The Company uses the market approach technique to value its financial assets and liabilities, and there were no changes in valuation techniques during the first ninethree months of 2017. The Company's financial assets and liabilities2021. Banker's acceptance drafts are carried at fair value are cash equivalents, banker's acceptance drafts, and derivative instruments used to hedge the Company's foreign currency and interest rate risks. The Company's cash equivalents are comprised of money market funds and bank depositsface value. which are highly liquid and readily tradable. These cash equivalents are valued using inputs observable in active markets for identical securities. The carrying value of banker's acceptance drafts approximates their fair value due to the short-term nature of the negotiable instrument. The fair value of the Company's interest rate swap agreement is based on LIBOR yield curves at the reporting date. The fair values of the Company's forward currency-exchange contracts are based on quoted forward foreign exchange rates at the reporting date. The fair value of the 2018 Swap Agreement is based on USD LIBOR yield curves at the reporting date. The forward currency-exchange contracts and interest rate swap agreementthe 2018 Swap Agreement are hedges of either recorded assets or liabilities or anticipated transactions.transactions and represent the estimated amount the Company would receive or pay upon liquidation of the contracts. Changes in values of the underlying hedged assets and liabilities or anticipated transactions are not reflected in the table above.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | October 1, | | September 30, | | October 1, |
(In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Revenues: | | | | | | | | |
Papermaking Systems | | $ | 111,135 |
| | $ | 96,078 |
| | $ | 295,416 |
| | $ | 280,436 |
|
Wood Processing Systems | | 39,714 |
| | 7,962 |
| | 61,050 |
| | 25,437 |
|
Fiber-based Products | | 1,945 |
| | 1,479 |
| | 9,427 |
| | 8,012 |
|
| | $ | 152,794 |
| | $ | 105,519 |
| | $ | 365,893 |
| | $ | 313,885 |
|
| | | | | | | | |
Income Before Provision for Income Taxes: | | |
| | |
| | |
| | |
|
Papermaking Systems (a) | | $ | 21,544 |
| | $ | 16,915 |
| | $ | 52,932 |
| | $ | 44,747 |
|
Wood Processing Systems (b) | | 4,418 |
| | 2,150 |
| | 6,196 |
| | 5,406 |
|
Corporate and Fiber-based Products (c) | | (6,504 | ) | | (6,504 | ) | | (16,181 | ) | | (15,255 | ) |
Total operating income | | 19,458 |
| | 12,561 |
| | 42,947 |
| | 34,898 |
|
Interest expense, net | | (1,188 | ) | | (251 | ) | | (1,722 | ) | | (739 | ) |
| | $ | 18,270 |
| | $ | 12,310 |
| | $ | 41,225 |
| | $ | 34,159 |
|
| | | | | | | | |
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
12. Business Segment Information (continued)The following table presents financial information for the Company's reportable operating segments:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | April 3, | | March 28, | | | | |
(In thousands) | | 2021 | | 2020 | | | | |
Revenue | | | | | | | | |
Flow Control | | $ | 63,754 | | | $ | 57,149 | | | | | |
Industrial Processing | | 69,154 | | | 64,709 | | | | | |
Material Handling | | 39,555 | | | 37,269 | | | | | |
| | $ | 172,463 | | | $ | 159,127 | | | | | |
| | | | | | | | |
Income Before Provision for Income Taxes | | | | | | | | |
Flow Control | | $ | 16,443 | | | $ | 13,330 | | | | | |
Industrial Processing | | 11,133 | | | 9,436 | | | | | |
Material Handling | | 4,443 | | | 4,134 | | | | | |
Corporate (a) | | (8,592) | | | (7,245) | | | | | |
Total operating income | | 23,427 | | | 19,655 | | | | | |
Interest expense, net (b) | | (1,046) | | | (2,408) | | | | | |
Other expense, net (b) | | (24) | | | (32) | | | | | |
| | $ | 22,357 | | | $ | 17,215 | | | | | |
| | | | | | | | |
Capital Expenditures | | | | | | | | |
Flow Control | | $ | 334 | | | $ | 821 | | | | | |
Industrial Processing | | 1,804 | | | 1,464 | | | | | |
Material Handling | | 121 | | | 398 | | | | | |
Corporate | | 0 | | | 3 | | | | | |
| | $ | 2,259 | | | $ | 2,686 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | October 1, | | September 30, | | October 1, |
(In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Capital Expenditures: | | |
| | |
| | |
| | |
|
Papermaking Systems | | $ | 3,790 |
| | $ | 1,632 |
| | $ | 6,567 |
| | $ | 3,341 |
|
Other | | 1,493 |
| | 211 |
| | 2,151 |
| | 238 |
|
| | $ | 5,283 |
| | $ | 1,843 |
| | $ | 8,718 |
| | $ | 3,579 |
|
| | | | | | | | |
| | | | | | September 30, | | December 31, |
(In thousands) | | | | | | 2017 | | 2016 |
Total Assets: | | |
| | |
| | |
| | |
|
Papermaking Systems | | | | | | $ | 492,071 |
| | $ | 407,538 |
|
Wood Processing Systems | | | | | | 259,487 |
| | 52,407 |
|
Other (d) | | | | | | 36,101 |
| | 10,746 |
|
| | | | | | $ | 787,659 |
| | $ | 470,691 |
|
(a) Includes $278,000, and $593,000 of acquisition-related expenses in the three- and nine-month periods ended September 30, 2017, respectively. Includes $114,000 and $3,491,000 of acquisition-related expenses in the three- and nine-month periods ended October 1, 2016, respectively. Acquisition-related expenses include acquisition transaction costs and amortization of acquired profit in inventory and backlog.
(b) Includes $4,625,000 and $8,727,000 of acquisition-related expenses in the three- and nine-month periods ended September 30, 2017, respectively.
(c) Corporate primarily includesRepresents general and administrative expenses.
(d) Primarily includes Corporate(b) The Company does not allocate interest and Fiber-based Products' cash and cash equivalents and property, plant and equipment.other expense, net to its segments.
13.10. Commitments and Contingencies
Right of Recourse
In the ordinary course of business, the Company's Chinese subsidiaries in China may receive banker's acceptance drafts from customers as payment for outstandingtheir trade accounts receivable. These banker's acceptanceThe drafts are noninterest-bearing obligations of the issuing bank and mature within six months of the origination date. The Company's Chinese subsidiaries in China may use these banker's acceptance drafts prior to the scheduled maturity date to settle outstanding accounts payable with vendors. Banker's acceptance drafts transferred to vendors are subject to customary right of recourse provisions prior to their scheduled maturity dates. As of September 30, 2017 and December 31, 2016, theThe Company had $11,222,000$6,476,000 at April 3, 2021 and $4,824,000, respectively,$7,568,000 at January 2, 2021 of banker's acceptance drafts subject to recourse, which were transferred to vendors and had not reached their scheduled maturity dates. Historically, the banker's acceptance drafts have settled upon maturity without any claim of recourse against the Company.
Litigation
From time to time, the Company is subject to various claims and legal proceedings covering a range of matters that arise in the ordinary course of business. Such litigation may include, but is not limited to, claims and counterclaims by and against the Company for breach of contract or warranty, canceled contracts, product liability, or bankruptcy-related claims. For legal proceedings in which a loss is probable and estimable, the Company accrues a loss based on the low end of the range of estimated loss when there is no better estimate within the range. If the Company were found to be liable for any of the claims or counterclaims against it, the Company would incur a charge against earnings for amounts in excess of legal accruals.
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations
When we use the terms “we,” “us,” “our,” and the “Company,” we mean Kadant Inc., a Delaware corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.
This Quarterly Report on Form 10-Q includesand the documents we incorporate by reference in this report include forward-looking statements thatwithin the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements are not statements of historical fact and may include statements regarding possible or assumed future results of operations. Forward-looking statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management, using information currently available to our management. When we use words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "seeks," "should," "likely," "will," "would," "may," "continue," "could," or similar expressions, we are making forward-looking statements.
Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions. Our future results of operations may differ materially from those expressed in the forward-looking statements. Many of the important factors that will determine these results and values are beyond our ability to control or predict. You should not put undue reliance on any forward-looking statements. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise. For a discussion of important factors that may cause our actual results to differ materially from those suggested by the forward-looking statements, you should read carefully the section captioned "Risk Factors"Risk Factors included in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (fiscal 2016),January 2, 2021, as filed with the Securities and Exchange Commission (SEC) and as may be further amended and/or restated in subsequent filings with the SEC.
Overview
Company Background
We are a leading global supplier of equipmenthigh-value, critical components and critical componentsengineered systems used in process industries worldwide. In addition, we manufacture granules made from papermaking by-products. We have a diverse and large customer base, including most of the world's major paper, lumber and oriented strand board (OSB) manufacturers, and ourOur products, technologies, and services play an integral role in enhancing process efficiency, optimizing energy utilization, and maximizing productivity in resource-intensive industries. We believe our large installed base provides us with a spare parts and consumables business that yields higher margins than our capital equipment business. In the first nine months of 2017, approximately 61% of our revenue was from the sale of parts and consumables products.
