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What changed in KADANT INC's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of KADANT INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+260 added−271 removedSource: 10-K (2023-02-28) vs 10-K (2022-03-01)

Top changes in KADANT INC's 2023 10-K

260 paragraphs added · 271 removed · 200 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeKadant Black Clawson manufactures stock-preparation equipment primarily for the pulp and paper industry. Mr. Westerhout has been our vice president since November 2021 with supervisory responsibilities for our Flow Control segment. Mr. Westerhout previously served as the vice president of our flow control subsidiaries in Europe since April 2014. These businesses are part of our Flow Control segment.
Biggest changeFlynn served as the president of our Kadant Black Clawson LLC subsidiary from 2003 to 2019. Kadant Black Clawson manufactures stock-preparation equipment primarily for the pulp and paper industry. Mr.
She previously served assistant general counsel of Demandware, Inc., a global SAAS software company, from January 2014 to July 2016, prior to its acquisition by salesforce.com, and was assistant general counsel of Entegris, Inc., a provider of advanced materials and materials handling solutions, from 2011 to 2014. Prior to 2011, Ms.
She previously served as assistant general counsel of Demandware, Inc., a global SAAS software company, from January 2014 to July 2016, prior to its acquisition by salesforce.com, and was assistant general counsel of Entegris, Inc., a provider of advanced materials and materials handling solutions, from 2011 to 2014. Prior to 2011, Ms.
Flow Control Segment We have numerous U.S. and foreign patents, including foreign counterparts to our U.S. patents, expiring on various dates ranging from 2022 to 2050, related to fluid handling and doctoring, cleaning, and filtration equipment. From time to time, we enter into licenses with other companies for products that serve the pulp, papermaking, converting, and paper recycling industries.
Flow Control Segment We have numerous U.S. and foreign patents, including foreign counterparts to our U.S. patents, expiring on various dates ranging from 2023 to 2050, related to fluid handling and doctoring, cleaning, and filtration equipment. From time to time, we enter into licenses with other companies for products that serve the pulp, papermaking, converting, and paper recycling industries.
Industrial Processing Segment We have numerous U.S. and foreign patents, including foreign counterparts to our U.S. patents, expiring on various dates ranging from 2022 to 2040, related to stock-preparation and wood processing systems and equipment.
Industrial Processing Segment We have numerous U.S. and foreign patents, including foreign counterparts to our U.S. patents, expiring on various dates ranging from 2023 to 2040, related to stock-preparation and wood processing systems and equipment.
Kadant Inc. trades on the New York Stock Exchange under the ticker symbol "KAI." Unless otherwise noted, references to 2021, 2020, and 2019 in this Annual Report on Form 10-K are to our fiscal years ended January 1, 2022, January 2, 2021, and December 28, 2019, respectively.
Kadant Inc. trades on the New York Stock Exchange under the ticker symbol "KAI." Unless otherwise noted, references to 2022, 2021, and 2020 in this Annual Report on Form 10-K are to our fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, respectively.
Our principal conveying and vibratory products include: – Vibratory equipment: feeders, screens, and flow aides utilized in the feeding of rugged and non-rugged materials as well as in mixing, blending, and packaging of fragile materials with speed and precision. 3 Table of Contents Kadant Inc. – Conveying equipment: transport idlers, power terminal units, and electric controls, used to transport bulk materials in harsh above- and below-ground mining environments; and screw conveyors and bucket elevators used for material handling operations in agricultural, food, and paper markets.
Our principal conveying and vibratory products include: – Vibratory equipment: feeders, screens, and flow aides utilized in the feeding of rugged and non-rugged materials as well as in mixing, blending, and packaging of fragile materials with speed and precision. – Conveying equipment: transport idlers, power terminal units, and electric controls, used to transport bulk materials in harsh above- and below-ground mining environments; and screw conveyors and bucket elevators used for material handling operations in agricultural, food, and paper markets.
Our shower and fabric-conditioning systems assist in the removal of these contaminants. – Formation systems: We supply structures that drain, purify, and recycle process water from the pulp mixture during paper sheet and web formation. – Water-filtration systems: We offer a variety of filtration systems and strainers that remove contaminants from process water before reuse and recover reusable fiber for recycling back into the pulp mixture. 2 Table of Contents Kadant Inc.
Our shower and fabric-conditioning systems assist in the removal of these contaminants. – Formation systems: We supply structures that drain, purify, and recycle process water from the pulp mixture during paper sheet and web formation. – Water-filtration systems: We offer a variety of filtration systems and strainers that remove contaminants from process water before reuse and recover reusable fiber for recycling back into the pulp mixture.
The Industrial Processing segment consists of our wood processing and stock-preparation product lines. Wood Processing We develop, manufacture, and market debarkers, stranders, chippers, logging machinery, and related equipment used in the harvesting and production of lumber and oriented strand board (OSB). In addition, we provide industrial automation and digitization solutions to process industries.
The Industrial Processing segment consists of our wood processing and stock-preparation product lines. 2 Table of Contents Kadant Inc. Wood Processing We develop, manufacture, and market debarkers, stranders, chippers, logging machinery, and related equipment used in the harvesting and production of lumber and oriented strand board (OSB). In addition, we provide industrial automation and digitization solutions to process industries.
Material Handling Segment We have numerous U.S. and foreign patents, including foreign counterparts to our U.S. patents, expiring on various dates ranging from 2022 to 2027, related to various aspects of conveyor belt systems and conveying apparatus, and baling equipment.
Material Handling Segment We have numerous U.S. and foreign patents, including foreign counterparts to our U.S. patents, expiring on various dates ranging from 2023 to 2041, related to various aspects of conveyor belt systems and conveying apparatus, and baling equipment.
We offer comprehensive, locally relevant benefits to all eligible employees which include, among other benefits: – Comprehensive health insurance coverage; – Retirement benefits; – Life insurance and disability benefits; and – Leave and wellness benefits. 6 Table of Contents Kadant Inc. Safety We maintain a safety-first culture grounded on the premise of eliminating workplace incidents, risks and hazards.
We offer comprehensive, locally relevant benefits to all eligible employees which include, among other benefits: – Comprehensive health insurance coverage; – Retirement benefits; – Life insurance and disability benefits; and – Leave and wellness benefits. Safety We maintain a safety-first culture grounded on the premise of eliminating workplace incidents, risks and hazards.
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.
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.
We license one of our two significant product brand names, Link-Belt®, from a third party pursuant to a trademark license agreement. More than a quarter of our Material Handling segment revenue in 2021 was generated by sales of conveying equipment under the Link-Belt® name.
We license one of our two significant product brand names, Link-Belt®, from a third party pursuant to a trademark license agreement. Approximately a quarter of our Material Handling segment revenue in 2022 was generated by sales of conveying equipment under the Link-Belt® name.
For more information, please reference our Corporate Sustainability Report, which is available at www.kadant.com. Available Information We file annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (SEC) under the Exchange Act.
For more information, please reference our Corporate Sustainability Report, which is available at www.kadant.com. 6 Table of Contents Kadant Inc. Available Information We file annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (SEC) under the Exchange Act.
Our success primarily depends on the following factors: – Technical expertise and process knowledge; – Product innovation; – Product quality, reliability, and performance; – Operating efficiency of our products; – Customer service and support; – Relative price of our products; and – Total cost of ownership of our products.
Our success primarily depends on the following factors: 4 Table of Contents Kadant Inc. – Technical expertise and process knowledge; – Product innovation; – Product quality, reliability, and performance; – Operating efficiency of our products; – Customer service and support; – Relative price of our products; and – Total cost of ownership of our products.
We also currently hold several U.S. patents, expiring on various dates ranging from 2027 to 2034, related to various aspects of the processing of fiber-based granules and the use of these materials in agricultural, home lawn and garden, professional lawn, turf and ornamental applications, and for oil and grease absorption. 5 Table of Contents Kadant Inc.
We also currently hold several U.S. patents, expiring on various dates ranging from 2026 to 2034, related to various aspects of the processing of fiber-based granules and the use of these materials in agricultural, home lawn and garden, professional lawn, turf and ornamental applications, and for oil and grease absorption.
In addition to internal product development activities, our research centers allow customers to simulate their own operating conditions and applications to identify and quantify opportunities for improvement. Our research and development expenses were $11.4 million in 2021, $11.3 million in 2020, and $10.9 million in 2019.
In addition to internal product development activities, our research centers allow customers to simulate their own operating conditions and applications to identify and quantify opportunities for improvement. Our research and development expenses were $12.7 million in 2022, $11.4 million in 2021, and $11.3 million in 2020.
Everyone is valued and appreciated for their distinct contributions to the growth and sustainability of our business. We strive to cultivate a culture of diversity and inclusion that supports and enhances our ability to recruit, develop and retain talent at every level. As of January 1, 2022, we had approximately 2,900 full-time employees worldwide.
Everyone is valued and appreciated for their distinct contributions to the growth and sustainability of our business. We strive to cultivate a culture of diversity and inclusion that supports and enhances our ability to recruit, develop and retain talent at every level. As of December 31, 2022, we had approximately 3,100 full-time employees worldwide.
Flynn 71 Vice President (2019) Fredrik H. Westerhout 57 Vice President (2021) Mr. Powell has been our chief executive officer and a director since July 2019 and our president since April 2019. He served as an executive vice president and a co-chief operating officer from March 2018 to March 2019.
Westerhout 58 Vice President (2021) Mr. Powell has been our chief executive officer and a director since July 2019 and our president since April 2019. He served as an executive vice president and a co-chief operating officer from March 2018 to March 2019.
Colwell has been our vice president since July 2019 with supervisory responsibility for our wood processing business, which is part of our Industrial Processing segment. He previously had responsibility for our fiber-based products business from July 2019 to November 2021. Mr.
Colwell has been our vice president responsible for our Industrial Processing segment since August 2022, and prior to that, had supervisory responsibility for our wood processing business, which is part of our Industrial Processing segment, from July 2019 to July 2022. He previously had responsibility for our fiber-based products business from July 2019 to November 2021. Mr.
Flow Control Segment Through our Flow Control segment, we provide custom-engineered products, systems, and technologies that control the flow of fluids used in industrial and commercial applications to keep critical processes running efficiently in the packaging, tissue, food, metals, and other industrial sectors. The Flow Control segment consists of our fluid-handling and doctoring, cleaning, & filtration product lines.
Flow Control Segment Through our Flow Control segment, we provide custom-engineered products, systems, and technologies that control the flow of fluids used in industrial and commercial applications to keep critical processes running efficiently in the packaging, tissue, food, metals, and other industrial sectors.
