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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2020
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 charter)

Wisconsin 39-0178960
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)

6555 West Good Hope Road
Milwaukee,Wisconsin53223
(Address of principal executive offices and Zip Code)
(414) 358-6600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Class A Nonvoting Common Stock, par value $0.01 per shareBRCNew York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes       No  
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      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer 
Emerging growth company
Non-accelerated filer Smaller reporting company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  
The aggregate market value of the non-voting common stock held by non-affiliates of the registrant as of January 31, 2020, was approximately $2,613,354,710 based on the closing sale price of $55.37 per share on that date as reported for the New York Stock Exchange. As of September 14, 2020, there were 48,466,712 outstanding shares of Class A Nonvoting Common Stock (the “Class A Common Stock”), and 3,538,628 shares of Class B Common Stock. The Class B Common Stock, all of which is held by affiliates of the registrant, is the only voting stock.


Table of Contents
INDEX
PART IPage
PART II
PART III
PART IV

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PART I

Forward-Looking Statements
In this annual report on Form 10-K, statements that are not reported financial results or other historic information are “forward-looking statements.” These forward-looking statements relate to, among other things, the Company's future financial position, business strategy, targets, projected sales, costs, income, capital expenditures, debt levels and cash flows, and plans and objectives of management for future operations.
The use of words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “should,” “project,” "continue," or “plan” or similar terminology are generally intended to identify forward-looking statements. These forward-looking statements by their nature address matters that are, to different degrees, uncertain and are subject to risks, assumptions, and other factors, some of which are beyond Brady's control, that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. For Brady, uncertainties arise from:
Adverse impacts of the novel coronavirus ("COVID-19") pandemic or other pandemics
Decreased demand for the Company's products
Ability to compete effectively or to successfully execute its strategy
Ability to develop technologically advanced products that meet customer demands
Raw material and other cost increases
Difficulties in protecting websites, networks, and systems against security breaches
Extensive regulations by U.S. and non-U.S. governmental and self-regulatory entities
Risks associated with the loss of key employees
Divestitures, contingent liabilities from divestitures and the failure to identify, integrate, and grow acquired companies
Litigation, including product liability claims
Foreign currency fluctuations
Potential write-offs of goodwill and other intangible assets
Changes in tax legislation and tax rates
Differing interests of voting and non-voting shareholders
Numerous other matters of national, regional and global scale, including major public health crises and government responses thereto and those of a political, economic, business, competitive, and regulatory nature contained from time to time in Brady's U.S. Securities and Exchange Commission filings, including, but not limited to, those factors listed in the “Risk Factors” section within Item 1A of Part I of this Form 10-K.
These uncertainties may cause Brady's actual future results to be materially different than those expressed in its forward-looking statements. Brady does not undertake to update its forward-looking statements except as required by law.
Item 1. Business
General Development of Business
Brady Corporation (“Brady,” “Company,” “we,” “us,” “our”) was incorporated under the laws of the state of Wisconsin in 1914. The Company’s corporate headquarters are located at 6555 West Good Hope Road, Milwaukee, Wisconsin 53223, and the telephone number is (414) 358-6600.
Brady Corporation is a global manufacturer and supplier of identification solutions and workplace safety products that identify and protect premises, products and people. The ability to provide customers with a broad range of proprietary, customized and diverse products for use in various applications, along with a commitment to quality and service, a global footprint, and multiple sales channels, have made Brady a leader in many of its markets.
The Company’s primary objective is to build upon its market position and increase shareholder value by enabling a highly competent and experienced organization to focus on the following key competencies:
Operational excellence — Continuous productivity improvement, automation, and product customization capabilities.
Customer service — Understanding customer needs and providing a high level of customer service.
Innovative products — Technologically-advanced, internally-developed proprietary products that drive revenue growth and sustain gross profit margins.
Global leadership position in niche markets.
Digital capabilities.
Compliance expertise.
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The long-term sales growth and profitability of our segments will depend not only on improved demand in end markets and the overall economic environment, but also on our ability to continuously improve operational excellence, focus on the customer, develop and market innovative new products, and to advance our digital capabilities. In our Identification Solutions ("ID Solutions" or "IDS") business, our strategy for growth includes an increased focus on certain industries and products, a focus on improving the customer buying experience, and investment in research and development ("R&D") to develop new products. In our Workplace Safety ("WPS") business, our strategy for growth includes a focus on workplace safety critical industries, innovative new product offerings, compliance expertise, customization expertise, and improving our digital capabilities.
The following were key initiatives supporting the strategy in fiscal 2020:
Investing in organic growth by enhancing our research and development process and improving the time to launch high-value, innovative products in alignment with our target markets.
Providing our customers with the highest level of customer service.
Expanding and enhancing our sales capabilities through an improved digital presence and increased sales resources.
Driving operational excellence and executing sustainable efficiency gains within our global operations and selling, general and administrative structures.
Growing through focused actions in selected vertical markets and strategic accounts.
Enhancing our employee development process to create an engaged diverse workforce and to attract and retain key talent.
Narrative Description of Business
Overview
The Company is organized and managed on a global basis within two reportable segments: Identification Solutions and Workplace Safety.
The IDS segment includes high-performance and innovative industrial and healthcare identification products manufactured under multiple brands, including the Brady brand. Industrial identification products are sold through distribution to a broad range of maintenance, repair, and operations ("MRO") and original equipment manufacturing ("OEM") customers and through other channels, including direct sales, catalog marketing, and digital. Healthcare identification products are sold direct and through distribution via group purchasing organizations ("GPO").
The WPS segment includes workplace safety and compliance products sold under multiple brand names primarily through catalog and digital channels to a broad range of MRO customers. Approximately half of the WPS business is derived from internally manufactured products and half is from externally sourced products.
Below is a summary of sales by reportable segment for the fiscal years ended July 31: 
202020192018
IDS72.6 %74.4 %72.1 %
WPS27.4 %25.6 %27.9 %
Total100.0 %100.0 %100.0 %

