KADANT INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

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

Overview

Company Background
We are a global supplier of technologies and engineered systems that drive
Sustainable Industrial Processing. Our products and services play an integral
role in enhancing efficiency, optimizing energy utilization, and maximizing
productivity in process industries while helping our customers advance their
sustainability initiatives with products that reduce waste or generate more
yield with fewer inputs, particularly fiber, energy, and water. Producing more
while consuming less is a core aspect of Sustainable Industrial Processing and a
major element of the strategic focus of our businesses.
Our financial results are reported in three reportable operating segments: Flow
Control, Industrial Processing, and Material Handling. The Flow Control segment
consists of our fluid-handling and doctoring, cleaning, & filtration product
lines; the Industrial Processing segment consists of our wood processing and
stock-preparation product lines; and the Material Handling segment consists of
our conveying and vibratory, baling, and fiber-based product lines. See   Note
  1    2  , Business Segment and Geographical Information, in the accompanying
consolidated financial statements for a description and financial information of
our reportable operating segments.

Industry and business overview

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

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

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

•Material Handling - Our Material Handling segment also ended the year with
record bookings. In August 2021, we acquired East Chicago Machine Tool
Corporation (Balemaster) and certain assets of affiliated companies, which
contributed $13.2 million of orders. Bookings for baling products at our
European operations continue to be bolstered by improved business conditions,
including the recovery of recycled commodity prices. Bookings for parts and
consumables at our conveying and vibratory equipment business have rebounded
from depressed 2020 levels due to the relaxation of pandemic-related
restrictions and an increased demand from our mining customers, while bookings
for capital equipment have moderated.
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In 2021, many of our operations were impacted by labor availability and supply
chain constraints, the latter of which resulted in inflationary pressure on
material costs, longer lead times, and increased freight costs, as well as
customer-requested delays in shipments. We believe these challenges will
generally persist into 2022. Our businesses are alleviating supply chain
constraints through various measures, including advance purchases of raw
materials to prevent potential manufacturing disruptions and mitigating
increased material and freight costs through price adjustments, when possible.
We believe that the fundamentals of our business will remain positive,
particularly given our high backlog levels, continued strong bookings, and
ongoing strength in the markets we serve as we enter 2022. Despite this
optimism, we expect our operating environment to continue to be challenging as a
result of the factors impacting our business discussed above and the
uncertainties and risks surrounding the COVID-19 pandemic. For more information
on risks related to health epidemics to our business, including COVID-19, and
other factors impacting our business discussed above, please see   Part I, Item
1A  , "Risk Factors."

International Sales

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

International trade

The United States imposes tariffs on certain imports from China, which has and
will continue to increase the cost of some of the equipment that we import.
Although we are working to mitigate the impact of tariffs through pricing and
sourcing strategies, we cannot be sure these strategies will effectively
mitigate the impact of these costs. For more information on risks associated
with our global operations, including tariffs, please see   Part I, Item 1A  ,
"Risk Factors."

Acquisitions

We expect that a significant driver of our growth over the next several years
will be the acquisition of businesses and technologies that complement or
augment our existing products and services or may involve entry into a new
process industry. We continue to pursue acquisition opportunities.
In the third quarter of 2021, we acquired Clouth for $92.9 million, net of cash
acquired plus debt assumed. Clouth, which is included in our Flow Control
segment, is a leading manufacturer of doctor blades and related equipment used
in the production of paper, packaging, and tissue. We expect several synergies
in connection with this acquisition, including deepening our presence in the
growing ceramic blade market and expansion of product sales at our existing
businesses by leveraging Clouth's complementary global geographic footprint.
Clouth has three manufacturing facilities in Germany and one in Poland and
generated revenue of approximately 40.5 million euros for the trailing twelve
months ended June 30, 2021 prior to its acquisition by us.
In the third quarter of 2021, we also acquired Balemaster for $53.7 million, net
of cash acquired. Balemaster, which is included in our Material Handling
segment, is a leading U.S. manufacturer of horizontal balers and related
equipment used primarily for recycling packaging waste at corrugated box plants
and large retail and distribution centers. We expect several synergies in
connection with this acquisition, including expanding our presence in the
secondary material processing sector and creating new opportunities for
leveraging our high-performance balers produced in Europe. Balemaster generated
revenue of approximately $22.2 million for the trailing twelve months ended June
30, 2021 prior to its acquisition by us.
In the fourth quarter of 2021, we acquired a business in India, which is
included in our Industrial Processing segment, for approximately $2.9 million.
In 2020, we acquired a business in Canada, which is included in our Industrial
Processing segment, for approximately $6.9 million, net of cash acquired.
See   Note 2  , Acquisitions, in the accompanying consolidated financial
statements for further details.


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Results of Operations

2021 Compared to 2020

Revenue

The following table presents changes in revenue by segment between 2021 and
2020, and those changes excluding the effect of foreign currency translation and
acquisitions which we refer to as change in organic revenue. The presentation of
the change in organic revenue is a non-GAAP measure. We believe this non-GAAP
measure helps investors gain an understanding of our underlying operations
consistent with how management measures and forecasts its performance,
especially when comparing such results to prior periods. This non-GAAP measure
should not be considered superior to or a substitute for the corresponding GAAP
measure.
Revenue by segment in 2021 and 2020 was as follows:
                                                                                                                                                                              (Non-GAAP)
                                                                                                                                                                              Change in
                                                                                                                                                                           Organic Revenue
(In thousands, except         January 1,          January 2,                                                          Currency
percentages)                     2022                2021              Total Increase           % Change            Translation            Acquisitions              Increase              % Change
Flow Control                 $  288,788          $  225,444          $        63,344                  28  %       $       6,425          $      23,221          $       33,698                   15  %
Industrial Processing           328,762             261,577                   67,185                  26  %              13,012                    589                  53,584                   20  %
Material Handling               169,029             148,007                   21,022                  14  %               2,796                  9,038                   9,188                    6  %

Consolidated turnover $786,579 $635,028 $

 151,551                  24  %       $      22,233          $      32,848          $       96,470                   15  %



Consolidated revenue in 2021 increased 24%, while consolidated organic revenue
increased 15%, driven by higher demand for both parts and consumables products
and capital equipment principally at our Industrial Processing and Flow Control
segments as described below.
Revenue at our Flow Control segment increased 28% in 2021, while organic revenue
increased 15% due to higher demand for parts and consumables products and, to a
lesser extent, capital equipment at substantially all locations. Increased
demand for parts and consumables products in 2021 was due in part to customer
maintenance requirements, pent-up demand, and orders in the latter part of the
year to mitigate potential supply chain disruptions. Conversely, revenue during
most of 2020 was depressed as a result of customer downtimes, shutdowns, and
visitation restrictions related to the COVID-19 pandemic. Higher capital
equipment revenue in 2021 resulted from improved market conditions and pent-up
demand, while revenue in 2020 was adversely impacted by customer reductions in
capital spending and deferrals of equipment installations as a result of the
pandemic.
Revenue at our Industrial Processing segment increased 26% in 2021, while
organic revenue increased 20% due to higher demand for both capital equipment
and parts and consumables products. Our wood processing business continues to
experience high demand for its products, driven by near capacity mill rates
resulting in increased capital investment and parts consumption. Additionally,
demand for parts was augmented by maintenance requirements in the latter part of
2021 at many of our wood processing customers. Increased revenue at our
stock-preparation business was led by increased demand for parts and consumables
at our North American stock-preparation operation due to improved market
conditions and pent-up demand coupled with a depressed 2020 period. Capital
equipment revenue also increased as a result of large orders at our Chinese
operation, offset in part by lower shipments at our North American and European
operations due to the timing of orders and curtailed spending by our customers
in 2020, which impacted revenue in the first half of 2021.
Revenue at our Material Handling segment increased 14% in 2021, while organic
revenue increased 6%. Demand for our European baling products was bolstered by
improved business conditions in Europe, including the recovery of recycled
commodity prices. This improvement was partially offset by lower capital
equipment revenue at our conveying and vibratory equipment business in 2021.

