Q4 2019 Earnings Call
At this time all participants are in a listen only mode. Later, we'll conduct a question and answer session and instructions will be given at that time, if anyone should require operator assistance. Please press Star then zero I know you touched on telephone I'd remind this conference maybe recorded I would now like to MACOM was answering chief accounting Officer, you may begin.
Thank you.
Good morning, and welcome to the Brady Corporation fiscal 2019 fourth quarter earnings Conference call. The slides for this morning's call are located on our website at Www Dot Brady Corp. Dot com slush investors, we will begin our prepared remarks on slide number three.
Please note that during this call we may make comments about forward looking information words, such as expect will may believe forecast and anticipate are just a few examples of words identifying a forward looking statement.
It's important to note that forward looking information is subject to various risk factors and uncertainties, which could significantly impact expected results.
Risk factors were noted in our news release this morning, and in Brady's fiscal 2019 Form 10-K , which was filed with the FCC. This morning as well.
Also please note that this teleconference is copyrighted by Brady Corporation and May not be rebroadcast without the consent of Brady.
We will be recording this call and broadcasting it on the Internet as such your participation in the Q and a session will constitute your can consent to being recorded.
I'll now turn the call over to Bradys, President and Chief Executive Officer, Michael Nauman. Thank you and good morning, and thank you all for joining us.
This morning, we released our 2019 fourth quarter financial results, we have a lot to be proud of this year.
We continue to improve our manufacturing processes, we've rebuilt our new product pipeline through our focused investment in R&D and we're driving operational efficiencies throughout our organization. All this has resulted in increased organic sales reduced as gionee expenses and increased profits. This quarter marks our ninth straight quarter of organic sales growth, which was driven by our focus on new product development and consistent execution of our strategy.
We sold the business during last year's fourth quarter and recognized a gain of 4.7 million I'm not too when we exclude this one time gain pre tax income increased 16%, which marks our 16th consecutive quarter of profit improvement I'm incredibly proud of the entire team at Brady for hitting this milestone the ability to improve quarterly pre tax profit for three years takes a great deal of focus.
On a consistent set of priorities, which are to develop and deliver innovative new products that solve our customers' problems to drive operational efficiencies throughout our business to improve the businesses that are not performing as well as they should be and most importantly to ensure that the actions. We take today are the right decisions for the long term.
Organic sales growth of 1.7% was driven by our dinner occasion solutions business, which posted organic sales growth of 3.3%. This quarter. The strongest growth continues to come from the U.S.. We're growing in most end markets and almost every major product line. We've launched some exciting new products this quarter and I'm pleased to report that our health care product line grew organic sales in the mid single digits. This quarter our investments in the sales force and R&D in the health care product line are beginning to pay off as we improve both organic sales and profit this quarter.
Organic sales declined 2.6% in WPS this quarter, our North American WPS business showed improvement as its rate of decline decreased from approximately 10% last quarter to mid single digit decline this quarter. During our last two quarterly conference calls we discussed how we took actions to enhance our digital platform by moving to a new platform. This new platform is working well and our digital sales are improving but we still see will take time to build their customer base back to the level, we experienced prior to the additional digital platform change. We believe that we're on the right track to return the WPS Americas business profitable growth there were positive trends with this business in the quarter as May was our toughest sales month and we saw improvements in June and then again in July with the fundamental building blocks for sustainable organic sales growth in place well looking ahead, what we believe will be the start of a trend of organic sales.
And profit improvements in fiscal 2020.
We've made incredible progress four straight years of quarterly pre tax income improvement is not easy, but the Brady team took on the challenge and delivered I see more energy and driving more people than ever before we've returned or health care business to growth and we've taken actions in our workplace safety business that will set us up for future success. The industrial economy is challenging but we believe the actions we've been taking over the last several years to invest in organic sales engine and drive sustainable efficiency gains to reduce our cost structure position us well for future revenue and profit growth. We continue to focus on the future by taking action today that will ensure our success in the long term.
I'll now turn the call over to Aaron to discuss our financial results. I'll, then return to provide specific commentary about our identification solutions and workplace safety businesses Aaron.
Thank you Michael and good morning, everyone. The financial review starts on slide number three.
