UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|
| |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 28, 2019June 27, 2020
OR
|
| |
☐ | 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)
|
| | | |
Delaware | | 52-1762325 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
One Technology Park Drive
Westford, Massachusetts 01886
(Address of principal executive offices, including zip code)
(978) 776-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
|
| | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, $.01 par value | | KAI | | New York Stock Exchange |
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 ☒ 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ 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.
|
| | | | |
Large accelerated filer | ☒ | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
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 ☒
As of October 25, 2019,July 24, 2020, the registrant had 11,272,47611,500,187 shares of Common Stockcommon stock outstanding.
Kadant Inc.
Quarterly Report on Form 10-Q
for the Period Ended September 28, 2019June 27, 2020
Table of Contents
|
| | |
| | Page |
PART I: Financial Information |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
PART II: Other Information |
| | |
| | |
| | |
| | |
PART 1 – FINANCIAL INFORMATION
Item 1 – Financial Statements
KADANT INC.
Condensed Consolidated Balance Sheet
(Unaudited)
|
| | | | | | | | |
| | September 28, 2019 | | December 29, 2018 |
(In thousands, except share and per share amounts) | | |
Assets | | | | |
Current Assets: | | | | |
Cash and cash equivalents | | $ | 48,650 |
| | $ | 45,830 |
|
Restricted cash (Note 1) | | 1,321 |
| | 287 |
|
Accounts receivable, less allowances of $2,826 and $2,897 (Note 1) | | 102,131 |
| | 92,624 |
|
Inventories (Note 1) | | 108,377 |
| | 86,373 |
|
Unbilled revenues | | 13,571 |
| | 15,741 |
|
Other current assets | | 17,246 |
| | 11,906 |
|
Total Current Assets | | 291,296 |
| | 252,761 |
|
| | | | |
Property, Plant, and Equipment, at Cost | | 179,098 |
| | 170,697 |
|
Less: accumulated depreciation and amortization | | 95,049 |
| | 90,540 |
|
Property, Plant, and Equipment, at Cost, Net | | 84,049 |
| | 80,157 |
|
| | | | |
Other Assets (Note 8) | | 46,040 |
| | 21,310 |
|
Intangible Assets, Net (Notes 1 and 2) | | 179,681 |
| | 113,347 |
|
Goodwill (Notes 1 and 2) | | 334,491 |
| | 258,174 |
|
Total Assets | | $ | 935,557 |
| | $ | 725,749 |
|
| | | | |
Liabilities and Stockholders' Equity | | | | |
Current Liabilities: | | | | |
Current maturities of long-term obligations (Note 5) | | $ | 2,749 |
| | $ | 1,668 |
|
Accounts payable | | 40,391 |
| | 35,720 |
|
Customer deposits | | 30,012 |
| | 26,987 |
|
Accrued payroll and employee benefits | | 30,739 |
| | 30,902 |
|
Advanced billings | | 8,124 |
| | 5,534 |
|
Other current liabilities | | 31,676 |
| | 28,178 |
|
Total Current Liabilities | | 143,691 |
| | 128,989 |
|
| | | | |
Long-Term Obligations (Note 5) | | 314,075 |
| | 174,153 |
|
Long-Term Deferred Income Taxes | | 23,692 |
| | 22,962 |
|
Other Long-Term Liabilities (Note 8) | | 47,226 |
| | 25,074 |
|
| | | | |
Commitments and Contingencies (Note 14) | |
|
| |
|
|
| | | | |
Stockholders' Equity: | | |
| | |
|
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued | | — |
| | — |
|
Common stock, $.01 par value, 150,000,000 shares authorized; 14,624,159 shares issued | | 146 |
| | 146 |
|
Capital in excess of par value | | 105,219 |
| | 104,731 |
|
Retained earnings | | 429,127 |
| | 393,578 |
|
Treasury stock at cost, 3,352,034 and 3,514,163 shares | | (82,138 | ) | | (86,111 | ) |
Accumulated other comprehensive items (Note 9) | | (47,360 | ) | | (39,376 | ) |
Total Kadant Stockholders' Equity | | 404,994 |
| | 372,968 |
|
Noncontrolling interest | | 1,879 |
| | 1,603 |
|
Total Stockholders' Equity | | 406,873 |
| | 374,571 |
|
Total Liabilities and Stockholders' Equity | | $ | 935,557 |
| | $ | 725,749 |
|
|
| | | | | | | | |
| | June 27, 2020 | | December 28, 2019 |
(In thousands, except share and per share amounts) | | |
Assets | | | | |
Current Assets: | | | | |
Cash and cash equivalents | | $ | 57,499 |
| | $ | 66,786 |
|
Restricted cash | | 3,450 |
| | 1,487 |
|
Accounts receivable, net of allowances of $2,914 and $2,698 | | 89,393 |
| | 95,740 |
|
Inventories | | 109,663 |
| | 102,715 |
|
Unbilled revenue | | 10,444 |
| | 13,162 |
|
Other current assets | | 17,202 |
| | 17,686 |
|
Total Current Assets | | 287,651 |
| | 297,576 |
|
Property, Plant, and Equipment, net of accumulated depreciation of $99,366 and $95,309 | | 82,242 |
| | 86,032 |
|
Other Assets | | 40,092 |
| | 45,851 |
|
Intangible Assets, Net (Note 1) | | 167,314 |
| | 173,896 |
|
Goodwill (Note 1) | | 337,993 |
| | 336,032 |
|
Total Assets | | $ | 915,292 |
| | $ | 939,387 |
|
| | | | |
Liabilities and Stockholders' Equity | | | | |
Current Liabilities: | | | | |
Short-term obligations and current maturities of long-term obligations (Note 6) | | $ | 20,387 |
| | $ | 2,851 |
|
Accounts payable | | 39,922 |
| | 45,852 |
|
Accrued payroll and employee benefits | | 25,388 |
| | 31,968 |
|
Customer deposits | | 22,716 |
| | 24,012 |
|
Advanced billings | | 6,110 |
| | 11,280 |
|
Other current liabilities | | 33,863 |
| | 30,206 |
|
Total Current Liabilities | | 148,386 |
| | 146,169 |
|
Long-Term Obligations (Note 6) | | 262,760 |
| | 298,174 |
|
Other Long-Term Liabilities | | 63,787 |
| | 67,965 |
|
| | | | |
Commitments and Contingencies (Note 13) | |
|
| |
|
|
| | | | |
Stockholders' Equity: | | |
| | |
|
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued | | — |
| | — |
|
Common stock, $.01 par value, 150,000,000 shares authorized; 14,624,159 shares issued | | 146 |
| | 146 |
|
Capital in excess of par value | | 107,202 |
| | 106,698 |
|
Retained earnings | | 453,874 |
| | 435,249 |
|
Treasury stock at cost, 3,127,565 and 3,214,888 shares | | (76,638 | ) | | (78,778 | ) |
Accumulated other comprehensive items (Note 9) | | (45,863 | ) | | (37,620 | ) |
Total Kadant Stockholders' Equity | | 438,721 |
| | 425,695 |
|
Noncontrolling interest | | 1,638 |
| | 1,384 |
|
Total Stockholders' Equity | | 440,359 |
| | 427,079 |
|
Total Liabilities and Stockholders' Equity | | $ | 915,292 |
| | $ | 939,387 |
|
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 | | Six Months Ended |
| | September 28, 2019 | | September 29, 2018 | | September 28, 2019 | | September 29, 2018 | | June 27, 2020 | | June 29, 2019 | | June 27, 2020 | | June 29, 2019 |
(In thousands, except per share amounts) | | |
| | | | | | | | | |
Revenues (Notes 1 and 12) | | $ | 173,504 |
| | $ | 165,745 |
| | $ | 521,985 |
| | $ | 469,851 |
| |
Revenue (Notes 1 and 12) | | | $ | 152,860 |
| | $ | 177,165 |
| | $ | 311,987 |
| | $ | 348,481 |
|
| | | | | | | | | | | | | | | | |
Costs and Operating Expenses: | | |
| | |
| | | | | | |
| | |
| | | | |
Cost of revenues | | 99,257 |
| | 92,652 |
| | 302,852 |
| | 262,515 |
| |
Cost of revenue | | | 86,412 |
| | 102,794 |
| | 177,216 |
| | 203,595 |
|
Selling, general, and administrative expenses | | 47,097 |
| | 42,888 |
| | 144,883 |
| | 133,796 |
| | 45,073 |
| | 48,467 |
| | 90,665 |
| | 97,786 |
|
Research and development expenses | | 2,597 |
| | 2,452 |
| | 7,980 |
| | 8,049 |
| | 2,798 |
| | 2,762 |
| | 5,874 |
| | 5,383 |
|
Restructuring costs (Note 13) | | — |
| | 378 |
| | — |
| | 1,717 |
| |
Restructuring costs (Note 3) | | | 456 |
| | — |
| | 456 |
| | — |
|
| | 148,951 |
| | 138,370 |
| | 455,715 |
| | 406,077 |
| | 134,739 |
| | 154,023 |
| | 274,211 |
| | 306,764 |
|
| | | | | | | | | | | | | | | | |
Operating Income | | 24,553 |
| | 27,375 |
| | 66,270 |
| | 63,774 |
| | 18,121 |
| | 23,142 |
| | 37,776 |
| | 41,717 |
|
| | | | | | | | | | | | | | | | |
Interest Income | | 43 |
| | 30 |
| | 158 |
| | 335 |
| | 37 |
| | 59 |
| | 88 |
| | 115 |
|
Interest Expense | | (3,066 | ) | | (1,738 | ) | | (10,143 | ) | | (5,320 | ) | | (1,931 | ) | | (3,573 | ) | | (4,390 | ) | | (7,077 | ) |
Other Expense, Net (Note 7) | | (98 | ) | | (245 | ) | | (296 | ) | | (736 | ) | |
Other Expense, Net | | | (31 | ) | | (99 | ) | | (63 | ) | | (198 | ) |
| | | | | | | | | | | | | | | | |
Income Before Provision for Income Taxes | | 21,432 |
| | 25,422 |
| | 55,989 |
| | 58,053 |
| | 16,196 |
| | 19,529 |
| | 33,411 |
| | 34,557 |
|
Provision for Income Taxes (Note 4) | | 5,219 |
| | 6,443 |
| | 12,310 |
| | 15,575 |
| |
Provision for Income Taxes (Note 5) | | | 4,474 |
| | 3,128 |
| | 9,033 |
| | 7,091 |
|
Net Income | | 16,213 |
| | 18,979 |
| | 43,679 |
| | 42,478 |
| | 11,722 |
| | 16,401 |
| | 24,378 |
| | 27,466 |
|
| | | | | | | | | | | | | | | | |
Net Income Attributable to Noncontrolling Interest | | (98 | ) | | (195 | ) | | (360 | ) | | (487 | ) | | (115 | ) | | (97 | ) | | (240 | ) | | (262 | ) |
| | | | | | | | | | | | | | | | |
Net Income Attributable to Kadant | | $ | 16,115 |
| | $ | 18,784 |
| | $ | 43,319 |
| | $ | 41,991 |
| | $ | 11,607 |
| | $ | 16,304 |
| | $ | 24,138 |
| | $ | 27,204 |
|
| | | | | | | | | | | | | | | | |
Earnings per Share Attributable to Kadant (Note 3): | | |
| | |
| | | | | |
Earnings per Share Attributable to Kadant (Note 4) | | | |
| | |
| | | | |
Basic | | $ | 1.43 |
| | $ | 1.69 |
| | $ | 3.87 |
| | $ | 3.79 |
| | $ | 1.01 |
| | $ | 1.46 |
| | $ | 2.11 |
| | $ | 2.44 |
|
Diluted | | $ | 1.41 |
| | $ | 1.64 |
| | $ | 3.79 |
| | $ | 3.69 |
| | $ | 1.00 |
| | $ | 1.42 |
| | $ | 2.09 |
| | $ | 2.38 |
|
| | | | | | | | | | | | | | | | |
Weighted Average Shares (Note 3): | | |
| | |
| | | | | |
Weighted Average Shares (Note 4) | | | |
| | |
| | | | |
Basic | | 11,267 |
| | 11,101 |
| | 11,198 |
| | 11,078 |
| | 11,482 |
| | 11,194 |
| | 11,457 |
| | 11,164 |
|
Diluted | | 11,469 |
| | 11,421 |
| | 11,434 |
| | 11,388 |
| | 11,552 |
| | 11,448 |
| | 11,530 |
| | 11,416 |
|
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 | | Six Months Ended |
| | September 28, 2019 | | September 29, 2018 | | September 28, 2019 | | September 29, 2018 | | June 27, 2020 | | June 29, 2019 | | June 27, 2020 | | June 29, 2019 |
(In thousands) | | |
| | | | | | | | | |
Net Income | | $ | 16,213 |
| | $ | 18,979 |
| | $ | 43,679 |
| | $ | 42,478 |
| | $ | 11,722 |
| | $ | 16,401 |
| | $ | 24,378 |
| | $ | 27,466 |
|
| | | | | | | | | |
Other Comprehensive Items: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Foreign currency translation adjustment | | (9,091 | ) | | (1,121 | ) | | (7,603 | ) | | (11,561 | ) | | 4,742 |
| | 1,953 |
| | (7,832 | ) | | 1,488 |
|
Pension and other post-retirement liability adjustments (net of tax provision of $12, $46, $22 and $155) | | 31 |
| | 143 |
| | 59 |
| | 472 |
| |
Deferred (loss) gain on cash flow hedges (net of tax (benefit) provision of ($47), $35, ($190) and ($12)) | | (123 | ) | | 100 |
| | (524 | ) | | 20 |
| |
Other Comprehensive Items | | (9,183 | ) | | (878 | ) | | (8,068 | ) | | (11,069 | ) | |
Pension and other post-retirement liability adjustments, net (net of tax provision of $–, $2, $20 and $10) | | | (2 | ) | | 7 |
| | 48 |
| | 28 |
|
Effect of other post-retirement plan settlement | | | — |
| | — |
| | (119 | ) | | — |
|
Deferred loss on cash flow hedges (net of tax benefit of $3, $39, $122 and $143) | | | (24 | ) | | (164 | ) | | (326 | ) | | (401 | ) |
Total other comprehensive items | | | 4,716 |
| | 1,796 |
| | (8,229 | ) | | 1,115 |
|
Comprehensive Income | | 7,030 |
| | 18,101 |
| | 35,611 |
| | 31,409 |
| | 16,438 |
| | 18,197 |
| | 16,149 |
| | 28,581 |
|
Comprehensive Income Attributable to Noncontrolling Interest | | (24 | ) | | (191 | ) | | (276 | ) | | (430 | ) | | (140 | ) | | (120 | ) | | (254 | ) | | (252 | ) |
Comprehensive Income Attributable to Kadant | | $ | 7,006 |
| | $ | 17,910 |
| | $ | 35,335 |
| | $ | 30,979 |
| | $ | 16,298 |
| | $ | 18,077 |
| | $ | 15,895 |
| | $ | 28,329 |
|
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 | | Six Months Ended |
| | September 28, 2019 | | September 29, 2018 | | June 27, 2020 | | June 29, 2019 |
(In thousands) | | |
| | | | | |
Operating Activities | | | | | | | | |
Net income attributable to Kadant | | $ | 43,319 |
| | $ | 41,991 |
| | $ | 24,138 |
| | $ | 27,204 |
|
Net income attributable to noncontrolling interest | | 360 |
| | 487 |
| | 240 |
| | 262 |
|
Net income | | 43,679 |
| | 42,478 |
| | 24,378 |
| | 27,466 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | |
| | |
| | |
| | |
|
Depreciation and amortization | | 24,304 |
