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 the section captioned Risk Factors , included in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 28, 2024 (Annual Report), as further amended in Part II, Item 1A , within this 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 segments consisting of our Flow Control segment, Industrial Processing segment, and Material Handling segment. We have aggregated our operating segments into reportable segments where they contained similar products and economic characteristics, and shared similar types of customers, and production and distribution methods. Our Flow Control segment consists of our fluid-handling and doctoring, cleaning, & filtration operating segments and our Industrial Processing segment consists of our wood processing and fiber processing operating segments. A description of each reportable 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 recycle paper and paperboard and process timber for use in the packaging, tissue, wood products, and alternative fuel industries, among others. Our primary products include fiber processing 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. See Note 8 , Business Segment Information, in the accompanying condensed consolidated financial statements for financial information on our reportable segments. 22 Table of Contents KADANT INC. Industry and Business Overview Our consolidated bookings increased 7% to $269.4 million in the second quarter of 2025 compared to the second quarter of 2024, driven by a 25% increase in demand for our capital equipment products. Notably, this strong bookings performance led to an increase in our quarter-end backlog to $299.1 million, representing a 16% increase from year-end 2024. Part of the increased demand in the second quarter of 2025 resulted from orders delayed from the first quarter as customers awaited more clarity on the impact of tariffs. While there has been some clarification on certain country-specific tariffs, newly announced tariffs, such as the recent steel import tariff increase, continue to create unease and uncertainty in the market. This environment of evolving trade policies has impacted our customers' decision-making process and resulted in a lengthening in quote-to-order times for capital orders, with some customers delaying capital projects into 2026. While investments in maintenance and mission-critical equipment continue, customers with flexibility in project timing are deferring capital expenditures until there is greater clarity regarding the tariff situation and the economy. This impact is more pronounced in our Industrial Processing segment, where average capital order values are significantly higher compared to our other segments. In response, our operations teams have been assessing our exposure to both existing and proposed tariffs and continue to develop and implement mitigation measures. From a geographic perspective, tariff-related developments in North America have created market uncertainty, which may lead to inflationary pressures. In Europe, uncertainty surrounding trade tensions and geopolitical risks continue to impact the market. In China, government-led initiatives seek to stimulate domestic demand and manufacturing activity, but escalating trade tensions with the United States are generally expected to have a negative impact. Overall, we anticipate stronger bookings in 2025 compared to 2024, especially in our Industrial Processing segment. However, the timing for securing capital orders remains uncertain and may shift between quarters or extend into 2026, depending in part by the outcome of ongoing tariff negotiations and the implementation of any tariff changes. Despite this near-term variability, we see long-term strength in our end markets as customers continue to depend on our products to enhance productivity through more efficient production processes. Additionally, we see growth opportunities from both proposed and enacted legislation in the U.S. and internationally aimed at fueling investment. An overview of our business by reportable segment is as follows: • Flow Control – Our Flow Control segment bookings were essentially flat compared to the second quarter of 2024, with strong demand for our parts and consumables products in North America, offset by weaker bookings in Europe where constrained market conditions and geopolitical tensions have dampened spending. In certain European markets, excess production capacity and declining demand for graphic paper have led to the closure of several mills, which negatively impacted demand for our capital equipment products. In North America, while quote activity related to capital projects remains strong, there have been delays in the timing for securing orders. We expect overall demand in this segment to improve as the year progresses, especially with increased clarity related to trade discussions and tariffs. • Industrial Processing – Our Industrial Processing segment bookings increased 9% compared to the second quarter of 2024 driven by strong demand for our capital equipment products at our wood processing product line. This growth was primarily fueled by the engineered wood industry in North America where customers selected our products for their ability to maximize wood fiber utilization. Despite these positive results, overall demand for our capital equipment in the wood processing product line was constrained by uncertain market conditions. Although there is ongoing quote activity for large capital projects, tariff-related uncertainty has led to a lengthening in quote-to-order times as customers await improved market conditions, with some customers in Europe already delaying capital orders into early 2026. Bookings at our fiber processing product line decreased 19% compared to the second quarter of 2024 due to constrained capital spending related to macroeconomic conditions, especially in China. These conditions resulted in several pending capital orders delayed into the third quarter of 2025. Tariff-related uncertainty has had a larger impact on this segment due to the higher average capital order value and our customers’ ability to delay the timing of large capital projects. Despite this, demand for our aftermarket parts in this segment has remained strong, and we expect steady demand to continue for the remainder of 2025. Additionally, we expect demand for our capital equipment in this segment to strengthen in the second half of 2025, with the anticipated receipt of a number of orders in the pipeline. • Material Handling – Our Material Handling segment bookings increased 16% compared to the second quarter of 2024, due to increased demand for our capital equipment products at our conveying and vibratory business. This increase was driven by underground mineral mining projects where customers placed substantial equipment orders to meet their operational needs. Our baling business also experienced increased demand for our capital equipment products, especially in the European market. Despite the overall increase in demand at our baling businesses, market conditions remain constrained, driven by a decline in used paper prices, market uncertainty related to tariffs and concerns over borrowing costs, all of which impact the timing of capital orders. From a tariff perspective, we anticipate some 23 Table of Contents KADANT INC. competitive advantage at our North American baling business as customers evaluate the incremental tariff costs on foreign-made balers. However, ongoing tariff-related market uncertainty has tempered demand for our capital equipment products, and we anticipate customers shifting their capital expenditures from larger capital projects to smaller aftermarket products in the short-term. Demand for our parts and consumables products in this segment was consistent with the first quarter of 2025, and we expect stable demand to continue for the remainder of the year. Our global operations have been and continue to be impacted by complex market conditions fueled by tariff-related uncertainty, inflationary pressures, and geopolitical tensions. We expect our operating environment to continue to be challenging, which creates continued uncertainty for the remainder of 2025. 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, as further amended in Part II, Item IA , within this report, and as may be further amended and/or restated in subsequent filings with the SEC. International Sales Approximately half of o ur 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. Global Trade The United States has imposed tariffs in the past and more recently proposed and implemented new tariffs on certain imports, which has and will continue to increase the cost of some of the parts and equipment we import. In addition, foreign countries have implemented and may in the future implement additional retaliatory tariffs in response to these actions by the United States, which have negatively impacted and may in the future negatively impact our operations. Although we are working 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, as further amended in Part II, Item IA , within this report, and as may be further amended and/or restated in subsequent filings with the SEC. Acquisitions We expect that a significant driver of our long-term growth will be through the acquisition of businesses and technologies that complement or augment our existing products and services or may involve entry into a new process industry. We have acquired several businesses in recent years and continue to pursue acquisition opportunities. On July 9, 2025, we acquired Babbini S.p.A and G.P.S. Engineering S.r.l (collectively, Babbini), two Italy-based companies specializing in industrial dewatering and engineered power transmission solutions, for approximately $18.7 million, net of cash acquired, and subject to certain adjustments. Babbini is part of our Industrial Processing segment. Results of Operations Second Quarter 2025 Compared With Second Quarter 2024 Revenue The following table presents the change in revenue by segment between the second quarters of 2025 and 2024, and those changes excluding the effect of acquisitions and foreign currency translation 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. 24 Table of Contents KADANT INC. Revenue by reportable segment in the second quarters of 2025 and 2024 is as follows: Three Months Ended Increase (Decrease) Acquisitions Currency Translation (Non-GAAP) Change in Organic Revenue (In thousands, except percentages) June 28, 2025 June 29, 2024 % Change Increase (Decrease) % Change Flow Control $ 95,947 $ 92,290 $ 3,657 4 % $ 704 $ 785 $ 2,168 2 % Industrial Processing 95,937 114,753 (18,816) (16) % — 455 (19,271) (17) % Material Handling 63,383 67,722 (4,339) (6) % 111 877 (5,327) (8) % Consolidated $ 255,267 $ 274,765 $ (19,498) (7) % $ 815 $ 2,117 $ (22,430) (8) % Consolidated revenue decreased to $255.3 million, or 7%, in the second quarter of 2025 compared to record revenue achieved in the second quarter of 2024, which was driven by record revenue at our Industrial Processing segment. Significant economic uncertainty impacted our customers’ decision-making process leading to a slowdown in capital orders in the second half of 2024 and the first quarter of 2025. As a result, capital revenue decreased 28% in the second quarter of 2025 compared to the prior year period. However, we experienced a sequential increase in our consolidated revenue across all segments compared to the first quarter of 2025. Demand for our parts and consumables products has remained steady and notably, we had record parts and consumables revenue of $181.8 million, or 71% of consolidated revenue, in the second quarter of 2025. Revenue at our Flow Control segment increased 4%, while organic revenue increased 2% in the second quarter of 2025, driven by higher demand for our parts and consumables products with strength in North America more than offsetting weakness in Europe. Revenue at our Industrial Processing segment decreased 16% in the second quarter of 2025 compared to record revenue achieved in the 2024 period, primarily driven by comparatively weaker demand for our capital equipment products at our wood processing business in the 2025 period. Ongoing market uncertainty in both North America and Europe has resulted in a lengthening of the quote-to-order times as customers await improved market conditions, causing some capital equipment orders to be delayed. Despite this, demand for our aftermarket products has remained steady as customers focus their spending on critical parts, resulting in a 7% increase in parts and consumables revenue in the second quarter of 2025 compared to 2024. Revenue at our Material Handling segment decreased 6% in the second quarter of 2025 due to lower capital equipment revenue at our conveying and vibratory business driven by tariff-related market uncertainty. Gross Profit Margin Gross profit margin by reportable segment in the second quarters of 2025 and 2024 is as follows: Three Months Ended Basis Point Change June 28, 2025 June 29, 2024 Flow Control 53.8% 53.0% 80 bps Industrial Processing 42.6% 41.3% 130 bps Material Handling 38.7% 37.8% 90 bps Consolidated 45.9% 44.4% 150 bps Consolidated gross profit margin increased to 45.9% in the second quarter of 2025 from 44.4% in the second quarter of 2024 due to an increase in the proportion of higher-margin parts and consumables revenue, which increased to 71% of consolidated revenue in the second quarter of 2025 compared to 63% in in the second quarter of 2024. Within our reportable segments, gross profit margin: • Increased to 53.8% at our Flow Control segment from 53.0% in the 2024 period primarily due to an increase in the proportion of higher-margin parts and consumables revenue in 2025 and, to a lesser extent, the inclusion of $0.2 million of amortization expense related to acquired profit in inventory, which lowered gross profit margin in 2024 by 0.3 percentage points. These increases were partially offset by lower margins achieved on our capital equipment products. 25 Table of Contents KADANT INC. • Increased to 42.6% at our Industrial Processing segment from 41.3% in the 2024 period due to an increase in the proportion of higher-margin parts and consumables revenue in 2025, partially offset by lower margins achieved on our capital equipment products. • Increased to 38.7% at our Material Handling segment from 37.8% in the 2024 period due to higher margins achieved on our parts and consumables products. Selling, General, and Administrative Expenses Selling, general, and administrative (SG&A) expenses by reportable segment and corporate in the second quarters of 2025 and 2024 are as follows: Three Months Ended (In thousands, except percentages) June 28, 2025 June 29, 2024 Increase % Change Flow Control $ 25,885 $ 23,971 $ 1,914 8% Industrial Processing 23,561 21,866 1,695 8% Material Handling 14,004 13,758 246 2% Corporate 10,491 10,409 82 