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 January 31, 2006
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large
accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of February 28, 2006, there were outstanding 45,462,077 shares of Class A
Common Stock and 3,538,628 shares of Class B Common Stock. The Class B Common
Stock, all of which is held by affiliates 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 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 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 25
PART II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits 27
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
January 31, 2006 July 31, 2005*
---------------- --------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 50,742 $ 72,970
Short term investments -- 7,100
Accounts receivable, less allowance for losses ($3,820
and $3,726, respectively) 145,794 123,453
Inventories:
Finished products 42,706 38,827
Work-in-process 12,103 9,681
Raw materials and supplies 32,185 22,227
-------- --------
Total inventories 86,994 70,735
Prepaid expenses and other current assets 32,381 28,114
-------- --------
TOTAL CURRENT ASSETS 315,911 302,372
OTHER ASSETS:
Goodwill 403,794 332,369
Other intangible assets, net 87,554 71,647
Deferred income taxes 38,187 39,043
Other 7,903 6,305
-------- --------
TOTAL OTHER ASSETS 537,438 449,364
PROPERTY, PLANT AND EQUIPMENT:
Cost:
Land 6,520 6,388
Buildings and improvements 71,625 65,007
Machinery and equipment 167,981 157,093
Construction in progress 8,811 6,510
-------- --------
254,937 234,998
Less accumulated depreciation 144,483 136,587
-------- --------
NET PROPERTY, PLANT AND EQUIPMENT 110,454 98,411
-------- --------
TOTAL $963,803 $850,147
======== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 54,886 $ 52,696
Wages and amounts withheld from employees 38,026 49,620
Taxes, other than income taxes 5,761 4,815
Accrued income taxes 14,546 24,028
Other current liabilities 26,712 29,649
Short-term borrowings and current maturities on
long-term debt 155 4
-------- --------
TOTAL CURRENT LIABILITIES 140,086 160,812
LONG-TERM DEBT, LESS CURRENT MATURITIES 250,217 150,026
OTHER LIABILITIES 48,700 42,035
-------- --------
TOTAL LIABILITIES 439,003 352,873
STOCKHOLDERS' INVESTMENT:
Class A nonvoting common stock - Issued 45,881,743 and
45,877,543 shares, respectively and
outstanding 45,421,577 and 45,792,199 shares,
respectively 459 458
Class B voting common stock - Issued and outstanding
3,538,628 shares 35 35
Additional paid-in capital 100,160 99,029
Income retained in the business 421,622 382,880
Treasury stock - 460,166 and 85,344 shares,
respectively of Class A nonvoting common stock,
at cost (16,554) (1,575)
Accumulated other comprehensive income 20,865 17,497
Other (1,787) (1,050)
-------- --------
TOTAL STOCKHOLDERS' INVESTMENT 524,800 497,274
-------- --------
TOTAL $963,803 $850,147
======== ========
See Notes to Condensed Consolidated Financial Statements.
* Condensed from audited financial statements.
3
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
-------------------------------------------------------------------
Three Months Ended January 31, Six Months Ended January 31,
-------------------------------- --------------------------------
Percentage Percentage
2006 2005 Change 2006 2005 Change
-------- -------- ---------- -------- -------- ----------
Net sales $230,974 $196,216 17.7% $463,609 $396,635 16.9%
Cost of products sold 113,869 91,260 24.8% 222,513 186,154 19.5%
-------- -------- -------- --------
Gross margin 117,105 104,956 11.6% 241,096 210,481 14.5%
Operating expenses:
Research and development 6,829 6,099 12.0% 13,363 11,803 13.2%
Selling, general and administrative 79,000 67,923 16.3% 152,328 135,951 12.0%
-------- -------- -------- --------
Total operating expenses 85,829 74,022 16.0% 165,691 147,754 12.1%
Operating income 31,276 30,934 1.1% 75,405 62,727 20.2%
Other income and (expense):
Investment and other income - net 88 493 -82.2% 480 776 -38.1%
Interest expense (2,435) (2,037) 19.5% (4,424) (4,176) 5.9%
-------- -------- -------- --------
Income before income taxes 28,929 29,390 -1.6% 71,461 59,327 20.5%
Income taxes 7,675 8,811 -12.9% 20,009 18,391 8.8%
-------- -------- -------- --------
Net income $ 21,254 $ 20,579 3.3% $ 51,452 $ 40,936 25.7%
======== ======== ======== ========
Per Class A Nonvoting Common Share:
Basic net income $ 0.43 $ 0.42 2.4% $ 1.05 $ 0.84 25.0%
Diluted net income $ 0.43 $ 0.41 4.9% $ 1.03 $ 0.83 24.1%
Dividends $ 0.13 $ 0.11 18.2% $ 0.26 $ 0.22 18.2%
Per Class B Voting Common Share:
Basic net income $ 0.43 $ 0.42 2.4% $ 1.03 $ 0.82 25.6%
Diluted net income $ 0.43 $ 0.41 4.9% $ 1.02 $ 0.81 25.9%
Dividends $ 0.13 $ 0.11 18.2% $ 0.24 $ 0.20 20.0%
Weighted average common shares outstanding (In Thousands):
Basic 48,994 49,060 49,098 48,773
Diluted 49,813 49,989 49,891 49,584
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,
--------------------
2006 2005
--------- --------
Operating activities:
Net income $ 51,452 $ 40,936
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 14,554 13,253
Income tax benefit from the exercise of stock options -- 3,740
Deferred income taxes 712 1,492
Loss on sale or disposal of property, plant & equipment 45 470
Provision for losses on accounts receivable 623 618
Stock-based compensation expense 2,827 2,048
Changes in operating assets and liabilities (net of
effects of business acquisitions):
Accounts receivable (11,250) 888
Inventories (11,537) (7,151)
Prepaid expenses and other assets (2,959) (1,715)
Accounts payable and accrued expenses (17,512) (19,323)
Income taxes (10,127) 5,748
Other liabilities 3,970 2,732
--------- --------
Net cash provided by operating activities 20,798 43,736
Investing activities:
Acquisition of businesses, net of cash acquired (100,256) (34,428)
Purchases of short-term investments (3,800) (20,500)
Sales of short-term investments 10,900 22,300
Purchases of property, plant and equipment (17,341) (9,648)
Proceeds from sale of property, plant and equipment 66 262
Other (1,711) (2,364)
--------- --------
Net cash used in investing activities (112,142) (44,378)
Financing activities:
Payment of dividends (12,710) (10,473)
Proceeds from options exercised 6,467 12,655
Principal payments on debt (829) (37)
Net proceeds from revolving loan agreement 100,000 --
Purchase of treasury stock (27,233) --
Income tax benefit from the exercise of stock options 3,354 --
--------- --------
Net cash provided by financing activities 69,049 2,145
Effect of exchange rate changes on cash 67 696
--------- --------
Net (decrease) increase in cash and cash equivalents (22,228) 2,199
Cash and cash equivalents, beginning of period 72,970 68,788
--------- --------
Cash and cash equivalents, end of period $ 50,742 $ 70,987
========= ========
Supplemental disclosures:
Cash paid during the period for:
Interest, net of capitalized interest $ 3,907 $ 4,051
Income taxes, net of refunds 24,510 6,122
Acquisitions:
Fair value of assets acquired, net of cash $ 39,422 $ 25,938
Liabilities assumed (9,326) (15,013)
Goodwill 70,160 23,503
--------- --------
Net cash paid for acquisitions $ 100,256 $ 34,428
========= ========
See Notes to Condensed Consolidated Financial Statements.