Of our full-time employees, approximately 45% were in North America, 32% were in Europe and 20% were in Asia. Other than certain of our Canadian employees and typical work councils outside of the U.S., none of our employees are represented by labor unions or covered by a collective bargaining agreement.
Of our full-time employees, approximately 46% were in North America, 32% were in Europe and 19% were in Asia. Other than certain of our Canadian employees and typical works co uncils outside of the U.S., none of our employees are represented by labor unions or covered by a collective bargaining agreement.
Colwell previously served as the president and chief executive officer of Carmanah Design and Manufacturing Inc. from April 2010 until its acquisition by us in November 2013. Mr.
Colwell previously served as the president and chief executive officer of Carmanah Design and Manufacturing Inc. from April 2010 until its acquisition by us in November 2013. Mr. Westerhout has been our vice president responsible for our Flow Control segment since November 2021. Mr.
We compete primarily on the basis of technical expertise, product innovation, and product performance. We believe the reputation that we have established for high-performance, high-reliability products supported by our in-depth process knowledge and application expertise provides us with a competitive advantage. In addition, a significant portion of our business is generated from our worldwide customer base.
Because of the diversity of our products, we face many different types of competitors and competition. We compete primarily on the basis of technical expertise, product innovation, and product performance. We believe the reputation that we have established for high-performance, high-reliability products supported by our in-depth process knowledge and application expertise provides us with a competitive advantage.
Flynn has been our vice president since July 2019 with supervisory responsibility for our stock-preparation business, which is part of our Industrial Processing segment, and our baling product line, which is part of our Material Handling segment. Prior to July 2019, Mr. Flynn served as the president of our Kadant Black Clawson LLC subsidiary from 2003 to 2019.
He previously served as our vice president from July 2019 to July 2022 with supervisory responsibility for our stock-preparation business, which is part of our Industrial Processing segment, and our baling product 7 Table of Contents Kadant Inc. line, which is part of our Material Handling segment. Prior to July 2019, Mr.
In our Industrial Processing segment, we compete with a limited number of global and regional competitors in the forest products markets and fiber processing equipment markets.
In our Industrial Processing segment, we compete with a limited number of global and regional competitors in the forest products markets and fiber processing equipment markets. In our Material Handling segment, we compete with numerous global, regional, and local competitors for our conveying and vibratory equipment, and strong regional competitors for our baling equipment and fiber-based granules offerings.
Information about our Executive Officers The following table summarizes certain information concerning our executive officers as of February 18, 2022: Name Age Present Title (Fiscal Year First Became Executive Officer) Jeffrey L. Powell 63 President and Chief Executive Officer (2009) Eric T. Langevin 59 Executive Vice President and Chief Operating Officer (2006) Michael J.
Information about our Executive Officers The following table summarizes certain information concerning our executive officers as of February 17, 2023: Name Age Present Title (Fiscal Year First Became Executive Officer) Jeffrey L. Powell 64 President and Chief Executive Officer (2009) Michael J. McKenney 61 Executive Vice President and Chief Financial Officer (2002) Stacy D.
Backlog Our backlog of firm orders by segment are as follows: (In millions) January 1, 2022 January 2, 2021 Flow Control $ 73.1 $ 48.7 Industrial Processing 185.2 115.0 Material Handling 51.6 29.3 $ 309.9 $ 193.0 We anticipate that the majority of the backlog at year-end 2021 will be shipped or completed during 2022, with the remainder expected to be shipped or completed within 15 months after year-end 2022.
Backlog Our backlog of firm orders by segment are as follows: (In millions) December 31, 2022 January 1, 2022 Flow Control $ 80.2 $ 73.1 Industrial Processing 197.8 185.2 Material Handling 67.3 51.6 $ 345.3 $ 309.9 We anticipate that the majority of the backlog at year-end 2022 will be shipped within 24 months.
Business Segments and Products We report our financial results by combining operating entities into three reportable operating segments: Flow Control, Industrial Processing, and Material Handling.
Business Segments and Products We report our financial results by combining operating entities into three reportable operating segments: Flow Control, Industrial Processing, and Material Handling. See Note 12 , Business Segment and Geographical Information, in the accompanying consolidated financial statements for financial information regarding our segments.
Fluid-Handling We develop, manufacture and market fluid-handling systems and equipment used in industrial piping systems to compensate for movement and to efficiently transfer fluid, power, and data. Our products are used primarily in the dryer section of the papermaking process and during the production of corrugated packaging, metals, plastics, pharmaceuticals, energy, rubber, textiles, chemicals, and food.
Our products are used primarily in the dryer section of the papermaking process and during the production of corrugated packaging, metals, plastics, pharmaceuticals, energy, rubber, textiles, chemicals, and food. Expansion joints are used in industrial piping systems.
McKenney 60 Executive Vice President and Chief Financial Officer (2002) Stacy D. Krause 45 Senior Vice President, General Counsel, and Secretary (2018) Dara F. Mitchell 53 Senior Vice President, Corporate Development (2021) Deborah S. Selwood 53 Senior Vice President and Chief Accounting Officer (2015) Thomas Andrew Blanchard 63 Vice President (2021) Michael C. Colwell 56 Vice President (2019) Peter J.
Krause 46 Senior Vice President, General Counsel, and Secretary (2018) Dara F. Mitchell 54 Senior Vice President, Corporate Development (2021) Deborah S. Selwood 54 Senior Vice President and Chief Accounting Officer (2015) Peter J. Flynn 72 Senior Vice President (2019) Thomas Andrew Blanchard 64 Vice President (2021) Michael C. Colwell 57 Vice President (2019) Fredrik H.
To maintain this base, we have emphasized our global presence, local support, and problem-solving relationship with our customers.
In addition, a significant portion of our business is generated from our worldwide customer base. To maintain this base, we have emphasized our global presence, local support, and problem-solving relationship with our customers.
Our compliance with these requirements did not change during the past year, and is not expected to have a material adverse effect on our cash flows, earnings, or competitive position.
Our compliance with these requirements did not change during the past year, and is not expected to have a material adverse effect on our cash flows, earnings, or competitive position. For more information on risks related to government regulations, please see Part I, Item 1A , “Risk Factors.” 5 Table of Contents Kadant Inc.
Baling We develop, manufacture, and market individual components and equipment for baling recyclable and waste materials to prepare them for secondary processing, transport, or storage. Our principal baling products include: – Balers and related equipment: Our equipment includes horizontal channel balers, vertical balers, conveyors, compactors, and bale wrapping machines used in the processing of recyclable and waste materials.
Baling We develop, manufacture, and market individual components and equipment for baling recyclable and waste materials to prepare them for secondary processing, transport, or storage.
Dependency on a Single Customer No single customer accounted for 10% or more of our consolidated revenues in any of the past three years. In addition, within our Flow Control, Industrial Processing, and Material Handling segments, no customer accounted for more than 10% of each of the respective segment's revenue.
In addition, within our Flow Control, Industrial Processing, and Material Handling segments, no single customer accounted for more than 10% of each of the respective segment's revenue. Approximately 55% in 2022, 58% in 2021, and 55% in 2020, of our consolidated revenue were to customers outside the United States, principally in Europe, Asia and Canada.
Prior to joining us, Mr. Powell was the chairman and chief executive officer of Castion Corporation from April 2003 through December 2007. Mr. Langevin, who will retire on March 31, 2022, has been an executive vice president and chief operating officer since April 2019 and has supervisory responsibility for our fluid-handling, doctoring, cleaning, & filtration, and conveying and vibratory businesses.
Prior to joining us, Mr. Powell was the chairman and chief executive officer of Castion Corporation from April 2003 through December 2007. Mr. McKenney has been an executive vice president and our chief financial officer since March 2018. From June 2015 to March 2018, he was a senior vice president and our chief financial officer.
Selwood held various financial positions at Arthur Andersen LLP and Genuity Inc. Mr. Blanchard has been our vice president since November 2021 with supervisory responsibility for portions of our Material Handling segment. Mr. Blanchard previously served as the president of our Syntron Material Handling subsidiaries (SMH) since January 2019 when we acquired SMH.
Blanchard has been our vice president responsible for our Material Handling segment since August 2022, and prior to that, had supervisory responsibility for our conveying and vibratory equipment and fiber-based products businesses from November 2021 to July 2022. Mr. Blanchard previously served as the president of our Syntron Material Handling subsidiaries (SMH) since January 2019 when we acquired SMH.
For more information on risks related to government regulations, please see Part I, Item 1A , “Risk Factors.” Seasonal Influences Flow Control Segment There are no material seasonal influences on this segment's sales of products and services.
Seasonal Influences Flow Control Segment There are no material seasonal influences on this segment's sales of products and services.
We have created and implemented processes to help eliminate safety events by reducing their frequency and severity. Our commitment to safety is reinforced by our robust safety program and training. Throughout the COVID-19 pandemic, we have remained focused on protecting the health and safety of our employees while meeting the needs of our customers.
We have created and implemented processes to help eliminate safety events by reducing their frequency and severity. Our commitment to safety is reinforced by our robust safety program and training. We believe that our employees are the core of our business, and we intend to continue building upon our culture to drive sustainable performance across the business.
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 1 Table of Contents Kadant Inc.
The Flow Control segment consists of our fluid-handling and doctoring, cleaning, & filtration product lines. 1 Table of Contents Kadant Inc. Fluid-Handling We develop, manufacture and market fluid-handling systems and equipment used in industrial piping systems to compensate for movement and to efficiently transfer fluid, power, and data.
Fiber-based Products We manufacture and sell biodegradable, absorbent granules derived from papermaking by-products. These materials are primarily used as carriers in agricultural, home lawn and garden, professional lawn, turf and ornamental applications, and for oil and grease absorption.
These materials are primarily used as carriers in agricultural, home lawn and garden, professional lawn, turf and ornamental applications, and for oil and grease absorption. Dependency on a Single Customer No single customer accounted for 10% or more of our consolidated revenues in any of the past three years.
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In 2021, we acquired all partnership interests and shares in The Clouth Group of Companies (Clouth) for $92.9 million, net of cash acquired plus debt assumed. The majority of the Clouth companies were acquired on July 19, 2021 and the acquisition of the last legal entity occurred on August 10, 2021.
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Our principal baling products include: 3 Table of Contents Kadant Inc. – Balers and related equipment: Our equipment includes horizontal channel balers, vertical balers, conveyors, compactors, and bale wrapping machines used in the processing of recyclable and waste materials. Fiber-based Products We manufacture and sell biodegradable, absorbent granules derived from papermaking by-products.
