What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-05 compared with 2020-05-06 · 214 added, 114 removed, 110 unchanged (75% of the section changed)

17 unchanged sentences

Papermaking Systems, Wood Processing Systems, and Material Handling Systems, and a separate product line, Fiber-based Products.

During the first quarter of 2020, we realigned our reportable operating segments consistent with our strategic initiatives to grow both organically and through acquisitions.

During the first quarter of 2020, we changed our reportable operating segments to better align with our strategic initiatives to grow both organically and through acquisitions.

See Note 12 , Business Segment Information, in the accompanying condensed consolidated financial statements for further detail regarding our segments.

2 unchanged sentences

The Flow Control segment consists of our fluid-handling and doctoring, cleaning, & filtration product lines;

the Industrial Processing segment consists of our wood processing and stock-preparation product lines (excluding our baling products);

the Industrial Processing

Overview (continued)

segment consists of our wood processing and stock-preparation product lines (excluding our baling products);

and the Material Handling segment consists of our conveying and screening, baling, and fiber-based product lines.

1 unchanged sentence

A description of each segment follows.

Flow Control – Custom-engineered products, systems, and technologies that control the flow of fluids used in industrial and commercial applications to keep critical processes running efficiently in the packaging, tissue, food processing, metals, and other industrial sectors.

Our products include rotary sealing devices, steam systems, expansion joints, doctor systems, roll and fabric cleaning devices, and filtration and fiber recovery systems.

Industrial Processing – Equipment, machinery, and technologies used to recycle paper and paperboard and process timber for use in the packaging, tissue, paper, wood products and alternative fuel industries, among others.

Our products include stock preparation systems and recycling equipment, debarkers, stranders, chippers, and logging machinery.

Material Handling – Products and engineered systems used to handle bulk and discrete materials for secondary processing or transport in the mining, aggregates, food processing, waste management, and pulp and paper industries, among others.

Industrial Processing – Equipment, machinery, and technologies used to recycle paper and paperboard and process timber for use in the packaging, tissue, wood products, and alternative fuel industries, among others.

Our products include stock-preparation systems and recycling equipment, chemical pulping equipment, debarkers, stranders, chippers, and logging machinery.

In addition, we provide industrial automation and digitization solutions to process industries.

Material Handling – Products and engineered systems used to handle bulk and discrete materials for secondary processing or transport in the aggregates, mining, food, and waste management industries, among others.

Our products include conveying and vibratory equipment and balers.

In addition, we manufacture and sell biodegradable, absorbent granules used as carriers in agricultural applications and for oil and grease absorption.

Overview (continued)

Business Outlook and Update on COVID-19

In March 2020, the World Health Organization designated the novel coronavirus (COVID-19) as a global pandemic.

The Company was designated as a critical infrastructure company by the U.S.

Department of Homeland Security.

Management has focused their efforts on:

safeguarding our workplaces and protecting our employees;

serving the needs of our customers to ensure that customers are able to provide the critical supplies needed in response to the pandemic;

Business Outlook and COVID-19 Update

In March 2020, the World Health Organization designated the novel coronavirus as a global pandemic (COVID-19).

From the onset of the outbreak, we have focused our efforts on:

protecting the health and safety of our employees though precautionary measures, including working remotely when employees are not required to be physically present, social distancing, wearing face coverings, adding safety and hygiene protocols within our facilities, restricting travel and other safeguards;

as a critical infrastructure company, serving the needs and expectations of our customers;

working closely with our supply chain to minimize any potential disruption;

preserving our balance sheet and liquidity position

From the onset of the outbreak in China, we have taken precautions to protect the health and safety of our employees and their families around the world, including working remotely when possible, implementing social distancing and sanitizing measures within our facilities, travel restrictions and other safeguards.

As the global pandemic spread, there was a deterioration in the general economic environment.

Our first quarter results were impacted by customer-requested delays on certain capital projects and service work, which we expect to continue into the second quarter and possibly for the remainder of the year.

Consolidated bookings decreased 4% to $175.6 million in the first quarter of 2020 compared to $183.6 million in the first quarter of 2019.

Within our Flow Control segment, bookings increased 5% during the first quarter of 2020 compared with the first quarter of 2019.

Our operating businesses within the Flow Control segment expect relatively stable demand for our parts and consumables products in the near term as many of our packaging, food processing, and tissue customers are experiencing increased demand.

However, we expect to see reduced demand for our capital equipment as our customers delay or reduce capital spending, as well as installation and repair activities as a result of COVID-19.

Within our Industrial Processing segment, bookings decreased 17% during the first quarter of 2020 compared with the first quarter of 2019 primarily due to decreased demand for our capital equipment products.

For our parts and consumables products, demand in our stock preparation businesses is expected to be relatively stable in the near term as many of our packaging and tissue customers are experiencing increased demand.

Our wood processing businesses may encounter a slowdown in their parts and consumables orders as a number of the mills we supply are idle or operating at reduced capacity, and some customers previously placed orders in anticipation of supply interruptions.

Additionally, many large companies in the forestry industry have announced reduced capital spending for the remainder of 2020 or have delayed delivery of new capital machines until service technicians are able to conduct installation and commissioning.

Within our Material Handling segment, bookings increased 6% during the first quarter of 2020 compared with the first quarter of 2019 primarily due to increased demand for underground conveyor systems for mining applications.

We expect demand for our parts and consumables products in this segment will remain relatively stable in 2020.

Demand for our conveying equipment is expected to remain steady in the near term as a result of large capital projects that were in place at the end of 2019.

