Brady Corporation (BRC) — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended April 30, 2020. The quarter was substantially affected by COVID-19 disruptions. Financial amounts below are in U.S. dollars; figures are in millions unless stated otherwise.
Financial results
| Metric | Quarter ended Apr. 30, 2020 | Year-to-date |
|---|---|---|
| Net sales | $265.9, down 8.2% | $829.6, down 4.1% |
| Gross margin | $129.5; 48.7% of sales, versus 50.3% | $410.1; 49.4% of sales, versus 49.9% |
| Operating income | $22.7, down 42.8%; 8.5% margin | $104.8, down 9.9%; 12.6% margin |
| Net income | $13.6, versus $34.8 | $84.7, versus $94.6 |
| Diluted EPS, Class A | $0.26, versus $0.65 | $1.58, versus $1.78 |
| Operating cash flow | Not separately reported for the quarter | $95.9, versus $96.9 |
- Quarterly sales declined 6.0% organically and 2.2% from currency translation. Organic sales rose 2.7% in the first two months of the quarter, then fell 23.6% in April.
- Quarterly organic sales declined 8.2% in Identification Solutions (IDS) and increased 0.2% in Workplace Safety (WPS). Year-to-date organic sales declined 3.2% in IDS and 0.5% in WPS.
- Quarterly segment profit was $36.4 for IDS (18.8% of segment sales) and $4.4 for WPS (6.0%). WPS profit and margin fell from $6.1 and 8.0% a year earlier; IDS margin improved modestly.
- Quarterly results included $13.8 of impairment charges, primarily related to WPS assets. Without treating the charge as a recurring item, it was a material contributor to the reported operating-income decline.
Cash, debt and liquidity
- Cash and equivalents were $238.9 at April 30, down $40.2 from July 31, 2019. Current maturities of long-term debt were $48.9; the filing says the remaining euro-denominated notes due May 13, 2020 were funded with cash on hand.
- Brady had no borrowings outstanding on its $200 revolving credit facility and $196.9 available after letters of credit. Management reported total liquidity of approximately $390, including cash.
- Year-to-date investing cash outflow was $26.0, including $21.6 of property and equipment purchases. Financing cash outflow was $101.0, including $64.1 of share repurchases and $34.4 of dividends.
- The company reported compliance with debt covenants: leverage ratio of 0.0x against a 3.25x maximum, and interest coverage of 77.7x against a 3.0x minimum.
Changes, outlook and risks
- COVID-19 reduced demand across most end markets, caused temporary shutdowns at some businesses, and adversely affected supply chains and operations. Management said the pandemic’s duration and financial effects remained uncertain and expected near-term adverse effects on sales, profitability and working capital.
- Management described cost reductions, including labor-cost actions, reduced travel and discretionary spending, while stating it intended to continue investing in organic growth, R&D and operational efficiency. It believed cash, operating cash flow and borrowing capacity were sufficient for anticipated needs over the next 12 months. No numerical earnings or sales guidance was provided.
- The impairment included a $8.7 write-down of indefinite-lived tradenames and charges on property, plant and equipment and operating lease assets. Further deterioration or weaker-than-expected performance could lead to additional impairments, potentially affecting goodwill, intangibles, long-lived assets, receivables, inventory or deferred tax assets.
- The quarterly effective tax rate rose to 38.5% from 15.1%, primarily because of a higher valuation allowance against foreign tax credit carryforwards. Year-to-date rates were 20.2% versus 19.5%.
- Brady repurchased 1.41 million shares during the quarter for $64.1. A quarterly dividend of $0.2175 per share was declared after quarter-end, payable July 31, 2020.
- Adoption of lease accounting standards added operating lease assets and liabilities to the balance sheet; the company reported no material impact on operating results or cash flows from adoption.
Key facts for investors to verify
- Whether demand recovered after April’s sharp organic sales decline, particularly in IDS and WPS North America.
- Whether COVID-related cost actions and lower sales volumes continue to affect segment margins and working capital.
- Whether further impairment charges or other estimate changes arise as economic and market conditions evolve.
- Cash generation, the repayment of the euro notes, and the availability of the revolving credit facility under continued disruption.
- The sustainability of share repurchases and dividends relative to cash needs and the company’s stated investment plans.