-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Eh9HF+M3TfHlJTjzXQuSkMEs6DHPJv3jsRFYl5/d++A9/0Qc9Pn8t0jtgwFJ1LNN pOK9fedo6P0WDZ/aL8o6Tw== 0000950134-03-016614.txt : 20031212 0000950134-03-016614.hdr.sgml : 20031212 20031212171743 ACCESSION NUMBER: 0000950134-03-016614 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20031031 FILED AS OF DATE: 20031212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRADY CORP CENTRAL INDEX KEY: 0000746598 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS MANUFACTURING INDUSTRIES [3990] IRS NUMBER: 390178960 STATE OF INCORPORATION: WI FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14959 FILM NUMBER: 031052578 BUSINESS ADDRESS: STREET 1: 6555 W GOOD HOPE RD STREET 2: P O BOX 571 CITY: MILWAUKEE STATE: WI ZIP: 53201-0571 BUSINESS PHONE: 4143586600 FORMER COMPANY: FORMER CONFORMED NAME: BRADY W H CO DATE OF NAME CHANGE: 19920703 10-Q 1 c81539e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended October 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 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 November 24, 2003, there were outstanding 21,715,320 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 15 Item 4. Controls and Procedures 15 PART II. Other Information Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BRADY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
(UNAUDITED) OCTOBER 31, JULY 31, 2003 2003 ASSETS --------- --------- CURRENT ASSETS: Cash and cash equivalents $ 60,105 $ 76,088 Accounts receivable, less allowance for losses ($3,414 and $3,166, respectively) 92,492 80,162 Inventories 41,608 36,564 Prepaid expenses and other current assets 21,727 22,343 --------- --------- TOTAL CURRENT ASSETS 215,932 215,157 OTHER ASSETS: Goodwill 150,360 130,667 Other 22,206 24,455 --------- --------- 172,566 155,122 PROPERTY, PLANT AND EQUIPMENT: Cost: Land 5,242 5,172 Buildings and improvements 52,759 51,471 Machinery and equipment 142,225 139,007 Construction in progress 5,211 3,245 --------- --------- 205,437 198,895 Less accumulated depreciation 124,878 119,655 --------- --------- NET PROPERTY, PLANT AND EQUIPMENT 80,559 79,240 --------- --------- TOTAL $ 469,057 $ 449,519 ========= ========= LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES: Accounts payable $ 29,974 $ 28,470 Wages and amounts withheld from employees 26,929 30,619 Taxes, other than income taxes 4,126 2,492 Accrued income taxes 15,116 11,449 Other current liabilities 18,928 17,320 Short-term borrowings and current maturities on long-term debt 175 929 --------- --------- TOTAL CURRENT LIABILITIES 95,248 91,279 LONG-TERM DEBT, LESS CURRENT MATURITIES 581 568 OTHER LIABILITIES 20,159 18,711 --------- --------- TOTAL LIABILITIES 115,988 110,558 STOCKHOLDERS' INVESTMENT: Class A nonvoting common stock -- Issued and outstanding 21,700,853 217 216 and 21,558,265 shares, respectively Class B voting common stock -- Issued and outstanding 1,769,314 shares 18 18 Additional paid-in capital 52,222 47,464 Income retained in the business 296,388 290,805 Cumulative other comprehensive income 5,839 1,595 Treasury stock -- 34,657 and 18,262 Class A common shares, respectively, at cost (1,074) (509) Other (541) (628) --------- --------- TOTAL STOCKHOLDERS' INVESTMENT 353,069 338,961 --------- --------- TOTAL $ 469,057 $ 449,519 ========= =========
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 October 31, 2003 2002 --------- --------- Net Sales $ 151,906 $ 138,662 Operating expenses: Cost of products sold 73,143 68,445 Research and development 4,864 4,071 Selling, general and administrative 56,388 53,772 Restructuring charge 1,753 - --------- --------- Total operating expenses 136,148 126,288 Operating income 15,758 12,374 Other income and (expense): Investment and other income -- (expense) (159) 86 Interest expense (30) (35) --------- --------- Income before income taxes 15,569 12,425 Income taxes 5,216 4,226 --------- --------- Net income 10,353 8,199 Income retained in business at beginning of period 290,805 287,674 Less: Redemption premium on preferred stock - (171) Common stock dividends (4,770) (4,471) --------- --------- Income retained in business at end of period $ 296,388 $ 291,231 ========= ========= Net income per Class A Nonvoting Common Share Basic $ 0.44 $ 0.35 ========= ========= Diluted $ 0.44 $ 0.35 ========= ========= Net income per Class B Voting Common Share Basic $ 0.41 $ 0.32 ========= ========= Diluted $ 0.41 $ 0.32 ========= =========
See Notes to Condensed Consolidated Financial Statements 4 BRADY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)