5
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended January 31, 2006
(Unaudited)
NOTE A - Basis of Presentation
The condensed consolidated financial statements included herein have been
prepared by Brady Corporation and subsidiaries (the "Company" or "Brady")
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 adjustments,
necessary to present fairly the financial position of the Company as of January
31, 2006 and July 3l, 2005, and its results of operations for the three months
and six months ended January 31, 2006 and 2005, and its cash flows for the six
months ended January 31, 2006 and 2005. The condensed consolidated balance sheet
as of July 31, 2005 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 ("GAAP") 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 GAAP 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 GAAP 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, 2005.
Reclassifications - Certain prior period amounts have been reclassified to
conform with the current period presentation.
NOTE B - Goodwill and Intangible Assets
Changes in the carrying amount of goodwill for the six months ended January
31, 2006, are as follows (in thousands):
Americas Europe Asia Total
-------- ------- ------- --------
Balance as of July 31, 2005 $226,843 $73,544 $31,982 $332,369
Goodwill acquired during the period 61,847 6,286 2,027 70,160
Translation adjustments and other 548 194 523 1,265
-------- ------- ------- --------
Balance as of January 31, 2006 $289,238 $80,024 $34,532 $403,794
======== ======= ======= ========
Goodwill increased by $71,425,000 during the six months ended January 31,
2006, including an increase of $1,265,000 attributable to translation
adjustments, and net of adjustments to the preliminary allocation of the
purchase price of Technology Print Supplies Ltd. and its associate, Technology
Supply Media Co., Ltd. in Thailand, which were acquired on July 29, 2005. The
increase in goodwill of $70,160,000 for the six months ended January 31, 2006
was due to the allocation of the purchase price for the acquisitions of
STOPware, Inc., TruMed Technologies, Inc., J.A.M. Plastics Inc., and Personnel
Concepts in the United States, Texit Danmark AS and Texit Norge AS in Europe,
and QDP Thailand Co. Ltd. in Asia.
6
Other intangible assets include patents, trademarks, non-compete agreements
and other intangible assets with finite lives being amortized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." The net book value of these assets was as follows:
JANUARY 31, 2006 JULY 31, 2005
----------------------------------------------------- ----------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMORTIZATION GROSS AMORTIZATION GROSS
PERIOD CARRYING ACCUMULATED NET BOOK PERIOD CARRYING ACCUMULATED NET BOOK
(YEARS) AMOUNT AMORTIZATION VALUE (YEARS) AMOUNT AMORTIZATION VALUE
------------ ------------ ------------ ----------- ------------ ----------- ------------ -----------
Amortized other
intangible assets:
Patents ........... 16 $ 7,005,000 $ (4,809,000) $ 2,196,000 16 $ 6,830,000 $ (4,525,000) $ 2,305,000
Trademarks
and other ...... 9 1,550,000 (1,405,000) 145,000 10 1,370,000 (1,134,000) 236,000
Customer
relationships .. 8 70,184,000 (10,906,000) 59,278,000 8 51,211,000 (7,244,000) 43,967,000
Purchased
software ....... 4 3,524,000 (1,716,000) 1,808,000 5 3,148,000 (1,353,000) 1,795,000
Non-compete
agreements ..... 4 7,468,000 (3,961,000) 3,507,000 4 6,216,000 (3,212,000) 3,004,000
Unamortized other
intangible assets:
Trademarks ........ N/A 20,620,000 -- 20,620,000 N/A 20,340,000 -- 20,340,000
------------ ------------ ----------- ----------- ------------ -----------
Total ................ $110,351,000 $(22,797,000) $87,554,000 $89,115,000 $(17,468,000) $71,647,000
============ ============ =========== =========== ============ ===========
The increase in customer relationships for the six months ended January 31,
2006, relates to the acquisitions of STOPware, Inc., TruMed Technologies, Inc.,
J.A.M. Plastics, Inc. and Personnel Concepts in the United States, Texit Danmark
AS and Texit Norge AS in Europe, and QDP Thailand Co. Ltd. in Asia. The increase
in non-compete agreements for the same period is due primarily to the
acquisitions of TruMed Technologies, Inc., Texit Danmark AS, Texit Norge AS, and
QDP Thailand Co. Ltd. The value of goodwill and intangible assets in the
Condensed Consolidated Financial Statements at January 31, 2006 differs from the
value assigned to them in the preliminary allocation of purchase price due to
the effect of fluctuations in the exchange rates used to translate financial
statements into the United States Dollar.
Amortization expense of intangible assets was $5,329,000 and $4,084,000 for
the six-month periods ended January 31, 2006 and 2005, respectively. The
amortization over each of the next five fiscal years is projected to be
$10,908,000, $11,545,000, $11,015,000, $10,456,000 and $9,646,000 for the years
ending July 31, 2006, 2007, 2008, 2009 and 2010, respectively.
NOTE C - Comprehensive Income
Total comprehensive income, which was comprised of net income, foreign
currency adjustments and net unrealized gains and losses from cash flow hedges,
amounted to approximately $25,846,000 and $23,628,000 for the three months ended
January 31, 2006 and 2005, respectively and $54,820,000 and $48,073,000 for the
six months ended January 31, 2006 and 2005, respectively.
7
NOTE D - Net Income Per Common Share
Reconciliations of the numerator and denominator of the basic and diluted
per share computations for the Company's Class A and Class B common stock are
summarized as follows:
Three Months Ended Six Months Ended
January 31, January 31,
------------------ -----------------
(Dollars in thousands, except share amounts) 2006 2005 2006 2005
-------- ------- ------- -------
Numerator:
Net Income $21,254 $20,579 $51,452 $40,936
Numerator for basic and diluted
Class A net income per share 21,254 20,579 51,452 40,936
Less: Preferential dividends -- -- (758) (751)
Less: Preferential dividends on
dilutive stock options -- -- (16) (23)
------- ------- ------- -------
Numerator for basic and diluted
Class B net income per share $21,254 $20,579 $50,678 $40,162
======= ======= ======= =======
Denominator:
Denominator for basic net income per
share for both Class A and Class B 48,994 49,060 49,098 48,773
Plus: Effect of dilutive stock options 819 929 793 811
------- ------- ------- -------
Denominator for diluted net income per
share for both Class A and Class B 49,813 49,989 49,891 49,584
======= ======= ======= =======
Class A Non Voting Common Stock net income per share:
Basic $ 0.43 $ 0.42 $ 1.05 $ 0.84
Diluted $ 0.43 $ 0.41 $ 1.03 $ 0.83
Class B Voting Common Stock net income per share:
Basic $ 0.43 $ 0.42 $ 1.03 $ 0.82
Diluted $ 0.43 $ 0.41 $ 1.02 $ 0.81
Options to purchase 1,261,500 shares of Class A Common Stock were excluded
from the calculation of diluted net income per share for the three and six
months ended January 31, 2006, because their inclusion would have been
anti-dilutive, or in the case of performance stock awards, because the number of
shares ultimately issued is contingent on Company performance against metrics
established for the performance period.
Options to purchase 7,000 and 616,000 shares of Class A Common Stock were
not included in the computation of diluted net income per share for the three
and six months ended January 31, 2005, respectively, because the option exercise
price was greater than the average market price of the common shares and,
therefore, the effect would be anti-dilutive.
8
NOTE E - Acquisitions
During the six months ended January 31, 2006, the Company acquired
STOPware, Inc. (August 2005), Texit Danmark AS and Texit Norge AS (September
2005), TruMed, Inc. (October 2005), QDP Thailand Co., Ltd. ("QDPT") (October
2005), J.A.M. Plastics Inc. (December 2005) and Personnel Concepts (January
2006) for a total combined purchase price, net of cash purchased, of
$100,256,000 in cash.
