Business Context and Reporting Period
Brady Corporation (NYSE: BRC) filed its Form 10-K for the fiscal year ended July 31, 2021. It manufactures identification solutions and workplace safety products through its Identification Solutions (IDS) and Workplace Safety (WPS) segments. The filing is an annual report, not a standalone fourth-quarter filing; quarterly results are also provided.
In the fourth quarter, Brady acquired Code Corporation, Magicard Holdings and Nordic ID, adding barcode scanning, ID-card printing and RFID capabilities to IDS. The acquired businesses’ results are included from their respective acquisition dates.
Financial Performance and Liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $1,144.7 million | $1,081.3 million |
| Gross margin | $561.4 million; 49.0% of sales | $528.6 million; 48.9% |
| Operating income | $167.1 million; 14.6% of sales | $138.0 million; 12.8% |
| Net income | $129.7 million | $112.4 million |
| Diluted Class A EPS | $2.47 | $2.11 |
| Cash from operating activities | $205.7 million | $141.0 million |
| Capital expenditures | $27.2 million | $27.3 million |
| Cash and cash equivalents | $147.3 million | $217.6 million |
| Long-term debt | $38.0 million | None reported |
Sales rose 5.9%, comprising 1.6% organic growth, 3.2% favorable currency translation and 1.1% acquisition contribution. The tax rate was 20.8%. Net cash used in investing was $268.6 million, primarily reflecting $244.0 million for acquisitions; net cash used in financing was $12.3 million. Dividends paid were $45.7 million.
At year-end, the $200 million revolving credit facility had $38.0 million drawn and $159.1 million available, with capacity potentially expandable to $400 million subject to conditions. Brady reported covenant compliance and approximately $506 million of total available liquidity, including cash. About 95% of cash was held outside the United States.
Fourth-quarter FY2021 sales were $306.1 million versus $251.7 million in the prior-year quarter; net income was $28.0 million versus $27.7 million. Quarterly comparisons include the effects of the timing of acquisitions and pandemic-related demand.
Material Changes Versus Prior Period
- IDS organic sales increased 3.7%; segment profit rose to $169.2 million from $150.6 million, and segment profit margin increased to 20.1% from 19.2%. Organic sales recovered in the second half of FY2021.
- WPS organic sales declined 3.8%, despite reported sales increasing 2.2% to $303.2 million due to favorable currency. Pandemic-related product demand receded, and core-product recovery did not fully offset the decline. Segment profit rose to $22.8 million from $21.0 million.
- Gross margin rate improved slightly. Management attributed the benefit from higher second-half sales volume partly to offsetting material, freight and labor cost increases.
- Operating income increased 21.1%, also reflecting the absence of FY2020’s $13.8 million impairment charge. FY2021 net income included a $5.0 million other-than-temporary impairment of the React Mobile investment.
- Acquisitions increased goodwill by $195.2 million; total goodwill reached $614.1 million. The three acquisitions cost $244.0 million net of cash acquired.
Outlook, Commentary and Risks
The filing provides no quantified sales or earnings guidance. Management said cash flow and borrowing capacity should fund anticipated working capital, capital expenditures, R&D and dividends for the next 12 months. Its stated priorities include organic product innovation, acquisitions, digital selling capabilities, customer service and operational efficiency.
Key risks include continuing COVID-19 effects, unpredictable demand and supply-chain disruptions, inflation in materials, freight and labor, and an inability to recover cost increases through pricing. Other disclosed risks include competition and digital-channel pricing pressure, acquisition integration, cybersecurity, foreign currency exposure, regulatory and tax matters, litigation, and possible impairment of goodwill or intangible assets. Nearly half of sales are outside the United States. The company reported no material pending legal proceeding expected by management to materially affect its consolidated financial statements.
On September 1, 2021, the board raised the annual Class A dividend from $0.88 to $0.90 per share, with a quarterly dividend of $0.225. The board also authorized a repurchase program of up to two million Class A shares, inclusive of prior authorization. No shares were repurchased in FY2021’s fourth quarter. The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting; controls at the three newly acquired businesses were excluded from the assessment.
Most Important Facts for Investors to Verify
- Whether IDS growth and the acquired businesses’ contributions continue, and whether WPS can offset the waning demand for pandemic-related products.
- Whether cost inflation and supply constraints pressure gross margins or limit product availability.
- Integration progress and realized performance of Code, Magicard and Nordic ID, including the final purchase-price allocation and acquisition-related costs.
- Cash generation, overseas cash accessibility and tax implications, debt repayment, and availability under the credit facility.
- Developments in React Mobile and the carrying value of goodwill and other intangible assets, particularly given the acquisitions.
- Potential changes in tax exposures: unrecognized tax benefits were $21.9 million at year-end; management said up to $3.3 million could be reduced within 12 months.