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, 2001 -------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) --- OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to -------- --------- Commission File Number 0-12730 BRADY CORPORATION ----------------- (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 29, 2001, there were outstanding 21,118,486 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 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 Earnings Retained in the Business 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 </TABLE>
3 BRADY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) <TABLE> <CAPTION> ASSETS April 30, 2001 July 31, 2000 ------ -------------- ------------- (Unaudited) <S> <C> <C> Current assets: Cash and cash equivalents $ 52,870 $ 60,784 Accounts receivable, less allowance for losses ($2,996 and $2,919, respectively) 84,797 82,656 Inventories 44,360 41,220 Prepaid expenses and other current assets 17,409 18,523 --------- --------- Total current assets 199,436 203,183 Other assets: Goodwill - net 97,432 99,954 Other 17,399 14,337 Property, plant and equipment: Cost: Land 5,409 4,723 Buildings and improvements 49,808 43,006 Machinery and equipment 130,978 113,319 Construction in progress 6,137 15,955 --------- --------- 192,332 177,003 Less accumulated depreciation 105,192 96,343 --------- --------- Net property, plant and equipment 87,140 80,660 --------- --------- Total $ 401,407 $ 398,134 ========= ========= LIABILITIES AND STOCKHOLDERS' INVESTMENT Current liabilities: Accounts payable $ 21,702 $ 26,070 Wages and amounts withheld from employees 20,518 27,857 Taxes, other than income taxes 3,779 2,585 Accrued income taxes 10,386 10,245 Other current liabilities 12,293 12,212 Short-term borrowings and current maturities on long-term debt 1,183 8,130 --------- --------- Total current liabilities 69,861 87,099 Long-term debt, less current maturities 5,579 4,157 Other liabilities 16,221 15,654 --------- --------- Total liabilities 91,661 106,910 Stockholders' investment: Preferred stock 2,855 2,855 Class A nonvoting common stock - issued 21,115,986 211 209 and 20,966,315 shares, respectively Class B voting common stock - issued 1,769,314 shares 18 18 Additional paid-in capital 34,551 31,586 Earnings retained in the business 283,516 265,462 Treasury stock - 4,548 shares of Class A nonvoting common stock, at cost (132) (132) Cumulative other comprehensive income (10,157) (7,137) Other (1,116) (1,637) --------- --------- Total stockholders' investment 309,746 291,224 --------- --------- Total $ 401,407 $ 398,134 ========= ========= </TABLE> See Notes to Condensed Consolidated Financial Statements. 3
4 BRADY CORPORATION 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 2001 2000 2001 2000 --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> Net sales $ 134,304 $ 142,484 $ 412,394 $ 397,255 Operating expenses: Cost of products sold 61,721 61,338 187,385 172,182 Research and development 4,740 5,881 15,891 15,228 Selling, general and administrative 51,350 56,163 160,157 155,586 --------- --------- --------- --------- Total operating expenses 117,811 123,382 363,433 342,996 Operating income 16,493 19,102 48,961 54,259 Other income and (expense): Investment and other income - net (142) (119) (101) 939 Interest expense (97) (135) (282) (254) --------- --------- --------- --------- Income before income taxes 16,254 18,848 48,578 54,944 Income taxes 6,095 7,119 18,378 21,016 --------- --------- --------- --------- Net income 10,159 11,729 30,200 33,928 Earnings retained in business at beginning of period 277,436 248,126 265,462 233,521 Less dividends: Preferred stock (64) (65) (194) (194) Common stock (4,015) (3,766) (11,952) (11,231) --------- --------- --------- --------- Earnings retained in business at end of period $ 283,516 $ 256,024 $ 283,516 $ 256,024 ========= ========= ========= ========= Net income per Class A Nonvoting Common Share Basic $ 0.44 $ 0.51 $ 1.32 $ 1.49 ========= ========= ========= ========= Diluted $ 0.44 $ 0.51 $ 1.30 $ 1.47 ========= ========= ========= ========= Net income per Class B Voting Common Share Basic $ 0.44 $ 0.51 $ 1.29 $ 1.46 ========= ========= ========= ========= Diluted $ 0.44 $ 0.51 $ 1.27 $ 1.44 ========= ========= ========= ========= </TABLE> See Notes to Condensed Consolidated Financial Statements. 4
5 BRADY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> (Dollars in Thousands) (Unaudited) Nine Months Ended April 30 2001 2000 -------- -------- <S> <C> <C> Operating activities: Net income $ 30,200 $ 33,928 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 11,107 9,059 Amortization 5,075 3,949 Loss on sale of property, plant & equipment 15 45 Gain on sale of securities (722) 0 Provision for losses on accounts receivable 1,270 1,295 Amortization of restricted stock 521 521 Changes in operating assets & liabilities (net of effects of business acquisitions): Accounts receivable (3,096) (15,155) Inventory (2,144) (1,494) Prepaid expenses and other assets 896 (6,408) Accounts payable, accrued expenses and other liabilities (9,346) 3,619 Income taxes (396) (2,099) -------- -------- Net cash provided by operating activities 33,380 27,260 Investing activities: Acquisitions of businesses, net of cash acquired (6,630) (38,371) Purchase of securities 0 (22,931) Purchases of property, plant and equipment (15,260) (14,757) Proceeds from sale of property, plant and equipment 115 198 Other 867 16 -------- -------- Net cash used in investing activities (20,908) (75,845) Financing activities: Payment of dividends (12,146) (11,425) Proceeds from issuance of common stock 2,966 1,630 Principal payments on debt (8,106) (9,431) Proceeds from short-term borrowings 0 25,161 Other (1,715) 0 -------- -------- Net cash (used in) provided by financing activities (19,001) 5,935 Effect of exchange rate changes on cash (1,385) 1,348 -------- -------- Net decrease in cash and cash equivalents (7,914) (41,302) Cash and cash equivalents, beginning of period 60,784 75,466 -------- -------- Cash and cash equivalents, end of period $ 52,870 $ 34,164 ======== ======== Supplemental disclosures: Cash paid during the period for: Interest $ 327 $ 364 Income taxes, net of refunds 16,353 21,946 Acquisitions: Fair value of asset acquired, net of cash 7,920 15,751 Liabilities assumed (4,299) (10,783) Goodwill 3,009 33,403 -------- -------- Net cash paid for acquisitions $ 6,630 $ 38,371 ======== ======== </TABLE> See Notes to Condensed Consolidated Financial Statements. 5
6 BRADY CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Three and Nine Months Ended April 30, 2001 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, 2001 and July 3l, 2000, its results of operations for the three months and nine months ended April 30, 2001 and 2000, and its cash flows for the nine months ended April 30, 2001 and 2000. The condensed consolidated balance sheet at July 31, 2000 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, this does 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. In the opinion of management, such unaudited interim information reflects all adjustments, consisting only of a normal recurring nature, necessary to present the financial position, results of operations, and cash flows for the periods presented. 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. Reclassifications - Certain prior year amounts have been reclassified to conform with the current year presentation. NOTE B - New Pronouncement Effective August 1, 2000, the Company adopted Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. The cumulative effect of adopting FAS 133 on August 1, 2000, was not material to the Company's financial statements. The Company is exposed to market risk, such as changes in interest rates and currency exchange rates. The Company does not hold or issue derivative financial instruments for trading purposes. Interest Rate Hedging - Brady could be exposed to interest rate risk through its corporate borrowing activities. The objective of Brady'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 Brady's preferred mix. The interest rate risk management program consists of entering into approved interest rate derivatives when there is a desire to modify Brady's exposure to interest rates. As of April 30, 2001, the Company has not entered into any interest rate derivatives. 6
7 Currency Rate Hedging - The primary objectives of the foreign exchange risk management activities are to understand and mitigate the impact of potential foreign exchange fluctuations on the Company's financial results and its economic well-being. While the Company's risk management objectives and strategies will be driven from an economic perspective, the Company will attempt where possible and practical to ensure that the hedging strategies it engages in can be treated as "hedges" from an accounting perspective or otherwise result in accounting treatment where the earnings effect of the hedging instrument provides substantial offset (in the same period) to the earnings effect of the hedged item. Generally, these risk management transactions will involve the use of foreign currency derivatives to protect against exposure resulting from intercompany sales and identified inventory or other asset purchases. The Company primarily utilizes forward exchange contracts with maturities of less than 12 months, which qualify as cash flow hedges. These are intended to offset the effect of exchange rate fluctuations on forecasted sales, inventory purchases and intercompany charges. The fair value of these instruments at April 30, 2001, was a $359,000 asset. Gains and losses on these instruments are deferred in other comprehensive income (OCI) until the underlying transaction is recognized in earnings. The impact is reported in investment and other income on the income statement to match the underlying transaction being hedged. Hedging activity for cash flow hedges, currently fair valued at $362,000 of after-tax gain, is expected to be reclassified to earnings within the next 12 months. Hedge effectiveness is determined by how closely the changes in the fair value of the hedging instrument offset the changes in the fair value or cash flows of the hedged item. Hedge accounting is permitted only if the hedging relationship is expected to be highly effective at the inception of the hedge and on an on-going basis. Any ineffective portions are to be recognized in earnings immediately. The Company's existing cash flow hedges are considered to be 100% effective. As a result, there is no current impact to earnings due to hedge ineffectiveness. No cash flow hedges were discontinued during the nine-month period ended April 30, 2001. NOTE C - 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 2001 Fiscal 2000 ----------- ----------- 3rd Quarter 9-Month 3rd Quarter 9-Month ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Numerator: - ---------- Net income $10,159,000 $30,200,000 $11,729,000 $33,928,000 Less: Preferred stock dividends (64,784) (194,351) (64,784) (194,351) ----------- ----------- ----------- ----------- Numerator for basic and diluted Class A earnings per share 10,094,216 30,005,649 11,664,216 33,733,649 Less: Preferential dividends -- (698,631) -- (694,492) Less: Preferential dividends on dilutive stock options -- (8,555) -- (10,410) -- ----------- -- ----------- Numerator for basic and diluted Class B earnings per share $10,094,216 $29,298,463 $11,664,216 $33,028,747 =========== =========== =========== =========== </TABLE> 7
8 <TABLE> <CAPTION> Fiscal 2001 Fiscal 2000 ----------- ----------- 3rd Quarter 9-Month 3rd Quarter 9-Month ----------- ---------- ------------ ----------- <S> <C> <C> <C> <C> Denominator: - ------------ Denominator for basic earnings per share for both Class A and Class B 22,864,826 22,797,715 22,690,631 22,665,331 Plus: Effect of dilutive stock options 336,377 277,318 236,481 271,350 ---------- ---------- ---------- ---------- Denominator for diluted earnings per share for both Class A and Class B 23,201,203 23,075,033 22,927,112 22,936,681 ========== ========== ========== ========== Class A Common Stock earnings per share: Basic $0.44 $1.32 $0.51 $1.49 Diluted $0.44 $1.30 $0.51 $1.47 Class B Common Stock earnings per share: Basic $0.44 $1.29 $0.51 $1.46 Diluted $0.44 $1.27 $0.51 $1.44 </TABLE> Options to purchase 16,450 and 526,000 shares of Class A Common Stock were not included in the computations of diluted earnings per share for the quarters ending April 30, 2001 and 2000, respectively, because the option exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. Options to purchase 75,450 and 260,167 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 and 2000, respectively, because the option exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. NOTE 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 $6,852,000 and $9,408,000 for the three months ended April 30, 2001 and 2000, respectively, and $25,805,000 and $30,248,000 for the nine months ended April 30, 2001 and 2000, respectively. NOTE E - Acquisition Effective March 31, 2001, the Company acquired the assets of Balkhausen GmbH, located in Syke, Germany, a manufacturer of precision die-cut parts, specialty materials and thermal-management products for cash of approximately $6,600,000 and assumed liabilities of approximately $4,300,000. The purchase price of the acquisition is subject to change based on post-closing adjustments. This acquisition has been accounted for using the purchase method of accounting and accordingly the results of operations have been included since the date of acquisition in the accompanying condensed consolidated financial statements. The pro-forma results assuming the acquisition had been consummated as of the beginning of the periods presented are not significant. 8
9 NOTE F - 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 three reportable segments: the Identification Solutions & Specialty Tapes Group, the Graphics Group and the Direct Marketing Group. The Company's internal measure of profit or loss changed in Fiscal 2001 to support the move to a global process organization. This change excludes certain administrative expenses from the segments' measure of profit or loss. The prior year has been restated to reflect this change. Following is a summary of segment information for the three months ended April 30, 2001 and 2000: <TABLE> <CAPTION> (Dollars in Thousands) Identification Solutions & Corporate Specialty Direct and Tapes Graphics Marketing Eliminations Totals ----- -------- --------- ------------ ------ <S> <C> <C> <C> <C> <C> Three months ended April 30, 2001: - ---------------------------------- Sales from external customers $61,679 $31,115 $41,510 $134,304 Intersegment revenues 553 1,246 780 ($2,579) -- Profit 12,855 7,752 12,020 (831) 31,796 Three months ended April 30, 2000: - ---------------------------------- Sales from external customers $65,961 $32,991 $43,532 $142,484 Intersegment revenues 474 1,420 252 ($2,146) -- Profit 18,575 8,016 12,443 (1,150) 37,884 </TABLE> Following is a summary of segment information for the nine months ended April 30, 2001 and 2000: <TABLE> <CAPTION> (Dollars in Thousands) Identification Solutions & Corporate Specialty Direct and Tapes Graphics Marketing Eliminations Totals ----- -------- --------- ------------ ------ <S> <C> <C> <C> <C> <C> Nine months ended April 30, 2001: - --------------------------------- Sales from external customers $196,950 $93,230 $122,214 $412,394 Intersegment revenues 2,662 3,327 1,337 ($7,326) -- Profit 44,370 22,687 34,990 (1,692) 100,355 Nine months ended April 30, 2000: - --------------------------------- Sales from external customers $179,142 $94,173 $123,940 $397,255 Intersegment revenues 1,632 2,870 746 ($5,248) -- Profit 49,873 22,287 33,940 (3,072) 103,028 </TABLE> 9
10 Following is a reconciliation of profit for the three and nine months ended April 30, 2001 and 2000: <TABLE> <CAPTION> (Dollars in Thousands) Fiscal 2001 Fiscal 2000 ----------- ----------- 3rd Quarter 9-Month 3rd Quarter 9-Month ----------- ------- ----------- ------- <S> <C> <C> <C> <C> Total profit from reportable segments $ 32,627 $ 102,047 $ 39,034 $ 106,100 Corporate and eliminations (831) (1,692) (1,150) (3,072) Unallocated amounts: Administrative costs (13,045) (44,731) (16,176) (42,059) Goodwill amortization (1,518) (4,591) (1,618) (4,127) Interest-net 280 866 287 1,389 Foreign exchange (486) (1,309) (624) (824) Other (773) (2,012) (905) (2,463) --------- --------- --------- --------- Income before income taxes $ 16,254 $ 48,578 $ 18,848 $ 54,944 ========= ========= ========= ========= </TABLE> 10
11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations For the three months ended April 30, 2001, sales of $134,304,000 were 5.7% lower than the same quarter of the previous year. For the nine months ended April 30, 2001, sales of $412,394,000 were 3.8% higher than the same period last year. Sales of the Company's international operations were flat for the quarter and increased 8.4% for the nine-month period in local currencies, due to continued market penetration of existing base products. This increase was more than 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 7.6 percentage points in the quarter and 10.0 percentage points in the nine-month period. Thus, international sales in U.S. currency decreased 7.6% for the quarter and 1.6% for the nine-month period. Sales of the Company's U.S. operations decreased 4.2% in the quarter and increased 8.4% for the nine months ended April 30, 2001. Base domestic business decreased 7.0% in the quarter and increased 0.2% for the nine-month period. The acquisitions of Data Recognition, Inc. and Imtec, Inc. increased U.S. sales by 2.8% in the quarter and along with the acquisition of the Champion America, Inc. brand name increased U.S. sales by 8.2% in the nine-month period. The decrease in U.S. base business in the quarter was related to softness in the U.S. economy and wireless, electronics and automatic identification industries. The cost of products sold as a percentage of sales increased from 43.0% to 46.0% for the quarter and from 43.3% to 45.4% for the nine months ended April 30, 2001. This increase was due primarily to changes in product mix resulting from some of the Company's recent acquisitions and the exchange rate on goods purchased by foreign subsidiaries. Selling, general and administrative (SG&A) expenses as a percentage of sales were 38.2% for the quarter compared to 39.4% for the same quarter of the previous year. For the nine months ended April 30, 2001, this percentage was 38.8% compared to 39.2% for the same period last year. The decrease was primarily due to cost-containment efforts, lower accruals for management bonuses and the fact that prior year quarter included expenses related to an attempt to acquire Critchley. Research and development expenditures decreased 19.4% for the quarter and increased 4.4% for the nine months ended April 30, 2001, versus the same periods last year, reflecting variations in project timing. As a percentage of sales, research and development expenses decreased from 4.1% to 3.5% for the quarter but increased from 3.8% to 3.9% for the nine-month period, reflecting the Company's commitment to new product development. Operating income was $16,493,000 for the quarter and $48,691,000 for the nine months ended April 30, 2001, compared to $19,102,000 and $54,259,000 for the same periods last year because of the factors cited above. Investment and other income was flat for the quarter and decreased $1,040,000 for the nine months ended April 30, 2001, compared to the prior-year results. This decrease was the result of higher foreign exchange transaction losses and lower investment income due to lower cash balances resulting from acquisitions. Income before income taxes decreased 13.8% for the quarter and 11.6% for the nine months ended April 30, 2001, compared to prior-year results. The Company's effective tax rate was 37.5% for the quarter compared to 37.8% for the same quarter of the previous year. For the nine months ended April 30, 2001, this percentage was 37.8% compared to 38.2% for the same period last year. These decreases were the result of profitability changes in the Company's international operations. 11
12 Net income for the three months ended April 30, 2001, decreased 13.4% to $10,159,000 compared to $11,729,000 for the same quarter of the previous year. For the nine months ended April 30, 2001, net income decreased 11.0% to $30,200,000 from $33,928,000 for the same period last year. On a Class A Common Share basis, diluted net income for the three months ended April 30, 2001, was $0.44 compared to $0.51 per share for the same quarter of the previous year. For the nine months ended April 30, 2001, Class A Common Share diluted net income was $1.30 compared to $1.47 per share for the same period last year. The decreases in the current quarter and nine-month period were primarily due to the sales shortfalls discussed above, a strong U.S. dollar, higher utility costs, and investments in electronic commerce and process improvement. Business Segment Operating Results Identification Solutions & Specialty Tapes (ISST) Group: ISST sales decreased 6.5% for the three months ended April 30, 2001. For the nine months ended April 30, 2001, ISST sales were 9.9% higher than the same period last year. Core business in local currency decreased 8.7% in the quarter and increased 3.6% for the nine-month period ended April 30, 2001. The acquisitions of Data Recognition, Inc., Imtec, Inc. and Balkhausen GmbH increased sales over prior year 5.0% in the quarter and 10.1% for the nine-month period. Contributing to the decreases 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 2.8% in the quarter and 3.8% in the nine-month period ended April 30, 2001. Latin America, Asia Pacific, Europe and the United States all showed sales declines in local currency for the quarter. The domestic decrease related to softness in the electronic and telecommunications and industrial markets. Profit as a percentage of sales decreased from 28.2% to 20.8% for the quarter and from 27.8% to 22.5% for the nine months ended April 30, 2001; the decreases were primarily a result of negative effects of foreign currency, increased utility costs and lower than expected sales. The negative effect of foreign currency decreased group profit for the nine-month period by approximately 5.0 percentage points. Graphics Group: Graphics sales decreased 5.7% for the three months ended April 30, 2001, and 1.0% for the nine months ended April 30, 2001. Sales in local currency decreased 3.1% in the quarter and increased 2.3% for the nine-month period ended April 30, 2001. Sales were negatively affected by fluctuations in the exchange rates used to translate financial results into U.S. currency, which reduced sales growth within the group by 2.6% and 3.3% in the quarter and the nine-month period, respectively. Sales for the quarter were down in North America and Europe, but rose in Asia Pacific. Profit as a percentage of sales increased from 24.3% to 24.9% in the quarter and from 23.7% to 24.3% for the nine months ended April 30, 2001. These increases were primarily the result of cost-control measures and the timing of research and development costs in comparison to the prior year. 12
13 Direct Marketing Group: Direct Marketing sales decreased 4.6% for the quarter and 1.4% for the nine-month period ended April 30, 2001, in comparison to the prior year. Core business in local currency increased 0.5% in the three months ended April 30, 2001, and 4.8% for the nine-month period. The acquisition of the Champion America Inc. brand name increased sales 0.5% for the nine-month period ended April 30, 2001. The Direct Marketing Group was particularly impacted by 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 5.2% in the quarter and 6.8% in the nine-month period. Sales for the quarter were flat in the United States. In Europe, sales were down in U.S. Dollars, but were flat in local currencies. Brazil continued to grow at double-digit rates. Profit as a percentage of sales increased from 28.6% to 29.0% in the quarter and from 27.4% to 28.6% for the nine months ended April 30, 2001. These improvements were primarily due to continued productivity improvement in selling and marketing expenses and refinements in mailing plan techniques. Financial Condition The Company's liquidity remained strong. The current ratio as of April 30, 2001, was 2.9. Cash and cash equivalents were $52,870,000 at April 30, 2001, compared to $60,784,000 at July 31, 2000. The decrease was primarily due to payment of $8,000,000 on the Company's revolving loan agreement and the acquisition of Balkhausen GmbH. Working capital increased $13,491,000 during the nine months ended April 30, 2001, to $129,575,000. Cash flow from operations totaled $33,380,000 for the nine months ended April 30, 2001, compared to $27,260,000 for the same period last year. The improvement was primarily the result of a decrease in prepaid expenses. Capital expenditures were $15,260,000 in the nine months ended April 30, 2001, compared to $14,757,000 in the same period last year. Cash used in financing activities was $19,001,000 for the nine-month period ended April 30, 2001, resulting from payments of dividends to the Company's stockholders and principal payments on bank debt. Cash flows provided by financing activities for the same period last year were $5,935,000. Long-term debt as a percentage of long-term debt plus stockholders' investment was 1.8% and 1.4% at April 30, 2001 and July 31, 2000, respectively. The Company maintains a $200,000,000 line of credit with a group of six banks, none of which was being utilized as of April 30, 2001. 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 $20,600,000 in the project. The Company estimates that about 50% of that cash outlay will be capital expenditures. 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. 13
14 Forward-Looking Statements Matters in this Quarterly Report may contain forward-looking information, as defined in the Private Securities Litigation Reform Act of 1995. All such forward-looking information in this report involves risks and uncertainties, including, but not limited to, variations in the economic or political conditions in the countries with which the Company does business; fluctuations in currency exchange rates for international currencies versus the U.S. dollar; technology changes; the continued availability of sources of supply; domestic and international economic conditions and growth rates; the ability of the Company to timely adjust its cost structure to changes in levels of sales, product mix and low levels of order backlog; and the ability of the Company to acquire new businesses. The Company cautions that forward-looking statements are not guarantees, since there are inherent difficulties in predicting future results, and that actual results could differ materially from those expressed or implied in forward-looking statements. 14
15 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits None (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, 2001. 15
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 8, 2001 /s/ K. M. Hudson -------------------- ---------------- K. M. Hudson President & Chief Executive Officer Date: June 8, 2001 /s/ F. M. Jaehnert -------------------- ------------------ F. M. Jaehnert Vice President & Chief Financial Officer (Principal Accounting Officer) 16