UNITED STATES
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 April 30, 2002
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
----- -----
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 21, 2002, there were outstanding 21,306,130 shares of Class A Common
Stock and 1,769,314 shares of Class B Common Stock. The Class B Common Stock,
all of which is held by an affiliate of the Registrant, is the only voting
stock.
FORM 10-Q
BRADY CORPORATION
INDEX
Page
----
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of
Income and Income Retained in the Business 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS APRIL 30, 2002 JULY 31, 2001
------ -------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 70,270 $ 62,811
Accounts receivable, less allowance for losses ($2,009 and $2,297 76,644 71,684
respectively)
Inventories 37,407 39,207
Prepaid expenses and other current assets 20,804 21,291
---------------- ---------------
TOTAL CURRENT ASSETS 205,125 194,993
OTHER ASSETS:
Goodwill - net 105,705 96,041
Other 19,262 16,909
---------------- ---------------
124,967 112,950
PROPERTY, PLANT AND EQUIPMENT:
Cost:
Land 5,971 5,944
Buildings and improvements 49,947 47,611
Machinery and equipment 126,275 132,272
Construction in progress 2,650 6,474
---------------- ---------------
184,843 192,301
Less accumulated depreciation 102,753 107,768
---------------- ---------------
NET PROPERTY, PLANT AND EQUIPMENT 82,090 84,533
---------------- ---------------
TOTAL $ 412,182 $ 392,476
================ ===============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 25,351 $ 20,666
Wages and amounts withheld from employees 27,513 26,767
Taxes, other than income taxes 3,250 1,496
Accrued income taxes 8,257 8,460
Other current liabilities 12,086 12,364
Short-term borrowings and current maturities on long-term debt 273 1,410
---------------- ---------------
TOTAL CURRENT LIABILITIES 76,730 71,163
LONG-TERM DEBT, LESS CURRENT MATURITIES 3,940 4,144
OTHER LIABILITIES 14,604 14,590
---------------- ---------------
TOTAL LIABILITIES 95,274 89,897
STOCKHOLDERS' INVESTMENT:
Preferred stock 2,855 2,855
Class A nonvoting common stock - Issued 21,304,697 and 213 211
21,149,551 shares, respectively
Class B voting common stock - Issued and outstanding 1,769,314 shares 18 18
Treasury Stock - 4,548 Class A Common Shares, at cost (132) (132)
Additional paid-in capital 39,451 35,806
Income retained in the business 286,469 276,779
Cumulative other comprehensive (loss) (11,544) (12,016)
Other (422) (942)
---------------- ---------------
TOTAL STOCKHOLDERS' INVESTMENT 316,908 302,579
---------------- ---------------
TOTAL $ 412,182 $ 392,476
================ ===============
See Notes to Condensed Consolidated Financial Statements
3
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND INCOME RETAINED IN THE BUSINESS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended April 30, Nine Months Ended April 30,
2002 2001 2002 2001
---------------- ----------------- --------------- ----------------
Net Sales $ 130,533 $ 136,881 $ 381,123 $ 419,664
Operating expenses:
Cost of products sold 63,516 64,298 187,591 194,655
Research and development 4,520 4,740 13,140 15,891
Selling, general and administrative 49,781 51,350 146,622 160,157
---------------- ----------------- --------------- ----------------
Total operating expenses 117,817 120,388 347,353 370,703
Operating income 12,716 16,493 33,770 48,961
Other income and (expense):
Investment and other income - net 238 (142) 826 (101)
Interest expense (15) (97) (34) (282)
---------------- ----------------- --------------- ----------------
Income before income taxes 12,939 16,254 34,562 48,578
Income taxes 4,464 6,095 11,954 18,378
---------------- ----------------- --------------- ----------------
Net Income 8,475 10,159 22,608 30,200
Income retained in business at beginning of period 282,329 277,436 276,779 265,462
Less dividends:
Preferred stock (65) (64) (195) (194)
Common stock (4,270) (4,015) (12,723) (11,952)
---------------- ----------------- --------------- ----------------
Income retained in business at end of period $ 286,469 $ 283,516 $ 286,469 $ 283,516
================ ================= =============== ================
Net income per Class A Nonvoting Common Share
Basic $ 0.36 $ 0.44 $ 0.97 $ 1.32
================ ================= =============== ================
Diluted $ 0.36 $ 0.44 $ 0.96 $ 1.30
================ ================= =============== ================
Net income per Class B Voting Common Share
Basic $ 0.36 $ 0.44 $ 0.94 $ 1.29
