UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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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 April 30,October 31, 2022
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number 1-14959
BRADY CORPORATION
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Wisconsin | | 39-0178960 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
6555 West Good Hope Road
Milwaukee, Wisconsin 53233
(Address of principal executive offices and zip code)
(414) 358-6600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
Class A Nonvoting Common Stock, par value $0.01 per share | BRC | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | | ☑ | Accelerated filer | | ☐ | Emerging growth company | | ☐ |
Non-accelerated filer | | ☐ | Smaller reporting company | | ☐ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of May 24,November 15, 2022, there were 46,687,05046,200,742 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)
| | | April 30, 2022 | | July 31, 2021 | | October 31, 2022 | | July 31, 2022 |
| | (Unaudited) | | | | (Unaudited) | | |
ASSETS | ASSETS | | ASSETS | |
Current assets: | Current assets: | | Current assets: | |
Cash and cash equivalents | Cash and cash equivalents | $ | 103,068 | | | $ | 147,335 | | Cash and cash equivalents | $ | 114,471 | | | $ | 114,069 | |
Accounts receivable, net of allowances for credit losses of $7,891 and $7,306, respectively | 186,843 | | | 170,579 | | |
Accounts receivable, net of allowance for credit losses of $6,938 and $7,355, respectively | | Accounts receivable, net of allowance for credit losses of $6,938 and $7,355, respectively | 180,183 | | | 183,233 | |
Inventories | Inventories | 177,156 | | | 136,107 | | Inventories | 195,695 | | | 190,023 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | 12,550 | | | 11,083 | | Prepaid expenses and other current assets | 12,902 | | | 10,743 | |
Total current assets | Total current assets | 479,617 | | | 465,104 | | Total current assets | 503,251 | | | 498,068 | |
Property, plant and equipment—net | Property, plant and equipment—net | 125,014 | | | 121,741 | | Property, plant and equipment—net | 136,320 | | | 139,511 | |
Goodwill | Goodwill | 591,780 | | | 614,137 | | Goodwill | 579,404 | | | 586,832 | |
Other intangible assets | Other intangible assets | 78,238 | | | 92,334 | | Other intangible assets | 69,494 | | | 74,028 | |
Deferred income taxes | Deferred income taxes | 14,804 | | | 16,343 | | Deferred income taxes | 15,061 | | | 15,881 | |
Operating lease assets | Operating lease assets | 30,466 | | | 41,880 | | Operating lease assets | 27,244 | | | 31,293 | |
Other assets | Other assets | 24,325 | | | 26,217 | | Other assets | 19,855 | | | 21,719 | |
Total | Total | $ | 1,344,244 | | | $ | 1,377,756 | | Total | $ | 1,350,629 | | | $ | 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 | $ | 79,567 | | | $ | 82,152 | | Accounts payable | $ | 79,604 | | | $ | 81,116 | |
Accrued compensation and benefits | Accrued compensation and benefits | 70,195 | | | 81,173 | | Accrued compensation and benefits | 57,095 | | | 76,764 | |
Taxes, other than income taxes | Taxes, other than income taxes | 12,910 | | | 13,054 | | Taxes, other than income taxes | 13,495 | | | 12,539 | |
Accrued income taxes | Accrued income taxes | 4,264 | | | 3,915 | | Accrued income taxes | 13,943 | | | 8,294 | |
Current operating lease liabilities | Current operating lease liabilities | 15,619 | | | 17,667 | | Current operating lease liabilities | 14,126 | | | 15,003 | |
Other current liabilities | Other current liabilities | 61,215 | | | 59,623 | | Other current liabilities | 65,350 | | | 61,458 | |
Total current liabilities | Total current liabilities | 243,770 | | | 257,584 | | Total current liabilities | 243,613 | | | 255,174 | |
Long-term debt | Long-term debt | 77,000 | | | 38,000 | | Long-term debt | 99,000 | | | 95,000 | |
Long-term operating lease liabilities | Long-term operating lease liabilities | 17,591 | | | 28,347 | | Long-term operating lease liabilities | 15,558 | | | 19,143 | |
Other liabilities | Other liabilities | 91,645 | | | 90,797 | | Other liabilities | 80,733 | | | 86,717 | |
Total liabilities | Total liabilities | 430,006 | | | 414,728 | | Total liabilities | 438,904 | | | 456,034 | |
Stockholders’ equity: | Stockholders’ equity: | | Stockholders’ equity: | |
Class A nonvoting common stock—Issued 51,261,487 shares, and outstanding 46,890,714 and 48,528,245 shares, respectively | 513 | | | 513 | | |
Class A nonvoting common stock—Issued 51,261,487 shares, and outstanding 46,176,267 and 46,370,708 shares, respectively | | Class A nonvoting common stock—Issued 51,261,487 shares, and outstanding 46,176,267 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 | 343,854 | | | 339,125 | | Additional paid-in capital | 346,064 | | | 345,266 | |
Retained earnings | Retained earnings | 862,583 | | | 788,369 | | Retained earnings | 920,482 | | | 892,417 | |
Treasury stock—4,370,773 and 2,733,242 shares, respectively, of Class A nonvoting common stock, at cost | (193,859) | | | (109,061) | | |
Treasury stock—5,085,220 and 4,890,779 shares, respectively, of Class A nonvoting common stock, at cost | | Treasury stock—5,085,220 and 4,890,779 shares, respectively, of Class A nonvoting common stock, at cost | (228,855) | | | (217,856) | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (98,888) | | | (55,953) | | Accumulated other comprehensive loss | (126,514) | | | (109,077) | |
Total stockholders’ equity | Total stockholders’ equity | 914,238 | | | 963,028 | | Total stockholders’ equity | 911,725 | | | 911,298 | |
Total | Total | $ | 1,344,244 | | | $ | 1,377,756 | | Total | $ | 1,350,629 | | | $ | 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 April 30, | | Nine months ended April 30, | | Three months ended October 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Net sales | Net sales | $ | 338,551 | | | $ | 295,503 | | | $ | 978,081 | | | $ | 838,568 | | Net sales | $ | 322,569 | | | $ | 321,475 | |
Cost of goods sold | Cost of goods sold | 174,525 | | | 146,656 | | | 509,705 | | | 424,771 | | Cost of goods sold | 167,305 | | | 166,487 | |
Gross margin | Gross margin | 164,026 | | | 148,847 | | | 468,376 | | | 413,797 | | Gross margin | 155,264 | | | 154,988 | |
Operating expenses: | Operating expenses: | | Operating expenses: | |
Research and development | Research and development | 14,923 | | | 11,305 | | | 42,795 | | | 31,384 | | Research and development | 13,933 | | | 13,907 | |
Selling, general and administrative | Selling, general and administrative | 96,214 | | | 90,817 | | | 285,485 | | | 256,088 | | Selling, general and administrative | 89,945 | | | 96,746 | |
Total operating expenses | Total operating expenses | 111,137 | | | 102,122 | | | 328,280 | | | 287,472 | | Total operating expenses | 103,878 | | | 110,653 | |
Operating income | Operating income | 52,889 | | | 46,725 | | | 140,096 | | | 126,325 | | Operating income | 51,386 | | | 44,335 | |
Other (expense) income: | Other (expense) income: | | Other (expense) income: | |
Investment and other (expense) income | Investment and other (expense) income | (1,308) | | | 1,181 | | | (1,343) | | | 3,372 | | Investment and other (expense) income | (157) | | | 543 | |
Interest expense | Interest expense | (329) | | | (131) | | | (763) | | | (288) | | Interest expense | (894) | | | (182) | |
Income before income taxes and losses of unconsolidated affiliate | 51,252 | | | 47,775 | | | 137,990 | | | 129,409 | | |
Income before income taxes | | Income before income taxes | 50,335 | | | 44,696 | |
Income tax expense | Income tax expense | 11,198 | | | 10,229 | | | 29,075 | | | 27,017 | | Income tax expense | 10,894 | | | 9,650 | |
Income before losses of unconsolidated affiliate | 40,054 | | | 37,546 | | | 108,915 | | | 102,392 | | |
Equity in losses of unconsolidated affiliate | — | | | (255) | | | — | | | (760) | | |
Net income | Net income | $ | 40,054 | | | $ | 37,291 | | | $ | 108,915 | | | $ | 101,632 | | Net income | $ | 39,441 | | | $ | 35,046 | |
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 | $ | 0.78 | | | $ | 0.72 | | | $ | 2.11 | | | $ | 1.95 | | Basic | $ | 0.79 | | | $ | 0.67 | |
Diluted | Diluted | $ | 0.78 | | | $ | 0.71 | | | $ | 2.09 | | | $ | 1.94 | | Diluted | $ | 0.79 | | | $ | 0.67 | |
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 | $ | 0.78 | | | $ | 0.72 | | | $ | 2.09 | | | $ | 1.94 | | Basic | $ | 0.78 | | | $ | 0.66 | |
Diluted | Diluted | $ | 0.78 | | | $ | 0.71 | | | $ | 2.08 | | | $ | 1.93 | | Diluted | $ | 0.77 | | | $ | 0.65 | |
Weighted average common shares outstanding: | Weighted average common shares outstanding: | | Weighted average common shares outstanding: | |
Basic | Basic | 51,326 | | | 52,050 | | | 51,700 | | | 52,030 | | Basic | 49,868 | | | 51,973 | |
Diluted | Diluted | 51,568 | | | 52,449 | | | 52,055 | | | 52,341 | | Diluted | 50,090 | | | 52,436 | |
See Notes to Condensed Consolidated Financial Statements.
