Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended July 31, 2005 | ||
| OR | ||
|
o
|
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 charter)
| Wisconsin | 39-0178960 | |
|
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
6555 West Good Hope Road,
Milwaukee, WI 53223
(Address of principal executive
offices) (Zip Code)
(414) 358-6600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
| Title of each class | Name of each exchange on which registered | |
| Class A Nonvoting Common Stock, Par Value $.01 per share | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act:
None
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 if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act). Yes þ No o
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the non-voting common stock held
by non-affiliates of the registrant as of January 31, 2005
was approximately $1,233,686,627 (based on closing sale price of
$28.39 per share on that date as reported for the New York
Stock Exchange). As of September 27, 2005, there were
outstanding 45,796,399 shares of Class A Nonvoting
Common Stock (the “Class A Common Stock”), and
3,538,628 shares of Class B Common Stock. The
Class B Common Stock, all of which is held by affiliates of
the registrant, is the only voting stock.
Table of Contents
INDEX
Table of Contents
Table of Contents
PART I
Brady Corporation and Subsidiaries are referred to herein as the
“Company,” “Brady,” or “we”.
| Item 1. | Business |
| (a) | General Development of Business |
The Company, a Wisconsin corporation founded in 1914, currently
operates 35 manufacturing facilities worldwide. Eleven are
located in the United States; three each in Brazil, China,
Germany, and the United Kingdom; two in Australia and Singapore;
and one each in Belgium, Canada, Denmark, France, Italy,
Malaysia, Mexico, and Thailand. The Company also sells through
subsidiaries or sales offices in these countries, with
additional sales through a dedicated team of international sales
representatives in Hungary, India, Japan, Korea, the
Netherlands, Norway, the Philippines, Slovakia, Spain, Sweden,
and Taiwan. The Company further markets its products to parts of
the Middle East. The Company’s corporate headquarters are
located at 6555 West Good Hope Road, Milwaukee, Wisconsin
53223, and the telephone number is (414) 358-6600. The
Company’s Internet address is http://www.bradycorp.com.
| (b) | Financial Information About Industry Segments |
The information required by this Item is provided in Note 7
of the Notes to Consolidated Financial Statements contained in
Item 8 — Financial Statements and Supplementary
Data.
| (c) | Narrative Description of Business |
Overview
Brady is an international manufacturer and marketer of
identification solutions and specialty materials which identify
and protect premises, products and people. Founded in 1914, the
Company serves customers in general manufacturing, maintenance
and safety, process industries, construction, electrical,
telecommunications, electronics, laboratory/healthcare,
airline/transportation, security/brand education, governmental,
public utility, and a variety of other industries. The Company
believes that its reputation for innovation, commitment to
quality and service, and dedicated employees have made it a
world leader in its markets.
Brady’s major product categories focus primarily on
facility identification, safety and complimentary products for
the Maintenance, Repair and Operations (“MRO”) market;
wire identification for telecommunications and electrical
industries; high-performance identification for electronics and
industrial manufacturers; and precision die-cut products for use
in hard-disk drives, cellular phones, pagers, automobiles and
other personal communication products. The need for the
Company’s products is driven by customer specifications, by
regulatory compliance requirements imposed by agencies such as
the Occupational Safety & Health Administration
(“OSHA”) and the Environmental Protection Agency
(“EPA”), or by the need to identify and track assets
or to direct, warn, inform, train and protect people. The
Company manufactures and sells products domestically and
internationally through multiple channels, including
distributors, direct sales, mail-order catalogs, retail, and
electronic access through the Internet. The Company has a broad
customer base, with the largest customer representing less than
5% of net sales.
Business Strategy
Brady’s vision is to be either first or second in terms of
market share in every market we serve, enabled by world-class
people, delivering differentiated solutions to loyal customers,
in order to achieve sustainable top tier growth and
profitability. To this end, the Company’s employees
participate in an incentive plan that has components focused
upon growth and profitability that serves to motivate employees,
foster a team-oriented work environment and maximize the
utilization of assets.
Key elements of the Company’s business strategy include:
Focus on customers — The Company seeks to
provide seamless customer service and to offer rapid response to
customer orders and inquiries. To meet this goal, the Company
has streamlined its manufacturing
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processes to shorten lead-times and has increased investment in
telecommunications and management information systems worldwide.
World Class People — The Company strives
to employ a world-class team of people throughout all of its
global operations. It believes that the Company can
differentiate itself through its people and it strives to hire
the best team members with competitive wages and compensation.
All of its employees are trained in its Code of Ethics Policy
and are held to highest standards of honesty and integrity.
Additionally, the Company highlights leadership as an integral
component of its values and growth strategy. All employees are
expected to embrace leadership principles which include customer
focus, high-performance, boldness, decisiveness and
accountability.
Innovative Differentiated Solutions — The
Company strives to provide innovative differentiated solutions
in niche markets that allow the Company to leverage its
capabilities in specialty labels, materials, die cutting,
software development and printing systems. By focusing on
specific markets and value-added product applications, the
Company has established leading positions in the electrical,
laboratory and safety markets with certain products such as wire
markers, pipe markers, labels, safety signs and printing
systems. It also is a leader in high performance work-in-process
labels and precision die-cut materials for Original Equipment
Manufacturers (“OEM’s”).
Materials and Customer Application Expertise —
The Company continually seeks to develop innovative pressure
sensitive materials, printers, software, and other
differentiated products to satisfy customers’ requirements
and expectations. Additionally, the Company strives to use its
materials expertise to develop unique products to meet the
demands of customers in new, faster growing markets adjacent to
its traditional markets. Brady’s commitment to product
innovation is reflected in its research and development efforts
that include approximately 165 employees primarily dedicated to
research and development activities in the United States,
Belgium, Singapore and China.
Operational Excellence — Productivity and
operational excellence are two initiatives that the Company uses
to increase the quality of its earnings each year. Brady is
committed to excellence within its operations and is utilizing
six-sigma problem solving to improve operational performance.
These activities are focused on working capital, yield,
purchasing, customer service and margin improvements, and work
to best utilize its selling, general and administrative expenses.
Global Presence — Sales from Brady’s
international operations have increased from $50,707,000 or
26.5% of net sales in fiscal 1990 to $451,201,000 or 55.3% of
net sales in fiscal 2005. The Company’s global presence is
a benefit to many of its customers who want to work with one
supplier to meet their global supply needs.
Premier Channels — Brady’s products are
sold through several channels including selected premier
distribution companies, direct sales, mail-order catalogs, and
electronic access through the Internet. The Company offers this
wide range of channels of distribution to meet the varying needs
of its very large and diverse customer base.
Key Initiatives
The Company’s key initiatives include:
Core Business Growth — The Company seeks to
increase market share through existing channels and through
strong sales and marketing strategies. To achieve this
objective, the Company is strengthening its relationships with
distributors, fine tuning its direct marketing strategies and
capitalizing on its global selling capabilities. In fiscal 2003,
the Company combined and streamlined its divisional sales forces
and expanded its geographic reach. The Company believes that
international markets continue to represent a significant growth
opportunity. The Company is actively seeking to increase
penetration in existing market segments in the Americas, Europe
and Asia/ Pacific.
Differentiated Solutions — The Company, through
product innovation and development activities, seeks to
continually introduce new technology and proprietary products
and explore additional applications for products in existing and
new markets. It seeks to provide products in its portfolio that
offer customers
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differentiated solutions. Through a regular portfolio review
process, the Company reviews the products and markets currently
in its portfolio, examines new opportunities, seeks to fully
understand the broad needs of each of its major market segments
and those adjacent to its major segments, and determines a
strategy to meet those needs. Management recognizes that new
product development remains a major challenge and opportunity
for the Company.
Acquisitions — While the Company intends to
continue pursuing internal growth through the above strategies,
it also intends, where practical, to accomplish its goal of
becoming number one or two in its key markets through strategic
acquisitions. Brady seeks to acquire companies that are
financially sound and can add to shareholder value within
predetermined guidelines.
Geographical Expansion — The Company considers
geographical expansion through greenfield operations and
acquisitions to be an integral part of its growth strategy. In
2005, the Company announced plans to expand into Denmark,
Norway, Slovakia, and Thailand.
Products
The Company is vertically integrated; designing, developing,
coating and producing most of its identification signs, labels
and printing systems. Brady labels are manufactured out of a
variety of films, predominantly coated by Brady, for
applications in the following markets: electronic, industrial,
electrical, utility, laboratory and security. Brady also
manufactures specialty tapes and related products that are
characterized by high-performance printable top coats and
adhesives, most of which are formulated by the Company, to meet
high-tolerance requirements of the industries in which they are
used.
The Company’s stock and custom products consist of over
300,000 stock-keeping units (“SKU’s”), including
complete identification systems that are used by the
Company’s customers to create a safer work environment,
improve production and operating efficiencies and increase the
utilization of assets through tracking and inventory process
controls. Major product categories include: facility and safety
signs and identification tags and markers, pipe and valve
markers, asset identification tags, lockout/tagout products,
security and traffic control products, and printing systems and
software for creating safety and regulatory software; wire and
cable markers, high-performance labels, laboratory
identification labels and printing systems, stand-alone printing
systems, bar-code and other software, automatic identification
and data collection systems; and precision die-cut solutions.
Some of the Company’s stock products were originally
designed, developed and manufactured as custom products for a
specific customer. However, such products have frequently
created wide industry acceptance and have become stock items
offered by the Company through mail order and distributor sales.
The Company’s most significant types of products are
described below.
| Facility and Safety Identification |
| • | Safety and informational signs and printers for use in a broad range of industrial, commercial, governmental and institutional applications. These signs are either self-adhesive or mechanically mounted, are designed for both indoor and outdoor use and are manufactured to meet standards issued by the National Safety Council, OSHA and a variety of industry associations in the United States and abroad. The Company’s sign products include admittance, directional and exit signs; electrical hazard warnings; energy conservation messages; fire protection and fire equipment signs; hazardous waste labels; hazardous and toxic material warning signs; transformers and power pole markers; personal hazard warnings; housekeeping and operational warnings; pictograms; radiation and laser signs; safety practices signs and regulatory markings. | |
| • | Warehouse identification products including self-adhesive and self-aligning die-cut numbers and letters, labels, and tags used to locate and identify inventory in storage facilities such as warehouses, factories, stockrooms and other industrial facilities. | |
| • | Self-adhesive and mechanically applied stock and custom-designed pipe markers, and plastic and metal valve tags for the identification of pipes and control valves in the mechanical contractor and |
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| process industry markets. These products are designed to help identify and provide information as to the contents, direction of flow and special hazardous properties of materials contained in piping systems, and to facilitate repair or maintenance of the systems. | ||
| • | Lockout/tagout products — under OSHA regulations, all energy sources must be “locked out” while machines are being serviced or maintained to prevent accidental engagement and injury. The Company’s products allow its customers to comply with these regulations and to ensure worker safety for a wide variety of energy- and fluid-transmission systems and operating machinery. | |
| • | Security and traffic control products including a variety of self-expiring badges, security seals, parking permits and wristbands designed for visitor control in financial, governmental, educational and commercial facilities including meeting and convention sites. Some of these products make use of migratory ink technology, which, upon activation, starts a timed process resulting in an altered message, color or design to indicate expiration. The Company also offers a wide variety of traffic control devices including traffic signs, directional and warning signs, parking tags and permits, barriers, cones and other products including barricading, visual warning systems, floor-marking products, safety badges, photo-identification kits, and first aid cabinets/kits, among others. | |
| • | Asset-identification products that are an important part of an effective asset-management program in a wide variety of markets. These include self-adhesive or mechanically mounted labels or tags made of aluminum, brass, stainless steel, polycarbonate, vinyl, polyester, mylar and paper. These products are also offered in tamper-evident varieties, and can be custom designed to ensure brand protection from counterfeiting. |
| Wire and Cable Identification |
Brady manufactures a broad range of wire- and cable-marking
products, including labels, sleeves, software that allows
customers to create their own labels, and printers to print and
apply them. These products mark and identify wires, cables and
their termination points to facilitate manufacturing,
construction, repair or maintenance of equipment, and data
communication and electrical wiring systems used in virtually
every industrial, power and communication market.
| High Performance Identification |
Brady produces a complete line of label materials to meet
customers’ needs for identification requirements for
product identification and bar coding that perform under harsh
or demanding conditions, such as extreme temperatures, or
environmental or chemical exposure. Brady prints stock and
custom labels and also sells unprinted materials to enable
customers to print their own labels.
| Precision Die-Cut Parts |
The Company develops customized precision die-cut products that
are used to seal, insulate, protect, shield or provide other
mechanical performance properties in the assembly of electronic,
telecommunications and other equipment, including cellular
phones, personal data assistants, computer hard drives,
computers and other devices. Solutions not only include the
materials and converting, but also automatic placement and other
value-added services. The Company also provides converting
services to the medical market for materials used in in-vitro
diagnostic kits and patient monitoring.
| Other Products |
The Company also designs and produces various computer software
packages, industrial thermal-transfer printers and other
electromechanical devices to serve the growing and specialized
needs of customers in a wide variety of markets. Industrial
labeling systems, software, tapes, ribbons and label stocks
provide customers with the resources and flexibility to produce
signs and labels on demand at their site.
The Company also sells a variety of other products, none of
which currently individually accounts for a significant portion
of its sales, including: automatic identification and data
collection solutions including bar-
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code-label-generating software and bar-code tags and labels to
enable accurate tracking of manufacturing, warehousing,
receiving and shipping data; lettering and labeling systems,
poster printers, laminators and supplies to education and
training markets; and hospital and clinical labels.
Marketing and Sales
Brady seeks to offer the right product with rapid response times
and superior service so that it can provide solutions to
customers that are better, faster and more economical than those
available from the Company’s competitors. The Company
markets and sells its products domestically and internationally
through multiple channels including direct sales, distributors,
mail-order-catalog marketing, retail, and electronic access
through the Internet. The Company has thousands of established
relationships with a broad range of electrical, safety,
industrial and other domestic and international distributors.
The Company’s sales force seeks to establish and foster
ongoing relationships with the end-users and distributors by
providing technical support and product-application expertise.
The Company also direct markets certain products and those of
other manufacturers by catalog sales in both domestic and
international markets. Such products include industrial and
facility identification products, safety and
regulatory-compliance products and original equipment
manufacturer component products, among others. Catalog
operations are conducted through offices in the U.S.A.,
Australia, Brazil, Canada, England, France, Germany and Italy,
and include foreign-language catalogs.
The Company’s products are sold in a wide variety of
markets, including electrical, electronic, telecommunications,
governmental, public utility, commercial office, computer disk
drive, construction, general manufacturing, laboratory,
transportation equipment and education. The telecommunication
and disk drive markets are concentrated with a small number of
customers and subject to more volatility than Brady’s other
more diverse markets. No material part of the Company’s
business is dependent upon a single customer or group of
customers. In fiscal 2005 Brady’s largest customer
accounted for less than 5% of the Company’s net sales.
Brands
The Company goes to market under a variety of brand names. The
Brady brand includes high-performance labels, printers,
software, safety and facility identification products,
lock-out/tag-out products, and precision die-cut parts and
specialty materials; other label products are also marketed
under the Etimark brand and other die-cut materials are marketed
as Brandon, Balkhausen or ID Technology products; safety and
facility identification products are marketed under the Safety
Signs Service brand, with some lockout/tagout products offered
under the Prinzing brand; safety identification under the
Electromark brand; poster printers for education and government
markets are offered under the Varitronic name brand; direct
marketing safety and facility identification products are
offered under the Seton, Emedco and Signals names; security and
identification badges and systems are included in the Temtec and
B.I.G brands; hand-held regulatory documentation systems are
available under the Tiscor name; and automatic identification
and data collection software is offered under the Teklynx and
Stopware brands.
Manufacturing Process and Raw Materials
The Company manufactures the majority of the products it sells,
while purchasing certain items from other manufacturers.
Products manufactured by the Company generally require a high
degree of precision and the application of adhesives with
chemical and physical properties suited for specific uses. The
Company’s manufacturing processes include compounding,
coating, converting, software development and printer design and
assembly. The compounding process involves the mixing of
chemical batches for primers, top coatings and adhesives, in
solvent or water-based materials. The coatings and adhesives are
applied to a wide variety of materials including polyester,
polyimide, cloth, paper, metal and metal foil. The converting
process may include embossing, perforating, laminating, die
cutting, slitting, and printing or marking the materials as
required.
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The Company produces the majority of the adhesive stocks and
top-coated materials through an integrated manufacturing
process. These integrated manufacturing processes permit greater
flexibility to meet customer needs in product design and
manufacture, and an improved ability to provide specialized
products designed to meet the needs of specific applications.
Brady’s “cellular” manufacturing processes and
“just-in-time” inventory control are designed to
attain profitability in small orders by emphasizing flexibility
and the maximization of assets through quick turnaround and
delivery, balanced with optimization of lot sizes. Most of the
Company’s manufacturing facilities have received ISO 9001
or 9002 certification.
The materials used in the products manufactured by the Company
consist primarily of plastic sheets and films, paper, metal and
metal foil, cloth, fiberglass, inks, dyes, adhesives, pigments,
natural and synthetic rubber, organic chemicals, polymers,
solvents and electronic components and subassemblies. In
addition the Company purchases finished products for resale. The
Company purchases raw materials, components and finished
products from many suppliers. Generally the Company is not
dependent upon any single supplier for most critical base
materials or components. In some cases the Company has chosen to
sole source materials, components or finished items for design
or cost reasons. In these cases, disruptions in supply could
have an impact on results for a period of time. In most cases
these disruptions would simply require qualification of new
suppliers and the disruption would be modest. In a few cases the
qualification process could be more costly or take a longer
period of time. In the most dramatic of cases, such as a global
shortage of a critical material or component, the financial
impact could be significant.
Technology and Product Development
The Company focuses its research and development efforts on
material development, printing systems design and software
development. Material development involves the application of
surface chemistry concepts for top coatings and adhesives
applied to a variety of base materials. Systems design
integrates materials, embedded software and a variety of
printing technologies to form a complete solution for customer
applications or the Company’s own production requirements.
The Company’s research and development team of engineers
also supports production and marketing efforts by providing
application and technical expertise.
The Company possesses patents covering various aspects of
adhesive chemistry, electronic circuitry, computer-generated
wire markers, systems for aligning letters and patterns, and
visually changing paper. Although the Company believes that its
patents are a significant factor in maintaining market position
for certain products, technology in the areas covered by many of
the patents is evolving rapidly and may limit the value of such
patents. The Company’s business is not dependent on any
single patent or group of patents.
The Company conducts much of its research and development
activities at the Frederic S. Tobey Research and Innovation
Center (approximately 39,600 sq. ft.) in Milwaukee,
Wisconsin. The Company spent approximately $25,100,000,
$23,000,000, and $18,900,000, in fiscal 2005, 2004, and 2003,
respectively, on its research and development activities. In
fiscal 2005, approximately 165 employees were engaged in
research and development activities for the Company. Additional
research projects were conducted in Company facilities in Europe
and Singapore and under contract with universities, other
institutions and consultants.
The Company’s name and its registered trademarks are
important to each of its business segments. In addition, the
Company owns other important trademarks applicable to only
certain of its products.
International Operations
In fiscal 2005, 2004, and 2003, sales from international
operations accounted for 55.3%, 55.2%, and 52.3%, respectively,
of the Company’s sales. The Company’s global
infrastructure includes subsidiaries in Australia, Belgium,
Brazil, Canada, China, Denmark, France, Germany, Hungary, Italy,
Japan, Malaysia, Mexico, Norway, Singapore, Slovakia, Sweden,
Thailand and the United Kingdom, with additional sales offices
in India, Korea, Netherlands, Philippines, Spain and Taiwan. The
Company further markets its products to parts of Eastern Europe
and the Middle East. Several of these locations manufacture or
have the capability to manufacture certain of the products they
sell.
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Competition
The markets for most of the Company’s products are
competitive. The Company believes that it is one of the leading
domestic producers of self-adhesive wire markers, safety signs,
pipe markers, precision die-cut materials and
bar-code-label-generating software. The Company competes for
business principally on the basis of product quality,
performance, service, range of products offered and to a lesser
extent, on price. Product quality is determined by factors such
as suitability of component materials for various applications,
adhesive properties, graphics quality, durability, product
consistency and workmanship. Competition in many of the
Company’s product markets is highly fragmented, ranging
from smaller companies offering only one or a few types of
products, to some of the world’s major adhesive and
electrical product companies offering some competing products as
part of their overall product lines. A number of the
Company’s competitors are larger than the Company and have
greater resources. Notwithstanding the resources of these
competitors, management believes that the Company provides a
broader range of identification solutions than any of its
competitors, and that Brady’s global infrastructure is a
significant competitive advantage in serving large
multi-national customers.
Backlog
As of July 31, 2005, the amount of the Company’s
backlog orders believed to be firm was approximately
$24,895,000. This compares with approximately $23,205,000 and
$16,300,000 of backlog orders as of July 31, 2004 and 2003,
respectively. Average delivery time for the Company’s
orders varies from one day to one month, depending on the type
of product, and whether the product is stock or custom-designed
and manufactured. Average delivery time for the direct marketing
business can be as low as the same day or the next day. The
Company’s backlog of $24,895,000 at July 31, 2005,
represents approximately one and one-half weeks of the
Company’s sales guidance for fiscal 2006.
Environment
At present, the manufacturing processes for the Company’s
adhesive-based products utilize certain evaporative solvents,
which, unless controlled, would be vented into the atmosphere.
Emissions of these substances are regulated at the federal,
state and local levels. The Company has implemented a number of
procedures to reduce atmospheric emissions and/or to recover
solvents. Management believes the Company is substantially in
compliance with all environmental regulations.
Employees
As of July 31, 2005, the Company employed approximately
4,500 individuals. The Company has never experienced a material
work stoppage due to a labor dispute, is not a party to any
negotiated labor contracts, and considers its relations with
employees to be excellent. The mix of employees is changing as
the Company employs more people in developing countries where
wage rates are lower and employee turnover tends to be higher
than in developed countries.
Acquisitions
Information about the Company’s acquisitions is provided in
Note 2 of the Notes to Consolidated Financial Statements
contained in Item 8 — Financial Statements and
Supplementary Data.
| (d) | Financial Information About Foreign and Domestic Operations and Export Sales |
The information required by this Item is provided in Note 7
of the Notes to Consolidated Financial Statements contained in
Item 8 — Financial Statements and Supplementary
Data.
| (e) | Information Available on the Internet |
The Company’s Corporate Internet address is
http://www.bradycorp.com. The Company makes available, and has
made available since June 2003, free of charge, on or through
its Internet website copies of its
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Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K,
Section 16 reports filed by the Company’s insiders,
and amendments to all such reports as soon as reasonably
practicable after such reports are electronically filed with or
furnished to the SEC.
| Item 2. | Properties |
The Company currently operates 35 manufacturing facilities in
the following regions:
Americas: Eleven are located in the United States; three
in Brazil; and one each in Canada and Mexico.
Europe: Three are located in Germany and the United
Kingdom and one each in Belgium, Denmark, France, and Italy.
Asia: Three are located in China; two in Australia and
Singapore; and one each in Malaysia and Thailand
The Company’s present operating facilities contain a total
of approximately 1,900,000 square feet of space, of which
approximately 950,000 square feet is leased. The Company
believes that its equipment and facilities are modern, well
maintained and adequate for present needs.
| Item 3. | Legal Proceedings |
The Company is, and may in the future be, party to litigation
arising in the normal course of business. The Company is not
currently a party to any material pending legal proceedings.
| Item 4. | Submission of Matters to a Vote of Security Holders |
None
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PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
| (a) | Market Information |
Brady Corporation Class A Nonvoting Common Stock trades on
the New York Stock Exchange under the symbol BRC. The quarterly
stock price history on the New York Stock Exchange is as follows
for each of the quarters in the fiscal years ended July 31:
| 2005(1) | 2004(1) | 2003(1) | ||||||||||||||||||||||
| High | Low | High | Low | High | Low | |||||||||||||||||||
|
4th Quarter
|
$ | 34.96 | $ | 28.80 | $ | 23.24 | $ | 18.14 | $ | 17.50 | $ | 15.34 | ||||||||||||
|
3rd Quarter
|
$ | 35.70 | $ | 26.30 | $ | 20.44 | $ | 17.45 | $ | 16.94 | $ | 12.93 | ||||||||||||
|
2nd Quarter
|
$ | 32.22 | $ | 26.75 | $ | 21.73 | $ | 16.99 | $ | 17.79 | $ | 12.53 | ||||||||||||
|
1st Quarter
|
$ | 27.49 | $ | 21.01 | $ | 18.24 | $ | 15.84 | $ | 17.68 | $ | 13.75 | ||||||||||||
| (1) | Adjusted for a two-for-one stock split in the form of a 100% stock dividend, effective December 31, 2004. |
There is no trading market for the Company’s Class B
Voting Common Stock.
On September 13, 2005, the Company announced that the Board of
Directors of Brady Corporation approved a share repurchase
program for up to 800,000 shares of the Company’s
non-voting Class A Common Stock during fiscal 2006. 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
Company’s Stock Option Plan and for other corporate
purposes.
| (b) | Holders |
As of September 26, 2005, there were 702 Class A
Common Stock shareholders of record and approximately 4,000
beneficial shareholders. There are three Class B Common
Stock shareholders.
| (c) | Issuer Purchases of Equity Securities |
| Total Number of | Maximum Number | |||||||||||||||
| Shares Purchased as | of Shares that May | |||||||||||||||
| (a)Total Number | Average Price | Part of Publicly | Yet Be Purchased | |||||||||||||
| of Shares | Paid per | Announced Plans or | Under the Plans or | |||||||||||||
| Period | Purchased | Share | Programs | Programs | ||||||||||||
|
May 1, 2005 — May 31, 2005
|
— | NA | NA | NA | ||||||||||||
|
June 1, 2005 — June 30, 2005
|
16,030 | $ | 31,26 | NA | NA | |||||||||||
|
July 1, 2005 — July 31, 2005
|
— | NA | NA | NA | ||||||||||||
| (a) | Shares purchased from employees to provide cash for payment of income taxes related to the vesting of restricted stock. |
| (d) | Dividends |
The Company has followed a practice of paying quarterly
dividends on outstanding common stock. Before any dividend may
be paid on the Class B Common Stock, holders of the
Class A Common Stock are entitled to receive an annual,
noncumulative cash dividend of $.01665 per share (subject
to adjustment in the event of future stock splits, stock
dividends or similar events involving shares of Class A
Common Stock). Thereafter, any further dividend in that fiscal
year must be paid on all shares of Class A Common Stock and
Class B Common Stock on an equal basis. The Company’s
revolving credit agreement restricts the amount of certain types
of payments, including dividends, which can be made annually to
$25 million plus 50% of the
II-1
Table of Contents
consolidated net income for the prior fiscal year. The Company
believes that based on its historic dividend practice, this
restriction will not impede it in following a similar dividend
practice in the future.
During the two most recent fiscal years and for the first
quarter of fiscal 2006, the Company declared the following
dividends per share on its Class A and Class B Common
Stock for the years ended July 31:
| Year | ||||||||||||||||||||||||||||||||||||
| Ending | ||||||||||||||||||||||||||||||||||||
| 2006 | 2005 | 2004 | ||||||||||||||||||||||||||||||||||
| 1st Qtr | 1st Qtr | 2nd Qtr | 3rd Qtr | 4th Qtr | 1st Qtr | 2nd Qtr | 3rd Qtr | 4th Qtr | ||||||||||||||||||||||||||||
|
Class A
|
$ | 0.13 | $ | 0.11 | $ | 0.11 | $ | 0.11 | $ | 0.11 | $ | 0.105 | $ | 0.105 | $ | 0.105 | $ | 0.105 | ||||||||||||||||||
|
Class B
|
0.113 | 0.093 | 0.11 | 0.11 | 0.11 | 0.090 | 0.105 | 0.105 | 0.105 | |||||||||||||||||||||||||||
Dividends in the above table have been adjusted for a
two-for-one stock split in the form of a 100% stock dividend,
effective December 31, 2004.
| Item 6. | Selected Financial Data |
CONSOLIDATED STATEMENTS OF INCOME AND SELECTED FINANCIAL
DATA
Years Ended July 31, 2001 through 2005
| 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||||
|
Operating Data
|
||||||||||||||||||||||
|
Net Sales
|
$ | 816,447 | $ | 671,219 | $ | 554,866 | $ | 516,962 | $ | 545,944 | ||||||||||||
|
Gross Margin
|
433,276 | 345,361 | 279,149 | 260,776 | 288,631 | |||||||||||||||||
|
Operating Expenses:
|
||||||||||||||||||||||
|
Research and development
|
25,078 | 23,028 | 18,873 | 17,271 | 20,329 | |||||||||||||||||
|
Selling, general and administrative
|
285,746 | 248,171 | 219,861 | 199,282 | 214,220 | |||||||||||||||||
|
Restructuring charge — net
|
— | 3,181 | 9,589 | 2,720 | 9,560 | |||||||||||||||||
|
Total operating expenses
|
310,824 | 274,380 | 248,323 | 219,273 | 244,109 | |||||||||||||||||
|
Operating Income
|
122,452 | 70,981 | 30,826 | 41,503 | 44,522 | |||||||||||||||||
|
Other (expense) income:
|
||||||||||||||||||||||
|
Investment and other income — net
|
1,369 | 577 | 1,750 | 1,714 | 686 | |||||||||||||||||
|
Interest expense
|
(8,403 | ) | (1,231 | ) | (121 | ) | (82 | ) | (418 | ) | ||||||||||||
|
Net other income (expense)
|
(7,034 | ) | (654 | ) | 1,629 | 1,632 | 268 | |||||||||||||||
|
Income before income taxes
|
115,418 | 70,327 | 32,455 | 43,135 | 44,790 | |||||||||||||||||
|
Income taxes
|
33,471 | 19,456 | 11,035 | 14,882 | 17,244 | |||||||||||||||||
|
Net income
|
$ | 81,947 | $ | 50,871 | $ | 21,420 | $ | 28,253 | $ | 27,546 | ||||||||||||
|
Net Income Per Common Share — (Diluted):
|
||||||||||||||||||||||
|
Class A Nonvoting
|
$ | 1.64 | $ | 1.07 | $ | 0.46 | $ | 0.60 | $ | 0.59 | ||||||||||||
|
Class B Voting
|
$ | 1.63 | $ | 1.05 | $ | 0.44 | $ | 0.59 | $ | 0.58 | ||||||||||||
|
Cash dividends on:
|
||||||||||||||||||||||
|
Class A Common Stock
|
$ | 0.44 | $ | 0.42 | $ | 0.40 | $ | 0.38 | $ | 0.36 | ||||||||||||
|
Class B Common Stock
|
$ | 0.42 | $ | 0.40 | $ | 0.39 | $ | 0.37 | $ | 0.35 | ||||||||||||
|
Balance Sheet at July 31:
|
||||||||||||||||||||||
|
Working capital
|
$ | 141,560 | $ | 131,706 | $ | 123,878 | $ | 135,764 | $ | 123,830 | ||||||||||||
|
Total assets
|
850,147 | 697,900 | 449,519 | 420,525 | 393,592 | |||||||||||||||||
|
Long-term obligations, less current maturities
|
150,026 | 150,019 | 568 | 3,751 | 4,144 | |||||||||||||||||
|
Stockholders’ investment
|
497,274 | 403,315 | 338,961 | 324,242 | 302,579 | |||||||||||||||||
|
Cash Flow Data:
|
||||||||||||||||||||||
|
Net cash provided by operating activities
|
119,103 | 87,646 | 57,316 | 54,251 | 53,228 | |||||||||||||||||
|
Depreciation and Amortization
|
26,822 | 20,190 | 17,771 | 16,630 | 22,646 | |||||||||||||||||
|
Capital Expenditures
|
(21,920 | ) | (14,892 | ) | (14,438 | ) | (13,095 | ) | (20,770 | ) | ||||||||||||
II-2
Table of Contents
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Overview
In fiscal 2005, the Company posted record sales of $816,447,000
and record net income of $81,947,000, an increase of 21.6% and
61.1%, respectively, over fiscal 2004. The increase is the
result of disciplined execution of the Company’s business
plan and successful integration of acquisitions, aided by a good
economy and favorable foreign exchange rates.
