What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-10 compared with 2022-05-11 · 177 added, 111 removed, 160 unchanged (64% of the section changed)

11 unchanged sentences

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 II, Item 1A , of this report and Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended January 1, 2022, as filed with the Securities and Exchange Commission (SEC) and as may be further amended and/or restated in subsequent filings with the SEC.

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 II , Item 1A , of this report and Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended January 1, 2022 (the Annual Report) and as may be further amended and/or restated in subsequent filings with the SEC.

Company Background

17 unchanged sentences

Industry and Business Overview

We had record consolidated bookings of $266.1 million in the first quarter of 2022, including bookings of $22.4 million attributable to our acquisitions.

We had consolidated bookings of $265.9 million in the second quarter of 2022 down slightly from our record bookings of $266.1 million in the first quarter of 2022.

Our consolidated bookings in the second quarter of 2022 included $25.9 million attributable to our acquisitions.

See Acquisitions below for further details.

Our first quarter of 2022 bookings include record orders for parts and consumables products and continued strong demand for our capital equipment.

We ended the first quarter of 2022 with record consolidated backlog of $348.3 million.

We also had a higher unfavorable foreign currency translation impact compared to prior quarters due to the strengthening U.S.

dollar resulting in a $9.9 million, or 4%, decrease in bookings compared to the second quarter of 2021.

Following our record first quarter 2022 bookings, we continued

to see strong demand for both parts and consumables and capital equipment products.

We expect a lower level of bookings in the second half of the year compared to the record bookings in the first half of 2022 as end-market demand slows in response to actions taken by the central banks to control inflation.

We ended the second quarter of 2022 with record consolidated backlog of $379.2 million.

An overview of our business by segment is as follows:

• Flow Control – Our Flow Control segment had record bookings in the first quarter of 2022, increasing 32% compared to first quarter of 2021, including a 17% increase from our acquisition of The Clouth Group of Companies (Clouth).

• Flow Control – Our Flow Control segment had its second highest bookings quarter, following our record bookings in the first quarter, increasing 36% compared to the second quarter of 2021.

This increase included a 19% increase from our acquisition of The Clouth Group of Companies (Clouth) and a 5% decrease from the unfavorable effect of foreign currency translation.

Orders for both parts and consumables products and capital equipment at our existing Flow Control businesses continue to be strong due to growth in the industries we serve.

• Industrial Processing – Our Industrial Processing segment had record bookings for parts and consumables products during the first quarter of 2022 and continued strong demand for capital equipment.

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 drives new capital equipment investment by our customers.

Maintenance requirements at many of our wood processing customers and high mill operating rates have augmented demand for our parts products.

Capital bookings at our stock-preparation business were strong, especially at our operations in China, but lower compared to the record bookings levels in the second and third quarters of 2021.

Orders for parts and consumables products for our stock-preparation business increased over the first quarter of 2021 and sequentially to a near record quarter due to a continued improvement in market conditions and further expansion into packaging grades.

• Material Handling – Our Material Handling segment had record bookings in the first quarter of 2022, increasing 42% compared to the first quarter of 2021, including a 23% increase from our acquisition of East Chicago Machine Tool Corporation (Balemaster).

Capital bookings at our conveying and vibratory business were more than double the bookings in the first quarter of 2021 due to several large orders.

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

Many of our operations continue to be impacted by labor availability and supply chain constraints, the latter of which

resulted in inflationary pressure on material costs, longer lead times, and increased freight costs.

We expect bookings to moderate in the second half of 2022 compared with the record-setting booking performance achieved during the first half of the year.

• Industrial Processing – Our Industrial Processing segment bookings increased 3% sequentially and 8% compared to the second quarter of 2021 resulting from strong demand for our capital equipment at our wood processing business due to the robust U.S.

housing market and high demand for lumber, oriented strand board and plywood.

Capital bookings at our stock-preparation business were lower in the second quarter of 2022 compared to the record bookings levels in the second and third quarters of 2021.

While we continue to experience robust capital project activity, we expect a lower level of capital bookings in our Industrial Processing segment in the third quarter of 2022 compared to prior quarters as customers assess new capital expenditures, and as the pace of capacity expansion moderates and new equipment is brought online.

Orders for parts and consumables products at our Industrial Processing segment increased over the second quarter of 2021 due to continued improvement in market conditions.

