UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
   
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period EndedApril 30,October 31, 2011
OR
   
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from                    to                    
Commission File Number 1-14959
BRADY CORPORATION
(Exact name of registrant as specified in its charter)
   
Wisconsin 39-0178960
   
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
6555 West Good Hope Road, Milwaukee, Wisconsin 53223
(Address of principal executive offices)
(Zip Code)
(414) 358-6600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
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). Yesþ Noo
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 definitionthe definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
       
Large accelerated filerþ Accelerated filero Non-accelerated filero Smaller reporting companyo
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
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 May 31,December 2, 2011, there were 48,892,686 outstanding 49,278,752 shares of Class A Nonvoting Common Stock and 3,538,628 shares of Class B Voting Common Stock. The Class B Voting Common Stock, all of which is held by affiliates of the Registrant, is the only voting stock.
 
 

 

 


 

FORM 10-Q
BRADY CORPORATION
INDEX
     
  Page 
  
  3 
     
  3 
     
  3 
     
  4 
     
  5 
     
  6 
     
  1816 
     
  2622 
     
  2622 
     
  23
23 
     
  2723
23 
     
 EX-10.1Exhibit 10.1
 EX-10.2Exhibit 31.1
 EX-31.1Exhibit 31.2
 EX-31.2Exhibit 32.1
 EX-32.1
EX-32.2Exhibit 32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 

2


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)Dollars in Thousands)
                
 April 30, 2011 July 31, 2010  October 31, 2011 July 31, 2011 
 (Unaudited)  (Unaudited)   
ASSETS
  
Current assets:
  
Cash and cash equivalents $373,978 $314,840  $371,594 $389,971 
Accounts receivable — net 235,634 221,621  232,837 228,483 
Inventories:  
Finished products 59,727 52,906  64,652 62,152 
Work-in-process 14,741 13,146  16,259 14,550 
Raw materials and supplies 28,034 28,620  28,752 27,484 
          
Total inventories 102,502 94,672  109,663 104,186 
Prepaid expenses and other current assets 39,614 37,839  42,120 35,647 
          
Total current assets
 751,728 668,972  756,214 758,287 
Other assets:
  
Goodwill 799,395 768,600  792,303 800,343 
Other intangible assets 96,386 103,546  84,461 89,961 
Deferred income taxes 52,744 39,103  50,676 53,755 
Other 19,633 20,808  19,444 19,244 
Property, plant and equipment:
  
Cost:  
Land 6,416 6,265  6,360 6,406 
Buildings and improvements 103,060 101,138  103,683 104,644 
Machinery and equipment 302,017 289,727  303,493 305,557 
Construction in progress 13,601 9,873  13,431 11,226 
          
 425,094 407,003  426,967 427,833 
Less accumulated depreciation 284,334 261,501  290,704 287,918 
          
Property, plant and equipment — net
 140,760 145,502  136,263 139,915 
          
Total
 $1,860,646 $1,746,531  $1,839,361 $1,861,505 
          
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
  
Current liabilities:
  
Accounts payable $90,621 $96,702  $96,237 $98,847 
Wages and amounts withheld from employees 67,316 67,285  46,221 69,798 
Taxes, other than income taxes 9,061 7,537  8,963 7,612 
Accrued income taxes 17,399 10,138  16,170 9,954 
Other current liabilities 65,300 50,862  57,717 54,406 
Current maturities on long-term obligations 61,264 61,264 
Current maturities on long-term debt 61,264 61,264 
          
Total current liabilities
 310,961 293,788  286,572 301,881 
Long-term obligations, less current maturities
 351,789 382,940  330,054 331,914 
Other liabilities
 65,741 64,776  68,200 71,518 
          
Total liabilities
 728,491 741,504  684,826 705,313 
Stockholders’ investment:
  
Class A nonvoting common stock — Issued 51,261,487 and 51,261,487 shares, respectively and outstanding 49,226,952 and 48,875,716 shares, respectively 513 513 
Class B voting common stock — Issued and outstanding 3,538,628 shares 35 35 
Class A nonvoting common stock — Issued 51,261,487 and 51,261,487 shares, respectively and outstanding 48,862,485 and 49,284,252 shares, respectively 513 513 
Class B voting common stock — Issued and outstanding, 3,538,628 shares 35 35 
Additional paid-in capital 308,908 304,205  310,602 307,527 
Earnings retained in the business 769,081 718,512 
Treasury stock — 1,724,535 and 2,175,771 shares, respectively, of Class A nonvoting common stock, at cost  (51,959)  (66,314)
Income retained in the business 812,142 789,100 
Treasury stock — 2,082,801 and 1,667,235 shares, respectively of Class A nonvoting common stock, at cost  (61,015)  (50,017)
Accumulated other comprehensive income 109,840 50,905  96,778 113,898 
Other  (4,263)  (2,829)  (4,520)  (4,864)
          
Total stockholders’ investment
 1,132,155 1,005,027  1,154,535 1,156,192 
          
Total
 $1,860,646 $1,746,531  $1,839,361 $1,861,505 
          
See Notes to Condensed Consolidated Financial Statements.

 

3


BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
                         
 Three Months Ended April 30, Nine Months Ended April 30,  Three Months Ended October 31,
 (Unaudited) (Unaudited)  (Unaudited)
 Percentage Percentage  Percentage
 2011 2010 Change 2011 2010 Change  2011 2010 Change
Net sales $337,896 $321,887  4.9% $996,493 $936,202  6.4% $349,508 $329,588  6.0%
Cost of products sold 170,258 161,690  5.3% 505,333 471,644  7.1% 181,677 165,076  10.1%
              
 
Gross margin 167,638 160,197  4.6% 491,160 464,558  5.7% 167,831 164,512  2.0%
 
Operating expenses:  
Research and development 10,550 10,709  (1.5%) 32,226 30,950  4.1% 9,809 9,944  (1.4)%
Selling, general and administrative 115,006 111,227  3.4% 332,394 328,638  1.1% 108,932 109,324  (0.4)%
Restructuring charge — (See Note J) 1,211 2,347  (48.4%) 6,986 9,597  (27.2%)
Restructuring charges  3,641  (100.0)%
              
Total operating expenses 126,767 124,283  2.0% 371,606 369,185  0.7% 118,741 122,909  (3.4)%
 
Operating income 40,871 35,914  13.8% 119,554 95,373  25.4% 49,090 41,603  18.0%
 
Other income (expense): 
Investment and other income — net 1,428 121  1080.2% 2,892 1,273  127.2%
Other income and (expense): 
Investment and other income (expense)  (202) 290  (169.7)%
Interest expense  (5,103)  (5,147)  (0.9%)  (16,640)  (15,472)  7.5%  (5,047)  (5,687)  (11.3)%
              
 
Income before income taxes 37,196 30,888  20.4% 105,806 81,174  30.3% 43,841 36,206  21.1%
 
Income taxes 8,607 7,193  19.7% 26,737 20,810  28.5% 11,109 9,925  11.9%
              
 
Net income $28,589 $23,695  20.7% $79,069 $60,364  31.0% $32,732 $26,281  24.5%
         
      
Per Class A Nonvoting Common Share:  
Basic net income $0.54 $0.45  20.0% $1.50 $1.15  30.4% $0.62 $0.50  24.0%
Diluted net income $0.54 $0.45  20.0% $1.49 $1.14  30.7% $0.62 $0.50  24.0%
Dividends $0.18 $0.175  2.9% $0.54 $0.525  2.9% $0.185 $0.18  2.8%
 
Per Class B Voting Common Share:  
Basic net income $0.54 $0.45  20.0% $1.48 $1.13  31.0% $0.60 $0.48  25.0%
Diluted net income $0.54 $0.45  20.0% $1.47 $1.12  31.3% $0.60 $0.48  25.0%
Dividends $0.18 $0.175  2.9% $0.523 $0.508  3.0% $0.168 $0.163  3.1%
 
Weighted average common shares outstanding (in thousands):  
Basic 52,701 52,427 52,581 52,378  52,657 52,448 
Diluted 53,337 52,873 53,067 52,971  52,954 52,810 
See Notes to Condensed Consolidated Financial Statements.

 

4


BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
                
 Nine Months Ended  Three Months Ended 
 April 30,  October 31, 
 (Unaudited)  (Unaudited) 
 2011 2010  2011 2010 
Operating activities:  
Net income $79,069 $60,364  $32,732 $26,281 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization 37,522 40,276  11,241 12,594 
Deferred income taxes 4,399  (4,849)
Non-cash portion of stock-based compensation expense 3,591 4,069 
Non-cash portion of restructuring charges 2,155 1,455   951 
Non-cash portion of stock-based compensation expense 9,396 7,574 
Gain on the divestiture of business  (4,394)  
Deferred income taxes  (9,018)  (4,582)
Changes in operating assets and liabilities (net of effects of business acquisitions/divestitures):  
Accounts receivable 211  (17,192)  (7,798)  (13,614)
Inventories  (1,491) 3,887   (7,156)  (3,689)
Prepaid expenses and other assets 772  (5,273)  (7,384) 1,078 
Accounts payable and accrued liabilities  (8,355) 31,493   (21,814)  (16,909)
Income taxes 4,579 152  7,470 10,245 
          
Net cash provided by operating activities 110,446 118,154  15,281 16,157 
 
Investing activities:  
Acquisition of businesses, net of cash acquired  (7,970)  (30,431)
Divestiture of business, net of cash retained in business 12,979  
Payments of contingent consideration  (979)  
Purchases of property, plant and equipment  (13,671)  (20,927)  (5,817)  (2,810)
Settlement of net investment hedges  (958)  
Other  (379) 1,197   (233)  (908)
          
Net cash used in investing activities  (10,020)  (50,161)  (7,008)  (3,718)
 
Financing activities:  
Payment of dividends  (28,500)  (27,560)  (9,690)  (9,424)
Proceeds from issuance of common stock 7,154 3,494  683 2,105 
Principal payments on debt  (42,514)  (26,143)
Income tax benefit from the exercise of stock options and deferred compensation distribution 1,075 182 
Purchase of treasury stock  (12,309)  
Income tax benefit from the exercise of stock options and deferred compensation distributions, and other 456  (146)
          
Net cash used in financing activities  (62,785)  (50,027)  (20,860)  (7,465)
 
Effect of exchange rate changes on cash 21,497 984   (5,790) 6,286 
          
Net increase in cash and cash equivalents 59,138 18,950 
Net (decrease) increase in cash and cash equivalents  (18,377) 11,260 
Cash and cash equivalents, beginning of period 314,840 188,156  389,971 314,840 
          
Cash and cash equivalents, end of period $373,978 $207,106  $371,594 $326,100 
     
      
Supplemental disclosures of cash flow information:  
Cash paid during the period for:  
Interest, net of capitalized interest $16,379 $18,217  $6,082 $7,211 
Income taxes, net of refunds 26,695 18,296  5,825 5,907 
Acquisitions: 
Fair value of assets acquired, net of cash and goodwill $4,624 $15,366 
Liabilities assumed  (1,446)  (5,201)
Goodwill 4,792 20,266 
     
Net cash paid for acquisitions $7,970 $30,431 
     
See Notes to Condensed Consolidated Financial Statements.

 

5


BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NineThree Months Ended April 30,October 31, 2011
(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,October 31, 2011 and July 3l, 2010,2011, and its results of operations for the three and nine months ended April 30, 2011 and 2010, and its cash flows for the ninethree months ended April 30,October 31, 2011 and 2010. The condensed consolidated balance sheet as of July 31, 20102011 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 condensed or 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, 2010.
The Company has reclassified certain prior year financial statement amounts to conform to their current year presentation. The operating activities including “Other,” “Other liabilities,” and “Accounts payable and accrued liabilities”, which were previously disclosed as single line items, have been combined and reported as “Accounts payable and accrued liabilities” on the Condensed Consolidated Statement of Cash Flows for the nine months ended April 30, 2011 and 2010. These reclassifications had no effect on total assets, net income, or earnings per share.2011.
NOTE B — Goodwill and Intangible Assets
Changes in the carrying amount of goodwill for the nine monthsquarter ended April 30,October 31, 2011, are as follows:
                 
  Americas  Europe  Asia-Pacific  Total 
Balance as of July 31, 2010 $425,018  $163,189  $180,393  $768,600 
Current year acquisitions        4,792   4,792 
Current year divestitures  (3,696)  (8,380)     (12,076)
Translation adjustments  4,203   18,847   15,029   38,079 
             
Balance as of April 30, 2011 $425,525  $173,656  $200,214  $799,395 
             
                 
  Americas  Europe  Asia-Pacific  Total 
Balance as of July 31, 2011 $425,578  $171,238  $203,527 ��$800,343 
             
Translation adjustments  (3,045)  (3,048)  (1,947)  (8,040)
             
Balance as of October 31, 2011 $422,533  $168,190  $201,580  $792,303 
             
Goodwill increased $30,795decreased $8,040 during the ninethree months ended April 30, 2011. Of the $30,795 increase, $38,079 wasOctober 31, 2011 due to the positivenegative effects of foreign currency translationtranslation. Goodwill at October 31, 2011 and $4,792 resulted from the acquisition of ID Warehouse during the second quarter of fiscal 2011. The increase was offset by a $12,076 decrease in goodwill as a result of the divestiture of the Company’s Teklynx business during the second quarter of fiscal 2011. See Note L, “Acquisitions and Divestitures” for further discussion.July 31, 2011 did not include any accumulated impairment losses.