Of the 21.6% increase in sales, base sales grew 5.7%,
acquisitions added 12.7%, and foreign currency added 3.2%.
Americas sales increased 22.2%, European sales rose 10.7%, and
sales from the Asia Pacific operations increased 53.1%.
Net income for fiscal 2005 rose 61.1% to $81,947,000 or
$1.64 per diluted share of Class A Common Stock,
compared to $50,871,000 or $1.07 per diluted share of
Class A Common Stock in fiscal 2004. Fiscal 2004 net
income included a $3 million tax benefit from completion of
a tax audit, and charges of $2.2 million after tax related
to the restructuring begun in fiscal 2003.
In fiscal 2005, the Company focused on leveraging its strengths.
Acquisitions focused on businesses that management understands
well in order to deepen market penetration or expand the
Company’s global footprint. New proprietary product
offerings capitalized on Brady’s core competencies in
specialty materials, software development and regulatory
expertise. The Company also invested in expanding many of its
global operations with new equipment and capacity.
Brady acquired four companies in fiscal 2005 —
businesses that span the globe from the U.S. to Europe to
Southeast Asia. As a result of good timing and a disciplined
acquisition process, the new members of the Brady team are
already making significant contributions.
The Company is adding 90,000 square feet for a consolidated
warehouse and distribution center at its corporate headquarters
in Milwaukee. Other activities include expansion of operations
in Wuxi and Shenzhen, China, Sydney, Australia, Bratislava,
Slovakia and Manaus, Brazil. Brady strives to employ the same
high safety and environmental standards across the globe
regardless of lesser government requirements in some areas.
Brady remains a financially strong company, with a solid balance
sheet and excellent cash flow. The Company made a two-for-one
stock split in the form of a 100% stock dividend, effective
December 31, 2004, and in September 2005 the Company
announced it was increasing the cash dividend payment for the
20th straight year.
In fiscal 2006, management expects annual sales to be in the
range of $870,000,000 and $880,000,000 with net income of
$89,000,000 to $91,000,000 for the full fiscal year. The Company
expects base sales growth of between 4.0% and 5.0%, including a
reduction of the positive effect of foreign currency on sales of
between 2.0% and 3.0% over the full fiscal year. We also expect
depreciation and amortization of $28,000,000 and capital
expenditures of $25,000,000. The guidance we have issued
includes the results of all acquisitions announced through
September 2005. We expect the effective tax rate to remain at
29.0% in fiscal 2006.
Looking long term, the Company intends to continue targeting 10%
growth in sales per year, with half from base business growth
and half from acquisitions. Over the next five years, management
plans to gradually improve net income as a percentage of sales
from the previously disclosed target of 10% to 12% of sales.
Results of Operations
| Year Ended July 31, 2005, Compared to Year Ended July 31, 2004 |
Sales for fiscal 2005 increased by $145,228,000 or 21.6% from
fiscal 2004. Base sales, defined as sales in the Company’s
existing core businesses and regions (exclusive of acquisitions
and foreign currency effects), increased $38,392,000 or 5.7% for
the same period. The acquisitions of ID Technologies (August
2004) in Singapore, Electromark (February 2005) in the United
States, and Signs & Labels (June 2005) in the UK,
increased sales by $85,502,000 or 12.7% in fiscal 2005 compared
to fiscal 2004. The results of the acquisition
II-3
Table of Contents
of Technology Print Supplies, Ltd., and its associate,
Technology and Supply Media Co., Ltd. in Thailand had minimal
impact on the results of Brady Corporation for fiscal 2005
because they were purchased at the close of business on
July 29, 2005. The increase in sales was also aided by the
positive effect of fluctuations in the exchange rates used to
translate financial results into the United States Dollar, which
increased sales by $21,334,000 or 3.2% for the year.
The gross margin as a percentage of sales increased from 51.5%
in fiscal 2004 to 53.1% in fiscal 2005. The increase was
primarily due to the following three factors:
| 1. Improved product mix attributable to EMED products, which carry a higher gross margin; | |
| 2. Improvement in North American margins due to improved product mix and continued cost control efforts; | |
| 3. Partially offset by decreased margins due to increased sales in Asia, where gross margins are lower due to a higher percentage of business coming from OEM electronics customers. |
Research and development expenses as a percentage of sales fell
from 3.4% in fiscal 2004 to 3.1% in fiscal 2005. Research and
development spending increases of 8.9% were offset by a 21.6%
increase in sales in fiscal 2005. Research and development
spending was lower than expected in the first three quarters of
fiscal 2005 as it has taken longer than expected to hire
senior-level research and development personnel. In the fourth
quarter of fiscal 2005, research and development spending
increased 15.5% over the same period in fiscal 2004. The Company
has been successful recently in hiring key personnel and
forecasted expenses for fiscal 2006 include an increase in
research and development costs to fund development of new
products at a more rapid rate.
Selling, general and administrative expenses as a percentage of
sales decreased to 35.0% in fiscal 2005 from 37.0% in fiscal
2004. The decrease was due primarily to the use of existing
resources to service greater sales volume and the increasing
sales in Asia, which has lower selling, general and
administrative costs than the other regions. Offsetting the
sales volume increase were compliance costs related to the
Sarbanes-Oxley Act of 2002.
Fiscal 2004 expenses included a before tax net restructuring
charge of $3,181,000. Approximately $2,900,000 of the charge
related to severance costs for employees. The remaining amount
was due to asset disposal at facilities, primarily in North
America and Europe.
Operating income increased $51,471,000 to $122,452,000 in fiscal
2005. The majority of the increase was due to sales growth,
strong cost control, the increased earnings of recent
acquisitions, and the benefit of fluctuations in exchange rates.
The 2004 operating income included $3,181,000 of restructuring
costs.
Investment and other income increased $792,000 in fiscal 2005
from the prior year, primarily due to the net effect of foreign
exchange rates on the Company’s hedge contracts and on
short-term intercompany loans.
Interest expense increased $7,172,000 in fiscal 2005 due to the
interest on the debt related to the acquisition of EMED. Fiscal
2005 included a full year of interest, while fiscal 2004
included less than three months.
The Company’s effective tax rate increased from 27.7% for
fiscal 2004 to 29.0% for fiscal 2005. The fiscal 2004 effective
tax rate included $3,000,000 related to the completion of the
federal income tax audit of fiscal years 2000 through 2002. The
improvement in the effective rate (excluding the tax audit
adjustment) was due to a shift in a portion of the
Company’s pre-tax income to lower tax countries. An
effective income tax rate of 29% is expected for fiscal 2006.
| Year Ended July 31, 2004, Compared to Year Ended July 31, 2003 |
Sales for fiscal 2004 increased by $116,353,000 or 21.0% from
fiscal 2003. Base sales increased $28,319,000 or 5.1% for the
same period. The acquisitions of Cleere Advantage Ltd. (February
2003), Aztech Ltd. (August 2003), and B.I.G (November 2003) in
the UK; Etimark GmbH (April 2003) in Germany; and TISCOR Inc.
(January 2003), Brandon International (September 2003), Prinzing
Enterprises, Inc. (October
II-4
Table of Contents
2003), and EMED (May 2004) in the United States increased sales
by $53,747,000 or 9.7% in fiscal 2004 compared to fiscal 2003.
The increase in sales was also aided by the positive effect of
fluctuations in the exchange rates used to translate financial
results into the United States Dollar, which increased sales by
$34,287,000 or 6.2% for the period.
The gross margin as a percentage of sales increased from 50.3%
in fiscal 2003 to 51.5% in fiscal 2004. The increase was
primarily due to restructuring cost savings from consolidation
of facilities and workforce reductions. Additionally, operating
costs improved as a percent of sales.
Research and development expenses as a percentage of sales were
unchanged at 3.4%. Research and development spending increases
of 22.0% were offset by a 21.0% increase in sales. Research and
development spending was higher in fiscal 2004 compared to
fiscal 2003 due to the timing of large projects.
Selling, general and administrative expenses as a percentage of
sales decreased to 37.0% in fiscal 2004 from 39.6% in fiscal
2003. The decrease was due primarily to the use of existing
resources to service greater sales volume. Additionally, the
regionally structured sales force in place in fiscal 2004 was
more efficient than the product-specific sales force that
existed in fiscal 2003.
Fiscal 2004 expenses included a before tax net restructuring
charge of $3,181,000. Approximately $2,900,000 of the charge
related to severance costs for employees. The remaining amount
was due to asset impairment at facilities, primarily in North
America and Europe.
Fiscal 2003 expenses included a before tax net restructuring
charge of $9,589,000, which included a $10,215,000 charge
relating primarily to consolidation of sales and marketing
resources in North America and Europe, consolidating operating
facilities in the United States and Europe, and a workforce
reduction. The $10,215,000 charge was partially offset by a
$626,000 adjustment to the fiscal 2002 and 2001 restructuring
accruals related to favorable settlement of leases upon
termination.
Operating income increased $40,155,000 to $70,981,000 in fiscal
2004. The majority of the increase was due to sales growth,
strong cost control, the benefit of positive foreign exchange
rates, the results of acquisitions, and savings realized from
the 2003 restructuring activities.
Investment and other income decreased $1,173,000 in fiscal 2004
from the prior year, primarily due to the net effect of foreign
exchange rates.
Interest expense increased $1,110,000 in fiscal 2004 due to the
interest on the debt related to the acquisition of EMED.
The Company’s effective tax rate decreased from 34.0% for
fiscal 2003 to 27.7% for fiscal 2004. The fiscal 2004 effective
tax rate included $3,000,000 related to the completion of the
federal income tax audit of fiscal years 2000 through 2002. The
improvement in the effective income tax rate was due to a shift
in the Company’s pre-tax income to lower tax countries.
Business Segment Operating Results
The segment table required by this Item is provided in
Note 7 of the Notes to Consolidated Financial Statements
contained in Item 8 — Financial Statements and
Supplementary Data.
Americas
Sales in the Americas region increased 22.2% from fiscal 2004 to
fiscal 2005, and 14.5% from fiscal 2003 to fiscal 2004. Base
sales in local currency increased 4.4% from 2004 to 2005 and
1.9% from 2003 to 2004. The base sales increase in fiscal 2005
was due partially to an improving economy in the United States
and strong performance in the industrial OEM and electronics
markets. Also contributing to the base growth increase are the
following factors: Canada turned the corner in fiscal 2005 and
posted double-digit base growth year over year and Brazil and
Mexico reported double-digit base growth in fiscal 2005 as well.
The base sales increase in 2004 was aided by strong improvement
in the industrial OEM and electronics markets, while the
non-residential construction market remained soft. The base
sales increase in fiscal 2004 can also be attributed to
II-5
Table of Contents
the addition of several new products including the
IDXPERTtm
labeling system. The acquisitions of Brandon International,
Prinzing Enterprises Inc., EMED, and Electromark added 16.6% to
fiscal 2005 sales. The acquisitions of Tiscor, Inc., Brandon
International, Prinzing Enterprises Inc., and EMED added 11.4%
to fiscal 2004 sales. The positive effect of fluctuations in the
exchange rates used to translate financial results into
U.S. currency increased sales in the region by 1.2% in
fiscal 2005 and fiscal 2004. Management believes that 4.4% base
growth in the Americas represents strong performance in this
region and expects base growth to continue at approximately this
level going forward.
In the Americas region, segment profit as a percentage of sales
increased to 23.5% in 2005 from 17.6% in 2004 driven by the
increase in sales volume, profit from acquisitions, continuing
cost savings, primarily in the direct marketing business and the
benefits from lower manufacturing costs of higher volume stock
products as we transferred production to the Company’s
Mexico subsidiary. Comparing fiscal 2004 to 2003, segment profit
as a percentage of sales increased from 14.1% to 17.6%, due to
the increase in sales and the related impact of our fixed costs
over a larger sales volume and the combination of sales forces.
Europe
Sales in the European region increased 10.7% in fiscal 2005 from
fiscal 2004 and 25.2% from fiscal 2003 to 2004. Base sales
increased 2.5% in fiscal 2005 and fiscal 2004. Foreign currency
translation increased the region’s sales by 6.0% from
fiscal 2004 to 2005 compared to a 12.7% increase from fiscal
2003 to 2004. The acquisitions of B.I.G. and Signs &
Labels added 2.2% to the region’s sales in fiscal 2005 and
the acquisitions of Etimark GmbH in Germany, and Cleere
Advantage Ltd. and B.I.G. in the United Kingdom added 10.0% to
the region’s sales in fiscal 2004.
Segment profit as a percentage of sales increased to 29.0% in
fiscal 2005 from 26.7% in fiscal 2004 and to 26.7% in fiscal
2004 from 23.9% in fiscal 2003 due to the restructuring activity
completed during fiscal 2004 and continued operational
improvements.
Management is excited about the Company’s recent expansion
into Bratislava, Slovakia in August 2005, which increases our
presence in Eastern Europe. Management is also optimistic about
the acquisition of Texit in September 2005, which expands our
position in the wire marker market and increases our coverage in
Denmark and Norway.
Asia
Asia sales increased 53.1% in fiscal 2005 from fiscal 2004 and
40.4% from fiscal 2003 to 2004. Base sales increased 21.4% in
fiscal 2005 and 30.8% in fiscal 2004. Foreign currency
translation increased the region’s sales by 3.0% from
fiscal 2004 to 2005 compared to a 9.6% increase from fiscal 2003
to 2004. The acquisition of ID Technologies added 28.7% to the
region’s sales in fiscal 2005. Of the 21.4% increase in
base sales in fiscal 2005 and the 30.8% increase in base sales
in fiscal 2004, 79.3% and 74.7%, respectively, was driven by the
growth in China. A strong Asian economy contributed to the base
sales increase in the Asia region in fiscal 2005.
Segment profit as a percentage of sales decreased to 27.6% in
fiscal 2005 from 28.1% in fiscal 2004 and increased from 24.5%
in fiscal 2003 to 28.1% in fiscal 2004. The decrease in the
profit percentage in fiscal 2005 is due to lower gross margins
in China as a result of a higher mix of OEM electronics, which
have lower margins. The growth in profit in fiscal 2004 is a
direct result of the sales growth. The Company continues to add
resources to support both market development and new product
development targeted at filling the needs of its key markets.
The development of new products is key to preventing future
margin decreases.
Liquidity and Capital Resources
Cash and cash equivalents were $72,970,000 at July 31,
2005, compared to $68,788,000 at July 31, 2004.
Additionally, short-term investments, consisting of investments
in auction rate securities, were $7,100,000 at July 31,
2005 compared to $5,150,000 at July 31, 2004. Working
capital increased $9,854,000 during fiscal 2005 to $141,560,000
and increased $7,828,000 during fiscal 2004 to $131,706,000.
Accounts receivable
II-6
Table of Contents
balances increased $18,131,000 from July 31, 2004 to
July 31, 2005. The increase in accounts receivable was due
primarily to increased sales volume, foreign currency
translation and accounts receivable balances added from
acquisitions completed during fiscal 2005. Inventories increased
$17,804,000 from July 31, 2004 to July 31, 2005 due to
foreign currency translation, inventory of acquired companies,
and a planned increase in inventory levels to avoid shortages
and improve Company service levels. Current liabilities
increased $37,025,000 due to higher accounts payable associated
with increased sales volume and related inventory purchases,
higher incentive accruals, higher income taxes payable
associated with increased taxable income, and increased
operating liabilities associated with acquisitions completed
during fiscal 2005.
The Company has maintained significant cash balances due in
large part to its strong operating cash flow, which totaled
$119,103,000 for fiscal 2005, $87,646,000 for fiscal 2004 and
$57,316,000 for fiscal 2003. The increase in operating cash
flows from fiscal 2004 to 2005 was primarily due to a
$31,076,000 increase in net income.
Capital expenditures were $21,920,000 in fiscal 2005,
$14,892,000 in fiscal 2004 and $14,438,000 in fiscal 2003.
Capital expenditures in 2005 included plant expansions in China
and approximately $4,100,000 for the addition of a central
distribution warehouse in Milwaukee. The central distribution
center is expected to cost approximately $10,000,000. Capital
expenditures in 2004 included plant additions/expansions in
China and facility improvement costs. Capital expenditures in
2003 included further investment in software related to the
Eclipse initiative (SAP system implementation), plant
additions/expansions in Asia and tooling for additional new
products.
Financing activities used $9,712,000 of cash in fiscal 2005,
provided $146,103,000 in fiscal 2004 and used $16,833,000 in
fiscal 2003. Cash used for dividends to shareholders was
$21,291,000 in fiscal 2005, $19,805,000 in fiscal 2004 and
$17,936,000 in fiscal 2003. Cash received from the exercise of
stock options was $15,734,000 in fiscal 2005, $19,422,000 in
fiscal 2004, and $4,662,000 in fiscal 2003. The Company also
redeemed all of the outstanding preferred stock during fiscal
2003 for $3,026,000, which included a required $171,000 premium
paid for the redemption. The Company purchased treasury stock of
$1,551,000 in fiscal 2005, $564,000 in fiscal 2004, and $377,000
in fiscal 2003. The treasury stock purchases resulted from
purchases of Brady Corporation stock by the Company’s
deferred compensation plan and purchases of stock from certain
executives of the Company to allow them to pay the taxes on
restricted stock that vested during those years.
On March 31, 2004, the Company entered into an unsecured
$215,000,000 multi-currency revolving loan agreement with a
group of five banks. The $215,000,000 was divided between a
5-year credit facility for $125,000,000 and a 364-day credit
facility for $90,000,000. On July 6, 2004, the Company
permanently reduced the borrowings on the 364-day facility to $0
and closed the facility.
Under the 5-year agreement, which has a final maturity date of
March 31, 2009, the Company has the option to use either a
base interest rate (based upon the higher of the federal funds
rate plus one-half of 1% or the prime rate at Bank of America)
or a Eurocurrency interest rate (at the LIBOR rate plus margin).
A commitment fee is payable on the unused amount of credit. The
agreement requires the Company to maintain certain financial
covenants. As of July 31, 2005, the Company was in
compliance with the covenants of the agreement. The agreement
restricts the amount of certain types of payments, including
dividends, which can be made annually to $25,000,000 plus 50% of
the consolidated net income for the prior year. The Company
believes that based on historic dividend practice, this
restriction would not impede the Company in following a similar
dividend practice in the future. During fiscal 2005, the Company
borrowed and repaid $83,000,000 under the agreement. As of
July 31, 2005, there were no outstanding borrowings on the
5-year revolving loan agreement.
On June 30, 2004, the Company finalized a debt offering of
$150,000,000 of 5.14% unsecured senior notes due in 2014 in an
offering exempt from the registration requirements of the
Securities Act of 1933. The debt offering was in conjunction
with the Company’s acquisition of EMED. The notes will be
amortized over seven years beginning in 2008, with interest
payable on the notes being due semiannually on June 28 and
December 28, beginning in December 2004. Interest payments
were made on December 28, 2004 and June 28, 2005. The
Company used the proceeds of the offering to reduce outstanding
indebtedness under the
II-7
Table of Contents
Company’s revolving credit facilities used to initially
fund the EMED acquisition. The debt has certain prepayment
penalties for repaying the debt prior to its maturity date. The
agreement also requires the Company to maintain a financial
covenant. As of July 31, 2005, the Company was in
compliance with this covenant.
Long-term obligations as a percentage of long-term obligations
plus stockholders’ investment were 23.2% at July 31,
2005 and 27.1% at July 31, 2004. Long-term obligations were
largely unchanged from July 31, 2004 to July 31, 2005,
while stockholders’ investment increased approximately
$94,000,000 during this period.
The Company intends to fund its short-term and long-term cash
requirements, including its fiscal 2006 dividend payments and
its share repurchase program, primarily through net cash
provided by operating activities.
The Company believes that its continued strong cash flows from
operations and existing borrowing capacity will enable it to
execute its long-term strategic plan. This strategic plan
includes investments, which expand our current market share,
open new markets and geographies, develop new products and
distribution channels and continue to improve our processes.
This strategic plan also includes executing key acquisitions.
Subsequent Events Affecting Liquidity and Capital
Resources
On September 13, 2005, the Board of Directors announced an
increase in the quarterly dividend to shareholders of the
Company’s Class A Common Stock, from $0.11 to
$0.13 per share. The dividend will be paid on
October 31, 2005, to shareholders of record at the close of
business on October 10, 2005. This dividend represents an
increase of 18 percent and is the 20th consecutive
annual increase in dividends since the Company went public in
1984.
On September 13, 2005, the Company announced that the Board
of Directors of Brady Corporation approved a share repurchase
program for up to 800,000 shares of the Company’s
non-voting Class A Common Stock during fiscal 2006. 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
Company’s Stock Option Plan and for other corporate
purposes.
On September 1, 2005, the Company announced that it filed a
shelf registration statement on Form S-3 with the
Securities and Exchange Commission (“SEC”) which when
declared effective by the SEC, will allow Brady to issue and
sell, from time to time in one or more offerings, up to an
aggregate of $400,000,000 of Class A Non-voting Common
Stock and debt securities as it deems prudent or necessary to
raise capital at a later date. 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.
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 risks discussed in this filing
and presented in other Company filings. However, the following
additional information is provided to assist financial statement
users.
Operating Leases — These leases generally are
entered into for investments in facilities such as manufacturing
facilities, warehouses and office buildings and computer
equipment for which the economic profile is favorable.
Purchase Commitments — The Company has purchase
commitments for materials, supplies, services, and property,
plant and equipment entered into in the ordinary course of
business. Such commitments are not in excess of current market
prices.
Due to the proprietary nature of many of the Company’s
materials and processes, certain supply contracts contain
penalty provisions for early termination. The Company does not
believe a material amount of penalties will be incurred under
these contracts based upon historical experience and current
expectations.
II-8
Table of Contents
Other Contractual Obligations — The Company
does not have material financial guarantees or other contractual
commitments that are reasonably likely to adversely affect
liquidity other than those discussed below under “Payments
Due Under Contractual Obligations.”
Related Party Transactions — The Company does
not have any related party transactions that affect the results
of operations, cash flow or financial condition, with the
exception of treasury stock purchases from certain executives of
the Company as noted above.
Payments Due Under Contractual Obligations
The Company’s future commitments at July 31, 2005 for
long-term debt, operating lease obligations, purchase
obligations, interest obligations and other obligations are as
follows (dollars in thousands):
| ?Payments Due by Period | |||||||||||||||||||||
| Less than | 1-3 | 3-5 | More than | ||||||||||||||||||
| Contractual Obligations | Total | 1 Year | Years | Years | 5 Years | ||||||||||||||||
|
Long-Term Debt Obligations
|
$ | 150,030 | $ | 4 | $ | 21,452 | $ | 42,861 | $ | 85,713 | |||||||||||
|
Operating Lease Obligations
|
44,475 | 12,810 | 13,684 | 9,018 | 8,963 | ||||||||||||||||
|
Purchase Obligations(1)
|
23,006 | 21,649 | 1,037 | 320 | 0 | ||||||||||||||||
|
Interest Obligations
|
46,260 | 7,710 | 15,420 | 12,116 | 11,014 | ||||||||||||||||
|
Other Obligations(2)
|
7,262 | 603 | 1,215 | 1,365 | 4,079 | ||||||||||||||||
|
Total
|
$ | 271,033 | $ | 42,776 | $ | 52,808 | $ | 65,680 | $ | 109,769 | |||||||||||
| (1) | Purchase obligations represent all open purchase orders as of July 31, 2005. |
| (2) | Other obligations represent expected payments under the Company’s postretirement medical, dental, and vision plan as disclosed in Note 3 to the consolidated financial statements, under Item 8 of this report. |
Inflation and Changing Prices
Essentially all of the Company’s revenue is derived from
the sale of its products in competitive markets. Because prices
are influenced by market conditions, it is not always possible
to fully recover cost increases through pricing. Changes in
product mix from year to year and timing differences in
instituting price changes and the large amount of part numbers
make it virtually impossible to accurately define the impact of
inflation on profit margins.
Critical Accounting Estimates
| Income Taxes |
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards (“SFAS”)
No. 109, “Accounting for Income Taxes,” which
requires an asset and liability approach to financial accounting
and reporting for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the
financial statement and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future based
on enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense
is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and
liabilities. Changes in existing regulatory tax laws and rates
may affect the Company’s ability to successfully manage
regulatory matters around the world, and future business results
may affect the amount of deferred tax liabilities or the
valuation of deferred tax assets over time. The Company’s
accounting for deferred tax consequences represents
management’s best estimate of future events that can be
appropriately reflected in the accounting estimates. Although
the Company’s current estimates may be subject to change in
the future, management does not believe such changes would
result in a material period-to-period impact on the results of
operations or the financial condition of the Company.
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Table of Contents
Goodwill and Intangible
Assets
The allocation of purchase price for business combinations
requires management estimates and judgment as to expectations
for future cash flows of the acquired business and the
allocation of those cash flows to identifiable intangible assets
in determining the estimated fair value for purchase price
allocation purposes. If the actual results differ from the
estimates and judgments used in these estimates, the amounts
recorded in the financial statements could result in a possible
impairment of the intangible assets and goodwill or require
acceleration of the amortization expense of finite-lived
intangible assets. In addition, SFAS No. 142,
“Goodwill and Other Intangible Assets,” requires that
goodwill and other indefinite-lived intangible assets be tested
annually for impairment. Changes in management’s estimates
or judgments could result in an impairment charge, and such a
charge could have an adverse effect on the Company’s
financial condition and results of operations. In order to
mitigate the risk associated with valuation of goodwill and
other intangible assets, Company policy requires that all
acquisitions with a purchase price above $5,000,000 must be
evaluated by a professional appraisal company.
Reserves and
Allowances
The Company has recorded reserves or allowances for inventory
obsolescence, returns, credit memos, incurred but not reported
medical claims, and income tax contingencies. These reserves
require the use of estimates and judgment. The Company bases its
estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances. The Company believes that such estimates are made
with consistent and appropriate methods. Actual results may
differ from these estimates under different assumptions or
conditions.
New Accounting Standards
The information required by this Item is provided in Note 1
of the Notes to Consolidated Financial Statements contained in
Item 8 — Financial Statements and Supplementary
Data.
Forward-Looking Statements
Except for historical information, the Company’s reports to
the Securities and Exchange Commission on Form 10-K and
Form 10-Q and periodic press releases, as well as other
public documents and statements, may contain
“forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995 —
that is, statements related to future, not past events. In this
context forward-looking statements often address our expected
future business and financial performance, and often contain
certain words such as “expect”,
“anticipate”, “intend”, “plan”,
“believe”, “seek”, or “may”.
Forward-looking statements by their nature address matters that
are, to different degrees uncertain. For us, uncertainties arise
from future financial performance of major markets we serve
which include, without limitation, telecommunications,
manufacturing, electrical, construction, laboratory, education,
governmental, public utility, computer, transportation; future
integration of and performance of acquired businesses;
fluctuations in currency rates versus the US dollar; technology
changes; interruptions to sources of supply; business
interruptions due to implementing business systems; and numerous
other matters of national, regional and global scale, including
those of a political, economic, business, competitive and
regulatory nature and those identified in reports we file with
the SEC. These uncertainties may cause our actual future results
to be materially different than those expressed in our
forward-looking statements.
Economic Conditions
Operating results are significantly influenced by general
economic conditions and growth or contraction of the principal
economies in which we operate, including the United States,
Canada, Europe, Latin America and the Asia-Pacific region. This
is especially true with respect to growth or contraction of the
industrial and technology sectors of those economies. All
economies in which we operate are cyclical and the rates of
growth or contraction can vary substantially. Because we have
few long-term contracts, we generally ship products within a
short period of time from receiving orders and thus maintain a
relatively small backlog. The extent to
II-10
Table of Contents
which we can rapidly adjust our cost structure and output to
changing economic conditions may have a significant effect on
our future profitability.
