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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, 2005
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 18, 2005, there were outstanding 45,735,249 shares of Class A Common
Stock and 3,538,628 shares of Class B Common Stock. The Class B Common Stock
is the only voting stock of the Corporation. All of the Class B Common Stock
is owned by three trusts.
FORM 10-Q
BRADY CORPORATION
INDEX
Page
----
PART I. Financial Information
Item 1. Condensed Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 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 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 25
PART II. Other Information
Item 6. Exhibits 26
Signatures 27
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(Unaudited)
-------------------------
APRIL 30, JULY 31,
2005 2004
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 70,287 $ 65,218
Short-term Investments 16,200 5,150
Accounts receivable, less allowance for losses ($3,899 and $3,869 respectively) 119,301 105,322
Inventories:
Finished products 37,102 29,616
Work-in-process 9,744 6,550
Raw materials and supplies 20,193 16,765
---------- -----------
Total inventories 67,039 52,931
Prepaid expenses and other current assets 24,226 23,302
---------- -----------
TOTAL CURRENT ASSETS 297,053 251,923
OTHER ASSETS:
Goodwill 314,589 275,897
Other intangible assets 60,557 45,879
Other 43,668 34,526
---------- -----------
Total other assets 418,814 356,302
PROPERTY, PLANT AND EQUIPMENT:
Cost:
Land 6,451 6,242
Buildings and improvements 64,760 58,850
Machinery and equipment 156,490 153,467
Construction in progress 5,646 1,468
---------- -----------
233,347 220,027
Less accumulated depreciation 138,507 133,922
---------- -----------
NET PROPERTY, PLANT AND EQUIPMENT 94,840 86,105
---------- -----------
TOTAL $ 810,707 $ 694,330
========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 36,914 $ 38,533
Wages and amounts withheld from employees 38,809 41,872
Taxes, other than income taxes 5,810 3,852
Accrued income taxes 24,419 12,399
Other current liabilities 26,316 23,529
Short-term borrowings and current maturities of long-term debt 11 32
---------- -----------
TOTAL CURRENT LIABILITIES 132,279 120,217
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 150,028 150,019
OTHER LIABILITIES 36,857 20,779
---------- -----------
TOTAL LIABILITIES 319,164 291,015
STOCKHOLDERS' INVESTMENT:
Common stock:
Class A nonvoting common stock - Issued and outstanding, 45,735,249
and 44,690,798 shares, respectively 457 447
Class B voting common stock - Issued and outstanding 3,538,628 shares 35 35
Additional paid-in capital 94,855 72,625
Income retained in the business 372,231 322,224
Treasury stock - 117,245 and 69,314 shares, respectively, at cost (2,134) (1,074)
Accumulated other comprehensive income 26,140 9,340
Other (41) (282)
---------- -----------
TOTAL STOCKHOLDERS' INVESTMENT 491,543 403,315
TOTAL $ 810,707 $ 694,330
========== ===========
See Notes to Condensed Consolidated Financial Statements
3
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
(Unaudited)
--------------------------------------------------------------------------------------
Three Months Ended April 30, Nine Months Ended April 30,
------------------------------------------- ---------------------------------------
Percentage Percentage
2005 2004 Change 2005 2004 Change
---------- --------- ---------- --------- --------- ----------
Net sales $ 209,766 $ 180,854 16.0% $ 606,401 $ 485,708 24.8%
Cost of products sold 95,898 86,315 11.1% 282,052 234,533 20.3%
---------- --------- --------- ---------
Gross margin 113,868 94,539 20.4% 324,349 251,175 29.1%
Operating expenses:
Research and development 5,941 6,210 -4.3% 17,744 16,680 6.4%
Selling, general and administrative 72,384 64,549 12.1% 208,335 181,495 14.8%
Restructuring charge - net - 455 - 2,274
---------- --------- --------- ---------
Total operating expenses 78,325 71,214 10.0% 226,079 200,449 12.8%
Operating income 35,543 23,325 52.4% 98,270 50,726 93.7%
Other income and (expense):
Investment and other income - net 36 106 -66.0% 812 385 110.9%
Interest expense (2,101) (5) 41,920.0% (6,277) (36) 17,336.1%
---------- --------- --------- ---------
Income before income taxes 33,478 23,426 42.9% 92,805 51,075 81.7%
Income taxes 8,522 7,027 21.3% 26,913 16,290 65.2%
---------- --------- --------- ---------
Net income $ 24,956 $ 16,399 52.2% $ 65,892 $ 34,785 89.4%
========== ========= ========= =========
Per Class A Nonvoting Common Share (1):
Basic net income $ 0.51 $ 0.35 45.7% $ 1.35 $ 0.74 82.4%
Diluted net income $ 0.50 $ 0.34 47.1% $ 1.32 $ 0.73 80.8%
Dividends $ 0.11 $ 0.11 0.0% $ 0.33 $ 0.32 3.1%
Per Class B Voting Common Share (1):
Basic net income $ 0.51 $ 0.35 45.7% $ 1.33 $ 0.73 82.2%
Diluted net income $ 0.50 $ 0.34 47.1% $ 1.31 $ 0.72 81.9%
Dividends $ 0.11 $ 0.11 0.0% $ 0.31 $ 0.30 3.3%
Weighted average common shares
outstanding (In Thousands)(1):
Basic 49,177 47,336 48,872 47,101
Diluted 50,192 47,998 49,754 47,683
- -----------------
(1) Restated for two-for-one stock split, accounted for as a dividend, effective
December 31, 2004.
