Brady Corporation (BRADY) — Form 10-Q Summary
Reporting period: Fiscal first quarter, three months ended October 31, 2011. Financial statements are unaudited; amounts below are in U.S. dollars.
Business context and results
Brady manufactures and markets identification solutions and specialty materials through three geographic segments: Americas, Europe, and Asia-Pacific.
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $349.5 million | $329.6 million | +6.0% |
| Gross profit / margin | $167.8 million / 48.0% | $164.5 million / 49.9% | Margin down 1.9 points |
| Operating income / margin | $49.1 million / 14.0% | $41.6 million / 12.6% | +18.0% |
| Net income / margin | $32.7 million / 9.4% | $26.3 million / 8.0% | +24.5% |
| Diluted EPS, Class A | $0.62 | $0.50 | +24.0% |
| Cash from operations | $15.3 million | $16.2 million | Down $0.9 million |
Financial position and cash flow
- Cash and cash equivalents were $371.6 million, down $18.4 million from July 31, 2011. Current assets were $756.2 million and current liabilities $286.6 million.
- Total debt carrying value was $391.3 million, including $61.3 million current maturities. No borrowings were outstanding under the $200 million revolving credit facility. The company reported compliance with debt covenants; leverage ratios were 1.8x under private-placement agreements and 1.7x under the revolver, versus limits of 3.5x and 3.0x, respectively.
- Investing cash outflow was $7.0 million, including $5.8 million of capital expenditures. Financing cash outflow was $20.9 million, including $9.7 million of dividends and $12.3 million of share repurchases.
- Approximately 59% of cash was held outside the United States at quarter-end. Management said operating cash flow and borrowing capacity should fund anticipated needs.
Material changes and segment performance
- Sales growth comprised 3.5% organic growth, a 2.7% favorable currency effect, and a 0.2% reduction from acquisitions and divestitures. The reported acquisition/divestiture impact reflected ID Warehouse and Teklynx.
- Americas sales rose 5.4% to $153.9 million; segment profit increased 9.8% to $43.2 million. Europe sales rose 5.8% to $97.4 million; segment profit increased 9.3% to $26.3 million.
- Asia-Pacific sales rose 7.4% to $98.3 million, but organic sales declined 0.2% and segment profit fell 20.9% to $13.3 million. Lower-margin sales, price pressure, and raw-material and wage inflation weighed on results.
- Gross margin declined mainly because Asia-Pacific accepted lower-margin sales opportunities. Consolidated operating income also benefited from the absence of the prior-year quarter’s $3.6 million restructuring charge and lower SG&A as a percentage of sales.
Outlook, risks, and unusual items
- Management expected fiscal 2012 full-year tax rate in the mid-20% range, R&D spending to increase for the remainder of the year, and capital expenditures of approximately $25 million.
- Thailand flooding had no material first-quarter impact, but management estimated a $0.05 per diluted-share reduction in second-quarter EPS. Potential losses were expected to be partly covered by insurance; customer effects and recovery timing were uncertain.
- Management highlighted North/South Asia’s reduced customer demand, pricing pressure, and natural-disaster disruption. That reporting unit had $163.7 million of goodwill; failure to improve operating results could lead to impairment charges and potentially affect covenant compliance.
- Foreign-exchange exposure remains significant. Currency translation adjustments were an unfavorable $19.1 million in the quarter, compared with a favorable $30.0 million a year earlier. A hypothetical 10% adverse exchange-rate move was estimated to reduce foreign net current assets by $40.7 million.
- The company authorized a new repurchase program for up to two million shares and bought 457,360 shares for $12.3 million during the quarter. It filed an effective shelf registration permitting future offerings of an indeterminate amount of common stock or debt securities.
- The board declared a $0.185-per-share quarterly dividend, payable January 31, 2012. No material off-balance-sheet arrangements were reported; purchase commitments were described as not material.
Key facts for investors to verify
- Whether Asia-Pacific margins and North/South Asia operating performance improve, and whether goodwill remains recoverable.
- The actual financial and customer effects of Thailand flooding, including insurance coverage and timing of recoveries.
- Whether organic sales growth continues, particularly given the decline in Asia-Pacific organic sales and reduced demand from a major mobile-handset customer.
- Cash generation, debt repayment, covenant headroom, and use of the new share-repurchase authorization and shelf registration.
- Whether foreign-exchange movements, input-cost inflation, and the expected increase in R&D and capital spending affect margins and cash flow.