UNITED STATES 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, 2002 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) --- OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _____ to _____ Commission File Number 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 ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of May 21, 2002, there were outstanding 21,306,130 shares of Class A Common Stock and 1,769,314 shares of Class B Common Stock. The Class B Common Stock, all of which is held by an affiliate of the Registrant, is the only voting stock.
FORM 10-Q BRADY CORPORATION INDEX <TABLE> <CAPTION> Page ---- <S> <C> <C> PART I. Financial Information Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Income and Income Retained in the Business 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 </TABLE>
BRADY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> (UNAUDITED) ASSETS APRIL 30, 2002 JULY 31, 2001 ------ -------------- ------------- <S> <C> <C> CURRENT ASSETS: Cash and cash equivalents $ 70,270 $ 62,811 Accounts receivable, less allowance for losses ($2,009 and $2,297 76,644 71,684 respectively) Inventories 37,407 39,207 Prepaid expenses and other current assets 20,804 21,291 ---------------- --------------- TOTAL CURRENT ASSETS 205,125 194,993 OTHER ASSETS: Goodwill - net 105,705 96,041 Other 19,262 16,909 ---------------- --------------- 124,967 112,950 PROPERTY, PLANT AND EQUIPMENT: Cost: Land 5,971 5,944 Buildings and improvements 49,947 47,611 Machinery and equipment 126,275 132,272 Construction in progress 2,650 6,474 ---------------- --------------- 184,843 192,301 Less accumulated depreciation 102,753 107,768 ---------------- --------------- NET PROPERTY, PLANT AND EQUIPMENT 82,090 84,533 ---------------- --------------- TOTAL $ 412,182 $ 392,476 ================ =============== LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES: Accounts payable $ 25,351 $ 20,666 Wages and amounts withheld from employees 27,513 26,767 Taxes, other than income taxes 3,250 1,496 Accrued income taxes 8,257 8,460 Other current liabilities 12,086 12,364 Short-term borrowings and current maturities on long-term debt 273 1,410 ---------------- --------------- TOTAL CURRENT LIABILITIES 76,730 71,163 LONG-TERM DEBT, LESS CURRENT MATURITIES 3,940 4,144 OTHER LIABILITIES 14,604 14,590 ---------------- --------------- TOTAL LIABILITIES 95,274 89,897 STOCKHOLDERS' INVESTMENT: Preferred stock 2,855 2,855 Class A nonvoting common stock - Issued 21,304,697 and 213 211 21,149,551 shares, respectively Class B voting common stock - Issued and outstanding 1,769,314 shares 18 18 Treasury Stock - 4,548 Class A Common Shares, at cost (132) (132) Additional paid-in capital 39,451 35,806 Income retained in the business 286,469 276,779 Cumulative other comprehensive (loss) (11,544) (12,016) Other (422) (942) ---------------- --------------- TOTAL STOCKHOLDERS' INVESTMENT 316,908 302,579 ---------------- --------------- TOTAL $ 412,182 $ 392,476 ================ =============== </TABLE> See Notes to Condensed Consolidated Financial Statements 3
BRADY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND INCOME RETAINED IN THE BUSINESS (Dollars in Thousands, Except Per Share Amounts) <TABLE> <CAPTION> (Unaudited) Three Months Ended April 30, Nine Months Ended April 30, 2002 2001 2002 2001 ---------------- ----------------- --------------- ---------------- <S> <C> <C> <C> <C> Net Sales $ 130,533 $ 136,881 $ 381,123 $ 419,664 Operating expenses: Cost of products sold 63,516 64,298 187,591 194,655 Research and development 4,520 4,740 13,140 15,891 Selling, general and administrative 49,781 51,350 146,622 160,157 ---------------- ----------------- --------------- ---------------- Total operating expenses 117,817 120,388 347,353 370,703 Operating income 12,716 16,493 33,770 48,961 Other income and (expense): Investment and other income - net 238 (142) 826 (101) Interest expense (15) (97) (34) (282) ---------------- ----------------- --------------- ---------------- Income before income taxes 12,939 16,254 34,562 48,578 Income taxes 4,464 6,095 11,954 18,378 ---------------- ----------------- --------------- ---------------- Net Income 8,475 10,159 22,608 30,200 Income retained in business at beginning of period 282,329 277,436 276,779 265,462 Less dividends: Preferred stock (65) (64) (195) (194) Common stock (4,270) (4,015) (12,723) (11,952) ---------------- ----------------- --------------- ---------------- Income retained in business at end of period $ 286,469 $ 283,516 $ 286,469 $ 283,516 ================ ================= =============== ================ Net income per Class A Nonvoting Common Share Basic $ 0.36 $ 0.44 $ 0.97 $ 1.32 ================ ================= =============== ================ Diluted $ 0.36 $ 0.44 $ 0.96 $ 1.30 ================ ================= =============== ================ Net income per Class B Voting Common Share Basic $ 0.36 $ 0.44 $ 0.94 $ 1.29 ================ ================= =============== ================ Diluted $ 0.36 $ 0.44 $ 0.93 $ 1.27 ================ ================= =============== ================ </TABLE> See Notes to Condensed Consolidated Financial Statements 4
