Brady Corporation (NYSE: BRC) — FY2016 Form 10-K
Reporting period: Fiscal year ended July 31, 2016. This is an annual filing; the fourth-quarter figures below are included in the filing’s unaudited quarterly data. Brady manufactures identification solutions and workplace safety products through Identification Solutions (IDS) and Workplace Safety (WPS).
Key financial results
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $1,120.6 million | $1,171.7 million |
| Organic sales change | -0.7% | +1.0% |
| Gross margin | $558.8 million; 49.9% of sales | $558.4 million; 47.7% of sales |
| Operating income | $117.9 million; 10.5% of sales | $35.3 million; 3.0% of sales |
| Continuing operations earnings | $80.1 million | $4.9 million |
| Net earnings | $80.1 million | $3.0 million |
| Diluted EPS, Class A | $1.58 | $0.10 |
| Operating cash flow | $139.0 million | $93.3 million |
| Capital expenditures | $17.1 million | $26.7 million |
The FY2016 effective tax rate was 26.7%, compared with 80.4% in FY2015. Interest expense declined to $7.8 million from $11.2 million.
Fourth-quarter snapshot
FY2016 fourth-quarter sales were $282.1 million, operating income was $33.4 million, and earnings from continuing operations were $25.1 million. In FY2015’s fourth quarter, sales were $288.6 million, operating results were a $32.8 million loss, and continuing-operations results were a $39.4 million loss. The prior-year quarter included impairment and restructuring charges.
Segments and material changes
- IDS: FY2016 sales were $776.9 million, down 3.7% (organic decline of 0.7%; currency impact of -3.0%). Segment profit rose 13.4% to $169.8 million, and segment margin increased to 21.9% from 18.6%, primarily on manufacturing efficiencies.
- WPS: FY2016 sales were $343.7 million, down 5.9% (organic decline of 0.8%; currency impact of -5.1%). Segment profit increased 5.8% to $59.8 million; margin rose to 17.4% from 15.5%, mainly due to lower selling and catalog advertising costs.
- Total sales fell 4.4%, including a 3.7% adverse currency effect. Organic sales declined in both segments; lower demand in the Americas and APAC weighed on results. WPS digital sales grew in Europe, partly offsetting weakness in traditional catalog sales.
- Gross margin recovered from FY2015’s facility-consolidation costs. The consolidation program was completed in FY2015; no restructuring or impairment charges were recorded in FY2016. By comparison, FY2015 included $16.8 million of restructuring charges and $46.9 million of impairment charges.
Cash, debt and liquidity
- Cash and cash equivalents were $141.2 million at July 31, 2016, up $26.7 million year over year; approximately 99% was held outside the United States.
- Cash from operating activities was $139.0 million. Investing activities used $15.4 million and financing activities used $99.6 million; financing outflows included $23.6 million of share repurchases and $40.8 million of dividends.
- Total debt was $216.9 million, including $112.0 million outstanding on the revolving facility; $183.7 million of revolving capacity remained available. Long-term obligations on the balance sheet were $212.0 million.
- Brady reported compliance with debt covenants: debt-to-EBITDA of 1.4x against a 3.5x maximum, and interest coverage of 19.9x against a 3.0x minimum. Management said cash flow and borrowing capacity should cover anticipated needs for the next 12 months.
Outlook, risks and unusual items
- No specific numerical sales or earnings guidance is provided. Management’s stated priorities include operational efficiency, customer service, product innovation, digital capabilities, and targeted growth in selected industries and accounts.
- Key risks include continued weak or uneven end-market demand, competitive and online pricing pressure, foreign-exchange volatility, execution of digital and operating initiatives, cybersecurity and data privacy, supply interruptions, and retention of key customers and employees.
- Goodwill and other intangible assets totaled approximately $489.7 million, or 46.9% of total assets. No FY2016 impairment was recorded; management reported that remaining goodwill reporting units’ fair values substantially exceeded carrying values. Future impairments remain a risk if assumptions or business performance weaken.
- Potential tax exposure includes $15.3 million of unrecognized tax benefits, plus accrued interest and penalties. Approximately $259.3 million of foreign earnings were treated as indefinitely reinvested; repatriation could result in tax charges.
- There were no material pending legal proceedings identified by management and no material off-balance-sheet arrangements. The company announced a 1.2% increase in the Class A annual dividend to $0.82 per share after year-end, its 31st consecutive annual increase.
Important facts for investors to verify
- Whether organic sales return to growth and whether the FY2016 weakness in Americas and APAC demand persists.
- Whether margin gains from facility efficiencies and lower selling costs can be sustained despite sales and currency pressure.
- Cash conversion, working-capital trends, capital spending, and the use of cash for dividends, repurchases, and debt repayment.
- Debt maturities and refinancing plans, including the FY2017 debt payment, as well as continued covenant headroom.
- Exposure to foreign exchange and the potential tax and liquidity consequences of repatriating foreign-held cash.
- Goodwill valuation assumptions and any developments that could trigger impairment testing or charges.
- The company’s non-voting public share structure: substantially all voting stock is controlled by Brady family members.