What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-08 compared with 2023-08-09 · 186 added, 147 removed, 176 unchanged (65% 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 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.

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 (Annual Report) and as may be further amended and/or restated in subsequent filings with the SEC.

Company Background

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• Industrial Processing – Equipment, machinery, and technologies used to recycle paper and paperboard and process timber for use in the packaging, tissue, wood products, and alternative fuel industries, among others.

Our primary products include stock-preparation systems and recycling equipment, chemical pulping equipment, debarkers, stranders, chippers, and logging machinery.

Our primary products include stock-preparation systems and recycling equipment, chemical pulping equipment, debarkers, stranders and chippers.

In addition, we provide industrial automation and digitization solutions to process industries.

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Industry and Business Overview

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.

Our consolidated bookings were $209.6 million in the third quarter of 2023, decreasing 3% sequentially and 1% compared to the third quarter of 2022.

Our bookings declined in the second and third quarters of 2023 after the record bookings in the first quarter of 2023 following a general slowdown in industrial activity.

We expect our bookings in the fourth quarter of 2023 to be consistent with the prior quarter as our customers assess and respond to the impact of differing market conditions around the world.

We ended the third quarter with a strong backlog of $323.5 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 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.

• Flow Control – Our Flow Control segment bookings decreased 2% compared to the third quarter of 2022 led by a decline in capital bookings.

In North America, there was constrained capital spending as mills took downtime and paper and containerboard producers consolidated or moved locations to align capacity with demand.

In Europe, there was continued uncertainty in the end markets we serve primarily due to elevated inflation and high interest rates.

In addition, there has been a reduction in demand for paper across Europe as the supply chain focuses on reducing the volume of packaging materials used in shipments.

However, many of the end markets in our Flow Control segment remain strong despite the general sluggishness in the manufacturing sector, and we expect bookings in the fourth quarter of 2023 to remain stable.

• Industrial Processing – Our Industrial Processing segment bookings decreased 10% compared to the third quarter of 2022 driven by weaker demand for our parts and consumables products.

Demand for our wood processing products declined 12% compared to the third quarter of 2022 largely driven by a decrease in new construction activity.

While there is still a healthy level of quote activity, there has been an increase in the quote to order times.

In our stock-preparation business in the U.S., market-related downtime at our customers contributed to weaker demand for our parts and consumables products.

This was offset in part by increased demand for our capital equipment as mills focused on replacement and refurbishment projects critical to keeping the mills operational.

In China, there was an increase in stock-preparation capital equipment bookings driven by a large greenfield project, however, overall market conditions are sluggish as mills focus on bringing capacity online.

Given the recent and anticipated capital project activity, we expect sequentially higher bookings in our Industrial Processing segment in the fourth quarter of 2023.

• Material Handling – Our Material Handling segment bookings increased 17% compared to the third quarter of 2022 led by our baling business.

The growing need for efficient waste handling and packaging solutions across various industries has resulted in increased demand for our baling products.

As more countries and industries prioritize waste reduction and recycling, the demand for baling equipment is expected to rise.

Increased demand led by our parts and consumables products at our conveying and vibratory business in the third quarter of 2023 was due in part to new government legislation, which has positively impacted the aggregates industry.

While we expect demand in our Material Handling segment to moderate in the near term, we continue to see growing project activity, particularly in North America.

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

While the U.S economy has proven more resilient, growth in the European economy has slowed due to high interest rates and elevated 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 and into 2024.

However, we believe that the fundamentals of our business remain strong, particularly given our high backlog levels, solid global operations teams, and long-term strength of our end markets.

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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Results of Operations

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.

Third Quarter 2023 Compared With Third Quarter 2022

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

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

Three Months Ended Increase Currency Translation (Non-GAAP)

Change in Organic Revenue

(In thousands, except percentages) September 30,

2023 October 1,

2022 % Change Increase % Change

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Consolidated $ 244,182 $ 224,510 $ 19,672 9% $ 3,950 $ 15,722 7%

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.

Consolidated revenue increased 9% in the third quarter of 2023, including a 2% increase from the favorable effect of foreign currency translation.

All our operating segments contributed to the 7% increase in organic revenue.