Removed
Clouth, which is included in our Flow Control segment, is a leading European manufacturer of doctor blades and related equipment used in the production of paper, packaging, and tissue. On August 23, 2021, we acquired all the outstanding equity securities in East Chicago Machine Tool Corporation (Balemaster) and certain assets of affiliated companies for $53.7 million, net of cash acquired.
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Selwood held various financial positions at Arthur Andersen LLP and Genuity Inc. Mr. Flynn has been our senior vice president since August 2022 and provides strategic management support, including management of special projects.
Removed
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. See Note 2 , Acquisitions, in the accompanying consolidated financial statements for further details regarding our recent acquisitions.
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Westerhout previously served as the vice president of our flow control subsidiaries in Europe since April 2014.
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Note 12 , Business Segment and Geographical Information, in the accompanying consolidated financial statements for financial information regarding our segments.
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Expansion joints are used in industrial piping systems.
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Approximately 58% in 2021, 55% in 2020, and 56% in 2019, of our consolidated revenue were to customers outside the United States, principally in Europe, Asia and Canada.
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In 4 Table of Contents Kadant Inc. our Material Handling segment, we compete with numerous global, regional, and local competitors for our conveying and vibratory equipment, and strong regional competitors for our baling equipment and fiber-based granules offerings. Because of the diversity of our products, we face many different types of competitors and competition.
Removed
We have adopted enhanced safety measures and practices across our facilities to protect employee health and safety and ensure a reliable supply of essential products to our customers. These enhanced safety measures and practices include encouraging vaccinations and the use of face coverings, adding safety and hygiene protocols within our facilities, and other safeguards.
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We monitor and track the impact of COVID-19 on our employees and within our operations, and proactively modify or adopt new practices to promote their health and safety. We believe that our employees are the core of our business, and we intend to continue building upon our culture to drive sustainable performance across the business.
Removed
From March 2018 to April 2019, he served as executive vice president and co-chief operating officer. From January 2010 to March 2018, he served as executive vice president and chief operating officer. Prior to January 2010, Mr. Langevin had been our senior vice president since March 2007 and had supervisory responsibility for our fluid-handling and doctoring, cleaning, & filtration businesses.
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He served as vice president, with responsibility for our doctoring, cleaning, & filtration business, from 2006 to 2007. From 2001 to 2006, Mr. Langevin was president of Kadant Web Systems Inc. (now our Kadant Solutions division) and before that served as its senior vice president and vice president of operations. Prior to 2001, 7 Table of Contents Kadant Inc. Mr.
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Langevin managed several product groups and departments within Kadant Web Systems after joining us in 1986 as a product development engineer. Mr. McKenney has been an executive vice president and our chief financial officer since March 2018. From June 2015 to March 2018, he was a senior vice president and our chief financial officer.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeAdditional risks and uncertainties not currently known to us or that we currently believe are not material may also impair our business, consolidated financial condition and results of operations. 8 Table of Contents Kadant Inc. Risks Related to our Business and Industry Adverse changes in global and local economic conditions may negatively affect our industry, business and results of operations.
Biggest changeOur business is also subject to general risks and uncertainties that affect many other companies, including overall economic and industry conditions. Additional risks and uncertainties not currently known to us or that we currently believe are not material may also impair our business, consolidated financial condition and results of operations.
Additionally, our financial results have been adversely impacted and may be adversely impacted in the future by decreased levels of bookings, customer-requested delays on certain capital projects and service work, customer downtime and shutdowns, and visitation restrictions at many customer facilities, all of which have affected and may adversely affect in the future our ability to recognize revenue for sales of our products and services.
Additionally, our financial results have been adversely impacted and may be adversely impacted in the future by decreased levels of bookings, customer-requested delays on certain capital projects and service work, customer downtime and shutdowns, and visitation restrictions at customer facilities, all of which have affected and may adversely affect in the future our ability to recognize revenue for sales of our products and services.
Like other global companies, we have experienced cyber threats and incidents, although none have been material or had a material adverse effect on our business or financial condition. Our information security efforts include major programs designed to address security governance, product security, identification and protection of critical assets, insider risk, third-party risk, and cyber defense operations.
Like other global companies, we have experienced cyber threats and incidents, although none have been material or had a material adverse effect on our business or financial condition. Our information security efforts include programs designed to address security governance, product security, identification and protection of critical assets, insider risk, third-party risk, and cyber defense operations.
Some of our businesses have been and may continue to be impacted by supply chain constraints, resulting in inflationary pressure on material costs, longer lead times, port congestion, and increased freight costs. In addition, current or future governmental policies may increase the risk of inflation which could further increase the costs of raw materials and components for our businesses.
Some of our businesses have been and may continue to be impacted by supply chain constraints, inflationary pressure on material costs, longer lead times, port congestion, and increased freight costs. In addition, current or future governmental policies may increase the risk of inflation which could further increase the costs of raw materials and components for our businesses.
In addition, the cost and operational consequences of implementing further data protection measures, such as to comply with local privacy laws such as the European Union's General Data Protection Regulation, or various similar U.S. federal and state laws, could be significant. The current cyber threat environment indicates increased risk for all companies.
In addition, the cost and operational consequences of implementing further data protection measures, such as to comply with local privacy laws such as the European Union's General Data Protection Regulation, or various similar foreign or U.S. federal and state laws, could be significant. The current cyber threat environment indicates increased risk for all companies.
We expect that a significant driver of our growth over the next several years will be the acquisition of technologies and businesses that complement or augment our existing products and services or may involve entry into a new process industry.
We expect that one significant driver of our growth over the next several years will be the acquisition of technologies and businesses that complement or augment our existing products and services or may involve entry into a new process industry.
The counterparty to the swap agreements could demand an early termination of the swap agreements if we were to be in default under the Credit Agreement, or any agreement that amends or replaces the Credit Agreement in which the counterparty is a member, and we were unable to cure the default.
The counterparty to the swap agreement could demand an early termination of the swap agreement if we were to be in default under the Credit Agreement, or any agreement that amends or replaces the Credit Agreement in which the counterparty is a member, and we were unable to cure the default.
The future impact of the COVID-19 pandemic could include further disruption and volatility in the global capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future. The COVID-19 pandemic has evolved and continues to evolve rapidly.
The future impact of pandemics could include further disruption and volatility in the global capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future. The COVID-19 pandemic has evolved and continues to evolve rapidly.
Other factors that could affect our share price and quarterly operating results include: – changes in the assumptions used for revenue recognized over time; – fluctuations in revenues due to customer-initiated delays in product shipments; – failure of a customer to comply with an order's contractual obligations or inability of a customer to provide financial assurances of performance; – adverse changes in demand for and market acceptance of our products; – failure of our products to pass contractually agreed upon acceptance tests, which could delay or prohibit recognition of revenues under applicable accounting guidelines; – competitive pressures resulting in lower sales prices for our products; – adverse changes in the process industries we serve; – delays or problems in our introduction of new products or in the manufacture of our products; – our competitors' announcements of new products, services, or technological innovations; – contractual liabilities incurred by us related to guarantees of our product performance; – increased costs of raw materials or supplies, including the cost of energy; – changes in the timing of product orders; – changes in the estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, or expenses; – the impact of acquisition accounting and the treatment of acquisition and restructuring costs as period costs; – fluctuations in our outstanding indebtedness and associated interest expense; – fluctuations in our effective tax rate; – fluctuations in foreign currency exchange rates; – the operating and share price performance of companies that investors consider to be comparable to us; and – changes in global financial markets and global economies and general market conditions.
Other factors that could affect our share price and quarterly operating results include: 20 Table of Contents Kadant Inc. – changes in the assumptions used for revenue recognized over time; – fluctuations in revenues due to customer-initiated delays in product shipments; – failure of a customer to comply with an order's contractual obligations or inability of a customer to provide financial assurances of performance; – adverse changes in demand for and market acceptance of our products; – failure of our products to pass contractually agreed upon acceptance tests, which could delay or prohibit recognition of revenues under applicable accounting guidelines; – competitive pressures resulting in lower sales prices for our products; – adverse changes in the process industries we serve; – delays or problems in our introduction of new products or in the manufacture of our products; – our competitors' announcements of new products, services, or technological innovations; – contractual liabilities incurred by us related to guarantees of our product performance; – increased costs of raw materials or supplies, including the cost of energy; – changes in the timing of product orders; – changes in the estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, or expenses; – the impact of acquisition accounting and the treatment of acquisition and restructuring costs as period costs; – fluctuations in our outstanding indebtedness and associated interest expense; – fluctuations in our effective tax rate; – fluctuations in foreign currency exchange rates; – the operating and share price performance of companies that investors consider to be comparable to us; and – changes in global financial markets and global economies and general market conditions.
Our business and operations have been and may continue to be challenged by the effects of the COVID-19 pandemic and may be challenged by other adverse public health developments, including disruptions or restrictions on our employees’ and other service providers’ ability to travel, reductions in our workforce, temporary closures of our facilities or the facilities of our customers, suppliers or other vendors in our supply chain, potentially including single source suppliers, and other disruptions in the supply chain.
Our business and operations have been and may continue to be challenged by the effects of the COVID-19 pandemic and may be challenged by other adverse public health developments, including disruptions or restrictions on our employees’ and other service providers’ ability to travel, temporary closures of our facilities or the facilities of our customers, suppliers or other vendors in our supply chain, potentially including single source suppliers, and other disruptions in the supply chain.
Many of our operations are located in regions that may become increasingly vulnerable due to climate change, which may cause extreme weather conditions such as more intense hurricanes, thunderstorms, tornadoes and snow or ice storms, winds, and rainfall, as well as rising sea levels and increased volatility in seasonal temperatures.
Some of our operations are located in regions that may become increasingly vulnerable due to climate change, which may cause extreme weather conditions such as more intense hurricanes, thunderstorms, tornadoes and snow or ice storms, winds, and rainfall, as well as rising sea levels and increased volatility in seasonal temperatures.
Although we have been successful with this strategy in the past, we may not be able to grow our business in the future through acquisitions for a number of reasons, including: – difficulties identifying and executing acquisitions, including our ability to conduct and complete due diligence, difficulties in negotiations with the counterparty, and inability to obtain regulatory and antitrust approvals; – competition with other prospective buyers resulting in our inability to complete an acquisition or in our paying a substantial premium over the fair value of the net assets of the acquired business; – access to and availability of capital; – difficulty in integrating operations, technologies, products and the key employees of the acquired business; – inability to maintain existing customers of the acquired business or to sell the products and services of the acquired business to our existing customers; – inability to retain key management of the acquired business; 10 Table of Contents Kadant Inc. – diversion of management's attention from other business concerns; – inability to improve the revenues and profitability or realize the expected cost savings and synergies; – assumption of significant liabilities, some of which may be unknown at the time of acquisition; and – identification of internal control deficiencies of the acquired business.