BRADY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) <TABLE> <CAPTION> (Unaudited) Nine Months Ended April 30, 2002 2001 ---------------- ---------------- <S> <C> <C> Operating activities: Net income $ 22,608 $ 30,200 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,799 16,182 Loss on sale of property, plant & equipment 605 15 Gain on sale of securities - (722) Provision for losses on accounts receivable 963 1,270 Amortization of restricted stock 520 521 Changes in operating assets and liabilities (Net of effects of business acquisitions): Accounts receivable (3,830) (3,096) Inventory 3,536 (2,144) Prepaid expenses and other assets 323 896 Accounts payable, accrued expenses and other liabilities 5,762 (9,346) Income taxes (1,196) (396) ---------------- ---------------- Net cash provided by operating activities 41,090 33,380 Investing activities: Acquisitions of businesses, net of cash acquired (12,749) (6,630) Purchases of property, plant and equipment (9,513) (15,260) Proceeds from sale of property, plant and equipment 102 115 Other 20 867 ---------------- ---------------- Net cash used in investing activities (22,140) (20,908) Financing activities: Payment of dividends (12,918) (12,146) Proceeds from issuance of Class A Common Stock 3,646 2,966 Principal payments on debt (1,369) (8,106) Other - (1,715) ---------------- ---------------- Net cash used in financing activities (10,641) (19,001) Effect of exchange rate changes on cash (850) (1,385) ---------------- ---------------- Net increase (decrease) in cash and cash equivalents 7,459 (7,914) Cash and cash equivalents, beginning of period 62,811 60,784 ---------------- ---------------- Cash and cash equivalents, end of period $ 70,270 $ 52,870 ================ ================ Supplemental disclosures: Cash paid during the period for: Interest $ 155 $ 327 Income taxes, net of refunds 11,726 16,353 Acquisitions: Fair value of assets acquired, net of cash $ 5,667 7,920 Liabilities assumed (1,789) (4,299) Goodwill 8,871 3,009 ---------------- ---------------- Net cash paid for acquisitions $ 12,749 $ 6,630 ================ ================ </TABLE> 5
BRADY CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Nine Months Ended April 30, 2002 (Unaudited) NOTE A - Basis of Presentation The condensed consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, the foregoing statements contain all adjustments, consisting only of normal recurring accruals, necessary to present fairly the financial position of the Company as of April 30, 2002 and July 31, 2001, its results of operations for the three months and nine months ended April 30, 2002 and 2001, and its cash flows for the nine months ended April 30, 2002 and 2001. The condensed consolidated balance sheet at July 31, 2001 has been derived from the audited consolidated financial statements of that date and condensed. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statement presentation. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest annual report on Form 10-K for the year ended July 31, 2001. It is not practical to segregate the amounts of raw material, work in process or finished goods at the respective interim balance sheet dates. NOTE B - New Pronouncements In May 2000, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs." EITF 00-10 provides guidance on the financial reporting of shipping and handling fees and costs in the condensed consolidated statements of income. During the fourth quarter of fiscal 2001, the Company adopted EITF 00-10 and, as a result, amounts billed to a customer in a sale transaction related to shipping costs are reported as net sales and the related costs incurred for shipping are reported as cost of goods sold. The Company previously reported shipping costs as a reduction of sales. Prior period condensed consolidated financial statements have been reclassified to conform to the new requirements. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," which eliminates the pooling method of accounting for all business combinations initiated after June 30, 2001 and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. The Company has adopted this accounting standard for business combinations initiated after June 30, 2001. As of August 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which addresses the financial accounting and reporting standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill be separately disclosed from other intangible assets in the condensed consolidated balance sheet, and no longer be amortized, but tested for impairment on at least a periodic basis. The provisions of this accounting standard also require the completion of a transitional impairment test within six months of adoption, with any impairments identified treated as a cumulative effect of a change in accounting principle. 6
