10-Q 1 c68073e10-q.txt QUARTERLY REPORT ENDED JANUARY 31, 2002 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, 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 0-12730 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 February 25, 2002, there were outstanding 21,257,944 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 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Item 4. Submission of Matters to a Vote of Security Holders 16 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18
BRADY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
(UNAUDITED) ASSETS JANUARY 31, JULY 31, 2001 2002 -------------- -------------- CURRENT ASSETS: Cash and cash equivalents $ 70,006 $ 62,811 Accounts receivable, less allowance for losses ($2,660 and $2,297 69,917 71,684 respectively) Inventories 35,958 39,207 Prepaid expenses and other current assets 21,920 21,291 -------------- -------------- TOTAL CURRENT ASSETS 197,801 194,993 OTHER ASSETS: Goodwill - net 98,987 96,041 Other 17,422 16,909 -------------- -------------- 116,409 112,950 PROPERTY, PLANT AND EQUIPMENT: Cost: Land 5,937 5,944 Buildings and improvements 49,421 47,611 Machinery and equipment 122,260 132,272 Construction in progress 6,501 6,474 -------------- -------------- 184,119 192,301 Less accumulated depreciation 101,863 107,768 -------------- -------------- NET PROPERTY, PLANT AND EQUIPMENT 82,256 84,533 -------------- -------------- TOTAL $ 396,466 $ 392,476 ============== ============== LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES: Accounts payable $ 21,122 $ 20,666 Wages and amounts withheld from employees 24,255 26,767 Taxes, other than income taxes 1,309 1,496 Accrued income taxes 9,656 8,460 Other current liabilities 11,629 12,364 Short-term borrowings and current maturities on long-term debt 160 1,410 -------------- -------------- TOTAL CURRENT LIABILITIES 68,131 71,163 LONG-TERM DEBT, LESS CURRENT MATURITIES 3,845 4,144 OTHER LIABILITIES 14,486 14,590 -------------- -------------- TOTAL LIABILITIES 86,462 89,897 STOCKHOLDERS' INVESTMENT: Preferred stock 2,855 2,855 Class A nonvoting common stock - Issued 21,255,262 212 211 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 38,324 35,806 Income retained in the business 282,329 276,779 Cumulative other comprehensive (loss) (13,007) (12,016) Other (595) (942) -------------- -------------- TOTAL STOCKHOLDERS' INVESTMENT 310,004 302,579 -------------- -------------- TOTAL $ 396,466 $ 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 January 31, Six Months Ended January 31, ------------------------------------ ----------------------------- 2002 2001 2002 2001 ---------------- ----------------- --------------- ------------ Net Sales $ 120,589 $ 135,965 $ 250,590 $ 282,783 Operating expenses: Cost of products sold 60,952 64,110 124,075 130,357 Research and development 4,168 5,591 8,620 11,151 Selling, general and administrative 46,083 52,208 96,841 108,807 ------------ ------------- ------------ ------------- Total operating expenses 111,203 121,909 229,536 250,315 Operating income 9,386 14,056 21,054 32,468 Other income and (expense): Investment and other income - net 6 (152) 588 40 Interest expense (3) (9) (19) (184) ------------ ------------- ------------ ------------- Income before income taxes 9,389 13,895 21,623 32,324 Income taxes 3,251 5,273 7,490 12,283 ------------ ------------- ------------ ------------- Net Income 6,138 8,622 14,133 20,041 Income retained in business at beginning of period 280,519 272,885 276,779 265,462 Less dividends: Preferred stock (65) (65) (130) (130) Common stock (4,263) (4,006) (8,453) (7,937) ------------ ------------- ------------ ------------- Income retained in business at end of period $ 282,329 $ 277,436 $ 282,329 $ 277,436 Net income per Class A Nonvoting Common Share Basic $ 0.26 $ 0.38 $ 0.61 $ 0.87 ============ ============= ============ ============= Diluted $ 0.26 $ 0.37 $ 0.60 $ 0.86 ============ ============= ============ ============= Net income per Class B Voting Common Share Basic $ 0.26 $ 0.38 $ 0.58 $ 0.84 ============ ============= ============ ============= Diluted $ 0.26 $ 0.37 $ 0.57 $ 0.83 ============ ============= ============ =============
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, 2002 2001 ------------- -------------- Operating activities: Net income $ 14,133 $ 20,041 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,716 10,982 Loss on sale of property, plant & equipment 474 167 Provision for losses on accounts receivable 744 798 Amortization of restricted stock 347 347 Changes in operating assets and liabilities (Net of effects of business acquisitions): Accounts receivable 1,046 (5,673) Inventory 3,320 (5,163) Prepaid expenses and other assets (313) (87) Accounts payable, accrued expenses and other liabilities (2,800) (4,323) Income taxes 1,354 (3,086) ------------- ------------- Net cash provided by operating activities 26,021 14,003 Investing activities: Acquisitions of businesses, net of cash acquired (3,848) 0 Purchases of property, plant and equipment (6,474) (12,341) Proceeds from sale of property, plant and equipment 14 42 Other 14 (13) ------------- ------------- Net cash (used in) investing activities (10,294) (12,312) Financing activities: Payment of dividends (8,583) (8,067) Proceeds from issuance of Class A Common Stock 2,519 2,252 Principal payments on debt (1,539) (8,071) Other 0 (1,223) ------------- ------------- Net cash (used in) financing activities (7,603) (15,109) Effect of exchange rate changes on cash (929) (594) ------------- ------------- Net increase (decrease) in cash and cash equivalents 7,195 (14,012) Cash and cash equivalents, beginning of period 62,811 60,784 ------------- ------------- Cash and cash equivalents, end of period $ 70,006 $ 46,772 ============= ============= Supplemental disclosures: Cash paid during the period for: Interest $ 147 $ 270 Income taxes, net of refunds 7,052 14,187 Acquisitions: Fair value of assets acquired, net of cash $ 1,095 Liabilities assumed (721) Goodwill 3,474 ------------- Net cash paid for acquisitions $ 3,848 =============
