Thank you for standing by, and welcome to the Fourth Quarter 2021 Kadant Inc. Earnings Conference Call. As a reminder, today's program may be recorded. I would now like to introduce your host for today's program, Michael McKenney, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, Jonathan. Good morning, everyone, and welcome to Kadant's Fourth Quarter and Full Year 2021 Earnings Call. With me on the call today is Jeff Powell, our President and Chief Executive Officer. Before we begin, let me read our safe harbor statement. Various remarks that we may make today about Kadant's future plans and expectations, financial and operating results, and prospects are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements as a result of various important factors, including those outlined at the beginning of our slide presentation and those discussed under the heading Risk Factors in our annual report on Form 10-K for the fiscal year ended January 2, 2021, and subsequent filings with the Securities and Exchange Commission. In addition, any forward-looking statements we make during this webcast represent our views and estimates only as of today. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or estimates change. During this webcast, we will refer to some non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is contained in our fourth quarter earnings press release and slides presented on the webcast and discussed in the conference call, which are available in the Investors section of our website at www.kadant.com. Finally, I wanted to note that when we refer to GAAP earnings per share or EPS and adjusted EPS on this call, we are referring to each of these measures as calculated on a diluted basis. With that, I'll turn the call over to Jeff Powell to give you an update on Kadant's business and future prospects. Following Jeff's remarks, I'll give an overview of our financial results for the quarter, and we will then have a Q&A session. Jeff?

