Form 10-Q
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, 2010
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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o 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
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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 February 28, 2010, there were outstanding 48,864,198 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, 2010 |
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July 31, 2009 |
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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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$ |
205,584 |
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$ |
188,156 |
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Accounts receivable, less allowance for losses ($8,065 and $7,931, respectively) |
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203,375 |
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191,189 |
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Inventories: |
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Finished products |
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54,003 |
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53,244 |
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Work-in-process |
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16,729 |
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13,159 |
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Raw materials and supplies |
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26,611 |
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27,405 |
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Total inventories |
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97,343 |
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93,808 |
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Prepaid expenses and other current assets |
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37,501 |
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36,274 |
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Total current assets |
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543,803 |
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509,427 |
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Other assets: |
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Goodwill |
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767,692 |
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751,173 |
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Other intangible assets |
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111,388 |
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115,754 |
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Deferred income taxes |
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38,141 |
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36,374 |
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Other |
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22,783 |
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18,551 |
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Property, plant and equipment: |
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Cost: |
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Land |
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6,334 |
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6,335 |
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Buildings and improvements |
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99,188 |
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96,968 |
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Machinery and equipment |
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287,434 |
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283,301 |
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Construction in progress |
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11,371 |
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7,869 |
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404,327 |
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394,473 |
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Less accumulated depreciation |
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253,269 |
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242,485 |
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Net property, plant and equipment |
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151,058 |
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151,988 |
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Total |
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$ |
1,634,865 |
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$ |
1,583,267 |
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LIABILITIES AND STOCKHOLDERS INVESTMENT |
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Current liabilities: |
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Accounts payable |
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$ |
82,008 |
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$ |
83,793 |
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Wages and amounts withheld from employees |
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50,279 |
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36,313 |
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Taxes, other than income taxes |
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6,818 |
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6,262 |
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Accrued income taxes |
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8,737 |
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5,964 |
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Other current liabilities |
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46,877 |
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45,247 |
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Current maturities on long-term obligations |
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44,893 |
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44,893 |
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Total current liabilities |
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239,612 |
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222,472 |
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Long-term obligations, less current maturities |
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346,457 |
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346,457 |
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Other liabilities |
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66,513 |
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63,246 |
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Total liabilities |
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652,582 |
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632,175 |
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Stockholders investment: |
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Class A nonvoting common stock Issued 51,261,487 and 51,261,487 shares, respectively and outstanding
48,856,512 and 48,780,560 shares, respectively |
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513 |
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513 |
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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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302,374 |
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298,466 |
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Earnings retained in the business |
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691,667 |
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673,342 |
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Treasury
stock 2,194,975 and 2,270,927 shares, respectively of Class A nonvoting common stock, at cost |
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(67,504 |
) |
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(69,823 |
) |
Accumulated other comprehensive income |
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58,709 |
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53,051 |
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Other |
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(3,511 |
) |
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(4,492 |
) |
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Total stockholders investment |
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982,283 |
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951,092 |
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Total |
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$ |
1,634,865 |
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$ |
1,583,267 |
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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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2010 |
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2009 |
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Change |
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2010 |
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2009 |
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Change |
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Net sales |
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$ |
295,829 |
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$ |
266,449 |
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11.0 |
% |
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$ |
614,315 |
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$ |
644,766 |
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(4.7% |
) |
Cost of products sold |
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148,911 |
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140,307 |
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6.1 |
% |
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309,955 |
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337,478 |
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(8.2% |
) |
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Gross margin |
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146,918 |
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126,142 |
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16.5 |
% |
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304,360 |
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307,288 |
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(1.0% |
) |
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Operating expenses: |
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Research and development |
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10,632 |
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8,503 |
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25.0 |
% |
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20,241 |
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17,559 |
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15.3 |
% |
Selling, general and administrative |
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108,735 |
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93,613 |
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16.2 |
% |
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|
217,411 |
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|
207,870 |
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4.6 |
% |
Restructuring charge (See Note K) |
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3,649 |
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|
19,408 |
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N/A |
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7,250 |
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21,047 |
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N/A |
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Total operating expenses |
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123,016 |
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121,524 |
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1.2 |
% |
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244,902 |
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|
246,476 |
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(.6% |
) |
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Operating income |
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23,902 |
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|
4,618 |
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417.6 |
% |
|
|
59,458 |
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|
60,812 |
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(2.2% |
) |
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Other income (expense): |
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Investment and other income (expense) net |
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1,104 |
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(1,698 |
) |
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|
165.0 |
% |
|
|
1,153 |
|
|
|
154 |
|
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|
648.7 |
% |
Interest expense |
|
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(5,163 |
) |
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|
(6,314 |
) |
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18.2 |
% |
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(10,325 |
) |
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(12,675 |
) |
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18.5 |
% |
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Income (loss) before income taxes |
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19,843 |
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(3,394 |
) |
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684.6 |
% |
|
|
50,286 |
|
|
|
48,291 |
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|
4.1 |
% |
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Income taxes |
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4,842 |
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|
756 |
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|
540.5 |
% |
|
|
13,617 |
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|
15,331 |
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(11.2% |
) |
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Net income (loss) |
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$ |
15,001 |
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|
$ |
(4,150 |
) |
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|
461.5 |
% |
|
$ |
36,669 |
|
|
$ |
32,960 |
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11.3 |
% |
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Per Class A Nonvoting Common Share: |
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Basic net income (loss) |
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$ |
0.29 |
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|
$ |
(0.08 |
) |
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|
462.5 |
% |
|
$ |
0.70 |
|
|
$ |
0.62 |
|
|
|
12.9 |
% |
Diluted net income (loss) |
|
$ |
0.28 |
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|
$ |
(0.08 |
) |
|
|
450.0 |
% |
|
$ |
0.69 |
|
|
$ |
0.62 |
|
|
|
11.3 |
% |
Dividends |
|
$ |
0.175 |
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|
$ |
0.17 |
|
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|
2.9 |
% |
|
$ |
0.35 |
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|
$ |
0.34 |
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|
2.9 |
% |
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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 (loss) |
|
$ |
0.29 |
|
|
$ |
(0.08 |
) |
|
|
462.5 |
% |
|
$ |
0.68 |
|
|
$ |
0.61 |
|
|
|
11.5 |
% |
Diluted net income (loss) |
|
$ |
0.28 |
|
|
$ |
(0.08 |
) |
|
|
450.0 |
% |
|
$ |
0.67 |
|
|
$ |
0.60 |
|
|
|
11.7 |
% |
Dividends |
|
$ |
0.175 |
|
|
$ |
0.17 |
|
|
|
2.9 |
% |
|
$ |
0.33 |
|
|
$ |
0.32 |
|
|
|
4.1 |
% |
|
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|
|
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Weighted average common shares outstanding (in
thousands): |
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|
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|
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|
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Basic |
|
|
52,370 |
|
|
|
52,350 |
|
|
|
|
|
|
|
52,354 |
|
|
|
52,821 |
|
|
|
|
|
Diluted |
|
|
53,096 |
|
|
|
52,350 |
|
|
|
|
|
|
|
53,020 |
|
|
|
53,144 |
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
4
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
|
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|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
January 31, |
|
|
|
(Unaudited) |
|
|
|
2010 |
|
|
2009 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
36,669 |
|
|
$ |
32,960 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
27,366 |
|
|
|
27,193 |
|
Non-cash portion of restructuring charges |
|
|
1,420 |
|
|
|
1,916 |
|
Non-cash portion of stock-based compensation expense |
|
|
5,156 |
|
|
|
4,244 |
|
Deferred income taxes |
|
|
(4,398 |
) |
|
|
515 |
|
Other |
|
|
(174 |
) |
|
|
759 |
|
Changes in operating assets and liabilities (net of effects of business
acquisitions): |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(10,300 |
) |
|
|
42,156 |
|
Inventories |
|
|
(1,891 |
) |
|
|
(548 |
) |
Prepaid expenses and other assets |
|
|
(1,585 |
) |
|
|
(3,648 |
) |
Accounts payable and accrued liabilities |
|
|
13,229 |
|
|
|
(64,413 |
) |
Income taxes |
|
|
2,670 |
|
|
|
(17,428 |
) |
Other liabilities |
|
|
(129 |
) |
|
|
(1,689 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
68,033 |
|
|
|
22,017 |
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired |
|
|
(20,299 |
) |
|
|
|
|
Purchase price adjustment |
|
|
|
|
|
|
3,514 |
|
Payments of contingent consideration |
|
|
|
|
|
|
(1,405 |
) |
Purchases of property, plant and equipment |
|
|
(14,974 |
) |
|
|
(12,948 |
) |
Other |
|
|
(570 |
) |
|
|
1,998 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(35,843 |
) |
|
|
(8,841 |
) |
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Payment of dividends |
|
|
(18,344 |
) |
|
|
(17,985 |
) |
Proceeds from issuance of common stock |
|
|
1,672 |
|
|
|
1,284 |
|
Principal payments on debt |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
(40,267 |
) |
Excess income tax benefit from the exercise of stock options
and deferred compensation distribution |
|
|
380 |
|
|
|
847 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(16,292 |
) |
|
|
(56,123 |
) |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
1,530 |
|
|
|
(30,317 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
17,428 |
|
|
|
(73,264 |
) |
Cash and cash equivalents, beginning of period |
|
|
188,156 |
|
|
|
258,355 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
205,584 |
|
|
$ |
185,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest, net of capitalized interest |
|
$ |
10,313 |
|
|
$ |
12,563 |
|
Income taxes, net of refunds |
|
|
10,817 |
|
|
|
27,384 |
|
Acquisitions: |
|
|
|
|
|
|
|
|
Fair value of assets acquired, net of cash and goodwill |
|
$ |
8,829 |
|
|
$ |
|
|
Liabilities assumed |
|
|
(2,678 |
) |
|
|
|
|
Goodwill |
|
|
14,148 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid for acquisitions |
|
$ |
20,299 |
|
|
$ |
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
5
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended January 31, 2010
(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 necessary to
present fairly the financial position of the Company as of January 31, 2010 and July 3l, 2009, its
results of operations for the three and six months ended January 31, 2010 and 2009, and its cash
flows for the six months ended January 31, 2010 and 2009. The condensed consolidated balance sheet
as of July 31, 2009 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, 2009.
