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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended January 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
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Commission File Number 0-12730
BRADY CORPORATION
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(Exact name of registrant as specified in its charter)
WISCONSIN 39-0178960
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6555 WEST GOOD HOPE ROAD, MILWAUKEE, WISCONSIN 53223
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(Address of principal executive offices)
(Zip Code)
(414) 358-6600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of February 24, 1999, there were outstanding 20,777,913 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.
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FORM 10-Q
BRADY CORPORATION
INDEX
Page
PART I. Financial Information
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets 3
Unaudited Condensed Consolidated Statements of
Income and Earnings Retained in the Business 4
Unaudited 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 9
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
ASSETS January 31, 1999 July 31, 1998
(Unaudited)
Current assets:
Cash and cash equivalents $ 69,552 $ 65,609
Accounts receivable, less allowance for losses ($2,282 and $2,011 respectively) 67,688 63,365
Inventories 38,411 38,444
Prepaid expenses and other current assets 12,320 16,635
--------- ---------
Total current assets 187,971 184,053
Other assets:
Intangibles - net 54,375 53,528
Other 7,507 7,078
Property, plant and equipment:
Cost:
Land 5,018 4,988
Buildings and improvements 39,988 39,595
Machinery and equipment 85,206 83,146
Construction in progress 15,555 11,705
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145,767 139,434
Less accumulated depreciation 77,581 72,269
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Net property, plant and equipment 68,186 67,165
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Total $ 318,039 $ 311,824
========= =========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Accounts payable $ 17,112 $ 15,761
Wages and amounts withheld from employees 16,921 19,542
Taxes, other than income taxes 2,400 2,033
Accrued income taxes 6,886 9,276
Other current liabilities 10,207 11,647
Current maturities on long-term debt 407 408
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Total current liabilities 53,933 58,667
Long-term debt, less current maturities 3,839 3,716
Other liabilities 15,041 16,068
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Total liabilities 72,813 78,451
Stockholders' investment:
Preferred stock 2,855 2,855
Class A nonvoting common stock - Issued and outstanding 20,771,079 207 207
and 20,726,863 shares, respectively
Class B voting common stock - issued and outstanding 1,769,314 shares 18 18
Additional paid-in capital 26,798 26,131
Earnings retained in the business 217,817 208,254
Other (2,678) (3,024)
Accumulated other comprehensive income 209 (1,068)
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Total stockholders' investment 245,226 233,373
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Total $ 318,039 $ 311,824
========= =========
See Notes to Condensed Consolidated Financial Statements
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BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND EARNINGS RETAINED IN THE
BUSINESS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
January 31 January 31
1999 1998 1999 1998
---------- ------------ ------------ ------------
Net sales $ 112,309 $ 107,150 $ 229,111 $ 222,452
Operating expenses:
Cost of products sold 50,001 47,639 101,279 100,224
Research and development 4,362 4,967 9,008 9,773
Selling, general and administrative 44,836 43,343 91,185 88,121
--------- --------- --------- ---------
Total operating expenses 99,199 95,949 201,472 198,118
Operating income 13,110 11,201 27,639 24,334
Other income and (expense):
Investment and other income - net 172 710 186 1,225
Interest expense (103) (60) (248) (139)
--------- --------- --------- ---------
Income before income taxes 13,179 11,851 27,577 25,420
Income taxes 5,205 4,682 10,892 10,041
--------- --------- --------- ---------
Net income 7,974 7,169 16,685 15,379
Earnings retained in business at beginning of period 213,437 198,495 208,254 193,602
Less dividends:
Preferred stock (65) (65) (130) (130)
Common stock (3,529) (3,332) (6,992) (6,584)
--------- --------- --------- ---------
Earnings retained in business at end of period $ 217,817 202,267 $ 217,817 202,267
========= ========= ========= =========
Net Income - Class A Nonvoting Common Share
Basic $ 0.35 $ 0.32 $ 0.74 $ 0.69
========= ========= ========= =========
Diluted $ 0.35 $ 0.31 $ 0.73 $ 0.68
========= ========= ========= =========
Net Income - Class B Voting Common Share
Basic $ 0.35 $ 0.32 $ 0.70 $ 0.66
========= ========= ========= =========
Diluted $ 0.35 $ 0.31 $ 0.70 $ 0.65
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements.
