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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended January 31, 2004
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
---
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
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Commission File Number 1-14959
BRADY CORPORATION
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(Exact name of registrant as specified in its charter)
Wisconsin 39-0178960
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(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
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(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
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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 February 16, 2004, there were outstanding 21,873,849 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 18
Item 4. Controls and Procedures 18
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
JANUARY 31, 2004 JULY 31, 2003
---------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 58,211 $ 76,088
Accounts receivable, less allowance for losses ($3,764
and $3,166, respectively) 94,428 80,162
Inventories 45,302 36,564
Prepaid expenses and other current assets 20,434 22,343
---------------- -------------
TOTAL CURRENT ASSETS 218,375 215,157
OTHER ASSETS:
Goodwill 162,504 130,667
Other 23,978 24,455
---------------- -------------
186,482 155,122
PROPERTY, PLANT AND EQUIPMENT:
Cost:
Land 5,252 5,172
Buildings and improvements 53,767 51,471
Machinery and equipment 146,441 139,007
Construction in progress 5,880 3,245
---------------- -------------
211,340 198,895
Less accumulated depreciation 130,207 119,655
---------------- -------------
NET PROPERTY, PLANT AND EQUIPMENT 81,133 79,240
---------------- -------------
TOTAL $ 485,990 $ 449,519
================ =============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 31,075 $ 28,470
Wages and amounts withheld from employees 30,003 30,619
Taxes, other than income taxes 3,633 2,492
Accrued income taxes 13,206 11,449
Other current liabilities 21,988 17,320
Short-term borrowings and current maturities on long-term debt 21 929
---------------- ------------
TOTAL CURRENT LIABILITIES 99,926 91,279
LONG-TERM DEBT, LESS CURRENT MATURITIES 48 568
OTHER LIABILITIES 19,917 18,711
---------------- ------------
TOTAL LIABILITIES 119,891 110,558
STOCKHOLDERS' INVESTMENT:
Class A nonvoting common stock -- Issued and outstanding 21,873,849 219 216
and 21,558,265 shares, respectively
Class B voting common stock -- Issued and outstanding 1,769,314 shares 18 18
Additional paid-in capital 57,213 47,464
Income retained in the business 299,563 290,805
Cumulative other comprehensive income 10,615 1,595
Treasury stock -- 34,657 and 18,262 class A common shares,
respectively, at cost (1,074) (509)
Other (455) (628)
---------------- ------------
TOTAL STOCKHOLDERS' INVESTMENT 366,099 338,961
---------------- ------------
TOTAL $ 485,990 $ 449,519
================ ============
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 January 31, Six Months Ended January 31,
2004 2003 2004 2003
--------- --------- --------- ---------
Net Sales $ 152,948 $ 129,565 $ 304,854 $ 268,227
Operating expenses:
Cost of products sold 74,718 65,909 147,861 134,354
Research and development 5,606 4,572 10,470 8,643
Selling, general and administrative 60,495 54,535 116,883 108,307
Restructuring Charge - net 66 - 1,819 -
--------- --------- --------- ---------
Total operating expenses 140,885 125,016 277,033 251,304
Operating income 12,063 4,549 27,821 16,923
Other income and (expense):
Investment and other income (expense) 18 (275) (141) (189)
Interest expense (1) (8) (31) (43)
--------- --------- --------- ---------
Income before income taxes 12,080 4,266 27,649 16,691
Income taxes 4,047 1,449 9,263 5,675
--------- --------- --------- ---------
Net income 8,033 2,817 18,386 11,016
Income retained in business at beginning of period 296,388 291,231 290,805 287,674
Less:
Redemption premium on preferred stock - - - (171)
Common stock dividends (4,858) (4,540) (9,628) (9,011)
--------- --------- --------- ---------
Income retained in business at end of period $ 299,563 $ 289,508 $ 299,563 $ 289,508
========= ========= ========= =========
Net income per Class A Nonvoting Common Share
Basic $ 0.34 $ 0.12 $ 0.78 $ 0.47
========= ========= ========= =========
Diluted $ 0.34 $ 0.12 $ 0.77 $ 0.46
========= ========= ========= =========
Net income per Class B Voting Common Share
Basic $ 0.34 $ 0.12 $ 0.75 $ 0.44
========= ========= ========= =========
Diluted $ 0.34 $ 0.12 $ 0.74 $ 0.43