Sales were $295.3 million in the fourth quarter, which consisted of organic sales growth of 1.7% a decrease of 1.9% from foreign currency translation and a decrease of 0.5% from the sale of everyone's business, which we finalized in the fourth quarter of last year.
Net income finished at $36.6 million compared to 35 million in last year's fourth quarter. If you would exclude last year's onetime gain on the sale of a business net income would have increased by 20.9%.
Diluted EPS was 68 cents this quarter compared to 66 cents in last years fourth quarter. The sale of ruins increased EPS by nine cents per share last year. So excluding this onetime gain from last year diluted EPS increased 19.3% this quarter.
Cash generation, which is a hallmark of Brady and a never ending focus area continues to be strong cash flow from operating activities was 65.3 million this quarter compared to $53.8 million in the fourth quarter of last year, an increase of more than 20%.
On slide number four you will find our quarterly sales trends our identification solutions business continues to grow nicely with organic sales growth of 3.3%, while our WPS business experienced an organic sales decline of 2.6% this quarter.
Turning to slide number five you'll find our gross profit margin trending our gross profit margin was 49.6% this quarter, which was consistent with last year's fourth quarter. We continue to see cost pressure in both ideas and WPS, but we've been successful in offsetting these increases through selected price increases and our constant focus on process improvements and manufacturing efficiency efficiencies across all of our facilities.
Slide number six outlines our SGN a expense trending.
SDMA was 89.1 million this quarter compared to $90.9 million last quarter.
Last year's SDMA was reduced by the 4.7 million gain on the sale of a business. If we exclude this gain we would have reported a decrease in sq nay of $6.5 million this quarter.
Approximately one third of this decrease was due to foreign currency translation as the US dollar strengthened against most major currencies and the other two thirds of the decrease was due to our ongoing efforts to drive process improvements and efficiency gains throughout our businesses.
Excluding the onetime gain in the fourth quarter of last year SGN a expense decreased from 32.1% of sales in last year's fourth quarter to 30.2% of sales this quarter.
Turning to slide number seven you'll find the trending of our investments in research and development, which decreased from $11.7 million in the fourth quarter of last year to $11.3 million. This quarter, excluding the impact of foreign currency R&D expenses were effectively flat for the full fiscal year 2019 compared to last year.
We remain committed to new product development, while at the same time, we're focused on making disciplined investment decisions to ensure that our R&D spend is efficient and effective.
Slide number eight outlines the quarterly trending of pre tax income excluding the gain on the sale of a business from last year's fourth quarter, we increased pre tax income by 16% to $47.1 million compared to $40.6 million last year. This is an indication that our focus on organic sales growth and driving sustainable efficiency gains is working.
Turning to slide number nine you'll find our after tax income trends in our quarterly EPS trends the sale of our ruins business in last year's fourth quarter added nine cents to diluted EPS adjusting for this onetime gain diluted EPS increased from 57 cents last year to 68 cents. This year an increase of 19.3%.
Slide number 10 details our quarterly cash generation, we generated $65.3 million of cash flow from operating activities compared to $53.8 million in last year's fourth quarter and free cash flow was $50 million compared to $46.8 million in the same quarter of last year, we continue to generate cash flow in excess of net income and for the full fiscal year cash flow from operating activities was 124% of net income.
We also returned $11.2 million to our shareholders in the form of dividends this quarter and we invested $15.3 million on capital expenditures. This quarter's capex was larger than normal as we've been actively upgrading our machinery and equipment to both add more capabilities as well as to drive efficiencies and increased productivity. This quarter. We also completed the purchase or moved forward with the construction of several manufacturing facilities that we've historically leased.
These are manufacturing facilities, we intend to be in for the long term and where it makes financial sense to own instead of lease.
Slide number 11 outlines the trending of our net cash position along with our debt structure at the end of the quarter, we increased our net cash position by 100 million this year, while increasing our investment in capital expenditures and increasing our dividends, which again highlights our ability to consistently generate strong cash flow. We finished the year in a net cash position of $228.9 million at July 31.
Our debt consists of a $45 million euro denominated private placements scheduled for repayment in May of next year, and we have no borrowings outstanding on our recently renewed line of credit.
