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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 October 31, 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 November 23, 2004, there were outstanding 22,737,034 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 20
Item 4. Controls and Procedures 20
PART II. Other Information
Item 6. Exhibits 21
Signatures 22
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
OCTOBER 31, 2004 JULY 31, 2004
---------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 52,370 $ 70,368
Accounts receivable, less allowance for losses ($4,298
and $3,869, respectively) 116,276 105,322
Inventories:
Finished products 32,138 29,616
Work-in-process 8,135 6,550
Raw materials and supplies 19,146 16,765
---------------- -------------
Total inventories 59,419 52,931
Prepaid expenses and other current assets 20,837 23,302
---------------- -------------
TOTAL CURRENT ASSETS 248,902 251,923
OTHER ASSETS:
Goodwill 300,460 275,897
Other intangible assets 64,665 45,879
Other 32,263 34,526
---------------- -------------
397,388 356,302
PROPERTY, PLANT AND EQUIPMENT:
Cost:
Land 6,290 6,242
Buildings and improvements 60,092 58,850
Machinery and equipment 158,593 153,467
Construction in progress 3,885 1,468
---------------- -------------
228,860 220,027
Less accumulated depreciation 140,001 133,922
---------------- -------------
NET PROPERTY, PLANT AND EQUIPMENT 88,859 86,105
---------------- -------------
TOTAL $ 735,149 $ 694,330
================ =============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 36,290 $ 38,533
Wages and amounts withheld from employees 26,163 41,872
Taxes, other than income taxes 5,645 3,852
Accrued income taxes 20,990 12,399
Other current liabilities 31,130 23,529
Short-term borrowings and current maturities on long-term debt 23 32
---------------- -------------
TOTAL CURRENT LIABILITIES 120,241 120,217
LONG-TERM DEBT, LESS CURRENT MATURITIES 150,000 150,019
OTHER LIABILITIES 33,306 20,779
---------------- -------------
TOTAL LIABILITIES 303,547 291,015
STOCKHOLDERS' INVESTMENT:
Class A nonvoting common stock - Issued and outstanding 22,556,266 226 224
and 22,345,399 shares, respectively
Class B voting common stock - Issued and outstanding 1,769,314 shares 18 18
Additional paid-in capital 81,803 72,865
Income retained in the business 337,403 322,224
Treasury stock - 34,657 class A common shares,
at cost (1,074) (1,074)
Accumulated other comprehensive income 13,428 9,340
Other (202) (282)
---------------- -------------
TOTAL STOCKHOLDERS' INVESTMENT 431,602 403,315
---------------- -------------
TOTAL $ 735,149 $ 694,330
================ =============
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 October 31,
2004 2003
-------------- --------------
Net sales $ 200,419 $ 151,906
Cost of products sold 94,894 73,143
-------------- --------------
Gross margin 105,525 78,763
Operating expenses:
Research and development 5,704 4,864
Selling, general and administrative 68,028 56,388
Restructuring charge - 1,753
-------------- --------------
Total operating expenses 73,732 63,005
Operating income 31,793 15,758
Other income (expense):
Investment and other income (expense) 283 (159)
Interest expense (2,139) (30)
-------------- --------------
Income before income taxes 29,937 15,569
Income taxes 9,580 5,216
-------------- --------------
Net income 20,357 10,353
Income retained in business at beginning of period 322,224 290,805
Less:
Common stock dividends (5,178) (4,770)
-------------- --------------
Income retained in business at end of period $ 337,403 $ 296,388
============== ==============
Net income per Class A Nonvoting Common Share
Basic $ 0.84 $ 0.44
============== ==============
Diluted $ 0.83 $ 0.44
============== ==============
Net income per Class B Voting Common Share
Basic $ 0.81 $ 0.41
============== ==============
Diluted $ 0.80 $ 0.41
============== ==============
See Notes to Condensed Consolidated Financial Statements
4
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
October 31,
2004 2003
------- -------
Operating activities:
Net income $20,357 $10,353
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 6,775 4,697
Income tax benefit from the exercise of stock options 2,184 415
Loss on sale or disposal of property, plant & equipment 158 37
Provision for losses on accounts receivable 329 360
Non-cash portion of stock-based compensation expense 1,193 86
Net restructuring charge - 1,676
Changes in operating assets and liabilities (net of effects of business acquisitions):
Accounts receivable (5,099) (6,478)
Inventories (3,536) (1,796)
Prepaid expenses and other assets 2,644 1,408
Accounts payable and accrued expenses (14,301) (4,566)
Income taxes 7,043 3,558
Other liabilities 1,001 341
------- -------
Net cash provided by operating activities 18,748 10,091
Investing activities:
Acquisition of businesses, net of cash acquired (34,394) (21,830)
Purchases of property, plant and equipment (2,819) (3,605)
Proceeds from sale of property, plant and equipment 298 194
Other (407) (61)
------- -------
Net cash used in investing activities (37,322) (25,302)
Financing activities:
Payment of dividends (5,178) (5,124)
Proceeds from issuance of common stock 5,643 4,732
Principal payments on debt (30) (816)
Purchase of treasury stock - (564)
------- -------
Net cash provided by (used in) financing activities 435 (1,772)
Effect of exchange rate changes on cash 141 1,000
------- -------
Net decrease in cash and cash equivalents (17,998) (15,983)
Cash and cash equivalents, beginning of period 70,368 76,088
------- -------
Cash and cash equivalents, end of period $52,370 $60,105
======= =======
Supplemental disclosures:
Cash paid during the period for:
Interest $ 78 $ 55
Income taxes, net of refunds 489 1,294
Acquisitions:
Fair value of assets acquired, net of cash $30,337 $ 8,242
Liabilities assumed (17,019) (3,025)
Goodwill 21,076 16,613
------- -------
Net cash paid for acquisitions $34,394 $21,830
======= =======
See Notes to Condensed Consolidated Financial Statements
5
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended October 31, 2004
(Unaudited)
NOTE A - Basis of Presentation
The condensed consolidated financial statements included herein have been
prepared by Brady Corporation and subsidiaries (the "Company" or "Brady")
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 adjustments,
necessary to present fairly the financial position of the Company as of October
31, 2004 and July 3l, 2004, and its results of operations and cash flows for the
three months ended October 31, 2004 and 2003. The condensed consolidated balance
sheet at July 31, 2004 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 ("GAAP") 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 GAAP 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, 2004.
NOTE B - Employee Benefit Plans
In December 2003, the United States enacted into law the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the "Act"). The
Act establishes a prescription drug benefit under Medicare, known as "Medicare
Part D," and a federal subsidy to sponsors of retiree health care benefit plans
that provide a benefit that is at least actuarially equivalent to Medicare Part
D.
In May 2004, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position No. 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003" ("FSP
106-2"). FSP 106-2 requires companies to account for the effect of the subsidy
on benefits attributable to past service as an actuarial experience gain and as
a reduction of the service cost component of net postretirement health care
costs for amounts attributable to current service, if the benefit provided is at
least actuarially equivalent to Medicare Part D.
Brady Corporation elected to adopt FSP 106-2 effective with the fiscal
year beginning August 1, 2004. The Company determined that benefits provided to
certain participants are expected to be at least actuarially equivalent to
Medicare Part D, and, accordingly, the Company will be entitled to a subsidy.
The expected subsidy reduces the accumulated postretirement benefit obligation
at August 1, 2004 by $575,000 and reduces the net periodic benefit cost for the
year ending July 31, 2005 by $97,000 as compared with the amount calculated
without considering the effects of the subsidy.
6
Assumptions used to develop these reductions include those used in the
determination of the annual expense under Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits
other than Pensions," and also include expectations of how the federal program
will ultimately operate. There are currently no written regulations that provide
this level of detail regarding the ultimate operation of the subsidy program. It
is expected that final regulations will be published in early calendar year
2005.
NOTE C - Goodwill and Intangible Assets
Changes in the carrying amount of goodwill for the quarter ended October
31, 2004, are as follows:
Americas Europe Asia Total
-------- -------- -------- -------
Balance as of July 31, 2004 $217,316 $ 55,848 $ 2,733 $275,897
Goodwill acquired during the period - - 21,076 21,076
Translation and other adjustments 544 2,242 701 3,487
-------- -------- -------- --------
Balance as of October 31, 2004 $217,860 $ 58,090 $ 24,510 $300,460
======== ======== ======== ========
Goodwill increased by $24,563,000 during the three months ended October
31, 2004, including an increase of $3,487,000 attributable to translation
adjustments and other. The preliminary allocation of the purchase price for the
acquisition of ID Technologies Pte Ltd. in Asia resulted in $21,076,000 of
additional goodwill.
Other intangible assets include patents, trademarks, non-compete
agreements and other intangible assets with finite lives being amortized in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets." The net book value of these assets was
as follows:
OCTOBER 31, 2004 JULY 31, 2004
------------------------------------------- --------------------------------------------
WEIGHTED
AVERAGE GROSS GROSS
AMORTIZATION CARRYING ACCUMULATED NET BOOK CARRYING ACCUMULATED NET BOOK
PERIOD (YEARS) AMOUNT AMORTIZATION VALUE AMOUNT AMORTIZATION VALUE
------------- ----------- ------------- ------------ ------------ ------------ ------------
Patents.............. 16 $ 6,578,000 $ (4,110,000) $ 2,468,000 $ 6,450,000 $ (3,967,000) $ 2,483,000
Trademarks and
other.............. N/A 15,301,000 (837,000) 14,464,000 15,290,000 (825,000) 14,465,000
Customer
relationships...... 8 46,470,000 (3,481,000) 42,989,000 28,203,000 (1,644,000) 26,559,000
Purchased software... 5 2,339,000 (1,000,000) 1,339,000 2,339,000 (894,000) 1,445,000
Non-compete
agreements......... 4 5,751,000 (2,346,000) 3,405,000 3,130,000 (2,203,000) 927,000
----------- ------------- ------------ ------------ ------------ ------------
Total.......... 8 $76,439,000 $ (11,774,000) $ 64,665,000 $ 55,412,000 (9,533,000) $ 45,879,000
=========== ============= ============ ============ ============ ============
The increase of customer relationships and non-compete agreements in the
quarter ended October 31, 2004, relates mainly to the acquisition of ID
Technologies, which added $18,218,000 of customer relationships and 2,621,000 of
non-compete agreements. The value of these intangible assets in the Condensed
Consolidated Financial Statements is greater than the value assigned to them in
the preliminary allocation of purchase price due to the positive effect of
fluctuations in the exchange rates used to translate financial results into the
United States Dollar.
Amortization expense of intangible assets during fiscal 2004 was
$2,965,000. The amortization over each of the next five fiscal years is
projected to be $7,764,000, $7,486,000, $7,318,000, $7,018,000 and $6,891,000
for 2005, 2006, 2007, 2008 and 2009, respectively.
NOTE D - Comprehensive Income
Total comprehensive income, which was comprised of net income, foreign
currency adjustments and net unrealized gains and losses from cash flow hedges,
amounted to approximately $24,445,000 and $14,597,000 for the three months ended
October 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:
(Dollars in thousands, except per share amounts)
Three Months Ended October 31,
--------------------------- ---
2004 2003
-------------- --------------
Numerator:
Net income $ 20,357 $ 10,353
Numerator for basic and diluted
Class A net income per share 20,357 10,353
Less: Preferential dividends (751) (721)
Less: Preferential dividends on
dilutive stock options (13) (9)
-------------- --------------
Numerator for basic and diluted
Class B net income per share $ 19,593 $ 9,623
============== ==============
Denominator:
Denominator for basic net income per
share for both Class A and Class B 24,237 23,413
Plus: Effect of dilutive stock options 378 267
-------------- --------------
Denominator for diluted net income per
share for both Class A and Class B 24,615 23,680
============== ==============
Class A Non Voting Common Stock net income per share:
Basic $ 0.84 $ 0.44
Diluted $ 0.83 $ 0.44
Class B Voting Common Stock net income per share:
Basic $ 0.81 $ 0.41
Diluted $ 0.80 $ 0.41
8
NOTE F - Restructuring
During fiscal 2004 the Company recorded restructuring charges of
$3,181,000. The Company also recorded a restructuring charge of $10,215,000 in
fiscal 2003. This combined total of $13,396,000 was part of the restructuring
program announced in the fourth quarter of fiscal 2003 related primarily to
combining sales and marketing resources and consolidating facilities throughout
North America and Europe resulting in a workforce reduction of approximately 300
employees.
The 2004 restructuring charge of $3,181,000 included a provision for
severance of approximately $2,900,000 and write-off or impairment of assets and
other of $281,000. In 2003 the $10,215,000 restructuring charge included a
provision for severance of approximately $8,220,000 and write-off or impairment
of assets and other of $1,995,000. Total cash expenditures in connection with
these actions are expected to be approximately $12,000,000, of which
approximately $2,300,000 was paid in fiscal 2003 and $8,300,000 was paid in
fiscal 2004. The remaining balance is sufficient to address any remaining
restructuring liabilities and is expected to be used in fiscal 2005.
Reconciliations of activity with respect to the Company's restructuring actions
are as follows:
Fiscal 2003
and 2004
Restructuring
-------------
Ending balance, July 31, 2004 $ 1,691,000
Fiscal 2005 first quarter activity:
Non-cash asset write-off (323,000)
Cash payments associated with severance and other (688,000)
-------------
Ending balance, October 31, 2004 $ 680,000
=============
NOTE G - Acquisitions
In August 2004, the Company acquired ID Technologies Pte Ltd., ("ID
Technologies") headquartered in Singapore, with additional operations in China.
ID Technologies is a manufacturer of die-cut products and was acquired to expand
our manufacturing capacity and market share in Asia. The cash purchase price net
of cash acquired was approximately $34,394,000 plus an additional $8,700,000 to
be paid at a future date. The $8,700,000 of future payments are not contingent
on any additional factors and consist of a $6,500,000 holdback, a final equity
adjustment, and repayment of cash purchased. The holdback will be paid in August
2006 and is recorded as a long-term liability at October 31, 2004. The agreement
also provides for a contingent payment of no more than $2,500,000 if ID
Technologies meets certain financial targets for the fiscal year ending July 31,
2005. No liability for this contingent payment is included in the accompanying
condensed consolidated financial statements. The purchase price allocation is
preliminary pending the final outcome of a valuation, which is in progress. Of
the purchase price, $21,076,000 was assigned to goodwill in the preliminary
allocation. In addition to goodwill, intangible assets of $20,226,000 are
included in the accompanying condensed consolidated balance sheet as of October
31, 2004. The preliminary allocation of these intangible assets includes
approximately $17,500,000 for customer relationships, $2,500,000 for non-compete
agreements, and $226,000 of other intangibles. The results of the operations of
ID Technologies have been included since the date of acquisition in the
accompanying condensed consolidated financial statements.
9
On May 20, 2004, the Company completed its acquisition of all of the
outstanding securities of EMED. The following unaudited pro-forma combined
information, assuming the EMED acquisition was completed on August 1, 2003, is
provided for illustrative purposes only and should not be relied upon as
necessarily being indicative of the historical results that would have been
obtained if this acquisition had actually occurred during those periods, or the
results that may be obtained in the future.
THREE MONTHS ENDED
OCTOBER 31,
2004 2003
--------- --------
(DOLLARS IN THOUSANDS)
Net Sales............................... $ 200,419 $165,824
========= ========
Net Income.............................. $ 21,686 $ 12,068
========= ========
Reported net income per share:
Class A
Basic 0.84 0.44
Diluted 0.83 0.44
Pro-forma net income per share:
Class A
Basic 0.89 0.52
Diluted 0.88 0.51
Reported net income per share:
Class B
Basic 0.81 0.41
Diluted 0.80 0.41
Pro-forma net income per share:
Class B
Basic 0.86 0.48
Diluted 0.85 0.48
10
NOTE H - Segment Information
The Company's reportable segments are geographical regions that are each
managed separately. The Company has three reportable segments: Americas, Europe
and Asia. Following is a summary of segment information for the three months
ended October 31, 2004 and 2003:
(Dollars in Thousands)
Corporate
and
Americas Europe Asia Eliminations Totals
-------- ------- ------- ------------ -------
Three months ended October 31, 2004:
Revenues from external customers $105,449 $64,527 $30,443 $200,419
Intersegment revenues 10,583 665 1,215 ($12,463) -
Profit (loss) 25,380 18,132 8,910 (1,425) 50,997
Three months ended October 31, 2003:
Revenues from external customers $ 80,092 $53,265 $18,549 $151,906
Intersegment revenues 9,990 563 995 ($11,548) -
Profit (loss) 15,116 13,449 5,424 (770) 33,219
Following is a reconciliation of segment profit (loss) to income before income
taxes for the three months ended October 31, 2004 and 2003:
(Dollars in Thousands)
Three months ended:
October 31,
2004 2003
-------- --------
Total profit from reportable segments $ 52,422 $ 33,989
Corporate and eliminations (1,425) (770)
Unallocated amounts:
Administrative costs (17,601) (15,172)
Interest-net (1,825) 91
Foreign exchange (30) (280)
Restructuring charge, net - (1,753)
Other (1,604) (536)
-------- --------
Income before income taxes $ 29,937 $ 15,569
======== ========
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 three months ended October 31, 2004 and October
31, 2003, under stock-based compensation plans previously approved by
shareholders. Generally, these options are not exercisable until one year after
the grant date, and will be exercisable thereafter, to the extent of one-third
per year, and have a maximum term of ten years. In fiscal 2004 and 2005, 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.
11
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company has elected to account for its employee stock option plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," which recognizes expense based on the intrinsic value at the date of
grant. As stock options have been issued with exercise prices equal to the
market value of the Company's Common Stock on the grant date, no compensation
cost has been recorded, with the exception of certain options issued during
fiscal 2004 and 2005 that vest upon meeting certain performance conditions
("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:
(In thousands, except per share amounts)
Three Months Ended
October 31,
2004 2003
---------- ----------
Net earnings:
As reported $ 20,357 $ 10,353
Stock-based compensation expense
recorded, net of tax 667 30
Pro forma expense, net of tax (504) (436)
---------- ----------
Pro forma $ 20,520 $ 9,947
========== ==========
Net earnings per class A common share
Basic:
As reported $ 0.84 $ 0.44
Pro forma adjustments 0.01 (0.02)
---------- ----------
Pro forma $ 0.85 $ 0.42
========== ==========
Diluted:
As reported $ 0.83 $ 0.44
Pro forma adjustments 0.01 (0.02)
---------- ----------
Pro forma $ 0.84 $ 0.42
========== ==========
NOTE J - Subsequent Events
On November 18, 2004, the Board of Directors of Brady Corporation approved
a two-for-one stock split in the form of a 100 percent stock dividend of one
share of Class A Common Stock on each outstanding share of Class A Common Stock
and one share of Class B Common Stock on each outstanding share of Class B
Common Stock effective December 31, 2004 for shareholders of record at the close
of business on December 10, 2004.
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
solutions and specialty materials which help customers increase safety,
security, productivity and performance. Its products include high-performance
labels and signs, printing systems and software, label-application and
data-collection systems, safety devices and precision die-cut materials. Founded
in 1914, the Company serves customers in electronics, telecommunications,
manufacturing, electrical, construction, laboratory, education, governmental,
public utility, computer, transportation and a variety of other industries. The
Company operates manufacturing facilities and/or sales offices in Australia,
Belgium, Brazil, Canada, China, England, France, Hong Kong, Hungary, Germany,
Italy, Japan, Korea, Malaysia, Mexico, the Netherlands, the Philippines,
Singapore, Spain, Sweden, Taiwan, Thailand and the United States. The Company
believes that its reputation for innovation, commitment to quality and service,
and dedicated employees have made it a world leader in the markets it serves.
Sales for the quarter ended October 31, 2004, were up 31.9% to
$200,419,000, compared to $151,906,000 in the same period of fiscal 2004. Base
sales were up 10.2%, or $15,563,000 in the quarter compared to the same period
in fiscal 2004. Net income for the quarter was $20,357,000 or $0.83 per diluted
Class A Common Share, up 96.6% from $10,353,000 or $0.44 per share reported in
the first quarter of last year. Management attributes the improved base growth
to the Company's initiatives to accelerate growth in its core business through
new product development, better market penetration, new market expansion and
improving economic conditions. Both sales growth and profitability improved in
the quarter due to positive growth and profitability of recent acquisitions, a
continued strengthening of the United States economy, and strong growth in Asia,
most notably in China.
In October 2004, the Company increased its guidance range to $780,000,000
to $800,000,000 in sales and net income of $66,000,000 to $69,000,000 for the
full fiscal year ending July 31, 2005. The guidance includes the expected
results of the Company's most recent acquisition, ID Technologies in Singapore.
Looking long term, the Company intends to continue 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, 2004. In addition,
the Company is currently beginning to feel some pressure from suppliers, which
plan to increase prices in fiscal 2005. Shortages of certain raw materials have
not currently had an effect on the Company's production, but management
continues to monitor key materials for possible shortages.
Results of Operations
For the three months ended October 31, 2004, net sales of $200,419,000
were 31.9% higher than the same quarter of the previous year. Base sales
increased 10.2% for the quarter ended October 31, 2004 compared to the same
period 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 3.7% in the quarter,
primarily due to the increased value of the Euro relative to the United States
Dollar. The acquisitions of Brandon International, Prinzing Enterprises, Inc.,
and EMED Co., Inc. (EMED) in the United States, B.I.G in the United Kingdom, and
ID Technologies in Singapore added 18.0% to sales in the quarter.
13
The gross margin as a percentage of sales increased from 51.8% to 52.7%
for the quarter ended October 31, 2004, compared to the same period of the
previous year. The gross margin percentage increase was primarily due to the
positive contribution of EMED to Brady's overall product mix.
Selling, general and administrative ("SG&A") expenses as a percentage of
sales decreased to 33.9% from 37.1% for the quarter ended October 31, 2004,
compared to the same period of the prior year due to the spreading of fixed
costs over a larger sales base. In dollars, SG&A increased due to foreign
currency translation, and SG&A expenses associated with acquired businesses.
As a percentage of sales, research and development expenses decreased from
3.2% to 2.8% for the quarter ended October 31, 2004, compared to the same period
of the previous year. The percentage decrease for the quarter was primarily due
to increased sales volume. In dollars, research and development expenses
increased from $4,864,000 to $5,704,000 for the quarter compared to the same
period in the prior year.
Fiscal 2004 included a restructuring charge of $1,753,000 for the quarter
ended October 31, 2003, which was primarily due to the consolidation of
operating facilities in Europe. There were no material restructuring charges in
the first three months of the current fiscal year.
The Company's effective tax rate was 32.0% for the quarter ended October
31, 2004, and 33.5% for the same period of the previous year. The reduction was
due to a higher percentage of profit growth in lower tax jurisdictions such as
China.
Net income for the three months ended October 31, 2004, increased 96.6% to
$20,357,000, compared to $10,353,000 for the same quarter of the previous year.
On a Class A Common Share basis, diluted net income for the three months ended
October 31, 2004, was $0.83 compared to $0.44 per share for the same quarter of
the previous year.
14
Business Segment Operating Results
Management of the Company evaluates results based on the following
geographic regions: Americas, Europe, and Asia.
(Unaudited, dollars in thousands)
Corporate
and
Americas Europe Asia Eliminations Totals
-------- ------- --------- ------------- --------
SALES TO EXTERNAL CUSTOMERS
Three months ended:
October 31, 2004 $105,449 $64,527 $ 30,443 $200,419
October 31, 2003 80,092 53,265 18,549 151,906
SALES GROWTH INFORMATION
Three months ended October 31, 2004:
Base 8.5% 6.6% 28.2% 10.2%
Currency (0.1)% 9.3% 3.8% 3.7%
Acquisitions 23.3% 5.2% 32.1% 18.0%
======== ======= ========= ========
Total 31.7% 21.1% 64.1% 31.9%
SEGMENT PROFIT (LOSS)
Three months ended:
October 31, 2004 $ 25,380 $18,132 $ 8,910 $ (1,425) $ 50,997
October 31, 2003 15,116 13,449 5,424 (770) 33,219
Percentage increase 67.9% 34.8% 64.3% 85.1% 53.5%
The Company evaluates regional performance using sales and segment profit.
Allocation of resources is based on a range of financial and strategic factors.
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," to the Company's Notes to Condensed Consolidated Financial
Statements for a reconciliation of segment profit to income before income taxes.
15
Americas:
Americas sales increased 31.7% for the quarter ended October 31, 2004,
compared to the same period in the prior year. Base sales in local currency
increased 8.5% in the quarter. Sales in the region increased by 23.3% in the
quarter due to acquisitions, primarily the acquisition of EMED. The increase in
base business was due primarily to new product introductions and the recovery of
the electronics and die cut markets. Additionally, the Company continues to see
strong growth in the core electronic and industrial OEM markets. Segment profit
for the region increased 67.9% to $25,380,000 for the quarter ended October 31,
2004, compared to $15,116,000, for the same period in the prior year. Increased
segment profit in the Americas can be attributed in part to the successful
integration of EMED earlier than planned and increased profit associated with
the base sales growth in the Brady brand business spread over flat fixed costs.
Benchmarking of the EMED business model also improved the profitability of the
other direct marketing operations.
Europe:
Europe sales increased 21.1% for the quarter ended October 31, 2004,
compared to the same period in the prior year. Base sales in local currency
increased 6.6 % in the quarter. 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 9.3% in the quarter. Sales
were also aided by the acquisition of BIG, which increased sales by 5.2% for the
quarter. The Company's base business continued to grow in Europe despite a
relatively flat European economy. The direct marketing business experienced
growth due to expansion of customer base and greater product offerings in its
catalogs. The wire identification and die cut businesses also showed
double-digit growth for the quarter reflecting solid performance of these end
markets. Segment profit for the region increased 34.8% in the quarter to
$18,132,000 from $13,449,000 in the same period of the prior year, due primarily
to base sales volume, foreign currency translation and increased productivity
from the existing cost structure.
Asia:
Asia sales increased 64.1% for the quarter ended October 31, 2004,
compared to the same period in the prior year. Base sales in local currency
increased 28.2% in the quarter, compared to the same period last year. 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
3.8% in the quarter as compared to the same quarter last year. Sales were also
aided by the acquisition of ID Technologies, which added 32.1% for the quarter.
Operations in China led the strong base growth performance in the region. The
Company is continuing to increase capacity and personnel in its facilities in
China to meet increased demand from the electronics and telecommunications
industries. Segment profit for the region was up 64.3% for the quarter to
$8,910,000 from $5,424,000 in the prior year first quarter. The increase in
profit was due primarily to increased sales volume, foreign currency translation
and the addition of ID Technologies.
16
Financial Condition
The Company's current ratio as of October 31, 2004, remained at 2.1, which
is consistent with the prior year. Cash and cash equivalents were $52,370,000 at
October 31, 2004, compared to $70,368,000 at July 31, 2004. The decrease was due
to the purchase of ID Technologies with cash, which was partially offset by cash
flow from operating activities. Working capital decreased $3,045,000 during the
three months ended October 31, 2004, to $128,661,000 from $131,706,000 at July
31, 2004. Inventories increased $6,488,000 for the quarter, due primarily to the
effects of acquisitions and foreign currency translation. Accounts receivable
increased $10,954,000 for the quarter due to increased sales volume,
acquisitions and foreign currency translation. The net increase in current
liabilities was $24,000 for the quarter. The increase was composed of increases
in accrued income taxes due to improved profitability and accrued liabilities
associated with acquisitions, incentive plans and foreign currency translation,
partially offset by a significant decrease in the accrued wages and amounts
withheld from employees due to the payment of incentives in the first quarter
related to the year ended July 31, 2004.
Cash flow from operating activities totaled $18,748,000 for the quarter
ended October 31, 2004, compared to $10,091,000 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 inventories and a decrease in accrued
liabilities associated with the payment of incentives. Capital expenditures were
$2,819,000 in the quarter ended October 31, 2004, compared to $3,605,000 in the
same period last year. Net cash provided by financing activities was $435,000
for the quarter ended October 31, 2004, due to proceeds from the issuance of
common stock due to stock option exercises, partially offset by payments of
dividends to the Company's stockholders . Net cash used in financing activities
for the same period last year was $1,772,000 related to payment of dividends,
issuance of common stock due to stock option exercises, principal payments on
debt and purchase of treasury stock.
Long-term debt as a percentage of long-term debt plus stockholders'
investment was 25.8% at October 31, 2004 and 27.1% at July 31, 2004. The
decrease was due to increases in stockholders' investment from proceeds from the
issuance of common stock due to stock option exercises, income retained in the
business, and other comprehensive income.
On March 31, 2004, the Company entered into an unsecured $125,000,000
multi-currency revolving loan agreement with a group of five banks. Under the
5-year agreement, which has a final maturity date of March 31, 2009, the Company
has the option to have interest rates determined based upon the higher of the
federal funds rate plus one-half of 1% or the prime rate at Bank of America or
at LIBOR rate plus margin. A commitment fee is payable on the unused portion.
The agreement requires the Company to maintain certain financial covenants. As
of October 31, 2004, the Company was in compliance with the covenants of the
agreement. The agreement restricts the amount of certain types of payments,
including dividends, which can be made annually to $25,000,000 plus 50% of the
consolidated net income for the prior year. The Company believes that based on
historic dividend policy, this restriction would not affect its ability to
follow a similar dividend policy in the future. As of October 31, 2004, there
were no outstanding borrowings on the 5-year revolving loan agreement.
On June 30, 2004, the Company finalized a debt offering of $150,000,000 of
5.14% unsecured senior notes due in 2014 in an offering exempt from the
registration requirements of the Securities Act of 1933. The repayment
requirement of the notes will be amortized over seven years beginning in 2008,
with interest payable on the notes semiannually on June 28 and December 28,
beginning in December 2004. The Company used the proceeds of the offering to
reduce outstanding indebtedness under the Company's revolving credit facilities
used to initially fund the EMED acquisition. The debt has certain prepayment
penalties.
17
During the quarter, the Company announced plans to build a 60,000 square
foot expansion of an existing facility in Milwaukee, Wisconsin. The
approximately $10,000,000 project, which will be funded out of the Company's
operating capital, will consolidate the warehouse and distribution services of
several Brady facilities, providing increased distribution efficiencies and
improved logistics for customers. The Company expects to complete the project in
12 to 18 months.
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 Company's continued positive cash flow and available borrowings 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 the Company's processes. This strategic plan also includes executing key
acquisitions.
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.
Purchase Commitments - The Company has purchase commitments for materials,
supplies, services, and property, plant and equipment as part of the ordinary
conduct its 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.
New Accounting Pronouncements
On October 22, 2004, the American Jobs Creation Act of 2004 (the "Act")
was signed into law. The Act contains $137 billion in tax cuts over a ten-year
period beginning in 2005, which are mainly targeted at U.S. manufacturing
businesses and multinational companies. The Company has not yet completed its
assessment of how the Act might impact future results of operations or cash
flows.
Subsequent Events
Please refer to Note J, "Subsequent Events," to the Company's Notes to
Condensed Consolidated Financial Statements for a description of the stock split
announced in November 2004.
18
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
2004 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.
19
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 may include entering into
approved interest rate derivatives when there is a desire to modify the
Company's exposure to interest rates. As of October 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 that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
20
PART II. OTHER INFORMATION
ITEM 6. Exhibits
(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
21
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: December 9, 2004 /s/ F. M. Jaehnert
-----------------------------
F. M. Jaehnert
President & Chief Executive Officer
Date: December 9, 2004 /s/ David Mathieson
-----------------------------
David Mathieson
Vice President & Chief Financial Officer
(Principal Accounting Officer)
(Principal Financial Officer)
22