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
2005 2004
---------- ----------
Operating activities:
Net income $ 65,892 $ 34,785
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 19,991 14,654
Income tax benefit from the exercise of stock options 4,747 2,134
Loss on sale or disposal of property, plant & equipment 599 111
Provision for losses on accounts receivable 980 1,116
Non-cash portion of stock-based compensation expense 3,101 791
Net restructuring charge accrued liability - 2,178
Changes in operating assets and liabilities (net of effects of business acquisitions):
Accounts receivable (5,099) (14,216)
Inventories (8,423) (4,677)
Prepaid expenses and other assets (979) (144)
Accounts payable and accrued expenses (9,170) 2,470
Income taxes 7,753 7,452
Other liabilities 3,491 828
---------- ----------
Net cash provided by operating activities 82,883 47,482
Investing activities:
Acquisition of businesses, net of cash acquired (49,397) (30,728)
Purchases of property, plant and equipment (14,411) (10,616)
Purchases of short-term investments (37,000) (28,050)
Sales of short-term investments 25,950 26,680
Proceeds from sale of property, plant and equipment 288 281
Other (1,188) (1,358)
---------- ----------
Net cash used in investing activities (75,758) (43,791)
Financing activities:
Payment of dividends (15,885) (14,854)
Proceeds from issuance of common stock 14,635 10,745
Principal payments on debt (83,046) (1,563)
Proceeds from debt 83,000 -
Purchase of treasury stock - (564)
---------- ----------
Net cash used in financing activities (1,296) (6,236)
Effect of exchange rate changes on cash (760) 4,918
---------- ----------
Net increase in cash and cash equivalents 5,069 2,373
Cash and cash equivalents, beginning of period 65,218 64,208
---------- ----------
Cash and cash equivalents, end of period $ 70,287 $ 66,581
========== ==========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 4,051 $ 73
Income taxes, net of refunds 12,982 5,616
Acquisitions:
Fair value of assets acquired, net of cash $ 35,971 $ 14,784
Liabilities assumed (18,212) (8,916)
Goodwill 31,638 24,860
---------- ----------
Net cash paid for acquisitions $ 49,397 $ 30,728
========== ==========
See Notes to Condensed Consolidated Financial Statements
5
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended April 30, 2005
(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 April
30, 2005 and July 3l, 2004, its results of operations for the three months and
nine months ended April 30, 2005 and 2004 and its cash flows for the nine months
ended April 30, 2005 and 2004. The condensed consolidated balance sheet as of
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.
Reclassifications - Certain prior year amounts have been reclassified to
conform with the current year presentation.
NOTE B - Goodwill and Intangible Assets
Changes in the carrying amount of goodwill for the nine months ended April
30, 2005, are as follows (in thousands):
Americas Europe Asia Total
---------- --------- ---------- ---------
Balance as of July 31, 2004 $ 217,316 $ 55,848 $ 2,733 $ 275,897
Goodwill acquired during the period 8,135 - 23,503 31,638
Translation adjustments and other 1,157 4,559 1,338 7,054
---------- --------- ---------- ---------
Balance as of April 30, 2005 $ 226,608 $ 60,407 $ 27,574 $ 314,589
========== ========= ========== =========
Goodwill increased by $38,692,000 during the nine months ended April 30,
2005, including an increase of $7,054,000 attributable to translation
adjustments and other, which consists primarily of direct costs attributable to
acquisitions. The allocation of the purchase price for the acquisition of ID
Technologies PTE, Ltd ("ID Technologies") in Asia and Permar Systems, Inc. d\b\a
Electromark Inc. ("Electromark") in the United States, resulted in $31,638,000
of additional goodwill.
Other intangible assets include patents, trademarks, customer
relationships, non-compete agreements, purchased software 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 (in thousands):
6
APRIL 30, 2005 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 $ 6,844 $ (4,413) $ 2,431 $ 6,450 $ (3,967) $ 2,483
Trademarks & other N/A 17,175 (1,087) 16,088 15,290 (825) 14,465
Customer relationships 8 43,821 (6,235) 37,586 28,203 (1,644) 26,559
Purchased software 5 2,565 (1,221) 1,344 2,339 (894) 1,445
Non-compete agreements 4 5,748 (2,640) 3,108 3,130 (2,203) 927
---------- ---------- -------- -------- --------- --------
Total 8 $ 76,153 $ (15,596) $ 60,557 $ 55,412 $ (9,533) $ 45,879
========== ========== ======== ======== ========= ========
The increase in intangible assets for the nine months ended April 30,
2005, relates mainly to the acquisitions of ID Technologies and Electromark,
which added $15,408,000 of customer relationships, $2,605,000 of non-compete
agreements, and $1,600,000 of trademarks. The value of the intangible assets of
ID Technologies in the Condensed Consolidated Financial Statements at April 30,
2005 is greater than the value assigned to them in the allocation of purchase
price due to the positive effect of fluctuations in the exchange rates used to
translate financial statements into the United States Dollar. The majority of
the Company's trademarks have an indefinite life.
Amortization expense of intangible assets was $6,062,000 and $1,848,000
for the nine-month periods ended April 30, 2005 and 2004, respectively. The
amortization is projected to be $7,996,000, $8,092,000, $7,898,000, $7,352,000
and $7,225,000 for fiscal 2005, 2006, 2007, 2008 and 2009, respectively.