Our approach to capital allocation is consistent we're disciplined and we are patient first we use our cash to fund organic sales and efficiency opportunities throughout the economic cycle, which includes funding investments in new product development sales generating resources improvements capability enhancing capital expenditures and capital expenditures to increase efficiency and automation in our facilities.
And second we focused on returning cash to our shareholders in the form of dividends in fact yesterday, we announced our 34th consecutive year of annual dividend increases as we increased our full year dividend to 87 cents per share.
After funding organic investments and dividends, we then deploy our cash in a disciplined manner for acquisitions, where we believe we have strong synergistic opportunities and we use our cash to improve shareholder returns through opportunistic share repurchases overall, our cash generation is strong our balance sheet is strong and we're focused on driving long term value for our shareholders through the disciplined allocation of capital.
Before moving to our fiscal 2020 EPS guidance, let's take a look back at our financial results for the full fiscal year 2019, which is on slide number 12.
This year, we increased organic sales in each quarter and grew 2.8% organically for the full year, we increased our GAAP pre tax income by 8.3% and if you exclude the gain we recorded from the sale of ruins business than our pre tax profit grew by 11.7%.
We returned the health care product line of our identification solutions business to organic growth.
We took actions to address the cost structure of our WPS North America business, and we expect to see the benefits next year from the digital platform change interest cost structure realignment, we recorded a healthy gross profit margin of 49.9% and we remained focused on executing sustainable process improvements, which is evidenced in our SGN a expense, which decreased to 19.3 million this year.
Increased decreased by 19.3 million this year, marking the fourth consecutive quarter of decreased SGN a expense as a percent of sales.
We generated 162.2 million of cash flow from operating activities, which equates to approximately 124% of net income. This strong cash generation also led to our non operating income and expense items turning from a net expense in fiscal 2018 to a net benefit of $2.2 million in fiscal 2019 due to reduced borrowing costs as well as increased investment earnings as a result of our strong balance sheet.
Our fiscal 2019 results were strong and our balance sheet is strong we are seeing weakness in the global industrial economy, but we believe that the actions we've taken to improve our WPS Americas business to return or health care product line to growth and to drive sustainable growth in all of our businesses through an increased focus on innovation will enable us to maintain our positive momentum into fiscal 2020, we believe we're taking the right actions today to ensure our long term success, but as always execution remains critical.
Which brings us to our fiscal 2020 guidance, which is summarized on slide number 13.
We expect to earnings per diluted class, a non voting common share to range from 245 to 55 for the fiscal year ending July 30, Onest 2020.
Our EPS growth will be driven by organic sales growth of approximately 1.5% to 2.5% along with continued efficiency gains in both our manufacturing facilities and our SG in a structure.
We expect our income tax rate to be in the low 20% range depreciation and amortization expense to approximate $25 million and we anticipate capital expenditures of approximately $35 million.
We also expect to continue to realize non operating income in excess of interest expense as a result of our strong balance sheet. This guidance is based on foreign currency exchange rates as of July 30, Onest, which continued to be a headwind due to the strength of the us dollar.
We're not anticipating any restructuring charges and we're not excluding any onetime income or expense items from this guidance. This guidance is based on financial results that are fully in accordance with us GAAP.
I'll now turn the call back over to Michael to cover our divisional results and to provide some closing comments before turning the call over to QNX Michael.
Thank you Aaron Slide number 14 summarizes the fourth quarter financial results. Prior Didnt application solutions business ideas sales increased 1.8%, finishing at $221.8 million with organic sales growth of 3.3%, while foreign currency translation decreased sales by 1.5% this quarter organic sales increased in the low single digits in all three regions. They also increase organically in the majority of our key product lines with the strongest growth in safety and facility identification as I mentioned earlier I am pleased to report that our healthcare identification product line increased organic sales in the mid single digits this quarter.
