UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 29, 2018March 30, 2019
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from ________ to _________ |
Commission file number 001-11406
KADANT INC.
(Exact name of registrant as specified in its charter)
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Delaware | | 52-1762325 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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One Technology Park Drive | | |
Westford, Massachusetts | | 01886 |
(Address of principal executive offices) | | (Zip Code) |
Registrant's telephone number, including area code: (978) 776-2000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
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", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer x | Accelerated filer o |
Non-accelerated filer o | Smaller reporting company o |
| Emerging growth company o
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | KAI | New York Stock Exchange |
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
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Class | | Outstanding at OctoberApril 26, 20182019 |
Common Stock, $.01 par value | | 11,107,29611,174,431 |
Kadant Inc.
Quarterly Report on Form 10-Q
for the Period Ended September 29, 2018March 30, 2019
Table of Contents
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PART I: Financial Information |
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PART II: Other Information |
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PART 1 – FINANCIAL INFORMATION
Item 1 – Financial Statements
KADANT INC.
Condensed Consolidated Balance Sheet
(Unaudited)
| | | | September 29, 2018 | | December 30, 2017 | | March 30, 2019 | | December 29, 2018 |
(In thousands, except share and per share amounts) | | |
Assets | | | | | | | | |
Current Assets: | | | | | | | | |
Cash and cash equivalents | | $ | 57,384 |
| | $ | 75,425 |
| | $ | 56,478 |
| | $ | 45,830 |
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Restricted cash (Note 1) | | 675 |
| | 1,421 |
| | 697 |
| | 287 |
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Accounts receivable, less allowances of $2,939 and $2,879 (Note 1) | | 96,326 |
| | 89,624 |
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Accounts receivable, less allowances of $2,951 and $2,897 (Note 1) | | | 104,120 |
| | 92,624 |
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Inventories (Note 1) | | 91,736 |
| | 84,933 |
| | 103,029 |
| | 86,373 |
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Unbilled revenues | | 8,315 |
| | 2,374 |
| | 16,996 |
| | 15,741 |
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Other current assets | | 13,032 |
| | 12,246 |
| | 13,020 |
| | 11,906 |
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Total Current Assets | | 267,468 |
| | 266,023 |
| | 294,340 |
| | 252,761 |
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Property, Plant, and Equipment, at Cost | | 168,414 |
| | 165,231 |
| | 181,384 |
| | 170,697 |
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Less: accumulated depreciation and amortization | | 88,956 |
| | 85,508 |
| | 93,652 |
| | 90,540 |
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Property, Plant, and Equipment, at Cost, Net | | 79,458 |
| | 79,723 |
| | 87,732 |
| | 80,157 |
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Other Assets | | 13,509 |
| | 14,311 |
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Intangible Assets, Net (Note 1) | | 119,246 |
| | 133,036 |
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Goodwill (Note 1) | | 262,081 |
| | 268,001 |
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Other Assets (Note 8) | | | 47,804 |
| | 21,310 |
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Intangible Assets, Net (Notes 1 and 2) | | | 184,596 |
| | 113,347 |
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Goodwill (Notes 1 and 2) | | | 343,768 |
| | 258,174 |
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Total Assets | | $ | 741,762 |
| | $ | 761,094 |
| | $ | 958,240 |
| | $ | 725,749 |
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Liabilities and Stockholders' Equity | | | | | | | | |
Current Liabilities: | | | | | | | | |
Current maturities of long-term obligations (Note 5) | | $ | 1,686 |
| | $ | 696 |
| | $ | 2,631 |
| | $ | 1,668 |
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Accounts payable | | 34,761 |
| | 35,461 |
| | 43,571 |
| | 35,720 |
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Customer deposits | | 36,431 |
| | 30,103 |
| | 30,693 |
| | 26,987 |
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Accrued payroll and employee benefits | | 28,677 |
| | 29,616 |
| | 25,843 |
| | 30,902 |
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Advanced billings | | 11,313 |
| | 7,316 |
| | 5,869 |
| | 5,534 |
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Other current liabilities | | 29,712 |
| | 29,038 |
| | 33,555 |
| | 28,178 |
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Total Current Liabilities | | 142,580 |
| | 132,230 |
| | 142,162 |
| | 128,989 |
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Long-Term Obligations (Note 5) | | 191,929 |
| | 241,384 |
| | 358,286 |
| | 174,153 |
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Long-Term Deferred Income Taxes | | 25,168 |
| | 29,085 |
| | 26,602 |
| | 22,962 |
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Other Long-Term Liabilities | | 23,646 |
| | 25,891 |
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Other Long-Term Liabilities (Note 8) | | | 49,194 |
| | 25,074 |
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Commitments and Contingencies (Note 12) | |
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Commitments and Contingencies (Note 14) | | |
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Stockholders' Equity: | | |
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Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued | | — |
| | — |
| | — |
| | — |
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Common stock, $.01 par value, 150,000,000 shares authorized; 14,624,159 shares issued | | 146 |
| | 146 |
| | 146 |
| | 146 |
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Capital in excess of par value | | 103,117 |
| | 103,221 |
| | 102,780 |
| | 104,731 |
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Retained earnings | | 377,602 |
| | 342,893 |
| | 401,891 |
| | 393,578 |
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Treasury stock at cost, 3,516,863 and 3,613,838 shares | | (86,177 | ) | | (88,554 | ) | |
Accumulated other comprehensive items (Note 8) | | (37,727 | ) | | (26,715 | ) | |
Treasury stock at cost, 3,449,728 and 3,514,163 shares | | | (84,532 | ) | | (86,111 | ) |
Accumulated other comprehensive items (Note 9) | | | (40,024 | ) | | (39,376 | ) |
Total Kadant Stockholders' Equity | | 356,961 |
| | 330,991 |
| | 380,261 |
| | 372,968 |
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Noncontrolling interest | | 1,478 |
| | 1,513 |
| | 1,735 |
| | 1,603 |
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Total Stockholders' Equity | | 358,439 |
| | 332,504 |
| | 381,996 |
| | 374,571 |
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Total Liabilities and Stockholders' Equity | | $ | 741,762 |
| | $ | 761,094 |
| | $ | 958,240 |
| | $ | 725,749 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
KADANT INC.
Condensed Consolidated Statement of Income
(Unaudited)
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended |
| | September 29, 2018 | | September 30, 2017 | | September 29, 2018 | | September 30, 2017 | | March 30, 2019 | | March 31, 2018 |
(In thousands, except per share amounts) | | |
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Revenues (Notes 1 and 11) | | $ | 165,745 |
| | $ | 152,794 |
| | $ | 469,851 |
| | $ | 365,893 |
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Revenues (Notes 1 and 12) | | | $ | 171,316 |
| | $ | 149,193 |
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Costs and Operating Expenses: | | |
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Cost of revenues | | 92,652 |
| | 88,139 |
| | 262,515 |
| | 199,369 |
| | 100,801 |
| | 83,114 |
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Selling, general, and administrative expenses | | 42,888 |
| | 42,346 |
| | 133,796 |
| | 115,936 |
| | 49,319 |
| | 45,776 |
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Research and development expenses | | 2,452 |
| | 2,635 |
| | 8,049 |
| | 7,004 |
| | 2,621 |
| | 2,869 |
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Restructuring costs (Note 2) | | 378 |
| | — |
| | 1,717 |
| | — |
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Restructuring costs (Note 13) | | | — |
| | 770 |
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| | 138,370 |
| | 133,120 |
| | 406,077 |
| | 322,309 |
| | 152,741 |
| | 132,529 |
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Operating Income | | 27,375 |
| | 19,674 |
| | 63,774 |
| | 43,584 |
| | 18,575 |
| | 16,664 |
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Interest Income | | 30 |
| | 94 |
| | 335 |
| | 300 |
| | 56 |
| | 183 |
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Interest Expense | | (1,738 | ) | | (1,282 | ) | | (5,320 | ) | | (2,022 | ) | | (3,504 | ) | | (1,732 | ) |
Other Expense, Net (Note 7) | | (245 | ) | | (216 | ) | | (736 | ) | | (637 | ) | | (99 | ) | | (246 | ) |
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Income Before Provision for Income Taxes | | 25,422 |
| | 18,270 |
| | 58,053 |
| | 41,225 |
| | 15,028 |
| | 14,869 |
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Provision for Income Taxes (Note 4) | | 6,443 |
| | 4,860 |
| | 15,575 |
| | 10,550 |
| | 3,963 |
| | 3,861 |
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Net Income | | 18,979 |
| | 13,410 |
| | 42,478 |
| | 30,675 |
| | 11,065 |
| | 11,008 |
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Net Income Attributable to Noncontrolling Interest | | (195 | ) | | (125 | ) | | (487 | ) | | (343 | ) | | (165 | ) | | (150 | ) |
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Net Income Attributable to Kadant | | $ | 18,784 |
| | $ | 13,285 |
| | $ | 41,991 |
| | $ | 30,332 |
| | $ | 10,900 |
| | $ | 10,858 |
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Earnings per Share Attributable to Kadant (Note 3): | | |
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Basic | | $ | 1.69 |
| | $ | 1.21 |
| | $ | 3.79 |
| | $ | 2.76 |
| | $ | 0.98 |
| | $ | 0.98 |
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Diluted | | $ | 1.64 |
| | $ | 1.17 |
| | $ | 3.69 |
| | $ | 2.69 |
| | $ | 0.96 |
| | $ | 0.96 |
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Weighted Average Shares (Note 3): | | |
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Basic | | 11,101 |
| | 11,004 |
| | 11,078 |
| | 10,986 |
| | 11,133 |
| | 11,042 |
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Diluted | | 11,421 |
| | 11,344 |
| | 11,388 |
| | 11,282 |
| | 11,385 |
| | 11,342 |
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Cash Dividends Declared per Common Share | | $ | 0.22 |
| | $ | 0.21 |
| | $ | 0.66 |
| | $ | 0.63 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
KADANT INC.
Condensed Consolidated Statement of Comprehensive Income
(Unaudited)
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended |
| | September 29, 2018 | | September 30, 2017 | | September 29, 2018 | | September 30, 2017 | | March 30, 2019 | | March 31, 2018 |
(In thousands) | | |
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Net Income | | $ | 18,979 |
| | $ | 13,410 |
| | $ | 42,478 |
| | $ | 30,675 |
| | $ | 11,065 |
| | $ | 11,008 |
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Other Comprehensive Items: | | |
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Foreign currency translation adjustment | | (1,121 | ) | | 7,740 |
| | (11,561 | ) | | 21,427 |
| | (465 | ) | | 5,336 |
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Pension and other post-retirement liability adjustments (net of tax provision of $46, $26, $155 and $86) | | 143 |
| | (11 | ) | | 472 |
| | 152 |
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Deferred gain on cash flow hedges (net of tax provision (benefit) of $35, $28, ($12) and $44) | | 100 |
| | 58 |
| | 20 |
| | 92 |
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Pension and other post-retirement liability adjustments (net of tax provision of $8 and $34) | | | 21 |
| | 117 |
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Deferred (loss) gain on cash flow hedges (net of tax benefit (provision) of $104 and ($8)) | | | (237 | ) | | 93 |
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Other Comprehensive Items | | (878 | ) | | 7,787 |
| | (11,069 | ) | | 21,671 |
| | (681 | ) | | 5,546 |
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Comprehensive Income | | 18,101 |
| | 21,197 |
| | 31,409 |
| | 52,346 |
| | 10,384 |
| | 16,554 |
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Comprehensive Income Attributable to Noncontrolling Interest | | (191 | ) | | (193 | ) | | (430 | ) | | (574 | ) | | (132 | ) | | (193 | ) |
Comprehensive Income Attributable to Kadant | | $ | 17,910 |
| | $ | 21,004 |
| | $ | 30,979 |
| | $ | 51,772 |
| | $ | 10,252 |
| | $ | 16,361 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
KADANT INC.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
| | | | Nine Months Ended | | Three Months Ended |
| | September 29, 2018 | | September 30, 2017 | | March 30, 2019 | | March 31, 2018 |
(In thousands) | | |
| | | | | | | | |
Operating Activities | | | | | | | | |
Net income attributable to Kadant | | $ | 41,991 |
| | $ | 30,332 |
| | $ | 10,900 |
| | $ | 10,858 |
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Net income attributable to noncontrolling interest | | 487 |
| | 343 |
| | 165 |
| | 150 |
|
Net income | | 42,478 |
| | 30,675 |
| | 11,065 |
| | 11,008 |
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Adjustments to reconcile net income to net cash provided by operating activities: | | |
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Depreciation and amortization | | 17,739 |
| | 13,056 |
| | 8,231 |
| | 6,099 |
|
Stock-based compensation expense | | 5,346 |
| | 4,283 |
| | 1,553 |
| | 1,464 |
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Right-of-use asset amortization | | | 1,083 |
| | — |
|
Provision for losses on accounts receivable | | 344 |
| | 238 |
| | 64 |
| | 316 |
|
Loss on the sale of property, plant, and equipment | | 79 |
| | 37 |
| |
(Gain) loss on the sale of property, plant, and equipment | | | (200 | ) | | 24 |
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Other items, net | | (3,543 | ) | | (738 | ) | | (487 | ) | | (386 | ) |
Contributions to U.S. pension plan | | — |
| | (810 | ) | |
Changes in current assets and liabilities, net of effects of acquisitions: | | |
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Accounts receivable | | (9,598 | ) | | (16,225 | ) | | (1,190 | ) | | (799 | ) |
Unbilled revenues | | (3,947 | ) | | (2,582 | ) | | (1,055 | ) | | 2,064 |
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Inventories | | (10,155 | ) | | (3,504 | ) | | (3,263 | ) | | (9,674 | ) |
Other current assets | | 241 |
| | (2,517 | ) | | (189 | ) | | (435 | ) |
Accounts payable | | 4,182 |
| | 2,049 |
| | 3,872 |
| | 3,854 |
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Other current liabilities | | 9,384 |
| | 8,366 |
| | (9,608 | ) | | (6,319 | ) |
Net cash provided by operating activities | | 52,550 |
| | 32,328 |
| | 9,876 |
| | 7,216 |
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Investing Activities | | |
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Acquisition, net of cash acquired (Note 2) | | | (175,288 | ) | | — |
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Purchases of property, plant, and equipment | | (12,817 | ) | | (8,718 | ) | | (2,168 | ) | | (5,151 | ) |
Proceeds from sale of property, plant, and equipment | | 173 |
| | 111 |
| | 293 |
| | 28 |
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Acquisitions, net of cash acquired | | — |
| | (204,228 | ) | |
Net cash used in investing activities | | (12,644 | ) | | (212,835 | ) | | (177,163 | ) | | (5,123 | ) |
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Financing Activities | | |
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Repayment of debt | | (81,540 | ) | | (20,272 | ) | |
Proceeds from issuance of debt | | 37,000 |
| | 222,019 |
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Proceeds from issuance of long-term obligations | | | 189,000 |
| | 12,000 |
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Repayment of long-term obligations | | | (6,404 | ) | | (13,493 | ) |
Tax withholding payments related to stock-based compensation | | | (2,647 | ) | | (3,641 | ) |
Dividends paid | | (7,200 | ) | | (6,699 | ) | | (2,444 | ) | | (2,316 | ) |
Tax withholding payments related to stock-based compensation | | (3,886 | ) | | (2,206 | ) | |
Proceeds from issuance of Company common stock | | 813 |
| | — |
| | 723 |
| | 742 |
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Dividend paid to noncontrolling interest | | (465 | ) | | (882 | ) | |
Payment of debt issuance costs | | (158 | ) | | (1,257 | ) | | (36 | ) | | — |
|
Other financing activities | | (351 | ) | | (288 | ) | |
Net cash (used in) provided by financing activities | | (55,787 | ) | | 190,415 |
| |
Net cash provided by (used in) financing activities | | | 178,192 |
| | (6,708 | ) |
| | | | | | | | |
Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash | | (2,906 | ) | | 7,911 |
| | 153 |
| | 1,511 |
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(Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash | | (18,787 | ) | | 17,819 |
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Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash | | | 11,058 |
| | (3,104 | ) |
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | | 76,846 |
| | 73,569 |
| | 46,117 |
| | 76,846 |
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Cash, Cash Equivalents, and Restricted Cash at End of Period | | $ | 58,059 |
| | $ | 91,388 |
| | $ | 57,175 |
| | $ | 73,742 |
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See Note 1 – Supplemental Cash Flow Information and Recently Adopted Accounting Pronouncements, Statement of Cash Flows (Topic 230), Restricted Cash for further details.supplemental cash flow information.
The accompanying notes are an integral part of these condensed consolidated financial statements.
KADANT INC.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands, except share amounts) | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Items | | Noncontrolling Interest | | Total Stockholders' Equity |
| Shares | | Amount | | | | Shares | | Amount | | | |
| | | | | | | | | | | | | | | | | | |
Balance at December 31, 2016 | | 14,624,159 |
| | $ | 146 |
| | $ | 101,405 |
| | $ | 321,050 |
| | 3,686,532 |
| | $ | (90,335 | ) | | $ | (49,637 | ) | | $ | 1,650 |
| | $ | 284,279 |
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Net income | | — |
| | — |
| | — |
| | 30,332 |
| | — |
| | — |
| | — |
| | 343 |
| | 30,675 |
|
| | | | | | | | | | | | | | | | | | |
Dividends declared | | — |
| | — |
| | — |
| | (6,933 | ) | | — |
| | — |
| | — |
| | — |
| | (6,933 | ) |
| | | | | | | | | | | | | | | | | | |
Dividend paid to noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (882 | ) | | (882 | ) |
| | | | | | | | | | | | | | | | | | |
Activity under stock plans | | — |
| | — |
| | 369 |
| | — |
| | (69,694 | ) | | 1,708 |
| | — |
| | — |
| | 2,077 |
|
| | | | | | | | | | | | | | | | | | |
Other comprehensive items | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 21,440 |
| | 231 |
| | 21,671 |
|
| | | | | | | | | | | | | | | | | | |
Balance at September 30, 2017 | | 14,624,159 |
| | $ | 146 |
| | $ | 101,774 |
| | $ | 344,449 |
| | 3,616,838 |
| | $ | (88,627 | ) | | $ | (28,197 | ) | | $ | 1,342 |
| | $ | 330,887 |
|
| | | | | | | | | | | | | | | | | | |
Balance at December 30, 2017 | | 14,624,159 |
| | $ | 146 |
| | $ | 103,221 |
| | $ | 342,893 |
| | 3,613,838 |
| | $ | (88,554 | ) | | $ | (26,715 | ) | | $ | 1,513 |
| | $ | 332,504 |
|
| | | | | | | | | | | | | | | | | | |
Net income | | — |
| | — |
| | — |
| | 41,991 |
| | — |
| | — |
| | — |
| | 487 |
| | 42,478 |
|
| | | | | | | | | | | | | | | | | | |
Adoption of ASU No. 2014-09 (Note 1) | | — |
| | — |
| | — |
| | 119 |
| | — |
| | — |
| | — |
| | — |
| | 119 |
|
| | | | | | | | | | | | | | | | | | |
Adoption of ASU No. 2016-16 (Note 1) | | — |
| | — |
| | — |
| | (75 | ) | | — |
| | — |
| | — |
| | — |
| | (75 | ) |
| | | | | | | | | | | | | | | | | | |
Dividends declared | | — |
| | — |
| | — |
| | (7,326 | ) | | — |
| | — |
| | — |
| | — |
| | (7,326 | ) |
| | | | | | | | | | | | | | | | | | |
Dividend paid to noncontrolling interest | | — |
| | — |
| | — |
| |
|
| | — |
| | — |
| | — |
| | (465 | ) | | (465 | ) |
| | | | | | | | | | | | | | | | | | |
Activity under stock plans | | — |
| | — |
| | (104 | ) | | — |
| | (96,975 | ) | | 2,377 |
| | — |
| | — |
| | 2,273 |
|
| | | | | | | | | | | | | | | | | | |
Other comprehensive items | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (11,012 | ) | | (57 | ) | | (11,069 | ) |
| | | | | | | | | | | | | | | | | | |
Balance at September 29, 2018 | | 14,624,159 |
| | $ | 146 |
| | $ | 103,117 |
| | $ | 377,602 |
| | 3,516,863 |
| | $ | (86,177 | ) | | $ | (37,727 | ) | | $ | 1,478 |
| | $ | 358,439 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands, except share and per share amounts) | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Items | | Noncontrolling Interest | | Total Stockholders' Equity |
| Shares | | Amount | | | | Shares | | Amount | | | |
Balance at December 29, 2018 | | 14,624,159 |
| | $ | 146 |
| | $ | 104,731 |
| | $ | 393,578 |
| | 3,514,163 |
| | $ | (86,111 | ) | | $ | (39,376 | ) | | $ | 1,603 |
| | $ | 374,571 |
|
| | | | | | | | | | | | | | | | | | |
Net income | | — |
| | — |
| | — |
| | 10,900 |
| | — |
| | — |
| | — |
| | 165 |
| | 11,065 |
|
| | | | | | | | | | | | | | | | | | |
Adoption of ASU No. 2016-02, Leases | | — |
| | — |
| | — |
| | (17 | ) | | — |
| | — |
| | — |
| | — |
| | (17 | ) |
| | | | | | | | | | | | | | | | | | |
Dividend declared – Common Stock, $0.23 per share | | — |
| | — |
| | — |
| | (2,570 | ) | | — |
| | — |
| | — |
| | — |
| | (2,570 | ) |
| | | | | | | | | | | | | | | | | | |
Activity under stock plans | | — |
| | — |
| | (1,951 | ) | | — |
| | (64,435 | ) | | 1,579 |
| | — |
| | — |
| | (372 | ) |
| | | | | | | | | | | | | | | | | | |
Other comprehensive items | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (648 | ) | | (33 | ) | | (681 | ) |
| | | | | | | | | | | | | | | | | | |
Balance at March 30, 2019 | | 14,624,159 |
| | $ | 146 |
| | $ | 102,780 |
| | $ | 401,891 |
| | 3,449,728 |
| | $ | (84,532 | ) | | $ | (40,024 | ) | | $ | 1,735 |
| | $ | 381,996 |
|
| | | | | | | | | | | | | | | | | | |
Balance at December 30, 2017 | | 14,624,159 |
| | $ | 146 |
| | $ | 103,221 |
| | $ | 342,893 |
| | 3,613,838 |
| | $ | (88,554 | ) | | $ | (26,715 | ) | | $ | 1,513 |
| | $ | 332,504 |
|
| | | | | | | | | | | | | | | | | | |
Net income | | — |
| | — |
| | — |
| | 10,858 |
| | — |
| | — |
| | — |
| | 150 |
| | 11,008 |
|
| | | | | | | | | | | | | | | | | | |
Adoption of ASU No. 2014-09, Revenue from Contracts with Customers | | — |
| | — |
| | — |
| | 119 |
| | — |
| | — |
| | — |
| | — |
| | 119 |
|
| | | | | | | | | | | | | | | | | | |
Adoption of ASU No. 2016-16, Income Taxes | | — |
| | — |
| | — |
| | (75 | ) | | — |
| | — |
| | — |
| | — |
| | (75 | ) |
| | | | | | | | | | | | | | | | | | |
Dividend declared – Common Stock, $0.22 per share | | — |
| | — |
| | — |
| | (2,440 | ) | | — |
| | — |
| | — |
| | — |
| | (2,440 | ) |
| | | | | | | | | | | | | | | | | | |
Activity under stock plans | | — |
| | — |
| | (3,393 | ) | | — |
| | (79,888 | ) | | 1,958 |
| | — |
| | — |
| | (1,435 | ) |
| | | | | | | | | | | | | | | | | | |
Other comprehensive items | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,503 |
| | 43 |
| | 5,546 |
|
| | | | | | | | | | | | | | | | | | |
Balance at March 31, 2018 | | 14,624,159 |
| | $ | 146 |
| | $ | 99,828 |
| | $ | 351,355 |
| | 3,533,950 |
| | $ | (86,596 | ) | | $ | (21,212 | ) | | $ | 1,706 |
| | $ | 345,227 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Kadant Inc. was incorporated in Delaware in November 1991 and currently trades on the New York Stock Exchange under the ticker symbol "KAI."