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements
4
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
January 31,
2004 2003
-------- --------
Operating activities:
Net income $ 18,386 $ 11,016
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 9,989 8,102
Loss on sale or disposal of property, plant & equipment 104 41
Provision for losses on accounts receivable 764 671
Amortization of restricted stock 173 123
Net restructuring charge accrued liability 1,742 -
Changes in operating assets and liabilities (net of effects of business acquisitions):
Accounts receivable (3,908) 1,320
Inventory (3,806) 730
Prepaid expenses and other assets 2,720 787
Accounts payable and accrued liabilities (6,627) (4,145)
Income taxes 2,561 2,008
-------- --------
Net cash provided by operating activities 22,098 20,653
Investing activities:
Acquisition of businesses, net of cash acquired (30,652) (12,817)
Termination of capital lease - (791)
Purchases of property, plant and equipment (6,621) (7,621)
Proceeds from sale of property, plant and equipment 255 16
Other (933) (295)
-------- --------
Net cash used in investing activities (37,951) (21,508)
Financing activities:
Payment of dividends (9,982) (9,182)
Proceeds from issuance of common stock 7,919 1,620
Principal payments on debt (1,534) (162)
Payment for redemption of preferred stock - (2,855)
Purchase of treasury stock (564) (377)
Proceeds from short-term borrowings-net - 75
-------- --------
Net cash used in financing activities (4,161) (10,881)
Effect of exchange rate changes on cash 2,137 1,393
-------- --------
Net decrease in cash and cash equivalents (17,877) (10,343)
Cash and cash equivalents, beginning of period 76,088 75,969
-------- --------
Cash and cash equivalents, end of period $ 58,211 $ 65,626
======== ========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 64 $ 38
Income taxes, net of refunds 6,502 3,942
Acquisitions:
Fair value of assets acquired, net of cash $ 14,594 $ 5,277
Liabilities assumed (9,040) (2,009)
Goodwill 25,098 9,549
-------- --------
Net cash paid for acquisitions $ 30,652 $ 12,817
======== ========
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
Six Months Ended January 31, 2004
(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 January 31, 2004 and July 3l, 2003, its results of operations
for the three and six months ended January 31, 2004 and 2003, and its cash flows
for the six months ended January 31, 2004 and 2003. The condensed consolidated
balance sheet at July 31, 2003 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, 2003.
It is not practical to segregate the amounts of raw material, work in
process or finished goods at the respective interim balance sheet dates.
NOTE B -- New Accounting Pronouncements
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. The Act introduced a
prescription drug benefit program under Medicare as well as a federal subsidy to
sponsors of retiree health care benefit plans. Certain accounting issues raised
by the Act, such as how to account for the federal subsidy, are not explicitly
addressed by Financial Accounting Standards Board ("FASB") Statement No.
106,"Employers' Accounting for Postretirement Benefits Other Than Pensions." The
FASB issued FASB Staff Position ("FSP") No. FAS 106-1, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003", ("FSP No.106-1") which allows sponsors to elect
to defer recognition of the effects of the Act to await guidance from various
governmental and regulatory agencies concerning the requirements that must be
met to obtain these cost reductions as well as the manner in which such savings
should be measured. In accordance with FSP No. 106-1, the Company has elected to
defer recognition of the effects of the Act. Accordingly, the financial
statements do not reflect the effects of the Act.
6
NOTE C -- Goodwill
Changes in the carrying amount of goodwill for the six months ended
January 31, 2004, are as follows:
Americas Europe Asia Total
------------ ------------ -------- --------
Balance as of July 31, 2003 $ 84,267 $ 43,820 $2,580 $130,667
Goodwill acquired during the period 17,496 7,602 - 25,098
Translation adjustments and other 817 5,448 474 6,739
------------ ------------ -------- --------
Balance as of January 31, 2004 $ 102,580 $ 56,870 $3,054 $162,504
============ ============ ======== ========
Goodwill increased by $31,837,000 during the six months ended January
31, 2004, including an increase of $6,739,000 attributable to translation
adjustments and other. The preliminary allocation of the purchase price for the
acquisitions of Brandon International, Prinzing Enterprises and B.I.G resulted
in $25,098,000 of additional goodwill.