Gross margin

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

                                         January 1,        January 2,
                                            2022              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%


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Consolidated gross profit margin declined to 42.9% in 2021 compared with 43.7%
in 2020. The 2021 period included $4.3 million of amortization of acquired
profit in inventory, which lowered consolidated gross profit margin by 0.5
percentage points, and lower benefits received from government employee
retention assistance programs. Benefits received from these programs were $0.9
million, or 0.1 percentage points of consolidated gross profit margin, in 2021
and $3.7 million, or 0.6 percentage points of consolidated gross profit margin,
in 2020.
Gross profit margin at our Flow Control segment decreased to 51.0% in 2021
compared with 52.9% in 2020 due to the inclusion of $3.1 million of amortization
of acquired profit in inventory, which lowered gross profit margin in 2021 by
1.1 percentage points, and a lower gross profit margin profile for Clouth. We
expect the lower gross profit margin profile for Clouth to continue to have a
negative impact on our Flow Control gross profit margin in 2022.
Gross profit margin at our Industrial Processing segment decreased to 40.1% in
2021 compared with 41.3% in 2020 due principally to lower benefits received from
government employee retention assistance programs. Cost of revenue included
benefits received of $0.7 million in 2021 compared with $2.9 million in 2020
related to these programs. The gross profit margin was also impacted by
lower-margin capital equipment revenue at our Chinese stock-preparation business
offset in part by a higher margin at our wood processing business.
Gross profit margin at our Material Handling segment increased to 34.4% in 2021
compared with 33.7% in 2020 due to a higher gross profit margin profile for
Balemaster and an improvement in gross profit margin for capital equipment at
our existing baler business. This was offset in part by $1.2 million of
amortization of acquired profit in inventory, which lowered gross profit margin
by 0.7 percentage points in 2021.

Selling, general and administrative expenses

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

                                            January 1,                                   January 2,
(In thousands, except percentages)             2022               % of Revenue              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. Consolidated SG&A
expenses increased $26.9 million as a result of the inclusion of $9.7 million of
SG&A expenses from acquisitions, higher incentive compensation resulting from
our improved financial performance, $5.1 million from the unfavorable effect of
currency translation, and an incremental $4.0 million of acquisition-related
costs. SG&A expenses included benefits received from government employee
retention assistance programs of $1.4 million in 2021 and $2.2 million in 2020.
SG&A expenses at our Flow Control segment increased $13.3 million principally
due to the inclusion of $7.0 million of SG&A expenses from Clouth, $3.1 million
of acquisition-related costs, and $1.7 million from the unfavorable effect of
foreign currency translation. The remaining increase is principally attributable
to higher incentive compensation in 2021.
SG&A expenses at our Industrial Processing segment increased $3.1 million
principally due to $2.7 million from the unfavorable effect of foreign currency
translation.
SG&A expenses at our Material Handling segment increased $5.0 million
principally due the inclusion of $2.4 million of SG&A expenses from Balemaster
and an incremental $1.3 million of acquisition-related costs.
SG&A expenses at Corporate increased $5.4 million primarily due to higher
incentive compensation and, to a lesser extent, increased professional service
fees.

Depreciation and other costs, net

Impairments and other costs, net in 2021 included an impairment charge of $0.5
million related to the write down of an intangible asset and restructuring costs
totaling $0.5 million for severance costs and the write down of certain assets
associated with the closure of a redundant business in our Flow Control segment.
Impairments and other costs, net in 2021 also included a gain on the sale of a
building of $0.5 million within our Industrial Processing segment.
Impairments and other costs, net in 2020 included impairment charges of $1.9
million related to the write down of intangible assets associated with our
timber-harvesting products, which are included in our Industrial Processing
segment, as a result of a continued decline in revenue and operating results for
this business. Impairments and other costs, net in 2020 also included
restructuring costs of $1.1 million, which consisted of severance costs of $0.7
million at our Flow Control segment, $0.2 million at our Industrial Processing
segment, and $0.2 million at our Material Handling segment. These restructuring
costs
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represent severance associated with a restructuring plan implemented in response
to the slowdown in the global economy that was largely driven by the impact of
the COVID-19 pandemic.
See   Note 1  , Nature of Operations and Summary of Significant Accounting
Policies, under the heading Impairment of Long-Lived Assets, and   Note 8  ,
Other Costs, Net in the accompanying consolidated financial statements for
further details relating to the items discussed above.