See Notes to Condensed Consolidated Financial Statements 5 BRADY CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Six Months Ended January 31, 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 January 31, 2002 and July 3l, 2001, its results of operations for the three months and six months ended January 31, 2002 and 2001, and its cash flows for the six months ended January 31, 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 FASB issued 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 ------------------------------- ---------------------------------- 2nd Quarter 6-Month 2nd Quarter 6-Month ----------- ----------- ------------ ------------ Reported net income $6,138,000 $14,133,000 $ 8,622,000 $20,041,000 Add: Goodwill amortization, net of tax - - 1,543,000 2,959,000 ---------- ----------- ----------- ----------- Adjusted net income $6,138,000 $14,133,000 $10,165,000 $23,000,000 ========== =========== =========== =========== Net income per Class A Nonvoting Common Share - Basic: Reported net income $0.26 $0.61 $0.38 $0.87 Add: Goodwill amortization, net of tax - - 0.07 0.13 ----- ----- ----- ----- Adjusted net income $0.26 $0.61 $0.45 $1.00 ===== ===== ===== ===== Net income per Class A Nonvoting Common Share - Diluted: Reported net income $0.26 $0.60 $0.37 $0.86 Add: Goodwill amortization, net of tax - - 0.07 0.13 ----- ----- ----- ----- Adjusted net income $0.26 $0.60 $0.44 $0.99 ===== ===== ===== =====
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 currently being evaluated. NOTE C - Goodwill and Other Intangible Assets Changes in the carrying amount of goodwill for the quarter ended January 31, 2002, are as follows:
Graphics & Workplace ISST Solutions Total ----------- ----------- ----------- Balance as of October 31, 2001 $56,756,000 $39,582,000 $96,338,000 Goodwill acquired during the period 2,041,000 1,433,000 3,474,000 Translation adjustments (376,000) (449,000) (825,000) ----------- ----------- ----------- Balance as of January 31, 2002 $58,421,000 $40,566,000 $98,987,000 =========== =========== ===========
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 $1,817,000 at January 31, 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 $5,196,000 and $11,434,000 for the three months ended January 31, 2002 and 2001, respectively, and $13,143,000 and $18,953,000 for the six months ended January 31, 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 ---------------------------------- -------------------------------- 2nd Quarter 6-Month 2nd Quarter 6-Month ----------- ------------ -------------- ----------- Numerator: Net income $6,138,000 $14,133,000 $8,622,000 $20,041,000 Less: Preferred stock dividends (65,000) (130,000) (65,000) (130,000) ---------- ----------- ---------- ----------- Numerator for basic and diluted Class A net income per share 6,073,000 14,003,000 8,557,000 19,911,000 Less: Preferential dividends 0 (705,000) 0 (699,000) Less: Preferential dividends on dilutive stock options 0 (10,000) 0 (8,000) ---------- ----------- ---------- ----------- Numerator for basic and diluted Class B net income per share $6,073,000 $13,288,000 $8,557,000 $19,204,000 ========== =========== ========== =========== Denominator: Denominator for basic net income per share for both Class A and Class B 22,997,000 22,995,000 22,788,000 22,765,000 Plus: Effect of dilutive stock options 335,000 327,000 314,000 278,000 ---------- ----------- ---------- ----------- Denominator for diluted net income per share for both Class A and Class B 23,332,000 23,322,000 23,102,000 23,043,000 ========== ========== ========== ========== Class A Common Stock net income per share: Basic $0.26 $0.61 $0.38 $0.87 Diluted $0.26 $0.60 $0.37 $0.86 Class B Common Stock net income per share: Basic $0.26 $0.58 $0.38 $0.84 Diluted $0.26 $0.57 $0.37 $0.83
8 Options to purchase 75,000 shares of Class A Common Stock were not included in the computations of diluted net income per share for the quarter ending January 31, 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 16,000 and 81,000 shares of Class A Common Stock were not included in the computations of diluted earnings per share for the six months ending January 31, 2002, and 2001, 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 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. The combined purchase price of these acquisitions was approximately $4,600,000. 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. 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 ===========
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. 9 Following is a summary of segment information for the three months ended January 31, 2002 and 2001:
(Dollars in Thousands) Identification Graphics & Solutions & Workplace Corporate and Specialty Tapes Solutions Eliminations Totals --------------- --------- ------------- ---------- Three months ended January 31, 2002: Sales from external customers $53,712 $66,877 $120,589 Intersegment sales 207 573 ($780) -- Profit 6,116 15,459 (534) 21,041 Three months ended January 31, 2001: Sales from external customers $66,478 $69,487 $135,965 Intersegment sales 1,025 344 ($1,369) -- Profit 14,018 16,284 (214) 30,088
