Brady Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended January 31, 2013. Unaudited consolidated financial statements; amounts below are in millions of dollars unless noted.
Financial results and position
| Metric | Three months ended Jan. 31, 2013 | Six months ended Jan. 31, 2013 |
|---|---|---|
| Net sales | $324.2; up 1.1% year over year | $661.8; down 1.3% |
| Organic sales | Down 3.1%; acquisition/divestiture impact +4.0%, currency +0.2% | Down 2.5%; acquisition/divestiture impact +2.2%, currency −1.0% |
| Gross margin | $150.1; 46.3%, versus 47.8% | $314.7; 47.5%, versus 47.9% |
| Operating income (loss) | $25.5, versus loss of $77.2 | $69.9, versus loss of $28.1 |
| Net income (loss) | Loss of $8.7, or $(0.17) per Class A share, versus loss of $90.0 | Income of $18.5, or $0.36 per Class A share, versus loss of $57.2 |
| Operating cash flow | $44.2 for six months, versus $43.3 |
- Quarterly gross margin was 46.8% excluding a $1.5 million nonrecurring PDC inventory fair-value adjustment. Management cited unfavorable business mix and difficulty passing cost increases to customers.
- Quarterly SG&A rose 6.8% to $112.0 million; six-month SG&A rose 4.7% to $223.7 million. Increases included PDC expenses and acquisition costs, partly offset by a $5.2 million Thailand flood-insurance gain.
- At January 31, cash was $141.3 million, down from $305.9 million at July 31, 2012. Current assets were $543.0 million and current liabilities $381.5 million.
- Total debt carrying value was approximately $438.0 million, including $112.3 million of revolving-credit borrowings classified as current. The company reported $187.7 million of remaining facility availability, potentially expandable subject to conditions. It was in compliance with covenants: debt/EBITDA 1.9x and interest coverage 8.7x.
- Six-month investing cash outflow was $306.8 million, primarily reflecting the $300.8 million PDC acquisition. Financing cash inflow was $88.6 million, including net revolver borrowing; dividends paid were $19.5 million.
Changes, transactions, and operating performance
- Brady acquired Precision Dynamics Corporation (PDC), a healthcare-identification products manufacturer, on December 28, 2012, for approximately $300.8 million. PDC contributed about $16.1 million in sales and a $1.2 million net loss from acquisition through January 31; the loss primarily reflected a $1.5 million inventory fair-value charge. Purchase accounting remained preliminary, including $189.9 million of goodwill.
- Brady sold Brady Medical and Varitronics in the first fiscal quarter. Together, the sales were associated with a $3.4 million net loss in the six-month results. Management described the divestitures as portfolio focus actions.
- Quarterly external sales increased in the Americas to $147.7 million, but fell in EMEA to $94.4 million and Asia-Pacific to $82.1 million. Segment profit declined year over year in all three regions: Americas 9.7%, EMEA 10.7%, and Asia-Pacific 28.7%.
- By business platform, quarterly Identification Solutions sales rose to $185.2 million, while Direct Marketing slipped to $87.5 million and Die-Cut to $51.5 million. Acquisition of PDC contributed to Identification Solutions growth.
Outlook, commentary, and risks
- Management cited continued economic weakness, particularly in Europe, Brazil, and Australia, and ongoing softness in Direct Marketing as online growth only partly offsets catalog declines. Asia-Pacific also faced weaker Australian demand and softness in Thailand’s hard-disk-drive business; management expected that softness to continue through the rest of fiscal 2013.
- Management said it expected modest second-half growth in the mobile handset business and highlighted growth initiatives in emerging geographies, selected industry sectors, new products, customer conversion, and online capabilities.
- After the quarter, the board approved a shift effective May 1, 2013, from geographic to global business-platform organization. Brady expects $15–$18 million of restructuring charges, mostly by fiscal year-end, and estimates annualized savings of $25–$30 million. Platform-based segment reporting was planned to begin in fiscal Q4 2013.
- The quarter’s $8.7 million net loss included a $25.0 million noncash tax charge tied to repatriating approximately $208 million to help fund PDC. The reported effective tax rate was 139.6% for the quarter; excluding this charge, management reported 25.6%. A $1.8 million discrete tax benefit from reinstated tax provisions partly offset tax expense.
- Management said cash from operations and borrowing capacity should fund expected needs, but additional U.S. cash repatriation could cause further material tax charges. About 88% of cash was held outside the United States.
- Goodwill impairment remained a risk if sales declines persist in Direct Marketing Americas or Die-Cut Asia, though management reported significant valuation cushion at the latest annual test and no interim triggering event. The filing also identifies economic, foreign-exchange, competitive, acquisition-integration, debt-covenant, tax, and product-liability risks, including potential claims involving healthcare products.
- The company reported no material off-balance-sheet arrangements. Disclosure controls were considered effective; PDC control integration was ongoing.
Important facts for investors to verify
- Whether PDC’s integration, results, and final purchase-price allocation support the acquisition rationale and goodwill valuation.
- Whether organic sales, gross margins, and regional segment profits stabilize, especially in Europe, Australia, Direct Marketing, and Die-Cut Asia.
- Whether the planned reorganization delivers the estimated $25–$30 million annual savings and how the $15–$18 million charges develop.
- How the company repays current revolver borrowings and manages debt covenants, overseas cash, and any further repatriation-related tax costs.
- Whether continued catalog-sales declines or weaker operating forecasts trigger impairment testing or charges for the identified at-risk reporting units.