Business context and reporting period
Brady Corporation is a global manufacturer and supplier of identification solutions and workplace safety products. This Form 10-K reports fiscal 2018, the year ended July 31, 2018; it also provides fourth-quarter results. Its reportable segments are Identification Solutions (IDS) and Workplace Safety (WPS). About half of sales came from outside the United States.
Financial performance
Amounts are in U.S. dollars; annual figures are for fiscal years ended July 31.
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $1,173.9 million | $1,113.3 million | +5.4% |
| Gross margin | $588.3 million; 50.1% | $558.3 million; 50.1% | +5.4% in dollars |
| Operating income | $152.7 million; 13.0% of sales | $131.0 million; 11.8% | +16.5% |
| Net earnings | $91.1 million | $95.6 million | -4.8% |
| Diluted EPS, Class A | $1.73 | $1.84 | -6.0% |
| Operating cash flow | $143.0 million | $144.0 million | -0.7% |
| Capital expenditures | $21.8 million | $15.2 million | Increased |
FY2018 sales growth comprised 2.6% organic growth and a 3.0% favorable currency effect, partly offset by a 0.2% impact from the Runelandhs divestiture. Segment profit was $143.4 million for IDS (16.9% of its sales) and $31.7 million for WPS (9.7%); both improved year over year.
Fourth-quarter sales were $297.5 million, versus $289.2 million a year earlier; operating income was $44.8 million versus $36.3 million, and net earnings were $35.0 million versus $25.2 million.
Liquidity, debt and capital allocation
Cash and cash equivalents were $181.4 million at July 31, 2018, up $47.5 million year over year. Total debt was $52.6 million, consisting of euro-denominated notes due in 2020; there were no borrowings outstanding on the revolving credit facility, with approximately $297.0 million available. Brady reported compliance with debt covenants. Management said operating cash flow and borrowing capacity should cover anticipated working capital, capital spending, repurchases, scheduled debt payments and dividends over the next 12 months. Class A dividends were $0.83 per share for FY2018; after year-end, the company announced an increase to $0.85 annually.
Changes, outlook and material items
- Net sales accelerated from a 0.7% decline in FY2017 to 5.4% growth in FY2018. Organic growth was stronger in IDS (+3.4%) than WPS (+0.7%). WPS returned to organic growth after a 2.0% decline in FY2017.
- Operating margin improved to 13.0%, supported by sales growth, manufacturing efficiencies and lower SG&A as a percentage of sales; higher R&D spending partly offset gains. R&D expense rose 14.2% to $45.3 million.
- Net earnings fell despite higher operating income, chiefly reflecting the 40.1% effective tax rate. Tax Reform Act effects added $21.1 million of tax expense, including a $21.4 million valuation allowance against foreign tax credit carryforwards. Management estimated a mid-twenties effective tax rate for FY2019.
- The May 2018 Runelandhs sale generated $19.1 million of net proceeds and a $4.7 million gain; the divested business’s earnings were described as immaterial. There were no material pending legal proceedings or material off-balance-sheet arrangements disclosed.
- Management emphasized innovation, digital sales capabilities, customer experience and continued operational efficiencies. It provided no specific quantitative revenue or earnings guidance in the filing. WPS Americas remained challenged by catalog response and digital-platform transition effects; IDS healthcare faced pricing pressure from customer consolidation.
Risks and contingencies
Key risks include competitive and pricing pressure, execution of digital and product-innovation strategies, cybersecurity and data privacy, foreign-exchange exposure, international regulation and trade changes, customer concentration, and execution of facility or business changes. Goodwill and other intangible assets totaled approximately $462.4 million, or 43.7% of total assets; the annual impairment test found reporting units with remaining goodwill had fair values substantially above carrying values. The company reported $20.4 million of unrecognized tax benefits and said up to $9.7 million could be reduced within 12 months. Currency exposure is material: a hypothetical 10% adverse currency move would reduce foreign net current assets by an estimated $17.0 million. Public Class A shares are non-voting, while voting control is concentrated in Brady family trusts.
Important facts for investors to verify
- Whether organic sales growth continues, especially WPS’s recovery and IDS healthcare trends, excluding currency and divestiture effects.
- Whether operating-margin gains persist as R&D investment increases and inflation, pricing pressure and digital-channel changes continue.
- How the Tax Reform Act, tax-credit valuation allowance and unresolved tax positions affect FY2019 cash taxes and the effective tax rate.
- Cash generation, capital expenditure needs, dividend increases, and the timing of the €45 million notes due in 2020.
- Assumptions supporting goodwill and intangible-asset valuations, and the implications of concentrated voting control for non-voting shareholders.