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Item 2. Management’s Discussion and Analysis

2023-05-10 compared with 2022-11-09 · 138 added, 232 removed, 129 unchanged (74% of the section changed)

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We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise.

For a discussion of important factors that may cause our actual results to differ materially from those suggested by the forward-looking statements, you should read carefully Risk Factors included in Part II, Item 1A , of this report and Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended January 1, 2022 (the Annual Report) and as may be further amended and/or restated in subsequent filings with the SEC.

For a discussion of important factors that may cause our actual results to differ materially from those suggested by the forward-looking statements, you should read carefully Risk Factors included in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the Annual Report) and as may be further amended and/or restated in subsequent filings with the SEC.

Company Background

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Our products and services play an integral role in enhancing efficiency, optimizing energy utilization, and maximizing productivity in process industries while helping our customers advance their sustainability initiatives with products that reduce waste or generate more yield with fewer inputs, particularly fiber, energy, and water.

Producing more while consuming less is a core aspect of Sustainable Industrial Processing and a major element of the strategic focus of our operating segments.

Producing more while consuming less is a core aspect of Sustainable Industrial Processing and a major element of the strategic focus of our business.

Our financial results are reported in three reportable operating segments:

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Industry and Business Overview

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.

We had record bookings of $274.5 million in the first quarter of 2023, surpassing the previous record set in the first quarter of 2022 despite inflationary pressures and a $9.2 million unfavorable effect of foreign currency translation.

Strong contributions from our Material Handling and Flow Control segments led to record bookings for our parts and consumable products in the first quarter of 2023 and the second highest quarterly bookings for our capital equipment.

Our backlog increased 14% sequentially to $393.0 million at the end of the first quarter of 2023, providing a robust start to 2023.

An overview of our business by segment is as follows:

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

• Flow Control – Our Flow Control segment bookings set a new quarterly record, increasing 33% sequentially and 4% compared to the prior record set in the first quarter of 2022.

We experienced strong demand in Europe due to the strength in the end markets we serve as customers seek to optimize energy utilization.

The first quarter of the year is historically the strongest as customers prepare for annual spring maintenance shutdowns.

As a result, we expect subsequent quarterly bookings to moderate as the year progresses, but expect our end markets to remain healthy.

• Industrial Processing – Our Industrial Processing segment bookings decreased 9% compared to a strong first quarter of 2022.

Although bookings were softer in the first quarter of 2023, demand for both parts and capital equipment remained good.

Demand for our wood processing capital equipment returned to more typical levels after the record-setting pace experienced over the last two years, which was fueled by a robust U.S.

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

We expect activity in this product line to continue to moderate as the year progresses.

Demand for our stock-preparation products remains steady and we expect this to continue throughout the year.

However, as we look forward, there is uncertainty as to how governmental efforts to control inflation may impact this segment's end markets and we expect comparatively lower bookings given the high level of bookings we experienced in the first half of 2022.

• Material Handling – Our Material Handling segment bookings set a new record, increasing 24% compared to the prior record set in the first quarter of 2022, led by strong demand for our vibratory and conveying equipment.

Our first quarter bookings included a capital equipment order valued at approximately $12 million for the longest conveying line in North America.

Growth trends in recycling led to strong demand in our baling business in both the U.S.

We expect our quarterly bookings for the remainder of 2023 to be strong, but lower than the first quarter record bookings .

Our global operations have been and continue to be impacted by complex market conditions fueled by inflationary pressures, geopolitical tensions, labor availability and lingering global supply chain constraints.

Although supply chain constraints have resulted in inflationary pressure on material costs, longer lead times, and increased freight costs, these constraints have recently eased.

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.

For more information related to these challenges, and other factors impacting our business, please see Risk Factors included in 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 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.

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

We currently do not use derivative instruments to hedge our exposure to exchange rate fluctuations created by the translation into the U.S.

dollar of our foreign subsidiaries' results that are in functional currencies other than the U.S.

To mitigate the impact of foreign currency transaction fluctuations, we generally seek to charge our customers in the same currency in which our operating costs are incurred.

