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KAI Q1 Earnings Call: Tariffs and Capital Project Delays Weigh on Revised Outlook
KAI Q1 Earnings Call: Tariffs and Capital Project Delays Weigh on Revised Outlook
Industrial equipment manufacturer Kadant (NYSE:KAI) met Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 3.9% year on year to $239.2 million. The company expects next quarter’s revenue to be around $246.5 million, close to analysts’ estimates. Its non-GAAP profit of $2.10 per share was 6.6% above analysts’ consensus estimates.
Revenue: $239.2 million vs analyst estimates of $239.4 million (3.9% year-on-year decline, in line)
Adjusted EPS: $2.10 vs analyst estimates of $1.97 (6.6% beat)
Adjusted EBITDA: $47.92 million vs analyst estimates of $48.63 million (20% margin, 1.5% miss)
The company dropped its revenue guidance for the full year to $1.03 billion at the midpoint from $1.05 billion, a 2.1% decrease
Management lowered its full-year Adjusted EPS guidance to $9.15 at the midpoint, a 7.3% decrease
Operating Margin: 14.9%, in line with the same quarter last year
Free Cash Flow Margin: 7.9%, up from 6.7% in the same quarter last year
Market Capitalization: $3.77 billion
StockStory’s Take
Kadant’s first quarter results reflected the continued resilience of its aftermarket parts business despite a challenging macroeconomic environment, particularly in capital equipment. Management highlighted that aftermarket bookings reached a record $190 million, representing 74% of total bookings, as customers delayed investing in new equipment but increased spending on maintenance. CEO Jeff Powell noted, “Our aftermarket parts revenue made up 75% of Q1 revenue and was up 5% to a record $179 million.” The company’s decentralized operating model and strong execution helped maintain gross margin performance even as capital shipments slowed, especially in the Industrial Processing segment.
Looking ahead, management cited heightened uncertainty from newly imposed tariffs and shifting global trade policies as key factors behind the lower full-year revenue and earnings guidance. CFO Michael McKenney explained that tariffs on steel, aluminum, and China imports are expected to raise material costs by $5–6 million in 2025, with most of the impact in the second and third quarters. He cautioned that delays in customer decision-making for capital projects could further push revenue into next year, stating, “We may end up having a great booking year on capital, but it may come in later, late enough that it causes the revenue to go into ‘26.”
Key Insights from Management’s Remarks
Kadant’s leadership addressed how ongoing tariff and trade policy uncertainty, along with softer capital equipment demand, shaped the quarter’s operational and financial results. Management emphasized the strength of recurring aftermarket revenue and outlined concrete steps to mitigate supply chain and input cost risks.
Aftermarket Parts Demand: The record level of aftermarket bookings was attributed to customers extending the life of existing equipment, increasing demand for maintenance components as capital investment is deferred.
Tariff Impact and Mitigation: Management detailed the operational response to new tariffs, including supplier diversification and cost-sharing with customers. CFO Michael McKenney noted, “We believe we’ll be able to mitigate the impact of the steel price increase by working with our suppliers and cost sharing with our customers.”
Segment Variation: Flow Control performed well, supported by North American demand and contributions from recent acquisitions. In contrast, Industrial Processing experienced a sharp decline in capital shipments, while Material Handling saw stable aftermarket demand but flat capital equipment orders.
Order Timing Uncertainty: Management reported that no major projects had been canceled, but many have been delayed as customers await clarity on tariffs, causing uncertainty in revenue recognition timing.
Geographic Diversification: Kadant’s global manufacturing footprint was presented as a strategic advantage, allowing the company to adjust sourcing and serve shifting customer needs in response to evolving trade policies.
Drivers of Future Performance
Management expects continued volatility in capital equipment demand due to tariff-related uncertainty and the timing of large project awards, while relying on aftermarket parts for near-term stability.
Tariff-Driven Cost Pressure: The company expects incremental material costs from tariffs through mid-year, with efforts underway to offset these via supply chain adjustments, surcharges, and operational changes.
Capital Project Timing: Future revenue growth will depend on the timing of deferred capital equipment orders; if projects are delayed further, some revenue may shift into next year despite a healthy project pipeline.
Aftermarket Stability: The installed base’s age and maintenance needs are likely to sustain strong aftermarket parts demand, which management believes will help offset capital market volatility.
Top Analyst Questions
Ross Sparenblek (William Blair): Asked about the risk of further capital order deferrals and overall project funnel health. Management stated no cancellations have occurred, but delays could push revenue into 2026 if uncertainty persists.
Gary Prestopino (Barrington): Questioned whether capital project delays could turn into cancellations. CEO Jeff Powell responded that permanent cancellations are rare, with most projects resuming once uncertainty eases.
Kurt Yinger (D.A. Davidson): Inquired about the level of capital bookings required to meet back-half guidance targets. CFO Michael McKenney explained a 15–20% increase in order flow is needed, with timing critical for recognizing revenue in 2025.
Walt Liptak (Seaport Research): Sought clarification on the composition and mitigation of the estimated $5–6 million tariff impact. Management outlined that direct tariff costs are being addressed through surcharges and supply chain shifts, though full mitigation will take time.
Kurt Yinger (D.A. Davidson): Asked about exposure of Canadian-manufactured products to tariffs if trade agreements change. Management confirmed current protection under USMCA, but acknowledged a potential future impact if policies shift.
Catalysts in Upcoming Quarters
Looking ahead, the StockStory team will monitor (1) the pace of capital project awards and whether deferred orders materialize as expected, (2) the company’s progress in mitigating tariff-related costs through supplier changes and pricing actions, and (3) the sustainability of record aftermarket parts demand as customers continue to extend equipment lifecycles. We will also watch for any shifts in global trade policy or macroeconomic trends that could affect project timing or cost structures.
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