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Item 7. Management’s Discussion and Analysis

2025-02-25 compared with 2024-02-27 · 176 added, 178 removed, 185 unchanged (66% of the section changed)

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

Our financial results are reported in three reportable operating segments:

Flow Control, Industrial Processing, and Material Handling.

The Flow Control segment consists of our fluid-handling and doctoring, cleaning, & filtration product lines;

the Industrial Processing segment consists of our wood processing and stock-preparation product lines;

and the Material Handling segment consists of our conveying and vibratory, baling, and fiber-based product lines.

See Note 12 , Business Segment and Geographical Information, in the accompanying consolidated financial statements for a description and financial information of our reportable operating segments.

Our financial results are reported in three reportable segments consisting of our Flow Control segment, Industrial Processing segment, and Material Handling segment.

We have aggregated our operating segments into reportable segments where they contained similar products and economic characteristics, and shared similar types of customers, and production and distribution methods.

Our Flow Control segment consists of our fluid-handling and doctoring, cleaning, & filtration operating segments and our Industrial Processing segment consists of our wood processing and fiber processing (formerly referred to as stock-preparation) operating segments.

See Note 11 , Business Segment and Geographical Information, in the accompanying consolidated financial statements for a description of and financial information on our reportable segments.

Industry and Business Overview

Bookings were $917.4 million in 2023, including record parts and consumables bookings, which represented 64% of consolidated bookings.

Bookings decreased 4% compared to record bookings in 2022, which included exceptionally strong demand for capital equipment at our Industrial Processing segment in the first half of the year.

The bookings decrease occurred across various regions.

In Europe, weak macroeconomic conditions impacted demand for our products, including in Germany, Europe’s largest economy, which experienced a more significant decline in industrial production than anticipated.

A decline in domestic and foreign confidence in China’s market, along with persistent debt pressures, particularly in the property market, have constrained growth, which has lengthened the timing of capital orders.

In North America, we experienced steady demand for our capital and aftermarket products following the exceptionally strong demand in the first two quarters of 2022.

In 2024, we expect steady demand in our key end markets to continue at current levels, along with healthy contributions from our recent acquisitions.

An overview of our business by segment is as follows:

• Flow Control – Our Flow Control segment bookings remained flat compared to 2022.

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 weak macroeconomic conditions caused by elevated inflation and high interest rates.

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 2024 to remain stable.

• Industrial Processing – Our Industrial Processing segment bookings decreased 13% compared to 2022 due to strong demand for our wood processing capital equipment in the first half of 2022.

This was fueled by a robust U.S.

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

Demand in our wood processing business returned to and has continued at a more typical level.

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

Demand for our stock-preparation products declined 9% compared to 2022 due to weaker market conditions in most regions.

In Europe, macroeconomic conditions led to a pullback in capital investments and paper mill shutdowns.

Market-related downtime at our customers in the U.S.

contributed to weaker demand for our products.

In China, overall market conditions were sluggish as changes to monetary policy impacted the timing of capital investments and mills focused on bringing capacity online.

We expect that our Industrial Processing segment will have higher bookings in 2024 due in large part to contributions from our recent acquisition of Key Knife, which we anticipate will also result in an incrementally higher percentage of parts and consumables.

In addition, we expect higher demand for our stock-preparation capital equipment driven by projects focused on energy savings and reduced water consumption.

• Material Handling – Our Material Handling segment had record bookings in 2023.

Bookings increased 3% compared to 2022 led by record parts and consumables bookings and a $12 million capital order for the longest conveying line in North America.

The largest contributor to our 2023 bookings increase was our conveying and vibratory business due in part to the positive impact on the aggregates industry from new government legislation.

The aggregates industry significantly expanded plant production capacity to meet demand and, as a result, we expect some slowing in capital expenditures in the near term.

We expect that our Material Handling segment will have higher bookings in 2024 due to contributions from our recent acquisition of KWS and increased demand at our European baling business due in part to government programs aimed at stimulating capital investment.

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.

Bookings were a record $981.1 million in 2024, increasing 7% compared to 2023 due to strong contributions from our 2024 acquisitions.

Organic bookings, which is defined as bookings excluding acquisitions and the effect of foreign currency translation, decreased 5% in 2024 compared to 2023 due to weaker demand for our capital equipment products driven by several factors, including economic uncertainties, macroeconomic conditions abroad, and the consolidation of some of our large customers.

While demand for our parts and consumables products remained strong in 2024, there was a lengthening in the timing for securing capital orders as customers became more cautious with some delaying large capital expenditures into 2025.

From a geographic perspective, our operations in North America and Europe were also impacted by the consolidation of some large customers in the paper industry causing disruption and delays in their normal spending levels.

In Europe, sluggish market conditions have been impacted by high interest rates and energy costs.

Additionally, depressed conditions in China led to a tightening of available credit and more cautious capital spending.