Interest charges

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

Provision for income taxes

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

Net Income

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

Non-GAAP Key Performance Indicators

In addition to the financial measures prepared in accordance with GAAP, we use
certain non-GAAP financial measures, including organic revenue (defined as
revenue excluding the effect of foreign currency translation and acquisitions),
adjusted operating income, earnings before interest, taxes, depreciation, and
amortization (EBITDA), adjusted EBITDA, adjusted EBITDA margin (defined as
adjusted EBITDA divided by revenue), and free cash flow (defined as cash flow
provided by operations less capital expenditures).
We use organic revenue in order to understand our trends and to forecast and
evaluate our financial performance and compare revenue to prior periods (see
discussion in Revenue above). Adjusted operating income, adjusted EBITDA, and
adjusted EBITDA margin exclude impairment and restructuring costs, acquisition
costs, amortization expense related to acquired profit in inventory and backlog,
and certain gains or losses. These items are excluded as they are not indicative
of our core operating results and are not comparable to other periods, which
have differing levels of incremental costs, expenditures or income, or none at
all. Additionally, we use free cash flow in order to provide insight on our
ability to generate cash for acquisitions and debt repayments, as well as for
other investing and financing activities.
We believe these non-GAAP financial measures, when taken together with the
corresponding GAAP financial measures, provide meaningful supplemental
information regarding our performance by excluding certain items that may not be
indicative of our core business, operating results, or future outlook. We
believe that the inclusion of such measures helps investors gain an
understanding of our underlying operating performance and future prospects,
consistent with how management measures and forecasts our performance,
especially when comparing such results to previous periods or forecasts and to
the performance of our competitors. Such measures are also used by us in our
financial and operating decision-making and for compensation purposes. We also
believe this information is responsive to investors' requests and gives them an
additional measure of our performance.
  Our non-GAAP financial measures are not meant to be considered superior to or
a substitute for the results of operations or cash flow prepared in accordance
with GAAP. In addition, our non-GAAP financial measures have limitations
associated with their use as compared to the most directly comparable GAAP
measures, in that they may be different from, and therefore not comparable to,
similar measures used by other companies.
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A reconciliation of adjusted operating income, adjusted EBITDA and adjusted EBITDA margin to net income attributable to Kadant is as follows:

                                                            January 1,          January 2,           December 28,
(In thousands, except percentages)                             2022                2021                  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. The 2021 increase was primarily due to organic
revenue growth without a proportionate increase in operating expenses. The 2020
increase was primarily due to cost reduction efforts, including the impact of
benefits received from government employee retention assistance programs, to
mitigate lower revenue and an increased proportion of higher margin parts and
consumables revenue.
A reconciliation of free cash flow from cash flow provided by operating
activities is as follows:

                                              January 1,      January 2,       December 28,
(In thousands)                                   2022            2021              2019

Cash flow from operating activities $162,420 $92,884

  $      97,413
Less: Capital Expenditures                      (12,771)          (7,595)            (9,957)
Free Cash Flow                               $  149,649      $    85,289      $      87,456



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

2020 Compared to 2019

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

Cash and capital resources

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


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Cash Flows

The cash flow information is as follows:

                                                                      January 1,           January 2,
(In thousands)                                                           2022                 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)

Effect of exchange rate 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. Our operating cash flows primarily consist of cash
received from customers, offset by cash payments for items such as inventory,
employee compensation, operating leases, income taxes and interest payments on
outstanding debt obligations. The increase in cash provided by operating
activities in 2021 was principally driven by improvements in operating assets
and liabilities and net income.
Cash provided by operating assets and liabilities was $29.3 million in 2021,
including sources of cash of $27.7 million from customer deposits and $26.3
million from accounts payable, reflecting the impact of increased capital
equipment order activity. Other liabilities provided cash of $19.5 million,
which includes a $6.2 million deposit received for the anticipated sale of a
building in China and an increase in our accrued incentive compensation, advance
billings, and accrued income taxes resulting from our improved financial
performance. These sources of cash were offset in part by cash used of $16.7
million for accounts receivable mostly due to revenue growth and timing of
shipments, $15.0 million for other assets due in part to prepayments for raw
materials and a land use right operating lease related to the relocation of our
existing facility in China, and $11.2 million for a buildup of inventories for
capital equipment orders and to mitigate potential supply chain issues.
Cash used for operating assets and liabilities of $8.0 million in 2020 included
cash used of $15.6 million for accounts payable primarily due to reduced
spending levels for capital equipment projects and $8.6 million for other
liabilities due in part to a decrease in advance billings resulting from lower
contract activity and a payment of $2.4 related to the settlement of a
post-retirement benefit plan. These uses of cash were offset by cash provided of
$13.2 million due to a reduction in unbilled revenue and accounts receivable
primarily as a result of lower capital equipment revenue during 2020.

Investing activities

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

Fundraising activities

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

Effect of exchange rate on cash, cash equivalents and restricted cash

The exchange rate effect on cash, cash equivalents, and restricted cash
represents the impact of translation of cash balances at our foreign
subsidiaries. The $3.2 million negative exchange rate effect in 2021 was
primarily attributable to the strengthening of the U.S. dollar against the euro
and the Swedish krona, offset in part by the weakening of the U.S. dollar
against the Chinese renminbi. The $4.6 million positive exchange rate effect in
2020 primarily related to the weakening of the U.S. dollar against the euro and
Chinese renminbi.

Borrowing capacity and borrowing obligations

We entered into an unsecured multi-currency revolving credit facility, dated as
of March 1, 2017 (as amended and restated to date, the Credit Agreement). At
year-end 2021, we have a borrowing capacity available under our Credit Agreement
of $149.9 million in addition to a $150 million uncommitted, unsecured
incremental borrowing facility. Under our debt
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agreements, our leverage ratio must be less than 3.75 or, if we elect, for the
quarter during which a material acquisition occurs and for the three fiscal
quarters thereafter, must be less than 4.00. As of January 1, 2022, our leverage
ratio was 1.3 and we were in compliance with our debt covenants. We expect to
renew our Credit Agreement prior to its maturity date of December 14, 2023. See

Note 6, Short-term and long-term obligations, in the accompanying consolidated financial statements for additional information regarding our debt obligations.

Additional cash and capital resources

On May 20, 2021, our board of directors approved the repurchase of up to $20
million of our equity securities during the period from May 20, 2021 to May 20,
2022. We have not repurchased any shares of our common stock under this
authorization or our previous authorization, which expired on May 13, 2021.
We paid cash dividends of $11.5 million in 2021. On November 18, 2021, we
declared a quarterly cash dividend of $0.25 per share totaling $2.9 million that
was paid on February 3, 2022. Future declarations of dividends are subject to
our board of directors' approval and may be adjusted as business needs or market
conditions change. The declaration of cash dividends is subject to our
compliance with the covenant in our revolving credit facility related to our
consolidated leverage ratio.
We plan to make expenditures of approximately $18.0 million during 2022 for
property, plant, and equipment. In addition, one of our Chinese subsidiaries
expects to build a new facility and relocate over the next two years. Capital
expenditures for the new facility are estimated to be approximately $20 million,
which will be offset by the proceeds received from the sale of our existing
facility. See   Note     15  , Subsequent Event, in the accompanying
consolidated financial statements for additional information regarding the
anticipated relocation of our Chinese manufacturing facility.
As of January 1, 2022, we had approximately $245.1 million of total unremitted
foreign earnings. It is our intent to indefinitely reinvest $223.0 million of
these earnings to support the current and future capital needs of our foreign
operations, including debt repayments, if any. In 2021, we recorded withholding
taxes on the earnings in certain foreign subsidiaries that we plan to repatriate
in the foreseeable future. The foreign withholding taxes that would be required
if we were to remit the indefinitely-reinvested foreign earnings to the United
States would be approximately $4.1 million.
We believe that existing cash and cash equivalents, along with cash generated
from operations, our existing borrowing capacity, and continued access to debt
markets, will be sufficient to meet the capital requirements of our operations
for the next 12 months and the foreseeable future.

