Brady Corporation - 10-Q quarterly report FY

 

(Exact name of registrant as specified in its charter)

6555 West Good Hope Road, Milwaukee, Wisconsin 53223
(Address of principal executive offices)
(Zip Code)

(414) 358-6600
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes     þ   No      o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes     o   No      o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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 issuer’s classes of common stock, as of the latest practicable date. As of June 2, 2009, there were outstanding 48,763,894 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.

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS)

See Notes to Condensed Consolidated Financial Statements.

BRADY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)

See Notes to Condensed Consolidated Financial Statements.

BRADY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

See Notes to Condensed Consolidated Financial Statements.

BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Nine Months Ended April 30, 2009

(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 April 30, 2009 and July 3l, 2008, its results of operations for the three and nine months ended April 30, 2009 and 2008, and its cash flows for the nine months ended April 30, 2009 and 2008. The condensed consolidated balance sheet as of July 31, 2008, 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 Company’s latest annual report on Form 10-K for the year ended July 31, 2008.

NOTE B — Goodwill and Intangible Assets

     Changes in the carrying amount of goodwill for the nine months ended April 30, 2009, are as follows:

     In November 2008, the Company reached a settlement with the former owners of Tradex Converting AB (“Tradex”), which the Company acquired in May 2006, resulting in a purchase price decrease of $3,514 which decreased goodwill accordingly. Goodwill increased $1,024 during the nine months ended April 30, 2009 as a result of adjustments to the preliminary allocation of the purchase price for the acquisitions of Transposafe Systems B.V. and Holland Mounting Systems B.V. (collectively, “Transposafe”) and Sorbent Products Company (“SPC”). Of the $1,024 increase in goodwill relating to prior year acquisitions, $703 related to the payment of an earnout to the former owners of Transposafe and $275 related to the final tax adjustment for the SPC acquisition. Goodwill decreased $59,673 during the nine months ended April 30, 2009 due to the effects of foreign currency translation.

     During the third quarter of fiscal 2009, the Company conducted an interim goodwill impairment assessment in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”. The assessment included comparing the carrying amount of net assets, including goodwill, of each reporting unit to its respective fair value as of February 28, 2009, the date of the assessment. Fair value was determined using the weighted average of a discounted cash flow and market participant analysis for each reporting unit. Because the estimated fair value of each of the Company’s reporting units exceeded its carrying amount, management concluded that no impairment existed as of February 28, 2009. No indications of impairment have been identified between the date of the interim assessment and April 30, 2009.

     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:

     The value of goodwill and other intangible assets in the Condensed Consolidated Balance Sheet at April 30, 2009, 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 April 30, 2009.

     Amortization expense on intangible assets was $5,559 and $7,260 for the three-month periods ended April 30, 2009 and 2008, respectively and $17,089 and $20,003 for the nine-month periods ended April 30, 2009 and 2008, respectively. Annual amortization is projected to be $22,752, $21,779, $18,306, $11,228 and $8,033 for the years ending July 31, 2009, 2010, 2011, 2012 and 2013, respectively.

NOTE C — Comprehensive Income (Loss)

     Total comprehensive income (loss), which was comprised of net income, foreign currency adjustments, net unrealized gains and losses from cash flow hedges, the unrealized gain on the post-retirement medical, dental, and vision plans, and their related tax effects amounted to $32,867 and $61,735 for the three months ended April 30, 2009 and 2008, respectively and ($71,761) and $148,454 for the nine months ended April 30, 2009 and 2008, respectively. The decrease in total comprehensive income for the three and nine months ended April 30, 2009 as compared to the same period in the previous year was primarily the result of the appreciation of the U.S. dollar against other currencies and a reduction in net income.

NOTE D — Net Income Per Common Share

     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:

     Options to purchase approximately 2,920,000 and 2,058,000 shares of Class A Nonvoting Common Stock for the three and nine months ended April 30, 2009, respectively, and 2,171,000 and 1,874,200 shares of Class A Nonvoting Common Stock for the three and nine months ended April 30, 2008, 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 — Segment Information

     The Company evaluates segment performance based on segment profit or loss and customer sales. Segment profit or loss does not include certain administrative costs, restructuring charges, interest, foreign exchange gain or loss, other expenses not allocated to a segment, and income taxes.

