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Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-K
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended July 31, 2007
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission file number 1-14959
 
 
 
 
BRADY CORPORATION
(Exact name of registrant as specified in charter)
 
     
Wisconsin
(State or other jurisdiction of
incorporation or organization)
  39-0178960
(IRS Employer Identification No.)
 
6555 West Good Hope Road,
Milwaukee, WI 53223
(Address of principal executive offices) (Zip Code)
 
(414) 358-6600
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of each class
 
Name of each exchange on which registered
Class A Nonvoting Common Stock, Par Value
$.01 per share
  New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ          Accelerated filer o          Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ
 
The aggregate market value of the non-voting common stock held by non-affiliates of the registrant as of January 31, 2007, was approximately $1,762,270,644 (based on closing sale price of $37.45 per share on that date as reported for the New York Stock Exchange). As of September 24, 2007, there were outstanding 50,830,420 shares of Class A Nonvoting Common Stock (the “Class A Common Stock”), and 3,538,628 shares of Class B Common Stock. The Class B Common Stock, all of which is held by affiliates of the registrant, is the only voting stock.
 


Table of Contents

 
INDEX
 
                 
        Page
 
  Business   I-1
    General Development of Business   I-1
    Financial Information About Industry Segments   I-1
    Narrative Description of Business   I-1
    Overview   I-1
    Competitive Strengths   I-2
    Key Strategies   I-3
    Products   I-4
    Marketing and Sales   I-6
    Brands   I-6
    Manufacturing Process and Raw Materials   I-6
    Technology and Product Development   I-7
    International Operations   I-7
    Competition   I-8
    Backlog   I-8
    Environment   I-8
    Employees   I-8
    Acquisitions   I-8
    Financial Information About Foreign and Domestic Operations and Export Sales   I-8
    Information Available on the Internet   I-8
  Risk Factors   I-9
  Unresolved Staff Comments   I-12
  Properties   I-12
  Legal Proceedings   I-12
  Submission of Matters to a Vote of Security Holders   I-12
 
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   II-1
  Selected Financial Data   II-3
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   II-4
  Quantitative and Qualitative Disclosures About Market Risk   II-14
  Financial Statements and Supplementary Data   II-15
  Changes In and Disagreements With Accountants on Accounting and Financial Disclosure   II-50
  Controls and Procedures   II-50
  Other Information   II-52
 
  Directors and Executive Officers of the Registrant   III-1
  Executive Compensation   III-5
    Compensation Discussion and Analysis   III-5
    Compensation Committee Interlocks and Insider Participation   III-10
    Compensation Committee Report   III-10
    Summary Compensation Table   III-11


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        Page
 
    Grants of Plan-Based Awards for 2007   III-12
    Outstanding Equity Awards at 2007 Fiscal Year End   III-13
    Option Exercises and Stock Vested for Fiscal 2007   III-14
    Non-Qualified Deferred Compensation for Fiscal 2007   III-14
    Potential Payments Upon Termination or Change in Control   III-14
    Compensation of Directors   III-16
    Director Compensation Table   III-17
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   III-18
  Certain Relationships and Related Transactions   III-20
  Principal Accounting Fees and Services   III-21
 
  Exhibits, Financial Statement Schedules   IV-1
  IV-5
 Complete and Permanent Release and Retirement Agreement
 Subsidiaries
 Consent of Deloitte & Touche LLP
 Certification
 Certification
 Section 1350 Certification
 Section 1350 Certification


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PART I
 
Brady Corporation and Subsidiaries are referred to herein as the “Company,” “Brady,” or “we”.
 
Item 1.   Business
 
(a)   General Development of Business
 
The Company, a Wisconsin corporation founded in 1914, currently operates 61 manufacturing or distribution facilities in Australia, Belgium, Brazil, Canada, China, Denmark, France, Germany, India, Italy, Japan, South Korea, Malaysia, Mexico, the Netherlands, Norway, Singapore, Slovakia, Sweden, Thailand, the United Kingdom and the United States. The Company also sells through subsidiaries or sales offices in these countries, with additional sales through a dedicated team of international sales representatives in Hong Kong, the Philippines, Spain, Taiwan, Turkey and the United Arab Emirates. The Company further markets its products to parts of Eastern Europe, the Middle East, Africa and Russia. The Company’s corporate headquarters are located at 6555 West Good Hope Road, Milwaukee, Wisconsin 53223, and the telephone number is (414) 358-6600. The Company’s Internet address is http://www.bradycorp.com.
 
(b)   Financial Information About Industry Segments
 
The information required by this Item is provided in Note 7 of the Notes to Consolidated Financial Statements contained in Item 8 — Financial Statements and Supplementary Data.
 
(c)   Narrative Description of Business
 
Overview
 
Brady Corporation is an international manufacturer and marketer of identification solutions and specialty products which identify and protect premises, products and people. Brady’s core capabilities in manufacturing, channel management, printing systems, precision engineering and materials expertise make it a leading supplier to the Maintenance, Repair and Operations (“MRO”) market and to the Original Equipment Manufacturing (“OEM”) market. The Company’s ability to provide customers with a broad range of differentiated solutions both through the organic development of its existing business and the acquisition of complementary and adjacent businesses, its commitment to quality and service, its global footprint and its diversified sales channels have made it a world leader in its markets.
 
Brady manufactures and markets a wide range of products for use in diverse applications. Major product lines provided to the MRO market include facility identification, safety and complementary products, wire and cable identification products, sorbent materials, people identification products and regulatory publishing. Major product lines provided to the OEM market include high-performance identification products for product identification, wire identification, work in process identification, bar code labels and precision die-cut components for mobile telecommunications devices, hard disk drives, medical devices and supplies, automotive electronics and other electronics. Products are marketed through multiple channels, including through distributors, business-to-business direct marketing and a direct sales force.
 
The need for the Company’s products is driven, in part, by customer specifications, by regulatory compliance requirements imposed by agencies such as the Occupational Safety & Health Administration (“OSHA”) and the Environmental Protection Agency (“EPA”) in the United States and other regulatory agencies around the world, and by the need to identify and track assets or to identify, direct, warn, inform, train and protect people or products. Brady serves customers in general manufacturing, maintenance and safety, process industries, construction, electrical, telecommunications, electronics, laboratory/healthcare, airline/transportation, security/brand education, governmental, public utility, and a variety of other industries. The Company has a broad customer base, with the largest customer representing approximately 5% of net sales.


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Competitive Strengths
 
Brady’s vision is to be either first or second in terms of market share in every market served. The Company’s primary growth objectives are to build upon its leading market positions, to improve performance and profitability and to expand existing activities through a multi-prong approach that incorporates organic growth, new product development and acquisitions.
 
The Company believes the following competitive strengths will allow it to achieve its strategy:
 
Leader in Niche Markets.  Brady competes in niche markets where it believes it is often the leading supplier with the manufacturing expertise, infrastructure, channels and sales resources necessary to provide the required product or comprehensive solution. For example, the Company believes it is the leading supplier of wire identification products to the North American MRO market and of precision die-cut components to the mobile telecommunications market. The Company believes its leadership positions make it a preferred supplier to many of its customers and enables it to be successful in its markets, which are generally fragmented and populated with smaller or regional competitors.
 
Differentiated Solutions and Commitment to Innovation.  The Company believes its sophisticated engineering and manufacturing capabilities, as well as its expertise in materials, give it a competitive advantage in supplying customized or high specification product solutions to meet individualized customer needs. The Company has been successful in identifying and incorporating innovative technologies to create integrated and precise solutions. Additionally, it is able to use its materials expertise and its investment in research and development to provide unique products to meet the demands of end-customers in new, faster growing markets adjacent to its traditional markets, such as laboratory identification. Brady’s commitment to product innovation is reflected in its research and development efforts that include approximately 250 employees primarily dedicated to research and development activities mainly in the United States, but also in Belgium, Germany, Singapore, Sweden and South Korea.
 
Operational Excellence.  Brady has achieved continuous improvement in operational productivity. It employs well-developed problem solving techniques and invests in state-of-the-art equipment to capture efficiencies. The Company is largely vertically integrated and designs, manufactures and markets a majority of the products it sells. The Company has invested heavily over the last several years to centralize its North American distribution network and to standardize its Systems, Applications, and Products for data processing (“SAP”) software applications. It has consistently generated positive cash flow from operations by continually reducing costs and optimizing inventory management and the efficiency of its manufacturing operations.
 
Broad Customer Base and Geographic Diversity.  Brady believes its global infrastructure and diverse market presence mitigates the impact of an economic downturn on its business in any particular country or region, enables it to act as a primary supplier to many of its global customers and provides a solid platform for further expansion. Sales from international operations increased from 44.4% of net sales in fiscal 2000 to 60.9% of net sales in fiscal 2007. The Company’s global presence benefits many of its customers who seek a single or primary supplier to meet their global design and manufacturing requirements. Brady has over 500,000 end-customers that operate in multiple industries.
 
Disciplined Acquisition and Integration Strategy.  The Company has a dedicated team of experienced professionals that employ a disciplined acquisition strategy and process to acquire companies. It applies strict financial standards to evaluate all acquisitions using an expected return model based on a modified return on invested capital calculation. It also conducts disciplined integration reviews of acquired firms to track progress toward results expected at the time of acquisition. Since 1996, the Company has acquired and integrated 51 companies to primarily increase market share in existing and new geographies. It has acquired companies that expand the product range it offers both existing and new customers, as well as adding new technological capabilities.
 
Channel Diversity and Strength.  Brady utilizes a wide range of channels to reach customers across a broad array of industries. It employs direct marketing expertise to meet its customers’ need for convenience. The Company also has long-standing relationships with, and is a preferred supplier to, many of its largest distributors. In addition, the Company employs a global sales team to support both distributors and end users and to serve their productivity, tracking and safety requirements. The Company believes its strong brands and reputation for quality,


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innovation and on-time delivery contribute to the popularity of its products with distributors, OEMs, resellers and other customers.
 
Deep and Talented Team.  The Company believes that its team of employees has substantial depth in critical operational areas and has demonstrated success in reducing costs, integrating acquisitions and improving processes through economic cycles. The international experience of its management team and its commitment to developing strong management teams in each of the local operations is a competitive advantage. In addition, the Company believes it employs a world-class team of people and dedicates significant resources to recruiting people committed to excellence and investing in their potential. The depth and breadth of knowledge within the entire Brady organization strengthens relationships with its customers and suppliers and enables the Company to provide its customers with a high level of product and industry expertise.
 
Key Strategies
 
The Company’s primary growth objectives are to build upon its leading market positions, to improve its performance and profitability and to expand its existing activities through a multi-prong strategic approach that incorporates both organic growth and acquisitions. The Company’s key strategies include:
 
Capitalize on Growing Niche Markets.  The Company seeks to leverage its premier reputation, global footprint and strength in manufacturing and materials expertise to capitalize on growth in existing niche markets. Growth prospects in the MRO market are driven primarily by the general health of regional economies, changes in legal and regulatory compliance requirements and the increased need of customers to identify their assets and protect their employees. Demand for OEM products is primarily driven by the strength of various electronics markets, such as mobile telecommunications, portable electronic devices, disk drives and computers, as well as technological advances in these markets and other industrial OEM’s.
 
Increase Market Share.  Many Brady markets are fragmented and populated with smaller or regional competitors. The Company seeks to leverage its investment in new product development and its global sales, operations and distribution capabilities to increase market share, as well as expand its distribution channels to capture new customers. The Company employs a dedicated and experienced sales team that works closely with existing customers to identify and capture new opportunities. In addition, Brady plans to leverage the strength of its brands, the quality of its products and its long-standing relationships with key customers to build upon current market positions.
 
Enter New Markets.  The Company looks to leverage its quality products, global infrastructure, channel relationships and selling capabilities to effectively enter new markets, many of which are fragmented and populated with smaller competitors. For example, Brady is expanding its precision die-cut capabilities into the medical market and is leveraging its common distribution networks into the sorbent materials market. Through product innovation and development activities, Brady seeks to introduce new technologies and differentiated products as well as seek additional applications for products in existing and new markets. The Company reviews its product and market portfolio on a regular basis through its standardized review process in order to identify new product opportunities.
 
Expand Geographically.  Brady’s long-term strategy involves the pursuit of growth opportunities in a number of markets outside of the United States. The Company is committed to being in close proximity to its customers and to low-cost manufacturing. Brady currently operates in 28 countries and employs approximately 3,900 people, approximately 45% of its total workforce, in developing regions. Brady has made strategic acquisitions and has invested heavily in its global infrastructure and flexible manufacturing capacity in order to follow its customers into new geographies. Brady’s regional management structure is a key component in effectively entering and competing in new geographies.
 
Pursue Strategic Acquisitions.  The Company intends to continue to make complementary strategic acquisitions to further its goal of strengthening its market positions and entering new markets and geographies. Brady works to drive substantial value creation through capitalizing on its acquisition and integration acumen.
 
Improve Profitability.  The Company plans to continue its focus on improving operating efficiency, reducing costs, and improving productivity and return on assets. In addition, each acquisition the Company makes provides


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additional opportunities to improve its performance as well as the performance of the acquired company. The Company often continues to realize synergies with acquired companies several years after the acquisition date.
 
Products
 
The Company is largely vertically integrated by designing, developing, coating and producing most of its identification signs, labels and printing systems. Brady materials are developed internally and manufactured out of a variety of films, predominantly coated by Brady, for applications in the following markets: electronic, industrial, electrical, utility, laboratory, safety and security. Brady also manufactures specialty tapes and related products that are characterized by high-performance printable top coats and adhesives, most of which are formulated by the Company, to meet high-tolerance requirements of the industries in which they are used.
 
The Company’s stock and custom products consist of over 500,000 stock-keeping units, including complete identification systems and other products used to create a safer work environment, improve operating efficiencies, and increase the utilization of assets through tracking and inventory process controls. Major product categories include: facility and safety signs and identification tags and markers, pipe and valve markers, asset identification tags, lockout/tagout products, security and traffic control products, and printing systems and software for creating safety and regulatory labels and signs, spill control and clean up products, wire and cable markers, high-performance labels, laboratory identification labels and printing systems, stand-alone printing systems, bar-code and other software, automatic identification and data collection systems, personal identification products, and precision die-cut solutions.
 
Some of the Company’s stock products were originally designed, developed and manufactured as custom products for a specific customer. However, such products have frequently created wide industry acceptance and have become stock items offered by the Company through mail order and distributor sales. The Company’s most significant types of products are described below.
 
MRO Market Products
 
• Facility Identification
 
Informational signs and printers for use in a broad range of industrial, commercial, governmental and institutional applications. These signs are either self-adhesive or mechanically mounted, designed for both indoor and outdoor use and are manufactured to meet standards issued by the National Safety Council, OSHA and a variety of industry associations in the United States and abroad. The Company’s sign products include admittance, directional and exit signs; electrical hazard warnings; energy conservation messages; fire protection and fire equipment signs; hazardous waste labels; hazardous and toxic material warning signs; transformers and power pole markers; personal hazard warnings; housekeeping and operational warnings; pictograms; radiation and laser signs; safety practices signs and regulatory markings; employment law posters; and photo luminescent (glow-in-the-dark) tapes.
 
Warehouse identification products including self-adhesive and self-aligning die-cut numbers and letters, labels, and tags used to locate and identify inventory in storage facilities such as warehouses, factories, stockrooms and other industrial facilities.
 
Pipe markers and valve tags including plastic or metal, self-adhesive or mechanically applied, stock or custom-designed pieces for the identification of pipes and control valves in the mechanical contractor and process industry markets. These products are designed to help identify and provide information as to the contents, direction of flow and special hazardous properties of materials contained in piping systems, and to facilitate repair or maintenance of the systems.
 
Asset-identification products that are an important part of an effective asset-management program in a wide variety of markets. These include self-adhesive or mechanically mounted labels or tags made of aluminum, brass, stainless steel, polycarbonate, vinyl, polyester, mylar and paper. These products are also offered in tamper-evident varieties, and can be custom designed to ensure brand protection from counterfeiting.


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• Safety and Complementary Products
 
Lockout/tagout products — under OSHA regulations, all energy sources must be “locked out” while machines are being serviced or maintained to prevent accidental engagement and injury. The Company’s products allow its customers to comply with these regulations and to ensure worker safety for a wide variety of energy- and fluid-transmission systems and operating machinery.
 
Security and traffic control products including a variety of security seals, parking permits and wristbands designed for visitor control in financial, governmental, educational and commercial facilities including meeting and convention sites. The Company also offers a wide variety of traffic control devices including traffic signs, directional and warning signs, parking tags and permits, barriers, cones and other products including barricading, visual warning systems, floor-marking products, safety badges, and first aid cabinets/kits, among others.
 
Spill control and clean-up products including synthetic sorbent materials in a variety of shapes, sizes and configurations; spill kits, containment booms, industrial rugs, absorbing pillows and pads, barrier spill matting and granular absorbents; and other products for absorbing and controlling chemical, oil-based and water-based spills.
 
• Wire and Cable Identification
 
Brady manufactures a broad range of wire and cable-marking products, including labels, sleeves, software that allows customers to create their own labels, and printers to print and apply them. These products mark and identify wires, cables and their termination points to facilitate manufacturing, construction, repair or maintenance of equipment, and data communication and electrical wiring systems used in virtually every industrial, power and communication market.
 
• People Identification
 
Identification systems and products including photo ID card systems that combine biometrics, digital imaging and other technologies to positively identify people; self-expiring name tags that make use of migratory ink technology which, upon activation, starts a timed process resulting in an altered message, color or design to indicate expiration; and ID accessories including lanyards, badge holders, badge reels and attachments, as well as photo identification kits.
 
OEM Market Products
 
• High Performance Identification
 
Brady produces a complete line of label materials and printing systems to meet customers’ needs for identification requirements for product identification, work in process labeling and bar coding that perform under harsh or demanding conditions, such as extreme temperatures, or environmental or chemical exposure. Brady prints stock and custom labels and also sells unprinted materials to enable customers to print their own labels.
 
• Precision Die-Cut Parts
 
The Company develops customized precision die-cut products that are used to seal, insulate, protect, shield or provide other mechanical performance properties in the assembly of electronic, telecommunications and other equipment, including mobile phones, personal data assistants, computer hard disk drives, computers and other devices. Solutions not only include the materials and converting, but also automatic placement and other value-added services. The Company also provides converting services to the medical market for materials used in in-vitro diagnostic kits and patient monitoring.
 
• Wire Identification
 
The Company produces a variety of high performance products used to mark wires, wire bundles and cables in the manufacturing of a variety of industrial, electrical and electronic equipment.


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Other Products
 
The Company also designs and produces software for barcoding and inspection automation, industrial thermal-transfer printers and other electromechanical devices to serve the growing and specialized needs of customers in a wide variety of markets. Industrial labeling systems, software, tapes, ribbons and label stocks provide customers with the resources and flexibility to produce signs and labels on demand at their site. The Company also offers poster printers, cutting systems, laminators and supplies to education and training markets.
 
Marketing and Sales
 
Brady seeks to offer high quality products with rapid response and superior service so that it can provide solutions to customers that are better, faster and more economical than those available from the Company’s competitors. The Company markets and sells its products domestically and internationally through multiple channels including distributors, direct sales, mail-order-catalog marketing, retail, and electronic access through the Internet. The Company has long-standing relationships with a broad range of electrical, safety, industrial and other domestic and international distributors. The Company’s sales force seeks to establish and foster ongoing relationships with the end-users and distributors by providing technical application and product expertise.
 
The Company also direct markets certain products and those of other manufacturers by catalog sales and outbound telemarketing in both domestic and international markets. Such products include industrial and facility identification products, safety and regulatory-compliance products and original equipment manufacturer component products, among others. Catalogs are distributed in the United States, Australia, Brazil, Canada, China, France, Germany, Italy, Spain, Sweden, Switzerland and the United Kingdom, and include foreign-language catalogs.
 