• Material Handling – Our Material Handling segment bookings increased 49% compared to the second quarter of 2021, including a 30% increase from our acquisition of East Chicago Machine Tool Corporation (Balemaster) and a 19% increase in capital bookings at our conveying and vibratory business.

We expect demand for baling products at our European operations to moderate in the second half of 2022.

Many of our operations continue to be impacted by labor availability and supply chain constraints, the latter of which resulted in inflationary pressure on material costs, longer lead times, and increased freight costs.

Our businesses are alleviating supply chain constraints through various measures, including advance purchases of raw materials to prevent potential manufacturing disruptions and mitigating increased material and freight costs through price adjustments, when possible.

1 unchanged sentence

Despite this optimism, we expect our operating environment to continue to be challenging as a result of the factors impacting our business discussed above and the uncertainties and risks surrounding the COVID-19 pandemic, including China's zero-COVID policy.

For more information related to these challenges, and other factors impacting our business, including recent geopolitical tensions, please see Risk Factors, included in Part II, Item 1A , of this report and Part I, Item 1A, included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2022.

For more information related to these challenges, and other factors impacting our business, including recent geopolitical tensions, please see Risk Factors included in Part II, Item 1A , of this report, and Part 1, Item 1A, of our Annual Report and subsequent filings with the SEC.

International Sales

More than half of our sales are to customers outside the United States, mainly in Europe, Asia, and Canada.

Slightly 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.

In the first half of 2022, we experienced a significant unfavorable foreign currency translation effect on our results of operations compared to 2021 due to the strengthening of the U.S.

dollar against foreign currencies in countries in which we operate, especially the euro.

We expect this trend to continue throughout the remainder of the year.

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.

To mitigate the impact of foreign currency transaction 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.

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 1, 2022.

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 and subsequent filings with the SEC.

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.

9 unchanged sentences

Results of Operations

First Quarter 2022 Compared With First Quarter 2021

The following table presents the change in revenue by segment between the first quarters of 2022 and 2021, and those changes excluding the effect of foreign currency translation and acquisitions which we refer to as change in organic revenue.

Second Quarter 2022 Compared With Second Quarter 2021

The following table presents the change in revenue by segment between the second quarters of 2022 and 2021, 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.

2 unchanged sentences

generally accepted accounting principles (GAAP) measure.

Revenue by segment in the first quarters of 2022 and 2021 was as follows:

Revenue by segment in the second quarters of 2022 and 2021 was as follows:

Three Months Ended Currency Translation Acquisitions Change in Organic Revenue

(In thousands, except percentages) April 2,

2022 April 3,

(In thousands, except percentages) July 2,

2021 Total Increase % Change Increase % Change

4 unchanged sentences

Consolidated Revenue $ 221,649 $ 195,811 $ 25,838 13 % $ (9,063) $ 19,912 $ 14,989 8 %

Consolidated revenue increased 31% in the first quarter of 2022, while consolidated organic revenue increased 22%, 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 35% in the first quarter of 2022, while organic revenue increased 18%.

Organic revenue increased due to higher demand for our capital equipment led by our European business and for parts and consumables products at substantially all locations resulting from improved market conditions and pent-up demand.

Revenue at our Industrial Processing segment increased 35% in the first quarter of 2022 due to higher demand for both capital equipment and parts and consumables products at our wood processing business.

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

Also contributing to the revenue increase was increased demand for capital equipment at our stock-preparation business at both our Chinese and European operations, offset in part by lower capital equipment revenue at our North American business due to the timing of orders.

Revenue for parts and consumables products at our North American stock-preparation business also increased due to improved market conditions and focused sales initiatives.

Revenue at our Material Handling segment increased 20% in the first quarter of 2022, while organic revenue increased 4% due to higher demand for capital equipment at our European baling operation due to improved business conditions.

Revenue from our parts and consumables products also increased at our conveying and vibratory business due to strong demand in the aggregate and food and packaging industries.

Consolidated revenue increased 13% in the second quarter of 2022, including a 10% increase from acquisitions and a 5% decrease from the negative effect of foreign currency translation.

Organic revenue increased 8% due to higher demand for parts and consumables products, principally at our Flow Control segment and capital equipment at our Material Handling and Industrial Processing segments as described below.