Thanks, Mike. Hello, everyone. Thank you for joining us this morning to review our fourth quarter and full year results and discuss our business outlook for 2022. The fourth quarter was a solid finish to an exceptional year. Despite the uncertainties brought about by the pandemic, supply chain constraints, and macroeconomic headwinds, we had another well-executed quarter and generated record cash flow among several other financial records. Good capital project activity across all our operating segments and robust aftermarket demand led to strong bookings and record backlog. I'll provide more details about this activity when I discuss the results of our operating segments. Our balance sheet remains healthy, and we finished the year well positioned to capitalize on new opportunities as they develop. As many of you know, our technologies play a pivotal role in helping our customers advance their sustainability initiatives with product innovations that reduce waste or generate more yield with fewer inputs, particularly fiber, energy, and water. This is what we refer to as sustainable industrial processing, producing more while consuming less. And it is a major element of our strategic focus and value proposition. At the end of 2021, we were honored to be named by Newsweek magazine as one of America's most responsible companies for a second consecutive year. We were also selected as a winner of the 2021 SEAL Business Sustainability Award in the environmental initiatives category. It's rewarding to be recognized for our sustainability efforts and our work towards driving sustainable industrial processing. Turning now to Slide 6 and our Q4 financial performance. You can see we had significant increases across all our key financial metrics and achieved new records in essentially every metric shown in the slide. Q4 revenue was up 30% compared to the fourth quarter of 2020 to a record of $219 million. Excluding acquisitions and the favorable impact of FX, revenue was up 18% compared to the same period last year. Our aftermarket parts revenue was up 22% to a record $137 million. Improved operating performance drove our adjusted EBITDA margin to 20.5%, which contributed to our record operating cash flow of $61 million in Q4. All our operating segments delivered excellent adjusted EBITDA margin performance despite the continuing inflationary pressures on material and ongoing supply chain constraints. Our Q4 GAAP EPS and adjusted EPS were up 48% and 50%, respectively. The record quarterly earnings performance contributed to an exceptional full year performance, which I'll review next, Slide 7. Strong economic momentum at the beginning of the year continued throughout 2021. While the challenges shifted from primarily pandemic-focused issues to supply chain, labor availability, and inflation, we experienced solid demand from our customers and a general feeling of increasing optimism in most regions of the world. Full year revenue increased 24% to a record $787 million, while our net income reached a new record at $84 million, up 52% compared to the prior year. As a result, adjusted diluted EPS increased to $7.83, exceeding the prior record set in 2019 at $5.36 per share. As many of you will recall, we set an adjusted EBITDA margin goal of 20% at our Investor Day event in March 2019. At that time, our adjusted EBITDA margin was around 18%. I'm pleased to say we achieved this in 2021 with our full year adjusted EBITDA margin of record 20.3%. This contributed to our record operating cash flow of $162 million and free cash flow of $150 million. Our workforce around the globe deserves tremendous credit for these results as they performed exceptionally well under challenging circumstances. I'm extremely proud of our employees for the innovative work they have done and continue to do to serve our customers. Next, I'd like to review our performance in our 3 operating segments. Our Flow Control segment continued its upward revenue trend with solid contributions from our recent acquisition. Revenue increased 30% to a record $78 million in the fourth quarter, and aftermarket parts revenue made up 74% of total revenue. Organic revenue, which excludes acquisitions and FX, increased 8% compared to the same period last year. Our integration of this business, which we acquired in the third quarter of 2021 is going as planned. While their operating margins are currently lower than our other flow control companies, management is implementing margin improvement initiatives outlined at the time of the acquisition. This includes, among other items, our 80/20 initiatives, which we have launched at a number of our businesses across our operating segments. We are excited about the contributions this acquisition is expected to make in the coming years. Looking ahead, we expect the first half of 2022 to show solid demand for both capital and aftermarket parts. We believe the fundamental drivers of our end markets remain strong, though business activity continues to be influenced by challenges in the supply chain around the globe. Turning now to our Industrial Processing segment. We continue to experience strong demand for our wood processing equipment, both for capital and parts. Our reported bookings were $95 million, which included a booking reversal of $10 million associated with a stock preparation capital project that was booked in the third quarter. The project has recently been put on hold and may not occur in 2022 so we thought it prudent to remove it from our current backlog. New orders for Q4 were $105 million as our customers continue to add capacity and invest in upgrading their operations. Revenue in this segment increased 38% to $95 million year-over-year with capital business driving this surge. Parts revenue was up 9% compared to the same period last year and made up 56% of total revenue in the fourth quarter. Improved operating leverage and good execution led to a 270 basis point improvement in our adjusted EBITDA margin. Looking ahead to 2022, we expect capital project activity to moderate as many of the new wood processing systems are or will be fully operational this year. That said, we expect this segment to continue to be active in terms of new projects and demand for aftermarket parts. In our Material Handling segment, we achieved solid gains in our profitability despite the dramatic increases in steel costs and the unpredictability in the supply chain. Demand for our high-performance sellers was very strong as municipalities, box plants, and distribution centers continue to invest in their facilities. Our recent acquisition in this segment, Balemaster, significantly contributed to our fourth quarter results. Revenue increased 15% to $45 million, and parts revenue in the fourth quarter made up 59% of total revenue. Excluding our acquisition and FX, Q4 revenue was flat due to lower capital revenue compared to a relatively strong prior year quarter. Bookings in our Material Handling segment increased 31% to a record $52 million. While this increase benefited from our recent acquisition, organic bookings were up 12% with solid parts demand and capital project activity expected to continue. Looking ahead to 2022, we believe this segment will strengthen as the year progresses and capital projects are executed, particularly in bulk material handling, where we are already experiencing increased activity associated with the U.S. infrastructure spending plans. As we look ahead to the first quarter of 2022 and the full year, ongoing project activity is healthy, and we expect industrial production to maintain this momentum. However, supply chain challenges and policy responses to inflationary pressure do introduce some uncertainty in the latter half of the year. Our record backlog and ability to generate robust cash flows have us well positioned to capitalize on opportunities that may emerge as the year unfolds, and we expect to deliver record financial performance again this year. I'd like to pass the call over to Mike now for a review of our financial performance and our outlook for 2022. Mike?