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands, Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended April 30, | | Nine months ended April 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net income | $ | 40,054 | | | $ | 37,291 | | | $ | 108,915 | | | $ | 101,632 | |
Other comprehensive (loss) income: | | | | | | | |
Foreign currency translation adjustments | (20,180) | | | 2,891 | | | (42,754) | | | 17,773 | |
| | | | | | | |
Cash flow hedges: | | | | | | | |
Net gain recognized in other comprehensive (loss) income | 475 | | | 118 | | | 674 | | | 1,266 | |
Reclassification adjustment for gains included in net income | (44) | | | (292) | | | (647) | | | (21) | |
| 431 | | | (174) | | | 27 | | | 1,245 | |
Pension and other post-retirement benefits: | | | | | | | |
Net loss recognized in other comprehensive (loss) income | — | | | — | | | (85) | | | (32) | |
Net actuarial gain amortization | (95) | | | (105) | | | (275) | | | (306) | |
| (95) | | | (105) | | | (360) | | | (338) | |
| | | | | | | |
Other comprehensive (loss) income, before tax | (19,844) | | | 2,612 | | | (43,087) | | | 18,680 | |
Income tax (expense) benefit related to items of other comprehensive (loss) income | (105) | | | 301 | | | 152 | | | (751) | |
Other comprehensive (loss) income, net of tax | (19,949) | | | 2,913 | | | (42,935) | | | 17,929 | |
Comprehensive income | $ | 20,105 | | | $ | 40,204 | | | $ | 65,980 | | | $ | 119,561 | |
| | | | | | | | | | | |
| Three months ended October 31, |
| 2022 | | 2021 |
Net income | $ | 39,441 | | | $ | 35,046 | |
Other comprehensive loss: | | | |
Foreign currency translation adjustments | (17,672) | | | (3,918) | |
| | | |
Cash flow hedges: | | | |
Net gain (loss) recognized in other comprehensive loss | 893 | | | (26) | |
Reclassification adjustment for gains included in net income | (581) | | | (568) | |
| 312 | | | (594) | |
| | | |
Pension and other post-retirement benefits actuarial gain amortization | (143) | | | (107) | |
| | | |
Other comprehensive loss, before tax | (17,503) | | | (4,619) | |
Income tax benefit (expense) related to items of other comprehensive loss | 66 | | | (99) | |
Other comprehensive loss, net of tax | (17,437) | | | (4,718) | |
Comprehensive income | $ | 22,004 | | | $ | 30,328 | |
See Notes to Condensed Consolidated Financial Statements.
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands, Unaudited)
| | | Three months ended April 30, 2022 | | Three months ended October 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 January 31, 2022 | | $ | 548 | | | $ | 341,889 | | | $ | 833,981 | | | $ | (130,911) | | | $ | (78,939) | | | $ | 966,568 | | |
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 | | — | | | — | | | 40,054 | | | — | | | — | | | 40,054 | | Net income | | — | | | — | | | 39,441 | | | — | | | — | | | 39,441 | |
Other comprehensive loss, net of tax | Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (19,949) | | | (19,949) | | Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (17,437) | | | (17,437) | |
Issuance of shares of Class A Common Stock under stock plan | Issuance of shares of Class A Common Stock under stock plan | | — | | | (18) | | | — | | | 262 | | | — | | | 244 | | Issuance of shares of Class A Common Stock under stock plan | | — | | | (2,226) | | | — | | | 1,071 | | | — | | | (1,155) | |
Tax benefit and withholdings from deferred compensation distributions | | Tax benefit and withholdings from deferred compensation distributions | | — | | | 66 | | | — | | | — | | | — | | | 66 | |
Stock-based compensation expense | Stock-based compensation expense | | — | | | 1,983 | | | — | | | — | | | — | | | 1,983 | | Stock-based compensation expense | | — | | | 2,958 | | | — | | | — | | | — | | | 2,958 | |
Repurchase of shares of Class A Common Stock | Repurchase of shares of Class A Common Stock | | — | | | — | | | — | | | (63,210) | | | — | | | (63,210) | | Repurchase of shares of Class A Common Stock | | — | | | — | | | — | | | (12,070) | | | — | | | (12,070) | |
Cash dividends on Common Stock: | Cash dividends on Common Stock: | | Cash dividends on Common Stock: | |
Class A — $0.2250 per share | | — | | | — | | | (10,655) | | | — | | | — | | | (10,655) | | |
Class B — $0.2250 per share | | — | | | — | | | (797) | | | — | | | — | | | (797) | | |
Balances at April 30, 2022 | | $ | 548 | | | $ | 343,854 | | | $ | 862,583 | | | $ | (193,859) | | | $ | (98,888) | | | $ | 914,238 | | |
Class A — $0.2300 per share | | Class A — $0.2300 per share | | — | | | — | | | (10,621) | | | — | | | — | | | (10,621) | |
Class B — $0.2134 per share | | Class B — $0.2134 per share | | — | | | — | | | (755) | | | — | | | — | | | (755) | |
Balances at October 31, 2022 | | Balances at October 31, 2022 | | $ | 548 | | | $ | 346,064 | | | $ | 920,482 | | | $ | (228,855) | | | $ | (126,514) | | | $ | 911,725 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended April 30, 2022 |
| | 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 | |
Net income | | — | | | — | | | 108,915 | | | — | | | — | | | 108,915 | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (42,935) | | | (42,935) | |
Issuance of shares of Class A Common Stock under stock plan | | — | | | (4,539) | | | — | | | 132 | | | — | | | (4,407) | |
Tax benefit and withholdings from deferred compensation distributions | | — | | | 115 | | | — | | | — | | | — | | | 115 | |
Stock-based compensation expense | | — | | | 9,153 | | | — | | | — | | | — | | | 9,153 | |
Repurchase of shares of Class A Common Stock | | — | | | — | | | — | | | (84,930) | | | — | | | (84,930) | |
Cash dividends on Common Stock: | | | | | | | | | | | | |
Class A — $0.6750 per share | | — | | | — | | | (32,370) | | | — | | | — | | | (32,370) | |
Class B — $0.6584 per share | | — | | | — | | | (2,331) | | | — | | | — | | | (2,331) | |
Balances at April 30, 2022 | | $ | 548 | | | $ | 343,854 | | | $ | 862,583 | | | $ | (193,859) | | | $ | (98,888) | | | $ | 914,238 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended October 31, 2021 |
| | 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 | |
Net income | | — | | | — | | | 35,046 | | | — | | | — | | | 35,046 | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (4,718) | | | (4,718) | |
Issuance of shares of Class A Common Stock under stock plan | | — | | | (3,187) | | | — | | | (1) | | | — | | | (3,188) | |
Tax benefit and withholdings from deferred compensation distributions | | — | | | 115 | | | — | | | — | | | — | | | 115 | |
Stock-based compensation expense | | — | | | 4,129 | | | — | | | — | | | — | | | 4,129 | |
Repurchase of shares of Class A Common Stock | | — | | | — | | | — | | | (18,924) | | | — | | | (18,924) | |
Cash dividends on Common Stock: | | | | | | | | | | | | |
Class A — $0.2250 per share | | — | | | — | | | (10,858) | | | — | | | — | | | (10,858) | |
Class B — $0.2084 per share | | — | | | — | | | (737) | | | — | | | — | | | (737) | |
Balances at October 31, 2021 | | $ | 548 | | | $ | 340,182 | | | $ | 811,820 | | | $ | (127,986) | | | $ | (60,671) | | | $ | 963,893 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended April 30, 2021 |
| | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
Balances at January 31, 2021 | | $ | 548 | | | $ | 334,077 | | | $ | 745,960 | | | $ | (109,789) | | | $ | (51,461) | | | $ | 919,335 | |
Net income | | — | | | — | | | 37,291 | | | — | | | — | | | 37,291 | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 2,913 | | | 2,913 | |
Issuance of shares of Class A Common Stock under stock plan | | — | | | 348 | | | — | | | 661 | | | — | | | 1,009 | |
Stock-based compensation expense | | — | | | 2,532 | | | — | | | — | | | — | | | 2,532 | |
Repurchase of shares of Class A Common Stock | | — | | | — | | | — | | | — | | | — | | | — | |
Cash dividends on Common Stock: | | | | | | | | | | | | |
Class A — $0.2200 per share | | — | | | — | | | (10,675) | | | — | | | — | | | (10,675) | |
Class B — $0.2200 per share | | — | | | — | | | (779) | | | — | | | — | | | (779) | |
Balances at April 30, 2021 | | $ | 548 | | | $ | 336,957 | | | $ | 771,797 | | | $ | (109,128) | | | $ | (48,548) | | | $ | 951,626 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended April 30, 2021 |
| | 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 | |
Net income | | — | | | — | | | 101,632 | | | — | | | — | | | 101,632 | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 17,929 | | | 17,929 | |
Issuance of shares of Class A Common Stock under stock plan | | — | | | (2,839) | | | — | | | 1,681 | | | — | | | (1,158) | |
Tax benefit and withholdings from deferred compensation distributions | | — | | | 32 | | | — | | | — | | | — | | | 32 | |
Stock-based compensation expense | | — | | | 8,003 | | | — | | | — | | | — | | | 8,003 | |
Repurchase of shares of Class A Common Stock | | — | | | — | | | — | | | (3,593) | | | — | | | (3,593) | |
Cash dividends on Common Stock: | | | | | | | | | | | | |
Class A — $0.6600 per share | | — | | | — | | | (32,013) | | | — | | | — | | | (32,013) | |
Class B — $0.6434 per share | | — | | | — | | | (2,278) | | | — | | | — | | | (2,278) | |
Balances at April 30, 2021 | | $ | 548 | | | $ | 336,957 | | | $ | 771,797 | | | $ | (109,128) | | | $ | (48,548) | | | $ | 951,626 | |
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands, Unaudited)
| | | Nine months ended April 30, | | Three months ended October 31, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Operating activities: | Operating activities: | | | | Operating activities: | | | |
Net income | Net income | $ | 108,915 | | | $ | 101,632 | | Net income | $ | 39,441 | | | $ | 35,046 | |
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 | 25,448 | | | 17,240 | | Depreciation and amortization | 8,665 | | | 8,509 | |
Stock-based compensation expense | Stock-based compensation expense | 9,153 | | | 8,003 | | Stock-based compensation expense | 2,958 | | | 4,129 | |
Deferred income taxes | Deferred income taxes | 2,858 | | | (3,957) | | Deferred income taxes | (1,705) | | | (625) | |
Equity in losses of unconsolidated affiliate | — | | | 760 | | |
Other | Other | (1,080) | | | (1,186) | | Other | (383) | | | (187) | |
Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
Accounts receivable | Accounts receivable | (26,438) | | | (13,247) | | Accounts receivable | (627) | | | (13,302) | |
Inventories | Inventories | (47,784) | | | 15,210 | | Inventories | (9,582) | | | (16,579) | |
Prepaid expenses and other assets | Prepaid expenses and other assets | (932) | | | (2,584) | | Prepaid expenses and other assets | (2,563) | | | (655) | |
Accounts payable and accrued liabilities | Accounts payable and accrued liabilities | (5,584) | | | 39,244 | | Accounts payable and accrued liabilities | (14,150) | | | 9,499 | |
Income taxes | Income taxes | 680 | | | (6,207) | | Income taxes | 5,945 | | | 1,656 | |
Net cash provided by operating activities | Net cash provided by operating activities | 65,236 | | | 154,908 | | Net cash provided by operating activities | 27,999 | | | 27,491 | |
| Investing activities: | Investing activities: | | Investing activities: | |
Purchases of property, plant and equipment | Purchases of property, plant and equipment | (22,130) | | | (21,411) | | Purchases of property, plant and equipment | (3,861) | | | (11,328) | |
Other | Other | 59 | | | 2,567 | | Other | — | | | 2 | |
Net cash used in investing activities | Net cash used in investing activities | (22,071) | | | (18,844) | | Net cash used in investing activities | (3,861) | | | (11,326) | |
| Financing activities: | Financing activities: | | Financing activities: | |
Payment of dividends | Payment of dividends | (34,701) | | | (34,290) | | Payment of dividends | (11,376) | | | (11,595) | |
Proceeds from exercise of stock options | Proceeds from exercise of stock options | 663 | | | 1,612 | | Proceeds from exercise of stock options | 349 | | | 151 | |
Payments for employee taxes withheld from stock-based awards | Payments for employee taxes withheld from stock-based awards | (5,070) | | | (2,772) | | Payments for employee taxes withheld from stock-based awards | (1,504) | | | (3,339) | |
Purchase of treasury stock | Purchase of treasury stock | (84,930) | | | (3,593) | | Purchase of treasury stock | (12,070) | | | (18,924) | |
Proceeds from borrowing on credit facilities | Proceeds from borrowing on credit facilities | 155,216 | | | 19,957 | | Proceeds from borrowing on credit facilities | 36,000 | | | 56,200 | |
Repayment of borrowing on credit facilities | Repayment of borrowing on credit facilities | (116,216) | | | (20,220) | | Repayment of borrowing on credit facilities | (32,000) | | | (27,200) | |
Other | Other | 3,276 | | | 32 | | Other | 66 | | | 115 | |
Net cash used in financing activities | Net cash used in financing activities | (81,762) | | | (39,274) | | Net cash used in financing activities | (20,535) | | | (4,592) | |
| Effect of exchange rate changes on cash | (5,670) | | | 7,368 | | |
Effect of exchange rate changes on cash and cash equivalents | | Effect of exchange rate changes on cash and cash equivalents | (3,201) | | | (1,355) | |
| Net (decrease) increase in cash and cash equivalents | (44,267) | | | 104,158 | | |
Net increase in cash and cash equivalents | | Net increase in cash and cash equivalents | 402 | | | 10,218 | |
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 | $ | 103,068 | | | $ | 321,801 | | Cash and cash equivalents, end of period | $ | 114,471 | | | $ | 157,553 | |
See Notes to Condensed Consolidated Financial Statements.