We expect stronger capital bookings in 2025, especially in our Industrial Processing segment.

However, the timing of securing capital orders can be uncertain and could shift by quarter and into 2026 due to macroeconomic uncertainty or other factors.

We expect steady demand for our aftermarket products to continue in 2025.

We see long-term strength in our end markets as customers continue to rely on our products to help maximize productivity through more efficient production processes.

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

and abroad aimed at fueling investment.

An overview of our business by reportable segment is as follows:

• Flow Control – Our Flow Control segment bookings increased 1% in 2024 compared to 2023, including a 5% increase from acquisitions.

Organic bookings decreased 3% in 2024 compared to 2023 primarily due to sluggish manufacturing activity, especially in Europe.

Weaker demand for paper led to low mill operating rates and mill closures.

In Europe, these challenges were further impacted by weak macroeconomic conditions and aggressive competition, which led to decreased demand for our capital equipment products.

We expect steady demand in our Flow Control segment in 2025 and long-term strength in our end markets.

• Industrial Processing – Our Industrial Processing segment bookings increased 15% in 2024 compared to 2023, including an 18% increase from acquisitions.

Organic bookings decreased 2% in 2024 compared to 2023 led by decreased demand for our capital equipment products at our wood processing business in North America.

High mortgage rates and economic uncertainty led to a decline in new construction in the U.S., leading to reduced demand

for OSB, lumber, and our products.

Consequently, the number of dormant or idle lines in the North American lumber industry remained high as lumber producers waited for market conditions to improve.

We anticipate that the significant pent up demand for housing, coupled with the continued focus on remodeling, will lead to increased demand for our wood processing products in 2025.

Demand for our capital equipment and aftermarket parts products at our fiber processing businesses remained stable compared to 2023, except at our Chinese operations due to challenging market conditions.

Overcapacity led to the closure of several smaller mills, while declining prices reduced profit margins at the remaining mills.

These unfavorable conditions led to delays in capital project activity.

In addition, the consolidation of some large customers in the paper industry disrupted and delayed their normal spending patterns, leading to decreased demand for our products in North America and Europe.

In this environment, customers are increasingly focused on projects aimed at reducing input costs, which is expected to drive increased demand for our products in this segment.

• Material Handling – Our Material Handling segment bookings increased 5% in 2024 compared to 2023, including a 17% increase from acquisitions.

Organic bookings decreased 13% led by a reduction in capital equipment bookings.

At our conveying and vibratory business, a large $12 million capital order for a conveying line in 2023 resulted in comparatively weaker capital bookings in 2024.

This impact was coupled with constrained capital spending by customers in the aggregates industry.

However, the long-term outlook for the aggregates industry remains strong, particularly in North America, fueled by new infrastructure projects as a result of significant federal and state investment.

At our baling businesses, organic bookings decreased both in North America and Europe, as customers were reluctant to commit to capital expenditures towards the end of the year.

While quote activity was active, a drop in used paper prices, constrained market conditions in Europe, and uncertainty related to borrowing costs all contributed to customers’ hesitation.

We expect customers will place these orders in 2025.

For the overall Material Handling segment, planned infrastructure projects and asset modernization in the recycling and waste management sectors are expected to lead to increased demand in 2025.

Our global operations have been and continue to be impacted by complex market conditions fueled by inflationary pressures, geopolitical tensions, labor availability and uncertainty in the 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 industry has contracted.

economy has proven more resilient, growth in the European economy has slowed due to high interest rates, elevated inflation, and geopolitical tensions and China's manufacturing industry has contracted.

We expect our operating environment to continue to be challenging, which creates continued uncertainty for 2025.

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

In addition, we see growth opportunity from different legislation in the U.S.

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

International Sales

More than half of our sales are to customers outside the United States, mainly in Europe, Asia, and Canada.

Approximately 50% of our sales are to customers outside the United States, mainly in Europe, Asia, and Canada.

As a result, our financial performance can be materially affected by currency exchange rate fluctuations between the U.S.

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

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

The United States has imposed tariffs in the past and more recently proposed and implemented new tariffs on certain imports, which has and will continue to increase the cost of some of the parts and equipment we import.

In addition, foreign countries may implement retaliatory tariffs in response to these actions by the United States, which may negatively impact our operations.

Although we are working 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.

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We have acquired several businesses in recent years and continue to pursue acquisition opportunities.

On January 1, 2024, we acquired Key Knife pursuant to a securities purchase agreement dated December 22, 2023, for approximately $156.0 million in cash, subject to certain customary adjustments.

Key Knife is part of our Industrial Processing segment.

On January 24, 2024, we acquired all of the outstanding equity securities of KWS for approximately $84.0 million in cash, subject to certain customary adjustments.

KWS is part of our Material Handling segment.

We completed several smaller acquisitions in 2022 and 2023.

In 2021, we acquired The Clouth Group of Companies, which is part of our Flow Control segment, and East Chicago Machine Tool Corporation, which is part of our Material Handling segment, for an aggregate $146.4 million, net of cash acquired and debt assumed.

See Note 2 , Acquisitions, and Note 15 , Subsequent Events, in the accompanying consolidated financial statements for further details.

On January 1, 2024, we acquired Key Knife for $153.4 million, net of cash acquired and subject to a post-closing adjustment.

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.

On January 24, 2024, we acquired KWS for $79.4 million.

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.

On May 31, 2024, we acquired DSTI for $53.6 million, net of cash acquired.

DSTI is a leading manufacturer of engineered fluid sealing and transfer solutions for rotating applications, with revenue of approximately $25.0 million for the twelve months ended March 31, 2024, and is part of our Flow Control 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 various markets we serve.

We also completed several smaller acquisitions in 2024.

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

Results of Operations

2024 Compared to 2023

The following table presents changes in revenue by segment between 2023 and 2022, and those changes excluding the effect of foreign currency translation and acquisitions, which we refer to as change in organic revenue.

The following table presents changes in revenue by segment between 2024 and 2023, and those changes excluding the effect of acquisitions and foreign currency translation, which we refer to as change in organic revenue.

Organic revenue excludes the effect of acquisitions for the four quarterly reporting periods following the date of the acquisition.

The presentation of the change in organic revenue is a non-GAAP measure.

We believe this non-GAAP measure helps investors gain an understanding of our underlying operations consistent with how management measures and forecasts its performance,

especially when comparing such results to prior periods.

We believe this non-GAAP measure helps investors gain an understanding of our underlying operations consistent with how management measures and forecasts its performance, especially when comparing such results to prior periods.

This non-GAAP measure should not be considered superior to or a substitute for the corresponding GAAP measure.

Revenue by segment in 2023 and 2022 is as follows:

Revenue by reportable segment in 2024 and 2023 is as follows:

Organic Revenue

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2024 December 30,

2022 Total Increase % Change Currency Translation Acquisition

Increase % Change

2023 Increase

% Change Acquisitions

Currency Translation

Increase (Decrease)

Flow Control $ 371,177 $ 363,451 $ 7,726 2 % $ 15,083 $ (1,913) $ (5,444) (1) %

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$ 1,053,384 $ 957,672 $ 95,712 10 % $ 115,417 $ (4,602) $ (15,103) (2) %

Both consolidated revenue and organic revenue increased 6% in 2023 with relatively equal contributions from parts and consumables products and capital equipment products.

The majority of the revenue increase was due to higher demand at our Material Handling segment, especially for our bulk material handling products and, to a lesser extent, increased demand for our parts and consumables products at our Flow Control and Industrial Processing segments.

From a regional perspective, the majority of the 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 4% in 2023 primarily due to higher demand for parts and consumables products and, to a lesser extent, 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 products in Europe from customers seeking to mitigate high energy prices, demand for our parts and consumables products was modestly higher than 2022 reflecting the challenging market conditions.

In China, a slowdown in manufacturing activity resulted in weaker demand for our capital equipment products.

Revenue at our Industrial Processing segment remained flat in 2023, while organic revenue increased 2%.

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

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

Additionally, demand increased for parts and consumable products in our stock-preparation business in Europe due to maintenance requirements at many of our customers.

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 19% in 2023 due to higher demand for our capital equipment products and, to a lesser extent, parts and consumables products at our conveying and vibratory business in North America.

This was due in large part to expansion projects related to the mining of minerals that led to increased demand for our conveying systems, including an expansion project for the longest conveying line in North America.

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.

Consolidated revenue increased 10% in 2024, including a 12% increase from acquisitions.

Organic revenue decreased 2% primarily due to weak demand in our Material Handling segment, partially offset by stronger demand at our Industrial Processing segment, especially for our capital equipment products.

From a geographic perspective, organic revenue was impacted by softening demand in Europe due to weak macroeconomic conditions.

Revenue at our Flow Control segment increased 2% while organic revenue decreased 1% in 2024 driven by lower demand for our capital equipment products in Europe reflecting challenging market conditions and a slowdown in manufacturing activity.

This decrease was partially offset by higher demand for our capital equipment products in North America, especially our fluid handling products that help customers optimize energy utilization and maximize productivity.

Revenue at our Industrial Processing segment increased 22% in 2024, including a 17% increase from acquisitions.

Organic revenue increased 6% in 2024 led by increased demand for our capital equipment products at our fiber processing business.

Capital equipment revenue increased 28% at our fiber processing business due to higher completion rates on large projects recognized on an over time basis in China and increased replacement and refurbishment projects in North America.

In addition, maintenance and production requirements at our customers in North America led to increased demand for our parts and consumables products at our wood processing business.

