1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) --- OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended April 30, 1997 -------------- 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 W. H. BRADY CO. --------------- (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 June 3, 1997, there were outstanding 20,161,253 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.
2 FORM 10-Q W. H. BRADY CO. INDEX Page ---- PART I. Financial Information Item 1. Financial Statements Unaudited Condensed Consolidated Balance Sheets 3 Unaudited Condensed Consolidated Statements of Income and Earnings Retained in the Business 4 Unaudited 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 7 PART II. Other Information Item 4. Results of Votes of Security Holders 9 Item 5. Other Information 9 Item 6. Exhibits and Reports on Form 8-K 10 Signatures 10
3 W. H. BRADY CO. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Dollars in Thousands) <TABLE> <CAPTION> ASSETS April 30, 1997 July 31, 1996 ------ -------------- ------------- (UNAUDITED) <S> <C> <C> Current assets: Cash and cash equivalents $ 52,049 $ 49,281 Accounts receivable, less allowance for losses ($1,998 and $1,992, respectively) 64,989 53,679 Inventories 47,492 40,697 Prepaid expenses and other current assets 11,672 12,454 ---------- --------- Total current assets 176,202 156,111 Other assets: Intangibles - net 39,306 34,212 Other 6,230 5,863 ---------- --------- 45,536 40,075 Property, plant and equipment: Cost: Land 5,174 4,735 Buildings and improvements 38,286 34,484 Machinery and equipment 80,018 78,680 Construction in progress 2,253 4,383 ---------- --------- 125,731 122,282 Less accumulated depreciation 61,869 56,633 ---------- --------- Net property, plant and equipment 63,862 65,649 ---------- --------- Total $ 285,600 $ 261,835 ========== ========= LIABILITIES AND STOCKHOLDERS' INVESTMENT ---------------------------------------- Current liabilities: Accounts payable $ 17,569 $ 13,922 Wages and amounts withheld from employees 17,220 14,144 Taxes, other than income taxes 2,485 1,790 Accrued income taxes 5,830 5,419 Other current liabilities 9,230 10,620 Current maturities on long-term debt 289 528 ---------- --------- Total current liabilities 52,623 46,423 Long-term debt, less current maturities 3,559 1,809 Other liabilities 27,098 24,340 ---------- --------- Total liabilities 83,280 72,572 Stockholders' investment: Preferred stock 2,855 2,855 Class A nonvoting common stock - Issued and outstanding 20,150,653 201 201 and 20,094,100 shares, respectively Class B voting common stock - issued and outstanding 1,769,314 shares 18 18 Additional paid-in capital 9,010 8,415 Earnings retained in the business 187,621 173,491 Cumulative translation adjustments 2,615 4,283 ---------- --------- Total stockholders' investment 202,320 189,263 ---------- --------- Total $ 285,600 $ 261,835 ========== ========= </TABLE> See Notes to Condensed Consolidated Financial Statements 3
4 W. H. BRADY CO. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND EARNINGS RETAINED IN THE BUSINESS (Dollars in Thousands, Except Per Share Amounts) <TABLE> <CAPTION> (Unaudited) Three Months Ended Nine Months Ended April 30 April 30 1997 1996 1997 1996 ------ ------ ------ ------ <S> <C> <C> <C> <C> Net sales $ 108,254 $ 94,652 $ 315,373 $ 261,695 Operating expenses: Cost of products sold 47,846 44,710 143,265 122,002 Research and development 4,284 2,494 11,834 7,999 Selling, general and administrative 41,723 34,868 124,079 102,810 ---------- -------- ---------- --------- Total operating expenses 93,853 82,072 279,178 232,811 Operating income: 14,401 12,580 36,195 28,884 Investment and other income - net 463 337 908 4,009 Interest expense (66) (64) (209) (181) ---------- -------- ---------- --------- Income before income taxes 14,798 12,853 36,894 32,712 Income taxes 5,360 4,967 14,084 12,616 ---------- -------- ---------- --------- Net income $ 9,438 $ 7,886 $ 22,810 $ 20,096 Earnings retained in business at beginning of period 181,097 $ 162,176 173,491 154,286 Less dividends: Preferred stock (65) (65) (194) (194) Common stock (2,849) (2,186) (8,486) (6,377) ---------- -------- ---------- --------- Earnings retained in business at end of period $ 187,621 $ 167,811 $ 187,621 $ 167,811 ========== ======== ========== ========= Net Income Per Common Share: Net Income - Class A Nonvoting $ 0.43 $ 0.36 $ 1.04 $ 0.91 ========== ======== ========== ========= Net Income - Class B Voting $ 0.43 $ 0.36 $ 1.01 $ 0.88 ========== ======== ========== ========= </TABLE> See Notes to Condensed Consolidated Financial Statements. 4