Kadant Inc. and(together with its subsidiaries' (collectively,subsidiaries, the Company) is a global supplier of high-value, critical components and engineered systems used in process industries worldwide. The Company has a diverse and large customer base, including most of the world's major paper, lumber and oriented strand board (OSB) manufacturers, and various mining companies across multiple industries. Its products, technologies, and services play an integral role in enhancing process efficiency, optimizing energy utilization, and maximizing productivity in resource-intensive industries.
The Company's operations include twothree reportable operating segments, Papermaking Systems, and Wood Processing Systems, and Material Handling Systems, and a separate product line, Fiber-based Products.
Through See Note 2 for information regarding the Company's most recent acquisition, which comprises its Papermakingnew Material Handling Systems segment, the Company develops, manufactures, and markets a range of equipment and products for the global papermaking, paper recycling, recycling and waste management, and other process industries. The Company's principal products include custom-engineered stock-preparation systems and equipment for the preparation of wastepaper for conversion into recycled paper and balers and related equipment used in the processing of recyclable and waste materials; fluid-handling systems and equipment used in industrial piping systems to compensate for movement and to efficiently transfer fluid, power, and data; doctoring systems and equipment and related consumables important to the efficient operation of paper machines and other industrial processes; and filtration and cleaning systems essential for draining, purifying, and recycling process water and cleaning fabrics, belts, and rolls in various process industries.
Through its Wood Processing Systems segment, the Company develops, manufactures, and markets stranders, debarkers, chippers, and logging machinery used in the harvesting and production of lumber and oriented strand board. Through this segment, the Company also provides refurbishment and repair of pulping equipment for the pulp and paper industry.
Through its Fiber-based Products business, the Company manufactures and sells biodegradable, absorbent granules derived from papermaking by-products for use primarily as carriers for agricultural, home lawn and garden, and professional lawn, turf and ornamental applications, as well as for oil and grease absorption.segment.
Interim Financial Statements
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 29, 2018,March 30, 2019, its results of operations, and comprehensive income, for the three- and nine-month periods ended September 29, 2018 and September 30, 2017, and its cash flows, and stockholders' equity for the nine-monththree-month periods ended September 29, 2018March 30, 2019 and September 30, 2017.March 31, 2018. Interim results are not necessarily indicative of results for a full year or for any other interim period.
The condensed consolidated balance sheet presented as of December 30, 201729, 2018 has been derived from the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2017.29, 2018. The condensed consolidated financial statements and related notes are presented as permitted by the Securities and Exchange Commission (SEC) rules and regulations for Form 10-Q and do not contain certain information included in the annual consolidated financial statements and related notes of the Company. The condensed consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2017,29, 2018, filed with the SEC.
Financial Statement Presentation
Certain reclassifications have been made to prior periods to conform with current reporting. As a result of the adoption of the Financial Accounting Standards Board's (FASB) Accounting Standards Update (ASU) No. 2017-07, Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost, certain components of net benefit cost have been reclassified from operating income to non-operating expenses and included in other expense, net in the condensed consolidated statement of income in the 2017 period. In addition, as a result of the adoption of the FASB's ASU No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash, the change in restricted cash has been reclassified from financing activities and exchange rate effect on cash and included in cash, cash equivalents, and restricted cash in the condensed consolidated statement of cash flows in the 2017 period.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Effective at the beginning of fiscal 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (Topic 606), using a modified retrospective method. See Recently Adopted Accounting Pronouncements in this note for further discussion. Results for fiscal 2018 are presented under Topic 606, while prior period amounts are not adjusted and are reported under the Company's prior method of reporting revenue recognition in accordance with Accounting Standards Codification (ASC), Revenue Recognition (Topic 605) (Topic 605). The impact on any financial statement line item arising from the application of Topic 606 versus Topic 605 on the Company's results for the third quarter and first nine months of 2018 is not material.
Use of Estimates and Critical Accounting Policies
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.
Critical accounting policies are defined as those that entail significant judgments and estimates, and could potentially result in materially different results under different assumptions and conditions. The Company believes that the most critical accounting policies upon which its financial position depends, and which involve the most complex or subjective decisions or assessments, concern revenue recognition, income taxes, the valuation of goodwill and intangible assets, inventories, and pension obligations. A discussion of the application of these and other accounting policies is included in Notes 1 and 3 to the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2017, and in Revenue Recognition and Recently Adopted Accounting Pronouncements, Revenue from Contracts with Customers (Topic 606), in this note.
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.
Supplemental Cash Flow Information
|
| | | | | | | | |
| | Nine Months Ended |
(In thousands) | | September 29, 2018 | | September 30, 2017 |
Cash Paid for Interest | | $ | 5,914 |
| | $ | 1,421 |
|
Cash Paid for Income Taxes, Net of Refunds | | $ | 20,823 |
| | $ | 12,479 |
|
| | | | |
Non-Cash Investing Activities: | | |
| | |
|
Estimated post-closing adjustment (a) | | $ | 397 |
| | $ | — |
|
| | | | |
Fair value of assets acquired | | $ | — |
| | $ | 241,141 |
|
Cash paid for acquired businesses | | — |
| | (206,447 | ) |
Liabilities assumed of acquired businesses | | $ | — |
| | $ | 34,694 |
|
| | | | |
Non-cash additions to property, plant and equipment | | $ | 783 |
| | $ | 1,938 |
|
| | | | |
Non-Cash Financing Activities: | | |
| | |
|
Issuance of Company common stock upon vesting of restricted stock units | | $ | 3,976 |
| | $ | 3,018 |
|
Dividends declared but unpaid | | $ | 2,444 |
| | $ | 2,312 |
|
(a) Represents an estimated post-closing purchase price adjustment relatedNotes 1 and 3 to the 2017 acquisitionconsolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2018 describe the significant accounting estimates and policies used in preparation of certain assetsthe consolidated financial statements. There have been no material changes in the Company’s significant accounting policies during the three months ended March 30, 2019, except for the adoption of Unaflex, LLC, which is expected to be settled in 2018.Accounting Standards Codification (ASC), Leases (Topic 842) (ASC 842). See Recently Adopted Accounting Pronouncements within this note and Note 8 for further details.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Supplemental Cash Flow Information
See Note 8 for supplemental cash flow information related to the Company's lease obligations. |
| | | | | | | | |
| | Three Months Ended |
(In thousands) | | March 30, 2019 | | March 31, 2018 |
Cash Paid for Interest | | $ | 2,782 |
| | $ | 2,459 |
|
Cash Paid for Income Taxes, Net of Refunds | | $ | 4,679 |
| | $ | 8,455 |
|
| | | | |
Non-Cash Investing Activities: | | | | |
Post-closing adjustments | | $ | 1,567 |
| | $ | 397 |
|
| | | | |
Liabilities assumed of acquired business | | $ | 29,664 |
| | $ | — |
|
| | | | |
Non-cash additions to property, plant, and equipment | | $ | 193 |
| | $ | 1,816 |
|
| | | | |
Non-Cash Financing Activities: | | |
| | |
|
Issuance of Company common stock upon vesting of restricted stock units | | $ | 3,278 |
| | $ | 2,755 |
|
Dividends declared but unpaid | | $ | 2,570 |
| | $ | 2,440 |
|
Restricted Cash
The Company's restricted cash serves as collateral for bank guarantees primarily associated with providing assurance to customers that the Company will fulfill certain customer obligations entered into in the normal course of business. The majority of the bank guarantees will expire over the next twelve months.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company's condensed consolidated balance sheet that are shown in aggregate in the accompanying condensed consolidated statement of cash flows:
| | (In thousands) | | September 29, 2018 | | September 30, 2017 | | December 30, 2017 | | December 31, 2016 | | March 30, 2019 | | March 31, 2018 | | December 29, 2018 | | December 30, 2017 |
Cash and cash equivalents | | $ | 57,384 |
| | $ | 90,622 |
| | $ | 75,425 |
| | $ | 71,487 |
| | $ | 56,478 |
| | $ | 72,210 |
| | $ | 45,830 |
| | $ | 75,425 |
|
Restricted cash | | 675 |
| | 766 |
| | 1,421 |
| | 2,082 |
| | 697 |
| | 1,532 |
| | 287 |
| | 1,421 |
|
Total Cash, Cash Equivalents, and Restricted Cash | | $ | 58,059 |
| | $ | 91,388 |
| | $ | 76,846 |
| | $ | 73,569 |
| | $ | 57,175 |
| | $ | 73,742 |
| | $ | 46,117 |
| | $ | 76,846 |
|
Banker's Acceptance Drafts included in Accounts Receivable
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-bearing obligations of the issuing bank and mature within six months of the origination date. The Company's 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 $14,193,000$7,772,000 at September 29, 2018March 30, 2019 and $15,960,000$7,976,000 at December 30, 2017,29, 2018, 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.
Inventories
The components of inventories are as follows:
|
| | | | | | | | |
| | September 29, 2018 | | December 30, 2017 |
(In thousands) | | |
Raw Materials and Supplies | | $ | 43,739 |
| | $ | 38,952 |
|
Work in Process | | 23,895 |
| | 18,203 |
|
Finished Goods | | 24,102 |
| | 27,778 |
|
| | $ | 91,736 |
| | $ | 84,933 |
|
Intangible Assets, Net
Acquired intangible assets by major asset class are as follows:
|
| | | | | | | | | | | | | | | | |
(In thousands) | | Gross | | Currency Translation | | Accumulated Amortization | | Net |
September 29, 2018 | | | | | | | | |
Definite-Lived | | | | | | | | |
Customer relationships | | $ | 113,283 |
| | $ | (2,716 | ) | | $ | (35,873 | ) | | $ | 74,694 |
|
Product technology | | 46,501 |
| | (1,282 | ) | | (22,653 | ) | | 22,566 |
|
Tradenames | | 5,227 |
| | (344 | ) | | (1,864 | ) | | 3,019 |
|
Other | | 13,744 |
| | (88 | ) | | (11,375 | ) | | 2,281 |
|
| | 178,755 |
| | (4,430 | ) | | (71,765 | ) | | 102,560 |
|
Indefinite-Lived | | | | | | | | |
Tradenames | | 16,600 |
| | 86 |
| | — |
| | 16,686 |
|
Acquired Intangible Assets | | $ | 195,355 |
| | $ | (4,344 | ) | | $ | (71,765 | ) | | $ | 119,246 |
|
| | | | | | | | |
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Inventories
The components of inventories are as follows:
|
| | | | | | | | | | | | | | | | |
(In thousands) | | Gross | | Currency Translation | | Accumulated Amortization | | Net |
December 30, 2017 | | |
| | |
| | |
| | |
|
Definite-Lived | | | | | | | | |
Customer relationships | | $ | 113,301 |
| | $ | (621 | ) | | $ | (28,789 | ) | | $ | 83,891 |
|
Product technology | | 46,501 |
| | (737 | ) | | (19,841 | ) | | 25,923 |
|
Tradenames | | 5,227 |
| | (262 | ) | | (1,504 | ) | | 3,461 |
|
Other | | 13,754 |
| | (35 | ) | | (10,863 | ) | | 2,856 |
|
| | 178,783 |
| | (1,655 | ) | | (60,997 | ) | | 116,131 |
|
Indefinite-Lived | | | | | | | | |
Tradenames | | 16,600 |
| | 305 |
| | — |
| | 16,905 |
|
Acquired Intangible Assets | | $ | 195,383 |
| | $ | (1,350 | ) | | $ | (60,997 | ) | | $ | 133,036 |
|
|
| | | | | | | | |
| | March 30, 2019 | | December 29, 2018 |
(In thousands) | | |
Raw Materials | | $ | 46,684 |
| | $ | 44,522 |
|
Work in Process | | 20,239 |
| | 15,876 |
|
Finished Goods | | 36,106 |
| | 25,975 |
|
| | $ | 103,029 |
| | $ | 86,373 |
|
Intangible Assets, Net
Acquired intangible assets by major asset class are as follows:
|
| | | | | | | | | | | | | | | | |
(In thousands) | | Gross | | Accumulated Amortization | | Currency Translation | | Net |
March 30, 2019 | | | | | | | | |
Definite-Lived | | | | | | | | |
Customer relationships | | $ | 166,183 |
| | $ | (41,222 | ) | | $ | (4,498 | ) | | $ | 120,463 |
|
Product technology | | 57,001 |
| | (24,619 | ) | | (1,761 | ) | | 30,621 |
|
Tradenames | | 5,227 |
| | (2,090 | ) | | (419 | ) | | 2,718 |
|
Other | | 17,784 |
| | (12,581 | ) | | (576 | ) | | 4,627 |
|
| | 246,195 |
| | (80,512 | ) | | (7,254 | ) | | 158,429 |
|
Indefinite-Lived | | | | | | | | |
Tradenames | | 26,300 |
| | — |
| | (133 | ) | | 26,167 |
|
Acquired Intangible Assets | | $ | 272,495 |
| | $ | (80,512 | ) | | $ | (7,387 | ) | | $ | 184,596 |
|
| | | | | | | | |
December 29, 2018 | | |
| | |
| | | | |
|
Definite-Lived | | | | | | | | |
Customer relationships | | $ | 113,283 |
| | $ | (38,160 | ) | | $ | (4,520 | ) | | $ | 70,603 |
|
Product technology | | 46,501 |
| | (23,563 | ) | | (1,677 | ) | | 21,261 |
|
Tradenames | | 5,227 |
| | (1,980 | ) | | (390 | ) | | 2,857 |
|
Other | | 13,744 |
| | (11,476 | ) | | (127 | ) | | 2,141 |
|
| | 178,755 |
| | (75,179 | ) | | (6,714 | ) | | 96,862 |
|
Indefinite-Lived | | | | | | | | |
Tradenames | | 16,600 |
| | — |
| | (115 | ) | | 16,485 |
|
Acquired Intangible Assets | | $ | 195,355 |
| | $ | (75,179 | ) | | $ | (6,829 | ) | | $ | 113,347 |
|
Intangible assets are initially recorded at fair value at the date of acquisition andacquisition. Definite-lived intangible assets are stated net of accumulated amortization and currency translation in the accompanying condensed consolidated balance sheet. The Company amortizes definite-lived intangible assets over lives that have been determined based on the anticipated cash flow benefits of the intangible asset.
Goodwill
The changes in the carrying amount of goodwill by segment are as follows:
|
| | | | | | | | | | | | |
(In thousands) | | Papermaking Systems Segment | | Wood Processing Systems Segment | | Total |
Balance at December 30, 2017 | | | | | | |
Gross balance | | $ | 247,014 |
| | $ | 106,496 |
| | $ | 353,510 |
|
Accumulated impairment losses | | (85,509 | ) | | — |
| | (85,509 | ) |
Net balance | | 161,505 |
| | 106,496 |
| | 268,001 |
|
2018 Adjustments | | | | | | |
Acquisitions (a) | | (17 | ) | | (75 | ) | | (92 | ) |
Currency translation | | (3,552 | ) | | (2,276 | ) | | (5,828 | ) |
Total 2018 adjustments | | (3,569 | ) | | (2,351 | ) | | (5,920 | ) |
Balance at September 29, 2018 | | |
| | |
| | |
|
Gross balance | | 243,445 |
| | 104,145 |
| | 347,590 |
|
Accumulated impairment losses | | (85,509 | ) | | — |
| | (85,509 | ) |
Net balance | | $ | 157,936 |
| | $ | 104,145 |
| | $ | 262,081 |
|
(a) Relates to a purchase price allocation adjustment primarily for inventory and a purchase price adjustment for acquisitions completed in 2017. The purchase price allocations for the Company's 2017 acquisitions were finalized in the second and third quarters of 2018.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Goodwill
The changes in the carrying amount of goodwill by segment are as follows:
|
| | | | | | | | | | | | | | | | |
(In thousands) | | Papermaking Systems | | Wood Processing Systems | | Material Handling Systems | | Total |
Balance at December 29, 2018 | | | | | | | | |
Gross balance | | $ | 241,912 |
| | $ | 101,771 |
| | $ | — |
| | $ | 343,683 |
|
Accumulated impairment losses | | (85,509 | ) | | — |
| | — |
| | (85,509 | ) |
Net balance | | 156,403 |
| | 101,771 |
| | — |
| | 258,174 |
|
2019 Adjustments | | | | | | | | |
Acquisition (Note 2) | | — |
| | — |
| | 86,502 |
| | 86,502 |
|
Currency translation | | (1,031 | ) | | 123 |
| | — |
| | (908 | ) |
Total 2019 adjustments | | (1,031 | ) | | 123 |
| | 86,502 |
| | 85,594 |
|
Balance at March 30, 2019 | | |
| | |
| | | | |
|
Gross balance | | 240,881 |
| | 101,894 |
| | 86,502 |
| | 429,277 |
|
Accumulated impairment losses | | (85,509 | ) | | — |
| | — |
| | (85,509 | ) |
Net balance | | $ | 155,372 |
| | $ | 101,894 |
| | $ | 86,502 |
| | $ | 343,768 |
|
Warranty Obligations
The Company's contracts covering the sale of its products include warranty provisions that provide assurance to its customers that the products will comply with agreed-upon specifications. The Company negotiates the terms regarding warranty coverage and length of warranty depending on the products and applications.
The changes in the carrying amount of accrued warranty costs included in other current liabilities in the accompanying condensed consolidated balance sheet are as follows:
| | | | Nine Months Ended | | Three Months Ended |
(In thousands) | | September 29, 2018 | | September 30, 2017 | | March 30, 2019 | | March 31, 2018 |
Balance at Beginning of Year | | $ | 5,498 |
| | $ | 3,843 |
| | $ | 5,726 |
| | $ | 5,498 |
|
Provision charged to expense | | 2,584 |
| | 1,931 |
| | 1,076 |
| | 715 |
|
Usage | | (1,828 | ) | | (1,506 | ) | | (925 | ) | | (364 | ) |
Acquisitions | | — |
| | 790 |
| |
Acquisition | | | 295 |
| | — |
|
Currency translation | | (215 | ) | | 382 |
| | (3 | ) | | 61 |
|
Balance at End of Period | | $ | 6,039 |
| | $ | 5,440 |
| | $ | 6,169 |
| | $ | 5,910 |
|
Revenue Recognition
Effective at the beginning of fiscal 2018, theThe Company adopted Topicrecognizes revenue under ASC 606, using a modified retrospective method. See Recently Adopted Accounting Pronouncements Revenue from Contracts with Customers.in this note for further discussion. Results for fiscal 2018 are presented under Topic 606, while prior period amounts are not adjusted and are reported in accordance with Topic 605. The impact on any financial statement line item arising from the application of Topic 606 versus Topic 605 on the Company's results for the third quarter and first nine months of 2018 is not material.
Approximately 90% in the third quarter of 2018 and 93% in the first nine months of 2018 Most of the Company’s revenue wasis recognized at a point in time for each performance obligation under the contract when the customer obtains control of the goods or service. The majority of the Company’s parts and consumables products and capital products with minimal customization are accounted for at a point in time. The Company has made a policy election not to not treat the obligation to ship as a separate performance obligation under the contract and, as a result, the associated shipping costs are accrued when revenue is recognized.
The remaining 10% in the third quarter of 2018 and 7% in the first nine months of 2018portion of the Company’s revenue wasis recognized on an over time basis based on an input method that compares the costs incurred to date to the total expected costs required to satisfy the performance obligation. Contracts are accounted for on an over time basis when they include products which have no alternative use and an enforceable right to payment over time. The majority of the contractsContracts recognized on an over time basis are typically for large capital projects within the Company's Stock-Preparation product line and, to a lesser extent, its Fluid-Handling and Doctoring, Cleaning, & Filtration product lines. These projectswhich are highly customized for the customer and, as a result, would include a significant cost to rework in the event of cancellation.
