Brady Corporation (10-Q): Quarter Ended April 30, 2012
All dollar amounts are in U.S. dollars. Financial statements are unaudited. The quarter ended April 30, 2012 was Brady’s fiscal third quarter; the filing also reports the first nine months of fiscal 2012.
Business context
Brady makes identification solutions and specialty materials, serving customers through its Americas, EMEA and Asia-Pacific regions. Its businesses include branded identification products, direct marketing and customized die-cut products.
Financial performance
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Net sales | $331.6 million | $337.9 million | $1,001.7 million | $996.5 million |
| Gross margin | $160.0 million; 48.3% | $167.6 million; 49.6% | $481.2 million; 48.0% | $491.2 million; 49.3% |
| Operating income | $41.0 million | $40.9 million | $12.8 million | $119.6 million |
| Net income (loss) | $27.7 million | $28.6 million | $(29.6) million | $79.1 million |
| Diluted Class A EPS | $0.52 | $0.54 | $(0.57) | $1.49 |
- Quarterly sales fell 1.9%; organic sales declined 0.5%, currency reduced sales 1.6%, and acquisitions added 0.2%. Nine-month sales rose 0.5%, including 0.4% organic growth.
- Quarterly net income declined 3.3%; lower gross margin was partly offset by reduced R&D and SG&A. SG&A fell 7.2% year over year, with lower incentive compensation and productivity initiatives contributing.
- The nine-month loss primarily reflects a $115.7 million non-cash goodwill impairment charge related to the former North/South Asia reporting unit. Excluding that impairment and restructuring charges, the company reported $88.8 million of net income, versus $84.1 million in the prior-year period.
- Regional results were mixed: Americas sales and segment profit increased; EMEA sales and profit declined amid weak European demand; Asia-Pacific segment profit fell 33.9% in the quarter as die-cut sales and margins weakened.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $100.6 million, down from $110.4 million, primarily reflecting lower accounts payable and higher inventory. Capital expenditures were $14.5 million; investing cash outflow was $22.5 million.
- Cash and equivalents were $374.4 million at April 30, 2012, versus $390.0 million at July 31, 2011. Cash declined $15.5 million during the period. Financing cash outflow was $80.6 million, including $42.5 million of debt principal payments, $29.2 million of dividends and $12.3 million of share repurchases.
- Total debt carrying value, including current maturities, was $342.1 million, down from $393.2 million at July 31, 2011. The company had a new $300 million multi-currency revolving facility, with no borrowings outstanding under it at April 30.
- Brady reported compliance with debt covenants: debt-to-EBITDA ratio of 1.5x versus a 3.25x maximum, and interest coverage of 11.3x versus a 3.0x minimum. Approximately 68% of cash was held outside the United States.
Outlook, risks and unusual items
- No specific sales or earnings guidance was provided. Management expected fiscal 2012 capital expenditures of approximately $20 million and said restructuring activity would continue for several quarters; most remaining restructuring cash payments were expected within 12 months.
- Management described the European macroeconomic slowdown as difficult and trending downward. Asia-Pacific die-cut results faced intense competition and reduced sales to a major mobile-handset customer following that customer’s market-share loss. Thailand flood-related losses were expected to be partially covered by insurance, potentially in periods after fiscal 2012.
- Restructuring charges were $3.4 million in Q3, taken in response to weaker sales forecasts and declining Asia die-cut results. The goodwill impairment reflected lower expected profitability and margins in the former North/South Asia unit; management said the pressures were not expected to be temporary.
- After quarter-end, Brady acquired Runelandhs in Sweden for approximately $23.9 million and Pervaco in Norway for approximately $12.2 million. The board declared a quarterly dividend of $0.185 per share, payable July 31, 2012.
- Key stated risks include economic conditions, customer and market concentration, competition and price pressure, foreign exchange movements, acquisition integration, restructuring execution, intangible-asset impairment and debt-covenant compliance.
Important facts for investors to verify
- Whether Asia-Pacific die-cut sales, pricing and segment margins stabilize, particularly in relation to the major mobile-handset customer.
- Whether the European sales decline and weaker outlook persist, and how restructuring affects costs and regional profitability.
- Operating cash conversion, working-capital trends, debt repayments and covenant headroom following the impairment-driven reported loss.
- Insurance recovery timing and amounts for Thailand flood-related losses, and the purchase accounting and performance of the two post-quarter acquisitions.
- Whether future goodwill testing, based on updated forecasts and valuation assumptions, results in additional impairment charges.