Additionally, we may enter into forward currency exchange contracts to hedge certain firm purchase and sale commitments denominated in currencies other than our subsidiaries' functional currencies.

We currently do not use derivative instruments to hedge our exposure to exchange rate fluctuations created by the translation into the U.S.

dollar of our foreign subsidiaries' results that are in functional currencies other than the U.S.

The United States imposes tariffs on certain imports from China, which has and will continue to increase the cost of some of the equipment that we import.

Although we have worked to mitigate the impact of tariffs through pricing and sourcing strategies, we cannot be sure these strategies will effectively mitigate the impact of these costs.

For more information on risks associated with our global operations, including tariffs, please see 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 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.

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.

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

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

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.

For more information on risks associated with our global operations, including tariffs, please see Risk Factors, included in Part I, Item 1A, of our Annual Report and subsequent filings with the SEC.

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.

Results of Operations

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.

First Quarter 2023 Compared With First Quarter 2022

The following table presents the change in revenue by segment between the first quarters of 2023 and 2022, 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.

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generally accepted accounting principles (GAAP) measure.

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

Revenue by segment in the first quarters of 2023 and 2022 is as follows:

Three Months Ended Increase (Decrease) Currency Translation Change in Organic Revenue

(In thousands, except percentages) April 1,

2023 April 2,

2022 % Change Increase (Decrease) % Change

Flow Control $ 89,521 $ 85,826 $ 3,695 4 % $ (2,555) $ 6,250 7 %

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Consolidated Revenue $ 229,758 $ 226,480 $ 3,278 1 % $ (7,392) $ 10,670 5 %

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.

Consolidated revenue increased 1% in the first quarter of 2023, including a 4% decrease from the unfavorable effect of foreign currency translation.

Organic revenue increased 5% due to higher demand for parts and consumables products across all segments and capital equipment at our Material Handling segment, partially offset by a decrease in demand for capital equipment at our Industrial Processing segment as described below.

Revenue at our Flow Control segment increased 4% in the first quarter of 2023, while organic revenue increased 7%.

The increase in organic revenue was primarily due to higher demand for parts and consumables driven by strength in the underlying packaging industry, especially in North America, and demand from our customers, especially in Europe, seeking to address high energy prices with our products that optimize energy utilization.

Revenue at our Industrial Processing segment decreased 10% in the first quarter of 2023, while organic revenue decreased 6%.

Organic revenue decreased principally due to softening demand for capital equipment at our wood processing businesses, primarily in North America and, to a lesser extent, at our stock-preparation businesses in China, as the pace of capacity expansion has moderated and new equipment is brought online and mills focus on installing and optimizing capital equipment purchased in prior periods.

These decreases were partially offset by an increase in demand for parts and consumables products at our stock-preparation business due to maintenance requirements at many of our customers.

Revenue at our Material Handling segment increased 19% in the first quarter of 2023, while organic revenue increased 21%, due to higher demand across all industries for capital equipment and, to a lesser extent, parts and consumables products at our vibratory and conveying business in North America.

Also contributing to the organic revenue increase was higher demand for our baling products driven by greater market and government-backed policy demand for recycling.

Gross Profit Margin

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

Gross profit margin by segment in the first quarters of 2023 and 2022 is as follows:

Three Months Ended Basis Point Change

2022 October 2,

2023 April 2,

Flow Control 53.3% 52.4% 90 bps

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Material Handling 36.1% 36.4% (30) bps

Consolidated Gross Profit Margin 42.5% 41.9% 60 bps

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.

Consolidated 44.4% 43.4% 100 bps

Consolidated gross profit margin increased to 44.4% in the first quarter of 2023 compared with 43.4%`in the first quarter of 2022 due to higher margins achieved on the mix of capital projects, especially at our Industrial Processing segment.

Also contributing to the improved gross profit margin was an increase in the percentage of higher-margin parts and consumables revenue, which increased to 66% compared to 65% in the prior year period.

Within our operating segments, gross profit margin:

• 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.

• Increased to 53.3% at our Flow Control segment from 52.4% in the 2022 period, due to higher margins achieved on our capital equipment revenue, and to a lesser extent, a higher percentage of parts and consumables product revenue compared to the prior year period.

