QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended January 31, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 1-14959
BRADY CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin
39-0178960
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
6555 West Good Hope Road
Milwaukee, Wisconsin53233
(Address of principal executive offices and zip code)
(414) 358-6600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Class A Nonvoting Common Stock, par value $0.01 per share
BRC
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☑No☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☑No☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☑
Accelerated filer
☐
Emerging growth company
☐
Non-accelerated filer
☐
Smaller reporting company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No☑
As of February 15, 2022, there were 48,065,965 outstanding shares of Class A Nonvoting Common Stock and 3,538,628 shares of Class B Voting Common Stock. The Class B Voting Common Stock, all of which is held by affiliates of the Registrant, is the only voting stock.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended January 31, 2022
(Unaudited)
(In thousands, except share and per share amounts)
NOTE A — Basis of Presentation
The condensed consolidated financial statements included herein have been prepared by Brady Corporation and subsidiaries (the "Company," "Brady," "we," or "our") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, the foregoing statements contain all adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial position of the Company as of January 31, 2022 and July 31, 2021, its results of operations and comprehensive income for the three and six months ended January 31, 2022 and 2021, and cash flows for the six months ended January 31, 2022 and 2021. The condensed consolidated balance sheet as of July 31, 2021, has been derived from the audited consolidated financial statements as of that date. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts therein. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from the estimates.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to rules and regulations of the Securities and Exchange Commission. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statement presentation. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2021.
NOTE B — New Accounting Pronouncements
Adopted Standards
In December 2019, the Financial Accounting Standards Board ("FASB") issued ASU 2019-12, "Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740)." This guidance removes certain exceptions to the general principles in ASC 740 such as recognizing deferred taxes for equity investments, the incremental approach to performing intraperiod tax allocation and calculating income taxes in interim periods. The standard also simplifies accounting for income taxes under U.S. GAAP by clarifying and amending existing guidance, including the recognition of deferred taxes for goodwill, the allocation of taxes to members of a consolidated group and requiring that an entity reflect the effect of enacted changes in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The Company adopted ASC 2019-12 effective August 1, 2021, which did not have a material impact on its consolidated financial statements or disclosures.
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." Subject to meeting certain criteria, this guidance provides optional expedients and exceptions to applying contract modification accounting under existing U.S. GAAP, to address the expected phase out of the London Inter-bank Offered Rate ("LIBOR") by the end of 2021. This guidance was effective upon issuance and allowed application to contract changes as early as January 1, 2020. The adoption of this update did not have a material impact on the Company's consolidated financial statements.
NOTE C — Additional Balance Sheet Information
Inventories
Inventories as of January 31, 2022, and July 31, 2021, consisted of the following:
Property, plant and equipment is presented net of accumulated depreciation in the amount of $282,808 and $277,246 as of January 31, 2022, and July 31, 2021, respectively.
NOTE D — Other Intangible Assets
Other intangible assets as of January 31, 2022 and July 31, 2021, consisted of the following:
January 31, 2022
July 31, 2021
Weighted Average Amortization Period (Years)
Gross Carrying Amount
Accumulated Amortization
Net Book Value
Weighted Average Amortization Period (Years)
Gross Carrying Amount
Accumulated Amortization
Net Book Value
Amortized other intangible assets:
Tradenames
3
$
1,799
$
(699)
$
1,100
3
$
1,821
$
(356)
$
1,465
Customer relationships
9
109,830
(45,076)
64,754
9
110,950
(39,069)
71,881
Technology
5
9,430
(1,318)
8,112
5
9,578
(335)
9,243
Unamortized other intangible assets:
Tradenames
N/A
9,642
—
9,642
N/A
9,745
—
9,745
Total
$
130,701
$
(47,093)
$
83,608
$
132,094
$
(39,760)
$
92,334
The change in the gross carrying amount of other intangible assets as of January 31, 2022 compared to July 31, 2021 was due to the effect of currency fluctuations during the six-month period.
Amortization expense of intangible assets was $3,749 and $1,353 for the three months ended January 31, 2022 and 2021, respectively, and $7,556 and $2,704 for the six months ended January 31, 2022 and 2021, respectively.
NOTE E — Leases
The Company leases certain manufacturing facilities, warehouse and office spaces, and vehicles accounted for as operating leases. Lease terms typically range from one year to ten years. As of January 31, 2022, the Company did not have any finance leases.
Operating lease expense was $4,087 and $4,169 for the three months ended January 31, 2022 and 2021, respectively, and $8,852 and $8,242 for the six months ended January 31, 2022 and 2021, respectively. Operating lease expense was recognized in either "Cost of goods sold" or "Selling, general and administrative" expenses in the condensed consolidated statements of income, based on the nature of the lease. Short-term lease expense, variable lease expenses, and sublease income was immaterial to the condensed consolidated statements of income for the three and six months ended January 31, 2022 and 2021.