6


Other intangible assets include patents, trademarks, customer relationships, non-compete agreements and other intangible assets with finite lives being amortized in accordance with the accounting guidance for goodwill and other intangible assets. The net book value of these assets was as follows:
                                                                
 April 30, 2011 July 31, 2010  October 31, 2011 July 31, 2011 
 Weighted Weighted        Weighted Weighted       
 Average Average        Average Average       
 Amortization Gross Amortization Gross      Amortization Gross Amortization Gross     
 Period Carrying Accumulated Net Book Period Carrying Accumulated Net Book  Period Carrying Accumulated Net Book Period Carrying Accumulated Net Book 
 (Years) Amount Amortization Value (Years) Amount Amortization Value  (Years) Amount Amortization Value (Years) Amount Amortization Value 
Amortized other intangible assets:  
Patents 5 $9,687 $(8,452) $1,235 5 $9,314 $(7,855) $1,459  5 $9,939 $(8,604) $1,335 5 $9,784 $(8,556) $1,228 
Trademarks and other 7 9,434  (6,505) 2,929 7 8,823  (5,685) 3,138  7 9,292  (7,025) 2,267 7 9,448  (6,599) 2,849 
Customer relationships 7 164,840  (115,293) 49,547 7 152,720  (95,996) 56,724  7 162,659  (121,832) 40,827 7 165,566  (119,977) 45,589 
Non-compete agreements 4 13,523  (12,709) 814 4 11,930  (11,059) 871 
Other 4 2,731  (2,723) 8 4 3,309  (3,297) 12 
Non-compete agreements and other 4 16,114  (15,562) 552 4 16,432  (15,760) 672 
Unamortized other intangible assets:  
Trademarks N/A 41,853  41,853 N/A 41,342  41,342  N/A 39,480  39,480 N/A 39,623  39,623 
                          
Total $242,068 $(145,682) $96,386 $227,438 $(123,892) $103,546  $237,484 $(153,023) $84,461 $240,853 $(150,892) $89,961 
                          

6


The value of goodwill and other intangible assets in the Condensed Consolidated Balance Sheetcondensed consolidated financial statements at April 30,October 31, 2011 differs from the value assigned to them in the original allocation of purchase price due to the effect of fluctuations in the exchange rates used to translate the financial statements into the United States Dollar between the date of acquisition and April 30,October 31, 2011. The acquisition completed during the nine months ended April 30, 2011 increased the customer relationships by $1,846 and increased the amortizable trademarks by $487. See Note L, “Acquisitions and Divestitures” for further discussion.
Amortization expense on intangible assets was $5,117$4,080 and $5,160$5,147 for the three-month periods ended April 30, 2011 and 2010, respectively and $15,387 and $16,395 for the nine-month periods ended April 30,October 31, 2011 and 2010, respectively. AnnualThe amortization over each of the next five fiscal years is projected to be $20,740, $16,794, $10,959, $5,941$16,436, $10,578, $5,617, $5,263 and $5,531$4,163 for the fiscal years ending July 31, 2011, 2012, 2013, 2014, 2015 and 2015,2016, respectively.
NOTE C — Comprehensive Income
Total comprehensive income for the periods presented was aas follows:
                 
  Three Months Ended April 30,  Nine Months Ended April 30, 
  2011  2010  2011  2010 
                 
Net Income $28,589  $23,695  $79,069  $60,364 
Unrealized (loss) gain on cash flow hedges  (315)  110   (1,206)  63 
Amortization of gain on post-retirement medical, dental and vision plan  (31)  (63)  (126)  (208)
Foreign currency translation adjustments  30,512   (1,758)  60,267   4,092 
             
Total comprehensive income $58,755  $21,984  $138,004  $64,311 
             
         
  Three Months Ended 
  October 31, 2011  October 31, 2010 
Net Income $32,732  $26,281 
Unrealized gain (loss) on cash flow hedges  1,330   (725)
Prior service credit and amortization of (gain) loss on post-retirement medical plan  668   (63)
Foreign currency translation adjustments (1)  (19,118)  30,095 
       
Total comprehensive income $15,612  $55,588 
       
(1)The cumulative translation adjustment in the table above includes the settlement of net investment hedges for the three months ended October 31, 2011 of ($584), net of tax.
The increasedecrease in total comprehensive income for the quarter ended April 30,October 31, 2011 as compared to April 30,the quarter ended October 31, 2010 was primarily due to the depreciationappreciation of the U.S. dollar against other currencies.

7


NOTE D — Net Income Perper Common Share
In June 2008, the Financial Accounting Standards Board (“FASB”) issued accounting guidance addressing whether instruments granted in share-based payment transactions are participating securities prior to vesting, and therefore need to be included in the earnings allocation in computing earnings per share. This guidance requires that all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends be considered participating securities in undistributed earnings with common shareholders. The Company adopted the guidance during the first quarter of fiscal 2010. As a result, the dividends on the Company’s performance-based restricted shares are included in the basic and diluted earnings per share calculations for the respective periods presented.
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:
                        
 Three Months Ended April 30, Nine Months Ended April 30,  Three Months Ended 
 2011 2010 2011 2010  October 31, 
Numerator: 
Net income (numerator for basic and diluted Class A net income per share) $28,589 $23,695 $79,069 $60,364 
 2011 2010 
Numerator: (in thousands) 
Net income $32,732 $26,281 
Less:  
Restricted stock dividends  (56)  (37)  (168)  (111)  (57)  (56)
              
Numerator for basic and diluted Class A net income per share $28,533 $23,658 $78,901 $60,253  $32,675 $26,225 
         
      
Less:  
Preferential dividends    (820)  (816)  (818)  (820)
Preferential dividends on dilutive stock options    (6)  (11)  (5)  (6)
              
Numerator for basic and diluted Class B net income per share $28,533 $23,658 $78,075 $59,426  $31,852 $25,399 
              
 
Denominator: 
Denominator: (in thousands) 
Denominator for basic net income per share for both Class A and Class B 52,701 52,427 52,581 52,378  52,657 52,448 
Plus: Effect of dilutive stock options 636 446 486 593  297 362 
              
Denominator for diluted net income per share for both Class A and Class B 53,337 52,873 53,067 52,971  $52,954 $52,810 
              
 
Class A Nonvoting Common Stock net income per share:  
Basic $0.54 $0.45 $1.50 $1.15  $0.62 $0.50 
Diluted $0.54 $0.45 $1.49 $1.14  $0.62 $0.50 
 
Class B Voting Common Stock net income per share:  
Basic $0.54 $0.45 $1.48 $1.13  $0.60 $0.48 
Diluted $0.54 $0.45 $1.47 $1.12  $0.60 $0.48 
Options to purchase approximately 2,500,0004,915,000 and 3,100,0003,636,000 shares of Class A Nonvoting Common Stock for the three and nine months ended April 30, 2011, respectively, and 2,800,000 and 2,700,000 shares of Class A Nonvoting Common Stock for the three and nine months ended April 30, 2010, respectively, were not included in the computationscomputation of diluted net income per share for the quarters ended October 31, 2011 and 2010, respectively, because the option exercise price was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive.

 

87


NOTE E — Segment Information
The Company evaluates short-term segment performance based on segment profit or loss and customer sales. Corporate long-term performance is evaluated based on shareholder value enhancement (“SVE”), which incorporates the cost of capital as a hurdle rate for capital expenditures, new product development, and acquisitions. Segment profit or loss does not include certain administrative costs, such as the cost of finance, information technology and human resources, which are managed as global functions. Restructuring charges, stock options, interest, investment and other income (expense) and income taxes are also excluded when evaluating performance.
The Company is organized and managed on a geographic basis by region. Each of these regions, Americas, Europe and Asia-Pacific, has a President that reports directly to the Company’s chief operating decision maker, its Chief Executive Officer. Each region has its own distinct operations, is managed by its own management team, maintains its own financial reports and is evaluated based on regional segment profit. The Company has determined that these regions comprise its operating and reportable segments based on the information used by the Chief Executive Officer to allocate resources and assess performance.
Intersegment sales and transfers are recorded at cost plus a standard percentage markup. Intercompany profit is eliminated in consolidation. It is not practicable to disclose enterprise-wide revenue from external customers on the basis of product or service.
Following is a summary of segment information for the three and nine months ended April 30,October 31, 2011 and 2010:
                                                
 Corporate    Corporate   
 Total And    and   
 Americas Europe Asia-Pacific Regions Eliminations Totals  Americas Europe Asia-Pacific Total Region Eliminations Totals 
Three months ended April 30, 2011: 
Three months ended October 31, 2011: 
Revenues from external customers $149,217 $105,894 $82,785 $337,896 $ $337,896  $153,863 $97,356 $98,289 $349,508 $ $349,508 
Intersegment revenues 9,938 696 5,960 16,594  (16,594)   10,225 762 7,442 18,429  (18,429)  
Segment profit 38,292 28,938 9,976 77,206  (3,561) 73,645  43,230 26,299 13,304 82,833  (3,263) 79,570 
 
Three months ended April 30, 2010: 
Three months ended October 31, 2010: 
Revenues from external customers $144,413 $98,152 $79,322 $321,887 $ $321,887  $145,988 $92,050 $91,550 $329,588 $ $329,588 
Intersegment revenues 11,624 791 4,443 16,858  (16,858)   9,748 893 5,946 16,587  (16,587)  
Segment profit 33,858 27,472 12,775 74,105  (3,558) 70,547  39,359 24,061 16,829 80,249  (3,436) 76,813 
 
Nine months ended April 30, 2011: 
Revenues from external customers $431,216 $301,985 $263,292 $996,493 $ $996,493 
Intersegment revenues 30,729 2,209 18,306 51,244  (51,244)  
Segment profit 108,666 82,165 38,330 229,161  (12,087) 217,074 
 
Nine months ended April 30, 2010: 
Revenues from external customers $402,255 $289,101 $244,846 $936,202 $ $936,202 
Intersegment revenues 32,657 3,367 13,344 49,368  (49,368)  
Segment profit 90,205 78,281 38,589 207,075  (10,161) 196,914 
Following is a reconciliation of segment profit to net income for the three months and nine months ended April 30,October 31, 2011 and 2010.2010:
                        
 Three months ended: Nine months ended:  Three months ended: 
 April 30, April 30,  October 31, 
 2011 2010 2011 2010  2011 2010 
Total profit from reportable segments $77,206 $74,105 $229,161 $207,075  $82,833 $80,249 
Corporate and eliminations  (3,561)  (3,558)  (12,087)  (10,161)  (3,263)  (3,436)
Unallocated amounts:  
Administrative costs  (31,563)  (32,286)  (90,534)  (91,944)  (30,480)  (31,569)
Restructuring charges  (1,211)  (2,347)  (6,986)  (9,597)   (3,641)
Investment and other income 1,428 121 2,892 1,273 
Investment and other income (expense)  (202) 290 
Interest expense  (5,103)  (5,147)  (16,640)  (15,472)  (5,047)  (5,687)
         
      
Income before income taxes 37,196 30,888 105,806 81,174  43,841 36,206 
Income taxes  (8,607)  (7,193)  (26,737)  (20,810)  (11,109)  (9,925)
              
Net income $28,589 $23,695 $79,069 $60,364  $32,732 $26,281 
              

 

