e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
July 31, 2006
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from
to
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Commission file number 1-14959
BRADY CORPORATION
(Exact name of registrant as
specified in charter)
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Wisconsin
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39-0178960
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(State or other jurisdiction
of
incorporation or organization)
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(IRS Employer Identification
No.)
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6555 West Good Hope Road,
Milwaukee, WI 53223
(Address of principal executive
offices) (Zip Code)
(414) 358-6600
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of each exchange on which
registered
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Class A Nonvoting Common
Stock, Par Value $.01 per share
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New York Stock
Exchange
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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 registrants 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. þ
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, 2006
was approximately $1,652,282,432 (based on closing sale price of
$39.77 per share on that date as reported for the New York
Stock Exchange). As of September 29, 2006, there were
outstanding 50,192,742 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.
PART I
Brady Corporation and Subsidiaries are referred to herein as the
Company, Brady, or we.
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(a)
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General
Development of Business
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The Company, a Wisconsin corporation founded in 1914, currently
operates 65 manufacturing or distribution facilities in
Australia, Belgium, Brazil, Canada, China, Denmark, France,
Germany, India, Italy, Korea, Malaysia, Mexico, 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, Japan, the Netherlands, the Philippines, Spain,
Taiwan and Turkey. The Company further markets its products to
parts of Eastern Europe, the Middle East, Africa and Russia. The
Companys corporate headquarters are located at
6555 West Good Hope Road, Milwaukee, Wisconsin 53223, and
the telephone number is
(414) 358-6600.
The Companys Internet address is
http://www.bradycorp.com.
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(b)
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Financial
Information About Industry Segments
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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.
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(c)
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Narrative
Description of Business
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Overview
Brady Corporation is an international manufacturer and marketer
of identification solutions and specialty products which
identify and protect premises, products and people. Bradys
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 Companys
ability to provide customers with a broad range of
differentiated solutions both through the organic development of
its existing business and the acquisition of competing,
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 identification products and people identification
products. Major product lines provided to the OEM market include
high-performance identification products for product
identification, work in process identification, bar code labels
and precision die-cut components for mobile telecommunications
devices, hard disk drives, medical devices and supplies and
automotive electronics. Products are marketed through multiple
channels, including distribution,
business-to-business
direct marketing and a direct sales force.
The need for the Companys 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, or 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 7% of
net sales.
Competitive
Strengths
Bradys vision is to be either first or second in terms of
market share in every market served. The Companys primary
growth objectives are to build upon its leading market
positions, to improve performance and profitability
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and to expand existing activities through a multi-prong approach
that incorporates both organic growth, new product development
and acquisitions.
The Company believes the following competitive strengths will
allow it to achieve its strategy:
Leader in Fragmented 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 outstanding materials expertise, 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 our traditional markets, such as
laboratory identification. Bradys commitment to product
innovation is reflected in its research and development efforts
that include approximately 200 employees primarily dedicated to
research and development activities mainly in the United States,
but also in Belgium, Germany, Singapore and China.
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. In addition, the Companys focus
on operational excellence has helped it deliver superior EBITDA
(earnings before interest, taxes, depreciation and amortization)
as a percentage of sales and returns on invested capital as
compared to similar companies in its markets.
Broad Customer Base and Geographic
Diversity. Brady believes its global
infrastructure mitigates the impact of an economic downturn on
our 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 57.6% of net sales in fiscal 2006. The
Companys 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 over a dozen industries.
Disciplined Acquisition and Integration
Strategy. The Company has a dedicated team of
experienced professionals that employ a disciplined acquisition
strategy to acquire companies that yield sustainable shareholder
value. It applies strict financial standards to evaluate all
acquisitions using a model focused on return on invested
capital. Since 1996, the Company has acquired and integrated
44 companies to expand geographic and market footprint,
increase market share and add new technological capabilities.
Brady believes its successful acquisition track record
demonstrates its ability to identify and integrate acquisitions
of companies that meet its selective criteria.
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 rapid delivery contribute to the popularity of
its products with distributors, OEMs, resellers and other
customers.
Deep and Talented Team. The Company believes
that its management team 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 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 Companys 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 Companys 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, disk
drives and computers, as well as technological advances in these
industries.
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 its
identification solutions into the laboratory identification
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
portfolio on a regular basis through its standardized review
process in order to identify new product opportunities.
Expand Geographically. Bradys long-term
strategy involves the pursuit of growth opportunities in a
number of markets outside of the United States. The Company is
committed to low-cost manufacturing and to being in close
proximity to its customers. Brady currently operates in 28
countries and employs approximately 3,600 people 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.
Bradys 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 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.
I-3
Products
The Company is largely vertically integrated; designing,
developing, coating and producing most of its identification
signs, labels and printing systems. Brady materials are
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 Companys stock and custom products consist of over
500,000 stock-keeping units, including complete identification
systems 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 software, wire and cable markers,
high-performance labels, laboratory identification labels and
printing systems, stand-alone printing systems, bar-code and
other software, automatic identification and data collection
systems, personal identification products, and precision die-cut
solutions.
Some of the Companys 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 Companys 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 Companys 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; 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.
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 Companys 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.
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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.
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 which 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 and bar coding that
perform under harsh or demanding conditions, such as extreme
temperatures, or environmental or chemical exposure. Brady
prints stock and custom labels and also sells unprinted
materials to enable customers to print their own labels.
Precision
Die-Cut Parts
The Company develops customized precision die-cut products that
are used to seal, insulate, protect, shield or provide other
mechanical performance properties in the assembly of electronic,
telecommunications and other equipment, including cellular
phones, personal data assistants, computer hard 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.
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, 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 Companys competitors. The Company
markets and sells its products domestically and internationally
through multiple channels including direct sales, distributors,
mail-order-catalog marketing, retail, and electronic access
through the Internet. The Company has long-standing
relationships with a broad range of electrical, safety,
industrial and other
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domestic and international distributors. The Companys
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. Catalog
operations are conducted through offices in the United States,
Australia, Brazil, Canada, England, France, Germany and Italy,
and include foreign-language catalogs.
The Companys 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, computer disk drive, construction,
general manufacturing, laboratory, transportation equipment and
education.
Brands
The Companys 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
Brandon, Balkhausen, ID Technologies, Tradex Converting or
Daewon products. Safety and facility identification products are
also marketed under the Safety Signs Service brand, with some
lockout/tagout products offered under the Prinzing brand. In
addition, safety identification is marketed under the
Electromark brand; poster printers for education and government
markets are offered under the Varitronics name brand; direct
marketing safety and facility identification products are
offered under the Seton, Emedco, Signals, Safetyshop and
Personnel Concepts names; security and identification badges and
systems are included in the Temtec, B.I.G.,
Indenticard/Identicam, STOPware, J.A.M. Plastics, CIPI,
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
Companys manufacturing processes include compounding,
coating, converting, software development and printer design and
assembly. The compounding process involves the mixing of
chemical batches for primers, top coatings and adhesives. 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.
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. Bradys
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 Companys
manufacturing facilities have received ISO 9001 or 9002
certification.
The materials used in the products manufactured by the Company
consist primarily of plastic sheets and films, paper, metal and
metal foil, cloth, fiberglass, inks, dyes, adhesives, pigments,
natural and synthetic rubber, organic chemicals, polymers,
solvents and electronic components and subassemblies. In
addition the Company purchases finished products for resale. The
Company purchases raw materials, components and finished
products from many suppliers. Generally, the Company is not
dependent upon any single supplier for most critical base
materials or components. In some cases, the Company has chosen
to sole source materials, components or finished items for
design or cost reasons. In these cases, disruptions in supply
could have an impact on results for a period of time. In most
cases, these disruptions would simply require qualification of
new suppliers and the disruption would be modest. In a few
cases, the qualification process could be more costly or take a
longer period of time. In the most
I-6
dramatic of cases, such as a global shortage of a critical
material or component, the financial impact could be significant.
Technology
and Product Development
The Company focuses its research and development efforts on
material development, printing systems design and software
development. Material development involves the application of
surface chemistry concepts for top coatings and adhesives
applied to a variety of base materials. Systems design
integrates materials, embedded software and a variety of
printing technologies to form a complete solution for customer
applications or the Companys own production requirements.
The Companys 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, computer-generated
wire markers, systems for aligning letters and patterns, and
visually changing paper. Although the Company believes that its
patents are a significant factor in maintaining market position
for certain products, technology in the areas covered by many of
the patents is evolving rapidly and may limit the value of such
patents. The Companys 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 $30.4 million,
$25.1 million and $23.0 million in fiscal 2006, 2005,
and 2004, respectively, on its research and development
activities. In fiscal 2006, approximately 180 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
Singapore and under contract with universities, other
institutions and consultants.
The Companys 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 2006, 2005, and 2004, sales from international
operations accounted for 57.6%, 55.3%, and 55.2%, respectively,
of the Companys sales. Its global infrastructure includes
subsidiaries in Australia, Belgium, Brazil, Canada, China,
Denmark, France, Germany, Hong Kong, India, Italy, Japan, Korea,
Luxembourg, Malaysia, Mexico, Norway, Singapore, Slovakia,
Sweden, Thailand 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 the
Netherlands, Philippines, Spain, Taiwan and Turkey. Brady
further markets its products to parts of Eastern Europe, the
Middle East, Africa and Russia.
Competition
The markets for all of the Companys products are
competitive. Brady believes that it is one of the leading
domestic producers of self-adhesive wire markers, safety signs,
pipe markers, precision die-cut materials and
bar-code-label-generating software. 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 worlds
major adhesive and electrical product companies offering some
competing products as part of their overall product lines. A
number of Bradys 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.
I-7
Backlog
As of July 31, 2006, the amount of the Companys
backlog orders believed to be firm was approximately
$42.3 million. This compares with approximately
$24.9 million and $23.2 million of backlog orders as
of July 31, 2005 and 2004, respectively. Average delivery
time for the Companys 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 Companys backlog of
$42.3 million at July 31, 2006, represents
approximately 1.75 weeks of the Companys sales
guidance for fiscal 2007.
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, 2006, the Company employed approximately
7,000 individuals. Upon completing the acquisition of
Comprehensive Identification Products, Inc. (CIPI)
in August, the number of individuals employed increased to
approximately 8,000. We have never experienced a material work
stoppage due to a labor dispute, are not a party to any
negotiated labor contracts, and consider our relations with
employees to be excellent. 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 Companys 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 Companys 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 Companys 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.
I-8
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 have been adversely affected by reduced
demand for our products due to downturns in the global economy
as this is a more cyclical business than the MRO business. This
cyclicality 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 personal digital assistants.
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
19 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. Furthermore, our rapid growth in recent
periods, our anticipated geographic expansion, and our planned
expansion through additional acquisitions present challenges to
maintain the internal control and disclosure control standards
applicable to public companies under the Sarbanes-Oxley Act of
2002. 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.
I-9
We
operate in highly competitive niche markets within the OEM
market 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 which could
put us at a disadvantage in the affected business by threatening
our market shares 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, 2006, we had $587.6 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 $134.1 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, 2006, goodwill and other
intangible assets represented approximately 53% of our total
assets. We evaluate this goodwill annually for impairment based
on the fair value of each geographic operating segment and we
assess the impairment of other intangible assets quarterly based
upon the expected cash flows of the acquisition. 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
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 8,000 employees and more than half
of our manufacturing locations are located 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.
We
have a concentration of business with several large key
customers in the OEM market 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. As a result of our
acquisition of Tradex Converting AB in May 2006, our largest
customer represents approximately 7% of our net sales. 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 other sources. 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.
I-10
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 2006, the strengthening U.S. dollar versus all
other currencies reduced sales by approximately
$3.7 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 assure you 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 an
accelerated implementation of an SAP platform in our facilities
in China, Europe, Malaysia and Singapore. To date, we have
completed the implementation at one facility in China and in
India. 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 this 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;
|
|
|
|
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
I-11
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.
The Company currently operates 65 manufacturing or distribution
facilities in the following regions:
Americas: Seventeen are located in the United
States; three each in Brazil and Mexico; and two in Canada.
Europe: Four are located in France; three each
in Germany and in the United Kingdom; two in Sweden; and one
each in Belgium, Denmark, Italy, Norway and Slovakia.
Asia-Pacific: Nine are located in China; five
in Australia; three in Thailand; two each in Korea and
Singapore; and one each in India and Malaysia.
The Companys present operating facilities contain a total
of approximately 3.0 million square feet of space, of which
approximately 2.2 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.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None
I-12
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
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:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005(1)
|
|
|
2004(1)
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
4th Quarter
|
|
$
|
42.79
|
|
|
$
|
32.94
|
|
|
$
|
34.96
|
|
|
$
|
28.80
|
|
|
$
|
23.24
|
|
|
$
|
18.14
|
|
3rd Quarter
|
|
$
|
40.49
|
|
|
$
|
34.67
|
|
|
$
|
35.70
|
|
|
$
|
26.30
|
|
|
$
|
20.44
|
|
|
$
|
17.45
|
|
2nd Quarter
|
|
$
|
39.98
|
|
|
$
|
28.20
|
|
|
$
|
32.22
|
|
|
$
|
26.75
|
|
|
$
|
21.73
|
|
|
$
|
16.99
|
|
1st Quarter
|
|
$
|
34.22
|
|
|
$
|
26.98
|
|
|
$
|
27.49
|
|
|
$
|
21.01
|
|
|
$
|
18.24
|
|
|
$
|
15.84
|
|
|
|
|
(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 Companys Class B
Voting Common Stock.
As of September 29, 2006, there were 697 Class A
Common Stock shareholders of record and approximately 4,000
beneficial shareholders. There are 3 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 2006.
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 Companys
revolving credit agreement restricts the amount of certain types
of payments, including dividends, which 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 2007, the Company declared the following
dividends per share on its Class A and Class B Common
Stock for the years ended July 31:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
1st Qtr
|
|
1st Qtr
|
|
2nd Qtr
|
|
3rd Qtr
|
|
4th Qtr
|
|
1st Qtr
|
|
2nd Qtr
|
|
3rd Qtr
|
|
4th Qtr
|
|
Class A
|
|
$
|
0.14
|
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
|
$
|
0.11
|
|
|
$
|
0.11
|
|
|
$
|
0.11
|
|
|
$
|
0.11
|
|
Class B
|
|
|
0.123
|
|
|
|
0.113
|
|
|
|
0.13
|
|
|
|
0.13
|
|
|
|
0.13
|
|
|
|
0.093
|
|
|
|
0.11
|
|
|
|
0.11
|
|
|
|
0.11
|
|
Dividends in the above table have been adjusted for a
two-for-one
stock split in the form of a 100% stock dividend, effective
December 31, 2004.
II-1
|
|
Item 6.
|
Selected
Financial Data
|
CONSOLIDATED
STATEMENTS OF INCOME AND SELECTED FINANCIAL DATA
Years Ended July 31, 2002 through 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
1,018,436
|
|
|
$
|
816,447
|
|
|
$
|
671,219
|
|
|
$
|
554,866
|
|
|
$
|
516,962
|
|
Gross Margin
|
|
|
525,755
|
|
|
|
433,276
|
|
|
|
345,361
|
|
|
|
279,149
|
|
|
|
260,776
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
30,443
|
|
|
|
25,078
|
|
|
|
23,028
|
|
|
|
18,873
|
|
|
|
17,271
|
|
Selling, general and administrative
|
|
|
338,796
|
|
|
|
285,746
|
|
|
|
248,171
|
|
|
|
219,861
|
|
|
|
199,282
|
|
Restructuring charge
net
|
|
|
|
|
|
|
|
|
|
|
3,181
|
|
|
|
9,589
|
|
|
|
2,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
369,239
|
|
|
|
310,824
|
|
|
|
274,380
|
|
|
|
248,323
|
|
|
|
219,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
156,516
|
|
|
|
122,452
|
|
|
|
70,981
|
|
|
|
30,826
|
|
|
|
41,503
|
|
Other (Expense)
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and other
income net
|
|
|
2,403
|
|
|
|
1,369
|
|
|
|
577
|
|
|
|
1,750
|
|
|
|
1,714
|
|
Interest expense
|
|
|
(14,231
|
)
|
|
|
(8,403
|
)
|
|
|
(1,231
|
)
|
|
|
(121
|
)
|
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other (expense) income
|
|
|
(11,828
|
)
|
|
|
(7,034
|
)
|
|
|
(654
|
)
|
|
|
1,629
|
|
|
|
1,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
144,688
|
|
|
|
115,418
|
|
|
|
70,327
|
|
|
|
32,455
|
|
|
|
43,135
|
|
Income Taxes
|
|
|
40,513
|
|
|
|
33,471
|
|
|
|
19,456
|
|
|
|
11,035
|
|
|
|
14,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
104,175
|
|
|
$
|
81,947
|
|
|
$
|
50,871
|
|
|
$
|
21,420
|
|
|
$
|
28,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Common
Share (Diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A nonvoting
|
|
$
|
2.07
|
|
|
$
|
1.64
|
|
|
$
|
1.07
|
|
|
$
|
0.46
|
|
|
$
|
0.60
|
|
Class B voting
|
|
$
|
2.05
|
|
|
$
|
1.63
|
|
|
$
|
1.05
|
|
|
$
|
0.44
|
|
|
$
|
0.59
|
|
Cash Dividends on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock
|
|
$
|
0.52
|
|
|
$
|
0.44
|
|
|
$
|
0.42
|
|
|
$
|
0.40
|
|
|
$
|
0.38
|
|
Class B common stock
|
|
$
|
0.50
|
|
|
$
|
0.42
|
|
|
$
|
0.40
|
|
|
$
|
0.39
|
|
|
$
|
0.37
|
|
Balance Sheet at
July 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
240,537
|
|
|
$
|
141,560
|
|
|
$
|
131,706
|
|
|
$
|
123,878
|
|
|
$
|
135,764
|
|
Total assets
|
|
|
1,365,186
|
|
|
|
850,147
|
|
|
|
697,900
|
|
|
|
449,519
|
|
|
|
420,525
|
|
Long-term obligations, less
current maturities
|
|
|
350,018
|
|
|
|
150,026
|
|
|
|
150,019
|
|
|
|
568
|
|
|
|
3,751
|
|
Stockholders investment
|
|
|
746,046
|
|
|
|
497,274
|
|
|
|
403,315
|
|
|
|
338,961
|
|
|
|
324,242
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
114,896
|
|
|
|
119,103
|
|
|
|
87,646
|
|
|
|
57,316
|
|
|
|
54,251
|
|
Depreciation and amortization
|
|
|
35,144
|
|
|
|
26,822
|
|
|
|
20,190
|
|
|
|
17,771
|
|
|
|
16,630
|
|
Capital expenditures
|
|
|
(39,410
|
)
|
|
|
(21,920
|
)
|
|
|
(14,892
|
)
|
|
|
(14,438
|
)
|
|
|
(13,095
|
)
|
II-2
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
In fiscal 2006, the Company posted record sales of
$1,018.4 million and record net income of
$104.2 million, an increase of 24.7% and 27.1%,
respectively, over fiscal 2005. The increase was the result of
disciplined execution of the Companys business plan and
successful integration of acquisitions, aided by a good economy.
Changes in foreign exchange rates had minimal impact on the
results for fiscal 2006.
Of the 24.7% increase in sales, organic growth accounted for
9.2%, acquisitions added 16.0%, and foreign currency lowered
sales by 0.5%. Americas sales increased 19.4%, European sales
rose 16.3%, and sales from the Asia-Pacific operations increased
61.4%.
Net income for fiscal 2006 rose 27.1% to $104.2 million or
$2.07 per diluted share of Class A Common Stock,
compared to $81.9 million, or $1.64 per diluted share
of Class A Common Stock in fiscal 2005.
In fiscal 2006, the Company continued to focus on leveraging its
strengths and continued its drive to become the number one or
number two leader in the markets that it serves. Acquisitions
focused on businesses that management understands well in order
to deepen market penetration or expand the Companys global
footprint. The Company also invested in expanding many of its
global operations with new equipment and capacity.
Brady acquired 11 companies in fiscal 2006
businesses that span the globe from the Americas to Europe to
Asia-Pacific. We have added strategically driven acquisitions in
people identification in the United States, wire identification
in Europe and precision die cut businesses that give us a global
leadership position in the mobile handset market, new
capabilities in the hard disk drive market and strengthen our
relatively small position in the medical converting market. We
also strengthened our MRO business in Australia with two
complementary acquisitions there.
Brady completed the addition of 90,000 square feet to its
corporate headquarters in Milwaukee, Wisconsin for a
consolidated warehouse and distribution center. Other
accomplishments in fiscal 2006 included the opening of a new
plant in Bratislava, Slovakia and continued expansion in India
and China. Brady strives to employ the same high safety and
environmental standards across the globe regardless of lesser
government requirements in some areas.
To fund this continued organic and acquisition growth, Brady
completed its first secondary stock offering to the public,
which generated approximately $157.7 million in cash. Brady
remains a financially strong company, with a solid balance sheet
and cash flow. In September 2006, the Company announced that it
will be increasing the cash dividend payment for the
21st straight year.
II-3
Results
of Operations
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 has been
significantly impacted by the following acquisitions completed
in fiscal 2006.
|
|
|
|
|
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
|
|
May 2006
|
|
|
and Asia-Pacific
|
|
|
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
Companys 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 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 caused sales to drop 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
unfavorable 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 favorable 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 offset by a 24.7% increase in sales in fiscal
2006. New product development continues to be a major focus of
the Brady management team.
Selling, general and administrative (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 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.
Operating income increased $34.1 million to
$156.5 million in fiscal 2006. As a percentage of sales,
operating income increased from 15.0% in fiscal 2005 to 15.4% in
fiscal 2006. The majority of the increase was due to sales
growth compounded by strong cost control. The existing
businesses improved operating income as a percent of sales,
which more than offset the negative impact from the acquisitions
completed in the year.
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.
II-4
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 full
twelve month impact of this additional fixed debt will be
$10.6 million.
The Companys effective tax rate decreased from 29.0% for
fiscal 2005 to 28.0% for fiscal 2006. The improvement in the
effective rate was due to a continuing shift to a higher
percentage of the Companys pre-tax income to lower tax
rate countries. An effective income tax rate of 28% is expected
for fiscal 2007.
Year
Ended July 31, 2005, Compared to Year Ended July 31,
2004
Sales for fiscal 2005 increased by $145.2 million or 21.6%
from fiscal 2004. Base sales, defined as sales in the
Companys existing core businesses and regions (exclusive
of acquisitions and foreign currency effects), increased
$38.4 million or 5.7% for the same period. The acquisitions
of ID Technologies (August 2004) in Singapore, Electromark
(February 2005) in the United States, and Signs &
Labels (June 2005) in the UK, increased sales by
$85.5 million or 12.7% in fiscal 2005 compared to fiscal
2004. The results of the acquisition of Technology Print
Supplies, Ltd., and its associate, Technology and Supply Media
Co., Ltd. in Thailand had minimal impact on the 2005 results
because they were purchased at the close of business on
July 29, 2005. The increase in sales was also aided by the
positive effect of fluctuations in the exchange rates used to
translate financial results into the United States Dollar, which
increased sales by $21.3 million or 3.2% for the year.
The gross margin as a percentage of sales increased from 51.5%
in fiscal 2004 to 53.1% in fiscal 2005. The increase was
primarily due to the following two factors:
1. Improved product mix attributable to EMED products,
which carry a higher gross margin; and
|
|
|
|
2.
|
Improvement in North American margins due to improved product
mix and continued cost control efforts.
|
This increase was partially offset by decreased margins due to
increased sales in Asia-Pacific, where gross margins are lower
due to a higher percentage of business coming from OEM
electronics customers.
Research and development expenses as a percentage of sales fell
from 3.4% in fiscal 2004 to 3.1% in fiscal 2005. Research and
development spending increases of 8.9% were offset by a 21.6%
increase in sales in fiscal 2005. Research and development
spending was lower than expected in the first three quarters of
fiscal 2005 as it took longer than expected to hire senior-level
research and development personnel. In the fourth quarter of
fiscal 2005, research and development spending increased 15.5%
over the same period in fiscal 2004.
Selling, general and administrative expenses as a percentage of
sales decreased to 35.0% in fiscal 2005 from 37.0% in fiscal
2004. The decrease was due primarily to the use of existing
resources to service greater sales volume and the increasing
sales in Asia-Pacific, which has lower selling, general and
administrative costs than the other regions. Offsetting the
sales volume increase were compliance costs related to the
Sarbanes-Oxley Act of 2002.
Fiscal 2004 expenses included a before tax net restructuring
charge of $3.2 million. Approximately $2.9 million of
the charge related to severance costs for employees. The
remaining amount was due to asset disposal at facilities,
primarily in North America and Europe.
Operating income increased $51.5 million to
$122.5 million in fiscal 2005. The majority of the increase
was due to sales growth, strong cost control, the increased
earnings of recent acquisitions, and the benefit of fluctuations
in exchange rates. The 2004 operating income included
$3.2 million of restructuring costs.
Investment and other income increased $0.8 million in
fiscal 2005 from the prior year, primarily due to the net effect
of foreign exchange rates on the Companys hedge contracts
and on short-term intercompany loans.
Interest expense increased $7.2 million in fiscal 2005 due
to the interest on the debt related to the acquisition of EMED.
Fiscal 2005 included a full year of interest, while fiscal 2004
included less than three months.
The Companys effective tax rate increased from 27.7% for
fiscal 2004 to 29.0% for fiscal 2005. The fiscal 2004 effective
tax rate included $3.0 million related to the completion of
the federal income tax audit of fiscal years
II-5
2000 through 2002. The improvement in the effective rate
(excluding the tax audit adjustment) was due to a shift in a
portion of the Companys pre-tax income to lower tax
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, 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
|
|
July 31, 2004
|
|
|
341,975
|
|
|
|
248,255
|
|
|
|
80,989
|
|
|
|
671,219
|
|
|
|
|
|
|
|
671,219
|
|
SALES GROWTH
INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
Year ended July 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Organic
|
|
|
4.4
|
%
|
|
|
2.5
|
%
|
|
|
21.4
|
%
|
|
|
5.7
|
%
|
|
|
|
|
|
|
5.7
|
%
|
Currency
|
|
|
1.2
|
%
|
|
|
6.0
|
%
|
|
|
3.0
|
%
|
|
|
3.2
|
%
|
|
|
|
|
|
|
3.2
|
%
|
Acquisitions
|
|
|
16.6
|
%
|
|
|
2.2
|
%
|
|
|
28.7
|
%
|
|
|
12.7
|
%
|
|
|
|
|
|
|
12.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
22.2
|
%
|
|
|
10.7
|
%
|
|
|
53.1
|
%
|
|
|
21.6
|
%
|
|
|
|
|
|
|
21.6
|
%
|
SEGMENT PROFIT
(LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
July 31, 2004
|
|
|
60,132
|
|
|
|
66,404
|
|
|
|
22,768
|
|
|
|
149,304
|
|
|
|
(4,696
|
)
|
|
|
144,608
|
|
NET
INCOME RECONCILIATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended:
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Total profit for reportable
segments
|
|
$
|
255,811
|
|
|
$
|
212,213
|
|
|
$
|
149,304
|
|
Corporate and eliminations
|
|
|
(10,633
|
)
|
|
|
(4,845
|
)
|
|
|
(4,696
|
)
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative costs
|
|
|
(88,662
|
)
|
|
|
(84,916
|
)
|
|
|
(70,446
|
)
|
Interest (expense)
income net
|
|
|
(14,231
|
)
|
|
|
(8,403
|
)
|
|
|
(1,231
|
)
|
Restructuring charge, net
|
|
|
|
|
|
|
|
|
|
|
(3,181
|
)
|
Investment and other income
|
|
|
2,403
|
|
|
|
1,369
|
|
|
|
577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
144,688
|
|
|
|
115,418
|
|
|
|
70,327
|
|
Income taxes
|
|
|
(40,513
|
)
|
|
|
(33,471
|
)
|
|
|
(19,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
104,175
|
|
|
$
|
81,947
|
|
|
$
|
50,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
II-6
The Company evaluates regional performance using sales and
segment profit. Segment profit or loss does not include certain
administrative costs, interest, restructuring charges,
investment and other income and income taxes.
Americas
Sales in the Americas region increased 19.4% from fiscal 2005 to
fiscal 2006, and 22.2% from fiscal 2004 to fiscal 2005. Organic
growth accounted for 5.0% in 2006 and 4.4% in 2005. 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 the Brady brand business. Within the
direct marketing business, base sales increased over the prior
year as well. The organic growth in fiscal 2005 was due
partially to an improving economy in the United States and
strong performance in the industrial OEM and electronics
markets. Also contributing to the base growth increase were the
following factors: Canada turned the corner in fiscal 2005 and
posted double-digit organic growth year over year and Brazil and
Mexico reported double-digit organic growth in fiscal 2005 as
well. The acquisitions of Stopware, TruMed, J.A.M., Personnel
Concepts and Identicard added 12.9% to fiscal 2006 sales. The
acquisitions of Brandon International, Prinzing Enterprises
Inc., EMED, and Electromark added 16.6% to fiscal 2005 sales.
The positive effect of fluctuations in the exchange rates used
to translate financial results into U.S. currency increased
sales in the region by 1.5% and 1.2% in fiscal 2006 and 2005,
respectively.
In the Americas region, segment profit as a percentage of sales
increased to 24.6% in 2006 from 23.5% in 2005. While the region
continues to experience increases on many of its materials and
utility costs, the impact on segment profit of the increase in
sales volume and sales prices has more than offset these cost
increases. As expected, the recent acquisitions have reported an
initial rate of profit that is below the average of the region.
As the businesses continue to integrate and achieve synergies,
profit levels are expected to increase, all other things being
equal. Comparing fiscal 2005 to 2004, segment profit as a
percentage of sales increased from 17.6% to 23.5%, due to the
increase in sales volume, profit from acquisitions, continuing
cost savings primarily in the direct marketing business and the
benefits from lower manufacturing costs of higher volume stock
products as we transferred production to the Companys
Mexico subsidiary.
Europe
Sales in the European region increased 16.3% in fiscal 2006 from
fiscal 2005 and 10.7% in fiscal 2005 from fiscal 2004. Organic
growth in fiscal 2006 accounted for 4.2% and 2.5% in fiscal
2005. 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
business, primarily from the expansion into Slovakia, Turkey and
the Nordic region. Foreign currency translation decreased the
regions sales by 4.3% from fiscal 2005 to 2006 compared to
an increase in the regions sales by 6.0% from fiscal 2004
to 2005. The acquisitions of Texit and Tradex added 16.4% to the
regions sales in fiscal 2006 and the acquisitions of
B.I.G. and Signs & Labels added 2.2% to the
regions sales in fiscal 2005.
Segment profit as a percentage of sales decreased to 26.3% in
fiscal 2006 from 29.0% in fiscal 2005 and increased to 29.0% in
fiscal 2005 from 26.7% in fiscal 2004. 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
Tradex, as we had anticipated. As Tradexs headquarters are
in Sweden, all of the headquarter costs are reflected in the
Europe segment. Excluding acquisitions in the year,
Europes segment profit as a percent of sales increased in
fiscal 2006 over fiscal 2005. The increase achieved in fiscal
2005 from 2004 was due to the restructuring activity completed
during fiscal 2004 and continued operational improvements.
Asia-Pacific
Asia-Pacific sales increased 61.4% in fiscal 2006 from fiscal
2005 and 53.1% in fiscal 2005 from fiscal 2004. Organic growth
accounted for 34.7% in fiscal 2006 and 21.4% in fiscal 2005. The
increase in organic growth 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 21.4%
increase in organic growth in fiscal 2005, a significant portion
was driven by growth in China as the Asian economy continued to
strengthen. Foreign currency translation increased the
regions sales by 1.6%
II-7
from fiscal 2005 to 2006 compared to an increase of 3.0% from
fiscal 2004 to 2005. The acquisitions of Technology Print Supply
and Technology Supply Media, QDPT, Accidental Health, Tradex,
Carroll and Daewon added 25.1% to the regions sales in
fiscal 2006, whereas the acquisition of ID Technologies added
28.7% in fiscal 2005.
Segment profit as a percentage of sales decreased to 24.7% in
fiscal 2006 from 27.6% in fiscal 2005 and to 27.6% in fiscal
2005 from 28.1% in fiscal 2004. The decrease experienced in
fiscal 2006 was due to the continued shift of business mix
towards the die cut business that 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. The decrease in the profit percentage in fiscal
2005 was also due to lower margins in China as a result of a
higher mix of OEM electronics, which have lower margins. As a
result of these pricing pressures, we will continue to focus on
generating efficiencies in our operations and the development of
proprietary new solutions.
Liquidity
and Capital Resources
Cash and cash equivalents were $113.0 million at
July 31, 2006, compared to $73.0 million at
July 31, 2005. Additionally, short-term investments,
consisting of investments in auction rate securities, were
$11.5 million at July 31, 2006, compared to
$7.1 million at July 31, 2005. Working capital
increased $98.9 million during fiscal 2006 to
$240.5 million and increased $9.9 million during
fiscal 2005 to $141.6 million. Accounts receivable balances
increased $64.5 million from July 31, 2005 to
July 31, 2006. 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 2006. Inventories increased
$39.2 million from July 31, 2005 to July 31, 2006
due to foreign currency translation, inventory of acquired
companies, and a planned increase in inventory levels in
Asia-Pacific and North America to meet demand for sales
initiatives and an extended supply chain due to the use of our
Mexican and Asian sourcing of purchased products. Current
liabilities increased $57.8 million due to increased
operating liabilities associated with acquisitions completed
during fiscal 2006.
The Company has maintained significant cash balances due in
large part to its strong operating cash flow, which totaled
$114.9 million for fiscal 2006, $119.1 million for
fiscal 2005 and $87.6 million for fiscal 2004. 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 and
$4.4 million for the fiscal years ended July 31, 2005
and 2004, respectively. The $31.5 million increase in
operating cash flows from fiscal 2004 to 2005 was primarily due
to a $31.1 million increase in net income.
Capital expenditures were $39.4 million in fiscal 2006,
$21.9 million in fiscal 2005 and $14.9 million in
fiscal 2004. 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. Capital expenditures in
2004 included plant additions/expansions in China and facility
improvement costs.
Financing activities provided $319.0 million of cash in
fiscal 2006, used $9.7 million in fiscal 2005 and provided
$146.1 million in fiscal 2004. 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 approximately $157.7 million. Cash used for dividends to
shareholders was $26.1 million in fiscal 2006,
$21.3 million in fiscal 2005 and $19.8 million in
fiscal 2004. Cash received from the exercise of stock options
was $8.9 million in fiscal 2006, $15.7 million in
fiscal 2005 and $19.4 million in fiscal 2004. The Company
purchased treasury stock of $24.7 million in fiscal 2006,
$1.6 million in fiscal 2005 and $0.6 million in fiscal
2004. 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 Companys 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 year 2006. The remainder of the
treasury stock purchases resulted from purchases of Class A
Common Stock by the Companys deferred compensation plan.
On March 31, 2004, the Company entered into an unsecured
$215.0 million multi-currency revolving loan agreement with
a group of five banks. The $215.0 million was divided
between a
5-year
credit facility for
II-8
$125.0 million and a
364-day
credit facility for $90.0 million. On July 6, 2004,
the Company permanently reduced the borrowings on the
364-day
facility to $0 and closed the facility. On January 19,
2006, the agreement was amended to increase the available amount
under the
5-year
credit facility to $200.0 million from $125.0 million
(the previous credit facility).
On October 5, 2006, the Company entered into a
$200.0 million multi-currency revolving loan agreement with
a group of five banks that replaced the previous credit
facility. At the Companys option, and subject to certain
standard conditions, the available amount under the new credit
facility may be increased from $200.0 million up to
$300.0 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 Companys consolidated leverage ratio). A
commitment fee is payable on the unused amount of the facility.
The agreement requires the Company to maintain two financial
covenants. As of October 5, 2006, the Company was in
compliance with the covenants of the new agreement, and as of
July 31, 2006, the Company was in compliance with the
covenants of the previous credit facility.
The new agreement restricts the amount of certain types of
payments, including dividends, which can be made annually to
$50.0 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 2006 and 2005,
the Company borrowed and repaid $415.7 million and
$83.0 million, respectively. As of July 31, 2006 and
October 5, 2006, there were $0 and $10.0 million of
outstanding borrowings under the previous credit facility or the
new credit facility, respectively.
On February 14, 2006, the Company completed the private
placement of $200.0 million in ten-year fixed notes at 5.3%
interest to institutional investors. The notes will be amortized
in equal installments over seven years, beginning in 2010 with
interest payable on the notes semiannually on August 14 and
February 14, beginning in August 2006. The notes have been
fully and unconditionally guaranteed on an unsecured basis by
the Companys domestic subsidiaries. The Company used the
net proceeds of the offering to finance acquisitions completed
in fiscal 2006 and intends to use the remainder to fund future
acquisitions 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, 2006, the
Company was in compliance with this covenant.
On June 30, 2004, the Company finalized a debt offering of
$150.0 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 Companys 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 Companys revolving credit facilities used to
initially fund the EMED acquisition. The debt has certain
prepayment penalties for repaying the debt prior to its maturity
date. The agreement also requires the Company to maintain a
financial covenant. As of July 31, 2006, the Company was in
compliance with this covenant.
Long-term obligations as a percentage of long-term obligations
plus stockholders investment were 31.9% at July 31,
2006 and 23.2% at July 31, 2005. Long-term obligations
increased by $200.0 million from July 31, 2005 to
July 31, 2006 due to the private placement that was
completed during the year and stockholders investment
increased $248.3 million during this period due to net
earnings for fiscal 2006 and the effect of the issuance of stock
from the equity offering.
The Company intends to fund its short-term and long-term cash
requirements, including its fiscal 2007 dividend payments,
primarily through net cash provided by operating activities.
II-9
The Company believes that its continued strong cash flows from
operations and existing borrowing capacity will enable it to
execute its long-term strategic plan. This strategic plan
includes investments, which expand its current market share,
open new markets and geographies, develop new products and
distribution channels and continue to improve our processes.
This strategic plan also includes executing key acquisitions.
Subsequent
Events Affecting Liquidity and Capital Resources
On August 15, 2006, the Company completed the acquisition
of CIPI, headquartered in Burlington, Massachusetts. 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 and government buildings.
Founded in 1966, CIPI had sales of approximately
$31 million in its fiscal 2005 and currently employs
approximately 900 people at operations in the United States, the
Netherlands, Hong Kong and China.
On September 12, 2006, the Board of Directors announced an
increase in the quarterly dividend to shareholders of the
Companys Class A Common Stock, from $0.13 to
$0.14 per share. The dividend will be paid on
October 31, 2006, to shareholders of record at the close of
business on October 10, 2006. This dividend represents an
increase of 7.7% percent and is the 21st consecutive annual
increase in dividends since the Company went public in 1984.
Off-Balance
Sheet Arrangements
The Company does not have material off-balance sheet
arrangements or related party transactions. The Company is not
aware of factors that are reasonably likely to adversely affect
liquidity trends, other than the risks discussed in this filing
and presented in other Company filings. However, the following
additional information is provided to assist financial statement
users.
Operating Leases These leases generally are
entered into for investments in facilities such as manufacturing
facilities, warehouses and office buildings, computer equipment
and company vehicles, for which the economic profile is
favorable.
Purchase Commitments The Company has purchase
commitments for materials, supplies, services, and property,
plant and equipment 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 Companys
materials and processes, certain supply contracts contain
penalty provisions for early termination. The Company does not
believe a material amount of penalties will be incurred under
these contracts based upon historical experience and current
expectations.
Other Contractual Obligations The Company
does not have material financial guarantees or other contractual
commitments that are reasonably likely to adversely affect
liquidity other than those discussed below under Payments
Due Under Contractual Obligations.
Related Party Transactions The Company does
not have related party transactions that affect the results of
operations, cash flow or financial condition.
II-10
Payments
Due Under Contractual Obligations
The Companys future commitments at July 31, 2006 for
long-term debt, operating lease obligations, purchase
obligations, interest obligations and other obligations are as
follows (dollars in thousands):
|
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|
|
|
|
|
|
|
|
|
|
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Payments Due by Period
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|
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|
|
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Less than
|
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1-3
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|
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3-5
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|
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More than
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Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Long-Term Debt Obligations
|
|
$
|
350,038
|
|
|
$
|
20
|
|
|
$
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42,875
|
|
|
$
|
100,000
|
|
|
$
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207,143
|
|
Operating Lease Obligations
|
|
|
51,946
|
|
|
|
15,744
|
|
|
|
20,931
|
|
|
|
8,199
|
|
|
|
7,072
|
|
Purchase Obligations(1)
|
|
|
47,860
|
|
|
|
47,250
|
|
|
|
400
|
|
|
|
210
|
|
|
|
0
|
|
Interest Obligations
|
|
|
112,750
|
|
|
|
18,310
|
|
|
|
35,519
|
|
|
|
29,598
|
|
|
|
29,323
|
|
Other Obligations(2)
|
|
|
7,490
|
|
|
|
628
|
|
|
|
1,370
|
|
|
|
1,521
|
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|
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3,971
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
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$
|
570,084
|
|
|
$
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81,952
|
|
|
$
|
101,095
|
|
|
$
|
139,528
|
|
|
$
|
247,509
|
|
|
|
|
|
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|
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(1) |
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Purchase obligations include all open purchase orders as of
July 31, 2006. |
|
(2) |
|
Other obligations represent expected payments under the
Companys postretirement medical, dental, and vision plan
as disclosed in Note 3 to the consolidated financial
statements, under Item 8 of this report. |
Inflation
and Changing Prices
Essentially all of the Companys 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.
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 Companys ability to successfully manage
regulatory matters around the world, and future business results
may affect the amount of deferred tax liabilities or the
valuation of deferred tax assets over time. The Companys
accounting for deferred tax consequences represents
managements best estimate of future events that can be
appropriately reflected in the accounting estimates. Although
the Companys 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 managements estimates
or judgments could result in an impairment charge, and such a
charge could
II-11
have an adverse effect on the Companys 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 Bradys
future financial position, business strategy, targets, projected
sales, costs, earnings, capital expenditures, debt levels and
cash flows, and plans and objectives of management for future
operations are forward-looking statements. When used in this
Form 10-K,
words such as may, will,
expect, intend, estimate,
anticipate, believe, should,
project or plan or similar terminology
are generally intended to identify forward-looking statements.
These forward-looking statements by their nature address matters
that are, to different degrees, uncertain and are subject to
risks, assumptions and other factors, some of which are beyond
Bradys control, that could cause actual results to differ
materially from those expressed or implied by such
forward-looking statements. For Brady, uncertainties arise from
future financial performance of major markets Brady serves,
which include, without limitation, telecommunications,
manufacturing, electrical, construction, laboratory, education,
governmental, public utility, computer, transportation;
difficulties in making and integrating acquisitions; risks
associated with newly acquired businesses; Bradys ability
to retain significant contracts and customers; future
competition; Bradys ability to develop and successfully
market new products; changes in the supply of, or price for,
parts and components; increased price pressure from suppliers
and customers; interruptions to sources of supply;
environmental, health and safety compliance costs and
liabilities; Bradys ability to realize cost savings from
operating initiatives; Bradys ability to attract and
retain key talent; difficulties associated with exports; risks
associated with international operations; fluctuations in
currency rates versus the US dollar; technology changes;
potential write-offs of Bradys substantial intangible
assets; risks associated with obtaining governmental approvals
and maintaining regulatory compliance for new and existing
products; business interruptions due to implementing business
systems; and numerous other matters of national, regional and
global scale, including those of a political, economic,
business, competitive and regulatory nature contained from time
to time in Bradys U.S. Securities and Exchange
Commission filings, including, but not limited to, those factors
listed in the Risk Factors section located in
Item 1A of Part I of this
Form 10-K.
These uncertainties may cause Bradys actual future results
to be materially different than those expressed in its
forward-looking statements. Brady does not undertake to update
its forward-looking statements.
Risk
Factors
Please see the information contained in Item 1A
Risk Factors.
II-12
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Item 7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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The Companys business operations give rise to market risk
exposure due to changes in foreign exchange rates. To manage
that risk effectively, the Company enters into hedging
transactions, according to established guidelines and policies,
that enable it to mitigate the adverse effects of this financial
market risk.
The global nature of the Companys business requires active
participation in the foreign exchange markets. As a result of
investments, production facilities and other operations on a
global scale, the Company has assets, liabilities and cash flows
in currencies other than the U.S. Dollar. The primary
objective of the Companys foreign-currency exchange risk
management is to minimize the impact of currency movements on
intercompany transactions and foreign raw-material imports. To
achieve this objective, 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
RMB 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
Companys interest rate risk management activities is to
manage the levels of the Companys fixed and floating
interest rate exposure to be consistent with the Companys
preferred mix. The interest rate risk management program allows
the Company to enter into approved interest rate derivatives if
there is a desire to modify the Companys exposure to
interest rates. As of July 31, 2006, the Company had no
interest rate derivatives.
II-13
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Item 8.
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Financial
Statements and Supplementary Data
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BRADY
CORPORATION & SUBSIDIARIES
INDEX TO
FINANCIAL STATEMENTS
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Page
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II-15
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Financial Statements:
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II-16
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II-17
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II-18
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II-19
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II-20
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II-14
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, 2006 and 2005, and the related consolidated
statements of income, stockholders investment, and cash
flows for each of the three years in the period ended
July 31, 2006. 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 Companys management. Our
responsibility is to express an opinion on the financial
statements and financial statement schedules 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, 2006 and
2005, and the results of their operations and their cash flows
for each of the three years in the period ended July 31,
2006, 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 Companys internal control over
financial reporting as of July 31, 2006, 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 28, 2006 expressed an unqualified opinion on
managements assessment of the effectiveness of the
Companys internal control over financial reporting and an
unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
/s/ Deloitte &
Touche LLP
Milwaukee, WI
September 28, 2006
II-15
BRADY
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
July 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
113,008
|
|
|
$
|
72,970
|
|
Short term investments
|
|
|
11,500
|
|
|
|
7,100
|
|
Accounts receivable, less allowance
for losses ($6,390 and $3,726, respectively)
|
|
|
187,907
|
|
|
|
123,453
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Finished products
|
|
|
59,365
|
|
|
|
38,827
|
|
Work-in-process
|
|
|
12,850
|
|
|
|
9,681
|
|
Raw materials and supplies
|
|
|
37,702
|
|
|
|
22,227
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
109,917
|
|
|
|
70,735
|
|
Prepaid expenses and other current
assets
|
|
|
36,825
|
|
|
|
28,114
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
459,157
|
|
|
|
302,372
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
587,642
|
|
|
|
332,369
|
|
Other intangibles assets
|
|
|
134,111
|
|
|
|
71,647
|
|
Deferred income taxes
|
|
|
34,135
|
|
|
|
39,043
|
|
Other
|
|
|
10,235
|
|
|
|
6,305
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
Land
|
|
|
6,548
|
|
|
|
6,388
|
|
Buildings and improvements
|
|
|
78,418
|
|
|
|
65,007
|
|
Machinery and equipment
|
|
|
198,426
|
|
|
|
157,093
|
|
Construction in progress
|
|
|
12,098
|
|
|
|
6,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
295,490
|
|
|
|
234,998
|
|
Less accumulated depreciation
|
|
|
155,584
|
|
|
|
136,587
|
|
|
|
|
|
|
|
|
|
|
Property, plant and
equipment net
|
|
|
139,906
|
|
|
|
98,411
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,365,186
|
|
|
$
|
850,147
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS INVESTMENT
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
78,585
|
|
|
$
|
52,696
|
|
Wages and amounts withheld from
employees
|
|
|
61,778
|
|
|
|
49,620
|
|
Taxes, other than income taxes
|
|
|
6,231
|
|
|
|
4,815
|
|
Accrued income taxes
|
|
|
25,243
|
|
|
|
24,028
|
|
Other current liabilities
|
|
|
46,763
|
|
|
|
29,649
|
|
Short-term borrowings and current
maturities on long-term obligations
|
|
|
20
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
218,620
|
|
|
|
160,812
|
|
Long-term obligations, less current
maturities
|
|
|
350,018
|
|
|
|
150,026
|
|
Other liabilities
|
|
|
50,502
|
|
|
|
42,035
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
619,140
|
|
|
|
352,873
|
|
|
|
|
|
|
|
|
|
|
Stockholders investment:
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
Class A Nonvoting
Issued 50,481,743 and 45,877,543 shares, respectively
(aggregate liquidation preference of $42,152 and $38,308 at
July 31, 2006 and 2005, respectively)
|
|
|
505
|
|
|
|
458
|
|
Class B Voting
Issued and outstanding 3,538,628 shares
|
|
|
35
|
|
|
|
35
|
|
Additional paid-in capital
|
|
|
258,922
|
|
|
|
99,029
|
|
Earnings retained in the business
|
|
|
460,991
|
|
|
|
382,880
|
|
Treasury stock 292,901
and 85,344 shares, respectively of Class A nonvoting
common stock, at cost
|
|
|
(10,865
|
)
|
|
|
(1,575
|
)
|
Accumulated other comprehensive
income
|
|
|
35,696
|
|
|
|
17,497
|
|
Other
|
|
|
762
|
|
|
|
(1,050
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders investment
|
|
|
746,046
|
|
|
|
497,274
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,365,186
|
|
|
$
|
850,147
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
II-16
BRADY
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
Years Ended July 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
1,018,436
|
|
|
$
|
816,447
|
|
|
$
|
671,219
|
|
Cost of products sold
|
|
|
492,681
|
|
|
|
383,171
|
|
|
|
325,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
525,755
|
|
|
|
433,276
|
|
|
|
345,361
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
30,443
|
|
|
|
25,078
|
|
|
|
23,028
|
|
Selling, general and administrative
|
|
|
338,796
|
|
|
|
285,746
|
|
|
|
248,171
|
|
Restructuring charge
net
|
|
|
|
|
|
|
|
|
|
|
3,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
369,239
|
|
|
|
310,824
|
|
|
|
274,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
156,516
|
|
|
|
122,452
|
|
|
|
70,981
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and other
income net
|
|
|
2,403
|
|
|
|
1,369
|
|
|
|
577
|
|
Interest expense
|
|
|
(14,231
|
)
|
|
|
(8,403
|
)
|
|
|
(1,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other expense
|
|
|
(11,828
|
)
|
|
|
(7,034
|
)
|
|
|
(654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
144,688
|
|
|
|
115,418
|
|
|
|
70,327
|
|
Income taxes
|
|
|
40,513
|
|
|
|
33,471
|
|
|
|
19,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
104,175
|
|
|
$
|
81,947
|
|
|
$
|
50,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Nonvoting:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.10
|
|
|
$
|
1.67
|
|
|
$
|
1.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
2.07
|
|
|
$
|
1.64
|
|
|
$
|
1.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
$
|
0.52
|
|
|
$
|
0.44
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Voting:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.09
|
|
|
$
|
1.66
|
|
|
$
|
1.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
2.05
|
|
|
$
|
1.63
|
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
$
|
0.50
|
|
|
$
|
0.42
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average Class A and
Class B common shares outstanding(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
49,494
|
|
|
|
48,967
|
|
|
|
47,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
50,385
|
|
|
|
49,859
|
|
|
|
47,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Adjusted for
two-for-one
stock split in the form of a 100% stock dividend, effective
December 31, 2004 |
See notes to consolidated financial statements.
II-17
BRADY
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS INVESTMENT
Years Ended JULY 31, 2006, 2005 AND 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2003
|
|
$
|
466
|
|
|
$
|
47,232
|
|
|
$
|
290,805
|
|
|
$
|
(509
|
)
|
|
$
|
1,595
|
|
|
$
|
(628
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
50,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,871
|
|
Net currency translation adjustment
and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,745
|
|
|
|
|
|
|
|
7,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 1,607,058 shares
of Class A Common Stock under stock option plan
|
|
|
16
|
|
|
|
19,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
346
|
|
|
|
|
|
Tax benefit from exercise of stock
options
|
|
|
|
|
|
|
4,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of 32,790 shares of
Class A Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(565
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
1,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends on Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
$.42 per share
|
|
|
|
|
|
|
|
|
|
|
(18,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B
$.40 per share
|
|
|
|
|
|
|
|
|
|
|
(1,427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at July 31, 2004
|
|
$
|
482
|
|
|
$
|
72,625
|
|
|
$
|
322,224
|
|
|
$
|
(1,074
|
)
|
|
$
|
9,340
|
|
|
$
|
(282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
81,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
81,947
|
|
Net currency translation adjustment
and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,157
|
|
|
|
|
|
|
|
8,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
90,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 1,117,431 shares
of Class A Common Stock under stock option plan
|
|
|
11
|
|
|
|
15,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(768
|
)
|
|
|
|
|
Tax benefit from exercise of stock
options
|
|
|
|
|
|
|
5,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of 16,030 shares of
Class A Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
5,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends on Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
$.44 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
II-18
BRADY
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years Ended July 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
104,175
|
|
|
$
|
81,947
|
|
|
$
|
50,871
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
35,144
|
|
|
|
26,822
|
|
|
|
20,190
|
|
Gain on foreign currency contract
|
|
|
(1,516
|
)
|
|
|
|
|
|
|
|
|
Income tax benefit from the
exercise of stock options
|
|
|
|
|
|
|
5,385
|
|
|
|
4,406
|
|
Deferred income taxes
|
|
|
(1,843
|
)
|
|
|
(2,653
|
)
|
|
|
5,172
|
|
Loss on sale of property, plant and
equipment
|
|
|
124
|
|
|
|
743
|
|
|
|
321
|
|
Provision for losses on accounts
receivable
|
|
|
1,152
|
|
|
|
1,216
|
|
|
|
1,450
|
|
Non-cash portion of stock-based
compensation expense
|
|
|
5,568
|
|
|
|
5,579
|
|
|
|
1,927
|
|
Net restructuring charge accrued
liability
|
|
|
|
|
|
|
|
|
|
|
3,221
|
|
Changes in operating assets and
liabilities (net of effects of business acquisitions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(13,620
|
)
|
|
|
(7,132
|
)
|
|
|
(11,979
|
)
|
Inventories
|
|
|
(16,961
|
)
|
|
|
(11,847
|
)
|
|
|
(6,791
|
)
|
Prepaid expenses and other assets
|
|
|
(2,163
|
)
|
|
|
(3,572
|
)
|
|
|
2,168
|
|
Accounts payable and accrued
liabilities
|
|
|
10,421
|
|
|
|
8,827
|
|
|
|
15,210
|
|
Income taxes
|
|
|
58
|
|
|
|
9,662
|
|
|
|
(393
|
)
|
Other liabilities
|
|
|
(5,643
|
)
|
|
|
4,126
|
|
|
|
1,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
114,896
|
|
|
|
119,103
|
|
|
|
87,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of businesses, net of
cash acquired
|
|
|
(351,331
|
)
|
|
|
(79,926
|
)
|
|
|
(228,928
|
)
|
Purchases of short-term investments
|
|
|
(150,900
|
)
|
|
|
(50,025
|
)
|
|
|
(38,450
|
)
|
Sales of short-term investments
|
|
|
146,500
|
|
|
|
48,075
|
|
|
|
42,850
|
|
Purchases of property, plant and
equipment
|
|
|
(39,410
|
)
|
|
|
(21,920
|
)
|
|
|
(14,892
|
)
|
Net settlement of foreign currency
contract
|
|
|
1,516
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of property,
plant and equipment
|
|
|
546
|
|
|
|
390
|
|
|
|
448
|
|
Other
|
|
|
(2,203
|
)
|
|
|
(1,686
|
)
|
|
|
(1,533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(395,282
|
)
|
|
|
(105,092
|
)
|
|
|
(240,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of dividends
|
|
|
(26,064
|
)
|
|
|
(21,291
|
)
|
|
|
(19,805
|
)
|
Proceeds from issuance of common
stock
|
|
|
166,664
|
|
|
|
15,734
|
|
|
|
19,422
|
|
Principal payments on debt
|
|
|
(417,601
|
)
|
|
|
(85,604
|
)
|
|
|
(161,578
|
)
|
Proceeds from issuance of debt
|
|
|
615,730
|
|
|
|
83,000
|
|
|
|
310,000
|
|
Purchase of treasury stock
|
|
|
(24,683
|
)
|
|
|
(1,551
|
)
|
|
|
(564
|
)
|
Income tax benefit from the
exercise of stock options
|
|
|
4,912
|
|
|
|
|
|
|
|
|
|
Debt issue costs
|
|
|
|
|
|
|
|
|
|
|
(1,372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
provided by financing activities
|
|
|
318,958
|
|
|
|
(9,712
|
)
|
|
|
146,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash
|
|
|
1,466
|
|
|
|
(117
|
)
|
|
|
6,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
40,038
|
|
|
|
4,182
|
|
|
|
183
|
|
Cash and cash equivalents,
beginning of year
|
|
|
72,970
|
|
|
|
68,788
|
|
|
|
68,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
year
|
|
$
|
113,008
|
|
|
$
|
72,970
|
|
|
$
|
68,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net of capitalized
interest
|
|
$
|
8,991
|
|
|
$
|
7,836
|
|
|
$
|
506
|
|
Income taxes, net of refunds
|
|
|
37,661
|
|
|
|
19,358
|
|
|
|
10,977
|
|
Acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired, net
of cash
|
|
$
|
167,900
|
|
|
$
|
60,193
|
|
|
$
|
96,656
|
|
Liabilities assumed
|
|
|
(63,667
|
)
|
|
|
(35,113
|
)
|
|
|
(8,674
|
)
|
Goodwill
|
|
|
247,098
|
|
|
|
54,846
|
|
|
|
140,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid for acquisitions
|
|
$
|
351,331
|
|
|
$
|
79,926
|
|
|
$
|
228,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
II-19
BRADY
CORPORATION AND SUBSIDIARIES
Years
Ended July 31, 2006, 2005 and 2004
(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. Bradys 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, 2006 and July 31, 2005 was $11,500 and
$7,100, 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 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 30% of total inventories at
July 31, 2006 and approximately 37% of total inventories at
July 31, 2005) and the
first-in,
first-out (FIFO) or average cost methods for other
inventories. The carrying value of certain domestic inventories
stated at FIFO cost exceeded the value of such inventories
stated at LIFO cost by $8,863 and $8,499 at July 31, 2006
and 2005, respectively.
II-20
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,
principally on a straight-line basis, over the estimated periods
benefited. Intangible assets with indefinite useful lives and
goodwill are not subjected to amortization. These assets are
assessed for impairment annually and when deemed necessary.
Changes in the carrying amount of goodwill for the years ended
July 31, 2006 and 2005, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
Europe
|
|
|
Asia-Pacific
|
|
|
Total
|
|
|
Balance as of July 31, 2004
|
|
$
|
217,316
|
|
|
$
|
55,848
|
|
|
$
|
2,733
|
|
|
$
|
275,897
|
|
Goodwill acquired during the period
|
|
|
8,771
|
|
|
|
18,326
|
|
|
|
28,176
|
|
|
|
55,273
|
|
Translation adjustments and other
|
|
|
756
|
|
|
|
(630
|
)
|
|
|
1,073
|
|
|
|
1,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Translation adjustments and other
|
|
|
731
|
|
|
|
4,356
|
|
|
|
3,088
|
|
|
|
8,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of July 31, 2006
|
|
$
|
322,759
|
|
|
$
|
111,792
|
|
|
$
|
153,091
|
|
|
$
|
587,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill increased by $255,273 during the year ended
July 31, 2006, including an increase of $8,175 attributable
to the effects of foreign currency translation and adjustments
to the preliminary 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.
II-21
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following acquisitions completed in fiscal 2006 increased
goodwill by the following amounts:
|
|
|
|
|
|
|
|
|
Segment
|
|
Goodwill
|
|
STOPware, Inc.
(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
|
|
QDP Thailand Co., Ltd.
(QDPT)
|
|
Asia-Pacific
|
|
|
2,298
|
|
Daewon Industry Corporation
(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 Converting AB
(Tradex)
|
|
Americas, Europe and Asia-Pacific
|
|
|
106,411
|
|
Goodwill increased by $56,472 during the year ended
July 31, 2005, including an increase of $1,199 attributable
to the effects of foreign currency translation and other. The
acquisitions of Emed Co, Inc. (EMED) and Electromark
in the Americas, ID Technologies, Inc. and TPS in Asia-Pacific,
and Signs & Labels in Europe resulted in $427, $8,344,
$25,926, $2,250 and $18,326 of additional goodwill, respectively.
Other intangible assets include patents, trademarks, non-compete
agreements and other intangible assets with finite lives being
amortized in accordance with Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets. The net book value of these
assets was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2006
|
|
|
July 31, 2005
|
|
|
|
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
|
|
|
$
|
7,885
|
|
|
$
|
(5,134
|
)
|
|
$
|
2,751
|
|
|
|
16
|
|
|
$
|
6,830
|
|
|
$
|
(4,525
|
)
|
|
$
|
2,305
|
|
Trademarks and other
|
|
|
6
|
|
|
|
3,328
|
|
|
|
(2,106
|
)
|
|
|
1,222
|
|
|
|
10
|
|
|
|
1,370
|
|
|
|
(1,134
|
)
|
|
|
236
|
|
Customer relationships
|
|
|
7
|
|
|
|
109,955
|
|
|
|
(17,693
|
)
|
|
|
92,262
|
|
|
|
8
|
|
|
|
51,211
|
|
|
|
(7,244
|
)
|
|
|
43,967
|
|
Purchased software
|
|
|
5
|
|
|
|
3,288
|
|
|
|
(1,887
|
)
|
|
|
1,401
|
|
|
|
5
|
|
|
|
3,148
|
|
|
|
(1,353
|
)
|
|
|
1,795
|
|
Non-compete agreements
|
|
|
4
|
|
|
|
9,757
|
|
|
|
(4,448
|
)
|
|
|
5,309
|
|
|
|
4
|
|
|
|
6,216
|
|
|
|
(3,212
|
)
|
|
|
3,004
|
|
Unamortized other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
N/A
|
|
|
|
31,166
|
|
|
|
|
|
|
|
31,166
|
|
|
|
N/A
|
|
|
|
20,340
|
|
|
|
|
|
|
|
20,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
165,379
|
|
|
$
|
(31,268
|
)
|
|
$
|
134,111
|
|
|
|
|
|
|
$
|
89,115
|
|
|
$
|
(17,468
|
)
|
|
$
|
71,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The acquisitions completed in fiscal 2006 (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 Tradex, Personnel Concepts, Daewon,
IDenticard, and Carroll which added $25,076, $6,000, $5,300,
$5,210, and $4,512, respectively. These assets will be amortized
over a weight average amortization period of six years. The
increase in non-compete agreements is primarily attributable to
the
II-22
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Carroll acquisition, which added $1,594. It will be amortized
over a five year life. The increase in unamortized trademarks
relates mainly to the acquisitions of Personnel Concepts and
IDenticard, adding $7,900 and $1,680, respectively.
The value of goodwill and other intangible assets in the
consolidated balance sheet at July 31, 2006 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, 2006.
Amortization expense of intangible assets during fiscal 2006,
2005, and 2004 was $13,633, $7,935, and $2,965, respectively.
The amortization over each of the next five fiscal years is
projected to be $19,370, $18,662, $18,098, $17,046 and $13,638
for the years ending July 31, 2007, 2008, 2009, 2010 and
2011, 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 2006,
there have been no indications of impairment in the
Companys long-lived and other intangible assets.
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 Companys 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, 2006.
Catalog Costs Direct response catalog costs
are primarily capitalized and amortized over the estimated
useful lives of the publications (generally less than one year).
Non-direct response catalog costs are recorded as prepaid
supplies and recorded as advertising expense as they are
consumed (less than one year). At July 31, 2006 and 2005,
$14,331 and $13,887, 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
Companys policy is to recognize revenue when title to the
product, ownership and risk of loss have transferred to the
customer, persuasive evidence of an arrangement exits and
collection of the sales proceeds is reasonably assured, all of
which generally occur upon shipment of goods to customers. The
vast majority of the Companys 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 Companys business and the
applicable rules guiding revenue recognition, the Companys
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 Boards Emerging Issues Task
Force Issue (EITF)
No. 01-9,
Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of the
II-23
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Vendors 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, 2006, 2005
and 2004 were $57,253, $50,405 and $46,143, 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 year ended
July 31, 2006 was $5,568 ($3,396 net of taxes). As of
July 31, 2006, total unrecognized compensation cost related
to share-based compensation awards was approximately $9,507, net
of estimated forfeitures, which the Company expects to recognize
over a weighted-average period of approximately 2.0 years.
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 2006
includes: (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
costs for the fiscal years ended July 31, 2005 and 2004
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 would have been changed to the pro forma
amounts indicated below:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
81,947
|
|
|
$
|
50,871
|
|
Stock-based compensation expense
recorded, net of tax effect
|
|
|
3,350
|
|
|
|
1,133
|
|
Pro-forma expense, net of tax
effect
|
|
|
(3,344
|
)
|
|
|
(2,377
|
)
|
|
|
|
|
|
|
|
|
|
Pro-forma net income, net of tax
effect
|
|
$
|
81,953
|
|
|
$
|
49,627
|
|
|
|
|
|
|
|
|
|
|
II-24
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income per Class A Common
Share:
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
1.67
|
|
|
$
|
1.08
|
|
Pro-forma adjustments
|
|
|
|
|
|
|
(0.03
|
)
|
Pro-forma net income per share
|
|
|
1.67
|
|
|
|
1.05
|
|
Diluted:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
1.64
|
|
|
$
|
1.07
|
|
Pro-forma adjustments
|
|
|
|
|
|
|
(0.03
|
)
|
Pro-forma net income per share
|
|
|
1.64
|
|
|
|
1.04
|
|
Net income per Class B Common
Share:
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
1.66
|
|
|
$
|
1.06
|
|
Pro-forma adjustments
|
|
|
|
|
|
|
(0.03
|
)
|
Pro-forma net income per share
|
|
|
1.66
|
|
|
|
1.03
|
|
Diluted:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
1.63
|
|
|
$
|
1.05
|
|
Pro-forma adjustments
|
|
|
|
|
|
|
(0.03
|
)
|
Pro-forma net income per share
|
|
|
1.63
|
|
|
|
1.02
|
|
The fair value of stock options used to compute pro-forma net
income and net income per common share disclosure is the
estimated present value at grant date using the Black-Scholes
option-pricing model with weighted average assumptions and the
resulting estimated fair value for fiscal years 2005 and 2004 as
follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Risk-free interest rate
|
|
|
3.1
|
%
|
|
|
2.6
|
%
|
Expected volatility
|
|
|
31.1
|
%
|
|
|
36.5
|
%
|
Dividend yield
|
|
|
1.9
|
%
|
|
|
2.5
|
%
|
Expected option life
|
|
|
4.5 years
|
|
|
|
4.0 years
|
|
Weighted average estimated fair
value at grant date
|
|
$
|
7.04
|
|
|
$
|
8.81
|
|
The Company has estimated the fair value of its
performance-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 for fiscal year 2006 are reflected in the following table:
|
|
|
|
|
|
|
|
|
|
|
Performance-Based
|
|
|
Service-Based
|
|
Black-Scholes Option Valuation Assumptions
|
|
Options
|
|
|
Options
|
|
|
Expected term (in years)
|
|
|
3.39
|
|
|
|
5.72
|
|
Expected volatility
|
|
|
31.10
|
%
|
|
|
34.54
|
%
|
Expected dividend yield
|
|
|
1.50
|
%
|
|
|
1.52
|
%
|
Risk-free interest rate
|
|
|
4.09
|
%
|
|
|
4.53
|
%
|
Weighted-average market value of
underlying stock at grant date
|
|
$
|
33.89
|
|
|
$
|
37.62
|
|
Weighted-average exercise price
|
|
$
|
33.89
|
|
|
$
|
37.62
|
|
Weighted-average fair value of
options granted
|
|
$
|
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
II-25
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
volatilities are based on the historical volatility of the
Companys stock. The expected dividend yield is based on
the Companys historical dividend payments. 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.
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, and their related tax effects. The
components of accumulated other comprehensive income were as
follows:
|
|
|
|
|
|
|
|
|
|
|
July 31, 2006
|
|
|
July 31, 2005
|
|
|
Unrealized (loss) gain on cash
flow hedges and securities in deferred compensation plans
|
|
$
|
(90
|
)
|
|
$
|
779
|
|
Deferred tax on cash flow hedges
and securities in deferred compensation plans
|
|
|
35
|
|
|
|
(304
|
)
|
Cumulative translation adjustments
|
|
|
35,751
|
|
|
|
17,022
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income
|
|
$
|
35,696
|
|
|
$
|
17,497
|
|
|
|
|
|
|
|
|
|
|
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 Companys financial results and its
economic well-being. While the Companys 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, 2006 and 2005 was $(355) and $618, 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.
II-26
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 enterprises
financial statements in accordance with FASB Statement
No. 109, Accounting for Income Taxes. This
interpretation establishes a threshold condition that a tax
position must meet for any part of the benefit of that position
to be recognized in the financial statements. This
Interpretation also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. This interpretation is
effective for fiscal years beginning after December 15,
2006. The Company has not yet completed the process of
evaluating the impact that will result from adopting FIN 48
and therefore is unable to disclose the impact that adopting
FIN 48 will have on its financial position and results of
operations when such statement is adopted.
Reclassifications Certain prior year amounts
have been reclassified to conform to the current year
presentation. The reclassifications did not impact the
Companys net income or net income per share.
|
|
2.
|
Acquisitions
of Businesses
|
The Company completed eleven business acquisitions during the
fiscal year ended July 31, 2006 and four acquisitions
during each of the fiscal years ended July 31, 2005 and
2004. 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, 2006, and will adjust the allocations
as additional information relative to the fair values of assets
and liabilities of the acquired businesses become known.
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.
|
|
|
|
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 is 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.
|
|
|
|
J.A.M. is 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.
|
|
|
|
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.
|
II-27
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
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 is 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.
|
|
|
|
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.
|
|
|
|
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 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.
|
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, $28,113 associated with
TruMed, J.A.M. and IDenticard is expected to be deductible for
tax purposes based on preliminary analysis.
The purchase agreements for Texit, QDPT, and Stopware each
include provisions for contingent payments based upon meeting
certain performance conditions over a period of time subsequent
to the acquisition. As of July 31, 2006, $1,000 has been
recorded as a liability on the accompanying consolidated
financial statements as a portion of the performance conditions
for Stopware has been met. The liability was paid in September
2006. The remaining total contingent payments of between $2,200
and $4,050 have not been accrued as liabilities in the
accompanying consolidated financial statements based on the
accounting guidance in SFAS No. 141 Business
Combinations. The purchase agreements for QDPT, Stopware
and Daewon include holdback provisions of $310, $200 and $4,350,
respectively, that have been recorded as liabilities in the
accompanying consolidated financial statements.
II-28
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 and 2005. Interest is 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.
II-29
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 $50 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 is being withheld until legal
ownership of the facility owned by TPS is transferred to Brady
Corporation. 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 $1,956 is expected to be deductible
for tax purposes based on the allocation of the purchase price.
Fiscal
2004
In September 2003, the Company acquired Brandon International,
Inc. (Brandon) headquartered in Baldwin Park,
California, with international operations in Mexico and
Singapore. Brandon is a manufacturer of die-cut products. In
October 2003, the Company acquired Prinzing Enterprises, Inc.
(Prinzing) located in Warrenville, Illinois.
Prinzing is a manufacturer of lockout/tagout products, signs and
other safety devices. In November 2003, the Company acquired
B.I.G, headquartered in the United Kingdom, a provider of
badging and business card solutions. The combined purchase price
for these acquisitions was approximately $31,700 in cash
(including $1,000 paid in February 2005). The Prinzing
acquisition agreement included provisions for contingent
payments up to a maximum $1,500 based on certain performance
criteria during fiscal year 2004. As of May 2004, these criteria
were met and the entire amount was paid to the sellers. The
allocation of the purchase price resulted in the allocation to
intangible assets as follows: $27,000 to goodwill, $500 to
trademarks, $300 to patents, $200 to non-compete agreements and
$2,900 to customer lists. Remaining combined tax goodwill of
$20,400 is expected to be deductible for tax purposes based on
the allocation of the purchase price.
In May 2004, the Company acquired EMED for cash with a purchase
price of $191,800, net of cash acquired. EMED is a direct
marketer and manufacturer of identification, safety and facility
management products headquartered in Buffalo, New York. The
funds used to finance the purchase price came from borrowings on
the Companys revolving credit facility and from working
capital.
II-30
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of the EMED
acquisition. The difference between the purchase price of
$191,800 and the net assets acquired value of $193,800 relates
to transaction costs.
|
|
|
|
|
Current assets
|
|
$
|
40,036
|
|
Property, plant &
equipment
|
|
|
6,800
|
|
Other intangible assets
|
|
|
35,300
|
|
Goodwill
|
|
|
114,331
|
|
|
|
|
|
|
Total assets acquired
|
|
|
196,467
|
|
Liabilities assumed
|
|
|
2,667
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
193,800
|
|
|
|
|
|
|
The following unaudited pro-forma combined information, assuming
the EMED acquisition was completed on August 1, 2003, is
provided for comparative purposes only and is not necessarily
indicative of the results that would have occurred had the
acquisition occurred at the beginning of the periods presented,
nor is it necessarily indicative of future results.
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
July 31, 2004
|
|
|
Net sales
|
|
|
|
|
As reported
|
|
$
|
671,219
|
|
Pro forma
|
|
|
714,848
|
|
Net income
|
|
|
|
|
As reported
|
|
$
|
50,871
|
|
Pro forma
|
|
|
57,091
|
|
Per Class A Nonvoting Common
Share:
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
As reported
|
|
|
1.08
|
|
Pro forma
|
|
|
1.21
|
|
Diluted earnings per share
|
|
|
|
|
As reported
|
|
|
1.07
|
|
Pro forma
|
|
|
1.20
|
|
Per Class B Voting Common
Share:
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
As reported
|
|
|
1.06
|
|
Pro forma
|
|
|
1.19
|
|
Diluted earnings per share
|
|
|
|
|
As reported
|
|
|
1.05
|
|
Pro forma
|
|
|
1.18
|
|
Of the $35,300 of acquired intangible assets, $13,900 was
assigned to trademarks that are not subject to amortization,
$21,100 was assigned to customer relationships and is being
amortized over 7 years and $300 was assigned to non-compete
agreements, which are amortized over 2 years. Remaining tax
goodwill of $83,523 is expected to be deductible for tax
purposes over the next eight years.
II-31
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Subsequent
Event
On August 15, 2006, the Company completed the acquisition
of Comprehensive Identification Products, Inc.
(CIPI), headquartered in Burlington, Massachusetts.
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 and government
buildings. Founded in 1966, CIPI had sales of approximately
$31.0 million in fiscal 2005 and currently employs
approximately 900 people at operations in the United States, the
Netherlands, Hong Kong and China.
|
|
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 employees age
and service at retirement.
The Company accounts for postretirement benefits other than
pensions in accordance with SFAS No. 106,
Employers Accounting for Postretirement Benefits
Other than Pensions. The Company funds benefit costs on a
pay-as-you-go basis.
The following table provides a reconciliation of the changes in
the Plans accumulated benefit obligations during the years
ended July 31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Obligation at beginning of year
|
|
$
|
10,909
|
|
|
$
|
12,606
|
|
Service cost
|
|
|
1,049
|
|
|
|
895
|
|
Interest cost
|
|
|
675
|
|
|
|
689
|
|
Actuarial (gain) loss
|
|
|
723
|
|
|
|
(373
|
)
|
Other events (Medicare Part D)
|
|
|
0
|
|
|
|
(2,227
|
)
|
Benefit payments
|
|
|
(706
|
)
|
|
|
(681
|
)
|
|
|
|
|
|
|
|
|
|
Obligation at end of fiscal year
|
|
$
|
12,650
|
|
|
$
|
10,909
|
|
|
|
|
|
|
|
|
|
|
The following table outlines the unfunded status of the Plan
recorded as a long-term liability in the accompanying
consolidated balance sheets as of July 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Unfunded status at July 31
|
|
$
|
12,650
|
|
|
$
|
10,909
|
|
Unrecognized net actuarial gain
|
|
|
2,720
|
|
|
|
3,470
|
|
Unrecognized prior service gain
|
|
|
310
|
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
Accumulated postretirement benefit
obligation (APBO) liability
|
|
$
|
15,680
|
|
|
$
|
14,722
|
|
|
|
|
|
|
|
|
|
|
II-32
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net periodic benefit cost for the Plan for fiscal years 2006,
2005 and 2004 includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net periodic postretirement
benefit cost included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost benefits
attributed to service during the period
|
|
$
|
1,049
|
|
|
$
|
895
|
|
|
$
|
866
|
|
Prior service cost
|
|
|
(33
|
)
|
|
|
(33
|
)
|
|
|
22
|
|
Interest cost on accumulated
postretirement benefit obligation
|
|
|
675
|
|
|
|
689
|
|
|
|
719
|
|
Amortization of unrecognized gain
|
|
|
(27
|
)
|
|
|
(127
|
)
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periodic postretirement benefit
cost
|
|
$
|
1,664
|
|
|
$
|
1,424
|
|
|
$
|
1,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following assumptions were used in accounting for the plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Weighted average discount rate
used in determining accumulated postretirement benefit
obligation liability
|
|
|
6.0
|
%
|
|
|
5.0
|
%
|
|
|
6.0
|
%
|
Weighted average discount rate
used in determining net periodic benefit cost
|
|
|
5.0
|
%
|
|
|
6.0
|
%
|
|
|
6.0
|
%
|
Assumed health care trend rate
used to measure APBO at July 31
|
|
|
10.0
|
%
|
|
|
11.0
|
%
|
|
|
12.0
|
%
|
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
|
|
$
|
141
|
|
|
$
|
(124
|
)
|
Effect on accumulated
postretirement benefit obligation at July 31, 2006
|
|
|
826
|
|
|
|
(732
|
)
|
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
|
|
|
2007
|
|
$
|
750
|
|
|
$
|
628
|
|
|
$
|
(122
|
)
|
2008
|
|
|
798
|
|
|
|
663
|
|
|
|
(135
|
)
|
2009
|
|
|
854
|
|
|
|
707
|
|
|
|
(147
|
)
|
2010
|
|
|
905
|
|
|
|
743
|
|
|
|
(162
|
)
|
2011
|
|
|
951
|
|
|
|
778
|
|
|
|
(173
|
)
|
2012 through 2016
|
|
|
4,908
|
|
|
|
3,971
|
|
|
|
(937
|
)
|
In December 2003, the United States enacted into law the
Medicare Prescription Drug, Improvement and Modernization Act of
2003 (the Act). The Act establishes a prescription
drug benefit under Medicare (Medicare Part D) as well
as a federal subsidy to sponsors of retiree health care benefit
plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D.
In May 2004, the Financial Accounting Standards Board issued FSP
106-2, Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug, Improvement and Modernization
Act of 2003. FSP 106-
II-33
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 the accumulated postretirement benefit
obligation at August 1, 2004 by approximately $2,200 and
net periodic cost for the year ended July 31, 2006 and 2005
by $409 and $463, 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, 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, 2006 and 2005, $5,928
and $5,048, respectively, of accrued profit-sharing
contributions were included in other current liabilities in 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, 2006 and 2005, $7,853 and $7,999, 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
Companys 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 Companys Class A Nonvoting
Common Stock or in certain other investment vehicles. Prior
deferred compensation deferrals must remain in the
Companys Class A Nonvoting Common Stock. All
participant deferrals into the new plan result in purchases of
Class A Nonvoting Common Stock or certain other investment
vehicles by the Rabbi Trust. Balances held by the Rabbi Trust
are distributed to participants upon separation from the Company
as defined in the plan agreement. 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
$9,862, $10,980, and $9,373 during the years ended July 31,
2006, 2005 and 2004, respectively.
II-34
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income
taxes consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Currently payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
14,201
|
|
|
$
|
10,002
|
|
|
$
|
2,645
|
|
Foreign
|
|
|
26,143
|
|
|
|
24,286
|
|
|
|
10,903
|
|
State
|
|
|
2,012
|
|
|
|
1,836
|
|
|
|
736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,356
|
|
|
|
36,124
|
|
|
|
14,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision (credit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(75
|
)
|
|
|
(1,215
|
)
|
|
|
1,075
|
|
Foreign
|
|
|
(472
|
)
|
|
|
(855
|
)
|
|
|
3,558
|
|
State
|
|
|
(1,296
|
)
|
|
|
(583
|
)
|
|
|
539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,843
|
)
|
|
|
(2,653
|
)
|
|
|
5,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40,513
|
|
|
$
|
33,471
|
|
|
$
|
19,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Domestic
|
|
$
|
46,790
|
|
|
$
|
36,985
|
|
|
$
|
15,911
|
|
Foreign
|
|
|
97,898
|
|
|
|
78,433
|
|
|
|
54,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
144,688
|
|
|
$
|
115,418
|
|
|
$
|
70,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
II-35
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The approximate tax effects of temporary differences are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
Capitalized R&D expenditures
|
|
|
2,800
|
|
|
|
|
|
|
|
2,800
|
|
Deferred compensation
|
|
|
13,446
|
|
|
|
|
|
|
|
13,446
|
|
Postretirement benefits
|
|
|
7,490
|
|
|
|
|
|
|
|
7,490
|
|
Currency translation adjustment
|
|
|
35
|
|
|
|
|
|
|
|
35
|
|
Tax loss carryforwards
|
|
|
17,300
|
|
|
|
|
|
|
|
17,300
|
|
Less valuation allowance
|
|
|
(15,668
|
)
|
|
|
|
|
|
|
(15,668
|
)
|
Other, net
|
|
|
589
|
|
|
|
|
|
|
|
589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
|
|
|
38,909
|
|
|
|
(24,532
|
)
|
|
|
14,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
50,697
|
|
|
$
|
(26,728
|
)
|
|
$
|
23,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2005
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Total
|
|
|
Inventories
|
|
$
|
3,203
|
|
|
|
|
|
|
$
|
3,203
|
|
Prepaid catalog costs
|
|
|
|
|
|
$
|
(2,130
|
)
|
|
|
(2,130
|
)
|
Employee benefits
|
|
|
1,675
|
|
|
|
|
|
|
|
1,675
|
|
Allowance for doubtful accounts
|
|
|
391
|
|
|
|
|
|
|
|
391
|
|
Other, net
|
|
|
3,016
|
|
|
|
|
|
|
|
3,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
8,285
|
|
|
|
(2,130
|
)
|
|
|
6,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
(4,691
|
)
|
|
|
(4,691
|
)
|
Amortization
|
|
|
20,352
|
|
|
|
(8,966
|
)
|
|
|
11,386
|
|
Capital R&D expenditures
|
|
|
3,266
|
|
|
|
|
|
|
|
3,266
|
|
Deferred compensation
|
|
|
11,205
|
|
|
|
|
|
|
|
11,205
|
|
Postretirement benefits
|
|
|
7,232
|
|
|
|
|
|
|
|
7,232
|
|
Currency translation adjustment
|
|
|
|
|
|
|
(304
|
)
|
|
|
(304
|
)
|
Tax loss carryforwards
|
|
|
5,038
|
|
|
|
|
|
|
|
5,038
|
|
Less valuation allowance
|
|
|
(4,877
|
)
|
|
|
|
|
|
|
(4,877
|
)
|
Other, net
|
|
|
|
|
|
|
(545
|
)
|
|
|
(545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
|
|
|
42,216
|
|
|
|
(14,506
|
)
|
|
|
27,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
50,501
|
|
|
$
|
(16,636
|
)
|
|
$
|
33,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
II-36
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The valuation allowance increased $10,791 during the fiscal year
ended July 31, 2006 and decreased $657 and $740 during the
fiscal years ended July 31, 2005 and 2004, respectively.
Tax loss carry forwards at July 31, 2006 are comprised of
foreign net operating losses of approximately $51,904, of which
$47,213 have no expiration date. The remaining balance relates
to state net operating losses of $46,937 and state credits of
$1,404. The Company expects to utilize all credits; however,
state net operating losses will begin to expire in the fiscal
year ending July 31, 2007. Of the $51,904 of valuation
allowances at July 31, 2006, $36,677 relates to net
operating losses acquired with the acquisition of Tradex. In the
future, if the Company determines that the realization of these
deferred tax assets is more likely than not, the reversal of the
related valuation allowance will reduce goodwill instead of the
provision for taxes.
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,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Tax at statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes, net of Federal
tax benefit
|
|
|
0.2
|
%
|
|
|
0.7
|
%
|
|
|
1.2
|
%
|
International losses with no
related tax benefits
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.4
|
%
|
International rate differential
|
|
|
(6.8
|
)%
|
|
|
(4.1
|
)%
|
|
|
(7.2
|
)%
|
Rate variances arising from
foreign subsidiary distributions
|
|
|
0.2
|
%
|
|
|
(1.1
|
)%
|
|
|
1.4
|
%
|
Resolution of prior period tax
matters
|
|
|
0.0
|
%
|
|
|
(0.6
|
)%
|
|
|
(4.2
|
)%
|
Other, net
|
|
|
(0.6
|
)%
|
|
|
(0.9
|
)%
|
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
28.0
|
%
|
|
|
29.0
|
%
|
|
|
27.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unremitted
Earnings
The Companys 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, 2006 amounted to approximately $233,169.
On October 5, 2006, the Company entered into a
$200.0 million multi-currency revolving loan agreement with
a group of five banks that replaced the Companys previous
credit facility that had been entered into on March 31,
2004 and amended on January 19, 2006. At the Companys
option, and subject to certain standard conditions, the
available amount under the new credit facility may be increased
from $200.0 million up to $300.0 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 Companys consolidated leverage ratio). A
commitment fee is payable on the unused amount of the facility.
The agreement requires the Company to maintain two financial
covenants. As of October 5, 2006, the Company was in
compliance with the covenants of the new agreement, and as of
July 31, 2006, the Company was in compliance with the
covenants of the previous credit facility. The new agreement
restricts the amount of certain types of payments, including
dividends, which can be made annually to $50.0 million plus
an amount equal to 75% of consolidated net
II-37
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2006 and
October 5, 2006, there were $0 and $10.0 million of
outstanding borrowings under the previous credit facility or the
new credit facility, respectively.
On February 14, 2006, the Company completed the private
placement of $200.0 million in ten-year fixed notes at 5.3%
interest to institutional investors. The notes will be amortized
in equal installments over seven years, beginning in 2010 with
interest payable on the notes semiannually on August 14 and
February 14, beginning in August 2006. The notes have been
fully and unconditionally guaranteed on an unsecured basis by
the Companys domestic subsidiaries. The Company used the
net proceeds of the offering to finance acquisitions completed
in fiscal 2006 (see Note 2 for more information) and
intends to use the remainder to fund future acquisitions 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, 2006, the Company was in
compliance with this covenant.
On June 30, 2004, the Company finalized a debt offering of
$150.0 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 Companys 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 Companys 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, 2006, the
Company was in compliance with this covenant.
Long-term obligations consist of the following as of
July 31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Various Bank loans
|
|
$
|
38
|
|
|
$
|
30
|
|
Fixed Debt
|
|
|
350,000
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350,038
|
|
|
|
150,030
|
|
|
|
|
|
|
|
|
|
|
Less Current maturities
|
|
$
|
(20
|
)
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
350,018
|
|
|
$
|
150,026
|
|
|
|
|
|
|
|
|
|
|
The fair value of the Companys long-term obligations
approximates $340,483. The fair value of the Companys
long-term obligations is estimated based on quoted market prices
for the same or similar issue and on the current rates offered
for debt of the same maturities.
Maturities on long-term debt are as follows:
|
|
|
|
|
Years Ending July 31,
|
|
|
|
|
2007
|
|
$
|
20
|
|
2008
|
|
|
21,443
|
|
2009
|
|
|
21,432
|
|
2010
|
|
|
50,000
|
|
2011
|
|
|
50,000
|
|
Thereafter
|
|
|
207,143
|
|
|
|
|
|
|
Total
|
|
$
|
350,038
|
|
|
|
|
|
|
II-38
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company had outstanding letters of credit of $2,887 and
$2,114 at July 31, 2006 and 2005, respectively.
|
|
6.
|
Stockholders
Investment
|
Information as to the Companys capital stock at
July 31, 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2006
|
|
|
July 31, 2005
|
|
|
|
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
|
|
|
|
50,481,743
|
|
|
$
|
505
|
|
|
|
100,000,000
|
|
|
|
45,877,543
|
|
|
$
|
458
|
|
Class B Voting
|
|
|
10,000,000
|
|
|
|
3,538,628
|
|
|
|
35
|
|
|
|
10,000,000
|
|
|
|
3,538,628
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
540
|
|
|
|
|
|
|
|
|
|
|
$
|
493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before any dividend may be paid on the Class B Common
Stock, holders of the Class A Common Stock are entitled to
receive an annual, noncumulative cash dividend of
$.01665 per share. Thereafter, any further dividend in that
fiscal year must be paid on each share of Class A Common
Stock and Class B Common Stock on an equal basis.
Holders of the Class A Common Stock are not entitled to any
vote on corporate matters, unless, in each of the three
preceding fiscal years, the $.01665 preferential dividend
described above has not been paid in full. Holders of the
Class A Common Stock are entitled to one vote per share for
the entire fiscal year immediately following the third
consecutive fiscal year in which the preferential dividend is
not paid in full. Holders of Class B Common Stock are
entitled to one vote per share for the election of directors and
for all other purposes.
Upon liquidation, dissolution or winding up of the Company, and
after distribution of any amounts due to holders of Cumulative
Preferred Stock, holders of the Class A Common Stock are
entitled to receive the sum of $0.835 per share before any
payment or distribution to holders of the Class B Common
Stock. Thereafter, holders of the Class B Common Stock are
entitled to receive a payment or distribution of $0.835 per
share. Thereafter, holders of the Class A Common Stock and
Class B Common Stock share equally in all payments or
distributions upon liquidation, dissolution or winding up of the
Company.
The preferences in dividends and liquidation rights of the
Class A Common Stock over the Class B Common Stock
will terminate at any time that the voting rights of
Class A Common Stock and Class B Common Stock become
equal.
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 Companys 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 Companys 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
approximately $158,148. In addition to underwriting discounts,
the Company incurred approximately $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.
II-39
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of other activity in
stockholders investment for the years ended July 31,
2004, 2005 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned
|
|
|
|
|
|
Shares Held
|
|
|
|
|
|
|
Restricted
|
|
|
Deferred
|
|
|
in Rabbi
|
|
|
|
|
|
|
Stock
|
|
|
Compensation
|
|
|
Trust, at cost
|
|
|
Total
|
|
|
Balances July 31, 2003
|
|
$
|
(628
|
)
|
|
$
|
14,725
|
|
|
$
|
(14,725
|
)
|
|
$
|
(628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares at July 31, 2003(1)
|
|
|
|
|
|
|
969,058
|
|
|
|
969,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of shares at cost
|
|
|
|
|
|
|
(411
|
)
|
|
|
411
|
|
|
|
|
|
Purchase of shares at cost
|
|
|
|
|
|
|
880
|
|
|
|
(880
|
)
|
|
|
|
|
Amortization of restricted stock
|
|
|
346
|
|
|
|
|
|
|
|
|
|
|
|
346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances July 31, 2004
|
|
$
|
(282
|
)
|
|
$
|
15,194
|
|
|
$
|
(15,194
|
)
|
|
$
|
(282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares at July 31, 2004(1)
|
|
|
|
|
|
|
988,534
|
|
|
|
988,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of shares at cost
|
|
|
|
|
|
|
(498
|
)
|
|
|
579
|
|
|
|
81
|
|
Purchase of shares at cost
|
|
|
|
|
|
|
516
|
|
|
|
(1,210
|
)
|
|
|
(694
|
)
|
Amortization of restricted stock
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
282
|
|
Other
|
|
|
|
|
|
|
(437
|
)
|
|
|
|
|
|
|
(437
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at July 31, 2005
|
|
$
|
0
|
|
|
$
|
14,775
|
|
|
$
|
(15,825
|
)
|
|
$
|
(1,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares at July 31, 2005
|
|
|
|
|
|
|
950,222
|
|
|
|
997,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Adjusted for
two-for-one
stock split in the form of a 100% stock dividend, effective
December 31, 2004. |
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
remain in Brady stock and be distributed in shares of Brady
stock. At July 31, 2006, 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 Companys 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 Companys Nonqualified Stock Option Plans allow the
granting of stock options to various officers, directors and
other employees of the Company at prices equal to fair market
value at the date of grant. At July 31, 2006, the Company
had reserved 3,815,052 shares of Class A Nonvoting Common
Stock for outstanding stock
II-40
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
options and 878,968 shares of Class A Nonvoting Common
Stock for future issuance of stock options under the various
plans, adjusted for a
two-for-one
stock split in the form of a 100% stock dividend, effective
December 31, 2004. A total of 11,550,000 shares have
been authorized under existing or prior plans. The Company uses
treasury stock or will issue new Class A Common Stock to
deliver shares under these plans.
The options 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 awards, generally expire 10 years
from the date of grant. During the fiscal years ended
July 31, 2006 and 2005, certain executives and key
management employees were issued stock options that vest upon
meeting certain financial performance conditions in addition to
the vesting schedule described above. The financial performance
conditions consist of net income targets that the Company must
meet. These options, referred to herein as performance
based awards, expire 5 years from the date of grant.
Changes in the options are as follows(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Options
|
|
|
Exercise
|
|
|
|
Option Price
|
|
|
Outstanding
|
|
|
Price
|
|
|
Balance, July 31, 2003
|
|
$
|
6.08 - $17.00
|
|
|
|
4,694,882
|
|
|
$
|
13.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
17.02 - 20.15
|
|
|
|
942,000
|
|
|
|
17.29
|
|
Options exercised
|
|
|
6.08 - 16.44
|
|
|
|
(1,607,058
|
)
|
|
|
12.09
|
|
Options cancelled
|
|
|
14.16 - 17.33
|
|
|
|
(157,340
|
)
|
|
|
15.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31, 2004
|
|
$
|
6.08 - $20.15
|
|
|
|
3,872,484
|
|
|
$
|
15.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
22.63 - 31.54
|
|
|
|
888,000
|
|
|
|
27.27
|
|
Options exercised
|
|
|
9.59 - 17.33
|
|
|
|
(1,117,431
|
)
|
|
|
14.08
|
|
Options cancelled
|
|
|
9.59 - 17.33
|
|
|
|
(113,722
|
)
|
|
|
15.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31, 2005
|
|
$
|
9.59 - $31.54
|
|
|
|
3,529,331
|
|
|
$
|
18.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for grant after
July 31, 2006
|
|
|
|
|
|
|
1,064,770
|
|
|
|
|
|
|
|
|
(1) |
|
Adjusted for a
two-for-one
stock split in the form of a 100% stock dividend, effective
December 31, 2004. |
The total fair value of options vested during the fiscal years
ended July 31, 2006, 2005 and 2004 was $4,744, $3,223 and
$5,147, respectively. The total intrinsic value of options
exercised during the fiscal years ended July 31, 2006, 2005
and 2004 was $13,974, $14,754 and $12,926, respectively.
There were 2,062,153, 1,772,930 and 2,142,578 options
exercisable with a weighted average exercise price of $17.02,
$14.84 and $13.94 at July 31, 2006, 2005 and 2004,
respectively.
II-41
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about stock options
outstanding at July 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2006
|
|
|
(in years)
|
|
|
Price
|
|
|
2006
|
|
|
Price
|
|
|
Up to $14.99
|
|
|
512,434
|
|
|
|
4.4
|
|
|
$
|
12.59
|
|
|
|
512,434
|
|
|
$
|
12.59
|
|
$15.00 to $29.99
|
|
|
2,332,618
|
|
|
|
6.1
|
|
|
|
20.29
|
|
|
|
1,537,052
|
|
|
|
18.38
|
|
$30.00 and up
|
|
|
970,000
|
|
|
|
7.5
|
|
|
|
36.07
|
|
|
|
12,667
|
|
|
|
31.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,815,052
|
|
|
|
6.2
|
|
|
|
23.27
|
|
|
|
2,062,153
|
|
|
|
17.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 31, 2006, the aggregate intrinsic value of the
number of options outstanding and the number of options
outstanding and exercisable was $40,021 and $34,518,
respectively.
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, restructuring charges, other
expenses not allocated to a segment, and income taxes. The
accounting policies of the reportable segments are the same as
those described in the summary of significant accounting
policies.
The Companys 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.
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, 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
|
|
II-42
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
Americas
|
|
|
Europe
|
|
|
Asia-Pacific
|
|
|
Subtotals
|
|
|
Eliminations
|
|
|
Totals
|
|
|
Year ended July 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
417,780
|
|
|
$
|
274,691
|
|
|
$
|
123,976
|
|
|
$
|
816,447
|
|
|
|
|
|
|
$
|
816,447
|
|
Intersegment revenues
|
|
|
45,284
|
|
|
|
2,774
|
|
|
|
4,402
|
|
|
|
52,460
|
|
|
$
|
(52,460
|
)
|
|
|
|
|
Depreciation and amortization
expense
|
|
|
17,428
|
|
|
|
4,140
|
|
|
|
4,323
|
|
|
|
25,891
|
|
|
|
931
|
|
|
|
26,822
|
|
Segment profit (loss)
|
|
|
98,193
|
|
|
|
79,792
|
|
|
|
34,228
|
|
|
|
212,213
|
|
|
|
(4,845
|
)
|
|
|
207,368
|
|
Assets
|
|
|
446,829
|
|
|
|
171,536
|
|
|
|
111,048
|
|
|
|
729,413
|
|
|
|
120,734
|
|
|
|
850,147
|
|
Expenditures for property, plant
and equipment
|
|
|
11,858
|
|
|
|
1,484
|
|
|
|
6,050
|
|
|
|
19,392
|
|
|
|
2,528
|
|
|
|
21,920
|
|
Year ended July 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
341,975
|
|
|
$
|
248,255
|
|
|
$
|
80,989
|
|
|
$
|
671,219
|
|
|
|
|
|
|
$
|
671,219
|
|
Intersegment revenues
|
|
|
40,764
|
|
|
|
2,199
|
|
|
|
4,165
|
|
|
|
47,128
|
|
|
$
|
(47,128
|
)
|
|
|
|
|
Depreciation and amortization
expense
|
|
|
14,112
|
|
|
|
3,686
|
|
|
|
1,136
|
|
|
|
18,934
|
|
|
|
1,256
|
|
|
|
20,190
|
|
Segment profit (loss)
|
|
|
60,132
|
|
|
|
66,404
|
|
|
|
22,768
|
|
|
|
149,304
|
|
|
|
(4,696
|
)
|
|
|
144,608
|
|
Assets
|
|
|
408,558
|
|
|
|
138,678
|
|
|
|
37,348
|
|
|
|
584,584
|
|
|
|
113,316
|
|
|
|
697,900
|
|
Expenditures for property, plant
and equipment
|
|
|
6,679
|
|
|
|
3,004
|
|
|
|
3,298
|
|
|
|
12,981
|
|
|
|
1,911
|
|
|
|
14,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Segment profit reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total profit for reportable
segments
|
|
$
|
255,811
|
|
|
$
|
212,213
|
|
|
$
|
149,304
|
|
Corporate and eliminations
|
|
|
(10,633
|
)
|
|
|
(4,845
|
)
|
|
|
(4,696
|
)
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative costs
|
|
|
(88,662
|
)
|
|
|
(84,916
|
)
|
|
|
(70,446
|
)
|
Interest (expense)
income net
|
|
|
(14,231
|
)
|
|
|
(8,403
|
)
|
|
|
(1,231
|
)
|
Restructuring charge, net
|
|
|
|
|
|
|
|
|
|
|
(3,181
|
)
|
Investment and other income
|
|
|
2,403
|
|
|
|
1,369
|
|
|
|
577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
144,688
|
|
|
|
115,418
|
|
|
|
70,327
|
|
Income taxes
|
|
|
(40,513
|
)
|
|
|
(33,471
|
)
|
|
|
(19,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
104,175
|
|
|
$
|
81,947
|
|
|
$
|
50,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
II-43
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues*
|
|
|
Long-Lived Assets**
|
|
|
|
Years Ended July 31,
|
|
|
As of Years Ended July 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Geographic information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
484,387
|
|
|
$
|
411,614
|
|
|
$
|
343,879
|
|
|
$
|
439,467
|
|
|
$
|
321,482
|
|
|
$
|
310,838
|
|
Other
|
|
|
605,518
|
|
|
|
464,542
|
|
|
|
379,188
|
|
|
|
422,192
|
|
|
|
180,945
|
|
|
|
97,043
|
|
Eliminations
|
|
|
(71,469
|
)
|
|
|
(59,709
|
)
|
|
|
(51,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$
|
1,018,436
|
|
|
$
|
816,447
|
|
|
$
|
671,219
|
|
|
$
|
861,659
|
|
|
$
|
502,427
|
|
|
$
|
407,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Revenues are attributed based on country of origin. |
|
** |
|
Long-lived assets consist of property, plant, and equipment,
other intangible assets and goodwill. |
|
|
8.
|
Net
Income Per Common Share
|
Net income per Common Share is computed by dividing net income
(after deducting the applicable Preferred Stock dividends and
preferential Class A Common Stock dividends) by the
weighted average Common Shares outstanding of 49,493,976 for
2006, 48,967,160 for 2005, and 47,298,454 for 2004. The
preferential dividend on the Class A Common Stock of
$.01665 per share has been added to the net income per
Class A Common Share for all years presented.
Reconciliations of the numerator and denominator of the basic
and diluted per share computations for the Companys
Class A and Class B common stock are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended July 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (numerator for basic
and diluted Class A net income per share)
|
|
$
|
104,175
|
|
|
$
|
81,947
|
|
|
$
|
50,871
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferential dividends
|
|
|
(758
|
)
|
|
|
(751
|
)
|
|
|
(721
|
)
|
Preferential dividends on dilutive
stock options
|
|
|
(15
|
)
|
|
|
(23
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted
Class B net income per share
|
|
$
|
103,402
|
|
|
$
|
81,173
|
|
|
$
|
50,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income
per share for both Class A and B
|
|
|
49,494
|
|
|
|
48,967
|
|
|
|
47,298
|
|
Plus: effect of dilutive stock
options
|
|
|
850
|
|
|
|
847
|
|
|
|
515
|
|
Treasury shares
deferred compensation plan
|
|
|
41
|
|
|
|
45
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income
per share for both Class A and B
|
|
|
50,385
|
|
|
|
49,859
|
|
|
|
47,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock net
income per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.10
|
|
|
$
|
1.67
|
|
|
$
|
1.08
|
|
Diluted
|
|
$
|
2.07
|
|
|
$
|
1.64
|
|
|
$
|
1.07
|
|
Class B common stock net
income per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.09
|
|
|
$
|
1.66
|
|
|
$
|
1.06
|
|
Diluted
|
|
$
|
2.05
|
|
|
$
|
1.63
|
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
II-44
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Options to purchase 650,500, 38,000 and 36,000 shares of
Class A common stock were excluded from the computations of
diluted net income per share for years ended July 31, 2006,
2005 and 2004, respectively, because the option exercise prices
were greater than the average market price of the common shares
and, therefore, the effect would be antidilutive.
|
|
9.
|
Commitments
and Contingencies
|
The Company has entered into various noncancellable operating
lease agreements. Rental expense charged to operations on a
straight-line basis was $15,181, $14,020, and $12,583 for the
years ended July 31, 2006, 2005 and 2004, respectively.
Future minimum lease payments required under such leases in
effect at July 31, 2006 are as follows, for the years
ending July 31:
|
|
|
|
|
2007
|
|
$
|
15,744
|
|
2008
|
|
|
11,987
|
|
2009
|
|
|
8,944
|
|
2010
|
|
|
4,629
|
|
2011
|
|
|
3,570
|
|
Thereafter
|
|
|
7,072
|
|
|
|
|
|
|
|
|
$
|
51,946
|
|
|
|
|
|
|
In the normal course of business, the Company is named as a
defendant in various lawsuits in which claims are asserted
against the Company. In the opinion of management, the
liabilities, if any, which may ultimately result from lawsuits
are not expected to have a material adverse effect on the
consolidated financial statements of the Company.
|
|
10.
|
Restructuring
Charges
|
During fiscal 2004, the Company recorded a restructuring charge
of $3,181, $2,166 after tax or $0.05 per diluted
Class A Common Share, as part of the restructuring program
announced in the fourth quarter of fiscal 2003 related primarily
to combining sales and marketing resources and consolidating
facilities throughout North America and Europe resulting in
a workforce reduction of approximately 300 employees. The fiscal
2004 restructuring charge by reportable segment was $1,262 in
Americas, $1,521 in Europe, and $398 in Asia-Pacific.
The restructuring charge included a provision for severance of
approximately $2,900 and a write-off of assets and other of
$281. Total cash expenditures in connection with this action was
approximately $2,858, which was paid out in fiscal 2004 and
2005. As of July 31, 2005, there was no balance remaining
in the restructuring reserve account on the consolidated balance
sheet.
II-45
BRADY
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11.
|
Unaudited
Quarterly Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth(1)
|
|
|
Total
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
232,635
|
|
|
$
|
230,974
|
|
|
$
|
266,494
|
|
|
$
|
288,333
|
|
|
$
|
1,018,436
|
|
Gross Margin
|
|
|
123,991
|
|
|
|
117,105
|
|
|
|
140,755
|
|
|
|
143,904
|
|
|
|
525,755
|
|
Operating Income
|
|
|
44,129
|
|
|
|
31,276
|
|
|
|
44,226
|
|
|
|
36,885
|
|
|
|
156,516
|
|
Net Income
|
|
|
30,198
|
|
|
|
21,254
|
|
|
|
30,246
|
|
|
|
22,477
|
|
|
|
104,175
|
|
Net Income Per Class A Common
Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.61
|
|
|
|
0.43
|
|
|
|
0.62
|
|
|
|
0.44
|
|
|
|
2.10
|
|
Diluted
|
|
|
0.60
|
|
|
|
0.43
|
|
|
|
0.61
|
|
|
|
0.43
|
|
|
|
2.07
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
200,419
|
|
|
$
|
196,216
|
|
|
$
|
209,766
|
|
|
$
|
210,046
|
|
|
$
|
816,447
|
|
Gross Margin
|
|
|
105,525
|
|
|
|
104,956
|
|
|
|
113,868
|
|
|
|
108,927
|
|
|
|
433,276
|
|
Operating Income
|
|
|
31,793
|
|
|
|
30,934
|
|
|
|
35,543
|
|
|
|
24,182
|
|
|
|
122,452
|
|
Net Income
|
|
|
20,357
|
|
|
|
20,579
|
|
|
|
24,956
|
|
|
|
16,055
|
|
|
|
81,947
|
|
Net Income Per Class A Common
Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.42
|
*
|
|
|
0.42
|
|
|
|
0.51
|
|
|
|
0.33
|
|
|
|
1.67
|
|
Diluted
|
|
|
0.42
|
*
|
|
|
0.41
|
|
|
|
0.50
|
|
|
|
0.32
|
|
|
|
1.64
|
|
|
|
|
* |
|
Earnings per share for the first quarter of fiscal 2005 has been
adjusted to reflect the effect of a
two-for-one
stock split in the form of a 100% stock dividend, effective
December 31, 2004. |
|
(1) |
|
The following significant events affect the comparability of the
fourth quarter results for fiscal 2006 and 2005: |
|
|
|
Throughout fiscal 2006, the Company completed eleven
acquisitions. Refer to Note 2. Acquisitions of Businesses
for further information on the companies acquired.
|
|
|
|
Gross margins in the fourth quarter of fiscal 2006
were impacted by the shift in business mix to more OEM business,
which generates lower gross margins, offset by lower selling,
general and administrative costs.
|
|
|
|
The Company sold 4,600,000 shares of its
Class A nonvoting common stock pursuant to an underwritten
public offering during the fourth quarter of fiscal 2006.
|
II-46
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Disclosure
Controls and Procedures:
The Company carried out an evaluation, under the supervision and
with the participation of its management, including the Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys
disclosure controls and procedures (as defined in
the Exchange Act Rule 13a 15(e)) as of the end
of the period covered by this report. Based on that evaluation,
the Companys Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls
and procedures are effective as of July 31, 2006.
Managements
Report on Internal Control Over Financial Reporting:
The management of Brady Corporation and subsidiaries is
responsible for establishing and maintaining adequate internal
control over financial reporting for the Company, as such term
is defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934. The Companys
internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principals.
With the participation of the Chief Executive Officer and the
Chief Financial Officer, our management conducted an evaluation
of the effectiveness of our internal control over financial
reporting as of July 31, 2006, based on the framework and
criteria established in Internal Control
Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal
Control Integrated Framework. Based on the
assessment, management concluded that, as of July 31, 2006,
the Companys internal control over financial reporting is
effective based on those criteria. Managements assessment
of the effectiveness of the Companys internal control over
financial reporting, as of July 31, 2006, has been audited
by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report,
which is included herein.
Because of the inherent limitations of internal control over
financial reporting, misstatements may not be prevented or
detected on a timely basis. Also, projections of any evaluation
of the effectiveness of internal control over financial
reporting to future periods are subject to the risk that the
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
Changes
in Internal Control Over Financial Reporting:
There was no change in the Companys internal control over
financial reporting that occurred during the Companys most
recently completed fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Companys
internal control over financial reporting.
II-47
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Brady Corporation
Milwaukee, WI
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting that Brady Corporation and subsidiaries (the
Company) maintained effective internal control over
financial reporting as of July 31, 2006, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, managements assessment that the Company
maintained effective internal control over financial reporting
as of July 31, 2006, is fairly stated, in all material
respects, based on the criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of July 31, 2006, based on the criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
July 31, 2006 of the Company and our report dated
September 28, 2006 expressed an unqualified opinion on
those financial statements.
/s/ Deloitte &
Touche LLP
Milwaukee, WI
September 28, 2006
II-48
|
|
Item 9B.
|
Other
Information
|
On October 5, 2006, the Company entered into a
$200 million multi-currency revolving loan agreement with a
group of five banks that replaced and terminated the
Companys previous credit facility that had been entered
into on March 31, 2004 and amended on January 19,
2006. No fees were paid by the Company for terminating the
previous credit facility prior to its expiration date. At the
Companys 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 Companys consolidated leverage ratio). A
commitment fee is payable on the unused amount of the facility.
The foregoing description of the new credit agreement does not
purport to be complete and is qualified in its entirety by
reference to the full text of the agreement, a copy of which is
filed herewith as Exhibit 10.14 and is incorporated herein
by reference.
II-49
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Title
|
|
Frank M. Jaehnert
|
|
|
49
|
|
|
President, CEO and Director
|
David Mathieson
|
|
|
52
|
|
|
Sr. V.P., CFO
|
David R. Hawke
|
|
|
52
|
|
|
Executive Vice President
|
Michael O. Oliver
|
|
|
53
|
|
|
Sr. V.P., Human Resources
|
Barbara Bolens
|
|
|
45
|
|
|
V.P., Treasurer, Director of
Investor Relations
|
Allan J. Klotsche
|
|
|
41
|
|
|
President Brady
Asia-Pacific and V.P., Brady Corporation
|
Peter C. Sephton
|
|
|
47
|
|
|
President Brady Europe
and V.P., Brady Corporation
|
Matt O. Williamson
|
|
|
50
|
|
|
President Brady
Americas and V.P., Brady Corporation
|
Thomas J. Felmer
|
|
|
44
|
|
|
President Direct
Marketing Americas and V.P., Brady Corporation
|
Robert L. Tatterson
|
|
|
41
|
|
|
Vice President and Chief
Technology Officer
|
Conrad G. Goodkind
|
|
|
62
|
|
|
Secretary
|
Dr. Elizabeth Pungello
|
|
|
39
|
|
|
Director
|
Peter J. Lettenberger
|
|
|
69
|
|
|
Director
|
Robert C. Buchanan
|
|
|
66
|
|
|
Director
|
Roger D. Peirce
|
|
|
69
|
|
|
Director
|
Richard A. Bemis
|
|
|
65
|
|
|
Director
|
Dr. Frank W. Harris
|
|
|
64
|
|
|
Director
|
Gary E. Nei
|
|
|
62
|
|
|
Director
|
Mary K. Bush
|
|
|
58
|
|
|
Director
|
Frank R. Jarc
|
|
|
64
|
|
|
Director
|
Frank M. Jaehnert Mr. Jaehnert joined
the Company in 1995 as Finance Director of the Identification
Solutions & Specialty Tapes Group. He served as Chief
Financial Officer from November 1996 to January 2002. He served
as Senior Vice President of the Company and President,
Identification Solutions and Specialty Tapes Group from January
2002 to March 2003. In February 2003, he was appointed to his
current position, effective April 1, 2003. He has served as
a Director of the Company since April 2003. Before joining the
Company, he held various financial and management positions for
Robert Bosch GmbH from 1983 to 1995.
David Mathieson Mr. Mathieson joined
Brady in 2001 as European Finance Director, based in the U.K. In
August 2003, he was appointed Vice President of Finance for
North America, and named Vice President and Chief Financial
Officer in December 2003. Prior to joining Brady, he was Vice
President and Chief Financial Officer of Honeywell Europe,
concluding a
20-year
career with Honeywell International, Inc., which included
positions in Belgium, Denmark, England and the United States. A
native of Scotland, he is a Fellow of the Chartered Management
Accountants Institute in the United Kingdom and studied for this
qualification at Glasgow College of Commerce and Glasgow
Caledonian University.
David R. Hawke Mr. Hawke joined the
Company in 1979. He served as General Manager of the Industrial
Products Division from 1985 to 1991. From 1991 to February 1995,
he served as Managing Director European Operations.
From February 1995 to August 2001, he served as Vice President,
Graphics Group. He served as Vice President, Graphics and
Workplace Solutions from August 2001 to January 2002. He served
as Senior Vice President of the Company and President, Graphics
and Workplace Solutions Group from January 2002 to April 2003.
In April 2003, he was appointed to his present position.
Michael O. Oliver Mr. Oliver joined the
Company in February 1997 as Vice President Human
Resources. He was appointed to his present position in January
2002. Before joining the Company, he held various human resource
positions for Unilever from 1990 to 1997.
III-1
Barbara Bolens Ms. Bolens joined the
Company in 1986 and has held a wide variety of positions
beginning in customer service and customer service management
and progressing through product management and new product
development. For 10 years, she had been the Assistant
Treasurer and has held several other positions in the Corporate
Finance Team throughout that time. She was appointed to her
present position in November 2004. Ms. Bolens also holds
the position of Director of Investor Relations.
Allan J. Klotsche Mr. Klotsche joined
the Company in 1988. He served in a variety of sales, marketing,
technical, and management roles until 1998, when he was
appointed V.P. and General Manager of the Precision Tapes Group.
He was appointed to his current position in April 2003.
Peter C. Sephton Mr. Sephton joined the
Company in 1997 as Managing Director Seton-U.K. From
2001 to 2003 he served as managing director for Bradys
Identification Solutions Business in Europe. In April 2003, he
was appointed to his current position. Before joining Brady, he
served in a variety of international managerial roles with Tate
and Lyle Plc, Sutcliffe Speakman Plc and Morgan Crucible Plc. He
is a graduate in accountancy and law from The University of
Wales (UCC).
Matthew O. Williamson Mr. Williamson
joined the Company in 1979. From 1979 to 1994, he served in a
variety of sales and marketing leadership roles. In 1995,
Mr. Williamson served as the V.P. and General Manager of
the Specialty Tape business. From 1996 to 1998,
Mr. Williamson served as the V.P. and General Manager of
the Identification Solutions and Specialty Tapes Division. From
1998 to 2001, he served as V.P. and General Manager of the
Identification Solutions Division. From 2001 to 2003, he served
as V.P. and General Manager of the Global High Performance
Identification Business. In April 2003, he was appointed to his
current position.
Thomas J. Felmer Mr. Felmer joined the
Company in 1989 and has held several sales and marketing
positions until being named Vice President and General Manager
of Bradys U.S. Signmark Division in 1994. In 1999,
Mr. Felmer moved to Europe where he led the European
Signmark business for two years, then gained additional
responsibility for the combined European Seton and Signmark
businesses, which he also led for two years. In 2003,
Mr. Felmer returned to Milwaukee where he was responsible
for Bradys global sales and marketing processes, Brady
Software businesses, and due diligence/integration of the EMED
acquisition. In June 2004, he was appointed to his current
position.
Robert L. Tatterson Mr. Tatterson joined
the Company in 2006 as Vice President and Chief Technology
Officer. Before joining Brady, he held a variety of positions
with increasing responsibility at GE since 1992. Most recently,
Mr. Tatterson served as Technology General Manager for GE
Plastics Display and Optical Film business in Mt. Vernon,
Indiana. He is a 6 Sigma Master Blackbelt and holds a Ph.D. in
chemical engineering from the University of Michigan in Ann
Arbor.
Conrad G. Goodkind Mr. Goodkind has
served as Secretary of the Company since November 1999. He is a
partner of Quarles & Brady LLP, general counsel to the
Company. He joined Quarles & Brady in 1979 and was a
member of its Executive Committee from 1983 to 2005.
Elizabeth Pungello Dr. Pungello has
served as a Director of the Company since November 2003. She is
the great-granddaughter of Brady founder William H.
Brady, Sr., and a developmental psychologist at the Frank
Porter Graham Child Development Institute at the University of
North Carolina at Chapel Hill. She is a member of the
Companys Finance, Corporate Governance and Technology
Committees. She has served as president of the Brady Education
Foundation (formerly the W.H. Brady Foundation) since January
2001.
Peter J. Lettenberger Mr. Lettenberger
has served as a Director of the Company since January 1977.
Mr. Lettenberger is chair of the Companys Finance
Committee, and serves as a member of the Audit and Corporate
Governance Committees. He retired as a partner of
Quarles & Brady LLP, general counsel to the Company,
which he joined in 1964.
Robert C. Buchanan Mr. Buchanan has been
a Director of the Company since November 1987. Mr. Buchanan
is a member of the Companys Compensation Committee and
chairs its Corporate Governance Committee. Mr. Buchanan is
the non-executive Chairman of the Board and CEO of Fox Valley
Corporation in Appleton, Wisconsin. He is also a trustee of The
Northwestern Mutual Life Insurance Company, Milwaukee, Wisconsin.
III-2
Roger D. Peirce Mr. Peirce has served as
a Director of the Company since September 1988. Mr. Peirce
is a member of the Compensation, Corporate Governance and Audit
Committees of the Company, and chair of the Retirement
Committee. Mr. Peirce is a private investor and consultant
and is a director of Journal Communications, Inc. and Allete,
Inc. He was the secretary/treasurer of The Jor-Mac Company,
Inc., a metal fabricator in Grafton, Wisconsin, from 1997
through 2002. He was President and CEO of Valuation Research
Corporation from April 1995 to May 1996. From September 1988 to
December 1993, he was President of Super Steel Products Corp. in
Milwaukee, Wisconsin. Prior to that he was a managing partner
for Arthur Andersen LLP, independent certified public
accountants.
Richard A. Bemis Mr. Bemis has been a
Director of the Company since January 1990 and is a member of
its Compensation and Governance Committees. Mr. Bemis is
Co-chairman of the Board of Directors of Bemis Manufacturing
Company, a manufacturer of molded plastic products in Sheboygan
Falls, Wisconsin. He is also a director of the Wisconsin Public
Service Corporation, Green Bay, Wisconsin.
Frank W. Harris Dr. Harris has been a
Director of the Company since November 1991. Dr. Harris is
a member of its Finance Committee, and chair of the Technology
Committee. He is a Distinguished Professor and Director of the
Maurice Morton Institute of Polymer Science and Biomedical
Engineering at the University of Akron, and has been on its
faculty since 1983. He is also President and CEO of Akron
Polymer Systems.
Gary E. Nei Mr. Nei has been a Director
of the Company since November 1992. Mr. Nei is a member of
the Companys Finance Committee and Chair of its
Compensation Committee. Mr. Nei is Chairman of Nei-Turner
Media, a publishing company in Walworth, Wisconsin. He also
serves as Chairman of the Beverage Testing Institute, a
publishing company in Chicago, Illinois and Chairman of Tastings
Imports, an importer of fine wines headquartered in Chicago,
Illinois.
Mary K. Bush Ms. Bush has been a
Director of the Company since May 2000. Ms. Bush is a
member of the Companys Finance and Compensation
Committees. Ms. Bush has been President of Bush
International, LLC, a Washington D.C. firm that advises foreign
governments and U.S. companies on international financial
markets. Prior to establishing Bush International, Ms. Bush
held several positions in financial institutions and has served
three Presidents of the United States as Alternate Director of
the International Monetary Fund, Managing Director of the
Federal Housing Finance Board, a member of the Board of Sallie
Mae, and chairman of the HELP Commission. Ms. Bush also is
a member of the boards of directors of Mortgage Guaranty
Insurance Corporation, Briggs & Stratton Corporation,
and United Airlines Corporation. She is also a trustee of the
Pioneer Funds and a member of the Advisory Boards of Washington
Mutual Investors Fund and Stern Stewart.
Frank R. Jarc Mr. Jarc was elected to
the Board of Directors in May 2000. Mr. Jarc is a
consultant specializing in corporate development and
international acquisitions. From April 1999 to March 2000 he was
Senior Vice President of Corporate Development at Office Depot,
an operator of office supply superstores. Between June 1996 and
March 1999, he was Executive Vice President and Chief Financial
Officer of Viking Office Products, a direct mail marketer of
office products. Prior to that, he was Executive Vice President
and Chief Financial Officer of R.R. Donnelley and Sons, a global
printing company. He is chair of Bradys Audit Committee
and serves on the Technology Committee.
All directors serve until their respective successors are
elected at the next annual meeting of shareholders. Officers
serve at the discretion of the Board of Directors. None of the
Companys directors or executive officers has any family
relationship with any other director or executive officer.
Audit Committee Financial Expert The
Companys board of directors has determined that at least
one audit committee financial expert is serving on its audit
committee. Mr. Jarc, chair of the audit committee is a
financial expert and is independent as that term is used in
Item 7(d)(3)(iv) of Schedule 14A under the Exchange
Act.
Director Independence A majority of the
directors must meet the criteria for independence established by
the Board in accordance with the rules of the New York Stock
Exchange. In determining the independence of a director, the
Board must find that a director has no relationship that may
interfere with the exercise of his or her independence from
management and the Company. Based on these guidelines all
directors, with the exception of Frank Jaehnert, President and
CEO, and Elizabeth Pungello, 50% beneficial owner of the
Class B Voting Common Stock, are deemed independent.
III-3
Meetings of Non-management Directors The
non-management directors of the Board regularly meet alone
without any members of management present. Mr. Buchanan,
Chairman of the Corporate Governance Committee, is the presiding
director at these sessions. In fiscal 2006 there were five
executive sessions. Interested parties can raise concerns to be
addressed at these meetings by calling the confidential Brady
hotline at
1-800-368-3613.
Audit Committee Members The Audit Committee,
which is a separately-designated standing committee of the Board
of Directors, is composed of Mr. Jarc (Chairman),
Mr. Lettenberger and Mr. Peirce. Each member of the
Audit Committee has been determined by the Board to be
independent under the rules of the SEC and NYSE. The charter for
the Audit Committee is available on the Companys corporate
website at www.bradycorp.com.
Code of Ethics For a number of years, the
Company has had a code of ethics for its employees. This code of
ethics applies to all of the Companys employees, officers
and Directors. The code of ethics can be viewed at the
Companys corporate website, www.bradycorp.com, or may be
obtained in print by any shareholder by contacting Brady
Corporation, Investor Relations, P.O. Box 571, Milwaukee,
WI 53201. The Company intends to satisfy the disclosure
requirements under Item 5.05 of
Form 8-K
regarding an amendment to, or a waiver from, a provision of its
code of ethics by placing such information on its Internet
website.
Corporate Governance Guidelines Bradys
Corporate Governance Principles as well as the charters for the
Audit Committee, Corporate Governance Committee, and
Compensation Committee, are available on the Companys
Corporate website, www.bradycorp.com. Shareholders may request
printed copies of these documents from Brady Corporation,
Investor Relations, P.O. Box 571, Milwaukee, WI 53201.
Certifications We have attached the required
certifications under Section 302 of the Sarbanes-Oxley Act
of 2002 regarding the quality of our public disclosures as
Exhibits 31.1 and 31.2 to this report. Additionally, on
December 1, 2005, the Company filed with the New York Stock
Exchange (NYSE) an annual certification regarding
our compliance with the NYSEs corporate governance listing
standards as required by NYSE Rule 303A.12(a).
SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the
Companys directors and executive officers, and persons who
own more than ten percent of a registered class of the
Companys equity securities, to file with the SEC initial
reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company.
Executive officers, directors and greater than ten percent
stockholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
To the Companys knowledge, based solely on a review of the
copies of such reports furnished to the Company and written
representations that no other reports were required, during the
fiscal year ended July 31, 2006, all Section 16(a)
filing requirements applicable to its officers, directors and
greater than 10 percent beneficial owners were complied
with.
III-4
|
|
Item 11.
|
Executive
Compensation
|
The following table summarizes the compensation paid or accrued
by the Company during the three years ended July 31, 2006,
to those persons who, as of the end of fiscal 2006, were the
Named Executive Officers.
SUMMARY
COMPENSATION TABLE
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
Long-Term Compensation
|
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|
|
|
|
|
|
|
|
Annual Compensation
|
|
|
Awards
|
|
|
All Other
|
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|
Fiscal
|
|
|
Salary
|
|
|
Bonus
|
|
|
Options/SAR
|
|
|
Comp
|
|
Name And Principal Position
|
|
Year
|
|
|
($)
|
|
|
($)(1)
|
|
|
(# Of Shares)(3)
|
|
|
($)(2)
|
|
|
F.M. Jaehnert
|
|
|
2006
|
|
|
|
573,077
|
|
|
|
862,308
|
|
|
|
110,000
|
|
|
|
104,035
|
|
President &
|
|
|
2005
|
|
|
|
493,269
|
|
|
|
734,902
|
|
|
|
120,000
|
|
|
|
107,632
|
|
Chief Executive Officer
|
|
|
2004
|
|
|
|
468,270
|
|
|
|
796,800
|
|
|
|
72,000
|
|
|
|
37,529
|
|
D.R. Hawke
|
|
|
2006
|
|
|
|
379,616
|
|
|
|
418,596
|
|
|
|
55,000
|
|
|
|
63,072
|
|
Executive Vice President
|
|
|
2005
|
|
|
|
362,304
|
|
|
|
363,714
|
|
|
|
30,000
|
|
|
|
65,080
|
|
|
|
|
2004
|
|
|
|
350,000
|
|
|
|
317,100
|
|
|
|
130,000
|
|
|
|
31,759
|
|
P.C. Sephton
|
|
|
2006
|
|
|
|
297,786
|
|
|
|
288,247
|
|
|
|
55,000
|
|
|
|
47,827
|
|
Vice President Brady
Europe
|
|
|
2005
|
|
|
|
290,714
|
|
|
|
281,633
|
|
|
|
60,000
|
|
|
|
49,584
|
|
|
|
|
2004
|
|
|
|
257,279
|
|
|
|
240,330
|
|
|
|
44,000
|
|
|
|
41,165
|
|
D. Mathieson
|
|
|
2006
|
|
|
|
264,616
|
|
|
|
279,323
|
|
|
|
55,000
|
|
|
|
41,572
|
|
Vice President & Chief
Financial
|
|
|
2005
|
|
|
|
244,616
|
|
|
|
248,285
|
|
|
|
60,000
|
|
|
|
33,712
|
|
Officer
|
|
|
2004
|
|
|
|
200,277
|
|
|
|
178,148
|
|
|
|
44,000
|
|
|
|
85,390
|
|
M. O. Williamson
|
|
|
2006
|
|
|
|
254,616
|
|
|
|
269,523
|
|
|
|
55,000
|
|
|
|
39,881
|
|
Vice President Brady
Americas
|
|
|
2005
|
|
|
|
237,308
|
|
|
|
237,545
|
|
|
|
60,000
|
|
|
|
35,050
|
|
|
|
|
2004
|
|
|
|
228,626
|
|
|
|
194,236
|
|
|
|
44,000
|
|
|
|
21,778
|
|
|
|
|
|
|
No perquisites or other personal benefits received from the
Company by any of the named executives exceeded the reporting
thresholds established by the Securities and Exchange Commission
(the lesser of $50,000 or 10% of the individuals cash
compensation). |
|
(1) |
|
Reflects bonus earned during the listed fiscal year, which was
paid during the next fiscal year. |
|
(2) |
|
All other compensation for fiscal 2006 for
Messrs. Jaehnert, Hawke, Mathieson and Williamson,
respectively, includes: (i) matching contributions to the
Companys Matched 401(k) Plan, Funded Retirement Plan and
Restoration Plan for each named executive officer of $100,993,
$58,813, $40,509, and $38,850, respectively and (ii) the
cost of group term life insurance for each named executive
officer of $3,042, $4,259, $1,063 and $1,032, respectively. |
|
|
|
All other compensation for fiscal 2006 for Mr. Sephton
includes: (i) matching contributions for the Brady U.K.
Pension Plan of $47,646 and (ii) the cost of group term
life insurance of $181. |
|
|
|
All other compensation for fiscal 2005 for
Messrs. Jaehnert, Hawke, Mathieson and Williamson,
respectively, includes: (i) matching contributions to the
Companys Matched 401(k) Plan, Funded Retirement Plan and
Restoration Plan for each named executive officer of $102,706,
$61,506, $32,944, and $34,314, respectively and (ii) the
cost of group term life insurance for each named executive
officer of $4,926, $3,574, $768 and $736, respectively. |
|
|
|
All other compensation for fiscal 2005 for Mr. Sephton
includes: (i) matching contributions for the Brady U.K.
Pension Plan of $46,514 and (ii) the cost of group term
life insurance of $3,070. |
|
|
|
All other compensation for fiscal 2004 for
Messrs. Jaehnert, Hawke, Mathieson and Williamson,
respectively, includes: (i) matching contributions to the
Companys Matched 401(k) Plan, Funded Retirement Plan and
Restoration Plan for each named executive officer of $34,191,
$27,462, $13,298 and $21,082, respectively and (ii) the
cost of group term life insurance for each named executive
officer of $3,338, $4,297, $509 and $696, respectively and
(iii) costs related to relocation for Mr. Mathieson of
$71,583. |
|
|
|
All other compensation for fiscal 2004 for Mr. Sephton
includes matching contributions for the Brady U.K. Pension Plan
of $41,165. |
|
(3) |
|
Adjusted for
two-for-one
stock split in the form of a 100% stock dividend, effective
December 31, 2004. |
III-5
Stock
Options
The following tables summarize option grants and exercises
during fiscal 2006 to or by the executive officers named in the
Summary Compensation Table above, and the value of unexercised
options held by such persons at July 31, 2006. Stock
Appreciation Rights are not available under any of the
Companys plans.
Option
Grants in Fiscal 2006
Individual
Grants
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of Securities
|
|
|
% of Total
|
|
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Granted to
|
|
|
Exercise
|
|
|
|
|
|
|
|
|
Granted
|
|
|
Employees in
|
|
|
Price
|
|
|
|
|
Name
|
|
Grant Date
|
|
(#)(1)
|
|
|
Fiscal 2006
|
|
|
($/Share)(2)
|
|
|
Expiration Date
|
|
|
F.M. Jaehnert
|
|
Aug. 1, 2005
|
|
|
60,000
|
|
|
|
6.3
|
%
|
|
|
33.8900
|
|
|
|
Aug. 1, 2010
|
|
|
|
Nov. 30, 2005
|
|
|
50,000
|
|
|
|
5.2
|
%
|
|
|
37.8300
|
|
|
|
Nov. 30, 2015
|
|
D.R. Hawke
|
|
Aug. 1, 2005
|
|
|
30,000
|
|
|
|
3.1
|
%
|
|
|
33.8900
|
|
|
|
Aug. 1, 2010
|
|
|
|
Nov. 30, 2005
|
|
|
25,000
|
|
|
|
2.6
|
%
|
|
|
37.8300
|
|
|
|
Nov. 30, 2015
|
|
D. Mathieson
|
|
Aug. 1, 2005
|
|
|
30,000
|
|
|
|
3.1
|
%
|
|
|
33.8900
|
|
|
|
Aug. 1, 2010
|
|
|
|
Nov. 30, 2005
|
|
|
25,000
|
|
|
|
2.6
|
%
|
|
|
37.8300
|
|
|
|
Nov. 30, 2015
|
|
P.C. Sephton
|
|
Aug. 1, 2005
|
|
|
30,000
|
|
|
|
3.1
|
%
|
|
|
33.8900
|
|
|
|
Aug. 1, 2010
|
|
|
|
Nov. 30, 2005
|
|
|
25,000
|
|
|
|
2.6
|
%
|
|
|
37.8300
|
|
|
|
Nov. 30, 2015
|
|
M.O. Williamson
|
|
Aug. 1, 2005
|
|
|
30,000
|
|
|
|
3.1
|
%
|
|
|
33.8900
|
|
|
|
Aug. 1, 2010
|
|
|
|
Nov. 30, 2005
|
|
|
25,000
|
|
|
|
2.6
|
%
|
|
|
37.8300
|
|
|
|
Nov. 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential Realizable Value
|
|
|
|
at Assumed Rates of
|
|
|
|
Stock Price Appreciation(3)
|
|
Name
|
|
0%($)
|
|
|
5%($)(6)
|
|
|
10%($)(6)
|
|
|
F.M. Jaehnert
|
|
|
0
|
|
|
|
2,057,653
|
|
|
|
4,642,497
|
|
D.R. Hawke
|
|
|
0
|
|
|
|
1,028,826
|
|
|
|
2,321,249
|
|
D. Mathieson
|
|
|
0
|
|
|
|
1,028,826
|
|
|
|
2,321,249
|
|
P.C. Sephton
|
|
|
0
|
|
|
|
1,028,826
|
|
|
|
2,321,249
|
|
M. O. Williamson
|
|
|
0
|
|
|
|
1,028,826
|
|
|
|
2,321,249
|
|
All Stockholders Gains
(increase in market value of Brady Corporation Common Stock at
assumed rates of stock price appreciation)(4)(6)
|
|
|
938,829,144
|
|
|
|
2,118,196,030
|
|
All Optionees Gains (as a
percent of all shareholders gains)(5)(6)
|
|
|
1.94
|
%
|
|
|
1.93
|
%
|
|
|
|
(1) |
|
The options granted August 1, 2005 equally vest upon
meeting certain financial goals in fiscal 2006, 2007 and 2008.
The financial goals in 2006 have been met and one-third of the
options have vested. The options have a term of five years. |
|
|
|
The options granted November 30, 2005, become exercisable
as follows: one-third of the shares on November 30, 2006,
one-third of the shares on November 30, 2007 and one-third
of the shares on November 30, 2008. These options have a
term of ten years. |
|
(2) |
|
The exercise price is the average of the highest and lowest sale
prices of the Companys Class A Common Stock as
reported by the New York Stock Exchange on the date of the grant |
|
(3) |
|
For options with a ten-year life, represents total potential
appreciation of approximately 0%, 63% and 159% for assumed
annual rates of appreciation of 0%, 5% and 10%, respectively,
compounded annually for ten years. |
|
|
|
For options with a five-year life, represents total potential
appreciation of approximately 0%, 28% and 61% for assumed annual
rates of appreciation of 0%, 5% and 10%, respectively,
compounded annually for five years. |
III-6
|
|
|
(4) |
|
Calculated from the $33.8900 exercise price applicable to the
options granted on August 1, 2005 and the $37.8300 exercise
price applicable to the options granted on November 30,
2005 based on the fiscal 2006 average of Class A Common
Stock outstanding of 45,473,676. |
|
(5) |
|
Represents potential realizable value for all options granted in
fiscal 2006 compared to the increase in market value of Brady
Corporation Class A Common Stock at assumed rates of stock
price appreciation. |
|
(6) |
|
The Company disavows the ability of any valuation model to
predict or estimate the Companys future stock price or to
place a reasonably accurate present value on these options
because any model depends on assumptions about the stocks
future price movement that the Company is unable to predict. |
AGGREGATED
OPTION EXERCISES IN FISCAL 2006
AND VALUE OF OPTIONS AT END OF FISCAL 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities Underlying
|
|
|
|
Shares
|
|
|
|
|
|
Unexercised Options at
|
|
|
|
Acquired on
|
|
|
Value
|
|
|
July 31, 2006
|
|
Name
|
|
Exercise(#)(2)
|
|
|
Realized($)
|
|
|
Exercisable(#)
|
|
|
Unexercisable(#)
|
|
|
F.M. Jaehnert
|
|
|
45,200
|
|
|
|
1,309,477
|
|
|
|
286,000
|
|
|
|
414,000
|
|
D.R. Hawke
|
|
|
178,000
|
|
|
|
4,400,288
|
|
|
|
66,667
|
|
|
|
118,333
|
|
D. Mathieson
|
|
|
0
|
|
|
|
0
|
|
|
|
60,933
|
|
|
|
109,667
|
|
P.C. Sephton
|
|
|
0
|
|
|
|
0
|
|
|
|
90,333
|
|
|
|
109,667
|
|
M.O. Williamson
|
|
|
8,000
|
|
|
|
176,100
|
|
|
|
77,333
|
|
|
|
109,667
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of Unexercised
In-the-Money
Options at July 31, 2006(1)
|
|
Name
|
|
Exercisable($)
|
|
|
Unexercisable($)
|
|
|
F.M. Jaehnert
|
|
|
5,274,632
|
|
|
|
4,914,940
|
|
D.R. Hawke
|
|
|
989,872
|
|
|
|
714,253
|
|
D. Mathieson
|
|
|
777,386
|
|
|
|
422,462
|
|
P.C. Sephton
|
|
|
1,409,658
|
|
|
|
459,427
|
|
M.O. Williamson
|
|
|
1,145,943
|
|
|
|
459,427
|
|
|
|
|
(1) |
|
Represents the closing price for the Companys Class A
Common Stock on July 31, 2006, of $33.76 less the exercise
price for all outstanding exercisable and unexercisable options
for which the exercise price is less than such closing price. |
|
(2) |
|
Adjusted for a
two-for-one
stock split in the form of a 100% stock dividend, effective
December 31, 2004. |
III-7
Common
Stock Price Performance Graph
The graph below shows a comparison of the cumulative return over
the last five fiscal years had $100 been invested at the close
of business on July 31, 2000, in each of Brady Corporation
Class A Common Stock, The Standard & Poors
(S&P) 500 index, the Standard and Poors Small Cap 600
index, and the Russell 2000 index.
Comparison
of 5 Year Cumulative Total Return*
Among Brady Corporation, The S&P 500 Index,
The S&P Smallcap 600 Index and The Russell 2000 Index
|
|
|
* |
|
$100 invested on 7/31/00 in stock or index including
reinvestment of dividends. Fiscal year ended July 31. |
Copyright (C) 2002, Standard & Poors, a
division of The McGraw-Hill Companies, Inc. All rights reserved.
www.researchdatagroup.com/S&P.htm
Compensation
of Directors
Each director who is also an employee of the Company receives no
additional compensation for service on the Board or on any
committee of the Board. Effective August 1, 2004, directors
who were not also employees of the Company received an annual
retainer of $30,000 plus $5,000 for each committee they chaired
($9,000 for the audit committee chair) and $1,250 plus expenses
for each meeting of the Board or any committee thereof, which
they attended and were a member or $750 for single issue
telephonic committee meetings of the Board. Directors also
received $750 for each meeting they attended of any committee
for which they were not a member.
Termination
of Employment and Change in Control Arrangements
On November 18, 2004, the Board of Directors of Brady
Corporation approved change of control agreements for certain
executive officers of the Company including David Mathieson,
Peter Sephton, and Matthew Williamson. The agreements call for
payment of an amount equal to two times their annual base salary
and two times the average bonus payment received in the two
years immediately prior to the date the Change of Control occurs
in the event of termination or resignation upon a change of
control. The agreements also call for reimbursement of any
excise taxes imposed and up to $25,000 of attorney fees to
enforce the executives rights under the agreement.
Payments under the agreement will be spread over two years.
In May 2003, the Board approved a Change in Control Agreement
for Mr. Jaehnert. The agreement calls for payment of an
amount equal to three times the annual salary and bonus for
Mr. Jaehnert in the event of termination or resignation
upon a change of control. The agreement also calls for
reimbursement of any excise taxes imposed
III-8
and up to $25,000 of attorney fees to enforce the
executives rights under the agreement. Payments under the
agreement will be spread over three years.
In January 2001, the Board approved Change in Control Agreements
for certain of its executive officers, including Mr. Hawke.
The agreements call for payment of an amount equal to two times
their annual salary and bonus in the event of termination or
resignation upon a change in control with payments spread over
two years. The agreements also call for reimbursement of any
excise taxes imposed and up to $25,000 of attorney fees to
enforce the executives rights under the agreements.
Compensation
Committee Interlocks and Insider Participation
During fiscal 2006, the Boards Compensation Committee was
composed of Messrs. Bemis, Buchanan, Nei and Peirce and
Ms. Bush. None of these persons has at any time been an
employee of the Company or any of its subsidiaries. There are no
relationships among the Companys executive officers,
members of the Compensation Committee or entities whose
executives serve on the Board that require disclosure under
applicable SEC regulations.
Funded
Retirement and 401(k) Plans
Substantially all Brady employees in the United States and
certain expatriate employees working for its international
subsidiaries are eligible to participate in Brady
Corporations Funded Retirement Plan (Funded
Retirement Plan) and the Brady Corporation Matched 401(k)
Plan (the employee 401(k) Plan). Under these plans
the Company agrees to contribute certain amounts to both Plans.
Under the Funded Retirement Plan, the Company contributes 4% of
the eligible earnings of each person covered by the Funded
Retirement Plan. In addition, participants may elect to have
their annual pay reduced by up to 4% and have the amount of this
reduction contributed to the employee 401(k) Plan and matched by
an additional, equal contribution by the Company. Participants
may also elect to have up to another 21% of their eligible
earnings contributed to the employee 401(k) Plan (without an
additional matching contribution by the Company). The assets of
the employee 401(k) Plan and Funded Retirement Plan credited to
each participant are invested by the trustee of the Plans as
directed by each plan participant in several investment funds as
permitted by the employee 401(k) Plan and Funded Retirement Plan.
Benefits are generally payable upon the death, disability, or
retirement of the participant or upon termination of employment
before retirement, although benefits may be withdrawn from the
employee 401(k) Plan and paid to the participant if required for
certain emergencies. Under certain specified circumstances, the
employee 401(k) Plan allows loans to be drawn on a
participants account. The participant is immediately fully
vested with respect to the contributions attributable to
reductions in pay; all other contributions become fully vested
over a three-year period of continuous service for the employee
401(k) Plan and after five years of continuous service for the
Funded Retirement Plan.
Deferred
Compensation Arrangements
During fiscal 2002, the Company adopted a deferred compensation
plan under which executive officers, corporate staff officers
and certain key management employees of the Company are
permitted to defer portions of their fees, salary and bonus into
a plan account, the value of which is measured by the fair value
of the underlying investments. The assets of the Plan are held
in a Rabbi Trust and are invested by the trustee of the Plan as
directed by the participant in several investment funds as
permitted by the Plan.
At least one year prior to termination of employment, the
Executive shall elect whether to receive his Account balance
following termination of employment in a single lump sum in cash
or by means of cash distribution under an Annual Installment
Method. If the Executive does not submit an election form or has
not submitted one timely, then payment shall be made each year
for a period of ten years. The first payment must be one-tenth
of the balance held; the second one-ninth; and so on, with the
balance held in the Trust reduced by each payment.
III-9
Compensation
Committee Report on Executive Compensation
The Companys Compensation Committee (the
Committee) is composed entirely of outside directors
and is responsible for considering and approving compensation
arrangements for senior management of the Company, including the
Companys executive officers and the chief executive
officer. It is the philosophy of the Committee to establish a
total executive compensation program which is competitive with a
broad range of companies that it considers to be of comparable
size and complexity.
The primary components of the Companys executive
compensation program are (i) base salary, (ii) annual
cash incentive plan and (iii) long-term incentive
compensation in the form of stock options
and/or
restricted stock. These are designed to align shareholder and
management interests, to balance the achievement of annual
performance targets with actions that focus on the long-term
success of the Company, and to attract, motivate and retain key
executives who are important to the continued success of the
Company. The base salary compensation and the annual cash
incentive compensation plan are reviewed and approved by the
Compensation Committee.
The Committee believes that:
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|
The Companys pay levels are appropriately targeted to
attract and retain key executives;
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The Companys incentive plan provides strong incentives for
management to increase shareholder value; and
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The Companys total executive compensation program is a
cost-effective strategy to increase shareholder value.
|
In December 2003 the Committee established stock ownership
guidelines for executives. The guidelines allow executives up to
five years to achieve the required stock ownership levels.
Base
Salary
Consistent with the Committees philosophy, base salaries
are generally maintained at or modestly above competitive base
salary levels. Competitive salary level is defined as the median
base salary for similar responsibilities in a group of companies
selected by the Committee that the Committee considers to be of
comparable size and complexity. In setting base salaries for
fiscal 2006, the Committee reviewed compensation survey data and
was satisfied that the base salary levels set would achieve the
Companys objectives. Specific increases reflect the
Committees subjective evaluation of individual performance.
Annual
Bonus Plan
The annual cash incentive compensation plan (the Bonus
Plan) provides for the annual payment of cash bonuses.
When viewed together with the Companys base salary, the
purpose of the Bonus Plan is to provide a balance between fixed
compensation and variable, results-oriented compensation. The
Bonus Plan is 80% objective. It stresses maximization of Company
profitability and revenue growth. In fiscal 2006, the Company
awarded a special bonus in recognition of achieving consolidated
net sales greater than $1 billion and consolidated net
income greater than $100 million.
Stock
Options
In November 2005, the holders of the Corporations
Class B Common Stock approved the Brady Corporation 2005
Nonqualified Stock Option Plan for Non-employee Directors, under
which 300,000 shares of Class A Common Stock were
authorized for grant. In November 2004, the holders of the
Corporations Class B Common Stock approved the Brady
Corporation 2004 Omnibus Incentive Stock Plan under which
1,500,000 shares of Class A Common Stock were
authorized for grant. In July 2003, the Companys
Class B Voting Common shareholders approved the Brady
Corporation 2003 Omnibus Incentive Stock Plan under which
1,500,000 shares of Class A Common Stock were
authorized for grant. In October 2001, the Company approved the
Brady Corporation 2001 Omnibus Incentive Stock Plan under which
1,000,000 shares of Class A Common Stock were
authorized for grant. In May 1997, the Company approved the
Brady Corporation 1997 Omnibus Incentive Stock Plan and the
Brady Corporation 1997 Nonqualified Stock Option Plan for
Non-Employee Directors (the Option Plans) under
which
III-10
4,000,000 shares and 250,000 shares, respectively, of
Class A Common Stock were authorized for grant. In 1989,
the Board approved the Brady Corporation 1989 Non-Qualified
Stock Option Plan (the Option Plan) under which
3,000,000 shares of Class A Common Stock were
authorized for grant. As of July 31, 2006, the Company had
reserved 3,815,052 shares of Class A Common Stock for
outstanding stock options and 878,968 shares of
Class A Common Stock for future issuance of stock options
under the Option Plans. The Option Plans assist directors,
executive officers, corporate staff officers and key management
employees in becoming shareholders with an important stake in
the Companys future, aligning their personal financial
interest with that of all shareholders. Stock options are
typically granted annually and have a term of ten years.
Generally, the options become one-third exercisable one year
after the date of the grant and one-third additional in each of
the succeeding two years so that at the end of three years after
the date of the grant they are fully exercisable. In August
2004, 2005 and 2006, certain executives and key management
employees were issued stock options that vest upon meeting
certain financial performance conditions in addition to the
vesting schedule described above and have a term of five years.
All grants under the Option Plans are at market price on the
date of the grant.
Compliance
with Tax Regulations Regarding Executive
Compensation
Section 162(m) of the Internal Revenue Code, added by the
Omnibus Budget Reconciliation Act of 1993, generally disallows a
tax deduction to public companies for compensation over
$1 million paid to the corporations chief executive
officer and the other named executive officers. Qualifying
performance-based compensation will not be subject to the
deduction limit if certain requirements are met. The
Companys executive compensation program, as currently
constructed, is not likely to generate significant nondeductible
compensation in excess of these limits. The Compensation
Committee will continue to review these tax regulations as they
apply to the Companys executive compensation program. It
is the Compensation Committees intent to preserve the
deductibility of executive compensation to the extent reasonably
practicable and to the extent consistent with its other
compensation objectives. To that end, the Compensation Committee
has recommended that the Class B Common Stock shareholders
approve an incentive compensation plan for elected corporate
officers at the shareholders next annual meeting.
Compensation
of the Chief Executive Officer
Mr. Jaehnert received $573,077 in base salary in fiscal
2006, an increase of 16.2% from the prior years base
salary. Based on the terms of the Companys objective Bonus
Plan, discussed above, Mr. Jaehnert earned a bonus
attributable to fiscal 2006 of $862,308, of which $60,000 is
attributable to the special bonus discussed above. In 2005,
Mr. Jaehnert earned a bonus of $734,902 and in 2004,
Mr. Jaehnert earned a bonus of $796,800.
Mr. Jaehnerts compensation reflects:
(i) continued strong performance as compared to its peers
with respect to sales, profits and stock price performance;
(ii) continued efforts to focus the Companys
resources on sustainable value-enhancing long-term growth, which
includes acquisitions and new product developments; and
(iii) continued involvement in management team development
and succession planning.
During fiscal 2006, Mr. Jaehnert was awarded options to
purchase 110,000 shares of Class A Common Stock.
******************************
The Compensation Committee believes the executive compensation
programs and practices described above are competitive. They are
designed to provide increased compensation with improved
financial performance and to provide additional opportunity for
capital accumulation.
Gary E. Nei, Chairman
Richard A. Bemis
Robert C. Buchanan
Mary K. Bush
Roger D. Peirce
III-11
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Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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(a)
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Security
Ownership of Certain Beneficial Owners
|
The following table sets forth the current beneficial ownership
of shareholders who are known by the Company to own more than
five percent (5%) of any class of the Companys voting
shares on August 15, 2006. As of that date, nearly all of
the voting stock of the Company was held by two trusts
controlled by direct descendants of the Companys founder,
William H. Brady, as follows:
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Amount of
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Beneficial
|
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Percent of
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Title of Class
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Name and Address of Beneficial Owner
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Ownership
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Ownership(2)
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Class B Common Stock
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Brady Corporation Class B
Common Stock Trust(1)
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1,769,304
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50
|
%
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c/o Elizabeth P. Pungello
2002 S. Hawick Ct.
Chapel Hill, NC 27516
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William H. Brady III
Revocable Trust of 2003(3)
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1,769,304
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50
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%
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c/o William H. Brady III
249 Rosemont Ave.
Pasadena, CA 91103
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(1) |
|
The trustee is Elizabeth P. Pungello, who has sole voting and
dispositive power and who is the remainder beneficiary.
Elizabeth Pungello is the great-granddaughter of William H.
Brady and currently serves on the Companys Board of
Directors. |
|
(2) |
|
An additional 20 shares are owned by a third trust with
different trustees. |
|
(3) |
|
William H. Brady III is special trustee of this trust and
has sole voting and dispositive powers with respect to these
shares. William H. Brady III is the grandson of William H.
Brady. |
III-12
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|
(b)
|
Security
Ownership of Management
|
The following table sets forth the current beneficial ownership
of each class of equity securities of the Company by each
Director or Nominee and by all Directors and Officers of the
Company as a group as of August 15, 2006. Unless otherwise
noted, the address for each of the listed persons is
c/o Brady Corporation, 6555 West Good Hope Road,
Milwaukee, Wisconsin 53223. Except as otherwise indicated, all
shares are owned directly.
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Amount of
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Beneficial
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Percent of
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Title of Class
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Name of Beneficial Owner & Nature of Beneficial
Ownership
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Ownership(8)
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Ownership
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Class A Common Stock
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Elizabeth P. Pungello(1)
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2,247,677
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4.5
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%
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Frank M. Jaehnert(2)
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294,658
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0.6
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Thomas J. Felmer
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99,402
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0.2
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David R. Hawke
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98,777
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0.2
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Peter C. Sephton
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90,733
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0.2
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Matthew O. Williamson
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77,333
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0.2
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Allan J. Klotsche
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76,705
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0.2
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David Mathieson
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65,448
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0.1
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Michael O. Oliver
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64,303
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0.1
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Conrad G. Goodkind
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43,013
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0.1
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Richard A. Bemis
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43,000
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0.1
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Roger D. Peirce(3)
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24,000
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|
*
|
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Gary E. Nei(4)
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22,000
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*
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Frank W. Harris
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20,066
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*
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Robert C. Buchanan(5)
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19,400
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*
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Frank R. Jarc
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19,000
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*
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Peter J. Lettenberger
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18,575
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*
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Barbara Bolens
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12,925
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*
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Mary K. Bush
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10,000
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*
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Robert L. Tatterson(6)
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0
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*
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All Officers and Directors as a
Group (20 persons)(7)
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6.6
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%
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|
Class B Common Stock
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Elizabeth P. Pungello(1)
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1,769,304
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50.0
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%
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* |
|
Indicates less than one-tenth of one percent. |
|
(1) |
|
Represents 2,183,572 shares owned by trusts for which
Ms. Pungello is a trustee and has either sole or joint
dispositive and voting authority. In addition, Ms. Pungello
is the beneficiary of an unrelated trust owning
1,833,409 shares, as to which she does not have voting or
dispositive authority. |
|
(2) |
|
Mr. Jaehnert owns 2,020 shares of Class A Common
Stock directly and 1,173 shares in his 401(k) Plan, and
holds vested options to acquire an additional
286,000 shares of Class A Common Stock.
Mr. Jaehnerts spouse owns 5,465 shares of
Class A Common Stock directly. |
|
(3) |
|
Mr. Peirce owns 3,000 shares of Class A Common
Stock directly, 3,000 shares through his Keogh plan and
holds vested options to acquire an additional 18,000 shares
of Class A Common Stock. |
|
(4) |
|
Mr. Nei owns 4,000 shares of Class A Common Stock
directly (with respect to which he shares voting and investment
power with his spouse) and holds vested options to acquire an
additional 18,000 shares of Class A Common Stock. |
|
(5) |
|
Mr. Buchanan owns 1,200 shares of Class A Common
Stock directly, 13,200 additional shares as co-trustee of two
separate trusts and holds vested options to acquire an
additional 5,000 shares of Class A Common Stock. |
|
(6) |
|
Mr. Tatterson joined the Company in October 2006 and owned no
shares of Class A Common Stock as of the reporting date. Mr.
Tatterson was granted options to acquire 15,000 shares of Class
A Common Stock upon joining the Company. |
III-13
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(7) |
|
The amount shown for all officers and directors as a group (20
persons) includes options to acquire a total of
943,227 shares of Class A Common Stock, which are currently
exercisable or will be exercisable within 60 days of
August 15, 2006, including the following: Mr. Felmer,
98,667 shares; Mr. Sephton, 90,333 shares; Mr. Williamson,
77,333 shares; Mr. Klotsche, 74,801 shares; Mr. Hawke, 66,667
shares; Mr. Mathieson, 60,933 shares; Mr. Oliver, 52,093 shares;
Mr. Bemis, 25,000 shares; Mr. Jarc, 19,000 shares; Mr. Harris,
16,000 shares; Mr. Lettenberger, 13,000 shares; Ms. Bolens,
12,400 shares; Ms. Bush, 10,000 shares; Mr. Tatterson, 0
shares. It does not include other options for Class A
Common Stock which have been granted at later dates and are not
exercisable within 60 days of August 15, 2006. |
|
(8) |
|
In addition to the shares shown in this table, the officers and
directors as a group owned the equivalent of 546,816 shares
of the Companys Class A Common Stock in its deferred
compensation plans. |
No arrangements are known to the Company, which may, at a
subsequent date, result in a change in control of the Company.
|
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(d)
|
Equity
Compensation Plan Information
|
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|
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|
|
Number of securities
|
|
|
|
|
|
|
|
|
|
remaining available for
|
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|
|
Number of securities
|
|
|
|
|
|
future issuance under
|
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|
|
to be issued upon
|
|
|
Weighted-average
|
|
|
equity compensation
|
|
|
|
exercise of
|
|
|
exercise price of
|
|
|
plans (excluding
|
|
|
|
outstanding options,
|
|
|
outstanding options,
|
|
|
securities reflected in
|
|
|
|
warrants and rights
|
|
|
warrants and rights
|
|
|
column (a))
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved
by security holders
|
|
|
3,815,052
|
|
|
$
|
23.27
|
|
|
|
1,064,770
|
|
Equity compensation plans not
approved by security holders
|
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None
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|
None
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|
None
|
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|
|
|
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|
|
|
|
|
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|
Total
|
|
|
3,815,052
|
|
|
$
|
23.27
|
|
|
|
1,064,770
|
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|
The Companys Nonqualified Stock Option Plans allow the
granting of stock options to various officers, directors and
other employees of the Company at prices equal to fair market
value at the date of grant. The Company has reserved 3,000,000,
4,250,000, 1,000,000, 1,500,000, 1,500,000 and
300,000 shares of Class A Nonvoting Common Stock for
issuance under the 1989, 1997, 2001, 2003, 2004 and 2005 Plans,
respectively, adjusted for the
two-for-one
stock split in the form of a 100% stock dividend, effective
December 31, 2004. Generally, options will not be
exercisable until one year after the date of grant, and will be
exercisable thereafter, to the extent of one-third per year and
have a maximum term of ten years. In August 2003, 2004, 2005,
and 2006, certain executives and key management employees were
issued stock options that vest upon meeting certain financial
performance conditions in addition to the vesting schedule
described above. These options have a maximum term of five
years. All grants under the Option Plans are at market price on
the date of the grant.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
Peter J. Lettenberger serves as a Director of the Company; he
recently retired as a partner of Quarles & Brady LLP,
general counsel to the Company. Conrad G. Goodkind serves as
Secretary to the Company. He is currently a partner of
Quarles & Brady LLP, general counsel to the Company.
III-14
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The following table presents the aggregate fees incurred for
professional services by Deloitte & Touche LLP and
Deloitte Tax LLP during the years ended July 31, 2006 and
2005. Other than as set forth below, no professional services
were rendered or fees billed by Deloitte & Touche LLP
or Deloitte Tax LLP during the years ended July 31, 2006
and 2005.
|
|
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|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Audit and
audit-related
|
|
|
|
|
|
|
|
|
Audit fees(1)
|
|
$
|
1,495
|
|
|
$
|
1,613
|
|
Audit-related fees(2)
|
|
|
68
|
|
|
|
63
|
|
Tax fees compliance
|
|
|
511
|
|
|
|
518
|
|
|
|
|
|
|
|
|
|
|
Subtotal audit and
audit-related fees
|
|
|
2,074
|
|
|
|
2,194
|
|
Non-audit
related
|
|
|
|
|
|
|
|
|
Tax fees planning and
advice
|
|
|
1,336
|
|
|
|
998
|
|
Other fees(3)
|
|
|
103
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
Subtotal non-audit related
fees
|
|
|
1,439
|
|
|
|
1,061
|
|
|
|
|
|
|
|
|
|
|
Total fees
|
|
$
|
3,513
|
|
|
$
|
3,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Audit fees consist of professional services rendered for the
audit of the Companys annual financial statements,
attestation of managements assessment of internal control,
reviews of the quarterly financial statements and statutory
reporting compliance. |
|
(2) |
|
Audit-related fees include fees related to due diligence and
employee benefit plan audits. |
|
(3) |
|
All other fees include fees related to expatriate activities. |
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Ratio of Tax Planning and Advice
Fees and All Other Fees to Audit Fees,
Audit-Related
Fees and Tax Compliance Fees
|
|
|
.7 to 1
|
|
|
|
.5 to 1
|
|
Pre-Approval Policy The services performed by
the Independent Registered Public Accounting Firm
(Independent Auditors) in fiscal 2005 and 2006 were
pre-approved in accordance with the pre-approval policy and
procedures adopted by the Audit Committee at its
November 19, 2003 meeting. The policy requires the Audit
Committee to pre-approve the audit and non-audit services
performed by the Independent Auditors in order to assure that
the provision of such services does not impair the
auditors independence. Unless a type of service to be
performed by the Independent Auditors has received general
pre-approval, it will require specific pre-approval by the Audit
Committee. Any proposed services exceeding pre-approved cost
levels will require specific pre-approval by the Audit Committee.
III-15
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
Item 15 (a) The following documents are filed
as part of this report:
|
|
|
|
1)
|
& 2) Consolidated Financial Statement
Schedule
|
Schedule II Valuation and Qualifying Accounts
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|
|
|
|
All other schedules are omitted as they are not required, or the
required information is shown in the consolidated financial
statements or notes thereto.
|
3) Exhibits See Exhibit Index at
page IV-2
of this
Form 10-K.
IV-1
EXHIBIT INDEX
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|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Restated Articles of Incorporation
of Brady Corporation(1)
|
|
3
|
.2
|
|
By-laws of Brady Corporation, as
amended(2)
|
|
*10
|
.1
|
|
Form of Brady Corporation
(2004) Change of Control Agreement entered into with David
Mathieson, Peter Sephton, and Matthew Williamson(17)
|
|
*10
|
.2
|
|
Brady Corporation BradyGold Plan,
as amended(2)
|
|
*10
|
.3
|
|
Executive Additional Compensation
Plan, as amended(2)
|
|
*10
|
.4
|
|
Executive Deferred Compensation
Plan, as amended(5)
|
|
*10
|
.5
|
|
Directors Deferred
Compensation Plan, as amended(2)
|
|
*10
|
.6
|
|
Brady Corporation 1989
Non-Qualified Stock Option Plan(4)
|
|
*10
|
.7
|
|
Brady Corporation 2004 Omnibus
Incentive Stock Plan(17)
|
|
*10
|
.8
|
|
Form of Brady Corporation 2004
Nonqualified Stock Option Agreement under the 2004 Omnibus
Incentive Stock Plan, as amended(18)
|
|
10
|
.9
|
|
Brady Corporation Automatic
Dividend Reinvestment Plan(4)
|
|
*10
|
.10
|
|
Brady Corporation 2005
Nonqualified Plan for Non-employee Directors(3)
|
|
*10
|
.11
|
|
Form of Nonqualified Stock Option
Agreement under 2005 Non-qualified Plan for Non-employee
Directors(3)
|
|
*10
|
.12
|
|
Brady Corporation 1997 Omnibus
Incentive Stock Plan(7)
|
|
*10
|
.13
|
|
Brady Corporation 1997
Nonqualified Stock Option Plan for Non-Employee Directors(7)
|
|
10
|
.14
|
|
Revolving Credit Facility Credit
Agreement
|
|
*10
|
.17
|
|
Change of Control Agreement dated
January 5, 2001, between Brady Corporation and David R.
Hawke(10)
|
|
*10
|
.23
|
|
Restricted Stock Agreement dated
August 1, 1997, between Brady Corporation and David R.
Hawke(8)
|
|
*10
|
.24
|
|
Amendment to Change of Control
Agreement dated May 20, 2003, between Brady Corporation and
Frank M. Jaehnert(14)
|
|
*10
|
.25
|
|
Restated Brady Corporation
Restoration Plan(5)
|
|
*10
|
.26
|
|
Brady Corporation 2001 Omnibus
Incentive Stock Plan(11)
|
|
10
|
.27
|
|
Revolving Credit Facility Credit
Agreement (Replaced by Exhibit 10.14)(12)
|
|
10
|
.28
|
|
First Amendment to Credit
Agreement (Replaced by Exhibit 10.14)(6)
|
|
*10
|
.29
|
|
Brady Corporation 2003 Omnibus
Incentive Stock Plan(16)
|
|
*10
|
.30
|
|
Restricted Stock Agreement dated
June 18, 2003, between Brady Corporation and David R.
Hawke(16)
|
|
10
|
.34
|
|
Brady Note Purchase Agreement
dated June 28, 2004(15)
|
|
10
|
.35
|
|
First Supplement to
Note Purchase Agreement, dated February 14, 2006(13)
|
|
21
|
|
|
Subsidiaries of Brady Corporation
|
|
23
|
|
|
Consent of Deloitte &
Touche LLP, Independent Registered Public Accounting Firm
|
|
31
|
.1
|
|
Rule 13a-14(a)/15d-14(a)
Certification of Frank M. Jaehnert
|
|
31
|
.2
|
|
Rule 13a-14(a)/15d-14(a)
Certification of David Mathieson
|
|
32
|
.1
|
|
Section 1350 Certification of
Frank M. Jaehnert
|
|
32
|
.2
|
|
Section 1350 Certification of
David Mathieson
|
|
|
|
* |
|
Management contract or compensatory plan or arrangement |
|
(1) |
|
Incorporated by reference to Registrants Registration
Statement
No. 333-04155
on
Form S-3 |
|
(2) |
|
Incorporated by reference to Registrants Current Report on
Form 8-K
filed September 15, 2006 |
|
(3) |
|
Incorporated by reference to Registrants Quarterly Report
on
Form 10-Q
for the fiscal quarter ended October 31, 2005 |
IV-2
|
|
|
(4) |
|
Incorporated by reference to Registrants Annual Report on
Form 10-K
for the fiscal year ended July 31, 1992 |
|
(5) |
|
Incorporated by reference to Registrants Current Report on
Form 8-K
filed February 22, 2006 |
|
(6) |
|
Incorporated by reference to Registrants Quarterly Report
on
Form 10-Q
for the fiscal quarter ended January 31, 2006 |
|
(7) |
|
Incorporated by reference to Registrants Quarterly Report
on
Form 10-Q
for the fiscal quarter ended April 30, 1997 |
|
(8) |
|
Incorporated by reference to Registrants Annual Report on
Form 10-K
for the fiscal year ended July 31, 1997 |
|
(9) |
|
Incorporated by reference to Registrants Annual Report on
Form 10-K
for the fiscal year ended July 31, 2000 |
|
(10) |
|
Incorporated by reference to Registrants Annual Report on
Form 10-K
for the fiscal year ended July 31, 2001 |
|
(11) |
|
Incorporated by reference to Registrants Quarterly Report
on
Form 10-Q
for the fiscal quarter ended January 31, 2002 |
|
(12) |
|
Incorporated by reference to Registrants Quarterly Report
on
Form 10-Q
for the fiscal quarter ended April 30, 2004 |
|
(13) |
|
Incorporated by reference to Registrants Current Report on
Form 8-K
filed February 17, 2006 |
|
(14) |
|
Incorporated by reference to Registrants Quarterly Report
on
Form 10-Q
for the fiscal quarter ended April 30, 2003 |
|
(15) |
|
Incorporated by reference to Registrants
8-K/A filed
August 3, 2004 |
|
(16) |
|
Incorporated by reference to Registrants Annual Report on
Form 10-K
for the fiscal year ended July 31, 2003 |
|
(17) |
|
Incorporated by reference to Registrants Current Report on
Form 8-K
filed November 24, 2004. |
|
(18) |
|
Incorporated by reference to Registrants Annual Report on
Form 10-K
for the fiscal year ended July 31, 2005 |
IV-3
BRADY
CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended July 31,
|
|
Description
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Valuation accounts deducted in
balance sheet from assets to which they apply
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
allowance for losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at beginning of period
|
|
$
|
3,726
|
|
|
$
|
3,869
|
|
|
$
|
3,166
|
|
Additions Charged to
expense
|
|
|
1,152
|
|
|
|
1,216
|
|
|
|
1,450
|
|
Due to acquired businesses
|
|
|
2,861
|
|
|
|
111
|
|
|
|
295
|
|
Deductions Bad debts
written off, net of recoveries
|
|
|
(1,349
|
)
|
|
|
(1,470
|
)
|
|
|
(1,042
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at end of period
|
|
$
|
6,390
|
|
|
$
|
3,726
|
|
|
$
|
3,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory reserve for
slow-moving inventory:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at beginning of period
|
|
$
|
8,573
|
|
|
$
|
7,434
|
|
|
$
|
6,715
|
|
Additions Charged to
expense
|
|
|
2,441
|
|
|
|
298
|
|
|
|
369
|
|
Due to acquired businesses
|
|
|
2,541
|
|
|
|
841
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at end of period
|
|
$
|
13,555
|
|
|
$
|
8,573
|
|
|
$
|
7,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IV-4
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized this sixth day of October 2006.
Brady Corporation
David Mathieson
Vice President & Chief Financial Officer
(Principal Accounting Officer)
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
/s/ F.
M. Jaehnert
F.
M. Jaehnert
|
|
President and Director
(Principal Executive Officer)
|
|
October 6, 2006
|
|
|
|
|
|
/s/ P.
J.
Lettenberger
P.
J. Lettenberger
|
|
Director
|
|
October 6, 2006
|
|
|
|
|
|
/s/ R.
A. Bemis
R.
A. Bemis
|
|
Director
|
|
October 6, 2006
|
|
|
|
|
|
/s/ F.
W. Harris
F.
W. Harris
|
|
Director
|
|
October 6, 2006
|
|
|
|
|
|
/s/ R.
C. Buchanan
R.
C. Buchanan
|
|
Director
|
|
October 6, 2006
|
|
|
|
|
|
/s/ R.
D. Peirce
R.
D. Peirce
|
|
Director
|
|
October 6, 2006
|
|
|
|
|
|
/s/ G.
E. Nei
G.
E. Nei
|
|
Director
|
|
October 6, 2006
|
|
|
|
|
|
/s/ M.
K. Bush
M.
K. Bush
|
|
Director
|
|
October 6, 2006
|
|
|
|
|
|
/s/ F.
R. Jarc
F.
R. Jarc
|
|
Director
|
|
October 6, 2006
|
|
|
|
|
|
/s/ E.
P. Pungello
E.
P. Pungello
|
|
Director
|
|
October 6, 2006
|
IV-5