| | 17,739 |
| | 15,174 |
| | 16,541 |
|
Stock-based compensation expense | | 5,125 |
| | 5,346 |
| | 3,516 |
| | 3,467 |
|
Right-of-use asset amortization | | 3,270 |
| | — |
| |
Provision for losses on accounts receivable | | 170 |
| | 344 |
| | 303 |
| | 39 |
|
(Gain) loss on the sale of property, plant, and equipment | | (139 | ) | | 79 |
| |
Gain on sale of property, plant, and equipment | | | — |
| | (189 | ) |
Other items, net | | (2,316 | ) | | (3,543 | ) | | (565 | ) | | 851 |
|
Changes in current assets and liabilities, net of effects of acquisitions: | | |
| | |
| | |
| | |
|
Accounts receivable | | (1,124 | ) | | (9,598 | ) | | 4,761 |
| | (2,855 | ) |
Unbilled revenues | | 1,957 |
| | (3,947 | ) | |
Unbilled revenue | | | 2,706 |
| | 2,131 |
|
Inventories | | (10,294 | ) | | (10,155 | ) | | (9,372 | ) | | (9,326 | ) |
Other current assets | | (4,093 | ) | | 241 |
| | 1,572 |
| | (3,417 | ) |
Accounts payable | | 2,798 |
| | 4,182 |
| | (5,032 | ) | | 3,419 |
|
Other current liabilities | | (5,171 | ) | | 9,384 |
| | (9,233 | ) | | (5,639 | ) |
Net cash provided by operating activities | | 58,166 |
| | 52,550 |
| | 28,208 |
| | 32,488 |
|
| | | | | | | | |
Investing Activities | | |
| | |
| | |
| | |
|
Acquisitions, net of cash acquired (Note 2) | | (177,058 | ) | | — |
| | (7,066 | ) | | (176,855 | ) |
Purchases of property, plant, and equipment | | (6,236 | ) | | (12,817 | ) | | (3,597 | ) | | (4,143 | ) |
Proceeds from sale of property, plant, and equipment | | 527 |
| | 173 |
| | 11 |
| | 368 |
|
Net cash used in investing activities | | (182,767 | ) | | (12,644 | ) | | (10,652 | ) | | (180,630 | ) |
| | | | | | | | |
Financing Activities | | |
| | |
| | |
| | |
|
Repayment of short- and long-term obligations | | | (24,160 | ) | | (24,562 | ) |
Proceeds from issuance of long-term obligations | | 247,090 |
| | 37,000 |
| | 7,000 |
| | 191,000 |
|
Repayment of long-term obligations | | (108,272 | ) | | (81,891 | ) | |
Dividends paid | | (7,604 | ) | | (7,200 | ) | | (5,381 | ) | | (5,014 | ) |
Tax withholding payments related to stock-based compensation | | (2,670 | ) | | (3,886 | ) | | (2,318 | ) | | (2,670 | ) |
Proceeds from issuance of Company common stock | | 2,006 |
| | 813 |
| | 1,445 |
| | 1,697 |
|
Dividend paid to noncontrolling interest | | — |
| | (465 | ) | |
Payment of debt issuance costs | | (52 | ) | | (158 | ) | | — |
| | (52 | ) |
Net cash provided by (used in) financing activities | | 130,498 |
| | (55,787 | ) | |
Net cash (used in) provided by financing activities | | | (23,414 | ) | | 160,399 |
|
| | | | | | | | |
Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash | | (2,043 | ) | | (2,906 | ) | | (1,466 | ) | | (236 | ) |
| | | | | | | | |
Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash | | 3,854 |
| | (18,787 | ) | |
(Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash | | | (7,324 | ) | | 12,021 |
|
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | | 46,117 |
| | 76,846 |
| | 68,273 |
| | 46,117 |
|
Cash, Cash Equivalents, and Restricted Cash at End of Period | | $ | 49,971 |
| | $ | 58,059 |
| | $ | 60,949 |
| | $ | 58,138 |
|
See Note 1, under the heading Supplemental Cash Flow Information for supplemental cash flow information.further details.
The accompanying notes are an integral part of these condensed consolidated financial statements.
KADANT INC.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 28, 2019 |
(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 June 29, 2019 | | 14,624,159 |
| | $ | 146 |
| | $ | 103,767 |
| | $ | 415,605 |
| | 3,369,304 |
| | $ | (82,562 | ) | | $ | (38,251 | ) | | $ | 1,855 |
| | $ | 400,560 |
|
Net income | | — |
| | — |
| | — |
| | 16,115 |
| | — |
| | — |
| | — |
| | 98 |
| | 16,213 |
|
Dividend declared – Common Stock, $0.23 per share | | — |
| | — |
| | — |
| | (2,593 | ) | | — |
| | — |
| | — |
| | — |
| | (2,593 | ) |
Activity under stock plans | | — |
| | — |
| | 1,452 |
| | — |
| | (17,270 | ) | | 424 |
| | — |
| | — |
| | 1,876 |
|
Other comprehensive items | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (9,109 | ) | | (74 | ) | | (9,183 | ) |
Balance at September 28, 2019 | | 14,624,159 |
| | $ | 146 |
| | $ | 105,219 |
| | $ | 429,127 |
| | 3,352,034 |
| | $ | (82,138 | ) | | $ | (47,360 | ) | | $ | 1,879 |
| | $ | 406,873 |
|
| | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 28, 2019 |
(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 | | — |
| | — |
| | — |
| | 43,319 |
| | — |
| | — |
| | — |
| | 360 |
| | 43,679 |
|
Adoption of ASU No. 2016-02, Leases | | — |
| | — |
| | — |
| | (17 | ) | | — |
| | — |
| | — |
| | — |
| | (17 | ) |
Dividends declared – Common Stock, $0.69 per share | | — |
| | — |
| | — |
| | (7,753 | ) | | — |
| | — |
| | — |
| | — |
| | (7,753 | ) |
Activity under stock plans | | — |
| | — |
| | 488 |
| | — |
| | (162,129 | ) | | 3,973 |
| | — |
| | — |
| | 4,461 |
|
Other comprehensive items | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7,984 | ) | | (84 | ) | | (8,068 | ) |
Balance at September 28, 2019 | | 14,624,159 |
| | $ | 146 |
| | $ | 105,219 |
| | $ | 429,127 |
| | 3,352,034 |
| | $ | (82,138 | ) | | $ | (47,360 | ) | | $ | 1,879 |
| | $ | 406,873 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 27, 2020 |
(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 March 28, 2020 | | 14,624,159 |
| | $ | 146 |
| | $ | 105,457 |
| | $ | 445,027 |
| | 3,154,644 |
| | $ | (77,302 | ) | | $ | (50,554 | ) | | $ | 1,498 |
| | $ | 424,272 |
|
Net income | | — |
| | — |
| | — |
| | 11,607 |
| | — |
| | — |
| | — |
| | 115 |
| | 11,722 |
|
Dividend declared – Common Stock, $0.24 per share | | — |
| | — |
| | — |
| | (2,760 | ) | | — |
| | — |
| | — |
| | — |
| | (2,760 | ) |
Activity under stock plans | | — |
| | — |
| | 1,745 |
| | — |
| | (27,079 | ) | | 664 |
| | — |
| | — |
| | 2,409 |
|
Other comprehensive items | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,691 |
| | 25 |
| | 4,716 |
|
Balance at June 27, 2020 | | 14,624,159 |
| | $ | 146 |
| | $ | 107,202 |
| | $ | 453,874 |
| | 3,127,565 |
| | $ | (76,638 | ) | | $ | (45,863 | ) | | $ | 1,638 |
| | $ | 440,359 |
|
| | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 27, 2020 |
(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 28, 2019 | | 14,624,159 |
| | $ | 146 |
| | $ | 106,698 |
| | $ | 435,249 |
| | 3,214,888 |
| | $ | (78,778 | ) | | $ | (37,620 | ) | | $ | 1,384 |
| | $ | 427,079 |
|
Net income | | — |
| | — |
| | — |
| | 24,138 |
| | — |
| | — |
| | — |
| | 240 |
| | 24,378 |
|
Dividends declared – Common Stock, $0.48 per share | | — |
| | — |
| | — |
| | (5,513 | ) | | — |
| | — |
| | — |
| | — |
| | (5,513 | ) |
Activity under stock plans | | — |
| | — |
| | 504 |
| | — |
| | (87,323 | ) | | 2,140 |
| | — |
| | — |
| | 2,644 |
|
Other comprehensive items | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8,243 | ) | | 14 |
| | (8,229 | ) |
Balance at June 27, 2020 | | 14,624,159 |
| | $ | 146 |
| | $ | 107,202 |
| | $ | 453,874 |
| | 3,127,565 |
| | $ | (76,638 | ) | | $ | (45,863 | ) | | $ | 1,638 |
| | $ | 440,359 |
|
KADANT INC.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 29, 2018 |
(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 June 30, 2018 | | 14,624,159 |
| | $ | 146 |
| | $ | 101,842 |
| | $ | 361,262 |
| | 3,528,550 |
| | $ | (86,464 | ) | | $ | (36,853 | ) | | $ | 1,752 |
| | $ | 341,685 |
|
Net income | | — |
| | — |
| | — |
| | 18,784 |
| | — |
| | — |
| | — |
| | 195 |
| | 18,979 |
|
Dividend declared – Common Stock, $0.22 per share | | — |
| | — |
| | — |
| | (2,444 | ) | | — |
| | — |
| | — |
| | — |
| | (2,444 | ) |
Dividend paid to noncontrolling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (465 | ) | | (465 | ) |
Activity under stock plans | | — |
| | — |
| | 1,275 |
| | — |
| | (11,687 | ) | | 287 |
| | — |
| | — |
| | 1,562 |
|
Other comprehensive items | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (874 | ) | | (4 | ) | | (878 | ) |
Balance at September 29, 2018 | | 14,624,159 |
| | $ | 146 |
| | $ | 103,117 |
| | $ | 377,602 |
| | 3,516,863 |
| | $ | (86,177 | ) | | $ | (37,727 | ) | | $ | 1,478 |
| | $ | 358,439 |
|
| | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 29, 2018 |
(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 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, Revenue from Contracts with Customers | | — |
| | — |
| | — |
| | 119 |
| | — |
| | — |
| | — |
| | — |
| | 119 |
|
Adoption of ASU No. 2016-16, Income Taxes | | — |
| | — |
| | — |
| | (75 | ) | | — |
| | — |
| | — |
| | — |
| | (75 | ) |
Dividends declared – Common Stock, $0.66 per share | | — |
| | — |
| | — |
| | (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 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 29, 2019 |
(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 March 30, 2019 | | 14,624,159 |
| | $ | 146 |
| | $ | 102,780 |
| | $ | 401,891 |
| | 3,449,728 |
| | $ | (84,532 | ) | | $ | (40,024 | ) | | $ | 1,735 |
| | $ | 381,996 |
|
Net income | | — |
| | — |
| | — |
| | 16,304 |
| | — |
| | — |
| | — |
| | 97 |
| | 16,401 |
|
Dividend declared – Common Stock, $0.23 per share | | — |
| | — |
| | — |
| | (2,590 | ) | | — |
| | — |
| | — |
| | — |
| | (2,590 | ) |
Activity under stock plans | | — |
| | — |
| | 987 |
| | — |
| | (80,424 | ) | | 1,970 |
| | — |
| | — |
| | 2,957 |
|
Other comprehensive items | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,773 |
| | 23 |
| | 1,796 |
|
Balance at June 29, 2019 | | 14,624,159 |
| | $ | 146 |
| | $ | 103,767 |
| | $ | 415,605 |
| | 3,369,304 |
| | $ | (82,562 | ) | | $ | (38,251 | ) | | $ | 1,855 |
| | $ | 400,560 |
|
| | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 29, 2019 |
(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 | | — |
| | — |
| | — |
| | 27,204 |
| | — |
| | — |
| | — |
| | 262 |
| | 27,466 |
|
Adoption of ASU No. 2016-02, Leases | | — |
| | — |
| | — |
| | (17 | ) | | — |
| | — |
| | — |
| | — |
| | (17 | ) |
Dividends declared – Common Stock, $0.46 per share | | — |
| | — |
| | — |
| | (5,160 | ) | | — |
| | — |
| | — |
| | — |
| | (5,160 | ) |
Activity under stock plans | | — |
| | — |
| | (964 | ) | | — |
| | (144,859 | ) | | 3,549 |
| | — |
| | — |
| | 2,585 |
|
Other comprehensive items | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,125 |
| | (10 | ) | | 1,115 |
|
Balance at June 29, 2019 | | 14,624,159 |
| | $ | 146 |
| | $ | 103,767 |
| | $ | 415,605 |
| | 3,369,304 |
| | $ | (82,562 | ) | | $ | (38,251 | ) | | $ | 1,855 |
| | $ | 400,560 |
|
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 trades on the New York Stock Exchange under the ticker symbol "KAI."
Kadant Inc. (together with its 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 3 reportable operating segments, Papermaking Systems, Wood Processing Systems, and Material Handling Systems,COVID-19
On March 11, 2020, the World Health Organization designated the novel coronavirus a global pandemic (COVID-19), and a
separate product line, Fiber-based Products,national emergency was subsequently declared by the U.S. government. The pandemic has negatively affected the global economy, disrupted global supply chains, and resulted in significant travel and transport restrictions, which
manufactures granules made from papermaking by-products. See Note 2 for information regardinghave adversely affected the Company's recent acquisition, which comprisesCompany’s bookings and financial results. The impact of the COVID-19 pandemic, including the resulting economic impact, continues to evolve and the Company is closely monitoring its new Material Handling Systems segment.impact on all aspects of its business.
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 28, 2019 andJune 27, 2020, its results of operations, comprehensive income, and stockholders' equity for the three- and nine-monthsix-month periods ended September 28,June 27, 2020 and June 29, 2019, and September 29, 2018, and its cash flows for the nine-monthsix-month periods ended September 28, 2019June 27, 2020 and SeptemberJune 29, 2018.2019. 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 29, 201828, 2019 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 29, 2018.28, 2019. The condensed consolidated financial statements and related notes are presented as permitted by the rules and regulations of 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 29, 2018,28, 2019, filed with the SEC.
