10-Q 1 c86049e10vq.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 April 30, 2004 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 May 24, 2004, there were outstanding 22,039,466 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 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Item 4. Controls and Procedures 19 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K 20 Signatures 21
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BRADY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
(UNAUDITED) APRIL 30, 2004 JULY 31, 2003 -------------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 79,831 $ 76,088 Accounts receivable, less allowance for losses ($3,651 and $3,166, respectively) 101,800 80,162 Inventories Finished products 25,151 18,870 Work-in-process 6,362 5,356 Raw materials and supplies 13,676 12,428 ------- -------- Total inventories 45,189 36,564 Prepaid expenses and other current assets 22,125 22,343 ------- -------- TOTAL CURRENT ASSETS 248,945 215,157 OTHER ASSETS: Goodwill 159,122 130,667 Other 25,904 24,455 ------- -------- 185,026 155,122 PROPERTY, PLANT AND EQUIPMENT: Cost: Land 5,244 5,172 Buildings and improvements 56,658 51,471 Machinery and equipment 149,233 139,007 Construction in progress 1,858 3,245 ------- -------- 210,993 198,895 Less accumulated depreciation 131,119 119,655 ------- -------- NET PROPERTY, PLANT AND EQUIPMENT 79,874 79,240 ------- -------- TOTAL $ 513,845 $ 449,519 ======= ======== LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES: Accounts payable $ 33,240 $ 28,470 Wages and amounts withheld from employees 33,580 30,619 Taxes, other than income taxes 4,563 2,492 Accrued income taxes 20,000 11,449 Other current liabilities 22,675 17,320 Short-term borrowings and current maturities on long-term debt 32 929 ------- -------- TOTAL CURRENT LIABILITIES 114,090 91,279 LONG-TERM DEBT, LESS CURRENT MATURITIES 28 568 OTHER LIABILITIES 20,657 18,711 ------- -------- TOTAL LIABILITIES 134,775 110,558 STOCKHOLDERS' INVESTMENT: Class A nonvoting common stock - Issued and outstanding 21,990,249 220 216 and 21,558,265 shares, respectively Class B voting common stock - Issued and outstanding 1,769,314 shares 18 18 Additional paid-in capital 60,870 47,464 Income retained in the business 311,089 290,805 Cumulative other comprehensive income 8,315 1,595 Treasury stock - 34,657 and 18,262 class A common shares, respectively, at cost (1,074) (509) Other (368) (628) ------- -------- TOTAL STOCKHOLDERS' INVESTMENT 379,070 338,961 ------- -------- TOTAL $ 513,845 $ 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 April 30, Nine Months Ended April 30, 2004 2003 2004 2003 ---- ---- ---- ---- Net Sales $ 180,854 $ 141,955 $ 485,708 $ 410,182 Cost of products sold 85,980 68,826 233,841 203,180 --------- --------- --------- --------- Gross Margin 94,874 73,129 251,867 207,002 Operating expenses: Research and development 6,210 5,165 16,680 13,808 Selling, general and administrative 64,490 55,890 181,373 164,197 Restructuring Charge - net 455 - 2,274 - --------- --------- --------- --------- Total operating expenses 157,135 129,881 434,168 381,185 Operating income 23,719 12,074 51,540 28,997 Other income and (expense): Investment and other (expense) income (288) 977 (429) 788 Interest expense (5) (22) (36) (65) --------- --------- --------- --------- Income before income taxes 23,426 13,029 51,075 29,720 Income taxes 7,027 4,432 16,290 10,107 --------- --------- --------- --------- Net income 16,399 8,597 34,785 19,613 Income retained in business at beginning of period 299,563 289,508 290,805 287,674 Less: Redemption premium on preferred stock - - - (171) Common stock dividends (4,873) (4,543) (14,501) (13,554) --------- --------- --------- --------- Income retained in business at end of period $ 311,089 $ 293,562 $ 311,089 $ 293,562 ========= ========= ========= ========= Net income per Class A Nonvoting Common Share Basic $ 0.69 $ 0.37 $ 1.48 $ 0.84 ========= ========= ========= ========= Diluted $ 0.68 $ 0.37 $ 1.46 $ 0.83 ========= ========= ========= ========= Net income per Class B Voting Common Share Basic $ 0.69 $ 0.37 $ 1.45 $ 0.81 ========= ========= ========= ========= Diluted $ 0.68 $ 0.37 $ 1.43 $ 0.80 ========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements 4 BRADY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)