We expect demand for our baler products will be adversely impacted by COVID-19, as well as from the challenging economic conditions in Europe.

Our liquidity position as of March 28, 2020 consisted of over $60 million of cash and cash equivalents, approximately $141 million of unused available borrowing capacity, and $265 million of uncommitted borrowing capacity.

We are conserving cash by reducing our discretionary operating expenses, managing working capital, suspending our discretionary debt obligation payments in the near term, and reducing our current capital spending.

We are also evaluating the potential for utilizing legislative provisions, such as deferring certain tax payments and job retention subsidies, where available and appropriate.

We continue to evaluate the impact of COVID-19 on our business and will take further actions that are in the best interests of our employees, customers, and stockholders, as necessary, or as mandated by governmental authorities.

preserving our liquidity position.

The COVID-19 pandemic has resulted in significant worldwide economic disruption and has adversely affected our bookings and results of operations in the second quarter of 2020 primarily due to delayed or reduced capital spending by our customers, as well as customer-requested delays on certain capital projects and service work.

We also experienced a moderate decline in demand for our parts and consumables products as the pandemic continued.

To offset these adverse effects on our business, we decreased discretionary spending in such areas as travel-related costs and incentive compensation, applied for government-sponsored COVID-19 employee retention programs, and executed restructuring actions to reduce payroll-related costs at certain of our operations.

We expect the impact of COVID-19 on our business to continue in the third quarter and possibly for the remainder of the year.

Consolidated bookings decreased 24% to $133.0 million in the second quarter of 2020 compared to $174.0 million in the second quarter of 2019, which included a 2% decrease from the unfavorable effect of foreign currency translation.

Our business outlook by segment, including updates on the impact of COVID-19, is as follows:

Flow Control – Bookings decreased 19% in the second quarter of 2020 compared with the second quarter of 2019.

Bookings for capital equipment declined due to delayed or reduced capital spending by our customers, as well as delayed repair work as a result of COVID-19.

Bookings for parts and consumables products also declined as a result of decreased demand from industrial customers due to COVID-19 related production downtime, shutdowns and visitation restrictions at many customer facilities, while demand from our packaging, food processing, and tissue customers remained relatively stable.

Industrial Processing – Bookings decreased 29% in the second quarter of 2020 compared with the second quarter of 2019.

Capital equipment bookings at our European stock-preparation operations and parts and consumables bookings at our North American and European stock-preparation operations declined due to a reduction in customer spending as a result of COVID-19.

Additionally, our North American wood processing operations experienced decreased demand for our timber-harvesting equipment, as well as overall reduced capital spending by our customers largely due to the impact of COVID-19.

Orders for parts and consumables products at our North American wood processing operations

Overview (continued)

were impacted by idled mills in the early part of the quarter, but strengthened during the latter part of the quarter due to rebounds in lumber prices and improved U.S.

housing starts, which increased mill run rates and parts consumption.

Material Handling – Bookings decreased 20% in the second quarter of 2020 compared with the second quarter of 2019.

Demand for our conveying and vibratory equipment and balers declined due to reduced customer spending primarily as a result of COVID-19 related shutdowns and visitation restrictions.

Our liquidity position as of June 27, 2020 consisted of over $57 million of cash and cash equivalents, approximately $151 million of unused available borrowing capacity, and $265 million of uncommitted borrowing capacity.

We currently do not have any material mandatory principal payments on our debt obligations until 2023.

We continue to conserve cash by reducing operating expenses and capital spending and managing working capital.

We intend to utilize legislative provisions related to COVID-19, such as employee retention programs and deferral of certain tax payments, where available and appropriate.

We continue to evaluate the impact of COVID-19 on our business and will take actions that are in the best interests of our employees, customers, and stakeholders or as mandated by governmental authorities.

The impact on our results of operations, financial condition and cash flows will depend on certain developments, including the duration of the pandemic and its impact on our customers and suppliers, which are uncertain at this time.

Accordingly, we cannot predict the extent of the impact that COVID-19 may have on our business for the remainder of fiscal 2020.

For more information on risks related to health epidemics on our business, including COVID-19, please see Risk Factors included in Part II, Item 1A , of this report.

Overview (continued)

For more information on risks related to health epidemics to our business, including COVID-19, please see Risk Factors included in Part II, Item 1A , of this report.

In 2018, the United States began imposing tariffs on certain imports from China, which has and will continue to increase the cost of some of the equipment that we import.

1 unchanged sentence

For more information on risks associated with our global operations, including tariffs, please see Part I, Item 1A.

Risk Factors , included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019, and as may be further amended and/or restated in subsequent filings with the SEC.

Risk Factors , included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019, as further amended in Part II, Item 1A, within this report and as may be further amended and/or restated in subsequent filings with the SEC.

International Sales and Foreign Currency

8 unchanged sentences

We continue to pursue acquisition opportunities.

In 2020, we made an acquisition in our Industrial Processing segment for approximately $6.8 million, net of cash acquired.

See Note 2 , Acquisitions, for further details.

Our significant acquisition in 2019 is described below.

O n January 2, 2019, we acquired Syntron Material Handling Group, LLC and certain of its affiliates (SMH) for approximately $176.9 million, net of cash acquired.

O n January 2, 2019, we acquired Syntron Material Handling Group, LLC and certain of its affiliates (SMH) for $176.9 million, net of cash acquired.

SMH, which is included in our Material Handling segment, is a leading provider of conveying and vibratory equipment and systems to various process industries, including mining, aggregates, food processing, packaging, and pulp and paper.

