Brady Corporation — Form 10-Q Summary
Business and period: Brady manufactures identification solutions and workplace safety products. This unaudited report covers the fiscal first quarter ended October 31, 2018; comparisons are with the three months ended October 31, 2017, unless noted.
Financial performance
| Metric | Q1 FY2019 | Prior year |
|---|---|---|
| Net sales | $293.2 million | $290.2 million |
| Gross margin | $146.5 million; 50.0% of sales | $146.1 million; 50.3% |
| Operating income | $40.6 million; 13.9% of sales | $35.4 million; 12.2% |
| Net earnings | $30.6 million; 10.4% of sales | $25.8 million; 8.9% |
| Diluted EPS, Class A | $0.58 | $0.49 |
| Operating cash flow | $18.8 million | $34.7 million |
| Capital expenditures | $6.0 million | $3.8 million |
Revenue grew 1.0% overall, comprising 4.7% organic growth, a 2.0% unfavorable currency impact, and a 1.7% decline related to divestitures. IDS sales increased 4.0% to $218.1 million, while WPS sales declined 6.6% to $75.1 million. Segment profit was $41.6 million for IDS, up from $35.8 million, and $5.5 million for WPS, down from $6.4 million.
Cash and cash equivalents were $192.2 million at October 31, versus $181.4 million at July 31, 2018. Total current assets were $494.0 million and current liabilities were $181.6 million. Long-term obligations were $54.4 million; the revolver balance was $3.4 million, with $293.6 million available under the $300 million facility after letters of credit. Brady reported compliance with debt covenants. Its debt-to-EBITDA ratio was 0.3:1.0 against a maximum of 3.25:1.0; interest coverage was 63.5:1.0 against a minimum of 3.0:1.0.
Material changes and management commentary
- Net earnings rose 18.6% and operating income rose 14.7%, despite sales increasing only 1.0%. Lower SG&A—down 5.5%—and stronger IDS segment profit drove the operating improvement.
- Gross margin declined 0.3 percentage points, primarily due to higher material, supplies, and freight costs; operational efficiencies partly offset the pressure. R&D expense increased 7.7% as Brady invested in personnel and new product development.
- Operating cash flow fell to $18.8 million. Management attributed the decrease to the timing of incentive compensation payments and greater working-capital use, partly offset by higher earnings.
- WPS faced weaker North American sales, including lower response to U.S. catalog promotions and continued effects from a digital-platform transition. European and Australian WPS organic sales grew.
- Cash rose by $10.7 million during the quarter. Investing used $5.7 million, and financing provided $0.7 million, compared with $21.7 million used in the prior-year quarter, principally reflecting lower net credit-facility repayments and more stock-option exercise proceeds.
Outlook, risks, and unusual items
The filing provides no quantified earnings or revenue guidance. Management’s stated fiscal 2019 priorities include product innovation, operational efficiency and automation, improved digital capabilities, targeted sales and marketing, and employee development. Management said operating cash flow and borrowing capacity should fund anticipated needs for the next 12 months.
Risks identified include competitive and demand pressures, product development, cybersecurity, customer retention, regulation, key-employee retention, divestitures and acquisitions, litigation, foreign-currency movements, tax-law changes, potential intangible-asset write-offs, and debt-covenant compliance. Brady noted that approximately 58% of cash was held outside the United States and that exchange-rate movements reduced quarterly cash by $3.1 million. It reported no material off-balance-sheet arrangements and no material change in market-risk disclosures from its prior annual report.
Brady adopted revenue-recognition Topic 606 on August 1, 2018, using the modified retrospective method. The adoption had no material impact on current-period results but reduced opening retained earnings by $2.1 million, net of tax, primarily due to the timing of revenue and costs for certain extended warranties. The effective tax rate declined to 23.2% from 25.7%, principally due to U.S. tax reform and equity-compensation tax benefits. The Board declared a $0.2125-per-share quarterly dividend payable January 31, 2019.
Management stated that disclosure controls were effective as of quarter-end and that no material changes to internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether organic growth continues, particularly in IDS, and whether WPS can recover North American sales and profitability.
- Whether elevated materials, supplies, and freight costs continue to pressure gross margin and whether efficiency initiatives offset them.
- Whether operating cash flow improves as working-capital use and incentive-payment timing normalize.
- Debt maturity and refinancing plans: the revolving agreement matures September 25, 2020, and €45 million of senior notes mature May 13, 2020.
- Foreign-exchange exposure, the final effects of U.S. tax reform, and any material future impact from lease-accounting adoption.