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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)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 30, 2004
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 24, 2004, there were outstanding 22,039,466 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 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
APRIL 30, 2004 JULY 31, 2003
-------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 79,831 $ 76,088
Accounts receivable, less allowance for losses ($3,651
and $3,166, respectively) 101,800 80,162
Inventories
Finished products 25,151 18,870
Work-in-process 6,362 5,356
Raw materials and supplies 13,676 12,428
------- --------
Total inventories 45,189 36,564
Prepaid expenses and other current assets 22,125 22,343
------- --------
TOTAL CURRENT ASSETS 248,945 215,157
OTHER ASSETS:
Goodwill 159,122 130,667
Other 25,904 24,455
------- --------
185,026 155,122
PROPERTY, PLANT AND EQUIPMENT:
Cost:
Land 5,244 5,172
Buildings and improvements 56,658 51,471
Machinery and equipment 149,233 139,007
Construction in progress 1,858 3,245
------- --------
210,993 198,895
Less accumulated depreciation 131,119 119,655
------- --------
NET PROPERTY, PLANT AND EQUIPMENT 79,874 79,240
------- --------
TOTAL $ 513,845 $ 449,519
======= ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 33,240 $ 28,470
Wages and amounts withheld from employees 33,580 30,619
Taxes, other than income taxes 4,563 2,492
Accrued income taxes 20,000 11,449
Other current liabilities 22,675 17,320
Short-term borrowings and current maturities on long-term debt 32 929
------- --------
TOTAL CURRENT LIABILITIES 114,090 91,279
LONG-TERM DEBT, LESS CURRENT MATURITIES 28 568
OTHER LIABILITIES 20,657 18,711
------- --------
TOTAL LIABILITIES 134,775 110,558
STOCKHOLDERS' INVESTMENT:
Class A nonvoting common stock - Issued and outstanding 21,990,249 220 216
and 21,558,265 shares, respectively
Class B voting common stock - Issued and outstanding 1,769,314 shares 18 18
Additional paid-in capital 60,870 47,464
Income retained in the business 311,089 290,805
Cumulative other comprehensive income 8,315 1,595
Treasury stock - 34,657 and 18,262 class A common shares,
respectively, at cost (1,074) (509)
Other (368) (628)
------- --------
TOTAL STOCKHOLDERS' INVESTMENT 379,070 338,961
------- --------
TOTAL $ 513,845 $ 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 April 30, Nine Months Ended April 30,
2004 2003 2004 2003
---- ---- ---- ----
Net Sales $ 180,854 $ 141,955 $ 485,708 $ 410,182
Cost of products sold 85,980 68,826 233,841 203,180
--------- --------- --------- ---------
Gross Margin 94,874 73,129 251,867 207,002
Operating expenses:
Research and development 6,210 5,165 16,680 13,808
Selling, general and administrative 64,490 55,890 181,373 164,197
Restructuring Charge - net 455 - 2,274 -
--------- --------- --------- ---------
Total operating expenses 157,135 129,881 434,168 381,185
Operating income 23,719 12,074 51,540 28,997
Other income and (expense):
Investment and other (expense) income (288) 977 (429) 788
Interest expense (5) (22) (36) (65)
--------- --------- --------- ---------
Income before income taxes 23,426 13,029 51,075 29,720
Income taxes 7,027 4,432 16,290 10,107
--------- --------- --------- ---------
Net income 16,399 8,597 34,785 19,613
Income retained in business at beginning of period 299,563 289,508 290,805 287,674
Less:
Redemption premium on preferred stock - - - (171)
Common stock dividends (4,873) (4,543) (14,501) (13,554)
--------- --------- --------- ---------
Income retained in business at end of period $ 311,089 $ 293,562 $ 311,089 $ 293,562
========= ========= ========= =========
Net income per Class A Nonvoting Common Share
Basic $ 0.69 $ 0.37 $ 1.48 $ 0.84
========= ========= ========= =========
Diluted $ 0.68 $ 0.37 $ 1.46 $ 0.83
========= ========= ========= =========
Net income per Class B Voting Common Share
Basic $ 0.69 $ 0.37 $ 1.45 $ 0.81
========= ========= ========= =========
Diluted $ 0.68 $ 0.37 $ 1.43 $ 0.80
========= ========= ========= =========
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,
2004 2003
---- ----
Operating activities:
Net income $ 34,785 $ 19,613
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 14,654 13,112
Loss on sale or disposal of property, plant & equipment 111 71
Provision for losses on accounts receivable 1,116 833
Non-cash portion of stock-based compensation expense 791 185
Net restructuring charge accrued liability 2,178 -
Changes in operating assets and liabilities (net of effects of business acquisitions):
Accounts receivable (14,216) (1,159)
Inventory (4,677) 2,713
Prepaid expenses and other assets (144) (1,468)
Accounts payable and accrued liabilities 3,298 1,943
Income taxes 9,586 4,628
-------- --------
Net cash provided by operating activities 47,482 40,471
Investing activities:
Acquisition of businesses, net of cash acquired (30,728) (20,906)
Termination of capital lease - (791)
Purchases of property, plant and equipment (10,616) (11,593)
Proceeds from sale of property, plant and equipment 281 56
Other (1,358) (198)
-------- --------
Net cash used in investing activities (42,421) (33,432)
Financing activities:
Payment of dividends (14,854) (13,725)
Proceeds from issuance of common stock 10,745 2,040
Principal payments on debt (1,563) (210)
Payment for redemption of preferred stock - (2,855)
Purchase of treasury stock (564) (377)
-------- --------
Net cash used in financing activities (6,236) (15,127)
Effect of exchange rate changes on cash 4,918 750
-------- --------
Net increase (decrease) in cash and cash equivalents 3,743 (7,338)
Cash and cash equivalents, beginning of period 76,088 75,969
-------- --------
Cash and cash equivalents, end of period $ 79,831 $ 68,631
======== ========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 73 $ 38
Income taxes, net of refunds 5,616 3,549
Acquisitions:
Fair value of assets acquired, net of cash $ 14,784 $ 14,460
Liabilities assumed (8,916) (9,264)
Goodwill 24,860 15,710
-------- --------
Net cash paid for acquisitions $ 30,728 $ 20,906
======== ========
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, 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 April 30, 2004 and July 31, 2003, its results of operations for
the three and nine months ended April 30, 2004 and 2003, and its cash flows for
the nine months ended April 30, 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.
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 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003", ("FSP No. 106-2") which allows sponsors to elect
to defer recognition of the effects of the Act if it has not been concluded
whether the benefits under the sponsor's plan are actuarially equivalent to
Medicare Part D. In accordance with FSP No. 106-2, the Company's measures of the
accumulated postretirement benefit obligation and the net periodic
postretirement benefit cost do not reflect the effects of the subsidy, because
it has not yet been concluded whether the benefits under the Company's plan are
actuarially equivalent to Medicare Part D. FSP No. 106-2 will be effective
beginning in the first quarter of fiscal 2005.
NOTE C - Sales Incentives
In accordance with the Financial Accounting Standard Board's ("FASB's")
Emerging Issues Task Force Issue No. 01-9,"Accounting for Consideration Given by
a Vendor to a Customer or a Reseller of the Vendor's Product," we account for
cash consideration (such as sales incentives and cash discounts) that we give to
our customers or resellers as a reduction of revenue rather than as an operating
expense.
6
NOTE D - Goodwill
Changes in the carrying amount of goodwill for the nine months ended April
30, 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 17,354 7,506 - 24,860
Translation adjustments and other 716 2,608 271 3,595
-------- ------- ------ --------
Balance as of April 30, 2004 $102,337 $53,934 $2,851 $159,122
======== ======= ====== ========
Goodwill increased by $28,455,000 during the nine months ended April 30,
2004, including an increase of $3,595,000 attributable to translation
adjustments and other. The final allocation of the purchase price for the
acquisitions of Brandon International and Prinzing Enterprises and the
preliminary allocation of the purchase price for B.I.G resulted in $24,860,000
of additional goodwill.
NOTE E - 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 $14,099,000 and $11,445,000 for the three months ended April 30,
2004 and 2003, respectively, and $41,505,000 and $28,628,000 for the nine months
ended April 30, 2004 and 2003, respectively.
7
NOTE F - 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:
Three Months Ended Nine Months Ended
------------------------- --------------------------
April 30, April 30,
------------------------- --------------------------
(Amounts in thousands, except per share amounts) 2004 2003 2004 2003
------- ------ -------- -------
Numerator:
Net income $16,399 $8,597 $ 34,785 $19,613
Less: Premium on redemption of preferred stock - - - (171)
------- ------ -------- -------
Numerator for basic and diluted
Class A net income per share 16,399 8,597 34,785 19,442
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 $16,399 $8,597 $34,055 $18,724
======= ====== ======= =======
Denominator:
Denominator for basic net income per
share for both Class A and Class B 23,668 23,183 23,551 23,151
Plus: Effect of dilutive stock options 331 157 291 200
------- ------ -------- -------
Denominator for diluted net income per
share for both Class A and Class B 23,999 23,340 23,842 23,351
======= ====== ======== =======
Class A Non-Voting Common Stock net income per share:
Basic $ 0.69 $ 0.37 $ 1.48 $ 0.84
Diluted $ 0.68 $ 0.37 $ 1.46 $ 0.83
Class B Voting Common Stock net income per share:
Basic $ 0.69 $ 0.37 $ 1.45 $ 0.81
Diluted $ 0.68 $ 0.37 $ 1.43 $ 0.80
Options to purchase 18,000 and 1,108,000 shares of Class A Common Stock
were not included in the computations of diluted net income per share for the
quarter ended April 30, 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 799,000 shares of Class A Common Stock were
not included in the computations of diluted net income per share for the nine
months ended April 30, 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 G - 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 $2,274,000 during the nine
months ended April 30, 2004. The fiscal 2004 charges, including consolidation of
facilities in Europe and Australia, consist primarily of provision for
severance of terminated employees. The Company expects to incur total pre-tax
restructuring charges in fiscal 2004 of approximately $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 -
============= =============
Fiscal 2004 third quarter activity:
Additional restructuring charges 455,000 -
Non-cash asset write-off - -
Cash payments associated with severance and other (1,826,000) -
------------- -------------
Ending balance, April 30, 2004 $ 1,659,000 -
============= =============
9
NOTE H -- 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. As of May 2004, these criteria were met and the entire amount was paid to
the sellers. 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, $24,860,000 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.
NOTE I - 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 nine months ended April
30, 2004 and 2003:
Corporate
and
(Dollars in Thousands) Americas Europe Asia Eliminations Totals
-------- -------- ------- ------------ --------
Three months ended April 30, 2004:
Revenues from external customers $ 89,251 $ 69,683 $21,920 - $180,854
Intersegment revenues 10,421 608 881 $ (11,910) -
Segment profit (loss) 17,991 19,461 6,520 (1,067) 42,905
Three months ended April 30, 2003:
Revenues from external customers $ 76,536 $ 50,838 $14,581 - $141,955
Intersegment revenues 8,082 489 265 $ (8,836) -
Segment profit (loss) 12,670 11,729 3,298 (847) 26,850
Nine months ended April 30, 2004:
Revenues from external customers $243,539 $183,308 $58,861 - $485,708
Intersegment revenues 29,645 1,791 3,254 $ (34,690) -
Segment profit (loss) 42,605 48,256 16,849 (3,037) 104,673
Nine months ended April 30, 2003:
Revenues from external customers $224,899 $143,801 $41,482 - $410,182
Intersegment revenues 25,124 1,614 278 $ (27,016) -
Segment profit (loss) 32,530 33,023 10,078 (2,053) 73,128
Following is a reconciliation of profit for the three and nine months ended
April 30, 2004 and 2003:
Three Months Ended Nine Months Ended
-------------------------- --------------------------
April 30, April 30,
-------------------------- --------------------------
(Dollars in Thousands) 2004 2003 2004 2003
--------- --------- --------- ---------
Total profit from reportable segments $ 43,972 $ 27,697 $ 107,710 $ 75,631
Corporate and eliminations (1,067) (847) (3,037) (2,503)
Unallocated amounts:
Administrative costs (17,415) (14,055) (47,952) (41,682)
Interest-net 138 148 363 528
Foreign exchange (429) 806 (826) 194
Restructuring charge, net (455) - (2,274) -
Other (1,318) (720) (2,909) (2,448)
--------- --------- --------- ---------
Income before income taxes $ 23,426 $ 13,029 $ 51,075 $ 29,720
========= ========= ========= =========
10
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, 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 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 Nine Months Ended
April 30, April 30,
(In thousands, except per share amounts) 2004 2003 2004 2003
---------- --------- ---------- ----------
Net income
As reported $ 16,399 $ 8,597 $ 34,785 $ 19,613
Stock-based compensation expense recorded 202 - 479 -
Pro forma expense, net of tax effect (549) (497) (1,586) (994)
---------- --------- ---------- ----------
Pro forma net income, net of tax effect $ 16,052 $ 8,100 $ 33,678 $ 18,619
========== ========= ========== ==========
Net income per class A common share
Basic
As reported $ 0.69 $ 0.37 $ 1.48 $ 0.84
Pro forma adjustments (0.01) (0.02) (0.05) (0.04)
---------- --------- ---------- ----------
Pro forma net income per share $ 0.68 $ 0.35 $ 1.43 $ 0.80
========== ========= ========== ==========
Diluted
As reported $ 0.68 $ 0.37 $ 1.46 $ 0.81
Pro forma adjustments (0.01) (0.02) (0.05) (0.04)
---------- --------- ---------- ----------
Pro forma net income per share $ 0.67 $ 0.35 $ 1.41 $ 0.77
========== ========= ========== ==========
Net income per class B common share
Basic
As reported $ 0.69 $ 0.37 $ 1.45 $ 0.81
Pro forma adjustments (0.01) (0.02) (0.05) (0.06)
---------- --------- ---------- ----------
Pro forma net income per share $ 0.68 $ 0.35 $ 1.40 $ 0.75
========== ========= ========== ==========
Diluted
As reported $ 0.68 $ 0.37 $ 1.43 $ 0.80
Pro forma adjustments (0.01) (0.02) (0.05) (0.06)
---------- --------- ---------- ----------
Pro forma net income per share $ 0.67 $ 0.35 $ 1.38 $ 0.74
========== ========= ========== ==========
11
NOTE K - Revolving Credit Facility
On March 31, 2004, the Company entered into a new revolving credit
facility. Under the new agreement, the Company currently has a maximum $215
million line of credit (based on certain financial ratios of the Company) with a
group of five banks. The $215 million includes a 5-year credit facility for $125
million and a 364-day credit facility for $90 million. The interest rate on the
line of credit is a spread over LIBOR, as indicated in the "applicable rate"
table in the Credit Agreement attached as Exhibit 10.27 to this filing. As of
April 30, 2004, no amounts were outstanding under either facility. At April 30,
2004, $215 million was available to the Company under the combined
facilities. The Company is in compliance with the covenants of the line of
credit agreement.
NOTE L - Subsequent Events
On May 20, 2004, the Company completed its acquisition of all of the
outstanding securities of EMED Co., Inc. ("EMED") for a purchase price of
$191,700,000, net of cash received. EMED is a direct marketer and manufacturer
of identification, safety and facility management products headquartered in
Buffalo, New York. The funds used to finance the purchase price came from
borrowings on the Company's revolving credit facility and from working capital.
On May 18, 2004 the Company borrowed $160,000,000 to finance the purchase
of EMED Co. Of the borrowed funds, $90 million was drawn from its 364-day credit
facility and $70 million was drawn from its 5-year credit facility. The Company
intends to pay down a portion of these borrowings with the proceeds of
longer-term fixed rate borrowings during the fourth quarter of the current year.
12
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, Mexico, and Singapore and operates
sales offices in Hong Kong, Hungary, Japan, Korea, the Philippines, Sweden and
Taiwan.
Sales for the quarter ended April 30, 2004 were up 27.4% to $180,900,000,
compared to $142,000,000 in the same period of fiscal 2003. Net income for the
quarter was $16,400,000 or $0.68 per diluted Class A Common Share, up 90.8% from
$8,600,000 or $0.37 per share reported in the third quarter of last year.
Efficiencies from prior restructuring activities, increased sales from
investments in strategic acquisitions, facilities expansion in key geographic
markets such as Asia, continuing improvements in the Americas and European
manufacturing and electronic sectors, continued strong sales in the Asian
markets, particularly telecommunications and electronics, and favorable foreign
currency translation all contributed to increased net income in the current
periods. Sales from recent acquisitions also contributed 8.9%to the Company's
sales growth in the third 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 final quarter of fiscal 2004, and has increased its guidance range to
$645,000,000 to $655,000,000 in sales and net income of $47,000,000 to
$49,000,000 for the full fiscal year, excluding the effect of the acquisition of
EMED Co. The net income guidance includes $3 million of additional net income in
the fourth quarter due to an expected favorable resolution of a federal income
tax audit. Looking long term, the Company intends to continue with its growth
strategies of developing proprietary products; making acquisitions that 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 April 30, 2004, net sales of $180,854,000 were
27.4% higher than the same quarter of the previous year. For the nine months
ended April 30, 2004, sales of $485,708,000 were 18.4% higher than the same
period of the previous year. Base sales increased 10.8% for the quarter ended
April 30, 2004 and 2.6% for the nine-month period, compared to the same periods
in the prior 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 7.7% in the quarter and
7.3% for the nine months ended April 30, 2004. The acquisitions of 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 8.9% to sales in the quarter and the same acquisitions in addition to
TISCOR, Inc. in the United States, added 8.5% to sales for the nine months ended
April 30, 2004.
13
The gross margin as a percentage of sales increased from 51.5% to 52.5%
for the quarter and from 50.5% to 51.8% for the nine months ended April 30,
2004, compared to the same periods of the previous year. The gross margin as a
percentage of sales was higher for the quarter and nine months ended April 30,
2004 compared to the same periods last year due to the impact of sales volume
increases, improved price yields and continued cost reduction programs. Selling,
general and administrative (SG&A) expenses as a percentage of sales decreased to
35.7% from 39.4% for the quarter and to 37.3% from 40.0% for the nine months
ended April 30, 2004, compared to the same periods of the prior year due to
savings from restructuring actions taken in the fourth quarter of fiscal 2003,
the spreading of fixed costs over a larger sales base, and continued cost
control programs. In dollars, SG&A increased due to foreign currency
translation, increased professional fees 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 decreased
from 3.6% to 3.4% for the quarter and remained flat at 3.4% for the nine months
ended April 30, 2004 compared to the same periods of the previous year. The
increase for the quarter is primarily due to increased sales volume. In dollars,
research and development expenses increased from $5,165,000 to $6,210,000 for
the quarter and from $13,808,000 to $16,680,000 for the nine-month period
compared to the same periods in the prior year. This increase was due to
additional investment in recently introduced products.
Fiscal 2004 included a restructuring charge of $455,000 for the quarter
and $2,274,000 for the nine months ended April 30, 2004, which was primarily due
to consolidation of operating facilities in Europe and Australia. The Company
expects to incur total pre-tax restructuring charges in fiscal 2004 of
approximately $3,000,000. There were no restructuring charges in the first nine
months of the prior year.
Operating income was $23,719,000 for the quarter and $51,540,000 for the
nine-month period ended April 30, 2004, compared to $12,074,000 and $28,997,000
for the same periods last year due to the factors cited above.
Investment and other income decreased $1,265,000 for the quarter and
$1,217,000 for the nine-month period ended April 30, 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 30.0% for the quarter and 31.9% for
the nine-month period ended April 30, 2004 and 34.0% for the same periods of the
previous year. The reduction was due to a continued shift of business and profit
growth to lower tax countries such as China. The impact of this change on net
income was $1.0 million in the quarter. The Company expects a 32.0% effective
rate for the fourth quarter of fiscal 2004 before the effect of a $3 million
adjustment due to an expected favorable resolution of a federal income tax
audit, and a similar rate in fiscal 2005.
Net income for the three months ended April 30, 2004, increased 90.8% to
$16,399,000, compared to $8,597,000 for the same quarter of the previous year.
For the nine months ended April 30, 2004, net income increased 77.4% to
$34,785,000 from $19,613,000 for the same period last year. On a Class A Common
Share basis, diluted net income for the three months ended April 30, 2004, was
$0.68 compared to $0.37 per share for the same quarter of the previous year. For
the nine months ended April 30, 2004, Class A Common Share diluted net income
was $1.46 compared to $0.83 for the same period last year. Net income included
the after-tax effect of restructuring charges of $319,000 in the quarter ended
April 30, 2004 and $1,546,000 in the nine-month period ended April 30, 2004.
14
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.
Corporate and
(Unaudited, dollars in thousands) Americas Europe Asia Eliminations Total
-------- -------- ------- -------------- --------
SALES TO EXTERNAL CUSTOMERS
Three months ended:
April 30, 2004 $ 89,251 $ 69,683 $21,920 $180,854
April 30, 2003 76,536 50,838 14,581 141,955
Nine months ended:
April 30, 2004 $243,539 $183,308 $58,861 $485,708
April 30, 2003 224,899 143,801 41,482 410,182
SALES GROWTH INFORMATION
Three months ended April 30, 2004:
Base 7.3% 8.4% 37.5% 10.8%
Currency 1.4% 15.6% 12.8% 7.7%
Acquisitions 7.9% 13.1% 0.0% 8.9%
Total 16.6% 37.1% 50.3% 27.4%
Nine months ended April 30, 2004:
Base (1.0)% 0.5% 30.2% 2.6%
Currency 1.6% 14.8% 11.7% 7.3%
Acquisitions 7.7% 12.2% 0.0% 8.5%
Total 8.3% 27.5% 41.9% 18.4%
SEGMENT PROFIT (LOSS)
Three months ended:
April 30, 2004 $ 17,991 $ 19,461 $6,520 $(1,067) $42,905
April 30, 2003 12,670 11,729 3,298 (847) 26,850
Percentage increase 42.0% 65.9% 97.7% 26.0% 59.8%
Nine months ended:
April 30, 2004 $ 42,605 $ 48,256 $16,849 $(3,037) $104,673
April 30, 2003 32,530 33,023 10,078 (2,503) 73,128
Percentage increase 31.0% 46.1% 67.2% 21.3% 43.1%
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 I
"Segment Information" for a reconciliation of segment profit to income before
income taxes.
15
Americas:
Americas sales increased 16.6% for the quarter and 8.3% for the nine
months ended April 30, 2004, compared to the same periods last year. Base sales
in local currency increased 7.3% in the quarter and decreased 1.0% for the
nine-month period. Acquisitions increased sales in the region by 7.9% in the
quarter and 7.7% for the nine-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 1.4% in the quarter and 1.6% for the nine-month
period ended April 30, 2004. The increase in base business was due to
significant improvement in the United States manufacturing sector, particularly
in the lab research, electronic and industrial OEM markets. Some minimal growth
has been noted in the safety, MRO and electrical markets. Segment profit for
the region increased 42.0% to $17,991,000 from $12,670,000 for the three-month
period and 31.0% to $42,605,000 from $32,530,000 for the nine months ended April
30, 2004, compared to the same periods in the prior year. Increased
profitability in the Americas can be attributed to improved gross margins due
primarily to increased sales volume, continued cost reductions, and operational
improvements.
Europe:
Europe sales increased 37.1% for the quarter and 27.5% for the nine months
ended April 30, 2004, compared to the same periods in the prior year. Base sales
in local currency increased 8.4% in the quarter and 0.5% in the nine-month
period. The increase in base sales was due primarily to ongoing programs to
leverage existing customer spending through expanded product offerings and the
Company's ability to follow global manufacturers as they shift production to
lower cost regions, such as Eastern Europe. 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 15.6% in the
quarter and 14.8% in the nine-month period. Sales were also aided by
acquisitions, which increased sales 13.1% for the quarter and 12.2% for the
nine-month period. Profit for the region increased 65.9% in the quarter to
$19,461,000 from $11,729,000 in the prior year and 46.1% in the nine-month
period to $48,256,000 from $33,023,000 in the prior year, due primarily to
benefits from restructuring activities, foreign currency translation and
improved gross margins due to a more favorable mix of product sales.
Asia:
Asian sales increased 50.3% for the quarter and 41.9% for the nine-month
period ended April 30, 2004, compared to the same periods in the prior year.
Base sales in local currency increased 37.5% in the quarter and 30.2% for the
nine-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 12.8% in the quarter
and 11.7% for the nine-month period. China and Malaysia both more than doubled
base sales for the quarter and the nine-month period compared to the same
periods in the prior year. Investments in infrastructure in China and Malaysia
over the past two years are yielding significant growth. Profit for the region
was up 97.7% for the quarter to $6,520,000 from $3,298,000 in the prior year
third quarter. Profit for the nine-month period was up 67.2% to $16,849,000 from
$10,078,000 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.
16
Financial Condition
The Company's liquidity remained strong. Its current ratio as of April 30,
2004 was 2.2, down from the current ratio at July 31, 2003 of 2.4. Cash and cash
equivalents were $79,831,000 at April 30, 2004, compared to $76,088,000 at July
31, 2003. The increase was due to strong cash flow from operating activities.
Working capital increased $10,977,000 during the nine months ended April 30,
2004, to $134,855,000 from $123,878,000 at July 31, 2003. Inventories increased
$8,625,000 for the nine-month period, due primarily to the effects of
acquisitions and foreign currency translation. Accounts receivable increased
$21,638,000 for the nine months due to increased sales volume, acquisitions and
foreign currency translation. Current liabilities increased $22,811,000 for the
nine months, due to the timing of income tax payments and increased liabilities
associated with acquisitions, incentive plans and foreign currency translation.
Cash flow from operating activities totaled $47,482,000 for the nine
months ended April 30, 2004, compared to $40,471,000 for the same period last
year. The increase was the result of higher net income partially offset by an
increase in accounts receivable balances, increased inventory balances and an
increase in accrued income taxes. Capital expenditures were $10,616,000 in the
nine months ended April 30, 2004, compared to $11,593,000 in the same period
last year. Net cash used in financing activities was $6,236,000 for the
nine-month period ended April 30, 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 $15,127,000 related to payment of dividends, redemption of
preferred stock, issuance of common stock due to stock option exercises and
purchase of treasury stock.
Long-term debt as a percentage of long-term debt plus stockholders'
investment was 0.01% at April 30, 2004 and 0.2% at July 31, 2003.
On March 31, 2004, the Company entered into a new revolving credit
facility. Under the new agreement, the Company currently has a maximum $215
million line of credit (based on certain financial ratios of the Company) with a
group of five banks. The $215 million includes a 5-year credit facility for $125
million and a 364-day credit facility for $90 million. The interest rate on the
line of credit is a spread over LIBOR, as indicated in the "applicable rate"
table in the Credit Agreement attached as Exhibit 10.27 to this filing. As of
April 30, 2004, no amounts were outstanding under either facility. At April 30,
2004, $215 million was available to the Company under the combined facilities.
At April 30, 2004, the Company was 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 that expand the Company's 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.
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.
17
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.
Subsequent Events
On May 20, 2004, the Company completed its acquisition of all of the
outstanding securities of EMED Co., Inc. ("EMED") for a purchase price of
$191,700,000, net of cash received. EMED is a direct marketer and manufacturer
of identification, safety and facility management products headquartered in
Buffalo, New York. The funds used to finance the purchase price came from
borrowing on the Company's revolving credit facility and from working capital.
On May 18, 2004 the Company borrowed $160,000,000 to finance the purchase
of EMED Co. Of the borrowed funds, $90 million was drawn from its 364-day credit
facility and $70 million was drawn from its S-year credit facility. The Company
intends to pay down a portion of these borrowings with the proceeds of
longer-term fixed rate borrowings during the fourth quarter of the current year.
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.
18
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 April 30, 2004, the Company had 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.
19
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.27 Revolving Credit Facility Credit Agreement
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 April 30, 2004, the Company filed a Current
Report on Form 8-K containing information pursuant to Item 5 ("Other
Events") dated April 5, 2004, relating to the definitive agreement
to acquire EMED Co., Inc.
Also during the quarter ended April 30, 2004, the Company submitted
a Current Report on Form 8-K pursuant to Item 12 ("Results of
Operations and Financial Condition") dated February 18, 2004, which
is not to be deemed incorporated by reference into other filings,
relating to the announcement of earnings for the Company's fiscal
2004 second quarter.
20
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 14, 2004 /s/ F. M. Jaehnert
- -------------------- ------------------------------------------
F. M. Jaehnert
President & Chief Executive Officer
Date: June 14, 2004 /s/ D. Mathieson
- -------------------- ------------------------------------------
D. Mathieson
Vice President & Chief Financial Officer
(Principal Accounting Officer)
(Principal Financial Officer)
21