Brady Corporation — Form 10-Q Summary
Reporting period: Three and six months ended January 31, 2018 (fiscal 2018 second quarter and first half). Amounts below are in millions of dollars unless stated otherwise. Brady manufactures and supplies identification solutions and workplace safety products; approximately 45% of sales are generated outside the United States.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Net sales | $287.8 | $268.0 | $577.9 | $548.2 |
| Gross margin | $143.7 (49.9%) | $134.2 (50.1%) | $289.8 (50.1%) | $274.5 (50.1%) |
| Operating income | $34.8 (12.1%) | $30.0 (11.2%) | $70.2 (12.1%) | $63.2 (11.5%) |
| Earnings before tax | $35.0 | $29.1 | $69.8 | $60.1 |
| Net earnings | $4.3 | $25.3 | $30.1 | $47.9 |
| Diluted EPS, Class A | $0.08 | $0.49 | $0.57 | $0.93 |
Q2 sales increased 7.4%, comprising 3.2% organic growth and 4.2% favorable currency translation; first-half sales rose 5.4%, with 2.4% organic growth and 3.0% currency benefit. Operating income improved 16.1% in Q2 and 11.1% for the first half. Gross margin was slightly lower in Q2, primarily because of price reductions in Workplace Safety. The effective tax rate rose to 87.8% for Q2 and 56.9% for the first half, chiefly due to the Tax Cuts and Jobs Act; reported net earnings consequently declined despite higher sales and operating income.
Segments and operating developments
- Identification Solutions (IDS): Sales grew 8.1% in Q2 and 6.1% for the first half; organic growth was 4.7% and 3.8%, respectively. Segment profit rose to $34.1 million in Q2 and $69.9 million year to date, with margins of 16.5% and 16.8%. Growth reflected Product ID, Wire ID and Safety and Facility ID, partly offset by Healthcare ID weakness and pricing pressure.
- Workplace Safety (WPS): Reported sales rose 5.6% in Q2 and 3.7% for the first half, mainly from currency; organic sales declined 0.5% and 1.0%. Segment profit increased to $7.1 million and $13.5 million, respectively. Digital growth and European performance were offset by weaker catalog sales and Americas demand; management attributed some U.S. digital weakness to a platform transition and expected a return to growth during the rest of the year.
R&D spending increased 19.3% in Q2 and 17.2% for the first half, primarily reflecting software and printer updates in IDS. Management cited operational efficiencies as helping offset cost increases. Priorities include product innovation, operational excellence, digital expansion, focused sales efforts, and employee development.
Cash flow, liquidity and debt
- First-half operating cash flow was $42.5 million, down from $53.3 million. Management attributed the decline mainly to higher receivables from sales timing and increased DSO, inventory investment, and incentive compensation payments.
- Capital expenditures were $8.5 million; investing cash outflow was $9.2 million. Dividends paid were $21.4 million. Cash declined $18.6 million to $115.3 million from July 31, 2017.
- At January 31, current assets were $414.1 million and current liabilities $171.7 million. Long-term obligations were $70.6 million; notes payable were $0.6 million. The revolving credit facility had $14.9 million outstanding and $281.9 million available, plus $3.2 million of letters of credit. The $45 million euro-denominated senior notes are due in 2020.
- Brady reported compliance with debt covenants: a 0.4-to-1 leverage ratio against a maximum of 3.25-to-1, and 44.0-to-1 interest coverage against a minimum of 3.0-to-1. About 87% of cash was held outside the United States. Management said operating cash flow and borrowing capacity should fund expected needs for the next 12 months.
Tax, outlook and risks
The Tax Reform Act generated $21.1 million of additional tax expense in the period. The filing describes provisional tax effects, including $18.8 million from remeasuring deferred taxes, the reduced tax rate and a valuation allowance, plus $1.8 million for future withholding and income taxes on distributions of foreign earnings. A $0.4 million deemed-repatriation tax charge was offset by foreign tax credit carryforwards, with no cash payment expected for that charge. The filing says estimates may change during the permitted measurement period; GILTI, FDII and BEAT impacts were not yet estimated.
No numerical sales or earnings guidance is provided. Management’s stated outlook centers on its fiscal 2018 operating and growth initiatives. Key disclosed risks include changing tax laws and tax audits, currency movements, demand and pricing pressure, competition, cybersecurity, product development, customer retention, litigation, integration of acquisitions, intangible-asset impairment, and compliance with debt covenants. Management reported effective disclosure controls and no significant change in internal control over financial reporting.
Most important facts for investors to verify
- How much of future earnings and cash flows will be affected by final Tax Reform Act accounting, foreign tax credit valuation allowances, and repatriation-related taxes.
- Whether organic growth continues in IDS and WPS, including whether WPS’s digital channel recovers after its platform transition and catalog weakness stabilizes.
- Whether receivables, DSO and inventory levels normalize and operating cash flow improves after the first-half decline.
- Whether gross margins withstand WPS pricing pressure and higher operating costs while R&D investment increases.
- Debt repayment, foreign-cash availability, covenant headroom, and the company’s ability to sustain dividends and other cash uses.