• Increased to 40.6% from 38.6% in the 2022 period at our Industrial Processing segment due to an increase in the proportion of higher-margin parts and consumables revenue and higher margins achieved on the mix of capital projects.

• Decreased to 36.1% at our Material Handling segment from 36.4% in the 2022 period primarily due to a lower percentage of higher-margin parts and consumables revenue compared to the prior year period.

Selling, General, and Administrative Expenses

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

Selling, general, and administrative (SG&A) expenses by segment in the first quarters of 2023 and 2022 are as follows:

Three Months Ended

(In thousands, except percentages) October 1,

2022 % of Revenue October 2,

(In thousands, except percentages) April 1,

2023 % of Revenue April 2,

2022 % of Revenue Increase (Decrease) % Change

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Corporate 9,328 N/A 9,711 N/A (383) (4) %

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

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 $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 $1.7 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 $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

Flow Control $ 257,926 $ 210,769 $ 47,157 22 % $ (10,663) $ 24,222 $ 33,598 16 %

Industrial Processing 263,572 233,455 30,117 13 % (9,940) 473 39,584 17 %

Material Handling

151,141 123,839 27,302 22 % (6,358) 15,371 18,289 15 %

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

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 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

Industrial Processing 38.8% 40.1% (130) bps

Material Handling 34.8% 33.8% 100 bps

Consolidated Gross Profit Margin 43.1% 43.1% 0 bps

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:

• 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 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

Flow Control $ 63,770 25 % $ 54,226 26 % $ 9,544 18 %

Industrial Processing 46,643 18 % 45,339 19 % 1,304 3 %

Material Handling 29,823 20 % 27,518 22 % 2,305 8 %

Corporate 27,404 N/A 23,931 N/A 3,473 15 %

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

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.

Consolidated $ 58,562 25 % $ 59,168 26 % $ (606) (1) %

Consolidated SG&A expenses as a percentage of revenue decreased to 25% in the first quarter of 2023 compared with 26% in the first quarter of 2022 principally due to the increase in revenue.

Consolidated SG&A expenses were lower in the first quarter of 2023 due to the inclusion of a $1.8 million favorable effect of foreign currency translation.

In the first quarter of 2022, consolidated SG&A expenses included $0.8 million in acquisition-related costs and a $0.6 indemnification asset reversal related to the release of tax reserves.

Excluding these items in both periods, consolidated SG&A expenses increased $2.6 million, or 4%, due to increased compensation expense and travel-related costs.

Within our operating segments, SG&A expenses:

• 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.

• Increased $0.1 million at our Flow Control segment principally due to increased compensation expense and travel costs.

These increases were partially offset by a $0.8 million favorable effect of foreign currency translation and a decrease in bad debt expense.

• Decreased $0.1 million at our Industrial Processing segment principally due to a $0.8 million favorable effect of foreign currency translation and the inclusion of an indemnification asset reversal related to the release of tax reserves of $0.6 million in 2022.

These decreases were offset in part by in creased compensation expense and travel costs.

• Decreased $0.3 million at our Material Handling segment principally due a $0.2 million favorable effect of foreign currency translation and the inclusion of $0.7 million in acquisition-related costs in 2022.

These decreases were largely offset by increased compensation expense associated with existing and new personnel.

• Decreased $0.4 million at Corporate primarily due to a decrease in incentive compensation.

Gain on Sale and Other Costs, Net

Gain on sale and other costs, net recognized during the first quarter of 2022 was $20.0 million and was comprised of a gain on the sale of a building of $20.2 million, net of an impairment charge of $0.2 million.

See Note 2 , Gain on Sale and Other Costs, Net, in the accompanying condensed consolidated financial statements for further details.

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.

We entered into several agreements with the local government in China to sell the existing manufacturing building and land use rights of 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 sale of these assets of $20.2 million, or $15.1 million, net of deferred taxes of $5.1 million, in the first quarter of 2022.

A 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 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.

As a result, we recognized a gain on the China Transaction of $20.2 million, or $15.1 million, net of deferred taxes of $5.0 million, in the first quarter of 2022.