The Company performed the transitional assessment of goodwill by comparing the carrying amount of net assets, including goodwill, of each reporting unit to their respective fair value as of August 1, 2001. Fair value was estimated based upon discounted cash flow analyses. Because the estimated fair value of each of the Company's reporting units exceeded their carrying amount, management believes that no impairment exists as of the implementation date, August 1, 2001. In accordance with SFAS No. 142, the Company discontinued the amortization of goodwill effective August 1, 2001. A reconciliation of previously reported net income and net income per share to the amounts adjusted for the exclusion of goodwill amortization net of the related income tax effect follows: <TABLE> <CAPTION> Fiscal 2002 Fiscal 2001 ----------- ----------- 3rd Quarter 9-Month 3rd Quarter 9-Month ----------- ------- ----------- ------- <S> <C> <C> <C> <C> Reported net income $8,475,000 $22,608,000 $10,159,000 $30,200,000 Add: Goodwill amortization, net of tax - - 1,485,000 4,444,000 ---------- ----------- ----------- ----------- Adjusted net income $8,475,000 $22,608,000 $11,644,000 $34,644,000 ========== =========== =========== =========== Net income per Class A Nonvoting Common Share - Basic: Reported net income $ 0.36 $ 0.97 $ 0.44 $ 1.32 Add: Goodwill amortization, net of tax - - 0.06 0.19 ---------- ----------- ----------- ----------- Adjusted net income $ 0.36 $ 0.97 $ 0.50 $ 1.51 ========== =========== =========== =========== Net income per Class A Nonvoting Common Share - Diluted: Reported net income $ 0.36 $ 0.96 $ 0.44 $ 1.30 Add: Goodwill amortization, net of tax - - 0.06 0.19 ---------- ----------- ----------- ----------- Adjusted net income $ 0.36 $ 0.96 $ 0.50 $ 1.49 ========== =========== =========== =========== </TABLE> In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the accounting for and the reporting of the impairment or disposal of long-lived assets and is effective for the Company on August 1, 2002. The impact of this pronouncement on the Company's financial results is not expected to be material. NOTE C - Goodwill and Other Intangible Assets Changes in the carrying amount of goodwill for the quarter ended April 30, 2002, are as follows: <TABLE> <CAPTION> Graphics & Workplace ISST Solutions Total -------- --------- ----- <S> <C> <C> <C> Balance as of January 31, 2002 $58,421,000 $40,566,000 $ 98,987,000 Goodwill acquired during the period - 5,397,000 5,397,000 Translation adjustments and other 543,000 778,000 1,321,000 ----------- ----------- ------------ Balance as of April 30, 2002 $58,964,000 $46,741,000 $105,705,000 =========== =========== ============ </TABLE> Other long-term assets include patents, trademarks, non-compete agreements and other intangibles with finite lives being amortized in accordance with SFAS No. 142. The net book value of these assets was $4,317,000 at April 30, 2002. Amortization expense related to intangible assets was not material. 7
NOTE D - Comprehensive Income Total comprehensive income, which was comprised of net income, foreign currency adjustments and net unrealized gains and losses from cash flow hedges, amounted to approximately $9,938,000 and $6,852,000 for the three months ended April 30, 2002 and 2001, respectively, and $23,080,000 and $25,805,000 for the nine months ended April 30, 2002 and 2001, respectively. NOTE E - Net Income Per Common Share Reconciliations of the numerator and denominator of the basic and diluted per share computations for the Company's Class A and Class B common stock are summarized as follows: <TABLE> <CAPTION> Fiscal 2002 Fiscal 2001 ----------- ----------- 3rd Quarter 9-Month 3rd Quarter 9-Month ----------- ------- ------------ ------- <S> <C> <C> <C> <C> Numerator: Net income $8,475,000 $22,608,000 $10,159,000 $30,200,000 Less: Preferred stock dividends (65,000) (195,000) (65,000) (194,000) ---------- ----------- ----------- ----------- Numerator for basic and diluted Class A net income per share 8,410,000 22,413,000 10,094,000 30,006,000 Less: Preferential dividends 0 (705,000) 0 (699,000) Less: Preferential dividends on dilutive stock options 0 (10,000) 0 (9,000) ---------- ----------- ----------- ----------- Numerator for basic and diluted Class B net income per share $8,410,000 $21,698,000 $10,094,000 $29,298,000 ========== =========== =========== =========== Denominator: Denominator for basic net income per share for both Class A and Class B 23,053,000 22,995,000 22,865,000 22,798,000 Plus: Effect of dilutive stock options 392,000 339,000 336,000 277,000 ---------- ----------- ----------- ----------- Denominator for diluted net income per share for both Class A and Class B 23,445,000 23,334,000 23,201,000 23,075,000 ========== =========== =========== =========== Class A Common Stock net income per share: Basic $ 0.36 $ 0.97 $ 0.44 $ 1.32 Diluted $ 0.36 $ 0.96 $ 0.44 $ 1.30 Class B Common Stock net income per share: Basic $ 0.36 $ 0.94 $ 0.44 $ 1.29 Diluted $ 0.36 $ 0.93 $ 0.44 $ 1.27 </TABLE> 8
