Brady Corporation (NYSE: BRC) — FY2020 Form 10-K
Reporting period: Fiscal year ended July 31, 2020. Brady manufactures identification solutions and workplace safety products through its Identification Solutions (IDS) and Workplace Safety (WPS) segments. The filing also reports fourth-quarter results; amounts below are U.S. dollars.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $1,081.3 million | $1,160.6 million |
| Gross margin | $528.6 million; 48.9% | $578.7 million; 49.9% |
| Operating income | $138.0 million; 12.8% of sales | $162.4 million; 14.0% of sales |
| Net income | $112.4 million | $131.3 million |
| Diluted Class A EPS | $2.11 | $2.46 |
| Operating cash flow | $141.0 million | $162.2 million |
| Capital expenditures | $27.3 million | $32.8 million |
Net sales fell 6.8% year over year: organic sales declined 5.4% and foreign currency translation reduced sales 1.4%. Net income margin was 10.4%, versus 11.3%. Cash and cash equivalents were $217.6 million, down from $279.1 million. Working capital included $135.7 million of inventory, up from $120.0 million, while accounts receivable declined to $146.2 million from $158.1 million.
At year-end Brady had no outstanding debt after repaying $48.7 million of principal during FY2020. Its $200 million revolving facility had no borrowings and $196.9 million available after $3.1 million of letters of credit; the facility may be increased to $400 million subject to conditions. Management reported total available liquidity of approximately $615 million, including cash. The company generated $141.0 million of operating cash flow and used $163.5 million in financing, including $64.5 million for share repurchases and $45.8 million for dividends.
Material changes and segment performance
- COVID-19: Demand weakened across most end markets in the second half of FY2020. IDS organic sales fell 8.0% for the year, while WPS organic sales grew 2.3%, supported by personal protective equipment, social-distancing products, and digital sales.
- Fourth quarter: Net sales were $251.7 million, versus $295.3 million in FY2019 Q4; net income was $27.7 million, versus $36.6 million. Brady said the rate of organic sales decline eased through the quarter. WPS digital sales rose 45% year over year in Q4.
- IDS: Sales were $784.7 million, down 9.1% including currency. Segment profit was $150.6 million, down 8.7%; segment profit margin edged up to 19.2% from 19.1% due to cost actions and efficiency gains.
- WPS: Sales were $296.6 million, down 0.3% including currency. Segment profit declined 8.7% to $21.0 million and its margin fell to 7.1% from 7.7%. The segment included approximately $4.0 million of costs related to inventory reserves, accelerated catalog-cost expense, severance, and other pandemic effects.
- Cost structure: SG&A declined 9.4% to $336.1 million, reflecting efficiency measures, lower incentive compensation, and reduced headcount. R&D declined to $40.7 million from $45.2 million.
Outlook, risks, and unusual items
- Management expected COVID-19 to continue adversely affecting near-term sales, profitability, and operating cash flow, but stated that the magnitude and duration were uncertain. The filing provides no quantified earnings or sales guidance.
- FY2020 included $13.8 million of impairment charges, primarily involving intangible and long-lived assets in WPS. Indefinite-lived tradenames with a $9.3 million carrying amount were written down to $0.6 million. The annual goodwill test found reporting units with remaining goodwill substantially above carrying value; no goodwill impairment was recorded.
- Other risks highlighted include weaker demand, pricing and competition, raw-material and labor costs, foreign-exchange movements, cybersecurity, regulatory compliance, tax exposures, and execution of digital, product-development, and acquisition strategies. Approximately 45% of sales were outside the U.S.
- Management said financial resources and cost-contingency plans were sufficient to manage pandemic impacts. There were no material pending legal proceedings believed likely to materially affect the financial statements and no material off-balance-sheet arrangements. Purchase and other contractual commitments were described as not material to financial position.
- The board announced after year-end an increase in the annual Class A dividend from $0.87 to $0.88 per share, its 35th consecutive annual increase. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. The audit identified deferred-tax valuation allowances as a critical audit matter.
Investor verification priorities
- Track post-year-end organic sales, especially whether IDS demand recovers and whether WPS pandemic-related product demand is sustained.
- Assess the assumptions behind the $13.8 million impairment and the sensitivity of goodwill and other assets to continued weak demand.
- Monitor inventory growth, operating cash flow, and the cash impact of dividends and repurchases.
- Review tax-asset realizability and uncertain tax positions; deferred-tax valuation allowances were $58.8 million and unrecognized tax benefits were $13.6 million.
- Consider the governance implications of publicly traded non-voting Class A shares: substantially all voting stock is controlled by two shareholders.