What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-09 compared with 2022-08-10 · 171 added, 147 removed, 190 unchanged (63% of the section changed)

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Industry and Business Overview

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.

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.

We had consolidated bookings of $210.9 million in the third quarter of 2022, down from the robust bookings experienced in the first and second quarters of 2022 of $266.1 million and $265.9 million, respectively, and $244.7 million in the third quarter of 2021, as industrial demand has moderated.

Demand for our capital equipment products was down 39% sequentially primarily from our Industrial Processing segment where demand has slowed following major capacity additions over the past several years.

We continue to see strong demand for our parts and consumables, down slightly from record

demand in the first half of 2022.

We expect a lower level of bookings in the last quarter of 2022 compared to previous quarters as end-market demand slows in response to actions taken by the central banks in several countries to control inflation.

We ended the third quarter of 2022 with consolidated backlog of $350.3 million.

An overview of our business by segment is as follows:

• 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.

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.

• Flow Control – Our Flow Control segment had its third highest bookings quarter, following record bookings in the first half of 2022, increasing 11% compared to the third quarter of 2021.

This increase included an 8% decrease from the unfavorable effect of foreign currency translation.

Orders for both parts and consumables products and capital equipment continue to be strong due in part to high energy prices as customers seek to optimize energy utilization.

We expect bookings to moderate in the last quarter of 2022 compared with the record booking performance achieved during the first nine months of 2022 due to growing uncertainty in the macroeconomic environment.

• Industrial Processing – Our Industrial Processing segment bookings decreased 34% compared to record bookings in the third quarter of 2021, and 29% sequentially after several quarters of growth, in part due to lower demand for capital equipment at our wood processing business.

This decrease was largely due to a reversion to more typical demand after a period of high activity.

In addition, capital bookings decreased at our stock-preparation business compared to strong bookings in the third quarter of 2021.

We expect sequentially higher capital bookings in our Industrial Processing segment in the last quarter of 2022, but lower than the first and second quarters of 2022, as demand for capital equipment returns to more typical levels .

Orders for parts and consumables products at our Industrial Processing segment increased sequentially and over the third quarter of 2021, however, we anticipate lower bookings in the last quarter of 2022 compared to the robust demand we experienced in prior quarters of 2022.

• Material Handling – Our Material Handling segment bookings decreased 2% compared to the third quarter of 2021, including a 5% decrease from the unfavorable effect of foreign currency translation.

We expect demand for our material handling products to continue to moderate in the last quarter of 2022 compared with the record levels experienced in the first half of the year.

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.

We believe that the fundamentals of our business will remain positive, particularly given our high backlog levels, continued strong bookings, and ongoing strength in the markets we serve.

We believe that the fundamentals of our business will remain positive, particularly given our high backlog and ongoing strength in the markets we serve.

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 1, Item 1A, of our Annual Report and subsequent filings with the SEC.

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, of our Annual Report and subsequent filings with the SEC.

International Sales

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dollar and foreign 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.

In the first nine months 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.

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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 and subsequent filings with the SEC.

For more information on risks associated with our global operations, including tariffs, please see Risk Factors, included in Part II, Item 1A , of this report, and Part I, Item 1A, of 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.

We continue to pursue acquisition opportunities.

In the third quarter of 2021, we acquired Clouth for $92.9 million, net of cash acquired plus debt assumed.

In the third quarter of 2021, we acquired The Clouth Group of Companies (Clouth) for $92.9 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.

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Clouth has three manufacturing facilities in Germany and one in Poland.

In the third quarter of 2021, we also acquired Balemaster for $53.5 million, net of cash acquired.

In the third quarter of 2021, we also acquired East Chicago Machine Tool Corporation (Balemaster) for $53.5 million, net of cash acquired.

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

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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.

In the fourth quarter of 2021, we acquired the assets of a business in India for $2.9 million, which is included in our Industrial Processing segment.

Results of Operations

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.

