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 January 31, 2003
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 No X
----- -----
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, 2003, there were outstanding 21,405,934 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 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 15
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Certifications 18
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS) (UNAUDITED)
ASSETS JANUARY 31, 2003 JULY 31, 2002
------ ---------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 65,626 $ 75,969
Accounts receivable, less allowance for losses ($3,780 and $3,206
respectively) 80,103 76,246
Inventories 37,747 36,718
Prepaid expenses and other current assets 17,455 21,093
----------------- -----------------
TOTAL CURRENT ASSETS 200,931 210,026
OTHER ASSETS:
Goodwill -- net 123,360 108,053
Other 22,050 21,555
----------------- -----------------
145,410 129,608
PROPERTY, PLANT AND EQUIPMENT:
Cost:
Land 5,122 5,612
Buildings and improvements 48,945 50,122
Machinery and equipment 130,220 127,955
Construction in progress 8,453 3,062
----------------- -----------------
192,740 186,751
Less accumulated depreciation 112,974 105,860
----------------- -----------------
NET PROPERTY, PLANT AND EQUIPMENT 79,766 80,891
----------------- -----------------
TOTAL $ 426,107 $ 420,525
================= =================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
----------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 23,953 $ 26,294
Wages and amounts withheld from employees 25,282 26,251
Taxes, other than income taxes 1,880 2,396
Accrued income taxes 8,256 6,312
Other current liabilities 16,803 12,847
Short-term borrowings and current maturities on long-term debt 51 162
----------------- -----------------
TOTAL CURRENT LIABILITIES 76,225 74,262
LONG-TERM DEBT, LESS CURRENT MATURITIES 865 3,751
OTHER LIABILITIES 18,262 18,270
----------------- -----------------
TOTAL LIABILITIES 95,352 96,283
STOCKHOLDERS' INVESTMENT:
Preferred stock - 2,855
Class A nonvoting common stock -- Issued and outstanding 21,405,934
and 21,356,605 shares, respectively 214 214
Class B voting common stock -- Issued and outstanding 1,769,314 shares 18 18
Treasury Stock -- 18,262 and 4,548 class A common shares, at cost (509) (132)
Additional paid-in capital 43,146 41,526
Income retained in the business 289,508 287,674
Cumulative other comprehensive (loss) (1,498) (7,665)
Other (124) (248)
----------------- -----------------
TOTAL STOCKHOLDERS' INVESTMENT 330,755 324,242
----------------- -----------------
TOTAL $ 426,107 $ 420,525
================= =================
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 January 31, Six Months Ended January 31,
2003 2002 2003 2002
--------- --------- --------- ---------
Net Sales $ 129,565 $ 120,589 $ 268,227 $ 250,590
Operating expenses:
Cost of products sold 65,909 60,952 134,354 124,075
Research and development 4,572 4,168 8,643 8,620
Selling, general and administrative 54,535 46,083 108,307 96,841
--------- --------- --------- ---------
Total operating expenses 125,016 111,203 251,304 229,536
Operating income 4,549 9,386 16,923 21,054
Other income and (expense):
Investment and other income - net (275) 6 (189) 588
Interest expense (8) (3) (43) (19)
--------- --------- --------- ---------
Income before income taxes 4,266 9,389 16,691 21,623
Income taxes 1,449 3,251 5,675 7,490
--------- --------- --------- ---------
Net Income 2,817 6,138 11,016 14,133
Income retained in business at beginning of period 291,231 280,519 287,674 276,779
Less Dividends:
Redemption premium on preferred stock - - (171) -
Preferred stock - (65) - (130)
Common stock (4,540) (4,263) (9,011) (8,453)
--------- --------- --------- ---------
Income retained in business at end of period $ 289,508 $ 282,329 $ 289,508 $ 282,329
========= ========= ========= =========
Net income per Class A Nonvoting Common Share
Basic $ 0.12 $ 0.26 $ 0.47 $ 0.61
========= ========= ========= =========
Diluted $ 0.12 $ 0.26 $ 0.46 $ 0.60
========= ========= ========= =========
Net income per Class B Voting Common Share
Basic $ 0.12 $ 0.26 $ 0.44 $ 0.58
========= ========= ========= =========
Diluted $ 0.12 $ 0.26 $ 0.43 $ 0.57
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements
4
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) (Unaudited)
Six Months Ended
January 31,
2003 2002
-------- --------
Operating activities:
Net income $ 11,016 $ 14,133
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 8,102 7,716
Loss on sale of property, plant & equipment 41 474
Provision for losses on accounts receivable 671 744
