Brady Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended April 30, 2019; comparisons are with the corresponding 2018 periods. Brady manufactures identification solutions and workplace safety products. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended April 30 | Nine months ended April 30 |
|---|---|---|
| Net sales | $289.7 million, down 2.9% | $865.4 million, down 1.3% |
| Gross margin | $145.7 million; 50.3% of sales, versus 50.6% | $432.1 million; 49.9% of sales, versus 50.3% |
| Operating income | $39.6 million, versus $37.7 million; margin 13.7%, versus 12.6% | $116.3 million, versus $107.9 million; margin 13.4%, versus 12.3% |
| Net income | $34.8 million, versus $26.0 million | $94.6 million, versus $56.1 million |
| Diluted EPS, Class A | $0.65, versus $0.49 | $1.78, versus $1.07 |
Cash flow and liquidity: For the nine months, operating cash flow was $96.9 million, capital expenditures were $17.5 million, and cash flow from operations less capital expenditures was $79.4 million. Cash increased $57.0 million to $238.4 million from July 31, 2018. At April 30, cash exceeded total long-term obligations of $50.3 million. No revolving-credit borrowings were outstanding; $296.7 million was available under the facility, subject to its terms. Brady reported compliance with debt covenants.
Balance sheet: Total current assets were $539.2 million and current liabilities $177.9 million. Stockholders’ equity was $824.5 million. Debt consisted principally of €45 million of senior notes due May 2020; the filing reports their carrying value within long-term obligations.
Dividends: Quarterly dividends were $0.21 per share during the quarter. On May 21, the board declared $0.2125 per share, payable July 31, 2019.
Changes and operating drivers
- Reported sales declined despite organic growth: third-quarter organic sales increased 2.4%, offset by currency translation of 3.8% and divestitures of 1.5%. For nine months, organic sales grew 3.1%, offset by currency translation of 2.8% and divestitures of 1.6%.
- Identification Solutions (IDS) delivered organic growth of 4.0% in the quarter and 4.4% year to date. Segment profit rose to $39.9 million in the quarter and $119.3 million year to date; segment margins improved to 18.6% in both periods.
- Workplace Safety (WPS) organic sales declined 1.6% in the quarter and 0.2% year to date. Segment profit fell to $6.1 million and $16.3 million, respectively; margins declined to 8.0% and 7.3%. Foreign currency and a prior-period divestiture further reduced reported sales.
- Gross margin pressure reflected higher freight and personnel costs, partly offset by selected price increases and manufacturing efficiencies. Lower SG&A, helped by efficiency actions, currency effects, and the prior-year divestiture, supported operating-income growth.
- Net income rose more sharply than operating income in part because income-tax expense was substantially lower. Effective tax rates were 15.1% for the quarter and 19.5% year to date, versus 29.7% and 47.4% in 2018. Brady attributed the 2019 rates partly to favorable settlements of tax matters; 2018 included $21.1 million of additional tax expense, primarily related to U.S. tax reform.
Outlook, commentary and risks
- No specific sales or earnings guidance was provided. Management said long-term growth and profitability depend on end-market demand, operational execution, customer focus, innovation, and digital capabilities. Priorities include new products, efficiency and automation, digital expansion, and focused sales and marketing.
- Management said the new WPS Americas digital platform improved functionality, but sales had not returned to levels before the previous platform change. Lower catalog-promotion response rates also weighed on sales. WPS Europe and Australia showed digital-channel growth.
- Management expects its ongoing annual effective tax rate to be in the mid-20% range, based on the current global business mix.
- Management believes operating cash flow and borrowing capacity can fund anticipated working capital, capital spending, repurchases, debt repayments, and dividends for the next 12 months. About 54% of cash was held outside the United States.
- Risks identified include competition and execution, product development, cybersecurity, demand and customer retention, regulation, key-personnel retention, divestiture and acquisition risks, litigation, foreign exchange, tax changes, intangible-asset impairment, and debt-covenant compliance. Brady reported no material change in market-risk disclosures since its 2018 Form 10-K.
- Brady planned to adopt the lease accounting standard on August 1, 2019, and expected to recognize right-of-use assets and lease liabilities; the impact was still being evaluated. Adoption of the revenue standard had not materially affected results, but reduced opening retained earnings by $2.1 million.
Key facts for investors to verify
- Whether IDS organic growth continues and whether WPS Americas recovers following its digital-platform transition.
- Whether pricing, efficiency initiatives, and automation offset freight and personnel cost inflation and stabilize gross margin.
- How currency movements and divestitures affect reported sales and segment results.
- The effect of the mid-20% expected tax rate on future earnings compared with the unusually low 2019 rates.
- Cash deployment, the May 2020 senior-note maturity, credit-facility availability, and the impact of lease-standard adoption.