Following is a summary of segment information for the six months ended January 31, 2002 and 2001:
(Dollars in Thousands) Identification Graphics & Solutions & Workplace Corporate and Specialty Tapes Solutions Eliminations Totals --------------- --------- ------------- ---------- Six months ended January 31, 2002: Sales from external customers $110,794 $139,796 $250,590 Intersegment sales 328 1,163 ($1,491) -- Profit 15,155 34,110 (1,094) 48,171 Six months ended January 31, 2001: Sales from external customers $138,002 $144,781 $282,783 Intersegment sales 1,629 1,188 ($2,817) -- Profit 31,593 36,656 (861) 67,388
Following is a reconciliation of profit for the three and six months ended January 31, 2002 and 2001:
(Dollars in Thousands) Fiscal 2002 Fiscal 2001 ----------------------------- ---------------------------- 2nd Quarter 6-Month 2nd Quarter 6-Month ----------- --------- ----------- --------- Total profit from reportable segments $21,575 $49,265 $30,302 $68,249 Corporate and eliminations (534) (1,094) (214) (861) Unallocated amounts: Administrative costs (11,460) (25,763) (14,026) (30,515) Goodwill amortization - - (1,576) (3,073) Interest-net 234 393 385 586 Foreign exchange (232) 174 (593) (823) Other (194) (1,352) (383) (1,239) ----------- --------- ----------- --------- Income before income taxes $9,389 $21,623 $13,895 $32,324 =========== ========= =========== =========
10 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. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations For the three months ended January 31, 2002, sales of $120,589,000 were 11.3% lower than the same quarter of the previous year. For the six months ended January 31, 2002, revenues of $250,590,000 were 11.4% lower than the same period last year. Sales of the Company's international operations increased 3.8% for the quarter and 3.6% for the six-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 3.0% in the quarter and 2.5% for the six months ended January 31, 2002. Acquisitions increased international sales by 6.5% for the quarter and 6.1% for the six-month period. The increase was partially offset by a decline in base sales (excludes the effect of acquisitions) in local currencies of 2.7% for the quarter and 2.5% for the six months ended January 31, 2002. Sales of the Company's U.S. operations decreased 20.9% in the quarter and 20.6% for the six months ended January 31, 2002. The decrease in U.S. base business was related to softness in the U.S. economy and the wireless, electronics and automatic identification industries. Acquisitions did not significantly affect U.S. sales for the quarter or the six months ended January 31, 2002. 11 The cost of products sold as a percentage of sales increased from 47.1% to 50.5% for the quarter and from 46.1% to 49.5% for the six months ended January 31, 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 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 38.2% for the quarter compared to 37.2% for the same quarter of the previous year, excluding goodwill amortization in both years. For the six months ended January 31, 2002, this percentage was 38.7% compared to 37.4% for the same period last year, excluding goodwill amortization. SG&A as a percentage of sales increased in both periods due to lower sales. Research and development expenditures decreased 25.5% for the quarter and 22.7% for the six months ended January 31, 2002, over the same periods last year. 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 decreased from 4.1% to 3.5% for the quarter and from 3.9% to 3.4% for the six-month period. Operating income was $9,386,000 for the quarter and $21,054,000 for the six months ended January 31, 2002, compared to $14,056,000 and $32,468,000 for the same periods last year because of the factors cited above. Excluding goodwill amortization, operating income in the prior year would have been $15,632,000 in the quarter and $35,541,000 for the six-month period. Investment and other income increased $158,000 for the quarter and increased $548,000 for the six months ended January 31, 2002, compared to same periods last year. Income before income taxes decreased 39.3% for the quarter and 38.9% for the six months ended January 31, 2002, compared to prior-year results, excluding goodwill amortization in both periods. The Company's effective tax rate was 34.6% for the quarter compared to 34.3% for the same quarter of the previous year, excluding goodwill amortization in both years. For the six months ended January 31, 2002, this percentage was 34.6% compared to 35.0% for the same period last year, excluding goodwill amortization in both periods. The decrease was the result of changes in the mix of earnings in the Company's international operations. Net income for the three months ended January 31, 2002, decreased 39.6% to $6,138,000 compared to $10,165,000 for the same quarter of the previous year, excluding goodwill amortization in both periods. For the six months ended January 31, 2002, net income decreased 38.6% to $14,133,000 from $23,000,000 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 January 31, 2002, was $0.26 compared to $0.37 per share for the same quarter of the previous year or $0.44 per share excluding goodwill amortization in the prior year first