The Company has reclassified certain prior year financial statement amounts to conform to
their current year presentation. The Company reclassified the Deferred income taxes as a
separate line item, previously included in the Other Operating activities line item on the
Condensed Consolidated Statements of Cash Flows for the six months ended January 31, 2009. This
reclassification had no effect on total assets, net income, or earnings per share.
NOTE B Goodwill and Intangible Assets
Changes in the carrying amount of goodwill for the six months ended January 31, 2010, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
|
Europe |
|
|
Asia-Pacific |
|
|
Total |
|
Balance as of July 31, 2009 |
|
$ |
410,135 |
|
|
$ |
166,251 |
|
|
$ |
174,787 |
|
|
$ |
751,173 |
|
Current year adjustments |
|
|
13,370 |
|
|
|
778 |
|
|
|
|
|
|
|
14,148 |
|
Translation adjustments |
|
|
330 |
|
|
|
(1,944 |
) |
|
|
3,985 |
|
|
|
2,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 31, 2010 |
|
$ |
423,835 |
|
|
$ |
165,085 |
|
|
$ |
178,772 |
|
|
$ |
767,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill increased $16,519 during the six months ended January 31, 2010 due to the recent
acquisition activity and the positive effects of foreign currency translation. Of the $16,519
increase, $2,371 was due to the positive effects of foreign currency translation, $778 resulted
from the acquisition of certain assets of Welco, a division of Welconstruct Group Limited (Welco)
in the first quarter of fiscal 2010, and $13,370 resulted from the acquisition of Stickolor
Industria e Comerciao de Auto Adesivos Ltda. (Stickolor) in the second quarter of fiscal 2010.
See Note M, Acquisitions for further discussion.
6
Other intangible assets include patents, trademarks, customer relationships, non-compete
agreements and other intangible assets with finite lives being amortized in accordance with
accounting guidance for goodwill and other intangible assets. The net book value of these assets
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2010 |
|
|
July 31, 2009 |
|
|
|
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 |
|
|
5 |
|
|
$ |
9,088 |
|
|
$ |
(7,503 |
) |
|
$ |
1,585 |
|
|
|
5 |
|
|
$ |
8,976 |
|
|
$ |
(7,165 |
) |
|
$ |
1,811 |
|
Trademarks and other |
|
|
7 |
|
|
|
8,354 |
|
|
|
(5,439 |
) |
|
|
2,915 |
|
|
|
7 |
|
|
|
7,703 |
|
|
|
(5,121 |
) |
|
|
2,582 |
|
Customer relationships |
|
|
7 |
|
|
|
151,215 |
|
|
|
(87,322 |
) |
|
|
63,893 |
|
|
|
7 |
|
|
|
144,625 |
|
|
|
(76,912 |
) |
|
|
67,713 |
|
Non-compete agreements |
|
|
4 |
|
|
|
11,812 |
|
|
|
(10,426 |
) |
|
|
1,386 |
|
|
|
4 |
|
|
|
11,502 |
|
|
|
(9,656 |
) |
|
|
1,846 |
|
Other |
|
|
4 |
|
|
|
3,311 |
|
|
|
(3,298 |
) |
|
|
13 |
|
|
|
4 |
|
|
|
3,311 |
|
|
|
(3,296 |
) |
|
|
15 |
|
Unamortized other intangible
assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
N/A |
|
|
|
41,596 |
|
|
|
|
|
|
|
41,596 |
|
|
|
N/A |
|
|
|
41,787 |
|
|
|
|
|
|
|
41,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
225,376 |
|
|
$ |
(113,988 |
) |
|
$ |
111,388 |
|
|
|
|
|
|
$ |
217,904 |
|
|
$ |
(102,150 |
) |
|
$ |
115,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The value of goodwill and other intangible assets in the Condensed Consolidated Balance Sheet
at January 31, 2010 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, 2010. The acquisitions
completed during the six months ended January 31, 2010 contributed to the increase in the customer
relationships of $5,490 and an increase in the amortizable trademarks of $635. See Note M,
Acquisitions for further discussion.
Amortization expense on intangible assets was $5,628 and $5,601 for the three-month periods
ended January 31, 2010 and 2009, respectively and $11,235 and $11,529 for the six-month periods
ended January 31, 2010 and 2009, respectively. Annual amortization is projected to be $23,500,
$19,757, $12,712, $9,409 and $4,749 for the years ending July 31, 2010, 2011, 2012, 2013 and 2014,
respectively.
NOTE C Comprehensive Income (Loss)
Total comprehensive income (loss), which was comprised of net income, foreign currency
adjustments, net unrealized gains and losses from cash flow hedges, the unrealized gain on the
post-retirement medical, dental, and vision plans, and their related tax effects amounted to
($3,513) and ($4,738) for the three months ended January 31, 2010 and 2009, respectively and
$42,327 and ($104,628) for the six months ended January 31, 2010 and 2009, respectively. The
increase in total comprehensive income for the three and six months ended January 31, 2010 as
compared to the same periods in the previous year was primarily the result of the increase in net
income as well as the depreciation of the U.S. dollar against other currencies.
7
NOTE D Net Income Per Common Share
In June 2008, the FASB issued accounting guidance addressing whether instruments granted in
share-based payment transactions are participating securities prior to vesting, and therefore need
to be included in the earnings allocation in computing earnings per share. This guidance requires
that all outstanding unvested share-based payment awards that contain rights to non-forfeitable
dividends be considered participating securities in undistributed earnings with common
shareholders. The Company adopted the guidance during the first quarter of fiscal 2010. As a
result of the adoption, the dividends on the Companys performance-based restricted shares, granted
in fiscal 2008, are included in the basic EPS calculations for all periods presented. The
inclusion has not materially impacted the earnings per share for the three and six months ended
January 31, 2010 and 2009.
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, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (numerator for basic and diluted Class A net income
per share) |
|
$ |
15,001 |
|
|
$ |
(4,150 |
) |
|
$ |
36,669 |
|
|
$ |
32,960 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock dividends |
|
|
(37 |
) |
|
|
(36 |
) |
|
|
(74 |
) |
|
|
(72 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basis and diluted Class A net income per share |
|
$ |
14,964 |
|
|
$ |
(4,114 |
) |
|
$ |
36,595 |
|
|
$ |
32,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferential dividends |
|
|
|
|
|
|
|
|
|
|
(816 |
) |
|
|
(823 |
) |
Preferential dividends on dilutive stock options |
|
|
|
|
|
|
|
|
|
|
(11 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted Class B net income per share |
|
$ |
14,964 |
|
|
$ |
(4,114 |
) |
|
$ |
35,768 |
|
|
$ |
32,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per share for both Class A and Class B |
|
|
52,370 |
|
|
|
52,350 |
|
|
|
52,354 |
|
|
|
52,821 |
|
Plus: Effect of dilutive stock options |
|
|
726 |
|
|
|
|
|
|
|
666 |
|
|
|
323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per share for both Class A and Class B |
|
|
53,096 |
|
|
|
52,350 |
|
|
|
53,020 |
|
|
|
53,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Nonvoting Common Stock net (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.29 |
|
|
$ |
(0.08 |
) |
|
$ |
0.70 |
|
|
$ |
0.62 |
|
Diluted |
|
$ |
0.28 |
|
|
$ |
(0.08 |
) |
|
$ |
0.69 |
|
|
$ |
0.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Voting Common Stock net (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.29 |
|
|
$ |
(0.08 |
) |
|
$ |
0.68 |
|
|
$ |
0.61 |
|
Diluted |
|
$ |
0.28 |
|
|
$ |
(0.08 |
) |
|
$ |
0.67 |
|
|
$ |
0.60 |
|
For the three months ended January 31, 2009, the Company was in a net loss position. As a
result of the Companys net loss position, no additional shares were included in the diluted
per-share amount for the three months ended January 31, 2009.
Options to purchase approximately 3,019,000 and 2,690,000 shares of Class A Nonvoting Common
Stock for the three and six months ended January 31, 2010, respectively, and 3,700,000 and
2,657,000 shares of Class A Nonvoting Common Stock for the three and six months ended January 31,
2009, 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 Company evaluates short-term segment performance based on segment profit or loss and
customer sales. Corporate long-term performance is evaluated based on shareholder value enhancement
(SVE), which incorporates the cost of capital as a hurdle rate for capital expenditures, new
product development, and acquisitions. Segment profit or loss does not include certain
administrative costs, such as the cost of finance, information technology and human resources,
which are managed as global functions. Restructuring charges, stock options, interest, investment
and other income and income taxes are also excluded when evaluating performance.
The Company is organized and managed on a geographic basis by region. Each of these regions,
Americas, Europe and Asia-Pacific, has a President that reports directly to the Companys chief
operating decision maker, its Chief Executive Officer. Each region has its own distinct operations,
is managed locally by its own management team, maintains its own financial reports and is evaluated
based on regional segment profit. The Company has determined that these regions comprise its
operating and reportable segments based on the information used by the Chief Executive Officer to
allocate resources and assess performance.
Intersegment sales and transfers are recorded at cost plus a standard percentage markup.
Intercompany profit is eliminated in consolidation. It is not practicable to disclose
enterprise-wide revenue from external customers on the basis of product or service.
