KADANT INC 10-Q

Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations When we use the terms "we," "us," "our," and the "Company," we mean Kadant Inc., a Delaware corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates. This Quarterly Report on Form 10-Q and the documents we incorporate by reference in this report include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements are not statements of historical fact and may include statements regarding possible or assumed future results of operations. Forward-looking statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management, using information currently available to our management. When we use words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "seeks," "should," "likely," "will," "would," "may," "continue," "could," or similar expressions, we are making forward-looking statements. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions. Our future results of operations may differ materially from those expressed in the forward-looking statements. Many of the important factors that will determine these results are beyond our ability to control or predict. You should not put undue reliance on any forward-looking statements. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise. For a discussion of important factors that may cause our actual results to differ materially from those suggested by the forward-looking statements, you should read carefully Risk Factors included in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 30, 2023 (Annual Report) and as may be further amended and/or restated in subsequent filings with the SEC. Overview Company Background We are a global supplier of technologies and engineered systems that drive Sustainable Industrial Processing ® . Our products and services play an integral role in enhancing efficiency, optimizing energy utilization, and maximizing productivity in process industries while helping our customers advance their sustainability initiatives with products that reduce waste or generate more yield with fewer inputs, particularly fiber, energy, and water. Producing more while consuming less is a core aspect of Sustainable Industrial Processing and a major element of the strategic focus of our business. Our financial results are reported in three reportable operating segments: Flow Control, Industrial Processing, and Material Handling. The Flow Control segment consists of our fluid-handling and doctoring, cleaning, & filtration product lines; the Industrial Processing segment consists of our wood processing and stock-preparation product lines; and the Material Handling segment consists of our conveying and vibratory, baling, and fiber-based product lines. A description of each segment is as follows: • Flow Control – Custom-engineered products, systems, and technologies that control the flow of fluids used in industrial and commercial applications to keep critical processes running efficiently in the packaging, tissue, food, metals, energy, and other industrial sectors. Our primary products include rotary sealing devices, steam systems, expansion joints, doctor systems, roll and fabric cleaning devices, and filtration and fiber recovery systems. • Industrial Processing – Equipment, machinery, and technologies used to process recycled paper and timber for the packaging, tissue, wood products, and alternative fuel industries, among others. Our primary products include stock-preparation systems and recycling equipment, chemical pulping equipment, debarkers, stranders, chippers and custom engineered knife systems. In addition, we provide industrial automation and digitization solutions to process industries. • Material Handling – Products and engineered systems used to handle bulk and discrete materials for secondary processing or transport in the aggregates, mining, food, and waste management industries, among others. Our primary products include conveying and vibratory equipment and balers. In addition, we manufacture and sell biodegradable, absorbent granules used as carriers in agricultural applications and for oil and grease absorption. Industry and Business Overview Our consolidated bookings increased 15% to $240.3 million in the third quarter of 2024 compared to the third quarter of 2023, due to strong contributions from our recent acquisitions and increased demand for our parts and consumables products. While demand for our parts and consumables products remains strong, we have seen a lengthening in the timing for securing capital orders as customers are being more cautious with some delaying large capital expenditures to later in the year or into 2025. This is due to several factors, including economic uncertainty surrounding actions by central banks, macroeconomic conditions abroad, and the consolidation of some of our large customers. These sluggish market conditions led to a 2% decrease 25 Table of Contents KADANT INC. in organic bookings, which is defined as bookings excluding the effect of foreign currency translation and acquisitions, compared to the third quarter of 2023. We anticipate stronger capital bookings in the fourth quarter of 2024 as customers prepare for 2025 projects, which we expect will result in sequentially higher bookings. However, the timing of securing capital orders can be uncertain and could shift by quarter due to macroeconomic uncertainty or other factors. The high percentage of aftermarket business at our recent acquisitions is expected to lead to increased annual bookings from our parts and consumables products in 2024. Looking beyond 2024, we see long-term strength in our end markets as customers continue to turn to our products