Important 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.

                                                Less than 1                                                 After 5
(In millions)                                      Year             1-3 Years           3-5 Years            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.
(b)Includes interest expense on both variable and fixed rate debt assuming no
prepayments. Variable interest rates have been assumed to remain constant
through the end of the term at the rates that existed as of year-end 2021.

Application of critical accounting estimates

Management's discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with GAAP. The preparation of these consolidated
financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of our consolidated financial statements, and the
reported amounts of revenue and expenses during the reporting period. Our actual
results may differ from these estimates under different assumptions or
conditions.
Critical accounting policies and estimates are defined as those that entail
significant judgments and uncertainties and could potentially result in
materially different results under different assumptions and conditions. For a
discussion on the application of these estimates and other accounting policies,
see   Note 1  , Nature of Operations and Summary of Significant
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Accounting Policies, in the accompanying consolidated financial statements. We
believe that our most critical accounting policies and estimates upon which our
financial position depends, and which involve the most complex or subjective
decisions or assessments, are those described below.

Income taxes

We operate in numerous countries under many legal forms and, as a result, are
subject to the jurisdiction of numerous domestic and non-U.S. tax authorities,
as well as to tax agreements and treaties among these governments. Determination
of taxable income in any jurisdiction requires the interpretation of the related
tax laws and regulations and the use of estimates and assumptions regarding
significant future events, such as the amount, timing and character of
deductions, permissible revenue recognition methods under the tax law and the
sources and character of income and available tax credits. Changes in tax laws,
regulations, agreements and treaties, currency-exchange restrictions or our
level of operations or profitability in each taxing jurisdiction could have an
impact upon the amount of current and deferred tax balances and our results of
operations.
We compute our provision for income taxes using the asset and liability method,
and we recognize deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial reporting and tax
bases of assets and liabilities and for tax loss or credit carryforwards. We
measure deferred tax assets and liabilities using the currently enacted tax
rates that are expected to apply to taxable income in the years in which we
expect to realize those deferred tax assets and liabilities. We estimate the
degree to which our deferred tax assets on deductible temporary differences and
tax loss or credit carryforwards will result in an income tax benefit based on
the expected profitability by tax jurisdiction, and we provide a valuation
allowance for these deferred tax assets if it is more likely than not that they
will not be realized in the future. If it were to become more likely than not
that these deferred tax assets would be realized, we would reverse the related
valuation allowance. Should our actual future taxable income by tax jurisdiction
vary from our estimates, additional valuation allowances or reversals thereof
may be necessary. When assessing the need for a valuation allowance in a tax
jurisdiction, we evaluate the weight of all available evidence to determine
whether it is more likely than not that some portion or all of the deferred
income tax assets will not be realized. As part of this evaluation, we consider
our cumulative three-year history of earnings before income taxes, taxable
income in prior carryback years, future reversals of existing taxable temporary
differences, prudent and feasible tax planning strategies, and expected future
results of operations. At year-end 2021, we continued to maintain a valuation
allowance in the United States against certain of our state operating loss
carryforwards due to the uncertainty of future profitability in these state
jurisdictions in the United States, and we maintained valuation allowances in
certain foreign jurisdictions because of the uncertainty of future
profitability. Our tax valuation allowance was $9.2 million at year-end 2021.
In the ordinary course of business there are inherent uncertainties and
judgements required in quantifying our income tax positions. It is our policy to
provide for uncertain tax positions and the related interest and penalties based
upon our assessment of whether a tax benefit is more likely than not to be
sustained upon examination by tax authorities. On a quarterly basis, we evaluate
our uncertain tax positions against various factors, including changes in facts
or circumstances, tax laws, or the status of audits by tax authorities. We
believe that we have appropriately accounted for any liability for unrecognized
tax benefits, and at year-end 2021, our liability for these unrecognized tax
benefits, including an accrual for the related interest and penalties, totaled
$11.4 million. To the extent we prevail in matters for which a liability for an
unrecognized tax benefit is established or are required to pay amounts in excess
of the liability, our effective tax rate in a given financial statement period
may be affected.
We intend to repatriate the distributable reserves of select foreign
subsidiaries back to the United States and, during 2021, we recorded $0.6
million of net tax expense associated with these foreign earnings that we plan
to repatriate in 2022. Except for these select foreign subsidiaries, we intend
to reinvest indefinitely the earnings of our international subsidiaries in order
to support the current and future capital needs of their operations, including
the repayment of our foreign debt.