Following is a summary of segment information for the three and six months ended January 31,
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
And |
|
|
|
|
|
|
Americas |
|
|
Europe |
|
|
Asia-Pacific |
|
|
Region |
|
|
Eliminations |
|
|
Totals |
|
Three months ended January 31,
2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
121,603 |
|
|
$ |
96,614 |
|
|
$ |
77,612 |
|
|
$ |
295,829 |
|
|
$ |
|
|
|
$ |
295,829 |
|
Intersegment revenues |
|
|
14,129 |
|
|
|
822 |
|
|
|
4,932 |
|
|
|
19,883 |
|
|
|
(19,883 |
) |
|
|
|
|
Segment profit |
|
|
23,546 |
|
|
|
25,947 |
|
|
|
10,687 |
|
|
|
60,180 |
|
|
|
(3,683 |
) |
|
|
56,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended January 31,
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
122,970 |
|
|
$ |
87,201 |
|
|
$ |
56,278 |
|
|
$ |
266,449 |
|
|
$ |
|
|
|
$ |
266,449 |
|
Intersegment revenues |
|
|
9,536 |
|
|
|
1,286 |
|
|
|
5,070 |
|
|
|
15,892 |
|
|
|
(15,892 |
) |
|
|
|
|
Segment profit |
|
|
22,041 |
|
|
|
22,945 |
|
|
|
4,122 |
|
|
|
49,108 |
|
|
|
(2,607 |
) |
|
|
46,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended January 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
257,842 |
|
|
$ |
190,949 |
|
|
$ |
165,524 |
|
|
$ |
614,315 |
|
|
$ |
|
|
|
$ |
614,315 |
|
Intersegment revenues |
|
|
27,564 |
|
|
|
2,577 |
|
|
|
8,901 |
|
|
|
39,042 |
|
|
|
(39,042 |
) |
|
|
|
|
Segment profit |
|
|
56,347 |
|
|
|
50,809 |
|
|
|
25,814 |
|
|
|
132,970 |
|
|
|
(6,603 |
) |
|
|
126,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended January 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
283,886 |
|
|
$ |
195,416 |
|
|
$ |
165,464 |
|
|
$ |
644,766 |
|
|
$ |
|
|
|
$ |
644,766 |
|
Intersegment revenues |
|
|
23,917 |
|
|
|
2,797 |
|
|
|
13,058 |
|
|
|
39,772 |
|
|
|
(39,772 |
) |
|
|
|
|
Segment profit |
|
|
57,564 |
|
|
|
54,084 |
|
|
|
26,523 |
|
|
|
138,171 |
|
|
|
(4,914 |
) |
|
|
133,257 |
|
Following is a reconciliation of segment profit to net income (loss) for the three months and
six months ended January 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended: |
|
|
Six months ended: |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Total profit from reportable segments |
|
$ |
60,180 |
|
|
$ |
49,108 |
|
|
$ |
132,970 |
|
|
$ |
138,171 |
|
Corporate and eliminations |
|
|
(3,683 |
) |
|
|
(2,607 |
) |
|
|
(6,603 |
) |
|
|
(4,914 |
) |
Unallocated amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative costs |
|
|
(28,946 |
) |
|
|
(22,475 |
) |
|
|
(59,659 |
) |
|
|
(51,398 |
) |
Restructuring charges |
|
|
(3,649 |
) |
|
|
(19,408 |
) |
|
|
(7,250 |
) |
|
|
(21,047 |
) |
Investment and other income
(expense) |
|
|
1,104 |
|
|
|
(1,698 |
) |
|
|
1,153 |
|
|
|
154 |
|
Interest expense |
|
|
(5,163 |
) |
|
|
(6,314 |
) |
|
|
(10,325 |
) |
|
|
(12,675 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
19,843 |
|
|
|
(3,394 |
) |
|
|
50,286 |
|
|
|
48,291 |
|
Income taxes |
|
|
(4,842 |
) |
|
|
(756 |
) |
|
|
(13,617 |
) |
|
|
(15,331 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
15,001 |
|
|
$ |
(4,150 |
) |
|
$ |
36,669 |
|
|
$ |
32,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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, 2010, the Company has reserved 5,348,639 shares of Class A Nonvoting Common
Stock for outstanding stock options and restricted shares and 2,228,500 shares of Class A Nonvoting
Common Stock remain 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 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, 2010 and 2009 was $2,205 ($1,345 net of taxes)
and $2,152 ($1,313 net of taxes), respectively, and expense recognized during the six months ended
January 31, 2010 and 2009 was $5,156 ($3,145 net of taxes) and $4,244 ($2,589 net of taxes),
respectively. As of January 31, 2010, total unrecognized compensation cost related to share-based
compensation awards was $17,198 pre-tax, net of estimated forfeitures, which the Company expects to
recognize over a weighted-average period of 2.4 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, 2010 and 2009 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, 2010 |
|
|
January 31, 2009 |
|
|
|
|
|
|
|
Performance- |
|
|
|
|
|
|
Performance- |
|
|
|
Service-Based |
|
|
Based Option |
|
|
Service-Based |
|
|
Based Option |
|
Black-Scholes Option Valuation Assumptions |
|
Option Awards |
|
|
Awards |
|
|
Option Awards |
|
|
Awards |
|
Expected term (in years) |
|
|
5.95 |
|
|
|
6.57 |
|
|
|
5.97 |
|
|
|
N/A |
|
Expected volatility |
|
|
39.85 |
% |
|
|
38.72 |
% |
|
|
36.01 |
% |
|
|
N/A |
|
Expected dividend yield |
|
|
3.02 |
% |
|
|
3.02 |
% |
|
|
1.75 |
% |
|
|
N/A |
|
Risk-free interest rate |
|
|
2.65 |
% |
|
|
3.03 |
% |
|
|
2.03 |
% |
|
|
N/A |
|
Weighted-average market value of
underlying stock at grant date |
|
$ |
28.73 |
|
|
|
28.73 |
|
|
$ |
21.31 |
|
|
|
N/A |
|
Weighted-average exercise price |
|
$ |
28.73 |
|
|
|
28.73 |
|
|
$ |
21.31 |
|
|
|
N/A |
|
Weighted-average fair value of options
granted during the period |
|
$ |
8.78 |
|
|
|
8.96 |
|
|
$ |
6.32 |
|
|
|
N/A |
|
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 fiscal 2008, with a
grant price and fair value of $32.83. The Company did not grant any performance-based restricted
shares during the six months ended January 31, 2010. As of January 31, 2010, 210,000
performance-based restricted shares were outstanding.
The Company granted 525,000 performance-based options during the six months ended January 31,
2010, with a weighted average exercise price of $28.73 and a weighted average fair value of $8.96.
The Company also granted 901,000 service-based options during the six months ended January 31,
2010, with a weighted average exercise price of $28.73 and a weighted average fair value of $8.78.
10
A summary of stock option activity under the Companys share-based compensation plans for the
six months ended January 31, 2010 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
Options |
|
Shares |
|
|
Exercise Price |
|
|
Term |
|
|
Value |
|
Outstanding at July 31, 2009 |
|
|
3,980,606 |
|
|
$ |
27.96 |
|
|
|
|
|
|
|
|
|
New grants |
|
|
1,426,000 |
|
|
$ |
29.12 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(96,567 |
) |
|
$ |
16.91 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(171,400 |
) |
|
$ |
33.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 31, 2010 |
|
|
5,138,639 |
|
|
$ |
28.32 |
|
|
|
6.6 |
|
|
$ |
17,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at January 31, 2010 |
|
|
3,340,857 |
|
|
$ |
28.52 |
|
|
|
4.8 |
|
|
$ |
14,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were 3,340,857 and 2,885,483 options exercisable with a weighted average exercise price
of $28.52 and $27.27 at January 31, 2010 and 2009, respectively. The cash received from the
exercise of options during the three months ended January 31, 2010 and 2009 was $956 and $122,
respectively. The cash received from the exercise of options during the six months ended January
31, 2010 and 2009 was $1,672 and $1,284, respectively. The cash received from the tax benefit on
options exercised during the quarters ended January 31, 2010 and 2009 was $181 and $86,
respectively. The cash received from the tax benefit on options exercised during the six months
ended January 31, 2010 and 2009 was $383 and $532, respectively.
The total intrinsic value of options exercised during the six months ended January 31, 2010
and 2009, based upon the average market price at the time of exercise during the period, was $1,266
and $1,702, respectively. The total fair value of stock options vested during the six months ended
January 31, 2010 and 2009, was $12,054 and $7,194, respectively.
NOTE G Stockholders Investment
In September 2008, 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. No shares were repurchased during
the quarter ended January 31, 2010 or for the six months ended January 31, 2010. As of January 31,
2010, there remained 306,200 shares available to purchase in connection with this share 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 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
2010 from those reported 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, 2009.
11
NOTE I Fair Value Measurements
The Company adopted new accounting guidance on fair value measurements on August 1, 2008 as it
relates to financial assets and liabilities. The Company adopted the new accounting guidance on
fair value measurements for its nonfinancial assets and liabilities on August 1, 2009. The
accounting guidance applies to other accounting pronouncements that require or permit fair value
measurements, defines fair value based upon an exit price model, establishes a framework for
measuring fair value, and expands the applicable disclosure requirements. The accounting guidance
indicates, among other things, that a fair value measurement assumes that a transaction to sell an
asset or transfer a liability occurs in the principal market for the asset or liability or, in the
absence of a principal market, the most advantageous market for the asset or liability.
The accounting guidance on fair value measurements establishes a fair market value hierarchy
for the pricing inputs used to measure fair market value. The Companys assets and liabilities
measured at fair market value are classified in one of the following categories:
|
|
|
Level 1 Assets or liabilities for which fair value is based on quoted market
prices in active markets for identical instruments as of the reporting date. At January 31,
2010 and July 31, 2009, $8,301 and $8,239 of the mutual funds held for the Companys deferred
compensation plans were valued using Level 1 pricing inputs. The Companys deferred
compensation investments are included in Other assets on the accompanying Condensed
Consolidated Balance Sheets. |
|
|
|
Level 2 Assets or liabilities for which fair value is based on valuation models
for which pricing inputs were either directly or indirectly observable. At January 31, 2010
and July 31, 2009, $250 and $248, respectively, of the Companys forward exchange contracts
designated as cash flow hedges were valued using Level 2 pricing inputs and are included in
Other current liabilities, on the accompanying Condensed Consolidated Balance Sheets. At
January 31, 2010, $131 of the Companys forward exchange contracts designated as cash flow
hedges were valued using Level 2 pricing inputs and are included in Prepaid expenses and
other current assets, on the accompanying Condensed Consolidated Balance Sheets. At July 31,
2009, $130 of the Companys forward contracts not designated as hedging instruments were
valued using Level 2 pricing inputs and are included in Prepaid expenses and other current
assets. See Note L, Derivatives and Hedging Activities for additional information
regarding the Companys hedging and derivatives activities. |
|
|
|
Level 3 Assets or liabilities for which fair value is based on valuation models
with significant unobservable pricing inputs and which result in the use of management
estimates. As of January 31, 2010, none of the Companys assets or liabilities were valued
using Level 3 pricing inputs. |
The Companys financial instruments, other than those presented in the disclosures above,
include cash, receivables, other investments, accounts payable, accrued liabilities and short- and
long-term debt. The fair values of cash, receivables, accounts payable, accrued liabilities and
short-term debt approximated carrying values because of the short-term nature of these instruments.
The estimated fair value of the Companys long-term obligations, based on the quoted market
prices for similar issues and on the current rates offered for debt of similar maturities, was
$418,693 and $412,678 at January 31, 2010 and July 31, 2009, respectively, as compared to the
carrying value of $391,350 at both January 31, 2010 and July 31, 2009.
Disclosures for nonfinancial assets and liabilities that are measured at fair value, but are
recognized and disclosed at fair value on a nonrecurring basis, were required prospectively
beginning August 1, 2009. During the three and six months ended January 31, 2010, the Company had
no significant measurements of assets or liabilities at fair value on a nonrecurring basis
subsequent to their initial recognition other than the acquisitions of Welco and Stickolor. See
Note M, Acquisitions for further information.
12
NOTE J New Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (FASB) issued new accounting
guidance related to business combinations. This guidance 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 in subsidiaries will be valued at fair value at the acquisition
date and classified as a separate component of equity; |
|
|
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. |
This guidance applies to business combinations for which the acquisition date is on or after
August 1, 2009. The impact of this guidance on the Companys future consolidated financial
statements will depend on the size and nature of future acquisitions. The impact during the six
months ended January 31, 2010 was not significant. See Note M, Acquisitions for further
discussion.
In April 2009, the FASB issued new accounting guidance related to the accounting for assets
and liabilities assumed in a business combination that arise from contingencies. This guidance
amends and clarifies the guidance issued in December 2007 related to business combinations to
address application issues raised by preparers, auditors, and members of the legal profession on
initial recognition and measurement, subsequent measurement and accounting, and disclosure of
assets and liabilities arising from contingencies in a business combination. This guidance has been
applied on a prospective basis for business combinations for which the acquisition date is on or
after August 1, 2009. The impact of this guidance on the Companys future consolidated financial
statements will depend on the size and nature of future acquisitions. The impact during the six
months ended January 31, 2010 was not significant. See Note M, Acquisitions for further
discussion.
In April 2009, the FASB issued new accounting guidance related to interim disclosures on the
fair value of financial instruments. This guidance requires disclosures about fair value of
financial instruments for interim periods of publicly traded companies as well as in annual
financial statements. This guidance is effective for interim reporting periods ending after June
15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company
adopted this new accounting guidance on August 1, 2009. See Note I, Fair Value Measurements for
the required disclosures.
In June 2009, the FASB issued new accounting guidance for variable interest entities. This
guidance makes changes to the overall consolidation analysis. This guidance is effective as of the
beginning of fiscal years that begin after November 15, 2009. The Company expects to adopt this
standard on August 1, 2010. The Company is in the process of evaluating the impact that will result
from adopting this guidance on the Companys results of operations and financial disclosures when
such statement is adopted.
In August 2009, the FASB issued new accounting guidance to provide clarification on measuring
liabilities at fair value when a quoted price in an active market is not available. The Company
adopted this guidance on October 1, 2009. The adoption of this accounting guidance did not have a
significant impact on the Companys consolidated financial statements.
In October 2009, the FASB issued new accounting guidance that provides amendments to the
criteria for separating consideration in multiple-deliverable revenue arrangements. As a result of
these amendments, multiple-deliverable revenue arrangements will be separated in more circumstances
than under existing GAAP. The guidance does this by establishing a selling price hierarchy for
determining the selling price of a deliverable. The selling price used for each deliverable will be
based on vendor-specific objective evidence if available, third-party evidence if vendor-specific
objective evidence is not available, or estimated selling price if neither vendor-specific
objective evidence nor third-party evidence is available. A vendor will be required to determine
its best estimate of selling price in a manner that is consistent with that used to determine the
price to sell the deliverable on a standalone basis. The guidance also eliminates the residual
method of allocation and will require that arrangement consideration be allocated at the inception
of the arrangement to all deliverables using the relative selling price method, which allocates any
discount in the overall arrangement proportionally to each deliverable based on its relative
selling price. Expanded disclosures of qualitative and quantitative information regarding
application of the multiple-deliverable revenue arrangement guidance are also required under the
guidance. The guidance does not apply to arrangements for which industry specific allocation and
measurement guidance exists, such as long-term construction contracts and software transactions.
The guidance is effective for the Company on August 1, 2010. The Company may elect to adopt the
provisions prospectively to new or materially modified arrangements beginning on the effective date
or retrospectively for all periods presented. The Company is currently evaluating the impact of
this standard on its consolidated results of operations and financial condition.
13
NOTE K Restructuring
In fiscal 2009, in response to the global economic downturn, the Company took several measures
to address its cost structure. In addition to a company-wide salary freeze, a reduction in its
contract labor and decreased discretionary spending, the Company reduced its workforce by 25%. The
Company reduced its workforce through voluntary and involuntary separation programs, voluntary
retirement programs, and facility consolidations. As a result of these actions, the Company
recorded restructuring charges of $25,849 in fiscal 2009. The restructuring charges included
$20,911 of employee separation costs, $2,101 of non-cash fixed asset write-offs, $1,194 of other
facility closure related costs, $1,275 of contract termination costs, and $368 of non-cash stock
option expense. The Company continued executing its restructuring actions that were announced in
fiscal 2009 during the first and second quarters of fiscal 2010.
During the three and six months ended January 31, 2010, the Company recorded restructuring
charges of $3,649 and $7,250, respectively. The year-to-date restructuring charges consisted of
$4,816 of employee separation costs, $1,420 of fixed asset write-offs, $942 of other facility
closure related costs, and $72 of contract termination costs. Of the $7,250 of restructuring
charges recorded during the six months ended January 31, 2010, $2,468 was incurred in the Americas,
$2,441 was incurred in Europe, and $2,341 was incurred in Asia-Pacific. The charges for employee
separation costs consisted of severance pay, outplacement services, medical and other related
benefits. The costs related to these restructuring activities have been recorded on the condensed
consolidated statements of income as restructuring charges. The Company expects the majority of
the remaining cash payments to be made within the next twelve months.
A reconciliation of the Companys restructuring activity for fiscal 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
|
Asset |
|
|
|
|
|
|
|
|
|
Related |
|
|
Write-offs |
|
|
Other |
|
|
Total |
|
Beginning balance, July 31, 2009 |
|
$ |
4,445 |
|
|
$ |
|
|
|
$ |
877 |
|
|
$ |
5,322 |
|
Restructuring charge |
|
|
2,581 |
|
|
|
391 |
|
|
|
629 |
|
|
|
3,601 |
|
Non-cash write-offs |
|
|
|
|
|
|
(288 |
) |
|
|
|
|
|
|
(288 |
) |
Cash payments |
|
|
(2,930 |
) |
|
|
|
|
|
|
(545 |
) |
|
|
(3,475 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, October 31, 2009 |
|
$ |
4,096 |
|
|
$ |
103 |
|
|
$ |
961 |
|
|
$ |
5,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charge |
|
|
2,235 |
|
|
|
1,029 |
|
|
|
385 |
|
|
|
3,649 |
|
Non-cash write-offs |
|
|
|
|
|
|
(1,132 |
) |
|
|
|
|
|
|
(1,132 |
) |
Cash payments |
|
|
(2,985 |
) |
|
|
|
|
|
|
(594 |
) |
|
|
(3,579 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, January 31, 2010 |
|
$ |
3,346 |
|
|
$ |
|
|
|
$ |
752 |
|
|
$ |
4,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
NOTE L Derivatives and Hedging Activities
The Company primarily utilizes forward foreign exchange currency contracts to reduce the
exchange rate risk of specific foreign currency denominated transactions. These contracts
typically require the exchange of a foreign currency for U.S. dollars at a fixed rate at a future
date, with maturities of less than 12 months, which qualify as cash flow hedges under the
accounting guidance for derivative instruments and hedging activities. The primary objective of
the Companys foreign currency exchange risk management is to minimize the impact of currency
movements due to products purchased in other than the respective subsidiaries functional
currency. To achieve this objective, the Company hedges a portion of known exposures using
forward foreign exchange currency contracts. As of January 31, 2010, the notional amount of
outstanding forward contacts was $14,443.