Financial Statement Presentation
In the first quarter of 2020, the Company realigned its business segments into 3 new reportable operating segments: Flow Control, Industrial Processing, and Material Handling. The Company previously reported its financial results by combining its operating entities into 3 reportable operating segments: Papermaking Systems, Wood Processing Systems, and Material Handling Systems, and a separate product line, Fiber-based Products. Financial information for 2019 has been recast to conform to the new segment presentation. See Note 12, Business Segment Information, for further detail regarding the Company's segments.
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 revenuesrevenue and expenses during the reporting period. Although the Company makes every effort to ensure the accuracy of the estimates and assumptions used in the preparation of its condensed consolidated financial statements or in the application of accounting policies, if business conditions were different, or if the Company were to use different estimates and assumptions, it is possible that materially different amounts could be reported in the Company's condensed consolidated financial statements.
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 29, 2018 describe the significant accounting estimates and policies used in preparation of the consolidated financial statements. There have been no material changes in the Company’s significant accounting policies during the nine months ended September 28, 2019, except for the adoption of 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)
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 28, 2019 describe the significant accounting estimates and policies used in preparation of the consolidated financial statements. There have been no material changes in the Company’s significant accounting policies during the six months ended June 27, 2020, except that the Company no longer considers its policy with respect to accounting for pension benefits to be a critical accounting policy due to the settlement of its U.S. pension plan in December 2019.
Supplemental Cash Flow Information
| | | | Nine Months Ended | | Six Months Ended |
(In thousands) | | September 28, 2019 | | September 29, 2018 | | June 27, 2020 | | June 29, 2019 |
Cash Paid for Interest | | $ | 9,711 |
| | $ | 5,914 |
| | $ | 4,186 |
| | $ | 6,108 |
|
Cash Paid for Income Taxes, Net of Refunds | | $ | 18,037 |
| | $ | 20,823 |
| | $ | 7,036 |
| | $ | 12,975 |
|
| | | | | | | | |
Non-Cash Investing Activities: | | | | | | | | |
Post-closing adjustment | | $ | — |
| | $ | 397 |
| |
Liabilities assumed of acquired business | | $ | 28,865 |
| | $ | — |
| |
Fair value of assets acquired | | | $ | 9,164 |
| | $ | 209,350 |
|
Cash paid for acquired businesses | | | (7,537 | ) | | (179,286 | ) |
Liabilities Assumed of Acquired Businesses | | | $ | 1,627 |
| | $ | 30,064 |
|
| | | | | |
Non-cash additions to property, plant, and equipment | | $ | 304 |
| | $ | 783 |
| | $ | 150 |
| | $ | 306 |
|
| | | | | | | | |
Non-Cash Financing Activities: | | |
| | |
| | |
| | |
|
Issuance of Company common stock upon vesting of restricted stock units | | $ | 3,908 |
| | $ | 3,976 |
| | $ | 4,027 |
| | $ | 3,743 |
|
Dividends declared but unpaid | | $ | 2,593 |
| | $ | 2,444 |
| | $ | 2,760 |
| | $ | 2,590 |
|
See Note 8 for supplemental cash flow information related to the Company's lease obligations.
Restricted Cash
The Company's restricted cash serves as collateral for potential claims in China and 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 28, 2019 | | September 29, 2018 | | December 29, 2018 | | December 30, 2017 | | June 27, 2020 | | June 29, 2019 | | December 28, 2019 | | December 29, 2018 |
Cash and cash equivalents | | $ | 48,650 |
| | $ | 57,384 |
| | $ | 45,830 |
| | $ | 75,425 |
| | $ | 57,499 |
| | $ | 57,049 |
| | $ | 66,786 |
| | $ | 45,830 |
|
Restricted cash | | 1,321 |
| | 675 |
| | 287 |
| | 1,421 |
| | 3,450 |
| | 1,089 |
| | 1,487 |
| | 287 |
|
Total Cash, Cash Equivalents, and Restricted Cash | | $ | 49,971 |
| | $ | 58,059 |
| | $ | 46,117 |
| | $ | 76,846 |
| | $ | 60,949 |
| | $ | 58,138 |
| | $ | 68,273 |
| | $ | 46,117 |
|
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 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 $5,824,000 at September 28, 2019 and $7,976,000 at December 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 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 28, 2019 | | December 29, 2018 | | June 27, 2020 | | December 28, 2019 |
(In thousands) | | |
Raw Materials | | $ | 48,468 |
| | $ | 44,522 |
| | $ | 49,174 |
| | $ | 49,332 |
|
Work in Process | | 21,382 |
| | 15,876 |
| | 15,765 |
| | 15,344 |
|
Finished Goods | | 38,527 |
| | 25,975 |
| | 44,724 |
| | 38,039 |
|
| | $ | 108,377 |
| | $ | 86,373 |
| | $ | 109,663 |
| | $ | 102,715 |
|
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Intangible Assets, Net
Acquired intangible assets by major asset class are as follows:
| | (In thousands) | | Gross | | Accumulated Amortization | | Currency Translation | | Net | | Gross | | Accumulated Amortization | | Currency Translation | | Net |
September 28, 2019 | | | | | | | | | |
June 27, 2020 | | | | | | | | | |
Definite-Lived | | | | | | | | | | | | | | | | |
Customer relationships | | $ | 171,583 |
| | $ | (48,403 | ) | | $ | (5,037 | ) | | $ | 118,143 |
| | $ | 174,423 |
| | $ | (58,560 | ) | | $ | (5,161 | ) | | $ | 110,702 |
|
Product technology | | 57,647 |
| | (26,754 | ) | | (1,932 | ) | | 28,961 |
| | 56,568 |
| | (29,712 | ) | | (1,878 | ) | | 24,978 |
|
Tradenames | | 5,227 |
| | (2,311 | ) | | (458 | ) | | 2,458 |
| | 6,753 |
| | (2,677 | ) | | (427 | ) | | 3,649 |
|
Other | | 17,964 |
| | (13,146 | ) | | (610 | ) | | 4,208 |
| | 18,248 |
| | (13,572 | ) | | (591 | ) | | 4,085 |
|
| | 252,421 |
| | (90,614 | ) | | (8,037 | ) | | 153,770 |
| | 255,992 |
| | (104,521 | ) | | (8,057 | ) | | 143,414 |
|
Indefinite-Lived | | | | | | | | | | | | | | | | |
Tradenames | | 26,100 |
| | — |
| | (189 | ) | | 25,911 |
| | 24,100 |
| | — |
| | (200 | ) | | 23,900 |
|
Acquired Intangible Assets | | $ | 278,521 |
| | $ | (90,614 | ) | | $ | (8,226 | ) | | $ | 179,681 |
| | $ | 280,092 |
| | $ | (104,521 | ) | | $ | (8,257 | ) | | $ | 167,314 |
|
| | | | | | | | | | | | | | | | |
December 29, 2018 | | |
| | |
| | | | |
| |
December 28, 2019 | | | |
| | |
| | | | |
|
Definite-Lived | | | | | | | | | | | | | | | | |
Customer relationships | | $ | 113,283 |
| | $ | (38,160 | ) | | $ | (4,520 | ) | | $ | 70,603 |
| | $ | 171,583 |
| | $ | (51,798 | ) | | $ | (4,141 | ) | | $ | 115,644 |
|
Product technology | | 46,501 |
| | (23,563 | ) | | (1,677 | ) | | 21,261 |
| | 56,011 |
| | (27,819 | ) | | (1,709 | ) | | 26,483 |
|
Tradenames | | 5,227 |
| | (1,980 | ) | | (390 | ) | | 2,857 |
| | 6,527 |
| | (2,421 | ) | | (427 | ) | | 3,679 |
|
Other | | 13,744 |
| | (11,476 | ) | | (127 | ) | | 2,141 |
| | 17,964 |
| | (13,295 | ) | | (593 | ) | | 4,076 |
|
| | 178,755 |
| | (75,179 | ) | | (6,714 | ) | | 96,862 |
| | 252,085 |
| | (95,333 | ) | | (6,870 | ) | | 149,882 |
|
Indefinite-Lived | | | | | | | | | | | | | | | | |
Tradenames | | 16,600 |
| | — |
| | (115 | ) | | 16,485 |
| | 24,100 |
| | — |
| | (86 | ) | | 24,014 |
|
Acquired Intangible Assets | | $ | 195,355 |
| | $ | (75,179 | ) | | $ | (6,829 | ) | | $ | 113,347 |
| | $ | 276,185 |
| | $ | (95,333 | ) | | $ | (6,956 | ) | | $ | 173,896 |
|
Gross intangible assets include $3,907,000 for acquired intangible assets from acquisitions that occurred in the second quarter of 2020. See Note 2, Acquisitions, for further details. Intangible assets are initially recorded at fair value at the date of acquisition. Subsequent impairment charges are reflected as a reduction in the gross balance, as applicable. 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 | | Wood Processing Systems | | Material Handling Systems | | Total | | Flow Control | | Industrial Processing | | Material Handling | | Total |
Balance at December 29, 2018 | | | | | | | | | |
Balance at December 28, 2019 (a) | | | | | | | | | |
Gross balance | | $ | 241,912 |
| | $ | 101,771 |
| | $ | — |
| | $ | 343,683 |
| | $ | 97,680 |
| | $ | 207,536 |
| | $ | 116,325 |
| | $ | 421,541 |
|
Accumulated impairment losses | | (85,509 | ) | | — |
| | — |
| | (85,509 | ) | | — |
| | (85,509 | ) | | — |
| | (85,509 | ) |
Net balance | | 156,403 |
| | 101,771 |
| | — |
| | 258,174 |
| | 97,680 |
| | 122,027 |
| | 116,325 |
| | 336,032 |
|
2019 Adjustments | | | | | | | | | |
2020 Adjustments | | | | | | | | | |
Acquisition (Note 2) | | — |
| | — |
| | 80,296 |
| | 80,296 |
| | — |
| | 4,001 |
| | — |
| | 4,001 |
|
Currency translation | | (3,791 | ) | | (188 | ) | | — |
| | (3,979 | ) | | (673 | ) | | (1,614 | ) | | 247 |
| | (2,040 | ) |
Total 2019 adjustments | | (3,791 | ) | | (188 | ) | | 80,296 |
| | 76,317 |
| |
Balance at September 28, 2019 | | |
| | |
| | | | |
| |
Total 2020 adjustments | | | (673 | ) | | 2,387 |
| | 247 |
| | 1,961 |
|
Balance at June 27, 2020 | | | |
| | |
| | | | |
|
Gross balance | | 238,121 |
| | 101,583 |
| | 80,296 |
| | 420,000 |
| | 97,007 |
| | 209,923 |
| | 116,572 |
| | 423,502 |
|
Accumulated impairment losses | | (85,509 | ) | | — |
| | — |
| | (85,509 | ) | | — |
| | (85,509 | ) | | — |
| | (85,509 | ) |
Net balance | | $ | 152,612 |
| | $ | 101,583 |
| | $ | 80,296 |
| | $ | 334,491 |
| | $ | 97,007 |
| | $ | 124,414 |
| | $ | 116,572 |
| | $ | 337,993 |
|
(a) Goodwill balances as of December 28, 2019 have been recast to conform to the current period presentation. See Note 12, Business Segment Information, for further details regarding the Company's change in reportable operating segments.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Impairment of Indefinite-Lived Assets
The Company evaluates the recoverability of goodwill and indefinite-lived intangible assets as of the end of each fiscal year or more frequently if events or changes in circumstances indicate that it is more likely than not that the carrying value of an asset might be impaired. Potential impairment indicators include a significant decline in sales, earnings, or cash flows, material adverse changes in the business climate, and a significant decline in the Company's market capitalization due to a sustained decrease in its stock price.
In March 2020, the Company experienced a significant decrease in market capitalization due to a decline in the Company’s stock price. During that time, the overall U.S. stock market also declined significantly amid market volatility driven by the uncertainty surrounding the outbreak of COVID-19. Based on these occurrences, the Company concluded that a triggering event had occurred related to the indefinite-lived assets within its material handling reporting unit. As a result, the Company prepared a quantitative impairment analysis (Step 1) for its material handling reporting unit, which indicated that its fair value exceeded its carrying value and the indefinite-lived assets were not impaired. In the second quarter of 2020, the Company’s market capitalization and the overall stock market, which are potential impairment indicators, recovered from their decreased levels that existed at the end of the first quarter of 2020. No other events that would trigger an impairment analysis were identified during the second quarter of 2020. The Company will continue to monitor for impairment indicators throughout the remainder of 2020 and will conduct an interim period impairment analysis as required.
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.specifications during a defined period of time. 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 costsCompany's liability for warranties is included in other current liabilities in the accompanying condensed consolidated balance sheetsheet. The changes in the carrying amount of product warranty obligations are as follows:
| | | | Nine Months Ended | | Six Months Ended |
(In thousands) | | September 28, 2019 | | September 29, 2018 | | June 27, 2020 | | June 29, 2019 |
Balance at Beginning of Year | | $ | 5,726 |
| | $ | 5,498 |
| | $ | 6,467 |
| | $ | 5,726 |
|
Provision charged to expense | | 3,332 |
| | 2,584 |
| | 2,675 |
| | 2,368 |
|
Usage | | (2,778 | ) | | (1,828 | ) | | (2,721 | ) | | (1,755 | ) |
Acquisition | | 303 |
| | — |
| | — |
| | 303 |
|
Currency translation | | (175 | ) | | (215 | ) | | (67 | ) | | 37 |
|
Balance at End of Period | | $ | 6,408 |
| | $ | 6,039 |
| | $ | 6,354 |
| | $ | 6,679 |
|
Revenue Recognition
The Company recognizes revenue under ASCAccounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers.Customers. Most of the Company’s revenue is recognized at a point in time for each performance obligation under the contract when the customer obtains control of the goods or service. The majorityMost of the Company’s parts and consumables products and its capital products with minimal customization are accounted for at a point in time. The Company has made a policy election to not to treat the obligation to ship as a separate performance obligation under the contract and, as a result, the associated shipping costs are accruedreflected in cost of revenue when revenue is recognized.