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BRADY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
January 31
1999 1998
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Operating Activities:
Net Income $ 16,685 $ 15,379
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation & Amortization 7,424 6,552
(Gain) Loss on Sale of Property, Plant & Equipment 30 127
Provision for Losses on Accounts Receivable 521 717
Amortization of Restricted Stock 347 0
Changes in Operating Assets & Liabilities:
(Increase) Decrease in Accounts Receivable (3,324) 1,292
(Increase) Decrease in Inventory 889 (2,555)
(Increase) Decrease in Prepaid Expense 4,415 (1,008)
Increase (Decrease) in Accounts Payable and Other Liabilities (4,274) (4,142)
Increase (Decrease) in Income Taxes (2,792) (2,837)
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Net Cash Provided by Operating Activities 19,921 13,525
Investing Activities:
Purchase of Business (4,214) 0
Purchases of Property, Plant and Equipment (6,298) (7,014)
Proceeds from Sale of Property, Plant and Equipment - Net 173 161
Other Investments (175) 0
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Net Cash (Used in) Investing Activities (10,514) (6,853)
Financing Activities:
Payment of Dividends (7,122) (6,714)
Proceeds from Issuance of Common Stock 667 369
Stock Released from Restriction 0 306
Principal Payments on Long-Term Debt (246) (264)
Proceeds from Issuance of Long-Term Debt 343 470
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Net Cash (Used in) Financing Activities (6,358) (5,833)
Effect of Exchange Rate Changes on Cash 894 216
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Net Increase in Cash and Cash Equivalents 3,943 1,055
Cash and Cash Equivalents at Beginning of Year 65,609 65,329
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Cash and Cash Equivalents at End of Period $ 69,552 $ 66,384
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year For:
Interest $ 325 $ 211
Income Taxes 12,029 14,306
See Notes to Condensed Consolidated Financial Statement
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BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended January 31, 1999
NOTE A - Basis of Presentation
The condensed consolidated financial statements included herein have
been prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of the
Company, the foregoing statements contain all adjustments, consisting only of
normal recurring accruals, necessary to present fairly the financial position of
the Company as of January 31, 1999, and July 3l, 1998, its results of operations
for the three months and six months ended January 31, 1999, and l998 and its
cash flows for the six months ended January 31, 1999, and 1998. The consolidated
balance sheet at July 31, l998, has been taken from the audited consolidated
financial statements of that date and condensed.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest annual report.
It is not practical to segregate the amounts of raw material, work in
process or finished goods at the respective interim balance sheet dates.
NOTE B - Net Income Per Common Share
Last fiscal year the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," which established new standards for the
calculation of net income per share effective for interim and annual periods
ending after December 15, 1997. Reconciliation's of the numerator and
denominator of the basic and diluted per share computations for the Company's
Class A and Class B common stock are summarized as follows:
Fiscal 1999 Fiscal 1998
-------------------------------- -----------------------------
2nd Quarter 6-Month 2nd Quarter 6-Month
Numerator:
Net income $ 7,974,000 $ 16,685,000 $ 7,169,000 $ 15,379,000
Less: Preferred stock dividends (64,784) (129,567) (64,784) (129,567)
------------ ------------ ------------ ------------
Numerator for basic and diluted
Class A earnings per share $ 7,909,216 $ 16,555,433 $ 7,104,216 $ 15,249,433
Less: Preferential dividends -- (690,541) -- (676,298)
Preferential dividends on
dilutive stock options -- (2,739) -- (9,140)
------------ ------------ ------------ ------------
Numerator for basic and diluted
Class B earnings per share $ 7,909,216 $ 15,862,937 $ 7,104,216 $ 14,563,995
============ ============ ============ ============
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Fiscal 1999 Fiscal 1998
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2nd Quarter 6-Month 2nd Quarter 6-Month
Denominator:
Denominator for basic earnings
per share for both Class A and B 22,529,702 22,514,567 22,379,633 22,227,104
Plus: Effect of dilutive stock options 185,864 115,104 270,711 266,981
---------- --------- ---------- ---------
Denominator for diluted earnings
per share for both Class A and B 22,715,566 22,629,671 22,650,344 22,494,085
========== ========== ========== ==========
Class A common stock earnings per share calculation:
Basic $0.35 $0.74 $0.32 $0.69
Diluted $0.35 $0.73 $0.31 $0.68
Class B common stock earnings per share calculation:
Basic $0.35 $0.70 $0.32 $0.66
Diluted $0.35 $0.70 $0.31 $0.65
Options to purchase 238,317 and 212,450 shares of Class A common stock
were not included in the computations of diluted earnings per share for the
quarters ending January 31, 1999, and 1998, respectively, because the option
exercise prices were greater than the average market price of the common shares
and, therefore, the effect would be antidilutive.
Options to purchase 1,024,418 and 218,450 shares of Class A common
stock were not included in the computations of diluted earnings per share for
the six months ending January 31, 1999, and 1998, respectively, because the
option exercise prices were greater than the average market price of the common
shares and, therefore, the effect would be antidilutive
NOTE C - Comprehensive Income
Effective August 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." Statement 130
establishes new rules for the reporting and display of comprehensive income and
its components. The adoption of this Statement had no impact on the Company's
net income or stockholders' investment. Statement 130 requires the Company's
foreign currency translation adjustments, which prior to adoption were reported
separately in stockholders' investment, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform with
the requirements of Statement 130. Total comprehensive income, which was
comprised of net income and foreign currency adjustments, amounted to
approximately $5,154,000 and $5,020,000 for the three months ended January 31,
1999 and 1998, respectively, and $17,962,000 and $14,874,000 for the six months
ended January 31, 1999 and 1998, respectively.
