Prepared remarks
Good day, and thank you for standing by. Welcome to the Brady Corporation Third Quarter 26 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press *1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press *1 again. Please be advised that today's conference is being recorded. I would now like to hand the call over to Ann E. Thornton, Chief Financial Officer. Please go ahead.
Thank you. Good morning, and welcome to the Brady Corporation fiscal 2026 Third Quarter Earnings Conference Call. The slides for this morning's call are located on our website at www.bradycorp.com/investors. We will begin our prepared remarks on slide number 3. Please note that during this call, we may make comments about forward-looking information. Words such as expect, will, may, believe, forecast, and anticipate are just a few examples of words identifying a forward-looking statement. It is important to note that forward-looking information is subject to various risk factors and uncertainties, which could significantly impact expected results. Risk factors were noted in our news release this morning and in Brady's fiscal 2025 Form 10-K, which was filed with the SEC in September. Also, please note that this teleconference is copyrighted by Brady Corporation and may not be rebroadcast without the consent of Brady. We will be recording this call and broadcasting it on the internet. As such, your participation in the Q&A session will constitute your consent to being recorded. I will now turn the call over to Brady's President and Chief Executive Officer, Russell R. Shaller. Russell?
Thanks, Ann, and thank you all for joining today. I am pleased to announce a fantastic quarter. We reported a new record high adjusted earnings per share of $1.50, an increase of 23% versus the third quarter of last year. Organic sales grew 8.2% and gross profit margin was nearly 52% while both regions reported significant growth in operating income and profitability. We are growing in our key product lines in both of our regions and we continue to see positive response to the new products we have introduced over the last several years. Launched in February, our i4300 is a 4-inch portable printer, which is tailored for plant safety and manufacturing professionals. It is selling well above expectations. Our development team worked with a wide variety of users to create this product and customer feedback has been fantastic. We are seeing continued growth in wire identification this quarter, particularly in data centers, which is a key end market for this highly critical identification solution.
Our top priorities are profitable sales growth and a constant focus on cash generation, and this quarter absolutely delivered both. In addition to 23% adjusted earnings per share growth in the quarter, our cash generation was nearly $80 million. Operating cash flow is up 35% so far this fiscal year. Last month we announced that we entered into an agreement to acquire Honeywell's Productivity Solutions and Services business. This marked an exciting moment in Brady's history and we are looking forward to combining our highly engineered durable labels, printers, and software with the data and devices powering the entire supply chain. This is an exciting moment in our company's history. Over the past several years, Brady has carefully evaluated the competitive landscape while identifying new growth opportunities that expand our addressable market. With this acquisition, the PSS business more than doubles the markets Brady can serve.
At the same time, we believe emerging marking and identification standards, including GS1 and Europe's digital product passport initiatives, along with new applications for RFID-based product identification, support a long runway for future growth. Additionally, our early work with AI-augmented products points the way to exciting new use cases to improve our customers' safety and efficiency. We see PSS as a unique opportunity to expand Brady into leading-edge mobility and scanning solutions trusted by some of the world's largest transportation, warehousing, and logistics companies. By combining Brady's high-performance printers, software, and specialty adhesive materials with PSS's full suite of mobility and scanning solutions, we will be able to offer a single-source solution to a broader set of customers. The PSS business has an incredible product portfolio, a talented R&D team with deep technical expertise, and critical sales and support functions who know their business extremely well.
We are looking forward to closing the transaction and bringing our businesses together. We have a bright future ahead of us, and we know this is an opportunity to drive a significant amount of long-term value for our shareholders. I will turn the call over to Ann to provide details on our financial results and then I will return to discuss our regional results and to share some additional thoughts regarding the PSS transaction. Ann?
Thanks, Russell. Our record adjusted earnings per share results this quarter were the result of strong organic sales growth, improved gross profit margin, efficiencies throughout SG&A, and growth in operating income throughout our global businesses. Organic sales grew 8.2%, which was driven by both of our regions. The Americas and Asia grew 10.1%, and Europe and Australia grew 4.5%. We also funded a significant increase in research and development. We reduced our SG&A expense as a percentage of sales, and we increased our net cash position to $149 million. Our financial position allows us to continue to invest in our organic business, and it puts us in an incredibly strong position to finance the PSS transaction, all while remaining committed to our dividend and to opportunistic share buybacks. Slide number 4 details our quarterly sales trends. Organic sales grew 8.2% this quarter, acquisitions added 2.1% and foreign currency translation increased sales by 3.5% for total sales growth of 13.8% in the quarter.