The remaining portion of the Company’s revenue is 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. ContractsMost of the contracts recognized on an over time basis are typically for large capital projects. These projects which are highly customized for the customer and, as a result, would include a significant cost to rework in the event of cancellation.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
The following table presents revenue by revenue recognition method:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 28, | | September 29, | | September 28, | | September 29, |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Point in time | | $ | 151,101 |
| | $ | 148,524 |
| | $ | 457,093 |
| | $ | 436,527 |
|
Over time | | 22,403 |
| | 17,221 |
| | 64,892 |
| | 33,324 |
|
| | $ | 173,504 |
| | $ | 165,745 |
| | $ | 521,985 |
| | $ | 469,851 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 27, | | June 29, | | June 27, | | June 29, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Point in Time | | $ | 129,797 |
| | $ | 157,716 |
| | $ | 265,889 |
| | $ | 305,992 |
|
Over Time | | 23,063 |
| | 19,449 |
| | 46,098 |
| | 42,489 |
|
| | $ | 152,860 |
| | $ | 177,165 |
| | $ | 311,987 |
| | $ | 348,481 |
|
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.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of OperationsThe Company disaggregates its revenue from contracts with customers by reportable operating segment, product type and Summary of Significant Accounting Policies (continued)
geography as this best depicts how its revenue is affected by economic factors.
The following table presents the disaggregation of revenuesrevenue by product type and geography:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
| | September 28, | | September 29, | | September 28, | | September 29, | | June 27, | | June 29, | | June 27, | | June 29, |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Revenues by Product Type: | | |
| | |
| | |
| | |
| |
Revenue by Product Type: | | | |
| | |
| | |
| | |
|
Parts and Consumables | | $ | 105,513 |
| | $ | 92,749 |
| | $ | 330,280 |
| | $ | 283,591 |
| | $ | 97,261 |
| | $ | 111,917 |
| | $ | 202,358 |
| | $ | 224,767 |
|
Capital | | 67,991 |
| | 72,996 |
| | 191,705 |
| | 186,260 |
| | 55,599 |
| | 65,248 |
| | 109,629 |
| | 123,714 |
|
| | $ | 173,504 |
| | $ | 165,745 |
| | $ | 521,985 |
| | $ | 469,851 |
| | $ | 152,860 |
| | $ | 177,165 |
| | $ | 311,987 |
| | $ | 348,481 |
|
Revenues by Geography: | | |
| | |
| | |
| | |
| |
Revenue by Geography: | | | |
| | |
| | |
| | |
|
North America | | $ | 92,041 |
| | $ | 74,089 |
| | 291,584 |
| | 227,080 |
| | $ | 88,718 |
| | $ | 98,667 |
| | 182,541 |
| | 199,543 |
|
Europe | | 49,146 |
| | 44,912 |
| | 131,944 |
| | 131,437 |
| | 37,916 |
| | 43,813 |
| | 73,930 |
| | 82,798 |
|
Asia | | 20,971 |
| | 32,887 |
| | 61,745 |
| | 78,537 |
| | 16,237 |
| | 23,696 |
| | 32,145 |
| | 40,774 |
|
Rest of World | | 11,346 |
| | 13,857 |
| | 36,712 |
| | 32,797 |
| | 9,989 |
| | 10,989 |
| | 23,371 |
| | 25,366 |
|
| | $ | 173,504 |
| | $ | 165,745 |
| | $ | 521,985 |
| | $ | 469,851 |
| | $ | 152,860 |
| | $ | 177,165 |
| | $ | 311,987 |
| | $ | 348,481 |
|
See Note 12, Business Segment Information, for further detailsinformation on the disaggregation of revenuesrevenue by segment and product line.reportable operating segment.
The following table presents contract balances from contracts with customers:
|
| | | | | | | | |
| | September 28, 2019 | | December 29, 2018 |
(In thousands) | | |
Accounts receivable | | $ | 102,131 |
| | $ | 92,624 |
|
Contract assets | | $ | 13,571 |
| | $ | 15,741 |
|
Contract liabilities | | $ | 39,336 |
| | $ | 34,774 |
|
|
| | | | | | | | |
| | June 27, 2020 | | December 28, 2019 |
(In thousands) | | |
Accounts Receivable | | $ | 89,393 |
| | $ | 95,740 |
|
Contract Assets | | $ | 10,444 |
| | $ | 13,162 |
|
Contract Liabilities | | $ | 30,730 |
| | $ | 37,216 |
|
Contract assets represent unbilled revenuesrevenue associated with revenue recognized on contracts accounted for on an over time basis, which will be billed in future periods based on the contract terms. Contract liabilities consist of customer deposits, advanced billings, and deferred revenue. Deferred revenue 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 advance 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 shipped and control of the asset has transferred to the customer. The Company recognized revenue of $4,780,000$7,158,000 in the thirdsecond quarter of 2020 and $4,427,000 in the second quarter of 2019, $5,787,000 in the third quarter of 2018, $28,302,000$26,866,000 in the first ninesix months of 20192020, and $35,900,000$23,522,000 in the first ninesix months of 20182019 that was included in the contract liabilities balance at the beginning of 2020 and 2019, and 2018respectively. The majority of the Company's contracts for capital equipment have an original expected duration of one year or less. For contracts with an original expected duration of over one year, the respective periods.aggregate amount of the transaction price allocated to the remaining partially unsatisfied performance obligations as of
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
June 27, 2020 was $9,798,000. The Company will recognize revenue for these performance obligations as they are satisfied, approximately 98% of which is expected to be recognized within the next twelve months.
Customers in China will often settle their accounts receivable with a banker's acceptance draft,drafts, in which case cash settlement will be delayed until the draft maturesdrafts mature or isare settled prior to maturity. For customers outside of 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.
The Company includes in revenue amounts invoiced for shipping and handling with the corresponding costs reflected in cost of revenue. Provisions for discounts, warranties, returns and other adjustments are provided for in the period in which the related sale was recorded. Sales taxes, value-added taxes, and certain excise taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenue.
Accounts Receivable and Allowance for Credit Losses
The Company's accounts receivable arise from sales on credit to customers, are recorded at the invoiced amount, and do not bear interest. The Company establishes an allowance for credit losses to reduce accounts receivable to the net amount expected to be collected. The Company exercises judgment in determining its allowance for credit losses, which is based on its historical collection and write-off experience, adjusted for current macroeconomic trends and conditions, credit policies, specific customer collection issues, and accounts receivable aging. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and each customer's current creditworthiness. The Company continuously monitors collections and payments from its customers. Account balances are charged off against the allowance when the Company believes it is probable the receivable will not be recovered. In some instances, the Company utilizes letters of credit to mitigate its credit exposure.
The changes in the allowance for credit losses are as follows:
|
| | | | | | | | |
| | Six Months Ended |
(In thousands) | | June 27, 2020 | | June 29, 2019 |
Balance at Beginning of Period | | $ | 2,698 |
| | $ | 2,897 |
|
Provision charged to expense | | 303 |
| | 39 |
|
Accounts written off | | (42 | ) | | (122 | ) |
Currency translation | | (45 | ) | | (4 | ) |
Balance at End of Period | | $ | 2,914 |
| | $ | 2,810 |
|
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 drafts are noninterest-bearing obligations of the issuing bank and mature within six months of the origination date. The Company's Chinese subsidiaries may sell the drafts at a discount to a third-party financial institution or transfer the drafts to vendors in settlement of current accounts payable prior to the scheduled maturity date. These drafts, which totaled $3,224,000 at June 27, 2020 and $5,230,000 at December 28, 2019, 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.
Recently Adopted Accounting Pronouncements
LeasesFinancial Instruments - Credit Losses (Topic 842)326), Measurement of Credit Losses on Financial Instruments. . In FebruaryJune 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02,2016-13, which requires a lesseechanges the way entities recognize impairment of financial assets, such as accounts receivable, by requiring immediate recognition of estimated credit losses expected to recognize a right-of-use (ROU) assetoccur over their remaining lives. During 2018 and a corresponding lease liability for operating leases, initially measured at2019, the present value of the future lease payments, on 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.FASB issued additional guidance and clarification. The Company adopted this ASU as ofusing a modified retrospective method at the beginning of fiscal 2019 using the cumulative-effect adjustment method. As a result, prior period amounts were not restated2020 and continue to be accounted for under Topic 840, Leases, whichits adoption did not require the recognition of operating leaseshave a material impact on the balance sheetcondensed consolidated financial statements. See Accounts Receivable and is not comparative. As permitted under ASC 842,Allowance for Credit Losses in this section for information on the Company elected the package of practical expedientsCompany's allowance for expired or existing contracts, which does notcredit losses.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
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 terms 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 4.8% to total liabilities and an immaterial decrease to retained earnings. In addition, the adoption 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 August 2017, the FASB issued ASU No. 2017-12, which revises hedge accounting to better portray the economic results of an entity’s risk management activities, simplifies hedge accounting guidance, and improves disclosures of hedge accounting arrangements. The Company adopted this ASU on a prospective basis at the beginning of fiscal 2019. The adoption of this ASU did not have an impact on the Company's condensed consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
Financial Instruments - Credit LossesReference Rate Reform (Topic 326)848), MeasurementFacilitation of Credit Lossesthe Effects of Reference Rate Reform on Financial Instruments.Reporting. In June 2016,March 2020, the FASB issued ASU No. 2016-13,2020-04, which significantly changesprovides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by the way entities recognize impairmentdiscontinuation of many financial assets by requiring immediate recognitionreference rates, such as the London Interbank Offered Rate (LIBOR), if certain criteria are met. Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of estimated credit losses expecteda previous accounting determination at the modification date. The guidance in this ASU is applicable to occur over their remaining lives. This new guidance is effective for the Company in fiscalCompany's existing contracts and hedging relationships that reference LIBOR and may be adopted prospectively beginning March 12, 2020 with early adoption permitted beginning in fiscal 2019.through December 31, 2022. 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)Income Taxes (Topic 740), Disclosure Framework - Changes toSimplifying the Disclosure RequirementsAccounting for Defined Benefit Plans.Income Taxes. In August 2018,December 2019, the FASB issued ASU 2018-14,No. 2019-12, which removes, addssimplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifies several disclosure requirementsby clarifying and amending existing guidance, including the recognition of franchise tax, the treatment of a step up in the tax basis of goodwill, and the timing for employers that sponsor defined benefit pensionrecognition of enacted changes in tax laws or other post-retirement plans.rates in the interim period annual effective tax rate computation. This new guidance is effective on a retrospective basis for the Company in fiscal 2020. Early2021, with early adoption is permitted. The Company does not believeis currently evaluating the effects that the adoption of this ASU will have a material effect on its condensed consolidated financial statements.
2. Acquisitions
The Company’s acquisitions have been accounted for using the purchase method of accounting and the results of the acquired businesses are included in its condensed consolidated financial statements from the date of acquisition. Historically, the Company’s acquisitions have been made at prices above the fair value of identifiable net assets, resulting in goodwill. Acquisition transaction costs are included in selling, general, and administrative expenses (SG&A) expenses in the accompanying condensed consolidated statement of income as incurred. The Company recorded acquisition costs of $407,000 in the first six months of 2020 and $843,000 in the first six months of 2019.
InOn June 1, 2020, the third quarter of 2019, the Company signed an agreement to acquire certain assets of a business in Brazil for its Papermaking SystemsCompany’s Industrial Processing segment acquired Cogent Industrial Technologies Ltd. (Cogent) for approximately $407,000, of which $203,000 was paid in the third quarter of 2019. The Company expects the remaining amount to be paid by year end.
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,$6,837,000, net of cash acquired.acquired, subject to a post-closing adjustment. The Company funded the acquisition through borrowings under its revolving credit facility. Intangible assets acquired totaled $3,350,000 and primarily related to customer relationships. Cogent, based in British Columbia, Canada, is an industrial automation and controls solution provider that offers expertise in process technology integration, industrial automation and controls, industrial safety, project management, and operational performance management systems.
SMH,In the second quarter of 2020, the Company’s Industrial Processing segment also acquired certain intellectual property from a company in Austria for $416,000, of which comprises$229,000 was paid in the Company's Material Handling Systems segment, has manufacturing operations in Mississippi, United States, and China. SMH is a leading providersecond quarter of material handling equipment and systems to various process industries, including mining, aggregates, food processing, packaging, and pulp and paper.2020. The Company expects several synergiesto pay the remaining amount no later than the first quarter of 2022.
3. Restructuring Costs
In the second quarter of 2020, the Company recorded restructuring costs of $456,000 for severance associated with headcount reductions of 30 employees within its Flow Control segment. The Company also reduced its workforce by 21 employees within its Industrial Processing segment with no associated severance costs. These cost-containment measures were taken to reduce future payroll-related overhead and operating costs in connection with this acquisition, including expansion of product sales into new markets by leveraging SMH's existing presence, strengthening of SMH's relationshipsresponse to the slowdown in the pulp and paper industry, and sourcing efficiencies. Goodwill fromglobal economy, largely driven by COVID-19. These headcount reductions affected approximately 2% of the SMH acquisition was $80,296,000,Company's workforce.
A summary of which $58,450,000 is expectedthe changes in accrued restructuring costs related to be deductible for tax purposes over 15 years. In addition, intangible assets acquired were $83,020,000,the 2020 restructuring plan included in other accrued expenses in the accompanying condensed consolidated balance sheet are as follows:
|
| | | | |
(In thousands) | | Severance |
Provision | | $ | 456 |
|
Usage | | (144 | ) |
Currency translation | | (2 | ) |
Balance at June 27, 2020 | | $ | 310 |
|
The Company expects to pay the remaining accrued restructuring costs primarily in the third quarter of which $70,925,000 is expected to be deductible for tax2020.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2. Acquisitions (continued)
purposes over 15 years. For the nine months ended September 28, 2019, the Company recorded revenues of $61,063,000 and operating income of $877,000 for SMH from the date of acquisition, including amortization expense of $4,852,000 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 is substantially complete but remains subject to change as the Company continues to refine its valuation of certain acquired assets and liabilities, primarily related to the finalization of income taxes.
|
| | | | |
(In thousands) | | Total |
Net Assets Acquired: | | |
Cash, Cash Equivalents, and Restricted Cash | | $ | 2,431 |
|
Accounts Receivable | | 10,275 |
|
Inventory | | 13,061 |
|
Other Current Assets | | 900 |
|
Property, Plant, and Equipment | | 7,085 |
|
Other Assets | | 11,083 |
|
Definite-Lived Intangible Assets | | |
Customer relationships | | 58,300 |
|
Product technology | | 11,000 |
|
Other | | 4,220 |
|
Indefinite-Lived Intangible Assets | | |
Tradenames | | 9,500 |
|
Goodwill | | 80,296 |
|
Total assets acquired | | 208,151 |
|
| | |
Accounts Payable | | 3,380 |
|
Other Current Liabilities | | 7,954 |
|
Long-Term Lease Liabilities | | 15,244 |
|
Long-Term Deferred Income Taxes | | 2,287 |
|
Total liabilities assumed | | 28,865 |
|
Net assets acquired | | $ | 179,286 |
|
| | |
Purchase Price: | | |
Cash Paid to Seller Borrowed Under Revolving Credit Facility | | $ | 179,286 |
|
The weighted-average amortization period for the definite-lived intangible assets above 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.