================ ================= =============== ================
Diluted $ 0.36 $ 0.44 $ 0.93 $ 1.27
================ ================= =============== ================
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,
2002 2001
---------------- ----------------
Operating activities:
Net income $ 22,608 $ 30,200
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 11,799 16,182
Loss on sale of property, plant & equipment 605 15
Gain on sale of securities - (722)
Provision for losses on accounts receivable 963 1,270
Amortization of restricted stock 520 521
Changes in operating assets and liabilities (Net of effects of business acquisitions):
Accounts receivable (3,830) (3,096)
Inventory 3,536 (2,144)
Prepaid expenses and other assets 323 896
Accounts payable, accrued expenses and other liabilities 5,762 (9,346)
Income taxes (1,196) (396)
---------------- ----------------
Net cash provided by operating activities 41,090 33,380
Investing activities:
Acquisitions of businesses, net of cash acquired (12,749) (6,630)
Purchases of property, plant and equipment (9,513) (15,260)
Proceeds from sale of property, plant and equipment 102 115
Other 20 867
---------------- ----------------
Net cash used in investing activities (22,140) (20,908)
Financing activities:
Payment of dividends (12,918) (12,146)
Proceeds from issuance of Class A Common Stock 3,646 2,966
Principal payments on debt (1,369) (8,106)
Other - (1,715)
---------------- ----------------
Net cash used in financing activities (10,641) (19,001)
Effect of exchange rate changes on cash (850) (1,385)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 7,459 (7,914)
Cash and cash equivalents, beginning of period 62,811 60,784
---------------- ----------------
Cash and cash equivalents, end of period $ 70,270 $ 52,870
================ ================
Supplemental disclosures:
Cash paid during the period for:
Interest $ 155 $ 327
Income taxes, net of refunds 11,726 16,353
Acquisitions:
Fair value of assets acquired, net of cash $ 5,667 7,920
Liabilities assumed (1,789) (4,299)
Goodwill 8,871 3,009
---------------- ----------------
Net cash paid for acquisitions $ 12,749 $ 6,630
================ ================
5
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended April 30, 2002
(Unaudited)
NOTE A - Basis of Presentation
The condensed consolidated financial statements included herein have
been prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of the
Company, the foregoing statements contain all adjustments, consisting only of
normal recurring accruals, necessary to present fairly the financial position of
the Company as of April 30, 2002 and July 31, 2001, its results of operations
for the three months and nine months ended April 30, 2002 and 2001, and its cash
flows for the nine months ended April 30, 2002 and 2001. The condensed
consolidated balance sheet at July 31, 2001 has been derived 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 accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to rules and regulations of the Securities and Exchange Commission. Accordingly,
the condensed consolidated financial statements do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statement presentation.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the consolidated financial statements and the notes thereto
included in the Company's latest annual report on Form 10-K for the year ended
July 31, 2001.
It is not practical to segregate the amounts of raw material, work in
process or finished goods at the respective interim balance sheet dates.
NOTE B - New Pronouncements
In May 2000, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and
Costs." EITF 00-10 provides guidance on the financial reporting of shipping and
handling fees and costs in the condensed consolidated statements of income.
During the fourth quarter of fiscal 2001, the Company adopted EITF 00-10 and, as
a result, amounts billed to a customer in a sale transaction related to shipping
costs are reported as net sales and the related costs incurred for shipping are
reported as cost of goods sold. The Company previously reported shipping costs
as a reduction of sales. Prior period condensed consolidated financial
statements have been reclassified to conform to the new requirements.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," which eliminates the pooling method of accounting for all
business combinations initiated after June 30, 2001 and addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. The Company has adopted this accounting standard for
business combinations initiated after June 30, 2001.
