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 provides workplace safety, identification and compliance products, approximately half of which are internally manufactured and half of which are externally sourced. 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 2021: •Investing in organic growth by enhancing our research and development process and utilizing customer feedback to develop innovative new products. •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. •Building on our culture of diversity and inclusion to increase employee engagement and enhance recruitment and retention practices. 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 continue to have adverse effects on our sales, overall profitability, and cash provided by operating activities. 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. During the quarter endedOctober 31, 2020 , our facilities were operating globally with enhanced safety protocols designed to protect the health and safety of our employees. We have taken actions throughout our business to reduce controllable costs, including actions to reduce 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 research and development ("R&D"), while continuing to drive sustainable efficiencies and automation in our operations and selling, general and administrative expenses ("SG&A") functions. AtOctober 31, 2020 , we had cash of$256.3 million , an undrawn credit facility of$200 million , which can be increased up to$400 million at the Company's option and subject to certain conditions, and outstanding letters of credit of$3.5 million , for total available liquidity of approximately$653 million . Due to the speed with which the COVID-19 pandemic developed and the resulting uncertainty, including the depth and duration of any disruptions to customers and suppliers, its future effect on our business, results of operations, and financial condition cannot be predicted. Despite this uncertainty, we believe that our financial resources, liquidity levels and debt-free status, along with various contingency plans to reduce costs are sufficient to manage the impact of the COVID-19 pandemic, which may result in reduced sales, reduced net income, and reduced cash provided by operating activities. Refer to Risk Factors, included in Part I, Item 1A of our Annual Report on Form 10-K for the year endedJuly 31, 2020 , for further discussion of the possible impact of the COVID-19 pandemic on our business. 17 -------------------------------------------------------------------------------- Table of Contents Results of Operations A comparison of results of operating income for the three months endedOctober 31, 2020 and 2019 is as follows: Three months ended October 31, (Dollars in thousands) 2020 % Sales 2019 % Sales Net sales$ 277,227 $ 286,947 Gross margin 135,428 48.9 % 141,405 49.3 % Operating expenses: Research and development 10,203 3.7 % 10,967 3.8 % Selling, general and administrative 83,037 30.0 % 89,547 31.2 % Total operating expenses 93,240 33.6 % 100,514 35.0 % Operating income$ 42,188 15.2 %$ 40,891 14.3 % 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. Net sales for the three months endedOctober 31, 2020 , decreased 3.4% to$277.2 million , compared to$286.9 million in the same period in the prior year. The decrease consisted of an organic sales decline of 4.9% and an increase from foreign currency translation of 1.5%. Organic sales declined 8.4% in the IDS segment and grew 5.5% in the WPS segment during the three months endedOctober 31, 2020 , compared to the same period in the prior year. The COVID-19 pandemic had a significant impact on organic sales during the three months endedOctober 31, 2020 , with the impact varying between the IDS and WPS segments. The IDS segment realized reduced demand across all major product lines, while the WPS segment realized increased demand globally for personal protective equipment and other pandemic-related safety and identification products during this same period. Gross margin for the three months endedOctober 31, 2020 , decreased 4.2% to$135.4 million , compared to$141.4 million in the same period in the prior year. As a percentage of net sales, gross margin decreased to 48.9% for the three months endedOctober 31, 2020 , from 49.3% in the same period in the prior year. The decrease in gross margin as a percentage of net sales was primarily due to the decline in sales volumes in the IDS segment resulting from the economic slowdown caused by the COVID-19 pandemic as well as product mix in our WPS segment, which was partially mitigated by our ongoing efforts to streamline manufacturing processes and drive sustainable operational efficiencies. R&D expenses for the three months endedOctober 31, 2020 , declined 7.0% to$10.2 