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Brady Corporation Reports Fiscal 2015 Second Quarter Results

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Brady Corporation (NYSE:BRC) (“Brady” or “Company”), a world leader in identification solutions, today reported its financial results for its fiscal 2015 second quarter ended January 31, 2015.

Quarter Ended January 31, 2015 Financial Results:

Sales for the quarter ended January 31, 2015 decreased 2.9 percent to $282.6 million compared to $291.2 million in the second quarter of fiscal 2014. Total organic sales increased 1.4 percent and foreign currency translation decreased sales by 4.3 percent. By segment, organic sales increased 1.9 percent in Identification Solutions and 0.6 percent in Workplace Safety.

Earnings from continuing operations for the quarter ended January 31, 2015 were $11.6 million compared to $10.5 million in the prior year quarter. Non-GAAP net earnings from continuing operations* for the current quarter were $15.0 million compared to $13.4 million in the same quarter last year.

Net earnings from continuing operations per Class A Nonvoting Common Share were $0.23 for the quarter ended January 31, 2015 compared to $0.20 in the same quarter last year. Non-GAAP earnings from continuing operations per diluted Class A Nonvoting Common Share* were $0.29 in the second quarter of fiscal 2015 compared to $0.25 per share in the second quarter of fiscal 2014.

Six-Month Period Ended January 31, 2015 Financial Results:

Sales for the six-month period ended January 31, 2015 decreased 1.0 percent to $592.9 million compared to $598.7 million in the same period in fiscal 2014. Organic sales increased 1.9 percent and the impact of foreign currency translation decreased sales by 2.9 percent. By segment, organic sales increased 2.1 percent in Identification Solutions and 1.5 percent in Workplace Safety.

Earnings from continuing operations for the six-month period ended January 31, 2015 were $27.1 million compared to $28.7 million in the same period in fiscal 2014. Non-GAAP net earnings from continuing operations* for the six-month period were $33.5 million compared to $36.2 million in the same period in fiscal 2014.

Net earnings from continuing operations per Class A Nonvoting Common share were $0.53 for the six-month period ended January 31, 2015 compared to $0.55 in the same period in fiscal 2014. Non-GAAP earnings from continuing operations per diluted Class A Common Share* were $0.65 in the six-month period ended January 31, 2015 compared to $0.69 in the same period in fiscal 2014.

Commentary:

“This marks the fourth consecutive quarter of organic sales growth for Brady Corporation and the third consecutive quarter of organic sales growth in our Workplace Safety business. Our gross profit margin is also stabilizing as we near completion of our facility consolidation activities. Our gross profit margin finished at 48.9 percent, which is a 50 basis point improvement over the first quarter of fiscal 2015,” said Brady President and Chief Executive Officer, J. Michael Nauman. “Although our profitability was impacted by costs related to the consolidation of our manufacturing facilities, the level of incremental costs is moderating and we expect completion of these activities by the end of fiscal 2015. We are focused on executing business fundamentals to drive organic sales growth and improve profitability while investing in research and development and sales resources in selected industries, as well as building an enhanced, scalable digital platform that will generate value for Brady and its customers.”

“Along with our stabilizing gross profit margins, we are also seeing benefits from our focus on controlling selling, general, and administrative expenses, which should aid in continuing our trend of improving financial results,” said Brady’s Chief Financial Officer, Aaron Pearce. “As we look to the second half of fiscal 2015, we also anticipate free cash flow to improve as we systematically reduce our inventory levels, moderate our capital expenditures and increase profitability.”

Fiscal 2015 Guidance:

The Company anticipates low single-digit organic sales growth in fiscal 2015, with organic sales growth in both the Identification Solutions and Workplace Safety platforms. Brady also expects a full-year income tax rate in the mid-to-upper 20 percent range, approximately $15 million of restructuring charges, $40 million of depreciation and amortization expense and capital expenditures of approximately $35 million in fiscal 2015.

Earnings from continuing operations per diluted Class A Nonvoting Common Share, exclusive of restructuring charges and other non-routine charges guidance remains unchanged at $1.50 to $1.70. However, due to the strengthening of the US dollar against other major currencies, the Company anticipates that its full-year fiscal 2015 results will finish at the low end of this range. This guidance is based on current exchange rates.