A brief description of each company acquired during the six months ended
January 31, 2006 is included below:
- STOPware, Inc. is located in San Jose, California and is a
manufacturer of visitor-badging and lobby-security software used to
identify and track visitors.
- Texit AS is a manufacturer and distributor of wire markers and
cable-management products headquartered in Odense, Denmark, with
operations in Alesund, Norway.
- TruMed Technologies, Inc. is a converter of disposable products and
components for manufacturers in the medical device, diagnostic,
personal care and industrial markets and is located in Burnsville,
Minnesota.
- QDPT is located in Wangnoi, Ayutthaya, Thailand and designs and
manufactures high-precision components for the electronic, medical and
automotive industries, specializing in precision laminating, stamping
and contract assembly.
- J.A.M. Plastics, Inc. is located in Anaheim, California and
specializes in the sale and manufacture of security-related accessory
products including patented badge holders, lanyards and retractable
badge reels.
- Personnel Concepts is located in Pomona, California and is a direct
marketer of labor-law compliance posters and related products. The
company also offers consultative expertise on required communication
of federal and state minimum wages, HIPAA privacy regulations, and EEO
compliance, among other regulatory areas.
The allocation of the purchase price of each company acquired during the
six months ended January 31, 2006, with the exception of STOPware, Inc., is
preliminary pending the final valuation of intangible assets. The results of the
operations of each acquisition have been included since their respective dates
of acquisition in the accompanying condensed consolidated financial statements.
The combined purchase price resulted in the allocation (or preliminary
allocation) to intangible assets in the accompanying Condensed Consolidated
Balance Sheets as follows (in Thousands):
January 31, 2006
----------------
Goodwill $70,160
Customer relationships 18,458
Non-compete agreements 808
Purchased software 378
Trademarks 221
Other 176
-------
Total $90,201
The purchase agreement for Texit AS includes a provision for a contingent
payment of approximately $800,000 that has not been accrued as a liability in
the accompanying condensed consolidated financial statements. Payment of the
additional consideration is contingent upon meeting certain performance
conditions.
9
The purchase agreement for QDPT includes an earn-out provision for a
contingent payment of between $400,000 and $2,250,000 that has not been accrued
as a liability in the accompanying condensed consolidated financial statements.
Payment of the additional consideration is contingent upon meeting certain
performance conditions. The purchase agreement also includes a holdback amount
of $310,000, which is included as a liability in the accompanying condensed
consolidated financial statements.
The purchase agreement for STOPware, Inc. includes an earn-out provision
under which the Company is required to pay additional consideration of up to a
maximum of $2,000,000 if STOPware, Inc. achieves certain performance targets for
the fiscal years ending July 31, 2006 and July 31, 2007. The contingent
consideration has not been accrued as a liability in the accompanying condensed
consolidated financial statements as of January 31, 2006.
As of January 31, 2006, the allocation of the purchase price of Signs and
Labels Ltd. in England and Print Supplies, Ltd., and its associate, Technology
and Supply Media Co., Ltd. in Thailand remained preliminary pending the
determination of the final purchase price and the final valuation of intangible
assets. These companies were purchased in the fourth quarter of fiscal 2005.
NOTE F - Segment Information
The Company's reportable segments are geographical regions that are each
managed separately. The Company has three reportable segments: Americas, Europe
and Asia. Following is a summary of segment information for the three and six
months ended January 31, 2006 and 2005:
Corporate and
(Dollars in Thousands) Americas Europe Asia Subtotals Eliminations Totals
-------- -------- ------- --------- ------------- --------
Three months ended January 31, 2006:
Revenues from external customers $109,951 $ 76,284 $44,739 $230,974 $ -- $230,974
Intersegment revenues 14,221 934 1,803 16,958 (16,958) --
Profit (loss) 24,969 19,989 11,717 56,675 (2,631) 54,044
Three months ended January 31, 2005:
Revenues from external customers $ 95,255 $ 70,886 $30,075 $196,216 $ -- $196,216
Intersegment revenues 11,220 637 810 $ 12,667 (12,667) --
Profit (loss) 20,431 21,601 8,709 $ 50,741 (585) 50,156
Six months ended January 31, 2006:
Revenues from external customers $226,010 $150,046 $87,553 $463,609 $ -- $463,609
Intersegment revenues 30,408 2,147 3,814 36,369 (36,369) --
Profit (loss) 57,163 40,767 24,727 122,657 (5,017) 117,640
Six months ended January 31, 2005:
Revenues from external customers $200,704 $135,413 $60,518 $396,635 $ -- $396,635
Intersegment revenues 21,803 1,302 2,025 25,130 (25,130) --
Profit (loss) 45,811 39,733 17,619 103,163 (2,010) 101,153
10
Following is a reconciliation of segment profit to income before income
taxes for the three and six months ended January 31, 2006 and 2005:
Three Months Ended Six Months Ended
January 31, January 31,
------------------- -------------------
(Dollars in thousands) 2006 2005 2006 2005
-------- -------- -------- --------
Total profit from reportable segments $ 56,675 $ 50,741 $122,657 $103,163
Corporate and eliminations (2,631) (585) (5,017) (2,010)
Unallocated amounts:
Administrative costs (22,279) (18,637) (40,938) (36,238)
Interest-net (2,239) (1,821) (3,910) (3,646)
Foreign exchange (75) 276 61 246
Other (522) (584) (1,392) (2,188)
-------- -------- -------- --------
Income before income taxes 28,929 29,390 71,461 59,327
Income taxes (7,675) (8,811) (20,009) (18,391)
-------- -------- -------- --------
Net income $ 21,254 $ 20,579 $ 51,452 $ 40,936
======== ======== ======== ========
NOTE G - Stock-Based Compensation
The Company has an incentive stock plan under which the Board of Directors
may grant non-qualified stock options to employees. Additionally, the Company
has a non-qualified stock option plan for non-employee directors under which
shares of Class A Common Stock are available for grant. The options have an
exercise price equal to the fair market value of the underlying stock at the
date of grant and vest ratably over a three-year period, with one-third becoming
exercisable one year after the grant date and one-third additional in each of
the succeeding two years. Options issued under these plans, referred to herein
as "service-based" awards, generally expire 10 years from the date of grant.
During the fiscal years ended July 31, 2004, 2005 and 2006, 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. These options, referred to herein as "performance-based"
awards, expire 5 years from the date of grant.
The Company has 11,550,000 shares of Class A Common Stock authorized for
issuance upon exercise of non-qualified stock options or restricted stock under
various incentive stock plans as of January 31, 2006. The Company uses treasury
stock or will issue new common stock to deliver shares under these plans.
Effective August 1, 2005, the Company adopted SFAS No. 123(R), "Share-Based
Payment". In accordance with this standard, the Company recognizes the
compensation cost of all share-based awards on a straight-line basis over the
vesting period of the award. Total stock compensation expense recognized by the
Company during the three and six months ended January 31, 2006, was $1,903,000
($1,161,000 net of taxes) and $2,827,000 ($1,724,000 net of taxes),
respectively. The Company expects that total stock compensation expense for the
year ending July 31, 2006 will be approximately $5,800,000 on a pre-tax basis.
As of January 31, 2006, total unrecognized compensation cost related to
share-based compensation awards was approximately $12,400,000, net of estimated
forfeitures, which the Company expects to recognize over a weighted-average
period of approximately 2.1 years.
The Company adopted the fair value recognition provisions of SFAS No.
