrative costs. Interest expense, investment and other income (expense), income taxes, and certain corporate administrative expenses continue to be excluded when evaluating segment performance.

Also effective August 1, 2016, the Company realigned certain businesses between the WPS and IDS reportable segments, resulting in increased revenues and segment profit in the IDS segment and equal and offsetting declines in revenues and segment profit in the WPS segment. The Company's accompanying segment information has been restated to reflect the change in measurement of segment profit and loss and the realignment of businesses.

The following is a summary of segment information for the three and six months ended January 31, 2017 and 2016 :

The following is a reconciliation of segment profit to earnings before income taxes for the three and six months ended January 31, 2017 and 2016 :

NOTE F – Stock-Based Compensation

The Company has an incentive stock plan under which the Board of Directors may grant nonqualified stock options to purchase shares of Class A Nonvoting Common Stock, restricted stock units ("RSUs"), or restricted and unrestricted shares of Class A Nonvoting Common Stock to employees and non-employee directors. Certain awards may be subject to pre-established performance goals.

The options issued under the plan have an exercise price equal to the fair market value of the underlying stock at the date of grant and generally vest over a three-year service period, with one-third becoming exercisable one year after the grant date and one-third additional in each of the succeeding two years. Options issued under the plan, referred to herein as "service-based" stock options, generally expire 10 years from the date of grant.

Restricted and unrestricted shares and RSUs issued under the plan have a grant date fair value equal to the fair market value of the underlying stock at the date of grant. Shares issued under the plan are referred to herein as either "service-based" or "performance-based" restricted shares and RSUs. The service-based RSUs granted under the plan generally vest over a three-year service period, with one-third becoming exercisable one year after the grant date and one-third additional in each of the succeeding two years. The performance-based RSUs granted under the plan generally vest at the end of a three-year service period provided specified company financial performance metrics are met.

As of January 31, 2017 , the Company has reserved 3,784,771 shares of Class A Nonvoting Common Stock for outstanding stock options, RSUs, and restricted shares and 4,477,197 shares of Class A Nonvoting Common Stock remain for future issuance of stock options, RSUs, and restricted and unrestricted shares under the plan. The Company uses treasury stock or will issue new Class A Nonvoting Common Stock to deliver shares under the plan.

The Company recognizes the compensation cost of all share-based awards at the time it is deemed probable the award will vest. This cost is recognized 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. Total stock-based compensation expense recognized by the Company during the three months ended January 31, 2017 and 2016 , was $2,238 ( $1,387 net of taxes) and $1,973 ( $1,223 net of taxes), respectively. Expense recognized during the six months ended January 31, 2017 and 2016 , was $5,394 ( $3,344 net of taxes) and $4,569 ( $2,833 net of taxes), respectively.

As of January 31, 2017 , total unrecognized compensation cost related to stock-based compensation awards was $17,455 pre-tax, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of 2.3 years.

The Company has estimated the grant date fair value of its service-based stock option awards granted during the six months ended January 31, 2017 and 2016 , using the Black-Scholes option valuation model. The weighted-average assumptions used in the Black-Scholes valuation model are reflected in the following table:

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.

A summary of stock option activity under the Company's share-based compensation plans for the six months ended January 31, 2017 , is presented below:

There were 2,037,018 and 2,723,184 options exercisable with a weighted average exercise price of $28.67 and $30.00 at January 31, 2017 and 2016 , respectively. The total intrinsic value of options exercised during the six months ended January 31, 2017 and 2016 , based upon the average market price at the time of exercise during the period, was $6,719 and $7 , respectively. The total fair value of stock options vested during the six months ended January 31, 2017 and 2016 , was $2,890 and $3,131 , respectively.

The cash received from the exercise of options during the three months ended January 31, 2017 and 2016 , was $5,846 and $53 , respectively. The cash received from the exercise of options during the six months ended January 31, 2017 , and 2016 was $14,659 and $53 , respectively. The tax benefit on options exercised during the three months ended January 31, 2017 and 2016 , was $353 and $3 , respectively. The tax benefit on options exercised during the six months ended January 31, 2017 and 2016 , was $1,453 and $3 , respectively.

The following table summarizes the RSU activity under the Company's share-based compensation plans for the six months ended January 31, 2017 :

The service-based RSUs granted during the six months ended January 31, 2016 , had a weighted-average grant date fair value of $ 20.07 . The total fair value of service-based RSUs vested during the six months ended January 31, 2017 and 2016 , was $ 3,853 and $ 1,471 , respectively.