5 W. H. BRADY CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) <TABLE> <CAPTION> (UNAUDITED) Nine Months Ended April 30 1997 1996 ------- ------- <S> <C> <C> Operating Activities: Net Income $ 22,810 $ 20,096 Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities: Depreciation & Amortization 10,539 6,973 (Gain) on Sale of Property, Plant & Equipment (133) (1,899) Provision for Losses on Accounts Receivable 585 612 Changes in Operating Assets & Liabilities (Excluding purchases of businesses in 1996): (Increase) Decrease in Accounts Receivable (11,640) (4,362) (Increase) Decrease in Inventory (7,094) (5,755) (Increase) Decrease in Prepaid Expense 235 1,596 Increase (Decrease) in Accounts Payable and Other Liabilities 6,879 (317) Increase (Decrease) in Income Taxes 228 1,859 --------- --------- Net Cash Provided by Operating Activities 22,409 18,803 Investing Activities: Purchases of Property, Plant and Equipment (6,694) (7,494) Proceeds from Sale of Property, Plant and Equipment - Net 983 3,458 Purchases of Businesses (7,884) (53,963) Other Investments 297 0 --------- --------- Net Cash (Used in) Investing Activities (13,298) (57,999) Financing Activities: Payment of Dividends (8,680) (6,571) Proceeds from Issuance of Common Stock 595 322 Principal Payments on Long-Term Debt (458) (537) Proceeds from Issuance of Long-Term Debt 1,387 0 --------- --------- Net Cash (Used in) Financing Activities (7,156) (6,786) Effect of Exchange Rate Changes on Cash 813 (298) --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents 2,768 (46,280) Cash and Cash Equivalents at Beginning of Year 49,281 89,067 --------- --------- Cash and Cash Equivalents at End of Period $ 52,049 $ 42,787 ========= ========= Supplemental Disclosures of Cash Flow Information: Cash Paid During the Year For: Interest $ 172 $ 147 Income Taxes 15,146 10,500 </TABLE> See Notes to Condensed Consolidated Financial Statement 5
6 W.H. BRADY CO. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Nine Months Ended April 30, 1997 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 except for a restructuring charge in fiscal 1997, necessary to present fairly the financial position of the Company as of April 30, 1997, and July 3l, 1996, and its results of operations and its cash flows for the three months and nine months ended April 30, 1997, and l996. The consolidated balance sheet at July 31, l996, has been taken from the audited financial statements of that date and condensed. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report. 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 - Net Earnings Per Common Share Net earnings per common share were computed by dividing net earnings (after deducting the applicable preferred stock and preferential Class A Common Stock dividends) by the weighted average number of shares of Class A and Class B Common Stock outstanding of 21,900,017 for the three months and nine months ended April 30, 1997, and 21,842,145 for the same period in 1996. The preferential dividend on the Class A Common Stock of $0.0333 per share declared on September 17, 1996, has been added to the net earnings per Class A Common Stock for the nine months ended April 30, 1997. The net earnings per share of Class A Common Share for the nine months ended April 30, 1996, includes $0.0333 per share relating to preferential dividends declared in that period. NOTE C - Intangible Assets The excess of cost over fair value of the net assets of business acquired is amortized using the straight-line method over various periods ranging from 20 to 40 years. The weighted average amortization period is 35 years. The carrying value of intangible assets is periodically reviewed by the Company and impairments are recognized when the expected future operating cash flows derived from such intangible assets is less than their carrying value. NOTE D - Acquisition On April 30, 1997, the Company acquired the common stock of Signals S.A., a direct marketer located in La Rochelle, France, for cash of approximately $9,600,000. 6