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 $12,809,000 and $9,029,000 for the three months ended January 31,
2004 and 2003, respectively, and $27,406,000 and $17,183,000 for the six months
ended January 31, 2004 and 2003, 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 2004 Fiscal 2003
----------- -----------
(Amounts in thousands, except per share amounts) 2nd Quarter Six Months 2nd Quarter Six Months
----------- ---------- ----------- ----------
Numerator:
Net income $ 8,033 $18,386 $ 2,817 $11,016
Less: Premium on redemption of preferred stock - - - (171)
------- ---------- ------- -------
Numerator for basic and diluted
Class A net income per share 8,033 18,386 2,817 10,845
Less: Preferential dividends - (721) - (711)
Less: Preferential dividends on
dilutive stock options - (9) - (7)
------- ---------- ------- -------
Numerator for basic and diluted
Class B net income per share $ 8,033 $17,656 $ 2,817 $10,127
======= ========== ======= =======
Denominator:
Denominator for basic net income per
share for both Class A and Class B 23,544 23,493 23,155 23,155
Plus: Effect of dilutive stock options 347 294 230 215
------- ---------- ------- -------
Denominator for diluted net income per
share for both Class A and Class B 23,891 23,787 23,385 23,370
======= ========== ======= =======
Class A Common Stock net income per share:
Basic $0.34 $0.78 $0.12 $0.47
Diluted $0.34 $0.77 $0.12 $0.46
Class B Common Stock net income per share:
Basic $0.34 $0.75 $0.12 $0.44
Diluted $0.34 $0.74 $0.12 $0.43
Options to purchase 18,000 and 657,000 shares of Class A Common Stock
were not included in the computations of diluted net income per share for the
quarter ended January 31, 2004 and 2003, respectively, 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 18,000 and 794,000 shares of Class A Common Stock
were not included in the computations of diluted net income per share for the
six months ended January 31, 2004 and 2003, respectively, 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 -- Restructuring
During the fourth quarters of fiscal 2003 and 2002, the Company
recorded restructuring charges of $10,215,000 and $3,030,000, respectively,
related primarily to facilities consolidations and workforce reductions. The
Company continued its restructuring actions that were announced in the fourth
quarter of fiscal 2003, resulting in a restructuring charge of $1,819,000 during
the six months ended January 31, 2004. The charge consists primarily of a
provision for severance of terminated employees. The Company expects to incur
total pre-tax restructuring charges in fiscal 2004 of $2,000,000 to $3,000,000.
Reconciliations of activity with respect to the Company's restructuring actions
are as follows:
Fiscal 2003
and 2004 Fiscal 2002
Restructuring Restructuring
------------- -------------
Ending balance, July 31, 2003 $6,926,000 $130,000
Fiscal 2004 first quarter activity:
Additional restructuring charges 1,753,000 -
Cash payments associated with severance and other (2,997,000) (100,000)
---------- ---------
Ending balance, October 31, 2003 $5,682,000 $30,000
========== =========
Fiscal 2004 second quarter activity:
Additional restructuring charges 66,000 -
Non-cash asset write-off (76,000)
Cash payments associated with severance and other (2,642,000) (30,000)
---------- --------
Ending balance, January 31, 2004 $3,030,000 -
========== ========
NOTE G -- Acquisitions
In September 2003, the Company acquired Brandon International, Inc.
("Brandon") headquartered in Baldwin Park, California, with international
operations in Mexico and Singapore. Brandon is a manufacturer of die-cut
products. In October 2003, the Company acquired Prinzing Enterprises, Inc.
located in Warrenville, Illinois. Prinzing is a manufacturer of lockout/tagout
products, signs and other safety devices. In November 2003, the Company acquired
B.I.G, headquartered in the United Kingdom, a provider of badging and business
card solutions. The combined purchase price for these acquisitions was
approximately $30,700,000 in cash and $1,000,000 in notes payable. The Prinzing
acquisition agreement includes provisions for contingent payments up to a
maximum $1,500,000 based on certain performance criteria during fiscal year
2004. The purchase price allocation is preliminary and pending the outcome of
final valuations of the acquired entities, which are in progress. Of the
combined purchase price, $25,098,000 was assigned to goodwill in the preliminary
allocation of the purchase price. The results of the operations of the acquired
businesses have been included since their respective dates of acquisition in the
accompanying condensed consolidated financial statements.
