Brady Corp Q3 FY2026 Earnings Call

Good day and thank you for standing by. Welcome to the Brady Corporation third quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I'd now like to hand the call over to Ann Thornton, Chief Financial Officer. Please go ahead.

Good morning and welcome to the Brady Corporation's Dischool 2026 Third Quarter Earnings Conference Call. The slides for this morning's call are located on your website at www.bradycorp.com slash investors. We will begin our prepared remarks on slide number three. Please note that during this call, we may make comments about forward-looking information. Words such as exceed, forecast, and anticipate are just a few examples of words identifying a forward-looking statement. It's important to note that forward-looking information is subject to various risk factors and uncertainties, which could significantly impact expectors 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 are recording this call, and this session will constitute your consent to being recorded. I'll now turn the call over to Brady's President and Chief Executive Officer, Russell Schaller.

I'm pleased to announce a fantastic quarter. We reported a new record high adjusted earnings per share of $1.50 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're growing in our key product lines in both of our regions and we continue to see positive responses to the new products we've introduced over the last several years. Launched in February, our I-4311 is a 4-inch portable printer which is tailored for plant safety and manufacturing professionals. And it's selling well above expectations.

We continue growth in wiring identification this quarter, particularly in data centers that margin comes throughout our global businesses. Organic sales grew 8.2%, which was driven by both of our regions. The Americas and Asia grew 10.1% in Europe and Australia. We also funded a significant increase in research and development. We reduced our SG&A expenses and increased our net cash position to $148.6 million. dollars. Our financial position allows us to continue to invest in our organic business and to put us in an incredibly strong position to finance the BSS transaction, all while remaining committed to our dividend and to opportunistic share buybacks. Slide number four 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%, but total sales growth of 30 details are quarterly gross margin trending. Our gross profit margin was 51.8% this quarter, compared to 51% in the second. Last year, we took actions to streamline our cost structure, and we closed manufacturing facilities in Beijing, China, and in Buffalo, New York. These actions reduced gross profit margin by 30 basis points approximately last year. So we're 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 girls' profit margin this quarter. Slide number six details our SG&A expense trending. SG&A was $128.7 million this quarter compared to $108.7 million in the third quarter of last year. As a percent of sales, SG&A was 29.6% compared to 28.4% last year. 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% of 120 basis points. We need to invest in growth through targeted additions to our sales force, and we're realizing the benefit of 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're seeing these multi-year investments paying off in our organic sales Printer unit sales are up nearly 8% this quarter compared to last year's 5.4% from 19.2% reporting record adjusted EP. Trending of our pre-tax earnings. Pre-tax earnings on a GAAP basis increased 11-point current period inflation charges we incurred last year. Pre-tax earnings increased 23.8% from $0.4 million to $92. Moving to slide number 9, this outlines the 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. Gap diluted earnings per share was $1.21 compared to $1.9 last year. And our adjusted gap diluted earnings per share was $1.50 compared to $1.22 last year, which was a 23% growth and a new quarterly record. We and in our sales force are paying off 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 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. Nearly 35% versus consistent focus on cash-based decision-making and our high-quality earnings. Slide number 11 details the impact that our cash generation has had on our balance sheet. $148.6 million in triple our net cash position from a year ago, and to finance the acquisition of the PSS business. $500 million in term loan aid bank debt, and $800 million in private placement debt. And our expectation is that our interest rate will be below the time of closing the transaction, and we expect to deliver quickly to below two times the ability to buy back shares when the opportunity arises. And this quarter, we bought 63,000 shares for $5.2 million, which was an average price of $81.59 per share. This fiscal year, we bought 184,000 shares for $14.1 million, which was an average price of $76.76. 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 EPS guidance range from $4.62 to $4.6 of approximately $45 million. 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, and engineering pressures that we're unable to offset on in economic activity. With that, I'll 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, Anne. Slide 13 shows the financial results of our Americas and Asia region. Organic sales growth is a critical burden.

Please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Our first question comes from Steve Ferrazani with Sidoti.

Morning, Russell. Morning, Ann. Morning, Dave. Obviously very positively surprised about the organic growth this quarter. I mean, I'm 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 fill in, I'm going to say maybe 1% or 2% was fill in from what we thought was a slightly weaker Q2 than we expected. Now, with that said, you know, clearly Q3 came in very strong. It's 20% of our business, and it grew at almost 20%, and so 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 you take what we felt was just generally strong environment for Brady's products, you get to the organic results that we posted, which, again, and we're hoping to continue through the rest of the fiscal year.

How much of a difference maker is the I-4311? Is that a share taker?

It's not only – I wouldn't even say it's a share taker. It's literally new to the world. There is no equivalent product to a portable 4-inch printer.