Revenue at our Material Handling segment increased 4% in 2024, including a 17% increase from acquisitions.

Organic revenue decreased 13% led by weaker demand for our capital equipment products.

At our conveying and vibratory business, a large expansion project for a conveying line in 2023 resulted in comparatively lower capital revenue in 2024.

At our baling business in Europe, high interest rates and declines in waste paper prices led to decreased demand for our capital equipment products.

Gross Profit Margin

Gross profit margin by segment in 2023 and 2022 is as follows:

Gross profit margin by reportable segment in 2024 and 2023 is as follows:

2024 December 30,

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Consolidated 44.3% 43.5% 80 bps

Consolidated gross profit margin increased to 43.5% in 2023 compared with 43.1% in 2022 due to higher margins achieved on parts and consumable products, especially at our Material Handling segment.

In addition, higher margins achieved on our capital equipment products were offset by a lower proportion of parts and consumables revenue, which decreased to 62% in 2023 compared to 63% in 2022.

Within our operating segments, gross profit margin:

• Decreased to 51.8% at our Flow Control segment from 52.0% in 2022 primarily due to higher margins achieved on our capital equipment products, offset by a decrease in margins for our parts and consumables products.

• Increased to 40.2% at our Industrial Processing segment from 39.2% in 2022 primarily due to higher margins achieved on our parts and consumable products and, to a lesser extent, an increase in the proportion of higher-margin stock-preparation parts and consumables revenue.

• Increased to 35.7% at our Material Handling segment from 34.4% in 2022 primarily due to higher margins achieved for our parts and consumables products, partially offset by a decrease in the proportion of higher-margin conveying and vibratory parts and consumables products revenue.

Consolidated gross profit margin increased to 44.3% in 2024 compared with 43.5% in 2023 due to a favorable increase in the proportion of parts and consumables revenue, which increased to 66% of total revenue compared to 62% in 2023.

This increase was partially offset by the inclusion of $5.2 million of amortization expense related to acquired profit in inventory, which lowered consolidated gross profit margin in 2024 by 0.4 percentage points.

Within our reportable segments, gross profit margin:

• Increased to 52.5% at our Flow Control segment from 51.8% in 2023 primarily due to higher margins achieved on our capital equipment products.

This increase was partially offset by the inclusion of $2.0 million of amortization expense related to acquired profit in inventory, which lowered gross profit margin in 2024 by 0.5 percentage points.

• Increased to 41.8% at our Industrial Processing segment from 40.2% in 2023 due to higher margins achieved on our capital equipment products and a higher proportion of parts and consumables revenue.

These increases were partially offset by the inclusion of $2.2 million of amortization expense related to acquired profit in inventory, which lowered gross profit margin in 2024 by 0.5 percentage points.

• Increased to 36.3% at our Material Handling segment from 35.7% in 2023.

The favorable increase in the proportion of parts and consumables revenue in 2024 was partially offset by the inclusion of $1.0 million of amortization expense related to acquired profit in inventory, which lowered gross profit margin in 2024 by 0.5 percentage points.

Selling, General, and Administrative Expenses

Selling, general, and administrative (SG&A) expenses by segment in 2023 and 2022 is as follows:

Selling, general, and administrative (SG&A) expenses by reportable segment and corporate in 2024 and 2023 are as follows:

(In thousands, except percentages) December 28,

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Consolidated as a Percentage of Revenue

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

Consolidated SG&A expenses increased $11.9 million, or 5%, in 2023 compared to 2022, which included a decrease of $1.2 million in indemnification asset reversals related to the release of tax reserves.

Excluding the decrease in indemnification asset reversals, consolidated SG&A expenses increased $13.1 million, or 6%, primarily due to annual wage increases, as well as incremental travel and consulting costs.

Within our operating segments, SG&A expenses:

• Increased $1.0 million at our Flow Control segment primarily due to annual wage increases, incremental travel and trade show costs, and an unfavorable effect of foreign currency translation of $0.7 million.

These increases were partially offset by a decrease in bad debt expense, acquisition costs, and the inclusion of an indemnification asset reversal related to the release of tax reserves of $0.7 million in 2022.

• Increased $4.5 million at our Industrial Processing segment principally due to increased compensation expense associated with existing and new personnel, incremental travel and trade show costs, and $1.1 million of acquisition costs.

These increases were partially offset by a $1.0 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 $2.9 million at our Material Handling segment due to increased compensation expense associated with existing and new personnel and increased selling-related costs, partially offset by a decrease of $0.5 million in acquisition-related costs.

Consolidated SG&A expenses as a percentage of revenue increased to 27% in 2024 compared to 25% in 2023 principally due to the impact of our acquisitions and acquisition-related costs.

Consolidated SG&A expenses increased $43.7 million, or 18%, primarily due to the inclusion of $35.6 million of SG&A expenses from acquisitions, $4.7 million of incremental acquisition-related costs and annual wage increases.

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

Within our reportable segments and corporate, SG&A expenses:

• Increased $9.3 million at our Flow Control segment principally due to the inclusion of $5.2 million of SG&A expenses from acquisitions, $2.2 million of acquisition-related costs and increased compensation expense, partially offset by a decrease in commission expense.

• Increased $21.4 million at our Industrial Processing segment due to the inclusion of $19.5 million of SG&A expenses from acquisitions and increased compensation expense.

These increases were partially offset by a $0.5 million favorable effect of foreign currency translation.

• Increased $11.3 million at our Material Handling segment primarily due to the inclusion of $10.9 million of SG&A expenses from acquisitions and $2.4 million of incremental acquisition-related costs, partially offset by a decrease in expense related to external commissions and sales incentives.

• Increased $1.6 million at Corporate due to annual wage increases and consulting costs.

Gain on Sale and Other Items, Net

The components of gain on sale and other items, net in 2023 and 2022 are as follows:

(In thousands) December 30, 2023 December 31, 2022

Gain on Sale of Assets $ — $ (20,190)

Other Income (841) —

Relocation Costs

Restructuring Costs

Impairment Costs

$ 723 $ (18,856)

Gain on Sale of Assets

We entered into several agreements with the local government in China to sell our then 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 8 , Gain on Sale and Other Items, Net in the accompanying consolidated financial statements for further details.

Other Income and Relocation Costs

In 2023, in connection with the China Transaction, we recognized income of $0.8 million from outsourcing the demolition and cleanup of the then existing manufacturing building in China and sale of the remaining fixed assets.

In addition, we incurred costs of $0.8 million related to the relocation of machinery and equipment and administrative offices to the new manufacturing facility.

Other Costs, Net

The components of other costs, net in 2024 and 2023 are as follows:

(In thousands) December 28,

2024 December 30,

Restructuring and Impairment Costs

2023 Restructuring Plans

Other Costs (Income)

Restructuring and Impairment Costs

• Restructuring and impairment costs of $0.4 million in 2023 within our Flow Control segment related to our restructuring plan to consolidate a small manufacturing operation into a larger facility in Germany.

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• Restructuring costs of $0.4 million in 2023 within our Flow Control segment related to the termination of a contract at one of our operations in Germany.

2021 Restructuring Plan

• Restructuring costs of $0.6 million in 2022 within our Flow Control segment related to our 2021 restructuring plan to eliminate a redundant ceramic blade manufacturing operation in France.

Restructuring costs related to this plan consisted of severance costs for the termination of five employees and facility and other closure costs.

Other Impairment Costs

• Impairment costs of $0.7 million in 2022 within our Industrial Processing segment consisted of $0.5 million primarily related to the write-down of inventory at our business in Russia and $0.2 million associated with the China Transaction related to the write-down of certain fixed assets that were not moved to the new manufacturing facility.

Other Costs (Income)

• Loss of $0.7 million in 2024 related to the recognition of a cumulative translation adjustment associated with the liquidation of a small foreign subsidiary in the Flow Control segment.

• In 2022, we entered into several agreements with the local government in China to sell our then existing manufacturing building and land use rights of one of our subsidiaries in China (China Transaction).

In connection with the China Transaction, we recognized other income of $0.8 million in 2023 related to the outsourcing of demolition and cleanup work of the then existing manufacturing building in China and sale of the remaining fixed assets.

In addition, we incurred costs of $0.8 million in 2023 related to the relocation of machinery and equipment and administrative offices to the new manufacturing facility in China.

Interest Expense

Interest expense increased to $8.4 million in 2023 from $6.5 million in 2022 primarily due to a higher weighted-average interest rate, offset in part by lower average debt outstanding in 2023 compared with 2022.

We expect interest expense will increase significantly in 2024 as a result of the $230.0 million borrowed in January 2024 to fund our Key Knife and KWS acquisitions.

Interest expense increased to $20.0 million in 2024 from $8.4 million in 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.

Provision for Income Taxes

Our provision for income taxes decreased to $42.2 million in 2023 from $43.9 million in 2022.

The effective tax rate of 27% in both 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 $116.8 million in 2023 from $121.7 million in 2022 primarily due to a $5.5 million decrease in operating income and a $1.9 million increase in interest expense, offset in part by a $1.7 million decrease in provision for income taxes.

Net income in 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).

Our provision for income taxes decreased to $40.5 million in 2024 from $42.2 million in 2023 primarily due to the decrease of $5.9 million in pre-tax income.

The effective tax rate was 26.5% in both 2024 and 2023 and 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 $112.6 million in 2024 from $116.8 million in 2023 primarily due to a $11.6 million increase in interest expense, offset in part by a $5.5 million increase in operating income and a $1.7 million decrease in provision for income taxes (see discussions above for further details).

Non-GAAP Key Performance Indicators

adjusted EBITDA margin (defined as adjusted EBITDA divided by revenue), and free cash flow (defined as net cash provided by operating activities less capital expenditures).

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

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

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

Adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin exclude amortization expense related to acquired profit in inventory and backlog, acquisition costs,

restructuring and impairment costs, relocation costs and other income and 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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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.

We also believe this information is responsive to investors' requests and gives them additional measures 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 flows prepared in accordance with GAAP.

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2024 December 30,

2022 January 1,

2023 December 31,

Net Income Attributable to Kadant $ 111,598 $ 116,069 $ 120,928

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Operating Income 171,252 165,757 171,282

Gain on Sale and Other Income (a)

Gain on Sale (a)

Acquired Profit in Inventory Amortization (b)

5,189 — (218)

Acquired Backlog Amortization (c)

Acquisition Costs 2,872 1,442 668

Indemnification Asset Reversals (b) 102 1,316 —

Relocation Costs

Restructuring and Impairment Costs

Indemnification Asset Reversal, Net (d)

158 102 1,316

Acquired Backlog Amortization (c) — 703 1,326

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

Restructuring and Impairment Costs

Other Costs (Income) (e)

Adjusted Operating Income (non-GAAP measure)

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2024 December 30,

2022 January 1,

2023 December 31,

Net Cash Provided by Operating Activities $ 155,265 $ 165,545 $ 102,625

Capital Expenditures (e) (31,850) (28,199) (12,771)

Capital Expenditures (f)

(21,005) (31,850) (28,199)

Free Cash Flow (non-GAAP measure)

$ 134,260 $ 133,695 $ 74,426

(a) Includes a $20.2 million gain in 2022 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.

(a) Represents a gain on the China Transaction in our Industrial Processing segment.

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

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

(e) Includes capital expenditures of $7.4 million in 2023 and $10.4 million in 2022 associated with the China Transaction.

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

(e) Includes a loss of $0.7 million from the recognition of a cumulative translation adjustment associated with the liquidation of a small foreign subsidiary in our Flow Control segment in 2024.

(f) Includes capital expenditures of $7.4 million in 2023 and $10.4 million in 2022 associated with the China Transaction.

Liquidity and Capital Resources

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Net Cash Used in Investing Activities (319,137) (30,790)

Net Cash Used in Financing Activities

Net Cash Provided by (Used in) Financing Activities

159,914 (111,111)

Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash (6,549) 3,084

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

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

$ (10,507) $ 26,728

Operating Activities

Cash provided by operating activities increased to $165.5 million in 2023 from $102.6 million in 2022 primarily due to a reduction in cash used for working capital.

Cash provided by operating activities decreased to $155.3 million in 2024 from $165.5 million in 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 2023, significant cash inflows associated with working capital related to inventory, other liabilities and unbilled revenue.

During 2024, significant operating cash outflows were associated with accounts receivable, customer deposits and other liabilities.

A decrease in customer deposits used cash of $29.8 million due to a reduction in capital equipment orders and an increase in accounts receivable and contract assets used cash of $9.8 million primarily due to our revenue growth.

Other liabilities used cash of $21.2 million primarily due to cash outflows from incentive compensation and operating lease payments.

These uses of cash were offset in part by cash provided from the shipment of inventory of $24.0 million and increases in accounts payable of $10.6 million related to inventory purchases and the timing of payments.

During 2023, significant operating cash inflows were associated with working capital related to inventory, other liabilities and unbilled revenue.

Shipments of inventory provided cash of $14.1 million and increases in other liabilities provided cash of $9.2 million due to the timing of payments to subcontractors and outside vendors.

In addition, a reduction in unbilled revenue provided cash of $6.5 million.

These sources of cash were offset in part by $28.9 million of cash outflows associated with accounts payable and customer deposits primarily due to the timing of payments.

During 2022, significant cash outflows associated with working capital related to inventory and accounts receivable.

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

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

These sources of cash were offset in part by $28.9 million of operating cash outflows associated with accounts payable and customer deposits primarily due to the timing of payments.

Investing Activities

Cash used in investing activities was $30.8 million in 2023 compared to $29.5 million in 2022.

Capital expenditures were $31.9 million in 2023 and $28.2 million in 2022, including capital expenditures associated with the China Transaction of $7.4 million in 2023 and $10.4 million in 2022.

Cash used in investing activities was $319.1 million in 2024 compared with $30.8 million in 2023.

Consideration paid for acquisitions, net of cash acquired, was $300.3 million in 2024.

Additionally, capital expenditures were $21.0 million in 2024 and $31.9 million in 2023, which included capital expenditures associated with the China Transaction of $7.4 million.

Financing Activities

Cash used in financing activities was $111.1 million in 2023 compared to $80.6 million in 2022.

Repayments of short- and long-term obligations were $94.0 million in 2023 compared to repayments of short- and long-term obligations of $85.5 million, partially offset by borrowings under our revolving credit facility of $22.1 million in 2022.

Cash provided by financing activities was $159.9 million in 2024 compared with cash used of $111.1 million in 2023.

Borrowings under our revolving credit facility were $305.2 million in 2024, which were primarily used to fund our 2024 acquisitions.

Repayments of short- and long-term obligations were $124.5 million in 2024 compared to $94.0 million in 2023.

Cash dividends paid to stockholders were $14.7 million in 2024 and $13.2 million in 2023.

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

The $3.1 million increase in cash, cash equivalents, and restricted cash in 2023 related to exchange rates was primarily attributable to the weakening of the U.S.

The $6.5 million decrease in cash, cash equivalents, and restricted cash in 2024 related to exchange rates was primarily attributable to the strengthening of the U.S.

dollar against the euro and the Canadian dollar and, to a lesser extent, the Brazilian real and Mexican peso.

The $3.1 million increase in cash, cash equivalents and restricted cash in 2023 was primarily attributable to the weakening of the U.S.

dollar against the euro, the Canadian dollar, and Mexican peso.

The $7.0 million reduction in cash, cash equivalents and restricted cash in 2022 related to exchange rates was primarily attributable to the strengthening of the U.S.

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

Borrowing Capacity and Debt Obligations

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

Among other things, this amendment extended the maturity date to November 30, 2027, and increased our uncommitted, unsecured incremental borrowing facility from $150.0 million to $200.0 million.

We have a total borrowing capacity of $400.0 million under our Credit Agreement.

As of December 30, 2023, we had $301.1 million of borrowing capacity available under our Credit Agreement, in addition to the $200.0 million uncommitted, unsecured incremental borrowing facility.

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.

In 2024, we borrowed $305.2 million under our revolving credit facility, which was primarily used to fund our acquisitions.

As of December 28, 2024, our outstanding balance under the Credit Agreement was $278.4 million, including $71.4 million of euro-denominated borrowings.

We also had $121.8 million of available borrowing capacity, along with a $200.0 million uncommitted, unsecured incremental borrowing facility.

Borrowings under our revolving credit facility bear variable rates of interest and adjust frequently based on prevailing market rates and the terms of our Credit Agreement.

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

As of December 28, 2024, our leverage ratio was 0.99 and we were in compliance with our debt covenants.

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

In January 2024, we borrowed $230.0 million under our revolving credit facility to fund the acquisitions of Key Knife and KWS.

Borrowings under our revolving credit facility bear variable rates of interest and adjust frequently based on prevailing market rates and the terms of our Credit Agreement.

The weighted average interest related to this debt was 6.45% at the time of borrowing.

Following these acquisitions, we had borrowing capacity of $71.1 million under our Credit Agreement, in addition to the $200.0 million uncommitted, unsecured incremental borrowing facility.

See Note 6 , Short-and Long-term Obligations, and Note 15 , Subsequent Events, in the accompanying consolidated financial statements for additional information.

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

Additional Liquidity and Capital Resources

In addition to the obligations on our consolidated balance sheet at December 30, 2023, which include, but are not limited to, short- and long-term obligations ( Note 6 ), unrecognized tax benefits ( Note 5 ), and leases ( Note 9 ), we have outstanding letters of credit and bank guarantees of $23.4 million at December 30, 2023, primarily relating to performance obligations and customer deposit guarantees ( Note 7 ).

In addition to the obligations on our consolidated balance sheet at December 28, 2024, which include, but are not limited to, long-term obligations ( Note 6 ), unrecognized tax benefits ( Note 5 ), leases ( Note 9 ), and contingent consideration associated with a 2024 acquisition ( Note 2 ), we have outstanding letters of credit and bank guarantees of $13.9 million at December 28, 2024, primarily relating to performance obligations and customer deposit guarantees ( Note 7 ).

On May 16, 2024, our board of directors approved the repurchase of up to $50.0 million of our equity securities during the period from May 16, 2024 to May 16, 2025.

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

We plan to make capital expenditures of approximately $29.0 to $31.0 million during 2024 for property, plant, and equipment, including $2.0 million related to final payments for the China Transaction.

We plan to make capital expenditures of approximately $24.0 to $26.0 million during 2025 for property, plant, and equipment.

As of December 28, 2024, we had approximately $296.1 million of total unremitted foreign earnings.

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The foreign withholding taxes that would be required if we were to remit the indefinitely-reinvested foreign earnings to the United States would be approximately $5.3 million.

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

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

Application of Critical Accounting Estimates

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tax authorities, as well as to tax agreements and treaties among these governments.

Determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and

assumptions regarding significant future events, such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources and character of income and available tax credits.

Changes in tax laws, regulations, agreements and treaties, currency-exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of current and deferred tax balances and our results of operations.

We compute our provision for income taxes using the asset and liability method, and we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for tax loss or credit carryforwards.

Determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and assumptions regarding significant future events, such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources and character of income and available tax credits.

Changes in tax laws, regulations, agreements and treaties, currency-exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of current tax and deferred tax balances and our results of operations.

We compute our provision for income taxes using the asset and liability method, and we recognize deferred tax assets

and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for tax loss or credit carryforwards.

We measure deferred tax assets and liabilities using the currently enacted tax rates that are expected to apply to taxable income in the years in which we expect to realize those deferred tax assets and liabilities.

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In December 2021, the OECD released the Pillar Two Rules.

Since the release of the Pillar Two Rules, the OECD has issued three tranches of administrative guidance, as well as guidance on transitional safe harbor relief.

Since the release of the Pillar Two Rules, the OECD has issued four tranches of administrative guidance, as well as guidance on transitional safe harbor relief.

Various countries, including the member states of the European Union, have adopted Pillar Two Rules into their domestic laws, with certain rules coming into effect for fiscal years beginning in 2024.

Some countries are in the process of drafting legislation for adoption in future years.

While the Pillar Two Rules serve as a framework for implementing the minimum tax, countries may enact domestic laws that vary slightly from the Pillar Two Rules and may also adjust domestic tax incentives to align with the Pillar Two Rules on different timelines.

We are monitoring developments of the Pillar Two Rules and are evaluating the potential impact they may have on the jurisdictions in which we operate.

We continue to assess the potential impact of the Pillar Two global minimum tax on our operations and effective tax rate.

Certain jurisdictions in which we operate have enacted or proposed legislation to align with the OECD's Pillar Two Rules.

For fiscal 2024, we qualify for the transitional safe harbor, which provides temporary relief from the application of the global minimum tax.

As a result of meeting the transitional safe harbor criteria, we do not anticipate a material impact on our effective tax rate or incremental tax liabilities in the near term.

We continue to evaluate our eligibility under the safe harbor provisions and monitor evolving regulatory guidance that may affect our long-term tax position.

Revenue Recognition

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Valuation of Goodwill and Intangible Assets

We use assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination, including the determination of the fair value of intangible assets acquired, which represents a significant portion

of the purchase price in many of our acquisitions.

We estimate the fair value of intangible assets primarily based on projections of discounted cash flows which we expect to arise from identifiable intangible assets of acquired businesses.

We estimate the fair value of intangible assets primarily using the multi-

period excess earnings and relief-from-royalty valuation methods, which are based on projections of discounted cash flows or royalty payments avoided that we expect from the identifiable intangible assets of the acquired businesses.

Our valuation models incorporate significant assumptions, including future revenue growth rates, customer attrition rates, gross and operating margins, discount rates and royalty rates.

The determination of the allocation of the purchase price for the fair value of intangible assets acquired requires significant judgment as does the determination as to whether such intangibles are amortizable or non-amortizable and, if amortizable, the amortization period of the intangible asset.

Beginning in 2023, we evaluate the recoverability of goodwill and indefinite-lived intangible assets as of the first day of our fourth quarter of each fiscal year, or more frequently if events or changes in circumstances indicate that the carrying value of an asset might be impaired.

Prior to 2023, this evaluation was performed as of the end of each fiscal year or more frequently if events or changes in circumstances indicate that the carrying value of an asset might be impaired.

We evaluate the recoverability of goodwill and indefinite-lived intangible assets as of the first day of our fourth quarter of each fiscal year, or more frequently if events or changes in circumstances indicate that the carrying value of an asset might be impaired.

Potential impairment indicators include a significant decline in sales, earnings, or cash flows, material adverse changes in the business climate, and a significant decline in the market capitalization due to a sustained decrease in our stock price.

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

At October 1, 2023 (the first day of the fourth quarter of 2023), we performed a quantitative impairment analysis on our goodwill and indefinite-lived intangible assets.

At September 29, 2024 (the first day of the fourth quarter of 2024), we performed a qualitative impairment analysis on our goodwill and indefinite-lived intangible assets.

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

Goodwill totaled $384.3 million and indefinite-lived intangible assets totaled $28.2 million at October 1, 2023.

At year-end 2023, no factors were identified that would alter the conclusions of our October 1, 2023 analysis.

Goodwill totaled $493.1 million and indefinite-lived intangible assets totaled $28.6 million at September 29, 2024.

At year-end 2024, no factors were identified that would alter the conclusions of our September 29, 2024 analysis.

Goodwill totaled $479.2 million and indefinite-lived intangible assets totaled $27.9 million at year-end 2024.

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Recent Accounting Pronouncements

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

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis