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 ended April 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. At April 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.
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Results of Operations
A comparison of results of operating income for the three and nine months ended
April 30, 2020 and 2019, is as follows:
                                                            Three months ended April 30,                                                                                           Nine months ended April 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 ended April 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 ended April 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 ended April 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 ended April
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 ended April 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 ended April 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 ended April 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 ended April 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 ended April 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 ended April 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.
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As a result of the economic slowdown, management evaluated whether indicators of
impairment of intangible assets and other long-lived assets existed as of
April 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
ended April 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 ended
April 30, 2020, and decreased 9.9% to $104.8 million for the nine months ended
April 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 ended April 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 ended April 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 ended April 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 ended April 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 ended April 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
ended April 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.
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The following is a summary of segment information for the three and nine months
ended April 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 OF NET 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 ended April 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 ended April 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 the Americas decreased in the high-single digits throughout the
region in the three months ended April 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 the U.S. This resulted in a
decline in organic sales in our healthcare identification product line in the
low-teens in the three months ended April 30, 2020.
Organic sales in the Americas decreased in the low-single digits in the nine
months ended April 30, 2020, compared to the same period in the prior year.
Organic sales declined in the low-single digits in the United States, Canada and
Brazil, and declined in the high-single digits in Mexico 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
the U.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 ended April 30, 2020.
Organic sales in Europe decreased in the low-teens in the three months ended
April 30, 2020, compared to the same period in the prior year. The decline was
broad-based throughout Europe except within a small group of businesses based in
the Nordic
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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 in Europe decreased in the high-single digits in the nine months
ended April 30, 2020, compared to the same period in the prior year. The decline
occurred throughout Europe 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 in Asia grew modestly in the three months ended April 30, 2020,
compared to the same period in the prior year. Organic sales growth was led by
Japan and China with low-single digit growth, which was offset by an organic
sales decline in India. Within China, Japan and the remainder of Southeast Asia,
local governments began easing restrictions related to COVID-19 in March while
India 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 in Asia decreased in the low-single digits in the nine months
ended April 30, 2020, compared to the same period in the prior year. Organic
sales declined in China and India, which was partially offset by growth in Japan
and Southeast 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 ended April 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 ended April 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 ended April 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 ended April 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 in Europe increased in the low-single digits in the three months
ended April 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 in France due to temporary shutdowns during the quarter.
Organic sales in Europe increased modestly in the nine months ended April 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 in France,
the UK, and the Nordic region was largely offset by a decline in sales in
Germany due to reduced demand for industrial products.
Organic sales in the Americas decreased in the mid-teens in the three months
ended April 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 the Americas decreased in the high-single digits in the
nine months ended April 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 in WPS 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-
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month period. In addition, the WPS 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 ended April
30, 2020.
Organic sales in Australia increased more than 30% in the three months ended
April 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 ended April 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 ended April 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
ended April 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 the WPS 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. At April 30, 2020, approximately 63% of the Company's cash
and cash equivalents were held outside the 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 the
U.S. from foreign jurisdictions, which may result in additional tax payments.
Cash Flows
Cash and cash equivalents were $238.9 million at April 30, 2020, a decrease of
$40.2 million from July 31, 2019. The significant changes were as follows:

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