Brady Corporation (NYSE: BRC) — FY2019 Form 10-K
Reporting period: Fiscal year ended July 31, 2019; the filing also reports the fourth quarter ended July 31, 2019. Brady manufactures identification solutions and workplace safety products. Its reportable segments are Identification Solutions (IDS) and Workplace Safety (WPS). Unless otherwise noted, amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $1,160.6 million | $1,173.9 million |
| Gross margin | $578.7 million; 49.9% | $588.3 million; 50.1% |
| Operating income | $162.4 million; 14.0% | $152.7 million; 13.0% |
| Net income | $131.3 million | $91.1 million |
| Diluted Class A EPS | $2.46 | $1.73 |
| Cash from operating activities | $162.2 million | $143.0 million |
| Capital expenditures | $32.8 million | $21.8 million |
FY2019 net margin was 11.3%, compared with 7.8% in FY2018. The effective tax rate fell to 20.3% from 40.1%; FY2018 included $21.1 million of incremental tax expense related to U.S. tax reform. FY2019 operating cash flow exceeded net income. Cash and cash equivalents were $279.1 million at year-end, up $97.6 million. The company had $50.2 million of Euro-denominated notes due in 2020, classified as current debt, and no revolver borrowings outstanding at July 31. Cash less reported debt was approximately $228.9 million.
FY2019 fourth quarter: Net sales were $295.3 million, operating income $46.2 million, net income $36.6 million, and diluted Class A EPS $0.68. In FY2018 Q4, the corresponding figures were $297.5 million, $44.8 million, $35.0 million, and $0.66.
Performance and changes versus prior periods
- Annual sales declined 1.1%, despite 2.8% organic growth, as currency translation reduced sales 2.6% and the prior-year divestiture reduced them 1.3%.
- IDS sales rose 2.0% to $863.1 million; organic growth was 4.1%. Segment profit increased 15.0% to $165.0 million, or 19.1% of sales, supported by growth and SG&A efficiencies.
- WPS sales fell 9.2% to $297.5 million, reflecting a 0.7% organic decline, a 3.7% currency impact, and a 4.8% divestiture impact. Segment profit fell 27.4% to $23.0 million, or 7.7% of sales.
- Gross margin declined 0.2 percentage points, with higher freight and personnel costs partly offset by price increases and manufacturing efficiencies. SG&A fell 4.9% to $371.1 million, and declined to 32.0% of sales from 33.3%.
- Operating cash flow increased by $19.2 million. Investing outflow increased to $34.5 million, primarily because of higher facility and equipment spending. Financing outflow was $27.6 million, including $44.7 million in dividends.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management said operating cash flow and borrowing capacity were expected to fund working capital, capital expenditures, dividends, repurchases and scheduled debt payments for the next 12 months.
- Management’s stated priorities include product innovation, operational efficiency, customer service, digital capabilities, and targeted growth in selected markets. WPS Americas continued to face sales weakness following a digital-platform change; the replacement platform improved functionality, but sales had not recovered to pre-change levels.
- Principal risks include competition and pricing pressure, execution of digital and product-development plans, raw-material, freight and labor costs, foreign-exchange movements, cybersecurity and data protection, changing tax rules, and potential impairment of goodwill or other intangibles. About 45% of sales were outside the United States.
- Goodwill and other intangible assets totaled approximately $447.1 million, or 38.6% of total assets. Annual goodwill testing found reporting units with remaining goodwill substantially above carrying value; a tradename was written down by $0.5 million. No goodwill impairment was recorded.
- The $60.1 million deferred-tax-asset valuation allowance was a critical audit matter because its assessment depends on estimates of future taxable income. Management reported no material pending legal proceedings and no material off-balance-sheet arrangements.
- Subsequent events: on August 1, 2019, Brady replaced its prior credit agreement with a $200 million multi-currency revolving facility maturing in 2024, with an option to increase capacity to $400 million subject to conditions. In September 2019, it announced an annual Class A dividend increase from $0.85 to $0.87 per share.
The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The publicly traded Class A shares are nonvoting; substantially all voting stock is controlled by two shareholders associated with the founder’s family.
Investor verification priorities
- Track whether WPS Americas digital sales and catalog performance recover, and whether WPS profitability stabilizes.
- Separate ongoing organic growth and operating improvement from currency effects, divestitures, and the unusually high FY2018 tax expense when comparing earnings.
- Review the next reporting periods for cash generation, capital spending, and repayment or refinancing of the $50.2 million notes due in 2020.
- Assess the assumptions supporting the $60.1 million deferred-tax valuation allowance and the recoverability of goodwill and other intangible assets.
- Confirm the terms, capacity, covenant compliance, and utilization of the post-year-end credit facility, and the sustainability of dividends and share repurchases.