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NineThree Months Ended April 30,October 31, 2022
(Unaudited)
(In thousands, except share and per share amounts)
NOTE A — Basis of Presentation
The condensed consolidated financial statements included herein have been prepared by Brady Corporation and subsidiaries (the "Company," "Brady," "we," or "our") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, the foregoing statements contain all adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial position of the Company as of April 30,October 31, 2022 and July 31, 2021,2022, its results of operations, cash flows and comprehensive income for the three and nine months ended April 30, 2022 and 2021, and cash flows for the nine months ended April 30,October 31, 2022 and 2021. 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, 2021, which did not have a material impact on its consolidated financial statements or disclosures.
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." Subject to meeting certain criteria, this guidance provides optional expedients and exceptions to applying contract modification accounting under existing U.S. GAAP, to address the expected phase out of the London Inter-bank Offered Rate ("LIBOR") by the end of 2021. This guidance was effective upon issuance and allowed application to contract changes as early as January 1, 2020. The adoption of this update did not have a material impact on the Company's consolidated financial statements.
Standards not yet adopted
In October 2021, the FASB issued ASU No. 2021-08, “Business Combinations (Topic 805), 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 be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, “Revenue from Contracts with Customers.”Customers” as if the acquirer had originated the contracts. The guidance is applied prospectively to acquisitions occurring on or after the effective for fiscal years beginning after December 15,date. The Company early adopted ASU No. 2021-08 during the quarter ended October 31, 2022. The Company does not currently expect a materialadoption of the new standard will only have an impact toon the Company's condensed consolidated financial statements or disclosures fromin the adoptionevent of this standard.future acquisitions.
NOTE C — Additional Balance Sheet Information
Inventories
Inventories as of April 30,October 31, 2022 and July 31, 2021,2022 consisted of the following:
| | | April 30, 2022 | | July 31, 2021 | | October 31, 2022 | | July 31, 2022 |
Finished products | Finished products | $ | 103,887 | | | $ | 87,489 | | Finished products | $ | 111,897 | | | $ | 112,323 | |
Work-in-process | Work-in-process | 27,403 | | | 20,189 | | Work-in-process | 30,359 | | | 29,272 | |
Raw materials and supplies | Raw materials and supplies | 45,866 | | | 28,429 | | Raw materials and supplies | 53,439 | | | 48,428 | |
Total inventories | Total inventories | $ | 177,156 | | | $ | 136,107 | | Total inventories | $ | 195,695 | | | $ | 190,023 | |
Property, plant and equipment
Property, plant and equipment is presented net of accumulated depreciation in the amount of $272,324$273,922 and $277,246$272,376 as of April 30,October 31, 2022 and July 31, 2021,2022, respectively.
NOTE D — Other Intangible Assets
Other intangible assets as of April 30,October 31, 2022 and July 31, 2021,2022 consisted of the following:
| | | April 30, 2022 | | July 31, 2021 | | October 31, 2022 | | 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 | | $ | 1,761 | | | $ | (854) | | | $ | 907 | | | 3 | | $ | 1,821 | | | $ | (356) | | | $ | 1,465 | | Tradenames | 3 | | $ | 1,728 | | | $ | (1,165) | | | $ | 563 | | | 3 | | $ | 1,749 | | | $ | (1,014) | | | $ | 735 | |
Customer relationships | Customer relationships | 9 | | 105,867 | | | (45,458) | | | 60,409 | | | 9 | | 110,950 | | | (39,069) | | | 71,881 | | Customer relationships | 9 | | 104,610 | | | (51,312) | | | 53,298 | | | 9 | | 105,404 | | | (48,428) | | | 56,976 | |
Technology | Technology | 5 | | 9,208 | | | (1,773) | | | 7,435 | | | 5 | | 9,578 | | | (335) | | | 9,243 | | Technology | 5 | | 9,013 | | | (2,686) | | | 6,327 | | | 5 | | 9,136 | | | (2,241) | | | 6,895 | |
Unamortized other intangible assets: | Unamortized other intangible assets: | | Unamortized other intangible assets: | |
Tradenames | Tradenames | N/A | | 9,487 | | | — | | | 9,487 | | | N/A | | 9,745 | | | — | | | 9,745 | | Tradenames | N/A | | 9,306 | | | — | | | 9,306 | | | N/A | | 9,422 | | | — | | | 9,422 | |
Total | Total | | $ | 126,323 | | | $ | (48,085) | | | $ | 78,238 | | | $ | 132,094 | | | $ | (39,760) | | | $ | 92,334 | | Total | | $ | 124,657 | | | $ | (55,163) | | | $ | 69,494 | | | $ | 125,711 | | | $ | (51,683) | | | $ | 74,028 | |
The change in the gross carrying amount of other intangible assets as of April 30,October 31, 2022 compared to July 31, 20212022 was primarily due to the effect of currency fluctuations during the nine-monththree-month period.
Amortization expense ofon intangible assets was $3,735$3,631 and $1,352$3,807 for the three months ended April 30, 2022 and 2021, respectively, and $11,291 and $4,056 for the nine months ended April 30,October 31, 2022 and 2021, respectively.
NOTE E — Leases
The Company leases certain manufacturing facilities, warehouse and office spaces, and vehicles accounted for as operating leases. Lease terms typically range from one year to ten years. As of April 30,October 31, 2022, the Company did not have any finance leases.
Operating lease expense was $4,346$3,780 and $4,714$4,765 for the three months ended April 30,October 31, 2022 and 2021, respectively, and $13,198 and $12,956 for the nine months ended April 30, 2022 and 2021, respectively. Operating lease expensewhich 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 nine months ended April 30,October 31, 2022 and 2021.
Supplemental cash flow information related to the Company's operating leases for the ninethree months ended April 30,October 31, 2022 and 2021, was as follows:
| | | | | | | | | | | |
| Nine months ended April 30, |
| 2022 | | 2021 |
Operating cash outflows from operating leases | $ | 14,582 | | | $ | 13,965 | |
Operating lease assets obtained in exchange for new operating lease liabilities | 2,553 | | | 5,832 | |
| | | | | | | | | | | |
| Three months ended October 31, |
| 2022 | | 2021 |
Operating cash flows from operating leases | $ | 4,202 | | | $ | 4,999 | |
Operating lease assets obtained in exchange for new operating lease liabilities (1) (2) | 102 | | | (868) | |
(1) Includes new leases and remeasurements or modifications of existing leases.
(2) During the three months ended October 31, 2021, the Company purchased two buildings which were previously leased. This resulted in a decrease in operating lease assets obtained in exchange for lease liabilities for the period as the remaining lease assets and liabilities were removed from the condensed consolidated balance sheets.
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 lossesgain 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 ninethree months ended April 30,October 31, 2022:
| | | Unrealized gain on cash flow hedges | | Unamortized gain on post-retirement plans | | Foreign currency translation adjustments | | Accumulated other comprehensive loss | | 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) | | |
Beginning balance, July 31, 2022 | | Beginning balance, July 31, 2022 | $ | 954 | | | $ | 1,436 | | | $ | (111,467) | | | $ | (109,077) | |
Other comprehensive income (loss) before reclassification | Other comprehensive income (loss) before reclassification | 307 | | | (59) | | | (42,408) | | | (42,160) | | Other comprehensive income (loss) before reclassification | 813 | | | — | | | (17,672) | | | (16,859) | |
Amounts reclassified from accumulated other comprehensive loss | Amounts reclassified from accumulated other comprehensive loss | (486) | | | (289) | | | — | | | (775) | | Amounts reclassified from accumulated other comprehensive loss | (435) | | | (143) | | | — | | | (578) | |
Ending balance, April 30, 2022 | $ | 550 | | | $ | 1,540 | | | $ | (100,978) | | | $ | (98,888) | | |
Ending balance, October 31, 2022 | | Ending balance, October 31, 2022 | $ | 1,332 | | | $ | 1,293 | | | $ | (129,139) | | | $ | (126,514) | |
The increase in accumulated other comprehensive loss as of April 30,October 31, 2022, compared to July 31, 2022, was primarily due to the appreciation of the U.S. dollar against certain other currencies during the three-month period.
The changes in accumulated other comprehensive loss by component, net of tax, for the three months ended October 31, 2021, 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 | (273) | | | — | | | (3,913) | | | (4,186) | |
Amounts reclassified from accumulated other comprehensive loss | (425) | | | (107) | | | — | | | (532) | |
Ending balance, October 31, 2021 | $ | 31 | | | $ | 1,781 | | | $ | (62,483) | | | $ | (60,671) | |
The increase in the accumulated other comprehensive loss as of October 31, 2021, compared to July 31, 2021, was primarily due to the appreciation of the U.S. dollar against certain other currencies during the nine-month period.
The changes in accumulated other comprehensive loss by component, net of tax, for the nine months ended April 30, 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 | 1,189 | | | (23) | | | 16,848 | | | 18,014 | |
Amounts reclassified from accumulated other comprehensive loss | (16) | | | (69) | | | — | | | (85) | |
Ending balance, April 30, 2021 | $ | 973 | | | $ | 2,089 | | | $ | (51,610) | | | $ | (48,548) | |
The decrease in accumulated other comprehensive loss as of April 30, 2021, compared to July 31, 2020, was primarily due to the depreciation of the U.S. dollar against certain other currencies during the nine-monththree-month period.
Of the amounts reclassified from accumulated other comprehensive loss during the ninethree months ended April 30,October 31, 2022 and 2021, unrealized gains on cash flow hedges were reclassified to "Cost of goods sold" and unamortized gains on post-retirement plans werewas reclassified into "Investment and other (expense) income" on the condensed consolidated statements of income.
The following table illustrates the income tax benefit (expense) benefit on the components of other comprehensive (loss) incomeloss for the three and nine months ended April 30,October 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended April 30, | | Nine months ended April 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Income tax (expense) benefit related to items of other comprehensive (loss) income: | | | | | | | |
Cash flow hedges | $ | (15) | | | $ | (71) | | | $ | (206) | | | $ | (72) | |
Pension and other post-retirement benefits | (3) | | | — | | | 12 | | | 246 | |
Other income tax adjustments and currency translation | (87) | | | 372 | | | 346 | | | (925) | |
Income tax (expense) benefit related to items of other comprehensive (loss) income: | $ | (105) | | | $ | 301 | | | $ | 152 | | | $ | (751) | |
| | | | | | | | | | | |
| Three months ended October 31, |
| 2022 | | 2021 |
Income tax benefit (expense) related to items of other comprehensive loss: | | | |
Cash flow hedges | $ | 66 | | | $ | (104) | |
Other income tax adjustments and currency translation | — | | | 5 | |
Income tax benefit (expense) related to items of other comprehensive loss | $ | 66 | | | $ | (99) | |
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 $2,687$2,727 and $2,519$2,675 as of April 30,October 31, 2022 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 $297$306 and $291$289 during the three months ended April 30,October 31, 2022 and 2021, respectively, and $882 during the nine months ended April 30, 2022 and April 30, 2021, 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 April 30,October 31, 2022, the Company expects to recognize 11% by the end of fiscal 2022, an additional 38%32% by the end of fiscal 2023, an additional 31% by the end of fiscal 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 nine months ended April 30,October 31, 2022 and 2021:
| | | Three months ended April 30, | | Nine months ended April 30, | | Three months ended October 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Net sales: | Net sales: | | | | | | | | Net sales: | | | |
ID Solutions | | |
IDS | | IDS | |
Americas | Americas | $ | 175,648 | | | $ | 143,348 | | | $ | 499,557 | | | $ | 401,585 | | Americas | $ | 173,349 | | | $ | 164,910 | |
Europe | Europe | 63,163 | | | 50,416 | | | 177,326 | | | 137,038 | | Europe | 56,643 | | | 56,889 | |
Asia | Asia | 25,313 | | | 24,301 | | | 80,844 | | | 71,861 | | Asia | 26,364 | | | 26,818 | |
Total | Total | $ | 264,124 | | | $ | 218,065 | | | $ | 757,727 | | | $ | 610,484 | | Total | $ | 256,356 | | | $ | 248,617 | |
Workplace Safety | | | | | | | | |
WPS | | WPS | | | |
Americas | Americas | $ | 21,618 | | | $ | 21,425 | | | $ | 62,891 | | | $ | 65,656 | | Americas | $ | 18,782 | | | $ | 21,142 | |
Europe | Europe | 39,646 | | | 42,491 | | | 119,100 | | | 123,922 | | Europe | 33,549 | | | 38,022 | |
Australia | Australia | 13,163 | | | 13,522 | | | 38,363 | | | 38,506 | | Australia | 13,882 | | | 13,694 | |
Total | Total | $ | 74,427 | | | $ | 77,438 | | | $ | 220,354 | | | $ | 228,084 | | Total | $ | 66,213 | | | $ | 72,858 | |
Total Company | Total Company | | | | | | | | Total Company | | | |
Americas | Americas | $ | 197,266 | | | $ | 164,773 | | | $ | 562,448 | | | $ | 467,241 | | Americas | $ | 192,131 | | | $ | 186,052 | |
Europe | Europe | 102,809 | | | 92,907 | | | 296,426 | | | 260,960 | | Europe | 90,192 | | | 94,911 | |
Asia-Pacific | Asia-Pacific | 38,476 | | | 37,823 | | | 119,207 | | | 110,367 | | Asia-Pacific | 40,246 | | | 40,512 | |
Total | Total | $ | 338,551 | | | $ | 295,503 | | | $ | 978,081 | | | $ | 838,568 | | Total | $ | 322,569 | | | $ | 321,475 | |
The following is a summary of segment profit for the three and nine months ended April 30,October 31, 2022 and 2021:
| | | Three months ended April 30, | | Nine months ended April 30, | | Three months ended October 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Segment profit: | Segment profit: | | | | | | | | Segment profit: | | | |
ID Solutions | $ | 53,962 | | | $ | 47,539 | | | $ | 146,907 | | | $ | 126,818 | | |
Workplace Safety | 7,109 | | | 5,656 | | | 13,917 | | | 17,107 | | |
IDS | | IDS | $ | 51,525 | | | $ | 48,816 | |
WPS | | WPS | 6,378 | | | 2,293 | |
Total Company | Total Company | $ | 61,071 | | | $ | 53,195 | | | $ | 160,824 | | | $ | 143,925 | | Total Company | $ | 57,903 | | | $ | 51,109 | |
The following is a reconciliation of segment profit to income before income taxes and losses of unconsolidated affiliate for the three and nine months ended April 30,October 31, 2022 and 2021:
| | | Three months ended April 30, | | Nine months ended April 30, | | Three months ended October 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Total profit from reportable segments | Total profit from reportable segments | $ | 61,071 | | | $ | 53,195 | | | $ | 160,824 | | | $ | 143,925 | | Total profit from reportable segments | $ | 57,903 | | | $ | 51,109 | |
Unallocated amounts: | Unallocated amounts: | | Unallocated amounts: | |
Administrative costs | Administrative costs | (8,182) | | | (6,470) | | | (20,728) | | | (17,600) | | Administrative costs | (6,517) | | | (6,774) | |
Investment and other (expense) income | Investment and other (expense) income | (1,308) | | | 1,181 | | | (1,343) | | | 3,372 | | Investment and other (expense) income | (157) | | | 543 | |
Interest expense | Interest expense | (329) | | | (131) | | | (763) | | | (288) | | Interest expense | (894) | | | (182) | |
Income before income taxes and losses of unconsolidated affiliate | $ | 51,252 | | | $ | 47,775 | | | $ | 137,990 | | | $ | 129,409 | | |
Income before income taxes | | Income before income taxes | $ | 50,335 | | | $ | 44,696 | |
NOTE I – Stock-Based Compensation
Incentive Stock Plans
The Company has an incentive stock plan under which the Board of Directors may grant nonqualified stock options to purchase shares of Class A Nonvoting Common Stock, restricted stock units ("RSUs"), performance-based restricted stock units ("PRSUs"), or restricted and unrestricted shares of Class A Nonvoting Common Stock to employees and non-employee directors. Certain awards may be subject to pre-established performance goals. The majority of the Company’s annual share-based awards are granted in the first quarter of the fiscal year.
Total stock-based compensation expense recognized during the three months ended October 31, 2022 and 2021 was $2,958 and $4,129, respectively. The total income tax benefit recognized in the condensed consolidated statements of income was $192 and $199 during the three months ended October 31, 2022 and 2021, respectively.
Stock Options
The stock options issued under the plan have an exercise price equal to the market price of the Company's stock at the date of the grant and generally vest ratably over three years, with one-third becoming exercisable one year after the grant date and one-third additional in each of the succeeding two years. Options issued under the plan, referred to herein as “time-based” options, generally expire ten years from the date of grant.
The Company has estimated the fair value of its time-based option awards granted during the three months ended October 31, 2022 and 2021, using the Black-Scholes option valuation model. The weighted-average assumptions used in the Black-Scholes valuation model are reflected in the following table:
| | | | | | | | | | | | | | |
| | Three months ended October 31, |
Black-Scholes Option Valuation Assumptions | | 2022 | | 2021 |
Expected term (in years) | | 5.7 | | 6.1 |
Expected volatility | | 29.6 | % | | 30.0 | % |
Expected dividend yield | | 2.0 | % | | 2.3 | % |
Risk-free interest rate | | 3.7 | % | | 1.0 | % |
The following is a summary of stock option activity for the three months ended October 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Time-Based Options | | Options Outstanding | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value |
Outstanding at July 31, 2022 | | 1,591,525 | | $ | 41.57 | | | | | |
Granted | | 147,629 | | 43.50 | | | | | |
Exercised | | (22,494) | | 30.48 | | | | | |
Forfeited | | (10,247) | | 45.41 | | | | | |
Outstanding at October 31, 2022 | | 1,706,413 | | $ | 41.86 | | | 6.4 | | $ | 9,729 | |
Exercisable at October 31, 2022 | | 1,270,763 | | $ | 40.67 | | | 5.4 | | $ | 8,851 | |
The weighted-average grant date fair value of options granted during the three months ended October 31, 2022 and 2021 was $12.06 and $11.29, respectively. The total intrinsic value of stock options exercised during the three months ended October 31, 2022 and 2021 was $364 and $319, respectively. The total fair value of stock options vested during the three months ended October 31, 2022 and 2021 was $2,458 and $2,446, respectively.
The cash received from the exercise of stock options during the three months ended October 31, 2022 and 2021 was $349 and $151, respectively. The tax benefit from the exercise of stock options during the three months ended October 31, 2022 and 2021 was $91 and $80, respectively.
As of October 31, 2022, total unrecognized compensation cost related to stock options was $2,898 pre-tax, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of 2.1 years.
RSUs
RSUs issued under the plan have a grant date fair value equal to the market price of the Company's stock at the date of grant and generally vest ratably over three years, with one-third vesting one year after the grant date and one-third additional in each of the succeeding two years.
The following is a summary of RSU activity for the three months ended October 31, 2022:
| | | | | | | | | | | | | | |
| | Number of Shares | | Weighted Average Grant Date Fair Value |
Non-vested RSUs as of July 31, 2022 | | 173,230 | | | $ | 47.45 | |
Granted | | 62,197 | | | 44.70 | |
Vested | | (61,316) | | | 47.50 | |
Forfeited | | (2,585) | | | 45.03 | |
Non-vested RSUs as of October 31, 2022 | | 171,526 | | | $ | 46.47 | |
The RSUs granted during the three months ended October 31, 2021 had a weighted-average grant date fair value of $49.85. The total fair value of RSUs vested during three months ended October 31, 2022 and 2021 was $2,608 and $3,380, respectively.
As of October 31, 2022, total unrecognized compensation cost related to RSUs was $5,029 pre-tax, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of 2.2 years.
PRSUs
PRSUs are contingent on the achievement of predetermined market and performance targets. The PRSUs granted under the plan vest at the end of a three-year performance period provided the specified market and performance targets are met. For the PRSUs granted during the three months ended October 31, 2022 and 2021, the vesting criteria for 50% of the grant is based upon the Company's total shareholder return ("TSR") relative to the S&P 600 SmallCap Industrials Index over a three-year performance period, and the vesting criteria for the other 50% of the grant is based upon Company revenue targets. All other previously granted non-vested PRSUs vest based upon the Company's TSR relative to the S&P 600 SmallCap Industrials Index.
The Company calculates the fair value of each component of the applicable PRSUs individually. The fair value of the revenue target metric, which is a performance condition, is equal to the average of the high and low stock price on the grant date. The fair value of the TSR metric, which is a market condition, is determined using a Monte Carlo valuation model. The assumptions used in the Monte Carlo valuation model are reflected in the following table:
| | | | | | | | | | | | | | |
| | Three months ended October 31, |
Monte Carlo Valuation Assumptions | | 2022 | | 2021 |
Expected volatility | | 34.8 | % | | 34.7 | % |
Risk-free interest rate | | 2.8 | % | | 0.3 | % |
The following is a summary of PRSU activity for the three months ended October 31, 2022:
| | | | | | | | | | | | | | |
| | Number of Shares | | Weighted Average Grant Date Fair Value |
Non-vested PRSUs as of July 31, 2022 | | 79,134 | | | $ | 66.79 | |
Granted | | 44,110 | | | 55.77 | |
Vested | | (18,959) | | | 75.00 | |
Forfeited | | (16,332) | | | 71.99 | |
Non-vested PRSUs as of October 31, 2022 | | 87,953 | | | $ | 58.63 | |
The PRSUs granted during the three months ended October 31, 2021 had a weighted-average grant date fair value of $61.76. The total fair value of PRSUs vested during three months ended October 31, 2022 and 2021 was $889 and $4,098, respectively.
As of October 31, 2022, total unrecognized compensation cost related to PRSUs was $2,889 pre-tax, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of 2.4 years.
NOTE IJ — 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 April 30, | | Nine months ended April 30, | | Three months ended October 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Numerator (in thousands): | Numerator (in thousands): | | | | | | | | Numerator (in thousands): | | | |
Net Income (Numerator for basic and diluted income per Class A Nonvoting Common Share) | $ | 40,054 | | | $ | 37,291 | | | $ | 108,915 | | | $ | 101,632 | | |
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) | $ | 39,441 | | | $ | 35,046 | |
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 | $ | 40,054 | | | $ | 37,291 | | | $ | 108,104 | | | $ | 100,820 | | Numerator for basic and diluted income per Class B Voting Common Share | $ | 38,668 | | | $ | 34,235 | |
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 | 51,326 | | | 52,050 | | | 51,700 | | | 52,030 | | Denominator for basic income per share for both Class A and Class B | 49,868 | | | 51,973 | |
Plus: Effect of dilutive equity awards | Plus: Effect of dilutive equity awards | 242 | | | 399 | | | 355 | | | 311 | | Plus: Effect of dilutive equity awards | 222 | | | 463 | |
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 | 51,568 | | | 52,449 | | | 52,055 | | | 52,341 | | Denominator for diluted income per share for both Class A and Class B | 50,090 | | | 52,436 | |
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 | $ | 0.78 | | | $ | 0.72 | | | $ | 2.11 | | | $ | 1.95 | | Basic | $ | 0.79 | | | $ | 0.67 | |
Diluted | Diluted | $ | 0.78 | | | $ | 0.71 | | | $ | 2.09 | | | $ | 1.94 | | Diluted | $ | 0.79 | | | $ | 0.67 | |
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 | $ | 0.78 | | | $ | 0.72 | | | $ | 2.09 | | | $ | 1.94 | | Basic | $ | 0.78 | | | $ | 0.66 | |
Diluted | Diluted | $ | 0.78 | | | $ | 0.71 | | | $ | 2.08 | | | $ | 1.93 | | Diluted | $ | 0.77 | | | $ | 0.65 | |
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 526,603583,533 and 239,707479,602 for the three months ended April 30,October 31, 2022 and 2021, respectively, and 492,527 and 603,356 for the nine months ended April 30, 2022 and 2021, respectively.
NOTE JK — 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 April 30,at October 31, 2022 and July 31, 2021:2022:
| | | | | | | | | | | | | | | | | |
| April 30, 2022 | | July 31, 2021 | | Fair Value Hierarchy |
Assets: | | | | | |
Deferred compensation plan assets | $ | 18,529 | | | $ | 20,135 | | | Level 1 |
Foreign exchange contracts | 433 | | | 150 | | | Level 2 |
Liabilities: | | | | | |
Foreign exchange contracts | 433 | | | 51 | | | Level 2 |
| | | | | | | | | | | | | | | | | |
| October 31, 2022 | | July 31, 2022 | | Fair Value Hierarchy |
Assets: | | | | | |
Deferred compensation plan assets | $ | 16,072 | | | $ | 18,037 | | | Level 1 |
Foreign exchange contracts | 1,138 | | | 489 | | | Level 2 |
Liabilities: | | | | | |
Foreign exchange contracts | — | | | 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,L, “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 KL — 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:
| | | April 30, 2022 | | July 31, 2021 | | October 31, 2022 | | July 31, 2022 |
Designated as cash flow hedges | Designated as cash flow hedges | $ | 7,690 | | | $ | 30,724 | | Designated as cash flow hedges | $ | 18,967 | | | $ | 25,276 | |
Non-designated hedges | Non-designated hedges | 20,342 | | | 3,580 | | Non-designated hedges | 4,190 | | | 4,057 | |
Total foreign exchange contracts | Total foreign exchange contracts | $ | 28,032 | | | $ | 34,304 | | Total foreign exchange contracts | $ | 23,157 | | | $ | 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 April 30,October 31, 2022 and July 31, 2021,2022, unrealized gains of $694$1,352 and $770$1,040 have been included in OCI, respectively.
The following table summarizes the amount of pre-tax gains and losses related to foreign exchange contracts designated as cash flow hedging instruments:
| | | Three months ended April 30, | | Nine months ended April 30, | | Three months ended October 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Gains recognized in OCI | $ | 475 | | | $ | 118 | | | $ | 674 | | | $ | 1,266 | | |
Gains (losses) recognized in OCI | | Gains (losses) recognized in OCI | $ | 893 | | | $ | (26) | |
Gains reclassified from OCI into cost of goods sold | Gains reclassified from OCI into cost of goods sold | 44 | | | 292 | | | 647 | | | 21 | | Gains reclassified from OCI into cost of goods sold | 581 | | | 568 | |
Fair values of derivative instruments in the condensed consolidated balance sheets were as follows:
| | | April 30, 2022 | | July 31, 2021 | | October 31, 2022 | | 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 | | 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) | $ | 433 | | | $ | — | | | $ | 150 | | | $ | 51 | | Foreign exchange contracts (cash flow hedges) | $ | 1,135 | | | $ | — | | | $ | 489 | | | $ | 30 | |
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) | — | | | 433 | | | — | | | — | | Foreign exchange contracts (non-designated hedges) | 3 | | | — | | | — | | | 2 | |
Total derivative instruments | Total derivative instruments | $ | 433 | | | $ | 433 | | | $ | 150 | | | $ | 51 | | Total derivative instruments | $ | 1,138 | | | $ | — | | | $ | 489 | | | $ | 32 | |
NOTE L —M – Income Taxes
The income tax rate was 21.6% for the three months ended April 30,October 31, 2022 and 2021, was 21.8% and 21.4%, respectively. The income tax rate for the nine months ended April 30, 2022 and 2021, was 21.1% and 20.9%, respectively.2021. The Company expects its ongoing annual income tax rate to be approximatelyapproximately 20% based on its current global business mix and based on tax laws and statutory tax rates currently in effect.
NOTE MN — Subsequent Events
On May 24,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 amends the original credit agreement dated as of August 1, 2019. Amendment No. 2 amends the credit agreement to, among other items, (a) increase the lending commitments by $100,000 for total lending commitments of $300,000 (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 $300,000 up to (i) an amount equal to the incremental borrowing necessary to bring the Company's consolidated net debt-to-EBITDA ratio to 2.5 to 1.0 plus(ii) $200,000. Borrowings under Amendment No. 2 remain unsecured and are guaranteed by certain of the Company's domestic subsidiaries. The credit agreement (as amended by Amendment No. 2) continues to contain various financial covenants, including a consolidated net debt-to-EBITDA ratio of 3.5 to 1.0 and a consolidated interest coverage ratio of 3.0 to 1.0.
On November 16, 2022, the Board of Directors declared a quarterly cash dividend to shareholders of the Company’s Class A and Class B Common Stock of $0.225$0.23 per share payable on July 29, 2022,January 31, 2023, to shareholders of record at the close of business on July 8, 2022.
Subsequent to April 30, 2022, the Company has purchased 203,664 shares of its Class A Nonvoting Common Stock under its share repurchase program for an aggregate purchase price of $9.3 million and an average purchase price per share of $45.71, which fully exhausted all shares available for repurchase under the existing repurchase program.
On May 24, 2022, the Company's Board of Directors authorized an increase in the Company's share repurchase program, authorizing the repurchase of up to $100.0 million of the Company's Class A Nonvoting Common Stock. The share repurchase program may be implemented from time to time on the open market or in privately negotiated transactions and has no expiration date. The repurchased shares will be available for use in connection with the Company's stock-based plans and for other corporate purposes.
January 10, 2023.
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, compliance expertise, customization expertise, improving the overall customer experience, 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 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.
•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 and other Global Geopolitical Events on Our Business
The Company has experienced, and expects to continue to experience, increased freight and input material cost inflation as a result of increased global demand, disruptions caused by COVID-19 and government-mandated actions in response to COVID-19, the conflict in the Ukraine, as well as labor shortages. The Company has taken and will continue to take actions to mitigate inflation issues, but thus far has not fully offset the impact of these trends partially due to advance notice requirements of certain distributors.through pricing actions. 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 fourth quarter of fiscal 2022.margin.
We believe we have the financial strength to continue to invest in organic sales growth opportunities including sales, 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 April 30,October 31, 2022, we had cash of $103.1$114.5 million, as well as a credit facility with $121.3$99.4 million available for future borrowing, which can be increased up to $321.3$299.4 million at the Company's option and subject to certain conditions, for total available liquidity of approximately $424.4$413.9 million.
We believe that our financial resources and liquidity levels including the remaining undrawn amount of the credit facility and our ability to increase that credit line as necessary are sufficient to manage the continuing impact of geopolitical events including supply chain disruptions as a result of the conflict in the Ukraine as well as the COVID-19 pandemic, including the spread of variants that could result in additional government actions around the world to contain the virus or prevent further spread which may result in reduced sales, reduced net income, and reduced cash provided by operating activities. Refer to Risk Factors, included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended July 31, 2021,2022, for further discussion of the possible impact of the COVID-19 pandemic and other global geopolitical events on our business.
Results of Operations
The comparability of the operating results for the three and nine months ended April 30, 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 nine months ended April 30,October 31, 2022 and 2021 is as follows:
| | | Three months ended April 30, | | Nine months ended April 30, | | Three months ended October 31, |
(Dollars in thousands) | (Dollars in thousands) | 2022 | | % Sales | | 2021 | | % Sales | | 2022 | | % Sales | | 2021 | | % Sales | (Dollars in thousands) | 2022 | | % Sales | | 2021 | | % Sales |
Net sales | Net sales | $ | 338,551 | | | | | $ | 295,503 | | | | | $ | 978,081 | | | | | $ | 838,568 | | | | Net sales | $ | 322,569 | | | | | $ | 321,475 | | | |
Gross margin | Gross margin | 164,026 | | | 48.4 | % | | 148,847 | | | 50.4 | % | | 468,376 | | | 47.9 | % | | 413,797 | | | 49.3 | % | Gross margin | 155,264 | | | 48.1 | % | | 154,988 | | | 48.2 | % |
Operating expenses: | Operating expenses: | | Operating expenses: | |
Research and development | Research and development | 14,923 | | | 4.4 | % | | 11,305 | | | 3.8 | % | | 42,795 | | | 4.4 | % | | 31,384 | | | 3.7 | % | Research and development | 13,933 | | | 4.3 | % | | 13,907 | | | 4.3 | % |
Selling, general and administrative | Selling, general and administrative | 96,214 | | | 28.4 | % | | 90,817 | | | 30.7 | % | | 285,485 | | | 29.2 | % | | 256,088 | | | 30.5 | % | Selling, general and administrative | 89,945 | | | 27.9 | % | | 96,746 | | | 30.1 | % |
Total operating expenses | Total operating expenses | 111,137 | | | 32.8 | % | | 102,122 | | | 34.6 | % | | 328,280 | | | 33.6 | % | | 287,472 | | | 34.3 | % | Total operating expenses | 103,878 | | | 32.2 | % | | 110,653 | | | 34.4 | % |
Operating income | Operating income | $ | 52,889 | | | 15.6 | % | | $ | 46,725 | | | 15.8 | % | | $ | 140,096 | | | 14.3 | % | | $ | 126,325 | | | 15.1 | % | Operating income | $ | 51,386 | | | 15.9 | % | | $ | 44,335 | | | 13.8 | % |
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 April 30,October 31, 2022, increased 14.6%0.3% to $338.6$322.6 million, compared to $295.5$321.5 million in the same period in the prior year. The increase consisted of organic sales growth of 9.0%, sales growth from acquisitions of 8.6% and6.9% partially offset by a decrease from foreign currency translation of 3.0%6.6%. Organic sales grew 11.8%8.6% in the IDS segment and 0.9%grew 1.2% in the WPS segment during the three months ended April 30, 2022, compared to the same period in the prior year.
In the first quarter of fiscal 2021, the IDS business began to recover from a decline in sales due to the impacts of the COVID-19 pandemic on a large demographic of our customers and the overall global economy, while the WPS segment realized strong organic sales growth due to increased sales of personal protective equipment and other pandemic-related products. As a result, the recovery from the COVID-19 pandemic had a significant impact on year-to-date organic sales through the third 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 nine months ended April 30, 2022, increased 16.6% to $978.1 million, compared to $838.6 million in the same period in the prior year. The increase consisted of organic sales growth of 9.6%, sales growth from acquisitions of 8.5% and a decrease from foreign currency translation of 1.5%. Organic sales increased 13.6% in the IDS segment and declined 1.1% in the WPS segment during the nine months ended April 30,October 31, 2022, compared to the same period in the prior year.
Gross margin increased 10.2%0.2% to $164.0$155.3 million in the three months ended April 30,October 31, 2022, compared to $148.8$155.0 million in the same period in the prior year. As a percentage of net sales, gross margin decreased to 48.4%48.1% compared to 50.4% in the same period in the prior year. Gross margin increased 13.2% to $468.4 million for the nine months ended April 30, 2022, compared to $413.8 million in the same period in the prior year. As a percentage of net sales, gross margin decreased to 47.9% compared to 49.3%48.2% in the same period in the prior year. The decrease in gross margin as a percentage of net sales was primarily due to an increase in the cost of materials labor and freight,labor, which was partially mitigated by price increases as well as our ongoing efforts to increase prices streamline manufacturing processes and drive sustainable operational efficiencies.
R&D expenses increased 32.0% to $14.9were consistent at $13.9 million and increased 36.4% to $42.8 million for4.3% of sales in the three and nine months ended April 30,October 31, 2022 respectively, compared to $11.3 million and $31.4 million in the same periods in the prior year. The increase in R&D spending for both the three and nine-month periods was primarily due to the acquisitions of Code and Nordic ID, as these companies operate with a greater amount of R&D spend as a percentage of net sales compared to Brady's organic business. In
addition, R&D headcount increased in the IDS business.2021. The Company remains committed to investing in new product development to increase sales within our IDS and WPS businesses. Investments in new printers,printing systems, materials and the buildingbuild out of a comprehensive industrial track and trace solution continue to beremain 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 5.9%decreased 7.0% to $96.2$89.9 million in the three months ended April 30,October 31, 2022, compared to $90.8$96.7 million in the same period in the prior year. As a percentage of sales, SG&A expenses increased 11.5%decreased to $285.5 million27.9% for the ninethree months ended April 30,October 31, 2022, compared to $256.130.1% in the same period in the prior year. The decrease in SG&A expenses was primarily due to foreign currency translation and to a lesser extent, reductions in catalog advertising expenses within the WPS segment.
Operating income increased 15.9% to $51.4 million in the three months ended October 31, 2022, compared to $44.3 million in the same period in the prior year. The increase in SG&A expenses in both the three and nine-month periods was primarily due to the acquisitions of Code, Magicard and Nordic ID, and to a lesser extent an increase in sales headcount in the IDS business, which was partially offset by a decrease due to foreign currency translation. As a percentage of net sales, SG&A decreased to 28.4% compared to 30.7% in the three-month period and decreased to 29.2% compared to 30.5% in the nine-month period ended April 30, 2022, compared to the same periods in the prior year. The decrease in SG&A expense as a percentage of sales for the three and nine-month periods ended April 30, 2022 was primarily due to ongoing efficiency activities throughout SG&A.
Operating income increased 13.2% to $52.9 million and increased 10.9% to $140.1 million for the three and nine months ended April 30, 2022, respectively, compared to $46.7 million and $126.3 million in the same periods in the prior year. The increase in operating income in both the three- and nine-month periods was primarily due to the increase in segment profit in the IDS segment as a result of organic sales growth, and to a lesser extent an increase in segment profit in the WPS segmentbusiness due to its reducedactions taken last fiscal year to reduce the cost structure.structure along with ongoing reductions in catalog advertising expenses, as well as an increase in IDS segment profit resulting from organic sales growth.
OPERATING INCOME TO NET INCOME
| | | Three months ended April 30, | | Nine months ended April 30, | | Three months ended October 31, |
(Dollars in thousands) | (Dollars in thousands) | 2022 | | % Sales | | 2021 | | % Sales | | 2022 | | % Sales | | 2021 | | % Sales | (Dollars in thousands) | 2022 | | % Sales | | 2021 | | % Sales |
Operating income | Operating income | $ | 52,889 | | | 15.6 | % | | $ | 46,725 | | | 15.8 | % | | $ | 140,096 | | | 14.3 | % | | $ | 126,325 | | | 15.1 | % | Operating income | $ | 51,386 | | | 15.9 | % | | $ | 44,335 | | | 13.8 | % |
Other (expense) income: | Other (expense) income: | | Other (expense) income: | |
Investment and other (expense) income | Investment and other (expense) income | (1,308) | | | (0.4) | % | | 1,181 | | | 0.4 | % | | (1,343) | | | (0.1) | % | | 3,372 | | | 0.4 | % | Investment and other (expense) income | (157) | | | 0.0 | % | | 543 | | | 0.2 | % |
Interest expense | Interest expense | (329) | | | (0.1) | % | | (131) | | | — | % | | (763) | | | (0.1) | % | | (288) | | | — | % | Interest expense | (894) | | | (0.3) | % | | (182) | | | (0.1) | % |
Income before income tax and losses of unconsolidated affiliate | 51,252 | | | 15.1 | % | | 47,775 | | | 16.2 | % | | 137,990 | | | 14.1 | % | | 129,409 | | | 15.4 | % | |
Income before income taxes | | Income before income taxes | 50,335 | | | 15.6 | % | | 44,696 | | | 13.9 | % |
Income tax expense | Income tax expense | 11,198 | | | 3.3 | % | | 10,229 | | | 3.5 | % | | 29,075 | | | 3.0 | % | | 27,017 | | | 3.2 | % | Income tax expense | 10,894 | | | 3.4 | % | | 9,650 | | | 3.0 | % |
Income before losses of unconsolidated affiliate | 40,054 | | | 11.8 | % | | 37,546 | | | 12.7 | % | | 108,915 | | | 11.1 | % | | 102,392 | | | 12.2 | % | |
Equity in losses of unconsolidated affiliate | — | | | — | % | | (255) | | | (0.1) | % | | — | | | — | % | | (760) | | | (0.1) | % | |
Net income | Net income | $ | 40,054 | | | 11.8 | % | | $ | 37,291 | | | 12.6 | % | | $ | 108,915 | | | 11.1 | % | | $ | 101,632 | | | 12.1 | % | Net income | $ | 39,441 | | | 12.2 | % | | $ | 35,046 | | | 10.9 | % |
Investment and other expense was $1.3$0.2 million in both the three and nine months ended April 30,October 31, 2022, compared to investment and other income of $1.2$0.5 million in the three-monthsame period and $3.4 million in the nine-month period ended April 30, 2021.prior year. The decrease in the three and nine-month periodschange was primarily due to a decrease in the market value of securities held in deferred compensation plans.plans during the three months ended October 31, 2022.