(Unaudited) Three Months Ended October 31, 2003 2002 -------- -------- Operating activities: Net income $ 10,353 $ 8,199 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,697 4,295 Loss on sale or disposal of property, plant & equipment 37 107 Provision for losses on accounts receivable 360 415 Amortization of restricted stock 86 62 Net restructuring charge accrued liability 1,676 - Changes in operating assets and liabilities (net of effects of business acquisitions): Accounts receivable (6,478) (1,869) Inventory (1,796) (1,103) Prepaid expenses and other assets 1,408 (812) Accounts payable and accrued liabilities (4,151) 2,605 Income taxes 3,899 2,420 -------- -------- Net cash provided by operating activities 10,091 14,319 Investing activities: Acquisition of businesses, net of cash acquired (21,830) - Purchases of property, plant and equipment (3,605) (3,862) Proceeds from sale of property, plant and equipment 194 1 Other (61) - -------- -------- Net cash used in investing activities (25,302) (3,861) Financing activities: Payment of dividends (5,124) (4,642) Proceeds from issuance of common stock 4,732 74 Principal payments on debt (816) (86) Redemption of preferred stock - (2,855) Purchase of treasury stock (564) (377) -------- -------- Net cash used in financing activities (1,772) (7,886) Effect of exchange rate changes on cash 1,000 744 -------- -------- Net (decrease) increase in cash and cash equivalents (15,983) 3,316 Cash and cash equivalents, beginning of period 76,088 75,969 -------- -------- Cash and cash equivalents, end of period $ 60,105 $ 79,285 ======== ======== Supplemental disclosures: Cash paid during the period for: Interest $ 55 $ 30 Income taxes, net of refunds 1,294 2,363 Acquisitions: Fair value of assets acquired, net of cash $ 8,242 $ - Liabilities assumed (3,025) - Goodwill 16,613 - -------- -------- Net cash paid for acquisitions $ 21,830 $ - ======== ========
See Notes to Condensed Consolidated Financial Statements 5 BRADY CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Three Months Ended October 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 October 31, 2003 and July 3l, 2003, its results of operations for the three months ended October 31, 2003 and 2002, and its cash flows for the three months ended October 31, 2003 and 2002. The condensed consolidated balance sheet at July 31, 2003 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, 2003. 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 - Goodwill Changes in the carrying amount of goodwill for the quarter ended October 31, 2003, are as follows:
Americas Europe Asia Total -------- ------- ------ -------- Balance as of July 31, 2003 $ 84,267 $43,820 $2,580 $130,667 Goodwill acquired during the period 16,613 - - 16,613 Translation adjustments and other 459 2,437 184 3,080 -------- ------- ------ -------- Balance as of October 31, 2003 $101,339 $46,257 $2,764 $150,360 ======== ======= ====== ========
Goodwill increased by $19,693,000 during the three months ended October 31, 2003, including an increase of $3,080,000 attributable to translation adjustments and other. The preliminary allocation of the purchase price for the acquisitions of Brandon International and Prinzing Enterprises resulted in $16,613,000 of additional goodwill. 6 NOTE C - 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 $14,597,000 and $8,154,000 for the three months ended October 31, 2003 and 2002, respectively. NOTE D - Net Income Per Common Share Reconciliations of the numerator and denominator of the basic and diluted per share computations for the Company's Class A and Class B common stock are summarized as follows:
Fiscal 2004 Fiscal 2003 (Dollars in thousands, except per share amounts) 1st Quarter 1st Quarter ----------- ----------- Numerator: Net income $ 10,353 $ 8,199 Less: Premium on redemption of preferred stock - (171) -------- -------- Numerator for basic and diluted Class A net income per share 10,353 8,028 Less: Preferential dividends (721) (711) Less: Preferential dividends on dilutive stock options (9) (7) -------- -------- Numerator for basic and diluted Class B net income per share $ 9,623 $ 7,310 ======== ======== Denominator: Denominator for basic net income per share for both Class A and Class B 23,413 23,116 Plus: Effect of dilutive stock options 267 218 -------- -------- Denominator for diluted net income per share for both Class A and Class B 23,680 23,334 ======== ======== Class A Common Stock net income per share: Basic $ 0.44 $ 0.35 Diluted $ 0.44 $ 0.35 Class B Common Stock net income per share: Basic $ 0.41 $ 0.32 Diluted $ 0.41 $ 0.32
Options to purchase 495,000 shares of Class A Common Stock were not included in the computations of diluted net income per share for the quarter ended October 31, 2002 because the option exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. 7 NOTE E - Restructuring During the fourth quarters of fiscal 2003 and 2002, the Company recorded restructuring charges of $10,215,000 and $3,030,000, respectively, related primarily to facilities consolidations and workforce reductions. The company continued its restructuring actions that were announced in the fourth quarter of fiscal 2003, resulting in a restructuring charge of $1,753,000 during the three months ended October 31, 2003. The charge consists primarily of a provision for severance of terminated employees. The Company expects to incur total pre-tax restructuring charges in fiscal 2004 of $2,000,000 to $3,000,000. Reconciliations of activity with respect to the Company's restructuring actions are as follows:
Fiscal 2003 and 2004 Fiscal 2002 Restructuring Restructuring ------------- ------------- Ending balance, July 31, 2003 $ 6,926,000 $ 130,000 Fiscal 2004 first quarter activity: Additional restructuring charges 1,753,000 - Cash payments associated with severance and other (2,997,000) (100,000) ----------- --------- Ending balance, October 31, 2003 $ 5,682,000 $ 30,000 =========== =========
