Brady Corporation — Q1 FY2017 10-Q
Business context and period: Brady manufactures identification solutions and workplace safety products. This unaudited quarter covers the three months ended October 31, 2016; comparisons are with the three months ended October 31, 2015, except balance-sheet comparisons, which are with July 31, 2016. About 45% of sales came from outside the United States.
Key financial results
| Metric | Q1 FY2017 | Prior-year quarter |
|---|---|---|
| Net sales | $280.2 million | $283.1 million |
| Gross margin | $140.4 million; 50.1% of sales | $139.3 million; 49.2% |
| Operating income | $33.2 million; 11.9% of sales | $30.1 million; 10.6% |
| Net earnings | $22.6 million | $18.7 million |
| Diluted EPS, Class A | $0.44 | $0.37 |
| Operating cash flow | $34.0 million | $30.4 million |
- Sales declined 1.0%: organic sales fell 0.2% and currency reduced sales 0.8%. Gross margin improved 0.9 percentage points.
- Operating income rose 10.3%, supported by higher gross margin and lower selling and administrative costs; higher R&D and currency effects partly offset the improvement.
- Cash and cash equivalents were $166.3 million, up $25.1 million from July 31. Investing activities used $2.4 million and financing activities used $2.4 million. Dividends paid were $10.4 million; capital expenditures were $4.0 million.
- At October 31, current assets were $429.9 million and current liabilities were $165.5 million. Debt carrying amounts included $210.6 million of long-term obligations and $5.4 million of notes payable. The $112 million revolver balance had $183.9 million available, after letters of credit; availability could rise to $333.9 million subject to conditions.
Material changes and segment performance
- Identification Solutions (IDS): Sales were $201.3 million, essentially flat year over year; organic sales grew 0.7%. Segment profit increased to $33.1 million from $25.4 million, and segment margin rose to 16.4% from 12.7%, primarily reflecting manufacturing efficiencies.
- Workplace Safety (WPS): Sales declined 3.8% to $78.9 million, including a 2.5% organic decline. Segment profit fell to $6.5 million from $9.4 million; margin declined to 8.2% from 11.4%, reflecting lower sales and digital price transparency.
- The company changed its segment-profit measure and realigned certain businesses between IDS and WPS effective August 1, 2016; prior-period segment data was restated. These changes affect segment comparisons.
Outlook, risks and notable items
- Management gave no specific sales or earnings forecast in the provided filing text. It said the 27.2% quarterly tax rate was consistent with its anticipated annual rate of 27%–29%, and believed operating cash flow and borrowing capacity could fund expected needs for the next 12 months. Approximately 98% of cash was held outside the United States; repatriation could result in tax charges.
- Management’s fiscal 2017 priorities include product innovation, operational excellence, product portfolio reviews, digital expansion, and targeted sales and marketing. It described weak demand in some industrial, oil and gas, manufacturing, mining, consumer electronics, and other markets.
- Debt covenants were met: debt-to-EBITDA was 1.4x against a maximum of 3.25x, and EBITDA-to-interest was 21.5x against a minimum of 3.0x. The company said it intended to use its revolving facility for private-placement principal payments due in fiscal 2017.
- Foreign currency movements reduced quarterly cash by $4.1 million and contributed to a $12.2 million net-of-tax other comprehensive loss. No goodwill impairment was recorded. Identified risks include currency fluctuations, weaker demand, competition, cyber-security, customer retention, litigation, intangible-asset write-offs, tax changes, and covenant compliance.
- The board declared a $0.205-per-share quarterly dividend on November 9, payable January 31, 2017. The company was evaluating new accounting standards for leases and revenue recognition.
Investor verification points
- Review whether the modest organic sales decline and WPS weakness persist, particularly in the Americas and Australia, and whether digital-channel growth offsets traditional-channel trends.
- Assess the sustainability of manufacturing cost savings, improved margins, and higher IDS profitability alongside increased R&D spending.
- Check future cash generation, debt repayments and revolver usage, including the planned funding of fiscal 2017 maturities and the concentration of cash overseas.
- Monitor foreign-exchange effects, the stated annual tax-rate range, and whether the new segment reporting basis is consistently applied in subsequent comparisons.