<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
-
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
-
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
---- ----
Commission File Number 0-12730
BRADY CORPORATION
-----------------
(Exact name of registrant as specified in its charter)
WISCONSIN 39-0178960
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6555 WEST GOOD HOPE ROAD, MILWAUKEE, WISCONSIN 53223
----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(414) 358-6600
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of December 1, 1998, there were outstanding 20,750,363 shares of
Class A Common Stock and 1,769,314 shares of Class B Common Stock. The Class B
Common Stock, all of which is held by an affiliate of the Registrant, is the
only voting stock.
<PAGE> 2
FORM 10-Q
BRADY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. Financial Information
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets 3
Unaudited Condensed Consolidated Statements of
Income and Earnings Retained in the Business 4
Unaudited Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
<PAGE> 3
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
ASSETS October 31, 1998 July 31, 1998
------ ---------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 61,343 $ 65,609
Accounts receivable, less allowance for losses ($2,177 and $2,011 respectively) 69,993 63,365
Inventories 38,383 38,444
Prepaid expenses and other current assets 13,645 16,635
--------- ---------
Total current assets 183,364 184,053
Other assets:
Intangibles - net 56,357 53,528
Other 7,384 7,078
Property, plant and equipment:
Cost:
Land 4,975 4,988
Buildings and improvements 39,933 39,595
Machinery and equipment 84,799 83,146
Construction in progress 14,303 11,705
--------- ---------
144,010 139,434
Less accumulated depreciation 75,569 72,269
--------- ---------
Net property, plant and equipment 68,441 67,165
--------- ---------
Total $ 315,546 $ 311,824
========= =========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Accounts payable $ 16,084 $ 15,761
Wages and amounts withheld from employees 17,795 19,542
Taxes, other than income taxes 2,670 2,033
Accrued income taxes 9,152 9,276
Other current liabilities 7,494 11,647
Current maturities on long-term debt 509 408
--------- ---------
Total current liabilities 53,704 58,667
Long-term debt, less current maturities 3,569 3,716
Other liabilities 15,303 16,068
--------- ---------
Total liabilities 72,576 78,451
Stockholders' investment:
Preferred stock 2,855 2,855
Class A nonvoting common stock - issued and outstanding 20,736,963 207 207
and 20,726,863 shares, respectively
Class B voting common stock - issued and outstanding 1,769,314 shares 18 18
Additional paid-in capital 26,275 26,131
Earnings retained in the business 213,437 208,254
Other (2,851) (3,024)
Accumulated other comprehensive income 3,029 (1,068)
--------- ---------
Total stockholders' investment 242,970 233,373
--------- ---------
Total $ 315,546 $ 311,824
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE> 4
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND EARNINGS RETAINED IN THE
BUSINESS
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
October 31
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 116,802 $ 115,302
Operating expenses:
Cost of products sold 51,278 52,585
Research and development 4,646 4,806
Selling, general and administrative 46,349 44,778
--------- ---------
Total operating expenses 102,273 102,169
Operating income 14,529 13,133
Other income and (expense):
Investment and other income - net 14 515
Interest expense (145) (79)
--------- ---------
Income before income taxes 14,398 13,569
Income taxes 5,687 5,359
--------- ---------
Net income 8,711 8,210
Earnings retained in business at beginning of period 208,254 193,602
Less dividends:
Preferred stock (65) (65)
Common stock (3,463) (3,252)
--------- ---------
Earnings retained in business at end of period $ 213,437 198,495
========= =========
Net Income - Class A Nonvoting Common Share
Basic $ 0.38 $ 0.37
========= =========
Diluted $ 0.38 $ 0.36
========= =========
Net Income - Class B Voting Common Share
Basic $ 0.35 $ 0.34
========= =========
Diluted $ 0.35 $ 0.33
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
BRADY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in Thousands) (Unaudited)
Three Months Ended
October 31
1998 1997
-------------- ----------
<S> <C> <C>
Operating Activities:
Net Income $ 8,711 $ 8,210
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation & Amortization 3,777 3,411
(Gain) Loss on Sale of Property, Plant & Equipment (2) 88
Provision for Losses on Accounts Receivable 230 426
Amortization of Restricted Stock 174 0
Changes in Operating Assets & Liabilities:
(Increase) Decrease in Accounts Receivable (4,785) (4,749)
(Increase) Decrease in Inventory 1,201 (109)
(Increase) Decrease in Prepaid Expense 3,571 (134)
Increase (Decrease) in Accounts Payable and Other Liabilities (6,923) (5,668)
Increase (Decrease) in Income Taxes (474) (923)
-------- --------
Net Cash Provided by Operating Activities 5,480 552
Investing Activities:
Purchase of Business (4,214) 0
Purchases of Property, Plant and Equipment (3,324) (4,702)
Proceeds from Sale of Property, Plant and Equipment - Net 20 78
Other Investments (153) 0
-------- --------
Net Cash (Used in) Investing Activities (7,671) (4,624)
Financing Activities:
Payment of Dividends (3,528) (3,317)
Proceeds from Issuance of Common Stock 143 194
Principal Payments on Long-Term Debt (121) (141)
Proceeds from Issuance of Long-Term Debt 208 263
-------- --------
Net Cash (Used in) Financing Activities (3,298) (3,001)
Effect of Exchange Rate Changes on Cash 1,223 640
-------- --------
Net (Decrease) in Cash and Cash Equivalents (4,266) (6,433)
Cash and Cash Equivalents at Beginning of Year 65,609 65,329
-------- --------
Cash and Cash Equivalents at End of Period $ 61,343 $ 58,896
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year For:
Interest $ 253 $ 176
Income Taxes 4,559 7,050
</TABLE>
See Notes to Condensed Consolidated Financial Statement
5
<PAGE> 6
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended October 31, 1998
NOTE A - Basis of Presentation
The condensed consolidated financial statements included herein have
been prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of the
Company, the foregoing statements contain all adjustments, consisting only of
normal recurring accruals, necessary to present fairly the financial position of
the Company as of October 31, 1998, and July 3l, 1998, and its results of
operations and its cash flows for the three months ended October 31, 1998, and
l997. The consolidated balance sheet at July 31, l998, has been taken from the
audited consolidated financial statements of that date and condensed.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest annual report.
It is not practical to segregate the amounts of raw material, work in
process or finished goods at the respective interim balance sheet dates.
NOTE B - Net Income Per Common Share
Last fiscal year the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share," which established new standards for the
calculation of net income per share effective for interim and annual periods
ending after December 15, 1997. Reconciliations of the numerator and denominator
of the basic and diluted per share computations for the Company's Class A and
Class B common stock are summarized as follows:
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
----------- -----------
1st Quarter 1st Quarter
<S> <C> <C>
Numerator:
Net income $8,711,000 $8,210,000
Less: Preferred stock dividends (64,784) (64,784)
---------- ----------
Numerator for basic and diluted
Class A earnings per share $8,646,216 $8,145,216
Less: Preferential dividends (690,541) (676,298)
Preferential dividends on
dilutive stock options (2,522) (9,140)
---------- ----------
Numerator for basic and diluted
Class B earnings per share $7,953,153 $7,459,778
========== ==========
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
----------- -----------
1st Quarter 1st Quarter
<S> <C> <C>
Denominator:
Denominator for basic earnings
per share for both Class A and B 22,499,432 22,074,575
Plus: Effect of dilutive stock options 75,735 274,475
----------- -----------
Denominator for diluted earnings
per share for both Class A and B 22,575,167 22,349,050
=========== ===========
Class A common stock earnings per share calculation:
Basic $0.38 $0.37
Diluted $0.38 $0.36
Class B common stock earnings per share calculation:
Basic $0.35 $0.34
Diluted $0.35 $0.33
</TABLE>
Options to purchase 1,629,684 and 213,100 shares of Class A common
stock were not included in the computations of diluted earnings per share for
the quarters ending October 31, 1998, and 1997, respectively, because the option
exercise prices were greater than the average market price of the common shares
and, therefore, the effect would be antidilutive.
NOTE C - Comprehensive Income
Effective August 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." Statement 130
establishes new rules for the reporting and display of comprehensive income and
its components. The adoption of this Statement had no impact on the Company's
net income or stockholders' investment. Statement 130 requires the Company's
foreign currency translation adjustments, which prior to adoption were reported
separately in stockholders' investment, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform with
the requirements of Statement 130. Total comprehensive income, which was
comprised of net income and foreign currency adjustments, amounted to
approximately $12,808,000 and $9,854,000 for the three months ended October 31,
1998 and 1997, respectively.
NOTE D - Restructuring
During the fourth quarter of fiscal 1998, the Company recorded a
nonrecurring charge of $5,390,000 related primarily to a provision for severance
costs associated with a reduction in workforce at its operations around the
world. The workforce reduction of 7.5%, approximately 200 people, was
essentially completed in August 1998.
7
<PAGE> 8
A reconciliation of activity with respect to the Company's
restructuring is as follows:
<TABLE>
<S> <C>
Provision, 1998 $ 5,390,000
Noncash asset write-offs (376,000)
Cash payments associated with severance (1,215,000)
-----------
Ending balance, October 31, 1998 $ 3,799,000
</TABLE>
NOTE E - Acquisition
Effective August 16, 1998, the Company acquired the common stock of VEB
Sistemas de Etiquetas Ltda. located in Sao Paulo, Brazil, an industrial label
manufacturer, for cash of approximately $4,400,000. The purchase price of this
acquisition is subject to change based on post-closing adjustments.
This acquisition has been accounted for using the purchase method of
accounting and accordingly the results of operations have been included since
the date of acquisition in the accompanying financial statements. The pro-forma
results assuming the acquisition had been consummated as of the beginning of the
periods presented are not significant.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
For the three months ended October 31, 1998, revenues of $116,802,000
were 1.3% higher than the same quarter of the previous year. Sales of the
Company's international operations increased 8.7%. Of that increase,
continued market penetration in Brady's operations outside the United States
increased international sales by 4.8%. The acquisitions of Techniques Avancees,
GrafTek Inc. and VEB Sistemas de Etiquetas Ltda. increased international sales
by 5.4%. These increases were somewhat offset by the negative effect of
fluctuations in the exchange rates used to translate financial results into U.S.
currency, which reduced international sales growth by 1.5 percentage points.
Sales of the Company's U.S. operations decreased 4.0%, due primarily to weakness
in electrical and electronics markets.
The cost of products sold decreased from 45.6% to 43.9% as a percentage
of sales during the first quarters of 1997 and 1998. Reduced costs due to
changes in product mix, the workforce reduction and manufacturing efficiencies
from the Company's continuous improvement efforts were partially offset
by increased depreciation, amortization expenses from the acquisitions
and by increases in inventory reserves. Selling, general and administrative
expenses as a percentage of sales increased from 38.8% to 39.7% due primarily to
the acquisitions and the increase in direct marketing efforts. Research and
development expenditures decreased 3.3% in this year's quarter to $4,646,000,
compared to $4,806,000 in last year's quarter.
Operating income increased 10.6% to $14,529,000, compared to
$13,133,000 in the prior year because of the factors cited above.
Investment and other income decreased $501,000 over the same period
last year. This decrease was the result of foreign exhange losses and lower
investment income because of lower cash balances as a result of the acquisitions
and lower interest rates.
Income before income taxes increased 6.1% over the same period
last year. The effective tax rate was 39.5% this year and last year.
Net income increased 6.1% to $8,711,000, compared to $8,210,000 for
the same quarter of the previous year. On a per share basis, fully diluted net
income for the three months ended October 31, 1998, was $0.38 compared to
$0.36 for the same quarter of the previous year.
Financial Condition
The Company's liquidity remains strong. The current ratio as of October
31, 1998, was 3.4 to 1. Cash and cash equivalents were $61,343,000 at October
31, 1998, compared to $65,609,000 at July 31, 1998. The decrease was primarily
due to the acquisition of VEB Sistemas de Etiquetas Ltda. Working capital
increased $4,274,000 during the quarter and equaled $129,660,000 as of October
31, 1998.
9
<PAGE> 10
The Company continues to maintain significant cash balances, although
about 6.5% lower than at July 31, 1998. The decrease was due primarily to
the acquisition of VEB Sistemas de Etiquetas Ltda. Cash flow from operations
totaled $5,480,000 for the three months ended October 31, 1998, compared to
$552,000 for the same period last year primarily from the decrease in inventory,
prepaid assets and accounts payable and other liabilities. Capital expenditures
were $3,324,000 in the three months ended October 31, 1998, compared to
$4,702,000 in last year's first quarter. These expenditures were primarily
progress payments made on the Company's new coating line. Financing activities,
primarily the payment of dividends to the Company's stockholders, consumed
$3,298,000 of cash in the first three months of fiscal 1999, compared to
$3,001,000 for the same period last year.
Long-term debt as a percentage of long-term debt plus stockholders'
investment was 1.5% at October 31, 1998, compared to 1.6% at July 31, 1998.
The Company believes that its cash and cash equivalents and the cash
flow it generates from operating activities are adequate to meet the Company's
current investing and financing needs.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2
digit year is commonly referred to as the Year 2000 Compliance issue (the
"Issue"). As the year 2000 approaches, such systems may be unable to process
certain date-based information. This could result in a system failure or
miscalculations causing disruptions of operations and the inability to engage in
normal business activities. Many of the Company's systems, including information
and computer systems and automated equipment, will be affected by the Issue.