123(R), using the modified-prospective-transition method. Under that transition
method, compensation cost recognized in fiscal 2006 includes: (a) compensation
cost for all share-based payments granted prior to, but not yet vested as of
August 1, 2005, based on the grant date fair value estimated in accordance with
the original provisions of SFAS No. 123, and (b) compensation cost for all
share-based payments granted subsequent to August 1, 2005, based on the
grant-date fair value estimated in accordance with the provisions of SFAS No.
123(R). Results for prior periods have not been restated.
11
Prior to August 1, 2005, the Company accounted for employee stock-based
compensation under the intrinsic value method prescribed by Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees." Under APB No. 25, no employee stock option based compensation
expense was recorded in the income statement prior to August 1, 2005 for the
time-based options. For performance-based options, the Company recorded
compensation expense for changes in the market value of the underlying common
stock under APB No. 25. Total stock compensation expense recognized by the
Company during the three and six months ended January 31, 2005 was $775,000
($465,000 net of taxes) and $1,887,000 ($1,132,000 net of taxes), respectively.
The compensation cost for this period included expense for both performance
stock options and restricted stock.
The effect of adopting SFAS 123(R) is not significant to the financial
statements due to the accounting treatment for performance options. Under APB
No. 25, performance options require variable accounting and the amount expensed
in the income statement is dependent on the stock price at the end of the
period. If the Company had continued to account for share-based compensation
under APB No. 25, the compensation expense charged to the income statement
related to performance options would have been similar to the total stock-based
compensation expense charged to the income statement under SFAS 123(R).
Had compensation cost for all options granted prior to August 1, 2005 been
determined based on the fair value at grant date consistent with SFAS No.
123(R), the Company's net income and income per share would have been as follows
for the three and six months ended January 31, 2005 (in thousands, except per
share amounts):
Three Months Ended Six Months Ended
(In thousands, except per share amounts) January 31, 2005 January 31, 2005
------------------ ----------------
Net earnings:
As reported $20,579 $40,936
Stock-based compensation expense
recorded, net of tax 465 1,132
Pro forma expense, net of tax (763) (1,267)
------- -------
Pro forma $20,281 $40,801
======= =======
Net earnings per class A common share
Basic:
As reported $ 0.42 $ 0.84
Pro forma adjustments (0.01) 0.00
------- -------
Pro forma $ 0.41 $ 0.84
======= =======
Diluted:
As reported $ 0.41 $ 0.83
Pro forma adjustments (0.01) 0.00
------- -------
Pro forma $ 0.40 $ 0.83
======= =======
Net earnings per class B common share
Basic:
As reported $ 0.42 $ 0.82
Pro forma adjustments (0.01) 0.00
------- -------
Pro forma $ 0.41 $ 0.82
======= =======
Diluted:
As reported $ 0.41 $ 0.81
Pro forma adjustments (0.01) 0.00
------- -------
Pro forma $ 0.40 $ 0.81
======= =======
12
The Company has estimated the fair value of its performance-based option
awards granted after August 1, 2005 using the Black-Scholes option valuation
model. The assumptions used in the Black-Scholes valuation model are reflected
in the following table:
Black-Scholes Option Valuation Performance-based options Service-based options
Assumptions at January 31, 2006 at January 31, 2006
--------------------------------- ------------------------- ---------------------
Expected term (in years) 3.39 5.72
Expected volatility 31.10% 34.56%
Expected dividend yield 1.50% 1.52%
Risk-free interest rate 4.09% 4.50%
Weighted-average Market value of
underlying stock at grant date $33.89 $37.6393
Weighted-average Exercise price $33.89 $37.6393
Weighted-average Fair value of
options granted during the period $ 8.34 $ 13.10
The total fair value of stock options vested during the six months ended
January 31, 2006 and 2005 was approximately $3,100,000 for each period.
The Company uses historical data regarding stock option exercise behaviors
to estimate the expected term of options granted based on the period of time
that options granted are expected to be outstanding. Expected volatilities are
based on the historical volatility of the Company's stock. The expected dividend
yield is based on the Company's historical dividend payments. The risk-free
interest rate is based on the U.S. Treasury yield curve in effect on the grant
date for the length of time corresponding to the expected term of the option.
The market value is obtained by taking the average of the high and the low stock
price on the date of grant.
A summary of stock option activity under the Company's share-based
compensation plans for the six months ended January 31, 2006 is presented below:
Weighted-Average Aggregate
Weighted-Average Remaining Contractual Intrinsic Value
Options Shares (000) Exercise Price Term (Years) (000)
------- ------------ ---------------- --------------------- ---------------
Outstanding at July 31, 2005 3,529 $18.41
New grants 914 $36.30
Exercised (436) $15.04
Forfeited or expired (27) $21.42
-----
Outstanding at January 31, 2006 3,980 $22.86 7.5 $67,290
===== =======
Exercisable at January 31, 2006 1,984 $17.13 6.1 $44,930
===== =======
The weighted-average grant-date fair value of options granted during the
six months ended January 31, 2006 and 2005, was $11.40 and $6.95, respectively.
The total intrinsic value of options exercised during the six months ended
January 31, 2006 and 2005, based upon the average market price during the
period, was approximately $9,813,000 and $10,700,000, respectively.
13
NOTE H - Debt
On January 19, 2006, the Company's unsecured $125,000,000 multi-currency
revolving loan agreement was amended to increase the available amount to
$200,000,000. Under the five-year agreement, which has a final maturity date of
March 31, 2009, the Company has the option to use either a base interest rate
(based upon the higher of the federal funds rate plus one-half of 1% or the
prime rate at Bank of America) or a Eurocurrency interest rate (at the LIBOR
rate plus margin). A commitment fee is payable on the unused portion. The
agreement requires the Company to maintain certain financial covenants. As of
January 31, 2006, the Company was in compliance with the covenants of the
agreement. The agreement restricts the amount of certain types of payments,
including dividends, which can be made annually to $25,000,000 plus 50% of the
consolidated net income for the prior year. The Company believes that, based on
historic dividend practice, this restriction would not affect its ability to
follow a similar dividend practice in the future. As of January 31, 2006, there
was $100,000,000 of outstanding borrowings on the five-year revolving loan
agreement.
NOTE I - Stockholders' Equity
In September 2005, the Company announced that the Board of Directors of
Brady Corporation approved a share repurchase program for up to 800,000 shares
of the Company's non-voting Class A Common Stock during fiscal 2006. The share
repurchase plan may be implemented by purchasing shares on the open market or in
privately negotiated transactions, with repurchased shares available for use in
connection with the Company's Stock Option Plan and for other corporate
purposes. During the six months ended January 31, 2006, the Company completed
the repurchase of all 800,000 shares of its Class A Common Stock for $26,495,000
under the repurchase plan approved by the Board of Directors.
Additional treasury shares are held by the participants of the Company's
deferred compensation plan. During the six months ended January 31, 2006, the
total cost of treasury shares purchased by the deferred compensation plan was
$738,000. The net cost of Brady Corporation Class A common shares held in the
deferred compensation plan and accounted for as treasury shares as of
January 31, 2006 was $1,787,000.
NOTE J - Employee Benefit Plans
The Company provides postretirement medical, dental and vision benefits
(the "Plan") for all regular full and part-time domestic employees (including
spouses) who retire on or after attainment of age 55 with 15 years of credited
service. Credited service begins accruing at the later of age 40 or date of
hire. All active employees first eligible to retire after July 31, 1992, are
covered by an unfunded, contributory postretirement healthcare plan where
employer contributions will not exceed a defined dollar benefit amount,
regardless of the cost of the program. Employer contributions to the plan are
based on the employee's age and service at retirement.
