Brady Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended January 31, 2015. Unaudited consolidated results; dollar figures below are in millions unless stated otherwise.
Business context
Brady manufactures identification solutions, specialty materials, and workplace safety products. It reports two segments: Identification Solutions (IDS) and Workplace Safety (WPS). The company completed the sale of its Die-Cut business on August 1, 2014; comparative-period results for that business are presented as discontinued operations.
Key financial results
| Metric | Three months ended Jan. 31, 2015 | Three months ended Jan. 31, 2014 | Six months ended Jan. 31, 2015 | Six months ended Jan. 31, 2014 |
|---|---|---|---|---|
| Net sales | $282.6 | $291.2 | $592.9 | $598.7 |
| Gross margin | $138.2; 48.9% | $142.5; 48.9% | $288.4; 48.6% | $300.4; 50.2% |
| Operating income | $16.8; 5.9% | $18.3; 6.3% | $43.8; 7.4% | $48.0; 8.0% |
| Continuing-operations earnings | $11.6 | $10.5 | $27.1 | $28.7 |
| Net earnings | $11.6 | $16.4 | $25.2 | $40.4 |
| Diluted EPS from continuing operations, Class A | $0.23 | $0.20 | $0.53 | $0.55 |
- Quarterly sales fell 2.9%, although organic sales grew 1.4%; unfavorable currency translation reduced sales 4.3%. For the six-month period, sales declined 1.0%, with 1.9% organic growth offset by a 2.9% currency impact.
- Quarterly gross margin was unchanged year over year; the six-month margin fell 1.6 percentage points, mainly due to facility-consolidation costs and, to a lesser extent, sales mix.
- Quarterly continuing-operations earnings increased despite lower operating income, primarily alongside a lower effective tax rate: 17.4% versus 29.5%. The company attributed the lower rate mainly to the extension of the U.S. R&D tax credit and other tax provisions. Six-month continuing-operations earnings declined 5.5%.
- Net earnings comparisons reflect discontinued operations: the prior-year quarter included $5.9 million of discontinued-operations earnings; the current six-month period included a $1.9 million loss versus $11.7 million of earnings in the prior year.
Segments
- IDS: Quarterly sales were $192.1 million, down 1.4% reported but up 1.9% organically. Segment profit was $35.7 million, down from $37.5 million; profit margin declined to 18.6% from 19.3%. The six-month profit margin fell to 19.6% from 21.9%.
- WPS: Quarterly sales were $90.6 million, down 6.1% reported, with 0.6% organic growth offset by a 6.7% currency headwind. Segment profit was $12.8 million versus $14.7 million; profit margin declined to 14.1% from 15.2%. Organic sales improved for a third consecutive quarter, according to management.
Cash flow, liquidity, and debt
- Six-month operating cash flow was $23.9 million, versus $41.8 million a year earlier. Management attributed the decline mainly to working-capital changes, including accounts-payable timing and accelerated corporate-card payments.
- Investing activities used $7.5 million, including $17.8 million in capital expenditures, partly offset by $6.1 million net proceeds from the Die-Cut sale. Financing activities provided $6.0 million; dividends paid were $20.4 million.
- Cash and cash equivalents were $93.3 million at January 31, 2015, up from $81.8 million at July 31, 2014. Approximately 87% of cash was held outside the United States. Current assets were $405.6 million and current liabilities $201.5 million.
- Balance-sheet borrowings included $11.9 million of notes payable, $42.5 million of current long-term debt maturities, and $222.8 million of long-term obligations. The $300 million revolving facility had $79.0 million outstanding, $4.6 million of letters of credit, and $216.4 million available; eligible capacity could increase to $450 million. China credit lines had $11.9 million outstanding and $22.4 million available.
- The company reported compliance with debt covenants: debt/EBITDA of 1.8x against a maximum 3.25x, and EBITDA/interest of 12.1x against a minimum 3.0x. Management said cash flow and borrowing capacity should cover anticipated needs for the next 12 months.
Material changes, outlook, and risks
- Facility consolidations across the Americas, Europe, and Asia continued. Management expected completion by fiscal year-end, approximately $15 million of fiscal 2015 restructuring charges, and operational savings beginning in fiscal 2016. Six-month charges were $9.2 million; $5.0 million of restructuring liabilities remained at January 31, with most remaining cash payments expected within 12 months.
- Management highlighted investment in R&D, sales and marketing, WPS e-commerce, and targeted markets. IDS organic growth was supported by selected U.S. markets and Asia, while Western Europe weakened; WPS faced currency pressure and economic challenges in Europe and Australia, particularly mining and related industries.
- No specific sales or earnings guidance was provided. Management anticipated a fiscal 2015 tax rate in the mid-to-upper 20% range.
- Foreign-exchange exposure is material: currency translation reduced sales and cash, and six-month comprehensive loss was $66.6 million, largely reflecting foreign-currency translation. Accumulated other comprehensive income/loss moved from a $64.2 million gain at July 31, 2014 to a $27.6 million loss at January 31, 2015.
- Other disclosed risks include restructuring execution and savings, competition, product development, international operations and currency, customer and supplier pressures, key-person retention, regulatory and product-liability matters, intangible-asset impairment, divestitures, and debt covenant compliance. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether organic growth can persist and offset currency-driven reported-sales declines, especially in WPS and Europe.
- Whether facility consolidations finish on schedule, remain within the approximately $15 million fiscal 2015 charge estimate, and deliver savings from fiscal 2016.
- Whether operating cash flow recovers from the working-capital-driven decline while funding capital spending, dividends, restructuring, and debt service.
- Debt balances, covenant headroom, and the availability and terms of revolving and China credit facilities.
- The effect of currency movements and discontinued-operation/divestiture accounting on earnings, cash, and comprehensive income.