9
NOTE H - Segment Information
The Company's reportable segments are geographical regions that are
each managed separately. Due to the change to a regional management structure at
the beginning of fiscal 2004, the Company has restated the corresponding segment
information from its previous group based structure for the prior year. The
Company has three reportable segments: Americas, Europe and Asia. It is
impracticable to present total assets by segment on an interim basis. Following
is a summary of segment information for the three and six months ended January
31, 2004 and 2003:
Corporate
(Dollars in Thousands) and
Americas Europe Asia Eliminations Totals
-------- ------- ------- ------------ --------
Three months ended January 31, 2004:
Revenues from external customers $74,196 $60,360 $18,392 $152,948
Intersegment revenues 9,234 620 1,378 ($11,232) -
Segment profit (loss) 9,498 15,346 4,905 (1,200) 28,549
Three months ended January 31, 2003:
Revenues from external customers $68,432 $47,880 $13,253 $129,565
Intersegment revenues 8,515 500 1 ($9,016) -
Segment profit (loss) 5,879 10,876 3,093 (1,127) 18,721
Six months ended January 31, 2004:
Revenues from external customers $154,288 $113,625 $36,941 $304,854
Intersegment revenues 19,224 1,183 2,373 ($22,780) -
Segment profit (loss) 24,614 28,795 10,329 (1,970) 61,768
Six months ended January 31, 2003:
Revenues from external customers $148,363 $92,963 $26,901 $268,227
Intersegment revenues 17,043 1,125 13 ($18,181) -
Segment profit (loss) 19,860 21,294 6,780 (1,656) 46,278
Following is a reconciliation of profit for the three and six months ended
January 31, 2004 and 2003:
(Dollars in Thousands) Fiscal 2004 Fiscal 2003
----------- -----------
2nd Quarter Six Months 2nd Quarter Six Months
----------- ---------- ----------- ----------
Total profit from reportable segments $29,749 $63,738 $19,848 $47,934
Corporate and eliminations (1,200) (1,970) (1,127) (1,656)
Unallocated amounts:
Administrative costs (15,365) (30,537) (13,292) (27,627)
Interest-net 134 225 253 380
Foreign exchange (117) (397) (536) (612)
Restructuring charge, net (66) (1,819) - -
Other (1,055) (1,591) (880) (1,728)
------- ------- ------ -------
Income before income taxes $12,080 $27,649 $4,266 $16,691
======= ======= ====== =======
10
NOTE I -- 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 six months ended January 31, 2004
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. During fiscal 2004, certain executives and
key management employees were issued stock options that vest upon meeting
certain financial performance conditions in addition to the vesting schedule
described above and have a term of five 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, with the exception of certain options issued during fiscal
2004 that contain a performance condition ("performance options"). The
performance options require the company to record compensation expense for
changes in the market value of the underlying common stock. The assumptions used
to calculate the fair value of new options granted are evaluated and revised, as
necessary, to reflect market conditions and experience.
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
income and income per share would have been as follows:
Three Months Ended Six Months Ended
(In thousands, except per share amounts) January 31, January 31,
2004 2003 2004 2003
---- ---- ---- ----
Net income
As reported $8,033 $2,817 $18,386 $11,016
Stock-based compensation expense recorded 195 - 277
Pro forma expense (549) (497) (1,037) (994)
------ ------ ------- -------
Pro forma net income $7,679 $2,320 $17,626 $10,022
====== ====== ======= =======
Net income per class A common share
Basic
As reported $ 0.34 $ 0.12 $ 0.78 $ 0.47
Pro forma adjustments (0.02) (0.02) (0.03) (0.04)
------ ------ ------- -------
Pro forma net income per share $ 0.32 $ 0.10 $ 0.75 $ 0.43
====== ====== ======= =======
Diluted
As reported $ 0.34 $ 0.12 $ 0.77 $ 0.46
Pro forma adjustments (0.02) (0.02) (0.03) (0.04)
------ ------ ------- -------
Pro forma net income per share $ 0.32 $ 0.10 $ 0.74 $ 0.42
====== ====== ======= =======
Net income per class B common share
Basic
As reported $ 0.34 $ 0.12 $ 0.75 $ 0.44
Pro forma adjustments (0.02) (0.02) (0.03) (0.04)
------ ------ ------- -------
Pro forma net income per share $ 0.32 $ 0.10 $ 0.72 $ 0.40
====== ====== ======= =======
Diluted
As reported $ 0.34 $ 0.12 $ 0.74 $ 0.43
Pro forma adjustments (0.02) (0.02) (0.03) (0.04)
------ ------ ------- -------
Pro forma net income per share $ 0.32 $ 0.10 $ 0.71 $ 0.39
====== ====== ======= =======
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS Overview
Brady is an international manufacturer and marketer of identification
and materials solutions, with products including labels, signs, precision
die-cut materials, printing systems, software, and label-application and
data-collection systems for electronics, telecommunications, manufacturing,
electrical, and a variety of other markets. The Company operates manufacturing
facilities and sales offices in Australia, Belgium, Brazil, Canada, China,
England, France, Germany, Italy, the United States, Malaysia, Singapore and
operates sales offices in Hong Kong, Hungary, Japan, Korea, Mexico, the
Philippines, Sweden and Taiwan.