As of August 1, 2001, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which addresses the financial accounting and reporting
standards for the acquisition of intangible assets outside of a business
combination and for goodwill and other intangible assets subsequent to their
acquisition. This accounting standard requires that goodwill be separately
disclosed from other intangible assets in the condensed consolidated balance
sheet, and no longer be amortized, but tested for impairment on at least a
periodic basis. The provisions of this accounting standard also require the
completion of a transitional impairment test within six months of adoption, with
any impairments identified treated as a cumulative effect of a change in
accounting principle.
6
The Company performed the transitional assessment of goodwill by
comparing the carrying amount of net assets, including goodwill, of each
reporting unit to their respective fair value as of August 1, 2001. Fair value
was estimated based upon discounted cash flow analyses. Because the estimated
fair value of each of the Company's reporting units exceeded their carrying
amount, management believes that no impairment exists as of the implementation
date, August 1, 2001.
In accordance with SFAS No. 142, the Company discontinued the
amortization of goodwill effective August 1, 2001. A reconciliation of
previously reported net income and net income per share to the amounts adjusted
for the exclusion of goodwill amortization net of the related income tax effect
follows:
Fiscal 2002 Fiscal 2001
----------- -----------
3rd Quarter 9-Month 3rd Quarter 9-Month
----------- ------- ----------- -------
Reported net income $8,475,000 $22,608,000 $10,159,000 $30,200,000
Add: Goodwill amortization, net of tax - - 1,485,000 4,444,000
---------- ----------- ----------- -----------
Adjusted net income $8,475,000 $22,608,000 $11,644,000 $34,644,000
========== =========== =========== ===========
Net income per Class A Nonvoting
Common Share - Basic:
Reported net income $ 0.36 $ 0.97 $ 0.44 $ 1.32
Add: Goodwill amortization, net of tax - - 0.06 0.19
---------- ----------- ----------- -----------
Adjusted net income $ 0.36 $ 0.97 $ 0.50 $ 1.51
========== =========== =========== ===========
Net income per Class A Nonvoting
Common Share - Diluted:
Reported net income $ 0.36 $ 0.96 $ 0.44 $ 1.30
Add: Goodwill amortization, net of tax - - 0.06 0.19
---------- ----------- ----------- -----------
Adjusted net income $ 0.36 $ 0.96 $ 0.50 $ 1.49
========== =========== =========== ===========
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the
accounting for and the reporting of the impairment or disposal of long-lived
assets and is effective for the Company on August 1, 2002. The impact of this
pronouncement on the Company's financial results is not expected to be material.
NOTE C - Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the quarter ended April
30, 2002, are as follows:
Graphics &
Workplace
ISST Solutions Total
-------- --------- -----
Balance as of January 31, 2002 $58,421,000 $40,566,000 $ 98,987,000
Goodwill acquired during the period - 5,397,000 5,397,000
Translation adjustments and other 543,000 778,000 1,321,000
----------- ----------- ------------
Balance as of April 30, 2002 $58,964,000 $46,741,000 $105,705,000
=========== =========== ============
Other long-term assets include patents, trademarks, non-compete
agreements and other intangibles with finite lives being amortized in accordance
with SFAS No. 142. The net book value of these assets was $4,317,000 at April
30, 2002. Amortization expense related to intangible assets was not material.
7
NOTE D - Comprehensive Income
Total comprehensive income, which was comprised of net income, foreign
currency adjustments and net unrealized gains and losses from cash flow hedges,
amounted to approximately $9,938,000 and $6,852,000 for the three months ended
April 30, 2002 and 2001, respectively, and $23,080,000 and $25,805,000 for the
nine months ended April 30, 2002 and 2001, respectively.
