What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-05-08 compared with 2023-11-08 · 152 added, 234 removed, 128 unchanged (75% of the section changed)

8 unchanged sentences

Our future results of operations may differ materially from those expressed in the forward-looking statements.

Many of the important factors that will determine these results and values are beyond our ability to control or predict.

Many of the important factors that will determine these results are beyond our ability to control or predict.

You should not put undue reliance on any forward-looking statements.

13 unchanged sentences

Our primary products include rotary sealing devices, steam systems, expansion joints, doctor systems, roll and fabric cleaning devices, and filtration and fiber recovery systems.

• 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 and chippers.

• Industrial Processing – Equipment, machinery, and technologies used to process recycled paper and timber for 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 custom engineered knife systems.

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

3 unchanged sentences

Industry and Business Overview

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.

Our consolidated bookings decreased 10% to $248.4 million in the first quarter of 2024 compared to unprecedented record bookings in the first quarter of 2023, but increased 14% compared to the fourth quarter of 2023, including an 11% increase from acquisitions and strong demand for our parts and consumables products across all segments.

We expect the strong demand for aftermarket products to continue contributing to higher bookings in 2024 compared to the prior year.

Stable demand for our capital equipment is expected to continue in North America, but strengthen during the year in Europe and Asia

following a period of constrained capital spending.

We have a healthy level of quote activity, but economic uncertainty as well as funding challenges in certain locations has lengthened the timing for securing capital orders.

An overview of our business by segment is as follows:

• 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.

• Flow Control – Our Flow Control segment bookings increased 11% sequentially compared to the fourth quarter of 2023.

Increased demand in North America was driven by anticipated spring maintenance requirements.

In Europe, despite sequentially higher bookings in the first quarter, there is continued uncertainty in the end markets we serve primarily due to geopolitical tensions and weak macroeconomic conditions.

Overall, many of the end markets in our Flow Control segment remain strong despite the general sluggishness in the manufacturing sector, and we expect bookings to remain stable during the remainder of 2024 and consistent with the levels achieved in 2023.

• Industrial Processing – Our Industrial Processing segment bookings increased 7% sequentially.

This included an 18% increase from acquisitions, partially offset by weaker demand for our capital equipment products at our wood processing and stock-preparation businesses.

Higher interest rates have contributed to a decrease in new construction activity in North America depressing demand for lumber and oriented strand board (OSB).

An uptick in remodeling is expected later in 2024, which would increase demand for lumber and OSB.

We had sequentially higher aftermarket parts bookings at our stock-preparation business, but weaker capital equipment bookings driven by sluggish market conditions and consolidation activity within our customer base, which has caused producers to delay new investment decisions.

While there is still a healthy level of quote activity for large capital projects in our Industrial Processing segment, there has been an increase in quote-to-order times.

We expect higher annual bookings in our Industrial Processing segment in 2024, especially for our parts and consumables products.

• Material Handling – Our Material Handling segment bookings increased 32% sequentially and 15% excluding the impact of an acquisition.

The 15% increase was led by our conveying and vibratory business due to planned expenditures by our customers for large underground mining projects.

In addition, there is increased demand from customers in the aggregates industry related to new infrastructure projects.

We anticipate steady demand at our baling business for the remainder of 2024 due in part to government initiatives aimed at stimulating capital investment.

We expect contributions from our recent acquisition will lead to higher bookings in our Material Handling segment in 2024 compared to the prior year.

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

While the U.S economy has proven more resilient than predicted, 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, which creates continued uncertainty for 2024.

However, we believe that the fundamentals of our business remain strong, particularly given our solid market position in key product lines, solid global operations teams, and long-term strength of our end markets.

In addition, we see growth opportunities from proposed and adopted legislation in the U.S.

and abroad aimed at fueling investment, including those targeting environmental initiatives.

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.

9 unchanged sentences

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

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

For more information on risks

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

We expect that a significant driver of our growth over the next several years will be the acquisition of businesses and technologies that complement or augment our existing products and services or may involve entry into a new process industry.

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

On January 1, 2024, we acquired Key Knife, Inc.

and certain of its affiliates (collectively, Key Knife) for $153.4 million, net of cash acquired.

Key Knife is a global supplier of engineered knife systems for custom chipping, planing, and flaking solutions for wood products industries, with revenue of approximately $65.0 million for the twelve months ended September 30, 2023, and is part of our Industrial Processing segment.

As part of the Key Knife acquisition, we acquired a 45% interest in two of Key Knife's subsidiaries, increasing our noncontrolling interest liability by $9.3 million.

On January 24, 2024, we acquired KWS Manufacturing Company, Ltd.

(KWS) for $81.2 million, subject to a post-closing adjustment.

KWS is a leading manufacturer of conveying equipment for the bulk material handling industry, with revenue of approximately $45.0 million for the twelve months ended September 30, 2023, and is part of our Material Handling segment.

We funded these acquisitions primarily through borrowings under our revolving credit facility.

We expect several synergies in connection with the acquisitions, including expansion of product sales into new markets by leveraging our global sales network and relationships, broadening our product portfolio, and strengthening our position in the wood processing and material handling markets.

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

Results of Operations

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.

First Quarter 2024 Compared With First Quarter 2023

The following table presents the change in revenue by segment between the first quarters of 2024 and 2023, 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.

3 unchanged sentences

generally accepted accounting principles (GAAP) measure.

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

Three Months Ended Increase Currency Translation (Non-GAAP)

Revenue by segment in the first quarters of 2024 and 2023 is as follows:

Three Months Ended Increase (Decrease)

Currency Translation Acquisitions

Change in Organic Revenue

(In thousands, except percentages) September 30,

2023 October 1,

2022 % Change Increase % Change

(In thousands, except percentages) March 30,

2024 April 1,

2023 % Change Increase (Decrease)

Flow Control $ 86,682 $ 89,521 $ (2,839) (3)% $ 734 $ — $ (3,573) (4)%

3 unchanged sentences

Consolidated $ 248,975 $ 229,758 $ 19,217 8% $ 828 $ 24,363 $ (5,974) (3)%

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 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

Industrial Processing 39.5% 39.3% 20 bps

Material Handling 35.7% 32.3% 340 bps

Consolidated 43.3% 42.5% 80 bps

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:

• 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 third quarters of 2023 and 2022 are as follows:

Three Months Ended

(In thousands, except percentages) September 30,

2023 October 1,

2022 Increase % Change

Flow Control $ 21,538 $ 20,717 $ 821 4%

Industrial Processing 15,968 14,660 1,308 9%

Material Handling 10,332 9,321 1,011 11%

Corporate 10,051 8,455 1,596 19%

Consolidated $ 57,889 $ 53,153 $ 4,736 9%

Consolidated as a Percentage of Revenue 24% 24%

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 $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 $2.1 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 $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%

Industrial Processing 267,729 263,572 4,157 2% (6,156) 10,313 4%

Material Handling 175,216 151,141 24,075 16% 441 23,634 16%

Consolidated $ 718,993 $ 672,639 $ 46,354 7% $ (5,774) $ 52,128 8%

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.

Consolidated revenue increased 8% in the first quarter of 2024 and organic revenue decreased 3% largely due to weaker demand for our capital equipment products at our Material Handling segment, partially offset by stronger demand at our Industrial Processing segment.

From a regional perspective, the majority of the decrease in organic revenue was driven by softening demand in Europe and China due to weak macroeconomic conditions.

Revenue at our Flow Control segment decreased 3% and organic revenue decreased 4% in the first quarter of 2024 due to decreased demand in Europe and China reflecting the challenging market conditions and slowdown in manufacturing activity.

This decrease was partially offset by higher demand for our 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.

Revenue at our Industrial Processing segment increased 27% in the first quarter of 2024, including a 20% increase from acquisitions.

Organic revenue increased 7% in the first quarter of 2024 primarily due to increased demand for our capital

equipment products, especially at our stock-preparation business in China following a slowdown in manufacturing activity when mills were focusing on installing and optimizing capital equipment purchased in prior periods.

In addition, we experienced higher demand for our capital equipment products at our 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.

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.

Revenue at our Material Handling segment remained flat in the first quarter of 2024, while organic revenue decreased 15% driven by weaker demand at our baling business.