The Company's contracts covering the sale of its products include warranty provisions that provide assurance to its customers that the products will comply with agreed-upon specifications. The Company negotiates the terms regarding warranty coverage and length of warranty depending on the products and applications.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
The Company disaggregates its revenue from contracts with customers by product line, product type, and geography as this best depicts how its revenue is affected by economic factors as shown below:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 29, | | September 30, | | September 29, | | September 30, |
(In thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Revenues by Product Line: | | | | | | | | |
Papermaking Systems: | | | | | | | | |
Stock-Preparation | | $ | 62,983 |
| | $ | 52,065 |
| | $ | 164,842 |
| | $ | 139,396 |
|
Fluid-Handling | | 33,083 |
| | 28,532 |
| | 98,500 |
| | 73,099 |
|
Doctoring, Cleaning, & Filtration | | 30,704 |
| | 30,538 |
| | 87,469 |
| | 82,921 |
|
Papermaking Systems | | $ | 126,770 |
| | $ | 111,135 |
| | $ | 350,811 |
| | $ | 295,416 |
|
Wood Processing Systems | | 37,042 |
| | 39,714 |
| | 109,335 |
| | 61,050 |
|
Fiber-based Products | | 1,933 |
| | 1,945 |
| | 9,705 |
| | 9,427 |
|
| | $ | 165,745 |
| | $ | 152,794 |
| | $ | 469,851 |
| | $ | 365,893 |
|
Revenues by Product Type: | | |
| | |
| | |
| | |
|
Parts and Consumables | | $ | 92,749 |
| | $ | 83,755 |
| | $ | 283,591 |
| | $ | 224,239 |
|
Capital | | 72,996 |
| | 69,039 |
| | 186,260 |
| | 141,654 |
|
| | $ | 165,745 |
| | $ | 152,794 |
| | $ | 469,851 |
| | $ | 365,893 |
|
Revenues by Geography: | | |
| | |
| | |
| | |
|
North America | | $ | 74,089 |
| | $ | 68,369 |
| | $ | 227,080 |
| | $ | 170,092 |
|
Europe | | 44,912 |
| | 46,475 |
| | 131,437 |
| | 113,178 |
|
Asia | | 32,887 |
| | 25,215 |
| | 78,537 |
| | 53,658 |
|
Rest of World | | 13,857 |
| | 12,735 |
| | 32,797 |
| | 28,965 |
|
| | $ | 165,745 |
| | $ | 152,794 |
| | $ | 469,851 |
| | $ | 365,893 |
|
The following table presents revenue by revenue recognition method:
|
| | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 29, | | September 29, |
(In thousands) | | 2018 | | 2018 |
Timing of Revenue Recognition: | | |
| | |
|
Point in Time | | $ | 148,524 |
| | $ | 436,527 |
|
Over Time | | 17,221 |
| | 33,324 |
|
| | $ | 165,745 |
| | $ | 469,851 |
|
|
| | | | | | | | |
| | Three Months Ended |
| | March 30, | | March 31, |
(In thousands) | | 2019 | | 2018 |
Point in time | | $ | 148,276 |
| | $ | 142,005 |
|
Over time | | 23,040 |
| | 7,188 |
|
| | $ | 171,316 |
| | $ | 149,193 |
|
The transaction price is typically based on the amount billed to the customer and includes estimated variable consideration where applicable. Such variable consideration relates to certain performance guarantees and rights to return the product. The Company estimates variable consideration as the most likely amount to which it expects to be entitled based on the terms of the contracts with customers and historical experience, where relevant. For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation based on the relative stand-alone selling price.
The following tables presenttable presents the disaggregation of revenues by product type and geography:
|
| | | | | | | | |
| | Three Months Ended |
| | March 30, | | March 31, |
(In thousands) | | 2019 | | 2018 |
Revenues by Product Type: | | |
| | |
|
Parts and Consumables | | $ | 112,850 |
| | $ | 95,985 |
|
Capital | | 58,466 |
| | 53,208 |
|
| | $ | 171,316 |
| | $ | 149,193 |
|
Revenues by Geography: | | |
| | |
|
North America | | $ | 100,876 |
| | $ | 77,616 |
|
Europe | | 38,985 |
| | 41,493 |
|
Asia | | 17,078 |
| | 20,148 |
|
Rest of World | | 14,377 |
| | 9,936 |
|
| | $ | 171,316 |
| | $ | 149,193 |
|
See Note 12, Business Segment Information, for further details on the disaggregation of revenues by segment and product line.
The following table presents balances from contracts with customers:
| | | | September 29, 2018 | | December 30, 2017 | | March 30, 2019 | | December 29, 2018 |
(In thousands) | | |
Balances from Contracts with Customers: | | | | | |
Accounts receivable | | $ | 96,326 |
| | $ | 89,624 |
| | $ | 104,120 |
| | $ | 92,624 |
|
Contract assets | | $ | 8,315 |
| | $ | 2,374 |
| | $ | 16,996 |
| | $ | 15,741 |
|
Contract liabilities | | $ | 48,959 |
| | $ | 38,702 |
| | $ | 38,950 |
| | $ | 34,774 |
|
Contract assets represent unbilled revenuerevenues associated with revenue recognized on contracts accounted for on an over time basis. Unbilled amountsbasis, which will be billed in future periods based on the contract terms. Contract liabilities consist of customer deposits, and advanced billings, and deferred revenue. Deferred revenue which is included in other current liabilities in the accompanying condensed consolidated balance sheet. Contract liabilities will be recognized as revenue in future periods once the revenue recognition criteria are met. The majority of the contract liabilities relate to advanced payments on contracts accounted for at a point in time. These advance payments will be recognized as revenue when the Company's performance obligations have been satisfied, which typically occurs when the product has been deliveredshipped and control of the asset has transferred to the customer.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
The Company recognized revenue of $5,787,000 in the third quarter of 2018 and $35,900,000$19,095,000 in the first ninethree months of 2019 and $27,325,000 in the first three months of 2018 that was included in the contract liabilities balance at the beginning of fiscal 2018.2019 and 2018, respectively.
Customers in China will often settle their accounts receivable with a banker's acceptance draft, in which case cash settlement will be delayed until the banker's acceptance draft matures or is settled prior to maturity. For customers outside of
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
China, final payment for the majority of the Company's products is received in the quarter following the product shipment. Certain of the Company's contracts include a longer period before final payment is due, which is typically within one year of final shipment or transfer of control to the customer.
Recently Adopted Accounting Pronouncements
Revenue from Contracts with Customers (Topic 606), Section A-Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40). In May 2014, the FASB issued ASU No. 2014-09, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The Company adopted this ASU using the modified retrospective transition approach effective at the beginning of fiscal 2018. The guidance applies 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 this ASU and the Company's previous revenue recognition practices under Topic 605 was recognized using a cumulative-effect adjustment that increased retained earnings by $119,000. The increase in retained earnings primarily related to contracts, which meet the over time criteria under the new revenue standard and, as a result, the portion of the contract completed as of the beginning of fiscal 2018 was recognized immediately in retained earnings. Partially offsetting this increase was a reduction of retained earnings associated with certain contracts which were previously accounted for under the percentage-of-completion method of accounting, but do not meet the requirements for over time recognition under Topic 606. Amounts previously recognized in fiscal 2017 based on the percentage-of-completion method of accounting were deferred at the beginning of fiscal 2018 and will be recognized along with the remaining revenue and costs in fiscal 2018 when control of the asset has been transferred to the customer.
The Company has implemented certain modifications to its existing internal controls to support the recognition criteria and disclosure requirements of this ASU. See Revenue Recognition in this note for further disclosures required by this ASU.
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. In August 2016, the FASB issued ASU No. 2016-15, which simplifies the diversity in practice related to the presentation and classification of certain cash receipts and cash payments in the statement of cash flows under Topic 230. The Company adopted this ASU at the beginning of fiscal 2018 with no impact on the Company's condensed consolidated statement of cash flows.
Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory. In October 2016, the FASB issued ASU No. 2016-16, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory. The Company adopted this ASU at the beginning of fiscal 2018 on a modified retrospective basis, which resulted in an immaterial adjustment to retained earnings. The impact of the adoption of this standard on future periods will be dependent on future asset transfers, which generally occur in connection with acquisitions and other business structuring activities.
Statement of Cash Flows (Topic 230), Restricted Cash. In November 2016, the FASB issued ASU No. 2016-18, which requires inclusion of restricted cash and restricted cash equivalents within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this ASU at the beginning of fiscal 2018. Prior period amounts related to the Company's "cash flows from financing activities," "exchange rate effect on cash," and "cash, cash equivalents, and restricted cash" were restated as required by this ASU, which did not have a material effect on the Company's statement of cash flows. See Restricted Cash in this note for further disclosures required by this ASU.
Business Combinations (Topic 805), Clarifying the Definition of a Business. In January 2017, the FASB issued ASU No. 2017-01, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The Company adopted this ASU on a prospective basis at the beginning of fiscal 2018. The adoption of this ASU will impact how the Company assesses acquisitions and disposals of businesses in the future.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost. In March 2017, the FASB issued ASU No. 2017-07, which requires employers to include only the service cost component of net periodic pension cost and net periodic post-retirement benefit cost within costs and operating expenses in the same income statement line item as the related employees' compensation costs. The other components of net benefit cost are required to be included within non-operating expenses. The Company adopted this ASU at the beginning of fiscal 2018 and prior period amounts were reclassified with no impact on the Company’s condensed consolidated net income. As a result of the adoption, the Company reclassified $216,000 in the third quarter of 2017 and $637,000 in the first nine months of 2017 from operating income to other expense, net in the accompanying condensed consolidated statement of income.
Compensation - Stock Compensation (Topic 718), Scope of Modification Accounting. In May 2017, the FASB issued ASU No. 2017-09, which provides clarity on which changes to the terms or conditions of share-based payment awards require entities to apply the modification accounting provisions required in Topic 718. The Company adopted this ASU on a prospective basis at the beginning of fiscal 2018. The adoption of this ASU did not have a material impact on the Company's condensed consolidated financial statements.
Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. In March 2018, the FASB issued ASU No. 2018-05, an amendment to the December 2017 SEC Staff Accounting Bulletin No. 118 (SAB 118), which allowed SEC registrants to record provisional amounts in earnings due to the complexities involved in accounting for the December 22, 2017 enactment of The Tax Cuts and Jobs Act of 2017 (2017 Tax Act). While the Company’s accounting for certain tax effects is incomplete, it has determined reasonable estimates for those effects and has recorded provisional amounts in the condensed consolidated financial statements as of September 29, 2018 and December 30, 2017.
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40),Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. In August 2018, the FASB issued ASU No. 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company elected to early adopt this ASU on a prospective basis in the third quarter of 2018. The adoption of this ASU did not have a material impact on the Company's condensed consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
Leases (Topic 842). In February 2016, the FASBFinancial Accounting Standards Board (FASB) issued ASUAccounting Standards Update (ASU) No. 2016-02, which requires a lessee to recognize a right-of-use (ROU) asset and a corresponding lease liability for operating leases, initially measured at the present value of the future lease payments, inon its balance sheet. This ASU also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. This new guidanceThe Company adopted this ASU as of the beginning of fiscal 2019 using the cumulative-effect adjustment method. As a result, prior period amounts were not restated and continue to be under Topic 840, Leases, which did not require the recognition of operating leases on the balance sheet and is effective fornot comparative. As permitted under ASC 842, the Company inelected the package of practical expedients for expired or existing contracts, which does not require the reassessment of prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected practical expedients relating to its ongoing accounting, including a short-term lease recognition exemption allowing lessees not to recognize ROU assets and liabilities with a term of 12 months or less and an election not to separate lease and non-lease components for all leases except vehicle leases.
The adoption of this standard as of the beginning of fiscal 2019 resulted in increases of 2.3% to total assets and early4.8% to total liabilities and an immaterial decrease to retained earnings. In addition, the adoption is permitted.of this ASU did not have a material impact on the Company’s condensed consolidated statements of income or cash flows. See Note 8, Leases, for required lease accounting disclosures. Derivatives and Hedging (Topic 815), Targeted Improvements in Accounting for Hedging Activity. In July 2018,August 2017, the FASB issued ASU 2018-11, Leases (Topic 842), Targeted ImprovementsNo. 2017-12, which providesrevises hedge accounting to better portray the economic results of an additional transition method that allows entities to recognize a cumulative effect adjustment to the opening balanceentity’s risk management activities, simplifies hedge accounting guidance, and improves disclosures of retained earnings in the period of adoption.hedge accounting arrangements. The Company has elected to adoptadopted this new transition method when it adopts ASU 2016-02on a prospective basis at the beginning of fiscal 2019. The adoption of this ASU did not have a material effect on the Company's condensed consolidated financial statements.
The Company is completing the assessment of the practical expedients allowed under this new guidance and finalizing its elections and the impact on its systems, processes and controls to account for its leases. The Company has substantially completed the evaluation of its lease population and is implementing a third-party software solution to assist with the accounting under the new standard. The implementation of this new standard will have a significant impact on the Company's disclosures and balance sheet as it expects that assets and liabilities will increase upon adoption for right-of-use assets and lease liabilities, but is not expected to have a material impact on its results of operations or cash flows. The Company’s operating leases are summarized in Note 7 to the consolidated financial statements for 2017 included in the Company's Annual Report on Form 10-K, filed with the SEC. The actual impact of this new standard will depend on the total amount of the Company’s lease commitments as of the adoption date.
Recent Accounting Pronouncements Not Yet Adopted
Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. In June 2016, the FASB issued ASU No. 2016-13, which significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining lives. This new
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
guidance is effective for the Company in fiscal 2020 with early adoption permitted beginning in fiscal 2019. The Company is currently evaluating the effects that the adoption of this ASU will have on its condensed consolidated financial statements.
Derivatives and Hedging (Topic 815), Targeted Improvements in Accounting for Hedging Activity. In August 2017, the FASB issued ASU No. 2017-12, which provides improvements to current hedge accounting to better portray the economic results of an entity’s risk management activities and to simplify the application of current hedge accounting guidance. This new guidance is effective on a prospective basis for the Company in fiscal 2019. Early adoption is permitted. The Company does not believe that adoption of this ASU will have a material effect on its condensed consolidated financial statements.
Income Statement - Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. In February 2018, the FASB issued ASU No. 2018-02, which allows a reclassification from accumulated other comprehensive items (AOCI) to retained earnings for stranded tax effects resulting from the 2017 Tax Act. The reclassification is elective and would allow the income tax effects on items that were originally recorded in AOCI to be reclassified from AOCI to retained earnings. This ASU is effective for the Company in fiscal year 2019 and interim periods therein and should be applied either at the beginning of the period of adoption or retrospectively to each period in which the income tax effects of the 2017 Tax Act are recognized. Early adoption is permitted. The Company is currently evaluating the effects that the adoption of this ASU will have on its condensed consolidated financial statements.
Compensation-Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20), Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans.In August 2018, the FASB issued ASU 2018-14, which removes, adds and clarifies several disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This new guidance is effective on a retrospective basis for the Company in fiscal 2021. Early adoption is permitted. The Company does not believe that the adoption of this ASU will have a material effect on its condensed consolidated financial statements.
2. Restructuring CostsAcquisition
In 2017,The Company’s acquisitions have been accounted for using the Company constructed a 160,000 square foot manufacturing facilitypurchase method of accounting and its results are included in its condensed consolidated financial statements from the United States that integrated its U.S. and Swedish papermaking stock-preparation product lines into a single manufacturing facility to achieve economiesdate of scale and greater efficiencies. As a resultacquisition. Historically, the Company’s acquisitions have been made at prices above the fair value of the consolidation and integration of these facilities, the Company developed a restructuring plan totaling approximately $1,920,000, primarily related toidentifiable net assets, resulting in goodwill. Acquisition transaction costs for the relocation of machinery and equipmentare included inselling, general, and administrative offices, severance, and abandonment of leased facilities in the Papermaking Systems segment. As a result of this plan, the Company recorded restructuring charges of $203,000 in 2017 associated with severance costs for the reduction of four employees in the United States and six employees in Sweden. In the first nine months of 2018, the Company recorded additional restructuring costs of $1,717,000 related to this plan, including $1,318,000 primarily for the relocation of machinery and equipment and administrative offices, $454,000 associated with employee retention costs and abandonment of excess facility and other closure costs, and a reversal of $55,000 of severance costs no longer required. The Company does not expect to incur additional charges related to this restructuring plan.
A summary of the changes in accrued restructuring costs included in other accrued expenses (SG&A) in the accompanying condensed consolidated balance sheet arestatement of income as follows:
|
| | | | | | | | | | | | | | | | |
(In thousands) | | Severance | | Relocation | | Other (a) | | Total |
Balance at December 30, 2017 | | $ | 203 |
| | $ | — |
| | $ | — |
| | $ | 203 |
|
(Reversal) provision | | (55 | ) | | 1,318 |
| | 454 |
| | 1,717 |
|
Usage | | (77 | ) | | (1,315 | ) | | (439 | ) | | (1,831 | ) |
Currency translation | | (8 | ) | | (3 | ) | | — |
| | (11 | ) |
Balance at September 29, 2018 | | $ | 63 |
| | $ | — |
| | $ | 15 |
| | $ | 78 |
|
(a) Includes employee retention costs that are accrued ratably over the period through which employees must work to qualify for a payment and facility closure and clean-up costs.
incurred. The Company expectsrecorded acquisition transaction costs of $843,000 in the first three months of 2019 relating to pay the remaining accrued restructuring costs in 2018.its recent acquisition described below.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2. Acquisition (continued)
On January 2, 2019, the Company acquired, directly and indirectly, all the outstanding equity interests of Syntron Material Handling Group, LLC and certain of its affiliates (SMH) pursuant to an equity purchase agreement, dated December 9, 2018, for approximately $176,855,000, net of cash acquired, which includes a post-closing adjustment of $1,567,000 that was paid by the Company in April 2019. The Company funded the acquisition through borrowings under its revolving credit facility.
SMH, which comprises the Company's new Material Handling Systems segment, has manufacturing operations in Mississippi, United States and in China. SMH is a leading provider of material handling equipment and systems to various process industries, including mining, aggregates, food processing, packaging, and pulp and paper. Revenues for SMH were approximately $89,365,000 for the trailing twelve months ended October 31, 2018. The Company expects several synergies in connection with this acquisition, including expansion of product sales into new markets by leveraging SMH's existing presence, strengthening of SMH's relationships in the pulp and paper industry, and sourcing efficiencies. Goodwill from the SMH acquisition was $86,502,000, of which $64,438,000 is expected to be deductible for tax purposes over 15 years. In addition, intangible assets acquired were $77,140,000, of which $66,725,000 is expected to be deductible for tax purposes over 15 years. For the quarter ended March 30, 2019, the Company recorded revenues of $20,584,000 and an operating loss of $1,353,000 for SMH from the date of acquisition, including amortization expense of $3,308,000 associated with acquired profit in inventory and backlog, and $843,000 of acquisition transaction costs.
The following table summarizes the estimated fair values of assets acquired and liabilities assumed and the purchase price for SMH. The final purchase accounting and purchase price allocation remain subject to change as the Company continues to refine its preliminary valuation of certain acquired assets and the valuation of acquired intangibles.
|
| | | | |
(In thousands) | | |
Net Assets Acquired: | | |
Cash, Cash Equivalents, and Restricted Cash | | $ | 2,431 |
|
Accounts Receivable | | 10,271 |
|
Inventory | | 12,982 |
|
Other Current Assets | | 900 |
|
Property, Plant, and Equipment | | 7,730 |
|
Other Assets | | 10,994 |
|
Definite-Lived Intangible Assets | | |
Customer relationships | | 52,900 |
|
Product technology | | 10,500 |
|
Other | | 4,040 |
|
Indefinite-Lived Intangible Assets | | |
Tradenames | | 9,700 |
|
Goodwill | | 86,502 |
|
Total assets acquired | | 208,950 |
|
| | |
Accounts Payable | | 4,663 |
|
Customer Deposits | | 2,919 |
|
Other Current Liabilities | | 3,724 |
|
Long-Term Lease Liabilities | | 15,244 |
|
Long-Term Deferred Income Taxes | | 3,114 |
|
Total liabilities assumed | | 29,664 |
|
Net assets acquired | | $ | 179,286 |
|
| | |
Purchase Price: | | |
Cash Paid to Seller Borrowed Under Revolving Credit Facility | | $ | 177,719 |
|
Post-Closing Adjustment to be Paid to Seller | | 1,567 |
|
Total Purchase Price | | $ | 179,286 |
|
The weighted-average amortization period for definite-lived intangible assets is 14 years, including weighted-average amortization periods of 15 years for customer relationships, 14 years for product technology, and 8 years for other intangible assets.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2. Acquisition (continued)
Unaudited Supplemental Pro Forma Information
Had the acquisition of SMH been completed as of the beginning of 2018, the Company’s pro forma results of operations for the three months ended March 30, 2019 and March 31, 2018 would have been as follows: |
| | | | | | | | |
| | Three Months Ended |
(In thousands, except per share amounts) | | March 30, 2019 | | March 31, 2018 |
Revenues | | $ | 171,316 |
| | $ | 170,532 |
|
Net Income Attributable to Kadant | | $ | 14,112 |
| | $ | 8,475 |
|
Earnings per Share Attributable to Kadant: | | | | |
Basic | | $ | 1.27 |
| | $ | 0.77 |
|
Diluted | | $ | 1.24 |
| | $ | 0.75 |
|
Pro forma results include the following non-recurring pro forma adjustments that were directly attributable to the business combination:
Pre-tax charge to SG&A expenses of $843,000 in 2018 and reversal in 2019, for acquisition transaction costs.
Estimated pre-tax charge to cost of revenues of $2,310,000 in 2018 and reversal in 2019, for the sale of SMH inventory revalued at the date of acquisition.
Estimated pre-tax charge to SG&A expenses of $998,000 in 2018 and reversal in 2019, for intangible asset amortization related to acquired backlog.
These pro forma results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that would have resulted had the acquisition of SMH occurred as of the beginning of 2018, or that may result in the future.
3. Earnings per Share
Basic and diluted earnings per share (EPS) are calculated as follows:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended |
| | September 29, 2018 | | September 30, 2017 | | September 29, 2018 | | September 30, 2017 | | March 30, 2019 | | March 31, 2018 |
(In thousands, except per share amounts) | | |
Amounts Attributable to Kadant: | | | | | | | | | | | | |
Net Income | | $ | 18,784 |
| | $ | 13,285 |
| | $ | 41,991 |
| | $ | 30,332 |
| | $ | 10,900 |
| | $ | 10,858 |
|
| | | | | | | | | | | | |
Basic Weighted Average Shares | | 11,101 |
| | 11,004 |
| | 11,078 |
| | 10,986 |
| | 11,133 |
| | 11,042 |
|
Effect of Stock Options, Restricted Stock Units and Employee Stock Purchase Plan Shares | | 320 |
| | 340 |
| | 310 |
| | 296 |
| | 252 |
| | 300 |
|
Diluted Weighted Average Shares | | 11,421 |
| | 11,344 |
| | 11,388 |
| | 11,282 |
| | 11,385 |
| | 11,342 |
|
| | | | | | | | | | | | |
Basic Earnings per Share | | $ | 1.69 |
| | $ | 1.21 |
| | $ | 3.79 |
| | $ | 2.76 |
| | $ | 0.98 |
| | $ | 0.98 |
|
| | | | | | | | | | | | |
Diluted Earnings per Share | | $ | 1.64 |
| | $ | 1.17 |
| | $ | 3.69 |
| | $ | 2.69 |
| | $ | 0.96 |
| | $ | 0.96 |
|
RestrictedThe dilutive effect of the outstanding and unvested restricted stock units (RSUs) totaling 11,000 shares of the Company's common stock in the third quarter of 2018, 4,000 in the third quarter of 2017, 25,000totaling 44,000 shares in the first ninethree months of 2019 and 30,000 in the first three months of 2018, and 21,000 in the first nine months of 2017 werewas not included in the computation of diluted EPS for the respective periods as the effect would have been antidilutive or, for unvested performance-based RSUs, the performance conditions had not been met as of the end of the reporting periods.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. Provision for Income Taxes
The 2017 Tax Act was signed into law on December 22, 2017 and its provisions are generally effective for tax years beginning January 1, 2018. The most significant impacts of the 2017 Tax Act to the Company include a decrease in the federal corporate income tax rate from 35% to 21% and a one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings. On December 22, 2017, the SEC staff issued SAB 118 to provide guidance on accounting for the 2017 Tax Act’s impact. In accordance with SAB 118, the Company recognized the provisional tax impacts related to the remeasurement of its deferred income tax assets and liabilities and the one-time mandatory transition tax on deemed repatriation of unremitted foreign earnings in the three months ended December 30, 2017. In the first nine months of 2018, the Company recorded an additional provisional net income tax expense of $792,000, which included the impact of state taxes for the one-time mandatory transition tax, primarily due to a 2018 tax law change associated with the 2017 Tax Act that impacted the provisional amount initially recorded.
Additional work is still necessary to finalize the provisional tax impacts of the 2017 Tax Act, including the completion of a more detailed analysis of the Company’s historical foreign earnings and the understanding and application of anticipated additional regulatory guidance regarding the provisions of the 2017 Tax Act that may be issued by the Internal Revenue Service and state and local jurisdictions. Any subsequent adjustment to the provisional amounts will be recorded to current tax expense in the fourth quarter of 2018 when the analysis will be complete.
The provision for income taxes was $15,575,000$3,963,000 in the first ninethree months of 20182019 and $10,550,000$3,861,000 in the first ninethree months of 2017.2018. The effective tax rate of 27%26% in the first ninethree months of 20182019 was higher than the Company's 2018 statutory tax rate of 21% primarily due to nondeductible expenses, the global intangible low-taxed incomedistribution of the Company’s worldwide earnings, state taxes, and tax expense associated with the Global Intangible Low-Taxed Income (GILTI) provisions of the Tax Cuts and Jobs Act of 2017 (2017 Tax Act, the distribution of the Company's worldwide earnings, the cost of repatriating the earnings of certain foreign subsidiaries, and a change in estimate to the federal and state provisional net income tax expense initially recorded in 2017 for the 2017 Tax Act.Act). This incremental tax expense was offset in part by a decrease in tax related to the reversal of tax reserves associated with uncertain tax positions and the net excess income tax benefits from stock-based compensation arrangements. The effective tax rate of 26% in the first ninethree months of 20172018 was lowerhigher than the Company's 2017 statutory tax rate of 35%21% primarily due to a true-up to the federal provisional net income tax expense initially recorded in 2017 for the 2017 Tax Act, the U.S. tax cost of foreign operations, including the GILTI provisions of the 2017 Tax Act, and the distribution of the Company's worldwide earnings andearnings. This incremental tax expense was offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements, offset in part by an increase inthe reversal of tax reserves associated with uncertain tax positions, and a favorable impact to state taxes primarily related to non-deductible expenses and unrecognizedthe true-up to the provisional net income tax benefits.
The Company has elected to accountexpense initially recorded in 2017 for GILTI as a current period expense when incurred (the period cost method). Because of the complexity of the GILTI tax rules and the lack of legislative guidance, the Company continues to evaluate the
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. Provision for Income Taxes (continued)
provisions of the 2017 Tax Act and the application of ASC 740, Income Taxes. The final impact on the Company from the 2017 Tax Act’s GILTI tax legislation may differ from the estimate calculated by the Company. Such differences could be material, due to, among other things, changes in interpretations of the 2017 Tax Act, future legislative action to address questions that arise because of the 2017 Tax Act, changes in accounting standards for income taxes or related interpretations in response to the 2017 Tax Act, or any updates or changes to estimates the Company has utilized to calculate the GILTI inclusion.Act.
5. Long-Term Obligations
Long-term obligations are as follows:
| | | | September 29, 2018 | | December 30, 2017 | | March 30, 2019 | | December 29, 2018 |
(In thousands) | | |
Revolving Credit Facility, due 2022 | | $ | 168,468 |
| | $ | 237,011 |
| |
Commercial Real Estate Loan, due 2028 | | 20,738 |
| | — |
| |
Obligations Under Capital Lease, due 2018 to 2022 | | 4,277 |
| | 4,633 |
| |
Other Borrowings, due 2018 to 2023 | | 286 |
| | 436 |
| |
Revolving Credit Facility, due 2023 | | | $ | 324,720 |
| | $ | 141,106 |
|
Commercial Real Estate Loan, due 2019 to 2028 | | | 20,213 |
| | 20,475 |
|
Senior Promissory Notes, due 2023 to 2028 | | | 10,000 |
| | 10,000 |
|
Finance Leases, due 2019 to 2024 | | | 1,921 |
| | — |
|
Other Borrowings, due 2019 to 2023 | | | 4,206 |
| | 4,388 |
|
Unamortized Debt Issuance Costs | | (154 | ) | | — |
| | (143 | ) | | (148 | ) |
Total | | 193,615 |
| | 242,080 |
| | 360,917 |
| | 175,821 |
|
Less: Current Maturities of Long-Term Obligations | | (1,686 | ) | | (696 | ) | | (2,631 | ) | | (1,668 | ) |
Long-Term Obligations | | $ | 191,929 |
| | $ | 241,384 |
| | $ | 358,286 |
| | $ | 174,153 |
|
See Note 1011 for the fair value information related to the Company's long-term obligations.
Revolving Credit Facility
In 2017,2018, the Company entered into an Amendeda second amendment (Second Amendment) to its existing amended and Restated Credit Agreement, as amended (the 2017 Credit Agreement), which is arestated five-year, unsecured multi-currency revolving credit facility, indated as of March 1, 2017 (as amended, the aggregate principal amountCredit Agreement). Pursuant to the Second Amendment, the Company has a borrowing capacity of up to $300,000,000. The 2017 Credit Agreement also includes$400,000,000, with an uncommitted unsecured incremental borrowing facility of up to an additional $100,000,000. The principal on any borrowings is due on March 1, 2022. Borrowing may be denominated in U.S. dollars or certain foreign currencies as defined in the 2017$150,000,000 under its Credit Agreement.Agreement, and a maturity date of December 14, 2023. Interest on any loansborrowings outstanding accrues and generally is payable quarterly in arrears and is 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, N.A., and (c) the thirty-day London Inter-Bank Offered Rate (LIBOR) rate, as defined, plus 0.50%; or (ii) the LIBOR rate (with a zero percent floor), as defined, plus an applicable margin of 1% to 2%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 and debt as defined,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 and debt 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, as amended by the 2017Second Amendment, the 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 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 29, 2018, 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.Company. In addition, one of the Company'sCompany’s foreign subsidiaries entered into a separate guarantee agreement limited to certain obligations of two foreign subsidiary borrowers.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
5. Long-Term Obligations (continued)
As of September 29, 2018,March 30, 2019, the outstanding balance under the 2017 Credit Agreement was $168,468,000, including $43,687,000$324,720,000, and included $39,863,000 of Canadian dollar-denominated borrowings and $33,781,000$15,857,000 of euro-denominated borrowings. As of September 29, 2018,March 30, 2019, the Company had $131,156,000$75,344,000 of borrowing capacity available under its 2017 Credit Agreement, which was calculated by translating its foreign-denominated borrowings using borrowing date foreign exchange rates.
See Note 10, Derivatives, under the heading Interest Rate Swap Agreements, for information relating to the swap agreements used to hedge the Company’s exposure to movements in the three-month LIBOR rate on its U.S. dollar-denominated debt borrowed under the Credit Agreement.
The weighted average interest rate for the revolving credit facilityoutstanding balance under the Credit Agreement was 3.07%3.64% as of September 29, 2018.March 30, 2019.
Commercial Real Estate Loan
In July 2018, the Company and certain domestic subsidiaries borrowed $21,000,000 under a promissory note (Real Estate Loan) which is repayable in quarterly principal installments of $262,500 over a ten-year period with the remaining principal balance of $10,500,000 due upon maturity. Interest accrues and is payable quarterly in arrears at a fixed rate of 4.45% per annum. The Company is not permitted to prepay any amount in the first twelve months of the term of the Real Estate Loan.before July 6, 2019. Any voluntary prepayments are subject to a 2% prepayment fee if paid in the second twelve months of the term of the Real Estate Loan,following July 6, 2019 and are subject to a 1% prepayment fee if paid in the third twelve months of the term of the Real Estate Loan.following July 6, 2020. Thereafter, no prepayment fee will be applied to voluntary prepayment by the Company.
The Real Estate Loan is secured by real estate and related personal property of the Company and certain of its domestic subsidiaries, pursuant to the mortgage and security agreements dated July 6, 2018 (Mortgage and Security Agreements). The obligations of the Company under the Real Estate Loan may be accelerated upon the occurrence of an event of default under the Real Estate Loan and the Mortgage and Security Agreements, which includes customary events of default including, without limitation, payment defaults, defaults in the performancefor financings of covenants and obligations, the inaccuracy of representations or warranties, bankruptcy- and insolvency-related defaults, liens on the properties or collateral and uninsured judgments.this type. In addition, the occurrence of an event ofa default under the 2017 Credit Agreement or any successor credit facility would be an event of default under the Real Estate Loan. The Company used the proceeds from the Real Estate Loan to repay a portion of its U.S. dollar-denominated debt under the 2017 Credit Agreement.
During the third quarter of 2018, the Company incurred $158,000 of debt issuance costs related to the Real Estate Loan. The effective interest rate for the Real Estate Loan, including amortization of debt issuance costs, was 4.55%4.60% as of September 29, 2018.March 30, 2019.
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 a minimum amount of $1,000,000, or the foreign currency equivalent thereof, if applicable) in accordance with the Note Purchase Agreement. The obligations of 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.
In accordance with the Note Purchase Agreement, the Company may also issue additional senior promissory notes (together with the Initial Notes, the Senior Promissory Notes) up to an additional $115,000,000 until the earlier of December 14, 2021 or the thirtieth day after written notice to terminate the issuance and sale of additional notes pursuant to the Note Purchase Agreement. The Senior Promissory 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 Compliance
As of March 30, 2019, the Company was in compliance with the covenants related to its debt obligations.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
5. Long-Term Obligations Under Capital Lease(continued)
Finance Leases
The Company's obligations under capitalfinance leases primarily relate to contracts for its fleet of vehicles. See Note 8 for further information relating to the Company's finance leases.
Other Borrowings
Other borrowings include a sale-leaseback financing arrangement for a manufacturing facility in Germany. Under this arrangement, the quarterly lease payment includes principal, interest, and a payment to the landlord toward a loan receivable. The interest rate on the outstanding obligation is 1.79%. The secured loan receivable, which is included in other assets in the accompanying condensed consolidated balance sheet, was $645,000$736,000 at September 29, 2018.March 30, 2019. The lease arrangement provides for a fixed price purchase option, net of the projected loan receivable, of $1,545,000$1,494,000 at the end of the lease term in 2022. If the Company does not exercise the purchase option for the facility, the Company will receive cash from the landlord to settle the loan receivable. As of September 29, 2018, $4,205,000March 30, 2019, $3,941,000 was outstanding under this capital lease obligation and $72,000 was outstanding under other capital lease obligations.obligation.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. Stock-Based Compensation
The Company recognized stock-based compensation expense of $1,553,000 in the first three months of 2019 and $1,464,000 in the first three months of 2018 within 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 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 actual forfeitures recorded when they occur. For performance-based RSUs, compensation expense is recognized ratably over the requisite service period for each separately-vesting portion of the award based on the grant date fair value, net of actual forfeitures recorded when they occur, and remeasured each reporting period until the total number of RSUs to be issued is known. The Company recognized stock-based compensation expense of $1,736,000 in the third quarter of 2018, $1,547,000 in the third quarter of 2017, $5,346,000 in the first nine months of 2018 and $4,283,000 in the first nine months of 2017 within selling, general, and administrative (SG&A) expenses in the accompanying condensed consolidated statement of income. Unrecognized compensation expense related to stock-based compensation totaled approximately $6,698,000$9,388,000 at September 29, 2018,March 30, 2019, and will be recognized over a weighted average period of 1.72.0 years.
On March 4, 2019, the Company granted to certain of its officers performance-based RSUs, which represented, in aggregate, the right to receive 27,422 shares (the target RSU amount), with an aggregate grant date fair value of $2,364,000. The RSUs are subject to adjustment based on the achievement of the performance measure selected for the 2019 fiscal year, which is a specified target for adjusted EBITDA generated from operations for the 2019 fiscal year. The RSUs are adjusted by comparing the actual adjusted EBITDA for the performance period to the target adjusted EBITDA. Actual adjusted EBITDA between 50% and 100% of the target adjusted EBITDA results in an adjustment of 50% to 100% of the RSU amount. Actual adjusted EBITDA between 100% and 115% of the target adjusted EBITDA results in an adjustment using a straight-line linear scale between 100% and 150% of the RSU amount. Actual adjusted EBITDA in excess of 115% results in an adjustment capped at 150% of the RSU amount. If actual adjusted EBITDA is below 50% of the target adjusted EBITDA for the 2019 fiscal year, these performance-based RSUs will be forfeited. In the first three months of 2019, the Company recognized compensation expense based on the probable number of performance-based RSUs expected to vest, which was 100% of the target RSU amount. Following the adjustment, the performance-based RSUs will be subject to additional time-based vesting, and will vest in three equal annual installments on March 10 of 2020, 2021, and 2022, provided that the officer is employed by the Company on the applicable vesting dates. On March 4, 2019, the Company also granted time-based RSUs representing 39,206 shares to its officers and employees with an aggregate grant date fair value of $3,385,000. These time-based RSUs generally vest in three equal annual installments on March 10 of 2020, 2021, and 2022, provided that a recipient remains employed by the Company on the applicable vesting dates.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. Retirement Benefit Plans
Effective at the beginning of fiscal 2018, theThe Company retrospectively adopted ASU No. 2017-07. See Recently Adopted Accounting Pronouncements in Note 1 for further discussion. As a result, onlyincludes the service cost component of net periodic benefit cost is included in operating income. Allincome and all other components are included in other expense, net in the accompanying condensed consolidated statement of income.
The components of net periodic benefit cost are as follows:
| | | | Three Months Ended September 29, 2018 | | Three Months Ended September 30, 2017 | | Three Months Ended March 30, 2019 | | Three Months Ended March 31, 2018 |
(In thousands, except percentages) | | U.S. Pension | | Non-U.S. Pension | | Other Post-Retirement | | U.S. Pension | | Non-U.S. Pension | | Other Post-Retirement | | U.S. Pension | | Non-U.S. Pension | | Other Post-Retirement | | U.S. Pension | | Non-U.S. Pension | | Other Post-Retirement |
Service Cost | | $ | 175 |
| | $ | 35 |
| | $ | 53 |
| | $ | 171 |
| | $ | 35 |
| | $ | 43 |
| | $ | — |
| | $ | 43 |
| | $ | 1 |
| | $ | 175 |
| | $ | 36 |
| | $ | 53 |
|
Interest Cost | | 298 |
| | 30 |
| | 43 |
| | 307 |
| | 28 |
| | 43 |
| | 283 |
| | 29 |
| | 38 |
| | 298 |
| | 30 |
| | 43 |
|
Expected Return on Plan Assets | | (322 | ) | | (11 | ) | | (1 | ) | | (331 | ) | | (10 | ) | | (1 | ) | | (249 | ) | | (17 | ) | | (1 | ) | | (322 | ) | | (11 | ) | | (1 | ) |
Recognized Net Actuarial Loss | | 135 |
| | 15 |
| | 34 |
| | 110 |
| | 10 |
| | 22 |
| | 8 |
| | 5 |
| | 3 |
| | 135 |
| | 16 |
| | 34 |
|
Amortization of Prior Service Cost | | — |
| | 2 |
| | 22 |
| | 14 |
| | 2 |
| | 22 |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 22 |
|
| | $ | 286 |
| | $ | 71 |
| | $ | 151 |
| | $ | 271 |
| | $ | 65 |
| | $ | 129 |
| | $ | 42 |
| | $ | 60 |
| | $ | 41 |
| | $ | 286 |
| | $ | 73 |
| | $ | 151 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
The weighted average assumptions used to determine net periodic benefit cost are as follows: | The weighted average assumptions used to determine net periodic benefit cost are as follows: | | | | |
| The weighted average assumptions used to determine net periodic benefit cost are as follows: | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Discount Rate | | 3.51 | % | | 3.86 | % | | 3.64 | % | | 4.03 | % | | 3.42 | % | | 4.12 | % | | 4.10 | % | | 2.80 | % | | 4.44 | % | | 3.51 | % | | 3.80 | % | | 3.65 | % |
Expected Long-Term Return on Plan Assets | | 4.50 | % | | 7.43 | % | | 7.43 | % | | 5.00 | % | | 7.72 | % | | 7.72 | % | | 4.10 | % | | 9.22 | % | | 9.22 | % | | 4.50 | % | | 7.43 | % | | 7.43 | % |
Rate of Compensation Increase | | 3.00 | % | | 3.72 | % | | 3.07 | % | | 3.00 | % | | 3.41 | % | | 3.08 | % | | — | % | | 2.98 | % | | 5.57 | % | | 3.00 | % | | 3.69 | % | | 3.07 | % |
In 2018, the Company's board of directors and its compensation committee approved amendments to freeze and terminate the Company's U.S. pension plan (Retirement Plan) and its restoration plan (Restoration Plan) as of December 29, 2018. Procedures for plan settlement and distribution of the Retirement Plan assets will be initiated once the plan termination satisfies certain regulatory requirements, which is expected to occur in late 2019 or early 2020. At the settlement date, the Company will recognize a loss based on the difference between the unrecognized actuarial loss, unfunded benefit obligation, and any additional cash required to be paid. Participants in the Retirement Plan will have the option to receive either a lump sum payment or an annuity. Retirees will continue to receive payments pursuant to their current annuity elections. The Company will settle liabilities under the Restoration Plan by paying a lump sum to plan participants between twelve and twenty-four months following the termination date. The Company expects to settle the liabilities under the Restoration Plan in early 2020. The Company has included both the Retirement Plan liability of $1,020,000 and the Restoration Plan liability of $2,300,000 at March 30, 2019 in accrued payroll and employee benefits in the accompanying condensed consolidated balance sheet. The Company does not plan to make any material cash contributions to its other pension and post-retirement plans in 2019.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
8. Leases
Under ASC 842, Leases, the Company determines if an arrangement is a lease obligation at inception of the contract. The Company enters into operating and finance lease commitments primarily for its manufacturing and office space, fleet of vehicles, and equipment leases that expire on various dates over the next 15 years, some of which include one or more options to extend the lease for up to 5 years. In addition, the Company leases land associated with certain of its buildings in Canada and China, under long-term leases expiring on various dates ranging from 2032 to 2062, one of which includes an assumed option to extend the lease for up to 10 years.
The Company's operating lease ROU assets and operating lease liabilities with contract terms greater than 12 months are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. In determining the present value of future lease payments, the Company utilizes either the rate implicit in the lease if that rate is readily determinable or the Company’s incremental secured borrowing rate commensurate with the term of the underlying lease. In addition, the calculation may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company recognizes its operating lease expense for lease payments on a straight-line basis over the lease term. Variable lease costs are not included in fixed lease payments and as a result, are excluded from the measurement of the ROU assets and lease liabilities. The Company expenses all variable lease costs as incurred, which were not material for the quarter ended March 30, 2019.
The Company's lease agreements often contain lease and non-lease components. For real estate and equipment leases, the Company accounts for the lease and non-lease components as a single lease component. For vehicle leases, the Company does not combine lease and non-lease components.
The components of lease expense are as follows:
|
| | | | |
| | Three Months Ended |
(In thousands) | | March 30, 2019 |
Operating Lease Cost | | $ | 1,370 |
|
| | |
Short-Term Lease Cost | | 185 |
|
| | |
Finance Lease Cost: | | |
ROU asset amortization | | 293 |
|
Interest on lease liabilities | | 19 |
|
Total Finance Lease Cost | | 312 |
|
| | |
Total Lease Costs | | $ | 1,867 |
|
Supplemental cash flow information related to leases is as follows:
|
| | | | |
| | Three Months Ended |
(In thousands) | | March 30, 2019 |
Cash Paid for Amounts Included in the Measurement of Lease Liabilities: | | |
Operating cash flows from operating leases | | $ | 1,391 |
|
Operating cash flows from finance leases | | $ | 19 |
|
Financing cash flows from finance leases | | $ | 274 |
|
| | |
ROU Assets Obtained in Exchange for Lease Obligations (a): | | |
Operating leases | | $ | 27,044 |
|
Finance leases | | $ | 2,161 |
|
| |
(a) | Includes additions related to the transition adjustment for the adoption ASC 842. The post-adoption additions of operating leases were $11,726,000, of which $10,994,000 related to ROU assets obtained as part of our acquisition of SMH. The post-adoption additions of finance leases were not material. |
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. Retirement Benefit Plans8. Leases (continued)
Supplemental balance sheet information related to leases is as follows:
|
| | | | | | |
(In thousands, except lease term and discount rate) | | Balance Sheet Line Item | | March 30, 2019 |
Operating Leases: | | | | |
ROU assets | | Other assets | | $ | 29,348 |
|
| | | | |
Short-term liabilities | | Other current liabilities | | $ | 4,188 |
|
Long-term liabilities | | Other long-term liabilities | | 26,607 |
|
Total operating lease liabilities | | | | $ | 30,795 |
|
| | | | |
Finance Leases: | | | | |
ROU assets, at cost | | Property, plant, and equipment, at cost | | $ | 3,288 |
|
ROU assets accumulated amortization | | Less: accumulated depreciation and amortization | | (1,219 | ) |
ROU assets, net | | Property, plant, and equipment, net | | $ | 2,069 |
|
| | | | |
Short-term obligations | | Current maturities of long-term obligations | | $ | 978 |
|
Long-term obligations | | Long-term obligations | | 943 |
|
Total finance lease liabilities | | | | $ | 1,921 |
|
| | | | |
Weighted Average Remaining Lease Term: | | | | |
Operating leases | | | | 10.6 years |
|
Finance leases | | | | 2.2 years |
|
| | | | |
Weighted Average Discount Rate: | | | | |
Operating leases | | | | 3.94 | % |
Finance leases | | | | 4.13 | % |
As of March 30, 2019, future lease payments for lease liabilities are as follows:
|
| | | | | | | | |
| | Operating | | Finance |
(In thousands) | | Leases | | Leases |
2019 | | $ | 4,038 |
| | $ | 803 |
|
2020 | | 4,876 |
| | 806 |
|
2021 | | 4,079 |
| | 347 |
|
2022 | | 3,416 |
| | 37 |
|
2023 | | 3,065 |
| | 14 |
|
Thereafter | | 18,657 |
| | — |
|
Total Future Lease Payments | | 38,131 |
| | 2,007 |
|
Less: Imputed Interest | | (7,336 | ) | | (86 | ) |
Present Value of Lease Payments | | $ | 30,795 |
| | $ | 1,921 |
|
As of March 30, 2019, the Company has no significant operating and finance leases that had not yet commenced.
As previously disclosed in the Company's 2018 Annual Report on Form 10-K and under the previous lease accounting standard, future minimum lease payments for noncancelable operating leases were as follows:
|
| | | | |
(In thousands) | | December 29, 2018 |
2019 | | $ | 4,507 |
|
2020 | | 3,275 |
|
2021 | | 2,230 |
|
2022 | | 1,579 |
|
2023 | | 987 |
|
Thereafter | | 1,713 |
|
Total Future Minimum Lease Payments | | $ | 14,291 |
|
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 29, 2018 | | Nine Months Ended September 30, 2017 |
(In thousands, except percentages) | | U.S. Pension | | Non-U.S. Pension | | Other Post-Retirement | | U.S. Pension | | Non-U.S. Pension | | Other Post-Retirement |
Service Cost | | $ | 525 |
| | $ | 106 |
| | $ | 159 |
| | $ | 514 |
| | $ | 100 |
| | $ | 131 |
|
Interest Cost | | 894 |
| | 90 |
| | 129 |
| | 923 |
| | 78 |
| | 127 |
|
Expected Return on Plan Assets | | (966 | ) | | (33 | ) | | (3 | ) | | (994 | ) | | (27 | ) | | (1 | ) |
Recognized Net Actuarial Loss | | 405 |
| | 46 |
| | 102 |
| | 331 |
| | 28 |
| | 62 |
|
Amortization of Prior Service Cost | | — |
| | 6 |
| | 66 |
| | 40 |
| | 4 |
| | 66 |
|
| | $ | 858 |
| | $ | 215 |
| | $ | 453 |
| | $ | 814 |
| | $ | 183 |
| | $ | 385 |
|
| | | | | | | | | | | | |
The weighted average assumptions used to determine net periodic benefit cost are as follows: | | | | |
|
| | | | | | | | | | | | |
Discount Rate | | 3.51 | % | | 3.82 | % | | 3.64 | % | | 4.03 | % | | 3.43 | % | | 4.12 | % |
Expected Long-Term Return on Plan Assets | | 4.50 | % | | 7.43 | % | | 7.43 | % | | 5.00 | % | | 7.72 | % | | 7.72 | % |
Rate of Compensation Increase | | 3.00 | % | | 3.70 | % | | 3.07 | % | | 3.00 | % | | 3.42 | % | | 3.07 | % |
On October 29, 2018, the Company's board of directors and its compensation committee approved amendments to freeze and terminate the U.S. pension plan and a restoration plan (included in "Other Post-Retirement" in the tables above) as of December 29, 2018. The Company estimates it will incur a curtailment loss in the fourth quarter of 2018 of approximately $1,400,000, which was calculated using actuarial assumptions as of September 29, 2018.
8.9. 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.
Changes in each component of AOCI,accumulated other comprehensive items (AOCI), net of tax, are as follows:
|
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Foreign Currency Translation Adjustment | | Unrecognized Prior Service Cost on Retirement Benefit Plans | | Net Actuarial Loss on Retirement Benefit Plans | | Deferred Gain on Cash Flow Hedges | | Total |
Balance at December 30, 2017 | | $ | (17,501 | ) | | $ | (319 | ) | | $ | (8,974 | ) | | $ | 79 |
| | $ | (26,715 | ) |
Other comprehensive (loss) income before reclassifications | | (11,504 | ) | | 1 |
| | — |
| | 34 |
| | (11,469 | ) |
Reclassifications from AOCI | | — |
| | 54 |
| | 417 |
| | (14 | ) | | 457 |
|
Net current period other comprehensive (loss) income | | (11,504 | ) | | 55 |
| | 417 |
| | 20 |
| | (11,012 | ) |
Balance at September 29, 2018 | | $ | (29,005 | ) | | $ | (264 | ) | | $ | (8,557 | ) | | $ | 99 |
| | $ | (37,727 | ) |
| | | | | | | | | | |
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
8. Accumulated Other Comprehensive Items (continued)
|
| | | | | | | | | | | | | | | | |
(In thousands) | | Foreign Currency Translation Adjustment | | Pension and Other Post-Retirement Benefit Liability Adjustments | | Deferred Loss on Cash Flow Hedges | | Total |
Balance at December 29, 2018 | | $ | (34,804 | ) | | $ | (4,375 | ) | | $ | (197 | ) | | $ | (39,376 | ) |
Other comprehensive (loss) income before reclassifications | | (432 | ) | | 9 |
| | (222 | ) | | (645 | ) |
Reclassifications from AOCI | | — |
| | 12 |
| | (15 | ) | | (3 | ) |
Net current period other comprehensive (loss) income | | (432 | ) | | 21 |
| | (237 | ) | | (648 | ) |
Balance at March 30, 2019 | | $ | (35,236 | ) | | $ | (4,354 | ) | | $ | (434 | ) | | $ | (40,024 | ) |
| | | | | | | | |
Amounts reclassified from AOCI are as follows:
| | | | Three Months Ended | | Nine Months Ended | | | Three Months Ended | |
(In thousands) | | September 29, 2018 | | September 30, 2017 | | September 29, 2018 | | September 30, 2017 | | Statement of Income Line Item | | March 30, 2019 | | March 31, 2018 | | Statement of Income Line Item |
Retirement Benefit Plans (a) | Retirement Benefit Plans (a) | | | | | | | Retirement Benefit Plans (a) | | |
Recognized net actuarial loss | | $ | (184 | ) | | $ | (142 | ) | | $ | (553 | ) | | $ | (421 | ) | | Other expense, net | |
Amortization of net actuarial loss | | | $ | (16 | ) | | $ | (185 | ) | | Other expense, net |
Amortization of prior service cost | | (24 | ) | | (38 | ) | | (72 | ) | | (110 | ) | | Other expense, net | | — |
| | (24 | ) | | Other expense, net |
Total expense before income taxes | | (208 | ) | | (180 | ) | | (625 | ) | | (531 | ) | | | | (16 | ) | | (209 | ) | | |
Income tax benefit | | 51 |
| | 63 |
| | 154 |
| | 186 |
| | Provision for income taxes | | 4 |
| | 52 |
| | Provision for income taxes |
| | (157 | ) | | (117 | ) | | (471 | ) | | (345 | ) | | | | (12 | ) | | (157 | ) | | |
Cash Flow Hedges (b) | | |
| | |
| | |
| | |
| | | | |
| | |
| | |
Interest rate swap agreements | | 17 |
| | (8 | ) | | (5 | ) | | (26 | ) | | Interest expense | | 20 |
| | (5 | ) | | Interest expense |
Forward currency-exchange contracts | | — |
| | (26 | ) | | 24 |
| | (37 | ) | | Cost of revenues | |
Total income (expense) before income taxes | | 17 |
| | (34 | ) | | 19 |
| | (63 | ) | | | | 20 |
| | (5 | ) | | |
Income tax (provision) benefit | | (4 | ) | | 11 |
| | (5 | ) | | 22 |
| | Provision for income taxes | | (5 | ) | | 1 |
| | Provision for income taxes |
| | 13 |
| | (23 | ) | | 14 |
| | (41 | ) | | | | 15 |
| | (4 | ) | | |
Total Reclassifications | | $ | (144 | ) | | $ | (140 | ) | | $ | (457 | ) | | $ | (386 | ) | | | | $ | 3 |
| | $ | (161 | ) | | |
| |
(a) | Included in the computation of net periodic benefit cost. See Note 7 for additional information. |
| |
(b) | See Note 910 for additional information. |
9.KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
10. 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 makes a determination as to whether the transaction is deemed to be a hedge for accounting purposes. If a derivative contract is deemed 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.
ASC 815, Derivatives and Hedging, requires that all derivatives be recognized on the 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 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.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
9. Derivatives (continued)
Interest Rate Swap Agreements
In May 2018, the Company entered into an interest rate swap agreement (2018 Swap Agreement) which has a $15,000,000 notional value and expires on June 30, 2023. In 2015, the Company also entered into an interest rate swap agreement (2015 Swap Agreement) which has a $10,000,000 notional value and expires on March 27, 2020. The swap agreements hedge the Company’s exposure to movements in the three-month LIBOR rate on U.S. dollar-denominated debt. On a quarterly basis, the Company receives a three-month LIBOR rate and pays a fixed rate of interest of 3.15% plus an applicable margin as defined in the revolving credit facilityCredit Agreement on the 2018 Swap Agreement and 1.50% plus an applicable margin as defined in the revolving credit facilityCredit Agreement on the 2015 Swap Agreement. The 2018 Swap Agreement is subject to a zero percent floor on the three-month LIBOR rate. The interest rate swap agreements are designated as cash flow hedges and, accordingly, unrecognized gains and losses are recorded to AOCI, net of tax.
The Company has structured its interest rate swap agreements 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 interest rate swap agreements is remote based on the Company's financial position and the creditworthiness of the financial institution that issued those agreements.
The counterparty to the interest rate swap agreements could demand an early termination of those agreements if the Company were 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 if the Company were to be 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, 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 29, 2018, the Company was in compliance with these covenants.(See Note 5). The fair values of the interest rate swap agreements represent the estimated amounts that the Company would receive from or pay to the counterparty in the event of early termination.
Forward Currency-Exchange Contracts
The Company uses forward currency-exchange contracts primarily 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 typically have maturities of twelve months or less.
Forward currency-exchange contracts that hedge forecasted accounts receivable or accounts payable are designated as cash flow hedges and unrecognized gains and losses are recorded to AOCI, net of tax. For 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 values of forward currency-exchange contracts that are not designated as hedges are recorded currently in earnings. The Company recognized within SG&A expenses in the accompanying condensed consolidated statement of income losses of $67,000 in the third quarter of 2018, gains of $109,000 in the third quarter of 2017, losses of $40,000$37,000 in the first ninethree months of 20182019 and lossesgains of $1,384,000$13,000 in the first ninethree months of 20172018 associated with forward currency-exchange contracts that were not designated as hedges. Management believes that any credit risk associated with forward currency-exchange contracts is remote based on the Company's financial position and the creditworthiness of the financial institutions issuing the contracts.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
9.10. Derivatives (continued)
The following table summarizes the fair value of the Company's derivative instruments in the accompanying condensed consolidated balance sheet:
| | | | | | September 29, 2018 | | December 30, 2017 | | | | March 30, 2019 | | December 29, 2018 |
| | Balance Sheet Location | | Asset (Liability) (a) | | Notional Amount (b) | | Asset (Liability) (a) | | Notional Amount | | Balance Sheet Location | | Asset (Liability) (a) | | Notional Amount (b) | | Asset (Liability) (a) | | Notional Amount |
(In thousands) | | |
Derivatives Designated as Hedging Instruments: | Derivatives Designated as Hedging Instruments: | | | | | | | | | Derivatives Designated as Hedging Instruments: | | | | | | | | |
Derivatives in an Asset Position: | | | | | | | | | | | | | | | | | | | | |
2015 Swap Agreement | | | Other Long-Term Assets | | $ | 99 |
| | $ | 10,000 |
| | $ | 148 |
| | $ | 10,000 |
|
Forward currency-exchange contract | | Other Long-Term Assets | | $ | 32 |
| | $ | 842 |
| | $ | — |
| | $ | — |
| | Other Long-Term Assets | | $ | — |
| | $ | — |
| | $ | 11 |
| | $ | 842 |
|
2015 Swap Agreement | | Other Long-Term Assets | | $ | 202 |
| | $ | 10,000 |
| | $ | 126 |
| | $ | 10,000 |
| |
Derivatives in a Liability Position: | | | | | | | | | | | | | | | | |
Forward currency-exchange contracts | | Other Current Liabilities | | $ | (12 | ) | | $ | 3,788 |
| | $ | — |
| | $ | — |
| |
Forward currency-exchange contract | | | Other Current Liabilities | | $ | (129 | ) | | $ | 2,946 |
| | $ | (50 | ) | | $ | 2,946 |
|
2018 Swap Agreement | | Other Long-Term Liabilities | | $ | (87 | ) | | $ | 15,000 |
| | $ | — |
| | $ | — |
| | Other Long-Term Liabilities | | $ | (540 | ) | | $ | 15,000 |
| | $ | (352 | ) | | $ | 15,000 |
|
Forward currency-exchange contract | | | Other Long-Term Liabilities | | $ | (15 | ) | | $ | 842 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | |
Derivatives Not Designated as Hedging Instruments: | Derivatives Not Designated as Hedging Instruments: | | |
| | |
| | |
| | |
| Derivatives Not Designated as Hedging Instruments: | | |
| | |
| | |
| | |
|
Derivatives in an Asset Position: | | | | |
| | |
| | |
| | |
| | | | |
| | |
| | |
| | |
|
Forward currency-exchange contracts | | Other Current Assets | | $ | — |
| | $ | — |
| | $ | 17 |
| | $ | 1,244 |
| | Other Current Assets | | $ | — |
| | $ | — |
| | $ | 9 |
| | $ | 1,192 |
|
Derivatives in a Liability Position: | | | | | | | | | | | | | | | | |
Forward currency-exchange contracts | | Other Current Liabilities | | $ | (36 | ) | | $ | 1,402 |
| | $ | (16 | ) | | $ | 2,049 |
| | Other Current Liabilities | | $ | (21 | ) | | $ | 1,082 |
| | $ | (31 | ) | | $ | 1,384 |
|
| |
(a) | See Note 1011 for the fair value measurements relating to these financial instruments. |
| |
(b) | The total 20182019 notional amounts are indicative of the level of the Company's recurring derivative activity. |
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 29, 2018:March 30, 2019:
|
| | | | | | | | | | | | |
(In thousands) | | Interest Rate Swap Agreements | | Forward Currency- Exchange Contracts | | Total |
Unrealized Gain, Net of Tax, at December 30, 2017 | | $ | 79 |
| | $ | — |
| | $ | 79 |
|
Loss (gain) reclassified to earnings (a) | | 4 |
| | (18 | ) | | (14 | ) |
Gain recognized in AOCI | | 3 |
| | 31 |
| | 34 |
|
Unrealized Gain, Net of Tax, at September 29, 2018 | | $ | 86 |
| | $ | 13 |
| | $ | 99 |
|
|
| | | | | | | | | | | | |
(In thousands) | | Interest Rate Swap Agreements | | Forward Currency- Exchange Contracts | | Total |
Unrealized Loss, Net of Tax, at December 29, 2018 | | $ | (170 | ) | | $ | (27 | ) | | $ | (197 | ) |
Gain reclassified to earnings (a) | | (15 | ) | | — |
| | (15 | ) |
Loss recognized in AOCI | | (150 | ) | | (72 | ) | | (222 | ) |
Unrealized Loss, Net of Tax, at March 30, 2019 | | $ | (335 | ) | | $ | (99 | ) | | $ | (434 | ) |
(a) See Note 89 for the income statement classification.
As of September 29, 2018,March 30, 2019, the Company expects to reclassify $37,000losses of $87,000 from AOCI to earnings over the next twelve months based on the estimated cash flows of the interest rate swap agreements and the maturity dates of the forward currency- exchangecurrency-exchange contracts.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
10.11. 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—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:
| | (In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
September 29, 2018 | | | | | | | | | |
March 30, 2019 | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Money market funds and time deposits | | $ | 4,344 |
| | $ | — |
| | $ | — |
| | $ | 4,344 |
| | $ | 9,124 |
| | $ | — |
| | $ | — |
| | $ | 9,124 |
|
Banker's acceptance drafts (a) | | | $ | — |
| | $ | 7,772 |
| | $ | — |
| | $ | 7,772 |
|
2015 Swap Agreement | | $ | — |
| | $ | 202 |
| | $ | — |
| | $ | 202 |
| | $ | — |
| | $ | 99 |
| | $ | — |
| | $ | 99 |
|
Banker's acceptance drafts (a) | | $ | — |
| | $ | 14,193 |
| | $ | — |
| | $ | 14,193 |
| |
Forward currency-exchange contract | | $ | — |
| | $ | 32 |
| | $ | — |
| | $ | 32 |
| |
| | | | | | | | | | | | | | | | |
Liabilities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
2018 Swap Agreement | | | $ | — |
| | $ | 540 |
| | $ | — |
| | $ | 540 |
|
Forward currency-exchange contracts | | $ | — |
| | $ | 48 |
| | $ | — |
| | $ | 48 |
| | $ | — |
| | $ | 165 |
| | $ | — |
| | $ | 165 |
|
2018 Swap Agreement | | $ | — |
| | $ | 87 |
| | $ | — |
| | $ | 87 |
| |
| | December 30, 2017 | | | | | | | | | |
December 29, 2018 | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Money market funds and time deposits | | $ | 17,728 |
| | $ | — |
| | $ | — |
| | $ | 17,728 |
| | $ | 6,902 |
| | $ | — |
| | $ | — |
| | $ | 6,902 |
|
Banker's acceptance drafts (a) | | | $ | — |
| | $ | 7,976 |
| | $ | — |
| | $ | 7,976 |
|
2015 Swap Agreement | | | $ | — |
| | $ | 148 |
| | $ | — |
| | $ | 148 |
|
Forward currency-exchange contracts | | $ | — |
| | $ | 17 |
| | $ | — |
| | $ | 17 |
| | $ | — |
| | $ | 20 |
| | $ | — |
| | $ | 20 |
|
2015 Swap Agreement | | $ | — |
| | $ | 126 |
| | $ | — |
| | $ | 126 |
| |
Banker's acceptance drafts (a) | | $ | — |
| | $ | 15,960 |
| | $ | — |
| | $ | 15,960 |
| |
| | | | | | | | | | | | | | | | |
Liabilities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
2018 Swap Agreement | | | $ | — |
| | $ | 352 |
| | $ | — |
| | $ | 352 |
|
Forward currency-exchange contracts | | $ | — |
| | $ | 16 |
| | $ | — |
| | $ | 16 |
| | $ | — |
| | $ | 81 |
| | $ | — |
| | $ | 81 |
|
| |
(a) | Included in accounts receivable in the accompanying condensed consolidated balance sheet. |
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
10. 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 2018.2019. The Company's financial assets and liabilities carried at fair value are cash equivalents, banker's acceptance drafts derivative instruments used to hedge the Company's foreign currency and interest rate risks, variable rate debt, and capital lease obligations. The Company's cash equivalents are comprised of money market funds and bank depositscarried at face value which are highly liquid and readily tradable. These cash equivalents are valued using inputs observable in active markets for identical securities. The carrying value of banker's acceptance drafts approximates their fair value due to the short-term nature of the negotiable instrument. The fair values of the Company's forward currency-exchange contracts are based on quoted forward foreign exchange rates at the reporting date. The fair values of the Company's interest rate swap agreements are based on LIBOR yield curves at the reporting date. The forward currency-exchange contracts and interest rate swap agreements 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.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
11. Fair Value Measurements and Fair Value of Financial Instruments (continued)
The carrying value and fair value of the Company's debt obligations, excluding lease obligations and other borrowings, are as follows:
| | | | September 29, 2018 | | December 30, 2017 | | March 30, 2019 | | December 29, 2018 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
(In thousands) | | |
Debt Obligations: | | | | | | | | | | | | | | | | |
Revolving credit facility | | $ | 168,468 |
| | $ | 168,468 |
| | $ | 237,011 |
| | $ | 237,011 |
| | $ | 324,720 |
| | $ | 324,720 |
| | $ | 141,106 |
| | $ | 141,106 |
|
Commercial real estate loan | | 20,584 |
| | 20,288 |
| | — |
| | — |
| | 20,213 |
| | 20,711 |
| | 20,475 |
| | 20,575 |
|
Capital lease obligations | | 4,277 |
| | 4,277 |
| | 4,633 |
| | 4,633 |
| |
Other borrowings | | 286 |
| | 286 |
| | 436 |
| | 436 |
| |
Senior promissory notes | | | 10,000 |
| | 10,310 |
| | 10,000 |
| | 10,120 |
|
| | $ | 193,615 |
| | $ | 193,319 |
| | $ | 242,080 |
| | $ | 242,080 |
| | $ | 354,933 |
| | $ | 355,741 |
| | $ | 171,581 |
| | $ | 171,801 |
|
The carrying value of the Company's revolving credit facility approximates the fair value as the obligation bears variable rates of interest, which adjust quarterly based on prevailing market rates. The fair valuevalues of the commercial real estate loan wasand senior promissory notes are primarily calculated based on a quoted market rate,rates plus an applicable margin available to the Company at the end of the quarter,respective period ends, which represents arepresent Level 2 measurement. The carrying values of the Company's capital lease obligations and other borrowings approximate fair value as the stipulated interest rates are comparable to prevailing market rates for those obligations.measurements.
11.12. Business Segment Information
The Company has combined its operating entities into twothree reportable operating segments, Papermaking Systems, and Wood Processing Systems, and Material Handling Systems, and a separate product line, Fiber-based Products. In classifying operational entities intoProducts, as described below:
Papermaking Systems Segment – The Company develops, manufactures, and markets a particularrange of equipment and products for the global papermaking, paper recycling, recycling and waste management, and other process industries. The Company's Papermaking Systems segment consists of the following product lines: Stock-Preparation; Fluid-Handling; and Doctoring, Cleaning, & Filtration.
Wood Processing Systems Segment – The Company develops, manufactures, and markets stranders, debarkers, chippers, and logging machinery used in the harvesting and production of lumber and OSB. Through this segment, the Company has aggregated businesses with similar economic characteristics, productsalso provides refurbishment and services, production processes, customers, and methodsrepair of distribution.
The following table presents financial informationpulping equipment for the Company's reportable operating segments:pulp and paper industry.
Material Handling Systems Segment – The Company develops, manufactures, and markets material handling equipment and systems to various process industries, including mining, aggregates, food processing, packaging, and pulp and paper.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 29, | | September 30, | | September 29, | | September 30, |
(In thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Revenues: | | | | | | | | |
Papermaking Systems (a) | | $ | 126,770 |
| | $ | 111,135 |
| | $ | 350,811 |
| | $ | 295,416 |
|
Wood Processing Systems (b) | | 37,042 |
| | 39,714 |
| | 109,335 |
| | 61,050 |
|
Fiber-based Products | | 1,933 |
| | 1,945 |
| | 9,705 |
| | 9,427 |
|
| | $ | 165,745 |
| | $ | 152,794 |
| | $ | 469,851 |
| | $ | 365,893 |
|
| | | | | | | | |
Fiber-based Products business – The Company manufactures and sells biodegradable, absorbent granules derived from papermaking by-products for use primarily as carriers for agricultural, home lawn and garden, and professional lawn, turf and ornamental applications, as well as for oil and grease absorption.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
11.12. Business Segment Information (continued)
The following table presents financial information for the Company's reportable operating segments:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended |
| | September 29, | | September 30, | | September 29, | | September 30, | | March 30, | | March 31, |
(In thousands) | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 |
Revenues: | | | | | |
Stock-Preparation | | | $ | 52,048 |
| | $ | 45,483 |
|
Fluid-Handling | | | 32,754 |
| | 32,886 |
|
Doctoring, Cleaning, & Filtration | | | 28,390 |
| | 27,222 |
|
Papermaking Systems | | | $ | 113,192 |
| | $ | 105,591 |
|
Wood Processing Systems | | | 34,049 |
| | 39,141 |
|
Material Handling Systems (a) | | | 20,584 |
| | — |
|
Fiber-based Products | | | 3,491 |
| | 4,461 |
|
| | | $ | 171,316 |
| | $ | 149,193 |
|
| | | | | |
Income Before Provision for Income Taxes: | | |
| | |
| | |
| | |
| | |
| | |
|
Papermaking Systems (c) | | $ | 25,919 |
| | $ | 21,684 |
| | $ | 61,402 |
| | $ | 53,247 |
| |
Wood Processing Systems (d) | | 8,704 |
| | 4,418 |
| | 21,380 |
| | 6,511 |
| |
Papermaking Systems (b) | | | $ | 18,509 |
| | $ | 14,584 |
|
Wood Processing Systems (c) | | | 7,270 |
| | 7,363 |
|
Material Handling Systems (a, d) | | | (1,353 | ) | | — |
|
Corporate and Fiber-based Products (e) | | (7,248 | ) | | (6,428 | ) | | (19,008 | ) | | (16,174 | ) | | (5,851 | ) | | (5,283 | ) |
Total operating income | | 27,375 |
| | 19,674 |
| | 63,774 |
| | 43,584 |
| | 18,575 |
| | 16,664 |
|
Interest expense, net (f) | | (1,708 | ) | | (1,188 | ) | | (4,985 | ) | | (1,722 | ) | | (3,448 | ) | | (1,549 | ) |
Other expense, net | | (245 | ) | | (216 | ) | | (736 | ) | | (637 | ) | |
Other expense, net (f) | | | (99 | ) | | (246 | ) |
| | $ | 25,422 |
| | $ | 18,270 |
| | $ | 58,053 |
| | $ | 41,225 |
| | $ | 15,028 |
| | $ | 14,869 |
|
| | | | | | | | | | | | |
Capital Expenditures: | | |
| | |
| | |
| | |
| | |
| | |
|
Papermaking Systems | | $ | 1,348 |
| | $ | 3,790 |
| | $ | 9,837 |
| | $ | 6,567 |
| | $ | 1,357 |
| | $ | 4,649 |
|
Wood Processing Systems | | 1,026 |
| | 1,358 |
| | 2,586 |
| | 1,649 |
| | 551 |
| | 376 |
|
Corporate and Other | | 232 |
| | 135 |
| | 394 |
| | 502 |
| |
Material Handling Systems (a) | | | 38 |
| | — |
|
Corporate and Fiber-based Products | | | 222 |
| | 126 |
|
| | $ | 2,606 |
| | $ | 5,283 |
| | $ | 12,817 |
| | $ | 8,718 |
| | $ | 2,168 |
| | $ | 5,151 |
|
| | | | | | | | | | | | |
| | | March 30, | | December 29, |
(In thousands) | | | 2019 | | 2018 |
Total Assets: | | | |
| | |
|
Papermaking Systems | | | $ | 479,312 |
| | $ | 462,297 |
|
Wood Processing Systems | | | 251,422 |
| | 247,553 |
|
Material Handling Systems (a) | | | 204,189 |
| | — |
|
Corporate and Fiber-based Products (g) | | | 23,317 |
| | 15,899 |
|
| | | $ | 958,240 |
| | $ | 725,749 |
|
| |
(a) | Includes $917,000 in the three-month period ended September 29, 2018 and $12,247,000 in the nine-month period ended September 29, 2018 from 2017 acquisitions. |
(a) Represents SMH, which was acquired on January 2, 2019 (see Note 2). (b) Includes $52,310,000 in the nine-month period ended September 29, 2018 from a 2017 acquisition.
(c) Includes $378,000restructuring costs of $770,000 in the three-month period ended September 29,March 31, 2018 and $1,717,000 in the nine-month period ended September 29, 2018 for restructuring costs (see Note 213) and $278,000.(c) Includes acquisition-related expenses of $252,000 in the three-month period ended September 30, 2017 and $593,000March 31, 2018 for the amortization of acquired backlog.
(d) Includes $4,151,000 in the nine-monththree-month period ended SeptemberMarch 30, 2017 for2019 of acquisition-related expenses. Acquisition-related expenses include acquisition transaction costs and amortization ofexpense associated with acquired profit in inventory.
(d) Includes $4,625,000 in the three-month period ended September 30, 2017, $252,000 in the nine-month period ended September 29, 2018inventory and $8,727,000 in the nine-month period ended September 30, 2017 for acquisition-related costs.backlog.
(e) Corporate primarily includes general and administrative expenses.
(f) The Company does not allocate interest and other expense, net to its segments.
(g) Primarily includes Corporate and Fiber-based Products' cash and cash equivalents, tax assets, ROU assets, and property, plant, and equipment.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
13. Restructuring Costs
In 2017, the Company constructed a 160,000 square foot manufacturing facility in the United States that integrated its U.S. and Swedish papermaking stock-preparation product lines into a single manufacturing facility to achieve economies of scale and greater efficiencies. As a result of the consolidation and integration of these facilities, the Company developed a restructuring plan totaling $1,920,000, including $148,000 associated with severance costs for the reduction of four employees in the United States and six employees in Sweden, $1,318,000 primarily for relocation costs of machinery, equipment and administrative offices, and $454,000 associated with employee retention costs, abandonment of excess facility and other closure costs in the Papermaking Systems segment. The Company does not expect to incur additional charges related to this restructuring plan.
As a result of this plan, the Company recorded restructuring charges of $770,000 in the first three months of 2018, including $563,000 for the relocation of machinery, equipment and administrative offices, and $207,000 associated with employee retention and facility closure costs.
12.14. Commitments and Contingencies
Right of Recourse
In the ordinary course of business, the Company's subsidiaries in China may receive banker's acceptance drafts from customers as payment for their trade accounts receivable. The banker's acceptance drafts are noninterest-bearing obligations of the issuing bank and mature within six months of the origination date. The Company's 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. The Company had outstanding $11,105,000$6,005,000 at September 29, 2018March 30, 2019 and $10,035,000$12,406,000 at December 30, 201729, 2018 of banker's acceptance drafts subject to recourse, which had beenwere transferred to vendors but had not reached their scheduled maturity dates. Historically, the banker's acceptance drafts have settled upon maturity without any claim of recourse against the Company.
Litigation
From time to time, the Company is subject to various claims and legal proceedings covering a range of matters that arise in the ordinary course of business. Such litigation may include, but is not limited to, claims and counterclaims by and against the Company for breach of contract or warranty, canceled contracts, product liability, or bankruptcy-related claims. For legal proceedings in which a loss is probable and estimable, the Company accrues a loss based on the low end of the range of estimated loss when there is no better estimate within the range. If the Company were found to be liable for any of the claims or counterclaims against it, the Company would incur a charge against earnings for amounts in excess of legal accruals.
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q includesand the documents we incorporate by reference in this Report include forward-looking statements within 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.
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.
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" in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 30, 201729, 2018 (fiscal 2017)2018), as filed with the Securities and Exchange Commission (SEC) and as may be further amended and/or restated in subsequent filings with the SEC.
Overview
Company Background
We are a leading global supplier of equipmenthigh-value, critical components and critical componentsengineered systems used in process industries worldwide. In addition, we manufacture granules made from papermaking by-products. We have a diverse and large customer base, including most of the world's major paper, lumber and oriented strand board (OSB) manufacturers, and ourvarious mining companies across multiple industries. Our products, technologies, and services play an integral role in enhancing process efficiency, optimizing energy utilization, and maximizing productivity in resource-intensive industries.
Our operations are comprised of twothree reportable operating segments: Papermaking Systems, and Wood Processing Systems, and Material Handling Systems, and a separate product line, Fiber-based Products, as detailed below.
Papermaking SystemsProducts. For additional information regarding our reportable segments, see Note 12, Business SegmentThrough our Papermaking Systems segment, we develop, manufacture, and market equipment and products for the global papermaking, paper recycling, recycling and waste management, and other process industries. This segment consists of the following product lines:
|
| | |
| - | Stock-Preparation: custom-engineered systems and equipment, as well as standard individual components, for baling, pulping, de-inking, screening, cleaning, and refining primarily recycled fiber for preparation for entry into the paper machine, and recausticizing and evaporation equipment and systems used in the production of virgin pulp. Our baling equipment is also used to compress a variety of other secondary materials to prepare them for transport or storage; |
| - | Fluid-Handling: rotary joints, precision unions, steam and condensate systems, components, and controls used to transfer fluids, power, and data in numerous process industries and expansion joints used in industrial piping systems; and |
| - | Doctoring, Cleaning, & Filtration: systems and related consumables that 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; and systems and equipment used to continuously clean fabrics 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. |
Overview (continued)
Wood Processing Systems Segment
Through our Wood Processing Systems segment, we develop, manufacture, market, and supply debarkers, stranders, chippers, logging machinery, and related equipment used Information, in the harvesting and production of lumber and OSB. In addition, we provide refurbishment and repair of pulping equipment for the pulp and paper industry. Our principal wood-processing products include:accompanying condensed consolidated financial statements.
|
| | |
| - | Debarkers: ring and rotary debarkers and related parts and consumables that employ mechanical abrasion or log-to-log contact to efficiently remove bark from logs of all shapes and species; |
| - | Stranders: disc and ring stranders and related parts and consumables that cut batch-fed logs into strands for OSB production; |
| - | Chippers: disc, drum, and veneer chippers and related parts and consumables are high quality, robust chipper systems for waste-wood and whole-log applications found in pulp woodrooms, chip plants, 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, we manufacture and sell biodegradable, absorbent granules derived from papermaking by-products for use primarily as carriers for agricultural, home lawn and garden, and professional lawn, turf and ornamental applications, as well as for oil and grease absorption.
Acquisitions
We expect that a significant driver of our growth over the next several years will be the acquisition of technologiesbusinesses and businessestechnologies that complement or augment our existing products and services or may involve entry into a new process industry. We continue to actively pursue additional acquisition opportunities. Certain
On January 2, 2019, we acquired, directly and indirectly, all the outstanding equity interests of our recent acquisitions are described below.
On July 5, 2017, we acquired the forest products businessSyntron Material Handling Group, LLC and certain of NII FPG Company (NII FPG) pursuant to a Stock and Asset Purchase Agreement dated May 24, 2017,its affiliates (SMH) for $170.8approximately $176.9 million, net of cash acquired. NII FPG isacquired, which includes a global leader in the design and manufacture of equipment used by sawmills, veneer mills, and other manufacturers in the forest products industry. NII FPG also designs and manufactures logging equipment used in harvesting timber from forest plantations. This acquisition extended our presence deeper into the forest products industry and complements our existing Wood Processing Systems segment.
On August 14, 2017, we acquired certain assets of Unaflex, LLC (Unaflex) for $31.7 million, consisting of $31.3 million in cash and an estimated $0.4 million post-closing adjustment
to beof $1.6 million that we paid in
2018. UnaflexApril 2019. SMH, which comprises our new Material Handling Systems segment, is a leading manufacturerprovider of expansion jointsmaterial handling equipment and related products forsystems to various process industries. industries, including mining, aggregates, food processing, packaging, and pulp and paper. This acquisition complementedextends our existing Fluid-Handlingcurrent product line within our Papermaking Systems segment.portfolio, and we expect it will strengthen SMH's relationships in the pulp and paper markets. See Note 2, Acquisition, in the accompanying condensed consolidated financial statements for further details.
Overview (continued)
International Sales
Our sales to customers outside the United States, mainly in Europe, AsiaCanada and Canada,Asia, were approximately 63%54% of total revenuesrevenue in the first ninethree months of 20182019 and 64%58% of total revenue in the first ninethree months of 2017.2018. 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. We may enter into forward 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.
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 the United States of America (GAAP). The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our condensed consolidatedthe 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 result 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 30, 2017,29, 2018, filed with the SEC. There have been no material changes to these critical accounting policies since fiscal year-end 20172018 that warrant disclosure, except for the adoption of the Financial Accounting Standards Board's Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), as described in Recently Adopted Accounting Pronouncements and Revenue Recognition in Note 1 to the accompanying condensed consolidated financial statements.disclosure.
Industry and Business Outlook
Our products are primarily sold in globalworldwide to process industries, and are primarily used to produce packaging, OSB, lumber, tissue, and, tissue, among other products.with the addition of our new material handling business, to handle bulk materials. Major markets for our products are as follows:
Packaging
Approximately 37%29% of our revenue in the first nine monthsquarter of 20182019 was from the sale of products that support packaging grades. Consumption of packaging, which is primarily comprised of containerboard and boxboard, is driven by many factors, including regional economic conditions, consumer spending on non-durable goods, usage levels of e-commerce, demand for food and beverage packaging, and greater urbanization in developing regions. The growth of e-commerce is expected to continue to increase demand for packaging grades used to make boxes. We have also extended our expertise in fluid handling to the corrugatingcorrugated packaging market in which boxes are produced and are starting to experienceexperiencing growth in this market. For balers and related equipment, demand is generally driven by rising standards of living and population growth, shortage and costs of landfilling, increasing recycling rates, and environmental regulation.
Wood Processing
Approximately 23%20% of our revenue in the first nine monthsquarter of 20182019 was from sales to manufacturers in the wood processing industries, including lumber mills, engineered wood panel producers, and sawmills, that use stranders, debarkers, and related equipment to prepare logs to be converted into OSB or lumber, and use harvesting equipment to cut, gather, and remove timber from forest plantations. Demand for OSB and lumber is primarily tied to new home construction and home remodeling in all markets we serve.remodeling. In addition, OSB is used in industrial applications such as crates and bed liners for shipping containers, andas well as furniture. The majority of OSB and lumber demand is in North America, as houses built in North America are more often constructed of wood compared to other parts of the world.
Overview (continued)
Tissue and Other Paper
Approximately 12%15% of our revenue in the first nine monthsquarter of 20182019 was from the sale of products that support tissue and other paper grades. Consumption of tissue is fairly stable and in the developed world tends to grow with the population. For both packaging and tissue, growthGrowth rates in the developing world are expected to increase as per capita consumption of paper products increases with rising standards of living.
Printing, Writing and NewsprintMaterial Handling
Approximately 11%12% of our revenue in the first nine monthsquarter of 20182019 was from sales of material handling equipment and systems to various process industries, including mining, aggregates, food processing, packaging, and pulp and paper. We provide material handling and processing equipment such as idler rolls, conveyors, vibratory screens, and flow aids to allow for the transportation of bulk materials from source to point of processing. Demand for minerals is largely driven by industrial economic growth, while infrastructure expansions and modernization drive demand for aggregates, which include sand, gravel, and crushed stone.
Printing, Writing and Newsprint
Approximately 9% of our revenue in the first quarter of 2019 was related to products used to produce printing and writing paper grades as well as newsprint, the demand for which has been negatively affected by the development and increased use of digital media. We expect the decline in the use of printing and writing and newsprint paper grades to continue due to the use of digital media.
Overview (continued)
Other
Our remaining revenue was from sales to other process industries, which tend to grow with the overall economy. These industries include metals, food and beverage, chemical, petrochemical, and energy, among others.
Bookings
Our bookings increased 22%1% to $165$184 million in the thirdfirst quarter of 2019 compared to the first quarter of 2018, compared with $135including $24 million in the third quarter of 2017. Bookings in the 2018 period included a $4from an acquisition and an $8 million or 3%, decrease from the unfavorable effect of foreignfrom currency translation. Excluding the acquisition and the unfavorable effect of foreign currency translation, our bookings in the thirdfirst quarter of 2019 decreased 8% compared with the first quarter of 2018 increased 25% compared with the third quarter of 2017, primarily due to strongreduced demand for our wood processing capital equipment in North America and, to a lesser extent, Asia and South America. 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. By comparison, demand for our parts and consumables products tends to be more predictable. We believe our large installed base provides us with a relatively stable parts and consumables business that yields higher margins than our capital equipment business. Bookings for our parts and consumables products increased to $91$120 million in the thirdfirst quarter of 2018,2019, or 55%65% of total bookings, compared with $81$103 million, or 60%57% of total bookings, in the thirdfirst quarter of 2017.2018 due to the inclusion of $18 million in bookings from an acquisition. Excluding the impact of the acquisition and the effect of currency translation, our parts and consumables bookings increased 4%.
Bookings by geographic region are as follows:
North America
The largest and most impactful regional market for our products in the third quarter of 2018 wasis North America, and we expect this to continue to be the case for the remainder of 2018.America. Our bookings in North America increased 30% to $78$105 million in the thirdfirst quarter of 2018 compared with $602019, including $22 million in the third quarter of 2017, includingbookings from an acquisition and an unfavorable foreign currency translation effect of $1 million. The primary pulp and paper markets we servemillion, from $93 million in North America tend to be relatively stable with modest growth.the first quarter of 2018. The packaging market in North America continues to be healthy, with low fiber input costs, due in part to the restrictions on waste paper imports in China, and relatively high fiber prices, and demand is expected to benefit from increasing e-commerce activity. In addition, the U.S. tax law passed in 2017 and repatriationhas shown some signs of offshore cash has resulted in additional capital investment activity by our customers in the United States. According to a RISI PPI Pulp & Paper Week report, U.S. box makers report stable demand going into the fourth quarter as linerboard prices are holding while export levels are beginning to fall. RISI also reported that containerboard mill operating rates were 97%softening in the first nine monthsquarter of 2019. Containerboard producers reduced operating rates to 91% in the first quarter of 2019 from 96% in the first quarter of 2018, a slight increase over the same period last year. The strength of the U.S. housing market has led to continued bookings growthreflecting lower demand from corrugated packaging plants.
We have experienced reduced capital project activity in our Wood Processing product linesegment compared to the high levels that occurred in the first nine months of 2018, compared with the 2017 period. We expect to see long-term strength in this market as long as home ownership among millennials continues to increase, along with higher employmentmany producers increased their capacity and limited inventory for new housing. Notwithstanding the current strength of the U.S. housing market, concerns about a potential softening have begun to surface related to an increasing lack of affordability as home prices have risen due to increasing costs of land, labor and material.modernized their facilities last year. For the month of September 2018,March 2019, the U.S. Census Bureau reported that U.S. housing starts increased 4%decreased 14% from the prior year to a seasonally-adjusted 1.201 million.annual rate of 1.139 million, with affordability being noted by industry analysts as a major factor.
Overview (continued)
In the mining and aggregates markets, which are primarily served by our new Material Handling Systems segment, we are experiencing a strong level of project activity for our conveying products from our mining customers based on healthy industrial activity. We are also seeing solid demand in the aggregates market, which includes sand, gravel, and crushed stone, for our vibratory feeding and conveying products. In addition, industry analysts believe there is bipartisan support for an infrastructure bill which could create demand for aggregates and cement.
Europe
In the first quarter of 2019, European packaging producers arehave continued operating in a favorablestable, slower-growth environment, with low fiber costsdue in part to political uncertainty and stableweak demand and prices.from reduced export activity, which negatively impacted Europe's overall industrial economy. Our bookings in Europe decreased 4% to $38$45 million in the thirdfirst quarter of 20182019 compared with $40$50 million in the thirdfirst quarter of 2017,2018, including an unfavorable foreign currency translation effect of $1$4 million. Excluding the unfavorable effect of foreign currency translation, our bookings in Europe decreased 1% in the third quarter of 2018 compared with the third quarter of 2017.
Asia
Our bookings in Asia increased 23% to $30 million in the third quarter of 2018 compared withwere $24 million in the thirdfirst quarter of 2017,2019 compared with $25 million in the first quarter of 2018, including a $2 million increase resulting from an acquisition and an unfavorable foreign currency translation effect of $1 million. The market in Asia continues to undergo a fundamental shift, as the Chinese government has restricted imports of recovered paper effective January 1, 2018, and has sincefurther announced that it may ban waste paper imports altogether by 2020. According to RISI, the Chinese government's actions have already led to a severe shortage of recovered paper in China that has forced mills to incur additional downtime,
Overview (continued)
which in the near term, may result in decreased demand for our parts and consumables products in China. In response to this,such actions, Chinese containerboard producers have been investinginvested in pulping capacity in Southeast Asia, particularly in Malaysia, to process recovered paper with the intent to either ship linerboard to China or ship the pulp to paper and paperboard mills in China. This capacity build-out has increased demand for our capital equipment outside of China which weover the last several quarters. We expect will result in related demand for capital equipment in China in 2019 to decrease compared to 2018 as a result of recent capacity additions and the continued recovered paper restrictions. Lower operating rates as a result of softer market conditions in China will also impact our parts and consumables products.business.
Rest of World
Our bookings in the rest of the world increased 59%decreased to $20$10 million in the thirdfirst quarter of 20182019 compared with $12$14 million in the thirdfirst quarter of 2017,2018, including an unfavorable foreign currency translation effect of $1 million, duemillion. South America continues to have a large stock-preparation order fromconstrained investment environment as a customer in Argentina. While our third quarter bookings were encouraging,result of geopolitical conditions which impacted our results in South America, particularly in Brazil, continue to create economic headwinds, leading to uncertainty and a constrained capital investment environment.this region.
Global Trade
On July 6, 2018,Within the last year, the United States began imposing tariffs on certain imports from China, which will increase the cost of some of our pulp and paperthe equipment that we import if we are not able to offset the costs through price increases.import. Although we are working to mitigate the impact of tariffs through pricing and sourcing strategies, we cannot be certainsure how our customers and competitors will react to thecertain actions we take. For more information on risks associated with our global operations, including tariffs, please see the risk factors within Part I, “Item 1A. Risk Factors” in our 20172018 Annual Report on Form 10-K, as amended in subsequent filings with the SEC.
Through the end of the third quarter, the strength of the economy in North America had led to upward pressure on input costs, particularly material costs. For more information on risks associated with price increases in raw materials, please see the risk factors within Part I, “Item 1A. Risk Factors” in our 2017 Annual Report on Form 10-K. Over time, we expect to offset most of the higher costs through price adjustments and sourcing strategies.
Guidance
For 2018, we now expect to report full year revenue of $628 to $632 million, revised from our previous guidance of $630 to $638 million. We expect to achieve GAAP diluted earnings per share (EPS) of $4.93 to $4.98 in 2018, revised from our previous guidance of $4.89 to $4.99. The revised 2018 guidance includes a pre-tax curtailment loss of $1.4 million, or $0.09 per diluted share, related to the termination of defined benefit plans at one of our U.S. operations. The revised 2018 guidance also includes pre-tax restructuring costs of $1.7 million, or $0.11 per diluted share, pre-tax amortization expense associated with acquired backlog of $0.3 million, or $0.02 per diluted share, and a discrete tax benefit of $1.7 million, or $0.15 per diluted share. For the fourth quarter of 2018, we expect GAAP diluted EPS of $1.24 to $1.29 on revenue of $158 to $162 million. The fourth quarter guidance includes the pre-tax curtailment loss described above of $1.4 million, or $0.09 per diluted share.
Results of Operations
ThirdFirst Quarter 20182019 Compared With ThirdFirst Quarter 20172018
Revenues
The following table presents changes in revenues by segment and product line between the thirdfirst quarters of 20182019 and 2017,2018, and the changes in revenues by segment and product line between the thirdfirst quarters of 20182019 and 20172018 excluding the effect of currency translation and an acquisition. Currency translation is calculated by converting thirdfirst quarter of 20182019 revenues in local currency into U.S. dollars at thirdfirst quarter of 20172018 exchange rates and then comparing this result with actual revenues in the thirdfirst quarter of 2018.2019. The presentation of the changes in revenues excluding the effect of currency translation and an acquisition is a non-GAAP measure. We believe this non-GAAP measure helps investors gain an understanding of our underlying operations consistent with how management measures and forecasts its performance, especially when comparing such results to prior periods. This non-GAAP measure should not be considered superior to or a substitute for the corresponding GAAP measures.
Results of Operations (continued)
Revenues for the thirdfirst quarters of 2019 and 2018 and 2017 arewere as follows: | | | | Three Months Ended | | | | Currency Translation | | | | (Non-GAAP) Adjusted | | Three Months Ended | | | | | | Currency Translation | | | | (Non-GAAP) Adjusted |
(In thousands) | | September 29, 2018 | | September 30, 2017 | | Total Increase (Decrease) | |
Acquisition | | Total Increase (Decrease) | |
| | | | | | | | | | | | | |
(In thousands, except percentages) | | | March 30, 2019 | | March 31, 2018 | | Total Increase (Decrease) | | % Change | | Currency Translation | |
Acquisition | | Total Increase (Decrease) | | % Change |
Stock-Preparation | | $ | 62,983 |
| | $ | 52,065 |
| | $ | 10,918 |
| | $ | (685 | ) | | $ | — |
| | $ | 11,603 |
| | $ | 52,048 |
| | $ | 45,483 |
| | $ | 6,565 |
| | 14 | % | | $ | — |
| | $ | 9,129 |
| | 20 | % |
Fluid-Handling | | 33,083 |
| | 28,532 |
| | 4,551 |
| | (817 | ) | | 917 |
| | 4,451 |
| | 32,754 |
| | 32,886 |
| | (132 | ) | | — |
| | (1,339 | ) | | — |
| | 1,207 |
| | 4 | % |
Doctoring, Cleaning, & Filtration | | 30,704 |
| | 30,538 |
| | 166 |
| | (893 | ) | | — |
| | 1,059 |
| | 28,390 |
| | 27,222 |
| | 1,168 |
| | 4 | % | | (1,130 | ) | | — |
| | 2,298 |
| | 8 | % |
Papermaking Systems | | 126,770 |
| | 111,135 |
| | 15,635 |
| | (2,395 | ) | | 917 |
| | 17,113 |
| | 113,192 |
| | 105,591 |
| | 7,601 |
| | 7 | % | | (5,033 | ) | | — |
| | 12,634 |
| | 12 | % |
Wood Processing Systems | | 37,042 |
| | 39,714 |
| | (2,672 | ) | | (1,377 | ) | | — |
| | (1,295 | ) | | 34,049 |
| | 39,141 |
| | (5,092 | ) | | (13 | )% | | (1,975 | ) | | — |
| | (3,117 | ) | | (8 | )% |
Material Handling Systems | | | 20,584 |
| | — |
| | 20,584 |
| | — |
| | — |
| | 20,584 |
| | — |
| | — |
|
Fiber-based Products | | 1,933 |
| | 1,945 |
| | (12 | ) | | — |
| | — |
| | (12 | ) | | 3,491 |
| | 4,461 |
| | (970 | ) | | (22 | )% | | — |
| | — |
| | (970 | ) | | (22 | )% |
| | $ | 165,745 |
| | $ | 152,794 |
| | $ | 12,951 |
| | $ | (3,772 | ) | | $ | 917 |
| | $ | 15,806 |
| |
Consolidated Revenues | | | $ | 171,316 |
| | $ | 149,193 |
| | $ | 22,123 |
| | 15 | % | | $ | (7,008 | ) | | $ | 20,584 |
| | $ | 8,547 |
| | 6 | % |
Consolidated revenues increased 15% in the first quarter of 2019 largely due to our acquisition, offset in part by an unfavorable effect of currency translation. Excluding the acquisition and the unfavorable effect of foreign currency translation, revenues increased 6% in the first quarter of 2019 compared to the first quarter of 2018.
Papermaking Systems Segment
Revenues fromin our Papermaking Systems segment increased $15.6 million, or 14%, to $126.8 million7% in the thirdfirst quarter of 2018 from $111.1 million in the third quarter of 2017,2019, including a $2.4 million decrease from thean unfavorable effect of foreign currency translation and $0.9 million of revenue from an acquisition.translation. Excluding the unfavorable effect of foreign currency translation, andrevenues in the acquisition, revenuesPapermaking Systems segment increased $17.1 million12% in the first quarter of 2019 compared to the first quarter of 2018, as explained in the product line discussions below.
Revenues from our Stock-Preparation product line increased $10.9 million, or 21%, to $63.0 million14% in the thirdfirst quarter of 2018 from $52.1 million in the third quarter of 2017,2019, including a $0.7 million decrease from thean unfavorable effect of foreign currency translation. Excluding the unfavorable effect of foreign currency translation, Stock-Preparation revenues increased $11.6 million, or 22%, primarily20% in the first quarter of 2019 largely due to increasedhigher demand for our capital equipment at our AsianEuropean and North American operations. The marketoperations, offset in Asia continues to undergo a fundamental shift, as the Chinese government restricted imports of recovered paper effective January 1, 2018, and has since announced that it may ban waste paper imports altogetherpart by 2020. In response to this, Chinese containerboard producers have been investing in pulping capacity to process recovered paper in Southeast Asia, with the intent to ship the pulp to paper and paperboard mills in China. This capacity build-out has increasedweaker demand for our products at our Chinese operations. The increase at our European operations was primarily due to a large capital equipment outside of China.project. Demand for our stock-preparation products in North America has benefited from increased use of boxes in e-commerce, as well as a general strengthening of the economy. We expect lower revenues at our Chinese operations for the next two quarters compared to the corresponding prior year periods due to recovered paper restrictions and weaker market conditions.
Revenues from our Fluid-Handling product line increased $4.6 million, or 16%, to $33.1 milliondecreased slightly in the thirdfirst quarter of 2018 from $28.5 million in the third quarter2019 due to an unfavorable effect of 2017, including $0.9 million of revenue from an acquisition and a $0.8 million decrease fromcurrency translation. Excluding the unfavorable effect of foreign currency translation. Excluding the acquisition and the unfavorable effect of foreign currency translation, Fluid-Handling revenues increased $4.5 million, or 16%,4% in the first quarter of 2019, largely due to a full quarter of revenues in 2018 related to our acquisition of the Unaflex business, as well as increased demand for our capital equipmentproducts at our North American operations and for our parts and consumables products. This increase was offset in part by decreased demand for our capital products at our European operations.
Revenues from our Doctoring, Cleaning, & Filtration product line increased $0.2 million, or 1%, to $30.7 million4% in the thirdfirst quarter of 2018 from $30.5 million in the third quarter of 2017,2019, including a $0.9 million decrease from thean unfavorable effect of foreign currency translation. Excluding the unfavorable effect of foreign currency translation, Doctoring, Cleaning, & Filtration revenues increased $1.1 million, or 3%,8% in the first quarter of 2019 due to increased demand for our capital products at our Asian operations, offset in part by decreased demand at our North American and, European operations.
Wood Processing Systems Segment
Revenues from our Wood Processing Systems segment decreased $2.7 million, or 7%, to $37.0 million in the third quarter of 2018 from $39.7 million in the third quarter of 2017, including a $1.4 million decrease from the unfavorable effect of foreign currency translation. Excluding the unfavorable effect of foreign currency translation, revenues decreased $1.3 million, or 3%, compared with a very strong third quarter in 2017. The decrease in the 2018 period was due to lower sales from our timber harvesting product line, offset in part by increased demand forlesser extent, our parts and consumables products at our European and North American operations.
Results of Operations (continued)
Fiber-based Products
Revenues from our Fiber-based Products business were flat at $1.9 million in both the third quarters of 2018 and 2017.
Gross Profit Margin
Gross profit margins for the third quarters of 2018 and 2017 were as follows:
|
| | | | | | |
| | Three Months Ended |
| | September 29, 2018 | | September 30, 2017 |
Papermaking Systems | | 44.6 | % | | 45.6 | % |
Wood Processing Systems | | 42.6 | % | | 33.5 | % |
Fiber-based Products | | 36.6 | % | | 35.7 | % |
Consolidated Gross Margin | | 44.1 | % | | 42.3 | % |
Papermaking Systems Segment
The gross profit margin in our Papermaking Systems segment decreased to 44.6% in the third quarter of 2018 from 45.6% in the third quarter of 2017 due to a lower proportion of higher-margin parts and consumables revenues as a percentage of total revenues.
Wood Processing Systems Segment
The gross profit margin in our Wood Processing Systems segment increased to 42.6% in the third quarter of 2018 from 33.5% in the third quarter of 2017 primarily due to the amortization in 2017 of $3.3 million of acquired profit in inventory related to the acquisition of our forest products business.
Fiber-based Products
The gross profit margin in our Fiber-based Products business increased to 36.6% in the third quarter of 2018 from 35.7% in the third quarter of 2017.
Selling, General, and Administrative Expenses
Selling, general, and administrative (SG&A) expenses for the third quarters of 2018 and 2017 were as follows:
|
| | | | | | | | | | | | |
| | Three Months Ended | | |
(In thousands) | | September 29, 2018 | | September 30, 2017 | | Increase (Decrease) |
Papermaking Systems | | $ | 28,390 |
| | $ | 27,159 |
| | $ | 1,231 |
|
Wood Processing Systems | | 6,639 |
| | 8,142 |
| | (1,503 | ) |
Corporate and Other | | 7,859 |
| | 7,045 |
| | 814 |
|
| | $ | 42,888 |
| | $ | 42,346 |
| | $ | 542 |
|
SG&A expenses as a percentage of revenues decreased to 26% in the third quarter of 2018 from 28% in the third quarter of 2017. SG&A expenses increased $0.5 million, or 1%, to $42.9 million in the third quarter of 2018 from $42.3 million in the third quarter of 2017, including $0.7 million from the favorable effect of foreign currency translation in the 2018 period and $1.5 million of acquisition-related costs in the 2017 period.
Papermaking Systems Segment
SG&A expenses in our Papermaking Systems segment increased $1.2 million, or 5%, to $28.4 million in the third quarter of 2018 from $27.2 million in the third quarter of 2017 primarily due to a full quarter of SG&A expenses in 2018 related to our acquisition of the Unaflex business and, to a lesser extent, SG&A expenses from a fourth quarter 2017 acquisition.
Results of Operations (continued)
Wood Processing Systems Segment
SG&A expenses inRevenues from our Wood Processing Systems segment decreased $1.5 million to $6.6 million13% in the thirdfirst quarter of 20182019, including an unfavorable effect of currency translation. Excluding the unfavorable effect of currency translation, revenues from $8.1 millionour Wood Processing Systems segment decreased 8% in the thirdfirst quarter of 2017 primarily2019 due to the inclusion in the 2017 period of $1.4 million of acquisition-related costs.
Corporate and Other
SG&A expensesdecreased demand for Corporate and Other increased $0.8 million to $7.9 million in the third quarter of 2018 from $7.0 million in the third quarter of 2017 primarily due to increased incentive compensation expense and consulting fees related to system conversion projects.
Research and Development Expenses
Research and development expenses decreased $0.1 million to $2.5 million, or 1% of revenues, in the third quarter of 2018 from $2.6 million, or 2% of revenues, in the third quarter of 2017.
Restructuring Costs
Restructuring costs in the third quarter of 2018 of $0.4 million primarily represented costs for the relocation of machinery and equipment and administrative offices related to the integration of our U.S. and Swedish papermaking stock-preparation product lines into a newly-constructed manufacturing facility in the United States to achieve economies of scale and greater efficiencies.
Interest Expense
Interest expense increased $0.5 million to $1.7 million in the third quarter of 2018 from $1.3 million in the third quarter of 2017 primarily due to higher interest rates in the third quarter of 2018 compared with the third quarter of 2017, partially offset by lower outstanding borrowings in the third quarter of 2018 compared with the third quarter of 2017.
Provision for Income Taxes
Our provision for income taxes was $6.4 million, or 25% of pre-tax income, in the third quarter of 2018 and $4.9 million, or 27% of pre-tax income, in the third quarter of 2017. The effective tax rate in the third quarter of 2018, included a discrete tax benefit of 7% primarily due to the release of tax reserves. The effective tax rate of 25% in the third quarter of 2018 was higher thancapital products at our 2018 statutory tax rate of 21% primarily due to the global intangible low-taxed income (GILTI) provisions of The Tax Cuts and Jobs Act of 2017 (2017 Tax Act), the distribution of our worldwide earnings, and the cost of repatriating the earnings of certain foreign subsidiaries. This incremental tax expense wasNorth American operations, offset in part by a decrease in tax related to the reversal of tax reserves associated with uncertain tax positions. The effective tax rate of 27% in the third quarter of 2017 was lower than our statutory tax rate of 35% primarily due to the distribution of our worldwide earnings, offset in part by an increase in tax related to non-deductible expenses and unrecognized tax benefits.
See Provision for Income Taxes in the Results of Operations for the first nine months of 2018 compared with the first nine months of 2017 for further discussion on the impact of the 2017 Tax Act and the GILTI provisions.
Net Income
Net income increased $5.6 million, or 42%, to $19.0 million in the third quarter of 2018 from $13.4 million in the third quarter of 2017 due to a $7.7 million increase in operating income that was partially offset by increases in provision for income taxes of $1.6 million and interest expense of $0.5 million (seediscussions above for further details).
Results of Operations (continued)
First Nine Months 2018 Compared With First Nine Months 2017
Revenues
The following table presents changes in revenues by segment and product line between the first nine months of 2018 and 2017, and the changes in revenues by segment and product line between the first nine months of 2018 and 2017 excluding the effect of currency translation and acquisitions. Currency translation is calculated by converting first nine months of 2018 revenues in local currency into U.S. dollars at first nine months of 2017 exchange rates and then comparing this result with actual revenues in the first nine months of 2018. 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 2018 and 2017 are as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | | | Currency Translation | | | | (Non-GAAP) Adjusted Total |
(In thousands) | | September 29, 2018 | | September 30, 2017 | | Total Increase | | | Acquisitions | | Increase (Decrease) |
| | | | | | | | | | | | |
Stock-Preparation | | $ | 164,842 |
| | $ | 139,396 |
| | $ | 25,446 |
| | $ | 5,714 |
| | $ | — |
| | $ | 19,732 |
|
Fluid-Handling | | 98,500 |
| | 73,099 |
| | 25,401 |
| | 1,540 |
| | 12,247 |
| | 11,614 |
|
Doctoring, Cleaning, & Filtration | | 87,469 |
| | 82,921 |
| | 4,548 |
| | 869 |
| | — |
| | 3,679 |
|
Papermaking Systems | | 350,811 |
| | 295,416 |
| | 55,395 |
| | 8,123 |
| | 12,247 |
| | 35,025 |
|
Wood Processing Systems | | 109,335 |
| | 61,050 |
| | 48,285 |
| | (512 | ) | | 52,310 |
| | (3,513 | ) |
Fiber-based Products | | 9,705 |
| | 9,427 |
| | 278 |
| | — |
| | — |
| | 278 |
|
| | $ | 469,851 |
| | $ | 365,893 |
| | $ | 103,958 |
| | $ | 7,611 |
| | $ | 64,557 |
| | $ | 31,790 |
|
Papermaking Systems Segment
Revenues from our Papermaking Systems segment increased $55.4 million, or 19%, to $350.8 million in the first nine months of 2018 from $295.4 million in the first nine months of 2017, including $12.2 million of revenue from acquisitions and an $8.1 million increase from the favorable effect of foreign currency translation. Excluding acquisitions and the favorable effect of foreign currency translation, revenues increased $35.0 million as explained in the product line discussions below.
Revenues from our Stock-Preparation product line increased $25.4 million, or 18%, to $164.8 million in the first nine months of 2018 from $139.4 million in the first nine months of 2017, including a $5.7 million increase from the favorable effect of foreign currency translation. Excluding the favorable effect of foreign currency translation, revenues increased $19.7 million, or 14%, primarily due to increased demand for capital equipment at our Asian and North American operations. The market in Asia continues to undergo a fundamental shift, as the Chinese government restricted imports of recovered paper effective January 1, 2018, and has since announced that it may ban waste paper imports altogether by 2020. In response to this, Chinese containerboard producers have been investing in pulping capacity to process recovered paper in Southeast Asia, with the intent to ship the pulp to paper and paperboard mills in China. This capacity build-out has increased demand for our capital equipment outside of China. Demand for our stock-preparation products in North America has benefited from increased use of boxes in e-commerce, as well as a general strengthening of the economy.
Revenues from our Fluid-Handling product line increased $25.4 million, or 35%, to $98.5 million in the first nine months of 2018 from $73.1 million in the first nine months of 2017 due to $12.2 million in revenues from acquisitions made in 2017 and a $1.5 million increase from the favorable effect of foreign currency translation. Excluding acquisitions and the favorable effect of foreign currency translation, revenues increased $11.6 million, or 16%, largely due to increased demand for our capital equipment primarily at our North American operations.
Results of Operations (continued)
Revenues from our Doctoring, Cleaning, & Filtration product line increased $4.6 million, or 5%, to $87.5 million in the first nine months of 2018 from $82.9 million in the first nine months of 2017, including a $0.9 million increase from the favorable effect of foreign currency translation. Excluding the favorable effect of foreign currency translation, revenues increased $3.7 million, or 4%, primarily due to increased demand for our parts and consumables products. There has been a reduction in capital spending in the first quarter of 2019 as many producers made significant improvements in 2018 to increase capacity and modernize their facilities.
Wood ProcessingMaterial Handling Systems Segment
Revenues from our Wood ProcessingMaterial Handling Systems segment increased $48.3 million to $109.3 million in the first nine monthsquarter of 2018 from $61.1 million in the first nine months of 2017 due to the inclusion of $52.3 million in revenues from an acquisition, slightly offset by a $0.5 million unfavorable effect of foreign currency translation. Excluding the acquisition and the unfavorable effect of foreign currency translation, revenues decreased $3.5 million, or 6%, primarily due to a decrease in sales2019 were from our timber harvesting product line.SMH acquisition, of which 82% were parts and consumables revenues that consist of aftermarket, replacements and upgrades.
Fiber-based Products
Revenues from our Fiber-based Products business increased $0.3 million to $9.7 milliondecreased 22% in the first nine monthsquarter of 2018 compared with $9.4 million in the first nine months of 20172019, primarily due to an increasea delayed start to the agricultural season related to adverse weather conditions that prevailed in certain of our geographical markets, which lessened demand for our biodegradable granular products.granules.
Gross Profit Margin
Gross profit margins for the first nine monthsquarters of 20182019 and 20172018 were as follows:
| | | | Nine Months Ended | | Three Months Ended |
| | September 29, 2018 | | September 30, 2017 | | March 30, 2019 | | March 31, 2018 |
Papermaking Systems | | 45.1 | % | | 47.1 | % | | 44.2 | % | | 45.6 | % |
Wood Processing Systems | | 40.4 | % | | 37.1 | % | | 41.4 | % | | 39.5 | % |
Material Handling Systems | | | 22.5 | % | | — |
|
Fiber-based Products | | 50.1 | % | | 50.1 | % | | 50.3 | % | | 56.0 | % |
Consolidated Gross Margin | | 44.1 | % | | 45.5 | % | |
Consolidated Gross Profit Margin | | | 41.2 | % | | 44.3 | % |
Papermaking Systems Segment
The gross profit margin in our Papermaking Systems segment decreased to 45.1% in the first nine monthsquarter of 2018 from 47.1% in the first nine months of 20172019 due to a lower proportion of higher-margin parts and consumables revenues as a percentage of total revenues, and to a lesser extent,as well as lower gross margins on our capital equipment.parts and consumables products.
Wood Processing Systems Segment
The gross profit margin in our Wood Processing Systems segment increased to 40.4% in the first nine monthsquarter of 2018 from 37.1%2019 primarily due to a larger proportion of higher-margin parts and consumables revenues as a percentage of total revenues, as capital product revenues have recently decreased at our North American operations.
Material Handling Systems Segment
The gross profit margin in our Material Handling Systems segment in the first nine monthsquarter of 2017 primarily due to the2019 was negatively affected by $2.3 million of amortization in 2017 of $3.3 million of acquired profit in inventory, related to the acquisition of our forest products business, partially offset by the inclusion of lowerwhich lowered its gross profit margins from our timber harvesting product line that was acquired in 2017 as part of the forest products business.margin by 11.2 percentage points.
Fiber-based Products
The gross profit margin in our Fiber-based Products business was flat at 50.1%decreased in both the first nine monthsquarter of 20182019 primarily due to the combined impact of lower revenues and 2017.decreased manufacturing efficiencies that resulted from lower production volumes.
Results of Operations (continued)
Selling, General, and Administrative Expenses
SG&ASelling, general, and administrative (SG&A) expenses for the first nine monthsquarters of 20182019 and 20172018 were as follows:
|
| | | | | | | | | | | | |
| | Nine Months Ended | | |
(In thousands) | | September 29, 2018 | | September 30, 2017 | | Increase |
Papermaking Systems | | $ | 89,205 |
| | $ | 80,121 |
| | $ | 9,084 |
|
Wood Processing Systems | | 20,929 |
| | 15,396 |
| | 5,533 |
|
Corporate and Other | | 23,662 |
| | 20,419 |
| | 3,243 |
|
| | $ | 133,796 |
| | $ | 115,936 |
| | $ | 17,860 |
|
SG&A expenses as a percentage of revenues decreased to 28% in the first nine months of 2018 from 32% in the first nine months of 2017 due to the inclusion of $5.7 million of incremental acquisition-related costs in the 2017 period, as well as improved operating leverage as a result of our 2017 acquisitions, which have a relatively lower percentage of SG&A expenses as a percentage of revenues. SG&A expenses increased $17.9 million, or 15%, to $133.8 million in the first nine months of 2018 from $115.9 million in the first nine months of 2017 primarily due to the inclusion of $14.4 million of incremental SG&A expenses from our acquisitions and a $2.4 million unfavorable effect from foreign currency translation. |
| | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
(In thousands, except percentages) | | March 30, 2019 | | March 31, 2018 | | (Decrease) Increase | | % Change |
Papermaking Systems | | $ | 29,475 |
| | $ | 30,756 |
| | $ | (1,281 | ) | | (4 | )% |
Wood Processing Systems | | 6,339 |
| | 7,299 |
| | (960 | ) | | (13 | )% |
Material Handling Systems | | 5,982 |
| | — |
| | 5,982 |
| | — |
|
Corporate and Fiber-based Products | | 7,523 |
| | 7,721 |
| | (198 | ) | | (3 | )% |
Consolidated SG&A | | $ | 49,319 |
| | $ | 45,776 |
| | $ | 3,543 |
| | 8 | % |
| | | | | | | | |
Consolidated SG&A as a Percentage of Revenues | | 28.8 | % | | 30.7 | % | | | | |
Papermaking Systems Segment
SG&A expenses in our Papermaking Systems segment increased $9.1 million to $89.2 milliondecreased in the first nine monthsquarter of 2018 from $80.1 million in the first nine months of 2017,2019 primarily due to $3.7a $1.4 million of incremental SG&A expenses from acquisitions and a $2.5 million unfavorablefavorable effect fromof foreign currency translation.
Wood Processing Systems Segment
SG&A expenses in our Wood Processing Systems segment increased $5.5 million to $20.9 milliondecreased in the first nine monthsquarter of 2019 primarily due to a $0.4 million favorable effect of foreign currency translation and $0.3 million of amortization of acquired backlog that was recorded in the 2018 from $15.4 millionperiod.
Material Handling Systems Segment
SG&A expenses in our Material Handling Systems segment in the first nine monthsquarter of 2017 primarily due to $10.72019 included $1.0 million of incremental SG&A expenses in the 2018 period from a 2017 acquisition, offset in part by $5.5amortization of acquired backlog and $0.8 million of acquisition-related costs in the 2017 period.costs.
Corporate and Other
SG&A expenses for Corporate and Other increased $3.2 million to $23.7 millionwere relatively unchanged in the first nine monthsquarter of 2018 from $20.4 million in2019 compared with the first nine monthsquarter of 2017 primarily due to increased incentive compensation expense and consulting fees related to system conversion projects.2018.
Research and Development Expenses
Research and development expenses, which represented 2% of revenues in both periods, increased $1.0 million to $8.0 million in the first nine months of 2018 from $7.0 million in the first nine months of 2017 due to the inclusion of research and development expenses from acquisitions.
Restructuring Costs
Restructuring costs in the first nine monthsquarter of 2018 of $1.7$0.8 million related to the integration of our U.S. and Swedish papermaking stock-preparationPapermaking Stock-Preparation product lines into a newly-constructedsingle manufacturing facility in the United States to achieve economies of scale and greater efficiencies, andefficiencies. This included $1.3$0.6 million of costs for the relocation of machinery, and equipment and administrative offices and $0.4$0.2 million primarily associated with employee retention costs and abandonment of excess facility and other closure costs.
Interest Expense
Interest expense increased $3.3$1.8 million to $5.3$3.5 million in the first nine monthsquarter of 20182019 from $2.0$1.7 million in the first nine monthsquarter of 20172018 primarily due to interest expense on additional borrowings related to our SMH acquisition. We expect our quarterly interest expense for acquisitions made in the second halfremainder of 2017, and2019 to be higher than the corresponding prior year periods primarily due to a lesser extent, to higher interest rates in the third quarterlevel of 2018 compared with the third quarter of 2017.debt outstanding.
Results of Operations (continued)
Provision for Income Taxes
Our provision for income taxes was $15.6increased to $4.0 million in the first nine monthsquarter of 2018 and $10.62019 from $3.9 million in the first nine monthsquarter of 2017.2018, and represented 26% of pre-tax income in both periods. The effective tax rate of 27%26% in the first nine monthsquarter of 20182019 was higher than our 2018 statutory tax rate of 21% primarily due to the GILTI provisions of the 2017 Tax Act,nondeductible expenses, the distribution of our worldwide earnings, the cost of repatriating the earnings of certain foreign subsidiaries,state taxes, and a change in estimate to the federal and state provisional net income tax expense initially recorded inassociated with the Global Intangible Low-Taxed Income (GILTI) provisions of the Tax Cuts and Jobs Act of 2017 for the 2017(2017 Tax Act.Act). This incremental tax expense was offset in part by a decrease in tax related to the reversal of tax reserves associated with uncertain tax positions and the net excess income tax benefits from stock-based compensation arrangements. The effective tax rate of 26% in the first nine monthsquarter of 20172018 was lowerhigher than our statutory tax rate of 35%21% primarily due to a true-up to the federal provisional net income tax expense initially recorded in 2017 for the 2017 Tax Act, the U.S. tax cost of foreign operations, including the GILTI provisions of the 2017 Tax Act, and the distribution of our worldwide earnings andearnings. This incremental tax expense was offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements, offset in part by an increase inthe reversal of tax reserves associated with uncertain tax positions, and a favorable impact to state taxes primarily related to non-deductible expenses and unrecognized tax benefits.
Additional work is still necessarythe true-up to finalize the provisional net income tax impacts ofexpense initially recorded in 2017 for the 2017 Tax Act, including the completion of a more detailed analysis of our historical foreign earnings and the understanding and application of anticipated additional regulatory guidance regarding the provisions of the 2017 Tax Act that may be issued by the Internal Revenue Service and state and local jurisdictions. Any subsequent adjustment to the provisional amounts will be recorded to current tax expense in the fourth quarter of 2018 when the analysis will be complete.
We have elected to account for GILTI as a current period expense when incurred (the period cost method). Because of the complexity of the GILTI tax rules and the lack of legislative guidance, we continue to evaluate the provisions of the 2017 Tax Act and the application of Accounting Standards Codification, Income Taxes (Topic 740). The final impact to us from the 2017 Tax Act’s GILTI tax legislation may differ from the estimate calculated by us. Such differences could be material due to, among other things, changes in interpretations of the 2017 Tax Act, future legislative action to address questions that arise because of the 2017 Tax Act, changes in accounting standards for income taxes or related interpretations in response to the 2017 Tax Act, or any updates or changes to estimates we have utilized to calculate the GILTI inclusion.Act.
Net Income
Net income increased $11.8$0.1 million or 38%, to $42.5$11.1 million in the first nine monthsquarter of 20182019 from $30.7$11.0 million in the first nine monthsquarter of 20172018 due to a $20.2$1.9 million increase in operating income, that was partially offset in part by increases inincreased interest expense of $1.8 million and provision for income taxes of $5.0 million and interest expense of $3.3$0.1 million (see discussions above for further details).
Recent Accounting Pronouncements
See Note 1, under the headings Recently Adopted Accounting Pronouncements and Recent Accounting Pronouncements Not Yet Adopted, in the accompanying condensed consolidated financial statements for further details.
Liquidity and Capital Resources
Consolidated working capital was $124.9$152.2 million at September 29, 2018,March 30, 2019, compared with $133.8$123.8 million at December 30, 2017.29, 2018. Included in working capital were cash and cash equivalents of $57.4$56.5 million at September 29, 2018,March 30, 2019, compared with $75.4$45.8 million at December 29, 2018. At March 30, 2017. At September 29, 2018, $53.12019, $51.5 million of cash and cash equivalents was held by our foreign subsidiaries.
Liquidity and Capital Resources (continued)
Cash Flows
First NineThree Months of 20182019
Our operating activities provided cash of $52.6$9.9 million in the first ninethree months of 20182019 primarily due to cash generated by our operating subsidiaries from product sales, which is largely represented within operating cash flows in net income, excluding non-cash charges for depreciation and amortization and stock-based compensation. Aside from cash generated from items which impacted net income, operating cash flows were also impacted by changes in working capital due to the timing of cash receipts and payments. WeWorking capital used cash of $10.2$11.4 million in the first quarter of 2019. A reduction of $9.6 million in other current liabilities was primarily related to purchasethe payment of incentive compensation, which was partially offset by a $3.7 million increase in customer deposits. Both the $3.3 million increase in inventory and the $3.9 million increase in accounts payable were primarily associated with the expected shipment of capital orders later in 2018. We had an increase in accounts receivable of $9.6 million related to a record level of revenue in the third quarter of 2018, which will be collected in subsequent periods. We received $9.4 million of cash from other current liabilities primarily related to customer deposits and advanced billings.2019.
Our investing activities used cash of $12.6$177.2 million in the first ninethree months of 2018 primarily related to2019, including $175.3 million for the SMH acquisition, net of cash acquired, and $2.2 million for purchases of property, plant, and equipment, including $6.4 million for a newly-constructed manufacturing facility in the United States.equipment.
Our financing activities usedprovided cash of $55.8$178.2 million in the first ninethree months of 2018.2019. We borrowed $189.0 million of U.S. dollar-denominated debt under our revolving credit facility primarily for our SMH acquisition, and used cash of $81.5$6.4 million for principal payments on our outstanding debt obligations, $7.2 million for cash dividends paid to stockholders, and $3.9$2.6 million for tax withholding payments related to the vesting of employee stock-based compensation. These usescompensation, and $2.4 million for cash dividends paid to stockholders.
Liquidity and $16.0 million under our revolving credit agreement, and $0.8 million received from employee purchases of our common stock.Capital Resources (continued)
First NineThree Months of 20172018
Our operating activities provided cash of $32.3$7.2 million in the first ninethree months of 20172018 primarily due to cash generated by our operating subsidiaries from product sales, whichsales. This is largely represented within operating cash flows in net income, excluding non-cash charges for depreciation and amortization and stock-based compensation. Aside from cash generated from items which impacted net income, operating cash flows were also impacted by changes in working capital due to the timing of cash receipts and payments. We had an increase in accounts receivable of $16.2 million related to increasedWorking capital shipments in the third quarter of 2017. We used cash of $3.5$11.3 million in the first quarter of 2018, including $9.7 million of cash used to purchase inventory primarily related to purchases associated with the shipment of Stock-Preparationstock-preparation capital orders later in the fourth quarter of 20172018 and the first half of 2018. We received $8.4$6.3 million of cash fromused to settle other current liabilities that was primarily related to advanced billings.the payment of incentive compensation and taxes.
Our investing activities used cash of $212.8$5.1 million in the first ninethree months of 2017, including $204.2 million for acquisitions and $8.7 million for2018 related to purchases of property, plant, and equipment.equipment, including $3.8 million for a manufacturing facility project in the United States.
Our financing activities providedused cash of $190.4$6.7 million in the first ninethree months of 2017. We borrowed $222.02018. Cash uses of $13.5 million under our revolving credit agreement, including $70.7 million of Canadian dollar-denominated and $61.8 million of euro-denominated borrowings. These borrowings were partially offset by $20.3 million used for principal payments on our outstanding debt obligations, $6.7$3.6 million usedfor tax withholding payments related to the vesting of employee stock-based compensation, and $2.3 million for cash dividends paid to stockholders $2.2were partially offset by U.S. dollar-denominated borrowings of $12.0 million used for tax withholding payments related to stock-based compensation, and $1.3 million used for the payment of debt issuance costs.under our revolving credit facility.
Additional Liquidity and Capital Resources
On May 16, 2018, our board of directors approved the repurchase of up to $20 million of our equity securities during the period from May 16, 2018 to May 16, 2019. We have not purchasedrepurchased any shares of our common stock under this authorization or under the previous authorization, which expired on May 17, 2018.authorization.
We paid cash dividends of $7.2$2.4 million in the first nine monthsquarter of 2018.2019. On September 12, 2018, our board of directorsMarch 5, 2019, we declared a quarterly cash dividend of $0.22$0.23 per share totaling $2.4$2.6 million that will bewas paid on November 8, 2018.May 7, 2019. 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.
Liquidity and Capital Resources (continued)
As of September 29, 2018,March 30, 2019, we had cash and cash equivalents of $57.4$56.5 million, of which $53.1$51.5 million was held by our foreign subsidiaries. As of September 29, 2018,March 30, 2019, we had approximately $267.5$288.7 million of total unremitted foreign earnings. It is our intent to indefinitely reinvest $259.2$276.7 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments. In the first nine months of 2018,quarter, we recorded withholding taxes on the earnings in certain foreign subsidiaries that we plan to repatriate in the foreseeable future. The foreign withholding taxes that would be required if we were to remit the indefinitely reinvested foreign earnings to the United States would be approximately $4.7$5.3 million.
We plan to make expenditures of approximately $5$10 to $12 million during the remainder of 20182019 for property, plant, and equipment.
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 our existing resources, together with the cashborrowings available fromunder our revolving credit facility and our Multi-Currency Note Purchase and Private Shelf Agreement (Note Purchase Agreement) and the cash we expect to generate from operations, will be sufficient to meet the capital requirements of our current operations for the foreseeable future.
Revolving Credit FacilityDebt Obligations
In 2017, we entered into an Amended and Restated Credit Agreement, as amended (the 2017 Credit Agreement), which is a five-year unsecured multi-currencyUnder our revolving credit facility, in the aggregate principal amountwe have a borrowing capacity of up$400 million, of which $75.3 million was available to $300 million. The 2017 Credit Agreement also includesborrow as of March 30, 2019, along with an additional uncommitted unsecured incremental borrowing facility of $150 million. In addition, under our Note Purchase Agreement, we may issue additional senior promissory notes up to an additional $100$115 million. The principal on any borrowings is due onUnder these agreements, our leverage ratio must be less than 4.0 for the next three fiscal quarters, and less than 3.75 thereafter. As of March 1, 2022. Borrowing may be denominated in U.S. dollars or certain foreign currencies as defined in the 2017 Credit Agreement. Interest on any loans outstanding accrues and generally is payable quarterly in arrears at one of the following rates selected by us: (i) the Base Rate, calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate as published by Citizens Bank, and (c) the thirty-day London Inter-Bank Offered Rate (LIBOR) rate, as defined, plus 0.50%; or (ii) the LIBOR rate (with a zero percent floor), as defined, plus an applicable margin of 1% to 2%. The applicable margin is determined based upon the ratio of30, 2019, our total debt, net of certain cash and debt, 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 and debt as 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.
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 minimumwas 2.33. See Note 5, Long-Term Obligations, in the accompanying condensed 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, changingfinancial statements for additional information regarding our fiscal year, arrangements affecting subsidiary distributions, entering into new lines of business, and certain actions related to a discontinued operation. As of September 29, 2018, 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. In addition, one of our foreign subsidiaries entered into a guarantee agreement limited to certain obligations of two foreign subsidiary borrowers.
As of September 29, 2018, the outstanding balance under the 2017 Credit Agreement was $168.5 million, including $43.7 million of Canadian dollar-denominated and $33.8 million of euro-denominated borrowings. As of September 29, 2018, we had $131.2 million of borrowing capacity available under the 2017 Credit Agreement, which was calculated by translating our foreign-denominated borrowings using borrowing date foreign exchange rates.
The weighted average interest rate for the revolving credit facility was 3.07% as of September 29, 2018.debt obligations.
Liquidity and Capital Resources (continued)
Commercial Real Estate Loan
In July 2018, we and certain domestic subsidiaries borrowed $21.0 million under a promissory note (Real Estate Loan) which is repayable in quarterly principal installments of $0.3 million over a ten-year period with the remaining principal balance of $10.5 million due upon maturity. Interest accrues and is payable quarterly in arrears at a fixed rate of 4.45% per annum. We are not permitted to prepay any amount in the first twelve months of the term of the Real Estate Loan. Any voluntary prepayments are subject to a 2% prepayment fee if paid in the second twelve months of the term of the Real Estate Loan, and are subject to a 1% prepayment fee if paid in the third twelve months of the term of the Real Estate Loan. Thereafter, no prepayment fee will be applied to voluntary prepayment by us.
The Real Estate Loan is secured by real estate and related personal property of ours and certain of our domestic subsidiaries pursuant to mortgage and security agreements dated July 6, 2018 (Mortgage and Security Agreements). Our obligations under the Real Estate Loan may be accelerated upon the occurrence of an event of default under the Real Estate Loan and the Mortgage and Security Agreements, which includes customary events of default including, without limitation, payment defaults, defaults in the performance of covenants and obligations, the inaccuracy of representations or warranties, bankruptcy- and insolvency-related defaults, liens on the properties or collateral and uninsured judgments. In addition, the occurrence of an event of default under the 2017 Credit Agreement or any successor credit facility would be an event of default under the Real Estate Loan. We used the proceeds from the Real Estate Loan to repay a portion of our U.S. dollar-denominated debt under the 2017 Credit Agreement.
Sale-Leaseback Financing Arrangement
We have a sale-leaseback financing arrangement for a manufacturing facility in Germany. Under this arrangement, the quarterly lease payment includes principal, interest, and a payment to the landlord toward a secured loan receivable. The lease arrangement includes a net fixed price purchase option of $1.5 million at the end of the lease term in 2022. At September 29, 2018, $4.2 million was outstanding under this capital lease obligation with an interest rate of 1.79% on the outstanding obligation.
Interest Rate Swap Agreements
In May 2018, we entered into a swap agreement (2018 Swap Agreement) that has a $15.0 million notional value and expires on June 30, 2023. In 2015, we also entered into a swap agreement (2015 Swap Agreement) that has a $10.0 million notional value and expires on March 27, 2020. The swap agreements hedge our exposure to movements in the three-month LIBOR rate on U.S. dollar-denominated debt and have been designated as cash flow hedges. On a quarterly basis, we receive a three-month LIBOR rate and pay a fixed rate of interest of 3.15% plus an applicable margin as defined in the revolving credit facility on the 2018 Swap Agreement and 1.50% plus an applicable margin as defined in the revolving credit facility on the 2015 Swap Agreement. The 2018 Swap Agreement is subject to a zero percent floor on the three-month LIBOR rate.
We believe that any credit risk associated with the swap agreements is remote based on our financial position and the creditworthiness of the financial institution that issued the 2018 and 2015 Swap Agreements.
The counterparty to the swap agreements could demand an early termination of these agreements if we were 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 if we were to be unable to cure the default.
Contractual Obligations and Other Commercial Commitments
There have been no significant changes to our contractual obligations and other commercial commitments other than as described below during the ninethree months ended September 29, 2018,March 30, 2019, 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-end 2017, other than2018.
In the Real Estate Loan andfirst quarter of 2019, we incurred additional borrowings of $183.6 million under our revolving credit facility that matures on December 14, 2023. The interest rate on these borrowings is based on the 2018 Swap Agreement, as described above.LIBOR rate (with a zero percent floor), plus an applicable margin. The additional borrowings increased our leverage ratio resulting in a 25-basis-point increase in the applicable margin beginning in the second quarter of 2019.
In connection with the SMH acquisition, we recorded an additional $15.6 million of operating lease obligations, of which approximately $15.0 million relates to the lease of a building that expires in June 2034. Lease payments on the building are estimated to be approximately $1.3 million annually.
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 20172018 as disclosed in Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 30, 2017,29, 2018, filed with the SEC, except as related to the Real Estate Loan and the 2018 Swap Agreement. Pursuant to the Real Estate Loan, in July 2018, we borrowed $21 million with a fixed interest rate of 4.45% and used the proceeds to repay our outstanding variable rate debt under the 2017 Credit Agreement. In May 2018, we entered into the 2018 Swap Agreement to hedge our exposure to movements in the three-month LIBOR rate.SEC.
Item 4 – Controls and Procedures
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 29, 2018.March 30, 2019. 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 29, 2018,March 30, 2019, our Chief Executive Officer and Chief Financial Officer concluded that as of September 29, 2018,March 30, 2019, our disclosure controls and procedures were effective at the reasonable assurance level.
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 29, 2018March 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1A – Risk Factors
There have been no material changes from the risk factors disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017, as amended in subsequent filings with the SEC.29, 2018.
Item 6 – Exhibits
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Exhibit Number | | |
| Description of Exhibit |
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10.1 | | Promissory Note inTransition and Executive Chairman Agreement between the principal amount of $21,000,000Registrant and Jonathan W. Painter dated July 6, 2018, executed by Kadant Inc., Kadant Johnson LLC, Kadant Black Clawson LLC and Verus Lebanon, LLC in favor of Citizens Bank, N.A.February 13, 2019 (filed as Exhibit 99.110.14 to the Registrant's Annual Report on Form 8-K10-K for the year ended December 29, 2018 [File No. 001-11406] and incorporated in this document by reference). |
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10.2 | | |
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10.3 | | |
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10.4 | | |
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31.1* | | |
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31.2* | | |
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32** | | |
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101.INS* | | XBRL Instance Document. |
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101.SCH* | | XBRL Taxonomy Extension Schema Document. |
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101.CAL* | | XBRL Taxonomy Calculation Linkbase Document. |
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101.LAB* | | XBRL Taxonomy Label Linkbase Document. |
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101.PRE* | | XBRL Taxonomy Presentation Linkbase Document. |
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101.DEF* | | XBRL Taxonomy Definition Linkbase Document. |
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* | Filed herewith. |
** | Furnished herewith. |
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheet as of SeptemberMarch 30, 2019 and December 29, 2018, and December 30, 2017, (ii) Condensed Consolidated Statement of Income for the three- and nine-monththree-month periods ended September 29,March 30, 2019 and March 31, 2018, and September 30, 2017, (iii) Condensed Consolidated Statement of Comprehensive Income for the three- and nine-monththree-month periods ended September 29,March 30, 2019 and March 31, 2018, and September 30, 2017, (iv) Condensed Consolidated Statement of Cash Flows for the nine-monththree-month periods ended September 29,March 30, 2019 and March 31, 2018, and September 30, 2017, (v) Condensed Consolidated Statement of Stockholders' Equity for the nine-monththree-month periods ended September 29,March 30, 2019 and March 31, 2018, and September 30, 2017, and (vi) Notes to Condensed Consolidated Financial Statements.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| KADANT INC. |
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Date: November 7, 2018May 8, 2019 | /s/ Michael J. McKenney |
| Michael J. McKenney |
| Executive Vice President and Chief Financial Officer |
| (Principal Financial Officer) |