BRADY CORPORATION 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 manufactures a broad range of stock and custom identification products and sells a broad range of resale products. The ability to provide customers with a broad range of proprietary, customized and diverse products for use in various applications across multiple industries and geographies, along with a commitment to quality and service, have made Brady a leader in many of its markets. Brady's long-term sales growth and profitability will depend not only on the overall economic environment and our ability to successfully navigate changes in the macro environment, but also on our ability to develop and market innovative new products, deliver a high level of customer service, advance our digital capabilities, and continuously improve the efficiency of our global operations. In our IDS business, our strategy for growth includes an increased focus on certain industries and products, a focus on improving the customer buying experience, and the development of technologically advanced, innovative and proprietary products. In our WPS business, our strategy for growth includes a focus on workplace safety critical industries, streamlining our product offerings, compliance expertise, customization expertise, improving the overall customer experience, and improving our digital capabilities.
The following are key initiatives supporting our strategy in fiscal 2023:
•Investing in organic growth by enhancing our research and development process and utilizing customer feedback and observations to develop innovative new products that solve customer needs and improve environmental sustainability. •Providing our customers with the highest level of customer service. •Expanding and enhancing our sales capabilities through an improved digital presence and the use of data-driven marketing automation tools. •Maintaining profitability through pricing mechanisms to mitigate the impacts of supply chain disruptions and inflationary pressures while ensuring prices are market competitive. •Investing in acquisitions that enhance our strategic position and accelerate long-term sales growth. •Driving operational excellence and executing sustainable efficiency gains within our selling, general and administrative structures and within our global operations including insourcing of critical products and manufacturing activities while reducing our environmental footprint and managing working capital. •Building on our culture of diversity, equity and inclusion to increase employee engagement and enhance recruitment and retention practices in order to drive differentiated performance and execute our strategy.
Impact of the COVID-19 Pandemic and other Global Geopolitical Events on Our Business
The Company has experienced, and expects to continue to experience, increased freight and input material cost inflation as a result of increased global demand, disruptions caused by COVID-19 and government-mandated actions in response to COVID-19, the conflict in theUkraine , as well as labor shortages. The Company has taken and will continue to take actions to mitigate inflation issues, but thus far has not fully offset the impact of these trends through pricing actions. As a result, these trends have negatively impacted the Company's gross profit margin. We believe we have the financial strength to continue to invest in organic sales growth opportunities including sales, marketing, and research and development ("R&D") and inorganic sales opportunities including acquisitions, while continuing to drive sustainable efficiency gains and automation in our operations and selling, general and administrative ("SG&A") functions. AtOctober 31, 2022 , we had cash of$114.5 million , as well as a credit facility with$99.4 million available for future borrowing, which can be increased up to$299.4 million at the Company's option and subject to certain conditions, for total available liquidity of$413.9 million . We believe that our financial resources and liquidity levels including the remaining undrawn amount of the credit facility and our ability to increase that credit line as necessary are sufficient to manage the continuing impact of geopolitical events which may result in reduced sales, reduced net income, and reduced cash provided by operating activities. Refer to Risk Factors, included in Part I, Item 1A of our Annual Report on Form 10-K for the year endedJuly 31, 2022 , for further discussion of the possible impact of the COVID-19 pandemic and other global geopolitical events on our business. 17
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Results of Operations
A comparison of results of operating income for the three months ended
Three months ended October 31,
(Dollars in thousands) 2022 % Sales 2021 % Sales
Net sales $ 322,569 $ 321,475
Gross margin 155,264 48.1 % 154,988 48.2 %
Operating expenses:
Research and development 13,933 4.3 % 13,907 4.3 %
Selling, general and administrative 89,945 27.9 % 96,746 30.1 %
Total operating expenses 103,878 32.2 % 110,653 34.4 %
Operating income $ 51,386 15.9 % $ 44,335 13.8 %
References in this Form 10-Q to "organic sales" refer to sales calculated in
accordance with GAAP, excluding the impact of foreign currency translation and
sales recorded from acquired companies prior to the first anniversary date of
their acquisition. 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.
Net sales for the three months ended October 31, 2022 , increased 0.3% to $322.6
million , compared to $321.5 million in the same period in the prior year. The
increase consisted of organic sales growth of 6.9% partially offset by a
decrease from foreign currency translation of 6.6%. Organic sales grew 8.6% in
the IDS segment and grew 1.2% in the WPS segment during the three months ended
October 31, 2022 , compared to the same period in the prior year.
Gross margin increased 0.2% to $155.3 million in the three months ended October
31, 2022 , compared to $155.0 million in the same period in the prior year. As a
percentage of net sales, gross margin decreased to 48.1% compared to 48.2% in
the same period in the prior year. The decrease in gross margin as a percentage
of net sales was primarily due to an increase in the cost of materials and
labor, which was partially mitigated by price increases as well as our ongoing
efforts to streamline manufacturing processes and drive sustainable operational
efficiencies.
R&D expenses were consistent at $13.9 million and 4.3% of sales in the three
months ended October 31, 2022 and 2021. The Company remains committed to
investing in new product development to increase sales within our IDS and WPS
businesses. Investments in new printing systems, materials and the build out of
a comprehensive industrial track and trace solution remain the primary focus of
R&D expenditures for the remainder of fiscal 2023.
SG&A expenses include selling and administrative costs directly attributed to
the IDS and WPS segments, as well as certain other corporate administrative
expenses including finance, information technology, human resources, and other
administrative expenses. SG&A expenses decreased 7.0% to $89.9 million in the
three months ended October 31, 2022 , compared to $96.7 million in the same
period in the prior year. As a percentage of sales, SG&A decreased to 27.9% for
the three months ended October 31, 2022 , compared to 30.1% in the same period in
the prior year. The decrease in SG&A expenses was primarily due to foreign
currency translation and to a lesser extent, reductions in catalog advertising
expenses within the WPS segment.
Operating income increased 15.9% to $51.4 million in the three months ended
October 31, 2022 , compared to $44.3 million in the same period in the prior
year. The increase in operating income was due to an increase in segment profit
in the WPS business due to actions taken last fiscal year to reduce the cost
structure along with ongoing reductions in catalog advertising expenses, as well
as an increase in IDS segment profit resulting from organic sales growth.
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OPERATING INCOME TO NET INCOME
Three months ended October 31,
(Dollars in thousands) 2022 % Sales 2021 % Sales
Operating income $ 51,386 15.9 % $ 44,335 13.8 %
Other (expense) income:
Investment and other (expense) income (157)
0.0 % 543 0.2 %
Interest expense (894) (0.3) % (182) (0.1) %
Income before income taxes 50,335 15.6 % 44,696 13.9 %
Income tax expense 10,894 3.4 % 9,650 3.0 %
Net income $ 39,441 12.2 % $ 35,046 10.9 %
Investment and other expense was $0.2 million in the three months ended October
31, 2022 , compared to investment and other income of $0.5 million in the same
period in the prior year. The change was primarily due to a decrease in the
market value of securities held in deferred compensation plans during the three
months ended October 31, 2022 .
Interest expense increased to $0.9 million in the three months ended October 31,
2022 , compared to $0.2 million in the same period in the prior year. The
increase in interest expense was primarily due to an increase in interest rates
in the Company's revolving loan agreement and partially due to an increase in
outstanding borrowings on the Company's revolving loan agreement compared to the
same period in the prior year.
The Company's income tax rate was 21.6% for the three months ended October 31,
2022 and 2021. Refer to Note M "Income Taxes" for additional information on the
Company's income tax rate.
Business Segment Operating Results
The Company evaluates short-term segment performance based on segment profit and customer sales. Interest expense, investment and other (expense) income, income tax expense, and certain corporate administrative expenses are excluded when evaluating segment performance.
The following is a summary of segment information for the three months ended
Three months ended October 31,
2022 2021
SALES GROWTH INFORMATION
IDS
Organic 8.6 % 13.2 %
Currency (5.5) % 0.6 %
Acquisitions - % 11.6 %
Total 3.1 % 25.4 %
WPS
Organic 1.2 % (8.6) %
Currency (10.3) % 0.8 %
Total (9.1) % (7.8) %
Total Company
Organic 6.9 % 7.0 %
Currency (6.6) % 0.7 %
Acquisitions - % 8.3 %
Total 0.3 % 16.0 %
SEGMENT PROFIT
IDS $ 51,525 $ 48,816
WPS 6,378 2,293
Total $ 57,903 $ 51,109
SEGMENT PROFIT AS A PERCENT OF NET SALES
IDS 20.1 % 19.6 %
WPS 9.6 % 3.1 %
Total 18.0 % 15.9 %
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IDS
IDS net sales increased 3.1% to$256.4 million in the three months endedOctober 31, 2022 , compared to$248.6 million in the same period in the prior year, which consisted of organic sales growth of 8.6% and a decrease from foreign currency translation of 5.5%. Organic sales grew in all major product lines with the most significant growth in the safety and facility identification product line, followed by growth in the product identification, wire identification and healthcare identification product lines. Organic sales in theAmericas increased in the mid-single digits, organic sales inEurope increased in the mid-teens, and organic sales inAsia increased in the mid-single digits in the three months endedOctober 31, 2022 compared to the same period in the prior year. Segment profit increased 5.5% to$51.5 million in the three months endedOctober 31, 2022 , compared to$48.8 million in the same period in the prior year. As a percentage of net sales, segment profit was 20.1% compared to 19.6% in the same period in the prior year. The increase in segment profit was primarily due to increased sales volumes in all regions and all major product lines globally.
WPS
WPS net sales declined 9.1% to$66.2 million in the three months endedOctober 31, 2022 , compared to$72.9 million in the same period in the prior year, which consisted of an organic sales increase of 1.2% and a decrease from foreign currency translation of 10.3%. Organic digital sales increased by nearly 13% and organic catalog sales declined in the low-single digits in the three-month period. Organic sales inEurope increased in the mid-single digits consisting of digital sales growth of approximately 10% and low-single digit catalog channel sales growth. Organic sales inNorth America declined by approximately 11% primarily due to actions taken to improve price competitiveness and simplify our product offering, which contributed to the significant improvement in segment profit in the three-month period. Organic sales inAustralia increased by approximately 11% in the three months endedOctober 31, 2022 compared to the same period in the prior year consisting of high-single digit digital sales growth and catalog channel sales growth of approximately 12%. Segment profit increased 178.2% to$6.4 million in the three months endedOctober 31, 2022 , compared to$2.3 million in the same period of the prior year. As a percentage of net sales, segment profit improved to 9.6% compared to 3.1% in the same period of the prior year. The increase in segment profit was primarily due to actions taken during fiscal 2022 to reduce the cost structure as well as ongoing reductions in catalog advertising expenses.
Liquidity and Capital Resources
The Company's cash balances are generated and held in numerous locations throughout the world. AtOctober 31, 2022 , approximately 95% of the Company's cash and cash equivalents were held outsidethe United States . The Company's organic and inorganic growth has historically been funded by a combination of cash provided by operating activities and debt financing. The Company believes that its cash flow from operating activities and its borrowing capacity are sufficient to fund its anticipated requirements for working capital, capital expenditures, research and development, common stock repurchases, 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 could require repatriation of cash to theU.S. from foreign jurisdictions, which may result in additional tax payments.
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