On August 14, 2017, we acquired certain assets of Unaflex, LLC (Unaflex) for approximately $31.3 million in cash, subject to a post-closing adjustment. Unaflex, located principally in South Carolina, is a leading manufacturer of expansion joints and related products for process industries. This acquisition complements our existing Fluid-Handling product line within our Papermaking Systems segment.
On July 5, 2017, we acquired the forest products business of NII FPG Company (NII) pursuant to a Stock and Asset Purchase Agreement dated May 24, 2017, for approximately $170.7 million, net of cash acquired, which includes a post-closing adjustment of $2.1 million received subsequent to the end of the third quarter. NII is a global leader in the design and manufacture of equipment used by sawmills, veneer mills, and other manufacturers in the forest products industry. NII also designs and manufactures harvesting equipment used in cutting, gathering, and removing timber from forest plantations. This acquisition extends our presence deeper into the forest products industry and complements our existing Wood Processing Systems segment.
Our operationsfinancial results are comprised of tworeported in three reportable operating segments: Papermaking SystemsFlow Control, Industrial Processing, and WoodMaterial Handling. The Flow Control segment consists of our fluid-handling and doctoring, cleaning, & filtration product lines; the Industrial Processing Systems,segment consists of our wood processing and a separatestock-preparation product line, Fiber-basedlines; and the Material Handling segment consists of our conveying and screening, baling, and fiber-based product lines.
A description of each segment is as follows:
•Flow Control – Custom-engineered products, systems, and technologies that control the flow of fluids used in industrial and commercial applications to keep critical processes running efficiently in the packaging, tissue, food, metals, and other industrial sectors. Our primary products include rotary sealing devices, steam systems, expansion joints, doctor systems, roll and fabric cleaning devices, and filtration and fiber recovery systems.
•Industrial Processing – Equipment, machinery, and technologies used to recycle paper and paperboard and process timber for use in the packaging, tissue, wood products, and alternative fuel industries, among others. Our primary products include stock-preparation systems and recycling equipment, chemical pulping equipment, debarkers, stranders, chippers, and logging machinery. In addition, we provide industrial automation and digitization solutions to process industries.
•Material Handling – Products as detailed below.
Overview (continued)
Papermaking Systems Segment
Through our Papermaking Systems segment, we develop, manufacture, and market a range of equipmentengineered systems used to handle bulk and productsdiscrete materials for secondary processing or transport in the global papermaking, paper recycling, recyclingaggregates, mining, food, and waste management industries, among others. Our primary products include conveying and other process industries. This segment consists of the following product lines:
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| | |
| - | Stock-Preparation: custom-engineered systems andvibratory equipment as well as standard individual components, for baling, pulping, de-inking, screening, cleaning, and refining primarily recyclable fibers; balers and related equipment used in the processing of recyclable and waste materials; and filtering, recausticizing, and evaporation equipment and systems used in the production of virgin pulp; |
| - | Doctoring, Cleaning, & Filtration: doctoring systems and related consumables that continuously clean rolls to keep paper machines and other industrial processes running efficiently; doctor blades made of a variety of materials to perform functions including cleaning, creping, web removal, flaking, and the application of coatings; profiling systems that control moisture, web curl, and gloss during paper converting; and systems and equipment used to continuously clean fabrics, belts, and rolls, drain water from pulp mixtures, form the sheet or web, and filter the process water for reuse. Doctoring and cleaning systems are also used in other process industries, such as carbon fiber, textiles and food processing; and |
| - | Fluid-Handling: rotary joints, expansion joints, precision unions, steam and condensate systems, components, and controls used in industrial piping systems to efficiently transfer fluid, power, and data. |
Wood Processing Systems Segment
Through our Wood Processing Systems segment, we develop, manufacture, and market stranders, debarkers, chippers, and logging machinery used in the harvesting and production of lumber and OSB. We also provide refurbishment and repair of pulping equipment for the pulp and paper industry. Our principal wood-processing products include:
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| | |
| - | Stranders: disc and ring stranders and related parts and consumables that cut batch-fed logs into strands for OSB production; |
| - | Debarkers: ring and rotary debarkers and related parts and consumables that employ a combination of mechanical abrasion and log-to-log contact to efficiently remove bark from logs of all shapes and species; |
| - | Chippers: disc, drum, and veneer chippers and related parts and consumables that are high quality, robust chipper systems for waste-wood and whole-log applications found in pulp woodrooms, chip plants, and sawmill and planer mill sites; and |
| - | Logging machinery: feller bunchers, log loaders, and swing yarders that are used to harvest and gather timber for lumber production. |
Fiber-based Products
Through our Fiber-based Products business,balers. In addition, we manufacture and sell biodegradable, absorbent granules derived from papermaking by-products for use primarilyused as carriers forin agricultural home lawnapplications and garden, and professional lawn, turf and ornamental applications, as well as for oil and grease absorption.
Industry and Business Overview
We had record bookings of $204 million in the first quarter of 2021 due to strong demand for our parts and consumables products, as well as a high level of capital project activity. This follows the previous bookings record set in the fourth quarter of 2020 as our businesses rebounded from the impact of the COVID-19 pandemic, which began to affect our Chinese operations in February 2020 and our other major operations late in the first quarter of 2020. As a result, our bookings and revenue were adversely impacted for a substantial part of 2020 due to reduced or delayed spending by our customers.
However, many of the markets in which we operate began to normalize in the latter part of 2020. We ended the first quarter of 2021 with a record backlog of $223 million. An overview of our business by segment is as follows:
•Flow Control – Orders for our parts and consumables products at all our Flow Control businesses began to recover in the latter part of 2020 and this trend continued through the first quarter of 2021. This was partially due to pent-up demand resulting from the adverse effect of COVID-19 pandemic-related downtimes and shutdowns, as well as visitation restrictions at many customer facilities earlier in 2020. Capital equipment bookings increased from depressed levels encountered during most of 2020, with capital equipment revenue anticipated to increase in the second quarter of 2021.
•Industrial Processing – Our wood processing business continues to experience strong demand for its products, fueled by a robust U.S. housing market and high demand for lumber, oriented strand board and plywood, which increased mill run rates resulting in higher parts consumption and capital equipment investment by our customers at our North American operations. Additionally, our European wood processing operation is experiencing a similar impact. While bookings for both parts and consumables products and capital equipment have been strong, revenue related to capital equipment orders will not accelerate until the second quarter of 2021. Conversely, despite several large project orders at our U.S. and Chinese operations in the fourth quarter of 2020, our stock-preparation business continues to be negatively impacted by delays on large capital projects and reductions in capital equipment spending due to the COVID-19 pandemic, as well as uncertainty in Asia surrounding our customers' response to China's recovered paper import restriction. The continued strength for our stock-preparation parts and consumables products, due in part to the ongoing recovery from a significant downturn in mid-2020 as a result of the COVID-19 pandemic, partially mitigated the effects of depressed capital equipment orders.
•Material Handling – Bookings for parts and consumables products rebounded in the first quarter of 2021 primarily due to increased customer spending as a result of the relaxation of COVID-19 pandemic-related shutdowns and visitation restrictions, which we expect to continue. Demand for our capital equipment has increased in the last few quarters driven by our baling business, which has experienced improved business conditions, including the recovery of recycled commodity prices.
While we have seen improved market conditions and increased demand for our products over the last two quarters, there is uncertainty surrounding the continued recovery in certain regions of the world due to variability around vaccine availability and COVID-19 infection rates. Travel and visitation restrictions continue to have an impact on our ability to interact with our customers, which affects the timing of orders. For more information on risks related to health epidemics to our business, including COVID-19, please see Part I, Item 1A, Risk Factors, included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021.
International Sales
During the first nine months of 2017 and 2016, approximately 64% and 59%, respectively,Slightly more than half of our sales wereare to customers outside the United States, principallymainly in Europe, Asia, and Asia. WeCanada. 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. However, our financial performance and competitive position can be affected by currency exchange rate fluctuations affecting the relationship between the U.S. dollar and foreign currencies. We seek to reduce our exposure to currency fluctuations through the use of forward currency exchange contracts. WeAdditionally, we may enter into forward currency exchange contracts to hedge certain firm purchase and sale commitments denominated in currencies other than our subsidiaries' functional currencies. We currently do not use derivative instruments to hedge our exposure to exchange rate fluctuations created by the translation into the U.S. dollar of our foreign subsidiaries' results that are in functional currencies other than the U.S. dollar.
Global Trade
In 2018, the United States began imposing 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 have worked 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, included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021.
Acquisitions
Overview (continued)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 June 2020, we made an acquisition in our Industrial Processing segment for approximately $6.9 million, net of cash acquired.
Results of Operations
First Quarter 2021 Compared With First Quarter 2020
Revenue
The following table presents the change in revenue by segment between the first quarters of 2021 and 2020, and those changes excluding the effect of foreign currency translation and an acquisition 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 U.S. generally accepted accounting principles (GAAP) measure.
