Brady Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended April 30, 2023; comparisons are with the corresponding 2022 periods. Brady manufactures identification solutions and workplace safety products. Effective February 1, 2023, it reorganized into Americas & Asia and Europe & Australia reportable segments; historical segment data was recast.
Key financial results
| Metric | Three months ended April 30 | Nine months ended April 30 |
|---|---|---|
| Net sales | $337.1 million, down 0.4% | $985.9 million, up 0.8% |
| Gross margin | $169.7 million; 50.3% of sales vs. 48.4% | $481.4 million; 48.8% vs. 47.9% |
| Operating income | $63.0 million, up 19.1%; 18.7% of sales vs. 15.6% | $163.2 million, up 16.5%; 16.5% vs. 14.3% |
| Net income | $48.1 million, up 20.0% | $125.5 million, up 15.2% |
| Diluted EPS, Class A | $0.96 vs. $0.78 | $2.51 vs. $2.09 |
| Operating cash flow | Not presented for the quarter | $129.9 million vs. $65.2 million |
Quarterly sales were nearly flat as 1.9% organic growth was offset by 2.1% unfavorable currency translation and a 0.2% divestiture impact. Nine-month organic sales grew 5.0%, offset partly by 4.1% unfavorable currency and a 0.1% divestiture impact. Margin gains reflected operating efficiencies, lower freight costs, and pricing actions. SG&A declined, helped by efficiency initiatives, currency effects, and a $3.8 million gain on the PremiSys sale. R&D spending increased.
Segments
Quarterly organic sales rose 1.2% in Americas & Asia and 3.4% in Europe & Australia. Segment profit increased to $49.2 million and $17.1 million, respectively. For nine months, organic sales rose 4.0% and 7.0%, respectively, while segment profit was $130.5 million and $47.3 million. Foreign exchange reduced reported sales, particularly in Europe & Australia.
Cash, debt, and liquidity
Cash was $135.0 million at April 30, 2023, up from $114.1 million at July 31, 2022. Nine-month investing cash use was $4.9 million, including $12.9 million of capital expenditures and $8.0 million proceeds from the PremiSys sale. Financing cash use was $105.9 million, including $34.2 million of dividends, $29.8 million of share repurchases, and $44.2 million of net credit-agreement repayments.
Long-term debt was $50.8 million, down from $95.0 million at July 31, 2022. The company reported $247.6 million available under its credit agreement, with capacity potentially expandable to $1.0476 billion subject to conditions. Together with cash, reported available liquidity was $1.1826 billion. Brady was in compliance with its covenants: debt-to-EBITDA of 0.19x versus a maximum 3.5x, and interest coverage of 77.1x versus a minimum 3.0x. Approximately 99% of cash was held outside the United States.
Outlook, commentary, and notable items
- Management expects its ongoing annual income tax rate to be approximately 21%, based on current business mix and tax laws. The filing provides no specific sales or earnings guidance.
- Management said operating cash flow and borrowing capacity should fund working capital, capital expenditures, R&D, repurchases, and dividends over the next 12 months and beyond. It noted that repatriating foreign cash could result in additional taxes.
- The company continues to face inflation, supply-chain and other business disruptions, and foreign-currency exposure. It cited pricing, efficiency initiatives, automation, and investment in product development as responses.
- The PremiSys business was sold during the quarter, generating $8.0 million in cash proceeds and a $3.8 million gain. The tax rate was also affected by the sale and by prior-year statute-of-limitations lapses that did not recur.
- The board declared a $0.23-per-share quarterly dividend payable July 31, 2023. Brady repurchased 229,320 shares during the quarter for approximately $11.9 million; $55.2 million remained authorized.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. The filing states there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported profitability improvement is sustainable after excluding the $3.8 million PremiSys gain and considering pricing, cost inflation, and ongoing efficiency gains.
- Whether organic sales growth continues across regions and product lines, especially given weakness in certain WPS, product identification, and Asia markets and the impact of currency translation.
- Whether operating cash flow remains strong as working-capital movements normalize, and how cash held overseas affects funding flexibility and potential repatriation taxes.
- Future borrowing costs, credit-agreement availability and conditions, and compliance with financial covenants.
- Effects of the regional reporting reorganization on comparability, and developments in the risks identified by the company, including supply disruptions, cybersecurity, foreign exchange, acquisitions, and goodwill or intangible-asset impairment.