to help maximize productivity with more efficient production processes. In addition, we see growth opportunities from proposed and adopted legislation in the U.S. and abroad aimed at fueling investment, including those targeting environmental initiatives. An overview of our business by segment is as follows: • Flow Control – Our Flow Control segment bookings increased 7% compared to the third quarter of 2023, including a 12% increase from acquisitions. Organic bookings decreased 5% compared to the third quarter of 2023 led by decreased demand for our capital equipment products in Europe as a result of challenging market conditions and a slowdown in manufacturing activity. In Europe, there is continued uncertainty in the end markets we serve primarily due to geopolitical tensions and weak macroeconomic conditions. In North America, demand for our capital equipment in 2024 has been impacted by mill shutdowns and the consolidation of some of our large customers. We expect steady demand in our Flow Control segment in the fourth quarter of 2024. • Industrial Processing – Our Industrial Processing segment bookings increased 27% compared to the third quarter of 2023, including 20% from acquisitions and 7% from organic bookings. The increase in organic bookings was led by increased demand for our parts and consumables products, especially in North America. We had stable demand for our capital equipment products in this segment in the third quarter of 2024 with increases at our stock-preparation business, offset in part by softness at our wood processing business. The number of dormant or idle lines in the North American lumber industry has remained high as lumber producers await market improvement. Demand for oriented strand board (OSB) was strong and mill operations drove solid parts and consumables bookings. Weakness in new home starts in the U.S. is expected to be offset by an uptick in home improvement projects, which will result in increased demand for OSB. lumber, and our products. We expect sequentially higher bookings in the fourth quarter of 2024 due to capital project activity. • Material Handling – Our Material Handling segment bookings increased 10% compared to the third quarter of 2023, including a 19% increase from acquisitions. Organic bookings decreased 9% compared to the third quarter of 2023 led by weak demand at our conveying and vibratory business where market conditions have caused customers to be more cautious with large capital expenditures. However, the long-term outlook for the aggregates industry remains strong, particularly in North America, fueled by new infrastructure projects as a result of significant federal and state investment. Organic bookings increased at our baling business due to strong demand for our capital products as more industries focus on waste reduction and recycling. We expect demand in our Material Handling segment to remain stable in the fourth quarter of 2024. Our global operations have been and continue to be impacted by complex market conditions fueled by inflationary pressures, geopolitical tensions, labor availability and uncertainty in the markets. While the U.S economy has proven more resilient than predicted, growth in the European economy has slowed due to high interest rates and elevated inflation, and China's manufacturing activity has contracted. We expect our operating environment to continue to be challenging, which creates continued uncertainty in the short-term. However, we believe that the fundamentals of our business remain strong, particularly given our solid market position in key product lines, solid global operations teams, and long-term strength of our end markets. For more information related to these challenges, and other factors impacting our business, please see Risk Factors included in Part I, Item 1A, of our Annual Report and subsequent filings with the SEC. International Sales Slightly more than half of our sales are to customers outside the United States, mainly in Europe, Asia, and Canada. As a result, our financial performance can be materially affected by currency exchange rate fluctuations between the U.S. dollar and foreign currencies. To mitigate the impact of foreign currency transaction fluctuations, we generally seek to charge our customers in the same currency in which our operating costs are incurred. Additionally, we may enter into forward currency exchange contracts to hedge certain firm purchase and sale commitments denominated in currencies other than our subsidiaries' functional currencies. We currently do not use derivative instruments to hedge our exposure to exchange rate fluctuations created by the translation into the U.S. dollar of our foreign subsidiaries' results that are in functional currencies other than the U.S. dollar. 26 Table of Contents KADANT INC. Global Trade The United States imposes tariffs on certain imports from China, which has and will continue to increase the cost of some of the equipment that we import. Although we have worked to mitigate the impact of tariffs through pricing and sourcing strategies, we cannot be sure these strategies will effectively mitigate the impact of these costs. For more information on risks associated with our global operations, including tariffs, please see Risk Factors, included in Part I, Item 1A, of our Annual Report and subsequent filings with the SEC. Acquisitions We expect that a significant driver of our growth over the next several years will be the acquisition of businesses and technologies that complement or augment our existing products and services or may involve entry into a new process industry. On January 1, 2024, we acquired Key