Revenue by segment in the first quarters of 2021 and 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | (Non-GAAP) |
| | Three Months Ended | | | | | | Currency Translation | | Acquisition | | Change in Organic Revenue |
(In thousands, except percentages) | | April 3, 2021 | | March 28, 2020 | | Total Increase | | % Change | | | | Increase | | % Change |
Flow Control | | $ | 63,754 | | | $ | 57,149 | | | $ | 6,605 | | | 12 | % | | $ | 1,630 | | | $ | — | | | $ | 4,975 | | | 9 | % |
Industrial Processing | | 69,154 | | | 64,709 | | | 4,445 | | | 7 | % | | 3,027 | | | 509 | | | 909 | | | 1 | % |
Material Handling | | 39,555 | | | 37,269 | | | 2,286 | | | 6 | % | | 1,355 | | | — | | | 931 | | | 2 | % |
Consolidated Revenue | | $ | 172,463 | | | $ | 159,127 | | | $ | 13,336 | | | 8 | % | | $ | 6,012 | | | $ | 509 | | | $ | 6,815 | | | 4 | % |
Consolidated revenue in the first quarter of 2021 increased 8%, while consolidated organic revenue increased 4%, driven by higher demand for parts and consumables products at our Flow Control and Industrial Processing segments as described below.
Revenue at our Flow Control segment increased 12% in the first quarter of 2021, while organic revenue increased 9%. These increases resulted from higher demand for parts and consumables products across all our operations, which was due in part to maintenance requirements at many of our customer locations and pent-up demand resulting from the adverse effect of the COVID-19 pandemic during most of 2020. Organic revenue for capital equipment declined slightly in the first quarter of 2021 compared to the first quarter of 2020. The continued impact of curtailed capital equipment orders by our customers during 2020 primarily at our North American operations was mostly offset by an increase in capital equipment revenue at our Chinese business due to lower revenues in the first quarter of 2020 from customer-requested deferrals of equipment installations and a rebound in the Chinese economy in the first quarter of 2021.
Revenue at our Industrial Processing segment increased 7% in the first quarter of 2021, while organic revenue increased 1%. Increased demand for parts and consumables products at our wood processing business was driven by continued near-capacity mill run rates resulting in higher parts consumption. Revenue for parts and consumables at most of our stock-preparation operations also increased, due in part to pent-up demand related to the impact of the COVID-19 pandemic and lower revenue from the adverse effects of COVID-19 in the 2020 quarter. These increases were largely offset by a decline in demand for capital equipment at our stock-preparation business due to the continued impact of curtailed capital equipment spending by our customers as a result of the COVID-19 pandemic.
Revenue at our Material Handling segment increased 6% in the first quarter of 2021, while organic revenue increased 2%. Organic revenue increased at our conveying and screening business primarily due to incremental capital equipment revenue related to a large order which began in the fourth quarter of 2019 that will be essentially complete in the second quarter of 2021, and at our baling business due to improved business conditions, including the recovery of recycled commodity prices. These increases were partially offset by a decline in demand for parts and consumables at our conveying and screening business due to a reduction in customer spending as a result of the continued impact of shutdowns and visitation restrictions related to the COVID-19 pandemic.
Gross Profit Margin
Gross profit margin by segment in the first quarters of 2021 and 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Basis Point Change |
| | April 3, 2021 | | March 28, 2020 | |
Flow Control | | 53.3% | | 52.9% | | 40 | bps |
Industrial Processing | | 40.5% | | 38.4% | | 210 | bps |
Material Handling | | 34.7% | | 35.5% | | (80) | bps |
Consolidated Gross Profit Margin | | 43.9% | | 42.9% | | 100 | bps |
Consolidated gross profit margin increased in the first quarter of 2021 compared with the first quarter of 2020 primarily due to a greater proportion of higher-margin parts and consumables revenue and improved margins on our capital equipment products.
Gross profit margin at our Flow Control segment was relatively unchanged in the first quarter of 2021.
Gross profit margin at our Industrial Processing segment increased in the first quarter of 2021 driven by improved margins at our wood processing business resulting from a greater proportion of higher-margin parts and consumables revenue, manufacturing efficiencies related to higher production volumes, and benefits received from government employee retention assistance programs.
Gross profit margin at our Material Handling segment decreased in the first quarter of 2021 primarily due to a greater proportion of lower-margin capital equipment revenue at our conveying and screening business, offset in part by improved margins on our capital equipment at our baling business.
Selling, General, and Administrative Expenses
Selling, general, and administrative (SG&A) expenses by segment in the first quarters of 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
(In thousands, except percentages) | | April 3, 2021 | | % of Revenue | | March 28, 2020 | | % of Revenue | | Increase | | % Change |
Flow Control | | $ | 16,508 | | | 26 | % | | $ | 15,942 | | | 28 | % | | $ | 566 | | | 4% |
Industrial Processing | | 15,662 | | | 23 | % | | 13,820 | | | 21 | % | | 1,842 | | | 13% |
Material Handling | | 8,786 | | | 22 | % | | 8,681 | | | 23 | % | | 105 | | | 1% |
Corporate | | 8,475 | | | N/A | | 7,149 | | | N/A | | 1,326 | | | 19% |
Consolidated SG&A Expenses | | $ | 49,431 | | | 29 | % | | $ | 45,592 | | | 29 | % | | $ | 3,839 | | | 8% |
Consolidated SG&A expenses as a percentage of revenue remained unchanged at 29% in the first quarters of 2021 and 2020. Consolidated SG&A expenses were adversely impacted by the unfavorable effect of currency translation of $1.7 million, incremental professional services fees at Corporate, and the impact of foreign currency transactions of $1.3 million primarily related to gains in the 2020 period on U.S. dollar-denominated cash at foreign operations. These increases were offset in part by reduced travel-related costs in the first quarter of 2021.
SG&A expenses as a percentage of revenue at our Flow Control segment decreased to 26% in the first quarter of 2021 compared with 28% in the first quarter of 2020 due to higher revenues in the 2021 period. SG&A expenses increased in the first quarter of 2021 compared with the first quarter of 2020 principally due to $0.5 million from the unfavorable effect of foreign currency translation and the impact of foreign currency transactions primarily related to gains in the 2020 period on U.S. dollar-denominated cash at our Mexican business, offset in part by reduced travel-related costs.
SG&A expenses at our Industrial Processing segment increased to 23% of revenue in the first quarter of 2021 compared with 21% in the first quarter of 2020 principally due to $0.9 million from the unfavorable effect of foreign currency translation and $0.6 million from the impact of foreign currency transactions primarily related to gains in the 2020 period on U.S. dollar-denominated cash at this segment's Canadian operations.
SG&A expenses as a percentage of revenue at our Material Handling segment decreased to 22% in the first quarter of 2021 compared with 23% in the first quarter of 2020 due to higher revenues in the 2021 period.
SG&A expenses at Corporate increased in the first quarter of 2021 compared with the first quarter of 2020 primarily due to incremental professional services fees.
Interest Expense
Interest expense decreased to $1.1 million in the first quarter of 2021 from $2.5 million in the first quarter of 2020 due to lower outstanding debt and a lower weighted-average interest rate.
Provision for Income Taxes
Our provision for income taxes increased to $5.6 million in the first quarter of 2021 from $4.6 million in the first quarter of 2020. The effective tax rate of 25% in the first quarter of 2021 was higher than our statutory rate of 21% primarily due to nondeductible expenses, the distribution of our worldwide earnings, state taxes, and tax expense associated with Global Intangible Low-Taxed Income (GILTI) provisions. This incremental tax expense was 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 of 26% in the first quarter of 2020 was higher than our statutory rate of 21% primarily due to nondeductible expenses, state taxes, the distribution of our worldwide earnings, and tax expense associated with GILTI. This incremental tax expense was offset in part by the reversal of tax reserves associated with uncertain tax positions.
Net Income
Net income increased $4.1 million to $16.8 million in the first quarter of 2021 from $12.7 million in the first quarter of 2020 primarily due to a $3.8 million increase in operating income and a $1.3 million decrease in interest expense, offset in part by a $1.0 million increase in provision for income taxes (see discussions above for further details).
Liquidity and Capital Resources
Consolidated working capital was $163.2 million at April 3, 2021, compared with $155.1 million at January 2, 2021. Cash and cash equivalents were $66.0 million at April 3, 2021, compared with $65.7 million at January 2, 2021, which included cash and cash equivalents held by our foreign subsidiaries of $64.2 million at April 3, 2021 and $63.6 million at January 2, 2021.
