Overview
Brady Corporation is a global manufacturer and supplier of identification solutions and workplace safety products that identify and protect premises, products and people. The IDS segment is primarily involved in the design, manufacture, and distribution of high-performance and innovative identification and healthcare products. The WPS segment provides workplace safety and compliance products, approximately half of which are internally manufactured and half of which are externally sourced. The long-term sales growth and profitability of our segments will depend not only on improved demand in end markets and the overall economic environment, but also on our ability to continuously improve operational excellence, focus on the customer, develop and market innovative new products, and to advance our digital capabilities. In our Identification Solutions ("ID Solutions" or "IDS") business, our strategy for growth includes an increased focus on certain industries and products, a focus on improving the customer buying experience, and investing in research and development ("R&D") to develop new products. In our Workplace Safety ("WPS") business, our strategy for growth includes a focus on workplace safety critical industries, innovative new product offerings, compliance expertise, customization expertise, and improving our digital capabilities. The Company's key initiatives for 2020 have not changed, however, the respective business plans to achieve these key initiatives have been and are expected to continue to be affected by the COVID-19 pandemic. Our key initiatives supporting our strategy in fiscal 2020 are focused on: •Investing in organic growth by enhancing our research and development process and improving the time to launch high-value, innovative products in alignment with our target markets. •Providing our customers with the highest level of customer service. •Expanding and enhancing our sales capabilities through an improved digital presence and increased sales resources. •Driving operational excellence and executing sustainable efficiency gains within our global operations and within our selling, general and administrative structures. •Growing through focused actions in selected vertical markets and strategic accounts. •Enhancing our employee development process to create an engaged workforce and to attract and retain key talent. Impact of the COVID-19 Pandemic on Our Business The impact of the COVID-19 pandemic on the global economic environment has resulted in reduced demand across the majority of our end markets. In the near-term, the COVID-19 pandemic is expected to have adverse effects on our sales, overall profitability, and working capital. As of the date of this filing, significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic.Brady Corporation is deemed an essential business under the majority of local government orders. Our products support first responders, healthcare workers, food processing companies, and many other critical industries. Certain of our businesses were shutdown temporarily during the quarter endedApril 30, 2020 , which had an impact on our financial results and operations. However, the majority of our facilities were operating globally while implementing enhanced safety protocols designed to protect the well-being of our employees. We are taking actions throughout our business to reduce controllable costs, including reductions in labor costs, eliminating non-essential travel, and reducing discretionary spend. We believe we have the financial strength to continue to invest in organic sales growth opportunities and R&D, while continuing to drive efficiencies and automation in our operations and selling, general and administrative expenses ("SG&A") functions. AtApril 30, 2020 , we have cash of$238.9 million , current maturities on long-term debt of$48.9 million and an undrawn credit facility of$200 million , for total liquidity of approximately$390 million . Due to the speed with which the COVID-19 pandemic has developed and the resulting uncertainty, including the depth and duration of any disruptions to customers and suppliers, its future effect on our business, results of operations, and financial condition cannot be predicted. Despite this uncertainty, we believe that our financial resources and liquidity levels, along with various contingency plans to reduce costs are sufficient to manage the impact of the COVID-19 pandemic, which may result in reduced sales, net income and operating cash flows. Refer to Risk Factors, included in Part II, Item 1A of this Quarterly Report on Form 10-Q, for further discussion of the possible impact of the COVID-19 pandemic on our business. 