Turning to slide number 5, this details our quarterly gross margin trending. Our gross profit margin was 51.8% this quarter, compared to 51% in the second quarter of last year. Last year, we took actions to streamline our cost structure and we closed manufacturing facilities in Beijing, China and in Buffalo, New York. Those actions reduced gross profit margin by 30 basis points last year. So we are seeing the gross profit margin benefit from cost reduction actions taken last year along with our sales growth led by our highly engineered products, all of which resulted in the 50 basis point improvement in our gross profit margin this quarter. Slide number 6 details our SG&A expense trending. SG&A was $129 million this quarter, compared to $109 million in the third quarter of last year. As a percent of sales, SG&A was 29.6%. If you exclude amortization expense and acquisition-related expenses from the current year, and exclude amortization expense and facility closure and other reorganization costs incurred last year, then SG&A was 25.3% of sales, compared to 26.5% of sales last third quarter, which is a reduction of 120 basis points.
We continue to invest in growth through targeted additions to our sales force, and we are realizing the benefits of our facility closure and other cost structure actions that we took last year. Turning to slide number 7, you will find the trending of our investments in research and development. We continue to increase our investment in new product development throughout our key product lines, and we are seeing these multiyear investments paying off in our organic sales growth. Printer unit sales are up nearly 8% this quarter compared to last year's third quarter, which is exactly what we are looking for because the consumable revenue will follow. R&D expense was $23.5 million, or 5.4% of sales this quarter, an increase from $19.2 million, or 5% of sales in last year's third quarter. We funded a 23% increase in R&D in the quarter while improving our profitability and reporting record adjusted EPS.
Slide number 8 details the trending of our pretax earnings. Pretax earnings on a GAAP basis increased 11.6%, from $65.7 million to $73.4 million in the quarter. If you exclude amortization and acquisition-related expenses in the current period, and exclude amortization and the facility closure and other reorganization charges we incurred last year, pretax earnings increased 23.8%, from $74.4 million to $92.1 million. Moving to slide number 9, this outlines trending of our net income and earnings per share. Net income increased 10.6% from $52.3 million to $57.8 million. Adjusted net income increased 22.3% from $58.8 million to $71.9 million. GAAP diluted earnings per share was $1.21 compared to $1.09 last year. And our adjusted GAAP diluted earnings per share was $1.50 compared to $1.22 last year, which was 23% growth and a new quarterly record. Our investments in R&D and in our sales force are paying off, and we are growing in all of our major product lines and improving our profitability.
Cash generation is detailed on slide number 10. Operating cash flow increased 30.7% to $78.2 million in the quarter from $59.9 million in the third quarter of last year. And free cash flow increased 20.8% to $67.2 million this quarter compared to $55.6 million in last year's third quarter. Year to date, our operating cash flow was up nearly 35% versus last year, which shows our consistent focus on cash-based decision making and our high-quality earnings. Slide 11 details the impact that our cash generation has had on our balance sheet. As of April 30, we were in a net cash position of $149 million, which is more than triple our net cash position from a year ago. We are in an excellent position to finance the acquisition of the PSS business. We plan to structure our financing with $500 million in term loan bank debt and $800 million of private placement debt, and our expectation is that our interest rate will be below 6%.
Our net leverage ratio will be approximately 2.5x at the time of closing the transaction, and we expect to delever quickly to below 2x within two years of the close. Our financial strength and our ability to generate a high amount of cash allows us to service our debt and delever quickly, while always investing in our business through R&D and our sales force. And we are focused on consistently increasing our dividends. At the beginning of this fiscal year, we announced our 40th consecutive annual dividend increase, which is a milestone that we are very proud of. Our strong balance sheet also gives us the ability to buy back shares when the opportunity arises. This quarter, we bought 63 thousand shares for $5.2 million, which was an average price of $81.59 per share. This fiscal year, we bought 184 thousand shares for $14.1 million, which was an average price of $76.76 per share. Slide number 12 details our fiscal 2026 guidance.
We are raising our full year adjusted EPS guidance range from $4.95 to $5.15 per share to $5.20 to $5.30 per share. And we are raising our GAAP EPS guidance range from $4.62 to $4.82 per share to $4.66 to $4.76 per share. Our adjusted EPS guidance range represents a range of growth of between 13% to 15.2% compared to 2025. We expect organic sales growth in the mid-single-digit percentages for the full year ending 07/31/2026. Other elements of our guidance include depreciation and amortization expense of approximately $44 million, capital expenditures of approximately $45 million, and a full year income tax rate of approximately 21%. Our income tax rate generally tends to be slightly lower in the fourth quarter compared to our full year expectation based upon our historical profit mix and the expected timing of other discrete adjustments. Potential risks to our guidance, among others, include potential strengthening of the U.S. dollar, inflationary pressures that we are unable to offset in a timely manner, or an overall slowdown in economic activity. With that, I will turn it back over to Russell to cover our regional results and to share additional information about the PSS transaction announcement before Q&A. Russell?