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- and nine-month periods ended September 28, 2019 and September 29, 2018 would have been as follows: |
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(In thousands, except per share amounts) | | September 28, 2019 | | September 29, 2018 | | September 28, 2019 | | September 29, 2018 |
Revenues | | $ | 173,504 |
| | $ | 187,084 |
| | $ | 521,985 |
| | $ | 533,868 |
|
Net Income Attributable to Kadant | | $ | 16,167 |
| | $ | 18,564 |
| | $ | 47,515 |
| | $ | 38,158 |
|
Earnings per Share Attributable to Kadant: | | | | | | | | |
Basic | | $ | 1.43 |
| | $ | 1.67 |
| | $ | 4.24 |
| | $ | 3.44 |
|
Diluted | | $ | 1.41 |
| | $ | 1.63 |
| | $ | 4.16 |
| | $ | 3.35 |
|
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2. Acquisitions (continued)
The historical consolidated financial information of the Company and SMH has been adjusted in the pro forma information to give effect to pro forma events that are directly attributable to the acquisition and related financing arrangements, are expected to have a continuing impact on the Company, and are factually supportable.
Pro forma results include the following non-recurring pro forma adjustments that were directly attributable to the acquisition:
Pre-tax charge to SG&A expenses of $843,000 in the nine months ended September 29, 2018 and reversal of $843,000 in the nine months ended September 28, 2019, for acquisition transaction costs.
Estimated pre-tax charge to cost of revenues of $3,549,000 in the nine months ended September 29, 2018 and reversal of $3,549,000 in the nine months ended September 28, 2019, for the sale of inventory revalued at the date of acquisition.
Estimated pre-tax charge to SG&A expenses of $21,000 in the three months ended September 29, 2018 and $1,303,000 in the nine months ended September 29, 2018 and reversal of $21,000 in the three months ended September 28, 2019 and $1,303,000 in the nine months ended September 28, 2019, for intangible asset amortization related to acquired backlog.
Estimated tax effects related to pro forma adjustments.
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.
3.4. Earnings per Share
Basic and diluted earnings per share (EPS) are calculated as follows:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
| | September 28, 2019 | | September 29, 2018 | | September 28, 2019 | | September 29, 2018 | | June 27, 2020 | | June 29, 2019 | | June 27, 2020 | | June 29, 2019 |
(In thousands, except per share amounts) | | |
Amounts Attributable to Kadant: | | | | | | | | | |
Net Income | | $ | 16,115 |
| | $ | 18,784 |
| | $ | 43,319 |
| | $ | 41,991 |
| |
| | | | | | | | | |
Net Income Attributable to Kadant | | | $ | 11,607 |
| | $ | 16,304 |
| | $ | 24,138 |
| | $ | 27,204 |
|
| | | | | | | | | | | | | | | | |
Basic Weighted Average Shares | | 11,267 |
| | 11,101 |
| | 11,198 |
| | 11,078 |
| | 11,482 |
| | 11,194 |
| | 11,457 |
| | 11,164 |
|
Effect of Stock Options, Restricted Stock Units and Employee Stock Purchase Plan Shares | | 202 |
| | 320 |
| | 236 |
| | 310 |
| | 70 |
| | 254 |
| | 73 |
| | 252 |
|
Diluted Weighted Average Shares | | 11,469 |
| | 11,421 |
| | 11,434 |
| | 11,388 |
| | 11,552 |
| | 11,448 |
| | 11,530 |
| | 11,416 |
|
| | | | | | | | | | | | | | | | |
Basic Earnings per Share | | $ | 1.43 |
| | $ | 1.69 |
| | $ | 3.87 |
| | $ | 3.79 |
| | $ | 1.01 |
| | $ | 1.46 |
| | $ | 2.11 |
| | $ | 2.44 |
|
| | | | | | | | | | | | | | | | |
Diluted Earnings per Share | | $ | 1.41 |
| | $ | 1.64 |
| | $ | 3.79 |
| | $ | 3.69 |
| | $ | 1.00 |
| | $ | 1.42 |
| | $ | 2.09 |
| | $ | 2.38 |
|
The dilutive effect of the outstanding and unvested restricted stock units (RSUs) of the Company's common stock totaling 8,00036,000 shares in the thirdsecond quarter of 2020, 44,000 shares in the second quarter of 2019, 11,000 in the third quarter of 2018, 32,00039,000 shares in the first ninesix months of 20192020, and 25,00044,000 in the first ninesix months of 20182019 was 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.
5. Provision for Income Taxes
The provision for income taxes was $9,033,000 in the first six months of 2020 and $7,091,000 in the first six months of 2019. The effective tax rate of 27% in the first six months of 2020 was higher than the Company's statutory rate of 21% primarily due to nondeductible expenses, the distribution of worldwide earnings, state taxes, and tax expense associated with Global Intangible Low-Taxed Income (GILTI) provisions. These increases in tax expense were offset in part by net excess income tax benefits from stock-based compensation arrangements. The effective tax rate of 21% in the first six months of 2019 was equal to the Company's statutory rate and included a net discrete tax benefit associated with foreign exchange losses and tax costs recognized upon the repatriation of certain previously taxed foreign earnings and a tax benefit related to the net excess income tax benefits from stock-based compensation arrangements. These tax benefits were offset by tax expense primarily related to nondeductible expenses, the distribution of worldwide earnings, GILTI, and state taxes.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law and provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief. The enactment of the CARES Act did not have a material impact on the Company’s provision for income taxes in the first six months of 2020. The Company continues to monitor any effects that may result from the CARES Act.
6. Short- and Long-Term Obligations
Short- and long-term obligations are as follows:
|
| | | | | | | | |
| | June 27, 2020 | | December 28, 2019 |
(In thousands) | | |
Revolving Credit Facility, due 2023 | | $ | 248,743 |
| | $ | 265,419 |
|
Commercial Real Estate Loan, due 2020 (a) | | 18,900 |
| | 19,425 |
|
Senior Promissory Notes, due 2023 to 2028 | | 10,000 |
| | 10,000 |
|
Finance Leases, due 2020 to 2025 | | 1,882 |
| | 2,308 |
|
Other Borrowings, due 2020 to 2023 | | 3,740 |
| | 4,000 |
|
Unamortized Debt Issuance Costs | | (118 | ) | | (127 | ) |
Total | | 283,147 |
| | 301,025 |
|
Less: Short-term Obligations and Current Maturities of Long-Term Obligations | | (20,387 | ) | | (2,851 | ) |
Long-Term Obligations | | $ | 262,760 |
| | $ | 298,174 |
|
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. Short- and Long-Term Obligations (continued)
4. Provision for Income Taxes
The provision for income taxes was $12,310,000 in(a) See further details on the first nine monthsrepayment of 2019this loan under the header Commercial Real Estate Loan below and $15,575,000 in the first nine months of 2018. The effective tax rate of 22% in the first nine months of 2019 was higher than the Company's statutory rate of 21% primarily due to the distribution of the Company’s worldwide earnings, nondeductible expenses, tax expense associated with the Global Intangible Low-Taxed Income (GILTI) provisions of the Tax Cuts and Jobs Act of 2017 (2017 Tax Act)Note 14, state taxes, and the cost of repatriating the earnings of certain foreign subsidiaries. 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, a net tax benefit associated with foreign exchange losses and tax costs recognized upon the Company’s repatriation of certain previously taxed foreign earnings, and the reversal of tax reserves associated with uncertain tax positions. The effective tax rate of 27% in the first nine months of 2018 was higher than the Company's statutory tax rate of 21% primarily due to the GILTI provisions of the 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. 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.
5. Long-Term Obligations
Long-term obligations are as follows:
|
| | | | | | | | |
| | September 28, 2019 | | December 29, 2018 |
(In thousands) | | |
Revolving Credit Facility, due 2023 | | $ | 280,960 |
| | $ | 141,106 |
|
Commercial Real Estate Loan, due 2019 to 2028 | | 19,688 |
| | 20,475 |
|
Senior Promissory Notes, due 2023 to 2028 | | 10,000 |
| | 10,000 |
|
Finance Leases, due 2019 to 2023 | | 2,408 |
| | — |
|
Other Borrowings, due 2019 to 2023 | | 3,901 |
| | 4,388 |
|
Unamortized Debt Issuance Costs | | (133 | ) | | (148 | ) |
Total | | 316,824 |
| | 175,821 |
|
Less: Current Maturities of Long-Term Obligations | | (2,749 | ) | | (1,668 | ) |
Long-Term Obligations | | $ | 314,075 |
| | $ | 174,153 |
|
Subsequent Event.See Note 1110, Derivatives, for the fair value information related to the Company's short- and long-term obligations.
Revolving Credit Facility
In 2018, theThe Company entered into a second amendment (Second Amendment) to its existing amended and restated five-year, unsecured multi-currency revolving credit facility, dated as of March 1, 2017 (as amended and restated to date, the Credit Agreement). Pursuant to the Second Amendment,Credit Agreement, the Company has a borrowing capacity of $400,000,000, with an uncommitted, unsecured incremental borrowing facility of $150,000,000, under its Credit Agreement, withand a maturity date of December 14, 2023. Interest on borrowings outstanding accrues and generally is payable quarterly in arrears calculated at one of the following rates selected by the Company: (i) the Base Rate, plus an applicable margin of 0% to 1.25%, or (ii) the LIBOR rate (with a 0 percent floor), as defined, plus an applicable margin of 1% to 2.25%. The Base Rate is calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate as published by Citizens Bank, N.A. (Citizens), and (c) the thirty-day USD London Inter-Bank Offered Rate (LIBOR) rate,U.S. dollar LIBOR (USD LIBOR), as defined, plus 0.50%. 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 debt obligations, to earnings before interest, taxes, depreciation, and amortization (EBITDA) as defined in the Credit Agreement.
The obligations of the CompanyObligations under the Credit Agreement may be accelerated upon the occurrence of an event of default, which includes customary events of default under such financing arrangements. In addition, the Credit Agreement contains negative covenants applicable to the Company and its subsidiaries, including financial covenants requiring the Company to maintain a maximum consolidated leverage ratio of 3.75 to 1.00, or for the quarter during which a material acquisition occurs and for the three fiscal quarters thereafter, 4.00 to 1.00, and limitations on making certain restricted payments (including dividends and stock repurchases).
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
5. Long-Term Obligations (continued)
Loans under the Credit Agreement are guaranteed by certain domestic subsidiaries of the Company. In addition, one of the Company’s foreign subsidiaries entered into a separate guarantee agreement limited to certain obligations of two foreign subsidiary borrowers.
As of September 28, 2019,June 27, 2020, the outstanding balance under the Credit Agreement was $280,960,000,$248,743,000, and included $34,094,000$58,905,000 of euro-denominated borrowings and $22,838,000 of Canadian dollar-denominated borrowings and $68,865,000 of euro-denominated borrowings. As of September 28, 2019,June 27, 2020, the Company had $118,798,000$150,830,000 of borrowing capacity available under itsthe 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 USD LIBOR rate on its U.S. dollar-denominated debt borrowed under the Credit Agreement.
The weighted average interest rate for the outstanding balance under the Credit Agreement was 3.08%1.85% as of September 28, 2019.June 27, 2020.
Commercial Real Estate Loan
In 2018, the Company and certain domestic subsidiaries borrowed $21,000,000 under a ten-year promissory note (Real Estate Loan), which iswas 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.July 6, 2028. Interest accruesaccrued and iswas payable quarterly in arrears at a fixed rate of 4.45% per annum. Any voluntary prepayments are subject to a 2% prepayment fee if paid inThe effective interest rate for the twelve months following July 6, 2019 and are subject to a 1% prepayment fee if paid in the twelve months following July 6,Real Estate Loan, including amortization of debt issuance costs, was 4.60% as of June 27, 2020. Thereafter, no prepayment fee will be applied to voluntary prepayment by the Company.
The Real Estate Loan iswas 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 CompanyObligations under the Real Estate Loan may becould have been accelerated upon the occurrence of an event of default under the Real Estate Loan and the Mortgage and Security Agreements, which includesincluded customary events of default for financings of this type. In addition, a default under the Credit Agreement or any successor credit facility would behave been an event of default under the Real Estate Loan. The effective interest rate for
On June 18, 2020, the Company delivered a prepayment notice to the lender bank of its intent to prepay the outstanding principal balance on the Real Estate Loan including amortization of $18,900,000 on July 20, 2020, together with accrued interest and a prepayment fee of 1.00% of the outstanding principal balance. In connection with the prepayment of the Real Estate Loan, the Mortgage and Security Agreements terminated. Accordingly, the outstanding balance and the associated unamortized debt issuance costs was 4.60%are included in short-term obligations in the accompanying condensed consolidated balance sheet as of September 28, 2019.June 27, 2020. See Note 14, Subsequent Event, for further details.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. Short- and Long-Term Obligations (continued)
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 the Initial Notes may be accelerated upon an event of default as defined in the Note Purchase Agreement, which includes customary events of default under such financing arrangements.
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 September 28, 2019,June 27, 2020, 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 (continued)
Finance Leases
The Company's finance leases primarily relate to contracts for its 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 $828,000$1,026,000 at September 28, 2019.June 27, 2020. The lease arrangement provides for a fixed price purchase option, net of the projected loan receivable, of $1,454,000$1,493,000 at the end of the lease term in 2022. If the Company does not exercise the purchase option for the facility, the Companyit will receive cash from the landlord to settle the loan receivable. As of September 28, 2019, $3,717,000June 27, 2020, $3,630,000 was outstanding under this obligation.
6.7. Stock-Based Compensation
The Company recognized stock-based compensation expense of $1,658,000$1,877,000 in the thirdsecond quarter of 2020, $1,914,000 in the second quarter of 2019, $1,736,000 in the third quarter of 2018, $5,125,000$3,516,000 in the first ninesix months of 2019,2020, and $5,346,000$3,467,000 in the first ninesix months of 20182019 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-vestingseparately 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. Unrecognized compensation expense related to stock-based compensation totaled approximately $6,542,000$8,409,000 at September 28, 2019,June 27, 2020 and will be recognized over a weighted average period of 1.61.9 years.
On May 12, 2020, the Company granted 8,340 RSUs in the aggregate to its then non-employee directors with a grant date fair value of $676,000. Half of these RSUs vested on June 1, 2020 and the remaining RSUs will vest ratably on the last day of the third and fourth fiscal quarters of 2020.
