Brady (BRC) - 2022 Q2 - Quarterly Report

PART I. Financial Information Financial Statements (Unaudited) Unaudited financial statements for January 31, 2022, show asset and sales growth, but a significant drop in operating cash flow Condensed Consolidated Balance Sheets As of January 31, 2022, total assets increased to $1.387 billion, primarily due to higher inventories, with stable equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Jan 31, 2022 (Unaudited) | July 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $500,015 | $465,104 | | Inventories | $167,456 | $136,107 | | Total Assets | $1,387,063 | $1,377,756 | | Total Current Liabilities | $227,496 | $257,584 | | Long-term debt | $83,000 | $38,000 | | Total Liabilities | $420,495 | $414,728 | | Total Stockholders' Equity | $966,568 | $963,028 | Condensed Consolidated Statements of Income For the six months ended January 31, 2022, net sales increased 17.8% to $639.5 million, with net income rising to $68.9 million Statement of Income Highlights (in thousands, except per share amounts) | Metric | Three Months Ended Jan 31, 2022 | Three Months Ended Jan 31, 2021 | Six Months Ended Jan 31, 2022 | Six Months Ended Jan 31, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $318,055 | $265,838 | $639,530 | $543,065 | | Gross Margin | $149,362 | $129,522 | $304,350 | $264,950 | | Operating Income | $42,872 | $37,412 | $87,207 | $79,600 | | Net Income | $33,815 | $30,860 | $68,861 | $64,341 | | Diluted EPS (Class A) | $0.65 | $0.59 | $1.32 | $1.23 | Condensed Consolidated Statements of Comprehensive Income Comprehensive income for the six months ended January 31, 2022, significantly decreased to $45.9 million due to negative foreign currency translation - Comprehensive income for the six months ended Jan 31, 2022, was $45.9 million, down from $79.4 million YoY[14] - The decrease was mainly caused by a $22.6 million loss from foreign currency translation adjustments, compared to a $14.9 million gain in the prior year[14] Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity slightly increased to $966.6 million, driven by net income offset by dividends and share repurchases Changes in Stockholders' Equity (Six months ended Jan 31, 2022, in thousands) | Description | Amount | | :--- | :--- | | Balance at July 31, 2021 | $963,028 | | Net Income | $68,861 | | Other comprehensive loss, net of tax | ($22,986) | | Repurchase of Class A Common Stock | ($21,720) | | Cash dividends on Common Stock | ($23,249) | | Balance at January 31, 2022 | $966,568 | Condensed Consolidated Statements of Cash Flows Operating cash flow for the six months ended January 31, 2022, sharply declined to $24.3 million, primarily due to increased inventories Net Cash Flow Summary (Six months ended Jan 31, in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $24,328 | $98,889 | | Net cash used in investing activities | ($16,381) | ($16,392) | | Net cash used in financing activities | ($4,505) | ($28,828) | | Effect of exchange rate changes on cash | ($3,370) | $6,276 | | Net increase in cash and cash equivalents | $72 | $59,945 | - The significant decrease in operating cash flow was primarily due to a $34.4 million use of cash for inventories, compared to a $15.0 million source of cash in the prior year[27] Notes to Condensed Consolidated Financial Statements Notes highlight increased inventories, strong ID Solutions sales, declining Workplace Safety sales, and ongoing share repurchases - Inventories increased to $167.5 million as of January 31, 2022, up from $136.1 million at July 31, 2021, with finished products accounting for the largest portion of the increase[33] Net Sales by Segment (Six months ended Jan 31, in thousands) | Segment | 2022 | 2021 | | :--- | :--- | :--- | | ID Solutions | $493,603 | $392,419 | | Workplace Safety | $145,927 | $150,646 | | Total Company | $639,530 | $543,065 | Segment Profit (Six months ended Jan 31, in thousands) | Segment | 2022 | 2021 | | :--- | :--- | :--- | | ID Solutions | $92,945 | $79,279 | | Workplace Safety | $6,808 | $11,451 | | Total Company | $99,753 | $90,730 | - The company's effective income tax rate for the six months ended January 31, 2022, was 20.6%, consistent with the prior year[67][68] - Subsequent to the quarter end, the Board declared a quarterly dividend of $0.225 per share and the company repurchased an additional 181,514 shares for $9.0 million[69][70] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes sales growth to organic and acquisitions, notes gross margin decline from inflation, and highlights segment performance and strong liquidity Overview and Strategy Key fiscal 2022 initiatives focus on organic growth, acquisitions, digital enhancement, and managing profitability amidst cost inflation - Key fiscal 2022 initiatives include investing in organic growth, acquisitions, customer service, digital presence, and maintaining profitability through pricing actions to counter inflation[74] - The company is experiencing increased freight and input material cost inflation, which has negatively impacted gross profit margins and is expected to continue in the second half of fiscal 2022[75] - As of January 31, 2022, the company had total available liquidity of approximately $462.7 million, consisting of $147.4 million in cash and $315.3 million in potential borrowing capacity[76] Results of Operations For the six months ended January 31, 2022, net sales increased 17.8% driven by organic growth and acquisitions, despite gross margin compression Net Sales Growth (Six months ended Jan 31, 2022 vs 2021) | Component | Growth Rate | | :--- | :--- | | Organic Sales Growth | 10.0% | | Acquisitions | 8.5% | | Foreign Currency (Decrease) | (0.7)% | | Total Net Sales Growth | 17.8% | - Gross margin percentage for the six-month period decreased to 47.6% from 48.8% YoY, primarily due to increased costs of materials, labor, and freight[84] - R&D expenses for the six-month period increased by 38.8% to $27.9 million, mainly due to the acquisitions of Code and Nordic ID[85] - SG&A expenses for the six-month period increased 14.5% to $189.3 million, also primarily due to acquisitions and increased personnel costs[89] Business Segment Operating Results ID Solutions segment sales grew significantly, while Workplace Safety sales declined due to reduced pandemic-related demand - ID Solutions (IDS): Six-month net sales increased 25.8% (14.6% organic), driven by recovery from the pandemic and growth in all major product lines and regions. Segment profit margin decreased from 20.2% to 18.8% due to cost pressures and acquisition-related amortization[98][99] - Workplace Safety (WPS): Six-month net sales decreased 3.1% (2.0% organic decline). This was primarily due to a tough comparison with the prior year, which saw high sales of pandemic-related products. Segment profit margin fell from 7.6% to 4.7%[102][106] Liquidity and Capital Resources The company maintains strong liquidity despite a significant decrease in operating cash flow due to strategic inventory increases - Approximately 93% of the company's $147.4 million in cash and cash equivalents were held outside the United States as of January 31, 2022[107] - Net cash from operating activities decreased to $24.3 million from $98.9 million YoY, primarily due to cash outflows for inventory purchases to mitigate supply chain disruption risks[109] - As of January 31, 2022, the outstanding balance on the revolving loan agreement was $83.0 million, with $115.3 million available for future borrowing[114] - The company was in compliance with its financial covenants, with a debt-to-EBITDA ratio of 0.33 to 1.0 (limit of 3.5 to 1.0)[118] Quantitative and Qualitative Disclosures About Market Risk No material changes in market risk information have occurred since the fiscal year ended July 31, 2021 - There has been no material change in market risk information since July 31, 2021[126] Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - The President & CEO and CFO concluded that the company's disclosure controls and procedures are effective as of January 31, 2022[127] - No changes occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[128] PART II. Other Information Unregistered Sale of Equity Securities and Use of Proceeds The company repurchased 55,756 shares for $2.8 million, with 1,569,244 shares remaining authorized for repurchase Share Repurchases (Three months ended Jan 31, 2022) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Nov 2021 | 43,277 | $49.90 | | Dec 2021 | 0 | N/A | | Jan 2022 | 12,479 | $50.98 | | Total | 55,756 | $50.14 | - As of January 31, 2022, 1,569,244 shares remained authorized for purchase under the company's share repurchase program[130][131] Exhibits This section lists exhibits filed with Form 10-Q, including credit agreement amendments, CEO/CFO certifications, and XBRL data - Filed exhibits include the First Amendment to the Credit Agreement, CEO/CFO certifications under Rule 13a-14(a) and Section 1350, and XBRL interactive data files[133]