Cash Flows
Cash flow information in the first quarter of 2021 and 2020 was as follows:
| | | | | | | | | | | | | | |
| | Three Months Ended |
(In thousands) | | April 3, 2021 | | March 28, 2020 |
Net Cash Provided by Operating Activities | | $ | 19,092 | | | $ | 6,169 | |
Net Cash Used in Investing Activities | | (2,352) | | | (2,672) | |
Net Cash Used in Financing Activities | | (15,582) | | | (7,002) | |
Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash | | (1,090) | | | (2,693) | |
Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash | | $ | 68 | | | $ | (6,198) | |
Operating Activities
Cash provided by operating activities increased to $19.1 million in the first quarter of 2021 from $6.2 million in the first quarter of 2020. Our operating cash flows are primarily from cash received from customers, offset by cash payments for items such as inventory, employee compensation, operating leases, income taxes and interest payments on outstanding debt obligations. The increase in cash provided by operating activities in the 2021 period was driven by a reduction in cash used for working capital and improved net income.
Cash used for working capital was $6.4 million in the first quarter of 2021 and $14.9 million in the first quarter of 2020. Cash used for working capital in the first quarter of 2021 included cash used of $14.0 million for accounts receivable due to revenue growth and the timing of revenue and $6.6 million for inventories relating to purchases for orders that will be shipped later in fiscal 2021. These uses of cash were offset in part by $8.0 million of cash provided by accounts payable primarily for inventory purchases related to increased order activity and $7.6 million from other current liabilities primarily for customer deposits related to capital equipment orders anticipated to ship later in fiscal 2021. Cash used for working capital in the first quarter of 2020 included cash used of $3.7 million related to the buildup of inventory for large capital orders, $3.4 million in accounts payable for payments related to inventory purchases made in 2019 for large capital orders, and $9.4 million for other current liabilities primarily related to incentive compensation payments and a final payment of $2.4 million to settle our post-retirement restoration plan.
Investing Activities
Cash used in investing activities was $2.4 million in the first quarter of 2021 and $2.7 million in the first quarter of 2020 primarily related to capital expenditures in both periods.
Financing Activities
Cash used in financing activities was $15.6 million in the first quarter of 2021 and $7.0 million in the first quarter of 2020. Repayment of long-term obligations was $19.6 million in the first quarter of 2021 and $3.0 million in the first quarter of 2020. Borrowings under our revolving credit facility were $10.1 million in the 2021 period.
Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash
The exchange rate effect on cash, cash equivalents, and restricted cash represents the impact of translation of cash balances at our foreign subsidiaries. The $1.1 million reduction in cash, cash equivalents, and restricted cash in the first quarter of 2021 is primarily attributable to the strengthening of the U.S. dollar against the euro. The $2.7 million reduction in cash, cash equivalents, and restricted cash in the first quarter of 2020 primarily related to the strengthening of the U.S. dollar against the Mexican peso, Canadian dollar and Brazilian real.
Borrowing Capacity and Debt Obligations
We entered into an unsecured multi-currency revolving credit facility, dated as of March 1, 2017 (as amended and restated to date, the Credit Agreement). As of April 3, 2021, we have a borrowing capacity of over $450 million, including $192.8 million available under the Credit Agreement, an additional $150 million in an uncommitted, unsecured incremental borrowing facility under the Credit Agreement, and $115 million of senior promissory notes available for issuance under our uncommitted Multi-Currency Note Purchase and Private Shelf Agreement (Note Purchase Agreement). Under these 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 April 3, 2021, our leverage ratio was 1.50 and we were in compliance with our debt covenants. We do not have any mandatory principal payments on our long-term debt obligations until 2023. See Note 4, Long-Term Obligations, in the accompanying condensed consolidated financial statements for additional information regarding our debt obligations.
Additional Liquidity and Capital Resources
On May 13, 2020, our board of directors approved the repurchase of up to $20 million of our equity securities during the period from May 13, 2020 to May 13, 2021. We have not repurchased any shares of our common stock under this authorization.
We paid cash dividends of $2.8 million in the first quarter of 2021. On March 10, 2021, we declared a quarterly cash dividend of $0.25 per share totaling $2.9 million that was paid on May 12, 2021. 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 $12 to $13 million during the remainder of 2021 for property, plant, and equipment.
As of April 3, 2021, we had approximately $275.1 million of total unremitted foreign earnings. It is our intent to indefinitely reinvest $252.0 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments, if any. In the first quarter of 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 $5.9 million.
In the future, our liquidity position will be affected by the level of cash flows from operations, cash paid to service our debt obligations, acquisitions, capital projects, dividends, and stock repurchases. We believe that our existing resources, together with the borrowings available under our Credit Agreement and available through our Note Purchase Agreement, and the cash we expect to generate from operations, will be sufficient to meet the capital requirements of our operations for the foreseeable future.
Contractual Obligations and Other Commercial Commitments
There have been no significant changes to our contractual obligations and other commercial commitments during the first quarter of 2021 compared with those disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended January 2, 2021.
Application of Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affectthe reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, at the date of our condensed consolidated financial statements, and the reported amounts of revenuesrevenue and expenses during the reporting period. Our actual results may differ from these estimates under different assumptions or conditions.
Criticalcritical accounting policies are defined as those that entail significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. Management evaluates its estimates on an ongoing basis based on historical experience, current economic and market conditions, and other assumptions management believes are reasonable. We believe that our most critical accounting policies upon which are significant to our consolidated financial position dependsstatements, and which involve the most complex or subjective decisions or assessments, are those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the section captioned "Application of Critical Accounting Policies and Estimates" in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the SEC.January 2, 2021. There have been no material changes to these critical accounting policies since the end of fiscal year-end 20162020 that warrant disclosure.
IndustryRecent Accounting Pronouncements
See Note 1, under the headings Recently Adopted Accounting Pronouncements and Business Outlook Our products are primarily sold in global process industries and used to produce packaging, tissue, OSB, and lumber, among other products.
In the first nine months of 2017, approximately 56% of our revenue was from the sale of products that support packaging, tissue, and other paper production, other than printing and writing and newsprint paper grades. Consumption of packaging, which is primarily comprised of containerboard and boxboard, is driven by many factors, including regional economic conditions, consumer spending on non-durable goods, increased use of e-commerce, demand for food and beverage packaging, and greater urbanization in developing regions. Consumption of tissue is fairly stable and in the developed world tends to grow with the population. For both tissue and packaging, growth rates in the developing world are expected to increase as per capita consumption of paper products increases with rising standards of living. For balers and related equipment, demand is generally driven by rising standards of living and population growth, shortage and costs of landfilling, increasing recycling rates, and environmental regulation. In the first nine months of 2017, 12% of our revenue was related to products that support printing and writing paper grades as well as newsprint, which have been negatively affected by the development and increased use of digital media. While we expect the decline in the use of printing and writing and newsprint paper grades to continue due to the use of digital media, we expect global packaging and tissue production to increase modestly.
In the first nine months of 2017, 17% of our revenue was from sales to engineered wood panel producers, sawmills, and other manufacturers in the forest products industry who use stranders, debarkers, and related equipment to prepare logs to be converted into OSB or lumber, and harvesting equipment to cut, gather, and remove timber from forest plantations. Demand for OSB and lumber is tied to residential housing construction and remodeling in all markets we serve. The majority of OSB and lumber demand is in North America, as North American houses are more often constructed of wood compared to other parts of the world. The remainder of our revenue was from sales to other process industries, which tend to grow with the overall economy.
Our bookings increased 43% to $135 million in the third quarter of 2017 compared to $95 million in the third quarter of 2016. Third quarter bookings in 2017 included a $20 million, or 22%Recent Accounting Pronouncements Not Yet Adopted, increase resulting from the acquisitions of the businesses of NII and Unaflex and a $2 million, or 2%, increase from the favorable effects of foreign currency translation. Excluding the impact of the acquisitions and foreign currency translation, our bookings in the third quarter of 2017 increased 19% compared to the third quarter of 2016, primarily due to strong performance in our Stock-Preparation and Fluid-Handling product lines. Bookings for our capital equipment tend to be variable and are dependent on regional economic conditions and the level of capital spending by our customers, among other factors. Demand for our parts and consumables products tends to be more predictable. Bookings for our parts and consumables products increased to $81 million in the third quarter of 2017, or 60% of total bookings, compared to $64 million, or 67% of total bookings, in the third quarter of 2016, primarily due to bookings of $14 million from the NII and Unaflex businesses.
Overview (continued)
The largest and most impactful regional market for our products in the third quarter of 2017 was North America, and we expect this will continue to be the case for the remainder of 2017. The pulp and paper market in North America tends to be stable. The strength of the U.S. housing market has led to continued growth in our Wood Processing product line, which we recently expanded with our NII acquisition. Our bookings in North America were $60 million in the third quarter of 2017, up 28% compared to $47 million in the third quarter of 2016, including bookings of $13 million from the NII and Unaflex businesses. According to Resource Information Systems Inc. (RISI) reports, U.S. demand for corrugated boxes remained relatively strong in 2017 with year-to-date average-week shipments up more than 3%. As a result, containerboard production in the first nine months of 2017 increased 3% compared to the same period in 2016 and containerboard mill operating rates were robust at 97% through the first nine months of 2017. U.S. housing starts in September 2017 were at a seasonally adjusted annual rate of 1.127 million, or 6.1% above the September 2016 rate, according to the U.S. Census Bureau. Continued growth in housing starts is expected to have a positive impact on demand for structural wood panels, which includes OSB, and lumber.
