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 January 3, 2026 (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 presented in three reportable segments consisting of our Flow Control segment, Industrial Processing segment, and Material Handling segment. 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, paper and tissue, food, energy, defense, and numerous 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, process timber, and optimize industrial steam boiler efficiency in the packaging, paper, tissue, wood products, and food processing industries, among others. Our primary products include fiber processing systems and recycling equipment, chemical pulping equipment, debarkers, stranders, chippers, custom-engineered profiles and industrial blades, boiler cleaning technologies, and continuous dewatering equipment. • 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, home lawn and garden, professional lawn, turf and ornamental applications, and for oil and grease absorption. See Note 9 , Business Segment Information, in the accompanying condensed consolidated financial statements for financial information on our reportable segments. Industry and Business Overview Consolidated bookings increased 16% to $312 million in the second quarter of 2026 compared to the second quarter of 2025, led by contributions from our recent acquisitions, and record demand for our parts and consumables products at our Industrial Processing segment. Our large installed base throughout the world continues to generate a stable stream of recurring 23 Table of Contents KADANT INC. business from aftermarket parts, maintenance upgrades, and related service requirements. Parts and consumables product bookings increased 25% compared to the second quarter of 2025 and represented 72% of consolidated bookings. Capital equipment product bookings decreased 3% compared to the second quarter of 2025. While customer requests and quotation activity remain healthy across all our segments, the timing for securing large capital equipment project orders remains uncertain. The volatility in trade policies, inflation, and geopolitical conflicts have led to pressure on input costs. As a result, customers remain cautious in approving large capital projects pending greater clarity regarding input costs and broader economic conditions. This has led to longer customer approval cycles and increased volatility in the timing of capital project orders. This dynamic is more pronounced in our Industrial Processing segment, where average capital order values are significantly higher than in our other segments. Based on the current level of quote activity, we anticipate stronger capital bookings in the second half of 2026 compared to the first half. Overall, we expect bookings in 2026 to exceed 2025 levels, largely driven by our Industrial Processing segment and incremental contributions from our recent acquisitions. We continue to see long-term strength in our end markets as customers rely on our products to enhance productivity through more efficient production processes. Additionally, we anticipate growth opportunities related to industrial automation and modernization investments as well as in the energy and defense sectors. An overview of our business by reportable segment is as follows: • Flow Control – Our Flow Control segment bookings increased 11% compared to the second quarter of 2025, reflecting strong demand for our parts and consumables products across all regions. Stronger demand in North America, fueled by factory automation projects, was tempered by weaker demand in Europe, which was negatively impacted by mill closures and low factory utilization rates. Demand for our capital equipment products was limited as customers remained cautious regarding their capital spending decisions amid market uncertainty. We expect consistent demand for the remainder of 2026 and long-term strength in this segment due to its diversified market exposure. • Industrial Processing – Our Industrial Processing segment bookings increased 29% compared to the second quarter of 2025, as recent acquisitions drove record aftermarket parts bookings in the quarter. Demand for our capital equipment products was negatively impacted by the volatility in timing of capital project orders. Quotation activity remains high and project discussions continue across most regions, however, customers continue to defer larger capital investments. Overall, we expect demand for our capital equipment products to strengthen in the second half of 2026, supported by the anticipated receipt of several large capital orders currently in the pipeline. In addition, we expect demand for our aftermarket parts to remain stable in 2026. • Material Handling – Our Material Handling segment bookings increased 3% compared to the second quarter of 2025, reflecting stable demand as customers balance challenging macroeconomic conditions. In this environment, customers are prioritizing maintenance spending and smaller incremental investments over large expansion projects. We expect modest growth in demand for our products in this segment to continue for the remainder of 2026. Our global operations have been and continue to be impacted by complex market conditions fueled by volatile trade policies, inflationary pressures, and geopolitical tensions. We expect our operating environment to continue to be challenging, especially for large capital equipment projects where the order timing is uncertain. However, we believe that the fundamentals of our business remain strong, supported by our solid market position in key product lines, experienced 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 1A , within this report, and as may be further amended and/or restated in subsequent filings with the SEC. International Sales Approximately half of our sales are to customers outside the United States, mainly in Europe, Asia, and Canada. As a result, our financial performance can be materially affected by currency exchange rate fluctuations between the U.S. dollar and foreign currencies. To mitigate the impact of foreign currency transaction fluctuations, we generally seek to charge our customers in the same currency in which our operating costs are incurred. Additionally, we may enter into forward currency exchange contracts to hedge certain firm purchase and sale commitments denominated in currencies other than our subsidiaries' functional currencies. We currently do not use derivative instruments to hedge our exposure to exchange rate fluctuations created by the translation into the U.S. dollar of our foreign subsidiaries' results that are in functional currencies other than the U.S. dollar. Global Trade The United States has imposed tariffs in the past and more recently proposed and implemented new tariffs on certain imports, which have and will continue to increase the cost of some of the parts and equipment we import. In addition, foreign 24 Table of Contents KADANT INC. 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 1A , 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 April 30, 2026, we completed the acquisition of voestalpine BÖHLER Profil GmbH & Co KG and voestalpine BÖHLER Profil VerwaltungsGmbH for a net purchase price of $170.1 million. Upon closing, the acquired entities were renamed Kadant Profil GmbH & Co KG and Kadant Profil Verwaltungs GmbH (collectively, Kadant Profil). Kadant Profil is a manufacturer of customized rolled profiles and industrial knife solutions for demanding industrial applications and is part of our Industrial Processing segment. See Note 2 , Acquisitions, in the accompanying condensed consolidated financial statements for further details. Results of Operations Second Quarter 2026 Compared with Second Quarter 2025 Revenue The following table presents the change in revenue by segment between the second quarters of 2026 and 2025, 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. Revenue by reportable segment in the second quarters of 2026 and 2025 is as follows: Three Months Ended Increase Acquisitions Currency Translation (Non-GAAP) Change in Organic Revenue (In thousands, except percentages) July 4, 2026 June 28, 2025 % Change Increase % Change Flow Control $ 100,310 $ 95,947 $ 4,363 5% $ — $ 2,394 $ 1,969 2% Industrial Processing 143,800 95,937 47,863 50% 33,922 1,040 12,901 13% Material Handling 68,765 63,383 5,382 8% — 645 4,737 7% Consolidated $ 312,875 $ 255,267 $ 57,608 23% $ 33,922 $ 4,079 $ 19,607 8% Consolidated revenue increased 23% in the second quarter of 2026, including a 13% increase from acquisitions. Organic revenue increased 8%, including a 23% increase in sales of capital equipment products led by our Industrial Processing segment, and steady demand for our parts and consumables products. Revenue at our Flow Control segment increased 5% in the second quarter of 2026, primarily driven by higher demand for our parts and consumables products, especially in North America and Asia. In addition, capital equipment product revenue increased in China due to the completion of several large projects. Revenue at our Industrial Processing segment increased 50% in the second quarter of 2026, primarily due to contributions from our recent acquisitions and the favorable effect of foreign currency translation. Organic revenue increased 13%, reflecting a higher volume of capital projects in the quarter compared to the prior-year period. Organic revenue from capital equipment products was strongest in North America, while Europe was comparatively weaker due to constrained market conditions, which have impacted input costs and continued to influence our customers’ decision-making process. 25 Table of Contents KADANT INC. Revenue at our Material Handling segment increased 8% in the second quarter of 2026, reflecting strong demand for both capital equipment and aftermarket parts products. The increase was primarily driven by our business in Europe, which benefited from a large refurbishment project during the quarter. Gross Profit Margin Gross profit margin by reportable segment in the second quarters of 2026 and 2025 is as follows: Three Months Ended Basis Point Change July 4, 2026 June 28, 2025 Flow Control 52.5% 53.8% (130) bps Industrial Processing 40.7% 42.6% (190) bps Material Handling 37.6% 38.7% (110) bps Consolidated 43.8% 45.9% (210) bps Consolidated gross profit margin decreased to 43.8% in the second quarter of 2026 from 45.9% in the second quarter of 2025 due to several factors. The proportion of higher-margin aftermarket parts revenue decreased to 68% in 2026 compared to 71% in 2025. In addition, our gross profit margins for both aftermarket parts and capital equipment products were adversely affected by the product mix within these categories. Gross profit margin in our Industrial Processing segment was negatively affected by the lower gross margin profile associated with recent acquisitions. Within our reportable segments, gross profit margin: • Decreased to 52.5% at our Flow Control segment from 53.8% in the 2025 period primarily due to lower margins achieved on our parts and consumables products and an unfavorable mix of capital equipment projects in the period. • Decreased to 40.7% at our Industrial Processing segment from 42.6% in the 2025 period due to the lower gross margin profile associated with recent acquisitions. In addition, gross profit margin was negatively impacted by a decrease in the proportion of higher-margin parts and consumables product revenue, which decreased to 69% of revenue in the second quarter of 2026 compared to 76% in the 2025 period, and lower margins achieved on our aftermarket parts products. • Decreased to 37.6% at our Material Handling segment from 38.7% in the 2025 period due to lower margins achieved on our capital equipment products. Selling, General, and Administrative Expenses Selling, general, and administrative (SG&A) expenses by reportable segm ent and Corp orate in the second quarters of 2026 and 2025 are as follows: Three Months Ended (In thousands, except percentages) July 4, 2026 June 28, 2025 Increase % Change Flow Control $ 26,255 $ 25,885 $ 370 1% Industrial Processing 29,010 23,561 5,449 23% Material Handling 14,356 14,004 352 3% Corporate 12,020 10,491 1,529 15% Consolidated $ 81,641 $ 73,941 $ 7,700 10% Consolidated as a Percentage of Revenue 26.1% 29.0% Consolidated SG&A expenses increased $7.7 million, or 10%, in the second quarter of 2026 compared to the second quarter of 2025, primarily due to the inclusion of $7.9 million of SG&A expenses from recent acquisitions. Within our reportable segments and Corporate, SG&A expenses: • Increased $0.4 million at our Flow Control segment primarily due to a net unfavorable impact from foreign currency transaction and translation. 26 Table of Contents KADANT INC. • Increased $5.4 million at our Industrial Processing segment primarily due to $7.9 million of SG&A expenses from acquisitions, offset in part by a $1.4 million shift from foreign currency losses in the 2025 period to gains in the 2026 period and a $0.5 million decrease in bad debt expense. • Increased $0.4 million at our Material Handling segment primarily due to a $0.2 million unfavorable impact from foreign currency translation and incremental selling-related costs. • Increased $1.5 million at Corporate due to a benefit received in 2025 related to an intellectual property settlement. Interest Expense Interest expense increased to $5.3 million in the second quarter of 2026 from $3.3 million in the second quarter of 2025 due to increased borrowings under our revolving credit facility, which were primarily used to fund our acquisitions during the second half of 2025 and first half of 2026, partially offset by a lower weighted-average interest rate. Provision for Income Taxes Provision for income taxes increased to $13.2 million in the second quarter of 2026 from $9.8 million in the second quarter of 2025. The effective tax rate of 28.6% in the second quarter of 2026 was higher than our statutory rate of 21%, primarily due to the distribution of our worldwide earnings, state taxes, and nondeductible expenses. The effective tax rate of 26.9% in the second quarter of 2025 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. Net Income Net income increased to $32.8 million in the second quarter of 2026 from $26.6 million in the second quarter of 2025 primarily due to a $11.5 million increase in operating income, offset in part by a $2.0 million increase in interest expense and a $3.4 million increase in provision for income taxes (see discussions above for further details). First Six Months 2026 Compared with First Six Months 2025 Revenue The following table presents changes in revenue and organic revenue by segment between the first six months of 2026 and 2025. Organic revenue is a non-GAAP measure as defined above in the results of operations for the second quarter of 2026 compared with the second quarter of 2025. Revenue by segment in the first six months of 2026 and 2025 is as follows: Six Months Ended Acquisitions Currency Translation (Non-GAAP) Change in Organic Revenue (In thousands, except percentages) July 4, 2026 June 28, 2025 Increase % Change Increase % Change Flow Control $ 198,918 $ 188,388 $ 10,530 6% $ — $ 7,189 $ 3,341 2% Industrial Processing 266,838 185,461 81,377 44% 67,906 4,527 8,944 5% Material Handling 128,624 120,628 7,996 7% — 2,201 5,795 5% Consolidated $ 594,380 $ 494,477 $ 99,903 20% $ 67,906 $ 13,917 $ 18,080 4% Consolidated revenue increased 20% in the first six months of 2026, including a 14% increase from acquisitions. Organic revenue increased 4%, primarily due to higher demand for our capital equipment products compared to the first six months of 2025, and steady demand for our parts and consumables products. Geographically, the economic effects of the conflicts in the Middle East contributed to weaker organic performance in Europe. Revenue at our Flow Control segment increased 6% and organic revenue increased 2% in the first six months of 2026, primarily driven by higher demand for parts and consumables products across all regions, except Europe. Ongoing geopolitical tensions, energy price volatility, and macroeconomic uncertainty have contributed to more cautious spending in Europe. Increased capital equipment product revenue in China due to the completion of several large projects was more than offset by weaker capital equipment demand in other regions. 27 Table of Contents KADANT INC. Revenue at our Industrial Processing segment increased 44% in the first six months of 2026, primarily due to our recent acquisitions and the favorable effect of foreign currency translation. Organic revenue increased 5%, reflecting higher demand for our capital equipment products, partially offset by lower demand for our parts and consumables products. Revenue at our Material Handling segment increased 7% in the first six months of 2026, driven by strong demand for both aftermarket and capital equipment products. Gross Profit Margin Gross profit margin by segment in the first six months of 2026 and 2025 is as follows: Six Months Ended Basis Point Change July 4, 2026 June 28, 2025 Flow Control 52.6% 53.6% (100) bps Industrial Processing 41.5% 43.3% (180) bps Material Handling 37.5% 38.2% (70) bps Consolidated 44.4% 46.0% (160) bps Consolidated gross profit margin decreased to 44.4% in the first six months of 2026 from 46.0% in the first six months of 2025. The proportion of higher-margin aftermarket parts revenue decreased to 71% in 2026 compared to 73% in 2025. In addition, gross profit margins for both aftermarket parts and capital equipment products were adversely affected by the product mix within these categories. Gross profit margin in our Industrial Processing segment was negatively affected by the lower gross margin profile associated with recent acquisitions. Within our reportable segments, gross profit margin: • Decreased to 52.6% at our Flow Control segment from 53.6% in the 2025 period primarily due to lower margins achieved on our parts and consumables products. • Decreased to 41.5% at our Industrial Processing segment from 43.3% in the 2025 period due to the lower gross margin profile associated with recent acquisitions. In addition, gross profit margin was impacted by lower margins achieved on our aftermarket products due in part to several large parts orders in the 2025 period. Gross margin was also negatively impacted by a decrease in the proportion of higher-margin parts and consumables product revenue, which decreased to 72% of revenue in the first six months of 2026 compared to 78% in the first six months of 2025. • Decreased to 37.5% at our Material Handling segment from 38.2% in the 2025 period due to lower margins achieved on our capital equipment products. Selling, General, and Administrative Expenses SG&A expenses by reportable segment and Corporate in the first six months of 2026 and 2025 are as follows: Six Months Ended (In thousands, except percentages) July 4, 2026 June 28, 2025 Increase % Change Flow Control $ 52,622 $ 51,055 $ 1,567 3% Industrial Processing 59,304 44,571 14,733 33% Material Handling 28,759 27,512 1,247 5% Corporate 23,494 22,024 1,470 7% Consolidated $ 164,179 $ 145,162 $ 19,017 13% Consolidated as a Percentage of Revenue 27.6% 29.4% Consolidated SG&A expenses increased $19.0 million, or 13%, in the first six months of 2026 compared to the first six months of 2025, primarily due to the inclusion of $15.8 million of SG&A expenses from acquisitions and an unfavorable impact from foreign currency translation of $3.9 million. 28 Table of Contents KADANT INC. Within our reportable segments and Corporate, SG&A expenses: • Increased $1.6 million at our Flow Control segment due to a $2.1 million unfavorable impact from foreign currency translation, offset in part by a $0.5 million reduction in backlog amortization expense. • Increased $14.7 million at our Industrial Processing segment principally due to $15.8 million of SG&A expenses from acquisitions, partially offset by a $0.5 million reduction in bad debt expense. • Increased $1.2 million at our Material Handling segment primarily due to a $0.6 million unfavorable impact from foreign currency translation and incremental selling-related costs. • Increased $1.5 million at Corporate due to a benefit received in 2025 related to an intellectual property settlement. Interest Expense Interest expense increased to $9.8 million in the first six months of 2026 from $7.2 million in the first six