Brady Corporation (NYSE: BRC) — FY2022 Form 10-K
Reporting period: Fiscal year ended July 31, 2022. This is an annual report, not a filing limited to the fourth quarter. Brady manufactures identification solutions and workplace safety products. Its reportable segments are Identification Solutions (IDS) and Workplace Safety (WPS).
Financial performance
| Metric | FY2022 | FY2021 | Change / context |
|---|---|---|---|
| Net sales | $1,302.1 million | $1,144.7 million | Up 13.7%; organic growth 9.4%, acquisitions 6.9%, currency impact (2.6%) |
| Gross margin | $631.6 million; 48.5% | $561.4 million; 49.0% | Dollar margin rose 12.5%; percentage declined 0.5 points |
| Operating income | $193.0 million; 14.8% | $167.1 million; 14.6% | Up 15.5% |
| Net income | $150.0 million | $129.7 million | Up 15.7% |
| Diluted EPS, Class A | $2.90 | $2.47 | Up 17.4%; reported as a fiscal-year record |
| Operating cash flow | $118.4 million | $205.7 million | Down $87.2 million |
| Capital expenditures | $43.1 million | $27.2 million | Increased year over year |
- Segment results: IDS sales rose 20.1% to $1,010.9 million, including 12.8% organic growth and 9.4% acquisition growth; segment profit was $197.1 million, or 19.5% of sales, versus 20.1% a year earlier. WPS sales fell 4.0% to $291.2 million due to currency; organic sales were flat. WPS segment profit was $23.2 million, or 8.0% of sales, versus 7.5%.
- Cash and debt: Cash and equivalents were $114.1 million at year-end, down $33.3 million. Long-term debt was $95.0 million, up from $38.0 million. Brady reported $103.4 million of undrawn credit availability, expandable to $303.4 million subject to conditions, and total available liquidity of $417.5 million. It was in compliance with its debt covenants.
- Working capital and equity: Inventory increased to $190.0 million from $136.1 million, primarily reflecting purchases to mitigate supply-chain disruption. Total assets were $1,367.3 million and stockholders’ equity was $911.3 million.
Material changes versus the prior year
- Sales growth reflected strong IDS demand and contributions from the three fiscal 2021 acquisitions—Code, Magicard and Nordic ID—partly offset by unfavorable currency translation. Those acquisitions contributed to fiscal 2022 comparisons for the full year.
- Inflation in materials, labor and freight compressed gross margin. Pricing, manufacturing improvements and operating efficiencies partially offset the pressure, but management said price actions had not yet fully recovered cost increases.
- R&D expense increased 31.4% to $58.5 million, or 4.5% of sales, partly due to acquisitions and higher IDS investment. SG&A rose 8.6% in dollars but declined to 29.2% of sales from 30.6%.
- Operating cash flow declined mainly because of inventory investment and higher annual incentive payments. Financing cash outflow included $109.2 million of share repurchases and $45.9 million of dividends, partly offset by $57.0 million of net credit-facility borrowing.
- Foreign-currency translation adjustments reduced equity by $53.4 million in FY2022. The stronger U.S. dollar reduced sales growth by 2.6%.
Outlook, risks and unusual items
- Outlook: The filing provides no specific numerical sales or earnings guidance. Management said it expected continuing input-cost and freight inflation and supply-chain effects, while emphasizing investment in organic growth, R&D, digital capabilities, acquisitions, automation and sustainable efficiencies. It stated cash flow and borrowing capacity should meet anticipated needs, including for the next 12 months.
- Key risks: Persistent inflation, shortages and supply-chain disruption; COVID-19 and related restrictions; weaker product demand and macroeconomic or geopolitical shocks, including the Russia-Ukraine conflict; pricing and competitive pressure; foreign-exchange volatility; cybersecurity and privacy incidents; acquisition integration; regulatory and litigation exposure; and potential goodwill or intangible-asset impairment.
- Debt and currency exposure: The revolving facility matures August 1, 2024 and bears variable rates. Brady had no fixed-rate debt or interest-rate derivatives at year-end. Approximately 94% of cash was held outside the U.S.; repatriation could result in additional taxes. A hypothetical 10% adverse currency move would reduce foreign-subsidiary net current assets by approximately $19.4 million, based on the filing’s sensitivity analysis.
- Unusual items and contingencies: No impairment charges were recorded in FY2022; the annual goodwill test found reporting-unit fair values substantially above carrying values. FY2021 included a $5.0 million impairment of the React Mobile investment. Management reported no material pending legal proceedings expected to materially affect the financial statements. Unrecognized tax benefits were $20.6 million, excluding interest and penalties; up to $3.9 million could be reduced in the following 12 months, with any recognized amount benefiting income tax expense.
- Subsequent event: On August 31, 2022, Brady announced an increase in its annual Class A dividend from $0.90 to $0.92 per share, its 37th consecutive annual increase.
- Governance and audit: Russell R. Shaller became CEO on April 1, 2022, succeeding J. Michael Nauman, who retired. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. Its critical audit matter concerned valuation allowances for deferred tax assets.
Important facts for investors to verify
- Whether pricing actions and productivity gains can offset ongoing materials, labor and freight inflation without weakening demand.
- Whether IDS growth and the acquired businesses’ contributions continue, and whether WPS can sustain recovery in core products after pandemic-related comparisons.
- Whether elevated inventory converts to sales and cash, given the FY2022 operating-cash-flow decline.
- Credit-facility availability, variable borrowing costs, covenant compliance and the August 2024 maturity as financing needs evolve.
- Foreign-currency effects, offshore cash and possible tax costs of repatriation; also the realization of deferred tax assets and resolution of uncertain tax positions.
- Acquisition integration and goodwill assumptions: goodwill was $586.8 million, and goodwill plus other intangible assets represented 48.3% of total assets.
- The implications of public Class A shares being nonvoting while voting control is concentrated in two shareholder trusts.