Supplemental cash flow information related to the Company's operating leases for the six months ended January 31, 2022 and 2021, was as follows:
Six months ended January 31,
2022
2021
Operating cash outflows from operating leases
$
9,805
$
8,762
Operating lease assets obtained in exchange for new operating lease liabilities
952
3,297
NOTE F — Accumulated Other Comprehensive Loss
Other comprehensive loss consists of foreign currency translation adjustments which includes the settlements of net investment hedges, unrealized gains and losses from cash flow hedges, and the unamortized gain on post-retirement plans, net of their related tax effects.
The following table illustrates the changes in the balances of each component of accumulated other comprehensive loss, net of tax, for the six months ended January 31, 2022:
Unrealized gain on cash flow hedges
Unamortized gain on post-retirement plans
Foreign currency translation adjustments
Accumulated other comprehensive loss
Beginning balance, July 31, 2021
$
729
$
1,888
$
(58,570)
$
(55,953)
Other comprehensive loss before reclassification
(142)
(60)
(22,141)
(22,343)
Amounts reclassified from accumulated other comprehensive loss
(453)
(190)
—
(643)
Ending balance, January 31, 2022
$
134
$
1,638
$
(80,711)
$
(78,939)
The increase in accumulated other comprehensive loss as of January 31, 2022 compared to July 31, 2021, was primarily due to the appreciation of the U.S. dollar against certain other currencies during the six-month period.
The changes in accumulated other comprehensive loss by component, net of tax, for the six months ended January 31, 2021, were as follows:
Unrealized (loss) gain on cash flow hedges
Unamortized gain on post-retirement plans
Foreign currency translation adjustments
Accumulated other comprehensive loss
Beginning balance, July 31, 2020
$
(200)
$
2,181
$
(68,458)
$
(66,477)
Other comprehensive income (loss) before reclassification
1,215
(23)
13,585
14,777
Amounts reclassified from accumulated other comprehensive loss
203
36
—
239
Ending balance, January 31, 2021
$
1,218
$
2,194
$
(54,873)
$
(51,461)
The decrease in accumulated other comprehensive loss as of January 31, 2021, compared to July 31, 2020, was primarily due to the depreciation of the U.S. dollar against certain other currencies during the six-month period.
Of the amounts reclassified from accumulated other comprehensive loss during the six months ended January 31, 2022 and 2021, unrealized (gains) losses on cash flow hedges were reclassified to "Cost of goods sold" and unamortized (gains) losses on post-retirement plans were reclassified into "Investment and other income" on the condensed consolidated statements of income.
The following table illustrates the income tax benefit (expense) on the components of other comprehensive (loss) income for the three and six months ended January 31, 2022 and 2021:
Three months ended January 31,
Six months ended January 31,
2022
2021
2022
2021
Income tax benefit (expense) related to items of other comprehensive (loss) income:
Cash flow hedges
$
(87)
$
47
$
(191)
$
(1)
Pension and other post-retirement benefits
15
6
15
246
Other income tax adjustments and currency translation
428
(1,304)
433
(1,297)
Income tax benefit (expense) related to items of other comprehensive (loss) income
$
356
$
(1,251)
$
257
$
(1,052)
NOTE G — Revenue Recognition
The Company recognizes revenue when control of the product or service transfers to the customer at an amount that represents the consideration expected to be received in exchange for those products and services. The Company’s revenues are primarily from the sale of identification solutions and workplace safety products that are shipped and billed to customers. All revenue is from contracts with customers and is included in “Net sales” on the condensed consolidated statements of income. See Note H, “Segment Information,” for the Company’s disaggregated revenue disclosure.
The Company offers extended warranty coverage that is included in the sales price of certain products, which it accounts for as service warranties. The Company accounts for the deferred revenue associated with extended service warranties as a contract liability. The balance of contract liabilities associated with service warranty performance obligations was $2,610 and $2,519 as of January 31, 2022 and July 31, 2021, respectively. The current portion and non-current portion of contract liabilities are included in “Other current liabilities” and “Other liabilities," respectively, on the condensed consolidated balance sheets. The Company recognized revenue of $296 and $294 during the three months ended January 31, 2022 and 2021, respectively, and $585 and $591 during the six months ended January 31, 2022 and 2021, respectively, that was included in the contract liability balance at the beginning of the respective period from the amortization of extended service warranties. Of the contract liability balance outstanding at January 31, 2022, the Company expects to recognize 22% by the end of fiscal 2022, an additional 35% by the end of fiscal 2023, and the remaining balance thereafter.
NOTE H — Segment Information
The Company is organized and managed on a global basis within three operating segments, Identification Solutions ("IDS"), Workplace Safety ("WPS"), and People Identification ("PDC"), which aggregate into two reportable segments that are organized around businesses with consistent products and services: IDS and WPS. The IDS and PDC operating segments aggregate into the IDS reporting segment, while the WPS reporting segment is comprised solely of the Workplace Safety operating segment.
The following is a summary of net sales by segment and geographic region for the three and six months ended January 31, 2022 and 2021:
Three months ended January 31,
Six months ended January 31,
2022
2021
2022
2021
Net sales:
ID Solutions
Americas
$
158,999
$
124,970
$
323,909
$
258,237
Europe
57,274
44,040
114,163
86,622
Asia
28,713
25,217
55,531
47,560
Total
$
244,986
$
194,227
$
493,603
$
392,419
Workplace Safety
Americas
$
20,131
$
20,200
$
41,273
$
44,231
Europe
41,432
40,165
79,454
81,431
Australia
11,506
11,246
25,200
24,984
Total
$
73,069
$
71,611
$
145,927
$
150,646
Total Company
Americas
$
179,130
$
145,170
$
365,182
$
302,468
Europe
98,706
84,205
193,617
168,053
Asia-Pacific
40,219
36,463
80,731
72,544
Total
$
318,055
$
265,838
$
639,530
$
543,065
The following is a summary of segment profit for the three and six months ended January 31, 2022 and 2021:
The following is a reconciliation of segment profit to income before income taxes and losses of unconsolidated affiliate for the three and six months ended January 31, 2022 and 2021:
Three months ended January 31,
Six months ended January 31,
2022
2021
2022
2021
Total profit from reportable segments
$
48,644
$
42,463
$
99,753
$
90,730
Unallocated amounts:
Administrative costs
(5,772)
(5,051)
(12,546)
(11,130)
Investment and other (expense) income
(578)
2,036
(35)
2,191
Interest expense
(252)
(51)
(434)
(157)
Income before income taxes and losses of unconsolidated affiliate
$
42,042
$
39,397
$
86,738
$
81,634
NOTE I — Net Income per Common Share
Reconciliations of the numerator and denominator of the basic and diluted per share computations for the Company’s Class A and Class B common stock are summarized as follows:
Three months ended January 31,
Six months ended January 31,
2022
2021
2022
2021
Numerator (in thousands):
Net Income (Numerator for basic and diluted income per Class A Nonvoting Common Share)
$
33,815
$
30,860
$
68,861
$
64,341
Less:
Preferential dividends
—
—
(803)
(808)
Preferential dividends on dilutive stock options
—
—
(8)
(4)
Numerator for basic and diluted income per Class B Voting Common Share
$
33,815
$
30,860
$
68,050
$
63,529
Denominator: (in thousands)
Denominator for basic income per share for both Class A and Class B
51,800
52,018
51,887
52,020
Plus: Effect of dilutive equity awards
362
264
412
268
Denominator for diluted income per share for both Class A and Class B
52,162
52,282
52,299
52,288
Net income per Class A Nonvoting Common Share:
Basic
$
0.65
$
0.59
$
1.33
$
1.24
Diluted
$
0.65
$
0.59
$
1.32
$
1.23
Net income per Class B Voting Common Share:
Basic
$
0.65
$
0.59
$
1.31
$
1.22
Diluted
$
0.65
$
0.59
$
1.30
$
1.21
Potentially dilutive securities attributable to outstanding stock options and restricted stock units were excluded from the calculation of diluted earnings per share where the combined exercise price and average unamortized fair value were greater than the average market price of the Company's Class A Nonvoting Common Stock because the effect would have been anti-dilutive. The amount of anti-dilutive shares were 471,377 and 829,617 for the three months ended January 31, 2022 and 2021, respectively, and 475,489 and785,181for the six months ended January 31, 2022 and 2021, respectively.
NOTE J — Fair Value Measurements
In accordance with fair value accounting guidance, the Company determines fair value based on the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The inputs used to measure fair value are classified into the following hierarchy:
Level 1 — Unadjusted quoted prices in active markets for identical instruments that are accessible as of the reporting date.
Level 2 — Other significant pricing inputs that are either directly or indirectly observable.
Level 3 — Significant unobservable pricing inputs, which result in the use of management's own assumptions.
The following table summarizes the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of January 31, 2022 and July 31, 2021:
January 31, 2022
July 31, 2021
Fair Value Hierarchy
Assets:
Deferred compensation plan assets
$
20,097
$
20,135
Level 1
Foreign exchange contracts
372
150
Level 2
Liabilities:
Foreign exchange contracts
165
51
Level 2
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Deferred compensation plan assets: The Company’s deferred compensation investments consist of investments in mutual funds, which are included in "Other assets" on the condensed consolidated balance sheets. These investments were classified as Level 1 as the shares of these investments trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.
Foreign exchange contracts: The Company’s foreign exchange contracts were classified as Level 2 as the fair value was based on the present value of the future cash flows using external models that use observable inputs, such as interest rates, yield curves and foreign exchange rates. See Note K, “Derivatives and Hedging Activities,” for additional information.
The fair values of cash and cash equivalents, accounts receivable, accounts payable, and other liabilities approximated carrying values due to their short-term nature.