     The Company is organized and managed on a geographic basis by region. Each of these regions, Brady Americas, Brady Europe and Brady Asia-Pacific, has a President that reports directly to the Company’s chief operating decision maker, its Chief Executive Officer. Each region has its own distinct operations, is managed locally by its own management team, maintains its own financial reports and is evaluated based on regional results. In applying the criteria set forth in SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information”, the Company has determined that these regions comprise its reportable segments based on the information used by the Chief Executive Officer to allocate resources and assess performance.

     Subsequent to the first quarter of fiscal 2008, the Company made several reporting and organizational changes in which the leadership, operations, and administrative functions of the two businesses in the Americas region were consolidated. As a result of the changes, the Company changed the number of reporting segments from four to three during the fourth quarter of fiscal 2008. Following is a summary of segment information for the three and nine months ended April 30, 2009 and 2008:

Following is a reconciliation of segment profit to net income for the three months and nine months ended April 30, 2009 and 2008.

NOTE F — Stock-Based Compensation

     The Company has an incentive stock plan under which the Board of Directors may grant nonqualified stock options to purchase shares of Class A Nonvoting Common Stock or restricted shares of Class A Nonvoting Common Stock to employees. Additionally, the Company has a nonqualified stock option plan for non-employee directors under which stock options to purchase shares of Class A Nonvoting Common Stock are available for grant. The options have an exercise price equal to the fair market value of the underlying stock at the date of grant and generally vest ratably over a three-year period, with one-third becoming exercisable one year after the grant date and one-third additional in each of the succeeding two years. Options issued under these plans, referred to herein as “service-based” options, generally expire 10 years from the date of grant. The Company also grants stock options to certain executives and key management employees that vest upon meeting certain financial performance conditions over the vesting schedule described above; these options are referred to herein as “performance-based” options. Performance-based options granted in fiscal 2006 expire five years from the grant date. All other performance-based options expire 10 years from the date of grant. Restricted shares have an issuance price equal to the fair market value of the underlying stock at the date of grant. They vest at the end of a five-year period and upon meeting certain financial performance conditions; these shares are referred to herein as “performance-based restricted shares.”

     As of April 30, 2009, the Company has reserved 4,248,811 shares of Class A Nonvoting Common Stock for outstanding stock options and restricted shares and 510,495 shares of Class A Nonvoting Common Stock for future issuance of stock options and restricted shares under the various plans. The Company uses treasury stock or will issue new Class A Nonvoting Common Stock to deliver shares under these plans.

     The Company accounts for share-based compensation awards in accordance with SFAS No. 123(R), “Share Based Payment”. In accordance with this standard, the Company recognizes the compensation cost of all share-based awards on a straight-line basis over the vesting period of the award. Total stock compensation expense recognized by the Company during the three months ended April 30, 2009 and 2008 was $1,972 ($1,203 net of taxes) and $1,415 ($863 net of taxes), respectively, and expense recognized during the nine months ended April 30, 2009 and 2008 was $6,281 ($3,831 net of taxes) and $7,797 ($4,756 net of taxes), respectively. As of April 30, 2009, total unrecognized compensation cost related to share-based compensation awards was approximately $12,906 pre-tax, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of approximately 2.5 years.

     The Company has estimated the fair value of its service-based and performance-based option awards granted during the nine months ended April 30, 2009 and 2008 using the Black-Scholes option valuation model. The weighted-average assumptions used in the Black-Scholes valuation model are reflected in the following table:

     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 Company’s stock. The expected dividend yield is based on the Company’s 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.

     Effective March 4, 2009, the Compensation Committee of the Board of Directors of the Company approved an amendment to the performance-based stock options issued on August 2, 2004. Pursuant to the amendment, the term of the performance-based stock options has been extended to ten years from five years resulting in an incremental expense of $191 ($116 net of taxes) which was recorded in the quarter ended April 30, 2009. Also, the amendment provides that during the extension period, executives may exercise the performance-based stock options following a termination only if the termination is as a result of the executive’s death or disability or qualifies as a retirement.

     The Company granted 210,000 performance-based restricted shares during the nine months ended April 30, 2008, with a grant price and fair value of $32.83. As of April 30, 2009, 210,000 performance-based restricted shares were outstanding.

