Kadant Inc. Aktie

Greetings, and welcome to the Kadant Inc. 2026 Annual Meeting of Stockholders. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to your host, Stacy Krause, Senior Vice President and General Counsel and Secretary. Please go ahead.

Thank you. Jon Painter, our Chairman of the Board, will start.

Hello. My name is Jon Painter. I'm the Chairman of the Board of Directors. Good afternoon, everyone, and thank you for joining us today. I now call to order the 2026 Annual Meeting of the Stockholders of Kadant Inc. First, I'd like to introduce our directors who are with us today: Jack Albertine, Tom Leonard, Rebecca Martinez O'Mara, Jeff Powell, who is also our President and CEO; and Erin Russell. Next, I'd like to introduce the other members of our management team who are present or participating in today's call. Mike McKenney, EVP, CFO and Assistant Secretary; Stacy Krause, SVP, General Counsel and Secretary; Deborah Selwood, SVP and Chief Accounting Officer; Dara Mitchell, SVP, Corporate Development; Peter Flynn, SVP; Michael Colwell, SVP; Thomas Blanchard, VP; Tom Martin, VP Tax; Orrin Bean, Treasurer; Jennifer Webb, Assistant General Counsel.

Also here with us today is Andrew Jacober, representing KPMG, our independent registered auditing firm, and he is available to answer any questions you may have regarding our audited financial statements. Stacy Krause has been appointed an Inspector of Election for the annual meeting and will now report on the meeting procedures, the quorum and present the voting results. Stacy?

Mr. Chairman, a quorum is present for the transaction of business at today's annual meeting. In addition, voting at today's meeting will be by proxy. However, if anyone present holds their shares directly in record name has not voted their shares and would like to do so now, please raise your hand, and we will provide you with a proxy card. Or if you are participating virtually, please take a moment now to cast your vote through the online voting platform by clicking the Vote My Shares button. I will now pause for a moment to address any final vote.

[Voting]

Seeing no hands and having enabled final online votes to be cast, I now declare that the polls for voting are closed. Three items of business have been presented for the consideration of stockholders at this meeting. Proposal 1, election of directors. The first proposal was the election of 2 directors constituting the entire class of directors to be elected for a 3-year term, expiring at the 2029 Annual Meeting of Stockholders. The directors nominated for reelection are: John M. Albertine, Thomas C. Leonard. Mr. Chairman, the tally of the proxy shows that a majority of the votes cast by the shareholders entitled to vote at this meeting were in favor of the election of the nominees and the nominees have been elected.

Proposal 2, say-on-pay. The second proposal was to approve by a nonbinding advisory vote the following resolution, also known as say-on-pay. Resolved that the compensation paid to our named executive officers as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the compensation discussion and analysis, the compensation tables and any related material disclosed in our proxy statement is hereby approved. Mr. Chairman, the tally of the proxy shows that a majority of the votes cast by the shareholders entitled to vote at this meeting were in favor of the approval of the adoption of this resolution and the proposal is approved.

Proposal 3, ratification of the selection of auditors. Our third and final item of business was the ratification of the selection of KPMG LLP as our independent registered accounting firm for the 2026 fiscal year. Mr. Chairman, the tally of the proxy shows that a majority of the votes cast by the shareholders entitled to vote at this meeting were in favor of the ratification of the selection of our auditor and the proposal is approved. Mr. Chairman, this completes my voting report and concludes the business portion of our annual meeting. At this time, I want to pause and address any questions from stockholders.

There are no questions to address at this time. Thank you.

As there is no further business to present at the meeting, the meeting is declared adjourned. Thank you for attending.

This concludes today's conference. You may now disconnect at this time. Thank you for your participation.

Good day, and thank you for standing by. Welcome to the Q1 2026 Kadant Earnings Conference Call.

[Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Michael McKenney, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, Therese. Good morning, everyone, and welcome to Kadant's First Quarter 2026 Earnings Call. With me on the call today is Jeff Powell, our President and Chief Executive Officer.

Before we begin, let me read our safe harbor statement. Various remarks that we may make today about Kadant's future plans and expectations, financial and operating results and prospects are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading Risk Factors in our annual report on Form 10-K for the fiscal year ended January 3, 2026, and subsequent filings with the Securities and Exchange Commission.

In addition, any forward-looking statements we make during this webcast represent our views and estimates only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or estimates change.

During this webcast, we will refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our first quarter earnings press release and the slides presented on the webcast and discussed in the conference call, which are available in the Investors section of our website at kadant.com.

Finally, I wanted to note that when we refer to GAAP earnings per share or EPS and adjusted EPS on this call, we are referring to each of these measures as calculated on a diluted basis.

With that, I'll turn the call over to Jeff Powell, who will give you an update on Kadant's business and future prospects. Following Jeff's remarks, I'll give an overview of our financial results for the quarter, and we will then have our Q&A session. Jeff?

Thanks, Mike. Hello, everyone. Thank you for joining us this morning to review our first quarter results and discuss our business outlook for 2026. The first quarter was a strong start to the year, highlighted by robust demand and solid earnings growth. We delivered strong profitability while continuing to see healthy demand in our aftermarket business and improving capital business. Despite the high level of uncertainty fueled by global trade challenges and the ongoing conflict in the Middle East, our first quarter exceeded expectations across most financial metrics. Record bookings and record aftermarket parts revenue, along with solid execution in our operations drove healthy gross margin performance across our businesses. This, combined with lower-than-expected operating costs, led to exceeding our earnings expectations in the first quarter. We continue to refine our 80/20 performance system, which also contributed to our results despite economic headwinds and tough competition in our core markets.

Turning now to our first quarter financial performance on Slide 6. I'd like to highlight a few metrics that I believe are central to our growth story. Double-digit organic growth, combined with our recent acquisitions delivered exceptional bookings growth of 25% in the first quarter compared to the same period last year. New order activity was strongest in North America and Asia, with all regions seeing healthy demand growth compared to last year. Revenue was up 18% with aftermarket parts revenue, a record $209 million, representing 74% of our total revenue. The first quarter of the year is often a strong quarter in terms of parts bookings and revenue as our customers prepare for annual maintenance shutdowns. This strong demand is supported by our large installed base.

Adjusted EBITDA increased 19% to $57 million, representing 20.2% of revenue. Finally, our adjusted EPS at $2.84 benefited from better-than-expected gross margin performance, lower-than-expected operating expenses and excellent execution discipline. Overall, the quarter reflected a balanced picture of increasing commercial momentum in bookings, solid profitability and cash flow and a revenue mix that strongly favored aftermarket parts.

Next, I'd like to discuss the performance of each of our 3 operating segments, beginning with our Flow Control segment. Flow Control segment experienced strong demand in the first quarter, led by our North American businesses. Bookings increased 12% to a record $112 million, led by robust capital order activity and record aftermarket parts demand. Q1 revenue increased 7% to $99 million with aftermarket parts revenue making up 77% of total Q1 revenue. This revenue performance is expected to remain stable as the year progresses and benefit from increased capital shipments in the second half of the year. Adjusted EBITDA increased 5% compared to the same period last year, and our adjusted EBITDA margin was 27.8%. While EBITDA margin was down modestly compared to last year, we expect to gain some operating leverage as the year progresses.

Next, I'll discuss our Industrial Processing segment on Slide 8. Strong demand for aftermarket parts and improved capital project order activity, combined with contributions from our recent acquisitions, led to record bookings of $145 million in the first quarter. Importantly, organic bookings were up 23%, reflecting improving underlying demand for our products and technologies as we started the year.

Revenue increased 37% to a record $123 million due to contributions from our recent acquisitions, which included Clyde Industries and Babbini. The integration of these companies into our Industrial Processing segment is progressing well, and we are pleased with the results delivered by both of these companies during the short time they have been part of Kadant. Adjusted EBITDA margin remained healthy at 24% of revenue. Overall, our first quarter performance in this segment was solid with second half of the year looking to be stronger than the first.

In our Material Handling segment, we achieved steady year-over-year growth in both revenue and bookings, consistent with our expectations. Revenue increased 5% to $60 million, while new order activity was up modestly to $65 million. While business activity remains stable, we are seeing an environment defined by capital equipment timing volatility. An unfavorable product mix led to downward pressure on gross margin, which contributed in part to a lower EBITDA margin. As we move into the second quarter, our backlog is strong, and we're encouraged by the fundamentals of our end markets, which include aggregate mining, waste management and recycling.

We've entered 2026 with a good start to the year in terms of record bookings and solid revenue performance, further supporting our confidence in the periods ahead. We are seeing an improving capital equipment market, although the timing of these projects is more uncertain than normal due to the ongoing geopolitical conflicts. We will continue to focus on strengthening our operations using our 80/20 business performance system and other internal initiatives, including increasing investments in automation to provide increased value for our customers.

Finally, last week, we closed on the previously announced acquisition of voestalpine BOHLER Profil, now called Kadant Profil, a manufacturer of customized rolled products, rolled profiles and industrial knives. In the short term, due to a portion of the sales of Kadant Profil being intercompany, this acquisition will have a dilutive effect on our adjusted EPS until the products currently held in inventory by other Kadant businesses are sold to a third-party customer. Mike will discuss this in more details in his remarks.

Looking forward, we expect the newest addition to Kadant to be accretive to our earnings growth, and we are looking forward to integrating this business into the Kadant family.

With that, I'd like to turn the call over to Mike.

Thank you, Jeff. I'll start with some key financial metrics from our first quarter. Revenue increased 18% to $281.5 million in the first quarter '26, driven by record parts and consumables revenue, representing 74% of total revenue. Gross margin was 45% in the first quarter of '26, down 110 basis points compared to 46.1% in the first quarter '25. About half of this decrease relates to the negative effect of acquired profit and inventory amortization, which lowered gross margin in the first quarter of '26 by 50 basis points. The remaining decrease was due to the lower gross margin profile associated with the product mix in the quarter.

SG&A expenses as a percentage of revenue decreased to 29.3% in the first quarter of '26 compared to 29.8% in the prior year period. SG&A expenses increased $11.3 million or 16% to $82.5 million in the first quarter of '26 compared to $71.2 million in the first quarter '25. This included an increase of $7.9 million from our acquisitions and $2.8 million unfavorable foreign currency translation effect. Our effective tax rate in the first quarter was 28.2% compared to 24.3% in the prior year period. The comparatively higher tax rate was due to discrete tax benefits related to the release of tax reserves and vesting of equity awards in the first quarter of '25, which lowered the effective tax rate by 320 basis points.

Our GAAP EPS increased 6% to $2.16 in the first quarter, and our adjusted EPS increased 14% to $2.84, which exceeded the high end of our guidance range by $0.43. As a reminder, we announced on our earnings call that our adjusted EPS excludes noncash intangible amortization expense. But $0.43 guidance beat was due to higher gross margins and lower operating expenses than anticipated.

Adjusted EBITDA increased 19% to $56.8 million compared to $47.9 million in the first quarter of '25, principally due to strong contributions from our 2025 acquisitions. As a percentage of revenue, adjusted EBITDA was 20.2% compared to 20% in the first quarter '25.

Operating cash flow was $21.9 million and free cash flow was $18.7 million in the first quarter of '26. Both were down slightly compared to the first quarter of '25. Our first quarter tends to be the weakest cash flow quarter as was the case in '25. Other non-operating use of cash in the first quarter of '26 included $9.8 million of repayments on our debt, $3.3 million for capital expenditures, $4 million for dividends on our common stock and $4.9 million for tax withholding payments related to the vesting stock awards.

Let me turn next to our EPS results for the quarter. Our adjusted EPS increased $0.34 from $2.50 in the first quarter of '25 to $2.84 in the first quarter of '26. This included increases of $0.58 from our acquisitions and $0.25 due to higher revenue. These increases were offset by decreases of $0.24 due to higher operating expenses, $0.12 due to a higher tax rate, $0.07 due to a lower gross margin percentage, $0.05 due to higher interest expense and $0.01 due to higher noncontrolling interest expense.

Let me provide some further details on these fluctuations. The $0.58 increase from our acquisitions represents the operating results of our 2025 acquisitions excluding associated borrowing costs and acquisition-related costs as well as recurring intangible amortization expense of $0.13. The majority of the $0.24 impact from higher operating expenses is due to an unfavorable foreign currency translation effect. Collectively, included in all the categories I just mentioned, was a favorable foreign currency translation effect of $0.08 in the first quarter of '26 compared to the first quarter of last year.

Looking at our liquidity metrics on Slide 15. Our cash conversion days increased to 147 at the end of the first quarter of '26 compared to 130 at the end of 2025, principally due to a higher number of days in inventory as our operations work to fulfill orders and backlog. Working capital as a percentage of revenue increased to 20% in the first quarter of '26 compared to 16.8% in the first quarter of '25 due to the lack of a full year of revenue from our 2025 acquisitions. If you exclude the impact of our 2025 acquisitions from this calculation, it would be 17.4%, which is slightly above the first quarter of '25.

Our net debt, that is debt less cash, decreased $8 million sequentially to $244 million at the end of the first quarter of '26. Our leverage ratio, calculated in accordance with our credit agreement, decreased to 1.27 at the end of the first quarter '26 compared to 1.33 at the end of '25. At the end of April, we borrowed EUR 155 million to fund our acquisition. And as a result, we anticipate that our leverage ratio will increase to just below 2 next quarter.

After deducting our acquisition borrowing, we have approximately $210 million of borrowing capacity available under our revolving credit facility and an additional $200 million of uncommitted borrowing capacity.

As we anticipated, we had an increase in capital bookings in the first quarter. Our book-to-bill ratio increased to 1.14, a 3-year high due to record aftermarket parts and a strong uptick in capital bookings. Our ending backlog was up 13% sequentially to $326 million. That being said, we remain cautious with our outlook for capital project activity in '26. While some pending capital projects have moved forward given some easing of earlier tariff-related uncertainty, the timing for other capital projects may be impacted by the current macroeconomic and geopolitical tensions. This environment has made it extremely difficult for our operations to forecast the timing of capital orders requiring significant judgment on order timing and future material costs.

As Jeff mentioned in his remarks, we completed our acquisition of voestalpine BOHLER Profil, which we now call Kadant Profil, on April 30. We have now incorporated the operating results for this business into our updated 2026 guidance. I want to outline how the financial results of this acquisition will be reflected in Kadant's financial statements. This company has been a longtime supplier to several Kadant businesses and as a result, a significant portion of its revenue, which was 45% for the last fiscal year, will be intercompany revenue and therefore, not included in Kadant reported revenue. The associated profit generated on this intercompany activity will be reflected in Kadant results, but the timing will depend on when the underlying product is sold to a third-party customer.

In addition, our Kadant businesses currently have on-hand inventory that will need to be consumed. For now, we have taken a conservative approach and have not included any profit for the intercompany sales as we estimate it may take the remainder of the year to work through the current on-hand inventory. Therefore, the only change to our guidance is the inclusion of Kadant Profil's external revenue and its operating results as well as the associated borrowing costs. We estimate Kadant Profil, including the associated borrowing costs, will be dilutive to our adjusted EPS results by $0.20 in 2026.

Of course, if current on-hand inventory turns faster than expected, there could be some upside potential for 2026. We are raising our revenue guidance for '26 to $1.178 billion to $1.203 billion, revised from our previous guidance of $1.116 billion to $1.185 billion. we now expect adjusted EPS of $12.33 to $12.68 in '26, which excludes $2.20 of intangible amortization expense and $0.33 of acquisition-related costs. This is revised from our previous guidance of $12.53 to $12.88 which excluded $2.13 of intangible amortization expense and $0.13 of acquisition-related costs.

Looking at our quarterly revenue and EPS performance in '26, we expect that the first quarter will be the weakest quarter of the year. Again, I want to stress the only guidance change is related to adding the forecasted results for Kadant Profil and the associated borrowing costs.

Our revenue guidance for the second quarter of '26 is $296 million to $306 million and our adjusted EPS guidance for the second quarter is $2.88 to $2.98, which excludes $0.55 of intangible amortization expense and $0.07 of acquisition-related costs.

Our revised '26 guidance includes the following assumptions: Gross margins of 44.5% to 45%; SG&A as a percent of revenue of 27.6% to 28.1%, net interest expense of $20 million to $21 million; a tax rate of 27.5% to 28%, depreciation expense of $27 million to $27.5 million, and intangible amortization expense, which we now add back to our adjusted EPS calculation of $34.5 million.

That concludes my review of the financials, and I will now turn the call back over to the operator for our Q&A session. Therese?

[Operator Instructions] Our first question comes from Gary Prestopino with Barrington.

Looking back on the -- on what you said at the end of Q4, you said there were several capital projects that you thought would come to the market but you weren't really including them in any guidance or anything like that just because of the uncertainty. I mean -- I know you said it's still an uncertain environment but has anything happened there in terms of the amount of projects that you still think will be coming to the market?

Great question, Gary. Yes. So we had several, a handful, I'd say, 7 to 8 projects that we were monitoring of varying size that did not come in -- that we thought may come in, in '25 that didn't come in but they're still alive and well here in '26. And in the first quarter, one of those projects came in. And I'm happy to tell you here that in the second quarter, an additional 2 of those projects have come in. So as Jeff and I have said in our little notes here, we see the capital activity warming up a little bit here now, which is nice to see.