98


NOTE F —Stock-Based— Stock-Based Compensation
The Company has an incentive stock planplans under which the Board of Directors may grant unrestricted stock, nonqualified stock options, to purchaseincentive stock options, shares of Class A Nonvoting Common Stock or restricted sharesstock and restricted stock units to eligible employees and Directors of Class A Nonvoting Common Stock to employees. Additionally, the Company has a nonqualified stock option plan for non-employee directors under whichand its affiliates. The stock options to purchase shares of Class A Nonvoting Common Stock are available for grant. Thegranted under the Company’s active incentive stock optionsplans 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. Stock options issued under these plans, referred to herein as “service-based” stock 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” stock options. Performance-based stock 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. The Company granted restricted shares in fiscal 2008 and fiscal 2011 that have an issuance price equal to the fair market value of the underlying stock at the date of grant. The restricted shares vest at the end of a five-year period, with respect to the restricted shares issuedgranted in fiscal 2008 were amended in fiscal 2011 to allow for vesting after a seven-year period upon meeting both performance and service conditions. The restricted shares granted in fiscal 2011 vest ratably at the end of years 3, 4three, four and 5 with respect to the restricted shares issued in fiscal 2011, andfive upon meeting certain financial performance conditions; theseand service conditions. The restricted shares granted in fiscal 2008 and 2011 are referred to herein as “performance-based restricted shares.”
As of April 30,October 31, 2011, the Company has reserved 5,885,2496,885,999 shares of Class A Nonvoting Common Stock for outstanding stock options and restricted shares and 740,0005,020,700 shares of Class A Nonvoting Common Stock remain for future issuance of stock options and restricted shares under the variousactive plans. The Company uses treasury stock or will issue new Class A Nonvoting Common Stock to deliver shares under these plans.
The Company recognizes the compensation cost of all share-based awards on a straight-line basis over the vesting period of the award. Total stock compensation expense recognized by the Company during the three months ended April 30,October 31, 2011 and 2010 was $2,527$3,591 ($1,5412,190 net of taxes) and $2,418$4,069 ($1,475 net of taxes), respectively, and expense recognized during the nine months ended April 30, 2011 and 2010 was $9,396 ($5,732 net of taxes) and $7,574 ($4,6202,482 net of taxes), respectively. As of April 30,October 31, 2011, total unrecognized compensation cost related to share-based compensation awards was $18,384$22,882 pre-tax, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of 2.22.3 years.
The Company has estimated the fair value of its service-based and performance-based stock option awards granted during the ninethree months ended April 30,October 31, 2011 and 2010 using the Black-Scholes option valuation model. The weighted-average assumptions used in the Black-Scholes valuation model are reflected in the following table:
                                
 Nine Months Ended Nine Months Ended  Three Months Ended Three Months Ended 
 April 30, 2011 April 30, 2010  October 31, 2011 October 31, 2010 
 Performance- Performance-  Performance- Performance- 
 Service-Based Based Option Service-Based Based Option  Service-Based Based Option Service-Based Based Option 
Black-Scholes Option Valuation Assumptions Option Awards Awards Option Awards Awards  Option Awards Awards Option Awards Awards 
Expected term (in years) 5.91 6.57 5.95 6.57  5.89 6.57 5.92 6.57 
Expected volatility  40.22%  39.39%  39.85%  38.72%  39.40%  39.21%  40.22%  39.39%
Expected dividend yield  1.94%  1.96%  3.02%  3.02%  2.07%  1.99%  1.94%  1.96%
Risk-free interest rate  1.65%  2.35%  2.65%  3.03%  1.16%  2.05%  1.65%  2.35%
Weighted-average market value of underlying stock at grant date $29.10 28.43 $28.73 28.73  $27.00 $29.55 $29.09 $28.35 
Weighted-average exercise price $29.10 28.35 $28.73 29.78  27.00 29.55 29.09 28.35 
Weighted-average fair value of options granted during the period $9.58 9.87 $8.78 8.70  8.37 10.01 9.58 9.82 
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 takingcalculated as the average of the high and the low stock price on the date of the grant.
The Company granted 100,000 shares of performance-based restricted stock to Frank M. Jaehnert, the Company’s President and Chief Executive Officer, in August of 2010, with a grant price and fair value of $28.35. The Company also granted 210,000 shares of performance-based restricted stock during fiscal 2008, with a grant price and fair value of $32.83. As of April 30,October 31, 2011, 310,000 performance-based restricted shares were outstanding.
The Company granted 465,000415,000 performance-based stock options during the ninethree months ended April 30,October 31, 2011, with a weighted average exercise price of $28.35$29.55 and a weighted average fair value of $9.87.$10.01. The Company also granted 897,500791,150 service-based stock options during the ninethree months ended April 30,October 31, 2011, with a weighted average exercise price of $29.10$27.00 and a weighted average fair value of $9.58.$8.37.

 

109


A summary of stock option activity under the Company’s share-based compensation plans for the ninethree months ended April 30,October 31, 2011 is presented below:
                                
 Weighted    Weighted   
 Average    Average   
 Weighted Remaining Aggregate  Weighted Remaining Aggregate 
 Average Contractual Intrinsic  Average Contractual Intrinsic 
Options Shares Exercise Price Term Value  Shares Exercise Price Term Value 
Outstanding at July 31, 2010 5,108,736 $28.69 
Outstanding at July 31, 2011 5,726,017 $29.24 
New grants 1,362,500 $28.84  1,206,150 $27.88 
Exercised  (366,488) $19.43   (69,803) $20.49 
Forfeited or expired  (292,499) $31.65   (49,365) $28.58 
      
Outstanding at April 30, 2011 5,812,249 $29.16 6.62 $48,729 
Outstanding at October 31, 2011 6,812,999 $29.09 6.8 $22,979 
          
Exercisable at April 30, 2011 3,359,215 $29.70 5.00 $26,350 
Exercisable at October 31, 2011 3,975,963 $29.83 5.3 $14,652 
          
There were 3,359,2153,975,963 and 3,104,0893,301,195 options exercisable with a weighted average exercise price of $29.70$29.83 and $28.34$29.10 at April 30,October 31, 2011 and 2010, respectively. The cash received from the exercise of options during the quarters ended April 30,October 31, 2011 and 2010 was $2,244$683 and $1,822,$2,105, respectively. The cash received from the exercise of options during the nine months ended April 30, 2011 and 2010 was $7,154 and $3,494, respectively. The cash received from the tax benefit on stock options exercised during the quarterquarters ended April 30,October 31, 2011 and 2010 was $695$469 and $462, respectively. The cash received from the tax benefit on options exercised during the nine months ended April 30, 2011 and 2010 was $1,398 and $845,$440, respectively.
The total intrinsic value (defined as the amount by which the fair value of the underlying stock exceeds the exercise price of an option) of options exercised during the ninethree months ended April 30,October 31, 2011 and 2010, based upon the average market price at the time of exercise during the period, was $4,907$642 and $2,660,$1,320, respectively. The total fair value of stock options vested during the ninethree months ended April 30,October 31, 2011 and 2010, was $6,775$6,935 and $5,294,$3,685, respectively.
NOTE G — Stockholders’ InvestmentEquity
In fiscal 2009, the Company’s Board of Directors authorized a share repurchase plansplan for the Company’s Class A Nonvoting Common Stock. The share repurchase plans wereplan was implemented by purchasing shares in 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. The Company reacquired approximately 102,067did not repurchase shares during fiscal 2011. As of July 31, 2011, there remained 204,133 shares to purchase in connection with this share repurchase plan.
On September 9, 2011, the Company’s Board of Directors authorized an additional share repurchase program for up to two million additional shares of the Company’s Class A Nonvoting Common Stock. The plan may be implemented by purchasing shares in 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 three months ended October 31, 2011, the Company purchased 457,360 shares of its Class A Nonvoting Common Stock under this plan for $2.5 million in fiscal 2010 in connection with its stock repurchase plans. No shares were reacquired during the nine months ended April 30, 2011.$12,309. As of April 30,October 31, 2011, there remained 204,1331,746,773 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 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 20112012 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, 2010.2011.

 

1110


NOTE I — Fair Value Measurements
The Company adopted newIn accordance with fair value accounting guidance, on fair value measurements on August 1, 2008 as it relates to financial assets and liabilities. The Company adopted the new accounting guidance on fair value measurements for its nonfinancial assets and liabilities on August 1, 2009. The accounting guidance applies to other accounting pronouncements that require or permit fair value measurements, defines fair value based upon an exit price model, establishes a framework for measuring fair value, and expands the applicable disclosure requirements. The accounting guidance indicates, among other things, that a fair value measurement assumes that a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.
The accounting guidance on fair value measurements establishes a fair market value hierarchy for the pricing inputs used to measure fair market value. The 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.
  
Level 2 — Assets or liabilities for which fair value is based on valuation models for which pricing inputs were either directly or indirectly observable.
  
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.
The following tables set forth by level within the fair value hierarchy, the Company’sour financial assets and liabilities that were accounted for at fair value on a recurring basis at April 30,October 31, 2011, and July 31, 2010,2011, according to the valuation techniques the Company used to determine their fair values.
                    
 Fair Value Measurements Using Inputs     Fair Value Measurements Using Inputs    
 Considered as     Considered As    
 Quoted Prices         Quoted Prices        
 in Active         in Active Significant      
 Markets Significant       Markets for Other Significant    
 for Other Significant     Identical Observable Unobservable    
 Identical Observable Unobservable     Assets Inputs Inputs Fair Balance Sheet
 Assets Inputs Inputs Fair Balance Sheet (Level 1) (Level 2) (Level 3) Values Classifications
 (Level 1) (Level 2) (Level 3) Value Classification
April 30, 2011:
  
Trading Securities $11,236 $ $ $11,236 Other assets
Foreign exchange contracts — cash flow hedges  65  65 Prepaid expenses and other current assets
          
Total Assets $11,236 $65 $ $11,301  
          
  
Foreign exchange contracts — cash flow hedges $ $1,672  $1,672 Other current liabilities
Foreign exchange contracts — net investment hedge  14,069  14,069 Other current liabilities
Foreign exchange contracts     Other current liabilities
Foreign currency denominated debt — net investment hedge  109,110  109,110 Long term obligations, less current maturities
          
Total Liabilities $ $124,851 $ $124,851  
          
  
July 31, 2010:
  
October 31, 2011:
  
Trading Securities $8,757 $ $ $8,757 Other assets $11,207 $ $ $11,207 Other assets
Foreign exchange contracts — cash flow hedges  156  156 Prepaid expenses and other current assets  296  296 Prepaid expenses and other current assets
Foreign exchange contracts  24  24 Prepaid expenses and other current assets  21  21 Prepaid expenses and other current assets
                    
Total Assets $8,757 $180 $ $8,937   $11,207 $317 $ $11,524  
                    
    
Foreign exchange contracts — cash flow hedges $ $829 $ $829 Other current liabilities $ $188 $ $188 Other current liabilities
Foreign exchange contracts — net investment hedges 2,656 2,656 Other current liabilities
Foreign exchange contracts 64 64 Other current liabilities  1  1 Other current liabilities
Foreign currency denominated debt — net investment hedge  97,747  97,747 Long term obligations, less current maturities  106,125  106,125 Long term obligations, less current maturities
                    
Total Liabilities $ $98,640 $ $98,640   $ $108,970 $ $108,970  
                    
July 31, 2011:
  
Trading Securities $10,897 $ $ $10,897 Other assets
Foreign exchange contracts — cash flow hedges  16  16 Prepaid expenses and other current assets
Foreign exchange contracts  3  3 Prepaid expenses and other current assets
          
Total Assets $10,897 $19 $ $10,916  
          
  
Foreign exchange contracts — cash flow hedges $ $830 $ $830 Other current liabilities
Foreign exchange contracts — net investment hedges  5,295  5,295 Other current liabilities
Foreign exchange contracts  2  2 Other current liabilities
Foreign currency denominated debt — net investment hedge  107,985  107,985 Long term obligations, less current maturities
          
Total Liabilities $ $114,112 $ $114,112  
          

12


The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
  
Trading Securities:The Company’s deferred compensation investments consist of investments in mutual funds. These investments were classified as Level 1 as the shares of these investments trade with sufficient frequency and volume to enable the Companyus to obtain pricing information on an ongoing basis.
  
Foreign currency exchange contacts:contracts:The Company’s foreign currency exchange contracts were classified as Level 2, as the fair value was based on the present value of the future cash flows using external models that use observable inputs, such as interest rates, yield curves and foreign currency exchange rates. See Note K, “Derivatives and Hedging Activities” for additional information.

11


  
Foreign currency denominated debt — net investment hedge:The Company’s foreign currency denominated debt designated as a net investment hedge was classified as Level 2, as the fair value was based on the present value of the future cash flows using external models that use observable inputs, such as interest rates, yield curves and foreign currency exchange rates. See Note K, “Derivatives and Hedging Activities” for additional information.
There have been no transfers of assets or liabilities between the fair value hierarchy levels, outlined above, during the ninethree months ended April 30,October 31, 2011.
The Company’s financial instruments, other than those presented in the disclosures above, include cash notes receivable,and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term and long-term debt. The fair values of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximated carrying values because of the short-term nature of these instruments.
The estimated fair value of the Company’s short-term and long-term debt obligations, including current maturities, based on the quoted market prices for similar issues and on the current rates offered for debt of similar maturities, was $430,276$414,631 and $467,479$416,694 at April 30,October 31, 2011 and July 31, 2010,2011, respectively, as compared to the carrying value of $413,053$391,318 and $444,204$393,178 at April 30,October 31, 2011 and July 31, 2010,2011, respectively.
Disclosures for nonfinancial assets and liabilities that are measured at fair value, but are recognized and disclosed at fair value on a nonrecurring basis, were required prospectively beginning August 1, 2009. During the ninethree months ended April 30,October 31, 2011, the Company had no significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition other than for the acquisition of ID Warehouse and divestiture of the Teklynx business. See Note L, “Acquisitions and Divestitures” for further information.recognition.
NOTE J — Restructuring
In fiscal 2010,2009, in response to the global economic downturn, the Company took several measures to address its cost structure. In addition to a company-wide salary freeze and decreased discretionary spending, the Company reduced its workforce by 25%. The Company reduced its workforce through voluntary and involuntary separation programs, voluntary retirement programs, and facility consolidations. The Company continued the execution of its restructuring actions announcedduring fiscal 2011. These actions included a reduction in fiscal 2009.its contract labor and decreased discretionary spending. As a result of these actions, the Company recorded restructuring charges of $15,314 in fiscal$3,641 during the three months ended October 31, 2010. The restructuring charges included $10,850$2,665 of employee separation costs, $2,260$951 of non-cash fixed asset write-offs, $1,493 of other facility closure related costs, and $711 of contract termination costs. The Company continued executing its restructuring actions during the nine months ended April 30, 2011.
During the three and nine months ended April 30 2011, the Company recorded restructuring charges of $1,211 and $6,986, respectively. The year-to-date charges of $6,986 consisted of $4,531 of employee separation costs, $2,155 of fixed asset write-offs, and $300$25 of other facility closure related costs and contract termination costs. Of the $6,986 of restructuring charges recorded during the nine months ended April 30, 2011, $4,401 was incurred in the Americas, $2,457 was incurred in Europe, and $128 was incurred in Asia-Pacific. The charges for employee separation costs consisted of severance pay, outplacement services, medical and other related benefits. The costs related to these restructuring activities have been recorded on the condensed consolidated statements of income as restructuring charges. The Company expects the majority of the remaining cash payments to be made during the next twelve months.
A reconciliation of the Company’s fiscal 2011 restructuring activity is as follows:
                 
  Employee  Asset Write-       
  Related  offs  Other  Total 
Beginning balance, July 31, 2010 $6,055  $  $106  $6,161 
             
Restructuring charge  2,665   951   25   3,641 
Non-cash write-offs     (951)     (951)
Cash payments  (3,413)     (112)  (3,525)
             
Ending balance, October 31, 2010 $5,307  $  $19  $5,326 
             
Restructuring charge  1,213   763   158   2,134 
Non-cash write-offs     (763)     (763)
Cash payments  (2,679)     (169)  (2,848)
             
Ending balance, January 31, 2011 $3,841  $  $8  $3,849 
             
Restructuring charge  653   441   117   1,211 
Non-cash write-offs     (441)     (441)
Cash payments  (1,823)     (117)  (1,940)
             
Ending balance, April 30, 2011 $2,671  $  $8  $2,679 
             
                 
  Employee  Asset       
  Related  Write-offs  Other  Total 
Beginning balance, July 31, 2011 $2,207  $  $49  $2,256 
             
Cash payments  (1,351)        (1,351)
             
Ending balance, October 31, 2011 $856  $  $49  $905 
             

13


NOTE K — Derivatives and Hedging Activities
The Company utilizes forward foreign exchange currency contracts to reduce the exchange rate risk of specific foreign currency denominated transactions and net investments.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 12less than 18 months, or less, which qualify as either cash flow hedges or net investment hedges under the accounting guidance for derivative instruments and hedging activities. The primary objectivesobjective of the Company’s foreign currency exchange risk management areis to minimize the impact of currency movements due to products purchasedtransactions in other than the respective subsidiaries’ functional currency and to minimize the impact of currency movements on the Company’s net investment denominated in a currency other than the U.S. dollar.Dollar. To achieve this objective, the Company hedges a portion of known exposures using forward foreign exchange currency contracts. As of April 30,October 31, 2011 and July 31, 2010,2011, the notional amount of outstanding forward exchange contracts was $120,475$56,938 and $45,328,$80,807, respectively.
Hedge effectiveness is determined by how closely the changes in the fair value of the hedging instrument offset the changes in the fair value or cash flows of the hedged item. Hedge accounting is permitted only if the hedging relationship is expected to be highly effective at the inception of the hedge and on an on-going basis. Gains or losses on the derivative related to hedge ineffectiveness are recognized in current earnings. The amount of hedge ineffectiveness was not significant for the three-month or nine-month periodsquarters ended April 30,October 31, 2011 and 2010.

12


The Company hedges a portion of known exposure using forward exchange contracts. Main exposures are related to transactions denominated in the British Pound, the Euro, Canadian Dollar, Australian Dollar, Singapore Dollar, Swedish Krona, Japanese Yen, Swiss Franc and the Korean Won.Singapore Dollar. Generally, these risk management transactions will involve the use of foreign currency derivatives to protect against exposure resulting from sales and identified inventory or other asset purchases.
The Company has designated a portion of its foreign exchange contracts as cash flow hedges and recorded these contracts at fair value on the Condensed Consolidated Balance Sheets. For these instruments, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. At April 30,October 31, 2011, and July 31, 2010, unrealized lossesgains of $2,210 and $493$252 have been included in OCI, respectively.OCI. As of July 31, 2011, unrealized losses of $1,535 have been included in OCI. All balances are expected to be reclassified from OCI to earnings during the next twelve months when the hedged transactions impact earnings.
At April 30,October 31, 2011 and July 31, 2010,2011, the Company had $65$296 and $156$16 of forward exchange contracts designated as cash flow hedges included in “Prepaid expenses and other current assets” on the accompanying Condensed Consolidated Balance Sheets. At April 30,October 31, 2011 and July 31, 2010,2011, the Company had $1,672$188 and $829,$830, respectively, of forward exchange contracts designated as cash flow hedgeshedge instruments included in “Other current liabilities” on the accompanying Condensed Consolidated Balance Sheets. At April 30,October 31, 2011 and July 31, 2010,2011, the U.S. dollar equivalent of these outstanding forward foreign exchange contracts totaled $20,475$25,288 and $32,020,$30,519, respectively, including contracts to sell Euros, Canadian Dollars, Australian Dollars, British Pounds, U.S. Dollars, and Swiss Franc.
The Company has also designated intercompany and third party foreign currency denominated debt instruments as net investments hedges. During the three months ended October 31, 2011, the Company designated €4,581 of intercompany loans as net investment hedges to hedge portions of its net investment in European foreign operations. No intercompany loans were designated as net investment hedges as of July 31, 2011. On May 13, 2010, the Company completed the private placement of €75.0 million aggregate principal amount of senior unsecured notes to accredited institutional investors. This Euro-denominated debt obligation was designated as a net investment hedge to selectively hedge portions of the Company’sits net investment in Euro-denominatedEuropean foreign operations. As net investment hedges, the currency effects of the intercompany and third party debt obligations are reflected in the foreign currency translation adjustments component of accumulated other comprehensive income where they offset gains and losses recorded on the Company’s net investment in Euro-denominatedEuropean operations. The Company’s foreign denominated debt obligations are valued under a market approach using publicized spot prices.
During the three and nine month period ended April 30, 2011,Additionally, the Company usedutilizes forward foreign exchange currency contracts designated as net investment hedgeshedge instruments to hedge portions of the Company’s net investments in Euro-denominated foreign operations. For hedges that meet the effectiveness requirements, the net gains or losses attributable to changes in spot exchange rates are recorded in the foreign exchangecumulative translation adjustment component of accumulatedwithin other comprehensive income where it offsets gains and losses recorded on the Company’s net investment in Euro-denominated foreign operations.income. Any ineffective portions are to be recognized in earnings. Recognition in earnings of amounts previously recorded in cumulative translation is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. At April 30,October 31, 2011 and July 31, 2011, the Company had $14,069$2,656 and $5,295, respectively, of forward foreign exchange currency contracts designated as net investment hedges included in “Other current liabilities” on the Condensed Consolidated Balance Sheet. At April 30,October 31, 2011 and July 31, 2011, the U.S dollar equivalent of these outstanding forward foreign exchange contracts totaled $100,000. There were no forward foreign exchange$31,650 and $50,000, respectively, including contracts designated as net investment hedges outstanding as of July 31, 2010.to sell Euros and Singapore Dollars.

 

1413


Fair values of derivative instruments in the Condensed Consolidated Balance Sheets were as follows:
                                     
 Asset Derivatives Liability Derivatives  Asset Derivatives Liability Derivatives 
 April 30, 2011 July 31, 2010 April 30, 2011 July 31, 2010  October 31, 2011 July 31, 2011 October 31, 2011 July 31, 2011 
 Balance Sheet Balance Sheet Balance Sheet Balance Sheet   
 Location Fair Value Location Fair Value Location Fair Value Location Fair Value 
Derivatives designated as hedging instruments
 
 
Derivatives Balance Balance Balance Balance   
designated as Sheet Fair Sheet Fair Sheet Fair Sheet Fair 
hedging instruments Location Value Location Value Location Value Location Value 
Cash flow hedges                         
Foreign exchange contracts Prepaid expenses and other current assets $65 Prepaid expenses and other current assets $156 Other current liabilities $1,672 Other current liabilities $829  Prepaid expenses and other current assets $296  Prepaid expenses and other current assets $16  Other current liabilities $188  Other current liabilities $830 
                             
 
Net investment hedges                         
Foreign exchange contracts Prepaid expenses and other current assets $  Prepaid expenses and other current assets $  Other current liabilities $2,656  Other current liabilities $5,295 
                     
Foreign currency denominated debt Prepaid expenses and other current assets $ Prepaid expenses and other current assets $ Long term obligations, less current maturities $109,110 Long term obligations, less current maturities $97,747  Prepaid expenses and other current assets $  Prepaid expenses and other current assets $  Long term obligations,
less current maturities
 $106,125  Long term obligations,
less current maturities
 $107,985 
         
 
Foreign exchange contracts Prepaid expenses and other current assets $ Prepaid expenses and other current assets $ Other current liabilities $14,069 Other current liabilities $ 
         
                     
Total derivatives designated as hedging instruments $65 $156 $124,851 $98,576    $296    $16    $108,969    $114,110 
                             
                         
Derivatives not designated as hedging instruments
                         
 
Foreign exchange contracts Prepaid expenses and other current assets $ Prepaid expenses and other current assets $24 Other current liabilities $ Other current liabilities $64  Prepaid expenses and other current assets $21  Prepaid expenses and other current assets $3  Other current liabilities $1  Other current liabilities $2 
         
                     
Total derivatives not designated as hedging instruments $ $24 $ $64    $21    $3    $1    $2 
                             
The pre-tax effects of derivative instruments designated as cash flow hedges and net investment hedges on the Condensed Consolidated Statements of Income consisted of the following:
                                
 Location of       
 Gain or Amount of Gain or (Loss) Location of Amount of Gain or (Loss) 
 Amount of Gain or (Loss) (Loss) Reclassified From Gain or Recognized in Income on                                 
 Recognized in OCI on Reclassified Accumulated OCI Into Income (Loss) Derivative (Ineffective  Amount of Gain Location of   
 Derivative (Effective Portion) From (Effective Portion) Recognized Portion)  Amount of Gain Location of Gain or or (Loss) Gain or (Loss) Amount of Gain 
 Nine Nine Accumulated Nine Nine in Income Nine Nine  or (Loss) (Loss) Reclassified Reclassified From Recognized in or (Loss) 
Derivatives in months months OCI into months months on months months  Recognized in From Accumulated Accumulated OCI Income on Recognized in 
Cash Flow ended ended Income ended ended Derivative ended ended 
Hedging April 30, April 30, (Effective April 30, April 30, (Ineffective April April 30, 
Cash Flow Hedging OCI on Derivative OCI into Income Into Income Derivative Income on Derivative 
Relationships 2011 2010 Portion) 2011 2010 Portion) 30, 2011 2010  (Effective Portion) (Effective Portion) (Effective Portion) (Ineffective Portion) (Ineffective Portion) 
Cash Flow Hedges
 
 Three months Three months Three months 
 ended October 31, ended October 31, ended October 31, 
 2011 2010 2011 2010 2011 2010 
Foreign exchange contracts $(2,210) $(120) Cost of Goods Sold $(887) $ Cost of Goods Sold $ $  $230 $(185) Cost of goods sold $(777) $(100) Cost of goods sold $ $ 
             
              
Total
 $(2,210) $(120) $(887) $ $ $  $230 $(185) $(777) $(100) $ $ 
                          

 

1514


The pre-tax effects of derivative instruments designated as net investment hedges on the Condensed Consolidated Balance Sheet consisted of the following:
                                 
              Amount of Gain        
              or (Loss)      Amount of Gain 
  Amount of Gain or (Loss)      Reclassified From      or (Loss) 
  Recognized in OCI on  Location of Gain  Accumulated OCI      Recognized in 
  Derivative  or (Loss)  Into Income  Location of  Income on Derivative 
Derivatives in (Effective Portion)  Reclassified From  (Effective Portion)  Gain or (Loss)  (Ineffective Portion) 
Net Investment Nine months ended  Accumulated  Nine months ended  Recognized in  Nine months ended 
Hedging April 30,  OCI into Income  April 30,  Income on Derivative  April 30, 
Relationships 2011  2010  (Effective Portion)  2011  2010  (Ineffective Portion)  2011  2010 
Foreign currency denominated debt $(11,362) $  Investment and other income — net $  $  Investment and other income — net $  $ 
Foreign exchange contracts $(14,069) $(1,326) Investment and other income — net $  $  Investment and other income — net $  $ 
                           
Total $(25,431) $(1,326)     $  $      $  $ 
                           
The pre-tax effects of derivative instruments not designated as hedge instruments on the Condensed Consolidated Statements of Income consisted of the following:
             
      Amount of Gain or (Loss) 
      Recognized in Income on Derivative 
  Location of Gain or  Nine months  Nine months 
  (Loss) Recognized in  ended April 30,  ended April 30, 
Derivatives Not Designated as Hedging Instruments Income on Derivative  2011  2010 
Foreign exchange contracts Other income (expense)  $(953) $(402)
           
Total     $(953) $(402)
           
                             
            Amount of Gain  Location of   
  Amount of Gain  Location of Gain or or (Loss)  Gain or (Loss) Amount of Gain 
  or (Loss)  (Loss) Reclassified Reclassified From  Recognized in or (Loss) 
Derivatives in Net Recognized in  From Accumulated Accumulated OCI  Income on Recognized in 
Invesment Hedging OCI on Derivative  OCI into Income into Income  Derivative Income on Derivative 
Relationships (Effective Portion)  (Effective Portion) (Effective Portion)  (Ineffective Portion) (Ineffective Portion) 
  Three months    Three months    Three months 
  ended October 31,    ended October 31,    ended October 31, 
  2011  2010    2011  2010    2011  2010 
Foreign currency intercompany debt $(298) $  Investment and other income — net $  $  Investment and other income — net $  $ 
Foreign currency denominated debt  (11,210)  (6,720) Investment and other income — net       Investment and other income — net      
                       
Total $(11,508) $(6,720)   $  $    $  $ 
                       
NOTE L — Acquisitions and Divestitures
On November 1, 2010, the Company acquired ID Warehouse, based in New South Wales, Australia for $7,970. ID Warehouse offers security identification and visitor management products including identification card printers, access control cards, wristbands, tamper-evident security seals and identification accessories. The business is included in the Company’s Asia-Pacific segment. The purchase price allocation resulted in $4,792 assigned to goodwill, $1,846 assigned to customer relationships, and $487 assigned to non-compete agreements. The amounts assigned to the customer relationships and non-compete agreements are being amortized over 10 and 5 years, respectively. The Company expects the acquisition to further strengthen its position in the people identification business in Australia and the segment.
The results of the operations of the acquired business have been included since the date of acquisition in the accompanying condensed consolidated financial statements. The Company is continuing to evaluate the initial purchase price allocations for the acquisition included above and will adjust the allocations as additional information relative to the fair value of assets and liabilities of the acquired business becomes known. Pro forma information related to the acquisition of ID Warehouse was not included because the impact on the Company’s consolidated results of operations is considered to be immaterial.
On December 16, 2010, the Company sold its Teklynx business, a barcode software company. The Teklynx business had operations primarily in the Company’s Americas and Europe segments. The Company received proceeds of $12,979, net of cash retained in the business. The transaction resulted in a pre-tax gain of $4,394, which was accounted for in “Selling, general, and administrative expenses” (“SG&A”) on the Condensed Consolidated Statement of Income for the nine month periods ended April 30, 2011. The divestiture of the Teklynx business was part of the Company’s continued long-term growth strategy to focus the Company’s energies and resources on growth of the Company’s core business.

16


NOTE M — Updated Accounting Policies
In July 2010, the FASB issued Accounting Standards Update No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, requiring more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses. The Company adopted the new guidance in the second quarter of fiscal 2011. The new guidance provides for additional disclosure included herein.
Accounts receivables are stated net of allowances for doubtful accounts of $5,523 and $7,137 as of April 30, 2011 and July 31, 2010, respectively. No single customer comprised more than 10% of the Company’s consolidated net sales as of April 30, 2011 or July 31, 2010, or 10% of the Company’s consolidated accounts receivable as of April 30, 2011 and July 31, 2010. Specific customer provisions are made when a review of significant outstanding amounts, utilizing information about customer creditworthiness and current economic trends, indicates that collection is doubtful. In addition, provisions are made at different rates, based upon the age of the receivable and the Company’s historical collection experience.
In addition, the Company provides for an allowance for estimated product returns and credit memos which is recognized as a deduction from sales at the time of the sale. As of April 30, 2011 and July 31, 2010, the Company had a reserve of $4,414 and $3,963, respectively.
NOTE N — Subsequent Events
On MayNovember 17, 2011 the Board of Directors declared a quarterly cash dividend to shareholders of the Company’s Class A and Class B Common Stock of $0.18$0.185 per share payable on July 29, 2011January 31, 2012 to shareholders of record at the close of business on July 8, 2011.January 10, 2012.

 

1715


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Brady, a Wisconsin corporation founded in 1914, is an international manufacturer and marketer of identification solutions and specialty materials that identify and protect premises, products, and people. Its products include facility identification products; safety and complementary products; wire and cable identification products; sorbent materials; people identification products; regulatory publishing products; high-performance identification products for product identification and work-in-process identification; and bar-code labels and precision die-cut components for mobile telecommunications devices, hard disk drives, medical devices and supplies, and automotive and other electronics. The Company serves customers in general manufacturing, maintenance and safety, process industries, construction, electrical, telecommunications, electronics, laboratory/healthcare, airline/transportation, brand protection, education, governmental, public utility, and a variety of other industries. The Company manufactures and sells products domestically and internationally through multiple channels including distributors, resellers, business-to-business direct marketing, and a direct sales force.and e-commerce capabilities. 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 in Australia, Belgium, Brazil, Canada, the Cayman Islands, China, Denmark, France, Germany, Hong Kong, India, Italy, Japan, Luxembourg, Malaysia, Mexico, the Netherlands, Norway, the Philippines, Poland, Singapore, Slovakia, South Korea, Spain, Sweden, Thailand, Turkey, the United Arab Emirates, 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 New Zealand, Russia, Taiwan, Turkey, Vietnam, and the United Arab Emirates. The Company further markets its products to parts of EasternCentral Europe, the Middle East, Africa and Russia.South America.
Results of Operations
Sales for the quarter ended April 30,October 31, 2011, increased 4.9%6.0% to $337.9$349.5 million, compared to $321.9$329.6 million in the same period of the last fiscal 2010.year. Of the 6.0% increase in sales, organic sales increased 1.0%by 3.5%, acquisitionsand divestitures, net of acquisitions reduced sales by 0.2%. The change in sales related to divestitures, added 0.4%net of acquisitions, resulted from the acquisition of ID Warehouse and the effectsdivestiture of Teklynx during fiscal 2011. The remaining increase in sales of 2.7% was due to fluctuations in the exchange rates used to translate financial results into the United States dollar increasedDollar for the three months ended October 31, 2011, compared to the same period in the previous year. The increase in organic sales for the quarter ended October 31, 2011 was comprised of 5.7% and 3.7% increases in sales in the Americas and Europe segments, respectively, partially offset by 3.5%.the 0.2% decline in sales in the Asia-Pacific segment. Net income for the quarter ended April 30,October 31, 2011, was $28.6$32.7 million or $0.54$0.62 per diluted Class A Nonvoting Common Share, up 20.7% and 20.0%, respectively,24.5% from $23.7$26.3 million or $0.45$0.50 per diluted Class A Nonvoting Common Share reported in the thirdfirst quarter of last fiscal year. Net income before restructuring-related expenses for the quarter ended April 30, 2011 was $29.5 million, or $0.55 per diluted Class A Nonvoting Common Share, an increase of 16.1% from $25.4 million, or $0.48 per diluted Class A Nonvoting Common Share for the quarter ended April 30, 2010.
Sales for the nine months ended April 30, 2011, increased 6.4% to $996.5 million, compared to $936.2 million in the same period of fiscal 2010. Of the increase in sales, organic sales increased 4.1%, acquisitions net of divestitures added 1.4% and the effects of fluctuations in the exchange rates used to translate financial results into the United States dollar increased sales 0.9%. Net income for the nine months ended April 30, 2011, was $79.1 million or $1.49 per diluted Class A Nonvoting Common Share, up 31.0% and 30.7%, respectively, from $60.4 million or $1.14 per diluted Class A Nonvoting Common Share reported in the same period of the prior fiscal year. Net income before restructuring-related expenses for the nine months ended April 30, 2011 was $84.1 million or $1.58 per diluted Class A Nonvoting Common Share, an increase of 25.0% from $67.3 million or $1.27 per diluted Class A Nonvoting Common Share, for the nine months ended April 30, 2010.
Results of Operations
The comparability of the operating results for the three and nine months ended April 30, 2011, to the prior year has been impacted by the following acquisitions and divestiture completed in fiscal 2011 and fiscal 2010.
Fiscal 2011
SegmentDate Completed
Acquisitions
ID WarehouseAsia PacificNovember 2010
Divestiture
TeklynxAmericas EuropeDecember 2010
Fiscal 2010
SegmentDate Completed
Acquisitions
Welconstruct Group Limited (“Welco”)EuropeOctober 2009
Stickolor Industria e Comerciao de Auto Adesivos Ltda. (“Stickolor”)AmericasDecember 2009
Securimed SAS (“Securimed”)EuropeMarch 2010

18


Sales for the three months ended April 30, 2011, increased 4.9% compared to the same period in fiscal 2010. The increase was comprised of an increase in organic sales of 1.0%, an increase of 0.4% due to the acquisitions net of divestitures listed in the above table, and an increase of 3.5% due to the effect of currencies on sales. Organic sales grew during the third quarter of fiscal 2011 in the Americas and Europe segments by 2.7% and 3.6%, respectively, partially offset by a decline in organic sales of 5.1% in the Asia-Pacific segment. The organic sales increase experienced in the Americas was due primarily to the strong Brady brand sales growth and new products positively received by end—users and distributors. The increase in Europe’s organic sales was mainly a result of the Brady business in Germany and in Southern Europe. The decline in organic sales for the Asia-Pacific segment was due to the reduced demand from one of our largest mobile handset customers and Japan-related supply chain issues experienced by the Company’s customers.
Sales for the nine months ended April 30, 2011, increased 6.4% compared to the same period in fiscal 2010. The increase was comprised of a 4.1% increase in organic sales and an increase of 1.4% resulting from sales related to the acquisitions of ID Warehouse in fiscal 2011 and the acquisitions of Welco, Stickolor and Securimed in fiscal 2010, net of divestiture. The positive impact of the fluctuations in exchange rates also increased sales in the quarter by 0.9%. The increase in organic sales was comprised of increases of 5.3% in the Americas segment, 5.6% in the Europe segment, and 0.4% in the Asia-Pacific segment.
Gross margin as a percentage of sales decreased to 49.6% from 49.8%was 48.0% for the quarter and to 49.3% from 49.6% for the nine months ended April 30,October 31, 2011, compared to 49.9% in the same periodsperiod of the previous year. This decreaseThe primary driver for the decline in gross margin as a percentage of sales for the three and nine months ended April 30, 2011 was primarily duerelates to the increased costs of raw materials whichAsia-Pacific segment where the Company was not abletook on lower margin sales opportunities in an effort to offset through continued cost reduction activities or price increases.volume declines.
Research and development (“R&D”) expenses decreased 1.5%1.4% to $10.6$9.8 million forduring the quarter and increased 4.1% to $32.2 million for the ninethree months ended April 30,October 31, 2011, compared to $10.7 million and $31.0$9.9 million for the same periodsperiod in the prior year, respectively. The decrease for the quarter ended April 30, 2011 was due to the elimination of the R&D expenses incurred by the Company’s previously owned Teklynx business in the second quarter of fiscal 2011.year. As a percentage of sales, R&D expenses represented a lower percentage of sales, decliningdecreased from 3.0% to 3.1% in2.8% during the third quarter of fiscal 2011 from 3.3% in the third quarter of fiscal 2010, and declining to 3.2% in the first ninethree months of fiscalended October 31, 2011, compared to 3.3% in the first ninethree months of fiscalended October 31, 2010. The Company continues its commitmentremains committed to innovation and new product development and expects R&D expense to continue to increase throughfor the remainder of fiscal 2011.2012.
Selling, general, and administrative expenses (“SG&A”) expenses increased 3.4%decreased 0.4% to $115.0$108.9 million for the three months ended April 30,October 31, 2011, compared to $111.2 million for the same period in the prior year, and increased 1.1% to $332.4 million for the nine months ended April 30, 2011, compared to $328.6$109.3 million for the same period in the prior year. SG&A increased during the quarter ended April 30, 2011 mainly dueexpense as percentage of sales declined to the fluctuations in exchange rates, in addition to the increase in annual merit increases and the increase in advertising campaign expenses. During the nine months ended April 30, 2011, the Company divested of its Teklynx business resulting in a pre-tax gain of $4.4 million, which is included in SG&A. This gain was offset by an increase31.2% in the Company’s transaction-related costsfirst quarter of fiscal 2012 compared to 33.2% in additionthe same quarter last year. The Company has continued to the merit increase during the nine months ended April 30, 2011. Asfocus on reducing its SG&A expenses as a percentage of sales, SG&A expenses declined to 34.0% from 34.6% for the quarter and to 33.4% from 35.1% for the nine months ended April 30, 2011, compared to the same periodswhich is partially offset by its reinvestment in the prior year.growth initiatives.
Restructuring expenses decreased to $1.2 million from $2.3 million for the three months ended April 30, 2011, as compared to the same period in the prior year, and decreased to $7.0 million from $9.6 million for the nine months ended April 30, 2011 as compared to the same period in the prior year. In fiscal 2009, in response to the global recession, the Company took several measures to address its cost structure. The Company continued to incur costscharges related to the reduction of itsthe Company’s workforce and facilitiesfacility consolidations were $3.6 million during the nine monthsthree-month period ended April 30, 2011. The Company expects to incur $8 to $10 million of restructuring charges in fiscal 2011.
Other income and expense increased to $1.4 million from $0.1 million for the three months ended April 30, 2011, as compared to the same period in the prior year, and increased to $2.9 million from $1.3 million for the nine months ended April 30, 2011 as compared to the same period in the prior year. The increase was primarily due to the gains on securities held in executive deferred compensation plans and interest income.October 31, 2010.
Interest expense remained constant at $5.1decreased to $5.0 million for the quarter and increased to $16.6 millionended October 31, 2011 from $15.5$5.7 million for the nine monthsquarter ended April 30, 2011, compared to the same periods in the prior year.October 31, 2010. The increasedecrease was due to the incremental interest onCompany’s lower principal balance under the Company’s May 2010 private placement entered into in the fourth quarter of fiscal 2010, partially offset by scheduledoutstanding debt payments made during the three and nine months ended April 30, 2011.agreements.

19


The Company’s income tax rate was 23.1% for the three months ended April 30, 2011 and 25.3% for the nine monthsquarter ended April 30,October 31, 2011 compared to 23.3% and 25.6%27.4% for the three and nine months ended April 30, 2010, respectively. Duringsame period of the quarter ended April 30, 2011, the Company recognized tax benefits associated with certain international tax positions being settled and the lapses of statutes of limitation.previous year. The benefits were partially offset by an increasedecrease in the Company’s effectiveincome tax rate during the first quarter of fiscal 2012 was primarily due to the mix of profits in low and high tax countries.countries as well as positive impacts from foreign tax credit benefits. The Company expects the full year effectiveincome tax rate for fiscal 20112012 to be approximately 25%.in the mid 20% range.
Net income for the three months ended April 30,October 31, 2011, increased 20.7%24.5% to $28.6$32.7 million, compared to $23.7$26.3 million for the same quarter of the previous year. Net income as a percentage of sales increased to 8.5% from 7.4%9.4% for the quarter ended April 30,October 31, 2011 compared tofrom 8.0% for the same period in the prior year. Net income before restructuring-relatedrestructuring related expenses was $28.9 million, or $0.55 per diluted Class A Common Share, for the quarter ended April 30, 2011 was $29.5 million, an increase of 16.1% from $25.4 million, for the same period in the previous year. For the ninethree months ended April 30, 2011, net income increased 31.0% to $79.1 million, compared to $60.4 million for the same period in the previous year. As a percentage of sales, net income increased to 7.9% from 6.4% for the nine months ended April 30, 2011, compared to the same period in the previous year. Net income before restructuring-related expenses for the nine months ended April 30, 2011 was $84.1 million, an increase of 25.0% from $67.3 million, for the nine months ended April 30,October 31, 2010. The improved earnings for the nine months ended April 30, 2011, was primarily driven by the organic growth, which included organic growth in all three segments along with the impacts of the Company’s on-going process improvement activities.

16


Business Segment Operating Results
The Company is organized and managed on a geographic basis by region. Each of these regions, Americas, Europe and Asia-Pacific, has a President that reports directly to the 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 segment profit. The Company has determined that these regions comprise its operating and reportable segments based on the information used by the Chief Executive Officer to allocate resources and assess performance.
Following is a summary of segment information for the three and nine months ended April 30,October 31, 2011 and 2010:
                                     
 Corporate    Corporate   
 Asia- Total and    Asia- Total and   
(Dollars in thousands) Americas Europe Pacific Regions Eliminations Total  Americas Europe Pacific Regions Eliminations Total 
SALES TO EXTERNAL CUSTOMERS
  
Three months ended:  
April 30, 2011 $149,217 $105,894 $82,785 $337,896 $ $337,896 
April 30, 2010 $144,413 $98,152 $79,322 $321,887 $ $321,887 
 
Nine months ended: 
April 30, 2011 $431,216 $301,985 $263,292 $996,493 $ $996,493 
April 30, 2010 $402,255 $289,101 $244,846 $936,202 $ $936,202 
 
October 31, 2011 $153,863 $97,356 $98,289 $349,508 $ $349,508 
October 31, 2010 $145,988 $92,050 $91,550 $329,588 $ $329,588 
SALES GROWTH INFORMATION
  
Three months ended April 30, 2011 
Organic  2.7%  3.6%  (5.1%)  1.0%   1.0%
Currency  1.3%  4.0%  7.0%  3.5%   3.5%
Acquisitions/Divestitures  (0.7%)  0.3%  2.5%  0.4%   0.4%
             
Total  3.3%  7.9%  4.4%  4.9%   4.9%
 
Nine months ended April 30, 2011 
Three months ended October 31, 2011 
Organic  5.3%  5.6%  0.4%  4.1%   4.1%  5.7%  3.7%  (0.2)%  3.5%   3.5%
Currency  0.9%  (3.2%)  5.6%  0.9%   0.9%  0.4%  3.7%  5.5%  2.7%   2.7%
Acquisitions/Divestitures  1.0%  2.1%  1.5%  1.4%   1.4%  (0.7)%  (1.6)%  2.1%  (0.2)%   (0.2)%
                          
Total  7.2%  4.5%  7.5%  6.4%   6.4%  5.4%  5.8%  7.4%  6.0%   6.0%
SEGMENT PROFIT
  
Three months ended:  
April 30, 2011 $38,292 $28,938 $9,976 $77,206 $(3,561) $73,645 
April 30, 2010 $33,858 $27,472 $12,775 $74,105 $(3,558) $70,547 
Percentage increase  13.1%  5.3%  (21.9%)  4.2%  4.4%
 
Nine months ended: 
April 30, 2011 $108,666 $82,165 $38,330 $229,161 $(12,087) $217,074 
April 30, 2010 $90,205 $78,281 $38,589 $207,075 $(10,161) $196,914 
Percentage increase  20.5%  5.0%  (0.7%)  10.7%  10.2%
October 31, 2011 $43,230 $26,299 $13,304 $82,833 $(3,263) $79,570 
October 31, 2010 $39,359 $24,061 $16,829 $80,249 $(3,436) $76,813 
Percentage increase (decrease)  9.8%  9.3%  (20.9)%  3.2%  3.6%

20


NET INCOME RECONCILIATION(Dollars in thousands)
                        
 Three months ended: Nine months ended:  Three months ended: 
 April 30, April 30, April 30, April 30,  October 31, 
 2011 2010 2011 2010 
(Dollars in thousands) 2011 2010 
Total profit from reportable segments $77,206 $74,105 $229,161 $207,075  $82,833 $80,249 
Corporate and eliminations  (3,561)  (3,558)  (12,087)  (10,161)  (3,263)  (3,436)
Unallocated amounts:  
Administrative costs  (31,563)  (32,286)  (90,534)  (91,944)  (30,480)  (31,569)
Restructuring costs  (1,211)  (2,347)  (6,986)  (9,597)
Investment and other income 1,428 121 2,892 1,273 
Restructuring charges   (3,641)
Investment and other income (expense)  (202) 290 
Interest expense  (5,103)  (5,147)  (16,640)  (15,472)  (5,047)  (5,687)
              
Income before income taxes 37,196 30,888 105,806 81,174  43,841 36,206 
Income taxes  (8,607)  (7,193)  (26,737)  (20,810)  (11,109)  (9,925)
              
Net income $28,589 $23,695 $79,069 $60,364  $32,732 $26,281 
              
The Company evaluates short-term segment performance based on segment profit or loss and customer sales. Corporate long-term performance is evaluated based on shareholder value enhancement (“SVE”), which incorporates the cost of capital as a hurdle rate for capital expenditures, new product development, and acquisitions. Segment profit or loss does not include certain administrative costs, such as the cost of finance, information technology and human resources, which are managed as global functions. Restructuring charges, stock options, interest, investment and other income and income taxes are also excluded when evaluating performance.