ID Solutions
Within the ID Solutions segment, the primary product categories include:
Facility identification and protection, which includes safety signs, floor-marking tape, pipe markers, labeling systems, spill control products, lockout/tagout devices, and software and services for safety compliance auditing, procedure writing and training.
Product identification, which includes materials and printing systems for product identification, brand protection labeling, work in process labeling, and finished product identification.
Wire identification, which includes hand-held printers, wire markers, sleeves, and tags.
People identification, which includes name tags, badges, lanyards, and access control software.
Patient identification, which includes wristbands and labels used in hospitals for tracking and improving the safety of patients.
Custom wristbands used in the leisure and entertainment industry such as theme parks, concerts, and festivals.
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Approximately 67% of ID Solutions products are sold under the Brady brand, with other primary brands including identification products for the utility industry which are marketed under the Electromark brand and security and identification badges and systems which are marketed under the IDenticard, PromoVision, and Brady People ID brands. Spill control products are marketed under the SPC brand, and lockout/tagout products are offered under the Scafftag brand. Identification and patient safety products in the healthcare industry are available under the PDC Healthcare brand and custom wristbands for the leisure and entertainment industry are available under the PDC brand and under the BIG brand.
The ID Solutions segment offers high quality products with rapid response and superior service to provide solutions to customers. The business markets and sells products through multiple channels including distributors, direct sales, catalog marketing, and digital. The ID Solutions sales force partners with end-users and distributors by providing technical application and product expertise.
This segment manufactures differentiated, proprietary products, most of which have been internally developed. These internally developed products include materials, printing systems, and software. IDS competes for business on several factors, including customer service, product innovation, product offering, product quality, price, expertise, production capabilities, and for multinational customers, our global footprint. Competition is highly fragmented, ranging from smaller companies offering minimal product variety, to some of the world's largest adhesive and electrical product companies offering competing products as part of their overall product lines.
ID Solutions serves customers in many industries, which include industrial manufacturing, electronic manufacturing, healthcare, chemical, oil, gas, automotive, aerospace, governments, mass transit, electrical contractors, leisure and entertainment and telecommunications, among others.
Workplace Safety
Within the Workplace Safety segment, the primary product categories include:
Safety and compliance signs, tags, labels, and markings.
Informational signage and markings.
Asset tracking labels.
Facility safety and personal protection equipment.
First aid products.
Labor law and other compliance posters.
Products within the Workplace Safety segment are sold under a variety of brands including: safety and facility identification products offered under the Seton, Emedco, Signals, Safety Signs, SafetyShop, Signs & Labels, and Pervaco brands; first aid supplies under the Accidental Health and Safety, Trafalgar, and Securimed brands; wire identification products marketed under the Carroll brand; and labor law and compliance posters under the Personnel Concepts and Clement Communications brands.
The Workplace Safety segment manufactures a broad range of stock and custom identification products, and also sells a broad range of related resale products. Historically, both the Company and many of our competitors focused their businesses on catalog marketing, often with varying product niches. Many of our competitors extensively utilize e-commerce to promote the sale of their products. A consequence of e-commerce is price transparency, as prices on non-proprietary products can be easily compared. Therefore, to compete effectively, we continue to build out our e-commerce capabilities and focus on developing unique or customized solutions, enhancing customer experience, and providing compliance expertise as these are critical to retain existing customers and convert new customers. Workplace Safety primarily sells to businesses and serves many industries, including manufacturers, process industries, government, education, construction, and utilities.
Research and Development
The Company focuses its R&D efforts on pressure sensitive materials, printing systems, software, and the development of other workplace safety related products. Although there is an increasing amount of R&D that supports the WPS segment, the majority of R&D spend supports the IDS segment. Material development involves the application of surface chemistry concepts for top coatings and adhesives applied to a variety of base materials. The design of printing systems integrates materials, embedded software and a variety of printing technologies to form a complete solution for customer applications. In addition, the R&D team supports production and marketing efforts by providing application and technical expertise.
The Company owns patents and tradenames relating to certain products in the United States and internationally. Although the Company believes patents are a significant driver in maintaining its position for certain products, technology in the areas covered by many of the patents continues to evolve and may limit the value of such patents. The Company's business is not
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dependent on any single patent or group of patents. Patents applicable to specific products extend for up to 20 years according to the date of patent application filing or patent grant, depending upon the legal term of patents in the various countries where patent protection is obtained. The Company's tradenames are valid ten years from the date of registration, and are typically renewed on an ongoing basis.
The Company spent $40.7 million, $45.2 million, and $45.3 million on its R&D activities during the fiscal years ended July 31, 2020, 2019, and 2018, respectively. The decrease in spending in fiscal 2020 compared to the prior year was primarily due to reductions in incentive-based compensation, project spending and headcount in as part of our ongoing efficiency efforts within R&D. As of July 31, 2020, 232 individuals were engaged in R&D activities for the Company, which is a decrease from 249 as of July 31, 2019.
Operations
The materials used in the products manufactured consist of a variety of plastic and synthetic films, paper, metal and metal foil, cloth, fiberglass, inks, dyes, adhesives, pigments, natural and synthetic rubber, organic chemicals, polymers, and solvents for consumable identification products in addition to electronic components, molded parts and sub-assemblies for printing systems. The Company operates coating facilities manufacturing bulk rolls of label stock for internal and external customers. In addition, the Company purchases finished products for resale.
The Company purchases raw materials, components and finished products from many suppliers. Overall, we are not dependent upon any single supplier for our most critical base materials or components; however, we have chosen in certain situations to sole source, or limit the sources of materials, components, or finished items for design or cost reasons. As a result, disruptions in supply could have an impact on results for a period of time, but we believe any disruptions would simply require qualification of new suppliers and the disruption would be modest. In certain instances, the qualification process could be more costly or take a longer period of time and in certain situations, such as a global shortage of critical materials or components, the financial impact could be material.
The Company carries working capital mainly related to accounts receivable and inventory. Inventory consists of raw materials, work in process and finished goods. Generally, custom products are made to order while an on-hand quantity of stock product is maintained to provide customers with timely delivery. Normal and customary payment terms range from net 10 to 90 days from date of invoice and vary by geography.
The Company has a broad customer base, and no individual customer represents 10% or more of total net sales.
Average time to fulfill customer orders varies from same-day to one month, depending on the type of product, customer request, and whether the product is stock or custom-designed and manufactured. The Company's backlog is not material, does not provide significant visibility for future business and is not pertinent to an understanding of the business.
Environment
Compliance with federal, state and local environmental protection laws during the fiscal year ended July 31, 2020 did not have a material impact on the Company’s business, financial condition or results of operations.
Employees
As of July 31, 2020, the Company employed approximately 5,400 individuals. Brady has never experienced a material work stoppage due to a labor dispute and considers its relations with employees to be good.
Information Available on the Internet
The Company’s Corporate Internet address is www.bradyid.com. The Company makes available, free of charge, on or through its Internet website copies of its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to all such reports as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. The Company is not including the information contained on or available through its website as part of, or incorporating such information by reference into, this Annual Report on Form 10-K.
Item 1A. Risk Factors
Investors should carefully consider the risks set forth below and all other information contained in this report and other documents we file with the SEC. The risks and uncertainties described below are those that we have identified as material, but are not the only risks and uncertainties facing us. Our business is also subject to general risks and uncertainties that affect many other companies, such as market conditions, geopolitical events, changes in laws or accounting rules, fluctuations in
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interest rates, terrorism, wars or conflicts, major health concerns, natural disasters or other disruptions of expected economic or business conditions. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may impair our business and financial results.
Business Risks
Our results of operations have been and may in the future be adversely impacted by the COVID-19 pandemic or other pandemics, and the duration and extent to which it will impact our business and financial results remains uncertain.
The global spread of COVID-19 has resulted in significant economic disruption, has negatively impacted our financial results, and significantly increased future uncertainty. The extent to which our business and financial results are further impacted will depend on numerous evolving factors which are uncertain and cannot be predicted, including: the duration and scope of the pandemic; governmental, business and individuals’ actions taken in response; the effect on our customers and customers’ demand for our services and products; the decrease in healthcare services provided; the effect on our suppliers and disruptions to the global supply chain; our ability to sell and manufacture our products; disruptions to our operations resulting from the illness of any of our employees; restrictions or disruptions to transportation, including reduced availability of ground or air transport; the ability of our customers to pay for our products; and any closures of our facilities, our suppliers’ facilities, and our customers’ facilities. The effects of the COVID-19 pandemic have resulted and will result in additional expenses, lost or delayed revenue, and we have been experiencing disruptions to our business and additional expenses as we implement modifications to employee travel, work locations and cancellation of events, among other modifications. In addition, the deterioration of macroeconomic conditions may impact the proper functioning of financial and capital markets, foreign currency exchange rates, commodity and energy prices, and interest rates. Even after the COVID-19 pandemic subsides, we may continue to experience adverse impacts to our business and financial results due to any economic recession or depression that has occurred, and due to any major public health crises that may occur in the future.