NOTE F - Acquisitions In September 2003, the Company acquired Brandon International, Inc. ("Brandon") headquartered in Baldwin Park, California, with international operations in Mexico and Singapore. Brandon is a manufacturer of die-cut products. In October 2003, the Company acquired Prinzing Enterprises, Inc. located in Warrenville, Illinois. Prinzing is a manufacturer of lockout/tagout products, signs and other safety devices. The combined purchase price for the two acquisitions was approximately $21,800,000 in cash and $1,000,000 in notes payable. The Prinzing acquisition agreement includes provisions for contingent payments up to a maximum $1,500,000 based on certain performance criteria during fiscal year 2004. The purchase price allocation is preliminary and pending the outcome of valuations of the acquired entities, which are in progress. $16,613,000 of the combined purchase price was assigned to goodwill in the preliminary allocation of the purchase price. The results of the operations of the acquired businesses have been included since their respective dates of acquisition in the accompanying condensed consolidated financial statements. In November 2003, the Company acquired B.I.G, headquartered in the United Kingdom, a provider of budging and business card solutions for approximately $9,000,000 in cash and notes payable. 8 NOTE G - Segment Information The Company's reportable segments are geographical regions that are each managed separately. Due to the change to a regional management structure at the beginning of fiscal 2004, the Company has restated the corresponding segment information from its previous group based structure for the prior year. The Company has three reportable segments: Americas, Europe and Asia. It is impracticable to present total assets by segment on an interim basis. Following is a summary of segment information for the three months ended October 31, 2003 and 2002:
(Dollars in Thousands) Corporate and Americas Europe Asia Eliminations Totals -------- ------ ---- ------------ ------ Three months ended October 31, 2003: - ------------------------------------ Revenues from external customers $80,092 $53,265 $18,549 - $ 151,906 Intersegment revenues 9,990 563 995 ($ 11,548) - Profit (loss) 15,116 13,449 5,424 (770) 33,219 Three months ended October 31, 2002: - ------------------------------------ Revenues from external customers $79,931 $45,083 $13,648 - $ 138,662 Intersegment revenues 8,528 625 12 ($ 9,165) - Profit (loss) 13,981 10,418 3,687 (529) 27,557
Following is a reconciliation of profit for the three months ended October 31, 2003 and 2002:
(Dollars in Thousands) Fiscal 2004 Fiscal 2003 ----------- ----------- 1st Quarter 1st Quarter ----------- ----------- Total profit from reportable segments $ 33,989 $ 28,086 Corporate and eliminations (770) (529) Unallocated amounts: Administrative costs (15,172) (14,335) Interest-net 91 127 Foreign exchange (280) (76) Restructuring charge, net (1,753) - Other (536) (848) -------- -------- Income before income taxes $ 15,569 $ 12,425 ======== ========
NOTE H - Pro Forma Stock-Based Compensation The Company has stock-based compensation plans under which stock options are granted to various officers, directors and other employees of the Company with exercise prices equal to the fair market value at the date of grant. Stock options were issued during the three months ended October 31, 2003 under stock-based compensation plans previously approved by shareholders. Generally, these options are not exercisable until one-year after the grant date, and will be exercisable thereafter, to the extent of one-third per year, and have a maximum term of ten years. In August 2003, certain executives and key management employees were issued stock options that vest upon meeting certain financial performance conditions in addition to the vesting schedule described above and have a term of five years. 9 Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the Company has elected to account for its employee stock option plans under APB Opinion No. 25, "Accounting for Stock Issued to Employees," which recognizes expense based on the intrinsic value at date of grant. As stock options have been issued with exercise prices equal to grant date fair value, no compensation cost has resulted, with the exception of the options issued in August 2003 that contain a performance condition ("performance options"). The performance options require the company to record compensation expense for changes in the market value of the underlying common stock. Had compensation cost for all options granted been determined based on the fair value at grant date consistent with SFAS No. 123, the Company's net earnings and earnings per share would have been as follows:
Three Months Ended (In thousands, except per share amounts) October 31, 2003 2002 ---------- ---------- Net earnings As reported $ 10,353 $ 8,199 Stock-based compensation expense recorded 30 - Pro forma expense (436) (497) ---------- ---------- Pro forma $ 9,947 $ 7,702 ========== ========== Net earnings per class A common share Basic As reported $ 0.44 $ 0.35 Pro forma adjustments (0.02) (0.03) ---------- ---------- Pro forma $ 0.42 $ 0.32 ========== ========== Diluted As reported $ 0.44 $ 0.35 Pro forma adjustments (0.02) (0.03) ---------- ---------- Pro forma $ 0.42 $ 0.32 ========== ==========
The assumptions used to calculate the fair value of new options granted are evaluated and revised, as necessary, to reflect market conditions and experience. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations For the three months ended October 31, 2003, sales of $151,906,000 were 9.6% higher than the same quarter of the previous year. This increase was aided by the positive effect of fluctuations in the exchange rates used to translate financial results into the United States Dollar, which contributed to sales growth by 6.1% in the quarter. The acquisitions of TISCOR, Inc. and Brandon International in the U.S., Etimark in Germany, and Cleere Advantage Ltd and Aztec, Ltd in the United Kingdom also added 6.1% to sales in the quarter. These increases were offset by a decline in base sales of 2.6% for the quarter. The cost of products sold as a percentage of sales decreased from 49.4% to 48.2% for the quarter ended October 31, 2003 compared to the same period of the previous year. The cost of products sold was higher in the previous year due to the initial production costs for two new printer products. Favorable product sales mix and benefits from restructuring activities in the current year first quarter also reduced the cost of products sold compared to the same period in the prior year. Selling, general and administrative (SG&A) expenses as a percentage of sales decreased to 37.1% for the quarter ended October 31, 2003, from 38.8% for the same quarter of the prior year due to savings from restructuring actions taken in the fourth quarter of fiscal 2003. As a percentage of sales, research and development expenses increased from 2.9% to 3.2% for the quarter, compared to the same period of the previous year. The increase is primarily due to research and development activities associated with acquired businesses. The expenses for the quarter ended October 31, 2003 included a restructuring charge of $1,753,000, which is primarily due to consolidation of operating facilities in Europe. The Company expects to incur total pre-tax restructuring charges in fiscal 2004 of $2,000,000 to $3,000,000. There were no restructuring charges in the same quarter of the prior year. Operating income was $15,758,000 for the quarter compared to $12,374,000 for the same period last year, an increase of $3,384,000 or 27.3% over the same period last year due to the factors cited above. Operating income for the quarter ended October 31, 2003 includes a pre-tax restructuring charge of $1,753,000. Investment and other income decreased $245,000 for the quarter compared to same period last year due to the net effect of foreign exchange, primarily on intercompany transactions. The Company's effective tax rate was 33.5% for the quarter ended October 31, 2003 and 34.0% for the same quarter of the previous year. The reduction is due to more favorable mix of regional profits and long-term tax planning strategies. Net income for the three months ended October 31, 2003, increased 26.3% to $10,353,000 compared to $8,199,000 for the same quarter of the previous year. On a Class A Common Share basis, diluted net income for the three months ended October 31, 2003, was $0.44 compared to $0.35 per share for the same quarter of the previous year. Net income includes an after-tax restructuring charge of $1,166,000 in the current quarter. Management expects improvement in revenue and earnings due to continued positive impact of foreign currency, increased acquisition activity, and benefits from restructuring initiatives. Management's guidance for the year is $600 million to $630 million in revenues and net income, including the effect of restructuring charges, of approximately $36 million to $40 million for fiscal 2004. 11 Business Segment Operating Results Effective August 1, 2003, the Company's organization was restructured from a product focused organization to geographic regions. Management of the Company now evaluates results based on the following geographical regions: Americas, Europe, and Asia. Americas: Americas sales increased 0.2% for the three months ended October 31, 2003, from the same period last year. Base sales in local currency decreased 6.3% in the quarter. The decrease in base sales was partially offset by acquisitions, which increased sales in the region by 5.1% in the quarter. The positive effect of fluctuations in the exchange rates used to translate financial results into U.S. currency increased sales in the region by 1.4% in the quarter. The decline in base business is due to continued U.S. market softness, particularly in the manufacturing and non-residential construction direct marketing end markets and for our products offered to the maintenance, repair and operation (MRO) end markets. Base business in Brazil and Mexico showed positive growth in electronics, telecommunications and consumer products markets while base sales in Canada were flat. Profit for the region increased 8.1% to $15,116,000 from $13,981,000 in the prior fiscal year first quarter. Savings from restructuring activities in the current year and new product initial production costs in the prior year, resulted in the improved profit level for the Americas. Europe: Europe sales increased 18.2% for the quarter. Base sales in local currency decreased 4.7% in the quarter, compared to the same period last year. The decline is primarily due to softness in the MRO market and the loss of a die cut customer. Sales were positively affected by fluctuations in the exchange rates used to translate financial results into U.S. currency, which increased sales within the region by 13.2% in the quarter. Sales were also aided by acquisitions compared to the prior year, which increased sales 9.7% for the quarter. Profit for the region increased 29.1% to $13,449,000 from $10,418,000 in the prior period due to benefits from restructuring activities, foreign currency translation and improved gross margins due to a more favorable mix of product sales. Asia: Asia sales increased 35.9% for the quarter. Base sales in local currency increased 26.0% in the quarter, compared to the same period last year. Sales were positively affected by fluctuations in the exchange rates used to translate financial results into U.S. currency, which increased sales within the group by 9.9% in the quarter. China and Malaysia had triple digit base sales growth for the quarter compared to the same period in the prior year. Investments in infrastructure in China and Malaysia over the past two years are beginning to yield impressive growth. Base sales in Australia and Japan showed double digit growth for the quarter. Base sales declined in Singapore due to the transfer of some business to China and Malaysia. Profit for the region was up 47.1% to $5,424,000 from $3,687,000 in the prior year first quarter. The increase in profit is due primarily to increased sales volume, foreign currency translation and also to improved margins due to improved use of manufacturing capacity. 12 Financial Condition The Company's liquidity remained strong. The Company's current ratio as of October 31, 2003, was 2.3, down from the current ratio at July 31, 2003 of 2.4. Cash and cash equivalents were $60,105,000 at October 31, 2003, compared to $76,088,000 at July 31, 2003. The decrease was primarily due to the $21,830,000 net cash paid for the acquisitions of Brandon International and Prinzing Enterprises in the quarter. Working capital decreased $3,194,000 during the three months ended October 31, 2003, to $120,684,000 from $123,878,000 at July 31, 2003. Inventories increased $5,044,000 for the quarter due primarily to the effects of acquisitions and foreign currency translation. Accounts receivable increased $12,330,000 for the quarter due to increased sales volume, acquisitions and foreign currency translation. Current liabilities increased $3,969,000 for the quarter due to the timing of income tax payments and increased liabilities associated with acquisitions completed in the first quarter of 2004. Cash flow from operations totaled $10,091,000 for the three months ended October 31, 2003, compared to $14,319,000 for the same period last year. The decrease was the result of higher accounts receivable balances due to the increased sales volume and lower accrued liabilities due to payment of annual incentive plans in the current quarter. Capital expenditures were $3,605,000 in the three months ended October 31, 2003, compared to $3,862,000 in the same period last year. Net cash used in financing activities was $1,772,000 for the three-month periods ended October 31, 2003 and 2002, due primarily to payments of dividends to the Company's stockholders, payments on long term debt, and purchase of treasury stock offset by proceeds from the issuance of common stock due to stock option exercises. Cash flows used in financing activities for the same period last year were $7,886,000 related to payment of dividends, redemption of preferred stock, and purchase of treasury stock. Long-term debt as a percentage of long-term debt plus stockholders' investment was 0.2% at October 31, 2003 and July 31, 2003. The Company maintains a maximum $100 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 October 31, 2003. No borrowings were made under the line of credit during the three months ended October 31, 2003. At October 31, 2003, approximately $70 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 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 enable the company to execute 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. Even in uncertain economic times, the Company's strong liquidity allows it to continue with investments for the Company's future. 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. 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. 13 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 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 will be incurred under these contracts based upon historical experience and current expectations. Other Contractual Obligations - The Company does not have material financial guarantees or other contractual commitments that are reasonably likely to adversely affect liquidity. Related Party Transactions - The Company does not have any related party transactions that materially affect the results of operations, cash flow or financial condition. Forward-Looking Statements Except for historical information, the Company's reports to the Securities and Exchange Commission on Form 10-K and Form 10-Q and periodic press releases, as well as other public documents and statements, may contain "forward-looking statements," as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are often identified by words such as "intend," "anticipate," "assume," "believe," "estimate," "expect," "plan," "project," "will," and other expressions, which refer to future events and trends. The ability of the Company to attain management's goals and objectives is materially dependent on numerous factors. These factors, which include economic conditions, currency fluctuations, cost of raw materials, reliance on suppliers, new products, acquisitions, intellectual property, environmental issues, political considerations and others, are more fully described in the Company's 2003 Form 10-K filed with the Securities and Exchange Commission. These factors could cause actual results to differ materially from those in the forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. 14 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 British Pound, the Euro, Canadian Dollar, Japanese Yen and Australian Dollar. The risk of these hedging instruments is not material. The Company could be exposed to interest rate risk through its corporate borrowing activities. The objective of the Company's interest rate risk management activities is to manage the levels of the Company's fixed and floating interest rate exposure to be consistent with the Company's preferred mix. The interest rate risk management program consists of entering into approved interest rate derivatives when there is a desire to modify the Company's exposure to interest rates. As of October 31, 2003, the Company has not entered into any interest rate derivatives. ITEM 4. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures designed to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized and reported on a timely basis. The Company's Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the period covered by this report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in bringing to their attention on a timely basis material information relating to the Company required to be included in the Company's periodic filings under the Exchange Act. There have not been any changes in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company's most recently completed fiscal quarter or subsequent to the Evaluation Date that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 15 PART II. OTHER INFORMATION ITEM 5. Other Information On November 20, 2003, the Company's Chairman of the Board of Directors, Katherine M. Hudson announced her decision to retire from the Board of Directors. Mrs. Hudson served as the company's president and chief executive officer from 1994 until April 2003 when she assumed the chairmanship of the Company's Board of Directors. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.33 Complete and Permanent Release and Severance Agreement dated October 10, 2003, between Brady Corporation and David W. Schroeder 31.1 Rule 13a-14(a)/15d-14(a) Certification of Frank M. Jaehnert 31.2 Rule 13a-14(a)/15d-14(a) Certification of David W. Schroeder 32.1 Section 1350 Certification of Frank M. Jaehnert 32.2 Section 1350 Certification of David W. Schroeder (b) Reports on Form 8-K. During the quarter ended October 31, 2003, the Company filed a Current Report on Form 8-K pursuant to Item 5 ("Other Events") dated October 20, 2003, announcing that David W. Schroeder, Senior Vice President and Chief Financial Officer has decided to leave the Company to pursue other interests, no later than May 31, 2004. Also during the quarter ended October 31, 2003, the Company furnished a Current Report on Form 8-K containing information pursuant to Item 12 ("Results of Operations and Financial Condition") dated September 12, 2003, relating to the announcement of earnings for the Company's fiscal 2003 fourth quarter. 16 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SIGNATURES BRADY CORPORATION Date: December 12, 2003 /s/ F. M. Jaehnert ------------------ ------------------ F. M. Jaehnert President & Chief Executive Officer Date: December 12, 2003 /s/ D.W. Schroeder ------------------ ------------------ D.W. Schroeder Sr. Vice President & Chief Financial Officer (Principal Accounting Officer) (Principal Financial Officer) 17 EX-10.33 3 c81539exv10w33.txt COMPLETE/PERMANENT RELEASE & SEVERANCE AGREEMENT EXHIBIT 10.33 COMPLETE AND PERMANENT RELEASE AND SEVERANCE AGREEMENT Mr. David Schroeder ("Mr. Schroeder") and Brady Corporation ("the Company") hereby enter into this complete and permanent release and severance agreement to resolve all matters relating to Mr. Schroeder's employment with and severance from the Company. Mr. Schroeder and the Company hereby agree as follows: 1. Mr. Schroeder's employment with the Company will irrevocably terminate on May 31, 2004 (the termination date). Assuming Mr. Schroeder accepts this agreement and does not revoke it, the Company will pay Mr. Schroeder his normal base salary (less required withholding), pursuant to the Company's normal payroll system, as "severance payments" for six months after he ceases full time work for the Company, which shall be a date of his choosing