     A summary of stock option activity under the Company’s share-based compensation plans for the nine months ended April 30, 2009 is presented below:

     There were 2,862,146 and 2,466,275 options exercisable with a weighted average exercise price of $27.24 and $25.15 at April 30, 2009 and 2008, respectively. The cash received from the exercise of options during the quarters ended April 30, 2009 and 2008 was $45 and $1,536, respectively. The cash received from the exercise of options during the nine months ended April 30, 2009 and 2008 was $1,479 and $9,517, respectively. The cash received from the tax benefit on options exercised during the quarter ended April 30, 2008 was $419. The cash received from the tax benefit on stock options exercised during the quarter ended April 30, 2009 was not significant. The cash received from the tax benefit on options exercised during the nine months ended April 30, 2009 and 2008 was $533 and $4,173, respectively.

     The total intrinsic value of options exercised during the nine months ended April 30, 2009 and 2008, based upon the average market price during the period, was $1,730 and $10,725, respectively. The total fair value of stock options vested during the nine months ended April 30, 2009 and 2008, was $6,419 and $6,484, respectively.

NOTE G — Stockholders’ Investment

     In March 2008, the Company announced that the Board of Directors of the Company authorized a share repurchase plan for up to 1 million shares of the Company’s Class A Nonvoting Common Stock. The share repurchase plan was 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-based plans and for other corporate purposes. As of July 31, 2008, there remained 650,864 shares to purchase in connection with this share repurchase plan. During the nine months ended April 30, 2009, the Company acquired 650,864 shares of its Class A Nonvoting Common Stock authorized for repurchase under this plan for $21,539. Share repurchases under this plan were completed in the quarter ended October 31, 2008.

     In September 2008, the Company announced that the Board of Directors of the Company authorized a share repurchase plan for up to 1 million shares of the Company’s Class A Nonvoting Common Stock. The share repurchase plan may be implemented by purchasing shares on the open market or in privately negotiated transactions, with repurchased shares available for use in connection with the Company’s stock-based plans and for other corporate purposes. During the nine months ended April 30, 2009, the Company acquired 693,800 shares of its Class A Nonvoting Common Stock under this plan for $18,728. No shares were purchased under the Company’s share repurchase plan during the three months ended April 30, 2009. As of April 30, 2009, there remained 306,200 shares to purchase in connection with this share repurchase plan.

NOTE H — Employee Benefit Plans

     The Company provides postretirement medical, dental and vision benefits for eligible regular full and part-time domestic employees (including spouses) outlined by the plan. Postretirement benefits are provided only if the employee was hired prior to April 1, 2008, and retires on or after attainment of age 55 with 15 years of credited service. Credited service begins accruing at the later of age 40 or date of hire. All active employees first eligible to retire after July 31, 1992, are covered by an unfunded, contributory postretirement healthcare plan where employer contributions will not exceed a defined dollar benefit amount, regardless of the cost of the program. Employer contributions to the plan are based on the employee’s age and service at retirement.

     The Company accounts for postretirement benefits other than pensions in accordance with SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” The Company funds benefit costs on a pay-as-you-go basis. There have been no changes to the components of net periodic benefit cost or the amount that the Company expects to fund in fiscal 2009 from those reported in Note 3 to the consolidated financial statements included in the Company’s latest annual report on Form 10-K for the year ended July 31, 2008.

     The Company also has deferred compensation plans for directors, officers, and key executives. The Company accounts for investments related to its deferred compensation plan in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. In accordance with SFAS No. 115, the Company recorded (income) expense of ($471) and $2,133 for the three and nine months ended April 30, 2009, respectively, in “Investment and other income — net” on the Condensed Consolidated Statements of Income related to investments held as of April 30, 2009.

NOTE I — Fair Value Measurements

     The Company adopted SFAS No. 157, “Fair Value Measurements”, on August 1, 2008 as it relates to financial assets and liabilities. The impact of this adoption has not been material to the Company’s financial statements. SFAS No. 157 will be effective for the Company’s nonfinancial assets and liabilities on August 1, 2009, the first day of the Company’s next fiscal year. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements, defines fair value based upon an exit price model, establishes a framework for measuring fair value, and expands the applicable disclosure requirements. SFAS No. 157 indicates, among other things, that a fair value measurement assumes that a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.

     SFAS No. 157 establishes a fair market value hierarchy for the pricing inputs used to measure fair market value. The Company’s assets and liabilities measured at fair market value are classified in one of the following categories:

Level 1 — Assets or liabilities for which fair value is based on quoted market prices in active markets for identical instruments as of the reporting date. At April 30, 2009, $7,460 of the mutual funds held for the Company’s deferred compensation plans were valued using Level 1 pricing inputs. The Company’s deferred compensation investments are included in “Other assets” on the accompanying Condensed Consolidated Balance Sheets.

Level 2 — Assets or liabilities for which fair value is based on valuation models for which pricing inputs were either directly or indirectly observable. At April 30, 2009, $676 of the Company’s forward exchange contracts designated as cash flow hedges under SFAS No. 133 were valued using Level 2 pricing inputs. These contracts are included in “Prepaid expenses and other current assets” on the accompanying Condensed Consolidated Balance Sheets. At April 30, 2009, $405 and $3 of the Company’s forward exchange contracts not designated as hedging instruments under SFAS No. 133 were valued using Level 2 pricing inputs and are included in “Other current liabilities” and “Prepaid expenses and other current assets”, on the accompanying Condensed Consolidated Balance Sheets, respectively. See Note L for additional information regarding the Company’s hedging and derivatives activities.

Level 3 — Assets or liabilities for which fair value is based on valuation models with significant unobservable pricing inputs and which result in the use of management estimates. As of April 30, 2009, none of the Company’s assets or liabilities were valued using Level 3 pricing inputs.

NOTE J: New Accounting Pronouncements

     In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” SFAS No. 141(R) requires acquiring entities to recognize all the assets and liabilities assumed in a transaction at fair values as of the acquisition date, but changes the accounting treatment for certain items, including:

SFAS No. 141(R) applies to business combinations for which the acquisition date is on or after August 1, 2009. The impact of SFAS No. 141(R) on our future consolidated financial statements will depend on the size and nature of future acquisitions.

     In June 2008, the FASB issued Staff Position on EITF Issue 03-6 (“FSP 03-6”), “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” FSP 03-6 requires that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends be considered participating securities in undistributed earnings with common shareholders. This staff position will be effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The Company is in the process of evaluating the impact that will result from adopting FSP 03-6 on the Company’s results of operations and financial disclosures when such statement is adopted.

     In April 2009, the FASB issued FSP No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” FSP 107-1 amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments”, and Accounting Principles Board Opinion No. 28, “Interim Financial Reporting”, to require disclosures about fair value of financial instruments for interim periods of publicly traded companies as well as in annual financial statements. FSP 107-1 is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company expects to adopt this FSP for the interim period ending October 31, 2009. The Company is in the process of evaluating the impact that will result from adopting FSP No. 107-1 and APB 28-1 on the Company’s financial disclosures when such guidance is adopted.

NOTE K: Restructuring

     In November 2008, in response to the global economic recession, the Company announced it would take several measures to address its cost structure. In addition to a company-wide salary freeze, a reduction in its contract labor, and decreased discretionary spending, the Company announced it would reduce its workforce.

     The Company implemented a plan to reduce its workforce through voluntary and involuntary separation programs, voluntary retirement programs, and facility consolidations. As a result of these actions, the Company recorded restructuring charges of $2,229 and $23,276 during the three and nine months ended April 30, 2009, respectively. The year-to-date restructuring charges consisted of $19,196 of employee separation costs, $1,861 of non-cash fixed asset write-offs, $1,025 of other facility closure related costs, $826 of contract termination costs, and $368 of non-cash stock option expense. Of the $23,276 of restructuring charges recorded during the nine months ended April 30, 2009, $11,789 was incurred in the Americas, $7,534 was incurred in Europe, and $3,953 was incurred in Asia-Pacific. The charges for employee separation costs consisted of severance pay, outplacement services, medical and other related benefits. The costs related to these restructuring activities have been recorded on the condensed consolidated statements of income as restructuring charges. The Company expects to incur approximately $30,000 of restructuring charges during fiscal year 2009 and expects to complete this restructuring plan during the remainder of fiscal 2009. The Company expects the majority of the remaining cash payments to be made within the next twelve months.

     A reconciliation of the Company’s restructuring activity for fiscal 2009 is as follows:

NOTE L: DERIVATIVES AND HEDGING ACTIVITIES

     The Company primarily utilizes forward foreign exchange currency contracts to reduce the exchange rate risk of specific foreign currency denominated transactions. These contracts typically require the exchange of a foreign currency for U.S. dollars at a fixed rate at a future date, with maturities of less than 12 months, which qualify as cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. 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 foreign exchange currency 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 has designated a portion of its foreign exchange contracts as cash flow hedges under SFAS No. 133, and recorded these contracts at fair value on the Condensed Consolidated Balance Sheets. For these instruments, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains or losses on the derivative related to hedge ineffectiveness are recognized in current earnings. At April 30, 2009, unrealized gains of $1,149 have been included in OCI. All balances are expected to be reclassified from OCI to earnings during the next twelve months when the hedged intercompany transactions impact earnings. At April 30, 2009, the Company’s $676 of forward exchange contracts were included in “Prepaid expenses and other current assets” on the accompanying Condensed Consolidated Balance Sheet. At July 31, 2008, the Company’s $96 of forward exchange contracts were included in “Other current liabilities” on the accompanying Condensed Consolidated Balance Sheet. At April 30, 2009, the U.S. dollar equivalent of these outstanding forward foreign exchange contracts totaled $5,086, including contracts to sell Euros, Canadian Dollars, and Australian Dollars.

     Additionally, during fiscal 2009, the Company entered into hedge contracts to create economic hedges to manage foreign exchange risk exposure. The Company has not designated these derivative contracts as hedge transactions under SFAS No. 133, and accordingly, the mark-to-market impact of these derivatives is recorded each period in current earnings. At April 30, 2009, $405 and $3 of the Company’s forward exchange contracts not designated as hedging instruments under SFAS No. 133 were included in “Other current liabilities” and “Prepaid expenses and other current assets”, on the accompanying Condensed Consolidated Balance Sheets, respectively. At April 30, 2009, the U.S. dollar equivalent of these outstanding forward foreign exchange contracts totaled $12,709, including contracts to sell Euros and British Pounds.

     Fair values of derivative instruments in the Condensed Consolidated Balance Sheets were as follows:

     The pre-tax effects of derivative instruments designated as cash flow hedges under SFAS No. 133 on the Condensed Consolidated Statements of Income consisted of the following:

     The pre-tax effects of derivative instruments not designated as hedging instruments under SFAS No. 133 on the Condensed Consolidated Statements of Income consisted of the following:

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Brady is an international manufacturer and marketer of identification solutions and specialty materials that identify and protect premises, products, and people. Its products include high-performance labels and signs, printing systems and software, safety devices, precision die-cut materials, and label-application and data-collection systems. Founded in 1914, the Company serves customers in manufacturing, electrical, telecommunications, electronics, construction, laboratory, education, governmental, public utility, computer, transportation and a variety of other industries. The Company manufactures and sells products domestically and internationally through multiple channels including distributor sales, direct sales, mail-order catalogs, telemarketing, retail and electronic access through the Internet. The Company believes that its reputation for innovation, commitment to quality and service, and dedicated employees have made it a world leader in the markets it serves. The Company operates manufacturing or distribution facilities in Australia, Belgium, Brazil, Canada, China, Denmark, France, Germany, Hong Kong, India, Italy, Japan, Korea, Malaysia, Mexico, the Netherlands, Norway, Poland, Singapore, Sweden, Thailand, the United Kingdom and the United States. Brady sells through subsidiaries or sales offices in these countries, with additional sales through a dedicated team of international sales representatives in the Philippines, Slovakia, Spain, Taiwan, Turkey, and the United Arab Emirates and further markets its products to parts of Eastern Europe, the Middle East, Africa and Russia.

     Sales for the quarter ended April 30, 2009, decreased 27.5% to $276.7 million, compared to $381.9 million in the same period of fiscal 2008. Of the decrease in sales, organic sales declined 19.9%, acquisitions added 0.1% and the effects of fluctuations in the exchange rates used to translate financial results into the United States dollar decreased sales 7.7%. Net income for the quarter ended April 30, 2009, was $18.0 million or $0.34 per diluted Class A Nonvoting Common Share, down 47.7% and 46.0%, respectively, from $34.4 million or $0.63 per diluted Class A Nonvoting Common Share reported in the third quarter of last fiscal year.

     Sales for the nine months ended April 30, 2009, decreased 18.2% to $921.5 million, compared to $1,126.2 million in the same period of fiscal 2008. Of the decrease in sales, organic sales declined 14.3%, acquisitions added 0.8% and the effects of fluctuations in the exchange rates used to translate financial results into the United States dollar decreased sales 4.7%. Net income for the nine months ended April 30, 2009, was $50.9 million or $0.96 per diluted Class A Nonvoting Common Share, down 47.7% and 45.8%, respectively, from $97.4 million or $1.77 per diluted Class A Nonvoting Common Share reported in the same period of the prior fiscal year.

     The comparability of the operating results for the three and nine months ended April 30, 2009, to the same periods of the prior year has been impacted by the following acquisitions completed in fiscal 2008.

     Sales for the three months ended April 30, 2009, decreased 27.5% compared to the same period in fiscal 2008. The decrease was comprised of a decline in organic sales of 19.9%, an increase of 0.1% due to the acquisitions listed in the above table, and a decrease of 7.7% due to the effect of currencies on sales. Declining organic sales in the quarter were primarily the result of the global economic recession. Organic sales were adversely impacted during the third quarter of fiscal 2009 across each of the Company’s three segments, with declines of 22.2%, 22.8%, and 10.8% for the Americas, Europe, and Asia-Pacific segments, respectively. The organic sales decline experienced in the Americas was due primarily to continued softness in the manufacturing and construction sectors. Geographically, the organic decline in sales for the Americas was primarily attributable to the U.S., Canada, and Brazil, slightly offset by modest gains in Mexico. Europe experienced declines in organic sales across most of its geographic units due to the economic recession, with Southern Europe suffering the largest organic losses. While organic sales to the private sector declined in the Europe segment, sales to governments and public utilities have partially offset these losses. The decrease in organic sales for the Asia-Pacific segment was due to the overall decline in the electronics and mobile handset markets and aggressive pricing demands from customers, slightly offset by increased demand for MRO products to support infrastructure development sponsored by government stimulus spending in the region.

     Sales for the nine months ended April 30, 2009, decreased 18.2% compared to the same period in fiscal 2008. The decrease was comprised of a decline in organic sales of 14.3%, an increase of 0.8% due to the acquisitions listed above, and a decrease of 4.7% due to the effect of currencies on sales. The decrease in organic sales was due to declines of 16.4% in the Americas segment, 15.6% in Europe, and 8.7% in Asia-Pacific. The decline in organic sales in the Americas segment was primarily driven by weakness in the manufacturing and construction markets. Organic sales for the nine months ended April 30, 2009 were adversely impacted in Europe by declining sales in the private sector to the automotive and electronics industries. The decrease in organic sales in the Asia-Pacific segment was the result of declines experienced in the electronics and mobile handset markets, primarily during the second and third quarters of fiscal 2009. All segments were negatively impacted by the current economic recession during the nine months ended April 30, 2009.

     Gross margin as a percentage of sales decreased to 48.5% from 49.6% for the quarter and to 47.9% from 49.0% for the nine months ended April 30, 2009, compared to the same periods of the previous year. This decrease in gross margin as a percentage of sales was primarily the result of decreased sales volumes, partially offset by savings generated from the reduction in the Company’s workforce and other restructuring activities that took place during the second and third quarters of fiscal 2009, the cancellation of fiscal 2009 incentive compensation plans, and efficiencies gained from the implementation of the Brady Business Performance System (“BBPS”) throughout the Company.

     Research and development (“R&D”) expenses decreased 24.4% to $7.8 million for the quarter and 13.6% to $25.3 million for the nine months ended April 30, 2009, compared to $10.3 million and $29.3 million for the same periods in the prior year, respectively. The decline in R&D spending during the third quarter of fiscal 2009 was reflective of the benefit of restructuring actions taken during the second and third quarters of fiscal 2009, as well as reduced incentive compensation expense compared to the prior year. As a percentage of sales, R&D expenses represented a slightly higher percentage of sales, increasing to 2.8% in the third quarter of fiscal 2009 from 2.7% in the third quarter of fiscal 2008, and increased slightly to 2.7% in the first nine months of fiscal 2009 compared to 2.6% in the first nine months of fiscal 2008, reflective of the Company’s commitment to new product development.

     Selling, general and administrative (“SG&A”) expenses decreased 25.1% to $94.9 million for the three months ended April 30, 2009, compared to $126.7 million for the same period in the prior year and 18.1% to $302.8 million for the nine months ended April 30, 2009, compared to $369.6 million for the same period in the prior year. The decrease in SG&A expenses was primarily related to the savings resulting from restructuring activities that took place during the second and third quarters of fiscal 2009, a decline in discretionary spending, and reduced incentive compensation expense compared to the prior year. As a percentage of sales, SG&A expenses increased to 34.3% from 33.2% for the quarter and to 32.9% from 32.8% for the nine months ended April 30, 2009, compared to the same periods in the prior year.

     Restructuring expenses were $2.2 million and $23.3 million for the three and nine months ended April 30, 2009, respectively. In response to the global recession, the Company implemented a plan to address its cost structure. During the three and nine months ended April 30, 2009, the Company incurred costs related to the reduction of its workforce and facility consolidations. Restructuring costs related primarily to employee separation costs, consisting of severance pay, outplacement services, medical and other related benefits for approximately 15 percent of its employees. The Company expects to complete its current restructuring plan during the remainder of fiscal 2009.

     Interest expense decreased to $6.3 million from $7.0 million for the quarter and to $19.0 million from $20.4 million for the nine months ended April 30, 2009, compared to the same periods in the prior year. In June 2008, the Company paid the first installment of $21.4 million related to the debt securities issued in June 2004. As a result of a lower principal balance under the related debt agreement, the Company’s interest expense decreased for the three and nine months ended April 30, 2009 as compared to the same periods in the prior year.

     Other income and expense increased to $1.0 million of income for the third quarter of fiscal 2009 compared to $0.9 million of income for the third quarter of fiscal 2008. Other income and expense decreased to $1.1 million of income for the nine months ended April 30, 2009, compared to $3.3 million of income for the same period in the prior year. Of the $1.0 million in other income for the three months ended April 30, 2009, $0.3 million was the result of interest income generated from investments of excess cash, $0.2 million of foreign exchange gains, and $0.5 million related to gains on investments related to its deferred compensation plan. Of the $0.9 million in other income for the three months ended April 30, 2008, $1.4 million was the result of interest income generated from investments of excess cash, partially offset by $0.7 million of foreign exchange losses. For the nine months ended April 30, 2009, the $1.1 million of other income consisted primarily of $2.2 million related to interest income generated from investments and $1.1 million related to foreign exchange gains, partially offset by $2.4 million of expense related to the decline in the value of mutual funds held in deferred compensation plans. For the nine months ended April 30, 2008, of the $3.3 million of other income, $4.3 million was related to interest income generated from investments, partially offset by $1.3 million in foreign exchange losses.

     The Company’s income tax rate was 25.0% for the quarter and 29.5% for the nine months ended April 30, 2009, compared to 26.2% and 28.5% for the three and nine months ended April 30, 2008. During the three months ended April 30, 2009, the Company recognized approximately $1.2 million in income tax benefits due to the expiration of various statutes of limitations, resulting in an effective tax rate of 25.0%. On a year-to-date basis, the income tax rate in fiscal 2009 has been negatively impacted by certain valuation allowances recorded against deferred tax assets as a result of the decline in income before taxes. The Company expects the full year income tax rate for fiscal 2009 to be approximately 28%.

     Net income for the three months ended April 30, 2009, decreased 47.7% to $18.0 million, compared to $34.4 million for the same quarter of the previous year. Net income as a percentage of sales decreased to 6.5% from 9.0% for the quarter ended April 30, 2009, compared to the same period in the prior year, due to the factors noted above. For the nine months ended April 30, 2009, net income decreased 47.7% to $50.9 million, compared to $97.4 million for the same period in the previous year. As a percentage of sales, net income decreased to 5.5% from 8.6% for the nine months ended April 30, 2009, compared to the same period in the previous year.

     The Company is organized and managed on a geographic basis by region. Effective in the fourth quarter of fiscal 2008, the Company has three reporting segments, Americas, Europe, and Asia-Pacific. Following is a summary of segment information for the three and nine months ended April 30, 2009 and 2008:

NET INCOME RECONCILIATION (Dollars in thousands)