Brady Corporation (BRC) — Q2 FY2020 Form 10-Q
Reporting period: Three and six months ended January 31, 2020. Brady makes identification and workplace safety products. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $276.7 | $282.4 | $563.6 | $575.6 |
| Gross margin | $139.1; 50.3% | $139.8; 49.5% | $280.5; 49.8% | $286.3; 49.7% |
| Operating income | $41.2; 14.9% of sales | $36.0; 12.8% | $82.1; 14.6% | $76.7; 13.3% |
| Net income | $33.6 | $29.2 | $71.1 | $59.9 |
| Diluted EPS, Class A | $0.62 | $0.55 | $1.32 | $1.13 |
- Cash flow: Six-month operating cash flow was $53.1 million, versus $44.2 million a year earlier. Capital expenditures were $13.1 million; investing cash outflow was $16.5 million. Dividends paid were $23.1 million.
- Liquidity and debt: Cash was $289.8 million at January 31, up $10.7 million from July 31, 2019. Current maturities of long-term debt were $49.6 million; the company had no revolver borrowings and $196.7 million available under its $200 million facility, after $3.3 million of letters of credit. The facility may be increased to $400 million subject to conditions. Brady reported compliance with debt covenants.
- Balance sheet: Total assets were $1,215.8 million and stockholders’ equity was $899.9 million. Adoption of lease accounting resulted in $51.9 million of operating lease liabilities at January 31.
Changes and operating drivers
- Q2 sales fell 2.0% year over year, reflecting a 1.2% organic decline and 0.8% adverse currency impact. Six-month sales declined 2.1%, comprising a 0.8% organic decline and 1.3% currency impact.
- Q2 segment sales were $205.4 million for Identification Solutions (IDS) and $71.3 million for Workplace Safety (WPS). Organic sales declined 1.3% and 1.0%, respectively. Six-month segment profit rose to $83.1 million for IDS and $10.6 million for WPS.
- Operating income increased despite lower sales, supported by manufacturing efficiencies, lower SG&A and compensation costs, and improved segment profit. Gross margin percentage also improved, partly offset by higher personnel and freight costs and reduced volume.
- Management cited weaker end-market demand in certain product lines and regions, including Europe and Asia. China organic sales declined about 10% in Q2, partly due to tariffs and economic weakness. WPS continued to experience sales effects from a prior digital-platform change; its new platform had improved functionality, but sales had not returned to earlier levels.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management described strategic priorities including new product development, customer service, operational efficiency, digital sales capabilities, and targeted vertical markets. It expects an ongoing annual effective tax rate of approximately 20%; the six-month FY2020 rate of 15.3% benefited from a favorable domestic tax audit settlement and stock-based compensation tax benefits.
- Management said operating cash flow and borrowing capacity should be sufficient for anticipated working capital, capital spending, repurchases, scheduled debt repayments, and dividends over the next 12 months.
- The €45 million, 4.24% senior notes are due May 13, 2020; their reported U.S.-dollar carrying amount was $49.6 million. The filing reports $49.6 million in current maturities of long-term debt.
- ASC 842 lease accounting was adopted August 1, 2019, adding lease assets and liabilities; it had no material impact on cash flows or operating results. No material off-balance-sheet arrangements were reported. Purchase commitments were described as not material.
- Risks identified include weaker product demand, competition and execution, raw-material and other cost increases, foreign-exchange volatility, cybersecurity, regulation, key-employee retention, litigation, and potential impairment of intangible assets. The company reported no material change in market-risk disclosures and stated that disclosure controls were effective.
Important facts for investors to verify
- Whether organic sales trends and end-market weakness—particularly in Europe, Asia, China, and WPS—persist or improve.
- Whether efficiency gains can continue to offset lower sales and input-cost pressure without reducing investment in product development.
- The repayment or refinancing of the May 2020 euro-note maturity and continued access to the revolving credit facility.
- The sustainability of earnings and cash flow, including the effect of the favorable tax settlement and stock-compensation tax benefits on the six-month tax rate.
- Whether WPS digital sales recover following the platform transition, and how foreign currency and tariffs affect results.