1% Consolidated $ 73,941 $ 70,004 $ 3,937 6% Consolidated as a Percentage of Revenue 29.0% 25.5% Consolidated SG&A expenses as a percentage of revenue increased to 29.0% in 2025 compared to 25.5% in 2024 largely due to the comparatively lower revenue in 2025. Consolidated SG&A expenses increased $3.9 million, or 6%, compared to 2024. The weakening of the U.S. dollar resulted in a $1.9 million increase in SG&A expenses, including a $1.2 million shift from foreign currency gains in the 2024 period to losses in the 2025 period, and a $0.7 million unfavorable effect of foreign currency translation. In addition, the increase in SG&A expenses includes $2.3 million of SG&A expenses from acquisitions, partially offset by a decrease of $0.5 million of acquisition-related costs. Acquisition-related costs consist of amortization expense associated with acquired backlog and acquisition costs. Within our reportable segments and corporate, SG&A expenses: • Increased $1.9 million at our Flow Control segment principally due to the inclusion of $1.9 million of SG&A expenses from acquisitions, partially offset by a decrease of $0.6 million of acquisition-related costs. In addition, SG&A expenses increased $0.7 million as foreign currency gains of $0.3 million in the prior quarter shifted to $0.4 million of foreign currency losses in the 2025 period. • Increased $1.7 million at our Industrial Processing segment principally due to increases of $0.8 million in acquisition-related costs, $0.6 million in foreign currency transaction and translation expense, and $0.3 million in legal expenses. • Increased $0.2 million at our Material Handling segment principally due to $0.4 million of SG&A expenses from acquisitions, $0.2 million unfavorable foreign currency translation effect and a $0.2 million increase in external commission expense. These increases were partially offset by a decrease of $0.7 million in acquisition-related costs. • Increased $0.1 million at Corporate due to a $0.7 million increase in compensation expense and $0.5 million increase in insurance expense, largely offset by a decrease in legal costs primarily due to an intellectual property settlement. Interest Expense Interest expense decreased to $3.3 million in the second quarter of 2025 from $5.2 million in the second quarter of 2024 due to decreased borrowings under our revolving credit facility and a lower weighted-average interest rate. Provision for Income Taxes Provision for income taxes decreased to $9.8 million in the second quarter of 2025 from $12.0 million in the second quarter of 2024. The effective tax rate of 27% in the second quarter of 2025 and 28% in the second quarter of 2024 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, state taxes, nondeductible expenses, and the cost of repatriating the earnings of certain foreign subsidiaries. These items were offset in part by foreign tax credits. 26 Table of Contents KADANT INC. Net Income Net income decreased to $26.6 million in the second quarter of 2025 from $31.6 million in the second quarter of 2024 primarily due to a $9.0 million decrease in operating income, offset in part by a $1.9 million decrease in interest expense and a $2.2 million decrease in provision for income taxes (see discussions above for further details). First Six Months 2025 Compared With First Six Months 2024 Revenue The following table presents changes in revenue and organic revenue by segment between the first six months of 2025 and 2024. Organic revenue is a non-GAAP measure as defined above in the results of operations for the second quarter of 2025 compared with the second quarter of 2024. Revenue by segment in the first six months of 2025 and 2024 is as follows: Six Months Ended Acquisitions Currency Translation (Non-GAAP) Change in Organic Revenue (In thousands, except percentages) June 28, 2025 June 29, 2024 Increase (Decrease) % Change Increase (Decrease) % Change Flow Control $ 188,388 $ 178,972 $ 9,416 5% $ 8,216 $ (1,748) $ 2,948 2% Industrial Processing 185,461 220,614 (35,153) (16)% — (2,378) (32,775) (15)% Material Handling 120,628 124,154 (3,526) (3)% 611 471 (4,608) (4)% Consolidated $ 494,477 $ 523,740 $ (29,263) (6)% $ 8,827 $ (3,655) $ (34,435) (7)% Consolidated revenue in the first six months of 2025 decreased to $494.5 million, or 6%, while organic revenue decreased 7% primarily due to weaker demand for our capital equipment products. Significant economic uncertainty impacted our customers’ decision-making process leading to a slowdown in capital orders in the second half of 2024 and the first quarter of 2025. As a result, capital revenue was comparatively lower in 2025. From a geographic perspective, organic revenue was impacted by softening demand across all regions due to weak macroeconomic conditions fueled by trade tensions. While customers delayed large capital expenditures, the demand for our parts and consumables was steady, resulting in a 5% increase in parts and consumables revenue compared to the first six months of 2024. Revenue at our Flow Control segment increased 5%, including a 4% increase from acquisitions and a 1% decrease from the unfavorable effect of foreign currency translation. Organic revenue increased 2% in the first six months of 2025 driven by higher demand for parts and consumable products with strength in North America offsetting weaker market conditions in Europe. This increase was partially offset by lower demand for our capital equipment products in North America due to challenging market conditions. Revenue at our Industrial Processing segment decreased 16% in the first six months of 2025 due to reduced demand for our capital equipment products, especially at our wood processing businesses in the latter half of 2024 and the first quarter of 2025. While there is active quote activity for large capital projects, tariff-related uncertainty has increased the time for securing orders with certain orders being delayed to later in 2025 or into 2026. Capital revenue also decreased at our fiber processing businesses in the first six months of 2025, especially in China, where trade tensions were further compounded by sluggish economic conditions resulting in more cautious capital spending. Given the delay in committing to major capital expenditures, many customers focused their spending on critical parts. As a result, there was solid demand for our parts and consumables products in this segment with a 3% increase in aftermarket revenue in the first six months of 2025 compared to the first six months of 2024. Revenue at our Material Handling segment decreased 3%, led by weaker demand for our capital equipment products at our conveying and vibratory business in North America. This decline was partly driven by the tariff-related market uncertainty, which tempered demand and delayed the execution of capital projects. However, this decrease was partially offset by stronger demand at our baling business in North America. 27 Table of Contents KADANT INC. Gross Profit Margin Gross profit margin by segment in the first six months of 2025 and 2024 is as follows: Six Months Ended Basis Point Change June 28, 2025 June 29, 2024 Flow Control 53.6% 53.4% 20 bps Industrial Processing 43.3% 41.5% 180 bps Material Handling 38.2% 36.8% 140 bps Consolidated 46.0% 44.5% 150 bps Consolidated gross profit margin increased to 46.0% in the first six months of 2025 from 44.5% in the first six months of 2024 due to an increase in the proportion of higher-margin parts and consumables revenue, which increased to 73% of consolidated revenue in the first six months of 2025 compared to 66% in in the first six months of 2024, and the inclusion of $2.9 million of amortization expense related to acquired profit in inventory in the first six months of 2024, which decreased consolidated gross profit margin in the first six months of 2024 by 0.5 percentage points. Within our reportable segments, gross profit margin: • Increased to 53.6% at our Flow Control segment from 53.4% in the 2024 period primarily due to an increase in the proportion of higher-margin parts and consumables revenue in 2025. • Increased to 43.3% at our Industrial Processing segment from 41.5% in the 2024 period due to an increase in the proportion of higher-margin parts and consumables revenue in 2025 and the inclusion of $1.6 million of amortization expense related to acquired profit in inventory in the 2024 period, which decreased gross profit margin in 2024 by 0.7 percentage points. These increases were partially offset by lower margins achieved on our capital equipment products. • Increased to 38.2% at our Material Handling segment from 36.8% in the 2024 period due to the inclusion of $1.0 million of amortization expense related to acquired profit in inventory in the 2024 period, which decreased gross profit margin in 2024 by 0.8 percentage points and, to a lesser extent, higher margins achieved on our capital equipment products in 2025. Selling, General, and Administrative Expenses SG&A expenses by reportable segment and corporate in the first six months of 2025 and 2024 are as follows: Six Months Ended (In thousands, except percentages) June 28, 2025 June 29, 2024 Increase (Decrease) % Change Flow Control $ 51,055 $ 47,395 $ 3,660 8% Industrial Processing 44,571 44,384 187 —% Material Handling 27,512 27,798 (286) (1)% Corporate 22,024 20,732 1,292 6% Consolidated $ 145,162 $ 140,309 $ 4,853 3% Consolidated as a Percentage of Revenue 29.4% 26.8% Consolidated SG&A expenses as a percentage of revenue increased to 29.4% in the first six months of 2025 compared with 26.8% in the first six months of 20 24 due in large part to the comparatively lower revenue in 2025. Consolidated SG&A expenses increased $4.9 million, or 3%, primarily due to the inclusion of $5.5 million of SG&A expenses from acquisitions made during the second and third quarters of 2024 and higher compensation-related costs. These increases were partially offset by a decrease of $1.7 million of acquisition-related costs. Within our reportable segments and corporate, SG&A expenses: • Increased $3.7 million at our Flow Control segment principally due to the inclusion of $4.5 million of SG&A expenses from acquisitions, partially offset by a decrease of $0.3 million in acquisition-related costs. • Increased $0.2 million at our Industrial Processing segment due to an increase of $0.5 million of acquisition costs, partially offset by a decrease of $0.2 million in bad debt expense. 28 Table of Contents KADANT INC. • Decreased $0.3 million at our Material Handling segment principally due to a decrease of $1.9 million of acquisition-related costs, partially offset by an increase of $1.0 million of SG&A expenses from acquisitions and an increase in compensation-related costs. • Increased $1.3 million at Corporate due to a $1.4 million increase in compensation expense and a $0.6 million increase in insurance expense, largely offset by a decrease in legal costs primarily due to an intellectual property settlement. Interest Expense Interest expense decreased to $7.2 million in the first six months of 2025 from $9.9 million in the first six months of 2024 due t o decreased borrowings under our revolving credit facility and a lower weighted-average interest rate. Provision for Income Taxes Provision for income taxes decreased to $17.7 million in the first six months of 2025 from $19.8 million in the first six months of 2024. The effective tax rate of 26% in the first six months of 2025 was higher than our statutory rate of 21% primarily due to nondeductible expenses, the distribution of our worldwide earnings, and state taxes. These items were offset in part by net excess income tax benefits from stock-based compensation arrangements. The effective tax rate of 26% in the first six 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 and net excess income tax benefits from stock-based compensation arrangements. Net Income Net income decreased to $51.1 million in the first six months of 2025 from $56.6 million in the first six months of 2024 primarily due to a $10.4 million decrease in operating income, offset in part by a $2.7 million decrease in interest expense and a $2.2 million decrease in provision for income taxes (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 acquisitions and foreign currency translation), 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, 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 additional measures of our performance. 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. 29 Table of Contents KADANT INC. A reconciliation of adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin from net income attributable to Kadant is as follows: Three Months Ended Six Months Ended (In thousands, except percentages) June 28, 2025 June 29, 2024 June 28, 2025 June 29, 2024 Net Income Attributable to Kadant $ 26,159 $ 31,291 $ 50,222 $ 55,980 Net Income Attributable to Noncontrolling Interests 480 283 854 579 Provision for Income Taxes 9,822 11,992 17,650 19,846 Interest Expense, Net 2,899 4,833 6,204 8,891 Other Expense, Net 17 2 33 32 Operating Income 39,377 48,401 74,963 85,328 Acquired Profit in Inventory Amortization (a) 24 529 35 2,860 Acquired Backlog Amortization (b) 202 695 581 1,494 Acquisition Costs 908 940 1,245 2,064 Indemnification Asset (Provision) Reversal (c) — (66) (29) 24 Adjusted Operating Income (non-GAAP measure) 40,511 50,499 76,795 91,770 Depreciation and Amortization 11,867 11,296 23,501 22,236 Adjusted EBITDA (non-GAAP measure) $ 52,378 $ 61,795 $ 100,296 $ 114,006 Adjusted EBITDA Margin (non-GAAP measure) 20.5% 22.5% 20.3% 21.8% (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 Six Months Ended (In thousands) June 28, 2025 June 29, 2024 June 28, 2025 June 29, 2024 Cash Provided by Operating Activities $ 40,482 $ 28,066 $ 63,317 $ 50,897 Capital Expenditures (3,968) (4,974) (7,804) (11,245) Free Cash Flow (non-GAAP measure) $ 36,514 $ 23,092 $ 55,513 $ 39,652 Liquidity and Capital Resources Consolidated working capital was $274.9 million at June 28, 2025, compared with $250.8 million at December 28, 2024. Cash and cash equivalents were $95.3 million at June 28, 2025, compared with $94.7 million at December 28, 2024, which included cash and cash equivalents held by our foreign subsidiaries o f $75.3 million at June 28, 2025 and $73.8 million at December 28, 2024. Cash Flow Cash flow information in the first six months of 2025 and 2024 is as follows: Six Months Ended (In thousands) June 28, 2025 June 29, 2024 Net Cash Provided by Operating Activities $ 63,317 $ 50,897 Net Cash Used in Investing Activities (6,940) (301,518) Net Cash (Used in) Provided by Financing Activities (61,476) 222,837 Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash 6,341 (3,491) Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash $ 1,242 $ (31,275) 30 Table of Contents KADANT INC. Operating Activities Cash provided by operating activities increased to $63.3 million in the first six months of 2025 from $50.9 million in the first six months of 2024 due in large part to the increase in cash received from customer deposits. 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 operating cash outflows associated with working capital in the six months of 2025 related to inventory and other current liabilities. Purchases of inventory used cash of $14.8 million and other current liabilities used cash of $13.4 million primarily related to incentive compensation payments. These uses of cash were offset in part by cash received from customer deposits of $9.4 million associated with an increase in capital equipment orders and cash received from contract assets of $7.7 million related to contracts accounted for on an over time basis. Significant cash outflows associated with working capital in the first six months of 2024 related to accounts receivable, customer deposits and other current liabilities. An increase in accounts receivable used cash of $7.3 million primarily due to our revenue growth, and a decrease in customer deposits used cash of $17.7 million due to a reduction in capital equipment orders. Other current liabilities used cash of $15.2 million primarily related to incentive compensation payments. These uses of cash were offset in part by cash provided by an increase in accounts payable of $14.0 million related to inventory purchases and the timing of payments. Investing Activities Cash used in investing activities was $6.9 million in the first six months of 2025, compared with $301.5 million in the first six months of 2024. Cash used in investing activities in the first six months of 2025 consisted of capital expenditures of $7.8 million. Cash used in investing activities in the first six months of 2024 included consideration paid for acquisitions, net of cash acquired, of $291.6 million and capital expenditures of $11.2 million. Financing Activities Cash used in financing activities was $61.5 million in the six months of 2025, compared with cash provided by financing activities of $222.8 million in the first six months of 2024. Borrowings under our revolving credit facility were $8.0 million in 2025 compared to $295.2 million in 2024, which was primarily used to fund our 2024 acquisitions. Repayments of short- and long-term obligations were $56.9 million in 2025 and $59.1 million in 2024. Cash dividends paid to stockholders were $7.8 million in 2025 and $7.2 million in 2024. In addition, taxes paid related to the vesting of equity awards were $6.1 million in 2025 and $5.9 million in 2024. 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 $6.3 million increase in cash, cash equivalents, and restricted cash in the first six months of 2025 related to exchange rates was primarily attributable to the weakening of the U.S. dollar against the euro and, to a lesser extent, the Swedish krona, and the Canadian dollar. The $3.5 million decrease in cash, cash equivalents, and restricted cash in the first six months of 2024 was primarily attributable to the strengthening of the U.S. dollar against the euro and, to a lesser extent, the Canadian dollar, the Chinese renminbi and Brazilian real. 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. As of June 28, 2025, our outstanding balance under the Credit Agreement was $239.2 million, which included $80.2 million of euro-denominated borrowings, and we had $161.6 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 June 28, 2025, our leverage ratio was 0.86 and we were in compliance with our debt covenants. See Note 4 , Long-Term Obligations, in the accompanying condensed consolidated financial statements for additional information regarding our debt obligations. In July 2025, we borrowed $21.1 million of euro-denominated funds under our revolving credit facility to finance our acquisition of Babbini. 31 Table of Contents KADANT INC. Additional Liquidity and Capital Resources On May 15, 2025, our board of directors approved the repurchase of up to $50.0 million of our equity securities during the period from May 15, 2025 to May 15, 2026. We did not repurchase any shares of our common stock under this authorization or our previous $50.0 million authorization that expired on May 16, 2025. We paid cash dividends of $7.8 million in the first six months of 2025. On May 15, 2025, we declared a quarterly cash dividend of $0.34 per share totaling $4.0 million that will be paid on August 7, 2025. 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 $16.0 to $18.0 million during the remainder of 2025 for property, plant, and equipment. As of June 28, 2025, we had approximately $130.0 million of total unremitted foreign earnings. It is our intent to indefinitely reinvest $71.7 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments, if any. In the first six months of 2025, 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 $1.8 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 2024 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. 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.