quarter. For the six months ended January 31, 2002, Class A Common Share diluted net income was $.60 compared to $.99 per share for the same period last year, 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 19.2% for the three months ended January 31, 2002, from the same period last year. For the six months ended January 31, 2002, ISST sales were 19.8% lower than the same period last year. Base business in local currency decreased 23.8% in the quarter and 23.9% for the six month period ended January 31, 2002. Acquisitions increased sales over prior year 6.0% in the quarter and 5.4% for the six months ended January 31, 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 1.5% in the quarter and 1.2% for the six months ended January 31, 2002. Latin America and the United States showed sales declines in local currency for the quarter, while Europe was up slightly and Asia Pacific sales showed a double-digit increase 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 21.1% to 11.4% for the quarter and from 22.9% to 13.7% for the six months ended January 31, 2002. The decrease was primarily a result of the decline in sales. 12 Graphics & Workplace Solutions Group: Graphics & Workplace Solutions' sales decreased 3.8% for the quarter and 3.4% for the six months ended January 31, 2002, compared to the same periods last year. Base sales in local currency decreased 3.1% in the quarter and 2.8% for the six months ended January 31, 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 growth within the group by 1.2% in the quarter and .9% for the six months ended January 31, 2002. Sales in local currencies for the quarter were up in Europe and Latin America and down in Asia Pacific and the United States. Profit as a percentage of sales decreased to 23.1% from 23.4% in the quarter and to 24.4% from 25.3% for the six months ended January 31, 2002, compared with the same periods the prior year. Financial Condition The Company's liquidity remained strong. The current ratio as of January 31, 2002, was 2.9. Cash and cash equivalents were $70,006,000 at January 31, 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 $5,840,000 during the six months ended January 31, 2002, to $129,670,000. Cash flow from operations totaled $26,021,000 for the six months ended January 31, 2002, compared to $14,003,000 for the same period last year. The improvement was primarily the result of changes in accounts receivable, inventory and current liabilities. Capital expenditures were $6,474,000 in the six months ended January 31, 2002, compared to $12,341,000 in the same period last year. Cash used for acquisitions was $3,848,000 for the six months ended January 31, 2002. Cash used in financing activities was $7,603,000 for the six-month period ended January 31, 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 $15,109,000 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 January 31, 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 January 31, 2002. At January 31, 2002, approximately $115 million of the line of credit was available to the Company. 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 $25,600,000 in the project. The Company estimates that about 50% of that cash outlay will be 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. 13 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, including those set forth herein. Economic Conditions Operating results are significantly influenced by general economic conditions and growth or contraction of the principal economies in which we operate, including the United States, Canada, Europe, Latin America and the Asia-Pacific region. This is especially true with respect to growth or contraction of the industrial and technology sectors of those economies. All economies in which we operate are cyclical and the rates of growth or contraction can vary substantially. Because we have few long-term contracts, we generally ship products within a short period of time from receiving orders and thus maintain only a small backlog. The extent to which we can rapidly adjust our cost structure and output to changing economic conditions may have a significant effect on our future profitability. Currency Fluctuations Approximately half of our sales are in foreign currencies, which fluctuate in relationship to one another and to the United States dollar. Fluctuations in currencies can cause transaction, translation and other losses. These fluctuations can have an adverse effect on our reported sales and earnings. Cost of Raw Materials As a manufacturer, our sales and profitability are also dependent upon availability and cost of raw materials and the ability to control or pass on costs of raw materials and labor. Inflationary and other increases in the costs of raw materials and labor have occurred in the past and are expected to recur. Our ability to reflect these costs in increased selling prices for our products, increasing our productivity, and focusing on higher profit businesses, will significantly influence our ability to maintain our margins. Past performance may or may not be replicable in the future. Reliance on Suppliers Our manufacturing operations depend on our suppliers' ability to deliver quality components and products in time for us to meet critical manufacturing and distribution schedules. If shortages or delays occur, our operating results could suffer until other sources can be developed. New Products A significant portion of the revenues in each of our recent fiscal years has been represented by sales of products we have introduced within three years prior to the period. Our ability to develop and successfully market new products and to develop, acquire and retain necessary intellectual property rights is therefore essential to maintaining our growth, which ability cannot be assured. Acquisitions, Strategic Alliances, Joint Ventures and Divestitures Part of our historic growth has come through acquisitions. We may also engage in strategic alliances, joint ventures and divestitures. Our ability to effectively evaluate potential acquisition, strategic alliance, joint venture or divestiture transactions and to effectuate such transactions at a reasonable price can affect our profitability. In addition, acquisitions, strategic alliances and joint ventures may require us to integrate with a different company culture, management team and business infrastructure. We may also have to develop, manufacture and market products with our products in a way that enhances the performance of the combined business or product line. Depending on the size and complexity of an acquisition, our successful integration of the entity depends on a variety of factors, including: 14 - The hiring and retention of key employees, - Management of facilities and employees in separate geographic areas, - The integration or coordination of different research and development and product manufacturing facilities, and - Systems integration and implementation. All of these efforts require varying levels of management resources, which may divert our attention from other business operations. Intellectual Property We generally rely upon patent, copyright, trademark and trade secret laws in the U.S. and in certain other countries, and agreements with our employees and customers to establish and maintain our property rights in our technology and products. However, any of our intellectual property rights could be challenged, invalidated or circumvented. Third parties may claim that we are infringing their intellectual property. Even if we do not believe that our products are infringing third parties' intellectual property rights, the claims can be time-consuming and costly to defend and divert management's attention and resources away from our business. Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements. If we cannot or do not license the infringed technology or substitute similar technology from another source, our business could suffer. Environmental Some of our operations use substances regulated under various federal, state and foreign laws governing the environment. It is our policy to apply strict standards for environmental protection to sites inside and outside the U.S., even when not subject to local government regulations. However, a failure to comply with applicable standards or the accidental emission of or exposure to hazardous materials could give rise to significant monetary liability. Also, the imposition of new governmental standards or requirements could materially increase our cost of operation. Effect of International Political Considerations Our international operations may be significantly influenced by political, economic and regulatory conditions (including tariffs) in the countries in which we conduct our operations. Other Other factors include costs and other effects of interest rate increases; legal and administrative cases and proceedings, settlements, judgments and investigations, claims, and changes in those items; adoption of new, or revised accounting policies and practices and the application of such policies and practices; the successful implementation of a new enterprise-resource-planning system; business reorganizations or combinations; loss of significant contract or customer; the euro conversion; the ability and willingness of purchasers to substitute other products for the products that we distribute; and pricing, purchasing, financing and promotional decisions by intermediaries in the distribution channel. The factors identified in this statement are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to be materially different from those that may be expressed or implied in any forward-looking statement made by, or on behalf, of the Company. Other factors not discussed in this statement could also have material adverse effects concerning forward-looking objectives or estimates. The Company assumes no obligation to update the information included in this statement. 15 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of shareholders was held on November 15, 2001. At the meeting the following persons were elected to serve as company directors by 100% of the 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. Peirce Additionally on October 16, 2001, the Class B Common Voting Shareholders unanimously consented to the Brady Corporation 2001 Omnibus Incentive Stock Option Plan. 16 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits 10.4 Form of Executive's Deferred Compensation Agreement, as amended 10.5 Form of Director's Deferred Compensation Agreement, as amended 10.26 Brady Corporation 2001 Omnibus Incentive Stock Plan (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, 2002. 17 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: March 14, 2002 /s/ K. M. Hudson --------------- ---------------- K. M. Hudson President & Chief Executive Officer Date: March 14, 2002 /s/ D.W. Schroeder --------------- ------------------ D.W. Schroeder Sr. Vice President & Chief Financial Officer (Principal Accounting Officer) 18