Results of Operations
Sales for the three months ended October 31, 2009 were down 15.8% compared to the same period in fiscal 2009. Of the 15.8% decrease in sales, organic sales declined 15.9%, partially offset by a 0.1% increase in sales from the acquisition of certain assets of the Welco division of Welconstruct Group Limited ("Welco") in the United Kingdom. There was minimal effect on sales from the fluctuations in the exchange rates used to translate financial results into the United States Dollar for the three months ended October 31, 2009 and 2008. The decline in organic sales for the quarter ended October 31, 2009, was due primarily to a 15.2%, 12.3%, and 20.4% decrease in sales in the Americas, Europe, and Asia-Pacific segments.
Gross margin as a percentage of sales increased to 49.4% for the quarter ended October 31, 2009, compared to 47.9% in the same period of the previous year. The increase in gross margin as a percentage of sales was mainly due to the cost reduction efforts and restructuring activities that began in the second quarter of fiscal 2009.
Research and development ("R&D") expenses increased 6.1% to $9.6 million for the three months ended October 31, 2009, compared to $9.1 million for the same period in the prior year. As a percentage of sales, R&D expenses increased to 3.0% in the first quarter of fiscal 2010 from 2.4% in the same period of fiscal 2009, evidencing the Company's continued commitment to innovation and new product development.
Selling, general, and administrative ("SG&A") expenses decreased 4.9% to $108.7 million for the three months ended October 31, 2009, as compared to $114.3 million for the same period in the prior year. The decrease in SG&A expenses was due to the realization of savings from prior year cost reduction activities and restructuring activities. As a percentage of sales, SG&A expenses increased to 34.1% in the first quarter of fiscal 2010 from 30.2% in the same period of fiscal 2009.
Restructuring charges were $3.6 and $1.6 million during the three months ended October 31, 2009 and 2008, respectively. In fiscal 2009, in response to the global economic downturn the Company took several measures to address its cost structure. The Company continued to incur costs related to the reduction of its workforce and facility consolidations during the three months ended October 31, 2009. The Company expects to incur approximately $15.0 million of restructuring charges during fiscal year 2010 and expects to complete this restructuring plan during the remainder of fiscal 2010.
Investment and other income decreased to $0.1 million for the quarter ended October 31, 2009 from $1.9 million for the quarter ended October 31, 2008. Interest income earned in the first quarter of fiscal 2010 was $0.3 million, as compared to $1.2 million in the first quarter of fiscal 2009. The $0.1 million of investment and other income recorded for the quarter ended October 31, 2009 consisted of $0.3 million of interest income and $0.3 million gain on securities held in executive deferred compensation plans partially offset by $0.5 million in foreign exchange losses. The $1.9 million of investment and other income recorded for the quarter ended October 31, 2008 consisted of $1.2 million of interest income and $0.8 million in foreign exchange gains partially offset by $0.1 million loss on securities held in executive deferred compensation plans. Interest expense decreased to $5.2 million for the quarter ended October 31, 2009 from $6.4 million for the quarter ended October 31, 2008. In fiscal 2009, the Company paid the annual installment of $21.4 million related to the debt securities issued in June 2004 as well as an additional prepayment of $65.8 million. As a result of a lower principal balance under the related debt facilities, the Company's interest expense decreased in the first quarter of fiscal 2010 as compared to the same period in the prior year.
The Company's effective tax rate was 28.8% for the quarter ended October 31, 2009 and 28.2% for the same period of the previous year. The slight increase in the effective tax rate was due to an increase in the unrecognized tax benefit accrued during the period ended October 31, 2009. The Company expects the full year effective tax rate for fiscal 2010 to be approximately 28%. Net income for the three months ended October 31, 2009, decreased 41.6% to $21.7 million, compared to $37.1 million for the same quarter of the previous year. Net income as a percentage of sales decreased to 6.8% for the quarter ended October 31, 2009 from 9.8% for the same period in the prior year. Net income before restructuring related expenses was $24.3 million, or $0.46 per diluted Class A Common Share for the three months ended October 31, 2009 compared to $38.3 million, or $0.71 per diluted Class A Common Share for the same period of the previous year.

Business Segment Operating Results
The Company is organized and managed on a geographic basis by region. Each of these regions, Americas, Europe and Asia-Pacific, has a President that reports directly to the Company's chief operating decision maker, its Chief Executive Officer. Each region has its own distinct operations, is managed locally by its own management team, maintains its own financial reports and is evaluated based on regional segment profit. The Company has determined that these regions comprise its operating and reportable segments based on the information used by the Chief Executive Officer to allocate resources and assess performance. Following is a summary of segment information for the three months ended October 31, 2009 and 2008:

                                                                                                   Corporate
                                                                   Asia-           Total              and
(Dollars in thousands)           Americas         Europe          Pacific         Regions         Eliminations         Total
SALES TO EXTERNAL CUSTOMERS
Three months ended:
October 31, 2009                 $ 136,239       $  94,335       $  87,912       $ 318,486       $            -      $ 318,486
October 31, 2008                 $ 160,916       $ 108,215       $ 109,186       $ 378,317       $            -      $ 378,317

SALES GROWTH INFORMATION
Three months ended
October 31, 2009
Organic                              (15.2 )%        (12.3 )%        (20.4 )%        (15.9 )%                 -          (15.9 )%
Currency                              (0.1 )%         (0.7 )%          0.9 %           0.0 %                  -            0.0 %
Acquisitions                           0.0 %           0.2 %           0.0 %           0.1 %                  -            0.1 %

Total                                (15.3 )%        (12.8 )%        (19.5 )%        (15.8 )%                 -          (15.8 )%

SEGMENT PROFIT
Three months ended:
October 31, 2009                 $  32,801       $  24,862       $  15,127       $  72,790       $       (2,920 )    $  69,870
October 31, 2008                 $  35,524       $  31,138       $  22,401       $  89,063       $       (2,307 )    $  86,756
Percentage (decrease)
increase                              (7.7 )%        (20.2 )%       (32.55 )%        (18.3 )%              26.6 %        (19.5 )%

NET INCOME RECONCILIATION

                                                     Three months ended:
                                                         October 31,
           (Dollars in thousands)                     2009          2008
           Total profit from reportable segments   $   72,790     $  89,063
           Corporate and eliminations                  (2,920 )      (2,307 )
           Unallocated amounts:
           Administrative costs                       (30,712 )     (28,923 )
           Restructuring charges                       (3,601 )      (1,639 )
           Investment and other income                     48         1,852
           Interest expense                            (5,162 )      (6,361 )

           Income before income taxes                  30,443        51,685
           Income taxes                                (8,775 )     (14,575 )
           Net income                              $   21,668     $  37,110

The Company evaluates short-term segment performance based on segment profit or loss and customer sales. Corporate long-term performance is evaluated based on shareholder value enhancement ("SVE"), which incorporates the cost of capital as a hurdle rate for capital expenditures, new product development, and acquisitions. Segment profit or loss does not include certain administrative costs, such as the cost of finance, information technology and human resources, which are managed as global functions. Restructuring charges, stock options, interest, investment and other income and income taxes are also excluded when evaluating performance.

Americas:
Sales in the Americas decreased 15.3% to $136.2 million for the quarter ended October 31, 2009, compared to $160.9 million for the same period in the prior year. Organic sales declined 15.2% in the first quarter of fiscal 2010 compared to the same period last year. Fluctuations in the exchange rates used to translate financial results into the U.S. dollar decreased sales by 0.1% in the quarter. The decline in organic sales during the quarter was primarily driven by declining volumes of the manufacturing sectors and weakness in the MRO markets in the United States, partially offset by growth in Mexico as well as moderate growth in the OEM markets in the United States. Management expects the challenging business conditions in the region to continue through the first half of this fiscal year and anticipates a slow economic recovery in the second half of this fiscal year.
Segment profit decreased 7.7% to $32.8 million for the quarter ended October 31, 2009, compared to $35.5 million for the same period in the prior year. As a percentage of sales, segment profit increased to 24.1% for the quarter ended October 31, 2009 from 22.1% for the same period in the prior year. The increase in segment profit as a percentage of sales was primarily due to the cost reduction efforts and restructuring activities that began in the second quarter of fiscal 2009. The cost reduction initiatives incurred during fiscal 2009 improved the Company's cost structure throughout the quarter. The Company continues the lean and facility rationalization activities to reduce costs and improve margin.
Europe:
Europe sales declined 12.8% to $94.3 million for the quarter ended October 31, 2009, compared to $108.2 million for the same period in the prior year. Organic sales were down 12.3% in the quarter as compared to the same period last year. Sales were slightly affected by fluctuations in the exchange rates used to translate financial results into the U.S. dollar, primarily the Euro and the British pound, which decreased sales within the region by 0.7% in the quarter. The fiscal 2010 acquisition of Welco increased sales by 0.2% in the quarter. The decline in organic sales during the quarter ended October 31, 2009 was primarily due to the global economic downturn, offset by increased MRO business due to the swine-flu campaigns in the United Kingdom and France. Management expects the challenging business conditions in the region to continue through the first half of this fiscal year and anticipates a slow economic recovery in the second half of this fiscal year.
Segment profit decreased 20.2% to $24.9 million for the quarter ended October 31, 2009, compared to $31.1 million for the same period of the prior year. As a percentage of sales, segment profit decreased to 26.4% in the first quarter of fiscal 2010 from 28.7% in the first quarter of fiscal 2009. The decline in segment profit in fiscal 2010 as compared to the same period of the prior year was attributable to the declining sales volumes and the impact of foreign currency translation. In response to the sales downturn, the segment has implemented cost saving measures that have generated savings to partially offset the impact of lower sales volumes.
Asia-Pacific:
Asia-Pacific sales decreased 19.5% to $87.9 million for the quarter ended October 31, 2009, compared to $109.2 million for the same period in the prior year. Organic sales were down 20.4% in the quarter as compared to the same period last year. Sales were positively affected by fluctuations in the exchange rates used to translate financial results into the U.S. dollar, which increased sales within the region by 0.9% in the quarter. The decline in organic sales during the quarter ended October 31, 2009 was primarily due to the overall decline in the electronics and mobile handset markets and aggressive pricing demands from customers, slightly offset by increased demand for MRO products to support infrastructure development sponsored by government stimulus spending in the region. Management expects the challenging business conditions in the region to continue through the first half of this fiscal year and anticipates a slow economic recovery in the second half of this fiscal year. Segment profit decreased 32.5% to $15.1 million for the quarter ended October 31, 2009, compared to $22.4 million for the same period in the prior year. As a percentage of sales, segment profit decreased to 17.2% in the first quarter of fiscal 2010 from 20.5% in the first quarter of fiscal 2009. The decrease in segment profit was primarily the result of the decrease in sales and increased focus on research and development, partially offset by the fiscal 2009 cost reduction efforts and restructuring activities. During the quarter the Company implemented capacity rationalization, process improvements driven by the Brady Business Performance System and raw material supplier partnerships to improve the Company's profitability.

Financial Condition
The Company's current ratio remained constant at 2.3 for both quarters ended October 31, 2009 and July 31, 2009. Cash and cash equivalents were $207.6 million at October 31, 2009, compared to $188.2 million at July 31, 2009. The increase in cash of $19.4 million was the result of cash provided by operations of $33.8 million, cash used in investing activities of $10.8 million, cash used in financing activities of $7.7 million, and the effects of the appreciation of the U.S. dollar against other currencies, which positively impacted cash in the amount of $4.1 million during the quarter ended October 31, 2009.
Accounts receivable increased $33.3 million during the three months ended October 31, 2009, primarily due to the increase in sales as compared to the three months ended July 31, 2009. Of the $33.3 million, $4.5 million was due to the effect of the fluctuations in the exchange rates used to translate financial statements into the U.S. dollar.
Inventories decreased $0.8 million for the quarter due to the continued focus on reducing inventory levels. The change in inventory was also a result of the $3.1 million decrease in volumes offset by the $2.3 million effect of the fluctuations in the exchange rates used to translate financial statements into the U.S. dollar. The net increase in current liabilities of $27.4 million for the quarter was primarily due to the increase in accrued wages as the Company accrued for the fiscal 2010 incentive compensation plans, in addition to the increases in the accounts payable and accrued liabilities.
Cash provided from operating activities totaled $33.8 million for the quarter ended October 31, 2009, compared to cash used in operating activities of $4.7 million for the same period last year. The decrease in the inventories and the increase in accounts payable and accrued liabilities were offset by an increase in accounts receivable resulting in an increase in the cash provided by operating activities as compared to the first quarter of fiscal 2009. The change in the accounts payable and accrued liabilities was primarily due to the accrual of the fiscal 2010 incentive compensation plans during the three months ended October 31, 2009. Incentive compensation plans were cancelled for fiscal 2009 due to the Company's performance resulting from the economic downturn and, as such, no payouts for incentive compensation were made during the first quarter of fiscal 2010.
Capital expenditures were $9.0 million for the quarter ended October 31, 2009, compared to $6.4 million in the same period last year. The Company expects the capital expenditures to be approximately $25.0 million for fiscal 2010. Net cash used in financing activities was $7.7 million for the quarter ended October 31, 2009, related primarily to the payment of the Class A Common Stock dividends. Cash used for acquisitions totaled $1.8 million for the quarter ended October 31, 2009 due to the acquisition of certain assets of Welco, a division of Welconstruct Group Limited. The Company did not complete any acquisitions during the quarter ended October 31, 2008.
On November 24, 2008, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission ("SEC"), which will allow the Company to issue and sell, from time to time in one or more offerings, an indeterminate amount of Class A Non-Voting Common Stock and debt securities as it deems prudent or necessary to raise capital at a later date. The shelf registration statement became effective upon filing with the SEC. The Company plans to use the proceeds from any future offerings under the shelf registration for general corporate purposes, including, but not limited to, acquisitions, capital expenditures, and refinancing of debt.
During fiscal 2004 through fiscal 2007, the Company completed three private placement note issuances totaling $500 million in ten-year fixed rate notes with varying maturity dates to institutional investors at interest rates varying from 5.14% to 5.33%. The notes must be repaid over seven years, with initial payment due dates ranging from 2008 to 2011, with interest payable on the notes due semiannually on various dates throughout the year, which began in December 2004. The private placements were exempt from the registration requirements of the Securities Act of 1933. The notes were not registered for resale and may not be resold absent such registration or an applicable exemption from the registration requirements of the Securities Act of 1933 and applicable state securities laws. The notes have certain prepayment penalties for repaying them prior to the maturity date. Under the debt agreement, the Company paid equal installments of $21.4 million in June 2008 and June 2009. In June 2009, the Company also completed a cash tender offer to purchase approximately $65.8 million of its outstanding notes.

On October 5, 2006, the Company entered into a $200 million multi-currency revolving loan agreement with a group of five banks that replaced the Company's previous credit agreement. At the Company's option, and subject to certain standard conditions, the available amount under the credit facility may be increased from $200 million up to $300 million. Under the credit agreement, the Company has the option to select either a base interest rate (based upon the higher of the federal funds rate plus one-half of 1% or the prime rate of Bank of America) or a Eurocurrency interest rate (at the LIBOR rate plus a margin based on the Company's consolidated leverage ratio). A commitment fee is payable on the unused amount of the facility. The agreement restricts the amount of certain types of payments, including dividends, which can be made annually to $50 million plus an amount equal to 75% of consolidated net income excluding all extraordinary non-cash items for the prior fiscal year of the Company. The Company believes that based on historic dividend practice, this restriction would not impede the Company in following a similar dividend practice in the future. On March 18, 2008, the Company entered into an amendment to the revolving loan agreement which extended the maturity date from October 5, 2011 to March 18, 2013. All other terms of the revolving loan agreement remained the same. As of October 31, 2009, there were no outstanding borrowings under the credit facility.
The Company's debt and revolving loan agreements require it to maintain certain financial covenants. The Company's June 2004, February 2006, and March 2007 debt agreements require the Company to maintain a ratio of debt to the trailing twelve months earnings before interest, taxes, depreciation and amortization ("EBITDA"), as defined in the debt agreements, of not more than a 3.5 to 1.0 ratio (leverage ratio). As of October 31, 2009, the Company was in compliance with the financial covenant of these debt agreements, with the ratio of debt to EBITDA, as defined by the agreements, equal to 2.4 to 1.0. Additionally, the Company's October 2006 revolving loan agreement requires the Company to maintain a ratio of debt to trailing twelve months EBITDA, as defined by the debt agreement, of not more than a 3.0 to 1.0 ratio. The revolving loan agreement requires the Company's trailing twelve months earnings before interest and taxes ("EBIT") to interest expense of not less than a 3.0 to 1.0 ratio (interest expense coverage). As of October 31, 2009, the Company was in compliance with the financial covenants of the revolving loan agreement, with the ratio of debt to EBITDA, as defined by the agreement, equal to 2.4 to 1.0 and the interest expense coverage ratio equal to 4.5 to 1.0.
The Company's growth has historically been funded by a combination of cash provided by operating activities and debt financing. The Company believes that its cash from operations, in addition to its sources of borrowing, are sufficient to fund its anticipated requirements for working capital, capital expenditures, restructuring activities, acquisitions, common stock repurchases, scheduled debt repayments, and dividend payments. As of the date of this Form 10-Q, the credit and financial markets are in a period of substantial instability and uncertainty that is affecting the availability of credit to borrowers. The Company believes that its current credit arrangements are sound and that the strength of its balance sheet will allow the Company the financial flexibility to respond to both internal growth opportunities and those available through acquisition.
Subsequent Events Affecting Financial Condition On November 19, 2009, the Board of Directors declared a quarterly cash dividend to shareholders of the Company's Class A Common Stock of $0.175 per share payable on January 29, 2010 to shareholders of record at the close of business on January 8, 2010.

Off-Balance Sheet Arrangements - The Company does not have material off-balance sheet arrangements or related-party transactions. The Company is not aware of factors that are reasonably likely to adversely affect liquidity trends, other than the risk factors described in this and other Company filings. However, the following additional information is provided to assist those reviewing the Company's financial statements.
Operating Leases - These leases generally are entered into for investments in facilities, such as manufacturing facilities, warehouses and office buildings, computer equipment and Company vehicles, for which the economic profile is favorable.
Purchase Commitments - The Company has purchase commitments for materials, supplies, services, and property, plant and equipment 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. Under the accounting guidelines established for reserves for uncertain tax positions, which the Company adopted as of August 1, 2007, the Company is unable to determine the period in which the cash settlement of any reserves for uncertain tax positions will occur with the respective taxing authority.
Related-Party Transactions - The Company does not have any related-party transactions that materially affect the results of operations, cash flow or financial condition.
Forward-Looking Statements
Brady believes that certain statements in this Form 10-Q are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements related to future, not past, events included in this Form 10-Q, including, without limitation, statements regarding Brady's future . . .