KADANT INC 10-Q

Item 1 – Financial Statements KADANT INC. Condensed Consolidated Balance Sheet (Unaudited) March 29, 2025 December 28, 2024 (In thousands, except share and per share amounts) Assets Current Assets: Cash and cash equivalents $ 91,678 $ 94,660 Restricted cash 2,127 1,286 Accounts receivable, net of allowances of $ 4,300 and $ 4,403 145,907 142,462 Inventories 153,544 146,092 Contract assets 12,222 18,408 Other current assets 41,252 39,418 Total Current Assets 446,730 442,326 Property, Plant, and Equipment, net of accumulated depreciation of $ 152,021 and $ 145,359 170,548 170,331 Other Assets 58,878 59,025 Intangible Assets, Net (Note 1) 274,782 279,494 Goodwill (Note 1) 484,501 479,169 Total Assets $ 1,435,439 $ 1,430,345 Liabilities and Stockholders' Equity Current Liabilities: Current maturities of long-term obligations (Note 4) $ 3,378 $ 3,376 Accounts payable 49,305 51,062 Accrued payroll and employee benefits 34,837 43,815 Accrued warranty costs 10,116 10,664 Customer deposits 35,761 35,887 Advanced billings 10,316 7,641 Other current liabilities 36,910 39,120 Total Current Liabilities 180,623 191,565 Long-Term Obligations (Note 4) 273,498 285,151 Long-Term Deferred Income Taxes 42,643 41,850 Other Long-Term Liabilities 52,105 53,651 Commitments and Contingencies (Note 9) Stockholders' Equity: Preferred stock, $ .01 par value, 5,000,000 shares authorized; none issued — — Common stock, $ .01 par value, 150,000,000 shares authorized; 14,624,159 shares issued 146 146 Capital in excess of par value 128,272 130,180 Retained earnings 879,752 859,693 Treasury stock at cost, 2,848,300 and 2,878,080 shares ( 69,795 ) ( 70,524 ) Accumulated other comprehensive items (Note 6) ( 62,424 ) ( 72,368 ) Total Kadant Stockholders' Equity 875,951 847,127 Noncontrolling interests 10,619 11,001 Total Stockholders' Equity 886,570 858,128 Total Liabilities and Stockholders' Equity $ 1,435,439 $ 1,430,345 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents KADANT INC. Condensed Consolidated Statement of Income (Unaudited) Three Months Ended March 29, 2025 March 30, 2024 (In thousands, except per share amounts) Revenue (Notes 1 and 8) $ 239,210 $ 248,975 Costs and Operating Expenses: Cost of revenue 128,880 138,013 Selling, general, and administrative expenses 71,221 70,305 Research and development expenses 3,523 3,730 203,624 212,048 Operating Income 35,586 36,927 Interest Income 517 611 Interest Expense ( 3,822 ) ( 4,669 ) Other Expense, Net ( 16 ) ( 30 ) Income Before Provision for Income Taxes 32,265 32,839 Provision for Income Taxes (Note 3) 7,828 7,854 Net Income 24,437 24,985 Net Income Attributable to Noncontrolling Interests ( 374 ) ( 296 ) Net Income Attributable to Kadant $ 24,063 $ 24,689 Earnings per Share Attributable to Kadant (Note 2) Basic $ 2.05 $ 2.11 Diluted $ 2.04 $ 2.10 Weighted Average Shares (Note 2) Basic 11,760 11,724 Diluted 11,776 11,744 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents KADANT INC. Condensed Consolidated Statement of Comprehensive Income (Unaudited) Three Months Ended March 29, 2025 March 30, 2024 (In thousands) Net Income $ 24,437 $ 24,985 Other Comprehensive Items: Foreign currency translation adjustment 10,009 ( 10,222 ) Post-retirement liability adjustments, net (net of tax of $ 1 and $ 0 ) 4 1 Deferred gain on cash flow hedges (net of tax of $ 0 and $ 13 ) — 38 Other comprehensive items 10,013 ( 10,183 ) Comprehensive Income 34,450 14,802 Comprehensive Income Attributable to Noncontrolling Interests ( 443 ) ( 224 ) Comprehensive Income Attributable to Kadant $ 34,007 $ 14,578 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents KADANT INC. Condensed Consolidated Statement of Cash Flows (Unaudited) Three Months Ended March 29, 2025 March 30, 2024 (In thousands) Operating Activities Net income attributable to Kadant $ 24,063 $ 24,689 Net income attributable to noncontrolling interests 374 296 Net income 24,437 24,985 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 12,013 11,739 Stock-based compensation expense 2,757 2,415 (Recovery of) provision for bad debts ( 240 ) 413 Other items, net 2,337 803 Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable ( 1,068 ) ( 7,956 ) Contract assets 6,310 ( 2,425 ) Inventories ( 5,516 ) ( 6,721 ) Other assets ( 1,368 ) 609 Accounts payable ( 1,658 ) 15,036 Customer deposits ( 827 ) ( 778 ) Other liabilities ( 14,342 ) ( 15,289 ) Net cash provided by operating activities 22,835 22,831 Investing Activities Acquisitions, net of cash acquired — ( 232,261 ) Purchases of property, plant, and equipment ( 3,836 ) ( 6,271 ) Proceeds from sale of property, plant, and equipment — 1,269 Net cash used in investing activities ( 3,836 ) ( 237,263 ) Financing Activities Proceeds from issuance of long-term obligations 8,000 234,000 Repayment of short- and long-term obligations ( 22,563 ) ( 33,450 ) Tax withholding payments related to stock-based compensation ( 6,036 ) ( 5,855 ) Dividends paid ( 3,762 ) ( 3,395 ) Proceeds from issuance of Company common stock 2,101 1,605 Dividend paid to noncontrolling interest ( 825 ) — Net cash (used in) provided by financing activities ( 23,085 ) 192,905 Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash 1,945 ( 2,308 ) Decrease in Cash, Cash Equivalents, and Restricted Cash ( 2,141 ) ( 23,835 ) Cash, Cash Equivalents, and Restricted Cash at Beginning of Period 95,946 106,453 Cash, Cash Equivalents, and Restricted Cash at End of Period $ 93,805 $ 82,618 See Note 1 , Nature of Operations and Summary of Significant Accounting Policies, under the heading Supplemental Cash Flow Information for further details. The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents KADANT INC. Condensed Consolidated Statement of Stockholders' Equity (Unaudited) Three Months Ended March 29, 2025 (In thousands, except share and per share amounts) Common Stock Capital in Excess of Par Value Retained Earnings Treasury Stock Accumulated Other Comprehensive Items Noncontrolling Interests Total Stockholders' Equity Shares Amount Shares Amount Balance at December 28, 2024 14,624,159 $ 146 $ 130,180 $ 859,693 2,878,080 $ ( 70,524 ) $ ( 72,368 ) $ 11,001 $ 858,128 Net income — — — 24,063 — — — 374 24,437 Dividend declared – Common Stock, $ 0.34 per share — — — ( 4,004 ) — — — — ( 4,004 ) Activity under stock plans — — ( 1,908 ) — ( 29,780 ) 729 — — ( 1,179 ) Dividend paid to noncontrolling interest — — — — — — — ( 825 ) ( 825 ) Other comprehensive items — — — — — — 9,944 69 10,013 Balance at March 29, 2025 14,624,159 $ 146 $ 128,272 $ 879,752 2,848,300 $ ( 69,795 ) $ ( 62,424 ) $ 10,619 $ 886,570 Three Months Ended March 30, 2024 (In thousands, except share and per share amounts) Common Stock Capital in Excess of Par Value Retained Earnings Treasury Stock Accumulated Other Comprehensive Items Noncontrolling Interests Total Stockholders' Equity Shares Amount Shares Amount Balance at December 30, 2023 14,624,159 $ 146 $ 124,940 $ 763,131 2,915,978 $ ( 71,453 ) $ ( 43,062 ) $ 2,538 $ 776,240 Net income — — — 24,689 — — — 296 24,985 Dividend declared – Common Stock, $ 0.32 per share — — — ( 3,758 ) — — — — ( 3,758 ) Activity under stock plans — — ( 2,687 ) — ( 34,765 ) 852 — — ( 1,835 ) Noncontrolling interests acquired — — — — — — — 9,319 9,319 Other comprehensive items — — — — — — ( 10,111 ) ( 72 ) ( 10,183 ) Balance at March 30, 2024 14,624,159 $ 146 $ 122,253 $ 784,062 2,881,213 $ ( 70,601 ) $ ( 53,173 ) $ 12,081 $ 794,768 The accompanying notes are an integral part of these condensed consolidated financial statements. 7 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Kadant Inc. was incorporated in Delaware in November 1991 and trades on the New York Stock Exchange under the ticker symbol "KAI." Kadant Inc. (together with its subsidiaries, the Company) is a global supplier of technologies and engineered systems that drive Sustainable Industrial Processing ® . Its products and services play an integral role in enhancing efficiency, optimizing energy utilization, and maximizing productivity in process industries while helping 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 the Company's three reportable segments consisting of the Flow Control segment, Industrial Processing segment, and Material Handling segment. Interim Financial Statements The interim condensed consolidated financial statements and related notes presented have been prepared by the Company, are unaudited, and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the Company's financial position at March 29, 2025, its results of operations, comprehensive income, cash flows and stockholders' equity for the three-month periods ended March 29, 2025 and March 30, 2024. Interim results are not necessarily indicative of results for a full year or for any other interim period. The condensed consolidated balance sheet presented as of December 28, 2024 has been derived from the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2024 (Annual Report). The condensed consolidated financial statements and related notes are presented as permitted by the rules and regulations of the Securities and Exchange Commission (SEC) for Form 10-Q and do not contain certain information included in the annual consolidated financial statements and related notes of the Company. The condensed consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and related notes included in the Annual Report. Use of Estimates and Critical Accounting Policies The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Although the Company makes every effort to ensure the accuracy of the estimates and assumptions used in the preparation of its condensed consolidated financial statements or in the application of accounting policies, if business conditions were different, or if the Company were to use different estimates and assumptions, it is possible that materially different amounts could be reported in the Company's condensed consolidated financial statements. Note 1 to the consolidated financial statements in the Annual Report describes the significant accounting estimates and policies used in preparation of the consolidated financial statements. There have been no material changes in the Company’s significant accounting policies during the three months ended March 29, 2025. Supplemental Cash Flow Information Three Months Ended (In thousands) March 29, 2025 March 30, 2024 Cash Paid for Interest $ 3,657 $ 4,484 Cash Paid for Income Taxes, Net of Refunds $ 11,109 $ 7,313 Non-Cash Investing Activities: Fair value of assets acquired $ — $ 266,061 Fair value of liabilities assumed $ — $ 18,436 Fair value of noncontrolling interest acquired $ — $ 9,319 Purchases of property, plant, and equipment in accounts payable $ 463 $ 1,342 8 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Three Months Ended (In thousands) March 29, 2025 March 30, 2024 Non-Cash Financing Activities: Issuance of Company common stock upon vesting of restricted stock units $ 5,033 $ 4,703 Dividends declared but unpaid $ 4,004 $ 3,758 Restricted Cash The Company's restricted cash generally serves as collateral for bank guarantees associated with providing assurance to customers that the Company will fulfill certain customer obligations entered into in the normal course of business and for certain banker's acceptance drafts issued to vendors. The majority of these restrictions will expire over the next twelve months . The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the accompanying condensed consolidated balance sheet that are shown in aggregate in the accompanying condensed consolidated statement of cash flows: (In thousands) March 29, 2025 March 30, 2024 December 28, 2024 December 30, 2023 Cash and cash equivalents $ 91,678 $ 81,440 $ 94,660 $ 103,832 Restricted cash 2,127 1,178 1,286 2,621 Total Cash, Cash Equivalents, and Restricted Cash $ 93,805 $ 82,618 $ 95,946 $ 106,453 Inventories The components of inventories are as follows: March 29, 2025 December 28, 2024 (In thousands) Raw Materials $ 61,938 $ 60,750 Work in Process 32,486 27,692 Finished Goods (includes $ 661 and $ 554 at customer locations) 59,120 57,650 $ 153,544 $ 146,092 Intangible Assets, Net Acquired intangible assets by major asset class are as follows: (In thousands) Gross Accumulated Amortization Currency Translation Net March 29, 2025 Definite-Lived Customer relationships $ 334,168 $ ( 132,255 ) $ ( 7,469 ) $ 194,444 Product technology 92,206 ( 50,719 ) ( 2,943 ) 38,544 Tradenames 16,534 ( 5,307 ) ( 451 ) 10,776 Other 25,221 ( 21,740 ) ( 645 ) 2,836 468,129 ( 210,021 ) ( 11,508 ) 246,600 Indefinite-Lived Tradenames 29,059 — ( 877 ) 28,182 Acquired Intangible Assets $ 497,188 $ ( 210,021 ) $ ( 12,385 ) $ 274,782 9 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands) Gross Accumulated Amortization Currency Translation Net December 28, 2024 Definite-Lived Customer relationships $ 334,066 $ ( 127,664 ) $ ( 8,607 ) $ 197,795 Product technology 92,106 ( 49,294 ) ( 3,245 ) 39,567 Tradenames 16,536 ( 5,084 ) ( 481 ) 10,971 Other 25,221 ( 21,280 ) ( 668 ) 3,273 467,929 ( 203,322 ) ( 13,001 ) 251,606 Indefinite-Lived Tradenames 29,059 — ( 1,171 ) 27,888 Acquired Intangible Assets $ 496,988 $ ( 203,322 ) $ ( 14,172 ) $ 279,494 Intangible assets are recorded at fair value at the date of acquisition. Subsequent impairment charges are reflected as a reduction in the gross balance, as applicable. Definite-lived intangible assets are stated net of accumulated amortization and currency translation in the accompanying condensed consolidated balance sheet. The Company amortizes definite-lived intangible assets over lives that have been determined based on the anticipated cash flow benefits of the intangible asset. Goodwill The changes in the carrying amount of goodwill by reportable segment are as follows: (In thousands) Flow Control Industrial Processing Material Handling Total Balance at December 28, 2024 Gross balance $ 132,205 $ 243,066 $ 189,436 $ 564,707 Accumulated impairment losses — ( 85,538 ) — ( 85,538 ) Net balance 132,205 157,528 189,436 479,169 2025 Activity Measurement period adjustments for 2024 acquisitions ( 173 ) — 109 ( 64 ) Currency translation 2,567 1,371 1,458 5,396 Total 2025 activity 2,394 1,371 1,567 5,332 Balance at March 29, 2025 Gross balance 134,599 244,437 191,003 570,039 Accumulated impairment losses — ( 85,538 ) — ( 85,538 ) Net balance $ 134,599 $ 158,899 $ 191,003 $ 484,501 Measurement period adjustments for the Company's acquisitions completed in the second and third quarters of 2024 were not material to its financial position or results of operations in the first quarter of 2025. Warranty Obligations The Company's contracts covering the sale of its products include warranty provisions that provide assurance to its customers that the products will comply with agreed-upon specifications during a defined period of time. The Company provides for the estimated cost of product warranties at the time of sale based on historical occurrence rates and repair costs, as well as knowledge of any specific warranty problems that indicate projected warranty costs may vary from historical patterns. The Company negotiates the terms regarding warranty coverage and length of warranty depending on the products and applications. 10 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The changes in the carrying amount of product warranty obligations are as follows: Three Months Ended (In thousands) March 29, 2025 March 30, 2024 Balance at Beginning of Year $ 10,664 $ 8,154 Provision charged to expense 1,009 1,069 Usage ( 1,728 ) ( 724 ) Acquisitions — 475 Currency translation 171 ( 150 ) Balance at End of Period $ 10,116 $ 8,824 Revenue Recognition Most of the Company’s revenue relates to products and services that require minimal customization and is recognized at a point in time for each performance obligation under the contract when the customer obtains control of the goods or service. The remaining portion of the Company’s revenue is recognized over time based on an input method that compares the costs incurred to date to the total expected costs required to satisfy the performance obligation. Contracts are accounted for on an over time basis when they include products which have no alternative use and an enforceable right to payment over time. Most of the contracts recognized on an over time basis are for large capital equipment projects. These projects are highly customized for the customer and, as a result, would include a significant cost to rework in the event of cancellation. The following table presents revenue by revenue recognition method: Three Months Ended March 29, March 30, (In thousands) 2025 2024 Point in Time $ 217,668 $ 216,493 Over Time 21,542 32,482 $ 239,210 $ 248,975 The Company disaggregates its revenue from contracts with customers by reportable segment, product type and geography as this best depicts how its revenue is affected by economic factors. The following table presents the disaggregation of revenue by product type and geography: Three Months Ended March 29, March 30, (In thousands) 2025 2024 Revenue by Product Type: Parts and consumables $ 179,308 $ 171,130 Capital 59,902 77,845 $ 239,210 $ 248,975 Revenue by Geography (based on customer location): North America $ 159,870 $ 156,491 Europe 49,341 55,787 Asia 18,702 22,554 Rest of world 11,297 14,143 $ 239,210 $ 248,975 See Note 8 , Business Segment Information, for information on the disaggregation of revenue by reportable segment. 11 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The following table presents contract balances from contracts with customers: March 29, 2025 December 28, 2024 (In thousands) Contract Assets $ 12,222 $ 18,408 Contract Liabilities $ 48,498 $ 46,062 Contract assets represent unbilled revenue associated with revenue recognized on contracts accounted for on an over time basis, which will be billed in future periods based on the contract terms. Contract liabilities consist of short- and long-term customer deposits, advanced billings, and deferred revenue. Deferred revenue is included in other current liabilities, and long-term customer deposits are included in other long-term liabilities in the accompanying condensed consolidated balance sheet. Contract liabilities will be recognized as revenue in future periods once the revenue recognition criteria are met. The majority of the contract liabilities relate to advance payments on contracts accounted for at a point in time. These advance payments will be recognized as revenue when the Company's performance obligations have been satisfied, which typically occurs when the product has shipped and control of the asset has transferred to the customer. The Company recognized revenue of $ 17,559,000 in th e first quarter of 2025 and $ 33,666,000 in the first quarter of 2024 that was included in the contract liabilities balance at the beginning of 2025 and 2024, respectively. The majority of the Company's contracts for capital equipment have an original expected duration of one year or less. Certain capital equipment contracts require longer lead times and could take up to 24 months to complete. For contracts with an original expected duration of over one year, the aggregate amount of the transaction price allocated to the remaining unsatisfied or partially unsatisfied performance obligations was $ 29,173,000 as of March 29, 2025. The Company will recognize revenue for these performance obligations as they are satisfied, approximately 66 % of which is expected to occur within the next twelve months and the remaining 34 % thereafter. Note Receivable - China Transaction The Company entered into several agreements with the local government in China, which became effective in the first quarter of 2022, to sell its then existing manufacturing building and land use rights at one of its subsidiaries in China for $ 25,159,000 and relocate to a new facility (China Transaction). The Company received a 31 % down payment and recognized a receivable of $ 16,082,000 , which was the present value of the remaining amount of the sale proceeds, and which was due on the earlier of the sale of the property by the local government or two years from the effective date of the agreements. The government settled $ 685,000 of the receivable in 2024. The outstanding receivable was $ 14,451,000 as of March 29, 2025, which the Company expects will be repaid in full, although the timing is uncertain. The subsidiary, which is part of the Industrial Processing segment, relocated to its new facility during the third quarter of 2023. Banker's Acceptance Drafts Included in Accounts Receivable The Company's Chinese subsidiaries may receive banker's acceptance drafts from customers as payment for their trade accounts receivable. The drafts are non-interest bearing obligations of the issuing bank and generally mature within six months of the origination date. The Company's Chinese subsidiaries may sell the drafts at a discount to a third-party financial institution or transfer the drafts to vendors in settlement of current accounts payable prior to the scheduled maturity date. These drafts, which totaled $ 3,953,000 at March 29, 2025 and $ 5,299,000 at December 28, 2024, are included in accounts receivable in the accompanying condensed consolidated balance sheet until the subsidiary sells the drafts to a bank and receives a discounted amount, transfers the banker's acceptance drafts in settlement of current accounts payable prior to maturity, or obtains cash payment on the scheduled maturity date. Income Taxes In accordance with Accounting Standards Codification (ASC) 740, Income Taxes (ASC 740), the Company recognizes deferred income taxes based on the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities, calculated using enacted tax rates in effect for the year in which these differences are expected to reverse. A tax valuation allowance is established, as needed, to reduce deferred tax assets to the amount expected to be realized. In the period in which it becomes more likely than not that some or all of the deferred tax assets will be realized, the valuation allowance will be adjusted. It is the Company's policy to provide for uncertain tax positions and the related interest and penalties based upon management's assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. 12 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) At March 29, 2025, the Company believes that it has appropriately accounted for any liability for unrecognized tax benefits. To the extent the Company prevails in matters for which a liability for an unrecognized tax benefit is established, the statute of limitations expires for a tax jurisdiction year, or the Company is required to pay amounts in excess of the liability, its effective tax rate in a given financial statement period may be affected. In December 2021, the Organisation for Economic Co-operation and Development (OECD) released model rules introducing a new 15% global minimum tax for large multinational enterprises with an annual global revenue exceeding 750,000,000 euros (Pillar Two Rules). Since the release of the Pillar Two Rules, the OECD has issued four tranches of administrative guidance, as well as guidance on transitional safe harbor relief. Various countries, including the member states of the European Union, have adopted the Pillar Two Rules into their domestic laws, with certain rules coming into effect beginning in fiscal 2024. Some countries are in the process of drafting legislation for adoption in future years. While the Pillar Two Rules serve as a framework for implementing the minimum tax, countries may enact domestic laws that vary slightly from the Pillar Two Rules and may also adjust domestic tax incentives to align with the Pillar Two Rules on different timelines. The Company continues to monitor developments of the Pillar Two Rules and evaluate the potential impact they may have on the jurisdictions in which it operates, including eligibility to qualify for transitional safe harbor relief. To date, the Pillar Two Rules have not had a material impact on the Company's effective tax rate or consolidated financial statements, and the Company does not expect the Pillar Two Rules to have a material impact on its effective tax rate or consolidated financial statements for the fiscal year ending January 3, 2026. Recent Accounting Pronouncements Not Yet Adopted Income Taxes - Improvements to Income Tax Disclosures (Topic 740) . In December 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2023-09, to improve income tax disclosure requirements, primarily through enhanced disclosures related to the income tax rate reconciliation and income taxes paid. This ASU is effective for fiscal year-end 2025, with early adoption permitted and may be applied retrospectively. The Company is currently evaluating the effects that the adoption of this ASU will have on its consolidated financial statements. Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosure (Topic 220). In November 2024, the FASB issued ASU No. 2024-03, to disaggregate operating expense into specific categories to provide enhanced transparency into the nature and function of expenses. This ASU is effective for fiscal year-end 2027 and interim periods beginning in fiscal 2028, with early adoption permitted and may be applied retrospectively. The Company is currently evaluating the effects that the adoption of this ASU will have on its consolidated financial statements. 2. Earnings per Share Basic and diluted earnings per share (EPS) were calculated as follows: Three Months Ended (In thousands, except per share amounts) March 29, 2025 March 30, 2024 Net Income Attributable to Kadant $ 24,063 $ 24,689 Basic Weighted Average Shares 11,760 11,724 Effect of Restricted Stock Units and Employee Stock Purchase Plan Shares 16 20 Diluted Weighted Average Shares 11,776 11,744 Basic Earnings per Share $ 2.05 $ 2.11 Diluted Earnings per Share $ 2.04 $ 2.10 The effect of outstanding and unvested restricted stock units (RSUs) of the Company’s common stock totaling 26,000 shares in the first quarter of 2025 and 33,000 shares in the first quarter of 2024 were not included in the computation of diluted EPS for the respective periods as the effect would have been antidilutive or, for unvested performance-based RSUs, the performance conditions had not been met as of the end of the respective reporting periods. 13 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 3. Provision for Income Taxes The provision for income taxes was $ 7,828,000 in the first quarter of 2025 and $ 7,854,000 in the first quarter of 2024. The effective tax rate of 24 % in the first quarter of 2025 was higher than the Company’s statutory rate of 21% primarily due to nondeductible expenses, the distribution of the Company’s worldwide earnings, and state taxes. These items were offset in part by net excess income tax benefits from stock-based compensation arrangements, the reversal of tax reserves associated with uncertain tax positions, and foreign tax credits. The effective tax rate of 24 % in the first quarter of 2024 was higher than the Company's statutory rate of 21% primarily due to nondeductible expenses, the distribution of the Company's worldwide earnings, state taxes, 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 net excess income tax benefits from stock-based compensation arrangements, foreign tax credits, and a tax benefit associated with a foreign exchange loss recognized upon the Company's repatriation of certain previously taxed foreign earnings. 4. Long-Term Obligations Long-term obligations are as follows: March 29, 2025 December 28, 2024 (In thousands) Revolving Credit Facility, due 2027 $ 267,007 $ 278,384 Senior Promissory Notes, due 2025 to 2028 6,660 6,660 Finance Leases, due 2025 to 2029 1,939 2,023 Other Borrowings, due 2025 to 2028 1,270 1,460 Total 276,876 288,527 Less: Current Maturities of Long-Term Obligations ( 3,378 ) ( 3,376 ) Long-Term Obligations $ 273,498 $ 285,151 See Note 7 , Fair Value Measurements and Fair Value of Financial Instruments, for the fair value information related to the Company's long-term obligations. Revolving Credit Facility The Company's 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 borrowing capacity of $ 400,000,000 , in addition to an uncommitted, unsecured incremental borrowing facility of $ 200,000,000 . Interest on borrowings outstanding accrues and is payable in arrears calculated at one of the following rates selected by the Company: (i) the Base Rate, as defined, plus an applicable margin of 0 % to 1.25 %, or (ii) Eurocurrency Rate, Term SOFR (plus a 10 basis point credit spread adjustment), Term CORRA, and RFR, as applicable and defined, plus an applicable margin of 1.0 % to 2.25 %. The margin is determined based upon the ratio of the Company's total debt, net of unrestricted cash up to $ 50,000,000 , to earnings before interest, taxes, depreciation, and amortization as defined in the Credit Agreement. Additionally, the Credit Agreement requires the payment of a commitment fee payable in arrears on the available borrowing capacity under the Credit Agreement, which ranges from 0.125 % to 0.350 %. Obligations under the Credit Agreement, which includes customary events of default under such financing arrangements, may be accelerated upon the occurrence of an event of default. In addition, the Credit Agreement contains negative covenants applicable to the Company and its subsidiaries, including financial covenants requiring the Company to maintain a maximum consolidated leverage ratio of 3.75 to 1.00, or, if the Company elects, for the quarter during which a material acquisition occurs and for the three fiscal quarters thereafter, 4.25 to 1.00, and limitations on making certain restricted payments (including dividends and stock repurchases). Loans under the Credit Agreement are guaranteed by certain domestic subsidiaries of the Company. As of March 29, 2025, the outstanding balance under the Credit Agreement was $ 267,007,000 , which included $ 74,007,000 of euro-denominated borrowings. The Company had $ 133,130,000 of borrowing capacity available as of March 29, 2025, which was calculated by translating its foreign-denominated borrowings using the administrative agent's borrowing date foreign exchange rates, in addition to the $ 200,000,000 uncommitted, unsecured incremental borrowing facility. The weighted average interest rate for the outstanding balance under the Credit Agreement was 4.85 % as of March 29, 2025 and 5.27 % as of year-end 2024. 14 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Senior Promissory Notes In 2018, the Company entered into an uncommitted, unsecured Multi-Currency Note Purchase and Private Shelf Agreement (Note Purchase Agreement). Simultaneously with the execution of the Note Purchase Agreement, the Company issued senior promissory notes (Initial Notes) in an aggregate principal amount of $ 10,000,000 , with a per annum interest rate of 4.90 % payable semiannually, and a maturity date of December 14, 2028. The Company is required to prepay a portion of the principal of the Initial Notes beginning on December 14, 2023 and each year thereafter, and may optionally prepay the principal on the Initial Notes, together with any prepayment premium, at any time in accordance with the Note Purchase Agreement. The obligations of the Initial Notes may be accelerated upon an event of default as defined in the Note Purchase Agreement, which includes customary events of default under such financing arrangements. The Initial Notes are pari passu with the Company’s indebtedness under the Credit Agreement, and any other senior debt of the Company, subject to certain specified exceptions, and participate in a sharing agreement with respect to the obligations of the Company and its subsidiaries under the Credit Agreement. The Initial Notes are guaranteed by certain of the Company’s domestic subsidiaries. Debt Compliance As of March 29, 2025, the Company was in compliance with the covenants related to its debt obligations. 5. Stock-Based Compensation The Company recognized stock-based compensation expense of $ 2,757,000 in the first quarter of 2025 and $ 2,415,000 in the first quarter of 2024 within selling, general and administration (SG&A) expenses in the accompanying condensed consolidated statement of income. The Company recognizes compensation expense for all stock-based awards granted to employees and directors based on the grant date estimate of fair value for those awards. The fair value of RSUs is based on the grant date price of the Company's common stock, reduced by the present value of estimated dividends foregone during the requisite service period. For time-based RSUs, compensation expense is recognized ratably over the requisite service period for the entire award based on the grant date fair value, and net of actual forfeitures recorded when they occur. For performance-based RSUs, compensation expense is recognized ratably over the requisite service period for each separately vesting portion of the award based on the grant date fair value, net of actual forfeitures recorded when they occur, and remeasured each reporting period until the total number of RSUs to be issued is known. Unrecognized compensation expense related to stock-based compensation totaled $ 15,981,000 at March 29, 2025, which will be recognized over a weighted average period of 2.0 years. Performance-based RSUs On March 4, 2025, the Company granted performance-based RSUs to certain of its officers, which represented, in aggregate, the right to receive 14,626 shares (target RSU amount), with an aggregate grant date fair value of $ 5,406,000 . The RSUs are subject to adjustment based on the achievement of the performance measure selected for the fiscal year, which is a specified target for adjusted earnings before interest, taxes, depreciation, and amortization (target adjusted EBITDA) generated from operations for the fiscal year. The RSUs are adjusted by comparing the actual adjusted EBITDA for the performance period to the target adjusted EBITDA. Actual adjusted EBITDA between 50 % and 100 % of the target adjusted EBITDA results in an adjustment of 50 % to 100 % of the target RSU amount. Actual adjusted EBITDA between 100 % and 115 % of the target adjusted EBITDA results in an adjustment using a straight-line linear scale between 100 % and 150 % of the target RSU amount. Actual adjusted EBITDA in excess of 115 % results in an adjustment capped at 150 % of the target RSU amount. If actual adjusted EBITDA is below 50 % of the target adjusted EBITDA for the 2025 fiscal year, these performance-based RSUs will be forfeited. The Company recognizes compensation expense based on the probable number of performance-based RSUs expected to vest. Following the adjustment, the performance-based RSUs will be subject to additional time-based vesting, and will vest in three equal annual installments on March 10 of 2026, 2027, and 2028, provided that the officer is employed by the Company on the applicable vesting dates. Time-based RSUs On March 4, 2025, the Company granted time-based RSUs representing 11,199 shares to certain of its officers and employees with an aggregate grant date fair value of $ 4,139,000 . These time-based RSUs vest in three equal annual installments on March 10 of 2026, 2027, and 2028, provided that a recipient is employed by the Company on the applicable vesting dates. 15 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 6. Accumulated Other Comprehensive Items Comprehensive income combines net income and other comprehensive items, which represent certain amounts that are reported as components of stockholders' equity in the accompanying condensed consolidated balance sheet. Changes in each component of accumulated other comprehensive items (AOCI), net of tax, are as follows: (In thousands) Foreign Currency Translation Adjustment Pension and Other Post-Retirement Benefit Liability Adjustments Total Balance at December 28, 2024 $ ( 72,416 ) $ 48 $ ( 72,368 ) Other comprehensive items before reclassifications 9,940 3 9,943 Reclassifications from AOCI — 1 1 Net current period other comprehensive items 9,940 4 9,944 Balance at March 29, 2025 $ ( 62,476 ) $ 52 $ ( 62,424 ) 7. Fair Value Measurements and Fair Value of Financial Instruments Fair value measurement is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is established, which prioritizes the inputs used in measuring fair value into three broad levels as follows: • Level 1—Quoted prices in active markets for identical assets or liabilities. • Level 2—Inputs, other than quoted prices in active markets, that are observable either directly or indirectly. • Level 3—Unobservable inputs based on the Company's own assumptions. The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis: Fair Value as of March 29, 2025 (In thousands) Level 1 Level 2 Level 3 Total Assets: Money market funds and time deposits (a) $ 14,954 $ — $ — $ 14,954 Banker's acceptance drafts (b) $ — $ 3,953 $ — $ 3,953 Forward currency-exchange contracts (c) $ — $ 3 $ — $ 3 Liabilities: Contingent consideration (d) $ — $ — $ 1,699 $ 1,699 Fair Value as of December 28, 2024 (In thousands) Level 1 Level 2 Level 3 Total Assets: Money market funds and time deposits (a) $ 21,248 $ — $ — $ 21,248 Banker's acceptance drafts (b) $ — $ 5,299 $ — $ 5,299 Liabilities: Forward currency-exchange contracts (c) $ — $ 39 $ — $ 39 Contingent consideration (d) $ — $ — $ 1,678 $ 1,678 (a) Included in cash and cash equivalents in the accompanying condensed consolidated balance sheet. (b) Included in accounts receivable in the accompanying condensed consolidated balance sheet. (c) Included in other current assets at March 29, 2025 and other current liabilities at December 28, 2024 in the accompanying condensed consolidated balance sheet. (d) Included in other long-term liabilities in the accompanying condensed consolidated balance sheet. 16 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The Company uses the market approach technique to value its financial assets and liabilities, and there were no changes in valuation techniques during the first quarter of 2025. Banker's acceptance drafts are carried at face value, which approximates their fair value due to the short-term nature of the negotiable instrument. The fair values of the forward currency-exchange contracts are based on quoted forward foreign exchange rates at the reporting date. The forward currency-exchange contracts are hedges of either recorded assets or liabilities or anticipated transactions and represent the estimated amount the Company would receive or pay upon liquidation of the contracts. Changes in values of the underlying hedged assets and liabilities or anticipated transactions are not reflected in the table above. The carrying value and fair value of debt obligations, excluding lease obligations, are as follows: March 29, 2025 December 28, 2024 (In thousands) Carrying Value Fair Value Carrying Value Fair Value Debt Obligations: Revolving credit facility $ 267,007 $ 267,007 $ 278,384 $ 278,384 Senior promissory notes 6,660 6,670 6,660 6,511 Other 1,270 1,270 1,460 1,460 $ 274,937 $ 274,947 $ 286,504 $ 286,355 The carrying value of the Company's revolving credit facility approximates the fair value as the obligation bears variable rates of interest, which adjust frequently, based on prevailing market rates. The fair value of the senior promissory notes is primarily calculated based on quoted market rates plus an applicable margin available to the Company at the respective period end, which represent Level 2 measurements. Contingent Consideration In connection with the acquisition of a technology company in August 2024, the Company assumed contingent consideration with a fair value of $ 1,785,000 measured at the date of acquisition. The contingent consideration is payable upon the achievement of certain revenue performance targets earned between June 30, 2025 and June 30, 2027. The maximum future value of the contingent consideration subject to payment is approximately $ 11,011,000 , calculated using the foreign currency spot rate at March 29, 2025. The Company uses the income approach technique to estimate the fair value of its Level 3 contingent consideration, including valuation models that incorporate probability adjusted assumptions and simulations related to the achievement of milestones and the likelihood of making the related payment. The unobservable inputs used in the fair value measurements include the probability of successful achievement of certain revenue targets, forecasted revenue, revenue volatility, and discount rates. These assumptions were estimated based on a review of historical and projected results. Projected contingent consideration related to revenue-based payments are discounted back to the current period using a discounted cash flow model. Changes to the fair value of contingent consideration can result from changes to one or multiple inputs, including the discount rate, projected revenue, revenue volatility, and the assumed probabilities of successful achievement of certain revenue targets. The following table provides a rollforward of the change in the fair value of the contingent consideration as determined by Level 3 inputs during the first quarter of 2025: (In thousands) Total Balance at December 28, 2024 $ 1,678 Currency translation 21 Balance at March 29, 2025 $ 1,699 8. Business Segment Information The Company is a global supplier of technologies and engineered systems that drive Sustainable Industrial Processing and operates in three reportable segments consisting of its Flow Control segment, Industrial Processing segment, and Material Handling segment. The Company aggregated its operating segments into its reportable segments where they contained similar products and economic characteristics, and shared similar types of customers, and production and distribution methods. The Flow Control segment is comprised of its fluid-handling and its doctoring, cleaning, & filtration operating segments, and the Industrial Processing segment is comprised of its wood processing and its fiber processing operating segments. Each of the Company's reportable segments is led by a segment vice president, who reports directly to the Chief Executive Officer (CEO). The Company has determined that its CEO is its Chief Operating Decision Maker (CODM) who is 17 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) responsible for assessing performance and allocating resources. The CODM utilizes segment gross profit margin and segment operating income margin to evaluate the performance of each segment and allocate resources effectively. The CODM primarily reviews these profit measures in comparison to forecasts, trends, key performance targets, and results of industry peers to assess profitability, identify areas for improvement, and make strategic decisions regarding investments and resource allocation within each segment. A description of each reportable segment 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. The Company's 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 recycle paper and paperboard and process timber for use in the packaging, tissue, wood products and alternative fuel industries, among others. The Company's primary products include fiber processing systems and recycling equipment, chemical pulping equipment, debarkers, stranders, chippers and custom engineered knife systems. In addition, the Company provides 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. The Company's primary products include conveying and vibratory equipment and balers. In addition, the Company manufactures and sells biodegradable, absorbent granules used as carriers in agricultural applications and for oil and grease absorption. The following tables present financial information for the Company's reportable segments: Three Months Ended March 29, 2025 (In thousands) Flow Control Industrial Processing Material Handling Total Revenue $ 92,441 $ 89,524 $ 57,245 $ 239,210 Cost of revenue 43,168 50,076 35,636 128,880 Gross Profit 49,273 39,448 21,609 110,330 Gross Profit Margin 53.3 % 44.1 % 37.7 % 46.1 % Operating Expenses: Selling expenses 14,779 10,177 6,468 31,424 General and administrative expenses 8,813 8,387 4,241 21,441 Research and development expenses 1,351 1,606 566 3,523 Intangible asset amortization expense 1,493 2,378 2,828 6,699 Other segment items (a) 85 68 ( 29 ) 124 Segment Operating Income $ 22,752 $ 16,832 $ 7,535 $ 47,119 Segment Operating Income Margin 24.6 % 18.8 % 13.2 % 19.7 % Corporate Expenses (b) ( 11,533 ) Interest Expense, Net ( 3,305 ) Other Expense, Net ( 16 ) Income Before Provision for Income Taxes $ 32,265 (In thousands) Flow Control Industrial Processing Material Handling Corporate Total Other Segment Disclosures Depreciation expense (c) $ 1,798 $ 2,347 $ 1,158 $ 11 $ 5,314 Capital expenditures $ 1,509 $ 1,325 $ 999 $ 3 $ 3,836 18 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Three Months Ended March 30, 2024 (In thousands) Flow Control Industrial Processing Material Handling Total Revenue $ 86,682 $ 105,861 $ 56,432 $ 248,975 Cost of revenue 39,999 61,669 36,345 138,013 Gross Profit 46,683 44,192 20,087 110,962 Gross Profit Margin 53.9 % 41.7 % 35.6 % 44.6 % Operating Expenses: Selling expenses 13,544 10,372 6,215 30,131 General and administrative expenses 9,068 8,936 4,082 22,086 Research and development expenses 1,549 1,675 506 3,730 Intangible asset amortization expense 685 2,832 3,354 6,871 Other segment items (a) 127 378 389 894 Segment Operating Income $ 21,710 $ 19,999 $ 5,541 $ 47,250 Segment Operating Income Margin 25.0 % 18.9 % 9.8 % 19.0 % Corporate Expenses (b) ( 10,323 ) Interest Expense, Net ( 4,058 ) Other Expense, Net ( 30 ) Income Before Provision for Income Taxes $ 32,839 (In thousands) Flow Control Industrial Processing Material Handling Corporate Total Other Segment Disclosures Depreciation expense (c) $ 1,536 $ 2,327 $ 993 $ 12 $ 4,868 Capital expenditures $ 1,874 $ 2,883 $ 1,506 $ 8 $ 6,271 March 29, 2025 December 28, 2024 (In thousands) Total Assets (d) Flow Control $ 439,798 $ 431,536 Industrial Processing 571,962 569,817 Material Handling 415,336 411,178 Corporate (e) 8,343 17,814 $ 1,435,439 $ 1,430,345 (a) Includes acquisition costs, net indemnification asset reversals associated with uncertain tax positions, and certain gains and losses. (b) Primarily consists of general and administrative expenses. (c) Depreciation expense by reportable segment is included within cost of revenue and selling, general and administrative, and research and development expenses. (d) Excludes intercompany receivables or payables and investment in subsidiary balances as the CODM uses total assets excluding these amounts as the measurement for the Company's segment assets. (e) Corporate assets primarily consist of cash and cash equivalents, tax assets, right-of-use assets, and property, plant, and equipment, net. 19 Table of Contents KADANT INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 9. Commitments and Contingencies Right of Recourse In the ordinary course of business, the Company's Chinese subsidiaries may receive banker's acceptance drafts from customers as payment for their trade accounts receivable. The drafts are non-interest bearing obligations of the issuing bank and generally mature within six months of the origination date. The Company's Chinese subsidiaries may use these banker's acceptance drafts prior to the scheduled maturity date to settle outstanding accounts payable with vendors. Banker's acceptance drafts transferred to vendors are subject to customary right of recourse provisions prior to their scheduled maturity dates. The Company had $ 5,381,000 at March 29, 2025 and $ 7,952,000 at December 28, 2024 of banker's acceptance drafts subject to recourse, which were transferred to vendors and had not reached their scheduled maturity dates. Historically, the banker's acceptance drafts have settled upon maturity without any claim of recourse against the Company. Litigation From time to time, the Company is subject to various claims and legal proceedings covering a range of matters that arise in the ordinary course of business. Such litigation may include, but is not limited to, claims and counterclaims by and against the Company for breach of contract or warranty, canceled contracts, product liability, or bankruptcy-related claims. For legal proceedings in which a loss is probable and estimable, the Company accrues a loss based on the low end of the range of estimated loss when there is no better estimate within the range. If the Company were found to be liable for any of the claims or counterclaims against it, the Company would incur a charge against earnings for amounts in excess of legal accruals. 20 Table of Contents KADANT INC.