A webcast regarding Brady’s fiscal 2015 second quarter financial results will be available at www.bradycorp.com beginning at 9:30 a.m. Central Time today.

Brady Corporation is an international manufacturer and marketer of complete solutions that identify and protect people, products and places. Brady’s products help customers increase safety, security, productivity and performance and include high-performance labels, signs, safety devices, printing systems and software. Founded in 1914, the Company has a diverse customer base in electronics, telecommunications, manufacturing, electrical, construction, medical, aerospace and a variety of other industries. Brady is headquartered in Milwaukee, Wisconsin and as of August 1, 2014, employed approximately 6,400 people in its worldwide businesses. Brady’s fiscal 2014 sales were approximately $1.23 billion. Brady stock trades on the New York Stock Exchange under the symbol BRC. More information is available on the Internet at www.bradycorp.com.

* See accompanying notes for Non-GAAP measures.

In this news release, statements that are not reported financial results or other historic information are “forward-looking statements.” These forward-looking statements relate to, among other things, the Company’s future financial position, business strategy, targets, projected sales, costs, earnings, capital expenditures, debt levels and cash flows, and plans and objectives of management for future operations.

The use of words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “should,” “project” or “plan” or similar terminology are generally intended to identify forward-looking statements. These forward-looking statements by their nature address matters that are, to different degrees, uncertain and are subject to risks, assumptions, and other factors, some of which are beyond Brady’s control, that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For Brady, uncertainties arise from: implementation of the healthcare strategy; implementation of the Workplace Safety strategy; future competition; risks associated with restructuring plans; future financial performance of major markets Brady serves, which include, without limitation, telecommunications, hard disk drive, manufacturing, electrical, construction, laboratory, education, governmental, public utility, computer, healthcare and transportation; technology changes and potential security violations to the Company’s information technology system; fluctuations in currency rates versus the U.S. dollar; risks associated with international operations; difficulties associated with exports; Brady’s ability to develop and successfully market new products; risks associated with identifying, completing, and integrating acquisitions; changes in the supply of, or price for, parts and components; increased price pressure from suppliers and customers; Brady’s ability to retain significant contracts and customers; risk associated with loss of key talent; risks associated with divestitures and businesses held for sale; risks associated with obtaining governmental approvals and maintaining regulatory compliance; risk associated with product liability claims; environmental, health and safety compliance costs and liabilities; potential write-offs of Brady’s substantial intangible assets; risks associated with our ownership structure; unforeseen tax consequences; Brady’s ability to maintain compliance with its debt covenants; increase in our level of debt; and numerous other matters of national, regional and global scale, including those of a political, economic, business, competitive, and regulatory nature contained from time to time in Brady’s U.S. Securities and Exchange Commission filings, including, but not limited to, those factors listed in the “Risk Factors” section within Item 1A of Part I of Brady’s Form 10-K for the year ended July 31, 2014.

These uncertainties may cause Brady’s actual future results to be materially different than those expressed in its forward-looking statements. Brady does not undertake to update its forward-looking statements except as required by law.

