Brady Corporation is a global manufacturer and supplier of identification
solutions and workplace safety products that identify and protect premises,
products and people. The IDS segment is primarily involved in the design,
manufacture, and distribution of high-performance and innovative identification
and healthcare products. The WPS segment provides workplace safety and
compliance products, approximately half of which are internally manufactured and
half of which are externally sourced.
The long-term sales growth and profitability of our segments will depend not
only on improved demand in end markets and
the overall economic environment, but also on our ability to continuously
improve operational excellence, focus on the customer, develop and market
innovative new products, and to advance our digital capabilities. In our
Identification Solutions ("ID Solutions" or "IDS") business, our strategy for
growth includes an increased focus on certain industries and products, a focus
on improving the customer buying experience, and increasing investment in
research and development ("R&D") to develop new products. In our Workplace
Safety ("WPS") business, our strategy for growth includes a focus on workplace
safety critical industries, innovative new product offerings, compliance
expertise, customization expertise, and improving our digital capabilities.
The following are key initiatives supporting the strategy in fiscal 2020:
• Enhancing our research and development process and improving the time to
launch high-value, innovative products in alignment with our target
markets.
• Providing our customers with the highest level of customer service.
• Driving operational excellence and executing sustainable efficiency gains
within our global operations and within our selling, general and
administrative structures.
• Expanding and enhancing our sales capabilities through an improved digital
presence and increased sales resources.
• Growing through focused actions in selected vertical markets and strategic
accounts.
• Enhancing our employee development process to create an engaged workforce
and to attract and retain key talent.
Results of Operations
A comparison of results of Operating Income for the three months ended October
31, 2019 and 2018 is as follows:
Three months ended October 31,
(Dollars in thousands) 2019 % Sales 2018 % Sales
Net sales $ 286,947 $ 293,196
Gross margin 141,405 49.3 % 146,539 50.0 %
Operating expenses:
Research and development 10,967 3.8 % 11,326 3.9 %
Selling, general and administrative 89,547 31.2 % 94,591 32.3 %
Total operating expenses 100,514 35.0 % 105,917 36.1 %
Operating income $ 40,891 14.3 % $ 40,622 13.9 %
References in this Form 10-Q to "organic sales" refer to sales calculated in
accordance with U.S. GAAP, excluding the impact of foreign currency translation
and divestitures. The Company's organic sales disclosures exclude the effects of
foreign currency translation as foreign currency translation is subject to
volatility that can obscure underlying business trends. Management believes that
the non-GAAP financial measure of organic sales is meaningful to investors as it
provides them with useful information to aid in identifying underlying sales
trends in our businesses and facilitating comparisons of our sales performance
with prior periods.
Net sales for the three months ended October 31, 2019, decreased 2.1% to $286.9
million, compared to $293.2 million in the same period of the prior year. The
decrease consisted of an organic sales decline of 0.4% and a decrease from
foreign currency translation of 1.7%. Organic sales declined 0.2% in the IDS
segment and declined 0.8% in the WPS segment during the three months ended
October 31, 2019, compared to the same period in the prior year. The IDS segment
realized sales growth in the Safety and Facility ID product line, and remained
essentially flat to slightly down in the Product ID, Wire ID and Healthcare ID
product lines compared to the prior year. The WPS segment realized low-single
digit sales growth in digital sales, while sales through the catalog channel
declined in the low-single digits.
19
--------------------------------------------------------------------------------
Table of Contents
Gross margin for the three months ended October 31, 2019, decreased 3.5% to
$141.4 million, compared to $146.5 million in the same period of the prior year.
As a percentage of net sales, gross margin decreased to 49.3% for the three
months ended October 31, 2019, from 50.0% in the same period of the prior year.
The decrease in gross margin as a percentage of net sales was primarily due to
increased input costs such as personnel, material, tariff, and freight costs,
along with reduced sales volume, which was partially mitigated by our ongoing
efforts to streamline manufacturing processes and drive operational
efficiencies, including increased automation in our manufacturing facilities.
Research and development ("R&D") expenses for the three months ended October 31,
2019, decreased 3.2% to $11.0 million, compared to $11.3 million in the same
period of the prior year. As a percentage of sales, R&D expenses remained
essentially flat for the three months ended October 31, 2019, compared to the
same period of the prior year. The decrease in R&D spending was primarily due to
the timing of expenditures related to ongoing new product development projects.
The Company remains committed to investing in new product development to
increase sales within our IDS and WPS businesses. Investments in new printers
and materials continue to be the primary focus of R&D expenditures.
Selling, general and administrative expenses ("SG&A") include selling and
administrative costs directly attributed to the IDS and WPS segments, as well as
certain other corporate administrative expenses including finance, information
technology, human resources, and other administrative expenses. SG&A decreased
5.3% to $89.5 million for the three months ended October 31, 2019, compared to
$94.6 million in the same period of the prior year. As a percentage of sales,
SG&A was 31.2% for the three months ended October 31, 2019, compared to 32.3% in
the same period of the prior year. Approximately one-third of the decrease in
SG&A was due to the impact of foreign currency translation, and the remainder
was due to ongoing efficiency gains and continued efforts to reduce SG&A costs.
Operating income was $40.9 million and $40.6 million for three months ended
October 31, 2019 and 2018, respectively. The increase was primarily due to
increased segment profit in the IDS segment and reduced SG&A in both segments.
OPERATING INCOME TO NET INCOME
Three months ended October 31,
(Dollars in thousands) 2019 % Sales 2018 % Sales
Operating income $ 40,891 14.3 % $ 40,622 13.9 %
Other income (expense):
Investment and other income (expense) 1,380 0.5 % (17 ) - %
Interest expense (701 ) (0.2 )% (712 ) (0.2 )%
Income before income tax 41,570 14.5 % 39,893 13.6 %
Income tax expense 4,072 1.4 % 9,256 3.2 %
Net income $ 37,498 13.1 % $ 30,637 10.4 %
Investment and other income (expense) was $1.4 million for the three months
ended October 31, 2019, compared to $0.0 million for the same period in the
prior year. The increase was primarily due to an increase in the market value of
securities held in deferred compensation plans and an increase in interest
income when compared to the same period in the prior year.
Interest expense remained essentially flat at $0.7 million for the three months
ended October 31, 2019, from $0.7 million for the same period in the prior year
as there was minimal change in the Company's principal balance under its
outstanding debt agreements compared to the same period in the prior year.
The Company's income tax rate was 9.8% for the three months ended October 31,
2019, compared to 23.2% in the same period in the prior year. Refer to Note M
"Income Taxes" for additional information on the Company's effective income tax
rate.
20
--------------------------------------------------------------------------------
Table of Contents
Business Segment Operating Results
The Company is organized and managed on a global basis within three operating
segments, Identification Solutions, Workplace Safety, and People Identification
("PDC"), which aggregate into two reportable segments that are organized around
businesses with consistent products and services: IDS and WPS. The
Identification Solutions and PDC operating segments aggregate into the IDS
reporting segment, while the WPS reporting segment is comprised solely of the
Workplace Safety operating segment. The Company evaluates short-term segment
performance based on segment profit and customer sales. Interest expense,
investment and other (expense) income, income taxes, and certain corporate
administrative expenses are excluded when evaluating segment performance.
The following is a summary of segment information for the three months ended
October 31, 2019 and 2018:
Three months ended October 31,
2019 2018
SALES GROWTH INFORMATION
ID Solutions
Organic (0.2 )% 5.7 %
Currency (1.2 )% (1.7 )%
Total (1.4 )% 4.0 %
Workplace Safety
Organic (0.8 )% 2.2 %
Currency (3.4 )% (2.6 )%
Divestitures - % (6.2 )%
Total (4.2 )% (6.6 )%
Total Company
Organic (0.4 )% 4.7 %
Currency (1.7 )% (2.0 )%
Divestitures - % (1.7 )%
Total (2.1 )% 1.0 %
SEGMENT PROFIT AS A PERCENT OF NET SALES
ID Solutions 19.7 % 19.1 %
Workplace Safety 7.2 % 7.4 %
Total 16.6 % 16.1 %
ID Solutions
IDS net sales decreased 1.4% for the three months ended October 31, 2019,
compared to the same period in the prior year, which consisted of an organic
sales decline of 0.2% and a decrease from foreign currency translation of 1.2%.