NOTE E - Net Income Per Common Share
Reconciliations of the numerator and denominator of the basic and
diluted per share computations for the Company's Class A and Class B common
stock are summarized as follows:
Fiscal 2002 Fiscal 2001
----------- -----------
3rd Quarter 9-Month 3rd Quarter 9-Month
----------- ------- ------------ -------
Numerator:
Net income $8,475,000 $22,608,000 $10,159,000 $30,200,000
Less: Preferred stock dividends (65,000) (195,000) (65,000) (194,000)
---------- ----------- ----------- -----------
Numerator for basic and diluted
Class A net income per share 8,410,000 22,413,000 10,094,000 30,006,000
Less: Preferential dividends 0 (705,000) 0 (699,000)
Less: Preferential dividends on
dilutive stock options 0 (10,000) 0 (9,000)
---------- ----------- ----------- -----------
Numerator for basic and diluted
Class B net income per share $8,410,000 $21,698,000 $10,094,000 $29,298,000
========== =========== =========== ===========
Denominator:
Denominator for basic net income per
share for both Class A and Class B 23,053,000 22,995,000 22,865,000 22,798,000
Plus: Effect of dilutive stock options 392,000 339,000 336,000 277,000
---------- ----------- ----------- -----------
Denominator for diluted net income per
share for both Class A and Class B 23,445,000 23,334,000 23,201,000 23,075,000
========== =========== =========== ===========
Class A Common Stock net income per share:
Basic $ 0.36 $ 0.97 $ 0.44 $ 1.32
Diluted $ 0.36 $ 0.96 $ 0.44 $ 1.30
Class B Common Stock net income per share:
Basic $ 0.36 $ 0.94 $ 0.44 $ 1.29
Diluted $ 0.36 $ 0.93 $ 0.44 $ 1.27
8
Options to purchase 16,000 shares of Class A Common Stock were not
included in the computations of diluted net income per share for the quarter
ending April 30, 2001, 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 75,000 shares of Class A Common Stock were not
included in the computations of diluted earnings per share for the nine months
ending April 30, 2001, because the option exercise prices were greater than the
average market price of the common shares and, therefore, the effect would be
antidilutive.
NOTE F - Acquisitions
In November 2001, the Company acquired StrandWare, Inc., located in Eau
Claire, Wisconsin, a bar-code, label-design, and data-collection software
developer. Also in November 2001, the Company acquired Safety Signs Service,
located in Perth, Australia, a manufacturer and supplier of safety products. In
April 2002, the Company acquired Temtec, located in Suffern, New York, a
printing Company that develops and markets products for security applications.
The combined purchase price of these acquisitions was approximately $13,600,000.
Each of the acquisitions was for cash. The agreements include provisions for
contingent payments up to a maximum of $4,000,000 based on the earnings of the
acquired entities. The results of their operations have been included since
their respective dates of acquisition in the accompanying condensed consolidated
financial statements. The pro-forma results assuming the acquisitions had been
consummated as of the beginning of the periods presented are not significant.
Preliminary allocation of the purchase price of these acquisitions has
been made, pending the outcome of a final valuation. Approximately $8,900,000
was assigned to goodwill and approximately $2,000,000 was assigned to patents,
which will be amortized over a weighted average life of nine years.
NOTE G - Restructuring
During the fourth quarter of fiscal 2001, the Company recorded a
nonrecurring charge of $9,560,000 related primarily to facilities consolidation
in the United States and Europe and workforce reductions in its operations
around the world. The workforce reduction of approximately 175 people was
essentially completed in August 2001.
A reconciliation of activity with respect to the Company's
restructuring is as follows:
Ending balance, July 31, 2001 $6,937,000
Fiscal 2002 First Quarter Activity
Cash payments associated with severance and other (1,487,000)
Non-cash asset write-offs (263,000)
-----------
Ending balance, October 31, 2001 5,187,000
Fiscal 2002 Second Quarter Activity
Cash payments associated with severance and other (1,474,000)
Non-cash asset write-offs (97,000)
-----------
Ending balance, January 31, 2002 3,616,000
Fiscal 2002 Third Quarter Activity
Cash payments associated with severance and other (777,000)
Non-cash asset write-offs (50,000)
-----------
Ending balance, April 30, 2002 2,789,000
===========
9
NOTE H - Segment Information
The Company's reportable segments are business units that are each
managed separately because they manufacture and/or distribute distinct products
using different processes. The Company has two reportable segments: the
Identification Solutions & Specialty Tapes Group and the Graphics and Workplace
Solutions Group. Effective August 1, 2001, the Company's Graphics and Direct
Marketing operating segments were combined to form Graphics and Workplace
Solutions. The prior year segment information has been reclassified to conform
to the current year presentation.
