Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Brady Corporation is a global manufacturer and supplier of identification solutions and workplace safety products that identify and protect premises, products and people. The Company is organized and managed on a geographic basis with two reportable segments: Americas & Asia and Europe & Australia.
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our audited consolidated financial statements and the notes to those statements (Item 8) in this Annual Report on Form 10-K. The following discussion is intended to help the reader understand the results of operations and financial condition of the Company for the year ended July 31, 2025 compared to the year ended July 31, 2024.
A discussion regarding our financial condition and results of operations for fiscal 2024 compared to fiscal 2023 can be found under Item 7 in our Annual Report on Form 10-K for the year ended July 31, 2024, filed with the SEC on September 6, 2024, which is available on the SEC's website at www.sec.gov and our corporate website at www.bradyid.com/corporate/investors and such information is incorporated by reference herein.
References in this Annual Report on Form 10-K to “organic sales” refer to sales calculated in accordance with U.S. GAAP, excluding the impact of foreign currency translation, sales recorded from divested companies up to the first anniversary of their divestiture and sales recorded from acquired companies prior to the first anniversary date of their acquisition. 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.
Macroeconomic Conditions and Trends
The Company's operations and financial performance are subject to the risks and uncertainties inherent in the global economic environment, including inflationary pressures, supply chain disruptions, and other macroeconomic challenges. These pressures may impact the Company's business, financial condition and results of operations as the global economic outlook remains uncertain.
In recent months, the U.S. government introduced incremental import tariffs on goods imported into the U.S. from numerous countries, triggering reciprocal tariffs and other actions from many countries on goods exported from the U.S. Trade policies of the U.S. and other countries, including China, are complex and rapidly evolving. Our strategy of manufacturing products near the point of sale reduces our overall exposure to tariffs, though certain sourced inputs and manufactured items remain subject to incremental tariffs. Our business has incurred, and expects to continue to incur, additional costs as it relates to these incremental tariffs for the foreseeable future. The Company has taken and will continue to take action to mitigate inflationary pressures caused by the incremental tariffs through a combination of targeted price increases and surcharges, strategic sourcing adjustments, product portfolio optimization, as well as our ongoing efforts to drive sustainable efficiency gains in our operations and administrative structures.
Notwithstanding the uncertain situation relating to tariffs, we believe our financial strength positions us well to continue investing in acquisitions and organic growth opportunities, such as expanded sales channels, marketing programs, and research and development (“R&D”). We remain focused on driving sustainable efficiency gains and automation across our operations and selling, general and administrative (“SG&A”) functions, while also returning capital to our shareholders through dividends and share repurchases. At July 31, 2025 , we had cash of $174.3 million, as well as a credit agreement with $ 198.1 million available for future borrowing, which can be increased up to $ 1,093.1 million at the Company's option and subject to certain conditions, for total available liquidity of $1,267.4 million.
We believe that our financial resources and liquidity levels, including the undrawn portion of our credit agreement and our ability to increase that credit line as necessary, are sufficient to support the execution of our growth strategy and to manage the impact of economic or geopolitical events that could potentially reduce sales, net income, or cash provided by operating activities. Refer to Risk Factors, included in Part I, Item 1A of this Annual Report on Form 10-K for the year ended July 31, 2025 , for further discussion of the possible impact of global economic or geopolitical events on our business.
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Results of Operations
The comparability of the operating results for the year ended July 31, 2025 to the year ended July 31, 2024 has been impacted by the acquisitions of Gravotech Holding (“Gravotech”) on August 1, 2024, American Barcode and RFID Incorporated (“AB&R”) on October 1, 2024 and the Microfluidic Solutions business unit of Funai Electric Co., Ltd. (“Microfluidic Solutions”) on April 1, 2025. The operating results of Gravotech, AB&R and Microfluidic Solutions have been included since their acquisition dates. Gravotech has been included in both reportable segments, and AB&R and Microfluidic Solutions have been included in the Americas & Asia reportable segment. The comparability of the operating results for the Americas & Asia segment has also been impacted by the divestiture of two non-core businesses, one in March 2023 and another in October 2023.
A comparison of results of operating income for the years ended July 31, 2025, 2024, and 2023 is as follows:
(Dollars in thousands)
% Sales
% Sales
% Sales
Net sales
Gross margin
Operating expenses:
Research and development
Selling, general and administrative
Total operating expenses
Operating income
Net sales increased 12.8% to $1,513.6 million in fiscal 2025 compared to $1,341.4 million in fiscal 2024, which consisted of organic sales growth of 2.6% and sales growth from acquisitions of 10.5%, which was partially offset by a decrease of 0.3% due to divestitures. Organic sales grew 4.8% in the Americas & Asia segment, while organic sales declined 1.8% in the Europe & Australia segment.
Gross margin increased 10.6% to $760.8 million in fiscal 2025 compared to $687.9 million in fiscal 2024. As a percentage of net sales, gross margin decreased to 50.3% in fiscal 2025 from 51.3% in fiscal 2024. The decrease in gross margin as a percentage of net sales was primarily due to a non-recurring increase in cost of goods sold of $4.1 million related to the fair value adjustment to inventory from acquisitions, facility closure and other reorganization costs of $4.9 million, as well as the impact of incremental tariffs, which were partially offset by organic sales growth in higher gross margin product lines.
R&D expenses increased 17.9% to $79.9 million in fiscal 2025 compared to $67.7 million in fiscal 2024. As a percentage of net sales, R&D expenses increased to 5.3% in fiscal 2025 compared to 5.1% in fiscal 2024. The increase in R&D spending in fiscal 2025 was primarily due to the acquisition of Gravotech, and, to a lesser extent, an increase in R&D headcount within the Company's organic business. The Company remains committed to investing in new innovative product development to drive long-term organic sales growth. Investments in new printing systems, pressure sensitive materials, scanners and software are the primary focus of R&D expenditures in fiscal 2026.
SG&A expenses include selling and administrative costs directly attributed to the Americas & Asia and Europe & Australia segments, as well as certain other corporate administrative expenses including finance, information technology, human resources and other administrative expenses. SG&A expenses increased 17.9% to $444.3 million in fiscal 2025 compared to $376.7 million in fiscal 2024. As a percentage of net sales, SG&A expense increased to 29.4% in fiscal 2025 compared to 28.1% in fiscal 2024 primarily due to incremental amortization expense from acquired intangible assets of $9.5 million and facility closure and other reorganization costs of $13.6 million.
Operating income decreased 2.8% to $236.6 million in fiscal 2025 compared to $243.4 million in fiscal 2024. As a percentage of sales, operating income decreased to 15.6% in fiscal 2025 compared to 18.1% in fiscal 2024. The decrease in operating income in fiscal 2025 was primarily due to facility closure and other reorganization costs, incremental amortization expense related to acquired businesses, and the fair value adjustment to inventory from acquisitions.
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OPERATING INCOME TO NET INCOME
The following is a reconciliation of operating income to net income for the years ended July 31:
(Dollars in thousands)
% Sales
% Sales
% Sales
Operating income
Other income (expense):
Investment and other income
Interest expense
Income before income taxes
Income tax expense
Net income
Investment and other income was $5.2 million in fiscal 2025 compared to $7.6 million in fiscal 2024. The decrease in investment and other income in fiscal 2025 was primarily due to a decrease in interest income resulting from a reduced cash balance and lower interest rates.
Interest expense increased to $4.7 million in fiscal 2025 compared to $3.1 million in fiscal 2024. The increase in interest expense in fiscal 2025 was primarily due to an increase in outstanding borrowings on the Company's credit agreement to fund acquisitions, which was partially offset by a decrease in the weighted average interest rate compared to fiscal 2024.
The Company's income tax rate was 20.2% in fiscal 2025 compared to 20.4% in fiscal 2024. Refer to Item 8, Note 11, “Income Taxes” for additional information on the Company's income tax rates.
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Business Segment Operating Results
The Company evaluates short-term segment performance based on segment profit and customer sales. Interest expense, investment and other income, income tax expense, and certain corporate administrative expenses are excluded when evaluating segment performance.
The following is a summary of segment information for the years ended July 31:
SALES GROWTH INFORMATION
Americas & Asia
Organic
Acquisitions
Currency
Divestiture
Total
Europe & Australia
Organic
Acquisitions
Currency
Total
Total Company
Organic
Acquisitions
Currency
Divestiture
Total
SEGMENT PROFIT AS A PERCENT OF NET SALES
Americas & Asia
Europe & Australia
Total
Americas & Asia
Americas & Asia net sales increased 12.1% to $993.7 million in fiscal 2025 compared to $886.5 million in fiscal 2024, which consisted of organic sales growth of 4.8% and sales growth from acquisitions of 8.3%, which were partially offset by a decrease from foreign currency translation of 0.6% and a decrease due to a divestiture of 0.4%. Organic sales growth reflected strong execution of our commercial strategies, supported by steady industrial demand in North America, continued expansion in key end markets across Latin America, and resilient demand in Asia despite mixed economic conditions in certain countries.