NOTE C - Comprehensive Income
Total comprehensive income, which is comprised of net income, foreign
currency adjustments and net unrealized gains and losses from cash flow hedges
and other investments, amounted to approximately $34,619,000 and $14,099,000 for
the three months ended April 30, 2005 and 2004, respectively and $82,692,000 and
$41,505,000 for the nine months ended April 30, 2005 and 2004, respectively.
NOTE D - 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:
7
Three Months Ended Nine Months Ended
April 30, April 30,
-------------------- ------------------
(Dollars in thousands, except per share amounts) 2005 2004 2005 2004
- ------------------------------------------------ -------- -------- -------- -------
Numerator:
Net Income $ 24,956 $ 16,399 $ 65,892 $34,785
Numerator for basic and diluted
Class A net income per share 24,956 16,399 65,892 34,785
Less: Preferential dividends - - (751) (721)
Less: Preferential dividends on
dilutive stock options - - (23) (9)
-------- -------- -------- -------
Numerator for basic and diluted
Class B net income per share $ 24,956 $ 16,399 $ 65,118 $34,055
======== ======== ======== =======
Denominator:
Denominator for basic net income per
share for both Class A and Class B 49,177 47,336 48,872 47,101
Plus: Treasury stock (deferred compensation) 48 - 48 -
Plus: Effect of dilutive stock options 967 662 834 582
-------- -------- -------- -------
Denominator for diluted net income per
share for both Class A and Class B 50,192 47,998 49,754 47,683
======== ======== ======== =======
Class A Non Voting Common Stock net income per share:
Basic $ 0.51 $ 0.35 $ 1.35 $ 0.74
Diluted $ 0.50 $ 0.34 $ 1.32 $ 0.73
Class B Voting Common Stock net income per share:
Basic $ 0.51 $ 0.35 $ 1.33 $ 0.73
Diluted $ 0.50 $ 0.34 $ 1.31 $ 0.72
Options to purchase 36,000 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, 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 616,000 and 36,000 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, 2005 and 2004, respectively, because the option exercise
price was greater than the average market price of the common shares and,
therefore, the effect would be antidilutive.
NOTE E - Restructuring
During the year ended July 31, 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.
8
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. Total
restructuring charges were $455,000 and $2,274,000 for the quarter and
nine-month period ended April 30, 2004.
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
=============
Fiscal 2005 second quarter activity:
Cash payments associated with severance and other (455,000)
-------------
Ending balance, January 31, 2005 $ 225,000
=============
Fiscal 2005 third quarter activity:
Cash payments associated with severance and other (193,000)
-------------
Ending balance, April 30, 2005 $ 32,000
=============
NOTE F - Acquisitions
In February 2005, the Company acquired Electromark, a manufacturer and
supplier of safety and facility identification products. Headquartered in
Wolcott, New York, Electromark is a market leader in supplying identification
products to the utility industry. A total of $3,500,000 was assigned to
intangible assets other than goodwill and $8,135,000 was assigned to goodwill in
the preliminary allocation of the purchase price. The intangible assets
consisted of approximately $1,300,000 of customer relationships, $1,600,000 of
trademarks, and $600,000 of other intangible assets at the time of acquisition.
The results of the operations of Electromark have been included since the date
of acquisition in the accompanying condensed consolidated financial statements.
In August 2004, the Company acquired ID Technologies headquartered in
Singapore, with additional operations in China. ID Technologies is a
manufacturer of die-cut products and was acquired to expand the Company's
manufacturing capacity and market share in Asia. A $6,500,000 holdback was part
of the agreement and will be paid in August 2006 and is recorded as a long-term
liability at April 30, 2005. Interest is imputed on the holdback at a rate of
4.9% per year. 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. Of the
purchase price, $23,503,000 was assigned to goodwill and $16,017,000 was
assigned to other intangible assets in the purchase price allocation. The
allocation of these intangible assets included approximately $13,500,000 for
customer relationships, $2,300,000 for non-compete agreements, and $217,000 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
Cash paid for acquisitions for the nine months ended April 30, 2005, net
of cash acquired, was approximately $49,397,000.
