KADANT INC 10-Q

Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations When we use the terms “we,” “us,” “our,” and the “Company,” we mean Kadant Inc., a Delaware corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates. This Quarterly Report on Form 10-Q and the documents we incorporate by reference in this report include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements are not statements of historical fact and may include statements regarding possible or assumed future results of operations. Forward-looking statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management, using information currently available to our management. When we use words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "seeks," "should," "likely," "will," "would," "may," "continue," "could," or similar expressions, we are making forward-looking statements. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions. Our future results of operations may differ materially from those expressed in the forward-looking statements. Many of the important factors that will determine these results and values are beyond our ability to control or predict. You should not put undue reliance on any forward-looking statements. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise. For a discussion of important factors that may cause our actual results to differ materially from those suggested by the forward-looking statements, you should read carefully Risk Factors included in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended January 2, 2021, as filed with the Securities and Exchange Commission (SEC) and as may be further amended and/or restated in subsequent filings with the SEC. Overview Company Background We are a global supplier of high-value, critical components and engineered systems used in process industries worldwide. Our products, technologies, and services play an integral role in enhancing process efficiency, optimizing energy utilization, and maximizing productivity in resource-intensive industries. Our financial results are reported in three reportable operating segments: Flow Control, Industrial Processing, and Material Handling. 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; and the Material Handling segment consists of our conveying and screening, baling, and fiber-based product lines. A description of each segment is as 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, metals, and other industrial sectors. Our primary products include rotary sealing devices, steam systems, expansion joints, doctor systems, roll and fabric cleaning devices, and filtration and fiber recovery systems. 20 Table of Contents KADANT INC. • 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 primary 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 primary 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. Industry and Business Overview We had record consolidated bookings of $213 million in the second quarter of 2021, including record bookings for capital equipment and continued strong demand for our parts and consumables products. This follows previous consolidated bookings records set in the prior two quarters as our businesses continue to rebound from the impact of the COVID-19 pandemic, which adversely affected our bookings and revenue for a substantial part of 2020. We ended the second quarter of 2021 with a record consolidated backlog of $242 million. An overview of our business by segment is as follows: • Flow Control – Orders for our parts and consumables products at our Flow Control businesses began to recover in the latter part of 2020 and this trend continued through the second quarter of 2021. This was due in part to customer maintenance requirements and pent-up demand resulting from the adverse effect of pandemic-related downtimes and shutdowns, as well as visitation restrictions at many customer facilities earlier in 2020. Capital equipment bookings increased in 2021 from depressed levels during most of 2020 resulting from improved market conditions and pent-up demand for our products. We expect orders for our existing products to moderate in the second half of the year while revenues are expected to remain strong due to a record backlog at the end of the second quarter of 2021. The results related to our acquisition of The Clouth Group of Companies (Clouth) in the third quarter of 2021 will be included in this segment going forward. See Acquisitions below for further details. • Industrial Processing – We had record bookings in the second quarter at our Industrial Processing segment, led by capital equipment orders at our Chinese stock-preparation business. Bookings for parts and consumables products continue to be strong across our stock-preparation businesses due to the ongoing recovery from the downturn encountered in 2020. Additionally, we saw continued strong demand for our wood processing products, which we expect to continue through the second half of 2021. This demand was fueled by a robust U.S. housing market and high demand for lumber, oriented strand board and plywood, which has increased mill run rates resulting in higher parts consumption