The additions we've made to our sales force as well as the products Weve added to our new product pipeline are starting to result in organic sales growth and profit improvements. We finished fiscal 2019 with positive momentum that will carry into next year organic sales increased in the low single digits and ideas Europe . This quarter, we're increasing sales in most major product lines in Europe , but we believe there has been an overall reduction in the industrial economy, which caused our growth rate to slow from mid single digits last quarter across most geographies and product lines to low single digit rates. We saw this quarter in Asia, we experienced low single digit organic sales growth, even though we've clearly seen a decrease in demand in certain end markets such as electronics in China and automotive in India in general our growth rates have slowed throughout Asia, and there appears to be economic weakness in China, which is our largest Asian market.
I'd segment profit increased 25% to $45.6 million in the fourth quarter compared to the fourth quarter of last year as a percentage of sales segment profit improved to 20.6% this quarter compared to 16.8% last year, our improved financial performance continues to be.
Due to a combination of successfully driving organic sales growth while at the same time driving efficiencies throughout our businesses. We've launched several new products in our ideas businesses year quarter, We launched the battery block battery cable lockout device, which is part of our lockout Tagout product line. This is a simple but effective device that is designed to be secured around the battery connection or electrical system of a commercial vehicle, while performing maintenance, which prevents an accidental battery connection that could engage or the safety of the mechanic or cause other damage to the vehicle. We also launched a similar product that is designed to lock out the battery connection on forklifts.
We also launched two new printer models in our health care product line. This quarter. The first is a service desktop printer, which is a high speed patient wristband printer that easy to use and fully integrated with electronic medical record software. The second is the portico mobile printer, which is why pie and Bluetooth enabled and allow those medical professionals to print barcode labels on the spot at the point of care of the patient.
I'm excited about the addition of these printers to our healthcare product line and our expanded product pipeline of new products. It's a direct result of the increased investment in R&D that we've made over the past several years.
Looking ahead to fiscal 2020, we expect Rds organic sales to grow between two and three per said, we will continue to invest in R&D and we will continue to drive efficiencies throughout our manufacturing and SGN a processes. We believe that F 20 will be a challenging macroeconomic environment for global manufacturers, but we're confident that the changes we put in place will enable us to continue to grow above GDP.
Turning to slide number 15, you'll find our workplace safety review.
WPS sales declined 7.8%, which consist of organic sales declines of 2.6%. It accretes from foreign currency of 3.3% and decreased from the divestiture of runs business of 1.9% compared to the fourth quarter of last year organic sales declined in the low single digits in a European and Australia businesses and organic sales declined in the mid single digits in the North American business.
As we discussed in previous calls this years, we've made a change to our digital platform in the us business and we're now seeing consistent improvements in our digital sales, but it will still take more time for us to build sales back to the level, we experienced prior to the initial platform change.
We remain focused on three priorities to return or WPS Americas business to consistent organic sales growth first we're improving the buying experience for our customers. So that it's as simple as possible reach our customers the way they prefer to be reached whether its online mobile catalog in person or through a combination of these channels is essential to returning this business to growth, which is exactly why we are focusing on having industry, leading web sites second we're increasing our customer interactions rather than only fulfilling orders. This allows us to better understand what our customers are dealing with from a safety and identification perspective, and it helps us better serve those needs by offering our compliance expertise and complete solutions. We're just doing this through an expanded sales force that is capable of providing full solutions for our customers, but it's also grounded industry knowledge and regulatory expertise that our competitors do not possess third one of our.
Our strengths is our ability to customize product and quickly turn orders, we've improved our portfolio of products by introducing more customized and proprietary products that our customers need.
We believe we're increasing the value that we bring to our customers by focusing on these three priorities, which creates customer loyalty and improves our sales and profitability over the long term. We believe we're taking the right actions to return or North American business to sustainable organic sales and profit growth a recovery has been and will continue to be choppy our sales to decline at a lesser rate this quarter than in the third quarter fulfill they but they still declined we need to stop the decline in sales and then return the business to growth. We believe we're on the right track as we finish this fiscal year and move into 2020.
Our European WPS business declined organically in the slows down low single digits this quarter, but sales grow steadily improved through the quarter and we closed July on a positive note digital sales continued to be strong in Europe , where we saw a growth in the mid single digits, but this quarter. The VAT growth wasn't enough to fully offset the decline in catalog sales organic sales declined in the low single digits. In this honest in Australia. This quarter, we had been growing steadily for the past couple of years, but more recently the growth rate in the Australian economy appears to have slowed.
We were still able to improve profit in Australia. This quarter. Despite the modest sales decline. This profit improvement was entirely due to our focus on driving sustainable operational efficiencies.
WPS segment profit was $6.7 million compared to 10.7 million in last years fourth quarter. The climate segment profit was due to the organic sales decline foreign currency translation and the sale of enrollment business, which closed on May 31 2018.
For the full fiscal 2020, we expect organic sales to be approximately flat in the WPS business and we expect to improvement segment profit through our reduced cost structure into continued efficiencies in SGN today as I look back at this year I'm proud of what we've accomplished.
We are growing organic sales were launching innovative new products, we're executing efficiency opportunities throughout our history in a structure, we returned or health care product line to growth and we're on our way to turn your WPS North American business around.
All righty US business is strong and continues to lead our consistent improving financial results and WPS Europe , and Australia are executing their digital strategies and growing their online presence, while driving efficiencies throughout their businesses.
This quarter marks my completion of five years with Brady as I look back I am proud of the progress Weve made not only through improved financial results, but as an organization, we're completely committed to providing our customers with high quality products that meet their needs and solve their problems with responsive customer service and ongoing sales support I regularly challenged our employees to get closer to the customer and think about how they're supporting this fundamental initiatives, which at its core is simply focus on what we do well. This has resulted in consistent growth in organic sales and significant profit improvements over the past four years. It has made us a more effective and efficient organization that is better able to react and adapt to change.
Labor continues to be a competitive.
Situation, especially in certain locations, where the unemployment rate is historically low because of this we are challenging ourselves to think differently to take our processes to the next level of automation to use our IP systems more effectively this reduces our need for resources that are already scarce.
Innovation is not only relevant to our new product development teams being innovative about what we do and how we do it has been a primary driver of our ability to drive four straight years of pre tax profit improvement. It takes the entire organization worked working toward a common goal to deliver this level of consistent financial improvement.
Im proud of the team for eliminating distractions and making themselves accountable for our results I'd like to start the queuing day, operator would you please provide instructions to our listeners.
Thank you ladies and gentlemen, if you have a question at this time. Please press Star then one on your Tushar telephone. If your question has been answered all your questions. Keith. Please press the past eight to prevent any background noise.
Thanks Your line I mean whats your question has been stated.
Our first question comes from George Staphos of Bank of America Merrill Lynch. Your line is now open.
Hi, This is actually my bomb sitting on for George.
Congrats on the quarter I just wanted to.
Start by asking a question about margins and I'd ask you mentioned process improvements in efficiency gain efficiency gains sorry, but can you provide more detail on maybe some of the specific actions that you've been taking that have really driven such strong incremental margins in the segment, particularly in your fiscal fourth quarter. Thank you.
Thank you Molly glad to have you on the call. This morning.
As we take a look at our portfolio, we have really focused strongly on not only making our products relevant to our customers as we go forward, but also making sure our factories in particular are a an avenue for us to provide a very positive customer experience and that starts with making sure we get the products out faster to the customer by doing that it inherently has us looking at automation more IAI inner facing direct communications between our software and our machinery and therefore, having the right machinery to be able to do all of that that has been coming through this quarter as you can see.
And we have more projects on the road in the future, but it's definitely had a significant impact.
Thank you for that and then.
For my second question you mentioned.
Some slight following an I'd ask in both Europe and Asia can you talk about how those two regions trended through the quarter and when we're looking at guidance for the segment of that organic growth of 2% to 4% what are your assumptions for how each region is.
You expect it to trend for the year. Thank you. So obviously there are a lot of dynamic issues going on in Asia, particularly in China.
If I had a crystal ball I would give it to you I think there are a lot of pieces in action there.
We will hope for the best in our trade negotiations throughout the world.
But at the same time, we are prepared to make sure. We are the most efficient and effective supplier and as you've seen I think weve held up pretty well.
In Asia, and China, despite the headwinds that we've seen.
We are as an organization planning for further headwinds.
But I don't think.
That it's been getting significantly worse I think its just a challenging environment now if we flip to Europe on the other hand, we've got a lot of pieces moving there. Some of those pieces are once again related to the situation in Asia.