Thank you, Jeff. I'll start with some key financial metrics from our fourth quarter, which included some notable records. Consolidated gross margins were 42.4% in the fourth quarter of 2021 compared to 44.1% in the fourth quarter of 2020, down 170 basis points. Our consolidated gross margins in the fourth quarter of 2021 were negatively affected by the amortization of acquired profit and inventory related to the Clouth and Balemaster acquisitions, which lowered consolidated gross margins by 90 basis points. In the fourth quarter of 2020, government assistance benefits increased consolidated gross margins by 50 basis points. Excluding the impact from both these items, consolidated gross margins were down 30 basis points due to a higher mix of capital revenue. Our overall percentage of parts and consumables revenue decreased to 63% of total revenue in the fourth quarter of 2021 compared to 67% in the fourth quarter of 2020 due to a significantly higher capital revenue at our Industrial Processing segment. SG&A expenses were $57.8 million in the fourth quarter of 2021, an increase of $10.4 million compared to $47.4 million in the fourth quarter of 2020. Fourth quarter of 2021, SG&A includes $6.4 million in SG&A from our acquisitions and an increase of $1.5 million in acquisition-related costs, which totaled $1.7 million in the fourth quarter of 2021 compared to $0.2 million in the prior year. The remaining increase in SG&A expense is primarily associated with increased incentive compensation due to improved business conditions. As a percentage of revenue, SG&A expenses decreased to 26.4% in the fourth quarter of 2021 compared to 28.1% in the prior year period. For the first time in our history, our quarterly GAAP diluted EPS exceeded $2, reaching $2.07 in the fourth quarter of 2021 compared to $1.40 in the fourth quarter of 2020. Our GAAP diluted EPS in the fourth quarter includes $0.23 in acquisition-related costs, $0.08 of restructuring costs, a $0.04 discrete tax benefit, and a $0.03 gain on the sale of the building. $0.23 in acquisition-related costs includes $0.13 of amortization of acquired profit in inventory, $0.04 of backlog amortization, and $0.06 of acquisition costs. The amortization of acquired profit in inventory related to the 2021 acquisition has been completed, and there is a $0.7 million or $0.05 of backlog amortization remaining, which will turn in 2022. The $0.08 in restructuring costs includes an asset impairment charge and other costs associated with the consolidation of our ceramic blade manufacturing in Europe into our recently acquired Clouth business. The tax rate in the fourth quarter was 19.5% and included approximately $0.16 of tax benefits related to a reversal of tax reserves associated with uncertain tax positions and the exercise of previously awarded employee stock options. Excluding these items, our tax rate would have been 25.9%. For the full year, 2021 gross margins were 42.9% compared to 43.7% in 2020. Excluding the amortization of profit and inventory, which reduced 2021 gross margins by 50 basis points and government assistance benefits in both periods, gross margins were up 20 basis points to 43.3% compared to 43.1%. Our percentage of parts and consumables revenue was 65% in 2021 compared to 66% in 2020. SG&A expenses were $208.8 million in 2021, an increase of $26.9 million or 15% compared to $181.9 million in 2020. As a percentage of revenue, SG&A expenses decreased to 26.5% in 2021 compared to 28.6% in 2020. We had $9.7 million of SG&A from our acquisitions in 2021 and incurred acquisition-related costs of $5 million and $1 million in 2021 and 2020, respectively. In addition, there was an unfavorable foreign currency translation effect of $5.1 million in 2021, and we had a reduction in government assistance benefits of $0.8 million. Excluding all these items, SG&A expenses were up $7.3 million or 4% compared to 2020, primarily due to an increase in incentive compensation. Our GAAP diluted EPS was a record $7.21 in 2021, up 51% compared to $4.77 in 2020. Our GAAP diluted EPS in 2021 includes $0.60 in acquisition-related costs, $0.08 of restructuring costs, a $0.04 benefit from discrete tax items, and a $0.03 gain on the sale of the building. In addition, our 2021 results included pretax income of $2.4 million or $0.16 net of tax attributable to government employee retention assistance programs related to the pandemic compared to pretax income of $6.1 million or $0.39 net of tax in 2020. In the fourth quarter of 2021, adjusted EBITDA increased 39% to a record $44.8 million or 20.5% of revenue compared to $32.1 million or 19.1% of revenue in the fourth quarter of 2020 due to strong performance in our Industrial