Following is a summary of segment information for the three months ended April
30, 2002 and 2001:
(Dollars in Thousands) Identification
Solutions & Graphics & Corporate
Specialty Workplace and
Tapes Solutions Eliminations Totals
----- --------- ------------ ------
Three months ended April 30, 2002:
- ----------------------------------
Sales from external customers $54,658 $75,875 - $130,533
Intersegment sales 58 225 $(283) -
Segment operating profit 6,987 20,019 (549) 26,457
Three months ended April 30, 2001:
- ----------------------------------
Sales from external customers $62,542 $74,339 - $136,881
Intersegment sales 553 405 ($958) --
Segment operating profit 12,757 19,612 (831) 31,538
Following is a summary of segment information for the nine months ended April
30, 2002 and 2001:
(Dollars in Thousands) Identification
Solutions & Graphics & Corporate
Specialty Workplace and
Tapes Solutions Eliminations Totals
----- --------- ------------ ------
Nine months ended April 30, 2002:
- ---------------------------------
Sales from external customers $165,452 $215,671 - $381,123
Intersegment sales 386 1,388 ($1,774) -
Segment operating profit 22,142 54,129 (1,643) 74,628
Nine months ended April 30, 2001:
- ---------------------------------
Sales from external customers $200,544 $219,120 $419,664
Intersegment sales 2,182 1,593 ($3,775) -
Segment operating profit 44,350 56,268 (1,917) 98,701
10
Following is a reconciliation of profit for the three and nine months
ended April 30, 2002 and 2001:
(Dollars in Thousands) Fiscal 2002 Fiscal 2001
----------- -----------
3rd Quarter 9-Month 3rd Quarter 9-Month
----------- ------- ----------- -------
Total profit from reportable segments $27,006 $76,271 $32,369 $100,618
Corporate and eliminations (549) (1,643) (831) (1,692)
Unallocated amounts:
Administrative costs (13,342) (39,105) (12,787) (43,302)
Goodwill amortization - - (1,518) (4,591)
Interest-net 111 505 280 866
Foreign exchange 111 285 (486) (1,309)
Other (398) (1,751) (773) (2,012)
-------- -------- -------- ---------
Income before income taxes $12,939 $34,562 $16,254 $ 48,578
======== ======== ======== =========
NOTE I - Liquidity and Capital Resources
On January 22, 2002, the Securities and Exchange Commission issued an
interpretive release on disclosures related to liquidity and capital resources,
including off-balance sheet arrangements. 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 presented in other Company filings. However,
the following additional information is provided to assist financial statement
users.
Operating Leases - These leases generally are entered into only for
non-strategic investments (e.g., warehouses, office buildings) where the
economic profile is favorable. The effects of outstanding leases are not
material to the Company.
Purchase Commitments - The Company has purchase commitments for
materials, supplies, services, and property, plant and equipment as part of the
ordinary conduct of business. In the aggregate, such commitments are not at
prices in excess of current market. 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 is reasonably likely to 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.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
For the three months ended April 30, 2002, sales of $130,533,000 were
4.6% lower than the same quarter of the previous year. For the nine months ended
April 30, 2002, sales of $381,123,000 were 9.2% lower than the same period last
year. Sales of the Company's international operations increased 4.9% for the
quarter and 4.1% for the nine-month period in local currencies. This increase
was partially offset by the negative effect of fluctuations in the exchange
rates used to translate financial results into U.S. currency, which reduced
international sales growth by 2.2% in the quarter and 2.4% for the nine months
ended April 30, 2002. Acquisitions increased international sales by 4.4% for the
quarter and 5.5% for the nine-month period. International base sales (excludes
the effect of acquisitions) in local currencies increased 0.5% for the quarter
and decreased 1.5% for the nine months ended April 30, 2002. Sales of the
Company's U.S. operations decreased 10.6% in the quarter and 17.4% for the nine
months ended April 30, 2002. The decrease in U.S. base business was related to
softness in the U.S. economy and the telecommunications, electronics and
automatic identification industries. The decrease was partially offset by
acquisitions, which increased U.S. sales growth by 1.4% for the quarter and 0.6%
for the nine months ended April 30, 2002.