If you take a look at countries like Germany, where they export a ton of machinery and equipment and they are the backbone of the industrial Heartland of Europe .
You will you will see that economy is struggling mightily right now and as a result that is having an impact on our business and we see that we'll continue to have an impact at the same time, we've got the Brexit situation there.
The outcome once again is unknown and uncertainty often drives for market challenges and that situation has been deteriorating.
In the UK, but also it has a great effect.
On Europe as an example, if you take out UK from the EU. They are literally a major trading partner with Germany. Once again as an example, so are those situations, Italy is seeing some some issues and even France is having some issues.
Creates a dynamic where we've actually been doing a good job I believe our team is they're very proud with the introduction of our new products with really getting to our customers faster and really interacting with a more have been able to overcome those headwinds, but I don't see that changing in the next quarter.
Thank you I'll turn it over.
Thank you. Thank you all right.
And our next question comes from Alison.
Wells Fargo. Your line is now open hi, guys. Good morning.
Good morning Allison.
Just want to talk about new products, you mentioned quite and quite a few of your remarks, and new products benefiting organic growth, you've obviously been putting a lot of effort into R&D is there any way to help us quantify or directionally. What that benefit is is it a point to growth has had growth above market just any color there.
So Allison I will say what you should see is specifically food we mentioned two new printers.
In our healthcare space those printers are a significant move forward.
As you know we made an acquisition a number of years ago, what health care and we've now really positioning ourselves to integrate the capabilities that I think had been hoped for with the capabilities Brady has and so yes that is making a significant difference.
We don't quantify the actual breakouts and the reason for that is as you know we have so many segments in so many different product lines that it varies by product line and the investments, we're making but we are making broad investments we've talked about lockout tagout with you we've talked about our capabilities for wire marketing they've been proving we've talked about our our wrapping capabilities automated rapid capabilities and now we're talking about integrating printers into our healthcare space. So we do see internally a product by product.
Changes to our growth rates is effect, but we don't break that out.
Got it and then just R&D and other on their entering 2020 is that fiscal 19, a good run rate from one dollar amount, we should be thinking about for 2020 or is that going to go up again.
You know expected to go up a little we are being challenged in that area as in all areas with the tightening market. We are not seeing significant turnover. We really do believe we are a great place to work a great place to ever career and challenge yourselves in a positive way.
So we think that has a big impact on the longevity of our workforce, but at the same time. When we are looking to fill roles. It is it is a little more challenging all of that said, yes, we do expect to increase our R&D, specifically key talent strengths that that we want to work on.
Got it so should we be thinking as you know sort of keeping in that 4% of sales. This remains just under that.
Yes, you can certainly.
Perfect. Thank you. Thank you.
Thank you and the next question comes from Joe Mondillo of Sidoti and company. Your line is open.
Hi, Good morning, everyone. Good morning, Joe.
Just on the idea on the quarter itself just wondering.
As far as with all these new products that are coming out and as I understand I think a lot of these are much more value add higher margin. So I imagine sort of product mix and just the higher volumes of self.
It's definitely driving volume I'm, just wondering how much is that driving.
The operating margin growth that we saw because operating margin growth was actually slowing on a year over year basis in the first three quarters and then it really accelerated strong in the fourth quarter. So how much is it based on that versus operational productivity improvements.
You know Joe if we take a look.
But as you know we have very good margins on our products.
We grew in all core in all three regions that had an impact but the biggest impact was out of our health care growth specifically.
Okay, and like I said.
Sort of the way that the year sort of progressed, we saw a huge spike up in the fourth quarter.
Can you give us more color exactly what happened in health care, what those two printers and those add to the sales in the product mix well happening in the fourth quarter and is it sustainable.
Over the next few quarters as you first of all it is sustainable.
Second as you recall from previous calls the health care has been our biggest challenge in the it space and had not been growing in fact had been declining we were able to turn that around and that turned around and a healthy margin business with new types of products that are a strong products for future has been this the most significant factor I do not want to understate, though the growth in all three regions because of the strength of our general margins has had a big impact as well and we do expect the healthcare part of that to maintain and we do expect the regions to continue to grow.