NOTE K — Derivatives and Hedging Activities
The Company utilizes forward foreign exchange currency contracts to reduce the exchange rate risk of specific foreign currency denominated transactions. These contracts typically require the exchange of a foreign currency for U.S. dollars at a fixed rate on a future date, with maturities of less than 18 months, which qualify as cash flow hedges or net investment hedges under the accounting guidance for derivative instruments and hedging activities. The primary objective of the Company’s foreign currency exchange risk management program is to minimize the impact of currency movements due to transactions in other than the respective subsidiaries’ functional currency and to minimize the impact of currency movements on the Company’s net investment denominated in a currency other than the U.S. dollar. To achieve this objective, the Company hedges a portion of known exposures using forward foreign exchange currency contracts.
Main foreign currency exposures are related to transactions denominated in the British Pound, Euro, Canadian dollar, Australian dollar, Mexican Peso, Chinese Yuan, Malaysian Ringgit and Singapore dollar. Generally, these risk management transactions will involve the use of foreign currency derivatives to minimize the impact of currency movements on non-functional currency transactions.
The U.S. dollar equivalent notional amounts of outstanding forward exchange contracts were as follows:
January 31, 2022
July 31, 2021
Designated as cash flow hedges
$
15,374
$
30,724
Non-designated hedges
3,455
3,580
Total foreign exchange contracts
$
18,829
$
34,304
Cash Flow Hedges
The Company has designated a portion of its forward foreign exchange contracts as cash flow hedges and recorded these contracts at fair value on the condensed consolidated balance sheets. For these instruments, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income ("OCI") and reclassified into income in the same period or periods during which the hedged transaction affects income. As of January 31, 2022 and July 31, 2021, unrealized gains of $263 and $770 have been included in OCI, respectively.
The following table summarizes the amount of pre-tax gains and losses related to foreign exchange contracts designated as cash flow hedging instruments:
Three months ended January 31,
Six months ended January 31,
2022
2021
2022
2021
Gains recognized in OCI
$
225
$
451
$
199
$
1,148
Gains (losses) reclassified from OCI into cost of goods sold
36
(60)
604
(271)
Fair values of derivative instruments in the condensed consolidated balance sheets were as follows:
January 31, 2022
July 31, 2021
Prepaid expenses and other current assets
Other current liabilities
Prepaid expenses and other current assets
Other current liabilities
Derivatives designated as hedging instruments:
Foreign exchange contracts (cash flow hedges)
$
372
$
153
$
150
$
51
Derivatives not designated as hedging instruments:
The income tax rate for the three and six months ended January 31, 2022, was 19.6% and 20.6%, respectively.The Company expects its ongoing annual income tax rate to be approximately 20% based on its current global business mix and based on tax laws and statutory tax rates currently in effect.
The income tax rate for the three and six months ended January 31, 2021, was 20.8% and 20.6%, respectively.
NOTE M — Subsequent Events
On February 15, 2022, the Board of Directors declared a quarterly cash dividend to shareholders of the Company’s Class A and Class B Common Stock of $0.225 per share payable on April 29, 2022, to shareholders of record at the close of business on April 8, 2022.
Subsequent to January 31, 2022, the Company has purchased 181,514 shares of its Class A Nonvoting Common Stock under its share repurchase program for an aggregate purchase price of $9.0 million and an average purchase price per share of $49.71. As of February 16, 2022, 1,387,730 shares remained authorized to purchase in connection with this share repurchase program.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
•Maintaining profitability through pricing mechanisms to mitigate the impacts of supply chain disruptions and inflationary pressures.
•Driving operational excellence and executing sustainable efficiency gains within our selling, general and administrative and global operations structures 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 Our Business
The Company has experienced, and expects to continue to experience, increased freight and input material cost inflation as a result of increased global demand, government-mandated actions in response to COVID-19 and labor shortages. The Company has taken and will continue to take actions to mitigate inflation issues, but thus far has not fully offset the impact of these trends. As a result, these trends have negatively impacted the Company's gross profit margin, and we expect ongoing inflationary pressures and supply chain issues will continue to negatively impact profitability in the second half of fiscal 2022.
We believe we have the financial strength to continue to invest in organic sales growth opportunities, inorganic sales opportunities including acquisitions, 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. At January 31, 2022, we had cash of $147.4 million, as well as a credit facility with $115.3 million available for future borrowing, which can be increased up to $315.3 million at the Company's option and subject to certain conditions, for total available liquidity of approximately $462.7 million.
We believe that our financial resources and liquidity levels including the remaining undrawn amount of the credit facility and our ability to increase that credit line as necessary are sufficient to manage the continuing impact of 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 ended July 31, 2021, for further discussion of the possible impact of the COVID-19 pandemic on our business.
The comparability of the operating results for the three and six months ended January 31, 2022, 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 and six months ended January 31, 2022 and 2021, is as follows:
Three months ended January 31,
Six months ended January 31,
(Dollars in thousands)
2022
% Sales
2021
% Sales
2022
% Sales
2021
% Sales
Net sales
$
318,055
$
265,838
$
639,530
$
543,065
Gross margin
149,362
47.0
%
129,522
48.7
%
304,350
47.6
%
264,950
48.8
%
Operating expenses:
Research and development
13,965
4.4
%
9,876
3.7
%
27,872
4.4
%
20,079
3.7
%
Selling, general and administrative
92,525
29.1
%
82,234
30.9
%
189,271
29.6
%
165,271
30.4
%
Total operating expenses
106,490
33.5
%
92,110
34.6
%
217,143
34.0
%
185,350
34.1
%
Operating income
$
42,872
13.5
%
$
37,412
14.1
%
$
87,207
13.6
%
$
79,600
14.7
%
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 which, for the periods reported in this Form 10-Q, includes each of Magicard, Nordic ID and Code. 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 January 31, 2022, increased 19.6% to $318.1 million, compared to $265.8 million in the same period in the prior year. The increase consisted of organic sales growth of 13.1%, sales growth from acquisitions of 8.6% and a decrease from foreign currency translation of 2.1%. Organic sales grew 16.0% in the IDS segment and 5.2% in the WPS segment during the three months ended January 31, 2022, compared to the same period in the prior year.
In the first quarter of fiscal 2021, the IDS business began to recover from a decline in sales due to the impacts of the COVID-19 pandemic on a large demographic of our customers and the overall global economy, while the WPS segment realized strong organic sales growth 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 year-to-date organic sales through the second 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.
Net sales for the six months ended January 31, 2022, increased 17.8% to $639.5 million, compared to $543.1 million in the same period in the prior year. The increase consisted of organic sales growth of 10.0%, sales growth from acquisitions of 8.5% and a decrease from foreign currency translation of 0.7%. Organic sales increased 14.6% in the IDS segment and declined 2.0% in the WPS segment during the six months ended January 31, 2022, compared to the same period in the prior year.
Gross margin increased 15.3% to $149.4 million in the three months ended January 31, 2022, compared to $129.5 million in the same period in the prior year. As a percentage of net sales, gross margin decreased to 47.0% compared to 48.7% in the same period in the prior year. Gross margin increased 14.9% to $304.4 million for the six months ended January 31, 2022, compared to $265.0 million in the same period in the prior year. As a percentage of net sales, gross margin decreased to 47.6% compared to 48.8% 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, which was partially mitigated by our ongoing efforts to streamline manufacturing processes, drive sustainable operational efficiencies and increase prices.
R&D expenses increased 41.4% to $14.0 million and increased 38.8% to $27.9 million for the three and six months ended January 31, 2022, respectively, compared to $9.9 million and $20.1 million in the same periods in the prior year. The increase in R&D spending for both the three and six-month periods 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 Brady's organic
business. In addition, R&D headcount increased 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.
SG&A expenses include selling and administrative costs directly attributed to the IDS and WPS segments, as well as certain other general and administrative expenses including finance, information technology, human resources, and other administrative expenses. SG&A expenses increased 12.5% to $92.5 million in the three months ended January 31, 2022, compared to $82.2 million in the same period in the prior year. As a percentage of net sales, SG&A decreased to 29.1% compared to 30.9% 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 personnel costs in the WPS business.
SG&A expenses increased 14.5% to $189.3 million for the six months ended January 31, 2022, compared to $165.3 million in the same period in the prior year. As a percentage of net sales, SG&A expense decreased to 29.6% from 30.4% in the same period in the prior year. The increase in SG&A expense was primarily due to the acquisitions of Code, Magicard and Nordic ID, and to a lesser extent an increase in personnel costs and advertising costs in both the IDS and WPS businesses. The decrease in SG&A expense as a percentage of sales for the three and six month periods ended January 31, 2022, was primarily due to ongoing efficiency activities throughout SG&A.
Operating income increased 14.6% to $42.9 million and increased 9.6% to $87.2 million for the three and six months ended January 31, 2022, respectively, compared to $37.4 million and $79.6 million in the same periods in the prior year. The increase in operating income in both the three and six-month periods was primarily due to the increase in segment profit in the IDS segment as a result of organic sales growth.
OPERATING INCOME TO NET INCOME
Three months ended January 31,
Six months ended January 31,
(Dollars in thousands)
2022
% Sales
2021
% Sales
2022
% Sales
2021
% Sales
Operating income
$
42,872
13.5
%
$
37,412
14.1
%
$
87,207
13.6
%
$
79,600
14.7
%
Other (expense) income:
Investment and other (expense) income
(578)
(0.2)
%
2,036
0.8
%
(35)
—
%
2,191
0.4
%
Interest expense
(252)
(0.1)
%
(51)
—
%
(434)
(0.1)
%
(157)
—
%
Income before income tax and losses of unconsolidated affiliate
42,042
13.2
%
39,397
14.8
%
86,738
13.6
%
81,634
15.0
%
Income tax expense
8,227
2.6
%
8,206
3.1
%
17,877
2.8
%
16,788
3.1
%
Income before losses of unconsolidated affiliate
33,815
10.6
%
31,191
11.7
%
68,861
10.8
%
64,846
11.9
%
Equity in losses of unconsolidated affiliate
—
—
%
(331)
(0.1)
%
—
—
%
(505)
(0.1)
%
Net income
$
33,815
10.6
%
$
30,860
11.6
%
$
68,861
10.8
%
$
64,341
11.8
%
Investment and other (expense) income was a net expense of $0.6 million and investment and other (expense) income was a net income of $2.0 million for the three months ended January 31, 2022 and 2021, respectively. Investment and other (expense) income was a net expense of $0.0 million and a net income of $2.2 million for the six months ended January 31, 2022 and 2021, respectively. The decrease in the three-month and six-month period was primarily due to a decrease in the market value of securities held in deferred compensation plans.
Interest expense increased to $0.3 million and $0.4 million for the three and six months ended January 31, 2022, respectively, compared to $0.1 million and $0.2 million in the same periods in the prior year. The increase in interest expense for both the three and six-month periods 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 19.6% and 20.8% for the three months ended January 31, 2022 and 2021, respectively, and the income tax rate was 20.6% for both of the six months ended January 31, 2022 and 2021. Refer to Note L, "Income Taxes" for additional information on the Company's income tax rates.
Equity in losses of unconsolidated affiliate of $0.3 million and $0.5 million for the three and six months ended January 31, 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. 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 (expense) 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 six months ended January 31, 2022 and 2021:
Three months ended January 31,
Six months ended January 31,
2022
2021
2022
2021
SALES GROWTH INFORMATION
ID Solutions
Organic
16.0
%
(6.9)
%
14.6
%
(7.6)
%
Acquisitions
11.8
%
—
%
11.7
%
—
%
Currency
(1.7)
%
1.5
%
(0.5)
%
1.0
%
Total
26.1
%
(5.4)
%
25.8
%
(6.6)
%
Workplace Safety
Organic
5.2
%
(4.8)
%
(2.0)
%
0.4
%
Currency
(3.2)
%
5.2
%
(1.1)
%
4.8
%
Total
2.0
%
0.4
%
(3.1)
%
5.2
%
Total Company
Organic
13.1
%
(6.3)
%
10.0
%
(5.6)
%
Acquisitions
8.6
%
—
%
8.5
%
—
%
Currency
(2.1)
%
2.4
%
(0.7)
%
2.0
%
Total
19.6
%
(3.9)
%
17.8
%
(3.6)
%
SEGMENT PROFIT
ID Solutions
$
44,129
$
39,000
$
92,945
$
79,279
Workplace Safety
4,515
3,463
6,808
11,451
Total
$
48,644
$
42,463
$
99,753
$
90,730
SEGMENT PROFIT AS A PERCENT OF NET SALES
ID Solutions
18.0
%
20.1
%
18.8
%
20.2
%
Workplace Safety
6.2
%
4.8
%
4.7
%
7.6
%
Total
15.3
%
16.0
%
15.6
%
16.7
%
ID Solutions
IDS net sales increased 26.1% to $245.0 million for the three months ended January 31, 2022, compared to $194.2 million in the same period in the prior year, which consisted of organic sales growth of 16.0%, sales growth from acquisitions of 11.8% and a decrease from foreign currency translation of 1.7%. IDS net sales increased 25.8% to $493.6 million for the six months ended January 31, 2022, compared to $392.4 million in the same period in the prior year, which consisted of organic sales growth of 14.6%, sales growth from acquisitions of 11.7% and a decrease from foreign currency translation of 0.5%. Organic sales grew in all major product lines with growth in the safety and facility identification, wire identification, product identification and healthcare identification in the six months ended January 31, 2022. Organic sales increased in the mid-teens in all three regions of the IDS business in both the three and six months ended January 31, 2022, compared to the same periods 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 13.2% to $44.1 million for the three months ended January 31, 2022, compared to $39.0 million in the same period in the prior year. Segment profit increased 17.2% to $92.9 million for the six months ended January 31, 2022, compared to $79.3 million in the same period in the prior year. As a percentage of net sales, segment profit decreased to 18.0% from 20.1% for the three-month period, and segment profit decreased to 18.8% from 20.2% for the six-month period ended January 31, 2022 compared to the same periods in the prior year. 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, as well as incremental amortization expense of $2.4 million and $4.9 million in the three and six months ended January 31, 2022, respectively, which was partially offset by pricing actions, compared to the same periods in the prior year.
WPS net sales increased 2.0% to $73.1 million for the three months ended January 31, 2022, compared to $71.6 million in the same period in the prior year, which consisted of organic sales growth of 5.2% and a decrease from foreign currency translation of 3.2%. Both digital sales and catalog channel sales increased in the mid-single digits organically in the three-month period ended January 31, 2022.
WPS net sales decreased 3.1% to $145.9 million for the six months ended January 31, 2022, compared to $150.6 million in the same period in the prior year, which consisted of an organic sales decline of 2.0% and a decrease from foreign currency translation of 1.1%. 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 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 year-to-date in fiscal 2022 primarily due to the decrease in demand for and sales of COVID-19 products. Both digital and catalog channel sales decreased in the low-single digits organically in the six-month period ended January 31, 2022.
