| BRADY CORP Item 1A Risk Factors Before making an investment decision with respect to our stock, you should carefully consider the risks set forth below and all other information contained in this report |
| If any of the events contemplated by the following risks actually occur, then our business, financial condition or results of operations could be materially adversely affected |
| Market demand for our products may be susceptible to fluctuations in the economy that may cause volatility in our results of operations |
| Sales of our products may be susceptible to changes in general economic conditions, namely general downturns in the regional economies in which we compete |
| Our business in the MRO market tends to vary with the nominal GDP of the local economies in which we manufacture and sell |
| As a result, in periods of economic contraction, our business may not grow or may decline |
| In the OEM market, we have been adversely affected by reduced demand for our products due to downturns in the global economy as this is a more cyclical business than the MRO business |
| This cyclicality can result in higher degrees of volatility in our net sales and results of operations |
| These more volatile markets include, but are not limited to, mobile telecommunication devices, hard disk drives and electronics in personal computers and personal digital assistants |
| Our current and future success could be impacted by our ability to effectively integrate acquired companies and manage our growth |
| Our growth has and will continue to place significant demands on our management and operational and financial resources |
| These recent and future acquisitions will require integration of sales and marketing, information technology, finance and administrative operations and information of the newly acquired business |
| The successful integration of acquisitions will require substantial attention from our management and the management of the acquired businesses, which could decrease the time they have to serve and attract customers |
| We cannot assure that we will be able to successfully integrate these recent or any future acquisitions, that these acquisitions will operate profitably or that we will be able to achieve the financial or operational success expected from the acquisitions |
| Furthermore, our rapid growth in recent periods, our anticipated geographic expansion, and our planned expansion through additional acquisitions present challenges to maintain the internal control and disclosure control standards applicable to public companies under the Sarbanes-Oxley Act of 2002 |
| Our financial condition, cash flows and operational results could be adversely affected if we do not successfully integrate the newly acquired businesses or if our other businesses suffer on account of our increased focus on the newly acquired businesses |
| If we fail to develop new products or our customers do not accept the new products we develop, our business could be affected adversely |
| Development of proprietary products is key to the success of our core growth and our high gross margins now and in the future |
| Therefore, we must continue to develop new and innovative products and acquire and retain the necessary intellectual property rights in these products on an ongoing basis |
| If we fail to make innovations, or the market does not accept our new products, then our financial condition and results of operations could be adversely affected |
| We continue to invest in the development and marketing of new products |
| These expenditures do not always result in products that will be accepted by the market |
| Failure to develop successful new products may also cause our customers to buy from a competitor or may cause us to lower our prices in order to compete |
| This could have an adverse impact on our profitability |
| We may be adversely impacted by an inability to identify and complete acquisitions |
| A large part of our growth since fiscal 2003 has come through acquisitions and a key component of our growth strategy is based upon acquisitions |
| We may not be able to identify acquisition targets or successfully complete acquisitions in the future due to the absence of quality companies, economic conditions, or price expectations from sellers |
| If we are unable to complete additional acquisitions, our growth may be limited |
| I-9 _________________________________________________________________ [93]Table of Contents We operate in highly competitive niche markets within the OEM market and may be forced to cut our prices or incur additional costs to remain competitive, which may have a negative impact on our profitability |
| We face substantial competition, particularly in the OEM markets we serve |
| Competition may force us to cut our prices or incur additional costs to remain competitive |
| We compete on the basis of production capabilities, engineering and R&D capabilities, materials expertise, our global footprint, customer service and price |
| Present or future competitors may have greater financial, technical or other resources which could put us at a disadvantage in the affected business by threatening our market shares in some markets or reducing our profit margins |
| Our goodwill or other intangible assets may become impaired, which may negatively impact our results of operations |
| We have a substantial amount of goodwill and other intangible assets on our balance sheet as a result of our acquisitions |
| As of July 31, 2006, we had dlra587dtta6 million of goodwill on our balance sheet, representing the excess of the total purchase price for our acquisitions over the fair value of the net assets we acquired, and dlra134dtta1 million of other intangible assets, primarily representing the fair value of the customer relationships, patents and trademarks we acquired in our acquisitions |
| At July 31, 2006, goodwill and other intangible assets represented approximately 53prca of our total assets |
| We evaluate this goodwill annually for impairment based on the fair value of each geographic operating segment and we assess the impairment of other intangible assets quarterly based upon the expected cash flows of the acquisition |
| These valuations could change if there were to be future changes in our capital structure, cost of debt, interest rates, capital expenditures, or our ability to perform in accordance with our forecasts |
| If this estimated fair value changes in future periods, we may be required to record an impairment charge related to goodwill or other intangible assets, which would have the effect of decreasing our earnings or increasing our losses in such period |
| We increasingly conduct a sizable amount of our manufacturing outside of the United States, which may present additional risks to our business |
| As a result of our strong growth in developing economies, particularly in Asia, a significant portion of our sales is attributable to products manufactured outside of the United States |
| More than half of our 8cmam000 employees and more than half of our manufacturing locations are located outside of the United States |
| Our international operations are generally subject to various risks including political, economic and societal instability, the imposition of trade restrictions, local labor market conditions, the effects of income taxes, and differences in business practices |
| We may incur increased costs and experience delays or disruptions in product deliveries and payments in connection with international manufacturing and sales that could cause loss of revenue |
| Unfavorable changes in the political, regulatory and business climate in countries where we have operations could have a material adverse effect on our financial condition, results of operations and cash flows |
| We have a concentration of business with several large key customers in the OEM market and loss of one or more of these customers could significantly affect our results of operations |
| Several of our large key customers in the OEM market, specifically the precision die-cut business, together comprise a significant portion of our revenues |
| As a result of our acquisition of Tradex Converting AB in May 2006, our largest customer represents approximately 7prca of our net sales |
| Our dependence on these large customers makes our relationships with these customers important to our business |
| We cannot assure you that we will be able to maintain these relationships and retain this business in the future |
| Because these large customers account for such a significant portion of our revenues, they possess relatively greater capacity to negotiate a reduction in the prices we charge for our products |
| If we are unable to provide products to our customers at prices acceptable to them, some of our customers may in the future elect to shift some or all of this business to competitors or to other sources |
| The loss of or reduction of business from one or more of these large key customers could have a material adverse impact on our financial condition and results of operations |
| I-10 _________________________________________________________________ [94]Table of Contents Foreign currency fluctuations could adversely affect our sales and profits |
| More than half of our revenues are derived outside of the United States |
| As such, fluctuations in foreign currency can have an adverse impact on our sales and profits as amounts that are measured in foreign currency are translated back to US dollars |
| Any increase in the value of the US dollar in relation to the value of the local currency will adversely affect our revenues from our foreign operations when translated into US dollars |
| Similarly, any decrease in the value of the US dollar in relation to the value of the local currency will increase our development costs in our foreign operations, to the extent such costs are payable in foreign currency, when translated into US dollars |
| During fiscal year 2006, the strengthening US dollar versus all other currencies reduced sales by approximately dlra3dtta7 million |
| We depend on our key personnel and the loss of these personnel could have an adverse effect on our operations |
| Our success depends to a large extent upon the continued services of our key executives, managers and other skilled personnel |
| We cannot assure you that we will be able to retain our key officers and employees |
| The departure of our key personnel without adequate replacement could severely disrupt our business operations |
| Additionally, we need qualified managers and skilled employees with technical and manufacturing industry experience to operate our business successfully |
| If we are unable to attract and retain qualified individuals or our costs to do so increase significantly, our operations would be materially adversely affected |
| We may be unable to successfully implement anticipated changes to our information technology system |
| We are now in the process of upgrading certain portions of our information technology |
| Part of this upgrade includes an accelerated implementation of an SAP platform in our facilities in China, Europe, Malaysia and Singapore |
| To date, we have completed the implementation at one facility in China and in India |
| We expect that this implementation of the SAP platform will enable us to more effectively and efficiently manage our supply chain and business processes |
| Our failure to successfully manage this process or implement these upgrades as scheduled could cause us to incur unexpected costs or to lose customers or sales, which could have a material adverse effect on our financial results |
| The increase in our level of indebtedness could adversely affect our financial health and make us vulnerable to adverse economic conditions |
| We have incurred indebtedness to finance acquisitions and for other general corporate purposes |
| Any increase in our level of indebtedness could have important consequences, such as: • it may be difficult for us to fulfill our obligations under our credit or other debt agreements; • it may be more challenging or costly to obtain additional financing to fund our future growth; • we may be more vulnerable to future interest rate fluctuations; • we may be required to dedicate a substantial portion of our cash flows to service our debt, thereby reducing the amount of cash available to fund new product development, capital expenditures, working capital and other general corporate activities; • it may place us at a competitive disadvantage relative to our competitors that have less debt; and • it may limit our flexibility in planning for and reacting to changes in our business |
| Environmental, health and safety laws and regulations could adversely affect our business |
| Our facilities and operations are subject to numerous laws and regulations relating to air emissions, wastewater discharges, the handling of hazardous materials and wastes, manufacturing and disposal of certain materials, and regulations otherwise relating to health, safety and the protection of the environment |
| Our products may also be governed by regulations in the countries where they are sold |
| As a result, we may need to devote management time or expend significant resources on compliance, and we have incurred and will continue to incur capital and other I-11 _________________________________________________________________ [95]Table of Contents expenditures to comply with these regulations |
| Any significant costs may have a material adverse impact on our financial condition, results of operations or cash flows |
| Further, these laws and regulations are constantly evolving and it is impossible to predict accurately the effect they may have upon our financial condition, results of operations or cash flows |