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 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 and nine months endedApril 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. AtApril 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$718 million . We believe that our financial resources, liquidity levels and debt-free status are sufficient to manage the impact of the COVID-19 pandemic, which may result in reduced sales, reduced net income, and reduced cash provided by operating activities. Refer to Risk Factors, included in Part I, Item 1A of our Annual Report on Form 10-K for the year endedJuly 31, 2020 , along with Risks Factors, included in Part II, Item IA of this Quarterly Report on Form 10-Q for the period endedApril 30, 2021 , for further discussion of the possible impact of the COVID-19 pandemic on our business. 16 -------------------------------------------------------------------------------- Table of Contents Results of Operations A comparison of results of operating income for the three and nine months endedApril 30, 2021 and 2020, is as follows: Three months ended April 30, Nine months ended April 30, (Dollars in thousands) 2021 % Sales 2020 % Sales 2021 % Sales 2020 % Sales Net sales$ 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 endedApril 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 theU.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 endedApril 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 endedApril 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 endedApril 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 endedApril 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 endedApril 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 endedApril 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 endedApril 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 endedApril 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 endedApril 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. 17 -------------------------------------------------------------------------------- Table of Contents 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 endedApril 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 endedApril 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 endedApril 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 endedApril 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 endedApril 30, 2021 , respectively, compared to$22.7 million and$104.8 million in the same periods in the prior year. The increase in operating income in both the three and nine-month periods was primarily due to the increase in segment profit in the IDS segment and the impairment charge recognized during the period endedApril 30, 2020 . OPERATING INCOME TO NET INCOME Three months ended April 30, Nine months ended April 30, (Dollars in thousands) 2021 % Sales 2020 % Sales 2021 % Sales 2020 % Sales Operating income$ 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 endedApril 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 endedApril 30, 2021 and 2020, respectively. Interest expense decreased to$0.1 million and$0.3 million for the three and nine months endedApril 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 endedApril 30, 2021 and 2020, and the income tax rate was 20.9% and 20.2% for the nine months endedApril 30, 2021 and 2020, respectively. Refer to Note M, "Income Taxes" for additional information on the Company's income tax rates. 18 -------------------------------------------------------------------------------- Table of Contents Equity in losses of unconsolidated affiliate of$0.3 million and$0.8 million for the three and nine months endedApril 30, 2021 , respectively, represented the Company's proportionate share of the loss in its equity interest inReact Mobile, Inc. , an employee safety software and hardware company based inthe 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 endedApril 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 OFNET 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 endedApril 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 endedApril 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 endedApril 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 endedApril 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 theAmericas increased in the high-single digits for the three months endedApril 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 inthe United States and grew approximately 20% in the remainder of theAmericas region for the three months endedApril 30, 2021 . 19 -------------------------------------------------------------------------------- Table of Contents Organic sales in theAmericas declined in the low-single digits for the nine months endedApril 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 inthe United States and grew in the mid-single digits in the remainder of theAmericas region for the nine months endedApril 30, 2021 . Organic sales inEurope increased in the low-double digits for the three months endedApril 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 bothWestern Europe and businesses based in emerging geographies primarily due to increased economic activity following the disruption caused by the COVID-19 pandemic. Organic sales inEurope declined in the low-single digits for the nine months endedApril 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 throughoutWestern Europe which was partially offset by organic sales growth in emerging geographies during the nine-month period. Organic sales inAsia increased in the low-double digits for the three months endedApril 30, 2021 , and increased in the mid-single digits for the nine months endedApril 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 inChina grew in the low-single digits in both periods. Organic sales grew nearly 20% throughout the rest ofAsia for the three-month period and grew in the high-single digits for the nine-month period endedApril 30, 2021 . Segment profit increased 30.6% to$47.5 million for the three months endedApril 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 endedApril 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 endedApril 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 endedApril 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 endedApril 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 endedApril 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 endedApril 30, 2021 compared to the same period in the prior year. Organic sales inEurope increased in the low-single digits for the three and nine months endedApril 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 endedApril 30, 2021 , while sales through the catalog channel increased in the low-single digits in both periods. Organic sales growth inEurope was led by businesses inFrance , which was partially offset by a decline in organic sales throughout the remainder ofWestern Europe . Organic sales inNorth America declined in the low-single digits for the three months endedApril 30, 2021 , compared to the same period in the prior year. Due to the increased digital marketing efforts around demand for personal protective 20
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Table of Contents 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 endedApril 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 endedApril 30, 2021 . Organic sales inNorth America declined in the mid-single digits for the nine months endedApril 30, 2021 , compared to the same period in the prior year. The decline was driven by one of our businesses inthe 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 endedApril 30, 2021 . Organic sales inAustralia declined in the high-teens for the three months endedApril 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 inAustralia 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 endedApril 30, 2020 . Organic sales inAustralia declined in the mid-single digits for the nine months endedApril 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 endedApril 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 endedApril 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 endedApril 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. AtApril 30, 2021 , approximately 70% 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$321.8 million atApril 30, 2021 , an increase of$104.2 million fromJuly 31, 2020 . The significant changes were as follows:
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