million , compared to$11.0 million in the same period in the prior year. As a percentage of sales, R&D expenses declined slightly to 3.7% for the three months endedOctober 31, 2020 , compared to 3.8% in the same period in the prior year. The decrease in R&D spending was due to a decrease in headcount, improved efficiency, and the timing of expenditures related to ongoing new product development costs compared to the same period 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 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 declined 7.3% to$83.0 million for the three months endedOctober 31, 2020 , compared to$89.5 million in the same period in the prior year. As a percentage of sales, SG&A was 30.0% for the three months endedOctober 31, 2020 , compared to 31.2% in the same period in the prior year. The decrease in both SG&A expenses and SG&A expenses as a percentage of net sales from the same period of the prior year was primarily due to ongoing efficiency gains, a reduction in the SG&A cost structure, along with a reduction in discretionary spend, including travel for our sales people, which was partially offset by the impact of foreign currency translation. Operating income increased 3.2% to$42.2 million for three months endedOctober 31, 2020 , compared to$40.9 million in the same period in the prior year. The increase in operating income was primarily due to increased segment profit in the WPS segment as a result of organic sales growth as well as a reduction in the SG&A cost structure in both segments. 18 -------------------------------------------------------------------------------- Table of Contents OPERATING INCOME TO NET INCOME Three months ended October 31, (Dollars in thousands) 2020 % Sales 2019 % Sales Operating income$ 42,188 15.2 %$ 40,891 14.3 % Other income (expense):
Investment and other income 155 0.1 % 1,380 0.5 %
Interest expense (106) - % (701) (0.2) %
Income before income tax and losses of
unconsolidated affiliate 42,237 15.2 % 41,570 14.5 %
Income tax expense 8,582 3.1 % 4,072 1.4 %
Income before losses of unconsolidated affiliate 33,655 12.1 % 37,498 13.1 %
Equity in losses of unconsolidated affiliate (174) (0.1) % - - %
Net income $ 33,481 12.1 % $ 37,498 13.1 %
Investment and other income was $0.2 million for the three months ended October
31, 2020 , compared to $1.4 million for the same period in the prior year. The
decrease was primarily due to reduced interest income as a result of the decline
in interest rates.
Interest expense decreased to $0.1 million for the three months ended October
31, 2020 , compared to $0.7 million for the same period in the prior year. The
decrease in interest expense was due to the repayment of the Company's remaining
principal balance under its private placement debt agreement during the fourth
quarter of the fiscal year ended July 31, 2020 .
The Company's income tax rate was 20.3% for the three months ended October 31,
2020 , compared to 9.8% in the same period in the prior year. Refer to Note M
"Income Taxes" for additional information on the Company's effective 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 .
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.
The following is a summary of segment information for the three months ended
October 31, 2020 and 2019:
Three months ended October 31,
2020 2019
SALES GROWTH INFORMATION
ID Solutions
Organic (8.4) % (0.2) %
Currency 0.6 % (1.2) %
Total (7.8) % (1.4) %
Workplace Safety
Organic 5.5 % (0.8) %
Currency 4.3 % (3.4) %
Total 9.8 % (4.2) %
Total Company
Organic (4.9) % (0.4) %
Currency 1.5 % (1.7) %
Total (3.4) % (2.1) %
SEGMENT PROFIT AS A PERCENT OF NET SALES
ID Solutions 20.3 % 19.7 %
Workplace Safety 10.1 % 7.2 %
Total 17.4 % 16.6 %
19-------------------------------------------------------------------------------- Table of Contents ID Solutions IDS net sales decreased 7.8% for the three months endedOctober 31, 2020 , compared to the same period in the prior year, which consisted of an organic sales decline of 8.4% and an increase from foreign currency translation of 0.6%. The economic slowdown caused by the COVID-19 pandemic had a significant impact on organic sales during the quarter, which resulted in organic sales declines across all major product lines for the three months endedOctober 31, 2020 . Organic sales in theAmericas declined in the high-single digits for the three months endedOctober 31, 2020 , compared to the same period in the prior year. Organic sales declined across all major product lines due to the economic slowdown caused by the COVID-19 pandemic. Organic sales declined by approximately 10% inthe United States and declined in the low-single digits in remainder of theAmericas region. Organic sales inEurope declined in the mid-single digits for the three months endedOctober 31, 2020 , as compared to the same period in the prior year. Organic sales declined across all major product lines due to the economic slowdown caused by the COVID-19 pandemic. The organic sales decline was broad-based throughoutWestern Europe , which was partially offset by mid-single digit organic sales growth for certain businesses based in emerging geographies. Organic sales inAsia declined in the low-single digits for the three months endedOctober 31, 2020 , as compared to the same period in the prior year. Organic sales growth in the safety and facility identification and wire identification product lines was offset by an organic sales decline in the product identification product line. The low-single digit decline was broad-based throughoutAsia . Segment profit decreased 5.1% to$40.3 million for the three months endedOctober 31, 2020 , compared to$42.4 million in the same period in the prior year. As a percentage of net sales, segment profit was 20.3% for the three months endedOctober 31, 2020 , compared to 19.7% in the same period in the prior year. The increase in segment profit as a percentage of sales was primarily driven by the reduced cost structure throughout the IDS segment and a reduction in discretionary spending in response to the decline in revenue from the impact of the COVID-19 pandemic. Workplace Safety WPS net sales increased 9.8% for the three months endedOctober 31, 2020 , compared to the same period in the prior year, which consisted of organic sales growth of 5.5% and an increase from foreign currency translation of 4.3%. Sales through the digital channel increased in the mid-teens and sales through the traditional catalog channel increased in the low-single digits. The WPS business realized increased demand globally for personal protective equipment, social distancing signage and floor markings, and other COVID-19 pandemic-related products. Organic sales inEurope increased in the high-single digits for the three months endedOctober 31, 2020 , compared to the same period in the prior year. Sales through the digital channel increased in the mid-teens, which was driven by digital marketing campaigns emphasizing personal protective equipment and other COVID-19 pandemic-related products. Sales through the traditional catalog channel increased in the mid-single digits. Organic sales growth inEurope was led by businesses inFrance followed by growth inNorway and theU.K. , which was partially offset by a decline in organic sales inGermany . Organic sales inNorth America declined in the low-single digits for the three months endedOctober 31, 2020 , compared to the same period in the prior year. This decrease was driven by a low-single digit decline in traditional catalog sales, which was partially offset by low-single digit growth in sales through the digital channel. The increase in digital sales was primarily due to increased sales of personal protective equipment, social distancing signage and floor markings, and other COVID-19 pandemic-related products. Organic sales inAustralia increased just over 10% for the three months endedOctober 31, 2020 , compared to the same period of the prior year. Digital channel sales grew approximately 40% over the same period in the prior year, which was driven by digital marketing campaigns emphasizing personal protective equipment along with floor markings and signage related to social distancing and personal hygiene. Sales through the traditional catalog channel increased in the mid-single digits. Our Australian business generated increased sales in a variety of product categories related to mitigating the COVID-19 pandemic, including various types of personal protective equipment and other healthcare supplies. Segment profit increased to$8.0 million for the three months endedOctober 31, 2020 , compared to$5.2 million in the same period of the prior year. As a percentage of net sales, segment profit increased to 10.1% for the three months endedOctober 31, 2020 , compared to 7.2% in the same period of the prior year. The increase in segment profit was primarily driven by increased organic sales volumes combined with the reduced SG&A cost structure, and to a lesser extent foreign currency translation. 20
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Table of Contents Liquidity and Capital Resources The Company's cash balances are generated and held in numerous locations throughout the world. AtOctober 31, 2020 , approximately 66% 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. 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$256.3 million atOctober 31, 2020 , an increase of$38.7 million fromJuly 31, 2020 . The significant changes were as follows:
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