Sales for the quarter ended January 31, 2004 were up 18.0 percent to
$152.9 million, compared to $129.6 million in the same period of fiscal 2003.
Net income for the quarter was $8.0 million or $0.34 per diluted Class A Common
Share, up 183 percent from $2.8 million or $0.12 per share reported in the
second quarter of last year. The Company's efforts to streamline its
organization and invest in strategic acquisitions and key geographic markets
such as Asia have contributed to the Company's improved earnings, despite only
moderate improvement in the manufacturing sector in the United States and
Europe. Compared to fiscal 2003's second quarter, the Company experienced some
improvement in key markets in the United States and Europe, while Asian markets,
particularly telecommunications and electronics, continue to be strong. This,
along with a positive foreign currency exchange, helped improve the Company's
results. Sales from recent acquisitions also contributed more than 10 percent to
the Company's sales growth in the second quarter, and despite the investment
costs associated with integrating these acquisitions, the Company's net income
continued to improve in the quarter.
The Company expects improvement in its key markets and further growth
through acquisitions, as well as the effects of a weaker dollar, to continue in
the second half of fiscal 2004, and has increased its guidance range to $615 to
$645 million in sales with net income of $37 to $41 million for the full fiscal
year. Looking long term, the Company intends to continue with its growth
strategies of developing proprietary products; making acquisitions which expand
its product range, technical expertise or market penetration; and further
improving processes to best serve customers. Going forward, business and market
uncertainties may affect results. For a discussion of key factors that could
impact results, please refer to the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report on Form 10-K for the fiscal year ended July 31, 2003.
Results of Operations
For the three months ended January 31, 2004, net sales of $152,948,000
were 18.0% higher than the same quarter of the previous year. For the six months
ended January 31, 2004, sales of $304,854,000 were 13.7% higher than the same
period of the previous year. The sales increase was aided by the positive effect
of fluctuations in the exchange rates used to translate financial results into
the United States Dollar, which increased sales growth by 8.2% in the quarter
and 7.1% for the six months ended January 31, 2004. The acquisitions of TISCOR,
Inc., Brandon International and Prinzing Enterprises, Inc. in the United States,
Etimark in Germany, and Cleere Advantage Ltd, Aztec, Ltd and B.I.G in the United
Kingdom added 10.5% to sales in the quarter and 8.2% to sales for the six months
ended January 31, 2004. These increases were offset by a decline in base sales
of 0.7% for the quarter and 1.6% for the six-month period compared to the prior
year.
12
The cost of products sold as a percentage of sales decreased from 50.9%
to 48.9% for the quarter and from 50.1% to 48.5% for the six months ended
January 31, 2004 compared to the same periods of the previous year. The cost of
products sold as a percentage of sales was higher during the same periods last
year due to the impact of lower sales volumes within the United States direct
marketing business due to its SAP implementation in December 2002. Selling,
general and administrative (SG&A) expenses as a percentage of sales decreased to
39.6% from 42.1% for the quarter and to 38.3% from 40.4% for the six months
ended January 31, 2004 compared to the same periods of the prior year due to
savings from restructuring actions taken in the fourth quarter of fiscal 2003.