No performance-based RSUs were granted during the six months ended January 31, 2016 . The aggregate intrinsic value of unvested service-based and performance-based RSUs outstanding at January 31, 2017 , and expected to vest, was $24,904 .

NOTE G - Fair Value Measurements

In accordance with fair value accounting guidance, the Company's assets and liabilities measured at fair market value are classified in one of the following categories:

Level 1 - Assets or liabilities for which fair value is based on unadjusted quoted prices in active markets for identical instruments that are accessible as of the reporting date.

Level 2 - Assets or liabilities for which fair value is based on other significant pricing inputs that are either directly or indirectly observable.

Level 3 - Assets or liabilities for which fair value is based on significant unobservable pricing inputs to the extent little or no market data is available, which result in the use of management's own assumptions.

The following tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis at January 31, 2017 and July 31, 2016 , according to the valuation techniques the Company used to determine their fair values.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Trading securities: The Company's deferred compensation investments consist of investments in mutual funds. These investments were classified as Level 1 as the shares of these investments trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.

Foreign exchange contracts: The Company's foreign exchange contracts were classified as Level 2 as the fair value was based on the present value of the future cash flows using external models that use observable inputs, such as interest rates, yield curves and foreign exchange rates. See Note H, "Derivatives and Hedging Activities," for additional information.

There have been no transfers of assets or liabilities between the fair value hierarchy levels outlined above during the six months ended January 31, 2017 . In addition, the Company had no significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition during the six months ended January 31, 2017 .

The Company's financial instruments, other than those presented in the disclosures above, include cash and cash equivalents, accounts receivable, notes payable, accounts payable, and other liabilities. The fair values of these financial instruments approximated carrying values because of their short-term nature.

The estimated fair value of the Company's short-term and long-term debt obligations, excluding notes payable, based on the quoted market prices for similar issues and on the current rates offered for debt of similar maturities was $162,711 and $218,977 at January 31, 2017 and July 31, 2016 , respectively, as compared to the carrying value of $157,223 and $211,982 at January 31, 2017 and July 31, 2016 , respectively.

NOTE H - Derivatives and Hedging Activities

The Company utilizes forward foreign exchange currency contracts to reduce the exchange rate risk of specific foreign currency denominated transactions. These contracts typically require the exchange of a foreign currency for U.S. dollars at a fixed rate at a future date, with maturities of less than 18 months , which qualify as cash flow hedges or net investment hedges under the accounting guidance for derivative instruments and hedging activities. The primary objective of the Company's foreign currency exchange risk management program is to minimize the impact of currency movements due to transactions in other than the respective subsidiaries' functional currency and to minimize the impact of currency movements on the Company's net investment denominated in a currency other than the U.S. dollar. To achieve this objective, the Company hedges a portion of known exposures using forward foreign exchange currency contracts. As of January 31, 2017 and July 31, 2016 , the notional amount of outstanding forward exchange contracts was $ 104,540 and $186,093 , respectively.

The Company hedges a portion of known exposures using forward exchange contracts. Main exposures are related to transactions denominated in the British Pound, the Euro, Canadian Dollar, Australian Dollar, Mexican Peso, and Singapore Dollar. Generally, these risk management transactions will involve the use of foreign currency derivatives to minimize the impact of currency movements on non-functional currency transactions.

Hedge effectiveness is determined by how closely the changes in 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 earnings.

Cash Flow Hedges

The Company has designated a portion of its foreign exchange contracts as cash flow hedges and recorded these contracts at fair value on the condensed consolidated balance sheets. For these instruments, the effective portion of the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. As of January 31, 2017 and 2016 , unrealized losses of $451 and $608 have been included in OCI, respectively. Balances are reclassified from OCI to earnings when the hedged transactions impact earnings. For the three months ended January 31, 2017 and 2016 , the Company reclassified losses of $10 and $115 from OCI into earnings, respectively. For the six months ended January 31, 2017 and 2016 , the Company reclassified losses of $415 and gains of $342 from OCI into earnings, respectively. At January 31, 2017 , the U.S. dollar equivalent of these outstanding forward foreign exchange contracts totaled $ 17,284 , including contracts to sell Euros, Canadian Dollars, Australian Dollars, and U.S. Dollars.

