What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-10 compared with 2021-08-11 · 154 added, 152 removed, 137 unchanged (69% of the section changed)

30 unchanged sentences

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.

We had record consolidated bookings of $244.7 million in the third quarter of 2021, including bookings of $15.0 million attributable to our acquisitions.

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.

Our third quarter of 2021 bookings include record orders for capital equipment and continued strong demand for our parts and consumables products.

This follows previous consolidated bookings records set in the prior three 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 third quarter of 2021 with record consolidated backlog of $299.5 million.

An overview of our business by segment is as follows:

• Flow Control – During the third quarter of 2021, we acquired The Clouth Group of Companies (Clouth), which contributed $9.9 million of bookings for the quarter .

Orders for both parts and consumables products and capital equipment at our existing Flow Control businesses continue to be strong, following record bookings during the first half of 2021 due to improved market conditions and pent-up demand from depressed levels encountered during most of 2020.

• Industrial Processing – Our Industrial Processing segment had record bookings for capital equipment and continued strong demand for parts and consumables products during the third quarter of 2021.

Orders for both capital equipment and parts and consumables products at our wood processing business were fueled by an ongoing robust U.S.

housing market and high demand for lumber, oriented strand board and plywood, which continues to result in high parts consumption and drive new capital equipment investment by our customers.

More recently, maintenance requirements at many of our wood processing customers have augmented demand for our parts products, which we expect to continue for the remainder of the year.

Increased bookings at our stock-preparation business was led by orders for fiber processing systems at our North American and European businesses.

This followed strong bookings for capital equipment at our Chinese operation in the prior quarter.

Orders for parts and consumables products for our stock-preparation business moderated slightly following three quarters of strong bookings attributable to improved market conditions and pent-up demand.

• Material Handling – Our Material Handling segment also had record bookings in the third quarter of 2021.

In August 2021, we acquired East Chicago Machine Tool Corporation (Balemaster) and certain assets of affiliated companies, which contributed $5.1 million of orders for the period.

Bookings for baling products at our European operations continue to be bolstered by improved business conditions, including the recovery of recycled commodity prices.

Bookings at our conveying and screening business have begun to rebound from 2020 levels with ongoing improved demand for our parts and consumables products as a result of the relaxation of pandemic-related restrictions.

While we have seen improved market conditions for our products and we expect our financial results for the remainder of 2021 to be strong, there is still some uncertainty regarding near-term economic growth due to ongoing risks surrounding the COVID-19 pandemic.

Additionally, some of our operations have been and may continue to be impacted by supply chain constraints, resulting in inflationary pressure on material costs, longer lead times, and increased freight costs, as well as customer-requested delays in shipments.

Also, in September 2021, China began limiting electricity usage within many of its provinces, requiring businesses in those regions to take downtime.

We have been able to mitigate increased material costs through price adjustments on many of our products;

however, we cannot be sure that we will be able to absorb future increases through price adjustments.

While our businesses are working to alleviate supply chain constraints through various measures, we are unable to predict the impact of these constraints and the impact from China's energy use restrictions on the timing of revenue and operating costs on our business in the near future.

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

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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.

In the third quarter of 2021, we acquired Clouth for $93.1 million, net of cash acquired plus debt assumed.

Clouth, which is included in our Flow Control segment, is a leading manufacturer of doctor blades and related equipment used in the production of paper, packaging, and tissue.

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.

Clouth has two manufacturing facilities in Germany and one in Poland and generated revenue of approximately 40.5 million euros for the trailing twelve months ended June 30, 2021.

In the third quarter of 2021, we also acquired Balemaster for $53.7 million, net of cash acquired.

Balemaster, which is included in our Material Handling segment, is a leading U.S.

manufacturer of horizontal balers and related equipment used primarily for recycling packaging waste at corrugated box plants and large retail and distribution centers.

We expect several synergies in connection with this acquisition, including expanding our presence in the secondary material processing sector and creating new opportunities for leveraging our high-performance balers produced in Europe.

Balemaster's revenue for the trailing twelve months ended June 30, 2021 was approximately $22.2 million.

See Note 2 , Acquisitions, 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

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.

Third Quarter 2021 Compared With Third Quarter 2020

The following table presents the change in revenue by segment between the third quarters of 2021 and 2020, and those changes excluding the effect of foreign currency translation and acquisitions which we refer to as change in organic revenue.

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

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generally accepted accounting principles (GAAP) measure.