and capital equipment investment by our customers. • Material Handling – Bookings at our Material Handling segment have improved from depressed levels in mid-2020. Demand for our baling products continues to be bolstered by improved business conditions in Europe, including the recovery of recycled commodity prices. Orders for parts and consumables products at our conveying and screening business have also rebounded from 2020 levels due to increased customer spending as a result of the relaxation of pandemic-related shutdowns and visitation restrictions, while bookings for capital equipment have moderated. While we have seen improved market conditions and increased demand for our products and we expect our financial results for the remainder of 2021 to be strong, there is still some uncertainty surrounding near-term economic growth due to risks surrounding the COVID-19 pandemic, including the impact of the Delta variant. Additionally, we may also be impacted by supply chain constraints and inflationary pressure on material costs, as well as travel and visitation restrictions in certain regions of the world. For more information on risks related to health epidemics to our business, including COVID-19, please see Part I, Item 1A, Risk Factors , included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021. International Sales More than half of our sales are to customers outside the United States, mainly in Europe, Asia, and Canada. As a result, our financial performance can be materially affected by currency exchange rate fluctuations between the U.S. dollar and foreign currencies. To mitigate the impact of foreign currency fluctuations, we generally seek to charge our customers in the same currency in which our operating costs are incurred. Additionally, we may enter into forward currency exchange contracts to hedge certain firm purchase and sale commitments denominated in currencies other than our subsidiaries' functional currencies. We currently do not use derivative instruments to hedge our exposure to exchange rate fluctuations created by the translation into the U.S. dollar of our foreign subsidiaries' results that are in functional currencies other than the U.S. dollar. 21 Table of Contents KADANT INC. Global Trade The United States imposes tariffs on certain imports from China, which has and will continue to increase the cost of some of the equipment that we import. Although we have worked to mitigate the impact of tariffs through pricing and sourcing strategies, we cannot be sure these strategies will effectively mitigate the impact of these costs. 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 January 2, 2021. Acquisitions We expect that a significant driver of our growth over the next several years will be the acquisition of businesses and technologies that complement or augment our existing products and services or may involve entry into a new process industry. We continue to pursue acquisition opportunities. In the third quarter of 2021, we acquired Clouth for approximately 78 million euros, or $92.0 million, net of cash acquired and debt assumed. The majority of Clouth companies were acquired on July 19, 2021 and the acquisition of the last legal entity occurred on August 10, 2021. Clouth is a leading manufacturer of doctor blades and related equipment used in the production of paper, packaging, and tissue and will be included in our Flow Control segment. We expect several synergies in connection with this acquisition, including deepening our presence in the growing ceramic blade market and expansion of product sales at our existing businesses by leveraging Clouth's complementary global geographic footprint. Clouth has two manufacturing facilities in Germany and one in Poland and generated revenue of approximately 41 million euros in 2020 . See N ote 11 , Subsequent Event, in the accompanying condensed consolidated financial statements for further details. In June 2020, we made an acquisition in our Industrial Processing segment for approximately $6.9 million, net of cash acquired. Results of Operations Second Quarter 2021 Compared With Second Quarter 2020 Revenue The following table presents the change in revenue by segment between the second quarters of 2021 and 2020, and those changes excluding the effect of foreign currency translation 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 U.S. generally accepted accounting principles (GAAP) measure. Revenue by segment in the second quarters of 2021 and 2020 was as follows: (Non-GAAP) Three Months Ended Currency Translation Change in Organic Revenue (In thousands, except percentages) July 3, 2021 June 27, 2020 Total Increase % Change Increase % Change Flow Control $ 70,762 $ 51,365 $ 19,397 38 % $ 3,787 $ 15,610 30 % Industrial Processing 82,681 65,673 17,008 26 % 6,213 10,795 16 % Material Handling 42,368 35,822 6,546 18 % 1,574 4,972 14 % Consolidated Revenue $ 195,811 $ 152,860 $ 42,951 28 % $ 11,574 $ 31,377 21 % Consolidated revenue in the second quarter of 2021 increased 28%, while consolidated organic revenue increased 21%, principally driven by higher demand for parts and consumables