Brady Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended April 30, 2021. Brady makes identification solutions and workplace safety products. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Three months ended April 30, 2021 | Nine months ended April 30, 2021 |
|---|---|---|
| Net sales | $295.5; up 11.1% year over year (6.5% organic, 4.6% currency) | $838.6; up 1.1% (organic down 1.7%, currency up 2.8%) |
| Gross margin | $148.8; 50.4% of sales, versus 48.7% | $413.8; 49.3% of sales, versus 49.4% |
| Operating income | $46.7; 15.8% of sales, versus $22.7 and 8.5% | $126.3; 15.1% of sales, versus $104.8 and 12.6% |
| Net income | $37.3, versus $13.6 | $101.6, versus $84.7 |
| Diluted EPS, Class A | $0.71, versus $0.26 | $1.94, versus $1.58 |
- Segment results: Third-quarter IDS sales rose 12.9% to $218.1 million, including 9.8% organic growth; WPS sales rose 6.4% to $77.4 million, despite a 2.2% organic decline. Segment profit margins improved for both segments: IDS to 21.8% from 18.8%, and WPS to 7.3% from 6.0%.
- Cash flow: Nine-month operating cash flow was $154.9 million, versus $95.9 million. Capital spending was $21.4 million; cash used in investing activities was $18.8 million and cash used in financing was $39.3 million. Cash increased $104.2 million to $321.8 million.
- Liquidity and debt: Brady reported no borrowings on its revolving credit facility and described itself as debt-free. The $200 million facility had $196.4 million available after $3.6 million of letters of credit; it can be increased to $400 million subject to conditions. Management reported approximately $718 million of total available liquidity, including cash. The company was in compliance with its credit covenants.
- Other balance-sheet measures: Current assets were $621.1 million and current liabilities $221.1 million at April 30, 2021. Stockholders’ equity was $951.6 million.
Changes versus the prior comparable periods
- Third-quarter sales recovered from the prior-year period’s pandemic-related decline. Management attributed growth primarily to IDS volume recovery across major product lines and favorable currency translation.
- Third-quarter operating income and earnings rose substantially. The comparison also benefited from the absence of the $13.8 million impairment charge recorded in the prior-year quarter, primarily for WPS-related intangible and long-lived assets.
- Nine-month sales remained slightly higher despite organic declines in both segments; currency translation more than offset the company-wide organic decline. Nine-month gross margin percentage was nearly flat.
- Operating cash flow improved with higher net income and working-capital benefits, including reduced inventories and lower incentive-compensation payments. Lower share repurchases also contributed to lower financing cash outflows: $3.6 million in the current period versus $64.1 million in the prior-year period.
Outlook, commentary, risks and unusual items
- Management gave no specific sales or earnings guidance in the provided filing text. It said cash flow and borrowing capacity should fund anticipated working capital, capital expenditures, R&D, repurchases and dividends for the next 12 months, and that available resources were sufficient to manage pandemic impacts.
- Management’s long-term expected annual effective tax rate is approximately 20% based on current business mix and tax laws; quarterly rates may vary. The nine-month 2021 effective rate was 20.9%.
- COVID-19 continued to affect demand, but management said its impact on third-quarter sales was lower than a year earlier. WPS pandemic-related product demand declined and did not fully replace weaker demand for core safety and identification products. Risks include renewed disruptions, staffing and facility impacts, demand and supply-chain uncertainty, excess or insufficient inventory, and cybersecurity exposure from remote work.
- Other identified risks include competition and execution, raw-material cost increases, foreign-currency movements, product development, litigation, regulation, and potential goodwill or intangible-asset impairments. About 70% of cash was held outside the United States; repatriation could result in additional taxes.
- Brady recorded equity-method losses of $0.8 million for the nine months on its investment in React Mobile. It also reported a subsequent Nordic ID tender-offer result: shares tendered represented 92.9% of outstanding shares and votes; the company intended to complete the acquisition for approximately $9.9 million in cash plus assumption of about $3 million of debt.
- The board declared a $0.22-per-share quarterly dividend payable July 30, 2021. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the strong quarterly IDS recovery continues, and whether WPS core-product demand offsets declining pandemic-related sales.
- How much reported growth reflects organic demand versus currency translation, particularly in the nine-month results.
- Whether improved cash flow and inventory reductions are sustainable, and how cash is allocated among investment, dividends, repurchases and acquisitions.
- The completion, final cost, debt assumption and integration effects of the Nordic ID acquisition.
- Potential continuing COVID-19, supply-chain, currency, cybersecurity and asset-impairment impacts, as well as the effect of foreign cash repatriation on taxes.