WASHINGTON, D.C. 20549
KADANT INC.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,"filer", "accelerated filer,"filer", "smaller reporting company,"company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Kadant Inc.
KADANT INC.
The accompanying notes are an integral part of these condensed consolidated financial statements.
KADANT INC.
The accompanying notes are an integral part of these condensed consolidated financial statements.
KADANT INC.
The accompanying notes are an integral part of these condensed consolidated financial statements.
KADANT INC.
The accompanying notes are an integral part of these condensed consolidated financial statements.
KADANT INC.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Kadant Inc. (collectively, "Kadant," "the Company," or "the Registrant") was incorporated in Delaware in November 1991 and currently trades on the New York Stock Exchange under the ticker symbol "KAI."
The interim condensed consolidated financial statements and related notes presented have been prepared by the Company, are unaudited, and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the Company's financial position at September 30, 2017 andApril 2, 2022, its results of operations, and comprehensive income, for the three- and nine-month periods ended September 30, 2017 and October 1, 2016, and its cash flows and stockholders' equity for the nine-monththree-month periods ended September 30, 2017April 2, 2022 and October 1, 2016.April 3, 2021. Interim results are not necessarily indicative of results for a full year or for any other interim period.
Although the Company makes every effort to ensure the accuracy of the estimates and assumptions used in the preparation of its condensed consolidated financial statements or in the application of accounting policies, if business conditions were different, or if the Company were to use different estimates and assumptions, it is possible that materially different amounts could be reported in the Company's condensed consolidated financial statements.
The Company's Chinese subsidiaries may receive banker's acceptance drafts from customers as payment for their trade accounts receivable. The banker's acceptance drafts are noninterest-bearingnon-interest bearing obligations of the issuing bank and generally mature within six months of the origination date. The Company's Chinese subsidiaries may sell the drafts at a discount to a third-party financial institution or transfer the drafts to vendors in settlement of current accounts payable prior to the scheduled maturity date. These drafts, which totaled $16,687,000$8,147,000 at April 2, 2022 and $7,852,000$8,049,000 at September 30, 2017 and December 31, 2016, respectively,January 1, 2022, are included in accounts receivable in the accompanying condensed consolidated balance sheet until the subsidiary sells the drafts to a bank and receives a discounted amount, transfers the banker's acceptance drafts in settlement of current accounts payable prior to maturity, or obtains cash payment on the scheduled maturity date.
3. Other Income
|
| | | | | | | | |
| | | September 30,
2017 | | December 31,
2016 |
| (In thousands) | | |
| Revolving Credit Facility, due 2022 | | $ | 273,577 |
| | $ | 61,494 |
|
| Obligations Under Capital Lease, due 2017 to 2022 | | 4,639 |
| | 4,309 |
|
| Other Borrowings, due 2017 to 2023 | | 582 |
| | 608 |
|
| Total | | 278,798 |
| | 66,411 |
|
| Less: Current Maturities of Long-Term Obligations | | (707 | ) | | (643 | ) |
| Long-Term Obligations | | $ | 278,091 |
| | $ | 65,768 |
|
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. Long-Term Obligations (continued)
Revolving Credit Facility
On March 1, 2017, the Company 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 $200,000,000. On May 24, 2017, the Company entered into a first amendment and limited consent (as amended, the "2017 Credit Agreement"), which increased the revolving loan commitment to $300,000,000. The 2017 Credit Agreement also includes an uncommitted unsecured incremental borrowing facility of up to an additional $100,000,000. 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.$150,000,000. Interest on any loansborrowings outstanding under the 2017 Credit Agreement accrues and generally is payable quarterly in arrears calculated at one of the following rates selected by the Company: (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%;an applicable margin of 0% to 1.25%, or (ii) the LIBOR rateEurocurrency Rate, CDOR Rate and RFR (with a zero percent floor), as applicable and as defined, plus an applicable margin of 1% to 2%2.25%. The applicable margin is determined based upon the ratio of the Company's total debt, net of unrestricted cash up to $30,000,000 and certain cash, as defined,debt obligations, 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 $30,000,000.
The obligations of the Company 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 tounder such matters as the Employment Retirement Income Security Act (ERISA), unsatisfied judgments, the failure to pay certain indebtedness, and a change of control default.financing arrangements. In addition, the 2017 Credit Agreement contains negative covenants applicable to the Company and its subsidiaries, including financial covenants requiring the Company to comply withmaintain a maximum consolidated leverage ratio of 3.53.75 to 1,1.00, or, if the Company elects, for the quarter during which a minimum consolidated interest coverage ratio of 3material acquisition occurs and for the three fiscal quarters thereafter, 4.00 to 1,1.00, and restrictionslimitations 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 its 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, the Company was in compliance with these covenants.
.
Loans under the 2017 Credit Agreement are guaranteed by certain domestic subsidiaries of the Company pursuant to an Amended and Restated Guarantee Agreement, dated asCompany.
As of March 1, 2017. In addition, one ofApril 2, 2022, the Company's 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.
In the first nine months of 2017, the Company borrowed an aggregate $222,019,000outstanding balance under the 2017 Credit Agreement including $70,691,000 of Canadian dollar-denominated and $61,769,000was $229,483,000, which included $78,483,000 of euro-denominated borrowings. As of September 30, 2017, the outstanding balance under the 2017 Credit Agreement was $273,577,000, including $90,410,000 of euro-denominated and $66,608,000 of Canadian dollar-denominated borrowings. As of September 30, 2017,April 2, 2022, the Company had $26,421,000$169,977,000 of borrowing capacity available under its 2017 Credit Agreement, which was calculated by translating its foreign-denominated borrowings using transactionborrowing date foreign exchange rates.
The weighted average interest rate for the borrowingsoutstanding balance under the 2017 Credit Agreement was 1.88%1.73% as of September 30, 2017.April 2, 2022.
See Note 8, Derivatives, under the heading Interest Rate Swap Agreement, for information relating to the swap agreement.
Senior Promissory Notes
In 2018, the Company entered into an uncommitted, unsecured Multi-Currency Note Purchase and Private Shelf Agreement (Note Purchase Agreement). Simultaneous with the execution of the Note Purchase Agreement, the Company issued senior promissory notes (Initial Notes) in an aggregate principal amount of $10,000,000, with a per annum interest rate of 4.90% payable semiannually, and a maturity date of December 14, 2028. The Company is required to prepay a portion of the principal of the Initial Notes beginning on December 14, 2023 and each year thereafter, and may optionally prepay the principal on the Initial Notes, together with any prepayment premium, at any time in accordance with the Note Purchase Agreement. The obligations of the Initial Notes may be accelerated upon an event of default as defined in the Note Purchase Agreement, which includes customary events of default under such financing arrangements.
The Initial Notes are pari passu with the Company’s indebtedness under the Credit Agreement, and any other senior debt of the Company, subject to certain specified exceptions, and participate in a sharing agreement with respect to the obligations of the Company and its subsidiaries under the Credit Agreement. The Senior Promissory Notes are guaranteed by certain of the Company’s domestic subsidiaries.
Debt Issuance CostsCompliance
During the first nine monthsAs of 2017,April 2, 2022, the Company incurred an additional $1,257,000 of debt issuance costswas in compliance with the covenants related to the 2017 Credit Agreement. Unamortizedits debt issuance costs were $1,362,000 as of September 30, 2017, which are included in other assets in the accompanying condensed consolidated balance sheet and are being amortizedobligations.
Finance Leases
The Company's finance leases primarily relate to interest expense using the straight-line method.contracts for vehicles.
Other Borrowings
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. Long-Term Obligations (continued)
Obligations Under Capital Lease
In connection with the acquisition of PAAL, the Company assumedOther borrowings include a sale-leaseback financing arrangement for PAAL'sa manufacturing 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 quarterly lease payment also includesand a payment to the landlord toward a corresponding loan receivable. The interest rate on the outstanding obligation is 1.79%. The secured loan receivable, which is included in other current assets in the accompanying condensed consolidated balance sheet, was $426,000$1,435,000 at September 30, 2017.April 2, 2022. The lease arrangement provides for a fixed price purchase option, net of the projected loan receivable, of $1,644,000$1,469,000 at the end of the lease term in August 2022. If the Company does not exercise the purchase option for the facility, the Companyit will receive cash from the landlord to settle the loan receivable. As of September 30, 2017, $4,532,000April 2, 2022, $3,152,000 was outstanding under this capital lease obligation.
Other borrowings also include $968,000 of short-term obligations and $2,925,000 of debt obligations outstanding at April 2, 2022 assumed in the acquisition of The Company also assumed capital lease obligations for certain equipment as partClouth Group of the PAAL acquisition. These capital lease obligations bear a weighted average interest rateCompanies (Clouth), which mature on various dates ranging from 2022 through 2028.
KADANT INC.
Notes to Condensed Consolidated Financial Statements 7.(Unaudited)
6. Stock-Based Compensation
The Company recognized stock-based compensation expense of $1,547,000 and $1,269,000 in the third quarters of 2017 and 2016, respectively, and $4,283,000 and $3,865,000$2,260,000 in the first nine monthsquarter of 20172022 and 2016, respectively,$1,499,000 in the first quarter of 2021 within SG&Aselling, general, and administrative (SG&A) expenses in the accompanying condensed consolidated statement of income. The Company recognizes compensation expense for all stock-based awards granted to employees and directors based on the grant date estimate of fair value for those awards. The fair value of RSUs is based on the grant date trading price of the Company's common stock, reduced by the present value of estimated dividends foregone during the requisite service period. For time-based RSUs, compensation expense is recognized ratably over the requisite service period for the entire award based on the grant date fair value, and net of forfeitures.actual forfeitures recorded when they occur. For performance-based RSUs, compensation expense is recognized ratably over the requisite service period for each separately-vestingseparately vesting portion of the award based on the grant date fair value, net of actual forfeitures recorded when they occur, and remeasured at each reporting period until the total number of RSUs to be issued is known. During the first quarter of 2017, the Company granted stock-based compensation to executive officers and employees consisting of 39,229 shares of performance-based RSUs and 38,331 shares of time-based RSUs and granted 12,000 shares of time-based RSUs to its non-employee directors. Unrecognized compensation expense related to stock-based compensation totaled approximately $6,037,000$11,628,000 at September 30, 2017, andApril 2, 2022, which will be recognized over a weighted average period of 1.72.0 years.
8. Employee Benefit Plans
The Company sponsors a noncontributory defined benefit pension plan for eligible employees at one of its U.S. divisions and its corporate office. Certain of the Company’s non-U.S. subsidiaries also sponsor defined benefit pension plans covering certain employees at those subsidiaries. Funds for the U.S. pension plan and one of the non-U.S. pension plans are contributed to a trustee as necessary to provide for current service and for any unfunded projected benefit obligation over a reasonable period. The remaining non-U.S. pension plans are unfunded as permitted under their plans and applicable laws. Benefits under the Company’s pension plans are based on years of service and employee compensation.
The Company also provides other post-retirement benefits under plans in the United States and at one of its non-U.S. subsidiaries. In addition, the Company provides a restoration plan for certain executive officers which fully supplements benefits lost under the noncontributory defined benefit retirement plan as a consequence of applicable Internal Revenue Service limits and restores benefits for the limitation of years of service under the retirement plan.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
8. Employee Benefit Plans (continued)
The components of net periodic benefit cost for the Company's U.S. and non-U.S. pension plans and other post-retirement benefit plans are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended
September 30, 2017 | | Three Months Ended
October 1, 2016 |
| (In thousands, except percentages) | | U.S. Pension | | Non-U.S. Pension | | Other Post-Retirement | | U.S. Pension | | Non-U.S. Pension | | Other Post-Retirement |
| Components of Net Periodic Benefit Cost: | | | | | | | | | | | | |
| Service cost | | $ | 171 |
| | $ | 35 |
| | $ | 43 |
| | $ | 181 |
| | $ | 25 |
| | $ | 33 |
|
| Interest cost | | 307 |
| | 28 |
| | 43 |
| | 318 |
| | 26 |
| | 38 |
|
| Expected return on plan assets | | (331 | ) | | (10 | ) | | (1 | ) | | (322 | ) | | (5 | ) | | (1 | ) |
| Recognized net actuarial loss | | 110 |
| | 10 |
| | 22 |
| | 124 |
| | 9 |
| | 12 |
|
| Amortization of prior service cost | | 14 |
| | 2 |
| | 22 |
| | 14 |
| | 2 |
| | 22 |
|
| Net Periodic Benefit Cost | | $ | 271 |
| | $ | 65 |
| | $ | 129 |
| | $ | 315 |
| | $ | 57 |
| | $ | 104 |
|
| | | | | | | | | | | | | |
| The weighted average assumptions used to determine net periodic benefit cost are as follows: | | | | |
|
| | | | | | | | | | | | | |
| Discount Rate | | 4.03 | % | | 3.42 | % | | 4.12 | % | | 4.22 | % | | 3.85 | % | | 4.30 | % |
| Expected Long-Term Return on Plan Assets | | 5.00 | % | | 7.72 | % | | 7.72 | % | | 5.00 | % | | 6.90 | % | | 6.90 | % |
| Rate of Compensation Increase | | 3.00 | % | | 3.41 | % | | 3.08 | % | | 3.00 | % | | 2.98 | % | | 3.03 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Nine Months Ended
September 30, 2017 | | Nine Months Ended
October 1, 2016 |
| (In thousands, except percentages) | | U.S. Pension | | Non-U.S. Pension | | Other Post-Retirement | | U.S. Pension | | Non-U.S. Pension | | Other Post-Retirement |
| Components of Net Periodic Benefit Cost: | | | | | | | | | | | | |
| Service cost | | $ | 514 |
| | $ | 100 |
| | $ | 131 |
| | $ | 543 |
| | $ | 77 |
| | $ | 99 |
|
| Interest cost | | 923 |
| | 78 |
| | 127 |
| | 954 |
| | 78 |
| | 114 |
|
| Expected return on plan assets | | (994 | ) | | (27 | ) | | (1 | ) | | (966 | ) | | (19 | ) | | (1 | ) |
| Recognized net actuarial loss | | 331 |
| | 28 |
| | 62 |
| | 372 |
| | 29 |
| | 36 |
|
| Amortization of prior service cost | | 40 |
| | 4 |
| | 66 |
| | 42 |
| | 4 |
| | 67 |
|
| Settlement loss | | — |
| | — |
| | — |
| | — |
| | — |
| | 114 |
|
| Net Periodic Benefit Cost | | $ | 814 |
| | $ | 183 |
| | $ | 385 |
| | $ | 945 |
| | $ | 169 |
| | $ | 429 |
|
| | | | | | | | | | | | | |
| The weighted average assumptions used to determine net periodic benefit cost are as follows: | | | | |
|
| | | | | | | | | | | | | |
| Discount Rate | | 4.03 | % | | 3.43 | % | | 4.12 | % | | 4.22 | % | | 3.88 | % | | 4.28 | % |
| Expected Long-Term Return on Plan Assets | | 5.00 | % | | 7.72 | % | | 7.72 | % | | 5.00 | % | | 6.90 | % | | 6.90 | % |
| Rate of Compensation Increase | | 3.00 | % | | 3.42 | % | | 3.07 | % | | 3.00 | % | | 2.98 | % | | 3.02 | % |
The Company made cash contributions of $810,000 to its U.S. noncontributory defined benefit pension plan in the first nine months of 2017 and expects to make cash contributions of $270,000 over the remainder of 2017. For the remaining pension and post-retirement benefit plans, no material cash contributions other than to fund current benefit payments are expected in 2017.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
9.7. Accumulated Other Comprehensive Items
Comprehensive income combines net income and other comprehensive items, which represent certain amounts that are reported as components of stockholders' equity in the accompanying condensed consolidated balance sheet, including foreign currency translation adjustments, unrecognized prior service cost and deferred losses associated with pension and other post-retirement benefit plans, and deferred gains (losses) on hedging instruments.
sheet.
Changes in each component of accumulated other comprehensive items (AOCI), net of tax, in the accompanying condensed consolidated balance sheet are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Foreign
Currency
Translation
Adjustment | | Post-Retirement Benefit Liability Adjustments | | Deferred Loss on Cash Flow Hedges | | Total |
| Balance at January 1, 2022 | | $ | (29,096) | | | $ | (792) | | | $ | (462) | | | $ | (30,350) | |
| Other comprehensive items before reclassifications | | (2,238) | | | 2 | | | 193 | | | (2,043) | |
| Reclassifications from AOCI | | — | | | 7 | | | 84 | | | 91 | |
| Net current period other comprehensive items | | (2,238) | | | 9 | | | 277 | | | (1,952) | |
| Balance at April 2, 2022 | | $ | (31,334) | | | $ | (783) | | | $ | (185) | | | $ | (32,302) | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Foreign Currency Translation Adjustment | | Unrecognized Prior Service Cost on Pension and Other Post- Retirement Benefit Plans | | Deferred Loss on Pension and Other Post- Retirement Benefit Plans | | Deferred Gain (Loss) on Hedging Instruments | | Accumulated Other Comprehensive Items |
| Balance at December 31, 2016 | | $ | (41,094 | ) | | $ | (397 | ) | | $ | (8,158 | ) | | $ | 12 |
| | $ | (49,637 | ) |
| Other comprehensive income (loss) before reclassifications | | 21,196 |
| | (115 | ) | | (78 | ) | | 51 |
| | 21,054 |
|
| Reclassifications from AOCI | | — |
| | 70 |
| | 275 |
| | 41 |
| | 386 |
|
| Net current period other comprehensive income (loss) | | 21,196 |
| | (45 | ) | | 197 |
| | 92 |
| | 21,440 |
|
| Balance at September 30, 2017 | | $ | (19,898 | ) | | $ | (442 | ) | | $ | (7,961 | ) | | $ | 104 |
| | $ | (28,197 | ) |
| | | | | | | | | | | |
| Balance at January 2, 2016 | | $ | (27,932 | ) | | $ | (489 | ) | | $ | (8,322 | ) | | $ | (229 | ) | | $ | (36,972 | ) |
| Other comprehensive loss before reclassifications | | (283 | ) | | (1 | ) | | (575 | ) | | (265 | ) | | (1,124 | ) |
| Reclassifications from AOCI | | — |
| | 71 |
| | 361 |
| | 364 |
| | 796 |
|
| Net current period other comprehensive (loss) income | | (283 | ) | | 70 |
| | (214 | ) | | 99 |
| | (328 | ) |
| Balance at October 1, 2016 | | $ | (28,215 | ) | | $ | (419 | ) | | $ | (8,536 | ) | | $ | (130 | ) | | $ | (37,300 | ) |
Amounts reclassified from AOCI are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | |
| (In thousands) | | April 2,
2022 | | April 3,
2021 | | | | | | Statement of Income Line Item |
| Post-retirement Benefit Plans | | | | | | | | | | |
| Recognized net actuarial loss | | $ | (7) | | | $ | (11) | | | | | | | Other expense, net |
| Amortization of prior service cost | | (3) | | | (3) | | | | | | | Other expense, net |
| Total expense before income taxes | | (10) | | | (14) | | | | | | | |
| Income tax benefit | | 3 | | | 4 | | | | | | | Provision for income taxes |
| | | (7) | | | (10) | | | | | | | |
| Cash Flow Hedges (a) | | �� | | | | | | | | |
| Interest rate swap agreements | | (111) | | | (109) | | | | | | | Interest expense |
| Total expense before income taxes | | (111) | | | (109) | | | | | | | |
| Income tax benefit | | 27 | | | 26 | | | | | | | Provision for income taxes |
| | | (84) | | | (83) | | | | | | | |
| Total Reclassifications | | $ | (91) | | | $ | (93) | | | | | | | |
(a)See Note 8, Derivatives, for additional information.
|
| | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Nine Months Ended | | |
| (In thousands) | | September 30,
2017 | | October 1,
2016 | | September 30,
2017 | | October 1,
2016 | | Statement of Income Line Item |
| Pension and Other Post-Retirement Plans: (a) | | | | | | | | |
| Amortization of actuarial losses | | $ | (142 | ) | | $ | (145 | ) | | $ | (421 | ) | | $ | (551 | ) | | SG&A expenses |
| Amortization of prior service costs | | (38 | ) | | (38 | ) | | (110 | ) | | (113 | ) | | SG&A expenses |
| Total expense before income taxes | | (180 | ) | | (183 | ) | | (531 | ) | | (664 | ) | | |
| Income tax benefit | | 63 |
| | 64 |
| | 186 |
| | 232 |
| | Provision for income taxes |
| | | (117 | ) | | (119 | ) | | (345 | ) | | (432 | ) | | |
| Cash Flow Hedges: (b) | | |
| | |
| | |
| | |
| | |
| Interest rate swap agreements | | (8 | ) | | (21 | ) | | (26 | ) | | (157 | ) | | Interest expense |
| Forward currency-exchange contracts | | — |
| | — |
| | — |
| | (24 | ) | | Revenues |
| Forward currency-exchange contracts | | (26 | ) | | (113 | ) | | (37 | ) | | (182 | ) | | Cost of revenues |
| Total expense before income taxes | | (34 | ) | | (134 | ) | | (63 | ) | | (363 | ) | | |
| Income tax benefit (provision) | | 11 |
| | 47 |
| | 22 |
| | (1 | ) | | Provision for income taxes |
| | | (23 | ) | | (87 | ) | | (41 | ) | | (364 | ) | | |
| Total Reclassifications | | $ | (140 | ) | | $ | (206 | ) | | $ | (386 | ) | | $ | (796 | ) | | |
| |
(a) | Included in the computation of net periodic benefit cost. See Note 8 for additional information. |
| |
(b) | See Note 10 for additional information. |
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
10.8. Derivatives
The Company uses derivative instruments primarily to reduce its exposure to changes in currency exchange rates and interest rates. When the Company enters into a derivative contract, the Company determines whether the transaction is deemed to be a hedge for accounting purposes. For a contract deemed to be a hedge, the Company formally documents the relationship between the derivative instrument and the risk being hedged. In this documentation, the Company specifically identifies the asset, liability, forecasted transaction, cash flow, or net investment that has been designated as the hedged item, and evaluates whether the derivative instrument is expected to reduce the risks associated with the hedged item. To the extent these criteria are not met, the Company does not use hedge accounting for the derivative. The changes in the fair value of a derivative not deemed to be a hedge are recorded currently in earnings. The Company does not hold or engage in transactions involving derivative instruments for purposes other than risk management.
Accounting Standards Codification (ASC) 815, Derivatives and Hedging, requires that all derivatives be recognized in the accompanying condensed consolidated balance sheet at fair value. For derivatives designated as cash flow hedges, the related gains or losses on these contracts are deferred as a component of AOCI. These deferred gains and losses are recognized in the accompanying condensed consolidated statement of income in the period in which the underlying anticipated transaction occurs. For derivatives designated as fair value hedges, the unrealized gains and losses resulting from the impact of currency exchange rate movements are recognized in earnings in the period in which the exchange rates change and offset the currency gains and losses on the underlying exposures being hedged. The Company performs an evaluation of the effectiveness of the hedge both at inception and on an ongoing basis. The ineffective portion of a hedge, if any, and changes in the fair value of a derivative not deemed to be a hedge are recorded in the accompanying condensed consolidated statement of income.
Interest Rate Swap Agreement
On January 16, 2015,In 2018, the Company entered into aan interest rate swap agreement (2015(2018 Swap Agreement) with Citizens Bank to hedge its exposure to movements in the three-monthUSD LIBOR rate on future outstanding debt and has designated the 2015its U.S. dollar-denominated debt. The 2018 Swap Agreement ashas a cash flow hedge. The 2015 Swap Agreement$15,000,000 notional value and expires on March 27, 2020 and has a $10,000,000 notional value. Under the 2015 Swap Agreement, onJune 30, 2023. On a quarterly basis, the Company receives three-month USD LIBOR, which is subject to a three-month LIBOR ratezero percent floor, and pays a fixed rate of interest of 1.50%3.15% plus an applicable margin. margin as defined in the Credit Agreement.
The Company designated its 2018 Swap Agreement as a cash flow hedge and structured it to be 100% effective. Unrealized gains and losses related to the fair value of the 20152018 Swap Agreement is included in other assets, with an offsetare recorded to AOCI, net of tax, intax. In the accompanying condensed consolidated balance sheet.
Theevent of early termination, the Company has structuredwill receive from or pay to the 2015counterparty the fair value of the 2018 Swap Agreement, to be 100% effective and as a result there is no current impact to earnings resulting from hedge ineffectiveness. Management believes that any credit risk associated with the 2015 Swap Agreement is remote based on the Company's financial position and the creditworthiness of the financial institution that issued the 2015 Swap Agreement.unrealized gain or loss outstanding will be recognized in earnings.
The counterparty to the 20152018 Swap Agreement could demand an early termination of the 2015 Swap Agreementthat agreement if the Company iswere to be 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 the Company isif it were to be unable to cure the default. An event of default under the 2017 Credit Agreement includes customary events of defaultSee Note 5, Short- and failure to comply with financial covenants, including 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 its 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, the Company was in compliance with these covenants. The unrealized gain associated with the 2015 Swap Agreement was $65,000 as of September 30, 2017, which represents the estimated amount that the Company would receive from the counterparty in the event of an early termination.Long-Term Obligations, for further details.
Forward Currency-Exchange Contracts
The Company uses forward currency-exchange contracts primarilythat generally have maturities of twelve months or less to hedge exposures resulting from fluctuations in currency exchange rates. Such exposures result primarily from portions of the Company's operations and assets and liabilities that are denominated in currencies other than the functional currencies of the businesses conducting the operations or holding the assets and liabilities. The Company typically manages its level of exposure to the risk of currency-exchange fluctuations by hedging a portion of its anticipated currency exposures over the ensuing 12-month period, using forward currency-exchange contracts that have maturities of 12 months or less.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
10. Derivatives (continued)
Company's subsidiaries.
Forward currency-exchange contracts that hedge forecasted accounts receivable or accounts payable are designated as cash flow hedges. The fair value for these instruments is included in other current assets forhedges and unrecognized gains and in other current liabilities for unrecognized losses with an offset inare recorded to AOCI, net of tax. ForDeferred gains and losses are recognized in the statement of income in the period in which the underlying transaction occurs. The fair values of forward currency-exchange contracts that are designated as fair value hedges the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item are recognized currently in earnings. The fair value ofand forward currency-exchange contracts that are not designated as hedges is recordedare recognized currently in earnings with gains reported in other current assetsearnings.
Gains and losses reported in other current liabilities.
In the second quarter of 2017, the Company entered into forward currency-exchange contracts associated with the anticipated consideration to be paid for the acquisition of NII and recognized a loss of $1,754,000 associated with these transactions. The Company recognized within SG&A expenses in the accompanying condensed consolidated statement of income a gain of $109,000 and a loss of $120,000 in the third quarters of 2017 and 2016, respectively, and losses of $1,384,000 and $556,000 in the first nine months of 2017 and 2016, respectively, associated with itsthe Company's forward currency-exchange contracts that were not designated as hedges includingwere not material for the contracts related to the NII acquisition. Management believes that any credit risk associated with forward currency-exchange contracts is remote based on the Company's financial positionthree-month periods ended April 2, 2022 and the creditworthiness of the financial institutions issuing the contracts.
April 3, 2021.
The following table summarizes the fair value of the Company's derivative instruments designated and not designated as hedging instruments, the notional value of the associated derivative contracts, and the location of these instruments in the accompanying condensed consolidated balance sheet:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | April 2, 2022 | | January 1, 2022 |
| | Balance Sheet Location | | Asset (Liability) (a) | | Notional Amount (b) | | Asset (Liability) (a) | | Notional Amount |
| (In thousands) | | | | | |
| Derivatives Designated as Hedging Instruments: | | | | | | | | |
| Derivatives in a Liability Position: | | | | | | | | | | |
| Forward currency-exchange contract | | Other Current Liabilities | | $ | (66) | | | $ | 842 | | | $ | (44) | | | $ | 842 | |
| 2018 Swap Agreement | | Other Long-Term Liabilities | | $ | (179) | | | $ | 15,000 | | | $ | (550) | | | $ | 15,000 | |
| | | | | | | | | | |
| Derivatives Not Designated as Hedging Instruments: | | | | | | | | |
| Derivatives in an Asset Position: | | | | | | | | | | |
| Forward currency-exchange contracts | | Other Current Assets | | $ | — | | | $ | — | | | $ | 14 | | | $ | 1,200 | |
|
| | | | | | | | | | | | | | | | | | |
| | | | | September 30, 2017 | | December 31, 2016 |
| | | Balance Sheet Location | | Asset (Liability) (a) | | Notional Amount (b) | | Asset (Liability) (a) | | Notional Amount |
| (In thousands) | | | | | |
| Derivatives Designated as Hedging Instruments: | | | | | | | | |
| Derivatives in an Asset Position: | | | | | | | | | | |
| Forward currency-exchange contracts | | Other Current Assets | | $ | 88 |
| | $ | 950 |
| | $ | — |
| | $ | — |
|
| Interest rate swap agreement | | Other Long-Term Assets | | $ | 65 |
| | $ | 10,000 |
| | $ | 62 |
| | $ | 10,000 |
|
| Derivatives in a Liability Position: | | | | | | | | | | |
| Forward currency-exchange contracts | | Other Current Liabilities | | $ | — |
| | $ | — |
| | $ | (41 | ) | | $ | 2,380 |
|
| | | | | | | | | | | |
| Derivatives Not Designated as Hedging Instruments: | | |
| | |
| | |
| | |
|
| Derivatives in an Asset Position: | | | | |
| | |
| | |
| | |
|
| Forward currency-exchange contracts | | Other Current Assets | | $ | 8 |
| | $ | 2,169 |
| | $ | 2 |
| | $ | 227 |
|
| Derivatives in a Liability Position: | | | | | | | | | | |
| Forward currency-exchange contracts | | Other Current Liabilities | | $ | (4 | ) | | $ | 886 |
| | $ | (237 | ) | | $ | 17,185 |
|
| |
(a) | See Note 11 for the fair value measurements relating to these financial instruments. |
| |
(b) | The total notional amount is indicative of the level of the Company's derivative activity during the first nine months of 2017, except for the purchase of forward currency-exchange contracts entered into in the second quarter of 2017 in anticipation of consideration paid for the acquisition of NII. |
(a) See Note 9, Fair Value Measurements and Fair Value of Financial Instruments, for the fair value measurements relating to these financial instruments.
(b) The 2022 notional amounts are indicative of the level of the Company's recurring derivative activity.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
10. Derivatives (continued)
The following table summarizes the activity in AOCI associated with the Company's derivative instruments designated as cash flow hedges as of and for the ninethree months ended September 30, 2017:April 2, 2022:
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Interest Rate Swap
Agreement | | Forward Currency-
Exchange
Contract | | Total |
| Unrealized (Loss) Gain, Net of Tax, at January 1, 2022 | | $ | (429) | | | $ | (33) | | | $ | (462) | |
| Loss reclassified to earnings (a) | | 84 | | | — | | | 84 | |
| Gain (loss) recognized in AOCI | | 209 | | | (16) | | | 193 | |
| Unrealized Loss, Net of Tax, at April 2, 2022 | | $ | (136) | | | $ | (49) | | | $ | (185) | |
|
| | | | | | | | | | | | |
| (In thousands) | | Interest Rate Swap Agreement | | Forward Currency- Exchange Contracts | | Total |
| Unrealized Gain (Loss), Net of Tax, at December 31, 2016 | | $ | 40 |
| | $ | (28 | ) | | $ | 12 |
|
| Loss reclassified to earnings (a) | | 17 |
| | 24 |
| | 41 |
|
| (Loss) gain recognized in AOCI | | (15 | ) | | 66 |
| | 51 |
|
| Unrealized Gain, Net of Tax, at September 30, 2017 | | $ | 42 |
| | $ | 62 |
| | $ | 104 |
|
(a) See Note 97, Accumulated Other Comprehensive Items, for the income statement classification.
As of September 30, 2017,April 2, 2022, the Company expects to reclassify $64,000losses of the net unrealized gains included in$184,000 from AOCI to earnings over the next twelve months.months based on the estimated cash flows of the 2018 Swap Agreement and the maturity date of the forward currency-exchange contract.
11.9. Fair Value Measurements and Fair Value of Financial Instruments
Fair value measurement is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
•Level 1—1��Quoted prices in active markets for identical assets or liabilities.
•Level 2—Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
•Level 3—Unobservable inputs based on the Company's own assumptions.
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value as of April 2, 2022 |
| (In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | | |
| Money market funds and time deposits | | $ | 14,175 | | | $ | — | | | $ | — | | | $ | 14,175 | |
| | | | | | | | |
| Banker's acceptance drafts (a) | | $ | — | | | $ | 8,147 | | | $ | — | | | $ | 8,147 | |
| | | | | | | | |
| Liabilities: | | | | | | | | |
| 2018 Swap Agreement | | $ | — | | | $ | 179 | | | $ | — | | | $ | 179 | |
| Forward currency-exchange contract | | $ | — | | | $ | 66 | | | $ | — | | | $ | 66 | |
|
| | | | | | | | | | | | | | | | |
| | | Fair Value as of September 30, 2017 |
| (In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | | |
| Money market funds and time deposits | | $ | 15,829 |
| | $ | — |
| | $ | — |
| | $ | 15,829 |
|
| Forward currency-exchange contracts | | $ | — |
| | $ | 96 |
| | $ | — |
| | $ | 96 |
|
| Interest rate swap agreement | | $ | — |
| | $ | 65 |
| | $ | — |
| | $ | 65 |
|
| Banker's acceptance drafts (a) | | $ | — |
| | $ | 16,687 |
| | $ | — |
| | $ | 16,687 |
|
| | | | | | | | | |
| Liabilities: | | |
| | |
| | |
| | |
|
| Forward currency-exchange contracts | | $ | — |
| | $ | 4 |
| | $ | — |
| | $ | 4 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value as of January 1, 2022 |
| (In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | | |
| Money market funds and time deposits | | $ | 13,458 | | | $ | — | | | $ | — | | | $ | 13,458 | |
| Banker's acceptance drafts (a) | | $ | — | | | $ | 8,049 | | | $ | — | | | $ | 8,049 | |
| Forward currency-exchange contracts | | $ | — | | | $ | 14 | | | $ | — | | | $ | 14 | |
| Liabilities: | | | | | | | | |
| 2018 Swap Agreement | | $ | — | | | $ | 550 | | | $ | — | | | $ | 550 | |
| Forward currency-exchange contracts | | $ | — | | | $ | 44 | | | $ | — | | | $ | 44 | |
|
| | | | | | | | | | | | | | | | |
| | | Fair Value as of December 31, 2016 |
| (In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | | |
| Money market funds and time deposits | | $ | 10,855 |
| | $ | — |
| | $ | — |
| | $ | 10,855 |
|
| Forward currency-exchange contracts | | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | 2 |
|
| Interest rate swap agreement | | $ | — |
| | $ | 62 |
| | $ | — |
| | $ | 62 |
|
| Banker's acceptance drafts (a) | | $ | — |
| | $ | 7,852 |
| | $ | — |
| | $ | 7,852 |
|
| | | | | | | | | |
| Liabilities: | | |
| | |
| | |
| | |
|
| Forward currency-exchange contracts | | $ | — |
| | $ | 278 |
| | $ | — |
| | $ | 278 |
|
| |
(a) | Included in accounts receivable in the accompanying condensed consolidated balance sheet. |
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
11. Fair Value Measurements and Fair Value of Financial Instruments (continued)
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 liabilities2022. Banker's acceptance drafts are carried at fairface 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 deposits 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
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
The carrying value and fair value of the Company's long-term debt obligations, excluding lease obligations, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | April 2, 2022 | | January 1, 2022 |
| | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| (In thousands) | | | | |
| Debt Obligations: | | | | | | | | |
| Revolving credit facility | | $ | 229,483 | | | $ | 229,483 | | | $ | 250,267 | | | $ | 250,267 | |
| Senior promissory notes | | 10,000 | | | 10,459 | | | 10,000 | | | 10,947 | |
| Other | | 3,893 | | | 3,893 | | | 4,331 | | | 4,331 | |
| | $ | 243,376 | | | $ | 243,835 | | | $ | 264,598 | | | $ | 265,545 | |
|
| | | | | | | | | | | | | | | | |
| | | September 30, 2017 | | December 31, 2016 |
| | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| (In thousands) | | | | |
| Long-term Debt Obligations: | | | | | | | | |
| Revolving credit facility | | $ | 273,577 |
| | $ | 273,577 |
| | $ | 61,494 |
| | $ | 61,494 |
|
| Capital lease obligations | | 4,115 |
| | 4,115 |
| | 3,857 |
| | 3,857 |
|
| Other borrowings | | 399 |
| | 399 |
| | 417 |
| | 417 |
|
| | | $ | 278,091 |
| | $ | 278,091 |
| | $ | 65,768 |
| | $ | 65,768 |
|
The carrying valuesvalue of the Company's revolving credit facility and capital lease obligations approximateapproximates the fair value as the obligations bearobligation bears variable rates of interest, which adjust quarterlyfrequently, based on prevailing market rates. The fair value of the senior promissory notes is primarily calculated based on quoted market rates plus an applicable margin available to the Company at the respective period end, which represent Level 2 measurements.
12.10. Business Segment Information
The Company has combined its operating entities into two3 reportable operating segments, Papermaking Systemssegments: Flow Control, Industrial Processing, and WoodMaterial Handling. The Flow Control segment consists of the fluid-handling and doctoring, cleaning, & filtration product lines; the Industrial Processing Systems,segment consists of the wood processing and a separatestock-preparation product line, Fiber-based Products.lines; and the Material Handling segment consists of the conveying and vibratory, baling, and fiber-based product lines. A description of each segment 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. The Company's 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. The Company's primary products include stock-preparation systems and recycling equipment, chemical pulping equipment, debarkers, stranders, chippers, and logging machinery. In classifying operational entities into a particular segment,addition, the Company has aggregated businesses with similar economic characteristics,provides industrial automation and digitization solutions to process industries.
•Material Handling – Products and engineered systems used to handle bulk and discrete materials for secondary processing or transport in the aggregates, mining, food, and waste management industries, among others. The Company's primary products include conveying and services, production processes, customers,vibratory equipment and methods of distribution.balers. In addition, the Company manufactures and sells biodegradable, absorbent granules used as carriers in agricultural applications and for oil and grease absorption.
The following table presents financial information for the Company's reportable operating segments:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | April 2, | | April 3, | | | | |
| (In thousands) | | 2022 | | 2021 | | | | |
| Revenue | | | | | | | | |
| Flow Control (a) | | $ | 85,826 | | | $ | 63,754 | | | | | |
| Industrial Processing | | 93,085 | | | 69,154 | | | | | |
| Material Handling (b) | | 47,569 | | | 39,555 | | | | | |
| | $ | 226,480 | | | $ | 172,463 | | | | | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | 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) | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | April 2, | | April 3, | | | | |
| (In thousands) | | 2022 | | 2021 | | | | |
| Income Before Provision for Income Taxes | | | | | | | | |
| Flow Control (a,c) | | $ | 21,725 | | | $ | 15,446 | | | | | |
| Industrial Processing (d) | | 38,159 | | | 11,106 | | | | | |
| Material Handling (b,e) | | 5,844 | | | 4,169 | | | | | |
| Corporate (f) | | (9,755) | | | (7,294) | | | | | |
| Total operating income | | 55,973 | | | 23,427 | | | | | |
| Interest expense, net (g) | | (1,132) | | | (1,046) | | | | | |
| Other expense, net (g) | | (22) | | | (24) | | | | | |
| | $ | 54,819 | | | $ | 22,357 | | | | | |
| | | | | | | | |
| Capital Expenditures | | | | | | | | |
| Flow Control | | $ | 525 | | | $ | 334 | | | | | |
| Industrial Processing | | 1,952 | | | 1,804 | | | | | |
| Material Handling | | 384 | | | 121 | | | | | |
| Corporate | | 7 | | | — | | | | | |
| | $ | 2,868 | | | $ | 2,259 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(a)Includes Clouth's results in 2022, which was acquired between July 19, 2021 and August 10, 2021.
(b)Includes the East Chicago Machine Tool Corporation (Balemaster) results in 2022, which was acquired on August 23, 2021.
(c)Includes acquisition costs of $997,000 in the three months ended April 3, 2021. |
| | | | | | | | | | | | | | | | |
| | | 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) (e)Includes $278,000, and $593,000 of acquisition-related expenses of $717,000 in the three-three months ended April 2, 2022 and nine-month periods ended September 30, 2017, respectively. Includes $114,000 and $3,491,000 of acquisition-related expenses$274,000 in the three- and nine-month periodsthree months ended October 1, 2016, respectively.April 3, 2021. Acquisition-related expenses include acquisition transaction costs and amortization ofexpense associated with 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 includes(f)Represents general and administrative expenses.
(d) Primarily includes Corporate(g)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.
13.11. 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-bearingnon-interest bearing obligations of the issuing bank and generally 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$8,419,000 at April 2, 2022 and $4,824,000, respectively,$9,593,000 at January 1, 2022 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.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 II, Item 1A, of this report and Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (fiscal 2016),January 1, 2022, 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 equipmenttechnologies and critical components 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 ourengineered systems that drive Sustainable Industrial Processing. Our products technologies, and services play an integral role in enhancing process efficiency, optimizing energy utilization, and maximizing productivity in resource-intensive industries. We believeprocess industries while helping our large installed base provides uscustomers advance their sustainability initiatives with products that reduce waste or generate more yield with fewer inputs, particularly fiber, energy, and water. Producing more while consuming less is a spare partscore aspect of Sustainable Industrial Processing and consumables business that yields higher margins than our capital equipment business. Ina major element of the first nine months of 2017, approximately 61%strategic focus 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.
operating segments.
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 vibratory, 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 consolidated bookings of $266.1 million in the first quarter of 2022, including bookings of $22.4 million attributable to our acquisitions. See Acquisitions below for further details. Our first quarter of 2022 bookings include record orders for parts and consumables products and continued strong demand for our capital equipment. We ended the first quarter of 2022 with record consolidated backlog of $348.3 million. An overview of our business by segment is as follows:
•Flow Control – Our Flow Control segment had record bookings in the first quarter of 2022, increasing 32% compared to first quarter of 2021, including a 17% increase from our acquisition of The Clouth Group of Companies (Clouth). Orders for both parts and consumables products and capital equipment at our existing Flow Control businesses continue to be strong due to growth in the industries we serve.
•Industrial Processing – Our Industrial Processing segment had record bookings for parts and consumables products during the first quarter of 2022 and continued strong demand for capital equipment. Orders for both capital equipment and parts and consumables products at our wood processing business were fueled by an ongoing robust U.S. housing market and high demand for lumber, oriented strand board and plywood, which continues to result in high parts consumption and drives new capital equipment investment by our customers. Maintenance requirements at many of our wood processing customers and high mill operating rates have augmented demand for our parts products. Capital bookings at our stock-preparation business were strong, especially at our operations in China, but lower compared to the record bookings levels in the second and third quarters of 2021. Orders for parts and consumables products for our stock-preparation business increased over the first quarter of 2021 and sequentially to a near record quarter due to a continued improvement in market conditions and further expansion into packaging grades.
•Material Handling – Our Material Handling segment had record bookings in the first quarter of 2022, increasing 42% compared to the first quarter of 2021, including a 23% increase from our acquisition of East Chicago Machine Tool Corporation (Balemaster). Capital bookings at our conveying and vibratory business were more than double the bookings in the first quarter of 2021 due to several large orders. Bookings for baling products at our European operations continue to be bolstered by improved business conditions, including the recovery of recycled commodity prices.
Many of our operations continue to be impacted by labor availability and supply chain constraints, the latter of which
resulted in inflationary pressure on material costs, longer lead times, and increased freight costs. Our businesses are alleviating supply chain constraints through various measures, including advance purchases of raw materials to prevent potential manufacturing disruptions and mitigating increased material and freight costs through price adjustments, when possible. We believe that the fundamentals of our business will remain positive, particularly given our high backlog levels, continued strong bookings, and ongoing strength in the markets we serve. Despite this optimism, we expect our operating environment to continue to be challenging as a result of the factors impacting our business discussed above and the uncertainties and risks surrounding the COVID-19 pandemic, including China's zero-COVID policy. For more information related to these challenges, and other factors impacting our business, including recent geopolitical tensions, please see Risk Factors, included in Part II, Item 1A, of this report and Part I, Item 1A, included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2022.
International Sales
During the first nine months of 2017 and 2016, approximately 64% and 59%, respectively,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
Overview (continued)
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 theThe United States imposes tariffs on certain imports from China, which has and will continue to increase the cost of America (GAAP). The preparationsome 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 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 ofcosts. For more information on risks associated with our condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Our actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that entail significant judgments and uncertainties, and could potentially resultglobal operations, including tariffs, please see Part I, Item 1A, Risk Factors, included in materially different results under different assumptions and conditions. We believe that our most critical accounting policies, upon which our financial position depends 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 withJanuary 1, 2022.
Acquisitions
We expect that a significant driver of our growth over the SEC. There have been no material changesnext 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 these critical accounting policies since fiscal year-end 2016 that warrant disclosure.pursue acquisition opportunities.
Industry and Business OutlookKADANT INC.
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 monthsthird quarter of 2017, approximately 56%2021, we acquired Clouth for $92.9 million, net 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,cash acquired plus debt assumed. Clouth, which is primarily comprisedincluded in our Flow Control segment, is a leading manufacturer of containerboarddoctor blades and boxboard, is driven by many factors, including regional economic conditions, consumer spending on non-durable goods, increased userelated equipment used in the production of e-commerce, demand for food and beveragepaper, packaging, and greater urbanizationtissue. We expect several synergies in developing regions. Consumption of tissue is fairly stable andconnection with this acquisition, including deepening our presence in the developed world tends to grow withgrowing ceramic blade market and expansion of product sales at our existing businesses by leveraging Clouth's complementary global geographic footprint. Clouth has three manufacturing facilities in Germany and one in Poland.
In the population. For both tissue and packaging, growth ratesthird quarter of 2021, we also acquired Balemaster for $53.5 million, net of cash acquired. Balemaster, which is included in the developing world are expected to increase as per capita consumptionour Material Handling segment, is a leading U.S. manufacturer of paper products increases with rising standards of living. Forhorizontal balers and related equipment demand is generally drivenused primarily for recycling packaging waste at corrugated box plants and large retail and distribution centers. We expect several synergies in connection with this acquisition, including expanding our presence in the secondary material processing sector and creating new opportunities for leveraging our high-performance balers produced in Europe.
Results of Operations
First Quarter 2022 Compared With First Quarter 2021
Revenue
The following table presents the change in revenue by rising standards of living and population growth, shortage and costs of landfilling, increasing recycling rates, and environmental regulation. Insegment between the first nine monthsquarters of 2017, 12% of our revenue was related to products that support printing2022 and writing paper grades as well as newsprint, which have been negatively affected by2021, and those changes excluding 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%, 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 bookingsand acquisitions which we refer to as change 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.organic revenue. The presentation of the changeschange in revenues excluding the effect of currency translation and acquisitionsorganic revenue is a non-GAAP measure. We believe this non-GAAP measure helps investors gain an understanding of our underlying operations consistent with how management measures and forecasts its performance, especially when comparing such results to prior periods. This non-GAAP measure should not be considered superior to or a substitute for the corresponding GAAP measures.U.S. generally accepted accounting principles (GAAP) measure.
Results of Operations (continued)
Revenues forRevenue by segment in the thirdfirst quarters of 20172022 and 2016 are2021 was as follows:
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| | | | | | | | | | | | | | (Non-GAAP) |
| | Three Months Ended | | | | | | Currency Translation | | Acquisitions | | Change in Organic Revenue |
| (In thousands, except percentages) | | April 2,
2022 | | April 3,
2021 | | Total Increase | | % Change | | | | Increase | | % Change |
| Flow Control | | $ | 85,826 | | | $ | 63,754 | | | $ | 22,072 | | | 35 | % | | $ | (1,428) | | | $ | 12,273 | | | $ | 11,227 | | | 18 | % |
| Industrial Processing | | 93,085 | | | 69,154 | | | 23,931 | | | 35 | % | | (1,389) | | | 134 | | | 25,186 | | | 36 | % |
| Material Handling | | 47,569 | | | 39,555 | | | 8,014 | | | 20 | % | | (1,063) | | | 7,593 | | | 1,484 | | | 4 | % |
| Consolidated Revenue | | $ | 226,480 | | | $ | 172,463 | | | $ | 54,017 | | | 31 | % | | $ | (3,880) | | | $ | 20,000 | | | $ | 37,897 | | | 22 | % |
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| | | 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 SegmentConsolidated revenue increased $15.0 million, or 16%, to $111.1 million31% in the thirdfirst quarter of 2017 from $96.1 million2022, while consolidated organic revenue increased 22%, due to higher demand for parts and consumables products and capital equipment principally at our Industrial Processing and Flow Control segments as described below.
Revenue at our Flow Control segment increased 35% in the thirdfirst 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, revenues2022, while organic revenue 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 201718%. Organic revenue 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 inhigher demand for our capital equipment led by our European business and for parts and consumables products at substantially all locations resulting from improved market conditions and pent-up demand.
Revenue at our Industrial Processing segment increased 35% in the first quarter of 2022 due to higher demand for both capital equipment and parts and consumables products at our wood processing business. Demand for our wood processing business products was driven by high mill activity resulting in increased capital investment and higher parts consumption. Also contributing to the revenue increase was increased demand for capital equipment at our stock-preparation business at both our Chinese and European operations.operations, offset in part by lower capital equipment revenue at our North American business due to the timing of orders. Revenue for parts and consumables products at our North American stock-preparation business also increased due to improved market conditions and focused sales initiatives.
Revenues fromRevenue at our Doctoring, Cleaning, & Filtration product lineMaterial Handling segment increased 20% in the thirdfirst quarter of 20172022, while organic revenue 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 inhigher demand in all regions for capital equipment at our European baling operation due to improved business conditions. Revenue from our parts and consumables products and for our capital equipmentalso increased at our Chinese operations. These increases were partially offset by decreases inconveying and vibratory business due to strong 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 acquisitionaggregate 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.food and packaging industries.
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 formargin by segment in the thirdfirst quarters of 20172022 and 2016 are2021 was as follows:
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| | | | | | |
| | | 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 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Basis Point Change |
| | April 2,
2022 | | April 3,
2021 | |
| Flow Control | | 52.4% | | 53.3% | | (90) | bps |
| Industrial Processing | | 38.6% | | 40.5% | | (190) | bps |
| Material Handling | | 36.4% | | 34.7% | | 170 | bps |
| Consolidated Gross Profit Margin | | 43.4% | | 43.9% | | (50) | bps |
Consolidated gross profit margin decreased to 43.4% in the first quarter of 2022 compared with 43.9% in the first quarter of 2021 due to a lower proportion of higher-margin parts and consumables revenue partially offset by a higher overall gross margin profile from our acquisitions.
Papermaking Systems Segment. TheWithin our operating segments, gross profit margin:
•Decreased to 52.4% from 53.3% at our Flow Control segment principally due to a lower gross profit margin profile from our recently acquired Clouth business.
•Decreased to 38.6% from 40.5% at our Industrial Processing segment due to the impact of lower-margin capital equipment revenue at our Chinese stock-preparation business and the inclusion of $0.3 million for benefits received from government employee retention assistance programs, which increased gross profit margin in the 2021 period by 0.4 percentage points.
•Increased to 36.4% from 34.7% at our Papermaking SystemsMaterial Handling segment decreased to 45.5% in the third quarter of 2017 from 46.0% in the third quarter of 2016primarily 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. Thehigher gross profit margin inprofile from 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 ofrecently acquired profit in inventory related to the NII acquisition, which lowered gross profit margin by 820 basis points,Balemaster business.
Selling, General, 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.
OperatingAdministrative Expenses
Selling, general, and administrative (SG&A) expenses by segment in the first quarters of 2022 and 2021 were as follows:
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| | Three Months Ended | | | | |
(In thousands, except percentages) | | April 2,
2022 | | % of Revenue | | April 3,
2021 | | % of Revenue | | Increase | | % Change |
| Flow Control | | $ | 22,084 | | | 26% | | $ | 17,505 | | | 28% | | $ | 4,579 | | | 26% |
| Industrial Processing | | 16,369 | | | 18% | | 15,689 | | | 23% | | 680 | | | 4% |
| Material Handling | | 11,004 | | | 23% | | 9,060 | | | 23% | | 1,944 | | | 21% |
| Corporate | | 9,711 | | | N/A | | 7,177 | | | N/A | | 2,534 | | | 35% |
| Consolidated SG&A Expenses | | $ | 59,168 | | | 26% | | $ | 49,431 | | | 29% | | $ | 9,737 | | | 20% |
Consolidated SG&A expenses as a percentage of revenues was 28%revenue decreased to 26% in the thirdfirst quarter of 20172022 compared to 32%with 29% in the thirdfirst quarter of 2016.2021 primarily due to higher revenue. Consolidated SG&A expenses increased $9.0$9.7 million or 27%,due 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 $6.1 million of SG&A expenses from NIIacquisitions, increased compensation expense associated with existing and Unaflexnew personnel, and $1.4increased selling-related costs associated with improved business conditions. These increases were offset by a $0.9 million of incremental acquisition-related expenses. This increase also included a $0.6 million increase from the unfavorablefavorable 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 inWithin our operating segments, SG&A expenses in the accompanying condensed consolidated statement of income.expenses:
Research and development (R&D) expenses increased $0.6•Increased $4.6 million or 32%, to $2.6 million in the third quarter of 2017 from $2.0 million in the third quarter of 2016, primarilyat our Flow Control segment principally due to the inclusion of R&D$4.3 million of SG&A expenses from NII,Clouth and represented 2%increased selling-related costs.
•Increased $0.7 million at our Industrial Processing segment principally due to a $0.6 million reversal of revenuesan indemnification asset related to the release of tax reserves associated with uncertain tax positions.
•Increased $1.9 million at our Material Handling segment principally due to the inclusion of $1.7 million of SG&A expenses from Balemaster, $0.4 million of incremental acquisition-related costs, and increased selling-related costs.
•Increased $2.5 million at Corporate primarily due to increased incentive compensation as a result of our improved financial performance.
Gain on Sale and Other Expense, Net
We entered into several agreements with the local government in both periods.China to sell the existing manufacturing building and land use rights at one of our subsidiaries in China for $25.2 million. The agreements became effective in the first quarter of 2022 after a 31% down payment was received, including 25% in 2021 and 6% in the first quarter of 2022, and a land use right in a new location was secured. As a result, we recognized a gain on the sale of these assets of $20.2 million, or $15.1 million, net of deferred taxes of $5.1 million, in the first quarter of 2022. A $16.1 million receivable was recognized for the present value of the remaining amount of the sale proceeds, which is due the earlier of when the government sells the property or within two years from the effective date of the agreements. Our subsidiary, which is part of our Industrial Processing segment, will continue to occupy its current facility until construction of its new facility is complete.
In the first quarter of 2022, we recognized an impairment charge of $0.2 million related to the write-down of certain fixed assets that will not be moved to the new facility.
Interest Expense
Interest expense increased $1.0 million to $1.3$1.2 million in the thirdfirst quarter of 20172022 from $0.3$1.1 million in the thirdfirst quarter of 2016 related to interest expense on additional borrowings in 2017 primarily due to the acquisitions.2021.
Provision for Income Taxes
Our provision for income taxes was $4.9 million and $3.1increased to $13.4 million in the third quartersfirst quarter of 2017 and 2016, respectively, and represented 27% and 25%2022 from $5.6 million in the first quarter of pre-tax income.2021. The effective tax rate of 27%24% in the thirdfirst quarter of 20172022 was lowerhigher than our statutory tax rate of 21% primarily due to the distribution of our worldwide earnings, offset in part by an increasenondeductible expenses, state taxes, and tax expense associated with the Global Intangible Low-Taxed Income (GILTI) provisions. These increases 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%, primarilytax 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 inand the reversal of tax related to non-deductible expenses and unrecognizedreserves associated with uncertain tax benefits.positions. The effective tax rate of 28%25% in the first nine monthsquarter of 20162021 was lowerhigher than our statutory tax rate of 21% primarily due to nondeductible expenses, the distribution of our worldwide earnings, the adoption ofstate taxes, and tax expense associated with GILTI provisions. These increases in tax expense were offset in part by a new accounting standard that resulteddecrease in a favorable adjustment fortax related to the net excess income tax benefits from stock-based compensation arrangements,arrangements.
Net Income
Net income increased to $41.4 million in the first quarter of 2022 from $16.8 million in the first quarter of 2021 primarily due to a partial release of the U.S. valuation allowance related to state net$32.5 million increase in operating losses, and a partial benefit of current-year state losses. These items wereincome, 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 $8.0a $7.8 million increase in our operating income that was partially offset by increases of $1.1 million in both our provision for income taxes (see discussions above for further details).
Non-GAAP Key Performance Indicators
In addition to the financial measures prepared in accordance with GAAP, we use certain non-GAAP financial measures, including organic revenue (defined as revenue excluding the effect of foreign currency translation and acquisitions), adjusted operating income, earnings before interest, expense (see Revenues, Gross Profit Margin, Operating Expenses, Interest Expensetaxes, depreciation, and Provision for Income Taxes discussed above)amortization (EBITDA), adjusted EBITDA, adjusted EBITDA margin (defined as adjusted EBITDA divided by revenue), and free cash flow (defined as cash flow provided by operations less capital expenditures).
Recent Accounting Pronouncements
Revenue from Contracts with Customers (Topic 606), Section A-SummaryWe use organic revenue in order to understand our trends and Amendments That Create Revenue from Contracts with Customers (Topic 606)to forecast and Other Assetsevaluate our financial performance 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 ofcompare revenue to prior periods (see discussion in Revenue above). Adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin exclude impairment costs, acquisition costs, amortization expense related to acquired profit in inventory and backlog, and certain gains or losses. These items are excluded as they are not indicative of our core operating results and are not comparable to other periods, which it expectshave differing levels of incremental costs, expenditures or income, or none at all. Additionally, we use free cash flow in order to provide insight on our ability to generate cash for acquisitions and debt repayments, as well as for other investing and financing activities.
We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our core business, operating results, or future outlook. We believe that the inclusion of such measures helps investors gain an understanding of our underlying operating performance and future prospects, consistent with how management measures and forecasts our performance, especially when comparing such results to previous periods or forecasts and to the performance of our competitors. Such measures are also used by us in our financial and operating decision-making and for compensation purposes. We also believe this information is responsive to investors' requests and gives them an additional measure of our performance.
Our non-GAAP financial measures are not meant to be entitledconsidered superior to or a substitute for the transferresults of promised goodsoperations 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 guidancecash flow prepared in GAAP when it becomes effective.accordance with GAAP. 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
addition, our non-GAAP financial measures have limitations
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 specificassociated with their use as compared to the customer's requirements. We recognize revenue for long-term contracts undermost directly comparable GAAP measures, in that they may be different from, and therefore not comparable to, similar measures used by other companies.
A reconciliation of adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin is as follows:
| | | | | | | | | | | | | | |
| | Three Months Ended |
| (In thousands, except percentages) | | April 2,
2022 | | April 3,
2021 |
| Net Income Attributable to Kadant | | $ | 41,192 | | | $ | 16,561 | |
| Net Income Attributable to Noncontrolling Interest | | 249 | | | 235 | |
| Provision for Income Taxes | | 13,378 | | | 5,561 | |
| Interest Expense, Net | | 1,132 | | | 1,046 | |
| Other Expense, Net | | 22 | | | 24 | |
| Operating Income | | 55,973 | | | 23,427 | |
| Gain on Sale of Assets (a) | | (20,190) | | | — | |
| Acquisition Costs | | 76 | | | 1,298 | |
| Indemnification Asset Reversal (b) | | 575 | | — | |
| Impairment Costs | | 182 | | | — | |
| Acquired Backlog Amortization (c) | | 703 | | | 60 | |
| Acquired Profit in Inventory Amortization (d) | | (218) | | | — | |
Adjusted Operating Income (non-GAAP measure) | | 37,101 | | | 24,785 | |
| Depreciation and Amortization | | 8,742 | | | 7,626 | |
Adjusted EBITDA (non-GAAP measure) | | $ | 45,843 | | | $ | 32,411 | |
Adjusted EBITDA Margin (non-GAAP measure) | | 20.2% | | 18.8% |
(a) Represents a gain on the completed-contract methodsale 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, revenuea facility in China in our Industrial Processing segment pursuant to a relocation plan.
(b) Represents an indemnification asset reversal related to such contracts will be accelerated if the "over time" criteria are met.release of tax reserves associated with uncertain tax positions.
(c) Represents intangible amortization expense associated with acquired backlog.
We are still(d) Represents income within cost of revenue associated with amortization of acquired profit in the processinventory.
A reconciliation 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 processfree cash flow from cash flow provided by operating activities 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 infollows:
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. | | | | | | | | | | | | | | |
| | Three Months Ended |
| (In thousands) | | April 2,
2022 | | April 3,
2021 |
| Cash Provided by Operating Activities | | $ | 23,768 | | | $ | 19,092 | |
| Less: Capital Expenditures | | (2,868) | | | (2,259) | |
Free Cash Flow (non-GAAP measure) | | $ | 20,900 | | | $ | 16,833 | |
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$174.7 million at September 30, 2017,April 2, 2022, compared with $118.4$162.4 million at December 31, 2016. Included in working capitalJanuary 1, 2022. Cash and cash equivalents were $86.2 million at April 2, 2022, compared with $91.2 million at January 1, 2022, which included 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.subsidiaries of $81.9 million at April 2, 2022 and $83.8 million at January 1, 2022.
First Nine Months
Cash Flows
Cash flow information in the first three months of 2022 and 2021 was as follows: | | | | | | | | | | | | | | |
| | Three Months Ended |
| (In thousands) | | April 2,
2022 | | April 3,
2021 |
| Net Cash Provided by Operating Activities | | $ | 23,768 | | | $ | 19,092 | |
| Net Cash Used in Investing Activities | | (1,291) | | | (2,352) | |
| Net Cash Used in Financing Activities | | (27,003) | | | (15,582) | |
| Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash | | (664) | | | (1,090) | |
| (Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash | | $ | (5,190) | | | $ | 68 | |
Operating Activities
Cash provided by operating activities provided cash of $32.3increased to $23.8 million in the first nine monthsquarter of 2017. Working capital used cash of $14.42022 from $19.1 million in the first nine monthsquarter of 2017, including increases2021. Our operating cash flows are primarily generated from cash received from customers, offset by cash payments for items such as inventory, employee compensation, operating leases, income taxes and interest payments on outstanding debt obligations.
Cash provided by income in the first quarter of $16.2 million2022 was offset in part by investments in working capital. Increases in accounts receivable and inventory used cash of $18.5 million 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 insupport our Stock-Preparation product line, and $2.5 million in other current assets largely related to anrevenue growth. 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 raw material purchases and customer deposits provided cash of inventory.
Our investing activities$12.2 million. Changes in other liabilities used cash of $212.8$10.1 million primarily related to incentive compensation payments in the first quarter of 2022.
Cash provided by income in the first quarter of 2021 was offset in part by investments in working capital. Increases in accounts receivable and inventory used cash of $20.6 million primarily to support increased order activity. An increase in accounts payable related to raw material purchases and customer deposits provided cash of $16.5 million in the first nine monthsquarter of 2017, including the use of $204.2 million for acquisitions and $8.7 million for purchases of property, plant, and equipment.2021.
Investing Activities
Liquidity and Capital Resources (continued)
Our financingCash used in investing activities provided cash of $191.9was $1.3 million in the first nine monthsquarter of 2017. We borrowed $222.02022, compared with $2.4 million in the first quarter of 2021. Capital expenditures of $2.9 million in the first quarter of 2022 were partially offset by proceeds received from the sale of assets of $1.6 million, compared with capital expenditures of $2.3 million in the first quarter of 2021.
Financing Activities
Cash used in financing activities was $27.0 million in the first quarter of 2022, compared with $15.6 million in the first quarter of 2021. Repayment of short- and long-term obligations was $35.1 million in the first quarter of 2022, partially offset by borrowings under our revolving credit facility of $15.5 million. Repayment of short- and long-term obligations was $19.6 million in the first quarter of 2021, partially offset by borrowings under our revolving credit facility of $10.1 million. In addition, taxes paid related to the vesting of equity awards was $4.6 million in the first quarter of 2022 compared to $3.4 million in the first quarter of 2021.
Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash
The exchange rate effect on cash, cash equivalents, and restricted cash represents the impact of translation of cash balances at our foreign subsidiaries. The $0.7 million reduction in cash, cash equivalents, and restricted cash in the first quarter of 2022 was primarily attributable to the strengthening of the U.S. dollar against the euro.
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 2, 2022, the outstanding balance under the Credit Agreement (as defined below under the heading Revolving Credit Facility), including $70.7was
$229.5 million, of Canadian dollar-denominated and $61.8which included $78.5 million of euro-denominated borrowings. These borrowings were partially offset by $20.3As of April 2, 2022, we have a borrowing capacity available under the Credit Agreement of $170 million used for principal payments onin addition to a $150 million uncommitted, unsecured incremental borrowing facility. Under 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 usedagreements, our leverage ratio must be less than 3.75, or, if we elect, for the paymentquarter during which a material acquisition occurs and for the three fiscal quarters thereafter, must be less than 4.00. As of April 2, 2022, our leverage ratio was 1.16 and we were in compliance with our debt issuance costs.
First Nine Monthscovenants. We expect to renew our Credit Agreement prior to its maturity date of 2016
Our operating activities provided cash of $34.7 millionDecember 14, 2023. See Note 5, Short- and Long-Term Obligations, in the first nine monthsaccompanying condensed consolidated financial statements for additional information regarding our debt obligations.
KADANT INC.
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, 2017,20, 2021, our board of directors approved the repurchase by us of up to $20 million of our equity securities during the period from May 17, 201720, 2021 to May 17, 2018.20, 2022. We didhave not purchaserepurchased any shares of our common stock under this authorization or under the previous authorization, which expired in the second quarter of 2017.
authorization.
We paid quarterly cash dividends totaling $6.7of $2.9 million in the first nine monthsquarter of 2017.2022. On September 20, 2017,March 9, 2022, we declared a quarterly cash dividend of $0.21$0.26 per outstanding share of our common stock, which will betotaling $3.0 million that was paid on November 9, 2017.May 11, 2022. Future declarations of dividends are subject to our board of directors' approval and may be adjusted as business needs or market conditions change. The declaration of cash dividends is subject to our compliance with the covenant in our revolving credit facility related to our consolidated leverage ratio containedratio.
We plan to make expenditures of approximately $15 million during the remainder of 2022 for property, plant, and equipment. In addition, one of our Chinese subsidiaries will be building a new manufacturing facility and relocating over the next two years. Capital expenditures for the new facility are estimated to be approximately $20 million, of which an estimated $12 million will be incurred in 2022. The cost of the new facility will be offset by the proceeds received from the sale of our 2017 Credit Agreement.existing facility. See Note 2, Gain on Sale and Other Expense, Net, in the accompanying condensed consolidated financial statements for additional information regarding the relocation of our Chinese manufacturing facility.
As of April 2, 2022, we had approximately $218.7 million of total unremitted foreign earnings. It is our intent to indefinitely reinvest indefinitely the$165.7 million of these earnings of our international subsidiaries in order to support the current and future capital needs of theirour foreign operations, including debt repayments. We do not anticipaterepayments, if any. In the needfirst quarter of 2022, we recorded withholding taxes on the earnings in certain foreign subsidiaries that we plan 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. incomeforeseeable future. The foreign withholding 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 indefinitely-reinvested foreign earnings to the U.S.,United States would be approximately $3.4$3.2 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 satisfyservice our debt repayments,
obligations, acquisitions, capital projects, dividends, and stock repurchases, or acquisitions.repurchases. We believe that existing cash and cash equivalents, along with cash generated from operations, our existing resources, together with the cash available from our credit facilitiesborrowing capacity and the cash we expectcontinued access to generate from operations,debt markets, will be sufficient to meet the capital requirements of our current operations for the next 12 months and foreseeable future.
Revolving Credit FacilityContractual Obligations and Other Commercial Commitments
On MarchThere have been no material changes to our contractual obligations and other commercial commitments during the first quarter of 2022 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 1, 2017, we entered into2022.
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 GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities, and the reported amounts of revenue and expenses during the reporting period. Our critical 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 Amendedongoing basis based on historical experience, current economic and Restated Credit Agreementmarket conditions, and other assumptions management believes are reasonable. We believe that became effective on March 2, 2017,our most critical accounting policies which is a five-year unsecured multi-currency revolving credit facilityare significant to our consolidated financial statements, and which involve the most complex or subjective decisions or assessments, are those described in the aggregate principal amount"Management's Discussion and Analysis of up to $200 million. On May 24, 2017, we entered into a first amendmentFinancial Condition 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 facilityResults of up to an additional $100 million. The principal on any borrowings madeOperations" under the 2017 Credit Agreement is duesection captioned "Application of Critical Accounting Estimates" in Part II, Item 7, of our Annual Report on MarchForm 10-K for the fiscal year ended January 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%There have been no material changes 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 atcritical accounting policies since the end of fiscal 2021 that warrant disclosure.
Recent Accounting Pronouncements
See Note 1, under 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 movementsheadings Recent Accounting Pronouncements Not Yet Adopted, 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.accompanying condensed consolidated financial statements for details.
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 1, 2022.
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 2, 2022. 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 2, 2022, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2017,April 2, 2022, 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 2, 2022 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
ThereIn addition to the revised risk factors below regarding "We have been no materialsignificant international sales and operations and face risks related to health epidemics and pandemics, including the COVID-19 pandemic, which has and continues to present challenges to our business and results of operations" and “Operating globally subjects us to changes fromin government regulations and policies in multiple jurisdictions around the world, including those related to tariffs and trade barriers, taxation, exchange controls and political risks,” careful consideration should be given to the risk factors disclosed in Part I, Item 1A, ofRisk Factors, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016January 1, 2022, which could materially affect our business, financial condition or future results, in addition to the information set forth in this Quarterly Report on Form 10-Q.
We have significant international sales and subsequent filings, filed withoperations and face risks related to health epidemics and pandemics, including the SEC.COVID-19 pandemic, which has and continues to present challenges to our business and results of operations.
Our business and operations have been and may continue to be challenged by the effects of the COVID-19 pandemic and may be challenged by other adverse public health developments, including disruptions or restrictions on our employees’ and other service providers��� ability to travel, reductions in our workforce, temporary closures of our facilities or the facilities of our customers, suppliers or other vendors in our supply chain, potentially including single source suppliers, and other disruptions in the supply chain. In addition, the COVID-19 pandemic has impacted and other disease outbreaks could impact global trade and reduce demand for our products, and adversely affect the U.S. or global economy and capital markets.
The COVID-19 pandemic has negatively affected the global economy, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place,” and initially created significant disruption of the financial markets. The COVID-19 pandemic has adversely affected, and may adversely affect in the future, our business and results of operations, as government authorities have imposed, and may in the future impose, temporary mandatory closures of our facilities, travel restrictions, work-from-home orders, vaccine or testing mandates and social distancing protocols and other restrictions that have impacted our ability to adequately staff and maintain our operations at normal levels. China’s zero-COVID strategy heightens the risk that our facilities in China may be closed by government authorities as a result of any COVID cases in a particular facility. Additionally, our financial results have been adversely impacted and may be adversely impacted in the future by decreased levels of bookings, customer-requested delays on certain capital projects and service work, customer downtime and shutdowns, and visitation restrictions at many customer facilities, all of which have affected and may adversely affect in the future our ability to recognize revenue for sales of our products and services. We may also incur future costs related to COVID-19, such as increased employee benefit costs if a significant number
of our employees contract COVID-19 and require hospitalization or other costly medical treatment, or expenses related to repeated cleaning and sanitizing of our facilities, which may also adversely affect our financial results. In March 2020, we experienced a significant decrease in market capitalization due to a decline in our stock price, and the overall U.S. stock market also declined significantly amid market volatility driven by the uncertainty surrounding the outbreak of COVID-19. The future impact of the COVID-19 pandemic could include further disruption and volatility in the global capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future.
The COVID-19 pandemic has evolved and continues to evolve rapidly. As a result, we cannot reasonably estimate the scope of the impact of the COVID-19 pandemic, including the potential impact of emerging variants or the response of government authorities to any such variants or other developments, on our business and the adverse effect and impact the COVID-19 pandemic may ultimately have on our business and our stock price. For instance, we may face additional requests from customers to delay the production or delivery of our products, particularly capital equipment products, which would affect our ability to recognize revenue for sales of such products. Other customers may decide not to proceed with large capital equipment orders in order to conserve their cash. A delay on our part of the production of our products may lead to liquidated damages owed to our customers. Further implementation, extension or renewal of government-mandated closures, “shelter-in-place” orders or vaccine or testing mandates related to the COVID-19 pandemic may create further disruption to our operations, our workforce, the supply chain, and our customer and vendor operations. The evolving effects of the COVID-19 pandemic on the global economy are uncertain, and we may be further adversely affected by general economic conditions, even if government mandates are repealed. The impact of COVID-19 could worsen if new and more virulent or transmissible variants emerge which result in a resurgence of COVID-19 infection in affected regions.
In addition, travel, commercial and other similar restrictions put in place by various government authorities in response to COVID-19 have contributed to global supply disruptions and we have, and may in the future, incur costs to mitigate such disruptions, which could be significant. New information may emerge concerning the severity of COVID-19 or any of its variants, the pace and method through which it is transmitted, contained and/or treated, and the nature of the approach of the local governments in the jurisdictions in which we operate to handling the outbreak, any of which could impact our employees, operations, suppliers, customers and/or operating and financial results, including our ability to determine our quarterly results. We operate in 20 countries and the government responses in each of those countries have differed and resulted in varying levels of containment of COVID-19, degree and duration of closures, and nature of safety precautions, all of which we have and will continue to manage. Although we have worked and continue to work diligently to ensure that our global facilities can operate with minimal disruption, mitigate the impact of the outbreak on our employees’ health and safety, and address the supply chain impact on ourselves and our customers, the full extent to which COVID-19 has affected and will affect the global economy and our results will depend on future developments and factors that cannot be predicted.
Operating globally subjects us to changes in government regulations and policies in multiple jurisdictions around the world, including those related to tariffs and trade barriers, taxation, exchange controls and political risks.
Changes in government policies, political unrest, economic sanctions, trade embargoes, or other adverse trade regulations can negatively impact our business. Non-U.S. markets contribute a substantial portion of our revenues, and we intend to continue expanding our presence in these regions. For example, we operate businesses in Mexico and Canada, and we benefited from the North American Free Trade Agreement, which has been replaced by the United States-Mexico-Canada Agreement (USMCA), from which we also benefit. If the United States were to withdraw from or materially modify the USMCA or impose significant tariffs or taxes on goods imported into the United States, the cost of our products could significantly increase or no longer be priced competitively, which in turn could have a material adverse effect on our business and results of operations.
In addition, the Office of the United States Trade Representative has imposed tariffs on a wide variety of products from China, including pulp and paper machinery equipment, pursuant to Section 301 of the Trade Act of 1974. The tariffs on pulp and paper machinery are set at 25%. In addition, the U.S. Department of Commerce has imposed tariffs of 25% on numerous categories of steel imports, and 10% on numerous categories of aluminum imports, from most countries under Section 232 of the Trade Expansion Act of 1962. While we try to mitigate the impact of the existing and other proposed tariffs through pricing and sourcing strategies, we cannot be certain how our customers and competitors will react to the actions we take. The tariffs have and could in the future negatively affect our ability to compete against competitors who do not manufacture in China and/or are not subject to the tariffs.
The United States has tightened trade sanctions targeting countries like China and Russia. For example, since 2018 the United States has imposed various trade and economic sanctions targeting certain persons in Russia and certain types of business with Russia. The United States has continued to expand export control restrictions applicable to certain Chinese firms and continued its assessment of new controls for “emerging foundational technologies,” escalating U.S.-China tension concerning technology. In response, Russia and China have begun considering and, in some cases, implementing trade
sanctions that could affect U.S.-owned businesses. The imposition of trade sanctions may make it generally more difficult to do business in Russia and China and cause delays or prevent shipment of products or services performed by our personnel, or to receive payment for products or services.
Additionally, the military conflict between Russia and Ukraine and the global response to it could adversely impact our revenues, gross margins and financial results. The United States, the European Union, and many other countries have imposed sanctions on Russia, individuals in Russia and Russian businesses, including several large banks. In 2021, our sales to Russia were $10.7 million, or 1% of our revenue. It is not possible to predict the broader or longer-term consequences of this conflict, which could include further sanctions, embargoes, regional instability, geopolitical shifts and adverse effects on macroeconomic conditions, security conditions, currency exchange rates and financial markets. Such geopolitical instability and uncertainty has and could continue to have in the future a negative impact on our ability to sell to, ship products to, collect payments from, and support customers in certain regions based on trade restrictions, embargoes and export control law restrictions, and logistics restrictions, and could increase the costs, risks and adverse impacts from these new challenges. To the extent the current conflict between Russia and Ukraine adversely affects our business, it may also have the effect of heightening many other risks disclosed in our Annual Report on Form 10-K, any of which could materially and adversely affect our business and results of operations. Such risks include, but are not limited to, adverse effects on macroeconomic conditions, including inflation and business and consumer spending; disruptions to our global technology infrastructure, including through cyberattack, ransomware attack, or cyber-intrusion; adverse changes in international trade policies and relations; our ability to maintain or increase our prices, including any fuel surcharges in response to rising fuel costs; our ability to implement and execute our business strategy; disruptions in global supply chains; our exposure to foreign currency fluctuations; and constraints, volatility, or disruption in the capital markets. Such restrictions could have a material adverse impact on our business and operating results going forward.
Item 6 – Exhibits
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| Exhibit Number | | |
| Description of Exhibit |
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Exhibit Number10.1* | | |
| Description of Exhibit |
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10.1 | |
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10.2 | |
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10.310.2* | |
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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). |
* 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.
Indicates management contract or compensatory plan or arrangement.
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 11, 2022 | /s/ Michael J. McKenney |
| Michael J. McKenney |
| SeniorExecutive Vice President and Chief Financial Officer |
| (Principal Financial Officer) |