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations For the three months ended April 30, 1997, revenues of $108,254,000 were 14.4% higher than the same quarter of the previous year. For the nine months ended April 30, 1997, revenues of $315,373,000 were 20.5% higher than the same period last year. Sales of the Company's international operations increased 11.6% for the quarter and 14.0% for the nine months ended April 30, 1997. This increase was a result of real growth through continued market penetration in Europe and the Far East (14.2% for the quarter and 11.0% for the nine months) and the acquisition of Techpress II Limited and the startup of the Company's Korean joint venture (1.6% for the quarter and 5.2% for the nine months), offsetting the negative effect of fluctuations in the exchange rates used to translate financial results into U.S. currency (4.2% for the quarter and 2.2% for the nine months). Sales of the Company's U.S. operations increased 16.5% for the quarter and 25.7% for the nine months ended April 30, 1997. This increase was a result of the acquisition of Varitronic Systems, Inc. and The Hirol Company (9.7% for the quarter and 16.5% for the nine months) and growth in the sales of the Company's core products (6.8% for the quarter and 9.2% for the nine months). The cost of products sold as a percentage of sales was 44.2% for the quarter and 45.4% for the nine months ended April 30, 1997, compared to 47.2% and 46.6% for the same periods last year. Reduced costs due to changes in product mix and manufacturing efficiencies from the Company's continuous improvement efforts were partially offset by increased amortization expenses. Cost of products sold for the nine months ended April 30, 1997, includes a charge in the second quarter of $1,200,000 ($715,000 after tax) for restructuring the Company's European operations and consolidating the Hirol Division's production operations into the Company's existing operations in the United States and in the United Kingdom. Selling, general and administrative expenses as a percentage of sales were 38.5% for the quarter compared to 36.8% for the same quarter of the previous year. For the nine months ended April 30, 1997, this percentage was 39.3% for both this year and last year. Selling, general and administrative expenses for the nine months ended April 30, 1997, includes a charge of $300,000 ($180,000 after tax) in the second quarter for the restructuring mentioned above. Research and development expenses increased 71.8% for the quarter and 47.9% for the nine months ended April 30, 1997, over the same periods last year because of higher expenditures for these items in operations acquired by the Company during the past year. Operating income was $14,401,000 for the quarter and $36,195,000 for the nine months ended April 30, 1997, compared to $12,580,000 and $28,884,000 for the same periods last year, representing increases of 14.5% and 25.3%, respectively, because of the factors cited above. Investment and other income for the nine months ended April 30, 1997, decreased $3,101,000 from the same period last year. This decrease is the result of lower investment income because of lower cash balances as a result of the acquisitions in the last year and foreign exchange losses. In addition, investment and other income for the nine months ended April 30, 1996, included $1,750,000 ($950,000 after tax) from the gain on the sale of a building in Germany during that period. Income before income taxes increased 15.1% for the quarter and 12.8% for the nine months ended April 30, 1997, compared to prior year results. Excluding the restructuring charge and the gain on the sale of the German building, income before income taxes increased 24.0% for the nine months ended April 30, 1997, compared to the prior year. 7
8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net income for the three months ended April 30, 1997, increased 19.7% to $9,438,000 compared to $7,886,000 for the same quarter of the previous year. For the nine months ended April 30, 1997, net income increased 13.5% to $22,810,000 from $20,096,000 for the same period last year. Excluding the $895,000 restructuring charge in 1997 and the $950,000 gain on the sale of the building in Germany in 1996, net income increased 23.8% for the nine months ended April 30, 1997. Financial Condition The Company's liquidity remains strong. The current ratio as of April 30, 1997, was 3.3 to 1. Cash and cash equivalents were $52,049,000 at April 30, 1997, compared to $49,281,000 at July 31, 1996. Working capital increased $13,891,000 during the nine months and equaled $123,579,000 as of April 30, 1997. The Company has maintained significant cash balances due in large part to its strong operating cash flow, which totaled $22,409,000 for the nine months ended April 30, 1997, compared to $18,803,000 for the same period last year. Capital expenditures were $6,694,000 in the nine months ended April 30, 1997, compared to $7,494,000 in the first nine months last year. Financing activities, primarily the payment of dividends to the Company's stockholders, consumed $7,156,000 of cash in the first nine months of fiscal 1997, compared to $6,786,000 for the same period last year. Increased dividend payments were partially offset by borrowing by the Company's new Korean joint venture. Long-term debt as a percentage of long-term debt plus stockholders' investment was 1.7% at April 30, 1997, compared to 0.9% at July 31, 1996, as a result of borrowing by the Company's new Korean joint venture. The Company believes that its cash and cash equivalents and the cash flow it generates from operating activities are adequate to meet the Company's current investing and financing needs. 8