The Company has a comprehensive plan to address the Issue. The plan
includes (i) the complete inventory of all in-house computers, software and
other equipment utilizing microprocessors and identification of all hardware and
software affected by the Issue; (ii) modification of the affected systems; and
(iii) testing the modified system, installing the changes and auditing the
installed system for final compliance. The Company is using both internal and
external resources to implement its plan. The Company has generally completed
the inventory phase and is at various stages of modification and testing of
these systems. The Company expects to complete the majority of its efforts in
this area by early calendar 1999, leaving adequate time to assess and correct
any significant issues that materialize. The Company currently estimates that
the total cost of its Year 2000 project will be approximately $2,000,000. Costs
associated with this issue have been and will continue to be expensed as
incurred and are not expected to have a material effect on the results of
operations, cash flows or financial condition of the Company.
As a third-party supplier of software and printing systems to other
companies, the Company has posted its own product compliance status on its
Internet site (www.bradycorp.com).
The Company is in the process of formally communicating with all of its
significant suppliers to determine the extent to which the Company is vulnerable
to those third parties' failure to remediate their own Year 2000 Compliance
issues. The Company can not guarantee that the systems of other companies on
which the Company's systems rely will be converted on time, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems would not have a material adverse effect on the Company.
10
<PAGE> 11
The costs of the project and the timetable in which the Company plans
to complete the Year 2000 requirements are based upon management's best
estimates, which are derived utilizing assumptions of future events including
the continued availability of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
However, there can be no guarantee that these estimates will be achieved, and
actual results could differ significantly from these plans. If the Company's
plan to address the Issue is not successfully or timely implemented, the Company
may need to devote more resources to the process and additional costs may be
incurred, which could have a material adverse effect on the Company's financial
condition and results of operations.
Management of the Company believes it has an effective program in place
to resolve the Issue in a timely manner. Nevertheless, since it is not possible
to anticipate all possible future outcomes, especially when third parties are
involved, there could be circumstances in which the Company would be unable to
take customer orders, manufacture and ship products, invoice customers and
collect payments, or the Company could be subject to litigation for product
failure. The amount of potential liability and lost revenue has not been
estimated.
Contingency plans will be developed in the second quarter of calendar
1999 and most of calendar 1999 has been reserved for final verification of all
Year 2000 Compliance processes and rehearsal of contingency plans.
Forward-Looking Statements
Matters in this Quarterly Report may contain forward-looking
information, as defined in the Private Securities Litigation Reform Act of 1995.
All such forward-looking information in this report involves risks and
uncertainties, including, but not limited to, variations in the economic or
political conditions in the countries with which the Company does business;
fluctuations in currency exchange rates for international currencies versus the
U.S. dollar; technology changes; the continued availability of sources of
supply; domestic and international economic conditions and growth rates; the
ability of the Company to timely adjust its cost structure to changes in levels
of sales, product mix and low levels of order backlog; the ability of the
Company to acquire new businesses; risks associated with the Year 2000
Compliance issue; and other risks indicated in filings by the Company with the
Securities and Exchange Commission. The Company cautions that forward-looking
statements are not guarantees, since there are inherent difficulties in
predicting future results, and that actual results could differ materially from
those expressed or implied in forward-looking statements.
11
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K.
The Company was not required to file and did not file
a report on Form 8-K during the quarter ended October
31, 1998.
12
<PAGE> 13
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNATURES
W. H. BRADY CO.
Date: December 4, 1998 /s/ K. M. Hudson
------------------------ -----------------------------
K. M. Hudson
President
Date: December 4, 1998 /s/ F. Jaehnert
------------------------ -----------------------------
F. M. Jaehnert
Vice President & Chief Financial Officer
(Principal Accounting Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 61,343
<SECURITIES> 0
<RECEIVABLES> 72,170
<ALLOWANCES> 2,177
<INVENTORY> 38,383
<CURRENT-ASSETS> 183,364
<PP&E> 144,010
<DEPRECIATION> 75,569
<TOTAL-ASSETS> 315,546
<CURRENT-LIABILITIES> 53,704
<BONDS> 3,569
2,855
0
<COMMON> 225
<OTHER-SE> 239,890
<TOTAL-LIABILITY-AND-EQUITY> 315,546
<SALES> 116,802
<TOTAL-REVENUES> 116,802
<CGS> 51,278
<TOTAL-COSTS> 51,278
<OTHER-EXPENSES> 50,995
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 145
<INCOME-PRETAX> 14,398
<INCOME-TAX> 5,687
<INCOME-CONTINUING> 8,711
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,711
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
</TABLE>
