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.
•Investing in acquisitions that enhance our strategic position and accelerate
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 selling, general and administrative structures and within our global
operations including insourcing of critical products and manufacturing
activities.
•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
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
and nine months ended April 30, 2021, 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, eliminate non-essential travel, and
reduce discretionary spend. We believe we have the financial strength to
continue to invest in organic sales growth opportunities, inorganic sales
opportunities, 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. At April 30, 2021, we had cash of $321.8
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 $3.6 million, for total available liquidity of
approximately $718 million.
We believe that our financial resources, liquidity levels and debt-free status
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 ended July 31, 2020, along with Risks Factors,
included in Part II, Item IA of this Quarterly Report on Form 10-Q for the
period ended April 30, 2021, 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, 2021 and 2020, is as follows:
                                                      Three months ended April 30,                                                     Nine months ended April 30,
(Dollars in thousands)               2021                % Sales              2020             % Sales                2021               % Sales              2020             % Sales
Net sales                      $      295,503                             $ 265,943                             $     838,568                             $ 829,555
Gross margin                          148,847               50.4  %         129,527               48.7  %             413,797               49.3  %         410,059               49.4  %
Operating expenses:
Research and development               11,305                3.8  %           9,814                3.7  %              31,384                3.7  %          31,298                3.8  %
Selling, general and
administrative                         90,817               30.7  %          83,223               31.3  %             256,088               30.5  %         260,136               31.4  %
Impairment charges                          -                  -  %          13,821                5.2  %                   -                  -  %          13,821                1.7  %
Total operating expenses              102,122               34.6  %         106,858               40.2  %             287,472               34.3  %         305,255               36.8  %
Operating income               $       46,725               15.8  %       $  22,669                8.5  %       $     126,325               15.1  %       $ 104,804               12.6  %


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 ended April 30, 2021, increased 11.1% to $295.5
million, compared to $265.9 million in the same period of the prior year. The
increase consisted of an organic sales growth of 6.5% and a positive currency
impact of 4.6% due to the weakening of the U.S. Dollar against certain other
currencies as compared to the same period in the prior year. Organic sales grew
9.8% in the IDS segment and declined 2.2% in the WPS segment during the three
months ended April 30, 2021, compared to the same period in the prior year.
The most significant impact on organic sales due to the COVID-19 pandemic
started 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 segment realized reduced demand across all major product
lines beginning in the third quarter fiscal 2020, while the WPS segment realized
essentially flat organic sales in the third quarter in fiscal 2020 primarily due
to increased sales of personal protective equipment and other pandemic-related
products which offset decreased demand in other core products. For the three
months ended April 30, 2021, the COVID-19 pandemic continued to affect sales in
the IDS and WPS segments, although to a much lesser extent compared to the same
period in the prior year.
Net sales for the nine months ended April 30, 2021, increased 1.1% to $838.6
million, compared to $829.6 million in the same period of the prior year. The
increase consisted of an organic sales decline of 1.7% and a positive currency
impact of 2.8%. Organic sales declined 2.1% in the IDS segment and declined 0.5%
in the WPS segment during the nine months ended April 30, 2021, compared to the
same period in the prior year. The COVID-19 pandemic had a significant impact on
organic sales during the nine months ended April 30, 2021, with the impact
varying between the IDS and WPS segments.
Gross margin increased 14.9% to $148.8 million in the three months ended April
30, 2021, compared to $129.5 million in the same period in the prior year. As a
percentage of net sales, gross margin increased to 50.4% compared to 48.7% in
the same period in the prior year. The increase was due to the increase in sales
volumes in our IDS business, which was partially offset by a decrease in gross
margin in our WPS business due to product mix. Gross margin increased 0.9% to
$413.8 million for the nine months ended April 30, 2021, compared to $410.1
million in the same period in the prior year. As a percentage of net sales,
gross margin decreased to 49.3% compared to 49.4% in the same period in the
prior year. The decrease in gross margin during the nine-month period was due to
reduced sales volumes in both IDS and WPS as well as product mix in our WPS
business.
R&D expenses increased 15.2% to $11.3 million and increased 0.3% to $31.4
million for the three and nine months ended April 30, 2021, respectively,
compared to $9.8 million and $31.3 million in the same periods in the prior
year. As a percentage of sales, R&D expenses remained essentially flat for both
the three and nine months ended April 30, 2021, compared to the same periods of
the prior year. The increase in R&D spending for both the three and nine-month
periods was primarily due to an increase in incentive-based compensation, which
was partially offset by a decrease in headcount, improved efficiency, and the
timing of expenditures related to ongoing new product development costs 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.
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SG&A expenses include selling and administration 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 9.1% to $90.8 million in the
three months ended April 30, 2021, compared to $83.2 million in the same period
in the prior year. As a percentage of net sales, SG&A decreased to 30.7%
compared to 31.3% in the same period in the prior year. The increase in SG&A
expenses was primarily due to increased incentive compensation compared to the
lower than normal incentive compensation in the prior year, and foreign currency
translation. The decrease as a percentage of net sales was due to a reduction in
the SG&A cost structure and a reduction in discretionary spend including a
decrease in travel for our sales people when compared to the same period in the
prior year.
SG&A expenses decreased 1.6% to $256.1 million for the nine months ended April
30, 2021, compared to $260.1 million in the same period in the prior year. As a
percentage of net sales, SG&A decreased to 30.5% from 31.4% in the same period
in the prior year. The decrease in SG&A was due to a reduction in the SG&A cost
structure and a reduction in discretionary spend including a decrease in travel
for our sales people when compared to the same period in the prior year, which
was partially offset by an increase in incentive compensation and foreign
currency translation.
As a result of the global economic slowdown that began during the three months
ended April 30, 2020 due to the COVID-19 pandemic, management evaluated whether
indicators of impairment of intangible assets and other long-lived assets
existed. 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.
Operating income increased 106.1% to $46.7 million and increased 20.5% to $126.3
million for the three and nine months ended April 30, 2021, respectively,
compared to $22.7 million and $104.8 million in the same periods in the prior
year. The increase in operating income in both the three and nine-month periods
was primarily due to the increase in segment profit in the IDS segment and the
impairment charge recognized during the period ended April 30, 2020.
OPERATING INCOME TO NET INCOME
                                                       Three months ended April 30,                                                    Nine months ended April 30,
(Dollars in thousands)                 2021               % Sales             2020             % Sales                2021               % Sales              2020             % Sales
Operating income                 $      46,725               15.8  %       $ 22,669                8.5  %       $     126,325               15.1  %       $ 104,804               12.6  %
Other income (expense):
Investment and other income              1,181                0.4  %            112                  -  %               3,372                0.4  %           3,252                0.4  %
Interest expense                          (131)                 -  %           (628)              (0.2) %                (288)                 -  %          (1,976)              (0.2) %
Income before income tax and
losses of unconsolidated
affiliate                               47,775               16.2  %         22,153                8.3  %             129,409               15.4  %         106,080               12.8  %
Income tax expense                      10,229                3.5  %          8,520                3.2  %              27,017                3.2  %          21,396                2.6  %
Income before losses of
unconsolidated affiliate                37,546               12.7  %         13,633                5.1  %             102,392               12.2  %          84,684               10.2  %
Equity in losses of
unconsolidated affiliate                  (255)              (0.1) %              -                  -  %                (760)              (0.1) %               -                  -  %
Net income                       $      37,291               12.6  %       $ 13,633                5.1  %       $     101,632               12.1  %       $  84,684               10.2  %


Investment and other income was $1.2 million and $0.1 million for the three
months ended April 30, 2021 and 2020, respectively. The increase in the
three-month period was primarily due to an increase in the market value of
securities held in deferred compensation plans, which was partially offset by a
decrease in interest income due to the decline in interest rates. Investment and
other income was consistent at $3.4 million and $3.3 million for the nine months
ended April 30, 2021 and 2020, respectively.
Interest expense decreased to $0.1 million and $0.3 million for the three and
nine months ended April 30, 2021, respectively, compared to $0.6 million and
$2.0 million in the same periods in the prior year. The decrease in interest
expense for both the three and nine-month periods was due to the repayment of
the Company's principal balance under its private placement debt agreement
during the fourth quarter of fiscal 2020.
The Company's income tax rate was 21.4% and 38.5% for the three months ended
April 30, 2021 and 2020, and the income tax rate was 20.9% and 20.2% for the
nine months ended April 30, 2021 and 2020, respectively. Refer to Note M,
"Income Taxes" for additional information on the Company's income tax rates.
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Equity in losses of unconsolidated affiliate of $0.3 million and $0.8 million
for the three and nine months ended April 30, 2021, respectively, 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 and nine months
ended April 30, 2021, and 2020:
                                                Three months ended April 30,                   Nine months ended April 30,
                                                 2021                   2020                   2021                   2020
SALES GROWTH INFORMATION
ID Solutions
Organic                                              9.8  %                (8.2) %                (2.1) %                (3.2) %
Currency                                             3.1  %                (1.5) %                 1.6  %                (1.1) %
Total                                               12.9  %                (9.7) %                (0.5) %                (4.3) %
Workplace Safety
Organic                                             (2.2) %                 0.2  %                (0.5) %                (0.5) %
Currency                                             8.6  %                (4.1) %                 6.1  %                (3.1) %
Total                                                6.4  %                (3.9) %                 5.6  %                (3.6) %
Total Company
Organic                                              6.5  %                (6.0) %                (1.7) %                (2.5) %
Currency                                             4.6  %                (2.2) %                 2.8  %                (1.6) %
Total                                               11.1  %                (8.2) %                 1.1  %                (4.1) %
SEGMENT PROFIT AS A PERCENT OF NET SALES
ID Solutions                                        21.8  %                18.8  %                20.8  %                19.5  %
Workplace Safety                                     7.3  %                 6.0  %                 7.5  %                 6.9  %
Total                                               18.0  %                15.3  %                17.2  %                16.2  %


ID Solutions
IDS net sales increased 12.9% to $218.1 million for the three months ended April
30, 2021, compared to the same period in the prior year, which consisted of
organic sales growth of 9.8% and an increase from foreign currency translation
of 3.1%. The economic slowdown caused by the COVID-19 pandemic had a significant
impact on organic sales trends in the three months ended April 30, 2021 and
2020. Organic sales recovered in all major product lines with growth in the
safety and facility identification, healthcare identification, product
identification, and wire identification product lines in the three months ended
April 30, 2021. Demand increased in most end markets as economic activity
improved following the disruption caused by the COVID-19 pandemic during the
second half of fiscal 2020 and the first half of fiscal 2021.
IDS net sales declined 0.5% to $610.5 million for the nine months ended April
30, 2021, compared to the same period in the prior year, which consisted of an
organic sales decline of 2.1% and an increase from foreign currency translation
of 1.6%. Organic sales declined in the nine-month period due to reduced demand
during the first half of the fiscal year resulting from the economic slowdown
caused by the COVID-19 pandemic. Organic sales declined in the safety and
facility identification and healthcare identification product lines, which was
partially offset by organic sales growth in the product identification and wire
identification product lines.
Organic sales in the Americas increased in the high-single digits for the three
months ended April 30, 2021, compared to the same period in the prior year.
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 grew in the high-single
digits in the United States and grew approximately 20% in the remainder of the
Americas region for the three months ended April 30, 2021.
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Organic sales in the Americas declined in the low-single digits for the nine
months ended April 30, 2021, compared to the same period in the prior year.
Organic sales declined in the healthcare identification and safety and facility
identification product lines due to reduced demand during the first half of the
fiscal year resulting from the economic slowdown caused by the COVID-19
pandemic. This was partially offset by organic sales growth in the product
identification and wire identification product lines. Organic sales declined in
the low-single digits in the United States and grew in the mid-single digits in
the remainder of the Americas region for the nine months ended April 30, 2021.
Organic sales in Europe increased in the low-double digits for the three months
ended April 30, 2021, compared to the same period in the prior year. Organic
sales grew in the safety and facility identification, product identification,
and wire identification product lines. Organic sales growth was broad-based
throughout both Western Europe and businesses based in emerging geographies
primarily due to increased economic activity following the disruption caused by
the COVID-19 pandemic.
Organic sales in Europe declined in the low-single digits for the nine months
ended April 30, 2021, compared to the same period in the prior year. Organic
sales declined in the healthcare identification product line primarily due to
reduced demand from the economic slowdown caused by the COVID-19 pandemic, which
was partially offset by organic sales growth in the product identification,
safety and facility identification, and wire identification product lines.
Organic sales declined throughout Western Europe which was partially offset by
organic sales growth in emerging geographies during the nine-month period.
Organic sales in Asia increased in the low-double digits for the three months
ended April 30, 2021, and increased in the mid-single digits for the nine months
ended April 30, 2021, compared to the same periods in the prior year. Organic
sales growth in both periods was primarily driven by growth in the product
identification product line, and to a lesser extent growth in the wire
identification and safety and facility identification product lines due to
increased demand for industrial identification products. Organic sales in China
grew in the low-single digits in both periods. Organic sales grew nearly 20%
throughout the rest of Asia for the three-month period and grew in the
high-single digits for the nine-month period ended April 30, 2021.
Segment profit increased 30.6% to $47.5 million for the three months ended April
30, 2021, compared to $36.4 million in the same period in the prior year.
Segment profit increased 6.1% to $126.8 million for the nine months ended April
30, 2021, compared to $119.5 million for the same period in the prior year. As a
percentage of net sales, segment profit increased to 21.8% from 18.8% for the
three-month period, and segment profit increased to 20.8% from 19.5% for the
nine-month period ended April 30, 2021 compared to the same periods in the prior
year. The increase in segment profitability was due to increased sales volumes
and an overall reduction in the cost structure throughout the IDS segment.
Workplace Safety
WPS net sales increased 6.4% to $77.4 million for the three months ended April
30, 2021, compared to the same period in the prior year, which consisted of an
organic sales decline of 2.2% and an increase from foreign currency translation
of 8.6%. The economic effect of the COVID-19 pandemic had a significant impact
on organic sales trends during the second half of fiscal 2020. The WPS business
refined its digital marketing efforts to focus on the increase in demand for
personal protective equipment and other social distancing signage and floor
markings resulting from the COVID-19 pandemic. These actions resulted in a
significant increase in sales in these product categories while sales of core
safety and identification products declined due to the economic disruption
caused by the pandemic. WPS continues to sell COVID-19 pandemic-related
products, but there was reduced demand for these products and sales did not
replace the decline in demand for core safety and identification products in the
three months ended April 30, 2021 compared to the same period in the prior year.
WPS net sales increased 5.6% to $228.1 million for the nine months ended April
30, 2021, compared to the same period in the prior year, which consisted of an
organic sales decline of 0.5% and an increase from foreign currency translation
of 6.1%. Due to the increased digital marketing efforts around demand for
personal protective equipment and other social distancing signage and floor
markings resulting from the COVID-19 pandemic, the business realized organic
sales growth in the first half of fiscal 2021. WPS continues to sell COVID-19
pandemic-related products, but the demand for these products has declined and
sales did not replace the decline in demand for core safety and identification
products in the nine months ended April 30, 2021 compared to the same period in
the prior year.
Organic sales in Europe increased in the low-single digits for the three and
nine months ended April 30, 2021, compared to the same periods in the prior
year. Digital sales increased in the mid-single digits in the three months and
increased in the high-single digits in the nine months ended April 30, 2021,
while sales through the catalog channel increased in the low-single digits in
both periods. Organic sales growth in Europe was led by businesses in France,
which was partially offset by a decline in organic sales throughout the
remainder of Western Europe.
Organic sales in North America declined in the low-single digits for the three
months ended April 30, 2021, compared to the same period in the prior year. Due
to the increased digital marketing efforts around demand for personal protective
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equipment and other social distancing signage and floor markings resulting from
the COVID-19 pandemic, the business realized increased sales of these products
during the second half of fiscal 2020. Demand for these products declined and
COVID-19 pandemic-related product sales did not replace the decline in demand
for core safety and identification products in the three months ended April 30,
2021 compared to the same period in the prior year. Digital sales increased in
the high-single digits and sales through the catalog channel decreased in the
low-single digits in the three months ended April 30, 2021.
Organic sales in North America declined in the mid-single digits for the nine
months ended April 30, 2021, compared to the same period in the prior year. The
decline was driven by one of our businesses in the United States that sells
primarily to small companies, which resulted in a significant decline in sales
at the beginning of the COVID-19 pandemic and has only recently annualized the
significant sales declines realized in the prior year. Digital sales increased
in the mid-single digits and sales through the catalog channel decreased in the
high-single digits in the nine months ended April 30, 2021.
Organic sales in Australia declined in the high-teens for the three months ended
April 30, 2021, compared to the same period in the prior year. The WPS Australia
business refined its digital marketing efforts to focus on the increase in
demand for personal protective equipment and other social distancing signage and
floor markings resulting from the COVID-19 pandemic. These actions resulted in
significant organic sales growth in Australia in the second half of fiscal 2020
and the first half of fiscal 2021. The business continues to sell COVID-19
pandemic-related products including personal protective equipment, social
distancing signage and floor markings, but demand has decreased significantly
compared to the organic sales growth of nearly 30% that the business generated
in the three months ended April 30, 2020.
Organic sales in Australia declined in the mid-single digits for the nine months
ended April 30, 2021, compared to the same period in the prior year. Organic
sales growth from COVID-19 pandemic-related products began to slow during the
second quarter of fiscal 2021, while demand for core safety and identification
products did not replace the decrease in sales of COVID-19 pandemic-related
products. Organic sales increased in the high-single digits in the nine months
ended April 30, 2020.
Segment profit increased 29.2% to $5.7 million from $4.4 million and as a
percentage of net sales, segment profit increased to 7.3% from 6.0% for the
three months ended April 30, 2021, compared to the same period in the prior
year. Segment profit increased 14.1% to $17.1 million from $15.0 million and as
a percentage of net sales, segment profit increased to 7.5% from 6.9% for the
nine months ended April 30, 2021, compared to the same period in the prior year.
The increase in segment profit in both the three and nine-month periods was
primarily due to increased sales in the current year and the additional costs
incurred in the prior year to address our cost structure.
Liquidity and Capital Resources
The Company's cash balances are generated and held in numerous locations
throughout the world. At April 30, 2021, approximately 70% 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. 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 the U.S. from foreign jurisdictions, which may result in
additional tax payments.
Cash Flows
Cash and cash equivalents were $321.8 million at April 30, 2021, an increase of
$104.2 million from July 31, 2020. The significant changes were as follows:

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