Brady Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended January 31, 2012. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise.
Business context
Brady manufactures and markets identification solutions and specialty materials, serving customers across industrial, electronics, healthcare and other markets. It reports three geographic segments: Americas, Europe and Asia-Pacific.
Financial performance
| Metric | Three months ended Jan. 31, 2012 | Six months ended Jan. 31, 2012 |
|---|---|---|
| Net sales | $320.6; down 2.6% year over year | $670.1; up 1.7% |
| Gross margin | $153.3; 47.8% of sales | $321.1; 47.9% of sales |
| Operating income (loss) | $(77.2) | $(28.1) |
| Net income (loss) | $(90.0); $(1.72) per diluted Class A share | $(57.2); $(1.09) per diluted Class A share |
| Cash from operations | Not separately stated for the quarter | $43.3, versus $57.6 a year earlier |
Results include a $115.7 million non-cash goodwill impairment charge for the North/South Asia reporting unit. Brady reported net income before this charge of $25.7 million for the quarter and $58.5 million for the six-month period. Gross margin percentage declined from 48.3% and 49.1% in the respective prior-year periods, primarily due to Asia-Pacific.
Six-month capital expenditures were $11.1 million. Cash and cash equivalents were $380.3 million at January 31, 2012, compared with $390.0 million at July 31, 2011. Current assets were $747.7 million and current liabilities $260.6 million. Total debt carrying value was $384.3 million, including $61.3 million of current maturities. The company reported compliance with its debt covenants; its debt-to-EBITDA ratio under existing private-placement covenants was 1.7-to-1.0.
Changes and segment trends
- Americas: Quarterly and six-month sales increased 1.8% and 3.7%; segment profit rose 15.4% and 12.3%. Growth reflected new products, price increases and OEM demand.
- Europe: Sales fell 8.1% for the quarter and 1.6% for six months; segment profit declined 8.9% and 0.7%. The quarterly comparison was affected by prior-year winter-product sales and weaker economic conditions.
- Asia-Pacific: Sales fell 2.7% for the quarter but rose 2.4% for six months; segment profit declined 32.9% and 25.8%. Lower mobile-handset margins, customer market-share loss, local price competition and Thailand flooding weighed on results.
- Quarterly organic sales declined 1.8%; currency and acquisitions/divestitures each reduced sales by 0.4%. Six-month organic sales grew 0.9%, currency added 1.1%, and acquisitions/divestitures reduced sales by 0.3%.
Cash, financing and outlook
Operating cash flow declined year over year, primarily because of an unfavorable change in accounts payable and accrued liabilities. Investing used $14.6 million and financing used $28.9 million during the six months; financing outflows included $19.5 million of dividends and $12.3 million of share repurchases. Foreign-exchange movements reduced cash by $9.4 million.
Management expected fiscal 2012 capital expenditures of approximately $25 million and a full-year income tax rate in the mid-20% range, excluding the effect of the nondeductible impairment. No specific sales or earnings guidance is provided in the filing. Management said operating cash flow and borrowing capacity were expected to cover anticipated needs.
On February 1, 2012, Brady entered a new unsecured $300 million revolving credit facility maturing February 1, 2017, replacing the prior facility; it may be increased to $450 million subject to conditions. The agreement includes leverage and interest-coverage covenants. No borrowings were reported under either facility as of the filing discussion. The board declared a $0.185-per-share quarterly dividend on February 15.
Risks, contingencies and unusual items
- The goodwill impairment followed persistent sales and margin deterioration in North/South Asia, including loss of a major handset customer’s market share and increased local competition. The charge reduced Asia-Pacific goodwill; future results remain sensitive to the reporting unit’s assumptions and performance.
- Thailand flooding disrupted the hard-disk-drive supply chain and reduced quarterly diluted EPS by approximately $0.04. Brady expected insurance to cover part of the losses, but recoveries could occur after fiscal 2012.
- Foreign-currency exposure is material. The filing estimates that a hypothetical 10% adverse currency move could affect foreign net current assets by $41.6 million; management cautions that this sensitivity assumes currencies move in parallel.
- Other disclosed risks include economic weakness, customer and supplier price pressure, competition, acquisition integration, product development, foreign exchange, supply interruptions and maintaining debt-covenant compliance. Brady reported no material off-balance-sheet arrangements and effective disclosure controls.
Important facts for investors to verify
- Whether Asia-Pacific mobile-handset sales and margins stabilize, and whether further goodwill impairment indicators arise.
- The timing and amount of any insurance recoveries related to Thailand flooding.
- Underlying operating performance apart from the $115.7 million impairment, including segment margins and organic sales trends.
- Cash conversion, working-capital movements, debt maturities and ongoing compliance with the new credit agreement’s covenants.
- Whether the stated mid-20% tax-rate expectation and approximately $25 million capital-spending plan remain current.