In Europe, while the requests for proposals are high, customers are more cautious given the weaker economic environment, which has resulted in a lengthening of quote-to-order times.

In North America, a decrease in capital equipment revenue was due in part to customer-requested shipping delays at our baling business from the first to the second quarter of 2024.

In addition, several large projects in the first quarter of 2023 at our conveying and vibratory business in North America resulted in comparatively lower revenue in the first quarter of 2024.

Gross Profit Margin

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,

Gross profit margin by segment in the first quarters of 2024 and 2023 is as follows:

Three Months Ended Basis Point Change

2024 April 1,

Flow Control 53.9% 53.3% 60 bps

2 unchanged sentences

Consolidated 44.6% 44.4% 20 bps

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.

Consolidated gross profit margin increased to 44.6% in the first quarter of 2024 compared with 44.4% in the first quarter of 2023 due to a larger proportion of higher-margin parts and consumables revenue and higher margins achieved on our capital equipment products especially at our Flow Control segment.

This increase was partially offset by the inclusion of $2.3 million of amortization expense related to acquired profit in inventory, which lowered consolidated gross profit margin in 2024 by 0.9 percentage points.

Within our operating segments, gross profit margin:

• 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.

• Increased to 53.9% at our Flow Control segment from 53.3% in the 2023 period primarily due to higher margins achieved on our capital equipment products.

• Increased to 41.7% at our Industrial Processing segment from 40.6% in the 2023 period due to higher margins achieved on our parts and consumables products, as well as a higher proportion of parts and consumables revenue.

These increases were partially offset by the inclusion of $1.3 million of amortization expense related to acquired profit in inventory, which lowered gross profit margin in 2024 by 1.2 percentage points.

• Decreased to 35.6% at our Material Handling segment from 36.1% in the 2023 period due to the inclusion of $1.0 million of amortization expense related to acquired profit in inventory, which lowered gross profit margin in 2024 by 1.8 percentage points.

This decrease was partially offset by a larger proportion of higher-margin parts and consumables revenue.

Selling, General, and Administrative Expenses

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,

Selling, general, and administrative (SG&A) expenses by segment in the first quarters of 2024 and 2023 is as follows:

Three Months Ended

(In thousands, except percentages) March 30,

2024 April 1,

2023 Increase % Change

5 unchanged sentences

Consolidated as a Percentage of Revenue 28% 25%

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.

Consolidated SG&A expenses as a percentage of revenue increased to 28% in 2024 from 25% in 20 23.

Consolidated SG&A expenses increased $11.7 million, or 20%, primarily due to the inclusion of $7.3 million of SG&A expenses from

acquisitions and an incremental $1.9 million of acquisition-related costs.

Acquisition-related costs included in SG&A consist of acquisition costs and amortization expense associated with acquired backlog.

Within our operating segments, SG&A expenses:

• 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 $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 (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, 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 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.

• Increased $1.2 million at our Flow Control segment principally due to increased incentive compensation, higher bad debt expense, an indemnification asset reversal of $0.2 million, and an unfavorable effect of foreign currency translation of $0.2 million.

• Increase d $6.2 million at our Industrial Processing segment due to the inclusion of $5.1 million of SG&A expenses from acquisitions, $0.6 million of acquisition-related costs and increased compensation expense.

• Increased $3.3 million at our Material Handling segment principally due to the inclusion of $2.2 million of SG&A expenses from an acquisition and $1.3 million of acquisition-related costs.

• Increased $1.0 million at Corporate due to increased consulting costs and incentive compensation expense.

Interest Expense

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.

Interest expense increased to $4.7 million in the first quarter of 2024 from $2.4 million in the first quarter of 2023 due to increased borrowings under our revolving credit facility, which were primarily used to fund our acquisitions and, to a lesser extent, a higher weighted-average interest rate.

We expect interest expense will increase significantly in 2024 compared to 2023 as a result of these borrowings.

Provision for Income Taxes

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).

Provision for income taxes decreased to $7.9 million in the first quarter of 2024 from $9.8 million in the first quarter of 2023.

The effective tax rate of 24% in the first quarter of 2024 was higher than our statutory rate of 21% primarily due to nondeductible expenses, the distribution of our worldwide earnings, state taxes, the cost of repatriating the earnings of certain foreign subsidiaries, and tax expense associated with the Global Intangible Low-Taxed Income provisions.

These items were offset in part by net excess income tax benefits from stock-based compensation arrangements, foreign tax credits, and a tax benefit associated with a foreign exchange loss recognized upon our repatriation of certain previously taxed foreign earnings.

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, offset in part by net excess income tax benefits from stock-based compensation arrangements.

Net income decreased to $25.0 million in the first quarter of 2024 from $28.3 million in the first quarter of 2023 primarily due to a $3.2 million decrease in operating income and a $2.3 million increase in interest expense, offset in part by a $1.9 million decrease in provision for income taxes (see discussions above for further details).

Non-GAAP Key Performance Indicators

1 unchanged sentence

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 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.

Adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin exclude 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.

1 unchanged sentence

We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our core business, operating results, or future outlook.

We believe that the inclusion of such measures helps investors gain an understanding of our underlying operating performance and future prospects, consistent with how management measures and forecasts our performance, especially when comparing such results to previous periods or forecasts and to the performance of our competitors.

and to the performance of our competitors.

Such measures are also used by us in our financial and operating decision-making and for compensation purposes.

We also believe this information is responsive to investors' requests and gives them an additional measure of our performance.

Our non-GAAP financial measures are not meant to be considered superior to or a substitute for the results of operations or cash flow prepared in accordance with GAAP.

Our non-GAAP financial measures are not meant to be considered superior to or a substitute for the results of operations or cash flows prepared in accordance with GAAP.

In addition, our non-GAAP financial measures have limitations associated with their use as compared to the most directly comparable GAAP measures, in that they may be different from, and therefore not comparable to, similar measures used by other companies.

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

Three Months Ended Nine Months Ended

(In thousands, except percentages) September 30,

2023 October 1,

2022 September 30,

2023 October 1,

Three Months Ended

(In thousands, except percentages) March 30,

2024 April 1,

Net Income Attributable to Kadant $ 24,689 $ 28,075

Net Income Attributable to Noncontrolling Interest 175 184 571 672

Net Income Attributable to Noncontrolling Interests

Provision for Income Taxes 7,854 9,763

2 unchanged sentences

Operating Income 36,927 40,114

Gain on Sale (a)

— — — (20,190)

Acquisition Costs 1,124 —

Indemnification Asset (Provision) Reversals (b)

(50) — 127 575

Relocation Costs

Restructuring and Impairment Costs

434 72 434 254

Acquired Backlog Amortization (c)

Acquired Profit in Inventory Amortization (d)

Indemnification Asset Reversals, Net (a)

Acquired Backlog Amortization (b)

Acquired Profit in Inventory Amortization (c)

Adjusted Operating Income (non-GAAP measure)

4 unchanged sentences

Adjusted EBITDA Margin (non-GAAP measure)

21.6% 21.3% 21.3%

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

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

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

(a) Represents net indemnification asset reversal related to the release of tax reserves associated with uncertain tax positions.

(b) Represents intangible amortization expense associated with acquired backlog.

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

Three Months Ended Nine Months Ended

(In thousands) September 30,

2023 October 1,

2022 September 30,

2023 October 1,

Three Months Ended

(In thousands) March 30,

2024 April 1,

Cash Provided by Operating Activities $ 22,831 $ 36,866

Capital Expenditures (a) (8,848) (6,376) (22,094) (16,191)

Capital Expenditures

(6,271) (4,469)

Free Cash Flow (non-GAAP measure)

$ 16,560 $ 32,397

(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 $222.6 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,

Consolidated working capital was $232.7 million at March 30, 2024, compared with $225.8 million at December 30, 2023.

Cash and cash equivalents were $81.4 million at March 30, 2024, compared with $103.8 million at December 30, 2023, which included cash and cash equivalents held by our foreign subsidiaries o f $71.1 million at March 30, 2024 and $94.6 million at December 30, 2023.

Cash flow information in the first quarters of 2024 and 2023 is as follows:

Three Months Ended

(In thousands) March 30,

2024 April 1,

Net Cash Provided by Operating Activities $ 22,831 $ 36,866

Net Cash Used in Investing Activities (237,263) (4,467)

Net Cash Used in Financing Activities (85,671) (62,112)

Net Cash Provided by (Used in) Financing Activities

192,905 (27,757)

Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash (2,308) 1,140

Decrease in Cash, Cash Equivalents, and Restricted Cash $ (672) $ (19,047)

(Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash

$ (23,835) $ 5,782

Operating Activities

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.

Cash provided by operating activities decreased to $22.8 million in the first quarter of 2024 from $36.9 million in the first quarter of 2023 primarily due to an increase 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 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.

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.

Significant cash outflows associated with working capital in the first quarter of 2024 related to other liabilities, accounts receivable, and inventory.

Decreases in other liabilities used cash of $15.3 million primarily related to incentive compensation payments.

Increases in accounts receivable used cash of $8.0 million mostly due to the timing of payments and purchases of inventory used cash of $6.7 million.

These uses of cash were offset in part by cash provided by an increase in accounts payable of $15.0 million related to inventory purchases and the timing of payments.

Significant cash outflows associated with working capital in the first quarter of 2023 related to inventory.

Increases in inventory used cash of $14.0 million primarily related to capital equipment orders that shipped throughout 2023.

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

Investing Activities

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.

Cash used in investing activities was $237.3 million in the first quarter of 2024, compared with $4.5 million in the first quarter of 2023.

Consideration paid for acquisitions, net of cash acquired, was $232.3 million in the first quarter of 2024.

Additionally, cash used in investing activities included capital expenditures of $6.3 million in the first quarter of 2024 and $4.5 million in the first quarter of 2023.

Financing Activities

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.

Cash provided by financing activities was $192.9 million in the first quarter of 2024, compared with cash used in financing activities of $27.8 million in the first quarter of 2023.

Borrowings under our revolving credit facility were $234.0 million in 2024, including $230.0 million to fund acquisitions.

Repayments of short- and long-term obligations were $33.5 million in 2024 compared to $20.8 million in 2023.

Cash dividends paid to stockholders were $3.4 million in 2024 and $3.0 million in 2023.

In addition, taxes paid related to the vesting of equity awards were $5.9 million in 2024 compared to $3.9 million in 2023.

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 $1.3 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.

The $2.3 million decrease in cash, cash equivalents, and restricted cash in the first quarter of 2024 related to exchange rates was primarily attributable to the strengthening of the U.S.

dollar against the euro, the Canadian dollar, the Chinese renminbi and Swedish krona.

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

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

Borrowing Capacity and Debt Obligations

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 $400.0 million.

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.

In the first quarter of 2024, we borrowed $234.0 million under our revolving credit facility, which was primarily used to fund our acquisitions of Key Knife and KWS, and will result in significantly higher interest payments in 2024 compared to 2023.

As of March 30, 2024, our outstanding balance under the Credit Agreement was $297.9 million, which included $73.9 million of euro-denominated borrowings, and we had $101.7 million of available borrowing capacity, in addition to a $200.0 million uncommitted, unsecured incremental borrowing facility.

Under our debt agreements, our leverage ratio must be less than 3.75 or, if we elect, for the quarter during which a material acquisition occurs and for the three fiscal quarters thereafter, must be less than 4.25.

As of March 30, 2024, our leverage ratio was 1.12 and we were in compliance with our debt covenants.

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

Additional Liquidity and Capital Resources

On May 18, 2023, our board of directors approved the repurchase of up to $50.0 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 or under our previous $50 million authorization that expired on May 19, 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.

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

We paid cash dividends of $3.4 million in the first quarter of 2024.

On March 6, 2024, we declared a quarterly cash dividend of $0.32 per share totaling $3.8 million that was paid on May 8, 2024.

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 $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.

We plan to make expenditures of approximately $23.0 to $25.0 million during the remainder of 2024 for property, plant, and equipment.

As of March 30, 2024, we had approximately $270.8 million of total unremitted foreign earnings.

It is our intent to indefinitely reinvest $205.0 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments, if any.

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

In the first quarter of 2024, 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 $3.4 million.

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 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

10 unchanged sentences

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