Brady Corporation (BRC) — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended January 31, 2021. Comparisons are with the corresponding periods ended January 31, 2020, except balance-sheet comparisons, which are with July 31, 2020. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $265.8, down 3.9% | $543.1, down 3.6% |
| Organic sales | Down 6.3%; currency added 2.4% | Down 5.6%; currency added 2.0% |
| Gross margin | $129.5; 48.7% of sales vs. 50.3% | $265.0; 48.8% vs. 49.8% |
| Operating expenses | $92.1, down 5.9% | $185.4, down 6.6% |
| Operating income | $37.4, down 9.3%; 14.1% margin vs. 14.9% | $79.6, down 3.1%; 14.7% margin vs. 14.6% |
| Net income | $30.9, down 8.0%; diluted EPS $0.59 vs. $0.62 | $64.3, down 9.4%; diluted EPS $1.23 vs. $1.32 |
| Operating cash flow | Not presented by quarter | $98.9 vs. $53.1 |
Lower sales volumes, particularly in Identification Solutions (IDS), and Workplace Safety (WPS) product mix weighed on gross margin and quarterly operating income. Cost reductions, lower discretionary spending, and operational efficiencies partly offset these pressures. The six-month effective tax rate was 20.6%, versus 15.3% a year earlier; the prior-year rate benefited from a tax audit settlement and stock-compensation tax benefits.
Segments and material changes
- IDS: Organic sales declined 6.9% in the quarter and 7.6% over six months. Segment profit was $39.0 million for the quarter, down 4.1%, and $79.3 million for six months, down 4.6%. Asia growth partly offset declines in the Americas and Europe. Segment profit margin improved to 20.1% for the quarter and 20.2% for six months, from 19.8% in each prior-year period, reflecting a lower cost structure.
- WPS: Organic sales declined 4.8% in the quarter but grew 0.4% over six months; reported sales rose 0.4% and 5.2%, respectively, aided by currency. Quarterly segment profit fell to $3.5 million from $5.5 million, with margin declining to 4.8% from 7.7%, mainly due to lower volume and product mix. Six-month profit rose to $11.5 million from $10.6 million.
- COVID-19-related products, including personal protective equipment and social-distancing signage, supported WPS demand but did not fully offset weakness in core products. Digital sales trends varied by region and period.
Cash, liquidity, and capital
- Cash and cash equivalents were $277.6 million, up from $217.6 million at July 31, 2020. Operating cash flow of $98.9 million was driven mainly by working-capital benefits, including lower inventory and payment timing.
- Investing cash outflow was $16.4 million, including $14.5 million of capital expenditures. Financing cash outflow was $28.8 million, including $22.8 million of dividends and $3.6 million of share repurchases.
- The company reported no borrowings on its $200 million revolving credit facility, with $196.4 million available after letters of credit. It may increase facility capacity to $400 million, subject to conditions. Management reported approximately $674 million of total available liquidity, reflecting the stated optional facility increase.
- Brady described itself as debt-free following repayment of private-placement debt in fiscal 2020. It was in compliance with its credit covenants. Approximately 69% of cash was held outside the United States.
- Total assets were $1.208 billion; total liabilities were $288.5 million; stockholders’ equity was $919.3 million at January 31, 2021. Current assets were $567.3 million and current liabilities $201.5 million.
Outlook, risks, and notable items
The filing provides no specific sales or earnings guidance. Management said cash flow and borrowing capacity should fund anticipated working capital, capital expenditures, R&D, repurchases, and dividends for the next 12 months. Brady expected its ongoing annual effective tax rate to be approximately 20% under current business mix and tax laws. Management said it intended to continue investing in organic growth, acquisitions, R&D, digital capabilities, and operational efficiency.
The company warned that the pandemic’s duration and business impact remained uncertain, including potential effects on customer demand, operations, suppliers, and the global economy. Other cited risks include competition, product development, input costs, cybersecurity, regulation, foreign exchange, acquisitions, litigation, and possible impairment of goodwill or intangible assets. Management noted that changing pandemic conditions could also affect estimates for credit losses, inventory, and deferred tax assets. The company reported a $0.3 million quarterly and $0.5 million six-month equity loss from its investment in React Mobile, Inc. A $0.22-per-share quarterly dividend was declared after quarter-end, payable April 30, 2021.
Key facts for investors to verify
- Whether sales and margins recover as COVID-related disruption eases, especially in IDS and North American WPS.
- How sustainable the working-capital-driven increase in operating cash flow is.
- Whether cost savings can continue to offset volume and product-mix pressure without impairing growth investment.
- The basis for management’s stated approximately $674 million liquidity figure, including the conditional expansion of the revolving facility.
- Potential pandemic-related changes to asset valuations, credit losses, inventory estimates, and deferred tax assets.