Although we have been successful with this strategy in the past, we may not be able to grow our business in the future through acquisitions for a number of reasons, including: – difficulties identifying and executing acquisitions, including our ability to conduct and complete due diligence, difficulties in negotiations with the counterparty, and inability to obtain regulatory and antitrust approvals; – competition with other prospective buyers resulting in our inability to complete an acquisition or in our paying a substantial premium over the fair value of the net assets of the acquired business; – access to and availability of capital; – difficulty in integrating operations, technologies, products and the key employees of the acquired business; – inability to maintain existing customers of the acquired business or to sell the products and services of the acquired business to our existing customers; – inability to retain key management of the acquired business; – diversion of management's attention from other business concerns; – inability to improve the revenues and profitability or realize the expected cost savings and synergies; – assumption of significant liabilities, some of which may be unknown at the time of acquisition; and – identification of internal control deficiencies of the acquired business.
Changes in the policies of the Chinese government, devaluation of the Chinese currency, restrictions on the expatriation of cash, political unrest, unstable economic conditions, or other developments in China or in U.S.-China relations that are adverse to trade, including enactment of protectionist legislation or trade or currency restrictions, could negatively impact our business and operating results.
Changes in the policies of the Chinese government, devaluation of the Chinese currency, restrictions on the repatriation of cash, political unrest, unstable economic conditions, or other developments in China or in U.S.-China relations that are adverse to trade, including enactment of protectionist legislation or trade or currency restrictions, could negatively impact our business and operating results.
Furthermore, our Credit Agreement requires that any amounts borrowed under the facility be repaid by the maturity date in 2023. If we are unable to roll over the amounts borrowed into a new credit facility and we do not have sufficient cash to repay our borrowings, we may default under the Credit Agreement.
Furthermore, our Credit Agreement requires that any amounts borrowed under the facility be repaid by the maturity date in 2027. If we are unable to roll over the amounts borrowed into a new credit facility and we do not have sufficient cash to repay our borrowings, we may default under the Credit Agreement.
The demand for capital equipment is variable and depends on a number of factors, including consumer demand for end products, existing manufacturing capacity, the level of capital spending by our customers and economic conditions. As a consequence, our bookings and revenues for capital projects tend to be variable and difficult to predict.
The demand for capital equipment is variable and depends on a number of factors, including consumer demand for end products, existing manufacturing capacity, the level of capital spending by our customers and economic conditions. As a consequence, our bookings and revenues for capital projects tend to be variable and hard to predict.
We have relationships with many financial institutions, including lenders under our credit facilities and insurance underwriters, and from time to time we execute transactions with counterparties in the financial industry, such as our interest rate swap agreements and other hedging transactions.
We have relationships with many financial institutions, including lenders under our credit facilities and insurance underwriters, and from time to time we execute transactions with counterparties in the financial industry, such as our interest rate swap agreement and other hedging transactions.
A sizable portion of our Material Handling segment is dependent on continued demand for coal, which is subject to economic and environmental risks. Approximately 4% and 2% of the Material Handling segment's 2021 revenues came from its thermal and metallurgical coal-mining customers, respectively. Many of these customers supply coal for the generation of electricity and/or steel production.
A portion of our Material Handling segment is dependent on continued demand for coal, which is subject to economic and environmental risks. Approximately 4% and 2% of the Material Handling segment's 2022 revenues came from its thermal and metallurgical coal-mining customers, respectively. Many of these customers supply coal for the generation of electricity and/or steel production.
A number of factors may cause our effective tax rate to fluctuate, including: changes in tax rates in various jurisdictions; unanticipated changes in the amount of profit in jurisdictions in which the statutory tax rates may be higher or lower than the U.S. tax rate; the resolution of issues arising from tax audits with various tax authorities; changes in the valuation of our deferred tax assets and liabilities; adjustments to income taxes upon finalization of various tax returns; increases in expenses not deductible for tax purposes, including impairments of goodwill in connection with acquisitions; and changes in available tax credits or our ability to utilize foreign tax credits.
A number of factors may cause our effective tax rate to fluctuate, including: changes in tax rates in various jurisdictions; unanticipated 13 Table of Contents Kadant Inc. changes in the amount of profit in jurisdictions in which the statutory tax rates may be higher or lower than the U.S. tax rate; the resolution of issues arising from tax audits with various tax authorities; changes in the valuation of our deferred tax assets and liabilities; adjustments to income taxes upon finalization of various tax returns; increases in expenses not deductible for tax purposes, including impairments of goodwill in connection with acquisitions; and changes in available tax credits or our ability to utilize foreign tax credits.
Our existing indebtedness bears interest at fixed and floating rates, and as a result, our interest payment obligations on our indebtedness will fluctuate if interest rates increase or decrease. From time to time, we hedge a portion of our variable rate interest payment obligations through interest rate swap agreements.
Our existing indebtedness bears interest at fixed and floating rates, and as a result, our interest payment obligations on our indebtedness will fluctuate if interest rates increase or decrease. From time to time, we hedge a portion of our variable rate interest payment obligations through an interest rate swap agreement.
We are subject to various local, state, federal, foreign and transnational laws and regulations, particularly those relating to environmental protection, the importation and exportation of products, tariffs and trade barriers, taxation, exchange controls, 18 Table of Contents Kadant Inc. current good manufacturing practices, data protection, health and safety and our business practices in the U.S. and abroad, such as anti-corruption and anti-competition laws, and, in the future, any changes to such laws and regulations could adversely affect us.
We are subject to various local, state, federal, foreign and transnational laws and regulations, particularly those relating to environmental protection, the importation and exportation of products, tariffs and trade barriers, taxation, exchange controls, current good manufacturing practices, data protection, health and safety and our business practices in the U.S. and abroad, such as anti-corruption and anti-competition laws, and, in the future, any changes to such laws and regulations could adversely affect us.
Although we have worked and continue to work diligently to ensure that our global facilities can operate with minimal disruption, mitigate the impact of the outbreak on our employees’ health and safety, and address the supply chain impact on ourselves and our customers, the full extent to which COVID-19 has affected and will affect the global economy and our results will depend on future developments and factors that cannot be predicted.
Although we have worked and continue to work diligently to ensure that our global facilities can operate with minimal disruption, mitigate the impact of the outbreak on our employees’ health and safety, and address the supply chain impact on ourselves and our customers, the full extent to which COVID-19 has affected and will continue to affect the global economy and our results will depend on future developments and factors that cannot be predicted. 9 Table of Contents Kadant Inc.
As a percentage of our Industrial Processing segment revenues, the two largest OSB customers accounted for 11% in 2021 and 9% in both 2020 and 2019. The loss of one or more of these OSB customers to a competitor could adversely affect our revenues and profitability. In addition, the market for building products is highly competitive.
As a percentage of our Industrial Processing segment revenues, the two largest OSB customers accounted for 13% in 2022, 11% in 2021, and 9% in 2020. The loss of one or more of these OSB customers to a competitor could adversely affect our revenues and profitability. In addition, the market for building products is highly competitive.
Our Wood Processing product line can be materially impacted by changes to the global timber supply. Changes in the environment that affect natural resources such as timber may have significant effects on the sales of wood processing equipment by our Industrial Processing segment. Approximately 23% of our revenue in 2021 was from our Wood Processing product line.
Our Wood Processing product line can be materially impacted by changes to the global timber supply. Changes in the environment that affect natural resources such as timber may have significant effects on the sales of wood processing equipment by our Industrial Processing segment. Approximately 22% of our revenue in 2022 was from our Wood Processing product line.
Approximately 8% of our revenue in 2021 was from customers producing newsprint and printing and writing grades of paper. Significant declines in the production of printing and writing paper grades have also led to a drop in the construction of recycled tissue mills, as those mills use printing and writing grades of waste paper as their fiber source.
Approximately 7% of our revenue in 2022 was from customers producing newsprint and printing and writing grades of paper. Significant declines in the production of printing and writing paper grades have also led to a drop in the construction of recycled tissue mills, as those mills use printing and writing grades of waste paper as their fiber source.
If the United States were to withdraw from or materially modify the USMCA or impose significant tariffs or taxes on goods imported into the United States, the cost of our products could significantly increase or no longer be priced competitively, which in turn could have a material adverse effect on our business and results of operations.
If the United States were to withdraw from or materially modify the USMCA or impose significant tariffs or taxes on goods imported into the United States, the cost of our products could significantly increase or no longer be priced competitively, which in turn could have a material adverse effect on our business and results of operations. 17 Table of Contents Kadant Inc.
Our indebtedness could have negative consequences, including: – increasing our vulnerability to adverse economic and industry conditions; – limiting our ability to obtain additional financing; – limiting our ability to pay dividends on or to repurchase our capital stock; 19 Table of Contents Kadant Inc. – limiting our ability to complete a merger or an acquisition or acquire new products and technologies through acquisitions or licensing agreements; and – limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we compete.
Our indebtedness could have negative consequences, including: – increasing our vulnerability to adverse economic and industry conditions; – limiting our ability to obtain additional financing; – limiting our ability to pay dividends on or to repurchase our capital stock; – limiting our ability to complete a merger or an acquisition or acquire new products and technologies through acquisitions or licensing agreements; and – limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we compete.
Changes in component prices, such as energy, chemicals, wood-based fibers, and nonfiber alternatives can change the competitive position of OSB relative to other available alternatives and could increase substitution. Our customers' OSB production can be adversely affected by lower-cost producers of other wood panel products and substitutes for wood building products.
Changes in component prices, such as energy, 10 Table of Contents Kadant Inc. chemicals, wood-based fibers, and nonfiber alternatives can change the competitive position of OSB relative to other available alternatives and could increase substitution. Our customers' OSB production can be adversely affected by lower-cost producers of other wood panel products and substitutes for wood building products.
We believe these measures reduce, but cannot eliminate, the risk of an information security incident. Any significant security incidents could have an adverse impact on sales, harm our reputation and cause us to incur legal liability and increased costs to address such events and related security concerns.
We believe these measures reduce, but cannot eliminate, the risk of an information security incident. Any significant security incidents could have an adverse impact on sales, harm our reputation and cause us to incur legal liability and increased costs to address such events and related security concerns. 12 Table of Contents Kadant Inc.
Reductions in demand levels in any of these areas can negatively impact our business. As companies in our customers' industries consolidate operations in response to market weakness, they frequently reduce capacity, increase downtime, defer maintenance and upgrades, and postpone or even cancel capacity additions or expansion projects.
