Brady Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended October 31, 2022, compared with the three months ended October 31, 2021. Unless noted otherwise, figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $322.6 million | $321.5 million |
| Gross margin | $155.3 million; 48.1% of sales | $155.0 million; 48.2% |
| Operating income | $51.4 million; 15.9% of sales | $44.3 million; 13.8% |
| Net income | $39.4 million; 12.2% of sales | $35.0 million; 10.9% |
| Diluted EPS, Class A | $0.79 | $0.67 |
| Operating cash flow | $28.0 million | $27.5 million |
Organic sales increased 6.9%, while foreign currency translation reduced reported sales growth by 6.6%; acquisitions contributed no growth in the quarter. Gross margin dollars edged up, but margin percentage slipped as higher materials and labor costs were partly offset by pricing and operating-efficiency efforts. SG&A fell 7.0% to $89.9 million, primarily due to currency translation and lower WPS catalog advertising. Operating income rose 15.9%.
- IDS: Sales increased 3.1% to $256.4 million, reflecting 8.6% organic growth and a 5.5% currency headwind. Segment profit rose 5.5% to $51.5 million; segment margin improved to 20.1% from 19.6%.
- WPS: Sales decreased 9.1% to $66.2 million, with 1.2% organic growth offset by a 10.3% currency headwind. Segment profit increased to $6.4 million from $2.3 million, and segment margin rose to 9.6% from 3.1%, primarily reflecting prior-year cost reductions and lower catalog advertising.
Cash, debt and liquidity
Cash and cash equivalents were $114.5 million at October 31, 2022, essentially unchanged from July 31. Operating activities provided $28.0 million; capital expenditures were $3.9 million, compared with $11.3 million in the prior-year quarter, when facility purchases increased spending. Financing activities used $20.5 million, including $11.4 million of dividends and $12.1 million of share repurchases. The company reported $99.0 million of revolving-credit borrowings and $99.4 million available to borrow at quarter-end. It stated total available liquidity was $413.9 million, including cash and borrowing capacity subject to conditions.
On November 14, 2022, after quarter-end, Brady amended its credit agreement: commitments increased by $100 million to $300 million, maturity was extended to November 14, 2027, and the interest rate on certain borrowings increased by 0.125%. The agreement permits additional capacity subject to conditions and retains financial covenants. Brady was compliant at October 31, with debt-to-EBITDA of 0.38:1 and interest coverage of 125.1:1. Approximately 95% of cash was held outside the United States; repatriation may result in additional taxes.
Management commentary, outlook and risks
Management gave no specific sales or earnings guidance in the supplied filing text. It expects its ongoing annual income tax rate to be approximately 20%, based on the current business mix and tax laws. Fiscal 2023 priorities include product development, customer service, digital sales capabilities, pricing to address inflation, acquisitions, and operational efficiencies.
Management said freight and input-material inflation, labor shortages, COVID-19-related disruption and the war in Ukraine had increased costs. Pricing had not yet fully offset these pressures, negatively affecting gross margin. The company said its cash flows and borrowing capacity were sufficient for anticipated needs, while warning that geopolitical events could reduce sales, earnings and operating cash flow. Other cited risks include weaker demand, competition, execution and acquisition risks, cybersecurity, foreign exchange movements, regulation, litigation and potential goodwill or intangible-asset write-offs. Brady reported no material changes to the risk factors in its FY2022 Form 10-K.
Foreign currency translation drove a $17.7 million other comprehensive loss for the quarter, primarily reflecting U.S. dollar appreciation against certain currencies. Brady repurchased 279,513 Class A shares for approximately $12.1 million; $72.9 million remained authorized under its repurchase program at October 31. A $0.23-per-share quarterly dividend was declared after quarter-end, payable January 31, 2023.
Investor verification priorities
- Assess whether organic growth, especially in IDS, can continue to outweigh currency headwinds and WPS sales weakness.
- Track whether pricing and efficiency initiatives offset materials, freight and labor inflation without compromising demand or margins.
- Review the amended credit agreement’s borrowing availability, interest costs and covenant terms, including any conditions on additional capacity.
- Monitor foreign-exchange effects on reported sales, cash held overseas and accumulated other comprehensive loss.
- Evaluate the sustainability of share repurchases and dividends alongside working-capital needs and investment plans.