Options to purchase 16,000 shares of Class A Common Stock were not included in the computations of diluted net income per share for the quarter ending April 30, 2001, because the option exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. Options to purchase 75,000 shares of Class A Common Stock were not included in the computations of diluted earnings per share for the nine months ending April 30, 2001, because the option exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. NOTE F - Acquisitions In November 2001, the Company acquired StrandWare, Inc., located in Eau Claire, Wisconsin, a bar-code, label-design, and data-collection software developer. Also in November 2001, the Company acquired Safety Signs Service, located in Perth, Australia, a manufacturer and supplier of safety products. In April 2002, the Company acquired Temtec, located in Suffern, New York, a printing Company that develops and markets products for security applications. The combined purchase price of these acquisitions was approximately $13,600,000. Each of the acquisitions was for cash. The agreements include provisions for contingent payments up to a maximum of $4,000,000 based on the earnings of the acquired entities. The results of their operations have been included since their respective dates of acquisition in the accompanying condensed consolidated financial statements. The pro-forma results assuming the acquisitions had been consummated as of the beginning of the periods presented are not significant. Preliminary allocation of the purchase price of these acquisitions has been made, pending the outcome of a final valuation. Approximately $8,900,000 was assigned to goodwill and approximately $2,000,000 was assigned to patents, which will be amortized over a weighted average life of nine years. NOTE G - Restructuring During the fourth quarter of fiscal 2001, the Company recorded a nonrecurring charge of $9,560,000 related primarily to facilities consolidation in the United States and Europe and workforce reductions in its operations around the world. The workforce reduction of approximately 175 people was essentially completed in August 2001. A reconciliation of activity with respect to the Company's restructuring is as follows: <TABLE> <S> <C> Ending balance, July 31, 2001 $6,937,000 Fiscal 2002 First Quarter Activity Cash payments associated with severance and other (1,487,000) Non-cash asset write-offs (263,000) ----------- Ending balance, October 31, 2001 5,187,000 Fiscal 2002 Second Quarter Activity Cash payments associated with severance and other (1,474,000) Non-cash asset write-offs (97,000) ----------- Ending balance, January 31, 2002 3,616,000 Fiscal 2002 Third Quarter Activity Cash payments associated with severance and other (777,000) Non-cash asset write-offs (50,000) ----------- Ending balance, April 30, 2002 2,789,000 =========== </TABLE> 9
NOTE H - Segment Information The Company's reportable segments are business units that are each managed separately because they manufacture and/or distribute distinct products using different processes. The Company has two reportable segments: the Identification Solutions & Specialty Tapes Group and the Graphics and Workplace Solutions Group. Effective August 1, 2001, the Company's Graphics and Direct Marketing operating segments were combined to form Graphics and Workplace Solutions. The prior year segment information has been reclassified to conform to the current year presentation. Following is a summary of segment information for the three months ended April 30, 2002 and 2001: <TABLE> <CAPTION> (Dollars in Thousands) Identification Solutions & Graphics & Corporate Specialty Workplace and Tapes Solutions Eliminations Totals ----- --------- ------------ ------ <S> <C> <C> <C> <C> Three months ended April 30, 2002: - ---------------------------------- Sales from external customers $54,658 $75,875 - $130,533 Intersegment sales 58 225 $(283) - Segment operating profit 6,987 20,019 (549) 26,457 Three months ended April 30, 2001: - ---------------------------------- Sales from external customers $62,542 $74,339 - $136,881 Intersegment sales 553 405 ($958) -- Segment operating profit 12,757 19,612 (831) 31,538 </TABLE> Following is a summary of segment information for the nine months ended April 30, 2002 and 2001: <TABLE> <CAPTION> (Dollars in Thousands) Identification Solutions & Graphics & Corporate Specialty Workplace and Tapes Solutions Eliminations Totals ----- --------- ------------ ------ <S> <C> <C> <C> <C> Nine months ended April 30, 2002: - --------------------------------- Sales from external customers $165,452 $215,671 - $381,123 Intersegment sales 386 1,388 ($1,774) - Segment operating profit 22,142 54,129 (1,643) 74,628 Nine months ended April 30, 2001: - --------------------------------- Sales from external customers $200,544 $219,120 $419,664 Intersegment sales 2,182 1,593 ($3,775) - Segment operating profit 44,350 56,268 (1,917) 98,701 </TABLE> 10