Okay. That's very good news. And then just for purposes with the acquisition, I'm going to call it VBP because I can't pronounce the name here. It looks like as of the last numbers you gave, EUR 51.5 million, EUR 15.6 million of adjusted EBITDA works out to about [ EUR 60 million ] of annualized revenues, [ EUR 18 million ] of EBITDA. Is that holding in terms of the profitability of the business? Do we see any growth from the time that you gave us that trailing 12-month September number for '25?

So the profitability is holding. But when we did the forecast, we really looked at where they were so far in '26 and what they thought would happen for the remainder of '26. And so it has stepped down a little bit. So that [ EUR 60 million ] run rate that you quoted, I now have is [ EUR 55 million. ] And I would say of that incremental decrease, we're a component of that. We are a component of it because what we're trying to do is, quite frankly, get through our on-hand inventory so that we can get to current inventory being purchased that is now intercompany and we can recognize the profit on it. So we were a component of the reduction. Some is also external sales but we stepped down our purchases because of our current inventory levels.

Okay. That's fine. And then this thing has 100% of aftermarket parts revenue. So it's basically recurring, right?

Correct.

Our next question is from Ross Sparenblek from William Blair.

Somewhat of a cautious tone this quarter from your European peers. It would be great to just kind of get a sense of what you're seeing by geography and also anything around just factory utilization rates globally as well?

Yes. I would say, of course, North America as it has been really for the last few years, is continuing to be the strongest market. Asia was strong, I would say, in the first quarter. And as you pointed out, Europe is the most sensitive to what's going on in the Middle East and energy prices in addition to all the other challenges they frankly have right now. So I think that we expect that will probably be the case probably for most of the year that North America will be the strongest. And last year, I would say Europe, Asia was quite weak to begin with, and Europe was in the middle. But I think Asia and Europe have flipped a little bit now.

And it really will depend on how quickly this conflict is resolved and what the ultimate terms are when it is resolved. If energy prices return back to normal, then I think Asia -- Europe was positioned to try to start to make some investments. But of course, this has really impacted them because they're so dependent on external supply chains for their energy production.

Okay. So have you seen factory utilizations start to tail off in Europe to start the year?

I don't know that we've seen data. This conflict has been going now for several weeks. I'm not sure that we've seen hard data yet as to what that's doing but it's definitely slowed. Our European partners, some of our European divisions are talking about customers talking about delaying things again until they get a better picture on where energy prices are going to go. A lot of our products, of course, the payback calculation is very much driven by energy cost. So some spikes in energy sometimes can help our products but of course, when you have significant spikes, it really crushes overall demand, and we get impacted by that like everybody else. So I think we're going to keep a close eye on what happens to energy prices in this conflict in the Middle East. But Europe is definitely the most sensitive to it.

Okay. Well, if we take out the large project in the first quarter, it looks like capital bookings were still up 20% year-over-year, and they've been accelerating here and your parts have been outperforming utilization rates for the last couple of years now. Just trying to get a sense of where you think kind of the run rate demand is and if we're starting to see the deferred maintenance start to flow at least in the States.

Yes. I mean we've been saying for some time that our history would tell us that it's hard for our customers to go more than 2 or 3 years underinvesting before it really starts to impact their operations. And so I think we've been tracking the age of our installed base and some of it is quite old. And as you pointed out, the parts are really outperforming because of that. So we have expected that there will start to be an investment cycle. A little bit the issue we have, it seems like beginning of every year, there's some black swan event that just creates uncertainty in the market. Last year, it was the big tariff war. This year now, it's the Middle East conflict. It's just -- and it just creates uncertainty and it slows things down. But they can only delay investing for so long before it starts to really impact their competitiveness.

So we're encouraged by the orders we've gotten. I would say when Mike mentioned a lot of those large capital projects, most of them were outside of Europe. They weren't in Europe. I mean there are a few that are in Europe, and we have gotten some actually from in Europe even this quarter. But a lot of the big ones are in North America or I would say, North Africa, places like that, really outside of -- certainly outside of Western Europe because they've been quite cautious for some time.

Yes. Well, I mean, just also given all the M&A you guys have done over the last 2 years, can you help us maybe frame what this deferred maintenance spend should look like in the bookings? I mean, is it like -- is it kind of a $100 million quarterly run rate?

Well, Ross, if we -- if you look at the midpoint of our guidance on revenue, and if we had the -- essentially the same split on parts capital, so 71-29, we need about $340 million of capital revenue. Capital revenue -- so if you did that right out of the gate, you'd say $85 million a quarter. Capital revenue in the first quarter, of course, was softer, but we had good capital bookings. So the first quarter capital revenue was just $72 million. So that would say, okay, now that $85 million of revenue needs to be about $90 million. And when we're looking forward, the divisions are saying that they foresee capital bookings that will be above the $90 million mark.

So -- and I would add, I would kind of stitch in here the reason for our continued caution and hopefully, the geopolitical stuff will be settled here shortly and that won't create any further disruptions. But okay, we did have some of these capital projects that we were tracking we thought would come in, in '25. Now some have come in. Projects that we had slated for '26, a couple of projects already have been moved to '27. And specifically, those movements were related to the war. So that's why we're being a little cautious here on the guidance front. So I'm hopeful that we'll continue on the track we're on, and we'll get to the end of the second quarter, and we'll have confidence to -- enough confidence to raise guidance.

Yes. I mean it looks like we're trending in the right direction after some headaches. And just on the capital backlog on the equipment side, like $193 million, is that ballpark? I know that subject to change with FX and...

Yes. Actually -- sorry, Ross, one second. I do have that right here. Yes. So backlog was $321 million, and you're spot on. It's $193 million capital. So nice work there.

[Operator Instructions] Our next question is from Adi Madan from D.A. Davidson.

Just a couple of quick ones from me. So coming -- looking at your FY '26 sales outlook, does it still contemplate roughly like 1% to 3% organic sales growth? And can you remind us how that splits out between capital equipment and P&C?

Hang in there, Adi. I'll flip to that. So on the sales side, yes, you're right in the ballpark there. At our midpoint, I have us at 2%. So right in the middle of the 1% to 3%. And then what was the second part of the question, Adi, on the split? I have that as being -- I have it being 71 parts and consumables, 29 capital.

Awesome. Okay. And so looking at like P&C, obviously, like slightly lower year-over-year. Was there any like 1 or 2 big factors that were like contributed to this? And would there -- is there anything that would lead you to be concerned around this, maybe the lower contribution?

Well, Adi, I'm not sure. I tried to read through your -- the precall report this morning, which I thought was relatively on track, except for one item. But I can tell you on the parts and consumables front, either -- now are you looking revenue or bookings there?

Mainly revenue, but yes, you talked about bookings too.

Because they're up. It's up all in and it's up organically for both revenue and bookings. So I'm not sure there might have been just a little misstep. I think the only place you might get to organic being negative -- or excuse me, either being negative is on organic. You wouldn't, of course, come anywhere near that on the all-in. It's -- there are huge upticks. But when I go to the organic, we're in good shape on that also.

Got it. I think our report mainly talks about like the 74% versus 75% last year.

Yes. Yes, I have -- I would grant you organic on the parts and consumables front for revenue is only up modestly on that revenue front. And on the bookings front, it's up 4%.

[Operator Instructions] And I'm showing no further questions at this time. So I would now like to turn it back to Jeff Powell for closing remarks.

Thank you, Therese. So before wrapping up the call today, I just want to leave you with a couple of takeaways. Our record-setting new order activity and strong demand for aftermarket parts provides a solid start to 2026. And while there are a lot of discussions around new capital projects, the timing of these projects is more uncertain than normal due to the issues that we've noted today. Our employees around the globe continue to focus on meeting our customers' needs and finding new ways to deliver long-term value to our stockholders.

I want to thank you for joining the call today, and we look forward to updating you at the end of next quarter. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may disconnect.

Good day, and thank you for standing by. Welcome to the Kadant Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Michael McKenney, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, Marvin. Good morning, everyone, and welcome to Kadant's Fourth Quarter and Full Year 2025 Earnings Call. With me on the call today is Jeff Powell, our President and Chief Executive Officer.

Before we begin, let me read our safe harbor statement. Various remarks that we may make today about Kadant's future plans and expectations, financial and operating results and prospects. Our forward-looking statements repurpose of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading Risk Factors in our annual report on Form 10-K for the fiscal year ended December 28, 2024, and subsequent filings with the Securities and Exchange Commission.

In addition, any forward-looking statements we make during this webcast represent our views and estimates only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or estimates change.

During this webcast, we will refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our fourth quarter and full year earnings press release and the slides presented on the webcast and discussed in the conference call, which are available in the Investors section of our website at cadence.com.

Finally, I want to note that when we refer to GAAP earnings per share or EPS and adjusted EPS on this call, we are referring to each of these measures as calculated on a diluted basis.

With that, I'll turn the call over to Jeff Powell, who will give you an update on Kadant's business and future prospects. Following Jeff's remarks, I'll give an overview of our financial results for the quarter and the year, and we will then have a Q&A session. Jeff?

Thanks, Mike. Hello, everyone, and thank you for joining us. Today, I'll review our fourth quarter and full year 2025 results and our outlook for 2026. Let me begin with our operational highlights.

We closed the year with solid performance despite a challenging macro background that included tariff volatility and continued cost pressures. Our performance led to solid margin results and strong cash flow in the fourth quarter, which I will outline in the next slide. Additionally, at the end of 2025, Newsweek recognized us as one of America's most responsible companies for the sixth straight year, and we're honored to be included on that list once again.

Our fourth quarter performance benefited from the acquisitions we completed in 2025 and solid demand in our flow control and material handling segments. Revenue increased 11% to a record $286 million, led by contributions from our recent acquisitions and record aftermarket parts business. Demand remains solid across all 3 operating segments with bookings increasing 12% compared to the same period last year. While acquisitions accounted for most of the growth and the new orders, organic demand was stable year-over-year and improved sequentially.

Adjusted EBITDA was up 11% compared to the same period last year, our adjusted EBITDA margin was 20.3%. Strong execution by our global operations teams play an important role in delivering value to our customers and driving our fourth quarter operating performance. Our Q4 operating cash flow was excellent at $61 million.

Next, I'd like to review our full year financial metrics with Slide 7. Stable demand combined with contributions from -- our 2 recent acquisitions drove solid revenue performance of $1.05 billion in fiscal 2025 with aftermarket parts making up a record 71% of total revenue. Softness in capital project activity combined with rising tariffs and other cost pressures resulted in adjusted EPS of $9.26 a share compared to the prior year record of $10.28 per share.

Despite ongoing economic and geopolitical headwinds, our free cash flow increased 15% to a record $154 million. The volatility and magnitude of the tariffs proved to be quite challenging for us in 2025. And I'm proud of our employees for the innovative work done to maximize value for our customers and our stockholders.

Next, I'd like to review our performance for our 3 operating segments. I'll begin with our Flow Control segment. Q4 revenue increased 5% to $100 million with strong performance in North America, offsetting weaker performance in Europe. Aftermarket parts revenue was up 9% compared to the prior year period and made up 73% of total revenue. Adjusted EBITDA and margin were down compared to the same period last year due to weaker gross margins related to tariffs and product mix.

While bookings were up 7% compared to the same period last year, softness in manufacturing sector persisted, particularly in Europe and Asia. We believe the long-term market trends impacting industrial markets such as automation, defense and energy will continue to drive new opportunities for growth, but business activity continues to be influenced by geopolitical and macroeconomic challenges around the globe.

In our Industrial Processing segment, capital project activity remained relatively soft throughout 2025 and continued at similar levels in the fourth quarter. Our performance in this segment, however, benefited from the additions of Clyde Industries and Babbini, both of which were acquired in the second half of the year. Integration efforts for these businesses are progressing well, and they are expected to contribute positively in the years ahead.

Revenue rose 16% to $118 million compared to the same period last year and aftermarket parts revenue grew 31% in the fourth quarter and represented 76% of revenue. Adjusted EBITDA margin improved by 90 basis points year-over-year, driven largely by a more favorable product mix. As we look ahead to 2026, there's increasing project activity and we expect demand for our capital equipment to strengthen as customers move forward with planned capital projects.

In our Material Handling segment, we delivered solid year-over-year performance improve bookings, revenue and margins. Fourth quarter revenue increased 11% to $69 million, driven by strong growth in capital revenue compared to the prior year period. Aftermarket parts made up 53% of total revenue and remained steady throughout the year. Margin performance strengthened as well with adjusted EBITDA margin increasing by 130 basis points to 22.1%.

Looking ahead to 2026, we are encouraged by the high level of project activity and are well positioned to secure new business, ongoing modernization efforts in the recycling and waste management sectors as well as infrastructure and data center construction are expected to drive the anticipated increase in order activity.

Looking to 2026, capital project activity is looking to improve, demand for aftermarket parts and continues to be steady as we start the new year. Additional -- or although industrial demand is projected to pick up, uncertainty persists regarding the timing of capital orders due to ongoing economic and geopolitical instability. Overall, our healthy balance sheet and ability to generate significant cash flow position us well to pursue new opportunities that develop, and we are committed to achieving improved financial results this year.

With that, I'll turn the call over to Mike for a review of our financial results and our 2026 outlook. Mike?

Thank you, Jeff. I'll start with some key financial metrics from our fourth quarter. Revenue was a record $286.2 million, up 11% compared to the fourth quarter including an 8% increase from acquisitions and a 3% increase from the favorable effect of foreign currency translation.

Gross margin increased 50 basis points to 43.9%, and in the fourth quarter of '25 compared to 43.4% in the fourth quarter '24 due to a favorable increase in the proportion of aftermarket parts which increased to 70% of total revenue compared to 67% in the prior period. There was a 40 basis point negative impact from the amortization of acquired profit and inventory in both periods.

As a percentage of revenue, SG&A expense increased to 28.3% in the fourth quarter of '25 compared to 27.3% in the prior year period. SG&A expenses were $80.9 million in the fourth quarter '25, increasing $10.3 million or 15% compared to $70.6 million in the fourth quarter of '24. The increase in SG&A expenses includes $7 million in SG&A expense related to our 2025 acquisitions and a $1.7 million unfavorable effect of foreign currency translation.

Our GAAP EPS was $2.04 in both periods, and our adjusted EPS increased to $2.27 and was just above the high end of our guidance range of $2.05 to $2.25 in the fourth quarter. Adjusted EBITDA increased 11% to $58 million and represented 20.3% of revenue. For the full year, revenue was $1.52 billion (sic) [ $1.052 billion ] compared to $1.53 billion in '24, including a 3% increase from acquisitions and a 1% increase from the favorable effect of foreign currency.

Gross margin increased 90 basis points to 45.2% compared to 44.3% in '24 and due to a favorable increase in the proportion of aftermarket parts, which increased to a record 71% of total revenue compared to 66% in 2024. Gross margin included a negative impact from the amortization of acquired profit and inventory of 20 basis points in '25 and 40 basis points in '24. Excluding this impact, gross margin was up 70 basis points over '24.

As a percentage of revenue, SG&A expenses increased to 28.7% in '25 compared to 26.6% in '24. SG&A expenses were $301.9 million in '25, increasing $21.9 million or 8% compared to $279.9 million in 24 million. Approximately 60% of this increase relates to our acquisitions, which had SG&A expenses of $13.2 million in '25. The remainder was primarily due to a $2.2 million unfavorable effect of foreign currency translation and higher compensation-related costs. Our GAAP EPS was $8.65 in '25, down 9% compared to $9.48 in '24, and our adjusted EPS was $9.26, down from $10.28 in '24.

Now turning to our cash flow performance. We finished the year with very strong cash flow. As you can see from the chart, we had stronger operating cash flow in the last 2 quarters of '25 compared to the first 2 quarters. For the full year, operating cash flow increased 10% to a record $171.3 million, compared to $155.3 million in '24. Our free cash flow was also a record at $154.3 million in '25, increasing 15% over '24.

We had several notable nonoperating uses of cash in the fourth quarter of '25. We paid $173.7 million for the acquisition of Clyde Industries net of cash acquired. We borrowed $170 million to fund this acquisition, and we repaid $53.7 million of debt in the quarter. In addition, we paid $6.1 million for capital expenditures and a $4 million dividend on our common stock. We continue to focus on utilizing our strong cash flows to accelerate the pay down of debt and I'm pleased we were able to repay $122.2 million this year or approximately 42% of our outstanding debt at the end of '24.

Turning to adjusted EBITDA. In the fourth quarter, '25, adjusted EBITDA increased 11% to $58 million compared to $52.4 million in the fourth quarter of '24. As a percentage of revenue, adjusted EBITDA was 20.3% in both periods. For the full year '25, adjusted EBITDA decreased 6% to $216.3 million or 20.6% of revenue compared to record adjusted EBITDA of $229.7 million or 21.8% of revenue in '24. That the weaker performance in '25 is due in large part to lower capital revenue, which was down 16% compared to the prior year.

Let me turn to our EPS results for the quarter. Our adjusted EPS increased $0.02 from $2.25 in the fourth quarter of '24 to $2.27 in the fourth quarter of '25. This includes increases of $0.17 due to higher revenue, $0.15 from the operating results of our acquisitions, excluding the associated borrowing costs and $0.09 due to higher gross margins. These increases were partially offset by $0.22 due to higher operating expenses, $0.10 due to a higher tax rate, $0.04 due to higher interest expense and $0.03 due to higher noncontrolling interest.

Our tax rate was 30% in the fourth quarter of '25 higher than we anticipated due to the impact of global minimum tax regulations as well as a change in geographic distribution of earnings. Collectively, included in all the categories I just mentioned, was a favorable foreign currency translation effect of $0.04 in the fourth quarter fo '25 compared to the fourth quarter of last year.

Now turning to our EPS results for the full year on Slide 17. Our adjusted EPS decreased $1.02 from $10.28 in '24 and to $9.26 in '25. This includes decreases of $1.06 from revenue, $0.70 due to higher operating expenses, $0.13 due to a higher tax rate, $0.07 from higher noncontrolling interest and $0.02 due to higher weighted average shares outstanding. These decreases were partially offset by $0.46 from higher gross margin $0.27 in lower interest expense and $0.25 from the operating results of our acquisitions, excluding the associated borrowing costs. Collectively, included in all the categories I just mentioned was an unfavorable foreign currency translation effect of $0.01 in '25 compared to '24.

Now let's turn to our liquidity metrics on Slide 18. Our cash conversion days measure, calculated by taking days in receivables plus days in inventory and subtracting days in accounts payable, increased to 130 at the end of the fourth quarter, '25 from 122 days at the end of '24. The increase in cash conversion days was principally driven by a higher number of days in inventory. Working capital as a percentage of revenue increased to 18.5% in the fourth quarter of '25 compared to 15% in the fourth quarter of '24 due to the lack of full year revenue for our '25 acquisitions. If you exclude the impact of our '25 acquisitions from this calculation, it would be 15.5%, which is slightly above the end of '24.

Net debt which is debt less cash, at the end of '25 was $251.8 million compared to net debt of $131.1 million at the end of the third quarter of '25. Our leverage ratio, calculated as defined in our credit agreement, increased to 1.33 at the end of '25 compared to 0.94 at the end of the third quarter '25. At the end of January, we announced that we had entered into a definitive agreement to acquire voestalpine BÖHLER Profil GmbH for approximately EUR 157 million, subject to certain customary adjustments. The closing is subject to certain Austrian regulatory approvals and the satisfaction of customary closing conditions.

We anticipate that our leverage ratio will increase to just above with the increase in our outstanding debt once this transaction closes. We had $383 million of borrowing capacity available under our revolving credit facility at the end which will be reduced by the anticipated acquisition borrowing.

Before I review our guidance, I want to remind you that our '26 guidance does not incorporate any assumptions related to the pending acquisition. We anticipate that the closing will occur in the first quarter of '26, and we will revise our '26 guidance as part of our next earnings call. For the full year '26, our revenue guidance is $1.160 billion to $1.185 billion and our adjusted EPS guidance is $10.40 to $10.75, which excludes $0.13 related to the amortization of acquired profit and inventory.

Looking at our quarterly revenue and EPS performance in '26, we expect that the first quarter will be the weakest quarter of the year. This is primarily related to soft capital bookings in the back half of '25. Our revenue guidance for the first quarter of '26 is $270 million to $280 million and our adjusted EPS guidance for the first quarter is $1.78 to $1.88 and which excludes $0.09 related to the amortization of acquired profit and inventory. I should caution here that there could be some variability in our quarterly results due to several factors, including the variability of order flow and the timing of capital shipments.

I wanted to highlight that due to the delayed timing of capital orders, we have a number of large capital projects where we have been actively working with customers and have provided proposals with a cadence solution to meet their needs. We have taken a conservative approach to our '26 guidance given the order delays we experienced in '25. These orders are waiting for customers to have enough clarity with the economic environment to commit to these capital expenditures. As soon as the customers place these pending orders, we will be able to determine the timing of the associated revenue recognition which provides upside potential for our '26 guidance.

We anticipate gross margins for '26 will be approximately 45.2% to 45.7%. As a percentage of revenue, we anticipate SG&A will be approximately 27.7% to 28.3% and R&D expense will be approximately 1.4% of revenue. In addition, we anticipate net interest expense of approximately $15.5 million to $16 million for '26, which does not include any estimated interest expense related to our proposed acquisition. We expect our recurring tax rate will be approximately 27.3% to 27.8% in '26, and we expect depreciation and amortization expense will be approximately $60 million to $61 million. We anticipate CapEx spending in '26 will be approximately $23 million to $27 million.

That concludes my review of the financials. But before we go to our Q&A session, I want to discuss our plan starting in the first quarter '26 to add back recurring intangible amortization expense in our adjusted EPS calculation. Many of you have suggested that we add back noncash amortization expense in our adjusted EPS calculation. Historically, we have only added back intangible amortization expense related to acquired backlog, which amortizes relatively quickly in the post-acquisition period.

Recurring intangible amortization expense has grown steadily given our significant acquisition activity with a projected annual increase of 22% in '26. These acquired intangible assets are initially recorded as part of purchase accounting and then reduced via a noncash amortization expense for periods which can extend over 15 years. With this change, our adjusted EPS will be more consistent with our adjusted EBITDA and cash flow metrics, which are not impacted by intangible amortization expense. We believe that the exclusion of this expense from adjusted EPS will allow for a more consistent comparisons of our operating results over time into peer companies.

Now I will summarize the '26 adjusted EPS guidance and comparative '25 information with this change. For '26, recurring amortization expense is $33.4 million or $25.1 million net of tax and represents $2.13 per share. Our adjusted EPS guidance presented today and in yesterday's earnings release was $10.40 to $10.75. After adding back recurring intangible amortization expense, our adjusted EPS guidance for '26 is now $12.53 to $12.88.

For '25, recurring intangible amortization expense was $27.4 million or $20.6 million net of tax and represented $1.75 per share. Our previously reported EPS of $9.26 for $25 is now $11.01. Recurring intangible amortization expense is $0.53 and $0.40 for the first quarter of '26 and '25, respectively. Our adjusted EPS guidance for the first quarter of '26 is now $2.31 to $2.41, and our previously reported adjusted EPS for the first quarter of '25 of $2.10 per share is now $2.50. We will be issuing an SEC Form 8-K filing shortly with formal reconciliations of prior period information.

I'll now turn the call back over to the operator for our Q&A session. Martin?

[Operator Instructions] And our first question comes from the line of Gary Prestopino of Barrington.

Mike, just a couple of housekeeping things here. Do you have the numbers for current assets and current liabilities at year-end?

Yes, I do hang in there and let me look that up. Current assets are $542 million and current liabilities are $228 million.

Okay. And I was going through this as you were talking, given your narrative, but consumables in flow control were 73% of revenues, industrial, 76% of revenues and material handling, 53% of revenues. Is that right?

Yes. Yes.

Okay. And then you're seeing a lot more increased demand for consumable products. Now some of that is a function of your acquisitions, right? But are you still seeing that the -- your customers are running their equipment really hard and using a lot more consumables in their processes. And that leads you to feel that the capital projects will get better as the year goes on in 2026.

Yes, Gary, we've kind of said actually most throughout a lot of last year as we reported that the parts for aftermarket was slightly overperforming our expectations based on the operating rates. As you know, we tend to say traditionally, our aftermarket is a function of operating rates. And operating rates really around the world have been quite low in '25 and the parts business really outperformed that. And the -- and they did it consistently.

And so it clearly was a case where they're running the equipment harder. There's been some capacity taken offline, and they're trying to make up for that overall demand, of course, increased last year in most of our markets. And even though some capacity was taken off-line in certain markets, and so because of that, they had to run the existing equipment harder and it's older, because they've been under-investing now for nearly 3 years.

And so that's the only explanation you can have for aftermarket overperforming consistently for such an extended period of time with these lower operating rates is that they're making up for that capacity taken offline by pushing everything harder and the equipment is just older.

And then lastly, what -- obviously was a lot of confusion on tariffs as we entered 2025 last year. What -- what's the thought process of your customers now? I mean you're saying that you're going to see the capital projects start increasing in 2026. I mean have they basically just got the mindset that, hey, this is going to square out to maybe a 10% to 20% tariffs and let's reinvigorate our capital projects.

Yes. I mean I think it was the volatility and the weekly changes that really -- and the breadth of the implementation in early last year that really shocked everybody and really caused everybody to take a wait-and-see attitude. But things are a little more stable now and people realize that they have to continue running their business. You can't stop running your business. You can't stop investing in your business, you'll lose your competitiveness. And so as things have started to stabilize a little bit, and people have absorbed whatever tariff impact for their respective businesses. They've kind of absorbed that.

Things are starting to rationalize and they've got to get back to increasing efficiency, increasing outputs. Everybody, I would say right now, the main focus is on improving productivity and driving down costs, not so much on adding new capacity. That tends to be where we're at. With a few exceptions, there are a couple of markets we're in where they are adding capacity, but most places now it's really trying to squeeze more out of their existing operations would be just be more efficient, more productive.

Our next question comes from the line of Ross Sparenblek of William Blair.

A couple for me here, and I'll pass it along. Did you guys give a backlog figure? I may have missed it. And then also with the equipment backlog when we include the Quiet acquisition.

Yes. I can give you a number here. Yes, when I -- when we brought in Clyde, they had a backlog of about $30 million, just as a reference point for you. Our backlog currently at the end of the fourth quarter was $288 million, and the split on that is 60-40, 60% capital, 40% parts.

Okay. That's helpful. And then, I mean, did you guys give organic assumptions within the 2026 guidance?

We didn't, but I'm happy to do that. What it was really I would say kind of flat -- a little less than 1% to 3% was what we modeled. And the point I was trying to stress is that as you know, Ross, through '25, we had line of sight on some nice capital projects. And the customers have yet to place the orders for those. So the approach we're taking for '26 is those orders are there. We think the customers will place those. There are significant orders. There's that would be meaningful upside for us, but we did not bake that into our guidance. of course, 1% to 3% organic.

There's not a lot of big capital jobs in there. But there are big capital jobs that are ready to go. And we're hoping that we're going to get to midyear and customers will have placed some of those orders, and we'll be able to take our guidance up.

Okay. So I mean I get the sense that most of that organic guide is just your confidence around the parts of the sinus business?

Yes. The capital is up, but not substantially. You're correct. We're really its confidence in parts and consumables. But we do anticipate the kind of, I'd say, single unit capital business to still keep plugging along.

Okay. So that seems to imply then that the capital equipment orders is kind of $290 million, $300 million run rate we've had the last 2 years, that kind of the static base case with potential for upside from there expectation that that's going to be lower.

Yes.

Our next question comes from the line of Kurt Yinger of D.A. Davidson.

Mike, you had talked about a large number of capital orders where you've provided proposals and you're sort of waiting to hear back from customers. Can you maybe just talk a little bit about how unique that is in terms of the time that proposals have been outstanding or maybe the typical time line where you would expect a proposal to turn into a booking and how that's different today than what you've seen in the past?

Yes, Kurt. So I would say the discussions have been ongoing, a lot of projects that we thought were going to be released in the back half of last year. didn't go away. But again, because of the constant changes in the geopolitical kind of discussions around tariffs and things really just caused them to say, well, we're just going to wait another quarter, we're going to wait another 2 quarters here before we do anything.

So we really haven't seen any projects kind of go away. We have some projects that we've actually gotten the order, but we're waiting for letters of credit or down payments before it becomes a booking. So there is some activity that has started to move forward, but it's taking longer in some cases to get the bank set up and get the letters of credit and the down payments and others are just proceeding more slowly. It's just 1 of caution. I think everybody is looking to see if we bottomed out and then we're going to start to see some growth from a macro level.

And so it's probably been, I would say, the capital business has been as -- the bookings have been as slow as soft as they've been any time in history when we haven't had a significant recession. We normally -- the bookings we've seen in the last kind of 2.5 years have been stuff we saw back in '08, '09 when you back when you have a raw recession. So it's really unusual to see this kind of softness when the economies are still growing. And I think it's just because of all the uncertainty.

The tariff thing, we're notwithstanding what the current administration says, the tariff thing has been highly chaotic for our customers to manage and to plan and to budget around. It just created a tremendous amount of instability. And -- but as I said earlier, when Gary was asking the question, the -- they are starting now to say, okay, things seem to calmed down a little bit. I mean we don't like where we're at, but at least we know where we are now, so we can start to plan around that.

And so that's what we're seeing. But we do know -- our companies are -- many of our companies are over 100 years old. We know history tells us, they cannot go forever without investing in the business. The markets were under still growing. Even the paper and packaging business, which is a chunk of our business right now, it's growing low single digits, but it's still growing. So you cannot under-invest forever in that. So they will have to start to make some investments.

Okay. That's super helpful. And then thinking about last quarter, you talked about some of those larger fiber processing orders that you could kind of recognize on an overtime basis. Is that kind of the main component that maybe element of conservatism where you just have assumed that those won't necessarily come in, in the guidance? Or are there other percolating areas of kind of capital activity across the portfolio that might be beneficial in there as well.

Yes. You've really hit it exactly, Kurt. We're just -- we're being cautious here as we move into '26. And as I said, hopefully, we'll get some good traction here. And we get to midyear, we'll be able to raise guidance if some of these capital bookings are placed.

We are a little bit gun because we thought things were going to strengthen. If you remember back when they were talking about things improving at the end of '24, and then it moved to the end of '25. And so we're just being -- trying to be as cautious as possible. As you know, we tend to always try to -- and traditionally have always kind of underpromised and overdelivered, and we want to continue that trend. And so we just said, look, it's early in the year, we're going to go out of the gate cautiously. And hopefully, some of these things that are out there that we believe will come in will come in, and we'll be able to then kind of update you guys accordingly.

Got it. Okay. And you talked about how aftermarket has kind of outperformed expectations and it's maybe been consistently surprising. It's interesting, some of the European peers have talked about a greater focus on that area, parts and services. Are you seeing that or hearing from your teams about that kind of showing up and kind of a meaningful change in the competitive environment and maybe any of these smaller kind of parts and consumables category? Or any commentary on that just in general?

No. I would say '25 was a good year for us. We did have a lot of our competitors come at as hard, and we were able to defend that. And many cases, if they did get their foot in the door, we were able to kind of turn that around as the year progressed. And so from our standpoint, it was a good year. And our customers' relationships tend to be quite sticky. They've been very -- we've had them for a very long time. And so it's held steady. And that many of our companies had kind of record -- if you look at the percentage of revenue aftermarket, it was at a very high level.

So we're quite pleased with the way our guys performed around the world. that is the daily challenge. Every day when our guys get in the morning, that's what we're focused on. That's a big challenge, serving the customers with that aftermarket piece to help our customers stay as efficient as possible. And so it's our primary focus, and our guys, I think, did a great job in '25.

And there's always people coming after us. If it's not the big guys from Europe, the regional players that can be quite competitive from a cost standpoint. So it's a challenge that we face every day and always have. But we're quite pleased with the way our guys performed.

Perfect. Okay. And just last one, Mike, if you have it in front of you. Could you just give us kind of organic parts and consumables versus capital kind of sales and bookings for Q4.

Yes I have you wanted both revenue and bookings on that curve? Is that your...

Yes, if possible. I realize it's a lot of numbers, but I have that.

No, that's okay. Organically, I have -- for the fourth quarter, parts -- on the revenue side, up 3% capital on the revenue side, down 7%. So overall, organically, that would comes out to flat. And then on the bookings side, I have parts up 4% and capital down 6%. But organically, the with the weighting on parts that puts us up 1% on bookings organically.

Our next question comes from the line of Walter Liptak of Seaport Research.

I wanted to do a follow-up on that last question about the aftermarket competition coming out of Europe, it sounds like. If that's the case, how do they compete? Is it -- are they competing on like a quality aftermarket? Or is it like a pricing thing? Like if you had seen any changes in the marketplace for aftermarket because of that?

Traditionally, when somebody is coming in trying to steal market share away from you, assuming your customer is happy with your product, your service, your performance, the only real leverage they have is try to undercut you on price. And our customers will always take advantage of that to try to lower their overall cost. And so that's typically what they do it. I mean we -- in the markets we're in, as you know, we tend to be #1 or 1 or 2 slight cases, maybe number two, very strong relations with our customers, really serve them well.

So the only way they can really make any real entries into those markets is to try to really reduce pricing. And frankly, European companies, they've got a cost structure that isn't substantially less than ours. So that does -- the only way they can really do it is to just make less money. And if you follow our competitors in Europe, you'll find that they often do make a lot less money than us because they try to undercut our price. But there's a lot more to it, that total cost of ownership is so critical. The technical services that we give them are important. We have guys living in the operations supporting our customers.

And because of that, we kind of were able to defend our territory and in some cases, pick up market share. So it's really nothing new. I mean like I said, if it's not the big guys coming after us, it's a small regional guys, actually the ones that can create more havoc for you because they try to come in and really undercut you on price.

But it's -- we worked very hard to understand our clients' operations and how we can help them create value and stay competitive and increase their throughput and reduce their inputs. I mean that's our value proposition. And so we that's our daily mission. We work it very hard and our guys do a great job of it.

Okay. Great. Okay. And during your prepared comments, Jeff, I think you commented about a good funnel for projects in recycling and waste in data center. And I wonder if you could talk a little bit about those, especially the data center part.

Yes. So as you know, the housing has been down, but data center construction is booming, there massive facilities. And of course, they -- all the materials they use to make those. For instance, our Material Handling Group is involved with, right? So you're talking about aggregate sand, concrete, copper, aluminum, everything that goes into building those structures starts out as a natural resource that is mined, process, screened, sized, clean things like that. And of course, our material handling group is in all those sectors.

And so if you look at some of our big customers out there, the Martin Marietta and people like that, on the sand and gravel side, they're doing quite well. in part because it's providing the materials required to build these facilities. The amount of copper, for instance, going into these facilities is quite substantial. So we support the copper mining operations around the world, of course.

The amount of concrete that goes into building one these you ever seen 1 of those data center farms. It's some of the biggest buildings that I've ever seen, and they just go forever. And so it's basically all that material has to get processed buy equipment that we build or our competitors build.

[Operator Instructions] And our next question comes from the line of Ross Sparenblek of William Blair.

Just as follow-ups here. Can you just give us a sense of where the OSB segment shock out with an industrial process for the year?

Well, I will say, Ross, we usually -- we don't bifurcate that. We usually just talk wood and fiber processing. But that is -- that's a bright spot for us, frankly, in the wood process side. The debarking business servicing dimensional lumber and North American housing is really on the capital side is quite soft right now. But OSB just keeps plugging along. They're doing fantastic.

They're finding -- first of all, we supply them globally, and we're 1 of only, I guess, technically 2 companies that are doing that. and they're finding more and more applications, more and more uses for the product. So it just continues to grow.

Okay. That's good to hear.

Siding, of course, they're going into a higher, higher value, higher dollar applications for it and new applications for they're going to starting to do it for dimensional and structural elements and things like that, looking at it for things that traditionally would be laminated products. So it's just -- we continue to see more and more demand.

Okay. And then one of your competitors recently called out the vertical integration of the pulp and processing market in China as a secular opportunity in the coming years. anything you can speak to as like Cadence content or how do you guys argue that market today?

Yes. So when you put pulp mills down, of course, one of the big issues there is the recovery boilers and Clyde of course, who joined us recently, serves that market. And so they've got -- they provide a lot of new technology into the Chinese market as these pulp mills are being built. Traditionally, China was almost 100% recycled fiber. But when they put the China, the Chinese government put the ban and the importing of waste paper, they had to go out and search for fiber.

And one of the things are going, of course, is they're putting these pulp mills in. And so lit is over their supply, and so the pole cleaning technology for those applications.

Okay. And then maybe just one last one on your 80/20 expectations this year. you guys usually target 2 to 3 divisions, anything more material to call out as likely the mix within the segments?

No. I mean we're constantly trying to increase the size of our team that leads those efforts and starting more and more companies up. But it's continuing to progress. I think -- it's some of the businesses, I think, are starting the program late last year. And so we're expecting maybe towards the end of this year to start to see some results from that. And then, of course, there are others that ever just entering it or on schedule to enter it. As you know, normally with acquisitions, the first year, we don't like to do anything with them. We'd like to kind of get them stabilized and integrated get them kind of understanding the programs and kind of deciding when they want to undertake that initiative.

So I'd say for some of the newer companies that are out there, they're still to be started. But it's continuing along. Our team, I think, continues to get better and better at implementing it. And it will be -- continue to be a primary internal initiative of ours for the years to come.

I'm showing no further questions at this time. I'd now like to turn it back to Jeff Powell for closing remarks.

Thanks, Marvin. Before wrapping up the call today, I just want to leave you with a couple of takeaways we finished the year with improving business conditions. We acquired 2 great companies in the second half of 2025 and the integration of business into the Kadant family is going well, and I'm confident that they'll make meaningful contributions in 2026 and beyond.

Outlook for 2026 is optimistic with expectations of increased project activity and stable aftermarket demand, and we look forward to maximizing the value that we create for our customers and for our stockholders in 2026. And with that, we want to thank you for joining us today.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Good day, and thank you for standing by. Welcome to the Kadant to acquire Voestalpine BOHLER Profil Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Michael McKenney, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, Shannon. Good morning, everyone. Welcome to Kadant's conference call to discuss its proposed acquisition of Voestalpine BOHLER Profil. With me on the call today is Jeff Powell, our President and Chief Executive Officer. Before we begin, let me read our safe harbor statement. Various remarks that we may make today about Kadant's future plans and expectations, including the expected benefits of the proposed acquisition of Voestalpine BOHLER Profil, are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements, as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading Risk Factors in our annual report on Form 10-K for the fiscal year ended December 28, 2024, and subsequent filings with the Securities and Exchange Commission.

In addition, any forward-looking statements we make during this webcast represent our views and estimates only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or estimates change.

With that, I'll turn the call over to Jeff Powell, who will discuss the acquisition. Following our remarks, we will have a Q&A session. Jeff?

Thanks, Mike. Good morning, and thank you for joining us today. We announced last week that we've entered into an agreement to acquire Voestalpine BOHLER Profil. Today, we'd like to share some details on the transaction and the company. The company is located in Bruckbach, Austria is over 150 years old, and they manufacture high-quality precision components that go into technically challenging applications and they possess unique expertise and patented processes as well as the history of innovation.

Revenue for the fiscal year '25 was EUR 51.5 million. They produce near net shape products that reduce the amount of downstream machining and processing, thereby lowering the total cost of production. Kadant has sourced components from BOHLER for more than 30 years including knives for our wood processing businesses. They also manufacture components that go into turbine engines and a broad range of industrial applications. BOHLER has been at the top of our acquisition target list for more than 10 years.

As I mentioned, we have worked with them for 30 years, and they have been instrumental in helping us develop products components for our wood processing businesses. They have an excellent management team that we have worked with and know very well. 100% of their business is parts and consumables, and that is, as most of you know, a key strategic focus for Kadant. BOHLER will continue to operate in their current location as a stand-alone division and will be part of our industrial processing reporting segment. The business will go forward as Kadant Profil GmbH & Co KG.

With that, Mike will give you more details on the financials and the unique attributes of this transaction. Mike?

I'd like to provide some additional color on the financial metrics associated with the proposed transaction. Purchase price is approximately EUR 157 million, subject to customary adjustments and the company had approximately EUR 52 million in revenue for the fiscal year ended March 31, 2025, which is 100% from parts and consumable products. This company is a valued supplier to several Kadant businesses and approximately 45% of their '25 revenue represents this activity.

I want to highlight that once this company is part of Kadant, the revenue generated from other Kadant businesses will become intercompany revenue and therefore, not part of Kadant's reported revenue. While the externally reported revenue will be smaller, both gross margin and EBITDA margins under Kadant will benefit from the combination. The timing of this benefit, however, may vary by quarter as the recognition of the gross margin related to intercompany sales to Kadant businesses is dependent on the ultimate shipment to third-party customers.

In addition, I wanted to note that our Kadant businesses will initially be using any on-hand inventory purchase prior to the closing of the acquisition to fulfill shipments to third-party customers before the new post acquisition purchases are consumed. These factors, along with normal acquisition fair value accounting, will make this acquisition dilutive in 2026, while we'll incorporate this acquisition -- we will incorporate this acquisition into our '26 guidance after the closing occurs. The company had approximately EUR 15.6 million of adjusted EBITDA in fiscal year 2025 with the resulting EBITDA multiple on the transaction of about 10x. In addition, beneficial tax attributes associated with the transaction are worth approximately 1.5 turns on the EBITDA multiple. With that, factored in, the multiple is about 8.5x.

We plan to fund the acquisition primarily through borrowings under our revolving credit facility in Europe. We estimate that our leverage ratio, as defined in our credit agreement will increase to just above 2 after the transaction closes. And as a result, we anticipate our borrowing rate to be approximately 3.5% for this debt in '26. I'm going to now turn the call over for questions. But before we start, I should mention that the Q&A session is specific to the proposed transaction, as we are currently in the fourth quarter '25 closing process and cannot comment on the fourth quarter '25 results or our guidance for '26 until our upcoming earnings call later this month.

With that, we'd be happy to take your questions. Shannon?

[Operator Instructions] Our first question comes from the line of Ross Sparenblek with William Blair.

Can you just elaborate a little further on kind of the attractiveness of this asset and why the parent wanted to sell?

Yes. From our perspective, as I mentioned, Ross, we've worked with these guys forever. And as Mike just indicated, about 45% of their business is with us. So they've become a bigger, bigger supplier and a more and more critical supplier to us. They have a very specialized processes that they have patented, they use for making their components. And so we, for more than 10 years, really have continued to expand our relationship with them and have really thought that they really would be a great fit within the Kadant organization.

So we're very pleased that we were able to acquire them. I think their parent company, of course, Voestalpine is a very, very large, one of the biggest companies in Austria. And this was a smaller division for them and maybe slightly non-core. And so as it became more and more important to us and the relationship continues to grow and develop, I think we both concluded that it would be better probably as part of the Kadant organization. So we feel very fortunate that we were able to reach an agreement with the parent company to purchase this.

As you know, all of the components are tend to be mission-critical and they tend to be alloy and metal based, and that's what these guys really specialize is making critical components. And because they have this near net shape technology it really reduces the downstream cost and processing time for a finished product. So they'll be able to help a lot of our Kadant companies, we believe over time.

Okay. No, that's very helpful. And then maybe just on the initial dilution dynamics, Mike, if you could maybe just help us kind of think through, I mean, it's definitely accretive on a margin basis, but something along the lines of the inventory, maybe some FIFO is going to impact near term?

Yes. Exactly, Ross. That's what -- so I was trying to give that color. So folks would be aware. Of course, as I mentioned on the call, roughly half the revenue is with Kadant. So once they become part of Kadant, that revenue will become intercompany revenue and we'll eliminate it. So we won't be able to recognize the profit on those intercompany transactions until that product is delivered to a third-party customer.

And the additional little bit of color on that and why we're going to -- why I mentioned the dilutive impact is because in the short run here, we already have components that we've purchased from this company, and we're going to need to work through that inventory, just as you said, on a FIFO, we need to work through that inventory before we start consuming the inventory that will have been purchased post acquisition. So until we get through that, the profit on those intercompany transactions will be, so to speak, deferred. And I think that will be a few quarters because we -- these are important components, and we have a few quarters' worth stocked.

That was very helpful. And maybe just 1 more and I'll pass it along. You kind of hinted that SG&A or not SG&A, but R&D synergies. Is there anything else we should think of or any buckets that stand out near term once you own this asset?

Well, as you know, we have a key strategic focus on parts and consumables, and this is a 100% part consumer business. So we will work with them to continue to try to expand their non-Kadant business around the world. But also they'll work with all of our other divisions to try to find opportunities to sell into our other divisions that they haven't done before. So -- it's just -- we really think there's unique opportunities here with their manufacturing and their specialized expertise to really expand our market share globally outside of Kadant and even within Kadant more opportunities.

So it's like every other kind of acquisition that we make, we integrate them into our global network, our direct sales network around the world and work with them to try to expand their market opportunities.

And maybe just what was the feedback from your sales force when you brought...

They're very happy. I would tell you that there were 2 divisions within our company, that you asked the presidents what kept them up at night, they would tell you it was this relationship with this company because we have become very dependent on this company for key components. And because of their patented process, they're really the only company in the world that can provide it. And so it was something that kept a few of our guys up at night. And so having them in the family now is, I think, is a great relief and a great acquisition for us.

Our next question comes from the line of Gary Prestopino with Barrington.

Just a couple of questions here. Just so I can understand this. You're buying this company. You're going to have intercompany revenues. So it actually will be less the 45% on what you're supplied from the company itself. But what about the impact on to adjusted EBITDA on that? Would you still be able to get the full adjusted EBITDA margin impact from all of the sales that you're getting from this company?

Yes. Good question, Gary. Yes. We will realize that, and that's part of the messaging I was giving here in terms of the intercompany activity. But recognition of that will be delayed until we work through the current inventory on hand for the intercompany, the pieces that now become intercompany. But yes, we'll realize all the margin benefit.

And how quickly will that -- once you work through that FIFO impact? How quickly is that inventory turn?

It turns quickly. These are -- it's parts and consumables. But as I said, I think it may take us a good part of '26 to work through it a few quarters to work through inventory on hand, and then -- and when we finally closed the transaction and we have another call, I'll give a little more color on what we think the timing is going to be for that turn.

Okay. That's very helpful. And then you mentioned something the company produces products for technically challenging applications. And you mentioned something about some kind of patents they have or patented technology. Could you just go over that so I can understand some of the competetive advantages it has?

Sure. So they've developed processing lines that make these critical components. They actually developed and built a processing lines themselves, and they patented them. And as I mentioned earlier, they make near net shape. So when you think of a lot of components and products, they'll start out as, say, bar stock or maybe an ignite of, say alloy and alloy, and it gets processed gets heated up, it gets formed, gets pressed and there's often an awful lot of machining that goes on to get to your final component shape and profile and characteristics.

They have developed processes that get you much closer to that final shape than many, many companies currently have the ability to do. And therefore, it really reduces the machining time. In some cases, they can make things with their patented process lines, where there's almost nothing, no post-processing required. And so it's just a very cost-effective way to get to a final shape or a near final shape, and they develop these process lines themselves, they built in themselves and they patented them.

That's interesting. And then it looks like, are they making the fan blades for jet engines when you look at the picture of aviation and marine. Is that part of...

I think they make the stators that go on the engines. So they make particular -- they're not making the turbine blades itself, but they're making other parts of the turbine engine.

[Operator Instructions] Our next question comes from the line of Kurt Yinger with D.A. Davidson.

Just one question. Going back to kind of the customer base and maybe widening that out. Does the company also kind of sell to your competitors? And I guess, how does that factor in terms of, I don't know if it's a dis-synergy risk or maybe a point of friction going forward with kind of that rest of the third-party sales?

Yes. I mean we have many of our companies that sell to people that we also compete with, Kurt, and this will be no different. They'll continue to serve everybody. They'll continue to supply to the entire industry just as our companies do now. And so there are probably a couple of places where they will be selling to people that we also compete with. But that's not new to us. Like I said, many of our divisions do that now, they'll sell to their competitors. Sometimes we'll be spec-ed in from the end customer, but other times, we just have a relationship with our competitors, and there are certain things that we do better, and we supply to them. So I don't expect this to be any different than that.

[Operator Instructions] And we have a follow-up question from the line of Ross Sparenblek with William Blair.

Just one quick follow-up. Can you maybe provide the end market mix there? I assume wood is probably 45% since you're the main customer, but on the aviation, marine and industrial and then kind of just the growth profile there?

Yes. So obviously, we're the biggest part, no less than half. And then it gets diluted down and it's pretty diverse after that, Ross. So I wouldn't say that there's any other particular market that is, for instance, 20% or 30%. I mean they supply into a lot of broad industries. They supply into the aviation industry. They provide some in the automotive industry and just industrial machinery in general. So it's a pretty broad mix that they supply into after you get away from Kadant.

Okay. I just didn't know if there's anything tied to like Airbus that we should be calling out? And then maybe just growth rate historically from the other customers?

In the near term, Ross, the last 2 years, they've grown in the 8% range. And if I go back a little further, say, 5 years, it's been about 10%. Of course, we're conservative and we didn't model a high single-digit growth.

And I'm currently showing no further questions at this time. I'd now like to turn the call back over to Jeff Powell for closing remarks.

Thank you. Well, I just want to thank everybody for joining us today. We look forward to reporting on the progress. We're really pleased and welcome the BOHLER family into Kadant, and we look forward to talking about it and presenting in the future. Thank you.

This concludes today's conference. Thank you for your participation. You may now disconnect.

Good day, and thank you for standing by. Welcome to Kadant's Third Quarter 2025 Earnings Conference Call.

[Operator Instructions] Please note that today's conference is being recorded.

I will now hand the conference over to your speaker host, Michael McKenney, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, Olivia. Good morning, everyone, and welcome to Kadant's Third Quarter 2025 Earnings Call. With me on the call today is Jeff Powell, our President and Chief Executive Officer.

Before we begin, let me read our safe harbor statement. Various remarks that we may make today about Kadant's future plans and expectations, financial and operating results and prospects are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading Risk Factors in our annual report on Form 10-K for the fiscal year ended December 28, 2024, and subsequent filings with the Securities and Exchange Commission.

In addition, any forward-looking statements we make during this webcast represent our views and estimates only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or estimates change. During this webcast, we will refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our third quarter earnings press release and the slides presented on the webcast and discussed in the conference call, which are available in the Investors section of our website at kadant.com. Finally, I wanted to note that when we refer to GAAP earnings per share or EPS and adjusted EPS on this call, we are referring to each of these measures as calculated on a diluted basis.

With that, I'll turn the call over to Jeff Powell, who will give you an update on Kadant's business and future prospects. Following Jeff's remarks, I'll give an overview of our financial results for the quarter, and we'll then have a Q&A session. Jeff?

Thanks, Mike. Hello, everyone. Thank you for joining us this morning to review our third quarter results and discuss our outlook for the remainder of the year. I'll begin with our third quarter highlights. We had solid earnings performance in the third quarter and benefited from record aftermarket parts revenue. As you know, our aftermarket parts business is one of our core strategic development areas, and it is encouraging to see this part of our new business continue to thrive. This is especially true in volatile times like now where economic headwinds are strong and global trade tensions remain high.

Overall, market demand for capital equipment continued to be sluggish, though we are seeing increasing activity early in the fourth quarter. As has been the case throughout 2025, our operations teams around the world delivered exceptional value for our customers. I want to thank them for their outstanding effort and the results they generated during these challenging times.

Turning next to Slide 6. I'd like to review our Q3 financial performance. Q3 revenue and earnings performance continued to improve sequentially from Q1 to Q2 despite softness in our capital business. Revenue was flat compared to the prior year period at $272 million and benefited from record aftermarket parts business, which was up 6% compared to the third quarter of last year. Solid execution contributed to an adjusted EBITDA of $58 million and adjusted EBITDA margin of 21.4%.

Cash flow from operations and free cash flow in the third quarter was $47 million and $44 million, respectively, demonstrating the continued strength of our business model. Bookings were relatively flat compared to the same period last year due entirely to a sustained weakness in capital project orders, which has been in a lull since 2023.

While capital project activity and quoting remains high, the timing of these capital projects continues to get pushed out. That said, we do see greater optimism in our sales teams with respect to capital orders moving forward in the near term.

Next, I'd like to review the performance of our operating segments, beginning with our Flow Control segment. Good performance in aftermarket parts revenue could not offset reduced capital shipments in the third quarter, leading to a 3% decline in Q3 revenue compared to last year. Encouragingly, new order activity was up 5% with aftermarket and capital demand both contributing to this increase to $94 million.

Adjusted EBITDA of $26 million was down 10% compared to the record EBITDA performance in the third quarter of last year. Factory automation and general industrial end markets continue to show strength, particularly in the Americas, while capital project activity in Europe and Asia reflects the persistent economic headwinds in those regions. In our Industrial Processing segment, revenue decreased 4% to $106 million. The revenue decline was entirely due to reduced capital shipments as aftermarket parts revenue was a record $81 million and represents 76% of total Q3 revenue.

Solid demand for aftermarket parts was not enough to offset the decline in capital bookings, leading to a 5% decrease in bookings compared to the same period last year. The outlook for capital bookings in the near term remains positive, and we are well positioned to win those new orders when they are released.

Adjusted EBITDA margin in the third quarter was 25.4%, down 330 basis points compared to the record margin set in Q3 of last year. I should note that our third quarter results do not include any contribution from our recently announced acquisition of Clyde Industries as that acquisition was completed after the third quarter closed. The acquisition will be included in our fourth quarter results, and we look forward to reporting on the integration in the next call.

In our Material Handling segment, we benefited from excellent commercial and operational execution in the third quarter. Revenue was up 11% to a record $70 million with solid increases from both product lines. This record revenue performance was led by capital shipments, up 18% compared to the same period last year. Bookings declined 4% compared to the third quarter of last year due largely to softer demand for aftermarket parts for our Bulk material handling equipment during the quarter.

Adjusted EBITDA margin increased 290 basis points to a record 23.3% compared to Q3 of last year. While we expect demand to stabilize in the near term, we continue to see good level of activity in the aggregate sector, particularly in North America.

As we look ahead to the remainder of 2025, we expect aftermarket demand to remain healthy and business activity to improve. We are seeing a lot of activity around capital projects, and this is expected to be a meaningful contributor to our Q4 new order activity. Though the timing of these projects can be uncertain and could shift due to macroeconomic uncertainty or other factors.

I will now pass the call over to Mike for his review of our Q2 -- Q3 financial performance. Mike?

Thank you, Jeff. I'll start with some key financial metrics from our third quarter. Our third quarter revenue of $271.6 million included record aftermarket parts revenue of $188.4 million. Gross margin was 45.2% in the third quarter '25, up 50 basis points compared to 44.7% in the third quarter '24. Our parts and consumables revenue increased to 69% of revenue in the third quarter of '25 compared to 65% in the prior year. Gross margin included amortization expense associated with acquired profit and inventory of $0.5 million and $1.2 million in the third quarter of '25 and '24, respectively.

Excluding this negative impact in both periods, gross margin was up 10 basis points over the third quarter of '24. For the first 9 months of '25, gross margin increased 120 basis points over the corresponding prior year period and 70 basis points after excluding the impact of acquired profit and inventory in both periods. This demonstrates our ability to maintain our gross margin profile despite various cost pressures, including the recent tariff challenges.

SG&A expenses as a percentage of revenue increased to 27.9% in the third quarter of '25 compared to 25.4% in the prior year period. SG&A expenses were $75.8 million in the third quarter of '25, increasing $6.8 million compared to $69 million in the third quarter of '24. This includes $1.2 million from unfavorable foreign currency translation, $1.3 million in acquisition-related costs and $0.8 million from our recent acquisition. The remaining increase is primarily associated with incremental compensation-related costs.

Our GAAP EPS decreased 12% to $2.35 in the third quarter, and our adjusted EPS decreased 9% to $2.59 in the third quarter of '25 compared to a record $2.84 in the third quarter of '24. The third quarter '25 adjusted EPS exceeded the high end of our guidance range by $0.36 due to higher-than-expected aftermarket parts revenue at our Industrial Processing segment. In addition, all of our segments had higher-than-expected gross margins due to the mix of aftermarket parts in the period.

Our effective tax rate of 29.5% in the third quarter was higher than the anticipated rate, primarily due to the shift in geographic distribution of earnings expected for the year and an increase in nondeductible acquisition costs. Our adjusted EBITDA has increased each quarter in '25 with strong performance in the third quarter from our Material Handling segment. However, overall, our third quarter '25 adjusted EBITDA and adjusted EBITDA margin were comparatively lower than the record performance we achieved in the third quarter of '24.

Turning to our cash flows. We had strong operating and free cash flow in the third quarter of '25 at $47.3 million and $44.1 million, respectively. On a year-to-date basis, both metrics are ahead of last year with free cash flow up 13% over last year. Nonoperating uses of cash in the third quarter of '25 included $16.5 million for the acquisition of the Babbini net of cash acquired, $3.2 million for capital expenditures, $4 million for a dividend on our common stock and $2.4 million for debt issuance costs.

Let me turn next to our EPS results for the quarter. Our adjusted EPS decreased $0.25 from $2.84 in the third quarter of '24 to $2.59 in the third quarter '25. This included decreases of $0.32 due to higher operating expenses, $0.17 due to lower revenue, $0.05 due to a higher tax rate and $0.01 due to higher noncontrolling interest. These decreases were partially offset by $0.15 in lower interest expense, $0.10 due to a higher gross margin percentage and $0.05 from the operating results of our recent acquisition, excluding associated borrowing costs.

Collectively, included in all the categories I just mentioned was a favorable foreign currency translation effect of $0.03 in the third quarter of '25 compared to the third quarter last year due to the weakening of the U.S. dollar against certain currencies.

Now I'll review our liquidity metrics on Slide 15. We renewed our revolving credit facility at the end of the third quarter, increasing our borrowing capacity from $400 million to $750 million and extending the maturity date to September 2030. This will help support the acquisition strategy we outlined in our most recent 5-year plan.

Our net debt, that is debt less cash, decreased $20.6 million or 14% sequentially to $131.1 million. Our cash balance grew to $126.9 million due to an increase in cash held in anticipation of our fourth quarter acquisition of Clyde Industries. Our leverage ratio calculated in accordance with our credit agreement increased to 0.94 compared to 0.86 at the end of the second quarter of '25.

At the end of the third quarter '25, we had $502 million of committed borrowing capacity, which was lowered to $332 million following our acquisition of Clyde at the beginning of the fourth quarter. Our cash conversion days, which we calculate by taking days in receivables plus days in inventory and subtracting days in accounts payable, increased to 131 at the end of the third quarter '25 compared to 129 in the prior year quarter. Working capital as a percentage of revenue increased to 18% in the third quarter '25 compared to 17.7% in the third quarter -- in the second quarter of '25.

Now turning to our guidance for the fourth quarter and full year '25. In early July, we completed the acquisition of Babbini for $16.5 million, net of cash acquired. And after the end of the third quarter, we acquired Clyde Industries for approximately $175 million, subject to customary closing adjustments. Both of these acquisitions were funded primarily through borrowings under our revolving credit facility. We have revised our guidance to include the operating results and associated borrowing costs from these 2 acquisitions.

We are continuing to monitor the impact of tariff changes and pursue opportunities to reduce the impact of these costs by finding alternative suppliers through cost sharing and in some cases, making investments to change our manufacturing capabilities and manufacture components at different Kadant facilities.

Capital bookings were below our expectations for the third quarter. Weak market conditions in the pulp and paper industry resulted in lower demand for our capital equipment products in our Industrial Processing and Flow Control segments. The larger impact by far was in our Industrial Processing segment, where certain market conditions have resulted in a lengthening in quote-to-order times with the majority of these pending orders moving into the fourth quarter or early 2026. This has negatively impacted our 2025 guidance as we will not receive the associated revenue and earnings related to these orders until '26.

We are increasing our full year revenue guidance range to $1.36 billion to $1.46 billion from $1.02 billion to $1.04 billion. The revenue guidance increase includes the net effect of incremental revenue from our recent acquisitions and lower forecasted organic revenue in our Flow Control and Industrial Processing segments as a result of lower-than-anticipated capital bookings in the third quarter.

We are maintaining our adjusted EPS guidance of $9.05 to $9.25 for 2025. Adjusted EPS guidance excludes $0.51 of acquisition-related costs and $0.02 of other costs. Our '25 guidance includes a $0.03 negative effect from foreign currency translation compared to our prior guidance. Future actions by the central banks may impact the U.S. dollar and other currencies, which could have an impact on our guidance. Both GAAP and adjusted EPS guidance are calculated using our initial estimates of purchase accounting adjustments, which are subject to change as we review and finalize the valuation work for our 2025 acquisitions.

Our revenue guidance for the fourth quarter of '25 is $270 million to $280 million, and our adjusted EPS guidance is $2.05 to $2.25, which excludes $0.14 of acquisition-related costs. We anticipate gross margins for '25 will be 45.1% to 45.4%. This includes a 20 basis point negative impact from $2.1 million of amortization expense associated with acquired profit and inventory.

We anticipate fourth quarter gross margin will be approximately 44% to 44.5%. We expect SG&A for '25 will be approximately 28.7% to 29% of revenue. This includes onetime acquisition-related costs of $4.8 million. We now anticipate net interest expense of approximately $14.4 million for '25. We expect our tax rate for the fourth quarter will be approximately 27% to 27.5%.

I hope these guidance comments are helpful, and I'll now turn the call back over to our operator for our Q&A session. Olivia?

[Operator Instructions] First question coming from the line of Gary Prestopino with Barrington Research.

Just as I usually ask here, Mike, do you have on the segment basis, the percentage of aftermarket parts revenue for this quarter versus last quarter or last year at this time?

Yes. I can walk through that, Gary. For Flow Control, current quarter, 74% prior year quarter, 70%, for Industrial Processing, 76% this quarter, comparing quarter, 67%, and for Material Handling, this quarter, 52% comparing quarter, 55%. And then as we stated on an overall basis, 69% for this quarter compared to 65% last year.

Okay. That's very helpful. And then just a little bit -- I'm a little bit fuzzy on what you're talking about or you're talking about that orders are being pushed back into 2026 for capital bookings, particularly in the Industrial Processing but then you expect stronger capital equipment demand in the fourth quarter. So maybe could you kind of square what's going on there? And then I'd have another follow-up after that.

Gary, so we have several projects that are in the late stages that we expect to book. And so the question becomes we've got essentially whatever the rest of this quarter to get these things booked. And in some cases, it requires down payments. In some cases, it requires letters of credit to be established. So there's some administrative things that go on after we receive the official contractor order. And so the question is, will we be able to get all of those administrative things taken care of this year and get those actually booked. We have fairly stringent booking requirements concerning down payments and letters of credit and bank credits and things like that. And some of those are out of our control.

When you're talking about foreign orders in, say, Northern Africa or somewhere going to take quite a while to get some of that administrative work from the banks signed off on. So there's some several large orders out there and just a question of whether we will book them this quarter or those strip into the beginning of next year. But we're encouraged by the activity level we're seeing and the opportunities that we're seeing now on the capital side, particularly on the Industrial Processing business.

Okay. And then just in terms of the challenges the sales force has been having in terms of just the worldwide -- the tariffs issues and things like that. Is that more or less in the rearview mirror in your opinion and the future capital equipment needs across all 3 segments? Have the clients come to realize that this is going to be the case for a while, and we need to order new capital equipment because we're running our old hard.

Well, I think it's certainly better than it was earlier in the year but it's not settled. I mean just this week, Trump got upset with Canada over a commercial they ran and said he's going to put another 10% tariff on them. He's meeting with China, I think, today to try to hammer out a deal there and maybe reduce some of the tariffs. So I would say there's still a level of uncertainty and volatility that's going on. It's less -- I would say it's less chaotic than it was 6 months ago but it's still not settled.

And I think, as you said, some people are starting to realize, okay, this is the new environment we're living in, and we've got to move forward with our business. And that's why we think we're seeing some activity level. But it's not where it needs to be. It's not -- we really need to get this sorted out and kind of everybody agree on what it's going to be, so we can all work accordingly. So it's improving, but it's not where it needs to be yet.

Our next question coming from the line of Ross Sparenblek with William Blair.

Maybe just sticking on the order disruption. Can you maybe help us think through kind of sizing the range of outcomes for the fourth quarter and maybe also thinking through like this to Gary's point, brownfield, greenfield, what's kind of the near-term driver?

I'll answer the latter part first. So some of the opportunities are brownfields, their existing plants with upgrades. And then in the developing world, as is often the case, there will be greenfields. There'll be kind of new opportunities in the developing world. So it's kind of both.

As far as the range, we really don't kind of give bookings range. So I don't know what you want to say there, Mike.

All right. I think we kind of lost you there for a second. But it looks like one of your peers called out maybe some disruption for several quarters, presumably because of tariffs. I mean those are larger greenfield orders. So you're not really seeing that level of impact or potential impact going into 2026.

I think the impact we see from tariffs is just the uncertainty that it creates. And so our customers are more cautious and move more slowly as they try to better understand what the environment looks like going forward. So I would say it has impacted the timing on a lot of our projects. But the projects that we're tracking I don't think we've seen any of them that we think are going to go away or be extended for years. I mean I think the ones we're tracking that we have kind of building our business strategy around, we think will occur over the next short period of time.

Okay. That's really helpful. One more question, I'll hop back in queue. Can you just give us a sense of factory utilization rates globally and how we should think about the parts and consumable mix here as we look at the year?

Yes. Well, so as we've said all year long, we had another record parts quarter. Our parts are overperforming relative to the operating rates, and that's because the equipment is getting quite old and it's just taking a lot more parts to keep it running. So the operating rates, it kind of depends on the business you're looking at, whether you're talking about the wood processing side or the or the paper side. But in the U.S., operating rates are higher than the rest of the world. I would say they're higher here, maybe in the kind of in the wood side, maybe in the low 80s -- or I'm sorry, on the paper side in the low 80s. The wood side, it's a little less clear. Those they can kind of curtail very quickly. And so it's a little harder to keep track of those.

But they're certainly running at a reduced operating rate and taking downtime. China, I would say, still in the 60s percent operating rates and Europe is in the kind of the 70s. So it really hasn't changed much throughout the year.

Our next question coming from the line of Kurt Yinger with D.A. Davidson.

Just wanted to stick on the capital equipment side and understanding we're not going to kind of guide to a Q4 bookings number. If we were to look at the Q3 performance, kind of low $60 million in capital equipment bookings, the last 2 years have kind of been in the low 70s. I guess my question is, when we think about these larger fiber processing orders that you seem to have visibility to, but maybe kind of still pushed out, like are those sufficient to really pick things up relative to maybe what we've seen versus the last 2 years? Or is it just kind of helping get back to that baseline relative to the weak Q3? How would you kind of frame that for us?

I think it would be a step change for us. It would be very, very helpful. These are projects that will be processed over a number of quarters, and we'll be able to recognize revenue on a percent complete basis. So as they get processed over, say, 3 or 4 quarters. I did -- on the -- and we usually kind of stay away from trying to forecast bookings but I can give you a little color on what we're looking at by the segments.

If I look at capital activity in Flow Control compared to what -- to the prior year period, so fourth quarter of '24, we're looking for capital activity to be up 3% or 4%. So somewhat modestly in Flow Control. And in Material Handling, I'd say kind of same boat, up about 3% to 5%. And interestingly there, I want to clarify that isn't on the capital side. That's in parts and consumables, whereas flow control is on the capital side.

But going to the -- I think the big wildcard is really in industrial processing. On the capital side there, wood is looking to be up, say, 3% or 4%. But the big difference maker is, as we've been discussing in fiber processing. So it could be up significantly compared to, frankly, many periods. There are a number of really nice projects that we're hoping will come in, I'd say, over the next quarter to 3 quarters. So first half of '26 to the fourth quarter of '25. But that's really the big wildcard for us. There's a number of good projects there. They haven't gone away. We feel we're well positioned, and we're just waiting for the order to be finally booked.

Got it. Okay. That's super helpful. And maybe bigger picture, the multiyear targets of 3% to 5% kind of organic top line growth, do we need a more broad-based recovery expanding past just some of those fiber processing orders? Or would those be kind of sufficient to help you get back into that range from what you can see?

I would say we do need a more broad-based to really get back to that.

In particular, housing. We need to see the housing environment improve because, as you know, that drives a lot of the economy and it drives a lot of our businesses. So a pickup in housing, I think, is quite important, not only to us but to the general economy.

Right. Okay. That makes sense. And then switching over to parts and consumables. That's obviously been a nice consistent performer here. How should we think about price versus volume kind of contribution so far this year? And then as we just kind of look across the backdrop, a lot of closures in the pulp and paper space, probably more to come on the wood processing side. Does that give you any concerns about potential deceleration there even? Or is kind of that older age of installed base still supporting pretty healthy demand?

Yes. I would say that on the -- a lot of those closures, of course, you've got to kind of look at the details of those. They may not be -- if it's a pulp plant, of course, as you know, we -- until the recent acquisition of Clyde, which mainly focuses on the new mega plants, we've not had a lot of business on that. So when they announced closures of some of these mills that are virgin mills, that has less of an impact. It's not 0 but it has less of an impact on us.

But I think we tend to look at the global market. In the global production, global demand is continuing to grow somewhere between 1.5% and 2.5%, depending on where you're at around the world right now. And so because we operate pretty much in every mill in the world, what you're seeing is you're seeing a shifting of the production to meet that demand growth. And we work very hard to make sure we're there so that we kind of -- if it's something shuts down in Georgia and something opens up in Turkey or Algeria, we're there to capture that.

And so we think that for the most part, our -- as long as global demand continues to grow, our parts business, which is a function of operating rates and total production demand will be okay.

Okay. Okay. That makes sense. And Mike, as we think about the Q4 revenue guide, can you just put a finer point, I guess, around how much contribution you expect from Clyde and Babbini and then the overall kind of organic growth assumption in there?

Yes. So for -- it's a good question, Kurt. For Clyde and Babbini, I'd say we're anticipating revenue in the $23 million to $25 million for those combined. I actually in mine -- I'm kind of the lower side of that to the $23 million. But a couple of comments I want to make on that. You can -- you'll be able to see, you heard in our comments, what you saw in our press release, Babbini had a very good third quarter. They shipped $5.9 million. You saw on the graphic, the chart we put up, that's $0.05 without interest cost. But a note of clarification there. Their third quarter tends to be their strongest third quarter. And of course, we've just brought them into the fold and haven't been able to -- we are working on but it will take us a little time to get them reoriented towards a parts and consumable business and capturing that flow.

I think the management team there is very excited about doing that and changing their business model, not being as focused on capital equipment. But for capital equipment in the fourth quarter, there -- it's quite weak. Frankly, it's quite a weak quarter for them. On the Babbini front -- or excuse me, on the Clyde front, we had said their revenues were about $92 million. So if you divided that by 4, you'd say $23 million, and they actually would have been pretty close to that. But they pulled a capital order into their third quarter. So they're a little -- they're going to be a little under that $23 million because they shipped an order a little bit earlier. It was scheduled for the fourth quarter. I think they would have come in pretty spot on, on the '23, but they're a little lighter than they would normally be. So that's some color on the top line.

And what was your -- what else? So I'll stick to -- you can see -- you saw for the third quarter, the $0.05. If we allocate the interest to that, that would be $0.04 for Babbini. And interestingly enough, with their weaker top line fourth quarter with interest allocated, they'll be dilutive $0.04 in the fourth quarter. So they'll be for the year breakeven but in the fourth quarter, dilutive $0.04 on our adjusted EPS.

For Clyde, we have them right now at being dilutive of $0.02 with the interest charge in there. Excluding the interest charge, they'd be accretive $0.3 -- so if I took then both of those, Babbini, Clyde, with interest allocated to them, they're actually a dilutive $0.06 in the fourth quarter for us.

Got it. Okay. Perfect. And then just last from me on kind of run rate SG&A, if we were to back out some of the onetime acquisition costs and whatnot, is a good kind of go-forward quarterly number in the $80 million range or even a little bit above that?

Well, I want to be -- we're working through the valuation. So we just have markers in currently. I think we'll run a little bit lower than that but you're not far off the mark there. But I think it will run just modestly lower than that. So maybe it's in the somewhere between the 78 to 80.

[Operator Instructions] Our next question coming from the line of Edward with Boston Partners.

I just had one here. When you talk about delayed bookings, what's the sort of quantum of official orders that you've received and that are just waiting for administrative to include relative to just conversations that are being had that are kind of still up in the air. Could you provide any color around that?

Yes. I mean we really -- because we don't kind of give bookings and they haven't officially been booked, I can't give you a number. I can just tell you that we're in discussions, the final discussions on some of these larger projects. And I said in some cases, we might have some of the paperwork but we're waiting for down payments where we can officially book it or we're waiting for a letter of credit. So I mean, there -- in some cases, they're very far along.

So we feel quite confident about them, but they just haven't met our bookings requirements so that we can actually book it and disclose it. We just -- as I said, we stay pretty disciplined on that and make sure that we check all the boxes before we actually call the bookings.

No worries. And then just one thing I might have missed it earlier. In terms of price and consumables performance, how much of this was driven by price versus volume this quarter?

I'd lean more towards the volume side of it.

Our next question coming from the line of Ross Sparenblek with William Blair.

A couple of questions. Can you help me pinpoint what the backlog was? I'm around like $260 million and also on the equipment side, I know there's some moving parts.

Yes, Ross. The -- we ended the third quarter with backlog at $273 million and capital in that is about 60%, so about $163 million.

Okay. And then is there any margin differential within that backlog versus the run rate for the year?

No. I think it's fairly consistent.

Okay. And then now that you've had some time with Clyde, what should we expect for that backlog contribution going into the fourth quarter? I know you said it was fairly strong, $92 million of revenue. I mean, where should that be shaking out as we think about modeling orders?

I have that here somewhere, Ross. I think it's a little over $30 million. So use $30 million as a marker.

Okay. And then is it all primarily -- it was not book and ship. There's about $25 million that's equipment but sales similar to orders for Clyde on a quarterly basis? Is that kind of the assumption?

Sorry, Ross, what was that? What's the -- I didn't catch...

When we include Clyde, are the orders going to be similar to what we should expect on the top line for revenue contribution, kind of a one-for-one. Everything goes through the order book?

Yes. Everything is going to go through the order book is a certainty. Yes. Everything will be through the order book. 75% of the business is parts and consumables. What I can't give you right now because we're acclimating ourselves the business is exactly that turn cycle.

Okay. And then just one last one on the margins. Can you give us a sense for Clyde, where the D&A, SG&A, R&D, gross margins all shifted out after you finish your accounting?

Well, I can talk to the margin profile. And one thing I'd say is broadly, it fits very well in the Industrial Processing segment. So what you see for metrics in Industrial Processing, this will fit really well, both on the gross margin and EBITDA margin front.

Okay. So nothing really to do there, pretty similar to the existing [ aftermarket. ]

Yes, it fits very nicely in that segment.

[Operator Instructions] Our next question coming from the line of Edward Odre with Boston Partners.

Just one more thing from me. Just regarding the Clyde acquisition, I wasn't able to see this in the release but how much cash do you acquire with that business?

We always do it -- we do all our things net of cash because we're just going to -- at the end of the day, the only cash that's going to be left is operating cash. I can do it off from the top of my head but it's -- to be quite honest, it's somewhat irrelevant because we'll sweep it and just pay down debt and just have operating cash there.

Thank you. And I'm showing no further questions at this time. I will now turn the call back over to Mr. Jeff Powell for any closing remarks.

Thanks, Olivia. Before we wrap up the call today, I just wanted to leave you with a few takeaways. The second half of 2025 is expected to show solid improvement compared to the first half across a wide range of metrics despite the turmoil in global trade policies and other societal challenges that we're currently facing. As we look ahead to the fourth quarter of 2025, we expect demand for capital equipment to improve and strong aftermarket parts order activity. We made solid progress this year in our efforts to drive operational improvements, which includes our 80/20 performance enhancement program and other initiatives to maximize value despite the continuing challenging macroeconomic environment in various regions of the world.

And lastly, we look forward to updating you next quarter on the integration of Clyde Industries and our other recent acquisitions. Thanks for joining today, and we wish you the best for the rest of the day.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.

Hello, and thank you for standing by. Welcome to the Kadant Acquisition of Clyde Industries Conference Call.

[Operator Instructions] I would now like to hand the conference over to Michael McKenney. You may begin.

Thank you, Towanda. Good morning, everyone, and welcome to Kadant's conference call to discuss its acquisition of Clyde Industries. With me on the call today is Jeff Powell, our President and Chief Executive Officer.

Before we begin, let me read our safe harbor statement. Various remarks that we may make today about Kadant's future plans and expectations, including the expected benefits of the acquisition of Clyde Industries, are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading Risk Factors in our annual report on Form 10-K for the fiscal year ended December 28, 2024, and subsequent filings with the Securities and Exchange Commission.

In addition, any forward-looking statements we make during this webcast represent our views and estimates only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or estimates change.

With that, I'll turn the call over to Jeff Powell, who will discuss the acquisition. Following Jeff's remarks, we will then have a Q&A session. Jeff?

Thanks, Mike. Hello, everyone. Thank you for joining us this morning to discuss the acquisition of Clyde Industries.

Clyde is a leading manufacturer of boiler efficiency and cleaning system technologies. They are based out of Atlanta. Like many of the Kadant companies, they are over 100 years old. They have major operations in addition to the U.S. and Brazil, Southeast Asia and Europe. They're a market leader in recovery boilers in the pulp and paper industry, but they also provide this technology to the general industry anywhere that you have a boiler operating where the residue and ash builds up and requires cleaning.

The revenue for the last fiscal year, which ended February 28, was approximately $92 million, and we paid approximately $175 million for the company.

Clyde's core product is a boiler cleaning technology. As I mentioned, boilers that are fired with fuel over time have residue that builds up ash, silt, hydrocarbon materials, and it needs to be cleaned to maintain the efficiency, the heat transfer efficiency of a boiler, but also the safe operations of a boiler. If you allow this to build up, not only do you reduce the energy efficiency, so you consume more fuel, but you also have the potential for fires and even explosions. And so it's a very core technology that is required when you're operating boilers.

Clyde specifically has leading technology called SMART Clean, which instead of just periodically on a time schedule cleaning actually has sensors that measure the buildup in a boiler and therefore, only go and clean the system when required. They also have technology that uses low-pressure steam, which is a much lower cost. And so the combination of the 2 technologies can generate energy savings in a given year for a large operating boiler of $2 million to $3 million in energy savings and equally important, can reduce CO2 emissions by up to a couple of hundred thousand tons. So this technology is, like I said, is state-of-the-art and really plays well into Kadant's overall sustainability and energy saving initiatives.

In addition to the sootblowers, we also manufacture electrostatic precipitators and other energy recovery technology that goes into general industrial applications. As you can see on this slide here, these sootblowers actually can be quite large. And a large boiler nowadays might have up to 200 of these in a particular installation. These are kind of hot corrosive environments, a lot of moving parts, and therefore, they generate a lot of aftermarket opportunities.

The industries they serve, really anywhere where there's boilers operating, but they really are particularly strong in the pulp and paper area where you use recovery boilers for the production of pulp, power generation as well as general industry. This picture here on general industry is actually, I think, a sugarcane operation in -- probably in South America, where they provide this technology.

We specifically like Clyde because it's an industry leader, has industry-leading technology. It has very strong financials. Approximately 75% of the revenue is aftermarket. They have a first-class management team and a very experienced management team with a very strong technical know-how. So they had all the attributes that we like, all the attributes that we think fit very well within the Kadant organization. So we're very, very pleased that they have joined our company, and we think it's a great opportunity for Kadant as well as for Clyde.

As many of you know, we operate a decentralized operating structure. And so they will continue to operate as a stand-alone business. They will have access to Kadant's global manufacturing footprint. They'll have access to Kadant's global sales force and service network and also all of the best practices that we employ within Kadant, things like 80/20, lean and other initiatives that we have found to be very valuable within the Kadant operating structure. So I think that they'll find as they get to know the organization that there are many opportunities for them to collaborate with our other divisions around the world.

With that, I will turn it over to Mike, who will discuss specific details of the transaction. Mike?

Thanks, Jeff. I'd like to provide some additional color on the financial metrics associated with this transaction.

The purchase price was approximately $175 million, subject to customary adjustments. For the fiscal year ended February 28, 2025, Clyde had approximately $92 million in revenue and $21.4 million of adjusted EBITDA, which translates to an EBITDA multiple of 8.2x. And factoring in some modest favorable tax attributes, the multiple is just below 8x. I would note that Clyde's revenue is 75% from parts and consumables, so a strong recurring revenue stream, and they're an asset-light business with low CapEx requirements.

We funded the acquisition primarily through borrowing under our revolving credit facility. We estimate that our leverage ratio, as defined in our credit agreement, will still be relatively low at approximately 1.5. And absent any changes from the Fed, we expect our borrowing rate to be approximately 5.4%. While we're still working on the valuation of intangibles that will be amortized for book purposes, our current estimates are that we will have a high level of noncash intangible amortization expense.

We estimate this in combination with the interest expense will make this transaction slightly dilutive in the fourth quarter of 2025 on a GAAP EPS basis. However, on an adjusted basis, we estimate it will be slightly accretive and free cash generation should be quite good. As always, we'll work hard to delever and drive down the interest cost.

I'm going to now turn the call over for questions. But before we start, I should mention that the Q&A session is specific to the Clyde transaction, as we are currently in the third quarter '25 closing process and cannot comment on the third quarter '25 results or our guidance for '25 until our upcoming earnings call near the end of October.

With that, we'd be happy to take your questions. Towanda, operator?

[Operator Instructions] Our first question comes from the line of Ross Sparenblek with William Blair.

It'd be great to get a sense of just how you guys source this deal and kind of impetus for the family making a decision to pass this along.

Yes. So they spun off from a European operation a few years ago. We actually looked at the opportunity back then and for various reasons, made the decision not to pursue it at that time. So they were purchased by a private equity and came to market again. And we've known the business. We like the business a lot even back then. And so when the opportunity came to look at again, we made the decision to pursue it and are very pleased that we were ultimately successful in being able to acquire the company.

Okay. And then can you just give us a sense of maybe what the growth profile has been for this company as well as maybe the margin profile in the last 5 years?

Yes. Ross, over the last 3 to 4 years, the CAGR has been about 7% to 8%.

Wow. Anything to call on like the specific drivers there, just broader adoption, maybe some R&D on the new tech?

Yes. I mean the -- what's happening around the world is you're seeing new, very large recovery boilers going in for pulp production, Southeast Asia, South America. And so -- and they're particularly strong in that market. So they've secured most of those orders. And so it's just the world is driving towards larger, more efficient operations with bigger and bigger systems, and they've been very successful in capturing the majority of that market share.

Our next question comes from the line of Gary Prestopino with Barrington.

Series of questions here. First of all, as I look on Slide 9, the main products here are these sootblowers, correct? Is that -- and then airport cleaners, those would be the main products that you guys are -- this Clyde company produces?

Yes.

Okay. So the question I would have is, what is the aftermarket part component of these things? If you put a sootblower, they have 200 on a machine. Is the useful life of these things 3 months and you have to replace the whole sootblower? Or is there something internally in the sootblower that needs to be replaced?

Yes. So there are -- as I mentioned, these things move in and out and rotate around as they're conveying the steam. So there's a lot of moving parts. So things do wear out. So there are many, many parts. There's the drive mechanisms. There's the actual lance that moves in and out of the boiler. There are several parts that have to be replaced over time. They can -- there will be times where they'll replace the entire structure, the canopy and everything. But more often, they're replacing particular parts as they wear out during the operations.

Okay. So that's what I'm getting at.

Yes.

Okay. So really, this is a great razor blade business in a sense, once you're on the system, you're going to get the aftermarket sales, right?

Yes. Yes. For the most part, that's accurate. Yes.

Okay. I noticed it looks like it's margin accretive on an adjusted EBITDA basis. And then you cited a CAGR of 70% revenue over a 3- to 4-year basis. Is that...

7% to 8% growth over the...

7% to 8%. Okay. I didn't -- I must have cut out there. 7% to 8%. I was wondering, wow, that's huge growth.

Okay.

Okay. Are most of the products that are manufactured, are they manufactured in the U.S. and then shipped across the world? Or how -- what's their manufacturing footprint look like?

So they have a big footprint in Atlanta, and they have a big footprint in Brazil. And then they have smaller kind of weld shops in other parts around the world, but the primary manufacturing footprint for the majority of the products is the U.S. and Brazil.

Okay. And then lastly, who is the main competitor in this business for you?

There's a company called Diamond. That's the main competitor. And they have -- there's maybe some smaller regional very small players, but the other big player is Diamond.

Our next question comes from the line of Kurt Yinger with D.A. Davidson.

Just 2 quick ones. I guess, Jeff, would you mind providing just kind of end market split and maybe geographic split of sales? I mean it sounds like it's very concentrated in pulp and paper, but any color there would be great.

Sure. On the geo revenue, 55% North America, rest of world because of their footprint in Brazil is 20%; Asia, 18%; and Europe, 7%. And then on the end markets, approximately 60% pulp and paper. On power gen, the revenues, it's in the low 20s. And then on the remainder industrial is in the high teens.

Got it. Okay. Perfect. And then not to get too far ahead of ourselves, but you kind of mentioned some of these large recovery boiler installations of late. I guess, how do you think about kind of the cyclicality of that, how it might impact next couple of years relative to at least the growth you cited in the 7% to 8% range?

So first of all, as we mentioned, 75% of the business is aftermarket. And so that obviously doesn't have near the cyclicality that the capital would. But there have been a lot of large new systems brought online that -- and so they'll start to generate parts going forward here for the next few years. And so that's where the bulk of the growth, we think, is going to come from is all of the aftermarket associated with a lot of these large installations that have come online in the last few years and are still in the process of coming online.

Our next question comes from the line of Walter Liptak with Seaport Research.

Congratulations. I wanted to ask just a follow on to that last one. And just -- so this is a similar business to what you guys already do with capital projects versus aftermarket, which is great. But with that 7% to 8% CAGR that you've seen in the last 3 or 4 years, are we going -- are we kind of coming out of a stronger capital period going into a weaker capital period? Or how do you see the capital projects doing? Like what's the funnel looking like? What's their orders and backlog looking like for capital projects?

Well, we certainly wouldn't model 7% to 8% going forward. As you know, we're pretty conservative when it comes to our planning and our modeling. And so I would say we tend to kind of model around GDP plus or minus a little bit. So obviously, it will be fantastic if they continue to grow in the high single digits. But certainly, our planning has been growing more in the lower single digits.

Okay. Great. And that's because of the mix of maybe more aftermarket, less capital than what you've seen.

Yes. There's a lot of big large projects that have come online that they've won. But as you know, those things tend to have a cyclicality to them. So we wouldn't expect that kind of growth over the next 5 years, although it could happen, but it's certainly nothing that we're budgeting for or planning for at this time.

Okay. Great. Okay. It sounds like you've got a great team with this acquisition. And so I wondered, as you think about this as more of a stand-alone business with access to the Kadant global networks, are there any cost synergies or sales synergies that you're thinking about for the future growth or profits?

Well, that's something that we'll look at. As you know, Walt, one of the things we never do is to model synergies into our acquisition models. And so our returns and our expectations are always unsynergized. We do know we have some synergies, and they tend to vary quite a bit from acquisition to acquisition. And so I think that's something to still be explored. But I will say that we do have, as you know, a manufacturing footprint all around the world. So they will have available to them the ability to manufacture some parts of their systems if they choose to in other places around the world.

As far as sales synergies, probably less so there because, as you know, Kadant is more on the recycled side and not on the virgin pulp side of the business. But I will say that we just bought, as you know, Babbini a couple of months ago, and they're very strong in the sugar beet market. And so there might be some opportunities there. These guys are starting to penetrate the sugarcane market with their technology. And it's still yet to be seen where there might be some opportunities on the sugar beet side, where Babbini pretty much is involved in a majority of the sugar beet operations around the world. So there might be some synergies there for new market opportunities. But I would say it's a little too early for us to fully understand what they may be.

Okay. Great. Okay. And then maybe the last one for me is 80/20 is clearly like a core value and strength for Kadant. How do you approach acquisitions now with 80/20? Do you introduce them to them early? Or do you wait until they're part of the family for a while, the group for a while and then introduce them to 80/20?

So traditionally, we have a fairly light touch starting out. We like them to get settled and there are some integration, even though we run a decentralized model, certainly on the financial side, as you know, there's a lot of integration because they got to report quarterly. So we typically like to let the dust settle and for them to get used to the new procedures and comfortable with that before we start to look at it. But we will introduce it to them and they can kind of guide us on their interest in it and what they think the timing might be for that. So some of our businesses want to get involved in that sooner and some want to start it after they've had a period of time to fully integrate in.

So that's a discussion we'll have with them. And together with them, we'll make a decision on when the timing might be appropriate. But we do believe, as it has been with every other company within Kadant, we do believe there's good opportunities there.

We have a follow-up question from the line of Ross Sparenblek with William Blair.

Can you hear me?

Yes, we can hear you.

Okay. Perfect. Yes. On the parts consumables and just thinking about the order cadence, is that primarily book and ship? Or is there a lag in the backlog there, similar to like Flow Control?

They've got -- some of their products are a little more standardized. So -- and one of the things they specialize in, I think, is quick turnarounds. That's one of the ways they maintain market share and go after market share is on delivery and quick turnaround. So they maintain a decent inventory of a lot of the standard products and really try to get -- service the customer and get them out to them pretty quickly.

Okay. Is there a backlog associated with this we should be aware of?

Yes. They currently have a fairly decent backlog, Ross, in terms of -- on the revenue recognition front. We think this will be -- we'll recognize this upon shipment. It's not going to be over time. So -- but the -- when they do these projects, where they're may be supplying 100 or 200 units, those will -- they'll be shipping those as they manufacture them.

Okay. Just you conceptualize a project of that size, is that like a 3-year project?

No, no, I don't think so. I think they ship -- they can assemble them, build them and get them out much sooner than that.

Okay. And then just on the footprint, I mean it is somewhat larger than what you guys have historically acquired. SG&A, is that accretive or dilutive to the overall company?

On an overall basis, I think it will be accretive, but it's quite modest. And Ross, I'd say one thing that we're still working on is the intangibles. So a component here is contingent on where the valuations land.

Our next question is a follow-up from the line of Gary Prestopino with Barrington.

Yes. Mike, just a quick question. I kind of calculate the adjusted EBITDA margin from the numbers you gave us at about 23%. Is there any reason why that would not hold going into 2026 just for modeling purposes?

Yes. Nothing comes to mind, Gary, that should change that particular metric in the short run.

Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Jeffrey Powell for closing remarks.

Again, I want to thank everybody for joining us today. As you can see, we're very excited. We think this is a great addition to the Kadant family. We're very excited that they're joining us, and we look forward to reporting on their progress going forward. Thank you.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.

Good day, and thank you for standing by. Welcome to the Second Quarter 2025 Kadant Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Michael McKenney, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, Daniel. Good morning, everyone, and welcome to Kadant's Second Quarter 2025 Earnings Call. With me on the call today is Jeff Powell, our President and Chief Executive Officer.

Before we begin, let me read our safe harbor statement. Various remarks that we may make today about Kadant future plans and expectations, financial and operating results and prospects are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading Risk Factors in our annual report on Form 10-K for the fiscal year ended December 28, 2024, and subsequent filings with the Securities and Exchange Commission.

In addition, any forward-looking statements we make during this webcast represent our views and estimates only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or estimates change. During this webcast, we refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our second quarter earnings press release and the slides presented on the webcast and discussed in the conference call, which are available in the Investors section of our website at kadant.com. Finally, I want to note that when we refer to GAAP earnings per share, or EPS and adjusted EPS on this call, we are referring to each of these measures as calculated on a diluted basis.

With that, I'll turn the call over to Jeff Powell, who will give you an update on Kadant's business and future prospects. Following Jeff's remarks, I'll give an overview of our financial results for the quarter, and we will then have a Q&A session. Jeff?

Thanks, Mike. Hello, everyone. Thank you for joining us this morning to review our second quarter results and discuss our business outlook for the second half of 2025. I'll begin by reviewing our operational highlights. I'm pleased to report that we had solid demand for aftermarket parts and a healthy increase in capital equipment orders during the second quarter.

Overall market demand, particularly in North America, was near a historical high in the second quarter across all our operating segments. Our commercial teams did an excellent job at winning new business in a challenging environment. This performance against the backdrop of continued trade policy uncertainty and global trade tension is noteworthy. And I want to congratulate our management teams around the globe on their strong performance. Our operations continue to focus on meeting our customers' needs and implementing process improvements to increase productivity. As we will discuss this morning, our strong gross margin performance in the quarter as a result of these efforts. Turning next to Slide 6.

I'd like to review our Q2 financial performance. Bookings in the second quarter increased 7% to $269 million, led by strong capital performance, [ stable ] demand for aftermarket parts. The capital project bookings were particularly encouraging to see as economic environment remains at a high level of uncertainty. Revenue decreased 7% compared to the record revenue achieved in the second quarter of 2024. This decline was largely the result of softer capital orders in the back half of 2024, which led to fewer capital shipments in the first half of this year. based on our high level of project activity, we expect sequential improvements in the coming quarters.

Adjusted EBITDA was $52 million, down 15% from the then record in the prior year period. Our adjusted EPS was $2.31, down 18% compared to the second quarter of 2024. We have a growing backlog and expect strong bookings in the second half of Capital project activity remains good, but I want to note that the timing of these orders is less certain. This uncertainty is amplified by evolving U.S. trade policies and the ever-changing tariff environment. I'll provide more details on that when I review our operating segments.

I'll begin with our Flow Control segment. As you can see on Slide 7, our Flow Control segment had solid bookings in the second quarter of 2025. We benefited from strong aftermarket demand while capital project activity was softer compared to the prior year period. Revenue in the second quarter increased 4% to $96 million even as weaker manufacturing activity in Europe and China dampened our results. Our aftermarket revenue remained strong in the second quarter and made up 75% of total revenue. Solid operating performance led to an adjusted EBITDA margin of 28.9%.

As we look ahead to the second half of 2025, we expect demand to improve as the year progresses. That said, the frequently changing global trade discussions and tariff targets may impact capital investment activity. Before leaving this segment, I wanted to share that the integration of Dynamic Selling Technologies, which was acquired in June of 2024 is now complete, and we are pleased to have this leading producer of fluid rotary unions and related Flow Control products fully integrated into Kadant. The diversity they bring to Kadant in terms of new markets and access to new customer segments, greatly expands our opportunities as we preserve growth within our Flow Control operating segment.

In our Industrial Processing segment, New order activity was up 9% compared to the same period last year to $105 million. This booking performance was led by a significant increase in capital orders for our wood processing equipment from our -- from 3 North American producers of engineered wood products. Revenue decreased 16% compared to the record revenue achieved in the second quarter of 2024. This decline was due entirely to weaker capital shipments as our aftermarket parts business was up 7% compared to the second quarter of last year. Adjusted EBITDA and adjusted EBITDA margin declined due to lower revenue volume and the lack of operating leverage. Looking ahead to the second half of 2025, we expect capital project activity to strengthen in this segment. particularly within our fiber processing product line, where a number of large capital projects are in the pipeline.

Turning now to our Material Handling segment. We had excellent bookings performance in the second quarter of $71 million. The 16% increase over the prior year period was led by our bulk material handling product line, and we had solid growth from our Bear product line. As was the case with our other 2 operating segments, weaker capital shipments were primarily contributed to a 6% decline in revenue in the second quarter. Business activity remained high with a number of larger capital projects under discussion, although the timing can be uncertain as to when these projects are executed.

As I conclude my prepared remarks, I want to emphasize how pleased I am with our operations teams as they continue to execute the strategic initiatives to create and capture more value. Looking ahead to the second half of 2025, we believe industrial demand will strengthen relative to the first half of the year, especially once the global trade issues get worked out. Our backlog is improving, and we are well positioned to capitalize on new opportunities that may emerge as the year unfolds due to our ability to generate strong cash flows. And with that said, I'm pleased to announce that shortly after the close of the quarter, we acquired Babini, a small company in Italy that manufactures dewatering equipment for the food and paper industry. We were a licensee for the technology for our upcycling business, and we are excited to have them join the Kadant family.

I'll now turn the call back over to Mike for a review of our financial performance in Q2 and our guidance outlook for the remainder of the year. Mike?

Thank you, Jeff. I'll start with some key financial metrics from our second quarter. Our second quarter revenue was $255.3 million included record aftermarket parts revenue of $181.8 million. Gross margin was 45.9% in the second quarter '25, up 150 basis points compared to 44.4% in the second quarter '24. Despite the impact from incremental tariffs, our gross margin was close to 46% for the second quarter in a row. This increase is primarily associated with a higher overall percentage of aftermarket parts, which represented 71% in the second quarter of '25 compared to 63% in the prior year. SG&A expenses as a percentage of revenue increased to 29% in the second quarter of '25 compared to 25.5% in the prior year period.

SG&A expenses increased $3.9 million or 6% to $73.9 million in the second quarter of '25 compared to $70 million in the second quarter of '24. The weakening of the U.S. dollar resulted in a $1.9 million increase in SG&A expenses, including a $1.2 million impact resulting from the change from foreign currency gains in the prior period to losses in the current period and a.7 million unfavorable effect of foreign currency translation. In addition, we had incremental SG&A expense of $1.8 million related to our acquisitions. Our GAAP EPS decreased 17% to $2.22 in the second quarter, and our adjusted EPS decreased 18% to $2.31.

The second quarter of '25 adjusted EPS exceeded the high end of our guidance range by $0.31 due to higher revenue and better gross margin than forecast. The higher revenue in the second quarter was driven by our record aftermarket part revenue. All of our segments had higher-than-expected gross margin due to the mix of aftermarket parts in the period. In addition to the revenue beat and gross margin performance, we had strong cash flow performance in the quarter, which I'll discuss further in further detail on the next slide. Adjusted EBITDA decreased 15% to $52.4 million compared to $61.8 million in the second quarter of '24 due to lower capital revenue at our Industrial Processing segment, which led to reduced EBITDA performance.

As a percentage of revenue, adjusted EBITDA was 20.5% compared to 22.5% in the second quarter of '24. As outlined in the chart, our cash flow increased significantly compared to both the first quarter of '25 and the prior year period. Operating cash flow increased 44% to $40.5 million in the second quarter of '25 compared to $28.1 million in the second quarter of '24. Free cash flow increased 58% to $36.5 million in the second quarter '25 compared to $23.1 million in the second quarter '24. This strong performance was driven in part by an increase in customer deposits associated with capital bookings in the quarter. Nonoperating uses of cash in the second quarter included $34 million of repayments on our debt, $4 million for capital expenditures and $4 million for dividends on our common stock.

Let me turn next to our EPS results for the quarter. Our adjusted EPS decreased $0.50 from $2.81 in the second quarter of '24 to $2.31 in the second quarter '25. This included decreases of $0.56 due to lower revenue, $0.26 from higher operating expenses, $0.02 due to higher noncontrolling interest expense and $0.01 due to higher weighted average shares outstanding. These decreases were partially offset by increases of $0.21 due to a higher gross margin percentage, $0.12 due to lower net interest expense and $0.02 from a lower effective tax rate. There was no foreign currency translation effect on net income in the second quarter as the weakening of the U.S. dollar caused foreign currency exchange rates to more closely align with the prior period exchange rates.

Looking at our liquidity metrics on Slide 15. Our cash conversion days, which we calculate by taking days in receivables plus days in inventory subtracting days in accounts payable, decreased to [ 128 ] at the end of the second quarter '25 compared to [ 130 ] at the end of the first quarter '25. Working capital as a percentage of revenue was 17.7% and in the second quarter of '25 compared to 18% in the second quarter '24. We continue to remain focused on paying down debt as efficiently as possible. Our net debt, that is debt less cash was $151.7 million in the second quarter, decreasing $31 million sequentially and over $100 million compared to the second quarter of '24. Our leverage ratio, calculated in accordance with our credit agreement decreased to [ 0.86 ] at the end of the second quarter '25 compared to [ 0.95 ] at the end of the second quarter '25. At the end of the second quarter, '25, we had $162 million of [indiscernible] available under our revolving credit facility and an additional $200 million of uncommitted bond capacity.

Now I'll review our guidance for '25. For the second quarter in a row, our book-to-bill ratio was over [ 1 ] and the strong bookings in the second quarter led to an ending backlog of $299 million, up 16% over the end of '24. The majority of the large capital bookings related to projects, which we recognize as revenue for [ '26 ]. While there has been some clarity on country-specific tariffs, customers with large capital projects remain cautious as they evaluate how the tariffs will be applied and whether certain tariff costs can be mitigated. The estimated impact from incremental tariffs remains largely unchanged from our prior forecast. The most significant tariff impact to Cadence relates to tariffs on the imports of steel which encouraged domestic suppliers to increase their prices and on products sourced from our facilities in China.

The Trump administration eliminated prior exemptions and applied a uniform 25% tariff on all U.S. steel imports in February and increased this tariff to 50% on June 4. We believe we'll be able to mitigate a large portion of the impact of the steel price increase by working with our suppliers and cautioning with our customers. There was a reduction to the recently announced China tariffs from 145% to 30% effective in the middle of May. We will continue to pursue opportunities to reduce the impact of these costs by finding alternative suppliers through cost sharing and in some cases, making investments to change our manufacturing capabilities and manufacturing components at different can facilities.

While there has been some clarification on certain tariffs, newly announced tariffs continue to create unease and resulting uncertainty in the market, which has impacted our customers' decision-making process for our capital comment. We have a very healthy level of quote activity for our capital equipment and we have seen little disruption to capital order activity related to maintenance and mission-critical equipment. However, if customers have flexibility with the timing for their equipment purchases, some are delaying placing the order until there is more certainty and stability in the markets they serve.

This environment has made it extremely difficult for our operations to forecast the timing of capital orders requiring significant judgment on order timing, revenue recognition and future material costs. We will continue to monitor these tariff changes and we'll provide further updates as the year progresses and there is more clarity with new trade policies. We are maintaining our full year 25 guidance. We continue to expect revenue of $1.20 billion to $1.40 billion in '25 and adjusted EPS of $9.05 to $9.25, which excludes $0.16 of acquisition-related costs.

Looking at our quarterly revenue and EPS performance in '25, we expect that the second half of the year will be stronger than the first half. Our revenue guidance for the third quarter of '25 is $256 million to $263 million and our adjusted EPS guidance for the third quarter is $2.13 to $2.23, which excludes $0.01 of acquisition-related costs. We now anticipate gross margins for '25 will be 44.8% to 45.3%, as a percentage of revenue, we now anticipate SG&A will be approximately 27.8% to 28.3%. For '25, we now anticipate slightly lower net interest expense of approximately $11.5 million to $12 million, and we continue to expect our recurring tax rate will be approximately 26% to 27%. That concludes my review of the financials.

And I will now turn the call back over to the operator for our Q&A session. Daniel?

[Operator Instructions] Our first question comes from Ross Sparenblack with William Blair.

Just touching on the demand environment. Forgive me, but I believe you said you guys are expecting sequential order improvement from here?

Yes. Yes. That's -- we're really talking first half versus back half, but we are looking at both a strong third and fourth quarter.

Okay. So we think we have closer to $90 million of equipment orders in the second quarter. Is that kind of the new run rate, something we did have a benefit from the OSB of $18 million that was announced in May. And it feels like run rate was roughly flat just from a demand perspective. So when you talk to your customers, you get a sense that maybe the tariff uncertainties embedding and just the natural maintenance needs are finally catching up.

I would say that it's as we talked earlier, industrial processing was the segment that we thought we'd have the strongest bookings growth in. And now we've seen some of that in wood processing. And we think that in the back half, it won't be at the second quarter level, but it will still be good on the capital side. But really, where we anticipate strong activity is in the fiber processing product line. There are a number of large projects actually throughout the world that we have our eyes on, and we hope that the customers will let those orders in the third and fourth quarter.

Okay. And then just on parts and consumables, the recent strength there. Do you believe that's been restocking. Is that still just the elevated age of the installed base? Or is this kind of $180 million revenue sustainable on a quarterly basis going forward?

Yes. We think that it's really that it's due to the age of the installed base and that we're anticipating, although I'd say maybe a modest movement down because of the summer months here in the third quarter, but very modest, but kind of continuing as we've seen.

Okay. So capital equipment orders start to pick up and you guys deliver, what's the sensitivity we should expect the parts of [indiscernible] down mid-single digits as the installed base catches up?

I mean as you're talking about when the equipment gets installed and what kind of impact that will have. Now you're out till '26.

Also, I would say that typically happens as the overall operating rates start to increase as the economy improves. So we wouldn't expect to see any noticeable drop off in the aftermarket because the overall operating rates will increase. As they get more confident, start to make the investments in the new equipment and bring that online, it's normally because the economic conditions have improved, and so we would expect operating rates to be up.

Our next question comes from Gary Prestopino with Barrington.

I want to get some numbers here. Mike, do you have about the current assets and current liabilities were at quarter end?

Sure.

He's pulling out his trusted notebook here, so just give him a second.

As an absolute current assets were approximately $475 million, and current liabilities were approximately $200 million.

Okay. And then could we -- could I just get some more numbers surrounding the parts and consumables. It was in Flow Control, it was 75% this quarter versus what was it last year at this time?

72%. And I'll just go through them, Gary. So full control, 75% this quarter, 72% last year, Industrial Processing, 76% this quarter, 59% last year. And in Material Handling, 58% this quarter, 57% last year. So then overall, as we mentioned, 71% this year, this quarter and 63% in the comparing quarter.

Should we -- given the fact that a lot more of the orders now are capital equipment and you're going to start seeing that come into the mix when in 2026, really? Or is it starting in the back half of the year?

Well, we're anticipating it to come for capital revenue to pick up in the back half of the year. And as I just was mentioning to Ross, that is really what we're focused on there is in the Industrial Processing segment in fiber processing. There are some meaningful projects both North America, Europe and Asia. So -- and if you recall, Gary, in fiber processing for those capital projects. Those are largely recognized on an overtime basis. So once we get the orders in, we will start to recognize revenue. So we really need to see those in the back half unlike wood processing, where I made a note in my call that those orders that we got in the second quarter in wood processing that will be revenue in '26 because that is going to be a point in time essentially when it shifts versus over time for the fiber processing.

I guess -- yes, okay, that's helpful. I just kind of thinking out loud here, would because you're getting more capital equipment into the mix, would you expect to see that percentage of aftermarket parts as part percentage of revenue jumped down sequentially?

Yes, it will moderate -- and there also should be an impact on the gross margins. It will moderate gross margins also. So we wouldn't be running a 46% gross margins. I would kind of anticipate those to drop down into the 44% is actually -- if the mix comes in as anticipated.

And can you maybe just -- I don't want to [indiscernible] the call here, but just can you maybe just talk about some of the bookings that you're seeing? Is it -- what percentage of it is replacement capital, what percentage of it is new capital to you in terms of new business?

I would say which is often the case that it's always more heavily weighted towards replacement than it is new greenfields. Certainly with the slowdown in Asia in particular, which is where a lot of the new greenfields over the last many years have taken place. But that being said, we're still getting greenfield projects in Eastern Europe, the Middle East and Asia outside some outside of China. And then there are some -- there are conversions that are taking place where people are converting maybe modernizing a plant and putting our technology in replacing a competitor's technology with ours. So we benefited from that a little bit in the last quarter. I would say the 1 area in the capital that is as people have heard us say over the last many years, really for the last 10 to 12 years, that's kind of overperformed as the engineering wood side.

Engineering wood side continues to perform well. They're just finding newer and newer opportunities for the engineered products. And so that's kind of the fastest-growing sector of the wood business. It happens to be one that we're very strong in. So we've really benefited over the years from that, the orders we mentioned that we received this quarter, those big orders were all in the engineered wood side. So that's one that probably has probably some of the best growth opportunities has and will going forward.

Okay. And just 1 last question in terms of all this new capital equipment, be it replacement or a new customer. Is there anything inherent with the newer equipment that would cause any kind of a lessening of the need of the aftermarket business from running these -- this equipment in terms of the part [indiscernible]

It depends a little bit on the equipment. If you think on the engineered wood side, as they put this new equipment in, almost [indiscernible] using our new knife design, our new Knife technology, which really increases the which really increases the aftermarket component of that. On some of the others, we're constantly trying to innovate our products to give the customer a better performance, in some cases, longer life. Now there's a kind of total cost of ownership calculation that goes in that. But generally speaking, we would not expect to see any significant drop-off in the parts consumables relative to the new technology. while we're continually trying to improve the performance of it, these are very harsh rugged environments that our equipment operates in. And so you're not going to see a significant change in the life of that equipment even though we constantly try to [indiscernible]

[Operator Instructions] Our next question comes from Adi Madan with D.A. Davidson.

Adi on for Kurt Yinger today, and that's a couple of questions from me. Going off the wood processing question. So obviously, very encouraging news on that front. But outside of good processing, how would you characterize the underlying demand for capital equipment bookings? And how are the conversations with customers going? Are you seeing customers more confident in placing orders?

Well, so we've -- going into this year kind of towards the end of last year and into the beginning of this year, there were a lot of discussions and we had a lot of projects on the board. And what's happened is they -- as we said last quarter, many of them were delayed or paused because of all the craziness associated with -- primarily with the tariffs. The tariffs really created a tremendous amount of uncertainty globally. And so a lot of people said we're just going to sit on the sidelines here until this stuff clears up. Now this is always the case with these things, there's a winner and a loser. So we have some customers that will be winners associated with this these tariffs, particularly our U.S. customers that won't be subject to the same pricing pressures from foreign competition. So some of our markets, some of our customers will benefit from these and others will be impacted by them. But I think what's happened is that there has been essentially kind of a capital equipment recession over the last 2 years.

Last -- the prior 8 quarters, we saw a pickup this quarter, which was the kind of the beginning of the third year of that. So we were pleased to see that. So the equipment is getting quite old and history tells us that they can't they can't delay that forever. The equipment just starts to really be unreliable to them. So there's a lot of project activity out there. I think they're just waiting for these uncertainties to clear up and to get a little more visibility. But there's a fair amount of demand in many of the markets we're in are forecasted to be quite robust over the next couple of -- over the next few years, '26 and '27, in particular, and so I think people just really want to see that we put -- whatever these trade negotiations are we putting behind us, and everybody says, okay, this is what I have to work with now, and we go forward under those conditions.

Okay. Got it. Yes, that makes sense. So going off that, so are you seeing big pockets of strength or weakening demand across the portfolio, whether by geographic or by any customer sets that you can give us any color on.

Well, I would say, as I mentioned a few minutes ago, we continue to see strength in certain parts of our Wood Group, in particular, the Engineered Wood Group continues to perform well. And if you talk to an industry executives out there, they are quite optimistic about the next many years, what the engineered wood business is going to look like. They just continue to find more and more applications for it. The -- probably our slowest market is China. The other parts of Asia are doing a little better, but China is quite slow right now, and there's a fair amount of I would say, economic challenges that they're dealing with right now there. North America is the strongest. And then, of course, Europe is kind of sitting in between -- it will be interesting to see what happens in Europe because they've agreed to increase their deficit spending. They've agreed to increase their military spending by quite a bit. and that should spur a lot of the industrial base over there, but we're in the very early stages of that. So it's too early to know what kind of impact that will have on the market.

Got it. That makes sense. And in the context of the Bibiani and GPS acquisition, can you give us an update on the current full year guide assumptions versus the prior as it relates to like tariff impact, FX, organic growth and acquisition contributions to sales?

Just specific to -- you're talking just Babini, Adi?

Babini and GPS, yes.

Yes. So the Babini's revenue in '24 was about USD 19 million. So it's small. It's a smaller transaction. In terms of -- we completed actually early here in the third quarter. So I actually didn't bake it into the guidance. It will have a small impact on the top line. And I would anticipate out of the gate here that it will be dilutive, will probably be dilutive a few cents in the third quarter and maybe also in the fourth.

This acquisition was very strategic for us in that we've used -- we've incorporated our technology into our upcycling business which is processing the waste and rejects from industrial processes, in particular, on the paper side. And so they have probably the world's best technology for dewatering. And so we really -- and we've had great success. We licensed a few years ago, and we've had great success with that technology. And so when the family decided they wanted to -- the owner passed away and his children decided they wanted to divest of all our businesses, including Babini, it really made a lot of sense for us to bring that into the company because it's a key technology, and we actually think it has broader -- they principally focused on the food side. That's where they started. And -- but we think there are opportunities in other dewatering areas. So it was a -- it's a very small acquisition, but we think strategically, it will be a nice addition.

Got it. That makes sense. And last question from me. How would you characterize your margin profile in the backlog and current bookings relative to the gross margin we've seen over the last few quarters?

Yes. Adi, I think what's most important there is -- in the first 2 quarters, we had very strong parts and consumable mix, which helped drive the gross margin to the 46%. In the back half of the year, we're expecting the mix to moderate. And I would say the parts and consumables probably be, say, mid-60s, [ 66, 67 ]. So we'll have more capital in the back half of the year, and that will weigh on the gross margins. And as I was mentioning, to Gary, I'd say I'm looking at kind of in the 44s in the back half of the year on margins with the capital mix we're anticipating.

Our next question comes from Ross Sperenbleck with William Blair.

Just a couple of follow-ups if we have a second here. You kind of ran through some of in parts on tariffs. Can you just help us think about that in the framework of your prior guidance of around $0.35 as of the first quarter?

Yes. It's -- Ross, we really -- amazingly, frankly, from the standpoint of when we are doing that guidance. the guidance is essentially it's the same. We're looking at kind of that $5 million to $6 million, $0.32 to $0.39. So we're really -- I was -- frankly, I was quite amazed when we rolled it up that the folks did such a good job at pegging where to land.

Okay. And that's just aluminum offsetting lower China rates? Presumably lower China rates?

Yes. I mean, the rates have come down a little bit in China, but you've got -- obviously, now you heard [indiscernible] talk about 15% up for all of Europe. We had the steel tariffs double. And so we've had puts and takes here. But unfortunately, when you add it all up, it hasn't changed much.

Okay. And then just SG&A, I mean, it looks like it's taken a little ahead of the informal guidance for 2025. I know we have M&A coming in there, too. So can you maybe just give us a sense of where that should shake out? Is that closer to 28% of sales now?

I think in the guidance range I gave were -- I said that we'll come in at 27.8% to 28.3%. So yes, 28% is probably a good marker there, Ross.

Perfect. And then just any sense on the P&C mix of the acquisitions Sorry, what was that? What the parting subs mix, I mean, last year, you guys had some pretty phenomenal deals that were highly accretive. It seems like that's been the focus just wondering.

This one is really going to be more towards the capital side. Of course, when we -- now that we have it, we'll work hard to build that parts and consumables business.

Our next question comes from Walter Liptak with Seaport Research.

I wanted to ask -- you had a nice report for this quarter, and it was above your own guidance. And I think I know that was -- why that happened, but I wonder if you could talk about what well this quarter that put you above guidance.

Yes. The -- really, the primary driver was the continued strength in the parts and consumables business and it actually beat our forecast. So the top line beat was driven by parts and consumables. And of course, that drove a strong mix towards parts and consumables, which drove a strong gross margin performance. So that at the end of the day, that was really what drove that EPS be.

Okay. And is it -- was it a market-related thing? Or is this your people out there to go get more parts and sales market share? What do you attribute it to?

Yes. I mean, as you know, that's a key focus of ours. So we're -- every day, our guys get up and their primary job is [indiscernible] and chase that aftermarket. So we're constantly trying to improve that. But I would say also that as we said last quarter, the aftermarket is really kind of overperforming the operating rates out there. relative to where you would expect them to be. And we think that's the result of not making investments in equipment for the last 2-plus years. It's just like you drive it on automobile. You drive a 2-year asset used of life, you've got to put a lot more parts to keep it running. And so I think it's a combination of both. Our guys out there working hard trying to capture every dollar they can find and having some success in doing that. But also it's just that there's more to chase out there because the equipment that's running is really getting hold. And that's why we think there's going to be a capital buying cycle that has to we had a good start this quarter, but we think there should be a pretty lengthened capital buying cycle, whether it continues this year, trips into next year. they're going to have to start making investments because they haven't for a few years now.

Okay. Got it. Okay. That makes sense. When you're thinking about the third quarter and that parts mix coming down from where it was this quarter, I think that makes sense just because of the maybe more capital projects shipping. But did you factor in, in the third quarter like a deceleration in part sales?

It was very -- it's very modest, well, and it's really attributed to summer...

Summer. People take vacations. They don't buy it.

It's very modest.

Particularly in Europe, they take those extended summer vacations. So there's nobody there to place orders.

[Operator Instructions] Our next question comes from Adi Madan with D.A. Davidson.

Just wanted to follow up on the contribution you're expecting from GPS acquisition as well for 2025 like you broke out for Babini. Any color on that?

Yes. So really, when we say Babini, we're kind of talking about both of those. GPS is a small manufacturer of gearboxes that they primarily supply to Babini they do sell to the outside world, but they're a principal customer is supplying to Babini. So when we talk about the combination we just call it Babini.

I'm showing no further questions at this time. I would now like to turn it back to Jeff Powell for closing remarks.

Thank you, Daniel. So before wrapping up the call today, I just want to leave you, as I always do, with a few takeaways. Despite the weaker economies in certain areas of the world and the global trade uncertainties Second quarter was strong in terms of capital order activity and relatively stable with respect to our aftermarket demand. Solid execution by our operations teams led to excellent gross margin performance, and our commercial teams were very successful in winning key projects during the quarter. We have strong market positions and expect strengthening demand as the second half of the year and project activity gains momentum. And with that, we want to thank you for joining us today, and we look forward to updating you next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.