NOTE D - Restructuring
During the fourth quarter of fiscal 1998, the Company recorded a
nonrecurring charge of $5,390,000 related primarily to a provision for severance
costs associated with a reduction in workforce at is operations around the
world. The workforce reduction of 7.5%, approximately 200 people, was
essentially completed in August 1998.
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A reconciliation of activity with respect to the Company's
restructuring is as follows:
Provision, 1998 $ 5,390,000
Noncash asset write-offs 376,000)
Cash payments associated with severance (1,215,000)
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Ending balance, October 31, 1998 $ 3,799,000
Cash payments associated with severance (1,367,000)
-----------
Ending balance, January 31, 1999 $ 2,432,000
===========
NOTE E - Acquisition
Effective August 16, 1998, the Company acquired the common stock of VEB
Sistemas de Etiquetas Ltda. located in Sao Paulo, Brazil, an industrial label
manufacturer, for cash of approximately $4,400,000. The purchase price of this
acquisition is subject to change based on post-closing adjustments.
This acquisition has been accounted for using the purchase method of
accounting and accordingly the results of operations have been included since
the date of acquisition in the accompanying financial statements. The pro-forma
results assuming the acquisition had been consummated as of the beginning of the
periods presented are not significant.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
For the three months ended January 31, 1999, revenues of $112,309,000
were 4.8% higher than the same quarter of the previous year. For the six months
ended January 31, 1999, revenues of $229,111,000 were 3.0% higher than the same
period last year. Sales of the Company's international operations increased
13.1% for the quarter and 10.9% for the six months ended January 31, 1999. Of
that increase, continued market penetration in Brady's operations outside the
United States increased international sales by 6.2% for the quarter and 5.5% for
the six month period. The acquisitions of Techniques Avancees, GrafTek Inc. and
VEB Sistemas de Etiquetas Ltda. increased international sales by 5.7% for the
quarter and 5.6% for the six months. These increases were also impacted by the
effects of fluctuations in the exchange rates used to translate financial
results into U.S. currency, which increased international sales growth by 1.2
percentage points in the quarter and decreased them by 0.2 percentage points in
the six months. Sales of the Company's U.S. operations decreased 1.7% in the
quarter and 2.9% for the six months ended January 31, 1999, due primarily to
weakness in electrical and electronics markets.
The cost of products sold as a percentage of sales was 44.5% for the
quarter and 44.2% for the six months ended January 31, 1999, compared to 44.5%
and 45.1% for the same periods last year. Reduced costs due to changes in
product mix, the workforce reduction and manufacturing efficiencies from the
Company's continuous improvement efforts were offset by increases in inventory
reserves and increased depreciation and amortization expenses from the
acquisitions. Selling, general and administrative expenses as a percentage of
sales were 39.9% for the quarter compared to 40.5% for the same quarter of the
previous year. For the six months ended January 31, 1999, this percentage was
39.8% compared to 39.6% for the same period last year. These changes are due
primarily to the acquisitions and increased direct marketing efforts. Research
and development expenditures decreased 12.2% for the quarter and 7.8% for the
six months ended January 31, 1999, over the same periods last year.
Operating income was $13,110,000 for the quarter and $27,639,000 for
the six months ended January 31, 1999, compared to $11,201,000 and $24,334,000
for the same periods last year because of the factors cited above. Investment
and other income decreased $538,000 for the quarter and $1,039,000 for the six
months ended January 31, 1999, over the same periods last year. These decreases
were the result of foreign exchange losses and lower investment income because
of lower interest rates.
Income before income taxes increased 11.2% for the quarter and 8.5% for
the six months ended January 31, 1999, compared to prior year results. The
effective tax rate was 39.5% this year and last year.
Net income for the three months ended January 31, 1999, increased 11.2%
to $7,974,000, compared to $7,169,000 for the same quarter of the previous year.
For the six months ended January 31, 1999, net income increased 8.5% to
$16,685,000 from $15,379,000 for the same period last year. On a per share
basis, fully diluted net income for the three months ended January 31, 1999, was
$0.35 compared to $0.31 for the same quarter of the previous year. For the six
months ended January 31, 1999, fully diluted net income per share was $0.73
compared to $0.68 for the same period last year.
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Financial Condition
The Company's liquidity remains strong. The current ratio as of January
31, 1999, was 3.5 to 1. Cash and cash equivalents were $69,552,000 at January
31, 1998, compared to $65,609,000 at July 31, 1998. Working capital increased
$8,652,000 during the six months and equaled $134,038,000 as of January 31,
1999.
The Company continues to maintain significant cash balances due in
large part to its strong operating cash flow which totaled $19,921,000 for the
six months ended January 31, 1999, compared to $13,525,000 for the same period
last year. Capital expenditures were $6,298,000 in the six months ended January
31, 1999, compared to $7,014,000 in the first six months last year. These
expenditures were primarily progress payments made on the Company's new coating
line. Financing activities, primarily the payment of dividends to the Company's
stockholders, consumed $6,358,000 of cash in the first six months of fiscal
1999, compared to $5,833,000 for the same period last year.
Long-term debt as a percentage of long-term debt plus stockholders'
investment was 1.5% at January 31, 1999, compared to 1.6% at July 31, 1998.
The Company believes that its cash and cash equivalents and the cash
flow it generates from operating activities are adequate to meet the Company's
current investing and financing needs.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2
digit year is commonly referred to as the Year 2000 Compliance issue (the
"Issue"). As the year 2000 approaches, such systems may be unable to process
certain date-based information. This could result in a system failure or
miscalculations causing disruptions of operations and the inability to engage in
normal business activities. Many of the Company's systems, including information
and computer systems and automated equipment, will be affected by the Issue.
The Company has a comprehensive plan to address the Issue. The plan
includes (i) the complete inventory of all in-house computers, software and
other equipment utilizing microprocessors and identification of all hardware and
software affected by the Issue; (ii) modification of the affected systems; and
(iii) testing the modified system, installing the changes and auditing the
installed system for final compliance. The Company is using both internal and
external resources to implement its plan. The Company has generally completed
the inventory phase and is at various stages of modification and testing of
these systems. The Company feels it has adequate time to assess and correct any
significant issues that materialize. The Company currently estimates that the
total cost of its Year 2000 project will be approximately $2,000,000. Costs
associated with this issue have been and will continue to be expensed as
incurred and are not expected to have a material effect on the results of
operations, cash flows or financial condition of the Company.
As a third-party supplier of software and printing systems to other
companies, the Company has posted its own product compliance status on its
Internet site (www.bradycorp.com).
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The Company has completed the process of formally communicating with
all of its significant suppliers and customers to determine the extent to which
the Company is vulnerable to those third parties' failure to remediate their own
Year 2000 Compliance issues. The Company can not guarantee that the systems of
other companies on which the Company's systems rely will be converted on time,
or that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems would not have a material adverse effect
on the Company.
The costs of the project and the timetable in which the Company plans
to complete the Year 2000 requirements are based upon management's best
estimates, which are derived utilizing assumptions of future events including
the continued availability of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
However, there can be no guarantee that these estimates will be achieved, and
actual results could differ significantly from these plans. If the Company's
plan to address the Issue is not successfully or timely implemented, the Company
may need to devote more resources to the process and additional costs may be
incurred, which could have a material adverse effect on the Company's financial
condition and results of operations.
Management of the Company believes it has an effective program in place
to resolve the Issue in a timely manner. Nevertheless, since it is not possible
to anticipate all possible future outcomes, especially when third parties are
involved, there could be circumstances in which the Company would be unable to
take customer orders, manufacture and ship products, invoice customers and
collect payments, or the Company could be subject to litigation for product
failure. The amount of potential liability and lost revenue has not been
estimated.
Contingency plans will be developed in the second quarter of calendar
1999 and most of calendar 1999 has been reserved for final verification of all
Year 2000 Compliance processes and rehearsal of contingency plans.
Forward-Looking Statements
Matters in this Quarterly Report may contain forward-looking
information, as defined in the Private Securities Litigation Reform Act of 1995.
All such forward-looking information in this report involves risks and
uncertainties, including, but not limited to, variations in the economic or
political conditions in the countries with which the Company does business;
fluctuations in currency exchange rates for international currencies versus the
U.S. dollar; technology changes; the continued availability of sources of
supply; domestic and international economic conditions and growth rates; the
ability of the Company to timely adjust its cost structure to changes in levels
of sales, product mix and low levels of order backlog; the ability of the
Company to acquire new businesses; risks associated with the Year 2000
Compliance issue; and other risks indicated in filings by the Company with the
Securities and Exchange Commission. The Company cautions that forward-looking
statements are not guarantees, since there are inherent difficulties in
predicting future results, and that actual results could differ materially from
those expressed or implied in forward-looking statements.
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PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K.
The Company was not required to file and did not file a report
on form 8-K during the quarter ended January 31, 1999.
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Pursuant to the requirements of the Securities and 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: February 26, 1999 /s/ K.M. Hudson
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K. M. Hudson
President
Date: February 26, 1999 /s/ F. M. Jaehnert
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F. M. Jaehnert
Vice President & Chief
Financial Officer
(Principal Accounting Officer)
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