Business context and reporting period
Brady Corporation’s unaudited Form 10-Q covers the three and nine months ended April 30, 2013. Brady manufactures identification solutions and specialty materials. It reported three geographic segments—Americas, EMEA and Asia-Pacific—and announced a shift effective May 1, 2013 to two global product platforms: Identification Solutions and Workplace Safety.
Financial performance
Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Net sales | $305.7 | $275.4 | $856.4 | $813.6 |
| Gross margin | $159.7; 52.2% | $151.7; 55.1% | $452.5; 52.8% | $446.2; 54.8% |
| Operating income | $31.0 | $43.0 | $96.0 | $125.1 |
| Continuing-operations earnings | $21.8 | $28.0 | $37.7 | $84.3 |
| Net earnings (loss) | $4.2 | $27.7 | $22.7 | $(29.6) |
| Diluted continuing-operations EPS, Class A | $0.42 | $0.53 | $0.73 | $1.59 |
- Sales increased 11.0% in the quarter and 5.3% year to date, but organic sales declined 4.7% and 2.7%, respectively. Acquisitions contributed 16.8% and 9.3%; currency reduced sales by 1.1% and 1.3%.
- Q3 continuing-operations earnings fell primarily with lower organic sales and $6.5 million more restructuring charges. Nine-month earnings included a $25.6 million non-cash tax charge related to repatriating cash to fund the PDC acquisition; excluding that charge, earnings were $62.7 million.
- Operating cash flow was $89.6 million for nine months, versus $100.6 million a year earlier. Investing cash use was $318.3 million, including the $301.2 million PDC purchase. Capital expenditures were $26.1 million. Cash declined $228.9 million to $77.0 million.
- At April 30, current assets were $504.1 million and current liabilities $319.3 million. Debt carrying value, including notes payable and current maturities, was $338.3 million. The company had $47.0 million drawn on its revolving facility, $253.0 million of additional availability, and $14.5 million available on its China credit line.
- Debt-to-EBITDA under the agreements was 1.6x and interest coverage was 9.0x; Brady reported compliance with its covenants. Quarterly dividend was $0.19 per share.
Material changes versus comparable periods
- PDC, acquired December 28, 2012 for $301.2 million, added $40.7 million of Q3 sales and $56.8 million from acquisition through April 30. The acquisition increased goodwill by $189.2 million; purchase-price allocation remained preliminary.
- Gross margin declined year over year, partly because PDC has lower gross margins. Excluding PDC, gross margin was 53.8% in Q3 and 54.0% year to date, still below the prior-year comparatives.
- Q3 and year-to-date restructuring charges were $8.5 million and $10.5 million, compared with $2.0 million in each prior-year period. SG&A rose 13.7% in Q3 and 9.7% year to date, reflecting PDC costs, acquisition expenses and growth investments.
- Brady classified Die-Cut Asia as held for sale and discontinued operations, recording a $15.7 million write-down. The disposal group had $108.6 million of net assets after the write-down. Discontinued-operations losses were $17.6 million for Q3 and $14.9 million year to date.
- Regional organic sales were weaker in all three segments in Q3: Americas down 2.9%, EMEA down 4.8%, and Asia-Pacific down 11.6%. EMEA and Asia-Pacific segment profit also declined year to date.
Outlook, management commentary and risks
- Management expected total restructuring charges of $15–18 million, with approximately $25–30 million of annual savings and $10–15 million reinvested in business initiatives. It expected a further $13–16 million of restructuring charges in fiscal Q4, including brand-related write-offs. No formal revenue or earnings guidance is stated in the filing text.
- Management cited continued economic weakness, particularly in Europe, Brazil and Australia, and pressure in Direct Marketing as catalog sales declined and e-commerce growth only partly offset the decline. It expected PDC-related gross-margin pressure to continue through Q2 of the next fiscal year.
- Management described Direct Marketing Americas as a goodwill-impairment risk if sales declines prove persistent; that reporting unit had $183.1 million of goodwill. Brady said it anticipated a return to single-digit sales growth there over several years, while noting the outcome depends on its digital strategy.
- Brady stated operating cash flow and borrowing capacity were expected to cover anticipated needs. It cautioned that further U.S. cash repatriation could produce material tax charges. Principal risks include economic conditions, foreign exchange, competition and pricing, acquisition integration, divestiture execution and contingent liabilities, restructuring, debt covenant compliance, and impairment of goodwill or other intangibles.
Important facts for investors to verify
- Whether organic sales and margins stabilize, particularly in Europe, Australia, Brazil and Direct Marketing.
- PDC integration, realized growth and profitability, and the final purchase-price allocation.
- Actual restructuring charges, timing and cash costs, and whether projected savings are achieved after reinvestment.
- Die-Cut Asia sale progress, proceeds and any additional valuation or contingent-liability effects.
- Tax consequences of future cash repatriations and the outlook for cash, debt repayment and covenant headroom.
- Direct Marketing Americas performance and any change in the assumptions supporting its goodwill valuation.