Thanks, Ann. Slide 13 shows the financial results of our Americas and Asia region. Organic sales growth was excellent at 10.1% in the quarter, ending at a record-high $290 million. Acquisitions added 3.1% and foreign currency translation increased sales 1.2% for total sales growth of 14.4%. We grew sales in all of our key product lines with another strong result in wire identification. Data centers are making a meaningful impact in our growth in this product category this year. Wire identification represents 20% of our revenue in Americas and Asia, and sales were up 19% this quarter. We are also seeing strong sales of our portable, benchtop, and automated printer units driving sales growth in wire identification, as well as product ID and safety and facility ID globally. Printer sales were up 7.8% in the third quarter. Breaking down the region further, organic sales in the Americas grew 9.7% and organic sales in Asia grew 11.9%.
We were pleased to see the Americas bounce back after a slower second quarter this year. We finished the quarter with momentum and we feel positive about a strong finish to the year. Our reported segment profit in the Americas and Asia region increased 20.2% to $68.7 million, and segment profit as a percentage of sales increased from 22.5% to 23.7% in the third quarter. If you exclude the impact of amortization in both the current quarter and last year's Q3 as well as the facility closure and other reorganization activities from last year, segment profit increased 16.4% and segment profit as a percentage of sales increased from 24.3% to 24.7%. Sales growth in our engineered products along with cost reduction activities from last year are driving our improvement in both profit and profitability. Slide 14 details the financial results of our Europe and Australia region. We returned to growth in Europe and Australia with strong sales results this quarter.
In light of the weak manufacturing environment in Europe in particular, our sales growth results are even more impressive. I am happy with the team's ability to navigate the weak macro conditions as well as the conflict in the Middle East and still grow sales 4.5% organically in the quarter. Foreign currency increased sales 8.1% for total sales growth of 12.6% to $145 million in Q3. We grew in all of our major product lines in Europe and Australia this quarter. Data centers are a key end market in Europe and Australia as well. Wire identification represents 13% of our sales in Europe and Australia, and this product line grew 13% in the quarter. We are monitoring the conflict in the Middle East, and modifying our own approach to procurement in targeted areas where it makes sense. We also evaluate the buying pattern of our customers and channel partners; we do not believe there were meaningful changes in the quarter that could indicate sales may have been brought forward due to customers' concerns about supply chain or energy constraints.
Segment profit significantly improved again this quarter. Our reported segment profit in Europe and Australia increased 22.8% in the quarter to $21.5 million, and segment profit as a percentage of sales increased from 13.6% to 14.8%. If you exclude the impact of amortization in both the current quarter and last year's Q3, as well as the facility closure and other reorganization activities from last year, segment profit increased 15.5% compared to last year. We took several actions last year to reduce our cost structure in Europe and Australia and now we are seeing the benefits in our results this year. We finished the quarter with momentum in Europe and Australia, and we feel positive about finishing the year on a high note. Turning to the future, we are excited about the growth potential from our announced acquisition of Honeywell's Productivity Solutions and Services business. Brady's strong foundation in identification and safety and PSS adds a critical third pillar: enterprise-level workforce productivity to the value we bring our customers today.
The combination of Brady and PSS represents a meaningful shift in the AIDC competitive landscape: a broader portfolio, a more complete solution set for enterprise customers, and the scale to invest behind a differentiated roadmap. Just as important as the products are the people and partnerships PSS has built. The global reseller network and the dedicated enterprise accounts that have built deep, long-standing customer relationships are central to what makes this combination compelling. Our intent is to preserve those relationships and build on them. Customers and channel partners should expect continuity in the teams they work with today, a sustained investment in R&D and software offerings, including operational intelligence, voice, and the Swift decoder, which are increasingly embedded in customer workflows, and a continued commitment to the resilient vertically integrated supply chain that long differentiated PSS in the market.
We see the combination of Brady's resources and PSS's customer-facing strengths as a clear opportunity to accelerate investment in these areas once the transaction closes. I would also like to provide some additional background on the recent financial performance of the PSS business as well as our expectations for the first year post-close. The PSS business was operated as a portion of a larger segment within Honeywell. Several years ago, PSS was part of the Safety and Productivity Solutions segment, abbreviated SPS. In 2024, the PSS business was moved into Honeywell's new Industrial Automation segment where it continued to be operated as a portion of a larger business unit. So to provide clarity around recent sales results specific to PSS, PSS's sales declined slightly by just under 2% in calendar year 2025 compared to calendar year 2024, and in 2026, PSS's sales grew nearly 5%. Last month, we announced that we expect the PSS business to be immediately accretive.
We expect the business will add approximately $0.80 of adjusted EPS accretion in the first year. The business is highly complementary to Brady and we expect it will deliver significant long-term value to our shareholders. With that, I would like to turn it over for Q&A. Operator, would you please provide instructions to our listeners?
Questions and answers
If you would like to ask a question at this time, please press *1 and wait for your name to be announced. To withdraw your question, please press *1 again. Our first question comes from Steve Ferazani with Sidoti.
Good morning, Russell. Good morning, Ann.
Morning.
Russell. Obviously, very positively surprised about the organic growth this quarter. I mean, I am looking back at the numbers you were under 5% organic growth for, it looks like, almost 10 straight quarters under 3% for five. This quarter, over 8%. I know you talked about printers, but that was only 8%. So the strength here was broader than just the new product development. Can you give us a little bit better sense of what got you here? And also, given that you raised guidance, it had to have slightly surprised you as well. Yeah, so I think a couple things went on. Q2 was definitely a little weaker than we had anticipated, and there were some timing issues of some small contracts. The net result was that a little bit of our growth — not to diminish it — but a little of our growth was still in from what we thought was a slightly weaker Q2 than we expected. With that said, Q3 came in very strong.
On data centers: if you do the math, it is 20% of our business and it grew at almost 20%. If you do the math, that was a 4% uplift in the Americas and Asia and then less in Europe. So if you take those into account and the generally strong environment for Brady's products, you get to the organic result that we posted, which we hope continues through the rest of the fiscal year. How much of a difference maker is the i4300? I would not even say it is a share taker. It is literally new to the world. There is no equivalent product to a portable 4-inch printer. We are up 50% over what we normally expect for a printer launch, which is both surprising and, quite frankly, awesome because we are very good traditionally at predicting printer placements because we have been doing this for a very long time. Again, I want to remind everybody that no one product in Brady is super significant on its own, but they also create a halo, pulling along other products as well.
This new printer also creates a little bit of a halo because it is truly unique in the industry: being able to go to a location without having to go back to a printer station and still be able to print a 4-inch, which is comparatively large-format thermal transfer product. We are excited about the product and what has happened so far. Is that meaningful to our growth today? Not really. But will it be? We think so.
Got it. Very helpful. Russell, I think I heard you right: you said in year one, the acquisition would add $0.80 to adjusted EPS. I think you were more — I think you had said double-digits before.
Correct. As time goes on, of course, we are going to hone in on exact answers. We are still in the integration phase and understanding the complete cost structure and the add-backs and what have you. Directionally, we feel comfortable with $0.80. Is that going to move up a little or move down a little bit as we get closer to close? Certainly, and then we will continue to unpack more detailed numbers as we get to the next quarter.
Is the expectation that there is some synergy realization with that, or is that without synergies? That first year is no synergies?
That first year estimate is without synergies. Timing on the deal: August 1st is our best estimate pending regulatory filings and some other matters. If we miss the August 1 date, it will likely be due to factors beyond Honeywell's or Brady's control.
Got it. Thanks, Russell.
Our next question comes from Keith Housum with Northcoast Research.
Good morning, guys. I want to echo congratulations on a great quarter. It is great to see. Russell, in terms of the data center business, obviously a driver of your business at 3% to 4% overall, do you guys have any increased visibility there? We all see the same headlines and data centers are expected to grow some incredible amounts over the next several years. Any visibility that you guys have that you will be partaking in that as well? We're several quarters now at least seeing this as a growth driver for you.
So far, the data centers are keeping pace. We neither see an acceleration from the current trend nor a deceleration on the backlog. From our perspective, the physical building of data centers seems to be at a virtual capacity limit, so while there are announced data centers and major projects, there is some limit to how fast the infrastructure can be put in place. Frankly, we see that as a good thing because it ensures a tailwind for this product category for several years rather than a short-lived spike.
And when in the process of the data center being built are you guys' products being used? Is it toward the completion of the data center? Is it earlier? Any context you can provide there?
It is kind of all along the way depending on how the data center itself is put together. In some cases, there is a lot of prewiring that happens before the data center is fully built, in which case we are involved earlier. In other cases it is more on-premises work later in the build. From the very beginning, once they break ground there are Brady products showing up in safety and facility ID all the way through to full commissioning. The biggest part tends to be when they install racks and do the wiring between them, which is where we see the single largest slug of work.
From Brady's perspective, you like it all along the way because until the plant's fully operational you are seeing revenue from groundbreaking all the way through, and then at some point you believe in the 3- to potentially 4-year timeframe they will do block upgrades of the data centers to get them to the next generation, and then you will see recurring revenue when that happens as well. Fundamentally, this is an awesome opportunity for the company. In terms of who the buyer is, is it the builder of the data center themselves, the server companies, or who is the buyer?
Depending on the region, a whole host of parties are involved. Sometimes it's the cable manufacturers themselves, sometimes it's the data center operator, and sometimes it's the on-premise installer or contractor. Many permutations exist because the field has exploded so quickly; there isn't necessarily a single optimal approach. We sell to a variety of buyers depending on the customer — whether it's a large hyperscaler or another provider — they all tend to do things a little differently.
Gross margins benefited obviously from data centers, but it sounds like also from the printer growth and consumables. You had a great number this quarter at 51.8%. As we think about going forward, how are you thinking about gross margins? Is 50% no longer the floor? Are we thinking maybe 51% or 52% possible as we look forward?
We don't target a specific gross margin percentage; we target the area under the curve because pushing pricing could get us to higher gross margins but could also damage demand. A lot of our products are used as labor savings or to provide a more professional solution versus a manual approach. We look at market dynamics and focus on long-term growth and product placement rather than bumping margin for margin's sake. Given our mix and the current tariff regime, a midpoint around 52% is a good place, but tariffs and mix could change. Our number one goal is long-term profitable growth, not a specific gross margin target.
Appreciate that. In terms of the $0.80 number for the Honeywell PSS acquisition in the first full year, what is included in that? I have an opinion that they underinvested in R&D and sales and marketing over the years. Perhaps you are closer to the numbers than I am. Any thoughts on what that includes in terms of any additional investment versus what they were doing?
They rebuilt much of their R&D infrastructure in the last couple years. I would say 2022-2023 marked a low point for R&D investment for the PSS business, but most of the necessary R&D investment has been added back. At the margins we know there are things we can do. We might add $5 million to $10 million in R&D and we will add to the sales force and some customer-facing supply chain support. But in the scheme of things, it is not a significant build-back. The business has a terrific product portfolio and R&D team, and we believe it has a great home at Brady.
That is perfect. Keith, in addition to what Russell mentioned, yes, the $0.80 estimate includes some potential additional investment in R&D and in the sales force. Our estimate excludes any one-time integration costs related to truly integrating the business and standing it up. It also reflects our expectations for interest expense, which we provided some clarity around. We will provide full disclosure post-close and more visibility into those puts and takes.
Okay. Appreciate it. Last question: I usually do not ask about board resignations, but the timing here was notable. With the stock down last week you had two board members resign a little over a week ago and you announced on a Friday afternoon. The stock was down 10%. Any clarity you can give in terms of the board's thought process? I realize you may be limited in what you can say, but I have to ask.
Of course. I appreciate the question. Let me give some context about the board and the last several months. Pre-Christmas, Brady was a very stable earnings grower and cash flow generator. Our board meetings were quarterly and the governance cadence was routine. Over the last four or five months, in working through the acquisition and a range of related matters, the board's involvement increased dramatically. At one point, as we were working through the acquisition, we were meeting weekly and sometimes on weekends. This level of time commitment was significant and unexpected for several board members. Some board members simply said they could not commit to that level of engagement given other commitments. I can understand that. I recognize the optics are not ideal and people can draw their own conclusions, but the board members who were here for the Honeywell acquisition all voted affirmatively. There was no dissent. The deal was approved unanimously by the board members involved. My sincere appreciation goes to the board members who have committed the time and energy needed to get this done; their work has been substantial and ongoing.
Okay. I appreciate it. Thank you.
That concludes today's question-and-answer session. I would like to turn the call back to Russell Schaller for closing remarks.
That is great. Thank you all for your time this morning. We reported an excellent quarter. I am proud of our entire team globally. Our ability to deliver 8.2% organic sales growth in this disruptive geopolitical and economic environment is impressive. We are growing in all of our major geographies. Our investment in R&D is paying off. Our new products are performing well, and we finished the quarter with momentum. We are in a great spot to finish the year on a high note. Thank you for your time this morning. Operator, you may disconnect the call.
This concludes today's conference call. Thank you for participating. You may now disconnect.