Net Investment Hedges

The Company has also designated intercompany and third party foreign currency denominated debt instruments as net investment hedges. At January 31, 2017 , the Company designated £25,036 of intercompany loans as net investment hedges to hedge portions of its net investment in British foreign operations. On May 13, 2010, the Company completed the private placement of €75 million aggregate principal amount of senior unsecured notes to accredited institutional investors. This Euro-denominated debt obligation was designated as a net investment hedge to selectively hedge portions of its net investment in European operations. The Company's foreign denominated debt obligations are valued under a market approach using publicized spot prices.

Non-Designated Hedges

For the three and six months ended January 31, 2017 , the Company recognized losses of $ 3,313 and $5,046 respectively, in "Investment and other income" on the condensed consolidated statements of earnings related to non-designated hedges. For the three and six months ended January 31, 2016 , the Company recognized losses of $100 and gains of $513 , respectively.

Fair values of derivative instruments in the condensed consolidated balance sheets were as follows:

NOTE I - Income Taxes

During the three months ended January 31, 2017, the Company recorded a $5,908 tax benefit for the repatriation of $126,948 of cash.  This non-cash tax benefit was primarily due to foreign tax credits generated as a result of the cash repatriation that occurred during the three months ended January 31, 2017.

NOTE J - New Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, "Leases," which replaces the current lease accounting standard. The update will require, among other items, lessees to recognize the assets and liabilities that arise from most leases on the balance sheet. This guidance is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The ASU must be adopted using a modified retrospective approach and early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," which eliminates the transaction-and industry-specific revenue recognition guidance under current GAAP and replaces it with a principles-based approach for determining revenue recognition. The new guidance requires revenue recognition when control of the goods or services transfers to the customer, replacing the existing guidance which requires revenue recognition when the risks and rewards transfer to the customer. Under the new guidance, companies should recognize revenues in amounts that reflect the payment to which a company expects to be entitled in exchange for those goods or services.

ASU 2014-09 (and related updates) is effective for interim and annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted for annual periods beginning after December 15, 2016.  The Company intends to adopt this standard beginning August 1, 2018.  Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the standard.  The Company is currently assessing the new guidance and whether to adopt using a full retrospective or a modified retrospective approach.  Management will conduct surveys of its various business units and analyze contracts and agreements during fiscal 2017 to ensure that all components of the new guidance are appropriately considered for the impact on its consolidated financial statements and disclosures upon adoption.

NOTE K - Subsequent Events

On February 22, 2017, the Board of Directors declared a quarterly cash dividend to shareholders of the Company's Class A and Class B Common Stock of $0.2050 per share payable on April 28, 2017, to shareholders of record at the close of business on April 7, 2017.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Overview

Brady Corporation is 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, half of which are internally manufactured and half 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 vast array of proprietary, customized and diverse products for use in various applications across multiple customers 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 operational excellence, focus on the customer, 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 key customers, industries and products and improving the efficiency and effectiveness of the research and development ("R&D") function. In our WPS business, our strategy for growth includes a focus on workplace safety critical industries, innovative new product offerings, and increased investment in digital capabilities.

The Company is targeting the following key initiatives in fiscal 2017:

Results of Operations

A comparison of results of operating income for the three and six months ended January 31, 2017 and 2016 , is as follows:

References in this Form 10-Q to "organic sales" refer to sales calculated in accordance with U.S. GAAP, excluding the impact of foreign currency translation. 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.

Sales for the three months ended January 31, 2017 , decreased 0.2% to $268.0 million , compared to $268.6 million in the same period of the prior year, which consisted of organic sales growth of 1.3% and a negative currency impact of 1.5% due to the strengthening of the U.S. Dollar against certain other currencies as compared to the same period in the prior year. Organic sales grew 1.9% in the IDS segment and declined 0.2% in the WPS segment during the three months ended January 31, 2017 , compared to the same period in the prior year. The IDS segment realized sales growth in the Product ID, Wire ID, and Safety and Facility ID product lines, partially offset by a decline in the Product ID product line while the Healthcare ID product line was essentially flat compared to the prior year. Catalog sales in the WPS segment declined, but were partially offset by sales growth in the digital channel.

Sales for the six months ended January 31, 2017 , decreased 0.6% to $548.2 million , compared to $551.7 million in the same period of the prior year, which consisted of a organic sales growth of 0.5% and a negative currency impact of 1.1% . Organic sales grew 1.3% in the IDS segment and declined 1.3% in the WPS segment during the six months ended January 31, 2017 , compared to the same period in the prior year. The IDS segment realized sales growth in the Healthcare ID, Product ID, and Wire ID product lines, partially offset by sales declines in the Safety and Facility ID product line. Catalog sales in the WPS segment declined, but were partially offset by sales growth in the digital channel.

