KADANT INC (KAI)

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with the consolidated financial statements and related notes set forth in Item 8, "Financial Statements and Supplementary Data." The following discussion also contains forward-looking statements, including the outlook for our business, that involve a number of risks and uncertainties. See Part I, "Forward-Looking Statements," for a discussion of the forward-looking statements contained below and Part I, Item 1A, "Risk Factors," for a discussion of certain risks that could cause our actual results to differ materially from the results anticipated in such forward-looking statements.

A detailed discussion of the year-over-year results for 2023 compared with 2022 can be found in Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended December 30, 2023, filed with the SEC.

Overview

Company Background

We are a global supplier of technologies and engineered systems that drive Sustainable Industrial Processing®. Our products and services play an integral role in enhancing efficiency, optimizing energy utilization, and maximizing productivity in process industries while helping our customers advance their sustainability initiatives with products that reduce waste or generate more yield with fewer inputs, particularly fiber, energy, and water. Producing more while consuming less is a core aspect of Sustainable Industrial Processing and a major element of the strategic focus of our businesses.

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 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

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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, 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.

International Sales

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. dollar and foreign currencies. To mitigate the impact of foreign currency fluctuations, we generally seek to charge our customers in the same currency in which our operating costs are incurred. Additionally, we may enter into forward currency exchange contracts to hedge certain firm purchase and sale commitments denominated in currencies other than our subsidiaries' functional currencies. We currently do not use derivative instruments to hedge our exposure to exchange rate fluctuations created by the translation into the U.S. dollar of our foreign subsidiaries' results that are in functional currencies other than the U.S. dollar.

Global Trade

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. For more information on risks associated with our global operations, including tariffs, please see Part I, Item 1A, "Risk Factors."

Acquisitions

We expect that a significant driver of our long-term growth will be through the acquisition of businesses and technologies that complement or augment our existing products and services or may involve entry into a new process industry. We have acquired several businesses in recent years and continue to pursue acquisition opportunities.

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.

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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

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

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

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.

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Gross Profit Margin

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

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 reportable segment and corporate in 2024 and 2023 are as follows:

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.

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•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.

Other Costs, Net

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

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. Restructuring and impairment costs related to this plan consisted of severance costs for the termination of 10 employees, facility and other closure costs, and asset-write downs.

•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.

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 $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 $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

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

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 amortization expense related to acquired profit in inventory and backlog, acquisition costs,

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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. Additionally, we use free cash flow in order to provide insight on our ability to generate cash for acquisitions and debt repayments, as well as for other investing and financing activities.

We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our core business, operating results, or future outlook. We believe that the inclusion of such measures helps investors gain an understanding of our underlying operating performance and future prospects, consistent with how management measures and forecasts our performance, especially when comparing such results to previous periods or forecasts and to the performance of our competitors. Such measures are also used by us in our financial and operating decision-making and for compensation purposes. 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. 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 from net income attributable to Kadant is as follows:

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

(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.

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

(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.

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Liquidity and Capital Resources

Consolidated working capital was $250.8 million at December 28, 2024, compared with $225.8 million at December 30, 2023. Cash and cash equivalents were $94.7 million at December 28, 2024, compared with $103.8 million at December 30, 2023, which included cash and cash equivalents held by our foreign subsidiaries of $73.8 million at December 28, 2024 and $94.6 million at December 30, 2023.

Cash Flow

Cash flow information is as follows:

Operating Activities

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 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 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 $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 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. 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 $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.

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.

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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, 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 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. We have not repurchased any shares of our common stock under this authorization or under our previous $50.0 million authorization that expired on May 18, 2024.

We paid cash dividends of $14.7 million in 2024. On November 14, 2024, we declared a quarterly cash dividend of $0.32 per share totaling $3.8 million that was paid on February 6, 2025. 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 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 $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. It is our intent to indefinitely reinvest $255.3 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments, if any. In 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 $5.3 million.

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

Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Our actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies and estimates are defined as those that entail significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. For a discussion on the application of these estimates and other accounting policies, see Note 1, Nature of Operations and Summary of Significant Accounting Policies, in the accompanying consolidated financial statements. We believe that our most critical accounting policies and estimates upon which our financial position depends, and which involve the most complex or subjective decisions or assessments, are those described below.

Income Taxes

We operate in numerous countries under many legal forms and, as a result, are subject to the jurisdiction of numerous domestic and non-U.S. 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 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

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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. We estimate the degree to which our deferred tax assets on deductible temporary differences and tax loss or credit carryforwards will result in an income tax benefit based on the expected profitability by tax jurisdiction, and we provide a valuation allowance for these deferred tax assets if it is more likely than not that they will not be realized in the future. If it were to become more likely than not that these deferred tax assets would be realized, we would reverse the related valuation allowance. Should our actual future taxable income by tax jurisdiction vary from our estimates, additional valuation allowances or reversals thereof may be necessary. When assessing the need for a valuation allowance in a tax jurisdiction, we evaluate the weight of all available evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. As part of this evaluation, we consider our cumulative three-year history of earnings before income taxes, taxable income in prior carryback years, future reversals of existing taxable temporary differences, prudent and feasible tax planning strategies, and expected future results of operations. At year-end 2024, we maintained a valuation allowance against a portion of our state operating loss carryforwards in the United States and a valuation allowance in certain foreign jurisdictions due to the uncertainty of future profitability in the state and those foreign jurisdictions. Our tax valuation allowance was $7.6 million at year-end 2024.

In the ordinary course of business there are inherent uncertainties and judgements required in quantifying our income tax positions. It is our policy to provide for uncertain tax positions and the related interest and penalties based upon our assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. On a quarterly basis, we evaluate our uncertain tax positions against various factors, including changes in facts or circumstances, tax laws, or the status of audits by tax authorities. We believe that we have appropriately accounted for any liability for unrecognized tax benefits, and at year-end 2024, our liability for these unrecognized tax benefits, including an accrual for the related interest and penalties, totaled $18.0 million. To the extent we prevail in matters for which a liability for an unrecognized tax benefit is established or are required to pay amounts in excess of the liability, our effective tax rate in a given financial statement period may be affected.

We intend to repatriate the distributable reserves of select foreign subsidiaries back to the United States and, during 2024, we recorded $0.6 million of tax expense associated with these foreign earnings that we plan to repatriate in 2025. Except for these select foreign subsidiaries, we intend to reinvest indefinitely the earnings of our international subsidiaries in order to support the current and future capital needs of their operations, including the repayment of our foreign debt.

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

Approximately 90% of our revenue is recognized at a point in time following the transfer of control of the goods or service to the customer, primarily relating to our products that require minimal customization for the customer. The remaining portion of our revenue is recognized on an over time basis using an input method that compares the costs incurred to date to the total expected costs required to satisfy the performance obligation. Most revenue recognized on an over time basis is for large capital products that are highly customized for the customer and, as a result, would include significant cost to rework in the event of cancellation. The over time basis of accounting requires significant judgment in determining applicable contract costs and the corresponding revenue to be recognized, which could be different if there were to be changes to the circumstances of the contract. When adjustments to revenue and costs are required, the adjustments are included in earnings in the period of the change. Judgment is also required for contracts involving variable consideration and multiple performance obligations.

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 using the multi-

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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.

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. We are permitted to first assess qualitative factors to determine whether the quantitative impairment test is necessary. If the qualitative impairment analysis (Step 0) results in a determination that the fair value of a reporting unit or an indefinite lived intangible asset is more likely than not less than its carrying amount, we perform a quantitative impairment analysis (Step 1). We may bypass the qualitative assessment and proceed directly to the quantitative assessment. Estimates of discounted future cash flows arising from intangible assets acquired require assumptions related to revenue and operating income growth rates, discount rates, and other factors. 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 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 $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.

Definite-lived intangible assets are evaluated for impairment if events or changes in circumstances indicate that the carrying value of an asset might be impaired, such as a significant reduction in cash flows associated with the assets. Actual cash flows arising from a particular intangible asset could vary from projected cash flows which could imply different carrying values from those established at the dates of acquisition and which could result in impairment of such asset. No indicators of impairment were identified in 2024 and 2023. Definite-lived intangible assets were $251.6 million at year-end 2024.

A material adverse change in the business climate including a prolonged economic downturn and weakness in demand for our products could negatively affect the revenue and profitability assumptions used in our assessment of goodwill and intangible assets, which may result in impairment charges. Any future impairment charges could have a material adverse effect on our results of operations in the period in which an impairment is determined to exist.

Inventories

We value our inventory at the lower of the actual cost (on a first-in, first-out; or weighted average basis) or net realizable value and include materials, labor, and manufacturing overhead. The valuation of inventory requires us to make judgments, based on currently available information, about the forecasted usage of and demand for each particular product or product line. Assumptions about future dispositions of inventory are inherently uncertain and, although we make every effort to ensure the accuracy of our forecasts of future product usage and demand, any changes in those assumptions may result in a write-down of inventory in the period in which inventory is deemed excessive or obsolete, which could adversely affect our results of operations.

Recent Accounting Pronouncements

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.