In dollars, SG&A increased due to foreign currency translation and SG&A expenses
associated with acquired businesses, which was partially offset by savings from
our restructuring program.
As a percentage of sales, research and development expenses increased
from 3.5% to 3.7% for the quarter and from 3.2% to 3.4% for the six months ended
January 31, 2004 compared to the same periods of the previous year. The increase
was primarily due to research and development activities associated with
acquired businesses.
Fiscal 2004 included a restructuring charge of $66,000 for the quarter
and $1,819,000 for the six months ended January 31, 2004, which was primarily
due to consolidation of operating facilities in Europe. The Company expects to
incur total pre-tax restructuring charges in fiscal 2004 of $2,000,000 to
$3,000,000. There were no restructuring charges in the first six months of the
prior year.
Operating income was $12,063,000 for the quarter and $27,821,000 for
the six-month period ended January 31, 2004 compared to $4,549,000 and
$16,923,000 for the same periods last year, due to the factors cited above.
Investment and other income increased $293,000 for the quarter and
$48,000 for the six-month period ended January 31, 2004 compared to the same
periods last year due to the net effect of foreign exchange, primarily on
intercompany transactions.
The Company's effective tax rate was 33.5% for the quarter and for the
six-month period ended January 31, 2004 and 34.0% for the same periods of the
previous year. The reduction was due to a more favorable mix of regional profits
and long-term tax planning strategies.
Net income for the three months ended January 31, 2004, increased
185.2% to $8,033,000 compared to $2,817,000 for the same quarter of the previous
year. For the six months ended January 31, 2004, net income increased 66.9% to
$18,386,000 from $11,016,000 for the same period last year. On a Class A Common
Share basis, diluted net income for the three months ended January 31, 2004, was
$0.34 compared to $0.12 per share for the same quarter of the previous year. For
the six months ended January 31, 2004, Class A Common Share diluted net income
was $0.77 compared to $0.46 for the same period last year. Net income included
the after-tax effect of restructuring charges of $44,000 in the quarter ended
January 31, 2004 and $1,210,000 in the six-month period ended January 31, 2004.
13
Business Segment Operating Results
Effective August 1, 2003, the Company's organization was restructured
from a product focused organization to geographic regions. Management of the
Company now evaluates results based on the following geographic regions:
Americas, Europe, and Asia.
(Unaudited, dollars in thousands) Americas Europe Asia Corporate Total
SALES TO EXTERNAL CUSTOMERS
Three months ended:
January 31, 2004 $ 74,196 $ 60,360 $ 18,392 $ 152,948
January 31, 2003 68,432 47,880 13,253 129,565
Six months ended:
January 31, 2004 $ 154,288 $ 113,625 $ 36,941 $ 304,854
January 31, 2003 148,363 92,963 26,901 268,227
SALES GROWTH INFORMATION
Three months ended January 31, 2004:
Base (4.2)% (3.3)% 26.6% (0.7)%
Currency 2.1 % 16.0 % 12.2% 8.2 %
Acquisitions 10.5 % 13.4 % 0.0% 10.5 %
Total 8.4 % 26.1 % 38.8% 18.0 %
Six months ended January 31, 2004:
Base (5.4)% (3.8)% 26.3% (1.6)%
Currency 1.8 % 14.4 % 11.0% 7.1 %
Acquisitions 7.6 % 11.6 % 0.0% 8.2 %
Total 4.0 % 22.2 % 37.3% 13.7 %
SEGMENT PROFIT (LOSS)
Three months ended:
January 31, 2004 $ 9,498 $ 15,346 $ 4,905 $ (1,200) $ 28,549
January 31, 2003 5,879 10,876 3,093 (1,127) 18,721
Percentage increase 61.6 % 41.1 % 58.6 % 6.5 % 52.5 %
Six months ended:
January 31, 2004 $ 24,614 $ 28,795 $ 10,329 $ (1,970) $ 61,768
January 31, 2003 19,860 21,294 6,780 (1,656) 46,278
Percentage increase 23.9 % 35.2 % 52.3 % 19.0 % 33.5 %
The Company evaluates performance and allocates resources based on
segment profit or loss. Segment profit or loss does not include certain
administrative costs, interest, foreign exchange gain or loss, restructuring
charges, other expenses not allocated to a segment and income taxes. Please
refer to Note H "Segment Information" for a reconciliation of segment profit to
income before income taxes.