Third Quarter 2022 Compared With Third Quarter 2021

The following table presents the change in revenue by segment between the third 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.

Organic revenue excludes the effect of acquisitions for the four quarterly reporting periods following the date of the acquisition.

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 2022 and 2021 was as follows:

Three Months Ended Currency Translation Acquisitions Change in Organic Revenue

(In thousands, except percentages) July 2,

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

Three Months Ended Currency Translation Acquisition Change in Organic Revenue

(In thousands, except percentages) October 1,

2022 October 2,

2021 Total Increase % Change Increase % Change

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Consolidated Revenue $ 224,510 $ 199,789 $ 24,721 12 % $ (14,018) $ 154 $ 38,585 19 %

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.

Consolidated revenue increased 12% in the third quarter of 2022, including a 7% decrease from the unfavorable effect of foreign currency translation.

Organic revenue increased 19% due to higher demand for capital equipment across all segments and parts and consumables products, principally at our Flow Control and Material Handling segments as described below.

Revenue at our Flow Control segment increased 14% in the third quarter of 2022, while organic revenue increased 22%.

The increase in organic revenue was due to higher demand for both parts and consumables products and capital equipment resulting in part from high energy prices as customers seek to optimize energy utiliz ation.

Parts and consumables revenue was particularly strong in Europe and North America due to improved market conditions and pri ce increases.

Increased demand for capital equipment was driven primarily by our Chinese operations due to several large projects.

Revenue at our Industrial Processing segment increased 5% in the third quarter of 2022, while organic revenue increased 11%.

Organic revenue increased principally due to higher demand for capital equipment at our wood processing businesses in North America and parts and consumables products throughout our Industrial Processing segment.

increases were partially offset by a decrease in demand for capital equipment at our stock-preparation businesses as mills focus on installing and optimizing capital equipment purchased in prior periods.

Revenue at our Material Handling segment increased 23% in the third quarter of 2022, while organic revenue increased 30%, due to higher demand for both capital equipment and parts and consumables products.

Increased demand at our conveying and vibratory equipment business was driven by several large capital equipment orders in North America, as well as price increases to offset higher input costs.

At our baling business, increased demand for our cap ital equipment in both North America and Europe was offset in part by a decrease in parts and consumables revenue in Europe partially due to shipment delays.

Gross Profit Margin

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

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

Three Months Ended Basis Point Change

2022 October 2,

Flow Control 51.6% 49.7% 190 bps

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Consolidated Gross Profit Margin 42.5% 41.9% 60 bps

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.

Consolidated gross profit margin increased to 42.5% in the third quarter of 2022 compared with 41.9% in the third quarter of 2021, which included $2.2 million of amortization of acquired profit in inventory that lowered gross profit margin in the 2021 period by 1.1 percentage points.

Within our operating segments, gross profit margin:

• 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 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.

• Increased to 51.6% at our Flow Control segment from 49.7% in the 2021 period, which included $1.8 million of amortization of acquired profit in inventory that lowered gross profit margin in the 2021 period by 2.4 percentage points.

• Decreased to 39.3% from 39.7% at our Industrial Processing se gment due to the impact of lower-margin capital equipment revenue at our wood processing businesses.

• Increased to 32.3% at our Material Handling segment from 31.9% in the 2021 period, which included $0.4 million of amortization of acquired profit in inventory that lowered gross profit margin in the 2021 period by 0.9 percentage points.

Selling, General, and Administrative Expenses

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

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

Three Months Ended

(In thousands, except percentages) July 2,

2022 % of Revenue July 3,

2021 % of Revenue Increase % Change

(In thousands, except percentages) October 1,

2022 % of Revenue October 2,

2021 % of Revenue Increase (Decrease) % Change

Flow Control $ 20,717 24 % $ 19,658 26 % $ 1,059 5 %

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Consolidated SG&A Expenses $ 53,153 24 % $ 52,316 26 % $ 837 2 %

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.

