Brady Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended January 31, 2011; comparisons are with the same periods of fiscal 2010. Amounts below are in U.S. dollars. Brady manufactures and markets identification solutions and specialty materials, reporting through its Americas, Europe, and Asia-Pacific segments.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $329.0 million, up 11.2% | $658.6 million, up 7.2% |
| Gross margin | $159.0 million; 48.3%, versus 49.7% | $323.5 million; 49.1%, versus 49.5% |
| Operating income | $37.1 million, up 55.1% | $78.7 million, up 32.3% |
| Net income | $24.2 million, up 61.3%; diluted Class A EPS $0.46 versus $0.28 | $50.5 million, up 37.7%; diluted Class A EPS $0.95 versus $0.69 |
| Operating cash flow | Not separately provided for the quarter | $57.6 million, versus $68.0 million |
Quarterly sales growth comprised 9.8% organic growth, 1.8% from acquisitions net of divestiture, and a 0.4% adverse currency effect. For the six months, those effects were 5.7%, 2.0%, and negative 0.5%, respectively. All three segments reported organic growth. Gross margin declined year over year, which management attributed primarily to a strong prior-year comparison and product mix.
Management also reported net income before after-tax restructuring-related expenses of $25.7 million for the quarter, up 46.0%, and $54.6 million for the six months, up 30.3%. These are management-presented adjusted figures, not GAAP net income.
Cash, liquidity, and debt
- Cash and equivalents were $362.3 million at January 31, 2011, up from $314.8 million at July 31, 2010. Current assets were $737.5 million and current liabilities $291.7 million.
- Six-month operating cash flow was $57.6 million; capital expenditures were $9.0 million. Operating cash flow was lower year over year, primarily because Brady paid fiscal 2010 incentive compensation during the period.
- Cash increased $47.5 million over the six months. Investing activities used $5.5 million net, including $8.0 million for the ID Warehouse acquisition and $13.0 million of net proceeds from the Teklynx sale. Financing activities used $13.7 million, primarily for dividends.
- Current and long-term obligations totaled $449.1 million at January 31, 2011. There were no borrowings under the $200 million revolving credit facility. Brady reported compliance with its debt covenants: leverage ratios of 2.1-to-1.0 under private-placement agreements and 2.2-to-1.0 under the revolver; the revolver interest coverage ratio was 7.1-to-1.0.
Material changes and segment results
- Americas quarterly external sales rose 11.9% to $136.0 million; segment profit rose 31.7% to $31.0 million. Six-month sales grew 9.4% and segment profit 24.9%.
- Europe quarterly sales rose 7.7% to $104.0 million, despite a 6.9% currency headwind; segment profit rose 12.4% to $29.2 million. Six-month sales grew 2.7% and segment profit 4.8%.
- Asia-Pacific quarterly sales rose 14.6% to $89.0 million, including a 5.6% currency benefit; segment profit rose 7.8% to $11.5 million. Segment profit as a percentage of sales declined in the quarter, which management attributed mainly to increased new-product investment.
- Brady acquired Australian-based ID Warehouse for $8.0 million on November 1, 2010. On December 16, it sold Teklynx, a barcode software business, receiving $13.0 million net of cash retained and recording a $4.4 million pretax gain in SG&A. The gain benefited reported results; discontinued-operations presentation was not used because the impact was considered immaterial.
Outlook, commentary, and risks
- Brady expected fiscal 2011 restructuring charges of $7 million to $10 million; $5.8 million had been recorded through January 31. Most remaining cash payments were expected within the next 12 months.
- Management expected R&D expense to increase in the second half of fiscal 2011, capital expenditures of approximately $25 million for the year ending July 31, 2011, and a fiscal 2011 effective tax rate of approximately 26%. The filing provides no specific full-year sales or EPS guidance.
- Management cited broad-based organic growth and ongoing process-improvement activity as drivers of improved earnings. It stated that operating cash and borrowing capacity should fund anticipated working capital, capital spending, restructuring, acquisitions, scheduled debt repayments, and dividends.
- Key stated risks include economic weakness in major markets, foreign-exchange movements, acquisition integration, product development and competition, input costs and supply interruptions, customer retention, restructuring execution, tax matters, intangible-asset write-offs, and maintaining debt-covenant compliance. Outstanding foreign-exchange contracts totaled $144.5 million; Brady reported no interest-rate derivatives.
- The company stated it had no material off-balance-sheet arrangements or related-party transactions, and that ordinary-course purchase commitments were not material to its financial position. Disclosure controls were judged effective, with no material change in internal control over financial reporting reported.
Investor verification priorities
- Assess how much earnings growth reflects recurring operations versus the $4.4 million Teklynx gain and restructuring-related adjustments.
- Track organic growth, especially the sustainability of quarterly growth and the differing currency and product-mix effects across regions.
- Monitor cash conversion and working capital, including receivables growth and the incentive-compensation payment effect on operating cash flow.
- Verify delivery of restructuring savings and the stated fiscal-year restructuring and capital-expenditure expectations.
- Review debt maturities, covenant headroom, and the impact of currency exposure and hedging on reported results.