Reductions in demand levels in any of these areas can negatively impact our business. As companies in 8 Table of Contents Kadant Inc. our customers' industries consolidate operations in response to market weakness, they frequently reduce capacity, increase downtime, defer maintenance and upgrades, and postpone or even cancel capacity additions or expansion projects.
For example, we received a request by local Chinese authorities to relocate one of our facilities, and have negotiated with the Chinese 14 Table of Contents Kadant Inc. government regarding the relocation of such facility. Such relocation, and any relocations required in the future, may increase our costs and could have a material impact on our manufacturing operations.
For example, we received a request by local Chinese authorities to relocate one of our facilities, and have negotiated with the Chinese government regarding the relocation of such facility. Such relocation, and any relocations required in the future, may increase our costs and could have a material impact on our manufacturing operations.
Anti-takeover provisions in our charter documents and under Delaware law could prevent or delay transactions that our shareholders may favor. Provisions of our charter and bylaws may discourage, delay, or prevent a merger or acquisition that our shareholders may consider favorable, including transactions in which shareholders might otherwise receive a premium for their shares. 21 Table of Contents Kadant Inc.
Anti-takeover provisions in our charter documents and under Delaware law could prevent or delay transactions that our shareholders may favor. Provisions of our charter and bylaws may discourage, delay, or prevent a merger or acquisition that our shareholders may consider favorable, including transactions in which shareholders might otherwise receive a premium for their shares.
Our systems could be compromised by malware (including ransomware), cyberattacks, 12 Table of Contents Kadant Inc. and other events, ranging from widespread, non-targeted, global cyber threats to targeted advanced persistent threats. These threats could be indicators of an increased risk to our products, solutions, services, manufacturing, and IT infrastructure.
Our systems could be compromised by malware (including ransomware), cyberattacks, and other events, ranging from widespread, non-targeted, global cyber threats to targeted advanced persistent threats. These threats could be indicators of an increased risk to our products, solutions, services, manufacturing, and IT infrastructure.
International revenues and operations are subject to a number of risks which vary by geographic region, including the following: – agreements may be difficult to enforce and receivables difficult to collect through a foreign country's legal system; – foreign customers may have longer payment cycles; – foreign countries may impose additional withholding taxes or otherwise tax our foreign income; – economic sanctions, trade embargoes, tariffs, currency restrictions or other adverse trade regulations; – environmental and other regulations can adversely impact our ability to operate our facilities; – disruption from climate change, natural disaster, including earthquakes and/or tornadoes, fires, war, terrorist activity, and other force majeure events beyond our control; – changes in zoning laws that may require relocation of our manufacturing operations; – disruption from fast-spreading health epidemics and pandemics which have and may continue to result in widespread interruption of our business operations and those of our customers, supplier and vendors; – worsening economic conditions may result in worker unrest, labor actions, and potential work stoppages; – political and/or civil unrest may disrupt commercial activities of ours or our customers; 16 Table of Contents Kadant Inc. – fluctuations in foreign currency exchange rates and foreign interest rates beyond our control; – it may be difficult to repatriate funds, due to unfavorable domestic and foreign tax consequences or other restrictions or limitations imposed by foreign governments; and – the protection of intellectual property in foreign countries may be more difficult to enforce.
International revenues and operations are subject to a number of risks which vary by geographic region, including the following: – agreements may be difficult to enforce and receivables difficult to collect through a foreign country's legal system; – foreign customers may have longer payment cycles; – foreign countries may impose additional withholding taxes or otherwise tax our foreign income; – economic sanctions, trade embargoes, tariffs, currency restrictions or other adverse trade regulations; – environmental and other regulations can adversely impact our ability to operate our facilities; – disruption from climate change, natural disaster, including earthquakes and/or tornadoes, fires, war, terrorist activity, and other force majeure events beyond our control; – changes in zoning laws that may require relocation of our manufacturing operations; – disruption from fast-spreading health epidemics and pandemics which have and may continue to result in widespread interruption of our business operations and those of our customers, supplier and vendors; – worsening economic conditions may result in worker unrest, labor actions, and potential work stoppages; – political and/or civil unrest may disrupt commercial activities of ours or our customers; – fluctuations in foreign currency exchange rates and foreign interest rates beyond our control; – it may be difficult to repatriate funds, due to unfavorable domestic and foreign tax consequences or other restrictions or limitations imposed by foreign governments; – the protection of intellectual property in foreign countries may be more difficult to enforce; and – any continuing effects on cross border trade and labor, and political and regulatory volatility resulting from the United Kingdom's exit from the European Union.
We manufacture capital equipment and systems used in process industries, including the paper, fluid handling, wood processing and material handling industries. Approximately 35% of our revenue in 2021 was from the sale of capital equipment to be used in process industries.
We manufacture capital equipment and systems used in process industries, including the paper, fluid handling, wood processing and material handling industries. Approximately 37% of our revenue in 2022 was from the sale of capital equipment to be used in process industries.
We have significant international sales and operations and face risks related to health epidemics and pandemics, including the COVID-19 pandemic, which has and continues to present challenges to our business and results of operations.
We have significant international sales and operations and face risks related to health epidemics and pandemics, including the COVID-19 pandemic, which has presented and may continue to present challenges to our business and results of operations.
We may provide a limited intellectual property indemnity in connection with our terms and conditions of sale to our customers and in other types of contracts with third parties. Indemnification payments and legal expenses to defend claims could be costly. 15 Table of Contents Kadant Inc.
We may provide a limited intellectual property indemnity in connection with our terms and conditions of sale to our customers and in other types of contracts with third parties. Indemnification payments and legal expenses to defend claims could be costly.
If we fail to enable the effective transfer of knowledge and facilitate smooth transitions for key personnel, the operating results and future growth for our business could be adversely affected, and the morale and productivity of the workforce could be disrupted.
If we fail to enable the effective transfer of knowledge and facilitate smooth transitions for key personnel, the operating results and 14 Table of Contents Kadant Inc. future growth for our business could be adversely affected, and the morale and productivity of the workforce could be disrupted.
In addition to declining orders for wood processing products, adverse economic 11 Table of Contents Kadant Inc. conditions for our wood processing customers may make it more difficult for us to collect accounts receivable in a timely manner, or at all, which may adversely affect our working capital.
In addition to declining orders for wood processing products, adverse economic conditions for our wood processing customers may make it more difficult for us to collect accounts receivable in a timely manner, or at all, which may adversely affect our working capital.
In addition, coal combustion typically generates significant greenhouse gas emissions and governmental and private sector goals and mandates to reduce greenhouse gas emissions may increasingly affect the mix of electricity generation sources.
In addition, coal combustion typically generates significant greenhouse gas emissions and governmental and private sector goals and mandates 11 Table of Contents Kadant Inc. to reduce greenhouse gas emissions may increasingly affect the mix of electricity generation sources.
The imposition of trade sanctions may, and with respect to the Ukraine-related sanctions are expected to, make it generally more difficult to do business in Russia and China and cause delays or prevent shipment of products or services performed by our personnel, or to receive payment for products or services.
The imposition of trade sanctions may make it generally more difficult to do business in Russia and China and cause delays or prevent shipment of products or services performed by our personnel, or to receive payment for products or services.
We may not be able to successfully implement these strategies, or achieve cost savings or desired efficiencies, and these strategies may not result in the expected growth of our business. 13 Table of Contents Kadant Inc.
We may not be able to successfully implement these strategies, or achieve cost savings or desired efficiencies, and these strategies may not result in the expected growth of our business.
As a result of such concentration, we may be disproportionately exposed to the impact of any disruptions (including natural disasters), regulations or delays that impact those geographic locations, which may negatively impact our ability to manufacture products produced in those locations and have an adverse effect on our business results.
In addition, our manufacture of certain products is concentrated in specific geographic locations. As a result of such concentration, we may be disproportionately exposed to the impact of any disruptions, regulations or delays that impact those geographic locations, which may negatively impact our ability to manufacture products produced in those locations and have an adverse effect on our business results.
Also, uncertainty regarding economic conditions has caused, and may in the future cause, liquidity and credit issues for many businesses, including our customers and suppliers in the pulp and paper industry as well as other process industries, and may result in their inability to fund projects, capacity expansion plans, and to some extent, routine operations and capital expenditures.
Also, uncertainty regarding economic conditions has caused, and may in the future cause, liquidity and credit issues for many businesses, including our customers and suppliers, and may result in their inability to fund projects, capacity expansion plans, and to some extent, routine operations and capital expenditures.
While some foreign currency transaction risks can be hedged using derivatives or other financial instruments, or may be insurable, such attempts to mitigate these risks may be costly and may not always be successful. 17 Table of Contents Kadant Inc.
While some foreign currency transaction risks can be hedged using derivatives or other financial instruments, or may be insurable, such attempts to mitigate these risks may be costly and may not always be successful.
Operating globally subjects us to various risks that may adversely affect our results of operations in the future. Policies of the Chinese government may negatively impact our business. We operate significant manufacturing facilities in China. In 2021, our sales to China were $82.1 million, or 10%, of our revenue.
Operating globally subjects us to various risks that may adversely affect our results of operations in the future. Policies of the Chinese government may negatively impact our business. We operate significant manufacturing facilities in China. In 2022, our sales to China were $85.5 million, or 9%, of our revenue.
We may need to repatriate cash from our overseas operations, which may not be possible, to fund the repayment and we may be required to pay taxes on the repatriated amounts. Such repatriation would have an adverse effect on our effective tax rate and cash flows.
We may need to repatriate cash from our overseas operations, which may not be possible, to fund the repayment and we may be required to pay taxes on the repatriated amounts. Such repatriation would have an adverse effect on our effective tax rate and cash flows. Adverse changes to the soundness of financial institutions could affect us.
As a result, we cannot reasonably estimate the scope of the impact of the COVID-19 pandemic, including the potential impact of emerging variants or the response of government authorities to any such variants or other developments, on our business and the adverse effect and impact the COVID-19 pandemic may ultimately have on our business and our stock price.
As a result, we cannot reasonably estimate the scope of the impact of this or other pandemics, including the potential impact of emerging variants or the response of government authorities to any such variants or other developments, on our business and any adverse effect and impact that pandemics may ultimately have on our business.
Chinese containerboard producers have been looking to build capacity for fiber in Southeast Asia, with the intent to ship pulp back to China for further processing.
Chinese containerboard producers have been looking to build capacity for fiber in Southeast Asia, with the intent to ship pulp back to 16 Table of Contents Kadant Inc. China for further processing.
If our swap agreements were to be terminated prior to the applicable scheduled maturity date and if we were required to pay cash for the value of the swap, we could incur a loss, which could adversely affect our financial results.
If our swap agreement was to be terminated prior to the applicable scheduled maturity date and if we were required to pay cash for the value of the swap, we could incur a loss, which could adversely affect our financial results. 19 Table of Contents Kadant Inc.
Changes in economic conditions affecting the global mining industry can occur abruptly and unpredictably, which may have significant effects on the sales of original equipment by our subsidiary, SMH, which comprises a substantial portion of our Material Handling segment. Approximately 4% of our revenue in 2021 was from SMH's mining customers.
Changes in economic conditions affecting the global mining industry can occur abruptly and unpredictably, which may have significant effects on the sale of equipment by our subsidiary, SMH, which is in our Material Handling segment. Approximately 4% of our revenue in 2022 was from SMH's mining customers.
Given the nature of the markets in which we participate and the volatility of orders, we may not be able to reliably predict future revenues and profitability, and unexpected changes may cause us to adjust our operations. A large proportion of our costs are fixed, due in part to our significant selling, research and development, and manufacturing costs.
Given the nature of the markets in which we participate and the volatility of orders, we may not be able to reliably predict future revenues and profitability, and unexpected changes may cause us to adjust our operations.
Our insurance coverage may be inadequate or expensive. We are subject to claims in the ordinary course of business. It is not always possible to prevent or detect activities giving rise to claims, and the precautions we take may not be effective in all cases.
We are subject to claims in the ordinary course of business. It is not always possible to prevent or detect activities giving rise to claims, and the precautions we take may not be effective in all cases. We maintain insurance policies that provide limited coverage for some, but not all, potential risks and liabilities associated with our business.
Any such disruption could cause losses in efficiencies, delays in shipments of our products and the loss of sales and customers, and insurance proceeds may not adequately compensate us for our losses.
Equipment and operating systems necessary for our manufacturing businesses may break down, perform poorly, or fail. Any such disruption could cause losses in efficiencies, delays in shipments of our products and the loss of sales and customers, and insurance proceeds may not adequately compensate us for our losses.
The overall favorable or unfavorable effect of foreign currency translation on our financial results will vary by quarter. We do not enter into derivatives or other financial instruments to hedge this type of foreign currency translation risk. Economic conditions and regulatory changes caused by the United Kingdom’s exit from the European Union could adversely affect our business.
The overall favorable or unfavorable effect of foreign currency translation on our financial results will vary by quarter. We do not enter into derivatives or other financial instruments to hedge this type of foreign currency translation risk.
We sell products worldwide to global process industries and a significant portion of our revenue is from customers based in North America, Europe and China.
Risks Related to our Business and Industry Adverse changes in global and local economic conditions may negatively affect our industry, business and results of operations. We sell products worldwide to global process industries and a significant portion of our revenue is from customers based in North America, Europe and China.
As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially, and in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. As a result, we may not be able to renew our existing insurance policies or procure other desirable insurance on commercially reasonable terms, if at all.
We may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially, and in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage.
Environmental laws and regulations could also require us to acquire pollution abatement or remediation equipment, modify product designs, or incur other expenses. New regulations promulgated in reaction to climate change could result in increased manufacturing costs associated with air pollution control or energy requirements, and increased or new monitoring, recordkeeping, and reporting of greenhouse gas emissions.
New regulations promulgated in reaction to climate change could result in increased manufacturing costs associated with air pollution control or energy requirements, and increased or new monitoring, recordkeeping, and reporting of greenhouse gas emissions. We also see the potential for higher energy costs driven by climate change regulations.
In addition, the COVID-19 pandemic has impacted and other disease outbreaks could impact global trade and reduce demand for our products, and adversely affect the U.S. or global economy and capital markets.
In addition, the COVID-19 pandemic has impacted and other disease outbreaks could impact global trade, and adversely affect the U.S. or global economy and capital markets. The COVID-19 pandemic negatively affected the global economy, disrupted global supply chains, resulted in significant travel and transport restrictions and created significant volatility in the financial markets.
As part of our ongoing effort to upgrade our current information systems, we are implementing enterprise resource planning software to manage certain of our business operations. As we implement and add functionality, problems could arise that we have not foreseen.
We monitor and manage various information systems that exist within our global operations and upgrade or implement new enterprise resource planning software at our business operations as needed. As we implement and add functionality, problems could arise that we have not foreseen.
If we are unable to mitigate the impact of supply chain constraints and inflationary pressure through price increases or other measures our results of operations and financial condition could be negatively impacted. We use a variety of raw materials, including a significant amount of stainless steel, carbon steel, commodities and critical components to manufacture our products.
Supply chain constraints and inflationary pressure have and may in the future continue to have a negative impact on our results of operations and financial condition, including pressure on our gross profit margins. We use a variety of raw materials, including a significant amount of stainless steel, carbon steel, commodities and critical components to manufacture our products.
In 2021, our sales to Russia were $10.7 million, or 1% of our revenue. The United States has continued to expand export control restrictions applicable to certain Chinese firms and continued its assessment of new controls for “emerging foundational technologies,” escalating U.S.-China tension over technology competition.
For example, since 2018 the United States has imposed various trade and economic sanctions targeting certain persons in Russia and certain types of business with Russia. The United States has continued to expand export control restrictions applicable to certain Chinese firms and continued its assessment of new controls for “emerging foundational technologies,” escalating U.S.-China tension concerning technology.
Pursuant to the Credit Agreement, we have a borrowing capacity of $400.0 million with an uncommitted, unsecured incremental borrowing facility of $150.0 million with a maturity date of December 14, 2023. In 2018, we also issued $10.0 million in senior notes under our Multi-Currency Note Purchase and Private Shelf Agreement with PGIM, Inc., an affiliate of Prudential (Note Purchase Agreement).
In 2018, we also issued $10.0 million in senior notes under our Multi-Currency Note Purchase and Private Shelf Agreement with Prudential Private Capital, a unit of PGIM, Inc., and affiliate of Prudential Financial, Inc. (Note Purchase Agreement).
Environmental, health and mine safety laws and regulations impacting the mining industry may adversely affect demand for products manufactured by our Material Handling segment. SMH, which is in our Material Handling segment, supplies equipment to mining companies operating in major mining regions throughout the world.
SMH, which is in our Material Handling segment, supplies equipment to mining companies operating in major mining regions throughout the world.
In addition, certain risks generally are not fully insurable. Even where insurance coverage applies, insurers may contest their obligations to make payments.
As a result, we may not be able to renew our existing insurance policies or procure other desirable insurance on commercially reasonable terms, if at all. In addition, certain risks generally are not fully insurable. Even where insurance coverage applies, insurers may contest their obligations to make payments.
We may also incur future costs related to COVID-19, such as increased employee benefit costs if a significant number of our employees contract COVID-19 and require hospitalization or other costly medical treatment, or expenses related to repeated cleaning and sanitizing of our facilities, which may also adversely affect our financial results.
We have incurred costs and may incur costs in the future related to pandemics, such as increased employee benefit costs, if our employees require hospitalization or other costly medical treatment.
In response, Russia and China have begun considering and, in some cases, implementing trade sanctions that could affect U.S.-owned businesses.
Moreover, tensions between the U.S. and China have increased and future actions by the U.S. or Chinese governments may impact our operations in and supply from China, as well as sales to and from China. In response, Russia and China have begun considering and, in some cases, implementing trade sanctions that could affect U.S.-owned businesses.
If we are unable to successfully manage our manufacturing operations, our ability to deliver products to our customers could be disrupted and our business, financial condition and results of operations could be adversely affected. Equipment and operating systems necessary for our manufacturing businesses may break down, perform poorly, or fail.
Some countries intend to implement laws based on Pillar Two proposals, which may adversely impact our provision for income taxes, net income and cash flows. If we are unable to successfully manage our manufacturing operations, our ability to deliver products to our customers could be disrupted and our business, financial condition and results of operations could be adversely affected.
We also see the potential for higher energy costs driven by climate change regulations. Implementation of such new regulations could increase our costs or require us to modify our operations and negatively impact our business and results of operations.
Implementation of such new regulations could increase our costs or require us to modify our operations and negatively impact our business and results of operations. Since 2020, we have set annual goals related to environmental, social and governance (ESG) issues.
The evolving effects of the COVID-19 pandemic on the global economy are uncertain, and we may be further adversely affected by general economic conditions, even if government mandates are repealed. The impact of COVID-19 could worsen if new and more virulent or transmissible variants emerge which result in a resurgence of COVID-19 infection in affected regions.
The impact of COVID-19 could worsen if new and more virulent or transmissible variants emerge, resulting in a resurgence of COVID-19 infections in affected regions.
For example, since 2018 the United States has imposed various trade and economic sanctions targeting certain persons in Russia and certain types of business with Russia, and, as a result of the February 2022 Russian invasion of Ukraine, the United States, the European Union, and many other countries have imposed sanctions on Russia, individuals in Russia and Russian businesses, including several large banks.
Additionally, the military conflict between Russia and Ukraine and the global response to it has and may in the future adversely impact our revenues, gross margins and financial results. The United States, the European Union, and many other countries have imposed sanctions on Russia, individuals in Russia and Russian businesses, including several large banks.
Thus, small declines in revenues could disproportionately affect our operating results.
A large proportion of our costs are fixed, due in part to our significant selling, general and administrative, research and development, and manufacturing costs. Thus, small declines in revenues could disproportionately affect our operating results.
Removed
Our business is also subject to general risks and uncertainties that affect many other companies, including overall economic and industry conditions.
Added
China's previous zero-COVID policy has resulted in the closure of one of our manufacturing facilities in China for a period of time and such policy, if reinstituted in the future, heightens the risk that our facilities in China may be closed by government authorities as a result of any COVID-19 cases in a particular geographic area, which could cause disruptions to our business that could adversely impact our financial results.
Removed
The COVID-19 pandemic continues to produce a level of general uncertainty and, in some cases, adverse changes in global economic conditions and has heightened, and in some cases manifested, certain of the risks we normally face in operating our business, including those disclosed herein.
Added
With China ceasing its zero-COVID policy, our facilities in China are managing COVID-19 cases in its employee population, which has had and may continue to have an adverse effect on our operations.
Removed
The COVID-19 pandemic has negatively affected the global economy, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place,” and initially created significant disruption of the financial markets.
Added
The impact of pandemics and potential actions by government authorities in response to them may also have the effect of heightening other risks disclosed in this Annual Report on Form 10-K, any of which could materially and adversely affect our business and results of operations.
Removed
The COVID-19 pandemic has adversely affected, and may adversely affect in the 9 Table of Contents Kadant Inc. future, our business and results of operations, as government authorities have imposed, and may in the future impose, temporary mandatory closures of our facilities, travel restrictions, work-from-home orders, vaccine or testing mandates and social distancing protocols and other restrictions that have impacted our ability to adequately staff and maintain our operations at normal levels.
Added
In addition, if a ransomware attack or other cybersecurity incident occurs, either internally or at our vendors or third-party technology service providers, we could be prevented from accessing our data or systems, which may cause interruptions or delays in our business operations, cause us to incur remediation costs, subject us to demands to pay a ransom, or damage our reputation, regardless of whether we pay the ransom amount.
Removed
In March 2020, we experienced a significant decrease in market capitalization due to a decline in our stock price, and the overall U.S. stock market also declined significantly amid market volatility driven by the uncertainty surrounding the outbreak of COVID-19.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeOur principal engineering and manufacturing facilities are located in Huckeswagen, Germany; Valinhos, Brazil; Kamienna Gora, Poland; Three Rivers, Michigan, United States; Anderson, South Carolina, United States; Auburn, Massachusetts, United States; Eltmann, Germany; Weesp, The Netherlands; Wuxi, China; Moers, Germany; Guadalajara, Mexico; Bury, England and Huskvarna, Sweden.
Biggest changeOur principal engineering and manufacturing facilities are located in Valinhos, Brazil; Three Rivers, Michigan, United States; Anderson, South Carolina, United States; Huckeswagen, Germany; Auburn, Massachusetts, United States; Weesp, The Netherlands; Wuxi, China; Moers, Germany; Guadalajara, Mexico; Bury, England; Huskvarna, Sweden; Kamienna Gora, Poland and Eltmann, Germany.
Also, in Sidney, British Columbia, Canada, we lease the land associated with our building under a long-term lease, which expires in 2032. Our principal engineering and manufacturing facilities are located in Vitry-le-Francois, France; Jining, China; Lebanon, Ohio, United States; Sidney, British Columbia, Canada; Lohja, Finland; Surrey, British Columbia, Canada and Pell City, Alabama, United States.
In addition, in Sidney, British Columbia, Canada, we lease the land associated with our building under a long-term lease, which expires in 2032. Our principal engineering and manufacturing facilities are located in Vitry-le-Francois, France; Jining, China; Lebanon, Ohio, United States; Sidney, British Columbia, Canada; Lohja, Finland and Surrey, British Columbia, Canada.
Material Handling Segment We own approximately 105,000 square feet and lease approximately 639,000 square feet, under leases expiring on various dates ranging from 2022 to 2034. Our principal manufacturing and office space is located in Saltillo, Mississippi, United States; Georgsmarienhutte, Germany; Crown Point, Indiana, United States; Green Bay, Wisconsin, United States and Alfreton, England.
Material Handling Segment We own approximately 230,000 square feet and lease approximately 519,000 square feet, under leases expiring on various dates ranging from 2023 to 2034. Our principal manufacturing and office space is located in Saltillo, Mississippi, United States; Georgsmarienhutte, Germany; Crown Point, Indiana, United States; Green Bay, Wisconsin, United States and Alfreton, England.
The location and general character of our principal properties as of year-end 2021 are as follows: Flow Control Segment We own approximately 1,449,000 square feet and lease approximately 234,000 square feet, under leases expiring on various dates ranging from 2022 to 2028, of manufacturing, engineering, and office space.
The location and general character of our principal properties as of year-end 2022 are as follows: Flow Control Segment We own approximately 1,033,000 square feet and lease approximately 212,000 square feet, under leases expiring on various dates ranging from 2023 to 2028, of manufacturing, engineering, and office space.
Corporate We lease approximately 18,000 square feet in Westford, Massachusetts, United States, for our corporate headquarters under a lease expiring in 2026. Item 3. Legal Proceedings Not applicable.
Corporate We lease approximately 18,000 square feet in Westford, Massachusetts, United States, for our corporate headquarters under a lease expiring in 2026. Item 3. Legal Proceedings Not applicable. Item 4. Mine Safety Disclosures Not applicable. PART II
Industrial Processing Segment We own approximately 1,241,000 square feet and lease approximately 148,000 square feet, under leases expiring on various dates ranging from 2022 to 2025 of manufacturing, engineering, and office space. In addition, in China, we lease the land associated with our existing and future-planned facilities under long-term leases, which expire on dates ranging from 2054 to 2071.
Industrial Processing Segment We own approximately 859,000 square feet and lease approximately 532,000 square feet, under leases expiring on various dates ranging from 2023 to 2027 of manufacturing, engineering, and office space. In addition, in China, we lease the land associated with our future-planned facility under a long-term lease, which expires in 2071.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeIssuer Purchases of Equity Securities 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 did not repurchase any shares of our common stock during 2021.
Biggest changeIssuer Purchases of Equity Securities 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.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Market Price of Common Stock Our common stock trades on the New York Stock Exchange under the symbol "KAI." The closing market price on the New York Stock Exchange for our common stock on February 18, 2022 was $199.36 per share.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Market Price of Common Stock Our common stock trades on the New York Stock Exchange under the symbol "KAI." The closing market price on the New York Stock Exchange for our common stock on February 17, 2023 was $218.55 per share.
Holders of Common Stock As of February 18, 2022, we had approximately 1,976 holders of record of our common stock. This does not include holdings in street or nominee name.
Holders of Common Stock As of February 17, 2023, we had approximately 1,864 holders of record of our common stock. This does not include holdings in street or nominee name. 22 Table of Contents Kadant Inc.
Because our fiscal year ends on a Saturday, the graph values are calculated using the last trading day prior to the end of our fiscal year. 12/31/2016 12/30/2017 12/29/2018 12/28/2019 1/2/2021 1/1/2022 Kadant Inc. 100.00 165.94 135.31 178.28 239.97 394.55 Russell 3000 100.00 121.13 114.78 150.39 181.80 228.45 Dow Jones U.S. Industrial Machinery TSM 100.00 132.70 111.92 152.22 177.61 220.86
Because our fiscal year ends on a Saturday, the graph values are calculated using the last trading day prior to the end of our fiscal year. 12/30/2017 12/29/2018 12/28/2019 1/2/2021 1/1/2022 12/31/2022 Kadant Inc. 100.00 81.54 107.44 144.62 237.77 184.48 Russell 3000 100.00 94.76 124.15 150.08 188.60 152.37 Dow Jones U.S. Industrial Machinery TSM 100.00 84.34 114.71 133.84 166.44 145.27
Added
We have not repurchased any shares of our common stock under this authorization or under our previous $20 million authorization, which expired on May 20, 2022.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

70 edited+38 added−42 removed42 unchanged
Biggest changeA reconciliation of adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin from net income attributable to Kadant is as follows: (In thousands, except percentages) January 1, 2022 January 2, 2021 December 28, 2019 Net Income Attributable to Kadant $ 84,043 $ 55,196 $ 52,068 Net Income Attributable to Noncontrolling Interest 838 543 496 Provision for Income Taxes 27,171 17,948 16,358 Interest Expense, Net 4,554 7,242 12,542 Other Expense, Net 104 195 6,359 Operating Income 116,710 81,124 87,823 Impairment and Restructuring Costs 980 2,979 2,528 Gain on Sale of Building (515) — — Acquisition Costs 3,655 485 843 Acquired Backlog Amortization 1,326 544 1,323 Acquired Profit in Inventory 4,284 — 3,549 Adjusted Operating Income 126,440 85,132 96,066 Depreciation and Amortization 32,976 30,790 31,067 Adjusted EBITDA $ 159,416 $ 115,922 $ 127,133 Adjusted EBITDA Margin 20.3% 18.3% 18.0% As a percentage of revenue, adjusted EBITDA margin increased 200 basis points in 2021 and 30 basis points in 2020.
Biggest changeA reconciliation of adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin from net income attributable to Kadant is as follows: (In thousands, except percentages) December 31, 2022 January 1, 2022 January 2, 2021 Net Income Attributable to Kadant $ 120,928 $ 84,043 $ 55,196 Net Income Attributable to Noncontrolling Interest 802 838 543 Provision for Income Taxes 43,906 27,171 17,948 Interest Expense, Net 5,574 4,554 7,242 Other Expense, Net 72 104 195 Operating Income 171,282 116,710 81,124 Gain on Sale (a) (20,190) (515) — Acquisition Costs 668 3,655 485 Indemnification Asset Reversals (b) 1,316 — — Impairment and Restructuring Costs 1,334 980 2,979 Acquired Backlog Amortization (c) 703 1,326 544 Acquired Profit in Inventory Amortization (d) (218) 4,284 — Adjusted Operating Income (non-GAAP measure) 154,895 126,440 85,132 Depreciation and Amortization 34,233 32,976 30,790 Adjusted EBITDA (non-GAAP measure) $ 189,128 $ 159,416 $ 115,922 Adjusted EBITDA Margin (non-GAAP measure) 20.9% 20.3% 18.3% A reconciliation of free cash flow from net cash provided by operating activities is as follows: (In thousands) December 31, 2022 January 1, 2022 January 2, 2021 Net Cash Provided by Operating Activities $ 102,625 $ 162,420 $ 92,884 Less: Capital Expenditures (e) (28,199) (12,771) (7,595) Free Cash Flow (non-GAAP measure) $ 74,426 $ 149,649 $ 85,289 (a) Includes a $20.2 million gain on the China Transaction in our Industrial Processing segment.
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. 28 Table of Contents Kadant Inc.
In addition, our non-GAAP financial measures have limitations 28 Table of Contents Kadant Inc. 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.
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.
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.
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.
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.
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).
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).
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.
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.
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.
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 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.
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. 25 Table of Contents Kadant Inc.
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.
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.
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.
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 32 Table of Contents Kadant Inc. event of cancellation.
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.
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.
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.
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.
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.
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. 24 Table of Contents Kadant Inc.
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.
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.
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.
The preparation of these consolidated financial 31 Table of Contents Kadant Inc. 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.
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.
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.
For a discussion on the application of these estimates and other accounting policies, see Note 1 , Nature of Operations and Summary of Significant 31 Table of Contents Kadant Inc. Accounting Policies, in the accompanying consolidated financial statements.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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. 29 Table of Contents Kadant Inc.
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. 29 Table of Contents Kadant Inc.
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 $3.2 million reduction i n 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.
Liquidity and Capital Resources Consolidated working capital was $162.4 million at January 1, 2022, compared with $155.1 million at January 2, 2021.
Liquidity and Capital Resources Consolidated working capital was $201.9 million at December 31, 2022, compared with $162.4 million at January 1, 2022.
Judgment is also required for contracts involving variable consideration and multiple performance obligations. 32 Table of Contents Kadant Inc.
Judgment is also required for contracts involving variable consideration and multiple performance obligations.
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.
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.
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.
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.
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.
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.
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.
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.
Gross Profit Margin Gross profit margin by segment in 2021 and 2020 was as follows: January 1, 2022 January 2, 2021 Flow Control 51.0% 52.9% Industrial Processing 40.1% 41.3% Material Handling 34.4% 33.7% Consolidated Gross Profit Margin 42.9% 43.7% 26 Table of Contents Kadant Inc. Consolidated gross profit margin declined to 42.9% in 2021 compared with 43.7% in 2020.
Gross Profit Margin Gross profit margin by segment in 2022 and 2021 is as follows: December 31, 2022 January 1, 2022 Flow Control 52.0% 51.0% Industrial Processing 39.2% 40.1% Material Handling 34.4% 34.4% Consolidated 43.1% 42.9% Consolidated gross profit margin increased to 43.1% in 2022 compared with 42.9% in 2021.
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).
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).
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.
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.
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.
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 $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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Under our debt 30 Table of Contents Kadant Inc. 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.
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 covenan ts.
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.
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.
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.
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.
Cash Flows Cash flow information is as follows: (In thousands) January 1, 2022 January 2, 2021 Net Cash Provided by Operating Activities $ 162,420 $ 92,884 Net Cash Used in Investing Activities (154,475) (14,545) Net Cash Provided by (Used in) Financing Activities 22,808 (84,556) Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash (3,232) 4,584 Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash $ 27,521 $ (1,633) Operating Activities Cash provided by operating activities increased to $162.4 million in 2021 from $92.9 million in 2020.
Cash Flows Cash flow information is as follows: (In thousands) December 31, 2022 January 1, 2022 Net Cash Provided by Operating Activities $ 102,625 $ 162,420 Net Cash Used in Investing Activities (29,520) (154,475) Net Cash (Used in) Provided by Financing Activities (80,569) 22,808 Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash (6,972) (3,232) (Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash $ (14,436) $ 27,521 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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. 26 Table of Contents Kadant Inc.
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.
(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.
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.
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.
Selling, General, and Administrative Expenses Selling, general, and administrative (SG&A) expenses by segment in 2021 and 2020 were as follows: (In thousands, except percentages) January 1, 2022 % of Revenue January 2, 2021 % of Revenue Increase % Change Flow Control $ 76,730 27 % $ 63,382 28 % $ 13,348 21 % Industrial Processing 60,802 18 % 57,702 22 % 3,100 5 % Material Handling 38,575 23 % 33,526 23 % 5,049 15 % Corporate 32,680 N/A 27,295 N/A 5,385 20 % Consolidated SG&A Expenses $ 208,787 27 % $ 181,905 29 % $ 26,882 15 % Consolidated SG&A expenses as a percentage of revenue decreased to 27% in 2021 compared with 29% in 2020 principally due to higher revenue.
Selling, General, and Administrative Expenses Selling, general, and administrative (SG&A) expenses by segment in 2022 and 2021 is as follows: (In thousands, except percentages) December 31, 2022 % of Revenue January 1, 2022 % of Revenue Increase % Change Flow Control $ 86,458 25 % $ 76,730 27 % $ 9,728 13 % Industrial Processing 61,885 17 % 60,802 18 % 1,083 2 % Material Handling 40,067 20 % 38,575 23 % 1,492 4 % Corporate 35,995 N/A 32,680 N/A 3,315 10 % Consolidated $ 224,405 25 % $ 208,787 27 % $ 15,618 7 % 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.
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.
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.
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.
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.
See Note 1 2 , Business Segment and Geographical Information, in the accompanying consolidated financial statements for a description and financial information of our reportable operating segments.
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.
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.
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.
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.
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.
(In millions) Less than 1 Year 1-3 Years 3-5 Years After 5 Years Total Debt Obligations: Principal payments (a) $ 1.2 $ 255.2 $ 4.4 $ 3.8 $ 264.6 Interest payments (b) 4.3 4.6 0.6 0.2 9.7 Operating and Finance Lease Obligations 5.4 7.0 4.0 9.8 26.2 Letters of Credit and Bank Guarantees 18.5 4.4 0.6 — 23.5 Total $ 29.4 $ 271.2 $ 9.6 $ 13.8 $ 324.0 (a) Excludes $1.5 million related to a net fixed price purchase option exercisable in 2022.
(In millions) Less than 1 Year 1-3 Years 3-5 Years After 5 Years Total Debt Obligations: Principal payments $ 2.8 $ 4.5 $ 190.2 $ 1.7 $ 199.2 Interest payments (a) 8.6 16.9 15.8 0.1 41.4 Operating and Finance Lease Obligations 6.3 8.3 4.3 9.3 28.2 Letters of Credit and Bank Guarantees 27.5 4.6 0.4 — 32.5 Total $ 45.2 $ 34.3 $ 210.7 $ 11.1 $ 301.3 (a) Includes interest expense on both variable and fixed rate debt assuming no prepayments.
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 T he exchange rate effect on cash, cash equivalents, and restricted cash represents the impact of translation of cash balances at our foreign subsidiaries.
Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash T he exchange rate effect on cash, cash equivalents, and restricted cash represents the impact of translation of cash balances at our foreign subsidiari es.
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).
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).
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.
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.
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.
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.
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.
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.
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.
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.
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.
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%.
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.
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.
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.
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.
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.
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. 27 Table of Contents Kadant Inc.
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 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.
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.
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.
Removed
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.
Added
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.
Removed
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.
Added
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.
Removed
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.
Added
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.
Removed
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.
Added
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.
Removed
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.
Added
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.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

9 edited+0 added−0 removed3 unchanged
Biggest changeGains and losses arising from forward contracts are 33 Table of Contents Kadant Inc. recognized as offsets to gains and losses resulting from the transactions being hedged. We do not hold or engage in transactions involving derivative instruments for purposes other than risk management. Interest Rates Our exposure to changes in interest rates relates primarily to our long-term debt.
Biggest changeOur forward currency-exchange contracts hedge transactions 33 Table of Contents Kadant Inc. primarily denominated in U.S. dollars, Canadian dollars, and euros. Gains and losses arising from forward contracts are recognized as offsets to gains and losses resulting from the transactions being hedged. We do not hold or engage in transactions involving derivative instruments for purposes other than risk management.
A 10% negative movement in the euro foreign exchange rates against the U.S. dollar would have decreased our borrowing capacity by approximately $7.8 million at year-end 2021. The fair value of forward currency-exchange contracts is sensitive to fluctuations in foreign currency exchange rates.
A 10% negative movement in the euro foreign exchange rates against the U.S. dollar would have decreased our borrowing capacity by approximately $7.9 million at year-end 2022. The fair value of forward currency-exchange contracts is sensitive to fluctuations in foreign currency exchange rates.
A 10% decrease in the three-month LIBOR forward curve would have increased our unrealized loss by immaterial amounts in both 2021 and 2020. Currency Exchange Rates We generally view our investment in foreign subsidiaries in a functional currency other than our reporting currency as long-term. Our investment in foreign subsidiaries is sensitive to fluctuations in foreign currency exchange rates.
A 10% decrease in the three-month LIBOR forward curve would have increased our unrealized loss by an immaterial amount in 2022. Currency Exchange Rates We generally view our investment in foreign subsidiaries in a functional currency other than our reporting currency as long-term. Our investment in foreign subsidiaries is sensitive to fluctuations in foreign currency exchange rates.
A 10% decrease in functional currencies relative to the U.S. dollar, would have resulted in a reduction in stockholders' equity of $36.4 million at year-end 2021. At year-end 2021, we had $78.3 million of euro-denominated borrowings outstanding. The translation of our foreign-denominated debt impacts our borrowing capacity available under our Credit Agreement, which is calculated in U.S. dollars.
A 10% decrease in functional currencies relative to the U.S. dollar, would have resulted in a reduction in stockholders' equity of $38.6 million at year-end 2022. At year-end 2022, we had $73.1 million of euro-denominated borrowings outstanding. The translation of our foreign-denominated debt impacts our borrowing capacity available under our Credit Agreement, which is calculated in U.S. dollars.
Assuming year-end borrowing levels, a 10% increase in interest rates on our variable-rate debt would have increased our annual pre-tax interest expense by an immaterial amount in 2021 and 2020. A portion of our outstanding variable-rate debt at year-end 2021 and 2020 was hedged with a swap agreement sensitive to changes in the three-month LIBOR forward curve.
Assuming year-end borrowing levels, a 10% increase in interest rates on our variable-rate debt would have increased our annual pre-tax interest expense by $0.5 million in 2022. A portion of our outstanding variable-rate debt at year-end 2022 was hedg ed with a swap agreement sensitive to changes in the three-month London Interbank Offered Rate (LIBOR) forward curve .
We do not engage in extensive foreign currency hedging activities. However, when we do enter into foreign currency hedging activities, the purpose is to protect our functional currency cash flows related to these commitments from fluctuations in foreign exchange rates. Our forward currency-exchange contracts hedge transactions primarily denominated in U.S. dollars, Canadian dollars, and euros.
We do not engage in extensive foreign currency hedging activities. However, when we do enter into foreign currency hedging activities, the purpose is to protect our functional currency cash flows related to these commitments from fluctuations in foreign exchange rates.
A 10% adverse change in year-end 2021 foreign currency exchange rates related to our foreign currency exchange contracts would have resulted in an increase in unrealized losses of $0.1 million in 2021, which would have been largely offset by the corresponding change in the fair value of the underlying hedged items.
Any adverse change related to foreign currency contracts would have been largely offset by the corresponding change in the fair value of the underlying hedged items.
Our borrowings under the Credit Agreement of $250.3 million at year-end 2021 and $218.0 million at year-end 2020 bear variable rates of interest, which adjust frequently based on prevailing market rates.
Interest Rates Our exposure to changes in interest rates relates primarily to our long-term debt. Our borrowings under the Credit Agreement of $186.1 million at year-end 2022 bear variable rates of interest, which adjust frequently based on prevailing market rates.
The fair value of forward currency-exchange contracts is the estimated amount that we would pay or receive upon termination of the contracts.
The fair value of forward currency-exchange contracts is the estimated amount that we would pay or receive upon termination of the contracts. A 10% adverse change in year-end 2022 foreign currency exchange rates related to our foreign currency exchange contracts would have had an immaterial effect on our results of operations in 2022.

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