SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended January 31, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
-----
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to _____
Commission File Number 0-12730
BRADY CORPORATION
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(Exact name of registrant as specified in its charter)
Wisconsin 39-0178960
---------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6555 WEST GOOD HOPE ROAD, MILWAUKEE, WISCONSIN 53223
(Address of principal executive offices)
(Zip Code)
(414) 358-6600
--------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of February 25, 2002, there were outstanding 21,257,944 shares of Class A
Common Stock and 1,769,314 shares of Class B Common Stock. The Class B Common
Stock, all of which is held by an affiliate of the Registrant, is the only
voting stock.
FORM 10-Q
BRADY CORPORATION
INDEX
Page
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PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of
Income and Income Retained in the Business 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS JANUARY 31, JULY 31, 2001
2002
-------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 70,006 $ 62,811
Accounts receivable, less allowance for losses ($2,660 and $2,297 69,917 71,684
respectively)
Inventories 35,958 39,207
Prepaid expenses and other current assets 21,920 21,291
-------------- --------------
TOTAL CURRENT ASSETS 197,801 194,993
OTHER ASSETS:
Goodwill - net 98,987 96,041
Other 17,422 16,909
-------------- --------------
116,409 112,950
PROPERTY, PLANT AND EQUIPMENT:
Cost:
Land 5,937 5,944
Buildings and improvements 49,421 47,611
Machinery and equipment 122,260 132,272
Construction in progress 6,501 6,474
-------------- --------------
184,119 192,301
Less accumulated depreciation 101,863 107,768
-------------- --------------
NET PROPERTY, PLANT AND EQUIPMENT 82,256 84,533
-------------- --------------
TOTAL $ 396,466 $ 392,476
============== ==============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 21,122 $ 20,666
Wages and amounts withheld from employees 24,255 26,767
Taxes, other than income taxes 1,309 1,496
Accrued income taxes 9,656 8,460
Other current liabilities 11,629 12,364
Short-term borrowings and current maturities on long-term debt 160 1,410
-------------- --------------
TOTAL CURRENT LIABILITIES 68,131 71,163
LONG-TERM DEBT, LESS CURRENT MATURITIES 3,845 4,144
OTHER LIABILITIES 14,486 14,590
-------------- --------------
TOTAL LIABILITIES 86,462 89,897
STOCKHOLDERS' INVESTMENT:
Preferred stock 2,855 2,855
Class A nonvoting common stock - Issued 21,255,262 212 211
21,149,551 shares, respectively
Class B voting common stock - Issued and outstanding 1,769,314 shares 18 18
Treasury Stock - 4,548 Class A Common Shares, at cost (132) (132)
Additional paid-in capital 38,324 35,806
Income retained in the business 282,329 276,779
Cumulative other comprehensive (loss) (13,007) (12,016)
Other (595) (942)
-------------- --------------
TOTAL STOCKHOLDERS' INVESTMENT 310,004 302,579
-------------- --------------
TOTAL $ 396,466 $ 392,476
============== ==============
See Notes to Condensed Consolidated Financial Statements
3
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND INCOME RETAINED IN THE BUSINESS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended January 31, Six Months Ended January 31,
------------------------------------ -----------------------------
2002 2001 2002 2001
---------------- ----------------- --------------- ------------
Net Sales $ 120,589 $ 135,965 $ 250,590 $ 282,783
Operating expenses:
Cost of products sold 60,952 64,110 124,075 130,357
Research and development 4,168 5,591 8,620 11,151
Selling, general and administrative 46,083 52,208 96,841 108,807
------------ ------------- ------------ -------------
Total operating expenses 111,203 121,909 229,536 250,315
Operating income 9,386 14,056 21,054 32,468
Other income and (expense):
Investment and other income - net 6 (152) 588 40
Interest expense (3) (9) (19) (184)
------------ ------------- ------------ -------------
Income before income taxes 9,389 13,895 21,623 32,324
Income taxes 3,251 5,273 7,490 12,283
------------ ------------- ------------ -------------
Net Income 6,138 8,622 14,133 20,041
Income retained in business at beginning of period 280,519 272,885 276,779 265,462
Less dividends:
Preferred stock (65) (65) (130) (130)
Common stock (4,263) (4,006) (8,453) (7,937)
------------ ------------- ------------ -------------
Income retained in business at end of period $ 282,329 $ 277,436 $ 282,329 $ 277,436
Net income per Class A Nonvoting Common Share
Basic $ 0.26 $ 0.38 $ 0.61 $ 0.87
============ ============= ============ =============
Diluted $ 0.26 $ 0.37 $ 0.60 $ 0.86
============ ============= ============ =============
Net income per Class B Voting Common Share
Basic $ 0.26 $ 0.38 $ 0.58 $ 0.84
============ ============= ============ =============
Diluted $ 0.26 $ 0.37 $ 0.57 $ 0.83
============ ============= ============ =============
See Notes to Condensed Consolidated Financial Statements
4
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
