Brady Corporation — Q1 Fiscal 2021 Form 10-Q
Reporting period: Three months ended October 31, 2020; comparable period is the three months ended October 31, 2019. Brady manufactures identification solutions and workplace safety products. Results were affected by the COVID-19 pandemic.
Financial results and position
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $277.2 million | $286.9 million | Down 3.4%; organic sales down 4.9%, partly offset by 1.5% favorable currency |
| Gross margin | $135.4 million; 48.9% of sales | $141.4 million; 49.3% | Margin down 0.4 percentage points |
| Operating income | $42.2 million; 15.2% of sales | $40.9 million; 14.3% | Up 3.2% |
| Net income | $33.5 million | $37.5 million | Down 10.7% |
| Diluted EPS, Class A | $0.64 | $0.70 | Down $0.06 |
| Operating cash flow | $62.8 million | $38.8 million | Up $24.0 million |
The effective tax rate rose to 20.3% from 9.8%; the prior-year rate benefited from a favorable domestic tax audit settlement and stock-compensation tax benefits. Cash and cash equivalents were $256.3 million at quarter-end, versus $217.6 million at July 31, 2020. Total current assets were $544.8 million and current liabilities were $205.0 million. Brady reported no credit-facility borrowings and described itself as debt-free. Its $200 million revolving facility had $196.5 million available after letters of credit; it may be increased to $400 million subject to conditions. The company reported total available liquidity of approximately $653 million.
Cash used in investing was $9.2 million, primarily reflecting $9.3 million of capital expenditures. Cash used in financing was $16.6 million, including $11.4 million of dividends and $2.7 million of share repurchases. Cash increased by $38.7 million during the quarter.
Material changes and segment performance
- Identification Solutions (IDS): Sales were $198.2 million, down 7.8% reported and 8.4% organically. Segment profit declined 5.1% to $40.3 million, but segment profit margin improved to 20.3% from 19.7% as cost reductions partly offset lower volume.
- Workplace Safety (WPS): Sales were $79.0 million, up 9.8% reported and 5.5% organically. Segment profit rose to $8.0 million from $5.2 million; margin increased to 10.1% from 7.2%. Demand for PPE, social-distancing signage and related pandemic products supported growth.
- Lower SG&A, down 7.3% to $83.0 million, and lower R&D, down 7.0% to $10.2 million, helped lift operating income. Gross margin was pressured by lower IDS volume and WPS product mix.
- Net income fell despite higher operating income, primarily reflecting the higher tax rate, lower investment and other income, and a $0.2 million equity loss from an unconsolidated affiliate.
Outlook, risks and other items
Brady provided no specific sales or earnings guidance in the supplied filing text. Management said the pandemic was expected to continue adversely affecting sales, profitability and operating cash flow, but emphasized that the duration and magnitude were uncertain. The company expected its ongoing annual effective tax rate to be approximately 20% based on its current business mix.
Management said cash flow and borrowing capacity were sufficient for anticipated working capital, capital expenditures, R&D, repurchases and dividends over the next 12 months. It continued to invest in organic growth, product development, digital capabilities, operational efficiency and automation while reducing controllable costs. The board declared a quarterly dividend of $0.22 per Class A share and $0.20 per Class B share, payable January 29, 2021.
Risks include pandemic-related demand and operational disruption, customer and supplier impacts, supply-chain constraints, foreign exchange movements, competition, raw-material costs, cybersecurity, regulation, litigation, and potential impairment of goodwill or other assets. The filing notes that pandemic-related estimates could change and could lead to impairment charges, additional credit losses or excess inventory. Brady was in compliance with its credit-facility covenants. It reported no material off-balance-sheet arrangements or material changes in market-risk disclosures. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether IDS demand recovered or weakened further after quarter-end, and how much WPS growth depended on pandemic-related products.
- Whether cost reductions can sustain operating margins if sales remain pressured, and whether gross-margin declines reverse.
- Whether operating cash flow remains strong when inventory reductions and timing-related working-capital benefits normalize.
- Whether the approximately 20% annual tax-rate expectation and the company’s liquidity assumptions remain appropriate.
- Any pandemic-related asset impairments, credit losses, inventory charges, supply disruptions or changes in customer demand.