Consolidated SG&A expenses as a percentage of revenue decreased to 24% in the third quarter of 2022 compared with 26% in the third quarter of 2021 principally due to a 12% increase in revenue.

Consolidated SG&A expenses increased $0.8 million due to increased compensation expense associated with existing and new personnel and increased selling-related costs.

These increases were largely offset by a $3.4 million favorable effect of foreign currency translation and a decrease of $0.9 million in incremental acquisition-related costs.

Within our operating segments, SG&A expenses:

• 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.

• Increased $1.1 million at our Flow Control segment principally due to increased compensation expense associated with existing and new personnel and increased travel costs.

These increases were partially offset by a $1.9 million favorable effect of foreign currency translation and a decrease of $0.5 million in acquisition-related costs.

• Decreased $0.6 million at our Industrial Processing segment principally due to a $0.9 million favorable effect of foreign currency translation .

This decrease was offset in part by in creased compensation expense and selling-related costs.

• Decreased $0.1 million at our Material Handling segment principally due a $0.5 million favorable effect of foreign currency translation and a $0.4 million decrease in acquisition-related costs.

These decreases were largely offset by increased compensation expense.

• Increased $0.5 million at Corporate primarily due to increased incentive compensation and travel costs.

Gain on Sale and Other Costs, Net

During the third quarter of 2022, we recorded restructuring costs within our Flow Control segment of $0.1 million, which consisted of severance costs related to the termination of two employees.

This restructuring plan was initiated in the fourth quarter of 2021 to eliminate a redundant ceramic blade manufacturing operation that resulted from our acquisition of Clouth.

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.

Interest expense increased to $1.7 million in the third quarter of 2022 from $1.3 million in the third quarter of 2021 due to a higher weighted-average interest rate, partially offset by lower average debt outstanding in the third quarter of 2022 compared to the third 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,

Provision for income taxes increased to $9.7 million in the third quarter of 2022 from $6.7 million in the third quarter of 2021.

The effective tax rate of 26% in the third quarter of 2022 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, nondeductible expenses, and state taxes.

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 in the third quarter of 2021 were offset in part by a decrease in tax expense related to the net excess income tax benefits from stock-based compensation arrangements.

Net income increased to $27.7 million in the third quarter of 2022 from $20.7 million in the third quarter of 2021 primarily due to a $10.2 million increase in operating income, offset in part by a $3.0 million increase in provision for income taxes (see discussions above for further details).

First Nine Months 2022 Compared With First Nine Months 2021

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

Organic revenue is a non-GAAP measure as defined above in the results of operations for the third quarter of 2022 compared with the third quarter of 2021.

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

Nine Months Ended Currency Translation Acquisitions Change in Organic Revenue

(In thousands, except percentages) October 1,

2022 October 2,

2021 Total Increase % Change Increase % Change

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Consolidated Revenue $ 672,639 $ 568,063 $ 104,576 18 % $ (26,961) $ 40,066 $ 91,471 16 %

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.

Consolidated revenue in the first nine months of 2022 increased 18%, including a 7% increase from acquisitions and a 5% decrease from the unfavorable effect of foreign currency translation.

Organic revenue increased 16%, principally driven by higher demand for capital equipment led by our Industrial Processing segment and parts and consumables at our Flow Control segment and, to a lesser extent, Industrial Processing segment, as described below.

Revenue at our Flow Control segment increased 22% in the first nine months of 2022, while organic revenue increased 16%.

Organic revenue increased due to higher demand for our parts and consumables products in North America and Europe due to improved market conditions, especially compared to the first half of 2021.

Also contributing to the organic revenue increase was higher demand for capital equipment in China and Europe primarily for our doctoring, cleaning, and filtration systems.

Re venue at our Industrial Processing segment increased 13% in the first nine months of 2022, while organic revenue increased 17%, due to higher demand for capital equipment, principally in Europe and North America and, to a lesser extent, a higher demand for parts and consumables, primarily in North America.