We're expecting, you know – Russell, I think you – make sure I heard you right. You said in year one, the acquisition would add 80 cents to adjusted EPS. I think you were more, I think you had said double digits before.

You know, as time goes on, of course, we're going to hone into exact answers. And, you know, we're still in the integration phase and understanding the complete cost structure.

Is the expectation that there's some synergy realization with that, or is that without synergies?

That first quarter, excuse me, that first year is no synergies.

Wow. And timing on the deal, any change?

August 1st is our best estimate, you know, pending regulatory filings and some other things. But if we miss the August 1st date, it will not Honeywell or Brady.

Got it. Thanks, Russell. Our next question comes from Keith Hosom with North Coast Research.

Good morning, guys. And I want to echo congratulations on a great quarter. Great to see. You know, Russell, in terms of the data center business, obviously as a driver of your business, 3% to 4% overall, do you guys have any increased visibility there? Obviously, we all see the same headlines and data centers are expected to grow up some incredible amounts over the next several years, you know, even more than what we've seen. Any visibility that you guys have that you guys will be partaking in that as well? It's been several quarters now that we've seen this as a code driver for you guys.

Yeah. So, you know, so far the data centers are keeping pace. You know, we either see an acceleration from the current trend or a deceleration. The backlog in data centers from our perspective, the physical building of data centers seems to be at a virtual capacity limit. So, in the end, there is some limit to how it is in place, which, frankly, we see as a good thing, because that ensures that several years, as opposed to, I'll say, a data center sugar high, which I'm hoping turns out not to be true.

When in the process of the data center being built are you guys, your products being used? Is it toward the completion of the data center? Is it earlier? Maybe any context you can provide there.

Yeah, so I'm going to say it's kind of all along the way, depending on how the data center itself is put together. So, in some cases, there's a lot of pre-wiring that happens before the data center is actually fully built. In that case, you know, we would be a little bit earlier, and then sometimes it's on-premises. You know, taken from the very beginning, once they break ground all the way through to full commissioning them, and that's when we…

I have a question on data centers for me. And who is the buyer of this? Is it the builder of the data center themselves? Is it the server companies? Who's the buyer?

So I would say, depending on the region and location, sometimes it's actually the cable manufacturers themselves. Sometimes it is the data center integrator. Sometimes it is the specific term. I appreciate that.

Gross margins, you know, benefiting obviously from data centers, but it sounds like also with the printer growth there, you're going to be benefiting from consumables. You have a great number this quarter, the 51.8. As we kind of think about going forward, how are you thinking about gross margins? Is 50 no longer on the floor? Are we thinking maybe 51, 52 is, you know, possible here as we look forward?

Yeah, so we, you know, just to remind the area under the curve, because, you know, some of our products have to push up pricing, and we could get even much higher gross margin than we stand right now. But we know that would come at the point of demand disruption. because a lot of our products are used to something different or more professional than, say, picking up a Sharpie. So we're always very careful.

I appreciate that. In terms of the 80-cent number that you gave for the Honeywell PFS acquisition the first full year, what has been included in that context? I mean, I've been in the opinion that they've underinvested R&D and sales and marketing over the years. You're obviously closer to the number than I am. Perhaps any thoughts on what that includes in terms of any additional investment about what they were doing?

So I'll give a little bit.

Unfortunately, even they realized that post-close will provide the visibility into the bills.

Appreciate it. And I guess last question from you guys, and I don't usually ask questions on board reservations, because I usually don't think much about it. Well, it's time to hear, obviously, the stock came down last week. You know, you had two board members resign a little bit over a week ago. You announced on a Friday afternoon. Stock was down 10%. Obviously, you made the Honeywell acquisition announcement about less than a month ago. Maybe any clarity you can give there in terms of the board thought process in this and any relationship? Maybe you're limited where you can speak, but I've got to ask that question.

Oh, of course, Keith. And frankly, I would have answered it even if you hadn't. So, you know, let's turn back the clock a little bit about Brady and my appreciation for the board we have and what they've had to go through for the last several months. So, if you were to take Brady pre-Christmas time, we were a cash flow generator that required, you know, of course, but let's be frank, and our board was with management. And, frankly, unexpected from every single week, sometimes for hours, and be directly engaged in a whole host. The same amount of work is actually going to continue because, again, our board can't say enough about their participation and the amount of time they've had.

I appreciate it. Thank you.

I'd like to turn the call back to Russell Schaller for closing remarks.

That's great. Thank you all for your time this morning. We reported an excellent quarter. I'm proud of our entire team globally with our ability to deliver 8.2% organic sales growth in this disruptive geopolitical environment is impressive. Our investment in R&D is paying off momentum. For your time this morning, I'll be right back to this conference call.

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