Processing segment, led by our wood processing product line. For the full year, adjusted EBITDA was a record $159.4 million or 20.3% of revenue compared to 2020 adjusted EBITDA of $115.9 million or 18.3% of revenue. Our operating and free cash flow performance was exceptional and demonstrates our continued strength in generating excellent cash flows from operations around the world. Operating cash flows was a record $61 million in the fourth quarter of 2021, far exceeding our prior quarterly record of $44.4 million. For the full year, operating cash flow was a record $162.4 million, up 75% from 2020 and up 67% compared to our prior record set in 2019. Free cash flow was $55.9 million in the fourth quarter of 2021, increasing 47% compared to the fourth quarter of 2020. For the full year, free cash flow was $149.6 million, up 75% from 2020 and 71% compared to our prior record set in 2019 of $87.5 million. We had several notable non-operating uses of cash in the fourth quarter of 2021. We repaid $42.5 million of debt, paid $5.1 million for capital expenditures, and paid a $2.9 million dividend on our common stock. We also paid $2.9 million for the acquisition of a small stock preparation manufacturer in India. For the full year, we paid $144 million for acquisitions, net of cash acquired, and repaid $104 million of our debt. Let me turn to our EPS results for the quarter. In the fourth quarter of 2021, GAAP diluted earnings per share was $2.07, and adjusted diluted EPS was $2.31. In the fourth quarter of 2020, GAAP diluted earnings per share was $1.40 and adjusted diluted EPS was $1.54. The $0.14 difference relates to an intangible asset impairment charge of $0.12, restructuring costs of $0.01, and amortization of acquired backlog of $0.01. The increase of $0.77 in adjusted diluted EPS in the fourth quarter of 2021 compared to the fourth quarter of 2020 consists of the following: $0.91 due to higher revenue, $0.11 from acquisitions, and $0.04 due to lower interest expense. These increases were partially offset by $0.13 due to higher operating expenses, $0.08 due to government assistance programs received in the prior year, $0.05 due to lower gross margins, $0.02 due to higher weighted average shares outstanding, and $0.01 due to a lower recurring tax rate. Collectively, included in all the categories I just mentioned, was a favorable foreign currency translation effect of $0.03 in the fourth quarter of 2021 compared to last year's fourth quarter due to the weakening of the U.S. dollar. Now turning to our EPS results for the full year on Slide 17. We reported GAAP diluted earnings per share of $7.21 in 2021, and our adjusted diluted EPS was $7.83. We reported GAAP diluted earnings per share of $4.77 in 2020, and our adjusted diluted EPS was $5. The $0.23 difference relates to an intangible asset impairment charge of $0.12, restructuring costs of $0.07, amortization of acquired backlog of $0.04, acquisition costs of $0.03, and a discrete tax benefit of $0.03. The increase of $2.83 in adjusted diluted EPS from 2020 to 2021 consists of the following: $3.33 from higher revenue, $0.23 from lower interest expense, $0.21 from the operating results of our acquisitions, $0.12 from higher gross margins, and $0.04 from a lower recurring tax rate. These increases were partially offset by $0.78 from higher operating expenses, $0.23 from a reduction in benefits from government assistance programs, $0.06 due to higher weighted average shares outstanding, and $0.03 from higher non-controlling interest expense. Collectively, included in all the categories I just mentioned, was a favorable foreign currency translation effect of $0.33 in 2021 compared to 2020. Now let's turn to our liquidity metrics, starting on Slide 18. Cash conversion days measure, calculated by taking days in receivables plus days in inventory and subtracting days in accounts payable was 106 at the end of the fourth quarter of 2021, down from 113 at the end of the third quarter of 2021 and 125 days at the end of 2020. The decrease in cash conversion days from the prior year was principally driven by a higher number of days in accounts payable. Working capital as a percentage of revenue decreased to 9.4% in the fourth quarter of 2021 compared to 13.5% in the third quarter of 2021 and 14.2% in the fourth quarter of 2020. Net debt, that is debt less cash at the end of 2021 was $175.4 million, a decrease of $55 million sequentially and compares to $166.8 million at the end of 2020. Our interest expense decreased 35% or $2.6 million to $4.8 million in 2021 compared to $7.4 million in 2020. Our leverage ratio, calculated as defined in our credit agreement, was 1.34 at the end of the fourth quarter of 2021, down