Brady Corporation Reports Fiscal 2012 Second Quarter Results And Non-Cash Goodwill Impairment

Brady Corporation (NYSE: BRC) (“Brady” or “Company”), a world leader in identification solutions, today reported its financial results for the fiscal 2012 second quarter ended January 31, 2012.

Quarter Ended January 31, 2012 Results :

Sales for the fiscal 2012 second quarter were down 2.6 percent to $320.6 million compared to $329.0 million in the second quarter of fiscal 2011. Organic sales declined by 1.8 percent, divestitures net of acquisitions reduced sales by 0.4 percent, and the impact of foreign currency translation decreased sales by 0.4 percent. By segment, organic sales increased 2.9 percent in the Americas, declined 5.7 percent in Europe and declined 4.4 percent in the Asia-Pacific region.

During the second quarter ended January 31, 2012, the Company recorded a non-cash impairment charge of $115.7 million for the write down of goodwill in the Asia-Pacific region. Operating results and financial forecasts in the Asia-Pacific region have been impacted by reduced sales volumes to one of the Company’s major mobile handset customers due to shifts in end market shares and compressed gross profit margins caused primarily by increased competition in the mobile handset industry. This non-cash impairment charge does not impact the Company’s future cash flow, profitability, liquidity, or compliance with debt covenants in its various credit agreements.

Net income (loss) in the fiscal 2012 second quarter was $(90.0) million compared to $24.2 million in the same quarter last year. Excluding the impact of the non-cash goodwill impairment charge outlined above and prior year restructuring charges, net income for the quarter ended January 31, 2012 was flat at $25.7 million.

Earnings (loss) per diluted Class A Common Share in the fiscal 2012 second quarter were $(1.72) compared to $0.46 in the same quarter last year. Excluding the impact of the non-cash goodwill impairment charge and prior year restructuring charges, earnings per diluted Class A Common Share were up 2.1 percent to $0.49 for the quarter ended January 31, 2012 compared to $0.48 in the same period in fiscal 2011.

Six Months Ended January 31, 2012 Results :

Sales for the six-month period ended January 31, 2012 were up 1.7 percent to $670.1 million compared to $658.6 million in the same period last year.

Net income (loss) for the six months ended January 31, 2012 was $(57.2) million compared to $50.5 million in the same period in fiscal 2011. Excluding the impact of the non-cash goodwill impairment charge and prior year restructuring charges, net income for the six months ended January 31, 2012 was up 7.1 percent to $58.5 million compared to $54.6 million in the same period in fiscal 2011.

Earnings (loss) per diluted Class A Common Share were $(1.09) for the six-month period ended January 31, 2012 compared to $0.95 in the same period of fiscal 2011. Excluding the impact of the non-cash goodwill impairment charge and prior year restructuring charges, earnings per diluted Class A Common Share for the six months ended January 31, 2012 were up 8.7 percent to $1.12 compared to $1.03 in the same period in fiscal 2011.

Commentary and Guidance :

“Today we announced an impairment charge related to our Asian business. As discussed earlier, reduced sales to our largest customer and increasing competitive pressures have led to this action. This month we began the process of splitting our Asia business into two dedicated teams - one team to focus on our die-cut business and the other team to focus on our MRO and identification businesses. This change should help increase our focus on both businesses as we work to accelerate the growth of our MRO business and improve growth and profitability of our die-cut business,” said Brady’s President and Chief Executive Officer Frank M. Jaehnert.

“We are encouraged by the continued recovery of the American economy and the strong profitability of our business in the Americas, but remain concerned with the European economy. Our focus going forward will be on expanding our business in emerging economies and higher growth vertical markets, moving to more digital business models and continuing to introduce innovative new products,” continued Jaehnert.

“Our second quarter was challenging as we had difficult comparables combined with certain headwinds this year, including the flooding in Thailand. Even with these challenges, we were able to increase net income as a percent of sales, excluding the goodwill impairment charge and we finished with a cash balance of $380 million at January 31, 2012,” said Brady Chief Financial Officer Thomas J. Felmer. “The non-cash goodwill impairment charge does not change our commitment to investing in core growth opportunities, paying dividends, and growing through acquisition. Given the uncertainties surrounding the European economy, the compressed margins in the mobile handset industry, and the depreciation of certain foreign currencies versus the U.S. dollar, we have modified our full year fiscal 2012 guidance for earnings per diluted Class A Common Share, exclusive of after-tax restructuring charges and the Asia goodwill impairment outlined above to between $2.20 and $2.40 from our previous guidance of between $2.30 and $2.50. Our guidance includes low single-digit organic sales growth in the Americas and Asia and approximately flat organic sales in Europe.”

A webcast regarding Brady’s fiscal 2012 second quarter financial results will be available at www.bradycorp.com beginning at 9:30 a.m. Central Time today.

Brady Corporation is an international manufacturer and marketer of complete solutions that identify and protect premises, products and people. Brady’s products help customers increase safety, security, productivity and performance and include high-performance labels and signs, safety devices, printing systems and software, and precision die-cut materials. Founded in 1914, the company has millions of customers in electronics, telecommunications, manufacturing, electrical, construction, education, medical and a variety of other industries. Brady is headquartered in Milwaukee, Wisconsin and as of July 31, 2011 employed approximately 6,500 people at operations in the Americas, Europe and Asia-Pacific. Brady’s fiscal 2011 sales were approximately $1.34 billion. Brady stock trades on the New York Stock Exchange under the symbol BRC. More information is available on the Internet at www.bradycorp.com.

Brady believes that certain statements in this news release are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements related to future, not past, events included in this news release, including, without limitation, statements regarding Brady’s future financial position, business strategy, targets, projected sales, costs, earnings, capital expenditures, debt levels and cash flows, and plans and objectives of management for future operations are forward-looking statements. When used in this news release, words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “should,” “project” or “plan” or similar terminology are generally intended to identify forward-looking statements. These forward-looking statements by their nature address matters that are, to different degrees, uncertain and are subject to risks, assumptions and other factors, some of which are beyond Brady’s control, that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For Brady, uncertainties arise from the length or severity of the current worldwide economic downturn or timing or strength of a subsequent recovery; future financial performance of major markets Brady serves, which include, without limitation, telecommunications, manufacturing, electrical, construction, laboratory, education, governmental, public utility, computer, transportation; difficulties in making and integrating acquisitions; risks associated with newly acquired businesses; Brady’s ability to develop and successfully market new products; changes in the supply of, or price for, parts and components; increased price pressure from suppliers and customers; fluctuations in currency rates versus the US dollar; unforeseen tax consequences; potential write-offs of Brady’s substantial intangible assets; Brady’s ability to retain significant contracts and customers; risks associated with international operations; Brady’s ability to maintain compliance with its debt covenants; technology changes; business interruptions due to implementing business systems; environmental, health and safety compliance costs and liabilities; future competition; interruptions to sources of supply; Brady’s ability to realize cost savings from operating initiatives; difficulties associated with exports; risks associated with restructuring plans; risks associated with obtaining governmental approvals and maintaining regulatory compliance; and numerous other matters of national, regional and global scale, including those of a political, economic, business, competitive and regulatory nature contained from time to time in Brady’s U.S. Securities and Exchange Commission filings, including, but not limited to, those factors listed in the “Risk Factors” section located in Item 1A of Part I of Brady’s Form 10-K for the year ended July 31, 2011. These uncertainties may cause Brady’s actual future results to be materially different than those expressed in its forward-looking statements. Brady does not undertake to update its forward-looking statements.
                 
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
(Dollars in Thousands, Except Per Share Amounts)
 
(Unaudited)
 
Three Months Ended January 31, Six Months Ended January 31,
Percentage Percentage
2012 2011 Change 2012 2011 Change
Net sales $ 320,584 $ 329,009 -2.6 % $ 670,092 $ 658,597 1.7 %
Cost of products sold 167,279   169,999   -1.6 % 348,956   335,075   4.1 %
Gross margin 153,305 159,010 -3.6 % 321,136 323,522 -0.7 %
 
Operating expenses:
Research and development 9,972 11,732 -15.0 % 19,781 21,676 -8.7 %
Selling, general and administrative 104,843 108,064 -3.0 % 213,775 217,388 -1.7 %
Restructuring charges - 2,134 -100.0 % - 5,775 -100.0 %
Impairment charge 115,688   -   100.0 % 115,688   -   100.0 %
 
Total operating expenses 230,503 121,930 89.0 % 349,244 244,839 42.6 %
 
Operating (loss) income (77,198 ) 37,080 -308.2 % (28,108 ) 78,683 -135.7 %
 
Other income and (expense):
Investment and other income 812 1,174 -30.8 % 610 1,464 -58.3 %
Interest expense (4,933 ) (5,850 ) -15.7 % (9,980 ) (11,537 ) -13.5 %
 
(Loss) income before income taxes (81,319 ) 32,404 -351.0 % (37,478 ) 68,610 -154.6 %
 
Income taxes 8,635   8,205   5.2 % 19,744   18,130   8.9 %
 
Net (loss) income $ (89,954 ) $ 24,199   -471.7 % $ (57,222 ) $ 50,480   -213.4 %
 
 
Per Class A Nonvoting Common Share:
Basic net (loss) income $ (1.72 ) $ 0.46 -473.9 % $ (1.09 ) $ 0.96 -213.5 %
Diluted net (loss) income $ (1.72 ) $ 0.46 -473.9 % $ (1.09 ) $ 0.95 -214.7 %
Dividends $ 0.185 $ 0.18 2.8 % $ 0.37 $ 0.36 2.8 %
 
Per Class B Voting Common Share:
Basic net (loss) income $ (1.72 ) $ 0.46 -473.9 % $ (1.11 ) $ 0.94 -218.1 %
Diluted net (loss) income $ (1.72 ) $ 0.46 -473.9 % $ (1.11 ) $ 0.94 -218.1 %
Dividends $ 0.185 $ 0.18 2.8 % $ 0.35 $ 0.34 2.9 %
 
Weighted average common shares outstanding (in thousands):
Basic 52,447 52,593 52,552 52,521
Diluted 52,447 53,053 52,552 52,932
   
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Dollars in Thousands)
(Unaudited)
January 31, 2012 July 31, 2011
 

ASSETS
 
Current assets:
Cash and cash equivalents $ 380,331 $ 389,971
Accounts receivable - net 215,929 228,483
Inventories:
Finished products 67,867 62,152
Work-in-process 16,343 14,550
Raw materials and supplies 27,905   27,484  
Total inventories 112,115 104,186
Prepaid expenses and other current assets 39,316   35,647  
 
Total current assets 747,691 758,287
 
Other assets:
Goodwill 666,907 800,343
Other intangible assets 79,090 89,961
Deferred income taxes 51,124 53,755
Other 19,205 19,244
 
Property, plant and equipment:
Cost:
Land 6,132 6,406
Buildings and improvements 101,452 104,644
Machinery and equipment 302,568 305,557
Construction in progress 14,418   11,226  
424,570 427,833
 
Less accumulated depreciation 292,426   287,918  
 
Property, plant and equipment - net 132,144   139,915  
 
Total $ 1,696,161   $ 1,861,505  
 

LIABILITIES AND STOCKHOLDERS' INVESTMENT
 
Current liabilities:
Accounts payable $ 81,140 $ 98,847
Wages and amounts withheld from employees 41,926 69,798
Taxes, other than income taxes 7,925 7,612
Accrued income taxes 16,599 9,954
Other current liabilities 51,744 54,406
Current maturities on long-term debt 61,264   61,264  
 
Total current liabilities 260,598 301,881
 
Long-term obligations, less current maturities 323,071 331,914
 
Other liabilities 65,550   71,518  
 
Total liabilities 649,219 705,313
 
Stockholders' investment:
Common stock:
Class A nonvoting common stock - Issued 51,261,487 and 51,261,487 shares, respectively and outstanding 48,927,002 and 49,284,252 shares, respectively 513 513
Class B voting common stock - Issued and outstanding, 3,538,628 shares 35 35
Additional paid-in capital 311,677 307,527
Earnings retained in the business 712,425 789,100
Treasury stock - 2,024,485 and 1,667,235 shares, respectively of Class A nonvoting common stock, at cost (58,869 ) (50,017 )
Accumulated other comprehensive income 85,259 113,898
Other (4,098 ) (4,864 )
 
Total stockholders' investment 1,046,942   1,156,192  
 
Total $ 1,696,161   $ 1,861,505  
   
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Dollars in Thousands) (Unaudited)
Six Months Ended
January 31,
2012 2011
Operating activities:
Net (loss) income $ (57,222 ) $ 50,480
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 22,176 25,502
Non-cash portion of restructuring charges - 1,714
Non-cash portion of stock-based compensation expense 5,506 6,869
Impairment charge 115,688 -
Gain on divestiture of business - (4,394 )
Deferred income taxes (4,831 ) (4,926 )
Changes in operating assets and liabilities
(net of effects of business acquisitions/divestitures):
Accounts receivable 6,029 (11,938 )
Inventories (11,814 ) (879 )
Prepaid expenses and other assets (5,155 ) 2,384
Accounts payable and accrued liabilities (36,297 ) (13,792 )
Income taxes 9,221   6,589  
Net cash provided by operating activities 43,301 57,609
 
Investing activities:
Purchases of property, plant and equipment (11,100 ) (9,045 )
Payments of contingent consideration (2,580 ) (979 )
Settlement of net investment hedges (797 ) -
Acquisition of business, net of cash acquired - (7,970 )
Divestiture of business, net of cash retained in business - 12,979
Other (128 ) (494 )
Net cash used in investing activities (14,605 ) (5,509 )
 
Financing activities:
Payment of dividends (19,452 ) (18,954 )
Proceeds from issuance of common stock 2,301 4,909
Purchase of treasury stock (12,309 ) -
Income tax benefit from the exercise of stock options and deferred
compensation distribution, and other 566   359  
Net cash used in financing activities (28,894 ) (13,686 )
 
Effect of exchange rate changes on cash (9,442 ) 9,048
 
Net (decrease) increase in cash and cash equivalents (9,640 ) 47,462
Cash and cash equivalents, beginning of period 389,971   314,840  
 
Cash and cash equivalents, end of period $ 380,331   $ 362,302  
 
Supplemental disclosures:
Cash paid during the period for:
Interest, net of capitalized interest $ 9,521 $ 9,138
Income taxes, net of refunds 16,189 17,398
Acquisitions:
Fair value of assets acquired, net of cash $ - $ 4,624
Liabilities assumed - (1,446 )
Goodwill -   4,792  
Net cash paid for acquisitions $ -   $ 7,970  
           
Information by regional segment for the three and six months ended January 31, 2012 and 2011 is as follows:
                         
Corporate
Asia- Total and
(in thousands)   Americas   Europe   Pacific   Region   Eliminations   Total
SALES TO EXTERNAL CUSTOMERS
Three months ended:
January 31, 2012   $ 138,406     $ 95,593     $ 86,586     $ 320,585       -     $ 320,585  
January 31, 2011   $ 136,011     $ 104,041     $ 88,957     $ 329,009       -     $ 329,009  
                         
Six months ended:
January 31, 2012   $ 292,267     $ 192,949     $ 184,876     $ 670,092       -     $ 670,092  
January 31, 2011   $ 281,999     $ 196,091     $ 180,507     $ 658,597       -     $ 658,597  
                         
SALES INFORMATION
Three months ended January 31, 2012:
Organic     2.9 %     -5.7 %     -4.4 %     -1.8 %     -       -1.8 %
Currency     -0.7 %     -1.5 %     1.7 %     -0.4 %     -       -0.4 %
Acquisitions/Divestitures     -0.4 %     -0.9 %     0.0 %     -0.4 %     -       -0.4 %
Total     1.8 %     -8.1 %     -2.7 %     -2.6 %     -       -2.6 %
                         
Six months ended January 31, 2012:
Organic     4.4 %     -1.3 %     -2.3 %     0.9 %     -       0.9 %
Currency     -0.2 %     1.0 %     3.6 %     1.1 %     -       1.1 %
Acquisitions/Divestitures     -0.5 %     -1.3 %     1.1 %     -0.3 %     -       -0.3 %

Total
    3.7 %     -1.6 %     2.4 %     1.7 %     -       1.7 %
                         
SEGMENT PROFIT
Three months ended:
January 31, 2012   $ 35,798     $ 26,562     $ 7,733     $ 70,093       ($2,359 )   $ 67,734  
January 31, 2011   $ 31,015     $ 29,165     $ 11,524     $ 71,704       ($5,088 )   $ 66,616  
Percentage change     15.4 %     -8.9 %     -32.9 %     -2.2 %         1.7 %
                         
Six months ended:
January 31, 2012   $ 79,028     $ 52,861     $ 21,037     $ 152,926       ($5,622 )   $ 147,304  
January 31, 2011   $ 70,374     $ 53,226     $ 28,353     $ 151,953       ($8,525 )   $ 143,428  
Percentage change     12.3 %     -0.7 %     -25.8 %     0.6 %         2.7 %
 
 
         
NET INCOME RECONCILIATION (in thousands)      
    Three months ended: Six months ended:
January 31, January 31, January 31, January 31,
    2012   2011 2012   2011
Total profit for reportable segments   $ 70,093     $ 71,704   $ 152,926     $ 151,953  
Corporate and eliminations     (2,359 )     (5,088 )   (5,622 )     (8,525 )
Unallocated amounts:              
Administrative costs     (29,244 )     (27,402 )   (59,724 )     (58,970 )
Restructuring charges     -       (2,134 )   -       (5,775 )
Impairment charge     (115,688 )     -     (115,688 )     -  
Investment and other income     812       1,174     610       1,464  
Interest expense     (4,933 )     (5,850 )   (9,980 )     (11,537 )
(Loss) income before income taxes     (81,319 )     32,404     (37,478 )     68,610  
Income taxes     (8,635 )     (8,205 )   (19,744 )     (18,130 )
Net (loss) income   $ (89,954 )   $ 24,199   $ (57,222 )   $ 50,480  
         
NON-GAAP MEASURES
(in thousands)
   
 
In accordance with the U.S. Securities and Exchange Commission’s Regulation G, the following provides definitions of the non-GAAP measures used in the earnings release and the reconciliation to the most closely related GAAP measure.
 
 
EBITDA:
Brady is presenting EBITDA because it is used by many of our investors and lenders, and is presented as a convenience to them. EBITDA represents net income before interest expense, income taxes, depreciation and amortization and non-cash impairment charges. EBITDA is not a calculation based on generally accepted accounting principles ("GAAP"). The amounts included in the EBITDA calculation, however, are derived from amounts included in the Condensed Consolidated Statements of Income data. EBITDA should not be considered as an alternative to net income or operating income as an indicator of the Company's operating performance, or as an alternative to operating cash flows as a measure of liquidity. The EBITDA measure presented may not always be comparable to similarly titled measures reported by other companies due to differences in the components of the calculation.
 
Fiscal 2012
 

Q1

Q2

Q3

Q4

Total
EBITDA:
Net (loss) income $ 32,732 $ (89,954 ) $ (57,222 )
Interest expense 5,047 4,933 9,980
Income taxes 11,109 8,635 19,744
Depreciation and amortization 11,241 10,935 22,176
Impairment charge   -     115,688               115,688  
 
EBITDA (non-GAAP measure) $ 60,129   $ 50,237     $ -   $ -     $ 110,366  
 
Fiscal 2011
 

Q1

Q2

Q3

Q4

Total
EBITDA:
Net income $ 26,281 $ 24,199 $ 28,589 $ 29,583 $ 108,652
Interest expense 5,687 5,850 5,103 5,484 22,124
Income taxes 9,925 8,205 8,607 8,669 35,406
Depreciation and amortization   12,594     12,908       12,020     11,305       48,827  
 
EBITDA (non-GAAP measure) $ 54,487   $ 51,162     $ 54,319   $ 55,041     $ 215,009  
 
 
 
Diluted Earnings Per Share Excluding Impairment and Restructuring Charges:
This is a measure of the Company’s diluted net earnings per share excluding the current year Asia non-cash goodwill impairment charge and prior year restructuring charges. We do not view these items to be part of our sustainable results. We believe this earnings per share measure provides an important perspective of underlying business trends and results and provides a more comparable measure of year-on-year earnings per share growth. The table below provides a reconciliation of diluted net earnings per share to diluted earnings per share excluding the impairment and restructuring charges:
 
Three Months Ended Six Months Ended
January 31,   January 31,
2012   2011   2012   2011
Diluted (Loss) Earnings per Share $ (1.72 ) $ 0.46 $ (1.09 ) $ 0.95
Non-Cash Goodwill Impairment 2.21 - 2.21 -
Restructuring Charges - 0.02 - 0.08
Diluted Earnings per Share Excluding              
Impairment and Restructuring Charges $ 0.49     $ 0.48   $ 1.12     $ 1.03  
 
 
 
Net Income Excluding Impairment and Restructuring Charges:
This is a measure of the Company’s net income excluding the current year Asia non-cash goodwill impairment charge and prior year restructuring charges. We do not view these items to be part of our sustainable results. We believe this net income measure provides an important perspective of underlying business trends and results and provides a more comparable measure of year-on-year net income growth. The table below provides a reconciliation of net income to net income excluding the impairment charge and restructuring charges:
 
Three Months Ended Six Months Ended
January 31,   January 31,
2012   2011   2012   2011
Net (Loss) Income $ (89,954 ) $ 24,199 $ (57,222 ) $ 50,480
Non-Cash Goodwill Impairment 115,688 - 115,688 -
Restructuring Charges - 1,537 - 4,122
Net Income Excluding              
Impairment and Restructuring Charges $ 25,734     $ 25,736   $ 58,466     $ 54,602  
 
 
 
All reconciling items are presented net of tax. Tax effects are calculated consistent with the nature of the underlying transaction.

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