Brady Corporation (BRC) — Q1 FY2022 Form 10-Q
Reporting period: Three months ended October 31, 2021; comparisons are to the three months ended October 31, 2020 unless noted. Brady manufactures identification solutions and workplace safety products. Its reportable segments are Identification Solutions (IDS) and Workplace Safety (WPS). Dollar amounts below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q1 FY2022 | Prior-year quarter | Change / context |
|---|---|---|---|
| Net sales | $321.5 | $277.2 | Up 16.0%; organic growth 7.0%, acquisitions 8.3%, currency 0.7% |
| Gross profit / margin | $155.0 / 48.2% | $135.4 / 48.9% | Profit up 14.4%; margin down 0.7 percentage points |
| Operating income / margin | $44.3 / 13.8% | $42.2 / 15.2% | Income up 5.1%; margin contracted |
| Net income / margin | $35.0 / 10.9% | $33.5 / 12.1% | Net income up 4.7% |
| Diluted EPS, Class A | $0.67 | $0.64 | Class B diluted EPS was $0.65 vs. $0.62 |
| Operating cash flow | $27.5 | $62.8 | Lower largely because of inventory purchases and higher receivables |
| Capital expenditures | $11.3 | $9.3 | Investing cash outflow was $11.3, including purchases of two previously leased European facilities |
- Cash was $157.6 at October 31, 2021, versus $147.3 at July 31, 2021. Total assets were $1,410.5 and stockholders’ equity was $963.9 at quarter-end.
- Long-term debt was $67.0, up from $38.0 at July 31. Credit-facility borrowings bore interest at 0.84%; $130.1 was available to borrow, with an option to increase facility capacity subject to conditions. Brady reported total available liquidity of approximately $487.7, including cash and potential additional facility capacity.
- The company was in compliance with debt covenants: debt/EBITDA of 0.3x against a 3.5x maximum, and interest coverage of 441.0x against a 3.0x minimum.
- Financing cash flows included $11.6 of dividends, $18.9 of share repurchases, and $29.0 of net credit-facility borrowings. The board declared a $0.225-per-share Class A dividend and $0.225-per-share Class B dividend, payable January 31, 2022.
Material changes and segment performance
- IDS: Sales rose 25.4% to $248.6, with organic growth of 13.2% and acquisition contribution of 11.6%. Segment profit increased 21.2% to $48.8; margin declined to 19.6% from 20.3%, reflecting cost pressures and $2.5 of incremental acquired-intangible amortization.
- WPS: Sales declined 7.8% to $72.9, including an 8.6% organic decline. Segment profit fell 71.3% to $2.3 and margin fell to 3.1% from 10.1%. The prior-year comparison benefited from elevated pandemic-related PPE and signage demand.
- Gross margin pressure reflected higher materials, labor and freight costs. Management said mitigation actions and operational efficiencies offset some, but not all, of the effects.
- Acquisitions completed in fiscal 2021—Magicard, Nordic ID and Code—contributed to reported sales and higher expenses. R&D rose 36.3% to $13.9, primarily reflecting acquired businesses and increased IDS headcount. SG&A rose 16.5% to $96.7, while remaining approximately flat as a percentage of sales.
Outlook, risks and other notable items
- Management expects its ongoing annual income tax rate to be approximately 20%, based on the current global business mix. The filing provides no quantified sales or earnings guidance.
- Management said operating cash flow and borrowing capacity should fund anticipated working capital, capital expenditures, R&D, repurchases and dividends for the next 12 months. Approximately 94% of cash was held outside the United States; repatriation could involve additional taxes.
- Management expects input-cost inflation and labor shortages to continue to pressure profitability in fiscal 2022. COVID-19 variants or government responses could also reduce sales, income and operating cash flow.
- The filing added a risk concerning OSHA’s COVID-19 vaccination-or-testing emergency standard for employers with 100 or more employees. The standard had been stayed by a federal appeals court pending review; potential enforcement could cause labor attrition, hiring difficulties and compliance costs.
- Other cited risks include raw-material shortages, acquisition integration, cybersecurity, foreign-currency movements, litigation and potential goodwill or intangible-asset impairments. No material off-balance-sheet arrangements were reported. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether IDS organic growth persists and whether WPS stabilizes as pandemic-related product demand normalizes.
- Whether pricing, productivity and other mitigation actions can offset ongoing materials, labor and freight inflation and restore margins.
- Whether inventory investment and receivables growth convert into stronger operating cash flow, and whether liquidity remains adequate.
- How acquired businesses contribute to growth and profitability, including integration costs and acquired-intangible amortization.
- Developments in the OSHA mandate litigation and any resulting workforce, operating or compliance impacts.