Following is a reconciliation of profit for the three and nine months ended April 30, 2002 and 2001: <TABLE> <CAPTION> (Dollars in Thousands) Fiscal 2002 Fiscal 2001 ----------- ----------- 3rd Quarter 9-Month 3rd Quarter 9-Month ----------- ------- ----------- ------- <S> <C> <C> <C> <C> Total profit from reportable segments $27,006 $76,271 $32,369 $100,618 Corporate and eliminations (549) (1,643) (831) (1,692) Unallocated amounts: Administrative costs (13,342) (39,105) (12,787) (43,302) Goodwill amortization - - (1,518) (4,591) Interest-net 111 505 280 866 Foreign exchange 111 285 (486) (1,309) Other (398) (1,751) (773) (2,012) -------- -------- -------- --------- Income before income taxes $12,939 $34,562 $16,254 $ 48,578 ======== ======== ======== ========= </TABLE> NOTE I - Liquidity and Capital Resources On January 22, 2002, the Securities and Exchange Commission issued an interpretive release on disclosures related to liquidity and capital resources, including off-balance sheet arrangements. The Company does not have material off-balance sheet arrangements or related party transactions. The Company is not aware of factors that are reasonably likely to adversely affect liquidity trends, other than the risk factors presented in other Company filings. However, the following additional information is provided to assist financial statement users. Operating Leases - These leases generally are entered into only for non-strategic investments (e.g., warehouses, office buildings) where the economic profile is favorable. The effects of outstanding leases are not material to the Company. Purchase Commitments - The Company has purchase commitments for materials, supplies, services, and property, plant and equipment as part of the ordinary conduct of business. In the aggregate, such commitments are not at prices in excess of current market. Due to the proprietary nature of many of the Company's materials and processes, certain supply contracts contain penalty provisions for early termination. The Company does not believe a material amount of penalties is reasonably likely to be incurred under these contracts based upon historical experience and current expectations. Other Contractual Obligations - The Company does not have material financial guarantees or other contractual commitments that are reasonably likely to adversely affect liquidity. Related Party Transactions - The Company does not have any related party transactions that materially affect the results of operations, cash flow or financial condition. 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations For the three months ended April 30, 2002, sales of $130,533,000 were 4.6% lower than the same quarter of the previous year. For the nine months ended April 30, 2002, sales of $381,123,000 were 9.2% lower than the same period last year. Sales of the Company's international operations increased 4.9% for the quarter and 4.1% for the nine-month period in local currencies. This increase was partially offset by the negative effect of fluctuations in the exchange rates used to translate financial results into U.S. currency, which reduced international sales growth by 2.2% in the quarter and 2.4% for the nine months ended April 30, 2002. Acquisitions increased international sales by 4.4% for the quarter and 5.5% for the nine-month period. International base sales (excludes the effect of acquisitions) in local currencies increased 0.5% for the quarter and decreased 1.5% for the nine months ended April 30, 2002. Sales of the Company's U.S. operations decreased 10.6% in the quarter and 17.4% for the nine months ended April 30, 2002. The decrease in U.S. base business was related to softness in the U.S. economy and the telecommunications, electronics and automatic identification industries. The decrease was partially offset by acquisitions, which increased U.S. sales growth by 1.4% for the quarter and 0.6% for the nine months ended April 30, 2002. The cost of products sold as a percentage of sales increased from 47.0% to 48.7% for the quarter and from 46.4% to 49.2% for the nine months ended April 30, 2002 compared to the same periods of the previous year. This increase was due primarily to the effect of a fixed cost structure being spread over a lower sales volume and the negative effect of the exchange rate on goods purchased by foreign subsidiaries. Selling, general and administrative (SG&A) expenses as a percentage of sales increased to 38.1% for the quarter compared to 36.4% for the same quarter of the previous year, excluding goodwill amortization in both periods. For the nine months ended April 30, 2002, the same percentage was 38.5% compared to 37.1% for the same period last year, excluding goodwill amortization. SG&A as a percentage of sales increased in both periods due to lower sales. The decrease reflects more focused spending, better tracking and allocation of costs and variations in project timing. As a percentage of sales, research and development expenses remained