Brady Corp: Form 10-Q for the period ended Jan 31, 2025

Brady Corporation is a global manufacturer and supplier of identification solutions and workplace safety products that identify and protect premises, products and people. The Company is organized and managed on a geographic basis with two reportable segments: Americas & Asia and Europe & Australia. This regional operating structure allows the Company to further integrate its businesses, support continued growth through the application of the best go-to-market strategies in key geographies, facilitate new product development within recent acquisitions and further simplify and scale the global business.

Within each of the reportable segments, the Company markets, sells and distributes a broad range of identification and safety products and solutions across the following primary product categories:

• Safety and facility identification and protection, which includes safety signs, traffic signs and control products, floor-marking tape, pipe markers, labeling systems, spill control products, lockout/tagout devices, personal protection equipment, first aid products, and software and services for safety compliance auditing, procedures writing and training.
• Product identification, which includes materials, printing systems, radio frequency identification (“RFID”) and barcode scanners for product identification, engraving equipment, brand protection labeling, work in process labeling, finished product identification, asset tracking labels, asset tags and industrial track and trace applications.
• Wire identification, which includes handheld printers, wire markers, sleeves, and tags.
• Healthcare identification, which includes wristbands, labels, printing systems, and other products used in hospital, laboratory, and other healthcare settings for tracking and improving the safety of patients.
• People identification, which includes name tags, badges, lanyards, rigid card printing systems, and access control software.

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. Brady's long-term sales growth and profitability will depend not only on 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 products, deliver a high level of customer service, advance our digital capabilities, and continuously improve the efficiency of our global operations. Our strategy for growth includes an increased focus on certain industries and products, streamlining our product offerings, expanding into higher growth end-markets, intensifying efforts to leverage our diverse product portfolio and synergies across our business, improving the overall customer experience, developing technologically advanced, innovative, and proprietary products, and improving our digital capabilities.

The following are key initiatives supporting our strategy in fiscal 2025:

• Investing in organic growth by enhancing our research and development process and utilizing customer feedback and observations to develop innovative new products that solve customer needs and improve environmental sustainability.
• Providing the highest level of customer service by aligning with customers' preferred communications channels and leveraging technology to enhance the customer experience.
• Expanding and enhancing our sales capabilities through an improved digital presence and the use of data-driven marketing automation tools.
• Maintaining profitability through pricing mechanisms to mitigate the impacts of ongoing supply chain disruptions and inflationary pressures while ensuring prices are market competitive.
• Integrating recent acquisitions to further 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 including insourcing of critical products and manufacturing activities while reducing our environmental footprint.
• Enhancing our high-performance culture, which rewards execution and respects diversity, to elevate employee engagement and improve recruitment and retention practices in order to drive differential performance and execute our strategy.

Macroeconomic Conditions and Trends

The Company's operations and financial performance are subject to the risks and uncertainties inherent in the global economic environment, including inflationary pressures, supply chain disruptions, and other macroeconomic challenges. These pressures may impact the Company's business, financial condition and results of operations as the global economic outlook remains uncertain. The Company has taken and will continue to take actions to mitigate inflationary pressures through targeted pricing actions and a commitment to driving long-term efficiency improvements.

We believe our financial strength positions us well to continue investing in acquisitions and organic growth opportunities, such as expanded sales channels, marketing programs, and research and development (“R&D”). We remain focused on driving sustainable efficiency gains and automation across our operations and selling, general and administrative (“SG&A”) functions, while also returning capital to our shareholders through dividends and share repurchases. At January 31, 2025, we had cash of $138.5 million, as well as a credit agreement with $210.1 million available for future borrowing, which can be increased up to $1,095.1 million at the Company's option and subject to certain conditions, for total available liquidity of $1,233.6 million.

We believe that our financial resources and liquidity levels, including the undrawn portion of our credit agreement and our ability to increase that credit line as necessary, are sufficient to support the execution of our growth strategy and to manage the impact of economic or geopolitical events that could potentially reduce sales, net income, or 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, 2024, for further discussion of the possible impact of global economic or geopolitical events on our business.

