Brady Corporation — Q3 FY2016 Form 10-Q
Business context and period. Brady manufactures identification solutions and workplace safety products. This unaudited quarterly report covers the three and nine months ended April 30, 2016; the comparable periods are the three and nine months ended April 30, 2015. Amounts below are in millions of dollars unless otherwise stated.
Financial performance
| Metric | Q3 FY2016 | Q3 FY2015 | 9M FY2016 | 9M FY2015 |
|---|---|---|---|---|
| Net sales | $286.8 | $290.2 | $838.5 | $883.1 |
| Gross margin | $145.4; 50.7% | $141.0; 48.6% | $417.7; 49.8% | $429.4; 48.6% |
| Operating income | $30.8; 10.7% | $24.3; 8.4% | $84.5; 10.1% | $68.1; 7.7% |
| Continuing-operations earnings | $21.0 | $17.2 | $55.0 | $44.3 |
| Net earnings | $21.0 | $17.2 | $55.0 | $42.4 |
| Diluted EPS, Class A | $0.42 | $0.33 | $1.08 | $0.83 |
- Q3 sales declined 1.2% year over year: organic sales fell 0.1% and currency reduced sales 1.1%. For nine months, sales fell 5.0%, including a 0.7% organic decline and 4.3% negative currency impact.
- Gross margin improved, primarily from manufacturing efficiency gains and lower supply and labor costs at consolidated facilities. Operating income also benefited from lower restructuring costs versus the prior year and lower interest expense.
- Q3 segment sales/profit: ID Solutions (IDS) $197.0/$46.4; Workplace Safety (WPS) $89.9/$13.8. Both segments improved profit and profit margin year over year. Nine-month segment profit was $123.5 for IDS and $43.8 for WPS.
- Net cash provided by operating activities was $98.6 for nine months, versus $52.7 a year earlier. Capital expenditures were $7.5; net cash used in investing was $5.5. Dividends paid were $30.6 and treasury-stock purchases were $23.6.
- Cash and equivalents were $141.6 at April 30, 2016, versus $114.5 at July 31, 2015. Current assets were $429.4 and current liabilities $163.8.
- Debt included $236.3 of long-term obligations and $6.2 of notes payable; no current maturities of long-term debt were reported. The revolving credit facility had $135.0 outstanding and $161.0 available, after $4.0 in letters of credit. The company reported compliance with debt covenants: leverage ratio 1.8x versus a 3.25x maximum, and interest coverage 16.1x versus a 3.0x minimum.
Material changes versus prior comparable periods
- Q3 operating income increased to $30.8 from $24.3; prior-year Q3 included $4.8 of restructuring charges. Nine-month operating income rose to $84.5 from $68.1; prior-year nine months included $14.0 of restructuring charges.
- Nine-month operating cash flow increased by $45.8, primarily due to improved working capital and higher earnings. Inventory reductions contributed cash as facilities consolidation-related inventory levels normalized.
- Interest expense declined to $1.8 from $2.5 for Q3 and to $6.1 from $8.4 for nine months, reflecting lower debt and a lower weighted-average interest rate.
- Prior-year nine-month net earnings included a $1.9 loss from discontinued Die-Cut operations; the business had been divested, and no discontinued-operations result was reported in the current period.
Outlook, management commentary, risks and unusual items
- Management expected the FY2016 annual income tax rate to be in the upper-20% range. No specific sales or earnings forecast was provided in the filing text.
- Management stated that operating cash flow and borrowing capacity should be sufficient for anticipated working capital, capital expenditures, repurchases, scheduled debt repayments and dividends over the next 12 months. Approximately 99% of cash was held outside the United States.
- Management’s priorities included operational efficiency, customer service, product innovation, product-line reviews, digital and mobile capabilities, focused sales efforts, and employee development. The prior facility-consolidation restructuring program was complete by fiscal 2015; management expected longer-term operational savings.
- Regional and end-market headwinds included industrial-sector softness in North America, weak Brazilian conditions and competitive pressure, weaker electronics demand in Asia, and challenges in Australian manufacturing and mining. Currency movements were a significant reported-sales headwind.
- Risks cited include competition, product development and market acceptance, currency and international exposure, customer retention, supply and pricing pressures, IT security, regulatory and product-liability matters, potential intangible-asset write-offs, tax uncertainties, debt and covenant matters, and execution of strategic initiatives.
- Q3 and nine-month 2016 had no restructuring charges. The board declared a subsequent quarterly dividend of $0.2025 per share, payable July 29, 2016. The company repurchased 7,418 shares for $0.2 during the quarter and had authorization for 2.0 million additional shares.
Important facts for investors to verify
- Whether margin improvement and segment profit growth can persist despite weak or declining organic sales and adverse currency effects.
- Whether working-capital cash flow gains, including inventory reduction and accrued incentive compensation, are repeatable rather than timing-related.
- The status and terms of revolving-facility borrowings, upcoming debt maturities, covenant headroom, and the impact of cash held overseas on liquidity and capital allocation.
- How the upper-20% FY2016 tax-rate expectation compares with reported effective rates of 29.3% for Q3 and 28.9% for nine months, and whether tax accrual adjustments recur.
- Whether management’s digital, product-innovation and operational initiatives offset demand weakness in industrial, electronics and other exposed end markets.