from 1.61% in the fourth quarter 2020. Quite an accomplishment given that we paid $144 million net of cash acquired for acquisitions in 2021. Now I'll review our guidance for 2022. Our revenue guidance for the first quarter of 2022 is $212 million to $217 million, and our adjusted diluted EPS guidance for the first quarter is $2 to $2.10. This excludes $0.05 from the amortization of acquired backlog. For the full year, our revenue guidance is $870 million to $890 million, and our adjusted diluted EPS guidance for the full year is $8.55 to $8.75 and excludes $0.05 from the amortization of acquired backlog. I should caution here that there could be some choppiness and variability in our quarterly results due to several factors, including the variability of order flow and the timing of capital shipments. In addition, other risks that could impact our guidance include supply chain challenges, strengthening of the U.S. dollar, geopolitical tensions, and China's zero-COVID policy. The 2022 guidance includes an unfavorable foreign currency translation impact of approximately $12 million on revenue and $0.15 on adjusted diluted EPS due to the strengthening of the U.S. dollar. Excluding the amortization of profit and inventory and the benefit from government assistance programs, our gross margins came in at 43.3% in 2021. And we anticipate gross margins for 2022 will be close to this level at 43% to 43.5%. As a percentage of revenue, we anticipate SG&A will be approximately 25% to 25.5%, and R&D expense will be approximately 1.5% of revenue in 2022. We anticipate net interest expense of approximately $5.5 million to $5.8 million. And we expect our recurring tax rate will be approximately 28% in 2022. Our recurring tax rate in the first quarter of '22 may be a little lower than the remaining quarters, which we anticipate receiving a tax benefit from the vesting of equity awards. We expect depreciation and amortization will be approximately $36 million to $37 million in 2022. And we anticipate CapEx spending in 2022 will be approximately 2% of revenue. In addition to the CapEx guidance I just provided, I want to outline for you another project starting in 2022. In 2006, we acquired a business in China to help us grow our stock preparation product line. As many of you are aware, that business has performed very well. When we acquired the business, we acquired its manufacturing facility. At that time, the facility was in the commercial area. As the city in which this business is located is growing, the area around our facility has become more residential. As a result, the local government has asked us to relocate our manufacturing operations. We have been discussing and negotiating with the local government for several years. In the fourth quarter of 2021, we reached an agreement, which we believe is likely to become effective in the first quarter of 2022. The local government will buy our existing facility at an agreed-upon price. And over the next 2 years, we will build and move into a new facility in the same city. Proceeds from selling the facility will pay for the new facility and the relocation costs that will be incurred. Currently, we estimate the CapEx for this project to be approximately $20 million, with most of the CapEx costs being incurred over the next 18 months. To date, the local government has paid a 25% down payment on the agreed-upon selling price with an additional 6% payment anticipated in the first quarter of 2022. The remaining proceeds from the sale of the facility will be due at the earlier of when the government sells the property or within 2 years of the effective date of the agreement. The U.S. GAAP accounting for this will result in a large gain on the sale of our existing facility when the final down payment is received, and the agreement goes into effect. We anticipate this will be in the first quarter of 2022. When this occurs, I will give all the numbers related to this transaction, and the gain will be excluded from our adjusted diluted EPS results. For U.S. GAAP purposes, the costs related to the new facility will be reflected in our CapEx numbers. I will also give color each quarter as we go forward on regular CapEx and CapEx related to this project. The key point I want folks to be aware of is that on a cash basis, at the end of the day, once we received all the proceeds from selling the old facility, the cost of the new facility will be offset by the proceeds received from the old facility sale. I also wanted to make it clear that our EPS and CapEx guidance for 2022 does not include this transaction. That concludes my review of the financials, and I will now turn the call back over to the operator for our Q&A session.