(Unaudited) Nine Months Ended April 30, 2004 2003 ---- ---- Operating activities: Net income $ 34,785 $ 19,613 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,654 13,112 Loss on sale or disposal of property, plant & equipment 111 71 Provision for losses on accounts receivable 1,116 833 Non-cash portion of stock-based compensation expense 791 185 Net restructuring charge accrued liability 2,178 - Changes in operating assets and liabilities (net of effects of business acquisitions): Accounts receivable (14,216) (1,159) Inventory (4,677) 2,713 Prepaid expenses and other assets (144) (1,468) Accounts payable and accrued liabilities 3,298 1,943 Income taxes 9,586 4,628 -------- -------- Net cash provided by operating activities 47,482 40,471 Investing activities: Acquisition of businesses, net of cash acquired (30,728) (20,906) Termination of capital lease - (791) Purchases of property, plant and equipment (10,616) (11,593) Proceeds from sale of property, plant and equipment 281 56 Other (1,358) (198) -------- -------- Net cash used in investing activities (42,421) (33,432) Financing activities: Payment of dividends (14,854) (13,725) Proceeds from issuance of common stock 10,745 2,040 Principal payments on debt (1,563) (210) Payment for redemption of preferred stock - (2,855) Purchase of treasury stock (564) (377) -------- -------- Net cash used in financing activities (6,236) (15,127) Effect of exchange rate changes on cash 4,918 750 -------- -------- Net increase (decrease) in cash and cash equivalents 3,743 (7,338) Cash and cash equivalents, beginning of period 76,088 75,969 -------- -------- Cash and cash equivalents, end of period $ 79,831 $ 68,631 ======== ======== Supplemental disclosures: Cash paid during the period for: Interest $ 73 $ 38 Income taxes, net of refunds 5,616 3,549 Acquisitions: Fair value of assets acquired, net of cash $ 14,784 $ 14,460 Liabilities assumed (8,916) (9,264) Goodwill 24,860 15,710 -------- -------- Net cash paid for acquisitions $ 30,728 $ 20,906 ======== ======== Termination of capital lease: Disposition of capital assets $ - $ (2,574) Settlement of capital lease liability - 3,365 -------- -------- Net cash paid for termination of capital lease $ - $ 791 ======== ========
See Notes to Condensed Consolidated Financial Statements 5 BRADY CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Nine Months Ended April 30, 2004 (Unaudited) NOTE A - Basis of Presentation The condensed consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, the foregoing statements contain all adjustments, consisting only of normal recurring accruals, necessary to present fairly the financial position of the Company as of April 30, 2004 and July 31, 2003, its results of operations for the three and nine months ended April 30, 2004 and 2003, and its cash flows for the nine months ended April 30, 2004 and 2003. 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. NOTE B - New Accounting Pronouncements On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") was signed into law. The Act introduced a prescription drug benefit program under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans. Certain accounting issues raised by the Act, such as how to account for the federal subsidy, are not explicitly addressed by Financial Accounting Standards Board ("FASB") Statement No. 106,"Employers' Accounting for Postretirement Benefits Other Than Pensions." The FASB issued FASB Staff Position ("FSP") No. FAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003", ("FSP No. 106-2") which allows sponsors to elect to defer recognition of the effects of the Act if it has not been concluded whether the benefits under the sponsor's plan are actuarially equivalent to Medicare Part D. In accordance with FSP No. 106-2, the Company's measures of the accumulated postretirement benefit obligation and the net periodic postretirement benefit cost do not reflect the effects of the subsidy, because it has not yet been concluded whether the benefits under the Company's plan are actuarially equivalent to Medicare Part D. FSP No. 106-2 will be effective beginning in the first quarter of fiscal 2005. NOTE C - Sales Incentives In accordance with the Financial Accounting Standard Board's ("FASB's") Emerging Issues Task Force Issue No. 01-9,"Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Product," we account for cash consideration (such as sales incentives and cash discounts) that we give to our customers or resellers as a reduction of revenue rather than as an operating expense. 6 NOTE D - Goodwill Changes in the carrying amount of goodwill for the nine months ended April 30, 2004, 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 17,354 7,506 - 24,860 Translation adjustments and other 716 2,608 271 3,595 -------- ------- ------ -------- Balance as of April 30, 2004 $102,337 $53,934 $2,851 $159,122 ======== ======= ====== ========
