e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For
the Quarterly Period Ended January 31, 2008
OR
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o |
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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)
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Wisconsin
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39-0178960 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
6555 West Good Hope Road, Milwaukee, Wisconsin 53223
(Address of principal executive offices)
(Zip Code)
(414) 358-6600
(Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
As of March 2, 2008, there were outstanding 50,784,181 shares of Class A Nonvoting Common Stock and
3,538,628 shares of Class B Voting Common Stock. The Class B Common Stock, all of which is held by
affiliates of the Registrant, is the only voting stock.
FORM 10-Q
BRADY CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
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January 31, 2008 |
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July 31, 2007 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
198,439 |
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$ |
142,846 |
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Short term investments |
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19,200 |
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Accounts receivable, less allowance for losses ($8,960 and $9,109, respectively) |
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242,394 |
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239,569 |
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Inventories: |
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Finished products |
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82,783 |
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80,486 |
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Work-in-process |
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21,164 |
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21,309 |
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Raw materials and supplies |
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35,867 |
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37,983 |
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Total inventories |
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139,814 |
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139,778 |
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Prepaid expenses and other current assets |
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45,946 |
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42,020 |
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Total current assets |
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626,593 |
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583,413 |
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Other assets: |
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Goodwill |
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768,850 |
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737,450 |
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Other intangible assets |
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148,468 |
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149,761 |
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Deferred income taxes |
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31,070 |
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32,508 |
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Other |
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24,697 |
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21,111 |
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Property, plant and equipment: |
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Cost: |
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Land |
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6,394 |
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6,332 |
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Buildings and improvements |
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93,938 |
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90,688 |
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Machinery and equipment |
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264,611 |
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248,356 |
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Construction in progress |
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14,531 |
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18,107 |
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379,474 |
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363,483 |
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Less accumulated depreciation |
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205,240 |
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188,869 |
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Net property, plant and equipment |
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174,234 |
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174,614 |
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Total |
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$ |
1,773,912 |
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$ |
1,698,857 |
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LIABILITIES AND STOCKHOLDERS INVESTMENT |
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Current liabilities: |
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Accounts payable |
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$ |
96,220 |
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$ |
91,596 |
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Wages and amounts withheld from employees |
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62,065 |
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73,622 |
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Taxes, other than income taxes |
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7,789 |
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8,461 |
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Accrued income taxes |
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12,804 |
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24,677 |
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Other current liabilities |
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53,129 |
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60,254 |
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Short-term borrowings and current maturities on long-term obligations |
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21,436 |
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21,444 |
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Total current liabilities |
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253,443 |
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280,054 |
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Long-term obligations, less current maturities |
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478,572 |
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478,575 |
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Other liabilities |
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62,899 |
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49,216 |
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Total liabilities |
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794,914 |
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807,845 |
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Stockholders investment: |
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January 31, 2008 |
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July 31, 2007 |
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(Unaudited) |
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Class A nonvoting common stock Issued and outstanding 51,032,887 and
50,586,524 shares, respectively |
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510 |
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506 |
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Class B voting common stock Issued and outstanding 3,538,628 shares |
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35 |
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35 |
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Additional paid-in capital |
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284,761 |
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266,203 |
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Earnings retained in the business |
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586,111 |
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540,238 |
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Accumulated other comprehensive income |
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107,035 |
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83,376 |
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Other |
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|
546 |
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|
654 |
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Total stockholders investment |
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978,998 |
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891,012 |
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Total |
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$ |
1,773,912 |
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$ |
1,698,857 |
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See Notes to Condensed Consolidated Financial Statements.
3
BRADY
CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
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Three Months Ended January 31, |
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Six Months Ended January 31, |
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(Unaudited) |
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(Unaudited) |
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Percentage |
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Percentage |
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2008 |
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2007 |
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Change |
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2008 |
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2007 |
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Change |
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Net sales |
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$ |
364,124 |
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$ |
321,275 |
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13.3 |
% |
|
$ |
744,258 |
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$ |
653,534 |
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13.9 |
% |
Cost of products sold |
|
|
189,101 |
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|
171,114 |
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10.5 |
% |
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|
381,567 |
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|
339,245 |
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|
12.5 |
% |
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|
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Gross margin |
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175,023 |
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150,161 |
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16.6 |
% |
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|
362,691 |
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|
314,289 |
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15.4 |
% |
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Operating expenses: |
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Research and development |
|
|
10,071 |
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9,082 |
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10.9 |
% |
|
|
19,050 |
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|
17,614 |
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|
8.2 |
% |
Selling, general and administrative |
|
|
122,508 |
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|
|
108,355 |
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|
13.1 |
% |
|
|
242,859 |
|
|
|
212,010 |
|
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|
14.6 |
% |
|
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|
|
|
|
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Total operating expenses |
|
|
132,579 |
|
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|
117,437 |
|
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|
12.9 |
% |
|
|
261,909 |
|
|
|
229,624 |
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|
14.1 |
% |
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|
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Operating income |
|
|
42,444 |
|
|
|
32,724 |
|
|
|
29.7 |
% |
|
|
100,782 |
|
|
|
84,665 |
|
|
|
19.0 |
% |
|
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|
|
|
|
|
|
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Other income (expense): |
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Investment and other
income(expense) net |
|
|
2,269 |
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|
|
(106 |
) |
|
NM |
|
|
2,387 |
|
|
|
532 |
|
|
|
348.7 |
% |
Interest expense |
|
|
(6,747 |
) |
|
|
(5,244 |
) |
|
|
28.7 |
% |
|
|
(13,467 |
) |
|
|
(9,979 |
) |
|
|
35.0 |
% |
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|
|
|
|
|
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|
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|
Income before income taxes |
|
|
37,966 |
|
|
|
27,374 |
|
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|
38.7 |
% |
|
|
89,702 |
|
|
|
75,218 |
|
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|
19.3 |
% |
|
|
|
|
|
|
|
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|
|
|
|
|
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|
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|
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Income taxes |
|
|
11,276 |
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|
|
7,665 |
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|
|
47.1 |
% |
|
|
26,642 |
|
|
|
21,061 |
|
|
|
26.5 |
% |
|
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|
|
|
|
|
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|
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|
|
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|
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|
|
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|
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|
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|
|
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|
Net income |
|
$ |
26,690 |
|
|
$ |
19,709 |
|
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|
35.4 |
% |
|
$ |
63,060 |
|
|
$ |
54,157 |
|
|
|
16.4 |
% |
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Per Class A Nonvoting Common Share: |
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Basic net income |
|
$ |
0.49 |
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|
$ |
0.37 |
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|
32.4 |
% |
|
$ |
1.16 |
|
|
$ |
1.01 |
|
|
|
14.9 |
% |
Diluted net income |
|
$ |
0.48 |
|
|
$ |
0.36 |
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|
|
33.3 |
% |
|
$ |
1.14 |
|
|
$ |
0.99 |
|
|
|
15.2 |
% |
Dividends |
|
$ |
0.15 |
|
|
$ |
0.14 |
|
|
|
7.1 |
% |
|
$ |
0.30 |
|
|
$ |
0.28 |
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|
7.1 |
% |
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Per Class B Voting Common Share: |
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic net income |
|
$ |
0.49 |
|
|
$ |
0.37 |
|
|
|
32.4 |
% |
|
$ |
1.14 |
|
|
$ |
0.99 |
|
|
|
15.2 |
% |
Diluted net income |
|
$ |
0.48 |
|
|
$ |
0.36 |
|
|
|
33.3 |
% |
|
$ |
1.13 |
|
|
$ |
0.97 |
|
|
|
16.5 |
% |
Dividends |
|
$ |
0.15 |
|
|
$ |
0.14 |
|
|
|
7.1 |
% |
|
$ |
0.28 |
|
|
$ |
0.26 |
|
|
|
7.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding (in thousands): |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
54,510 |
|
|
|
53,894 |
|
|
|
|
|
|
|
54,430 |
|
|
|
53,814 |
|
|
|
|
|
Diluted |
|
|
55,228 |
|
|
|
54,789 |
|
|
|
|
|
|
|
55,175 |
|
|
|
54,697 |
|
|
|
|
|
NM = Not Meaningful
See Notes to Condensed Consolidated Financial Statements.
4
BRADY
CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
January 31, |
|
|
|
(Unaudited) |
|
|
|
2008 |
|
|
2007 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
63,060 |
|
|
$ |
54,157 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
29,669 |
|
|
|
26,096 |
|
Deferred income taxes |
|
|
(1,527 |
) |
|
|
(542 |
) |
Loss on disposal of property, plant & equipment |
|
|
1,010 |
|
|
|
305 |
|
Non-cash portion of stock-based compensation expense |
|
|
6,382 |
|
|
|
3,669 |
|
Changes in operating assets and liabilities (net of effects of business acquisitions): |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
7,080 |
|
|
|
(14,036 |
) |
Inventories |
|
|
7,571 |
|
|
|
(14,787 |
) |
Prepaid expenses and other assets |
|
|
(7,339 |
) |
|
|
(8,590 |
) |
Accounts payable and accrued liabilities |
|
|
(17,117 |
) |
|
|
(8,316 |
) |
Income taxes |
|
|
(1,266 |
) |
|
|
(3,411 |
) |
Other liabilities |
|
|
325 |
|
|
|
2,514 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
87,848 |
|
|
|
37,059 |
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired |
|
|
(24,552 |
) |
|
|
(90,418 |
) |
Payments of contingent consideration |
|
|
(5,798 |
) |
|
|
(9,329 |
) |
Purchases of short-term investments |
|
|
(10,350 |
) |
|
|
|
|
Sales of short-term investments |
|
|
29,550 |
|
|
|
11,500 |
|
Purchases of property, plant and equipment |
|
|
(14,358 |
) |
|
|
(31,901 |
) |
Other |
|
|
(3,259 |
) |
|
|
(5,831 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(28,767 |
) |
|
|
(125,979 |
) |
Financing activities: |
|
|
|
|
|
|
|
|
Payment of dividends |
|
|
(16,285 |
) |
|
|
(15,014 |
) |
Proceeds from issuance of common stock |
|
|
7,980 |
|
|
|
3,837 |
|
Principal payments on debt |
|
|
(9 |
) |
|
|
(26,231 |
) |
Proceeds from issuance of debt |
|
|
|
|
|
|
97,020 |
|
Excess income tax benefit from the exercise of stock options
and deferred compensation distribution |
|
|
4,093 |
|
|
|
763 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(4,221 |
) |
|
|
60,375 |
|
Effect of exchange rate changes on cash |
|
|
733 |
|
|
|
1,945 |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
55,593 |
|
|
|
(26,600 |
) |
Cash and cash equivalents, beginning of period |
|
|
142,846 |
|
|
|
113,008 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
198,439 |
|
|
$ |
86,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest, net of capitalized interest |
|
$ |
13,153 |
|
|
$ |
9,754 |
|
Income taxes, net of refunds |
|
|
26,381 |
|
|
|
23,983 |
|
Acquisitions: |
|
|
|
|
|
|
|
|
Fair value of assets acquired, net of cash and goodwill |
|
$ |
17,279 |
|
|
$ |
50,042 |
|
Liabilities assumed |
|
|
(6,371 |
) |
|
|
(15,617 |
) |
Goodwill |
|
|
13,644 |
|
|
|
55,993 |
|
|
|
|
|
|
|
|
Net cash paid for acquisitions |
|
$ |
24,552 |
|
|
$ |
90,418 |
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
5
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended January 31, 2008
(Unaudited)
(In thousands, except share and per share amounts)
NOTE A Basis of Presentation
The condensed consolidated financial statements included herein have been prepared by
Brady Corporation and subsidiaries (the Company or Brady) without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. In the opinion of the Company, the
foregoing statements contain all adjustments, consisting only of normal recurring adjustments and
the impact of adopting Financial Accounting Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48) (see Note I for further information) as of
August 1, 2007, necessary to present fairly the financial position of the Company as of January 31,
2008 and July 3l, 2007, its results of operations for the three and six months ended January 31,
2008 and 2007, and its cash flows for the six months ended January 31, 2008 and 2007. The condensed
consolidated balance sheet as of July 31, 2007 has been derived from the audited consolidated
financial statements of that date. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America (GAAP) requires
management to make estimates and assumptions that affect the reported amounts therein. Due to the
inherent uncertainty involved in making estimates, actual results in future periods may differ from
the estimates.
Certain information and footnote disclosures normally included in financial statements
prepared in accordance with GAAP have been omitted pursuant to rules and regulations of the
Securities and Exchange Commission. Accordingly, the condensed consolidated financial statements do
not include all of the information and footnotes required by GAAP for complete financial statement
presentation. It is suggested that these condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes thereto included in the
Companys latest annual report on Form 10-K for the year ended July 31, 2007.
NOTE B Goodwill and Intangible Assets
Changes in the carrying amount of goodwill for the six months ended January 31, 2008, are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
|
|
|
|
|
|
|
|
|
|
Brady |
|
|
& People ID |
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
|
Americas |
|
|
Europe |
|
|
Asia-Pacific |
|
|
Total |
|
Balance as of July 31, 2007 |
|
$ |
143,775 |
|
|
$ |
260,299 |
|
|
$ |
163,699 |
|
|
$ |
169,677 |
|
|
$ |
737,450 |
|
Goodwill acquired during the period |
|
|
|
|
|
|
|
|
|
|
13,644 |
|
|
|
|
|
|
|
13,644 |
|
Adjustments for prior year acquisitions |
|
|
(392 |
) |
|
|
700 |
|
|
|
(246 |
) |
|
|
3,765 |
|
|
|
3,827 |
|
Translation adjustments |
|
|
653 |
|
|
|
847 |
|
|
|
6,434 |
|
|
|
5,995 |
|
|
|
13,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 31, 2008 |
|
$ |
144,036 |
|
|
$ |
261,846 |
|
|
$ |
183,531 |
|
|
$ |
179,437 |
|
|
$ |
768,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill increased $31,400 during the six months ended January 31, 2008. A significant
component of the increase related to the November 2007 acquisitions of Transposafe Systems B.V. and
Holland Mounting Systems B.V. (collectively Transposafe), which added $13,644. Goodwill also
increased as a result of adjustments to the preliminary allocation of purchase price for the
acquisitions completed in fiscal 2007, of which the largest adjustment related to the final
purchase price adjustments for Comprehensive Identification Products, Inc (CIPI) which added
$3,668. Of the $3,668 increase in goodwill attributed to the allocation of the purchase price for
CIPI, $1,609 related to the adoption of FIN 48 (see Note I), $1,250 related to the accrual for
employee termination costs, and the remaining $809 related to various exit costs associated with
the closure of a facility. Additionally, during the six months ended January 31, 2008, goodwill
increased by $13,929 due the effects of foreign currency translation.
6
Other intangible assets include patents, trademarks, customer relationships, purchased
software, non-compete agreements and other intangible assets with finite lives being amortized in
accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets. The net book value of these assets was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2008 |
|
|
July 31, 2007 |
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
Gross |
|
|
|
|
|
|
|
|
|
Period |
|
|
Carrying |
|
|
Accumulated |
|
|
Net Book |
|
|
Period |
|
|
Carrying |
|
|
Accumulated |
|
|
Net Book |
|
|
|
(Years) |
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
|
(Years) |
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
Amortized other
intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents |
|
|
15 |
|
|
$ |
8,424 |
|
|
$ |
(6,238 |
) |
|
$ |
2,186 |
|
|
|
15 |
|
|
$ |
8,392 |
|
|
$ |
(5,913 |
) |
|
$ |
2,479 |
|
Trademarks and
other |
|
|
4 |
|
|
|
6,063 |
|
|
|
(4,225 |
) |
|
|
1,838 |
|
|
|
5 |
|
|
|
4,510 |
|
|
|
(3,250 |
) |
|
|
1,260 |
|
Customer
relationships |
|
|
7 |
|
|
|
144,295 |
|
|
|
(47,516 |
) |
|
|
96,779 |
|
|
|
7 |
|
|
|
134,125 |
|
|
|
(36,674 |
) |
|
|
97,451 |
|
Non-compete
agreements |
|
|
4 |
|
|
|
11,821 |
|
|
|
(7,345 |
) |
|
|
4,476 |
|
|
|
4 |
|
|
|
11,364 |
|
|
|
(6,294 |
) |
|
|
5,070 |
|
Other |
|
|
5 |
|
|
|
3,298 |
|
|
|
(2,868 |
) |
|
|
430 |
|
|
|
5 |
|
|
|
3,297 |
|
|
|
(2,554 |
) |
|
|
743 |
|
Unamortized other
intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
N/A |
|
|
|
42,759 |
|
|
|
|
|
|
|
42,759 |
|
|
|
N/A |
|
|
|
42,758 |
|
|
|
|
|
|
|
42,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
216,660 |
|
|
$ |
(68,192 |
) |
|
$ |
148,468 |
|
|
|
|
|
|
$ |
204,446 |
|
|
$ |
(54,685 |
) |
|
$ |
149,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The value of goodwill and other intangible assets in the Condensed Consolidated Balance
Sheet at January 31, 2008 differs from the value assigned to them in the allocation of purchase
price due to the effect of fluctuations in the exchange rates used to translate financial
statements into the United States Dollar between the date of acquisition and January 31, 2008.
Amortization expense on intangible assets was $6,838 and $5,720 for the three-month
periods ended January 31, 2008 and 2007, respectively and $12,743 and $10,960 for the six-month
periods ended January 31, 2008 and 2007, respectively. Annual amortization is projected to be
$26,560, $24,803, $23,920, $20,207 and $11,084 for the years ending July 31, 2008, 2009, 2010, 2011
and 2012, respectively.
NOTE C Comprehensive Income
Total comprehensive income, which was comprised of net income, foreign currency
adjustments, net unrealized gains and losses from cash flow hedges and other investments, the
unrealized gain on the post-retirement medical, dental, and vision plans, and their related tax
effects amounted to $25,675 and $10,536 for the three months ended January 31, 2008 and 2007,
respectively and $86,719 and $40,811 for the six months ended January 31, 2008 and 2007,
respectively.
7
NOTE D Net Income Per Common Share
Reconciliations of the numerator and denominator of the basic and diluted per share
computations for the Companys Class A and Class B common stock are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended January 31, |
|
|
Six Months Ended January 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (numerator for basic and
diluted Class A net income per share) |
|
$ |
26,690 |
|
|
$ |
19,709 |
|
|
$ |
63,060 |
|
|
$ |
54,157 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferential dividends |
|
|
|
|
|
|
|
|
|
|
(846 |
) |
|
|
(836 |
) |
Preferential dividends on
dilutive stock options |
|
|
|
|
|
|
|
|
|
|
(13 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted
Class B net income per share |
|
$ |
26,690 |
|
|
$ |
19,709 |
|
|
$ |
62,201 |
|
|
$ |
53,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per
share for both Class A and Class B |
|
|
54,510 |
|
|
|
53,894 |
|
|
|
54,430 |
|
|
|
53,814 |
|
Plus: Effect of dilutive stock options |
|
|
718 |
|
|
|
895 |
|
|
|
745 |
|
|
|
883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income
per share for both Class A and
Class B |
|
|
55,228 |
|
|
|
54,789 |
|
|
|
55,175 |
|
|
|
54,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Nonvoting Common Stock net income
per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.49 |
|
|
$ |
0.37 |
|
|
$ |
1.16 |
|
|
$ |
1.01 |
|
Diluted |
|
$ |
0.48 |
|
|
$ |
0.36 |
|
|
$ |
1.14 |
|
|
$ |
0.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Voting Common Stock net income per
share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.49 |
|
|
$ |
0.37 |
|
|
$ |
1.14 |
|
|
$ |
0.99 |
|
Diluted |
|
$ |
0.48 |
|
|
$ |
0.36 |
|
|
$ |
1.13 |
|
|
$ |
0.97 |
|
Options to purchase 2,171,000 and 1,725,750 shares of Class A Nonvoting Common Stock for the
three and six months ended January 31, 2008, respectively, and 1,269,500 and 949,500 shares of
Class A Nonvoting Common Stock for the three and six months ended January 31, 2007, respectively,
were not included in the computations of diluted net income per share because the option exercise
price was greater than the average market price of the common shares and, therefore, the effect
would be anti-dilutive.
8
NOTE E Segment Information
The Companys reportable segments are businesses that are each managed separately. As a
result of continuing organizational changes within the executive leadership team in which
management of the manufacturing facilities was aligned with the geographic region of the facility,
the Company has revised its reportable segments and has restated the corresponding segment
information from its previous geographical based structure for the prior year. The Company has
four reportable segments: Brady Americas, Direct Marketing & People ID Americas, Europe and
Asia-Pacific. The Brady Americas reportable segment includes businesses that focus on MRO market
products and OEM market products sold to customers in North and South America through distributors
or a direct sales force. The Direct Marketing & People ID Americas reportable segment includes
businesses that market their products through business-to-business direct mail, catalogs, and
telemarketing, distribution and a direct sales force in North and South Americas. The Europe and
Asia-Pacific reportable segments have not changed from prior year disclosures. Following is a
summary of segment information for the three and six months ended January 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing & |
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
Brady |
|
People ID |
|
|
|
|
|
|
|
|
|
|
|
|
|
And |
|
|
|
|
Americas |
|
Americas |
|
Europe |
|
Asia-Pacific |
|
Sub-Totals |
|
Eliminations |
|
Totals |
Three months ended
January 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
external customers |
|
$ |
95,303 |
|
|
$ |
61,318 |
|
|
$ |
122,615 |
|
|
$ |
84,888 |
|
|
$ |
364,124 |
|
|
$ |
|
|
|
$ |
364,124 |
|
Intersegment revenues |
|
|
15,316 |
|
|
|
572 |
|
|
|
2,261 |
|
|
|
6,247 |
|
|
|
24,396 |
|
|
|
(24,396 |
) |
|
|
|
|
Segment profit |
|
|
19,517 |
|
|
|
12,519 |
|
|
|
31,067 |
|
|
|
12,660 |
|
|
|
75,763 |
|
|
|
(2,347 |
) |
|
|
73,416 |
|
Three months ended
January 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
external customers |
|
$ |
80,510 |
|
|
$ |
59,478 |
|
|
$ |
98,846 |
|
|
$ |
82,441 |
|
|
$ |
321,275 |
|
|
$ |
|
|
|
$ |
321,275 |
|
Intersegment revenues |
|
|
13,124 |
|
|
|
780 |
|
|
|
1,664 |
|
|
|
4,703 |
|
|
|
20,271 |
|
|
|
(20,271 |
) |
|
|
|
|
Segment profit |
|
|
14,473 |
|
|
|
14,920 |
|
|
|
22,604 |
|
|
|
12,394 |
|
|
|
64,391 |
|
|
|
(2,828 |
) |
|
|
61,563 |
|
Six months ended
January 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
external customers |
|
$ |
200,538 |
|
|
$ |
130,858 |
|
|
$ |
231,529 |
|
|
$ |
181,333 |
|
|
$ |
744,258 |
|
|
$ |
|
|
|
$ |
744,258 |
|
Intersegment revenues |
|
|
29,902 |
|
|
|
1,192 |
|
|
|
5,253 |
|
|
|
12,461 |
|
|
|
48,808 |
|
|
|
(48,808 |
) |
|
|
|
|
Segment profit |
|
|
43,975 |
|
|
|
32,167 |
|
|
|
60,967 |
|
|
|
32,050 |
|
|
|
169,159 |
|
|
|
(4,583 |
) |
|
|
164,576 |
|
Six months ended
January 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
external customers |
|
$ |
163,269 |
|
|
$ |
123,662 |
|
|
$ |
191,211 |
|
|
$ |
175,392 |
|
|
$ |
653,534 |
|
|
$ |
|
|
|
$ |
653,534 |
|
Intersegment revenues |
|
|
25,342 |
|
|
|
1,492 |
|
|
|
2,450 |
|
|
|
10,693 |
|
|
|
39,977 |
|
|
|
(39,977 |
) |
|
|
|
|
Segment profit |
|
|
35,188 |
|
|
|
31,723 |
|
|
|
45,609 |
|
|
|
34,531 |
|
|
|
147,051 |
|
|
|
(5,638 |
) |
|
|
141,413 |
|
Following is a reconciliation of segment profit to net income for the three months and six months
ended January 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended: |
|
|
Six months ended: |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Total profit from reportable segments |
|
$ |
75,763 |
|
|
$ |
64,391 |
|
|
$ |
169,159 |
|
|
$ |
147,051 |
|
Corporate and eliminations |
|
|
(2,347 |
) |
|
|
(2,828 |
) |
|
|
(4,583 |
) |
|
|
(5,638 |
) |
Unallocated amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative costs |
|
|
(30,972 |
) |
|
|
(28,839 |
) |
|
|
(63,794 |
) |
|
|
(56,748 |
) |
Investment and other income (expense) |
|
|
2,269 |
|
|
|
(106 |
) |
|
|
2,387 |
|
|
|
532 |
|
Interest expense |
|
|
(6,747 |
) |
|
|
(5,244 |
) |
|
|
(13,467 |
) |
|
|
(9,979 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
37,996 |
|
|
|
27,374 |
|
|
|
89,702 |
|
|
|
75,218 |
|
Income taxes |
|
|
(11,276 |
) |
|
|
(7,665 |
) |
|
|
(26,642 |
) |
|
|
(21,061 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
26,690 |
|
|
$ |
19,709 |
|
|
$ |
63,060 |
|
|
$ |
54,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
NOTE F Stock-Based Compensation
The Company has an incentive stock plan under which the Board of Directors may grant
nonqualified stock options to purchase shares of Class A Nonvoting Common Stock or restricted
shares of Class A Nonvoting Common Stock to employees. Additionally, the Company has a nonqualified
stock option plan for non-employee directors under which stock options to purchase shares of
Class A Nonvoting Common Stock are available for grant. The options have an exercise price equal to
the fair market value of the underlying stock at the date of grant and generally vest ratably over
a three-year period, with one-third becoming exercisable one year after the grant date and
one-third additional in each of the succeeding two years. Options issued under these plans,
referred to herein as service-based options, generally expire 10 years from the date of grant.
The Company also grants stock options to certain executives and key management employees that vest
upon meeting certain financial performance conditions over the vesting schedule described above.
These options are referred to herein as performance-based options. Performance-based options
granted in fiscal 2007 and forward expire 10 years from the date of grant. Restricted shares have
an issuance price equal to the fair market value of the underlying stock at the date of grant.
They vest at the end of a five-year period and upon meeting certain financial performance
conditions. These shares are referred to herein as performance-based restricted shares.
As of January 31, 2008, the Company has reserved 4,768,201 shares of Class A Nonvoting
Common Stock for outstanding stock options and restricted shares and 887,500 shares of Class A
Nonvoting Common Stock for future issuance of stock options and restricted shares under the various
plans. The Company uses treasury stock or will issue new Class A Nonvoting Common Stock to deliver
shares under these plans.
The Company accounts for share-based compensation awards in accordance with SFAS
No. 123(R), Share Based Payment. In accordance with this standard, the Company recognizes the
compensation cost of all share-based awards on a straight-line basis over the vesting period of the
award. Total stock compensation expense recognized by the Company during the three months ended
January 31, 2008 and 2007 was $3,125 ($1,906 net of taxes) and $2,110 ($1,287 net of taxes),
respectively, and expense recognized during the six months ended January 31, 2008 and 2007 was
$6,382 ($3,893 net of taxes) and $3,669 ($2,238 net of taxes), respectively. As of January 31,
2008, total unrecognized compensation cost related to share-based compensation awards was
approximately $23,656 pre-tax, net of estimated forfeitures, which the Company expects to recognize
over a weighted-average period of approximately 2.9 years.
The Company has estimated the fair value of its service-based and performance-based
option awards granted during the six months ended January 31, 2008 and 2007 using the Black-Scholes
option valuation model. The weighted-average assumptions used in the Black-Scholes valuation model
are reflected in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
Six Months Ended |
|
|
January 31, 2008 |
|
January 31, 2007 |
|
|
Service-Based |
|
Performance- |
|
|
|
|
|
Performance- |
|
|
Option |
|
Based Option |
|
Service-Based |
|
Based Option |
Black-Scholes Option Valuation Assumptions |
|
Awards |
|
Awards |
|
Option Awards |
|
Awards |
Expected term (in years) |
|
|
6.04 |
|
|
|
6.57 |
|
|
|
6.07 |
|
|
|
6.57 |
|
Expected volatility |
|
|
32.05 |
% |
|
|
33.68 |
% |
|
|
34.01 |
% |
|
|
34.66 |
% |
Expected dividend yield |
|
|
1.62 |
% |
|
|
1.58 |
% |
|
|
1.46 |
% |
|
|
1.51 |
% |
Risk-free interest rate |
|
|
3.44 |
% |
|
|
4.66 |
% |
|
|
4.52 |
% |
|
|
4.90 |
% |
Weighted-average market value of
underlying stock at grant date |
|
$ |
38.22 |
|
|
$ |
35.35 |
|
|
$ |
38.19 |
|
|
$ |
33.32 |
|
Weighted-average exercise price |
|
$ |
38.22 |
|
|
$ |
35.35 |
|
|
$ |
38.19 |
|
|
$ |
33.32 |
|
Weighted-average fair value of options
granted during the period |
|
$ |
11.94 |
|
|
$ |
12.83 |
|
|
$ |
13.57 |
|
|
$ |
12.57 |
|
The Company uses historical data regarding stock option exercise behaviors to estimate the
expected term of options granted based on the period of time that options granted are expected to
be outstanding. Expected volatilities are based on the historical volatility of the Companys
stock. The expected dividend yield is based on the Companys historical dividend payments and
historical yield. The risk-free interest rate is based on the U.S. Treasury yield curve in effect
on the grant date for the length of time corresponding to the expected term of the option. The
market value is obtained by taking the average of the high and the low stock price on the date of
the grant.
The Company granted 210,000 performance-based restricted shares during the six months ended
January 31, 2008 with a grant price and fair value of $32.83. As of January 31, 2008, 210,000
performance-based restricted shares were outstanding.
10
A summary of stock option activity under the Companys share-based compensation plans for
the six months ended January 31, 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
Options |
|
Shares |
|
|
Exercise Price |
|
|
Term |
|
|
Value |
|
Outstanding at July 31, 2007 |
|
|
4,182,739 |
|
|
$ |
26.36 |
|
|
|
|
|
|
|
|
|
New grants |
|
|
954,500 |
|
|
$ |
37.44 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(446,363 |
) |
|
$ |
18.10 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(132,675 |
) |
|
$ |
36.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 31, 2008 |
|
|
4,558,201 |
|
|
$ |
29.20 |
|
|
|
7.0 |
|
|
$ |
22,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at January 31, 2008 |
|
|
2,606,364 |
|
|
$ |
25.17 |
|
|
|
5.8 |
|
|
$ |
18,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the six months ended January 31, 2008
and 2007, based upon the average market price during the period, was $9,628 and $4,597,
respectively. The total fair value of stock options vested during the six months ended January 31,
2008 and 2007, was $6,554 and $4,592, respectively.
NOTE G Stockholders Equity
In September 2007, the Company announced that the Board of Directors of the Company authorized
a share repurchase plan for up to 1 million shares of the Companys Class A Nonvoting Common Stock.
The share repurchase plan may be implemented by purchasing shares on the open market or in
privately negotiated transactions, with repurchased shares available for use in connection with the
Companys stock-based plans and for other corporate purposes. During the six months ended January
31, 2008, the Company did not reacquire any shares under the repurchase plan.
NOTE H Employee Benefit Plans
The Company provides postretirement medical, dental and vision benefits for eligible
regular full and part-time domestic employees (including spouses) outlined by the plan.
Postretirement benefits are provided only if the employee was hired prior to April 1, 2008 and
retires on or after attainment of age 55 with 15 years of credited service. Credited service
begins accruing at the later of age 40 or date of hire. All active employees first eligible to
retire after July 31, 1992, are covered by an unfunded, contributory postretirement healthcare plan
where employer contributions will not exceed a defined dollar benefit amount, regardless of the
cost of the program. Employer contributions to the plan are based on the employees age and service
at retirement.
The Company accounts for postretirement benefits other than pensions in accordance with SFAS
No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. The
Company funds benefit costs on a pay-as-you-go basis. There have been no changes to the components
of net periodic benefit cost or the amount that the Company expects to fund in fiscal 2008 from
those reported thereto in Note 3 to the consolidated financial statements included in the Companys
latest annual report on Form 10-K for the year ended July 31, 2007.
11
NOTE I Income Taxes
On August 1, 2007, the Company adopted FIN 48. FIN 48 prescribes a recognition threshold that
a tax position is required to meet before being recognized in the financial statements and provides
guidance on derecognition, measurement, classification, interest and penalties, accounting in
interim periods, and disclosure and transition issues.
The adoption of FIN 48 resulted in a $900 charge to earnings retained in the business as of
August 1, 2007 and a change in the classification of the liability on the balance sheet from
accrued income taxes to other liabilities. As of August 1, 2007, the Companys liability for
uncertain tax positions was $15,900. Unrecognized tax benefits of $10,500 would affect the
Companys effective tax rate if recognized. As of January 31, 2008 the Companys liability for
uncertain tax positions was $17,500.
The Company recognizes accrued interest and penalties, if any, related to unrecognized tax
benefits in income taxes on the accompanying condensed consolidated statement of income. At August
1, 2007, the Company had accrued $2,200 for the potential payment of interest which is included in
the $15,900 liability for uncertain tax positions. During the six months ended January 31, 2008
the Company recognized $500 in potential interest associated with uncertain tax positions. The
total accrual for potential payment of interest is $2,700.
The Company and its subsidiaries file income tax returns in the US federal jurisdiction, and
various state and foreign jurisdictions. The following table summarized the open tax years for the
Companys major jurisdictions:
|
|
|
Jurisdiction |
|
Open Tax Years |
United States Federal
|
|
F04 F07 |
France
|
|
F04 F07 |
Germany
|
|
F03 F07 |
United Kingdom
|
|
F05 F07 |
Approximately $2,000 of unrecognized tax benefits relate to items that are affected by
expiring statute of limitations within the next 12 months.
12
NOTE J New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement
provides guidance on how to measure the fair value of assets and liabilities utilizing a fair value
hierarchy to classify the sources of information used in the measurement calculation. SFAS No. 157
also provides new disclosure rules for assets and liabilities measured at fair value based on their
level in the fair value hierarchy. This new statement will be effective for fiscal years beginning
after November 15, 2007. The Company is in the process of evaluating the impact that will result
from adopting SFAS No. 157 and therefore is unable to disclose the impact SFAS No. 157 will have on
its financial position and results of operations when such statement is adopted.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities. This statement permits entities to choose the fair value option to
measure many financial instruments and certain other items at fair value that are not currently
required to be measured at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge accounting. This
new statement will be effective for fiscal years beginning after November 15, 2007. The Company is
in the process of evaluating the impact that will result from adopting SFAS No. 159 and therefore
is unable to disclose the impact SFAS No. 159 will have on its financial position and results of
operations when such statement is adopted.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R)
requires acquiring entities to recognize all the assets and liabilities assumed in a transaction at
fair values as of the acquisition date, but changes the accounting treatment for certain items,
including:
|
a) |
|
Acquisition costs will generally be expensed as incurred; |
|
|
b) |
|
Noncontrolling interests will be valued at fair value at the acquisition date; |
|
|
c) |
|
Liabilities related to contingent consideration will be re-measured at fair value in each
subsequent reporting period; |
|
|
d) |
|
Restructuring costs associated with a business combination will generally be expensed
after the acquisition date; and |
|
|
e) |
|
In-process research and development will be recorded at fair value as an indefinite-lived
intangible asset at the acquisition date |
SFAS No. 141(R) applies to business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008. The Company
is in the process of evaluating the impact that will result from adopting SFAS No.141(R), and
therefore, the Company is unable to disclose the impact SFAS No. 141(R) will have on its financial
position and results of operations when such statement is adopted.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements. SFAS No. 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary. This statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated financial statements and
separate from the parents equity. The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income statement. This new
statement will be effective for fiscal years beginning after December 15, 2008. The Company
expects that the adoption of SFAS No. 160 will not have a material effect on its consolidated
financial statements.
13
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Brady is an international manufacturer and marketer of identification solutions and specialty
materials that identify and protect premises, products, and people. Its products include
high-performance labels and signs, printing systems and software, label-application and
data-collection systems, safety devices and precision die-cut materials. Founded in 1914, the
Company serves customers in electronics, telecommunications, manufacturing, electrical,
construction, laboratory, education, governmental, public utility, computer, transportation and a
variety of other industries. The Company manufactures and sells products domestically and
internationally through multiple channels including distributor sales, direct sales, mail-order
catalogs, telemarketing, retail and electronic access through the Internet. The Company operates
manufacturing or distribution facilities in Australia, Belgium, Brazil, Canada, China, Denmark,
France, Germany, Hong Kong, India, Italy, Japan, Korea, Malaysia, Mexico, the Netherlands, Norway,
Poland, Singapore, Slovakia, Sweden, Thailand, the United Kingdom and the United States. Brady
sells through subsidiaries or sales offices in these countries, with additional sales through a
dedicated team of international sales representatives in the Philippines, Spain, Taiwan, Turkey,
and the United Arab Emirates and further markets it products to parts of Eastern Europe, the Middle
East, Africa and Russia. The Company believes that its reputation for innovation, commitment to
quality and service, and dedicated employees have made it a world leader in the markets it serves.
Sales for the quarter ended January 31, 2008, were up 13.3% to $364.1 million, compared to
$321.3 million in the same period of fiscal 2007. Of the increase in sales, organic sales decreased
1.0%, acquisitions added 8.2% and the effects of fluctuations in the exchange rates used to
translate financial results into the United States dollar added 6.1%. Net income for the quarter
ended January 31, 2008, was $26.7 million or $0.48 per diluted Class A Nonvoting Common Share, up
35.4% from $19.7 million, or $0.36 per diluted Class A Nonvoting Common Share reported in the
second quarter of last fiscal year.
Sales for the six months ended January 31, 2008, increased 13.9% to $744.3 million, compared
to $653.5 million in the same period of fiscal 2007. Organic growth accounted for 0.3%,
acquisitions added 7.9% and the effects of fluctuations in the exchange rates used to translate
financial results into the United States dollar added 5.7%. Net income for the six months ended
January 31, 2008 was $63.1 million or $1.14 per diluted Class A Nonvoting Common Share, up 16.4%
from $54.2 million, or $0.99 per diluted Class A Nonvoting Common Share reported in the same period
of the prior fiscal year.
Results of Operations
The comparability of the operating results for the three and six months ended January 31,
2008, to the prior year has been significantly impacted by the following acquisitions completed in
fiscal 2007 and fiscal 2008.
|
|
|
|
|
Acquisitions |
|
Segment |
|
Date Completed |
Comprehensive Identification Products, Inc. (CIPI)
|
|
Direct Marketing &
People ID Americas,
Europe and
Asia-Pacific
|
|
August 2006 |
|
|
|
|
|
Precision Converters, L.P. (Precision Converters)
|
|
Brady Americas
|
|
October 2006 |
|
|
|
|
|
Scafftag, Ltd., Safetrak, Ltd. and Scafftag Pty., Ltd.
(collectively Scafftag)
|
|
Brady Americas,
Europe and
Asia-Pacific
|
|
December 2006 |
|
|
|
|
|
Asterisco Artes Graficas Ltda. (Asterisco)
|
|
Brady Americas
|
|
December 2006 |
|
|
|
|
|
Modernotecnica SpA (Moderno)
|
|
Europe
|
|
December 2006 |
|
|
|
|
|
Clement Communications, Inc. (Clement)
|
|
Direct Marketing &
People ID Americas
|
|
February 2007 |
|
|
|
|
|
Sorbent Products Co., Inc. (SPC)
|
|
Brady Americas,
Europe and
Asia-Pacific
|
|
April 2007 |
|
|
|
|
|
Transposafe Systems B.V. and Holland Mounting Systems B.V.
(collectively Transposafe)
|
|
Europe
|
|
November 2007 |
14
Sales for the three months ended January 31, 2008, were up 13.3% compared to the same period
in fiscal 2007. The sales growth was comprised of a decline in organic sales of 1.0%, an increase
of 8.2% due to the acquisitions listed in the above table, and an increase of 6.1% due to the
effect of currencies on sales. The decline in organic sales for the quarter ended January 31,
2008, was the result of the contraction of the Asia-Pacific and Direct Marketing and People ID
Americas segments by 4.6% and 4.1%, respectively, partially offset by growth in the Brady Americas
and Europe segments of 2.0% and 1.6%, respectively. The decline in the Direct Marketing Americas
segment was attributed to a softening in the manufacturing sector of the U.S. economy, while the
contraction in the Asia-Pacific segment was primarily due to a shift in the mobile handset market
to low-end phones with lower average selling prices as well as the Companys conscious choice to
deemphasize low-profit business. Top-line revenue in the Asia-Pacific segment was also impacted by
continued pricing pressures within the supply chain.
Sales for the six months ended January 31, 2008, increased 13.9% compared to the same period
in fiscal 2007. The increase was comprised of an increase of 0.3% attributed to organic growth, an
increase of 7.9% due to the acquisitions listed above, and an increase of 5.7% due to the effect of
currencies on sales. The organic growth was primarily due to growth in the Brady Americas segment
of 5.1% and Europe of 0.9%, offset by a decline in the organic business in the Asia-Pacific and
Direct Marketing and People ID Americas segments of 3.9% and 0.8%, respectively. Organic growth in
the Brady Americas segment for the six months ended January 31, 2008 was driven by strong results
across many markets, including safety and industrial identification, laboratory, aerospace, and
defense. The decrease in organic sales in the Asia-Pacific segment was the result of declines in
the mobile phone market as discussed above.
Gross margin as a percentage of sales increased to 48.1% from 46.7% for the quarter and to
48.7% from 48.1% for the six months ended January 31, 2008, compared to the same periods of the
previous year. This increase in gross margin as a percentage of sales was primarily the result of
cost reduction actions taken during fiscal 2007.
Research and development (R&D) expenses increased 10.9% to $10.1 million for the quarter and
8.2% to $19.1 million for the six months ended January 31, 2008, compared to $9.1 million and $17.6
million for the same periods in the prior year, respectively. In the second quarter of fiscal 2008,
R&D expenses as a percentage of sales remained flat compared to the same period in the previous
year, at 2.8% of sales. For the first half of fiscal 2008, R&D expense as a percentage of sales
declined slightly to 2.6% from 2.7% in the same period of the prior year.
Selling, general and administrative (SG&A) expenses increased 13.1% to $122.5 million for
the three months ended January 31, 2008, compared to $108.4 million for the same period in the
prior year and 14.6% to $242.9 million for the six months ended January 31, 2008, compared to
$212.0 million for the same period in the prior year. The increase in SG&A expenses was primarily
the result of acquisitions made during fiscal 2007 and 2008. As a percentage of sales, SG&A
expenses decreased slightly to 33.6% from 33.7% for the second quarter, and increased to 32.6% from
32.4% for the six months ended January 31, 2008, compared to the same periods in the prior year.
Interest expense increased to $6.7 million from $5.2 million for the quarter and to $13.5
million from $10.0 million for the six months ended January 31, 2008, compared to the same periods
in the prior year. The increase in interest expense was due to interest on the $150 million
private placement of senior notes that the Company completed in the third quarter of fiscal 2007.
Other income and expense increased to $2.3 million of income for the quarter and to $2.4
million of income for the six months ended January 31, 2008, compared to $0.1 million of expense
and $0.5 million of income for the same periods in the prior year, respectively. Of the $2.3
million in other income for the three months ended January 31, 2008, $1.8 million was the result of
interest income generated from investments of excess cash and $0.4 million related to foreign
exchange gains during the quarter. Other income and expense for the three months ended January 31,
2007 consisted primarily of $0.4 million of interest income,
offset by $0.6 million of foreign exchange
loss. For the six months ended January 31, 2008, of the $2.4 million of other income, $2.9 million
was related to interest income generated from investments, partially offset by $0.6 million in
foreign exchange loss. Of the $0.5 million of other income for the six months ended January 31,
2007, $0.8 million was related to interest income, partially offset by $0.4 million of foreign
exchange loss.
The Companys effective tax rate was 29.7% for the three and six months ended January 31,
2008, compared to 28.0% for the three and six months ended January 31, 2007. The increased tax
rate in fiscal 2008 is primarily due to increased profits in higher tax countries. The Company
expects the full year effective tax rate for fiscal 2008 to be approximately 29%.
Net income for the three months ended January 31, 2008, increased 35.4% to $26.7 million,
compared to $19.7 million for the same quarter of the previous year. Net income as a percentage of
sales increased to 7.3% from 6.1% for the quarter ended January 31, 2008, compared to the same
period in the prior year, due to the factors noted above. For the six months ended January 31,
2008, net income increased 16.4% to $63.1 million, compared to $54.2 million for the same period in
the previous year. As a percentage of sales, net income increased to 8.5% from 8.3% for the six
months ended January 31, 2008, compared to the same period in the previous year.
15
Business
Segment Operating Results
Effective August 1, 2007, the Company revised its reportable segments as a result of organizational
changes within the executive leadership team. Management of the Company now evaluates results
based on the following businesses: Brady Americas, Direct Marketing & People ID Americas, Europe,
and Asia-Pacific.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing & |
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
Brady |
|
People ID |
|
|
|
|
|
Asia- |
|
|
|
|
|
and |
|
|
(Dollars in thousands) |
|
Americas |
|
Americas |
|
Europe |
|
Pacific |
|
Subtotals |
|
Eliminations |
|
Total |
SALES TO EXTERNAL CUSTOMERS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2008 |
|
$ |
95,303 |
|
|
$ |
61,318 |
|
|
$ |
122,615 |
|
|
$ |
84,888 |
|
|
$ |
364,124 |
|
|
$ |
|
|
|
$ |
364,124 |
|
January 31, 2007 |
|
|
80,510 |
|
|
|
59,478 |
|
|
|
98,846 |
|
|
|
82,441 |
|
|
|
321,275 |
|
|
|
|
|
|
|
321,275 |
|
|
Six months ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2008 |
|
$ |
200,538 |
|
|
$ |
130,858 |
|
|
$ |
231,529 |
|
|
$ |
181,333 |
|
|
$ |
744,258 |
|
|
$ |
|
|
|
$ |
744,258 |
|
January 31, 2007 |
|
|
163,269 |
|
|
|
123,662 |
|
|
|
191,211 |
|
|
|
175,392 |
|
|
|
653,534 |
|
|
|
|
|
|
|
653,534 |
|
|
SALES GROWTH INFORMATION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended January 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base |
|
|
2.0 |
% |
|
|
-4.1 |
% |
|
|
1.6 |
% |
|
|
-4.6 |
% |
|
|
-1.0 |
% |
|
|
|
|
|
|
-1.0 |
% |
Currency |
|
|
2.7 |
% |
|
|
1.9 |
% |
|
|
10.4 |
% |
|
|
7.2 |
% |
|
|
6.1 |
% |
|
|
|
|
|
|
6.1 |
% |
Acquisitions |
|
|
13.7 |
% |
|
|
5.3 |
% |
|
|
12.1 |
% |
|
|
0.4 |
% |
|
|
8.2 |
% |
|
|
|
|
|
|
8.2 |
% |
Total |
|
|
18.4 |
% |
|
|
3.1 |
% |
|
|
24.1 |
% |
|
|
3.0 |
% |
|
|
13.3 |
% |
|
|
|
|
|
|
13.3 |
% |
|
Six months ended January 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base |
|
|
5.1 |
% |
|
|
-0.8 |
% |
|
|
0.9 |
% |
|
|
-3.9 |
% |
|
|
0.3 |
% |
|
|
|
|
|
|
0.3 |
% |
Currency |
|
|
2.2 |
% |
|
|
1.6 |
% |
|
|
10.1 |
% |
|
|
6.9 |
% |
|
|
5.7 |
% |
|
|
|
|
|
|
5.7 |
% |
Acquisitions |
|
|
15.5 |
% |
|
|
5.0 |
% |
|
|
10.1 |
% |
|
|
0.4 |
% |
|
|
7.9 |
% |
|
|
|
|
|
|
7.9 |
% |
Total |
|
|
22.8 |
% |
|
|
5.8 |
% |
|
|
21.1 |
% |
|
|
3.4 |
% |
|
|
13.9 |
% |
|
|
|
|
|
|
13.9 |
% |
|
SEGMENT PROFIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2008 |
|
$ |
19,517 |
|
|
$ |
12,519 |
|
|
$ |
31,067 |
|
|
$ |
12,660 |
|
|
$ |
75,763 |
|
|
$ |
(2,347 |
) |
|
$ |
73,416 |
|
January 31, 2007 |
|
|
14,473 |
|
|
|
14,920 |
|
|
|
22,604 |
|
|
|
12,394 |
|
|
|
64,391 |
|
|
|
(2,828 |
) |
|
|
61,563 |
|
Percentage increase |
|
|
34.9 |
% |
|
|
-16.1 |
% |
|
|
37.4 |
% |
|
|
2.1 |
% |
|
|
17.7 |
% |
|
|
-17.0 |
% |
|
|
19.3 |
% |
|
Six months ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2008 |
|
$ |
43,975 |
|
|
$ |
32,167 |
|
|
$ |
60,967 |
|
|
$ |
32,050 |
|
|
$ |
169,159 |
|
|
$ |
(4,583 |
) |
|
$ |
164,576 |
|
January 31, 2007 |
|
|
35,188 |
|
|
|
31,723 |
|
|
|
45,609 |
|
|
|
34,531 |
|
|
|
147,051 |
|
|
|
(5,638 |
) |
|
|
141,413 |
|
Percentage increase |
|
|
25.0 |
% |
|
|
1.4 |
% |
|
|
33.7 |
% |
|
|
-7.2 |
% |
|
|
15.0 |
% |
|
|
-18.7 |
% |
|
|
16.4 |
% |
SEGMENT PROFIT RECONCILIATION (Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended: |
|
|
Six months ended: |
|
|
|
January 31, |
|
|
January 31, |
|
|
January 31, |
|
|
January 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Total profit from reportable segments |
|
$ |
75,763 |
|
|
$ |
64,391 |
|
|
$ |
169,159 |
|
|
$ |
147,051 |
|
Corporate and eliminations |
|
|
(2,347 |
) |
|
|
(2,828 |
) |
|
|
(4,583 |
) |
|
|
(5,638 |
) |
Unallocated amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative costs |
|
|
(30,972 |
) |
|
|
(28,839 |
) |
|
|
(63,794 |
) |
|
|
(56,748 |
) |
Investment and other income (expense) |
|
|
2,269 |
|
|
|
(106 |
) |
|
|
2,387 |
|
|
|
532 |
|
Interest expense |
|
|
(6,747 |
) |
|
|
(5,244 |
) |
|
|
(13,467 |
) |
|
|
(9,979 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
37,966 |
|
|
|
27,374 |
|
|
|
89,702 |
|
|
|
75,218 |
|
Income taxes |
|
|
(11,276 |
) |
|
|
(7,665 |
) |
|
|
(26,642 |
) |
|
|
(21,061 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
26,690 |
|
|
$ |
19,709 |
|
|
$ |
63,060 |
|
|
$ |
54,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company evaluates performance of the businesses using sales and segment profit. Segment
profit or loss does not include certain administrative costs, such as the cost of finance, stock
options, information technology and human resources, which are managed as global functions.
Corporate research and development, interest, investment and other income and income taxes are also
excluded when evaluating performance.
16
Brady Americas:
Brady Americas sales increased 18.4% for the quarter and 22.8% for the six months ended
January 31, 2008, compared to the same periods in the prior year. Organic growth accounted for 2.0%
and 5.1% of the growth in the quarter and year-to-date, respectively, as compared to the same
periods in the previous year. Fluctuations in the exchange rates used to translate financial
results into the United States dollar had a modest impact on sales, increasing it by 2.7% in the
quarter and 2.2% for the six-month period. Sales were also aided by the prior year acquisitions of
Precision Converters, Scafftag, Asterisco and SPC, which increased sales by 13.7% for the quarter
and 15.5% for the six-month period. The organic growth of 2.0% for the quarter within the segment
was driven by strong results in the laboratory and aerospace/defense markets, partially offset by a
slowing in the manufacturing and utility markets. On a year-to-date basis, the 5.1% organic growth
was the result of strong sales across most of the major markets, including laboratory, aerospace,
defense, mass transit, and safety and facility identification.
Segment profit increased 34.9% to $19.5 million from $14.5 million for the quarter and 25.0%
to $44.0 million from $35.2 million for the six months ended January 31, 2008, compared to the same
periods in the prior year. The increase in segment profit was driven by increased sales volume
from both the base business and acquisitions discussed above. As a percentage of sales, segment
profit increased to 20.5% from 18.0% in the second quarter of fiscal 2008 and to 21.9% from 21.6%
in the six months ended January 31, 2008, compared to the same periods in the prior year. The
increase in segment profit as a percentage of sales over the prior year was the result of cost
control efforts and improvements made in the prior year to lower performing businesses.
Direct Marketing and People ID Americas:
Direct Marketing and People ID Americas sales increased 3.1% for the quarter and 5.8% for the
six months ended January 31, 2008, compared to the same periods in the prior year. Organic sales
for the segment declined 4.1% and 0.8% in the second quarter and year-to-date, respectively, as
compared to the same periods in the previous year. The decline in the organic sales of the Direct
Marketing and People ID Americas segment was due to a large one-time order in the previous year,
softness in the manufacturing and construction sectors which particularly impacted the Companys
Emedco business, and the SAP implementation at Emedco. Fluctuations in the exchange rates used to
translate financial results into the United States dollar contributed to sales, increasing it by
1.9% in the quarter and 1.6% for the six-month period. Sales in the region were also increased by
the prior year acquisitions of CIPI and Clement, which increased sales by 5.3% for the quarter and
5.0% for the six-month period.
Segment profit declined 16.1% to $12.5 million from $14.9 million for the quarter and
increased 1.4% to $32.2 million from $31.7 million for the six months ended January 31, 2008,
compared to the same periods in the prior year. The decrease in segment profit in the second
quarter was driven by a lower than expected sales volume in the base business, in addition to
unplanned costs and business interruption associated with the move of manufacturing in People ID in
China. As a percentage of sales, segment profit decreased to 20.4% from 25.1% in the second
quarter of fiscal 2008 and to 24.6% from 25.7% in the six months ended January 31, 2008, compared
to the same periods in the prior year. The decline in segment profit as a percentage of sales
compared to the prior year was due to the decline in high margin organic sales during the second
quarter.
Europe:
Europe sales increased 24.1% for the quarter and 21.1% for the six months ended January 31,
2008, compared to the same periods in the prior year. Organic growth accounted for 1.6% and 0.9% of
the increase for the quarter and year-to-date, respectively, compared to the same periods in the
previous year. Sales were positively affected by fluctuations in the exchange rates used to
translate financial results into the United States dollar, which increased sales in the segment by
10.4% in the quarter and 10.1% for the six-month period. The fiscal 2008 acquisition of Transposafe
and the fiscal 2007 acquisitions of CIPI, Scafftag, Moderno, and SPC increased sales by 12.1% for
the quarter and 10.1% for the six-month period. The lower organic growth in the quarter was due to
a slowing in the European economy and the sales from the prior year implementation of No Smoking
legislation in France that did not recur in fiscal 2008.
Segment profit increased 37.4% to $31.1 million from $22.6 million for the quarter and 33.7%
to $61.0 million from $45.6 million for the six months ended January 31, 2008, compared to the same
periods in the prior year. As a percentage of sales, segment profit increased to 25.3% from 22.9%
in the second quarter of fiscal 2008 and to 26.3% from 23.9% in the six months ended January 31,
2008, compared to the same periods in the prior year. The increase in segment profit was driven by
a favorable mix towards the MRO market from the acquisitions of Scafftag and Moderno and continued
growth in the direct marketing business, and the realization of benefits from cost reduction
activities taken at the end of fiscal 2007.
17
Asia-Pacific:
Asia-Pacific sales increased 3.0% for the quarter and 3.4% for the six months ended January
31, 2008, compared to the same periods in the prior year. Organic sales in local currency decreased
4.6% in the quarter and 3.9% year-to-date, compared to the same periods in the previous year.
Sales were positively affected by fluctuations in the exchange rates used to translate financial
results into the United States dollar, which increased sales within the region by 7.2% for the
quarter and 6.9% for the six-month period. The fiscal 2007 acquisitions of CIPI, Scafftag, and SPC
increased sales by 0.4% for the quarter and 0.4% for the six-month period. The decline in organic
sales for the quarter was primarily due to a shift in the mobile handset market to low-end phones
with lower average selling prices as well as the Companys conscious choice to deemphasize
low-profit business. Top-line revenue was also impacted by continued pricing pressures within the
supply chain.
Segment profit increased 2.1% to $12.7 million from $12.4 million for the quarter and declined
7.2% to $32.1 million from $34.5 million for the six months ended January 31, 2008, compared to the
same periods in the prior year. As a percentage of sales, segment profit decreased slightly to
14.9% from 15.0% in the second quarter of fiscal 2008 and to 17.7% from 19.7% in the six months
ended January 31, 2008, compared to the same periods in the prior year. The decline in segment
profit as a percentage of sales was due to the industry mix shift from high-end, feature rich
mobile phones to low-end basic mobile phones and continued pricing pressures within the mobile
handset supply chain, partially offset by cost reduction activities
initiated in fiscal 2007.
Financial Condition
The Companys current ratio as of January 31, 2008, was 2.5 compared to 2.1 at July 31, 2007.
Cash and cash equivalents were $198.4 million at January 31, 2008, compared to $142.8 million at
July 31, 2007. There were no short-term investments outstanding at January 31, 2008, compared to
$19.2 million outstanding at July 31, 2007. Working capital increased $69.8 million during the six
months ended January 31, 2008, to $373.2 million from $303.4 million at July 31, 2007. Accounts
receivable increased $2.8 million for the six months ended January 31, 2008 due to the acquisition
of Transposafe and foreign currency translation, partially offset by a lower receivable balance at
January 31, 2008 due to fewer billing days in the quarter. Inventories remained flat at $139.9
million as the decline in inventory due to working capital initiatives was offset by the
acquisition of Transposafe and foreign currency translation. The net decrease in current
liabilities was $26.6 million for the current year. The decrease was composed of a significant
decrease in accrued wages due to the payment of incentives in the first quarter of fiscal 2008
related to the incentives earned in the year ended July 31, 2007, and a decrease in accrued income
taxes as the adoption of FIN 48 required a reclassification of a portion of the current payable
recorded at July 31, 2007 to long-term liabilities, partially offset by an increase in accounts
payable due to foreign currency translation.
Cash flow from operating activities totaled $87.8 million for the six months ended January 31,
2008, compared to $37.1 million for the same period last year. The increase was the result of the
impact of working capital initiatives on accounts receivable and inventory balances as compared to
the changes reported for the six months ended January 31, 2007, an increase in net income of $8.9
million, and a $3.6 million increase in depreciation and amortization on the intangible assets
acquired in fiscal 2007.
The acquisitions of businesses used $24.6 million of cash for the six months ended January 31,
2008, compared to $90.4 million for the same period in the prior year. Payments of $4.4 million,
$1.2 million, and $0.2 million were paid during the six months ended January 31, 2008 to satisfy
the earnout and holdback liabilities of the Daewon Industry Corporation, STOPware, Inc., and
Asterisco acquisitions, respectively. Capital expenditures were $14.4 million for the six months
ended January 31, 2008, compared to $31.9 million in the same period last year. Fiscal 2007
capital expenditures included the implementation of SAP and expansions in China, Canada, India,
Slovakia, and other locations which were not repeated in fiscal 2008. Net cash used in financing
activities was $4.2 million for the six months ended January 31, 2008, due to the payment of
dividends, partially offset by the proceeds from the issuance of common stock. Net cash provided
by financing activities for the same period last year was $60.4 million due to net borrowings of
$70.8 million on the revolving loan agreement, partially offset by the payment of dividends and the
issuance of common stock.
On October 5, 2006, the Company entered into a $200 million multi-currency revolving loan
agreement with a group of five banks that replaced the Companys previous credit agreement. At the
Companys option, and subject to certain standard conditions, the available amount under the new
credit facility may be increased from $200 million up to $300 million.
Under the 5-year agreement, which has a final maturity date of October 5, 2011, the Company
has the option to select either a base interest rate (based upon the higher of the federal funds
rate plus one-half of 1% or the prime rate of Bank of America) or a Eurocurrency interest rate (at
the LIBOR rate plus a margin based on the Companys consolidated leverage ratio). A commitment fee
is payable on the unused amount of the facility. The agreement requires the Company to maintain two
financial covenants. As of January 31, 2008, the Company was in compliance with the covenants of
the agreement.
The credit agreement restricts the amount of certain types of payments, including dividends,
which can be made annually to $50 million plus an amount equal to 75% of consolidated net income
for the prior fiscal year. The Company believes that based on historic dividend practice, this
restriction would not impede the Company in following a similar dividend practice in the future.
During the six months ended January 31, 2008, the Company did not borrow or repay any amounts under
the credit agreement. As of January 31, 2008, there were no outstanding borrowings under the
credit agreement.
18
On March 23, 2007, the Company completed the private placement of $150 million in ten-year
fixed notes at 5.3% interest to institutional investors. The notes will be amortized in equal
installments over seven years, beginning in 2011 with interest payable on the notes semiannually on
September 23 and March 23, beginning in September 2007. The notes have been fully and
unconditionally guaranteed on an unsecured basis by the Companys domestic subsidiaries. The
Company used the net proceeds of the offering to reduce outstanding indebtedness under the
Companys revolving loan agreement and fund its ongoing strategic growth plan. This private
placement was exempt from the registration requirements of the Securities Act of 1933. The notes
were not registered for resale and may not be resold absent such registration or an applicable
exemption from the registration requirements of the Securities Act of 1933 and applicable state
securities laws. The notes have certain prepayment penalties for repaying them prior to the
maturity date. The agreement also requires the Company to maintain a financial covenant. As of
January 31, 2008, the Company was in compliance with this covenant.
On February 14, 2006, the Company completed the private placement of $200 million in ten-year
fixed notes at 5.3% interest to institutional investors. The notes will be amortized in equal
installments over seven years, beginning in 2010 with interest payable on the notes semiannually on
August 14 and February 14, beginning in August 2006. The notes have been fully and unconditionally
guaranteed on an unsecured basis by the Companys domestic subsidiaries. The Company used the net
proceeds of the offering to finance acquisitions completed in fiscal 2006 and fiscal 2007. This
private placement was exempt from the registration requirements of the Securities Act of 1933. The
notes were not registered for resale and may not be resold absent such registration or an
applicable exemption from the registration requirements of the Securities Act of 1933 and
applicable state securities laws. The notes have certain prepayment penalties for repaying them
prior to the maturity date. The agreement also requires the Company to maintain a financial
covenant. As of January 31, 2008, the Company was in compliance with this covenant.
On June 30, 2004, the Company finalized a debt offering of $150 million of 5.14% unsecured
senior notes due in 2014 in an offering exempt from the registration requirements of the Securities
Act of 1933. The debt offering was in conjunction with the Companys acquisition of EMED. The notes
will be amortized over seven years beginning in 2008, with interest payable on the notes
semiannually on June 28 and December 28, beginning in December 2004. The Company used the proceeds
of the offering to reduce outstanding indebtedness under the Companys revolving credit facilities
used to initially fund the EMED acquisition. The debt has certain prepayment penalties for repaying
the debt prior to its maturity date. The agreement also requires the Company to maintain a
financial covenant. As of January 31, 2008, the Company was in compliance with this covenant.
On February 19, 2008, the Board of Directors declared a quarterly cash dividend to
shareholders of the Companys Class A Common Stock of $0.15 per share payable on April 30, 2008 to
shareholders of record at the close of business on April 10, 2008.
Off-Balance Sheet Arrangements The Company does not have material off-balance sheet
arrangements or related-party transactions. The Company is not aware of factors that are reasonably
likely to adversely affect liquidity trends, other than the risk factors described in this and
other Company filings. However, the following additional information is provided to assist those
reviewing the Companys financial statements.
Operating Leases These leases generally are entered into for investments in facilities,
such as manufacturing facilities, warehouses and office buildings, computer equipment and Company
vehicles, for which the economic profile is favorable.
Purchase Commitments The Company has purchase commitments for materials, supplies,
services, and property, plant and equipment as part of the ordinary conduct of its business. In the
aggregate, such commitments are not in excess of current market prices and are not material to the
financial position of the Company. Due to the proprietary nature of many of the Companys materials
and processes, certain supply contracts contain penalty provisions for early termination. The
Company does not believe a material amount of penalties will be incurred under these contracts
based upon historical experience and current expectations.
Other Contractual Obligations The Company does not have material financial guarantees or
other contractual commitments that are reasonably likely to adversely affect liquidity. In
connection with the adoption of FIN 48 as of August 1, 2007, the Company is unable to determine the
period in which the cash settlement of the liability associated with FIN 48 will occur with the
respective taxing authority.
Related-Party Transactions The Company does not have any related-party transactions that
materially affect the results of operations, cash flow or financial condition.
19
Forward-Looking Statements
Brady believes that certain statements in this Form 10-Q are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. All statements related
to future, not past, events included in this Form10-Q, including, without limitation, statements
regarding Bradys future financial position, business strategy, targets, projected sales, costs,
earnings, capital expenditures, debt levels and cash flows, and plans and objectives of management
for future operations are forward-looking statements. When used in this Form 10-Q, words such as
may, will, expect, intend, estimate, anticipate, believe, should, project or
plan or similar terminology are generally intended to identify forward-looking statements. These
forward-looking statements by their nature address matters that are, to different degrees,
uncertain and are subject to risks, assumptions and other factors, some of which are beyond Bradys
control, that could cause actual results to differ materially from those expressed or implied by
such forward-looking statements. For Brady, uncertainties arise from future financial performance
of major markets Brady serves, which include, without limitation, telecommunications,
manufacturing, electrical, construction, laboratory, education, governmental, public utility,
computer, transportation; difficulties in making and integrating acquisitions; risks associated
with newly acquired businesses; Bradys ability to retain significant contracts and customers;
future competition; Bradys ability to develop and successfully market new products; changes in the
supply of, or price for, parts and components; increased price pressure from suppliers and
customers; interruptions to sources of supply; environmental, health and safety compliance costs
and liabilities; Bradys ability to realize cost savings from operating initiatives; Bradys
ability to attract and retain key talent; difficulties associated with exports; risks associated
with international operations; fluctuations in currency rates versus the US dollar; technology
changes; potential write-offs of Bradys substantial intangible assets; risks associated with
obtaining governmental approvals and maintaining regulatory compliance for new and existing
products; business interruptions due to implementing business systems; and numerous other matters
of national, regional and global scale, including those of a political, economic, business,
competitive and regulatory nature contained from time to time in Bradys U.S. Securities and
Exchange Commission filings, including, but not limited to, those factors listed in the Risk
Factors section located in Item 1A of Part I of Bradys Form 10-K for the year ended July 31,
2007. These uncertainties may cause Bradys actual future results to be materially different than
those expressed in its forward-looking statements. Brady does not undertake to update its
forward-looking statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Companys 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 Companys 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 Companys foreign currency exchange risk management is to
minimize the impact of currency movements on intercompany transactions and foreign raw-material
imports. To achieve this objective, the Company hedges a portion of known exposures using forward
contracts. Main exposures are related to transactions denominated in the British Pound, the Euro,
Canadian Dollar, Australian Dollar, Singapore Dollar, Swedish Krona, Korean Won and Chinese Yuan
currency.
The Company could be exposed to interest rate risk through its corporate borrowing activities.
The objective of the Companys interest rate risk management activities is to manage the levels of
the Companys fixed and floating interest rate exposure to be consistent with the Companys
preferred mix. The interest rate risk management program allows the Company to enter into approved
interest rate derivatives, with the approval of the Board of Directors, if there is a desire to
modify the Companys exposure to interest rates. As of January 31, 2008, the Company had no
interest rate derivatives.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure that the
information the Company must disclose in its filings with the Securities and Exchange Commission is
recorded, processed, summarized and reported on a timely basis. The Companys Chief Executive
Officer and Chief Financial Officer have reviewed and evaluated the Companys disclosure controls
and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the Exchange Act) as of the end of the period covered by this report (the
Evaluation Date). Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, the Companys disclosure controls and procedures are effective in bringing to
their attention on a timely basis material information relating to the Company required to be
included in the Companys periodic filings under the Exchange Act.
The Company is in the process of implementing its enterprise resource planning system, SAP, to
many of its locations around the world. This implementation has resulted in certain changes to
business processes and internal controls impacting financial reporting. Management is taking the
necessary steps to monitor and maintain appropriate internal controls during this period of change.
There were no other changes in the Companys internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Companys most
recently completed fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 6. Exhibits
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10.1
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Restated Brady Corporation Restoration Plan |
31.1
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Rule 13a-14(a)/15d-14(a) Certification of Frank M. Jaehnert |
31.2
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Rule 13a-14(a)/15d-14(a) Certification of Thomas J. Felmer |
32.1
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Section 1350 Certification of Frank M. Jaehnert |
32.2
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Section 1350 Certification of Thomas J. Felmer |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
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BRADY CORPORATION
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Date: March 7, 2008 |
/s/ F. M. Jaehnert
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F. M. Jaehnert |
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President & Chief Executive Officer |
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Date: March 7, 2008 |
/s/ Thomas J. Felmer
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Thomas J. Felmer |
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Senior Vice President & Chief Financial Officer
(Principal Accounting Officer)
(Principal Financial Officer) |
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