products at our three segments and higher demand for capital equipment at our Flow Control segment as described below. Revenue at our Flow Control segment increased 38% in the second quarter of 2021, while organic revenue increased 30%. The increase in organic revenue resulted from higher demand for both capital equipment and parts and consumables products at substantially all locations. Organic revenue for capital equipment increased in the second quarter of 2021 due to improved market conditions and pent-up demand for our products while the corresponding 2020 period was adversely impacted by customer reductions in capital equipment spending and deferrals of equipment installations. Increased demand for parts and consumables products in the second quarter of 2021 was due in part to maintenance requirements at many of our customer 22 Table of Contents KADANT INC. locations and pent-up demand, while the second quarter of 2020 was depressed as a result of customer downtimes and shutdowns as well as visitation restrictions due to the COVID-19 pandemic. Revenue at our Industrial Processing segment increased 26% in the second quarter of 2021, while organic revenue increased 16%. Organic revenue increased due to higher demand for both parts and consumables products and capital equipment at our wood processing business, driven by continued near-capacity mill run rates resulting in higher parts consumption and increased capital investment. Organic revenue at our stock-preparation business was relatively flat with increased revenue due to pent-up demand for parts and consumables products and improved capital equipment revenue at our Chinese business, partially offset by lower capital equipment revenue at our North American business due to timing of orders. Revenue at our Material Handling segment increased 18% in the second quarter of 2021, while organic revenue increased 14%. Organic revenue increased at our baling business due to improved business conditions in Europe, including the recovery of recycled commodity prices. Organic revenue at our conveying and screening business was relatively flat due to lower capital equipment revenue as a result of the completion of a multi-year project early in the second quarter of 2021, offset by the impact of pent-up demand for parts and consumables products, which was depressed in 2020 as a result of customer shutdowns and visitation restrictions due to the COVID-19 pandemic. Gross Profit Margin Gross profit margin by segment in the second quarters of 2021 and 2020 was as follows: Three Months Ended Basis Point Change July 3, 2021 June 27, 2020 Flow Control 52.8% 53.5% (70) bps Industrial Processing 40.1% 40.9% (80) bps Material Handling 34.9% 33.8% 110 bps Consolidated Gross Profit Margin 43.6% 43.5% 10 bps Consolidated gross profit margin was relatively unchanged in the second quarter of 2021 compared with the second quarter of 2020. We received benefits from government employee retention assistance programs of $0.5 million, or 0.3% of revenue, in the second quarter of 2021 compared with $1.3 million, or 0.8% of revenue, in the second quarter of 2020. Offsetting the impact of the decrease in benefits received from these programs was an increase in consolidated gross profit margin due to an improved gross profit margin at our Material Handling segment as described below. We do not anticipate significant benefits from government employee retention assistance programs in the future. Gross profit margin at our Flow Control segment decreased to 52.8% in the second quarter of 2021 compared with 53.5% in the second quarter of 2020 primarily due to a lower proportion of higher-margin parts and consumables revenue. We expect gross profit margin for this segment to decline in the second half of the year due to the impact of the amortization of acquired profit in inventory related to the Clouth acquisition. Gross profit margin at our Industrial Processing segment decreased to 40.1% in the second quarter of 2021 compared with 40.9% in the second quarter of 2020 due to a decrease in benefits received from government employee retention assistance programs. Gross profit margin at our Material Handling segment increased in the second quarter of 2021 compared with the second quarter of 2020 primarily due to a greater proportion of higher-margin parts and consumables revenue at our conveying and screening business. Selling, General, and Administrative Expenses Selling, general, and administrative (SG&A) expenses by segment in the second quarters of 2021 and 2020 were as follows: Three Months Ended (In thousands, except percentages) July 3, 2021 % of Revenue June 27, 2020 % of Revenue Increase (Decrease) % Change Flow Control $ 17,064 24 % $ 15,798 31 % $ 1,266 8% Industrial Processing 14,367 17 % 14,920 23 % (553) (4)% Material Handling 8,682 20 % 8,094 23 % 588 7% Corporate 9,154 N/A 6,261 N/A 2,893 46% Consolidated SG&A Expenses $ 49,267 25 % $ 45,073 29 % $ 4,194 9% 23 Table of Contents KADANT INC. Consolidated SG&A expenses as a percentage of revenue decreased to 25% in the second quarter of 2021 compared with 29% in the second quarter of 2020 primarily due to higher revenue in the 2021 period. Consolidated SG&A expenses increased in the second quarter of 2021 compared with the second quarter of 2020 principally due to $2.6 million from the unfavorable effect of currency translation and incremental incentive compensation resulting from our improved financial performance. SG&A expenses included benefits received from government employee retention assistance programs of $1.0 million in the second quarter of 2021 and $0.8 million in the second quarter of 2020. SG&A expenses at our Flow Control segment increased in the second quarter of 2021 compared with the second quarter of 2020 principally due to the unfavorable effect of foreign currency translation of $1.0 million and $0.2 million for acquisition transaction costs related to the July 2021 acquisition of Clouth. SG&A expenses at our Industrial Processing segment decreased in the second quarter of 2021 compared with the second quarter of 2020 principally due to reduced professional service fees, including a reduction of $0.4 million for acquisition transaction costs, and $0.6 million of insurance proceeds received in the second quarter of 2021. These decreases were offset in part by an increase of $1.2 million from the unfavorable effect of foreign currency translation. SG&A expenses at our Material Handling segment increased in the second quarter of 2021 compared with the second quarter of 2020 principally due to the unfavorable effect of foreign currency translation. SG&A expenses at Corporate increased in the second quarter of 2021 compared with the second quarter of 2020 primarily due to additional incentive compensation as a result of improved financial performance and, to a lesser extent, higher professional service fees. Restructuring Costs Restructuring costs were $0.5 million in the second quarter of 2020, which represented severance costs for 30 employees within our Flow Control segment related to a restructuring plan implemented in response to the slowdown in the global economy that was largely driven by the impact of the COVID-19 pandemic. Interest Expense Interest expense decreased to $1.1 million in the second quarter of 2021 from $1.9 million in the second quarter of 2020 due to lower outstanding debt and a lower weighted-average interest rate. Provision for Income Taxes Our provision for income taxes increased to $8.9 million in the second quarter of 2021 from $4.5 million in the second quarter of 2020 and represented 28% of pre-tax income in both periods. The effective tax rate in the second quarter of 2021 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, nondeductible expenses, state taxes, and tax expense associated with Global Intangible Low-Taxed Income (GILTI) provisions. The effective tax rate in the second quarter of 2020 was higher than our statutory 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 a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements. Net Income Net income increased $11.3 million to $23.0 million in the second quarter of 2021 from $11.7 million in the second quarter of 2020 primarily due to a $14.9 million increase in operating income and a $0.9 million decrease in interest expense, offset in part by a $4.5 million increase in provision for income taxes (see discussions above for further details). First Six Months 2021 Compared With First Six Months 2020 Revenue The following table presents changes in revenue by segment between the first six months of 2021 and 2020, 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. 24 Table of Contents KADANT INC. Revenue by segment in the first six months of 2021 and 2020 was as follows: (Non-GAAP) Six Months Ended Currency Translation Acquisition Change in Organic Revenue (In thousands, except percentages) July 3, 2021 June 27, 2020 Total Increase % Change Increase % Change Flow Control $ 134,516 $ 108,514 $ 26,002 24 % $ 5,417 $ — $ 20,585 19 % Industrial Processing 151,835 130,382 21,453 16 % 9,240 509 11,704 9 % Material Handling 81,923 73,091 8,832 12 % 2,929 — 5,903 8 % Consolidated Revenue $ 368,274 $ 311,987 $ 56,287 18 % $ 17,586 $ 509 $ 38,192 12 % Consolidated revenue in the first six months of 2021 increased 18%, while consolidated organic revenue increased 12%, driven principally by higher demand for parts and consumables products at our Industrial Processing and Flow Control segments and, to a lesser extent, capital equipment at our Flow Control segment as described below. Revenue at our Flow Control segment increased 24% in the first six months of 2021, while organic revenue increased 19%. The increase in organic revenue resulted from higher demand for parts and consumables products and, to a lesser extent, capital equipment at substantially all locations. Increased demand for parts and consumables products was due in part to maintenance requirements at many of our customer locations and pent-up demand, while the 2020 period was depressed as a result of customer downtimes and shutdowns as well as visitation restrictions due to the COVID-19 pandemic. Organic revenue for capital equipment increased in the first six months of 2021 due to improved market conditions