Increased demand for our wood processing business products, for both capital and parts and consumables products, principally in North America, was driven by high mill activity, which resulted in increased capital investment and higher parts consumption.

In addition, increased demand for capital equipment at our stock-preparation businesses, primarily at our European and Chinese operations, due to improved market conditions compared to early 2021.

Revenue at our Material Handling segment increased 22% in the first nine months of 2022, while organic revenue increased 15%, due to higher demand for capital equipment at our European baling operations driven by improved business conditions, and parts and consumables at our vibratory and conveying business in North America resulting from 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

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

Nine Months Ended Basis Point Change

2022 October 2,

Flow Control 52.3% 51.8% 50 bps

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Consolidated Gross Profit Margin 43.1% 43.1% 0 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.

Consolidated gross profit margin remained flat at 43.1% in the first nine months of 2022 compared with the first nine months of 2021.

The consolidated gross profit margin in 2021 was impacted by $2.2 million of amortization of acquired profit in inventory, which lowered gross profit margin in the 2021 period by 0.4 percentage points, partially offset by the benefits received from government employee retention assistance programs of $0.9 million in the 2021 period, which increased gross profit margin by 0.2 percentage points.

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.

• Increased to 52.3% at our Flow Control segment from 51.8% in the 2021 period, which included $1.8 million of amortization of acquired profit in inventory that lowered gross profit margin in the 2021 period by 0.9 percentage points.

• Decreased to 38.8% from 40.1% at our Industrial Processing segment due to the impact of lower-margin capital equipment revenue at our wood processing businesses and at our Chinese stock-preparation business in the 2022

period, 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 0.3 percentage points.

• Increased to 34.8% from 33.8% at our Material Handling segment primarily due to a higher gross profit margin profile from our Balemaster business acquired in 2021 and the inclusion of $0.4 million of amortization of acquired profit in inventory, which lowered gross profit margin in the 2021 period by 0.3 percentage points.

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,

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

Nine Months Ended

(In thousands, except percentages) October 1,

2022 % of Revenue October 2,

2021 % of Revenue Increase % Change

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Consolidated SG&A Expenses $ 167,640 25 % $ 151,014 27 % $ 16,626 11 %

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.

Consolidated SG&A expenses as a percentage of revenue decreased to 25% in the first nine months of 2022 compared with 27% in the first nine months of 2021 principally due to an 18% increase in revenue.

Consolidated SG&A expenses increased $16.6 million due to the inclusion of $11.3 million of SG&A expenses from acquisitions, increased compensation expense associated with existing and new personnel, increased selling-related costs associated with improved business conditions, and the inclusion of benefits received from government employee retention assistance programs of $1.4 million in the first nine months of 2021.

These increases were offset in part by a $6.5 million favorable effect of foreign currency translation and a decrease of $2.1 million in incremental acquisition-related costs.

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

• Increased $9.5 million at our Flow Control segment principally due to the inclusion of $7.8 million of SG&A expenses from Clouth, increased compensation and travel costs, and the inclusion of benefits received from government employee retention assistance programs of $0.8 million in the first nine months of 2021.

These increases were partially offset by a $3.2 million favorable effect of foreign currency translation and a decrease of $1.6 million in incremental acquisition-related costs.

• Increased $1.3 million at our Industrial Processing segment due to increased compensation and selling-related costs, a $0.6 million reversal of an indemnification asset related to the release of tax reserves, and the inclusion of benefits received from government employee retention assistance programs of $0.5 million in the first nine months of 2021.

These increases were partially offset by a $2.2 million favorable effect of foreign currency translation and a decrease of $0.2 million in incremental acquisition-related costs.

• Increased $2.3 million at our Material Handling segment principally due to the inclusion of $3.1 million of SG&A expenses from Balemaster, increased travel costs, and the inclusion of benefits received from government employee retention assistance programs of $0.2 million in the first nine months of 2021.