prior to or no later than May 31, 2004. Additionally, Mr. Schroeder will be entitled to receive a pro-rated bonus, based on actual company performance against the bonus targets, through his last day of full time work. Although Mr. Schroeder will have no specific duties or obligations to the Company after his last day of full time work, he shall remain available to respond to reasonable inquiries and to provide relevant information to the Company until his termination date. As an employee, Mr. Schroeder shall also be entitled to employee health and dental insurance benefits up to his termination date, unless he becomes eligible for alternative benefits through another employer prior to May 31, 2004, in which event such insurance benefits shall cease. Additionally, Mr. Schroeder shall be entitled to executive perquisites through either his last day of full time employment or his termination date, whichever occurs first. If Mr. Schroeder does not have 1 alternative benefits through another employer as of May 31, 2004, then he can continue medical coverage pursuant to a valid COBRA election by him. Mr. Schroeder shall be responsible for the employee portion of such premium costs. His termination date shall be deemed to be the "qualifying event" for insurance continuation purposes under state and federal law. As of the date he ceases full-time work for the Company, Mr. Schroeder shall no longer be entitled to participate in the Company's 401(k) or other retirement plans, but he shall have all vested rights with respect to those plans. Mr. Schroeder shall be deemed to be actively employed through May 31, 2004, for all purposes under any Company stock option plan in which he is a participant. 2. Mr. Schroeder acknowledges that the Company is under no pre-existing obligation to pay him any of the severance payments or benefits described above, and that no amounts are due and owing Mr. Schroeder other than salary through his termination date and vested benefits to which he is otherwise entitled ("vested benefits"). The parties agree that the foregoing, and the benefits described in paragraphs 3 and 4 below, constitute all of the payments and benefits to be provided to Mr. Schroeder under this Agreement, and that they are in full settlement of all payments and benefits, including but not limited to, claims for wages, vacation pay, sick pay, bonuses, commissions, relocation costs, severance payments, or any other compensation. No portion of the severance payments made under this Agreement following Mr. Schroeder's termination date shall be taken into account as compensation under any Company welfare, pension, 401(K), profit sharing plan or similar program that bases benefits in whole or in part on compensation received from the Company. In addition, Mr. Schroeder shall not accrue fringe benefits such as holidays, vacations, or similar benefits during the period of his severance 2 payments, nor shall any 401(K) payments be made by the Company or by Mr. Schroeder after his termination date. 3. As of the date he ceases full time employment, or his termination date, whichever occurs first, Mr. Schroeder shall also be entitled to purchase his Company automobile at 80% of its wholesale value. In further consideration of the provisions of this Agreement, the Company will provide outplacement services to Mr. Schroeder through its designated provider. 4. In further consideration of the provisions of this Agreement, Mr. Schroeder shall be allowed to retain the laptop computer and printer provided to him by the Company, provided, however, that no later than his termination date he shall return to the Company any proprietary information in his possession and provided that he shall not be allowed access to the Company's e-mail, Internet, or other network systems after his termination date. 5. Mr. Schroeder agrees that his employment with the Company will irrevocably end as of his termination date, with no right of re-employment with the Company. 6. In consideration of the payments and benefits described above, and to the fullest extent allowed by law, Mr. Schroeder, for himself, his spouse, heirs, successors and assigns, hereby releases and forever discharges the Company, its owners, parents, successors, affiliates, directors, officers, employees and all other representatives, from any and all charges, claims, suits and expenses (including attorneys' fees and costs), whether known or unknown, including, but not limited to, claims of age, gender, or other discrimination, breach of contract, wrongful discharge, constructive discharge, claims under the Wisconsin Fair Employment Act, Section 111.31, et seq. Wis. Stats.; Title VII of The Civil Rights Act of 1964, as amended, 42 U.S.C. 3 Section 2000e, et seq.; the Age Discrimination in Employment Act, 29 U.S.C. '621 et. seq.; the common law of Wisconsin, or any other federal, state or local law relating to employment. This release includes any and all matters in connection with or relating in any way to Mr. Schroeder's employment with the Company and his termination from the Company, provided, however, that nothing herein shall release, diminish, or otherwise affect Mr. Schroeder's vested benefits. 