Revenue at our Flow Control segment increased 20% in the second quarter of 2022, while organic revenue increased 8%.

Organic revenue increased due to higher demand for parts and consumables products in North America resulting from improved market conditions.

Revenue at our Industrial Processing segment increased 2% in the second quarter of 2022, while organic revenue increased 6%.

Organic revenue increased due to higher demand for parts and consumables products at our wood processing business due in part to maintenance spending by our customers.

Also contributing to the organic revenue increase was an increase in demand for capital equipment at our European stock-preparation business due to several large projects.

Revenue at our Material Handling segment increased 23% in the second quarter of 2022, while organic revenue increased 10% due to higher demand for capital equipment at our European baling operations due to improved business conditions.

Gross Profit Margin

Gross profit margin by segment in the first quarters of 2022 and 2021 was as follows:

Gross profit margin by segment in the second quarters of 2022 and 2021 was as follows:

Three Months Ended Basis Point Change

2022 April 3,

Flow Control 52.8% 52.8% 0 bps

2 unchanged sentences

Consolidated Gross Profit Margin 43.3% 43.6% (30) bps

Consolidated gross profit margin decreased to 43.4% in the first quarter of 2022 compared with 43.9% in the first quarter of 2021 due to a lower proportion of higher-margin parts and consumables revenue partially offset by a higher overall gross margin profile from our acquisitions.

Consolidated gross profit margin decreased to 43.3% in the second quarter of 2022 compared with 43.6% in the second quarter of 2021 due to the inclusion of $0.5 million of benefits received from government employee retention assistance programs, which increased gross profit margin in the 2021 period by 0.3 percentage points.

Within our operating segments, gross profit margin:

• Decreased to 52.4% from 53.3% at our Flow Control segment principally due to a lower gross profit margin profile from our recently acquired Clouth business.

• Decreased to 38.4% from 40.1% at our Industrial Processing segment due to the impact of lower-margin capital equipment revenue at our Chinese stock-preparation business and the inclusion of $0.4 million for benefits received from government employee retention assistance programs, which increased gross profit margin in the 2021 period by 0.5 percentage points.

• Increased to 36.4% from 34.7% at our Material Handling segment primarily due to a higher gross profit margin profile from our recently acquired Balemaster business.

• Increased to 35.9% from 34.9% at our Material Handling segment primarily due to a higher gross profit margin profile from our Balemaster business acquired in 2021.

Selling, General, and Administrative Expenses

Selling, general, and administrative (SG&A) expenses by segment in the first quarters of 2022 and 2021 were as follows:

Selling, general, and administrative (SG&A) expenses by segment in the second quarters of 2022 and 2021 were as follows:

Three Months Ended

(In thousands, except percentages) April 2,

2022 % of Revenue April 3,

(In thousands, except percentages) July 2,

2022 % of Revenue July 3,

2021 % of Revenue Increase % Change

4 unchanged sentences

Consolidated SG&A Expenses $ 55,319 25% $ 49,267 25% $ 6,052 12%

Consolidated SG&A expenses as a percentage of revenue decreased to 26% in the first quarter of 2022 compared with 29% in the first quarter of 2021 primarily due to higher revenue.

Consolidated SG&A expenses increased $9.7 million du e to the inclusion of $6.1 million of SG&A expenses from acquisitions, increased compensation expense associated with existing and new personnel, and increased selling-related costs associated with improved business conditions.

These increases were offset by a $0.9 million favorable effect of foreign currency translation.

Consolidated SG&A expenses as a percentage of revenue remained flat at 25% in the second quarter of 2022 compared with the second quarter of 2021.

Consolidated SG&A expenses increased $6.1 million du e to the inclusion of $5.0 million of SG&A expenses from acquisitions, increased selling-related costs associated with improved business conditions, and the inclusion of benefits received from government employee retention assistance programs of $1.0 million in the second quarter of 2021.

These increases were offset by a $2.1 million favorable effect of foreign currency translation and a decrease of $0.6 million in acquisition costs.

Within our operating segments, SG&A expenses:

• Increased $4.6 million at our Flow Control segment principally due to the inclusion of $4.3 million of SG&A expenses from Clouth and increased selling-related costs.