We saw increased business activity in Europe in the third quarter of 2017 compared to the third quarter of 2016, particularly in the lumber, industrial and packaging segments. We expect the overall economy to be stable in Europe for the remainder of 2017 and our markets have shown strength in the first nine months of the year. Our bookings in Europe were $40 million in the third quarter of 2017, up 29% compared to $31 million in the third quarter of 2016, including a $4 million increase from NII and a favorable foreign currency translation effect of $2 million. Excluding NII and the favorable effect of foreign currency translation, our bookings in Europe were up 12%.
Our bookings in Asia were $24 million in the third quarter of 2017, up 128% compared to $11 million in the third quarter of 2016. The market in Asia continues to be quite strong for both our capital and parts and consumables products. We saw continued strength in project activity in containerboard grades during the third quarter of 2017, particularly in China, which has had strong bookings throughout 2017. The most recent RISI outlook for containerboard demand in China forecasts growth rates of approximately 3% per year for the next few years. New capacity additions in China are forecasted to exceed this growth rate over the next several years due in part to the closure of smaller, less efficient mills as the result of both increased governmental regulatory actions and competitive factors.
Our bookings in the rest of the world were $12 million in the third quarter of 2017, up 74% compared to $7 million in the third quarter of 2016, including bookings of $4 million from NII.
We expect full year 2017 GAAP diluted earnings per share (EPS) of $3.56 to $3.60, revised from our previous guidance of $3.18 to $3.26. The revised guidance includes pre-tax acquisition costs of $5.0 million, or $0.38 per diluted share, and pre-tax amortization expense associated with acquired profit in inventory and backlog of $6.6 million, or $0.43 per diluted share. For 2017, we expect revenue of $509 to $512 million, revised from our previous guidance of $488 to $494 million. For the fourth quarter of 2017, we expect to achieve GAAP diluted EPS of $0.87 to $0.91 on revenue of $143 to $146 million, including $0.15 of amortization expense associated with acquired profit in inventory and backlog.
Results of Operations
Third Quarter 2017 Compared With Third Quarter 2016
Revenues
The following table presents changes in revenues by segment and product line between the third quarters of 2017 and 2016, and the changes in revenues by segment and product line between the third quarters of 2017 and 2016 excluding the effect of currency translation and acquisitions. Currency translation is calculated by converting third quarter of 2017 revenues in local currency into U.S. dollars at the third quarter of 2016 exchange rates and then comparing this result to actual revenues in the third quarter of 2017. The presentation of the changes in revenues excluding the effect of currency translation and acquisitions 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 measures.
Results of Operations (continued)
Revenues for the third quarters of 2017 and 2016 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | | | (Non-GAAP) Adjusted Total Increase |
(In thousands) | | September 30, 2017 | | October 1, 2016 | | Total Increase | | Currency Translation | | Acquisitions |
| |
| | | | | | | | | | | | |
Stock-Preparation | | $ | 52,065 |
| | $ | 44,099 |
| | $ | 7,966 |
| | $ | 1,061 |
| | $ | — |
| | $ | 6,905 |
|
Doctoring, Cleaning, & Filtration | | 30,538 |
| | 28,955 |
| | 1,583 |
| | 454 |
| | — |
| | 1,129 |
|
Fluid-Handling | | 28,532 |
| | 23,024 |
| | 5,508 |
| | 616 |
| | 2,522 |
| | 2,370 |
|
Papermaking Systems | | 111,135 |
| | 96,078 |
| | 15,057 |
| | 2,131 |
| | 2,522 |
| | 10,404 |
|
Wood Processing Systems | | 39,714 |
| | 7,962 |
| | 31,752 |
| | 510 |
| | 26,668 |
| | 4,574 |
|
Fiber-based Products | | 1,945 |
| | 1,479 |
| | 466 |
| | — |
| | — |
| | 466 |
|
| | $ | 152,794 |
| | $ | 105,519 |
| | $ | 47,275 |
| | $ | 2,641 |
| | $ | 29,190 |
| | $ | 15,444 |
|
Papermaking Systems Segment
Revenues from our Papermaking Systems Segment increased $15.0 million, or 16%, to $111.1 million in the third quarter of 2017 from $96.1 million in the third quarter of 2016, and included $2.5 million in revenues from Unaflex, which was acquired on August 14, 2017, and a $2.1 million increase from the favorable effect of foreign currency translation. Excluding the Unaflex acquisition and favorable effect of foreign currency translation, revenues increased $10.4 million, or 11%, as explained in the product line discussions below.
Revenues from our Stock-Preparation product line in the third quarter of 2017 increased $8.0 million, or 18%, compared to the third quarter of 2016, and included a $1.1 million increase from the favorable effect of foreign currency translation. Excluding the favorable effect of foreign currency translation, revenues increased $6.9 million, or 16%, primarily due to increases in demand for our capital equipment at our Chinese and European operations.
Revenues from our Doctoring, Cleaning, & Filtration product line in the third quarter of 2017 increased $1.6 million, or 5%, compared to the third quarter of 2016. Excluding a favorable effect of foreign currency translation of $0.5 million, revenues increased $1.1 million, or 4%, compared to the third quarter of 2016 due to increases in demand in all regions for our parts and consumables products and for our capital equipment at our Chinese operations. These increases were partially offset by decreases in demand for our capital equipment at our European and North American operations.
Revenues from our Fluid-Handling product line in the third quarter of 2017 increased $5.5 million, or 24%, compared to the third quarter of 2016, including $2.5 million in revenues from Unaflex. Excluding the Unaflex acquisition and a favorable effect of foreign currency translation of $0.6 million, revenues increased $2.4 million, or 10%, compared to the third quarter of 2016, due to increases in demand for our products in all our major geographic markets.
Wood Processing Systems Segment
Revenues from our Wood Processing Systems Segment increased $31.7 million to $39.7 million in the third quarter of 2017 from $8.0 million in the third quarter of 2016, including $26.7 million in revenues from NII, which was acquired on July 5, 2017, and a favorable effect from foreign currency translation of $0.5 million. Excluding the NII acquisition and favorable effect of foreign currency translation, revenues increased $4.6 million, or 57%, primarily due to increased demand for our products as a result of the strength of the U.S. housing industry.
Fiber-based Products
Revenues from our Fiber-based Products business increased $0.4 million, or 32%, to $1.9 million in the third quarter of 2017 from $1.5 million in the third quarter of 2016, primarily due to increased demand for our biodegradable granular products.
Results of Operations (continued)
Gross Profit Margin
Gross profit margins for the third quarters of 2017 and 2016 are as follows:
|
| | | | | | |
| | Three Months Ended |
| | September 30, 2017 | | October 1, 2016 |
Gross Profit Margin: | | | | |
Papermaking Systems | | 45.5 | % | | 46.0 | % |
Wood Processing Systems | | 33.5 | % | | 45.9 | % |
Fiber-based Products | | 35.7 | % | | 15.0 | % |
| | 42.3 | % | | 45.6 | % |
Papermaking Systems Segment. The gross profit margin in our Papermaking Systems segment decreased to 45.5% in the third quarter of 2017 from 46.0% in the third quarter of 2016 due to lower gross profit margins on our capital products and, to a lesser extent, an increase in the proportion of lower-margin capital revenues compared to the third quarter of 2016.
Wood Processing Systems Segment. The gross profit margin in our Wood Processing Systems segment decreased to 33.5% in the third quarter of 2017 from 45.9% in the third quarter of 2016 primarily due to the amortization of $3.3 million of acquired profit in inventory related to the NII acquisition, which lowered gross profit margin by 820 basis points, and a change in product mix to an increased proportion of lower-margin capital revenues compared to the third quarter of 2016.
Fiber-based Products. The gross profit margin in our Fiber-based Products business increased to 35.7% in the third quarter of 2017 from 15.0% in the third quarter of 2016 due to the combined effects of increased revenues in the third quarter of 2017 and increased manufacturing efficiency related to higher production volumes.
Operating Expenses
Selling, general, and administrative (SG&A) expenses as a percentage of revenues was 28% in the third quarter of 2017 compared to 32% in the third quarter of 2016. SG&A expenses increased $9.0 million, or 27%, to $42.5 million in the third quarter of 2017 from $33.5 million in the third quarter of 2016, primarily due to $5.8 million from the inclusion of SG&A expenses from NII and Unaflex and $1.4 million of incremental acquisition-related expenses. This increase also included a $0.6 million increase from the unfavorable effect of foreign currency translation.
Total stock-based compensation expense was $1.5 million and $1.3 million in the third quarters of 2017 and 2016, respectively, and is included in SG&A expenses in the accompanying condensed consolidated statement of income.
Research and development (R&D) expenses increased $0.6 million, or 32%, to $2.6 million in the third quarter of 2017 from $2.0 million in the third quarter of 2016, primarily due to the inclusion of R&D expenses from NII, and represented 2% of revenues in both periods.
Interest Expense
Interest expense increased $1.0 million to $1.3 million in the third quarter of 2017 from $0.3 million in the third quarter of 2016 related to interest expense on additional borrowings in 2017 primarily due to the acquisitions.
Provision for Income Taxes
Our provision for income taxes was $4.9 million and $3.1 million in the third quarters of 2017 and 2016, respectively, and represented 27% and 25% of pre-tax income. The effective tax rate of 27% in the third quarter of 2017 was lower than our statutory tax rate primarily due to the distribution of our worldwide earnings, offset in part by an increase in tax related to non-deductible expenses and unrecognized tax benefits. The effective tax rate of 25% in the third quarter of 2016 was lower than our statutory tax rate primarily due to the distribution of our worldwide earnings, a partial release of the U.S. valuation allowance related to state net operating losses, and a partial benefit of current-year state losses. These benefits were offset in part by an increase in tax related to non-deductible expenses.
Results of Operations (continued)
Net Income
Net income increased $4.2 million to $13.4 million in the third quarter of 2017 from $9.2 million in the third quarter of 2016 due to a $6.9 million increase in operating income that was partially offset by increases in our provision for income taxes of $1.8 million and interest expense of $1.0 million (see Revenues, Gross Profit Margin, Operating Expenses, Interest Expense and Provision for Income Taxes discussed above).
First Nine Months 2017 Compared With First Nine Months 2016
Revenues
The following table presents changes in revenues by segment and product line between the first nine months of 2017 and 2016, and the changes in revenues by segment and product line between the first nine months of 2017 and 2016 excluding the effect of currency translation and acquisitions. Currency translation is calculated by converting the first nine months of 2017 revenues in local currency into U.S. dollars at the first nine months of 2016 exchange rates and then comparing this result to actual revenues in the first nine months of 2017. The presentation of the changes in revenues excluding the effect of currency translation and acquisitions 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 measures.
Revenues for the first nine months of 2017 and 2016 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | | | | | | | (Non-GAAP) Adjusted Total Increase (Decrease) |
(In thousands) | | September 30, 2017 | | October 1, 2016 | | Total Increase | | Currency Translation | | Acquisitions |
| |
| | | | | | | | | | | | |
Stock-Preparation | | $ | 139,396 |
| | $ | 132,158 |
| | $ | 7,238 |
| | $ | (675 | ) | | $ | 13,311 |
| | $ | (5,398 | ) |
Doctoring, Cleaning, & Filtration | | 82,921 |
| | 80,374 |
| | 2,547 |
| | (749 | ) | | — |
| | 3,296 |
|
Fluid-Handling | | 73,099 |
| | 67,904 |
| | 5,195 |
| | (54 | ) | | 2,522 |
| | 2,727 |
|
Papermaking Systems | | 295,416 |
| | 280,436 |
| | 14,980 |
| | (1,478 | ) | | 15,833 |
| | 625 |
|
Wood Processing Systems | | 61,050 |
| | 25,437 |
| | 35,613 |
| | 358 |
| | 26,668 |
| | 8,587 |
|
Fiber-based Products | | 9,427 |
| | 8,012 |
| | 1,415 |
| | — |
| | — |
| | 1,415 |
|
| | $ | 365,893 |
| | $ | 313,885 |
| | $ | 52,008 |
| | $ | (1,120 | ) | | $ | 42,501 |
| | $ | 10,627 |
|
Papermaking Systems Segment
Revenues from our Papermaking Systems Segment increased $15.0 million to $295.4 million in the first nine months of 2017 from $280.4 million in the first nine months of 2016, including $13.3 million of revenues in the first quarter of 2017 from the PAALGROUP (PAAL), which was acquired in April 2016, and $2.5 million in revenues from Unaflex, which was acquired on August 14, 2017, offset in part by a $1.5 million decrease from the unfavorable effect of foreign currency translation. Excluding the acquisitions and unfavorable effect of foreign currency translation, revenues increased $0.6 million as explained in the product line discussions below.
Revenues from our Stock-Preparation product line in the first nine months of 2017 increased $7.2 million, or 5%, compared to the first nine months of 2016, including $13.3 million of revenues in the first quarter of 2017 from PAAL, which was acquired in April 2016, that were offset in part by a $0.7 million decrease from the unfavorable effect of foreign currency translation. Excluding the incremental PAAL revenues and unfavorable effect of foreign currency translation, revenues decreased $5.4 million, or 4%, compared to the first nine months of 2016, primarily due to decreases in demand for our products at both our North American and European operations, which were partially offset by an increase in demand for our products at our Chinese operations.
Results of Operations (continued)
Revenues from our Doctoring, Cleaning, & Filtration product line in the first nine months of 2017 increased $2.5 million, or 3%, including a $0.8 million decrease from the unfavorable effect of foreign currency translation. Excluding the unfavorable effect of foreign currency translation, revenues increased $3.3 million, or 4%, compared to the first nine months of 2016 due to increased demand for our products at our European and Chinese operations, offset in part by decreased demand for our capital equipment at our South American operations.
Revenues from our Fluid-Handling product line in the first nine months of 2017 increased $5.2 million, or 8%, compared to the first nine months of 2016, including $2.5 million in revenues from Unaflex, and a $0.1 million decrease from the unfavorable effect of foreign currency translation. Excluding the Unaflex acquisition and unfavorable effect of foreign currency translation, revenues increased $2.7 million, or 4%, due to increased demand for our parts and consumables products primarily at our European and North American operations, offset in part by decreased demand for our capital equipment primarily at our North American operations.
Wood Processing Systems Segment
Revenues from our Wood Processing Systems Segment increased $35.6 million to $61.0 million in the first nine months of 2017 from $25.4 million in the first nine months of 2016, including $26.7 million in revenues from NII, which was acquired on July 5, 2017, and an increase of $0.4 million from the favorable effect of foreign currency translation. Excluding the NII acquisition and favorable effect of foreign currency translation, revenues increased $8.6 million, or 34%, primarily related to increased demand for our products due to continued strength in the U.S. housing industry.
Fiber-based Products
Revenues from our Fiber-based Products business increased $1.4 million, or 18%, to $9.4 million in the first nine months of 2017 from $8.0 million in the first nine months of 2016, primarily due to increased demand for our biodegradable granular products.
Gross Profit Margin
Gross profit margins for the first nine months of 2017 and 2016 are as follows:
|
| | | | | | |
| | Nine Months Ended |
| | September 30, 2017 | | October 1, 2016 |
Gross Profit Margin: | | | | |
Papermaking Systems | | 47.1 | % | | 45.7 | % |
Wood Processing Systems | | 37.1 | % | | 41.7 | % |
Fiber-based Products | | 50.1 | % | | 45.7 | % |
| | 45.5 | % | | 45.3 | % |
Papermaking Systems Segment. The gross profit margin in our Papermaking Systems segment increased to 47.1% in the first nine months of 2017 from 45.7% in the first nine months of 2016. This increase was primarily due to higher margins on our parts and consumables products and, to a lesser extent, an increase in the proportion of higher-margin parts and consumables revenues.
Wood Processing Systems Segment. The gross profit margin in our Wood Processing Systems segment decreased to 37.1% in the first nine months of 2017 from 41.7% in the first nine months of 2016 due to the amortization of $3.3 million of acquired profit in inventory related to the NII acquisition, which lowered gross profit margin by 530 basis points.
Fiber-based Products. The gross profit margin in our Fiber-based Products business increased to 50.1% in the first nine months of 2017 from 45.7% in the first nine months of 2016 due to the combined effects of increased revenues in the first nine months of 2017 and increased manufacturing efficiency related to higher production volumes.
Results of Operations (continued)
Operating Expenses
SG&A expenses as a percentage of revenues was 32% in both the first nine months of 2017 and 2016. SG&A expenses increased $14.4 million, or 14%, to $116.5 million in the first nine months of 2017 from $102.1 million in the first nine months of 2016, primarily due to $5.8 million from the inclusion of SG&A expenses from NII and Unaflex, $2.7 million of incremental acquisition-related expenses, and $3.1 million of first quarter 2017 SG&A expenses from PAAL, which was acquired in April 2016. These increases were offset in part by a $0.6 million decrease from the favorable effect of foreign currency translation.
Total stock-based compensation expense was $4.3 million and $3.9 million in the first nine months of 2017 and 2016, respectively, and is included in SG&A expenses in the accompanying condensed consolidated statement of income.
R&D expenses increased $1.4 million, or 24%, to $7.0 million in the first nine months of 2017 from $5.6 million in the first nine months of 2016, primarily due to $0.6 million from the inclusion of R&D expenses from NII and $0.4 million of first quarter 2017 R&D expenses from PAAL, which was acquired in April 2016, and represented 2% of revenues in both periods.
Other Income
Other income in the first nine months of 2016 represents a pre-tax gain of $0.3 million related to the sale of real estate in Sweden for cash proceeds of $0.4 million.
Interest Expense
Interest expense increased $1.1 million to $2.0 million in the first nine months of 2017 from $0.9 million in the first nine months of 2016 related to interest expense on additional borrowings in 2017 primarily due to the acquisitions.
Provision for Income Taxes
Our provision for income taxes was $10.6 million and $9.5 million in the first nine months of 2017 and 2016, respectively, and represented 26% and 28% of pre-tax income. The effective tax rate of 26% in the first nine months of 2017 was lower than our statutory tax rate primarily due to the distribution of our worldwide earnings and the net excess income tax benefits from stock-based compensation arrangements, offset in part by an increase in tax related to non-deductible expenses and unrecognized tax benefits. The effective tax rate of 28% in the first nine months of 2016 was lower than our statutory tax rate primarily due to the distribution of our worldwide earnings, the adoption of a new accounting standard that resulted in a favorable adjustment for the net excess income tax benefits from stock-based compensation arrangements, a partial release of the U.S. valuation allowance related to state net operating losses, and a partial benefit of current-year state losses. These items were offset in part by an increase in tax related to non-deductible expenses.
Net Income
Net income increased $6.0 million to $30.7 million in the first nine months of 2017 compared to $24.7 million in the first nine months of 2016 due to an $8.0 million increase in our operating income that was partially offset by increases of $1.1 million in both our provision for income taxes and interest expense (see Revenues, Gross Profit Margin, Operating Expenses, Interest Expense and Provision for Income Taxes discussed above).
Recent Accounting Pronouncements
Revenue from Contracts with Customers (Topic 606), Section A-Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40). In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. In March 2016, the FASB issued ASU No. 2016-08, which further clarifies the guidance on the principal versus agent considerations within ASU No. 2014-09. In April 2016, the FASB issued ASU No. 2016-10 to expand the guidance on identifying performance obligations and licensing within ASU 2014-09. In May 2016, the FASB issued ASU No. 2016-11, which rescinds certain previously-issued guidance, including, among other items, guidance relating to accounting for shipping and handling fees and freight services effective upon adoption of ASU No. 2014-09. Also in May 2016, the FASB issued ASU No. 2016-12, which
Results of Operations (continued)
narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition. In December 2016, the FASB issued ASU No. 2016-20, which clarifies narrow aspects of Topic 606 and corrects unintended application of the guidance. These new ASUs are effective for us beginning in fiscal 2018. Early adoption is permitted in fiscal 2017.
We are continuing to assess the potential effects of these ASUs on our condensed consolidated financial statements business processes, systems and controls. We are analyzing our current contracts and comparing our current accounting policies and practices pertaining to revenue recognition to those required under the new ASUs to identify potential differences. Based on procedures performed to date, we have identified certain contracts that would likely be impacted by applying the new revenue standard. These include contracts that are currently accounted for under the completed-contract method of accounting and contracts for products that are specific to the customer's requirements. We recognize revenue for long-term contracts under the completed-contract method of accounting when the contract is substantially complete, the product is delivered and, if applicable, customer acceptance criteria is met. Contracts that contain customer-specific components and do not meet the requirements for percentage of completion method of accounting are accounted for when the risks and rewards of ownership have transferred, provided all other revenue recognition criteria are met. Under the new guidance, revenue related to such contracts will be accelerated if the "over time" criteria are met.details.
We are still in the process of evaluating these contracts and other types of contracts and quantifying the expected impact that the standard will have on our financial statements and related disclosures. While the assessment process is ongoing, we currently anticipate adopting these ASUs using the modified retrospective transition approach. Under this approach, this guidance would apply to all new contracts initiated in fiscal 2018. For existing contracts that have remaining obligations as of the beginning of fiscal 2018, any difference between the recognition criteria in these ASUs and our current revenue recognition practices would be recognized using a cumulative effect adjustment to the opening balance of retained earnings. The amount of this adjustment is yet to be determined and will be impacted by many factors including the number and value of contracts in
progress at the transition date, the nature and composition of contracts in progress at the transition date, the terms of the respective contracts in progress at the transition date and the relevant accounting conclusions on each of these contracts in progress at the transition date. We are also in the process of developing and implementing appropriate changes to our business processes, systems and controls to support the recognition criteria and disclosure requirements of these ASUs.
See Note 1, under the heading “Recent Accounting Pronouncements,” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information on recently implemented and issued accounting standards.
Liquidity and Capital Resources
Consolidated working capital was $174.6 million at September 30, 2017, compared with $118.4 million at December 31, 2016. Included in working capital were cash and cash equivalents of $90.6 million at September 30, 2017, compared with $71.5 million at December 31, 2016. At September 30, 2017, $62.5 million of cash and cash equivalents was held by our foreign subsidiaries.
First Nine Months of 2017
Our operating activities provided cash of $32.3 million in the first nine months of 2017. Working capital used cash of $14.4 million in the first nine months of 2017, including increases of $16.2 million in accounts receivable primarily related to increased capital shipments in the third quarter, $3.5 million in inventories primarily related to purchases associated with the expected shipment of Stock-Preparation capital orders in the fourth quarter of 2017 and the first half of 2018, $2.6 million in unbilled contract costs and fees primarily in our Stock-Preparation product line, and $2.5 million in other current assets largely related to an increase in refundable income taxes. Partially offsetting these uses of cash were increases of $8.4 million in other current liabilities primarily related to an increase in billings in excess of costs and fees connected with large orders at our Stock-Preparation product line and $2.0 million in accounts payable related to purchases of inventory.
Our investing activities used cash of $212.8 million in the first nine months of 2017, including the use of $204.2 million for acquisitions and $8.7 million for purchases of property, plant, and equipment.
Liquidity and Capital Resources (continued)
Our financing activities provided cash of $191.9 million in the first nine months of 2017. We borrowed $222.0 million under our 2017 Credit Agreement (as defined below under the heading Revolving Credit Facility), including $70.7 million of Canadian dollar-denominated and $61.8 million of euro-denominated borrowings. These borrowings were partially offset by $20.3 million used for principal payments on our outstanding debt obligations, $6.7 million used for cash dividends paid to stockholders, $2.2 million used for tax withholding payments related to stock-based compensation, and $1.3 million used for the payment of debt issuance costs.
First Nine Months of 2016
Our operating activities provided cash of $34.7 million in the first nine months of 2016. Working capital used cash of $4.2 million in the first nine months of 2016, including decreases of $5.6 million in accounts payable due to reduced project activity in our Stock-Preparation product line and $6.7 million in other current liabilities primarily related to income tax and incentive compensation payments and a decrease in billings in excess of costs and fees. These uses of cash were offset in part by $5.4 million of cash provided by decreases in accounts receivable and unbilled contract costs and fees primarily in our Stock-Preparation product line, and $2.1 million from a decrease in inventory primarily due to the shipment of Stock-Preparation orders in the third quarter of 2016.
Our investing activities used cash of $59.8 million in the first nine months of 2016 primarily related to the acquisition of PAAL for approximately $56.6 million in cash, net of cash acquired. In addition, we used $3.6 million for purchases of property, plant, and equipment.
Our financing activities provided cash of $24.0 million in the first nine months of 2016. We received cash proceeds of $48.0 million from borrowings, of which $29.9 million was used to fund the PAAL acquisition, and $1.8 million from the issuance of our common stock due to the exercise of employee stock options. These sources of cash were offset in part by $15.4 million used for principal payments on our outstanding debt obligations in the first nine months of 2016, $6.0 million used for cash dividends paid to stockholders, and $2.6 million used for tax withholding payments related to stock-based compensation. In addition, we paid $1.1 million of contingent consideration in the first nine months of 2016 related to a prior period acquisition.
Additional Liquidity and Capital Resources
On May 17, 2017, our board of directors approved the repurchase by us of up to $20 million of our equity securities during the period from May 17, 2017 to May 17, 2018. We did not purchase any shares of our common stock under this authorization or under the previous authorization, which expired in the second quarter of 2017.
We paid quarterly cash dividends totaling $6.7 million in the first nine months of 2017. On September 20, 2017, we declared a quarterly cash dividend of $0.21 per outstanding share of our common stock, which will be paid on November 9, 2017. 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 consolidated leverage ratio contained in our 2017 Credit Agreement.
It is our intent to reinvest indefinitely the earnings of our international subsidiaries in order to support the current and future capital needs of their operations, including debt repayments. We do not anticipate the need to repatriate funds to the United States to satisfy domestic liquidity needs arising in the ordinary course of business. Through September 30, 2017, we have not provided for U.S. income taxes on approximately $229.1 million of unremitted foreign earnings. The U.S. tax cost has not been determined due to the fact that it is not practicable to estimate at this time. The related foreign tax withholding, which would be required if we were to remit the foreign earnings to the U.S., would be approximately $3.4 million.
On July 5, 2017, we acquired the forest products business of NII pursuant to a Stock and Asset Purchase Agreement dated May 24, 2017, for approximately $170.7 million, net of cash acquired, which includes a post-closing adjustment of $2.1 million that was received subsequent to the end of the third quarter. On August 14, 2017, we acquired certain assets of Unaflex for approximately $31.3 million in cash, subject to a post-closing adjustment.