20 -------------------------------------------------------------------------------- Table of Contents Results of Operations A comparison of results of operating income for the three and nine months endedApril 30, 2020 and 2019, is as follows: Three months endedApril 30 , Nine months endedApril 30 , (Dollars in thousands) 2020 % Sales 2019 % Sales 2020 % Sales 2019 % Sales Net sales$ 265,943 $ 289,745 $ 829,555 $ 865,367 Gross margin 129,527 48.7 % 145,749 50.3 % 410,059 49.4 % 432,098 49.9 % Operating expenses: Research and development 9,814 3.7 % 11,437 3.9 % 31,298 3.8 % 33,837 3.9 % Selling, general and administrative 83,223 31.3 % 94,691 32.7 % 260,136 31.4 % 281,988 32.6 % Impairment charges 13,821 5.2 % - - % 13,821 3.4 % - - % Total operating expenses 106,858 40.2 % 106,128 36.6 % 305,255 36.8 % 315,825 36.5 % Operating income$ 22,669 8.5 %$ 39,621 13.7 %$ 104,804 12.6 %$ 116,273 13.4 % References in this Form 10-Q to "organic sales" refer to sales calculated in accordance with GAAP, excluding the impact of foreign currency translation. The Company's organic sales disclosures exclude the effects of foreign currency translation as foreign currency translation is subject to volatility that can obscure underlying business trends. Management believes that the non-GAAP financial measure of organic sales is meaningful to investors as it provides them with useful information to aid in identifying underlying sales trends in our businesses and facilitating comparisons of our sales performance with prior periods. Sales for the three months endedApril 30, 2020 , decreased 8.2% to$265.9 million , compared to$289.7 million in the same period of the prior year. The decrease consisted of an organic sales decline of 6.0% and a decrease from foreign currency translation of 2.2%. Organic sales declined 8.2% in the IDS segment and grew 0.2% in the WPS segment during the three months endedApril 30, 2020 , compared to the same period in the prior year. Organic sales increased by 2.7% through the first two months of the quarter and decreased by 23.6% in the month of April, compared to the same periods in the prior year. Sales for the nine months endedApril 30, 2020 , decreased 4.1% to$829.6 million , compared to$865.4 million in the same period of the prior year. The decrease consisted of an organic sales decline of 2.5% and a decrease from foreign currency translation of 1.6%. Organic sales declined 3.2% in the IDS segment and declined 0.5% in the WPS segment during the nine months endedApril 30, 2020 , compared to the same period in the prior year. Gross margin decreased 11.1% to$129.5 million and decreased 5.1% to$410.1 million for the three and nine months endedApril 30, 2020 , respectively, compared to$145.7 million and$432.1 million in the same periods of the prior year. As a percentage of net sales, gross margin decreased to 48.7% and 49.4% for the three and nine months endedApril 30, 2020 , respectively, compared to 50.3% and 49.9% in the same periods of the prior year. The decrease in gross margin as a percentage of net sales during both the three and nine-month periods was primarily due to the decline in sales volumes resulting from the economic slowdown caused by the COVID-19 pandemic. R&D expenses decreased 14.2% to$9.8 million and decreased 7.5% to$31.3 million for the three and nine months endedApril 30, 2020 , respectively, compared to$11.4 million and$33.8 million in the same periods of the prior year. As a percentage of sales, R&D expenses remained consistent for the three and nine months endedApril 30, 2020 , compared to the same periods of the prior year. The decrease in R&D expenses was primarily due to a reduction in incentive-based compensation in the current three and nine-month periods compared to the same periods in the prior year. The Company remains committed to investing in new product development to increase sales within our IDS and WPS businesses. Investments in new printers and materials continue to be the primary focus of R&D expenditures. SG&A expenses include selling costs directly attributed to the IDS and WPS segments, as well as certain other administrative expenses including finance, information technology, human resources, and other administrative expenses. SG&A decreased 12.1% to$83.2 million and 7.7% to$260.1 million for the three and nine months endedApril 30, 2020 , respectively, compared to$94.7 million and$282.0 million in the same periods of the prior year. As a percentage of sales, SG&A was 31.3% and 31.4% for the three and nine months endedApril 30, 2020 , respectively, compared to 32.7% and 32.6% in the same periods of the prior year. Increased costs associated with the COVID-19 pandemic during the three-month period, including employee severance and other related costs, were offset by reduced incentive compensation. The decrease in SG&A in the nine-month period was due to ongoing efficiency gains and reduced incentive compensation, and to a lesser extent the impact of foreign currency translation. 