The Company accounts for postretirement benefits other than pensions in
accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions." The Company funds benefit costs on a pay-as-you-go basis.
The components of net periodic benefit cost and the amount that the Company
expects to fund in fiscal 2006 are expected to be consistent with those reported
thereto in Note 3 to the consolidated financial statements included in the
Company's latest annual report on Form 10-K for the year ended July 31, 2005.
NOTE K - Subsequent Events
On February 9, 2006, the Company announced that it acquired GE IDenticard
Systems, Inc., based in Lancaster, Pennsylvania, and its Canadian affiliate GE
Identicam located in Markham, Ontario. IDenticard is a market leader in personal
identification, access control and consumable identification badges. Founded in
1970, IDenticard and Identicam had combined sales of approximately $33 million
in 2005.
14
On February 16, 2006, the Company announced the completion of a private
placement of $200 million in ten-year notes at 5.3 percent to institutional
investors. The notes will be amortized in equal installments over 7 years,
beginning in 2010. Brady intends to use the net proceeds of the offering to
finance previously announced acquisitions and future acquisitions, and for
general corporate purposes. A portion of the proceeds was used to pay off the
outstanding balance on the revolver. The sale was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Section 4(2) of the Act.
The notes will not be registered for resale and may not be resold absent such
registration or an applicable exemption from the registration requirements of
the Securities Act and applicable state securities laws.
On March 2, 2006, Brady announced that it acquired Accidental Health &
Safety Pty. Ltd., and its business unit Trafalgar First Aid Pty. Ltd. The
companies are suppliers and distributors of customized first-aid kits and
supplies, and related safety products and signage for commercial enterprises in
the Australian market and are headquartered in Glendenning, New South Wales,
Australia.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Brady is an international manufacturer and marketer of identification
solutions and specialty materials which identify and protect premises, products,
and people. Its products include high-performance labels and signs, printing
systems and software, label-application and data-collection systems, safety
devices and precision die-cut materials. Founded in 1914, the Company serves
customers in electronics, telecommunications, manufacturing, electrical,
construction, laboratory, education, governmental, public utility, computer,
transportation and a variety of other industries. The Company manufactures and
sells products domestically and internationally through multiple channels
including direct sales, distributor sales, mail-order catalogs, telemarketing,
retail, and electronic access through the Internet. The Company operates
manufacturing facilities and/or sales offices in Australia, Belgium, Brazil,
Canada, China, Denmark, England, France, Germany, Hong Kong, Hungary, India,
Italy, Japan, Korea, Malaysia, Mexico, the Netherlands, Norway, the Philippines,
Singapore, Slovakia, Spain, Sweden, Taiwan, Thailand and the United States. The
Company believes that its reputation for innovation, commitment to quality and
service, and dedicated employees have made it a world leader in the markets it
serves.
Sales for the quarter ended January 31, 2006, increased 17.7% to
$230,974,000, compared to $196,216,000 in the same period last year. Base sales
increased 9.5% compared to the same period in the prior year and acquisitions
added 11.1%, while the effect of fluctuations in the exchange rates used to
translate financial results into the United States Dollar reduced sales by 2.9%.
The increase in base sales for the quarter ended January 31, 2006, was largely
driven by a 39.4% increase in base sales in Asia. Within Asia, China base sales
alone grew 78.8% in the quarter due to seasonally strong demand for consumer
electronics. Additionally, the Company continues to experience solid growth in
many of its mature markets in the Americas with base growth of 5.2%. Net income
for the quarter ended January 31, 2006, was $21,254,000 or $0.43 per diluted
Class A Common Share, which was up 3.3% from $20,579,000 or $0.41 per share
reported in the second quarter of last fiscal year. Net income growth, driven by
the increased sales volume, increased less than sales due to the timing of
selling, general and administrative items, lower profitability of the majority
of recent acquisitions, changes in the sales mix and price pressure in the OEM
electronics market. Acquired companies have been less profitable initially
because they require some time to make the changes necessary to achieve the same
level of profitability of our existing businesses.
Sales for the six months ended January 31, 2006, increased 16.9% to
$463,609,000, compared to $396,635,000 in the same period of fiscal 2005. Base
sales were up 8.2% for the period compared to the same period in fiscal 2005.
Acquisitions added 9.6% to sales and the effect of exchange rates reduced sales
by 0.9%. The base sales increase for the six-month period ended January 31,
2006, was driven by seasonal demand in Asia as noted above and by strong
performance in electrical and original equipment manufacturer ("OEM") markets in
the Americas. Net income for the six-month period was $51,452,000 or $1.03 per
diluted Class A Common Share, up 25.7% from $40,936,000 or $0.83 per share
reported in the same period of last year.
On February 17, 2006, the Company increased its fiscal 2006 guidance range
to $980,000,000 to $990,000,000 in sales and net income of $100,000,000 to
$103,000,000, and diluted earnings per share of $2.00 to $2.06 for the full
fiscal year ending July 31, 2006, up from previous guidance of sales of
$910,000,000 to $920,000,000, net income of $98,000,000 to $100,000,000 and
diluted earnings per share of $1.96 to $2.00. The Company expects capital
expenditures to be approximately $26,000,000 and depreciation and amortization
to be approximately $33,000,000 for the full fiscal year ending July 31, 2006.
Management believes this guidance is justified based on the Company's strong
performance in the first six months of fiscal 2006 and acquisitions made this
fiscal year, but notes that this guidance should be viewed in light of the
various factors that could affect performance described in or incorporated by
reference into this report, as well as the following factors:
- Over the last two years, the strength and seasonality of the
Company's OEM electronics business has somewhat shifted the total
Company seasonality trend and this trend has been factored into
the Company's guidance for the full year.
16
- The Company continues to experience pressure from suppliers who
are attempting to raise their prices as well as customers seeking
cost decreases.
- The Company's business operations and those of its customers and
suppliers give rise to market risk exposure due to changes in
foreign exchange rates. Fluctuations in the United States Dollar
relative to other currencies may introduce some volatility with
respect to the Company's sales and net income guidance.
- Management remains cautious regarding sales and net income growth
in Europe, due to the uncertain economic environment in the
region.
- The Company continues its preparations for compliance with the
European directive on Waste Electrical and Electronics Equipment
(WEEE). The new directive requires that by July 2006 all
electronic and electrical equipment be free of substances as
defined in the new Restrictions on the Use of Hazardous
Substances (RoHS) directive. The Company could incur additional
costs of compliance or loss of sales, based on availability of
compliant subcomponents and the finalization of implementing
regulations within each of the EU member countries.
Looking long term, the Company intends to continue its growth strategies of
developing proprietary products; making acquisitions that expand its product
range, geographic presence, 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 additional 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, 2005.
Results of Operations
As noted in the overview section above, net sales were 17.7% higher for the
three months ended January 31, 2006 than the same quarter of the previous year.
The increase was comprised of an increase of 9.5% attributed to base sales, a
decrease of 2.9% due to the effect of currencies on sales, and an increase of
11.1% due to the acquisitions of Electromark, J.A.M. Plastics, Inc., Personnel
Concepts, STOPware, Inc., and TruMed Technologies, Inc. in the United States,
Signs & Labels Ltd. in the United Kingdom, Texit Danmark AS in Denmark, Texit
Norge AS in Norway and QDP Thailand and Technology Print Supplies Ltd and its
associate, Technology Supply Media Co., Ltd. in Thailand. For the six months
ended January 31, 2006, sales were 16.9% higher than the same period of the
previous year. The increase was comprised of an increase of 8.2% attributed to
base sales, a decrease of 0.9% due to the effect of currencies on sales, and an
increase of 9.6% due to the acquisitions listed above.