Organic sales in the Americas increased in the low-single digits for the three
months ended October 31, 2019, compared to the same period in the prior year.
The increase was primarily due to growth in the Safety and Facility ID and
Product ID product lines. Organic sales grew in the low-single digits in the
United States and declined in the low-single digits in the rest of the Americas.
Organic sales in Europe decreased in the mid-single digits for the three months
ended October 31, 2019, as compared to the same period in the prior year,
primarily due to a decline in the Safety and Facility ID product line. The
organic sales decline was due to businesses in emerging geographies due to a
decline in economic activity, and to a lesser extent certain businesses based in
Western Europe.
Organic sales in Asia decreased in the low-single digits for the three months
ended October 31, 2019, as compared to the same period in the prior year. The
decrease was primarily due to a decline in the Safety and Facility ID and
Product ID product lines, partially offset by growth in the Wire ID product
line. Organic sales declined in the mid-single digits within China partially due
to the direct and indirect impact of tariffs, and remained essentially flat in
the rest of Asia.
Segment profit increased 2.1% to $42.4 million for the three months ended
October 31, 2019, compared to $41.6 million in the same period of the prior
year. As a percentage of net sales, segment profit was 19.7% for the three
months ended October 31,
21
--------------------------------------------------------------------------------
Table of Contents
2019, compared to 19.1% in the same period of the prior year. The increase in
segment profit was primarily driven by efficiency gains throughout SG&A in all
regions.
Workplace Safety
WPS net sales decreased 4.2% for the three months ended October 31, 2019,
compared to the same period in the prior year, which consisted of an organic
sales decline of 0.8% and a decrease from foreign currency translation of 3.4%.
Sales through the digital channel increased in the low-single digits while sales
through the catalog channel decreased in the low-single digits.
Organic sales in Europe increased modestly for the three months ended October
31, 2019, compared to the same period in the prior year. Organic sales growth in
France and Belgium was largely offset by a decline in sales in Germany due to
reduced demand in industrial production and exports. Sales throughout the rest
of Europe remained essentially flat. Sales through the digital channel increased
in the mid-single digits while sales through the catalog channel decreased in
the low-single digits.
Organic sales in the Americas declined in the low-single digits for the three
months ended October 31, 2019, compared to the same period in the prior year.
This decrease was driven by a low-single digit decline in catalog sales and a
slight decline in sales through the digital channel. This business continued to
experience a negative impact on sales from a digital platform that was
implemented in fiscal 2018 and transitioned to a new digital platform in fiscal
2019 to address this decline. The functionality of the new digital platform has
improved compared to the former digital platform; however, sales have not yet
returned to the level experienced prior to the initial platform change in fiscal
2018.
Organic sales in Australia declined in the low-single digits in both the digital
and traditional catalog channel for the three months ended October 31, 2019, as
compared to the same period of the prior year. The decrease in sales was due to
reduced demand in our primary end markets, which include non-residential
construction and industrial manufacturing.
Segment profit decreased to $5.2 million for the three months ended October 31,
2019, compared to $5.5 million in the same period of the prior year. As a
percentage of net sales, segment profit decreased to 7.2% for the three months
ended October 31, 2019, compared to 7.4% in the same period of the prior year.
The decrease in segment profit was due to the decrease in sales volumes in the
North American and Australian businesses and foreign currency translation,
partially offset by efficiency gains throughout SG&A.
Financial Condition
Cash and cash equivalents were $295.1 million at October 31, 2019, an increase
of $16.0 million from July 31, 2019. The significant changes were as follows:
© Edgar Online, source Glimpses
BRADY CORPORATION 
