Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q



☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended October 31, 2019



☐	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	53223
(Address of principal executive offices)		(Zip Code)

(414) 358-6600

(Registrant’s telephone number, including area code)

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 ☑

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

As of November 19, 2019, there were 49,766,327 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.




	Page
PART I. Financial Information	3
Item 1. Financial Statements (Unaudited)	3
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of Income	4
Condensed Consolidated Statements of Comprehensive Income	5
Condensed Consolidated Statements of Cash Flows	6
Notes to Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition	19
Item 3. Quantitative and Qualitative Disclosures About Market Risk	24
Item 4. Controls and Procedures	24
PART II. Other Information	25
Item 6. Exhibits	25
Signatures	26



	October 31, 2019		July 31, 2019
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	295,093			$	279,072
Accounts receivable—net	162,561			158,114
Inventories	119,612			120,037
Prepaid expenses and other current assets	16,642			16,056
Total current assets	593,908			573,279
Property, plant and equipment—net	112,565			110,048
Goodwill	411,328			410,987
Other intangible assets	34,860			36,123
Deferred income taxes	7,447			7,298
Operating lease assets	52,233			—
Other assets	18,881			19,573
Total	$	1,231,222			$	1,157,308
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	59,385			$	64,810
Accrued compensation and benefits	63,794			62,509
Taxes, other than income taxes	8,885			8,107
Accrued income taxes	6,790			6,557
Current operating lease liabilities	14,857			—
Other current liabilities	52,092			49,796
Current maturities on long-term debt	50,144			50,166
Total current liabilities	255,947			241,945
Long-term operating lease liabilities	40,124			—
Other liabilities	58,616			64,589
Total liabilities	354,687			306,534
Stockholders’ equity:
Class A nonvoting common stock—Issued 51,261,487 shares, and outstanding 49,764,799 and 49,458,841 shares, respectively	513			513
Class B voting common stock—Issued and outstanding, 3,538,628 shares	35			35
Additional paid-in capital	327,241			329,969
Retained earnings	663,808			637,843
Treasury stock—1,496,688 and 1,802,646 shares, respectively, of Class A nonvoting common stock, at cost	(43,779	)		(46,332	)
Accumulated other comprehensive loss	(71,283	)		(71,254	)
Total stockholders’ equity	876,535			850,774
Total	$	1,231,222			$	1,157,308



	Three months ended October 31,
	2019		2018
Net sales	$	286,947			$	293,196
Cost of goods sold	145,542			146,657
Gross margin	141,405			146,539
Operating expenses:
Research and development	10,967			11,326
Selling, general and administrative	89,547			94,591
Total operating expenses	100,514			105,917
Operating income	40,891			40,622
Other income (expense):
Investment and other income (expense)	1,380			(17	)
Interest expense	(701	)		(712	)
Income before income taxes	41,570			39,893
Income tax expense	4,072			9,256
Net income	$	37,498			$	30,637
Net income per Class A Nonvoting Common Share:
Basic	$	0.71			$	0.59
Diluted	$	0.70			$	0.58
Dividends	$	0.22			$	0.21
Net income per Class B Voting Common Share:
Basic	$	0.69			$	0.57
Diluted	$	0.68			$	0.56
Dividends	$	0.20			$	0.20
Weighted average common shares outstanding:
Basic	53,143			52,201
Diluted	53,736			52,958



	October 31, 2019		July 31, 2019
Finished products	$	76,538			$	77,532
Work-in-process	20,696			20,515
Raw materials and supplies	22,378			21,990
Total inventories	$	119,612			$	120,037



	October 31, 2019	July 31, 2019
	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:
Customer relationships and other	9	$	46,594			$	(30,634	)	$	15,960			9	$	46,595		$	(29,343	)	$	17,252
Unamortized other intangible assets:
Trademarks	N/A	18,900			—			18,900		N/A		18,871		—		18,871
Total		$	65,494			$	(30,634	)	$	34,860				$	65,466		$	(29,343	)	$	36,123



		Three months ended
	Condensed Consolidated Statements of Income Location	October 31, 2019
Operating lease cost	Cost of goods sold	$	4,095
Operating lease cost	Selling, general, and administrative expenses	1,310



Years ended July 31,	Operating Leases
Remainder of 2020	$	12,556
2021	15,599
2022	12,647
2023	9,265
2024	5,502
Thereafter	3,181
Total lease payments	$	58,750
Less interest	(3,769	)
Present value of lease liabilities	$	54,981



	October 31, 2019
Weighted average remaining lease term (in years)	4.1
Weighted average discount rate	3.4	%



	Three months ended
	October 31, 2019
Operating cash flows from operating leases	$	4,010
Operating lease assets obtained in exchange for new operating lease liabilities	9,952



Years ended July 31,	Operating Leases
2020	$	18,450
2021	16,132
2022	13,439
2023	10,065
2024	5,656
Thereafter	3,502
Total lease payments	$	67,244



	Three months ended October 31,
	2019		2018
Net income	$	37,498			$	30,637
Other comprehensive loss:
Foreign currency translation adjustments	50			(8,790	)

Cash flow hedges:
Net gain (loss) recognized in other comprehensive loss	196			(380	)
Reclassification adjustment for gains included in net income	(381	)		(47	)
	(185	)		(427	)

Pension and other post-retirement benefits actuarial gain amortization	(105	)		(155	)

Other comprehensive loss, before tax	(240	)		(9,372	)
Income tax benefit (expense) related to items of other comprehensive loss	211			(458	)
Other comprehensive loss, net of tax	(29	)		(9,830	)
Comprehensive income	$	37,469			$	20,807



	Three months ended October 31,
	2019		2018
Operating activities:
Net income	$	37,498			$	30,637
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	5,634			5,960
Non-cash portion of stock-based compensation expense	3,618			4,965
Deferred income taxes	1,009			2,164
Other	1,533			218
Changes in operating assets and liabilities:
Accounts receivable	(4,362	)		(6,709	)
Inventories	249			(3,125	)
Prepaid expenses and other assets	(1,404	)		(2,197	)
Accounts payable and accrued liabilities	(5,193	)		(14,288	)
Income taxes	266			1,193
Net cash provided by operating activities	38,848			18,818

Investing activities:
Purchases of property, plant and equipment	(7,724	)		(6,009	)
Other	527			337
Net cash used in investing activities	(7,197	)		(5,672	)

Financing activities:
Payment of dividends	(11,533	)		(11,096	)
Proceeds from exercise of stock options	3,411			13,001
Payments for employee taxes withheld from stock-based awards	(7,269	)		(2,937	)
Proceeds from borrowing on credit facilities	—			5,737
Repayment of borrowing on credit facilities	—			(2,269	)
Other	65			(1,772	)
Net cash (used in) provided by financing activities	(15,326	)		664

Effect of exchange rate changes on cash and cash equivalents	(304	)		(3,061	)

Net increase in cash and cash equivalents	16,021			10,749
Cash and cash equivalents, beginning of period	279,072			181,427

Cash and cash equivalents, end of period	$	295,093			$	192,176



	Three months ended October 31,
Black-Scholes Option Valuation Assumptions	2019		2018
Expected term (in years)	6.20			6.20
Expected volatility	25.85	%		25.83	%
Expected dividend yield	2.63	%		2.71	%
Risk-free interest rate	1.64	%		3.01	%
Weighted-average market value of underlying stock at grant date	$	54.05			$	43.96
Weighted-average exercise price	$	54.05			$	43.96
Weighted-average fair value of options granted during the period	$	10.63			$	9.70



Time-Based Options	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at July 31, 2019	1,594,716	$	31.63
New grants	247,297	54.05
Exercised	(381,698)	27.05
Forfeited or expired	(2,221)	40.25
Outstanding at October 31, 2019	1,458,094	$	36.62		7.2	$	28,976
Exercisable at October 31, 2019	933,905	$	30.59		6.0	$	24,192



	Common Stock		Additional Paid-In Capital		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Loss		Total Stockholders' Equity
Balances at July 31, 2019	$	548			$	329,969			$	637,843		$	(46,332	)		$	(71,254	)	$	850,774
Net income	—			—			37,498			—		—			37,498
Other comprehensive loss, net of tax	—			—			—			—		(29	)		(29	)
Issuance of shares of Class A Common Stock under stock plan	—			(6,410	)		—			2,553		—			(3,857	)
Tax benefit and withholdings from deferred compensation distributions	—			64			—			—		—			64
Stock-based compensation expense	—			3,618			—			—		—			3,618
Purchase of shares of Class A Common Stock	—			—			—			—		—			—
Cash dividends on Common Stock
Class A — $0.22 per share	—			—			(10,822	)		—		—			(10,822	)
Class B — $0.20 per share	—			—			(711	)		—		—			(711	)
Balances at October 31, 2019	$	548			$	327,241			$	663,808		$	(43,779	)		$	(71,283	)	$	876,535



Time-Based RSUs	Shares		Weighted Average Grant Date Fair Value
Outstanding at July 31, 2019	188,638			$	38.15
New grants	69,328			54.10
Vested	87,002			36.00
Forfeited	(454	)		40.43
Outstanding at October 31, 2019	344,514			$	45.72



Performance-Based RSUs	Shares		Weighted Average Grant Date Fair Value
Outstanding at July 31, 2019	158,410			$	38.33
New grants	38,946			75.00
Vested	(87,928	)		32.03
Outstanding at October 31, 2019	109,428			$	50.79



	Unrealized gain on cash flow hedges		Unamortized gain on post-retirement plans		Foreign currency translation adjustments		Accumulated other comprehensive loss
Beginning balance, July 31, 2019	$	707			$	2,800		$	(74,761	)	$	(71,254	)
Other comprehensive income before reclassification	136			—			226		362
Amounts reclassified from accumulated other comprehensive loss	(286	)		(105	)		—		(391	)
Ending balance, October 31, 2019	$	557			$	2,695		$	(74,535	)	$	(71,283	)



	October 31, 2019		July 31, 2019		Fair Value Hierarchy
Assets:
Trading securities	$	15,212			$	15,744		Level 1
Foreign exchange contracts	595			474			Level 2
Liabilities:
Foreign exchange contracts	12			5			Level 2



	October 31, 2019	July 31, 2019
	Carrying Value		Fair Value	Carrying Value		Fair Value
Current maturities on long-term debt	$	50,144		$	51,076		$	50,166	$	51,566



	October 31, 2019		July 31, 2019
Designated as cash flow hedges	$	19,540			$	26,013
Non-designated hedges	3,385			3,376
Total foreign exchange contracts	$	22,925			$	29,389


•	Enhancing our research and development process and improving the time to launch high-value, innovative products in alignment with our target markets.


•	Providing our customers with the highest level of customer service.


•	Driving operational excellence and executing sustainable efficiency gains within our global operations and within our selling, general and administrative structures.


•	Expanding and enhancing our sales capabilities through an improved digital presence and increased sales resources.


•	Growing through focused actions in selected vertical markets and strategic accounts.


•	Enhancing our employee development process to create an engaged workforce and to attract and retain key talent.



	Three months ended October 31,
(Dollars in thousands)	2019		% Sales		2018		% Sales
Net sales	$	286,947					$	293,196
Gross margin	141,405			49.3	%		146,539			50.0	%
Operating expenses:
Research and development	10,967			3.8	%		11,326			3.9	%
Selling, general and administrative	89,547			31.2	%		94,591			32.3	%
Total operating expenses	100,514			35.0	%		105,917			36.1	%
Operating income	$	40,891			14.3	%		$	40,622			13.9	%


•	Brady's ability to compete effectively or to successfully execute its strategy


•	Brady's ability to develop technologically advanced products that meet customer demands


•	Difficulties in protecting websites, networks, and systems against security breaches


•	Extensive regulations by U.S. and non-U.S. governmental and self regulatory entities


•	Divestitures, contingent liabilities from divestitures and the failure to identify, integrate, and grow acquired companies


•	Potential write-offs of Brady's substantial intangible assets