7.KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
8. Retirement Benefit Plans
The Company includes the service cost component of net periodic benefit cost in operating income 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 28, 2019 | | Three Months Ended September 29, 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 |
Service Cost | | $ | — |
| | $ | 43 |
| | $ | 1 |
| | $ | 175 |
| | $ | 35 |
| | $ | 53 |
|
Interest Cost | | 283 |
| | 27 |
| | 37 |
| | 298 |
| | 30 |
| | 43 |
|
Expected Return on Plan Assets | | (248 | ) | | (16 | ) | | (1 | ) | | (322 | ) | | (11 | ) | | (1 | ) |
Recognized Net Actuarial Loss | | 8 |
| | 5 |
| | 3 |
| | 135 |
| | 15 |
| | 34 |
|
Amortization of Prior Service Cost | | — |
| | — |
| | — |
| | — |
| | 2 |
| | 22 |
|
| | $ | 43 |
| | $ | 59 |
| | $ | 40 |
| | $ | 286 |
| | $ | 71 |
| | $ | 151 |
|
| | | | | | | | | | | | |
The weighted average assumptions used to determine net periodic benefit cost are as follows: | | | | |
|
| | | | | | | | | | | | |
Discount Rate | | 4.10 | % | | 2.82 | % | | 4.44 | % | | 3.51 | % | | 3.86 | % | | 3.64 | % |
Expected Long-Term Return on Plan Assets | | 4.10 | % | | 9.22 | % | | 9.22 | % | | 4.50 | % | | 7.43 | % | | 7.43 | % |
Rate of Compensation Increase | | — | % | | 2.99 | % | | 5.57 | % | | 3.00 | % | | 3.72 | % | | 3.07 | % |
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. Retirement Benefit Plans (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 28, 2019 | | Nine Months Ended September 29, 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 |
Service Cost | | $ | — |
| | $ | 129 |
| | $ | 3 |
| | $ | 525 |
| | $ | 106 |
| | $ | 159 |
|
Interest Cost | | 850 |
| | 84 |
| | 112 |
| | 894 |
| | 90 |
| | 129 |
|
Expected Return on Plan Assets | | (745 | ) | | (50 | ) | | (3 | ) | | (966 | ) | | (33 | ) | | (3 | ) |
Recognized Net Actuarial Loss | | 24 |
| | 15 |
| | 9 |
| | 405 |
| | 46 |
| | 102 |
|
Amortization of Prior Service Cost | | — |
| | — |
| | — |
| | — |
| | 6 |
| | 66 |
|
| | $ | 129 |
| | $ | 178 |
| | $ | 121 |
| | $ | 858 |
| | $ | 215 |
| | $ | 453 |
|
| | | | | | | | | | | | |
The weighted average assumptions used to determine net periodic benefit cost are as follows: | | | | |
|
| | | | | | | | | | | | |
Discount Rate | | 4.10 | % | | 2.81 | % | | 4.44 | % | | 3.51 | % | | 3.82 | % | | 3.64 | % |
Expected Long-Term Return on Plan Assets | | 4.10 | % | | 9.22 | % | | 9.22 | % | | 4.50 | % | | 7.43 | % | | 7.43 | % |
Rate of Compensation Increase | | — | % | | 2.99 | % | | 5.57 | % | | 3.00 | % | | 3.70 | % | | 3.07 | % |
In 2018, the Company's board of directors and its compensation committee approved amendments to freeze and terminate the Company'sits U.S. pension plan (Retirement Plan) and its restoration plan (Restoration Plan) as of December 29, 2018.. In November 2019, the Company will finalize the settlement amount of its Retirement Plan obligation, which requires remeasurement at the settlement date based on the participants' elections to receive either a lump sum payment or an annuity, current discount rates, asset returns, and economic conditions. The Company expects to recognize a settlement loss of approximately $7,192,000 in the fourth quarter of 2019, which is calculated as the sumCompany settled its Retirement Plan obligation. In the first quarter of 2020, the unrecognized actuarial loss and an estimated $5,144,000 of additional cash to be paid, less the accrued pension liability. The Company expects to settle liabilities under thesettled its Restoration Plan obligation of $2,427,000 by paying a lump sum to its plan participantsparticipants. No benefit costs were incurred related to these plans in 2020.
The components of $2,370,000net periodic benefit cost are as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 27, 2020 | | Three Months Ended June 29, 2019 |
(In thousands, except percentages) | | Non-U.S. Pension | | Other Post-Retirement | | U.S. Pension | | Non-U.S. Pension | | Other Post-Retirement |
Service Cost | | $ | 42 |
| | $ | 1 |
| | $ | — |
| | $ | 43 |
| | $ | 1 |
|
Interest Cost | | 21 |
| | 11 |
| | 284 |
| | 28 |
| | 37 |
|
Expected Return on Plan Assets | | (15 | ) | | (1 | ) | | (248 | ) | | (17 | ) | | (1 | ) |
Recognized Net Actuarial Loss | | 10 |
| | 4 |
| | 8 |
| | 5 |
| | 3 |
|
Amortization of Prior Service Cost | | 1 |
| | — |
| | — |
| | — |
| | — |
|
| | $ | 59 |
| | $ | 15 |
| | $ | 44 |
| | $ | 59 |
| | $ | 40 |
|
| | | | | | | | | | |
The weighted average assumptions used to determine net periodic benefit cost are as follows: | | | | |
|
| | | | | | | | | | |
Discount Rate | | 2.06 | % | | 3.75 | % | | 4.10 | % | | 2.81 | % | | 4.44 | % |
Expected Long-Term Return on Plan Assets | | 7.21 | % | | 7.21 | % | | 4.10 | % | | 9.22 | % | | 9.22 | % |
Rate of Compensation Increase | | 3.14 | % | | 5.57 | % | | — | % | | 2.99 | % | | 5.57 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 27, 2020 | | Six Months Ended June 29, 2019 |
(In thousands, except percentages) | | Non-U.S. Pension | | Other Post-Retirement | | U.S. Pension | | Non-U.S. Pension | | Other Post-Retirement |
Service Cost | | $ | 86 |
| | $ | 3 |
| | $ | — |
| | $ | 86 |
| | $ | 2 |
|
Interest Cost | | 44 |
| | 20 |
| | 567 |
| | 57 |
| | 75 |
|
Expected Return on Plan Assets | | (31 | ) | | (2 | ) | | (497 | ) | | (34 | ) | | (2 | ) |
Recognized Net Actuarial Loss | | 21 |
| | 8 |
| | 16 |
| | 10 |
| | 6 |
|
Amortization of Prior Service Cost | | 3 |
| | — |
| | — |
| | — |
| | — |
|
| | $ | 123 |
| | $ | 29 |
| | $ | 86 |
| | $ | 119 |
| | $ | 81 |
|
| | | | | | | | | | |
The weighted average assumptions used to determine net periodic benefit cost are as follows: | | | | |
|
| | | | | | | | | | |
Discount Rate | | 2.15 | % | | 3.84 | % | | 4.10 | % | | 2.81 | % | | 4.44 | % |
Expected Long-Term Return on Plan Assets | | 7.21 | % | | 7.21 | % | | 4.10 | % | | 9.22 | % | | 9.22 | % |
Rate of Compensation Increase | | 3.19 | % | | 5.57 | % | | — | % | | 2.99 | % | | 5.57 | % |
Other than the payment made for the settlement of the Restoration Plan obligations in early 2020. TheJanuary 2020, the Company does not plan to make any other material cash contributions to its other pension and post-retirement plans in 2019.2020.
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, 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 corresponding 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 nine months ended September 28, 2019.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
8. Leases (continued)
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 | | Nine Months Ended |
(In thousands) | | September 28, 2019 | | September 28, 2019 |
Operating Lease Cost | | $ | 1,390 |
| | $ | 4,141 |
|
| | | | |
Short-Term Lease Cost | | 178 |
| | 542 |
|
| | | | |
Finance Lease Cost: | | | | |
ROU asset amortization | | 309 |
| | 907 |
|
Interest on lease liabilities | | 25 |
| | 69 |
|
Total Finance Lease Cost | | 334 |
| | 976 |
|
| | | | |
Total Lease Costs | | $ | 1,902 |
| | $ | 5,659 |
|
Supplemental cash flow information related to leases is as follows:
|
| | | | |
| | Nine Months Ended |
(In thousands) | | September 28, 2019 |
Cash Paid for Amounts Included in the Measurement of Lease Liabilities: | | |
Operating cash flows from operating leases | | $ | 4,223 |
|
Operating cash flows from finance leases | | $ | 69 |
|
Financing cash flows from finance leases | | $ | 854 |
|
| | |
ROU Assets Obtained in Exchange for Lease Obligations (a): | | |
Operating leases | | $ | 27,949 |
|
Finance leases | | $ | 3,575 |
|
| |
(a) | Includes additions related to the transition adjustment for the adoption of ASC 842. The post-adoption additions of operating leases were $12,632,000, of which $10,994,000 related to ROU assets obtained as part of the acquisition of SMH. The post-adoption additions of finance leases were $2,224,000, of which $528,000 related to ROU assets obtained as part of the acquisition of SMH. |
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
8. Leases (continued)
Supplemental balance sheet information related to leases is as follows:
|
| | | | | | |
(In thousands, except lease term and discount rate) | | Balance Sheet Line Item | | September 28, 2019 |
Operating Leases: | | | | |
ROU assets | | Other assets | | $ | 27,714 |
|
| | | | |
Short-term liabilities | | Other current liabilities | | $ | 4,217 |
|
Long-term liabilities | | Other long-term liabilities | | 25,047 |
|
Total operating lease liabilities | | | | $ | 29,264 |
|
| | | | |
Finance Leases: | | | | |
ROU assets, at cost | | Property, plant, and equipment, at cost | | $ | 3,731 |
|
ROU assets accumulated amortization | | Less: accumulated depreciation and amortization | | (1,274 | ) |
ROU assets, net | | Property, plant, and equipment, net | | $ | 2,457 |
|
| | | | |
Short-term obligations | | Current maturities of long-term obligations | | $ | 1,128 |
|
Long-term obligations | | Long-term obligations | | 1,280 |
|
Total finance lease liabilities | | | | $ | 2,408 |
|
| | | | |
Weighted Average Remaining Lease Term: | | | | |
Operating leases | | | | 10.3 |
|
Finance leases | | | | 2.4 |
|
| | | | |
Weighted Average Discount Rate: | | | | |
Operating leases | | | | 3.97 | % |
Finance leases | | | | 4.16 | % |
As of September 28, 2019, future lease payments for lease liabilities are as follows:
|
| | | | | | | | |
| | Operating | | Finance |
(In thousands) | | Leases | | Leases |
2019 | | $ | 1,387 |
| | $ | 320 |
|
2020 | | 5,112 |
| | 1,149 |
|
2021 | | 4,306 |
| | 743 |
|
2022 | | 3,531 |
| | 251 |
|
2023 | | 3,078 |
| | 62 |
|
Thereafter | | 18,637 |
| | 1 |
|
Total Future Lease Payments | | 36,051 |
| | 2,526 |
|
Less: Imputed Interest | | (6,787 | ) | | (118 | ) |
Present Value of Lease Payments | | $ | 29,264 |
| | $ | 2,408 |
|
As of September 28, 2019, the Company had 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 for the fiscal year ended December 29, 2018 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)
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 accumulated other comprehensive items (AOCI), net of tax, are as follows:
|
| | | | | | | | | | | | | | | | |
(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 (income) loss before reclassifications | | (7,519 | ) | | 23 |
| | (601 | ) | | (8,097 | ) |
Reclassifications from AOCI | | — |
| | 36 |
| | 77 |
| | 113 |
|
Net current period other comprehensive (income) loss | | (7,519 | ) | | 59 |
| | (524 | ) | | (7,984 | ) |
Balance at September 28, 2019 | | $ | (42,323 | ) | | $ | (4,316 | ) | | $ | (721 | ) | | $ | (47,360 | ) |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
(In thousands) | | Foreign Currency Translation Adjustment | | Pension and Other Post-Retirement Benefit Liability Adjustments | | Deferred Loss on Cash Flow Hedges | | Total |
Balance at December 28, 2019 | | $ | (36,145 | ) | | $ | (831 | ) | | $ | (644 | ) | | $ | (37,620 | ) |
Other comprehensive (loss) income before reclassifications | | (7,846 | ) | | 25 |
| | (424 | ) | | (8,245 | ) |
Reclassifications from AOCI | | — |
| | (96 | ) | | 98 |
| | 2 |
|
Net current period other comprehensive items | | (7,846 | ) | | (71 | ) | | (326 | ) | | (8,243 | ) |
Balance at June 27, 2020 | | $ | (43,991 | ) | | $ | (902 | ) | | $ | (970 | ) | | $ | (45,863 | ) |
| | | | | | | | |
Amounts reclassified from AOCI are as follows:
| | | | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | Six Months Ended | |
(In thousands) | | September 28, 2019 | | September 29, 2018 | | September 28, 2019 | | September 29, 2018 | | Statement of Income Line Item | | June 27, 2020 | | June 29, 2019 | | June 27, 2020 | | June 29, 2019 | | Statement of Income Line Item |
Retirement Benefit Plans (a) | Retirement Benefit Plans (a) | | | | | | | | | | | | | | | | |
Amortization of net actuarial loss | $ | (16 | ) | | $ | (184 | ) | | $ | (48 | ) | | $ | (553 | ) | | Other expense, net | |
Recognized net actuarial loss | | | $ | (14 | ) | | $ | (16 | ) | | $ | (29 | ) | | $ | (32 | ) | | Other expense, net |
Amortization of prior service cost | Amortization of prior service cost | — |
| | (24 | ) | | — |
| | (72 | ) | | Other expense, net | | (1 | ) | | — |
| | (3 | ) | | — |
| | Other expense, net |
Total expense before income taxes | | (16 | ) | | (208 | ) | | (48 | ) | | (625 | ) | | | | (15 | ) | | (16 | ) | | (32 | ) | | (32 | ) | | |
Income tax benefit | | 4 |
| | 51 |
| | 12 |
| | 154 |
| | Provision for income taxes | | 4 |
| | 4 |
| | 128 |
| | 8 |
| | Provision for income taxes |
| | (12 | ) | | (157 | ) | | (36 | ) | | (471 | ) | | | | (11 | ) | | (12 | ) | | 96 |
| | (24 | ) | | |
Cash Flow Hedges (b) | | |
| | |
| | |
| | |
| | | | |
| | |
| | |
| | |
| | |
Interest rate swap agreements | | (10 | ) | | 17 |
| | 17 |
| | (5 | ) | | Interest expense | | (72 | ) | | 7 |
| | (106 | ) | | 27 |
| | Interest expense |
Forward currency-exchange contracts | | — |
| | — |
| | (129 | ) | | 24 |
| | Cost of revenues | | — |
| | (129 | ) | | (23 | ) | | (129 | ) | | Cost of revenue |
Total (expense) income before income taxes | | (10 | ) | | 17 |
| | (112 | ) | | 19 |
| | | |
Income tax benefit (provision) | | 2 |
| | (4 | ) | | 35 |
| | (5 | ) | | Provision for income taxes | |
Total expense before income taxes | | | (72 | ) | | (122 | ) | | (129 | ) | | (102 | ) | | |
Income tax benefit | | | 17 |
| | 38 |
| | 31 |
| | 33 |
| | Provision for income taxes |
| | (8 | ) | | 13 |
| | (77 | ) | | 14 |
| | | | (55 | ) | | (84 | ) | | (98 | ) | | (69 | ) | | |
Total Reclassifications | | $ | (20 | ) | | $ | (144 | ) | | $ | (113 | ) | | $ | (457 | ) | | | | $ | (66 | ) | | $ | (96 | ) | | $ | (2 | ) | | $ | (93 | ) | | |
| |
(a) | Included in the computation of net periodic benefit cost. See Note 78, Retirement Benefit Plans, for additional information. |
| |
(b) | See Note 10, Derivatives, for additional information. |
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. The Company believes that any credit risk associated with its derivative instruments is remote based on the creditworthiness of the financial institutions issuing those agreements. The Company does not hold or engage in transactions involving derivative instruments for purposes other than risk management.
Interest Rate Swap Agreements
The Company has entered into interest rate swap agreements to hedge its exposure to movements in USD LIBOR on its U.S. dollar-denominated debt. In 2018, the Company entered into an interest rate swap agreement (2018 Swap Agreement) with Citizens, 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) with Citizens 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 three-month USD LIBOR, which is subject to a three-month LIBOR ratezero percent floor, and pays a fixed rate of interest of 3.15% plus an applicable margin as defined in the Credit Agreement. In 2015, the Company entered into an interest rate swap agreement (2015 Swap Agreement) with Citizens which had a $10,000,000 notional value and expired on March 27, 2020. Under the 2015 Swap
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
10. Derivatives (continued)
Agreement, on the 2018 Swap AgreementCompany received three-month USD LIBOR and 1.50%paid a fixed rate of interest of 1.5% plus an applicable margin as defined in the Credit Agreement on the 2015 Swap Agreement. The 2018 Swap Agreement is subject to a 0 percent floor on the three-month LIBOR rate.
The interest rate swap agreements arehave been designated as cash flow hedges and the Company hasare structured its interest rate swap agreements to be 100% effective. The fair values of the interest rate swap agreements represent the estimated amounts the Company would receive from or pay to the counterparty in the event of early termination. Unrealized gains and losses related to the fair values of the swap agreements arewere recorded to AOCI, net of tax.
In the event of early termination of the 2018 Swap Agreement, the Company will receive from or pay to the counterparty the fair value of the interest rate swap agreement, and the unrealized gain or loss outstanding will be recognized in earnings.
The counterparty to the interest rate swap agreements2018 Swap Agreement could demand an early termination of those agreementsthat agreement if the Company were to be in default under the Credit Agreement, or any agreement that amends or replaces the Credit Agreement in which the counterparty is a member, and if the Companyit were to be unable to cure the default (Seedefault. See Note 56)., Short- and Long-Term Obligations, for further details.
Forward Currency-Exchange Contracts
The Company uses forward currency-exchange contracts that typically have maturities of twelve months or less to hedge exposures resulting from fluctuations in currency exchange rates. Such exposures result from assets and liabilities that are denominated in currencies other than the functional currencies.
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. Deferred gains and losses are recognized in the statement of income in the period in which the underlying transaction occurs. The fair values of forward currency-exchange contracts that are designated as fair value hedges and forward currency-exchange contracts that are not designated as hedges are recognized currently in earnings.
The Company recognized within SG&A expenses in the accompanying condensed consolidated statement of income lossesgains of $14,000$6,000 in the thirdsecond quarter of 2019, losses of $67,0002020 and $5,000 in the thirdsecond quarter of 2018, losses of $46,000 in the first nine months of 2019, and losses of $40,000$28,000 in the first ninesix months of 20182020 and $32,000 in the first six months of 2019 associated with forward currency-exchange contracts that were not designated as hedges.
The following table summarizes the fair value of derivative instruments in the accompanying condensed consolidated balance sheet:
|
| | | | | | | | | | | | | | | | | | |
| | | | June 27, 2020 | | December 28, 2019 |
| | Balance Sheet Location | | Asset (Liability) (a) | | Notional Amount (b) | | Asset (Liability) (a) | | Notional Amount |
(In thousands) | | | | | |
Derivatives Designated as Hedging Instruments: | | | | | | | | |
Derivatives in an Asset Position: | | | | | | | | | | |
Forward currency-exchange contract | | Other Current Assets | | $ | 47 |
| | $ | 1,328 |
| | $ | — |
| | $ | — |
|
2015 Swap Agreement | | Other Current Assets | | $ | — |
| | $ | — |
| | $ | 11 |
| | $ | 10,000 |
|
Derivatives in a Liability Position: | | | | | | | | | | |
Forward currency-exchange contracts | | Other Current Liabilities | | $ | (43 | ) | | $ | 842 |
| | $ | (75 | ) | | $ | 4,825 |
|
2018 Swap Agreement | | Other Long-Term Liabilities | | $ | (1,286 | ) | | $ | 15,000 |
| | $ | (770 | ) | | $ | 15,000 |
|
| | | | | | | | | | |
Derivatives Not Designated as Hedging Instruments: | | |
| | |
| | |
| | |
|
Derivatives in an Asset Position: | | | | |
| | |
| | |
| | |
|
Forward currency-exchange contracts | | Other Current Assets | | $ | 7 |
| | $ | 707 |
| | $ | 3 |
| | $ | 387 |
|
Derivatives in a Liability Position: | | | | | | | | | | |
Forward currency-exchange contracts | | Other Current Liabilities | | $ | (9 | ) | | $ | 1,040 |
| | $ | (43 | ) | | $ | 2,545 |
|
(a) See Note 11, Fair Value Measurements and Fair Value of Financial Instruments, for the fair value measurements relating to these financial instruments. (b) The total 2020 notional amounts are indicative of the level of the Company's recurring derivative activity.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
10. Derivatives (continued)
The following table summarizes the fair value of the Company's derivative instruments in the accompanying condensed consolidated balance sheet:
|
| | | | | | | | | | | | | | | | | | |
| | | | September 28, 2019 | | December 29, 2018 |
| | Balance Sheet Location | | Asset (Liability) (a) | | Notional Amount (b) | | Asset (Liability) (a) | | Notional Amount |
(In thousands) | | | | | |
Derivatives Designated as Hedging Instruments: | | | | | | | | |
Derivatives in an Asset Position: | | | | | | | | | | |
2015 Swap Agreement | | Other Current Assets | | $ | 26 |
| | $ | 10,000 |
| | $ | — |
| | $ | — |
|
2015 Swap Agreement | | Other Long-Term Assets | | $ | — |
| | $ | — |
| | $ | 148 |
| | $ | 10,000 |
|
Forward currency-exchange contract | | Other Long-Term Assets | | $ | — |
| | $ | — |
| | $ | 11 |
| | $ | 842 |
|
Derivatives in a Liability Position: | | | | | | | | | | |
Forward currency-exchange contracts | | Other Current Liabilities | | $ | (89 | ) | | $ | 1,976 |
| | $ | (50 | ) | | $ | 2,946 |
|
2018 Swap Agreement | | Other Long-Term Liabilities | | $ | (894 | ) | | $ | 15,000 |
| | $ | (352 | ) | | $ | 15,000 |
|
| | | | | | | | | | |
Derivatives Not Designated as Hedging Instruments: | | |
| | |
| | |
| | |
|
Derivatives in an Asset Position: | | | | |
| | |
| | |
| | |
|
Forward currency-exchange contracts | | Other Current Assets | | $ | — |
| | $ | — |
| | $ | 9 |
| | $ | 1,192 |
|
Derivatives in a Liability Position: | | | | | | | | | | |
Forward currency-exchange contracts | | Other Current Liabilities | | $ | (32 | ) | | $ | 1,277 |
| | $ | (31 | ) | | $ | 1,384 |
|
(a) See Note 11 for the fair value measurements relating to these financial instruments.(b) The total 2019 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 ninesix months ended September 28, 2019:June 27, 2020:
|
| | | | | | | | | | | | |
(In thousands) | | Interest Rate Swap Agreements | | Forward Currency- Exchange Contracts | | Total |
Unrealized Loss, Net of Tax, at December 29, 2018 | | $ | (170 | ) | | $ | (27 | ) | | $ | (197 | ) |
(Gain) loss reclassified to earnings (a) | | (12 | ) | | 89 |
| | 77 |
|
Loss recognized in AOCI | | (478 | ) | | (123 | ) | | (601 | ) |
Unrealized Loss, Net of Tax, at September 28, 2019 | | $ | (660 | ) | | $ | (61 | ) | | $ | (721 | ) |
|
| | | | | | | | | | | | |
(In thousands) | | Interest Rate Swap Agreements | | Forward Currency- Exchange Contracts | | Total |
Unrealized Loss, Net of Tax, at December 28, 2019 | | $ | (589 | ) | | $ | (55 | ) | | $ | (644 | ) |
Loss reclassified to earnings (a) | | 81 |
| | 17 |
| | 98 |
|
(Loss) gain recognized in AOCI | | (468 | ) | | 44 |
| | (424 | ) |
Unrealized (Loss) Gain, Net of Tax, at June 27, 2020 | | $ | (976 | ) | | $ | 6 |
| | $ | (970 | ) |
(a) See Note 9, Accumulated Other Comprehensive Items, for the income statement classification.
As of September 28, 2019,June 27, 2020, the Company expects to reclassify losses of $195,000$332,000 from AOCI to earnings over the next twelve months based on the estimated cash flows of the interest rate swap agreements2018 Swap Agreement and the maturity dates of the forward currency-exchange contracts.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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:
| | | | | | | | | | | | Fair Value as of June 27, 2020 |
(In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
September 28, 2019 | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Money market funds and time deposits | | $ | 5,657 |
| | $ | — |
| | $ | — |
| | $ | 5,657 |
| | $ | 8,712 |
| | $ | — |
| | $ | — |
| | $ | 8,712 |
|
Banker's acceptance drafts (a) | | $ | — |
| | $ | 5,824 |
| | $ | — |
| | $ | 5,824 |
| | $ | — |
| | $ | 3,224 |
| | $ | — |
| | $ | 3,224 |
|
2015 Swap Agreement | | $ | — |
| | $ | 26 |
| | $ | — |
| | $ | 26 |
| |
| | | | | | | | | |
Forward currency-exchange contracts | | | $ | — |
| | $ | 54 |
| | $ | — |
| | $ | 54 |
|
Liabilities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
2018 Swap Agreement | | $ | — |
| | $ | 894 |
| | $ | — |
| | $ | 894 |
| | $ | — |
| | $ | 1,286 |
| | $ | — |
| | $ | 1,286 |
|
Forward currency-exchange contracts | | $ | — |
| | $ | 121 |
| | $ | — |
| | $ | 121 |
| | $ | — |
| | $ | 52 |
| | $ | — |
| | $ | 52 |
|
| | December 29, 2018 | | | | | | | | | |
| | | Fair Value as of December 28, 2019 |
(In thousands) | | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | | | | | | | |
Money market funds and time deposits | | $ | 6,902 |
| | $ | — |
| | $ | — |
| | $ | 6,902 |
| | $ | 9,920 |
| | $ | — |
| | $ | — |
| | $ | 9,920 |
|
Banker's acceptance drafts (a) | | $ | — |
| | $ | 7,976 |
| | $ | — |
| | $ | 7,976 |
| | $ | — |
| | $ | 5,230 |
| | $ | — |
| | $ | 5,230 |
|
2015 Swap Agreement | | $ | — |
| | $ | 148 |
| | $ | — |
| | $ | 148 |
| | $ | — |
| | $ | 11 |
| | $ | — |
| | $ | 11 |
|
Forward currency-exchange contracts | | $ | — |
| | $ | 20 |
| | $ | — |
| | $ | 20 |
| | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | 3 |
|
| | | | | | | | | | | | | | | | |
Liabilities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
2018 Swap Agreement | | $ | — |
| | $ | 352 |
| | $ | — |
| | $ | 352 |
| | $ | — |
| | $ | 770 |
| | $ | — |
| | $ | 770 |
|
Forward currency-exchange contracts | | $ | — |
| | $ | 81 |
| | $ | — |
| | $ | 81 |
| | $ | — |
| | $ | 118 |
| | $ | — |
| | $ | 118 |
|
| |
(a) | Included in accounts receivable in the accompanying condensed consolidated balance sheet. |
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
11. Fair Value Measurements and Fair Value of Financial Instruments (continued)
The Company uses the market approach technique to value its financial assets and liabilities, and there were no changes in valuation techniques during the first ninesix months of 2019. The Company's banker's2020. Banker's acceptance drafts are carried at face value which 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 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 28, 2019 | | December 29, 2018 | | June 27, 2020 | | December 28, 2019 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
(In thousands) | | |
Debt Obligations: | | | | | | | | | | | | | | | | |
Revolving credit facility | | $ | 280,960 |
| | $ | 280,960 |
| | $ | 141,106 |
| | $ | 141,106 |
| | $ | 248,743 |
| | $ | 248,743 |
| | $ | 265,419 |
| | $ | 265,419 |
|
Commercial real estate loan | | 19,688 |
| | 21,055 |
| | 20,475 |
| | 20,575 |
| | 18,900 |
| | 19,124 |
| | 19,425 |
| | 20,541 |
|
Senior promissory notes | | 10,000 |
| | 10,928 |
| | 10,000 |
| | 10,120 |
| | 10,000 |
| | 10,595 |
| | 10,000 |
| | 10,803 |
|
| | $ | 310,648 |
| | $ | 312,943 |
| | $ | 171,581 |
| | $ | 171,801 |
| | $ | 277,643 |
| | $ | 278,462 |
| | $ | 294,844 |
| | $ | 296,763 |
|
The carrying value of the Company's revolving credit facility approximates the fair value as the obligation bears variable rates of interest, which adjust frequently, based on prevailing market rates. The fair values of the commercial real estate loan and senior promissory notes are primarily calculated based on quoted market rates plus an applicable margin available to the Company at the respective period ends, which represent Level 2 measurements. The fair value of the commercial real estate loan includes a prepayment penalty of $189,000 which was paid in connection with the prepayment of the loan in July 2020.