Gross margin as a percentage of sales decreased from 53.5% to 50.7% for the
quarter and from 53.1% to 52.0% for the six-month period ended January 31, 2006,
compared to the same periods of the previous year. The gross margin decline was
due to a combination of the following factors:
- The Company's product mix is changing, with the faster growing
OEM electronics business reducing gross margins overall. While
gross margins are lower in this business, selling, general, and
administrative expenses are lower as well.
- Acquired companies require some time to make the changes required
to achieve the same level of profitability of our existing
businesses.
- The Company's investment in manufacturing operations in
Bratislava, Slovakia is ahead of schedule and represents a
significant investment in cost of goods sold.
- The Company experienced pressure on gross margins in the OEM
electronics business in Asia, specifically China, and management
has focused plans in place to stabilize margins in the region.
17
Selling, general and administrative ("SG&A") expenses as a percentage of
sales decreased from 34.6% to 34.2% for the quarter and from 34.3% to 32.9% for
the six months ended January 31, 2006, compared to the same periods of the prior
year. The decrease in SG&A as a percentage of sales is primarily due to an
increase in the mix of business attributable to the OEM electronics business in
Asia, which has lower SG&A expenses, offset by lower gross margins. Lower SG&A
associated with acquired businesses also contributed to the decrease in SG&A as
a percentage of sales. In absolute dollars, SG&A increased $11,077,000 for the
quarter and $16,377,000 for the six months ended January 31, 2006, compared to
the same periods in the prior year, primarily due to the addition of SG&A
expenses associated with acquired businesses and increased sales volume.
Research and development expenses as a percentage of sales decreased
slightly from 3.1% to 3.0% for the quarter and from 3.0% to 2.9% for the six
months ended January 31, 2006, compared to the same periods of the previous
year. In dollars, research and development expenses increased from $6,099,000 to
$6,829,000 for the quarter and from $11,803,000 to $13,363,000 for the six
months ended January 31, 2006, compared to the same periods in the prior year.
New product development continues to be a major focus of the Brady management
team.
Interest expense increased from $2,037,000 to $2,435,000 for the quarter
and from $4,176,000 to $4,424,000 for the six months ended January 31, 2006,
compared to the same periods in the prior year. The increase in interest expense
was due to larger outstanding borrowings on the Company's line of credit during
the three months and six months ended January 31, 2006, compared to the same
periods in 2005.
The Company's effective tax rate was 28.0% for the six months ended January
31, 2006, compared to 31.0% for the same period of the previous year. The
improvement in the effective rate was due to a continuing shift in a portion of
the Company's pre-tax income to lower tax rate countries.
Net income as a percentage of sales decreased from 10.5% to 9.2% for the
quarter and increased from 10.3% to 11.1% for the six months ended January 31,
2006, compared to the same periods in the prior year. The decrease as a
percentage of sales for the quarter was due to the lower gross margins discussed
above, which were mitigated by lower SG&A and tax rates. The increase for the
six-month period was due to strong margin performance in the Americas region
earlier in the Company's current fiscal year.
18
Business Segment Operating Results
Management of the Company evaluates results based on the following geographic
regions: Americas, Europe, and Asia.
Corporate and
(Dollars in Thousands) Americas Europe Asia Subtotals Eliminations Total
-------- -------- ------- --------- ------------- --------
SALES TO EXTERNAL CUSTOMERS
Three months ended:
January 31, 2006 $109,951 $ 76,284 $44,739 $230,974 -- $230,974
January 31, 2005 95,255 70,886 30,075 196,216 -- 196,216
Six months ended:
January 31, 2006 $226,010 $150,046 $87,553 $463,609 -- $463,609
January 31, 2005 200,704 135,413 60,518 396,635 -- 396,635
SALES GROWTH INFORMATION
Three months ended January 31, 2006:
Base 5.2% 2.5% 39.4% 9.5% -- 9.5%
Currency 1.3% -9.4% -0.7% -2.9% -- -2.9%
Acquisitions 8.9% 14.5% 10.1% 11.1% -- 11.1%
Total 15.4% 7.6% 48.8% 17.7% -- 17.7%
Six months ended January 31, 2006:
Base 4.4% 1.5% 35.8% 8.2% -- 8.2%
Currency 1.6% -5.5% 1.4% -0.9% -- -0.9%
Acquisitions 6.6% 14.8% 7.5% 9.6% -- 9.6%
Total 12.6% 10.8% 44.7% 16.9% -- 16.9%
SEGMENT PROFIT (LOSS)
Three months ended:
January 31, 2006 $ 24,969 $ 19,989 $11,717 $ 56,675 ($2,631) $ 54,044
January 31, 2005 20,431 21,601 8,709 50,741 ($585) 50,156
Percentage increase (decrease) 22.2% -7.5% 34.5% 11.7% 349.7% 7.8%
Six months ended:
January 31, 2006 $ 57,163 $ 40,767 $24,727 $122,657 ($5,017) $117,640
January 31, 2005 45,811 39,733 17,619 103,163 ($2,010) 101,153
Percentage increase 24.8% 2.6% 40.3% 18.9% 149.6% 16.3%
19
NET INCOME RECONCILIATION (in thousands)
Three months ended: Six months ended:
------------------------- -------------------------
January 31, January 31, January 31, January 31,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Total profit for reportable segments $ 56,675 $ 50,741 $122,657 $103,163
Corporate and eliminations (2,631) (585) (5,017) (2,010)
Unallocated amounts:
Administrative costs (22,279) (18,637) (40,938) (36,238)
Interest - net (2,239) (1,821) (3,910) (3,646)
Foreign exchange (75) 276 61 246
Other (522) (584) (1,392) (2,188)
-------- -------- -------- --------
Income before income taxes 28,929 29,390 71,461 59,327
Income taxes (7,675) (8,811) (20,009) (18,391)
-------- -------- -------- --------
Net income $ 21,254 $ 20,579 $ 51,452 $ 40,936
======== ======== ======== ========
The Company evaluates regional performance using sales and segment profit.
Allocation of resources is based on a range of financial and strategic factors.
Segment profit or loss does not include certain administrative costs, interest,
foreign exchange gain or loss, other expenses not allocated to a segment and
income taxes.
Americas:
Americas sales increased 15.4% for the quarter and 12.6% for the six months
ended January 31, 2006, compared to the same periods in the prior year. Base
sales in local currency increased 5.2% in the quarter and 4.4% in the six-month
period. 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 1.3% in the quarter and 1.6% for the six-month
period. Sales in the region were also aided by the acquisitions of Electromark,
J.A.M. Plastics, Inc., Personnel Concepts, STOPware, Inc., and TruMed
Technologies, Inc., which increased sales by 8.9% for the quarter and 6.6% for
the six-month period. Base sales increased in both the Brady brand business and
the direct marketing business. The Company is experiencing broad-based growth in
the majority of its businesses and countries in this region. Canada and Brazil
both continue to grow steadily over the prior year. Base sales in the U.S.
increased modestly due to growth in the Brady brand business, with sales to the
electrical and OEM markets being particularly strong.
Segment profit for the region increased 22.2% to $24,969,000 from
$20,431,000 for the quarter and 24.8% to $57,163,000 from $45,811,000 for the
six months ended January 31, 2006, compared to the same periods in the prior
year. While the region continues to experience cost increases on many of its
materials and utility costs, the impact on segment profit of the increase in
volume has more than offset these cost increases. As a result, segment profit
growth continues to outpace sales growth in this region.