17


Americas:
Sales in the Americas sales increased 3.3%5.4% to $149.2$153.9 million for the quarter and 7.2% to $431.2 million for the nine months ended April 30,October 31, 2011, compared to $144.4 million and $402.3$146.0 million for the same three and nine-month periodsperiod in the prior year. Organic sales increased 2.7% and 5.3% during5.7% for the quarter and year-to-date, respectively, asended October 31, 2011, compared to the same periods in the previous year across.period last year. Fluctuations in the exchange rates used to translate financial results into the United StatesU.S. dollar resulted in a positive impact onincreased sales of 1.3% and 0.9%by 0.4% in the quarter andquarter. The fiscal 2011 divestiture of Teklynx reduced sales by 0.7% in the nine-month period, respectively, as compared to the same periodsUnited States. The increase in the previous year. Sales resulting from acquisitions net of divestiture declined 0.7% fororganic sales during the quarter and increased 1.0% for the nine-month period as a result of the sales of Stickolor, acquired in the second quarter of fiscal 2010, offset by the reduction in saleswas primarily due to the divestiture ofstrong Brady brand growth in the Teklynx business. The increases in organic sales of 2.7% for the three-month periodUnited States, Brazil, Canada, and 5.3% for the nine-month period wasMexico, driven by the broad-based improvementan ongoing investment in the Company’s core markets, in addition to the positive results fromR&D and new products.product launches.
Segment profit for the region increased 13.1%9.8% to $38.3 million from $33.9$43.2 million for the quarter and 20.5%ended October 31, 2011, compared to $108.7 million from $90.2$39.4 million for the nine months ended April 30, 2011, compared to the same periodsperiod in the prior year. Segment profit for the quarter was positively impacted by increased sales volumes, while the segment continued to drive productivity improvements through consolidating facilities, and implementing other operational improvement initiatives to further reduce costs and improve productivity. As a percentage of sales, segment profit increased to 25.7%28.1% for the quarter ended October 31, 2011 from 23.4% in the third quarter of fiscal 2011 and increased to 25.2% from 22.4% in the nine months ended April 30, 2011, compared to27.0% for the same periodsperiod in the prior year. The increase in segment profit increase was primarily due to an improved gross profit margin as a percentageresult of sales was due toselected price increases that went into effect at the cost reduction efforts andbeginning of fiscal 2012, as well as the benefit of the segment’s ongoing productivity improvements described above.initiatives.
Europe:
Sales in Europe sales increased 7.9%5.8% to $105.9$97.4 million for the quarter and 4.5% to $302.0 million for the nine months ended April 30,October 31, 2011, compared to $98.2 million and $289.1$92.1 million for the same three and nine-month periodsperiod in the prior year. Organic sales increased 3.6% and 5.6% for3.7% in the quarter and year-to-date, respectively,ended October 31, 2011 compared to the same periods in the previousperiod last year. Sales were also affected by fluctuationsFluctuations in the exchange rates used to translate financial results into the United StatesU.S. dollar which increased sales within the segment by 4.0%3.7% in the quarter and reduced sales by 3.2% during the nine-month period. Segment sales increased 0.3% during the quarter and 2.1% during the nine-month period as result of the fiscal 2010 acquisitions of Welco and Securimed, net of thequarter. The fiscal 2011 divestiture of Teklynx reduced sales by 1.6% in the Teklynx business.quarter. The segment’sincrease in organic sales were positively impacted during the three and nine monthsquarter ended April 30,October 31, 2011 as a resultwas driven primarily by the growth of growth in the Bradydirect marketing business in Germanywithin Northern and Southern Europe due to a combination of improving economies and positive results of sales initiatives, partially offset by the continued depressed conditions in the United Kingdom.Europe.
Segment profit for the region increased 5.3%9.3% to $28.9 million from $27.5$26.3 million for the quarter and 5.0%ended October 31, 2011, compared to $82.2 million from $78.3$24.1 million for the nine months ended April 30, 2011, compared to the same periodsperiod in the prior year. The increase in segment profit for the quarter was attributable to the increased sales volumes in addition to productivity initiatives. As a percentage of sales, segment profit declinedincreased to 27.3%27.0% for the quarter ended October 31, 2011 from 28.0% in the third quarter of fiscal 2011 and increased slightly to 27.2% from 27.1% in the nine months ended April 30, 2011, compared to26.1% for the same periodsperiod in the prior year. The increase in segment profit as a percentage of sales in the nine months ended April 30, 2011increase was partiallyprimarily due to the increased sales volumesreduced selling expenses, and the continued efforts to streamline selling expenses through strategic initiatives.benefits from reorganization.

21


Asia-Pacific:
Asia-Pacific sales increased 4.4%7.4% to $82.8$98.3 million for the quarter and 7.5% to $263.3 million for the nine months ended April 30,October 31, 2011, compared to $79.3 million and $244.8$91.6 million for the same three and nine-month periodsperiod in the prior year. Organic sales declined 5.1%decreased 0.2% in the quarter and increased 0.4% for the nine-month periods,ended October 31, 2011, compared to the same periods in the previousperiod last year. Sales were positively impacted by fluctuationsFluctuations in the exchange rates used to translate financial results into the United StatesU.S. dollar which increased sales within the regionsegment by 7.0%5.5% in the quarter and 5.6% for the nine-month period. Segment sales increased 2.5% during the quarter and 1.5% during the nine-month period as result of thequarter. The fiscal 2011 acquisition of ID Warehouse.Warehouse increased sales by 2.1% in the quarter. The significant declinerelatively flat organic growth in organic sales for the first quarter of fiscal 2012 was primarily due toa result of increased sales from the segment’s on-going customer base diversification in the mobile handset and other adjacent markets, partially offset by reduced demand from one of ourthe Company’s largest mobile handset customers and the supply chain disruptions at several of the segment’s electronic customers resulting from the earthquake in Japan. The modest increase in organic sales for the nine months ended April 30, 2011 was driven by increased sales in the consumer electronic market in addition to the expanded focus on MRO applications throughout the segment, partially offset by the decline of mobile handset sales. The segment continues to focus on the development of new value-added solutions, while continuing growth in adjacent markets.customers.
Segment profit for the region declined 21.9%decreased 20.9% to 10.0 million from $12.8$13.3 million for the quarter and declined 0.7%ended October 31, 2011, compared to $38.3 million from $38.6$16.8 million for the nine months ended April 30, 2011, compared to the same periodsperiod in the prior year. The decline in segment profit during the three and nine months ended April 30, 2011 was primarily due to the decline in organic sales as discussed above in addition to the inflationary pressures on raw materials resulting in cost increases. The segment continues to focus on driving operational excellence through its strategic sourcing initiatives. As a percentage of sales, segment profit declineddecreased to 12.1%13.5% for the quarter ended October 31, 2011 from 16.1%18.4% for the same period in the thirdprior year. The decrease in segment profit was the result of lower margin sales opportunities and continued price pressure and inflation on raw materials and wages. The Thailand flood did not have a material impact on the Company’s financial results for the period ended October 31, 2011 due to the timing of the event near the end of the quarter. The flood is expected to have the most significant impact on financial results for the second quarter ending January 31, 2012, with an estimated reduction in EPS of $0.05 per diluted share. Potential losses caused by the flooding are expected to be partially covered by property and business interruption insurance. The impact on the Company’s customers is not yet known, and the timing of the insurance recoveries could fall into subsequent periods beyond fiscal year 2012.
The Company has identified seven reporting units within its three reporting segments for purposes of the annual goodwill impairment analysis. The Asia-Pacific reporting segment has two reporting units: North/South Asia and Australia. The segment profit decrease within the Asia-Pacific region is primarily related to the Company’s North/South Asia reporting unit. The Company last completed its annual impairment testing of goodwill in the fourth quarter of fiscal 2011. The methodologies for valuing goodwill are applied consistently on a year-over-year basis, and the assumptions used in performing the 2011 impairment calculations were evaluated in light of market and business conditions. Brady continues to 14.5% from 15.8%believe that the discounted cash flow model and market multiples model provide a reasonable and meaningful fair value estimate based upon the reporting units’ projections of future operating results and cash flows and replicates how market participants would value the Company’s reporting units. The projections of future operating results are based on both past performance and the projections and assumptions used in the nine months ended April 30, 2011, comparedCompany’s current and long-range operating plans. The Company’s estimates could be materially impacted by factors such as significant negative industry or economic trends, disruptions to the same periodsCompany’s business, competitive forces, or changes in significant customers.

18


The North/South Asia reporting unit has goodwill of $163.7 million as of October 31, 2011. This reporting unit has faced difficulties in reduced customer demand, increased price pressures, and business disruptions due to natural disasters. The Company believes that its long-term strategies will be successful in returning the reporting unit to higher levels of profitability. The valuation of any long lived asset is inherently subjective and dependent on projections of future operating results. If operating results do not improve, the Company may adjust its estimates of future operating results or change other key variables and assumptions utilized in the prior year.goodwill impairment model. If such changes occur, these assets may be impaired in the future, which would reduce the Company’s earnings in the period in which the impairment charge is taken. Depending on the size of the impairment, the Company may fail to meet certain of the financial covenants in its revolving loan agreement, which, if not waived by the lenders, could result in the Company’s outstanding indebtedness under its debt and revolving loan agreements becoming immediately due and payable.
Financial Condition
Cash and cash equivalents were $374.0$371.6 million at April 30,October 31, 2011, a decline of $18.4 million compared to $314.8$390.0 million at July 31, 2010. The increase in cash of $59.2 million2011. Cash from net income was offset by the result of cash provided by operations of $110.4 millionannual incentive compensation payment, quarterly dividend payment and the $21.5 million effectpurchase of exchange rates, partially offset by cash used for acquisitions, capital expenditures, dividends, and debt payments during the nine months ended April 30, 2011.Company’s Class A Common Stock.
The Company’s working capital, excluding cash and cash equivalents, increased to $66.8$98.0 million at April 30,October 31, 2011 from $60.3$66.4 million at July 31, 2010.2011. Accounts receivable and inventoriesbalances increased $14.0 million and $7.8 million for the nine months ended April 30, 2011, respectively, due the impact of foreign currency translation on the Company’s foreign balances. The net increase in current liabilities was $17.2$4.4 million from July 31, 20102011 to April 30, 2011.October 31, 2011 as a result of increased sales volumes during the quarter. Inventories increased $5.5 million for the quarter as a result of increased production volumes. The increasenet decrease in the current liabilities of $15.3 million was primarily due to the decrease in accrued wages due to the payment of the Company’s forward foreign exchange currency contracts designated as net investment hedges.fiscal 2011 annual incentive compensation during the quarter ended October 31, 2011.
Cash flowIn the first quarter of fiscal 2012, the Company generated $15.3 million of cash from operating activities totaled $110.4operations, a decrease of $0.9 million for the nine months ended April 30, 2011, compared to $118.2 million forfrom the same period last year. The decrease was primarily due to a moderate increase in the payment of the Company’s fiscal 20102011 annual incentive compensation payment during the nine monthsquarter ended April 30,October 31, 2011, whereas no incentive compensation was paid in same period in the prior year duecompared to the elimination of the annual incentive compensation in fiscal 2009.
Cash used for acquisitions totaled $8.0 million for the nine monthsquarter ended April 30, 2011 due to the acquisition of ID Warehouse. The Company used $30.4 million for acquisitions of Welco, Stickolor, and Securimed during the nine months ended April 30, 2010; the net cash paid for Welco, Stickolor, and Securimed was $1.8 million, $18.5 million, and $10.1 million, respectively. Cash received from divestiture was $13.0 million during the nine months ended April 30, 2011 as a result of the sale of the Teklynx business.October 31, 2010.
Capital expenditures were $13.7$5.8 million for the nine monthsquarter ended April 30,October 31, 2011, compared to $20.9$2.8 million in the same period last year. The decrease was mainly due to the expenditures related to the new coater in the Americas segment and the increased tooling required for new products in fiscal 2010. Capital expenditures were $26.3 million during the twelve months ended July 31, 2010. The Company expects the capital expenditures to be between $18.0 million and $20.0of approximately $25.0 million for the twelve monthsyear ending July 31, 2011.2012. Net cash used in financing activities was $62.8$20.9 million for the nine monthsquarter ended April 30,October 31, 2011, due primarily to the paymentan increase of dividends of $28.5$13.4 million and the principal debt payments of $42.5 million, partially offset by the proceeds from the issuancesame period last year. The increase was primarily due to $12.3 million of shares of the common stock related to stock option exercises.Company’s Class A Common Stock purchased during the three month period ended October 31, 2011.
On November 24, 2008,October 26, 2011, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”), which will allow the Company to issue and sell, from time to time in one or more offerings, an indeterminate amount of Class A Non-VotingNonvoting Common Stock and debt securities as it deems prudent or necessary to raise capital at a later date. The shelf registration statement became effective upon filing with the SEC. The Company plans to use the proceeds from any future offerings under the shelf registration for general corporate purposes, including, but not limited to, acquisitions, capital expenditures, and refinancing of debt.

22


On May 13, 2010, the Company completed a private placement of €75.0 million aggregate principal amount of senior unsecured notes to accredited institutional investors. The €75.0 million of senior notes consists of €30.0 million aggregate principal amount of 3.71% Series 2010-A Senior Notes, due May 13, 2017 and €45.0 million aggregate principal amount of 4.24% Series 2010-A Senior Notes, due May 13, 2020, with interest payable on the notes semiannually. 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 prepaying them prior to maturity. The notes have been fully and unconditionally guaranteed on an unsecured basis by the Company’s domestic subsidiaries. These unsecured notes were issued pursuant to a note purchase agreement, dated May 13, 2010.
During fiscal 2004 through fiscal 2007, the Company completed three private placement note issuances totaling $500 million in ten-year fixed rate notes with varying maturity dates to institutional investors at interest rates varying from 5.14% to 5.33%. The notes must be repaid equally over seven years, with initial payment due dates ranging from 2008 to 2011, with interest payable on the notes due semiannually on various dates throughout the year, which began in December 2004. The private placements were exempt from the registration requirements of the Securities Act of 1933. The notes were not registered for resale and may not be resold absent such registration or an applicable exemption from the registration requirements of the Securities Act of 1933 and applicable state securities laws. The notes have certain prepayment penalties for repaying them prior to the maturity date.
On October 5, 2006, the Company entered into a $200 million multi-currency revolving loan agreement with a group of five banks that replaced the Company’s previous credit agreement. At the Company’s option, and subject to certain conditions, the available amount under the credit facility may be increased from $200 million up to $300 million. Under the credit agreement, the Company has the option to select either a base interest rate (based upon the higher of the federal funds rate plus one-half of 1% or the prime rate of Bank of America) or a Eurocurrency interest rate (at the LIBOR rate plus a margin based on the Company’s consolidated leverage ratio). A commitment fee is payable on the unused amount of the facility. The agreement restricts the amount of certain types of payments, including dividends, which can be made annually to $50 million plus an amount equal to 75% of consolidated net income for the prior fiscal year of the Company. The Company believes that based on historic dividend practice, this restriction would not impede the Company in following a similar dividend practice in the future. On March 18, 2008, the Company entered into an amendment to the revolving loan agreement which extended the maturity date from October 5, 2011 to March 18, 2013. All other terms of the revolving loan agreement remained the same. As of April 30,October 31, 2011, there were no outstanding borrowings under the credit facility.