9 PART II. OTHER INFORMATION ITEM 4. Results of Votes of Security Holders By unanimous written consent of the holders of the Company's Class B Voting Common Stock on May 12, 1997, the shareholders voted to adopt the W. H. Brady Co. 1997 Omnibus Incentive Stock Plan and the W. H. Brady Co. 1997 Nonqualified Stock Option Plan for Non-Employee Directors. The vote in connection with the adoption of each of these plans was 1,769,314 in favor and 0 against. No proxies were solicited or received in connection with this meeting. Copies of these plans are attached as Exhibits 10.12 and 10.13, respectively. See also, Item 5. ITEM 5. Other Information On May 12, 1997, the Company's Board of Directors and the holders of the Company's Class B Voting Common Stock approved the W. H. Brady Co. 1997 Omnibus Incentive Stock Plan, the W. H. Brady Co. 1997 Nonqualified Stock Option Plan for Non-Employee Directors, and Change of Control Agreements for a number of the Company's employees. The executive officers of the Company specified under Item 402 (a) (3) of Item S-K who are parties to Change of Control Agreements are Katherine M. Hudson, David W. Schroeder, Richard L. Fisk, David R. Hawke, and Mary T. Arnold. The Change of Control Agreements for these executive officers are attached as Exhibits 10.14, 10.15, 10.16, 10.17, and 10.18, respectively. In addition, the Company's Board of Directors approved a Supplemental Executive Retirement Plan for Richard L. Fisk, effective May 14, 1997, a copy of which is attached as Exhibit 10.19. Under the W. H. Brady Co. 1997 Omnibus Incentive Stock Plan, the Company may grant Nonqualified Stock Options to purchase its Class A Nonvoting Common Stock and/or shares of Restricted Class A Nonvoting Common Stock to its employees in order to provide an incentive for employees of the Company and its affiliates to improve corporate performance on a long-term basis, and to attract and retain employees by enabling employees to participate in the future successes of the Company, and by associating the long-term interests of employees with those of the Company and its shareholders. On May 13, 1997, the Company made option grants under the W. H. Brady Co. 1997 Omnibus Incentive Stock Plan in the amount of 200,000 shares to Katherine M. Hudson, and 100,000 shares each to Richard L. Fisk, David R. Hawke, and David W. Schroeder. In addition, under the W. H. Brady Co. 1997 Nonqualified Stock Option Plan for Non-Employee Directors, the Company, on May 13, 1997, granted an option to purchase 2,500 shares of its Class A Nonvoting Common Stock to each of its six non-employee directors. The Company's objective in granting the foregoing options under the W. H. Brady Co. 1997 Omnibus Incentive Stock Plan, entering into the described Change of Control Agreements and providing the Supplemental Executive Retirement Plan for Mr. Fisk was to insure the continuity of the Company's principal executive officer management team. The Company's objective in granting the options to directors under the W. H. Brady Co. 1997 Nonqualified Stock Option Plan for Non-Employee Directors was to attract and retain the services of experienced and knowledgeable independent directors for the benefit of the Company and its shareholders and to provide additional incentive for such directors to continue to work for the best interest of the Company and its shareholders. 9
10 ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.12 W. H. Brady Co. 1997 Omnibus Incentive Stock Plan 10.13 W. H. Brady Co. 1997 Nonqualified Stock Option Plan for Non-Employee Directors 10.14 Change of Control for Katherine M. Hudson 10.15 Change of Control for David W. Schroeder 10.16 Change of Control for Richard L. Fisk 10.17 Change of Control for David R. Hawke 10.18 Change of Control for Mary T. Arnold 10.19 Supplemental Executive Retirement Plan for Richard L. Fisk (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 April 30, 1997. 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 W. H. BRADY CO. Date: June 11, 1997 /s/ K. M. Hudson ----------------- ------------------- K. M. Hudson President Date: June 11, 1997 /s/ F. Jaehnert ----------------- ------------------- F. M. Jaehnert Vice President & Chief Financial Officer (Principal Accounting Officer) 10