Knife, Inc. and certain of its affiliates (collectively, Key Knife) for $153.4 million, net of cash acquired. Key Knife is a global supplier of engineered knife systems for custom chipping, planing, and flaking solutions for wood products industries, with revenue of approximately $65.0 million for the twelve months ended September 30, 2023, and is part of our Industrial Processing segment. On January 24, 2024, we acquired KWS Manufacturing Company, Ltd. (KWS) for $81.2 million, subject to a post-closing adjustment. KWS is a leading manufacturer of conveying equipment for the bulk material handling industry, with revenue of approximately $45.0 million for the twelve months ended September 30, 2023, and is part of our Material Handling segment. On May 31, 2024, we acquired Dynamic Sealing Technologies LLC and affiliates (collectively, DSTI) for $53.7 million, net of cash acquired and subject to a post-closing adjustment. DSTI is a leading manufacturer of engineered fluid sealing and transfer solutions for rotating applications, with revenue of approximately $25.0 million for the twelve months ended March 31, 2024, and is part of our Flow Control segment. We funded these acquisitions primarily through borrowings under our revolving credit facility. We expect several synergies in connection with the acquisitions, including expansion of product sales into new markets by leveraging our global sales network and relationships, broadening our product portfolio, and strengthening our position in the various markets we serve. See Note 2 , Acquisitions, in the accompanying condensed consolidated financial statements for further information related to our 2024 acquisitions. Results of Operations Third Quarter 2024 Compared With Third Quarter 2023 Revenue The following table presents the change in revenue by segment between the third quarters of 2024 and 2023, and those changes excluding the effect of foreign currency translation and acquisitions which we refer to as change in organic revenue. Organic revenue excludes the effect of acquisitions for the four quarterly reporting periods following the date of the acquisition. The presentation of the change in organic revenue is a non-GAAP measure. We believe this non-GAAP measure helps investors gain an understanding of our underlying operations consistent with how management measures and forecasts its performance, especially when comparing such results to prior periods. This non-GAAP measure should not be considered superior to or a substitute for the corresponding U.S. generally accepted accounting principles (GAAP) measure. Revenue by segment in the third quarters of 2024 and 2023 is as follows: Three Months Ended Increase Currency Translation Acquisitions (Non-GAAP) Change in Organic Revenue (In thousands, except percentages) September 28, 2024 September 30, 2023 % Change Increase (Decrease) % Change Flow Control $ 97,521 $ 90,798 $ 6,723 7% $ (572) $ 5,574 $ 1,721 2% Industrial Processing 110,696 94,220 16,476 17% (527) 14,926 2,077 2% Material Handling 63,397 59,164 4,233 7% 214 10,020 (6,001) (10)% Consolidated $ 271,614 $ 244,182 $ 27,432 11% $ (885) $ 30,520 $ (2,203) (1)% 27 Table of Contents KADANT INC. Consolidated revenue increased 11% in the third quarter of 2024, while organic revenue decreased 1%. The decrease in organic revenue is largely due to decreased demand for capital equipment products at our Material Handling segment, partially offset by increased demand for our parts and consumables products, especially at our Industrial Processing segment. From a geographic perspective, the majority of the organic revenue decrease was driven by softening demand in Europe due to weak macroeconomic conditions, offset in part by higher demand in North America where the U.S. economy and industrial demand continued to demonstrate resiliency against inflationary pressures. Revenue at our Flow Control segment increased 7% in the third quarter of 2024, including a 6% increase from acquisitions. Organic revenue increased 2% in the third quarter of 2024 due to higher demand for our capital equipment products in North America driven by continued strength in the U.S. economy and underlying packaging industry and, to a lesser extent, in China where the government has implemented initiatives to encourage investment activity. This increase was offset by decreased demand for our capital equipment products in Europe as a result of challenging market conditions and a slowdown in manufacturing activity. Revenue at our Industrial Processing segment increased 17% in the third quarter of 2024, including a 16% increase from acquisitions. Organic revenue increased 2% due to increased demand for our parts and consumables products in North America. Demand for replacement parts at our wood processing business remains strong, offsetting lower capital project activity resulting from continued weakness in new home starts. At our stock-preparation business, increased demand for capital equipment products, primarily related to replacement and refurbishment projects in North America, was partially offset by decreased demand for our parts and consumable products in China and Europe. Revenue at our Material Handling segment increased 7% in the third quarter of 2024, including a 17% increase from acquisitions. Organic revenue decreased 10% due to weaker demand for our products in both North America and Europe. At our vibratory and conveying business in North America, several large projects in the third quarter of 2023 resulted in comparatively lower revenue in the third quarter of 2024. Constrained market conditions in Europe resulted in decreased demand for our baling