Currency Fluctuations
Approximately half of our sales are in foreign currencies, which
fluctuate in relationship to one another and to the United
States dollar. Fluctuations in currencies can cause transaction,
translation and other losses. These fluctuations can have an
adverse effect on our reported sales and net income. The Company
mitigates this exposure to foreign currency fluctuations by
following a hedge policy whereby approximately 50% of the
intercompany transactions and material trade transactions are
hedged via forward contracts.
Cost of Raw Materials
As a manufacturer, our sales and profitability are also
dependent upon availability and cost of raw materials and the
ability to control or pass on costs of raw materials and labor.
Inflationary and other increases in the costs of raw materials
and labor have occurred in the past and are expected to recur.
Our ability to reflect these costs in increased selling prices
for our products, increase our productivity, and focus on higher
profit businesses, will significantly influence our ability to
maintain our margins. Past performance may or may not be
replicable in the future.
Reliance on Suppliers
Our manufacturing operations depend on our suppliers’
ability to deliver quality components and products in time for
us to meet critical manufacturing and distribution schedules. If
shortages or delays occur, our operating results could suffer
until other sources can be developed. In some cases, where
shortages are projected, the Company has increased inventory
levels in an effort to prevent any effect on our customers.
New Products
A significant portion of the revenues in each of our recent
fiscal years has been represented by sales of products we have
introduced within three years prior to the period. Our ability
to develop and successfully market new products and to develop,
acquire and retain necessary intellectual property rights is
therefore essential to maintaining our growth, which ability
cannot be assured.
Acquisitions, Strategic Alliances, Joint Ventures and
Divestitures
Part of our historic growth has come through acquisitions. We
may also engage in strategic alliances, joint ventures and
divestitures. Our ability to effectively evaluate potential
acquisition, strategic alliance, joint venture or divestiture
transactions and to effectuate such transactions at a reasonable
price can affect our profitability. In addition, acquisitions,
strategic alliances and joint ventures may require us to
integrate with a different company culture, management team and
business infrastructure. We may also have to develop,
manufacture and market products with our products in a way that
enhances the performance of the combined business or product
line. Depending on the size and complexity of an acquisition,
our successful integration of the entity depends on a variety of
factors, including:
| • | The hiring and retention of key employees, | |
| • | Management of facilities and employees in separate geographic areas, | |
| • | The integration or coordination of different research and development and product manufacturing facilities, and | |
| • | Systems integration and implementation. |
All of these efforts require varying levels of management
resources, which may divert our attention from other business
operations.
II-11
Table of Contents
Intellectual Property
We generally rely upon patent, copyright, trademark and trade
secret laws in the U.S.A. and in certain other countries, and
agreements with our employees and customers to establish and
maintain our property rights in our technology and products.
However, any of our intellectual property rights could be
challenged, invalidated or circumvented. Third parties may claim
that we are infringing upon their intellectual property. Even if
we do not believe that our products are infringing upon third
parties’ intellectual property rights, the claims can be
time-consuming and costly to defend and can divert
management’s attention and resources away from our
business. Claims of intellectual property infringement might
also require us to enter into costly royalty or license
agreements. If we cannot or do not license the infringed
technology or substitute similar technology from another source,
our business could suffer.
Environmental
Some of our operations use substances regulated under various
federal, state and foreign laws governing the environment. It is
our policy to apply strict standards for environmental
protection to sites inside and outside the United States, even
when not subject to local government regulations. However, a
failure to comply with applicable standards or the accidental
emission of or exposure to hazardous materials could give rise
to significant monetary liability. Also, the imposition of new
governmental standards or requirements could materially increase
our cost of operation.
New environmental legislation is in the process of being
implemented in parts of Europe and parts of Asia over the next
year. The Waste Electrical and Electronic Equipment
(“WEEE”) Directive provides that certain banned
substances not be used in electrical and electronic equipment
and that companies have a recycling scheme in place to deal with
the disposal of that equipment at its end-of-life. Additionally,
the Restrictions on the Use of Hazardous Substances
(“RoHS”) Directive defines the restricted substances
referenced by the WEEE regulation. Certain of the Company’s
products may be governed by these new regulations in the
regulated countries in which such products are sold. In
addition, some of our products may be sold to customers for
inclusion in electrical and electronic equipment products that
are regulated under these new regulations. These customers may
require that our products meet certain requirements that pertain
to their products. It is our policy to meet all applicable
requirements. We are currently in the process of finalizing the
testing and re-designing of our products as required to meet
these new regulations. The imposition of additional compliance
requirements could significantly increase our cost of
compliance. Failure to comply with this type of regulation could
result in a material limitation on the sale of the affected
products in regulated countries.
Effect of International Conditions
Our international operations may be significantly influenced by
political, economic, regulatory, and environmental/health
conditions (including tariffs) in the countries in which we
conduct our operations.
Other
Other factors include costs and other effects of increasing oil
prices, computer viruses, availability of electricity, natural
gas and other sources of power, interest rate increases;
increase or decrease in sales due to natural disasters; legal
and administrative cases and proceedings, settlements, judgments
and investigations, claims, and changes in those items; adoption
of new or revised accounting policies and practices and the
application of such policies and practices; the continued
successful implementation of an enterprise-resource-planning
system in portions of the business; business reorganizations or
combinations; loss of significant contracts or customers; the
ability and willingness of purchasers to substitute other
products for the products that we distribute; and pricing,
purchasing, financing and promotional decisions by
intermediaries in the distribution channel.
The factors identified in this statement are believed to be
important factors (but not necessarily all of the important
factors) that could cause actual results to be materially
different from those that may be expressed or implied in any
forward-looking statement made by, or on behalf of, the Company.
Other factors not
II-12
Table of Contents
discussed in this statement could also have material adverse
effects concerning forward-looking objectives or estimates. The
Company assumes no obligation to update the information included
in this statement.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
The Company’s business operations give rise to market risk
exposure due to changes in foreign exchange rates. To manage
that risk effectively, the Company enters into hedging
transactions, according to established guidelines and policies,
that enable it to mitigate the adverse effects of this financial
market risk.
The global nature of the Company’s business requires active
participation in the foreign exchange markets. As a result of
investments, production facilities and other operations on a
global scale, the Company has assets, liabilities and cash flows
in currencies other than the U.S. Dollar. The primary
objective of the Company’s foreign-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, Japanese Yen and Australian Dollar. The risk of
these hedging instruments is not material.
The Company could be exposed to interest rate risk through its
corporate borrowing activities. The objective of the
Company’s interest rate risk management activities is to
manage the levels of the Company’s fixed and floating
interest rate exposure to be consistent with the Company’s
preferred mix. The interest rate risk management program allows
the Company to enter into approved interest rate derivatives if
there is a desire to modify the Company’s exposure to
interest rates. As of July 31, 2005, the Company has no
interest rate derivatives.
II-13
Table of Contents
| Item 8. | Financial Statements and Supplementary Data |
BRADY CORPORATION & SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
| Page | |||||
| II-15 | |||||
|
Financial Statements:
|
|||||
| II-16 | |||||
| II-17 | |||||
| II-18 | |||||
| II-19 | |||||
| II-20 | |||||
II-14
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Brady Corporation
Milwaukee, WI
We have audited the accompanying consolidated balance sheets of
Brady Corporation and subsidiaries (the “Company”) as
of July 31, 2005 and 2004, and the related consolidated
statements of income, stockholders’ investment and cash
flows for each of the three years in the period ended
July 31, 2005. Our audits also included the financial
statement schedule listed in the index at Item 15. These
financial statements and financial statement schedule are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Brady Corporation and subsidiaries at July 31, 2005 and
2004, and the results of their operations and their cash flows
for each of the three years in the period ended July 31,
2005, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion,
such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set
forth therein.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Company’s internal control over
financial reporting as of July 31, 2005, based on the
criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
September 29, 2005 expressed an unqualified opinion on
management’s assessment of the effectiveness of the
Company’s internal control over financial reporting and an
unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
/s/ Deloitte & Touche
LLP
Milwaukee, WI
September 29, 2005
II-15
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, 2005 and 2004
| 2005 | 2004 | ||||||||||
| (In thousands) | |||||||||||
| ASSETS | |||||||||||
|
Current Assets:
|
|||||||||||
|
Cash and cash equivalents (Note 1)
|
$ | 72,970 | $ | 68,788 | |||||||
|
Short term investments (Note 1)
|
7,100 | 5,150 | |||||||||
|
Accounts receivable, less allowance for losses ($3,726 and
3,869, respectively)
|
123,453 | 105,322 | |||||||||
|
Inventories (Note 1):
|
|||||||||||
|
Finished products
|
38,827 | 32,448 | |||||||||
|
Work-in-process
|
9,681 | 6,550 | |||||||||
|
Raw materials and supplies
|
22,227 | 13,933 | |||||||||
|
Total inventories
|
70,735 | 52,931 | |||||||||
|
Prepaid expenses and other current assets (Notes 1, 3 and 4)
|
28,114 | 23,302 | |||||||||
|
Total current assets
|
302,372 | 255,493 | |||||||||
|
Other Assets:
|
|||||||||||
|
Goodwill (Note 1)
|
332,369 | 275,897 | |||||||||
|
Other intangibles assets (Note 1)
|
71,647 | 45,879 | |||||||||
|
Deferred income taxes (Note 4)
|
39,043 | 29,551 | |||||||||
|
Other
|
6,305 | 4,975 | |||||||||
|
Property, plant and equipment (Note 1):
|
|||||||||||
|
Cost:
|
|||||||||||
|
Land
|
6,388 | 6,242 | |||||||||
|
Buildings and improvements
|
65,007 | 58,850 | |||||||||
|
Machinery and equipment
|
157,093 | 153,467 | |||||||||
|
Construction in progress
|
6,510 | 1,468 | |||||||||
| 234,998 | 220,027 | ||||||||||
|
Less accumulated depreciation
|
136,587 | 133,922 | |||||||||
|
Property, plant and equipment — net
|
98,411 | 86,105 | |||||||||
|
Total
|
$ | 850,147 | $ | 697,900 | |||||||
| LIABILITIES AND STOCKHOLDERS’ INVESTMENT | |||||||||||
|
Current Liabilities:
|
|||||||||||
|
Accounts payable
|
$ | 52,696 | $ | 42,103 | |||||||
|
Wages and amounts withheld from employees
|
49,620 | 41,872 | |||||||||
|
Taxes, other than income taxes
|
4,815 | 3,852 | |||||||||
|
Accrued income taxes
|
24,028 | 12,399 | |||||||||
|
Other current liabilities (Note 3)
|
29,649 | 23,529 | |||||||||
|
Short-term borrowings and current maturities on long-term
obligations (Note 5)
|
4 | 32 | |||||||||
|
Total current liabilities
|
160,812 | 123,787 | |||||||||
|
Long-term obligations, less current maturities (Note 5)
|
150,026 | 150,019 | |||||||||
|
Other liabilities (Notes 2, 3, and 4)
|
42,035 | 20,779 | |||||||||
|
Total liabilities
|
352,873 | 294,585 | |||||||||
|
Stockholders’ Investment (Notes 1 and 6):
|
|||||||||||
|
Common Stock:
|
|||||||||||
|
Class A Nonvoting — Issued 45,792,199 and
44,690,798 shares, respectively (aggregate liquidation
preference of $38,236 and $37,316 at July 31, 2005 and
2004, respectively)(1)
|
458 | 447 | |||||||||
|
Class B Voting — Issued and outstanding
3,538,628 shares(1)
|
35 | 35 | |||||||||
|
Additional paid-in capital
|
99,029 | 72,625 | |||||||||
|
Earnings retained in the business
|
382,880 | 322,224 | |||||||||
|
Treasury stock — 85,344 and 69,314 shares,
respectively of Class A nonvoting common stock, at cost(1)
|
(1,575 | ) | (1,074 | ) | |||||||
|
Cumulative other comprehensive income
|
17,497 | 9,340 | |||||||||
|
Other
|
(1,050 | ) | (282 | ) | |||||||
|
Total stockholders’ investment
|
497,274 | 403,315 | |||||||||
|
Total
|
$ | 850,147 | $ | 697,900 | |||||||
| (1) | Adjusted for two-for-one stock split in the form of a 100% stock dividend, effective December 31, 2004. |
See notes to consolidated financial statements.
II-16
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended July 31, 2005, 2004 and 2003
| 2005 | 2004 | 2003 | ||||||||||||
| (Dollars in thousands, | ||||||||||||||
| Except Per Share Amounts) | ||||||||||||||
|
Net Sales (Note 1)
|
$ | 816,447 | $ | 671,219 | $ | 554,866 | ||||||||
|
Cost of products sold
|
383,171 | 325,858 | 275,717 | |||||||||||
|
Gross margin
|
433,276 | 345,361 | 279,149 | |||||||||||
|
Operating Expenses:
|
||||||||||||||
|
Research and development
|
25,078 | 23,028 | 18,873 | |||||||||||
|
Selling, general and administrative
|
285,746 | 248,171 | 219,861 | |||||||||||
|
Restructuring charge — net (Note 10)
|
— | 3,181 | 9,589 | |||||||||||
|
Total operating expenses
|
310,824 | 274,380 | 248,323 | |||||||||||
|
Operating Income
|
122,452 | 70,981 | 30,826 | |||||||||||
|
Other Income (Expense):
|
||||||||||||||
|
Investment and other income — net
|
1,369 | 577 | 1,750 | |||||||||||
|
Interest expense
|
(8,403 | ) | (1,231 | ) | (121 | ) | ||||||||
|
Net other income (expense)
|
(7,034 | ) | (654 | ) | 1,629 | |||||||||
|
Income Before Income Taxes
|
115,418 | 70,327 | 32,455 | |||||||||||
|
Income Taxes (Notes 1 and 4)
|
33,471 | 19,456 | 11,035 | |||||||||||
|
Net Income
|
$ | 81,947 | $ | 50,871 | $ | 21,420 | ||||||||
|
Net Income Per Common Share(1) (Notes 6 and 8):
|
||||||||||||||
|
Class A Nonvoting:
|
||||||||||||||
|
Basic
|
$ | 1.67 | $ | 1.08 | $ | 0.46 | ||||||||
|
Diluted
|
$ | 1.64 | $ | 1.07 | $ | 0.46 | ||||||||
|
Dividends
|
$ | 0.44 | $ | 0.42 | $ | 0.40 | ||||||||
|
Class B Voting:
|
||||||||||||||
|
Basic
|
$ | 1.66 | $ | 1.06 | $ | 0.45 | ||||||||
|
Diluted
|
$ | 1.63 | $ | 1.05 | $ | 0.44 | ||||||||
|
Dividends
|
$ | 0.42 | $ | 0.40 | $ | 0.39 | ||||||||
|
Weighted average Class A and Class B common shares
outstanding(1) (in Thousands)
|
||||||||||||||
|
Basic
|
48,967 | 47,298 | 46,356 | |||||||||||
|
Diluted
|
49,859 | 47,813 | 46,754 | |||||||||||
| (1) | Adjusted for two-for-one stock split in the form of a 100% stock dividend, effective December 31, 2004 |
See notes to consolidated financial statements.
II-17
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ INVESTMENT
Years Ended JULY 31, 2005, 2004 AND 2003
| Earnings | Other | ||||||||||||||||||||||||||||||||||
| Additional | Retained | Comprehensive | Total | ||||||||||||||||||||||||||||||||
| Preferred | Common | Paid-In | in the | Treasury | Income | Comprehensive | |||||||||||||||||||||||||||||
| Stock | Stock | Capital | Business | Stock | (Loss) | Other | Income | ||||||||||||||||||||||||||||
| (Dollars in thousands, except per share amounts) | |||||||||||||||||||||||||||||||||||
|
Balances at July 31, 2002
|
$ | 2,855 | $ | 232 | $ | 41,526 | $ | 287,674 | $ | (132 | ) | $ | (7,665 | ) | $ | (248 | ) | ||||||||||||||||||
|
Adjustment for two-for-one stock split, in the form of a stock
dividend, effective December 31, 2004
|
— | 230 | (230 | ) | — | — | — | — | |||||||||||||||||||||||||||
|
Adjusted balances at July 31, 2002
|
$ | 2,855 | $ | 462 | $ | 41,296 | $ | 287,674 | $ | (132 | ) | $ | (7,665 | ) | $ | (248 | ) | ||||||||||||||||||
|
Net income
|
21,420 | $ | 21,420 | ||||||||||||||||||||||||||||||||
|
Net currency translation Adjustment and other
|
9,260 | 9,260 | |||||||||||||||||||||||||||||||||
|
Total comprehensive income
|
$ | 30,680 | |||||||||||||||||||||||||||||||||
|
Issuance of 403,320 shares of Class A Common Stock
under stock option plan
|
4 | 4,658 | |||||||||||||||||||||||||||||||||
|
Other (Note 6)
|
669 | (380 | ) | ||||||||||||||||||||||||||||||||
|
Tax benefit from exercise of stock options
|
609 | ||||||||||||||||||||||||||||||||||
|
Redemption of Preferred Stock
|
(2,855 | ) | (171 | ) | |||||||||||||||||||||||||||||||
|
Purchase of 27,428 shares of Class A Common Stock
|
(377 | ) | |||||||||||||||||||||||||||||||||
|
Cash dividends on Common Stock:
|
|||||||||||||||||||||||||||||||||||
|
Class A — $.40 a share
|
(16,762 | ) | |||||||||||||||||||||||||||||||||
|
Class B — $.39 a share
|
(1,356 | ) | |||||||||||||||||||||||||||||||||
|
Balances at July 31, 2003
|
$ | — | $ | 466 | $ | 47,232 | $ | 290,805 | $ | (509 | ) | $ | 1,595 | $ | (628 | ) | |||||||||||||||||||
|
Net income
|
50,871 | $ | 50,871 | ||||||||||||||||||||||||||||||||
|
Net currency translation adjustment and other
|
7,745 | 7,745 | |||||||||||||||||||||||||||||||||
|
Total comprehensive income
|
$ | 58,616 | |||||||||||||||||||||||||||||||||
|
Issuance of 1,607,058 shares of Class A Common Stock
under stock option plan
|
16 | 19,406 | |||||||||||||||||||||||||||||||||
|
Other (Note 6)
|
346 | ||||||||||||||||||||||||||||||||||
|
Tax benefit from exercise of stock options
|
4,406 | ||||||||||||||||||||||||||||||||||
|
Purchase of 32,790 shares of Class A Common Stock
|
(565 | ) | |||||||||||||||||||||||||||||||||
|
Stock-based compensation expense
|
1,581 | ||||||||||||||||||||||||||||||||||
|
Cash dividends on Common Stock:
|
|||||||||||||||||||||||||||||||||||
|
Class A — $.42 a share
|
(18,025 | ) | |||||||||||||||||||||||||||||||||
|
Class B — $.40 a share
|
(1,427 | ) | |||||||||||||||||||||||||||||||||
|
Balances at July 31, 2004
|
$ | — | $ | 482 | $ | 72,625 | $ | 322,224 | $ | (1,074 | ) | $ | 9,340 | $ | (282 | ) | |||||||||||||||||||
|
Net income
|
81,947 | $ | 81,947 | ||||||||||||||||||||||||||||||||
|
Net currency translation adjustment and other
|
8,157 | 8,157 | |||||||||||||||||||||||||||||||||
|
Total comprehensive income
|
$ | 90,104 | |||||||||||||||||||||||||||||||||
|
Issuance of 1,117,431 shares of Class A Common Stock
under stock option plan
|
11 | 15,722 | |||||||||||||||||||||||||||||||||
|
Other (Note 6)
|
(768 | ) | |||||||||||||||||||||||||||||||||
|
Tax benefit from exercise of stock options
|
5,385 | ||||||||||||||||||||||||||||||||||
|
Purchase of 16,030 shares of Class A Common Stock
|
(501 | ) | |||||||||||||||||||||||||||||||||
|
Stock-based compensation expense
|
5,297 | ||||||||||||||||||||||||||||||||||
|
Cash dividends on Common Stock:
|
|||||||||||||||||||||||||||||||||||
|
Class A — $.44 a share
|
(19,793 | ) | |||||||||||||||||||||||||||||||||
|
Class B — $.42 a share
|
(1,498 | ) | |||||||||||||||||||||||||||||||||
|
Balances at July 31, 2005
|
$ | — | $ | 493 | $ | 99,029 | $ | 382,880 | $ | (1,575 | ) | $ | 17,497 | $ | (1,050 | ) | |||||||||||||||||||
See notes to consolidated financial statements.
| (1) | Adjusted for two-for-one stock split in the form of a 100% stock dividend, effective December 31, 2004 |
II-18
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended July 31, 2005, 2004 and 2003
| 2005 | 2004 | 2003 | ||||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Operating Activities:
|
||||||||||||||||
|
Net income
|
$ | 81,947 | $ | 50,871 | $ | 21,420 | ||||||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||||||
|
Depreciation and amortization
|
26,822 | 20,190 | 17,771 | |||||||||||||
|
Income tax benefit from the exercise of stock options
|
5,385 | 4,406 | 608 | |||||||||||||
|
Deferred income taxes
|
(2,653 | ) | 5,172 | (1,915 | ) | |||||||||||
|
Loss on sale of property, plant and equipment
|
743 | 321 | 55 | |||||||||||||
|
Provision for losses on accounts receivable
|
1,216 | 1,450 | 1,523 | |||||||||||||
|
Non-cash portion of stock-based compensation expense
|
5,579 | 1,927 | 289 | |||||||||||||
|
Net restructuring charge accrued liability
|
— | 3,221 | 6,926 | |||||||||||||
|
Changes in operating assets and liabilities (net of effects of
business acquisitions):
|
||||||||||||||||
|
Accounts receivable
|
(7,132 | ) | (11,979 | ) | 4,334 | |||||||||||
|
Inventories
|
(11,847 | ) | (6,791 | ) | 4,140 | |||||||||||
|
Prepaid expenses and other assets
|
(3,572 | ) | 2,168 | (1,179 | ) | |||||||||||
|
Accounts payable and accrued liabilities
|
8,827 | 15,210 | (1,940 | ) | ||||||||||||
|
Income taxes
|
9,662 | (393 | ) | 4,636 | ||||||||||||
|
Other liabilities
|
4,126 | 1,873 | 648 | |||||||||||||
|
Net cash provided by operating activities
|
119,103 | 87,646 | 57,316 | |||||||||||||
|
Investing Activities:
|
||||||||||||||||
|
Acquisitions of businesses, net of cash acquired
|
(79,926 | ) | (228,928 | ) | (23,912 | ) | ||||||||||
|
Purchases of short-term investments
|
(47,025 | ) | (38,450 | ) | (16,750 | ) | ||||||||||
|
Sales of short-term investments
|
45,075 | 42,850 | 17,200 | |||||||||||||
|
Purchases of property, plant and equipment
|
(21,920 | ) | (14,892 | ) | (14,438 | ) | ||||||||||
|
Termination of capital lease
|
— | — | (791 | ) | ||||||||||||
|
Proceeds from sale of property, plant and equipment
|
390 | 448 | 257 | |||||||||||||
|
Other
|
(1,686 | ) | (1,533 | ) | 68 | |||||||||||
|
Net cash used in investing activities
|
(105,092 | ) | (240,505 | ) | (38,366 | ) | ||||||||||
|
Financing Activities:
|
||||||||||||||||
|
Payment of dividends
|
(21,291 | ) | (19,805 | ) | (17,936 | ) | ||||||||||
|
Proceeds from issuance of common stock
|
15,734 | 19,422 | 4,662 | |||||||||||||
|
Principal payments on debt
|
(85,604 | ) | (161,578 | ) | (327 | ) | ||||||||||
|
Proceeds from debt
|
83,000 | 310,000 | — | |||||||||||||
|
Payment for redemption of preferred stock
|
— | — | (2,855 | ) | ||||||||||||
|
Purchase of treasury stock
|
(1,551 | ) | (564 | ) | (377 | ) | ||||||||||
|
Debt issue costs
|
— | (1,372 | ) | — | ||||||||||||
|
Net cash (used in) provided by financing activities
|
(9,712 | ) | 146,103 | (16,833 | ) | |||||||||||
|
Effect of exchange rate changes on cash
|
(117 | ) | 6,939 | 519 | ||||||||||||
|
Net increase in cash and cash equivalents
|
4,182 | 183 | 2,636 | |||||||||||||
|
Cash and cash equivalents, beginning of year
|
68,788 | 68,605 | 65,969 | |||||||||||||
|
Cash and cash equivalents, end of year
|
$ | 72,970 | $ | 68,788 | $ | 68,605 | ||||||||||
|
Supplemental Disclosure of Cash Flow Information:
|
||||||||||||||||
|
Cash paid during the year for:
|
||||||||||||||||
|
Interest
|
$ | 7,836 | $ | 506 | $ | 43 | ||||||||||
|
Income taxes, net of refunds
|
19,358 | 10,977 | 12,789 | |||||||||||||
|
Acquisitions:
|
||||||||||||||||
|
Fair value of assets acquired, net of cash
|
$ | 60,193 | $ | 96,656 | $ | 14,430 | ||||||||||
|
Liabilities assumed
|
(35,113 | ) | (8,674 | ) | (8,146 | ) | ||||||||||
|
Goodwill
|
54,846 | 140,946 | 17,628 | |||||||||||||
|
Net cash paid for acquisitions
|
$ | 79,926 | $ | 228,928 | $ | 23,912 | ||||||||||
|
Termination of capital lease:
|
||||||||||||||||
|
Disposition of capital assets
|
— | — | (2,574 | ) | ||||||||||||
|
Settlement of capital lease liability
|
— | — | 3,365 | |||||||||||||
|
Net cash paid for termination of capital lease
|
$ | — | $ | — | $ | 791 | ||||||||||
See notes to consolidated financial statements.
II-19
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 2005, 2004 and 2003
| 1. | Summary of Significant Accounting Policies |
Principles of Consolidation — The accompanying
consolidated financial statements include the accounts of Brady
Corporation and its subsidiaries (the “Company”), all
of which are wholly-owned with the exception of the
Company’s Thailand operations, in which a third party
retains an approximately $1,200 investment. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates — The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Stock Dividend — All previously presented
earnings per share, share amounts, and stock price data have
been adjusted for a two-for-one stock split in the form of a
100% stock dividend, effective December 31, 2004.
Fair Value of Financial Instruments — The
Company believes the carrying amount of its financial
instruments (cash and cash equivalents, accounts receivable and
accounts payable) is a reasonable estimate of the fair value of
these instruments due to their short-term nature.
Cash Equivalents — The Company considers all
highly liquid investments with maturities of three months or
less when acquired to be cash equivalents, which are recorded at
cost.
Available-for-Sale Securities — The Company has
invested in certain marketable securities that are categorized
as available-for-sale. These investments consist of auction-rate
securities, which were previously classified as cash
equivalents, and have been reclassified as short-term
investments available-for-sale for all periods presented. The
amount of available-for-sale securities included in the
consolidated balance sheets as of July 31, 2005 and
July 31, 2004 was $7,100,000 and $5,150,000, respectively,
and consists solely of auction rate securities. The effect of
this reclassification has also been reflected in the
consolidated statements of cash flows for all periods presented.
The auction rate securities held by the Company are municipal
bonds with either perpetual or intermediate to long-term
maturities. The holding period of each bond is either 7,
28, 35, or 49 days and is determined when the security is
issued. A Dutch auction takes place at the end of each holding
period at which time the security can be sold or held. The
lowest rate that sells all of the securities is the set rate for
the subsequent holding period. If there are not sufficient
orders to place all of the available securities, the auction is
said to have “failed” and liquidity will be denied for
the subsequent holding period.
The carrying value of the available-for-sale securities
approximates the aggregate fair value of the securities and
there are no unrealized gains or losses on the
available-for-sale securities. There were no gains or losses on
available-for-sales securities during the periods presented.
Inventories — Inventories are stated at the
lower of cost or market. Cost has been determined using the
last-in, first-out (“LIFO”) method for certain
domestic inventories (approximately 37% of total inventories at
July 31, 2005 and 36% of total inventories at July 31,
2004) and the first-in, first-out (“FIFO”) or average
cost methods for other inventories. The carrying value of
certain domestic inventories stated at FIFO cost exceeded the
value of such inventories stated at LIFO cost by $8,499,000 and
$7,452,000 at July 31, 2005 and 2004, respectively.
II-20
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Depreciation — The cost of buildings and
improvements and machinery and equipment is being depreciated
over their estimated useful lives using primarily the
straight-line method for financial reporting purposes. The
estimated useful lives range from 3 to 33 years as shown
below.
| Asset Category | Range of Useful Lives | |||
|
Buildings and improvements
|
10 to 33 Years | |||
|
Machinery and equipment
|
3 to 10 Years | |||
Goodwill and other Intangible Assets — The cost
of intangible assets with determinable useful lives is amortized
to reflect the pattern of economic benefits consumed,
principally on a straight-line basis, over the estimated periods
benefited. Intangible assets with indefinite useful lives and
goodwill are not subjected to amortization. These assets are
assessed for impairment annually and when deemed necessary.
Changes in the carrying amount of goodwill for the years ended
July 31, 2005 and 2004, are as follows:
| Americas | Europe | Asia | Total | ||||||||||||||
|
Balance as of July 31, 2003
|
$ | 84,267,000 | $ | 43,820,000 | $ | 2,580,000 | $ | 130,667,000 | |||||||||
|
Goodwill acquired during the period
|
132,593,000 | 8,353,000 | — | 140,946,000 | |||||||||||||
|
Translation adjustments and other
|
456,000 | 3,675,000 | 153,000 | 4,284,000 | |||||||||||||
|
Balance as of July 31, 2004
|
$ | 217,316,000 | $ | 55,848,000 | $ | 2,733,000 | $ | 275,897,000 | |||||||||
|
Goodwill acquired during the period
|
8,771,000 | 18,326,000 | 28,176,000 | 55,273,000 | |||||||||||||
|
Translation adjustments and other
|
756,000 | (630,000 | ) | 1,073,000 | 1,199,000 | ||||||||||||
|
Balance as of July 31, 2005
|
$ | 226,843,000 | $ | 73,544,000 | $ | 31,982,000 | $ | 332,369,000 | |||||||||
Goodwill increased by $56,472,000 during the year ended
July 31, 2005, including an increase of $1,199,000
attributable to the effects of foreign currency translation and
other. The acquisitions of Emed Co, Inc. (“EMED”) and
Electromark in the Americas, ID Technologies, Inc., Technology
Print Supplies, Ltd., and Technology and Supply Media Co., Ltd.
in Asia, and Signs & Labels Ltd., in Europe resulted in
$427,000, $8,344,000, $25,926,000, $2,250,000 and $18,326,000 of
additional goodwill, respectively.
