e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended January 31, 2007
OR
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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 its charter)
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Wisconsin
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39-0178960 |
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(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
6555 West Good Hope Road, Milwaukee, Wisconsin 53223
(Address of principal executive offices)
(Zip Code)
(414) 358-6600
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
As of
March 2, 2007, there were outstanding 50,409,791 shares of Class A Nonvoting Common Stock
and 3,538,628 shares of Class B Voting Common Stock. The Class B Common Stock, all of which is held
by affiliates of the Registrant, is the only voting stock.
FORM 10-Q
BRADY CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
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January 31, 2007 |
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|
July 31, 2006 |
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|
(Unaudited) |
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|
ASSETS |
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|
|
|
|
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Current assets: |
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|
|
|
|
|
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|
Cash and cash equivalents |
|
$ |
86,408 |
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|
$ |
113,008 |
|
Short term investments |
|
|
|
|
|
|
11,500 |
|
Accounts receivable, less allowance for losses ($8,340 and $6,390, respectively) |
|
|
218,594 |
|
|
|
187,907 |
|
Inventories: |
|
|
|
|
|
|
|
|
Finished products |
|
|
76,245 |
|
|
|
59,365 |
|
Work-in-process |
|
|
18,292 |
|
|
|
12,850 |
|
Raw materials and supplies |
|
|
39,823 |
|
|
|
37,702 |
|
|
|
|
|
|
|
|
Total inventories |
|
|
134,360 |
|
|
|
109,917 |
|
Prepaid expenses and other current assets |
|
|
43,389 |
|
|
|
36,825 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
482,751 |
|
|
|
459,157 |
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|
|
|
|
|
|
|
|
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Other assets: |
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|
|
|
|
|
|
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Goodwill |
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|
655,238 |
|
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|
587,642 |
|
Other intangible assets |
|
|
145,544 |
|
|
|
134,111 |
|
Deferred income taxes |
|
|
33,954 |
|
|
|
34,135 |
|
Other |
|
|
16,599 |
|
|
|
10,235 |
|
|
|
|
|
|
|
|
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|
Property, plant and equipment: |
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|
|
|
|
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Cost: |
|
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|
|
|
|
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Land |
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|
6,582 |
|
|
|
6,548 |
|
Buildings and improvements |
|
|
81,878 |
|
|
|
78,418 |
|
Machinery and equipment |
|
|
219,468 |
|
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|
198,426 |
|
Construction in progress |
|
|
28,636 |
|
|
|
12,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
336,564 |
|
|
|
295,490 |
|
Less accumulated depreciation |
|
|
171,144 |
|
|
|
155,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net property, plant and equipment |
|
|
165,420 |
|
|
|
139,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,499,506 |
|
|
$ |
1,365,186 |
|
|
|
|
|
|
|
|
|
|
|
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|
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|
LIABILITIES AND STOCKHOLDERS INVESTMENT |
|
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|
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|
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Current liabilities: |
|
|
|
|
|
|
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Accounts payable |
|
$ |
92,598 |
|
|
$ |
78,585 |
|
Wages and amounts withheld from employees |
|
|
49,555 |
|
|
|
61,778 |
|
Taxes, other than income taxes |
|
|
6,768 |
|
|
|
6,231 |
|
Accrued income taxes |
|
|
22,627 |
|
|
|
25,243 |
|
Other current liabilities |
|
|
43,357 |
|
|
|
46,763 |
|
Short-term borrowings and current maturities on long-term obligations |
|
|
12 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
214,917 |
|
|
|
218,620 |
|
|
|
|
|
|
|
|
|
|
Long-term obligations, less current maturities |
|
|
420,817 |
|
|
|
350,018 |
|
Other liabilities |
|
|
56,968 |
|
|
|
50,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
692,702 |
|
|
|
619,140 |
|
|
|
|
|
|
|
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Stockholders investment: |
|
|
|
|
|
|
|
|
Class A nonvoting common stock Issued 50,481,743 and 50,481,743 shares,
respectively and outstanding 50,403,641 and 50,188,842 shares, respectively |
|
|
505 |
|
|
|
505 |
|
Class B voting common stock Issued and outstanding 3,538,628 shares |
|
|
35 |
|
|
|
35 |
|
Additional paid-in capital |
|
|
259,282 |
|
|
|
258,922 |
|
Earnings retained in the business |
|
|
500,134 |
|
|
|
460,991 |
|
Treasury stock 78,102 and 292,901 shares, respectively of Class A nonvoting
common stock, at cost |
|
|
(2,956 |
) |
|
|
(10,865 |
) |
Accumulated other comprehensive income |
|
|
49,042 |
|
|
|
35,696 |
|
Other |
|
|
762 |
|
|
|
762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders investment |
|
|
806,804 |
|
|
|
746,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,499,506 |
|
|
$ |
1,365,186 |
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements
2
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
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|
Three Months Ended January 31, |
|
|
Six Months Ended January 31, |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
|
|
Net sales |
|
$ |
321,275 |
|
|
$ |
230,974 |
|
|
|
39.1 |
% |
|
$ |
653,534 |
|
|
$ |
463,609 |
|
|
|
41.0 |
% |
Cost of products sold |
|
|
171,114 |
|
|
|
113,869 |
|
|
|
50.3 |
% |
|
|
339,245 |
|
|
|
222,513 |
|
|
|
52.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
150,161 |
|
|
|
117,105 |
|
|
|
28.2 |
% |
|
|
314,289 |
|
|
|
241,096 |
|
|
|
30.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
9,082 |
|
|
|
6,829 |
|
|
|
33.0 |
% |
|
|
17,614 |
|
|
|
13,363 |
|
|
|
31.8 |
% |
Selling, general and administrative |
|
|
108,355 |
|
|
|
79,000 |
|
|
|
37.2 |
% |
|
|
212,010 |
|
|
|
152,328 |
|
|
|
39.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
117,437 |
|
|
|
85,829 |
|
|
|
36.8 |
% |
|
|
229,624 |
|
|
|
165,691 |
|
|
|
38.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
32,724 |
|
|
|
31,276 |
|
|
|
4.6 |
% |
|
|
84,665 |
|
|
|
75,405 |
|
|
|
12.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and other income net |
|
|
(106 |
) |
|
|
88 |
|
|
|
-220.5 |
% |
|
|
532 |
|
|
|
480 |
|
|
|
10.8 |
% |
Interest expense |
|
|
(5,244 |
) |
|
|
(2,435 |
) |
|
|
115.4 |
% |
|
|
(9,979 |
) |
|
|
(4,424 |
) |
|
|
125.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
27,374 |
|
|
|
28,929 |
|
|
|
-5.4 |
% |
|
|
75,218 |
|
|
|
71,461 |
|
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
7,665 |
|
|
|
7,675 |
|
|
|
-0.1 |
% |
|
|
21,061 |
|
|
|
20,009 |
|
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
19,709 |
|
|
$ |
21,254 |
|
|
|
-7.3 |
% |
|
$ |
54,157 |
|
|
$ |
51,452 |
|
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Class A Nonvoting Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income |
|
$ |
0.37 |
|
|
$ |
0.43 |
|
|
|
-14.0 |
% |
|
$ |
1.01 |
|
|
$ |
1.05 |
|
|
|
-3.8 |
% |
Diluted net income |
|
$ |
0.36 |
|
|
$ |
0.43 |
|
|
|
-16.3 |
% |
|
$ |
0.99 |
|
|
$ |
1.03 |
|
|
|
-3.9 |
% |
Dividends |
|
$ |
0.14 |
|
|
$ |
0.13 |
|
|
|
7.7 |
% |
|
$ |
0.28 |
|
|
$ |
0.26 |
|
|
|
7.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Class B Voting Common Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income |
|
$ |
0.37 |
|
|
$ |
0.43 |
|
|
|
-14.0 |
% |
|
$ |
0.99 |
|
|
$ |
1.03 |
|
|
|
-3.9 |
% |
Diluted net income |
|
$ |
0.36 |
|
|
$ |
0.43 |
|
|
|
-16.3 |
% |
|
$ |
0.97 |
|
|
$ |
1.02 |
|
|
|
-4.9 |
% |
Dividends |
|
$ |
0.14 |
|
|
$ |
0.13 |
|
|
|
7.7 |
% |
|
$ |
0.26 |
|
|
$ |
0.24 |
|
|
|
8.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
53,894 |
|
|
|
48,994 |
|
|
|
|
|
|
|
53,814 |
|
|
|
49,098 |
|
|
|
|
|
Diluted |
|
|
54,789 |
|
|
|
49,813 |
|
|
|
|
|
|
|
54,697 |
|
|
|
49,891 |
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
3
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
January 31, |
|
|
|
(Unaudited) |
|
|
|
2007 |
|
|
2006 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
54,157 |
|
|
$ |
51,452 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
26,096 |
|
|
|
14,554 |
|
Deferred income taxes |
|
|
(542 |
) |
|
|
712 |
|
Loss on disposal of property, plant & equipment |