Our first question comes from the line of John Franzreb from Sidoti.

Congratulations on a great quarter. Actually, this kind of dovetails into what you're just talking about. A common theme emerging this reporting season is higher capital spending on projects that have either been deferred by labor or equipment availability. I'm curious if you think that you're benefiting from this trend? And if so, by about how much?

There was definitely a slowdown in capital project activity last year when the pandemic was at its peak. However, we have seen some recovery in that area. Our markets have experienced pandemic-related shifts that are driving demand and are likely to continue as the pandemic subsides. Specifically, the increase in at-home deliveries has led to a greater need for packaging, and the housing boom driven by remote work has significantly impacted our wood processing operations. So, I believe it’s a combination of societal changes in how we live, work, and consume goods, along with some renewed activity in capital projects. We are still in the early stages of executing these projects, and there is a considerable amount of work ahead to catch up.

Got it. And Jeff, you mentioned in your prepared remarks that you've achieved the 20% EBITDA target this year you said often support in your 2019 Investor Day. I'm curious, did you expect to achieve it this early? Or has something happened that kind of outperformed our original expectations?

This is our third five-year plan, which we launched in 2019. In our first plan, we achieved some metrics in three years, and in the second, we achieved it in four years. Therefore, it’s not uncommon for us to meet several targets before the five-year mark. However, I want to note that we haven't met all our targets yet. We have met the EBITDA margin goal and are getting close to the earnings per share goal, but we still need to work on our revenue. We aim to set ambitious yet attainable goals for our team. We are pleased with the progress made. The 80/20 initiative, which we began implementing several years ago, has yielded solid results for us and has positively impacted the divisions involved. Additionally, some recent acquisitions have proven to be quite profitable and have contributed to this success. Overall, it has been a blend of improved operating leverage, internal cost initiatives from the 80/20 approach, and beneficial acquisitions. Once we have most metrics achieved, and when the time is right, we will introduce a new five-year plan, which will likely include an increased EBITDA margin goal and new targets for further improvement.

Got it. Got it. And I guess one last question, I'll get back in the queue. Just about with higher commodity costs and other input costs affecting companies across the board. I just wonder if you could kind of review how you manage higher input costs and pricing across your 3 business segments?

One of the great advantages of our decentralized structure is that our teams are highly focused on the local conditions and can respond quickly to any changes that arise. We do not have a central procurement or sourcing manager handling everything globally. Instead, we have 20 major operating units worldwide that make adjustments in real time based on local conditions. This approach has enabled us to act quickly regarding sourcing, controlling costs, and adjusting pricing as needed. Our teams have effectively stayed ahead of challenges, demonstrated by the fact that our same-store sales gross margin increased by 20 basis points for the year. This success is attributed to our employees making real-time decisions based on local circumstances. Throughout the pandemic, our decentralized structure has proven to be beneficial. We believe that during crises, having strong management teams capable of making local decisions in real time provides significant advantages, and this is just one example of how that has worked for us.

So are you at price cost equilibrium right now? Or is there still a lag going on? And if so, how long?

It really depends on the commodity. Some commodities are starting to stabilize, while others remain the same. Overall, supply chain challenges are still present, and in areas where we've had to implement new pricing, it's gradually working through the system. This process can take varying amounts of time due to existing projects that were agreed upon before inflation surged, and we also have supply agreements that fix prices for a year or longer. Therefore, there's still pricing adjustment happening. However, our primary focus is on managing our costs to keep them as low as possible, which helps reduce the price increases for our customers.

Our next question comes from the line of Chris Howe from Barrington Research.

Well, as it relates to the outlook, you talked about the many puts and takes that may influence that outlook. As we take that and put it into context versus this past year, there's certainly continuing uncertainty regarding the timing of capital shipments. Can you talk about the puts and takes with gross margin and also leverage on the operating line? How you see perhaps the first half and the second half playing out versus last year, perhaps a reversal? Or is it too early to tell based on the timing of orders?

I have an outlook as of now, which may evolve. Generally, looking at our guidance throughout the year, it appears that the first and fourth quarters will have a balance between them, suggesting that the highest revenue will likely occur during the second and third quarters. If I analyze the first half versus the second half, the revenue appears similar. However, regarding different pressure points, I anticipate that our margins and operating performance will improve in the latter half of the year compared to the first half. This is mainly due to the capital shipments expected in the second quarter, which may put some strain on our margin performance, but those pressures should ease as we progress into the latter half of the year. Overall, while the top-line revenue seems evenly split between the two halves, I believe our operating metrics and performance will be stronger in the second half.

Okay. Perfect. And just throw a question here for Jeff. You mentioned the potential for improvement initiatives as we consider the integration of Clouth and their margin in the context of the business. Can you place kind of this opportunity into further detail? I think on the last call, you had mentioned just opportunities across the business for product development and sharing of best practices. What type of synergistic opportunity, whether that's leverage or growth you see for the combination?

Yes. There are several opportunities available for pooling. One of the initiatives we are currently pursuing is in our ceramics business, which we are investing in significantly and beginning to capture some market share. However, this field is quite challenging since it involves pioneering efforts. The team we are working with is very strong in this area. Therefore, we decided to transition our ceramics business to them and are in the process of shutting down our facilities, which is associated with the impairment charges Mike mentioned. This action was taken almost immediately and is expected to yield benefits. In a few weeks, we will hold a global strategy meeting where senior management will convene to discuss the synergies and determine our priorities. By consolidating the ceramics business, streamlining product development, and implementing the 80/20 initiatives that significantly impacted our Doctoring, Cleaning, and Filtration business, we anticipate achieving similar advantages. Although this process will take a couple of years to realize the full benefits, we believe the work is very achievable and expect to see progress this year and next year as well.

Our next question comes from the line of Kurt Yinger from D.A. Davidson.

Just 2 quick ones for me. I mean, I just wanted to start off on project timelines. I mean, given what's going on in the supply chain, are customers coming back to you at all and kind of pushing orders out to later dates? Or do you expect that could be an issue at some stage this year?

There are clearly challenges everywhere, and that's always a possibility. The project I mentioned that was put on hold was not due to a supply chain issue. There are other factors that the customer is considering, which affected their decision to pause things while they do some work. We are noticing this, and it may impact the timing of some projects. It really depends on where we are shipping in any given quarter. Obviously, items produced and sold in the current market are in better shape than those that need to be transported around the world. Timing on capital shipments is a constant challenge in our business. If something ships on a Friday, it counts for that quarter. If it slips to a Monday, it goes to the next quarter. That’s something we manage closely. So it's possible. We've only had that one project that's been delayed. However, it's feasible to request a shipment three or four weeks from now, and we can accommodate that under good conditions, though it might be more challenging currently. We hope and believe that some logistics, particularly transportation, will start to improve as the year goes on, and that backlogs will begin to resolve, making it less of an issue in the latter half of the year compared to the beginning.

Got it. Okay. That's helpful. It seems like operating rates are still very healthy, and the market environment appears solid. However, do you anticipate any difficulties when comparing some of these parts and consumables given how strong 2021 was? While it's not as inconsistent as the capital side, I assume that can still pose a challenge.

Yes. It's interesting to note that as we invest in new capital equipment, it begins to generate consumables and parts. While we did see some pent-up demand last year when customers were restocking, we are currently deploying a significant amount of capital equipment, which will require parts over time. This may lead to some moderation in demand. However, as long as operating rates remain high, our capital investments will continue to drive demand for consumables. Since we are currently making substantial capital investments, we anticipate seeing the benefits of this in the coming years. We often joke that if we could sell parts without needing to sell capital, it would simplify our business, but ultimately, it's the capital that fuels the demand for parts.

Right, right. Okay. That's a helpful reminder. And then just lastly, in terms of geographies. I mean the North American market is very strong. But even looking at Europe and Asia revenue this year grew very nicely rebounding off of 2020. As you look into 2022, any kind of directional commentary in terms of markets you think will be strongest or areas that you think might see momentum start to slow a bit?

I would say, Kurt, that 2021 was a very good year across all the geographies, and we are really looking forward to seeing that again in 2022.

Our next question comes from the line of Walter Liptak from Seaport.

I have a follow-up question. When discussing the seasonality for 2022 and the increase in capital shipments expected in the second quarter, could you clarify your backlog and the extent of your visibility at this point? Are you indicating that for the second half you have yet to receive bookings that are anticipated to come in? Additionally, could you elaborate on the mix, particularly regarding the likelihood of more capital projects this year compared to parts orders?

Yes. I would say our backlog is currently at $310 million, with a small portion extending into 2023. It's distributed throughout the year, not necessarily evenly. We generally have good visibility for about two quarters ahead, so predicting capital activity in the second half of the year is a bit more challenging. However, we have strong visibility for the first half. Regarding margins, I guided to a range of 43 to 43.5. Based on our expected capital shipments for the first half, I believe we will see margins leaning towards the lower end of that range, around $43 million. In the second half, we anticipate that average will move toward the higher end of the range.

Okay, great. Yes, that helps. In regard to the gross margin you just reported, it seems like there was some amortization expense included. I'm curious if that is an ongoing expense, as typically those would be below the gross margin line. It seems like you are including it in the cost of goods sold. Will this be a continuous challenge for the gross margin?

No. What you want to look at, Walt, is the pretax number in our EBITDA table, specifically the line called acquired profit and inventory. That's what's going through cost of goods sold and affecting the margins. We have essentially completed that process. When you acquire a business, you have to fair value everything, including the inventory, and then that gets amortized as the inventory turns. So that is now behind us. We do have other considerations.

Okay. I understand, those were purchase accounting costs.

