Brady Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended April 30, 2018. Unaudited results are compared with the corresponding 2017 periods. Unless stated otherwise, dollar amounts are in millions.
Business context and key financial metrics
Brady manufactures identification solutions and workplace safety products. Its reportable segments are Identification Solutions (IDS) and Workplace Safety (WPS); approximately 45% of total sales are generated outside the United States.
| Metric | Quarter ended Apr. 30, 2018 | Quarter ended Apr. 30, 2017 | Nine months ended Apr. 30, 2018 | Nine months ended Apr. 30, 2017 |
|---|---|---|---|---|
| Net sales | $298.4 | $275.9 | $876.4 | $824.1 |
| Gross margin | $151.1; 50.6% | $139.9; 50.7% | $440.8; 50.3% | $414.4; 50.3% |
| Operating income | $37.7; 12.6% of sales | $31.6; 11.4% | $107.9; 12.3% | $94.7; 11.5% |
| Net earnings | $26.0 | $22.6 | $56.1 | $70.4 |
| Diluted EPS, Class A | $0.49 | $0.43 | $1.07 | $1.36 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $89.2 | $91.2 |
At April 30, 2018, cash and cash equivalents were $130.9, total assets $1,033.4, total liabilities $298.8, and stockholders’ investment $734.6. Long-term obligations were $58.2, with no notes payable reported on the balance sheet. The revolving credit facility had $3.6 outstanding and $293.3 available; an additional $150.0 capacity was subject to conditions. The company reported compliance with debt covenants, with a 0.3-to-1 leverage ratio and 53.4-to-1 interest coverage ratio. Approximately 81% of cash was held outside the United States.
Nine-month capital expenditures were $14.8; dividends paid were $32.1. Cash declined $3.0 over the nine months to $130.9. The balance-sheet figures are compared with July 31, 2017; cash flow figures are compared with the prior-year nine-month period.
Material changes versus prior periods
- Quarterly sales rose 8.2%, comprising 3.2% organic growth and a 5.0% favorable currency impact. Nine-month sales rose 6.3%, including 2.7% organic growth and 3.6% from currency.
- Quarterly net earnings increased about 15%, while nine-month net earnings fell about 20%. The nine-month comparison was materially affected by $21.1 of additional tax expense related to U.S. tax reform, recorded in the period ended January 31, 2018.
- Quarterly segment sales grew organically 3.7% in IDS and 1.7% in WPS. For nine months, IDS organic sales grew 3.7%, while WPS declined 0.1%. WPS reported sales growth benefited substantially from currency translation.
- Operating income increased 19.3% for the quarter and 13.9% for nine months. Segment profit margins improved in both businesses: IDS to 17.4% from 16.6% quarterly and WPS to 8.7% from 6.5%.
- Interest expense declined to $2.5 for nine months from $4.6, reflecting lower debt balances. Operating cash flow declined modestly, which management attributed primarily to working-capital needs supporting growth and higher incentive payments.
Outlook, management commentary, risks, and unusual items
No numerical revenue or earnings guidance is provided. Management’s fiscal 2018 priorities include innovation, operational efficiencies, customer service, digital expansion, focused sales and marketing, and employee development. Management said manufacturing efficiencies were helping offset higher input costs; it also cited SG&A efficiencies and increased R&D investment in IDS software and printer updates.
The Tax Cuts and Jobs Act produced provisional tax effects, including a $0.4 charge for deemed repatriation, $18.8 for remeasurement of deferred taxes and related items, and $1.8 for future withholding and income taxes on foreign distributions. Management stated that estimates remained provisional and that GILTI, FDII, and BEAT impacts were not yet included. The nine-month effective tax rate was 47.4%, versus 22.4% a year earlier.
On May 16, 2018, Brady agreed to sell Runelandhs, a Swedish business with approximately $16 of annual sales, for about $20; closing was expected in the quarter ending July 31, 2018. On May 22, the board declared a $0.2075-per-share dividend payable July 31, 2018.
Risks identified include competitive pressures, product and technology execution, cybersecurity, demand and customer retention, regulatory and litigation exposure, operational consolidations, key-personnel retention, acquisition and divestiture risks, foreign exchange, tax-law uncertainty, potential intangible-asset write-offs, shareholder voting differences, and debt-covenant compliance. The company reported no material off-balance-sheet arrangements and stated that liquidity and borrowing capacity should cover anticipated needs for the next 12 months.
Important facts for investors to verify
- How much of sales and operating-income growth reflects sustainable organic performance rather than favorable currency translation, particularly in WPS.
- The final tax-reform accounting, including provisional deferred-tax balances and the effects of tax provisions not yet estimated.
- Whether working-capital requirements continue to constrain operating cash flow relative to earnings, and the expected level of capital spending.
- The status and proceeds of the Runelandhs sale, and the use of available revolver capacity, dividends, and authorized share repurchases.
- Whether Healthcare ID pricing pressure and WPS catalog-channel weakness persist, and whether investments in digital channels, innovation, and efficiency deliver the expected returns.