These increases were partially offset by a $1.2 million favorable effect of foreign currency translation and a decrease of $0.3 million in incremental acquisition-related costs.

• Increased $3.5 million at Corporate primarily due to increased compensation expense for existing and new personnel.

Gain on Sale and Other Costs, Net

Gain on Sale of Assets

We entered into several agreements with the local government in China to sell the existing manufacturing building and land use rights at one of our subsidiaries in China for $25.2 million.

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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.

In the first quarter of 2022, we recognized an impairment charge of $0.2 million related to the write-down of certain fixed assets that will not be moved to the new facility.

The receivable outstanding at October 1, 2022 was $14.6 million.

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

During the first quarter of 2022, we recognized an impairment charge of $0.2 million related to the write-down of certain fixed assets that will not be moved to the new manufacturing facility in China, as discussed above.

During the third quarter of 2022, we recorded restructuring costs within our Flow Control segment of $0.1 million which consisted of severance costs related to the termination of two employees.

This restructuring plan was initiated in the fourth quarter of 2021 to eliminate a redundant ceramic blade manufacturing operation that resulted from our acquisition of Clouth.

Interest Expense

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.

Interest expense increased to $4.3 million in the first nine months of 2022 from $3.5 million in the first nine months of 2021 due to a higher weighted-average interest rate, partially offset by lower average debt outstanding in the first nine months of 2022 compared to the first nine months of 2021.

Provision for Income Taxes

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.

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).

Provision for income taxes increased to $33.1 million in the first nine months of 2022 from $21.3 million in the first nine months of 2021.

The effective tax rate of 26% in the first nine 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.

The effective tax rate of 26% 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 in the first nine months of 2021 were offset in part by a decrease in tax expense related to the net excess income tax benefits from stock-based compensation arrangements.

Net income increased to $95.5 million in the first nine months of 2022 from $60.5 million in the first nine months of 2021 primarily due to a $47.2 million increase in operating income, offset in part by a $11.8 million increase in provision for income taxes (see discussions above for further details).

Non-GAAP Key Performance Indicators

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We use organic revenue in order to understand our trends and to forecast and evaluate our financial performance and compare revenue to prior periods (see discussion in Revenue above).

Adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin exclude impairment costs, acquisition costs, amortization expense related to acquired profit in inventory and backlog, and certain gains or losses.

Adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin exclude impairment and restructuring costs, acquisition costs, amortization expense related to acquired profit in inventory and backlog, and certain gains or losses.

These items are excluded as they are not indicative of our core operating results and are not comparable to other periods, which have differing levels of incremental costs, expenditures or income, or none at all.

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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.

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

Three Months Ended Six Months Ended

(In thousands, except percentages) July 2,

Three Months Ended Nine Months Ended

(In thousands, except percentages) October 1,

2022 October 2,

2021 October 1,

2022 October 2,

Net Income Attributable to Kadant $ 27,487 $ 20,461 $ 94,849 $ 59,886

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Operating Income 38,886 28,728 132,327 85,165

Gain on Sale of Assets (a) — — (20,190) —

Gain on Sale (a) — — (20,190) —

Acquisition Costs 410 718 486 2,619

Indemnification Asset Reversal (b) — — 575 —

Impairment Costs — — 182 —

Impairment and Restructuring Costs 72 — 254 —

Acquired Backlog Amortization (c) — 604 703 691

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

Three Months Ended Six Months Ended

(In thousands) July 2,

Three Months Ended Nine Months Ended

(In thousands) October 1,

2022 October 2,

2021 October 1,

2022 October 2,

Cash Provided by Operating Activities $ 24,897 $ 37,932 $ 67,462 $ 101,410

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$ 18,521 $ 34,562 $ 51,271 $ 93,722

(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.

(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 (as discussed above).

(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).

