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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 30, 2003
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________to________
Commission File Number 1-14959
BRADY CORPORATION
-----------------
(Exact name of registrant as specified in its charter)
WISCONSIN 39-0178960
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6555 WEST GOOD HOPE ROAD, MILWAUKEE, WISCONSIN 53223
----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(414) 358-6600
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of May 20, 2003, there were outstanding 21,432,334 shares of Class A Common
Stock and 1,769,314 shares of Class B Common Stock. The Class B Common Stock,
all of which is held by an affiliate of the Registrant, is the only voting
stock.
FORM 10-Q
BRADY CORPORATION
INDEX
Page
----
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of
Income and Income Retained in the Business 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 17
PART II. Other Information
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Certifications 20
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
APRIL 30, 2003 JULY 31, 2002
-------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 68,631 $ 75,969
Accounts receivable, less allowance for losses ($3,574 and $3,206, 85,098 76,246
respectively)
Inventories 37,685 36,718
Prepaid expenses and other current assets 19,965 21,093
---------- ------------
TOTAL CURRENT ASSETS 211,379 210,026
OTHER ASSETS:
Goodwill - net 128,655 108,053
Other 26,292 21,555
---------- ------------
154,947 129,608
PROPERTY, PLANT AND EQUIPMENT:
Cost:
Land 5,155 5,612
Buildings and improvements 50,409 50,122
Machinery and equipment 138,159 127,955
Construction in progress 3,865 3,062
---------- ------------
197,588 186,751
Less accumulated depreciation 116,554 105,860
---------- ------------
NET PROPERTY, PLANT AND EQUIPMENT 81,034 80,891
---------- ------------
TOTAL $ 447,360 $ 420,525
========== ============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 27,198 $ 26,294
Wages and amounts withheld from employees 29,120 26,251
Taxes, other than income taxes 2,614 2,396
Accrued income taxes 10,890 6,312
Other current liabilities 19,961 12,847
Short-term borrowings and current maturities on long-term debt 39 162
---------- ------------
TOTAL CURRENT LIABILITIES 89,822 74,262
LONG-TERM DEBT, LESS CURRENT MATURITIES 845 3,751
OTHER LIABILITIES 18,554 18,270
---------- ------------
TOTAL LIABILITIES 109,221 96,283
STOCKHOLDERS' INVESTMENT:
Preferred stock - 2,855
Class A nonvoting common stock - Issued and outstanding 21,426,467 214 214
and 21,356,605 shares, respectively
Class B voting common stock - Issued and outstanding 1,769,314 shares 18 18
Treasury stock - 18,262 and 4,548 class A common shares, at cost (509) (132)
Additional paid-in capital 43,566 41,526
Income retained in the business 293,562 287,674
Cumulative other comprehensive income (loss) 1,350 (7,665)
Other (62) (248)
---------- ------------
TOTAL STOCKHOLDERS' INVESTMENT 338,139 324,242
---------- ------------
TOTAL $ 447,360 $ 420,525
========== ============
See Notes to Condensed Consolidated Financial Statements
3
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND INCOME RETAINED IN THE BUSINESS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended April 30, Nine Months Ended April 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales $ 141,955 $ 130,533 $ 410,182 $ 381,123
Operating expenses:
Cost of products sold 68,826 63,516 203,180 187,591
Research and development 5,165 4,520 13,808 13,140
Selling, general and administrative 55,890 49,781 164,197 146,622
--------- --------- --------- ---------
Total operating expenses 129,881 117,817 381,185 347,353
Operating income 12,074 12,716 28,997 33,770
Other income and (expense):
Investment and other income - net 977 238 788 826
Interest expense (22) (15) (65) (34)
--------- --------- --------- ---------
Income before income taxes 13,029 12,939 29,720 34,562
Income taxes 4,432 4,464 10,107 11,954
--------- --------- --------- ---------
Net income 8,597 8,475 19,613 22,608
Income retained in business at beginning of period 289,508 282,329 287,674 276,779
Less dividends:
Redemption premium on preferred stock - - (171) -
Preferred stock - (65) - (195)
Common stock (4,543) (4,270) (13,554) (12,723)
--------- --------- --------- ---------
Income retained in business at end of period $ 293,562 $ 286,469 $ 293,562 $ 286,469
========= ========= ========= =========
Net income per class A nonvoting common share
Basic $ 0.37 $ 0.36 $ 0.84 $ 0.97
========= ========= ========= =========
Diluted $ 0.37 $ 0.36 $ 0.83 $ 0.96
========= ========= ========= =========
Net income per class B voting common share
Basic $ 0.37 $ 0.36 $ 0.81 $ 0.94
========= ========= ========= =========
Diluted $ 0.37 $ 0.36 $ 0.80 $ 0.93
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements
4
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
April 30,
2003 2002
-------- --------
Operating activities:
Net income $ 19,613 $ 22,608
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 13,112 11,799
Loss on sale of property, plant & equipment 71 605
Provision for losses on accounts receivable 833 963
Amortization of restricted stock 185 520
Changes in operating assets and liabilities (net of effects of business acquisitions):
Accounts receivable (1,159) (3,830)
Inventory 2,713 3,536
Prepaid expenses and other assets (1,468) 323
Accounts payable, accrued expenses and other liabilities 1,943 5,762
Income taxes 4,628 (1,196)
-------- --------
Net cash provided by operating activities 40,471 41,090
Investing activities:
Purchase of business (20,906) (12,749)
Termination of capital lease (791) -
Purchases of property, plant and equipment (11,593) (9,513)
Proceeds from sale of property, plant and equipment 56 102
Other investments (198) 20
-------- --------
Net cash used in investing activities (33,432) (22,140)
Financing activities:
Payment of dividends (13,725) (12,918)