The majority of the organic revenue increase was due to higher demand for our capital equipment at our Material Handling and Industrial Processing segments and, to a lesser extent, increased demand for our parts and consumables products at our Industrial Processing segment.

Revenue at our Flow Control segment increased 5% in the third quarter of 2023, while organic revenue increased 1%, with offsetting geographic impacts.

Increased demand for our parts and consumables products in North America as mills took downtime and focused on maintenance spending was partially offset by softening demand in Europe due to more challenging market conditions.

Higher demand for our capital equipment in Europe, especially from our customers seeking to mitigate high energy prices, were mostly offset by weaker demand in China due to depressed market conditions resulting in longer quote to order times.

Revenue at our Industrial Processing segment increased 9% in the third quarter of 2023 driven by increased demand for both our capital equipment and parts and consumable products.

The higher demand for capital equipment occurred primarily in our stock-preparation business due to several large projects in Europe.

Additionally, there was increased demand for parts and consumables products in our stock-preparation and wood processing businesses, primarily in North America, due to maintenance requirements at many of our customers.

Revenue at our Material Handling segment increased 15% in the third quarter of 2023, while organic revenue increased 12%.

The increase in organic revenue was led by capital project activity at our conveying and vibratory business due to higher production rates.

In addition, our baling business had increased demand for parts and consumables as more industries focus on waste reduction and recycling.

Gross Profit Margin

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

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

Three Months Ended Basis Point Change

September 30,

2023 October 1,

Flow Control 52.2% 51.6% 60 bps

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Consolidated 43.3% 42.5% 80 bps

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.

Consolidated gross profit margin increased to 43.3% in the third quarter of 2023 compared with 42.5%`in the third quarter of 2022 due to higher margins achieved on our parts and consumables products, especially in our Material Handling segment.

This increase was partially offset by a decrease in the proportion of higher-margin parts and consumables revenue, which decreased to 61% compared to 63% in the prior year period.

Within our operating segments, gross profit margin:

• 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.

• Increased to 52.2% at our Flow Control segment from 51.6% in the 2022 period primarily due to higher margins achieved on our capital equipment partially offset by a decrease in margins for our parts and consumables products.

• Increased to 39.5% at our Industrial Processing segment from 39.3% in the 2022 period due to higher margins achieved on parts and consumable products partially offset by a decrease in margins achieved on our wood processing capital equipment products.

• Increased to 35.7% at our Material Handling segment from 32.3% in the 2022 period due to increased margins on our conveying and vibratory parts and consumable products partially offset by a decrease in margins achieved on our capital equipment products.

Selling, General, and Administrative Expenses

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

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

Three Months Ended

(In thousands, except percentages) July 1,

(In thousands, except percentages) September 30,

2023 October 1,

2022 Increase % Change

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Consolidated as a Percentage of Revenue 24% 24%

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.

Consolidated SG&A expenses as a percentage of revenue was 24% in both the third quarters of 2023 and 20 22.

Consolidated SG&A expenses increased $4.7 million in the third quarter of 2023 compared to the third quarter of 2022, including a $1.1 million unfavorable effect of foreign currency translation and increased compensation expense, professional service fees, and travel-related costs.

Within our operating segments, SG&A expenses:

• 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.

• Increased $0.8 million at our Flow Control segment principally due to a $0.7 million unfavorable effect of foreign currency translation, foreign currency transaction losses, and increased travel costs.

These increases were partially offset by a decrease in acquisition costs of $0.4 million.

• Increase d $1.3 million at our Industrial Processing segment due to increased compensation expense associated with existing and new personnel and higher trade show costs.

• Increased $1.0 million at our Material Handling segment principally due to increased compensation expense associated with existing and new personnel and a $0.2 million unfavorable effect of foreign currency translation.

• Increased $1.6 million at Corporate due to higher professional service fees and compensation expense.

Other Costs were $1.0 million in the third quarter of 2023 and $0.1 million in the third quarter of 2022 and included the following:

• Costs of $0.5 million in the third quarter of 2023 within our Industrial Processing segment were associated with the China Transaction (as defined below in the results of operations for the first nine months of 2023 compared with the first nine months of 2022) and related to the relocation of machinery and equipment and administrative offices to the new manufacturing facility.

• Restructuring and impairment costs of $0.4 million in the third quarter of 2023 within our Flow Control segment related to the consolidation of a small manufacturing operation into a larger facility in Germany (2023 Restructuring Plan).

This charge consisted of severance costs for the termination of 10 employees, asset-write downs, and facility and other closure costs.

We expect annualized savings of approximately $0.7 million, primarily in cost of sales, from these restructuring actions.

• Restructuring costs of $0.1 million in the third quarter of 2022 within our Flow Control segment related to a restructuring plan we initiated in the fourth quarter of 2021 to eliminate a redundant ceramic blade manufacturing operation in France (2021 Restructuring Plan).

This charge consisted of severance costs associated with the termination of two employees.

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.

Interest expense increased to $2.1 million in the third quarter of 2023 from $1.7 million in the third quarter of 2022 due to a higher weighted-average interest rate, partially offset by lower average debt outstanding in the third quarter of 2023 compared to the third 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

Provision for income taxes increased to $10.8 million in the third quarter of 2023 from $9.7 million in the third quarter of 2022.

The effective tax rate of 26% in the third quarter of 2023 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings and state taxes.

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.

Net income increased to $31.0 million in the third quarter of 2023 from $27.7 million in the third quarter of 2022 primarily due to a $4.7 million increase in operating income, offset in part by a $0.4 million increase in interest expense and a $1.1 million increase in provision for income taxes (see discussions above for further details).

First Nine Months 2023 Compared With First Nine Months 2022

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

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

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

Nine Months Ended Currency Translation (Non-GAAP)

Change in Organic Revenue

(In thousands, except percentages) September 30,

2023 October 1,

2022 Increase

% Change Increase % Change

Flow Control $ 276,048 $ 257,926 $ 18,122 7% $ (59) $ 18,181 7%

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Consolidated $ 718,993 $ 672,639 $ 46,354 7% $ (5,774) $ 52,128 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.

Consolidated revenue in the first nine months of 2023 increased 7%, including a 1% decrease from the unfavorable effect of foreign currency translation.

All our operating segments contributed to the 8% increase in organic revenue with relatively equal contributions from sales of our capital equipment and parts and consumables products.

The majority of the organic revenue increase was driven by higher demand in North America.

In addition, modestly higher demand in Europe was offset by softening demand in China.

Revenue at our Flow Control segment increased 7% in the first nine months of 2023 primarily due to higher demand for parts and consumables and capital equipment products in North America driven by continued strength in the U.S.

economy and underlying packaging industry.

While there was increased demand for our capital equipment in Europe from customers seeking to mitigate high energy prices, demand for our parts and consumables products was modestly higher than the 2022 period reflecting the challenging market conditions.

In China, there was softening demand for our capital equipment as manufacturing activity has slowed.

Revenue at our Industrial Processing segment increased 2% in the first nine months of 2023, while organic revenue increased 4%.

Organic revenue increased primarily due to higher demand for our capital equipment products at our wood processing and stock-preparation 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.

Additionally, there was increased demand for parts and consumable products in our stock-preparation business in Europe and, to a lesser extent, North America due to maintenance requirements at many of our customers.

Revenue at our Material Handling segment increased 16% in the first nine months of 2023 due to higher demand for both capital equipment and parts and consumables products at our conveying and vibratory business in North America.

This was due in part to expansion projects related to the mining of minerals that led to increased demand for our conveying systems.

Revenue also increased, but to a lesser extent, at our baling business due to higher demand for our products as more industries focus on waste reduction and recycling.

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

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

Nine Months Ended Basis Point Change

September 30,

2023 October 1,

Flow Control 52.3% 52.3% 0 bps

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Consolidated 43.7% 43.1% 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.

Consolidated gross profit margin increased to 43.7% in the first nine months of 2023 compared with 43.1% in the first nine months of 2022 due to higher margins achieved on both capital equipment and parts and consumable products, partially offset by a lower proportion of parts and consumables revenue, which decreased to 63% compared to 64% 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.

• Increased to 39.8% at our Industrial Processing segment from 38.8% in the 2022 period primarily due to higher margins achieved on our stock-preparation capital equipment and parts and consumable products, partially offset by a decrease in proportion of higher-margin parts and consumables revenue.

• Increased to 36.2% at our Material Handling segment from 34.8% in the 2022 period principally due to higher margins achieved for our parts and consumables products.

This increase was partially offset by lower margins achieved on our capital equipment products and, to a lesser extent, a decrease in proportion of higher-margin parts and consumables revenue.

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,

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

Nine Months Ended

(In thousands, except percentages) September 30,

2023 October 1,

2022 Increase % Change

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Consolidated as a Percentage of Revenue 25% 25%

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.

Consolidated SG&A expenses as a percentage of revenue was 25% in both the first nine months of 2023 and 2022 .

Consolidated SG&A expenses increased $8.8 million in the first nine months of 2023 compared to the first nine months of 2022 and included a decrease of $1.2 million in acquisition-related costs, a $1.0 million favorable effect of foreign currency, 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 $11.4 million, or 7%, 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.

• 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 .

• Increased $2.2 million at our Flow Control segment primarily due to increased compensation expense, travel costs, and foreign currency transaction losses.

These increases were partially offset by a decrease in bad debt expense and acquisition costs.

• Increased $2.3 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 costs.

These increases were partially offset by a $1.2 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.

• Increased $2.2 million at our Material Handling segment d ue 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.

• Increased $2.1 million at Corporate d ue to increased compensation expense and professional service fees.

Gain on Sale and Other Costs, Net

Gain on Sale of Assets

We entered into several agreements with the local government in China to sell the existing manufacturing building and land use rights of one of our subsidiaries in China for $25.2 million and relocate to a new facility (the China Transaction).

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

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

Our subsidiary, which is part of the Industrial Processing segment, relocated to its new facility during the third quarter of 2023.

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.

Other Costs were $1.0 million in the first nine months of 2023 and $0.3 million in the first nine months of 2022 and included the following:

• Costs of $0.6 million in the first nine months of 2023 within our Industrial Processing segment were associated with the China Transaction and related to the relocation of machinery and equipment and administrative offices to the new manufacturing facility.

• Restructuring and impairment costs of $0.4 million in the first nine months of 2023 within our Flow Control segment related to the 2023 Restructuring Plan, which consisted of severance costs for the termination of 10 employees, asset-write downs, and facility and other closure costs.

• Impairment costs of $0.2 million in the first nine months of 2022 within our Industrial Processing segment were associated with the China Transaction and related to the write-down of certain fixed assets that were not moved to the new manufacturing facility.

Restructuring costs of $0.1 million in the first nine months of 2022 within our Flow Control segment under the 2021 Restructuring Plan consisted of severance costs for the termination of two employees.

Interest Expense

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.

Interest expense increased to $6.7 million in the first nine months of 2023 from $4.3 million in the first nine months of 2022 due to a higher weighted-average interest rate, partially offset by lower average debt outstanding in the first nine months of 2023 compared to the first nine months of 2022.

Provision for Income Taxes

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).

Provision for income taxes decreased to $31.8 million in the first nine months of 2023 from $33.1 million in the first nine months of 2022.

The effective tax rate of 26% in the first nine months of 2023 and 2022 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, state taxes, and nondeductible expenses.

Net income decreased to $89.2 million in the first nine months of 2023 from $95.5 million in the first nine months of 2022 primarily due to a decrease in operating income of $5.6 million and a $2.4 million increase in interest expense, offset in part by a $1.3 million decrease in provision for income taxes.

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

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

Adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin exclude relocation costs, restructuring and impairment costs, acquisition costs, amortization expense related to acquired profit in inventory and backlog, and other income or expense, as indicated.

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

Three Months Ended Six Months Ended

(In thousands, except percentages) July 1,

Three Months Ended Nine Months Ended

(In thousands, except percentages) September 30,

2023 October 1,

2022 September 30,

2023 October 1,

Net Income Attributable to Kadant $ 30,864 $ 27,487 $ 88,673 $ 94,849

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Gain on Sale (a)

— — — (20,190)

Acquisition Costs — 410 — 486

Indemnification Asset Reversals (b) 177 — 177 575

Other Costs 74 — 74 182

Indemnification Asset (Provision) Reversals (b)

(50) — 127 575

Relocation Costs

Restructuring and Impairment Costs

434 72 434 254

Acquired Backlog Amortization (c)

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

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

(b) Represents the provision for or reversal of indemnification assets related to the establishment or release of tax reserves associated with uncertain tax positions.

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

Three Months Ended Six Months Ended

(In thousands) July 1,

Three Months Ended Nine Months Ended

(In thousands) September 30,

2023 October 1,

2022 September 30,

2023 October 1,

Cash Provided by Operating Activities $ 46,967 $ 24,897 $ 106,311 $ 67,462

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$ 38,119 $ 18,521 $ 84,217 $ 51,271

(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.

(a) Includes $2.5 million and $5.8 million in the three and nine months ended September 30, 2023, respectively, and $2.2 million and $5.4 million in the three and nine months ended October 1, 2022, respectively, related to the China Transaction.

Liquidity and Capital Resources

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,

Consolidated working capital was $222.6 million at September 30, 2023, compared with $201.9 million at December 31, 2022.

Cash and cash equivalents were $76.8 million at September 30, 2023, compared with $76.4 million at December 31, 2022, which included cash and cash equivalents held by our foreign subsidiaries o f $73.0 million at September 30, 2023 and $75.8 million at December 31, 2022.

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

Nine Months Ended

(In thousands) September 30,

2023 October 1,

Net Cash Provided by Operating Activities $ 106,311 $ 67,462

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Operating Activities

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.

Cash provided by operating activities increased to $106.3 million in the first nine months of 2023 from $67.5 million in the first nine 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 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.

During the first nine months of 2023, significant cash outflows associated with working capital related to accounts payable and accounts receivable.

Decreases in accounts payable used cash of $12.9 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.

An increase in accounts receivable used cash of $10.7 million mainly due to our revenue growth and the timing of shipments.

In addition, an increase in other liabilities provided cash of $5.9 million due in part to work performed by subcontractors and outside vendors.

During the first nine months of 2022, significant cash outflows associated with working capital related to inventory and accounts receivable.

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 shipped in 2022 and the first half of 2023.

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

Investing Activities

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.

Cash used in investing activities was $20.1 million in the first nine months of 2023, compared with $13.9 million in the first nine months of 2022.

Capital expenditures were $22.1 million in the first nine months of 2023 and $16.2 million in the first nine months of 2022, including capital expenditures associated with the construction of our new manufacturing facility in China of $5.8 million in the first nine months of 2023 and $5.4 million in the first nine months of 2022.

Financing Activities

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.

Cash used in financing activities was $85.7 million in the first nine months of 2023, compared with $62.1 million in the first nine months of 2022.

Repayments of short- and long-term obligations were $71.9 million in the first nine months of 2023 compared to repayments of short- and long-term obligations of $69.5 million, partially offset by borrowings under our revolving credit facility of $21.6 million in the first nine months of 2022.

Cash dividends paid to stockholders were $9.8 million in the first nine months of 2023 and $9.0 million in the first nine months of 2022.

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

The $1.3 million decrease in cash, cash equivalents, and restricted cash in the first nine months of 2023 was primarily attributable to the strengthening of the U.S.

dollar against the Chinese renminbi, and to a lesser extent, the Euro and Swedish Krona.

Borrowing Capacity and Debt Obligations

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.

At September 30, 2023, we had $284.9 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 September 30, 2023, our leverage ratio was 0.38 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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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.

We paid cash dividends of $9.8 million in the first nine months of 2023.

On September 7, 2023, we declared a quarterly cash dividend of $0.29 per share totaling $3.4 million that will be paid on November 9, 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 $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.

We plan to make expenditures of approximately $16 to $18 million during the remainder of 2023 for property, plant, and equipment, including $2 to $3 million for our new manufacturing facility in China.

As of September 30, 2023, we had approximately $265.6 million of total unremitted foreign earnings.

It is our intent to indefinitely reinvest $224.8 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments, if any.

In the first six months 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 nine 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 $4.2 million.

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

We believe that existing cash and cash equivalents, along with future 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 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.

There have been no material changes to our contractual obligations and other commercial commitments during the first nine 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 condensed 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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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 heading 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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What changed 10-Q

Item 2. Management’s Discussion and Analysis