products, especially our parts and consumables products. Gross Profit Margin Gross profit margin by segment in the third quarters of 2024 and 2023 is as follows: Three Months Ended Basis Point Change September 28, 2024 September 30, 2023 Flow Control 51.8% 52.2% (40) bps Industrial Processing 44.0% 39.5% 450 bps Material Handling 35.0% 35.7% (70) bps Consolidated 44.7% 43.3% 140 bps Consolidated gross profit margin increased to 44.7% in the third quarter of 2024 compared with 43.3% in the third quarter of 2023 due to higher margins achieved on our capital equipment products across all our segments, especially at our Industrial Processing segment. This increase was partially offset by the inclusion of $1.2 million of amortization expense related to acquired profit in inventory, which lowered consolidated gross profit margin in 2024 by 0.5 percentage points. Within our operating segments, gross profit margin: • Decreased to 51.8% at our Flow Control segment from 52.2% in the 2023 period primarily due to the inclusion of $0.7 million of amortization expense related to acquired profit in inventory, which lowered gross profit margin in 2024 by 0.8 percentage points. • Increased to 44.0% at our Industrial Processing segment from 39.5% in the 2023 period due to higher margins achieved on both our capital equipment and parts and consumable products, and, to a lesser extent, a higher proportion of parts and consumables revenue. This was partially offset by the inclusion of $0.5 million of amortization expense related to acquired profit in inventory, which lowered gross profit margin in 2024 by 0.4 percentage points. • Decreased to 35.0% at our Material Handling segment from 35.7% in the 2023 period primarily due to lower margins achieved on our parts and consumable products, partially offset by higher margins achieved on our capital equipment. 28 Table of Contents KADANT INC. Selling, General, and Administrative Expenses Selling, general, and administrative (SG&A) expenses by segment in the third quarters of 2024 and 2023 are as follows: Three Months Ended (In thousands, except percentages) September 28, 2024 September 30, 2023 Increase % Change Flow Control $ 24,791 $ 21,538 $ 3,253 15% Industrial Processing 21,324 15,968 5,356 34% Material Handling 12,874 10,332 2,542 25% Corporate 10,054 10,051 3 —% Consolidated $ 69,043 $ 57,889 $ 11,154 19% Consolidated as a Percentage of Revenue 25% 24% Consolidated SG&A expenses as a percentage of revenue increased to 25% in the third quarter of 2024 from 24% in the third quarter of 20 23 due to the impact of our acquisitions and acquisition-related costs. Consolidated SG&A expenses increased $11.2 million, or 19%, primarily due to the inclusion of $9.7 million of SG&A expenses from acquisitions and an incremental $1.2 million of acquisition-related costs. Acquisition-related costs included in SG&A consist of amortization expense associated with acquired backlog and acquisition costs. Within our operating segments, SG&A expenses: • Increased $3.3 million at our Flow Control segment principally due to the inclusion of $2.2 million of SG&A expenses from acquisitions, $0.7 million of acquisition-related costs and increased compensation expense. • Increase d $5.4 million at our Industrial Processing segment due to the inclusion of $4.8 million of SG&A expenses from acquisitions, $0.2 million of acquisition-related costs and increased compensation costs and travel expenses. • Increased $2.5 million at our Material Handling segment principally due to the inclusion of $2.7 million of SG&A expenses from acquisitions and $0.3 million of acquisition-related costs, partially offset by a decrease in expense from sales incentives. Other Costs Other costs of $1.0 million in the third quarter of 2023 included the following: • Relocation costs of $0.5 million within our Industrial Processing segment related to the write-down of certain fixed assets that were not moved to a new manufacturing facility in China and facility moving costs. • Restructuring and impairment costs of $0.4 million within our Flow Control segment related to the consolidation of a small manufacturing operation into a larger facility in Germany (2023 Restructuring Plan). This charge consisted of severance costs for the termination of 10 employees, asset write-downs, and facility and other closure costs. Interest Expense Interest expense increased to $5.5 million in the third quarter of 2024 from $2.1 million in the third quarter of 2023 due to increased borrowings under our revolving credit facility, which were primarily used to fund our acquisitions and, to a lesser extent, a higher weighted-average interest rate. Provision for Income Taxes Provision for income taxes increased to $12.0 million in the third quarter of 2024 from $10.8 million in the third quarter of 2023. The effective tax rate of 27% in the third quarter of 2024 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, state taxes, nondeductible expenses, the cost of repatriating the earnings of certain foreign subsidiaries, and tax expense associated with the Global Intangible Low-Taxed Income provisions. These items were offset in part by foreign tax credits. The effective tax rate of 26% in the third quarter of 2023 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings and state taxes. 29 Table of Contents KADANT INC. Net Income Net income increased to $31.9 million in the third quarter of 2024 from $31.0 million in the third quarter of 2023 primarily due to a $5.4 million increase in operating income, offset in part by a $3.4 million increase in interest expense and a $1.1 million increase in provision for income taxes (see discussions above for further details). First Nine Months 2024 Compared With First Nine Months 2023 Revenue The following table presents changes in revenue and organic revenue by segment between the first nine months of 2024 and 2023. Organic revenue is a non-GAAP measure as defined above in the results of operations for the third quarter of 2024 compared with the third quarter of 2023. Revenue by segment in the first nine months of 2024 and 2023 is as follows: Nine Months Ended Currency Translation Acquisitions (Non-GAAP) Change in Organic Revenue (In thousands, except percentages) September 28, 2024 September 30, 2023 Increase % Change Increase (Decrease) % Change Flow Control $ 276,493 $ 276,048 $ 445 —% $ (600) $ 7,098 $ (6,053) (2)% Industrial Processing 331,310 267,729 63,581 24% (2,026) 46,298 19,309 7% Material Handling 187,551 175,216 12,335 7% 253 28,869 (16,787) (10)% Consolidated $ 795,354 $ 718,993 $ 76,361 11% $ (2,373) $ 82,265 $ (3,531) —% Consolidated revenue in the first nine months of 2024 increased 11%, while organic revenue remained flat. Weaker demand at our Material Handling and Flow Control segments was largely offset by stronger demand at our Industrial Processing segment, especially for our capital equipment products. From a geographic perspective, organic revenue was impacted by softening demand in Asia and Europe due to weak macroeconomic conditions, largely offset by stronger industrial demand in North America. Revenue at our Flow Control segment remained flat while organic revenue decreased 2% in the first nine months of 2024 due to decreased demand for our capital equipment products in Europe reflecting the challenging market conditions and slowdown in manufacturing activity. This decrease was partially offset by higher demand for our capital equipment products in North America driven by continued strength in the U.S. economy and underlying packaging industry. Revenue at our Industrial Processing segment increased 24% in the first nine months of 2024, including a 17% increase from acquisitions. Organic revenue increased 7% in the first nine months of 2024 primarily due to increased demand for our capital equipment products at our stock-preparation and wood processing businesses and for our aftermarket products at our wood processing business. Revenue from parts and consumables products increased 8% at our wood processing business due to maintenance requirements for our customers in North America. At our stock-preparation business, capital equipment revenue increased 24% due to higher completion rates on large projects recognized on an over time basis in China and increased replacement and refurbishment projects in North America. Revenue at our Material Handling segment increased 7% in the first nine months of 2024, including a 17% increase from acquisitions. Organic revenue decreased 10% driven by weaker demand for our products in North America and Europe. At our baling business in Europe, decreased demand for our capital equipment products resulted from weaker market conditions, which have lengthened quote-to-order times and delayed several large projects to later in the year. At our conveying and vibratory business, several large parts orders associated with capital projects in the first nine months of 2023 resulted in comparatively lower organic parts and consumables revenue in the first nine months of 2024. 30 Table of Contents KADANT INC. Gross Profit Margin Gross profit margin by segment in the first nine months of 2024 and 2023 is as follows: Nine Months Ended Basis Point Change September 28, 2024 September 30, 2023 Flow Control 52.9% 52.3% 60 bps Industrial Processing 42.3% 39.8% 250 bps Material Handling 36.2% 36.2% — bps Consolidated 44.5% 43.7% 80 bps Consolidated gross profit margin increased to 44.5% in the first nine months of 2024 compared with 43.7% in the first nine months of 2023 due to higher margins achieved on our capital equipment products across all our segments, especially at our Industrial Processing segment. This increase was partially offset by the inclusion of $4.1 million of amortization expense related to acquired profit in inventory, which lowered consolidated gross profit margin in 2024 by 0.6 percentage points. Within our operating segments, gross profit margin: • Increased to 52.9% at our Flow Control segment from 52.3% in the 2023 period primarily due to higher margins achieved on our capital equipment products. This increase was partially offset by the inclusion of $1.0 million of amortization expense related to acquired profit in inventory, which lowered gross profit margin in 2024 by 0.3 percentage points. • Increased to 42.3% at our Industrial Processing segment from 39.8% in the 2023 period due to higher margins achieved on our capital equipment products and, to a lesser extent, a higher proportion of parts and consumables revenue. These increases were partially offset by the inclusion of $2.1 million of amortization expense related to acquired profit in inventory, which lowered gross profit margin in 2024 by 0.7 percentage points. • Remained flat at 36.2% at our Material Handling segment. The impact of a higher proportion of parts and consumables revenue in 2024 was offset by the inclusion of $1.0 million of amortization expense related to acquired profit in inventory, which lowered gross profit margin in 2024 by 0.6 percentage points. Selling, General, and Administrative Expenses SG&A expenses by segment in the first nine months of 2024 and 2023 are as follows: Nine Months Ended (In thousands, except percentages) September 28, 2024 September 30, 2023 Increase % Change Flow Control $ 72,186 $ 65,955 $ 6,231 9% Industrial Processing 65,708 48,943 16,765 34% Material Handling 40,672 32,070 8,602 27% Corporate 30,786 29,473 1,313 4% Consolidated $ 209,352 $ 176,441 $ 32,911 19% Consolidated as a Percentage of Revenue 26% 25% Consolidated SG&A expenses as a percentage of revenue increased to 26% in the first nine months of 2024 compared with 25% in the first nine months of 20 23 principally due to the impact of our acquisitions and acquisition-related costs. Consolidated SG&A expenses increased $32.9 million, or 19%, primarily due to the inclusion of $25.3 million of SG&A expenses from acquisitions, $4.7 million of acquisition-related costs and increased compensation expense associated with new and existing personnel. Within our operating segments, SG&A expenses: • Increased $6.2 million at our Flow Control segment principally due to the inclusion of $2.9 million of SG&A expenses from acquisitions, $1.5 million of acquisition-related costs and increased compensation expense. • Increased $16.8 million at our Industrial Processing segment due to the inclusion of $14.7 million of SG&A expenses from acquisitions, $0.8 million of acquisition-related costs and increased compensation expense associated with new and existing personnel. These increases were partially offset by a $0.4 million favorable effect of foreign currency translation. 31 Table of Contents KADANT INC. • Increased $8.6 million at our Material Handling segment primarily due to the inclusion of $7.7 million of SG&A expenses from acquisitions and $2.4 million of acquisition-related costs, partially offset by a decrease in expense related to external commissions and sales incentives. • Increased $1.3 million at Corporate d ue to increased compensation expense and consulting costs. Other Costs Other costs of $1.0 million in the first nine months of 2023 included the following: • Relocation costs of $0.6 million within our Industrial Processing segment related to the write-down of certain fixed assets that were not moved to a new manufacturing facility in China and facility moving costs. • Restructuring and impairment costs of $0.4 million within our Flow Control segment related to the 2023 Restructuring Plan. This charge consisted of severance costs for the termination of 10 employees, asset write-downs, and facility and other closure costs. Interest Expense Interest expense increased to $15.4 million in the first nine months of 2024 from $6.7 million in the first nine months of 2023 due t o increased borrowings under our revolving credit facility, which were primarily used to fund our acquisitions and, to a lesser extent, a higher weighted-average interest rate. Provision for Income Taxes Provision for income taxes was $31.8 million in both the first nine months of 2024 and the first nine months of 2023. The effective tax rate of 26% in the first nine months of 2024 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, nondeductible expenses, state taxes, and the cost of repatriating the earnings of certain foreign subsidiaries. These items were offset in part by foreign tax credits. The effective tax rate of 26% in the first nine months of 2023 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, state taxes, and nondeductible expenses. Net Income Net income decreased to $88.5 million in the first nine months of 2024 from $89.2 million in the first nine months of 2023 primarily due to a $8.7 million increase in interest expense, offset in part by a $7.6 million increase in operating income (see discussions above for further details). Non-GAAP Key Performance Indicators In addition to the financial measures prepared in accordance with GAAP, we use certain non-GAAP financial measures, including organic revenue (defined as revenue excluding the effect of foreign currency translation and acquisitions), adjusted operating income, earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted EBITDA, adjusted EBITDA margin (defined as adjusted EBITDA divided by revenue), and free cash flow (defined as cash flow provided by operations less capital expenditures). We use organic revenue to understand our trends and to forecast and evaluate our financial performance and compare revenue to prior periods (see discussion in Revenue above). Adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin exclude amortization expense related to acquired profit in inventory and backlog, acquisition costs, relocation costs, restructuring and impairment costs, and other income or expense, as indicated. These items are excluded as they are not indicative of our core operating results and are not comparable to other periods, which have differing levels of incremental costs, expenditures or income, or none at all. Additionally, we use free cash flow in order to provide insight on our ability to generate cash for acquisitions and debt repayments, as well as for other investing and financing activities. We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our core business, operating results, or future outlook. We believe that the inclusion of such measures helps investors gain an understanding of our underlying operating performance and future prospects, consistent with how management measures and forecasts our performance, especially when comparing such results to previous periods or forecasts and to the performance of our competitors. Such measures are also used by us in our financial and operating decision-making and for compensation purposes. We also believe this information is responsive to investors' requests and gives them an additional measure of our performance. 32 Table of Contents KADANT INC. Our non-GAAP financial measures are not meant to be considered superior to or a substitute for the results of operations or cash flows prepared in accordance with GAAP. In addition, our non-GAAP financial measures have limitations associated with their use as compared to the most directly comparable GAAP measures, in that they may be different from, and therefore not comparable to, similar measures used by other companies. A reconciliation of adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin is as follows: Three Months Ended Nine Months Ended (In thousands, except percentages) September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023 Net Income Attributable to Kadant $ 31,586 $ 30,864 $ 87,566 $ 88,673 Net Income Attributable to Noncontrolling Interests 312 175 891 571 Provision for Income Taxes 11,964 10,816 31,810 31,761 Interest Expense, Net 5,109 1,669 14,000 5,669 Other Expense, Net 16 20 48 62 Operating Income 48,987 43,544 134,315 126,736 Acquired Profit in Inventory Amortization (a) 1,205 — 4,065 — Acquired Backlog Amortization (b) 687 — 2,181 — Acquisition Costs 469 — 2,533 — Indemnification Asset (Provision) Reversal, Net (c) (175) (50) (151) 127 Relocation Costs — 535 — 609 Restructuring and Impairment Costs — 434 — 434 Adjusted Operating Income (non-GAAP measure) 51,173 44,463 142,943 127,906 Depreciation and Amortization 12,088 8,234 34,324 24,917 Adjusted EBITDA (non-GAAP measure) $ 63,261 $ 52,697 $ 177,267 $ 152,823 Adjusted EBITDA Margin (non-GAAP measure) 23.3% 21.6% 22.3% 21.3% (a) Represents amortization expense within cost of revenue associated with acquired profit in inventory. (b) Represents intangible amortization expense associated with acquired backlog. (c) Represents the provision for or reversal of indemnification assets related to the establishment or release of tax reserves associated with uncertain tax positions. A reconciliation of free cash flow from cash flow provided by operating activities is as follows: Three Months Ended Nine Months Ended (In thousands) September 28, 2024 September 30, 2023 September 28, 2024 September 30, 2023 Cash Provided by Operating Activities $ 52,478 $ 46,967 $ 103,375 $ 106,311 Capital Expenditures (4,185) (8,848) (15,430) (22,094) Free Cash Flow (non-GAAP measure) $ 48,293 $ 38,119 $ 87,945 $ 84,217 Liquidity and Capital Resources Consolidated working capital was $264.3 million at September 28, 2024, compared with $225.8 million at December 30, 2023. Cash and cash equivalents were $88.4 million at September 28, 2024, compared with $103.8 million at December 30, 2023, which included cash and cash equivalents held by our foreign subsidiaries o f $74.1 million at September 28, 2024 and $94.6 million at December 30, 2023. 33 Table of Contents KADANT INC. Cash Flows Cash flow information in the first nine months of 2024 and 2023 is as follows: Nine Months Ended (In thousands) September 28, 2024 September 30, 2023 Net Cash Provided by Operating Activities $ 103,375 $ 106,311 Net Cash Used in Investing Activities (315,871) (20,060) Net Cash Provided by (Used in) Financing Activities 196,774 (85,671) Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash (997) (1,252) Decrease in Cash, Cash Equivalents, and Restricted Cash $ (16,719) $ (672) Operating Activities Cash provided by operating activities decreased to $103.4 million in the first nine months of 2024 from $106.3 million in the first nine months of 2023 primarily due to an increase in cash used for working capital. Our operating cash flows are primarily generated from cash received from customers, offset by cash payments for items such as inventory, employee compensation, operating leases, income taxes, and interest payments on outstanding debt obligations. Significant cash outflows associated with working capital in the first nine months of 2024 related to accounts receivable, customer deposits and other liabilities. An increase in accounts receivable used cash of $10.4 million primarily due to our revenue growth, and a decrease in customer deposits used cash of $21.6 million due to a reduction in capital equipment orders. Other liabilities used cash of $15.5 million primarily related to incentive compensation payments. These uses of cash were offset in part by cash provided from the shipment of inventory of $10.2 million and increases in accounts payable of $8.7 million related to inventory purchases and the timing of payments. Significant cash outflows associated with working capital in the first nine months of 2023 related to accounts payable and accounts receivable. Decreases in accounts payable used cash of $12.9 million primarily due to the timing of payments. An increase in accounts receivable used cash of $10.7 million mainly due to our revenue growth and the timing of shipments. In addition, an increase in other liabilities provided cash of $5.9 million due in part to work performed by subcontractors and outside vendors. Investing Activities Cash used in investing activities was $315.9 million in the first nine months of 2024, compared with $20.1 million in the first nine months of 2023. Consideration paid for acquisitions, net of cash acquired, was $302.0 million in the first nine months of 2024. Additionally, cash used in investing activities included capital expenditures of $15.4 million in the first nine months of 2024 and $22.1 million in the first nine months of 2023. Financing Activities Cash provided by financing activities was $196.8 million in the first nine months of 2024, compared with cash used in financing activities of $85.7 million in the first nine months of 2023. Borrowings under our revolving credit facility were $305.2 million in 2024, which were primarily used to fund our 2024 acquisitions. Repayments of short- and long-term obligations were $91.4 million in 2024 compared to $71.9 million in 2023. Cash dividends paid to stockholders were $10.9 million in 2024 and $9.8 million in 2023. In addition, taxes paid related to the vesting of equity awards were $5.9 million in 2024 compared to $3.9 million in 2023. Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash The exchange rate effect on cash, cash equivalents, and restricted cash represents the impact of translation of cash balances at our foreign subsidiaries. The $1.0 million decrease in cash, cash equivalents, and restricted cash in the first nine months of 2024 related to exchange rates was primarily attributable to the strengthening of the U.S. dollar against the Mexican peso and, to a lesser extent, the Brazilian real and the Canadian dollar. The $1.3 million decrease in cash, cash equivalents, and restricted cash in the first nine months of 2023 was primarily attributable to the strengthening of the U.S. dollar against the Chinese renminbi and, to a lesser extent, the euro and Swedish krona. 34 Table of Contents KADANT INC. Borrowing Capacity and Debt Obligations Our unsecured multi-currency revolving credit facility originally entered into on March 1, 2017 (as amended and restated to date, the Credit Agreement) matures on November 30, 2027 and has a total borrowing capacity of $400.0 million. In the first nine months of 2024, we borrowed $305.2 million under our revolving credit facility, which was primarily used to fund our acquisitions. As of September 28, 2024, our outstanding balance under the Credit Agreement was $314.5 million, which included $76.5 million of euro-denominated borrowings, and we had $85.3 million of available borrowing capacity, in addition to a $200.0 million uncommitted, unsecured incremental borrowing facility. Under our debt agreements, our leverage ratio must be less than 3.75 or, if we elect, for the quarter during which a material acquisition occurs and for the three fiscal quarters thereafter, must be less than 4.25. As of September 28, 2024, our leverage ratio was 1.13 and we were in compliance with our debt covenants. See Note 6 , Long-Term Obligations, in the accompanying condensed consolidated financial statements for additional information regarding our debt obligations. Additional Liquidity and Capital Resources On May 16, 2024, our board of directors approved the repurchase of up to $50.0 million of our equity securities during the period from May 16, 2024 to May 16, 2025. We have not repurchased any shares of our common stock under this authorization or our previous $50.0 million authorization that expired on May 18, 2024. We paid cash dividends of $10.9 million in the first nine months of 2024. On September 5, 2024, we declared a quarterly cash dividend of $0.32 per share totaling $3.8 million that will be paid on November 7, 2024. Future declarations of dividends are subject to our board of directors' approval and may be adjusted as business needs or market conditions change. The declaration of cash dividends is subject to our compliance with the covenant in our Credit Agreement related to our consolidated leverage ratio. We plan to make expenditures of approximately $10.0 to $11.0 million during the remainder of 2024 for property, plant, and equipment. As of September 28, 2024, we had approximately $292.4 million of total unremitted foreign earnings. It is our intent to indefinitely reinvest $242.3 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments, if any. In the first nine months of 2024, we recorded withholding taxes on the earnings in certain foreign subsidiaries that we plan to repatriate in the foreseeable future. The foreign withholding taxes that would be required if we were to remit the indefinitely-reinvested foreign earnings to the United States would be approximately $5.0 million. We believe that existing cash and cash equivalents, along with future cash generated from operations, and our existing borrowing capacity will be sufficient to meet the capital requirements of our operations for the next 12 months and the foreseeable future. Application of Critical Accounting Policies and Estimates Management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities, and the reported amounts of revenue and expenses during the reporting period. Our critical accounting policies are defined as those that entail significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. Management evaluates its estimates on an ongoing basis based on historical experience, current economic and market conditions, and other assumptions management believes are reasonable. We believe that our most critical accounting policies which are significant to our consolidated financial statements, and which involve the most complex or subjective decisions or assessments, are those described in Management's Discussion and Analysis of Financial Condition and Results of Operations under the heading Application of Critical Accounting Estimates in Part II, Item 7, of our Annual Report. There have been no material changes to these critical accounting policies since the end of fiscal 2023 that warrant disclosure. Recent Accounting Pronouncements See Note 1 , under the heading Recent Accounting Pronouncements Not Yet Adopted , in the accompanying condensed consolidated financial statements for details. 35 Table of Contents KADANT INC. Item 3 – Quantitative and Qualitative Disclosures About Market Risk Our exposure to market risk from changes in interest rates and foreign currency exchange rates has not changed materially from our exposure as disclosed in Part II, Item 7A, of our Annual Report.