Brady Corporation (BRADY CORP) — Form 10-Q Summary
Business context and reporting period
Brady manufactures and markets identification solutions and specialty materials, serving customers across manufacturing, safety, electronics, healthcare, and other industries. This unaudited report covers the fiscal third quarter and nine months ended April 30, 2011; comparisons are with the corresponding 2010 periods. Financial amounts below are in U.S. dollars.
Financial performance and position
- Third-quarter sales: $337.9 million, up 4.9%. Growth comprised 1.0% organic growth, 0.4% from acquisitions net of divestitures, and 3.5% from currency translation.
- Third-quarter earnings: Operating income was $40.9 million, up 13.8%; net income was $28.6 million, up 20.7%; diluted Class A EPS was $0.54, up 20.0%. Net margin rose to 8.5% from 7.4%.
- Nine-month results: Sales were $996.5 million, up 6.4%; operating income was $119.6 million, up 25.4%; net income was $79.1 million, up 31.0%; diluted Class A EPS was $1.49, up 30.7%.
- Margins: Gross margin was 49.6% for the quarter versus 49.8% a year earlier, and 49.3% for the nine months versus 49.6%. Management attributed the decline to higher raw-material costs that cost reductions and price increases did not fully offset.
- Cash flow: Nine-month operating cash flow was $110.4 million, down from $118.2 million. Investing activities used $10.0 million, including $8.0 million for an acquisition, partly offset by $13.0 million of divestiture proceeds. Financing activities used $62.8 million, including $42.5 million of debt payments and $28.5 million of dividends.
- Liquidity: Cash and equivalents were $374.0 million at April 30, 2011, compared with $314.8 million at July 31, 2010. Current assets were $751.7 million and current liabilities $311.0 million. The company reported no borrowings under its $200 million revolving credit facility.
- Debt: Current and long-term obligations totaled $413.1 million, down from $444.2 million at July 31, 2010. Brady reported compliance with its debt covenants; leverage ratios were 1.8–1.9 times EBITDA against applicable limits of 3.5 times or 3.0 times, and revolving-facility interest coverage was 7.4 times against a 3.0-times minimum.
- Dividends: Quarterly dividend was $0.18 per share. A further $0.18 dividend was declared May 17, payable July 29, 2011.
Material changes versus prior comparable periods
- Quarterly organic sales increased in the Americas (2.7%) and Europe (3.6%), but fell 5.1% in Asia-Pacific. Asia-Pacific weakness reflected reduced demand from a major mobile-handset customer and Japan-related supply-chain disruption.
- Quarterly segment profit rose 13.1% in the Americas and 5.3% in Europe, but fell 21.9% in Asia-Pacific. Asia-Pacific margin was 12.1%, down from 16.1%, with weaker organic sales and raw-material inflation cited as causes.
- For the nine months, organic sales rose across all regions: Americas 5.3%, Europe 5.6%, and Asia-Pacific 0.4%.
- Gross margin declined despite stronger sales. SG&A as a share of sales improved, while interest expense increased year to date, partly because of the May 2010 euro-denominated note placement.
- Cash increased substantially, aided by operating cash flow and a $21.5 million favorable foreign-exchange effect. Stockholders’ investment also increased, including a $60.3 million favorable currency translation adjustment.
Outlook, management commentary, risks, and unusual items
- Management expected fiscal 2011 restructuring charges of $8 million to $10 million; $7.0 million had been recorded in the first nine months. Most remaining cash payments were expected within 12 months.
- Management expected fiscal 2011 capital expenditures of $18 million to $20 million and an effective tax rate of approximately 25%. It expected R&D expense to continue increasing through fiscal 2011. The filing does not provide overall sales or earnings guidance.
- Brady acquired Australian ID Warehouse for $8.0 million in November 2010. It sold Teklynx in December 2010 for $13.0 million net proceeds and recorded a $4.4 million pretax gain in SG&A.
- Foreign-exchange exposure is material. The company used forward contracts and euro-denominated debt as hedges; the notes report $120.5 million of outstanding forward contracts. A hypothetical 10% adverse currency move would affect the translated value of foreign subsidiaries’ $411.2 million of net current assets by approximately $41.1 million, under the filing’s stated assumptions.
- Other risks identified include raw-material prices and availability, economic and customer demand conditions, currency movements, acquisition integration, competition, restructuring execution, technology changes, and compliance with debt covenants. The company stated it had no material off-balance-sheet arrangements.
- Disclosure controls were assessed as effective at period end; no material changes in internal control over financial reporting were reported for the quarter.
Most important facts for investors to verify
- Whether Asia-Pacific demand and segment profitability recover, particularly given handset-customer weakness and Japan-related supply disruptions.
- Whether Brady can offset raw-material inflation through pricing, sourcing, and productivity improvements without further gross-margin pressure.
- Whether cash generation remains sufficient to fund dividends, scheduled debt payments, restructuring, capital spending, and potential acquisitions.
- Progress against the stated restructuring-charge and capital-expenditure ranges, and the expected timing of remaining restructuring payments.
- The foreign-exchange exposure and hedge disclosures: the notes state $120.5 million of outstanding contracts, while the market-risk section text appears to state “$120,475 million”; confirm the intended unit in the filed disclosure.
- The sustainability of earnings growth after considering the $4.4 million Teklynx divestiture gain, favorable currency effects, and restructuring charges.