What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-10 · 182 added, 126 removed, 141 unchanged (69% of the section changed)

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Industry and Business Overview

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.

Our consolidated bookings were $215.2 million in the second quarter of 2023, decreasing 22% sequentially from record bookings in the first quarter of 2023, which included several large orders in our Material Handling and Flow Control segments.

Our bookings returned to a more typical level in the second quarter following a general slowdown in industrial activity, and we expect bookings for the remainder of the year to be consistent with the second quarter of 2023.

We ended the second quarter with a strong backlog of $362.8 million, more than half of which was attributable to our Industrial Processing segment.

An overview of our business by segment is as follows:

• 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.

• Flow Control – Our Flow Control segment bookings decreased 16% sequentially compared to record bookings in the first quarter of 2023 led by weaker demand in Europe where inflationary pressures resulted in constrained spending.

We expect a slight decrease in demand in this segment for the remainder of the year compared to the second quarter of 2023 reflecting the overall softening in industrial production, but expect our end markets to remain healthy.

• Industrial Processing – Our Industrial Processing segment bookings decreased 18% sequentially from the first quarter of 2023 driven by weaker demand for our capital equipment products.

D emand for our wood processing capital equipment returned to more typical levels in the second quarter of 2023 after the record-setting pace experienced over the last two years, which was fueled by a robust U.S.

housing market.

Demand for our wood processing parts and consumable products declined sequentially in the second quarter of 2023 but remained strong.

Orders for our stock-preparation capital equipment products declined sequentially in the second quarter of 2023, especially in Europe and China, while demand for our parts and consumables products remained stable during the same period.

We expect steady demand in the Industrial Processing segment for the remainder of the year, but remain cautious as to how governmental efforts to control inflation may impact this segment's end markets.

• Material Handling – Our Material Handling segment bookings decreased 35% sequentially compared to the record bookings in the first quarter of 2023.

Our vibratory and conveying business led the sequential decline primarily due to a large capital equipment order valued at approximately $12 million booked in the first quarter for the longest conveying line in North America.

Demand in our baling business also declined sequentially in both the U.S.

and Europe due in part to the delay of capital equipment projects given the increased uncertainty in the economy.

We expect demand in the Material Handling segment for the second half of 2023 to be steady and consistent with the second quarter of 2023.

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

While the U.S economy has proven more resilient, growth in the European economy has slowed due to high energy prices and surging inflation, and China's manufacturing activity has contracted.

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

However, we believe that the fundamentals of our business remain strong, particularly given our high backlog levels, solid global operations teams, 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.

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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.

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.

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

Results of Operations

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.

Second Quarter 2023 Compared With Second Quarter 2022

The following table presents the change in revenue by segment between the second 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 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

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

Three Months Ended Increase Currency Translation Change in Organic Revenue

(In thousands, except percentages) July 1,

2022 % Change Increase % Change

Flow Control $ 95,729 $ 85,220 $ 10,509 12% $ (247) $ 10,756 13%

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59,357 52,027 7,330 14% 238 7,092 14%

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

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.

Consolidated $ 245,053 $ 221,649 $ 23,404 11% $ (2,332) $ 25,736 12%

Consolidated revenue increased 11% in the second quarter of 2023, including a 1% decrease from the unfavorable effect of foreign currency translation.

All our operating segments contributed to the 12% increase in organic revenue led by our Flow Control segment.

The majority of the organic revenue increase was due to higher demand for our capital equipment, especially at our Industrial Processing segment's wood processing businesses and, to a lesser extent, our Flow Control segment.

In addition, we experienced increased demand for our parts and consumables products at our Material Handling segment's vibratory and conveying business and at our Flow Control segment.

Revenue at our Flow Control segment increased 12% in the second quarter of 2023 primarily due to higher demand for capital equipment, especially in North America and, to a lesser extent, for our parts and consumables products.

The higher demand for parts and consumables occurred in all regions and was driven by the strength in the underlying packaging industry primarily in North America, and from our customers, primarily in Europe, seeking to mitigate high energy prices with our products that optimize energy utilization.

Revenue at our Industrial Processing segment increased 7% in the second quarter of 2023, while organic revenue increased 9%.

The increase in organic revenue was primarily driven by higher demand for capital equipment at our wood processing businesses due to several large projects in North America.

This increase was offset in part by softening demand at our stock-preparation businesses in China as manufacturing activity has contracted and mills focus on installing and optimizing capital equipment purchased in prior periods.

Revenue at our Material Handling segment increased 14% in the second quarter of 2023 primarily from our parts and consumables products at our vibratory and conveying business in North America partially due to the fulfillment of orders from our backlog, which led to record parts and consumables revenue in this segment in the second quarter of 2023.

Revenue also increased, but to a lesser extent, at our baling business in North America driven by the sale of our capital equipment products used to recycle packaging materials.

Gross Profit Margin

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

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

Three Months Ended Basis Point Change

2023 April 2,

Flow Control 51.4% 52.8% (140) bps

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Consolidated 43.5% 43.3% 20 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.

Consolidated gross profit margin increased to 43.5% in the second quarter of 2023 compared with 43.3%`in the second quarter of 2022 due to higher margins achieved on our capital equipment products, especially in our Industrial Processing segment, partially offset by a decrease in the proportion of higher-margin parts and consumables revenue, which decreased to 62% compared to 66% in the prior year period.

Within our operating segments, gross profit margin:

• 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.

• Decreased to 51.4% at our Flow Control segment from 52.8% in the 2022 period due to a lower percentage of parts and consumables revenue compared to the prior year period and lower margins achieved on our parts and consumables products.

• Increased to 39.5% at our Industrial Processing segment from 38.4% in the 2022 period due to higher margins achieved on wood processing capital equipment products, partially offset by a decrease in the proportion of higher-margin parts and consumables revenue.

• Increased to 36.8% at our Material Handling segment from 35.9% in the 2022 period due to a greater proportion of higher-margin parts and consumables revenue compared to the prior year period, and higher margins achieved on our capital equipment products.

Selling, General, and Administrative Expenses

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

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

Three Months Ended

(In thousands, except percentages) April 1,

2023 % of Revenue April 2,

2022 % of Revenue Increase (Decrease) % Change

(In thousands, except percentages) July 1,

2022 Increase % Change

Flow Control $ 22,200 $ 20,969 $ 1,231 6%

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Material Handling 11,019 9,498 1,521 16%

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

Corporate 10,094 9,238 856 9%

Consolidated $ 59,990 $ 55,319 $ 4,671 8%

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.

Consolidated as a Percentage of Revenue 24% 25%

Consolidated SG&A expenses as a percentage of revenue decreased to 24% in the second quarter of 2023 compared with 25% in the second quarter of 2022 principally due to the increase in revenue .

Consolidated SG&A expenses were higher in the second quarter of 2023 due to increased compensation expense, trade show and travel-related costs, and professional service fees.

Within our operating segments, SG&A expenses:

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

• Increased $1.2 million at our Flow Control segment principally due t o increased compensation expense, travel costs, and professional service fees.

• Increased $1.1 million at our Industrial Processing segment due to increased compensation expense associated with existing and new personnel and incremental trade show and travel-related costs .

These increases were offset in part by a $0.4 million favorable effect of foreign currency translation.

• Increased $1.5 million at our Material Handling segment principally due to increased compensation expense associated with existing and new personnel and a $0.2 million indemnification asset reversal related to the release of tax reserves.

• Increased $0.9 million at Corporate due to increased professional service fees and compensation expense associated with existing and new personnel .

Other costs of $0.1 million in the second quarter of 2023 within our Industrial Processing segment associated with the China Transaction (as defined below in the results of operations for the first six months of 2023 compared with the first six months of 2022) included a write-down of certain fixed assets that will not be moved to the new manufacturing facility in China and facility moving costs.

Interest Expense

Interest expense increased to $2.2 million in the second quarter of 2023 from $1.4 million in the second quarter of 2022 due to a higher weighted-average interest rate, partially offset by lower average debt outstanding in the second quarter of 2023 compared to the second quarter of 2022.

Provision for Income Taxes

Provision for income taxes increased to $11.2 million in the second quarter of 2023 from $10.0 million in the second quarter of 2022.