Amortization of restricted stock 123 347
Changes in operating assets and liabilities (Net of effects of business acquisitions):
Accounts receivable 1,320 1,046
Inventory 730 3,320
Prepaid expenses and other assets 787 (313)
Accounts payable, accrued expenses and other liabilities (4,145) (2,800)
Income taxes 2,008 1,354
-------- --------
Net cash provided by operating activities 20,653 26,021
Investing activities:
Purchase of business (12,817) (3,848)
Termination of capital lease (791) -
Purchases of property, plant and equipment (7,621) (6,474)
Proceeds from sale of property, plant and equipment 16 14
Other Investments (295) 14
-------- --------
Net cash used in investing activities (21,508) (10,294)
Financing activities:
Payment of dividends (9,182) (8,583)
Proceeds from issuance of Class A Common Stock 1,620 2,519
Principal payments on debt (162) (1,539)
Redemption of preferred stock (2,855) -
Purchase of treasury Stock (377) -
Proceeds from short-term borrowings-net 75 -
-------- --------
Net cash used in financing activities (10,881) (7,603)
Effect of exchange rate changes on cash 1,393 (929)
-------- --------
Net (decrease) increase in cash and cash equivalents (10,343) 7,195
Cash and cash equivalents, beginning of period 75,969 62,811
-------- --------
Cash and cash equivalents, end of period $ 65,626 $ 70,006
======== ========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 38 $ 147
Income taxes, net of refunds 8,171 7,052
Acquisitions:
Fair value of asset acquired, net of cash $ 5,277 $ 1,095
Liabilities assumed (2,009) (721)
Goodwill 9,549 3,474
-------- --------
Net cash paid for acquisitions $ 12,817 $ 3,848
======== ========
Termination of capital lease
Disposition of capital assets $ (2,574) $ -
Settlement of capital lease liability 3,365 -
-------- --------
Net cash paid for termination of capital lease $ 791 $ -
======== ========
See Notes to Condensed Consolidated Financial Statements
5
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended January 31, 2003
(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 January 31, 2003 and July 3l, 2002, its results of operations
for the three months and six months ended January 31, 2003 and 2002, and its
cash flows for the six months ended January 31, 2003 and 2002. The condensed
consolidated balance sheet at July 31, 2002 has been derived from the audited
consolidated financial statements of that date and condensed. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts therein. Due to the inherent
uncertainty involved in making estimates, actual results in future periods may
differ from the estimates.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to rules and regulations of the Securities and Exchange Commission. Accordingly,
the condensed consolidated financial statements do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statement presentation.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the consolidated financial statements and the notes thereto
included in the Company's latest annual report on Form 10-K for the year ended
July 31, 2002.
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 July 2000, the Emerging Issues Task Force (EITF) of the FASB reached
final consensus on EITF Issue 00-14, "Accounting for Certain Sales Incentives."
EITF Issue 00-14 addresses the recognition, measurement, and income statement
classification for sales incentives offered to customers. Sales incentives
include discounts, coupons, and generally any other offers that entitle a
customer to receive a reduction in the price of a product by submitting a claim
for a refund or rebate. Under EITF Issue 00-14, the reduction in or refund of
the selling price of the product resulting from any sales incentives should be
classified as a reduction of revenue. In July 2001, the EITF reached final
consensus on EITF No. 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products" (EITF 00-25). EITF
00-25 generally requires that consideration, including equity instruments, given
to a customer be classified in a vendor's financial statements not as an
expense, but as an offset to revenue up to the amount of cumulative revenue
recognized or to be recognized. In November 2001, the EITF reached consensus on
EITF No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer or
Reseller of the Vendor's Products" (EITF 01-09). EITF 01-09 clarifies and
modifies certain items discussed in EITF 00-14 and EITF 00-25. The Company
adopted these new standards in the quarter ended April 30, 2002. The
implementation of EITF 00-14, EITF 00-25, EITF 01-09, and the accompanying
interpretive guidance did not have an impact on the Company's financial
position, results of operations, or cash flows.
