Kadant Inc. Q2 FY2026 earnings call

• Overall Quarterly Performance

  • The firm delivered record Q2 2026 results despite continued softness in global capital equipment markets and ongoing geopolitical uncertainty
  • Total revenue grew 23% year-over-year to a record $313 million, with 8% organic revenue growth across all operating segments
  • Bookings increased 16% year-over-year to $312 million, led by contributions from recent acquisitions and strong aftermarket demand; multiple large capital projects are in advanced stages of development despite not yet being formally released
  • Adjusted EBITDA hit a record $68 million, up 30% year-over-year; adjusted diluted EPS reached a record $3.42, up 26% year-over-year and exceeded the prior guidance range by 44 cents
  • Operating cash flow increased 32% year-over-year to $54 million, and free cash flow rose 17% year-over-year to $43 million
  • Gross margin was 43.8%, down 210 basis points year-over-year, driven by a shift to a higher mix of capital revenue (down from 71% to 68% aftermarket revenue mix) and acquisition-related inventory amortization impacts; these factors offset a benefit from tariff refunds
  • SG&A expenses were well managed, falling to 26.1% of revenue from 29% year-over-year
  • Cash conversion days improved to 133 from 147 in the prior quarter

• Business Model & Market Dynamics

  • The company's large installed base generates stable recurring profitable revenue from maintenance, upgrades, aftermarket parts and services, as customers prioritize maximizing existing asset productivity and reducing input costs
  • Healthy quote activity and commercial engagement continue, but extended customer approval cycles and delayed project releases are the primary headwinds; management notes that most delayed demand is deferred rather than canceled
  • Key long-term growth drivers include industrial automation modernization, energy, infrastructure, defense, mining, food processing and recycling

• Acquisition Updates

  • The recent Cadence Profile acquisition has approximately 50% of its revenue as intercompany sales under Cadent; profit recognition for intercompany activity is deferred until inventory on hand at acquisition is consumed, a process expected to complete by the end of 2026
  • Net debt increased to $373 million sequentially after borrowing to fund recent acquisitions, resulting in a leverage ratio of 1.72, with $249 million of available committed borrowing capacity plus $200 million of uncommitted capacity

1. Flow Control: Q2 2026 bookings grew 11% year-over-year, with revenue increasing 5% to $100 million. Aftermarket revenue hit a record $76 million, accounting for 76% of the segment's total revenue. Adjusted EBITDA margin remained relatively stable at 27.7% amid mixed market conditions.
2. Industrial Processing: Q2 2026 bookings rose 29% year-over-year to $136 million, driven by recent acquisitions. Revenue reached a record $144 million, with 13% organic growth. Adjusted EBITDA hit a record $38 million, equal to an adjusted EBITDA margin of 26.1% of revenue. Operational leverage from recent acquisitions improved margin performance for the segment.
3. Material Handling: Q2 2026 bookings totaled $73 million, supported by robust demand for the high-performance Beller product line and strong aftermarket activity. Adjusted EBITDA increased 7% year-over-year to $15 million. Aftermarket and service activity continues to support segment earnings, with large capital projects under active discussion.

• Full year 2026 guidance has been upwardly revised from the prior range: revenue is now guided to $1.19 billion to $1.21 billion, up from the previous $1.178 billion to $1.203 billion
• Adjusted diluted EPS full year guidance is updated to $12.43 to $12.68, with the lower bound raised from the prior $12.33 and the upper bound maintained; adjusted guidance excludes $2.17 of intangible amortization and $0.48 of acquisition-related costs
• Third quarter 2026 revenue is guided to $297 million to $307 million, with adjusted EPS guided to $2.90 to $3.00, excluding 55 cents of intangible amortization and 7 cents of acquisition-related costs
• Full year 2026 assumptions include: gross margin of 44% to 44.5%, SG&A as a percentage of revenue of 27.2% to 27.7%, net interest expense of $19.5 million to $20 million, effective tax rate of 27.8% to 28.3%, depreciation expense of $28 million to $28.5 million, and intangible amortization of ~$34 million
• Management maintains expectations for improving capital spending trends in the second half of 2026 and into 2027, with demand strengthening relative to the first half of 2026

• Ongoing geopolitical uncertainty and trade policy tensions have led to extended customer capital project approval cycles and delayed project releases, as customers take a more cautious approach to large investments
• Prolonged softness in global capital equipment markets has persisted longer than expected, driven by broad risk aversion amid geopolitical conflict and macro uncertainty
• Acquisition-related profit deferral from the Cadence Profile acquisition will continue to impact gross margin through the end of 2026 while pre-acquisition inventory is consumed
• The 8020 cost optimization program has remained stuck at ~50% completion due to ongoing acquisition activity adding new businesses to integrate and optimize
• One recent 2025 acquisition (a technology buy for fiber processing upcycling systems) is facing near-term headwinds from soft current demand in its end market

Q: What pockets of strength do you see in your large project pipeline, and how does the current pipeline compare to last year? How have recent acquisitions performed, and what is the outlook for margin expansion from these acquisitions?

A: Large advanced-stage projects are diversified across most major sectors, including packaging, aerospace, wood products (OSB), and large baler projects. The pipeline is stronger than it was at this point last year, with large delayed projects moving toward approval as customers can no longer defer necessary capital investments. Two of three 2025 acquisitions are performing well above expectations: the large Clyde acquisition is delivering strong results, and Cadence Profile has gotten off to a good start with solid bookings despite near-term profit deferral. The smaller fiber processing technology acquisition is facing near-term softness in end-market demand but has long-term opportunity as capital demand recovers.

Q: Is it accurate to say customers remain reticent to commit to capital projects even as you expect improvement in H2 2026? Does strong aftermarket growth indicate aging installed base that will drive future capital demand?

A: We are seeing a noticeable pickup in capital booking activity, with Q2 2026 capital revenue the second highest on record for the second quarter, and we expect this improvement to continue. The prolonged capital softness is unusual outside of a broad recession, driven by geopolitical uncertainty that has suppressed investment. Strong aftermarket demand even with moderate customer operating rates confirms that the average age of the installed base has increased significantly, requiring more maintenance to keep aging equipment running, which points to growing underlying need for eventual capital replacement.

Q: Does the modest upward guidance revision reflect continued caution amid ongoing uncertainty, after Q2 outperformance? What is the update on the 8020 profitability improvement program?

A: The guidance is intentionally conservative given continued uncertainty around capital project timing, even after the strong Q2 outperformance. The 8020 program remains around 50% complete, as the percentage of completion has not increased recently because new acquisitions add more businesses to optimize as the firm completes existing integrations. The initiative remains a core driver of long-term profitability and EBITDA margin expansion as part of the firm's five-year strategic plan, and implementation continues aggressively across all businesses.

Q: Is $300 million in quarterly bookings the new base for H2 2026, and does the Q3 guidance imply you are building backlog for 2027?

A: $300 million in quarterly bookings is a reasonable expectation for the H2 2026 base. Large new capital orders received in the second half of 2026 will mostly be recognized as revenue in 2027, which is reflected in the current Q3 revenue guidance, confirming growing backlog heading into 2027. Total equipment backlog currently stands at $182 million, in line with analyst estimates.