Goodwill increased by $28,455,000 during the nine months ended April 30, 2004, including an increase of $3,595,000 attributable to translation adjustments and other. The final allocation of the purchase price for the acquisitions of Brandon International and Prinzing Enterprises and the preliminary allocation of the purchase price for B.I.G resulted in $24,860,000 of additional goodwill. NOTE E - Comprehensive Income Total comprehensive income, which was comprised of net income, foreign currency adjustments and net unrealized gains and losses from cash flow hedges, amounted to $14,099,000 and $11,445,000 for the three months ended April 30, 2004 and 2003, respectively, and $41,505,000 and $28,628,000 for the nine months ended April 30, 2004 and 2003, respectively. 7 NOTE F - 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:
Three Months Ended Nine Months Ended ------------------------- -------------------------- April 30, April 30, ------------------------- -------------------------- (Amounts in thousands, except per share amounts) 2004 2003 2004 2003 ------- ------ -------- ------- Numerator: Net income $16,399 $8,597 $ 34,785 $19,613 Less: Premium on redemption of preferred stock - - - (171) ------- ------ -------- ------- Numerator for basic and diluted Class A net income per share 16,399 8,597 34,785 19,442 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 $16,399 $8,597 $34,055 $18,724 ======= ====== ======= ======= Denominator: Denominator for basic net income per share for both Class A and Class B 23,668 23,183 23,551 23,151 Plus: Effect of dilutive stock options 331 157 291 200 ------- ------ -------- ------- Denominator for diluted net income per share for both Class A and Class B 23,999 23,340 23,842 23,351 ======= ====== ======== ======= Class A Non-Voting Common Stock net income per share: Basic $ 0.69 $ 0.37 $ 1.48 $ 0.84 Diluted $ 0.68 $ 0.37 $ 1.46 $ 0.83 Class B Voting Common Stock net income per share: Basic $ 0.69 $ 0.37 $ 1.45 $ 0.81 Diluted $ 0.68 $ 0.37 $ 1.43 $ 0.80
Options to purchase 18,000 and 1,108,000 shares of Class A Common Stock were not included in the computations of diluted net income per share for the quarter ended April 30, 2004 and 2003, respectively, 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 18,000 and 799,000 shares of Class A Common Stock were not included in the computations of diluted net income per share for the nine months ended April 30, 2004 and 2003, respectively, because the option exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. 8 NOTE G - 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 $2,274,000 during the nine months ended April 30, 2004. The fiscal 2004 charges, including consolidation of facilities in Europe and Australia, consist primarily of provision for severance of terminated employees. The Company expects to incur total pre-tax restructuring charges in fiscal 2004 of approximately $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 ============ ============ Fiscal 2004 second quarter activity: Additional restructuring charges 66,000 - Non-cash asset write-off (76,000) Cash payments associated with severance and other (2,642,000) (30,000) ------------- ------------- Ending balance, January 31, 2004 $ 3,030,000 - ============= ============= Fiscal 2004 third quarter activity: Additional restructuring charges 455,000 - Non-cash asset write-off - - Cash payments associated with severance and other (1,826,000) - ------------- ------------- Ending balance, April 30, 2004 $ 1,659,000 - ============= =============
9 NOTE H -- 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. In November 2003, the Company acquired B.I.G, headquartered in the United Kingdom, a provider of badging and business card solutions. The combined purchase price for these acquisitions was approximately $30,700,000 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. As of May 2004, these criteria were met and the entire amount was paid to the sellers. The purchase price allocation is preliminary and pending the outcome of final valuations of the acquired entities, which are in progress. Of the combined purchase price, $24,860,000 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. NOTE I - 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 and nine months ended April 30, 2004 and 2003:
Corporate and (Dollars in Thousands) Americas Europe Asia Eliminations Totals -------- -------- ------- ------------ -------- Three months ended April 30, 2004: Revenues from external customers $ 89,251 $ 69,683 $21,920 - $180,854 Intersegment revenues 10,421 608 881 $ (11,910) - Segment profit (loss) 17,991 19,461 6,520 (1,067) 42,905 Three months ended April 30, 2003: Revenues from external customers $ 76,536 $ 50,838 $14,581 - $141,955 Intersegment revenues 8,082 489 265 $ (8,836) - Segment profit (loss) 12,670 11,729 3,298 (847) 26,850 Nine months ended April 30, 2004: Revenues from external customers $243,539 $183,308 $58,861 - $485,708 Intersegment revenues 29,645 1,791 3,254 $ (34,690) - Segment profit (loss) 42,605 48,256 16,849 (3,037) 104,673 Nine months ended April 30, 2003: Revenues from external customers $224,899 $143,801 $41,482 - $410,182 Intersegment revenues 25,124 1,614 278 $ (27,016) - Segment profit (loss) 32,530 33,023 10,078 (2,053) 73,128
Following is a reconciliation of profit for the three and nine months ended April 30, 2004 and 2003:
Three Months Ended Nine Months Ended -------------------------- -------------------------- April 30, April 30, -------------------------- -------------------------- (Dollars in Thousands) 2004 2003 2004 2003 --------- --------- --------- --------- Total profit from reportable segments $ 43,972 $ 27,697 $ 107,710 $ 75,631 Corporate and eliminations (1,067) (847) (3,037) (2,503) Unallocated amounts: Administrative costs (17,415) (14,055) (47,952) (41,682) Interest-net 138 148 363 528 Foreign exchange (429) 806 (826) 194 Restructuring charge, net (455) - (2,274) - Other (1,318) (720) (2,909) (2,448) --------- --------- --------- --------- Income before income taxes $ 23,426 $ 13,029 $ 51,075 $ 29,720 ========= ========= ========= =========
10 NOTE J - 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 nine months ended April 30, 2004 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. During fiscal 2004, 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. 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 certain options issued during fiscal 2004 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. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and experience. 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 income and income per share would have been as follows:
Three Months Ended Nine Months Ended April 30, April 30, (In thousands, except per share amounts) 2004 2003 2004 2003 ---------- --------- ---------- ---------- Net income As reported $ 16,399 $ 8,597 $ 34,785 $ 19,613 Stock-based compensation expense recorded 202 - 479 - Pro forma expense, net of tax effect (549) (497) (1,586) (994) ---------- --------- ---------- ---------- Pro forma net income, net of tax effect $ 16,052 $ 8,100 $ 33,678 $ 18,619 ========== ========= ========== ========== Net income per class A common share Basic As reported $ 0.69 $ 0.37 $ 1.48 $ 0.84 Pro forma adjustments (0.01) (0.02) (0.05) (0.04) ---------- --------- ---------- ---------- Pro forma net income per share $ 0.68 $ 0.35 $ 1.43 $ 0.80 ========== ========= ========== ========== Diluted As reported $ 0.68 $ 0.37 $ 1.46 $ 0.81 Pro forma adjustments (0.01) (0.02) (0.05) (0.04) ---------- --------- ---------- ---------- Pro forma net income per share $ 0.67 $ 0.35 $ 1.41 $ 0.77 ========== ========= ========== ========== Net income per class B common share Basic As reported $ 0.69 $ 0.37 $ 1.45 $ 0.81 Pro forma adjustments (0.01) (0.02) (0.05) (0.06) ---------- --------- ---------- ---------- Pro forma net income per share $ 0.68 $ 0.35 $ 1.40 $ 0.75 ========== ========= ========== ========== Diluted As reported $ 0.68 $ 0.37 $ 1.43 $ 0.80 Pro forma adjustments (0.01) (0.02) (0.05) (0.06) ---------- --------- ---------- ---------- Pro forma net income per share $ 0.67 $ 0.35 $ 1.38 $ 0.74 ========== ========= ========== ==========