BRADY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; Dollars in thousands, except per share data)
Three months ended January 31, Six months ended January 31,
2015 2014 2015 2014
Net sales $ 282,628 $ 291,194 $ 592,868 $ 598,724
Cost of products sold 144,425 148,658 304,503 298,341
Gross margin 138,203 142,536 288,365 300,383
Operating expenses:
Research and development 8,948 8,440 18,579 17,027
Selling, general and administrative 107,565 111,426 216,846 224,159
Restructuring charges 4,879 4,324 9,157 11,163
Total operating expenses 121,392 124,190 244,582 252,349
Operating income 16,811 18,346 43,783 48,034
Other income and (expense):
Investment and other income 211 255 535 1,017
Interest expense (3,000 ) (3,676 ) (5,891 ) (7,397 )
Earnings from continuing operations before income taxes 14,022 14,925 38,427 41,654
Income tax expense 2,438 4,408 11,344 13,002
Earnings from continuing operations $ 11,584 $ 10,517 $ 27,083 $ 28,652
Earnings (loss) from discontinued operations, net of income taxes 5,907 (1,915 ) 11,701
Net earnings $ 11,584 $ 16,424 $ 25,168 $ 40,353
Earnings from continuing operations per Class A Nonvoting Common Share:
Basic $ 0.23 $ 0.20 $ 0.53 $ 0.55
Diluted $ 0.23 $ 0.20 $ 0.53 $ 0.55
Earnings from continuing operations per Class B Voting Common Share:
Basic $ 0.23 $ 0.20 $ 0.51 $ 0.53
Diluted $ 0.23 $ 0.20 $ 0.51 $ 0.53
Earnings (loss) from discontinued operations per Class A Nonvoting Common Share:
Basic $ $ 0.11 $ (0.04 ) $ 0.22
Diluted $ $ 0.11 $ (0.04 ) $ 0.22
Earnings (loss) from discontinued operations per Class B Voting Common Share:
Basic $ $ 0.11 $ (0.03 ) $ 0.23
Diluted $ $ 0.11 $ (0.04 ) $ 0.22
Net earnings per Class A Nonvoting Common Share:
Basic $ 0.23 $ 0.31 $ 0.49 $ 0.77
Diluted $ 0.23 $ 0.31 $ 0.49 $ 0.77
Dividends $ 0.20 $ 0.195 $ 0.40 $ 0.39
Net earnings per Class B Voting Common Share:
Basic $ 0.23 $ 0.31 $ 0.48 $ 0.76
Diluted $ 0.23 $ 0.31 $ 0.47 $ 0.75
Dividends $ 0.20 $ 0.195 $ 0.383 $ 0.373
Weighted average common shares outstanding (in thousands):
Basic 51,272 52,208 51,262 52,140
Diluted 51,348 52,494 51,330 52,457
BRADY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in thousands)
January 31, 2015 July 31, 2014

ASSETS

Current assets:

Cash and cash equivalents

$ 93,299 $ 81,834
Accounts receivable-net 151,426 177,648
Inventories:
Finished products 70,974 73,096
Work-in-process 19,315 17,689
Raw materials and supplies 26,649 22,490
Total inventories 116,938 113,275
Assets held for sale 49,542
Prepaid expenses and other current assets 43,953 41,543
Total current assets 405,616 463,842
Other assets:
Goodwill 478,991 515,004
Other intangible assets 81,526 91,014
Deferred income taxes 19,293 27,320
Other 20,775 22,314
Property, plant and equipment:
Cost:
Land 5,924 7,875
Buildings and improvements 97,729 101,866
Machinery and equipment 283,773 288,409
Construction in progress 8,508 12,500
395,934 410,650
Less accumulated depreciation 266,680 276,479
Property, plant and equipment-net 129,254 134,171
Total $ 1,135,455 $ 1,253,665

LIABILITIES AND STOCKHOLDERS’ INVESTMENT

Current liabilities:
Notes payable $ 90,850 $ 61,422
Accounts payable 74,154 88,099
Wages and amounts withheld from employees 32,535 38,064
Liabilities held for sale 10,640
Taxes, other than income taxes 5,928 7,994
Accrued income taxes 1,549 7,893
Other current liabilities 32,935 35,319
Current maturities on long-term debt 42,514 42,514
Total current liabilities 280,465 291,945
Long-term obligations, less current maturities 143,778 159,296
Other liabilities 65,652 69,348
Total liabilities 489,895 520,589
Stockholders’ investment:
Common stock:
Class A nonvoting common stock-Issued 51,261,487 and 51,261,487 shares, respectively and outstanding 47,748,984 and 47,704,196 shares, respectively 513 513
Class B voting common stock-Issued and outstanding, 3,538,628 shares 35 35
Additional paid-in capital 312,819 311,811
Earnings retained in the business 456,777 452,057
Treasury stock-3,512,503 and 3,477,291 shares, respectively of Class A nonvoting