So yes, okay.
Perfect no that definitely clarify thank you.
I also wanted to ask.
Regarding these new tariffs that are coming online this fall.
Is that going to affect any of your business do you think.
We do have business that exports out of China. We also have imports into China, where multinational comes the current company with 70 plus locations in 31 countries. So those dynamics can be complex. We are working hard to overcome the dynamics of the good news is most of our revenue because of the type of products we make.
Our local right. The reason we have so many locations and so many even manufacturing locations is to provide local.
Capability and local sourcing to our customer base. It doesn't mean, we won't be impacted in some of our product lines and we've already had to pass on significant price increases to some of our channel partners and end users.
They have accepted those increases not happily, but they have accepted them because they understand the reality.
We all hope.
There is an end.
To this situation in a positive light for all participants.
But we are planning as though that won't change for the foreseeable future.
Okay, Great and then last question.
The non operating income.
Doubled for the year year over year compared to last year and it was higher than I was expecting in the fourth quarter. Just wondering what is driving that line.
There and then in terms of the guidance I guess for fiscal 20.
How do we think about that.
Terms of the drivers there.
Yes.
And then in the non operating lines, we basically have interest income interest expense those are by by far the two biggest components.
Interest expense as you know it's been relatively consistent because we have the one piece of debt outstanding, which we intend to pay off at the end of May of next year and interest income has been growing and it's been growing because of the cash that we have on our balance sheet. Today. We're in a very enviable balance sheet position. So we we anticipate that that interest income will continue to be strong unless we deployed unless we deploy that capital. So as you look forward I would definitely anticipate that non operating items would continue to be positive into into F 20.
Okay. So the other the other income line is mainly interest income that's correct.
Okay, all right. Thanks, a lot.
Thank you.
Thank you and our next question comes from Keith Housum Northcoast Research. Your line is now open.
Good morning, guys. Congratulations on the turnaround of the health care business.
Keith Good morning.
Absolutely so.
In terms of the Capex investments if I heard right you guys are investing in machinery, which is consistent with you guys in the past, but also it may sound like you're investing in some new buildings as well.
In terms of your progress along that front are you seeing some of that in the operating and the lower SGN a now anticipation that we will continue to see a decline next year as some of those facilities come online you can get rid of some of these payments and whatnot.
We do as Keith you're aware it is financially more advantageous for us to own than lease, but the biggest reason for us owning who really we really have a couple of reasons one as we build buildings, we can customize them for our particular applications.
Two.
As we go down the road, we're not reluctant to invest properly in those buildings, because we aren't going to be double hit by landlords, telling us what a terrific new building they have because of our investments and then three the actual.
Soft side as it relates to our people.
It is amazing the positive comments I've received from people who have been in buildings that weve leased for.
25 years of when they found that we are the buying the building or building a new building and the comment about the commitment to the company and how strong that makes their commitment to the company. It's an interesting dynamic that frankly is even much stronger than I expected, but one that is so positive I've pointed out to you, but those are the real reasons and you're you're absolutely correct the financial.
Difference between leasing and owning Israel.
But thats not really the driver us doing it we need the buildings to be able to be configured in the way we want them when we want them and we want to make sure that people are treating the buildings and the high quality manner that we expect I just have a fundamental belief that if you are working in and walking into a building that is a well run efficient clean.
You will end up making a better more effective product and Thats also showing so there's a lot of there's a lot of benefits to this just beyond the the accounting treatment.
Got you I appreciate that and can you walk me through I guess your guidance.
Just the puts and takes that you guys are thinking about at the midpoint of the EPS range. It was only 2% above where you were for this year, but it looks like your SGN a improvements are really all kind of stepped up especially as you close out the year. So what's kind of I guess offsetting some of the SG nave adds that we're not seeing more of that fall to the bottom line.
I can I can take that question Keith I mean, as we look at our guidance its.
The the major the major components are relatively consistent with what we've talked about in the past as we look at gross margins.
We have very very strong gross margins at nearly 50% as you know.
We're not anticipating massive changes in our gross profit margins.
And in fact, we're quite happy where we're at and the efficiencies that we put in place.
Have been offsetting.
Actually effectively all of the cost increases we saw in the fourth quarter. We do continue to make improvements in SG and as you saw in the fourth quarter actually as you saw throughout this year and the last two previous years as well.
And Michael mentioned that we will be investing back into R&D as well. So R&D you should expect to see that as an increase in cost next year.
In addition to two R&D when we look at our tax rate, we would anticipate that our tax rate would be in.
In the low 20% range this year.
So overall.
Sorry, the one item that I failed to mention is foreign currency. This continues to be a headwind for us.
As the US dollar just continues to strengthen against most of the major currencies as well so the the major headwinds if you will versus EPS would be foreign currency.
Continued and our continued investment back into R&D expense.
Okay. Thanks, and then I guess my last question I have for you if I think.
Historical conversations there's always kind of thought process that brady's performance kind of lagged we overall macro accounting fees by one to two quarters is that still a valid assumption or you think it's more.
Immediate response to the macro economies.
Well as you know, we don't have a large backlog.
But the a lot of our industrial products are toward the.
Our used in building construction used when you lay out new spaces. So we do find that the later into economic.
Upturn, we tend to do better that would be absolutely correct and if you look at our history. We didn't go down as far during the down last recession as as the overall economy did and we don't see that situation changing either because a lot of our products are needed regardless of the revenue stream at the moment.
We certainly aren't immune as you well known no, but we do see.
A little less sharp decline when we have a big recession, and we do see a bigger improvement.
At the end of a cycle that said I also believe we have a strategy now for were financially deploying ourselves in a very.
Consistent manner that as we come out of a recession I feel fundamentally very good and I'm not predicting one by the way so don't don't take that the wrong way, but but we think this way long term because us long term.
We think that we'll have an ability to grow better than our competition coming out of the recession because of our continuous.
Investment in R&D and are very close effort to contact and deal with our end users.
Great. Thank you.
Thank you.
Thank you and we do have a follow up question George Staphos. This line of Bank of America Merrill Lynch line open.
Hey, Thanks for taking my follow up the first add two additional questions. The first one can you talk about kind of what you're seeing in terms of lockout tagout regulatory landscape I saw an article come up that trade groups trade groups have talked about potentially changing.
Potentially some of the current Osha regulations. So just wanted to know.
What.
You're seeing in that sense and then the second one was just a follow up.
On Joes question about I'd ask can you just again I'm sorry, if I Miss this highlight what the biggest driver of the margin improvement was whether it was the mix benefits from healthcare growth or.
Buck up cost out that you talked about earlier reduction that she'd et cetera. Thank you Molly Molly absolutely let me start with.
The lockout Tagout, we're developing a variety of new products in that space, both anticipating change and leading that change we are absolutely a driver in that space and we feel it's fundamentally a great space both for us and our customers what I challenged our employees with is we make the world a better and safer place every day and they are darn few companies and people, who can say that and then lockout tagout, we push our leadership in that area.
To make sure we're doing even better job of that so.
These things take time as you are well aware.
But we believe that if changes do come about.
We are well positioned to handle all of them. The second question you have a relates to our margins and the biggest element of that was our healthcare growth absolutely.
Followed by our regional growth.
Thank you. Thank you.
Thank you and ladies and gentlemen, this does conclude our question and answer session I would now like to turn the call back over to Michael Novod for closing remarks.
Thank you so much I would like to leave you with a few concluding comments this morning.
We reported another strong year in 2019, we are growing our sick ganic sales, while continuing to generate strong gross margins and reduce SGN a expenses.
We are investing in capital expenditures in our facilities to upgrade machinery and to improve our level of automation and we're purchasing or building certain critical manufacturing site, where it is a strategic fit and make financial sense.
New products launched in 2019 were the result of our increased investment in R&D over the last several years and we have more exciting products in our pipeline for future development.
Our team is motivated and how motivated to carry this momentum into 2020 and beyond even in this tough economic environment, we expect to grow organic sales drive efficiency through the organization and grow earnings I'm proud of what we've accomplished so far and I know there were making the right decisions today to set us up for improved long term financial situation as always if you have questions. Please contact us. Thank you all for participating today and have a great day operator, you may disconnect the call.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program you may all disconnect.