The cost of products sold as a percentage of sales increased from 47.0%
to 48.7% for the quarter and from 46.4% to 49.2% for the nine months ended April
30, 2002 compared to the same periods of the previous year. This increase was
due primarily to the effect of a fixed cost structure being spread over a lower
sales volume and the negative effect of the exchange rate on goods purchased by
foreign subsidiaries. Selling, general and administrative (SG&A) expenses as a
percentage of sales increased to 38.1% for the quarter compared to 36.4% for the
same quarter of the previous year, excluding goodwill amortization in both
periods. For the nine months ended April 30, 2002, the same percentage was 38.5%
compared to 37.1% for the same period last year, excluding goodwill
amortization. SG&A as a percentage of sales increased in both periods due to
lower sales. The decrease reflects more focused spending, better tracking and
allocation of costs and variations in project timing. As a percentage of sales,
research and development expenses remained flat at 3.5% for the quarter and
decreased from 3.8% to 3.5% for the nine-month period.
Operating income was $12,716,000 for the quarter and $33,770,000 for
the nine months ended April 30, 2002, compared to $16,493,000 and $48,961,000
for the same periods last year because of the factors cited above. Excluding
goodwill amortization, operating income in the prior year would have been
$18,011,000 in the quarter and $53,552,000 for the nine-month period.
Investment and other income increased $380,000 for the quarter and
$927,000 for the nine months ended April 30, 2002, compared to same periods last
year due to a more favorable foreign exchange environment.
Income before income taxes decreased 27.2% for the quarter and 35.0%
for the nine months ended April 30, 2002, compared to prior-year results,
excluding goodwill amortization in both periods. The Company's effective tax
rate was 34.5% for the quarter ended April 30, 2002 and for the same quarter of
the previous year, excluding goodwill amortization in both years. For the nine
months ended April 30, 2002, this percentage was 34.6% compared to 34.8% for the
same period last year, excluding goodwill amortization in both periods.
12
Net income for the three months ended April 30, 2002, decreased 27.2%
to $8,475,000 compared to $11,644,000 for the same quarter of the previous year,
excluding goodwill amortization in both periods. For the nine months ended April
30, 2002, net income decreased 34.7% to $22,608,000 from $34,644,000 for the
same period last year, excluding goodwill amortization in both periods. On a
Class A Common Share basis, diluted net income for the three months ended April
30, 2002, was $0.36 compared to $0.44 per share for the same quarter of the
previous year or $0.50 per share excluding goodwill amortization in the prior
period. For the nine months ended April 30, 2002, Class A Common Share diluted
net income was $0.96 compared to $1.30 per share for the same period last year
or $1.49 per share excluding goodwill amortization. The decrease in the current
quarter was primarily due to the sales shortfalls discussed above offset by
restructuring and cost reduction efforts.
Business Segment Operating Results
Identification Solutions & Specialty Tapes (ISST) Group:
ISST sales decreased 12.6% for the three months ended April 30, 2002,
from the same period last year. For the nine months ended April 30, 2002, ISST
sales were 17.5% lower than the same period last year. Base business in local
currency decreased 16.1% in the quarter and 21.5% for the nine-month period
ended April 30, 2002. Acquisitions increased sales over prior year 4.7% in the
quarter and 5.1% for the nine months ended April 30, 2002. Contributing to the
decrease was the negative effect of fluctuations in the exchange rates used to
translate financial results into U.S. currency, which reduced sales growth
within the group by 1.2% in the quarter and for the nine months ended April 30,
2002. The United States and Latin America each showed sales declines in local
currency for the quarter, while Europe and Asia Pacific sales showed increases
in the quarter. The domestic decrease related to softness in the electronic and
telecommunications and industrial markets. Profit as a percentage of sales
decreased from 20.4% to 12.8% for the quarter and from 22.1% to 13.4% for the
nine months ended April 30, 2002. The decrease was primarily a result of the
decline in sales.
