UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended January 31, 20222023
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, Wisconsin 5323353223
(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 (§232.405 of this chapter) 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, a 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.
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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, 2022,22, 2023, there were 48,065,96546,121,200 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.
FORM 10-Q
BRADY CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
| | | January 31, 2022 | | July 31, 2021 | | January 31, 2023 | | July 31, 2022 |
| | (Unaudited) | | | | (Unaudited) | | |
ASSETS | ASSETS | | ASSETS | |
Current assets: | Current assets: | | Current assets: | |
Cash and cash equivalents | Cash and cash equivalents | $ | 147,407 | | | $ | 147,335 | | Cash and cash equivalents | $ | 108,210 | | | $ | 114,069 | |
Accounts receivable, net of allowances for credit losses of $7,868 and $7,306, respectively | 172,471 | | | 170,579 | | |
Accounts receivable, net of allowance for credit losses of $8,097 and $7,355, respectively | | Accounts receivable, net of allowance for credit losses of $8,097 and $7,355, respectively | 186,852 | | | 183,233 | |
Inventories | Inventories | 167,456 | | | 136,107 | | Inventories | 195,167 | | | 190,023 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | 12,681 | | | 11,083 | | Prepaid expenses and other current assets | 13,986 | | | 10,743 | |
Total current assets | Total current assets | 500,015 | | | 465,104 | | Total current assets | 504,215 | | | 498,068 | |
Property, plant and equipment—net | Property, plant and equipment—net | 126,551 | | | 121,741 | | Property, plant and equipment—net | 140,784 | | | 139,511 | |
Goodwill | Goodwill | 601,681 | | | 614,137 | | Goodwill | 590,776 | | | 586,832 | |
Other intangible assets | Other intangible assets | 83,608 | | | 92,334 | | Other intangible assets | 67,513 | | | 74,028 | |
Deferred income taxes | Deferred income taxes | 15,234 | | | 16,343 | | Deferred income taxes | 15,826 | | | 15,881 | |
Operating lease assets | Operating lease assets | 33,710 | | | 41,880 | | Operating lease assets | 31,411 | | | 31,293 | |
Other assets | Other assets | 26,264 | | | 26,217 | | Other assets | 21,748 | | | 21,719 | |
Total | Total | $ | 1,387,063 | | | $ | 1,377,756 | | Total | $ | 1,372,273 | | | $ | 1,367,332 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Accounts payable | Accounts payable | $ | 80,611 | | | $ | 82,152 | | Accounts payable | $ | 75,876 | | | $ | 81,116 | |
Accrued compensation and benefits | Accrued compensation and benefits | 56,510 | | | 81,173 | | Accrued compensation and benefits | 53,213 | | | 76,764 | |
Taxes, other than income taxes | Taxes, other than income taxes | 12,141 | | | 13,054 | | Taxes, other than income taxes | 12,799 | | | 12,539 | |
Accrued income taxes | Accrued income taxes | 4,783 | | | 3,915 | | Accrued income taxes | 6,794 | | | 8,294 | |
Current operating lease liabilities | Current operating lease liabilities | 16,601 | | | 17,667 | | Current operating lease liabilities | 15,402 | | | 15,003 | |
Other current liabilities | Other current liabilities | 56,850 | | | 59,623 | | Other current liabilities | 65,765 | | | 61,458 | |
Total current liabilities | Total current liabilities | 227,496 | | | 257,584 | | Total current liabilities | 229,849 | | | 255,174 | |
Long-term debt | Long-term debt | 83,000 | | | 38,000 | | Long-term debt | 77,281 | | | 95,000 | |
Long-term operating lease liabilities | Long-term operating lease liabilities | 20,341 | | | 28,347 | | Long-term operating lease liabilities | 17,822 | | | 19,143 | |
Other liabilities | Other liabilities | 89,658 | | | 90,797 | | Other liabilities | 79,917 | | | 86,717 | |
Total liabilities | Total liabilities | 420,495 | | | 414,728 | | Total liabilities | 404,869 | | | 456,034 | |
Stockholders’ equity: | Stockholders’ equity: | | Stockholders’ equity: | |
Class A nonvoting common stock—Issued 51,261,487 shares, and outstanding 48,243,347 and 48,528,245 shares, respectively | 513 | | | 513 | | |
Class A nonvoting common stock—Issued 51,261,487 shares, and outstanding 46,115,760 and 46,370,708 shares, respectively | | Class A nonvoting common stock—Issued 51,261,487 shares, and outstanding 46,115,760 and 46,370,708 shares, respectively | 513 | | | 513 | |
Class B voting common stock—Issued and outstanding, 3,538,628 shares | Class B voting common stock—Issued and outstanding, 3,538,628 shares | 35 | | | 35 | | Class B voting common stock—Issued and outstanding, 3,538,628 shares | 35 | | | 35 | |
Additional paid-in capital | Additional paid-in capital | 341,889 | | | 339,125 | | Additional paid-in capital | 348,513 | | | 345,266 | |
Retained earnings | Retained earnings | 833,981 | | | 788,369 | | Retained earnings | 947,051 | | | 892,417 | |
Treasury stock—3,018,140 and 2,733,242 shares, respectively, of Class A nonvoting common stock, at cost | (130,911) | | | (109,061) | | |
Treasury stock—5,145,727 and 4,890,779 shares, respectively, of Class A nonvoting common stock, at cost | | Treasury stock—5,145,727 and 4,890,779 shares, respectively, of Class A nonvoting common stock, at cost | (233,338) | | | (217,856) | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (78,939) | | | (55,953) | | Accumulated other comprehensive loss | (95,370) | | | (109,077) | |
Total stockholders’ equity | Total stockholders’ equity | 966,568 | | | 963,028 | | Total stockholders’ equity | 967,404 | | | 911,298 | |
Total | Total | $ | 1,387,063 | | | $ | 1,377,756 | | Total | $ | 1,372,273 | | | $ | 1,367,332 | |
See Notes to Condensed Consolidated Financial Statements.
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts, Unaudited)
| | | Three months ended January 31, | | Six months ended January 31, | | Three months ended January 31, | | Six months ended January 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Net sales | Net sales | $ | 318,055 | | | $ | 265,838 | | | $ | 639,530 | | | $ | 543,065 | | Net sales | $ | 326,249 | | | $ | 318,055 | | | $ | 648,818 | | | $ | 639,530 | |
Cost of goods sold | Cost of goods sold | 168,693 | | | 136,316 | | | 335,180 | | | 278,115 | | Cost of goods sold | 169,809 | | | 168,693 | | | 337,114 | | | 335,180 | |
Gross margin | Gross margin | 149,362 | | | 129,522 | | | 304,350 | | | 264,950 | | Gross margin | 156,440 | | | 149,362 | | | 311,704 | | | 304,350 | |
Operating expenses: | Operating expenses: | | Operating expenses: | |
Research and development | Research and development | 13,965 | | | 9,876 | | | 27,872 | | | 20,079 | | Research and development | 15,377 | | | 13,965 | | | 29,310 | | | 27,872 | |
Selling, general and administrative | Selling, general and administrative | 92,525 | | | 82,234 | | | 189,271 | | | 165,271 | | Selling, general and administrative | 92,282 | | | 92,525 | | | 182,227 | | | 189,271 | |
Total operating expenses | Total operating expenses | 106,490 | | | 92,110 | | | 217,143 | | | 185,350 | | Total operating expenses | 107,659 | | | 106,490 | | | 211,537 | | | 217,143 | |
Operating income | Operating income | 42,872 | | | 37,412 | | | 87,207 | | | 79,600 | | Operating income | 48,781 | | | 42,872 | | | 100,167 | | | 87,207 | |
Other (expense) income: | | |
Investment and other (expense) income | (578) | | | 2,036 | | | (35) | | | 2,191 | | |
Other income (expense): | | Other income (expense): | |
Investment and other income (expense) | | Investment and other income (expense) | 968 | | | (578) | | | 811 | | | (35) | |
Interest expense | Interest expense | (252) | | | (51) | | | (434) | | | (157) | | Interest expense | (1,239) | | | (252) | | | (2,133) | | | (434) | |
Income before income taxes and losses of unconsolidated affiliate | 42,042 | | | 39,397 | | | 86,738 | | | 81,634 | | |
Income before income taxes | | Income before income taxes | 48,510 | | | 42,042 | | | 98,845 | | | 86,738 | |
Income tax expense | Income tax expense | 8,227 | | | 8,206 | | | 17,877 | | | 16,788 | | Income tax expense | 10,524 | | | 8,227 | | | 21,418 | | | 17,877 | |
Income before losses of unconsolidated affiliate | 33,815 | | | 31,191 | | | 68,861 | | | 64,846 | | |
Equity in losses of unconsolidated affiliate | — | | | (331) | | | — | | | (505) | | |
Net income | Net income | $ | 33,815 | | | $ | 30,860 | | | $ | 68,861 | | | $ | 64,341 | | Net income | $ | 37,986 | | | $ | 33,815 | | | $ | 77,427 | | | $ | 68,861 | |
Net income per Class A Nonvoting Common Share: | Net income per Class A Nonvoting Common Share: | | | | | | | | Net income per Class A Nonvoting Common Share: | | | | | | | |
Basic | Basic | $ | 0.65 | | | $ | 0.59 | | | $ | 1.33 | | | $ | 1.24 | | Basic | $ | 0.76 | | | $ | 0.65 | | | $ | 1.55 | | | $ | 1.33 | |
Diluted | Diluted | $ | 0.65 | | | $ | 0.59 | | | $ | 1.32 | | | $ | 1.23 | | Diluted | $ | 0.76 | | | $ | 0.65 | | | $ | 1.55 | | | $ | 1.32 | |
Net income per Class B Voting Common Share: | Net income per Class B Voting Common Share: | | Net income per Class B Voting Common Share: | |
Basic | Basic | $ | 0.65 | | | $ | 0.59 | | | $ | 1.31 | | | $ | 1.22 | | Basic | $ | 0.76 | | | $ | 0.65 | | | $ | 1.54 | | | $ | 1.31 | |
Diluted | Diluted | $ | 0.65 | | | $ | 0.59 | | | $ | 1.30 | | | $ | 1.21 | | Diluted | $ | 0.76 | | | $ | 0.65 | | | $ | 1.53 | | | $ | 1.30 | |
Weighted average common shares outstanding: | Weighted average common shares outstanding: | | Weighted average common shares outstanding: | |
Basic | Basic | 51,800 | | | 52,018 | | | 51,887 | | | 52,020 | | Basic | 49,745 | | | 51,800 | | | 49,806 | | | 51,887 | |
Diluted | Diluted | 52,162 | | | 52,282 | | | 52,299 | | | 52,288 | | Diluted | 50,009 | | | 52,162 | | | 50,049 | | | 52,299 | |
See Notes to Condensed Consolidated Financial Statements.