Proceeds from issuance of class A common stock 2,040 3,646
Principal payments on debt (210) (1,369)
Redemption of preferred stock (2,855) -
Purchase of treasury stock (377) -
-------- --------
Net cash used in financing activities (15,127) (10,641)
Effect of exchange rate changes on cash 750 (850)
-------- --------
Net (decrease) increase in cash and cash equivalents (7,338) 7,459
Cash and cash equivalents, beginning of period 75,969 62,811
-------- --------
Cash and cash equivalents, end of period $ 68,631 $ 70,270
======== ========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 38 $ 155
Income taxes, net of refunds 8,045 11,726
Acquisitions:
Fair value of asset acquired, net of cash $ 14,460 $ 5,667
Liabilities assumed (9,264) (1,789)
Goodwill 15,710 8,871
-------- --------
Net cash paid for acquisitions $ 20,906 $ 12,749
======== ========
Termination of capital lease
Disposition of capital assets $ (2,574) $ -
Settlement of capital lease liability 3,365 -
-------- --------
Net cash paid for termination of capital lease $ 791 $ -
======== ========
See Notes to Condensed Consolidated Financial Statements
5
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended April 30, 2003
(Unaudited)
NOTE A - Basis of Presentation
The condensed consolidated financial statements included herein have
been prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of the
Company, the foregoing statements contain all adjustments, consisting only of
normal recurring accruals, necessary to present fairly the financial position of
the Company as of April 30, 2003 and July 3l, 2002, its results of operations
for the three months and nine months ended April 30, 2003 and 2002, and its cash
flows for the nine months ended April 30, 2003 and 2002. The condensed
consolidated balance sheet at July 31, 2002 has been derived from the audited
consolidated financial statements of that date and condensed. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts therein. Due to the inherent
uncertainty involved in making estimates, actual results in future periods may
differ from the estimates.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to rules and regulations of the Securities and Exchange Commission. Accordingly,
the condensed consolidated financial statements do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statement presentation.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the consolidated financial statements and the notes thereto
included in the Company's latest annual report on Form 10-K for the year ended
July 31, 2002.
It is not practical to segregate the amounts of raw material, work in
process or finished goods at the respective balance sheet dates.
NOTE B - New Pronouncements
In July 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") reached final consensus on EITF Issue No.
00-14, "Accounting for Certain Sales Incentives." EITF Issue No. 00-14 addresses
the recognition, measurement, and income statement classification for sales
incentives offered to customers. Sales incentives include discounts, coupons,
and generally any other offers that entitle a customer to receive a reduction in
the price of a product by submitting a claim for a refund or rebate. Under EITF
Issue No. 00-14, the reduction in or refund of the selling price of the product
resulting from any sales incentives should be classified as a reduction of
revenue. In July 2001, the EITF reached final consensus on EITF Issue No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products" (EITF Issue No. 00-25). EITF Issue No. 00-25 generally
requires that consideration, including equity instruments, given to a customer
be classified in a vendor's financial statements not as an expense, but as an
offset to revenue up to the amount of cumulative revenue recognized or to be
recognized. In November 2001, the EITF reached consensus on EITF Issue No.
01-09, "Accounting for Consideration Given by a Vendor to a Customer or Reseller
of the Vendor's Products" (EITF Issue No. 01-09). EITF Issue No. 01-09 clarifies
and modifies certain items discussed in EITF Issue No. 00-14 and EITF Issue No.
00-25. The Company adopted these new standards in the quarter ended April 30,
2002. The implementation of EITF Issue No. 00-14, EITF Issue No. 00-25, EITF
Issue No. 01-09, and the accompanying interpretive guidance did not have an
impact on the Company's financial position, results of operations, or cash
flows.
6
In August 2001, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 addresses the accounting for and the reporting
of the impairment or disposal of long-lived assets and was effective for the
Company on August 1, 2002. This pronouncement did not have a material effect on
the Company's financial results.
NOTE C - Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the nine months ended
April 30, 2003, are as follows:
Identification
Solutions & Graphics &
Specialty Workplace
Tapes Solutions Total
-------------- ------------ ------------
Balance as of July 31, 2002 $ 59,884,000 $ 48,169,000 $108,053,000
Goodwill acquired (including adjustments) 4,074,000 11,685,000 15,759,000
Translation adjustments 2,391,000 2,452,000 4,843,000
------------ ------------ ------------
Balance as of April 30, 2003 $ 66,349,000 $ 62,306,000 $128,655,000
============ ============ ============
Goodwill increased by $20,602,000 during the nine months ended April
30, 2003, including an increase of $4,843,000 attributable to the effects of
foreign currency translation. The acquisitions of TISCOR Inc., Cleere Advantage
Ltd. and Etimark GmbH resulted in $8,057,000, $1,492,000 and $3,654,000 of
additional goodwill, respectively. An additional payment of $2,000,000 related
to the fiscal 2002 Temtec, Inc. acquisition was earned and paid during the
period, resulting in additional goodwill of $2,000,000. Lastly, a holdback
payment and a purchase accounting adjustment related to the fiscal 2002
acquisitions of Strandware and Temtec, Inc., respectively, resulted in
additional goodwill of $556,000.
Other long-term assets include patents, trademarks, non-compete
agreements and other intangibles with finite lives being amortized in accordance
with SFAS No. 142, "Goodwill and Other Intangible Assets." The net book value of
these assets was $9,335,000 and $3,918,000 at April 30, 2003 and July 31, 2002,
respectively. At April 30, 2003, this amount consisted of $2,852,000 related to
patents and trademarks, $3,599,000 related to customer relationships, $1,960,000
related to software and $924,000 related to non-compete agreements. The amounts
related to customer relationships and software were acquired with the TISCOR,
Inc. and Cleere Advantage Ltd. acquisitions during the nine months ended April
30, 2003. The TISCOR, Inc. purchase accounting was finalized during the three
months ended April 30, 2003. The purchase accounting related to the Cleere
Advantage Ltd. and Etimark GmbH acquisitions is subject to change based on
completion of the final valuation of the assets purchased. Amortization expense
related to intangible assets was not material for the three and nine-month
periods ended April 30, 2003. The intangible assets have finite estimated lives
over which the value is amortized ranging from one to ten years.
NOTE D - Comprehensive Income
Total comprehensive income, which was comprised of net income, foreign
currency adjustments and net unrealized gains and losses from cash flow hedges,
amounted to approximately $11,445,000 and $9,938,000 for the three months ended
April 30, 2003 and 2002, respectively, and $28,628,000 and $23,080,000 for the
nine months ended April 30, 2003 and 2002, respectively.
7
NOTE E - Net Income Per Common Share
Reconciliations of the numerator and denominator of the basic and
diluted per share computations for the Company's Class A and Class B common
stock are summarized as follows:
Fiscal 2003 Fiscal 2002
----------- -----------
(Dollars in thousands, except per share amounts) 3rd Quarter Nine-months 3rd Quarter Nine-months
================================================ ----------- ----------- ----------- -----------
Numerator:
Net income $ 8,597 $ 19,613 $ 8,475 $ 22,608
Less: Preferred stock dividends and premium on
redemption of preferred stock - (171) (65) (195)
-------- -------- -------- --------
Numerator for basic and diluted
Class A net income per share 8,597 19,442 8,410 22,413
Less: Preferential dividends - (711) - (705)
--------
Less: Preferential dividends on
dilutive stock options - (7) - (10)
-------- -------- -------- --------
Numerator for basic and diluted
Class B net income per share $ 8,597 $ 18,724 $ 8,410 $ 21,698
======== ======== ======== ========
Denominator:
Denominator for basic net income per
share for both Class A and Class B 23,183 23,151 23,053 22,995
Plus: Effect of dilutive stock options 152 192 392 339
-------- -------- -------- --------
Denominator for diluted net income per
share for both Class A and Class B 23,335 23,343 23,445 23,334
======== ======== ======== ========
Class A common stock net income per share:
Basic $ 0.37 $ 0.84 $ 0.36 $ 0.97
Diluted $ 0.37 $ 0.83 $ 0.36 $ 0.96
Class B common stock net income per share:
Basic $ 0.37 $ 0.81 $ 0.36 $ 0.94
Diluted $ 0.37 $ 0.80 $ 0.36 $ 0.93
Options to purchase 1,108,000 shares of class A common stock were not
included in the computation of diluted net income per share for the three months
ended April 30, 2003, because the option exercise price was greater than the
average market price of the common shares and, therefore, the effect would be
antidilutive.
Options to purchase 799,000 shares of class A common stock were not
included in the computation of diluted net income per share for the nine months
ended April 30, 2003 because the option exercise price was greater than the
average market price of the common shares and, therefore, the effect would be
antidilutive.
8
NOTE F - Acquisitions
In April 2003, the Company acquired Etimark GmbH, located in Bad
Nauheim, Germany, a leading provider of complete barcode solutions including
labels, printers, applicators and software for the German Market. In February
2003, the Company acquired Cleere Advantage Ltd., a small printing system
distributor, located in the United Kingdom. The combined purchase price for the
two acquisitions was approximately $5,100,000 in cash and $2,100,000 in notes
payable. Preliminary allocation of the purchase price of these acquisitions has
been made based on the carrying values recorded by the acquired entities. The
purchase price allocation is preliminary and pending the outcome of valuations
of the acquired entities, which are in progress. Approximately $5,100,000 was
assigned to goodwill in the preliminary allocation of the purchase price.
In January 2003, the Company acquired TISCOR, Inc., located in Poway,
California, an innovator in mobile workforce automation solutions, and an
industry leader in designing hand-held-computer software for technicians
performing site and equipment inspections. The purchase price was approximately
$13,500,000 in cash. The agreement includes provisions for contingent payments
up to a maximum of $3,000,000 based on the earnings of the acquired entity in
calendar years ending December 31, 2003 and 2004. The results of its operations
have been included since the respective date of acquisition in the accompanying
condensed consolidated financial statements. The allocation of the purchase
price resulted in the allocation to intangible assets as follows: $8,057,000 to
goodwill, $2,900,000 to customer relationships and $2,100,000 to software. The
pro-forma results assuming the acquisitions had been consummated as of the
beginning of the periods presented are not significant.
NOTE G - Restructuring
During the fourth quarters of fiscal 2002 and 2001, the Company
recorded nonrecurring charges of $3,030,000 and $9,560,000, respectively,
related primarily to facilities consolidations and workforce reductions.
Reconciliations of activity with respect to the Company's restructuring actions
are as follows:
Fiscal 2002 Fiscal 2001
Restructuring Restructuring
------------- -------------
Ending reserve balance, July 31, 2002 $ 2,239,000 $ 1,748,000
Fiscal 2003 first quarter activity:
Cash payments associated with severance, leases and other (542,000) (394,000)
Fiscal 2003 second quarter activity:
Cash payments associated with severance, leases and other (319,000) (551,000)
Non-cash asset write-offs (59,000) -
Fiscal 2003 third quarter activity:
Cash payments associated with severance, leases and other (170,000) (199,000)
Non-cash asset write-offs - (40,000)
----------- -----------
Ending reserve balance, April 30, 2003 $ 1,149,000 $ 564,000
=========== ===========
NOTE H - Preferred Stock Redemption
On August 1, 2002, all Cumulative Preferred Stock was redeemed at a 6%
premium for approximately $3 million. Each share of $100 par value Cumulative
Preferred Stock was entitled to receive cumulative cash dividends and could be
redeemed, under certain circumstances, by the Company at par value plus accrued
dividends plus a premium of 6% of the par value. Such shares, which were held by
the initial holder thereof, were subject to redemption only if the holder
consented thereto.
9
NOTE I - Segment Information
The Company's reportable segments are business units that are each
managed separately because they manufacture and/or distribute distinct products
to differentiated markets. The Company has two reportable segments: the
Identification Solutions & Specialty Tapes Group and the Graphics and Workplace
Solutions Group. In April 2003, the Company announced a new regional based
management structure. The Company continues to internally evaluate its fiscal
2003 results under the historical group structure. As a result, the Company will
begin to report segment information by Americas, Europe and Asia in fiscal 2004,
when they are fully operational.
Following is a summary of segment information for the three months ended April
30, 2003 and 2002:
Identification
Solutions & Graphics & Corporate
Specialty Workplace and
(Dollars in Thousands) Tapes Solutions Eliminations Totals
-------------- ---------- ------------ ------
Three months ended April 30, 2003:
Revenues from external customers $ 55,872 $ 86,083 - $141,955
Intersegment revenues 71 337 ($ 408) -
Profit (loss) 6,895 20,802 (847) 26,850
Three months ended April 30, 2002:
Revenues from external customers $ 54,658 $ 75,875 - $130,533
Intersegment revenues 58 225 ($ 283) -
Profit (loss) 6,987 20,019 (549) 26,457
Following is a summary of segment information for the nine months ended April
30, 2003 and 2002:
Identification
Solutions & Graphics & Corporate
Specialty Workplace and
(Dollars in Thousands) Tapes Solutions Eliminations Totals
-------------- ---------- ------------ ------
Nine months ended April 30, 2003:
Revenues from external customers $170,110 $240,072 - $410,182
Intersegment revenues 315 676 ($ 991) -
Profit (loss) 22,429 53,202 (2,503) 73,128
Nine months ended April 30, 2002:
Revenues from external customers $165,452 $215,671 - $381,123
Intersegment revenues 386 1,388 ($ 1,774) -
Profit (loss) 22,142 54,129 (1,643) 74,628
10
Following is a reconciliation of profit for the three and nine months ended
April 30, 2003 and 2002:
Fiscal 2003 Fiscal 2002
----------- -----------
(Dollars in Thousands) 3rd Quarter Nine-months 3rd Quarter Nine-months
----------- ----------- ----------- -----------
Total profit from reportable segments $ 27,697 $ 75,631 $ 27,006 $ 76,271
Corporate and eliminations (847) (2,503) (549) (1,643)
Unallocated amounts:
Administrative costs (14,055) (41,682) (13,342) (39,105)
Interest-net 148 528 111 505
Foreign exchange 806 194 111 285
Other (720) (2,448) (398) (1,751)
-------- -------- -------- --------
Income before income taxes $ 13,029 $ 29,720 $ 12,939 $ 34,562
======== ======== ======== ========
NOTE J - Pro Forma Stock-Based Compensation
The Company has stock-based compensation plans under which stock
options are granted to various officers, directors and other employees of the
Company with exercise prices equal to the fair market value at the date of
grant. Stock options were issued during the nine months ended April 30, 2003
under stock-based compensation plans previously approved by shareholders.
Generally, these options are not exercisable until one-year after the grant
date, and will be exercisable thereafter, to the extent of one-third per year,
and have a maximum term of ten years.
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company has elected to account for its employee stock option plans under APB
Opinion No. 25, "Accounting for Stock Issued to Employees," which recognizes
expense based on the intrinsic value at date of grant. As stock options have
been issued with exercise prices equal to grant date fair value, no compensation
cost has resulted. Had compensation cost for all options granted been determined
based on the fair value at grant date consistent with SFAS No. 123, the
Company's net earnings and earnings per share would have been as follows:
Three Months Ended Nine Months Ended
April 30 April 30
-------- --------
(In thousands, except per share amounts) 2003 2002 2003 2002
---- ---- ---- ----
Net earnings
As reported $ 8,597 $ 8,475 $ 19,613 $ 22,608
Pro forma expense 525 510 1,497 1,529
Pro forma 8,072 7,965 18,116 21,079
Net earnings per class A common share
Basic
As reported $ 0.37 $ 0.36 $ 0.84 $ 0.97
Pro forma adjustments (0.02) (0.02) (0.06) (0.06)
Pro forma 0.35 0.34 0.78 0.91
Diluted
As reported 0.37 0.36 0.83 0.96
Pro forma adjustments (0.02) (0.02) (0.06) (0.06)
Pro forma 0.35 0.34 0.77 0.90
The assumptions used to calculate the fair value of new options granted
are evaluated and revised, as necessary, to reflect market conditions and
experience.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
For the three months ended April 30, 2003, sales of $141,955,000 were
8.8% higher than the same quarter of the previous year. For the nine months
ended April 30, 2003, sales of $410,182,000 were 7.6% higher than the same
period last year. Sales of the Company's international operations increased
18.7% for the quarter and 14.6% for the nine-month period ended April 30, 2003.
This increase was aided by the positive effect of fluctuations in the exchange
rates used to translate financial results into United States currency, which
increased international sales by 14.0% in the quarter and 9.6% for the
nine-month period ended April 30, 2003. The acquisition of Cleere Advantage Ltd.
increased international sales by 0.7% for the quarter. The acquisition of Cleere
Advantage Ltd. combined with the acquisition of Safety Signs Service increased
international sales by 0.6% for the nine-month period. Sales of the Company's
United States operations decreased 0.5% in the quarter and increased 1.2% for
the nine-month period ended April 30, 2003. The acquisitions of Temtec, Inc. and
TISCOR Inc. increased U.S. sales by 4.4% for the quarter and 3.8% for the
nine-month period. U.S. base sales declined 4.9% for the three-month period and
2.6% for the nine-month period ended April 30, 2003. The decrease in the
three-month period was due to the continued shift of business away from the
United States within the Identification Solutions and Specialty Tapes Group and
sales declines when compared to the same period of the prior year, which
included higher sales related to the introduction of the ID Pal Identification
Product. In addition, the decrease in U.S. base sales for the nine-month period
was due to a business disruption caused by the process of converting the North
American direct marketing operations to SAP.
The cost of products sold as a percentage of sales decreased from 48.7%
to 48.5% for the quarter and increased from 49.2% to 49.5% for the nine-month
period ended April 30, 2003 compared to the same periods of the previous year.
The decrease for the quarter was due to the growth in the higher margin Graphics
& Workplace Solutions Group outpacing growth in the Identification Solutions and
Specialty Tapes Group. The increase for the nine-month period was due primarily
to the conversion of our North American direct marketing operations to SAP in
December 2002, which caused depressed sales levels in that business. Selling,
general and administrative (SG&A) expenses as a percentage of sales increased to
39.4% for the quarter compared to 38.1% for the same quarter of the prior year.
The increase, as a percentage of sales, was due to higher administrative
expenses associated with acquired businesses and increased spending in our
European direct marketing operation. For the nine months ended April 30, 2003,
this percentage was 40.0% compared to 38.5% for the same period last year. The
increase for the nine-month period, as a percentage of sales, was due to higher
administrative expenses associated with acquired businesses, increased catalog
expansion programs in our European direct marketing operation, temporary
expenses related to a North American SAP implementation in the direct marketing
operations and general cost increases including pay and benefit cost increases
throughout the organization.
Research and development expenditures increased 14.3% for the quarter
and 5.1% for the nine months ended April 30, 2003 over the same periods last
year. As a percentage of sales, research and development expenses increased from
3.5% to 3.6% for the quarter and were flat at 3.4% for the nine-month period,
compared to the prior year.
Operating income was $12,074,000 for the quarter and $28,997,000 for
the nine-month period ended April 30, 2003, compared to $12,716,000 and
33,770,000 for the same periods last year because of the factors cited above.
Investment and other income increased $739,000 for the quarter and
decreased $38,000 for the nine-month period ended April 30, 2003, compared to
the same periods last year due to the net effect of foreign exchange, primarily
on intercompany transactions.
12
Income before income taxes increased 0.7% for the quarter and decreased
14.0% for the nine-month period ended April 30, 2003, compared to the same
periods last year. The Company's effective tax rate was 34.0% for the quarter
and for the nine-month period ended April 30, 2003, compared to 34.5% for the
quarter and 34.6% for the nine months ended April 30, 2002.
Net income for the three months ended April 30, 2003 increased 1.4% to
$8,597,000 compared to $8,475,000 for the same quarter of the previous year. For
the nine months ended April 30, 2003, net income decreased 13.2% to $19,613,000
from $22,608,000 for the same period last year. On a class A common share basis,
diluted net income for the three months ended April 30, 2003, was $0.37 compared
to $0.36 per share for the same quarter of the previous year. For the nine
months ended April 30, 2003, class A common share diluted net income was $0.83
compared to $0.96 for the same period last year.
In May 2003, the company announced that it plans to consolidate certain
facilities around the world and combine sales and marketing efforts throughout
North America and Europe. These efforts will result in a global workforce
reduction of about 10%. As a result, the Company expects to incur costs related
to this restructuring of $10 to $13 million pretax ($6.6 to $8.6 million after
tax), with $7 to $10 million pretax ($4.6 to $6.6 million after tax) occuring in
the fourth quarter of fiscal 2003 and the remainder in fiscal 2004. For the
current fiscal year, management expects sales to be in the range of $550 to $560
million and earnings to be in the range of $0.90 to $1.00 per diluted class A
common share, including the restructuring charges of $0.20 to $0.28 per share.
The Company expects sales for the next fiscal year, ending July 31, 2004 of $575
to $610 million and earnings of $1.50 to $1.65 per diluted class A common share,
including any charges associated with the restructuring discussed above.
Business Segment Operating Results
Identification Solutions & Specialty Tapes (ISST) Group:
ISST sales increased 2.2% for the three months ended April 30, 2003 and
2.8% for the nine-month period then ended, compared to the same periods last
year. Base sales in local currency decreased 3.3% for the three-month period
ended April 30, 2003 and 1.1% for the nine-month period then ended. The decrease
in base sales was offset by the positive effect of fluctuations in the exchange
rates used to translate financial results into United States dollar, which
increased sales within the group by 5.5% and 3.6% for the three-month and
nine-month periods, respectively. Acquisitions increased sales over the prior
year 0.3% for the nine-month period.
North American base sales declined by 8.9% and 4.0% for the three and
nine-month periods ended April 30, 2003, respectively. Approximately half of the
base sales decline, for the three-month period, was due to higher sales in the
prior year resulting from the initial stocking packages for the introduction of
the ID Pal identification product. The remaining sales decline was in the
electronics, industrial and telecommunications markets, in which production
continued to move outside of the United States.
In Asia, base sales increased 5.0% in local currencies, for the three
month period ended April 30, 2003 due to increased sales in China and Malaysia,
which was partially offset by lower sales in the disk drive market and
reductions in the scale of our Korean operations. Base sales decreased 4.5%, in
local currencies, for the nine-month period due to a decline in sales to the
disk drive market over the same period last year and reductions in the scale of
our Korean operations. This decline for the nine-month period was partially
offset by strong growth in China and Malaysia.
13
In local currencies, base sales in Europe decreased 0.2% for the
three-month period and increased 3.9% for the nine-month period. The base
decrease for the three-month period was due to a weakening economy in Europe.
The base increase for the nine-month period, excluding acquisitions, was due to
strong performance in the automotive and telecommunications industries. Foreign
currency translation increased sales 22.0% for the three-month period and 15.6%
for the nine-month period.
Latin American base sales in local currencies increased 39.0% for the
three-month period and 35.5% for the nine-month period, while sales in United
States dollars increased 2.1% for the three-month period and 2.0% for the
nine-month period compared to the same periods last year.
Profit as a percentage of sales decreased from 12.8% to 12.3% for the
three-month period ended April 30, 2003 and from 13.4% to 13.2% for the
nine-month period compared to the same periods in the prior year. Both decreases
were a result of slight declines in gross margin as a percentage of sales.
Graphics & Workplace Solutions Group:
Graphics & Workplace Solutions' sales increased 13.5% for the
three-month period and 11.3% for the nine-month period ended April 30, 2003
compared to the same periods last year. Base sales in local currency increased
1.3% in the three-month period and 2.2% for the nine-month period. Sales were
positively affected by fluctuations in the exchange rates used to translate
financial results into United States dollars, which increased sales within the
group by 7.6% in the three-month period and 5.4% for the nine-month period.
Sales were also aided by acquisitions, which increased sales 4.5% for the
three-month period and 3.7% for the nine-month period, compared to the same
periods in the prior year.
North American base sales decreased 0.5% in the three-month period and
0.9% in the nine-month period. For the three-month period, the base sales
decline reflects a continued softening in the U.S. direct marketing end markets.
In addition to the softening of the end markets in the U.S., base sales in the
nine-month period declined due to temporary disruptions related to a SAP
implementation in the direct marketing businesses in North America. The
acquisitions of Temtec, Inc. and TISCOR Inc. added 6.9% to sales for the
three-month period and 5.8% for the nine-month period.
Europe's base sales, in local currencies, increased 3.3% for the
three-month period and 4.9% for the nine-month period. The base sales increase
for both periods was due to growth in France and Italy, partially offset by
slight decreases in Germany and Belgium. In addition to the base sales increase,
the positive impact of foreign currency exchange increased sales by 18.7% and
13.8% in the three-month and nine-month periods, respectively, due to the strong
Euro. The acquisition of Cleere Advantage Ltd. also increased the region's sales
by 1.8% and 0.6% in the three-month and nine-month periods, respectively.
Asia Pacific base sales, in local currencies, increased 4.2% for the
three-month period and 11.4% for the nine-month period. The base sales increase
for both periods was due to growth in Australia, which was offset slightly by a
decline in Japan due to the exit of the direct marketing business earlier this
fiscal year. Sales in Asia Pacific were also aided by the acquisition of Safety
Signs Service in Australia, which increased the region's sales in the nine-month
period by 3.5%.
Latin America base sales, in local currencies, increased 12.3% for the
three-month period and 27.5% for the nine-month period. This increase was more
than offset by the negative effect of fluctuations in the exchange rates used to
translate financial results into United States currency, which decreased sales
by 30.4% in the quarter and 31.4% for the nine-month period.
14
Profit as a percentage of sales decreased from 26.4% to 24.2% in the
three-month period and from 25.1% to 22.2% for the nine-month period. The
decrease in both periods was due to lower gross margins in the United States
related to the SAP conversion in the North American direct marketing business
and profit margins lower than historical base business for acquisitions, due to
integration costs.
Financial Condition
The Company's liquidity remains strong. The current ratio as of April
30, 2003 was 2.4, down from the current ratio at July 31, 2002 of 2.8. Cash and
cash equivalents were $68,631,000 at April 30, 2003, compared to $75,969,000 at
July 31, 2002. The decrease was primarily due to funding the acquisitions of
TISCOR Inc., Cleere Advantage Ltd., and Etimark GmbH, investments in property,
plant, and equipment, payment of dividends and redemption of preferred stock,
offset by strong operating cash flow. Working capital decreased $14,207,000
during the nine months ended April 30, 2003, to $121,557,000.
Cash flow from operations totaled $40,471,000 for the nine months ended
April 30, 2003, compared to $41,090,000 for the same period last year. The
decrease was the result of lower net income offset by changes in current
operating assets and liabilities, in local currencies, compared to the same
period of the prior year. Capital expenditures were $11,593,000 in the nine
months ended April 30, 2003, compared to $9,513,000 in the same period last
year. Cash used in financing activities was $15,127,000 for the nine-month
period ended April 30, 2003, resulting primarily from payments of dividends to
the Company's stockholders and redemption of preferred stock, offset by proceeds
from issuance of common stock associated with employee stock options. Cash flows
used in financing activities for the same period last year were $10,641,000
related to payment of dividends and debt payments, offset by proceeds from
issuance of common stock associated with employee stock options.
Long-term debt as a percentage of long-term debt plus stockholders'
investment was 0.2% and 1.1% at April 30, 2003 and July 31, 2002, respectively.
In November 2002, the Company successfully exited a capital lease of a domestic
facility. This capital lease represented approximately $3 million of the
long-term debt balance at July 31, 2002.
In April 2003, the Company decreased the maximum commitment under its
$200 million line of credit with a group of nine banks to $100 million, none of
which was being utilized as of April 30, 2003. No borrowings were made under the
line of credit during the nine months ended April 30, 2003. At April 30, 2003,
approximately $75.3 million of the line of credit (based on certain financial
ratios of the Company) was available to the Company. The Company is in
compliance with the covenants of the line of credit agreement.
The Company continues to seek opportunities to invest in new products,
new markets and strategic acquisitions and joint ventures, which fit its growth
strategy. Management believes that its cash and cash equivalents, the cash flow
it generates from operating activities and the available line of credit are
adequate to meet the Company's current and anticipated investing and financing
needs.
The strong liquidity of the Company and its continued strong cash flows
enable the company to execute a long-term strategic plan. This strategic plan
includes investments, which expand our current market share, open new markets
and geographies, develop new products and distribution channels and continue to
improve our processes. This strategic plan also includes executing key
acquisitions and joint ventures. Even in uncertain economic times, the Company's
strong liquidity allows it to continue with investments for the Company's
future. Should the Company remain in an unleveraged position during expansionary
times, the Company may experience a less rapid rate of growth compared to some
of its competitors.
15
The Company does not have material off-balance sheet arrangements or
related party transactions. The Company is not aware of factors that are
reasonably likely to adversely affect liquidity trends. However, the following
additional information is provided to assist financial statement users.
Operating Leases - These leases generally are entered into only for
non-strategic investments (e.g., warehouses, office buildings, computer
equipment) for which the economic profile is favorable.
Purchase Commitments - The Company has purchase commitments for
materials, supplies, services, and property, plant and equipment as part of the
ordinary conduct of business. Such commitments are not in excess of current
market prices. Due to the proprietary nature of many of the Company's materials
and processes, certain supply contracts contain penalty provisions for early
termination. The Company does not believe a material amount of penalties will be
incurred under these contracts based upon historical experience and current
expectations.
Other Contractual Obligations - The Company does not have material
financial guarantees or other contractual commitments that are reasonably likely
to adversely affect liquidity.
Related Party Transactions - The Company does not have any related
party transactions that materially affect the results of operations, cash flow
or financial condition.
Forward-Looking Statements
Except for historical information, the Company's reports to the
Securities and Exchange Commission on Form 10-K and Form 10-Q and periodic press
releases, as well as other public documents and statements, may contain
"forward-looking statements," as defined in the Private Securities Litigation
Reform Act of 1995. These forward-looking statements are often identified by
words such as "intend," "anticipate," "assume," "believe," "estimate," "expect,"
"plan," "project," "will," and other expressions, which refer to future events
and trends.
The ability of the Company to attain management's goals and objectives
is materially dependent on numerous factors. These factors, which include
economic conditions, currency fluctuations, cost of raw materials, reliance on
suppliers, new products, acquisitions, intellectual property, environmental
issues, political considerations and others, are more fully described in the
Company's 2002 Form 10-K filed with the Securities and Exchange Commission.
These factors, as well as the uncertain impact of the war with Iraq, other
geo-political events and the SARS virus, could cause actual results to differ
materially from those in the forward-looking statements. The Company undertakes
no obligation to publicly update or revise any forward-looking statements
whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's business operations give rise to market risk exposure due
to changes in foreign exchange rates. To manage that risk effectively, the
Company enters into hedging transactions, according to established guidelines
and policies, that enable it to mitigate the adverse effects of this financial
market risk.
The global nature of the Company's business requires active
participation in the foreign exchange markets. As a result of investments,
production facilities and other operations on a global scale, the Company has
assets, liabilities and cash flows in currencies other than the U.S. Dollar. The
primary objective of the Company's foreign-exchange risk management is to
minimize the impact of currency movements on intercompany transactions and
foreign raw-material imports. To achieve this objective, the Company hedges a
portion of known exposures using forward contracts. Main exposures are related
to transactions denominated in the British Pound, the Euro, Canadian Dollar,
Japanese Yen and Australian Dollar. The risk of these hedging instruments is not
material.
16
The Company could be exposed to interest rate risk through its
corporate borrowing activities. The objective of the Company's interest rate
risk management activities is to manage the levels of the Company's fixed and
floating interest rate exposure to be consistent with the Company's preferred
mix. The interest rate risk management program consists of entering into
approved interest rate derivatives when there is a desire to modify the
Company's exposure to interest rates. As of April 30, 2003, the Company has not
entered into any interest rate derivatives.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this Form 10-Q, Brady
Corporation management, including the Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rules 13a-14 and
15d-14(c). Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures are
effective in ensuring that all material information required to be filed in
this quarterly report has been made known to them in a timely fashion. There
have been no significant changes in internal controls, or in factors that could
significantly affect internal controls, subsequent to the date the Chief
Executive Officer and Chief Financial Officer completed their evaluation.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On February 20, 2003, the Company's Board of Directors announced the
election of Frank M. Jaehnert as President and Chief Executive Officer, and
Katherine M. Hudson as Chairman of the Board, both effective April 1, 2003. Mr.
Jaehnert was also appointed to the Company's Board of Directors. Mr. Jaehnert
previously served as Senior Vice President of the Company and President of the
Company's Identification Solutions and Specialty Tapes Group. From 1996 to 2002
he served as the Company's Chief Financial Officer. From 1995 to 1996 he served
as a Financial Director for the Company. Prior to joining the Company in 1995
he held various financial and management positions in both Germany and the
United States for Robert Bosch GmbH, headquartered in Stuttgart, Germany. A
native of Stuttgart, he holds the equivalent of a master of business
administration degree from the University of Stuttgart, Germany. Mrs. Hudson
has served as President and Chief Executive Officer of the Company since 1994.
17
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.24 Change of Control Agreement dated May 20,
2003, between Brady Corporation and Frank M.
Jaehnert
99.1 Written Statement of Chief Executive Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Written Statement of Chief Financial Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
A report on Form 8-K was filed on February 21, 2003,
relating to the election of Frank M. Jaehnert as
President and Chief Executive Officer, and Katherine
M. Hudson as Chairman of the Board, both effective
April 1, 2003.
A report on Form 8-K was furnished on February 21,
2003, relating to the announcement of the Company's
fiscal 2003 second quarter results.
A report on Form 8-K was filed on April 15, 2003,
relating to the appointment of David R. Hawke as
Executive Vice President, and announced a new
region-based organization structure.
18
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNATURES
BRADY CORPORATION
Date: June 13, 2003 /s/ F. M. Jaehnert
------------------
F.M. Jaehnert
President & Chief Executive Officer
Date: June 13, 2003 /s/ D.W. Schroeder
------------------
D.W. Schroeder
Sr. Vice President & Chief Financial Officer
(Principal Accounting Officer)
(Principal Financial Officer)
19
CERTIFICATIONS
I, Frank M. Jaehnert, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Brady Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 13, 2003
/s/ FRANK M. JAEHNERT
- -----------------------------
Frank M. Jaehnert
President and Chief Executive Officer
20
I, David W. Schroeder, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Brady Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 13, 2003
/s/ DAVID W. SCHROEDER
- -----------------------------
David W. Schroeder
Senior Vice President and Chief Financial Officer
21
EXHIBIT INDEX
10.24 Change of Control Agreement dated May 20, 2003,
between Brady Corporation and Frank M. Jaehnert
99.1 Written Statement of Chief Executive Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Written Statement of Chief Financial Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.