• Increased $0.7 million at our Industrial Processing segment principally due to a $0.6 million reversal of an indemnification asset related to the release of tax reserves associated with uncertain tax positions.

• Increased $1.9 million at our Material Handling segment principally due to the inclusion of $1.7 million of SG&A expenses from Balemaster, $0.4 million of incremental acquisition-related costs, and increased selling-related costs.

• Increased $2.5 million at Corporate primarily due to increased incentive compensation as a result of our improved financial performance.

• Increased $3.9 million at our Flow Control segment principally due to the inclusion of $3.5 million of SG&A expenses from Clouth, increased selling-related costs, and $0.5 million of benefits received from government employee retention assistance programs which lowered SG&A in the 2021 period.

These increases were partially offset by a $0.8 million favorable effect of foreign currency translation and a $0.2 million decrease in acquisition costs.

• Increased $1.2 million at our Industrial Processing segment principally due to increased selling-related costs, partially offset by a $0.9 million favorable effect of foreign currency translation.

• Increased $0.5 million at our Material Handling segment principally due to the inclusion of $1.4 million of SG&A expenses from Balemaster, partially offset by a $0.4 million favorable effect of foreign currency translation and a $0.3 million decrease in acquisition costs.

Interest Expense

Interest expense increased to $1.4 million in the second quarter of 2022 from $1.1 million in the second quarter of 2021 due to a higher weighted-average interest rate in the second quarter of 2022 as compared to the second quarter of 2021.

Provision for Income Taxes

Provision for income taxes increased to $10.0 million in the second quarter of 2022 from $8.9 million in the second quarter of 2021.

The effective tax rate of 27% in the second quarter of 2022 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, state taxes, nondeductible expenses, and the cost of repatriating the earnings of certain foreign subsidiaries.

The effective tax rate of 28% 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.

Net income increased to $26.4 million in the second quarter of 2022 from $23.0 million in the second quarter of 2021 primarily due to a $4.5 million increase in operating income, offset in part by a $1.0 million increase in provision for income taxes (see discussions above for further details).

First Six Months 2022 Compared With First Six Months 2021

The following table presents changes in revenue by segment between the first six months of 2022 and 2021, 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.

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

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

Revenue by segment in the first six months of 2022 and 2021 was as follows:

Six Months Ended Currency Translation Acquisitions Change in Organic Revenue

(In thousands, except percentages) July 2,

2021 Total Increase % Change Increase % Change

Flow Control $ 171,046 $ 134,516 $ 36,530 27 % $ (4,377) $ 24,222 $ 16,685 12 %

Industrial Processing 177,487 151,835 25,652 17 % (5,072) 319 30,405 20 %

Material Handling

99,596 81,923 17,673 22 % (3,494) 15,371 5,796 7 %

Consolidated Revenue $ 448,129 $ 368,274 $ 79,855 22 % $ (12,943) $ 39,912 $ 52,886 14 %

Consolidated revenue in the first six months of 2022 increased 22%, including an 11% increase from acquisitions and a 3% decrease from the negative effect of foreign currency translation.

Organic revenue increased 14%, principally driven by higher demand for capital equipment at our Industrial Processing segment and, to a lesser extent, parts and consumables at our Flow Control and Industrial Processing segments, as described below.

Revenue at our Flow Control segment increased 27% in the first six months of 2022, while organic revenue increased 12%.

Organic revenue increased due to higher demand for our parts and consumables products in North America and capital equipment in Europe, resulting from improved market conditions.

Revenue at our Industrial Processing segment increased 17% in the first six months of 2022, while organic revenue increased 20% due to higher demand for capital equipment, especially in Europe and, to a lesser extent, China and North America.

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 primarily occurred at our European and Chinese operations due to improved market conditions.

Also contributing to the organic revenue increase was an increase in demand for parts and consumables products at our wood processing business due to maintenance spending by our customers.

Revenue at our Material Handling segment increased 22% in the first six months of 2022, while organic revenue increased 7% due to higher demand for capital equipment at our European baling operations due to improved business

conditions, and parts and consumables at our conveying business resulting from a strong demand in the aggregate and food and packaging industries.

Gross Profit Margin

Gross profit margin by segment in the first six months of 2022 and 2021 was as follows:

Six Months Ended Basis Point Change

Flow Control 52.6% 53.0% (40) bps

Industrial Processing 38.5% 40.3% (180) bps

Material Handling 36.1% 34.8% 130 bps

Consolidated Gross Profit Margin 43.3% 43.7% (40) bps

Consolidated gross profit margin decreased to 43.3% in the first six months of 2022 compared with 43.7% in the first six months of 2021 due to the inclusion of $0.9 million of benefits received from government employee retention assistance programs, which increased gross profit margin in the 2021 period by 0.2 percentage points, and the impact of lower margin capital equipment revenue.

Within our operating segments, gross profit margin:

• Decreased to 52.6% from 53.0% at our Flow Control segment due to a lower gross profit margin profile from our recently acquired Clouth business.

• Decreased to 38.5% from 40.3% at our Industrial Processing segment due to the impact of lower-margin capital equipment revenue at our Chinese stock-preparation business and the inclusion of $0.7 million for benefits received from government employee retention assistance programs, which increased gross profit margin in the 2021 period by 0.4 percentage points.

• Increased to 36.1% from 34.8% at our Material Handling segment primarily due to a higher gross profit margin profile from our Balemaster business acquired in 2021.

Selling, General, and Administrative Expenses

SG&A expenses by segment in the first six months of 2022 and 2021 were as follows:

Six Months Ended

(In thousands, except percentages) July 2,

2022 % of Revenue July 3,

2021 % of Revenue Increase % Change

Flow Control $ 43,053 25 % $ 34,568 26 % $ 8,485 25%

Industrial Processing 31,983 18 % 30,110 20 % 1,873 6%

Material Handling 20,502 21 % 18,053 22 % 2,449 14%

Corporate 18,949 N/A 15,967 N/A 2,982 19%

Consolidated SG&A Expenses $ 114,487 26 % $ 98,698 27 % $ 15,789 16%

Consolidated SG&A expenses as a percentage of revenue decreased to 26% in the first six months of 2022 compared with 27% in the first six months of 2021 principally due to higher revenue.

Consolidated SG&A expenses increased $15.8 million due to the inclusion of $11.1 million of SG&A expenses from acquisitions, increased compensation expense associated with existing and new personnel, and increased selling-related costs associated with improved business conditions.

These increases were offset in part by a $3.1 million favorable effect of foreign currency translation.

Within our operating segments, SG&A expenses:

• Increased $8.5 million at our Flow Control segment principally due to the inclusion of $7.8 million of SG&A expenses from Clouth and increased personnel and selling-related costs.

These increases were partially offset by a $1.2 million favorable effect of foreign currency translation.

• Increased $1.9 million at our Industrial Processing segment due to increased selling-related costs and a $0.6 million reversal of an indemnification asset related to the release of tax reserves.

These increases were partially offset by a $1.2 million favorable effect of foreign currency translation.

• Increased $2.4 million at our Material Handling segment principally due to the inclusion of $3.1 million of SG&A expenses from Balemaster, partially offset by a $0.7 million favorable effect of foreign currency translation.

• Increased $3.0 million at Corporate primarily due to increased incentive compensation and travel expense due to improved business conditions.

Gain on Sale and Other Expense, Net

2 unchanged sentences

As a result, we recognized a gain on the sale of these assets of $20.2 million, or $15.1 million, net of deferred taxes of $5.1 million, in the first quarter of 2022.

A $16.1 million receivable was recognized for the present value of the remaining amount of the sale proceeds, which is due the earlier of when the government sells the property or within two years from the effective date of the agreements.

A receivable of $16.1 million was recognized for the present value of the remaining amount of the sale proceeds, which is due the earlier of when the government sells the property or within two years from the effective date of the agreements.

The amount of the receivable recorded at July 2, 2022 was $15.4 million.

Our subsidiary, which is part of our Industrial Processing segment, will continue to occupy its current facility until construction of its new facility is complete.

1 unchanged sentence

Interest Expense

Interest expense increased to $1.2 million in the first quarter of 2022 from $1.1 million in the first quarter of 2021.

Interest expense increased to $2.6 million in the first six months of 2022 from $2.2 million in the first six months of 2021 due to a higher weighted-average interest rate for the first six months of 2022 compared to the first six months of 2021.

Provision for Income Taxes

Our provision for income taxes increased to $13.4 million in the first quarter of 2022 from $5.6 million in the first quarter of 2021.

The effective tax rate of 24% in the first quarter of 2022 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 the 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 and the reversal of tax reserves associated with uncertain tax positions.

The effective tax rate of 25% in the first 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 GILTI provisions.

Provision for income taxes increased to $23.3 million in the first six months of 2022 from $14.5 million in the first six months of 2021.

The effective tax rate of 26% in the first six months of 2022 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, nondeductible expenses, 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 to $41.4 million in the first quarter of 2022 from $16.8 million in the first quarter of 2021 primarily due to a $32.5 million increase in operating income, offset in part by a $7.8 million increase in provision for income taxes (see discussions above for further details).

The effective tax rate of 27% 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.

Net income increased to $67.9 million in the first six months of 2022 from $39.8 million in the first six months of 2021 primarily due to a $37.0 million increase in operating income, offset in part by a $8.8 million increase in provision for income taxes (see discussions above for further details).

Non-GAAP Key Performance Indicators

6 unchanged sentences

We believe that the inclusion of such measures helps investors gain an understanding of our underlying operating performance and future prospects, consistent with how management measures and forecasts our performance, especially when comparing such results to previous periods or forecasts and to the performance of our competitors.

Such measures are also used by us in our financial and operating decision-making and for compensation purposes.

Such measures are also used by us in our financial and operating decision-making

and for compensation purposes.

We also believe this information is responsive to investors' requests and gives them an additional measure of our performance.

Our non-GAAP financial measures are not meant to be considered superior to or a substitute for the results of operations or cash flow prepared in accordance with GAAP.

In addition, our non-GAAP financial measures have limitations

associated with their use as compared to the most directly comparable GAAP measures, in that they may be different from, and therefore not comparable to, similar measures used by other companies.

In addition, our non-GAAP financial measures have limitations associated with their use as compared to the most directly comparable GAAP measures, in that they may be different from, and therefore not comparable to, similar measures used by other companies.

A reconciliation of adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin is as follows:

Three Months Ended

(In thousands, except percentages) April 2,

2022 April 3,

Three Months Ended Six Months Ended

(In thousands, except percentages) July 2,

Net Income Attributable to Kadant $ 26,170 $ 22,864 $ 67,362 $ 39,425

16 unchanged sentences

Adjusted EBITDA Margin (non-GAAP measure)

(a) Represents a gain on the sale of a facility in China in our Industrial Processing segment pursuant to a relocation plan.

(b) Represents an indemnification asset reversal related to the release of tax reserves associated with uncertain tax positions.

(d) Represents income within cost of revenue associated with amortization of acquired profit in inventory.

20.7% 21.1% 20.5% 20.0%

A reconciliation of free cash flow from cash flow provided by operating activities is as follows:

Three Months Ended

(In thousands) April 2,

2022 April 3,

Three Months Ended Six Months Ended

(In thousands) July 2,

Cash Provided by Operating Activities $ 18,797 $ 44,386 $ 42,565 $ 63,478

Capital Expenditures (2,868) (2,259)

Capital Expenditures (e) (6,947) (2,059) (9,815) (4,318)

Free Cash Flow (non-GAAP measure)

$ 11,850 $ 42,327 $ 32,750 $ 59,160

(a) Consists of a $20.2 million gain on the sale of a Chinese facility in our Industrial Processing segment pursuant to a relocation plan.

(b) Represents an indemnification asset reversal related to the release of tax reserves associated with uncertain tax positions.

(d) Represents income within the cost of revenue associated with amortization of acquired profit in inventory.

(e) Includes capital expenditures of $3.1 million and $3.2 million in the three and six months ended July 2, 2022, respectively, associated with the construction of a new manufacturing facility in China (as discussed below).

Liquidity and Capital Resources

Consolidated working capital was $174.7 million at April 2, 2022, compared with $162.4 million at January 1, 2022.

Cash and cash equivalents were $86.2 million at April 2, 2022, compared with $91.2 million at January 1, 2022, which included cash and cash equivalents held by our foreign subsidiaries of $81.9 million at April 2, 2022 and $83.8 million at January 1, 2022.