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands, Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net income | $ | 33,815 | | | $ | 30,860 | | | $ | 68,861 | | | $ | 64,341 | |
Other comprehensive (loss) income: | | | | | | | |
Foreign currency translation adjustments | (18,656) | | | 19,074 | | | (22,574) | | | 14,882 | |
| | | | | | | |
Cash flow hedges: | | | | | | | |
Net gain recognized in other comprehensive (loss) income | 225 | | | 451 | | | 199 | | | 1,148 | |
Reclassification adjustment for (gains) losses included in net income | (35) | | | 60 | | | (603) | | | 271 | |
| 190 | | | 511 | | | (404) | | | 1,419 | |
Pension and other post-retirement benefits: | | | | | | | |
Net loss recognized in other comprehensive (loss) income | (85) | | | (32) | | | (85) | | | (32) | |
Net actuarial gain amortization | (73) | | | (95) | | | (180) | | | (201) | |
| (158) | | | (127) | | | (265) | | | (233) | |
| | | | | | | |
Other comprehensive (loss) income, before tax | (18,624) | | | 19,458 | | | (23,243) | | | 16,068 | |
Income tax benefit (expense) related to items of other comprehensive (loss) income | 356 | | | (1,251) | | | 257 | | | (1,052) | |
Other comprehensive (loss) income, net of tax | (18,268) | | | 18,207 | | | (22,986) | | | 15,016 | |
Comprehensive income | $ | 15,547 | | | $ | 49,067 | | | $ | 45,875 | | | $ | 79,357 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
| 2023 | | 2022 | | 2023 | | 2022 |
Net income | $ | 37,986 | | | $ | 33,815 | | | $ | 77,427 | | | $ | 68,861 | |
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustments | 30,562 | | | (18,656) | | | 12,890 | | | (22,574) | |
| | | | | | | |
Cash flow hedges: | | | | | | | |
Net gain recognized in other comprehensive income (loss) | 776 | | | 225 | | | 1,669 | | | 199 | |
Reclassification adjustment for gains included in net income | (217) | | | (35) | | | (798) | | | (603) | |
| 559 | | | 190 | | | 871 | | | (404) | |
Pension and other post-retirement benefits: | | | | | | | |
Net loss recognized in other comprehensive income (loss) | — | | | (85) | | | — | | | (85) | |
Net actuarial loss (gain) amortization | 27 | | | (73) | | | (116) | | | (180) | |
| 27 | | | (158) | | | (116) | | | (265) | |
| | | | | | | |
Other comprehensive income (loss), before tax | 31,148 | | | (18,624) | | | 13,645 | | | (23,243) | |
Income tax (expense) benefit related to items of other comprehensive income (loss) | (4) | | | 356 | | | 62 | | | 257 | |
Other comprehensive income (loss), net of tax | 31,144 | | | (18,268) | | | 13,707 | | | (22,986) | |
Comprehensive income | $ | 69,130 | | | $ | 15,547 | | | $ | 91,134 | | | $ | 45,875 | |
See Notes to Condensed Consolidated Financial Statements.
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands, Unaudited)
| | | Three months ended January 31, 2022 | | Three months ended January 31, 2023 |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
Balances at October 31, 2021 | | $ | 548 | | | $ | 340,182 | | | $ | 811,820 | | | $ | (127,986) | | | $ | (60,671) | | | $ | 963,893 | | |
Balances at October 31, 2022 | | Balances at October 31, 2022 | | $ | 548 | | | $ | 346,064 | | | $ | 920,482 | | | $ | (228,855) | | | $ | (126,514) | | | $ | 911,725 | |
Net income | Net income | | — | | | — | | | 33,815 | | | — | | | — | | | 33,815 | | Net income | | — | | | — | | | 37,986 | | | — | | | — | | | 37,986 | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (18,268) | | | (18,268) | | |
Other comprehensive income, net of tax | | Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 31,144 | | | 31,144 | |
Issuance of shares of Class A Common Stock under stock plan | Issuance of shares of Class A Common Stock under stock plan | | — | | | (1,334) | | | — | | | (129) | | | — | | | (1,463) | | Issuance of shares of Class A Common Stock under stock plan | | — | | | 1,026 | | | — | | | 1,308 | | | — | | | 2,334 | |
Stock-based compensation expense | Stock-based compensation expense | | — | | | 3,041 | | | — | | | — | | | — | | | 3,041 | | Stock-based compensation expense | | — | | | 1,423 | | | — | | | — | | | — | | | 1,423 | |
Repurchase of shares of Class A Common Stock | Repurchase of shares of Class A Common Stock | | — | | | — | | | — | | | (2,796) | | | — | | | (2,796) | | Repurchase of shares of Class A Common Stock | | — | | | — | | | — | | | (5,791) | | | — | | | (5,791) | |
Cash dividends on Common Stock: | Cash dividends on Common Stock: | | Cash dividends on Common Stock: | |
Class A — $0.2250 per share | | — | | | — | | | (10,857) | | | — | | | — | | | (10,857) | | |
Class B — $0.2250 per share | | — | | | — | | | (797) | | | — | | | — | | | (797) | | |
Balances at January 31, 2022 | | $ | 548 | | | $ | 341,889 | | | $ | 833,981 | | | $ | (130,911) | | | $ | (78,939) | | | $ | 966,568 | | |
Class A — $0.2300 per share | | Class A — $0.2300 per share | | — | | | — | | | (10,603) | | | — | | | — | | | (10,603) | |
Class B — $0.2300 per share | | Class B — $0.2300 per share | | — | | | — | | | (814) | | | — | | | — | | | (814) | |
Balances at January 31, 2023 | | Balances at January 31, 2023 | | $ | 548 | | | $ | 348,513 | | | $ | 947,051 | | | $ | (233,338) | | | $ | (95,370) | | | $ | 967,404 | |
| | | Six months ended January 31, 2022 | | Six months ended January 31, 2023 |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
Balances at July 31, 2021 | | $ | 548 | | | $ | 339,125 | | | $ | 788,369 | | | $ | (109,061) | | | $ | (55,953) | | | $ | 963,028 | | |
Balances at July 31, 2022 | | Balances at July 31, 2022 | | $ | 548 | | | $ | 345,266 | | | $ | 892,417 | | | $ | (217,856) | | | $ | (109,077) | | | $ | 911,298 | |
Net income | Net income | | — | | | — | | | 68,861 | | | — | | | — | | | 68,861 | | Net income | | — | | | — | | | 77,427 | | | — | | | — | | | 77,427 | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (22,986) | | | (22,986) | | |
Other comprehensive income, net of tax | | Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 13,707 | | | 13,707 | |
Issuance of shares of Class A Common Stock under stock plan | Issuance of shares of Class A Common Stock under stock plan | | — | | | (4,521) | | | — | | | (130) | | | — | | | (4,651) | | Issuance of shares of Class A Common Stock under stock plan | | — | | | (1,200) | | | — | | | 2,379 | | | — | | | 1,179 | |
Tax benefit and withholdings from deferred compensation distributions | Tax benefit and withholdings from deferred compensation distributions | | — | | | 115 | | | — | | | — | | | — | | | 115 | | Tax benefit and withholdings from deferred compensation distributions | | — | | | 66 | | | — | | | — | | | — | | | 66 | |
Stock-based compensation expense | Stock-based compensation expense | | — | | | 7,170 | | | — | | | — | | | — | | | 7,170 | | Stock-based compensation expense | | — | | | 4,381 | | | — | | | — | | | — | | | 4,381 | |
Repurchase of shares of Class A Common Stock | Repurchase of shares of Class A Common Stock | | — | | | — | | | — | | | (21,720) | | | — | | | (21,720) | | Repurchase of shares of Class A Common Stock | | — | | | — | | | — | | | (17,861) | | | — | | | (17,861) | |
Cash dividends on Common Stock: | Cash dividends on Common Stock: | | Cash dividends on Common Stock: | |
Class A — $0.4500 per share | | — | | | — | | | (21,715) | | | — | | | — | | | (21,715) | | |
Class B — $0.4334 per share | | — | | | — | | | (1,534) | | | — | | | — | | | (1,534) | | |
Balances at January 31, 2022 | | $ | 548 | | | $ | 341,889 | | | $ | 833,981 | | | $ | (130,911) | | | $ | (78,939) | | | $ | 966,568 | | |
Class A — $0.4600 per share | | Class A — $0.4600 per share | | — | | | — | | | (21,224) | | | — | | | — | | | (21,224) | |
Class B — $0.4434 per share | | Class B — $0.4434 per share | | — | | | — | | | (1,569) | | | — | | | — | | | (1,569) | |
Balances at January 31, 2023 | | Balances at January 31, 2023 | | $ | 548 | | | $ | 348,513 | | | $ | 947,051 | | | $ | (233,338) | | | $ | (95,370) | | | $ | 967,404 | |
| | | Three months ended January 31, 2021 | | Three months ended January 31, 2022 |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
Balances at October 31, 2020 | | $ | 548 | | | $ | 332,121 | | | $ | 726,546 | | | $ | (109,146) | | | $ | (69,668) | | | $ | 880,401 | | |
Balances at October 31, 2021 | | Balances at October 31, 2021 | | $ | 548 | | | $ | 340,182 | | | $ | 811,820 | | | $ | (127,986) | | | $ | (60,671) | | | $ | 963,893 | |
Net income | Net income | | — | | | — | | | 30,860 | | | — | | | — | | | 30,860 | | Net income | | — | | | — | | | $ | 33,815 | | | — | | | — | | | 33,815 | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 18,207 | | | 18,207 | | |
Other comprehensive loss, net of tax | | Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (18,268) | | | (18,268) | |
Issuance of shares of Class A Common Stock under stock plan | Issuance of shares of Class A Common Stock under stock plan | | — | | | 59 | | | — | | | 230 | | | — | | | 289 | | Issuance of shares of Class A Common Stock under stock plan | | — | | | (1,334) | | | — | | | (129) | | | — | | | (1,463) | |
Stock-based compensation expense | Stock-based compensation expense | | — | | | 1,897 | | | — | | | — | | | — | | | 1,897 | | Stock-based compensation expense | | — | | | 3,041 | | | — | | | — | | | — | | | 3,041 | |
Repurchase of shares of Class A Common Stock | Repurchase of shares of Class A Common Stock | | — | | | — | | | — | | | (873) | | | — | | | (873) | | Repurchase of shares of Class A Common Stock | | — | | | — | | | — | | | (2,796) | | | — | | | (2,796) | |
Cash dividends on Common Stock: | Cash dividends on Common Stock: | | Cash dividends on Common Stock: | | |
Class A — $0.2200 per share | | — | | | — | | | (10,667) | | | — | | | — | | | (10,667) | | |
Class B — $0.2200 per share | | — | | | — | | | (779) | | | — | | | — | | | (779) | | |
Balances at January 31, 2021 | | $ | 548 | | | $ | 334,077 | | | $ | 745,960 | | | $ | (109,789) | | | $ | (51,461) | | | $ | 919,335 | | |
Class A — $0.2250 per share | | Class A — $0.2250 per share | | — | | | — | | | (10,857) | | | — | | | — | | | (10,857) | |
Class B — $0.2250 per share | | Class B — $0.2250 per share | | — | | | — | | | (797) | | | — | | | — | | | (797) | |
Balances at January 31, 2022 | | Balances at January 31, 2022 | | $ | 548 | | | $ | 341,889 | | | $ | 833,981 | | | $ | (130,911) | | | $ | (78,939) | | | $ | 966,568 | |
| | | Six months ended January 31, 2021 | | Six months ended January 31, 2022 |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
Balances at July 31, 2020 | | $ | 548 | | | $ | 331,761 | | | $ | 704,456 | | | $ | (107,216) | | | $ | (66,477) | | | $ | 863,072 | | |
Balances at July 31, 2021 | | Balances at July 31, 2021 | | $ | 548 | | | $ | 339,125 | | | $ | 788,369 | | | $ | (109,061) | | | $ | (55,953) | | | $ | 963,028 | |
Net income | Net income | | — | | | — | | | 64,341 | | | — | | | — | | | 64,341 | | Net income | | — | | | — | | | 68,861 | | | — | | | — | | | 68,861 | |
Other comprehensive income, net of tax | Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 15,016 | | | 15,016 | | Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | (22,986) | | | (22,986) | |
Issuance of shares of Class A Common Stock under stock plan | Issuance of shares of Class A Common Stock under stock plan | | — | | | (3,187) | | | — | | | 1,020 | | | — | | | (2,167) | | Issuance of shares of Class A Common Stock under stock plan | | — | | | (4,521) | | | — | | | (130) | | | — | | | (4,651) | |
Tax benefit and withholdings from deferred compensation distributions | Tax benefit and withholdings from deferred compensation distributions | | — | | | 32 | | | — | | | — | | | — | | | 32 | | Tax benefit and withholdings from deferred compensation distributions | | — | | | 115 | | | — | | | — | | | — | | | 115 | |
Stock-based compensation expense | Stock-based compensation expense | | — | | | 5,471 | | | — | | | — | | | — | | | 5,471 | | Stock-based compensation expense | | — | | | 7,170 | | | — | | | — | | | — | | | 7,170 | |
Repurchase of shares of Class A Common Stock | Repurchase of shares of Class A Common Stock | | — | | | — | | | — | | | (3,593) | | | — | | | (3,593) | | Repurchase of shares of Class A Common Stock | | — | | | — | | | — | | | (21,720) | | | — | | | (21,720) | |
Cash dividends on Common Stock: | Cash dividends on Common Stock: | | Cash dividends on Common Stock: | | |
Class A — $0.4400 per share | | — | | | — | | | (21,338) | | | — | | | — | | | (21,338) | | |
Class B — $0.4234 per share | | — | | | — | | | (1,499) | | | — | | | — | | | (1,499) | | |
Balances at January 31, 2021 | | $ | 548 | | | $ | 334,077 | | | $ | 745,960 | | | $ | (109,789) | | | $ | (51,461) | | | $ | 919,335 | | |
Class A — $0.4500 per share | | Class A — $0.4500 per share | | — | | | — | | | (21,715) | | | — | | | — | | | (21,715) | |
Class B — $0.4334 per share | | Class B — $0.4334 per share | | — | | | — | | | (1,534) | | | — | | | — | | | (1,534) | |
Balances at January 31, 2022 | | Balances at January 31, 2022 | | $ | 548 | | | $ | 341,889 | | | $ | 833,981 | | | $ | (130,911) | | | $ | (78,939) | | | $ | 966,568 | |
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands, Unaudited)
| | | Six months ended January 31, | | Six months ended January 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Operating activities: | Operating activities: | | | | Operating activities: | | | |
Net income | Net income | $ | 68,861 | | | $ | 64,341 | | Net income | $ | 77,427 | | | $ | 68,861 | |
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Depreciation and amortization | Depreciation and amortization | 16,996 | | | 11,421 | | Depreciation and amortization | 17,117 | | | 16,996 | |
Stock-based compensation expense | Stock-based compensation expense | 7,170 | | | 5,471 | | Stock-based compensation expense | 4,381 | | | 7,170 | |
Deferred income taxes | Deferred income taxes | (788) | | | (3,866) | | Deferred income taxes | (5,234) | | | (788) | |
Equity in losses of unconsolidated affiliate | — | | | 505 | | |
Other | Other | (812) | | | 121 | | Other | (908) | | | (812) | |
Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
Accounts receivable | Accounts receivable | (7,216) | | | (4,157) | | Accounts receivable | 280 | | | (7,216) | |
Inventories | Inventories | (34,360) | | | 15,018 | | Inventories | (1,287) | | | (34,360) | |
Prepaid expenses and other assets | Prepaid expenses and other assets | (1,148) | | | (2,436) | | Prepaid expenses and other assets | (3,502) | | | (1,148) | |
Accounts payable and accrued liabilities | Accounts payable and accrued liabilities | (25,357) | | | 11,990 | | Accounts payable and accrued liabilities | (29,156) | | | (25,357) | |
Income taxes | Income taxes | 982 | | | 481 | | Income taxes | (1,734) | | | 982 | |
Net cash provided by operating activities | Net cash provided by operating activities | 24,328 | | | 98,889 | | Net cash provided by operating activities | 57,384 | | | 24,328 | |
| Investing activities: | Investing activities: | | Investing activities: | |
Purchases of property, plant and equipment | Purchases of property, plant and equipment | (16,440) | | | (14,511) | | Purchases of property, plant and equipment | (8,167) | | | (16,440) | |
Other | Other | 59 | | | (1,881) | | Other | 11 | | | 59 | |
Net cash used in investing activities | Net cash used in investing activities | (16,381) | | | (16,392) | | Net cash used in investing activities | (8,156) | | | (16,381) | |
| Financing activities: | Financing activities: | | Financing activities: | |
Payment of dividends | Payment of dividends | (23,249) | | | (22,837) | | Payment of dividends | (22,793) | | | (23,249) | |
Proceeds from exercise of stock options | Proceeds from exercise of stock options | 374 | | | 471 | | Proceeds from exercise of stock options | 2,688 | | | 374 | |
Payments for employee taxes withheld from stock-based awards | Payments for employee taxes withheld from stock-based awards | (5,025) | | | (2,638) | | Payments for employee taxes withheld from stock-based awards | (1,509) | | | (5,025) | |
Purchase of treasury stock | Purchase of treasury stock | (21,720) | | | (3,593) | | Purchase of treasury stock | (17,861) | | | (21,720) | |
Proceeds from borrowing on credit facilities | 131,216 | | | 19,957 | | |
Repayment of borrowing on credit facilities | (86,216) | | | (20,220) | | |
Proceeds from borrowing on credit agreement | | Proceeds from borrowing on credit agreement | 71,036 | | | 131,216 | |
Repayment of borrowing on credit agreement | | Repayment of borrowing on credit agreement | (88,755) | | | (86,216) | |
Other | Other | 115 | | | 32 | | Other | 66 | | | 115 | |
Net cash used in financing activities | Net cash used in financing activities | (4,505) | | | (28,828) | | Net cash used in financing activities | (57,128) | | | (4,505) | |
| Effect of exchange rate changes on cash | (3,370) | | | 6,276 | | |
Effect of exchange rate changes on cash and cash equivalents | | Effect of exchange rate changes on cash and cash equivalents | 2,041 | | | (3,370) | |
| Net increase in cash and cash equivalents | 72 | | | 59,945 | | |
Net (decrease) increase in cash and cash equivalents | | Net (decrease) increase in cash and cash equivalents | (5,859) | | | 72 | |
Cash and cash equivalents, beginning of period | Cash and cash equivalents, beginning of period | 147,335 | | | 217,643 | | Cash and cash equivalents, beginning of period | 114,069 | | | 147,335 | |
| Cash and cash equivalents, end of period | Cash and cash equivalents, end of period | $ | 147,407 | | | $ | 277,588 | | Cash and cash equivalents, end of period | $ | 108,210 | | | $ | 147,407 | |
See Notes to Condensed Consolidated Financial Statements.
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended January 31, 20222023
(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, 20222023 and July 31, 2021,2022, its results of operations and comprehensive income for the three and six months ended January 31, 20222023 and 2021,2022, and cash flows for the six months ended January 31, 20222023 and 2021.2022. The condensed consolidated balance sheet as of July 31, 2021,2022, 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, 2021.2022.
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,October 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 ReformNo. 2021-08, “Business Combinations (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." Subject805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which requires contract assets and contract liabilities (e.g. deferred revenue) acquired in a business combination to meeting certain criteria, this guidance provides optional expedientsbe recognized 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")measured by the end of 2021. Thisacquirer on the acquisition date in accordance with ASC 606, “Revenue from Contracts with Customers” as if the acquirer had originated the contracts. The guidance wasis applied prospectively to acquisitions occurring on or after the effective upon issuance and allowed application to contract changes asdate. The Company early as January 1, 2020.adopted ASU No. 2021-08 during the quarter ended October 31, 2022. The adoption of this update did notthe new standard will only have a materialan impact on the Company's condensed consolidated financial statements.statements in the event of future acquisitions.
NOTE C — Additional Balance Sheet Information
Inventories
Inventories as of January 31, 2022,2023, and July 31, 2021,2022, consisted of the following:
| | | | | | | | | | | |
| January 31, 2022 | | July 31, 2021 |
Finished products | $ | 102,115 | | | $ | 87,489 | |
Work-in-process | 25,211 | | | 20,189 | |
Raw materials and supplies | 40,130 | | | 28,429 | |
Total inventories | $ | 167,456 | | | $ | 136,107 | |
| | | | | | | | | | | |
| January 31, 2023 | | July 31, 2022 |
Finished products | $ | 109,617 | | | $ | 112,323 | |
Work-in-process | 30,572 | | | 29,272 | |
Raw materials and supplies | 54,978 | | | 48,428 | |
Total inventories | $ | 195,167 | | | $ | 190,023 | |
Property, plant and equipment
Property, plant and equipment is presented net of accumulated depreciation in the amount of $282,808$284,186 and $277,246$272,376 as of January 31, 2022,2023, and July 31, 2021,2022, respectively.
NOTE D — Other Intangible Assets
Other intangible assets as of January 31, 20222023 and July 31, 2021,2022, consisted of the following:
| | | January 31, 2022 | | July 31, 2021 | | January 31, 2023 | | July 31, 2022 |
| | 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 | | 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: | Amortized other intangible assets: | | | | | | | | | | | | | | | | Amortized other intangible assets: | | | | | | | | | | | | | | | |
Tradenames | Tradenames | 3 | | $ | 1,799 | | | $ | (699) | | | $ | 1,100 | | | 3 | | $ | 1,821 | | | $ | (356) | | | $ | 1,465 | | Tradenames | 3 | | $ | 1,757 | | | $ | (1,353) | | | $ | 404 | | | 3 | | $ | 1,749 | | | $ | (1,014) | | | $ | 735 | |
Customer relationships | Customer relationships | 9 | | 109,830 | | | (45,076) | | | 64,754 | | | 9 | | 110,950 | | | (39,069) | | | 71,881 | | Customer relationships | 9 | | 105,842 | | | (54,149) | | | 51,693 | | | 9 | | 105,404 | | | (48,428) | | | 56,976 | |
Technology | Technology | 5 | | 9,430 | | | (1,318) | | | 8,112 | | | 5 | | 9,578 | | | (335) | | | 9,243 | | Technology | 5 | | 9,204 | | | (3,221) | | | 5,983 | | | 5 | | 9,136 | | | (2,241) | | | 6,895 | |
Unamortized other intangible assets: | Unamortized other intangible assets: | | Unamortized other intangible assets: | |
Tradenames | Tradenames | N/A | | 9,642 | | | — | | | 9,642 | | | N/A | | 9,745 | | | — | | | 9,745 | | Tradenames | N/A | | 9,433 | | | — | | | 9,433 | | | N/A | | 9,422 | | | — | | | 9,422 | |
Total | Total | | $ | 130,701 | | | $ | (47,093) | | | $ | 83,608 | | | $ | 132,094 | | | $ | (39,760) | | | $ | 92,334 | | Total | | $ | 126,236 | | | $ | (58,723) | | | $ | 67,513 | | | $ | 125,711 | | | $ | (51,683) | | | $ | 74,028 | |
The change in the gross carrying amount of other intangible assets as of January 31, 20222023 compared to July 31, 20212022 was due to the effect of currency fluctuations during the six-month period.
Amortization expense of intangible assets was $3,749$3,258 and $1,353$3,749 for the three months ended January 31, 20222023 and 2021,2022, respectively, and $7,556$6,889 and $2,704$7,556 for the six months ended January 31, 20222023 and 2021,2022, 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, 2022,2023, the Company did not have any finance leases.
Operating lease expense was $4,087$3,868 and $4,169$4,087 for the three months ended January 31, 20222023 and 2021,2022, respectively, and $8,852$7,648 and $8,242$8,852 for the six months ended January 31, 2023 and 2022, and 2021, respectively. Operating lease expenserespectively, which 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, 20222023 and 2021.2022.
Supplemental cash flow information related to the Company's operating leases for the six months ended January 31, 20222023 and 2021,2022, was as follows:
| | | Six months ended January 31, | | Six months ended January 31, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Operating cash outflows from operating leases | Operating cash outflows from operating leases | $ | 9,805 | | | $ | 8,762 | | Operating cash outflows from operating leases | $ | 8,766 | | | $ | 9,805 | |
Operating lease assets obtained in exchange for new operating lease liabilities(1) | Operating lease assets obtained in exchange for new operating lease liabilities(1) | 952 | | | 3,297 | | Operating lease assets obtained in exchange for new operating lease liabilities(1) | 6,545 | | | 952 | |
(1)Includes new leases and remeasurements or modifications of existing leases.
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, 2022:2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized gain on cash flow hedges | | Unamortized gain on post-retirement plans | | Foreign currency translation adjustments | | Accumulated other comprehensive loss |
Beginning balance, July 31, 2022 | $ | 954 | | | $ | 1,436 | | | $ | (111,467) | | | $ | (109,077) | |
Other comprehensive income (loss) before reclassification | 1,593 | | | — | | | 12,890 | | | 14,483 | |
Amounts reclassified from accumulated other comprehensive loss | (598) | | | (178) | | | — | | | (776) | |
Ending balance, January 31, 2023 | $ | 1,949 | | | $ | 1,258 | | | $ | (98,577) | | | $ | (95,370) | |
The decrease in accumulated other comprehensive loss as of January 31, 2023 compared to July 31, 2022 was primarily due to the depreciation of the U.S. dollar against certain other currencies during the six-month period. The foreign currency translation adjustments column in the table above includes the impact of foreign currency translation, foreign currency translation on intercompany notes, and the settlements of net investment hedges, net of tax.
The changes in accumulated other comprehensive loss by component, net of tax, for the six months ended January 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2023 and 2022, and 2021, unrealized (gains) lossesgains on cash flow hedges were reclassified to "Cost of goods sold" and unamortized (gains) lossesgains 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 income (loss) income for the three and six months ended January 31, 20222023 and 2021:2022:
| | | Three months ended January 31, | | Six months ended January 31, | | Three months ended January 31, | | Six months ended January 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Income tax benefit (expense) related to items of other comprehensive (loss) income: | | | | | | | | |
Income tax (expense) benefit related to items of other comprehensive income (loss): | | Income tax (expense) benefit related to items of other comprehensive income (loss): | | | | | | | |
Cash flow hedges | Cash flow hedges | $ | (87) | | | $ | 47 | | | $ | (191) | | | $ | (1) | | Cash flow hedges | $ | 58 | | | $ | (87) | | | $ | 124 | | | $ | (191) | |
Pension and other post-retirement benefits | Pension and other post-retirement benefits | 15 | | | 6 | | | 15 | | | 246 | | Pension and other post-retirement benefits | (62) | | | 15 | | | (62) | | | 15 | |
Other income tax adjustments and currency translation | Other income tax adjustments and currency translation | 428 | | | (1,304) | | | 433 | | | (1,297) | | Other income tax adjustments and currency translation | — | | | 428 | | | — | | | 433 | |
Income tax benefit (expense) related to items of other comprehensive (loss) income | $ | 356 | | | $ | (1,251) | | | $ | 257 | | | $ | (1,052) | | |
Income tax (expense) benefit related to items of other comprehensive income (loss): | | Income tax (expense) benefit related to items of other comprehensive income (loss): | $ | (4) | | | $ | 356 | | | $ | 62 | | | $ | 257 | |
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$2,728 and $2,519$2,675 as of January 31, 20222023 and July 31, 2021,2022, 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$311 and $294$296 during the three months ended January 31, 20222023 and 2021,2022, respectively, and $585$617 and $591$585 during the six months ended January 31, 20222023 and 2021,2022, 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, 2022,2023, the Company expects to recognize 22% by the end of fiscal 2022,2023, an additional 35%34% by the end of fiscal 2023,2024, 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, 20222023 and 2021:2022:
| | | Three months ended January 31, | | Six months ended January 31, | | Three months ended January 31, | | Six months ended January 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Net sales: | Net sales: | | | | | | | | Net sales: | | | | | | | |
ID Solutions | | |
IDS | | IDS | |
Americas | Americas | $ | 158,999 | | | $ | 124,970 | | | $ | 323,909 | | | $ | 258,237 | | Americas | $ | 176,893 | | | $ | 158,999 | | | $ | 350,242 | | | $ | 323,909 | |
Europe | Europe | 57,274 | | | 44,040 | | | 114,163 | | | 86,622 | | Europe | 54,797 | | | 57,274 | | | 111,440 | | | 114,163 | |
Asia | Asia | 28,713 | | | 25,217 | | | 55,531 | | | 47,560 | | Asia | 23,993 | | | 28,713 | | | 50,357 | | | 55,531 | |
Total | Total | $ | 244,986 | | | $ | 194,227 | | | $ | 493,603 | | | $ | 392,419 | | Total | $ | 255,683 | | | $ | 244,986 | | | $ | 512,039 | | | $ | 493,603 | |
Workplace Safety | | | | | | | | |
WPS | | WPS | | | | | | | |
Americas | Americas | $ | 20,131 | | | $ | 20,200 | | | $ | 41,273 | | | $ | 44,231 | | Americas | $ | 19,182 | | | $ | 20,131 | | | $ | 37,964 | | | $ | 41,273 | |
Europe | Europe | 41,432 | | | 40,165 | | | 79,454 | | | 81,431 | | Europe | 38,962 | | | 41,432 | | | 72,511 | | | 79,454 | |
Australia | Australia | 11,506 | | | 11,246 | | | 25,200 | | | 24,984 | | Australia | 12,422 | | | 11,506 | | | 26,304 | | | 25,200 | |
Total | Total | $ | 73,069 | | | $ | 71,611 | | | $ | 145,927 | | | $ | 150,646 | | Total | $ | 70,566 | | | $ | 73,069 | | | $ | 136,779 | | | $ | 145,927 | |
Total Company | Total Company | | | | | | | | Total Company | | | | | | | |
Americas | Americas | $ | 179,130 | | | $ | 145,170 | | | $ | 365,182 | | | $ | 302,468 | | Americas | $ | 196,075 | | | $ | 179,130 | | | $ | 388,206 | | | $ | 365,182 | |
Europe | Europe | 98,706 | | | 84,205 | | | 193,617 | | | 168,053 | | Europe | 93,759 | | | 98,706 | | | 183,951 | | | 193,617 | |
Asia-Pacific | Asia-Pacific | 40,219 | | | 36,463 | | | 80,731 | | | 72,544 | | Asia-Pacific | 36,415 | | | 40,219 | | | 76,661 | | | 80,731 | |
Total | Total | $ | 318,055 | | | $ | 265,838 | | | $ | 639,530 | | | $ | 543,065 | | Total | $ | 326,249 | | | $ | 318,055 | | | $ | 648,818 | | | $ | 639,530 | |
The following is a summary of segment profit for the three and six months ended January 31, 20222023 and 2021:2022:
| | | Three months ended January 31, | | Six months ended January 31, | | Three months ended January 31, | | Six months ended January 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Segment profit: | Segment profit: | | | | | | | | Segment profit: | | | | | | | |
ID Solutions | $ | 44,129 | | | $ | 39,000 | | | $ | 92,945 | | | $ | 79,279 | | |
Workplace Safety | 4,515 | | | 3,463 | | | 6,808 | | | 11,451 | | |
IDS | | IDS | $ | 47,384 | | | $ | 44,129 | | | $ | 98,909 | | | $ | 92,945 | |
WPS | | WPS | 6,249 | | | 4,515 | | | 12,627 | | | 6,808 | |
Total Company | Total Company | $ | 48,644 | | | $ | 42,463 | | | $ | 99,753 | | | $ | 90,730 | | Total Company | $ | 53,633 | | | $ | 48,644 | | | $ | 111,536 | | | $ | 99,753 | |
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, 20222023 and 2021:2022:
| | | Three months ended January 31, | | Six months ended January 31, | | Three months ended January 31, | | Six months ended January 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Total profit from reportable segments | Total profit from reportable segments | $ | 48,644 | | | $ | 42,463 | | | $ | 99,753 | | | $ | 90,730 | | Total profit from reportable segments | $ | 53,633 | | | $ | 48,644 | | | $ | 111,536 | | | $ | 99,753 | |
Unallocated amounts: | Unallocated amounts: | | Unallocated amounts: | |
Administrative costs | Administrative costs | (5,772) | | | (5,051) | | | (12,546) | | | (11,130) | | Administrative costs | (4,852) | | | (5,772) | | | (11,369) | | | (12,546) | |
Investment and other (expense) income | (578) | | | 2,036 | | | (35) | | | 2,191 | | |
Investment and other income (expense) | | Investment and other income (expense) | 968 | | | (578) | | | 811 | | | (35) | |
Interest expense | Interest expense | (252) | | | (51) | | | (434) | | | (157) | | Interest expense | (1,239) | | | (252) | | | (2,133) | | | (434) | |
Income before income taxes and losses of unconsolidated affiliate | $ | 42,042 | | | $ | 39,397 | | | $ | 86,738 | | | $ | 81,634 | | |
Income before income taxes | | Income before income taxes | $ | 48,510 | | | $ | 42,042 | | | $ | 98,845 | | | $ | 86,738 | |
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, | | Three months ended January 31, | | Six months ended January 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Numerator (in thousands): | Numerator (in thousands): | | | | | | | | 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 | | |
Net income (Numerator for basic and diluted income per Class A Nonvoting Common Share) | | Net income (Numerator for basic and diluted income per Class A Nonvoting Common Share) | $ | 37,986 | | | $ | 33,815 | | | $ | 77,427 | | | $ | 68,861 | |
Less: | Less: | | Less: | |
Preferential dividends | Preferential dividends | — | | | — | | | (803) | | | (808) | | Preferential dividends | — | | | — | | | (769) | | | (803) | |
Preferential dividends on dilutive stock options | Preferential dividends on dilutive stock options | — | | | — | | | (8) | | | (4) | | Preferential dividends on dilutive stock options | — | | | — | | | (4) | | | (8) | |
Numerator for basic and diluted income per Class B Voting Common Share | Numerator for basic and diluted income per Class B Voting Common Share | $ | 33,815 | | | $ | 30,860 | | | $ | 68,050 | | | $ | 63,529 | | Numerator for basic and diluted income per Class B Voting Common Share | $ | 37,986 | | | $ | 33,815 | | | $ | 76,654 | | | $ | 68,050 | |
Denominator: (in thousands) | Denominator: (in thousands) | | | | | | | | Denominator: (in thousands) | | | | | | | |
Denominator for basic income per share for both Class A and Class B | Denominator for basic income per share for both Class A and Class B | 51,800 | | | 52,018 | | | 51,887 | | | 52,020 | | Denominator for basic income per share for both Class A and Class B | 49,745 | | | 51,800 | | | 49,806 | | | 51,887 | |
Plus: Effect of dilutive equity awards | Plus: Effect of dilutive equity awards | 362 | | | 264 | | | 412 | | | 268 | | Plus: Effect of dilutive equity awards | 264 | | | 362 | | | 243 | | | 412 | |
Denominator for diluted income per share for both Class A and Class B | Denominator for diluted income per share for both Class A and Class B | 52,162 | | | 52,282 | | | 52,299 | | | 52,288 | | Denominator for diluted income per share for both Class A and Class B | 50,009 | | | 52,162 | | | 50,049 | | | 52,299 | |
Net income per Class A Nonvoting Common Share: | Net income per Class A Nonvoting Common Share: | | | | | | | | Net income per Class A Nonvoting Common Share: | | | | | | | |
Basic | Basic | $ | 0.65 | | | $ | 0.59 | | | $ | 1.33 | | | $ | 1.24 | | Basic | $ | 0.76 | | | $ | 0.65 | | | $ | 1.55 | | | $ | 1.33 | |
Diluted | Diluted | $ | 0.65 | | | $ | 0.59 | | | $ | 1.32 | | | $ | 1.23 | | Diluted | $ | 0.76 | | | $ | 0.65 | | | $ | 1.55 | | | $ | 1.32 | |
Net income per Class B Voting Common Share: | Net income per Class B Voting Common Share: | | Net income per Class B Voting Common Share: | |
Basic | Basic | $ | 0.65 | | | $ | 0.59 | | | $ | 1.31 | | | $ | 1.22 | | Basic | $ | 0.76 | | | $ | 0.65 | | | $ | 1.54 | | | $ | 1.31 | |
Diluted | Diluted | $ | 0.65 | | | $ | 0.59 | | | $ | 1.30 | | | $ | 1.21 | | Diluted | $ | 0.76 | | | $ | 0.65 | | | $ | 1.53 | | | $ | 1.30 | |
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 471,377634,999 and 829,617471,377 for the three months ended January 31, 20222023 and 2021,2022, respectively, and 475,489609,266 and 785,181475,489 for the six months ended January 31, 20222023 and 2021,2022, 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, 20222023 and July 31, 2021:2022:
| | | January 31, 2022 | | July 31, 2021 | | Fair Value Hierarchy | | January 31, 2023 | | July 31, 2022 | | Fair Value Hierarchy |
Assets: | Assets: | | | | | | Assets: | | | | | |
Deferred compensation plan assets | Deferred compensation plan assets | $ | 20,097 | | | $ | 20,135 | | | Level 1 | Deferred compensation plan assets | $ | 17,558 | | | $ | 18,037 | | | Level 1 |
Foreign exchange contracts | Foreign exchange contracts | 372 | | | 150 | | | Level 2 | Foreign exchange contracts | 1,591 | | | 489 | | | Level 2 |
Liabilities: | Liabilities: | | Liabilities: | |
Foreign exchange contracts | Foreign exchange contracts | 165 | | | 51 | | | Level 2 | Foreign exchange contracts | (116) | | | 32 | | | 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 | | January 31, 2023 | | July 31, 2022 |
Designated as cash flow hedges | Designated as cash flow hedges | $ | 15,374 | | | $ | 30,724 | | Designated as cash flow hedges | $ | 12,651 | | | $ | 25,276 | |
Non-designated hedges | Non-designated hedges | 3,455 | | | 3,580 | | Non-designated hedges | 4,456 | | | 4,057 | |
Total foreign exchange contracts | Total foreign exchange contracts | $ | 18,829 | | | $ | 34,304 | | Total foreign exchange contracts | $ | 17,107 | | | $ | 29,333 | |
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, 20222023 and July 31, 2021,2022, unrealized gains of $263$1,911 and $770$1,040 have been included in OCI, respectively.
Net Investment Hedges
The Company has designated certain third party foreign currency denominated debt borrowed under its credit agreement as net investment hedges. These debt obligations, denominated in Euros and British Pounds, were designated as net investment hedges to hedge portions of the Company's net investment in its European operations. The Company’s foreign currency denominated debt obligations are valued under a market approach using publicized spot prices, and the net gains or losses attributable to the changes in spot prices are recorded as cumulative translation within AOCI and are included in the foreign currency translation adjustments section of the condensed consolidated statements of comprehensive income. As of January 31, 2023 and July 31, 2022, the cumulative balance recognized in accumulated other comprehensive income were losses of $841 and $0, respectively, on any outstanding foreign currency denominated debt obligations.
The following table summarizes the amount of pre-tax gains and losses related to foreign exchange contractsderivatives 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) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended January 31, | | Six months ended January 31, |
| 2023 | | 2022 | | 2023 | | 2022 |
Gains (losses) recognized in OCI: | | | | | | | |
Forward exchange contracts (cash flow hedges) | $ | 776 | | | $ | 225 | | | $ | 1,669 | | | $ | 199 | |
Foreign currency denominated debt (net investment hedges) | (841) | | | — | | | (841) | | | — | |
Gains reclassified from OCI into cost of goods sold | | | | | | | |
Forward exchange contracts (cash flow hedges) | 217 | | | 36 | | | 798 | | | 604 | |
Fair values of derivative instruments in the condensed consolidated balance sheets were as follows:
| | | January 31, 2022 | | July 31, 2021 | | January 31, 2023 | | July 31, 2022 |
| | Prepaid expenses and other current assets | | Other current liabilities | | Prepaid expenses and other current assets | | Other current liabilities | | Prepaid expenses and other current assets | | Other current liabilities | | Long-term obligations | | Prepaid expenses and other current assets | | Other current liabilities |
Derivatives designated as hedging instruments: | Derivatives designated as hedging instruments: | | | | | | | | Derivatives designated as hedging instruments: | | | | | | | | | |
Foreign exchange contracts (cash flow hedges) | Foreign exchange contracts (cash flow hedges) | $ | 372 | | | $ | 153 | | | $ | 150 | | | $ | 51 | | Foreign exchange contracts (cash flow hedges) | $ | 1,564 | | | (116) | | | — | | | $ | 489 | | | $ | 30 | |
Foreign currency denominated debt (net investment hedges) | | Foreign currency denominated debt (net investment hedges) | — | | | — | | | (38,981) | | | — | | | — | |
Derivatives not designated as hedging instruments: | Derivatives not designated as hedging instruments: | | Derivatives not designated as hedging instruments: | |
Foreign exchange contracts (non-designated hedges) | Foreign exchange contracts (non-designated hedges) | — | | | 12 | | | — | | | — | | Foreign exchange contracts (non-designated hedges) | 27 | | | — | | | — | | | — | | | 2 | |
Total derivative instruments | Total derivative instruments | $ | 372 | | | $ | 165 | | | $ | 150 | | | $ | 51 | | Total derivative instruments | $ | 1,591 | | | (116) | | | (38,981) | | | $ | 489 | | | $ | 32 | |
NOTE L — Income Taxes
The income tax rate for the three months ended January 31, 2023 and 2022, was 21.7% and 19.6%, respectively. The income tax rate for the six months ended January 31, 2023 and 2022, was 19.6%21.7% and 20.6%, respectively. The Company expects its ongoing annual income tax rate to be abetweenpproximately 20% and 21% 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
Effective February 1, 2023, the Company announced a modification of its organizational structure under new regional operating segments. Beginning in the third quarter of fiscal 2023, the Company will report sales and segment profit based on the following two operating segments: Americas & Asia and Europe & Australia.
On February 15, 2022,21, 2023, 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$0.23 per share payable on April 29, 2022,28, 2023, to shareholders of record at the close of business on April 8, 2022.10, 2023.
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. TheBrady's long-term sales growth and profitability of our segments will depend not only on improved demand in end markets and the overall economic environment and our ability to successfully navigate changes in the macro environment, but also on our ability to develop and market innovative new products, deliver a high level of customer service, advance our digital capabilities, and 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.operations. 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 newstreamlining our product offerings, enhancing our compliance expertise,and customization expertise, improving our price competitiveness, and improving our digital capabilities.
The following are key initiatives supporting our strategy in fiscal 2022:2023:
•Investing in organic growth by enhancing our research and development process and utilizing customer feedback and observations to develop innovative new products.
•Investing in acquisitionsproducts that enhance our strategic positionsolve customer needs and accelerate long-term sales growth.improve environmental sustainability.
•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 ongoing supply chain disruptions and inflationary pressures.pressures while ensuring prices are market competitive.
•Investing in acquisitions that enhance our strategic position and accelerate long-term sales growth and profitability.
•Driving operational excellence and executing sustainable efficiency gains within our selling, general and administrative structures and within our global operations structures including insourcing of critical products and manufacturing activities.activities while reducing our environmental footprint and managing working capital.
•Building on our culture of diversity, equity and inclusion to increase employee engagement and enhance recruitment and retention practices.practices in order to drive differentiated performance and execute our strategy.
Impact of the COVID-19 Pandemic on Our Business•Executing our reorganization to a regional operating structure to support continued growth in key geographies, facilitate new product development in our recent acquisitions, and simplify and further integrate our businesses.
Macroeconomic Conditions and Trends
The Company has experienced, and expects to continue to experience, increased freightinflationary pressures; labor shortages in certain geographies; supply chain and input material cost inflationother business disruptions as a result of increased global demand,the conflict in Ukraine; as well as disruptions caused by COVID-19 and government-mandated actions in response to COVID-19, and labor shortages.particularly in China. The Company has taken and will continue to take actions to mitigate inflation issues but thus far has not fully offsetthrough pricing actions and the impactexecution 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.sustainable efficiency gains.
We believe we have the financial strength to continue to invest in organic sales growth opportunities inorganicincluding sales, opportunities including acquisitions, sales and marketing, and research and development ("R&D"), and inorganic sales opportunities including acquisitions, while continuing to drive sustainable efficienciesefficiency gains and automation in our operations and selling, general and administrative ("SG&A") functions. At January 31, 2022,2023, we had cash of $147.4$108.2 million, as well as a credit facilityagreement with $115.3$221.1 million available for future borrowing, which can be increased up to $315.3$981.1 million at the Company's option and subject to certain conditions, for total available liquidity of approximately $462.7$1,089.3 million.
We believe that our financial resources and liquidity levels, including the remaining undrawn amount of theour credit facilityagreement and our ability to increase thatour 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 viruseconomic or prevent further spreadgeopolitical events 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, 2021,2022, for further discussion of the possiblepotential impact of global economic or geopolitical events or the COVID-19 pandemic on our business.
Results of Operations
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, 20222023 and 2021,2022, is as follows:
| | | Three months ended January 31, | | Six months ended January 31, | | Three months ended January 31, | | Six months ended January 31, |
(Dollars in thousands) | (Dollars in thousands) | 2022 | | % Sales | | 2021 | | % Sales | | 2022 | | % Sales | | 2021 | | % Sales | (Dollars in thousands) | 2023 | | % Sales | | 2022 | | % Sales | | 2023 | | % Sales | | 2022 | | % Sales |
Net sales | Net sales | $ | 318,055 | | | | | $ | 265,838 | | | | | $ | 639,530 | | | | | $ | 543,065 | | | | Net sales | $ | 326,249 | | | | | $ | 318,055 | | | | | $ | 648,818 | | | | | $ | 639,530 | | | |
Gross margin | Gross margin | 149,362 | | | 47.0 | % | | 129,522 | | | 48.7 | % | | 304,350 | | | 47.6 | % | | 264,950 | | | 48.8 | % | Gross margin | 156,440 | | | 48.0 | % | | 149,362 | | | 47.0 | % | | 311,704 | | | 48.0 | % | | 304,350 | | | 47.6 | % |
Operating expenses: | Operating expenses: | | Operating expenses: | |
Research and development | Research and development | 13,965 | | | 4.4 | % | | 9,876 | | | 3.7 | % | | 27,872 | | | 4.4 | % | | 20,079 | | | 3.7 | % | Research and development | 15,377 | | | 4.7 | % | | 13,965 | | | 4.4 | % | | 29,310 | | | 4.5 | % | | 27,872 | | | 4.4 | % |
Selling, general and administrative | Selling, general and administrative | 92,525 | | | 29.1 | % | | 82,234 | | | 30.9 | % | | 189,271 | | | 29.6 | % | | 165,271 | | | 30.4 | % | Selling, general and administrative | 92,282 | | | 28.3 | % | | 92,525 | | | 29.1 | % | | 182,227 | | | 28.1 | % | | 189,271 | | | 29.6 | % |
Total operating expenses | Total operating expenses | 106,490 | | | 33.5 | % | | 92,110 | | | 34.6 | % | | 217,143 | | | 34.0 | % | | 185,350 | | | 34.1 | % | Total operating expenses | 107,659 | | | 33.0 | % | | 106,490 | | | 33.5 | % | | 211,537 | | | 32.6 | % | | 217,143 | | | 34.0 | % |
Operating income | Operating income | $ | 42,872 | | | 13.5 | % | | $ | 37,412 | | | 14.1 | % | | $ | 87,207 | | | 13.6 | % | | $ | 79,600 | | | 14.7 | % | Operating income | $ | 48,781 | | | 15.0 | % | | $ | 42,872 | | | 13.5 | % | | $ | 100,167 | | | 15.4 | % | | $ | 87,207 | | | 13.6 | % |
References in this Form 10-Q to “organic sales” refer to sales calculated in accordance with GAAP, excluding the impact of foreign currency translation 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.acquisition. The Company's organic sales disclosures exclude the effects of foreign currency translation as foreign currency translation is subject to volatility that can obscure underlying business trends. Management believes that the non-GAAP financial measure of organic sales is meaningful to investors as it provides them with useful information to aid in identifying underlying sales trends in our businesses and facilitating comparisons of our sales performance with prior periods.
Net sales for the three months ended January 31, 2022,2023 increased 19.6%2.6% to $318.1$326.2 million, compared to $265.8$318.1 million in the same period in the prior year. The increase consisted of organic sales growth of 13.1%6.3%, sales growth from acquisitions of 8.6% andwhich was partially offset by a decrease from foreign currency translation of 2.1%3.7%. Organic sales grew 16.0%7.4% in the IDS segment and 5.2%2.8% in the WPS segment during the three months ended January 31, 2022,2023 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, 2022,2023 increased 17.8%1.5% to $639.5$648.8 million, compared to $543.1$639.5 million in the same period in the prior year. The increase consisted of organic sales growth of 10.0%6.6%, sales growth from acquisitions of 8.5% andwhich was partially offset by a decrease from foreign currency translation of 0.7%5.1%. Organic sales increased 14.6%8.0% in the IDS segment and declined 2.0% in the WPS segment during the six months ended January 31, 2022,2023 compared to the same period in the prior year.
Gross margin increased 15.3%4.7% to $149.4$156.4 million in the three months ended January 31, 2022,2023 compared to $129.5$149.4 million in the same period in the prior year. As a percentage of net sales, gross margin decreasedincreased to 48.0% from 47.0% compared to 48.7% in the same period in the prior year.three-month period. Gross margin increased 14.9%2.4% to $304.4$311.7 million for the six months ended January 31, 2022,2023 compared to $265.0$304.4 million in the same period in the prior year. As a percentage of net sales, gross margin decreasedincreased to 48.0% from 47.6% compared to 48.8% in the same period in the prior year.six-month period. The decreaseincrease in gross margin as a percentage of net sales was primarily due to our ongoing efforts to streamline manufacturing processes to drive sustainable operating efficiencies as well as price increases, which were partially offset by 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.labor.
R&D expenses increased 41.4%10.1% to $15.4 million in the three months ended January 31, 2023 compared to $14.0 million andin the same period in the prior year. As a percentage of net sales, R&D expenses increased 38.8% to $27.94.7% from 4.4% in the three-month period. R&D expenses increased 5.2% to $29.3 million forin the three and six months ended January 31, 2022, respectively,2023 compared to $9.9 million and $20.1$27.9 million in the same periodsperiod 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 asAs a percentage of net sales, comparedR&D expenses increased slightly to Brady's organic
business. In addition, R&D headcount increased4.5% from 4.4% in the IDS business.six-month period. 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 buildingbuild out of a comprehensive industrial track and trace solution continue to besolutions remain the primary focus of R&D expenditures for the remainder of fiscal 2022.2023.
SG&A expenses include selling and administrative costs directly attributed to the IDS and WPS segments, as well as certain other general andcorporate administrative expenses including finance, information technology, human resources, and other administrative expenses. SG&A expenses increased 12.5%decreased 0.3% to $92.5$92.3 million in the three months ended January 31, 2022,2023 compared to $82.2$92.5 million in the same period in the prior year. As a percentage of net sales, SG&A decreased to 28.3% from 29.1% compared to 30.9% in the same period in the prior year. The increase inthree-month period. SG&A expenses was primarily duedecreased 3.7% 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$182.2 million for the six months ended January 31, 2022,2023 compared to $165.3$189.3 million in the same period in the prior year. As a percentage of net sales, SG&A expense decreased to 29.6%28.1% from 30.4%29.6% in the same period in the prior year.six-month period. The increasedecrease in SG&A expenseexpenses for the three and six-month periods ended January 31, 2023 was primarily due to the acquisitions of Code, Magicard and Nordic ID,foreign currency translation and, to a lesser extent, an increasereductions in personnel costs andcatalog advertising costs in bothexpenses within 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.segment.
Operating income increased 14.6%13.8% to $42.9$48.8 million and increased 9.6%14.9% to $87.2$100.2 million for the three and six months ended January 31, 2022,2023, respectively, compared to $37.4$42.9 million and $79.6$87.2 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.growth, and an increase in segment profit in the WPS segment due to its reduced cost structure.
OPERATING INCOME TO NET INCOME
| | | Three months ended January 31, | | Six months ended January 31, | | Three months ended January 31, | | Six months ended January 31, |
(Dollars in thousands) | (Dollars in thousands) | 2022 | | % Sales | | 2021 | | % Sales | | 2022 | | % Sales | | 2021 | | % Sales | (Dollars in thousands) | 2023 | | % Sales | | 2022 | | % Sales | | 2023 | | % Sales | | 2022 | | % Sales |
Operating income | Operating income | $ | 42,872 | | | 13.5 | % | | $ | 37,412 | | | 14.1 | % | | $ | 87,207 | | | 13.6 | % | | $ | 79,600 | | | 14.7 | % | Operating income | $ | 48,781 | | | 15.0 | % | | $ | 42,872 | | | 13.5 | % | | $ | 100,167 | | | 15.4 | % | | $ | 87,207 | | | 13.6 | % |
Other (expense) income: | | |
Investment and other (expense) income | (578) | | | (0.2) | % | | 2,036 | | | 0.8 | % | | (35) | | | — | % | | 2,191 | | | 0.4 | % | |
Other income (expense): | | Other income (expense): | |
Investment and other income (expense) | | Investment and other income (expense) | 968 | | | 0.3 | % | | (578) | | | (0.2) | % | | 811 | | | 0.1 | % | | (35) | | | (0.0) | % |
Interest expense | Interest expense | (252) | | | (0.1) | % | | (51) | | | — | % | | (434) | | | (0.1) | % | | (157) | | | — | % | Interest expense | (1,239) | | | (0.4) | % | | (252) | | | (0.1) | % | | (2,133) | | | (0.3) | % | | (434) | | | (0.1) | % |
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 before income taxes | | Income before income taxes | 48,510 | | | 14.9 | % | | 42,042 | | | 13.2 | % | | 98,845 | | | 15.2 | % | | 86,738 | | | 13.6 | % |
Income tax expense | Income tax expense | 8,227 | | | 2.6 | % | | 8,206 | | | 3.1 | % | | 17,877 | | | 2.8 | % | | 16,788 | | | 3.1 | % | Income tax expense | 10,524 | | | 3.2 | % | | 8,227 | | | 2.6 | % | | 21,418 | | | 3.3 | % | | 17,877 | | | 2.8 | % |
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 | Net income | $ | 33,815 | | | 10.6 | % | | $ | 30,860 | | | 11.6 | % | | $ | 68,861 | | | 10.8 | % | | $ | 64,341 | | | 11.8 | % | Net income | $ | 37,986 | | | 11.6 | % | | $ | 33,815 | | | 10.6 | % | | $ | 77,427 | | | 11.9 | % | | $ | 68,861 | | | 10.8 | % |
Investment and other (expense) income was a net$1.0 million and $0.8 million for the three and six months ended January 31, 2023, respectively, compared to investment and other expense of $0.6 million and investment and other (expense)$0.0 million in the same periods in the prior year. The increase in income was a net income of $2.0 million forduring 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 periodperiods was primarily due to a decreasean increase in the market value of securities held in deferred compensation plans.plans and to a lesser extent an increase in interest income.
Interest expense increased to $0.3$1.2 million and $0.4$2.1 million for the three and six months ended January 31, 2022,2023, respectively, compared to $0.1$0.3 million and $0.2$0.4 million in the same periods in the prior year. The increase in interest expense for both the three and six-month periods was primarily due to increased borrowing on our credit facilityan increase in benchmark interest rates compared to the same periodperiods in the prior year.
The Company's income tax rate was 19.6%21.7% and 20.8%19.6% for the three months ended January 31, 20222023 and 2021,2022, respectively, and the income tax rate was 21.7% and 20.6% for both of the six months ended January 31, 2023 and 2022, and 2021.respectively. 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 income (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, 20222023 and 2021:2022:
| | | Three months ended January 31, | | Six months ended January 31, | | Three months ended January 31, | | Six months ended January 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
SALES GROWTH INFORMATION | SALES GROWTH INFORMATION | | | | | | | | SALES GROWTH INFORMATION | | | | | | | |
ID Solutions | | |
IDS | | IDS | |
Organic | Organic | 16.0 | % | | (6.9) | % | | 14.6 | % | | (7.6) | % | Organic | 7.4 | % | | 16.0 | % | | 8.0 | % | | 14.6 | % |
Currency | | Currency | (3.0) | % | | (1.7) | % | | (4.3) | % | | (0.5) | % |
Acquisitions | Acquisitions | 11.8 | % | | — | % | | 11.7 | % | | — | % | Acquisitions | — | % | | 11.8 | % | | — | % | | 11.7 | % |
Currency | (1.7) | % | | 1.5 | % | | (0.5) | % | | 1.0 | % | |
Total | Total | 26.1 | % | | (5.4) | % | | 25.8 | % | | (6.6) | % | Total | 4.4 | % | | 26.1 | % | | 3.7 | % | | 25.8 | % |
Workplace Safety | | | | | | | | |
WPS | | WPS | | | | | | | |
Organic | Organic | 5.2 | % | | (4.8) | % | | (2.0) | % | | 0.4 | % | Organic | 2.8 | % | | 5.2 | % | | 2.0 | % | | (2.0) | % |
Currency | Currency | (3.2) | % | | 5.2 | % | | (1.1) | % | | 4.8 | % | Currency | (6.2) | % | | (3.2) | % | | (8.3) | % | | (1.1) | % |
Total | Total | 2.0 | % | | 0.4 | % | | (3.1) | % | | 5.2 | % | Total | (3.4) | % | | 2.0 | % | | (6.3) | % | | (3.1) | % |
Total Company | Total Company | | | | | | | | Total Company | | | | | | | |
Organic | Organic | 13.1 | % | | (6.3) | % | | 10.0 | % | | (5.6) | % | Organic | 6.3 | % | | 13.1 | % | | 6.6 | % | | 10.0 | % |
Currency | | Currency | (3.7) | % | | (2.1) | % | | (5.1) | % | | (0.7) | % |
Acquisitions | Acquisitions | 8.6 | % | | — | % | | 8.5 | % | | — | % | Acquisitions | — | % | | 8.6 | % | | — | % | | 8.5 | % |
Currency | (2.1) | % | | 2.4 | % | | (0.7) | % | | 2.0 | % | |
Total | Total | 19.6 | % | | (3.9) | % | | 17.8 | % | | (3.6) | % | Total | 2.6 | % | | 19.6 | % | | 1.5 | % | | 17.8 | % |
SEGMENT PROFIT | SEGMENT PROFIT | | | | | | | | SEGMENT PROFIT | | | | | | | |
ID Solutions | $ | 44,129 | | | $ | 39,000 | | | $ | 92,945 | | | $ | 79,279 | | |
Workplace Safety | 4,515 | | | 3,463 | | | 6,808 | | | 11,451 | | |
IDS | | IDS | $ | 47,384 | | | $ | 44,129 | | | $ | 98,909 | | | $ | 92,945 | |
WPS | | WPS | 6,249 | | | 4,515 | | | 12,627 | | | 6,808 | |
Total | Total | $ | 48,644 | | | $ | 42,463 | | | $ | 99,753 | | | $ | 90,730 | | Total | $ | 53,633 | | | $ | 48,644 | | | $ | 111,536 | | | $ | 99,753 | |
SEGMENT PROFIT AS A PERCENT OF NET SALES | SEGMENT PROFIT AS A PERCENT OF NET SALES | | | | | | | | 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 | % | |
IDS | | IDS | 18.5 | % | | 18.0 | % | | 19.3 | % | | 18.8 | % |
WPS | | WPS | 8.9 | % | | 6.2 | % | | 9.2 | % | | 4.7 | % |
Total | Total | 15.3 | % | | 16.0 | % | | 15.6 | % | | 16.7 | % | Total | 16.4 | % | | 15.3 | % | | 17.2 | % | | 15.6 | % |
ID SolutionsIDS
IDS net sales increased 26.1%4.4% to $245.0$255.7 million for the three months ended January 31, 2022,2023 compared to $194.2$245.0 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%7.4% and a decrease from foreign currency translation of 1.7%3.0%. IDS net sales increased 25.8%3.7% to $493.6$512.0 million for the six months ended January 31, 2022,2023 compared to $392.4$493.6 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%8.0% and a decrease from foreign currency translation of 0.5%4.3%. Organic sales grew in all major product lines with the strongest growth in the safety and facility identification and wire identification product lines, followed by growth in healthcare identification and healthcareproduct 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, 2022,2023.
Organic sales in the Americas increased approximately 11% in the three months ended January 31, 2023 and increased in the high-single digits in the six months ended January 31, 2023 compared to the same periods in the prior year. Organic sales grew in all major product lines in the Americas with the strongest growth in the safety and facility identification and product identification product lines.
Organic sales in Europe increased in the mid-single digits in the three months ended January 31, 2023 and increased approximately 12% in the six months ended January 31, 2023 compared to the same periods in the prior year. Organic sales grew in all geographies as our businesses continuemajor product lines in Europe in both the three and six-month periods with the strongest growth in the product identification product line followed by growth in the safety and facility identification and wire identification product lines.
Organic sales in Asia declined in the high-single digits in the three months ended January 31, 2023 and declined in the low-single digits in the six months ended January 31, 2023 compared to recover from the economic slowdown causedsame periods in the prior year. The organic sales decline was primarily driven by decreased sales in China due to the spread of COVID-19 pandemic.during the three-month period. The organic sales declines in China were partially offset by strong sales growth in India and Japan during both the three and six-month periods.
Segment profit increased 13.2%7.4% to $44.1$47.4 million for the three months ended January 31, 2022,2023 compared to $39.0$44.1 million in the same period in the prior year. Segment profit increased 17.2%6.4% to $92.9$98.9 million for the six months ended January 31, 2022,2023 compared to $79.3$92.9 million in the same period in the prior year. As a percentage of net sales, segment profit decreasedincreased to 18.0%18.5% from 20.1%18.0% for the three-month period, and segment profit decreasedincreased to 18.8%19.3% from 20.2%18.8% for the six-month period ended
January 31, 20222023 compared to the same periods in the prior year. The decreaseincrease in segment profit as a percentage of net sales was primarily due to gross margin compression resulting fromongoing efforts to streamline processes to drive operational efficiencies as well as price increases, which were partially offset by 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, comparedcosts due to the same periods in the prior year.inflationary pressures.
Workplace SafetyWPS
WPS net sales increased 2.0%declined 3.4% to $73.1$70.6 million for the three months ended January 31, 2022,2023 compared to $71.6$73.1 million in the same period in the prior year, which consisted of organic sales growth of 5.2%2.8% and a decrease from foreign currency translation of 3.2%6.2%. BothOrganic digital sales and catalog channelincreased approximately 12% while organic sales increased in the mid-single digits organically infrom all other channels, including catalogs, were flat during the three-month period ended January 31, 2022.2023.
WPS net sales decreased 3.1%declined 6.3% to $145.9$136.8 million for the six months ended January 31, 2022,2023 compared to $150.6$145.9 million in the same period in the prior year, which consisted of an organic sales declinegrowth of 2.0% and a decrease from foreign currency translation of 1.1%8.3%. The economic effect of the COVID-19 pandemic had a significant impact onOrganic digital sales increased by approximately 13% while 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 andfrom all 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 saleschannels, including catalogs, decreased in the low-single digits organically in the six-month period ended January 31, 2022.2023.
Organic sales in Europe increased in the high-singlelow-single digits in both the three and six months ended January 31, 2022,2023 compared to the same periodperiods in the prior year. Organic digital sales in Europeincreased approximately 12% while organic sales from all other channels, including catalogs, were essentially flat in both the six monthsthree and six-month periods 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, 2022.2023.
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 sixthree months ended January 31, 2022,2023 compared to the same period in the prior year. DigitalOrganic digital sales decreasedincreased approximately 13% while organic sales from all other channels, including catalogs, declined nearly 20% during the three months ended January 31, 2023. Organic sales in the mid-single digits and catalog channel sales decreasedNorth America declined 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 threesix months ended January 31, 2022 and increased in the low-single digits in the six-month period ended January 31, 2022,2023 compared to the same period in the prior year. DigitalOrganic digital sales increased nearly 20% which was more than offset by a decline of nearly 20% in organic sales from all other channels, including catalogs, in the six-month period ended January 31, 2023.
Organic sales in Australia increased in the high-single digitsmid-teens in both the three and catalog channel sales increased in the mid-single digits in the threesix months ended January 31, 2022,2023 compared to the same periodperiods in the prior year. DigitalOrganic sales were essentially flatdriven by consistent growth in both digital and catalog channel sales increasedfrom all other channels, including catalogs, in both the low-single digits inthree and six-month periods, which was primarily the result of price increases implemented throughout the six months ended January 31, 2022, compared to the same period in the prior year.2023.
Segment profit increased 30.4%38.4% to $4.5$6.2 million from $3.5$4.5 million, and as a percentage of net sales, segment profit increased to 6.2%8.9% from 4.8%6.2% for the three months ended January 31, 2022,2023 compared to the same period in the prior year. Segment profit increased 85.5% to $12.6 million from $6.8 million and as a percentage of net sales, segment profit increased to 9.2% from 4.7% for the six months ended January 31, 2023 compared to the same period in the prior year. The increase in segment profit in the three-month periodfor both periods was primarily due to actions taken during fiscal 2022 to reduce 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 yearcost structure as well as gross margin compression due to an increaseongoing reductions in the cost of materials, labor and freight.catalog advertising expenses.
Liquidity and Capital Resources
The Company's cash balances are generated and held in numerous locations throughout the world. At January 31, 2022,2023, approximately 93%99% 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 Flows
Cash and cash equivalents were $147.4$108.2 million at January 31, 2022, an increase2023, a decrease of $0.1$5.9 million from July 31, 2021.2022. The significant changes were as follows:
| | | Six months ended January 31, | | Six months ended January 31, |
(Dollars in thousands) | (Dollars in thousands) | 2022 | | 2021 | (Dollars in thousands) | 2023 | | 2022 |
Net cash flow provided by (used in): | Net cash flow provided by (used in): | | | | Net cash flow provided by (used in): | | | |
Operating activities | Operating activities | $ | 24,328 | | | $ | 98,889 | | Operating activities | $ | 57,384 | | | $ | 24,328 | |
Investing activities | Investing activities | (16,381) | | | (16,392) | | Investing activities | (8,156) | | | (16,381) | |
Financing activities | Financing activities | (4,505) | | | (28,828) | | Financing activities | (57,128) | | | (4,505) | |
Effect of exchange rate changes on cash | Effect of exchange rate changes on cash | (3,370) | | | 6,276 | | Effect of exchange rate changes on cash | 2,041 | | | (3,370) | |
Net increase in cash and cash equivalents | $ | 72 | | | $ | 59,945 | | |
Net (decrease) increase in cash and cash equivalents | | Net (decrease) increase in cash and cash equivalents | $ | (5,859) | | | $ | 72 | |
Net cash provided by operating activities was $24.3$57.4 million for the six months ended January 31, 2022,2023 compared to $98.9$24.3 million in the same period of the prior year. The decreaseincrease in cash provided by operating activities was primarily due to cash outflows forreduced inventory purchases compared to increased inventory purchases in the prior year 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$8.2 million in both the six months ended January 31, 2022 and 2021,2023 compared to $16.4 million in the same period of the prior year, which consisted primarily of capital expenditures in both periods. Prior year capital expenditures were elevated due to the purchase of two facilities that were previously leased.
Net cash used in financing activities was $4.5$57.1 million in the six months ended January 31, 2022, which consisted2023 compared to $4.5 million in the same period of dividend paymentsthe prior year. The increase in cash used by financing activities was primarily due to $17.7 million 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 borrowingrepayments on the credit facility. Net cash used in financing activitiesagreement in the six months ended January 31, 20212023 compared to $45.0 million of $28.8 million primarily consistednet borrowings on the credit agreement in the same period of dividend paymentsthe prior year, which was due to the increase in net cash provided by operating activities in the current six-month period.
Material Cash Requirements
Our material cash requirements for known contractual obligations include capital expenditures, borrowings on our credit agreement and lease obligations. We believe that net cash provided by operating activities will continue to be adequate to meet our liquidity and capital needs for these items over the next 12 months and in the long-term beyond the next 12 months. We also have cash requirements for purchase orders and contracts for the purchase of $22.8 millioninventory and share repurchasesother goods and services, which are based on current and anticipated customer needs and are fulfilled by our suppliers within short time horizons. We do not have significant agreements for the purchase of $3.6 million.inventory or other goods or services specifying minimum order quantities. In addition, we may have liabilities for uncertain tax positions, but we do not believe that the cash requirements to meet any of these liabilities will be material.
Credit FacilitiesAgreement
On August 1, 2019, the Company and certain of its subsidiaries entered into an unsecured $200 million multi-currency revolving loancredit 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 loancredit agreement which amends the revolving loan agreement dated as of August 1, 2019. The amendment amendsmodified the revolving loancredit agreement to, among other things, (a) change the interest rate under the revolving loancredit 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 loancredit 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 loancredit agreement did not have a material impact on the interest rate or related balances in the Company's consolidated financial statements.
On November 14, 2022, the Company and certain of its subsidiaries entered into a Second Amendment to Credit Agreement (“Amendment No. 2”) with a group of six banks, which amended the original credit agreement dated August 1, 2019. Amendment No. 2 amended the credit agreement to, among other items, (a) increase the lending commitments by $100 million for total lending commitments of $300 million, (b) extend the final maturity date to November 14, 2027, (c) increase the
interest rate on certain borrowings by 0.125%, and (d) increase the available amount under the credit agreement, at the Company's option and subject to certain conditions, from $300 million up to (i) an amount equal to the incremental borrowing necessary to bring the Company's consolidated net debt-to-EBITDA ratio as defined in the credit agreement to 2.5 to 1.0 plus (ii) $200 million. Borrowings under Amendment No. 2 are unsecured and are guaranteed by certain of the Company's domestic subsidiaries.
As of January 31, 2022,2023, the outstanding balance on the Company's revolving loancredit agreement was $83.0$77.3 million. The maximum amount outstanding on the credit facilityagreement during the six months ended January 31, 20222023 was $93.4$103.0 million. TheAs of January 31, 2023, the U.S. dollar-denominated borrowings of $38.3 million bear interest at 0.86% as5.6%; the Euro-denominated borrowings of January 31, 2022.€20.0 million bear interest at 2.9%; and the British Pound-denominated borrowings of £17.3 million bear interest at 4.3% for a weighted average interest rate of 4.5%. The Company had letters of credit outstanding under the loancredit agreement of $1.7$1.6 million as of January 31, 2022,2023, and there was $115.3$221.1 million available for future borrowing, which can be increased to $315.3$981.1 million at the Company's option, subject to certain conditions. The revolving loancredit agreement has a final maturity date of August 1, 2024.November 14, 2027. As such, borrowings were classified as long-term on the condensed consolidated balance sheets.
Covenant Compliance
The Company's revolving loancredit 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,credit agreement, 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, 2022,2023, the Company was in compliance with these financial covenants, with a ratio of debt to EBITDA, as defined by the agreements,agreement, equal to 0.330.31 to 1.0 and the interest expense coverage ratio equal to 322.785.9 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 impactsIncreased cost of the novel coronavirus ("COVID-19") pandemic or other pandemicsraw materials, labor and freight as well as raw material shortages and supply chain disruptions
•Decreased demand for the Company's products
•Ability to compete effectively or to successfully execute itsthe Company's 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
•Adverse impacts of the novel coronavirus ("COVID-19") pandemic or other pandemics
•Difficulties in protecting websites, networks, and systems against security breaches and difficulties in preventing phishing attacks, social engineering or malicious break-ins
•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, 2021.2022.
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 reportAnnual Report on Form 10-K for the year ended July 31, 2021.2022. There has been no material change in this information since July 31, 2021.2022.
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.
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
The Company’s business, results of operations, financial condition, and cash flows are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors” of Company’s Annual Report on Form 10-K for the year ended July 31, 2022. There have been no material changes from the risk factors set forth in the 2022 Form 10-K.
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 planrepurchase program 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’sMay 24, 2022, the Company'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 currentCompany's share repurchase program, has no expiration date.authorizing the repurchase of up to $100.0 million of the Company's Class A Nonvoting Common Stock. As of January 31, 2022, 1,569,2442023, there were $67.1 million worth of shares remained authorized to purchase in connection with thisremaining pursuant to the existing 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, 2022:2023:
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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 |
November 1, 2021 - November 30, 2021 | | 43,277 | | | $ | 49.90 | | | 43,277 | | | 1,581,723 | |
December 1, 2021 - December 31, 2021 | | — | | | — | | | — | | | 1,581,723 | |
January 1, 2022 - January 31, 2022 | | 12,479 | | | 50.98 | | | 12,479 | | | 1,569,244 | |
Total | | 55,756 | | | $ | 50.14 | | | 55,756 | | | 1,569,244 | |
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Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan (Dollars in Thousands) |
November 1, 2022 - November 30, 2022 | | — | | | $ | — | | | — | | | $ | 72,939 | |
December 1, 2022 - December 31, 2022 | | 123,321 | | | 46.92 | | | 123,321 | | | 67,153 | |
January 1, 2023 - January 31, 2023 | | 100 | | | 45.99 | | | 100 | | | 67,148 | |
Total | | 123,421 | | | $ | 46.92 | | | 123,421 | | | $ | 67,148 | |
ITEM 6. EXHIBITS
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Exhibit No. | | Exhibit Description |
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10.1 | | |
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10.2 | | |
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10.3 | | |
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31.1 | | |
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31.2 | | |
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32.1 | | |
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32.2 | | |
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101.INS | | 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.) |
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101.SCH | | XBRL Taxonomy Schema Document |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | XBRL Taxonomy Presentation Label Linkbase Document |
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104 | | Cover Page Inline XBRL data (contained in Exhibit 101) |
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* | Management contract or compensatory plan or arrangement |
SIGNATURES
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.
SIGNATURES | | | | | | | | | | | | | | | | | | | | |
| | | | | | BRADY CORPORATION |
| | | |
Date: February 17, 202224, 2023 | | | | | | /s/ J. MICHAEL NAUMANRUSSELL R. SHALLER |
| | | | | | J. Michael NaumanRussell R. Shaller |
| | | | | | President and Chief Executive Officer |
| | | | | | (Principal Executive Officer) |
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Date: February 17, 202224, 2023 | | | | | | /s/ AARON J. PEARCE |
| | | | | | Aaron J. Pearce |
| | | | | | Chief Financial Officer and Treasurer |
| | | | | | (Principal Financial Officer) |