14
Americas:
Americas sales increased 8.4% for the quarter and 4.0% for the six
months ended January 31, 2004, compared to the same periods last year. Base
sales in local currency decreased 4.2% in the quarter and 5.4% for the six-month
period, more than offset by acquisitions, which increased sales in the region by
10.5% in the quarter and 7.6% for the six-month period. The positive effect of
fluctuations in the exchange rates used to translate financial results into U.S.
currency increased sales in the region by 2.1% in the quarter and 1.8% for the
six-month period ended January 31, 2004. The decline in base business was due to
continued United States market softness, particularly in the maintenance, repair
and operations (MRO) and non-residential construction end markets. Some
improvement has been noted in the electrical, industrial and electronics
markets. Profit for the region increased 61.6% to $9,498,000 from $5,879,000 for
the three-month period and 23.9% to $24,614,000 from $19,860,000 for the six
months ended January 31, 2004, compared to the same periods in the prior year.
Increased profitability in the Americas can be attributed to improved gross
margins due to increased sales of higher margin products and continuing cost
controls. As mentioned above, the prior year second quarter results were reduced
by the disruption in the United States direct marketing business in conjunction
with SAP go-live.
Europe:
Europe sales increased 26.1% for the quarter and 22.2% for the six
months ended January 31, 2004 compared to the same periods in the prior year.
Base sales in local currency decreased 3.3% in the quarter and 3.8% in the
six-month period. The decline was primarily due to the loss of a low margin die
cut customer in fiscal 2003. Sales were positively affected by fluctuations in
the exchange rates used to translate financial results into United States
currency, which increased sales within the region by 16.0% in the quarter and
14.4% in the six-month period. Sales were also aided by acquisitions, which
increased sales 13.4% for the quarter and 11.7% for the six-month period. Profit
for the region increased 41.1% in the quarter to $15,346,000 from $10,876,000 in
the prior year and 35.2% in the six-month period to $28,795,000 from $21,294,000
in the prior year, due to benefits from restructuring activities, foreign
currency translation and improved gross margins due to a more favorable mix of
product sales.
Asia:
Asia sales increased 38.8% for the quarter and 37.3% for the six-month
period ended January 31, 2004, compared to the same periods in the prior year.
Base sales in local currency increased 26.6% in the quarter and 26.3% for the
six-month period compared to the same periods last year. Base growth was
concentrated in sales of high-performance identification and die cut products in
the telecommunications and electronics markets. Sales were positively affected
by fluctuations in the exchange rates used to translate financial results into
U.S. currency, which increased sales within the region by 12.2% in the quarter
and 11.0% for the six-month period. China and Malaysia both more than doubled
sales for the quarter and the six-month period compared to the same periods in
the prior year. Investments in infrastructure in China and Malaysia over the
past two years are beginning to yield significant growth. Profit for the region
was up 58.6% for the quarter to $4,905,000 from $3,093,000 in the prior year
second quarter. Profit for the six-month period was up 52.3% to $10,329,000 from
$6,780,000 in the prior year. The increase in profit was due primarily to
increased sales volume, foreign currency translation and also to improved
margins due to improved use of manufacturing capacity.
15
Financial Condition
The Company's liquidity remained strong. Its current ratio as of
January 31, 2004, was 2.2, down from the current ratio at July 31, 2003 of 2.4.
Cash and cash equivalents were $58,211,000 at January 31, 2004, compared to
$76,088,000 at July 31, 2003. The decrease was primarily due to the $30,652,000
net cash paid for the acquisitions of Brandon International, Prinzing
Enterprises, Inc. and B.I.G in the first six months of the year. Working capital
decreased $5,429,000 during the six months ended January 31, 2004, to
$118,449,000 from $123,878,000 at July 31, 2003. Inventories increased
$8,738,000 for the six-month period due primarily to the effects of acquisitions
and foreign currency translation. Accounts receivable increased $14,266,000 for
the quarter due to acquisitions and foreign currency translation. Current
liabilities increased $8,647,000 for the six months due to the timing of income
tax payments and increased liabilities associated with acquisitions and foreign
currency translation.