19


The Company’s debt and revolving loan agreements require it to maintain certain financial covenants. The Company’s June 2004, February 2006, March 2007, and May 2010 private placement debt agreements require the Company to maintain a ratio of debt to the trailing twelve months EBITDA, as defined in the debt agreements, of not more than a 3.5 to 1.0 ratio (leverage ratio). As of April 30,October 31, 2011, the Company was in compliance with the financial covenant of the June 2004, February 2006, and March 2007 private placementthese debt agreements, with the ratio of debt to EBITDA, as defined by the agreements, equal to 1.9 to 1.0. As of April 30, 2011, the Company was in compliance with the financial covenant of the May 2010 private placement debt agreement, with the ratio of debt to EBITDA, as defined by the agreement, equal to 1.8 to 1.0. Additionally, the Company’s October 2006 revolving loan agreement requires the Company to maintain a ratio of debt to trailing twelve months EBITDA, as defined by the debt agreement, of not more than a 3.0 to 1.0 ratio. The revolving loan agreement requires the Company’s trailing twelve months earnings before interest and taxes (“EBIT”) to interest expense of not less than a 3.0 to 1.0 ratio (interest expense coverage). As of April 30,October 31, 2011, the Company was in compliance with the financial covenants of the revolving loan agreement, with the ratio of debt to EBITDA, as defined by the agreement, equal to 1.91.7 to 1.0 and the interest expense coverage ratio equal to 7.48.3 to 1.0.
Long-term obligations, less current obligations,maturities, as a percentage of long-term obligations, less current obligations,maturities, plus stockholders’ investment were 23.7%22.2% at April 30,October 31, 2011 and 27.6%22.3% at July 31, 2010.2011. Long-term obligations increaseddecreased by $11.3$1.9 million from July 31, 20102011 to April 30,October 31, 2011 due to the negativepositive impact of foreign currency translation on the Company’s Euro-denominated debt. The increase was offset by the $42.5 million debt payments made during the nine months ended April 30, 2011.
Stockholders’ investment increased $127.1$1.7 million during the ninethree months ended April 30, 2011 asOctober 31, 2011. The increase is a result of the Company’s net income of $79.1$32.7 million, as well asoffset by the increase in the accumulated other comprehensive incomeClass A Common Stock repurchase transactions of $60.3$12.3 million due to the impact of foreign currency translation. The increase was offset byand the dividends paid on Class A and Class B Common Stock of $26.6$9.1 million and $1.9$0.6 million, respectively.
The Company’s cash balances are generated and held in numerous locations throughout the world. At October 31, 2011 and July 31, 2011, approximately 59% and 69% of the Company’s cash and cash equivalents was held outside the United States, respectively. The Company’s growth has historically been funded by a combination of cash provided by operating activities and debt financing. The Company believes that its cash flow from operations,operating activities, in addition to its borrowing capacity, are sufficient to fund its anticipated requirements for working capital, capital expenditures, restructuring activities, acquisitions, common stock repurchases, scheduled debt repayments, and dividend payments. The Company believes that its current credit arrangements are sound and that the strength of its balance sheet will allow the Company the financial flexibility to respond to both internal growth opportunities and those available through acquisition.
Subsequent Events Affecting Financial Condition
On November 17, 2011, the Board of Directors declared a quarterly cash dividend to shareholders of the Company’s Class A and Class B Common Stock of $0.185 per share payable on January 31, 2012 to shareholders of record at the close of business on January 10, 2012.

 

2320


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 Company’s financial statements.
Operating Leases — TheseThe leases generally are entered into for investments in facilities such as manufacturing facilities, warehouses and office space, computer equipment and Company vehicles.
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 Company’s materials and processes, certain supply contracts contain penalty provisions for early termination. The Company does not believe a material amount of penalties will be incurred under these contracts based upon historical experience and current expectations.
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 evaluated its affiliated party transactions for the period ended April 30,October 31, 2011. Based on the evaluation the Company does not have material related party transactions that affect the results of operations, cash flow or financial condition.
Subsequent Events Affecting Financial Condition
On May 17, 2011, the Board of Directors declared a quarterly cash dividend to shareholders of the Company’s Class A and Class B Common Stock of $0.18 per share payable on July 29, 2011 to shareholders of record at the close of business on July 8, 2011.

24


Forward-Looking Statements
Brady believes that certain statements in this Form 10-Q10-K 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,10-K, including, without limitation, statements regarding Brady’s 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,10-K, 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 Brady’s control, that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For Brady, uncertainties arise from the length or severity of the current worldwide economic downturn or timing or strength of a subsequent recovery; future financial performance of major markets Brady serves, which include, without limitation, telecommunications, manufacturing, electrical, construction, laboratory, education, governmental, public utility, computer, transportation; difficulties in making and integrating acquisitions; risks associated with newly acquired businesses; Brady’s ability to develop and successfully market new products; changes in the supply of, or price for, parts and components; increased price pressure from suppliers and customers; fluctuations in currency rates versus the US dollar; unforeseen tax consequences; potential write-offs of Brady’s substantial intangible assets; Brady’s ability to retain significant contracts and customers; risks associated with international operations; Brady’s ability to maintain compliance with its debt covenants; technology changes; business interruptions due to implementing business systems; environmental, health and safety compliance costs and liabilities; future competition; interruptions to sources of supply; Brady’s ability to realize cost savings from operating initiatives; difficulties associated with exports; risks associated with restructuring plans; risks associated with obtaining governmental approvals and maintaining regulatory compliance; 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 Brady’s 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 the Company’s most recently filed Form 10-K for the year ended July 31, 2010.2011. These uncertainties may cause Brady’s 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.statements except as required by law.

 

2521


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s business operations give rise to market risk exposure due to changes in foreign exchange rates. To manage that risk effectively, the Company enters into hedging transactions, according to established guidelines and policies that enable it to mitigate the adverse effects of this financial market risk.
The global nature of the Company’s business requires active participation in the foreign exchange markets. As a result of investments, production facilities and other operations on a global scale, the Company has assets, liabilities and cash flows in currencies other than the U.S. Dollar. The primary objective of the Company’s foreign currency exchange risk management is to minimize the impact of currency movements on intercompanynon-functional currency transactions and minimize the foreign raw-material imports.currency translation impact on the Company’s operations. 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, Japanese Yen, and the Korean Won.Swiss Franc. As of April 30,October 31, 2011, the notional amount of outstanding foreign exchangeforward contracts designated as cash flow hedges was $120,475$25.3 million. In fiscal 2010 and continuing in fiscal 2011, theThe Company also hedged portions of its net investments in its European foreign operations using forward foreign exchange currency contracts of $31.7 million, intercompany foreign currency denominated debt instruments of $6.2 million and Euro-denominated debt of €75.0$106.1 million designated as a hedge instrument.
The Company could be exposed to interest rate risk through its corporate borrowing activities. The objective of the Company’s interest rate risk management activities is to manage the levels of the Company’s fixed and floating interest rate exposure to be consistent with the Company’s preferred mix. The interest rate risk management program allows the Company to enter into approved interest rate derivatives with the approval of the Board of Directors, if there is a desire to modify the Company’s exposure to interest rates. As of April 30,October 31, 2011, the Company had no interest rate derivatives.
The Company is subject to the risk of changes in foreign currency exchange rates due to its operations in foreign countries. The Company has manufacturing facilities and sells and distributes its products throughout the world. As a result, the Company’s financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company manufactures, distributes and sells its products. The Company’s operating results are principally exposed to changes in exchange rates between the U.S. Dollar and the European currencies, primarily the Euro, changes between the U.S. Dollardollar and the Australian Dollar, changes between the U.S. Dollar anddollar, the Canadian Dollar, and changes betweendollar, the U.S. DollarSingapore dollar, the Euro, the British Pound, the Brazilian Real, the Korean Won, and the Chinese Yuan. Changes in foreign currency exchange rates for the Company’s foreign subsidiaries reporting in local currencies are generally reported as a component of shareholders’ equity.stockholders’ investment. The Company’s currency translation adjustments recorded for the three and nine months ended April 30,October 31, 2011 were $30.5 million favorable and $60.3 million favorable, respectively. The Company’s currency translation adjustments recorded for the three and nine months ended April 30, 2010 were $1.8$19.1 million unfavorable, and $4.0$30.0 million favorable, respectively. As of April 30,October 31, 2011 and 2010, the Company’s foreign subsidiaries had net current assets (defined as current assets less current liabilities) subject to foreign currency translation risk of $411.2$407.4 million and $221.7$277.1 million, respectively. These amounts were offset by net investment hedges of $144.0 million as of October 31, 2011, and $104.5 million as of October 31, 2010. The potential increasedecrease in the net current assets as of April 30,October 31, 2011 from a hypothetical 10 percent adverse change in quoted foreign currency exchange rates would be $41.1$40.7 million. This sensitivity analysis assumes a parallel shift in foreign currency exchange rates. Exchange rates rarely move in the same direction relative to the U.S. Dollar.dollar. This assumption may overstate the impact of changing exchange rates on individual assets and liabilities denominated in a foreign currency.
ITEM 4. CONTROLS AND PROCEDURES
Brady Corporation maintains a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports filed by the Company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports the Company files under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of its management, including its President and Chief Executive Officer and its Senior Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, the Company’s President and Chief Executive Officer and Senior Executive Vice President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report.
There were no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company’s most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION
ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds
In fiscal 2009, the Company’s Board of Directors authorized a share repurchase plan for the Company’s Class A Nonvoting Common Stock. The plan was implemented by purchasing shares in 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. The Company did not repurchase shares during fiscal 2011. As of July 31, 2011, there remained 204,133 shares to purchase in connection with this share repurchase plan.
On September 9, 2011, the Company’s Board of Directors authorized an additional share repurchase program for up to two million additional shares of the Company’s Class A Nonvoting Common Stock. The plan may be implemented by purchasing shares in 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 three months ended October 31, 2011, the Company purchased 457,360 shares of its Class A Nonvoting Common Stock under this plan for $12,309. As of October 31, 2011, there remained 1,746,773 shares to purchase in connection with this share repurchase plan.
The following table provides information with respect to the purchase of Class A Nonvoting Common Stock during the three months ended October 31, 2011:
                 
          Total Number of  Maximum Number 
      Average  Shares Purchased  of Shares that May 
  Total Number of  Price Paid  as Part of Publicly  Yet Be Purchased 
Period Shares Purchased  per Share  Announced Plans  Under the Plans 
August 1, 2011 — August 31, 2011    $      204,133 
September 1, 2011 — September 30, 2011  369,228  $27.17   369,228   1,834,905 
October 1, 2011 — October 31, 2011  88,132  $25.83   88,132   1,746,773 
             
Total  457,360  $26.91   457,360   1,746,773 
             
ITEM 6. 
Exhibits
(a) Exhibits
     
 10.1  Brady Corporation Executive Deferred Compensation Plan,Change of Control Agreement, dated as amended
10.2Brady Corporation Directors’ Deferred Compensation Plan, as amended
of November 21, 2011, entered into with Stephen Millar
 31.1  Rule 13a-14(a)/15d-14(a) Certification of Frank M. Jaehnert
 
31.2  Rule 13a-14(a)/15d-14(a) Certification of Thomas J. Felmer
 32.1  Section 1350 Certification of Frank M. Jaehnert
 
32.2  Section 1350 Certification of Thomas J. Felmer
 101  Interactive Data File
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
     
 BRADY CORPORATION
 
 
Date: June 7,December 6, 2011 /s/ FrankFRANK M. JaehnertJAEHNERT   
 FrankFrank. M. Jaehnert  
 President & Chief Executive Officer  
 
Date: June 7,December 6, 2011 /s/ ThomasTHOMAS J. FelmerFELMER   
 Thomas J. Felmer  
 Senior Vice President & Chief Financial Officer
(Principal Financial Officer) 
 

 

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