7. Mr. Schroeder and the Company agree that this complete and permanent release and severance agreement shall not constitute an admission by the Company that it has acted wrongfully with respect to Mr. Schroeder or that it has discriminated against him or against any other individual. 8. Except as permitted below, Mr. Schroeder hereby agrees to keep the terms and existence of this complete and permanent release and severance agreement confidential, and he agrees that he shall neither directly nor indirectly disclose the terms of this Agreement to any other person or entity except to his attorneys, tax preparers or financial advisors, and immediate family members, but only on the condition that they agree to abide by the terms of this confidentiality clause, unless compelled by law. 9. Mr. Schroeder acknowledges that as of his termination date, he will cease to perform services for the Company, and that thereafter he will not have any further authority to act on its behalf. Mr. Schroeder agrees that at no time will he make disparaging remarks about the Company, its products or practices including, but not limited to, its personnel practices. Mr. Schroeder agrees to cooperate with and assist the Company in connection with all pending legal matters in which he was involved. Mr. Schroeder further agrees to comply in all respects with 4 his Confidential Information Agreement dated January, 2001, which shall survive his termination of employment with the Company. Mr. Schroeder and the Company specifically agree that the severance payments under paragraph 1 above, regardless of the date they actually commence, shall be deemed to fulfill the first 12 months of any obligation the Company may have to provide a maximum of 24 months of payments to Mr. Schroeder under that Confidential Information Agreement. 10. This complete and permanent release and severance agreement sets forth the entire agreement between the parties and fully supersedes any and all prior agreements or understandings between Mr. Schroeder and the Company with the exception of the January, 2001 Confidential Information Agreement, which shall remain in full force and effect except as modified in paragraph 9 above. Mr. Schroeder acknowledges that he is hereby advised to seek legal counsel before signing this Agreement, that he has twenty-one (21) days to consider this Agreement, that upon his acceptance he has seven (7) days to revoke his acceptance, and that this Agreement will not become effective until that seven (7) day period has expired. Mr. Schroeder agrees that he has read, understands and voluntarily accepts its terms. October 10, 2003 /s/ David Schroeder - ---------------------------- ------------------------------------ Date David Schroeder BRADY CORPORATION October 10, 2003 By: /s/ Frank M. Jaehnert - ---------------------------- --------------------------------- Date Its Authorized Representative 5 EX-31.1 4 c81539exv31w1.txt RULE 13A-14(A)/15D-14(A) CERTIFICATION EXHIBIT 31.1 RULE 13a-14(a)/15d-14(a) CERTIFICATION I, Frank M. Jaehnert, certify that: (1) I have reviewed this quarterly report on Form 10-Q of Brady Corporation; (2) Based on my knowledge, this 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 report; (3) Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 12, 2003 /s/ FRANK M. JAEHNERT - ----------------------- Frank M. Jaehnert President and Chief Executive Officer EX-31.2 5 c81539exv31w2.txt RULE 13A-14(A)/15D-14(A) CERTIFICATION EXHIBIT 31.2 RULE 13a-14(a)/15d-14(a) CERTIFICATION 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 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 report; (3) Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 12, 2003 /s/ DAVID W. SCHROEDER - ------------------------ David W. Schroeder Senior Vice President and Chief Financial Officer EX-32.1 6 c81539exv32w1.txt SECTION 1350 CERTIFICATION EXHIBIT 32.1 SECTION 1350 CERTIFICATION Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Brady Corporation (the "Company") certifies to his knowledge that: (1) The Quarterly Report on Form 10-Q of the Company for the quarterly period ended October 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in that Form 10-Q fairly presents, in all material respects, the financial conditions and results of operations of the Company. Date: December 12, 2003 /s/ FRANK M. JAEHNERT - ----------------------- Frank M. Jaehnert President and Chief Executive Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. This certification accompanies this report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. EX-32.2 7 c81539exv32w2.txt SECTION 1350 CERTIFICATION EXHIBIT 32.2 SECTION 1350 CERTIFICATION Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Brady Corporation (the "Company") certifies to his knowledge that: (1) The Quarterly Report on Form 10-Q of the Company for the quarterly period ended October 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in that Form 10-Q fairly presents, in all material respects, the financial conditions and results of operations of the Company. Date: December 12, 2003 /s/ DAVID W. SCHROEDER - ------------------------ David W. Schroeder Senior Vice President and Chief Financial Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. This certification accompanies this report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----