On May 20, 2004, the Company completed its acquisition of all of the
outstanding securities of EMED Co., Inc. ("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 NINE MONTHS ENDED
--------------------------- ---------------------------
April 30, April 30, April 30, April 30,
(DOLLARS IN THOUSANDS) 2005 2004 2005 2004
--------- --------- -------------- ---------
Net Sales........................ $ 209,766 $ 195,916 $ 606,401 $ 526,274
Net Income....................... 24,956 18,652 66,155 40,061
Reported net income per share:
Class A
Basic 0.51 0.35 1.35 0.74
Diluted 0.50 0.34 1.32 0.73
Pro-forma net income per share:
Class A
Basic 0.51 0.39 1.35 0.85
Diluted 0.50 0.39 1.33 0.84
Reported net income per share:
Class B
Basic 0.51 0.35 1.33 0.73
Diluted 0.50 0.34 1.31 0.72
Pro-forma net income per share:
Class B
Basic 0.51 0.39 1.34 0.84
Diluted 0.50 0.39 1.31 0.82
10
NOTE G - 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 and nine
months ended April 30, 2005 and 2004:
Corporate
and
(in Thousands) Americas Europe Asia Eliminations Totals
-------------- -------- ------ ---- ------------ ------
Three months ended April 30, 2005:
Revenues from external customers $ 109,058 $ 71,452 $ 29,256 - $ 209,766
Intersegment revenues 12,048 657 1,396 (14,101) -
Segment profit 28,155 21,563 7,778 (905) 56,591
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 17,656 19,461 6,520 (1,067) 42,570
Nine months ended April 30, 2005:
Revenues from external customers $ 309,762 $ 206,865 $ 89,774 - $ 606,401
Intersegment revenues 33,851 1,959 3,421 (39,231) -
Segment profit 73,966 61,296 25,397 (2,915) 157,744
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 41,913 48,256 16,849 (3,037) 103,981
Following is a reconciliation of segment profit to net income for the three and
nine months ended April 30, 2005 and 2004:
Three months ended: Nine months ended:
------------------- ------------------
April 30, April 30, April 30, April 30,
(in Thousands) 2005 2004 2005 2004
- -------------- --------- --------- --------- ---------
Total profit from reportable segments $ 57,496 $ 43,637 $ 160,659 $ 107,018
Corporate and eliminations (905) (1,067) (2,915) (3,037)
Unallocated amounts:
Administrative costs (19,288) (17,474) (55,526) (48,074)
Interest-net (1,826) 138 (5,472) 363
Foreign exchange (211) (35) 35 (12)
Restructuring charge, net - (455) - (2,274)
Other (1,788) (1,318) (3,976) (2,909)
-------------- --------------- --------------- --------------
Income before income taxes 33,478 23,426 92,805 51,075
Income taxes (8,522) (7,027) (26,913) (16,290)
-------------- --------------- --------------- --------------
Net income $ 24,956 $ 16,399 $ 65,892 $ 34,785
============== =============== =============== ==============
11
NOTE H - 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, 2005 and 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. In fiscal 2005 and 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
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 2005 and 2004 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 net income per share would have been as follows:
12
Three Months Ended Nine Months Ended
April 30, April 30,
(In thousands, except per share amounts) 2005 2004 2005 2004
- ---------------------------------------- ---- ---- ---- ----
Net earnings:
As reported $ 24,956 $ 16,399 $ 65,892 $ 34,785
Stock-based compensation expense
recorded, net of tax 632 202 1,861 479
Pro forma expense, net of tax (1,100) (549) (2,464) (1,586)
--------- --------- --------- ---------
Pro forma $ 24,488 $ 16,052 $ 65,289 $ 33,678
========= ========= ========= =========
Net earnings per class A common share
Basic:
As reported $ 0.51 $ 0.35 $ 1.35 $ 0.74
Pro forma adjustments (0.01) (0.01) (0.01) (0.02)
--------- --------- --------- ---------
Pro forma $ 0.50 $ 0.34 $ 1.34 $ 0.72
========= ========= ========= =========
Diluted:
As reported $ 0.50 $ 0.34 $ 1.32 $ 0.73
Pro forma adjustments (0.01) (0.01) (0.01) (0.02)
--------- --------- --------- ---------
Pro forma $ 0.49 $ 0.33 $ 1.31 $ 0.71
========= ========= ========= =========
Net earnings per class B common share
Basic:
As reported $ 0.51 $ 0.35 $ 1.33 $ 0.73
Pro forma adjustments (0.01) (0.01) (0.01) (0.02)
--------- --------- --------- ---------
Pro forma $ 0.50 $ 0.34 $ 1.32 $ 0.71
========= ========= ========= =========
Diluted:
As reported $ 0.50 $ 0.34 $ 1.31 $ 0.72
Pro forma adjustments (0.01) (0.01) (0.01) (0.02)
--------- --------- --------- ---------
Pro forma $ 0.49 $ 0.33 $ 1.30 $ 0.70
========= ========= ========= =========
The total number of shares issued upon exercise of stock options for the
nine months ended April 30, 2005 was 1,044,451. The total number of shares
issued upon exercise of stock options for the year ended July 31, 2004 was
1,574,268.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (Revised 2004), "Share-Based Payment" ("SFAS 123(R)"). This
statement revises SFAS No. 123 by eliminating the option to account for employee
stock options under APB No. 25 and generally requires companies to recognize the
cost of employee services received in exchange for awards of equity instruments
based on the grant-date fair value of those awards (the "fair-value-based"
method). The Company plans to adopt SFAS 123(R) on August 1, 2005. The Company
has not yet completed its evaluation of the impact of adopting SFAS 123 (R) will
have on its condensed consolidated financial statements.
13
NOTE I - Available-for-Sale Securities
The Company has invested in certain marketable securities that are
categorized as available-for-sale. These investments consist of auction rate
securities, which were previously classified as cash equivalents, and have been
reclassified as short-term investments available-for-sale for all periods
presented. The cash flows related to these investments are now classified as
investing activities in the Company's condensed consolidated statements of cash
flows for all periods presented. For the nine months ended April 30, 2004,
$1,370,000 has been reclassified as an investing activity in the condensed
consolidated statement of cash flows, including purchases of short-term
investments of $28,050,000 and sales of short-term investments of $26,680,000.
The auction rate securities held by the Company are municipal bonds with holding
periods of 7 or 35 days. A Dutch auction takes place at the end of each holding
period at which time the security can be sold or held. The lowest rate that
sells all of the securities is the set rate for the subsequent holding period.
If there are not sufficient orders to place all of the available securities, the
auction is said to have "failed" and liquidity will be denied for the subsequent
holding period. Although the possibility of a failed auction historically has
been low, there still does exist some liquidity risk and the maturity of the
securities is more than ninety days when purchased, leading the securities to
be classified as short-term investments rather than cash equivalents.
NOTE J - 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 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.
Assumptions used to develop these reductions include those used in the
determination of the annual expense under SFAS No. 106 , "Employers' Accounting
for Postretirement Benefits other than Pensions," and also include expectations
of how the federal program would ultimately operate.
On January 21, 2005, the Centers for Medicare & Medicaid Services released
final regulations to implement the new prescription drug benefit under Part D of
Medicare. The Company is currently in the process of evaluating the effect of
the final regulations on its net periodic benefit cost for the year ending July
31, 2005.
14
Components of Net Periodic Benefit Cost
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- -----------------------
April 30, April 30, April 30, April 30,
(DOLLARS IN THOUSANDS) 2005 2004 2005 2004
- ---------------------- --------- --------- --------- ---------
Service cost 214 $ 217 $ 643 $ 650
Interest cost 188 180 565 539
Expected return on plan assets - - - -
Amortization of prior service cost (8) 5 (25) 17
Amortization of net (gain) loss (8) (14) (24) (41)
--------- --------- --------- ---------
Net periodic benefit cost $ 386 $ 388 $ 1,159 $ 1,165
========= ========= ========= =========
As previously disclosed, the Company plans to contribute $690,800 to its
postretirement benefit plans in the year ending July 31, 2005.
NOTE K - Stockholders' Equity and Stock Split
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. All share and per-share numbers contained
herein reflect this stock split.
NOTE L - New Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Cost--an
amendment of ARB No. 43, Chapter 4," which is the result of its efforts to
converge U.S. accounting standards for inventories with International Accounting
Standards. SFAS No. 151 requires idle facility expenses, abnormal freight,
handling costs, and wasted material (spoilage) costs to be recognized as
current-period charges. It also requires that allocation of fixed production
overhead costs to the costs of conversion be based on the normal capacity of the
production facilities. SFAS No. 151 will be effective for inventory costs
incurred after July 31, 2005. The Company does not believe the adoption of this
standard will have a material effect on its consolidated financial statements.
15
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 manufactures and sells products domestically and internationally through
multiple channels including direct sales, distributor sales, mail-order
catalogs, telemarketing and electronic access through the Internet. 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 April 30, 2005, were up 16.0% to $209,766,000,
compared to $180,854,000 in the same period of fiscal 2004. Base sales increased
0.1% compared to the same period in the prior year, while the effect of
fluctuations in the exchange rates used to translate financial results into the
United States Dollar added 2.9% and acquisitions added 13.0%. Net income for the
quarter ended April 30, 2005 was $24,956,000 or $0.50 per diluted Class A Common
Share, up 52.2% from $16,399,000 or $0.34 per share reported in the third
quarter of last year. The low base sales increase in the quarter ended April 30,
2005 was partially due to strengthened comparisons in the prior year (10.8%
base sales growth for the quarter ended April 30, 2004, compared to the quarter
ended April 30, 2003) as well as a slower start to the quarter. Base sales
strengthened toward the end of the quarter, but not enough to materially
increase base sales for the quarter. Both sales growth and profitability
improved in the quarter due to recent acquisitions and continued cost reduction
efforts throughout Brady's global operations.
Sales for the nine months ended April 30, 2005, were up 24.8% to
$606,401,000, compared to $485,708,000 in the same period of fiscal 2004. Base
sales were up 6.7%, or $32,670,000 in the nine-month period compared to the same
period in fiscal 2004. Net income for the nine-month period was $65,892,000 or
$1.32 per diluted Class A Common Share, up 89.4% from $34,785,000 or $0.73 per
share reported in the same period of last year. Management attributes the base
sales growth to improving economic conditions in North America and the Company's
initiatives to accelerate growth in its core business through new product
development, better market penetration, and new market expansion. Both sales
growth and profitability improved in the nine-month period due to positive
growth and profitability of recent acquisitions, continued cost reduction
efforts, a continued strengthening of the United States economy, growth in
Europe, and strong growth in Asia, most notably in China.
On May 18, 2005, the Company narrowed its fiscal 2005 guidance range to
$805,000,000 to $810,000,000 in sales and increased its net income guidance to
$80,000,000 to $82,000,000, and earnings per share of $1.61 to $1.64 for the
full fiscal year ending July 31, 2005. The Company expects capital expenditures
to be approximately $23,000,000 and depreciation and amortization to be
approximately $27,000,000 for the full fiscal year ending July 31, 2005.
Management believes this guidance is justified based on the Company's strong
performance in the first three quarters of fiscal 2005, but notes that this
guidance should be viewed in light of the various factors that could affect
performance described in or incorporated by reference into this report, as well
as the following factors:
16
- Over the last two fiscal years, the Company has issued a limited
number of performance-based stock options to senior management. The
vesting of these options is tied to the financial performance of the
Company. As these options vest, an income statement impact is
recorded based on the stock price at the end of each quarter. An
estimate of this expense is included in the Company's guidance for
Fiscal 2005, but the actual expense is subject to fluctuations in
the Company's stock price and could introduce some volatility.
- The Company continues to feel pressure from suppliers who are
attempting to raise their prices.
- Shortages of certain raw materials have not currently had an effect
on the Company's production, but management continues to monitor
supplies of key materials for possible shortages and develop plans
for alternative sources of supply.
- The Company's business operations and those of its customers and
suppliers give rise to market risk exposure due to changes in
foreign exchange rates. Fluctuations in the United States dollar
relative to other currencies may introduce some volatility with
respect to the Company's sales and net income guidance.
- Management is cautious regarding sales and net income growth in
Europe, due to the uncertain economic environment in the region.
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 additional 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.
Results of Operations
For the three months ended April 30, 2005, net sales of $209,766,000 were
16.0% higher than the same quarter of the previous year. For the nine months
ended April 30, 2005, sales of $606,401,000 were 24.8% higher than the same
period of the previous year. Base sales increased 0.1% for the quarter and 6.7%
for the nine months ended April 30, 2005, compared to the same periods in the
prior year. The sales increase was also aided by the positive effect of
fluctuations in the exchange rates used to translate financial results into the
United States Dollar, which increased sales by 2.9% in the quarter and 3.7% for
the nine months ended April 30, 2005, primarily due to the increased value of
the Euro relative to the United States Dollar. The acquisitions of EMED Co.,
Inc. ("EMED") and Electromark in the United States and ID Technologies in
Singapore added 13.0% to sales in the quarter. For the nine-month period ended
April 30, 2005, the acquisitions of Brandon International, Prinzing Enterprises,
Inc., EMED and Electromark in the United States, B.I.G in the United Kingdom,
and ID Technologies in Singapore added 14.4% to sales.
Gross margin as a percentage of sales increased from 52.3% to 54.3% for
the quarter and from 51.7% to 53.5% for the nine-month period ended April 30,
2005, compared to the same periods of the previous year. The gross margin
increase was due to the positive contribution of EMED and the continued benefits
of cost-reduction efforts. Selling, general and administrative ("SG&A") expenses
as a percentage of sales decreased from 35.7% to 34.5% for the quarter and from
37.4% to 34.4% for the nine months ended April 30, 2005, compared to the same
periods of the prior year. The decrease in SG&A was due to the spreading of
fixed costs over a larger sales base and continued cost control efforts and was
partially offset by the cost of Sarbanes-Oxley compliance. In dollars, SG&A
increased $7,835,000 for the quarter and $26,840,000 for the nine-month period
ended April 30, 2005, compared to the same periods in the prior year due to
foreign currency translation, Sarbanes-Oxley compliance costs, and SG&A expenses
associated with acquired businesses.
17
As a percentage of sales, research and development expenses decreased from
3.4% to 2.8% for the quarter and from 3.4% to 2.9% for the nine months ended
April 30, 2005, compared to the same periods of the previous year. In dollars,
research and development expenses decreased from $6,210,000 to $5,941,000 for
the quarter and increased from $16,680,000 to $17,744,000 for the nine months
ended April 30, 2005, compared to the same periods in the prior year. Research
and development expenses decreased for the quarter on a percentage and dollar
basis due to multiple product launches in the prior year comparison period. The
Company expects to increase research and development costs in the fourth quarter
of fiscal 2005 due to the launch of several new initiatives. The planned
initiatives include the expansion of the Company's research and development
capabilities in Europe and Asia and the development of proprietary materials for
the original equipment manufacturing and electronics markets.
The three months and nine months ended April 30, 2004 included a
restructuring charge of $455,000 and $2,274,000, respectively, which was
primarily due to the consolidation of operating facilities in North America and
Europe. There were no material restructuring charges in the first nine months of
the current fiscal year.
Interest expense increased from $5,000 to $2,101,000 for the quarter and
from $36,000 to $6,277,000 for the nine months ended April 30, 2005, compared to
the same periods in the prior year. The increased interest expense relates to
the Company's long-term debt, which was increased in the fourth quarter of the
year ended July 31, 2004, to fund the purchase of EMED.
The Company's effective tax rate was 25.5% for the quarter and 29.0% for
the nine months ended April 30, 2005, and 30.0% and 31.9% for the same periods
of the previous year. The quarter ended April 30, 2005 included favorable tax
adjustments of $1,200,000 to reduce the effective tax rate to 29.0% for the
nine-month period. The reduction in the effective tax rate for the nine-month
period ended April 30, 2005 is due to a higher percentage of profit in lower tax
jurisdictions such as China and Singapore compared to the same period in the
previous year and favorable settlements with taxing authorities. The Company
expects the effective tax rate to be 29% for the year ending July 31, 2005.
Net income for the three months ended April 30, 2005, increased 52.2% to
$24,956,000, compared to $16,399,000 for the same quarter of the previous year.
For the nine-month period ended April 30, 2005, net income increased 89.4% to
$65,892,000, compared to $34,785,000 for the same period in the prior year. Net
income as a percentage of sales increased from 9.1% to 11.9% for the quarter and
from 7.2% to 10.9% for the nine-month period ended April 30, 2005, compared to
the same periods in the prior year. The increase was due to the factors noted
above. On a Class A Common Share basis, diluted net income per share was $0.50
for the quarter and $1.32 for the nine months ended April 30, 2005, compared to
$0.34 and $0.73 per share for the same periods of the previous year.
Business Segment Operating Results
Management of the Company evaluates results based on the following
geographic regions: Americas, Europe, and Asia.