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("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 was effective for the Company on August 1, 2002. This pronouncement
did not have a material effect on the Company's financial results.
NOTE C -- Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the three months ended
January 31, 2003, are as follows:
Graphics &
Workplace
ISST Solutions Total
------------ ------------ ------------
Balance as of October 31, 2002 $ 60,006,000 $ 48,333,000 $108,339,000
Goodwill acquired during the period 420,000 11,129,000 11,549,000
Translation adjustments 1,569,000 1,903,000 3,472,000
------------ ------------ ------------
Balance as of January 31, 2003 $ 61,995,000 $ 61,365,000 $123,360,000
============ ============ ============
6
Excluding the effects of translation adjustments, goodwill increased by
$11,549,000 during three-months ended January 31, 2003. The acquisition of
TISCOR resulted in $9,129,000 of goodwill due to the preliminary allocation of
the purchase price. An additional payment of $2,000,000 related to the Temtec,
Inc. acquisition was earned and accrued during the three-month period, resulting
in additional goodwill of $2,000,000 related to that acquisition. Lastly, a
holdback payment of $420,000 related to the Strandware acquisition was paid
during the period, which resulted in additional goodwill of $420,000.
Other long-term assets include patents, trademarks, non-compete
agreements and other intangibles with finite lives being amortized in accordance
with SFAS No. 142 "Goodwill and Other Intangible Assets". The net book value of
these assets was $5,753,000 and $3,918,000 at January 31, 2003 and July 31,
2002, respectively. At January 31, 2003, this amount consisted of $2,840,000
related to patents and trademarks, $2,094,000 related to software and $819,000
related to non-compete agreements. The amount related to software was acquired
with the TISCOR, Inc. acquisition in January 2003. This amount is subject to
change based on completion of the final valuation of the assets purchased.
Amortization expense related to intangible assets was not material.
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:
Fiscal 2003 Fiscal 2002
----------- -----------
(Dollars in thousands, except per share amounts) 2nd Quarter Six-months 2nd Quarter Six-months
================================================ ----------- ---------- ----------- ----------
Numerator:
- ----------
Net income $ 2,817 $ 11,016 $ 6,138 $ 14,133
Less: Preferred stock dividends and premium on
redemption of preferred stock - (171) (65) (130)
-------- -------- -------- --------
Numerator for basic and diluted
Class A net income per share 2,817 10,845 6,073 14,003
Less: Preferential dividends - (711) - (705)
Less: Preferential dividends on
dilutive stock options - (7) - (10)
-------- -------- -------- --------
Numerator for basic and diluted
Class B net income per share $ 2,817 $ 10,127 $ 6,073 $ 13,288
======== ======== ======== ========
Denominator:
- ------------
Denominator for basic net income per
share for both Class A and Class B 23,155 23,155 22,997 22,995
share for both Class A and Class B
Plus: Effect of dilutive stock options 230 215 335 327
-------- -------- -------- --------
Denominator for diluted net income per
share for both Class A and Class B 23,384 23,370 23,332 23,322
======== ======== ======== ========
Class A Common Stock net income per share:
Basic $ 0.12 $ 0.47 $ 0.26 $ 0.61
Diluted $ 0.12 $ 0.46 $ 0.26 $ 0.60
Class B Common Stock net income per share:
Basic $ 0.12 $ 0.44 $ 0.26 $ 0.58
Diluted $ 0.12 $ 0.43 $ 0.26 $ 0.57
7
Options to purchase 657,000 shares of Class A Common Stock were not
included in the computation of diluted net income per share for the quarter
ended January 31, 2003, 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 794,000 and 16,000 shares of Class A Common Stock
were not included in the computations of diluted net income per share for the
six-months ended January 31, 2003 and 2002, 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 - 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 $9,029,000 and $5,196,000 for the three months ended
January 31, 2003 and 2002, respectively, and $17,183,000 and $13,143,000 for the
six months ended January 31, 2003 and 2002, respectively.
NOTE F - Acquisitions
In January 2003, the Company acquired TISCOR, Inc., located in Poway,
California, an innovator in mobile workforce automation solutions, and an
industry leader in designing hand-held-computer software for technicians
performing site and equipment inspections. The purchase price was approximately
$13,500,000 in cash. The acquisition agreement includes provisions for
contingent payments up to an additional $3,000,000 based on the future earnings
of the acquired entity. The results of its operations have been included since
the respective date 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 this acquisition has
been made based on the carrying values recorded by the acquired entity. The
purchase price allocation is preliminary and pending the outcome of a valuation
of the acquired entity, including its identifiable intangible assets.
Approximately $9,100,000 was assigned to goodwill and approximately $2,100,000
was assigned to software.
NOTE G - Restructuring
During the fourth quarters of fiscal 2002 and 2001, the Company
recorded nonrecurring charges of $3,030,000 and $9,560,000, respectively,
related primarily to facilities consolidations and workforce reductions.
Reconciliations of activity with respect to the Company's restructuring actions
are as follows:
Fiscal 2002 Fiscal 2001
Restructuring Restructuring
------------- -------------
Ending balance, July 31, 2002 $2,239,000 $1,748,000
Fiscal 2003 first quarter activity:
Cash payments associated with severance and other (542,000) (394,000)
Fiscal 2003 second quarter activity:
Cash payments associated with severance and other (319,000) (551,000)
Non-cash asset write-offs (59,000) -
---------- ----------
Ending balance, January 31, 2003 $1,319,000 $ 803,000
========== ==========
8
NOTE H - Preferred Stock Redemption
On August 1, 2002, all Cumulative Preferred Stock was redeemed at a 6%
premium for approximately $3 million. Each share of $100 par value Cumulative
Preferred Stock was entitled to receive cumulative cash dividends and could be
redeemed, under certain circumstances, by the Company at par value plus accrued
dividends plus a premium of 6% of the par value. Such shares, which were held by
the initial holder thereof, were subject to redemption only if the holder
consented thereto.
NOTE I - Segment Information
The Company's reportable segments are business units that are each
managed separately because they manufacture and/or distribute distinct products
to differentiated markets. The Company has two reportable segments: the
Identification Solutions & Specialty Tapes Group and the Graphics and Workplace
Solutions Group.
Following is a summary of segment information for the three months ended January
31, 2003 and 2002:
(Dollars in Thousands) Identification
Solutions & Graphics &
Specialty Workplace Corporate and
Tapes Solutions Eliminations Totals
----- --------- ------------ ------
Three months ended January 31, 2003:
- ------------------------------------
Revenues from external customers $56,580 $72,985 - $129,565
Intersegment revenues 113 186 ($299) -
Profit (loss) 6,561 13,287 (1,127) 18,721
Three months ended January 31, 2002:
- ------------------------------------
Revenues from external customers $53,712 $66,877 - $120,589
Intersegment revenues 207 573 ($780) -
Profit (loss) 6,116 15,459 (534) 21,041
Following is a summary of segment information for the six months ended January
31, 2003 and 2002:
(Dollars in Thousands) Identification
Solutions & Graphics &
Specialty Workplace Corporate and
Tapes Solutions Eliminations Totals
----- --------- ------------- ------
Six months ended January 31, 2003:
- ----------------------------------
Revenues from external customers $114,238 $153,989 - $268,227
Intersegment revenues 244 339 ($583) -
Profit (loss) 15,534 32,400 (1,656) 46,278
Six months ended January 31, 2002:
- ----------------------------------
Revenues from external customers $110,794 $139,796 - $250,590
Intersegment revenues 328 1,163 ($1,491) -
Profit (loss) 15,155 34,110 (1,094) 48,171
9
Following is a reconciliation of profit for the three and six months ended
January 31, 2003 and 2002:
(Dollars in Thousands) Fiscal 2003 Fiscal 2002
----------- -----------
2nd Quarter Six-months 2nd Quarter Six-months
----------- ---------- ----------- ----------
Total profit from reportable segments $ 19,848 $ 47,934 $ 21,575 $ 49,265
Corporate and eliminations (1,127) (1,656) (534) (1,094)
Unallocated amounts:
Administrative costs (13,292) (27,627) (11,460) (25,763)
Interest-net 253 380 234 393
Foreign exchange (536) (612) (232) 174
Other (880) (1,728) (194) (1,352)
-------- -------- -------- --------
Income before income taxes $ 4,266 $ 16,691 $ 9,389 $ 21,623
======== ======== ======== ========
NOTE J -- SUBSEQUENT EVENT
On February 20, 2003, the Company's Board of Directors announced the
election of Frank M. Jaehnert as President and Chief Executive Officer, and
Katherine M. Hudson as Chairman of the Board, both effective April 1, 2003.