21 -------------------------------------------------------------------------------- Table of Contents As a result of the economic slowdown, management evaluated whether indicators of impairment of intangible assets and other long-lived assets existed as ofApril 30, 2020 . Management concluded that the COVID-19 pandemic resulted in indicators of impairment in certain businesses within the WPS and IDS segments, and performed an interim impairment analysis. As a result of the analysis, impairment charges of$13.8 million related to other intangible and long-lived assets, primarily in the WPS segment, were recorded during the three months endedApril 30, 2020 . Refer to Note D, "Other Intangible and Long-Lived Assets" for further discussion regarding the impairment charges. Operating income decreased 42.8% to$22.7 million for the three months endedApril 30, 2020 , and decreased 9.9% to$104.8 million for the nine months endedApril 30, 2020 , compared to$39.6 million and$116.3 million in the same periods of the prior year, respectively. The decrease in operating income for both the three and nine-month periods endedApril 30, 2020 , compared to the same periods in the prior year, was primarily due to impairment charges of$13.8 million recognized in the current quarter. OPERATING INCOME TO NET INCOME Three months ended April 30, Nine months ended April 30, (Dollars in thousands) 2020 % Sales 2019 % Sales 2020 % Sales 2019 % Sales Operating income$ 22,669 8.5 %$ 39,621 13.7 %$ 104,804 12.6 %$ 116,273 13.4 % Other income (expense): Investment and other income 112 - % 2,065 0.7 % 3,252 0.4 % 3,425 0.4 % Interest expense (628) (0.2) % (708) (0.2) % (1,976) (0.2) % (2,137) (0.2) % Income before income tax 22,153 8.3 % 40,978 14.1 % 106,080 12.8 % 117,561 13.6 % Income tax expense 8,520 3.2 % 6,197 2.1 % 21,396 2.6 % 22,916 2.6 % Net income$ 13,633 5.1 %$ 34,781 12.0 %$ 84,684 10.2 %$ 94,645 10.9 % Investment and other income was$0.1 million and$2.1 million for the three months endedApril 30, 2020 and 2019, respectively. The decrease in the three-month period was primarily due to a decrease in the market value of securities held in deferred compensation plans. Investment and other income was$3.3 million and$3.4 million for the nine months endedApril 30, 2020 , and 2019, respectively. The market value of securities held in deferred compensation plans remained essentially flat during the current nine-month period while interest income increased compared to the prior nine-month period. Interest income is expected to decline in future periods considering the recent decline in interest rates. Interest expense was consistent at$0.6 million and$0.7 million for the three months, and$2.0 million and$2.1 million for the nine months endedApril 30, 2020 and 2019, respectively. There was minimal change in the Company's principal balance under its outstanding debt agreements. The Company's income tax rate was 38.5% for the three months endedApril 30, 2020 , compared to 15.1% for the same period in the prior year. The income tax rate was 20.2% for the nine months endedApril 30, 2020 , compared to 19.5% for the same period in the prior year. Refer to Note M, " Income Taxes" for additional information on the Company's income tax rates. Business Segment Operating Results The Company evaluates short-term segment performance based on segment profit and customer sales. Impairment charges, interest expense, investment and other income, income tax expense, and certain corporate administrative expenses are excluded when evaluating segment performance. 22 -------------------------------------------------------------------------------- Table of Contents The following is a summary of segment information for the three and nine months endedApril 30, 2020 , and 2019: Nine months ended Three months ended April 30, April 30, 2020 2019 2020 2019 SALES GROWTH INFORMATION ID Solutions Organic (8.2) % 4.0 % (3.2) % 4.4 % Currency (1.5) % (3.1) % (1.1) % (2.3) % Total (9.7) % 0.9 % (4.3) % 2.1 % Workplace Safety Organic 0.2 % (1.6) % (0.5) % (0.2) % Currency (4.1) % (5.3) % (3.1) % (3.7) % Divestitures - % (5.3) % - % (5.8) % Total (3.9) % (12.2) % (3.6) % (9.7) %Total Company Organic (6.0) % 2.4 % (2.5) % 3.1 % Currency (2.2) % (3.8) % (1.6) % (2.8) % Divestitures - % (1.5) % - % (1.6) % Total (8.2) % (2.9) % (4.1) % (1.3) % SEGMENT PROFIT AS A PERCENT OFNET SALES ID Solutions 18.8 % 18.6 % 19.5 % 18.6 % Workplace Safety 6.0 % 8.0 % 6.9 % 7.3 % Total 15.3 % 15.9 % 16.2 % 15.7 % ID Solutions IDS net sales decreased 9.7% in the three months endedApril 30, 2020 , compared to the same period in the prior year, which consisted of an organic sales decline of 8.2% and a decrease from foreign currency translation of 1.5%. The economic slowdown caused by the COVID-19 pandemic had a significant impact on organic sales trends during the quarter. Organic sales increased by 2.2% through the first two months of the quarter, then decreased by 27.6% in the month of April compared to the same periods in the prior year. Organic sales declined in all product lines in the quarter due to reduced demand from the economic slowdown caused by the COVID-19 pandemic. IDS net sales decreased 4.3% in the nine months endedApril 30, 2020 , compared to the same period in the prior year, which consisted of an organic sales decline of 3.2% and a decrease from foreign currency translation of 1.1%. Organic sales declined in all product lines in the nine-month period due to reduced demand from the economic slowdown caused by the COVID-19 pandemic. Organic sales in theAmericas decreased in the high-single digits throughout the region in the three months endedApril 30, 2020 , compared to the same period in the prior year. By product line, product identification decreased in the low-single digits, and wire identification and safety and facility identification decreased in the mid-single digits due to the decrease in economic activity. As concerns grew regarding the availability of healthcare, a trend