This acquisition extended our current product portfolio and we expect that it will strengthen SMH's relationships in the pulp and paper markets.

Overview (continued)

Application of Critical Accounting Policies and Estimates

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Results of Operations

First Quarter 2020 Compared With First Quarter 2019

The following table presents change in revenue by segment between the first quarters of 2020 and 2019 , and those changes excluding the effect of foreign currency translation.

We refer to the change in revenue excluding the effect of currency translation as a change in organic revenue.

Second Quarter 2020 Compared With Second Quarter 2019

The following table presents the change in revenue by segment between the second quarters of 2020 and 2019 , and those changes excluding the effect of foreign currency translation and an acquisition which we refer to as change in organic revenue.

The presentation of the change in organic revenue is a non-GAAP measure.

1 unchanged sentence

This non-GAAP measure should not be considered superior to or a substitute for the corresponding GAAP measure.

Revenue by segment for the first quarters of 2020 and 2019 was as follows:

Revenue by segment in the second quarters of 2020 and 2019 was as follows:

Three Months Ended

2 unchanged sentences

(In thousands, except percentages)

Total Decrease

Total (Decrease) Increase

(Decrease) Increase

Industrial Processing

1 unchanged sentence

Consolidated Revenue

Consolidated revenue in the first quarter of 2020 decreased by 7%, while consolidated organic revenue declined 6% principally due to lower revenue at our Industrial Processing and Flow Control segments as described below.

We expect to experience a sequential decline in revenue in the second quarter of 2020, largely driven by the impact of the COVID-19 pandemic.

Revenue from our Flow Control segment decreased 7% in the first quarter of 2020, while organic revenue declined by 4%.

Organic revenue declined primarily due to lower parts and consumables revenue at our European fluid-handling business due to a general weakening of the European economy and a relatively strong first quarter of 2019.

Also contributing to this decline was lower capital equipment revenue at our North American and Chinese operations due to the timing of orders and customer-requested deferrals of equipment installations as a result of COVID-19.

Revenue from our Industrial Processing segment decreased 10% in the first quarter of 2020, while organic revenue declined by 9%.

Organic revenue declined due to weaker demand for our parts and consumables products at our North American stock-preparation business and our capital equipment products at our European stock-preparation business due in part to delays resulting from COVID-19.

Organic revenue from our wood processing businesses decreased primarily due to weakness in the lumber and oriented strand board industries, which negatively impacted our capital equipment and parts and consumables revenue, and customer-requested deferrals of equipment installations as a result of COVID-19.

Revenue from our Material Handling segment decreased 2% in the first quarter of 2020, while organic revenue decreased 1%.

Decreased demand in our baler product line was offset by increased demand for our fiber-based products.

Consolidated revenue in the second quarter of 2020 decreased 14%, while consolidated organic revenue declined 12%, due to lower revenue at our Flow Control and Industrial Processing segments as described below.

We expect a sequential decline in revenue in the third quarter of 2020, largely driven by the impact of the COVID-19 pandemic.

Revenue at our Flow Control segment decreased 21% in the second quarter of 2020, while organic revenue declined 18%.

Organic revenue from capital equipment at most of our operations declined primarily due to customer reductions in capital spending, as well as customer-requested delays in installation and repairs, due to COVID-19.

Additionally, the 2019 period included relatively high demand for capital equipment at our North American operations.

Organic revenue was also impacted by a decline in demand for parts and consumables at our North American and European operations due to COVID-19 related production downtime and shutdowns at our customers, as well as visitation restrictions at many customer facilities.

Results of Operations (continued)

Revenue at our Industrial Processing segment decreased 14% in the second quarter of 2020, while organic revenue declined 12%.

Organic revenue at our North American wood processing operations decreased due to the weakness in the lumber and oriented strand board industries, primarily for capital equipment, and was further impacted by reduced spending as a result of COVID-19.

Organic revenue at our stock-preparation business was negatively impacted by decreased demand for capital equipment at our Chinese operations due to overcapacity in the Asian markets, and decreased demand for parts and consumables at our North American operations due to reduced customer spending as a result of COVID-19.

These declines were partially offset by increased organic revenue from capital equipment at our North American stock-preparation operations due to several large orders that were received prior to the onset of the pandemic, and increased demand for parts and consumables at our Chinese operations due to the reopening of businesses we service.

Revenue and organic revenue at our Material Handling segment were relatively unchanged in the second quarter of 2020.

Organic revenue from our conveying and vibratory equipment business increased primarily due to capital equipment revenues associated with a large order that was received in late 2019, partially offset by a decline in demand for parts and consumables due to a reduction in customer spending primarily as a result of COVID-19 related shutdowns and visitation restrictions.

Organic revenue from our baler business declined due to a continued weak European economy, which was further impacted by COVID-19.

Gross Profit Margin

Gross profit margin by segment for the first quarters of 2020 and 2019 was as follows:

Gross profit margin by segment in the second quarters of 2020 and 2019 was as follows:

Three Months Ended

2 unchanged sentences

Consolidated Gross Profit Margin

Consolidated gross profit margin increased in the first quarter of 2020 primarily due to $2.3 million of amortization of acquired profit in inventory related to the SMH acquisition, which lowered consolidated gross profit margin in the first quarter of 2019 by 1.3 percentage points.

Results of Operations (continued)

The gross profit margin for our Flow Control segment increased in the first quarter of 2020 primarily due to improved margins on capital equipment projects.