Organic sales in Europe increased in the high-single digits in the three months ended January 31, 2022, compared to the same period in the prior year. Organic sales in Europe were essentially flat in the six months ended January 31, 2022, compared to the same period in prior year. Digital sales increased in the mid-single digits and catalog channel sales increased in the high-single digits in the three-month period, and both digital sales and catalog channel sales were essentially flat in the six-month period ended January 31, 2022.
Organic sales in North America were essentially flat in the three months ended January 31, 2022, compared to the same period in the prior year. Digital sales increased in the mid-single digits, and sales through the catalog channel decreased in the low-single digits in the three months ended January 31, 2022. Organic sales in North America declined in the mid-single digits in the six months ended January 31, 2022, compared to the same period in the prior year. Digital sales decreased in the mid-single digits and catalog channel sales decreased in the high-single digits in the six-month period ended January 31, 2022.
Organic sales in Australia increased in the mid-single digits in the three months ended January 31, 2022 and increased in the low-single digits in the six-month period ended January 31, 2022, compared to the same period in the prior year. Digital sales increased in the high-single digits and catalog channel sales increased in the mid-single digits in the three months ended January 31, 2022, compared to the same period in the prior year. Digital sales were essentially flat and catalog channel sales increased in the low-single digits in the six months ended January 31, 2022, compared to the same period in the prior year.
Segment profit increased 30.4% to $4.5 million from $3.5 million, and as a percentage of net sales, segment profit increased to 6.2% from 4.8% for the three months ended January 31, 2022, compared to the same period in the prior year. The increase in segment profit in the three-month period was due to the increase in sales volumes as compared to the prior year. Segment profit decreased 40.5% to $6.8 million from $11.5 million and as a percentage of net sales, segment profit decreased to 4.7% from 7.6% for the six months ended January 31, 2022, compared to the same period in the prior year. The decrease in segment profit in the six-month period was due to the decrease in sales volumes as compared to prior year as well as gross margin compression due to an increase in the cost of materials, labor and freight.
Liquidity and Capital Resources
The Company's cash balances are generated and held in numerous locations throughout the world. At January 31, 2022, approximately 93% of the Company's cash and cash equivalents were held outside the 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 and beyond. 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 and cash equivalents were $147.4 million at January 31, 2022, an increase of $0.1 million from July 31, 2021. The significant changes were as follows:
Six months ended January 31,
(Dollars in thousands)
2022
2021
Net cash flow provided by (used in):
Operating activities
$
24,328
$
98,889
Investing activities
(16,381)
(16,392)
Financing activities
(4,505)
(28,828)
Effect of exchange rate changes on cash
(3,370)
6,276
Net increase in cash and cash equivalents
$
72
$
59,945
Net cash provided by operating activities was $24.3 million for the six months ended January 31, 2022, compared to $98.9 million in the same period of the prior year. The decrease was primarily due to cash outflows for inventory purchases in order to reduce the risk of supply chain disruption. In addition, annual incentive compensation payments were higher in the current six-month period than they were the same period in the prior year.
Net cash used in investing activities was $16.4 million in both the six months ended January 31, 2022 and 2021, which consisted primarily of capital expenditures in both periods.
Net cash used in financing activities was $4.5 million in the six months ended January 31, 2022, which consisted of dividend payments of $23.2 million, share repurchases of $21.7 million, and tax withholding from stock-based awards of $5.0 million, partially offset by $45.0 million net borrowing on the credit facility. Net cash used in financing activities in the six months ended January 31, 2021 of $28.8 million primarily consisted of dividend payments of $22.8 million and share repurchases of $3.6 million.
Credit Facilities
On August 1, 2019, the Company and certain of its subsidiaries entered into an unsecured $200 million multi-currency revolving loan agreement with a group of five banks. At the Company's option, and subject to certain conditions, the available amount under the revolving loan agreement may be increased from $200 million to $400 million.
On December 21, 2021, the Company and certain of its subsidiaries entered into an amendment to the revolving loan agreement, which amends the revolving loan agreement dated as of August 1, 2019. The amendment amends the revolving loan agreement to, among other things, (a) change the interest rate under the revolving loan agreement for borrowings (i) denominated in British Pounds from the London Inter-bank Offered Rate ("LIBOR") to a daily simple SONIA-based rate, (ii) denominated in Euro from a LIBOR-based rate to a rate based on the Euro Interbank Offered Rate and (iii) denominated in Japanese Yen from a LIBOR-based rate to a rate based on the Tokyo Interbank Offered Rate, in each of the foregoing cases subject to certain adjustments specified in the revolving loan agreement; and (b) provide mechanics relating to a transition away from U.S. dollar LIBOR (with respect to borrowings denominated in U.S. dollars) and the designated benchmarks for the other eligible currencies as benchmark interest rates and the replacement of any such benchmark by a replacement benchmark rate. The amendment to the revolving loan agreement did not have a material impact on the interest rate or related balances in the Company's consolidated financial statements.