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with the consolidated financial statements and related notes set forth in Item 8, "Financial Statements and Supplementary Data." The following discussion also contains forward-looking statements, including the outlook for our business, that involve a number of risks and uncertainties. See Part I, "Forward-Looking Statements," for a discussion of the forward-looking statements contained below and Part I, Item 1A, "Risk Factors," for a discussion of certain risks that could cause our actual results to differ materially from the results anticipated in such forward-looking statements.

A detailed discussion of the year-over-year results for 2022 compared with 2021 can be found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC.

Overview

Company Background

We are a global supplier of technologies and engineered systems that drive Sustainable Industrial Processing. Our products and services play an integral role in enhancing efficiency, optimizing energy utilization, and maximizing productivity in process industries while helping our customers advance their sustainability initiatives with products that reduce waste or generate more yield with fewer inputs, particularly fiber, energy, and water. Producing more while consuming less is a core aspect of Sustainable Industrial Processing and a major element of the strategic focus of our 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.

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.

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•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. 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. 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, 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. As a result, our financial performance can be materially affected by currency exchange rate fluctuations between the U.S. dollar and foreign currencies. To mitigate the impact of foreign currency fluctuations, we generally seek to charge our customers in the same currency in which our operating costs are incurred. Additionally, we may enter into forward currency exchange contracts to hedge certain firm purchase and sale commitments denominated in currencies other than our subsidiaries' functional currencies. We currently do not use derivative instruments to hedge our exposure to exchange rate fluctuations created by the translation into the U.S. dollar of our foreign subsidiaries' results that are in functional currencies other than the U.S. dollar.

Global Trade

The United States imposes tariffs on certain imports from China, which has and will continue to increase the cost of some of the equipment that we import. Although we 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. For more information on risks associated with our global operations, including tariffs, please see Part I, Item 1A, "Risk Factors."

Acquisitions

We expect that a significant driver of our long-term growth will be through the acquisition of businesses and technologies that complement or augment our existing products and services or may involve entry into a new process industry. We 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.

Results of Operations

2023 Compared to 2022

Revenue

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. 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,

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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:

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.

Gross Profit Margin

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

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.

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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.

Selling, General, and Administrative Expenses

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

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.

•Increased $3.5 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:

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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.

Restructuring and Impairment Costs

2023 Restructuring Plans

•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. Restructuring and impairment costs related to this plan consisted of severance costs for the termination of 10 employees, facility and other closure costs, and asset-write downs.

•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.

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.

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

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).

Non-GAAP Key Performance Indicators

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 foreign currency translation and acquisitions), adjusted operating income, earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted EBITDA,

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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. 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. Additionally, we use free cash flow in order to provide insight on our ability to generate cash for acquisitions and debt repayments, as well as for other investing and financing activities.

We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our core business, operating results, or future outlook. We believe that the inclusion of such measures helps investors gain an understanding of our underlying operating performance and future prospects, consistent with how management measures and forecasts our performance, especially when comparing such results to previous periods or forecasts and to the performance of our competitors. Such measures are also used by us in our financial and operating decision-making and for compensation purposes. 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 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 from net income attributable to Kadant is as follows:

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

(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.

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

(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.

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Liquidity and Capital Resources

Consolidated working capital was $225.8 million at December 30, 2023, compared with $201.9 million at December 31, 2022. Cash and cash equivalents were $103.8 million at December 30, 2023, compared with $76.4 million at December 31, 2022, which included cash and cash equivalents held by our foreign subsidiaries of $94.6 million at December 30, 2023 and $75.8 million at December 31, 2022.

Cash Flow

Cash flow information is as follows:

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. 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. 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.

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.

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 dividends paid to stockholders were $13.2 million in 2023 and $12.0 million in 2022. In addition, taxes paid related to the vesting of equity awards were $3.9 million in 2023 compared to $4.6 million in 2022.

Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash

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

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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. 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 30, 2023, our leverage ratio was 0.27 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.

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).

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 $50.0 million authorization that expired on May 19, 2023.

We paid cash dividends of $13.2 million in 2023. On November 16, 2023, we declared a quarterly cash dividend of $0.29 per share totaling $3.4 million that was paid on February 1, 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 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.

As of December 30, 2023, we had approximately $285.0 million of total unremitted foreign earnings. It is our intent to indefinitely reinvest $253.5 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments, if any. In 2023, we recorded withholding taxes on the earnings in certain foreign subsidiaries that we plan to repatriate in the foreseeable future. The foreign withholding taxes that would be required if we were to remit the indefinitely-reinvested foreign earnings to the United States would be approximately $5.2 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.

Application of Critical Accounting Estimates

Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Our actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies and estimates are defined as those that entail significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. For a discussion on the application of these estimates and other accounting policies, see Note 1, Nature of Operations and Summary of Significant Accounting Policies, in the accompanying consolidated financial statements. We believe that our most critical accounting policies and estimates upon which our financial position depends, and which involve the most complex or subjective decisions or assessments, are those described below.

Income Taxes

We operate in numerous countries under many legal forms and, as a result, are subject to the jurisdiction of numerous domestic and non-U.S. 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

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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. 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. We estimate the degree to which our deferred tax assets on deductible temporary differences and tax loss or credit carryforwards will result in an income tax benefit based on the expected profitability by tax jurisdiction, and we provide a valuation allowance for these deferred tax assets if it is more likely than not that they will not be realized in the future. If it were to become more likely than not that these deferred tax assets would be realized, we would reverse the related valuation allowance. Should our actual future taxable income by tax jurisdiction vary from our estimates, additional valuation allowances or reversals thereof may be necessary. When assessing the need for a valuation allowance in a tax jurisdiction, we evaluate the weight of all available evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. As part of this evaluation, we consider our cumulative three-year history of earnings before income taxes, taxable income in prior carryback years, future reversals of existing taxable temporary differences, prudent and feasible tax planning strategies, and expected future results of operations. At year-end 2023, we maintained a valuation allowance against a portion of our state operating loss carryforwards in the United States and a valuation allowance in certain foreign jurisdictions due to the uncertainty of future profitability in the state and those foreign jurisdictions. Our tax valuation allowance was $7.8 million at year-end 2023.

In the ordinary course of business there are inherent uncertainties and judgements required in quantifying our income tax positions. It is our policy to provide for uncertain tax positions and the related interest and penalties based upon our assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. On a quarterly basis, we evaluate our uncertain tax positions against various factors, including changes in facts or circumstances, tax laws, or the status of audits by tax authorities. We believe that we have appropriately accounted for any liability for unrecognized tax benefits, and at year-end 2023, our liability for these unrecognized tax benefits, including an accrual for the related interest and penalties, totaled $13.2 million. To the extent we prevail in matters for which a liability for an unrecognized tax benefit is established or are required to pay amounts in excess of the liability, our effective tax rate in a given financial statement period may be affected.

We intend to repatriate the distributable reserves of select foreign subsidiaries back to the United States and, during 2023, we recorded $0.7 million of tax expense associated with these foreign earnings that we plan to repatriate in 2024. Except for these select foreign subsidiaries, we intend to reinvest indefinitely the earnings of our international subsidiaries in order to support the current and future capital needs of their operations, including the repayment of our foreign debt.

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. 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.

Revenue Recognition

Approximately 90% of our revenue is recognized at a point in time following the transfer of control of the goods or service to the customer, primarily relating to our products that require minimal customization for the customer. The remaining portion of our revenue is recognized on an over time basis using an input method that compares the costs incurred to date to the total expected costs required to satisfy the performance obligation. Most revenue recognized on an over time basis is for large capital products that are highly customized for the customer and, as a result, would include significant cost to rework in the event of cancellation. The over time basis of accounting requires significant judgment in determining applicable contract costs and the corresponding revenue to be recognized, which could be different if there were to be changes to the circumstances of the contract. When adjustments to revenue and costs are required, the adjustments are included in earnings in the period of the change. Judgment is also required for contracts involving variable consideration and multiple performance obligations.

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

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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. 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. 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. We are permitted to first assess qualitative factors to determine whether the quantitative impairment test is necessary. If the qualitative impairment analysis (Step 0) results in a determination that the fair value of a reporting unit or an indefinite lived intangible asset is more likely than not less than its carrying amount, we perform a quantitative impairment analysis (Step 1). We may bypass the qualitative assessment and proceed directly to the quantitative assessment. Estimates of discounted future cash flows arising from intangible assets acquired require assumptions related to revenue and operating income growth rates, discount rates, and other factors. 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. 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 $392.1 million and indefinite-lived intangible assets totaled $28.6 million at year-end 2023.

Definite-lived intangible assets are evaluated for impairment if events or changes in circumstances indicate that the carrying value of an asset might be impaired, such as a significant reduction in cash flows associated with the assets. Actual cash flows arising from a particular intangible asset could vary from projected cash flows which could imply different carrying values from those established at the dates of acquisition and which could result in impairment of such asset. No indicators of impairment were identified in 2023 and 2022. Definite-lived intangible assets were $130.7 million at year-end 2023.

A material adverse change in the business climate including a prolonged economic downturn and weakness in demand for our products could negatively affect the revenue and profitability assumptions used in our assessment of goodwill and intangible assets, which may result in impairment charges. Any future impairment charges could have a material adverse effect on our results of operations in the period in which an impairment is determined to exist.

Inventories

We value our inventory at the lower of the actual cost (on a first-in, first-out; or weighted average basis) or net realizable value and include materials, labor, and manufacturing overhead. The valuation of inventory requires us to make judgments, based on currently available information, about the forecasted usage of and demand for each particular product or product line. Assumptions about future dispositions of inventory are inherently uncertain and, although we make every effort to ensure the accuracy of our forecasts of future product usage and demand, any changes in those assumptions may result in a write-down of inventory in the period in which inventory is deemed excessive or obsolete, which could adversely affect our results of operations.

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.

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with the consolidated financial statements and related notes set forth in Item 8, "Financial Statements and Supplementary Data." The following discussion also contains forward-looking statements, including the outlook for our business, that involve a number of risks and uncertainties. See Part I, "Forward-Looking Statements," for a discussion of the forward-looking statements contained below and Part I, Item 1A, "Risk Factors," for a discussion of certain risks that could cause our actual results to differ materially from the results anticipated in such forward-looking statements.

Overview

Company Background

We are a global supplier of technologies and engineered systems that drive Sustainable Industrial Processing. Our products and services play an integral role in enhancing efficiency, optimizing energy utilization, and maximizing productivity in process industries while helping our customers advance their sustainability initiatives with products that reduce waste or generate more yield with fewer inputs, particularly fiber, energy, and water. Producing more while consuming less is a core aspect of Sustainable Industrial Processing and a major element of the strategic focus of our 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.

Industry and Business Overview

Our bookings increased 7% to a record $958.2 million in 2022 led by strong parts and consumables bookings, especially within our Flow Control segment. Our 2022 bookings included $50.2 million attributable to acquisitions and a $39.8 million unfavorable effect from foreign currency translation. See Acquisitions below for further details. We ended the year with consolidated backlog of $345.3 million, increasing 11% from the end of 2021. An overview of our business by segment is as follows:

•Flow Control – Our Flow Control segment ended a strong year with record bookings for both parts and consumables products and capital equipment. Bookings increased 17% and organic bookings, which excludes an acquisition and an unfavorable foreign currency translation effect, increased 14% compared to 2021. Orders for both parts and consumables products and capital equipment continue to be strong due to the strength in the end markets we serve and as customers seek to optimize energy utilization. We expect to continue to see steady demand in 2023, but comparatively lower than 2022 due to the nearly $200 million of record orders we received in the first half of the year.

•Industrial Processing – Our Industrial Processing segment bookings decreased 6% and organic bookings, which excludes an acquisition and an unfavorable foreign currency translation effect, decreased 3% compared to 2021. While our parts and consumables bookings experienced a record year, our capital bookings decreased 18% compared to a record 2021 as demand for capital equipment at our wood processing business returned to a more typical level in 2022. Record orders for our wood processing business products in 2021 were fueled by a robust U.S. housing market and high demand for lumber, OSB and plywood, which drove new capital equipment investment. As we look forward, there is uncertainty as to how governmental efforts to control inflation may impact this segment's end markets. Therefore, we expect comparatively lower bookings in 2023 given the high level of bookings we experienced in the first half of 2022.

•Material Handling – Our Material Handling segment had record bookings in 2022 for both parts and consumables and capital equipment. Bookings increased 20% and organic bookings, which excludes an acquisition and an unfavorable foreign currency translation effect, increased 13% compared to 2021. We expect this steady demand to continue into 2023 given the anticipated growth trends in recycling and infrastructure investments.

Our global operations have been and continue to be impacted by increasingly complex market conditions fueled by inflationary pressures, including the strengthening of the U.S. dollar, geopolitical tensions, labor availability, and lingering global supply chain constraints. Supply chain constraints have resulted in inflationary pressure on material costs, longer lead times, and increased freight costs. Our businesses are alleviating supply chain constraints through various measures, including advance purchases of raw materials to prevent potential manufacturing disruptions and mitigating increased material and freight costs through price adjustments, when possible.

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We expect our operating environment to continue to be challenging as central banks work to address inflationary pressures, which creates more uncertainty for the latter half of 2023. We believe that the fundamentals of our business remain strong, particularly given our high backlog levels, solid global operations team, and ongoing strength in the markets we serve.

International Sales

More than half 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. dollar and foreign currencies. To mitigate the impact of foreign currency fluctuations, we generally seek to charge our customers in the same currency in which our operating costs are incurred. Additionally, we may enter into forward currency exchange contracts to hedge certain firm purchase and sale commitments denominated in currencies other than our subsidiaries' functional currencies. We currently do not use derivative instruments to hedge our exposure to exchange rate fluctuations created by the translation into the U.S. dollar of our foreign subsidiaries' results that are in functional currencies other than the U.S. dollar.

Global Trade

The United States imposes tariffs on certain imports from China, which has and will continue to increase the cost of some of the equipment that we import. Although we 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. For more information on risks associated with our global operations, including tariffs, please see Part I, Item 1A, "Risk Factors."

Acquisitions

We expect that one significant driver of our growth over the next several years will be the acquisition of businesses and technologies that complement or augment our existing products and services or may involve entry into a new process industry. In recent years, we have acquired several businesses and continue to pursue acquisition opportunities.

On November 14, 2022, we acquired a business in Canada, which is included in our Material Handling segment, for approximately $3.6 million, net of cash acquired.

In the third quarter of 2021, we acquired The Clouth Group of Companies (Clouth) for $92.9 million, net of cash acquired plus debt assumed. Clouth, which is included in our Flow Control segment, is a leading manufacturer of doctor blades and related equipment used in the production of paper, packaging, and tissue. We expect several synergies in connection with this acquisition, including deepening our presence in the growing ceramic blade market and expansion of product sales at our existing businesses by leveraging Clouth's complementary global geographic footprint. Clouth has three manufacturing facilities in Germany and one in Poland.

On August 23, 2021, we acquired East Chicago Machine Tool Corporation (Balemaster) for $53.5 million, net of cash acquired. Balemaster, which is included in our Material Handling segment, is a leading U.S. manufacturer of horizontal balers and related equipment used primarily for recycling packaging waste at corrugated box plants and large retail and distribution centers. We expect several synergies in connection with this acquisition, including expanding our presence in the secondary material processing sector and creating new opportunities for leveraging our high-performance balers produced in Europe.

In the fourth quarter of 2021, we acquired a business in India, which is included in our Industrial Processing segment, for approximately $2.9 million.

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

Results of Operations

2022 Compared to 2021

Revenue

The following table presents changes in revenue by segment between 2022 and 2021, 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. 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. This non-GAAP measure should not be considered superior to or a substitute for the corresponding GAAP measure.

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Revenue by segment in 2022 and 2021 is as follows:

Consolidated revenue in 2022 increased 15%, including a 5% increase from acquisitions and a 5% decrease from the unfavorable effect of foreign currency translation. The 15% increase in organic revenue was broad-based with each of our operating segments increasing over 10% compared to 2021.

Revenue at our Flow Control segment increased 21% in 2022, while organic revenue increased 18% with relatively equal contributions from our fluid-handling and doctoring, cleaning, & filtration product lines. Increased revenue for both our parts and consumables products and capital equipment was driven by strength in the underlying packaging industry, especially in the U.S., and increased demand in Europe resulting in part from high energy prices as customers sought to optimize energy utilization.

Revenue at our Industrial Processing segment increased 8% in 2022, while organic revenue increased 12%. Nearly 70% of the organic revenue increase was related to our wood processing business where the robust U.S. housing market and high demand for lumber, OSB and plywood, especially in the first half of the year, drove demand for our products. Maintenance requirements at many of our wood processing customers and high mill operating rates augmented demand for our parts and consumables products. The remaining organic revenue increase related to our stock-preparation business where we had steady demand for our products throughout the year. Compared to 2021, we experienced increased demand for stock-preparation capital equipment primarily at our European operations, as customers sought to reduce their input costs with our fiber processing solutions.

Revenue at our Material Handling segment increased 19% in 2022, while organic revenue increased 15%, due to higher demand for both capital equipment and parts and consumables products at our vibratory and conveying business in North America resulting from strong demand across all industries. Also contributing to the organic revenue increase was higher demand for capital equipment at our baling operations due to greater market and government-backed policy demand for recycling.

Gross Profit Margin

Gross profit margin by segment in 2022 and 2021 is as follows:

Consolidated gross profit margin increased to 43.1% in 2022 compared with 42.9% in 2021. The consolidated gross profit margin in 2021 included $4.3 million of amortization of acquired profit in inventory, which lowered gross profit margin by 0.5 percentage points and benefits received from government employee retention assistance programs of $0.9 million, which increased gross profit margin by 0.1 percentage points.

Within our operating segments, gross profit margin:

•Increased to 52.0% at our Flow Control segment from 51.0% in 2021 due to the inclusion of $3.1 million of amortization of acquired profit in inventory, which lowered gross profit margin in 2021 by 1.1 percentage points.

•Decreased to 39.2% from 40.1% at our Industrial Processing segment due to the impact of lower-margin capital equipment revenue at our wood processing businesses and the inclusion of $0.7 million of benefits received from government employee retention assistance programs, which increased gross profit margin in the 2021 period by 0.2 percentage points.

•Remained flat at 34.4% at our Material Handling segment. The impact of the higher gross profit margin generated from our Balemaster business acquired in the third quarter of 2021 was offset by the inclusion of $1.2 million of amortization of acquired profit in inventory, which lowered gross profit margin by 0.7 percentage points in 2021.

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Selling, General, and Administrative Expenses

Selling, general, and administrative (SG&A) expenses by segment in 2022 and 2021 is as follows:

Consolidated SG&A expenses as a percentage of revenue decreased to 25% in 2022 from 27% in 2021 principally due to the increase in revenue. Consolidated SG&A expenses increased $15.6 million primarily due to higher compensation expense associated with existing and new personnel and increased travel costs, which are gradually returning to pre-pandemic levels. Consolidated SG&A expense also included increases from an incremental $11.3 million of SG&A expenses from acquisitions, the inclusion of $1.4 million of benefits received from government employee retention assistance programs in 2021, and $1.3 million from indemnification asset reversals related to the release of tax reserves. These increases were offset by a $9.8 million favorable effect of foreign currency translation and a decrease of $3.6 million in acquisition-related costs.

Within our operating segments, SG&A expenses:

•Increased $9.7 million at our Flow Control segment principally due to the inclusion of an incremental $7.8 million of SG&A expenses from Clouth, increased compensation expense and travel costs, indemnification asset reversals of $0.7 million related to the release of tax reserves, and the inclusion of benefits received from government employee retention assistance programs of $0.8 million in 2021. These increases were partially offset by a $4.8 million favorable effect of foreign currency translation and a decrease of $2.6 million in incremental acquisition-related costs.

•Increased $1.1 million at our Industrial Processing segment due to increased compensation and selling-related costs, an indemnification asset reversal related to the release of tax reserves of $0.6 million, and the inclusion of benefits received from government employee retention assistance programs of $0.5 million in 2021. These increases were partially offset by a $3.4 million favorable effect of foreign currency translation.

•Increased $1.5 million at our Material Handling segment principally due to the inclusion of an incremental $3.1 million of SG&A expenses from Balemaster, offset in part by a $1.6 million favorable effect of foreign currency translation.

•Increased $3.3 million at Corporate primarily due to increased compensation expense and travel costs.

Gain on Sale and Other Costs, Net

A summary of the items included in gain on sale and other costs, net is as follows:

Gain on Sale of Assets

We entered into several agreements with the local government in China to sell the existing manufacturing building and land use rights at one of our subsidiaries in China for $25.2 million 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 $5.1 million, in the first quarter of 2022. A receivable of $16.1 million was recognized for the present value of the remaining amount of the sale proceeds, which is due on the earlier of when the government sells the property or within two years from the effective date of the agreements. The receivable outstanding at December 31, 2022 was $15.2 million. Our subsidiary, which is part of our Industrial Processing segment, will continue to occupy its current facility until construction of its new facility is complete, which is expected in 2023.

In 2021, gain on sale of assets included a gain of $0.5 million on the sale of a building within our Industrial Processing segment.

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Impairment and Restructuring Costs

During 2022, we recorded impairment costs of $0.7 million within our Industrial Processing segment. The impairment costs included $0.5 million primarily related to the write-down of inventory at our business in Russia and $0.2 million related to the write-down of certain fixed assets that will not be moved to the new manufacturing facility in China.

During the fourth quarter of 2021, we initiated a restructuring plan within our Flow Control segment to eliminate a redundant ceramic blade manufacturing operation that resulted from our acquisition of Clouth. The plan consisted of severance costs related to the termination of five employees, and facility and other closure costs. Severance costs totaled $0.4 million, of which $0.2 million were recorded in 2022 and $0.2 million in 2021, and facility and other closure costs totaled $0.4 million, all of which were recorded in 2022. During 2021, we also recorded asset impairment charges related to this restructuring plan of $0.5 million for the write-down of an intangible asset, $0.2 million for the write-down of certain machinery and equipment, and $0.1 million for the write-down of a right-of-use asset. We do not expect to incur additional restructuring charges related to this restructuring plan.

See Note 8, Gain on Sale and Other Costs, Net in the accompanying consolidated financial statements for further details.

Interest Expense

Interest expense increased to $6.5 million in 2022 from $4.8 million in 2021 primarily due to a higher weighted-average interest rate, offset in part by lower average debt outstanding in 2022 compared with 2021.

Provision for Income Taxes

Our provision for income taxes increased to $43.9 million in 2022 from $27.2 million in 2021. The effective tax rate of 27% in 2022 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, nondeductible expenses, and state taxes. These increases in tax expense were offset in part by a decrease in tax related to the reversal of tax reserves associated with uncertain tax positions. The effective tax rate of 24% in 2021 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, nondeductible expenses, and state taxes. These increases in tax expense were offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements.

Net Income

Net income increased to $121.7 million in 2022 from $84.9 million in 2021 primarily due to a $54.6 million increase in operating income, offset in part by a $16.7 million increase in provision for income taxes (see discussions above for further details).

Non-GAAP Key Performance Indicators

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 foreign currency translation and acquisitions), 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 impairment and restructuring costs, acquisition costs, amortization expense related to acquired profit in inventory and backlog, and certain gains or losses. These items are excluded as they are not indicative of our core operating results and are not comparable to other periods, which have differing levels of incremental costs, expenditures or income, or none at all. Additionally, we use free cash flow in order to provide insight on our ability to generate cash for acquisitions and debt repayments, as well as for other investing and financing activities.

We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our core business, operating results, or future outlook. We believe that the inclusion of such measures helps investors gain an understanding of our underlying operating performance and future prospects, consistent with how management measures and forecasts our performance, especially when comparing such results to previous periods or forecasts and to the performance of our competitors. Such measures are also used by us in our financial and operating decision-making and for compensation purposes. 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. In addition, our non-GAAP financial measures have limitations

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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 from net income attributable to Kadant is as follows:

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

(a) Includes a $20.2 million gain on the China Transaction in our Industrial Processing segment.

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

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

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

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

2021 Compared to 2020

A detailed discussion of the year-over-year results of operations for 2021 compared with 2020 can be found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended January 1, 2022, filed with the SEC.

Liquidity and Capital Resources

Consolidated working capital was $201.9 million at December 31, 2022, compared with $162.4 million at January 1, 2022. Cash and cash equivalents were $76.4 million at December 31, 2022, compared with $91.2 million at January 1, 2022, which included cash and cash equivalents held by our foreign subsidiaries of $75.8 million at December 31, 2022 and $83.8 million at January 1, 2022.

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Cash Flows

Cash flow information is as follows:

Operating Activities

Cash provided by operating activities decreased to $102.6 million in 2022 from $162.4 million in 2021 due to the timing of investments in working capital. Our operating cash flows are primarily generated from cash received from customers, offset by cash payments for items such as inventory, employee compensation, operating leases, income taxes and interest payments on outstanding debt obligations.

Cash provided by operating activities in 2022 was due to cash provided by net income, offset in part by investments in working capital. 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 will ship in 2023. These uses of cash were offset in part by $14.4 million of cash provided by customer deposits.

Cash provided by operating activities in 2021 was due to cash provided by net income and working capital. Cash provided by working capital in 2021 included $54.0 million from customer deposits and accounts payable, reflecting the impact of increased capital equipment order activity, and $19.5 million from other liabilities, which included a $6.2 million deposit received for the anticipated sale of a building in connection with the China Transaction, and an increase in our accrued incentive compensation, advance billings, and accrued income taxes resulting from our improved financial performance. These sources of cash were offset in part by cash used of $27.9 million for accounts receivable and inventories as a result of revenue growth and to support increased demand, and $15.0 million for other assets due in part to prepayments for raw materials and a land use right operating lease related to the relocation of our existing facility in China.

Investing Activities

Cash used in investing activities was $29.5 million in 2022 compared to $154.5 million in 2021. Cash used in investing activities in 2022 included capital expenditures of $28.2 million, which included $10.4 million for expenditures associated with the construction of a new manufacturing facility in China, and $3.5 million for acquisitions. This use of cash was partially offset by proceeds received from the sale of assets of $2.1 million in 2022. Cash used in investing activities in 2021 included $144.0 million for acquisitions and $12.8 million for capital expenditures.

Financing Activities

Cash used in financing activities was $80.6 million in 2022, compared with cash provided by financing activities of $22.8 million in 2021. In 2022, we had net debt repayments of $63.4 million, which consisted of repayments of short- and long-term obligations of $85.5 million, partially offset by short- and long-term borrowings of $22.1 million, primarily under our revolving credit facility. In 2021, we had net borrowings of $36.3 million, which consisted of borrowings under our revolving credit facility of $151.9 million, including $140.3 million used to fund acquisitions, partially offset by repayments of short- and long-term obligations of $115.6 million. In addition, we made payments of cash dividends to stockholders of $12.0 million in 2022 and $11.5 million in 2021.

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 $7.0 million reduction in cash, cash equivalents and restricted cash in 2022 was primarily attributable to the strengthening of the U.S. dollar against the Chinese renminbi, euro, and British pound sterling. The $3.2 million reduction in cash, cash equivalents and restricted cash in 2021 was primarily attributable to the strengthening of the U.S. dollar against the euro and Swedish krona, offset in part by the weakening of the U.S. dollar against the Chinese renminbi.

Borrowing Capacity and Debt Obligations

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

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amendment extended the maturity date to November 30, 2027, and increased our uncommitted, unsecured incremental borrowing facility from $150 million to $200 million.

We have a total borrowing capacity of $400 million under our Credit Agreement. At year-end 2022, we had $214.1 million of borrowing capacity available under our Credit Agreement, in addition to the $200 million uncommitted, unsecured incremental borrowing facility. Under our debt agreements, our leverage ratio must be less than 3.75 or, if we elect, for the quarter during which a material acquisition occurs and for the three fiscal quarters thereafter, must be less than 4.25. As of December 31, 2022, our leverage ratio was 0.74 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.

Additional Liquidity and Capital Resources

On May 19, 2022, our board of directors approved the repurchase of up to $50 million of our equity securities during the period from May 19, 2022 to May 19, 2023. We have not repurchased any shares of our common stock under this authorization or our previous $20 million authorization, which expired on May 20, 2022.

We paid cash dividends of $12.0 million in 2022. On November 17, 2022, we declared a quarterly cash dividend of $0.26 per share totaling $3.0 million that was paid on February 2, 2023. Future declarations of dividends are subject to our board of directors' approval and may be adjusted as business needs or market conditions change. The declaration of cash dividends is 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 $32 to $34 million during 2023 for property, plant, and equipment, including $8 to $9 million for a new manufacturing facility in China. One of our Chinese subsidiaries entered into several agreements with the Chinese government in the first quarter of 2022 to sell its existing facility but will continue to occupy it until construction of a new facility is completed, which is expected in 2023. Capital expenditures for the new facility are approximately $19 million, including $10.4 million paid in 2022 and $8.6 million to be paid in 2023. These expenditures will be offset by the proceeds received from the sale of our existing facility, the remainder of which is due the earlier of when the government sells the property or the first quarter of 2024. Capital expenditures for 2023 also include a facility expansion project of $5 million related to our wood processing product line.

As of December 31, 2022, we had approximately $248.1 million of total unremitted foreign earnings. It is our intent to indefinitely reinvest $229.0 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments, if any. In 2022, we recorded withholding taxes on the earnings in certain foreign subsidiaries that we plan to repatriate in the foreseeable future. The foreign withholding taxes that would be required if we were to remit the indefinitely-reinvested foreign earnings to the United States would be approximately $4.1 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.

Material Contractual Obligations

The following table summarizes our material contractual obligations as of December 31, 2022 and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods. Detailed information concerning these obligations can be found in Note 6 - Short- and Long-Term Obligations, Note 7 - Commitments and Contingencies, and Note 9 - Leases in the accompanying consolidated financial statements.

(a)Includes interest expense on both variable and fixed rate debt assuming no prepayments. Variable interest rates have been assumed to remain constant through the end of the term at the rates that existed as of year-end 2022.

Application of Critical Accounting Estimates

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

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statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Our actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies and estimates are defined as those that entail significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. For a discussion on the application of these estimates and other accounting policies, see Note 1, Nature of Operations and Summary of Significant Accounting Policies, in the accompanying consolidated financial statements. We believe that our most critical accounting policies and estimates upon which our financial position depends, and which involve the most complex or subjective decisions or assessments, are those described below.

Income Taxes

We operate in numerous countries under many legal forms and, as a result, are subject to the jurisdiction of numerous domestic and non-U.S. 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. 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. We estimate the degree to which our deferred tax assets on deductible temporary differences and tax loss or credit carryforwards will result in an income tax benefit based on the expected profitability by tax jurisdiction, and we provide a valuation allowance for these deferred tax assets if it is more likely than not that they will not be realized in the future. If it were to become more likely than not that these deferred tax assets would be realized, we would reverse the related valuation allowance. Should our actual future taxable income by tax jurisdiction vary from our estimates, additional valuation allowances or reversals thereof may be necessary. When assessing the need for a valuation allowance in a tax jurisdiction, we evaluate the weight of all available evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. As part of this evaluation, we consider our cumulative three-year history of earnings before income taxes, taxable income in prior carryback years, future reversals of existing taxable temporary differences, prudent and feasible tax planning strategies, and expected future results of operations. At year-end 2022, we continued to maintain a valuation allowance in the United States against certain of our state operating loss carryforwards due to the uncertainty of future profitability in these state jurisdictions in the United States, and we maintained valuation allowances in certain foreign jurisdictions because of the uncertainty of future profitability. Our tax valuation allowance was $9.0 million at year-end 2022.

In the ordinary course of business there are inherent uncertainties and judgements required in quantifying our income tax positions. It is our policy to provide for uncertain tax positions and the related interest and penalties based upon our assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. On a quarterly basis, we evaluate our uncertain tax positions against various factors, including changes in facts or circumstances, tax laws, or the status of audits by tax authorities. We believe that we have appropriately accounted for any liability for unrecognized tax benefits, and at year-end 2022, our liability for these unrecognized tax benefits, including an accrual for the related interest and penalties, totaled $12.2 million. To the extent we prevail in matters for which a liability for an unrecognized tax benefit is established or are required to pay amounts in excess of the liability, our effective tax rate in a given financial statement period may be affected.

We intend to repatriate the distributable reserves of select foreign subsidiaries back to the United States and, during 2022, we recorded $0.8 million of net tax expense associated with these foreign earnings that we plan to repatriate in 2023. Except for these select foreign subsidiaries, we intend to reinvest indefinitely the earnings of our international subsidiaries in order to support the current and future capital needs of their operations, including the repayment of our foreign debt.

Revenue Recognition

Approximately 90% of our revenue is recognized at a point in time following the transfer of control of the goods or service to the customer, primarily relating to our products that require minimal customization for the customer. The remaining portion of our revenue is recognized on an over time basis using an input method that compares the costs incurred to date to the total expected costs required to satisfy the performance obligation. Most revenue recognized on an over time basis is for large capital products that are highly customized for the customer and, as a result, would include significant cost to rework in the

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event of cancellation. The over time basis of accounting requires significant judgment in determining applicable contract costs and the corresponding revenue to be recognized, which could be different if there were to be changes to the circumstances of the contract. When adjustments to revenue and costs are required, the adjustments are included in earnings in the period of the change. Judgment is also required for contracts involving variable consideration and multiple performance obligations.

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. 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.

We evaluate the recoverability of goodwill and indefinite-lived intangible assets 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. Estimates of discounted future cash flows arising from intangible assets acquired require assumptions related to revenue and operating income growth rates, discount rates, and other factors. 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 year-end 2022 and 2021, we performed a qualitative impairment analysis (Step 0) for our reporting units. Based on these analyses, we determined goodwill and indefinite-lived intangible assets were not impaired. Goodwill totaled $385.5 million and indefinite-lived intangible assets totaled $28.3 million at year-end 2022.

Definite-lived intangible assets are evaluated for impairment if events or changes in circumstances indicate that the carrying value of an asset might be impaired, such as a significant reduction in cash flows associated with the assets. Actual cash flows arising from a particular intangible asset could vary from projected cash flows which could imply different carrying values from those established at the dates of acquisition and which could result in impairment of such asset. No indicators of impairment were identified in 2022 and 2021, except for impairment charges of $0.5 million in 2021 related to the closure of a business in our Flow Control Segment. Definite-lived intangible assets were $147.4 million at year-end 2022.

A material adverse change in the business climate including a prolonged economic downturn and weakness in demand for our products could negatively affect the revenue and profitability assumptions used in our assessment of goodwill and intangible assets, which may result in impairment charges. Any future impairment charges could have a material adverse effect on our results of operations in the period in which an impairment is determined to exist.

See Note 1, Nature of Operations and Summary of Significant Accounting Policies, under the heading Impairment of Long-Lived Assets, in the accompanying consolidated financial statements for further details regarding impairment costs recorded.

Inventories

We value our inventory at the lower of the actual cost (on a first-in, first-out; or weighted average basis) or net realizable value and include materials, labor, and manufacturing overhead. The valuation of inventory requires us to make judgments, based on currently available information, about the forecasted usage of and demand for each particular product or product line. Assumptions about future dispositions of inventory are inherently uncertain and, although we make every effort to ensure the accuracy of our forecasts of future product usage and demand, any changes in those assumptions may result in a write-down of inventory in the period in which inventory is deemed excessive or obsolete, which could adversely affect our results of operations.

Recent Accounting Pronouncements

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

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with the consolidated financial statements and related notes set forth in Item 8, "Financial Statements and Supplementary Data." The following discussion also contains forward-looking statements, including the outlook for our business, that involve a number of risks and uncertainties. See Part I, "Forward-Looking Statements," for a discussion of the forward-looking statements contained below and Part I, Item 1A, "Risk Factors," for a discussion of certain risks that could cause our actual results to differ materially from the results anticipated in such forward-looking statements.

Overview

Company Background

We are a global supplier of technologies and engineered systems that drive Sustainable Industrial Processing. Our products and services play an integral role in enhancing efficiency, optimizing energy utilization, and maximizing productivity in process industries while helping our customers advance their sustainability initiatives with products that reduce waste or generate more yield with fewer inputs, particularly fiber, energy, and water. Producing more while consuming less is a core aspect of Sustainable Industrial Processing and a major element of the strategic focus of our 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.

Industry and Business Overview

We had record consolidated bookings of $893.2 million for 2021 as our businesses rebounded from the impact of the COVID-19 pandemic, which adversely affected our bookings and revenue for a substantial part of 2020. Our consolidated 2021 bookings included $36.9 million attributable to acquisitions and $27.0 million from a favorable foreign currency effect, and consisted of record orders for both parts and consumables products and capital equipment. See Acquisitions below for further details. We ended the year with record consolidated backlog of $309.9 million, increasing 61% from the end of 2020. An overview of our business by segment is as follows:

•Flow Control – Our Flow Control segment ended a strong year with record bookings for both parts and consumables products and capital equipment. In 2021, we acquired The Clouth Group of Companies (Clouth), which contributed $23.2 million of bookings. Orders for both parts and consumables products and capital equipment at our existing Flow Control businesses have been bolstered by growth in the industries we serve, particularly the packaging and tissue markets. Our bookings in the earlier part of 2021 were also boosted by pent-up demand from depressed levels encountered during most of 2020.

•Industrial Processing – Strong quarterly bookings, particularly in the latter half of 2021, contributed to record orders in 2021 for our Industrial Processing segment. Orders for our wood processing business products continue to be fueled by a robust U.S. housing market and high demand for lumber, oriented strand board and plywood, which has driven new capital equipment investment and high parts consumption by our customers. During the second half of 2021, maintenance requirements at many of our customers have augmented demand for our parts products, which we expect to continue into the first half of 2022. In the fourth quarter of 2021, wood processing capital equipment bookings were exceptionally strong, resulting in a backlog that will be fulfilled primarily through mid-2023. Bookings at our stock-preparation business increased 28% in 2021 largely due to a rebound in capital equipment orders compared with the depressed capital spending environment for most of 2020 and due to steady demand for our parts and consumables products. We expect the demand for our Industrial Processing segment products to moderate somewhat in 2022 compared to the record level in 2021.

•Material Handling – Our Material Handling segment also ended the year with record bookings. In August 2021, we acquired East Chicago Machine Tool Corporation (Balemaster) and certain assets of affiliated companies, which contributed $13.2 million of orders. Bookings for baling products at our European operations continue to be bolstered by improved business conditions, including the recovery of recycled commodity prices. Bookings for parts and consumables at our conveying and vibratory equipment business have rebounded from depressed 2020 levels due to the relaxation of pandemic-related restrictions and an increased demand from our mining customers, while bookings for capital equipment have moderated.

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In 2021, many of our operations were impacted by labor availability and supply chain constraints, the latter of which resulted in inflationary pressure on material costs, longer lead times, and increased freight costs, as well as customer-requested delays in shipments. We believe these challenges will generally persist into 2022. Our businesses are alleviating supply chain constraints through various measures, including advance purchases of raw materials to prevent potential manufacturing disruptions and mitigating increased material and freight costs through price adjustments, when possible.

We believe that the fundamentals of our business will remain positive, particularly given our high backlog levels, continued strong bookings, and ongoing strength in the markets we serve as we enter 2022. Despite this optimism, we expect our operating environment to continue to be challenging as a result of the factors impacting our business discussed above and the uncertainties and risks surrounding the COVID-19 pandemic. For more information on risks related to health epidemics to our business, including COVID-19, and other factors impacting our business discussed above, please see Part I, Item 1A, “Risk Factors.”

International Sales

More than half 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. dollar and foreign currencies. To mitigate the impact of foreign currency fluctuations, we generally seek to charge our customers in the same currency in which our operating costs are incurred. Additionally, we may enter into forward currency exchange contracts to hedge certain firm purchase and sale commitments denominated in currencies other than our subsidiaries' functional currencies. We currently do not use derivative instruments to hedge our exposure to exchange rate fluctuations created by the translation into the U.S. dollar of our foreign subsidiaries' results that are in functional currencies other than the U.S. dollar.

Global Trade

The United States imposes tariffs on certain imports from China, which has and will continue to increase the cost of some of the equipment that we import. Although we 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. For more information on risks associated with our global operations, including tariffs, please see Part I, Item 1A, "Risk Factors."

Acquisitions

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

In the third quarter of 2021, we acquired Clouth for $92.9 million, net of cash acquired plus debt assumed. Clouth, which is included in our Flow Control segment, is a leading manufacturer of doctor blades and related equipment used in the production of paper, packaging, and tissue. We expect several synergies in connection with this acquisition, including deepening our presence in the growing ceramic blade market and expansion of product sales at our existing businesses by leveraging Clouth's complementary global geographic footprint. Clouth has three manufacturing facilities in Germany and one in Poland and generated revenue of approximately 40.5 million euros for the trailing twelve months ended June 30, 2021 prior to its acquisition by us.

In the third quarter of 2021, we also acquired Balemaster for $53.7 million, net of cash acquired. Balemaster, which is included in our Material Handling segment, is a leading U.S. manufacturer of horizontal balers and related equipment used primarily for recycling packaging waste at corrugated box plants and large retail and distribution centers. We expect several synergies in connection with this acquisition, including expanding our presence in the secondary material processing sector and creating new opportunities for leveraging our high-performance balers produced in Europe. Balemaster generated revenue of approximately $22.2 million for the trailing twelve months ended June 30, 2021 prior to its acquisition by us.

In the fourth quarter of 2021, we acquired a business in India, which is included in our Industrial Processing segment, for approximately $2.9 million.

In 2020, we acquired a business in Canada, which is included in our Industrial Processing segment, for approximately $6.9 million, net of cash acquired.

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

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Results of Operations

2021 Compared to 2020

Revenue

The following table presents changes in revenue by segment between 2021 and 2020, and those changes excluding the effect of foreign currency translation and acquisitions which we refer to as change in organic revenue. 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. This non-GAAP measure should not be considered superior to or a substitute for the corresponding GAAP measure.

Revenue by segment in 2021 and 2020 was as follows:

Consolidated revenue in 2021 increased 24%, while consolidated organic revenue increased 15%, driven by higher demand for both parts and consumables products and capital equipment principally at our Industrial Processing and Flow Control segments as described below.

Revenue at our Flow Control segment increased 28% in 2021, while organic revenue increased 15% due to higher demand for parts and consumables products and, to a lesser extent, capital equipment at substantially all locations. Increased demand for parts and consumables products in 2021 was due in part to customer maintenance requirements, pent-up demand, and orders in the latter part of the year to mitigate potential supply chain disruptions. Conversely, revenue during most of 2020 was depressed as a result of customer downtimes, shutdowns, and visitation restrictions related to the COVID-19 pandemic. Higher capital equipment revenue in 2021 resulted from improved market conditions and pent-up demand, while revenue in 2020 was adversely impacted by customer reductions in capital spending and deferrals of equipment installations as a result of the pandemic.

Revenue at our Industrial Processing segment increased 26% in 2021, while organic revenue increased 20% due to higher demand for both capital equipment and parts and consumables products. Our wood processing business continues to experience high demand for its products, driven by near capacity mill rates resulting in increased capital investment and parts consumption. Additionally, demand for parts was augmented by maintenance requirements in the latter part of 2021 at many of our wood processing customers. Increased revenue at our stock-preparation business was led by increased demand for parts and consumables at our North American stock-preparation operation due to improved market conditions and pent-up demand coupled with a depressed 2020 period. Capital equipment revenue also increased as a result of large orders at our Chinese operation, offset in part by lower shipments at our North American and European operations due to the timing of orders and curtailed spending by our customers in 2020, which impacted revenue in the first half of 2021.

Revenue at our Material Handling segment increased 14% in 2021, while organic revenue increased 6%. Demand for our European baling products was bolstered by improved business conditions in Europe, including the recovery of recycled commodity prices. This improvement was partially offset by lower capital equipment revenue at our conveying and vibratory equipment business in 2021.

Gross Profit Margin

Gross profit margin by segment in 2021 and 2020 was as follows:

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Consolidated gross profit margin declined to 42.9% in 2021 compared with 43.7% in 2020. The 2021 period included $4.3 million of amortization of acquired profit in inventory, which lowered consolidated gross profit margin by 0.5 percentage points, and lower benefits received from government employee retention assistance programs. Benefits received from these programs were $0.9 million, or 0.1 percentage points of consolidated gross profit margin, in 2021 and $3.7 million, or 0.6 percentage points of consolidated gross profit margin, in 2020.

Gross profit margin at our Flow Control segment decreased to 51.0% in 2021 compared with 52.9% in 2020 due to the inclusion of $3.1 million of amortization of acquired profit in inventory, which lowered gross profit margin in 2021 by 1.1 percentage points, and a lower gross profit margin profile for Clouth. We expect the lower gross profit margin profile for Clouth to continue to have a negative impact on our Flow Control gross profit margin in 2022.

Gross profit margin at our Industrial Processing segment decreased to 40.1% in 2021 compared with 41.3% in 2020 due principally to lower benefits received from government employee retention assistance programs. Cost of revenue included benefits received of $0.7 million in 2021 compared with $2.9 million in 2020 related to these programs. The gross profit margin was also impacted by lower-margin capital equipment revenue at our Chinese stock-preparation business offset in part by a higher margin at our wood processing business.

Gross profit margin at our Material Handling segment increased to 34.4% in 2021 compared with 33.7% in 2020 due to a higher gross profit margin profile for Balemaster and an improvement in gross profit margin for capital equipment at our existing baler business. This was offset in part by $1.2 million of amortization of acquired profit in inventory, which lowered gross profit margin by 0.7 percentage points in 2021.

Selling, General, and Administrative Expenses

Selling, general, and administrative (SG&A) expenses by segment in 2021 and 2020 were as follows:

Consolidated SG&A expenses as a percentage of revenue decreased to 27% in 2021 compared with 29% in 2020 principally due to higher revenue. Consolidated SG&A expenses increased $26.9 million as a result of the inclusion of $9.7 million of SG&A expenses from acquisitions, higher incentive compensation resulting from our improved financial performance, $5.1 million from the unfavorable effect of currency translation, and an incremental $4.0 million of acquisition-related costs. SG&A expenses included benefits received from government employee retention assistance programs of $1.4 million in 2021 and $2.2 million in 2020.

SG&A expenses at our Flow Control segment increased $13.3 million principally due to the inclusion of $7.0 million of SG&A expenses from Clouth, $3.1 million of acquisition-related costs, and $1.7 million from the unfavorable effect of foreign currency translation. The remaining increase is principally attributable to higher incentive compensation in 2021.

SG&A expenses at our Industrial Processing segment increased $3.1 million principally due to $2.7 million from the unfavorable effect of foreign currency translation.

SG&A expenses at our Material Handling segment increased $5.0 million principally due the inclusion of $2.4 million of SG&A expenses from Balemaster and an incremental $1.3 million of acquisition-related costs.

SG&A expenses at Corporate increased $5.4 million primarily due to higher incentive compensation and, to a lesser extent, increased professional service fees.

Impairments and Other Costs, Net

Impairments and other costs, net in 2021 included an impairment charge of $0.5 million related to the write down of an intangible asset and restructuring costs totaling $0.5 million for severance costs and the write down of certain assets associated with the closure of a redundant business in our Flow Control segment. Impairments and other costs, net in 2021 also included a gain on the sale of a building of $0.5 million within our Industrial Processing segment.

Impairments and other costs, net in 2020 included impairment charges of $1.9 million related to the write down of intangible assets associated with our timber-harvesting products, which are included in our Industrial Processing segment, as a result of a continued decline in revenue and operating results for this business. Impairments and other costs, net in 2020 also included restructuring costs of $1.1 million, which consisted of severance costs of $0.7 million at our Flow Control segment, $0.2 million at our Industrial Processing segment, and $0.2 million at our Material Handling segment. These restructuring costs

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represent severance associated with a restructuring plan implemented in response to the slowdown in the global economy that was largely driven by the impact of the COVID-19 pandemic.

See Note 1, Nature of Operations and Summary of Significant Accounting Policies, under the heading Impairment of Long-Lived Assets, and Note 8, Other Costs, Net in the accompanying consolidated financial statements for further details relating to the items discussed above.

Interest Expense

Interest expense decreased to $4.8 million in 2021 from $7.4 million in 2020 due to a lower weighted average interest rate and lower outstanding debt in 2021.

Provision for Income Taxes

Our provision for income taxes increased to $27.2 million in 2021 from $17.9 million in 2020 and represented 24% of pre-tax income in both periods. The effective tax rate in 2021 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, nondeductible expenses, and state taxes. These increases in tax expense were offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements. The effective tax rate in 2020 was higher than our statutory rate of 21% primarily due to nondeductible expenses, the distribution of our worldwide earnings, and state taxes. These increases in tax expense were offset in part by a decrease in tax related to the net reversal of tax reserves associated with uncertain tax positions, the net excess income tax benefits from stock-based compensation arrangements, and a tax benefit for the partial release of a valuation allowance.

Net Income

Net income increased $29.1 million in 2021 from $55.7 million in 2020 primarily due to a $35.6 million increase in operating income and a $2.6 million decrease in interest expense, offset in part by a $9.2 million increase in provision for income taxes (see discussions above for further details).

Non-GAAP Key Performance Indicators

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 foreign currency translation and acquisitions), 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 cash flow provided by operations 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 impairment and restructuring costs, acquisition costs, amortization expense related to acquired profit in inventory and backlog, and certain gains or losses. These items are excluded as they are not indicative of our core operating results and are not comparable to other periods, which have differing levels of incremental costs, expenditures or income, or none at all. Additionally, we use free cash flow in order to provide insight on our ability to generate cash for acquisitions and debt repayments, as well as for other investing and financing activities.

We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our core business, operating results, or future outlook. We believe that the inclusion of such measures helps investors gain an understanding of our underlying operating performance and future prospects, consistent with how management measures and forecasts our performance, especially when comparing such results to previous periods or forecasts and to the performance of our competitors. Such measures are also used by us in our financial and operating decision-making and for compensation purposes. 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. 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.

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A reconciliation of adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin from net income attributable to Kadant is as follows:

As a percentage of revenue, adjusted EBITDA margin increased 200 basis points in 2021 and 30 basis points in 2020. The 2021 increase was primarily due to organic revenue growth without a proportionate increase in operating expenses. The 2020 increase was primarily due to cost reduction efforts, including the impact of benefits received from government employee retention assistance programs, to mitigate lower revenue and an increased proportion of higher margin parts and consumables revenue.

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

Free cash flow increased to $149.6 million in 2021 from $85.3 million in 2020 primarily due to improvements in operating assets and liabilities and net income. See below for further discussion of cash provided by operating activities. Free cash flow decreased to $85.3 million in 2020 from $87.5 million in 2019 primarily due to a use of cash for working capital purposes, driven by a reduction in accounts payable as a result of reduced spending levels in 2020 for capital equipment orders.

2020 Compared to 2019

A detailed discussion of the year-over-year results of operations for 2020 compared with 2019 can be found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended January 2, 2021, filed with the SEC.

Liquidity and Capital Resources

Consolidated working capital was $162.4 million at January 1, 2022, compared with $155.1 million at January 2, 2021. Cash and cash equivalents were $91.2 million at January 1, 2022, compared with $65.7 million at January 2, 2021, which included cash and cash equivalents held by our foreign subsidiaries of $83.8 million at January 1, 2022 and $63.6 million at January 2, 2021.

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Cash Flows

Cash flow information is as follows:

Operating Activities

Cash provided by operating activities increased to $162.4 million in 2021 from $92.9 million in 2020. Our operating cash flows primarily consist of 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. The increase in cash provided by operating activities in 2021 was principally driven by improvements in operating assets and liabilities and net income.

Cash provided by operating assets and liabilities was $29.3 million in 2021, including sources of cash of $27.7 million from customer deposits and $26.3 million from accounts payable, reflecting the impact of increased capital equipment order activity. Other liabilities provided cash of $19.5 million, which includes a $6.2 million deposit received for the anticipated sale of a building in China and an increase in our accrued incentive compensation, advance billings, and accrued income taxes resulting from our improved financial performance. These sources of cash were offset in part by cash used of $16.7 million for accounts receivable mostly due to revenue growth and timing of shipments, $15.0 million for other assets due in part to prepayments for raw materials and a land use right operating lease related to the relocation of our existing facility in China, and $11.2 million for a buildup of inventories for capital equipment orders and to mitigate potential supply chain issues.

Cash used for operating assets and liabilities of $8.0 million in 2020 included cash used of $15.6 million for accounts payable primarily due to reduced spending levels for capital equipment projects and $8.6 million for other liabilities due in part to a decrease in advance billings resulting from lower contract activity and a payment of $2.4 related to the settlement of a post-retirement benefit plan. These uses of cash were offset by cash provided of $13.2 million due to a reduction in unbilled revenue and accounts receivable primarily as a result of lower capital equipment revenue during 2020.

Investing Activities

Cash used in investing activities was $154.5 million in 2021 compared to $14.5 million in 2020. Cash used in investing activities included consideration paid for acquisitions, net of cash acquired, of $144.0 million in 2021 and $7.1 million in 2020. Additionally, cash used in investing activities included purchases of property, plant, and equipment of $12.8 million in 2021 and $7.6 million in 2020, reflecting depressed capital expenditures in 2020 due to the impact of the COVID-19 pandemic.

Financing Activities

Cash provided by financing activities was $22.8 million in 2021 compared with cash used in financing activities of $84.6 million in 2020. Borrowings under our revolving credit facility were $151.9 million in 2021, including $140.3 million to fund acquisitions, and $26.0 million in 2020, including $18.9 million used to prepay the outstanding principal balance on our real estate loan. Repayment of short- and long-term obligations was $115.6 million in 2021 and $99.5 million in 2020, including the $18.9 million prepayment of our real estate loan.

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 $3.2 million negative exchange rate effect in 2021 was primarily attributable to the strengthening of the U.S. dollar against the euro and the Swedish krona, offset in part by the weakening of the U.S. dollar against the Chinese renminbi. The $4.6 million positive exchange rate effect in 2020 primarily related to the weakening of the U.S. dollar against the euro and Chinese renminbi.

Borrowing Capacity and Debt Obligations

We entered into an unsecured multi-currency revolving credit facility, dated as of March 1, 2017 (as amended and restated to date, the Credit Agreement). At year-end 2021, we have a borrowing capacity available under our Credit Agreement of $149.9 million in addition to a $150 million uncommitted, unsecured incremental borrowing facility. Under our debt

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agreements, our leverage ratio must be less than 3.75 or, if we elect, for the quarter during which a material acquisition occurs and for the three fiscal quarters thereafter, must be less than 4.00. As of January 1, 2022, our leverage ratio was 1.3 and we were in compliance with our debt covenants. We expect to renew our Credit Agreement prior to its maturity date of December 14, 2023. See Note 6, Short- and Long-Term Obligations, in the accompanying consolidated financial statements for additional information regarding our debt obligations.

Additional Liquidity and Capital Resources

On May 20, 2021, our board of directors approved the repurchase of up to $20 million of our equity securities during the period from May 20, 2021 to May 20, 2022. We have not repurchased any shares of our common stock under this authorization or our previous authorization, which expired on May 13, 2021.

We paid cash dividends of $11.5 million in 2021. On November 18, 2021, we declared a quarterly cash dividend of $0.25 per share totaling $2.9 million that was paid on February 3, 2022. 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 revolving credit facility related to our consolidated leverage ratio.

We plan to make expenditures of approximately $18.0 million during 2022 for property, plant, and equipment. In addition, one of our Chinese subsidiaries expects to build a new facility and relocate over the next two years. Capital expenditures for the new facility are estimated to be approximately $20 million, which will be offset by the proceeds received from the sale of our existing facility. See Note 15, Subsequent Event, in the accompanying consolidated financial statements for additional information regarding the anticipated relocation of our Chinese manufacturing facility.

As of January 1, 2022, we had approximately $245.1 million of total unremitted foreign earnings. It is our intent to indefinitely reinvest $223.0 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments, if any. In 2021, we recorded withholding taxes on the earnings in certain foreign subsidiaries that we plan to repatriate in the foreseeable future. The foreign withholding taxes that would be required if we were to remit the indefinitely-reinvested foreign earnings to the United States would be approximately $4.1 million.

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

Material Contractual Obligations

The following table summarizes our material contractual obligations as of January 1, 2022 and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods. Detailed information concerning these obligations can be found in Notes 6, 7, and 9 in the accompanying consolidated financial statements.

(a)Excludes $1.5 million related to a net fixed price purchase option exercisable in 2022.

(b)Includes interest expense on both variable and fixed rate debt assuming no prepayments. Variable interest rates have been assumed to remain constant through the end of the term at the rates that existed as of year-end 2021.

Application of Critical Accounting Estimates

Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Our actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies and estimates are defined as those that entail significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. For a discussion on the application of these estimates and other accounting policies, see Note 1, Nature of Operations and Summary of Significant

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Accounting Policies, in the accompanying consolidated financial statements. We believe that our most critical accounting policies and estimates upon which our financial position depends, and which involve the most complex or subjective decisions or assessments, are those described below.

Income Taxes

We operate in numerous countries under many legal forms and, as a result, are subject to the jurisdiction of numerous domestic and non-U.S. 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. 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. We estimate the degree to which our deferred tax assets on deductible temporary differences and tax loss or credit carryforwards will result in an income tax benefit based on the expected profitability by tax jurisdiction, and we provide a valuation allowance for these deferred tax assets if it is more likely than not that they will not be realized in the future. If it were to become more likely than not that these deferred tax assets would be realized, we would reverse the related valuation allowance. Should our actual future taxable income by tax jurisdiction vary from our estimates, additional valuation allowances or reversals thereof may be necessary. When assessing the need for a valuation allowance in a tax jurisdiction, we evaluate the weight of all available evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. As part of this evaluation, we consider our cumulative three-year history of earnings before income taxes, taxable income in prior carryback years, future reversals of existing taxable temporary differences, prudent and feasible tax planning strategies, and expected future results of operations. At year-end 2021, we continued to maintain a valuation allowance in the United States against certain of our state operating loss carryforwards due to the uncertainty of future profitability in these state jurisdictions in the United States, and we maintained valuation allowances in certain foreign jurisdictions because of the uncertainty of future profitability. Our tax valuation allowance was $9.2 million at year-end 2021.

In the ordinary course of business there are inherent uncertainties and judgements required in quantifying our income tax positions. It is our policy to provide for uncertain tax positions and the related interest and penalties based upon our assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. On a quarterly basis, we evaluate our uncertain tax positions against various factors, including changes in facts or circumstances, tax laws, or the status of audits by tax authorities. We believe that we have appropriately accounted for any liability for unrecognized tax benefits, and at year-end 2021, our liability for these unrecognized tax benefits, including an accrual for the related interest and penalties, totaled $11.4 million. To the extent we prevail in matters for which a liability for an unrecognized tax benefit is established or are required to pay amounts in excess of the liability, our effective tax rate in a given financial statement period may be affected.

We intend to repatriate the distributable reserves of select foreign subsidiaries back to the United States and, during 2021, we recorded $0.6 million of net tax expense associated with these foreign earnings that we plan to repatriate in 2022. Except for these select foreign subsidiaries, we intend to reinvest indefinitely the earnings of our international subsidiaries in order to support the current and future capital needs of their operations, including the repayment of our foreign debt.

Revenue Recognition

Approximately 90% of our revenue is recognized at a point in time following the transfer of control of the goods or service to the customer, primarily relating to our products that require minimal customization for the customer. The remaining portion of our revenue is recognized on an over time basis using an input method that compares the costs incurred to date to the total expected costs required to satisfy the performance obligation. Most revenue recognized on an over time basis is for large capital products that are highly customized for the customer and, as a result, would include significant cost to rework in the event of cancellation. The over time basis of accounting requires significant judgment in determining applicable contract costs and the corresponding revenue to be recognized, which could be different if there were to be changes to the circumstances of the contract. When adjustments to revenue and costs are required, the adjustments are included in earnings in the period of the change. Judgment is also required for contracts involving variable consideration and multiple performance obligations.

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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. 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.

We evaluate the recoverability of goodwill and indefinite-lived intangible assets 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. Estimates of discounted future cash flows arising from intangible assets acquired require assumptions related to revenue and operating income growth rates, discount rates, and other factors. 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 year-end 2021 and 2020, we performed a qualitative impairment analysis (Step 0) for our reporting units, except for the material handling reporting unit for which we performed a quantitative impairment analysis (Step 1) at year-end 2020. Based on these analyses, we determined goodwill and indefinite-lived intangible assets were not impaired. Goodwill totaled $396.9 million and indefinite-lived intangible assets totaled $28.9 million at year-end 2021.

Definite-lived intangible assets are evaluated for impairment if events or changes in circumstances indicate that the carrying value of an asset might be impaired, such as a significant reduction in cash flows associated with the assets. Actual cash flows arising from a particular intangible asset could vary from projected cash flows which could imply different carrying values from those established at the dates of acquisition and which could result in impairment of such asset. No indicators of impairment were identified in 2021 and 2020, except for impairment charges of $0.5 million in 2021 related to the closure of a business in our Flow Control Segment and $1.9 million in 2020 associated with our timber-harvesting product line, which is included in our Industrial Processing segment. Definite-lived intangible assets were $170.4 million at year-end 2021.

A material adverse change in the business climate including a prolonged economic downturn and weakness in demand for our products could negatively affect the revenue and profitability assumptions used in our assessment of goodwill and intangible assets, which may result in impairment charges. Any future impairment charges could have a material adverse effect on our results of operations in the period in which an impairment is determined to exist.

See Note 1, Nature of Operations and Summary of Significant Accounting Policies, under the heading Impairment of Long-Lived Assets, in the accompanying consolidated financial statements for further details regarding impairment costs recorded in 2021 and 2020.

Inventories

We value our inventory at the lower of the actual cost (on a first-in, first-out; or weighted average basis) or net realizable value and include materials, labor, and manufacturing overhead. The valuation of inventory requires us to make judgments, based on currently available information, about the forecasted usage of and demand for each particular product or product line. Assumptions about future dispositions of inventory are inherently uncertain and, although we make every effort to ensure the accuracy of our forecasts of future product usage and demand, any changes in those assumptions may result in a write-down of inventory in the period in which inventory is deemed excessive or obsolete, which could adversely affect our results of operations.

Recent Accounting Pronouncements

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