18
Corporate
and
(Dollars in thousands) Americas Europe Asia Eliminations Total
---------------------- -------- ------ ---- ------------ -----
SALES TO EXTERNAL CUSTOMERS
Three months ended:
April 30, 2005 $109,058 $ 71,452 $29,256 $209,766
April 30, 2004 89,251 69,683 21,920 180,854
Nine months ended:
April 30, 2005 $309,762 $206,865 $89,774 $606,401
April 30, 2004 243,539 183,308 58,861 485,708
SALES GROWTH INFORMATION
Three months ended April 30, 2005:
Base 0.7% -2.9% 7.5% 0.1%
Currency 1.2% 5.4% 1.8% 2.9%
Acquisitions 20.3% 0.0% 24.1% 13.0%
Total 22.2% 2.5% 33.4% 16.0%
Nine months ended April 30, 2005:
Base 5.9% 3.6% 19.7% 6.7%
Currency 1.0% 7.7% 2.7% 3.7%
Acquisitions 20.3% 1.5% 30.1% 14.4%
Total 27.2% 12.8% 52.5% 24.8%
SEGMENT PROFIT (LOSS)
Three months ended:
April 30, 2005 $ 28,155 $ 21,563 $ 7,778 $ (905) $ 56,591
April 30, 2004 17,656 19,461 6,520 (1,067) 42,570
Percentage increase 59.5% 10.8% 19.3% 15.2% 32.9%
Nine months ended:
April 30, 2005 $ 73,966 $ 61,296 $25,397 $ (2,915) $157,744
April 30, 2004 41,913 48,256 16,849 (3,037) 103,981
Percentage increase 76.5% 27.0% 50.7% 4.0% 51.7%
19
PROFIT RECONCILIATION (Dollars in thousands)
Three months ended: Nine months ended:
---------------------- ------------------------
April 30, April 30, April 30, April 30,
2005 2004 2005 2004
-------- -------- --------- ---------
Total profit from reportable segments $ 57,496 $ 43,637 $ 160,659 $ 107,018
Corporate and eliminations (905) (1,067) (2,915) (3,037)
Unallocated amounts:
Administrative costs (19,288) (17,474) (55,526) (48,074)
Interest - net (1,826) 138 (5,472) 363
Foreign exchange (211) (35) 35 (12)
Restructuring charge, net - (455) - (2,274)
Other (1,788) (1,318) (3,976) (2,909)
Income before income taxes 33,478 23,426 92,805 51,075
Income taxes (8,522) (7,027) (26,913) (16,290)
Net income $ 24,956 $ 16,399 $ 65,892 $ 34,785
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.
Americas:
Americas sales increased 22.2% for the quarter and 27.2% for the nine
months ended April 30, 2005, compared to the same periods in the prior year.
Base sales in local currency increased 0.7% in the quarter and 5.9% for the nine
months ended April 30, 2005. 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 1.2% in the quarter and
1.0% for the nine-month period ended April 30, 2005. Sales in the region
increased by 20.3% for quarter and the nine-month period due to the acquisition
of EMED in May 2004 and Electromark in February 2005. Base sales were up
slightly for the quarter ended April 30, 2005, due to a flat direct marketing
and Brady MRO business and softness in the North American die cut business,
offset by growth in Mexico, Canada and Brazil and increased sales in the United
States of high performance labels, wire identification products, and coated
materials sold to external customers. Base growth for the nine-month period was
fueled by new products including proprietary printing systems and related
consumables. The growth during the nine months ended April 30, 2005 was also
aided by a strengthening of the United States direct marketing business.
Segment profit for the region increased 59.5% to $28,155,000 from
$17,656,000 for the quarter and 76.5% to $73,966,000 from $41,913,000 for the
nine months ended April 30, 2005, compared to the same periods in the prior
year. The increased segment profit was primarily due to the acquisition of EMED
and cost control throughout the region's businesses. Segment profit growth
continues to outpace sales growth in this region.
Europe:
Europe sales increased 2.5% for the quarter and 12.8% for the nine months
ended April 30, 2005, compared to the same periods in the prior year. Base sales
in local currency decreased 2.9% in the quarter and increased 3.6% for the
nine-month period. 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 5.4% in the quarter and 7.7% for the
nine-month period ended April 30, 2005. Sales for the nine-month period were
also aided by the acquisition of BIG, which increased sales by 1.5%.
20
The base sales decline in the quarter was primarily due to a general
slowdown across some of the major economies in this region. Base sales in
England, Germany and Belgium declined while southern Europe and France continued
to show positive growth. While the direct marketing business improved base
growth for the nine-month period ended April 30, 2005 due to expansion of the
Company's customer base and a greater product offering in its catalogs, the
majority of this growth came in the first half of the fiscal year. The Brady
business also grew in the nine-month period due to growth in the European die
cut business. All of the region's businesses continue to outperform economic
indicators, but management expects growth to slow for the remainder of the
fiscal year as indicators weaken.
Segment profit for the region increased 10.8% in the quarter to
$21,563,000 from $19,461,000 and 27.0% for the nine-month period to $61,296,000
from $48,256,000 compared to the same periods of the prior year, driven
primarily by base sales volume in the first half of the fiscal year, foreign
currency translation and continued efforts to leverage the existing cost
structure across an increasing revenue base.
The Company plans to open a sales and production office in Bratislava,
Slovakia. The facility is planned to open in the first quarter of the fiscal
year ending July 31, 2006. This operation will primarily serve the region's
original equipment manufacturer ("OEM") label and die-cut customers and will
support the Company's strategy of following OEM customers as they migrate to
emerging and lower labor cost markets.