Interest expense increased to $0.3$0.9 million and $0.8 million forin the three and nine months ended April 30,October 31, 2022, respectively, compared to $0.1 million and $0.3$0.2 million in the same periodsperiod in the prior year. The increase in interest expense for both the three and nine-month periods was primarily due to increased borrowingan increase in interest rates in the Company's revolving loan agreement and partially due to an increase in outstanding borrowings on our credit facilitythe Company's revolving loan agreement compared to the same periodsperiod in the prior year.
The Company'sCompany’s income tax rate was 21.8% and 21.4%21.6% for the three months ended April 30,October 31, 2022 and 2021, respectively, and the income tax rate was 21.1% and 20.9% for the nine months ended April 30, 2022 and 2021, respectively.2021. Refer to Note L,M "Income Taxes" for additional information on the Company's income tax rates.
Equity in losses of unconsolidated affiliate of $0.3 million and $0.8 million for the three and nine months ended April 30, 2021, respectively, represented the Company's proportionate share of the loss in its equity interest in React Mobile, Inc., an employee safety software and hardware company based in the United States. In the fourth quarter of fiscal 2021, the Company recorded an other-than-temporary impairment charge for the Company's remaining equity interest in React Mobile, Inc.
Business Segment Operating Results
The Company evaluates short-term segment performance based on segment profit and customer sales. Interest expense, investment and other (expense) income, income tax expense, equity in losses of unconsolidated affiliate, and certain corporate administrative expenses are excluded when evaluating segment performance.
The following is a summary of segment information for the three and nine months ended April 30,October 31, 2022 and 2021:
| | | Three months ended April 30, | | Nine months ended April 30, | | Three months ended October 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
SALES GROWTH INFORMATION | SALES GROWTH INFORMATION | | | | | | | | SALES GROWTH INFORMATION | | | |
ID Solutions | | |
IDS | | IDS | |
Organic | Organic | 11.8 | % | | 9.8 | % | | 13.6 | % | | (2.1) | % | Organic | 8.6 | % | | 13.2 | % |
Currency | | Currency | (5.5) | % | | 0.6 | % |
Acquisitions | Acquisitions | 11.7 | % | | — | % | | 11.8 | % | | — | % | Acquisitions | — | % | | 11.6 | % |
Currency | (2.4) | % | | 3.1 | % | | (1.3) | % | | 1.6 | % | |
Total | Total | 21.1 | % | | 12.9 | % | | 24.1 | % | | (0.5) | % | Total | 3.1 | % | | 25.4 | % |
Workplace Safety | | | | | | | | |
WPS | | WPS | | | |
Organic | Organic | 0.9 | % | | (2.2) | % | | (1.1) | % | | (0.5) | % | Organic | 1.2 | % | | (8.6) | % |
Currency | Currency | (4.8) | % | | 8.6 | % | | (2.3) | % | | 6.1 | % | Currency | (10.3) | % | | 0.8 | % |
Total | Total | (3.9) | % | | 6.4 | % | | (3.4) | % | | 5.6 | % | Total | (9.1) | % | | (7.8) | % |
Total Company | Total Company | | | | | | | | Total Company | | | |
Organic | Organic | 9.0 | % | | 6.5 | % | | 9.6 | % | | (1.7) | % | Organic | 6.9 | % | | 7.0 | % |
Currency | | Currency | (6.6) | % | | 0.7 | % |
Acquisitions | Acquisitions | 8.6 | % | | — | % | | 8.5 | % | | — | % | Acquisitions | — | % | | 8.3 | % |
Currency | (3.0) | % | | 4.6 | % | | (1.5) | % | | 2.8 | % | |
Total | Total | 14.6 | % | | 11.1 | % | | 16.6 | % | | 1.1 | % | Total | 0.3 | % | | 16.0 | % |
SEGMENT PROFIT | SEGMENT PROFIT | | | | | | | | SEGMENT PROFIT | | | |
ID Solutions | $ | 53,962 | | | $ | 47,539 | | | $ | 146,907 | | | $ | 126,818 | | |
Workplace Safety | 7,109 | | | 5,656 | | | 13,917 | | | 17,107 | | |
IDS | | IDS | $ | 51,525 | | | $ | 48,816 | |
WPS | | WPS | 6,378 | | | 2,293 | |
Total | Total | $ | 61,071 | | | $ | 53,195 | | | $ | 160,824 | | | $ | 143,925 | | Total | $ | 57,903 | | | $ | 51,109 | |
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 | 20.4 | % | | 21.8 | % | | 19.4 | % | | 20.8 | % | |
Workplace Safety | 9.6 | % | | 7.3 | % | | 6.3 | % | | 7.5 | % | |
IDS | | IDS | 20.1 | % | | 19.6 | % |
WPS | | WPS | 9.6 | % | | 3.1 | % |
Total | Total | 18.0 | % | | 18.0 | % | | 16.4 | % | | 17.2 | % | Total | 18.0 | % | | 15.9 | % |
IDS
IDS net sales increased 21.1%3.1% to $264.1$256.4 million forin the three months ended April 30,October 31, 2022, compared to $218.1$248.6 million in the same period in the prior year, which consisted of organic sales growth of 11.8%, sales growth from acquisitions of 11.7%8.6% and a decrease from foreign currency translation of 2.4%. IDS net sales increased 24.1% to $757.7 million for the nine months ended April 30, 2022, compared to $610.5 million in the same period in the prior year, which consisted of organic sales growth of 13.6%, sales growth from acquisitions of 11.8% and a decrease from foreign currency translation of 1.3%5.5%. Organic sales grew in all major product lines with the strongestmost significant growth in the safety and facility identification andproduct line, followed by growth in the product identification, wire identification and healthcare identification product lines in both the three and nine months ended April 30, 2022. lines.
Organic sales in the Americas increased in all three regions as our businesses continue to recover from the economic slowdown caused bymid-single digits, organic sales in Europe increased in the COVID-19 pandemic.
Segment profitmid-teens, and organic sales in Asia increased 13.5% to $54.0 million forin the mid-single digits in the three months ended April 30,October 31, 2022 compared to $47.5 million in the same period in the prior year.
Segment profit increased 15.8%5.5% to $146.9$51.5 million forin the ninethree months ended April 30,October 31, 2022, compared to $126.8$48.8 million in the same period in the prior year. As a percentage of net sales, segment profit decreased to 20.4% from 21.8% for the three-month period, and segment profit decreased to 19.4% from 20.8% for the nine-month period ended April 30, 2022was 20.1% compared to the same periods in the prior year. The decrease in segment profit as a percentage of net sales was primarily due to gross margin compression resulting from an increase in the cost of materials, labor and freight, as well as incremental amortization expense of $2.4 million and $7.2 million in the three and nine months ended April 30, 2022, respectively, which was partially offset by pricing actions, compared to the same periods in the prior year.
Workplace Safety
WPS net sales decreased 3.9% to $74.4 million for the three months ended April 30, 2022, compared to $77.4 million19.6% in the same period in the prior year, which consisted of organicyear. The increase in segment profit was primarily due to increased sales growth of 0.9%volumes in all regions and a decrease from foreign currency translation of 4.8%. Digital sales increased in the low-single digits while catalog channel sales were essentially flat in the three-month period ended April 30, 2022.all major product lines globally.
WPS
WPS net sales decreased 3.4%declined 9.1% to $220.4$66.2 million forin the ninethree months ended April 30,October 31, 2022, compared to $228.1$72.9 million in the same period in the prior year, which consisted of an organic sales declineincrease of 1.1%1.2% and a decrease from foreign currency translation of 2.3%10.3%. The economic effect of the COVID-19 pandemic had a significant impact onOrganic digital sales increased by nearly 13% and organic sales trends during the prior year. The WPS business realized strong organic sales growth through the first quarter of fiscal 2021 due to increased sales of personal protective equipment and other pandemic-related products. As a result, WPS organiccatalog sales declined year-to-date in fiscal 2022 primarily due to the decrease in demand for and sales of COVID-19 products. Digital sales were essentially flat and catalog channel sales decreased in the low-single digits organically in the nine-month period ended April 30, 2022.three-month period.
Organic sales in Europe were essentially flat in both the three and nine months ended April 30, 2022, compared to the same periodsincreased in the prior year. Bothmid-single digits consisting of digital sales growth of approximately 10% and low-single digit catalog channel sales were essentially flat in both the three and nine-month periods ended April 30, 2022. Increased demand for core safety and identification products was offset by a decrease in demand for personal protective equipment and other pandemic-related products.
growth. Organic sales in North America were essentially flatdeclined by approximately 11% primarily due to actions taken to improve price competitiveness and simplify our product offering, which contributed to the significant improvement in segment profit in the three-month period. Organic sales in Australia increased by approximately 11% in the three months ended April 30,October 31, 2022 compared to the same period in the prior year. Digitalyear consisting of high-single digit digital sales increased in the low-teensgrowth and catalog channel sales were essentially flatgrowth of approximately 12%.
Segment profit increased 178.2% to $6.4 million in the three months ended April 30, 2022. Organic sales in North America declined in the mid-single digits in the nine months ended April 30,October 31, 2022, compared to $2.3 million in the same period inof the prior year. Digital sales were essentially flat and catalog channel sales decreased in the mid-single digits in the nine-month period ended April 30, 2022.
Organic sales in Australia increased in the low-single digits in both the three and nine months ended April 30, 2022, compared to the same periods in the prior year. Digital sales increased in the low-teens and catalog channel sales were essentially flat in the three months ended April 30, 2022, compared to the same period in the prior year. Both digital and catalog channel sales increased in the low-single digits in the nine months ended April 30, 2022, compared to the same period in the prior year.
Segment profit increased 25.7% to $7.1 million from $5.7 million, and asAs a percentage of net sales, segment profit increasedimproved to 9.6% from 7.3% for the three months ended April 30, 2022, compared to 3.1% in the same period inof the prior year. The increase in segment profit was primarily due to actions taken during the current three-month periodfiscal 2022 to reduce the cost structure includingas well as ongoing reductions in headcount andcatalog advertising expenses. Segment profit decreased 18.6% to $13.9 million from $17.1 million and as a percentage of net sales, segment profit decreased to 6.3% from 7.5% for the nine months ended April 30, 2022, compared to the same period in the prior year. The decrease in segment profit in the nine-month period was primarily due to the decrease in sales volumes as compared to prior year.
Liquidity and Capital Resources
The Company's cash balances are generated and held in numerous locations throughout the world. At April 30,October 31, 2022, approximately 94%95% 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.months. Although the Company believes these sources of cash are currently sufficient to fund domestic operations, annual cash needs could require repatriation of cash to the U.S. from foreign jurisdictions, which may result in additional tax payments.
Cash Flows
Cash and cash equivalents were $114.5 million at October 31, 2022, an increase of $0.4 million from July 31, 2022. The significant changes were as follows:
| | | | | | | | | | | |
| Three months ended October 31, |
(Dollars in thousands) | 2022 | | 2021 |
Net cash flow provided by (used in): | | | |
Operating activities | $ | 27,999 | | | $ | 27,491 | |
Investing activities | (3,861) | | | (11,326) | |
Financing activities | (20,535) | | | (4,592) | |
Effect of exchange rate changes on cash | (3,201) | | | (1,355) | |
Net increase in cash and cash equivalents | $ | 402 | | | $ | 10,218 | |
Cash Flows
Cash and cash equivalents were $103.1 million at April 30, 2022, a decrease of $44.3 million from July 31, 2021. The significant changes were as follows:
| | | | | | | | | | | |
| Nine months ended April 30, |
(Dollars in thousands) | 2022 | | 2021 |
Net cash flow provided by (used in): | | | |
Operating activities | $ | 65,236 | | | $ | 154,908 | |
Investing activities | (22,071) | | | (18,844) | |
Financing activities | (81,762) | | | (39,274) | |
Effect of exchange rate changes on cash | (5,670) | | | 7,368 | |
Net (decrease) increase in cash and cash equivalents | $ | (44,267) | | | $ | 104,158 | |
Net cash provided by operating activities was $65.2$28.0 million forin the ninethree months ended April 30,October 31, 2022, compared to $154.9$27.5 million in the same period of the prior year. The decreaseuse of cash from working capital was reduced primarily due to cash outflows fora decrease in the amount of inventory purchases in order to reduce the risk of supply chain disruption. In addition,current quarter, which was offset by the annual cash incentive compensation payments were higherplan payment made in the current nine-month period than they were inquarter compared to the same period insecond quarter of the prior year.
Net cash used in investing activities was $22.1consisted of $3.9 million of capital expenditures in the ninethree months ended April 30,October 31, 2022, compared to $18.8$11.3 million usedof capital expenditures in the same period inof the prior year. Prior year which consisted primarily of capital expenditures in both periods.were elevated due to the purchase of two facilities that were previously leased.
Net cash used in financing activities was $81.8$20.5 million in the ninethree months ended April 30,October 31, 2022 which consistedcompared to $4.6 million in the same period of share repurchases of $84.9 million, dividend payments of $34.7 million, and tax withholding from stock-based awards of $5.1 million, partially offset by $39.0 million net borrowingthe prior year. Net borrowings on the credit facility. Net cash used in financing activities in the nine months ended January 31, 2021 of $39.3facility declined by $25.0 million primarily consisted of dividend payments of $34.3 milliondue to reduced capital expenditures and share repurchases in the three months ended October 31, 2022 compared to the same period in the prior year.
Material Cash Requirements
Our material cash requirements for known contractual obligations include capital expenditures, borrowings on credit facilities 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 short-term in 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 $3.6 million.inventory and other 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 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 Facilities
On August 1, 2019, the Company and certain of its subsidiaries entered into an unsecured $200 million multi-currency revolving loan agreement with a group of five banks. At the Company's option, and subject to certain conditions, the available amount under the revolving loan agreement may be increased from $200 million to $400 million.
On December 21, 2021, the Company and certain of its subsidiaries entered into an amendment to the revolving loan agreement, which amends the revolving loan agreement dated August 1, 2019. The amendment amends the revolving loan agreement to, among other things,items, (a) change the interest rate under the revolving loan agreement for borrowings (i) denominated in British Pounds from the London Inter-bank Offered Rate ("LIBOR") to a daily simple SONIA-based rate, (ii) denominated in Euro from a LIBOR-based rate to a rate based on the Euro Interbank Offered Rate and (iii) denominated in Japanese Yen from a LIBOR-based rate to a rate based on the Tokyo Interbank Offered Rate, in each of the foregoing cases subject to certain adjustments specified in the revolving loan agreement; and (b) provide mechanics relating to a transition away from U.S. dollar LIBOR (with respect to borrowings denominated in U.S. dollars) and the designated benchmarks for the other eligible currencies as benchmark interest rates and the replacement of any such benchmark by a replacement benchmark rate. The amendment to the revolving loan agreement did not have a material impact on the interest rate or related balances in the Company's consolidated financial statements.
As of April 30,October 31, 2022, the outstanding balance on the Company's revolving loan agreement was $77.0$99.0 million. The maximum amount outstanding on the credit facility during the ninethree months ended April 30,October 31, 2022 was $101.0 million. The borrowings bear interest at 1.28%4.09% as of April 30,October 31, 2022. The Company had letters of credit outstanding under the loan agreement of $1.7$1.6 million as of April 30,October 31, 2022 and there was $121.3$99.4 million available for future borrowing, which can be increased to $321.3$299.4 million at the Company's option, subject to certain conditions. The revolving loan agreement has a final maturity date of August 1, 2024. As such, borrowings were classified as long-term on the condensed consolidated balance sheets.Condensed Consolidated Balance Sheets.
Refer to Item 1, Note N, "Subsequent Events" for information regarding the Company's subsequent events affecting financial condition.
Covenant Compliance
The Company's revolving loan agreement requires it to maintain certain financial covenants, including a ratio of debt to the trailing twelve months EBITDA, as defined in the debt agreements, of not more than a 3.5 to 1.0 ratio (leverage ratio) and the trailing twelve months EBITDA to interest expense of not less than a 3.0 to 1.0 ratio (interest expense coverage). As of April 30,October 31, 2022, the Company was in compliance with these financial covenants, with a ratio of debt to EBITDA, as defined by the agreements, equal to 0.310.38 to 1.0 and the interest expense coverage ratio equal to 255.5125.1 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 and 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:
•Increased cost of raw materials, labor and freight as well as raw material shortages and supply chain disruptions
•Adverse impacts of the novel coronavirus ("COVID-19") pandemic or other pandemics
•Decreased demand for the Company's products
•Ability to compete effectively or to successfully execute its strategy
•Increased cost of raw materials, labor and freight as well as raw material shortages and supply chain disruptions
•Ability to develop technologically advanced products that meet customer demands
•Ability to identify, integrate, and grow acquired companies, and to manage contingent liabilities from divested businesses
•Difficulties in protecting websites, networks, and systems against security breaches 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 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 plan may be implemented by purchasing shares in the open market or in privately negotiated transactions, with repurchased shares available for use in connection with the Company's stock-based plans and for other corporate purposes. On September 1, 2021, Brady’s Board of Directors authorized an increase in the Company’s share buyback program, bringing the amount of the Company’s Class A Common Stock authorized for repurchase up to a total of two million shares, inclusive of the shares in the existing share buyback program. As of April 30, 2022, 203,664 shares remained authorized for purchase in connection with this share repurchase program. Subsequent to April 30, 2022, the Company has purchased 203,664 shares of its Class A Nonvoting Common Stock under its share repurchase program for an aggregate purchase price of $9.3 million and an average purchase price per share of $45.71, which fully exhausted all shares available for repurchase under the existing repurchase program.
On May 24, 2022, the Company's Board of Directors authorized an increase in the Company's share repurchase program, authorizing the repurchase of up to $100.0 million of the Company's Class A Nonvoting Common Stock. TheAs of October 31, 2022, there were $72.9 million worth of shares authorized to purchase remaining pursuant to the existing share repurchase program may be implemented from time to time on the open market or in privately negotiated transactions and has no expiration date. The repurchased shares will be available for use in connection with the Company's stock-based plans and for other corporate purposes.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 April 30,October 31, 2022:
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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 |
February 1, 2022 - February 28, 2022 | | 311,234 | | | $ | 48.29 | | | 311,234 | | | 1,258,010 | |
March 1, 2022 - March 31, 2022 | | 467,660 | | | 45.79 | | | 467,660 | | | 790,350 | |
April 1, 2022 - April 30, 2022 | | 586,686 | | | 45.63 | | | 586,686 | | | 203,664 | |
Total | | 1,365,580 | | | $ | 46.29 | | | 1,365,580 | | | 203,664 | |
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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) |
August 1, 2022 - August 31, 2022 | | — | | | $ | — | | | — | | | $ | 85,010 | |
September 1, 2022 - September 30, 2022 | | 255,814 | | | 43.30 | | | 255,814 | | | 73,932 | |
October 1, 2022 - October 31, 2022 | | 23,699 | | | 41.88 | | | 23,699 | | | 72,939 | |
Total | | 279,513 | | | $ | 43.18 | | | 279,513 | | | $ | 72,939 | |
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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10.4 | | |
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10.5 | | |
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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 |
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Date: May 26,November 17, 2022 | | | | | | /s/ RUSSELL R. SHALLER |
| | | | | | Russell R. Shaller |
| | | | | | President and Chief Executive Officer |
| | | | | | (Principal Executive Officer) |
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Date: May 26,November 17, 2022 | | | | | | /s/ AARON J. PEARCE |
| | | | | | Aaron J. Pearce |
| | | | | | Chief Financial Officer and Treasurer |
| | | | | | (Principal Financial Officer) |