BRADY CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended January 31, 2005
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ to _________
Commission File Number 1-14959

BRADY CORPORATION
-----------------
(Exact name of registrant as specified in its charter)

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

6555 WEST GOOD HOPE ROAD, MILWAUKEE, WISCONSIN 53223
----------------------------------------------------
(Address of principal executive offices)
(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes X No
--- ---

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes X No
--- ---

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

As of February 17, 2005, there were outstanding 45,592,849 shares of 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 an affiliate of the Registrant, is the only
voting stock.

FORM 10-Q

BRADY CORPORATION

INDEX

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

See Notes to Condensed Consolidated Financial Statements

3

BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)

(1) Restated for two-for-one stock split, accounted for as a dividend, effective
December 31, 2004.

See Notes to Condensed Consolidated Financial Statements

4

BRADY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in Thousands)

See Notes to Condensed Consolidated Financial Statements

5

BRADY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended January 31, 2005
(Unaudited)

NOTE A - Basis of Presentation

The condensed consolidated financial statements included herein have
been prepared by Brady Corporation and subsidiaries (the "Company" or "Brady")
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of the Company, the foregoing statements
contain all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of the Company as of January
31, 2005 and July 3l, 2004, its results of operations for the three months and
six months ended January 31, 2005 and 2004 and its cash flows for the six months
ended January 31, 2005 and 2004. The condensed consolidated balance sheet at
July 31, 2004 has been derived from the audited consolidated financial
statements of that date and condensed. The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America ("GAAP") requires management to make estimates and assumptions that
affect the reported amounts therein. Due to the inherent uncertainty involved in
making estimates, actual results in future periods may differ from the
estimates.

Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to rules and regulations of the Securities and Exchange Commission. Accordingly,
the condensed consolidated financial statements do not include all of the
information and footnotes required by GAAP for complete financial statement
presentation. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's latest annual report on Form 10-K
for the year ended July 31, 2004.

Reclassifications - Certain prior year amounts have been reclassified
to conform with the current year presentation.

NOTE B - Goodwill and Intangible Assets

Changes in the carrying amount of goodwill for the six months ended
January 31, 2005, are as follows (in thousands):

Goodwill increased by $29,947,000 during the six months ended January
31, 2005, including an increase of $6,444,000 attributable to translation
adjustments and other. The allocation of the purchase price for the acquisition
of ID Technologies PTE, Ltd ("ID Technologies") in Asia resulted in $23,503,000
of additional goodwill.

Other intangible assets include patents, trademarks, customer
relationships, non-compete agreements and other intangible assets with finite
lives being amortized in accordance with Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets." The net book value of
these assets was as follows (in thousands):

6

The increase of customer relationships and non-compete agreements for
the six months ended January 31, 2005, relates mainly to the acquisition of ID
Technologies, which added $14,208,000 of customer relationships and $2,382,000
of non-compete agreements. The value of these intangible assets in the Condensed
Consolidated Financial Statements at January 31, 2005 is greater than the value
assigned to them in the allocation of purchase price due to the positive effect
of fluctuations in the exchange rates used to translate financial results into
the United States Dollar.

Amortization expense of intangible assets for the six-month period
ended January 31, 2004 was $2,595,000. The amortization over each of the next
five fiscal years is projected to be $7,396,000, $7,126,000, $6,958,000,
$6,657,000 and $6,531,000 for 2005, 2006, 2007, 2008 and 2009, respectively.

NOTE C - Comprehensive Income

Total comprehensive income, which was comprised of net income, foreign
currency adjustments and net unrealized gains and losses from cash flow hedges,
amounted to approximately $23,628,000 and $12,809,000 for the three months ended
January 31, 2005 and 2004, respectively and $48,073,000 and $27,406,000 for the
six months ended January 31, 2005 and 2004, respectively.

NOTE D - Net Income Per Common Share

Reconciliations of the numerator and denominator of the basic and
diluted per share computations for the Company's Class A and Class B common
stock are summarized as follows:

7

Options to purchase 7,000 and 18,000 shares of Class A Common Stock
were not included in the computations of diluted net income per share for the
quarter and six months ended January 31, 2005 and 2004, respectively, because
the option exercise price was greater than the average market price of the
common shares and, therefore, the effect would be antidilutive.