The Company’s products are sold in a wide variety of markets within the larger MRO and OEM markets, including electrical, electronic, telecommunications, governmental, public utility, commercial building, computers and computer components, construction, general manufacturing, laboratory, transportation equipment and education.
 
Brands
 
The Company’s products go to market under a variety of brand names. The Brady brand includes high-performance labels, printers, software, safety and facility identification products, lock-out/tag-out products, and precision die-cut parts and specialty materials. Other die-cut materials are marketed as Balkhausen or Tradex Converting products. Safety and facility identification products are also marketed under the Safety Signs Service brand and the Asterisco brand, with some lockout/tagout products offered under the Prinzing and LOTO brands. In addition, identification for the utility industry is marketed under the Electromark brand and spill-control products are marketed under the SPC brand; poster printers and cutting systems for education and government markets are offered under the Varitronics name brand; wire identification products are marketed under the Modernotecnica brand and the Carroll brand; direct marketing safety and facility identification products are offered under the Seton, Emedco, Signals, Safetyshop, Clement and Personnel Concepts names; security and identification badges and systems are included in the Temtec, B.I.G., Identicard/Identicam, STOPware, J.A.M. Plastics, PromoVision, and Quo-Luck brands; hand-held regulatory documentation systems are available under the Tiscor name; and automatic identification and bar code software is offered under the Teklynx brand.
 
Manufacturing Process and Raw Materials
 
The Company manufactures the majority of the products it sells, while purchasing certain items from other manufacturers. Products manufactured by the Company generally require a high degree of precision and the application of adhesives with chemical and physical properties suited for specific uses. The Company’s manufacturing processes include compounding, coating, converting, melt-blown operations, software development and printer design and assembly. The compounding process involves the mixing of chemical batches for primers, top coatings and adhesives. The coatings and adhesives are applied to a wide variety of materials including polyester, polyimide, cloth, paper, metal and metal foil. The converting process may include embossing, perforating, laminating, die cutting, slitting, and printing or marking the materials as required.


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The Company produces the majority of the pressure sensitive materials through an integrated manufacturing process. These integrated manufacturing processes permit greater flexibility to meet customer needs in product design and manufacture, and an improved ability to provide specialized products designed to meet the needs of specific applications. Brady’s “cellular” manufacturing processes and “just-in-time” inventory control are designed to attain profitability in small orders by emphasizing flexibility and the maximization of assets through quick turnaround and delivery, balanced with optimization of lot sizes. Most of the Company’s manufacturing facilities have received ISO 9001 or 9002 certification.
 
The materials used in the products manufactured by the Company consist primarily of plastic sheets and films, paper, metal and metal foil, cloth, fiberglass, polypropylene, inks, dyes, adhesives, pigments, natural and synthetic rubber, organic chemicals, polymers, solvents and electronic components and subassemblies. In addition, the Company purchases finished products for resale. The Company purchases raw materials, components and finished products from many suppliers. Overall, the Company is not dependent upon any single supplier for its most critical base materials or components; however the Company has chosen in certain situations to sole source materials, components or finished items for design or cost reasons. As a result, disruptions in supply could have an impact on results for a period of time, but generally these disruptions would simply require qualification of new suppliers and the disruption would be modest. In certain instances, the qualification process could be more costly or take a longer period of time and in rare circumstances, such as a global shortage of a critical material or component, the financial impact could be significant.
 
Technology and Product Development
 
The Company focuses its research and development efforts on material development, printing systems design and software development. Material development involves the application of surface chemistry concepts for top coatings and adhesives applied to a variety of base materials. Systems design integrates materials, embedded software and a variety of printing technologies to form a complete solution for customer applications or the Company’s own production requirements. The Company’s research and development team also supports production and marketing efforts by providing application and technical expertise.
 
The Company possesses patents covering various aspects of adhesive chemistry, electronic circuitry, printing systems for wire markers, systems for aligning letters and patterns, and visually changing paper. Although the Company believes that its patents are a significant factor in maintaining market position for certain products, technology in the areas covered by many of the patents is evolving rapidly and may limit the value of such patents. The Company’s business is not dependent on any single patent or group of patents.
 
The Company conducts much of its research and development activities at the Frederic S. Tobey Research and Innovation Center (approximately 39,600 sq. ft.) in Milwaukee, Wisconsin. The Company spent approximately $36.0 million, $30.4 million, and $25.1 million during the fiscal years ended July 31, 2007, 2006, and 2005, respectively, on its research and development activities. In fiscal 2007, approximately 250 employees were engaged in research and development activities for the Company. Additional research projects were conducted in Company facilities in other locations in the United States, Europe and Asia and under contract with universities, other institutions and consultants.
 
The Company’s name and its registered trademarks are important to each of its business segments. In addition, the Company owns other important trademarks applicable to only certain of its products.
 
International Operations
 
In fiscal 2007, 2006, and 2005, sales from international operations accounted for 60.9%, 57.6%, and 55.3%, respectively, of the Company’s sales. Its global infrastructure includes subsidiaries in Australia, Belgium, Brazil, Canada, China, Denmark, France, Germany, Hong Kong, India, Italy, Japan, Luxembourg, Malaysia, Mexico, the Netherlands, Norway, Philippines, Poland, Singapore, Slovakia, South Korea, Spain, Sweden, Thailand, Turkey and the United Kingdom. Most of these locations manufacture or have the capability to manufacture certain of the products they sell. In addition, Brady has sales offices in Spain, Taiwan, Turkey and the United Arab Emirates. Brady further markets its products to parts of Eastern Europe, the Middle East, Africa and Russia.


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Competition
 
The markets for all of the Company’s products are competitive. Brady believes that it is one of the leading domestic producers of wire markers, safety signs, pipe markers, label printing systems, precision die-cut materials and bar-code-label-generating software. Brady competes for business principally on the basis of production capabilities, engineering, and research and development capabilities, materials expertise, its global footprint, global account management where needed, customer service and price. Product quality is determined by factors such as suitability of component materials for various applications, adhesive properties, graphics quality, durability, product consistency and workmanship. Competition in many of its product markets is highly fragmented, ranging from smaller companies offering only one or a few types of products, to some of the world’s major adhesive and electrical product companies offering some competing products as part of their overall product lines. A number of Brady’s competitors are larger than the Company and have greater resources. Notwithstanding the resources of these competitors, management believes that Brady provides a broader range of identification solutions than any of them, and that its global infrastructure is a significant competitive advantage in serving large multi-national customers.
 
Backlog
 
As of July 31, 2007, the amount of the Company’s backlog orders believed to be firm was $25.3 million. This compares with $42.3 million and $24.9 million of backlog orders as of July 31, 2006 and 2005, respectively. Average delivery time for the Company’s orders varies from one day to one month, depending on the type of product, and whether the product is stock or custom-designed and manufactured. Average delivery time for the direct marketing business can be as low as the same day or the next day. The Company’s backlog does not provide much visibility for future business.
 
Environment
 
At present, the manufacturing processes for our adhesive-based products utilize certain evaporative solvents, which, unless controlled, would be vented into the atmosphere. Emissions of these substances are regulated at the federal, state and local levels. We have implemented a number of systems and procedures to reduce atmospheric emissions and/or to recover solvents. Management believes we are substantially in compliance with all environmental regulations.
 
Employees
 
As of July 31, 2007, the Company employed approximately 8,600 individuals. We have never experienced a material work stoppage due to a labor dispute and consider our relations with employees to be strong. The mix of employees is changing as we employ more people in developing countries where wage rates are lower and employee turnover tends to be higher than in developed countries.
 
Acquisitions
 
Information about the Company’s acquisitions is provided in Note 2 of the Notes to Consolidated Financial Statements contained in Item 8 — Financial Statements and Supplementary Data.
 
(d)   Financial Information About Foreign and Domestic Operations and Export Sales
 
The information required by this Item is provided in Note 7 of the Notes to Consolidated Financial Statements contained in Item 8 — Financial Statements and Supplementary Data.
 
(e)   Information Available on the Internet
 
The Company’s Corporate Internet address is http://www.bradycorp.com. The Company makes available, free of charge, on or through its Internet website copies of its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 reports filed by the Company’s insiders, and amendments to all such reports as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. We are not including the information contained on or available through our website as part of, or incorporating such information by reference into, this Annual Report on Form 10-K.


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Item 1A.  Risk Factors
 
Before making an investment decision with respect to our stock, you should carefully consider the risks set forth below and all other information contained in this report. If any of the events contemplated by the following risks actually occur, then our business, financial condition or results of operations could be materially adversely affected.
 
Market demand for our products may be susceptible to fluctuations in the economy that may cause volatility in our results of operations.
 
Sales of our products may be susceptible to changes in general economic conditions, namely general downturns in the regional economies in which we compete. Our business in the MRO market tends to vary with the nominal GDP of the local economies in which we manufacture and sell. As a result, in periods of economic contraction, our business may not grow or may decline. In the OEM market, we may be adversely affected by reduced demand for our products due to downturns in the global economy as this is a more volatile business than the MRO business. This can result in higher degrees of volatility in our net sales and results of operations. These more volatile markets include, but are not limited to, mobile telecommunication devices, hard disk drives and electronics in personal computers and other electronic devices.
 
Our current and future success could be impacted by our ability to effectively integrate acquired companies and manage our growth.
 
Our growth has and will continue to place significant demands on our management and operational and financial resources. Since the beginning of fiscal year 2004, we have acquired 26 companies. These recent and future acquisitions will require integration of sales and marketing, information technology, finance and administrative operations and information of the newly acquired business. The successful integration of acquisitions will require substantial attention from our management and the management of the acquired businesses, which could decrease the time they have to serve and attract customers. We cannot assure that we will be able to successfully integrate these recent or any future acquisitions, that these acquisitions will operate profitably or that we will be able to achieve the financial or operational success expected from the acquisitions. Our financial condition, cash flows and operational results could be adversely affected if we do not successfully integrate the newly acquired businesses or if our other businesses suffer on account of our increased focus on the newly acquired businesses.
 
If we fail to develop new products or our customers do not accept the new products we develop, our business could be affected adversely.
 
Development of proprietary products is key to the success of our core growth and our high gross margins now and in the future. Therefore, we must continue to develop new and innovative products and acquire and retain the necessary intellectual property rights in these products on an ongoing basis. If we fail to make innovations, or the market does not accept our new products, then our financial condition and results of operations could be adversely affected. We continue to invest in the development and marketing of new products. These expenditures do not always result in products that will be accepted by the market. Failure to develop successful new products may also cause our customers to buy from a competitor or may cause us to lower our prices in order to compete. This could have an adverse impact on our profitability.
 
We may be adversely impacted by an inability to identify and complete acquisitions.
 
A large part of our growth since fiscal 2003 has come through acquisitions and a key component of our growth strategy is based upon acquisitions. We may not be able to identify acquisition targets or successfully complete acquisitions in the future due to the absence of quality companies, economic conditions, or price expectations from sellers. If we are unable to complete additional acquisitions, our growth may be limited.


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We operate in competitive markets and may be forced to cut our prices or incur additional costs to remain competitive, which may have a negative impact on our profitability.
 
We face substantial competition, particularly in the OEM markets we serve. Competition may force us to cut our prices or incur additional costs to remain competitive. We compete on the basis of production capabilities, engineering and R&D capabilities, materials expertise, our global footprint, customer service and price. Present or future competitors may have greater financial, technical or other resources, lower production costs or other pricing advantages, any of which could put us at a disadvantage in the affected business by threatening our market share in some markets or reducing our profit margins.
 
Our goodwill or other intangible assets may become impaired, which may negatively impact our results of operations.
 
We have a substantial amount of goodwill and other intangible assets on our balance sheet as a result of our acquisitions. As of July 31, 2007, we had $737.5 million of goodwill on our balance sheet, representing the excess of the total purchase price for our acquisitions over the fair value of the net assets we acquired, and $149.8 million of other intangible assets, primarily representing the fair value of the customer relationships, patents and trademarks we acquired in our acquisitions. At July 31, 2007, goodwill and other intangible assets represented approximately 52% of our total assets. We evaluate this goodwill annually for impairment based on the fair value of each operating segment. We assess the impairment of other intangible assets quarterly based upon the expected future cash flows of the respective assets. These valuations could change if there were to be future changes in our capital structure, cost of debt, interest rates, capital expenditures, or our ability to perform in accordance with our forecasts. If this estimated fair value changes in future periods, we may be required to record an impairment charge related to goodwill or other intangible assets, which would have the effect of decreasing our earnings or increasing our losses in such period.
 
We have a concentration of business with several large key customers and distributors and loss of one or more of these customers could significantly affect our results of operations.
 
Several of our large key customers in the OEM market, specifically the precision die-cut business, together comprise a significant portion of our revenues. Our largest customer represents approximately 5% of our net sales. Additionally in the MRO markets, we do business with several large distribution companies. Our dependence on these large customers makes our relationships with these customers important to our business. We cannot assure you that we will be able to maintain these relationships and retain this business in the future. Because these large customers account for such a significant portion of our revenues, they possess relatively greater capacity to negotiate a reduction in the prices we charge for our products. If we are unable to provide products to our customers at prices acceptable to them, some of our customers may in the future elect to shift some or all of this business to competitors or to substitute other manufacturer’s products. If one of our key customers consolidates, is acquired by another company or loses market share, the result of that event may have an adverse impact on our business. The loss of or reduction of business from one or more of these large key customers could have a material adverse impact on our financial condition and results of operations.
 
We increasingly conduct a sizable amount of our manufacturing outside of the United States, which may present additional risks to our business.
 
As a result of our strong growth in developing economies, particularly in Asia, a significant portion of our sales is attributable to products manufactured outside of the United States. More than half of our approximately 8,600 employees and more than half of our manufacturing locations are outside of the United States. Our international operations are generally subject to various risks including political, economic and societal instability, the imposition of trade restrictions, local labor market conditions, the effects of income taxes, and differences in business practices. We may incur increased costs and experience delays or disruptions in product deliveries and payments in connection with international manufacturing and sales that could cause loss of revenue. Unfavorable changes in the political, regulatory and business climate in countries where we have operations could have a material adverse effect on our financial condition, results of operations and cash flows.


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Our ability to continue to source low cost MRO products from regions such as China may decline. Conversely, low cost sourcing may also present risks to our revenue if our MRO customers choose to source cheaper products from low cost regions.
 
An increasing portion of our MRO products is expected to be sourced from low cost regions in the future. Changes in export laws, suppliers and disruption in transportation routes could lessen our ability to source these products and adversely impact our results. Additionally, our MRO distributors/customers may seek low cost sourcing opportunities directly, which could cause a loss of business that may adversely impact our revenues.
 
Foreign currency fluctuations could adversely affect our sales and profits.
 
More than half of our revenues are derived outside of the United States. As such, fluctuations in foreign currency can have an adverse impact on our sales and profits as amounts that are measured in foreign currency are translated back to U.S. dollars. Any increase in the value of the U.S. dollar in relation to the value of the local currency will adversely affect our revenues from our foreign operations when translated into U.S. dollars. Similarly, any decrease in the value of the U.S. dollar in relation to the value of the local currency will increase our development costs in our foreign operations, to the extent such costs are payable in foreign currency, when translated into U.S. dollars. During fiscal year 2007, the weakening U.S. dollar versus the majority of other currencies increased sales by approximately $41.7 million.
 
We depend on our key personnel and the loss of these personnel could have an adverse effect on our operations.
 
Our success depends to a large extent upon the continued services of our key executives, managers and other skilled personnel. We cannot ensure that we will be able to retain our key officers and employees. The departure of our key personnel without adequate replacement could severely disrupt our business operations. Additionally, we need qualified managers and skilled employees with technical and manufacturing industry experience to operate our business successfully. If we are unable to attract and retain qualified individuals or our costs to do so increase significantly, our operations would be materially adversely affected.
 
We may be unable to successfully implement anticipated changes to our information technology system.
 
We are now in the process of upgrading certain portions of our information technology. Part of this upgrade includes continued implementations of SAP in our facilities in China, Europe, Malaysia, Singapore, Mexico, India and the United States. In fiscal 2007, we completed the implementation at 16 of our facilities in these regions, and expect to continue this pace in future years. We expect that this implementation of the SAP platform will enable us to more effectively and efficiently manage our supply chain and business processes. Our failure to successfully manage the SAP implementation process or implement these upgrades as scheduled could cause us to incur unexpected costs or to lose customers or sales, which could have a material adverse effect on our financial results.
 
The increase in our level of indebtedness could adversely affect our financial health and make us vulnerable to adverse economic conditions.
 
We have incurred indebtedness to finance acquisitions and for other general corporate purposes. Any increase in our level of indebtedness could have important consequences, such as:
 
  •  it may be difficult for us to fulfill our obligations under our credit or other debt agreements;
 
  •  it may be more challenging or costly to obtain additional financing to fund our future growth;
 
  •  we may be more vulnerable to future interest rate fluctuations;
 
  •  we may be required to dedicate a substantial portion of our cash flows to service our debt, thereby reducing the amount of cash available to fund new product development, capital expenditures, working capital and other general corporate activities;


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  •  it may place us at a competitive disadvantage relative to our competitors that have less debt; and
 
  •  it may limit our flexibility in planning for and reacting to changes in our business.
 
Environmental, health and safety laws and regulations could adversely affect our business.
 
Our facilities and operations are subject to numerous laws and regulations relating to air emissions, wastewater discharges, the handling of hazardous materials and wastes, manufacturing and disposal of certain materials, and regulations otherwise relating to health, safety and the protection of the environment. Our products may also be governed by regulations in the countries where they are sold. As a result, we may need to devote management time or expend significant resources on compliance, and we have incurred and will continue to incur capital and other expenditures to comply with these regulations. Any significant costs may have a material adverse impact on our financial condition, results of operations or cash flows. Further, these laws and regulations are constantly evolving and it is impossible to predict accurately the effect they may have upon our financial condition, results of operations or cash flows.
 
Item 1B.   Unresolved Staff Comments
 
None.
 
Item 2.   Properties
 
The Company currently operates 61 manufacturing or distribution facilities in the following regions:
 
Americas:  Seventeen are located in the United States; three each in Brazil and Mexico; and one in Canada.
 
Europe:  Four are located in the United Kingdom; three are each located in France and Germany; two each in Belgium and Sweden; and one each in Denmark, Italy, Norway and Slovakia.
 
Asia-Pacific:  Seven are located in China; four in Australia; three in Thailand; two in South Korea; and one each in Singapore, India, and Malaysia.
 
The Company’s present operating facilities contain a total of approximately 3.9 million square feet of space, of which approximately 2.8 million square feet is leased. The Company believes that its equipment and facilities are modern, well maintained and adequate for present needs.
 
Item 3.   Legal Proceedings
 
The Company is, and may in the future be, party to litigation arising in the normal course of business. The Company is not currently a party to any material pending legal proceedings in which management believes the ultimate resolution would have a material adverse effect on the Company’s consolidated financial statements.
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year ended July 31, 2007.


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PART II
 
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
(a)   Market Information
 
Brady Corporation Class A Nonvoting Common Stock trades on the New York Stock Exchange under the symbol BRC. The quarterly stock price history on the New York Stock Exchange is as follows for each of the quarters in the fiscal years ended July 31:
 
                                                 
    2007     2006     2005(1)  
    High     Low     High     Low     High     Low  
 
4th Quarter
  $ 37.73     $ 32.73     $ 42.79     $ 32.94     $ 34.96     $ 28.80  
3rd Quarter
  $ 38.37     $ 30.91     $ 40.49     $ 34.67     $ 35.70     $ 26.30  
2nd Quarter
  $ 40.52     $ 35.70     $ 39.98     $ 28.20     $ 32.22     $ 26.75  
1st Quarter
  $ 38.68     $ 33.16     $ 34.22     $ 26.98     $ 27.49     $ 21.01  
 
 
(1) Adjusted for a two-for-one stock split in the form of a 100% stock dividend, effective December 31, 2004.
 