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

(e) Includes capital expenditures of $2.2 million and $5.4 million in the three and nine months ended October 1, 2022, respectively, associated with the construction of a new manufacturing facility in China (as discussed below).

Liquidity and Capital Resources

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,

Consolidated working capital was $188.0 million at October 1, 2022, compared with $162.4 million at January 1, 2022.

Cash and cash equivalents were $72.9 million at October 1, 2022, compared with $91.2 million at January 1, 2022, which included cash and cash equivalents held by our foreign subsidiaries o f $70.7 million at October 1, 2022 and $83.8 million at January 1, 2022.

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

Nine Months Ended

(In thousands) October 1,

2022 October 2,

Net Cash Provided by Operating Activities $ 67,462 $ 101,410

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Operating Activities

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.

Cash provided by operating activities decreased to $67.5 million in the first nine months of 2022 from $101.4 million in the first nine months of 2021 due to the timing of investments in working capital.

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 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 net income in the first nine months of 2022 was offset in part by investments in working capital.

Increases in inventory and accounts receivable used cash of $54.5 million, including $33.8 million for inventory primarily related to capital equipment orders that will ship in the fourth quarter of 2022 and first half of 2023.

These uses of cash were offset in part by $16.2 million of cash provided by customer deposits.

Cash provided by operating activities in the first nine months of 2021 was due to cash provided by net income and working capital.

Cash provided by working capital in 2021 included $19.8 million from accounts payable related to inventory purchases for increased order activity and $19.6 million in customer deposits for capital equipment orders.

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Investing Activities

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.

Cash used in investing activities was $13.9 million in the first nine months of 2022, compared with $148.6 million in the first nine months of 2021.

Cash used in investing activities in the first nine months of 2022 included capital expenditures of $16.2 million, which included $5.4 million for expenditures associated with the construction of a new manufacturing facility in China.

This use of cash was partially offset by proceeds received from the sale of assets of $2.1 million.

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

Cash used in investing activities in the first nine months of 2021 included $141.5 million for acquisitions and $7.7 million for capital expenditures.

Financing Activities

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.

Cash used in financing activities was $62.1 million in the first nine months of 2022, compared with cash provided by financing activities of $66.7 million in the first nine months of 2021.

Repayment of short- and long-term obligations was $69.5 million in the first nine months of 2022, partially offset by borrowings under our revolving credit facility of $21.6 million compared to borrowings under our revolving credit facility of $151.9 million in the first nine months of 2021, partially offset by repayment of short- and long-term obligations of $72.7 million.

Cash dividends paid to stockholders were $9.0 million in the first nine months of 2022 and $8.6 million in the first nine months of 2021.

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

The $10.5 million reduction in cash, cash equivalents, and restricted cash in the first nine 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.

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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 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.

As of October 1, 2022, the outstanding balance under the Credit Agreement was $195.0 million, which included $71.0 million of euro-denominated borrowings.

As of October 1, 2022, we have a borrowing capacity

available under the Credit Agreement of $206.3 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 July 2, 2022, our leverage ratio was 1.05 and we were in compliance with our debt covenants.

As of October 1, 2022, our leverage ratio was 0.94 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.

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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.

We paid cash dividends of $9.0 million in the first nine months of 2022.

On September 8, 2022, we declared a quarterly cash dividend of $0.26 per share totaling $3.0 million that will be paid on November 10, 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.

The declaration of cash dividends is subject to our compliance with the covenant in our Credit Agreement related to our consolidated leverage ratio.

We plan to make expenditures of approximately $11 to $13 million during the remainder of 2022 for property, plant, and equipment, including $6 million for a new manufacturing facility.

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

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

As of October 1, 2022, we had approximately $219.8 million of total unremitted foreign earnings.

It is our intent to indefinitely reinvest $198.2 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments, if any.

In the first six months 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 nine 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 $3.5 million .

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Contractual Obligations and Other Commercial Commitments

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.

There have been no material changes to our contractual obligations and other commercial commitments during the first nine 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

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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