Brady Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended January 31, 2022. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless stated otherwise.
Business context
Brady manufactures identification solutions and workplace safety products. Its reportable segments are Identification Solutions (IDS) and Workplace Safety (WPS). Results include contributions from Magicard, Nordic ID and Code, acquired in May and June 2021.
Financial performance
| Metric | Three months ended Jan. 31, 2022 | Year-over-year | Six months ended Jan. 31, 2022 | Year-over-year |
|---|---|---|---|---|
| Net sales | $318.1 | +19.6% | $639.5 | +17.8% |
| Gross profit | $149.4 | +15.3% | $304.4 | +14.9% |
| Gross margin | 47.0% | Down 1.7 pts | 47.6% | Down 1.2 pts |
| Operating income | $42.9 | +14.6% | $87.2 | +9.6% |
| Operating margin | 13.5% | Down 0.6 pts | 13.6% | Down 1.1 pts |
| Net income | $33.8 | +9.6% | $68.9 | +7.0% |
| Diluted EPS, Class A | $0.65 | Up from $0.59 | $1.32 | Up from $1.23 |
Quarterly organic sales grew 13.1%; acquisitions added 8.6% and currency translation reduced growth by 2.1%. For the six-month period, organic sales grew 10.0%, acquisitions added 8.5% and currency reduced growth by 0.7%.
- IDS: Quarterly sales were $245.0 million, up 26.1% (16.0% organic); six-month sales were $493.6 million, up 25.8% (14.6% organic). Six-month segment profit rose 17.2% to $92.9 million, but segment margin fell to 18.8% from 20.2%.
- WPS: Quarterly sales were $73.1 million, up 2.0% (5.2% organic); six-month sales were $145.9 million, down 3.1% (2.0% organic decline). Six-month segment profit fell 40.5% to $6.8 million, with margin declining to 4.7% from 7.6%.
Cash flow and capital: Six-month operating cash flow was $24.3 million, versus $98.9 million a year earlier. Capital expenditures were $16.4 million; investing cash outflow was $16.4 million. Financing cash outflow was $4.5 million, including $23.2 million in dividends and $21.7 million in repurchases, partly offset by $45.0 million of net borrowing. Cash was $147.4 million at January 31, essentially unchanged from July 31, 2021.
Debt and liquidity: Revolver borrowings were $83.0 million, compared with $38.0 million at July 31, 2021; the stated interest rate was 0.86%, and maturity is August 1, 2024. Brady reported $115.3 million available under the facility, with a conditional option to increase capacity; it stated total available liquidity, including cash, of approximately $462.7 million. The company was in compliance with its debt covenants.
Changes, outlook and risks
- Sales growth reflected recovery in IDS, acquired businesses and organic demand. WPS’s six-month comparison was weighed down by prior-year demand for pandemic-related products.
- Higher material, labor and freight costs compressed gross margins despite pricing actions and efficiency initiatives. Management expected inflationary pressures and supply-chain issues to continue reducing profitability in the second half of fiscal 2022.
- R&D spending rose, primarily reflecting acquired businesses and increased IDS headcount. Management cited continued investment in product development, digital capabilities, customer service, acquisitions and operational efficiency.
- The filing provides no specific sales or earnings guidance. Management expected its ongoing annual tax rate to be approximately 20%, based on current business mix and tax laws.
- Other disclosed risks include COVID-19 impacts, weaker demand, raw-material shortages and cost inflation, foreign currency movements, acquisition integration, cybersecurity, competition, regulation, litigation and potential goodwill or intangible-asset impairment.
- Foreign currency translation drove a $23.0 million six-month other comprehensive loss, primarily due to U.S. dollar appreciation against certain currencies. A decline in deferred-compensation securities also reduced investment and other income versus the prior year.
- After quarter-end, Brady declared a $0.225-per-share dividend and repurchased 181,514 shares for $9.0 million through the date reported. Approximately 93% of cash was held outside the United States; repatriation could result in additional taxes.
Important facts for investors to verify
- Whether pricing and efficiency measures can offset continuing input, labor and freight inflation, especially in the second half of fiscal 2022.
- Whether IDS organic growth and acquired-business contributions continue, and whether WPS demand stabilizes after lower pandemic-product sales.
- Whether operating cash flow recovers as inventory investment and incentive compensation payments normalize.
- How acquisitions affect margins and amortization, and how foreign exchange movements affect reported results and equity.
- Current revolver availability, covenant headroom, share repurchases and the potential tax cost of accessing overseas cash.