flat at 3.5% for the quarter and decreased from 3.8% to 3.5% for the nine-month period. Operating income was $12,716,000 for the quarter and $33,770,000 for the nine months ended April 30, 2002, compared to $16,493,000 and $48,961,000 for the same periods last year because of the factors cited above. Excluding goodwill amortization, operating income in the prior year would have been $18,011,000 in the quarter and $53,552,000 for the nine-month period. Investment and other income increased $380,000 for the quarter and $927,000 for the nine months ended April 30, 2002, compared to same periods last year due to a more favorable foreign exchange environment. Income before income taxes decreased 27.2% for the quarter and 35.0% for the nine months ended April 30, 2002, compared to prior-year results, excluding goodwill amortization in both periods. The Company's effective tax rate was 34.5% for the quarter ended April 30, 2002 and for the same quarter of the previous year, excluding goodwill amortization in both years. For the nine months ended April 30, 2002, this percentage was 34.6% compared to 34.8% for the same period last year, excluding goodwill amortization in both periods. 12
Net income for the three months ended April 30, 2002, decreased 27.2% to $8,475,000 compared to $11,644,000 for the same quarter of the previous year, excluding goodwill amortization in both periods. For the nine months ended April 30, 2002, net income decreased 34.7% to $22,608,000 from $34,644,000 for the same period last year, excluding goodwill amortization in both periods. On a Class A Common Share basis, diluted net income for the three months ended April 30, 2002, was $0.36 compared to $0.44 per share for the same quarter of the previous year or $0.50 per share excluding goodwill amortization in the prior period. For the nine months ended April 30, 2002, Class A Common Share diluted net income was $0.96 compared to $1.30 per share for the same period last year or $1.49 per share excluding goodwill amortization. The decrease in the current quarter was primarily due to the sales shortfalls discussed above offset by restructuring and cost reduction efforts. Business Segment Operating Results Identification Solutions & Specialty Tapes (ISST) Group: ISST sales decreased 12.6% for the three months ended April 30, 2002, from the same period last year. For the nine months ended April 30, 2002, ISST sales were 17.5% lower than the same period last year. Base business in local currency decreased 16.1% in the quarter and 21.5% for the nine-month period ended April 30, 2002. Acquisitions increased sales over prior year 4.7% in the quarter and 5.1% for the nine months ended April 30, 2002. Contributing to the decrease was the negative effect of fluctuations in the exchange rates used to translate financial results into U.S. currency, which reduced sales growth within the group by 1.2% in the quarter and for the nine months ended April 30, 2002. The United States and Latin America each showed sales declines in local currency for the quarter, while Europe and Asia Pacific sales showed increases in the quarter. The domestic decrease related to softness in the electronic and telecommunications and industrial markets. Profit as a percentage of sales decreased from 20.4% to 12.8% for the quarter and from 22.1% to 13.4% for the nine months ended April 30, 2002. The decrease was primarily a result of the decline in sales. Graphics & Workplace Solutions Group: Graphics & Workplace Solutions' sales increased 2.1% for the quarter and decreased 1.6% for the nine months ended April 30, 2002, compared to the same periods last year. Base sales in local currency increased 1.7% in the quarter and decreased 1.3% for the nine months ended April 30, 2002, compared to the same periods last year. Sales were negatively affected by fluctuations in the exchange rates used to translate financial results into U.S. currency, which reduced sales within the group by 0.8% in the quarter and 0.9% for the nine months ended April 30, 2002. Sales in local currencies for the quarter were up slightly in Europe and the United States with near double digit increases in Latin America and Asia Pacific. Profit as a percentage of sales remained flat at 26.4% in the quarter and decreased to 25.1% from 25.7% for the nine months ended April 30, 2002, compared with the same periods the prior year. Financial Condition The Company's liquidity remained strong. The current ratio as of April 30, 2002, was 2.7. Cash and cash equivalents were $70,270,000 at April 30, 2002, compared to $62,811,000 at July 31, 2001. The increase was primarily due to continued strong cash flow provided by operating activities, offset by investments in property, plant and equipment and payment of dividends. Working capital increased $4,565,000 during the nine months ended April 30, 2002, to $128,395,000. 13