months of 2025 due to higher borrowings under our revolving credit facility used to finance acquisitions during the second half of 2025 and first half of 2026, partially offset by a lower weighted-average interest rate. We expect interest expense to remain higher than prior-year levels for the remainder of 2026, primarily due to borrowings used to finance our April 2026 acquisition of Kadant Profil. Provision for Income Taxes Provision for income taxes increased to $23.3 million in the first six months of 2026 from $17.7 million in the first six months of 2025. The effective tax rate of 28.4% in the first six months of 2026 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, state taxes, and nondeductible expenses. The effective tax rate of 25.7% 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. Net Income Net income increased to $58.7 million in the first six months of 2026 from $51.1 million in the first six months of 2025 primarily due to a $16.0 million increase in operating income, offset in part by a $2.6 million increase in interest expense and a $5.7 million increase 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 intangible assets, profit in inventory, and backlog (collectively, purchase accounting expenses); acquisition costs; and other income or expense, as indicated. We exclude purchase accounting expenses and acquisition costs to provide a more meaningful and consistent comparison of our operating results over time and with peer companies. While we have a history of acquisition activity, such transactions do not occur on a predictable cycle, and the size and nature of these transactions will vary. We believe it is important for investors to understand that these intangible assets were recorded as part of purchase accounting and that they contribute to revenue generation. We also exclude other items when 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 29 Table of Contents KADANT INC. 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. 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) July 4, 2026 June 28, 2025 July 4, 2026 June 28, 2025 Net Income Attributable to Kadant $ 32,468 $ 26,159 $ 57,977 $ 50,222 Net Income Attributable to Noncontrolling Interests 379 480 691 854 Provision for Income Taxes 13,182 9,822 23,324 17,650 Interest Expense, Net 4,819 2,899 8,952 6,204 Other Expense, Net 32 17 45 33 Operating Income 50,880 39,377 90,989 74,963 Intangible Asset Amortization Expense 8,626 6,333 17,011 12,653 Profit in Inventory Amortization Expense (a) 1,201 24 2,610 35 Backlog Amortization Expense (b) — 202 — 581 Acquisition Costs 604 908 1,278 1,245 Indemnification Asset Provision (c) (125) — (125) (29) Adjusted Operating Income (d) (non-GAAP measure) 61,186 46,844 111,763 89,448 Depreciation Expense 6,918 5,534 13,180 10,848 Adjusted EBITDA (non-GAAP measure) $ 68,104 $ 52,378 $ 124,943 $ 100,296 Adjusted EBITDA Margin (non-GAAP measure) 21.8% 20.5% 21.0% 20.3% (a) Represents amortization expense within cost of revenue associated with acquired profit in inventory. (b) Represents intangible amortization expense associated with acquired backlog. (c) Represents the net indemnification asset provision related to the establishment of tax reserves associated with uncertain tax positions. (d) Reflects new methodology, announced on February 19, 2026, to exclude intangible amortization expense. A reconciliation of free cash flow from cash flow provided by operating activities is as follows: Three Months Ended Six Months Ended (In thousands) July 4, 2026 June 28, 2025 July 4, 2026 June 28, 2025 Cash Provided by Operating Activities $ 53,510 $ 40,482 $ 75,426 $ 63,317 Capital Expenditures (a) (10,947) (3,968) (14,205) (7,804) Free Cash Flow (non-GAAP measure) $ 42,563 $ 36,514 $ 61,221 $ 55,513 (a) Includes $5.8 million paid in the second quarter of 2026 for the purchase of a previously leased manufacturing facility in the Flow Control segment. Liquidity and Capital Resources Consolidated working capital was $356.7 million at July 4, 2026, compared with $313.8 million at January 3, 2026. Cash and cash equivalents were $134.5 million at July 4, 2026, compared with $119.6 million at January 3, 2026, which included cash and cash equivalents held by our foreign subsidiaries o f $114.5 million at July 4, 2026 and $100.3 million at January 3, 2026. 30 Table of Contents KADANT INC. Cash Flow Cash flow information in the first six months of 2026 and 2025 is as follows: Six Months Ended (In thousands) July 4, 2026 June 28, 2025 Net Cash Provided by Operating Activities $ 75,426 $ 63,317 Net Cash Used in Investing Activities (185,093) (6,940) Net Cash Provided by (Used in) Financing Activities 127,379 (61,476) Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash (2,769) 6,341 Increase in Cash, Cash Equivalents, and Restricted Cash $ 14,943 $ 1,242 Operating Activities Cash provided by operating activities increased to $75.4 million in the first six months of 2026 from $63.3 million in the first six months of 2025. 