Revenue recognition

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

We use assumptions and estimates in determining the fair value of assets
acquired and liabilities assumed in a business combination, including the
determination of the fair value of intangible assets acquired, which represents
a significant portion of the purchase price in many of our acquisitions. We
estimate the fair value of intangible assets primarily based on projections of
discounted cash flows which we expect to arise from identifiable intangible
assets of acquired businesses. The determination of the allocation of the
purchase price for the fair value of intangible assets acquired requires
significant judgment as does the determination as to whether such intangibles
are amortizable or non-amortizable and, if amortizable, the amortization period
of the intangible asset.
We evaluate the recoverability of goodwill and indefinite-lived intangible
assets as of the end of each fiscal year, or more frequently if events or
changes in circumstances indicate that the carrying value of an asset might be
impaired. Estimates of discounted future cash flows arising from intangible
assets acquired require assumptions related to revenue and operating income
growth rates, discount rates, and other factors. Different assumptions from
those made in our analysis could materially affect projected cash flows and our
evaluation of goodwill and indefinite-lived intangible assets for impairment. At
year-end 2021 and 2020, we performed a qualitative impairment analysis (Step 0)
for our reporting units, except for the material handling reporting unit for
which we performed a quantitative impairment analysis (Step 1) at year-end 2020.
Based on these analyses, we determined goodwill and indefinite-lived intangible
assets were not impaired. Goodwill totaled $396.9 million and indefinite-lived
intangible assets totaled $28.9 million at year-end 2021.
Definite-lived intangible assets are evaluated for impairment if events or
changes in circumstances indicate that the carrying value of an asset might be
impaired, such as a significant reduction in cash flows associated with the
assets. Actual cash flows arising from a particular intangible asset could vary
from projected cash flows which could imply different carrying values from those
established at the dates of acquisition and which could result in impairment of
such asset. No indicators of impairment were identified in 2021 and 2020, except
for impairment charges of $0.5 million in 2021 related to the closure of a
business in our Flow Control Segment and $1.9 million in 2020 associated with
our timber-harvesting product line, which is included in our Industrial
Processing segment. Definite-lived intangible assets were $170.4 million at
year-end 2021.
A material adverse change in the business climate including a prolonged economic
downturn and weakness in demand for our products could negatively affect the
revenue and profitability assumptions used in our assessment of goodwill and
intangible assets, which may result in impairment charges. Any future impairment
charges could have a material adverse effect on our results of operations in the
period in which an impairment is determined to exist.
See   Note 1  , Nature of Operations and Summary of Significant Accounting
Policies, under the heading Impairment of Long-Lived Assets, in the accompanying
consolidated financial statements for further details regarding impairment costs
recorded in 2021 and 2020.

Inventories

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

Recent accounting pronouncements

See Note 1, Nature of Transactions 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.

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