Our subsidiary, which is part of the Industrial Processing segment, will continue to occupy its current facility until construction of its new facility is complete, which is expected during the second half of 2023.

Impairment Costs

During the first quarter of 2022, we recognized an impairment charge of $0.2 million within our Industrial Processing segment associated with the write-down of certain fixed assets that will not be moved to the new manufacturing facility in China in connection with the China Transaction.

Interest Expense

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.

Interest expense increased to $2.4 million in the first quarter of 2023 from $1.2 million in the first quarter of 2022 due to a higher weighted-average interest rate, partially offset by lower average debt outstanding in the first quarter of 2023 compared to the first quarter of 2022.

Provision for Income Taxes

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).

Provision for income taxes decreased to $9.8 million in the first quarter of 2023 from $13.4 million in the first quarter of 2022.

The effective tax rate of 26% in the first quarter of 2023 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 in the first quarter of 2023 were offset in part by a decrease in tax expense related to the net excess income tax benefits from stock-based compensation arrangements.

The effective tax rate of 24% in the first quarter of 2022 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, nondeductible expenses, state taxes, and tax expense associated with the Global Intangible Low-Taxed Income provisions.

These increases in tax expense in the first quarter of 2022 were offset in part by a decrease in tax expense related to the net excess income tax benefits from stock-based compensation arrangements and the reversal of tax reserves associated with uncertain tax positions.

Net income decreased to $28.3 million in the first quarter of 2023 from $41.4 million in the first quarter of 2022 primarily due to the inclusion of a $15.1 million after-tax gain on the sale of a building in 2022 (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 and restructuring 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 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 these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our core business, operating results, or future outlook.

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.

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.

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

Three Months Ended Nine Months Ended

(In thousands, except percentages) October 1,

2022 October 2,

2021 October 1,

2022 October 2,

Three Months Ended

(In thousands, except percentages) April 1,

2023 April 2,

Net Income Attributable to Kadant $ 28,075 $ 41,192

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Indemnification Asset Reversal (b) — 575

Impairment and Restructuring Costs 72 — 254 —

Impairment Costs — 182

Acquired Backlog Amortization (c) — 703

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Adjusted EBITDA Margin (non-GAAP measure)

21.3% 20.5% 20.8% 20.2%

(a) Represents a $20.2 million pre-tax gain on the China Transaction in our Industrial Processing segment.

(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.

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

Three Months Ended Nine Months Ended

(In thousands) October 1,

2022 October 2,

2021 October 1,

2022 October 2,

Three Months Ended

(In thousands) April 1,

2023 April 2,

Cash Provided by Operating Activities $ 36,866 $ 23,768

Capital Expenditures (e) (6,376) (3,370) (16,191) (7,688)

Capital Expenditures (4,469) (2,868)

Free Cash Flow (non-GAAP measure)

$ 32,397 $ 20,900

(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 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 $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,

Consolidated working capital was $224.3 million at April 1, 2023, compared with $201.9 million at December 31, 2022.

Cash and cash equivalents were $81.2 million at April 1, 2023, compared with $76.4 million at December 31, 2022, which included cash and cash equivalents held by our foreign subsidiaries o f $70.7 million at April 1, 2023 and $75.8 million at December 31, 2022.

Cash flow information in the first three months of 2023 and 2022 is as follows:

Three Months Ended

(In thousands) April 1,

2023 April 2,

Net Cash Provided by Operating Activities $ 36,866 $ 23,768

Net Cash Used in Investing Activities (4,467) (1,291)

Net Cash (Used in) Provided by Financing Activities (62,112) 66,714

Net Cash Used in Financing Activities (27,757) (27,003)

Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash 1,140 (664)

(Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash $ (19,047) $ 17,024

Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash $ 5,782 $ (5,190)

Operating Activities

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.

Cash provided by operating activities increased to $36.9 million in the first quarter of 2023 from $23.8 million in the first quarter of 2022 principally driven by a reduction in cash used for 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 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.

These sources of cash were offset in part by cash used of $32.9 million for accounts receivable and inventory as a result of revenue growth and to support increased demand.

During the first quarter of 2023, increases in inventory used cash of $14.0 million primarily related to capital equipment orders that will ship throughout 2023.

This use of cash was offset in part by $11.1 million of cash provided by customer deposits.

Changes in other liabilities used cash of $4.6 million primarily related to incentive compensation payments in the first quarter of 2023.

During the first quarter of 2022, increases in inventory and accounts receivable used cash of $18.5 million, primarily to support our revenue growth.

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

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

Investing Activities

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 nine months of 2021 included $141.5 million for acquisitions and $7.7 million for capital expenditures.

Cash used in investing activities was $4.5 million in the first quarter of 2023, compared with $1.3 million in the first quarter of 2022.

Capital expenditures were $4.5 million in the first quarter of 2023 compared to $2.9 million in the first quarter of 2022.

Proceeds received from the sale of assets were $1.6 million in the first quarter of 2022.

Financing Activities

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.

Cash used in financing activities was $27.8 million in the first quarter of 2023, compared with $27.0 million in the first quarter of 2022.

Repayments of short- and long-term obligations were $20.8 million in the first quarter of 2023.

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

Cash dividends paid to stockholders were $3.0 million in the first quarter of 2023 and $2.9 million in the first quarter of 2022.

In addition, taxes paid related to the vesting of equity awards was $3.9 million in the first quarter of 2023 compared to $4.6 million in the first quarter of 2022.

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 $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.

The $1.1 million increase in cash, cash equivalents, and restricted cash in the first quarter of 2023 was primarily attributable to the weakening of the U.S.

dollar against the euro, and to a lesser extent, the Mexican peso and the 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).

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 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.

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 the uncommitted, unsecured increm ental borrowing facility from $150 million to $200 million.

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

At April 1, 2023, we had $232.8 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 April 1, 2023, our leverage ratio was 0.64 and we were in compliance with our debt covenants.

See Note 5 , Short- and Long-Term Obligations, in the accompanying condensed 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 under our previous $20 million authorization, which expired on May 20, 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.

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

We paid a cash dividend of $3.0 million in the first quarter of 2023.

On March 8, 2023, we declared a quarterly cash dividend of $0.29 per share totaling $3.4 million that was paid on May 10, 2023.

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 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.

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

Capital expenditures for the new facility are estimated to be approximately $20 million, including $11 million in 2022.

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

See Note 2 , Gain on Sale and Other 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.

We plan to make expenditures of approximately $28 to $30 million during the remainder of 2023 for property, plant, and equipment, including $8 to $9 million for a new manufacturing facility in China.

As of April 1, 2023, we had approximately $254.0 million of total unremitted foreign earnings.

It is our intent to indefinitely reinvest $208.0 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments, if any.

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.

In the first quarter of 2023, 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 $3.3 million.

In the future, our liquidity position will be affected by cash flows from operations, cash paid to service our debt obligations, acquisitions, capital projects, dividends, and stock repurchases.

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

Contractual Obligations and Other Commercial Commitments

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

There have been no material changes to our contractual obligations and other commercial commitments during the first quarter of 2023 compared with those disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations under the heading Liquidity and Capital Resources in Part II, Item 7, of our Annual Report.

Application of Critical Accounting Policies and Estimates

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Management evaluates its estimates on an ongoing basis based on historical experience, current economic and market conditions, and other assumptions management believes are reasonable.

We believe that our most critical accounting policies which are significant to our consolidated financial statements, and which involve the most complex or subjective decisions or assessments, are those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the section captioned "Application of Critical Accounting Estimates" in Part II, Item 7, of our Annual Report.

We believe that our most critical accounting policies which are significant to our consolidated financial statements, and which involve the most complex or subjective decisions or assessments, are those described in Management's Discussion and Analysis of Financial Condition and Results of Operations under the heading Application of Critical Accounting Estimates in Part II, Item 7, of our Annual Report.

There have been no material changes to these critical accounting policies since the end of fiscal 2022 that warrant disclosure.

Recent Accounting Pronouncements

See Note 1 , under the headings Recent Accounting Pronouncements Not Yet Adopted , in the accompanying condensed consolidated financial statements for details.

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

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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