common stock, at cost

(94,089 ) (93,337 )
Accumulated other comprehensive (loss) income (27,569 ) 64,156
Other (2,926 ) (2,159 )
Total stockholders’ investment 645,560 733,076
Total $ 1,135,455 $ 1,253,665
BRADY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in thousands)
Six months ended January 31,
2015 2014
Operating activities:
Net earnings $ 25,168 $ 40,353
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 20,066 22,342
Non-cash portion of stock-based compensation expense 2,471 4,377
Non-cash portion of restructuring charges 896 97
Loss on sale of business, net 426
Deferred income taxes (781 ) (2,402 )
Changes in operating assets and liabilities (net of effects of business acquisitions/divestitures):
Accounts receivable 10,918 (1,418 )
Inventories (10,840 ) (8,754 )
Prepaid expenses and other assets (3,053 ) (3,505 )
Accounts payable and accrued liabilities (15,423 ) (7,263 )
Income taxes (5,918 ) (2,050 )
Net cash provided by operating activities 23,930 41,777
Investing activities:
Purchases of property, plant and equipment (17,808 ) (17,607 )
Sale of business, net of cash retained 6,111
Other 4,173 89
Net cash used in investing activities (7,524 ) (17,518 )
Financing activities:
Payment of dividends (20,449 ) (20,370 )
Proceeds from issuance of common stock 847 10,894
Proceeds from borrowing on notes payable 47,818 3,187
Repayment of borrowing on notes payable (18,390 ) (30,000 )
Income tax on the exercise of stock options and deferred compensation distributions, and other (3,830 ) (984 )
Net cash provided by (used in) financing activities 5,996 (37,273 )
Effect of exchange rate changes on cash (10,937 ) 1,072
Net increase (decrease) in cash and cash equivalents 11,465 (11,942 )
Cash and cash equivalents, beginning of period 81,834 91,058
Cash and cash equivalents, end of period $ 93,299 $ 79,116
Supplemental disclosures:
Cash paid during the period for:
Interest $ 6,146 $ 7,283
Income taxes, net of refunds 15,727 14,083
BRADY CORPORATION AND SUBSIDIARIES
SEGMENT INFORMATION
(Unaudited; Dollars in thousands)
Three Months Ended January 31, Six Months Ended January 31,
2015 2014 2015 2014
SALES TO EXTERNAL CUSTOMERS
ID Solutions $ 192,065 $ 194,732 $ 404,162 $ 404,278
Workplace Safety 90,563 96,462 188,706 194,446
Total $ 282,628 $ 291,194 $ 592,868 $ 598,724
SALES INFORMATION
ID Solutions

Organic

1.9 % 2.5 % 2.1 % 2.9 %
Currency (3.3 )% (0.5 )% (2.1 )% (0.4 )%
Acquisitions % 13.8 % % 19.8 %
Total (1.4 )% 15.8 % % 22.3 %
Workplace Safety
Organic 0.6 % (6.8 )% 1.5 % (8.4 )%
Currency (6.7 )% (0.9 )% (4.5 )% (0.8 )%
Acquisitions % % % %
Total (6.1 )% (7.7 )% (3.0 )% (9.2 )%
Total Company
Organic 1.4 % (1.1 )% 1.9 % (1.6 )%
Currency (4.3 )% (0.6 )% (2.9 )% (0.5 )%
Acquisitions % 8.5 % % 12.0 %
Total (2.9 )% 6.8 % (1.0 )% 9.9 %
SEGMENT PROFIT
ID Solutions $ 35,719 $ 37,526 $ 79,186 $ 88,493
Workplace Safety 12,776 14,668 28,315 33,042
Total $ 48,495 $ 52,194 $ 107,501 $ 121,535
SEGMENT PROFIT AS A PERCENT OF SALES
ID Solutions 18.6 % 19.3 % 19.6 % 21.9 %
Workplace Safety 14.1 % 15.2 % 15.0 % 17.0 %
Total 17.2 % 17.9 % 18.1 % 20.3 %
Three Months Ended January 31, Six Months Ended January 31,
2015 2014 2015 2014
Total segment profit $ 48,495 $ 52,194 $ 107,501 $ 121,535
Unallocated amounts:
Administrative costs (26,805 ) (29,524 ) (54,561 ) (62,338 )
Restructuring charges (4,879 ) (4,324 ) (9,157 ) (11,163 )
Investment and other income 211 255 535 1,017
Interest expense (3,000 ) (3,676 ) (5,891 ) (7,397 )
Earnings from continuing operations before income taxes $ 14,022 $ 14,925 $ 38,427 $ 41,654
GAAP to NON-GAAP MEASURES
(Unaudited; Dollars in Thousands, Except Per Share Amounts)
In accordance with the U.S. Securities and Exchange Commission’s Regulation G, the following provides definitions of the non-GAAP measures used in the earnings release and the reconciliation to the most closely related GAAP measure.
Earnings from Continuing Operations Before Income Taxes Excluding Certain Items:
Brady is presenting the Non-GAAP measure “Earnings from Continuing Operations Before Income Taxes Excluding Certain Items.” This is not a calculation based upon GAAP. The amounts included in this Non-GAAP measure are derived from amounts included in the Consolidated Financial Statements and supporting footnote disclosures. We do not view these items to be part of our sustainable results. We believe this profit measure provides an important perspective of underlying business trends and results and provides a more comparable measure from year to year. The table below provides a reconciliation of Earnings from Continuing Operations Before Income Taxes to Earnings from Continuing Operations Before Income Taxes Excluding Certain Items:
Three Months Ended January 31, Six Months Ended January 31,
2015 2014 2015 2014
Earnings from Continuing Operations Before Income Taxes (GAAP measure) $ 14,022 $ 14,925 $ 38,427 $ 41,654
Restructuring charges 4,879 4,324 9,157 11,163

Earnings from Continuing Operations Before Income Taxes Excluding Certain Items (non-GAAP measure)

$ 18,901 $ 19,249 $ 47,584 $ 52,817
Income Taxes on Continuing Operations Excluding Certain Items:
Brady is presenting the Non-GAAP measure “Income Taxes on Continuing Operations Excluding Certain Items.” This is not a calculation based upon GAAP. The amounts included in this Non-GAAP measure are derived from amounts included in the Consolidated Financial Statements and supporting footnote disclosures. We do not view these items to be part of our sustainable results. We believe this measure provides an important perspective of underlying business trends and results and provides a more comparable measure from year to year. The table below provides a reconciliation of Income Taxes on Continuing Operations to Income Taxes on Continuing Operations Excluding Certain Items:
Three Months Ended January 31, Six Months Ended January 31,
2015 2014 2015 2014
Income Taxes on Continuing Operations (GAAP measure) $ 2,438 $ 4,408 $ 11,344 $ 13,002
Restructuring charges 1,434 1,481 2,770 3,611

Income Taxes on Continuing Operations Excluding Certain Items (non-GAAP measure)

$ 3,872 $ 5,889 $ 14,114 $ 16,613
Net Earnings from Continuing Operations Excluding Certain Items:
Brady is presenting the Non-GAAP measure “Net Earnings from Continuing Operations Excluding Certain Items.” This is not a calculation based upon GAAP. The amounts included in this Non-GAAP measure are derived from amounts included in the Consolidated Financial Statements and supporting footnote disclosures. We do not view these items to be part of our sustainable results. We believe this measure provides an important perspective of underlying business trends and results and provides a more comparable measure from year to year. The table below provides a reconciliation of Net Earnings from Continuing Operations to Net Earnings from Continuing Operations Excluding Certain Items:
Three Months Ended January 31, Six Months Ended January 31,
2015 2014 2015 2014
Net Earnings from Continuing Operations (GAAP measure) $ 11,584 $ 10,517 $ 27,083 $ 28,652
Restructuring charges 3,445 2,843 6,387 7,552

Net Earnings from Continuing Operations Excluding Certain Items (non-GAAP measure)

$ 15,029 $ 13,360 $ 33,470 $ 36,204
Net Earnings from Continuing Operations Per Diluted Class A Nonvoting Common Share Excluding Certain Items:
Brady is presenting the Non-GAAP measure “Net Earnings from Continuing Operations Per Diluted Class A Nonvoting Common Share Excluding Certain Items.” This is not a calculation based upon GAAP. The amounts included in this Non-GAAP measure are derived from amounts included in the Consolidated Financial Statements. We do not view these items to be part of our sustainable results. We believe this measure provides an important perspective of underlying business trends and results and provides a more comparable measure from year to year. The table below provides a reconciliation of Net Earnings from Continuing Operations Per Diluted Class A Nonvoting Common Share to Net Earnings from Continuing Operations Per Diluted Class A Nonvoting Common Share Excluding Certain Items:
Three Months Ended January 31, Six Months Ended January 31,
2015 2014 2015 2014

Net Earnings from Continuing Operations Per Diluted Class A Nonvoting Common Share (GAAP measure)

$ 0.23 $ 0.20 $ 0.53 $ 0.55
Restructuring charges 0.07 0.05 0.12 0.14

Net Earnings from Continuing Operations Per Diluted Class A Nonvoting Common Share Excluding Certain Items (non-GAAP measure)

$ 0.29 $ 0.25 $ 0.65 $ 0.69

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