NOTE E - Restructuring

During the year ended July 31, 2004 the Company recorded restructuring
charges of $3,181,000. The Company also recorded a restructuring charge of
$10,215,000 in fiscal 2003. This combined total of $13,396,000 was 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 2004 restructuring charge of $3,181,000 included a provision for
severance of approximately $2,900,000 and write-off or impairment of assets and
other of $281,000. In 2003 the $10,215,000 restructuring charge included a
provision for severance of approximately $8,220,000 and write-off or impairment
of assets and other of $1,995,000. Total cash expenditures in connection with
these actions are expected to be approximately $12,000,000, of which
approximately $2,300,000 was paid in fiscal 2003 and $8,300,000 was paid in
fiscal 2004. The remaining balance is sufficient to address any remaining
restructuring liabilities and is expected to be used in fiscal 2005. Total
restructuring charges were $66,000 and $1,819,000 for the quarter and six-month
period ended January 31, 2004.

8

Reconciliations of activity with respect to the Company's restructuring
actions are as follows:

NOTE F - Acquisitions

In August 2004, the Company acquired ID Technologies headquartered in
Singapore, with additional operations in China. ID Technologies is a
manufacturer of die-cut products and was acquired to expand the Company's
manufacturing capacity and market share in Asia. The cash purchase price net of
cash acquired was approximately $34,428,000 plus an additional $6,500,000
two-year holdback. The holdback will be paid in August 2006 and is recorded as a
long-term liability at January 31, 2005. Interest is imputed on the holdback at
a rate of 4.9% per year. The agreement also provides for a contingent payment of
no more than $2,500,000 if ID Technologies meets certain financial targets for
the fiscal year ending July 31, 2005. No liability for this contingent payment
is included in the accompanying condensed consolidated financial statements. Of
the purchase price, $23,503,000 was assigned to goodwill and $16,017,000 was
assigned to other intangible assets in the final purchase price allocation. The
allocation of these intangible assets includes approximately $13,500,000 for
customer relationships, $2,300,000 for non-compete agreements, and $217,000 of
other intangibles. The results of the operations of ID Technologies have been
included since the date of acquisition in the accompanying condensed
consolidated financial statements.

On May 20, 2004, the Company completed its acquisition of all of the
outstanding securities of EMED. The following unaudited pro-forma combined
information, assuming the EMED acquisition was completed on August 1, 2003, is
provided for illustrative purposes only and should not be relied upon as
necessarily being indicative of the historical results that would have been
obtained if this acquisition had actually occurred during those periods, or the
results that may be obtained in the future.

9

10

NOTE G - Segment Information

The Company's reportable segments are geographical regions that are
each managed separately. The Company has three reportable segments: Americas,
Europe and Asia. Following is a summary of segment information for the three and
six months ended January 31, 2005 and 2004:

Following is a reconciliation of segment profit to net income for the three and
six months ended January 31, 2005 and 2004:

11

NOTE H - Pro Forma Stock-Based Compensation

The Company has stock-based compensation plans under which stock
options are granted to various officers, directors and other employees of the
Company with exercise prices equal to the fair market value at the date of
grant. Stock options were issued during the six months ended January 31, 2005
and January 31, 2004, under stock-based compensation plans previously approved
by shareholders. Generally, these options are not exercisable until one year
after the grant date, and will be exercisable thereafter, to the extent of
one-third per year, and have a maximum term of ten years. In fiscal 2005 and
2004, 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.

Pursuant to Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," the Company has elected to
account for its employee stock option plans under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," which recognizes
expense based on the intrinsic value at the date of grant. As stock options have
been issued with exercise prices equal to the market value of the Company's
Common Stock on the grant date, no compensation cost has been recorded, with the
exception of certain options issued during fiscal 2004 and 2005 that vest upon
meeting certain performance conditions ("performance options"). The performance
options require the Company to record compensation expense for changes in the
market value of the underlying common stock. The assumptions used to calculate
the fair value of options granted are evaluated and revised, as necessary, to
reflect market conditions and experience.

Had compensation cost for all options granted been determined based on
the fair value at grant date consistent with SFAS No. 123, the Company's net
income and income per share would have been as follows:

12

13

In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 (Revised 2004), "Share-Based Payment" ("SFAS 123(R)"). This
Statement revises SFAS No. 123 by eliminating the option to account for employee
stock options under APB No. 25 and requires companies to recognize the cost of
employee services received in exchange for awards of equity instruments based on
the grant-date fair value of those awards (the "fair-value-based" method). The
Company plans to adopt SFAS 123(R) on August 1, 2005. The Company has not yet
completed its evaluation of the impact of adopting SFAS 123(R) on its condensed
consolidated financial statements.

NOTE I - Employee Benefit Plans

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, known as "Medicare
Part D," and a federal subsidy to sponsors of retiree health care benefit plans
that provide a benefit that is at least actuarially equivalent to Medicare Part
D.

In May 2004, the FASB issued FASB Staff Position No. 106-2, "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003" ("FSP 106-2"). FSP 106-2 requires
companies to account for the effect of the subsidy on benefits attributable to
past service as an actuarial experience gain and as a reduction of the service
cost component of net postretirement health care costs for amounts attributable
to current service, if the benefit provided is at least actuarially equivalent
to Medicare Part D.

Brady Corporation elected to adopt 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 reduces the accumulated postretirement benefit obligation
at August 1, 2004 by $575,000 and reduces the net periodic benefit cost for the
year ending July 31, 2005 by $97,000 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.

On January 21, 2005, the Centers for Medicare & Medicaid Services
released final regulations to implement the new prescription drug benefit under
Part D of Medicare. The Company is currently in the process of evaluating the
effect of the final regulations on its net periodic benefit cost for the year
ending July 31, 2005.

NOTE J - Stockholder's Equity and Stock Split

On November 18, 2004, the Board of Directors of Brady Corporation
approved a two-for-one stock split in the form of a 100 percent stock dividend
of one share of Class A Common Stock on each outstanding share of Class A Common
Stock and one share of Class B Common stock on each outstanding share of Class B
Common Stock effective December 31, 2004 for shareholders of record at the close
of business on December 10, 2004. All share and per-share numbers contained
herein reflect this stock split.

14

NOTE K - New Accounting Pronouncements

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs--an
amendment of ARB No. 43", which is the result of its efforts to converge U.S.
accounting standards for inventories with International Accounting Standards.
SFAS No. 151 requires idle facility expenses, abnormal freight, handling costs,
and wasted material (spoilage) costs to be recognized as current-period charges.
It also requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
No. 151 will be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company does not believe the adoption of this
standard will have a material effect on its consolidated financial statements.

NOTE L - Subsequent Events

On February 1, 2005, Brady Corporation announced that it acquired
Permar Systems, Inc., doing business as Electromark. The purchase was funded
entirely with cash. Electromark is a manufacturer and supplier of safety and
facility identification products including custom and stock signs, tags, and
labels. Electromark, headquartered in Wolcott, New York, is a market leader in
supplying identification products to the utility industry. Founded in 1970,
Electromark had sales of approximately $11 million during the year ended
December 31, 2004.

15

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

Overview

Brady is an international manufacturer and marketer of identification
solutions and specialty materials which help customers increase safety,
security, productivity and performance. Its products include high-performance
labels and signs, printing systems and software, label-application and
data-collection systems, safety devices and precision die-cut materials. Founded
in 1914, the Company serves customers in electronics, telecommunications,
manufacturing, electrical, construction, laboratory, education, governmental,
public utility, computer, transportation and a variety of other industries. The
Company manufactures and sells products domestically and internationally through
multiple channels including direct sales, distributor sales, mail-order
catalogs, telemarketing and electronic access through the Internet. The Company
operates manufacturing facilities and/or sales offices in Australia, Belgium,
Brazil, Canada, China, England, France, Hong Kong, Hungary, Germany, Italy,
Japan, Korea, Malaysia, Mexico, the Netherlands, the Philippines, Singapore,
Spain, Sweden, Taiwan, Thailand and the United States. The Company believes that
its reputation for innovation, commitment to quality and service, and dedicated
employees have made it a world leader in the markets it serves.

Sales for the quarter ended January 31, 2005, were up 28.3% to
$196,216,000, compared to $152,948,000 in the same period of fiscal 2004. Base
sales were up 11.4%, or $17,428,000 in the quarter compared to the same period
in fiscal 2004. This represents the fourth consecutive quarter of double-digit
base sales growth. Net income for the quarter was $20,579,000 or $0.41 per
diluted Class A Common Share, up 156.2% from $8,033,000 or $0.17 per share
reported in the second quarter of last year. Management attributes the improved
base sales growth to improving economic conditions in North America and the
Company's initiatives to accelerate growth in its core business through new
product development, better market penetration, and new market expansion. Both
sales growth and profitability improved in the quarter due to positive growth
and profitability of recent acquisitions, continued cost reduction efforts, a
continued strengthening of the United States economy, upper single-digit growth
in Europe, and strong growth in Asia, most notably in China.

Sales for the six months ended January 31, 2005, were up 30.1% to
$396,635,000, compared to $304,854,000 in the same period of fiscal 2004. Base
sales were up 10.6%, or $32,430,000 in the quarter compared to the same period
in fiscal 2004. Net income for the six-month period was $40,936,000 or $0.83 per
diluted Class A Common Share, up 122.6% from $18,386,000 or $0.39 per share
reported in the same period of last year.

In February 2005, the Company increased its guidance range to
$790,000,000 to $810,000,000 in sales, net income of $78,000,000 to $80,000,000,
and earnings per share of $1.55 to $1.60 for the full fiscal year ending July
31, 2005. The Company expects capital expenditures to be approximately
$25,000,000 and depreciation and amortization to be approximately $27,000,000
for the full fiscal year ending July 31, 2005. Management believes this guidance
is justified based on the Company's strong performance in the first two quarters
of fiscal 2005, but notes that this guidance should be viewed in light of the
various factors that could affect performance described in or incorporated by
reference into this report, as well as the following factors. For the last two
years, the Company has issued a limited number of performance-based stock
options to senior management. The vesting of these options is tied to the
financial performance of the Company. As these options vest, they must be marked
to market based on the ending stock price at the end of each quarter. An
estimate of this expense is included in the Company's guidance for Fiscal 2005
but the actual expense is subject to fluctuations in the Company's stock price
and could introduce some volatility. In addition, the Company continues to feel
pressure from suppliers who are attempting to raise their prices. Shortages of
certain raw materials have not currently had an effect on the Company's
production, but management continues to monitor supplies of key materials for
possible shortages and develop plans for alternative sources of supply. The
Company's business operations and those of its customers and suppliers give rise
to market risk exposure due to changes in foreign exchange rates. Fluctuations
in the United States dollar relative to other currencies may introduce some
volatility.

16

Looking long term, the Company intends to continue its growth
strategies of developing proprietary products, making acquisitions that expand
its product range, technical expertise or market penetration, and further
improving processes to best serve customers. Going forward, business and market
uncertainties may affect results. For a discussion of key factors that could
impact results, please refer to the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report on Form 10-K for the fiscal year ended July 31, 2004.

Results of Operations

For the three months ended January 31, 2005, net sales of $196,216,000
were 28.3% higher than the same quarter of the previous year. For the six months
ended January 31, 2005, sales of $396,635,000 were 30.1% higher than the same
period of the previous year. Base sales increased 11.4% for the quarter and
10.6% for the six months ended January 31, 2005 compared to the same periods in
the prior year due primarily to brand expansion and new product introductions.
The sales increase 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 growth by 4.4% in the quarter and 4.2% for the six
months ended January 31, 2005, primarily due to the increased value of the Euro
relative to the United States Dollar. The acquisitions of EMED Co., Inc.
("EMED") in the United States and ID Technologies in Singapore added 12.5% to
sales in the quarter. For the six-month period ended January 31, 2005, the
acquisitions of Brandon International, Prinzing Enterprises, Inc., and EMED in
the United States, B.I.G in the United Kingdom, and ID Technologies in Singapore
added 15.3% to sales.

The gross margin as a percentage of sales increased from 50.9% to 53.5%
for the quarter and from 51.4% to 53.1% for the six-month period ended January
31, 2005, compared to the same periods of the previous year. The gross margin
increase was due to the positive contribution of EMED, continued improvement in
the Company's base business and the benefits of cost-reduction efforts. Selling,
general and administrative ("SG&A") expenses as a percentage of sales decreased
to 34.6% from 39.6% for the quarter and to 34.3% from 38.3% for the six months
ended January 31, 2005, compared to the same periods of the prior year due to
the spreading of fixed costs over a larger sales base. Management does not
expect the lower spending rate experienced in the second quarter to continue. SG
&A expenses are expected to increase in the third and fourth quarters of fiscal
2005 due to implementation of planned sales growth initiatives. In dollars, SG&A
increased $7,428,000 for the quarter and $19,068,000 for the six-month period
ended January 31, 2005 compared to the same periods in the prior year due to
foreign currency translation and SG&A expenses associated with acquired
businesses.

As a percentage of sales, research and development expenses decreased
from 3.7% to 3.1% for the quarter and from 3.4% to 3.0% for the six months ended
January 31, 2005, compared to the same periods of the previous year. The
percentage decrease for the quarter and for the six-month period was primarily
due to increased sales volume. In dollars, research and development expenses
increased from $5,606,000 to $6,099,000 for the quarter and from $10,470,000 to
$11,803,000 for the six months ended January 31, 2005, compared to the same
periods in the prior year. For the remainder of the fiscal year, the Company
expects to increase research and development costs due to the launch of several
new initiatives. The planned initiatives include the expansion of the Company's
research and development capabilities in Europe and Asia and the development of
proprietary materials for the original equipment manufacturing and electronics
markets.

Fiscal 2004 included a restructuring charge of $66,000 for the quarter
and $1,819,000 for the six months ended January 31, 2004, which was primarily
due to the consolidation of operating facilities in North America and Europe.
There were no material restructuring charges in the first six months of the
current fiscal year.

17

The Company's effective tax rate was 30.0% for the quarter and 31.0%
for the six months ended January 31, 2005, and 33.5% for the same periods of the
previous year. The reduction was due to a higher percentage of profit in lower
tax jurisdictions such as China and Singapore in the 2005 periods.

Net income for the three months ended January 31, 2005, increased
156.2% to $20,579,000, compared to $8,033,000 for the same quarter of the
previous year. For the six-month period ended January 31, 2005, net income
increased 122.6% to $40,936,000, compared to $18,386,000 for the same period in
the prior year. On a Class A Common Share basis, diluted net income per share
was $.41 for the quarter and $.83 for the six months ended January 31, 2005,
compared to $0.17 and $.39 per share for the same periods of the previous year.

Business Segment Operating Results

Management of the Company evaluates results based on the following
geographic regions: Americas, Europe, and Asia.

18

The Company evaluates regional performance using sales and segment
profit. Allocation of resources is based on a range of financial and strategic
factors. 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. Please refer to Note G, "Segment
Information" in the Company's Notes to Condensed Consolidated Financial
Statements for a reconciliation of segment profit to net income.

19

Americas:

Americas sales increased 28.3% for the quarter and 30.1% for the six
months ended January 31, 2005, compared to the same periods in the prior year.
Base sales in local currency increased 10.2% in the quarter and 9.0% for the six
months ended January 31, 2005. Sales were positively affected by fluctuations in
the exchange rates used to translate financial results into United States
currency, which increased sales within the region by 1.1% in the quarter and
0.8% for the six-month period ended January 31, 2005. Sales in the region
increased by 17.0% in the quarter and 20.3% for the six month period due to
acquisitions, primarily the acquisition of EMED. New products including
proprietary printing systems and related consumables continue to fuel base
growth. The growth was also aided by a strengthening of the United States direct
marketing business, particularly within the construction market. Solid growth
continues in the core industrial OEM market, but the electronics
telecommunications market is beginning to soften. Management expects this trend
to continue into the third quarter. Segment profit for the region increased
115.1% to $20,431,000 from $9,498,000 for the quarter and 86.1% to $45,811,000
from $24,614,000 for the six months ended January 31, 2005, compared to the same
periods in the prior year. The increased segment profit was primarily due to
higher sales volume and lower operating expenses as a percentage of sales. Base
growth within the Brady brand, the acquisition of EMED, and cost control
throughout our businesses drove additional profit improvement.

Europe:

Europe sales increased 17.4% for the quarter and 19.2% for the six
months ended January 31, 2005, compared to the same periods in the prior year.
Base sales in local currency increased 8.5 % in the quarter and 7.6% for the
six-month period. Sales were also positively affected by fluctuations in the
exchange rates used to translate financial results into United States currency,
which increased sales within the region by 8.9% in the quarter and 9.1% for the
six-month period ended January 31, 2005. Sales for the six-month period were
also aided by the acquisition of BIG, which increased sales by 2.5%. The direct
marketing business continues to exceed GDP growth in the region; however, core
growth has softened slightly since December 2004. If European economic growth
slows further, management believes core growth may continue to soften into the
third quarter. This growth is due to the continued expansion of the Company's
customer base and a greater product offering in its catalogs. The Brady business
also grew in the second quarter due to strong growth in the electrical and
telecom markets. Segment profit for the region increased 40.8% in the quarter to
$21,601,000 from $15,346,000 and 38.0% for the six-month period to $39,733,000
from $28,795,000 compared to the same periods of the prior year, due primarily
to base sales volume, foreign currency translation and increased productivity
from the existing cost structure.

Asia:

Asia sales increased 63.5% for the quarter and 63.8% for the six months
ended January 31, 2005, compared to the same periods in the prior year. Base
sales in local currency increased 25.5% in the quarter and 26.9% for the
six-month period, compared to the same periods last year. Sales were also
positively affected by fluctuations in the exchange rates used to translate
financial results into United States currency, which increased sales within the
region by 2.8% in the quarter and 3.3% for the six months ended January 31,
2005, compared to the same periods last year. Sales were also aided by the
acquisition of ID Technologies, which added 35.2% for the quarter and 33.6% for
the six-month period. Operations in China led the strong base growth performance
in the region. The Company recently completed the expansion of its facilities in
Beijing and Wuxi to meet forecasted demand. The integration of ID Technologies
led to the realization of planned synergies. The expanded product portfolio
allows the Company to better meet the needs of its customers through a broader
product offering. Segment profit for the region was up 77.6% for the quarter to
$8,709,000 from $4,905,000 and 70.6% for the six-month period to $17,619,000
from $10,329,000 compared to the same periods in the prior year.

20

The increase in profit was due primarily to increased sales volume,
foreign currency translation and the addition of ID Technologies. The Asia
region is currently experiencing pressure for additional price reductions each
quarter from its customers. In the short term, the Company is attempting to
realize manufacturing efficiencies to offset the price reductions. On a
long-term basis, the Company will continue to invest in research and development
in an effort to continue introducing new differentiated products that are not as
susceptible to price pressure.

Financial Condition

The Company's current ratio as of January 31, 2005, was 2.3, compared
to 2.1 at July 31, 2004. Cash and cash equivalents were $72,599,000 at January
31, 2005, compared to $70,368,000 at July 31, 2004. The increase was due to
strong operating cash flow and proceeds from the issuance of common stock upon
exercise of stock options, which was partially offset by the purchase of ID
Technologies, purchases of property, plant and equipment and payment of
dividends. Working capital increased $24,329,000 during the six months ended
January 31, 2005, to $156,035,000 from $131,706,000 at July 31, 2004.
Inventories increased $10,993,000 for the six-month period, due primarily to a
planned increase in inventory levels to avoid shortages and improve Company
service levels. Accounts receivable increased $6,482,000 for the six-month
period due to increased sales volume, acquisitions and foreign currency
translation. The net decrease in current liabilities was $2,703,000 for the
six-month period representing a decrease in accounts payable and accrued wages,
offset by an increase in accrued income taxes.

Cash flow from operating activities totaled $45,568,000 for the six
months ended January 31, 2005, compared to $22,380,000 for the same period last
year. The increase was the result of higher net income and related increased
accrued income taxes, partially offset by a decrease in accounts payable,
accrued expenses, and other liabilities due to payment of fiscal 2004 incentives
in the first quarter of fiscal 2005. Capital expenditures were $9,648,000 for
the six-month period ended January 31, 2005, compared to $6,621,000 in the same
period last year. Net cash provided by financing activities was $2,145,000 for
the six months ended January 31, 2005, due to proceeds from the issuance of
common stock due to stock option exercises, partially offset by payments of
dividends to the Company's stockholders. Net cash used in financing activities
for the same period last year was $4,161,000 related to payment of dividends,
issuance of common stock due to stock option exercises, principal payments on
debt and purchase of treasury stock.

On March 31, 2004, the Company entered into an unsecured $125,000,000
multi-currency revolving loan agreement with a group of five banks. Under the
5-year agreement, which has a final maturity date of March 31, 2009, the Company
has the option to use either a base interest rate (based upon the
higher of the federal funds rate plus one-half of 1% or the prime rate at Bank
of America) or a Eurocurrency interest rate (at the LIBOR rate plus margin). A
commitment fee is payable on the unused portion. The agreement requires the
Company to maintain certain financial covenants. As of January 31, 2005, the
Company was in compliance with the covenants of the agreement. The agreement
restricts the amount of certain types of payments, including dividends, which
can be made annually to $25,000,000 plus 50% of the consolidated net income for
the prior year. The Company believes that based on historic dividend practice,
this restriction would not affect its ability to follow a similar dividend
practice in the future. As of January 31, 2005, there were no outstanding
borrowings on the 5-year revolving loan agreement.

On June 30, 2004, the Company sold $150,000,000 of 5.14% unsecured
senior notes due in 2014 in an offering exempt from the registration
requirements of the Securities Act of 1933. The repayment requirement of the
notes will be amortized over seven years beginning in 2008, with interest
payable on the notes semiannually on June 28 and December 28. The first interest
payments were made on December 28, 2004. The Company used the proceeds of the
offering to reduce outstanding indebtedness under the Company's revolving credit
facilities used to initially fund the EMED acquisition. The debt has certain
prepayment penalties.

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During the first quarter of fiscal 2005, the Company announced plans to
build a 60,000 square foot expansion of an existing facility in Milwaukee,
Wisconsin. The approximately $10,000,000 project, which will be funded out of
the Company's operating capital, will consolidate the warehouse and distribution
services of several Brady facilities, providing increased distribution
efficiencies and improved logistics for customers. As of January 31, 2005, the
purchases of property, plant and equipment included approximately $1,300,000
related to the warehouse expansion. The Company expects to complete the project
in 12 to 18 months.

The Company continues to seek opportunities to invest in new products,
new markets, strategic acquisitions and joint ventures, which fit its growth
strategy. Management believes that its cash and cash equivalents, the cash flow
it generates from operating activities, its available line of credit and other
borrowing alternatives will be adequate to meet the Company's current and
anticipated investing and financing needs.

Management believes the Company's continued positive cash flow and
available borrowings will enable the Company to execute a long-term strategy
that includes investments that expand the Company's current market share, open
new markets and geographies, develop new products and distribution channels and
continue to improve the Company's processes. This strategy also includes
executing key acquisitions

The Company does not have material off-balance sheet arrangements or
related-party transactions. The Company is not aware of factors that are
reasonably likely to adversely affect liquidity trends, other than the risk
factors described in other Company filings. However, the following additional
information is provided to assist financial statement users.

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

Other Contractual Obligations - The Company does not have material
financial guarantees or other contractual commitments that are reasonably likely
to adversely affect liquidity.

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

Legal - On October 22, 2004, the American Jobs Creation Act of 2004
(the "Act") was signed into law. The Act contains $137 billion in tax cuts over
a ten-year period beginning in 2005, which are mainly targeted at U.S.
manufacturing businesses and multinational companies. We have not yet completed
our assessment of how the Act might impact our future results of operations or
cash flows.

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Forward-Looking Statements

Except for historical information, the Company's reports to the
Securities and Exchange Commission on Form 10-K and Form 10-Q and periodic press
releases, as well as other public documents and statements, may contain
"forward-looking statements," as defined in the Private Securities Litigation
Reform Act of 1995. These forward-looking statements are often identified by
words such as "intend," "anticipate," "assume," "believe," "estimate," "expect,"
"plan," "project," "will," and other expressions, which refer to future events
and trends.

The ability of the Company to attain management's goals and objectives
is materially dependent on numerous factors. These factors, which include
economic conditions, currency fluctuations, cost of raw materials, reliance on
suppliers, new products, acquisitions, intellectual property, environmental
issues, political considerations and others, are more fully described in the
Company's 2004 Form 10-K filed with the Securities and Exchange Commission.
These factors could cause actual results to differ materially from those in the
forward-looking statements. The Company undertakes no obligation to publicly
update or revise any forward-looking statements whether as a result of new
information, future events or otherwise.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's business operations give rise to market risk exposure due
to changes in foreign exchange rates. To manage that risk effectively, the
Company enters into hedging transactions, according to established guidelines
and policies, that enable it to mitigate the adverse effects of this financial
market risk.

The global nature of the Company's business requires active
participation in the foreign exchange markets. As a result of investments,
production facilities and other operations on a global scale, the Company has
assets, liabilities and cash flows in currencies other than the U.S. Dollar. The
primary objective of the Company's foreign-exchange risk management is to
minimize the impact of currency movements on intercompany transactions and
foreign raw-material imports. To achieve this objective, the Company hedges a
portion of known exposures using forward contracts. Main exposures are related
to transactions denominated in the British Pound, the Euro, Canadian Dollar,
Japanese Yen and Australian Dollar. The risk of these hedging instruments is not
material.

The Company could be exposed to interest rate risk through its
corporate borrowing activities. The objective of the Company's interest rate
risk management activities is to manage the levels of the Company's fixed and
floating interest rate exposure to be consistent with the Company's preferred
mix. The interest rate risk management program may include entering into
approved interest rate derivatives when there is a desire to modify the
Company's exposure to interest rates. As of January 31, 2005, the Company has
not entered into any interest rate derivatives.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures designed to
ensure that the information the Company must disclose in its filings with the
Securities and Exchange Commission is recorded, processed, summarized and
reported on a timely basis. The Company's Chief Executive Officer and Chief
Financial Officer have reviewed and evaluated the Company's disclosure controls
and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the
period covered by this report (the "Evaluation Date"). Based on such evaluation,
such officers have concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures are effective in bringing to their attention
on a timely basis material information relating to the Company required to be
included in the Company's periodic filings under the Exchange Act.

There have not been any changes in the Company's internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
that occurred during the Company's most recently completed fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The annual meeting of shareholders was held on November 18, 2004. At
the meeting the following persons were elected to serve as the Company's
directors by the affirmative vote of 100% of the 3,538,628 shares of Class B
Common Voting Stock until the next annual meeting of shareholders and until
their successors have been elected:

Richard A. Bemis
Robert C. Buchanan
Mary K. Bush
Frank W. Harris
Frank M. Jaehnert
Frank R. Jarc
Peter J. Lettenberger
Gary E. Nei
Roger D. Peirce
Elizabeth I. Pungello

At the annual meeting, the shareholders, by the affirmative vote of
100% of the 3,538,628 shares of Class B Common Voting Stock, approved the "2004
Omnibus Incentive Stock Plan" (the "Plan"). The purpose of the Plan is to
provide an incentive for employees of Brady Corporation and its affiliates to
improve corporate performance on a long-term basis and to attract and retain
employees by enabling employees to participate in the future successes of the
Corporation, and by associating the long term interests of employees with those
of the Corporation and its shareholders. The Plan is intended to permit the
grant of nonqualified stock options, incentive stock options, shares of
restricted stock, and restricted stock units. The Plan was filed as Exhibit 99.1
to the Company's Form 8-K filed with the SEC on November 24, 2004, which Form
8-K contains additional information regarding the Plan.

At the annual meeting, the shareholders, by the affirmative vote of
100% of the 3,538,628 shares of Class B Common Voting Stock, also approved an
amendment to the "W.H. Brady Co. Nonqualified Stock Option Plan For Non-employee
Directors." The amendment increases the number of shares each non-employee
director has an option to purchase upon initial election as a director and after
each annual meeting. The "W.H. Brady Co. Nonqualified Stock Option Plan For
Non-employee Directors" was filed as Exhibit 99.3 to the Form 8-K filed with the
SEC on November 24, 2004, which Form 8-K contains additional information
regarding such plan. The original agreement was Exhibit 10.13 to the Brady
Corporation 2004 Form 10-K.

ITEM 6. Exhibits

(a) Exhibits

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

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Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

SIGNATURES

BRADY CORPORATION

Date: March 10, 2005 /s/ F. M. Jaehnert
-------------- ------------------
F. M. Jaehnert
President & Chief Executive Officer

Date: March 10, 2005 /s/ David Mathieson
-------------- -------------------
David Mathieson
Vice President & Chief Financial Officer
(Principal Accounting Officer)
(Principal Financial Officer)

26