11 NOTE K - Revolving Credit Facility On March 31, 2004, the Company entered into a new revolving credit facility. Under the new agreement, the Company currently has a maximum $215 million line of credit (based on certain financial ratios of the Company) with a group of five banks. The $215 million includes a 5-year credit facility for $125 million and a 364-day credit facility for $90 million. The interest rate on the line of credit is a spread over LIBOR, as indicated in the "applicable rate" table in the Credit Agreement attached as Exhibit 10.27 to this filing. As of April 30, 2004, no amounts were outstanding under either facility. At April 30, 2004, $215 million was available to the Company under the combined facilities. The Company is in compliance with the covenants of the line of credit agreement. NOTE L - Subsequent Events On May 20, 2004, the Company completed its acquisition of all of the outstanding securities of EMED Co., Inc. ("EMED") for a purchase price of $191,700,000, net of cash received. EMED is a direct marketer and manufacturer of identification, safety and facility management products headquartered in Buffalo, New York. The funds used to finance the purchase price came from borrowings on the Company's revolving credit facility and from working capital. On May 18, 2004 the Company borrowed $160,000,000 to finance the purchase of EMED Co. Of the borrowed funds, $90 million was drawn from its 364-day credit facility and $70 million was drawn from its 5-year credit facility. The Company intends to pay down a portion of these borrowings with the proceeds of longer-term fixed rate borrowings during the fourth quarter of the current year. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Brady is an international manufacturer and marketer of identification and materials solutions, with products including labels, signs, precision die-cut materials, printing systems, software, and label-application and data-collection systems for electronics, telecommunications, manufacturing, electrical, and a variety of other markets. The Company operates manufacturing facilities and sales offices in Australia, Belgium, Brazil, Canada, China, England, France, Germany, Italy, the United States, Malaysia, Mexico, and Singapore and operates sales offices in Hong Kong, Hungary, Japan, Korea, the Philippines, Sweden and Taiwan. Sales for the quarter ended April 30, 2004 were up 27.4% to $180,900,000, compared to $142,000,000 in the same period of fiscal 2003. Net income for the quarter was $16,400,000 or $0.68 per diluted Class A Common Share, up 90.8% from $8,600,000 or $0.37 per share reported in the third quarter of last year. Efficiencies from prior restructuring activities, increased sales from investments in strategic acquisitions, facilities expansion in key geographic markets such as Asia, continuing improvements in the Americas and European manufacturing and electronic sectors, continued strong sales in the Asian markets, particularly telecommunications and electronics, and favorable foreign currency translation all contributed to increased net income in the current periods. Sales from recent acquisitions also contributed 8.9%to the Company's sales growth in the third quarter, and despite the investment costs associated with integrating these acquisitions, the Company's net income continued to improve in the quarter. The Company expects improvement in its key markets and further growth through acquisitions, as well as the effects of a weaker dollar, to continue in the final quarter of fiscal 2004, and has increased its guidance range to $645,000,000 to $655,000,000 in sales and net income of $47,000,000 to $49,000,000 for the full fiscal year, excluding the effect of the acquisition of EMED Co. The net income guidance includes $3 million of additional net income in the fourth quarter due to an expected favorable resolution of a federal income tax audit. Looking long term, the Company intends to continue with its growth strategies of developing proprietary products; making acquisitions that expand its product range, technical expertise or market penetration; and further improving processes to best serve customers. Going forward, business and market uncertainties may affect results. For a discussion of key factors that could impact results, please refer to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2003. Results of Operations For the three months ended April 30, 2004, net sales of $180,854,000 were 27.4% higher than the same quarter of the previous year. For the nine months ended April 30, 2004, sales of $485,708,000 were 18.4% higher than the same period of the previous year. Base sales increased 10.8% for the quarter ended April 30, 2004 and 2.6% for the nine-month period, compared to the same periods in the prior year. The sales increase was aided by the positive effect of fluctuations in the exchange rates used to translate financial results into the United States Dollar, which increased sales growth by 7.7% in the quarter and 7.3% for the nine months ended April 30, 2004. The acquisitions of Brandon International and Prinzing Enterprises, Inc. in the United States, Etimark in Germany, and Cleere Advantage Ltd, Aztec, Ltd and B.I.G in the United Kingdom added 8.9% to sales in the quarter and the same acquisitions in addition to TISCOR, Inc. in the United States, added 8.5% to sales for the nine months ended April 30, 2004. 13 The gross margin as a percentage of sales increased from 51.5% to 52.5% for the quarter and from 50.5% to 51.8% for the nine months ended April 30, 2004, compared to the same periods of the previous year. The gross margin as a percentage of sales was higher for the quarter and nine months ended April 30, 2004 compared to the same periods last year due to the impact of sales volume increases, improved price yields and continued cost reduction programs. Selling, general and administrative (SG&A) expenses as a percentage of sales decreased to 35.7% from 39.4% for the quarter and to 37.3% from 40.0% for the nine months ended April 30, 2004, compared to the same periods of the prior year due to savings from restructuring actions taken in the fourth quarter of fiscal 2003, the spreading of fixed costs over a larger sales base, and continued cost control programs. In dollars, SG&A increased due to foreign currency translation, increased professional fees and SG&A expenses associated with acquired businesses, which was partially offset by savings from our restructuring program. As a percentage of sales, research and development expenses decreased from 3.6% to 3.4% for the quarter and remained flat at 3.4% for the nine months ended April 30, 2004 compared to the same periods of the previous year. The increase for the quarter is primarily due to increased sales volume. In dollars, research and development expenses increased from $5,165,000 to $6,210,000 for the quarter and from $13,808,000 to $16,680,000 for the nine-month period compared to the same periods in the prior year. This increase was due to additional investment in recently introduced products. Fiscal 2004 included a restructuring charge of $455,000 for the quarter and $2,274,000 for the nine months ended April 30, 2004, which was primarily due to consolidation of operating facilities in Europe and Australia. The Company expects to incur total pre-tax restructuring charges in fiscal 2004 of approximately $3,000,000. There were no restructuring charges in the first nine months of the prior year. Operating income was $23,719,000 for the quarter and $51,540,000 for the nine-month period ended April 30, 2004, compared to $12,074,000 and $28,997,000 for the same periods last year due to the factors cited above. Investment and other income decreased $1,265,000 for the quarter and $1,217,000 for the nine-month period ended April 30, 2004, compared to the same periods last year, due to the net effect of foreign exchange, primarily on intercompany transactions. The Company's effective tax rate was 30.0% for the quarter and 31.9% for the nine-month period ended April 30, 2004 and 34.0% for the same periods of the previous year. The reduction was due to a continued shift of business and profit growth to lower tax countries such as China. The impact of this change on net income was $1.0 million in the quarter. The Company expects a 32.0% effective rate for the fourth quarter of fiscal 2004 before the effect of a $3 million adjustment due to an expected favorable resolution of a federal income tax audit, and a similar rate in fiscal 2005. Net income for the three months ended April 30, 2004, increased 90.8% to $16,399,000, compared to $8,597,000 for the same quarter of the previous year. For the nine months ended April 30, 2004, net income increased 77.4% to $34,785,000 from $19,613,000 for the same period last year. On a Class A Common Share basis, diluted net income for the three months ended April 30, 2004, was $0.68 compared to $0.37 per share for the same quarter of the previous year. For the nine months ended April 30, 2004, Class A Common Share diluted net income was $1.46 compared to $0.83 for the same period last year. Net income included the after-tax effect of restructuring charges of $319,000 in the quarter ended April 30, 2004 and $1,546,000 in the nine-month period ended April 30, 2004. 14 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 geographic regions: Americas, Europe, and Asia.