The gross profit margin for our Industrial Processing segment declined in the first quarter of 2020 due to a decrease in capital equipment margins and a higher proportion of lower-margin capital equipment revenue at our North American stock preparation business.

The gross profit margin for our Material Handling segment in the first quarter of 2019 was negatively affected by $2.3 million of amortization of acquired profit in inventory, which lowered the gross profit margin for this segment by 6.1 percentage points.

Excluding the impact of the amortization of acquired profit in inventory in the 2019 period, the gross profit margin for this segment was relatively unchanged in the first quarter of 2020 compared to the first quarter of 2019.

Consolidated gross profit margin increased in the second quarter of 2020 primarily due to COVID-19 government-sponsored employee retention incentives of $1.3 million, which increased consolidated gross profit margin in the second quarter of 2020 by 0.8 percentage points, and the amortization of acquired profit in inventory related to the SMH acquisition of $1.2 million, which lowered consolidated gross profit margin in the second quarter of 2019 by 0.7 percentage points.

Gross profit margin at our Flow Control segment increased in the second quarter of 2020 due to improved margins on capital equipment, an increased proportion of higher-margin parts and consumables revenue, and employee retention incentives.

Gross profit margin at our Industrial Processing segment increased in the second quarter of 2020 due to employee retention incentives of $0.9 million, which improved the gross profit margin by 1.4 percentage points.

Gross profit margin at our Material Handling segment in the second quarter of 2019 was negatively affected by $1.2 million of amortization of acquired profit in inventory, which lowered the gross profit margin by 3.5 percentage points.

Excluding the impact of amortization of acquired profit in inventory in the 2019 period, the gross profit margin decreased in the 2020 period primarily due to an increased proportion of lower-margin capital equipment revenue at our conveying and vibratory equipment business.

Selling, General, and Administrative Expenses

Selling, general, and administrative (SG&A) expenses by segment for the first quarters of 2020 and 2019 were as follows:

Selling, general, and administrative (SG&A) expenses by segment in the second quarters of 2020 and 2019 were as follows:

Three Months Ended

(In thousands, except percentages)

Increase (Decrease)

Industrial Processing

1 unchanged sentence

Consolidated SG&A Expenses

Consolidated SG&A expenses as a percentage of revenue remained unchanged at 29% in the first quarters of 2020 and 2019.

SG&A expenses as a percentage of revenue for our Flow Control segment were 28% in the first quarters of 2020 and 2019.

SG&A expenses in the first quarter of 2020 were positively affected by incremental currency gains of $0.8 million, primarily on U.S.

dollar-denominated cash at our Mexican operations, and $0.4 million from the favorable effect of currency translation.

SG&A expenses as a percentage of revenue for our Industrial Processing segment were 21% in the first quarters of 2020 and 2019.

SG&A expenses in the first quarter of 2020 were positively affected by incremental currency gains of $0.7 million primarily on U.S.

dollar denominated cash at this segment's Canadian and Chinese operations, and $0.2 million from the favorable effect of currency translation.

SG&A expenses as a percentage of revenue for our Material Handling segment decreased to 23% in the first quarter of 2020, compared to 26% in the first quarter of 2019.

The first quarter of 2019 included $1.0 million of amortization of acquired backlog and $0.8 million of acquisition-related costs associated with the SMH acquisition.

Excluding these acquisition-related costs, our Material Handling segment's SG&A expenses as a percentage of revenue were 21% in the first quarter of 2019.

SG&A expenses for Corporate increased slightly in the first quarter of 2020 compared with the first quarter of 2019 primarily due to increased professional services fees.

Results of Operations (continued)

Consolidated SG&A expenses as a percentage of revenue increased to 29% in the second quarter of 2020 compared with 27% in the second quarter of 2019 due to lower revenues in the 2020 period.

Consolidated SG&A expenses decreased $3.4 million in the second quarter of 2020 compared with the second quarter of 2019 primarily due to a reduction in travel-related costs of $3.1 million.

In addition, SG&A expenses decreased due to a favorable effect of foreign currency translation of $1.1 million and COVID-19 government-sponsored employee retention incentives of $0.8 million, which were offset in part by acquisition costs in the second quarter of 2020.

SG&A expenses as a percentage of revenue at our Flow Control segment increased to 31% in the second quarter of 2020 compared with 26% in the second quarter of 2019 due to lower revenues in the 2020 period.

SG&A expenses decreased in the second quarter of 2020 compared with the second quarter of 2019 due to reduced travel-related costs of $1.1 million and a favorable effect of foreign currency translation of $0.6 million.

These decreases in SG&A expenses were partially offset by incremental currency transaction losses of $0.6 million, primarily on Euro and U.S.

dollar-denominated cash at our Swedish and Mexican operations.

SG&A expenses as a percentage of revenue at our Industrial Processing segment increased to 23% in the second quarter of 2020 compared with 20% in the second quarter of 2019 due to lower revenues in the 2020 period.

SG&A expenses decreased in the second quarter of 2020 compared to the second quarter of 2019 due to reduced travel-related costs of $1.2 million and a favorable effect of foreign currency translation of $0.4 million.

These decreases were offset in part by acquisition costs of $0.4 million in the second quarter of 2020.

SG&A expenses as a percentage of revenue at our Material Handling segment decreased to 23% in the second quarter of 2020 compared with 26% in the second quarter of 2019.

The second quarter of 2019 included $0.3 million of amortization of acquired backlog associated with the SMH acquisition.