Cash flow from operations totaled $41,090,000 for the nine months ended April 30, 2002, compared to $33,380,000 for the same period last year. The improvement was the result of longer payment terms with our vendors, lower incentive payments to employees in fiscal 2002 and lower inventories due to the lower sales volume and lower inventory requirements as a result of our facilities consolidation performed in our July 2001 restructuring. Capital expenditures were $9,513,000 in the nine months ended April 30, 2002, compared to $15,260,000 in the same period last year. Cash used for acquisitions was $12,749,000 for the nine months ended April 30, 2002 compared to $6,630,000 for the same period in the prior year. Cash used in financing activities was $10,641,000 for the nine-month period ended April 30, 2002, resulting primarily from payments of dividends to the Company's stockholders. Cash flows used in financing activities for the same period last year were $19,001,000 related to payment of dividends and principal payments on debt. Long-term debt as a percentage of long-term debt plus stockholders' investment was 1.2% and 1.4% at April 30, 2002 and July 31, 2001, respectively. The Company maintains a maximum $200 million line of credit (based on certain financial ratios of the Company) with a group of six banks, none of which was being utilized as of April 30, 2002. At April 30, 2002, approximately $94 million of the line of credit was available to the Company. The Company is in compliance with the covenants of the agreement. During the second quarter of fiscal 2000, Brady began a Company-wide process-improvement initiative, known as Eclipse - Earning Customer Loyalty through Integrated Processes and Systems Everywhere. This initiative is intended to improve and standardize processes throughout the Company and install new technology to support those processes. The Company estimates this initiative will take approximately three years to complete with total cash outlay of approximately $30,000,000. To date, the Company has invested approximately $27,700,000 in the project. Approximately 41% of the cash outlay has been capitalized. The Company believes that its cash and cash equivalents, the cash flow from operating activities and available line of bank credit are adequate to meet the Company's current and anticipated investing and financing needs. Forward-Looking Statements Except for historical information, the Company's reports to the Securities and Exchange Commission on Form 10-K and Form 10-Q and periodic press releases, as well as other public documents and statements, may contain "forward-looking statements," as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are often identified by words such as "intend," "anticipate," "assume," "believe," "estimate," "expect," "plan," "project," "will," and other expressions, which refer to future events and trends. The ability of the Company to attain management's goals and objectives are materially dependent on numerous factors. These factors, which include economic conditions, currency fluctuations, cost of raw materials, reliance on suppliers, new products, acquisitions, intellectual property, environmental issues, political considerations and others are incorporated by reference in the Brady Corporation 2002 second quarter Form 10-Q filed with the Securities and Exchange Commission. Such factors could cause actual results to differ materially from those in the forward-looking statements. 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's business operations give rise to market risk exposure due to changes in foreign exchange rates. To manage that risk effectively, the Company enters into hedging transactions, according to established guidelines and policies, that enable it to mitigate the adverse effects of this financial market risk The global nature of the Company's business requires active participation in the foreign exchange markets. As a result of investments, production facilities and other operations on a global scale, the Company has assets, liabilities and cash flows in currencies other than the U.S. Dollar. The primary objective of the Company's foreign-exchange risk management is to minimize the impact of currency movements on intercompany transactions and foreign raw-material imports. To achieve this objective, the Company hedges a portion of estimated exposures using forward contracts. Main exposures are related to transactions denominated in the British Pound, the Euro, Canadian Dollar, Japanese Yen and Australian Dollar. The risk of these hedging instruments is not material. 15
PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.27 Revolving Credit Facility Credit Agreement (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, 2002. 16
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SIGNATURES BRADY CORPORATION Date: June 13, 2002 /s/ K. M. Hudson ------------- ---------------- K. M. Hudson President & Chief Executive Officer Date: June 13, 2002 /s/ D.W. Schroeder ------------- ------------------ D.W. Schroeder Sr. Vice President & Chief Financial Officer (Principal Accounting Officer) 17