Brady's Q4 2025: Contradictions Emerge on R&D and Pricing Strategies, Tariff Mitigation, Revenue Mix, and Economic Outlook

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

Date of Call: September 4, 2025

Financials Results

• Revenue: Total sales up 15.7% YOY (organic +2.4%, acquisitions +11.3%, FX +2.0%); segment sales: Americas & Asia $260.8M, Europe & Australia $136.5M
• EPS: Adjusted diluted EPS $1.26, up 5.9% YOY; GAAP diluted EPS $1.04 vs $1.15 prior year
• Gross Margin: 50.4%, compared to 51.6% in the prior year; excluding $1.9M reorg costs in COGS, would have been 50.9%

Guidance:

• FY26 GAAP EPS expected $4.55–$4.85 (+15.5% to +23.1% vs FY25)
• FY26 adjusted EPS expected $4.85–$5.15 (+5.4% to +12%)
• Organic sales growth expected low single digits
• Tax rate ~21%
• Depreciation & amortization ~ $42M; CapEx ~ $40M
• Incremental tariff headwind estimated $8M–$12M vs FY25 (net of mitigation), more weighted to 1H
• Risks: USD strength, inflation not fully offset, macro slowdown

Business Commentary:

• Strong Financial Performance and Shareholder Returns:
• Brady Corporation reported record adjusted EPS of $4.60 for fiscal 2025, with a new quarterly record of $1.26 per share.
• The growth was driven by organic sales increase of 2.4% in Q4 and strategic acquisitions contributing 11.3% to sales growth.

• The company returned $96 million to shareholders through dividends and share buybacks, marking the 40th consecutive year of annual dividend increases.

• Regional Sales Performance:

• The Americas and Asia region reported strong organic sales growth of 4.3% in Q4, while Europe and Australia saw a decline of 1.3%.
• Growth in the Americas and Asia was supported by the wire identification product line with nearly 12% organic growth.

• The decline in Europe and Australia was due to a challenging macro environment, prompting facility closures and reorganization costs.

• Research and Development Investments:

• Brady increased R&D spending by 31% in Q4, driven by organic business investments and strategic acquisitions like Gravotech and Funai's Microfluidics Solutions.

• This investment aims to enhance product offerings, including high-performance materials, printers, and direct part marking technologies.

• Cost Management and Tariff Impact:

• The company recognized facility closure and reorganization costs of $8.9 million in Q4, reflecting actions to improve profitability in response to economic conditions.
• Incremental tariff expenses were approximately $2 million in Q4 and $7 million in fiscal year 2025, with an anticipated additional impact of $8 million to $12 million in fiscal year 2026.

Sentiment Analysis:

• Management highlighted a “new quarterly record of $1.26” adjusted EPS and “fifth consecutive year of record EPS,” with FY26 GAAP EPS guided up 15.5%–23.1%. Despite Europe/Australia softness and tariffs, they cited cost reductions, tariff mitigations, and strong printer/consumables demand (notably wire markers) as drivers.

Q&A:

• Question from Steve Ferazani (Sidoti & Company, LLC): How can EPS grow so strongly in FY26 amid macro and tariff headwinds—what drives margin expansion?
  Response: Cost reductions over the last two quarters and tariff mitigation actions (reshoring, supply chain changes, price increases) support margin expansion within the guided EPS range.

• Question from Steve Ferazani (Sidoti & Company, LLC): Why was free cash flow weak in Q4 and implications for next year with higher CapEx?
  Response: Temporary inventory builds tied to multiple facility moves suppressed Q4 cash flow; impacts should normalize as transitions complete.

• Question from Steve Ferazani (Sidoti & Company, LLC): Will reorg/plant closure cash costs carry into FY26?
  Response: Some cash outflows persist into Q1, then largely completed by quarter-end.

• Question from Steve Ferazani (Sidoti & Company, LLC): Will R&D stay above 5% and are recent acquisitions initially dilutive?
  Response: Funai microfluidics is an R&D platform; Mecco should be accretive quickly with cost synergies alongside Gravotech.

• Question from Keith Housum (Northcoast Research Partners, LLC): Is R&D now above the prior ~5% norm?
  Response: No fixed R&D target; higher-engineered products can run 10%+ R&D but carry 60–70% gross margins, boosting profitability.

• Question from Keith Housum (Northcoast Research Partners, LLC): Is ~$23M quarterly R&D a good run-rate?
  Response: Near term may dip slightly as teams merge; long-term trend is to keep increasing R&D—it's not a cost-cut focus.

• Question from Keith Housum (Northcoast Research Partners, LLC): Will the $8–$12M FY26 incremental tariff headwind be first-half weighted, and is mitigation in guidance?
  Response: Mostly 1H as price actions phase in; mitigation strategies are reflected in guidance.

• Question from Keith Housum (Northcoast Research Partners, LLC): Printers/consumables near 40% of business—what end markets are driving growth?
  Response: Wire markers are strongest, driven by data centers and aerospace/defense; these underpin printers/consumables growth.