January 31,
2002 2001
------------- --------------
Operating activities:
Net income $ 14,133 $ 20,041
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 7,716 10,982
Loss on sale of property, plant & equipment 474 167
Provision for losses on accounts receivable 744 798
Amortization of restricted stock 347 347
Changes in operating assets and liabilities (Net of effects of business acquisitions):
Accounts receivable 1,046 (5,673)
Inventory 3,320 (5,163)
Prepaid expenses and other assets (313) (87)
Accounts payable, accrued expenses and other liabilities (2,800) (4,323)
Income taxes 1,354 (3,086)
------------- -------------
Net cash provided by operating activities 26,021 14,003
Investing activities:
Acquisitions of businesses, net of cash acquired (3,848) 0
Purchases of property, plant and equipment (6,474) (12,341)
Proceeds from sale of property, plant and equipment 14 42
Other 14 (13)
------------- -------------
Net cash (used in) investing activities (10,294) (12,312)
Financing activities:
Payment of dividends (8,583) (8,067)
Proceeds from issuance of Class A Common Stock 2,519 2,252
Principal payments on debt (1,539) (8,071)
Other 0 (1,223)
------------- -------------
Net cash (used in) financing activities (7,603) (15,109)
Effect of exchange rate changes on cash (929) (594)
------------- -------------
Net increase (decrease) in cash and cash equivalents 7,195 (14,012)
Cash and cash equivalents, beginning of period 62,811 60,784
------------- -------------
Cash and cash equivalents, end of period $ 70,006 $ 46,772
============= =============
Supplemental disclosures:
Cash paid during the period for:
Interest $ 147 $ 270
Income taxes, net of refunds 7,052 14,187
Acquisitions:
Fair value of assets acquired, net of cash $ 1,095
Liabilities assumed (721)
Goodwill 3,474
-------------
Net cash paid for acquisitions $ 3,848
=============
See Notes to Condensed Consolidated Financial Statements
5
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended January 31, 2002
(Unaudited)
NOTE A - Basis of Presentation
The condensed consolidated financial statements included herein have
been prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of the
Company, the foregoing statements contain all adjustments, consisting only of
normal recurring accruals, necessary to present fairly the financial position of
the Company as of January 31, 2002 and July 3l, 2001, its results of operations
for the three months and six months ended January 31, 2002 and 2001, and its
cash flows for the six months ended January 31, 2002 and 2001. The condensed
consolidated balance sheet at July 31, 2001 has been derived from the audited
consolidated financial statements of that date and condensed.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to rules and regulations of the Securities and Exchange Commission. Accordingly,
the condensed consolidated financial statements do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statement presentation.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the consolidated financial statements and the notes thereto
included in the Company's latest annual report on Form 10-K for the year ended
July 31, 2001.
It is not practical to segregate the amounts of raw material, work in
process or finished goods at the respective interim balance sheet dates.
NOTE B - New Pronouncements
In May 2000, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and
Costs." EITF 00-10 provides guidance on the financial reporting of shipping and
handling fees and costs in the condensed consolidated statements of income.
During the fourth quarter of fiscal 2001, the Company adopted EITF 00-10 and, as
a result, amounts billed to a customer in a sale transaction related to shipping
costs are reported as net sales and the related costs incurred for shipping are
reported as cost of goods sold. The Company previously reported shipping costs
as a reduction of sales. Prior period condensed consolidated financial
statements have been reclassified to conform to the new requirements.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations,"
which eliminates the pooling method of accounting for all business combinations
initiated after June 30, 2001 and addresses the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination. The Company has adopted this accounting standard for business
combinations initiated after June 30, 2001.
As of August 1, 2001, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which addresses the financial accounting and reporting
standards for the acquisition of intangible assets outside of a business
combination and for goodwill and other intangible assets subsequent to their
acquisition. This accounting standard requires that goodwill be separately
disclosed from other intangible assets in the condensed consolidated balance
sheet, and no longer be amortized, but tested for impairment on at least a
periodic basis. The provisions of this accounting standard also require the
completion of a transitional impairment test within six months of adoption, with
any impairments identified treated as a cumulative effect of a change in
accounting principle.