Corporate and (Unaudited, dollars in thousands) Americas Europe Asia Eliminations Total -------- -------- ------- -------------- -------- SALES TO EXTERNAL CUSTOMERS Three months ended: April 30, 2004 $ 89,251 $ 69,683 $21,920 $180,854 April 30, 2003 76,536 50,838 14,581 141,955 Nine months ended: April 30, 2004 $243,539 $183,308 $58,861 $485,708 April 30, 2003 224,899 143,801 41,482 410,182 SALES GROWTH INFORMATION Three months ended April 30, 2004: Base 7.3% 8.4% 37.5% 10.8% Currency 1.4% 15.6% 12.8% 7.7% Acquisitions 7.9% 13.1% 0.0% 8.9% Total 16.6% 37.1% 50.3% 27.4% Nine months ended April 30, 2004: Base (1.0)% 0.5% 30.2% 2.6% Currency 1.6% 14.8% 11.7% 7.3% Acquisitions 7.7% 12.2% 0.0% 8.5% Total 8.3% 27.5% 41.9% 18.4% SEGMENT PROFIT (LOSS) Three months ended: April 30, 2004 $ 17,991 $ 19,461 $6,520 $(1,067) $42,905 April 30, 2003 12,670 11,729 3,298 (847) 26,850 Percentage increase 42.0% 65.9% 97.7% 26.0% 59.8% Nine months ended: April 30, 2004 $ 42,605 $ 48,256 $16,849 $(3,037) $104,673 April 30, 2003 32,530 33,023 10,078 (2,503) 73,128 Percentage increase 31.0% 46.1% 67.2% 21.3% 43.1%
The Company evaluates performance and allocates resources based on segment profit or loss. Segment profit or loss does not include certain administrative costs, interest, foreign exchange gain or loss, restructuring charges, other expenses not allocated to a segment and income taxes. Please refer to Note I "Segment Information" for a reconciliation of segment profit to income before income taxes. 15 Americas: Americas sales increased 16.6% for the quarter and 8.3% for the nine months ended April 30, 2004, compared to the same periods last year. Base sales in local currency increased 7.3% in the quarter and decreased 1.0% for the nine-month period. Acquisitions increased sales in the region by 7.9% in the quarter and 7.7% for the nine-month period. 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 and 1.6% for the nine-month period ended April 30, 2004. The increase in base business was due to significant improvement in the United States manufacturing sector, particularly in the lab research, electronic and industrial OEM markets. Some minimal growth has been noted in the safety, MRO and electrical markets. Segment profit for the region increased 42.0% to $17,991,000 from $12,670,000 for the three-month period and 31.0% to $42,605,000 from $32,530,000 for the nine months ended April 30, 2004, compared to the same periods in the prior year. Increased profitability in the Americas can be attributed to improved gross margins due primarily to increased sales volume, continued cost reductions, and operational improvements. Europe: Europe sales increased 37.1% for the quarter and 27.5% for the nine months ended April 30, 2004, compared to the same periods in the prior year. Base sales in local currency increased 8.4% in the quarter and 0.5% in the nine-month period. The increase in base sales was due primarily to ongoing programs to leverage existing customer spending through expanded product offerings and the Company's ability to follow global manufacturers as they shift production to lower cost regions, such as Eastern Europe. Sales were positively affected by fluctuations in the exchange rates used to translate financial results into United States currency, which increased sales within the region by 15.6% in the quarter and 14.8% in the nine-month period. Sales were also aided by acquisitions, which increased sales 13.1% for the quarter and 12.2% for the nine-month period. Profit for the region increased 65.9% in the quarter to $19,461,000 from $11,729,000 in the prior year and 46.1% in the nine-month period to $48,256,000 from $33,023,000 in the prior year, due primarily to benefits from restructuring activities, foreign currency translation and improved gross margins due to a more favorable mix of product sales. Asia: Asian sales increased 50.3% for the quarter and 41.9% for the nine-month period ended April 30, 2004, compared to the same periods in the prior year. Base sales in local currency increased 37.5% in the quarter and 30.2% for the nine-month period, compared to the same periods last year. Base growth was concentrated in sales of high-performance identification and die cut products in the telecommunications and electronics markets. 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 12.8% in the quarter and 11.7% for the nine-month period. China and Malaysia both more than doubled base sales for the quarter and the nine-month period compared to the same periods in the prior year. Investments in infrastructure in China and Malaysia over the past two years are yielding significant growth. Profit for the region was up 97.7% for the quarter to $6,520,000 from $3,298,000 in the prior year third quarter. Profit for the nine-month period was up 67.2% to $16,849,000 from $10,078,000 in the prior year. The increase in profit was due primarily to increased sales volume, foreign currency translation and also to improved margins due to improved use of manufacturing capacity. 16 Financial Condition The Company's liquidity remained strong. Its current ratio as of April 30, 2004 was 2.2, down from the current ratio at July 31, 2003 of 2.4. Cash and cash equivalents were $79,831,000 at April 30, 2004, compared to $76,088,000 at July 31, 2003. The increase was due to strong cash flow from operating activities. Working capital increased $10,977,000 during the nine months ended April 30, 2004, to $134,855,000 from $123,878,000 at July 31, 2003. Inventories increased $8,625,000 for the nine-month period, due primarily to the effects of acquisitions and foreign currency translation. Accounts receivable increased $21,638,000 for the nine months due to increased sales volume, acquisitions and foreign currency translation. Current liabilities increased $22,811,000 for the nine months, due to the timing of income tax payments and increased liabilities associated with acquisitions, incentive plans and foreign currency translation. Cash flow from operating activities totaled $47,482,000 for the nine months ended April 30, 2004, compared to $40,471,000 for the same period last year. The increase was the result of higher net income partially offset by an increase in accounts receivable balances, increased inventory balances and an increase in accrued income taxes. Capital expenditures were $10,616,000 in the nine months ended April 30, 2004, compared to $11,593,000 in the same period last year. Net cash used in financing activities was $6,236,000 for the nine-month period ended April 30, 2004, 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 $15,127,000 related to payment of dividends, redemption of preferred stock, issuance of common stock due to stock option exercises and purchase of treasury stock. Long-term debt as a percentage of long-term debt plus stockholders' investment was 0.01% at April 30, 2004 and 0.2% at July 31, 2003. On March 31, 2004, the Company entered into a new revolving credit facility. Under the new agreement, the Company currently has a maximum $215 million line of credit (based on certain financial ratios of the Company) with a group of five banks. The $215 million includes a 5-year credit facility for $125 million and a 364-day credit facility for $90 million. The interest rate on the line of credit is a spread over LIBOR, as indicated in the "applicable rate" table in the Credit Agreement attached as Exhibit 10.27 to this filing. As of April 30, 2004, no amounts were outstanding under either facility. At April 30, 2004, $215 million was available to the Company under the combined facilities. At April 30, 2004, the Company was 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, available line of credit and other borrowing alternatives will be adequate to meet the Company's current and anticipated investing and financing needs. The strong liquidity of the Company and its continued strong cash flow enable the Company to execute a long-term strategic plan. This strategic plan includes investments that expand the Company's 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. The Company does not have material off-balance sheet arrangements or related party transactions. The Company is not aware of factors that are reasonably likely to adversely affect liquidity trends, other than the risk factors described in other Company filings. However, the following additional information is provided to assist financial statement users. Operating Leases - These leases generally are entered into only for non-strategic investments (e.g., warehouses, office buildings, computer equipment) where the economic profile is favorable. 17 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. Subsequent Events On May 20, 2004, the Company completed its acquisition of all of the outstanding securities of EMED Co., Inc. ("EMED") for a purchase price of $191,700,000, net of cash received. EMED is a direct marketer and manufacturer of identification, safety and facility management products headquartered in Buffalo, New York. The funds used to finance the purchase price came from borrowing on the Company's revolving credit facility and from working capital. On May 18, 2004 the Company borrowed $160,000,000 to finance the purchase of EMED Co. Of the borrowed funds, $90 million was drawn from its 364-day credit facility and $70 million was drawn from its S-year credit facility. The Company intends to pay down a portion of these borrowings with the proceeds of longer-term fixed rate borrowings during the fourth quarter of the current year. 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. 18 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 April 30, 2004, the Company had 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. 19 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.27 Revolving Credit Facility Credit Agreement 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 Mathieson 32.1 Section 1350 Certification of Frank M. Jaehnert 32.2 Section 1350 Certification of David Mathieson (b) Reports on Form 8-K. During the quarter ended April 30, 2004, the Company filed a Current Report on Form 8-K containing information pursuant to Item 5 ("Other Events") dated April 5, 2004, relating to the definitive agreement to acquire EMED Co., Inc. Also during the quarter ended April 30, 2004, the Company submitted a Current Report on Form 8-K pursuant to Item 12 ("Results of Operations and Financial Condition") dated February 18, 2004, which is not to be deemed incorporated by reference into other filings, relating to the announcement of earnings for the Company's fiscal 2004 second quarter. 20 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: June 14, 2004 /s/ F. M. Jaehnert -------------------- ------------------------------------------ F. M. Jaehnert President & Chief Executive Officer Date: June 14, 2004 /s/ D. Mathieson -------------------- ------------------------------------------ D. Mathieson Vice President & Chief Financial Officer (Principal Accounting Officer) (Principal Financial Officer) 21