Goodwill increased by $145,230,000 during the year ended
July 31, 2004, including an increase of $4,284,000
attributable to the effects of foreign currency translation and
other. The acquisitions of Brandon International, Inc., Prinzing
Enterprises, Inc., B.I.G. and EMED resulted in $6,624,000,
$12,065,000, $8,353,000 and $113,904,000 of additional goodwill,
respectively.
II-21
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Other intangible assets include patents, trademarks, non-compete
agreements and other intangible assets with finite lives being
amortized in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 142, “Goodwill and
Other Intangible Assets.” The net book value of these
assets was as follows:
| July 31, 2005 | July 31, 2004 | ||||||||||||||||||||||||||||||||
| Weighted | Weighted | ||||||||||||||||||||||||||||||||
| Average | Average | ||||||||||||||||||||||||||||||||
| Amortization | Gross Carrying | Accumulated | Net Book | Amortization | Gross Carrying | Accumulated | Net Book | ||||||||||||||||||||||||||
| Period (Years) | Amount | Amortization | Value | Period (Years) | Amount | Amortization | Value | ||||||||||||||||||||||||||
|
Amortized other intangible assets:
|
|||||||||||||||||||||||||||||||||
|
Patents
|
16 | $ | 6,830,000 | $ | (4,525,000 | ) | $ | 2,305,000 | 16 | $ | 6,450,000 | $ | (3,967,000 | ) | $ | 2,483,000 | |||||||||||||||||
|
Trademarks and other
|
10 | 1,370,000 | (1,134,000 | ) | 236,000 | 13 | 911,000 | (825,000 | ) | 86,000 | |||||||||||||||||||||||
|
Customer relationships
|
8 | 51,211,000 | (7,244,000 | ) | 43,967,000 | 7 | 28,203,000 | (1,644,000 | ) | 26,559,000 | |||||||||||||||||||||||
|
Purchased software
|
5 | 3,148,000 | (1,353,000 | ) | 1,795,000 | 5 | 2,339,000 | (894,000 | ) | 1,445,000 | |||||||||||||||||||||||
|
Non-compete agreements
|
4 | 6,216,000 | (3,212,000 | ) | 3,004,000 | 3 | 3,130,000 | (2,203,000 | ) | 927,000 | |||||||||||||||||||||||
|
Unamortized other intangible assets:
|
|||||||||||||||||||||||||||||||||
|
Trademarks
|
N/A | 20,340,000 | — | 20,340,000 | N/A | 14,379,000 | — | 14,379,000 | |||||||||||||||||||||||||
|
Total
|
$ | 89,115,000 | $ | (17,468,000 | ) | $ | 71,647,000 | $ | 55,412,000 | $ | (9,533,000 | ) | $ | 45,879,000 | |||||||||||||||||||
The increase in trademarks and other (both amortized and
unamortized) in fiscal 2005 relates mainly to the acquisitions
of Signs & Labels and Electromark, which added
$4,376,000 and $1,600,000, respectively. In fiscal 2004, the
acquisitions of EMED and B.I.G. added $13,900,000 and $473,000,
respectively.
The increase in customer relationships in 2005 relates mainly to
the acquisitions of ID Technologies, Signs & Labels,
Technology, Print & Supply and Electromark, which added
$13,960,000, $5,870,000, $1,973,000 and $1,300,000,
respectively. In 2004, the acquisitions of EMED and B.I.G. added
$21,100,000 and $2,300,000, respectively.
The value of the intangible assets of ID Technologies,
Signs & Labels, and Technology Print Supplies in the
consolidated balance sheet at July 31, 2005 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.
Amortization expense of intangible assets during fiscal 2005,
2004, and 2003 was $7,935,000, $2,965,000, and $1,539,000
respectively. The amortization over each of the next five fiscal
years is projected to be $8,596,000, $8,240,000, $7,958,000,
$7,582,000 and $6,781,000 for the years ending July 31,
2006, 2007, 2008, 2009 and 2010, respectively.
Impairment of Long-Lived and Other Intangible
Assets — The Company evaluates whether events and
circumstances have occurred that indicate the remaining
estimated useful life of long-lived and other finite-lived
intangible assets may warrant revision or that the remaining
balance of an asset may not be recoverable. The measurement of
possible impairment is based on fair value of the assets
generally estimated by the ability to recover the balance of
assets from expected future operating cash flows on an
undiscounted basis. If an impairment is determined to exist, any
related impairment loss is calculated based on the fair value of
the asset.
II-22
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Impairment of Goodwill — The Company evaluates
goodwill under SFAS No. 142, which addresses the
financial accounting and reporting standards for the acquisition
of intangible assets outside of a business combination and for
goodwill and other intangible assets subsequent to their
acquisition. This accounting standard requires that goodwill not
be amortized, but instead be tested for impairment on at least
an annual basis.
The Company performed its annual assessments in the fourth
quarter of each year. The assessments included comparing the
carrying amount of net assets, including goodwill, of each
reporting unit to its respective fair value as of the date of
the assessment. Fair value was estimated based upon discounted
cash flow analyses. Because the estimated fair value of each of
the Company’s reporting units exceeded its carrying amount,
management believes that no impairment existed as of the date of
the latest assessment. No indications of impairment have been
identified between the date of the latest assessment and
July 31, 2005.
Catalog Costs — Direct response catalog costs
are primarily capitalized and amortized over the estimated
useful lives of the publications (generally less than one year).
Non-direct response catalog costs are recorded as prepaid
supplies and amortized to advertising expense as they are
consumed (less than one year). At July 31, 2005 and 2004,
$13,887,000 and $11,167,000, respectively of prepaid catalog
costs were included in prepaid expenses and other current assets.
Revenue Recognition — Revenue is recognized
when it is both earned and realized or realizable. The
Company’s policy is to recognize revenue when title to the
product, ownership and risk of loss have transferred to the
customer, persuasive evidence of an arrangement exits and
collection of the sales proceeds is reasonably assured, all of
which generally occur upon shipment of goods to customers. The
vast majority of the Company’s revenue relates to the sale
of inventory to customers, and revenue is recognized when title
and the risks and rewards of ownership pass to the customer.
Given the nature of the Company’s business and the
applicable rules guiding revenue recognition, the Company’s
revenue recognition practices do not contain estimates that
materially affect the results of operations.
Sales Incentives — In accordance with the
Financial Accounting Standard Board’s Emerging Issues Task
Force Issue (“EITF”) No. 01-9, “Accounting
for Consideration Given by a Vendor to a Customer or a Reseller
of the Vendor’s Product,” the Company accounts for
cash consideration (such as sales incentives and cash discounts)
given to its customers or resellers as a reduction of revenue
rather than an operating expense.
Shipping and Handling Fees and Costs — The
Company accounts for shipping and handling fees and costs in
accordance with EITF Issue No. 00-10, “Accounting for
Shipping and Handling Fees and Costs.” Under EITF
No. 00-10 amounts billed to a customer in a sale
transaction related to shipping costs are reported as net sales
and the related costs incurred for shipping are reported as cost
of goods sold.
Advertising Costs — Advertising costs are
expensed as incurred, except catalog costs as outlined above.
Advertising expense for the years ended July 31, 2005, 2004
and 2003 were $50,405,000, $46,143,000 and $43,833,000,
respectively.
Stock Based Compensation —
SFAS No. 123, “Accounting for Stock-Based
Compensation,” establishes a fair value based method of
accounting for stock-based compensation; however, it allows
companies to continue accounting for employee stock-based
compensation under the intrinsic value method prescribed by
Accounting Principles Board Opinion (“APB”)
No. 25, “Accounting for Stock Issued to
Employees.” The Company accounts for its stock based
compensation plans using the intrinsic value method in
accordance with APB No. 25. SFAS No. 123, as
amended by SFAS No. 148, “Accounting for
Stock-Based Compensation — Transition and
Disclosure,” requires certain disclosures, including
pro-forma net income and net income per share as if the fair
value based accounting method had been used for employee
stock-based compensation cost. The Company has adopted
SFAS No. 123 through disclosure with respect to
employee stock-based compensation.
II-23
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
If the Company had elected to recognize compensation cost for
the stock option plans based on the fair value at the grant
dates for awards under those plans, consistent with the method
prescribed by SFAS No. 123, net income and net income
per common share would have been changed to the pro forma
amounts indicated below:
| 2005 | 2004 | 2003 | |||||||||||
| (In thousands) | |||||||||||||
| (except per share amounts) | |||||||||||||
|
Net income:
|
|||||||||||||
|
As reported
|
$ | 81,947 | $ | 50,871 | $ | 21,420 | |||||||
|
Stock-based compensation expense recorded, net of tax effect
|
3,350 | 1,133 | 194 | ||||||||||
|
Pro-forma expense, net of tax effect
|
(3,344 | ) | (2,377 | ) | (2,232 | ) | |||||||
|
Pro-forma net income, net of tax effect
|
$ | 81,953 | $ | 49,627 | $ | 19,382 | |||||||
|
Net income per Class A Common Share:
|
|||||||||||||
|
Basic:
|
|||||||||||||
|
As reported
|
$ | 1.67 | $ | 1.08 | $ | 0.46 | |||||||
|
Pro-forma adjustments
|
— | (0.03 | ) | (0.04 | ) | ||||||||
|
Pro-forma net income per share
|
1.67 | 1.05 | 0.42 | ||||||||||
|
Diluted:
|
|||||||||||||
|
As reported
|
$ | 1.64 | $ | 1.07 | $ | 0.46 | |||||||
|
Pro-forma adjustments
|
— | (0.03 | ) | (0.04 | ) | ||||||||
|
Pro-forma net income per share
|
1.64 | 1.04 | 0.42 | ||||||||||
|
Net income per Class B Common Share:
|
|||||||||||||
|
Basic:
|
|||||||||||||
|
As reported
|
$ | 1.66 | $ | 1.06 | $ | 0.45 | |||||||
|
Pro-forma adjustments
|
— | (0.03 | ) | (0.04 | ) | ||||||||
|
Pro-forma net income per share
|
1.66 | 1.03 | 0.41 | ||||||||||
|
Diluted:
|
|||||||||||||
|
As reported
|
$ | 1.63 | $ | 1.05 | $ | 0.44 | |||||||
|
Pro-forma adjustments
|
— | (0.03 | ) | (0.04 | ) | ||||||||
|
Pro-forma net income per share
|
1.63 | 1.02 | 0.40 | ||||||||||
The fair value of stock options used to compute pro-forma net
income and net income per common share disclosure is the
estimated present value at grant date using the Black-Scholes
option-pricing model with weighted average assumptions and the
resulting estimated fair value for fiscal years 2005, 2004 and
2003 as follows:
| 2005 | 2004 | 2003 | ||||||||||
|
Risk-free interest rate
|
3.11 | % | 2.6 | % | 3.2 | % | ||||||
|
Expected volatility
|
31.1 | % | 36.5 | % | 38.5 | % | ||||||
|
Dividend yield
|
1.94 | % | 2.5 | % | 2.4 | % | ||||||
|
Expected option life
|
4.5 years | 4.0 years | 5.0 years | |||||||||
|
Weighted average estimated fair value at grant date
|
$7.04 | $8.81 | $9.62 | |||||||||
Research and Development — Amounts expended for
research and development are expensed as incurred.
II-24
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Other comprehensive income — Other
comprehensive income consists of foreign currency translation
adjustments, net unrealized gains and losses from cash flow
hedges and other investments, and their related tax effects. The
components of accumulated other comprehensive income were as
follows, in thousands:
| July 31, 2005 | July 31, 2004 | |||||||
|
Unrealized gain on cash flow hedges
|
$ | 779 | $ | 117 | ||||
|
Deferred tax on cash flow hedges
|
(304 | ) | (46 | ) | ||||
|
Cumulative translation adjustments
|
17,022 | 9,269 | ||||||
|
Accumulated other comprehensive income
|
$ | 17,497 | $ | 9,340 | ||||
Foreign Currency Translation — Foreign currency
assets and liabilities are translated into United States dollars
at end of period rates of exchange, and income and expense
accounts are translated at the weighted average rates of
exchange for the period. Resulting translation adjustments are
included in other comprehensive income.
Income Taxes — The Company accounts for income
taxes in accordance with SFAS No. 109,
“Accounting for Income Taxes,” which requires an asset
and liability approach to financial accounting and reporting for
income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial
statement and tax basis of assets and liabilities that will
result in taxable or deductible amounts in the future based on
enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense
is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and
liabilities.
Risk Management Activities — The Company is
exposed to market risk, such as changes in interest rates and
currency exchange rates. The Company does not hold or issue
derivative financial instruments for trading purposes.
Currency Rate Hedging — The primary objectives
of the foreign exchange risk management activities are to
understand and mitigate the impact of potential foreign exchange
fluctuations on the Company’s financial results and its
economic well-being. While the Company’s risk management
objectives and strategies will be driven from an economic
perspective, the Company will attempt, where possible and
practical, to ensure that the hedging strategies it engages in
can be treated as “hedges” from an accounting
perspective or otherwise result in accounting treatment where
the earnings effect of the hedging instrument provides
substantial offset (in the same period) to the earnings effect
of the hedged item. Generally, these risk management
transactions will involve the use of foreign currency
derivatives to protect against exposure resulting from
intercompany sales and identified inventory or other asset
purchases.
The Company primarily utilizes forward exchange contracts with
maturities of less than 12 months, which qualify as cash
flow hedges. These are intended to offset the effect of exchange
rate fluctuations on forecasted sales, inventory purchases and
intercompany charges. The fair value of these instruments at
July 31, 2005 and 2004 was $618,000 and $393,000,
respectively.
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.
New Accounting Standards — In December 2004,
the Financial Accounting Standards Board (“FASB”)
issued SFAS No. 123 (Revised 2004), “Share-Based
Payment” (“SFAS 123(R)”). This statement
revises SFAS No. 123 by eliminating the option to
account for employee stock options under APB No. 25 and
II-25
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
generally requires companies to recognize the cost of employee
services received in exchange for awards of equity instruments
based on the grant-date fair value of those awards (the
“fair-value-based” method). The Company intends to
adopt SFAS 123(R) on August 1, 2005. The Company
intends to use the Black-Scholes-Merton valuation model to
estimate the grant-date fair value of its equity compensation
under SFAS 123(R). The Company has not yet completed the
process of evaluating the impact that will result from adopting
SFAS 123(R) and therefore is unable to disclose the impact
that adopting SFAS 123(R) will have on its financial
position and results of operations when such statement is
adopted.
In November 2004, the FASB issued SFAS No. 151,
“Inventory Cost — an amendment of ARB
No. 43, Chapter 4,” which is the result of its
efforts to converge U.S. generally accepted accounting
standards for inventories with International Accounting
Standards. SFAS No. 151 requires idle facility
expenses, abnormal freight, handling costs, and wasted material
(spoilage) costs to be recognized as current-period
charges. It also requires that the allocation of fixed
production overhead costs to the costs of conversion be based on
the normal capacity of the production facilities.
SFAS No. 151 will be effective for inventory costs
incurred after July 31, 2005. The Company does not believe
the adoption of this standard will have a material effect on its
consolidated financial statements.
Reclassifications — Certain prior year amounts
have been reclassified to conform to the current year
presentation. The reclassifications did not impact the
Company’s net income or net income per share.
| 2. | Acquisitions of Businesses |
In January 2003, the Company acquired TISCOR, located in Poway,
California, an innovator in mobile workforce automation
solutions, and an industry leader in designing hand-held
computer software for technicians performing site and equipment
inspections. The purchase price was approximately $13,500,000 in
cash. The results of its operations have been included since the
respective date of acquisition in the accompanying consolidated
financial statements. The purchase price resulted in the
allocation to intangible assets as follows: $8,200,000 to
goodwill, $2,900,000 to customer relationships and $2,100,000 to
software.
In February 2003, the Company acquired Cleere Advantage Ltd., a
small printing system distributor located in the United Kingdom.
In April 2003, the Company acquired Etimark GmbH, located in Bad
Nauheim, Germany, a leading provider of complete barcode
solutions including labels, printers, applicators and software
for the German market. In July 2003, the Company acquired Aztech
Systems, an industrial labeling and signmaking system
distributor, located in Yorkshire, England. The combined
purchase price for these acquisitions was approximately
$8,100,000 in cash.
The allocation of the purchase price resulted in the allocation
to intangible assets as follows: $6,900,000 to goodwill,
$1,300,000 to customer lists, $400,000 to patents and $300,000
to non-compete agreements.
In September 2003, the Company acquired Brandon International,
Inc. (“Brandon”) headquartered in Baldwin Park,
California, with international operations in Mexico and
Singapore. Brandon is a manufacturer of die-cut products. In
October 2003, the Company acquired Prinzing Enterprises, Inc.
(“Prinzing”) located in Warrenville, Illinois.
Prinzing is a manufacturer of lockout/tagout products, signs and
other safety devices. In November 2003, the Company acquired
B.I.G, headquartered in the United Kingdom, a provider of
badging and business card solutions. The combined purchase price
for these acquisitions was approximately $31,700,000 in cash
(including $1,000,000 paid in February 2005). The Prinzing
acquisition agreement included provisions for contingent
payments up to a maximum $1,500,000 based on certain performance
criteria during fiscal year 2004. As of May 2004, these criteria
were met and the entire amount was paid to the sellers. The
allocation of the purchase price resulted in the allocation to
intangible assets as follows: $27,000,000 to goodwill, $500,000
to trademarks, $300,000 to patents, $200,000 to non-compete
agreements and $2,900,000 to customer lists.
II-26
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In May 2004, the Company acquired EMED for cash with a purchase
price of $191,800,000, net of cash acquired. EMED is a direct
marketer and manufacturer of identification, safety and facility
management products headquartered in Buffalo, New York. The
funds used to finance the purchase price came from borrowings on
the Company’s revolving credit facility and from working
capital.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of
acquisition. The difference between the purchase price of
$191,800,000 and the net assets acquired value of $193,800,000
relates to transaction costs.
|
Current Assets
|
$ | 40,036,000 | ||
|
Property, Plant & Equipment
|
6,800,000 | |||
|
Other Intangible Assets
|
35,300,000 | |||
|
Goodwill
|
114,331,000 | |||
|
Total Assets Acquired
|
196,467,000 | |||
|
Liabilities Assumed
|
2,667,000 | |||
|
Net Assets Acquired
|
$ | 193,800,000 | ||
The following unaudited pro-forma combined information, assuming
the EMED acquisition was completed on August 1, 2002, is
provided for illustrative purposes only and should not be relied
upon as necessarily being indicative of the historical results
that would have been obtained if this acquisition had actually
occurred during those periods, or the results that may be
obtained in the future.
| 2004 | 2003 | ||||||||
| (Dollars in thousands) | |||||||||
|
Net Sales
|
$ | 714,848 | $ | 611,938 | |||||
|
Net Income
|
$ | 57,091 | $ | 29,051 | |||||
|
Reported net income per share: Class A
|
|||||||||
|
Basic
|
1.08 | 0.46 | |||||||
|
Diluted
|
1.07 | 0.46 | |||||||
|
Pro-forma net income per share: Class A
|
|||||||||
|
Basic
|
1.21 | 0.63 | |||||||
|
Diluted
|
1.20 | 0.62 | |||||||
|
Reported net income per share: Class B
|
|||||||||
|
Basic
|
1.06 | 0.45 | |||||||
|
Diluted
|
1.05 | 0.44 | |||||||
|
Pro-forma net income per share: Class B
|
|||||||||
|
Basic
|
1.19 | 0.61 | |||||||
|
Diluted
|
1.18 | 0.61 | |||||||
Of the $35,300,000 of acquired intangible assets, $13,900,000
was assigned to trademarks that are not subject to amortization,
$21,100,000 was assigned to customer relationships and is being
amortized over 7 years and $300,000 was assigned to
non-compete agreements, which are amortized over 2 years.
Remaining tax goodwill of $94,300,000 is expected to be
deductible for tax purposes over the next nine years.
In August 2004 the Company acquired ID Technologies, a Singapore
based manufacturer and supplier of pressure sensitive die-cut
components and labeling products with annual sales of
approximately $24,000,000. The purchase price was approximately
$42,800,000 in cash. The purchase price includes a holdback
amount of
II-27
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
$6,500,000, which will be paid in August 2006 and is recorded in
other liabilities in the accompanying consolidated balance sheet
at July 31, 2005. Interest is imputed on the holdback at a
rate of 4.9% per year. The agreement also provides for a
contingent payment of no more than $2,500,000 if ID Technologies
meets certain financial targets for the fiscal year ended
July 31, 2005. As of July 31, 2005, the financial
targets have been met and the corresponding liability is
reflected in the consolidated financial statements at the
maximum payment amount. Of the purchase price, $25,926,000 was
assigned to goodwill and $16,017,000 was assigned to other
intangible assets in the purchase price allocation. The
allocation of these intangible assets included approximately
$13,500,000 for customer relationships, $2,300,000 for
non-compete agreements, and $217,000 of other intangible assets.
There is no remaining goodwill expected to be deductible for tax
purposes.
In February 2005, the Company acquired Electromark, a
manufacturer and supplier of safety and facility identification
products to the utility industry, headquartered in Wolcott, New
York. The purchase price was approximately $15,100,000 in cash.
Of the purchase price, a total of $3,500,000 was assigned to
intangible assets other than goodwill and $8,344,000 was
assigned to goodwill in the allocation of the purchase price.
The intangible assets consist of approximately $1,300,000 of
customer relationships, $1,600,000 of trademarks, and $600,000
of other intangible assets at the time of acquisition. Remaining
tax goodwill of $52,000 is expected to be deductible for tax
purposes.
In June 2005, the Company acquired Signs and Labels Ltd., a
provider of stock and custom signage, custom safety signs,
architectural signs and modular signage systems for business
offices, schools and hospitals in the United Kingdom. The
purchase price was approximately $24,000,000 in cash. Of the
purchase price, a total of $10,955,000 was assigned to
intangible assets other than goodwill and $18,326,000 was
assigned to goodwill in the preliminary allocation of the
purchase price. The intangible assets identified in the
preliminary allocation of the purchase price consist of
approximately $5,800,000 of customer relationships, $4,600,000
of trademarks, and $555,000 of non-compete and other.
Immediately following the acquisition, all outstanding debt of
Signs & Labels, approximately $2,500,000, was repaid
with cash. There is no remaining goodwill expected to be
deductible for tax purposes.
In July 2005, the Company acquired the businesses of Technology
Print Supplies, Ltd., and its associate, Technology and Supply
Media Co., Ltd., manufacturers and suppliers of pressure
sensitive labels, nameplates and tags in Thailand. The purchase
price was approximately $5,250,000 in cash. Of the purchase
price, a total of $2,400,000 was assigned to intangible assets
other than goodwill and $2,250,000 was assigned to goodwill in
the preliminary allocation of the purchase price.
Of the cash purchase price, a portion is being withheld until
legal ownership of the facility owned by Technology Print
Supplies, Ltd is transferred to Brady Corporation. The
intangible assets identified in the preliminary allocation of
the purchase price include approximately $1,900,000 of customer
relationships and $500,000 of non-compete agreements and other.
Remaining tax goodwill of $2,250,000 is expected to be
deductible for tax purposes based on the preliminary allocation
of the purchase price.
The results of the operations of the acquired businesses have
been included since their respective dates of acquisition in the
accompanying consolidated financial statements.
On August 2, 2005, the Company acquired STOPware, Inc.
(“Stopware”), in San Jose, California. STOPware
is the market leader in visitor-badging and lobby-security
software used to identify and track visitors in a variety of
settings. STOPware had sales of approximately $2,000,000 during
the year ended July 31, 2005.
On September 1, 2005, the Company acquired Texit AS
(“Texit”), a wire-marker manufacturer headquartered in
Odense, Denmark, with operations in Alesund, Norway. Texit had
sales of approximately $9,000,000 in calendar 2004.
II-28
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 3. | Employee Benefit Plans |
The Company provides postretirement medical, dental and vision
benefits (the “Plan”) for all regular full and
part-time domestic employees (including spouses) who retire 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 employee’s age
and service at retirement.
The Company accounts for postretirement benefits other than
pensions in accordance with SFAS No. 106,
“Employers’ Accounting for Postretirement Benefits
Other than Pensions.” The Company funds benefit costs on a
pay-as-you-go basis. During fiscal 2004, there was a change in
the Plan relating to deductibles and co-payment amounts and is
reported under plan amendments. The change reduced the
accumulated benefits obligation by $552,000 during the year
ended July 31, 2004.
The following table provides a reconciliation of the changes in
the Plan’s accumulated benefit obligations during the years
ended July 31:
| 2005 | 2004 | |||||||
| (In thousands) | ||||||||
|
Obligation at beginning of year
|
$ | 12,606 | $ | 11,413 | ||||
|
Service cost
|
895 | 866 | ||||||
|
Plan amendments
|
0 | (552 | ) | |||||
|
Interest cost
|
689 | 719 | ||||||
|
Actuarial (gain) loss
|
(373 | ) | 797 | |||||
|
Other Events (Medicare Part D)
|
(2,227 | ) | 0 | |||||
|
Benefit payments
|
(681 | ) | (637 | ) | ||||
|
Obligation at end of fiscal year
|
$ | 10,909 | $ | 12,606 | ||||
The following table outlines the unfunded status of the Plan
recorded as a long-term liability in the accompanying
consolidated balance sheets as of July 31, 2005 and 2004:
| 2005 | 2004 | |||||||
| (In thousands) | ||||||||
|
Unfunded status at July 31
|
$ | 10,909 | $ | 12,606 | ||||
|
Unrecognized net actuarial gain
|
3,470 | 997 | ||||||
|
Unrecognized prior service gain
|
343 | 376 | ||||||
|
Accumulated postretirement benefit obligation liability
|
$ | 14,722 | $ | 13,979 | ||||
II-29
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Net periodic benefit cost for the Plan for fiscal years 2005,
2004 and 2003 includes the following components:
| Years Ended July 31, | |||||||||||||
| 2005 | 2004 | 2003 | |||||||||||
| (In thousands) | |||||||||||||
|
Net periodic postretirement benefit cost included the following
components:
|
|||||||||||||
|
Service cost — benefits attributed to service during
the period
|
$ | 895 | $ | 866 | $ | 658 | |||||||
|
Prior service cost
|
(33 | ) | 22 | 22 | |||||||||
|
Interest cost on accumulated postretirement benefit obligation
|
689 | 719 | 726 | ||||||||||
|
Amortization of unrecognized gain
|
(127 | ) | (54 | ) | (182 | ) | |||||||
|
Periodic postretirement benefit cost
|
$ | 1,424 | $ | 1,553 | $ | 1,224 | |||||||
The following assumptions were used in accounting for the plan:
| 2005 | 2004 | |||||||
|
Weighted average discount rate used in determining accumulated
postretirement benefit obligation liability
|
5.0 | % | 6.0 | % | ||||
|
Weighted average discount rate used in determining net periodic
benefit cost
|
6.0 | % | 6.0 | % | ||||
|
Assumed health care trend rate used to measure APBO at
July 31
|
11.0 | % | 12.0 | % | ||||
|
Rate to which cost trend rate is assumed to decline (the
ultimate trend rate)
|
5.5 | % | 5.5 | % | ||||
|
Fiscal year the ultimate trend rate is reached
|
2011 | 2011 | ||||||
The assumed health care cost trend rate has a significant effect
on the amounts reported for the Plan. A one-percentage point
change in assumed health care cost trend rates would have the
following effects:
| One-Percentage | One-Percentage | |||||||
| Point Increase | Point Decrease | |||||||
| (In thousands) | ||||||||
|
Effect on future service and interest cost
|
$ | 130 | $ | (114 | ) | |||
|
Effect on accumulated postretirement benefit obligation at
July 31, 2005
|
713 | (632 | ) | |||||
The mortality tables used in the valuation reports were changed
to the RP 2000 tables in order to reflect the most up-to-date
tables available. The effect of this change on the valuation was
insignificant.
The following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid during the
years ending July 31:
| Prior to | After | Impact of | ||||||||||
| Medicare Part D | Medicare Part D | Medicare Part D | ||||||||||
| (In thousands) | ||||||||||||
|
2006
|
$ | 665 | $ | 603 | $ | (62 | ) | |||||
|
2007
|
705 | 591 | (116 | ) | ||||||||
|
2008
|
751 | 624 | (127 | ) | ||||||||
|
2009
|
804 | 666 | (138 | ) | ||||||||
|
2010
|
851 | 699 | (152 | ) | ||||||||
|
2011 through 2015
|
5,029 | 4,079 | (950 | ) | ||||||||
The Company expects to fund approximately $603,000 in fiscal
2006, which is equivalent to total expected payments in
fiscal 2006.
II-30
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In December 2003, the United States enacted into law the
Medicare Prescription Drug, Improvement and Modernization Act of
2003 (the “Act”). The Act establishes a prescription
drug benefit under Medicare (Medicare Part D) as well as a
federal subsidy to sponsors of retiree health care benefit plans
that provide a benefit that is at least actuarially equivalent
to Medicare Part D.
In May 2004, the Financial Accounting Standards Board
issued FSP 106-2, “Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003”. FSP 106-2
requires companies to account for the effect of the subsidy on
benefits attributable to past service as an actuarial experience
gain and as a reduction of the service cost component of net
postretirement health care costs for amounts attributable to
current service, if the benefit provided is at least actuarially
equivalent to Medicare Part D.
The Company elected to adopt FSP 106-2 effective with the
fiscal year beginning August 1, 2004. The Company
determined that benefits provided to certain participants are
expected to be at least actuarially equivalent to Medicare
Part D, and, accordingly, the Company will be entitled to a
subsidy. The expected subsidy reduced the accumulated
postretirement benefit obligation at August 1, 2004 by
approximately $2,200,000 and net periodic cost for the year
ended July 31, 2005 by $463,000 as compared with the amount
calculated without considering the effects of the subsidy.
Assumptions used to develop these reductions include those used
in the determination of the annual expense under
SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits other than Pensions,” and also
include expectations of how the federal program would ultimately
operate.
The Company has retirement and profit-sharing plans covering
substantially all full-time domestic employees and certain of
its foreign subsidiaries. Contributions to the plans are
determined annually or quarterly, according to the respective
plans, based on earnings of the respective companies and
employee contributions. At July 31, 2005 and 2004,
$5,048,000 and $4,701,000, respectively, of accrued
profit-sharing contributions were included in other current
liabilities in the accompanying consolidated balance sheet.
The Company also has deferred compensation plans for directors,
officers and key executives which are discussed below. At
July 31, 2005 and 2004, $7,999,000 and $5,683,000,
respectively, of deferred compensation was included in current
and other long-term liabilities on the accompanying consolidated
balance sheet.
During fiscal 1998, the Company adopted a new deferred
compensation plan that invests solely in shares of the
Company’s Class A Nonvoting Common Stock. Participants
in a predecessor phantom stock plan were allowed to convert
their balances in the old plan to this new plan. The new plan
was funded initially by the issuance of 372,728 (745,456
subsequent to two-for-one stock split in the form of a 100%
stock dividend, effective December 31, 2004) shares of
Class A Nonvoting Common Stock to a Rabbi Trust. All
deferrals into the new plan result in purchases of Class A
Nonvoting Common Stock by the Rabbi Trust. No deferrals are
allowed into a predecessor plan. Shares held by the Rabbi Trust
are distributed to participants upon separation from the Company
as defined in the plan agreement.
During fiscal 2002, the Company adopted a new deferred
compensation plan that allows future contributions to be
invested in shares of the Company’s Class A Nonvoting
Common Stock or in certain other investment vehicles. Prior
deferred compensation deferrals must remain in the
Company’s Class A Nonvoting Common Stock. All
participant deferrals into the new plan result in purchases of
Class A Nonvoting Common Stock or certain other investment
vehicles by the Rabbi Trust. Balances held by the Rabbi Trust
are distributed to participants upon separation from the Company
as defined in the plan agreement.
The amounts charged to expense for the retirement, profit
sharing and deferred compensation plans described above were
$10,980,000, $9,373,000, and $8,506,000 during the years ended
July 31, 2005, 2004 and 2003, respectively.
II-31
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 4. | Income Taxes |
Income taxes consist of the following:
| Years Ended July 31, | |||||||||||||
| 2005 | 2004 | 2003 | |||||||||||
| (Dollars in thousands) | |||||||||||||
|
Currently payable:
|
|||||||||||||
|
Federal
|
$ | 10,002 | $ | 2,645 | $ | 1,556 | |||||||
|
Foreign
|
24,286 | 10,903 | 10,329 | ||||||||||
|
State
|
1,836 | 736 | 1,065 | ||||||||||
| 36,124 | 14,284 | 12,950 | |||||||||||
|
Deferred provision (credit):
|
|||||||||||||
|
Federal
|
(1,215 | ) | 1,075 | (2,004 | ) | ||||||||
|
Foreign
|
(855 | ) | 3,558 | 851 | |||||||||
|
State
|
(583 | ) | 539 | (762 | ) | ||||||||
| (2,653 | ) | 5,172 | (1,915 | ) | |||||||||
|
Total
|
$ | 33,471 | $ | 19,456 | $ | 11,035 | |||||||
Deferred income taxes result from temporary differences in the
recognition of revenues and expenses for financial statement and
income tax purposes.
Income before income taxes consists of the
following:
| Years Ended July 31, | |||||||||||||
| 2005 | 2004 | 2003 | |||||||||||
| (Dollars in thousands) | |||||||||||||
|
Domestic
|
$ | 36,985 | $ | 15,911 | $ | 3,371 | |||||||
|
Foreign
|
78,433 | 54,416 | 29,084 | ||||||||||
|
Total
|
$ | 115,418 | $ | 70,327 | $ | 32,455 | |||||||
II-32
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The approximate tax effects of temporary differences are as
follows:
| July 31, 2005 | |||||||||||||
| Assets | Liabilities | Total | |||||||||||
| (Dollars in thousands) | |||||||||||||
|
Inventories
|
$ | 3,203 | $ | 3,203 | |||||||||
|
Prepaid catalog costs
|
$ | (2,130 | ) | (2,130 | ) | ||||||||
|
Employee benefits
|
1,675 | 1,675 | |||||||||||
|
Allowance for doubtful accounts
|
391 | 391 | |||||||||||
|
Other, net
|
3,016 | 3,016 | |||||||||||
|
Current
|
8,285 | (2,130 | ) | 6,155 | |||||||||
|
Depreciation and amortization
|
(16,873 | ) | (16,873 | ) | |||||||||
|
Intangibles
|
23,568 | 23,568 | |||||||||||
|
Capitalized R&D expenditures
|
3,266 | 3,266 | |||||||||||
|
Deferred compensation
|
11,205 | 11,205 | |||||||||||
|
Postretirement benefits
|
7,232 | 7,232 | |||||||||||
|
Currency translation adjustment
|
(304 | ) | (304 | ) | |||||||||
|
Tax loss carryforwards
|
5,038 | 5,038 | |||||||||||
|
Less valuation allowance
|
(4,877 | ) | (4,877 | ) | |||||||||
|
Other, net
|
(545 | ) | (545 | ) | |||||||||
|
Noncurrent
|
45,432 | (17,722 | ) | 27,710 | |||||||||
|
Total
|
$ | 53,717 | $ | (19,852 | ) | $ | 33,865 | ||||||
| July 31, 2004 | |||||||||||||
| Assets | Liabilities | Total | |||||||||||
| (Dollars in thousands) | |||||||||||||
|
Inventories
|
$ | 2,675 | $ | 2,675 | |||||||||
|
Prepaid catalog costs
|
$ | (1,559 | ) | (1,559 | ) | ||||||||
|
Employee benefits
|
2,034 | 2,034 | |||||||||||
|
Allowance for doubtful accounts
|
490 | 490 | |||||||||||
|
Other, net
|
2,469 | 2,469 | |||||||||||
|
Current
|
7,668 | (1,559 | ) | 6,109 | |||||||||
|
Depreciation and amortization
|
(11,717 | ) | (11,717 | ) | |||||||||
|
Intangibles
|
26,433 | 26,433 | |||||||||||
|
Capital R&D expenditures
|
3,733 | 3,733 | |||||||||||
|
Deferred compensation
|
7,214 | 7,214 | |||||||||||
|
Postretirement benefits
|
6,233 | 6,233 | |||||||||||
|
Currency translation adjustment
|
(4,432 | ) | (4,432 | ) | |||||||||
|
Tax loss carryforwards
|
5,534 | 5,534 | |||||||||||
|
Less valuation allowance
|
(5,534 | ) | (5,534 | ) | |||||||||
|
Other, net
|
1,373 | 1,373 | |||||||||||
|
Noncurrent
|
44,986 | (16,149 | ) | 28,837 | |||||||||
|
Total
|
$ | 52,654 | $ | (17,708 | ) | $ | 34,946 | ||||||
II-33
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The valuation allowance decreased $657,000 and $740,000 during
the fiscal years ended July 31, 2005 and 2004, respectively
and increased $1,627,000 during the fiscal year ended
July 31, 2003.
Tax loss carryforwards are comprised of foreign net operating
losses of approximately $10,000,000 of which $9,500,000 never
expire. The remaining balance relates to state net operating
losses of $31,250,000 and state credits of $1,400,000. The
Company expects to utilize all credits, however state net
operating losses will begin to expire in the fiscal year ending
July 31, 2006.
| Rate Reconciliation |
The effective tax rate differed from the statutory federal
income tax rate of 35% as described below:
| Years Ended July 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
|
Tax at statutory rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State income taxes, net of Federal tax benefit
|
0.7 | % | 1.2 | % | 0.6 | % | ||||||
|
International losses with no related tax benefits
|
0.0 | % | 0.4 | % | 3.1 | % | ||||||
|
International rate differential
|
(4.1 | )% | (7.2 | )% | (3.8 | )% | ||||||
|
Rate variances arising from foreign subsidiary distributions
|
(1.1 | )% | 1.4 | % | 0.1 | % | ||||||
|
Resolution of prior period tax matters
|
(0.6 | )% | (4.2 | )% | 0.0 | % | ||||||
|
Other, net
|
(0.9 | )% | 1.1 | % | (1.0 | )% | ||||||
|
Effective tax rate
|
29.0 | % | 27.7 | % | 34.0 | % | ||||||
| Unremitted Earnings |
The Company’s policy is to remit earnings from foreign
subsidiaries only to the extent any resultant foreign income
taxes are creditable in the United States. Accordingly, the
Company does not currently provide for the additional United
States and foreign income taxes which would become payable upon
remission of undistributed earnings of foreign subsidiaries. The
cumulative undistributed earnings of such subsidiaries at
July 31, 2005 amounted to approximately $183,650,000.
| 5. | Long-Term Obligations |
On March 31, 2004, the Company entered into an unsecured
$215,000,000 multicurrency revolving loan agreement with a group
of five banks. The $215,000,000 was divided between a 5-year
credit facility for $125,000,000 and a 364-day credit facility
for $90,000,000. On July 6, 2004, the Company permanently
reduced the borrowings on the 364-day facility to $0 and closed
the facility. Under the 5-year agreement, which has a final
maturity date of March 31, 2009, the Company has the option
to have interest rates determined based upon the prime rate at
Bank of America plus margin or a LIBOR rate plus margin. A
commitment fee is payable on the unused amount of credit. The
agreement requires the Company to maintain certain financial
covenants. The Company is in compliance with the covenants of
the agreement. The agreement restricts the amount of certain
types of payments, including dividends, which can be made
annually to $25 million plus 50% of the consolidated net
income for the prior year, totaling approximately
$50 million in 2005. The Company believes that based on its
historic dividend practice, this restriction will not impede it
from following a similar dividend practice in the future. As of
July 31, 2005, there were no outstanding borrowings on the
5-year revolving loan agreement.
On June 30, 2004, the Company finalized a debt offering of
$150,000,000 of 5.14% fixed rate unsecured senior notes due in
2014 in an offering exempt from the registration requirements of
the Securities Act of 1933. The debt offering was in conjunction
with the Company’s acquisition of EMED. The notes will be
II-34
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
repaid over 7 years beginning in 2008 with interest payable
on the notes semiannually on June 28 and December 28
beginning in December 2004. Interest payments were made on
December 28, 2004 and June 28, 2005. The Company used
the proceeds of the offering to reduce outstanding indebtedness
under the Company’s revolving credit facilities. The debt
has certain prepayment penalties for repaying the debt prior to
its maturity date. The agreement also requires the Company to
maintain a financial covenant. As of July 31, 2005, the
Company was in compliance with this covenant.
Long-term obligations consist of the following as of
July 31:
| 2005 | 2004 | |||||||
| (In thousands) | ||||||||
|
Various Bank loans
|
$ | 30 | $ | 51 | ||||
|
Fixed Debt
|
150,000 | 150,000 | ||||||
| 150,030 | 150,051 | |||||||
|
Less Current maturities
|
$ | (4 | ) | $ | (32 | ) | ||
| $ | 150,026 | $ | 150,019 | |||||
The fair value of the Company’s long-term obligations
approximates $150,674,000. The fair value of the Company’s
long-term obligations is estimated based on quoted market prices
for the same or similar issue and on the current rates offered
for debt of the same maturities.
Maturities on long-term debt are as follows:
| Years Ending July 31, | ||||
| (In thousands) | ||||
|
2006
|
$ | 4 | ||
|
2007
|
19 | |||
|
2008
|
21,433 | |||
|
2009
|
21,432 | |||
|
2010
|
21,429 | |||
|
Thereafter
|
85,713 | |||
|
Total
|
$ | 150,030 | ||
The Company had outstanding letters of credit of $2,114,000 and
$2,072,000 at July 31, 2005 and 2004, respectively.
II-35
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 6. | Stockholders’ Investment |
Information as to the Company’s capital stock at
July 31, 2005 and 2004 is as follows(1):
| July 31, 2005 | July 31, 2004 | ||||||||||||||||||||||||
| Shares | Shares | Shares | Shares | ||||||||||||||||||||||
| Authorized | Issued | Amount | Authorized | Issued | Amount | ||||||||||||||||||||
| (Dollars in | (Dollars in | ||||||||||||||||||||||||
| thousands) | thousands) | ||||||||||||||||||||||||
|
Preferred Stock, $.01 par value
|
5,000,000 | 5,000,000 | |||||||||||||||||||||||
|
Cumulative Preferred Stock:
|
|||||||||||||||||||||||||
|
6% Cumulative
|
5,000 | 5,000 | |||||||||||||||||||||||
|
1972 Series
|
10,000 | 10,000 | |||||||||||||||||||||||
|
1979 Series
|
30,000 | 30,000 | |||||||||||||||||||||||
|
Common Stock, $.01 par value:
|
|||||||||||||||||||||||||
|
Class A Nonvoting
|
100,000,000 | 45,792,199 | $ | 458 | 100,000,000 | 44,690,798 | $ | 447 | |||||||||||||||||
|
Class B Voting
|
10,000,000 | 3,538,628 | 35 | 10,000,000 | 3,538,628 | 35 | |||||||||||||||||||
| $ | 493 | $ | 482 | ||||||||||||||||||||||
| (1) | Adjusted for two-for-one stock split in the form of a 100% stock dividend, effective December 31, 2004. |
On August 1, 2002, all Cumulative Preferred Stock was
redeemed at a 6% premium for approximately $3,026,000. Each
share of $100 par value Cumulative Preferred Stock was
entitled to receive cumulative cash dividends and could be
redeemed, under certain circumstances, by the Company at par
value plus accrued dividends plus a premium of 6% of the par
value. Such shares, which were held by the initial holder
thereof, were subject to redemption only if the holder consented
thereto.
Before any dividend may be paid on the Class B Common
Stock, holders of the Class A Common Stock are entitled to
receive an annual, noncumulative cash dividend of
$.01665 per share. Thereafter, any further dividend in that
fiscal year must be paid on each share of Class A Common
Stock and Class B Common Stock on an equal basis.
Holders of the Class A Common Stock are not entitled to any
vote on corporate matters, unless, in each of the three
preceding fiscal years, the $.01665 preferential dividend
described above has not been paid in full. Holders of the
Class A Common Stock are entitled to one vote per share for
the entire fiscal year immediately following the third
consecutive fiscal year in which the preferential dividend is
not paid in full. Holders of Class B Common Stock are
entitled to one vote per share for the election of directors and
for all other purposes.
Upon liquidation, dissolution or winding up of the Company, and
after distribution of any amounts due to holders of Cumulative
Preferred Stock, holders of the Class A Common Stock are
entitled to receive the sum of $0.835 per share before any
payment or distribution to holders of the Class B Common
Stock. Thereafter, holders of the Class B Common Stock are
entitled to receive a payment or distribution of $0.835 per
share. Thereafter, holders of the Class A Common Stock and
Class B Common Stock share equally in all payments or
distributions upon liquidation, dissolution or winding up of the
Company.
The preferences in dividends and liquidation rights of the
Class A Common Stock over the Class B Common Stock
will terminate at any time that the voting rights of
Class A Common Stock and Class B Common Stock become
equal.
II-36
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following is a summary of other activity in
stockholders’ investment for the years ended July 31,
2003, 2004 and 2005:
| Unearned | Shares Held | |||||||||||||||
| Restricted | Deferred | in Rabbi | ||||||||||||||
| Stock | Compensation | Trust, at cost | Total | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Balances July 31, 2002
|
$ | (248 | ) | $ | 14,332 | $ | (14,332 | ) | $ | (248 | ) | |||||
|
Sale of shares at cost
|
(430 | ) | 430 | |||||||||||||
|
Purchase of shares at cost
|
823 | (823 | ) | |||||||||||||
|
Issuance of restricted stock
|
(670 | ) | (670 | ) | ||||||||||||
|
Amortization of restricted stock
|
290 | 290 | ||||||||||||||
|
Balances July 31, 2003
|
$ | (628 | ) | $ | 14,725 | $ | (14,725 | ) | $ | (628 | ) | |||||
|
Shares at July 31, 2003
|
||||||||||||||||
|
Adjusted for two-for-one stock split in the form of a 100% stock
dividend, effective December 31, 2004
|
969,058 | 969,058 | ||||||||||||||
|
Sale of shares at cost
|
(411 | ) | 411 | |||||||||||||
|
Purchase of shares at cost
|
880 | (880 | ) | |||||||||||||
|
Amortization of restricted stock
|
346 | 346 | ||||||||||||||
|
Balances July 31, 2004
|
$ | (282 | ) | $ | 15,194 | $ | (15,194 | ) | $ | (282 | ) | |||||
|
Shares at July 31, 2004
|
||||||||||||||||
|
Adjusted for two-for-one stock split in the form of a 100% stock
dividend, effective December 31, 2004
|
988,534 | 988,534 | ||||||||||||||
|
Sale of shares at cost
|
(498 | ) | 579 | 81 | ||||||||||||
|
Purchase of shares at cost
|
516 | (1,210 | ) | (694 | ) | |||||||||||
|
Amortization of restricted stock
|
282 | 282 | ||||||||||||||
|
Other
|
(437 | ) | (437 | ) | ||||||||||||
|
Balances at July 31, 2005
|
$ | 0 | $ | 14,775 | $ | (15,825 | ) | $ | (1,050 | ) | ||||||
|
Shares at July 31, 2005
|
950,222 | 997,034 | ||||||||||||||
Prior to 2002, all Brady Corporation deferred compensation was
invested in Brady stock. In 2002, the Company adopted a new
deferred compensation plan which allowed investing in other
investment funds in addition to Brady stock. The deferred
compensation balance in stockholders’ investment represents
the investment at cost of shares held in Brady stock for the
deferred compensation plan prior to 2002. The balance of shares
held in the Rabbi Trust represents the investment in Brady stock
at cost of all Brady stock held in deferred compensation plans.
The Company’s Employee Monthly Stock Investment Plan
(“the Plan”) provides that eligible employees may
authorize a fixed dollar amount between $20 and $500 per
month to be deducted from their pay. The funds deducted are
forwarded to the Plan administrator and are used to purchase
Brady stock at the market price. As part of the Plan, Brady pays
all brokerage fees for stock purchases and dividend
reinvestments.
The Company’s Nonqualified Stock Option Plans allow the
granting of stock options to various officers, directors and
other employees of the Company at prices equal to fair market
value at the date of grant. The Company has reserved 3,000,000,
4,250,000, 1,000,000, 1,500,000, and 1,500,000 shares of
Class A Nonvoting
II-37
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Common Stock for issuance under the 1989, 1997, 2001, 2003, and
2004 Plans, respectively, adjusted for a two-for-one stock split
in the form of a 100% stock dividend, effective
December 31, 2004. Generally, options will not be
exercisable until one year after the date of grant, and will be
exercisable thereafter, to the extent of one-third per year and
have a maximum term of ten years.
Changes in the options are as follows(1):
| Weighted | ||||||||||||
| Average | ||||||||||||
| Options | Exercise | |||||||||||
| Option Price | Outstanding | Price | ||||||||||
|
Balance, July 31, 2002
|
$ 6.08 - $17.00 | 4,317,964 | 13.11 | |||||||||
|
Options granted
|
13.31 - 16.39 | 816,600 | 15.64 | |||||||||
|
Options exercised
|
6.08 - 16.44 | (390,748 | ) | 11.93 | ||||||||
|
Options Cancelled
|
14.16 - 17.00 | (48,934 | ) | 14.76 | ||||||||
|
Balance, July 31, 2003
|
$6.08 - $17.00 | 4,694,882 | $ | 13.62 | ||||||||
|
Options granted
|
17.02 - 20.15 | 942,000 | 17.29 | |||||||||
|
Options exercised
|
6.08 - 16.44 | (1,607,058 | ) | 12.09 | ||||||||
|
Options Cancelled
|
14.16 - 17.33 | (157,340 | ) | 15.97 | ||||||||
|
Balance, July 31, 2004
|
$ 6.08 - $20.15 | 3,872,484 | $ | 15.05 | ||||||||
|
Options granted
|
22.63 - 31.54 | 888,000 | 27.27 | |||||||||
|
Options exercised
|
9.59 - 17.33 | (1,117,431 | ) | 14.08 | ||||||||
|
Options Cancelled
|
9.59 - 17.33 | (113,722 | ) | 15.82 | ||||||||
|
Balance, July 31, 2005
|
$ 9.59 - $31.54 | 3,529,331 | $ | 18.41 | ||||||||
|
Available for grant after July 31, 2005
|
1,307,334 | |||||||||||
| (1) | Adjusted for a two-for-one stock split in the form of a 100% stock dividend, effective December 31, 2004. |
There were 1,772,930, 2,142,578 and 3,010,184 options
exercisable with a weighted average exercise price of $14.84,
$13.94, and $12.79 at July 31, 2005, 2004 and 2003,
respectively.
The following table summarizes information about stock options
outstanding at July 31, 2005:
| Options Outstanding and | |||||||||||||||||||||
| Options Outstanding | Exercisable | ||||||||||||||||||||
| Weighted Average | Weighted | Shares | Weighted | ||||||||||||||||||
| Number of Shares | Remaining | Average | Exercisable | Average | |||||||||||||||||
| Range of | Outstanding at | Contractual Life | Exercise | at July 31, | Exercise | ||||||||||||||||
| Exercise Prices | July 31, 2005 | (in years) | Price | 2005 | Price | ||||||||||||||||
|
Up to $15.49
|
1,083,234 | 4.6 | 13.38 | 936,567 | 13.25 | ||||||||||||||||
|
$15.50 - $19.99
|
1,522,097 | 6.2 | 16.78 | 824,363 | 16.56 | ||||||||||||||||
|
$20.00 and up
|
924,000 | 9.0 | 26.99 | 12,000 | 20.15 | ||||||||||||||||
|
Total
|
3,529,331 | 6.4 | 18.41 | 1,772,930 | 14.84 | ||||||||||||||||
| 7. | Segment Information |
The Company evaluates short-term regional performance based on
segment profit or loss and customer sales. Corporate short-term
performance is evaluated based on shareholder value enhancement
(“SVE”), which incorporates the cost of capital (11%
in fiscal 2005) as a hurdle rate for capital expenditures, new
II-38
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
product development, acquisitions, and long-term lines of
business. Segment profit or loss does not include certain
administrative costs, interest, foreign exchange gain or loss,
restructuring charges, other expenses not allocated to a
segment, and income taxes. The accounting policies of the
reportable segments are the same as those described in the
summary of significant accounting policies.
The Company’s reportable segments are geographical regions
that are each managed separately. Due to the change to a
regional management structure at the beginning of fiscal 2004,
in 2004 the Company restated the corresponding segment
information from its previous group-based structure for fiscal
2003. The Company has three reportable segments: Americas,
Europe and Asia. Each reportable segment derives its revenue
from the same types of products and services.
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.
| Corporate | |||||||||||||||||||||||||
| and | |||||||||||||||||||||||||
| Americas | Europe | Asia | Subtotals | Eliminations | Totals | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||
|
Year ended July 31, 2005:
|
|||||||||||||||||||||||||
|
Revenues from external customers
|
$ | 417,780 | $ | 274,691 | $ | 123,976 | $ | 816,447 | $ | 816,447 | |||||||||||||||
|
Intersegment revenues
|
45,284 | 2,774 | 4,402 | 52,460 | $ | (52,460 | ) | ||||||||||||||||||
|
Depreciation and amortization expense
|
17,428 | 4,140 | 4,323 | 25,891 | 931 | 26,822 | |||||||||||||||||||
|
Segment profit (loss)
|
98,193 | 79,792 | 34,228 | 212,213 | (4,845 | ) | 207,368 | ||||||||||||||||||
|
Assets
|
446,829 | 171,536 | 111,048 | 729,413 | 120,734 | 850,147 | |||||||||||||||||||
|
Expenditures for property, plant and equipment
|
11,858 | 1,484 | 6,050 | 19,392 | 2,528 | 21,920 | |||||||||||||||||||
|
Year ended July 31, 2004:
|
|||||||||||||||||||||||||
|
Revenues from external customers
|
$ | 341,975 | $ | 248,255 | $ | 80,989 | $ | 671,219 | $ | 671,219 | |||||||||||||||
|
Intersegment revenues
|
40,764 | 2,199 | 4,165 | 47,128 | $ | (47,128 | ) | ||||||||||||||||||
|
Depreciation and amortization expense
|
14,112 | 3,686 | 1,136 | 18,934 | 1,256 | 20,190 | |||||||||||||||||||
|
Segment profit (loss)
|
60,132 | 66,404 | 22,768 | 149,304 | (4,696 | ) | 144,608 | ||||||||||||||||||
|
Assets
|
408,558 | 138,678 | 37,348 | 584,584 | 113,316 | 697,900 | |||||||||||||||||||
|
Expenditures for property, plant and equipment
|
6,679 | 3,004 | 3,298 | 12,981 | 1,911 | 14,892 | |||||||||||||||||||
|
Year ended July 31, 2003:
|
|||||||||||||||||||||||||
|
Revenues from external customers
|
$ | 298,844 | $ | 198,353 | $ | 57,669 | $ | 554,866 | $ | 554,866 | |||||||||||||||
|
Intersegment revenues
|
33,580 | 1,995 | 695 | 36,270 | $ | (36,270 | ) | ||||||||||||||||||
|
Depreciation and amortization expense
|
10,398 | 3,280 | 740 | 14,418 | 3,353 | 17,771 | |||||||||||||||||||
|
Segment profit (loss)
|
42,079 | 47,469 | 14,142 | 103,690 | (2,812 | ) | 100,878 | ||||||||||||||||||
|
Assets
|
202,236 | 112,870 | 26,627 | 341,733 | 109,853 | 451,586 | |||||||||||||||||||
|
Expenditures for property, plant and equipment
|
3,188 | 2,017 | 2,663 | 7,868 | 6,570 | 14,438 | |||||||||||||||||||
II-39
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Years Ended July 31, | ||||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Segment profit reconciliation:
|
||||||||||||||||
|
Total profit for reportable segments
|
$ | 212,213 | $ | 149,304 | $ | 103,690 | ||||||||||
|
Corporate and eliminations
|
(4,845 | ) | (4,696 | ) | (2,812 | ) | ||||||||||
|
Unallocated amounts:
|
||||||||||||||||
|
Administrative costs
|
(77,836 | ) | (66,114 | ) | (56,365 | ) | ||||||||||
|
Interest (expense) income — net
|
(7,103 | ) | (552 | ) | 717 | |||||||||||
|
Foreign exchange
|
136 | (100 | ) | 911 | ||||||||||||
|
Restructuring charge, net
|
— | (3,181 | ) | (9,589 | ) | |||||||||||
|
Other
|
(7,147 | ) | (4,334 | ) | (4,097 | ) | ||||||||||
|
Income before income taxes
|
115,418 | 70,327 | 32,455 | |||||||||||||
|
Income taxes
|
(33,471 | ) | (19,456 | ) | (11,035 | ) | ||||||||||
|
Net Income
|
$ | 81,947 | $ | 50,871 | $ | 21,420 | ||||||||||
| Revenues* | Long-Lived Assets** | |||||||||||||||||||||||||
| Years Ended July 31, | As of Years Ended July 31, | |||||||||||||||||||||||||
| 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||
|
Geographic information:
|
||||||||||||||||||||||||||
|
United States
|
$ | 411,614 | $ | 343,879 | $ | 303,849 | $ | 321,482 | $ | 310,838 | $ | 143,342 | ||||||||||||||
|
Other
|
464,542 | 379,188 | 292,800 | 180,945 | 97,043 | 75,401 | ||||||||||||||||||||
|
Eliminations
|
(59,709 | ) | (51,848 | ) | (41,783 | ) | ||||||||||||||||||||
|
Consolidated total
|
$ | 816,447 | $ | 671,219 | $ | 554,866 | $ | 502,427 | $ | 407,881 | $ | 218,743 | ||||||||||||||
| * | Revenues are attributed based on country of origin. |
| ** | Long-lived assets consist of property, plant, and equipment, other intangible assets and goodwill. |
| 8. | NET INCOME PER COMMON SHARE |
Net income per Common Share is computed by dividing net income
(after deducting the applicable Preferred Stock dividends and
preferential Class A Common Stock dividends) by the
weighted average Common Shares outstanding of 48,967,160 for
2005, 47,298,454 for 2004 and 46,355,482 for 2003. The
preferential dividend on the Class A Common Stock of
$.01665 per share has been added to the net income per
Class A Common Share for all years presented.
II-40
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Reconciliations of the numerator and denominator of the basic
and diluted per share computations for the Company’s
Class A and Class B common stock are summarized as
follows:
| Years ended July 31, | |||||||||||||
| 2005 | 2004 | 2003 | |||||||||||
| (In thousands, except per share amounts) | |||||||||||||
|
Numerator
|
|||||||||||||
|
Net Income
|
$ | 81,947 | $ | 50,871 | $ | 21,420 | |||||||
|
Less: Preferred Stock dividends and Premium on redemption of
preferred stock
|
— | — | (171 | ) | |||||||||
|
Numerator for basic and diluted Class A net income per share
|
$ | 81,947 | $ | 50,871 | $ | 21,249 | |||||||
|
Less:
|
|||||||||||||
|
Preferential dividends
|
(751 | ) | (721 | ) | (711 | ) | |||||||
|
Preferential dividends on dilutive stock options
|
(23 | ) | (9 | ) | (7 | ) | |||||||
|
Numerator for basic and diluted Class B net income per share
|
$ | 81,173 | $ | 50,141 | $ | 20,531 | |||||||
|
Denominator:
|
|||||||||||||
|
Denominator for basic net income per share for both Class A
and B
|
48,967 | 47,298 | 46,356 | ||||||||||
|
Plus: Effect of dilutive stock options
|
847 | 515 | 398 | ||||||||||
|
Treasury Shares — Deferred Compensation Plan
|
45 | 0 | 0 | ||||||||||
|
Denominator for diluted net income per share for both
Class A and B
|
49,859 | 47,813 | 46,754 | ||||||||||
|
Class A common stock net income per share calculation:
|
|||||||||||||
|
Basic
|
$ | 1.67 | $ | 1.08 | $ | 0.46 | |||||||
|
Diluted
|
$ | 1.64 | $ | 1.07 | $ | 0.46 | |||||||
|
Class B common stock net income per share calculation:
|
|||||||||||||
|
Basic
|
$ | 1.66 | $ | 1.06 | $ | 0.45 | |||||||
|
Diluted
|
$ | 1.63 | $ | 1.05 | $ | 0.44 | |||||||
Options to purchase 38,000, 36,000 and
1,557,368 shares of Class A common stock were excluded
from the computations of diluted net income per share for years
ended July 31, 2005, 2004 and 2003, respectively, because
the option exercise prices were greater than the average market
price of the common shares and, therefore, the effect would be
antidilutive.
In November 2004, the Company announced a two-for-one stock
split in the form of a 100% stock dividend, effective
December 31, 2004.
II-41
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 9. | COMMITMENTS AND CONTINGENCIES |
The Company has entered into various noncancellable operating
lease agreements. Rental expense charged to operations was
$14,020,000, $12,583,000, and $10,800,000 for the years ended
July 31, 2005, 2004, and 2003, respectively. Future minimum
lease payments required under such leases in effect at
July 31, 2005 are as follows, for the years ending
July 31:
|
2006
|
$ | 12,810,000 | ||
|
2007
|
7,901,000 | |||
|
2008
|
5,783,000 | |||
|
2009
|
5,006,000 | |||
|
2010
|
4,012,000 | |||
|
Thereafter
|
8,963,000 | |||
| $ | 44,475,000 | |||
In the normal course of business, the Company is named as a
defendant in various lawsuits in which claims are asserted
against the Company. In the opinion of management, the
liabilities, if any, which may ultimately result from lawsuits
are not expected to have a material adverse effect on the
consolidated financial statements of the Company.
| 10. | RESTRUCTURING CHARGES |
During fiscal 2004 and 2003 the Company recorded restructuring
charges of $3,181,000 and $10,215,000, respectively. This
combined total of $13,396,000 was part of the restructuring
program announced in the fourth quarter of fiscal 2003 related
primarily to combining sales and marketing resources and
consolidating facilities throughout North America and Europe
resulting in a workforce reduction of approximately 300
employees. The fiscal 2004 restructuring charges by reportable
segment were $1,262,000 in Americas, $1,521,000 in Europe, and
$398,000 in Asia.
The 2004 restructuring charge of $3,181,000 includes a provision
for severance of approximately $2,900,000 and write-off of
assets and other of $281,000. In 2003 the $10,215,000 charge
includes a provision for severance of
approximately $8,220,000 and write-off of assets and other
of $1,995,000. Total cash expenditures in connection with these
actions were approximately $12,000,000, of which
approximately $2,300,000 was paid in fiscal 2003 and
$8,300,000 was paid in fiscal 2004. The remaining balance was
paid in fiscal 2005. The restructuring charge for 2004 was
$2,166,000 after tax, or $.05 per diluted Class A
Common Share.
The cost savings resulting from this restructuring began in
fiscal 2003 and continued in fiscal 2004 and fiscal 2005. The
$10,215,000 charge in fiscal 2003 was partially offset by a
credit of $626,000 related to adjustments in lease
termination costs associated with the Company’s fiscal 2002
and 2001 restructuring activities. The net restructuring charge
in fiscal 2003 was $9,589,000 ($6,329,000 after tax, or
$0.13 per diluted Class A Common Share).
II-42
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A reconciliation of activity with respect to the Company’s
2003 and 2004 restructuring is as follows:
|
Beginning balance, April 30, 2003
|
$ | 0 | |||
|
Restructuring charge
|
10,215,000 | ||||
|
Non-cash asset write-offs
|
(948,000 | ) | |||
|
Cash payments
|
(2,341,000 | ) | |||
|
Ending balance, July 31, 2003
|
$ | 6,926,000 | |||
|
Additional charges
|
3,181,000 | ||||
|
Non-cash asset write-offs
|
(76,000 | ) | |||
|
Cash payments associated with severance and other
|
(8,340,000 | ) | |||
|
Ending balance, July 31, 2004
|
$ | 1,691,000 | |||
|
Non-cash asset write-offs
|
(323,000 | ) | |||
|
Cash payments associated with severance and other
|
(1,368,000 | ) | |||
|
Ending balance, July 31, 2005
|
$ | 0 | |||
The Company recorded a restructuring charge of $3,030,000 in
fiscal 2002 related primarily to consolidation of facilities in
Asia/ Pacific, United States and Europe and a workforce
reduction of approximately three percent. The
$3,030,000 charge includes a provision for severance of
approximately $1,720,000, a provision for lease
cancellation costs associated with the facilities consolidation
of $940,000 and write-off or impairment of assets and other of
$370,000.
The workforce reduction of approximately 100 people was
essentially completed in July 2002. Total cash expenditures
in connection with these actions were approximately $2,400,000
of which approximately $800,000 was paid prior to July 31,
2002. The cost savings resulting from this plan began in fiscal
2003. The $3,030,000 charge in fiscal 2002 was partially offset
by a credit of $310,000 related to adjustments in severance
costs associated with the Company’s fiscal 2001
restructuring activities. The net restructuring charge in fiscal
2002 was $2,720,000 ($1,782,000 after tax, or $0.04 per
diluted Class A Common Share).
A reconciliation of activity with respect to the Company’s
2002 restructuring is as follows:
|
Ending balance, July 31, 2002
|
$ | 2,239,000 | |||
|
Cash payments associated with severance and other
|
(1,461,000 | ) | |||
|
Non-cash asset write-offs
|
(195,000 | ) | |||
|
Adjustment to lease accrual
|
(453,000 | ) | |||
|
Ending balance, July 31, 2003
|
$ | 130,000 | |||
|
Cash payments associated with severance and other
|
(130,000 | ) | |||
|
Ending balance, July 31, 2004
|
$ | 0 | |||
II-43
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 11. | Unaudited Quarterly Financial Information |
| Quarters | |||||||||||||||||||||
| First | Second | Third | Fourth | Total | |||||||||||||||||
| (Dollars in thousands, except per share data) | |||||||||||||||||||||
|
2005
|
|||||||||||||||||||||
|
Net Sales
|
$ | 196,216 | $ | 209,766 | $ | 200,419 | $ | 210,046 | $ | 816,447 | |||||||||||
|
Gross Margin
|
104,956 | 113,868 | 105,525 | 108,927 | 443,276 | ||||||||||||||||
|
Operating Income
|
30,934 | 35,543 | 31,793 | 24,182 | 122,452 | ||||||||||||||||
|
Net Income
|
20,579 | 24,956 | 20,357 | 16,055 | 81,947 | ||||||||||||||||
|
Net Income Per Class A Common Share:
|
|||||||||||||||||||||
|
Basic
|
0.42 | * | 0.42 | 0.51 | 0.33 | 1.67 | |||||||||||||||
|
Diluted
|
0.42 | * | 0.41 | 0.50 | 0.32 | 1.64 | |||||||||||||||
|
2004
|
|||||||||||||||||||||
|
Net Sales
|
$ | 151,906 | $ | 152,948 | $ | 180,854 | $ | 185,511 | $ | 671,219 | |||||||||||
|
Gross Margin
|
78,763 | 77,874 | 94,539 | 94,185 | 345,361 | ||||||||||||||||
|
Operating Income
|
15,758 | * | 11,644 | * | 23,325 | * | 20,254 | * | 70,981 | * | |||||||||||
|
Net Income
|
10,353 | * | 8,033 | * | 16,399 | * | 16,086 | * | 50,871 | * | |||||||||||
|
Net Income Per Class A Common Share:*
|
|||||||||||||||||||||
|
Basic
|
0.22 | 0.17 | 0.35 | 0.34 | 1.08 | ||||||||||||||||
|
Diluted
|
0.22 | 0.17 | 0.34 | 0.33 | 1.07 | ||||||||||||||||
| * | Earnings per share for the first quarter of fiscal 2005 and all four quarters for fiscal 2004 has been adjusted to reflect the effect of a two-for-one stock split in the form of a 100% stock dividend, effective December 31, 2004. |
| Fiscal 2004 included a net before tax restructuring charge by quarter of $1,753,000, $67,000, $455,000 and $906,000 for a total of $3,181,000. Fiscal 2004 included a net after tax restructuring charge by quarter of $1,166,000, $44,000, $319,000 and $637,000 for a total of $2,166,000. | |
| The fourth quarter of fiscal 2004 includes a tax benefit of $3,000,000. |
II-44
Table of Contents
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| Item 9A. | Controls and Procedures |
Disclosure Controls and Procedures:
The Company carried out an evaluation, under the supervision and
with the participation of its management, including the Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company’s
“disclosure controls and procedures” (as defined in
the Exchange Act Rule 13a — 15(e)) as of the end
of the period covered by this report. Based on that evaluation,
the Company’s Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls
and procedures are effective as of July 31, 2005.
Management’s Report on Internal Control Over Financial
Reporting:
The management of Brady Corporation and subsidiaries is
responsible for establishing and maintaining adequate internal
control over financial reporting for the Company; as such term
is defined in Rule 13a-15(f) under the Securities Exchange
Act of 1934. The Company’s internal control over financial
reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principals.
With the participation of the Chief Executive Officer and the
Chief Financial Officer, our management conducted an evaluation
of the effectiveness of our internal control over financial
reporting as of July 31, 2005, based on the framework and
criteria established in Internal Control — Integrated
Framework, issued by the Committee of Sponsoring Organizations
of the Treadway Commission in Internal Control —
Integrated Framework. Based on the assessment, management
concluded that, as of July 31, 2005, the Company’s
internal control over financial reporting is effective based on
those criteria. Management’s assessment of the
effectiveness of the Company’s internal control over
financial reporting, as of July 31, 2005, has been audited
by Deloitte & Touche LLP, an independent registered public
accounting firm, as stated in their report, which is included
herein.
Because of the inherent limitations of internal control over
financial reporting, misstatements may not be prevented or
detected on a timely basis. Also, projections of any evaluation
of the effectiveness of internal control over financial
reporting to future periods are subject to the risk that the
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
Changes in Internal Control Over Financial Reporting:
There was no change in the Company’s internal control over
financial reporting that occurred during the Company’s most
recently completed fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
II-45
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Brady Corporation
Milwaukee, WI
We have audited management’s assessment, included in the
accompanying Management’s Report on Internal Control Over
Financial Reporting, that Brady Corporation and subsidiaries
(the “Company”) maintained effective internal control
over financial reporting as of July 31, 2005, based on
criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the
Company’s internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A company’s internal control over financial reporting is a
process designed by, or under the supervision of, the
company’s principal executive and principal financial
officers, or persons performing similar functions, and effected
by the company’s board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, management’s assessment that the Company
maintained effective internal control over financial reporting
as of July 31, 2005, is fairly stated, in all material
respects, based on the criteria established in Internal
Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of July 31, 2005, based on the criteria
established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended July 31, 2005 of the
Company and our report dated September 29, 2005 expressed
an unqualified opinion on those financial statements and
financial statement schedule.
/s/ Deloitte &
Touche LLP
Milwaukee, WI
September 29, 2005
| Item 9B. | Other Information |
None.
II-46
Table of Contents
PART III
| Item 10. | Directors and Executive Officers of the Registrant |
| Name | Age | Title | ||||
|
Frank M. Jaehnert
|
48 | President, CEO and Director | ||||
|
David Mathieson
|
51 | V.P., CFO | ||||
|
David R. Hawke
|
51 | Executive Vice President | ||||
|
Michael O. Oliver
|
52 | Sr. V.P., Human Resources | ||||
|
Donald E. Rearic
|
65 | Sr. V.P. — Finance, & Assistant Secretary | ||||
|
Barbara Bolens
|
44 | V.P., Treasurer, Director of Investor Relations | ||||
|
Allan J. Klotsche
|
40 | V.P. — Brady Asia-Pacific, Global Die Cut | ||||
|
Thomas J. Felmer
|
43 | V.P. — Direct Marketing Americas | ||||
|
Peter C. Sephton
|
46 | V.P. — Brady Europe | ||||
|
Matt O. Williamson
|
49 | V.P. — Brady Americas | ||||
|
Conrad G. Goodkind
|
61 | Secretary | ||||
|
Elizabeth Pungello
|
38 | Director | ||||
|
Peter J. Lettenberger
|
68 | Director | ||||
|
Robert C. Buchanan
|
65 | Director | ||||
|
Roger D. Peirce
|
68 | Director | ||||
|
Richard A. Bemis
|
64 | Director | ||||
|
Dr. Frank W. Harris
|
63 | Director | ||||
|
Gary E. Nei
|
61 | Director | ||||
|
Mary K. Bush
|
57 | Director | ||||
|
Frank R. Jarc
|
63 | Director | ||||
Frank M. Jaehnert — Mr. Jaehnert joined
the Company in 1995 as Finance Director of the Identification
Solutions & Specialty Tapes Group. He served as Chief
Financial Officer from November 1996 to January 2002.
He served as Senior Vice President of the Company and President,
Identification Solutions and Specialty Tapes Group from
January 2002 to March 2003. In February 2003, he
was appointed to his current position, effective April 1,
2003. He has served as a Director of the Company since
April 2003. Before joining the Company, he held various
financial and management positions for Robert Bosch GmbH from
1983 to 1995.
David R. Hawke — Mr. Hawke joined the
Company in 1979. He served as General Manager of the Industrial
Products Division from 1985 to 1991. From 1991 to
February 1995, he served as Managing Director —
European Operations. From February 1995 to
August 2001, he served as Vice President, Graphics Group.
He served as Vice President, Graphics and Workplace Solutions
from August 2001 to January 2002. He served as Senior
Vice President of the Company and President, Graphics and
Workplace Solutions Group from January 2002 to
April 2003. In April 2003, he was appointed to his
present position.
David Mathieson — Mr. Mathieson joined
Brady in 2001 as European Finance Director, based in the U.K. In
August 2003, he was appointed Vice President of Finance for
North America, and named Vice President and Chief Financial
Officer in December 2003. Prior to joining Brady, he was
Vice President and Chief Financial Officer of Honeywell Europe,
concluding a 20-year career with Honeywell International, Inc.,
which included positions in Belgium, Denmark, England and the
United States. A native of Scotland, he is a Fellow of the
Chartered Management Accountants Institute in the United Kingdom
and studied for this qualification at Glasgow College of
Commerce and Glasgow Caledonian University.
Michael O. Oliver — Mr. Oliver joined the
Company in February 1997 as Vice President —
Human Resources. He was appointed to his present position in
January 2002. Before joining the Company, he held various
human resource positions for Unilever from 1990 to 1997.
III-1
Table of Contents
Donald E. Rearic — Mr. Rearic joined the
Company in 1990. He served in a variety of treasury and finance
roles until 2002, when he was appointed to Senior Vice
President — Finance. In 2004, he relinquished his
position as Treasurer as part of a succession plan. Before
joining Brady, he served as V.P., Treasurer and Assistant
Secretary at CSC Industries, Inc., Warren, Ohio, the holding
company for Copperweld Steel Company.
Barbara Bolens — Ms. Bolens joined the
Company in 1986 and has held a wide variety of positions
beginning in customer service and customer service management
and progressing through product management and new product
development. For the past 10 years, she has been the
Assistant Treasurer and has held several other positions in the
Corporate Finance Team throughout that time. She was appointed
to her present position in November 2004. Ms. Bolens also
holds the position of Director of Investor Relations.
Allan J. Klotsche — Mr. Klotsche joined
the Company in 1988. He served in a variety of sales, marketing,
technical, and management roles until 1998, when he was
appointed V.P. and General Manager of the Precision Tapes Group.
He was appointed to his current position in April 2003.
Peter C. Sephton — Mr. Sephton joined the
Company in 1997 as Managing Director — Seton-U.K. From
2001 to 2003 he served as managing director for Brady’s
Identification Solutions Business in Europe. In April 2003,
he was appointed to his current position. Before joining Brady,
he served in a variety of international managerial roles with
Tate and Lyle Plc, Sutcliffe Speakman Plc and Morgan Crucible
Plc. He is a graduate in accountancy and law from The University
of Wales (UCC).
Matthew O. Williamson — Mr. Williamson
joined the Company in 1979. From 1979 to 1994 he served in a
variety of sales and marketing leadership roles. In 1995,
Mr. Williamson served as the V.P. and General Manager of
the Specialty Tape (now Diecut) business. From 1996 to 1998,
Mr. Williamson served as the V.P. and General Manager of
the Identification Solutions and Specialty Tapes Division. From
1998 to 2001, he served as V.P. and General Manager of the
Identification Solutions Division. From 2001 to 2003 he served
as V.P. and General Manager of the Global High Performance
Identification Business. In April 2003, he was appointed to
his current position.
Thomas J. Felmer — Mr. Felmer joined Brady
in 1989 and held several sales and marketing positions until
being named vice president and general manager of Brady’s
U.S. Signmark Division in 1994. In 1999 Mr. Felmer
moved to Europe where he led the European Signmark business for
two years, then gained additional responsibility for the
combined European Seton and Signmark businesses, which he also
held for two years. In 2003 Mr. Felmer returned to
Milwaukee where he was responsible for Brady’s global sales
and marketing processes, Brady Software businesses, and due
diligence/integration of the EMED acquisition. In
June 2004, he was appointed to his current position.
Conrad G. Goodkind — Mr. Goodkind has
served as Secretary of the Company since November 1999. He
is a partner of Quarles & Brady LLP, general counsel to
the Company. He joined Quarles & Brady in 1979 and has
been a member of its Executive Committee since 1983.
Peter J. Lettenberger — Mr. Lettenberger
has served as a Director of the Company since January 1977.
Mr. Lettenberger is chair of the Company’s Finance
Committee, and serves as a member of the Audit and Corporate
Governance Committees. He retired as a partner of
Quarles & Brady LLP, general counsel to the Company,
which he joined in 1964.
Robert C. Buchanan — Mr. Buchanan has been
a Director of the Company since November 1987.
Mr. Buchanan is a member of the Company’s Compensation
Committee and chairs its Corporate Governance Committee.
Mr. Buchanan is Chairman of the Board and CEO of Fox Valley
Corporation in Appleton, Wisconsin, having assumed that position
in November 1980. He is also a trustee of The Northwestern
Mutual Life Insurance Company, Milwaukee, Wisconsin.
Roger D. Peirce — Mr. Peirce has served as
a Director of the Company since September 1988.
Mr. Peirce is a member of the Compensation, Corporate
Governance and Audit Committees of the Company, and chair of the
Retirement Committee. Mr. Peirce is a private investor and
consultant and is a director of Journal Communications, Inc. and
Allete, Inc. He was the secretary/treasurer of The Jor-Mac
Company,
III-2
Table of Contents
Inc., a metal fabricator in Grafton, Wisconsin, from 1997
through 2002. He was President and CEO of Valuation Research
Corporation from April 1995 to May 1996. From
September 1988 to December 1993, he was President of
Super Steel Products Corp. in Milwaukee, Wisconsin. Prior to
that he was a managing partner for Arthur Andersen LLP,
independent certified public accountants.
Richard A. Bemis — Mr. Bemis has been a
Director of the Company since January 1990 and is a member
of its Compensation and Governance Committees. Mr. Bemis is
President and CEO of Bemis Manufacturing Company, a manufacturer
of molded plastic products in Sheboygan Falls, Wisconsin. He is
also a director of the Wisconsin Public Service Corporation,
Green Bay, Wisconsin.
Frank W. Harris — Dr. Harris has been a
Director of the Company since November 1991, a member of
its Finance Committee, and chair of the Technology Committee.
Dr. Harris is a Distinguished Professor and Director of the
Maurice Morton Institute of Polymer Science and Biomedical
Engineering at the University of Akron, and has been on its
faculty since 1983. He is also President and CEO of Akron
Polymer Systems.
Gary E. Nei — Mr. Nei has been a Director
of the Company since November 1992. Mr. Nei is a
member of the Company’s Finance Committee and Chair of its
Compensation Committee. Mr. Nei is Chairman of Nei-Turner
Media, a publishing company in Walworth, Wisconsin. He also
serves as Chairman of the Beverage Testing Institute, a
publishing company in Chicago, Illinois and Chairman of Tastings
Imports, an importer of fine wines headquartered in Chicago,
Illinois.
Mary K. Bush — Ms. Bush has been a
Director of the Company since May 2000. Ms. Bush is a
member of the Company’s Finance and Compensation
Committees. Ms. Bush has been President of Bush
International, LLC, a Washington D.C. firm that advises foreign
governments and U.S. companies on international financial
markets. Prior to establishing Bush International, Ms. Bush
held several positions in financial institutions and has served
three Presidents of the United States as Alternate Director of
the International Monetary Fund, Managing Director of the
Federal Housing Finance Board, a member of the Board of Sally
Mae, and a member of the HELP Commission. Ms. Bush also is
a member of the boards of directors of Mortgage Guaranty
Insurance Corporation and Briggs & Stratton
Corporation, a trustee of the Pioneer Funds and a member of the
Advisory Boards of Washington Mutual Investors Fund and Stern
Stewart.
Frank R. Jarc — Mr. Jarc was elected to
the Board of Directors in May 2000. Mr. Jarc is a
consultant specializing in corporate development and
international acquisitions. From April 1999 to
March 2000 he was Senior Vice President of Corporate
Development at Office Depot, an operator of office supply
superstores. Between June 1996 and March 1999, he was
Executive Vice President and Chief Financial Officer of Viking
Office Products, a direct mail marketer of office products.
Prior to that, he was Executive Vice President and Chief
Financial Officer of R.R. Donnelley and Sons, a global printing
company. He is chair of Brady’s Audit Committee and serves
on the Technology Committee.
Elizabeth Pungello — Dr. Pungello is the
great-granddaughter of Brady founder William H. Brady, Sr.,
and a developmental psychologist at the Frank Porter Graham
Child Development Institute at the University of North Carolina
at Chapel Hill. She was elected to the Board of Directors in
November 2003. She is a member of the Company’s
Finance, Governance and Technology Committees. She has served as
president of the Brady Education Foundation (formerly the W.H.
Brady Foundation) since January 2001.
All directors serve until their respective successors are
elected at the next annual meeting of shareholders. Officers
serve at the discretion of the Board of Directors. None of the
Company’s directors or executive officers has any family
relationship with any other director or executive officer.
Audit Committee Financial Expert — The
Company’s board of directors has determined that at least
one audit committee financial expert is serving on its audit
committee. Mr. Jarc, chair of the audit committee is a
financial expert and is independent as that term is used in
Item 7(d)(3)(iv) of Schedule 14A under the Exchange
Act.
Director Independence — A majority of the
directors must meet the criteria for independence established by
the Board in accordance with the rules of the New York Stock
Exchange. In determining the independence of a director, the
Board must find that a director has no relationship that may
interfere with the exercise of his
III-3
Table of Contents
or her independence from management and the Company. Based on
these guidelines all directors, with the exception of Frank
Jaehnert, President and CEO, and Elizabeth Pungello, 50%
beneficial owner of the Class B Voting Common Stock, are
deemed independent.
Meetings of Non-management Directors — The
non-management directors of the Board regularly meet alone
without any members of management present. Mr. Buchanan,
Chairman of the Corporate Governance Committee, is the presiding
director at these sessions. In fiscal 2005 there were five
executive sessions. Interested parties can raise concerns to be
addressed at these meetings by calling the confidential Brady
hotline at 1-800-368-3613.
Audit Committee Members — The Audit Committee,
which is a separately-designated standing committee of the Board
of Directors, is composed of Mr. Jarc (Chairman),
Mr. Lettenberger and Mr. Peirce. Each member of the
Audit Committee has been determined by the Board to be
independent under the rules of the SEC and NYSE. The charter for
the Audit Committee is available on the Company’s corporate
website at www.bradycorp.com.
Code of Ethics — For a number of years, the
Company has had a code of ethics for its employees. This code of
ethics applies to all of the Company’s employees, officers
and Directors. The code of ethics can be viewed at the
Company’s corporate website, www.bradycorp.com, or may be
obtained in print by any shareholder by contacting Brady
Corporation, Investor Relations, P.O. Box 571, Milwaukee,
WI 53201. The Company intends to satisfy the disclosure
requirements under Item 5.05 of Form 8-K regarding an
amendment to, or a waiver from, a provision of its code of
ethics by placing such information on its Internet website.
Corporate Governance Guidelines — Brady’s
Corporate Governance Principles as well as the charters for the
Audit Committee, Corporate Governance Committee, and
Compensation Committee, are available on the Company’s
Corporate website, www.bradycorp.com. Shareholders may request
printed copies of these documents from Brady Corporation,
Investor Relations, P.O. Box 571, Milwaukee, WI 53201.
Certifications — We have attached the required
certifications under Section 302 of the Sarbanes-Oxley Act
of 2002 regarding the quality of our public disclosures as
Exhibits 31.1 and 31.2 to this report. Additionally, on
November 23, 2004, the Company filed with the New York
Stock Exchange (“NYSE”) an annual certification
regarding our compliance with the NYSE’s corporate
governance listing standards as required by NYSE
Rule 303A.12(a).
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE
Section 16(a) of the Exchange Act requires the
Company’s directors and executive officers, and persons who
own more than ten percent of a registered class of the
Company’s equity securities, to file with the SEC initial
reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company.
Executive officers, directors and greater than ten percent
stockholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
To the Company’s knowledge, based solely on a review of the
copies of such reports furnished to the Company and written
representations that no other reports were required, during the
fiscal year ended July 31, 2005, all Section 16(a)
filing requirements applicable to its officers, directors and
greater than 10 percent beneficial owners were complied
with, except with respect to the following:
| 1. | On December 13, 2004, Ms. Bolens was granted the right and option to purchase 1,000 shares of the presently authorized Class A Common Stock of the Corporation, $.01 par value, at the price of $30.90 per share, as adjusted for the two-for-one stock split in the form of a 100% stock dividend, effective December 31, 2004. This transaction was reported on a Form 4 filed December 22, 2004. |
III-4
Table of Contents
| 2. | In March 2005, a trust of which Elizabeth Pungello is the beneficiary sold 124,200 shares of Class A Common Stock. The individual stock prices and dates are shown in the table below. These transactions were reported on a Form 4 filed March 30, 2005. |
| Number | ||||||||
| Date of Sale | of Shares | Sale Price | ||||||
|
March 21, 2005
|
22,000 | $ | 32.4317 | |||||
|
March 22, 2005
|
10,200 | $ | 33.1455 | |||||
|
March 18, 2005
|
10,500 | $ | 32.9389 | |||||
|
March 17, 2005
|
21,900 | $ | 33.4420 | |||||
|
March 16, 2005
|
8,500 | $ | 32.4151 | |||||
|
March 15, 2005
|
13,600 | $ | 33.0849 | |||||
|
March 14, 2005
|
15,300 | $ | 34.0028 | |||||
|
March 11, 2005
|
11,000 | $ | 33.7194 | |||||
|
March 10, 2005
|
11,200 | $ | 33.9012 | |||||
| 3. | On December 29, 2004, Mr. Sephton acquired 200 shares of Class A Common Stock of the Corporation for $30.36 per share. This transaction was reported on a Form 4 filed September 22, 2005. |
| Item 11. | Executive Compensation |
The following table summarizes the compensation paid or accrued
by the Company during the three years ended July 31, 2005,
to those persons who, as of the end of fiscal 2005, were the
Named Executive Officers.
SUMMARY COMPENSATION TABLE
| Long-Term Compensation | ||||||||||||||||||||||||||||
| Annual Compensation | Awards | |||||||||||||||||||||||||||
| Other | Restricted | |||||||||||||||||||||||||||
| Annual | Stock | All Other | ||||||||||||||||||||||||||
| Fiscal | Salary | Bonus | Comp | Awards | Options/SAR | Comp | ||||||||||||||||||||||
| Name And Principal Position | Year | ($) | ($)(1) | ($)(2) | ($)(4) | (# Of Shares)(5) | ($)(3) | |||||||||||||||||||||
|
F.M. Jaehnert
|
2005 | 493,269 | 734,902 | — | — | 120,000 | 107,632 | |||||||||||||||||||||
|
President &
|
2004 | 468,270 | 796,800 | — | — | 72,000 | 37,529 | |||||||||||||||||||||
|
Chief Executive Officer
|
2003 | 345,769 | — | — | — | 230,000 | 32,371 | |||||||||||||||||||||
|
D.R. Hawke
|
2005 | 362,304 | 363,714 | — | — | 30,000 | 65,080 | |||||||||||||||||||||
|
Executive Vice President
|
2004 | 350,000 | 317,100 | — | — | 130,000 | 31,759 | |||||||||||||||||||||
| 2003 | 315,673 | 83,170 | — | 334,700 | 30,000 | 28,744 | ||||||||||||||||||||||
|
P.C. Sephton
|
2005 | 290,714 | 281,633 | — | — | 60,000 | 49,584 | |||||||||||||||||||||
|
Vice President — Brady Europe
|
2004 | 257,279 | 240,330 | — | — | 44,000 | 41,165 | |||||||||||||||||||||
| 2003 | 204,212 | 31,536 | — | — | 10,000 | 31,645 | ||||||||||||||||||||||
|
D. Mathieson
|
2005 | 244,616 | 248,285 | — | — | 60,000 | 33,712 | |||||||||||||||||||||
|
Vice President & Chief Financial
|
2004 | 200,277 | 178,148 | — | — | 44,000 | 85,390 | |||||||||||||||||||||
|
Officer
|
2003 | 196,736 | 24,843 | — | — | 9,000 | 37,131 | |||||||||||||||||||||
|
M. O. Williamson
|
2005 | 237,308 | 237,545 | — | — | 60,000 | 35,050 | |||||||||||||||||||||
|
Vice President — Brady Americas
|
2004 | 228,626 | 194,236 | — | — | 44,000 | 21,778 | |||||||||||||||||||||
| 2003 | 202,523 | 43,684 | — | — | 10,000 | 18,072 | ||||||||||||||||||||||
| (1) | Reflects bonus earned during the listed fiscal year, which was paid during the next fiscal year. |
| (2) | Unless otherwise noted, any perquisites or other personal benefits received from the Company by any of the named executives were less than the reporting thresholds established by the Securities and Exchange Commission (the lesser of $50,000 or 10% of the individual’s cash compensation). |
| (3) | All other compensation for fiscal 2005 for Messrs. Jaehnert, Hawke, Mathieson and Williamson, respectively, includes: (i) matching contributions to the Company’s Matched 401(k) Plan, Funded Retirement Plan and Restoration Plan for each named executive officer of $102,706, $61,506, $32,944, |
III-5
Table of Contents
| and $34,314, respectively and (ii) the cost of group term life insurance for each named executive officer of $4,926, $3,574, $768 and $736, respectively. | |
| All other compensation for fiscal 2005 for Mr. Sephton includes: (i) matching contributions for the Brady U.K. Pension Plan of $46,514 and (ii) the cost of group term life insurance of $3,070. | |
| All other compensation for fiscal 2004 for Messrs. Jaehnert, Hawke, Mathieson and Williamson, respectively, includes: (i) matching contributions to the Company’s Matched 401(k) Plan, Funded Retirement Plan and Restoration Plan for each named executive officer of $34,191, $27,462, $13,298 and $21,082 respectively and (ii) the cost of group term life insurance for each named executive officer of $3,338, $4,297, $509 and $696 respectively and (iii) costs related to relocation for Mr. Mathieson of $71,583. | |
| All other compensation for fiscal 2004 for Mr. Sephton includes matching contributions for the Brady U.K. Pension Plan of $41,165. | |
| All other compensation for fiscal 2003 for Messrs. Jaehnert, Hawke, Mathieson, and Williamson, respectively, includes: (i) matching contributions to the Company’s Matched 401(k) Plan, Funded Retirement Plan and Restoration Plan for each named executive officer of $29,329, $24,485, $36,522 and $17,342 respectively and (ii) the cost of group term life insurance for each named executive officer of $3,042, $4,259, $609 and $730 respectively. | |
| All other compensation for fiscal 2003 for Mr. Sephton includes matching contributions for the Brady U.K. Pension Plan of $31,645. | |
| (4) | In June 2003, the Company granted restricted stock awards to certain key executives. Mr. Hawke was awarded 20,000 shares of authorized, but unissued Class A Common Stock (adjusted for the two-for-one stock split in the form of a 100% stock dividend, effective December 31, 2004), which shares he continued to hold as of July 31, 2005. The value of the grants stated in the table is based on the closing price on the date of grant. Using the closing price of $34.20 per share for the Company’s Class A Common Stock on July 29, 2005, the holdings of Mr. Hawke were valued at $684,000. The restricted stock award granted to Mr. Hawke vested 100% on June 18, 2005. Dividends are paid on restricted stock. |
| (5) | Adjusted for two-for-one stock split in the form of a 100% stock dividend, effective December 31, 2004. |
Stock Options
The following tables summarize option grants and exercises
during fiscal 2005 to or by the executive officers named in the
Summary Compensation Table above, and the value of unexercised
options held by such persons at July 31, 2005. Stock
Appreciation Rights are not available under any of the
Company’s plans.
Option Grants in Fiscal 2005
Individual Grants
| # of Securities | % of Total | |||||||||||||||||||
| Underlying | Options | |||||||||||||||||||
| Options | Granted to | Exercise | ||||||||||||||||||
| Granted | Employees in | Price | ||||||||||||||||||
| Name | Grant Date | (#)(1) | Fiscal 2005 | ($/Share)(2) | Expiration Date | |||||||||||||||
|
F.M. Jaehnert
|
Aug. 2, 2004 | 60,000 | 7.2% | 22.6325 | Aug. 2, 2009 | |||||||||||||||
| Nov. 18, 2004 | 60,000 | 7.2% | 28.8425 | Nov. 18, 2014 | ||||||||||||||||
|
D.R. Hawke
|
Nov. 18, 2004 | 30,000 | 3.6% | 28.8425 | Nov. 18, 2014 | |||||||||||||||
|
D. Mathieson
|
Aug. 2, 2004 | 30,000 | 3.6% | 22.6325 | Aug. 2, 2009 | |||||||||||||||
| Nov. 18, 2004 | 30,000 | 3.6% | 28.8425 | Nov. 18, 2014 | ||||||||||||||||
|
P.C. Sephton
|
Aug. 2, 2004 | 30,000 | 3.6% | 22.6325 | Aug. 2, 2009 | |||||||||||||||
| Nov. 18, 2004 | 30,000 | 3.6% | 28.8425 | Nov. 18, 2014 | ||||||||||||||||
|
M.O. Williamson
|
Aug. 2, 2004 | 30,000 | 3.6% | 22.6325 | Aug. 2, 2009 | |||||||||||||||
| Nov. 18, 2004 | 30,000 | 3.6% | 28.8425 | Nov. 18, 2014 | ||||||||||||||||
III-6
Table of Contents
| Potential Realizable Value | ||||||||||||
| at Assumed Rates of | ||||||||||||
| Stock Price Appreciation(3) | ||||||||||||
| Name | 0%($) | 5%($)(6) | 10%($)(6) | |||||||||
|
F.M. Jaehnert
|
0 | 1,463,510 | 3,587,093 | |||||||||
|
D.R. Hawke
|
0 | 544,167 | 1,379,026 | |||||||||
|
D. Mathieson
|
0 | 731,755 | 1,793,547 | |||||||||
|
P.C. Sephton
|
0 | 731,755 | 1,793,547 | |||||||||
|
M. O. Williamson
|
0 | 731,755 | 1,793,547 | |||||||||
| All Stockholders’ Gains (increase in market value of Brady Corporation Common Stock at assumed rates of stock price appreciation)(4)(6) | 579,161,303 | 1,425,773,118 | ||||||||||
| All Optionees’ Gains (as a percent of all shareholders’ gains)(5)(6) | 2.17 | % | 2.20 | % | ||||||||
| (1) | The options granted August 2, 2004 equally vest upon meeting certain financial goals in fiscal 2005, 2006 and 2007. The financial goals in 2005 have been met and one-third of the options have vested. The options have a term of five years. |
| The options granted November 18, 2004, become exercisable as follows: one-third of the shares on November 18, 2005, one-third of the shares on November 18, 2006 and one-third of the shares on November 18, 2007. These options have a term of ten years. | |
| Option grants have been adjusted to reflect a two-for-one stock split in the form of a 100% stock dividend, effective December 31, 2004. | |
| (2) | The exercise price is the average of the highest and lowest sale prices of the Company’s Class A Common Stock as reported by the New York Stock Exchange on the date of the grant, adjusted for a two-for-one stock split in the form of a 100% stock dividend, effective December 31, 2004. |
| (3) | For options with a ten-year life, represents total potential appreciation of approximately 0%, 63% and 159% for assumed annual rates of appreciation of 0%, 5% and 10%, respectively, compounded annually for ten years. |
| For options with a five-year life, represents total potential appreciation of approximately 0%, 28% and 61% for assumed annual rates of appreciation of 0%, 5% and 10%, respectively, compounded annually for five years. | |
| (4) | Calculated from the $22.6325 exercise price applicable to the options granted on August 2, 2004 and the $28.8425 exercise price applicable to the options granted on November 18, 2004 based on the fiscal 2005 average of Class A Common Stock outstanding of 45,473,676. Average shares outstanding have been adjusted to reflect a two-for-one stock split in the form of a 100% stock dividend, effective December 31, 2004. |
| (5) | Represents potential realizable value for all options granted in fiscal 2005 compared to the increase in market value of Brady Corporation Class A Common Stock at assumed rates of stock price appreciation. |
| (6) | The Company disavows the ability of any valuation model to predict or estimate the Company’s future stock price or to place a reasonably accurate present value on these options because any model depends on assumptions about the stock’s future price movement that the Company is unable to predict. |
III-7
Table of Contents
AGGREGATED OPTION EXERCISES IN FISCAL 2005
AND VALUE OF OPTIONS AT END OF FISCAL 2005
| Number of Securities Underlying | ||||||||||||||||
| Unexercised Options at | ||||||||||||||||
| Shares | July 31, 2005(2) | |||||||||||||||
| Acquired on | Value | |||||||||||||||
| Name | Exercise(#)(2) | Realized($) | Exercisable(#) | Unexercisable(#) | ||||||||||||
|
F.M. Jaehnert
|
49,000 | 930,745 | 257,200 | 378,000 | ||||||||||||
|
D.R. Hawke
|
200,000 | 2,862,606 | 181,133 | 126,667 | ||||||||||||
|
D. Mathieson
|
0 | 0 | 23,267 | 92,333 | ||||||||||||
|
P.C. Sephton
|
0 | 0 | 52,333 | 92,667 | ||||||||||||
|
M.O. Williamson
|
0 | 0 | 47,333 | 92,667 | ||||||||||||
| Value of Unexercised In-the-Money | ||||||||
| Options at July 31, 2005(1) | ||||||||
| Name | Exercisable($) | Unexercisable($) | ||||||
|
F.M. Jaehnert
|
5,564,918 | 6,181,625 | ||||||
|
D.R. Hawke
|
3,475,505 | 1,820,100 | ||||||
|
D. Mathieson
|
367,855 | 998,508 | ||||||
|
P.C. Sephton
|
970,160 | 1,068,375 | ||||||
|
M.O. Williamson
|
848,825 | 1,068,375 | ||||||
| (1) | Represents the closing price for the Company’s Class A Common Stock on July 29, 2005, of $34.20 less the exercise price for all outstanding exercisable and unexercisable options for which the exercise price is less than such closing price. |
| (2) | Adjusted for a two-for-one stock split in the form of a 100% stock dividend, effective December 31, 2004. |
III-8
Table of Contents
Common Stock Price Performance Graph
The graph below shows a comparison of the cumulative return over
the last five fiscal years had $100 been invested at the close
of business on July 31, 2000, in each of Brady Corporation
Class A Common Stock, The Standard & Poor’s
(S&P) 500 index, the Standard and Poor’s Small Cap 600
index, and the Russell 2000 index.
Comparison of 5 Year Cumulative Total Return*
Among Brady Corporation, The S&P 500 Index,
The S&P Smallcap 600 Index and The Russell 2000 Index
| * | $100 invested on 7/31/00 in stock or index-including reinvestment of dividends. Fiscal year ended July 31. |
Copyright © 2002, Standard & Poor’s, a
division of The McGraw-Hill Companies, Inc. All rights reserved.
www.researchdatagroup.com/ S&P.htm
Compensation of Directors
Each director who is also an employee of the Company receives no
additional compensation for service on the Board or on any
committee of the Board. Effective August 1, 2003, directors
who were not also employees of the Company received an annual
retainer of $25,000 plus $1,500 for each committee they chaired
($5,500 for the audit committee chair) and $1,250 plus expenses
for each meeting of the Board or any committee thereof, which
they attended and were a member or $750 for single issue
telephonic committee meetings of the Board. Directors also
received $750 for each meeting they attended of any committee
for which they were not a member.
Effective August 1, 2004, directors who are not also
employees of the Company receive an annual retainer of $30,000
plus $5,000 for each committee they chair ($9,000 for the audit
committee chair). The per meeting attendance fees remain the
same.
Termination of Employment and Change in Control
Arrangements
On November 18, 2004, the Board of Directors of Brady
Corporation approved change of control agreements for certain
executive officers of the Company as follows: David Mathieson,
Peter Sephton, and Matthew Williamson. The agreements call for
payment of an amount equal to two times their annual base salary
and two times the average bonus payment received in the two
years immediately prior to the date the Change of Control occurs
in the event of termination or resignation upon a change of
control. The agreements
III-9
Table of Contents
also call for reimbursement of any excise taxes imposed and up
to $25,000 of attorney fees to enforce the executive’s
rights under the agreement. Payments under the agreement will be
spread over two years.
In May 2003, the Board approved a Change in Control Agreement
for Mr. Jaehnert. The agreement calls for payment of an
amount equal to three times the annual salary and bonus for
Mr. Jaehnert in the event of termination or resignation
upon a change of control. The agreement also calls for
reimbursement of any excise taxes imposed and up to $25,000 of
attorney fees to enforce the executive’s rights under the
agreement. Payments under the agreement will be spread over
three years.
In January 2001, the Board approved new Change in Control
Agreements for certain of its executive officers, including
Messrs. Hawke and Oliver. The agreements call for payment
of an amount equal to two times their annual salary and bonus in
the event of termination or resignation upon a change in control
with payments spread over two years. The agreements also call
for reimbursement of any excise taxes imposed and up to $25,000
of attorney fees to enforce the executive’s rights under
the agreements.
Restricted Stock
In June 2003, the Company granted restricted stock awards to
certain key executives. Mr. Hawke and Mr. Oliver were
awarded 10,000 (20,000 subsequent to a two-for-one stock split
in the form of a 100% stock dividend, effective
December 31, 2004) shares each of authorized, but unissued
Class A Common Stock. These restricted stock awards were
fully vested on June 18, 2005.
Compensation Committee Interlocks and Insider
Participation
During fiscal 2005, the Board’s Compensation Committee was
composed of Messrs. Bemis, Buchanan, Nei and Peirce and
Ms. Bush. None of these persons has at any time been an
employee of the Company or any of its subsidiaries. There are no
relationships among the Company’s executive officers,
members of the Compensation Committee or entities whose
executives serve on the Board that require disclosure under
applicable SEC regulations.
Funded Retirement and 401(k) Plans
Substantially all Brady employees in the United States and
certain expatriate employees working for its international
subsidiaries are eligible to participate in Brady
Corporation’s Funded Retirement Plan (“Funded
Retirement Plan”) and the Brady Corporation Matched 401(k)
Plan (the “employee 401(k) Plan”). Under these plans
the Company agrees to contribute certain amounts to both Plans.
Under the Funded Retirement Plan, the Company contributes 4% of
the eligible earnings of each person covered by the Funded
Retirement Plan. In addition, participants may elect to have
their annual pay reduced by up to 4% and have the amount of this
reduction contributed to the employee 401(k) Plan and
matched by an additional, equal contribution by the Company.
Participants may also elect to have up to another 21% of their
eligible earnings contributed to the employee 401(k) Plan
(without an additional matching contribution by the Company).
The assets of the employee 401(k) Plan and Funded
Retirement Plan credited to each participant are invested by the
trustee of the Plans as directed by each plan participant in
several investment funds as permitted by the employee
401(k) Plan and Funded Retirement Plan. The annual
contributions and forfeitures allocated to any participant under
all defined contribution plans may not exceed $32,400.
Benefits are generally payable upon the death, disability, or
retirement of the participant or upon termination of employment
before retirement, although benefits may be withdrawn from the
employee 401(k) Plan and paid to the participant if
required for certain emergencies. Under certain specified
circumstances, the employee 401(k) Plan allows loans to be
drawn on a participant’s account. The participant is
immediately fully vested with respect to the contributions
attributable to reductions in pay; all other contributions
become fully vested over a three-year period of continuous
service for the employee 401(k) Plan and after five years
of continuous service for the Funded Retirement Plan.
III-10
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Deferred Compensation Arrangements
During fiscal 2002, the Company adopted a deferred compensation
plan under which executive officers, corporate staff officers
and certain key management employees of the Company are
permitted to defer portions of their fees, salary and bonus into
a plan account, the value of which is measured by the fair value
of the underlying investments. The assets of the Plan are held
in a Rabbi Trust and are invested by the trustee of the Plan as
directed by the participant in several investment funds as
permitted by the Plan.
At least one year prior to termination of employment, the
Executive shall elect whether to receive his Account balance
following termination of employment in a single lump sum in cash
or by means of cash distribution under an Annual Installment
Method. If the Executive does not submit an election form or has
not submitted one timely, then payment shall be made each year
for a period of ten years. The first payment must be one-tenth
of the balance held; the second one-ninth; and so on, with the
balance held in the Trust reduced by each payment.
Compensation Committee Report on Executive Compensation
The Company’s Compensation Committee (the
“Committee”) is composed entirely of outside directors
and is responsible for considering and approving compensation
arrangements for senior management of the Company, including the
Company’s executive officers and the chief executive
officer. It is the philosophy of the Committee to establish a
total executive compensation program which is competitive with a
broad range of companies that it considers to be of comparable
size and complexity.
The primary components of the Company’s executive
compensation program are (i) base salary, (ii) annual
cash incentive plan and (iii) long-term incentive
compensation in the form of stock options and/or restricted
stock. These are designed to align shareholder and management
interests, to balance the achievement of annual performance
targets with actions that focus on the long-term success of the
Company, and to attract, motivate and retain key executives who
are important to the continued success of the Company. The base
salary compensation and the annual cash incentive compensation
plan are reviewed and approved by the Compensation Committee.
The Committee believes that:
| • | The Company’s pay levels are appropriately targeted to attract and retain key executives; | |
| • | The Company’s incentive plan provides strong incentives for management to increase shareholder value; and | |
| • | The Company’s total executive compensation program is a cost-effective strategy to increase shareholder value. |
In December 2003 the Committee established stock ownership
guidelines for executives. The guidelines allow executives up to
five years to achieve the required stock ownership levels.
| Base Salary |
Consistent with the Committee’s philosophy, base salaries
are generally maintained at or modestly above competitive base
salary levels. Competitive salary level is defined as the median
base salary for similar responsibilities in a group of companies
selected by the Committee that the Committee considers to be of
comparable size and complexity. In setting base salaries for
fiscal 2005, the Committee reviewed compensation survey data and
was satisfied that the base salary levels set would achieve the
Company’s objectives. Specific increases reflect the
Committee’s subjective evaluation of individual performance.
| Annual Bonus Plan |
The annual cash incentive compensation plan (the “Bonus
Plan”) provides for the annual payment of cash bonuses.
When viewed together with the Company’s base salary, the
purpose of the Bonus Plan is to
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provide a balance between fixed compensation and variable,
results-oriented compensation. The Bonus Plan is 80% objective.
It stresses maximization of Company profitability and revenue
growth.
| Stock Options |
In November 2004, the holders of the Corporation’s
Class B Common Stock of Brady Corporation approved the
Brady Corporation 2004 Omnibus Incentive Stock Plan under which
1,500,000 shares of Class A Common Stock were
available for grant. In July 2003, the Company’s
Class B Voting Common shareholders approved the Brady
Corporation 2003 Omnibus Incentive Stock Plan under which
1,500,000 shares of Class A Common Stock were
available for grant. In October 2001, the Company approved
the Brady Corporation 2001 Omnibus Incentive Stock Plan under
which 1,000,000 shares of Class A Common Stock were
available for grant. In May 1997, the Company approved the
Brady Corporation 1997 Omnibus Incentive Stock Plan and the
Brady Corporation 1997 Nonqualified Stock Option Plan for
Non-Employee Directors (the “Option Plans”) under
which 4,000,000 shares and 250,000 shares,
respectively, of Class A Common Stock were available for
grant. In 1989 the Board approved the Brady Corporation 1989
Non-Qualified Stock Option Plan (the “Option Plan”)
under which 3,000,000 shares of Class A Common Stock
were available for grant. The Option Plans assist directors,
executive officers, corporate staff officers and key management
employees in becoming shareholders with an important stake in
the Company’s future, aligning their personal financial
interest with that of all shareholders. Stock options are
typically granted annually and have a term of ten years.
Generally, the options become one-third exercisable one year
after the date of the grant and one-third additional in each of
the succeeding two years so that at the end of three years after
the date of the grant they are fully exercisable. In
August 2003, 2004, and 2005, certain executives and key
management employees were issued stock options that vest upon
meeting certain financial performance conditions in addition to
the vesting schedule described above and have a term of five
years. All grants under the Option Plans are at market price on
the date of the grant.
| Compliance with Tax Regulations Regarding Executive Compensation |
Section 162(m) of the Internal Revenue Code, added by the
Omnibus Budget Reconciliation Act of 1993, generally disallows a
tax deduction to public companies for compensation over
$1 million paid to the corporation’s chief executive
officer and the other named executive officers. Qualifying
performance-based compensation will not be subject to the
deduction limit if certain requirements are met. The
Company’s executive compensation program, as currently
constructed, is not likely to generate nondeductible
compensation in excess of these limits. The Compensation
Committee will continue to review these tax regulations as they
apply to the Company’s executive compensation program. It
is the Compensation Committee’s intent to preserve the
deductibility of executive compensation to the extent reasonably
practicable and to the extent consistent with its other
compensation objectives.
| Compensation of the Chief Executive Officer |
Mr. Jaehnert received $493,269 in base salary in fiscal
2005, an increase of 5.3% from the prior year’s base
salary. Based on the terms of the Company’s objective Bonus
Plan, discussed above, Mr. Jaehnert earned a bonus
attributable to fiscal 2005 of $734,902. In 2004,
Mr. Jaehnert earned a bonus of $700,000. In 2003,
Mr. Jaehnert voluntarily elected to waive his right to his
bonus, deferring the entire amount to be paid together with any
bonus earned in fiscal 2004, dependent upon certain financial
performance in fiscal 2004. Consequently, he was paid a bonus of
$96,800 in fiscal 2004 attributable to this deferral.
Mr. Jaehnert’s compensation reflects:
(i) continued strong performance as compared to its peers
with respect to sales, profits and stock price performance;
(ii) continued efforts to focus the Company’s
resources on sustainable value-enhancing long-term growth, which
includes acquisitions and new product developments; and
(iii) continued involvement in management team development
and succession planning.
III-12
Table of Contents
During fiscal 2005, Mr. Jaehnert was awarded options to
purchase 120,000 shares of Class A Common Stock.
The Committee believes these awards are consistent with the
objectives of the various plans and with the overall
compensation policy of the Board of Directors.
******************************
The Compensation Committee believes the executive compensation
programs and practices described above are competitive. They are
designed to provide increased compensation with improved
financial performance and to provide additional opportunity for
capital accumulation.
| Gary E. Nei, Chairman | |
| Richard A. Bemis | |
| Robert C. Buchanan | |
| Mary K. Bush | |
| Roger D. Peirce |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
| (a) | Security Ownership of Certain Beneficial Owners |
The following table sets forth the current beneficial ownership
of shareholders who are known by the Company to own more than
five percent (5%) of any class of the Company’s voting
shares on August 15, 2005. As of that date, nearly all of
the voting stock of the Company was held by two trusts
controlled by direct descendants of the Company’s founder,
William H. Brady, as follows:
| Amount of | ||||||||||
| Beneficial | Percent of | |||||||||
| Title of Class | Name and Address of Beneficial Owner | Ownership | Ownership(2) | |||||||
|
Class B Common Stock
|
Brady Corporation Class B Common Stock Trust(1) | 1,769,304 | 50% | |||||||
|
c/o Elizabeth P. Pungello 2002 S. Hawick Ct. Chapel Hill, NC 27516 |
||||||||||
| William H. Brady III Revocable Trust of 2003(3) | 1,769,304 | 50% | ||||||||
|
c/o William H. Brady III 249 Rosemont Ave. Pasadena, CA 91103 |
||||||||||
| (1) | The trustee is Elizabeth P. Pungello, who has sole voting and dispositive power and who is the remainder beneficiary. Elizabeth Pungello is the great-granddaughter of William H. Brady and currently serves on the Company’s Board of Directors. |
| (2) | An additional 20 shares are owned by a third trust with different trustees. |
| (3) | William H. Brady III is special trustee of this trust and has sole voting and dispositive powers with respect to these shares. William H. Brady III is the grandson of William H. Brady. |
| (b) | Security Ownership of Management |
The following table sets forth the current beneficial ownership
of each class of equity securities of the Company by each
Director or Nominee and by all Directors and Officers of the
Company as a group as of August 15, 2005. Unless otherwise
noted, the address for each of the listed persons is
c/o Brady Corporation, 6555 West Good Hope Road,
Milwaukee, Wisconsin 53223. Except as otherwise indicated, all
shares are owned directly.
III-13
Table of Contents
| Amount of | ||||||||||
| Beneficial | Percent of | |||||||||
| Title of Class | Name of Beneficial Owner & Nature of Beneficial Ownership | Ownership(7) | Ownership | |||||||
|
Class A Common Stock
|
Elizabeth P. Pungello(1) | 2,680,223 | 5.9 | % | ||||||
| Frank M. Jaehnert(2) | 285,699 | .6 | ||||||||
| David R. Hawke | 243,443 | .5 | ||||||||
| Peter C. Sephton | 72,532 | .2 | ||||||||
| Matthew O. Williamson | 67,332 | .2 | ||||||||
| Conrad G. Goodkind | 41,860 | .1 | ||||||||
| Richard A. Bemis | 39,000 | .1 | ||||||||
| David Mathieson | 36,747 | .1 | ||||||||
| Roger D. Peirce(3) | 27,000 | .1 | ||||||||
| Gary E. Nei(5) | 25,000 | .1 | ||||||||
| Peter J. Lettenberger | 24,386 | .1 | ||||||||
| Frank W. Harris | 16,066 | * | ||||||||
| Frank R. Jarc | 15,000 | * | ||||||||
| Mary K. Bush | 15,000 | * | ||||||||
| Robert C. Buchanan(4) | 5,867 | * | ||||||||
| All Officers and Directors as a Group (20 persons)(6) | 3,875,627 | 8.5 | % | |||||||
|
Class B Common Stock
|
Elizabeth P. Pungello(1) | 1,769,304 | 50.0 | % | ||||||
| * | Indicates less than one-tenth of one percent. |
| (1) | Represents 2,678,223 shares owned by trusts which Ms. Pungello is a trustee and has either sole or joint dispositive and voting authority and holds vested options to acquire an additional 2,000 shares of Class A Common Stock. In addition, Ms. Pungello is the beneficiary of an unrelated trust owning 556,479 shares, as to which she does not have voting or dispositive authority. | |
| (2) | Mr. Jaehnert owns 2,000 shares of Class A Common Stock directly and 1,034 shares in his 401(k) Plan, and holds vested options to acquire an additional 277,200 shares of Class A Common Stock. Mr. Jaehnert’s spouse owns 5,465 shares of Class A Common Stock directly. | |
| (3) | Mr. Peirce owns 3,000 shares of Class A Common Stock directly, 3,000 shares through his Keogh plan and holds vested options to acquire an additional 21,000 shares of Class A Common Stock. | |
| (4) | Mr. Buchanan owns 1,200 shares of Class A Common Stock directly, 3,000 additional shares through his Keogh plan and holds vested options to acquire an additional 1,667 shares of Class A Common Stock. | |
| (5) | Mr. Nei owns 4,000 shares of Class A Common Stock directly (with respect to which he shares voting and investment power with his spouse) and holds vested options to acquire an additional 21,000 shares of Class A Common Stock. | |
| (6) | The amount shown for all officers and directors as a group (20 persons) includes options to acquire a total of 1,063,988 shares of Class A Common Stock, which are currently exercisable or will be exercisable within 60 days of August 15, 2005. It does not include other options for Class A Common Stock, which have been granted at later dates. | |
| (7) | In addition to the shares shown in this table, the officers and directors as a group owned the equivalent of 529,535 shares of the Company’s Class A Common Stock in its deferred compensation plans. |
| (c) | Changes in Control |
No arrangements are known to the Company, which may, at a
subsequent date, result in a change in control of the Company.
III-14
Table of Contents
| (d) | Equity Compensation Plan Information |
| Number of securities | ||||||||||||
| remaining available for | ||||||||||||
| Number of securities | future issuance under | |||||||||||
| to be issued upon | Weighted-average | equity compensation | ||||||||||
| exercise of | exercise price of | plans (excluding | ||||||||||
| outstanding options, | outstanding options, | securities reflected in | ||||||||||
| warrants and rights | warrants and rights | column (a)) | ||||||||||
| Plan Category | (a) | (b) | (c) | |||||||||
|
Equity compensation plans approved by security holders
|
3,529,331 | $ | 18.41 | 1,307,334 | ||||||||
|
Equity compensation plans not approved by security holders
|
None | None | None | |||||||||
|
Total
|
3,529,331 | $ | 18.41 | 1,307,334 | ||||||||
The Company’s Nonqualified Stock Option Plans allow the
granting of stock options to various officers, directors and
other employees of the Company at prices equal to fair market
value at the date of grant. The Company has reserved 3,000,000,
4,250,000, 1,000,000, 1,500,000 and 1,500,000 shares of
Class A Nonvoting Common Stock for issuance under the 1989,
1997, 2001, 2003, and 2004 Plans, respectively, adjusted for the
two-for-one stock split in the form of a 100% stock dividend,
effective December 31, 2004. Generally, options will not be
exercisable until one year after the date of grant, and will be
exercisable thereafter, to the extent of one-third per year and
have a maximum term of ten years. In August 2003, 2004, and
2005, certain executives and key management employees were
issued stock options that vest upon meeting certain financial
performance conditions in addition to the vesting schedule
described above. These options have a maximum term of five
years. All grants under the Option Plans are at market price on
the date of the grant.
| Item 13. | Certain Relationships and Related Transactions |
Peter J. Lettenberger serves as a Director of the Company; he
recently retired as a partner of Quarles & Brady LLP,
general counsel to the Company. Conrad G. Goodkind serves as
Secretary to the Company. He is currently a partner of
Quarles & Brady LLP, general counsel to the Company.
| Item 14. | Principal Accounting Fees and Services |
The following table presents the aggregate fees incurred for
professional services by Deloitte & Touche LLP and
Deloitte Tax LLP during the years ended July 31, 2005 and
2004. Other than as set forth below, no professional services
were rendered or fees billed by Deloitte & Touche LLP
or Deloitte Tax LLP during the years ended July 31, 2005
and 2004.
| 2005 | 2004 | |||||||||
|
Audit and audit-related
|
||||||||||
|
Audit fees(1)
|
$ | 1,613,000 | $ | 607,000 | ||||||
|
Audit-related fees(2)
|
63,000 | 275,000 | ||||||||
|
Tax fees — compliance
|
518,000 | 605,000 | ||||||||
|
Subtotal audit and audit-related fees
|
2,194,000 | 1,487,000 | ||||||||
|
Non-audit related
|
||||||||||
|
Tax fees — planning and advice
|
998,000 | 512,000 | ||||||||
|
Other fees(3)
|
63,000 | 55,000 | ||||||||
|
Subtotal non-audit related fees
|
1,061,000 | 567,000 | ||||||||
|
Total fees
|
$ | 3,255,000 | $ | 2,054,000 | ||||||
| (1) | Audit fees consist of professional services rendered for the audit of the Company’s annual financial statements, attestation of management’s assessment of internal control, reviews of the quarterly financial statements and statutory reporting compliance. |
III-15
Table of Contents
| (2) | Audit related fees include fees related to due diligence, compliance with the Sarbanes-Oxley Act and employee benefit plan audits. |
| (3) | All other fees include fees related to expatriate activities. |
| 2005 | 2004 | |||||||
|
Ratio of Tax Planning and Advice Fees and All Other Fees to
Audit Fees, Audit-Related Fees and Tax Compliance Fees
|
.5 to 1 | .4 to 1 | ||||||
Pre-Approval Policy — The services performed by
the Registered Public Accounting Firm (“Independent
Auditors”) in fiscal 2004 and 2005 were pre-approved in
accordance with the pre-approval policy and procedures adopted
by the Audit Committee at its November 19, 2003 meeting.