We plan to make expenditures of approximately $9.0 to $10.0 million during the remainder of 2017 for property, plant, and equipment.
Liquidity and Capital Resources (continued)
In the future, our liquidity position will be primarily affected by the level of cash flows from operations, cash paid to satisfy debt repayments, capital projects, dividends, stock repurchases, or acquisitions. We believe that our existing resources, together with the cash available from our credit facilities and the cash we expect to generate from operations, will be sufficient to meet the capital requirements of our current operations for the foreseeable future.
Revolving Credit Facility
On March 1, 2017, we entered into an Amended and Restated Credit Agreement that became effective on March 2, 2017, which is a five-year unsecured multi-currency revolving credit facility in the aggregate principal amount of up to $200 million. On May 24, 2017, we entered into a first amendment and limited consent (as amended, the "2017 Credit Agreement"), which increased the revolving loan commitment to $300 million. The 2017 Credit Agreement also included an uncommitted unsecured incremental borrowing facility of up to an additional $100 million. The principal on any borrowings made under the 2017 Credit Agreement is due on March 1, 2022. Borrowing may be denominated in U.S. dollars or certain foreign currencies, as defined in the 2017 Credit Agreement. Interest on any loans outstanding under the 2017 Credit Agreement accrues and generally is payable quarterly in arrears at one of the following rates selected by us: (i) the Base Rate, calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate as published by Citizens Bank, and (c) the thirty-day London Inter-Bank Offered Rate (LIBOR) rate, as defined, plus 0.50%; or (ii) the LIBOR rate (with a zero percent floor), as defined, plus an applicable margin of 1% to 2%. The applicable margin is determined based upon the ratio of our total debt, net of certain cash, as defined, to earnings before interest, taxes, depreciation, and amortization (EBITDA), as defined in the 2017 Credit Agreement. For this purpose, total debt net of certain cash is defined as total debt less the sum of (i) unrestricted U.S. cash, and (ii) 65% of unrestricted cash outside of the United States, but no more than an aggregate amount of $30 million.
In the first nine months of 2017, we borrowed an aggregate $222.0 million under the 2017 Credit Agreement. As of September 30, 2017, the outstanding balance under the 2017 Credit Agreement was $273.6 million, including $90.4 million of euro-denominated and $66.6 million of Canadian dollar-denominated borrowings. As of September 30, 2017, we had $26.4 million of borrowing capacity available under our 2017 Credit Agreement, which is calculated by translating its foreign-denominated borrowings using transaction date foreign exchange rates.
Our obligations under the 2017 Credit Agreement may be accelerated upon the occurrence of an event of default under the 2017 Credit Agreement, which includes customary events of default including, without limitation, payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy- and insolvency-related defaults, defaults relating to such matters as the Employment Retirement Income Security Act (ERISA), unsatisfied judgments, the failure to pay certain indebtedness, and a change of control default. In addition, the 2017 Credit Agreement contains negative covenants applicable to us, including financial covenants requiring us to comply with a maximum consolidated leverage ratio of 3.5 to 1, a minimum consolidated interest coverage ratio of 3 to 1, and restrictions on liens, indebtedness, fundamental changes, dispositions of property, making certain restricted payments (including dividends and stock repurchases), investments, transactions with affiliates, sale and leaseback transactions, swap agreements, changing our fiscal year, arrangements affecting subsidiary distributions, entering into new lines of business, and certain actions related to a discontinued operation. As of September 30, 2017, we were in compliance with these covenants.
Loans under the 2017 Credit Agreement are guaranteed by certain of our domestic subsidiaries pursuant to an Amended and Restated Guarantee Agreement, dated as of March 1, 2017. In addition, one of our foreign subsidiaries entered into a Guarantee Agreement limited to certain obligations of two foreign subsidiary borrowers pursuant to a Guarantee Agreement, dated as of March 1, 2017.
Sale-Leaseback Financing Arrangement
In connection with the acquisition of PAAL in April 2016, we assumed a sale-leaseback financing arrangement for PAAL's facility in Germany. Under this arrangement, the quarterly lease payment includes principal and interest based on an interest rate which is reset, from time to time, to prevailing short-term borrowing rates in Germany. The interest rate at September 30, 2017 was 1.70%. The lease arrangement includes a net fixed price purchase option of $1.6 million at the end of the lease term in 2022. At September 30, 2017, $4.5 million was outstanding under this capital lease obligation.
Liquidity and Capital Resources (continued)
Interest Rate Swap Agreement
On January 16, 2015, we entered into a swap agreement (2015 Swap Agreement) to hedge our exposure to movements in the three-month LIBOR rate on future outstanding debt. The 2015 Swap Agreement expires on March 27, 2020, and has a $10 million notional value. Under the 2015 Swap Agreement, on a quarterly basis we receive a three-month LIBOR rate and pay a fixed rate of interest of 1.50% plus an applicable margin.
As of September 30, 2017, the 2015 Swap Agreement had an unrealized gain of $65,000. We believe that any credit risk associated with the swap agreement is remote based on our financial position and the creditworthiness of the financial institution that issued the 2015 Swap Agreement.
The counterparty to the 2015 Swap Agreement could demand an early termination of the 2015 Swap Agreement if we are in default under the 2017 Credit Agreement, or any agreement that amends or replaces the 2017 Credit Agreement in which the counterparty is a member, and we are unable to cure the default. An event of default under the 2017 Credit Agreement includes customary events of default and failure to comply with financial covenants, including a maximum consolidated leverage ratio of 3.5 to 1 and a minimum consolidated interest coverage ratio of 3 to 1. The unrealized gain of $65,000 associated with the 2015 Swap Agreement as of September 30, 2017 represents the estimated amount that we would receive from the counterparty in the event of an early termination.
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk from changes in interest rates and foreign currency exchange rates has not changed materially from our exposure at fiscal year-end 2016 as disclosed in Part II, Item 7A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the SEC, except for the interest rate and foreign currency risk associated with the $273.6 million in borrowings at September 30, 2017 under our revolving credit facility. In the first nine months of 2017, we entered into $70.7 million of Canadian dollar-denominated borrowings and $61.8 million of euro-denominated borrowings. We also have outstanding $22.6 million from euro-denominated borrowings made in 2016. The translation of our foreign-denominated debt impacts our borrowing capacity available under our 2017 Credit Agreement, which is calculated in U.S. dollars. A 10% movement in the euro and Canadian dollar rates against the U.S. dollar would have decreased our borrowing capacity by approximately $15.7 million as of September 30, 2017. Our borrowings under the revolving credit facility are subject to interest rate risk as they bear variable rates of interest, which adjust quarterly. A 10% increase in interest rates associated with our borrowings outstanding at September 30, 2017 would have the effect of increasing our annual interest expense by approximately $0.2 million.January 2, 2021.
Item 4 – Controls and Procedures
(a)Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017.April 3, 2021. The term "disclosure controls and procedures," as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon the evaluation of our disclosure controls and procedures as of September 30, 2017,April 3, 2021, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2017,April 3, 2021, our disclosure controls and procedures were effective at the reasonable assurance level.
(b)Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the fiscal quarter ended September 30, 2017April 3, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1A – Risk Factors
There have been no material changes from the risk factors disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and subsequent filings, filed with the SEC.January 2, 2021.
Item 6 – Exhibits
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| Description of Exhibit |
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Exhibit Number10.1* | | |
| Description of Exhibit |
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10.1 | |
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10.231.1 | |
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10.3 | |
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31.1 | | |
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31.2 | | |
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32 | | |
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101.INS | | Inline XBRL Instance Document.*Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH | | Inline XBRL Taxonomy Extension Schema Document.* |
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101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document.* |
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101.LAB101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document.* |
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101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document.* |
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101.DEF104 | | Cover Page Interactive Data File (formatted as Inline XBRL Taxonomy Definition Linkbase Document.*and contained in Exhibit 101). |
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* | Management contract or compensatory plan or arrangement. |
* Submitted electronically herewith.
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheet at September 30, 2017 and December 31, 2016, (ii) Condensed Consolidated Statement of Income for the three- and nine-month periods ended September 30, 2017 and October 1, 2016, (iii) Condensed Consolidated Statement of Comprehensive Income for the three- and nine-month periods ended September 30, 2017 and October 1, 2016, (iv) Condensed Consolidated Statement of Cash Flows for the nine-month periods ended September 30, 2017 and October 1, 2016, (v) Condensed Consolidated Statement of Stockholders' Equity for the nine-month periods ended September 30, 2017 and October 1, 2016, and (vi) Notes to Condensed Consolidated Financial Statements.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized as of the 8th day of November 2017.authorized.
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| KADANT INC. |
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Date: May 12, 2021 | /s/ Michael J. McKenney |
| Michael J. McKenney |
| SeniorExecutive Vice President and Chief Financial Officer |
| (Principal Financial Officer) |