Cash flow from operations totaled $22,098,000 for the six months ended
January 31, 2004, compared to $20,653,000 for the same period last year. The
increase was the result of higher net income offset by an increase in accounts
receivable balances, increased inventory balances and lower accrued liabilities.
Capital expenditures were $6,621,000 in the six months ended January 31, 2004,
compared to $7,621,000 in the same period last year. Net cash used in financing
activities was $4,161,000 for the six-month periods ended January 31, 2004, due
primarily to payments of dividends to the Company's stockholders, payments on
long term debt, and purchase of treasury stock offset by proceeds from the
issuance of common stock due to stock option exercises. Cash flows used in
financing activities for the same period last year were $10,881,000 related to
payment of dividends, redemption of preferred stock, and purchase of treasury
stock.
Long-term debt as a percentage of long-term debt plus stockholders'
investment was 0.01% at January 31, 2004 and 0.2% at July 31, 2003.
The Company maintains a maximum $100 million line of credit (based on
certain financial ratios of the Company) with a group of six banks, none of
which was being utilized as of January 31, 2004. No borrowings were made under
the line of credit during the six months ended January 31, 2004. At January 31,
2004, approximately $86 million of the line of credit 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, available line of credit and other
borrowing alternatives will be adequate to meet the Company's current and
anticipated investing and financing needs.
The strong liquidity of the Company and its continued strong cash flow
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 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.
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, other than the risk
factors described in other Company filings. 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) where the economic profile is favorable.
16
Purchase Commitments - The Company has purchase commitments for
materials, supplies, services, and property, plant and equipment as part of the
ordinary conduct of business. In the aggregate, 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 2003 Form 10-K filed with the Securities and Exchange Commission.
These factors 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.
17
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.
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 January 31, 2004, the Company has
not entered into any interest rate derivatives.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to
ensure that the information the Company must disclose in its filings with the
Securities and Exchange Commission is recorded, processed, summarized and
reported on a timely basis. The Company's Chief Executive Officer and Chief
Financial Officer have reviewed and evaluated the Company's disclosure controls
and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the ""Exchange Act") as of the end of the
period covered by this report (the "Evaluation Date"). Based on such evaluation,
such officers have concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures are effective in bringing to their attention
on a timely basis material information relating to the Company required to be
included in the Company's periodic filings under the Exchange Act.
There have not been any changes in the Company's internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
that occurred during the Company's most recently completed fiscal quarter or
subsequent to the Evaluation Date that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
18
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on November 20, 2003. At
the meeting the following persons were elected to serve as the Company's
directors by the affirmative vote of 100% of the 1,769,314 shares of Class B
Common Voting Stock until the next annual meeting of shareholders and until
their successors have been elected:
Richard A. Bemis
Robert C. Buchanan
Mary K. Bush
Frank W. Harris
Frank M. Jaehnert
Frank R. Jarc
Peter J. Lettenberger
Gary E. Nei
Roger D. Pierce
Elizabeth I. Pungello
ITEM 5. OTHER INFORMATION
On December 15, 2003, the Company announced that David Mathieson was
named Vice President and Chief Financial Officer. A report on Form 8-K was filed
regarding this leadership change on December 16, 2003.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Rule 13a-14(a)/15d-14(a) Certification of Frank M.
Jaehnert
31.2 Rule 13a-14(a)/15d-14(a) Certification of David
Mathieson
32.1 Section 1350 Certification of Frank M. Jaehnert
32.2 Section 1350 Certification of David Mathieson
(b) Reports on Form 8-K.
During the quarter ended January 31, 2004, the
Company filed a Current Report on Form 8-K pursuant
to Item 5 ("Other Events") dated December 15, 2003,
announcing that David Mathieson was named Vice
President and Chief Financial Officer. Also during
the quarter ended January 31, 2004, the Company
furnished a Current Report on Form 8-K containing
information pursuant to Item 12 ("Results of
Operations and Financial Condition") dated November
18, 2003, relating to the announcement of earnings
for the Company's fiscal 2004 first quarter.
19
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: March 1, 2004 /s/ F. M. Jaehnert
- -------------------- ------------------
F. M. Jaehnert
President & Chief Executive Officer
Date: March 1, 2004 /s/ D. Mathieson
- -------------------- ----------------
D. Mathieson
Vice President & Chief Financial Officer
(Principal Accounting Officer)
(Principal Financial Officer)
20