Brady Corporation — Form 10-Q Summary
Business context and reporting period
Brady manufactures and markets identification solutions and specialty materials across industrial, safety, healthcare, electronics, and other markets. This unaudited report covers the first quarter of fiscal 2011, the three months ended October 31, 2010, compared with the three months ended October 31, 2009. Brady reports three geographic segments: Americas, Europe, and Asia-Pacific. Unless otherwise noted, financial amounts below are in millions of U.S. dollars.
Financial performance and position
| Metric | Quarter ended Oct. 31, 2010 | Prior-year quarter / comparison |
|---|---|---|
| Net sales | $329.6 | $318.5; up 3.5% |
| Gross profit and margin | $164.5; 49.9% | $157.4; 49.4% |
| Operating income | $41.6 | $35.6; up 17.0% |
| Net income | $26.3; 8.0% of sales | $21.7; 6.8% of sales; up 21.3% |
| Diluted EPS, Class A | $0.50 | $0.41 |
| Operating cash flow | $16.2 | $33.8 |
| Capital expenditures | $2.8 | $9.0 |
Management reported net income before restructuring-related expenses of $28.9 million, or $0.55 per diluted Class A share, versus $24.3 million, or $0.46, a year earlier. This is a company-presented measure; GAAP net income was $26.3 million.
Cash and cash equivalents were $326.1 million at October 31, up from $314.8 million at July 31, 2010. Current liabilities were $291.1 million; current borrowings and current maturities were $61.3 million. Long-term obligations, less current maturities, were $389.7 million, making total carrying-value debt of approximately $450.9 million. No borrowings were outstanding under the $200 million revolving credit facility. Brady reported compliance with debt covenants: leverage ratios were 2.2-to-1.0 under private-placement agreements and 2.3-to-1.0 under the revolver agreement; revolver interest coverage was 6.7-to-1.0.
Working capital excluding cash increased to $90.3 million from $60.3 million at July 31, primarily reflecting higher receivables and inventory. Operating cash flow declined by $17.7 million year over year, primarily because the company paid fiscal 2010 annual incentive compensation in the current quarter. Cash dividends paid were $9.4 million.
Material changes versus the prior-year quarter
- Sales grew 3.5%; management attributed 2.0 percentage points to organic growth and 2.0 points to acquisitions, partly offset by a 0.5-point unfavorable currency effect.
- Americas sales increased 7.2% and segment profit increased 20.0%. Europe sales fell 2.4%, mainly reflecting a 6.9% currency headwind, while organic sales rose 0.7%; segment profit declined 3.2%. Asia-Pacific sales increased 4.1%, with organic sales down 0.3%; segment profit increased 11.3%.
- Gross margin improved by 0.5 percentage point, which the company attributed mainly to cost reductions and restructuring actions. SG&A rose 0.6% in dollars but declined to 33.2% of sales from 34.1%.
- Interest expense increased to $5.7 million from $5.2 million, primarily due to the May 2010 euro-denominated note placement. The effective tax rate declined to 27.4% from 28.8%.
- Cash from operations was lower, while cash at quarter-end remained higher than at the prior fiscal year-end. Foreign currency translation contributed $6.3 million to the quarterly increase in cash.
Outlook, management commentary, risks, and unusual items
- Fiscal 2011 expectations disclosed: restructuring charges of approximately $12–$15 million before tax; capital expenditures of $25–$30 million; and a full-year effective tax rate of approximately 26%, subject to pending or proposed U.S. tax legislation. Management expected R&D expense to increase during the rest of fiscal 2011.
- Management anticipated a slow economic recovery in Europe. It stated that operating cash flow and borrowing sources should be sufficient for working capital, capital spending, restructuring, acquisitions, scheduled debt repayments, and dividends.
- Quarterly restructuring charges were $3.6 million, including $2.7 million of employee separation costs and $1.0 million of non-cash asset write-offs. The company expected most remaining cash payments to occur within 12 months.
- On November 1, 2010, after quarter-end, Brady acquired ID Warehouse, an Australian people-identification and security-solutions supplier. The company considered the acquisition immaterial to consolidated results and did not provide pro forma results. On November 18, the board declared a $0.18-per-share quarterly dividend payable January 31, 2011.
- Foreign exchange is a material exposure. Brady hedged a portion of known currency exposures and designated €75 million of senior notes as a hedge of its European net investment. A hypothetical 10% adverse exchange-rate move was estimated to reduce foreign net current assets by $16.6 million; management cautioned that this sensitivity assumes currencies move together.
- Other disclosed risks include economic weakness in served markets, acquisition integration, product development and competition, input costs, customer and supplier pricing pressure, tax changes, intangible-asset write-offs, debt covenant compliance, restructuring execution, and international operations. Management stated that disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether organic sales growth and margin improvement persist, particularly in Europe and Asia-Pacific, and how currency movements affect reported results.
- Cash conversion and working-capital trends, including the timing of incentive compensation, receivables, and inventory.
- Progress and total cost of restructuring against the $12–$15 million fiscal 2011 estimate, including remaining cash payments.
- Debt maturities, covenant headroom, and the impact of euro-denominated debt and hedging on interest expense and reported equity.
- The ID Warehouse acquisition’s subsequent contribution and integration costs, and whether the stated tax-rate and capital-spending outlooks are achieved.