20
Europe:
Europe sales increased 7.6% for the quarter and 10.8% for the six months
ended January 31, 2006, compared to the same periods in the prior year. Base
sales in local currency increased 2.5% in the quarter and 1.5% in the six-month
period. Sales were negatively affected by fluctuations in the exchange rates
used to translate financial results into United States currency, which decreased
sales within the region by 9.4% in the quarter and 5.5% in the six-month period.
The acquisition of Signs & Labels in the United Kingdom, Texit Danmark AS in
Denmark, and Texit Norge AS in Norway increased sales by 14.5% for the quarter
and 14.8% for the six-month period.
The increase in base sales in the region for both the quarter and the
six-month period was driven by modest growth in the direct marketing business
in excess of GDP as a result of continuing to add new customers and expand
product offerings. This growth was partially offset by a weakening in the UK
manufacturing sector and the planned exit of certain unprofitable Brady brand
businesses in the region.
Segment profit for the region decreased 7.5% to $19,989,000 from
$21,601,000 for the quarter and increased 2.6% to $40,767,000 from $39,733,000
for the six months ended January 31, 2006, compared to the same periods of the
prior year. The decrease for the quarter was primarily due to the impact of the
stronger U.S. dollar and the profit dilution caused by the start-up of business
in Slovakia. Segment profit for the six-month period reflects the benefit of
acquisitions and increased base profitability offset by investment in Slovakia.
The Slovakia operations started manufacturing in the second quarter of
fiscal 2006, supplying subcontract customers in the mobile telephone industry.
Production capacity will be increased over the next two quarters.
Asia:
Asia sales increased 48.8% for the quarter and 44.7% for the six months
ended January 31, 2006, compared to the same periods in the prior year. Base
sales in local currency increased 39.4% in the quarter and 35.8% in the
six-month period compared to the same periods last year. Sales were also
affected by fluctuations in the exchange rates used to translate financial
results into United States currency, which decreased sales within the region by
0.7% in the quarter and increased sales in the region by 1.4% for the six-month
period. The acquisitions of QDP Thailand, Technology Print Supply and Technology
Supply Media in Thailand increased sales by 10.1% for the quarter and 7.5% for
the six-month period. The base sales increase is largely attributable to sales
in China, which were very strong as expected in response to the seasonal
build-up of consumer electronics manufacturers. Additionally, the Australia
direct marketing and safety businesses continued their strong growth over the
prior year.
Segment profit for the region was up 34.5% to $11,717,000 from $8,709,000
for the quarter and 40.3% to $24,727,000 from $17,619,000 for the six months
ended January 31, 2006, compared to the same periods in the prior year. The
increase in profit was due primarily to increased sales volume. The Company
continues to face significant pressure on gross margins due to increases in raw
material prices from suppliers, expectations of quarterly price reductions from
our customers, increased levels of inventories to support multiple manufacturing
sites and the impact of third-party hubs.
The Company continues to expand its management and sales teams in India and
has begun the process of establishing a manufacturing presence in the Indian
market. The Company expects to have an operational manufacturing facility in
India by the first half of its next fiscal year. Brady has received positive
signals from key customers indicating that its presence in India is important to
their growth plans.
21
Financial Condition
The Company's current ratio as of January 31, 2006, was 2.3 compared to 1.9
at July 31, 2005. Cash and cash equivalents were $50,742,000 at January 31,
2006, compared to $72,970,000 at July 31, 2005. Additionally, there were no
short-term investments outstanding at January 31, 2006, compared to $7,100,000
outstanding at July 31, 2005, consisting of investments in auction rate
securities. Working capital increased $34,265,000 during the six months ended
January 31, 2006, to $175,825,000 from $141,560,000 at July 31, 2005. Accounts
receivable increased $22,341,000 for the six months due to increased sales
volume, acquisitions and foreign currency translation. Inventories increased
$16,259,000 for the six-month period, due to acquisitions and planned increases
in inventory levels in Asia to meet seasonal demand and in North America to meet
demand for sales initiatives. The net decrease in current liabilities was
$20,726,000 for the six-month period. The decrease was composed of a significant
decrease in accrued wages due to the payment of fiscal 2005 year-end bonuses in
the six-month period related to the year ended July 31, 2005. This decrease was
partially offset by increases in accrued income taxes due to improved
profitability and accrued liabilities associated with interest and retirement
plans.
Cash flow from operating activities totaled $20,798,000 for the six months
ended January 31, 2006, compared to $43,736,000 for the same period last year.
The decrease was the result of an increase in accounts receivable balances,
increased inventories, a decrease in accrued liabilities related to the payment
of incentives, and a decrease in income taxes payable due to foreign and
domestic tax payments. These decreases were partially offset by a $10,516,000
increase in net income. In accordance with the adoption of SFAS No. 123(R),
"Share Based Payment" on August 1, 2005, the Company has classified the income
tax benefit from the exercise of stock options subsequent to adoption as a
financing cash inflow. Prior to adoption, this tax benefit was recorded in cash
flows from operations.
The acquisitions of businesses used $100,256,000 of cash for the six months
ended January 31, 2006. Capital expenditures were $17,341,000 for the six months
ended January 31, 2006, compared to $9,648,000 in the same period last year,
driven by the expansion of the Company's facility in Milwaukee, Wisconsin,
continued expansion in Asia, and a new facility in Slovakia. Net cash provided
by financing activities was $69,049,000 for the six months ended January 31,
2006, due to additional borrowings under the revolving loan agreement made in
conjunction with recent acquisitions, cash proceeds from the exercise of stock
options, and the income tax benefit from the exercise of stock options,
partially offset by the repurchase of stock and the payment of dividends. Net
cash provided in financing activities for the same period last year was
$2,145,000 related to the issuance of common stock upon the exercise of stock
options, partially offset by payment of dividends to the Company's stockholders.
On March 31, 2004, the Company entered into an unsecured $125,000,000
multi-currency revolving loan agreement with a group of five banks. Under the
five-year agreement, which has a final maturity date of March 31, 2009, the
Company has the option to use either a base interest rate (based upon the higher
of the federal funds rate plus one-half of 1% or the prime rate at Bank of
America) or a Eurocurrency interest rate (at the LIBOR rate plus margin). A
commitment fee is payable on the unused portion. The agreement requires the
Company to maintain certain financial covenants. As of January 31, 2006, the
Company was in compliance with the covenants of the agreement. The agreement
restricts the amount of certain types of payments, including dividends, which
can be made annually to $25,000,000 plus 50% of the consolidated net income for
the prior year. The Company believes that, based on historic dividend practice,
this restriction would not affect its ability to follow a similar dividend
practice in the future. On January 19, 2006, the agreement was amended to
increase the available amount to $200,000,000. As of January 31, 2006, there was
$100,000,000 of outstanding borrowings on the five-year revolving loan
agreement.
22
On June 30, 2004, the Company finalized a debt offering of $150,000,000 of
5.14% unsecured senior notes due in 2014 in an offering exempt from the
registration requirements of the Securities Act of 1933. The notes will be
amortized over seven years beginning in 2008, with interest payable on the notes
semiannually on June 28 and December 28. The debt has certain prepayment
penalties for repaying the debt prior to its maturity date. The agreement also
requires the Company to maintain a financial covenant. As of January 31, 2006,
the Company was in compliance with this covenant.
During the six months ended January 31, 2006, the Company completed the
60,000 square foot expansion of an existing facility in Milwaukee, Wisconsin.
The approximately $10,000,000 project resulted in the consolidation of the
warehouse and distribution services of several Brady facilities and will provide
increased distribution efficiencies and improved logistics for customers.