and pent-up demand for our products, particularly in the second quarter, while the corresponding 2020 period was adversely impacted by customer reductions in capital spending and deferrals of equipment installations due to the COVID-19 pandemic. Revenue at our Industrial Processing segment increased 16% in the first six months of 2021, while organic revenue increased 9%. Organic revenue for our wood processing business increased due to higher demand for parts and consumables products and, to a lesser extent, capital equipment driven by continued near-capacity mill run rates resulting in higher parts consumption and increased capital investment. Additionally, organic revenue was positively impacted by pent-up demand for parts and consumables products at our stock-preparation business. These increases were offset in part by a decline in capital equipment revenue at our stock-preparation business, particularly in the first quarter of 2021, due to curtailed capital equipment spending by our customers in 2020, which impacted capital revenue in 2021. Revenue at our Material Handling segment increased 12% in the first six months of 2021, while organic revenue increased 8% due to improved business conditions for our baling business, including the recovery of recycled commodity prices. Gross Profit Margin Gross profit margin by segment in the first six months of 2021 and 2020 was as follows: Six Months Ended Basis Point Change July 3, 2021 June 27, 2020 Flow Control 53.0% 53.2% (20) bps Industrial Processing 40.3% 39.7% 60 bps Material Handling 34.8% 34.7% 10 bps Consolidated Gross Profit Margin 43.7% 43.2% 50 bps Consolidated gross profit margin increased to 43.7% in the first six months of 2021 compared with 43.2% in the first six months of 2020. We received benefits from government employee retention assistance programs of $0.9 million, or 0.2% of revenue, in the first six months of 2021 compared with $1.3 million, or 0.4% of revenue, in the first six months of 2020. Offsetting the impact of the decrease in benefits received from these programs was an increase in consolidated gross profit margin primarily due to an improved gross profit margin at our Industrial Processing segment as described below. Gross profit margin at our Flow Control segment decreased slightly to 53.0% in the first six months of 2021 compared with 53.2% in the first six months of 2020. Gross profit margin at our Industrial Processing segment increased to 40.3% in the first six months of 2021 compared with 39.7% in the first six months of 2020 due to improved margins at our wood processing business primarily resulting from manufacturing efficiencies related to higher production volumes. Gross profit margin at our Material Handling segment was relatively unchanged in the first six months of 2021 compared with the first six months of 2020. 25 Table of Contents KADANT INC. Selling, General, and Administrative Expenses SG&A expenses by segment in the first six months of 2021 and 2020 were as follows: Six Months Ended (In thousands, except percentages) July 3, 2021 % of Revenue June 27, 2020 % of Revenue Increase % Change Flow Control $ 34,568 26 % $ 31,740 29 % $ 2,828 9% Industrial Processing 30,030 20 % 28,740 22 % 1,290 4% Material Handling 17,468 21 % 16,775 23 % 693 4% Corporate 16,632 N/A 13,410 N/A 3,222 24% Consolidated SG&A Expenses $ 98,698 27 % $ 90,665 29 % $ 8,033 9% Consolidated SG&A expenses as a percentage of revenue decreased to 27% in the first six months of 2021 compared with 29% in the first six months of 2020 principally due to higher revenue. Consolidated SG&A expenses increased in the first six months of 2021 compared with the first six months of 2020 due to $4.3 million from the unfavorable effect of currency translation, additional incentive compensation resulting from our improved financial performance, and higher professional service fees, including an incremental $1.5 million of acquisition transaction costs. SG&A expenses included benefits received from government employee retention assistance programs of $1.2 million in the first six months of 2021 and $0.8 million in the first six months of 2020. SG&A expenses at our Flow Control segment increased in the first six months of 2021 compared with the first six months of 2020 principally due to $1.5 million from the unfavorable effect of foreign currency translation and $1.2 million of acquisition transaction costs related to the July 2021 acquisition of Clouth. SG&A expenses at our Industrial Processing segment increased in the first six months of 2021 compared with the first six months of 2020 principally due to $2.1 million from the unfavorable effect of foreign currency translation, partially offset by reduced professional service fees in the 2021 period, including a reduction of $0.4 million of acquisition transaction costs. SG&A expenses at our Material Handling segment increased in the first six months of 2021 compared with the first six months of 2020 due to the unfavorable effect of foreign currency translation. SG&A expenses at Corporate increased in the first six months of 2021 compared with the first six months of 2020 primarily due to additional incentive compensation as result of improved financial performance and, to a lesser extent, higher professional service fees. Restructuring Costs See Restructuring Costs in Results of Operations, "Second Quarter 2021 Compared With Second Quarter 2020" for a discussion of the restructuring actions taken during the second quarter of 2020. Interest Expense Interest expense decreased to $2.2 million in the first six months of 2021 from $4.4 million in the first six months of 2020 due to lower outstanding debt and a lower weighted-average interest rate. Provision for Income Taxes Our provision for income taxes increased to $14.5 million in the first six months of 2021 from $9.0 million in the first six months of 2020 and represented 27% of pre-tax income in both periods. The effective tax rate in the first six months of 2021 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, nondeductible expenses, state taxes, and tax expense associated with GILTI. These increases in tax expense were offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements. The effective tax rate in the first six months of 2020 was higher than our statutory 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 a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements. 26 Table of Contents KADANT INC. Net Income Net income increased $15.4 million to $39.8 million in the first six months of 2021 from $24.4 million in the first six months of 2020 primarily due to an $18.7 million increase in operating income and a $2.2 million decrease in interest expense, offset in part by a $5.5 million increase in provision for income taxes (see discussions above for further details). Liquidity and Capital Resources Consolidated working capital was $244 .3 million at July 3, 2021, compared with $155.1 million at January 2, 2021. Consolidated working capital at July 3, 2021 included restricted cash of $84.2 million which was used to fund the acquisition of Clouth in the third quarter of 2021. See Note 11 , Subsequent Event, in the notes to the accompanying condensed consolidated financial statements for further details. Cash and cash equivalents were $73.4 million at July 3, 2021, compared with $65.7 million at January 2, 2021, which included cash and cash equivalents held by our foreign subsidiaries of $69.5 million at July 3, 2021 and $63.6 million at January 2, 2021. Cash Flows Cash flow information in the first six months of 2021 and 2020 was as follows: Six Months Ended (In thousands) July 3, 2021 June 27, 2020 Net Cash Provided by Operating Activities $ 63,478 $ 28,208 Net Cash Used in Investing Activities (3,869) (10,652) Net Cash Provided by (Used in) Financing Activities 32,698 (23,414) Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash (803) (1,466) Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash $ 91,504 $ (7,324) Operating Activities Cash provided by operating activities increased to $63.5 million in the first six months of 2021 from $28.2 million in the first six months of 2020. Our operating cash flows are primarily from cash received from customers, offset by cash payments for items such as inventory, employee compensation, operating leases, income taxes and interest payments on outstanding debt obligations. The increase in cash provided by operating activities in the 2021 period was principally driven by improvements in both changes in working capital and net income. Cash provided by working capital was $5.4 million in the first six months of 2021. Cash provided by working capital in 2021 included $12.9 million from accounts payable related to inventory purchases for increased order activity and $15.9 million from other current liabilities primarily due to an increase in customer deposits for capital equipment orders that will ship in the latter half of fiscal 2021 and early fiscal 2022. These sources of cash were offset in part by cash used of $15.3 million for accounts receivable principally due to revenue growth and $7.3 million for inventories related to orders that will ship in the latter half of fiscal 2021 and early fiscal 2022. Cash used for working capital was $14.6 million in the first six months of 2020. Cash used for working capital in 2020 included $9.4 million for inventories due to delayed shipments and purchases of safety stocks of critical parts, as well as other purchases to support capital projects; $9.2 million by other current liabilities primarily due to a reduction in advance billings due to the timing and reduced level of capital orders, as well as a final payment of $2.4 million to settle our post-retirement restoration plan; and $5.0 million by accounts payable primarily due to reduced spending levels in 2020. These uses of cash were offset in part by cash provided of $4.8 million from accounts receivable due to a decline in revenue in 2020 and timing of collections. Investing Activities Cash used in investing activities was $3.9 million in the first six months of 2021, compared with $10.7 million in the first six months of 2020. The 2020 period included a use of cash of $7.1 million for acquisitions. Financing Activities Cash provided by financing activities was $32.7 million in the first six months of 2021, compared with cash used in financing activities of $23.4 million in the first six months of 2020. Repayment of long-term obligations was $47.1 million in the first six months of 2021 and $24.2 million in the first six months of 2020. Borrowings under our revolving credit facility 27 Table of Contents KADANT INC. were $88.9 million in the first six months of 2021, including $78.7 million to partially fund the acquisition of Clouth, and $7.0 million in the first six months of 2020. 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 $0.8 million reduction in cash, cash equivalents, and restricted cash in the first six months of 2021 was primarily attributable to the strengthening of the U.S. dollar against the euro. The $1.5 million reduction in cash, cash equivalents, and restricted cash in the first six months of 2020 primarily related to the strengthening of the U.S. dollar against the Brazilian real, Canadian dollar, and Mexican peso. Borrowing Capacity and Debt Obligations We entered into an unsecured multi-currency revolving credit facility, dated as of March 1, 2017 (as amended and restated to date, the Credit Agreement). As of July 3, 2021, we have a borrowing capacity of over $400 million, including $140.5 million available under the Credit Agreement, an additional $150 million in an uncommitted, unsecured incremental borrowing facility under the Credit Agreement, and $115 million of senior promissory notes available for issuance under our uncommitted Multi-Currency Note Purchase and Private Shelf Agreement (Note Purchase Agreement). Under these agreements, our leverage ratio must be less than 3.75, or, if we elect, for the quarter during which a material acquisition occurs and for the three fiscal quarters thereafter, must be less than 4.00. As of July 3, 2021, our leverage ratio was 1.71 and we were in compliance with our debt covenants. We do not have any mandatory principal payments on our long-term debt obligations until 2023. See Note 4 , Long-Term Obligations, in the accompanying condensed consolidated financial statements for additional information regarding our debt obligations. Additional Liquidity and Capital Resources On May 20, 2021, our board of directors approved the repurchase of up to $20 million of our equity securities during the period from May 20, 2021 to May 20, 2022. We have not repurchased any shares of our common stock under this authorization or our previous authorization, which expired on May 13, 2021. We paid cash dividends of $5.7 million in the first six months of 2021. On May 20, 2021, we declared a quarterly cash dividend of $0.25 per share totaling $2.9 million that will be paid on August 12, 2021. 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. We plan to make expenditures of approximately $12 to $13 million during the remainder of 2021 for property, plant, and equipment. As of July 3, 2021, we had approximately $219.4 million of total unremitted foreign earnings. It is our intent to indefinitely reinvest $195.8 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments, if any. In the first six months of 2021, 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 $5.9 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 Credit Agreement 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 first six months of 2021 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 January 2, 2021, except for the commitments related to the acquisition of Clouth as described in Note 11 , Subsequent Event, in the accompanying condensed consolidated financial statements. Application of Critical Accounting Policies and Estimates Management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, 28 Table of Contents KADANT INC. disclosure of contingent liabilities, and the reported amounts of revenue and expenses during the reporting period. Our critical accounting policies are defined as those that entail significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. Management evaluates its estimates on an ongoing basis based on historical experience, current economic and market conditions, and other assumptions management believes are reasonable. We believe that our most critical accounting policies which are significant to our consolidated financial statements, and which involve the most complex or subjective decisions or assessments, are those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the section captioned "Application of Critical Accounting Policies and Estimates" in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended January 2, 2021. There have been no material changes to these critical accounting policies since the end of fiscal 2020 that warrant disclosure. Recent Accounting Pronouncements See Note 1 , under the headings Recently Adopted Accounting Pronouncements and Recent Accounting Pronouncements Not Yet Adopted , in the accompanying condensed consolidated financial statements for details. 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 Part II, Item 7A, of our Annual Report on Form 10-K for the fiscal year ended January 2, 2021.