As of January 31, 2022, the outstanding balance on the Company's revolving loan agreement was $83.0 million. The maximum amount outstanding on the credit facility during the six months ended January 31, 2022 was $93.4 million. The borrowings bear interest at 0.86% as of January 31, 2022. The Company had letters of credit outstanding under the loan agreement of $1.7 million as of January 31, 2022, and there was $115.3 million available for future borrowing, which can be increased to $315.3 million at the Company's option, subject to certain conditions. The revolving loan agreement has a final maturity date of August 1, 2024. As such, borrowings were classified as long-term on the condensed consolidated balance sheets.
Covenant Compliance
The Company's revolving loan agreement requires it to maintain certain financial covenants, including a ratio of debt to the trailing twelve months EBITDA, as defined in the debt agreements, of not more than a 3.5 to 1.0 ratio (leverage ratio) and the trailing twelve months EBITDA to interest expense of not less than a 3.0 to 1.0 ratio (interest expense coverage). As of
January 31, 2022, the Company was in compliance with these financial covenants, with a ratio of debt to EBITDA, as defined by the agreements, equal to 0.33 to 1.0 and the interest expense coverage ratio equal to 322.7 to 1.0.
Other Commitments
The Company does not have material off-balance sheet arrangements. The Company is not aware of factors that are reasonably likely to adversely affect liquidity trends, other than the risk factors described in this Quarterly Report and its other filings with the Securities and Exchange Commission. However, the following additional information is provided to assist those reviewing the Company’s financial statements.
Purchase Commitments - The Company has purchase commitments for materials, supplies, services, and property, plant and equipment as part of the ordinary conduct of its business. In the aggregate, such commitments are not in excess of current market prices and are not material to the financial position of the Company. Due to the proprietary nature of many of the Company’s materials and processes, certain supply contracts contain penalty provisions for early termination. The Company does not believe a material amount of penalties will be incurred under these contracts based upon historical experience and current expectations.
Other Contractual Obligations - The Company does not have material financial guarantees or other contractual commitments that are reasonably likely to adversely affect liquidity.
Forward-Looking Statements
In this quarterly report on Form 10-Q, statements that are not reported financial results or other historic information are “forward-looking statements.” These forward-looking statements relate to, among other things, the Company's future financial position, business strategy, targets, projected sales, costs, income, capital expenditures, debt levels and cash flows, and plans and objectives of management for future operations.
The use of words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “should,” “project” or “plan” or similar terminology are generally intended to identify forward-looking statements. These forward-looking statements by their nature address matters that are, to different degrees, uncertain and are subject to risks, assumptions, and other factors, some of which are beyond Brady's control, that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For Brady, uncertainties arise from:
•Adverse impacts of the novel coronavirus ("COVID-19") pandemic or other pandemics
•Decreased demand for the Company's products
•Ability to compete effectively or to successfully execute its strategy
•Increased cost of raw materials, labor and freight as well as raw material shortages
•Ability to develop technologically advanced products that meet customer demands
•Ability to identify, integrate, and grow acquired companies, and to manage contingent liabilities from divested businesses
•Difficulties in protecting websites, networks, and systems against security breaches
•Risks associated with the loss of key employees
•Extensive regulations by U.S. and non-U.S. governmental and self-regulatory entities
•Litigation, including product liability claims
•Foreign currency fluctuations
•Potential write-offs of goodwill and other intangible assets
•Changes in tax legislation and tax rates
•Differing interests of voting and non-voting shareholders
•Numerous other matters of national, regional and global scale, including major public health crises and government responses thereto and those of a political, economic, business, competitive, and regulatory nature contained from time to time in Brady's U.S. Securities and Exchange Commission filings, including, but not limited to, those factors listed in the “Risk Factors” section within Item 1A of Part I of Brady's Form 10-K for the year ended July 31, 2021.
These uncertainties may cause Brady's actual future results to be materially different than those expressed in its forward-looking statements. Brady does not undertake to update its forward-looking statements except as required by law.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to the Company’s annual report on Form 10-K for the year ended July 31, 2021. There has been no material change in this information since July 31, 2021.
ITEM 4. CONTROLS AND PROCEDURES
Brady Corporation maintains a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports filed by the Company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports the Company files under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of its management, including its President and Chief Executive Officer and its Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, the Company’s President & Chief Executive Officer and Chief Financial Officer and Treasurer concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report.
There were no changes in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company's most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company has a share repurchase program for the Company's Class A Nonvoting Common Stock. The plan may be implemented by purchasing shares in the open market or in privately negotiated transactions, with repurchased shares available for use in connection with the Company's stock-based plans and for other corporate purposes. On September 1, 2021, Brady’s Board of Directors authorized an increase in the Company’s share buyback program, bringing the amount of the Company’s Class A Common Stock authorized for repurchase up to a total of two million shares, inclusive of the shares in the existing share buyback program. The current share repurchase program has no expiration date. As of January 31, 2022, 1,569,244 shares remained authorized to purchase in connection with this share repurchase program.
The following table provides information with respect to the purchases by the Company of Class A Nonvoting Common Stock during the three months ended January 31, 2022:
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans
Maximum Number of Shares That May Yet Be Purchased Under the Plans
XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.)
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