Excluding the amortization of acquired backlog, SG&A expenses as a percentage of revenue decreased to 23% in the second quarter of 2020 from 25% in the second quarter of 2019 primarily due to reduced travel-related costs of $0.7 million.

SG&A expenses at Corporate decreased in the second quarter of 2020 compared with the second quarter of 2019 primarily due to lower incentive compensation cost.

Restructuring Costs

Restructuring costs of $0.5 million in the second quarter of 2020 represent severance costs for 30 employees within our Flow Control segment related to a restructuring plan implemented during the quarter.

Additionally, we reduced our workforce by 21 employees within our Industrial Processing segment with no associated severance costs.

We expect annualized payroll-related savings as a result of these actions of approximately $3.7 million, including $2.4 million at our Flow Control segment and $1.3 million at our Industrial Processing segment.

These annualized savings consist of $1.8 million for cost of sales and $1.9 million for operating expenses.

We may incur additional restructuring costs as we continue to evaluate the impact of COVID-19 and the resulting global economic downturn on our business.

Interest Expense

Interest expense decreased to $2.5 million in the first quarter of 2020 from $3.5 million in the first quarter of 2019 primarily due to lower outstanding debt and a lower weighted-average interest rate.

Interest expense decreased to $1.9 million in the second quarter of 2020 from $3.6 million in the second quarter of 2019 due to a lower weighted-average interest rate and lower outstanding debt.

In July 2020, we prepaid the outstanding principal balance of $18.9 million on our Real Estate Loan using borrowings available under our revolving credit facility.

We expect a decrease in interest expense in the second half of 2020 partially due to the lower interest rate on our revolving credit facility.

Provision for Income Taxes

Our provision for income taxes increased to $4.6 million in the first quarter of 2020 from $4.0 million in the first quarter of 2019 and represented 26% of pre-tax income in both periods.

The effective tax rate of 26% was higher than our statutory tax rate of 21% in both periods primarily due to nondeductible expenses, state taxes, the distribution of our worldwide earnings, and tax expense associated with the Global Intangible Low-Taxed Income provisions.

This incremental tax expense was offset in part by the reversal of tax reserves associated with uncertain tax positions in the first quarter of 2020 and by net excess income tax benefits from stock-based compensation arrangements in the first quarter of 2019.

Our provision for income taxes increased to $4.5 million in the second quarter of 2020, or 28% of pre-tax income, from $3.1 million in the second quarter of 2019, or 16% of pre-tax income.

The effective tax rate for the second quarter of 2020 was higher than our statutory tax rate of 21% primarily due to nondeductible expenses, the distribution of our worldwide earnings, state taxes, and tax expense associated with Global Intangible Low-Taxed Income (GILTI) provisions.

These increases in tax expense were offset in part by net excess income tax benefits from stock-based compensation arrangements.

The effective tax rate for the second quarter of 2019 was lower than our statutory tax rate of 21% primarily due to a net tax benefit of 6% of pre-tax income associated with foreign exchange losses and tax costs recognized upon our repatriation of certain previously-taxed foreign earnings and a tax benefit related to the net excess income tax benefits from stock-based compensation arrangements.

These tax benefits were offset in part by tax expense related to nondeductible expenses, GILTI, the distribution of our worldwide earnings, and unrecognized tax benefits.

Results of Operations (continued)

Net income decreased $4.7 million to $11.7 million in the second quarter of 2020 from $16.4 million in the second quarter of 2019 due to a $5.0 million decrease in operating income and a $1.3 million increase in provision for income taxes, offset in part by a decrease in interest expense of $1.6 million (see discussions above for further details).

First Six Months 2020 Compared With First Six Months 2019

The following table presents changes in revenue by segment between the first six months of 2020 and 2019 , and those changes excluding the effect of foreign currency translation and an acquisition which we refer to as change in organic revenue.

The presentation of the change in organic revenue is a non-GAAP measure.

We believe this non-GAAP measure helps investors gain an understanding of our underlying operations consistent with how management measures and forecasts its performance, especially when comparing such results to prior periods.

This non-GAAP measure should not be considered superior to or a substitute for the corresponding GAAP measure.

Revenue by segment in the first six months of 2020 and 2019 was as follows:

Six Months Ended

Currency Translation

Change in Organic Revenue

(In thousands, except percentages)

Total Decrease

(Decrease) Increase

Industrial Processing

Material Handling

Consolidated Revenue

Consolidated revenue in the first six months of 2020 decreased by 10%, while consolidated organic revenue declined 9% primarily due to lower revenue at our Industrial Processing and Flow Control segments as described below.

Revenue from our Flow Control segment decreased 14% in the first six months of 2020, while organic revenue declined 11%.

Additionally, the 2019 period included relatively high demand for capital equipment at our North American operations.

Organic revenue was also impacted by a decline in demand for parts and consumables at our North American and European operations due to COVID-19 related downtimes and shutdowns at our customers, as well as visitation restrictions at many customer facilities.

Revenue from our Industrial Processing segment decreased 12% in the first six months of 2020, while organic revenue declined by 11%.

Organic revenue at our stock-preparation business was negatively impacted by decreased demand for parts and consumables at our North American operations, and lower demand for capital equipment at our European and Chinese operations due in part to reduced customer spending as a result of COVID-19.

Revenue and organic revenue at our Material Handling segment were relatively unchanged in the first six months of 2020.

Organic revenue from our conveying and vibratory equipment business increased primarily due to capital equipment revenues associated with a large order that was received in late 2019, partially offset by a decline in demand for parts and consumables due to a reduction in customer spending largely as a result of COVID-19 shutdowns and visitation restrictions.