Results of Operations

The comparability of the operating results for the three and six months ended January 31, 2025 compared to the same periods in the prior year have been impacted by the acquisitions of Gravotech on August 1, 2024 and AB&R on October 1, 2024. The operating results of Gravotech and AB&R have been included since their acquisition dates. Gravotech has been included in both reportable segments, and AB&R has been included in the Americas & Asia reportable segment. The comparability of the year-to-date operating results of the Americas & Asia segment has also been impacted by the divestiture of a non-core business in October 2023.

A comparison of results of operating income for the three and six months ended January 31, 2025 and 2024, is as follows:

(Dollars in thousands)

References in this Form 10-Q to “organic sales” refer to sales calculated in accordance with GAAP, excluding the impact of foreign currency translation, sales recorded from acquired companies prior to the first anniversary date of their acquisition, and sales recorded from divested companies up to the first anniversary of their divestiture. The Company's organic sales disclosures exclude the effects of foreign currency translation as foreign currency translation is subject to volatility that can obscure underlying business trends. Management believes that the non-GAAP financial measure of organic sales is meaningful to investors as it provides them with useful information to aid in identifying underlying sales trends in our businesses and facilitating comparisons of our sales performance with prior periods.

Net sales for the three months ended January 31, 2025 increased 10.6% to $356.7 million compared to $322.6 million in the same period in the prior year. The increase consisted of organic sales growth of 2.6% and sales growth from acquisitions of 10.2%, which was partially offset by a decrease from foreign currency translation of 2.2%. Organic sales growth of 4.3% in the Americas & Asia segment was partially offset by an organic sales decline of 0.8% in the Europe & Australia segment during the three months ended January 31, 2025 compared to the same period in the prior year.

Net sales for the six months ended January 31, 2025 increased 12.1% to $733.7 million compared to $654.6 million in the same period in the prior year. The increase consisted of organic sales growth of 3.1% and sales growth from acquisitions of 10.0%, partially offset by a decrease from foreign currency translation of 0.5% and a decrease of 0.5% due to a divestiture. Organic sales grew 4.7% in the Americas & Asia segment and were flat in the Europe & Australia segment during the six months ended January 31, 2025 compared to the same period in the prior year.

Gross margin increased 8.5% to $175.8 million in the three months ended January 31, 2025 compared to $162.1 million in the same period in the prior year. As a percentage of net sales, gross margin decreased to 49.3% from 50.2% in the three-month period. Gross margin increased 9.5% to $365.5 million in the six months ended January 31, 2025 compared to $333.8 million in the same period in the prior year. As a percentage of net sales, gross margin decreased to 49.8% from 51.0% in the six-month period. The decrease in gross margin as a percentage of net sales during the three months ended January 31, 2025 was primarily due to facility closure and other reorganization costs of $2.3 million, which were partially offset by organic sales growth in higher gross margin product lines. The facility closure and other reorganization costs primarily relate to headcount reductions associated with the closure of a manufacturing facility in China and the closure of a manufacturing facility in the U.S. The decrease in gross margin as a percentage of net sales during the six months ended January 31, 2025 was primarily due to a non-recurring increase in cost of goods sold of $4.1 million related to the fair value adjustment to inventory from acquisitions as well as the facility closure and other reorganization costs of $2.3 million, which were partially offset by organic sales growth in higher gross margin product lines.

R&D expenses increased 11.2% to $18.7 million in the three months ended January 31, 2025 compared to $16.8 million in the same period in the prior year. As a percentage of net sales, R&D expenses were unchanged at 5.2% in the three-month period compared to the same period in the prior year. R&D expenses increased 15.7% to $37.6 million in the six months ended January 31, 2025 compared to $32.5 million in the same period in the prior year. As a percentage of net sales, R&D expenses increased to 5.1% from 5.0% in the six-month period. The increase in R&D spending was primarily due to the acquisition of Gravotech, and, to a lesser extent, an increase in R&D headcount within the Company's organic business. The Company remains committed to investing in new product development to drive long-term organic sales growth. Investments in new printing systems, materials and new product development within recent acquisitions are the primary focus of R&D expenditures in fiscal 2025.

SG&A expenses include selling and administrative costs directly attributed to the Americas & Asia and Europe & Australia segments, as well as certain other corporate administrative expenses including finance, information technology, human resources and other administrative expenses. SG&A expenses increased 15.9% to $105.9 million in the three months ended January 31, 2025 compared to $91.3 million in the same period in the prior year. As a percentage of sales, SG&A expenses increased to 29.7% from 28.3% in the three-month period. SG&A expenses increased 16.1% to $217.7 million for the six months ended January 31, 2025 compared to $187.6 million in the same period in the prior year. As a percentage of net sales, SG&A expenses increased to 29.7% from 28.7% in the six-month period. The increase in SG&A expenses during the three and six months ended January 31, 2025 was primarily due to increased headcount and other selling-related costs from acquisitions, including incremental amortization expense from the acquired intangible assets. SG&A expenses during the three months ended January 31, 2025 also include facility closure and other reorganization costs of $3.4 million. SG&A expenses during the six months ended January 31, 2025 also include facility closure and other reorganization costs of $3.4 million and non-recurring acquisition-related costs and other expenses of $1.0 million.

Operating income decreased 5.0% to $51.2 million and decreased 3.1% to $110.2 million in the three and six months ended January 31, 2025, respectively, compared to $53.9 million and $113.7 million in the same periods in the prior year. The decrease in operating income in both the three and six-month periods was primarily due to non-recurring acquisition-related costs and incremental amortization expense related to acquired businesses, as well as facility closure and other reorganization costs.

OPERATING INCOME TO NET INCOME

(Dollars in thousands)

Investment and other income was $2.1 million in the three months ended January 31, 2025 compared to $2.7 million in the same period in the prior year. Investment and other income was $3.4 million in the six months ended January 31, 2025 compared to $3.1 million in the same period in the prior year. The change in investment and other income during both the three and six-month periods was primarily due to the change in market value of securities held in deferred compensation plans.

Interest expense increased to $1.3 million and $2.7 million for the three and six months ended January 31, 2025, respectively, compared to $0.8 million and $1.6 million in the same periods in the prior year. The increase in interest expense was primarily due to an increase in outstanding borrowings on the Company's credit agreement to fund acquisitions, which was partially offset by a decrease in the weighted average interest rate compared to the same periods in the prior year.

The Company's income tax rate was 22.5% and 21.8% for the three months ended January 31, 2025 and 2024, respectively, and the income tax rate was 21.4% and 21.1% for the six months ended January 31, 2025 and 2024, respectively. The Company expects its ongoing annual income tax rate to be approximately 21% based on its current global business mix and based on tax laws and statutory rates currently in effect.

Business Segment Operating Results

The Company evaluates short-term segment performance based on segment profit and customer sales. Interest expense, investment and other income, income tax expense, and certain corporate administrative expenses are excluded when evaluating segment performance.

The following is a summary of segment information for the three and six months ended January 31, 2025 and 2024:

Americas & Asia

Americas & Asia net sales increased 10.5% to $233.8 million in the three months ended January 31, 2025 compared to $211.6 million in the same period in the prior year, which consisted of organic sales growth of 4.3% and sales growth from acquisitions of 7.6%, which were partially offset by a decrease from foreign currency translation of 1.4%. Americas & Asia net sales increased 10.6% to $479.3 million in the six months ended January 31, 2025 compared to $433.3 million in the same period in the prior year, which consisted of organic sales growth of 4.7% and sales growth from acquisitions of 7.5%, which were partially offset by a decrease from foreign currency translation of 0.8% and a decrease due to a divestiture of 0.8%.

Organic sales in the Americas increased in the low-single digits in the three months ended January 31, 2025 and in the mid-single digits in the six months ended January 31, 2025 compared to the same periods in the prior year. Organic sales growth in both the three and six-month periods was driven by growth in the wire identification, safety and facility identification, and product identification product lines, which was partially offset by an organic sales decline in the healthcare identification product line.

Organic sales in Asia increased approximately 11% in the three months ended January 31, 2025 and increased in the high-single digits in the six months ended January 31, 2025 compared to the same periods in the prior year. The organic sales increase in both the three and six-month periods was primarily driven by organic sales growth in Japan and India, which was partially offset by an organic sales decline in China. Organic sales grew in all major products lines with the strongest growth in the product identification and safety and facility identification product lines.

Americas & Asia segment profit increased 4.8% to $46.0 million in the three months ended January 31, 2025 compared to $43.9 million in the same period in the prior year. Segment profit increased 7.6% to $100.9 million in the six months ended January 31, 2025 compared to $93.8 million in the same period in the prior year. As a percentage of net sales, segment profit decreased to 19.7% from 20.7% in the three-month period and segment profit decreased to 21.0% from 21.6% in the six-month period ended January 31, 2025 compared to the same periods in the prior year. The decrease in segment profit as a percentage of sales was primarily due to costs associated with the closure of two facilities during the three-month period, and incremental amortization from acquired businesses and purchase accounting adjustments during the six-month period, which was partially offset by increased profit from organic sales growth.

Europe & Australia

Europe & Australia net sales increased 10.7% to $122.8 million in the three months ended January 31, 2025 compared to $111.0 million in the same period in the prior year, which consisted of sales growth from acquisitions of 15.1% that was partially offset by an organic sales decline of 0.8% and a decrease from foreign currency translation of 3.6%. Europe & Australia net sales increased 15.0% to $254.5 million in the six months ended January 31, 2025 compared to $221.3 million in the same period in the prior year, which consisted of sales growth from acquisitions of 15.1%, which was partially offset by a decrease from foreign currency translation of 0.1% while organic sales were flat.

Organic sales in Europe were essentially flat in both the three and six months ended January 31, 2025. Organic sales growth in the product identification and wire identification product lines was offset by an organic sales decline in the safety and facility identification product line during the three-month period. Organic sales growth during the six-month period was primarily driven by growth in the safety and facility identification and wire identification product lines, which was offset by an organic sales decline in the product identification product line.

Organic sales in Australia declined in the low-single digits in both the three and six months ended January 31, 2025 compared to the same periods in the prior year. The organic sales decline was primarily driven by a decrease in volume in the safety and facility and wire identification product lines.

Europe & Australia segment profit decreased 24.4% to $11.4 million in the three months ended January 31, 2025 compared to $15.1 million in the same period in the prior year. Segment profit decreased 23.0% to $24.5 million in the six months ended January 31, 2025 compared to $31.8 million in the same period in the prior year. As a percentage of net sales, segment profit decreased to 9.3% from 13.6% for the three-month period and segment profit decreased to 9.6% from 14.4% for the six-month period ended January 31, 2025, compared to the same periods in the prior year. The decrease in segment profit was primarily due to incremental amortization from acquired businesses, purchase accounting adjustments and reorganization costs in order to streamline our operating structure.

Liquidity and Capital Resources

The Company's cash balances are generated and held in numerous locations throughout the world. At January 31, 2025, 94% 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. 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 $138.5 million at January 31, 2025, an increase of $111.7 million from July 31, 2024. The significant changes were as follows:

(Dollars in thousands)

Net cash provided by operating activities was $63.0 million in the six months ended January 31, 2025, compared to $98.4 million in the same period of the prior year. The decrease in cash provided by operating activities was primarily due to increased vendor payments related to acquired businesses, increased inventory purchases and higher annual incentive compensation payments.

Net cash used in investing activities was $151.7 million in the six months ended January 31, 2025, which primarily consisted of the acquisition of businesses of $137.3 million and capital expenditures of $14.4 million. Net cash used in investing activities was $60.8 million in the six months ended January 31, 2024, which consisted of capital expenditures including the purchase of a previously leased facility in Mexico and facility construction costs in Belgium.

Net cash used in financing activities was $22.3 million in the six months ended January 31, 2025 compared to $43.0 million in the same period in the prior year. The decrease in cash used in financing activities was primarily due to a decline in share repurchases 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 our credit agreement and lease obligations. We believe that net cash provided by operating activities will continue to be adequate to meet our liquidity and capital needs for these items over the next 12 months and in the long-term beyond the next 12 months. We also have cash requirements for purchase orders and contracts for the purchase of 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 Agreement

On August 1, 2019, the Company and certain of its subsidiaries entered into an unsecured $200 million multi-currency credit agreement with a group of five banks.

On November 14, 2022, the Company and certain of its subsidiaries entered into a second amendment to the credit agreement to, among other items, (a) increase the lending commitments by $100 million for total lending commitments of $300 million, (b) extend the final maturity date to November 14, 2027, (c) increase the interest rate on certain borrowings by 0.125%, and (d) increase the available amount under the credit agreement, at the Company's option and subject to certain conditions, from $300 million up to (i) an amount equal to the incremental borrowing necessary to bring the Company's consolidated net debt-to-EBITDA ratio as defined in the credit agreement to 2.5 to 1.0 plus (ii) $200 million.

On October 10, 2024, the Company and certain of its subsidiaries entered into a Third Amendment to Credit Agreement (“Amendment No. 3”) with a group of six banks, which amended the original credit agreement dated August 1, 2019. Amendment No. 3 amended the credit agreement to, among other things, change the applicable benchmark under the credit agreement for borrowings denominated in Canadian Dollars from the Canadian Dollar Offered Rate (“CDOR”) to the adjusted Term Canadian Overnight Repo Rate Average Rate (“CORRA”). Borrowings under Amendment No. 3 are unsecured and are guaranteed by certain of the Company's domestic subsidiaries.

As of January 31, 2025, the outstanding balance on the Company's credit agreement was $87.7 million. The maximum amount outstanding on the credit agreement during the six months ended January 31, 2025 was $144.8 million. As of January 31, 2025, the U.S. dollar-denominated borrowings of $31.0 million bear interest at 5.3%; the Euro-denominated borrowings of €45.0 million bear interest at 3.8%; and the British Pound-denominated borrowings of £8.0 million bear interest at 5.6%. The Company had letters of credit outstanding under the credit agreement of $2.2 million as of January 31, 2025, and there was $210.1 million available for future borrowing, which can be increased to $1,095.1 million at the Company's option, subject to certain conditions. The credit agreement has a final maturity date of November 14, 2027. As such, borrowings were classified as long-term on the condensed consolidated balance sheets.

Covenant Compliance

The Company's credit agreement requires it to maintain certain financial covenants, including a ratio of debt to the trailing twelve months EBITDA, as defined in the debt agreements, of not more than a 3.5 to 1.0 ratio (leverage ratio) and the trailing twelve months EBITDA to interest expense of not less than a 3.0 to 1.0 ratio (interest expense coverage). As of January 31, 2025, the Company was in compliance with these financial covenants, with a ratio of debt to EBITDA, as defined by the agreements, equal to 0.3 to 1.0 and the interest expense coverage ratio equal to 73.5 to 1.0.

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 and labor as well as material shortages and supply chain disruptions
• Decreased demand for the Company's products
• Ability to compete effectively or to successfully execute the Company's strategy
• 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
• Global climate change and environmental regulations
• Litigation, including product liability claims
• Foreign currency fluctuations
• Changes in tax legislation and tax rates
• Potential write-offs of goodwill and other intangible assets
• Differing interests of voting and non-voting shareholders and changes in the regulatory and business environment around dual-class voting structures
• 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, 2024.

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.

Refer to the Company’s annual report on Form 10-K for the year ended July 31, 2024. There has been no material change in this information since the 2024 Form 10-K.

Brady Corporation maintains 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 (the “Chief Executive Officer”) and its Chief Financial Officer, Chief Accounting Officer and Treasurer (the “Chief Financial Officer”), 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 Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were 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.

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, 2024. There have been no material changes from the risk factors set forth in the 2024 Form 10-K.