The policy requires the Audit Committee to pre-approve the audit
and non-audit services performed by the Independent Auditors in
order to assure that the provision of such services does not
impair the auditor’s independence. Unless a type of service
to be performed by the Independent Auditors has received general
pre-approval, it will require specific pre-approval by the Audit
Committee. Any proposed services exceeding pre-approved cost
levels will require specific pre-approval by the Audit Committee.
III-16
Table of Contents
PART IV
| Item 15. | Exhibits and Financial Statement Schedules |
Item 15 (a) — The following documents are filed
as part of this report:
| 1) & 2) | Consolidated Financial Statement Schedule — |
| Schedule II Valuation and Qualifying Accounts | |
| All other schedules are omitted as they are not required, or the required information is shown in the consolidated financial statements or notes thereto. |
| 3) | Exhibits — See Exhibit Index at page IV-2 of this Form 10-K. |
IV-1
Table of Contents
EXHIBIT INDEX
| Exhibit | ||||
| Number | Description | |||
| 3 | .1 | Restated Articles of Incorporation of Brady Corporation(1) | ||
| 3 | .2 | By-laws of Brady Corporation, as amended(2) | ||
| *10 | .1 | Form of Brady Corporation (2004) Change of Control Agreement entered into with Thomas Felmer, Allan Klotsche, David Mathieson, Peter Sephton, and Matthew Williamson(17) | ||
| *10 | .2 | Brady Corporation BradyGold Plan, as amended(2) | ||
| *10 | .3 | Executive Additional Compensation Plan, as amended(2) | ||
| *10 | .4 | Form of Executive’s Deferred Compensation Agreement, as amended(11) | ||
| *10 | .5 | Forms of Director’s Deferred Compensation Agreement, as amended(11) | ||
| *10 | .6 | Brady Corporation 1989 Non-Qualified Stock Option Plan(4) | ||
| *10 | .7 | Brady Corporation 2004 Omnibus Incentive Stock Plan(17) | ||
| *10 | .8 | Form of Brady Corporation 2004 Nonqualified Stock Option Agreement under the 2004 Omnibus Incentive Stock Plan, as amended | ||
| 10 | .9 | Brady Corporation Automatic Dividend Reinvestment Plan(4) | ||
| *10 | .10 | Supplemental Executive Retirement Plan between Brady Corporation and Katherine M. Hudson(5) | ||
| *10 | .11 | Supplemental Executive Retirement Plan between Brady Corporation and Donald E. Rearic(16) | ||
| *10 | .12 | Brady Corporation 1997 Omnibus Incentive Stock Plan(7) | ||
| *10 | .13 | Brady Corporation 1997 Nonqualified Stock Option Plan for Non-Employee Directors(7) | ||
| *10 | .17 | Change of Control Agreement dated January 5, 2001, between Brady Corporation and David R. Hawke(10) | ||
| *10 | .18 | Change of Control Agreement dated May 13, 1997, between Brady Corporation and Donald E. Rearic(16) | ||
| *10 | .23 | Restricted Stock Agreement dated August 1, 1997, between Brady Corporation and David R. Hawke(8) | ||
| *10 | .24 | Amendment to Change of Control Agreement dated May 20, 2003, between Brady Corporation and Frank M. Jaehnert(14) | ||
| *10 | .25 | Brady Corporation Restoration Plan dated January 1, 2000(9) | ||
| *10 | .26 | Brady Corporation 2001 Omnibus Incentive Stock Plan(11) | ||
| 10 | .27 | Revolving Credit Facility Credit Agreement(12) | ||
| *10 | .28 | Change of Control Agreement dated January 5, 2001, between Brady Corporation and Michael O. Oliver(13) | ||
| *10 | .29 | Brady Corporation 2003 Omnibus Incentive Stock Plan(16) | ||
| *10 | .30 | Restricted Stock Agreement dated June 18, 2003, between Brady Corporation and David R. Hawke(16) | ||
| *10 | .31 | Restricted Stock Agreement dated June 18, 2003, between Brady Corporation and Michael O. Oliver(16) | ||
| *10 | .34 | Brady Note Purchase Agreement dated June 28, 2004(15) | ||
| 21 | Subsidiaries of Brady Corporation | |||
| 23 | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm | |||
| 31 | .1 | Rule 13a-14(a)/15d-14(a) Certification of Frank M. Jaehnert | ||
IV-2
Table of Contents
| Exhibit | ||||
| Number | Description | |||
| 31 | .2 | Rule 13a-14(a)/15d-14(a) Certification of David Mathieson | ||
| 32 | .1 | Section 1350 Certification of Frank M. Jaehnert | ||
| 32 | .2 | Section 1350 Certification of David Mathieson | ||
| * | Management contract or compensatory plan or arrangement |
| (1) | Incorporated by reference to Registrant’s Registration Statement No. 333-04155 on Form S-3 |
| (2) | Incorporated by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 1989 |
| (4) | Incorporated by reference to Registrant’s Annual Report on form 10-K for the fiscal year ended July 31, 1992 |
| (5) | Incorporated by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 1994 |
| (6) | Incorporated by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 1995 |
| (7) | Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 1997 |
| (8) | Incorporated by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 1997 |
| (9) | Incorporated by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 2000 |
| (10) | Incorporated by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 2001 |
| (11) | Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2002 |
| (12) | Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2002 |
| (13) | Incorporated by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 2002 |
| (14) | Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2003 |
| (15) | Incorporated by reference to Registrant’s 8-K/A filed August 3, 2004 |
| (16) | Incorporated by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 2003 |
| (17) | Incorporated by reference to Registrant’s Current Report on Form 8-K filed November 24, 2004. |
IV-3
Table of Contents
BRADY CORPORATION AND SUBSIDIARIES
SCHEDULE II — VALUATION AND QUALIFYING
ACCOUNTS
| Year ended July 31, | |||||||||||||||
| Description | 2005 | 2004 | 2003 | ||||||||||||
| (Dollars in thousands) | |||||||||||||||
|
Valuation accounts deducted in balance sheet from assets to
which they apply —
|
|||||||||||||||
|
Accounts receivable — allowance for losses:
|
|||||||||||||||
|
Balances at beginning of period
|
$ | 3,869 | $ | 3,166 | $ | 3,206 | |||||||||
|
Additions — Charged to expense
|
1,216 | 1,450 | 1,523 | ||||||||||||
|
Due to acquired businesses
|
111 | 295 | 167 | ||||||||||||
|
Deductions — Bad debts written off, net of recoveries
|
(1,470 | ) | (1,042 | ) | (1,730 | ) | |||||||||
|
Balances at end of period
|
$ | 3,726 | $ | 3,869 | $ | 3,166 | |||||||||
|
Inventory — reserve for slow-moving inventory:
|
|||||||||||||||
|
Balances at beginning of period
|
$ | 7,434 | $ | 6,715 | $ | 4,957 | |||||||||
|
Additions — Charged to expense
|
298 | 369 | 1,593 | ||||||||||||
|
Due to acquired businesses
|
841 | 350 | 165 | ||||||||||||
|
Balances at end of period
|
$ | 8,573 | $ | 7,434 | $ | 6,715 | |||||||||
IV-4
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 this third day of October 2005.
| Brady Corporation |
| By | /s/ David Mathieson |
|
|
|
| David Mathieson | |
| Vice President & Chief Financial Officer | |
| (Principal Accounting Officer) | |
| (Principal Financial Officer) |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
/s/ F. M. Jaehnert |
President and Director (Principal Executive Officer) |
October 3, 2005 | ||||
|
/s/ P. J. Lettenberger |
Director | October 3, 2005 | ||||
|
/s/ R. A. Bemis |
Director | October 3, 2005 | ||||
|
/s/ F. W. Harris |
Director | October 3, 2005 | ||||
|
/s/ R. C. Buchanan |
Director | October 3, 2005 | ||||
|
/s/ R. D. Peirce |
Director | October 3, 2005 | ||||
|
/s/ G. E. Nei |
Director | October 3, 2005 | ||||
|
/s/ M. K. Bush |
Director | October 3, 2005 | ||||
|
/s/ F. R. Jarc |
Director | October 3, 2005 | ||||
|
/s/ E. P. Pungello |
Director | October 3, 2005 | ||||
IV-5
Exhibit 10.8
BRADY CORPORATION
NONQUALIFIED STOCK OPTION AGREEMENT
NONQUALIFIED STOCK OPTION AGREEMENT
Option granted on ___, 200_, by Brady Corporation, a Wisconsin corporation (the
“Corporation”), to ___(the “Employee”).
WITNESSETH:
WHEREAS, the Board of Directors of the Corporation, desiring to provide increased long-term
incentives for key salaried employees of the Corporation and any present or future Subsidiary of
the Corporation and desiring to facilitate the efforts of the Corporation and its Subsidiaries to
obtain and retain employees of outstanding ability, adopted the Brady Corporation 2004 Omnibus
Incentive Stock Plan on November 18, 2004 (“the Plan”);
NOW, THEREFORE, it is agreed as follows:
| 1. | Number of Shares Optioned; Option Price | |
| The Corporation grants to the Employee the right and option to purchase, on the terms and conditions hereof, all or any part of an aggregate of ___(___) shares of the presently authorized Class A Common Stock of the Corporation, $.01 par value, whether unissued or issued and reacquired by the Corporation, at the price of $___.___per share (the “Option Price”). | ||
| 2. | Conditions of Exercise of Options During Employee’s Lifetime; Vesting of Option | |
| Except as provided hereinafter in this paragraph and in paragraph 3, this Option may not be exercised (a) unless Employee is at the date of the exercise in the employ of the Corporation or a Subsidiary, and (b) until Employee shall have been continuously so employed for a period of at least one year from the date hereof. Thereafter, this Option shall be exercisable for any amount of shares up to the maximum percentage of shares covered by this Option (rounded up to the nearest whole share), as follows (but in no event shall this Option be exercisable for any shares after the expiration date provided in paragraph 7): |
| Number of Completed | Maximum | |||
| Years of Continuous | Percentage | |||
| Employment by Corporation | of Shares For | |||
| or a Subsidiary After | Which Option is | |||
| Date of Grant of this Option | Exercisable | |||
| Less than 1 | Zero | |||
| At least 1 but less than 2 | 33-1/3% | |||
| At least 2 but less than 3 | 66-2/3% | |||
| At least 3 | 100% |
If Employee shall cease to be employed by the Corporation or a Subsidiary for any reason
other than as provided in paragraph 3 after Employee shall have been continuously so
employed for one year after the grant of this Option, Employee may, at any time within 90
days of such termination, but in no event later than the date of expiration of this Option,
exercise this Option to the extent Employee was entitled to do so on the date of such
termination. However, if Employee was dismissed for cause, of which the Compensation
Committee of the Board of Directors of the Corporation (the “Committee”) shall be the sole
judge, this Option shall forthwith expire. This Agreement does not confer upon Employee any
right of continuation of employment by the Corporation or a Subsidiary, nor does it impair
any right the Corporation or any Subsidiary may have to terminate the Employee’s employment
at any time.
| 3. | Termination of Employment | |
| Notwithstanding the provisions of paragraph 2 hereof, if the Employee: |
| (a) | is terminated by the death of the Employee, any unexercised, unexpired Stock Options granted hereunder to the Employee shall be 100% vested and fully exercisable, in whole or in part, at any time within one year after the date of death, by the Employee’s personal representative or by the person to whom the Stock Options are transferred under the Employee’s last will and testament or the applicable laws of descent and distribution; | ||
| (b) | dies within 90 days after termination of employment by the Corporation or its Affiliates, other than for cause, any unexercised, unexpired Stock Options granted hereunder to the Employee and exercisable as of the date of such termination of employment shall be exercisable, in whole or in part, at any time within one year after the date of death, by the Employee’s personal representative or by the person to whom the Stock Options are transferred under the Employee’s last will and testament or the applicable laws of descent and distribution; | ||
| (c) | is terminated as a result of the disability of the Employee (a disability means that the Employee is disabled as a result of sickness or injury, such that he or she is unable to satisfactorily perform the material duties of his or her job, as determined by the Board of Directors, on the basis of medical evidence satisfactory to it), any unexercised, unexpired Stock Options granted hereunder to the Employee shall become 100% vested and fully exercisable, in whole or in part, at any time within one year after the date of disability; or | ||
| (d) | is terminated as a result of the Employee’s retirement (after age 55 with ten years of employment with the Corporation or an Affiliate or after age 65), any unexercised, unexpired Stock Options granted hereunder to the Employee and exercisable as of the date of such retirement may be exercised by the Employee at any time within one year after the date of retirement. |
2
| 4. | Deferral of Exercise | |
| Although the Corporation intends to exert its best efforts so that the shares purchasable upon the exercise of this Option will be registered under, or exempt from, the registration requirements of, the Securities Act of 1933 (the “Act”) and any applicable state securities law at the time or times this Option (or any portion of this Option) first becomes exercisable, if the exercise of this Option would otherwise result in a violation by the Corporation of any provision of the Act or of any state securities law, the Corporation may require that such exercise be deferred until the Corporation has taken appropriate action to avoid any such violation. | ||
| 5. | Method of Exercising Option | |
| This Option shall be exercised by delivering to the Corporation, at the office of its Treasurer, a written notice of the number of shares with respect to which this Option is at the time being exercised and by paying the Corporation in full the Option Price of the shares being acquired at the time. | ||
| 6. | Method of Payment | |
| Payment shall be made either (i) in cash; (ii) by delivering shares of the Corporation’s Class A Common Stock which have been beneficially owned by the Employee, the spouse of the Employee, or both of them, for a period of at least six months prior to the time of exercise (“Delivered Stock”); or (iii) by delivering a combination of cash and Delivered Stock. Payment in the form of Delivered Stock shall be in the amount of the Fair Market Value of the stock at the date of exercise, determined in accordance with paragraph 9. | ||
| 7. | Expiration Date | |
| This Option shall expire ten years after the date on which this Option was granted. | ||
| 8. | Withholding Taxes | |
| The Corporation may require, as a condition to the exercise of this Option, that the Employee concurrently pay to the Corporation any taxes which the Corporation is required to withhold by reason of such exercise. In lieu of part or all of any such payment, the Employee may elect, subject to such rules and regulations as the Committee may adopt from time to time, to have the Corporation withhold from the shares to be issued upon exercise that number of shares having a Fair Market Value, determined in accordance with paragraph 9, equal to the amount which the Corporation is required to withhold. | ||
| 9. | Method of Valuation of Stock | |
| The “Fair Market Value” of the Class A Common Stock of the Corporation on any date shall mean, if the stock is then listed and traded on a registered national securities exchange, or is quoted in the NASDAQ National Market System, the average of the high |
3
and low sales price recorded in composite transactions as reported in the Wall Street
Journal (Midwest Edition) for such date or, if such date is not a business day or if no
sales of shares shall have been reported with respect to such date, the next preceding
business date with respect to which sales were reported. In the absence of reported sales
or if the stock is not so listed or quoted, but is traded in the over-the-counter market,
Fair Market Value shall be the average of the closing bid and asked prices for such shares
on the relevant date.
| 10. | No Rights in Shares Until Certificates Issued | |
| Neither the Employee nor his heirs nor his personal representative shall have any of the rights or privileges of a stockholder of the Corporation in respect of any of the shares issuable upon the exercise of the Option herein granted, unless and until certificates representing such shares shall have been issued. | ||
| 11. | Option Not Transferable | |
| No portion of the Option granted hereunder shall be transferable or assignable (or made subject to any pledge, lien, obligation or liability of an Employee) except (a) by last will and testament or the laws of descent and distribution (and upon a transfer or assignment pursuant to an Employee’s last will and testament or the laws of descent and distribution, any Option must be transferred in accordance therewith); (b) during the Employee’s lifetime, nonqualified stock Options may be transferred by an Employee to the Employee’s spouse, children or grandchildren or to a trust for the benefit of such spouse, children or grandchildren, provided that the terms of any such transfer prohibit the resale of shares acquired upon exercise of the option at a time during which the transferor would not be permitted to sell such shares under the Corporation’s policy on trading by insiders. | ||
| 12. | Prohibition Against Pledge, Attachment, Etc. | |
| Except as otherwise herein provided, the Option herein granted and the rights and privileges pertaining thereto shall not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process. | ||
| 13. | Changes in Stock | |
| In the event there are any changes in the Class A Common Stock of the Corporation through merger, consolidation, reorganization, recapitalization, stock dividend, stock split, combination or exchange of shares, rights offering or any other change affecting the Class A Common Stock of the Corporation, appropriate changes may be made by the Committee, subject to approval of the Board of Directors of the Corporation, in the aggregate number of shares and the purchase price and kind of shares subject to this Option, to prevent substantial dilution or enlargement of the rights granted to or available for Employee. |
4
| 14. | Dissolution or Merger | |
| Anything contained herein to the contrary notwithstanding upon the dissolution or liquidation of the Corporation, or upon any merger in which the Corporation is not the surviving corporation, at any time prior to the expiration date of the termination of this Option, the Employee shall have the right within sixty (60) days prior to the effective date of such dissolution, liquidation or merger, to surrender all or any unexercised portion of this Option to the Corporation for cash, subject to the discretion of the Committee as to the exact timing of said surrender. Notwithstanding the foregoing, however, in the event Employee has retired or died, Employee’s right to surrender all or any unexercised portion of this Option under this paragraph shall be available only to the extent that at the time of any such surrender, Employee would have been entitled to exercise this Option under paragraphs 2 or 3 hereof, as the case may be. The amount of cash to be paid to Employee for the portion of this Option so surrendered, shall be equal to the number of shares of Class A Common Stock subject to the surrendered Option multiplied by the difference between the Option Price per share, as described in paragraph 1 hereof, and the Fair Market Value per share, determined in accordance with paragraph 9 hereof, as of the time of surrender. | ||
| 15. | Notices | |
| Any notice to be given to the Corporation under the terms of this Agreement shall be addressed to the Corporation in care of its Vice President and Chief Financial Officer, and any notice to be given to the Employee may be addressed at the address as it appears on the Corporation’s records, or at such other address as either party may hereafter designate in writing to the other. Except as provided in paragraph 5 hereof, any such notice shall be deemed to have been duly given, if and when enclosed in a properly sealed envelope addressed as aforesaid, and deposited, postage prepaid, in the United States mail. | ||
| 16. | Provisions of Plan Controlling | |
| This Option is subject in all respects to the provisions of the Plan. In the event of any conflict between any provisions of this Option and the provisions of the Plan, the provisions of the Plan shall control. Terms defined in the Plan where used herein shall have the meanings as so defined. Employee acknowledges receipt of a copy of the Plan. | ||
| 17. | Wisconsin Contract | |
| This Option has been granted in Wisconsin and shall be construed under the laws of that state. |
5
IN WITNESS WHEREOF, the Corporation has caused these presents to be executed on its behalf by
its President and to be sealed with its corporate seal, and attested by the Secretary and the
Employee has hereunto set his hand and seal, all as of the day and year first above written, which
is the date of the granting of this Option evidenced hereby.
| BRADY CORPORATION |
||||
| By: | ||||
| Frank M. Jaehnert | ||||
| President and Chief Executive Officer | ||||
| By: | ||||
| Gary E. Nei | ||||
| Chairman, Compensation Committee | ||||
| By: | ||||
| Conrad G. Goodkind | ||||
| Secretary | ||||
| EMPLOYEE: | ||||
| Employee Name (Country) | ||||
6
Exhibit 21
SCHEDULE OF SUBSIDIARIES OF BRADY CORPORATION
| Percentage | ||||
| of Voting | ||||
| State (Country) | Securities | |||
| Name of Company | of Incorporation | Owned | ||
Brady Corporation |
Wisconsin | Parent | ||
Tricor Direct Inc.- |
Delaware | 100% | ||
Doing Business As: |
||||
Seton |
||||
Seton Name Plate Company |
||||
D&G Sign and Label Co. |
||||
Seton Identification Products |
||||
The Hirol Company |
||||
Worldmark of Wisconsin Inc. |
Delaware | 100% | ||
Brady Investment Co. |
Nevada | 100% | ||
Brady International Sales, Inc. |
U.S. Virgin Islands | 100% | ||
Brady International Co. |
Wisconsin | 100% | ||
Brady Worldwide, Inc. (1) |
Wisconsin | 100% | ||
Also Doing Business As: |
||||
Varitronic Systems |
||||
Teklynx International |
||||
Barcodes West |
||||
Temtec |
||||
Brady Australia Pty. Ltd. |
Australia | 100% | ||
Visi Sign Pty. Ltd. |
Australia | 100% | ||
Seton Australia Pty. Ltd. |
Australia | 100% | ||
W.H. Brady, N.V. |
Belgium | 100% | ||
W.H.B. do Brasil Ltda. |
Brazil | 100% | ||
W.H.B. Identification Solutions, Inc.- |
Canada | 100% | ||
Doing Business As: |
||||
Brady |
||||
GrafTek |
||||
Revere-Seton |
||||
Seton |
||||
BRC Financial |
Canada | 100% | ||
EMED Co., Inc. |
New York | 100% | ||
Stopware, Inc. |
California | 100% | ||
Permar Sytems, Inc. - |
New York | 100% | ||
Doing Business As Electromark |
||||
Henryc, Inc. (U.S.) |
New York | 100% | ||
Oliver of New York (U.S.) |
New York | 100% | ||
| Percentage | ||||
| of Voting | ||||
| State (Country) | Securities | |||
| Name of Company | of Incorporation | Owned | ||
Brady Shanghai International Trading Co., Ltd. |
China | 100% | ||
Brady Technology (Wuxi) Co. Ltd. |
China | 100% | ||
Brady (Beijing) Co. Ltd. |
China | 100% | ||
ID Tech Printing (Shanghai) Co. Ltd. |
China | 100% | ||
B.I. U.K. Limited |
England | 100% | ||
B.I. Financial Limited |
England | 100% | ||
Seton Limited |
England | 100% | ||
W.H. Brady Co. Ltd. |
England | 100% | ||
Brady Corporation Limited |
England | 100% | ||
Brady European Finance Limited |
England | 100% | ||
Brady European Holdings Limited |
England | 100% | ||
Cleere Advantage Limited |
England | 100% | ||
Focal Display Limited |
England | 100% | ||
Focal Signs Limited |
England | 100% | ||
S & L Signmaker Limited |
England | 100% | ||
Safety Shop Limited |
England | 100% | ||
Safety Shop Co. U.K. Limited |
England | 100% | ||
Signs & Labels Limited |
England | 100% | ||
Southern Signs Systems Limited |
England | 100% | ||
Braton Europe S.A.R.L |
France | 100% | ||
Braton Groupe S.A.R.L. |
France | 100% | ||
Doing Business As: |
||||
Brady |
||||
Techniques Avancees |
||||
Holman |
||||
Periprint |
||||
Brady Group S.A.S. |
France | 100% | ||
Doing Business As: |
||||
Seton |
||||
Signals & Lettrasoft |
||||
Brady Holding GmbH |
Germany | 100% | ||
Brady GmbH |
Germany | 100% | ||
Doing Business As: |
||||
Seton |
||||
Balkhausen |
||||
Brady ISST |
||||
Soft & Etimark |
||||
Brady KFT |
Hungary | 100% | ||
Brady Italia, SRL |
Italy | 100% | ||
Nippon Brady K.K. |
Japan | 100% | ||
| Percentage | ||||
| of Voting | ||||
| State (Country) | Securities | |||
| Name of Company | of Incorporation | Owned | ||
Brady Technology SDN, BHD. |
Malaysia | 100% | ||
W. H. Brady S. de R.L. de C.V. |
Mexico | 100% | ||
Brady Corporation S.E.A. Pte. Ltd. |
Singapore | 100% | ||
Brady Corporation Asia Pte. Ltd. |
Singapore | 100% | ||
Brady Identification S.L. |
Spain | 100% | ||
Brady AB |
Sweden | 100% | ||
Seton Scandinavia AB |
Sweden | 100% | ||
Brady (Shenzhen) Co. Ltd. |
China | 100% | ||
Pure Vantage |
England | 100% | ||
Rapid Update |
England | 100% | ||
Brady Servicios, S. de R.L. de C.V. |
Mexico | 100% | ||
Brandon Converting Mexico S. de R.L. de C.V. |
Mexico | 100% | ||
Brandon Precision Pte. Ltd. |
Singapore | 100% | ||
Brady Technologies Asia Pte. Ltd. |
Singapore | 100% | ||
Brady Asia Holding Pte. Ltd. |
Singapore | 100% | ||
Brady Singapore Holdings Pte. Ltd. |
Singapore | 100% | ||
ID Technologies Pte. Ltd. |
Singapore | 100% | ||
ID Technologies (China) Pte. Ltd. |
Singapore | 100% | ||
Brady S.R.O. |
Slovakia | 100% | ||
Brady Holding Co. Ltd. |
Thailand | 49%(2) | ||
Brady (Thailand) Co. Ltd. |
Thailand | 100% | ||
| (1) | TISCOR, Inc., a California Corporation, was legally merged into Brady Worldwide, Inc. on August 1, 2005. | |
| (2) | Brady Corporation owns 49% of the outstanding shares of Brady Holding Co. Ltd., but Brady Corporation maintains controlling voting rights. The 51% owner holds preferred shares, which entitle it to one vote for every 20 shares. Brady Corporation holds common shares, which entitle it to one vote for every one share. The preferred shareholder’s share of the net income in Brady Holding Co. Ltd is limited to recovery of their initial investment. |
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-110949, 333-99615,
333-38857, 333-38859, 333-44505 and 333-92417 on Form S-8 and 333-128023 on form S-3 of our
reports dated September 29, 2005, relating to the financial statements and financial statement
schedule of Brady Corporation and management’s report on the effectiveness of internal control over
financial reporting, appearing in this Annual Report on Form 10-K of Brady Corporation for the year
ended July 31, 2005.
/s/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
October 3, 2005
Milwaukee, Wisconsin
October 3, 2005
EXHIBIT 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, Frank M. Jaehnert, certify that:
(1) I have reviewed this annual report on Form 10-K of Brady Corporation;
(2) Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
(4) The registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
(5) The registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant’s internal control over financial reporting.
Date: October 3, 2005
/s/ FRANK M. JAEHNERT
___________________________________________________
(Frank M. Jaehnert)
President and Chief Executive Officer
___________________________________________________
(Frank M. Jaehnert)
President and Chief Executive Officer
EXHIBIT 31.2
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, David Mathieson, certify that:
(1) I have reviewed this annual report on Form 10-K of Brady Corporation;
(2) Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
(5) The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal control over financial reporting.
Date: October 3, 2005
/s/ DAVID MATHIESON
___________________________________________________
(David Mathieson)
Vice President and Chief Financial Officer
___________________________________________________
(David Mathieson)
Vice President and Chief Financial Officer
EXHIBIT 32.1
SECTION 1350 CERTIFICATION
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, the undersigned officer of Brady Corporation (the “Company”) certifies to his
knowledge that:
(1) The Annual Report on Form 10-K of the Company for the year ended July 31, 2005 fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in that Form 10-K fairly presents, in all material respects,
the financial conditions and results of operations of the Company.
Date: October 3, 2005
/s/ FRANK M. JAEHNERT
________________________________________________
(Frank M. Jaehnert)
President and Chief Executive Officer
________________________________________________
(Frank M. Jaehnert)
President and Chief Executive Officer
A signed original of this written statement required by Section 906, or other document
authenticating, acknowledging, or otherwise adopting the signature that appears in typed form
within the electronic version of this written statement required by Section 906, has been provided
to the Company and will be retained by the Company and furnished to the Securities and Exchange
Commission or its staff upon request.
EXHIBIT 32.2
SECTION 1350 CERTIFICATION
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, the undersigned officer of Brady Corporation (the “Company”) certifies to his
knowledge that:
(1) The Annual Report on Form 10-K of the Company for the year ended July 31, 2005 fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in that Form 10-K fairly presents, in all material respects,
the financial conditions and results of operations of the Company.
Date: October 3, 2005
/s/ DAVID MATHIESON
________________________________________________
(David Mathieson)
Vice President and Chief Financial Officer
________________________________________________
(David Mathieson)
Vice President and Chief Financial Officer
A signed original of this written statement required by Section 906, or other document
authenticating, acknowledging, or otherwise adopting the signature that appears in typed form
within the electronic version of this written statement required by Section 906, has been provided
to the Company and will be retained by the Company and furnished to the Securities and Exchange
Commission or its staff upon request.