Organic revenue from our baler business declined due to a continued weak European economy, which was further impacted by COVID-19.

Results of Operations (continued)

Gross Profit Margin

Gross profit margin by segment in the first six months of 2020 and 2019 was as follows:

Six Months Ended

Industrial Processing

Material Handling

Consolidated Gross Profit Margin

Consolidated gross profit margin increased in the first six months of 2020 largely due to the amortization of acquired profit in inventory related to the SMH acquisition of $3.5 million that lowered consolidated gross profit margin in the first six months of 2019 by 1.0 percentage points, and COVID-19 government-sponsored employee retention incentives received in the second quarter of 2020 of $1.3 million, which increased consolidated gross profit margin by 0.4 percentage points.

Gross profit margin at our Flow Control segment increased in the first six months of 2020 due to improved margins on capital equipment and an increased proportion of higher-margin parts and consumables revenue.

Gross profit margin at our Industrial Processing segment increased in the first six months of 2020 primarily due to employee retention incentives of $0.9 million, which improved the gross profit margin by 0.7 percentage points.

Gross profit margin at our Material Handling Systems segment was relatively unchanged in the first six months of 2020 compared to the 2019 period after excluding the effect of amortization of acquired profit in inventory of $3.5 million, which lowered the gross profit margin in 2019 by 4.8 percentage points.

Selling, General, and Administrative Expenses

SG&A expenses in the first six months of 2020 and 2019 were as follows:

Six Months Ended

(In thousands, except percentages)

Industrial Processing

Material Handling

Consolidated SG&A Expenses

Consolidated SG&A expenses as a percentage of revenue increased to 29% in the first six months of 2020 compared with 28% in the first six months of 2019 due to lower revenues in the 2020 period.

Consolidated SG&A expenses decreased $7.1 million in the first six months of 2020 compared with the first six months of 2019 due to reduced travel-related costs of $3.7 million, a favorable effect of foreign currency translation of $1.8 million, lower acquisition-related costs of $1.7 million, and COVID-19 government-sponsored employee retention incentives received in the second quarter of 2020 of $0.8 million.

SG&A expenses as a percentage of revenue at our Flow Control segment increased to 29% in the first six months of 2020 compared with 27% in the first six months of 2019 due to lower revenues in the 2020 period.

SG&A expenses decreased in the first six months of 2020 compared with the first six months of 2019 due to reduced travel-related costs of $1.5 million and a favorable effect of foreign currency translation of $1.0 million.

SG&A expenses as a percentage of revenue at our Industrial Processing segment increased to 22% in the first six months of 2020 compared with 20% in the first six months of 2019 due to lower revenues in the 2020 period.

These decreases were partially offset by acquisition costs of $0.4 million.

Results of Operations (continued)

SG&A expenses as a percentage of revenue at our Material Handling segment decreased to 23% in the first six months of 2020 compared with 26% in the first six months of 2019.

The first six months of 2019 included amortization of acquired backlog of $1.3 million and other acquisition-related costs associated with the SMH acquisition of $0.8 million.

Excluding these acquisition-related costs, SG&A expenses as a percentage of revenue were unchanged at 23% in both periods.

SG&A expenses at Corporate decreased in the first six months of 2020 compared with the first six months of 2019 primarily due to lower incentive compensation cost.

Restructuring Costs

See Restructuring Costs in Results of Operations, "Second Quarter 2020 Compared With Second Quarter 2019" for a discussion of the restructuring actions taken during the second quarter of 2020.

Interest Expense

Interest expense decreased to $4.4 million in the first six months of 2020 from $7.1 million in the first six months of 2019 due to a lower weighted-average interest rate and lower outstanding debt.

Provision for Income Taxes

Our provision for income taxes increased to $9.0 million in the first six months of 2020 from $7.1 million in the first six months of 2019.

The effective tax rate of 27% in the first six months of 2020 was higher than our statutory tax rate of 21% primarily due to nondeductible expenses, the distribution of our worldwide earnings, state taxes, and tax expense associated with GILTI.

These increases in tax expense were offset in part by net excess income tax benefits from stock-based compensation arrangements.

The effective tax rate of 21% in the first six months of 2019 was equal to our statutory tax rate.

Included in our effective tax rate of 21% was a net tax benefit of 3% of pre-tax income associated with foreign exchange losses and tax costs recognized upon our repatriation of certain previously-taxed foreign earnings and a tax benefit related to the net excess income tax benefits from stock-based compensation arrangements.

These tax benefits were offset by tax expense primarily related to nondeductible expenses, the distribution of our worldwide earnings, GILTI, and state taxes.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law and provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief.

The enactment of the CARES Act did not have a material impact on our provision for income taxes for the first quarter of 2020.

We continue to monitor any effects that result from the new law.

Net income increased $1.6 million to $12.7 million in the first quarter of 2020 from $11.1 million in the first quarter of 2019 due to a $1.1 million increase in operating income and a decrease in interest expense of $1.0 million, offset in part by a $0.6 million increase in provision for income taxes (see discussions above for further details).

The enactment of the CARES Act did not have a material impact on our provision for income taxes for the first six months of 2020.

We continue to monitor any effects that result from the CARES Act.

Net income decreased $3.1 million to $24.4 million in the first six months of 2020 from $27.5 million in the first six months of 2019 primarily due to a $3.9 million decrease in operating income and a $1.9 million increase in provision for income taxes, offset in part by a decrease in interest expense of $2.7 million (see discussions above for further details).

Recent Accounting Pronouncements

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Liquidity and Capital Resources

Consolidated working capital was $157.8 million at March 28, 2020 , compared with $151.4 million at December 28, 2019 .

Included in working capital were cash and cash equivalents of $60.0 million at March 28, 2020 , compared with $66.8 million at December 28, 2019 .

Cash and cash equivalents held by our foreign subsidiaries was $56.1 million at March 28, 2020 and $58.9 million at December 28, 2019 .

Cash flow information for the first quarters of 2020 and 2019 was as follows:

Three Months Ended

Consolidated working capital was $139.3 million at June 27, 2020 , compared with $151.4 million at December 28, 2019 .

Included in working capital were cash and cash equivalents of $57.5 million at June 27, 2020 , compared with $66.8 million at December 28, 2019 .

Cash and cash equivalents held by our foreign subsidiaries was $56.1 million at June 27, 2020 and $58.9 million at December 28, 2019 .

The decrease in working capital at June 27, 2020 was largely impacted by the reclassification of our Real Estate Loan to short-term obligations at June 27, 2020.

Our Real Estate Loan was prepaid in July 2020 with borrowings under our revolving credit facility.

See Debt Obligations below for more detail.

Liquidity and Capital Resources (continued)

Cash flow information in the first six months of 2020 and 2019 was as follows:

Six Months Ended

(In thousands)

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Operating Activities

Cash provided by operating activities decreased to $6.2 million in the first quarter of 2020 from $9.9 million in the first quarter of 2019.

Our operating cash flows result primarily from cash received from our customers, offset by cash payments for such items as inventory, employee compensation, operating leases, income taxes and interest payments on our outstanding debt obligations.

The decrease in cash provided by operating activities in the first quarter of 2020 was primarily due to incremental cash used for working capital, which included a final payment of $2.4 million in 2020 to settle current liabilities associated with our post-retirement restoration plan.

The incremental cash used for working capital also included changes in accounts payable, which used cash of $3.4 million in the first quarter of 2020 compared with providing cash of $3.9 million in the 2019 period primarily due to payments related to inventory purchases for large capital orders.

These uses of cash were offset in part by collections on accounts receivable that provided cash of $1.9 million in the first quarter of 2020 compared to using cash of $1.2 million in the first quarter of 2019 due to the timing of cash collections.

Cash provided by operating activities decreased to $28.2 million in the first six months of 2020 from $32.5 million in the first six months of 2019.

Our operating cash flows are primarily from cash received from customers, offset by cash payments for such items as inventory, employee compensation, operating leases, income taxes and interest payments on outstanding debt obligations.

The decrease in cash provided by operating activities in the first six months of 2020 compared with the first six months of 2019 was primarily due to lower net income, offset in part by lower cash used for working capital.

We received cash of $4.8 million for accounts receivable in the first six months of 2020 compared to cash used of $2.9 million in the prior period, primarily due to the timing of collections and reduced project activity in 2020.

We received cash of $1.6 million from other current assets in the first six months of 2020 compared to cash used of $3.4 million in the 2019 period, primarily related to refundable income taxes.

We used cash of $5.0 million for accounts payable in the first six months of 2020 compared to cash received of $3.4 million in the prior period primarily due to lower payables from reduced spending levels in 2020.

We used $9.2 million for other current liabilities in the first six months of 2020 compared to $5.6 million in the 2019 period primarily due to a reduction in advanced billings due to timing and amounts of capital orders.

Investing Activities

Our investing activities used cash of $2.7 million in the first quarter of 2020 compared with $177.2 million in the first quarter of 2019.

The 2019 quarter included a use of cash of $175.3 million for the purchase of SMH.

Liquidity and Capital Resources (continued)

Our investing activities used cash of $10.7 million in the first six months of 2020 compared with $180.6 million in the first six months of 2019.

The 2020 period included a use of cash of $7.1 million for acquisitions and the 2019 period included a use of cash of $176.9 million for the acquisition of SMH.

Financing Activities

Our financing activities used cash of $7.0 million in the first quarter of 2020 compared with providing cash of $178.2 million in the first quarter of 2019.

The 2019 quarter included $189.0 million of U.S.

dollar-denominated borrowings under our revolving credit facility primarily used for the purchase of SMH.

We used cash of $3.0 million primarily for payments on our outstanding debt obligations in the first quarter of 2020 compared with $6.4 million in 2019.

We did not borrow any funds from our revolving credit facility in the first quarter of 2020 and, beginning in March 2020, did not make additional discretionary principal payments on our outstanding debt obligations to conserve our global cash resources for short-term cash needs that may develop as a result of the COVID-19 pandemic.

Our financing activities used cash of $23.4 million in the first six months of 2020 compared with cash provided of $160.4 million in the first six months of 2019.

dollar-denominated borrowings under our revolving credit facility, primarily relating to acquisitions, were $7.0 million in the 2020 period and $191.0 million in the 2019 period.

Payments on our outstanding debt obligations were $24.2 million in the 2020 period and $24.6 million in the 2019 period.

Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash

The exchange rate effect on cash, cash equivalents, and restricted cash represents the impact of translation of cash balances at our foreign subsidiaries.

The $2.7 million reduction in cash in the first quarter of 2020 is primarily related to the strengthening of the U.S.

dollar, particularly against the Mexican peso, Canadian dollar and Brazilian real.