The effective tax rate of 27% in the second quarter of 2023 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, state taxes, nondeductible expenses, and tax expense associated with Global Intangible Low-Taxed Income provisions.

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

Net income increased to $29.9 million in the second quarter of 2023 from $26.4 million in the second quarter of 2022 primarily due to a $5.6 million increase in operating income, offset in part by a $0.9 million increase in interest expense and a $1.2 million increase in provision for income taxes (see discussions above for further details).

First Six Months 2023 Compared With First Six Months 2022

The following table presents changes in revenue and organic revenue by segment between the first six months of 2023 and 2022.

Organic revenue is a non-GAAP measure as defined above in the results of operations for the second quarter of 2023 compared with the second quarter of 2022.

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

Six Months Ended Currency Translation Change in Organic Revenue

(In thousands, except percentages) July 1,

2022 Increase (Decrease) % Change Increase % Change

Flow Control $ 185,250 $ 171,046 $ 14,204 8% $ (2,802) $ 17,006 10%

Industrial Processing 173,509 177,487 (3,978) (2)% (6,146) 2,168 1%

Material Handling 116,052 99,596 16,456 17% (776) 17,232 17%

Consolidated $ 474,811 $ 448,129 $ 26,682 6% $ (9,724) $ 36,406 8%

Consolidated revenue in the first six months of 2023 increased 6%, including a 2% decrease from the unfavorable effect of foreign currency translation.

The organic revenue increase of 8% was led by our Material Handling and Flow Control segments due to higher demand for both our parts and consumables and capital equipment products.

Revenue at our Flow Control segment increased 8% in the first six months of 2023, while organic revenue increased 10% with relatively equal contributions from our fluid-handling and doctoring, cleaning, & filtration product lines.

in organic revenue was primarily due to higher demand for parts and consumables and capital equipment products in North America driven by strength in the underlying packaging industry and, to a lesser extent, demand from our customers, primarily in Europe, seeking to mitigate high energy prices with our products that optimize energy utilization.

We are more cautious about the outlook for the remainder of the year as mills take downtime and reduce maintenance spending and customers in Europe face challenging market conditions.

Revenue at our Industrial Processing segment decreased 2% in the first six months of 2023, while organic revenue increased 1%.

Organic revenue increased primarily due to higher demand for our capital equipment products at both our stock-preparation and wood processing businesses in North America where the U.S.

economy and housing market continued to demonstrate resiliency against inflationary pressures.

This increase was largely offset by softening demand at our stock-preparation businesses in China as manufacturing activity has contracted and mills focus on installing and optimizing capital equipment purchased in prior periods.

Revenue at our Material Handling segment increased 17% in the first six months of 2023 led by our vibratory and conveying business in North America.

Expansion projects related to the mining of minerals led to increased demand for our aboveground and underground conveying systems.

In addition, parts and consumables revenue at our vibratory and conveying business increased over 25% from the prior year period partially due to the fulfillment of orders from our backlog.

Revenue also increased, but to a lesser extent, at our baling business in North America driven by the sale of our capital equipment products used to recycle packaging materials.

Gross Profit Margin

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

Six Months Ended Basis Point Change

Flow Control 52.3% 52.6% (30) bps

Industrial Processing 40.0% 38.5% 150 bps

Material Handling 36.4% 36.1% 30 bps

Consolidated 43.9% 43.3% 60 bps

Consolidated gross profit margin increased to 43.9% in the first six months of 2023 compared with 43.3% in the first six months of 2022 due to higher margins achieved on capital equipment products, partially offset by a lower proportion of parts and consumables revenue, which decreased to 64% compared to 65% in the prior year period.

Within our operating segments, gross profit margin:

• Decreased to 52.3% at our Flow Control segment from 52.6% in the 2022 period primarily due to a lower proportion of parts and consumables revenue.

• Increased to 40.0% at our Industrial Processing segment from 38.5% in the 2022 period primarily due to higher margins achieved on our stock-preparation capital equipment products.

• Increased to 36.4% at our Material Handling segment from 36.1% in the 2022 period principally due to higher margins achieved on our parts and consumables products.

Selling, General, and Administrative Expenses

SG&A expenses by segment in the first six months of 2023 and 2022 were as follows:

Six Months Ended

(In thousands, except percentages) July 1,

2022 Increase % Change

Flow Control $ 44,417 $ 43,053 $ 1,364 3%

Industrial Processing 32,975 31,983 992 3%

Material Handling 21,738 20,502 1,236 6%

Corporate 19,422 18,949 473 2%

Consolidated $ 118,552 $ 114,487 $ 4,065 4%

Consolidated as a Percentage of Revenue 25% 26%

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

Consolidated SG&A expenses in the first

six months of 2023 included a $2.1 million favorable effect of foreign currency, a decrease of $0.8 million in acquisition-related costs, and a decrease of $0.4 million in indemnification asset reversals related to the release of tax reserves.

Excluding these favorable items, consolidated SG&A expenses increased $7.4 million, or 6%, primarily due to increased compensation expense and travel-related costs.

Within our operating segments, SG&A expenses:

• Increased $1.4 million at our Flow Control segment primarily due t o increased compensation expense and travel costs.

These increases were partially offset by a $0.6 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.

• Increased $1.0 million at our Industrial Processing segment principally due to increased compensation expense associated with existing and new personnel and incremental trade show and travel-related cost s .

These increases were partially offset by a $1.3 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.

• Increased $1.2 million at our Material Handling segment due to increased compensation expense associated with existing and new personnel and, to a lesser extent, the inclusion of an indemnification asset reversal related to the release of tax reserves of $0.2 million.

These increases were partially offset by a decrease of $0.7 million in acquisition-related costs and a $0.2 million favorable effect of foreign currency translation.

• Increased $0.5 million at Corporate due to increased professional service fees and compensation expense associated with existing and new personnel , partially offset by 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 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.

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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.

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

Other costs of $0.1 million in the first six months of 2023 and $0.2 million in the first six months of 2022 within our Industrial Processing segment associated with the China Transaction included a write-down of certain fixed assets that will not be moved to the new manufacturing facility in China and facility moving costs.

Interest Expense

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.

Interest expense increased to $4.6 million in the first six months of 2023 from $2.6 million in the first six months of 2022 due to a higher weighted-average interest rate, partially offset by lower average debt outstanding in the first six months of 2023 compared to the first six months of 2022.

Provision for Income Taxes

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).

Provision for income taxes decreased to $20.9 million in the first six months of 2023 from $23.3 million in the first six months of 2022.

The effective tax rate of 26% in the first six months of 2023 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, state taxes, and nondeductible expenses.

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

These increases in ta x expense in the first six months 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.

Net income decreased to $58.2 million in the first six months of 2023 from $67.9 million in the first six months of 2022 primarily due to a decrease in operating income $10.2 million and a $2.0 million increase in interest expense, offset in part by a $2.4 million decrease in provision for income taxes.

Net income in the first six months of 2022 included a $15.1 million after-tax gain on the sale of a building related to the China Transaction (see discussions above for further details).

Non-GAAP Key Performance Indicators

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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.

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

(In thousands, except percentages) April 1,

2023 April 2,

Three Months Ended Six Months Ended

(In thousands, except percentages) July 1,

Net Income Attributable to Kadant $ 29,734 $ 26,170 $ 57,809 $ 67,362

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Acquisition Costs — — — 76

Indemnification Asset Reversal (b) — 575

Impairment Costs — 182

Indemnification Asset Reversals (b) 177 — 177 575

Other Costs 74 — 74 182

Acquired Backlog Amortization (c) — — — 703

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Adjusted EBITDA Margin (non-GAAP measure)

21.0% 20.7% 21.1% 20.5%

(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.

(b) Represents indemnification asset reversals 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.

(d) Represents income within 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

(In thousands) April 1,

2023 April 2,

Three Months Ended Six Months Ended

(In thousands) July 1,

Cash Provided by Operating Activities $ 22,478 $ 18,797 $ 59,344 $ 42,565

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

Capital Expenditures (a) (8,777) (6,947) (13,246) (9,815)

Free Cash Flow (non-GAAP measure)

$ 13,701 $ 11,850 $ 46,098 $ 32,750

(a) Includes $3.1 million and $3.3 million in the three and six months ended July 1, 2023, respectively, and $3.1 million and $3.2 million in the three and six months ended July 2, 2022, respectively, related to the China Transaction.

Liquidity and Capital Resources

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,

Consolidated working capital was $222.4 million at July 1, 2023, compared with $201.9 million at December 31, 2022.

Cash and cash equivalents were $66.7 million at July 1, 2023, compared with $76.4 million at December 31, 2022, which included cash and cash equivalents held by our foreign subsidiaries o f $62.0 million at July 1, 2023 and $75.8 million at December 31, 2022.

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

Six Months Ended

(In thousands) July 1,

Net Cash Provided by Operating Activities $ 59,344 $ 42,565

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Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash 579 (5,418)

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

Decrease in Cash, Cash Equivalents, and Restricted Cash $ (9,530) $ (16,135)

Operating Activities

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.

Cash provided by operating activities increased to $59.3 million in the first six months of 2023 from $42.6 million in the first six months of 2022 primarily due to 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.

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.

During the first six months of 2023, cash provided by income was offset in part by investments in working capital.

Increases in inventory used cash of $10.8 million primarily related to capital equipment orders that will ship in 2023 and early 2024.

Decreases in accounts payable used cash of $9.4 million primarily due to the timing of payments.

In addition, an increase in accounts receivable used cash of $4.0 million mainly due to our revenue growth and the timing of shipments.

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

Increases in inventory used cash of $26.8 million primarily related to capital equipment orders that shipped in 2022 and early 2023.

In addition, an increase in accounts receivable associated with our revenue growth used cash of $12.3 million.

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

Investing Activities

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.

Cash used in investing activities was $12.9 million in the first six months of 2023, compared with $7.9 million in the first six months of 2022.

Capital expenditures were $13.2 million in the first six months of 2023 and $9.8 million in the first six months of 2022, including capital expenditures associated with the construction of our new manufacturing facility in China of $3.3 million in the first six months of 2023 and $3.2 million in the first six months of 2022.

In addition, we received $1.9 million of cash from the sale of assets in the first six months of 2022.

Financing Activities

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.

Cash used in financing activities was $56.6 million in the first six months of 2023, compared with $45.4 million in the first six months of 2022.

Repayments of short- and long-term obligations were $46.1 million in the first six months of 2023 compared to repayments of short- and long-term obligations of $51.4 million, partially offset by borrowings under our revolving credit facility of $16.5 million in the first six months of 2022.

Cash dividends paid to stockholders were $6.4 million in the first six months of 2023 and $5.9 million in the first six months of 2022.

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

The $0.6 million increase in cash, cash equivalents, and restricted cash in the first six months 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 Brazilian real, partially offset by the strengthening of the U.S.

dollar against the Chinese renminbi.

Borrowing Capacity and Debt Obligations

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.

Our unsecured multi-currency revolving credit facility originally entered into on March 1, 2017 (as amended and restated to date, the Credit Agreement) matures on November 30, 2027 and has a total borrowing capacity of $400 million.

At July 1, 2023, we had $257.3 million of borrowing capacity available under our Credit Agreement, in addition to a $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 July 1, 2023, our leverage ratio was 0.51 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 18, 2023, our board of directors approved the repurchase of up to $50 million of our equity securities during the period from May 18, 2023 to May 18, 2024.

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.

We have not repurchased any shares of our common stock under this authorization or under our previous $50 million authorization that expired on May 19, 2023.

We paid cash dividends of $6.4 million in the first six months of 2023.

On May 18, 2023, we declared a quarterly cash dividend of $0.29 per share totaling $3.4 million that will be paid on August 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 $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.

We plan to make expenditures of approximately $25 to $27 million during the remainder of 2023 for property, plant, and equipment, including $5 million for our new manufacturing facility in China.

As of July 1, 2023, we had approximately $269.9 million of total unremitted foreign earnings.

It is our intent to indefinitely reinvest $223.8 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments, if any.

In the first quarter of 2023, we recorded withholding taxes on the earnings in certain foreign subsidiaries that we plan to repatriate in the foreseeable future.

In the first six months of 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 $3.7 million.

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Contractual Obligations and Other Commercial Commitments

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

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

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

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

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

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

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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis