Brady Corporation (NYSE: BRC) — Form 10-Q
Reporting period: Fiscal second quarter and six months ended January 31, 2023. The quarter compares with the three months ended January 31, 2022; balance-sheet changes compare with July 31, 2022. Dollar amounts below are in millions, except per-share data.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Net sales | $326.2 | $318.1 | $648.8 | $639.5 |
| Gross margin | $156.4 (48.0%) | $149.4 (47.0%) | $311.7 (48.0%) | $304.4 (47.6%) |
| Operating income | $48.8 (15.0%) | $42.9 (13.5%) | $100.2 (15.4%) | $87.2 (13.6%) |
| Net income | $38.0 | $33.8 | $77.4 | $68.9 |
| Diluted EPS, Class A | $0.76 | $0.65 | $1.55 | $1.32 |
Q2 reported sales rose 2.6%; organic sales grew 6.3%, partly offset by a 3.7% adverse currency impact. Six-month reported sales rose 1.5%, reflecting 6.6% organic growth offset by a 5.1% currency impact. Gross-margin improvement reflected pricing and manufacturing efficiencies, partly offset by higher material and labor costs. SG&A declined year over year, while R&D spending increased.
- Segments: Q2 IDS sales were $255.7 million, up 4.4% reported and 7.4% organically; IDS segment profit rose 7.4% to $47.4 million. WPS sales were $70.6 million, down 3.4% reported but up 2.8% organically; WPS segment profit increased 38.4% to $6.2 million, largely reflecting cost reductions and lower catalog advertising.
- Cash flow: Six-month operating cash flow was $57.4 million versus $24.3 million a year earlier. Investing activities used $8.2 million, primarily capital expenditures, versus $16.4 million. Financing activities used $57.1 million, including dividends, share repurchases and net debt repayments. Cash declined $5.9 million from fiscal year-end to $108.2 million.
- Liquidity and debt: Long-term debt was $77.3 million at January 31, versus $95.0 million at July 31, 2022. The company reported $221.1 million available under its credit agreement, with capacity potentially expandable to $981.1 million subject to conditions; stated total available liquidity, including cash, was $1,089.3 million. The $300 million unsecured facility matures November 14, 2027. Brady reported compliance with covenants: debt/EBITDA of 0.31x and interest coverage of 85.9x.
Changes, outlook and risks
Profitability improved despite modest reported-sales growth, with organic growth, pricing and operating efficiencies supporting margins. IDS growth was broad-based outside Asia; China sales were affected by COVID-19 disruptions. WPS continued to face weaker North American non-digital/catalog sales, while digital sales grew. Interest expense increased substantially year over year, primarily due to higher benchmark rates.
Management expects inflation, labor shortages, supply-chain disruption and effects related to the Ukraine conflict and COVID-19—particularly in China—to remain relevant. It cited pricing and sustainable efficiency actions as mitigants and stated that operating cash flow and borrowing capacity should support working capital, capital expenditures, R&D, repurchases and dividends. No specific revenue or earnings guidance is provided in the filing. Management expects an ongoing annual tax rate of 20%–21%; the six-month effective rate was 21.7%.
Effective in fiscal Q3, Brady planned to report under two regional operating segments: Americas & Asia and Europe & Australia. The board declared a $0.23-per-share quarterly dividend payable April 28, 2023. Other disclosed risks include demand and competitive pressures, input-cost and supply risks, foreign exchange, cybersecurity, acquisitions, regulation, litigation and potential impairment of goodwill or intangibles. The filing states there were no material changes to previously disclosed risk factors or market-risk information.
Important facts for investors to verify
- Whether organic sales growth and margin gains persist as pricing, inflation and currency effects change.
- Whether China-related disruption and North American WPS channel weakness continue, and whether digital growth offsets those pressures.
- Credit-facility availability and expansion remain subject to agreement conditions; confirm borrowing costs and covenant headroom as rates change.
- Approximately 99% of cash was held outside the United States; potential repatriation may involve additional taxes.
- Review the fiscal Q3 regional-segment reporting transition and its effect on comparability, alongside the company’s ongoing operational and macroeconomic risks.