Brady Corporation — Q1 FY2020 Form 10-Q
Reporting period: Three months ended October 31, 2019; comparisons are with the three months ended October 31, 2018, unless noted. Brady manufactures identification solutions and workplace safety products. Figures are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial results
| Metric | Q1 FY2020 | Prior year | Change |
|---|---|---|---|
| Net sales | $286.9 | $293.2 | Down 2.1% |
| Gross profit / margin | $141.4 / 49.3% | $146.5 / 50.0% | Profit down 3.5%; margin down 0.7 percentage points |
| Operating income / margin | $40.9 / 14.3% | $40.6 / 13.9% | Income up 0.7%; margin up 0.4 points |
| Net income | $37.5 | $30.6 | Up 22.4% |
| Diluted EPS, Class A | $0.70 | $0.58 | Up $0.12 |
| Operating cash flow | $38.8 | $18.8 | Up $20.0 |
| Capital expenditures | $7.7 | $6.0 | Cash outflow |
| Cash and equivalents, Oct. 31 | $295.1 | $279.1 at July 31, 2019 | Up $16.0 during quarter |
Organic sales declined 0.4%; foreign currency translation reduced reported sales by 1.7%. Gross margin pressure reflected higher personnel, material, tariff and freight costs and lower volume, partly offset by manufacturing efficiencies. SG&A fell 5.3%, with reductions attributed to currency translation, efficiency gains and cost-control efforts. R&D expense decreased 3.2%, primarily due to project spending timing.
Segments and regions
- Identification Solutions (IDS): Sales of $215.0 million, down 1.4% reported and 0.2% organically. Segment profit rose 2.1% to $42.4 million; segment margin improved to 19.7% from 19.1%. Americas growth was offset by declines in Europe and Asia, including weakness in China that Brady partly attributed to tariffs.
- Workplace Safety (WPS): Sales of $72.0 million, down 4.2% reported and 0.8% organically. Segment profit fell to $5.2 million from $5.5 million; segment margin declined to 7.2% from 7.4%. Lower volume in North America and Australia and currency effects weighed on results.
Cash, debt and liquidity
Cash provided by operations was $38.8 million; investing activities used $7.2 million and financing activities used $15.3 million. The operating cash flow increase chiefly reflected timing of annual incentive payments and higher net income adjusted for noncash items. Financing cash use included $11.5 million of dividends. Cash increased to $295.1 million at quarter-end.
Current maturities of long-term debt were $50.1 million, principally the €45 million, 4.24% senior notes due May 13, 2020. Brady had no borrowings outstanding under its new $200 million revolving facility; $196.4 million was available after letters of credit, with a conditional option to increase capacity. The company reported compliance with debt covenants. Management said operating cash flow and borrowing capacity should cover anticipated needs for the next 12 months, including working capital, capital spending, scheduled debt repayments and dividends.
Adoption of the new lease standard added operating lease assets and liabilities at August 1, 2019; at October 31, operating lease assets were $52.2 million and lease liabilities totaled $55.0 million. Adoption had no material effect on cash flows or operating results. Approximately 44% of cash was held outside the United States.
Outlook, commentary and risks
- No specific sales or earnings guidance was provided. Management described fiscal 2020 priorities including new product development, customer service, operational efficiencies, digital sales capabilities and growth in selected markets.
- Management expects an ongoing annual effective tax rate of approximately 20%. The quarter’s 9.8% rate reflected a favorable domestic tax-audit settlement and stock-based compensation tax benefits; the prior-year rate was 23.2%.
- Brady identified risks including weaker product demand and economic conditions, raw-material and other cost increases, tariffs, currency movements, competition, product development and execution, cybersecurity, regulation, key-employee retention, litigation, tax changes, and impairment of goodwill or other intangible assets. It also noted that WPS sales had not recovered to pre-platform-change levels following its digital platform transition.
- There were no material off-balance-sheet arrangements or material changes in market-risk disclosures from the prior annual report. The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether organic sales trends improve, particularly in Europe, China, WPS North America and Australia, and whether digital-channel execution restores prior sales levels.
- Whether cost inflation, tariffs and freight pressures continue to weigh on gross margin, and whether efficiency gains can offset them.
- The effect of the tax-audit settlement and stock-compensation benefits on the unusually low quarterly tax rate; the filing does not quantify each benefit separately.
- Repayment or refinancing of the €45 million notes due May 2020, and continued access to the revolving facility and covenant compliance.
- Cash conversion and the timing of incentive payments, capital expenditures, dividends and other financing uses.