|
|
305 |
|
|
|
45 |
|
Provision for losses on accounts receivable |
|
|
1,301 |
|
|
|
623 |
|
Non-cash portion of stock-based compensation expense |
|
|
3,669 |
|
|
|
2,827 |
|
Changes in operating assets and liabilities (net of effects of business acquisitions): |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(15,337 |
) |
|
|
(11,250 |
) |
Inventories |
|
|
(14,787 |
) |
|
|
(11,537 |
) |
Prepaid expenses and other assets |
|
|
(8,590 |
) |
|
|
(2,959 |
) |
Accounts payable and accrued liabilities |
|
|
(8,316 |
) |
|
|
(17,512 |
) |
Income taxes |
|
|
(3,411 |
) |
|
|
(10,127 |
) |
Other liabilities |
|
|
2,514 |
|
|
|
3,970 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
37,059 |
|
|
|
20,798 |
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired |
|
|
(90,418 |
) |
|
|
(100,256 |
) |
Payments of contingent consideration |
|
|
(9,329 |
) |
|
|
|
|
Purchases of short-term investments |
|
|
|
|
|
|
(3,800 |
) |
Sales of short-term investments |
|
|
11,500 |
|
|
|
10,900 |
|
Purchases of property, plant and equipment |
|
|
(32,135 |
) |
|
|
(17,341 |
) |
Proceeds from sale of property, plant and equipment |
|
|
234 |
|
|
|
66 |
|
Other |
|
|
(5,831 |
) |
|
|
(1,711 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(125,979 |
) |
|
|
(112,142 |
) |
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Payment of dividends |
|
|
(15,014 |
) |
|
|
(12,710 |
) |
Proceeds from issuance of common stock |
|
|
3,837 |
|
|
|
6,467 |
|
Principal payments on debt |
|
|
(26,231 |
) |
|
|
(190,459 |
) |
Proceeds from issuance of debt |
|
|
97,020 |
|
|
|
289,630 |
|
Purchase of treasury stock |
|
|
|
|
|
|
(27,233 |
) |
Income tax benefit from the exercise of stock options |
|
|
763 |
|
|
|
3,354 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
60,375 |
|
|
|
69,049 |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
1,945 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(26,600 |
) |
|
|
(22,228 |
) |
Cash and cash equivalents, beginning of period |
|
|
113,008 |
|
|
|
72,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
86,408 |
|
|
$ |
50,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest, net of capitalized interest |
|
$ |
9,754 |
|
|
$ |
3,907 |
|
Income taxes, net of refunds |
|
|
23,983 |
|
|
|
24,510 |
|
|
|
|
|
|
|
|
|
|
Acquisitions: |
|
|
|
|
|
|
|
|
Fair value of assets acquired, net of cash and goodwill |
|
$ |
50,042 |
|
|
$ |
39,422 |
|
Liabilities assumed |
|
|
(15,617 |
) |
|
|
(9,326 |
) |
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
55,993 |
|
|
|
70,160 |
|
|
|
|
|
|
|
|
Net cash paid for acquisitions |
|
$ |
90,418 |
|
|
$ |
100,256 |
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
4
BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended January 31, 2007
(Unaudited)
(In thousands, except share and per share amounts)
NOTE A Basis of Presentation
The condensed consolidated financial statements included herein have been prepared by Brady
Corporation and subsidiaries (the Company or Brady) without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of the Company, the foregoing
statements contain all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Company as of January 31, 2007 and July 3l, 2006, its
results of operations for the three and six months ended January 31, 2007 and 2006, and its cash
flows for the six months ended January 31, 2007 and 2006. The condensed consolidated balance sheet
as of July 31, 2006 has been derived from the audited consolidated financial statements of that
date. The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America (GAAP) requires management to make estimates and
assumptions that affect the reported amounts therein. Due to the inherent uncertainty involved in
making estimates, actual results in future periods may differ from the estimates.
Certain information and footnote disclosures normally included in financial statements
prepared in accordance with GAAP have been omitted pursuant to rules and regulations of the
Securities and Exchange Commission. Accordingly, the condensed consolidated financial statements do
not include all of the information and footnotes required by GAAP for complete financial statement
presentation. It is suggested that these condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes thereto included in the
Companys latest annual report on Form 10-K for the year ended July 31, 2006.
Reclassifications Certain prior period amounts have been reclassified to conform with the
current period presentation.
NOTE B Goodwill and Intangible Assets
Changes in the carrying amount of goodwill for the six months ended January 31, 2007, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
|
Europe |
|
|
Asia-Pacific |
|
|
Total |
|
Balance as of July 31, 2006 |
|
$ |
322,759 |
|
|
$ |
111,792 |
|
|
$ |
153,091 |
|
|
$ |
587,642 |
|
Goodwill acquired during the period |
|
|
41,024 |
|
|
|
14,808 |
|
|
|
161 |
|
|
|
55,993 |
|
Adjustments for prior year acquisitions |
|
|
1,934 |
|
|
|
200 |
|
|
|
3,536 |
|
|
|
5,670 |
|
Translation adjustments |
|
|
(441 |
) |
|
|
2,476 |
|
|
|
3,898 |
|
|
|
5,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 31, 2007 |
|
$ |
365,276 |
|
|
$ |
129,276 |
|
|
$ |
160,686 |
|
|
$ |
655,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following acquisitions completed during the six months ended January 31, 2007 increased
goodwill by the following amounts:
|
|
|
|
|
|
|
|
|
Segment |
|
Goodwill |
|
Comprehensive Identification Products, Inc. (CIPI) |
|
Americas, Europe and Asia-Pacific |
|
$ |
18,937 |
|
Precision Converters, L.P. (PC) |
|
Americas |
|
|
8,409 |
|
Scafftag, Ltd., Safetrak, Ltd. and Scafftag Pty., Ltd. (collectively Scafftag) |
|
Americas, Europe and Asia-Pacific |
|
|
6,380 |
|
Asterisco Artes Graficas Ltda. (Asterisco) |
|
Americas |
|
|
12,391 |
|
Modernotecnica SpA (Moderno) |
|
Europe |
|
|
9,876 |
|
|
|
|
|
|
Total |
|
|
|
$ |
55,993 |
|
|
|
|
|
|
5
Goodwill also increased $5,670 during the six months ended January 31, 2007 as a result of
adjustments to the preliminary allocation of the purchase price for acquisitions completed in
fiscal 2006 and the recording of a $1,577 liability for the contingent payment due to the previous
owners of QDP Thailand Co., Ltd. (QDPT), which was acquired in fiscal 2006 (see Note E for more
information). The largest components of the increase as a result of adjustments to the preliminary
allocation of purchase price related to Daewon Industry Corporation (Daewon) and Tradex
Converting AB (Tradex), which added $1,509 and $1,491, respectively. The remaining $5,933
increase to goodwill during the six months was attributable to the effects of foreign currency
translation.
Other intangible assets include patents, trademarks, customer relationships, purchased
software, non-compete agreements and other intangible assets with finite lives being amortized in
accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets. The net book value of these assets was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2007 |
|
|
July 31, 2006 |
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
Gross |
|
|
|
|
|
|
|
|
|
Period |
|
|
Carrying |
|
|
Accumulated |
|
|
Net Book |
|
|
Period |
|
|
Carrying |
|
|
Accumulated |
|
|
Net Book |
|
|
|
(Years) |
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
|
(Years) |
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
Amortized
other intangible
assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents |
|
|
15 |
|
|
$ |
8,402 |
|
|
$ |
(5,546 |
) |
|
$ |
2,856 |
|
|
|
15 |
|
|
$ |
7,885 |
|
|
$ |
(5,134 |
) |
|
$ |
2,751 |
|
Trademarks and
other |
|
|
5 |
|
|
|
4,019 |
|
|
|
(2,699 |
) |
|
|
1,320 |
|
|
|
6 |
|
|
|
3,328 |
|
|
|
(2,106 |
) |
|
|
1,222 |
|
Customer
relationships |
|
|
7 |
|
|
|
129,505 |
|
|
|
(26,743 |
) |
|
|
102,762 |
|
|
|
7 |
|
|
|
109,955 |
|
|
|
(17,693 |
) |
|
|
92,262 |
|
Purchased
software |
|
|
5 |
|
|
|
3,291 |
|
|
|
(2,196 |
) |
|
|
1,095 |
|
|
|
5 |
|
|
|
3,288 |
|
|
|
(1,887 |
) |
|
|
1,401 |
|
Non-compete
agreements |
|
|
4 |
|
|
|
11,340 |
|
|
|
(5,503 |
) |
|
|
5,837 |
|
|
|
4 |
|
|
|
9,757 |
|
|
|
(4,448 |
) |
|
|
5,309 |
|
Unamortized other
intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
N/A |
|
|
|
31,674 |
|
|
|
|
|
|
|
31,674 |
|
|
|
N/A |
|
|
|
31,166 |
|
|
|
|
|
|
|
31,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
188,231 |
|
|
$ |
(42,687 |
) |
|
$ |
145,544 |
|
|
|
|
|
|
$ |
165,379 |
|
|
$ |
(31,268 |
) |
|
$ |
134,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The acquisitions completed during the six months ended January 31, 2007 (see Note E
for more information) contributed to the increases in each of the categories of other intangible
assets listed above. The increase in customer relationships relates to the acquisitions of CIPI,
PC, Scafftag and Moderno which added $5,633, $2,225, $3,279 and $6,570, respectively. These assets
will be amortized over a weighted average amortization period of 5.6 years.
The value of goodwill and other intangible assets in the Consolidated Financial Statements at
January 31, 2007 differs from the value assigned to them in the allocation of purchase price due to
the effect of fluctuations in the exchange rates used to translate financial statements into the
United States Dollar between the date of acquisition and January 31, 2007.
Amortization expense on intangible assets was $5,720 and $2,925 for the three-month periods
ended January 31, 2007 and 2006, respectively and $10,961 and $5,329 for the six-month periods
ended January 31, 2007 and 2006, respectively. The amortization over each of the next five fiscal
years is projected to be $23,166, $22,531, $21,751, $20,643 and $17,296 for the years ending July
31, 2007, 2008, 2009, 2010 and 2011, respectively.
NOTE C Comprehensive Income
Total comprehensive income, which was comprised of net income, foreign currency adjustments
and net unrealized gains and losses from cash flow hedges, amounted to approximately $10,536 and
$25,846 for the three months ended January 31, 2007 and 2006, respectively and $40,811 and $54,820
for the six months ended January 31, 2007 and 2006, respectively.
6
NOTE D Net Income Per Common Share
Reconciliations of the numerator and denominator of the basic and diluted per share
computations for the Companys Class A and Class B common stock are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended January 31, |
|
|
Six Months Ended January 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (numerator for basic and
diluted Class A net income per share) |
|
$ |
19,709 |
|
|
$ |
21,254 |
|
|
$ |
54,157 |
|
|
$ |
51,452 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferential dividends |
|
|
|
|
|
|
|
|
|
|
(836 |
) |
|
|
(758 |
) |
Preferential dividends on
dilutive stock options |
|
|
|
|
|
|
|
|
|
|
(15 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted
Class B net income per share |
|
$ |
19,709 |
|
|
$ |
21,254 |
|
|
$ |
53,306 |
|
|
$ |
50,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per
share for both Class A and Class B |
|
|
53,894,000 |
|
|
|
48,994,000 |
|
|
|
53,814,000 |
|
|
|
49,098,000 |
|
Plus: Effect of dilutive stock options |
|
|
895,000 |
|
|
|
819,000 |
|
|
|
883,000 |
|
|
|
793,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net
income per share for both Class A and
Class B |
|
|
54,789,000 |
|
|
|
49,813,000 |
|
|
|
54,697,000 |
|
|
|
49,891,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Nonvoting Common Stock net income
per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.37 |
|
|
$ |
0.43 |
|
|
$ |
1.01 |
|
|
$ |
1.05 |
|
Diluted |
|
$ |
0.36 |
|
|
$ |
0.43 |
|
|
$ |
0.99 |
|
|
$ |
1.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Voting Common Stock net income per
share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.37 |
|
|
$ |
0.43 |
|
|
$ |
0.99 |
|
|
$ |
1.03 |
|
Diluted |
|
$ |
0.36 |
|
|
$ |
0.43 |
|
|
$ |
0.97 |
|
|
$ |
1.02 |
|
Options to purchase 1,269,500 and 949,500 shares of Class A Nonvoting Common Stock for the
three and six months ended January 31, 2007, respectively, and 1,261,500 and 811,250 shares of
Class A Nonvoting Common Stock for the three and six months ended January 31, 2006, respectively,
were not included in the computations of diluted net income per share because the option exercise
price was greater than the average market price of the common shares and, therefore, the effect
would be anti-dilutive.
NOTE E Acquisitions
During the six months ended January 31, 2007, the Company acquired the following companies for
a total combined purchase price, net of cash acquired, of $90,418. A brief description of each
company acquired during the six months is included below.
CIPI is headquartered in Burlington, Massachusetts,
with operations in Hong Kong, China and the
Netherlands. CIPI is a market leader in badging
accessories used to identify and track employees and
visitors in a variety of settings including
businesses, healthcare facilities, special events and
government buildings. CIPI was acquired in August
2006.
PC is located in Dallas, Texas and is a supplier of
die-cut products to the medical market with a specific
focus on disposable, advanced wound-care products. PC
was acquired in October 2006.
Scafftag is located in Barry, Wales, U.K., with
operations in Australia and in the United States and
sales offices in the United Arab Emirates. Scafftag
is an industry leader in safety identification and
facility management products in the U.K., specializing
in products that help companies meet legislative
requirements for safety standards in the oil and gas,
construction and scaffolding industries. Scafftag was
acquired in December 2006.
Asterisco is located in Sao Paulo, Brazil and is a
leading manufacturer of industrial high-performance
labels in Brazil, specializing in custom labels
printed on film materials for the electronics,
automotive, pharmaceutical and other industries.
Asterisco was acquired in December 2006.
7
Moderno is located in Milan, Italy and is a wire-identification manufacturer
serving the Maintenance, Repair and Operations market with products used
primarily in the electrical industry. Moderno was acquired in December 2006.
The purchase agreements for Scafftag and Asterisco each include provisions for contingent
payments based upon meeting certain performance conditions over a period of time subsequent to the
acquisition. The total maximum contingent payments of $5.2 million have not been accrued as
liabilities in the accompanying consolidated financial statements as the payments are based on
attaining certain financial results which have not been achieved as of January 31, 2007.
Approximately $4.9 million of the contingency related to the Asterisco acquisition has been placed
in an escrow account in compliance with the terms of the purchase agreement. This cash outflow has
been recorded in other investing activities on the accompanying consolidated statement of cash
flows for the six months ended January 31, 2007. The purchase agreement of Asterisco also includes
a holdback provision of approximately $2.3 million that has been recorded as a liability in the
accompanying consolidated financial statements.
The allocation of the purchase price of each company acquired during the six months ended
January 31, 2007, is preliminary pending the final valuation of intangible assets as well as
certain tangible assets and liabilities. The following table summarizes the combined estimated fair
values of the assets acquired and liabilities assumed as of the date of the acquisitions.
|
|
|
|
|
Current assets |
|
$ |
23,409 |
|
Property, plant & equipment |
|
|
6,795 |
|
Goodwill |
|
|
55,993 |
|
Customer relationships |
|
|
17,707 |
|
Non-compete agreements |
|
|
811 |
|
Patents |
|
|
300 |
|
Trademarks and other intangible assets |
|
|
1,020 |
|
|
|
|
|
Total assets acquired |
|
|
106,035 |
|
Liabilities assumed |
|
|
(15,617 |
) |
|
|
|
|
Net assets acquired |
|
$ |
90,418 |
|
|
|
|
|
Of the $55,993 allocated to goodwill, $8,658 is expected to be deductible for tax
purposes based on preliminary analysis.
The purchase agreement for the acquisition of QDPT that was completed in fiscal 2006 included
a provision for contingent payments based upon meeting certain performance conditions over a period
of time subsequent to the acquisition. As of January 31, 2007, $1,577 has been recorded as a
liability on the accompanying consolidated financial statements as the performance conditions of
the agreement have been met. The liability will be paid in the third quarter of fiscal 2007.
Subsequent event
On February 1, 2007, the Company completed the acquisition of Clement Communications, Inc.
(Clement), headquartered in Concordville, Pennsylvania. Clement is a direct marketer of posters,
newsletters, guides and handbooks that address safety, quality, teamwork, sales, employment
practices, customer service and OSHA regulations. Clements products are designed to facilitate
and enhance employee communications for business, government and scholastic markets.
8
NOTE F Segment Information
The Companys reportable segments are geographical regions that are each managed separately.
The Company has three reportable segments: Americas, Europe and Asia-Pacific. Following is a
summary of segment information for the three months and six months ended January 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
And |
|
|
|
|
Americas |
|
Europe |
|
Asia-Pacific |
|
Subtotals |
|
Eliminations |
|
Totals |
Three months
ended January 31,
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
external customers |
|
$ |
139,988 |
|
|
$ |
98,846 |
|
|
$ |
82,441 |
|
|
$ |
321,275 |
|
|
$ |
|
|
|
$ |
321,275 |
|
Intersegment revenues |
|
|
12,504 |
|
|
|
1,664 |
|
|
|
4,702 |
|
|
|
18,870 |
|
|
|
(18,870 |
) |
|
|
|
|
Segment profit (loss) |
|
|
28,793 |
|
|
|
22,604 |
|
|
|
12,394 |
|
|
|
63,791 |
|
|
|
(2,228 |
) |
|
|
61,563 |
|
Three months ended
January 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
external customers |
|
$ |
109,951 |
|
|
$ |
76,284 |
|
|
$ |
44,739 |
|
|
$ |
230,974 |
|
|
$ |
|
|
|
$ |
230,974 |
|
Intersegment revenues |
|
|
14,221 |
|
|
|
934 |
|
|
|
1,803 |
|
|
|
16,958 |
|
|
|
(16,958 |
) |
|
|
|
|
Segment profit (loss) |
|
|
24,969 |
|
|
|
19,989 |
|
|
|
11,717 |
|
|
|
56,675 |
|
|
|
(2,631 |
) |
|
|
54,044 |
|
Six months ended
January 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
external customers |
|
$ |
286,931 |
|
|
$ |
191,211 |
|
|
$ |
175,392 |
|
|
$ |
653,534 |
|
|
$ |
|
|
|
$ |
653,534 |
|
Intersegment revenues |
|
|
24,498 |
|
|
|
2,450 |
|
|
|
10,693 |
|
|
|
37,641 |
|
|
|
(37,641 |
) |
|
|
|
|
Segment profit (loss) |
|
|
65,698 |
|
|
|
45,609 |
|
|
|
34,531 |
|
|
|
145,838 |
|
|
|
(4,425 |
) |
|
|
141,413 |
|
Six months ended
January 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
external customers |
|
$ |
226,010 |
|
|
$ |
150,046 |
|
|
$ |
87,553 |
|
|
$ |
463,609 |
|
|
$ |
|
|
|
$ |
463,609 |
|
Intersegment revenues |
|
|
30,408 |
|
|
|
2,147 |
|
|
|
3,814 |
|
|
|
36,369 |
|
|
|
(36,369 |
) |
|
|
|
|
Segment profit (loss) |
|
|
57,163 |
|
|
|
40,767 |
|
|
|
24,727 |
|
|
|
122,657 |
|
|
|
(5,017 |
) |
|
|
117,640 |
|
Following is a reconciliation of segment profit to net income for the three months and six months
ended January 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended: |
|
|
Six months ended: |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Total profit from reportable segments |
|
$ |
63,791 |
|
|
$ |
56,675 |
|
|
$ |
145,838 |
|
|
$ |
122,657 |
|
Corporate and eliminations |
|
|
(2,228 |
) |
|
|
(2,631 |
) |
|
|
(4,425 |
) |
|
|
(5,017 |
) |
Unallocated amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative costs |
|
|
(28,839 |
) |
|
|
(22,768 |
) |
|
|
(56,748 |
) |
|
|
(42,235 |
) |
Investment and other (expense) income |
|
|
(106 |
) |
|
|
88 |
|
|
|
532 |
|
|
|
480 |
|
Interest expense |
|
|
(5,244 |
) |
|
|
(2,435 |
) |
|
|
(9,979 |
) |
|
|
(4,424 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
27,374 |
|
|
|
28,929 |
|
|
|
75,218 |
|
|
|
71,461 |
|
Income taxes |
|
|
(7,665 |
) |
|
|
(7,675 |
) |
|
|
(21,061 |
) |
|
|
(20,009 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
19,709 |
|
|
$ |
21,254 |
|
|
$ |
54,157 |
|
|
$ |
51,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
NOTE G Stock-Based Compensation
The Company has an incentive stock plan under which the Board of Directors may grant
nonqualified stock options to purchase shares of Class A Nonvoting Common Stock to employees.
Additionally, the Company has a nonqualified stock option plan for non-employee directors under
which stock options to purchase shares of Class A Nonvoting Common Stock are available for grant.
The options have an exercise price equal to the fair market value of the underlying stock at the
date of grant and vest ratably over a three-year period, with one-third becoming exercisable one
year after the grant date and one-third additional in each of the succeeding two years. Options
issued under these plans, referred to herein as service-based options, generally expire 10 years
from the date of grant. The Company also grants stock options to certain executives and key
management employees that vest upon meeting certain financial performance conditions over the
vesting schedule described above. These options are referred to herein as performance-based
options. All performance-based options that were granted in fiscal 2006 and in prior years expire 5
years from the date of grant. Beginning in fiscal 2007, any performance options granted expire 10
years from the date of grant.
As of January 31, 2007, the Company has reserved 4,487,618 shares of Class A Nonvoting Common
Stock for outstanding stock options and 1,971,000 shares of Class A Nonvoting Common Stock remain
for future issuance of stock options under the various plans. The Company uses treasury stock or
will issue new Class A Nonvoting Common Stock to deliver shares under these plans.
The Company accounts for share-based compensation awards in accordance with Statement of
Financial Accounting Standards No. 123(R), Share Based Payment. In accordance with this standard,
the Company recognizes the compensation cost of all share-based awards on a straight-line basis
over the vesting period of the award. Total stock compensation expense recognized by the Company
during the three months ended January 31, 2007 and 2006 was $2,110 ($1,287 net of taxes) and $1,903
($1,161 net of taxes), respectively, and expense recognized during the six months ended January 31,
2007 and 2006 was $3,669 ($2,238 net of taxes) and $2,827 ($1,724 net of taxes), respectively. As
of January 31, 2007, total unrecognized compensation cost related to share-based compensation
awards was approximately $16,987 pre-tax, net of estimated forfeitures, which the Company expects
to recognize over a weighted-average period of approximately 2.3 years.
The Company has estimated the fair value of its service-based and performance-based option
awards granted during the six months ended January 31, 2007 and 2006 using the Black-Scholes option
valuation model. The weighted-average assumptions used in the Black-Scholes valuation model are
reflected in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
Six Months Ended |
|
|
January 31, 2007 |
|
January 31, 2006 |
|
|
|
|
|
|
Performance- |
|
|
|
|
|
Performance- |
|
|
Service-Based |
|
Based Option |
|
Service-Based |
|
Based Option |
Black-Scholes Option Valuation Assumptions |
|
Option Awards |
|
Awards |
|
Option Awards |
|
Awards |
Expected term (in years) |
|
|
6.07 |
|
|
|
6.57 |
|
|
|
5.72 |
|
|
|
3.39 |
|
Expected volatility |
|
|
34.01 |
% |
|
|
34.66 |
% |
|
|
34.56 |
% |
|
|
31.10 |
% |
Expected dividend yield |
|
|
1.46 |
% |
|
|
1.51 |
% |
|
|
1.52 |
% |
|
|
1.50 |
% |
Risk-free interest rate |
|
|
4.52 |
% |
|
|
4.90 |
% |
|
|
4.50 |
% |
|
|
4.09 |
% |
Weighted-average market value of underlying
stock at grant date |
|
$ |
38.19 |
|
|
$ |
33.32 |
|
|
$ |
37.64 |
|
|
$ |
33.89 |
|
Weighted-average exercise price |
|
$ |
38.19 |
|
|
$ |
33.32 |
|
|
$ |
37.64 |
|
|
$ |
33.89 |
|
Weighted-average fair value of options
granted during the period |
|
$ |
13.57 |
|
|
$ |
12.57 |
|
|
$ |
13.10 |
|
|
$ |
8.34 |
|
The Company uses historical data regarding stock option exercise behaviors to estimate the
expected term of options granted based on the period of time that options granted are expected to
be outstanding. Expected volatilities are based on the historical volatility of the Companys
stock. The expected dividend yield is based on the Companys historical dividend payments and
historical yield. The risk-free interest rate is based on the U.S. Treasury yield curve in effect
on the grant date for the length of time corresponding to the expected term of the option. The
market value is obtained by taking the average of the high and the low stock price on the date of
the grant.
10
A summary of stock option activity under the Companys share-based compensation
plans for the six months ended January 31, 2007 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
Options |
|
Shares |
|
|
Exercise Price |
|
|
Term |
|
|
Value |
|
|
Outstanding at July 31, 2006 |
|
|
3,815,052 |
|
|
$ |
23.27 |
|
|
|
|
|
|
|
|
|
New grants |
|
|
905,000 |
|
|
$ |
36.76 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(214,799 |
) |
|
$ |
17.77 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(17,635 |
) |
|
$ |
30.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 31, 2007 |
|
|
4,487,618 |
|
|
$ |
26.16 |
|
|
|
7.3 |
|
|
$ |
51,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at January 31, 2007 |
|
|
2,471,622 |
|
|
$ |
20.66 |
|
|
|
6.0 |
|
|
$ |
41,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the six months ended January 31, 2007
and 2006, based upon the average market price during the period, was approximately $4,597 and
$9,813, respectively. The total fair value of stock options vested during the six months ended
January 31, 2007 and 2006, was approximately $4,592 and $3,100, respectively.
NOTE H Debt
On October 5, 2006, the Company entered into a $200 million multi-currency revolving loan
agreement with a group of five banks. At the Companys option, and subject to certain standard
conditions, the available amount under the credit facility may be increased from $200 million up to
$300 million. Under the 5-year agreement, which has a final maturity date of October 5, 2011, the
Company has the option to select either a base interest rate (based upon the higher of the federal
funds rate plus one-half of 1% or the prime rate of Bank of America) or a Eurocurrency interest
rate (at the LIBOR rate plus a margin based on the Companys consolidated leverage ratio). A
commitment fee is payable on the unused amount of the facility. The agreement requires the Company
to maintain two financial covenants. As of January 31, 2007, 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 $50 million plus an amount equal to 75% of
consolidated net income for the prior fiscal year of the Company. The Company believes that based
on historic dividend practice, this restriction would not impede the Company in following a similar
dividend practice in the future. As of January 31, 2007, there were $70.8 million of outstanding
borrowings under the credit facility.
NOTE I Employee Benefit Plans
The Company provides postretirement medical, dental and vision benefits 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 employees 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. There have been no changes to the components of net
periodic benefit cost or the amount that the Company expects to fund in fiscal 2007 from those
reported thereto in Note 3 to the consolidated financial statements included in the Companys
latest annual report on Form 10-K for the year ended July 31, 2006.
NOTE J New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued FIN 48, Accounting for
Uncertainty in Income Taxes. This interpretation clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial statements in accordance with FASB Statement
No. 109, Accounting for Income Taxes. This interpretation establishes a threshold condition that
a tax position must meet for any part of the benefit of that position to be recognized in the
financial statements. This interpretation also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and transition. This
interpretation is effective for fiscal years beginning after December 15, 2006. The Company has not
yet completed the process of evaluating the impact that will result from adopting FIN 48 and
therefore is unable to disclose the impact that adopting FIN 48 will have on its financial position
and results of operations when such statement is adopted.
11
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157,
Fair Value Measurements (SFAS No. 157). This statement provides guidance on how to measure the
fair value of assets and liabilities utilizing a fair value hierarchy to classify the sources of
information used in the measurement calculation. SFAS No. 157 also provides new disclosure rules
for assets and liabilities measured at fair value based on their level in the fair value hierarchy.
This new statement will be effective for fiscal years beginning after November 15, 2007. The
Company expects that the adoption of SFAS No. 157 will not have a material effect on its
consolidated financial statements.
In October 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans (SFAS No. 158). This statement requires full recognition
of the funded status of defined benefit and other postretirement plans on the balance sheet as an
asset or a liability. SFAS No. 158 also continues to require that unrecognized prior service
costs/credits, gains/losses, and transition obligations/assets be recorded in Accumulated Other
Comprehensive Income, thus not changing the income statement recognition rules for such plans. This
new statement will be effective for fiscal years ending after December 15, 2006. The Company
expects that the adoption of SFAS No. 158 will not have a material effect on its consolidated
financial statements.
12
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Brady is an international manufacturer and marketer of identification solutions and specialty
materials that identify and protect premises, products, and people. Its products include
high-performance labels and signs, printing systems and software, label-application and
data-collection systems, safety devices and precision die-cut materials. Founded in 1914, the
Company serves customers in electronics, telecommunications, manufacturing, electrical,
construction, laboratory, education, governmental, public utility, computer, transportation and a
variety of other industries. The Company manufactures and sells products domestically and
internationally through multiple channels including distributor sales, direct sales, mail-order
catalogs, telemarketing, retail and electronic access through the Internet. The Company operates
manufacturing or distribution facilities in Australia, Belgium, Brazil, Canada, China, Denmark,
France, Germany, Hong Kong, India, Italy, Korea, Malaysia, Mexico, Norway, Singapore, Slovakia,
Sweden, Thailand, the United Kingdom and the United States. Brady sells through subsidiaries or
sales offices in these countries, with additional sales through a dedicated team of international
sales representatives in Japan, the Netherlands, the Philippines, Spain, Taiwan and Turkey and
further markets it products to parts of Eastern Europe, the Middle East, Africa and Russia. The
Company believes that its reputation for innovation, commitment to quality and service, and
dedicated employees have made it a world leader in the markets it serves.
Sales for the quarter ended January 31, 2007, were up 39.1% to $321.3 million, compared to
$231.0 million in the same period of fiscal 2006. Of the increase in sales, organic growth
accounted for 4.6%, acquisitions added 29.8% and the effects of fluctuations in the exchange rates
used to translate financial results into the United States dollar added 4.7%. Net income for the
quarter ended January 31, 2007, was $19.7 million or $0.36 per diluted Class A Nonvoting Common
Share, down 7.3% from $21.3 million, or $0.43 per diluted Class A Nonvoting Common Share reported
in the second quarter of last fiscal year.
Sales for the six months ended January 31, 2007, increased 41.0% to $653.5 million, compared
to $463.6 million in the same period of fiscal 2006. Organic growth accounted for 5.2%,
acquisitions added 32.2% and the effects of fluctuations in the exchange rates used to translate
financial results into the United States dollar added 3.6%. Net income for the six months ended
January 31, 2007 was $54.2 million or $0.99 per diluted Class A Nonvoting Common Share, up 5.3%
from $51.5 million, or $1.03 per diluted Class A Nonvoting Common Share reported in the same period
of the prior fiscal year.
Results of Operations
The comparability of the operating results for the three and six months ended January 31,
2007, to the prior year has been significantly impacted by the following acquisitions completed in
fiscal 2007 and fiscal 2006.
|
|
|
|
|
Acquisitions |
|
Segment |
|
Date Completed |
STOPware, Inc. (Stopware)
|
|
Americas
|
|
August 2005 |
Texit Danmark AS and Texit Norge AS (collectively Texit)
|
|
Europe
|
|
September 2005 |
TruMed Technologies, Inc. (TruMed)
|
|
Americas
|
|
October 2005 |
QDP Thailand Co., Ltd (QDPT)
|
|
Asia-Pacific
|
|
October 2005 |
J.A.M. Plastics Inc. (J.A.M.)
|
|
Americas
|
|
January 2006 |
Personnel Concepts
|
|
Americas
|
|
February 2006 |
IDenticard Systems, Inc. and Identicam Systems (collectively Identicard)
|
|
Americas
|
|
February 2006 |
Accidental Health & Safety Pty. Ltd and Trafalgar First Aid Pty. Ltd.
(collectively Accidental Health)
|
|
Asia-Pacific
|
|
March 2006 |
Tradex Converting AB (Tradex)
|
|
Americas, Europe
and Asia-Pacific
|
|
May 2006 |
Carroll Australasia Pty. Ltd. (Carroll)
|
|
Asia-Pacific
|
|
June 2006 |
Daewon Industry Corporation (Daewon)
|
|
Asia-Pacific
|
|
July 2006 |
Comprehensive Identification Products, Inc. (CIPI)
|
|
Americas, Europe
and Asia-Pacific
|
|
August 2006 |
Precision Converters, L.P. (PC)
|
|
Americas
|
|
October 2006 |
Scafftag Ltd., Safetrak, Ltd. and Scafftag Pty., Ltd. (collectively Scafftag)
|
|
Americas, Europe
and Asia-Pacific
|
|
December 2006 |
Asterisco Artes Graficas Ltda. (Asterisco)
|
|
Americas
|
|
December 2006 |
Modernotecnica SpA (Moderno)
|
|
Europe
|
|
December 2006 |
13
Sales for the three months ended January 31, 2007, were up 39.1% compared to the same period
in fiscal 2006. The increase was comprised of an increase of 4.6% attributed to organic growth, an
increase of 4.7% due to the effect of currencies on sales, and an increase of 29.8% due to the
acquisitions listed in the above table. The organic growth for the quarter ended January 31, 2007,
was due to solid growth in the Americas and Europe segments, generating 5.6% and 7.4% organic
growth, respectively, while the Asia-Pacific segment contracted 2.5%. The decline in Asia-Pacific
was due to the loss of certain programs in the hard disk drive business due to industry
consolidations and softening in Bradys mobile handset and high performance labeling businesses.
Sales for the six months ended January 31, 2007, increased 41.0% compared to the same period
in fiscal 2006. The increase was comprised of an increase of 5.2% attributed to organic growth, an
increase of 3.6% due to the effect of currencies on sales, and an increase of 32.2% due to the
acquisitions listed above. The organic growth was due to continued growth in the Americas and
Europe. The organic growth in Asia-Pacific for the six month period was also positive as the first
quarter results showed double-digit organic growth, which was partially offset by the contraction
noted above for the second quarter.
Gross margin as a percentage of sales decreased from 50.7% to 46.7% for the quarter and from
52.0% to 48.1% for the six months ended January 31, 2007, compared to the same periods of the
previous year. This decline was driven by the results in our global precision die cut business,
primarily in the mobile handset and hard disk drive businesses, as well as the acquisitions that
Brady completed in the last 12 months, which were more heavily weighted towards the precision die
cut business, which is generally characterized by lower gross margins and lower selling, general
and administrative (SG&A) expenses.
Research and development (R&D) expenses increased 33.0% to $9.1 million for the quarter and
31.8% to $17.6 million for the six months ended January 31, 2007, compared to $6.8 million and
$13.4 million for the same periods in the prior year, respectively. As a percentage of sales, R&D
expenses represented a lower percentage of sales, declining from 3.0% in the second quarter of
fiscal 2006 to 2.8% in the second quarter for fiscal 2007, and from 2.9% in the first half of
fiscal 2006 to 2.7% in the first half of fiscal 2007. Brady continues to expand new product
development investment.
SG&A expenses increased 37.2% to $108.4 million for the three months ended January 31, 2007,
compared to $79.0 million for the same period in the prior year and 39.2% to $212.0 million for the
six months ended January 31, 2007, compared to $152.3 million for the same period in the prior
year. These increases were expected due to acquisitions and a number of initiatives taking place
this year, such as the continued integration of the acquisitions completed in fiscal 2006 and 2007,
roll-out of SAP to 18 of our locations around the world, creation of a business process shared
service center in India, development of a customer call center in the Philippines, and geographic
expansions in Eastern Europe, Mexico and India. As a percentage of sales, SG&A expenses declined
from 34.2% to 33.7% for the quarter and from 32.9% to 32.4% for the six months ended January 31,
2007, compared to the same periods in the prior year, despite the increases described above. The
decline as a percentage of sales was due to changes in our sales mix towards the precision die cut
business, which typically has lower SG&A expenses.
Interest expense increased from $2.4 million to $5.2 million for the quarter and from $4.4
million to $10.0 million for the six months ended January 31, 2007, compared to the same periods in
the prior year. The increase in interest expense was due to the interest on the $200 million
private placement of senior notes that was completed in the third quarter of fiscal 2006, as well
as interest on the borrowings under our revolving credit facility in the first half of fiscal 2007.
The Companys effective tax rate was 28.0% for the quarter and six months ended January 31,
2007, compared to 26.5% and 28.0% for the three and six months ended January 31, 2006,
respectively. The lower rate in the second quarter of fiscal 2006 was due to a shift of a higher
percentage of the Companys pre-tax income to lower tax rate countries.
Net income for the three months ended January 31, 2007, decreased 7.3% to $19.7 million,
compared to $21.3 million for the same quarter of the previous year. Net income as a percentage of
sales decreased from 9.2% to 6.1% for the quarter ended January 31, 2007, compared to the same
period in the prior year, due to the factors noted above. For the six months ended January 31,
2007, net income increased 5.3% to $54.2 million, compared to $51.5 million for the same period in
the previous year. Similar to the results for the quarter, as a percentage of sales, net income
decreased from 11.1% to 8.3% for the six months ended January 31, 2007, compared to the same period
in the previous year. The decreases as a percentage of sales were due to the factors noted above.
Net income per share comparisons were also further diluted by the Companys July 2006 sale of an
additional 4.6 million shares of Class A Nonvoting Common Stock in a public offering.
14
Business Segment Operating Results
Management of the Company evaluates results based on the following geographic regions:
Americas, Europe, and Asia-Pacific.
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Corporate |
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Asia- |
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And |
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(Dollars in thousands) |
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Americas |
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Europe |
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Pacific |
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Subtotals |
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Eliminations |
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Total |
SALES TO EXTERNAL CUSTOMERS |
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Three months ended: |
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January 31, 2007 |
|
$ |
139,988 |
|
|
$ |
98,846 |
|
|
$ |
82,441 |
|
|
$ |
321,275 |
|
|
$ |
|
|
|
$ |
321,275 |
|
January 31, 2006 |
|
|
109,951 |
|
|
|
76,284 |
|
|
|
44,739 |
|
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|
230,974 |
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230,974 |
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Six months ended: |
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|
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January 31, 2007 |
|
$ |
286,931 |
|
|
$ |
191,211 |
|
|
$ |
175,392 |
|
|
$ |
653,534 |
|
|
$ |
|
|
|
$ |
653,534 |
|
January 31, 2006 |
|
|
226,010 |
|
|
|
150,046 |
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|
|
87,553 |
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|
|
463,609 |
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|
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|
463,609 |
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SALES GROWTH INFORMATION |
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Three months ended January 31, 2007 |
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Base |
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5.6 |
% |
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7.4 |
% |
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-2.5 |
% |
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4.6 |
% |
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4.6 |
% |
Currency |
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0.3 |
% |
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10.8 |
% |
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4.9 |
% |
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4.7 |
% |
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4.7 |
% |
Acquisitions |
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21.4 |
% |
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|
11.4 |
% |
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|
81.9 |
% |
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|
29.8 |
% |
|
|
|
|
|
|
29.8 |
% |
Total |
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|
27.3 |
% |
|
|
29.6 |
% |
|
|
84.3 |
% |
|
|
39.1 |
% |
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|
|
|
|
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39.1 |
% |
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|
Six months ended January 31, 2007 |
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Base |
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4.1 |
% |
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7.1 |
% |
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|
4.6 |
% |
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|
5.2 |
% |
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5.2 |
% |
Currency |
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0.6 |
% |
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8.1 |
% |
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3.7 |
% |
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3.6 |
% |
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3.6 |
% |
Acquisitions |
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22.3 |
% |
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12.2 |
% |
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92.0 |
% |
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32.2 |
% |
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|
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32.2 |
% |
Total |
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27.0 |
% |
|
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27.4 |
% |
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|
100.3 |
% |
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|
41.0 |
% |
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41.0 |
% |
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SEGMENT PROFIT (LOSS) |
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Three months ended |
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|
January 31, 2007 |
|
$ |
28,793 |
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|
$ |
22,604 |
|
|
$ |
12,394 |
|
|
$ |
63,791 |
|
|
$ |
(2,228 |
) |
|
$ |
61,563 |
|
January 31, 2006 |
|
|
24,969 |
|
|
|
19,989 |
|
|
|
11,717 |
|
|
|
56,675 |
|
|
|
(2,631 |
) |
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|
54,044 |
|
Percentage increase |
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|
15.3 |
% |
|
|
13.1 |
% |
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|
5.8 |
% |
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|
12.6 |
% |
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|
-15.3 |
% |
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|
13.9 |
% |
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Six months ended |
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|
January 31, 2007 |
|
$ |
65,698 |
|
|
$ |
45,609 |
|
|
$ |
34,531 |
|
|
$ |
145,838 |
|
|
$ |
(4,425 |
) |
|
$ |
141,413 |
|
January 31, 2006 |
|
|
57,163 |
|
|
|
40,767 |
|
|
|
24,727 |
|
|
|
122,657 |
|
|
|
(5,017 |
) |
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|
117,640 |
|
Percentage increase |
|
|
14.9 |
% |
|
|
11.9 |
% |
|
|
39.6 |
% |
|
|
18.9 |
% |
|
|
-11.8 |
% |
|
|
20.2 |
% |
NET INCOME RECONCILIATION (Dollars in thousands)
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|
|
|
Three months ended: |
|
|
Six months ended: |
|
|
|
January 31, |
|
|
January 31, |
|
|
January 31, |
|
|
January 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Total profit from reportable segments |
|
$ |
63,791 |
|
|
$ |
56,675 |
|
|
$ |
145,838 |
|
|
$ |
122,657 |
|
Corporate and eliminations |
|
|
(2,228 |
) |
|
|
(2,631 |
) |
|
|
(4,425 |
) |
|
|
(5,017 |
) |
Unallocated amounts: |
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|
|
|
|
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|
|
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|
|
|
|
|
|
|
Administrative costs |
|
|
(28,839 |
) |
|
|
(22,768 |
) |
|
|
(56,748 |
) |
|
|
(42,235 |
) |
Investment and other (expense) income |
|
|
(106 |
) |
|
|
88 |
|
|
|
532 |
|
|
|
480 |
|
Interest expense |
|
|
(5,244 |
) |
|
|
(2,435 |
) |
|
|
(9,979 |
) |
|
|
(4,424 |
) |
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|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
27,374 |
|
|
|
28,929 |
|
|
|
75,218 |
|
|
|
71,461 |
|
Income taxes |
|
|
(7,665 |
) |
|
|
(7,675 |
) |
|
|
(21,061 |
) |
|
|
(20,009 |
) |
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|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
19,709 |
|
|
$ |
21,254 |
|
|
$ |
54,157 |
|
|
$ |
51,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company evaluates regional performance using sales and segment profit. Segment
profit or loss does not include certain administrative costs, interest, investment and other income
and income taxes.
15
Americas:
Americas sales increased 27.3% for the quarter and 27.0% for the six months ended January 31,
2007, compared to the same periods in the prior year. Organic growth accounted for 5.6% and 4.1% of
the growth in the quarter and year-to-date, respectively, as compared to the same periods in the
previous year. Fluctuations in the exchange rates used to translate financial results into the
United States dollar had a minimal impact on sales, increasing it by 0.3% in the quarter and 0.6%
for the six month period. Sales in the region were also aided by the current year acquisitions of
CIPI, PC, Scafftag and Asterisco and the prior year acquisitions of TruMed, J.A.M, Personnel
Concepts and Identicard, which increased sales by 21.4% for the quarter and 22.3% for the six month
period. The strongest organic growth in the quarter by market continues to be in the electrical and
wire identification areas, but the growth in the safety and identification markets and direct
marketing was solid as well.
Segment profit for the region increased 15.3% to $28.8 million from $25.0 million for the
quarter and 14.9% to $65.7 million from $57.2 million for the six months ended January 31, 2007,
compared to the same periods in the prior year. As a percentage of sales, segment profit decreased
from 22.7% to 20.6% in the second quarter of fiscal 2007 and from 25.3% to 22.9% in the six months
ended January 31, 2007, compared to the same periods in the prior year. The declines were due to
the effect of recent acquisitions. As expected, the segments recent acquisitions have produced an
initial rate of profit that is below the average rate of profit of the segment. As we integrate the
businesses and achieve synergies, the profit percentages are expected to increase.
Europe:
Europe sales increased 29.6% for the quarter and 27.4% for the six months ended January 31,
2007, compared to the same periods in the prior year. Organic growth accounted for 7.4% and 7.1% of
the growth in the quarter and year-to-date, respectively, compared to the same periods in the
previous year. Sales were positively affected by fluctuations in the exchange rates used to
translate financial results into the United States dollar, which increased sales within the region
by 10.8% in the quarter and 8.1% for the six month period. The fiscal 2007 acquisitions of CIPI,
Scafftag, and Moderno and the fiscal 2006 acquisitions of Texit and Tradex increased sales by 11.4%
for the quarter and 12.2% for the six month period. The organic growth in the quarter was due to
growth in the majority of the businesses and countries. The region is benefiting from recent No
Smoking legislation enacted in France, which stimulates demand for certain of our product lines.
Segment profit for the region increased 13.1% to $22.6 million from $20.0 million for the
quarter and 11.9% to $45.6 million from $40.8 million for the six months ended January 31, 2007,
compared to the same periods in the prior year. As a percentage of sales, segment profit decreased
from 26.2% to 22.9% in the second quarter of fiscal 2007 and from 27.2% to 23.9% in the six months
ended January 31, 2007, compared to the same periods in the prior year. The declines were due to
continued integration costs of recent acquisitions, the slowdown of the mobile handset precision
die-cut business and the global headquarter costs of Tradex.
Asia-Pacific:
Asia-Pacific sales increased 84.3% for the quarter and 100.3% for the six months ended January
31, 2007, compared to the same periods in the prior year. Organic sales in local currency decreased
2.5% in the quarter and increased 4.6% year-to-date, compared to the same periods in the previous
year. Sales were positively affected by fluctuations in the exchange rates used to translate
financial results into the United States dollar, which increased sales within the region by 4.9% in
the quarter and 3.7% for the six month period. The fiscal 2007 acquisitions of CIPI and Scafftag
and the fiscal 2006 acquisitions of QDPT, Accidental Health, Tradex, Carroll and Daewon increased
sales by 81.9% for the quarter and 92.0% for the six month period. The decline in organic sales
for the quarter was due to a slowdown in our OEM electronics
business, led by the loss of certain programs in the hard disk drive business, market share loss in mobile handsets and a slowdown in high
performance labeling. Overall, our base business in Asia was aided by the stronger levels of our
Australian business, which is more focused on the MRO market.
Segment profit for the region increased 5.8% to $12.4 million from $11.7 million for the
quarter and 39.6% to $34.5 million from $24.7 million for the six months ended January 31, 2007,
compared to the same periods in the prior year. As a percentage of sales, segment profit decreased
from 26.2% to 15.0% in the second quarter of fiscal 2007 and from 28.2% to 19.7% in the six months
ended January 31, 2007, compared to the same periods in the prior year. The declines were due to
the slowdown in our OEM electronics business, coupled with redundant capacity and pricing pressure
received from customers. Over the remainder of this fiscal year, we will be rebalancing some of
our capacity to be closer to our customers facilities and eliminating some levels of redundant
infrastructure resulting from the Tradex and Daewon acquisitions completed in the fourth quarter of
fiscal 2006.
16
Financial Condition
The Companys current ratio as of January 31, 2007, was 2.2 compared to 2.1 at July 31, 2006.
Cash and cash equivalents were $86.4 million at January 31, 2007, compared to $113.0 million at
July 31, 2006. Additionally, there were no short-term investments outstanding at January 31, 2007,
compared to $11.5 million outstanding at July 31, 2006. Working capital increased $27.3 million
during the six months ended January 31, 2007, to $267.8 million from $240.5 million at July 31,
2006. Accounts receivable increased $30.7 million during the six months ended January 31, 2007, due
to increased sales volume, seasonal build-up from our OEM customers, acquisitions and foreign
currency translation. Inventories increased $24.4 million in the current year, due to acquisitions
and increased inventory levels in the Americas to support the launch of new products to the market
and in Asia in anticipation of shutdowns for the Chinese New Year. We expect that during the second
half of the fiscal year the accounts receivable and inventory levels associated with seasonal
demand will decline. The net decrease in current liabilities was $3.7 million for the six month
period. The decrease was composed of a significant decrease in accrued wages due to the payment of
incentives in the first quarter related to the year ended July 31, 2006, partially offset by an
increase in accounts payable from the fiscal 2007 acquisitions and foreign currency.
Cash flow from operating activities totaled $37.1 million for the six months ended January 31,
2007, compared to $20.8 million for the same period last year. The increase was the result of a
$2.7 million increase in net income and a $11.5 million increase in depreciation and amortization
on the intangible assets acquired in fiscal 2006 and 2007, partially offset by cash requirements
for changes in accounts receivable, prepaid expenses and other assets and accounts payable and
accrued liabilities.
The acquisitions of businesses used $90.4 million of cash for the six months ended January 31,
2007. Contingent consideration payments of $9.3 million were paid during the six months ended
January 31, 2007, to satisfy the $6.5 million holdback requirement of the ID Technologies
acquisition completed in fiscal 2005, the $1.0 million earnout liability of the Stopware
acquisition completed in fiscal 2006 and the $1.8 million purchase price adjustment of the Daewon
acquisition completed in fiscal 2006. Capital expenditures were $32.1 million for the six months
ended January 31, 2007, compared to $17.3 million in the same period last year. Approximately $9
million was spent on implementing SAP in 18 of Bradys global operations and ultimately bringing
the number of users up from approximately 2,300 to 6,700 in the next three years. The remainder of
the increase in capital expenditures was due to the expansions in China, Canada, India, Slovakia,
and other locations. Net cash provided by financing activities was $60.4 million for the six
months ended January 31, 2007, due to net borrowings of $70.8 million on the revolving loan
agreement, partially offset by the payment of dividends. Net cash provided by financing activities
for the same period last year was $69.0 million related to net borrowings on the revolving loan
agreement, partially offset by the repurchase of the Companys stock and the payment of dividends.
On October 5, 2006, the Company entered into a $200 million multi-currency revolving loan
agreement with a group of five banks. At the Companys option, and subject to certain standard
conditions, the available amount under the credit facility may be increased from $200 million up to
$300 million.
Under the 5-year agreement, which has a final maturity date of October 5, 2011, the Company
has the option to select either a base interest rate (based upon the higher of the federal funds
rate plus one-half of 1% or the prime rate of Bank of America) or a Eurocurrency interest rate (at
the LIBOR rate plus a margin based on the Companys consolidated leverage ratio). A commitment fee
is payable on the unused amount of the facility. The agreement requires the Company to maintain two
financial covenants. As of January 31, 2007, the Company was in compliance with the covenants of
the agreement.
The credit agreement restricts the amount of certain types of payments, including dividends,
which can be made annually to $50 million plus an amount equal to 75% of consolidated net income
for the prior fiscal year. The Company believes that based on historic dividend practice, this
restriction would not impede the Company in following a similar dividend practice in the future.
During the six months ended January 31, 2007, the Company borrowed and repaid $97.0 million and
$26.2 million, respectively. As of January 31, 2007, there was $70.8 million of outstanding
borrowings on the credit agreement.
On February 14, 2006, the Company completed the private placement of $200 million in ten-year
fixed notes at 5.3% interest to institutional investors. The notes will be amortized in equal
installments over seven years, beginning in 2010 with interest payable on the notes semiannually on
August 14 and February 14, beginning in August 2006. The notes have been fully and unconditionally
guaranteed on an unsecured basis by the Companys domestic subsidiaries. The Company used the net
proceeds of the offering to finance acquisitions completed in fiscal 2006 and 2007. This private
placement was exempt from the registration requirements of the Securities Act of 1933. The notes
were not registered for resale and may not be resold absent such registration or an applicable
exemption from the registration requirements of the Securities Act of 1933 and applicable state
securities laws. The notes have certain prepayment penalties for repaying them prior to the
maturity date. The agreement also requires the Company to maintain a financial covenant. As of
January 31, 2007, the Company was in compliance with this covenant.
17
On June 30, 2004, the Company finalized a debt offering of $150 million of 5.14% unsecured
senior notes due in 2014 in an offering exempt from the registration requirements of the Securities
Act of 1933. The notes will be amortized over seven years beginning in 2008, with interest payable
on the notes semiannually on June 28 and December 28, beginning in December 2004. The Company used
the proceeds of the offering to reduce outstanding indebtedness under the Companys revolving
credit facilities used to initially fund the EMED acquisition. The debt has certain prepayment
penalties for repaying the debt prior to its maturity date. The agreement also requires the Company
to maintain a financial covenant. As of January 31, 2007, the Company was in compliance with this
covenant.
On February 20, 2007, the Board of Directors declared a quarterly cash dividend to
shareholders of the Companys Class A Common Stock of $0.14 per share payable on April 30, 2007 to
shareholders of record at the close of business on April 10, 2007.
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 its 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.
Off-Balance Sheet Arrangements The Company does not have material off-balance sheet
arrangements or related-party transactions. The Company is not aware of factors that are reasonably
likely to adversely affect liquidity trends, other than the risk factors described in this and
other Company filings. However, the following additional information is provided to assist those
reviewing the Companys financial statements.
Operating Leases These leases generally are entered into for investments in facilities, such
as manufacturing facilities, warehouses and office buildings, computer equipment and Company
vehicles, for which the economic profile is favorable.
Purchase Commitments The Company has purchase commitments for materials, supplies, services,
and property, plant and equipment as part of the ordinary conduct of its business. In the
aggregate, such commitments are not in excess of current market prices and are not material to the
financial position of the Company. Due to the proprietary nature of many of the Companys materials
and processes, certain supply contracts contain penalty provisions for early termination. The
Company does not believe a material amount of penalties will be incurred under these contracts
based upon historical experience and current expectations.
Other Contractual Obligations The Company does not have material financial guarantees or
other contractual commitments that are reasonably likely to adversely affect liquidity.
Related-Party Transactions The Company does not have any related-party transactions that
materially affect the results of operations, cash flow or financial condition.
Forward-Looking Statements
Brady believes that certain statements in this Form 10-Q are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. All statements related
to future, not past, events included in this Form 10-Q, including, without limitation, statements
regarding Bradys future financial position, business strategy, targets, projected sales, costs,
earnings, capital expenditures, debt levels and cash flows, and plans and objectives of management
for future operations are forward-looking statements. When used in this Form 10-Q, words such as
may, will, expect, intend, estimate, anticipate, believe, should, project or
plan or similar terminology are generally intended to identify forward-looking statements. These
forward-looking statements by their nature address matters that are, to different degrees,
uncertain and are subject to risks, assumptions and other factors, some of which are beyond Bradys
control, that could cause actual results to differ materially from those expressed or implied by
such forward-looking statements. For Brady, uncertainties arise from future financial performance
of major markets Brady serves, which include, without limitation, telecommunications,
manufacturing, electrical, construction, laboratory, education, governmental, public utility,
computer, transportation; difficulties in making and integrating acquisitions; risks associated
with newly acquired businesses; Bradys ability to retain significant contracts and customers;
future competition; Bradys ability to develop and successfully market new products; changes in the
supply of, or price for, parts and components; increased price pressure from suppliers and
customers; interruptions to sources of supply; environmental, health and safety compliance costs
and liabilities; Bradys ability to realize cost savings from operating initiatives; Bradys
ability to attract and retain key talent; difficulties associated with exports; risks associated
with international operations; fluctuations in currency rates versus the US dollar; technology
changes; potential write-offs of Bradys substantial intangible assets; risks associated with
obtaining governmental approvals and maintaining regulatory compliance for new and existing
products; business interruptions due to implementing business systems; and numerous other matters
of national, regional and global scale, including those of a political, economic, business,
competitive and regulatory nature contained from time to time in Bradys U.S. Securities and
Exchange Commission filings, including, but not limited to, those factors listed in the Risk
Factors section located in Item 1A of Part I of Bradys Form 10-K for the year ended July 31,
2006. These uncertainties may cause Bradys actual future results to be materially different than
those expressed in its forward-looking statements. Brady does not undertake to update its
forward-looking statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Companys business operations give rise to market risk exposure due to changes in foreign
exchange rates. To manage that risk effectively, the Company enters into hedging transactions,
according to established guidelines and policies that enable it to mitigate the adverse effects of
this financial market risk.
The global nature of the Companys business requires active participation in the foreign
exchange markets. As a result of investments, production facilities and other operations on a
global scale, the Company has assets, liabilities and cash flows in currencies other than the U.S.
Dollar. The primary objective of the Companys foreign currency exchange risk management is to
minimize the impact of currency movements on intercompany transactions and foreign raw-material
imports. To achieve this objective, the Company hedges a portion of known exposures using forward
contracts. Main exposures are related to transactions denominated in the British Pound, the Euro,
Canadian Dollar, Australian Dollar, Singapore Dollar, Swedish Krona, Korean Won and Chinese Yuan
currency.
The Company could be exposed to interest rate risk through its corporate borrowing activities.
The objective of the Companys interest rate risk management activities is to manage the levels of
the Companys fixed and floating interest rate exposure to be consistent with the Companys
preferred mix. The interest rate risk management program allows the Company to enter into approved
interest rate derivatives, with the approval of the Board of Directors, if there is a desire to
modify the Companys exposure to interest rates. As of January 31, 2007, the Company had no
interest rate derivatives.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure that the
information the Company must disclose in its filings with the Securities and Exchange Commission is
recorded, processed, summarized and reported on a timely basis. The Companys Chief Executive
Officer and Chief Financial Officer have reviewed and evaluated the Companys disclosure controls
and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the Exchange Act) as of the end of the period covered by this report (the
Evaluation Date). Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, the Companys disclosure controls and procedures are effective in bringing to
their attention on a timely basis material information relating to the Company required to be
included in the Companys periodic filings under the Exchange Act.
The Company is in the process of implementing its enterprise resource planning system, SAP, to
many of its locations around the world. This implementation has resulted in certain changes to
business processes and internal controls impacting financial reporting. Management is taking the
necessary steps to monitor and maintain appropriate internal controls during this period of change.
There were no other changes in the Companys internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Companys most
recently completed fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders was held on November 16, 2006. At the meeting, the
following persons were elected to serve as the Companys directors by the affirmative vote of 100%
of the 3,538,628 shares of Class B Voting Common Stock until the next annual meeting of
shareholders and until their successors have been elected:
Richard A. Bemis
Robert C. Buchanan
Mary K. Bush
Chan Galbato
Frank W. Harris
Frank M. Jaehnert
Frank R. Jarc
Peter J. Lettenberger
Gary E. Nei
Roger D. Peirce
Elizabeth I. Pungello
At the annual meeting, the shareholders, by affirmative vote of 100% of the 3,538,628 shares
of Class B Voting Common Stock, also approved the Brady Corporation 2006 Omnibus Incentive Stock
Plan and the Brady Corporation Incentive Compensation Plan for Elected Corporate Officers, both of
which are described in more detail in the Current Report on Form 8-K filed by the Company on
November 20, 2006.
On November 30, 2006, by written consent of the holders of 100% of the 3,538,628 shares of
Class B Voting Common Stock, the shareholders approved a revised version of the Brady Corporation
2005 Nonqualified Stock Option Plan for Non-Employee Directors, which is described in more detail
in the Current Report on Form 8-K filed by the Company on December 4, 2006.
ITEM 6. Exhibits
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(a) |
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Exhibits |
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31.1 |
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Rule 13a-14(a)/15d-14(a) Certification of Frank M. Jaehnert |
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31.2 |
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Rule 13a-14(a)/15d-14(a) Certification of David Mathieson |
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32.1 |
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Section 1350 Certification of Frank M. Jaehnert |
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32.2 |
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Section 1350 Certification of David Mathieson |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
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BRADY CORPORATION
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Date: March 7, 2007 |
/s/ F. M. Jaehnert
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F. M. Jaehnert |
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President & Chief Executive Officer |
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Date: March 7, 2007 |
/s/ David Mathieson
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David Mathieson |
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Vice President & Chief Financial Officer
(Principal Accounting Officer)
(Principal Financial Officer) |
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