Industrial equipment manufacturer Kadant (NYSE: KAI) announced better-than-expected revenue in Q2 CY2025, but sales fell by 7.1% year on year to $255.3 million. Revenue guidance for the full year exceeded analysts’ estimates, but next quarter’s guidance of $259.5 million was less impressive, coming in 4.2% below expectations. Its non-GAAP profit of $2.31 per share was 18.9% above analysts’ consensus estimates.

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StockStory’s Take

Kadant’s second quarter results were marked by solid demand for aftermarket parts and a notable increase in capital equipment orders, despite a year-over-year revenue decline. Management emphasized that the backlog and bookings benefited from resilient demand in North America and continued strength in aftermarket sales. CEO Jeffrey Powell credited the company’s performance to “strong execution by our operations teams” and highlighted that the revenue mix, with aftermarket sales making up 71%, drove gross margin expansion even as trade policy uncertainty persisted.

Looking ahead, Kadant expects industrial demand to improve in the second half of the year, supported by a growing project backlog and anticipated sequential increases in capital project activity. Management acknowledged ongoing challenges from global tariffs and trade policy shifts, with CFO Michael McKenney stating, “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.” The company is focused on mitigating tariff impacts and maintaining gross margins by managing supplier relationships and adjusting its manufacturing footprint.

Key Insights from Management’s Remarks

Management attributed the quarter’s results to outperformance in aftermarket parts, robust capital bookings, and continued productivity improvements, while also noting the challenges posed by global trade policy shifts and evolving tariffs.

• Aftermarket parts drive margin: Kadant’s record aftermarket revenue, accounting for 71% of total sales, was a key factor in achieving gross margins near 46%. This was attributed to the aging installed base and customers extending equipment lifecycles, leading to increased maintenance needs.
• Capital project bookings rebound: Bookings rose 7% year-over-year to $269 million, with strength in North American engineered wood projects and stable demand for fiber processing equipment. Management expects further sequential improvements as delayed projects move forward.
• Tariff and trade policy headwinds: Uncertainty from evolving U.S. and global tariffs affected customer decision-making on capital investments. Management highlighted the challenge of forecasting order timing and future material costs, with tariffs on steel and China-sourced products raising input prices.
• Segment performance diverges: The Flow Control segment saw strong aftermarket and capital demand, while Industrial Processing suffered from lower capital shipments despite robust bookings. Material Handling delivered solid bookings but also faced revenue declines due to shipment timing.
• Acquisition integration underway: The integration of Dynamic Sealing Technologies expanded Kadant’s addressable markets, while the recent Babbini acquisition brought proprietary dewatering technology expected to bolster the Upcycling and food sector offerings.

Drivers of Future Performance

Kadant’s outlook is shaped by expectations for improved industrial demand, a shifting aftermarket-to-capital revenue mix, and ongoing efforts to mitigate tariff impacts.

• Capital equipment rebound expected: Management believes pent-up demand and aging customer equipment will drive a recovery in capital project orders, particularly for fiber processing and engineered wood solutions, as clarity on trade policy improves.
• Margin pressures from mix shift: As capital shipments increase and the aftermarket share moderates from recent highs, gross margins are projected to ease to the mid-44% range. Management is actively managing supplier relationships and production locations to offset input cost pressures from tariffs.
• Tariff and policy risk persists: Uncertainty around the timing and stability of global tariffs remains a significant headwind for both customer investment decisions and Kadant’s ability to forecast future material costs. The company continues to seek ways to reduce exposure, including alternative sourcing and cost-sharing initiatives.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be monitoring (1) the pace of capital project bookings, particularly in fiber processing and engineered wood; (2) the impact of tariffs and trade policy changes on both order timing and gross margins; and (3) the evolution of the aftermarket-to-capital revenue mix as new equipment orders are delivered. Strategic integration of recent acquisitions and further clarity on global trade policy will also be important milestones.

Kadant currently trades at $340.70, in line with $343.73 just before the earnings. Is there an opportunity in the stock?The answer lies in our full research report (it’s free).

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