Brady Corporation — fiscal 2016 first-quarter 10-Q
Reporting period: Three months ended October 31, 2015; comparisons are to the three months ended October 31, 2014. Brady manufactures identification solutions and workplace safety products. Approximately 45% of company sales are generated outside the United States.
Financial performance
- Sales: $283.1 million, down 8.8%. Organic sales declined 2.2% and currency reduced sales 6.6%.
- Profit and margins: Gross margin was $139.3 million, or 49.2% of sales, versus 48.4%. Operating income was $30.1 million (10.6% margin), compared with $27.0 million; however, the prior-year quarter included $4.3 million of restructuring charges, and operating income was $31.3 million excluding those charges. Continuing-operations earnings were $18.7 million, or $0.37 per Class A share, versus $15.5 million, or $0.30. Net earnings were $18.7 million versus $13.6 million, which included a $1.9 million discontinued-operations loss.
- Segments: ID Solutions sales fell 7.4% to $196.3 million; segment profit fell 8.0% to $40.0 million, with a 20.4% margin. Workplace Safety sales fell 11.6% to $86.7 million; segment profit rose to $16.7 million from $15.5 million, and its margin increased to 19.2% from 15.8%.
- Cash flow: Operating cash flow was $30.4 million, versus $18.6 million. Capital expenditures were $2.3 million. Cash decreased $3.9 million to $110.6 million, after $30.9 million of financing outflows, including $16.2 million of share repurchases and $10.2 million of dividends.
- Debt and liquidity: Long-term obligations were $241.4 million and notes payable were $9.2 million at quarter-end. The company had $196.2 million available under its $300 million revolving facility and $10.8 million available on its China credit lines. Debt covenants were met: leverage ratio 1.8x versus a 3.25x maximum, and interest coverage 13.7x versus a 3.0x minimum. Cash was $110.6 million, approximately 99% held outside the United States.
- Other metrics: Interest expense declined to $2.2 million from $2.9 million. The continuing-operations tax rate was 31.2%, versus 36.5%. Other comprehensive loss was $8.4 million, primarily reflecting currency translation.
Changes, outlook, and risks
- Sales weakness affected both segments, with currency the largest driver of the reported decline, particularly in Workplace Safety. Management cited reduced demand in North American industrial markets, Brazil, China, Singapore, and Japan, and ongoing challenges in Australian manufacturing and mining. Workplace Safety’s organic decline moderated from the preceding quarter; European digital sales grew strongly.
- Management attributed improved gross margin to operational efficiencies at consolidated facilities. Workplace Safety profit and margin benefited from lower catalog advertising and improved efficiencies. Facility-consolidation restructuring was completed in fiscal 2015; management expects continuing efficiency benefits.
- Management’s fiscal 2016 initiatives include operational excellence, product innovation and portfolio reviews, digital and mobile expansion, and focused sales efforts. The company expects its fiscal 2016 tax rate to be in the upper-20% range and believes operating cash flow and borrowing capacity can fund expected needs over the next 12 months. No specific sales or earnings guidance was provided in the filing.
- A new $300 million multi-currency revolving credit agreement was entered into in September 2015, with final maturity in September 2020. The facility may be increased to $450 million subject to conditions. The company reported no material off-balance-sheet arrangements or material change in market-risk disclosures.
- Key stated risks include foreign-exchange movements, weak end markets and international economic conditions, competition and pricing pressure, execution of the Workplace Safety strategy, product development, customer retention, supply costs, restructuring and service levels, cybersecurity, intangible-asset impairment, and debt-covenant compliance. No goodwill impairment was recorded in the quarter.
- After quarter-end, the board declared a $0.2025-per-share dividend and authorized an additional 807,692 shares for repurchase, bringing the authorized available amount to as many as 2 million shares.
Important facts for investors to verify
- Whether organic sales trends improve, especially in ID Solutions and in Workplace Safety’s Americas and Australia businesses, and whether currency remains a significant headwind.
- Whether reported margin improvements and expected facility-consolidation savings are sustainable despite lower sales.
- Debt balances, scheduled repayments, revolver availability, covenant headroom, and the implications of cash held predominantly overseas.
- The use and pace of the expanded share-repurchase authorization alongside dividends and capital needs.
- The assumptions supporting the expected upper-20% fiscal 2016 tax rate and management’s liquidity outlook.