Asia:
Asia sales increased 33.4% for the quarter and 52.5% for the nine months
ended April 30, 2005, compared to the same periods in the prior year. Base sales
in local currency increased 7.5% in the quarter and 19.7% for the nine-month
period, compared to the same periods last year. 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 1.8% in the
quarter and 2.7% for the nine months ended April 30, 2005, compared to the same
periods last year. The acquisition of ID Technologies increased sales by 24.1%
for the quarter and 30.1% for the nine-month period. Operations in China led the
strong base growth performance in the region. The Company expanded its
facilities in Beijing and Wuxi during the nine-month period ended April 30,
2005. Customer demand has increased to fill much of this capacity and the
Shenzhen facility is currently at capacity. The Company also completed a move to
a larger facility in Australia during the quarter. This region is also
experiencing growth in the safety, facility and wire identification business as
a result of the Company's initiative to grow this business.
Segment profit for the region was up 19.3% for the quarter to $7,778,000
from $6,520,000 and 50.7% for the nine-month period to $25,397,000 from
$16,849,000 compared to the same periods in the prior year. The increase in
profit was due primarily to increased sales volume, foreign currency translation
and the addition of ID Technologies. The Asia region is currently experiencing
pressure for price reductions each quarter from its customers. In the short
term, the Company is attempting to realize manufacturing efficiencies to offset
the price reductions. On a long-term basis, the Company will continue to invest
in research and development in an effort to continue introducing new
differentiated products that are not as susceptible to price pressure.
In addition to new product development in the region, the Company plans to
focus geographic and business expansion in Thailand and China. The Company is
also responding to increased activities by electronic OEM's in India by
considering future expansion there as well.
21
Financial Condition
The Company's current ratio as of April 30, 2005, was 2.2, compared to 2.1
at July 31, 2004. Cash and cash equivalents were $70,287,000 at April 30, 2005,
compared to $65,218,000 at July 31, 2004. The increase was due to strong
operating cash flow and proceeds from the issuance of common stock upon exercise
of stock options. These sources of cash were used to acquire ID Technologies and
Electromark, purchase property, plant and equipment, pay dividends and purchase
short-term investments. Working capital increased $33,068,000 during the nine
months ended April 30, 2005, to $164,774,000 from $131,706,000 at July 31, 2004.
Short-term investments increased $11,050,000 for the nine-month period due to
purchases of available-for-sale investments (auction rate securities), from
$5,150,000 at July 31, 2004 to $16,200,000 at April 30, 2005. Inventories
increased $14,108,000 for the nine-month period, due primarily to a planned
increase in inventory levels to avoid shortages and improve Company service
levels. Accounts receivable increased $13,979,000 for the nine-month period due
to increased sales volume, acquisitions and foreign currency translation. The
net increase in current liabilities was $12,062,000 for the nine-month period
due to a decrease in accounts payable and accrued wages, offset by an increase
in accrued income taxes.
Cash flow from operating activities totaled $82,883,000 for the nine
months ended April 30, 2005, compared to $47,482,000 for the same period last
year. The increase was the result of a $31,107,000 increase in net income and
increased non-cash expenses for amortization costs associated with the
intangible assets of EMED, ID Technologies and Electromark. These increases were
partially offset by increased working capital requirements discussed above and
performance-based stock option expenses. Capital expenditures were $14,411,000
for the nine-month period ended April 30, 2005, compared to $10,616,000 in the
same period last year, driven by continued expansion in Asia and the expansion
of the Company's facility in Milwaukee, Wisconsin. Net cash used in financing
activities was $1,296,000 for the nine months ended April 30, 2005, 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 $6,236,000
related to payment of dividends, issuance of common stock upon the exercise of
stock options, principal payments on debt and purchase of treasury stock. The
decrease in net cash used for financing activities was primarily due to
increased stock option exercises in the current year.
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 use either a base interest rate (based upon the higher of the
federal funds rate plus one-half of 1% or the prime rate at Bank of America) or
a Eurocurrency interest rate (at the 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 April 30, 2005, 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
April 30, 2005, there were no outstanding borrowings on the 5-year revolving
loan agreement.
On June 30, 2004, the Company sold $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. The first interest payments were made
on December 28, 2004. The Company used the proceeds of the offering to reduce
outstanding indebtedness under the Company's revolving credit facility, which
had been used initially to fund the EMED acquisition. The debt has certain
prepayment penalties.
22
During the first quarter of fiscal 2005, 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. As of April 30, 2005, the
purchases of property, plant and equipment included approximately $1,800,000
related to the warehouse expansion. Construction of the expansion is currently
well under way and management expects the expanded facility to be fully
operational in the spring of 2006.
The Company continues to seek opportunities to invest in new products, new
markets, 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, its available line of credit and other
borrowing alternatives will be adequate to meet the Company's current and
anticipated investing and financing needs.
Management believes the Company's continued positive cash flow and
available borrowings will enable the Company to execute a long-term strategy,
which 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 strategy 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.
Purchase Commitments - The Company has purchase commitments for materials,
supplies, services, and property, plant and equipment as part of the ordinary
conduct of its business. In the aggregate, such commitments are not in excess of
current market prices and are not material to the financial position of the
Company. 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.
Legal - 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. We have not yet completed
our assessment of how the Act might impact our future results of operations or
cash flows.
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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 this report and
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.
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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 activities 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 Euro, Canadian Dollar, Japanese Yen and the
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 April 30, 2005, 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.
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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
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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 3, 2005 /s/ F. M. Jaehnert
------------------------------------------
F. M. Jaehnert
President & Chief Executive Officer
Date: June 3, 2005 /s/ David Mathieson
-----------------------------------------------
David Mathieson
Vice President & Chief Financial Officer
(Principal Accounting Officer)
(Principal Financial Officer)
27