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 first six months of 2026 were primarily attributable to increases in accounts receivable and contract assets and decreases in customer deposits and other liabilities. Accounts receivable and contract assets used $9.7 million of cash, primarily due to the timing of billings and customer payments. Customer deposits used $7.5 million of cash, primarily due to the timing of capital equipment orders, and other liabilities used $8.4 million of cash, primarily related to incentive compensation payments. Significant cash outflows associated with working capital in the first six months of 2025 were primarily attributable to a decrease in other liabilities and an increase in inventory. 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 cash outflows were partially offset by customer deposits, which provided $9.4 million of cash due to higher capital equipment orders, and contract assets, which provided $7.7 million of cash primarily due to the timing of billings on contracts accounted for over time. Investing Activities Cash used in investing activities was $185.1 million in the first six months of 2026, compared with $6.9 million in the first six months of 2025. The increase in 2026 was primarily attributable to $171.8 million of acquisition consideration, net of cash acquired, including $170.1 million for the acquisition of Kadant Profil and $1.7 million of post-closing payments related to acquisitions completed in 2024. Capital expenditures increased to $14.2 million in the first six months of 2026, compared with $7.8 million in the first six months of 2025, primarily due to the purchase of a manufacturing facility that had previously been leased. Financing Activities Cash provided by financing activities was $127.4 million in the first six months of 2026, compared with cash used of $61.5 million in the first six months of 2025. The increase in the first six months of 2026 primarily reflected higher net borrowings under our revolving credit facility, including borrowings of $190.9 million used primarily to finance the acquisition of Kadant Profil, partially offset by repayments of long-term obligations of $49.2 million. In the first six months of 2025, borrowings under our revolving credit facility were $8.0 million and repayments of long-term obligations were $56.9 million. Cash dividends paid to stockholders increased to $8.3 million in 2026, compared with $7.8 million in 2025. Taxes paid related to the vesting of equity awards decreased to $4.9 million in 2026, compared with $6.1 million in 2025. 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 $2.8 million decrease in cash, cash equivalents, and restricted cash in the first six months of 2026 related to exchange rates was primarily attributable to the strengthening of the U.S. dollar against the euro and Swedish krona, offset in part by the weakening of the U.S. dollar against the Chinese renminbi. 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. 31 Table of Contents KADANT INC. Borrowing Capacity and Debt Obligations Our unsecured multi-currency revolving credit facility entered into on March 1, 2017 (as amended and restated to date, the Credit Agreement) matures on September 26, 2030 and has a borrowing capacity of $750.0 million. In April 2026, we borrowed approximately $181.8 million of euro-denominated debt under our revolving credit facility to fund the acquisition of Kadant Profil. As of July 4, 2026, our outstanding balance under the Credit Agreement was $502.5 million, which included $245.5 million of euro-denominated borrowings, and we had $248.7 million of available committed 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 to 1 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 to 1. As of July 4, 2026, our leverage ratio was 1.72 and we were in compliance with our debt covenants. See Note 5 , Long-Term Obligations in the accompanying condensed consolidated financial statements for additional information regarding our debt obligations. Additional Liquidity and Capital Resources On May 21, 2026, our board of directors approved the repurchase of up to $50.0 million of our equity securities during the period from May 21, 2026 to May 21, 2027. We did not repurchase any shares of our common stock under this authorization or under our previous authorization that expired on May 15, 2026. We paid cash dividends of $8.3 million in the first six months of 2026. On May 21, 2026, we declared a quarterly cash dividend of $0.36 per share totaling $4.3 million that will be paid on August 13, 2026. 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 $12.0 to $16.0 million during the remainder of 2026 for property, plant, and equipment. As of July 4, 2026, we had approximately $150.3 million of total unremitted foreign earnings. It is our intent to indefinitely reinvest $93.8 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 2026, 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 $2.9 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 2025 that warrant disclosure. Recent Accounting Pronouncements See Note 1 , under the heading Recent Accounting Pronouncements , 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. 32 Table of Contents KADANT INC.