There is no trading market for the Company’s Class B Voting Common Stock.
 
(b)   Holders
 
As of September 24, 2007, there were 711 Class A Common Stock shareholders of record and approximately 4,100  beneficial shareholders. There are three Class B Common Stock shareholders.
 
(c)   Issuer Purchases of Equity Securities
 
The Company did not repurchase any of its equity securities in the fourth quarter of fiscal 2007.
 
(d)   Dividends
 
The Company has followed a practice of paying quarterly dividends on outstanding common stock. Before any dividend may be paid on the Class B Common Stock, holders of the Class A Common Stock are entitled to receive an annual, noncumulative cash dividend of $0.01665 per share (subject to adjustment in the event of future stock splits, stock dividends or similar events involving shares of Class A Common Stock). Thereafter, any further dividend in that fiscal year must be paid on all shares of Class A Common Stock and Class B Common Stock on an equal basis. The Company’s revolving credit agreement restricts the amount of certain types of payments, including dividends, that can be made annually to $50 million plus 75% of the consolidated net income for the prior fiscal year. The Company believes that based on its historic dividend practice, this restriction will not impede it in following a similar dividend practice in the future.
 
During the two most recent fiscal years and for the first quarter of fiscal 2008, the Company declared the following dividends per share on its Class A and Class B Common Stock for the years ended July 31:
 
                                                                         
    Year
                               
    Ending
                               
    2008
  2007   2006
    1st Qtr   1st Qtr   2nd Qtr   3rd Qtr   4th Qtr   1st Qtr   2nd Qtr   3rd Qtr   4th Qtr
 
Class A
  $ 0.15     $ 0.14     $ 0.14     $ 0.14     $ 0.14     $ 0.13     $ 0.13     $ 0.13     $ 0.13  
Class B
    0.13335       0.123       0.14       0.14       0.14       0.113       0.13       0.13       0.13  


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(e)   Common Stock Price Performance Graph
 
The graph below shows a comparison of the cumulative return over the last five fiscal years had $100 been invested at the close of business on July 31, 2002, in each of Brady Corporation Class A Common Stock, The Standard & Poor’s (S&P) 500 index, the Standard and Poor’s Small Cap 600 index, and the Russell 2000 index.
 
Comparison of 5 Year Cumulative Total Return*
Among Brady Corporation, The S&P 500 Index,
The S&P Smallcap 600 Index and The Russell 2000 Index
 
(PERFORMANCE GRAPH)
 
* $100 invested on 7/31/02 in stock or index — including reinvestment of dividends. Fiscal year ended July 31. Copyright©  2002, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.


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Item 6.   Selected Financial Data
 
CONSOLIDATED STATEMENTS OF INCOME AND SELECTED FINANCIAL DATA
Years Ended July 31, 2003 through 2007
 
                                         
    2007     2006     2005     2004     2003  
    (In thousands, except per share amounts)  
 
Operating Data
                                       
Net Sales(1)
  $ 1,362,631     $ 1,018,436     $ 816,447     $ 671,219     $ 554,866  
Gross Margin
    657,044       525,755       433,276       345,361       279,149  
Operating Expenses:
                                       
Research and development
    35,954       30,443       25,078       23,028       18,873  
Selling, general and administrative
    449,103       338,796       285,746       248,171       219,861  
Restructuring charge — net
                      3,181       9,589  
                                         
Total operating expenses
    485,057       369,239       310,824       274,380       248,323  
                                         
Operating Income
    171,987       156,516       122,452       70,981       30,826  
Other (Expense) Income:
                                       
Investment and other income — net
    2,875       2,403       1,369       577       1,750  
Interest expense
    (22,934 )     (14,231 )     (8,403 )     (1,231 )     (121 )
                                         
Net other (expense) income
    (20,059 )     (11,828 )     (7,034 )     (654 )     1,629  
                                         
Income before income taxes
    151,928       144,688       115,418       70,327       32,455  
Income Taxes
    42,540       40,513       33,471       19,456       11,035  
                                         
Net Income
  $ 109,388     $ 104,175     $ 81,947     $ 50,871     $ 21,420  
                                         
Net Income Per Common Share —
                                       
(Diluted):
                                       
Class A nonvoting
  $ 2.00     $ 2.07     $ 1.64     $ 1.07     $ 0.46  
Class B voting
  $ 1.98     $ 2.05     $ 1.63     $ 1.05     $ 0.44  
Cash Dividends on:
                                       
Class A common stock
  $ 0.56     $ 0.52     $ 0.44     $ 0.42     $ 0.40  
Class B common stock
  $ 0.54     $ 0.50     $ 0.42     $ 0.40     $ 0.39  
Balance Sheet at July 31:
                                       
Working capital
  $ 303,359     $ 240,537     $ 141,560     $ 131,706     $ 123,878  
Total assets
    1,698,857       1,365,186       850,147       697,900       449,519  
Long-term obligations, less current maturities
    478,575       350,018       150,026       150,019       568  
Stockholders’ investment
    891,012       746,046       497,274       403,315       338,961  
Cash Flow Data:
                                       
Net cash provided by operating activities
    136,018       114,896       119,103       87,646       57,316  
Depreciation and amortization
    53,856       35,144       26,822       20,190       17,771  
Capital expenditures
    (51,940 )     (39,410 )     (21,920 )     (14,892 )     (14,438 )
 
 
(1) Net sales has been impacted by the acquisitive nature of the Company as seven, eleven and four acquisitions were completed in fiscal years ended July 31, 2007, 2006 and 2005, respectively. See Note 2 in Item 8 for further information on the acquisitions that were completed in each of the years.


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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview
 
In fiscal 2007, the Company posted record sales of $1,362.6 million and record net income of $109.4 million, an increase of 33.8% and 5.0%, respectively, over fiscal 2006. During fiscal 2007, the Company completed seven acquisitions and further expansions into Mexico, Thailand, Malaysia, India, China and the Philippines, among other geographic areas.
 
Of the 33.8% increase in sales, organic growth accounted for 4.2%, acquisitions added 25.5%, and foreign currency translation increased sales by 4.1%. Americas sales increased 22.2%, European sales rose 30.4%, and sales from the Asia-Pacific region increased 68.1%.
 
Net income for fiscal 2007 rose 5.0% to $109.4 million or $2.00 per diluted share of Class A Common Stock, compared to $104.2 million, or $2.07 per diluted share of Class A Common Stock in fiscal 2006.
 
In fiscal 2007, the Company continued to focus on leveraging its strengths and continued its drive to become the number one or two leader in the markets that it serves. Acquisitions were concentrated in businesses that management understands well in order to deepen market penetration or expand the Company’s global footprint. The Company also invested in expanding many of its global operations with new equipment, information systems and capacity, and adjusted operating capacities to achieve efficiencies and cost savings.
 
Brady acquired seven companies in fiscal 2007 including businesses that span the globe from the Americas to Europe to Asia-Pacific. We have added strategically driven acquisitions in people identification, medical precision die-cut, direct marketing and safety and facility products in the United States, safety and facility products and wire identification in Europe, high performance labeling in South America, and people identification and safety and facility products in the Asia-Pacific region.
 
Brady completed the transition to a new 50,000 square foot facility in Penang, Malaysia in fiscal 2007 after having outgrown its previous space. Other geographic expansions during the year included the start of new operations in Dongguan (China), Xiamen (China), Bangalore (India), Reynosa (Mexico), Queretaro (Mexico) and Cainta Rizal (Philippines), as well as the development of a state-of-the-art facility in Pathumthani (Thailand). Brady strives to employ the same high safety and environmental standards across the globe regardless of lesser government requirements in some areas.
 
Brady remains a financially strong company, with a solid balance sheet and strong cash flows. In September 2007, the Company announced that it will be increasing its cash dividend payment for the 22nd straight year.


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Results of Operations
 
Year Ended July 31, 2007, Compared to Year Ended July 31, 2006
 
The comparability of the operating results for the fiscal years ended July 31, 2007 to July 31, 2006, has been impacted by the following acquisitions completed in fiscal 2007, as well as the annualized impact of the acquisitions completed in fiscal 2006.
 
         
Acquisitions:
 
Segment
 
Date Completed
 
Comprehensive Identification Products, Inc. (“CIPI”)
  Americas, Europe   August 2006
    Asia-Pacific    
Precision Converters, L.P. (“Precision Converters”)
  Americas   October 2006
Scafftag, Ltd., Safetrak, Ltd. and Scafftag Pty., Ltd. (collectively
  Americas, Europe and   December 2006
“Scafftag”)
  Asia-Pacific    
Asterisco Artes Graficas Ltda. (“Asterisco”)
  Americas   December 2006
Modernotecnica SpA (“Moderno”)
  Europe   December 2006
Clement Communications, Inc. (“Clement”)
  Americas   February 2007
Sorbent Products Co., Inc. (“SPC”)
  Americas, Europe and   April 2007
    Asia-Pacific    
 
Sales for fiscal 2007 increased by $344.2 million, or 33.8% from fiscal 2006. Organic sales, defined as sales in the Company’s existing core businesses and regions (exclusive of acquisitions and foreign currency effects), increased $42.3 million or 4.2% for the same period. The acquisitions listed above and the annualized impact of the fiscal 2006 acquisitions increased sales by $260.2 million or 25.5% in fiscal 2007 compared to fiscal 2006. Fluctuations in the exchange rates used to translate financial results into the United States Dollar resulted in a sales increase of $41.7 million or 4.1% for the year.
 
The gross margin as a percentage of sales decreased from 51.6% in fiscal 2006 to 48.2% in fiscal 2007. This decline was driven by the results in our OEM electronics business, primarily in the mobile handset business in Asia-Pacific. The decline was also driven by the acquisitions that Brady completed in the last 12 months, which were more heavily weighted towards OEM electronics, which is generally characterized by lower gross margins and lower selling, general and administrative (“SG&A”) expenses.
 
Research and development expenses grew to $36.0 million in fiscal 2007 from $30.4 million in fiscal 2006, but decreased as a percentage of sales from 3.0% in fiscal 2006 to 2.6% in fiscal 2007. Brady continues to expand its investment in new product development.
 
SG&A expenses of $449.1 million in fiscal 2007, as compared to $338.8 million in fiscal 2006, decreased as a percentage of sales from 33.3% in fiscal 2006 to 33.0% in fiscal 2007. The decrease was due to changes in the Company’s sales mix towards the OEM electronics business, which typically has lower SG&A expense.
 
The Company recorded expenses of $11.4 million in fiscal year 2007 for cost reduction actions, which are primarily recorded in SG&A expenses in the consolidated statements of income. These actions consisted of $9.2 million for severance and other employee termination costs, $1.8 million for asset write-offs and $0.4 million for facility closure costs. Pre-tax savings from these actions, and the exit activity charges for planned integration activities of acquisitions completed in the last 12 months that increased goodwill by $8.8 million, are expected to be approximately $14 million in fiscal 2008.
 
Investment and other income increased $0.5 million in fiscal 2007 from the prior year. The income recorded in fiscal 2007 was primarily due to interest income earned on cash and marketable securities investments, while the income recorded in fiscal 2006 was primarily due to a gain of approximately $1.5 million on a currency option that the Company purchased to hedge against increases in the purchase price in U.S. dollar terms of Tradex Converting AB as the transaction was denominated in Swedish Krona.
 
Interest expense increased $8.7 million in fiscal 2007 due to interest on the $150 million private placement of senior notes that the Company completed in the third quarter of fiscal 2007 and the $200 million private placement


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of senior notes that the Company completed in second quarter of fiscal 2006, as well as interest on the borrowings under our revolving credit facility in fiscal 2007.
 
The Company’s effective tax rate was 28.0% in both fiscal 2007 and 2006.
 
Net income for the fiscal year ended July 31, 2007, increased 5.0% to $109.4 million, compared to $104.2 million for fiscal year ended July 31, 2006, as a result of the factors noted above. Diluted net income per share comparisons between fiscal 2007 of $2.00 per share and 2006 of $2.07 per share were also affected by the greater number of shares outstanding in fiscal 2007 as a result of the Company’s July 2006 sale of an additional 4.6 million shares of Class A Nonvoting Common Stock in a public offering.
 
Year Ended July 31, 2006, Compared to Year Ended July 31, 2005
 
The comparability of the operating results for the fiscal years ended July 31, 2006 to July 31, 2005 was impacted by the following acquisitions completed in fiscal 2006, as well as the annualized impact of the acquisitions completed in fiscal 2005.
 
         
Acquisitions:
 
Segment
 
Date Completed
 
STOPware, Inc. (“Stopware”)
  Americas   August 2005
Texit Danmark AS and Texit Norge AS
  Europe   September 2005
(collectively “Texit”)
       
TruMed Technologies, Inc. (“TruMed”)
  Americas   October 2005
QDP Thailand Co., Ltd (“QDPT”)
  Asia-Pacific   October 2005
J.A.M. Plastics Inc. (“J.A.M.”)
  Americas   December 2005
Personnel Concepts
  Americas   January 2006
IDenticard Systems, Inc. and Identicam Systems
  Americas   February 2006
(collectively “Identicard”)
       
Accidental Health & Safety Pty. Ltd and
  Asia-Pacific   March 2006
Trafalgar First Aid Pty. Ltd.
       
(collectively “Accidental Health”)
       
Tradex Converting AB (“Tradex”)
  Americas, Europe
and Asia-Pacific
  May 2006
Carroll Australasia Pty. Ltd. (“Carroll”)
  Asia-Pacific   June 2006
Daewon Industry Corporation (“Daewon”)
  Asia-Pacific   July 2006
 
Sales for fiscal 2006 increased by $202.0 million, or 24.7% from fiscal 2005. Organic sales, defined as sales in the Company’s existing core businesses and regions (exclusive of acquisitions and foreign currency effects), increased $75.4 million or 9.2% for the same period. The acquisitions listed above and the annualized impact of the fiscal 2005 acquisitions increased sales by $130.3 million or 16.0% in fiscal 2006 compared to fiscal 2005. Fluctuations in the exchange rates used to translate financial results into the United States Dollar decreased sales by $3.7 million or 0.5% for the year.
 
The gross margin as a percentage of sales decreased from 53.1% in fiscal 2005 to 51.6% in fiscal 2006. The decrease was primarily due to a decline in Asia-Pacific attributable to acquisition mix, a shift in the product mix towards OEM electronics and cost pressures not offset by sales price increases, and a decline in Europe due to acquisition mix, partially offset by an increase in the Americas due to sales price increases, cost reductions and acquisition mix.
 
Research and development expenses grew to $30.4 million in fiscal 2006 from $25.1 million in fiscal 2005, but fell slightly as a percentage of sales from 3.1% in fiscal 2005 to 3.0% in fiscal 2006. Research and development spending increases of 21.4% were slightly less than the 24.7% increase in sales in fiscal 2006.
 
SG&A expenses of $338.8 million decreased as a percentage of sales from 35.0% in fiscal 2005 to 33.3% in fiscal 2006. The decrease was due primarily to cost efficiencies gained in the existing businesses in all regions


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driven by organic sales growth and cost control and a change in our business mix, partially offset by higher SG&A expenses from the acquisitions completed in fiscal 2006.
 
Investment and other income increased $1.0 million in fiscal 2006 from the prior year, primarily due to a gain of approximately $1.5 million on a currency option that the Company purchased to hedge against increases in the purchase price in U.S. dollar terms of Tradex as the transaction was denominated in Swedish Krona.
 
Interest expense increased $5.8 million in fiscal 2006 due to the interest on the $200 million private placement that was completed in the third quarter of fiscal 2006.
 
The Company’s effective tax rate decreased from 29.0% for fiscal 2005 to 28.0% for fiscal 2006. The decrease in the effective tax rate was due to a continuing shift to a higher percentage of the Company’s pre-tax income coming from lower tax rate countries.
 
Business Segment Operating Results
 
Management of the Company evaluates results based on the following geographic regions: Americas, Europe, and Asia-Pacific.
 
                                                 
                            Corporate and
       
(Dollars in thousands)
  Americas     Europe     Asia-Pacific     Subtotals     Eliminations     Total  
 
SALES TO EXTERNAL CUSTOMERS
                                               
Years ended:
                                               
July 31, 2007
  $ 609,855     $ 416,514     $ 336,262     $ 1,362,631           $ 1,362,631  
July 31, 2006
    498,916       319,432       200,088       1,018,436             1,018,436  
July 31, 2005
    417,780       274,691       123,976       816,447             816,447  
SALES GROWTH INFORMATION
                                               
Year ended July 31, 2007:
                                               
Organic
    3.3 %     8.3 %     (0.4 )%     4.2 %           4.2 %
Currency
    0.5 %     9.0 %     5.2 %     4.1 %           4.1 %
Acquisitions
    18.4 %     13.1 %     63.3 %     25.5 %           25.5 %
                                                 
Total
    22.2 %     30.4 %     68.1 %     33.8 %           33.8 %
Year ended July 31, 2006:
                                               
Organic
    5.0 %     4.2 %     34.7 %     9.2 %           9.2 %
Currency
    1.5 %     (4.3 )%     1.6 %     (0.5 )%           (0.5 )%
Acquisitions
    12.9 %     16.4 %     25.1 %     16.0 %           16.0 %
                                                 
Total
    19.4 %     16.3 %     61.4 %     24.7 %           24.7 %
SEGMENT PROFIT (LOSS)
                                               
Years ended:
                                               
July 31, 2007
  $ 142,306     $ 107,552     $ 57,236     $ 307,094     $ (8,208 )   $ 298,886  
July 31, 2006
    122,525       83,970       49,316       255,811       (10,633 )     245,178  
July 31, 2005
    98,193       79,792       34,228       212,213       (4,845 )     207,368  


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NET INCOME RECONCILIATION
 
                         
    Years ended:  
    July 31,
    July 31,
    July 31,
 
    2007     2006     2005  
 
Total profit for reportable segments
  $ 307,094     $ 255,811     $ 212,213  
Corporate and eliminations
    (8,208 )     (10,633 )     (4,845 )
Unallocated amounts:
                       
Administrative costs
    (126,899 )     (88,662 )     (84,916 )
Investment and other income — net
    2,875       2,403       1,369  
Interest expense
    (22,934 )     (14,231 )     (8,403 )
                         
Income before income taxes
    151,928       144,688       115,418  
Income taxes
    (42,540 )     (40,513 )     (33,471 )
                         
Net income
  $ 109,388     $ 104,175     $ 81,947  
                         
 
The Company evaluates regional performance using sales and segment profit. Segment profit or loss does not include certain administrative costs, such as the cost of finance, stock options, information technology and human resources, which are managed as global functions. Interest, investment and other income and income taxes are also excluded when evaluating regional performance. The increased administrative costs in fiscal 2007 include $11.4 million of expenses associated with cost reduction charges.
 
Americas
 
Sales in the Americas region increased 22.2% from fiscal 2006 to fiscal 2007, and 19.4% from fiscal 2005 to fiscal 2006. Organic growth accounted for 3.3% in 2007 and 5.0% in 2006. The organic growth in fiscal 2007 was due to strong growth in the United States in both the Brady and direct marketing brands, with strong results from the electrical and wire identification products. The growth was partially offset by the planned transfer of die cut business to Asia-Pacific in the early part of the year. Canada and Brazil also experienced year-over-year growth. The organic growth in fiscal 2006 was due to strong growth in the United States in our safety, electrical, and industrial markets. Our operations in Canada, Mexico and Brazil also provided year-over-year organic sales growth in 2006 in the Brady brand business. Within the direct marketing business, base sales increased in 2006 over the prior year as well. The acquisitions of TruMed, J.A.M., Personnel Concepts and Identicard in fiscal 2006 and CIPI, Precision Converters, Scafftag, Asterisco, Clement and SPC in fiscal 2007 added 18.4% to fiscal 2007 sales. The acquisitions of Electromark in fiscal 2005 and Stopware, TruMed, J.A.M., Personnel Concepts and Identicard in fiscal 2006 added 12.9% to fiscal 2006 sales. The positive effect of fluctuations in the exchange rates used to translate financial results into U.S. currency increased sales in the region by 0.5% and 1.5% in fiscal 2007 and 2006, respectively.
 
In the Americas region, segment profit as a percentage of sales decreased from 24.6% in 2006 to 23.3% in 2007. This decrease was due to the effect of the recent acquisitions. As expected, the segment’s recent acquisitions have produced an initial rate of profit that is below the average rate of profit of the segment. As the businesses are integrated and synergies are achieved, the profit percentages are expected to increase. Comparing fiscal 2006 to 2005, segment profit as a percentage of sales increased from 23.5% to 24.6%, due to the increase in sales volume and sales prices, partially offset by increases in many of the segment’s material and utility costs. Also, as expected, the acquisitions completed in 2006 reported an initial rate of profit that was below the average of the region.
 
Europe
 
Sales in the European region increased 30.4% in fiscal 2007 from fiscal 2006 and 16.3% in fiscal 2006 from fiscal 2005. Organic growth accounted for 8.3% in fiscal 2007 and 4.2% in fiscal 2006. The organic growth reported in fiscal 2007 was due to growth in the majority of the businesses and countries as the European economy continued to strengthen. Business in the region has benefited from recent “No Smoking” legislation enacted in France and in the United Kingdom, which stimulated demand for certain of our product lines. The increase in the organic growth in fiscal 2006 was due to modest growth in the direct marketing business as a result of continuing to add new customers and expand product offerings and growth from expansion into newer geographies for the Brady brand


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business, primarily from the expansion into Slovakia, Turkey and the Nordic region. Foreign currency translation increased the region’s sales by 9.0% from fiscal 2006 to 2007 compared to a decrease in the region’s sales of 4.3% from fiscal 2005 to 2006. The acquisitions of Texit and Tradex in fiscal 2006 and CIPI, Scafftag, Moderno and SPC in fiscal 2007 added 13.1% to the region’s sales in fiscal 2007 and the acquisitions of Texit and Tradex in fiscal 2006 and Signs and Labels in fiscal 2005 added 16.4% to the region’s sales in fiscal 2006.
 
Segment profit as a percentage of sales decreased to 25.8% in fiscal 2007 from 26.3% in fiscal 2006 and decreased from 29.0% in fiscal 2005 to 26.3% in fiscal 2006. The decrease experienced in fiscal 2007 from 2006 was due to the global headquarter costs of Tradex, partially offset by the strong performance of the direct marketing businesses in the region. The decrease experienced in fiscal 2006 from 2005 was due to the impact of a stronger U.S. dollar, the profit dilution caused by the start-up of business in Slovakia and the integration and acquisition-related costs from the June 2005 acquisition of Signs and Labels and the May 2006 acquisition of Tradex. As Tradex’s headquarters are in Sweden, all of the headquarter costs are reflected in the Europe segment in 2006.
 
Asia-Pacific
 
Asia-Pacific sales increased 68.1% in fiscal 2007 from fiscal 2006 and 61.4% in fiscal 2006 from fiscal 2005. Organic sales declined 0.4% in fiscal 2007 and increased 34.7% in fiscal 2006. The decline in organic sales in fiscal 2007 was due to a slowdown in our OEM electronics business, led by the loss of certain programs in the hard disk drive business related to industry consolidation and a slowdown in high performance labeling. The increase in organic sales for fiscal 2006 was due to the high demand for consumer electronics and strong growth in the Australian direct marketing and safety businesses. Of the 34.7% increase in organic growth in fiscal 2006, a significant portion was driven by growth in China as the Asian economy strengthened. Foreign currency translation increased the region’s sales by 5.2% from fiscal 2006 to 2007 compared to an increase of 1.6% from fiscal 2005 to 2006. The acquisitions of QDPT, Accidental Health, Tradex, Carroll and Daewon in fiscal 2006 and CIPI, Scafftag and SPC in fiscal 2007 added 63.3% to the region’s sales in fiscal 2007, whereas the acquisitions of Technology Print Supply and Technology Supply Media in fiscal 2005 and QDPT, Accidental Health, Tradex, Carroll and Daewon in fiscal 2006 added 25.1% to the region’s sales in fiscal 2006.
 
Segment profit as a percentage of sales decreased to 17.0% in fiscal 2007 from 24.7% in fiscal 2006 and to 24.7% in fiscal 2006 from 27.6% in fiscal 2005. The decrease in fiscal 2007 was due to the slowdown in our OEM electronics business, excess capacity at our facilities and lower margins from acquisitions. By the end of fiscal 2007, we had nearly completed the capacity and footprint changes that were necessary to reduce our cost structure and be closer to our customers’ facilities. These changes are expected to result in a reduced cost base for the upcoming year, but we should still be able to support sudden spikes in customer demand. The decrease experienced in fiscal 2006 was due to the continued shift of business mix towards the die cut business, which experiences lower margins, combined with pricing pressures from our OEM customers, and the lower initial rate of profit produced by the companies acquired in the region.
 
Liquidity and Capital Resources
 
Cash and cash equivalents were $142.8 million at July 31, 2007, compared to $113.0 million at July 31, 2006. Additionally, short-term investments, consisting of investments in auction rate securities, were $19.2 million at July 31, 2007, compared to $11.5 million at July 31, 2006. Working capital increased $62.9 million during fiscal 2007 to $303.4 million and increased $98.9 million during fiscal 2006 to $240.5 million. Accounts receivable balances increased $51.7 million from July 31, 2006 to July 31, 2007. The increase in accounts receivable was due primarily to increased sales volume, foreign currency translation and accounts receivable balances added from acquisitions completed during fiscal 2007. Inventories increased $29.9 million from July 31, 2006 to July 31, 2007 due to foreign currency translation, inventory of acquired companies, and increased inventory levels to support the launch of new products and to maintain adequate service levels for our customers. Current liabilities increased $61.4 million due to the inclusion of principal debt payments that are due for payment in the fourth quarter of fiscal 2008 which were included in long-term obligations in the prior year, an increase in accounts payable from the fiscal 2007 acquisitions, and an increase in other current liabilities as a result of our cost reduction activities.


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The Company has maintained significant cash balances due in large part to its strong operating cash flow, which totaled $136.0 million for fiscal 2007, $114.9 million for fiscal 2006 and $119.1 million for fiscal 2005. The increase from fiscal 2006 to fiscal 2007 was the result of a $5.2 million increase in net income and an $18.7 million increase in depreciation and amortization primarily due to the tangible and intangible assets acquired in fiscal 2006 and 2007, partially offset by cash requirements for changes in operating assets and liabilities. In accordance with the adoption of SFAS No. 123(R), “Share Based Payment” on August 1, 2005, the Company has classified the income tax benefit from the exercise of stock options subsequent to adoption as a financing cash inflow. Prior to adoption, this tax benefit was recorded in cash flows from operations and totaled $5.4 million for the fiscal year ended July 31, 2005.
 
The acquisitions of businesses used $159.5 million in fiscal 2007, $351.3 million in fiscal 2006, and $79.9 million in fiscal 2005. Contingent consideration payments of $10.9 million were paid during fiscal 2007 to satisfy the $6.5 million holdback requirement of the ID Technologies acquisition completed in fiscal 2005, the $1.0 million earnout liability of the Stopware acquisition completed in fiscal 2006, the $1.8 million purchase price adjustment of the Daewon acquisition completed in fiscal 2006 and the $1.6 million earnout liability of the QDPT acquisition completed in fiscal 2006.
 
Capital expenditures were $51.9 million in fiscal 2007, $39.4 million in fiscal 2006 and $21.9 million in fiscal 2005. $9.8 million was spent during fiscal 2007 on implementing SAP in 16 of Brady’s global operations and ultimately bringing the number of users up from approximately 2,300 to approximately 6,700 in the next three years. The remainder of the increase in capital expenditures in fiscal 2007 was due to expansions in China, Canada, India, Mexico, the Philippines, Slovakia and other locations. Capital expenditures in 2006 were driven by the completion of the central distribution warehouse in Milwaukee, Wisconsin, continued expansion in Asia, new facilities in Slovakia and in Canada and by upgrading existing plant and machinery. Capital expenditures in 2005 included plant expansions in China and the start of the addition of the central distribution warehouse in Milwaukee.
 
Financing activities provided $129.4 million of cash in fiscal 2007, provided $319.0 million in fiscal 2006 and used $9.7 million in fiscal 2005. In fiscal 2006, the Company completed a secondary public offering of 4.6 million shares of its Class A nonvoting common stock and received proceeds of $157.7 million. Cash used for dividends to shareholders was $30.1 million in fiscal 2007, $26.1 million in fiscal 2006 and $21.3 million in fiscal 2005. Cash received from the exercise of stock options was $6.8 million in fiscal 2007, $8.9 million in fiscal 2006 and $15.7 million in fiscal 2005. The Company did not purchase treasury stock in fiscal 2007, but purchased treasury stock of $24.7 million in fiscal 2006 and $1.6 million in fiscal 2005. In fiscal 2006, a stock repurchase plan was implemented by purchasing shares on the open market or in privately negotiated transactions, with repurchased shares available for use in connection with the Company’s stock option plan and for other corporate purposes. The Company completed the repurchase of 800,000 shares of its Class A Common Stock for $26.5 million in fiscal 2006.
 
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 facility that had been entered into on March 31, 2004 and amended on January 19, 2006. At the Company’s option, and subject to certain standard conditions, the available amount under the new credit facility may be increased from $200 million up to $300 million. Under the new 5-year agreement, which has a final maturity date of October 5, 2011, the Company has the option to select either a base interest rate (based upon the higher of the federal funds rate plus one-half of 1% or the prime rate of Bank of America) or a Eurocurrency interest rate (at the LIBOR rate plus a margin based on the Company’s consolidated leverage ratio). A commitment fee is payable on the unused amount of the facility. The agreement requires the Company to maintain two financial covenants. As of July 31, 2007, the Company was in compliance with the covenants of the agreement. The agreement restricts the amount of certain types of payments, including dividends, which can be made annually to $50 million plus an amount equal to 75% of consolidated net income for the prior fiscal year of the Company. The Company believes that based on historic dividend practice, this restriction would not impede the Company in following a similar dividend practice in the future. During fiscal 2007 and 2006, the Company borrowed and repaid $109.3 million and $415.7 million, respectively. As of July 31, 2007, there were no outstanding borrowings under the credit facility.


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On March 23, 2007, the Company completed the private placement of $150 million in ten-year fixed notes at 5.33% interest to institutional investors. The notes will be amortized in equal installments over seven years, beginning in 2011 with interest payable on the notes semiannually on September 23 and March 23, beginning in September 2007. The notes have been fully and unconditionally guaranteed on an unsecured basis by the Company’s domestic subsidiaries. The Company used the net proceeds of the offering to reduce outstanding indebtedness under the Company’s revolving loan agreement and fund its ongoing strategic growth plan. This private placement was exempt from the registration requirements of the Securities Act of 1933. The notes were not registered for resale and may not be resold absent such registration or an applicable exemption from the registration requirements of the Securities Act of 1933 and applicable state securities laws. The notes have certain prepayment penalties for repaying them prior to the maturity date. The agreement also requires the Company to maintain a financial covenant. As of July 31, 2007, the Company was in compliance with this covenant.
 
On February 14, 2006, the Company completed the private placement of $200 million in ten-year fixed notes at 5.3% interest to institutional investors. The notes will be amortized in equal installments over seven years, beginning in 2010 with interest payable on the notes semiannually on August 14 and February 14, beginning in August 2006. The notes have been fully and unconditionally guaranteed on an unsecured basis by the Company’s domestic subsidiaries. The Company used the net proceeds of the offering to finance acquisitions completed in fiscal 2006 and 2007 and for general corporate purposes. This private placement was exempt from the registration requirements of the Securities Act of 1933. The notes were not registered for resale and may not be resold absent such registration or an applicable exemption from the registration requirements of the Securities Act of 1933 and applicable state securities laws. The notes have certain prepayment penalties for repaying them prior to the maturity date. The agreement also requires the Company to maintain a financial covenant. As of July 31, 2007, the Company was in compliance with this covenant.
 
On June 30, 2004, the Company finalized a debt offering of $150 million of 5.14% unsecured senior notes due in 2014 in an offering exempt from the registration requirements of the Securities Act of 1933. The debt offering was in conjunction with the Company’s acquisition of EMED. The notes will be amortized over seven years beginning in 2008, with interest payable on the notes being due semiannually on June 28 and December 28, beginning in December 2004. The Company used the proceeds of the offering to reduce outstanding indebtedness under the Company’s revolving credit facilities used to initially fund the EMED acquisition. The debt has certain prepayment penalties for repaying the debt prior to its maturity date. The agreement also requires the Company to maintain a financial covenant. As of July 31, 2007, the Company was in compliance with this covenant.
 
Long-term obligations as a percentage of long-term obligations plus stockholders’ investment were 34.9% at July 31, 2007, and 31.9% at July 31, 2006. Long-term obligations increased by $128.6 million from July 31, 2006 to July 31, 2007 due to the private placement that was completed during the year, partially offset by the portion of long-term obligations that is due for payment in fiscal 2008 that is recorded in current liabilities, and stockholders’ investment increased $145.0 million during this period due to net earnings for fiscal 2007 and changes in accumulated other comprehensive income.
 
The Company intends to fund its short-term and long-term operating cash requirements, including its fiscal 2008 dividend payments, primarily through net cash provided by operating activities.
 
The Company believes that its continued strong cash flows from operations, existing borrowing capacity and continued access to capital markets will enable it to execute its long-term strategic plan. This strategic plan includes investments, which expand its current market share, open new markets and geographies, develop new products and distribution channels and continue to improve our processes. This strategic plan also includes executing key acquisitions.
 
Subsequent Events Affecting Liquidity and Capital Resources
 
On September 11, 2007, the Board of Directors announced an increase in the quarterly dividend to shareholders of the Company’s Class A Common Stock, from $0.14 to $0.15 per share. The dividend will be paid on October 31, 2007, to shareholders of record at the close of business on October 10, 2007. This dividend represents an increase of 7% and is the 22nd consecutive annual increase in dividends since the Company went public in 1984.


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Off-Balance Sheet Arrangements
 
The Company does not have material off-balance sheet arrangements or related party transactions. The Company is not aware of factors that are reasonably likely to adversely affect liquidity trends, other than the risks discussed in this filing and presented in other Company filings. However, the following additional information is provided to assist financial statement users.
 
Operating Leases — These leases generally are entered into for investments in facilities such as manufacturing facilities, warehouses and office space, computer equipment and Company vehicles, when the economic profile is favorable.
 
Purchase Commitments — The Company has purchase commitments for materials, supplies, services, and property, plant and equipment entered into in the ordinary course of business. Such commitments are not in excess of current market prices.
 
Due to the proprietary nature of many of the Company’s materials and processes, certain supply contracts contain penalty provisions for early termination. The Company does not believe a material amount of penalties will be incurred under these contracts based upon historical experience and current expectations.
 
Other Contractual Obligations — The Company does not have material financial guarantees or other contractual commitments that are reasonably likely to adversely affect liquidity other than those discussed below under “Payments Due Under Contractual Obligations.”
 
Related Party Transactions — The Company does not have material related party transactions that affect the results of operations, cash flow or financial condition.
 
Payments Due Under Contractual Obligations
 
The Company’s future commitments at July 31, 2007, for long-term debt, operating lease obligations, purchase obligations, interest obligations and other obligations are as follows (dollars in thousands):
 
                                         
    Payments Due by Period  
          Less than
    1-3
    3-5
    More than
 
Contractual Obligations
  Total     1 Year     Years     Years     5 Years  
 
Long-Term Debt Obligations
  $ 500,019     $ 21,444     $ 71,433     $ 142,856     $ 264,286  
Operating Lease Obligations
    71,842       23,097       32,540       10,625       5,580  
Purchase Obligations(1)
    30,331       30,194       137       0       0  
Interest Obligations
    150,405       26,305       49,306       39,215       35,579  
Other Obligations(2)
    10,517       575       1,403       1,804       6,735  
                                         
Total
  $ 763,114     $ 101,615     $ 154,819     $ 194,500     $ 312,180  
                                         
 
 
(1) Purchase obligations include all open purchase orders as of July 31, 2007.
 
(2) Other obligations represent expected payments under the Company’s postretirement medical, dental, and vision plans as disclosed in Note 3 to the consolidated financial statements, under Item 8 of this report.
 
Inflation and Changing Prices
 
Essentially all of the Company’s revenue is derived from the sale of its products in competitive markets. Because prices are influenced by market conditions, it is not always possible to fully recover cost increases through pricing. Changes in product mix from year to year, timing differences in instituting price changes and the large amount of part numbers make it virtually impossible to accurately define the impact of inflation on profit margins.


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Critical Accounting Estimates
 
Income Taxes
 
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Changes in existing regulatory tax laws and rates may affect the Company’s ability to manage successfully regulatory matters around the world, and future business results may affect the amount of deferred tax liabilities or the valuation of deferred tax assets over time. The Company’s accounting for deferred tax consequences represents management’s best estimate of future events that can appropriately be reflected in the accounting estimates. Although the Company’s current estimates may be subject to change in the future, management does not believe such changes would result in a material period-to-period impact on the results of operations or the financial condition of the Company.
 
Goodwill and Intangible Assets
 
The allocation of purchase price for business combinations requires management estimates and judgment as to expectations for future cash flows of the acquired business and the allocation of those cash flows to identifiable intangible assets in determining the estimated fair value for purchase price allocation purposes. If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the financial statements could result in a possible impairment of the intangible assets and goodwill or require acceleration of the amortization expense of finite-lived intangible assets. In addition, SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill and other indefinite-lived intangible assets be tested annually for impairment. Changes in management’s estimates or judgments could result in an impairment charge, and such a charge could have an adverse effect on the Company’s financial condition and results of operations. To aid in establishing the value of goodwill and other intangible assets at the time of acquisition, Company policy requires that all acquisitions with a purchase price above $5 million must be evaluated by a professional appraisal company.
 
Reserves and Allowances
 
The Company has recorded reserves or allowances for inventory obsolescence, uncollectible accounts receivable, returns, credit memos, incurred but not reported medical claims, and income tax contingencies. These reserves require the use of estimates and judgment. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The Company believes that such estimates are made with consistent and appropriate methods. Actual results may differ from these estimates under different assumptions or conditions.
 
New Accounting Standards
 
The information required by this Item is provided in Note 1 of the Notes to Consolidated Financial Statements contained in Item 8 — Financial Statements and Supplementary Data.
 
Forward-Looking Statements
 
Brady believes that certain statements in this Form 10-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-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-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


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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 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 retain significant contracts and customers; future competition; 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; interruptions to sources of supply; environmental, health and safety compliance costs and liabilities; Brady’s ability to realize cost savings from operating initiatives; Brady’s ability to attract and retain key talent; difficulties associated with exports; risks associated with international operations; fluctuations in currency rates versus the US dollar; technology changes; potential write-offs of Brady’s substantial intangible assets; risks associated with obtaining governmental approvals and maintaining regulatory compliance for new and existing products; business interruptions due to implementing business systems; and numerous other matters of national, regional and global scale, including those of a political, economic, business, competitive and regulatory nature contained from time to time in 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 this Form 10-K. 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.
 
Risk Factors
 
Please see the information contained in Item 1A — Risk Factors.
 
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
 
The Company’s business operations give rise to market risk exposure due to changes in foreign exchange rates. To manage that risk effectively, the Company enters into hedging transactions, according to established guidelines and policies, that enable it to mitigate the adverse effects of this financial market risk.
 
The global nature of the Company’s business requires active participation in the foreign exchange markets. As a result of investments, production facilities and other operations on a global scale, the Company has assets, liabilities and cash flows in currencies other than the U.S. Dollar. The primary objective of the Company’s foreign-currency exchange risk management is to minimize the impact of currency movements on intercompany transactions and foreign raw-material imports. To achieve this objective, we hedge 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, Swedish Krona and Chinese Yuan currency. In the third quarter of fiscal 2006, we purchased a currency option to hedge against increases in the purchase price in U.S. dollar terms of Tradex, as the transaction was denominated in the Swedish Krona. A gain of approximately $1.5 million was recorded in fiscal 2006 due to this option.
 
The Company could be exposed to interest rate risk through its corporate borrowing activities. The objective of the Company’s interest rate risk management activities is to manage the levels of the Company’s fixed and floating interest rate exposure to be consistent with the Company’s preferred mix. The interest rate risk management program allows the Company to enter into approved interest rate derivatives if there is a desire to modify the Company’s exposure to interest rates. As of July 31, 2007, the Company had no interest rate derivatives.


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Item 8.   Financial Statements and Supplementary Data
 
BRADY CORPORATION & SUBSIDIARIES
 
INDEX TO FINANCIAL STATEMENTS
 
         
    Page
 
  II-16
Financial Statements:
   
  II-17
  II-18
  II-19
  II-20
  II-21


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
Brady Corporation
Milwaukee, WI
 
We have audited the accompanying consolidated balance sheets of Brady Corporation and subsidiaries (the “Company”) as of July 31, 2007 and 2006, and the related consolidated statements of income, stockholders’ investment, and cash flows for each of the three years in the period ended July 31, 2007. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Brady Corporation and subsidiaries at July 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of July 31, 2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 27, 2007, expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
/s/  Deloitte & Touche LLP
Milwaukee, WI
September 27, 2007


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BRADY CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
July 31, 2007 and 2006
 
                 
    2007     2006  
    (In thousands)  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 142,846     $ 113,008  
Short term investments
    19,200       11,500  
Accounts receivable, less allowance for losses ($9,109 and $6,390, respectively)
    239,569       187,907  
Inventories:
               
Finished products
    80,486       59,365  
Work-in-process
    21,309       12,850  
Raw materials and supplies
    37,983       37,702  
                 
Total inventories
    139,778       109,917  
Prepaid expenses and other current assets
    42,020       36,825  
                 
Total current assets
    583,413       459,157  
                 
Other assets:
               
Goodwill
    737,450       587,642  
Other intangibles assets
    149,761       134,111  
Deferred income taxes
    32,508       34,135  
Other
    21,111       10,235  
Property, plant and equipment:
               
Cost:
               
Land
    6,332       6,548  
Buildings and improvements
    90,688       78,418  
Machinery and equipment
    248,356       198,426  
Construction in progress
    18,107       12,098  
                 
      363,483       295,490  
Less accumulated depreciation
    188,869       155,584  
                 
Property, plant and equipment — net
    174,614       139,906  
                 
Total
  $ 1,698,857     $ 1,365,186  
                 
 
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
Current liabilities:
               
Accounts payable
  $ 91,596     $ 78,585  
Wages and amounts withheld from employees
    73,622       61,778  
Taxes, other than income taxes
    8,461       6,231  
Accrued income taxes
    24,677       25,243  
Other current liabilities
    60,254       46,763  
Short-term borrowings and current maturities on long-term obligations
    21,444       20  
                 
Total current liabilities
    280,054       218,620  
Long-term obligations, less current maturities
    478,575       350,018  
Other liabilities
    49,216       50,502  
                 
Total liabilities
    807,845       619,140  
                 
Stockholders’ investment:
               
Common stock:
               
Class A Nonvoting — Issued 50,586,524 and 50,481,743 shares, respectively (aggregate liquidation preference of $42,240 and $42,152 at July 31, 2007 and 2006, respectively)
    506       505  
Class B Voting — Issued and outstanding 3,538,628 shares
    35       35  
Additional paid-in capital
    266,203       258,922  
Earnings retained in the business
    540,238       460,991  
Treasury stock — 0 and 292,901 shares, respectively of Class A nonvoting common stock, at cost
          (10,865 )
Accumulated other comprehensive income
    83,376       35,696  
Other
    654       762  
                 
Total stockholders’ investment
    891,012       746,046  
                 
Total
  $ 1,698,857     $ 1,365,186  
                 
 
See notes to consolidated financial statements.


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BRADY CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME
Years Ended July 31, 2007, 2006 and 2005
 
                         
    2007     2006     2005  
    (In thousands, except per share amounts)  
 
Net sales
  $ 1,362,631     $ 1,018,436     $ 816,447  
Cost of products sold
    705,587       492,681       383,171  
                         
Gross margin
    657,044       525,755       433,276  
Operating expenses:
                       
Research and development
    35,954       30,443       25,078  
Selling, general and administrative
    449,103       338,796       285,746  
                         
Total operating expenses
    485,057       369,239       310,824  
                         
Operating income
    171,987       156,516       122,452  
Other income (expense):
                       
Investment and other income — net
    2,875       2,403       1,369  
Interest expense
    (22,934 )     (14,231 )     (8,403 )
                         
Net other expense
    (20,059 )     (11,828 )     (7,034 )
                         
Income before income taxes
    151,928       144,688       115,418  
Income taxes
    42,540       40,513       33,471  
                         
Net income
  $ 109,388     $ 104,175     $ 81,947  
                         
Net income per common share(1):
                       
Class A Nonvoting:
                       
Basic
  $ 2.03     $ 2.10     $ 1.67  
                         
Diluted
  $ 2.00     $ 2.07     $ 1.64  
                         
Dividends
  $ 0.56     $ 0.52     $ 0.44  
                         
Class B Voting:
                       
Basic
  $ 2.01     $ 2.09     $ 1.66  
                         
Diluted
  $ 1.98     $ 2.05     $ 1.63  
                         
Dividends
  $ 0.54     $ 0.50     $ 0.42  
                         
Weighted average Class A and Class B common shares outstanding(1)
                       
Basic
    53,907       49,494       48,967  
                         
Diluted
    54,741       50,385       49,859  
                         
 
 
(1) Adjusted for two-for-one stock split in the form of a 100% stock dividend, effective December 31, 2004
 
See notes to consolidated financial statements.


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BRADY CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ INVESTMENT
Years Ended JULY 31, 2007, 2006 AND 2005
 
                                                         
                Earnings
          Accumulated
             
          Additional
    Retained
          Other
          Total
 
    Common
    Paid-In
    in the
    Treasury
    Comprehensive
          Comprehensive
 
    Stock     Capital     Business     Stock     Income     Other     Income  
    (In thousands, except per share amounts)  
 
Balances at July 31, 2004
  $ 482     $ 72,625     $ 322,224     $ (1,074 )   $ 9,340     $ (282 )        
                                                         
Net income
                81,947                       $ 81,947  
Net currency translation adjustment and other
                            8,157             8,157  
                                                         
Total comprehensive income
                                                  $ 90,104  
                                                         
Issuance of 1,117,431 shares of Class A Common Stock under stock option plan
    11       15,722                                  
Other (Note 6)
                                  (768 )        
Tax benefit from exercise of stock options
          5,385                                  
Purchase of 16,030 shares of Class A Common Stock
                      (501 )                    
Stock-based compensation expense
          5,297                                  
Cash dividends on Common Stock:
                                                       
Class A — $.44 per share
                (19,793 )                          
Class B — $.42 per share
                (1,498 )                          
                                                         
Balances at July 31, 2005
  $ 493     $ 99,029     $ 382,880     $ (1,575 )   $ 17,497     $ (1,050 )        
                                                         
Net income
                104,175                       $ 104,175  
Net currency translation adjustment and other
                            18,199             18,199  
                                                         
Total comprehensive income
                                                  $ 122,374  
                                                         
Issuance of 4,600,000 shares of Class A Common Stock from equity offering
    46       157,699                                  
Issuance of 4,200 shares of Class A Common Stock under stock option plan
    1       (8,286 )           17,205                      
Other (Note 6)
                                  1,812          
Tax benefit from exercise of stock options
          4,912                                  
Purchase of 800,000 shares of Class A Common Stock
                      (26,495 )                    
Stock-based compensation expense
          5,568                                  
Cash dividends on Common Stock:
                                                       
Class A — $.52 per share
                (24,283 )                          
Class B — $.50 per share
                (1,781 )                          
                                                         
Balances at July 31, 2006
  $ 540     $ 258,922     $ 460,991     $ (10,865 )   $ 35,696     $ 762          
                                                         
Net income
                109,388                       $ 109,388  
Net currency translation adjustment and other
                            44,256             44,256  
                                                         
Total comprehensive income
                                                  $ 153,644  
                                                         
Issuance of 104,781 shares of Class A Common Stock under stock option plan
    1       (4,037 )           10,865                      
Other (Note 6)
          108                         (108 )        
Tax benefit from exercise of stock options and deferred compensation distributions
          4,303                                  
Stock-based compensation expense
          6,907                                  
Adjustment to adopt SFAS No. 158, net of tax of $1,551
                            3,424                
Cash dividends on Common Stock:
                                                       
Class A — $.56 per share
                (28,218 )                          
Class B — $.54 per share
                (1,923 )                          
                                                         
Balances at July 31, 2007
  $ 541     $ 266,203     $ 540,238     $     $ 83,376     $ 654          
                                                         
 
See notes to consolidated financial statements.
 
 
Adjusted for two-for-one stock split in the form of a 100% stock dividend, effective December 31, 2004.


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BRADY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended July 31, 2007, 2006 and 2005
 
                         
    2007     2006     2005  
    (Dollars in thousands)  
 
Operating activities:
                       
Net income
  $ 109,388     $ 104,175     $ 81,947  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization
    53,856       35,144       26,822  
Gain on foreign currency contract
          (1,516 )      
Income tax benefit from the exercise of stock options
                5,385  
Deferred income taxes
    70       (1,843 )     (2,653 )
Loss on sale of property, plant and equipment
    13       124       743  
Provision for losses on accounts receivable
    3,287       1,152       1,216  
Non-cash portion of stock-based compensation expense
    6,907       5,568       5,579  
Changes in operating assets and liabilities (net of effects of business acquisitions):
                       
Accounts receivable
    (20,308 )     (13,620 )     (7,132 )
Inventories
    (12,323 )     (16,961 )     (11,847 )
Prepaid expenses and other assets
    (13,307 )     (2,163 )     (3,572 )
Accounts payable and accrued liabilities
    8,058       10,421       8,827  
Income taxes
    (6,821 )     58       9,662  
Other liabilities
    7,198       (5,643 )     4,126  
                         
Net cash provided by operating activities
    136,018       114,896       119,103  
                         
Investing activities:
                       
Acquisitions of businesses, net of cash acquired
    (159,475 )     (351,331 )     (79,926 )
Payments of contingent consideration
    (10,906 )            
Purchases of short-term investments
    (68,100 )     (150,900 )     (50,025 )
Sales of short-term investments
    60,400       146,500       48,075  
Purchases of property, plant and equipment
    (51,940 )     (39,410 )     (21,920 )
Net settlement of foreign currency contract
          1,516        
Proceeds from sale of property, plant and equipment
    2,166       546       390  
Other
    (9,184 )     (2,203 )     (1,686 )
                         
Net cash used in investing activities
    (237,039 )     (395,282 )     (105,092 )
                         
Financing activities:
                       
Payment of dividends
    (30,141 )     (26,064 )     (21,291 )
Proceeds from issuance of common stock
    6,829       166,664       15,734  
Principal payments on debt
    (110,870 )     (417,601 )     (85,604 )
Proceeds from issuance of debt
    259,300       615,730       83,000  
Purchase of treasury stock
          (24,683 )     (1,551 )
Income tax benefit from the exercise of stock options and deferred compensation distributions
    4,303       4,912        
                         
Net cash provided by (used in) financing activities
    129,421       318,958       (9,712 )
                         
Effect of exchange rate changes on cash
    1,438       1,466       (117 )
                         
Net increase in cash and cash equivalents
    29,838       40,038       4,182  
Cash and cash equivalents, beginning of year
    113,008       72,970       68,788  
                         
Cash and cash equivalents, end of year
  $ 142,846     $ 113,008     $ 72,970  
                         
Supplemental disclosure of cash flow information:
                       
Cash paid during the year for:
                       
Interest, net of capitalized interest
  $ 19,842     $ 8,991     $ 7,836  
Income taxes, net of refunds
    49,233       37,661       19,358  
Acquisitions:
                       
Fair value of assets acquired, net of cash
  $ 87,398     $ 167,900     $ 60,193  
Liabilities assumed
    (33,248 )     (63,667 )     (35,113 )
Goodwill
    105,325       247,098       54,846  
                         
Net cash paid for acquisitions
  $ 159,475     $ 351,331     $ 79,926  
                         
 
See notes to consolidated financial statements.


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BRADY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 2007, 2006 and 2005
(In thousands except share and per share amounts)
 
1.   Summary of Significant Accounting Policies
 
Nature of Operations — Brady Corporation (“Brady” or the “Company”) is an international manufacturer and marketer of identification solutions and specialty products which identify and protect premises, products and people. Brady’s core capabilities in manufacturing, printing systems, precision engineering and materials expertise make it a leading supplier to the Maintenance, Repair and Operations (“MRO”) market and to the Original Equipment Manufacturing (“OEM”) market.
 
Principles of Consolidation — The accompanying consolidated financial statements include the accounts of Brady Corporation and its subsidiaries (the “Company”), all of which are wholly-owned, with the exception of one subsidiary where a third party retains an insignificant investment. All significant intercompany accounts and transactions have been eliminated in consolidation.
 
Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Stock Dividend — All previously presented earnings per share, share amounts, and stock price data have been adjusted for a two-for-one stock split in the form of a 100% stock dividend, effective December 31, 2004.
 
Fair Value of Financial Instruments — The Company believes the carrying amount of its financial instruments (cash and cash equivalents, accounts receivable and accounts payable) is a reasonable estimate of the fair value of these instruments due to their short-term nature.
 
Cash Equivalents — The Company considers all highly liquid investments with maturities of three months or less when acquired to be cash equivalents, which are recorded at cost.
 
Available-for-Sale Securities — The Company has invested in certain marketable securities that are categorized as available-for-sale. These investments consist of auction-rate securities and have been classified as short-term investments available-for-sale for all periods presented. The amount of available-for-sale securities included in the consolidated balance sheets as of July 31, 2007 and July 31, 2006 was $19,200 and $11,500, respectively, and consists solely of auction rate securities.
 
The auction rate securities held by the Company are municipal bonds with either perpetual or intermediate to long-term maturities. The holding period of each bond is either 7, 28, 35, or 49 days and is determined when the security is issued. A Dutch auction takes place at the end of each holding period at which time the security can be sold or held. The lowest rate that sells all of the securities is the set rate for the subsequent holding period. If there are not sufficient orders to place all of the available securities, the auction is said to have “failed” and liquidity will be denied for the subsequent holding period.
 
The carrying value of the available-for-sale securities approximates the aggregate fair value of the securities and there are no unrealized gains or losses on the available-for-sale securities. There were no realized gains or losses on available-for-sales securities during the periods presented.
 
Inventories — Inventories are stated at the lower of cost or market. Cost has been determined using the last-in, first-out (“LIFO”) method for certain domestic inventories (approximately 27% of total inventories at July 31, 2007 and approximately 30% of total inventories at July 31, 2006) and the first-in, first-out (“FIFO”) or average cost methods for other inventories. Had all domestic inventories been accounted for on a FIFO basis instead of on a LIFO basis, the carrying value would have increased by $8,228 and $8,863 at July 31, 2007 and 2006, respectively.


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Depreciation — The cost of buildings and improvements and machinery and equipment is being depreciated over their estimated useful lives using primarily the straight-line method for financial reporting purposes. The estimated useful lives range from 3 to 33 years as shown below.
 
     
Asset Category
  Range of Useful Lives
 
Buildings and improvements
  10 to 33 Years
Machinery and equipment
  3 to 10 Years
 
Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life of the asset.
 
Goodwill and other Intangible Assets — The cost of intangible assets with determinable useful lives is amortized to reflect the pattern of economic benefits consumed on a straight-line basis, over the estimated periods benefited. Intangible assets with indefinite useful lives and goodwill are not subjected to amortization. These assets are assessed for impairment annually and when deemed necessary.
 
Changes in the carrying amount of goodwill for the years ended July 31, 2007 and 2006, are as follows:
 
                                 
    Americas     Europe     Asia-Pacific     Total  
 
Balance as of July 31, 2005
  $ 226,843     $ 73,544     $ 31,982     $ 332,369  
Goodwill acquired during the period
    95,185       33,892       118,021       247,098  
Adjustments for prior year acquisitions
    0       (341 )     (154 )     (495 )
Translation adjustments
    731       4,697       3,242       8,670  
                                 
Balance as of July 31, 2006
  $ 322,759     $ 111,792     $ 153,091     $ 587,642  
                                 
Goodwill acquired during the period
    76,944       26,696       1,685       105,325  
Adjustments for prior year acquisitions
    2,161       15,005       4,239       21,405  
Translation adjustments
    2,210       10,206       10,662       23,078  
                                 
Balance as of July 31, 2007
  $ 404,074     $ 163,699     $ 169,677     $ 737,450  
                                 
 
The following acquisitions completed in fiscal 2007 increased goodwill during the year ended July 31, 2007 by the following amounts:
 
             
   
Segment
  Goodwill
 
Comprehensive Identification Products, Inc. (“CIPI”)
  Americas, Europe and Asia-Pacific   $ 20,451  
Precision Converters, L.P. (“Precision Converters”)
  Americas     9,665  
Scafftag, Ltd., Safetrak, Ltd. and Scafftag Pty., Ltd. (collectively “Scafftag”)
  Americas, Europe and Asia-Pacific     7,030  
Asterisco Artes Graficas Ltda. (“Asterisco”)
  Americas     8,508  
Modernotecnica SpA (“Moderno”)
  Europe     11,285  
Clement Communications, Inc. (“Clement”)
  Americas     12,960  
Sorbent Products Co., Inc. (“SPC”)
  Americas, Europe and Asia-Pacific     35,426  
             
Total
      $ 105,325  
             
 
Goodwill also increased $21,405 during the year ended July 31, 2007, as a result of adjustments to the allocation of the purchase price for acquisitions completed in fiscal 2006 and the recording of $1,577 for the contingent payment due to the previous owners of QDP Thailand Co., Ltd. (“QDPT”) and $1,000 for the contingent payment due to the previous owners of STOPware, Inc. (“Stopware”), which were both acquired in fiscal 2006 (see Note 2 for more information). The largest components of the increase were as a result of adjustments to the


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
allocation of purchase price related to Tradex Converting AB (“Tradex”) and Daewon Industry Corporation (“Daewon”), which added $14,843 and $2,940, respectively.
 
Of the $14,843 increase in goodwill related to the allocation of the purchase price for Tradex, $6,788 of the increase was due to the accrual for planned cost reduction activities contemplated at the date of the acquisition. The accrual consists of $2,639 for severance and other employee termination costs, $2,885 for contract termination and facility exit costs, and $1,264 for changes in the valuation of fixed assets. As of July 31, 2007, the remaining liability from such charges was approximately $2,702.
 
Of the $2,940 increase in goodwill related to the allocation of the purchase price for Daewon, $1,829 of the increase was due to the finalization and payment of the purchase price adjustment owed to the former owners of Daewon and $1,013 of the increase was due to the accrual for planned cost reduction activities contemplated at the date of the acquisition. The accrual consists of $289 for severance and other employee termination costs, $277 for contract termination and facility exit costs, and $447 for changes in the valuation of assets. As of July 31, 2007, the remaining liability from such charges was approximately $309.
 
The remaining $23,078 increase to goodwill during fiscal 2007 was attributable to the effects of foreign currency translation.
 
The following acquisitions completed in fiscal 2006 increased goodwill during the year ended July 31, 2006 by the following amounts:
 
             
   
Segment
  Goodwill
 
Stopware
  Americas   $ 2,506  
TruMed Technologies, Inc. (“TruMed”)
  Americas     4,134  
J.A.M. Plastics Inc. (“J.A.M.”)
  Americas     9,116  
Personnel Concepts
  Americas     48,154  
IDenticard Systems, Inc. (“IDenticard”)
  Americas     25,192  
Identicam Systems (“Identicam”)
  Americas     6,001  
Texit Danmark AS and Texit Norge AS (collectively “Texit”)
  Europe     6,043  
QDPT
  Asia-Pacific     2,298  
Daewon
  Asia-Pacific     18,005  
Accidental Health & Safety Pty. Ltd. and Trafalgar First Aid Pty. Ltd. (collectively “Accidental Health”)
  Asia-Pacific     6,895  
Carroll Australasia Pty. Ltd. (“Carroll”)
  Asia-Pacific     12,343  
Tradex
  Americas, Europe and Asia-Pacific     106,411  
             
Total
      $ 247,098  
             
 
Goodwill also decreased $495 during the year ended July 31, 2006, as a result of adjustments to the allocation of the purchase price of Signs and Labels Ltd. (“Signs & Labels”), in Europe which was acquired on June 24, 2005 and to Technology Print Supplies, Ltd. and its associate, Technology Supply Media Co., Ltd. (“TPS”) in Thailand, which were acquired on July 29, 2005. The remaining $8,670 increase to goodwill during fiscal 2006 was attributable to the effects of foreign currency translation.


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Other intangible assets include patents, trademarks, customer relationships, purchased software, non-compete agreements and other intangible assets with finite lives being amortized in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” The net book value of these assets was as follows:
 
                                                                 
    July 31, 2007     July 31, 2006  
    Weighted
                      Weighted
                   
    Average
    Gross
                Average
    Gross
             
    Amortization
    Carrying
    Accumulated
    Net Book
    Amortization
    Carrying
    Accumulated
    Net Book
 
    Period (Years)     Amount     Amortization     Value     Period (Years)     Amount     Amortization     Value  
 
Amortized other intangible assets:
                                                               
Patents
    15     $ 8,392     $ (5,913 )   $ 2,479       15     $ 7,885     $ (5,134 )   $ 2,751  
Trademarks and other
    5       4,510       (3,250 )     1,260       6       3,328       (2,106 )     1,222  
Customer relationships
    7       134,125       (36,674 )     97,451       7       109,955       (17,693 )     92,262  
Non-compete agreements
    4       11,364       (6,294 )     5,070       4       9,757       (4,448 )     5,309  
Other
    5       3,297       (2,554 )     743       5       3,288       (1,887 )     1,401  
Unamortized other intangible assets:
                                                               
Trademarks
    N/A       42,758             42,758       N/A       31,166             31,166  
                                                                 
Total
          $ 204,446     $ (54,685 )   $ 149,761             $ 165,379     $ (31,268 )   $ 134,111  
                                                                 
 
The acquisitions completed in fiscal 2007 (see Note 2 for more information) attributed to the increases in each of the categories of other intangible assets listed above. The largest components of the increase in customer relationships relates to the acquisitions of CIPI, Precision Converters, Scafftag, Asterisco, Moderno, Clement, and SPC which added $5,609, $1,415, $2,767, $5,133, $5,913, $2,200 and $860, respectively. These assets will be amortized over a weighted average amortization period of 6.6 years. The increase in unamortized trademarks primarily relates to the acquisitions of Scafftag, Clement and SPC, which added $988, $1,000 and $8,998, respectively.
 
The value of goodwill and other intangible assets in the consolidated balance sheet at July 31, 2007 differs from the value assigned to them in the allocation of purchase price due to the effect of fluctuations in the exchange rates used to translate financial statements into the United States Dollar between the date of acquisition and July 31, 2007.
 
Amortization expense of intangible assets during fiscal 2007, 2006, and 2005 was $21,882, $13,633, and $7,935, respectively. The amortization over each of the next five fiscal years is projected to be $23,286, $22,423, $21,267, $17,906 and $8,996 for the years ending July 31, 2008, 2009, 2010, 2011 and 2012, respectively.
 
Impairment of Long-Lived and Other Intangible Assets — The Company evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived and other finite-lived intangible assets may warrant revision or that the remaining balance of an asset may not be recoverable. The measurement of possible impairment is based on fair value of the assets generally estimated by the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis. If an impairment is determined to exist, any related impairment loss is calculated based on the fair value of the asset. Based on the assessments completed in fiscal 2007, there have been no indications of impairment in the Company’s long-lived and other intangible assets.


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Impairment of Goodwill — The Company evaluates goodwill under SFAS No. 142, which addresses the financial accounting and reporting standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill not be amortized, but instead be tested for impairment on at least an annual basis.
 
The Company performed its annual assessments in the fourth quarter of the fiscal year. The assessments included comparing the carrying amount of net assets, including goodwill, of each reporting unit to its respective fair value as of the date of the assessment. Fair value was estimated based upon discounted cash flow analyses. Because the estimated fair value of each of the Company’s reporting units exceeded its carrying amount, management believes that no impairment existed as of the date of the latest assessment. No indications of impairment have been identified between the date of the latest assessment and July 31, 2007.
 
Catalog Costs — Direct response catalog and mailer costs are primarily capitalized and amortized over the estimated useful lives of the publications (generally less than one year). Non-direct response catalog costs are recorded as prepaid supplies and recorded as advertising expense as they are consumed (less than one year). At July 31, 2007 and 2006, $15,292 and $14,331, respectively, of prepaid catalog costs were included in prepaid expenses and other current assets.
 
Revenue Recognition — Revenue is recognized when it is both earned and realized or realizable. The Company’s policy is to recognize revenue when title to the product, ownership and risk of loss have transferred to the customer, persuasive evidence of an arrangement exits and collection of the sales proceeds is reasonably assured, all of which generally occur upon shipment of goods to customers. The majority of the Company’s revenue relates to the sale of inventory to customers, and revenue is recognized when title and the risks and rewards of ownership pass to the customer. Given the nature of the Company’s business and the applicable rules guiding revenue recognition, the Company’s revenue recognition practices do not contain estimates that materially affect the results of operations, with the exception of estimated returns. The Company provides for an allowance for estimated product returns, which is recognized as a deduction from sales at the time of the sale.
 
Sales Incentives — In accordance with the Financial Accounting Standard Board’s Emerging Issues Task Force Issue (“EITF”) No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Product,” the Company accounts for cash consideration (such as sales incentives and cash discounts) given to its customers or resellers as a reduction of revenue rather than an operating expense.
 
Shipping and Handling Fees and Costs — The Company accounts for shipping and handling fees and costs in accordance with EITF Issue No. 00-10, “Accounting for Shipping and Handling Fees and Costs.” Under EITF No. 00-10 amounts billed to a customer in a sale transaction related to shipping costs are reported as net sales and the related costs incurred for shipping are reported as cost of goods sold.
 
Advertising Costs — Advertising costs are expensed as incurred, except catalog costs as outlined above. Advertising expense for the years ended July 31, 2007, 2006 and 2005 were $75,452, $57,253 and $50,405, respectively.
 
Stock Based Compensation — Effective August 1, 2005, the Company adopted SFAS No. 123(R), “Shared Based Payment.” In accordance with this standard, the Company recognizes the compensation cost of all share-based awards using the grant-date fair value of those awards (the “fair-value-based” method). The expense is recognized on a straight-line basis over the vesting period of the award. Total stock compensation expense recognized by the Company during the years ended July 31, 2007 and 2006 was $6,907 ($4,213 net of taxes) and $5,568 ($3,396 net of taxes), respectively. As of July 31, 2007, total unrecognized compensation cost related to share-based compensation awards was $12,762, net of estimated forfeitures, which the Company expects to recognize over a weighted-average period of 1.9 years.


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Company adopted the fair value recognition provisions of SFAS No. 123(R) using the modified-prospective-transition method. Under that transition method, compensation cost recognized during fiscal 2007 and 2006 included: (a) compensation costs for all share-based payments granted prior to, but not yet vested as of August 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to August 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Prior periods are not restated under this method of adoption.
 
Prior to August 1, 2005, the Company accounted for employee stock-based compensation under the intrinsic value method prescribed by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees.” Under APB No. 25, no employee stock option based compensation expense was recorded in the income statement prior to August 1, 2005 for the service-based options. For performance-based options, the Company recorded compensation expense for changes in the market value of the underlying common stock under APB No. 25. The compensation cost for the fiscal year ended July 31, 2005 included expense for both performance stock options and restricted stock.
 
If the Company had elected to recognize compensation cost for the stock option plans based on the fair value at the grant dates for awards under those plans, consistent with the method prescribed by SFAS No. 123(R), net income and net income per common share for the fiscal year ended July 31, 2005 would have been changed to the pro-forma amounts indicated below:
 
                 
Net income:
               
As reported
  $ 81,947          
Stock-based compensation expense recorded, net of tax effect
    3,350          
Pro-forma expense, net of tax effect
    (3,344 )        
                 
Pro-forma net income, net of tax effect
  $ 81,953          
                 
Net income per Class A Common Share:
               
Basic:
               
As reported
  $ 1.67          
Pro-forma adjustments
             
Pro-forma net income per share
    1.67          
Diluted:
               
As reported
  $ 1.64          
Pro-forma adjustments
             
Pro-forma net income per share
    1.64          
Net income per Class B Common Share:
               
Basic:
               
As reported
  $ 1.66          
Pro-forma adjustments
             
Pro-forma net income per share
    1.66          
Diluted:
               
As reported
  $ 1.63          
Pro-forma adjustments
             
Pro-forma net income per share
    1.63          


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The fair value of stock options used to compute pro-forma net income and net income per common share disclosure is the estimated present value at grant date using the Black-Scholes option-pricing model with weighted average assumptions and the resulting estimated fair value for fiscal year 2005 as follows:
 
         
Risk-free interest rate
    3.1 %
Expected volatility
    31.1 %
Dividend yield
    1.9 %
Expected option life
    4.5 years  
Weighted average estimated fair value at grant date
    $7.04  
 
The Company has estimated the fair value of its performance-based and service-based option awards granted after August 1, 2005 using the Black-Scholes option-pricing model. The weighted-average assumptions used in the Black-Scholes valuation model are reflected in the following table:
 
                                 
    2007     2006  
    Performance-Based
    Service-Based
    Performance-Based
    Service-Based
 
Black-Scholes Option Valuation Assumptions
  Options     Options     Options     Options  
 
Expected term (in years)
    6.57       6.07       3.39       5.72  
Expected volatility
    34.66 %     33.99 %     31.10 %     34.54 %
Expected dividend yield
    1.51 %     1.46 %     1.50 %     1.52 %
Risk-free interest rate
    4.90 %     4.52 %     4.09 %     4.53 %
Weighted-average market value of underlying stock at grant date
  $ 33.32     $ 38.17     $ 33.89     $ 37.62  
Weighted-average exercise price
  $ 33.32     $ 38.17     $ 33.89     $ 37.62  
Weighted-average fair value of options granted
  $ 12.57     $ 13.56     $ 8.34     $ 13.11  
 
The Company uses historical data regarding stock option exercise behaviors to estimate the expected term of options granted based on the period of time that options granted are expected to be outstanding. Expected volatilities are based on the historical volatility of the Company’s stock. The expected dividend yield is based on the Company’s historical dividend payments and historical yield. The risk-free interest rate is based on the U.S. Treasury yield curve in effect on the grant date for the length of time corresponding to the expected term of the option. The market value is obtained by taking the average of the high and the low stock price on the date of grant.
 
In accordance with the adoption of SFAS No. 123(R), the Company has classified the income tax benefit from the exercise of stock options subsequent to adoption as a financing cash inflow on the accompanying consolidated statements of cash flows. Prior to this adoption, this tax benefit was recorded in cash flows from operations.
 
Research and Development — Amounts expended for research and development are expensed as incurred.
 
Other comprehensive income — Other comprehensive income consists of foreign currency translation adjustments, net unrealized gains and losses from cash flow hedges and other investments, the unamortized gain on the post-retirement medical, dental and vision plan and their related tax effects. The components of accumulated other comprehensive income were as follows:
 
                 
    July 31, 2007     July 31, 2006  
 
Unrealized gain (loss) on cash flow hedges and securities in deferred compensation plans, net of tax of $93 and $35, respectively
  $ 145     $ (55 )
Unamortized gain on post-retirement medical, dental and vision plan, net of $1,551 tax
    3,424        
Cumulative translation adjustments
    79,807       35,751  
                 
Accumulated other comprehensive income
  $ 83,376     $ 35,696  
                 


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Foreign Currency Translation — Foreign currency assets and liabilities are translated into United States dollars at end of period rates of exchange, and income and expense accounts are translated at the weighted average rates of exchange for the period. Resulting translation adjustments are included in other comprehensive income.
 
Income Taxes — The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
 
Risk Management Activities — The Company is exposed to market risk, such as changes in interest rates and currency exchange rates. The Company does not hold or issue derivative financial instruments for trading purposes.
 
Currency Rate Hedging — The primary objectives of the foreign exchange risk management activities are to understand and mitigate the impact of potential foreign exchange fluctuations on the Company’s financial results and its economic well-being. While the Company’s risk management objectives and strategies will be driven from an economic perspective, the Company will attempt, where possible and practical, to ensure that the hedging strategies it engages in can be treated as “hedges” from an accounting perspective or otherwise result in accounting treatment where the earnings effect of the hedging instrument provides substantial offset (in the same period) to the earnings effect of the hedged item. Generally, these risk management transactions will involve the use of foreign currency derivatives to protect against exposure resulting from intercompany sales and identified inventory or other asset purchases.
 
The Company primarily utilizes forward exchange contracts with maturities of less than 12 months, which qualify as cash flow hedges. These are intended to offset the effect of exchange rate fluctuations on forecasted sales, inventory purchases and intercompany charges. The fair value of these instruments at July 31, 2007 and 2006 was $(421) and $(355), respectively.
 
Hedge effectiveness is determined by how closely the changes in the fair value of the hedging instrument offset the changes in the fair value or cash flows of the hedged item. Hedge accounting is permitted only if the hedging relationship is expected to be highly effective at the inception of the hedge and on an on-going basis. Any ineffective portions are to be recognized in earnings immediately as a component of investment and other income. The amount of hedge ineffectiveness was not significant for the years ended July 31, 2007, 2006 and 2005.
 
New Accounting Standards — In June 2006, the Financial Accounting Standards Board (“FASB”) issued FIN 48, “Accounting for Uncertainty in Income Taxes.” This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This interpretation establishes a threshold condition that a tax position must meet for any part of the benefit of that position to be recognized in the financial statements. This Interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company is in the process of completing the process of evaluating the impact that will result from adopting FIN 48 and therefore is unable to disclose the impact that adopting FIN 48 will have on its financial position and results of operations when such statement is adopted.
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement provides guidance on how to measure the fair value of assets and liabilities utilizing a fair value hierarchy to classify the sources of information used in the measurement calculation. SFAS No. 157 also provides new disclosure rules for assets and liabilities measured at fair value based on their level in the fair value hierarchy. This new statement will


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
be effective for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the impact that will result from adopting SFAS No. 157 and therefore is unable to disclose the impact from adopting SFAS No. 157 will have on its financial position and results of operations when such statement is adopted.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement permits entities to choose to use the fair value option to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting. This new statement will be effective for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the impact that will result from adopting SFAS No. 159 and therefore is unable to disclose the impact from adopting SFAS No. 159 will have on its financial position and results of operations when such statement is adopted.
 
2.   Acquisitions of Businesses
 
The Company completed seven business acquisitions during the fiscal year ended July 31, 2007, eleven business acquisitions during the fiscal year ended July 31, 2006 and four acquisitions during the fiscal year ended July 31, 2005. All of these transactions were accounted for using the purchase method of accounting; therefore, the results of operations are included in the accompanying consolidated financial statements only since their acquisition dates. The Company is continuing to evaluate the initial purchase price allocations for the acquisitions completed during the fiscal year ended July 31, 2007, and will adjust the allocations as additional information relative to the fair values of assets and liabilities of the acquired businesses become known.
 
Fiscal 2007
 
The Company acquired the following companies in fiscal 2007 for a total combined purchase price, net of cash acquired, of $159,475. A brief description of each company acquired during the year is included below:
 
  •  CIPI is headquartered in Burlington, Massachusetts, with operations in Hong Kong, China and the Netherlands. CIPI is a market leader in badging accessories used to identify and track employees and visitors in a variety of settings including businesses, healthcare facilities, special events and government buildings. CIPI was acquired in August 2006.
 
  •  Precision Converters is located in Dallas, Texas and is a supplier of die-cut products to the medical market with a specific focus on disposable, advanced wound-care products. Precision Converters was acquired in October 2006.
 
  •  Scafftag is located in Barry, Wales, U.K., with operations in Australia and in the United States and a sales office in the United Arab Emirates. Scafftag is an industry leader in safety identification and facility management products in the U.K., specializing in products that help companies meet legislative requirements for safety standards in the oil and gas, construction and scaffolding industries. Scafftag was acquired in December 2006.
 
  •  Asterisco is located in Sao Paulo, Brazil and is a leading manufacturer of industrial high-performance labels in Brazil, specializing in custom labels printed on film materials for the electronics, automotive, pharmaceutical and other industries. Asterisco was acquired in December 2006.
 
  •  Moderno is located in Milan, Italy and is a wire-identification manufacturer serving the Maintenance, Repair and Operations market with products used primarily in the electrical industry. Moderno was acquired in December 2006.


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
  •  Clement is located in Concordville, Pennsylvania and is a direct marketer of posters, newsletters, guides and handbooks that address safety, quality, teamwork, sales employment practices, customer service and OSHA regulations. Clement was acquired in February 2007.
 
  •  SPC is headquartered in Somerset, New Jersey, with operations in Belgium and Hong Kong. SPC is a leading manufacturer and marketer of synthetic sorbent materials used in a variety of industrial maintenance and environmental applications for spill clean-up, containment and control. SPC was acquired in April 2007.
 
The purchase agreements for Scafftag and Asterisco each include provisions for contingent payments based upon meeting certain performance conditions over a period of time subsequent to the acquisition. The total maximum contingent payments of $5.2 million have not been accrued as liabilities on the accompanying consolidated financial statements as the payments are based on attaining certain financial results which have not been achieved as of July 31, 2007. Approximately $4.9 million of the contingency related to the Asterisco acquisition has been placed in an escrow account in compliance with the terms of the purchase agreement. This cash outflow has been recorded in other long-term assets on the accompanying consolidated balance sheets as of July 31, 2007 and in other investing activities on the accompanying consolidated statements of cash flows for the fiscal year ended July 31, 2007. The purchase agreement of Asterisco also includes a holdback provision of approximately $2.3 million that has been recorded as a liability in the accompanying consolidated financial statements at July 31, 2007.
 
The allocation of the purchase price of each company acquired during fiscal 2007 is preliminary pending the final valuation of intangible assets as well as certain tangible assets and liabilities. The following table summarizes the combined estimated fair values of the assets acquired and liabilities assumed at the date of the acquisitions.
 
         
Current assets
  $ 38,148  
Property, plant & equipment
    12,158  
Goodwill
    105,325  
Customer relationships
    23,897  
Trademarks
    11,232  
Non-compete agreements
    967  
Other intangible assets
    996  
         
Total assets acquired
    192,723  
Liabilities assumed
    33,248  
         
Net assets acquired
  $ 159,475  
         
 
Of the $105,325 allocated to goodwill, $72,134 is expected to be deductible for tax purposes based on preliminary analysis.
 
The fiscal 2007 acquisitions were determined to be immaterial individually and in the aggregate, so no pro forma disclosures were required.
 
Fiscal 2006
 
The Company acquired the following companies in fiscal 2006 for a total combined purchase price, net of cash acquired, of $351,331. A brief description of each company acquired during the year is included below:
 
  •  Stopware is located in San Jose, California and is a manufacturer of visitor-badging and lobby-security software used to identify and track visitors. Stopware was acquired in August 2005.
 
  •  Texit is a manufacturer and distributor of wire markers and cable-management products headquartered in Odense, Denmark, with operations in Alesund, Norway. Texit was acquired in September 2005.


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
  •  TruMed is a converter of disposable products and components for manufacturers in the medical device, diagnostic, personal care and industrial markets and is located in Burnsville, Minnesota. TruMed was acquired in October 2005.
 
  •  QDPT was formerly located in Wangnoi, Ayutthaya, Thailand and designs and manufactures high-precision components for the electronic, medical and automotive industries, specializing in precision laminating, stamping and contract assembly. QDPT was acquired in October 2005. In fiscal 2007, QDPT combined its operations with TPS in a facility in Klongluang, Pathumthani, Thailand.
 
  •  J.A.M. was formerly located in Anaheim, California and specializes in the sale and manufacture of security-related accessory products including patented badge holders, lanyards and retractable badge reels. J.A.M. was acquired in December 2005. In fiscal 2007, the operations of J.A.M. were merged with CIPI.
 
  •  Personnel Concepts is located in Pomona, California and is a direct marketer of labor-law compliance posters and related products. Personnel Concepts also offers consultative expertise on required communication of federal and state minimum wages, HIPAA privacy regulations, and EEO compliance, among other regulatory areas. Personnel Concepts was acquired in January 2006.
 
  •  IDenticard is located in Lancaster, Pennsylvania and its affiliate Identicam is located in Markham, Ontario. The companies are market leaders in personal identification, access control and consumable identification badges. IDenticard and Identicam were acquired in February 2006.
 
  •  Accidental Health was formerly located in Glendenning, New South Wales, Australia and is a supplier and distributor of customized first-aid kits, related safety products and signage for commercial enterprises. Accidental Health was acquired in March 2006. In fiscal 2007, Accidental Health combined its operations with Brady Australia Pty. Ltd. in Sydney, Australia.
 
  •  Tradex is headquarterd in Kungalv, Sweden with operations in Sweden, China, Korea, Mexico, the United States, Brazil, and Taiwan. Tradex is a leading manufacturer and supplier of pressure sensitive, die-cut adhesive components for the mobile handset and electronics industries. Tradex was acquired in May 2006. In fiscal 2007, the operations in Suzhou, China were closed.
 
  •  Carroll is located in Sydney, New South Wales, Australia and is a supplier and distributor of identification products for the electrical industry, with a complete line of wiring accessory products including prepared wire and cable markers, termination and connection supplies, wire-bundling materials and electrical circuit protection products. Carroll also markets to the automotive and marine markets. Carroll was acquired in June 2006.
 
  •  Daewon is based in Seoul, South Korea with additional operations in Gumi, South Korea and former operations in Suzhou, China. Daewon is a manufacturer and supplier of pressure sensitive, die-cut adhesive components for the mobile handset and electronics industry and was acquired in July 2006. In fiscal 2007, the operations in Suzhou, China were closed.


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
The following table summarizes the combined estimated fair values of the assets acquired and liabilities assumed at the date of the acquisitions.
 
         
Current assets
  $ 72,882  
Property, plant & equipment
    22,159  
Goodwill
    247,098  
Customer relationships
    56,538  
Trademarks
    10,619  
Non-compete agreements
    3,206  
Purchased software
    378  
Patents
    610  
Other intangible assets
    1,508  
         
Total assets acquired
    414,998  
Liabilities assumed
    63,667  
         
         
Net assets acquired
  $ 351,331  
         
 
Of the $247,098 allocated to goodwill, $26,209 is expected to be deductible for tax purposes based on preliminary analysis.
 
The purchase agreements for Texit, QDPT, and Stopware each included provisions for contingent payments based upon meeting certain performance conditions over a period of time subsequent to the acquisition. In fiscal 2006 and 2007, $1,800 and $2,577, respectively, of the conditions were met and recorded in goodwill. Payments of $3,377 were made during fiscal 2007 to satisfy the contingent payment requirements. The remaining $1,000 liability will be paid in fiscal 2008. The purchase agreements for QDPT, Stopware and Daewon included holdback provisions of $310, $200 and $4,350, respectively. The holdback provision for QDPT was paid in fiscal 2007 and $4,550 remains as a liability in the accompanying consolidated financial statements for Stopware and Daewon as of July 31, 2007. The holdback provision for Stopware was paid in August 2007.


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following unaudited pro forma results of operations of the Company for the fiscal years ended July 31, 2006 and 2005, respectively, give effect to all acquisitions completed since August 1, 2005 as listed above as though the transactions had occurred on August 1, 2004.
 
                 
    Fiscal Year Ended July 31,  
    2006     2005  
 
Net sales
               
As reported
  $ 1,018,436     $ 816,447  
Pro forma
    1,189,545       1,040,327  
Net income
               
As reported
  $ 104,175     $ 81,947  
Pro forma
    105,883       84,171  
Per Class A Nonvoting Common Share:
               
Basic earnings per share
               
As reported
  $ 2.10     $ 1.67  
Pro forma
    2.14       1.72  
Diluted earnings per share
               
As reported
  $ 2.07     $ 1.64  
Pro forma
    2.10       1.69  
Per Class B Voting Common Share:
               
Basic earnings per share
               
As reported
  $ 2.09     $ 1.66  
Pro forma
    2.12       1.70  
Diluted earnings per share
               
As reported
  $ 2.05     $ 1.63  
Pro forma
    2.09       1.67  
 
These unaudited pro-forma results have been prepared for comparative purposes only and primarily include adjustments for amortization arising from the valuation of intangible assets, interest expense on debt issued in connection with the acquisitions, and the related income tax adjustments. The pro-forma information is not necessarily indicative of the results that would have occurred had the acquisitions occurred at the beginning of the periods presented, nor is it necessarily indicative of future results.
 
Fiscal 2005
 
In August 2004, the Company acquired ID Technologies, a Singapore based manufacturer and supplier of pressure sensitive die-cut components and labeling products. The purchase price was approximately $42,800 in cash and included a holdback amount of $6,500, which was paid in August 2006. The holdback is recorded in other liabilities in the accompanying consolidated balance sheets at July 31, 2006. Interest was imputed on the holdback at a rate of 4.9% per year. The agreement also provided for a contingent payment of no more than $2,500 if ID Technologies met certain financial targets for the fiscal year ended July 31, 2005. As of July 31, 2005, the financial targets had been met and the corresponding liability was reflected in the consolidated financial statements at the maximum payment amount and was paid to the sellers in fiscal 2006. Of the purchase price, $25,926 was assigned to goodwill and $16,017 was assigned to other intangible assets in the purchase price allocation. The allocation of these intangible assets included approximately $13,500 for customer relationships, $2,300 for non-compete agreements, and $217 of other intangible assets. There is no remaining goodwill expected to be deductible for tax purposes.


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
In February 2005, the Company acquired Electromark, a manufacturer and supplier of safety and facility identification products to the utility industry, headquartered in Wolcott, New York. The purchase price was approximately $15,100 in cash. Of the purchase price, a total of $3,509 was assigned to intangible assets other than goodwill and $8,344 was assigned to goodwill in the purchase price allocation. The intangible assets consist of approximately $1,300 of customer relationships, $1,600 of trademarks, and $609 of other intangible assets at the time of acquisition. Remaining tax goodwill of $48 is expected to be deductible for tax purposes.
 
In June 2005, the Company acquired Signs & Labels, a provider of stock and custom signage, custom safety signs, architectural signs and modular signage systems for business offices, schools and hospitals in the United Kingdom. The purchase price was approximately $24,000 in cash. Of the purchase price, a total of $10,955 was assigned to intangible assets other than goodwill and $18,039 was assigned to goodwill in the allocation of the purchase price. The intangible assets identified in the allocation of the purchase price consist of approximately $6,109 of customer relationships, $4,554 of trademarks, and $292 of non-compete and other. Immediately following the acquisition, all outstanding debt of Signs & Labels, approximately $2,500, was repaid with cash. There is no remaining goodwill expected to be deductible for tax purposes.
 
In July 2005, the Company acquired TPS, a manufacturer and supplier of pressure sensitive labels, nameplates and tags in Thailand. The purchase price was approximately $5,250 in cash. Of the purchase price, a total of $2,755 was assigned to intangible assets other than goodwill and $2,090 was assigned to goodwill in the allocation of the purchase price. Of the cash purchase price, a portion was being withheld until legal ownership of the facility owned by TPS was transferred to Brady Corporation. This transfer was completed in fiscal 2006. The intangible assets identified in the allocation of the purchase price include approximately $1,975 of customer relationships and $780 of non-compete agreements and other. Remaining tax goodwill of $2,506 is expected to be deductible for tax purposes based on the allocation of the purchase price.
 
3.   Employee Benefit Plans
 
The Company provides postretirement medical, dental and vision benefits (the “Plan”) for all regular full and part-time domestic employees (including spouses) who retire on or after attainment of age 55 with 15 years of credited service. Credited service begins accruing at the later of age 40 or date of hire. All active employees first eligible to retire after July 31, 1992, are covered by an unfunded, contributory postretirement healthcare plan where employer contributions will not exceed a defined dollar benefit amount, regardless of the cost of the program. Employer contributions to the plan are based on the employee’s age and service at retirement. The Company funds benefit costs on a pay-as-you-go basis.
 
In October 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” This statement requires full recognition of the funded status of defined benefit and other postretirement plans on the balance sheet as an asset or a liability. SFAS No. 158 also continues to require that unrecognized prior service costs/credits, gains/losses, and transition obligations/assets be recorded in Accumulated Other Comprehensive Income, thus not changing the income statement recognition rules for such plans. The Company adopted the provisions of SFAS No. 158 for the fiscal year ended July 31, 2007.


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The incremental effects of the initial application of SFAS No. 158 to the consolidated balance at July 31, 2007 were as follows:
 
                         
    Before Application
          After Application
 
    of SFAS No. 158     Adjustments     of SFAS No. 158  
 
Deferred income taxes
  $ 34,059     $ (1,551 )   $ 32,508  
Total assets
    1,700,408       (1,551 )     1,698,857  
Other current liabilities
    60,254             60,254  
Total current liabilities
    280,054             280,054  
Other liabilities
    54,191       (4,975 )     49,216  
Total liabilities
    812,820       (4,975 )     807,845  
Accumulated other comprehensive income
    79,952       3,424       83,376  
                         
Total stockholders’ investment
  $ 887,588     $ 3,424     $ 891,012  
                         
 
The adoption of SFAS No. 158 had no effect on the Company’s net earnings.
 
The following table provides a reconciliation of the changes in the Plan’s accumulated benefit obligations during the years ended July 31:
 
                 
    2007     2006  
 
Obligation at beginning of year
  $ 12,650     $ 10,909  
Service cost
    967       1,049  
Interest cost
    797       675  
Actuarial (gain) loss
    (2,097 )     723  
Benefit payments
    (612 )     (706 )
                 
Obligation at end of fiscal year
  $ 11,705     $ 12,650  
                 
 
The following table outlines the unfunded status of the Plan recorded as a liability in the accompanying consolidated balance sheets as of July 31, 2007 and 2006:
 
                 
    2007     2006  
 
Unfunded status at July 31
  $ 11,705     $ 12,650  
Unrecognized net actuarial gain
          2,720  
Unrecognized prior service gain
          310  
                 
Accumulated postretirement benefit obligation (“APBO”) liability
  $ 11,705     $ 15,680  
                 
 
As of July 31, 2007 and 2006, amounts recognized as liabilities in the accompanying consolidated balance sheets consist of:
 
                 
    2007     2006  
 
Current liability
  $ 575     $  
Noncurrent liability
    11,130       15,680  
                 
    $ 11,705     $ 15,680  
                 


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
As of July 31, 2007 and 2006, pre-tax amounts recognized in accumulated other comprehensive income in the accompanying consolidated balance sheets consist of:
 
                 
    2007     2006  
 
Net actuarial gain
  $ (4,698 )   $  
Prior service credit
    (277 )      
                 
    $ (4,975 )   $  
                 
 
Net periodic benefit cost for the Plan for fiscal years 2007, 2006 and 2005 includes the following components:
 
                         
    Years Ended July 31,  
    2007     2006     2005  
 
Net periodic postretirement benefit cost included the following components:
                       
Service cost — benefits attributed to service during the period
  $ 967     $ 1,049     $ 895  
Prior service cost
    (33 )     (33 )     (33 )
Interest cost on accumulated postretirement benefit obligation
    797       675       689  
Amortization of unrecognized gain
    (119 )     (27 )     (127 )
                         
Periodic postretirement benefit cost
  $ 1,612     $ 1,664     $ 1,424  
                         
 
The estimated actuarial gain and prior service credit that will be amortized from accumulated other comprehensive income into net periodic postretirement benefit cost over the next fiscal year are $303 and $33, respectively.
 
The following assumptions were used in accounting for the plan:
 
                         
    2007     2006     2005  
 
Weighted average discount rate used in determining accumulated postretirement benefit obligation Liability
    6.3 %     6.0 %     5.0 %
Weighted average discount rate used in determining net periodic benefit cost
    6.0 %     5.0 %     6.0 %
Assumed health care trend rate used to measure APBO at July 31
    9.0 %     10.0 %     11.0 %
Rate to which cost trend rate is assumed to decline (the ultimate trend rate)
    5.5 %     5.5 %     5.5 %
Fiscal year the ultimate trend rate is reached
    2011       2011       2011  
 
The assumed health care cost trend rate has a significant effect on the amounts reported for the Plan. A one-percentage point change in assumed health care cost trend rates would have the following effects:
 
                 
    One-Percentage
  One-Percentage
    Point Increase   Point Decrease
 
Effect on future service and interest cost
  $ (109 )   $ 116  
Effect on accumulated postretirement benefit obligation at July 31, 2007
    (567 )     644  


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid during the years ending July 31:
 
                         
    Prior to
    After
    Impact of
 
    Medicare Part D     Medicare Part D     Medicare Part D  
 
2008
  $ 671     $ 575     $ (96 )
2009
    761       652       (109 )
2010
    874       751       (123 )
2011
    996       852       (144 )
2012
    1,122       952       (170 )
2013 through 2017
    8,031       6,735       (1,296 )
 
In December 2003, the United States enacted into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act establishes a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D.
 
In May 2004, the FASB issued FSP 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”. FSP 106-2 requires companies to account for the effect of the subsidy on benefits attributable to past service as an actuarial experience gain and as a reduction of the service cost component of net postretirement health care costs for amounts attributable to current service, if the benefit provided is at least actuarially equivalent to Medicare Part D.
 
The Company adopted FSP 106-2 effective with the fiscal year beginning August 1, 2004. The Company determined that benefits provided to certain participants are expected to be at least actuarially equivalent to Medicare Part D, and, accordingly, the Company will be entitled to a subsidy. The expected subsidy reduced net periodic cost for the years ended July 31, 2007 and 2006 by $522 and $409, respectively, as compared with the amount calculated without considering the effects of the subsidy.
 
Assumptions used to develop these reductions include those used in the determination of the annual expense under SFAS No. 106, “Employers’ Accounting for Postretirement Benefits other than Pensions,” as amended by SFAS No. 158, and also include expectations of how the federal program would ultimately operate.
 
The Company has retirement and profit-sharing plans covering substantially all full-time domestic employees and certain of its foreign subsidiaries. Contributions to the plans are determined annually or quarterly, according to the respective plans, based on earnings of the respective companies and employee contributions. At July 31, 2007 and 2006, $6,590 and $5,928, respectively, of accrued profit-sharing contributions were included in other current liabilities and other long-term liabilities on the accompanying consolidated balance sheets.
 
The Company also has deferred compensation plans for directors, officers and key executives which are discussed below. At July 31, 2007 and 2006, $10,147 and $7,853, respectively, of deferred compensation was included in current and other long-term liabilities on the accompanying consolidated balance sheets.
 
During fiscal 1998, the Company adopted a new deferred compensation plan that invests solely in shares of the Company’s Class A Nonvoting Common Stock. Participants in a predecessor phantom stock plan were allowed to convert their balances in the old plan to this new plan. The new plan was funded initially by the issuance of shares of Class A Nonvoting Common Stock to a Rabbi Trust. All deferrals into the new plan result in purchases of Class A Nonvoting Common Stock by the Rabbi Trust. No deferrals are allowed into a predecessor plan. Shares held by the Rabbi Trust are distributed to participants upon separation from the Company as defined in the plan agreement.
 
During fiscal 2002, the Company adopted a new deferred compensation plan that allows future contributions to be invested in shares of the Company’s Class A Nonvoting Common Stock or in certain other investment vehicles. Prior deferred compensation deferrals must remain in the Company’s Class A Nonvoting Common Stock. All


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
participant deferrals into the new plan result in purchases of Class A Nonvoting Common Stock or certain other investment vehicles by the Rabbi Trust. Balances held by the Rabbi Trust are distributed to participants upon separation from the Company as defined in the plan agreement. On May 1, 2006, the plan was amended to require that deferrals into Brady stock must remain in Brady stock and be distributed in shares of Brady stock.
 
The amounts charged to expense for the retirement, profit sharing and deferred compensation plans described above were $14,990, $9,862 and $10,980 during the years ended July 31, 2007, 2006 and 2005, respectively.
 
4.   Income Taxes
 
Income taxes consist of the following:
 
                         
    Years Ended July 31,  
    2007     2006     2005  
 
Currently payable:
                       
Federal
  $ 5,439     $ 14,201     $ 10,002  
Foreign
    34,835       26,143       24,286  
State
    2,336       2,012       1,836  
                         
      42,610       42,356       36,124  
                         
Deferred provision (credit):
                       
Federal
    2,728       (75 )     (1,215 )
Foreign
    (4,151 )     (472 )     (855 )
State
    1,353       (1,296 )     (583 )
                         
      (70 )     (1,843 )     (2,653 )
                         
Total
  $ 42,540     $ 40,513     $ 33,471  
                         
 
Deferred income taxes result from temporary differences in the recognition of revenues and expenses for financial statement and income tax purposes.
 
Income before income taxes consists of the following:
 
                         
    Years Ended July 31,  
    2007     2006     2005  
 
Domestic
  $ 67,448     $ 46,790     $ 36,985  
Foreign
    84,480       97,898       78,433  
                         
Total
  $ 151,928     $ 144,688     $ 115,418  
                         


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The approximate tax effects of temporary differences are as follows:
 
                         
    July 31, 2007  
    Assets     Liabilities     Total  
 
Inventories
  $ 6,289           $ 6,289  
Prepaid catalog costs
        $ (1,785 )     (1,785 )
Employee benefits
    2,318             2,318  
Allowance for doubtful accounts
    851             851  
Other, net
    1,939             1,939  
                         
Current
    11,397       (1,785 )     9,612  
                         
Depreciation
          (3,777 )     (3,777 )
Amortization
    8,170       (19,629 )     (11,459 )
Capitalized R&D expenditures
    2,333             2,333  
Deferred compensation
    13,799             13,799  
Postretirement benefits
    6,630             6,630  
Tax loss carryforwards
    25,926             25,926  
Less valuation allowance
    (19,687 )           (19,687 )
Other, net
    333       (1,898 )     (1,565 )
                         
Noncurrent
    37,504       (25,304 )     12,200  
                         
Total
  $ 48,901     $ (27,089 )   $ 21,812  
                         
 
                         
    July 31, 2006  
    Assets     Liabilities     Total  
 
Inventories
  $ 5,058           $ 5,058  
Prepaid catalog costs
        $ (2,196 )     (2,196 )
Employee benefits
    3,258             3,258  
Allowance for doubtful accounts
    774             774  
Other, net
    2,698             2,698  
                         
Current
    11,788       (2,196 )     9,592  
                         
Depreciation
          (4,300 )     (4,300 )
Amortization
    12,917       (20,232 )     (7,315 )
Capital R&D expenditures
    2,800             2,800  
Deferred compensation
    13,446             13,446  
Postretirement benefits
    7,490             7,490  
Tax loss carryforwards
    17,300             17,300  
Less valuation allowance
    (15,668 )           (15,668 )
Other, net
    624             624  
                         
Noncurrent
    38,909       (24,532 )     14,377  
                         
Total
  $ 50,697     $ (26,728 )   $ 23,969  
                         
 
The valuation allowance increased $4,019 and $10,791 during the fiscal years ended July 31, 2007 and 2006, respectively and decreased $657 during the fiscal year ended July 31, 2005.


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Tax loss carry forwards at July 31, 2007 are comprised of foreign net operating losses of approximately $84,517, of which $67,946 have no expiration date. The remaining balance relates to state net operating losses of $45,350 and state credits of $1,683. The Company expects to utilize all credits; however, state net operating losses will begin to expire in the fiscal year ending July 31, 2008.
 
Rate Reconciliation
 
A reconciliation of the tax computed by applying the statutory U.S. Federal income tax rate to income before income taxes to the total income tax provision is as follows:
 
                         
    Years Ended July 31,  
    2007     2006     2005  
 
Tax at statutory rate
    35.0 %     35.0 %     35.0 %
State income taxes, net of Federal tax benefit
    1.6 %     0.2 %     0.7 %
International rate differential
    (3.3 )%     (6.8 )%     (4.1 )%
Rate variances arising from foreign subsidiary distributions
    (2.7 )%     0.2 %     (1.1 )%
Resolution of prior period tax matters
    (2.0 )%     (0.9 )%     (0.6 )%
Other, net
    (0.6 )%     0.3 %     (0.9 )%
                         
Effective tax rate
    28.0 %     28.0 %     29.0 %
                         
 
Unremitted Earnings
 
The Company’s policy is to remit earnings from foreign subsidiaries only to the extent any resultant foreign income taxes are creditable in the United States. Accordingly, the Company does not currently provide for the additional United States and foreign income taxes which would become payable upon remission of undistributed earnings of foreign subsidiaries.
 
The cumulative undistributed earnings of such subsidiaries at July 31, 2007 amounted to approximately $282,076.
 
5.   Long-Term Obligations
 
On March 23, 2007, the Company completed the private placement of $150 million in ten-year fixed notes at 5.33% interest to institutional investors. The notes will be amortized in equal installments over seven years, beginning in 2011, with interest payable on the notes semiannually on September 23 and March 23, beginning in September 2007. The notes have been fully and unconditionally guaranteed on an unsecured basis by the Company’s domestic subsidiaries. The Company used the net proceeds of the offering to reduce outstanding indebtedness under the Company’s revolving loan agreement and fund its ongoing strategic growth plan. The private placement was exempt from the registration requirements of the Securities Act of 1933. The notes were not registered for resale and may not be resold absent such registration or an applicable exemption from the registration requirements of the Securities Act of 1933 and applicable state securities laws. The notes have certain prepayment penalties for repaying them prior to the maturity date. The agreement also requires the Company to maintain a financial covenant. As of July 31, 2007, the Company was in compliance with this covenant.
 
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 facility that had been entered into on March 31, 2004 and amended on January 19, 2006. At the Company’s option, and subject to certain standard conditions, the available amount under the new credit facility may be increased from $200 million up to $300 million. Under the new 5-year agreement, which has a final maturity date of October 5, 2011, the Company has the option to select either a base interest rate (based upon the higher of the federal funds rate plus one-half of 1% or the prime rate of Bank of America) or a Eurocurrency interest rate (at the LIBOR rate plus a margin based on the Company’s


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
consolidated leverage ratio). A commitment fee is payable on the unused amount of the facility. The agreement requires the Company to maintain two financial covenants. As of July 31, 2007, the Company was in compliance with the covenants of the agreement. The agreement restricts the amount of certain types of payments, including dividends, which can be made annually to $50 million plus an amount equal to 75% of consolidated net income for the prior fiscal year of the Company. The Company believes that based on historic dividend practice, this restriction would not impede the Company in following a similar dividend practice in the future. As of July 31, 2007, there were no outstanding borrowings under credit facility.
 
On February 14, 2006, the Company completed the private placement of $200 million in ten-year fixed notes at 5.3% interest to institutional investors. The notes will be amortized in equal installments over seven years, beginning in 2010 with interest payable on the notes semiannually on August 14 and February 14, beginning in August 2006. The notes have been fully and unconditionally guaranteed on an unsecured basis by the Company’s domestic subsidiaries. The Company used the net proceeds of the offering to finance acquisitions completed in fiscal 2006 and 2007. This private placement was exempt from the registration requirements of the Securities Act of 1933. The notes were not registered for resale and may not be resold absent such registration or an applicable exemption from the registration requirements of the Securities Act of 1933 and applicable state securities laws. The notes have certain prepayment penalties for repaying them prior to the maturity date. The agreement also requires the Company to maintain a financial covenant. As of July 31, 2007, the Company was in compliance with this covenant.
 
On June 30, 2004, the Company finalized a debt offering of $150 million of 5.14% fixed rate unsecured senior notes due in 2014 in an offering exempt from the registration requirements of the Securities Act of 1933. The debt offering was in conjunction with the Company’s acquisition of EMED. The notes will be repaid over 7 years beginning in 2008 with interest payable on the notes semiannually on June 28 and December 28 beginning in December 2004. The Company used the proceeds of the offering to reduce outstanding indebtedness under the Company’s revolving credit facilities. The debt has certain prepayment penalties for repaying the debt prior to its maturity date. The agreement also requires the Company to maintain a financial covenant. As of July 31, 2007, the Company was in compliance with this covenant.
 
Long-term obligations consist of the following as of July 31:
 
                 
    2007     2006  
 
Various bank loans
  $ 19     $ 38  
Fixed debt
    500,000       350,000  
                 
      500,019       350,038  
                 
Less current maturities
  $ (21,444 )   $ (20 )
                 
    $ 478,575     $ 350,018  
                 
 
The fair value of the Company’s long-term obligations approximates $488,780. The fair value of the Company’s long-term obligations is estimated based on quoted market prices for the same or similar issue and on the current rates offered for debt of the same maturities.


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Maturities on long-term debt are as follows:
 
         
Years Ending July 31,
     
 
2008
  $ 21,444  
2009
    21,433  
2010
    50,000  
2011
    71,428  
2012
    71,428  
Thereafter
    264,286  
         
Total
  $ 500,019  
         
 
The Company had outstanding letters of credit of $1,680 and $2,887 at July 31, 2007 and 2006, respectively.
 
6.   Stockholders’ Investment
 
Information as to the Company’s capital stock at July 31, 2007 and 2006 is as follows:
 
                                                 
    July 31, 2007     July 31, 2006  
    Shares
    Shares
          Shares
    Shares
       
    Authorized     Issued     Amount     Authorized     Issued     Amount  
 
Preferred Stock, $.01 par value
    5,000,000                       5,000,000                  
Cumulative Preferred Stock:
                                               
6% Cumulative
    5,000                       5,000                  
1972 Series
    10,000                       10,000                  
1979 Series
    30,000                       30,000                  
Common Stock, $.01 par value:
                                               
Class A Nonvoting
    100,000,000       50,586,524     $ 506       100,000,000       50,481,743     $ 505  
Class B Voting
    10,000,000       3,538,628       35       10,000,000       3,538,628       35  
                                                 
                    $ 541                     $ 540  
                                                 
 
Before any dividend may be paid on the Class B Common Stock, holders of the Class A Common Stock are entitled to receive an annual, noncumulative cash dividend of $.01665 per share. Thereafter, any further dividend in that fiscal year must be paid on each share of Class A Common Stock and Class B Common Stock on an equal basis.
 
Other than as required by law, holders of the Class A Common Stock are not entitled to any vote on corporate matters, unless, in each of the three preceding fiscal years, the $.01665 preferential dividend described above has not been paid in full. Holders of the Class A Common Stock are entitled to one vote per share for the entire fiscal year immediately following the third consecutive fiscal year in which the preferential dividend is not paid in full. Holders of Class B Common Stock are entitled to one vote per share for the election of directors and for all other purposes.
 
Upon liquidation, dissolution or winding up of the Company, and after distribution of any amounts due to holders of Cumulative Preferred Stock, holders of the Class A Common Stock are entitled to receive the sum of $0.835 per share before any payment or distribution to holders of the Class B Common Stock. Thereafter, holders of the Class B Common Stock are entitled to receive a payment or distribution of $0.835 per share. Thereafter, holders of the Class A Common Stock and Class B Common Stock share equally in all payments or distributions upon liquidation, dissolution or winding up of the Company.


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The preferences in dividends and liquidation rights of the Class A Common Stock over the Class B Common Stock will terminate at any time that the voting rights of Class A Common Stock and Class B Common Stock become equal.
 
In September 2005, the Company announced that the Board of Directors of the Company approved a share repurchase program for up to 800,000 shares of the Company’s Class A Common Stock during fiscal 2006. The share repurchase plan was implemented by purchasing shares on the open market or in privately negotiated transactions, with repurchased shares available for use in connection with the Company’s stock option plan and for other corporate purposes. The Company completed the repurchase of all 800,000 shares of its Class A Common Stock for $26,495 under the repurchase plan approved by the Board of Directors during the fiscal year ended July 31, 2006.
 
In June 2006, the Company sold, pursuant to an underwritten public offering, 4,600,000 shares of its Class A nonvoting common stock at a price of $36 per share. Cash proceeds from the offering, net of underwriting discounts, were $158,148. In addition to underwriting discounts, the Company incurred $403 of additional accounting, legal and other expenses related to the offering that were charged to additional paid-in capital. The proceeds were used to fund acquisitions completed in fiscal 2006 and early fiscal 2007.
 
The following is a summary of other activity in stockholders’ investment for the years ended July 31, 2007, 2006 and 2005:
 
                                 
    Unearned
          Shares Held
       
    Restricted
    Deferred
    in Rabbi
       
    Stock     Compensation     Trust, at cost     Total  
 
Balances July 31, 2004
  $ (282 )   $ 15,194     $ (15,194 )   $ (282 )
                                 
Shares at July 31, 2004
            988,534       988,534          
                                 
Sale of shares at cost
          (498 )     579       81  
Purchase of shares at cost
          516       (1,210 )     (694 )
Amortization of restricted stock
    282                   282  
Other
          (437 )           (437 )
                                 
Balances July 31, 2005
  $ 0     $ 14,775     $ (15,825 )   $ (1,050 )
                                 
Shares at July 31, 2005
            950,222       997,034          
                                 
Sale of shares at cost
          (450 )     451       1  
Purchase of shares at cost
          573       (1,466 )     (893 )
Effect of plan amendment
          2,704             2,704  
                                 
Balances at July 31, 2006
  $ 0     $ 17,602     $ (16,840 )   $ 762  
                                 
Shares at July 31, 2006
            1,012,914       1,012,914          
                                 
Sale of shares at cost
          (5,242 )     5,134       (108 )
Purchase of shares at cost
          1,215       (1,215 )      
                                 
Balances at July 31, 2007
  $ 0     $ 13,575     $ (12,921 )   $ 654  
                                 
Shares at July 31, 2007
            724,417       724,417          
                                 
 
Prior to 2002, all Brady Corporation deferred compensation was invested in Brady stock. In 2002, the Company adopted a new deferred compensation plan which allowed investing in other investment funds in addition to Brady stock. Under this plan, participants were allowed to transfer funds between Brady stock and the other investment funds. On May 1, 2006 the plan was amended with the provision that deferrals into Brady stock must


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
remain in Brady stock and be distributed in shares of Brady stock. At July 31, 2007, the deferred compensation balance in stockholders’ investment represents the investment at the original cost of shares held in Brady stock for the deferred compensation plan prior to 2002 and the investment at the cost of shares held in Brady stock for the plan subsequent to 2002, adjusted for the plan amendment on May 1, 2006. The balance of shares held in the Rabbi Trust represents the investment in Brady stock at the original cost of all Brady stock held in deferred compensation plans.
 
The Company’s Employee Monthly Stock Investment Plan (“the Plan”) provides that eligible employees may authorize a fixed dollar amount between $20 and $500 per month to be deducted from their pay. The funds deducted are forwarded to the Plan administrator and are used to purchase Brady stock at the market price. As part of the Plan, Brady pays all brokerage fees for stock purchases and dividend reinvestments.
 
The Company has an incentive stock plan under which the Board of Directors may grant nonqualified stock options to purchase shares of Class A Nonvoting Common Stock to employees. Additionally, the Company has a nonqualified stock option plan for non-employee directors under which stock options to purchase shares of Class A Nonvoting Common Stock are available for grant. The options have an exercise price equal to the fair market value of the underlying stock at the date of grant and generally vest ratably over a three-year period, with one-third becoming exercisable one year after the grant date and one-third additional in each of the succeeding two years. Options issued under these plans, referred to herein as “service-based” options, generally expire 10 years from the date of grant. The Company also grants stock options to certain executives and key management employees that vest upon meeting certain financial performance conditions over the vesting schedule described above. These options are referred to herein as “performance-based” options. All performance-based options that were granted in fiscal 2006 and in prior years expire five years from the date of grant. Beginning in fiscal 2007, any performance options granted expire 10 years from the date of grant.
 
As of July 31, 2007, the Company has reserved 4,182,739 shares of Class A Nonvoting Common Stock for outstanding stock options and 1,987,500 shares of Class A Nonvoting Common Stock remain for future issuance of stock options under the various plans. The Company uses treasury stock or will issue new Class A Nonvoting Common Stock to deliver shares under these plans.
 
Changes in the options are as follows(1):
 
                         
                Weighted
 
                Average
 
          Options
    Exercise
 
    Option Price     Outstanding     Price  
 
Balance, July 31, 2004
  $ 6.08 - $20.15       3,872,484     $ 15.05  
                         
Options granted
    22.63 - 31.54       888,000       27.27  
Options exercised
    9.59 - 17.33       (1,117,431 )     14.08  
Options cancelled
    9.59 - 17.33       (113,722 )     15.82  
                         
Balance, July 31, 2005
  $ 9.59 - $31.54       3,529,331     $ 18.41  
                         
Options granted
    33.75 - 40.37       955,500       36.33  
Options exercised
    9.59 - 28.84       (596,643 )     14.95  
Options cancelled
    16.00 - 40.37       (73,136 )     27.20  
                         
Balance, July 31, 2006
  $ 9.59 - $40.37       3,815,052     $ 23.27  
                         
Options granted
    32.93 - 38.19       908,000       36.74  
Options exercised
    9.59 - 28.84       (397,682 )     17.13  
Options cancelled
    16.00 - 40.37       (142,631 )     35.40  
                         
Balance, July 31, 2007
  $ 9.59 - $40.37       4,182,739     $ 26.36  
                         
 
 
(1) Adjusted for a two-for-one stock split in the form of a 100% stock dividend, effective December 31, 2004.


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
The total fair value of options vested during the fiscal years ended July 31, 2007, 2006 and 2005 was $4,687, $4,744 and $3,223, respectively. The total intrinsic value of options exercised during the fiscal years ended July 31, 2007, 2006 and 2005 was $8,272, $13,974 and $14,754, respectively.
 
There were 2,300,239, 2,062,153 and 1,772,930 options exercisable with a weighted average exercise price of $21.07, $17.02 and $14.84 at July 31, 2007, 2006 and 2005, respectively.
 
The following table summarizes information about stock options outstanding at July 31, 2007:
 
                                         
          Options Outstanding and
 
    Options Outstanding     Exercisable  
          Weighted Average
    Weighted
    Shares
    Weighted
 
    Number of Shares
    Remaining
    Average
    Exercisable
    Average
 
Range of
  Outstanding at
    Contractual Life
    Exercise
    at July 31,
    Exercise
 
Exercise Prices
  July 31, 2007     (in years)     Price     2007     Price  
 
Up to $14.99
    503,097       3.2     $ 12.89       263,097     $ 12.24  
$15.00 to $29.99
    1,943,806       4.9       20.79       1,717,970       19.69  
$30.00 and up
    1,735,836       7.2       36.52       319,172       35.81  
                                         
Total
    4,182,739       5.7       26.36       2,300,239       21.07  
                                         
 
As of July 31, 2007, the aggregate intrinsic value of the number of options outstanding and the number of options outstanding and exercisable was $39,548 and $32,494, respectively.
 
7.   Segment Information
 
The Company evaluates short-term regional 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, acquisitions, and long-term lines of business. Segment profit or loss does not include certain administrative costs, interest, foreign exchange gain or loss, other expenses not allocated to a segment, and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
 
The Company’s reportable segments are geographical regions that are each managed separately. The Company has three reportable segments: Americas, Europe and Asia-Pacific. Each reportable segment derives its revenue from the same types of products and services.


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BRADY CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Intersegment sales and transfers are recorded at cost plus a standard percentage markup. Intercompany profit is eliminated in consolidation. It is not practicable to disclose enterprise-wide revenue from external customers on the basis of product or service.
 
                                                 
                            Corporate
       
                            and
       
    Americas     Europe     Asia-Pacific     Subtotals     Eliminations     Totals  
 
Year ended July 31, 2007:
                                               
Revenues from external customers
  $ 609,855     $ 416,514     $ 336,262     $ 1,362,631             $ 1,362,631  
Intersegment revenues
    52,595       6,511       23,554       82,660     $ (82,660 )        
Depreciation and amortization expense
    23,643       8,363       16,913       48,919       4,937       53,856  
Segment profit (loss)
    142,306       107,552       57,236       307,094       (8,208 )     298,886  
Assets
    781,868       347,827       376,645       1,506,340       192,517       1,698,857  
Expenditures for property, plant and equipment
    19,834       5,849       15,301       40,984       10,956       51,940  
Year ended July 31, 2006:
                                               
Revenues from external customers
  $ 498,916     $ 319,432     $ 200,088     $ 1,018,436             $ 1,018,436  
Intersegment revenues
    54,716       4,017       6,376       65,109     $ (65,109 )        
Depreciation and amortization expense
    20,407       6,282       7,435       34,124       1,020       35,144  
Segment profit (loss)
    122,525       83,970       49,316       255,811       (10,633 )     245,178  
Assets
    643,206       255,635       338,424       1,237,265       127,921       1,365,186  
Expenditures for property, plant and equipment
    22,838       6,397       7,303       36,538       2,872       39,410  
Year ended July 31, 2005:
                                               
Revenues from external customers
  $ 417,780     $ 274,691