Organic sales in the Americas increased in the low-single digits in fiscal 2025. The increase in organic sales was primarily due to growth in the wire identification, safety and facility identification and product identification product lines, which was partially offset by a decline in the people identification and healthcare identification product lines.
Organic sales in Asia increased approximately 13% in fiscal 2025. The organic sales increase was primarily driven by higher demand from electronics manufacturing services providers, technology companies, and industrial suppliers across Japan, India, Malaysia and Singapore. This growth was partially offset by lower volumes in China.
Segment profit increased 6.6% to $209.8 million in fiscal 2025 from $196.8 million in fiscal 2024. As a percent of net sales, segment profit decreased to 21.1% in fiscal 2025 from 22.2% in fiscal 2024. The increase in segment profit was primarily due to increased profit from organic sales growth, which was partially offset by facility closure and other reorganization costs and incremental amortization expense related to acquired businesses. The decrease in segment profit as a percentage of sales was primarily due to costs associated with the closure of two facilities, incremental amortization from acquired businesses and purchase accounting adjustments, which was partially offset by increased profit from organic sales growth.
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Europe & Australia
Europe & Australia sales increased 14.3% to $519.9 million in fiscal 2025 compared to $454.9 million in fiscal 2024. The increase consisted of sales growth from acquisitions of 14.7% and an increase from foreign currency translation of 1.4%, which was partially offset by an organic sales decline of 1.8%. Organic sales declined due to softer industrial demand, driven by lower manufacturing output and ongoing economic uncertainty in Europe, particularly the United Kingdom and Germany, and by a weaker growth outlook in Australia. Looking ahead, the Company remains focused on leveraging its capabilities and market presence to drive growth in key markets over the long term.
Organic sales in Europe declined in the low-single digits in fiscal 2025. The decline was driven by the safety and facility identification and people identification product lines, which was partially offset by growth in the wire identification product line. The decline was driven by the United Kingdom and Western Europe Regions, which was partially offset by growth in the Middle East and Nordic Regions.
Organic sales in Australia declined in the mid-single digits in fiscal 2025. The organic sales decline was primarily driven by a decrease in volume in the safety and facility and wire identification product lines.
Segment profit decreased 19.4% to $56.9 million in fiscal 2025 compared to $70.6 million in fiscal 2024. As a percentage of net sales, segment profit decreased to 11.0% in fiscal 2025 compared to 15.5% in fiscal 2024. The decrease in segment profit and segment profit as a percentage of sales was primarily due to incremental amortization from acquired businesses, purchase accounting adjustments and reorganization costs in order to streamline our operating structure.
Financial Condition
Liquidity & Capital Resources
The Company's cash balances are generated and held in numerous locations throughout the world. At July 31, 2025, approximately 97% of the Company's cash and cash equivalents were held outside the United States. The Company's organic and inorganic 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, dividend payments, and strategic acquisitions for the next 12 months and beyond. 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.
Cash Flows
Cash and cash equivalents were $174.3 million at July 31, 2025, a decrease of $75.8 million from July 31, 2024. The following summarizes the cash flow statement for the years ended July 31:
(Dollars in thousands)
Net cash flow provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash
Net (decrease) increase in cash and cash equivalents
Net cash provided by operating activities was $181.2 million during fiscal 2025 compared to $255.1 million in fiscal 2024. The decrease in cash provided by operating activities was primarily due to changes in working capital, including inventory growth to maintain high service levels and align with customer needs, higher receivables from strong organic growth in the Americas & Asia segment, and lower payroll-related accruals and accounts payable due to the timing of payments.
Net cash used in investing activities was $171.3 million during fiscal 2025, which primarily consisted of the acquisition of businesses of $144.5 million and capital expenditures of $27.6 million. Net cash used in investing activities was $81.0 million in fiscal 2024, which primarily consisted of capital expenditures, which included the purchase of a previously leased facility in Mexico and facility construction costs in Belgium.
Net cash used in financing activities was $83.9 million during fiscal 2025 compared to $70.5 million in fiscal 2024. The
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increase in cash used in financing activities was primarily due to increased net repayments on borrowings on our credit agreement following the funding of acquisitions in fiscal 2025, which was partially offset by a decline in share repurchases compared to the prior year.
Material Cash Requirements
Our material cash requirements for known contractual obligations include capital expenditures, borrowings on our credit agreement and lease obligations. We believe that net cash provided by operating activities will continue to be adequate to meet our liquidity and capital needs for these items over the next 12 months and in the long-term beyond the next 12 months. We also have cash requirements for purchase orders and contracts for the purchase of inventory and other goods and services, which are based on current and anticipated customer needs and are fulfilled by our suppliers within short time horizons. We do not have significant agreements for the purchase of inventory or other goods or services specifying minimum order quantities. In addition, we may have liabilities for uncertain tax positions, but we do not believe that the cash requirements to meet any of these liabilities will be material. A discussion of income taxes is contained in Note 11 of the notes to consolidated financial statements.
Credit Agreement and Covenant Compliance
Refer to Item 8, Note 6, “Debt” for information regarding the Company's credit agreement and covenant compliance.
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 custom products 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 $21.8 million and $22.6 million as of July 31, 2025 and 2024, respectively. If recognized, $18.3 million of unrecognized tax benefits would reduce the Company's income tax rate as of both July 31, 2025 and 2024. Accrued interest and penalties related to unrecognized tax benefits were $6.6 million and $6.1 million as of July 31, 2025 and 2024, 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 $3.1 million in
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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.
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 $82.2 million and $47.2 million as of July 31, 2025 and 2024, respectively, which were primarily related to foreign tax credit carryforwards and net operating loss carryforwards in its various tax jurisdictions.
Goodwill and Other 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. If the actual results differ from these estimates, it could result in an impairment of intangible assets and goodwill or require acceleration of the amortization expense of finite-lived intangible assets. In addition, goodwill and other indefinite-lived intangible assets must be tested for impairment at least annually. 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, Americas & Asia and Europe & Australia, with the following goodwill balances as of July 31, 2025: North America, $494.8 million; Europe, $179.3 million; and Latin America, $2.9 million. The other three identified reporting units each have a goodwill balance of zero. The Company has the option to first assess qualitative factors to determine if it is more likely than not that the fair value of the reporting unit is greater than its respective carrying value. If the qualitative assessment leads to a determination that the fair value of a reporting unit may be less than its carrying value, or if the Company elects to bypass the qualitative assessment altogether, the Company performs a quantitative impairment test by calculating the fair value of the reporting unit and comparing the fair value with its associated carrying value. When the Company performs the quantitative test for goodwill, the Company establishes the fair value for the reporting unit based on the income approach, in which a discounted cash flow model is utilized, the market approach, in which market multiples of comparable companies are utilized, or a combination of both approaches. The income approach requires the use of significant estimates and assumptions, including forecasted sales growth, operating income projections, and discount rates and changes in these assumptions may adversely impact the fair value assessments. The market approach requires significant assumptions related to the selection of comparable publicly traded companies and the market multiples. Significant industry or macroeconomic trends, to the Company's business, of significant customers, to effectively integrate acquired businesses, significant changes or planned changes in use of the assets or in entity structure, and may 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) GDP growth for the respective geography, (ii) industry and market factors such as competition and changes in the market for the reporting unit's products, (iii) new product development, (iv) competing technologies, (v) overall financial performance such as cash flows, actual and planned revenue and profitability, and (vi) changes in the strategy of the reporting unit. In the event the fair value of a reporting unit is less than the carrying value, the Company would recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds the fair value. If necessary, the Company may consult valuation specialists to assist with the assessment of the estimated fair value of the reporting unit.
On May 1, 2025, the Company performed the qualitative assessment for all three reporting units with goodwill balances and determined that it was more likely than not that the fair value exceeds the carrying value for each reporting unit, and as such, goodwill was not considered impaired.
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Business Combinations
The Company uses the acquisition method of accounting to allocate the purchase price of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair value of assets and liabilities is recorded as goodwill. If the fair value of net assets acquired exceeds the purchase price, the Company records the excess as a bargain purchase gain in earnings after reassessing the estimated values. Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values and the values of assets in use and often requires the application of judgment regarding estimates and assumptions. While the ultimate responsibility resides with management, for material acquisitions, we retain the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets, including intangible assets and significant tangible long-lived assets. The valuation methods used to determine the estimated fair value of intangible assets included the multi-period excess earnings method for customer relationships using customer inputs and contributory charges, and the relief from royalty method for tradenames and technological know-how. Several assumptions and estimates were involved in the application of these valuation methods, including forecasted sales growth, margin, and cash flows attributable to existing customers, obsolescence factor, royalty rate, contributory asset charges, customer rate, tax rates, and discount rates. Tangible long-lived assets are valued using a combination of the income, cost and market value approaches. While we believe expectations and assumptions utilized for historical business combinations have been reasonable, they are inherently uncertain and include significant management judgment.
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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