Hedge effectiveness is determined by how closely the changes in the fair value of the hedging
instrument offset the changes in the fair value or cash flows of the hedged item. Hedge accounting
is permitted only if the hedging relationship is expected to be highly effective at the inception
of the hedge and on an on-going basis. Any ineffective portions are to be recognized in earnings
immediately as a component of investment and other income. The amount of hedge ineffectiveness was
not significant for the six months ended January 31, 2010. The amount of hedge ineffectiveness for
the six months ended January 31, 2009 was $238.
The Company hedges a portion of known exposure using forward exchange contracts. Main
exposures are related to transactions denominated in the British Pound, the Euro, Canadian Dollar,
Australian Dollar, Singapore Dollar, Swedish Krona, Danish Krone, Japanese Yen, and the Korean
Won. Generally, these risk management transactions will involve the use of foreign currency
derivatives to protect against exposure resulting from intercompany sales and identified inventory
or other asset purchases.
The Company has designated a portion of its foreign exchange contracts as cash flow hedges and
recorded these contracts at fair value on the Condensed Consolidated Balance Sheets. For these
instruments, the effective portion of the gain or loss on the derivative is reported as a component
of other comprehensive income (OCI) and reclassified into earnings in the same period or periods
during which the hedged transaction affects earnings. Gains or losses on the derivative related to
hedge ineffectiveness are recognized in current earnings. At January 31, 2010 and July 31, 2009,
unrealized losses of $248 and $35 have been included in OCI, respectively. All balances are
expected to be reclassified from OCI to earnings during the next twelve months when the hedged
intercompany transactions impact earnings.
At January 31, 2010, the Company had $131 of forward exchange contracts included in Prepaid
expenses and other current assets on the accompanying Condensed Consolidated Balance Sheet. At
July 31, 2009, $130 of the Companys forward exchange contracts not designated as hedging
instruments under SFAS No. 133 were included in Prepaid expenses and other current assets, on the
accompanying Condensed Consolidated Balance Sheet. At January 31, 2010 and July 31, 2009, the
Company had $250 and $248, of forward exchange contracts included in Other current liabilities on
the accompanying Condensed Consolidated Balance Sheet, respectively. At January 31, 2010 and July
31, 2009, the U.S. dollar equivalent of these outstanding forward foreign exchange contracts
totaled $14,443 and $21,793, respectively, including contracts to sell Euros, Canadian Dollars,
Australian Dollars, British Pounds, U.S. Dollars, and Danish Krone.
Fair values of derivative instruments in the Condensed Consolidated Balance Sheets were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
January 31, 2010 |
|
|
July 31, 2009 |
|
|
January 31, 2010 |
|
|
July 31, 2009 |
|
|
|
Balance Sheet |
|
|
Fair |
|
|
Balance Sheet |
|
|
Fair |
|
|
Balance Sheet |
|
|
Fair |
|
|
Balance Sheet |
|
|
Fair |
|
|
|
Location |
|
|
Value |
|
|
Location |
|
|
Value |
|
|
Location |
|
|
Value |
|
|
Location |
|
|
Value |
|
Foreign exchange contracts |
|
Prepaid expenses and other current assets |
|
$ |
131 |
|
|
Prepaid expenses and other current assets |
|
$ |
|
|
|
Other current liabilities |
|
$ |
250 |
|
|
Other current liabilities |
|
$ |
248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments |
|
|
|
|
|
$ |
131 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
250 |
|
|
|
|
|
|
$ |
248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
Prepaid expenses and other current assets |
|
$ |
|
|
|
Prepaid expenses and other current assets |
|
$ |
130 |
|
|
Other current liabilities |
|
$ |
|
|
|
Other current liabilities |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging
instruments |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
130 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
The pre-tax effects of derivative instruments designated as cash flow hedges on the Condensed
Consolidated Statements of Income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or |
|
|
Amount of Gain or (Loss) |
|
|
Amount of Gain or (Loss) |
|
|
|
(Loss) Recognized in |
|
|
Reclassified From |
|
|
Recognized in Income on |
|
|
|
OCI on Derivative |
|
|
Accumulated OCI Into Income |
|
|
Derivative (Ineffective |
|
|
|
(Effective Portion) |
|
|
(Effective Portion) |
|
|
Portion) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain or (Loss) |
|
|
|
|
|
|
|
|
|
Six |
|
|
Six |
|
|
Location of Gain or |
|
|
|
|
|
|
|
|
|
|
Recognized in |
|
|
|
|
|
|
|
Derivatives in |
|
months |
|
|
months |
|
|
(Loss) Reclassified |
|
|
Six months |
|
|
Six months |
|
|
Income on |
|
|
Six months |
|
|
Six months |
|
Cash Flow |
|
ended |
|
|
ended |
|
|
From Accumulated |
|
|
ended |
|
|
ended |
|
|
Derivative |
|
|
ended |
|
|
ended |
|
Hedging |
|
January 31, |
|
|
January 31, |
|
|
OCI into Income |
|
|
January 31, |
|
|
January 31, |
|
|
(Ineffective |
|
|
January 31, |
|
|
January 31, |
|
Relationships |
|
2010 |
|
|
2009 |
|
|
(Effective Portion) |
|
|
2010 |
|
|
2009 |
|
|
Portion) |
|
|
2010 |
|
|
2009 |
|
Foreign exchange
contracts |
|
$ |
(69 |
) |
|
$ |
2,914 |
|
|
Cost of Goods Sold |
|
$ |
144 |
|
|
$ |
31 |
|
|
Cost of Goods Sold |
|
$ |
|
|
|
$ |
238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(69 |
) |
|
$ |
2,914 |
|
|
|
|
|
|
$ |
144 |
|
|
$ |
31 |
|
|
|
|
|
|
$ |
|
|
|
$ |
238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE M Acquisitions
On December 23, 2009, the Company acquired Stickolor Industria e Comercio de Auto Adesivos
Ltda. (Stickolor), based in Saõ Paulo, Brazil for $18,459. Stickolor manufactures screen-printed
custom labels, overlays and nameplates for automobiles, tractors, motorcycles, electronics, white
goods and general industrial markets. The Stickolor business is included in the Companys Americas
segment. The purchase price allocation resulted in $13,370 assigned to goodwill, $4,989 assigned
to customer relationships, and $55 assigned to trademark. The amounts assigned to the trademark
and customer relationships are being amortized over 3 and 7 years, respectively. The Company
expects the acquisition to further strengthen its position in the industrial identification market
in Brazil and enhance its screen printing capabilities, as well as facilitate its growth into
complementary markets in the region including automotive, agricultural equipment, and major
appliances.
On October 9, 2009, the Company acquired certain assets of the Welco division of Welconstruct
Group Limited, based in the United Kingdom for $1,840. The Welco division conducts a direct
marketing business consisting of sales of storage, handling, office and workplace products, and
equipment via catalog and the internet to industrial and commercial markets under the name and
title Welco. The purchase price allocation resulted in $778 assigned to goodwill, $501 assigned
to customer relationships, and $580 assigned to trademark. The amounts assigned to the trademark
and customer relationships are being amortized over 10 and 6 years, respectively.
The results of the operations of the acquired business have been included since the respective
dates of acquisition in the accompanying condensed consolidated financial statements. The Company
is continuing to evaluate the initial purchase price allocations for the acquisitions completed
within the past 12 months and will adjust the allocations as additional information relative to the
fair value of assets and liabilities of the acquired businesses becomes known. Pro forma
information related to the acquisitions during the six months ended January 31, 2010 is not
included because the impact on the Companys consolidated results of operations is considered to be
immaterial.
NOTE N Subsequent Events
On February 18, 2010, the Board of Directors declared a quarterly cash dividend to
shareholders of the Companys Class A Common Stock of $0.175 per share payable on April 30, 2010 to
shareholders of record at the close of business on April 9, 2010.
16
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, safety devices, precision die-cut
materials, and label-application and data-collection systems. Founded in 1914, the Company serves
customers in manufacturing, electrical, telecommunications, electronics, 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 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. The Company operates manufacturing or distribution facilities in
Australia, Belgium, Brazil, Canada, China, France, Germany, India, Italy, Japan, Malaysia, Mexico,
the Netherlands, Norway, Poland, Singapore, South Korea, 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 Hong Kong, the
Philippines, Slovakia, Spain, Taiwan, Turkey, and the United Arab Emirates and further markets its
products to parts of Eastern Europe, the Middle East, Africa and Russia.
Sales for the quarter ended January 31, 2010, were up 11.0% to $295.8 million, compared to
$266.4 million in the same period of fiscal 2009. Of the 11.0% increase in sales, organic sales
increased 2.9%, acquisitions added 0.9% and the effects of fluctuations in the exchange rates used
to translate financial results into the United States dollar positively impacted sales 7.2%. Net
income for the quarter ended January 31, 2010, was $15.0 million or $0.28 per diluted Class A
Nonvoting Common Share, up from the net loss of $4.2 million or $0.08 per diluted Class A Nonvoting
Common Share reported in the second quarter of last fiscal year. Net income before
restructuring-related expenses for the quarter ended January 31, 2010 was $17.6 million, or $0.33
per diluted Class A Nonvoting Common Share, up 79.6% from $9.8 million or $0.19 per diluted Class A
Nonvoting Common Share reported in the second quarter of last fiscal year.
Sales for the six months ended January 31, 2010, decreased 4.7% to $614.3 million, compared to
$644.8 million in the same period of fiscal 2009. Organic sales declined 8.1%, acquisitions added
0.4% and the effects of fluctuations in the exchange rates used to translate financial results into
the United States dollar positively impacted sales 3.0%. Net income for the six months ended
January 31, 2010 was $36.7 million or $0.69 per diluted Class A Nonvoting Common Share, up 11.3%
from $33.0 million, or $0.62 per diluted Class A Nonvoting Common Share reported in the same period
of the prior fiscal year. Net income before restructuring-related expenses for the six months
ended January 31, 2010 was $41.9 million or $0.79 per diluted Class A Nonvoting Common Share, down
12.9% from $48.1 million, or $0.91 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,
2010, to the prior year has been impacted by the following acquisitions completed in fiscal 2010.
|
|
|
|
|
Acquisitions |
|
Segment |
|
Date Completed |
Welconstruct Group Limited (Welco) |
|
Europe |
|
October 2009 |
|
|
|
|
|
Stickolor Industria e Comerciao de Auto Adesivos Ltda. (Stickolor) |
|
Americas |
|
December 2009 |
Sales for the three months ended January 31, 2010, were up 11.0% compared to the same period
in fiscal 2009. The sales increase was comprised of an increase in organic sales of 2.9%, a slight
increase of 0.9% due to the acquisition of Stickolor, and the effects of fluctuations in the
exchange rates used to translate financial results into the United States dollar positively
impacted sales of 7.2%. The increase in organic sales for the quarter ended January 31, 2010, was
primarily the result of comparatively lower sales in the prior year in the Asia-Pacific segment due
to the Lunar New Year Holiday falling in the second quarter of fiscal 2009 and in the third quarter
of fiscal 2010, as well as the global impact of the economic recession in the same period in fiscal
2009. Organic sales were positively impacted during the second quarter of fiscal 2010 in the
Asia-Pacific segment with an increase of 25.7%, offset by the declines in the organic sales in the
Americas and Europe segments of 4.3% and 1.6%, respectively.
Sales for the six months ended January 31, 2010, decreased 4.7% compared to the same period in
fiscal 2009. The decline was comprised of an 8.1% decrease in organic sales, an increase of 0.4%
due to the acquisitions of Stickolor and Welco, and an increase of 3.0% due to the positive effect
of currencies on sales. The decrease in organic sales was due to declines of 10.5% in the Americas
segment, 7.5% in the Europe segment, and 4.7% in the Asia-Pacific segment. The decrease in the
Companys organic sales was
primarily driven by the global economic recession. The decline in organic sales in the Americas
segment was primarily driven by weakness in the manufacturing and construction sector. Organic
sales were adversely impacted in the Europe and Asia-Pacific segments due to the declines
experienced in the electronics industries, primarily during the first quarter of fiscal 2010.
17
Gross margin as a percentage of sales increased to 49.7% from 47.3% for the quarter and
increased to 49.5% from 47.7% for the six months ended January 31, 2010, compared to the same
periods of the previous year. This increase in gross margin as a percentage of sales for the
quarter was primarily the result of increased sales volumes in the Asia-Pacific region as well as
the cost savings generated from the reduction of contract labor, restructuring activities that took
place during fiscal 2009 and continued in fiscal 2010, and efficiencies gained from the
implementation of the Brady Business Performance System (BBPS) throughout the Company. The
increase in the gross margin as a percentage of sales for the six months ended January 31, 2010 was
primarily due to the cost savings described above which offset the decrease in sales.
Research and development (R&D) expenses increased 25.0% to $10.6 million for the three
months ended January 31, 2010 compared to $8.5 million for the same period in the prior year, and
increased 15.3% to $20.2 million for the six months ended January 31, 2010, compared to $17.6
million for the same period in the prior year, In the second quarter of fiscal 2010, R&D expenses
as a percentage of sales increased to 3.6% as compared to 3.2% in the same period of the previous
year. For the first half of fiscal 2010, R&D expense as a percentage of sales increased to 3.3%
from 2.7% in the same period of the prior year, evidencing the Companys continued commitment to
innovation and new product development.
Selling, general and administrative (SG&A) expenses increased 16.2% to $108.7 million for
the three months ended January 31, 2010, compared to $93.6 million for the same period in the prior
year, and increased 4.6% to $217.4 million for the six months ended January 31, 2010, compared to
$207.9 million for the same period in the prior year. The increase in the SG&A was primarily the
result of the positive effect of fluctuations in the exchange rates used to translate financial
results into the United States dollar as well as the increase in the incentive-based compensation
and salary increases, which were eliminated in fiscal 2009 due to the economic downturn. As a
percentage of sales, SG&A expenses increased to 36.8% from 35.1% for the second quarter, and
increased to 35.4% from 32.2% for the six months ended January 31, 2010, compared to the same
periods in the prior year.
Restructuring charges were $3.6 million and $7.3 million for the three and six months ended
January 31, 2010, respectively. Restructuring charges were $19.4 million and $21.0 million for the
three and six months ended January 31, 2009, respectively. In fiscal 2009, in response to the
global recession, the Company took several measures to address its cost structure. The Company
continued to incur costs related to the reduction of its workforce and facilities consolidations
during the six months ended January 31, 2010. The Company expects to incur $15.0 million of
restructuring charges in fiscal 2010.
Interest expense decreased to $5.2 million from $6.3 million for the quarter and to $10.3
million from $12.7 million for the six months ended January 31, 2010, compared to the same periods
in the prior year. In fiscal 2009, the Company paid the first installment of $21.4 million related
to the debt securities issued in June 2004. Also, in June 2009, the Company completed a cash
tender offer to purchase an additional $65.8 million of its outstanding notes. As a result of
lower debt principal balances, the Companys interest expense decreased for the three and six
months ended January 31, 2010 as compared to the same periods in the prior year.
Other income and expense increased to $1.1 million of income for the quarter and increased to
$1.2 million of income for the six months ended January 31, 2010, compared to $1.7 million of
expense and $0.2 million of income for the same periods in the prior year, respectively. The
increase in the other income and expense for the three and six months ended January 31, 2010 was
primarily due to the a decline in the value of the mutual funds held in deferred compensation plans
during the second quarter of fiscal 2009, partially offset by interest income and foreign exchange
gains.
The Companys effective tax rate was 24.4% for the quarter ended January 31, 2010. The
Companys effective tax rate for the six months ended January 31, 2010 was 27.1 % compared to 31.7%
for the same period in the prior year. The decline in the Companys effective tax rate in the
current year was primarily due to decreased profits in higher tax countries as well as positive
impacts from the settlement of a foreign audit. Additionally, the Company recorded certain
valuation allowances against deferred tax assets as a result of the decline in income before taxes
during the six months ended January 31, 2009, which negatively impacted the effective tax rate for
2009. The Company expects the full year effective tax rate for fiscal 2010 to be approximately
27%.
Net income for the three months ended January 31, 2010, increased to $15.0 million, compared
to a loss of $4.2 million for the same quarter of the previous year. Net income (loss) as a
percentage of sales increased to 5.1% from (1.6%) for the quarter ended January 31, 2010, compared
to the same period in the prior year, due to the factors noted above. For the six months ended
January 31, 2010, net income increased 11.3% to $36.7 million, compared to $33.0 million for the
same period in the previous year. As a percentage of sales, net income increased to 6.0% from 5.1%
for the six months ended January 31, 2010, compared to the same period in the previous year.
18
Business Segment Operating Results
The Company is organized and managed on a geographic basis by region. Each of these regions,
Americas, Europe and Asia-Pacific, has a President that reports directly to the Companys chief
operating decision maker, its Chief Executive Officer. Each region has its own distinct operations,
is managed locally by its own management team, maintains its own financial reports and is evaluated
based on regional segment profit. The Company has determined that these regions comprise its
operating and reportable segments based on the information used by the Chief Executive Officer to
allocate resources and assess performance.
Following is a summary of segment information for the three and six months ended January 31,
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia- |
|
|
Region |
|
|
and |
|
|
|
|
(Dollars in thousands) |
|
Americas |
|
|
Europe |
|
|
Pacific |
|
|
Total |
|
|
Eliminations |
|
|
Total |
|
SALES TO EXTERNAL CUSTOMERS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2010 |
|
$ |
121,603 |
|
|
$ |
96,614 |
|
|
$ |
77,612 |
|
|
$ |
295,829 |
|
|
$ |
|
|
|
$ |
295,829 |
|
January 31, 2009 |
|
|
122,970 |
|
|
|
87,201 |
|
|
|
56,278 |
|
|
|
266,449 |
|
|
|
|
|
|
|
266,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2010 |
|
$ |
257,842 |
|
|
$ |
190,949 |
|
|
$ |
165,524 |
|
|
$ |
614,315 |
|
|
$ |
|
|
|
$ |
614,315 |
|
January 31, 2009 |
|
|
283,886 |
|
|
|
195,416 |
|
|
|
165,464 |
|
|
|
644,766 |
|
|
|
|
|
|
|
644,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES GROWTH INFORMATION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended January 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base |
|
|
(4.3 |
%) |
|
|
(1.6 |
%) |
|
|
25.7 |
% |
|
|
2.9 |
% |
|
|
|
|
|
|
2.9 |
% |
Currency |
|
|
2.6 |
% |
|
|
10.4 |
% |
|
|
12.2 |
% |
|
|
7.2 |
% |
|
|
|
|
|
|
7.2 |
% |
Acquisitions |
|
|
0.6 |
% |
|
|
2.0 |
% |
|
|
0.0 |
% |
|
|
0.9 |
% |
|
|
|
|
|
|
0.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(1.1 |
%) |
|
|
10.8 |
% |
|
|
37.9 |
% |
|
|
11.0 |
% |
|
|
|
|
|
|
11.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended January 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base |
|
|
(10.5 |
%) |
|
|
(7.5 |
%) |
|
|
(4.7 |
%) |
|
|
(8.1 |
%) |
|
|
|
|
|
|
(8.1 |
%) |
Currency |
|
|
1.1 |
% |
|
|
4.2 |
% |
|
|
4.7 |
% |
|
|
3.0 |
% |
|
|
|
|
|
|
3.0 |
% |
Acquisitions |
|
|
0.2 |
% |
|
|
1.0 |
% |
|
|
0.0 |
% |
|
|
0.4 |
% |
|
|
|
|
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(9.2 |
%) |
|
|
(2.3 |
%) |
|
|
0.0 |
% |
|
|
(4.7 |
%) |
|
|
|
|
|
|
(4.7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEGMENT PROFIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2010 |
|
$ |
23,546 |
|
|
$ |
25,947 |
|
|
$ |
10,687 |
|
|
$ |
60,180 |
|
|
$ |
(3,683 |
) |
|
$ |
56,497 |
|
January 31, 2009 |
|
|
22,041 |
|
|
|
22,945 |
|
|
|
4,122 |
|
|
|
49,108 |
|
|
|
(2,607 |
) |
|
|
46,501 |
|
Percentage change |
|
|
6.8 |
% |
|
|
13.1 |
% |
|
|
159.3 |
% |
|
|
22.5 |
% |
|
|
41.3 |
% |
|
|
21.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2010 |
|
$ |
56,347 |
|
|
$ |
50,809 |
|
|
$ |
25,814 |
|
|
$ |
132,970 |
|
|
$ |
(6,603 |
) |
|
$ |
126,367 |
|
January 31, 2009 |
|
|
57,564 |
|
|
|
54,084 |
|
|
|
26,523 |
|
|
|
138,171 |
|
|
|
(4,914 |
) |
|
|
133,257 |
|
Percentage change |
|
|
(2.1 |
%) |
|
|
(6.1 |
%) |
|
|
(2.7 |
%) |
|
|
(3.8 |
%) |
|
|
34.4 |
% |
|
|
(5.2 |
%) |
NET INCOME (LOSS) RECONCILIATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended: |
|
|
Six months ended: |
|
|
|
January 31, |
|
|
January 31, |
|
|
January 31, |
|
|
January 31, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Total profit from reportable segments |
|
$ |
60,180 |
|
|
$ |
49,108 |
|
|
$ |
132,970 |
|
|
$ |
138,171 |
|
Corporate and eliminations |
|
|
(3,683 |
) |
|
|
(2,607 |
) |
|
|
(6,603 |
) |
|
|
(4,914 |
) |
Unallocated amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative costs |
|
|
(28,946 |
) |
|
|
(22,475 |
) |
|
|
(59,659 |
) |
|
|
(51,398 |
) |
Restructuring charges |
|
|
(3,649 |
) |
|
|
(19,408 |
) |
|
|
(7,250 |
) |
|
|
(21,047 |
|
Investment and other income (expense) |
|
|
1,104 |
|
|
|
(1,698 |
) |
|
|
1,153 |
|
|
|
154 |
|
Interest expense |
|
|
(5,163 |
) |
|
|
(6,314 |
) |
|
|
(10,325 |
) |
|
|
(12,675 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
19,843 |
|
|
|
(3,394 |
) |
|
|
50,286 |
|
|
|
48,291 |
|
Income taxes |
|
|
(4,842 |
) |
|
|
(756 |
) |
|
|
(13,617 |
) |
|
|
(15,331 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
15,001 |
|
|
$ |
(4,150 |
) |
|
$ |
36,669 |
|
|
$ |
32,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
The Company evaluates short-term segment performance based on segment profit or loss and
customer sales. Corporate long-term performance is evaluated based on shareholder value enhancement
(SVE), which incorporates the cost of capital as a hurdle rate for capital expenditures, new
product development, and acquisitions. Segment profit or loss does not include certain
administrative costs, such as the cost of finance, information technology and human resources,
which are managed as global functions. Restructuring charges, stock options, interest, investment
and other income and income taxes are also excluded when evaluating performance.
Americas:
Sales in the Americas decreased 1.1% to $121.6 million for the quarter and 9.2% to $257.8
million for the six months ended January 31, 2010, compared to $123.0 million and $283.9 million
for the same three and six-month periods in the prior year. Organic sales declined 4.3% and 10.5%
during 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 resulted in a positive impact on sales of 2.6% in the quarter and 1.1% for the
six-month period. Sales increased slightly due to the fiscal 2010 acquisition of Stickolor, 0.6%
for the quarter and 0.2% for the six-month period. The declines in organic sales of 4.3% for the
quarter and 10.5% for the six months ended January 31, 2010 was caused by the economic downturn,
specifically in the manufacturing, and construction sectors. The segment continues to focus on
driving organic sales by introducing new, differentiated products, growing in new markets, and
preparing to launch the Companys direct marketing businesses new transactional web-sites.
Geographically, the U.S., has seen continued declines in organic sales, offset slightly by modest
growth in Brazil, Canada, and Mexico.
Segment profit increased 6.8% to $23.5 million from $22.0 million for the quarter and declined
2.1% to $56.3 million from $57.6 million for the six months ended January 31, 2010, compared to the
same periods in the prior year. Segment profit was adversely impacted by decreased sales volume,
impacting the segments ability to absorb fixed costs. To counter the impact of decreased sales
volume, the segment continued to drive productivity improvements through consolidating facilities,
and implementing other operational improvement initiatives to further reduce costs and improve
productivity. As a percentage of sales, segment profit in the second quarter of fiscal 2010
increased to 19.4% from 17.9% and for the first half of fiscal 2010 increased to 21.9% from 20.3%,
compared to the same periods in the prior year. The increase in segment profit as a percentage of
sales was due to the productivity improvements described above.
Europe:
Europe sales increased 10.8% to $96.6 million for the quarter and decreased 2.3% to $190.9
million for the six months ended January 31, 2010, compared to $87.2 million and $195.4 million for
the same periods in the prior year. Organic sales declined 1.6% and 7.5% 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 4.2% for
the six-month period. The fiscal 2010 acquisition of Welco impacted sales by 2.0% and 1.0% for the
quarter and year-to date, respectively. The segments organic sales were positively impacted
during the quarter by the increases in the direct marketing businesses and the electronics
industries. The organic sales for the six months ended January 31, 2010 were adversely impacted
by the declines in the automotive and electronics industries during the first quarter of fiscal
2010.
Segment profit increased 13.1% to $25.9 million from $22.9 million for the quarter and
decreased 6.1% to $50.8 million from $54.1 million for the six months ended January 31, 2010,
compared to the same periods in the prior year. The increase in segment profit for the quarter was
attributable to the increased sales as discussed above. The decline in the segment profit for the
six months ended January 31, 2010 was primarily due to the decline in sales volumes as well as the
impact of foreign currency translation during the first quarter of fiscal 2010. As a percentage of
sales, segment profit increased to 26.9% from 26.3% in the second quarter of fiscal 2010; and
declined to 26.6% from 27.7% in the six months ended January 31, 2010, compared to the same periods
in the prior year. The increase in segment profit as a percentage of sales in the quarter was due
to the increased sales volumes. In response to the slowdown in business in the prior year and the
first quarter of 2010, the segment took actions to address its cost structure, including a
reduction in its workforce, limited discretionary spending, and consolidating facilities to offset
the decline in sales. During the second quarter of fiscal 2010, the segment began to realize
savings resulting from these actions.
20
Asia-Pacific:
Asia-Pacific sales increased 37.9% to $77.6 million from $56.3 million for the quarter and
held steady for the six months ended January 31, 2010, compared to the same periods in the prior
year. Organic sales increased 25.7% in the quarter; however organic sales declined 4.7%
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 segment by 12.2% for the quarter and 4.7% for the
six-month period. The significant increase in organic sales for the quarter was primarily due to a
heightened focus on high-end mobile electronics, strong growth in the data storage market and an
expanded focus on MRO applications throughout the region. During the second quarter of fiscal
2009, the global economic recession decreased demands in the electronic industry resulting in lower
sales in the segment. Sales in the prior year were also negatively impacted by the celebration of
the Lunar New Year which fell during the second quarter of fiscal 2009, which will fall in the
third quarter of fiscal 2010. The decline in the organic sales for the six months ended January
31, 2010 is a result of the decrease in sales during the first quarter of fiscal 2010 due to the
global economic recession, partially offset by the strong sales growth during the second quarter of
fiscal 2010 as discussed above.
Segment profit increased 159.3% to $10.7 million from $4.1 million for the quarter and
declined 2.7% to $25.8 million from $26.5 million for the six months ended January 31, 2010,
compared to the same periods in the prior year. As a percentage of sales, segment profit increased
to 13.8% from 7.3% in the second quarter of fiscal 2010 and declined to 15.6% from 16.0% in the six
months ended January 31, 2010, compared to the same periods in the prior year. The increase in
segment profit during the three months ended January 31, 2010 was primarily due to our increased
focused on higher-end, value-added solutions, newly launched products and the cost savings
generated from the restructuring activities and better facility rationalization. The decline in
the segment profit for the six months ended January 31, 2010 was primarily due to the decrease in
sales during the first quarter of fiscal 2010.
Financial Condition
Cash and cash equivalents were $205.6 million at January 31, 2010, compared to $188.2 million
at July 31, 2009. The increase in cash of $17.4 million was the result of cash provided by
operations of $68.0 million, offset by cash used for acquisitions and dividends, and the positive
effects of the depreciation of the U.S. dollar against other currencies during the six months ended
January 31, 2010.
Accounts receivable increased $12.2 million for the six months ended January 31, 2010 mainly
due to higher sales volumes. Inventories increased $3.5 million for the six months needed January
31, 2010 due to the positive impact of foreign currency translation on the Companys foreign
inventory balances and the inventory growth in the Americas segment. The net increase in current
liabilities was $17.1 million from July 31, 2009 to January 31, 2010. The increase was composed of
a significant increase in accrued wages and amounts withheld from employees due to the accrual of
the fiscal 2010 incentive compensation plans during the six months ended January 31, 2010.
Incentive compensation plans were cancelled for fiscal 2009 due to the Companys financial
performance resulting from the economic downturn and as such, no payouts for incentive compensation
were made during the first quarter of fiscal 2010.
Cash flow from operating activities totaled $68.0 million for the six months ended January 31,
2010, compared to $22.0 million for the same period last year. The increases in the accounts
receivable, inventory, and net income were offset by the increase in accounts payable and accrued
liabilities resulting in an increase in the cash provided by operating activities as compared to
the quarter of fiscal 2009. The significant change in the accounts payable and accrued liabilities
was primarily due to the accrual of the fiscal 2010 incentive compensation plans during the six
months ended January 31, 2010 as included above.
Cash used for acquisitions totaled $20.3 million for the six months ended January 31, 2010 due
to the acquisitions of Welco and Stickolor. The net cash paid for Welco and Stickolor was $1.8
million and $18.5 million, respectively. The Company did not complete any acquisitions during the
six months ended January 31, 2009. Capital expenditures were $15.0 million for the six months
ended January 31, 2010, compared to $12.9 million in the same period last year. The Company expects
the capital expenditures to be approximately $25.0 million for fiscal 2010. Net cash used in
financing activities was $16.3 million for the six months ended January 31, 2010, due primarily to
the payment of dividends, partially offset by the proceeds from the issuance of the common stock.
Net cash used in financing activities for the same period last year was $56.1 million due primarily
to the repurchase of the Companys Class A Non-Voting Common Stock and the payment of dividends.
21
On November 24, 2008, the Company filed a shelf registration statement on Form S-3 with the
Securities and Exchange Commission (SEC), which will allow the Company to issue and sell, from
time to time in one or more offerings, an indeterminate amount of Class A Non-Voting Common Stock
and debt securities as it deems prudent or necessary to raise capital at a later date. The shelf
registration statement became effective upon filing with the SEC. The Company plans to use the
proceeds from any future offerings under the shelf registration for general corporate purposes,
including, but not limited to, acquisitions, capital expenditures, and refinancing of debt.
During fiscal 2004 through fiscal 2007, the Company completed three private placement note
issuances totaling $500 million in ten-year fixed rate notes with varying maturity dates to
institutional investors at interest rates varying from 5.14% to 5.33%. The notes must be repaid
over seven years, with initial payment due dates ranging from 2008 to 2011, with interest payable
on the notes due semiannually on various dates throughout the year, which began in December 2004.
The private placements were 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 penalties under the agreement were waived for early prepayment.
Under the debt agreement, the Company paid equal installments of $21.4 million in June 2008 and
June 2009. In June 2009, the Company also completed a cash tender offer to purchase approximately
$65.8 million of its outstanding notes.
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 credit
facility may be increased from $200 million up to $300 million. Under the credit agreement, 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 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 excluding all extraordinary non-cash items for
the prior fiscal year of the Company. 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. On March 18, 2008, the Company entered into an amendment to the revolving loan
agreement which extended the maturity date from October 5, 2011 to March 18, 2013. All other terms
of the revolving loan agreement remained the same. As of January 31, 2010, there were no
outstanding borrowings under the credit facility.
The Companys debt and revolving loan agreements require it to maintain certain financial
covenants. The Companys June 2004, February 2006, and March 2007 private placement debt agreements
require the Company to maintain a ratio of debt to the trailing twelve months earnings before
interest, taxes, depreciation and amortization (EBITDA), as defined in the debt agreements, of
not more than a 3.5 to 1.0 ratio (leverage ratio). As of January 31, 2010, the Company was in
compliance with the financial covenant of these debt agreements, with the ratio of debt to EBITDA,
as defined by the agreements, equal to 2.1 to 1.0. Additionally, the Companys October 2006
revolving loan agreement requires the Company to maintain a ratio of debt to trailing twelve months
EBITDA, as defined by the debt agreement, of not more than a 3.0 to 1.0 ratio. The revolving loan
agreement requires the Companys trailing twelve months earnings before interest and taxes (EBIT)
to interest expense of not less than a 3.0 to 1.0 ratio (interest expense coverage). As of January
31, 2010, the Company was in compliance with the financial covenants of the revolving loan
agreement, with the ratio of debt to EBITDA, as defined by the agreement, equal to 2.1 to 1.0 and
the interest expense coverage ratio equal to 5.8 to 1.0.
The Companys growth has historically been funded by a combination of cash provided by
operating activities and debt financing. The Company believes that its cash from operations, in
addition to its borrowing capacity, are sufficient to fund its anticipated requirements for working
capital, capital expenditures, restructuring activities, acquisitions, common stock repurchases,
scheduled debt repayments, and dividend payments. As of the date of this Form 10-Q, the credit and
financial markets are in a period of instability and uncertainty that is affecting the availability
of credit to borrowers. The Company believes that its current credit arrangements are sound and
that the strength of its balance sheet will allow the Company the financial flexibility to respond
to both internal growth opportunities and those available through acquisition.
Subsequent Events Affecting Financial Condition
On February 18, 2010 the Board of Directors declared a quarterly cash dividend to shareholders
of the Companys Class A Common Stock of $0.175 per share payable on April 30, 2010 to shareholders
of record at the close of business on April 9, 2010.
22
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. Under the
accounting guidelines established for reserves for uncertain tax positions, the Company is unable
to determine the period in which the cash settlement of any reserves for uncertain tax positions
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.
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 Form 10-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 the length or severity of the
current worldwide economic downturn or timing or strength of a subsequent recovery; 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 develop and successfully market
new products; changes in the supply of, or price for, parts and components; increased price
pressure from suppliers and customers; fluctuations in currency rates versus the US dollar;
unforeseen tax consequences; potential write-offs of Bradys substantial intangible assets; Bradys
ability to retain significant contracts and customers; risks associated with international
operations; Bradys ability to attract and retain key talent; Bradys ability to maintain
compliance with its debt covenants; technology changes; business interruptions due to implementing
business systems; environmental, health and safety compliance costs and liabilities; future
competition; interruptions to sources of supply; Bradys ability to realize cost savings from
operating initiatives; difficulties associated with exports; risks associated with restructuring
plans; risks associated with obtaining governmental approvals and maintaining regulatory compliance
for new and existing products; 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, 2009. 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, Danish Krone, Japanese Yen,
and the Korean Won. As of January 31, 2010, the amount of outstanding foreign exchange contracts
was $14.4 million.
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, 2010, the Company had no
interest rate derivatives.
The Company is subject to the risk of changes in foreign currency exchange rates due to its
operations in foreign countries. The Company has manufacturing facilities and sells and distributes
its products throughout the world. As a result, the Companys financial results could be
significantly affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in the foreign markets in which the Company manufactures, distributes and sells
its products. The Companys operating results are principally exposed to changes in exchange rates
between the U.S. Dollar and the European currencies, primarily the Euro, changes between the U.S.
Dollar and the Australian Dollar, changes between the U.S. Dollar and the Canadian Dollar, and
changes between the U.S. Dollar and the Chinese Yuan. Changes in foreign currency exchange rates
for the Companys foreign subsidiaries reporting in local currencies are generally reported as a
component of shareholders equity. The Companys currency translation adjustments recorded for the
three and six months ended January 31, 2010 were $18.8 million unfavorable and $5.8 million
favorable, respectively. The Companys currency translation adjustments recorded for the three and
six months ended January 31, 2009 were $2.1 million unfavorable and $140.6 million unfavorable,
respectively. As of January 31, 2010 and 2009, the Companys foreign subsidiaries had net current
assets (defined as current assets less current liabilities) subject to foreign currency translation
risk of $229.9 million and $232.9 million, respectively. The potential decrease in the net current
assets as of January 31, 2010 from a hypothetical 10 percent adverse change in quoted foreign
currency exchange rates would be $22.9 million. This sensitivity analysis assumes a parallel shift
in foreign currency exchange rates. Exchange rates rarely move in the same direction relative to
the U.S. Dollar. This assumption may overstate the impact of changing exchange rates on individual
assets and liabilities denominated in a foreign currency.
ITEM 4. CONTROLS AND PROCEDURES
Brady Corporation maintains a set of disclosure controls and procedures that are designed to
ensure that information required to be disclosed by the Company in the reports filed by the Company
under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by the Company in the reports the Company files under the
Exchange Act is accumulated and communicated to the Companys management, including the Companys
principal executive and principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure. The Company carried out an
evaluation, under the supervision and with the participation of its management, including its
President and Chief Executive Officer and its Executive Vice President and Chief Financial Officer,
of the effectiveness of the design and operation of the Companys disclosure controls and
procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, the Companys
President and Chief Executive Officer and Executive Vice President and Chief Financial Officer
concluded that the Companys disclosure controls and procedures are effective as of the end of the
period covered by this report.
There were no 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
(a) Exhibits
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31.1 |
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Rule 13a-14(a)/15d-14(a) Certification of Frank M. Jaehnert |
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31.2 |
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Rule 13a-14(a)/15d-14(a) Certification of Thomas J. Felmer |
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32.1 |
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Section 1350 Certification of Frank M. Jaehnert |
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32.2 |
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Section 1350 Certification of Thomas J. Felmer |
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 5, 2010 |
/s/ Frank M. Jaehnert
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Frank M. Jaehnert |
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President & Chief Executive Officer |
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Date: March 5, 2010 |
/s/ Thomas J. Felmer
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Thomas J. Felmer |
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Senior Vice President &
Chief Financial Officer
(Principal Financial Officer) |
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