In September 2005, the Company announced that the Board of Directors of
Brady Corporation approved a share repurchase program for up to 800,000 shares
of the Company's non-voting Class A Common Stock during fiscal 2006. The share
repurchase plan may be implemented by purchasing shares on the open market or in
privately negotiated transactions, with repurchased shares available for use in
connection with the Company's Stock Option Plan and for other corporate
purposes. During the six months ended January 31, 2006, the Company reacquired
800,000 shares of its Class A Common Stock for $26,495,000 under the repurchase
plan approved by the Board of Directors. Additional treasury shares with a cost
of $738,000 were purchased on behalf of the participants of the Company's
deferred compensation plan.
On November 10, 2005, the Securities and Exchange Commission
("SEC")declared effective the Company's shelf registration statement on Form
S-3, which will allow the Company to issue and sell, from time to time in one or
more offerings, up to an aggregate of $400,000,000 of Class A Non-voting Common
Stock and debt securities as it deems prudent or necessary to raise capital at a
later date. The Company plans to use the proceeds from any future offerings
under the shelf registration for general corporate purposes, including, but not
limited to, acquisitions, capital expenditures and refinancing of debt.
Management believes the Company's continued positive cash flow and
available borrowings will enable the Company to execute a long-term strategy,
which 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 the Company's processes. This strategy also includes
executing key acquisitions.
Subsequent Events Affecting Financial Condition
On February 16, 2006, the Company announced the completion of a private
placement of $200 million in ten-year notes at 5.3 percent to institutional
investors. The notes will be amortized in equal installments over 7 years,
beginning in 2010. Brady intends to use the net proceeds of the offering to
finance previously announced acquisitions and future acquisitions, and for
general corporate purposes. A portion of the proceeds was used to pay off the
outstanding balance on the revolver. The private placement was exempt from the
registration requirements of the Securities Act of 1933 pursuant to Section 4(2)
of the Act. The notes will not be registered for resale and may not be resold
absent such registration or an applicable exemption from the registration
requirements of the Securities Act and applicable state securities laws.
On February 16, 2006, the Board of Directors declared a quarterly cash
dividend to shareholders of the Company's Class A Common Stock of $0.13 per
share payable on April 28, 2006 to shareholders of record at the close of
business on April 10, 2006.
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 described in this and other Company filings.
However, the following additional information is provided to assist those
reviewing the Company's financial statements.
23
Purchase Commitments - The Company has purchase commitments for materials,
supplies, services, and property, plant and equipment as part of the ordinary
conduct of its business. In the aggregate, such commitments are not in excess of
current market prices and are not material to the financial position of the
Company. 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.
Critical Accounting Estimates
We account for stock-based compensation in accordance with SFAS No. 123(R),
Share-Based Payment. Under the fair value recognition provisions of this
statement, share-based compensation cost is measured at the grant date based on
the value of the award and is recognized as expense over the vesting period.
Determining the fair value of share-based awards at the grant date and
estimating the amount of share-based awards that are expected to be forfeited
requires judgment. If actual results differ significantly from these estimates,
stock-based compensation expense and our results of operations could be
impacted.
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" within the meaning of the Private Securities Litigation Reform Act
of 1995 -- that is, statements related to future, not past events. In this
context forward-looking statements often address our expected future business
and financial performance, and often contain certain words such as "expect",
"anticipate", "intend", "plan", "believe", "seek", or "may". Forward-looking
statements by their nature address matters that are, to different degrees
uncertain. For us, uncertainties arise from future financial performance of
major markets we serve which include, without limitation, telecommunications,
manufacturing, electrical, construction, laboratory, education, governmental,
public utility, computer, transportation; future integration of and performance
of acquired businesses; fluctuations in currency rates versus the US dollar;
technology changes; interruptions to sources of supply; business interruptions
due to implementing business systems; and numerous other matters of national,
regional and global scale, including those of a political, economic, business,
competitive and regulatory nature and those identified in reports we file with
the SEC. These uncertainties may cause our actual future results to be
materially different than those expressed in our forward-looking statements.
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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 to the consolidated financial statements of the Company.
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 may include entering into
approved interest rate derivatives when there is a desire to modify the
Company's exposure to interest rates. As of January 31, 2006, the Company has
not entered into any interest rate derivatives.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure
that the information the Company must disclose in its filings with the
Securities and Exchange Commission is recorded, processed, summarized and
reported on a timely basis. The Company's Chief Executive Officer and Chief
Financial Officer have reviewed and evaluated the Company's disclosure controls
and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the
period covered by this report (the "Evaluation Date"). Based on such evaluation,
such officers have concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures are effective in bringing to their attention
on a timely basis material information relating to the Company required to be
included in the Company's periodic filings under the Exchange Act.
There have not been any changes in the Company's internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
that occurred during the Company's most recently completed fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
In September 2005, the Company announced that the Board of Directors of
Brady Corporation had approved a share repurchase program for up to 800,000
shares of the Company's non-voting Class A Common Stock during fiscal 2006. The
share repurchase plan may be implemented by purchasing shares on the open market
or in privately negotiated transactions, with repurchased shares available for
use in connection with the Company's Stock Option Plan and for other corporate
purposes. The following table provides information with respect to Class A
Common Stock purchases by the Company during the six months ended January 31,
2006.
ISSUER PURCHASES OF SECURITIES
TOTAL NUMBER OF
SHARES PURCHASED
TOTAL AVERAGE PRICE AS PART OF MAXIMUM NUMBER OF SHARES THAT
NUMBER OF PAID PER PUBLICLY ANNOUNCED MAY YET BE PURCHASED UNDER THE
PERIOD SHARES PURCHASED SHARE PLANS OR PROGRAMS PLANS OR PROGRAMS
------ ---------------- ------------- ------------------ ------------------------------
November 1 to November 30, 2005 103,000 $29.27 103,000 400,000
December 1 to December 31, 2005 152,300 $36.43 152,300 247,700
January 1 to January 31, 2006 247,700 $37.16 247,700 --
------- ------ ------- -------
Total 503,000 $35.32 503,000 --
======= ====== ======= =======
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on November 17, 2005. At the
meeting the following persons were elected to serve as the Company's directors
by the affirmative vote of 100% of the 3,538,628 shares of Class B Voting Common
Stock until the next annual meeting of shareholders and until their successors
have been elected:
Richard A. Bemis
Robert C. Buchanan
Mary K. Bush
Philip M. Gresh, Jr.
Frank W. Harris
Frank M. Jaehnert
Frank R. Jarc
Peter J. Lettenberger
Gary E. Nei
Roger D. Peirce
Elizabeth I. Pungello
At the annual meeting, the shareholders, by affirmative vote of 100% of the
3,538,628 shares of Class B Voting Common Stock, approved the Brady Corporation
2005 Nonqualified Stock Option Plan for Non-Employee Directors (the "Plan").
Under the terms of the Plan, 300,000 Class A Non-Voting Common Shares are
reserved for issuance upon exercise of options granted under the Plan. The
Company filed a Form 8-K on December 1, 2005, and attached the Plan as Exhibit
10.1 to its Form 10-Q for the period ended October 31, 2005, which filings
contain additional information regarding the Plan.
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ITEM 6. EXHIBITS
(a) Exhibits
10.1 First Amendment to Credit Agreement, dated as of January 19,
2006
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
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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: March 8, 2006 /s/ F. M. Jaehnert
----------------------------------------
F. M. Jaehnert
President & Chief Executive Officer
Date: March 8, 2006 /s/ David Mathieson
----------------------------------------
David Mathieson
Vice President & Chief Financial Officer
(Principal Accounting Officer)
(Principal Financial Officer)
28