e10vq

\n\n\n

\n\n\n\n\n

UNITED STATES SECURITIES AND EXCHANGE COMMISSION\n

\n\n

Washington, DC 20549\n

\n\n

FORM 10-Q\n

\n\n

\n\n\n \n \n \n\n\n \n \n \n\n


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE\nSECURITIES EXCHANGE ACT OF 1934

\n\n

For the Quarterly Period Ended January 31, 2007\n

\n\n\n

OR\n\n

\n\n\n \n \n \n\n\n \n \n \n\n


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE\nSECURITIES EXCHANGE ACT OF 1934

\n\n

For the Transition Period from to \n\n

\n\n\n

Commission File Number 1-14959\n\n

BRADY CORPORATION\n

\n\n

(Exact name of registrant as specified in its charter)

\n\n\n

\n\n\n\n \n \n \n\n\n\n\n \n \n \n\n\n \n \n \n\n\n \n \n \n\n\n \n \n \n\n\n


Wisconsin\n		39-0178960
\n
(State or other jurisdiction of\n		(I.R.S. Employer
incorporation or organization)\n		Identification No.)

\n\n\n

6555 West Good Hope Road, Milwaukee, Wisconsin 53223
\n(Address of principal executive offices)
\n(Zip Code)
\n(414) 358-6600\n\n

\n\n

(Registrant’s telephone number, including area code)\n\n

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

\n\n

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,\nor a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in\nRule 12b-2 of the Exchange Act.\n

\n\n

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

\n\n\n

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the\nExchange Act). Yes o No þ\n

\n\n\n

APPLICABLE ONLY TO CORPORATE ISSUERS\n\n

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of\nthe latest practicable date.\n

\n\n

As of\nMarch 2, 2007, there were outstanding 50,409,791 shares of Class A Nonvoting Common Stock\nand 3,538,628 shares of Class B Voting Common Stock. The Class B Common Stock, all of which is held\nby affiliates of the Registrant, is the only voting stock.\n

\n\n\n

\n\n\n\n\n\n

\n\n

PART I. FINANCIAL INFORMATION\n

\n\n

ITEM 1. FINANCIAL STATEMENTS

\n\n\n\n

BRADY CORPORATION AND SUBSIDIARIES

\n\n\n

\n\n

CONDENSED CONSOLIDATED BALANCE SHEETS

\n\n\n\n

(DOLLARS IN THOUSANDS)

\n\n\n


	January 31, 2007			July 31, 2006
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	86,408			$	113,008
Short term investments		—				11,500
Accounts receivable, less allowance for losses ($8,340 and $6,390, respectively)		218,594				187,907
Inventories:
Finished products		76,245				59,365
Work-in-process		18,292				12,850
Raw materials and supplies		39,823				37,702

Total inventories		134,360				109,917
Prepaid expenses and other current assets		43,389				36,825


Total current assets		482,751				459,157

Other assets:
Goodwill		655,238				587,642
Other intangible assets		145,544				134,111
Deferred income taxes		33,954				34,135
Other		16,599				10,235

Property, plant and equipment:
Cost:
Land		6,582				6,548
Buildings and improvements		81,878				78,418
Machinery and equipment		219,468				198,426
Construction in progress		28,636				12,098


		336,564				295,490
Less accumulated depreciation		171,144				155,584


Net property, plant and equipment		165,420				139,906


Total	$	1,499,506			$	1,365,186


LIABILITIES AND STOCKHOLDERS’ INVESTMENT
Current liabilities:
Accounts payable	$	92,598			$	78,585
Wages and amounts withheld from employees		49,555				61,778
Taxes, other than income taxes		6,768				6,231
Accrued income taxes		22,627				25,243
Other current liabilities		43,357				46,763
Short-term borrowings and current maturities on long-term obligations		12				20


Total current liabilities		214,917				218,620

Long-term obligations, less current maturities		420,817				350,018
Other liabilities		56,968				50,502


Total liabilities		692,702				619,140

Stockholders’ investment:
Class A nonvoting common stock – Issued 50,481,743 and 50,481,743 shares,\nrespectively and outstanding 50,403,641 and 50,188,842 shares, respectively		505				505
Class B voting common stock – Issued and outstanding 3,538,628 shares		35				35
Additional paid-in capital		259,282				258,922
Earnings retained in the business		500,134				460,991
Treasury stock – 78,102 and 292,901 shares, respectively of Class A nonvoting\ncommon stock, at cost		(2,956	)			(10,865	)
Accumulated other comprehensive income		49,042				35,696
Other		762				762


Total stockholders’ investment		806,804				746,046


Total	$	1,499,506			$	1,365,186

\n\n

See Notes to Condensed Consolidated Financial Statements\n

\n\n\n\n\n

2\n

\n\n\n\n\n

BRADY CORPORATION AND SUBSIDIARIES\n\n

\n\n

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

\n\n\n\n

(Dollars in Thousands, Except Per Share Amounts)

\n\n\n

\n\n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n\n\n\n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n


	Three Months Ended January 31,			Six Months Ended January 31,
	(Unaudited)			(Unaudited)
								Percentage										Percentage
	2007			2006			Change		2007		2006			Change

Net sales	$	321,275			$	230,974			39.1	%	$	653,534			$	463,609			41.0	%
Cost of products sold		171,114				113,869			50.3	%		339,245				222,513			52.5	%

Gross margin		150,161				117,105			28.2	%		314,289				241,096			30.4	%

Operating expenses:
Research and development		9,082				6,829			33.0	%		17,614				13,363			31.8	%
Selling, general and administrative		108,355				79,000			37.2	%		212,010				152,328			39.2	%


Total operating expenses		117,437				85,829			36.8	%		229,624				165,691			38.6	%

Operating income		32,724				31,276			4.6	%		84,665				75,405			12.3	%

Other income (expense):
Investment and other income — net		(106	)			88			-220.5	%		532				480			10.8	%
Interest expense		(5,244	)			(2,435	)		115.4	%		(9,979	)			(4,424	)		125.6	%


Income before income taxes		27,374				28,929			-5.4	%		75,218				71,461			5.3	%

Income taxes		7,665				7,675			-0.1	%		21,061				20,009			5.3	%


Net income	$	19,709			$	21,254			-7.3	%	$	54,157			$	51,452			5.3	%


Per Class A Nonvoting Common Share:
Basic net income	$	0.37			$	0.43			-14.0	%	$	1.01			$	1.05			-3.8	%
Diluted net income	$	0.36			$	0.43			-16.3	%	$	0.99			$	1.03			-3.9	%
Dividends	$	0.14			$	0.13			7.7	%	$	0.28			$	0.26			7.7	%

Per Class B Voting Common Share:
Basic net income	$	0.37			$	0.43			-14.0	%	$	0.99			$	1.03			-3.9	%
Diluted net income	$	0.36			$	0.43			-16.3	%	$	0.97			$	1.02			-4.9	%
Dividends	$	0.14			$	0.13			7.7	%	$	0.26			$	0.24			8.3	%

Weighted average common shares\noutstanding (in thousands):
Basic		53,894				48,994						53,814				49,098
Diluted		54,789				49,813						54,697				49,891

\n\n

See Notes to Condensed Consolidated Financial Statements.\n

\n\n\n\n\n\n

3\n

\n\n\n\n\n

BRADY CORPORATION AND SUBSIDIARIES\n\n

\n\n

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

\n\n\n\n

(Dollars in Thousands)

\n\n\n


	Six Months Ended
	January 31,
	(Unaudited)
	2007			2006
Operating activities:
Net income	$	54,157			$	51,452
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		26,096				14,554
Deferred income taxes		(542	)			712
Loss on disposal of property, plant & equipment		305				45
Provision for losses on accounts receivable		1,301				623
Non-cash portion of stock-based compensation expense		3,669				2,827
Changes in operating assets and liabilities (net of effects of business acquisitions):
Accounts receivable		(15,337	)			(11,250	)
Inventories		(14,787	)			(11,537	)
Prepaid expenses and other assets		(8,590	)			(2,959	)
Accounts payable and accrued liabilities		(8,316	)			(17,512	)
Income taxes		(3,411	)			(10,127	)
Other liabilities		2,514				3,970

Net cash provided by operating activities		37,059				20,798

Investing activities:
Acquisition of businesses, net of cash acquired		(90,418	)			(100,256	)
Payments of contingent consideration		(9,329	)			—
Purchases of short-term investments		—				(3,800	)
Sales of short-term investments		11,500				10,900
Purchases of property, plant and equipment		(32,135	)			(17,341	)
Proceeds from sale of property, plant and equipment		234				66
Other		(5,831	)			(1,711	)

Net cash used in investing activities		(125,979	)			(112,142	)

Financing activities:
Payment of dividends		(15,014	)			(12,710	)
Proceeds from issuance of common stock		3,837				6,467
Principal payments on debt		(26,231	)			(190,459	)
Proceeds from issuance of debt		97,020				289,630
Purchase of treasury stock		—				(27,233	)
Income tax benefit from the exercise of stock options		763				3,354

Net cash provided by financing activities		60,375				69,049

Effect of exchange rate changes on cash		1,945				67


Net decrease in cash and cash equivalents		(26,600	)			(22,228	)
Cash and cash equivalents, beginning of period		113,008				72,970


Cash and cash equivalents, end of period	$	86,408			$	50,742


Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of capitalized interest	$	9,754			$	3,907
Income taxes, net of refunds		23,983				24,510

Acquisitions:
Fair value of assets acquired, net of cash and goodwill	$	50,042			$	39,422
Liabilities assumed		(15,617	)			(9,326	)

Goodwill		55,993				70,160

Net cash paid for acquisitions	$	90,418			$	100,256

\n\n

See Notes to Condensed Consolidated Financial Statements.\n

\n\n\n\n

4\n

\n\n\n\n\n

BRADY CORPORATION AND SUBSIDIARIES\n

\n\n

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

\n\n\n

Six Months Ended January 31, 2007

\n\n\n

(Unaudited)

\n\n\n

(In thousands, except share and per share amounts)

\n\n\n\n

NOTE A — Basis of Presentation\n

\n\n\n

The condensed consolidated financial statements included herein have been prepared by Brady\nCorporation and subsidiaries (the “Company” or “Brady”) without audit, pursuant to the rules and\nregulations of the Securities and Exchange Commission. In the opinion of the Company, the foregoing\nstatements contain all adjustments, consisting only of normal recurring adjustments, necessary to\npresent fairly the financial position of the Company as of January 31, 2007 and July 3l, 2006, its\nresults of operations for the three and six months ended January 31, 2007 and 2006, and its cash\nflows for the six months ended January 31, 2007 and 2006. The condensed consolidated balance sheet\nas of July 31, 2006 has been derived from the audited consolidated financial statements of that\ndate. The preparation of financial statements in conformity with accounting principles generally\naccepted in the United States of America (“GAAP”) requires management to make estimates and\nassumptions that affect the reported amounts therein. Due to the inherent uncertainty involved in\nmaking estimates, actual results in future periods may differ from the estimates.\n

\n\n

Certain information and footnote disclosures normally included in financial statements\nprepared in accordance with GAAP have been omitted pursuant to rules and regulations of the\nSecurities and Exchange Commission. Accordingly, the condensed consolidated financial statements do\nnot include all of the information and footnotes required by GAAP for complete financial statement\npresentation. It is suggested that these condensed consolidated financial statements be read in\nconjunction with the consolidated financial statements and the notes thereto included in the\nCompany’s latest annual report on Form 10-K for the year ended July 31, 2006.\n

\n\n

Reclassifications — Certain prior period amounts have been reclassified to conform with the\ncurrent period presentation.\n

\n\n

NOTE B — Goodwill and Intangible Assets\n

\n\n\n

Changes in the carrying amount of goodwill for the six months ended January 31, 2007, are as\nfollows:\n


	Americas			Europe			Asia-Pacific		Total
Balance as of July 31, 2006	$	322,759			$	111,792		$	153,091	$	587,642
Goodwill acquired during the period		41,024				14,808			161		55,993
Adjustments for prior year acquisitions		1,934				200			3,536		5,670
Translation adjustments		(441	)			2,476			3,898		5,933

Balance as of January 31, 2007	$	365,276			$	129,276		$	160,686	$	655,238

\n\n\n

The following acquisitions completed during the six months ended January 31, 2007 increased\ngoodwill by the following amounts:\n


	Segment	Goodwill
Comprehensive Identification Products, Inc. (“CIPI”)	Americas, Europe and Asia-Pacific	$	18,937
Precision Converters, L.P. (“PC”)	Americas		8,409
Scafftag, Ltd., Safetrak, Ltd. and Scafftag Pty., Ltd. (collectively “Scafftag”)	Americas, Europe and Asia-Pacific		6,380
Asterisco Artes Graficas Ltda. (“Asterisco”)	Americas		12,391
Modernotecnica SpA (“Moderno”)	Europe		9,876

Total		$	55,993

\n\n\n

5\n

\n\n\n

Goodwill also increased $5,670 during the six months ended January 31, 2007 as a result of\nadjustments to the preliminary allocation of the purchase price for acquisitions completed in\nfiscal 2006 and the recording of a $1,577 liability for the contingent payment due to the previous\nowners of QDP Thailand Co., Ltd. (“QDPT”), which was acquired in fiscal 2006 (see Note E for more\ninformation). The largest components of the increase as a result of adjustments to the preliminary\nallocation of purchase price related to Daewon Industry Corporation (“Daewon”) and Tradex\nConverting AB (“Tradex”), which added $1,509 and $1,491, respectively. The remaining $5,933\nincrease to goodwill during the six months was attributable to the effects of foreign currency\ntranslation.\n

\n\n

Other intangible assets include patents, trademarks, customer relationships, purchased\nsoftware, non-compete agreements and other intangible assets with finite lives being amortized in\naccordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other\nIntangible Assets.” The net book value of these assets was as follows:\n


	January 31, 2007		July 31, 2006
	Weighted												Weighted
	Average												Average
	Amortization		Gross									Amortization		Gross
	Period		Carrying			Accumulated		Net Book		Period			Carrying		Accumulated		Net Book
	(Years)		Amount			Amortization		Value		(Years)			Amount		Amortization		Value
Amortized\nother intangible\nassets:
Patents		15		$	8,402		$	(5,546	)	$	2,856			15		$	7,885	$	(5,134	)	$	2,751
Trademarks and\nother		5			4,019			(2,699	)		1,320			6			3,328		(2,106	)		1,222
Customer\nrelationships		7			129,505			(26,743	)		102,762			7			109,955		(17,693	)		92,262
Purchased\nsoftware		5			3,291			(2,196	)		1,095			5			3,288		(1,887	)		1,401
Non-compete\nagreements		4			11,340			(5,503	)		5,837			4			9,757		(4,448	)		5,309
Unamortized other\nintangible assets:
Trademarks		N/A			31,674			—			31,674			N/A			31,166		—			31,166

Total				$	188,231		$	(42,687	)	$	145,544					$	165,379	$	(31,268	)	$	134,111

\n\n\n

The acquisitions completed during the six months ended January 31, 2007 (see Note E\nfor more information) contributed to the increases in each of the categories of other intangible\nassets listed above. The increase in customer relationships relates to the acquisitions of CIPI,\nPC, Scafftag and Moderno which added $5,633, $2,225, $3,279 and $6,570, respectively. These assets\nwill be amortized over a weighted average amortization period of 5.6 years.\n

\n\n

The value of goodwill and other intangible assets in the Consolidated Financial Statements at\nJanuary 31, 2007 differs from the value assigned to them in the allocation of purchase price due to\nthe effect of fluctuations in the exchange rates used to translate financial statements into the\nUnited States Dollar between the date of acquisition and January 31, 2007.\n

\n\n

Amortization expense on intangible assets was $5,720 and $2,925 for the three-month periods\nended January 31, 2007 and 2006, respectively and $10,961 and $5,329 for the six-month periods\nended January 31, 2007 and 2006, respectively. The amortization over each of the next five fiscal\nyears is projected to be $23,166, $22,531, $21,751, $20,643 and $17,296 for the years ending July\n31, 2007, 2008, 2009, 2010 and 2011, respectively.\n

\n\n

NOTE C — Comprehensive Income\n

\n\n\n

Total comprehensive income, which was comprised of net income, foreign currency adjustments\nand net unrealized gains and losses from cash flow hedges, amounted to approximately $10,536 and\n$25,846 for the three months ended January 31, 2007 and 2006, respectively and $40,811 and $54,820\nfor the six months ended January 31, 2007 and 2006, respectively.\n

\n\n

6\n

\n\n

NOTE D — Net Income Per Common Share\n

\n\n\n

Reconciliations of the numerator and denominator of the basic and diluted per share\ncomputations for the Company’s Class A and Class B common stock are summarized as follows:\n


	Three Months Ended January 31,		Six Months Ended January 31,
	2007		2006			2007		2006
Numerator:
Net income (numerator for basic and\ndiluted Class A net income per share)	$	19,709		$	21,254		$	54,157		$	51,452
Less:
Preferential dividends		—			—			(836	)		(758	)
Preferential dividends on\ndilutive stock options		—			—			(15	)		(16	)

Numerator for basic and diluted\nClass B net income per share	$	19,709		$	21,254		$	53,306		$	50,678


Denominator:
Denominator for basic net income per\nshare for both Class A and Class B		53,894,000			48,994,000			53,814,000			49,098,000
Plus: Effect of dilutive stock options		895,000			819,000			883,000			793,000

Denominator for diluted net\nincome per share for both Class A and\nClass B		54,789,000			49,813,000			54,697,000			49,891,000


Class A Nonvoting Common Stock net income\nper share:
Basic	$	0.37		$	0.43		$	1.01		$	1.05
Diluted	$	0.36		$	0.43		$	0.99		$	1.03

Class B Voting Common Stock net income per\nshare:
Basic	$	0.37		$	0.43		$	0.99		$	1.03
Diluted	$	0.36		$	0.43		$	0.97		$	1.02

\n\n\n

Options to purchase 1,269,500 and 949,500 shares of Class A Nonvoting Common Stock for the\nthree and six months ended January 31, 2007, respectively, and 1,261,500 and 811,250 shares of\nClass A Nonvoting Common Stock for the three and six months ended January 31, 2006, respectively,\nwere not included in the computations of diluted net income per share because the option exercise\nprice was greater than the average market price of the common shares and, therefore, the effect\nwould be anti-dilutive.\n

\n\n

NOTE E — Acquisitions\n

\n\n\n

During the six months ended January 31, 2007, the Company acquired the following companies for\na total combined purchase price, net of cash acquired, of $90,418. A brief description of each\ncompany acquired during the six months is included below.\n

\n\n\n

CIPI is headquartered in Burlington, Massachusetts,\nwith operations in Hong Kong, China and the\nNetherlands. CIPI is a market leader in badging\naccessories used to identify and track employees and\nvisitors in a variety of settings including\nbusinesses, healthcare facilities, special events and\ngovernment buildings. CIPI was acquired in August\n2006.\n

\n\n\n

PC is located in Dallas, Texas and is a supplier of\ndie-cut products to the medical market with a specific\nfocus on disposable, advanced wound-care products. PC\nwas acquired in October 2006.\n

\n\n\n

Scafftag is located in Barry, Wales, U.K., with\noperations in Australia and in the United States and\nsales offices in the United Arab Emirates. Scafftag\nis an industry leader in safety identification and\nfacility management products in the U.K., specializing\nin products that help companies meet legislative\nrequirements for safety standards in the oil and gas,\nconstruction and scaffolding industries. Scafftag was\nacquired in December 2006.\n

\n\n\n

Asterisco is located in Sao Paulo, Brazil and is a\nleading manufacturer of industrial high-performance\nlabels in Brazil, specializing in custom labels\nprinted on film materials for the electronics,\nautomotive, pharmaceutical and other industries.\nAsterisco was acquired in December 2006.\n

\n\n

7\n

\n\n\n

Moderno is located in Milan, Italy and is a wire-identification manufacturer\nserving the Maintenance, Repair and Operations market with products used\nprimarily in the electrical industry. Moderno was acquired in December 2006.\n

\n\n

The purchase agreements for Scafftag and Asterisco each include provisions for contingent\npayments based upon meeting certain performance conditions over a period of time subsequent to the\nacquisition. The total maximum contingent payments of $5.2 million have not been accrued as\nliabilities in the accompanying consolidated financial statements as the payments are based on\nattaining certain financial results which have not been achieved as of January 31, 2007.\nApproximately $4.9 million of the contingency related to the Asterisco acquisition has been placed\nin an escrow account in compliance with the terms of the purchase agreement. This cash outflow has\nbeen recorded in other investing activities on the accompanying consolidated statement of cash\nflows for the six months ended January 31, 2007. The purchase agreement of Asterisco also includes\na holdback provision of approximately $2.3 million that has been recorded as a liability in the\naccompanying consolidated financial statements.\n

\n\n

The allocation of the purchase price of each company acquired during the six months ended\nJanuary 31, 2007, is preliminary pending the final valuation of intangible assets as well as\ncertain tangible assets and liabilities. The following table summarizes the combined estimated fair\nvalues of the assets acquired and liabilities assumed as of the date of the acquisitions.\n


Current assets	$	23,409
Property, plant & equipment		6,795
Goodwill		55,993
Customer relationships		17,707
Non-compete agreements		811
Patents		300
Trademarks and other intangible assets		1,020

Total assets acquired		106,035
Liabilities assumed		(15,617	)

Net assets acquired	$	90,418

\n\n\n

Of the $55,993 allocated to goodwill, $8,658 is expected to be deductible for tax\npurposes based on preliminary analysis.\n

\n\n

The purchase agreement for the acquisition of QDPT that was completed in fiscal 2006 included\na provision for contingent payments based upon meeting certain performance conditions over a period\nof time subsequent to the acquisition. As of January 31, 2007, $1,577 has been recorded as a\nliability on the accompanying consolidated financial statements as the performance conditions of\nthe agreement have been met. The liability will be paid in the third quarter of fiscal 2007.\n

\n\n

Subsequent event\n

\n\n\n

On February 1, 2007, the Company completed the acquisition of Clement Communications, Inc.\n(“Clement”), headquartered in Concordville, Pennsylvania. Clement is a direct marketer of posters,\nnewsletters, guides and handbooks that address safety, quality, teamwork, sales, employment\npractices, customer service and OSHA regulations. Clement’s products are designed to facilitate\nand enhance employee communications for business, government and scholastic markets.\n

\n\n\n\n\n

8\n

\n\n\n\n\n

NOTE F — Segment Information\n

\n\n\n

The Company’s reportable segments are geographical regions that are each managed separately.\nThe Company has three reportable segments: Americas, Europe and Asia-Pacific. Following is a\nsummary of segment information for the three months and six months ended January 31, 2007 and 2006:\n


												Corporate
												And
	Americas		Europe	Asia-Pacific		Subtotals	Eliminations		Totals
Three months\nended January 31,\n2007:
Revenues from\nexternal customers	$	139,988		$	98,846		$	82,441		$	321,275	$	—		$	321,275
Intersegment revenues		12,504			1,664			4,702			18,870		(18,870	)		—
Segment profit (loss)		28,793			22,604			12,394			63,791		(2,228	)		61,563
Three months ended\nJanuary 31, 2006:
Revenues from\nexternal customers	$	109,951		$	76,284		$	44,739		$	230,974	$	—		$	230,974
Intersegment revenues		14,221			934			1,803			16,958		(16,958	)		—
Segment profit (loss)		24,969			19,989			11,717			56,675		(2,631	)		54,044
Six months ended\nJanuary 31, 2007:
Revenues from\nexternal customers	$	286,931		$	191,211		$	175,392		$	653,534	$	—		$	653,534
Intersegment revenues		24,498			2,450			10,693			37,641		(37,641	)		—
Segment profit (loss)		65,698			45,609			34,531			145,838		(4,425	)		141,413
Six months ended\nJanuary 31, 2006:
Revenues from\nexternal customers	$	226,010		$	150,046		$	87,553		$	463,609	$	—		$	463,609
Intersegment revenues		30,408			2,147			3,814			36,369		(36,369	)		—
Segment profit (loss)		57,163			40,767			24,727			122,657		(5,017	)		117,640

\n\n

Following is a reconciliation of segment profit to net income for the three months and six months\nended January 31, 2007 and 2006:\n

\n\n


	Three months ended:			Six months ended:
	January 31,			January 31,
	2007			2006			2007		2006
Total profit from reportable segments	$	63,791			$	56,675		$	145,838		$	122,657
Corporate and eliminations		(2,228	)			(2,631	)		(4,425	)		(5,017	)
Unallocated amounts:
Administrative costs		(28,839	)			(22,768	)		(56,748	)		(42,235	)
Investment and other (expense) income		(106	)			88			532			480
Interest expense		(5,244	)			(2,435	)		(9,979	)		(4,424	)

Income before income taxes		27,374				28,929			75,218			71,461
Income taxes		(7,665	)			(7,675	)		(21,061	)		(20,009	)

Net income	$	19,709			$	21,254		$	54,157		$	51,452

\n\n\n

9\n

\n\n\n

NOTE G —Stock-Based Compensation\n

\n\n\n

The Company has an incentive stock plan under which the Board of Directors may grant\nnonqualified stock options to purchase shares of Class A Nonvoting Common Stock to employees.\nAdditionally, the Company has a nonqualified stock option plan for non-employee directors under\nwhich stock options to purchase shares of Class A Nonvoting Common Stock are available for grant.\nThe options have an exercise price equal to the fair market value of the underlying stock at the\ndate of grant and vest ratably over a three-year period, with one-third becoming exercisable one\nyear after the grant date and one-third additional in each of the succeeding two years. Options\nissued under these plans, referred to herein as “service-based” options, generally expire 10 years\nfrom the date of grant. The Company also grants stock options to certain executives and key\nmanagement employees that vest upon meeting certain financial performance conditions over the\nvesting schedule described above. These options are referred to herein as “performance-based”\noptions. All performance-based options that were granted in fiscal 2006 and in prior years expire 5\nyears from the date of grant. Beginning in fiscal 2007, any performance options granted expire 10\nyears from the date of grant.\n

\n\n

As of January 31, 2007, the Company has reserved 4,487,618 shares of Class A Nonvoting Common\nStock for outstanding stock options and 1,971,000 shares of Class A Nonvoting Common Stock remain\nfor future issuance of stock options under the various plans. The Company uses treasury stock or\nwill issue new Class A Nonvoting Common Stock to deliver shares under these plans.\n

\n\n

The Company accounts for share-based compensation awards in accordance with Statement of\nFinancial Accounting Standards No. 123(R), “Share Based Payment”. In accordance with this standard,\nthe Company recognizes the compensation cost of all share-based awards on a straight-line basis\nover the vesting period of the award. Total stock compensation expense recognized by the Company\nduring the three months ended January 31, 2007 and 2006 was $2,110 ($1,287 net of taxes) and $1,903\n($1,161 net of taxes), respectively, and expense recognized during the six months ended January 31,\n2007 and 2006 was $3,669 ($2,238 net of taxes) and $2,827 ($1,724 net of taxes), respectively. As\nof January 31, 2007, total unrecognized compensation cost related to share-based compensation\nawards was approximately $16,987 pre-tax, net of estimated forfeitures, which the Company expects\nto recognize over a weighted-average period of approximately 2.3 years.\n

\n\n

The Company has estimated the fair value of its service-based and performance-based option\nawards granted during the six months ended January 31, 2007 and 2006 using the Black-Scholes option\nvaluation model. The weighted-average assumptions used in the Black-Scholes valuation model are\nreflected in the following table:\n


	Six Months Ended		Six Months Ended
	January 31, 2007		January 31, 2006
				Performance-					Performance-
	Service-Based		Based Option	Service-Based		Based Option
Black-Scholes Option Valuation Assumptions	Option Awards		Awards	Option Awards		Awards
Expected term (in years)		6.07			6.57			5.72			3.39
Expected volatility		34.01	%		34.66	%		34.56	%		31.10	%
Expected dividend yield		1.46	%		1.51	%		1.52	%		1.50	%
Risk-free interest rate		4.52	%		4.90	%		4.50	%		4.09	%
Weighted-average market value of underlying\nstock at grant date	$	38.19		$	33.32		$	37.64		$	33.89
Weighted-average exercise price	$	38.19		$	33.32		$	37.64		$	33.89
Weighted-average fair value of options\ngranted during the period	$	13.57		$	12.57		$	13.10		$	8.34

\n\n\n

The Company uses historical data regarding stock option exercise behaviors to estimate the\nexpected term of options granted based on the period of time that options granted are expected to\nbe outstanding. Expected volatilities are based on the historical volatility of the Company’s\nstock. The expected dividend yield is based on the Company’s historical dividend payments and\nhistorical yield. The risk-free interest rate is based on the U.S. Treasury yield curve in effect\non the grant date for the length of time corresponding to the expected term of the option. The\nmarket value is obtained by taking the average of the high and the low stock price on the date of\nthe grant.\n

\n\n\n

10\n

\n\n\n

A summary of stock option activity under the Company’s share-based compensation\nplans for the six months ended January 31, 2007 is presented below:\n


									Weighted
									Average
					Weighted			Remaining			Aggregate
					Average			Contractual			Intrinsic
Options	Shares			Exercise Price			Term			Value

Outstanding at July 31, 2006		3,815,052			$	23.27
New grants		905,000			$	36.76
Exercised		(214,799	)		$	17.77
Forfeited or expired		(17,635	)		$	30.72

Outstanding at January 31, 2007		4,487,618			$	26.16				7.3		$	51,331

Exercisable at January 31, 2007		2,471,622			$	20.66				6.0		$	41,564

\n\n\n

The total intrinsic value of options exercised during the six months ended January 31, 2007\nand 2006, based upon the average market price during the period, was approximately $4,597 and\n$9,813, respectively. The total fair value of stock options vested during the six months ended\nJanuary 31, 2007 and 2006, was approximately $4,592 and $3,100, respectively.\n

\n\n

NOTE H – Debt\n

\n\n\n

On October 5, 2006, the Company entered into a $200 million multi-currency revolving loan\nagreement with a group of five banks. At the Company’s option, and subject to certain standard\nconditions, the available amount under the credit facility may be increased from $200 million up to\n$300 million. Under the 5-year agreement, which has a final maturity date of October 5, 2011, the\nCompany has the option to select either a base interest rate (based upon the higher of the federal\nfunds rate plus one-half of 1% or the prime rate of Bank of America) or a Eurocurrency interest\nrate (at the LIBOR rate plus a margin based on the Company’s consolidated leverage ratio). A\ncommitment fee is payable on the unused amount of the facility. The agreement requires the Company\nto maintain two financial covenants. As of January 31, 2007, the Company was in compliance with the\ncovenants of the agreement. The agreement restricts the amount of certain types of payments,\nincluding dividends, which can be made annually to $50 million plus an amount equal to 75% of\nconsolidated net income for the prior fiscal year of the Company. The Company believes that based\non historic dividend practice, this restriction would not impede the Company in following a similar\ndividend practice in the future. As of January 31, 2007, there were $70.8 million of outstanding\nborrowings under the credit facility.\n

\n\n

NOTE I – Employee Benefit Plans\n

\n\n\n

The Company provides postretirement medical, dental and vision benefits for all regular full\nand part-time domestic employees (including spouses) who retire on or after attainment of age 55\nwith 15 years of credited service. Credited service begins accruing at the later of age 40 or date\nof hire. All active employees first eligible to retire after July 31, 1992, are covered by an\nunfunded, contributory postretirement healthcare plan where employer contributions will not exceed\na defined dollar benefit amount, regardless of the cost of the program. Employer contributions to\nthe plan are based on the employee’s age and service at retirement.\n

\n\n

The Company accounts for postretirement benefits other than pensions in accordance with SFAS\nNo. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions.” The Company funds\nbenefit costs on a pay-as-you-go basis. There have been no changes to the components of net\nperiodic benefit cost or the amount that the Company expects to fund in fiscal 2007 from those\nreported thereto in Note 3 to the consolidated financial statements included in the Company’s\nlatest annual report on Form 10-K for the year ended July 31, 2006.\n

\n\n

NOTE J – New Accounting Pronouncements\n

\n\n\n

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FIN 48, “Accounting for\nUncertainty in Income Taxes.” This interpretation clarifies the accounting for uncertainty in\nincome taxes recognized in an enterprise’s financial statements in accordance with FASB Statement\nNo. 109, “Accounting for Income Taxes.” This interpretation establishes a threshold condition that\na tax position must meet for any part of the benefit of that position to be recognized in the\nfinancial statements. This interpretation also provides guidance on de-recognition, classification,\ninterest and penalties, accounting in interim periods, disclosure and transition. This\ninterpretation is effective for fiscal years beginning after December 15, 2006. The Company has not\nyet completed the process of evaluating the impact that will result from adopting FIN 48 and\ntherefore is unable to disclose the impact that adopting FIN 48 will have on its financial position\nand results of operations when such statement is adopted.\n

\n\n

11\n

\n\n

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157,\n“Fair Value Measurements” (“SFAS No. 157”). This statement provides guidance on how to measure the\nfair value of assets and liabilities utilizing a fair value hierarchy to classify the sources of\ninformation used in the measurement calculation. SFAS No. 157 also provides new disclosure rules\nfor assets and liabilities measured at fair value based on their level in the fair value hierarchy.\nThis new statement will be effective for fiscal years beginning after November 15, 2007. The\nCompany expects that the adoption of SFAS No. 157 will not have a material effect on its\nconsolidated financial statements.\n

\n\n

In October 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit\nPension and Other Postretirement Plans” (“SFAS No. 158”). This statement requires full recognition\nof the funded status of defined benefit and other postretirement plans on the balance sheet as an\nasset or a liability. SFAS No. 158 also continues to require that unrecognized prior service\ncosts/credits, gains/losses, and transition obligations/assets be recorded in Accumulated Other\nComprehensive Income, thus not changing the income statement recognition rules for such plans. This\nnew statement will be effective for fiscal years ending after December 15, 2006. The Company\nexpects that the adoption of SFAS No. 158 will not have a material effect on its consolidated\nfinancial statements.\n

\n\n

12\n

\n\n

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

\n\n\n

Overview\n

\n\n\n

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

\n\n

Sales for the quarter ended January 31, 2007, were up 39.1% to $321.3 million, compared to\n$231.0 million in the same period of fiscal 2006. Of the increase in sales, organic growth\naccounted for 4.6%, acquisitions added 29.8% and the effects of fluctuations in the exchange rates\nused to translate financial results into the United States dollar added 4.7%. Net income for the\nquarter ended January 31, 2007, was $19.7 million or $0.36 per diluted Class A Nonvoting Common\nShare, down 7.3% from $21.3 million, or $0.43 per diluted Class A Nonvoting Common Share reported\nin the second quarter of last fiscal year.\n

\n\n

Sales for the six months ended January 31, 2007, increased 41.0% to $653.5 million, compared\nto $463.6 million in the same period of fiscal 2006. Organic growth accounted for 5.2%,\nacquisitions added 32.2% and the effects of fluctuations in the exchange rates used to translate\nfinancial results into the United States dollar added 3.6%. Net income for the six months ended\nJanuary 31, 2007 was $54.2 million or $0.99 per diluted Class A Nonvoting Common Share, up 5.3%\nfrom $51.5 million, or $1.03 per diluted Class A Nonvoting Common Share reported in the same period\nof the prior fiscal year.\n

\n\n

Results of Operations\n

\n\n\n

The comparability of the operating results for the three and six months ended January 31,\n2007, to the prior year has been significantly impacted by the following acquisitions completed in\nfiscal 2007 and fiscal 2006.\n


Acquisitions	Segment	Date Completed
STOPware, Inc. (“Stopware”)\n	Americas\n	August 2005
Texit Danmark AS and Texit Norge AS (collectively “Texit”)\n	Europe\n	September 2005
TruMed Technologies, Inc. (“TruMed”)\n	Americas\n	October 2005
QDP Thailand Co., Ltd (“QDPT”)\n	Asia-Pacific\n	October 2005
J.A.M. Plastics Inc. (“J.A.M.”)\n	Americas\n	January 2006
Personnel Concepts\n	Americas\n	February 2006
IDenticard Systems, Inc. and Identicam Systems (collectively “Identicard”)\n	Americas\n	February 2006
Accidental Health & Safety Pty. Ltd and Trafalgar First Aid Pty. Ltd.\n(collectively “Accidental Health”)\n	Asia-Pacific\n	March 2006
Tradex Converting AB (“Tradex”)\n	Americas, Europe\nand Asia-Pacific\n	May 2006
Carroll Australasia Pty. Ltd. (“Carroll”)\n	Asia-Pacific\n	June 2006
Daewon Industry Corporation (“Daewon”)\n	Asia-Pacific\n	July 2006
Comprehensive Identification Products, Inc. (“CIPI”)\n	Americas, Europe\nand Asia-Pacific\n	August 2006
Precision Converters, L.P. (“PC”)\n	Americas\n	October 2006
Scafftag Ltd., Safetrak, Ltd. and Scafftag Pty., Ltd. (collectively “Scafftag”)\n	Americas, Europe\nand Asia-Pacific\n	December 2006
Asterisco Artes Graficas Ltda. (“Asterisco”)\n	Americas\n	December 2006
Modernotecnica SpA (“Moderno”)\n	Europe\n	December 2006

\n\n\n

13\n

\n\n

Sales for the three months ended January 31, 2007, were up 39.1% compared to the same period\nin fiscal 2006. The increase was comprised of an increase of 4.6% attributed to organic growth, an\nincrease of 4.7% due to the effect of currencies on sales, and an increase of 29.8% due to the\nacquisitions listed in the above table. The organic growth for the quarter ended January 31, 2007,\nwas due to solid growth in the Americas and Europe segments, generating 5.6% and 7.4% organic\ngrowth, respectively, while the Asia-Pacific segment contracted 2.5%. The decline in Asia-Pacific\nwas due to the loss of certain programs in the hard disk drive business due to industry\nconsolidations and softening in Brady’s mobile handset and high performance labeling businesses.\n

\n\n

Sales for the six months ended January 31, 2007, increased 41.0% compared to the same period\nin fiscal 2006. The increase was comprised of an increase of 5.2% attributed to organic growth, an\nincrease of 3.6% due to the effect of currencies on sales, and an increase of 32.2% due to the\nacquisitions listed above. The organic growth was due to continued growth in the Americas and\nEurope. The organic growth in Asia-Pacific for the six month period was also positive as the first\nquarter results showed double-digit organic growth, which was partially offset by the contraction\nnoted above for the second quarter.\n

\n\n

Gross margin as a percentage of sales decreased from 50.7% to 46.7% for the quarter and from\n52.0% to 48.1% for the six months ended January 31, 2007, compared to the same periods of the\nprevious year. This decline was driven by the results in our global precision die cut business,\nprimarily in the mobile handset and hard disk drive businesses, as well as the acquisitions that\nBrady completed in the last 12 months, which were more heavily weighted towards the precision die\ncut business, which is generally characterized by lower gross margins and lower selling, general\nand administrative (“SG&A”) expenses.\n

\n\n

Research and development (“R&D”) expenses increased 33.0% to $9.1 million for the quarter and\n31.8% to $17.6 million for the six months ended January 31, 2007, compared to $6.8 million and\n$13.4 million for the same periods in the prior year, respectively. As a percentage of sales, R&D\nexpenses represented a lower percentage of sales, declining from 3.0% in the second quarter of\nfiscal 2006 to 2.8% in the second quarter for fiscal 2007, and from 2.9% in the first half of\nfiscal 2006 to 2.7% in the first half of fiscal 2007. Brady continues to expand new product\ndevelopment investment.\n

\n\n

SG&A expenses increased 37.2% to $108.4 million for the three months ended January 31, 2007,\ncompared to $79.0 million for the same period in the prior year and 39.2% to $212.0 million for the\nsix months ended January 31, 2007, compared to $152.3 million for the same period in the prior\nyear. These increases were expected due to acquisitions and a number of initiatives taking place\nthis year, such as the continued integration of the acquisitions completed in fiscal 2006 and 2007,\nroll-out of SAP to 18 of our locations around the world, creation of a business process shared\nservice center in India, development of a customer call center in the Philippines, and geographic\nexpansions in Eastern Europe, Mexico and India. As a percentage of sales, SG&A expenses declined\nfrom 34.2% to 33.7% for the quarter and from 32.9% to 32.4% for the six months ended January 31,\n2007, compared to the same periods in the prior year, despite the increases described above. The\ndecline as a percentage of sales was due to changes in our sales mix towards the precision die cut\nbusiness, which typically has lower SG&A expenses.\n

\n\n

Interest expense increased from $2.4 million to $5.2 million for the quarter and from $4.4\nmillion to $10.0 million for the six months ended January 31, 2007, compared to the same periods in\nthe prior year. The increase in interest expense was due to the interest on the $200 million\nprivate placement of senior notes that was completed in the third quarter of fiscal 2006, as well\nas interest on the borrowings under our revolving credit facility in the first half of fiscal 2007.\n

\n\n

The Company’s effective tax rate was 28.0% for the quarter and six months ended January 31,\n2007, compared to 26.5% and 28.0% for the three and six months ended January 31, 2006,\nrespectively. The lower rate in the second quarter of fiscal 2006 was due to a shift of a higher\npercentage of the Company’s pre-tax income to lower tax rate countries.\n

\n\n

Net income for the three months ended January 31, 2007, decreased 7.3% to $19.7 million,\ncompared to $21.3 million for the same quarter of the previous year. Net income as a percentage of\nsales decreased from 9.2% to 6.1% for the quarter ended January 31, 2007, compared to the same\nperiod in the prior year, due to the factors noted above. For the six months ended January 31,\n2007, net income increased 5.3% to $54.2 million, compared to $51.5 million for the same period in\nthe previous year. Similar to the results for the quarter, as a percentage of sales, net income\ndecreased from 11.1% to 8.3% for the six months ended January 31, 2007, compared to the same period\nin the previous year. The decreases as a percentage of sales were due to the factors noted above.\nNet income per share comparisons were also further diluted by the Company’s July 2006 sale of an\nadditional 4.6 million shares of Class A Nonvoting Common Stock in a public offering.\n

\n\n

14\n

\n\n

Business Segment Operating Results\n

\n\n\n

Management of the Company evaluates results based on the following geographic regions:\nAmericas, Europe, and Asia-Pacific.\n

\n\n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n\n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n\n\n


													Corporate
							Asia-					And
(Dollars in thousands)	Americas		Europe	Pacific		Subtotals	Eliminations		Total
SALES TO EXTERNAL CUSTOMERS
Three months ended:
January 31, 2007	$	139,988		$	98,846		$	82,441		$	321,275		$	—		$	321,275
January 31, 2006		109,951			76,284			44,739			230,974			—			230,974

Six months ended:
January 31, 2007	$	286,931		$	191,211		$	175,392		$	653,534		$	—		$	653,534
January 31, 2006		226,010			150,046			87,553			463,609			—			463,609

SALES GROWTH INFORMATION
Three months ended January 31, 2007
Base		5.6	%		7.4	%		-2.5	%		4.6	%		—			4.6	%
Currency		0.3	%		10.8	%		4.9	%		4.7	%		—			4.7	%
Acquisitions		21.4	%		11.4	%		81.9	%		29.8	%		—			29.8	%
Total		27.3	%		29.6	%		84.3	%		39.1	%		—			39.1	%

Six months ended January 31, 2007
Base		4.1	%		7.1	%		4.6	%		5.2	%		—			5.2	%
Currency		0.6	%		8.1	%		3.7	%		3.6	%		—			3.6	%
Acquisitions		22.3	%		12.2	%		92.0	%		32.2	%		—			32.2	%
Total		27.0	%		27.4	%		100.3	%		41.0	%		—			41.0	%

SEGMENT PROFIT (LOSS)
Three months ended
January 31, 2007	$	28,793		$	22,604		$	12,394		$	63,791		$	(2,228	)	$	61,563
January 31, 2006		24,969			19,989			11,717			56,675			(2,631	)		54,044
Percentage increase		15.3	%		13.1	%		5.8	%		12.6	%		-15.3	%		13.9	%

Six months ended
January 31, 2007	$	65,698		$	45,609		$	34,531		$	145,838		$	(4,425	)	$	141,413
January 31, 2006		57,163			40,767			24,727			122,657			(5,017	)		117,640
Percentage increase		14.9	%		11.9	%		39.6	%		18.9	%		-11.8	%		20.2	%

\n\n\n

NET INCOME RECONCILIATION (Dollars in thousands)\n

\n\n


	Three months ended:			Six months ended:
	January 31,			January 31,			January 31,		January 31,
	2007			2006			2007		2006
Total profit from reportable segments	$	63,791			$	56,675		$	145,838		$	122,657
Corporate and eliminations		(2,228	)			(2,631	)		(4,425	)		(5,017	)
Unallocated amounts:
Administrative costs		(28,839	)			(22,768	)		(56,748	)		(42,235	)
Investment and other (expense) income		(106	)			88			532			480
Interest expense		(5,244	)			(2,435	)		(9,979	)		(4,424	)

Income before income taxes		27,374				28,929			75,218			71,461
Income taxes		(7,665	)			(7,675	)		(21,061	)		(20,009	)

Net income	$	19,709			$	21,254		$	54,157		$	51,452

\n\n\n

The Company evaluates regional performance using sales and segment profit. Segment\nprofit or loss does not include certain administrative costs, interest, investment and other income\nand income taxes.\n

\n\n

15\n

\n\n

Americas:\n

\n\n\n

Americas sales increased 27.3% for the quarter and 27.0% for the six months ended January 31,\n2007, compared to the same periods in the prior year. Organic growth accounted for 5.6% and 4.1% of\nthe growth in the quarter and year-to-date, respectively, as compared to the same periods in the\nprevious year. Fluctuations in the exchange rates used to translate financial results into the\nUnited States dollar had a minimal impact on sales, increasing it by 0.3% in the quarter and 0.6%\nfor the six month period. Sales in the region were also aided by the current year acquisitions of\nCIPI, PC, Scafftag and Asterisco and the prior year acquisitions of TruMed, J.A.M, Personnel\nConcepts and Identicard, which increased sales by 21.4% for the quarter and 22.3% for the six month\nperiod. The strongest organic growth in the quarter by market continues to be in the electrical and\nwire identification areas, but the growth in the safety and identification markets and direct\nmarketing was solid as well.\n

\n\n

Segment profit for the region increased 15.3% to $28.8 million from $25.0 million for the\nquarter and 14.9% to $65.7 million from $57.2 million for the six months ended January 31, 2007,\ncompared to the same periods in the prior year. As a percentage of sales, segment profit decreased\nfrom 22.7% to 20.6% in the second quarter of fiscal 2007 and from 25.3% to 22.9% in the six months\nended January 31, 2007, compared to the same periods in the prior year. The declines were due to\nthe effect of recent acquisitions. As expected, the segment’s recent acquisitions have produced an\ninitial rate of profit that is below the average rate of profit of the segment. As we integrate the\nbusinesses and achieve synergies, the profit percentages are expected to increase.\n

\n\n

Europe:\n

\n\n\n

Europe sales increased 29.6% for the quarter and 27.4% for the six months ended January 31,\n2007, compared to the same periods in the prior year. Organic growth accounted for 7.4% and 7.1% of\nthe growth in the quarter and year-to-date, respectively, compared to the same periods in the\nprevious year. Sales were positively affected by fluctuations in the exchange rates used to\ntranslate financial results into the United States dollar, which increased sales within the region\nby 10.8% in the quarter and 8.1% for the six month period. The fiscal 2007 acquisitions of CIPI,\nScafftag, and Moderno and the fiscal 2006 acquisitions of Texit and Tradex increased sales by 11.4%\nfor the quarter and 12.2% for the six month period. The organic growth in the quarter was due to\ngrowth in the majority of the businesses and countries. The region is benefiting from recent “No\nSmoking” legislation enacted in France, which stimulates demand for certain of our product lines.\n

\n\n

Segment profit for the region increased 13.1% to $22.6 million from $20.0 million for the\nquarter and 11.9% to $45.6 million from $40.8 million for the six months ended January 31, 2007,\ncompared to the same periods in the prior year. As a percentage of sales, segment profit decreased\nfrom 26.2% to 22.9% in the second quarter of fiscal 2007 and from 27.2% to 23.9% in the six months\nended January 31, 2007, compared to the same periods in the prior year. The declines were due to\ncontinued integration costs of recent acquisitions, the slowdown of the mobile handset precision\ndie-cut business and the global headquarter costs of Tradex.\n

\n\n

Asia-Pacific:\n

\n\n\n

Asia-Pacific sales increased 84.3% for the quarter and 100.3% for the six months ended January\n31, 2007, compared to the same periods in the prior year. Organic sales in local currency decreased\n2.5% in the quarter and increased 4.6% year-to-date, compared to the same periods in the previous\nyear. Sales were positively affected by fluctuations in the exchange rates used to translate\nfinancial results into the United States dollar, which increased sales within the region by 4.9% in\nthe quarter and 3.7% for the six month period. The fiscal 2007 acquisitions of CIPI and Scafftag\nand the fiscal 2006 acquisitions of QDPT, Accidental Health, Tradex, Carroll and Daewon increased\nsales by 81.9% for the quarter and 92.0% for the six month period. The decline in organic sales\nfor the quarter was due to a slowdown in our OEM electronics\nbusiness, led by the loss of certain programs in the hard disk drive business, market share loss in mobile handsets and a slowdown in high\nperformance labeling. Overall, our base business in Asia was aided by the stronger levels of our\nAustralian business, which is more focused on the MRO market.\n

\n\n

Segment profit for the region increased 5.8% to $12.4 million from $11.7 million for the\nquarter and 39.6% to $34.5 million from $24.7 million for the six months ended January 31, 2007,\ncompared to the same periods in the prior year. As a percentage of sales, segment profit decreased\nfrom 26.2% to 15.0% in the second quarter of fiscal 2007 and from 28.2% to 19.7% in the six months\nended January 31, 2007, compared to the same periods in the prior year. The declines were due to\nthe slowdown in our OEM electronics business, coupled with redundant capacity and pricing pressure\nreceived from customers. Over the remainder of this fiscal year, we will be rebalancing some of\nour capacity to be closer to our customer’s facilities and eliminating some levels of redundant\ninfrastructure resulting from the Tradex and Daewon acquisitions completed in the fourth quarter of\nfiscal 2006.\n

\n\n

16\n

\n\n

Financial Condition\n

\n\n\n

The Company’s current ratio as of January 31, 2007, was 2.2 compared to 2.1 at July 31, 2006.\nCash and cash equivalents were $86.4 million at January 31, 2007, compared to $113.0 million at\nJuly 31, 2006. Additionally, there were no short-term investments outstanding at January 31, 2007,\ncompared to $11.5 million outstanding at July 31, 2006. Working capital increased $27.3 million\nduring the six months ended January 31, 2007, to $267.8 million from $240.5 million at July 31,\n2006. Accounts receivable increased $30.7 million during the six months ended January 31, 2007, due\nto increased sales volume, seasonal build-up from our OEM customers, acquisitions and foreign\ncurrency translation. Inventories increased $24.4 million in the current year, due to acquisitions\nand increased inventory levels in the Americas to support the launch of new products to the market\nand in Asia in anticipation of shutdowns for the Chinese New Year. We expect that during the second\nhalf of the fiscal year the accounts receivable and inventory levels associated with seasonal\ndemand will decline. The net decrease in current liabilities was $3.7 million for the six month\nperiod. The decrease was composed of a significant decrease in accrued wages due to the payment of\nincentives in the first quarter related to the year ended July 31, 2006, partially offset by an\nincrease in accounts payable from the fiscal 2007 acquisitions and foreign currency.\n

\n\n

Cash flow from operating activities totaled $37.1 million for the six months ended January 31,\n2007, compared to $20.8 million for the same period last year. The increase was the result of a\n$2.7 million increase in net income and a $11.5 million increase in depreciation and amortization\non the intangible assets acquired in fiscal 2006 and 2007, partially offset by cash requirements\nfor changes in accounts receivable, prepaid expenses and other assets and accounts payable and\naccrued liabilities.\n

\n\n

The acquisitions of businesses used $90.4 million of cash for the six months ended January 31,\n2007. Contingent consideration payments of $9.3 million were paid during the six months ended\nJanuary 31, 2007, to satisfy the $6.5 million holdback requirement of the ID Technologies\nacquisition completed in fiscal 2005, the $1.0 million earnout liability of the Stopware\nacquisition completed in fiscal 2006 and the $1.8 million purchase price adjustment of the Daewon\nacquisition completed in fiscal 2006. Capital expenditures were $32.1 million for the six months\nended January 31, 2007, compared to $17.3 million in the same period last year. Approximately $9\nmillion was spent on implementing SAP in 18 of Brady’s global operations and ultimately bringing\nthe number of users up from approximately 2,300 to 6,700 in the next three years. The remainder of\nthe increase in capital expenditures was due to the expansions in China, Canada, India, Slovakia,\nand other locations. Net cash provided by financing activities was $60.4 million for the six\nmonths ended January 31, 2007, due to net borrowings of $70.8 million on the revolving loan\nagreement, partially offset by the payment of dividends. Net cash provided by financing activities\nfor the same period last year was $69.0 million related to net borrowings on the revolving loan\nagreement, partially offset by the repurchase of the Company’s stock and the payment of dividends.\n

\n\n

Under the 5-year agreement, which has a final maturity date of October 5, 2011, the Company\nhas the option to select either a base interest rate (based upon the higher of the federal funds\nrate plus one-half of 1% or the prime rate of Bank of America) or a Eurocurrency interest rate (at\nthe LIBOR rate plus a margin based on the Company’s consolidated leverage ratio). A commitment fee\nis payable on the unused amount of the facility. The agreement requires the Company to maintain two\nfinancial covenants. As of January 31, 2007, the Company was in compliance with the covenants of\nthe agreement.\n

\n\n

The credit agreement restricts the amount of certain types of payments, including dividends,\nwhich can be made annually to $50 million plus an amount equal to 75% of consolidated net income\nfor the prior fiscal year. The Company believes that based on historic dividend practice, this\nrestriction would not impede the Company in following a similar dividend practice in the future.\nDuring the six months ended January 31, 2007, the Company borrowed and repaid $97.0 million and\n$26.2 million, respectively. As of January 31, 2007, there was $70.8 million of outstanding\nborrowings on the credit agreement.\n

\n\n

On February 14, 2006, the Company completed the private placement of $200 million in ten-year\nfixed notes at 5.3% interest to institutional investors. The notes will be amortized in equal\ninstallments over seven years, beginning in 2010 with interest payable on the notes semiannually on\nAugust 14 and February 14, beginning in August 2006. The notes have been fully and unconditionally\nguaranteed on an unsecured basis by the Company’s domestic subsidiaries. The Company used the net\nproceeds of the offering to finance acquisitions completed in fiscal 2006 and 2007. This private\nplacement was exempt from the registration requirements of the Securities Act of 1933. The notes\nwere not registered for resale and may not be resold absent such registration or an applicable\nexemption from the registration requirements of the Securities Act of 1933 and applicable state\nsecurities laws. The notes have certain prepayment penalties for repaying them prior to the\nmaturity date. The agreement also requires the Company to maintain a financial covenant. As of\nJanuary 31, 2007, the Company was in compliance with this covenant.\n

\n\n

17\n

\n\n

On June 30, 2004, the Company finalized a debt offering of $150 million of 5.14% unsecured\nsenior notes due in 2014 in an offering exempt from the registration requirements of the Securities\nAct of 1933. The notes will be amortized over seven years beginning in 2008, with interest payable\non the notes semiannually on June 28 and December 28, beginning in December 2004. The Company used\nthe proceeds of the offering to reduce outstanding indebtedness under the Company’s revolving\ncredit facilities used to initially fund the EMED acquisition. The debt has certain prepayment\npenalties for repaying the debt prior to its maturity date. The agreement also requires the Company\nto maintain a financial covenant. As of January 31, 2007, the Company was in compliance with this\ncovenant.\n

\n\n

On February 20, 2007, the Board of Directors declared a quarterly cash dividend to\nshareholders of the Company’s Class A Common Stock of $0.14 per share payable on April 30, 2007 to\nshareholders of record at the close of business on April 10, 2007.\n

\n\n

The Company believes that its continued strong cash flows from operations and existing\nborrowing capacity will enable it to execute its long-term strategic plan. This strategic plan\nincludes investments, which expand its current market share, open new markets and geographies,\ndevelop new products and distribution channels and continue to improve our processes. This\nstrategic plan also includes executing key acquisitions.\n

\n\n

Off-Balance Sheet Arrangements – The Company does not have material off-balance sheet\narrangements or related-party transactions. The Company is not aware of factors that are reasonably\nlikely to adversely affect liquidity trends, other than the risk factors described in this and\nother Company filings. However, the following additional information is provided to assist those\nreviewing the Company’s financial statements.\n

\n\n

Operating Leases – These leases generally are entered into for investments in facilities, such\nas manufacturing facilities, warehouses and office buildings, computer equipment and Company\nvehicles, for which the economic profile is favorable.\n

\n\n

Purchase Commitments – The Company has purchase commitments for materials, supplies, services,\nand property, plant and equipment as part of the ordinary conduct of its business. In the\naggregate, such commitments are not in excess of current market prices and are not material to the\nfinancial position of the Company. Due to the proprietary nature of many of the Company’s materials\nand processes, certain supply contracts contain penalty provisions for early termination. The\nCompany does not believe a material amount of penalties will be incurred under these contracts\nbased upon historical experience and current expectations.\n

\n\n

Other Contractual Obligations – The Company does not have material financial guarantees or\nother contractual commitments that are reasonably likely to adversely affect liquidity.\n

\n\n

Related-Party Transactions – The Company does not have any related-party transactions that\nmaterially affect the results of operations, cash flow or financial condition.\n

\n\n

Forward-Looking Statements\n

\n\n\n

Brady believes that certain statements in this Form 10-Q are “forward-looking statements”\nwithin the meaning of the Private Securities Litigation Reform Act of 1995. All statements related\nto future, not past, events included in this Form 10-Q, including, without limitation, statements\nregarding Brady’s future financial position, business strategy, targets, projected sales, costs,\nearnings, capital expenditures, debt levels and cash flows, and plans and objectives of management\nfor future operations are forward-looking statements. When used in this Form 10-Q, words such as\n“may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “should,” “project” or\n“plan” or similar terminology are generally intended to identify forward-looking statements. These\nforward-looking statements by their nature address matters that are, to different degrees,\nuncertain and are subject to risks, assumptions and other factors, some of which are beyond Brady’s\ncontrol, that could cause actual results to differ materially from those expressed or implied by\nsuch forward-looking statements. For Brady, uncertainties arise from future financial performance\nof major markets Brady serves, which include, without limitation, telecommunications,\nmanufacturing, electrical, construction, laboratory, education, governmental, public utility,\ncomputer, transportation; difficulties in making and integrating acquisitions; risks associated\nwith newly acquired businesses; Brady’s ability to retain significant contracts and customers;\nfuture competition; Brady’s ability to develop and successfully market new products; changes in the\nsupply of, or price for, parts and components; increased price pressure from suppliers and\ncustomers; interruptions to sources of supply; environmental, health and safety compliance costs\nand liabilities; Brady’s ability to realize cost savings from operating initiatives; Brady’s\nability to attract and retain key talent; difficulties associated with exports; risks associated\nwith international operations; fluctuations in currency rates versus the US dollar; technology\nchanges; potential write-offs of Brady’s substantial intangible assets; risks associated with\nobtaining governmental approvals and maintaining regulatory compliance for new and existing\nproducts; business interruptions due to implementing business systems; and numerous other matters\nof national, regional and global scale, including those of a political, economic, business,\ncompetitive and regulatory nature contained from time to time in Brady’s U.S. Securities and\nExchange Commission filings, including, but not limited to, those factors listed in the “Risk\nFactors” section located in Item 1A of Part I of Brady’s Form 10-K for the year ended July 31,\n2006. These uncertainties may cause Brady’s actual future results to be materially different than\nthose expressed in its forward-looking statements. Brady does not undertake to update its\nforward-looking statements.\n

\n\n

18\n

\n\n

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK\n

\n\n\n

The Company’s business operations give rise to market risk exposure due to changes in foreign\nexchange rates. To manage that risk effectively, the Company enters into hedging transactions,\naccording to established guidelines and policies that enable it to mitigate the adverse effects of\nthis financial market risk.\n

\n\n

The global nature of the Company’s business requires active participation in the foreign\nexchange markets. As a result of investments, production facilities and other operations on a\nglobal scale, the Company has assets, liabilities and cash flows in currencies other than the U.S.\nDollar. The primary objective of the Company’s foreign currency exchange risk management is to\nminimize the impact of currency movements on intercompany transactions and foreign raw-material\nimports. To achieve this objective, the Company hedges a portion of known exposures using forward\ncontracts. Main exposures are related to transactions denominated in the British Pound, the Euro,\nCanadian Dollar, Australian Dollar, Singapore Dollar, Swedish Krona, Korean Won and Chinese Yuan\ncurrency.\n

\n\n

The Company could be exposed to interest rate risk through its corporate borrowing activities.\nThe objective of the Company’s interest rate risk management activities is to manage the levels of\nthe Company’s fixed and floating interest rate exposure to be consistent with the Company’s\npreferred mix. The interest rate risk management program allows the Company to enter into approved\ninterest rate derivatives, with the approval of the Board of Directors, if there is a desire to\nmodify the Company’s exposure to interest rates. As of January 31, 2007, the Company had no\ninterest rate derivatives.\n

\n\n

ITEM 4. CONTROLS AND PROCEDURES\n

\n\n\n

The Company maintains disclosure controls and procedures designed to ensure that the\ninformation the Company must disclose in its filings with the Securities and Exchange Commission is\nrecorded, processed, summarized and reported on a timely basis. The Company’s Chief Executive\nOfficer and Chief Financial Officer have reviewed and evaluated the Company’s disclosure controls\nand procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of\n1934, as amended (the “Exchange Act’’) as of the end of the period covered by this report (the\n“Evaluation Date’’). Based on such evaluation, such officers have concluded that, as of the\nEvaluation Date, the Company’s disclosure controls and procedures are effective in bringing to\ntheir attention on a timely basis material information relating to the Company required to be\nincluded in the Company’s periodic filings under the Exchange Act.\n

\n\n

The Company is in the process of implementing its enterprise resource planning system, SAP, to\nmany of its locations around the world. This implementation has resulted in certain changes to\nbusiness processes and internal controls impacting financial reporting. Management is taking the\nnecessary steps to monitor and maintain appropriate internal controls during this period of change.\n

\n\n

There were no other changes in the Company’s internal control over financial reporting (as\ndefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company’s most\nrecently completed fiscal quarter that have materially affected, or are reasonably likely to\nmaterially affect, the Company’s internal control over financial reporting.\n

\n\n

19\n

\n\n

PART II. OTHER INFORMATION\n

\n\n

ITEM 4. Submission of Matters to a Vote of Security Holders\n

\n\n\n

The annual meeting of shareholders was held on November 16, 2006. At the meeting, the\nfollowing persons were elected to serve as the Company’s directors by the affirmative vote of 100%\nof the 3,538,628 shares of Class B Voting Common Stock until the next annual meeting of\nshareholders and until their successors have been elected:\n

Richard A. Bemis
\nRobert C. Buchanan
\nMary K. Bush
\nChan Galbato
\nFrank W. Harris
\nFrank M. Jaehnert
\nFrank R. Jarc
\nPeter J. Lettenberger
\nGary E. Nei
\nRoger D. Peirce
\nElizabeth I. Pungello\n

\n\n\n

At the annual meeting, the shareholders, by affirmative vote of 100% of the 3,538,628 shares\nof Class B Voting Common Stock, also approved the Brady Corporation 2006 Omnibus Incentive Stock\nPlan and the Brady Corporation Incentive Compensation Plan for Elected Corporate Officers, both of\nwhich are described in more detail in the Current Report on Form 8-K filed by the Company on\nNovember 20, 2006.\n

\n\n

On November 30, 2006, by written consent of the holders of 100% of the 3,538,628 shares of\nClass B Voting Common Stock, the shareholders approved a revised version of the Brady Corporation\n2005 Nonqualified Stock Option Plan for Non-Employee Directors, which is described in more detail\nin the Current Report on Form 8-K filed by the Company on December 4, 2006.\n

\n\n

ITEM 6. Exhibits\n

\n\n


(a)	Exhibits

\n	31.1	Rule 13a-14(a)/15d-14(a) Certification of Frank M. Jaehnert

\n	31.2	Rule 13a-14(a)/15d-14(a) Certification of David Mathieson

\n	32.1	Section 1350 Certification of Frank M. Jaehnert

\n	32.2	Section 1350 Certification of David Mathieson

\n\n\n

20\n

\n\n

EXHIBIT 31.1\n

\n\n\n

RULE 13a-14(a)/15d-14(a) CERTIFICATION\n

\n\n

I, Frank M. Jaehnert, certify that:\n

\n\n\n

(1) I have reviewed this quarterly report on Form 10-Q of Brady Corporation;\n

\n\n

(2) Based on my knowledge, this report does not contain any untrue statement of a material\nfact or omit to state a material fact necessary to make the statements made, in light of the\ncircumstances under which such statements were made, not misleading with respect to the period\ncovered by this report;\n

\n\n

(3) Based on my knowledge, the financial statements, and other financial information included\nin this report, fairly present in all material respects the financial condition, results of\noperations and cash flows of the registrant as of, and for, the periods presented in this report;\n

\n\n

(4) The registrant’s other certifying officer and I are responsible for establishing and\nmaintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and\n15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules\n13a-15(f) and 15d-15(f)) for the registrant and have:\n

\n\n

a) Designed such disclosure controls and procedures, or caused such disclosure controls and\nprocedures to be designed under our supervision, to ensure that material information relating to\nthe registrant, including its consolidated subsidiaries, is made known to us by others within those\nentities, particularly during the period in which this report is being prepared;\n

\n\n

b) Designed such internal control over financial reporting, or caused such internal control\nover financial reporting to be designed under our supervision to provided reasonable assurance\nregarding the reliability of financial reporting and the preparation of financial statements for\nexternal purposes in accordance with generally accepted accounting principles;\n

\n\n

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and\npresented in this report our conclusions about the effectiveness of the disclosure controls and\nprocedures, as of the end of the period covered by this report based on such evaluation; and\n

\n\n

d) Disclosed in this report any change in the registrant’s internal control over financial\nreporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth\nfiscal quarter in the case of an annual report) that has materially affected, or is reasonably\nlikely to materially affect, the registrant’s internal control over financial reporting; and\n

\n\n

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent\nevaluation of internal control over financial reporting, to the registrant’s auditors and the audit\ncommittee of the registrant’s board of directors (or persons performing the equivalent functions):\n

\n\n

a) All significant deficiencies and material weaknesses in the design or operation of internal\ncontrol over financial reporting which are reasonably likely to adversely affect the registrant’s\nability to record, process, summarize and report financial information; and\n

\n\n

b) Any fraud, whether or not material, that involves management or other employees who have a\nsignificant role in the registrant’s internal control over financial reporting.\n

\n\n

Date: March 7, 2007\n\n

\n\n

/s/ FRANK M. JAEHNERT
\nFrank M. Jaehnert
\nPresident and Chief Executive Officer\n\n

\n\n

22\n

\n\n

EXHIBIT 31.2\n

\n\n\n

RULE 13a-14(a)/15d-14(a) CERTIFICATION\n

\n\n

I, David Mathieson, certify that:\n

\n\n\n

(1) I have reviewed this quarterly report on Form 10-Q of Brady Corporation;\n

\n\n

b) Any fraud, whether or not material, that involves management or other employees who have a\nsignificant role in the registrant’s internal control over financial reporting.\n

\n\n

Date: March 7, 2007\n\n

\n\n

/s/ DAVID MATHIESON
\nDavid Mathieson
\nVice President and Chief Financial Officer\n\n

\n\n

23\n

\n\n

EXHIBIT 32.1\n

\n\n\n

SECTION 1350 CERTIFICATION\n

\n\n\n

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley\nAct of 2002, the undersigned officer of Brady Corporation (the “Company”) certifies to his\nknowledge that:\n

\n\n

(1) The Quarterly Report on Form 10-Q of the Company for the quarterly period ended January\n31, 2007 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange\nAct of 1934; and\n

\n\n

(2) The information contained in that Form 10-Q fairly presents, in all material respects, the\nfinancial conditions and results of operations of the Company.\n

\n\n

Date: March 7, 2007\n\n

\n\n

/s/ FRANK M. JAEHNERT
\nFrank M. Jaehnert
\nPresident and Chief Executive Officer\n\n

\n\n

A signed original of this written statement required by Section 906, or other document\nauthenticating, acknowledging, or otherwise adopting the signature that appears in typed form\nwithin the electronic version of this written statement required by Section 906, has been provided\nto the Company and will be retained by the Company and furnished to the Securities and Exchange\nCommission or its staff upon request. This certification accompanies this report pursuant to\nSection 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for\npurposes of Section 18 of the Securities Exchange Act of 1934, as amended.\n

\n\n

24\n

\n\n

EXHIBIT 32.2\n

\n\n\n

SECTION 1350 CERTIFICATION\n

\n\n\n

\n\n

(2) The information contained in that Form 10-Q fairly presents, in all material respects, the\nfinancial conditions and results of operations of the Company.\n

\n\n

Date: March 7, 2007\n\n

\n\n

/s/ DAVID MATHIESON
\nDavid Mathieson
\nVice President and Chief Financial Officer\n\n

\n\n

\n\n\n\n

25\n


	BRADY CORPORATION \n
Date: March 7, 2007	/s/ F. M. Jaehnert\n
	F. M. Jaehnert
	President & Chief Executive Officer


Date: March 7, 2007	/s/ David Mathieson\n
	David Mathieson
	Vice President & Chief Financial Officer\n(Principal Accounting Officer)\n(Principal Financial Officer)

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	Page
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets		2
Condensed Consolidated Statements of Income		3
Condensed Consolidated Statements of Cash Flows		4
Notes to Condensed Consolidated Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Quantitative and Qualitative Disclosures About Market Risk		19
Item 4. Controls and Procedures		19
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders		20
Item 6. Exhibits		20
Certification
Certification
Section 1350 Certification
Section 1350 Certification
Certification
Certification
Certification
Certification