Brady Corp's Q4 2025: Contradictions Emerge on Tariff Mitigation, R&D, Economic Outlook, and Regional Performance

The above is the analysis of the conflicting points in this earnings call

Date of Call: None provided

Financials Results

• Revenue: Not disclosed; total sales up 15.7% YOY (organic +2.4%, acquisitions +11.3%, FX +2.0%)
• EPS: Adjusted diluted EPS $1.26, up 5.9% YOY; GAAP diluted EPS $1.04 vs $1.15 prior year
• Gross Margin: 50.4%, down from 51.6% YOY; excluding $1.9M reorg costs in COGS, 50.9%
• Operating Margin: Not disclosed

Guidance:

• FY26 GAAP EPS expected at $4.55–$4.85 (+15.5%–23.1% YOY).
• FY26 adjusted EPS expected at $4.85–$5.15 (+5.4%–12% YOY).
• FY26 organic sales growth: low single digits.
• Tax rate ~21%.
• Depreciation & amortization ~ $42M; Capex ~ $40M.
• Incremental tariff impact in FY26: ~$8–$12M vs FY25 (more weighted to 1H); mitigation actions included in outlook.
• Risks: stronger USD, inflation not offset in time, and macro slowdown.

Business Commentary:

* Sales Growth and Profitability: - Brady Corporation reported a record high adjusted EPS of $1.26 per share for Q4, up 5.9% from the previous year, and organic sales growth of 2.4% in the quarter. - Growth was driven by strong performance in the Americas and Asia region, acquisitions, and increased investment in R&D.

• Regional Performance:
• The Americas and Asia region reported strong organic sales growth of 4.3% in Q4, contributing significantly to the company's overall growth, despite a decline in Europe and Australia.

• This growth was supported by robust performance in wire identification and printer products, particularly in data centers and aerospace and defense sectors.

• Impact of Tariffs and Mitigation Strategies:

• Brady faced an incremental tariff expense of approximately $2 million in Q4 and $7 million in fiscal year 2025.

• The company is implementing mitigating strategies such as reshoring and reconfiguring the supply chain to offset tariff impacts, with additional mitigations planned for fiscal year 2026.

• R&D Investments:

• R&D investment increased by 31% in Q4, driven by organic business investments and acquisitions like Gravitec and Hunais Microfluidic Solutions.
• The focus of these investments is to drive innovation and product differentiation, particularly in high-performance materials and safety products.

Sentiment Analysis:

• Management highlighted a record quarterly and annual adjusted EPS, fifth consecutive year of record EPS, and strong Americas/Asia growth. They guided to higher FY26 EPS despite macro and tariff headwinds, citing cost reductions and tariff mitigation. Europe/Australia remain challenging, but restructuring positions the business for improved profitability.

Q&A:

• Question from Steve Verrazzani (Sidoti): Guidance implies strong EPS growth and margin expansion despite headwinds. How will you achieve this?
  Response: Margin expansion driven by recent cost reductions and tariff mitigation (pricing, supply-chain/reshoring actions), with improving traction of current products.

• Question from Steve Verrazzani (Sidoti): Why was Q4 free cash flow weak, and what does it mean for FY26 cash flow given higher Capex?
  Response: Lower Q4 cash flow stemmed from inventory builds tied to multiple facility moves; remaining cash costs will taper and be largely done by end of Q1.

• Question from Steve Verrazzani (Sidoti): Will R&D stay above 5%, and are recent acquisitions dilutive near term?
  Response: Funai microfluidics is a longer-term R&D platform; MECO should be immediately accretive with cost overlaps; R&D to remain a priority near/above ~5%.

• Question from Keith Housum (Northcoast Research): Will R&D revert to ~5% of sales or is this a new normal?
  Response: No strict percent target; investments are opportunity-driven. Highly engineered products carry higher gross margins, so elevated R&D can improve profitability.

• Question from Keith Housum (Northcoast Research): Is the $8–$12M incremental tariff impact front-half loaded and included in guidance?
  Response: Yes; impacts skew to H1 as price actions phase in, and mitigation efforts are embedded in the FY26 outlook.

• Question from Keith Housum (Northcoast Research): What end markets are driving printer/consumables (just under 40% of sales) growth?
  Response: Wire markers are strongest, led by data centers and defense/aerospace; construction contributes but is smaller.