Cash flow information in the first three months of 2022 and 2021 was as follows:

Three Months Ended

(In thousands) April 2,

2022 April 3,

Consolidated working capital was $181.0 million at July 2, 2022, compared with $162.4 million at January 1, 2022.

Cash and cash equivalents were $76.5 million at July 2, 2022, compared with $91.2 million at January 1, 2022, which included cash and cash equivalents held by our foreign subsidiaries of $70.1 million at July 2, 2022 and $83.8 million at January 1, 2022.

Cash flow information in the first six months of 2022 and 2021 was as follows:

Six Months Ended

(In thousands) July 2,

Net Cash Provided by Operating Activities $ 42,565 $ 63,478

Net Cash Used in Investing Activities (7,894) (3,869)

Net Cash Used in Financing Activities (27,003) (15,582)

Net Cash (Used in) Provided by Financing Activities (45,388) 32,698

Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash (5,418) (803)

1 unchanged sentence

Operating Activities

Cash provided by operating activities increased to $23.8 million in the first quarter of 2022 from $19.1 million in the first quarter of 2021.

Cash provided by operating activities decreased to $42.6 million in the first six months of 2022 from $63.5 million in the first six months of 2021.

Our operating cash flows are primarily generated 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.

Cash provided by income in the first quarter of 2022 was offset in part by investments in working capital.

Increases in accounts receivable and inventory used cash of $18.5 million primarily to support our revenue growth.

An increase in accounts payable related to raw material purchases and customer deposits provided cash of $12.2 million.

Changes in other liabilities used cash of $10.1 million primarily related to incentive compensation payments in the first quarter of 2022.

Cash provided by income in the first quarter of 2021 was offset in part by investments in working capital.

Increases in accounts receivable and inventory used cash of $20.6 million primarily to support increased order activity.

An increase in accounts payable related to raw material purchases and customer deposits provided cash of $16.5 million in the first quarter of 2021.

Cash provided by income in the first six months of 2022 was offset in part by investments in working capital.

Increases in inventory and accounts receivable used cash of $39.2 million, including $26.8 million from inventory primarily related to capital equipment orders that will ship in the latter half of fiscal 2022 and early fiscal 2023.

These uses of cash were offset in part by an increase in cash provided of $9.3 million from customer deposits.

Cash provided by income in the first six months of 2021 was offset in part by investments in working capital.

Cash provided by working capital in 2021 included $12.9 million from accounts payable related to inventory purchases for increased order activity and $11.1 million in customer deposits for capital equipment orders.

These sources of cash were offset in part by cash used of $22.6 million for accounts receivable and inventory as a result of revenue growth and to support increased demand.

Investing Activities

Cash used in investing activities was $1.3 million in the first quarter of 2022, compared with $2.4 million in the first quarter of 2021.

Capital expenditures of $2.9 million in the first quarter of 2022 were partially offset by proceeds received from the sale of assets of $1.6 million, compared with capital expenditures of $2.3 million in the first quarter of 2021.

Cash used in investing activities was $7.9 million in the first six months of 2022, compared with $3.9 million in the first six months of 2021.

Cash used in investing activities in the first six months of 2022 included capital expenditures of $9.8 million, which included $3.2 million for expenditures associated with the manufacturing facility and building relocation project in China.

This use of cash was partially offset by proceeds received from the sale of assets of $1.9 million.

Cash used in investing activities in the first six months of 2021 included capital expenditures of $4.3 million.

Financing Activities

Cash used in financing activities was $27.0 million in the first quarter of 2022, compared with $15.6 million in the first quarter of 2021.

Repayment of short- and long-term obligations was $35.1 million in the first quarter of 2022, partially offset by borrowings under our revolving credit facility of $15.5 million.

Repayment of short- and long-term obligations was $19.6 million in the first quarter of 2021, partially offset by borrowings under our revolving credit facility of $10.1 million.

In addition, taxes paid related to the vesting of equity awards was $4.6 million in the first quarter of 2022 compared to $3.4 million in the first quarter of 2021.

Cash used in financing activities was $45.4 in the first six months of 2022, compared with cash provided by financing activities of $32.7 million in the first six months of 2021.

Repayment of short- and long-term obligations was $51.4 million in the first six months of 2022, partially offset by borrowings under our revolving credit facility of $16.5 million compared to borrowings under our revolving credit facility of $88.9 million in the first six months of 2021, partially offset by repayment of short- and long-term obligations of $47.1 million.

In addition, taxes paid related to the vesting of equity awards was $4.6 million in the first six months of 2022 compared to $3.4 million in the first six months of 2021.

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 $0.7 million reduction in cash, cash equivalents, and restricted cash in the first quarter of 2022 was primarily attributable to the strengthening of the U.S.

dollar against the euro.

The $5.4 million reduction in cash, cash equivalents, and restricted cash in the first six months of 2022 was primarily attributable to the strengthening of the U.S.

dollar against the euro and Chinese renminbi and, to a lesser extent, the British pound sterling.

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 April 2, 2022, the outstanding balance under the Credit Agreement was

$229.5 million, which included $78.5 million of euro-denominated borrowings.

As of April 2, 2022, we have a borrowing capacity available under the Credit Agreement of $170 million in addition to a $150 million uncommitted, unsecured incremental borrowing facility.

As of July 2, 2022, the outstanding balance under the Credit Agreement was $210.5 million, which included $70.5 million of euro-denominated borrowings.

As of July 2, 2022, we have a borrowing capacity available under the Credit Agreement of $189.0 million in addition to a $150.0 million uncommitted, unsecured incremental

borrowing facility.

Under our debt 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 April 2, 2022, our leverage ratio was 1.16 and we were in compliance with our debt covenants.

As of July 2, 2022, our leverage ratio was 1.05 and we were in compliance with our debt covenants.

We expect to renew our Credit Agreement prior to its maturity date of December 14, 2023.

2 unchanged sentences

On May 19, 2022, our board of directors approved the repurchase of up to $50 million of our equity securities during the period from May 19, 2022 to May 19, 2023.

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

We paid cash dividends of $2.9 million in the first quarter of 2022.

On March 9, 2022, we declared a quarterly cash dividend of $0.26 per share totaling $3.0 million that was paid on May 11, 2022.

We have not repurchased any shares of our common stock under this authorization or under our previous $20 million authorization which expired on May 20, 2022.

We paid cash dividends of $5.9 million in the first six months of 2022.

On May 19, 2022, we declared a quarterly cash dividend of $0.26 per share totaling $3.0 million that will be paid on August 11, 2022.

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 $15 million during the remainder of 2022 for property, plant, and equipment.

In addition, one of our Chinese subsidiaries will be building a new manufacturing facility and relocating over the next two years.

Capital expenditures for the new facility are estimated to be approximately $20 million, of which an estimated $12 million will be incurred in 2022.

We plan to make expenditures of approximately $21 to $23 million during the remainder of 2022 for property, plant, and equipment, including $9 million for a new manufacturing facility.

One of our Chinese subsidiaries is building a new manufacturing facility and relocating over the next two years.

Capital expenditures for the new facility are estimated to be approximately $20 million, including $12 million in 2022.

The cost of the new facility will be offset by the proceeds received from the sale of our existing facility.

See Note 2 , Gain on Sale and Other Expense, Net, in the accompanying condensed consolidated financial statements for additional information regarding the relocation of our Chinese manufacturing facility.

As of April 2, 2022, we had approximately $218.7 million of total unremitted foreign earnings.

As of July 2, 2022, we had approximately $217.7 million of total unremitted foreign earnings.

It is our intent to indefinitely reinvest $182.2 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments, if any.

In the first quarter of 2022, we recorded withholding taxes on the earnings in certain foreign subsidiaries that we plan to repatriate in the foreseeable future.

In the first six months of 2022, 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 $3.0 million.

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.

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 existing cash and cash equivalents, along with cash generated from operations, our existing borrowing capacity and continued access to debt markets, will be sufficient to meet the capital requirements of our operations for the next 12 months and foreseeable future.

Contractual Obligations and Other Commercial Commitments

There have been no material changes to our contractual obligations and other commercial commitments during the first quarter of 2022 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 1, 2022.

There have been no material changes to our contractual obligations and other commercial commitments during the first six months of 2022 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.

Application of Critical Accounting Policies and Estimates

3 unchanged sentences

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 Estimates" in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended January 1, 2022.

There have been no material changes to these critical accounting policies since the end of fiscal 2021 that warrant disclosure.

2 unchanged sentences

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 1, 2022.

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.

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