Revenue by segment in the second quarters of 2021 and 2020 was as follows:

Three Months Ended Currency Translation Change in Organic Revenue

(In thousands, except percentages) July 3,

2021 June 27,

Revenue by segment in the third quarters of 2021 and 2020 was as follows:

Three Months Ended Currency Translation Acquisitions Change in Organic Revenue

(In thousands, except percentages) October 2,

2021 September 26,

2020 Total Increase % Change Increase % Change

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Consolidated Revenue $ 199,789 $ 154,610 $ 45,179 29 % $ 4,598 $ 12,758 $ 27,823 18 %

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

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.

Consolidated revenue in the third quarter of 2021 increased 29%, while consolidated organic revenue increased 18%, due to higher demand for parts and consumables products and capital equipment principally at our Industrial Processing and Flow Control segments as described below.

Revenue at our Flow Control segment increased 34% in the third quarter of 2021, while organic revenue increased 14%.

Organic revenue increased due to higher demand for parts and consumables products at substantially all locations resulting from improved market conditions and pent-up demand and due to increased capital equipment revenue at our North American business, which was attributable in part to customer reductions in spending and deferrals of equipment installations in the corresponding 2020 period.

Revenue at our Industrial Processing segment increased 31% in the third quarter of 2021, while organic revenue increased 27% due to higher demand for both capital equipment and parts and consumables products at our wood processing and stock-preparation businesses.

Demand for our wood processing business products was driven by high mill activity resulting in increased capital investment and higher parts consumption.

Increased demand for capital equipment at our stock-preparation business was primarily attributable to capital orders at our Chinese business, offset in part by lower capital equipment revenue at our North American business due to the timing of orders.

Organic revenue for parts and consumables products at our North American stock-preparation business also increased due to improved market conditions and pent-up demand coupled with a depressed 2020 period as a result of the COVID-19 pandemic.

Revenue at our Material Handling segment increased 17% in the third quarter of 2021, while organic revenue increased 8%.

Increased demand for products at our European baling operation due to improved business conditions in Europe, including the recovery of recycled commodity prices, was partially offset by lower capital equipment revenue at our conveying and screening business.

Gross Profit Margin

Gross profit margin by segment in the second quarters of 2021 and 2020 was as follows:

Gross profit margin by segment in the third quarters of 2021 and 2020 was as follows:

Three Months Ended Basis Point Change

2021 June 27,

2021 September 26,

Flow Control 49.7 % 52.9% (320) bps

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Consolidated Gross Profit Margin 41.9 % 44.2% (230) 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.

Consolidated gross profit margin declined to 41.9% in the third quarter of 2021 compared with 44.2% in the third quarter of 2020 due to the inclusion of $2.2 million of amortization of acquired profit in inventory, which lowered consolidated gross profit margin in the 2021 period by 1.1 percentage points, and the inclusion of $1.6 million for benefits received from government employee retention assistance programs, which increased consolidated gross profit margin in the 2020 period by 1.1 percentage points.

Gross profit margin at our Flow Control segment decreased to 49.7% in the third quarter of 2021 compared with 52.9% in the third quarter of 2020 primarily due to the inclusion of $1.8 million of amortization of acquired profit in inventory for Clouth, which lowered gross profit margin in the 2021 period by 2.4 percentage points, and a lower gross profit margin profile for Clouth.

Gross profit margin at our existing businesses increased principally due to higher margins on parts and consumables.

Gross profit margin at our Industrial Processing segment decreased to 39.7% in the third quarter of 2021 compared with 43.7% in the third quarter of 2020 due to the inclusion of $1.4 million for benefits received from government employee retention assistance programs, which increased gross profit margin in the 2020 period by 2.3 percentage points, and the impact of lower-margin capital equipment revenue at our Chinese stock-preparation business.

Gross profit margin at our Material Handling segment increased to 31.9% in the third quarter of 2021 compared with 31.1% in the third quarter of 2020 primarily due to a higher gross profit margin profile for Balemaster and an improved gross profit margin at our existing baler business resulting from a favorable product mix and higher revenue.

These items were offset in part by $0.4 million of amortization of acquired profit in inventory for Balemaster, which lowered gross profit margin for this segment by 0.9 percentage points.

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:

Selling, general, and administrative (SG&A) expenses by segment in the third 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

(In thousands, except percentages) October 2,

2021 % of Revenue September 26,

2020 % of Revenue Increase % Change

Flow Control $ 19,658 26 % $ 15,136 27 % $ 4,522 30%

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Consolidated SG&A Expenses $ 52,316 26 % $ 43,853 28 % $ 8,463 19%

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.

Consolidated SG&A expenses as a percentage of revenue decreased to 26% in the third quarter of 2021 compared with 28% in the third quarter of 2020 primarily due to higher revenue.

Consolidated SG&A expenses increased $8.5 million du e to the inclusion of $3.4 million of SG&A expenses from acquisitions, an incremental $0.9 million of acquisition-related costs, $0.9 million from the unfavorable effect of currency translation, and a $0.7 million decrease in benefits received from government employee retention assistance programs.

The remaining $2.6 million is principally due to increased incentive compensation, travel-related costs, and professional services fees resulting from improved business conditions.

SG&A expenses at our Flow Control segment increased $4.5 million principally due to the inclusion of $2.8 million of SG&A expenses from Clouth, $0.9 million of acquisition-related costs, and $0.4 million from the unfavorable effect of foreign currency translation.

SG&A expenses at our Industrial Processing segment increased $1.5 million principally due to the inclusion of $0.7 million in the 2020 period for benefits received from government employee retention assistance programs, increased travel-related costs and professional service fees, and $0.5 million from the unfavorable effect of foreign currency translation.

SG&A expenses at our Material Handling segment increased $1.5 million principally due to the inclusion of $0.6 million of SG&A expenses from Balemaster, increased travel-related costs and professional service fees, and $0.2 million of incremental acquisition-related costs.

SG&A expenses at Corporate increased $1.0 million primarily due to additional incentive compensation as a result of our improved financial performance.

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.

Restructuring costs were $0.5 million in the third quarter of 2020, which represented severance costs of $0.3 million in our Flow Control segment and $0.2 million in our Industrial Processing segment.

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.

Interest expense decreased to $1.3 million in the third quarter of 2021 from $1.7 million in the third quarter of 2020 due to 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.

Our provision for income taxes increased to $6.7 million in the third quarter of 2021 from $4.7 million in the third quarter of 2020.

The effective tax rate of 25% in the third quarter of 2021 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 Global Intangible Low-Taxed Income (GILTI) provisions.

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 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

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 effective tax rate of 24% in the third quarter of 2020 was higher than our statutory rate of 21% primarily due to nondeductible expenses and the distribution of our worldwide earnings.

These increases in tax expense were offset in part by a tax benefit related to final GILTI regulations issued by the U.S.

Treasury Department during the third quarter of 2020 on an election to provide a high-tax exception to the GILTI tax retroactive to 2018.

Net income increased to $20.7 million in the third quarter of 2021 from $15.0 million in the third quarter of 2020 primarily due to a $7.4 million increase in operating income, offset in part by a $2.0 million increase in provision for income taxes (see discussions above for further details).

First Nine Months 2021 Compared With First Nine Months 2020

The following table presents changes in revenue by segment between the first nine months of 2021 and 2020, and those changes excluding the effect of foreign currency translation and acquisitions which we refer to as change in organic revenue.

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

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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 2021 and 2020 was as follows:

Six Months Ended Currency Translation Acquisition Change in Organic Revenue

(In thousands, except percentages) July 3,

2021 June 27,

Revenue by segment in the first nine months of 2021 and 2020 was as follows:

Nine Months Ended Currency Translation Acquisitions Change in Organic Revenue

(In thousands, except percentages) October 2,

2021 September 26,

2020 Total Increase % Change Increase % Change

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Consolidated Revenue $ 568,063 $ 466,597 $ 101,466 22 % $ 22,184 $ 13,267 $ 66,015 14 %

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%.

Consolidated revenue in the first nine months of 2021 increased 22%, while consolidated organic revenue increased 14%, principally driven by higher demand for parts and consumables products and, to a lesser extent, capital equipment at our Flow Control and Industrial Processing segments as described below.

Revenue at our Flow Control segment increased 27% in the first nine months of 2021, while organic revenue increased 17%.

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.

Increased demand for capital equipment was due to improved market conditions and pent-up demand w hile the corresponding 2020 period was adversely impacted by customer reductions in capital spending and deferrals of equipment installations as a result of the COVID-19 pandemic.

Revenue at our Industrial Processing segment increased 21% in the first nine months of 2021, while organic revenue increased 15% due to higher demand for parts and consumables products at our wood processing and stock-preparation businesses and capital equipment at our wood processing business.

Demand for parts and consumables products and, to a lesser extent, capital equipment at our wood processing business was driven by high mill activity resulting in higher parts consumption and increased capital investment.

Demand for parts and consumables at our North American stock-preparation business increased due to improved market conditions and pent-up demand coupled with a depressed 2020 period as a result of the COVID-19 pandemic.

Conversely, lower capital equipment revenue at our North American and European stock-preparation businesses due to the timing of orders and curtailed spending by our customers, which impacted revenue in the first half of 2021, was offset in part by revenue attributable to capital equipment orders at our Chinese business.

Revenue at our Material Handling segment increased 14% in the first nine months of 2021, while organic revenue increased 8%.

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

2021 June 27,

Gross profit margin by segment in the first nine months of 2021 and 2020 was as follows:

Nine Months Ended Basis Point Change

2021 September 26,

Flow Control 51.8 % 53.1% (130) bps

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Consolidated Gross Profit Margin 43.1 % 43.5% (40) 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.

Consolidated gross profit margin declined slightly to 43.1% in the first nine months of 2021 compared with 43.5% in the first nine months of 2020.

The 2021 period included $2.2 million of amortization of acquired profit in inventory, which lowered consolidated gross profit margin by 0.4 percentage points.

We received benefits from government employee retention assistance programs of $0.9 million, or 0.2% of revenue, in the first nine months of 2021 compared with $2.9 million, or 0.6% of revenue, in the first nine months of 2020.

Gross profit margin at our Flow Control segment decreased to 51.8% in the first nine months of 2021 compared with 53.1% in the first nine months of 2020 due to the inclusion of $1.8 million of amortization of acquired profit in inventory, which lowered the gross profit margin in the 2021 period by 0.9 percentage points and, to a lesser extent, a lower gross profit margin profile for Clouth.

Gross profit margin at our Industrial Processing segment decreased to 40.1% in the first nine months of 2021 compared with 41.0% in the first nine months of 2020 due to lower benefits received from government retention assistance programs.

We received benefits from government employee retention assistance programs of $0.7 million, or 0.3% of revenue, in the first nine months of 2021 compared with $2.4 million, or 1.2% of revenue, in the first nine months of 2020.

Higher margins at our wood processing business primarily resulting from manufacturing efficiencies related to higher production volumes were offset by the impact of lower-margin capital equipment revenue at our Chinese stock-preparation business.

Gross profit margin at our Material Handling segment increased slightly to 33.8% in the first nine months of 2021 compared with 33.5% in the first nine months of 2020.

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,

SG&A expenses by segment in the first nine months of 2021 and 2020 were as follows:

Nine Months Ended

(In thousands, except percentages) October 2,

2021 % of Revenue September 26,

2020 % of Revenue Increase % Change

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Consolidated SG&A Expenses $ 151,014 27 % $ 134,518 29 % $ 16,496 12%

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.

Consolidated SG&A expenses as a percentage of revenue decreased to 27% in the first nine months of 2021 compared with 29% in the first nine months of 2020 principally due to higher revenue.

Consolidated SG&A expenses increased $16.5 million principally due to $5.2 million from the unfavorable effect of currency translation, the inclusion of $3.7 million of SG&A expenses from acquisitions, additional incentive compensation resulting from our improved financial performance, an incremental $2.5 million of acquisition-related costs, and increased professional service fees.

SG&A expenses included benefits received from government employee retention assistance programs of $1.4 million in the first nine months of 2021 and $1.8 million in the first nine months of 2020.

SG&A expenses at our Flow Control segment increased $7.4 million principally due to the inclusion of $2.8 million of SG&A expenses from Clouth, $2.1 million of acquisition-related costs, and $1.8 million from the unfavorable effect of foreign currency translation.

SG&A expenses at our Industrial Processing segment increased $2.8 million principally due to $2.6 million from the unfavorable effect of foreign currency translation and a $0.7 million reduction in benefits received from government assistance programs.

SG&A expenses at our Material Handling segment increased $2.8 million principally due to $0.8 million from the unfavorable effect of foreign currency translation, an incremental $0.8 million of acquisition-related costs, and the inclusion of $0.6 million of SG&A expenses from Balemaster.

SG&A expenses at Corporate increased $3.5 million 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.

Restructuring costs were $0.9 million in the first nine months of 2020, which represented severance costs of $0.7 million in our Flow Control segment and $0.2 million in our Industrial Processing segment.

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.

Interest expense decreased to $3.5 million in the first nine months of 2021 from $6.1 million in the first nine months of 2020 due to a lower weighted-average interest rate and lower outstanding debt for the first nine months of 2021.

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.

Our provision for income taxes increased to $21.3 million in the first nine months of 2021 from $13.7 million in the first nine months of 2020 and represented 26% of pre-tax income in both periods.

The effective tax rate in the first nine 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.

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

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 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).

Net income increased to $60.5 million in the first nine months of 2021 from $39.4 million in the first nine months of 2020 primarily due to a $26.1 million increase in operating income and a $2.6 million decrease in interest expense, offset in part by a $7.5 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 flow information in the first six months of 2021 and 2020 was as follows:

Six Months Ended

(In thousands) July 3,

2021 June 27,

Consolidated working capital was $177.4 million at October 2, 2021, compared with $155.1 million at January 2, 2021.

Cash and cash equivalents were $82.6 million at October 2, 2021, compared with $65.7 million at January 2, 2021, which included cash and cash equivalents held by our foreign subsidiaries of $78.6 million at October 2, 2021 and $63.6 million at January 2, 2021.

Cash flow information in the first nine months of 2021 and 2020 was as follows:

Nine Months Ended

(In thousands) October 2,

2021 September 26,

Net Cash Provided by Operating Activities $ 101,410 $ 52,601

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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.

Cash provided by operating activities increased to $101.4 million in the first nine months of 2021 from $52.6 million in the first nine 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.

The increase in cash provided by operating activities in the 2021 period was principally driven by improvements in net income and working capital.

Cash provided by working capital was $11.7 million in the first nine months of 2021.

Cash provided by working capital in 2021 included $33.3 million from other current liabilities primarily due to an increase in customer deposits and advance billings related to capital equipment orders that will be fulfilled over the next year and $19.8 million from accounts payable attributable to increased inventory purchases.

These sources of cash were offset in part by cash used of $22.3 million for accounts receivable mostly due to revenue growth and timing of shipments, $10.6 million for a buildup of inventories primarily for capital equipment orders and to mitigate potential supply chain issues, and $8.1 million for other current assets principally due to a prepayment for raw material at one of our Chinese businesses.

Cash used for working capital was $15.4 million in the first nine months of 2020.

Cash used for working capital in 2020 included $6.2 million for inventories primarily related to the buildup of inventory for capital equipment and spare parts

that were shipped in late fiscal 2020 and early fiscal 2021 and $13.2 million from accounts payable primarily due to reduced spending levels in 2020.

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.

Cash used in investing activities was $148.6 million in the first nine months of 2021, compared with $12.5 million in the first nine months of 2020.

Cash used in investing activities included consideration paid for acquisitions, net of cash acquired, of $141.5 million in the 2021 period and $7.1 million in the 2020 period.

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

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.

Cash provided by financing activities was $66.7 million in the first nine months of 2021, compared with cash used in financing activities of $52.9 million in the first nine months of 2020.

Borrowings under our revolving credit facility were $151.9 million in the first nine months of 2021, including $140.3 million to fund acquisitions, and $26.0 million in the first nine months of 2020, including $18.9 million used to prepay the outstanding principal balance on our real estate loan.

Repayment of long-term obligations was $72.7 million in the first nine months of 2021, and $69.0 million in the first nine months of 2020, including the $18.9 million prepayment of the real estate loan.

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.

The $2.5 million reduction in cash, cash equivalents, and restricted cash in the first nine 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).

As of October 2, 2021, we have a borrowing capacity of $369.9 million, including $104.9 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), which expires on December 14, 2021.

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.

As of October 2, 2021, our leverage ratio was 1.69 and we were in compliance with our debt covenants.

Except for $5.6 million of short-term obligations and current maturities of long-term obligations, we do not have any material mandatory principal payments on our debt obligations until 2023.

See Note 5 , Short- and Long-Term Obligations, in the accompanying condensed consolidated financial statements for additional information regarding our debt obligations.

Additional Liquidity and Capital Resources

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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.

We paid cash dividends of $8.6 million in the first nine months of 2021.

On September 9, 2021, we declared a quarterly cash dividend of $0.25 per share totaling $2.9 million that will be paid on November 11, 2021.

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

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We plan to make expenditures of approximately $5 to $7 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.

As of October 2, 2021, we had approximately $230.6 million of total unremitted foreign earnings.

It is our intent to indefinitely reinvest $212.5 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.

In the first nine 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 $4.4 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.

In the future, our liquidity position will be affected by 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.

There have been no material changes to our contractual obligations and other commercial commitments during the first nine 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 an increase of $81.0 million of short- and long-term obligations as of October 2, 2021 primarily related to our acquisitions.

See Note 2 , Acquisitions, and Note 5 , Short- and Long-term Obligations, 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,

disclosure of contingent liabilities, and the reported amounts of revenue and expenses during the reporting period.

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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.

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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