The $1.5 million reduction in cash, cash equivalents, and restricted cash in the first six months of 2020 is primarily related to the strengthening of the U.S.

dollar, particularly against the Brazilian real, Canadian dollar and Mexican peso.

Debt Obligations

Under our revolving credit facility, we have a borrowing capacity of $400 million, of which $141.5 million was available to borrow as of March 28, 2020, along with an additional uncommitted unsecured incremental borrowing facility of $150 million.

Under our revolving credit facility, we have a borrowing capacity of $400 million, of which $150.8 million was available to borrow as of June 27, 2020, along with an additional uncommitted, unsecured incremental borrowing facility of $150 million.

In addition, under our uncommitted Multi-Currency Note Purchase and Private Shelf Agreement (Note Purchase Agreement), we may issue up to an additional $115 million of senior promissory notes.

Under these agreements, our leverage ratio must be less than 3.75.

As of March 28, 2020, our leverage ratio was 2.04 and we were in compliance with our debt covenants.

With the exception of quarterly payments of $0.3 million on our real estate loan and principal payments under lease obligations, we have no mandatory principal payments on our debt obligations until 2023.

See Note 4 , Long-Term Obligations, in the accompanying condensed consolidated financial statements for additional information regarding our debt obligations.

As of June 27, 2020, our leverage ratio was 2.01 and we were in compliance with our debt covenants.

Liquidity and Capital Resources (continued)

In July 2020, we prepaid the outstanding principal balance of $18.9 million on our Real Estate Loan, together with accrued interest and a prepayment penalty of $0.2 million using borrowings available under our revolving credit facility.

We do not have any material mandatory principal payments on our debt obligations until 2023.

See Note 6 , Short- and Long-Term Obligations, and Note 14 , Subsequent Event, in the accompanying condensed consolidated financial statements for additional information regarding our debt obligations, including the prepayment of our Real Estate Loan.

Additional Liquidity and Capital Resources

On May 13, 2020, our board of directors approved the repurchase of up to $20 million of our equity securities during the period from May 13, 2020 to May 13, 2021.

We have not repurchased any shares of our common stock under this authorization.

We plan to make expenditures of approximately $4 million to $5 million during the remainder of 2020 for property, plant, and equipment.

We have currently reduced our anticipated capital expenditures as part of our effort to conserve our global cash resources for any short-term cash needs that may develop as a result of the COVID-19 pandemic.

We paid cash dividends of $2.6 million in the first quarter of 2020.

On March 3, 2020, we declared a quarterly cash dividend of $0.24 per share totaling $2.8 million that was paid on May 5, 2020.

We have not repurchased any shares of our common stock under this authorization or under the previous authorization, which expired on May 15, 2020.

We paid cash dividends of $5.4 million in the first six months of 2020.

On May 13, 2020, we declared a quarterly cash dividend of $0.24 per share totaling $2.8 million that will be paid on August 6, 2020.

Future declarations of dividends are subject to our board of directors' approval and may be adjusted as business needs or market conditions change.

The declaration of cash dividends is subject to our compliance with the covenant in our revolving credit facility related to our consolidated leverage ratio.

As of March 28, 2020 , we had approximately $241.3 million of total unremitted foreign earnings.

We plan to make expenditures of approximately $3 million to $4 million during the remainder of 2020 for property, plant, and equipment.

We will continue to monitor our capital expenditures for the remainder of 2020 as part of our effort to conserve global cash resources for any short-term cash needs that may develop as a result of the COVID-19 pandemic.

As of June 27, 2020 , we had approximately $253.9 million of total unremitted foreign earnings.

It is our intent to indefinitely reinvest $243.9 million of these earnings to support the current and future capital needs of our foreign operations,

including debt repayments, if any.

In the first quarter of 2020, we recorded withholding taxes on the earnings in certain foreign subsidiaries that we plan to repatriate in the foreseeable future.

For the first six months of 2020, we recorded withholding taxes on the earnings in certain foreign subsidiaries that we plan to repatriate in the foreseeable future.

The foreign withholding taxes that would be required if we were to remit the indefinitely reinvested foreign earnings to the United States would be approximately $6.1 million.

In the future, our liquidity position will be affected by the level of cash flows from operations, cash paid to service our debt obligations, acquisitions, capital projects, dividends, and stock repurchases.

We believe that our existing resources, together with the borrowings available under our revolving credit facility and available through our Note Purchase Agreement, as well as the cash we expect to generate from operations, will be sufficient to meet the capital requirements of our current operations for the foreseeable future.

Liquidity and Capital Resources (continued)

We believe that our existing resources, together with the borrowings available under our revolving credit facility and available through our Note Purchase Agreement, and the cash we expect to generate from operations, will be sufficient to meet the capital requirements of our operations for the foreseeable future.

Contractual Obligations and Other Commercial Commitments

There have been no significant changes to our contractual obligations and other commercial commitments during the three months ended March 28, 2020, compared with those disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended December 28, 2019 .

There have been no significant changes to our contractual obligations and other commercial commitments during the six months ended June 27, 2020 compared with those disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended December 28, 2019 , except that we gave notice to the lender bank of our intent to prepay the Real Estate Loan as disclosed in Note 6 , Short- and Long-Term Obligations, and Note 14 , Subsequent Event, in the accompanying condensed consolidated financial statements.

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk from changes in interest rates and foreign currency exchange rates has not changed materially from our exposure as disclosed in Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 28, 2019 .

Item 4 – Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 27, 2020 .

The term "disclosure controls and procedures," as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis