BRADY CORPORATION 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 safety, 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. 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 the efficiency of our global operations, deliver a high level of customer service, develop and market innovative new products, and to advance our digital capabilities. 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, innovative new product offerings, compliance expertise, customization expertise, and improving our digital capabilities. The following are key initiatives supporting our strategy in fiscal 2022: •Investing in organic growth by enhancing our research and development process and utilizing customer feedback to develop innovative new products. •Investing in acquisitions that enhance our strategic position and accelerate long-term sales growth. •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. •Driving operational excellence and executing sustainable efficiency gains within our global operations and within our selling, general and administrative structures and within our global operations including insourcing of critical products and manufacturing activities. •Building on our culture of diversity, equity and inclusion to increase employee engagement and enhance recruitment and retention practices. Impact of the COVID-19 Pandemic on OurBusiness 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. During the three months endedOctober 31, 2021 , our facilities were operating globally with enhanced safety protocols designed to protect the health and safety of our employees. The Company has experienced, and expects to continue to experience, increased input material cost inflation as a result of increased global demand, government-mandated actions in response to COVID-19 and labor shortages. The Company has taken action to mitigate inflation issues, which has offset some, but not all, of the impact of these trends. As a result, these trends negatively impacted the Company's gross profit margin and may continue to negatively impact profitability in fiscal 2022. We believe we have the financial strength to continue to invest in organic sales growth opportunities, inorganic sales opportunities, sales and marketing, and research and development ("R&D"), while continuing to drive sustainable efficiencies and automation in our operations and selling, general and administrative ("SG&A") functions. AtOctober 31, 2021 , we had cash of$157.6 million , a credit facility with$130.1 million available for future borrowing, which can be increased up to$330.1 million at the Company's option and subject to certain conditions, for total available liquidity of approximately$487.7 million . We believe that our financial resources including the remaining undrawn amount of the credit facility and our ability to increase that credit line as necessary and liquidity levels are sufficient to manage the continuing impact of the COVID-19 pandemic, including the spread of variants that could result in additional government actions around the world to contain the virus or prevent further spread 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, 2021 , as well as the updates contained within this Quarterly Report on Form 10-Q, for further discussion of the possible impact of the COVID-19 pandemic on our business. 17 -------------------------------------------------------------------------------- Table of Contents Results of Operations The comparability of the operating results for the three months endedOctober 31, 2021 , to the prior year has been impacted by the following acquisitions: Acquisitions Segment Date Completed Magicard Holdings Limited ("Magicard") IDS May 2021 Nordic ID Oyj ("Nordic ID") IDS May 2021 The Code Corporation ("Code") IDS June 2021
A comparison of results of operating income for the three months ended
Three months ended October 31,
(Dollars in thousands) 2021 % Sales 2020 % Sales
Net sales $ 321,475 $ 277,227
Gross margin 154,988 48.2 % 135,428 48.9 %
Operating expenses:
Research and development 13,907 4.3 % 10,203 3.7 %
Selling, general and administrative 96,746 30.1 % 83,037 30.0 %
Total operating expenses 110,653 34.4 % 93,240 33.6 %
Operating income $ 44,335 13.8 % $ 42,188 15.2 %
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, 2021 , increased 16.0% to $321.5
million , compared to $277.2 million in the same period in the prior year. The
increase consisted of organic sales growth of 7.0%, sales growth from
acquisitions of 8.3% and an increase from foreign currency translation of 0.7%.
Organic sales grew 13.2% in the IDS segment and declined 8.6% in the WPS segment
during the three months ended October 31, 2021 , compared to the same period in
the prior year.
The most significant impact on organic sales due to the COVID-19 pandemic began
in the second half of fiscal 2020 when varied government responses to the
pandemic impacted a large demographic of our customers and the overall global
economy. The IDS business realized reduced demand across all major product lines
beginning in the third quarter of fiscal 2020 continuing through the second
quarter of fiscal 2021, while the WPS business realized strong organic sales
growth beginning in the fourth quarter of fiscal 2020 continuing through the
first quarter of fiscal 2021 due to increased sales of personal protective
equipment and other pandemic-related products. As a result, the recovery from
the COVID-19 pandemic had a significant impact on organic sales during the first
quarter of fiscal 2022, with the impact varying between the IDS and WPS
businesses due to sales patterns realized during the height of the pandemic in
fiscal 2021.
Gross margin increased 14.4% to $155.0 million in the three months ended October
31, 2021 , compared to $135.4 million in the same period in the prior year. As a
percentage of net sales, gross margin decreased to 48.2% compared to 48.9% 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, labor
and freight expense, which was partially mitigated by our ongoing efforts to
streamline manufacturing processes and drive sustainable operational
efficiencies.
R&D expenses increased 36.3% to $13.9 million in the three months ended October
31, 2021 , compared to $10.2 million in the same period in the prior year. As a
percentage of sales, R&D expenses increased to 4.3% compared to 3.7% in the same
period in the prior year. The increase in R&D spending was primarily due to the
acquisitions of Code and Nordic ID, as these companies operate with a greater
amount of R&D spend as a percentage of net sales compared to the organic
business, in addition to an increase in R&D headcount in the IDS business. The
Company remains committed to investing in new product development to increase
sales within our IDS and WPS businesses. Investments in new printers, materials,
and the building out of a comprehensive industrial track and trace solution
continue to be the primary focus of R&D expenditures for the remainder of fiscal
2022.
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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 increased 16.5% to $96.7 million in the
three months ended October 31, 2021 , compared to $83.0 million in the same
period in the prior year. The increase in SG&A expenses was primarily due to the
acquisitions of Code, Magicard and Nordic ID, and to a lesser extent an increase
in sales and marketing personnel in the IDS business and increased advertising
and personnel costs in the WPS business. As a percentage of sales, SG&A was
consistent at 30.1% for the three months ended October 31, 2021 , compared to
30.0% in the same period in the prior year, as increased costs were largely
offset by ongoing efficiency activities throughout SG&A.
Operating income increased 5.1% to $44.3 million in the three months ended
October 31, 2021 , compared to $42.2 million in the same period in the prior
year. The increase in operating income was primarily due to the increase in
segment profit in the IDS segment as a result of organic sales growth which was
partially offset by the decline in segment profit in the WPS segment.
OPERATING INCOME TO NET INCOME
Three months ended October 31,
(Dollars in thousands) 2021 % Sales 2020 % Sales
Operating income $ 44,335 13.8 % $ 42,188 15.2 %
Other income (expense):
Investment and other income 543 0.2 % 155 0.1 %
Interest expense (182) (0.1) % (106) - %
Income before income tax and losses of
unconsolidated affiliate 44,696 13.9 % 42,237 15.2 %
Income tax expense 9,650 3.0 % 8,582 3.1 %
Income before losses of unconsolidated affiliate 35,046 10.9 % 33,655 12.1 %
Equity in losses of unconsolidated affiliate - - % (174) (0.1) %
Net income $ 35,046 10.9 % $ 33,481 12.1 %
Investment and other income increased to $0.5 million in the three months ended
October 31, 2021 , compared to $0.2 million for the same period in the prior
year. The increase was primarily due to an increase in the market value of
securities held in deferred compensation plans.
Interest expense increased to $0.2 million in the three months ended October 31,
2021 , compared to $0.1 million for the same period in the prior year. The
increase in interest expense was due to increased borrowing on our credit
facility 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,
2021 , compared to 20.3% in the same period in the prior year. Refer to Note M
"Income Taxes" for additional information on the Company's income tax rate.
Equity in losses of unconsolidated affiliate of $0.2 million for the three
months ended October 31, 2020 represented the Company's proportionate share of
the loss in its equity interest in React Mobile, Inc. , an employee safety
software and hardware company based in the United States . In the fourth quarter
of fiscal 2021, the Company recorded an other-than-temporary impairment charge
for the Company's remaining equity interest in React Mobile, Inc.
Business Segment Operating Results
The Company evaluates short-term segment performance based on segment profit and
customer sales. Interest expense, investment and other income, income tax
expense, equity in losses of unconsolidated affiliate, 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 months ended
October 31, 2021 and 2020:
Three months ended October 31,
2021 2020
SALES GROWTH INFORMATION
ID Solutions
Organic 13.2 % (8.4) %
Currency 0.6 % 0.6 %
Acquisitions 11.6 % - %
Total 25.4 % (7.8) %
Workplace Safety
Organic (8.6) % 5.5 %
Currency 0.8 % 4.3 %
Total (7.8) % 9.8 %
Total Company
Organic 7.0 % (4.9) %
Currency 0.7 % 1.5 %
Acquisitions 8.3 % - %
Total 16.0 % (3.4) %
SEGMENT PROFIT
ID Solutions $ 48,816 $ 40,279
Workplace Safety 2,293 7,988
Total $ 51,109 $ 48,267
SEGMENT PROFIT AS A PERCENT OF NET SALES
ID Solutions 19.6 % 20.3 %
Workplace Safety 3.1 % 10.1 %
Total 15.9 % 17.4 %
ID Solutions
IDS net sales increased 25.4% to $248.6 million in the three months ended
October 31, 2021 , compared to $198.2 million in the same period in the prior
year, which consisted of organic sales growth of 13.2%, sales growth from
acquisitions of 11.6% and an increase from foreign currency translation of 0.6%.
Organic sales grew in all major product lines with growth in the wire
identification, safety and facility identification, product identification and
healthcare identification product lines.
Organic sales in the Americas increased nearly 12%, organic sales in Europe
increased in the mid-teens, and organic sales in Asia increased over 15% in the
three months ended October 31, 2021 compared to the same period in the prior
year. Organic sales grew in all major product lines and in all geographies as
our businesses continue to recover from the economic slowdown caused by the
COVID-19 pandemic.
Segment profit increased 21.2% to $48.8 million in the three months ended
October 31, 2021 , compared to $40.3 million in the same period in the prior
year. As a percentage of net sales, segment profit was 19.6% compared to 20.3%
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 product lines
globally. The decrease in segment profit as a percentage of net sales was
primarily due to gross margin compression resulting from an increase in the cost
of materials, labor and freight expense, as well as incremental amortization
expense of $2.5 million from businesses acquired in fiscal 2021.
Workplace Safety
WPS net sales declined 7.8% to $72.9 million in the three months ended October
31, 2021 , compared to $79.0 million in the same period in the prior year, which
consisted of an organic sales decline of 8.6% and an increase from foreign
currency translation of 0.8%. The economic effect of the COVID-19 pandemic had a
significant impact on organic sales trends during the prior year. The WPS
business realized strong organic sales growth beginning in the fourth quarter of
fiscal 2020 continuing through the first quarter of fiscal 2021 due to increased
sales of personal protective equipment and other pandemic-related products. As a
result, WPS organic sales declined in the first quarter of fiscal 2022 primarily
due to the increase in sales of COVID-19 products during the height of the
pandemic last year.
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Table of Contents Organic sales inEurope declined in the high-single digits, organic sales inNorth America declined by approximately 12% and organic sales inAustralia declined in the low-single digits in the three months endedOctober 31, 2021 compared to the same period in the prior year. The increase in demand for core safety and identification products did not make up for the decrease in demand for personal protective equipment and other social distancing signage and floor markings resulting from the COVID-19 pandemic. Digital channel sales and sales through the catalog channel both decreased in the high-single digits in the global WPS business. Segment profit decreased 71.3% to$2.3 million in the three months endedOctober 31, 2021 , compared to$8.0 million in the same period of the prior year. As a percentage of net sales, segment profit was 3.1% compared to 10.1% in the same period of the prior year. The decrease in segment profit was primarily due to the decrease in sales volumes and gross margin compression resulting from an increase in the cost of materials, labor and freight expense, as well as increased investments in advertising and selling resources in certain businesses inNorth America . Liquidity and Capital Resources The Company's cash balances are generated and held in numerous locations throughout the world. AtOctober 31, 2021 , approximately 94% 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. Cash Flows Cash and cash equivalents were$157.6 million atOctober 31, 2021 , an increase of$10.2 million fromJuly 31, 2021 . The following summarizes the cash flow statement for the three months endedOctober 31, 2021 and 2020:
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