Although our current accounting estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could differ from our expectations, which could materially affect our results of operations and financial position. In particular, a number of estimates have been and will continue to be affected by the ongoing COVID-19 pandemic. The severity, magnitude and duration, as well as the economic consequences of the COVID-19 pandemic, are uncertain, rapidly changing and difficult to predict. As a result, our accounting estimates and assumptions may change over time in response to COVID-19. Such changes could result in future impairments of goodwill, intangible assets, long-lived assets, incremental credit losses on accounts receivable, excess and obsolete inventory, or a decrease in the carrying amount of our deferred tax assets. Any of these events could amplify the other risks and uncertainties described in this Annual Report on Form 10-K for the fiscal year ended July 31, 2020 and could have an adverse effect on our business and financial results.
Demand for our products may be adversely affected by numerous factors, some of which we cannot predict or control. This could adversely affect our business and financial results.
Numerous factors may affect the demand for our products, including:
Deterioration of economic conditions in major markets served.
Ongoing economic and operational impact of the COVID-19 or other pandemics.
Consolidation in the marketplace allowing competitors to be more efficient and more price competitive.
Competitors entering the marketplace.
Decreasing product life cycles.
Changes in customer preferences.
Ability to achieve operational excellence.
If any of these factors occur, the demand for our products could suffer, and this could adversely impact our business and financial results.
Failure to compete effectively or to successfully execute our strategy may have a negative impact on our business and financial results.
We actively compete with companies that produce and market the same or similar products, and in some instances, with companies that sell different products that are designed for the same end user. Competition may force us to reduce prices or incur additional costs to remain competitive in an environment in which business models are changing rapidly. We compete on the basis of several factors, including customer support, product innovation, product offering, product quality, price, expertise, digital capabilities, production capabilities, and for multinational customers, our global footprint. Present or future competitors may develop and introduce new and enhanced products, offer products based on alternative technologies and processes, accept
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lower profit, have greater financial, technical or other resources, or have lower production costs or other pricing advantages. Any of these could put us at a disadvantage by threatening our share of sales or reducing our profit margins, which could adversely impact our business and financial results.
Additionally, throughout our global business, distributors and customers may seek lower cost sourcing opportunities, which could result in a loss of business that may adversely impact our business and financial results.
Our strategy is to expand into higher-growth adjacent product categories and markets with technologically advanced new products, as well as to grow our sales generated through the digital channel. While traditional direct marketing channels such as catalogs are an important means of selling our products, an increasing number of customers are purchasing products on the internet. Our strategy to increase sales through the digital channel is an investment in our internet sales capabilities. There is a risk that we may not continue to successfully implement this strategy, or if successfully implemented, not realize its expected benefits due to the continued levels of increased competition and pricing pressure brought about by the internet. Our failure to successfully implement our strategy could adversely impact our business and financial results.
Failure to develop technologically advanced products that meet customer demands, including price expectations, could adversely impact our business and financial results.
Development of technologically advanced new products is targeted as a driver of our organic growth and profitability. Technology is changing rapidly and our competitors are innovating quickly. If we do not keep pace with developing technologically advanced products, we risk product commoditization, deterioration of the value of our brand, and reduced ability to effectively compete. We must continue to develop innovative products, as well as acquire and retain the necessary intellectual property rights in these products. If we fail to innovate, or we launch products with quality problems, or if customers do not accept our products, then our business and financial results could be adversely affected.
Raw material and other cost increases could adversely affect our business and financial results.
We manufacture certain parts and components of our products and therefore require raw materials from suppliers, which could be interrupted for a variety of reasons, including availability and pricing. Prices for raw materials necessary for production have fluctuated in the past and significant increases could adversely affect our profit margins and results of operations. Changes in trade policies, shortages due to the COVID-19 or other pandemics, the imposition of duties and tariffs and potential retaliatory countermeasures could adversely impact the price or availability of raw materials. In addition, labor shortages or an increase in the cost of labor could adversely affect our profit margins and results of operations. Due to pricing pressure or other factors, the Company may not be able to pass along increased raw material and component part costs to its customers in the form of price increases or its ability to do so could be delayed, which could adversely impact our business and financial results.
Our failure or the failure of third-party service providers to protect our sites, networks and systems against security breaches, to protect our confidential information, or to facilitate our digital strategy, could adversely affect our business and financial results.
Our business systems collect, transmit and store data about our customers, vendors and others, including credit card information and personally identifiable information. We also employ third-party service providers that store, process and transmit proprietary, personal and confidential information on our behalf. We rely on encryption and authentication technology licensed from third parties in an effort to securely transmit confidential and sensitive information, including credit card numbers. Our security measures, and those of our third-party service providers, may not detect or prevent all attempts to hack our systems, denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or other similar disruptions that may jeopardize the security of information stored in or transmitted by our sites, networks and systems or that we or our third-party service providers otherwise maintain. We engage third-party service providers to assist with certain of our website and digital platform upgrades, which may result in a decline in sales when initially deployed, which could have an adverse effect on our business and financial results.
We and our service providers may not have the resources or technical sophistication to anticipate or prevent all types of attacks, and techniques used to obtain unauthorized access to or to sabotage systems change frequently and may not be known until launched against us or our third-party service providers. In addition, security breaches can also occur as a result of non-technical issues, including intentional or inadvertent breaches by our employees or by persons with whom we have commercial relationships. Although we maintain privacy, data breach and network security liability insurance, we cannot be certain that our coverage will be adequate or will cover liabilities actually incurred, or that insurance will continue to be available to us on economically reasonable terms, or at all. Any compromise or breach of our security measures, or those of our third-party service providers, could adversely impact our ability to conduct business, violate applicable privacy, data security and other
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laws, and cause significant legal and financial exposure, adverse publicity, and a loss of confidence in our security measures, which could have an adverse effect on our business and financial results.
We are a global company headquartered in the United States. We are subject to extensive regulations by U.S. and non-U.S. governmental and self-regulatory entities at various levels of the governing bodies. Failure to comply with laws and regulations could adversely affect our business and financial results.
Approximately 45% of our sales are derived outside of the United States. Our operations are subject to the risks of doing business domestically and globally, including the following:
Delays or disruptions in product deliveries and payments in connection with international manufacturing and sales.
Regulations resulting from political and economic instability and disruptions.
Imposition of new, or change in existing, duties, tariffs and trade agreements, which could have a direct or indirect impact on our ability to manufacture products, on our customers' demand for our products, or on our suppliers' ability to deliver raw materials.
Import, export and economic sanction laws.
Current and changing governmental policies, regulatory, and business environments.
Disadvantages from competing against companies from countries that are not subject to U.S. laws and regulations including the Foreign Corrupt Practices Act.
Local labor regulations.
Regulations relating to climate change, air emissions, wastewater discharges, handling and disposal of hazardous materials and wastes.
Regulations relating to product content, health, safety and the protection of the environment.
Imposition of trade or travel restrictions as a result of the COVID-19 or other pandemics.
Specific country regulations where our products are manufactured or sold.
Regulations relating to compliance with data protection and privacy laws throughout our global business.
Laws and regulations that apply to companies doing business with the government, including audit requirements of government contracts related to procurement integrity, export control, employment practices, and the accuracy of records and recording of costs.
Further, these laws and regulations are constantly evolving and it is difficult to accurately predict the effect they may have upon our business and financial results.
We cannot provide assurance that our internal controls and compliance systems will always protect us from acts committed by employees, agents or business partners that would violate U.S. and/or non-U.S. laws, including the laws governing payments to government officials, bribery, fraud, anti-kickback and false claims rules, competition, export and import compliance, money laundering and data privacy. Any such improper actions could subject us to civil or criminal investigations in the U.S. and in other jurisdictions, lead to substantial civil or criminal, monetary and non-monetary penalties and related lawsuits by shareholders and others, damage our reputation, and adversely impact our business and financial results.
We depend on key employees and the loss of these individuals could have an adverse effect on our business and financial results.
Our success depends to a large extent upon the continued services of our key executives, managers and other skilled employees. We cannot ensure that we will be able to retain our key executives, managers and employees. The departure of key personnel without adequate replacement could disrupt our business operations. Additionally, we need qualified managers and skilled employees with technical and 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 business and financial results could be adversely affected.
Divestitures, contingent liabilities from divested businesses and the failure to properly identify, integrate and grow acquired companies could adversely affect our business and financial results.
We continually assess the strategic fit of our existing businesses and may divest businesses that we determine do not align with our strategic plan, or that are not achieving the desired return on investment. Divestitures pose risks and challenges that could negatively impact our business. When we decide to sell a business or specific assets, we may be unable to do so on satisfactory terms or within our anticipated time-frame, and even after reaching a definitive agreement to sell a business, the sale is typically subject to pre-closing conditions which may not be satisfied. In addition, the impact of the divestiture on our revenue and net income may be larger than projected, which could distract management, and disputes may arise with buyers. We have retained responsibility for and have agreed to indemnify buyers against certain contingent liabilities related to several
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businesses that we have sold. The resolution of these contingencies has not had a material adverse impact on our financial results, but we cannot be certain that this favorable pattern will continue.
Our historical growth has included acquisitions, and our future growth strategy may include acquisitions. If our future growth strategy includes a focus on acquisitions, we may not be able to identify acquisition targets or successfully complete acquisitions due to the absence of quality companies in our target markets, economic conditions, or price expectations from sellers. Acquisitions place significant demands on management, operational, and financial resources. Future acquisitions will require integration of operations, sales and marketing, information technology, and administrative operations, which could decrease the time available to focus on our other growth strategies. We cannot assure that we will be able to successfully integrate acquisitions, that these acquisitions will operate profitably, or that we will be able to achieve the desired sales growth or operational success. Our business and financial results could be adversely affected if we do not successfully integrate the newly acquired businesses, or if our other businesses suffer due to the increased focus on the acquired businesses.
We are subject to litigation, including product liability claims that could adversely impact our business, financial results, and reputation.
We are a party to litigation that arises in the normal course of our business operations, including product liability and recall (strict liability and negligence) claims, patent and trademark matters, contract disputes and environmental, employment and other litigation matters. We face an inherent business risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in injury or other damage. In addition, we face an inherent risk that our competitors will allege that aspects of our products infringe their intellectual property or that our intellectual property is invalid, such that we could be prevented from manufacturing and selling our products or prevented from stopping others from manufacturing and selling competing products. To date, we have not incurred material costs related to these types of claims. However, while we currently maintain insurance coverage for certain types of claims that we believe is adequate, we cannot be certain that we will be able to maintain this insurance on acceptable terms or that this insurance will provide sufficient coverage against potential liabilities that may arise. Any claims brought against us, with or without merit, may have an adverse effect on our business, financial results and reputation as a result of potential adverse outcomes. The expenses associated with defending such claims and the diversion of our management’s resources and time may have an adverse effect on our business and financial results.
Financial/Ownership Risks
The global nature of our business exposes us to foreign currency fluctuations that could adversely affect our business and financial results.
Approximately 45% of our sales are derived outside the United States. Sales and purchases in currencies other than the U.S. dollar expose us to fluctuations in foreign currencies relative to the U.S. dollar, and may adversely affect our financial results. Increased strength of the U.S. dollar will increase the effective price of our products sold in currencies other than U.S. dollars into other countries. Decreased strength of the U.S. dollar could adversely affect the cost of materials, products, and services purchased overseas. Our sales and expenses are translated into U.S. dollars for reporting purposes, and the strengthening of the U.S. dollar could result in unfavorable translation effects, which occurred during fiscal years 2019 and 2020. In addition, certain of our subsidiaries may invoice customers in a currency other than its functional currency or may be invoiced by suppliers in a currency other than its functional currency, which could result in unfavorable translation effects on our business and financial results.
Failure to execute our strategies could result in impairment of goodwill or other intangible assets, which may negatively impact income and profitability.
We have goodwill of $416.0 million and other intangible assets of $22.3 million as of July 31, 2020, which represents 38.4% of our total assets, and we have recognized impairment charges in the past. We evaluate goodwill and other intangible assets for impairment on an annual basis, or more frequently if impairment indicators are present, based upon the fair value of each respective asset. The valuations prepared for the required impairment test include management's estimates of sales, profitability, cash flow generation, capital structure, cost of debt, interest rates, capital expenditures, and other assumptions. Significant negative industry or economic trends, disruptions to our business, inability to achieve sales projections or cost savings, inability to effectively integrate acquired businesses, unexpected changes in the use of the assets, and divestitures may adversely impact the assumptions used in the valuations. If the estimated fair value of our goodwill or other intangible assets change in future periods, we may be required to record an impairment charge, which would reduce net income in such period.
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Changes in tax legislation or tax rates could adversely affect results of operations and financial statements. Additionally, audits by taxing authorities could result in tax payments for prior periods.
We are subject to income taxes in the U.S. and in many non-U.S. jurisdictions. As such, our income is subject to risk due to changing tax laws and tax rates around the world. Our tax filings are subject to audit by U.S. federal, state and local tax authorities and by non-U.S. tax authorities. If these audits result in payments or assessments that differ from our reserves, our future net income may be adversely impacted.
We review the probability of the realization of our deferred tax assets quarterly based on forecasts of taxable income in both the U.S. and foreign jurisdictions. As part of this review, we utilize historical results, projected future operating results, eligible carry-forward periods, tax planning opportunities, and other relevant considerations. Changes in profitability and financial outlook in both the U.S. and/or foreign jurisdictions, or changes in our geographic footprint may require modifications in the valuation allowance for deferred tax assets. At any point in time, there are a number of tax proposals at various stages of legislation throughout the globe. While it is impossible for us to predict whether some or all of these proposals will be enacted, many will likely have an impact on our business and financial results.
Substantially all of our voting stock is controlled by two shareholders, while our public investors hold non-voting stock. The interests of the voting and non-voting shareholders could differ, potentially resulting in decisions that affect the value of the non-voting shares.
Substantially all of our voting stock is controlled by Elizabeth P. Bruno, one of our Directors, and William H. Brady III, both of whom are descendants of the Company's founder. All of our publicly traded shares are non-voting. Therefore, the voting shareholders have control in most matters requiring approval or acquiescence by shareholders, including the composition of our Board of Directors and many corporate actions, and their interests may not align with those of the non-voting shareholders. Such concentration of ownership may discourage a potential acquirer from making a purchase offer that our public shareholders may find favorable and it may adversely affect the trading price for our non-voting common stock because investors may perceive disadvantages in owning stock in companies whose voting stock is controlled by a limited number of shareholders. Additionally, certain mutual funds and index sponsors have implemented rules restricting ownership, or excluding from indices, companies with non-voting publicly traded shares.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company currently operates 38 manufacturing and distribution facilities across the globe and are split by reporting segment as follows:
IDS: Twenty-nine manufacturing and distribution facilities are used for our IDS business. Six are located in the United States; four each in China and Belgium; three in Mexico; two each in Brazil and the United Kingdom; and one each in Canada, India, Japan, Malaysia, Netherlands, Singapore, South Africa, and Thailand.
WPS: Nine manufacturing and distribution facilities are used for our WPS business. Three are located in France; two are located in Australia; and one each in Germany, Norway, the United Kingdom, and the United States.
The Company believes that its equipment and facilities are modern, well maintained, and adequate for present needs.
Item 3. Legal Proceedings
The Company is, and may in the future be, named as a defendant in various legal proceedings and claims that arise in the normal course of business in which claims are asserted against the Company. The Company records a liability for these legal actions when a loss is known or considered probable and the amount can be reasonably estimated. The Company is not currently a party to any material pending legal proceedings in which management believes the ultimate resolution would have a material effect on the Company’s consolidated financial statements.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a)Market Information
Brady Corporation Class A Nonvoting Common Stock trades on the New York Stock Exchange under the symbol BRC. There is no trading market for the Company’s Class B Voting Common Stock.
(b)Holders
As of August 31, 2020, there were approximately 1,100 Class A Common Stock shareholders of record and approximately 9,000 beneficial shareholders. There are three Class B Common Stock shareholders.
(c)Dividends
The Company has historically paid quarterly dividends on outstanding common stock. Before any dividend may be paid on the Class B Common Stock, holders of the Class A Common Stock are entitled to receive an annual, noncumulative cash dividend of $0.01665 per share (subject to adjustment in the event of future stock splits, stock dividends or similar events involving shares of Class A Common Stock). Thereafter, any further dividend in that fiscal year must be paid on all shares of Class A Common Stock and Class B Common Stock on an equal basis. The Company believes that based on its historic dividend practice, this requirement will not impede it in following a similar dividend practice in the future.
During the two most recent fiscal years and for the first quarter of fiscal 2021, the Company declared the following dividends per share on its Class A and Class B Common Stock for the years ended July 31: 
 202120202019
 1st Qtr1st Qtr2nd Qtr3rd Qtr4th Qtr1st Qtr2nd Qtr3rd Qtr4th Qtr
Class A$0.22 $0.2175 $0.2175 $0.2175 $0.2175 $0.2125 $0.2125 $0.2125 $0.2125 
Class B0.20335 0.20085 0.2175 0.2175 0.2175 0.19585 0.2125 0.2125 0.2125 
(d)Issuer Purchases of Equity Securities
The Company has a share repurchase program for the Company’s Class A Nonvoting Common Stock. The plan may be implemented by purchasing shares in the open market or in privately negotiated transactions, with repurchased shares available for use in connection with the Company’s stock-based plans and for other corporate purposes. On February 16, 2016, the Company's Board of Directors authorized a share repurchase program of 2,000,000 shares. As of July 31, 2020, there were 461,796 shares authorized to purchase in connection with this share repurchase program.
The following table provides information with respect to the purchase of Class A Nonvoting Common Stock during the three months ended July 31, 2020:
PeriodTotal Number of Shares PurchasedAverage Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced PlansMaximum Number of Shares That May Yet Be Purchased Under the Plans
May 1, 2020 - May 31, 202010,029 $39.95 10,029 461,796 
June 1, 2020 - June 30, 2020   461,796 
July 1, 2020 - July 31, 2020   461,796 
Total10,029 $39.95 10,029 461,796 
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(e)Common Stock Price Performance Graph
The graph below shows a comparison of the cumulative return over the last five fiscal years had $100 been invested at the close of business on July 31, 2015, in each of Brady Corporation Class A Common Stock, the Standard & Poor’s ("S&P") 500 Index, the S&P SmallCap 600 Index, and the Russell 2000 Index.

brc-20200731_g1.gif

201520162017201820192020
Brady Corporation$100.00 $141.41 $149.56 $176.13 $242.63 $219.50 
S&P 500 Index100.00 105.48 122.40 142.28 153.64 172.01 
S&P SmallCap 600 Index100.00 105.86 124.55 153.34 142.99 130.59 
Russell 2000 Index100.00 99.93 118.38 140.55 134.34 128.18 

Copyright (C) 2020, Standard & Poor’s, Inc. and Russell Investments. All rights reserved.
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Item 6. Selected Financial Data
CONSOLIDATED STATEMENTS OF INCOME AND SELECTED FINANCIAL DATA
Years Ended July 31, 2016 through 2020
20202019201820172016
(In thousands, except per share amounts)
Operating data
Net sales$1,081,299 $1,160,645 $1,173,851 $1,113,316 $1,120,625 
Gross margin528,565 578,678 588,291 558,292 558,773 
Operating expenses:
Research and development 40,662 45,168 45,253 39,624 35,799 
Selling, general and administrative(1)
336,059 371,082 390,342 387,653 405,096 
Impairment charges(2)
13,821     
Total operating expenses390,542 416,250 435,595 427,277 440,895 
Operating income138,023 162,428 152,696 131,015 117,878 
Other income (expense):
Investment and other income (expense)5,079 5,046 2,487 1,121 (709)
Interest expense(2,166)(2,830)(3,168)(5,504)(7,824)
Net other income (expense)2,913 2,216 (681)(4,383)(8,533)
Income before income taxes and losses of unconsolidated affiliate140,936 164,644 152,015 126,632 109,345 
Income tax expense(3)
28,321 33,386 60,955 30,987 29,235 
Income before losses of unconsolidated affiliate$112,615 $131,258 $91,060 $95,645 $80,110 
Equity in losses of unconsolidated affiliate(4)
(246)    
Net income$112,369 $131,258 $91,060 $95,645 $80,110 
Net income per Common Share— (Diluted):
Class A nonvoting$2.11 $2.46 $1.73 $1.84 $1.58 
Class B voting$2.10 $2.45 $1.72 $1.83 $1.56 
Cash Dividends on:
Class A common stock$0.87 $0.85 $0.83 $0.82 $0.81 
Class B common stock$0.85 $0.83 $0.81 $0.80 $0.79 
Balance Sheet at July 31:
Total assets$1,142,466 $1,157,308 $1,056,931 $1,050,223 $1,043,964 
Long-term debt, less current maturities  52,618 104,536 211,982 
Stockholders’ equity863,072 850,774 752,112 700,140 603,598 
Cash Flow Data:
Net cash provided by operating activities$140,977 $162,211 $143,042 $144,032 $138,976 
Net cash used in investing activities(36,119)(34,463)(2,905)(15,253)(15,416)
Net cash used in financing activities(163,520)(27,628)(90,680)(136,241)(99,576)
Depreciation and amortization23,437 23,799 25,442 27,303 32,432 
Capital expenditures(27,277)(32,825)(21,777)(15,167)(17,140)
(1)During fiscal 2018, the Company recognized a gain of $4.7 million on the sale of its Runelandhs Försäljnings AB business which was recorded as a reduction of selling, general and administrative expense.
(2)The Company recognized impairment charges of $13.8 million during the fiscal year ended July 31, 2020, primarily related to other intangible and long-lived assets of the WPS business.
(3)Fiscal 2018 was significantly impacted by the Tax Reform Act which resulted in total incremental tax expense of $21.1 million, which consisted of $1.0 million related to the recording of a deferred tax liability for future withholdings and income taxes on the distribution of foreign income, an income tax charge of $3.3 million related to the deemed repatriation of the historical income of foreign subsidiaries, and the impact of the Tax Reform Act on the revaluation of deferred tax assets and liabilities of $16.8 million.
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(4)During fiscal 2020, the Company invested $6.0 million in React Mobile, Inc., an employee safety software and hardware company based in the United States, which is accounted for as an equity method investment. Equity in losses of unconsolidated affiliate of $0.2 million in fiscal 2020 represented the Company's equity interest in React Mobile, Inc.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a global manufacturer and supplier of identification solutions and workplace safety products that identify and protect premises, products and people. The IDS segment is primarily involved in the design, manufacture, and distribution of high-performance and innovative identification and healthcare products. The WPS segment provides workplace safety and compliance products, approximately half of which are internally manufactured and half of which are externally sourced. Approximately 45% of our total sales are derived outside of the United States. Foreign sales within the IDS and WPS segments are approximately 40% and 70%, respectively.
The ability to provide customers with a broad range of proprietary, customized and diverse products for use in various applications across multiple industries and geographies, along with a commitment to quality and service, have made Brady a leader in many of its markets. The long-term sales growth and profitability of our segments will depend not only on improved demand in end markets and the overall economic environment, but also on our ability to continuously improve the efficiency of our global operations, deliver a high level of customer service, develop and market innovative new products, and to advance our digital capabilities. In our IDS business, our strategy for growth includes an increased focus on certain industries and products, a focus on improving the customer buying experience, and the development of technologically advanced, innovative and proprietary products. In our WPS business, our strategy for growth includes a focus on workplace safety critical industries, innovative new product offerings, compliance expertise, customization expertise, and improving our digital capabilities.
Impact of the COVID-19 Pandemic on Our Business
The impact of the COVID-19 pandemic on the global economic environment has resulted in reduced demand across the majority of our end markets. In the near-term, the COVID-19 pandemic is expected to continue to have adverse effects on our sales, overall profitability, and cash provided by operating activities. As of the date of this filing, significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic.
Brady Corporation is deemed an essential business under the majority of local government orders. Our products support first responders, healthcare workers, food processing companies, and many other critical industries. Certain of our businesses were shutdown temporarily and many employees worked remotely during the second half of 2020, which had a negative impact on our financial results, operations, and employee productivity. However, the majority of our facilities were operating globally while implementing enhanced safety protocols designed to protect the well-being of our employees.
We have taken actions throughout our business to reduce controllable costs, including actions to reduce labor costs, eliminating non-essential travel, and reducing discretionary spend. We believe we have the financial strength to continue to invest in organic sales growth opportunities and R&D, while continuing to drive efficiencies and automation in our operations and selling, general and administrative expenses ("SG&A") functions. At July 31, 2020, we had cash of $217.6 million, an undrawn credit facility of $200 million, which can be increased up to $400 million at the Company's option and subject to certain conditions, and outstanding letters of credit of $3.1 million, for total available liquidity of approximately $615 million.
Due to the speed with which the COVID-19 pandemic has developed and the resulting uncertainty, including the depth and duration of any disruptions to customers and suppliers, its future effect on our business, results of operations, and financial condition cannot be predicted. Despite this uncertainty, we believe that our financial resources, liquidity levels and no outstanding debt, along with various contingency plans to reduce costs are sufficient to manage the impact of the COVID-19 pandemic, which may result in reduced sales, reduced net income, and reduced cash provided by operating activities. Refer to Risk Factors, included in Part I, Item 1A of this Annual Report on Form 10-K, for further discussion of the possible impact of the COVID-19 pandemic on our business.
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Results of Operations
A comparison of results of operating income for the fiscal years ended July 31, 2020, 2019, and 2018 is as follows:
(Dollars in thousands)2020% Sales2019% Sales2018% Sales
Net sales$1,081,299 $1,160,645 $1,173,851 
Gross margin528,565 48.9 %578,678 49.9 %588,291 50.1 %
Operating expenses:
Research and development40,662 3.8 %45,168 3.9 %45,253 3.9 %
Selling, general and administrative336,059 31.1 %371,082 32.0 %390,342 33.3 %
Impairment charges13,821 1.3 %  %  %
Total operating expenses390,542 36.1 %416,250 35.9 %435,595 37.1 %
Operating income$138,023 12.8 %$162,428 14.0 %$152,696 13.0 %

A discussion regarding our financial condition and results of operations for fiscal 2019 compared to fiscal 2018 can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended July 31, 2019, filed with the SEC on September 6, 2019, which is available free of charge on the SEC's website at www.sec.gov and our corporate website at www.bradyid.com/corporate/investors. References in this Form 10-K to “organic sales” refer to net sales calculated in accordance with U.S. GAAP, excluding the impact of foreign currency translation and divestitures. The Company’s organic sales disclosures exclude the effects of foreign currency translation as foreign currency translation is subject to volatility that can obscure underlying business trends. Management believes that the non-GAAP financial measure of organic sales is meaningful to investors as it provides them with useful information to aid in identifying underlying sales trends in our businesses and facilitating comparisons of our sales performance with prior periods. All analytical commentary within the Results of Operations section regarding the change in sales when compared to prior periods are in reference to organic sales unless otherwise noted.
Net sales decreased 6.8% to $1,081.3 million in fiscal 2020, compared to $1,160.6 million in fiscal 2019, which consisted of an organic sales decline of 5.4% and a decrease from foreign currency translation of 1.4%. Organic sales declined 8.0% in the IDS segment and grew 2.3% in the WPS segment.
The COVID-19 pandemic had a significant impact on organic sales during the second half of 2020, with the impact varying between the IDS and WPS segments. The IDS segment realized reduced demand across all major product lines beginning in the third quarter which continued throughout the fourth quarter, while the WPS segment realized essentially flat organic sales in the third quarter, which improved to 10.8% organic sales growth in the fourth quarter primarily due to increased sales of personal protective equipment and other pandemic-related products. In total, the rate of decline in organic sales decreased through the fourth quarter of fiscal 2020.
Gross margin decreased 8.7% to $528.6 million in fiscal 2020, compared to $578.7 million in fiscal 2019. As a percentage of net sales, gross margin decreased to 48.9% in fiscal 2020, compared to 49.9% in fiscal 2019. The decrease in gross margin as a percentage of net sales was primarily due to the decline in sales volumes resulting from the economic slowdown caused by the COVID-19 pandemic during second half of the fiscal 2020.
R&D expenses decreased to $40.7 million in fiscal 2020, compared to $45.2 million in fiscal 2019. The decrease in R&D expense in fiscal 2020 compared to the prior year was primarily due to a reduction in incentive-based compensation, and to a lesser extent a reduction in project spending and headcount. The Company remains committed to investing in new product development to increase sales within our IDS and WPS businesses. Investments in new printers and materials continue to be the primary focus of R&D expenditures, along with investment in products specifically designed for the fight against COVID-19.
SG&A expenses include selling and administrative costs directly attributed to the IDS and WPS segments, as well as certain other corporate administrative expenses including finance, information technology, human resources, and other administrative expenses. SG&A expenses decreased 9.4% to $336.1 million in fiscal 2020 compared to $371.1 million in fiscal 2019. SG&A expense as a percentage of net sales was 31.1% in fiscal 2020 compared to 32.0% in fiscal 2019. The decrease in both SG&A expenses and SG&A expenses as a percentage of net sales from the prior year was due to ongoing efficiency gains and continued efforts to reduce selling, general and administrative costs, reduced incentive-based compensation, and a decline in headcount. Increased cost associated with the COVID-19 pandemic during the second half of the fiscal year, including employee severance and other related costs, were effectively offset by reduced incentive-based compensation.
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Impairment charges of $13,821 were recognized in fiscal 2020 due to a decline in sales in certain businesses primarily in the WPS segment. Refer to Note 3, "Other Intangible and Long-Lived Assets" for further information regarding impairment charges.

OPERATING INCOME TO NET INCOME
(Dollars in thousands)2020% Sales2019% Sales2018% Sales
Operating income$138,023 12.8 %$162,428 14.0 %$152,696 13.0 %
Other income (expense):
         Investment and other income5,079 0.5 %5,046 0.4 %2,487 0.2 %
         Interest expense(2,166)(0.2)%(2,830)(0.2)%(3,168)(0.3)%
Income before income taxes and losses of unconsolidated affiliate140,936 13.0 %164,644 14.2 %152,015 13.0 %
Income tax expense28,321 2.6 %33,386 2.9 %60,955 5.2 %
Income before losses of unconsolidated affiliate112,615 10.4 %131,258 11.3 %91,060 7.8 %
Equity in losses of unconsolidated affiliate(246) %  %  %
Net income$112,369 10.4 %$131,258 11.3 %$91,060 7.8 %

Investment and Other Income
Investment and other income was $5.1 million in fiscal 2020 compared to $5.0 million in fiscal 2019. Reduced interest income in fiscal 2020 was effectively offset by an increase in the market value of securities held in deferred compensation plans compared to fiscal 2019.
Interest Expense
Interest expense decreased to $2.2 million in fiscal 2020 compared to $2.8 million in fiscal 2019. The decrease in interest expense was due to the repayment of the Company's remaining principal balance under its private placement debt agreement during the quarter ended July 31, 2020.
Income Tax Expense
The Company's effective income tax rate was 20.1% in fiscal 2020. The effective income tax rate was below the applicable U.S. statutory tax rate of 21.0% primarily due to the favorable settlement of a domestic income tax audit and tax benefits from stock-based compensation, which were partially offset by an increase in the foreign income tax rate differential.
The Company's effective income tax rate was 20.3% in fiscal 2019. The effective income tax rate was below the applicable U.S. statutory tax rate of 21.0% primarily due to adjustments to the reserve for uncertain tax positions and R&D tax credits, partially offset by non-deductible executive compensation and the tax rate differential on foreign income.
Equity in Losses of Unconsolidated Affiliate
Equity in losses of unconsolidated affiliate of $0.2 million in fiscal 2020 represented the Company's equity interest in React Mobile, Inc., an employee safety software and hardware company based in the United States.
Business Segment Operating Results
The Company evaluates short-term segment performance based on segment profit and customer sales. Impairment charges, interest expense, investment and other income, income tax expense, equity in losses of unconsolidated affiliate, and certain corporate administrative expenses are excluded when evaluating segment performance.
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Following is a summary of segment information for the fiscal years ended July 31:
202020192018
SALES GROWTH INFORMATION
ID Solutions
Organic(8.0)%4.1 %3.4 %
Currency(1.1)%(2.1)%2.3 %
Total(9.1)%2.0 %5.7 %
Workplace Safety
Organic2.3 %(0.7)%0.7 %
Currency(2.6)%(3.7)%4.6 %
Divestitures %(4.8)%(0.6)%
Total(0.3)%(9.2)%4.7 %
Total Company
Organic(5.4)%2.8 %2.6 %
Currency(1.4)%(2.6)%3.0 %
Divestitures %(1.3)%(0.2)%
Total(6.8)%(1.1)%5.4 %
SEGMENT PROFIT AS A PERCENT OF NET SALES
ID Solutions19.2 %19.1 %16.9 %
Workplace Safety7.1 %7.7 %9.7 %
Total15.9 %16.2 %14.9 %

ID Solutions
IDS net sales decreased 9.1% to $784.7 million in fiscal 2020, compared to $863.1 million in fiscal 2019. The net sales decrease consisted of an organic sales decline of 8.0% and a decrease from foreign currency translation of 1.1%. The economic slowdown caused by the COVID-19 pandemic had a significant impact on organic sales trends during the second half of fiscal 2020, in large part due to the varied government responses to the pandemic. Following a 0.7% organic sales decline through the first half of fiscal 2020, organic sales declined in all product lines in the second half of the year resulting in an 8.0% organic sales decline in fiscal 2020.
Organic sales in the Americas region declined in the high-single digits in fiscal 2020 compared to fiscal 2019. Organic sales declined in all major product lines during the second half of fiscal 2020 due to the economic slowdown caused by the COVID-19 pandemic. Organic sales declined in the high-single digits in the U.S., Canada, and Brazil, and declined in the low-teens in Mexico.
Organic sales in Europe decreased in the low-teens in fiscal 2020 compared to fiscal 2019. The decline was broad-based throughout Europe due to the economic slowdown caused by the COVID-19 pandemic in the second half of fiscal 2020, except within a group of small businesses based in the Nordic region. Organic sales declined in all major product lines in the second half of 2020 due to the economic slowdown caused by the COVID-19 pandemic.
Organic sales in Asia decreased in the low-single digits in fiscal 2020 compared to fiscal 2019. The COVID-19 pandemic had a varying impact on our Asian businesses in fiscal 2020 with a mid-single digit decline in China and a mid-teens decline in India, which were partially offset by a mid-single digit growth in Japan and Malaysia. Organic sales declined in the safety and facility identification product line, which was partially offset by growth in the product identification and wire identification product lines which occurred in the first half of fiscal 2020.
Segment profit decreased to $150.6 million in fiscal 2020 from $165.0 million in fiscal 2019, a decrease of $14.3 million or 8.7%. As a percent of net sales, segment profit increased to 19.2% in fiscal 2020, compared to 19.1% in fiscal 2019. The increase in segment profit as a percentage of sales was due to cost actions taken in response to the decline in revenue from the impact of the COVID-19 pandemic, reduced incentive-based compensation, and efficiency gains throughout SG&A during fiscal 2020.
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Workplace Safety
WPS sales decreased 0.3% to $296.6 million in fiscal 2020, compared to $297.5 million in fiscal 2019. The change in net sales consisted of organic sales growth of 2.3% and a decrease from foreign currency translation of 2.6%. The economic effect of the COVID-19 pandemic had a significant impact on organic sales trends during the second half of fiscal 2020. Organic sales decreased by 0.9% through the first half of fiscal 2020 and organic sales increased during the second half of the year, resulting in organic sales growth of 2.3% in fiscal 2020. Digital marketing was the driver of sales growth during the COVID-19 pandemic. Organic sales through the digital channel increased in the mid-teens in fiscal 2020, with the majority of this generated by 45% digital sales growth in the fourth quarter compared to the fourth quarter of fiscal 2019. The WPS business realized increased demand globally for personal protective equipment and other social distancing signage and floor markings resulting from the COVID-19 pandemic. Organic sales growth was generated entirely through the digital channel while sales through the traditional catalog channel decreased in the low-single digits in fiscal 2020 compared to fiscal 2019.
Organic sales in Europe increased in the mid-single digits in fiscal 2020 compared to fiscal 2019. Sales growth was driven by digital marketing campaigns emphasizing personal protective equipment and other pandemic-related products, which resulted in sales growth in the mid-teens. The U.K. and France led sales growth in the region, with both businesses growing organically in the mid-teens in fiscal 2020. This sales growth was partially offset by a mid-single digit decline in Germany.
Organic sales in North America decreased in the mid-single digits in fiscal 2020 compared to fiscal 2019. Digital channel sales were effectively flat and sales through the traditional catalog channel decreased in the high-single digits. The target customer demographic of one particular business in WPS North America consists primarily of small companies, of which many were subject to government-ordered shutdowns during the second half of fiscal 2020. This resulted in a significant decline in sales orders during the shutdowns which caused the majority of the decline in sales in fiscal 2020.
Organic sales in Australia increased in the low-teens in fiscal 2020 compared to fiscal 2019. Digital channel sales grew nearly 45%, which was driven by digital marketing campaigns emphasizing personal protective equipment and other pandemic-related products. Sales through the traditional catalog channel increased in the high-single digits. Australia was not impacted as severely by the COVID-19 pandemic as other countries in which we operate, and our Australian business generated increased sales in a variety of product categories related to mitigating the COVID-19 pandemic, including various types of personal protective equipment and other healthcare supplies.
Segment profit decreased to $21.0 million in fiscal 2020 compared to $23.0 million in fiscal 2019, a decrease of $2.0 million, or 8.7%. As a percentage of net sales, segment profit decreased to 7.1% in fiscal 2020 compared to 7.7% in fiscal 2019. The decrease in segment profit was due to increased reserves for inventory and the accelerated expense of previously capitalized catalog costs, as well as other costs incurred as a result of the COVID-19 pandemic, such as severance. These expenses were approximately $4.0 million, which were included in segment profit in 2020.
Liquidity & Capital Resources
The Company's cash balances are generated and held in numerous locations throughout the world. At July 31, 2020, approximately 68% of the Company's cash and cash equivalents were held outside the United States. 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 flow from operating activities and its borrowing capacity are sufficient to fund its anticipated requirements for working capital, capital expenditures, research and development, common stock repurchases, and dividend payments for the next 12 months. Although the Company believes these sources of cash are currently sufficient to fund domestic operations, annual cash needs could require repatriation of cash to the U.S. from foreign jurisdictions, which may result in additional tax payments.
Refer to Item 8, Note 6, "Debt" for information regarding the Company's credit facility.
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Cash Flows
Cash and cash equivalents were $217.6 million at July 31, 2020, a decrease of $61.4 million from July 31, 2019. The following summarizes the cash flow statement for the fiscal years ended July 31:
(Dollars in thousands)202020192018
Net cash flow provided by (used in):
Operating activities$140,977 $162,211 $143,042 
Investing activities(36,119)(34,463)(2,905)
Financing activities(163,520)(27,628)(90,680)
Effect of exchange rate changes on cash(2,767)(2,475)(1,974)
Net (decrease) increase in cash and cash equivalents$(61,429)$97,645 $47,483 

Net cash provided by operating activities was $141.0 million during fiscal 2020, compared to $162.2 million in fiscal 2019. The decrease was due to a decrease in net income adjusted for non-cash items and an increase in cash used for inventories in selected geographies to ensure adequate inventory to meet customer demand, which was partially offset by an increase in cash provided by accounts receivable.
Net cash used in investing activities was $36.1 million during fiscal 2020, compared to $34.5 million in the prior year. The increase in cash used in investing activities was primarily driven by the $6.0 million equity investment in React Mobile, Inc. and to a lesser extent by investment purchases to fund deferred compensation plans. These increases were partially offset by a decrease in capital expenditures during fiscal 2020 compared to fiscal 2019.
Net cash used in financing activities was $163.5 million during fiscal 2020, compared to $27.6 million during the prior year. The change was primarily driven by an increase of $61.3 million in share repurchases, $48.7 million in debt repayments, and a decrease of $20.1 million in cash proceeds from stock option exercises in fiscal 2020 when compared to the fiscal 2019.
Subsequent Events Affecting Financial Condition
Refer to Item 8, Note 17, "Subsequent Events" for information regarding the Company's subsequent events affecting financial condition.
Off-Balance Sheet Arrangements
The Company does not have material off-balance sheet arrangements. 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.
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.
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Payments Due Under Contractual Obligations
The Company’s future commitments at July 31, 2020, for operating lease obligations, purchase obligations, and tax obligations are as follows (dollars in thousands):
 Payments Due by Period
Contractual ObligationsTotalLess than
1 Year
1-3
Years
3-5
Years
More
than
5 Years
Uncertain
Timeframe
Operating Lease Obligations$50,251 $16,684 $24,522 $8,090 $955 $ 
Purchase Obligations(1)
53,293 52,423 862 1 7  
Tax Obligations13,622     13,622 
Total$117,166 $69,107 $25,384 $8,091 $962 $13,622 
(1)Purchase obligations include all open purchase orders as of July 31, 2020.
Inflation and Changing Prices
Essentially all of the Company’s revenue is derived from the sale of its products and services in competitive markets. Because prices are influenced by market conditions, it is not always possible to fully recover cost increases through pricing. Changes in product mix from year to year, timing differences in instituting price changes, and the large amount of part numbers make it impracticable to accurately define the impact of inflation on profit margins.
Critical Accounting Estimates
Management’s discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company bases these estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates and judgments.
The Company believes the following accounting estimates are most critical to an understanding of its financial statements. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) material changes in the estimates are reasonably likely from period to period. For a detailed discussion on the application of these and other accounting estimates, refer to Note 1 to the Company’s Consolidated Financial Statements.
Income Taxes
The Company operates in numerous taxing jurisdictions and is subject to regular examinations by U.S. federal, state and non-U.S. taxing authorities. Its income tax positions are based on research and interpretations of the income tax laws and rulings in each of the jurisdictions in which the Company does business. Due to the ambiguity of laws and rulings in each jurisdiction, the differences and interplay in tax laws between those jurisdictions, the uncertainty of how underlying facts may be construed and the inherent uncertainty in estimating the final resolution of complex tax audit matters, the Company's estimates of income tax liabilities may differ from actual payments or assessments.
While the Company has support for the positions it takes on tax returns, taxing authorities may assert different interpretations of laws and facts and may challenge cross-jurisdictional transactions. The Company generally re-evaluates the technical merits of its tax positions and recognizes an uncertain tax benefit when (i) there is completion of a tax audit; (ii) there is a change in applicable tax laws including a tax case ruling or legislative guidance; or (iii) there is an expiration of the statute of limitations. The liability for unrecognized tax benefits, excluding interest and penalties, was $13.6 million and $14.8 million as of July 31, 2020 and 2019, respectively. If recognized, $10.6 million and $12.0 million of unrecognized tax benefits as of July 31, 2020 and 2019, respectively, would reduce the Company's income tax rate. Accrued interest and penalties related to unrecognized tax benefits were $2.0 million and $2.4 million as of July 31, 2020 and 2019, respectively. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense on the Consolidated Statements of Income. The Company believes it is reasonably possible that the amount of gross unrecognized tax benefits could be reduced by up to $1.4 million in the next 12 months as a result of the resolution of worldwide tax matters, tax audit settlements, amended tax filings, and/or statute expirations, which would be the maximum amount that would be recognized as an income tax benefit in the Consolidated Statements of Income.
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The Company recognizes deferred tax assets and liabilities for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. The Company establishes valuation allowances for its deferred tax assets if it is more likely than not that some or all of the deferred tax asset will not be realized. This requires management to make judgments regarding: (i) the timing and amount of the reversal of taxable temporary differences, (ii) expected future taxable income or loss, and (iii) the impact of tax planning strategies. The Company recognized valuation allowances for its deferred tax assets of $58.8 million and $60.1 million as of July 31, 2020 and 2019, respectively, which were primarily related to foreign tax credit carryforwards and net operating loss carryforwards in its various tax jurisdictions.
Goodwill and Other Indefinite-lived Intangible Assets
The allocation of purchase price for business combinations requires management estimates and judgment as to expectations for future cash flows of the acquired business and the allocation of those cash flows to identifiable intangible assets in determining the estimated fair value for purchase price allocation purposes. If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the financial statements could result in a possible impairment of the intangible assets and goodwill or require acceleration of the amortization expense of finite-lived intangible assets. In addition, accounting guidance requires that goodwill and other indefinite-lived intangible assets be tested at least annually for impairment. If circumstances or events prior to the date of the required annual assessment indicate that, in management's judgment, it is more likely than not that there has been a reduction of fair value of a reporting unit below its carrying value, the Company performs an impairment analysis at the time of such circumstance or event. Changes in management's estimates or judgments could result in an impairment charge, and such a charge could have an adverse effect on the Company's financial condition and results of operations.
The Company has identified six reporting units within its two reportable segments, IDS and WPS, with the following goodwill balances as of July 31, 2020: IDS Americas & Europe, $289.1 million; PDC, $93.3 million; and WPS Europe, $33.6 million. The IDS APAC, WPS Americas, and WPS APAC reporting units each have a goodwill balance of zero. The Company believes that the discounted cash flow model and the market approach provide a reasonable and meaningful fair value estimate based upon the reporting units' projections of future operating results and cash flows and replicates how market participants would value the Company's reporting units. The projections of future operating results, which are based on both past performance and the projections and assumptions used in the Company's current and long-range operating plans, are subject to change as a result of changing economic and competitive conditions. Significant estimates used by management in the discounted cash flows methodology include estimates of future cash flows based on expected growth rates, price increases, fluctuations in gross profit margins and SG&A expense as a percentage of sales, capital expenditures, working capital levels, income tax rates, and a weighted-average cost of capital reflecting the specific risk profile of the reporting unit being tested. Significant negative industry or economic trends, disruptions to the Company's business, loss of significant customers, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in use of the assets or in entity structure, and divestitures may adversely impact the assumptions used in the valuations.
The Company completes its annual goodwill impairment analysis on May 1 of each fiscal year and evaluates its reporting units for potential triggering events on a quarterly basis in accordance with ASC 350, "Intangibles - Goodwill and Other." In addition to the metrics listed above, the Company considers multiple internal and external factors when evaluating its reporting units for potential impairment, including (i) U.S. GDP growth, (ii) industry and market factors such as competition and changes in the market for the reporting unit's products, (iii) new product development, (iv) hospital admission rates, (v) competing technologies, (vi) overall financial performance such as cash flows, actual and planned revenue and profitability, and (vii) changes in the strategy of the reporting unit. In the event the fair value of a reporting unit is less than the carrying value, including goodwill, the Company would then perform an additional assessment that would compare the implied fair value of goodwill with the carrying amount of goodwill. The determination of the implied fair value of goodwill would require management to compare the fair value of the reporting unit to the estimated fair value of the assets and liabilities of the reporting unit. If necessary, the Company may consult valuation specialists to assist with the assessment of the estimated fair value of assets and liabilities for the reporting unit. If the implied fair value of the goodwill is less than the carrying value, an impairment charge would be recognized.
The Company considers a reporting unit’s fair value to be substantially in excess of its carrying value at 20% or greater. The annual impairment testing performed on May 1, 2020, in accordance with ASC 350, “Intangibles - Goodwill and Other” (“Step One”) indicated that all of the reporting units passed Step One of the goodwill impairment test, and each had a fair value substantially in excess of its carrying value.
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Other Indefinite-Lived Intangible Assets
Other indefinite-lived intangible assets in accordance with the Company's policy outlined above using the income approach. Fair value is estimated using the income approach based upon current sales projections applying the relief from royalty method. If the carrying value of the indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Indicators of impairment primarily in the WPS segment consisted of a decline in sales in certain of its businesses resulting from the economic challenges presented by the COVID-19 pandemic. As a result of the impairment analyses performed during the fiscal year ended July 31, 2020, indefinite-lived tradenames with a carrying amount of $9.3 million were written down to their estimated fair value of $0.6 million. Refer to Note 3, "Other Intangible and Long-Lived Assets" for further information regarding impairment charges during fiscal 2020.
New Accounting Standards
The information required by this Item is provided in Note 1 of the Notes to Consolidated Financial Statements contained in Item 8 — Financial Statements and Supplementary Data.
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Item 7A. 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. The Company has manufacturing facilities and sells and distributes its products throughout the world and therefore has assets, liabilities and cash flows in currencies other than the U.S. dollar. As a result, the Company’s financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company manufactures, distributes and sells its products. The Company’s operating results are principally exposed to changes in exchange rates between the U.S. dollar and the Euro, the British Pound, the Mexican Peso, the Canadian dollar, the Australian dollar, the Singapore dollar, the Malaysian Ringgit, and the Chinese Yuan.
The objective of the Company’s foreign currency exchange risk management is to minimize the impact of currency movements on non-functional currency transactions. To achieve this objective, the Company hedges a portion of known exposures using forward contracts. As of July 31, 2020, the notional amount of outstanding forward foreign exchange contracts designated as cash flow hedges was $24.6 million. The Company's multi-currency revolving credit facility allows it to borrow up to $200.0 million in currencies other than U.S. dollars. The Company has periodically borrowed funds in Euros and British Pounds under its revolving credit facility. Debt issued in currencies other than U.S. dollars acts as a natural hedge to the Company's exposure to the associated currency.
The Company also faces exchange rate risk from transactions with customers in countries outside the United States and from intercompany transactions between affiliates. Although the Company has a U.S. dollar functional currency for reporting purposes, it has manufacturing sites throughout the world and a significant portion of its sales are generated in foreign currencies. Costs incurred and sales recorded by subsidiaries operating outside of the United States are translated into U.S. dollars using exchange rates in effect during the respective period. As a result, the Company is exposed to movements in the exchange rates of various currencies against the U.S. dollar. In particular, the Company has more sales in European currencies than it has expenses in those currencies. Therefore, when European currencies strengthen or weaken against the U.S. dollar, operating profits are increased or decreased, respectively. Currency exchange rates decreased fiscal 2020 net sales by 1.4% compared to fiscal 2019 as the U.S. dollar appreciated, on average, against other major currencies throughout the year.
Changes in foreign currency exchange rates for the Company’s foreign subsidiaries reporting in local currencies are generally reported as a component of stockholders’ equity. The Company’s currency translation adjustments recorded in the fiscal years ended July 31, 2020, 2019, and 2018, as a separate component of stockholders’ equity, was favorable by $6.6 million, unfavorable by $13.2 million, and unfavorable by $13.7 million, respectively. As of July 31, 2020 and 2019, the Company’s foreign subsidiaries had net current assets (defined as current assets less current liabilities) subject to foreign currency translation risk of $210.6 million and $192.9 million, respectively. The potential decrease in net current assets as of July 31, 2020, from a hypothetical 10 percent adverse change in quoted foreign currency exchange rates would be approximately $21.1 million. This sensitivity analysis assumes a parallel shift in all major foreign currency exchange rates versus the U.S. dollar. Exchange rates rarely move in the same direction relative to the U.S. dollar due to positive and negative correlations of the various global currencies. This assumption may overstate the impact of changing exchange rates on individual assets and liabilities denominated in a foreign currency.
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 allows the Company to enter into approved interest rate derivatives if there is a desire to modify the Company’s exposure to interest rates. As of July 31, 2020, the Company had no interest rate derivatives and no variable rate debt outstanding.
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Item 8. Financial Statements and Supplementary Data
BRADY CORPORATION & SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS

 Page
Financial Statements:

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of
Brady Corporation
Milwaukee, Wisconsin

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Brady Corporation and subsidiaries (the "Company") as of July 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows, for each of the three years in the period ended July 31, 2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of July 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of July 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 16, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.
Adoption of a New Accounting Standard
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases in the year ended July 31, 2020, due to the adoption of the Financial Accounting Standards Board Accounting Standard Update No. 2016-02, Leases (Topic ASC 842) using the optional transition method allowing a cumulative effect adjustment to the opening balance of retained earnings during the period of adoption.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Taxes — Valuation Allowances — Refer to Note 11 to the financial statements
Critical Audit Matter Description
The Company recognizes deferred income tax assets and liabilities for the estimated future tax effects attributable to temporary differences and carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized in the future. Future realization of deferred tax assets depends on the existence of sufficient
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taxable income within the carryback or carryforward period of the appropriate character under the relevant tax law. Sources of taxable income include future reversals of deferred tax assets and liabilities, future taxable income (exclusive of the reversals of deferred tax assets and liabilities), taxable income in prior carryback year(s) if permitted under the tax law, and tax planning strategies. The Company’s valuation allowance for deferred tax assets was $58.8 million as of July 31, 2020.
The Company’s determination of the valuation allowance involves estimates. Management’s primary estimate in determining whether a valuation allowance should be established is the projection of future sources of taxable income. Auditing management’s estimate of future sources of taxable income, which affects the recorded valuation allowances, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our income tax specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to estimated future sources of taxable income included the following, among others:
We tested the effectiveness of management’s controls over the estimates of future sources of taxable income.
With the assistance of our income tax specialists, we considered relevant tax laws and regulations in evaluating the appropriateness of management’s estimates of future sources of taxable income.
We evaluated management’s ability to accurately estimate future sources of taxable income by comparing actual results to management’s historical estimates. Further, we evaluated the reasonableness of management’s estimates of future sources of taxable income by comparing the estimates to historical sources of taxable income or losses and minutes of the Board of Directors.
With the assistance of our income tax specialists, we evaluated whether the estimated future sources of taxable income were of the appropriate character to utilize the deferred tax assets under tax law.
We evaluated management’s assessment that it is more likely than not that sufficient taxable income will be generated in the future to utilize the net deferred tax assets.

/s/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
September 16, 2020

We have served as the Company's auditor at least since 1981; however, an earlier year cannot be reliably determined.

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BRADY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, 2020 and 2019
20202019
 (Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents$217,643 $279,072 
Accounts receivable—net146,181 158,114 
Inventories135,662 120,037 
Prepaid expenses and other current assets9,962 16,056 
Total current assets509,448 573,279 
Property, plant and equipment—net115,068 110,048 
Goodwill416,034 410,987 
Other intangible assets22,334 36,123 
Deferred income taxes8,845 7,298 
Operating lease assets41,899  
Other assets28,838 19,573 
Total$1,142,466 $1,157,308 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$62,547 $64,810 
Accrued compensation and benefits41,546 62,509 
Taxes, other than income taxes8,057 8,107 
Accrued income taxes8,652 6,557 
Current operating lease liabilities15,304  
Other current liabilities49,782 49,796 
Current maturities on long-term debt 50,166 
Total current liabilities185,888 241,945 
Long-term operating lease liabilities31,982  
Other liabilities61,524 64,589 
Total liabilities279,394 306,534 
Stockholders’ equity:
Class A nonvoting common stock — Issued 51,261,487 shares, and outstanding 48,456,954 and 49,458,841 shares, respectively (aggregate liquidation preference of $42,716 and $42,803, respectively) 513 513 
Class B voting common stock — Issued and outstanding 3,538,628 shares35 35 
Additional paid-in capital331,761 329,969 
Retained earnings704,456 637,843 
Treasury stock — 2,804,533 and 1,802,646 shares, respectively, of Class A nonvoting common stock, at cost(107,216)(46,332)
Accumulated other comprehensive loss(66,477)(71,254)
Total stockholders’ equity863,072 850,774 
Total$1,142,466 $1,157,308 
See Notes to Consolidated Financial Statements.
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BRADY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended July 31, 2020, 2019 and 2018
202020192018
(In thousands, except per share amounts)
Net sales$1,081,299 $1,160,645 $1,173,851 
Cost of goods sold552,734 581,967 585,560 
Gross margin528,565 578,678 588,291 
Operating expenses:
Research and development40,662 45,168 45,253 
Selling, general and administrative336,059 371,082 390,342 
Impairment charges13,821   
Total operating expenses390,542 416,250 435,595 
Operating income138,023 162,428 152,696 
Other income (expense):
Investment and other income5,079 5,046 2,487 
Interest expense(2,166)(2,830)(3,168)
Income before income taxes and losses of unconsolidated affiliate140,936 164,644 152,015 
Income tax expense28,321 33,386 60,955 
Income before losses of unconsolidated affiliate112,615