6
The Company performed the transitional assessment of goodwill by
comparing the carrying amount of net assets, including goodwill, of each
reporting unit to their respective fair value as of August 1, 2001. Fair value
was estimated based upon discounted cash flow analyses. Because the estimated
fair value of each of the Company's reporting units exceeded their carrying
amount, management believes that no impairment exists as of the implementation
date, August 1, 2001.
In accordance with SFAS No. 142, the Company discontinued the
amortization of goodwill effective August 1, 2001. A reconciliation of
previously reported net income and net income per share to the amounts adjusted
for the exclusion of goodwill amortization net of the related income tax effect
follows:
Fiscal 2002 Fiscal 2001
------------------------------- ----------------------------------
2nd Quarter 6-Month 2nd Quarter 6-Month
----------- ----------- ------------ ------------
Reported net income $6,138,000 $14,133,000 $ 8,622,000 $20,041,000
Add: Goodwill amortization, net of tax - - 1,543,000 2,959,000
---------- ----------- ----------- -----------
Adjusted net income $6,138,000 $14,133,000 $10,165,000 $23,000,000
========== =========== =========== ===========
Net income per Class A Nonvoting
Common Share - Basic:
Reported net income $0.26 $0.61 $0.38 $0.87
Add: Goodwill amortization, net of tax - - 0.07 0.13
----- ----- ----- -----
Adjusted net income $0.26 $0.61 $0.45 $1.00
===== ===== ===== =====
Net income per Class A Nonvoting
Common Share - Diluted:
Reported net income $0.26 $0.60 $0.37 $0.86
Add: Goodwill amortization, net of tax - - 0.07 0.13
----- ----- ----- -----
Adjusted net income $0.26 $0.60 $0.44 $0.99
===== ===== ===== =====
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the
accounting for and the reporting of the impairment or disposal of long-lived
assets and is effective for the Company on August 1, 2002. The impact of this
pronouncement on the Company's financial results is currently being evaluated.
NOTE C - Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the quarter ended
January 31, 2002, are as follows:
Graphics &
Workplace
ISST Solutions Total
----------- ----------- -----------
Balance as of October 31, 2001 $56,756,000 $39,582,000 $96,338,000
Goodwill acquired during the period 2,041,000 1,433,000 3,474,000
Translation adjustments (376,000) (449,000) (825,000)
----------- ----------- -----------
Balance as of January 31, 2002 $58,421,000 $40,566,000 $98,987,000
=========== =========== ===========
Other long-term assets include patents, trademarks, non-compete
agreements and other intangibles with finite lives being amortized in accordance
with SFAS No. 142. The net book value of these assets was $1,817,000 at January
31, 2002. Amortization expense related to intangible assets was not material.
7
NOTE D - Comprehensive Income
Total comprehensive income, which was comprised of net income, foreign
currency adjustments and net unrealized gains and losses from cash flow hedges,
amounted to approximately $5,196,000 and $11,434,000 for the three months ended
January 31, 2002 and 2001, respectively, and $13,143,000 and $18,953,000 for the
six months ended January 31, 2002 and 2001, respectively.
NOTE E - Net Income Per Common Share
Reconciliations of the numerator and denominator of the basic and
diluted per share computations for the Company's Class A and Class B common
stock are summarized as follows:
Fiscal 2002 Fiscal 2001
---------------------------------- --------------------------------
2nd Quarter 6-Month 2nd Quarter 6-Month
----------- ------------ -------------- -----------
Numerator:
Net income $6,138,000 $14,133,000 $8,622,000 $20,041,000
Less: Preferred stock dividends (65,000) (130,000) (65,000) (130,000)
---------- ----------- ---------- -----------
Numerator for basic and diluted
Class A net income per share 6,073,000 14,003,000 8,557,000 19,911,000
Less: Preferential dividends 0 (705,000) 0 (699,000)
Less: Preferential dividends on
dilutive stock options 0 (10,000) 0 (8,000)
---------- ----------- ---------- -----------
Numerator for basic and diluted
Class B net income per share $6,073,000 $13,288,000 $8,557,000 $19,204,000
========== =========== ========== ===========
Denominator:
Denominator for basic net income per
share for both Class A and Class B 22,997,000 22,995,000 22,788,000 22,765,000
Plus: Effect of dilutive stock options 335,000 327,000 314,000 278,000
---------- ----------- ---------- -----------
Denominator for diluted net income per
share for both Class A and Class B 23,332,000 23,322,000 23,102,000 23,043,000
========== ========== ========== ==========
Class A Common Stock net income per share:
Basic $0.26 $0.61 $0.38 $0.87
Diluted $0.26 $0.60 $0.37 $0.86
Class B Common Stock net income per share:
Basic $0.26 $0.58 $0.38 $0.84
Diluted $0.26 $0.57 $0.37 $0.83
8
Options to purchase 75,000 shares of Class A Common Stock were not
included in the computations of diluted net income per share for the quarter
ending January 31, 2001, because the option exercise price was greater than the
average market price of the common shares and, therefore, the effect would be
antidilutive.
Options to purchase 16,000 and 81,000 shares of Class A Common Stock
were not included in the computations of diluted earnings per share for the six
months ending January 31, 2002, and 2001, respectively, because the option
exercise prices were greater than the average market price of the common shares
and, therefore, the effect would be antidilutive.
NOTE F - Acquisitions
In November 2001, the Company acquired StrandWare, Inc., located in Eau
Claire, Wisconsin, a bar-code, label-design, and data-collection software
developer. Also in November 2001, the Company acquired Safety Signs Service,
located in Perth, Australia, a manufacturer and supplier of safety products. The
combined purchase price of these acquisitions was approximately $4,600,000. The
results of their operations have been included since their respective dates of
acquisition in the accompanying condensed consolidated financial statements. The
pro-forma results assuming the acquisitions had been consummated as of the
beginning of the periods presented are not significant.
NOTE G - Restructuring
During the fourth quarter of fiscal 2001, the Company recorded a
nonrecurring charge of $9,560,000 related primarily to facilities consolidation
in the United States and Europe and workforce reductions in its operations
around the world. The workforce reduction of approximately 175 people was
essentially completed in August 2001.
A reconciliation of activity with respect to the Company's
restructuring is as follows:
Ending balance, July 31, 2001 $ 6,937,000
Fiscal 2002 First Quarter Activity
Cash payments associated with severance and other (1,487,000)
Non-cash asset write-offs (263,000)
-----------
Ending balance, October 31, 2001 5,187,000
Fiscal 2002 Second Quarter Activity
Cash payments associated with severance and other (1,474,000)
Non-cash asset write-offs (97,000)
-----------
Ending balance, January 31, 2002 $ 3,616,000
===========
NOTE H - Segment Information
The Company's reportable segments are business units that are each
managed separately because they manufacture and/or distribute distinct products
using different processes. The Company has two reportable segments: the
Identification Solutions & Specialty Tapes Group and the Graphics and Workplace
Solutions Group. Effective August 1, 2001, the Company's Graphics and Direct
Marketing operating segments were combined to form Graphics and Workplace
Solutions. The prior year segment information has been reclassified to conform
to the current year presentation.
9
Following is a summary of segment information for the three months ended January
31, 2002 and 2001:
(Dollars in Thousands) Identification Graphics &
Solutions & Workplace Corporate and
Specialty Tapes Solutions Eliminations Totals
--------------- --------- ------------- ----------
Three months ended January 31, 2002:
Sales from external customers $53,712 $66,877 $120,589
Intersegment sales 207 573 ($780) --
Profit 6,116 15,459 (534) 21,041
Three months ended January 31, 2001:
Sales from external customers $66,478 $69,487 $135,965
Intersegment sales 1,025 344 ($1,369) --
Profit 14,018 16,284 (214) 30,088
Following is a summary of segment information for the six months ended January
31, 2002 and 2001:
(Dollars in Thousands) Identification Graphics &
Solutions & Workplace Corporate and
Specialty Tapes Solutions Eliminations Totals
--------------- --------- ------------- ----------
Six months ended January 31, 2002:
Sales from external customers $110,794 $139,796 $250,590
Intersegment sales 328 1,163 ($1,491) --
Profit 15,155 34,110 (1,094) 48,171
Six months ended January 31, 2001:
Sales from external customers $138,002 $144,781 $282,783
Intersegment sales 1,629 1,188 ($2,817) --
Profit 31,593 36,656 (861) 67,388
Following is a reconciliation of profit for the three and six months ended
January 31, 2002 and 2001:
(Dollars in Thousands) Fiscal 2002 Fiscal 2001
----------------------------- ----------------------------
2nd Quarter 6-Month 2nd Quarter 6-Month
----------- --------- ----------- ---------
Total profit from reportable segments $21,575 $49,265 $30,302 $68,249
Corporate and eliminations (534) (1,094) (214) (861)
Unallocated amounts:
Administrative costs (11,460) (25,763) (14,026) (30,515)
Goodwill amortization - - (1,576) (3,073)
Interest-net 234 393 385 586
Foreign exchange (232) 174 (593) (823)
Other (194) (1,352) (383) (1,239)
----------- --------- ----------- ---------
Income before income taxes $9,389 $21,623 $13,895 $32,324
=========== ========= =========== =========
10
NOTE I - Liquidity and Capital Resources
On January 22, 2002, the Securities and Exchange Commission issued an
interpretive release on disclosures related to liquidity and capital resources,
including off-balance sheet arrangements. The Company does not have material
off-balance sheet arrangements or related party transactions. The Company is
not aware of factors that are reasonably likely to adversely affect liquidity
trends, other than the risk factors presented in other Company filings.
However, the following additional information is provided to assist financial
statement users.
Operating Leases - These leases generally are entered into only for
non-strategic investments (e.g., warehouses, office buildings) where the
economic profile is favorable. The effects of outstanding leases are not
material to the Company.
Purchase Commitments - The Company has purchase commitments for
materials, supplies, services, and property, plant and equipment as part of the
ordinary conduct of business. In the aggregate, such commitments are not at
prices in excess of current market. Due to the proprietary nature of many of the
Company's materials and processes, certain supply contracts contain penalty
provisions for early termination. The Company does not believe a material amount
of penalties is reasonably likely to be incurred under these contracts based
upon historical experience and current expectations.
Other Contractual Obligations - The Company does not have material
financial guarantees or other contractual commitments that are reasonably likely
to adversely affect liquidity.
Related Party Transactions - The Company does not have any related
party transactions that materially affect the results of operations, cash flow
or financial condition.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
For the three months ended January 31, 2002, sales of $120,589,000 were
11.3% lower than the same quarter of the previous year. For the six months ended
January 31, 2002, revenues of $250,590,000 were 11.4% lower than the same period
last year. Sales of the Company's international operations increased 3.8% for
the quarter and 3.6% for the six-month period in local currencies. This increase
was partially offset by the negative effect of fluctuations in the exchange
rates used to translate financial results into U.S. currency, which reduced
international sales growth by 3.0% in the quarter and 2.5% for the six months
ended January 31, 2002. Acquisitions increased international sales by 6.5% for
the quarter and 6.1% for the six-month period. The increase was partially offset
by a decline in base sales (excludes the effect of acquisitions) in local
currencies of 2.7% for the quarter and 2.5% for the six months ended January 31,
2002. Sales of the Company's U.S. operations decreased 20.9% in the quarter and
20.6% for the six months ended January 31, 2002. The decrease in U.S. base
business was related to softness in the U.S. economy and the wireless,
electronics and automatic identification industries. Acquisitions did not
significantly affect U.S. sales for the quarter or the six months ended January
31, 2002.
11
The cost of products sold as a percentage of sales increased from 47.1%
to 50.5% for the quarter and from 46.1% to 49.5% for the six months ended
January 31, 2002 compared to the same periods of the previous year. This
increase was due primarily to the effect of a fixed cost structure being spread
over a lower sales volume and the effect of the exchange rate on goods purchased
by foreign subsidiaries. Selling, general and administrative (SG&A) expenses as
a percentage of sales increased to 38.2% for the quarter compared to 37.2% for
the same quarter of the previous year, excluding goodwill amortization in both
years. For the six months ended January 31, 2002, this percentage was 38.7%
compared to 37.4% for the same period last year, excluding goodwill
amortization. SG&A as a percentage of sales increased in both periods due to
lower sales. Research and development expenditures decreased 25.5% for the
quarter and 22.7% for the six months ended January 31, 2002, over the same
periods last year. The decrease reflects more focused spending, better tracking
and allocation of costs and variations in project timing. As a percentage of
sales, research and development expenses decreased from 4.1% to 3.5% for the
quarter and from 3.9% to 3.4% for the six-month period.
Operating income was $9,386,000 for the quarter and $21,054,000 for the
six months ended January 31, 2002, compared to $14,056,000 and $32,468,000 for
the same periods last year because of the factors cited above. Excluding
goodwill amortization, operating income in the prior year would have been
$15,632,000 in the quarter and $35,541,000 for the six-month period.
Investment and other income increased $158,000 for the quarter and
increased $548,000 for the six months ended January 31, 2002, compared to same
periods last year.
Income before income taxes decreased 39.3% for the quarter and 38.9%
for the six months ended January 31, 2002, compared to prior-year results,
excluding goodwill amortization in both periods. The Company's effective tax
rate was 34.6% for the quarter compared to 34.3% for the same quarter of the
previous year, excluding goodwill amortization in both years. For the six months
ended January 31, 2002, this percentage was 34.6% compared to 35.0% for the same
period last year, excluding goodwill amortization in both periods. The decrease
was the result of changes in the mix of earnings in the Company's international
operations.
Net income for the three months ended January 31, 2002, decreased 39.6%
to $6,138,000 compared to $10,165,000 for the same quarter of the previous year,
excluding goodwill amortization in both periods. For the six months ended
January 31, 2002, net income decreased 38.6% to $14,133,000 from $23,000,000 for
the same period last year, excluding goodwill amortization in both periods. On a
Class A Common Share basis, diluted net income for the three months ended
January 31, 2002, was $0.26 compared to $0.37 per share for the same quarter of
the previous year or $0.44 per share excluding goodwill amortization in the
prior year first quarter. For the six months ended January 31, 2002, Class A
Common Share diluted net income was $.60 compared to $.99 per share for the same
period last year, excluding goodwill amortization. The decrease in the current
quarter was primarily due to the sales shortfalls discussed above offset by
restructuring and cost reduction efforts.
Business Segment Operating Results
Identification Solutions & Specialty Tapes (ISST) Group:
ISST sales decreased 19.2% for the three months ended January 31, 2002,
from the same period last year. For the six months ended January 31, 2002, ISST
sales were 19.8% lower than the same period last year. Base business in local
currency decreased 23.8% in the quarter and 23.9% for the six month period ended
January 31, 2002. Acquisitions increased sales over prior year 6.0% in the
quarter and 5.4% for the six months ended January 31, 2002. Contributing to the
decrease was the negative effect of fluctuations in the exchange rates used to
translate financial results into U.S. currency, which reduced sales growth
within the group by 1.5% in the quarter and 1.2% for the six months ended
January 31, 2002. Latin America and the United States showed sales declines in
local currency for the quarter, while Europe was up slightly and Asia Pacific
sales showed a double-digit increase in the quarter. The domestic decrease
related to softness in the electronic and telecommunications and industrial
markets. Profit as a percentage of sales decreased from 21.1% to 11.4% for the
quarter and from 22.9% to 13.7% for the six months ended January 31, 2002. The
decrease was primarily a result of the decline in sales.
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Graphics & Workplace Solutions Group:
Graphics & Workplace Solutions' sales decreased 3.8% for the quarter
and 3.4% for the six months ended January 31, 2002, compared to the same periods
last year. Base sales in local currency decreased 3.1% in the quarter and 2.8%
for the six months ended January 31, 2002, compared to the same periods last
year. Sales were negatively affected by fluctuations in the exchange rates used
to translate financial results into U.S. currency, which reduced sales growth
within the group by 1.2% in the quarter and .9% for the six months ended January
31, 2002. Sales in local currencies for the quarter were up in Europe and Latin
America and down in Asia Pacific and the United States. Profit as a percentage
of sales decreased to 23.1% from 23.4% in the quarter and to 24.4% from 25.3%
for the six months ended January 31, 2002, compared with the same periods the
prior year.
Financial Condition
The Company's liquidity remained strong. The current ratio as of
January 31, 2002, was 2.9. Cash and cash equivalents were $70,006,000 at January
31, 2002, compared to $62,811,000 at July 31, 2001. The increase was primarily
due to continued strong cash flow provided by operating activities, offset by
investments in property, plant and equipment and payment of dividends. Working
capital increased $5,840,000 during the six months ended January 31, 2002, to
$129,670,000.
Cash flow from operations totaled $26,021,000 for the six months ended
January 31, 2002, compared to $14,003,000 for the same period last year. The
improvement was primarily the result of changes in accounts receivable,
inventory and current liabilities. Capital expenditures were $6,474,000 in the
six months ended January 31, 2002, compared to $12,341,000 in the same period
last year. Cash used for acquisitions was $3,848,000 for the six months ended
January 31, 2002. Cash used in financing activities was $7,603,000 for the
six-month period ended January 31, 2002, resulting primarily from payments of
dividends to the Company's stockholders. Cash flows used in financing activities
for the same period last year were $15,109,000 related to payment of dividends
and principal payments on debt.
Long-term debt as a percentage of long-term debt plus stockholders'
investment was 1.2% and 1.4% at January 31, 2002 and July 31, 2001,
respectively.
The Company maintains a maximum $200 million line of credit (based on
certain financial ratios of the Company) with a group of six banks, none of
which was being utilized as of January 31, 2002. At January 31, 2002,
approximately $115 million of the line of credit was available to the Company.
During the second quarter of fiscal 2000, Brady began a Company-wide
process-improvement initiative, known as Eclipse - Earning Customer Loyalty
through Integrated Processes and Systems Everywhere. This initiative is intended
to improve and standardize processes throughout the Company and install new
technology to support those processes. The Company estimates this initiative
will take approximately three years to complete with total cash outlay of
approximately $30,000,000. To date, the Company has invested approximately
$25,600,000 in the project. The Company estimates that about 50% of that cash
outlay will be capitalized.
The Company believes that its cash and cash equivalents, the cash flow
from operating activities and available line of bank credit are adequate to meet
the Company's current and anticipated investing and financing needs.
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Forward-Looking Statements
Except for historical information, the Company's reports to the
Securities and Exchange Commission on Form 10-K and Form 10-Q and periodic press
releases, as well as other public documents and statements, may contain
"forward-looking statements," as defined in the Private Securities Litigation
Reform Act of 1995. These forward-looking statements are often identified by
words such as "intend," "anticipate," "assume," "believe," "estimate," "expect,"
"plan," "project," "will," and other expressions, which refer to future events
and trends.
The ability of the Company to attain management's goals and objectives
are materially dependent on numerous factors, including those set forth herein.
Economic Conditions
Operating results are significantly influenced by general economic
conditions and growth or contraction of the principal economies in which we
operate, including the United States, Canada, Europe, Latin America and the
Asia-Pacific region. This is especially true with respect to growth or
contraction of the industrial and technology sectors of those economies. All
economies in which we operate are cyclical and the rates of growth or
contraction can vary substantially. Because we have few long-term contracts, we
generally ship products within a short period of time from receiving orders and
thus maintain only a small backlog. The extent to which we can rapidly adjust
our cost structure and output to changing economic conditions may have a
significant effect on our future profitability.
Currency Fluctuations
Approximately half of our sales are in foreign currencies, which
fluctuate in relationship to one another and to the United States dollar.
Fluctuations in currencies can cause transaction, translation and other losses.
These fluctuations can have an adverse effect on our reported sales and
earnings.
Cost of Raw Materials
As a manufacturer, our sales and profitability are also dependent upon
availability and cost of raw materials and the ability to control or pass on
costs of raw materials and labor. Inflationary and other increases in the costs
of raw materials and labor have occurred in the past and are expected to recur.
Our ability to reflect these costs in increased selling prices for our products,
increasing our productivity, and focusing on higher profit businesses, will
significantly influence our ability to maintain our margins. Past performance
may or may not be replicable in the future.
Reliance on Suppliers
Our manufacturing operations depend on our suppliers' ability to
deliver quality components and products in time for us to meet critical
manufacturing and distribution schedules. If shortages or delays occur, our
operating results could suffer until other sources can be developed.
New Products
A significant portion of the revenues in each of our recent fiscal
years has been represented by sales of products we have introduced within three
years prior to the period. Our ability to develop and successfully market new
products and to develop, acquire and retain necessary intellectual property
rights is therefore essential to maintaining our growth, which ability cannot be
assured.
Acquisitions, Strategic Alliances, Joint Ventures and Divestitures
Part of our historic growth has come through acquisitions. We may also
engage in strategic alliances, joint ventures and divestitures. Our ability to
effectively evaluate potential acquisition, strategic alliance, joint venture or
divestiture transactions and to effectuate such transactions at a reasonable
price can affect our profitability. In addition, acquisitions, strategic
alliances and joint ventures may require us to integrate with a different
company culture, management team and business infrastructure. We may also have
to develop, manufacture and market products with our products in a way that
enhances the performance of the combined business or product line. Depending on
the size and complexity of an acquisition, our successful integration of the
entity depends on a variety of factors, including:
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- The hiring and retention of key employees,
- Management of facilities and employees in separate geographic areas,
- The integration or coordination of different research and development
and product manufacturing facilities, and
- Systems integration and implementation.
All of these efforts require varying levels of management resources,
which may divert our attention from other business operations.
Intellectual Property
We generally rely upon patent, copyright, trademark and trade secret
laws in the U.S. and in certain other countries, and agreements with our
employees and customers to establish and maintain our property rights in our
technology and products. However, any of our intellectual property rights could
be challenged, invalidated or circumvented. Third parties may claim that we are
infringing their intellectual property. Even if we do not believe that our
products are infringing third parties' intellectual property rights, the claims
can be time-consuming and costly to defend and divert management's attention and
resources away from our business. Claims of intellectual property infringement
might also require us to enter into costly royalty or license agreements. If we
cannot or do not license the infringed technology or substitute similar
technology from another source, our business could suffer.
Environmental
Some of our operations use substances regulated under various federal,
state and foreign laws governing the environment. It is our policy to apply
strict standards for environmental protection to sites inside and outside the
U.S., even when not subject to local government regulations. However, a failure
to comply with applicable standards or the accidental emission of or exposure to
hazardous materials could give rise to significant monetary liability. Also, the
imposition of new governmental standards or requirements could materially
increase our cost of operation.
Effect of International Political Considerations
Our international operations may be significantly influenced by
political, economic and regulatory conditions (including tariffs) in the
countries in which we conduct our operations.
Other
Other factors include costs and other effects of interest rate
increases; legal and administrative cases and proceedings, settlements,
judgments and investigations, claims, and changes in those items; adoption of
new, or revised accounting policies and practices and the application of such
policies and practices; the successful implementation of a new
enterprise-resource-planning system; business reorganizations or combinations;
loss of significant contract or customer; the euro conversion; the ability and
willingness of purchasers to substitute other products for the products that we
distribute; and pricing, purchasing, financing and promotional decisions by
intermediaries in the distribution channel.
The factors identified in this statement are believed to be important
factors (but not necessarily all of the important factors) that could cause
actual results to be materially different from those that may be expressed or
implied in any forward-looking statement made by, or on behalf, of the Company.
Other factors not discussed in this statement could also have material adverse
effects concerning forward-looking objectives or estimates. The Company assumes
no obligation to update the information included in this statement.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's business operations give rise to market risk exposure due
to changes in foreign exchange rates. To manage that risk effectively, the
Company enters into hedging transactions, according to established guidelines
and policies, that enable it to mitigate the adverse effects of this financial
market risk
The global nature of the Company's business requires active
participation in the foreign exchange markets. As a result of investments,
production facilities and other operations on a global scale, the Company has
assets, liabilities and cash flows in currencies other than the U.S. Dollar. The
primary objective of the Company's foreign-exchange risk management is to
minimize the impact of currency movements on intercompany transactions and
foreign raw-material imports. To achieve this objective, the Company hedges a
portion of estimated exposures using forward contracts. Main exposures are
related to transactions denominated in the British Pound, the Euro, Canadian
Dollar, Japanese Yen and Australian Dollar. The risk of these hedging
instruments is not material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on November 15, 2001. At
the meeting the following persons were elected to serve as company directors by
100% of the Class B Common Voting Stock until the next annual meeting of
shareholders and until their successors have been elected:
Richard A. Bemis
Robert C. Buchanan
Mary K. Bush
Frank W. Harris
Katherine M. Hudson
Frank R. Jarc
Peter J. Lettenberger
Gary E. Nei
Roger D. Peirce
Additionally on October 16, 2001, the Class B Common Voting
Shareholders unanimously consented to the Brady Corporation 2001 Omnibus
Incentive Stock Option Plan.
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PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
10.4 Form of Executive's Deferred Compensation Agreement,
as amended
10.5 Form of Director's Deferred Compensation Agreement,
as amended
10.26 Brady Corporation 2001 Omnibus Incentive Stock Plan
(b) Reports on Form 8-K.
The Company was not required to file and did not
file a report on Form 8-K during the quarter ended
January 31, 2002.
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Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNATURES
BRADY CORPORATION
Date: March 14, 2002 /s/ K. M. Hudson
--------------- ----------------
K. M. Hudson
President & Chief Executive Officer
Date: March 14, 2002 /s/ D.W. Schroeder
--------------- ------------------
D.W. Schroeder
Sr. Vice President & Chief Financial Officer
(Principal Accounting Officer)
18