Gross margin for the three months ended January 31, 2017 , increased 1.0% to $134.2 million , compared to $132.9 million in the same period of the prior year, and increased 0.8% to $274.5 million for the six months ended January 31, 2017 , compared to $272.2 million in the same period of the prior year. As a percentage of sales, gross margin increased to 50.1% for the three months ended January 31, 2017 from 49.5% in the same period of the prior year, and increased to 50.1% for the six months ended January 31, 2017 , from 49.3% in the same period of the prior year. The increases in gross margin in both the three and six month periods were primarily due to our on-going efforts to streamline manufacturing processes and drive operational efficiencies in manufacturing facilities. These efforts resulted in reduced material, supplies and labor costs as well as improvements in excess inventory and scrap charges compared to the same periods in the prior year.

R&D expenses for the three months ended January 31, 2017 , increased 4.2% to $9.5 million , compared to $9.1 million in the same period of the prior year, and increased 5.4% to $18.6 million for the six months ended January 31, 2017 , compared to $17.7 million in the same period of the prior year. The increases in both the three and six month periods were due to the hiring of engineers as well as increased spending on printing and software solutions projects within our IDS businesses.

Selling, general and administrative expenses ("SG&A") include selling costs directly attributed to the IDS and WPS segments, as well as certain other expenses including finance, information technology, human resources, and other administrative expenses. SG&A decreased 5.5% to $94.7 million for the three months ended January 31, 2017 , and 4.1% to $192.7 million for the six months ended January 31, 2017 , compared to $100.2 million and $200.9 million in the same periods of the prior year, respectively. The declines in both the three and six month periods were primarily due to reduced selling expenses, due to efficiency gains, and continued efforts to control general and administrative costs, which were partially offset by increases in incentive-based compensation.

Operating income was $30.0 million during the three months ended January 31, 2017 , compared to $23.6 million for the three months ended January 31, 2016 . Operating income was $63.2 million during the six months ended January 31, 2017 , compared to $53.7 million for the six months ended January 31, 2016 . The increase was primarily due to increased gross margins in the IDS segment and reduced selling, general and administrative expenses in both the IDS and WPS segments. The increase in operating income compared to the same period in the prior year was partially offset by the negative impact of foreign currency fluctuations and increased R&D expense in 2017.

OPERATING INCOME TO NET EARNINGS

Investment and other income was $0.6 million for the three months ended January 31, 2017 , and was $0.1 million for the six months ended January 31, 2017 , compared to investment and other expense of $1.0 million and $1.8 million in the same periods of the prior year, respectively. These changes during the three and six month periods were primarily due to reduced foreign currency losses and an increase in market value of securities held in executive deferred compensation plans.

Interest expense decreased to $1.5 million from $2.1 million for the three months, and decreased to $3.2 million from $4.3 million for the six months ended January 31, 2017 , compared to the same periods in the prior year. For both the three and six month periods, the decrease was due to a reduction in the Company's outstanding debt balances.

The Company's income tax rate was 13.1% for the three months ended January 31, 2017 , compared to 25.3% for the same period in the prior year. The income tax rate was 20.4% for the  six months ended January 31, 2017 , compared to 28.7% for the same period of the prior year. The decrease in the tax rates for both the three and six month periods were due to foreign tax credits generated from a cash repatriation to the U.S. during the three months ended January 31, 2017 . The Company's anticipated annual income tax rate is expected to be in the mid- 20% range for fiscal year 2017.

Business Segment Operating Results

The Company is organized and managed on a global basis within two reportable segments: ID Solutions and Workplace Safety. Effective August 1, 2016, the Company changed its internal measure of segment profit and loss that is reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segment and assessing its performance. Prior to August 1, 2016, administrative costs were excluded from the measure of segment profit and loss. Effective August 1, 2016, a portion of these administrative costs have been included within the IDS and WPS segments, which includes the cost of finance, information technology, human resources, and certain other administrative costs. Interest expense, investment and other income (expense), income taxes, and certain corporate administrative expenses continue to be excluded when evaluating segment performance.

Also effective August 1, 2016, the Company realigned certain businesses between the WPS and IDS reportable segments, resulting in increased revenues and segment profit in the IDS segment and equal and offsetting declines in revenues and segment profit in the WPS segment. The Company's accompanying segment information has been restated to reflect the change in measurement of segment profit and loss and the realignment of businesses.

The following is a summary of segment information for the three and six months ended January 31, 2017 , and 2016 :