And the other amortization, that actually goes through SG&A, not through cost of goods sold.

Okay, I understand. That makes more sense. Regarding the gross margin, I appreciate the guidance for 2022. How do the current bookings adjust if prices continue to rise? How are you managing inflation with the orders that have already been booked? Have you been able to cover the inflation that has occurred?

Yes, we've been discussing this throughout 2021. It's easier for us with parts and consumables since those orders have quick cycle times, allowing us to respond to changes in input costs promptly. The greater risk lies with capital that may be on backlog for a long time. For some larger projects, we have surcharge arrangements that allow us to make adjustments. However, most are priced currently. We aim to shorten the validity period of our quotations to limit exposure, so customers must place orders within a month or the quote expires. Nonetheless, there may still be capital goods in backlog, and if material or input costs rise, we will have to manage that situation.

Our next question comes from the line of Bobby Eubank from Chevy Chase Trust.

Two questions for you. One, Mike, are you able to split out the difference between volume and price in the 18% organic revenue for the quarter?

No, Bobby. As Jeff mentioned, we have 20 operating units and the price increases have varied across these units. Therefore, I can't provide a precise breakdown on that.

Okay. But it's fair to say that price is a meaningful contributor you think to organic revenue?

It's fair to say that price is a contributor. Margins remain relatively stable, so they haven't decreased, but they also haven't increased.

Right. Yes. Regarding the book-to-bill step down, even excluding the $10 million from that one project, as we look into the rest of 2022 and considering your conversations with customers across those 20 business units, what is the general sentiment from them? When observing the market, there's a perception that we might be at a peak in the cycle, which seems a bit premature. How are your customers feeling about the order outlook for the second half of the year? Can you provide any insights based on your discussions with them?

I think, as Mike mentioned earlier, visibility is always challenging for us, especially regarding capital projects for the second half of the year. We have a good amount of visibility for the first half, but the latter half is more uncertain. Our geographic diversity makes it vary significantly. For example, in Asia, project activity levels are currently quite strong, and we expect that momentum to continue throughout the year with solid bookings. In North America, bookings were robust last year, so they may moderate somewhat. Europe is somewhere in between; they saw improvements last year and currently have good activity. If I had to estimate, I would say Asia is strong, Europe is steady, and the key question is whether North America can maintain its momentum. Forecasting the second half of the year is particularly difficult. What I can say is that our customers are turning a good profit, with prices rising. For instance, lumber prices have increased, and there have been several price hikes on boxes as well. This generally indicates that when our customers do well, they tend to reinvest in their businesses over time, which ultimately benefits us.

Makes a lot of sense. If I can do a follow-up, what does the acquisition pipeline look like? Not a focus on this call, but congratulations on strong free cash flow, clearly have the capacity to do so.

Yes. As we've mentioned in previous calls, our deal flow activity is quite strong, and our corporate development team is very active. The challenge we face is maintaining our discipline in finding opportunities that align strategically with us and are priced in a way that allows us to create value. We have turned down some prospects that didn’t fit strategically, as well as others that we felt were overpriced. There is a lot of capital available right now, making some prices quite high. Our focus is typically on privately owned companies that we have longstanding relationships or prior negotiations with. Most of our acquisitions follow this strategy. Currently, we are in discussions with around 100 to 200 companies and continue to track several hundred more. If we can find something that meets our criteria, we have the balance sheet to pursue it, so financing is not an issue for us. Our main challenge remains finding acquisitions that are both a good strategic fit and a fair value. Our team is diligently working on this, but predicting when suitable opportunities will arise is always difficult.

And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Jeffrey Powell, President, Chief Executive Officer and Director.

Thank you, Jonathan. So before wrapping up the call today, I just want to leave you with a couple of takeaways. 2021 was a record-setting year for Kadant, and our employees deserve a lot of credit for achieving these results. And I really want to thank all of our employees around the world for tireless effort to meet our customers' needs. In 2022, we will continue to focus on meeting our customers' needs with innovative technologies and solutions that really drive sustainable industrial processing. Our financial health is excellent, and our ability to generate strong free cash flow remains the cornerstone of Kadant’s business model. And we look forward to delivering exceptional value for our stakeholders in 2022. With that, I want to thank you for joining us today, and please take care and stay safe.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect, good day.