What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-28 compared with 2022-03-01 · 178 added, 155 removed, 166 unchanged (67% of the section changed)

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Industry and Business Overview

We had record consolidated bookings of $893.2 million for 2021 as our businesses rebounded from the impact of the COVID-19 pandemic, which adversely affected our bookings and revenue for a substantial part of 2020.

Our consolidated 2021 bookings included $36.9 million attributable to acquisitions and $27.0 million from a favorable foreign currency effect, and consisted of record orders for both parts and consumables products and capital equipment.

Our bookings increased 7% to a record $958.2 million in 2022 led by strong parts and consumables bookings, especially within our Flow Control segment.

Our 2022 bookings included $50.2 million attributable to acquisitions and a $39.8 million unfavorable effect from foreign currency translation.

See Acquisitions below for further details.

We ended the year with record consolidated backlog of $309.9 million, increasing 61% from the end of 2020.

We ended the year with consolidated backlog of $345.3 million, increasing 11% from the end of 2021.

An overview of our business by segment is as follows:

• Flow Control – Our Flow Control segment ended a strong year with record bookings for both parts and consumables products and capital equipment.

In 2021, we acquired The Clouth Group of Companies (Clouth), which contributed $23.2 million of bookings.

Orders for both parts and consumables products and capital equipment at our existing Flow Control businesses have been bolstered by growth in the industries we serve, particularly the packaging and tissue markets.

Our bookings in the earlier part of 2021 were also boosted by pent-up demand from depressed levels encountered during most of 2020.

• Industrial Processing – Strong quarterly bookings, particularly in the latter half of 2021, contributed to record orders in 2021 for our Industrial Processing segment.

Orders for our wood processing business products continue to be fueled by a robust U.S.

housing market and high demand for lumber, oriented strand board and plywood, which has driven new capital equipment investment and high parts consumption by our customers.

During the second half of 2021, maintenance requirements at many of our customers have augmented demand for our parts products, which we expect to continue into the first half of 2022.

In the fourth quarter of 2021, wood processing capital equipment bookings were exceptionally strong, resulting in a backlog that will be fulfilled primarily through mid-2023.

Bookings at our stock-preparation business increased 28% in 2021 largely due to a rebound in capital equipment orders compared with the depressed capital spending environment for most of 2020 and due to steady demand for our parts and consumables products.

We expect the demand for our Industrial Processing segment products to moderate somewhat in 2022 compared to the record level in 2021.

• Material Handling – Our Material Handling segment also ended the year with record bookings.

In August 2021, we acquired East Chicago Machine Tool Corporation (Balemaster) and certain assets of affiliated companies, which contributed $13.2 million of orders.

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

Bookings for parts and consumables at our conveying and vibratory equipment business have rebounded from depressed 2020 levels due to the relaxation of pandemic-related restrictions and an increased demand from our mining customers, while bookings for capital equipment have moderated.

In 2021, many of our operations were 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, as well as customer-requested delays in shipments.

We believe these challenges will generally persist into 2022.

Bookings increased 17% and organic bookings, which excludes an acquisition and an unfavorable foreign currency translation effect, increased 14% compared to 2021.

Orders for both parts and consumables products and capital equipment continue to be strong due to the strength in the end markets we serve and as customers seek to optimize energy utilization.

We expect to continue to see steady demand in 2023, but comparatively lower than 2022 due to the nearly $200 million of record orders we received in the first half of the year.

• Industrial Processing – Our Industrial Processing segment bookings decreased 6% and organic bookings, which excludes an acquisition and an unfavorable foreign currency translation effect, decreased 3% compared to 2021.

While our parts and consumables bookings experienced a record year, our capital bookings decreased 18% compared to a record 2021 as demand for capital equipment at our wood processing business returned to a more typical level in 2022.

Record orders for our wood processing business products in 2021 were fueled by a robust U.S.

housing market and high demand for lumber, OSB and plywood, which drove new capital equipment investment.

As we look forward, there is uncertainty as to how governmental efforts to control inflation may impact this segment's end markets.

Therefore, we expect comparatively lower bookings in 2023 given the high level of bookings we experienced in the first half of 2022.

• Material Handling – Our Material Handling segment had record bookings in 2022 for both parts and consumables and capital equipment.

Bookings increased 20% and organic bookings, which excludes an acquisition and an unfavorable foreign currency translation effect, increased 13% compared to 2021.

We expect this steady demand to continue into 2023 given the anticipated growth trends in recycling and infrastructure investments.

Our global operations have been and continue to be impacted by increasingly complex market conditions fueled by inflationary pressures, including the strengthening of the U.S.

dollar, geopolitical tensions, labor availability, and lingering global supply chain constraints.

Supply chain constraints have 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 as we enter 2022.

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.

For more information on risks related to health epidemics to our business, including COVID-19, and other factors impacting our business discussed above, please see Part I, Item 1A , “Risk Factors.”

We expect our operating environment to continue to be challenging as central banks work to address inflationary pressures, which creates more uncertainty for the latter half of 2023.

We believe that the fundamentals of our business remain strong, particularly given our high backlog levels, solid global operations team, and ongoing strength in the markets we serve.

International Sales

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

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.

We expect that one 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.

In recent years, we have acquired several businesses and continue to pursue acquisition opportunities.

On November 14, 2022, we acquired a business in Canada, which is included in our Material Handling segment, for approximately $3.6 million, net of cash acquired.

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.

We expect several synergies in connection with this acquisition, including deepening our presence in the growing ceramic blade market and expansion of product sales at our existing businesses by leveraging Clouth's complementary global geographic footprint.

Clouth has three manufacturing facilities in Germany and one in Poland and generated revenue of approximately 40.5 million euros for the trailing twelve months ended June 30, 2021 prior to its acquisition by us.

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

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

On August 23, 2021, we 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.

Balemaster generated revenue of approximately $22.2 million for the trailing twelve months ended June 30, 2021 prior to its acquisition by us.

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

In 2020, we acquired a business in Canada, which is included in our Industrial Processing segment, for approximately $6.9 million, net of cash acquired.

See Note 2 , Acquisitions, in the accompanying consolidated financial statements for further details.

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The following table presents changes in revenue by segment between 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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This non-GAAP measure should not be considered superior to or a substitute for the corresponding GAAP measure.

Revenue by segment in 2021 and 2020 was as follows:

Revenue by segment in 2022 and 2021 is as follows:

Organic Revenue

(In thousands, except percentages) January 1,

(In thousands, except percentages) December 31,

2022 January 1,

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Consolidated Revenue $ 904,739 $ 786,579 $ 118,160 15 % $ (41,065) $ 40,066 $ 119,159 15 %

Consolidated revenue in 2021 increased 24%, while consolidated organic revenue increased 15%, driven by higher demand for both 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 28% in 2021, while organic revenue increased 15% due to higher demand for parts and consumables products and, to a lesser extent, capital equipment at substantially all locations.

Increased demand for parts and consumables products in 2021 was due in part to customer maintenance requirements, pent-up demand, and orders in the latter part of the year to mitigate potential supply chain disruptions.

Conversely, revenue during most of 2020 was depressed as a result of customer downtimes, shutdowns, and visitation restrictions related to the COVID-19 pandemic.

Higher capital equipment revenue in 2021 resulted from improved market conditions and pent-up demand, while revenue in 2020 was adversely impacted by customer reductions in capital spending and deferrals of equipment installations as a result of the pandemic.

Revenue at our Industrial Processing segment increased 26% in 2021, while organic revenue increased 20% due to higher demand for both capital equipment and parts and consumables products.

Our wood processing business continues to experience high demand for its products, driven by near capacity mill rates resulting in increased capital investment and parts consumption.

Additionally, demand for parts was augmented by maintenance requirements in the latter part of 2021 at many of our wood processing customers.

Increased revenue at our stock-preparation business was led by increased demand for parts and consumables at our North American stock-preparation operation due to improved market conditions and pent-up demand coupled with a depressed 2020 period.

Capital equipment revenue also increased as a result of large orders at our Chinese operation, offset in part by lower shipments at our North American and European operations due to the timing of orders and curtailed spending by our customers in 2020, which impacted revenue in the first half of 2021.

Revenue at our Material Handling segment increased 14% in 2021, while organic revenue increased 6%.

Demand for our European baling products was bolstered by improved business conditions in Europe, including the recovery of recycled commodity prices.

This improvement was partially offset by lower capital equipment revenue at our conveying and vibratory equipment business in 2021.

Consolidated revenue in 2022 increased 15%, including a 5% increase from acquisitions and a 5% decrease from the unfavorable effect of foreign currency translation.

The 15% increase in organic revenue was broad-based with each of our operating segments increasing over 10% compared to 2021.

Revenue at our Flow Control segment increased 21% in 2022, while organic revenue increased 18% with relatively equal contributions from our fluid-handling and doctoring, cleaning, & filtration product lines.

Increased revenue for both our parts and consumables products and capital equipment was driven by strength in the underlying packaging industry, especially in the U.S., and increased demand in Europe resulting in part from high energy prices as customers sought to optimize energy utilization.

Revenue at our Industrial Processing segment increased 8% in 2022, while organic revenue increased 12%.

Nearly 70% of the organic revenue increase was related to our wood processing business where the robust U.S.

housing market and high demand for lumber, OSB and plywood, especially in the first half of the year, drove demand for our products.

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

The remaining organic revenue increase related to our stock-preparation business where we had steady demand for our products throughout the year.

Compared to 2021, we experienced increased demand for stock-preparation capital equipment primarily at our European operations, as customers sought to reduce their input costs with our fiber processing solutions.

Revenue at our Material Handling segment increased 19% in 2022, while organic revenue increased 15%, due to higher demand for both capital equipment and parts and consumables products at our vibratory and conveying business in North America resulting from strong demand across all industries.

Also contributing to the organic revenue increase was higher demand for capital equipment at our baling operations due to greater market and government-backed policy demand for recycling.

Gross Profit Margin

Gross profit margin by segment in 2021 and 2020 was as follows:

Gross profit margin by segment in 2022 and 2021 is as follows:

2022 January 1,

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Material Handling 34.4% 34.4%

Consolidated Gross Profit Margin 42.9% 43.7%

Consolidated gross profit margin declined to 42.9% in 2021 compared with 43.7% in 2020.

The 2021 period included $4.3 million of amortization of acquired profit in inventory, which lowered consolidated gross profit margin by 0.5 percentage points, and lower benefits received from government employee retention assistance programs.

Benefits received from these programs were $0.9 million, or 0.1 percentage points of consolidated gross profit margin, in 2021 and $3.7 million, or 0.6 percentage points of consolidated gross profit margin, in 2020.

Gross profit margin at our Flow Control segment decreased to 51.0% in 2021 compared with 52.9% in 2020 due to the inclusion of $3.1 million of amortization of acquired profit in inventory, which lowered gross profit margin in 2021 by 1.1 percentage points, and a lower gross profit margin profile for Clouth.

We expect the lower gross profit margin profile for Clouth to continue to have a negative impact on our Flow Control gross profit margin in 2022.

Gross profit margin at our Industrial Processing segment decreased to 40.1% in 2021 compared with 41.3% in 2020 due principally to lower benefits received from government employee retention assistance programs.

Cost of revenue included benefits received of $0.7 million in 2021 compared with $2.9 million in 2020 related to these programs.

The gross profit margin was also impacted by lower-margin capital equipment revenue at our Chinese stock-preparation business offset in part by a higher margin at our wood processing business.

Gross profit margin at our Material Handling segment increased to 34.4% in 2021 compared with 33.7% in 2020 due to a higher gross profit margin profile for Balemaster and an improvement in gross profit margin for capital equipment at our existing baler business.

This was offset in part by $1.2 million of amortization of acquired profit in inventory, which lowered gross profit margin by 0.7 percentage points in 2021.

Consolidated 43.1% 42.9%

Consolidated gross profit margin increased to 43.1% in 2022 compared with 42.9% in 2021.

The consolidated gross profit margin in 2021 included $4.3 million of amortization of acquired profit in inventory, which lowered gross profit margin by 0.5 percentage points and benefits received from government employee retention assistance programs of $0.9 million, which increased gross profit margin by 0.1 percentage points.

Within our operating segments, gross profit margin:

• Increased to 52.0% at our Flow Control segment from 51.0% in 2021 due to the inclusion of $3.1 million of amortization of acquired profit in inventory, which lowered gross profit margin in 2021 by 1.1 percentage points.

• Decreased to 39.2% from 40.1% at our Industrial Processing segment due to the impact of lower-margin capital equipment revenue at our wood processing businesses and the inclusion of $0.7 million of benefits received from government employee retention assistance programs, which increased gross profit margin in the 2021 period by 0.2 percentage points.

• Remained flat at 34.4% at our Material Handling segment.

The impact of the higher gross profit margin generated from our Balemaster business acquired in the third quarter of 2021 was offset by the inclusion of $1.2 million of amortization of acquired profit in inventory, which lowered gross profit margin by 0.7 percentage points in 2021.

Selling, General, and Administrative Expenses

Selling, general, and administrative (SG&A) expenses by segment in 2021 and 2020 were as follows:

(In thousands, except percentages) January 1,

Selling, general, and administrative (SG&A) expenses by segment in 2022 and 2021 is as follows:

(In thousands, except percentages) December 31,

2022 % of Revenue January 1,

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Corporate 35,995 N/A 32,680 N/A 3,315 10 %

Consolidated SG&A Expenses $ 208,787 27 % $ 181,905 29 % $ 26,882 15 %

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

Consolidated SG&A expenses increased $26.9 million as a result of the inclusion of $9.7 million of SG&A expenses from acquisitions, higher incentive compensation resulting from our improved financial performance, $5.1 million from the unfavorable effect of currency translation, and an incremental $4.0 million of acquisition-related costs.

SG&A expenses included benefits received from government employee retention assistance programs of $1.4 million in 2021 and $2.2 million in 2020.

SG&A expenses at our Flow Control segment increased $13.3 million principally due to the inclusion of $7.0 million of SG&A expenses from Clouth, $3.1 million of acquisition-related costs, and $1.7 million from the unfavorable effect of foreign currency translation.

The remaining increase is principally attributable to higher incentive compensation in 2021.

SG&A expenses at our Industrial Processing segment increased $3.1 million principally due to $2.7 million from the unfavorable effect of foreign currency translation.

SG&A expenses at our Material Handling segment increased $5.0 million principally due the inclusion of $2.4 million of SG&A expenses from Balemaster and an incremental $1.3 million of acquisition-related costs.

SG&A expenses at Corporate increased $5.4 million primarily due to higher incentive compensation and, to a lesser extent, increased professional service fees.

Impairments and Other Costs, Net

Impairments and other costs, net in 2021 included an impairment charge of $0.5 million related to the write down of an intangible asset and restructuring costs totaling $0.5 million for severance costs and the write down of certain assets associated with the closure of a redundant business in our Flow Control segment.

Impairments and other costs, net in 2021 also included a gain on the sale of a building of $0.5 million within our Industrial Processing segment.

Impairments and other costs, net in 2020 included impairment charges of $1.9 million related to the write down of intangible assets associated with our timber-harvesting products, which are included in our Industrial Processing segment, as a result of a continued decline in revenue and operating results for this business.

Impairments and other costs, net in 2020 also included restructuring costs of $1.1 million, which consisted of severance costs of $0.7 million at our Flow Control segment, $0.2 million at our Industrial Processing segment, and $0.2 million at our Material Handling segment.

These restructuring costs

represent severance associated with a restructuring plan implemented in response to the slowdown in the global economy that was largely driven by the impact of the COVID-19 pandemic.

See Note 1 , Nature of Operations and Summary of Significant Accounting Policies, under the heading Impairment of Long-Lived Assets , and Note 8 , Other Costs, Net in the accompanying consolidated financial statements for further details relating to the items discussed above.

Consolidated $ 224,405 25 % $ 208,787 27 % $ 15,618 7 %

Consolidated SG&A expenses as a percentage of revenue decreased to 25% in 2022 from 27% in 2021 principally due to the increase in revenue.

Consolidated SG&A expenses increased $15.6 million primarily due to higher compensation expense associated with existing and new personnel and increased travel costs, which are gradually returning to pre-pandemic levels.

Consolidated SG&A expense also included increases from an incremental $11.3 million of SG&A expenses from acquisitio ns, the inclusion of $1.4 million of benefits received from government employee retention assistance programs in 2021, and $1.3 million from indemnification asset reversals related to the release of tax reserves.

These increases were offset by a $9.8 million favorable effect of foreign currency translation and a decrease of $3.6 million in acquisition-related costs.

Within our operating segments, SG&A expenses:

• Increased $9.7 million at our Flow Control segment principally due to the inclusion of an incremental $7.8 million of SG&A expenses from Clouth, increased compensation expense and travel costs, indemnification asset reversals of $0.7 million related to the release of tax reserves, and the inclusion of benefits received from government employee retention assistance programs of $0.8 million in 2021.

These increases were partially offset by a $4.8 million favorable effect of foreign currency translation and a decrease of $2.6 million in incremental acquisition-related costs.

• Increased $1.1 million at our Industrial Processing segment due to increased compensation and selling-related costs, an indemnification asset reversal related to the release of tax reserves of $0.6 million, and the inclusion of benefits received from government employee retention assistance programs of $0.5 million in 2021.

These increases were partially offset by a $3.4 million favorable effect of foreign currency translation.

• Increased $1.5 million at our Material Handling segment principally due to the inclusion of an incremental $3.1 million of SG&A expenses from Balemaster, offset in part by a $1.6 million favorable effect of foreign currency translation.

• Increased $3.3 million at Corporate primarily due to increased compensation expense and travel costs.

Gain on Sale and Other Costs, Net

A summary of the items included in gain on sale and other costs, net is as follows:

(In thousands) December 31,

2022 January 1,

Gain on Sale of Assets $ (20,190) $ (515)

Impairment Costs 731 804

Restructuring Costs 603 176

$ (18,856) $ 465

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 and relocate to a new facility (China Transaction).

The agreements became effective in the first quarter of 2022 after a 31% down payment was received, including 25% in 2021 and 6% in the first quarter of 2022, and a land use right in a new location was secured.

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

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

The receivable outstanding at December 31, 2022 was $15.2 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, which is expected in 2023.

In 2021, gain on sale of assets included a gain of $0.5 million on the sale of a building within our Industrial Processing segment.

Impairment and Restructuring Costs

During 2022, we recorded impairment costs of $0.7 million within our Industrial Processing segment.

The impairment costs included $0.5 million primarily related to the write-down of inventory at our business in Russia and $0.2 million related to the write-down of certain fixed assets that will not be moved to the new manufacturing facility in China.

During the fourth quarter of 2021, we initiated a restructuring plan within our Flow Control segment to eliminate a redundant ceramic blade manufacturing operation that resulted from our acquisition of Clouth.

The plan consisted of severance costs related to the termination of five employees, and facility and other closure costs.

Severance costs totaled $0.4 million, of which $0.2 million were recorded in 2022 and $0.2 million in 2021, and facility and other closure costs totaled $0.4 million, all of which were recorded in 2022.

During 2021, we also recorded asset impairment charges related to this restructuring plan of $0.5 million for the write-down of an intangible asset, $0.2 million for the write-down of certain machinery and equipment, and $0.1 million for the write-down of a right-of-use asset.

We do not expect to incur additional restructuring charges related to this restructuring plan.

See Note 8 , Gain on Sale and Other Costs, Net in the accompanying consolidated financial statements for further details.

Interest Expense

Interest expense decreased to $4.8 million in 2021 from $7.4 million in 2020 due to a lower weighted average interest rate and lower outstanding debt in 2021.

Interest expense increased to $6.5 million in 2022 from $4.8 million in 2021 primarily due to a higher weighted-average interest rate, offset in part by lower average debt outstanding in 2022 compared with 2021.

Provision for Income Taxes

Our provision for income taxes increased to $27.2 million in 2021 from $17.9 million in 2020 and represented 24% of pre-tax income in both periods.

The effective tax rate in 2021 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, nondeductible expenses, and state taxes.

Our provision for income taxes increased to $43.9 million in 2022 from $27.2 million in 2021.

The effective tax rate of 27% in 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 reversal of tax reserves associated with uncertain tax positions.

The effective tax rate of 24% in 2021 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 in 2020 was higher than our statutory rate of 21% primarily due to nondeductible expenses, the distribution of our worldwide earnings, and state taxes.

These increases in tax expense were offset in part by a decrease in tax related to the net reversal of tax reserves associated with uncertain tax positions, the net excess income tax benefits from stock-based compensation arrangements , and a tax benefit for the partial release of a valuation allowance.

Net income increased $29.1 million in 2021 from $55.7 million in 2020 primarily due to a $35.6 million increase in operating income and a $2.6 million decrease in interest expense, offset in part by a $9.2 million increase in provision for income taxes (see discussions above for further details).

Net income increased to $121.7 million in 2022 from $84.9 million in 2021 primarily due to a $54.6 million increase in operating income, offset in part by a $16.7 million increase in provision for income taxes (see discussions above for further details).

Non-GAAP Key Performance Indicators

In addition to the financial measures prepared in accordance with GAAP, we use certain non-GAAP financial measures, including organic revenue (defined as revenue excluding the effect of foreign currency translation and acquisitions), adjusted operating income, earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted EBITDA, adjusted EBITDA margin (defined as adjusted EBITDA divided by revenue), and free cash flow (defined as cash flow provided by operations less capital expenditures).

In addition to the financial measures prepared in accordance with GAAP, we use certain non-GAAP financial measures, including organic revenue (defined as revenue excluding the effect of foreign currency translation and acquisitions), adjusted operating income, earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted EBITDA, adjusted EBITDA margin (defined as adjusted EBITDA divided by revenue), and free cash flow (defined as net cash provided by operating activities less capital expenditures).

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).

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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 from net income attributable to Kadant is as follows:

(In thousands, except percentages) January 1,

(In thousands, except percentages) December 31,

2022 January 1,

2021 December 28,

2022 January 2,

Net Income Attributable to Kadant $ 120,928 $ 84,043 $ 55,196

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Operating Income 171,282 116,710 81,124

Impairment and Restructuring Costs 980 2,979 2,528

Gain on Sale of Building (515) — —

Gain on Sale (a) (20,190) (515) —

Acquisition Costs 668 3,655 485

Acquired Backlog Amortization 1,326 544 1,323

Acquired Profit in Inventory 4,284 — 3,549

Adjusted Operating Income 126,440 85,132 96,066

Indemnification Asset Reversals (b) 1,316 — —

Impairment and Restructuring Costs 1,334 980 2,979

Acquired Backlog Amortization (c) 703 1,326 544

Acquired Profit in Inventory Amortization (d) (218) 4,284 —

Adjusted Operating Income (non-GAAP measure)

154,895 126,440 85,132

Depreciation and Amortization 34,233 32,976 30,790

Adjusted EBITDA $ 159,416 $ 115,922 $ 127,133

Adjusted EBITDA Margin 20.3% 18.3% 18.0%

As a percentage of revenue, adjusted EBITDA margin increased 200 basis points in 2021 and 30 basis points in 2020.

The 2021 increase was primarily due to organic revenue growth without a proportionate increase in operating expenses.

The 2020 increase was primarily due to cost reduction efforts, including the impact of benefits received from government employee retention assistance programs, to mitigate lower revenue and an increased proportion of higher margin parts and consumables revenue.

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

(In thousands) January 1,

Adjusted EBITDA (non-GAAP measure)

$ 189,128 $ 159,416 $ 115,922

Adjusted EBITDA Margin (non-GAAP measure)

20.9% 20.3% 18.3%

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

(In thousands) December 31,

2022 January 1,

2021 December 28,

Cash Provided by Operating Activities $ 162,420 $ 92,884 $ 97,413

Capital Expenditures (12,771) (7,595) (9,957)

Free Cash Flow $ 149,649 $ 85,289 $ 87,456

Free cash flow increased to $149.6 million in 2021 from $85.3 million in 2020 primarily due to improvements in operating assets and liabilities and net income.

See below for further discussion of cash provided by operating activities.

Free cash flow decreased to $85.3 million in 2020 from $87.5 million in 2019 primarily due to a use of cash for working capital purposes, driven by a reduction in accounts payable as a result of reduced spending levels in 2020 for capital equipment orders.

2022 January 2,

Net Cash Provided by Operating Activities $ 102,625 $ 162,420 $ 92,884

Capital Expenditures (e) (28,199) (12,771) (7,595)

Free Cash Flow (non-GAAP measure)

$ 74,426 $ 149,649 $ 85,289

(a) Includes a $20.2 million gain on the China Transaction in our Industrial Processing segment.

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

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

(e) Includes capital expenditures of $10.4 million in 2022 associated with the China Transaction.

2021 Compared to 2020

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Liquidity and Capital Resources

Consolidated working capital was $162.4 million at January 1, 2022, compared with $155.1 million at January 2, 2021.

Cash and cash equivalents were $91.2 million at January 1, 2022, compared with $65.7 million at January 2, 2021, which included cash and cash equivalents held by our foreign subsidiaries of $83.8 million at January 1, 2022 and $63.6 million at January 2, 2021.

Consolidated working capital was $201.9 million at December 31, 2022, compared with $162.4 million at January 1, 2022.

Cash and cash equivalents were $76.4 million at December 31, 2022, compared with $91.2 million at January 1, 2022, which included cash and cash equivalents held by our foreign subsidiaries of $75.8 million at December 31, 2022 and $83.8 million at January 1, 2022.

Cash flow information is as follows:

(In thousands) January 1,

(In thousands) December 31,

2022 January 1,

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Net Cash Used in Investing Activities (29,520) (154,475)

Net Cash Provided by (Used in) Financing Activities 22,808 (84,556)

Net Cash (Used in) Provided by Financing Activities (80,569) 22,808

Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash (6,972) (3,232)

Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash $ 27,521 $ (1,633)

(Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash $ (14,436) $ 27,521

Operating Activities

Cash provided by operating activities increased to $162.4 million in 2021 from $92.9 million in 2020.

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

The increase in cash provided by operating activities in 2021 was principally driven by improvements in operating assets and liabilities and net income.

Cash provided by operating assets and liabilities was $29.3 million in 2021, including sources of cash of $27.7 million from customer deposits and $26.3 million from accounts payable, reflecting the impact of increased capital equipment order activity.

Other liabilities provided cash of $19.5 million, which includes a $6.2 million deposit received for the anticipated sale of a building in China and an increase in our accrued incentive compensation, advance billings, and accrued income taxes resulting from our improved financial performance.

These sources of cash were offset in part by cash used of $16.7 million for accounts receivable mostly due to revenue growth and timing of shipments, $15.0 million for other assets due in part to prepayments for raw materials and a land use right operating lease related to the relocation of our existing facility in China, and $11.2 million for a buildup of inventories for capital equipment orders and to mitigate potential supply chain issues.

Cash used for operating assets and liabilities of $8.0 million in 2020 included cash used of $15.6 million for accounts payable primarily due to reduced spending levels for capital equipment projects and $8.6 million for other liabilities due in part to a decrease in advance billings resulting from lower contract activity and a payment of $2.4 related to the settlement of a post-retirement benefit plan.

These uses of cash were offset by cash provided of $13.2 million due to a reduction in unbilled revenue and accounts receivable primarily as a result of lower capital equipment revenue during 2020.

Cash provided by operating activities decreased to $102.6 million in 2022 from $162.4 million in 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 operating activities in 2022 was due to cash provided by net income, offset in part by investments in working capital.

Increases in inventories and accounts receivable used cash of $54.6 million, including $36.1 million for inventory primarily related to capital equipment orders that will ship in 2023.

These uses of cash were offset in part by $14.4 million of cash provided by customer deposits.

Cash provided by operating activities in 2021 was due to cash provided by net income and working capital.

Cash provided by working capital in 2021 included $54.0 million from customer deposits and accounts payable, reflecting the impact of increased capital equipment order activity, and $19.5 million from other liabilities, which included a $6.2 million deposit received for the anticipated sale of a building in connection with the China Transaction, and an increase in our accrued incentive compensation, advance billings, and accrued income taxes resulting from our improved financial performance.

These sources of cash were offset in part by cash used of $27.9 million for accounts receivable and inventories as a result of revenue growth and to support increased demand, and $15.0 million for other assets due in part to prepayments for raw materials and a land use right operating lease related to the relocation of our existing facility in China.

Investing Activities

Cash used in investing activities was $29.5 million in 2022 compared to $154.5 million in 2021.

Cash used in investing activities included consideration paid for acquisitions, net of cash acquired, of $144.0 million in 2021 and $7.1 million in 2020.

Additionally, cash used in investing activities included purchases of property, plant, and equipment of $12.8 million in 2021 and $7.6 million in 2020, reflecting depressed capital expenditures in 2020 due to the impact of the COVID-19 pandemic.

Cash used in investing activities in 2022 included capital expenditures of $28.2 million, which included $10.4 million for expenditures associated with the construction of a new manufacturing facility in China, and $3.5 million for acquisitions.

This use of cash was partially offset by proceeds received from the sale of assets of $2.1 million in 2022.

Cash used in investing activities in 2021 included $144.0 million for acquisitions and $12.8 million for capital expenditures.

Financing Activities

Cash provided by financing activities was $22.8 million in 2021 compared with cash used in financing activities of $84.6 million in 2020.

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

Repayment of short- and long-term obligations was $115.6 million in 2021 and $99.5 million in 2020, including the $18.9 million prepayment of our real estate loan.

Cash used in financing activities was $80.6 million in 2022, compared with cash provided by financing activities of $22.8 million in 2021.

In 2022, we had net debt repayments of $63.4 million, which consisted of repayments of short- and long-term obligations of $85.5 million, partially offset by short- and long-term borrowings of $22.1 million, primarily under our revolving credit facility.

In 2021, we had net borrowings of $36.3 million, which consisted of borrowings under our revolving credit facility of $151.9 million, including $140.3 million used to fund acquisitions, partially offset by repayments of short- and long-term obligations of $115.6 million.

In addition, we made payments of cash dividends to stockholders of $12.0 million in 2022 and $11.5 million in 2021.

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

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

The $3.2 million negative exchange rate effect in 2021 was primarily attributable to the strengthening of the U.S.

dollar against the euro and the Swedish krona, offset in part by the weakening of the U.S.

T he exchange rate effect on cash, cash equivalents, and restricted cash represents the impact of translation of cash balances at our foreign subsidiari es.

Th e $7.0 million reduction in cash, cash equivalents and restricted cash in 2022 was primarily attributable to the strengthening of the U.S.

dollar against the Chinese renminbi, euro, and British pound sterling.

The $3.2 million reduction i n cash, cash equivalents and restricted cash in 2021 was primarily attributable to the strengthening of the U.S.

dollar against the euro and Swedish krona, offset in part by the weakening of the U.S.

dollar against the Chinese renminbi.

The $4.6 million positive exchange rate effect in 2020 primarily related to the weakening of the U.S.

dollar against the euro and Chinese renminbi.

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).

At year-end 2021, we have a borrowing capacity available under our Credit Agreement of $149.9 million in addition to a $150 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 January 1, 2022, our leverage ratio was 1.3 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.

On November 30 2022, we entered into a sixth amendment to our unsecured multi-currency revolving credit facility, originally entered into on March 1, 2017 (as amended and restated to date, the Credit Agreement).

Among other things, this

amendment extended the maturity date to November 30, 2027, and increased our uncommitted, unsecured incremental borrowing facility from $150 million to $200 million.

We have a total borrowing capacity of $400 million under our Credit Agreement.

At year-end 2022, we had $214.1 million of borrowing capacity available under our Credit Agreement, in addition to the $200 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 4.25.

As of December 31, 2022, our leverage ratio was 0.74 and we were in compliance with our debt covenan ts.

See Note 6 , Short- and Long-Term Obligations, in the accompanying consolidated financial statements for additional information regarding our debt obligations.

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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 or our previous authorization, which expired on May 13, 2021.

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

We paid cash dividends of $12.0 million in 2022.

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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 $18.0 million during 2022 for property, plant, and equipment.

In addition, one of our Chinese subsidiaries expects to build a new facility and relocate over the next two years.

Capital expenditures for the new facility are estimated to be approximately $20 million, which will be offset by the proceeds received from the sale of our existing facility.

See Note 15 , Subsequent Event, in the accompanying consolidated financial statements for additional information regarding the anticipated relocation of our Chinese manufacturing facility.

As of January 1, 2022, we had approximately $245.1 million of total unremitted foreign earnings.

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

We plan to make capital expenditures of approximately $32 to $34 million during 2023 for property, plant, and equipment, including $8 to $9 million for a new manufacturing facility in China.

One of our Chinese subsidiaries entered into several agreements with the Chinese government in the first quarter of 2022 to sell its existing facility but will continue to occupy it until construction of a new facility is completed, which is expected in 2023.

Capital expenditures for the new facility are approximately $19 million, including $10.4 million paid in 2022 and $8.6 million to be paid in 2023.

These expenditures will be offset by the proceeds received from the sale of our existing facility, the remainder of which is due the earlier of when the government sells the property or the first quarter of 2024.

Capital expenditures for 2023 also include a facility expansion project of $5 million related to our wood processing product line.

As of December 31, 2022, we had approximately $248.1 million of total unremitted foreign earnings.

It is our intent to indefinitely reinvest $229.0 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments, if any.

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The foreign withholding taxes that would be required if we were to remit the indefinitely-reinvested foreign earnings to the United States would be approximately $4.1 million.

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 the foreseeable future.

We believe that our 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 the foreseeable future.

Material Contractual Obligations

The following table summarizes our material contractual obligations as of January 1, 2022 and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods.

Detailed information concerning these obligations can be found in Notes 6, 7, and 9 in the accompanying consolidated financial statements.

The following table summarizes our material contractual obligations as of December 31, 2022 and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods.

Detailed information concerning these obligations can be found in Note 6 - Short- and Long-Term Obligations, Note 7 - Commitments and Contingencies, and Note 9 - Leases in the accompanying consolidated financial statements.

(In millions) Less than 1 Year 1-3 Years 3-5 Years After 5 Years Total

Debt Obligations:

Principal payments (a) $ 1.2 $ 255.2 $ 4.4 $ 3.8 $ 264.6

Interest payments (b) 4.3 4.6 0.6 0.2 9.7

Principal payments $ 2.8 $ 4.5 $ 190.2 $ 1.7 $ 199.2

Interest payments (a) 8.6 16.9 15.8 0.1 41.4

Operating and Finance Lease Obligations 6.3 8.3 4.3 9.3 28.2

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Total $ 45.2 $ 34.3 $ 210.7 $ 11.1 $ 301.3

(a) Excludes $1.5 million related to a net fixed price purchase option exercisable in 2022.

(b) Includes interest expense on both variable and fixed rate debt assuming no prepayments.

(a) Includes interest expense on both variable and fixed rate debt assuming no prepayments.

Variable interest rates have been assumed to remain constant through the end of the term at the rates that existed as of year-end 2022.

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Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP.

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period.

The preparation of these consolidated financial

statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period.

Our actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies and estimates are defined as those that entail significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions.

For a discussion on the application of these estimates and other accounting policies, see Note 1 , Nature of Operations and Summary of Significant

Accounting Policies, in the accompanying consolidated financial statements.

For a discussion on the application of these estimates and other accounting policies, see Note 1 , Nature of Operations and Summary of Significant Accounting Policies, in the accompanying consolidated financial statements.

We believe that our most critical accounting policies and estimates upon which our financial position depends, and which involve the most complex or subjective decisions or assessments, are those described below.

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The remaining portion of our revenue is recognized on an over time basis using an input method that compares the costs incurred to date to the total expected costs required to satisfy the performance obligation.

Most revenue recognized on an over time basis is for large capital products that are highly customized for the customer and, as a result, would include significant cost to rework in the event of cancellation.

Most revenue recognized on an over time basis is for large capital products that are highly customized for the customer and, as a result, would include significant cost to rework in the

event of cancellation.

The over time basis of accounting requires significant judgment in determining applicable contract costs and the corresponding revenue to be recognized, which could be different if there were to be changes to the circumstances of the contract.

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Different assumptions from those made in our analysis could materially affect projected cash flows and our evaluation of goodwill and indefinite-lived intangible assets for impairment.

At year-end 2021 and 2020, we performed a qualitative impairment analysis (Step 0) for our reporting units, except for the material handling reporting unit for which we performed a quantitative impairment analysis (Step 1) at year-end 2020.

At year-end 2022 and 2021, we performed a qualitative impairment analysis (Step 0) for our reporting units.

Based on these analyses, we determined goodwill and indefinite-lived intangible assets were not impaired.

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Actual cash flows arising from a particular intangible asset could vary from projected cash flows which could imply different carrying values from those established at the dates of acquisition and which could result in impairment of such asset.

No indicators of impairment were identified in 2021 and 2020, except for impairment charges of $0.5 million in 2021 related to the closure of a business in our Flow Control Segment and $1.9 million in 2020 associated with our timber-harvesting product line, which is included in our Industrial Processing segment.

No indicators of impairment were identified in 2022 and 2021, except for impairment charges of $0.5 million in 2021 related to the closure of a business in our Flow Control Segment.

Definite-lived intangible assets were $147.4 million at year-end 2022.

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Any future impairment charges could have a material adverse effect on our results of operations in the period in which an impairment is determined to exist.

See Note 1 , Nature of Operations and Summary of Significant Accounting Policies, under the heading Impairment of Long-Lived Assets , in the accompanying consolidated financial statements for further details regarding impairment costs recorded in 2021 and 2020.

We value our inventory at the lower of the actual cost (on a first-in, first-out;

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Recent Accounting Pronouncements

See Note 1 , Nature of Operations and Summary of Significant Accounting Policies, under the headings Recently Adopted Accounting Pronouncements and Recent Accounting Pronouncements Not Yet Adopted , in the accompanying consolidated financial statements for further details.

See Note 1 , Nature of Operations and Summary of Significant Accounting Policies, under the heading Recently Adopted Accounting Pronouncements , in the accompanying consolidated financial statements for further details.

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-K

Item 7. Management’s Discussion and Analysis