Brady Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended April 30, 2022. Comparisons are with the corresponding 2021 periods. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Business context and results
Brady makes identification solutions and workplace safety products. Its reportable segments are Identification Solutions (IDS) and Workplace Safety (WPS). Results include contributions from the acquisitions of Magicard, Nordic ID and Code.
- Third-quarter sales: $338.6 million, up 14.6%; growth comprised 9.0% organic, 8.6% from acquisitions, and a 3.0% reduction from currency translation.
- Nine-month sales: $978.1 million, up 16.6%; growth comprised 9.6% organic, 8.5% from acquisitions, and a 1.5% reduction from currency translation.
- Third-quarter net income: $40.1 million versus $37.3 million; diluted EPS was $0.78 versus $0.71 for Class A shares.
- Nine-month net income: $108.9 million versus $101.6 million; diluted EPS was $2.09 versus $1.94 for Class A shares.
Margins, segments and operating costs
- Third-quarter gross margin was $164.0 million, or 48.4% of sales, compared with $148.8 million and 50.4%. Nine-month gross margin was $468.4 million, or 47.9%, compared with $413.8 million and 49.3%.
- Operating income was $52.9 million for the quarter and $140.1 million for nine months, up 13.2% and 10.9%, respectively. Operating margin was 15.6% for the quarter versus 15.8%, and 14.3% for nine months versus 15.1%.
- IDS sales rose 21.1% for the quarter and 24.1% year to date; organic growth was 11.8% and 13.6%. IDS segment profit increased, but segment profit margin declined to 20.4% from 21.8% for the quarter and to 19.4% from 20.8% year to date.
- WPS sales declined 3.9% for the quarter and 3.4% year to date. Organic sales rose 0.9% in the quarter but fell 1.1% year to date. WPS segment profit rose 25.7% in the quarter to $7.1 million, but declined 18.6% year to date to $13.9 million.
- Higher materials, labor and freight costs compressed gross and IDS segment margins, partly offset by pricing and efficiency actions. R&D expense increased, largely reflecting acquisitions and higher IDS R&D headcount; SG&A as a share of sales declined due to efficiency efforts.
Cash flow, liquidity and capital allocation
- Nine-month operating cash flow was $65.2 million versus $154.9 million. The filing attributes the decline mainly to inventory purchases to reduce supply-disruption risk and higher annual incentive compensation payments.
- Investing cash outflow was $22.1 million, primarily capital expenditures. Financing cash outflow was $81.8 million, including $84.9 million of share repurchases and $34.7 million of dividends, partly offset by $39.0 million of net borrowing.
- Cash was $103.1 million at April 30, down from $147.3 million at July 31, 2021. Inventory rose to $177.2 million from $136.1 million.
- Long-term debt was $77.0 million, versus $38.0 million at July 31, 2021. The borrowing rate was 1.28%; the credit facility matures August 1, 2024. Brady reported covenant compliance, with debt/EBITDA of 0.31:1 against a 3.5:1 maximum and interest coverage of 255.5:1 against a 3.0:1 minimum.
- The company reported $121.3 million available under its facility, with capacity to increase availability by $200 million subject to conditions. Together with cash, it described liquidity of approximately $424.4 million on that expanded-capacity basis. About 94% of cash was held outside the U.S.
- After quarter-end, Brady completed the remaining repurchases under its existing authorization and on May 24 authorized a new program of up to $100 million. The board also declared a $0.225-per-share quarterly dividend.
Outlook, risks and other notable items
- Management expected inflationary pressures and supply-chain issues to continue to weigh on profitability in fiscal 2022’s fourth quarter. Pricing actions had not yet fully offset increased costs.
- Management said liquidity was sufficient to support working capital, capital spending, R&D, dividends and repurchases, and to manage pandemic- and geopolitical-related disruption. The filing does not provide numeric sales or earnings guidance.
- Risks highlighted include COVID-19 and other public-health events, the Ukraine conflict, supply shortages and cost inflation, foreign-exchange movements, weaker product demand, acquisition integration, cybersecurity, regulation, litigation, and potential goodwill or intangible-asset impairment.
- The ongoing annual income tax rate was expected to be approximately 20%, based on the current business mix and tax laws. Quarterly and nine-month effective rates were 21.8% and 21.1%, respectively.
- Foreign currency translation drove most of the nine-month increase in accumulated other comprehensive loss, which reached $98.9 million. Investment and other expense was $1.3 million for both the quarter and nine months, primarily reflecting lower market values of deferred-compensation plan securities.
Important facts for investors to verify
- Whether pricing and efficiency measures can offset continued materials, labor and freight inflation, and how margins trend in subsequent periods.
- Whether inventory growth and working-capital demands normalize and operating cash flow recovers.
- Underlying organic demand by segment, particularly WPS after lower pandemic-related product sales, and the contribution and integration of recent acquisitions.
- Cash availability and location, credit-facility capacity and covenants, and the pace of the new $100 million repurchase authorization.
- Foreign-currency exposure and the effect of continued dollar strength on reported results and accumulated other comprehensive loss.