emerged in the second half of the quarter which was a significant decrease in elective surgeries and hospital admissions in theU.S. This resulted in a decline in organic sales in our healthcare identification product line in the low-teens in the three months endedApril 30, 2020 . Organic sales in theAmericas decreased in the low-single digits in the nine months endedApril 30, 2020 , compared to the same period in the prior year. Organic sales declined in the low-single digits inthe United States ,Canada andBrazil , and declined in the high-single digits inMexico due to the economic slowdown caused by the COVID-19 pandemic. By product line, safety and facility identification increased organic sales in the low-single digits, product identification was flat and wire identification decreased in the low-single digits. The decrease in elective surgeries and hospital admissions occurring in theU.S. in the second half of the third quarter resulted in a mid-single digit organic sales decline in the healthcare identification product line in the nine months endedApril 30, 2020 . Organic sales inEurope decreased in the low-teens in the three months endedApril 30, 2020 , compared to the same period in the prior year. The decline was broad-based throughoutEurope except within a small group of businesses based in the Nordic 23 -------------------------------------------------------------------------------- Table of Contents region, which had organic sales growth of approximately 10% in the quarter. By product line, wire identification and product identification declined in the mid-single digits, and safety and facility identification declined in the mid-teens in the three-month period due to reduced demand from the economic slowdown caused by the COVID-19 pandemic. Organic sales inEurope decreased in the high-single digits in the nine months endedApril 30, 2020 , compared to the same period in the prior year. The decline occurred throughoutEurope except within a small group of businesses based in the Nordic region, which had organic sales growth in the mid-single digits in the nine-month period. By product line, wire identification and product identification declined in the low-single digits, and safety and facility identification declined in the high-single digits in the nine-month period due to reduced demand from the economic slowdown caused by the COVID-19 pandemic. Organic sales inAsia grew modestly in the three months endedApril 30, 2020 , compared to the same period in the prior year. Organic sales growth was led byJapan andChina with low-single digit growth, which was offset by an organic sales decline inIndia . WithinChina ,Japan and the remainder ofSoutheast Asia , local governments began easing restrictions related to COVID-19 in March whileIndia was under a government-ordered shutdown for the second half of the quarter. By product line, sales growth was led by wire identification and product identification, while safety and facility identification declined in the three-month period. Organic sales inAsia decreased in the low-single digits in the nine months endedApril 30, 2020 , compared to the same period in the prior year. Organic sales declined inChina andIndia , which was partially offset by growth inJapan andSoutheast Asia . By product line, sales growth was led by wire identification and product identification, while safety and facility identification declined in the nine-month period. Segment profit decreased to$36.4 million and increased to$119.5 million for the three and nine months endedApril 30, 2020 , respectively, compared to$39.9 million and$119.3 million for the same periods in the prior year. As a percentage of net sales, segment profit increased to 18.8% and 19.5% for the three and nine months endedApril 30, 2020 , respectively, from 18.6% for both periods in the prior year. The increase in segment profit as a percentage of sales was due to cost actions taken in response to the decline in revenue from the impact of the COVID-19 pandemic as well as reduced incentive compensation in both the three and nine-month periods. Workplace Safety WPS net sales decreased 3.9% in the three months endedApril 30, 2020 , compared to the same period in the prior year, which consisted of organic sales growth of 0.2% and a decrease from foreign currency translation of 4.1%. The economic slowdown caused by the COVID-19 pandemic had a significant impact on organic sales trends during the quarter. Organic sales increased by 4.0% through the first two months of the quarter, then decreased by 7.5% in the month of April, compared to the same periods in the prior year. Sales through the digital channel grew approximately 12% while sales through the catalog channel declined in the low-single digits in the three-month period. WPS net sales decreased 3.6% in the nine months endedApril 30, 2020 , compared to the same period in the prior year, which consisted of an organic sales decline of 0.5% and a decrease from foreign currency translation of 3.1%. Sales through the digital channel grew in the mid-single digits while sales through the catalog channel declined in the low-single digits in the nine-month period. Organic sales inEurope increased in the low-single digits in the three months endedApril 30, 2020 , compared to the same period in the prior year. Digital channel sales increased in the high-single digits and catalog channel sales decreased slightly during the three-month period. Organic sales growth in the three-month period was primarily driven by increased sales of a variety of product categories related to mitigating the COVID-19 pandemic and increased sales in the Nordic region, which largely offset a decline in organic sales primarily inFrance due to temporary shutdowns during the quarter. Organic sales inEurope increased modestly in the nine months endedApril 30, 2020 , compared to the same period in the prior year. Digital channel sales increased in the mid-single digits and catalog channel sales decreased in the low-single digits during the nine-month period. Organic sales growth inFrance , theUK , and the Nordic region was largely offset by a decline in sales inGermany due to reduced demand for industrial products. Organic sales in theAmericas decreased in the mid-teens in the three months endedApril 30, 2020 , compared to the same period in the prior year, which was driven by a mid-teens decline in both catalog channel sales and digital channel sales. Organic sales in theAmericas decreased in the high-single digits in the nine months endedApril 30, 2020 , compared to the same period in the prior year. Digital channel sales declined in the mid-single digits and catalog channel sales declined in the high-single digits in the nine-month period. The target customer demographic of one particular business inWPS North America consists primarily of small companies, of which many were subject to government-ordered shutdowns during the second half of the quarter. This resulted in a significant decrease in sales orders which caused the majority of the decline in sales in the three- 24
--------------------------------------------------------------------------------
Table of Contents month period. In addition, theWPS North America business continued to experience a negative impact on sales from a digital platform that was implemented toward the end of fiscal 2018. The business transitioned to a new digital platform mid-way through fiscal 2019, however, sales have not yet returned to the level experienced prior to the initial platform change in fiscal 2018. Reduced demand from the economic slowdown caused by the COVID-19 pandemic resulted in additional digital sales declines in the three months endedApril 30, 2020 . Organic sales inAustralia increased more than 30% in the three months endedApril 30, 2020 , compared to the same period in the prior year. Digital channel sales increased more than 70% and catalog channel sales increased more than 20% during the three-month period.Australia was not impacted by the COVID-19 pandemic as severely as other countries in which we operate, and our Australian business generated increased sales of a variety of product categories related to mitigating the COVID-19 pandemic, including various types of personal protective equipment and other healthcare supplies. Organic sales increased nearly 10% in the nine months endedApril 30, 2020 , compared to the same period in the prior year, which was entirely due to the increase in organic sales in the current quarter. Segment profit decreased to$4.4 million and$15.0 million for the three and nine months endedApril 30, 2020 , respectively, compared to$6.1 million and$16.3 million for the same periods in the prior year. As a percentage of net sales, segment profit decreased to 6.0% and 6.9% for the three and nine months endedApril 30, 2020 , respectively, compared to 8.0% and 7.3% for the same periods in the prior year. The decreases in segment profit were primarily due to additional costs incurred to further address our cost structure as a result of the COVID-19 pandemic, and the decline in profit resulting from the decrease in sales in theWPS North America business. These costs were partially offset by reduced incentive compensation. Liquidity and Capital Resources The Company's cash balances are generated and held in numerous locations throughout the world. AtApril 30, 2020 , approximately 63% of the Company's cash and cash equivalents were held outsidethe United States . The Company's growth has historically been funded by a combination of cash provided by operating activities and debt financing. Based on management's current expectations and currently available information, the Company believes that current cash on hand, cash flow from operating activities, and its borrowing capacity are sufficient to fund anticipated requirements for working capital, planned capital expenditures, common stock repurchases, scheduled debt repayments, and dividend payments for the next 12 months. Although the Company believes these sources of cash are currently sufficient to fund domestic operations, annual cash needs and the impact of the COVID-19 pandemic could require repatriation of cash to theU.S. from foreign jurisdictions, which may result in additional tax payments. Cash Flows Cash and cash equivalents were$238.9 million atApril 30, 2020 , a decrease of$40.2 million fromJuly 31, 2019 . The significant changes were as follows:
© Edgar Online, source