Brady Corporation — Form 10-Q Summary
Business context and reporting period
Quarter ended October 31, 2014 (first quarter of fiscal 2015); comparative period is the quarter ended October 31, 2013. Brady manufactures identification solutions, specialty materials, and workplace safety products. Its reportable segments are Identification Solutions (IDS) and Workplace Safety (WPS). The statements are unaudited.
The company completed the final phase of its Die-Cut business divestiture on August 1, 2014. Die-Cut results are presented as discontinued operations in both periods.
Financial performance and position
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $310.2 million | $307.5 million |
| Gross margin | $150.2 million; 48.4% of sales | $157.8 million; 51.3% |
| Operating income | $27.0 million; 8.7% of sales | $29.7 million; 9.7% |
| Continuing-operations earnings | $15.5 million; $0.30 per Class A diluted share | $18.1 million; $0.35 |
| Net earnings | $13.6 million; $0.26 per Class A diluted share | $23.9 million; $0.46 |
| Operating cash flow | $18.6 million | $25.6 million |
Sales rose 0.9%, reflecting 2.4% organic growth partly offset by a 1.5% adverse currency impact. Gross margin fell 2.9 percentage points, primarily because of facility-consolidation costs and, to a lesser extent, sales mix. Restructuring charges were $4.3 million, versus $6.8 million. Excluding those charges, management reported operating income of $31.3 million versus $36.5 million.
IDS sales increased 1.2% to $212.1 million, but segment profit declined 14.7% to $43.5 million; segment margin was 20.5% versus 24.3%. WPS sales increased 0.2% to $98.1 million, while segment profit fell to $15.5 million from $18.4 million; segment margin was 15.8% versus 18.8%. Both segments reported 2.4% organic sales growth, with currency reducing reported sales.
Cash and cash equivalents were $116.5 million at October 31, compared with $81.8 million at July 31. Current assets were $452.7 million and current liabilities $318.5 million. Investing activities used $2.1 million, including $11.5 million of capital expenditures and $8.8 million of net cash proceeds related to the Die-Cut sale. Financing provided $21.9 million, including $41.0 million of additional revolving-credit borrowings; dividends paid were $10.2 million.
Notes payable were $94.7 million, current maturities of long-term debt $42.5 million, and long-term obligations $153.5 million. Total debt was approximately $290.7 million; debt represented 29.9% of debt plus stockholders’ investment, up from 26.4% at July 31. The company had $213.5 million available under its revolving facility, with a potential increase subject to conditions, and $12.5 million available on its China facility. It reported compliance with debt covenants (leverage ratio 1.9x; interest coverage 11.7x). Approximately 94% of cash was held outside the United States.
Material changes, outlook, risks, and unusual items
- Net earnings fell mainly as prior-year discontinued operations contributed $5.8 million of earnings, whereas the current quarter recorded a $1.9 million discontinued-operations loss. The current-period loss included divestiture-related operating costs and a loss on sale.
- Comprehensive loss was $42.0 million, versus comprehensive income of $38.2 million a year earlier. Other comprehensive loss included a $59.0 million foreign-currency translation loss, driven in part by reclassification of accumulated translation gains upon the Die-Cut sale and U.S. dollar appreciation.
- Management expected facility consolidations to be completed by fiscal year-end and forecast approximately $15 million of restructuring charges for fiscal 2015. Most remaining restructuring cash payments were expected within 12 months.
- Management anticipated a fiscal 2015 effective tax rate in the mid-to-upper 20% range; the quarter’s continuing-operations tax rate was 36.5%, compared with 32.2% a year earlier.
- Management said operating cash flow and borrowing capacity should fund anticipated working capital, capital expenditures, restructuring, repurchases, scheduled debt repayments, and dividends for the next 12 months. The board subsequently declared a $0.20 per-share quarterly dividend payable January 30, 2015.
- Key risks identified include execution of restructuring and business strategies, currency movements, international operations, market and competitive conditions, product development, customer retention, supply costs, potential intangible-asset write-offs, tax matters, and maintaining debt-covenant compliance. The filing reported no material off-balance-sheet arrangements and no material change in market-risk disclosures.
Important facts for investors to verify
- Whether consolidation costs and other pressures on segment margins ease as facility changes conclude.
- Progress toward the approximately $15 million fiscal 2015 restructuring estimate and its expected savings and cash requirements.
- Organic growth trends by segment and region, particularly WPS recovery and currency effects.
- Debt repayment plans, covenant headroom, and the effect of cash held outside the United States on liquidity.
- The final economic and accounting impact of the Die-Cut divestiture, including the unusual foreign-currency translation reclassification.
- Whether the expected fiscal 2015 tax-rate range and management’s next-12-month liquidity assessment remain achievable.