Graphics & Workplace Solutions Group:
Graphics & Workplace Solutions' sales increased 2.1% for the quarter
and decreased 1.6% for the nine months ended April 30, 2002, compared to the
same periods last year. Base sales in local currency increased 1.7% in the
quarter and decreased 1.3% for the nine months ended April 30, 2002, compared to
the same periods last year. Sales were negatively affected by fluctuations in
the exchange rates used to translate financial results into U.S. currency, which
reduced sales within the group by 0.8% in the quarter and 0.9% for the nine
months ended April 30, 2002. Sales in local currencies for the quarter were up
slightly in Europe and the United States with near double digit increases in
Latin America and Asia Pacific. Profit as a percentage of sales remained flat at
26.4% in the quarter and decreased to 25.1% from 25.7% for the nine months ended
April 30, 2002, compared with the same periods the prior year.
Financial Condition
The Company's liquidity remained strong. The current ratio as of April
30, 2002, was 2.7. Cash and cash equivalents were $70,270,000 at April 30, 2002,
compared to $62,811,000 at July 31, 2001. The increase was primarily due to
continued strong cash flow provided by operating activities, offset by
investments in property, plant and equipment and payment of dividends. Working
capital increased $4,565,000 during the nine months ended April 30, 2002, to
$128,395,000.
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Cash flow from operations totaled $41,090,000 for the nine months ended
April 30, 2002, compared to $33,380,000 for the same period last year. The
improvement was the result of longer payment terms with our vendors, lower
incentive payments to employees in fiscal 2002 and lower inventories due to the
lower sales volume and lower inventory requirements as a result of our
facilities consolidation performed in our July 2001 restructuring. Capital
expenditures were $9,513,000 in the nine months ended April 30, 2002, compared
to $15,260,000 in the same period last year. Cash used for acquisitions was
$12,749,000 for the nine months ended April 30, 2002 compared to $6,630,000 for
the same period in the prior year. Cash used in financing activities was
$10,641,000 for the nine-month period ended April 30, 2002, resulting primarily
from payments of dividends to the Company's stockholders. Cash flows used in
financing activities for the same period last year were $19,001,000 related to
payment of dividends and principal payments on debt.
Long-term debt as a percentage of long-term debt plus stockholders'
investment was 1.2% and 1.4% at April 30, 2002 and July 31, 2001, respectively.
The Company maintains a maximum $200 million line of credit (based on
certain financial ratios of the Company) with a group of six banks, none of
which was being utilized as of April 30, 2002. At April 30, 2002, approximately
$94 million of the line of credit was available to the Company. The Company is
in compliance with the covenants of the agreement.
During the second quarter of fiscal 2000, Brady began a Company-wide
process-improvement initiative, known as Eclipse - Earning Customer Loyalty
through Integrated Processes and Systems Everywhere. This initiative is intended
to improve and standardize processes throughout the Company and install new
technology to support those processes. The Company estimates this initiative
will take approximately three years to complete with total cash outlay of
approximately $30,000,000. To date, the Company has invested approximately
$27,700,000 in the project. Approximately 41% of the cash outlay has been
capitalized.
The Company believes that its cash and cash equivalents, the cash flow
from operating activities and available line of bank credit are adequate to meet
the Company's current and anticipated investing and financing needs.
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
are 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 incorporated by reference in the
Brady Corporation 2002 second quarter Form 10-Q filed with the Securities and
Exchange Commission. Such factors could cause actual results to differ
materially from those in the forward-looking statements.
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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 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 estimated exposures using forward contracts. Main exposures are
related to transactions denominated in the British Pound, the Euro, Canadian
Dollar, Japanese Yen and Australian Dollar. The risk of these hedging
instruments is not material.
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PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.27 Revolving Credit Facility Credit Agreement
(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 April 30, 2002.
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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: June 13, 2002 /s/ K. M. Hudson
------------- ----------------
K. M. Hudson
President & Chief Executive Officer
Date: June 13, 2002 /s/ D.W. Schroeder
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D.W. Schroeder
Sr. Vice President & Chief Financial Officer
(Principal Accounting Officer)
17