Brady Corporation — Q2 FY2016 Form 10-Q
Business context and period: Brady manufactures identification solutions and workplace safety products. This unaudited filing covers the quarter and six months ended January 31, 2016; dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Net sales | $268.6 | $282.6 | $551.7 | $592.9 |
| Gross margin | $132.9; 49.5% | $138.2; 48.9% | $272.2; 49.3% | $288.4; 48.6% |
| Operating income | $23.6; 8.8% | $16.8; 5.9% | $53.7; 9.7% | $43.8; 7.4% |
| Continuing-operations earnings | $15.3 | $11.6 | $34.0 | $27.1 |
| Net earnings | $15.3 | $11.6 | $34.0 | $25.2 |
| Diluted EPS, Class A | $0.30 | $0.23 | $0.67 | $0.49 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $58.3 | $23.9 |
Quarterly sales declined 5.0%, comprising 0.4% organic growth and a 5.4% currency headwind. Six-month sales fell 6.9%, including a 0.9% organic decline and 6.0% adverse currency impact. Interest expense declined to $2.1 million for the quarter and $4.3 million for six months. Investment and other expense was $1.0 million and $1.8 million, respectively. The effective tax rate was 25.3% for the quarter and 28.7% for six months.
Segments and material changes
- ID Solutions: Q2 sales were $184.9 million, down 3.7% overall but up 0.7% organically; segment profit rose to $37.0 million from $35.7 million. Six-month sales were $381.2 million, down 5.7%; segment profit was $77.0 million versus $79.2 million. Management cited softer North American healthcare and industrial demand, weakness in Brazil and China, and currency pressure; Europe and Mexico provided areas of growth.
- Workplace Safety: Q2 sales were $83.8 million, down 7.5%, with organic sales down 0.1%; segment profit increased to $13.4 million from $12.8 million. Six-month sales were $170.5 million, down 9.6%, while segment profit rose to $30.1 million from $28.3 million. European organic growth was offset by weakness in North America and Australia and substantial currency effects.
- Gross margin improved, which management attributed mainly to lower freight, supplies and labor costs following facility consolidation. SG&A declined, reflecting currency translation, selling-cost efficiencies and lower amortization.
- Prior-year operating results included restructuring charges of $4.9 million for the quarter and $9.2 million for six months; none were recorded in the current periods. Prior-year six-month net earnings also included a $1.9 million loss from discontinued Die-Cut operations.
Financial condition, outlook and risks
At January 31, 2016, cash was $120.2 million, current assets $405.9 million and current liabilities $157.1 million. Long-term obligations, less current maturities, were $247.7 million; notes payable were $5.0 million, and current maturities on long-term debt were nil. The company reported $107.0 million outstanding on its $300 million multicurrency revolver, with $189.7 million available (subject to stated conditions). Approximately 94% of cash was held outside the United States.
Operating cash flow increased by $34.3 million year over year to $58.3 million for six months. Management attributed the improvement primarily to working-capital improvement, including inventory reduction, and higher earnings. Investing cash use was $1.4 million; financing cash use was $46.3 million, including $23.4 million of share repurchases and $20.4 million of dividends. Cash increased by $5.7 million.
The company was in compliance with its debt covenants: debt-to-EBITDA was 1.8x against a maximum of 3.25x, and EBITDA-to-interest coverage was 14.9x against a minimum of 3.0x. Management said operating cash flow and borrowing capacity should fund anticipated working capital, capital expenditure, repurchases, scheduled debt and dividends over the next 12 months. It gave no specific sales or earnings guidance; it expected a fiscal 2016 tax rate in the mid-to-upper 20% range.
Key risks include foreign-exchange movements, economic weakness in served markets, competition and pricing pressure, customer retention, product development, international operations, information-technology security, potential intangible-asset write-offs, and debt/covenant risks. Brady reported no material off-balance-sheet arrangements and no material change in market-risk disclosures. Disclosure controls were concluded effective, with no significant quarterly change in internal control over financial reporting.
After quarter-end, the board declared a $0.2025-per-share dividend and authorized repurchases of up to 2 million Class A shares available under the program, inclusive of the existing authorization.
Investor verification points
- Assess whether organic demand stabilizes, especially in North American industrial and healthcare markets, China, Brazil and Australia, and whether European growth continues.
- Separate underlying operating trends from currency effects and confirm whether facility-efficiency gains sustain improved margins.
- Evaluate cash-flow quality, including the timing-related working-capital contribution, and monitor debt, covenant headroom and cash held overseas.
- Review the deployment of the expanded share-repurchase authorization and the sustainability of dividends against operating cash generation.
- Track the expected tax rate and any material developments in the risks identified by management.