Jaehnert was also elected to the Company's Board of Directors. Mr. Jaehnert
currently serves as Senior Vice President of the Company and President of the
Company's Identification Solutions and Specialty Tapes Group.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
For the three months ended January 31, 2003, net sales of $129,565,000
were 7.5% higher than the same quarter of the previous year. For the six months
ended January 31, 2003, net sales of $268,227,000 were 7.0% higher than the same
period last year. Sales of the Company's international operations increased
13.7% for the quarter and 12.4% for the six-month period ended January 31, 2003,
as compared to the same periods last year. This increase was aided by the
positive effect of fluctuations in the exchange rates used to translate
financial results into United States currency, which increased international
sales growth by 9.8% in the quarter and 7.4% for the six-month period ended
January 31, 2003. International base sales (excluding the effect of
acquisitions) in local currencies increased 3.9% for the quarter and 4.6% for
the six-month period. Sales of the Company's United States operations increased
1.1% in the quarter and 2.1% for the six-month period ended January 31, 2003.
The increase was due to the acquisitions of Temtec, Inc. and TISCOR Inc., which
increased U.S. sales growth by 3.7% for the quarter and 3.5% for the six-month
period. U.S. base sales declined 2.6% for the quarter and 1.5% for the six-month
period ended January 31, 2003. The decrease in U.S. base sales was primarily due
to business interruptions caused by the conversion of the North American direct
marketing business to SAP.
10
The cost of products sold as a percentage of sales increased from 50.6%
to 50.9% for the quarter and from 49.5% to 50.1% for the six-month period ended
January 31, 2003 compared to the same periods of the previous year. This
increase was due primarily to the conversion of our North American direct
marketing operations to SAP in December 2002, which caused depressed sales
levels in that higher-margin business in the quarter. For the six-month period,
cost of products sold increased due to unabsorbed capacity in our North American
operations in addition to the depressed sales due to the SAP implementation in
North America. The SAP implementation in North America resulted in lower than
expected sales for the quarter. Management expects to recover from the depressed
sales levels resulting from the conversion by the end of the third quarter of
fiscal 2003.
Selling, general and administrative (SG&A) expenses as a percentage of
sales increased to 42.1% for the current quarter compared to 38.2% for the same
quarter of the prior year. For the six months ended January 31, 2003, this
percentage was 40.4% compared to 38.7% for the same period last year. In
dollars, SG&A increased by $8.5 million in the quarter and $11.5 million for the
six-month period compared to the same periods of last year. Twenty-five percent
of the increases can be attributed to foreign currency translation increasing
expenses in Europe and Asia. Another twenty-five percent of the increases was
due to additional administrative expenses associated with acquired businesses,
temporary expenses related to the SAP conversion of the North American direct
marketing business and geographic expansion of direct marketing catalogs. The
remainder of the increases was due to general cost increases and pay and benefit
increases.
Research and development expenditures increased 9.7% for the quarter
and 0.3% for the six months ended January 31, 2003 over the same periods last
year. As a percentage of sales, research and development expenses were flat for
the quarter and decreased from 3.4% to 3.2% for the six-month period.
Operating income was $4,549,000 for the quarter and $16,923,000 for the
six-month period ended January 31, 2003, compared to $9,386,000 and 21,054,000
for the same periods last year because of the factors cited above.
Investment and other income decreased $281,000 for the quarter and
$777,000 for the six-month period ended January 31, 2003, compared to the same
periods last year due to the net effect of foreign exchange, primarily on
intercompany transactions.
Income before income taxes decreased 54.6% or $5,123,000 for the
quarter and 22.8% or $3,117,000 for the six-month period ended January 31, 2003,
compared to the same periods last year. The Company's effective tax rate was
34.0% for the quarter and for the six-month period ended January 31, 2003,
compared to 34.6% for the same periods last year.
Net income for the three months ended January 31, 2003 decreased 54.1%
to $2,817,000 compared to $6,138,000 for the same quarter of the previous year.
For the six months ended January 31, 2003, net income decreased 22.1% to
$11,016,000 from 14,133,000 for the same period last year. On a Class A Common
Share basis, diluted net income for the three months ended January 31, 2003, was
$0.12 compared to $0.26 per share for the same quarter of the previous year. For
the six months ended January 31, 2003, Class A Common Share diluted net income
was $0.46 compared to $0.60 for the same period last year.
For the current fiscal year, Management expects sales for the fiscal
year to be in the range of $552 to $562 million and earnings to be in the range
of $1.27 to $1.37 per share. The fourth quarter is expected to be stronger than
the third quarter.
11
Business Segment Operating Results
Identification Solutions & Specialty Tapes (ISST) Group:
ISST sales increased 5.4% for the three months and 3.1% for the
six-month period ended January 31, 2003 compared to the same periods last year.
The increase in sales consisted primarily of the positive effect of fluctuations
in the exchange rates used to translate financial results into United States
currency, which increased sales within the group by 3.8% in the quarter and 2.7%
for the six-month period. Base sales in local currency (excluding acquisitions
and the effect of foreign currency) increased 1.6% in the quarter and were flat
for the six-month period. Acquisitions did not have an impact in the current
quarter, but increased the group's sales over the prior year by 0.4% for the
six-month period.
Asia sales declined in local currency for the quarter as compared to
the same period last year, Europe and Latin America sales increased in the
quarter, while North American sales were flat. For the six-month period, North
America and Asia sales declined in local currency, while Europe and Latin
America sales increased.
In North America, base electronics and industrial business remained
flat for the quarter and the six-month periods. In the Quarter, sales of the
electrical and data communication identification product line grew in
double-digit percentages due to market share gains in the United States. This
growth was offset by a decline in external coating business and the sale of the
Imtec applicator business last year.
The base sales decrease of 7.3%, in local currencies, for the quarter
and 8.8% for the six-month period in Asia was due to a decline in disk drive
sales over the same periods last year and reductions in the scale of our Korean
operations. The decrease was partially offset by increased sales in China.
Sales in Europe increased 21.0% in United States dollars for the
quarter and 18.8% for the six-month period over the same periods last year. This
increase consisted primarily of an increase of 16.2% for the quarter and 12.5%
for the six-month period due to the positive impact of foreign currency
exchange. The base increase of 4.8% for the quarter and 5.9% for the six-month
period, excluding acquisitions and the effect of foreign currencies, was due to
strong performance in the automotive and telecommunications industries. Latin
American sales in local currencies increased 46.5% for the quarter and 33.6% for
the six-month period, while sales in United States dollars increased 5.6% for
the quarter and 2.0% for the six-month period compared to the same periods last
year.
Profit as a percentage of sales increased from 11.4% to 11.6% for the
quarter and decreased from 13.7% to 13.6% for the six-month period compared to
the same periods in the prior year.
Graphics & Workplace Solutions Group:
Graphics & Workplace Solutions' sales increased 9.1% for the quarter
and 10.2% for the six-month period ended January 31, 2003 compared to the same
periods last year. Base sales in local currency increased 0.1% in the quarter
and increased 2.7% for the six-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 group by 5.7% in the quarter and 4.2% for the six-month period.
Sales were also aided by acquisitions, which increased sales 3.3% for the
quarter and the six-month period, compared to the same periods in the prior
year.
North American sales decreased 4.6% in local currencies, excluding
acquisitions, for the quarter. European sales increased 4.7%, Asia had 9.7%
sales growth and Latin America had 26.5% sales increases in the quarter.
12
Asia Pacific sales in United States dollars were up 19.8% for the
quarter and 30.0% for the six-month period compared to the same periods in the
prior year. This includes an increase of 5.6% for the six-month period due to
acquisitions and an increase of 10.1% for the quarter and 8.5% for the six-month
period due to fluctuations in the exchange rates used to translate financial
results into United States currency. The base sales increase in Asia Pacific of
9.7% for the quarter and 15.9% for the six-month period was largely due to
strong performance in Australia.
Sales in Latin America in local currencies increased 26.5% for the
quarter and 35.6% for the six-month period compared to the same periods in the
prior year. This increase was reduced by the negative effect of fluctuations in
the exchange rates used to translate financial results into United States
currency, which decreased sales by 35.9% in the quarter and 31.9% for the
six-month period.
Profit as a percentage of sales decreased from 23.1% to 18.2% in the
quarter and from 24.4% to 21.0% for the six-month period compared with the same
periods last year. The decrease relates to the unabsorbed capacity in our North
American operations, the depressed sales due to the SAP implementation in North
America and higher expenses associated with the SAP implementation.
Financial Condition
The Company's liquidity remained strong. The current ratio as of
January 31, 2003, was 2.6, down slightly from the current ratio at July 31, 2002
of 2.8. Cash and cash equivalents were $65,626,000 at January 31, 2003, compared
to $75,969,000 at July 31, 2002. The decrease was primarily due to funding the
acquisition of TISCOR Inc., investments in property, plant, and equipment,
payment of dividends and redemption of preferred stock, offset by strong
operating cash flow. Working capital decreased $11,058,000 during the six months
ended January 31, 2003, to $124,706,000.
Cash flow from operations totaled $20,653,000 for the six months ended
January 31, 2003, compared to $26,021,000 for the same period last year. The
decrease was the result of lower net income and less reduction in inventory
levels, in local currencies, than for the same period of the prior year. Capital
expenditures were $7,621,000 in the six months ended January 31, 2003, compared
to $6,474,000 in the same period last year. Cash used in financing activities
was $10,881,000 for the six-month period ended January 31, 2003, resulting
primarily from payments of dividends to the Company's stockholders, redemption
of preferred stock, and purchase of treasury stock. Cash flows used in financing
activities for the same period last year were $7,603,000 related to payment of
dividends, offset by proceeds from issuance of common stock.
Long-term debt as a percentage of long-term debt plus stockholders'
investment was 0.3% and 1.1% at January 31, 2003 and July 31, 2002,
respectively. In November 2002, the Company successfully exited a capital lease
of a domestic facility. This capital lease represented approximately $3 million
of the long-term debt balance at July 31, 2002.
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 January 31, 2003. No borrowings were made under
the line of credit during the six months ended January 31, 2003. At January 31,
2003, approximately $81.3 million of the line of credit was available to the
Company. The Company is in compliance with the covenants of the line of credit
agreement.
The Company continues to seek opportunities to invest in new products,
new markets and strategic acquisitions and joint ventures, which fit its growth
strategy. Management believes that its cash and cash equivalents, the cash flow
it generates from operating activities and its available line of credit are
adequate to meet the Company's current and anticipated investing and financing
needs.
The strong liquidity of the Company and its continued strong cash flows
enables the company to execute on a long-term strategic plan. This strategic
plan includes investments which expand our current market share, open new
markets and geographies, develop new products and distribution channels and
continue to improve our processes. This strategic plan also includes executing
key acquisitions and joint ventures. In uncertain economic times, our strong
liquidity allows us to make investments that we believe some of our competitors
are unable to match. Should the Company remain in an unleveraged position during
expansionary times the Company may experience a less rapid rate of growth
compared to some of its competitors.
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The Company does not have material off-balance sheet arrangements or
related party transactions. The Company is not aware of factors that are
reasonably likely to adversely affect liquidity trends, other than the risk
factors described in other Company filings. However, the following additional
information is provided to assist financial statement users.
Operating Leases - These leases generally are entered into only for
non-strategic investments (e.g., warehouses, office buildings, computer
equipment) where the economic profile is favorable.
Purchase Commitments - The Company has purchase commitments for
materials, supplies, services, and property, plant and equipment as part of the
ordinary conduct of its business. In the aggregate, such commitments are not in
excess of current market prices. Due to the proprietary nature of many of the
Company's materials and processes, certain supply contracts contain penalty
provisions for early termination. The Company does not believe a material amount
of penalties is likely to be incurred under these contracts based upon
historical experience and current expectations.
Other Contractual Obligations - The Company does not have 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.
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 more fully described in the
Company's 2002 Form 10-K filed with the Securities and Exchange Commission.
These factors, as well as the uncertain impact of a potential war with Iraq or
other geo-political events, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's business operations give rise to market risk exposure due
to changes in foreign exchange rates. To manage that risk effectively, the
Company enters into hedging transactions, according to established guidelines
and policies, that enable it to mitigate the adverse effects of this financial
market risk.
The global nature of the Company's business requires active
participation in the foreign exchange markets. As a result of investments,
production facilities and other operations on a global scale, the Company has
assets, liabilities and cash flows in currencies other than the U.S. Dollar. The
primary objective of the Company's foreign-exchange risk management is to
minimize the impact of currency movements on intercompany transactions and
foreign raw-material imports. To achieve this objective, the Company hedges a
portion of known exposures using forward contracts. Main exposures are related
to transactions denominated in the Euro, Canadian Dollar, Japanese Yen and
Australian Dollar. The risk of these hedging instruments is not material.
14
The Company could be exposed to interest rate risk through its
corporate borrowing activities. The objective of the Company's interest rate
risk management activities is to manage the levels of the Company's fixed and
floating interest rate exposure to be consistent with the Company's preferred
mix. The interest rate risk management program consists of entering into
approved interest rate derivatives when there is a desire to modify the
Company's exposure to interest rates. As of January 31, 2003, the Company has
not entered into any interest rate derivatives.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this Form 10-Q, Brady
Corporation management, including the Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures are
effective in ensuring that material information is collected and evaluated by
management of the Company on a timely basis and that the quality and timeliness
of the Company's public disclosures comply with the SEC disclosure obligations.
There have been no significant changes in internal controls, or in factors that
could significantly affect internal controls, subsequent to the date the Chief
Executive Officer and Chief Financial Officer completed their evaluation.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on November 14, 2002. At
the meeting the following persons were elected to serve as company directors by
the affirmative vote of 100% of the 1,769,314 shares of Class B Common Voting
Stock until the next annual meeting of shareholders and until their successors
have been elected:
Richard A. Bemis
Robert C. Buchanan
Mary K. Bush
Frank W. Harris
Katherine M. Hudson
Frank R. Jarc
Peter J. Lettenberger
Gary E. Nei
Roger D. Pierce
ITEM 5. OTHER INFORMATION
On February 20, 2003, the Company's Board of Directors announced the
election of Frank M. Jaehnert as President and Chief Executive Officer, and
Katherine M. Hudson as Chairman of the Board, both effective April 1, 2003.
Jaehnert was also elected to the Company's Board of Directors. Mr. Jaehnert
currently serves as Senior Vice President of the Company and President of the
Company's Identification Solutions and Specialty Tapes Group. From 1996 to 2002
he served as the Company's Chief Financial Officer. Prior to joining the Company
in 1995 he held various financial and management positions in both Germany and
the United States for Robert Bosch GmbH, headquartered in Stuttgart, Germany. A
native of Stuttgart, he holds the equivalent of a master of business
administration degree from the University of Stuttgart, Germany. Mrs. Hudson has
served as President and Chief Executive Officer of the Company since 1994. A
report on Form 8-K was filed regarding this leadership change on February 24,
2003.
15
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Written Statement of Chief Executive Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Written Statement of Chief Financial Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(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, 2003.
A report on Form 8-K, was filed on February 24, 2003 relating
to the election of Frank M. Jaehnert as President and Chief
Executive Officer, and Katherine M. Hudson as Chairman of the
Board, both effective April 1, 2003.
A report on Form 8-K, was furnished on February 21, 2003,
relating to the announcement of the Company's fiscal 2003
second quarter results.
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SIGNATURES
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.
BRADY CORPORATION
Date: March 14, 2003 /s/ K. M. Hudson
--------------- -------------------
K. M. Hudson
President & Chief Executive Officer
Date: March 14, 2003 /s/ D.W. Schroeder
--------------- -------------------
D.W. Schroeder
Sr. Vice President & Chief Financial Officer
(Principal Accounting Officer)
(Principal Financial Officer)
17
CERTIFICATIONS
I, Katherine M. Hudson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Brady Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 14, 2003
/s/ KATHERINE M. HUDSON
- --------------------------
Katherine M. Hudson
President and Chief Executive Officer
18
I, David W. Schroeder, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Brady Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 14, 2003
/s/ DAVID W. SCHROEDER
- -------------------------
David W. Schroeder
Senior Vice President and Chief Financial Officer
19