12. Business Segment Information
The Company has combinedpreviously reported its financial results by combining its operating entities into 3 reportable operating segments,segments: Papermaking Systems, Wood Processing Systems, and Material Handling Systems, and a separate product line, Fiber-based Products, as described below:Products. During the first quarter of 2020, the Company changed its reportable operating segments to better align with its strategic initiatives to grow both organically and through acquisitions. Such growth and diversification resulted in a change in the internal organization of the Company and how its chief operating decision maker makes operating decisions, assesses the performance of the business, and allocates resources. Accordingly, the Company's financial results are reported in three new reportable operating segments: Flow Control, Industrial Processing, and Material Handling. The Flow Control segment consists of the Company’s fluid-handling and doctoring, cleaning, & filtration product lines; the Industrial Processing segment consists of the Company’s wood processing and stock-preparation product lines (excluding baling products); and the Material Handling segment consists of the Company’s conveying and screening, baling, and fiber-based product lines. Financial information for 2019 has been recast to conform to the new segment presentation. A description of each segment follows.
| |
• | Papermaking Systems SegmentFlow Control – The Company develops, manufactures,Custom-engineered products, systems, and markets a rangetechnologies that control the flow of equipmentfluids used in industrial and products forcommercial applications to keep critical processes running efficiently in the global papermaking, paper recycling, recycling and waste management,packaging, tissue, food, metals, and other process industries.industrial sectors. The Company's Papermaking Systems segment consists of the following product lines: Stock-Preparation; Fluid-Handling;products include rotary sealing devices, steam systems, expansion joints, doctor systems, roll and Doctoring, Cleaning, & Filtration.fabric cleaning devices, and filtration and fiber recovery systems.
|
| |
• | WoodIndustrial Processing Systems Segment – Equipment, machinery, and technologies used to recycle paper and paperboard and process timber for use in the packaging, tissue, wood products and alternative fuel industries, among others. The Company develops, manufactures,Company's primary products include stock-preparation systems and marketsrecycling equipment, chemical pulping equipment, debarkers, stranders, debarkers, chippers, and logging machinery used in the harvesting and production of lumber and OSB. Through this segment,machinery. In addition, the Company also provides refurbishmentindustrial automation and repair of pulping equipment for the pulp and paper industry.digitization solutions to process industries.
|
| |
• | Material Handling Systems Segment – Products and engineered systems used to handle bulk and discrete materials for secondary processing or transport in the aggregates, mining, food, and waste management industries, among others. The Company develops, manufactures,Company's primary products include conveying and markets material handlingvibratory equipment and systems to various process industries, including mining, aggregates, food processing, packaging, and pulp and paper. |
| |
• | Fiber-based Products business – Thebalers. In addition, the Company manufactures and sells biodegradable, absorbent granules derived from papermaking by-products for use primarilyused as carriers forin agricultural home lawnapplications and garden, and professional lawn, turf and ornamental applications, as well as for oil and grease absorption.
|
The following table presents financial information for the Company's reportable operating segments:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 28, | | September 29, | | September 28, | | September 29, |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Revenues: | | | | | | | | |
Stock-Preparation | | $ | 56,128 |
| | $ | 62,983 |
| | $ | 158,993 |
| | $ | 164,842 |
|
Fluid-Handling | | 32,734 |
| | 33,083 |
| | 100,201 |
| | 98,500 |
|
Doctoring, Cleaning, & Filtration | | 29,641 |
| | 30,704 |
| | 88,591 |
| | 87,469 |
|
Papermaking Systems | | 118,503 |
| | 126,770 |
| | 347,785 |
| | 350,811 |
|
Wood Processing Systems | | 32,731 |
| | 37,042 |
| | 104,649 |
| | 109,335 |
|
Material Handling Systems (a) | | 20,282 |
| | — |
| | 61,063 |
| | — |
|
Fiber-based Products | | 1,988 |
| | 1,933 |
| | 8,488 |
| | 9,705 |
|
| | $ | 173,504 |
| | $ | 165,745 |
| | $ | 521,985 |
| | $ | 469,851 |
|
| | | | | | | | |
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
12. Business Segment Information (continued)
The following table presents financial information for the Company's reportable operating segments:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 28, | | September 29, | | September 28, | | September 29, |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Income Before Provision for Income Taxes: | | |
| | |
| | |
| | |
|
Papermaking Systems (b) | | $ | 22,798 |
| | $ | 25,919 |
| | $ | 61,368 |
| | $ | 61,402 |
|
Wood Processing Systems (c) | | 6,787 |
| | 8,704 |
| | 22,858 |
| | 21,380 |
|
Material Handling Systems (a, d) | | 1,742 |
| | — |
| | 877 |
| | — |
|
Corporate and Fiber-based Products (e) | | (6,774 | ) | | (7,248 | ) | | (18,833 | ) | | (19,008 | ) |
Total operating income | | 24,553 |
| | 27,375 |
| | 66,270 |
| | 63,774 |
|
Interest expense, net (f) | | (3,023 | ) | | (1,708 | ) | | (9,985 | ) | | (4,985 | ) |
Other expense, net (f) | | (98 | ) | | (245 | ) | | (296 | ) | | (736 | ) |
| | $ | 21,432 |
| | $ | 25,422 |
| | $ | 55,989 |
| | $ | 58,053 |
|
| | | | | | | | |
Capital Expenditures: | | |
| | |
| | |
| | |
|
Papermaking Systems | | $ | 1,376 |
| | $ | 1,348 |
| | $ | 3,890 |
| | $ | 9,837 |
|
Wood Processing Systems | | 444 |
| | 1,026 |
| | 1,423 |
| | 2,586 |
|
Material Handling Systems (a) | | 225 |
| | — |
| | 605 |
| | — |
|
Corporate and Fiber-based Products | | 48 |
| | 232 |
| | 318 |
| | 394 |
|
| | $ | 2,093 |
| | $ | 2,606 |
| | $ | 6,236 |
| | $ | 12,817 |
|
| | | | | | | | |
| | | | | | September 28, | | December 29, |
(In thousands) | | | | | | 2019 | | 2018 |
Total Assets: | | | | | | |
| | |
|
Papermaking Systems | | | | | | $ | 467,034 |
| | $ | 462,297 |
|
Wood Processing Systems | | | | | | 248,843 |
| | 247,553 |
|
Material Handling Systems (a) | | | | | | 198,423 |
| | — |
|
Corporate and Fiber-based Products (g) | | | | | | 21,257 |
| | 15,899 |
|
| | | | | | $ | 935,557 |
| | $ | 725,749 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 27, | | June 29, | | June 27, | | June 29, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Revenue | | | | | | | | |
Flow Control | | $ | 51,365 |
| | $ | 65,273 |
| | $ | 108,514 |
| | $ | 126,417 |
|
Industrial Processing | | 65,673 |
| | 76,396 |
| | 130,382 |
| | 148,670 |
|
Material Handling | | 35,822 |
| | 35,496 |
| | 73,091 |
| | 73,394 |
|
| | $ | 152,860 |
| | $ | 177,165 |
| | $ | 311,987 |
| | $ | 348,481 |
|
| | | | | | | | |
Income Before Provision for Income Taxes | | |
| | |
| | |
| | |
|
Flow Control (a) | | $ | 10,260 |
| | $ | 15,133 |
| | $ | 23,590 |
| | $ | 28,117 |
|
Industrial Processing (b) | | 10,639 |
| | 13,869 |
| | 20,075 |
| | 25,723 |
|
Material Handling (c) | | 3,593 |
| | 1,259 |
| | 7,727 |
| | 1,990 |
|
Corporate (d) | | (6,371 | ) | | (7,119 | ) | | (13,616 | ) | | (14,113 | ) |
Total operating income | | 18,121 |
| | 23,142 |
| | 37,776 |
| | 41,717 |
|
Interest expense, net (e) | | (1,894 | ) | | (3,514 | ) | | (4,302 | ) | | (6,962 | ) |
Other expense, net (e) | | (31 | ) | | (99 | ) | | (63 | ) | | (198 | ) |
| | $ | 16,196 |
| | $ | 19,529 |
| | $ | 33,411 |
| | $ | 34,557 |
|
| | | | | | | | |
Capital Expenditures | | |
| | |
| | |
| | |
|
Flow Control | | $ | 337 |
| | $ | 707 |
| | $ | 1,158 |
| | $ | 1,178 |
|
Industrial Processing | | 211 |
| | 807 |
| | 1,675 |
| | 2,170 |
|
Material Handling | | 283 |
| | 415 |
| | 681 |
| | 748 |
|
Corporate | | 80 |
| | 46 |
| | 83 |
| | 47 |
|
| | $ | 911 |
| | $ | 1,975 |
| | $ | 3,597 |
| | $ | 4,143 |
|
(a) Represents SMH, which was acquired on January 2, 2019 (see Note 2). (b) Includes restructuring costs of $378,000$456,000 in the three- and six-month periods ended June 27, 2020.
(b) Includes $435,000 of acquisition-related expense in the three- and six-month periods ended June 27, 2020. Acquisition-related expenses include amortization expense associated with backlog and acquisition costs.
(c) Includes $1,523,000 in the three-month period ended
SeptemberJune 29,
20182019 and
$1,717,000$5,674,000 in the
nine-monthsix-month period ended
SeptemberJune 29,
2018 (see Note 13). (c) Includes acquisition-related expenses of $252,000 in the nine-month period ended September 29, 2018 for the amortization of acquired backlog.
(d) Includes $21,000 in the three-month period ended September 28, 2019 and $5,695,000 in the nine-month period ended September 28, 2019 of acquisition-related expenses.expense. Acquisition-related expenses include amortization expense associated with acquired profit in inventory and backlog and acquisition transaction costs.
(e)(d) Corporate primarily includes general and administrative expenses.
(f)(e) 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.
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 4 employees in the United States and 6 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. The Company does not expect to incur additional charges related to this restructuring plan.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
13. Restructuring (continued)
As a result of this plan, the Company recorded restructuring charges in its Papermaking Systems segment of $1,717,000 in the first nine months of 2018, including $1,318,000 for the relocation of machinery, equipment and administrative offices, $454,000 associated with employee retention and facility closure costs, and a reversal of $55,000 of severance costs no longer required.
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 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 $9,065,000$5,341,000 at September 28, 2019June 27, 2020 and $12,406,000$7,003,000 at December 29, 201828, 2019 of banker's acceptance drafts subject to recourse, which were transferred to vendors butand 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.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
13. Commitments and Contingencies (continued)
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.
14. Subsequent Event
On June 18, 2020, the Company provided written notice of its intent to prepay the outstanding principal balance of the Real Estate Loan of $18,900,000, together with all accrued interest (Prepayment Amount). On July 20, 2020, the Company paid the Prepayment Amount, as well as a prepayment fee of $189,000, or 1.00% of the outstanding principal balance. The Real Estate Loan was secured by certain real estate and related personal property of the Company pursuant to certain Mortgage and Security Agreements, which terminated in connection with the prepayment of the Real Estate Loan. To prepay the Real Estate Loan, the Company borrowed $19,000,000 under the Credit Agreement.
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations
When we use the terms “we,” “us,” “our,” and the “Company,” we mean Kadant Inc., a Delaware corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.
This Quarterly Report on Form 10-Q and 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 Risk Factors included in Part II, Item 1A, within this report and the section captioned "Risk Factors"Risk Factors, in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 29, 2018,28, 2019, 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 global supplier of high-value, critical components and engineered 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 various mining companies serving 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 ofWe previously reported our financial results by combining operating entities into three reportable operating segments: Papermaking Systems, Wood Processing Systems, and Material Handling Systems, and a separate product line, Fiber-based Products. For additional information regardingDuring the first quarter of 2020, we changed our reportable operating segments seeto better align with our strategic initiatives to grow both organically and through acquisitions. See Note 12, Business Segment Information, in the accompanying condensed consolidated financial statements.statements for further detail regarding our segments. Accordingly, our financial results are reported in three new reportable operating segments: Flow Control, Industrial Processing, and Material Handling. The Flow Control segment consists of our fluid-handling and doctoring, cleaning, & filtration product lines; the Industrial Processing
Acquisitions
We expect that a significant driver of our growth over the next several years will be the acquisition of businesses and technologies that complement or augment our existing products and services or may involve entry into a new process industry. We continue to actively pursue additional acquisition opportunities. Our significant acquisition in 2019 is described below.
On January 2, 2019, we acquired, directly and indirectly, all the outstanding equity interests of Syntron Material Handling Group, LLC and certain of its affiliates (SMH) for approximately $176.9 million, net of cash acquired. SMH, which comprises our Material Handling Systems segment, is a leading provider of material handling equipment and systems to various process industries, including mining, aggregates, food processing, packaging, and pulp and paper. This acquisition has extended our current product 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.
International Sales
Our sales to customers outside the United States, mainly in Europe, Asia, and Canada, were approximately 55% of total revenue in the first nine months of 2019 and 63% of total revenue in the first nine months of 2018. The decrease in the percentage of international sales in 2019 was primarily due to the acquisition of SMH, which predominantly sells to customers in the United States. 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 primarily 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.
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 affectthe 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. 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
Overview (continued)
on Form 10-K for the fiscal year ended December 29, 2018. There have been no material changes to these critical accounting policies since the end of fiscal 2018 that warrant disclosure.
Industry and Business Outlook
Our products are sold worldwide to process industries, and are primarily used to produce packaging, OSB, lumber, tissue, and handle bulk materials. Major markets for our products are as follows:
Packaging
Approximately 30% of our revenue in the first nine months of 2019 was from the sale of products that support packaging production. 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 also have expertise in fluid handling in the corrugated packaging market in which boxes are produced and have experienced 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 20% of our revenue in the first nine months of 2019 was from sales to manufacturers in 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 addition, OSB is used in industrial applications such as crates and bed liners for shipping containers, as 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 those in other parts of the world.
Tissue and Other Paper
Approximately 14% of our revenue in the first nine months of 2019 was from the sale of products that support the manufacturing of tissue and other paper grades. Consumption of tissue is fairly stable and in the developed world tends to grow with the population. Growth rates in the developing world are expected to increase as per capita consumption of paper products increases with rising standards of living.
Material Handling
Approximately 12% of our revenue in the first nine months of 2019 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 nine months 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 increased use of digital media.
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 4% to $171 million in the third quarter of 2019 compared to the third quarter of 2018, including $18 million from an acquisition and a $3 million unfavorable effect from currency translation. Excluding the acquisition and unfavorable effect from currency translation, our bookings in the third quarter of 2019 decreased 5% compared
Overview (continued)
segment consists of our wood processing and stock-preparation product lines (excluding our baling products); and the Material Handling segment consists of our conveying and screening, baling, and fiber-based product lines. Financial information for 2019 has been recast to conform to the new segment presentation. A description of each segment follows.
| |
• | Flow Control – Custom-engineered products, systems, and technologies that control the flow of fluids used in industrial and commercial applications to keep critical processes running efficiently in the packaging, tissue, food, metals, and other industrial sectors. Our products include rotary sealing devices, steam systems, expansion joints, doctor systems, roll and fabric cleaning devices, and filtration and fiber recovery systems. |
| |
• | Industrial Processing – Equipment, machinery, and technologies used to recycle paper and paperboard and process timber for use in the packaging, tissue, wood products, and alternative fuel industries, among others. Our products include stock-preparation systems and recycling equipment, chemical pulping equipment, debarkers, stranders, chippers, and logging machinery. In addition, we provide industrial automation and digitization solutions to process industries. |
| |
• | Material Handling – Products and engineered systems used to handle bulk and discrete materials for secondary processing or transport in the aggregates, mining, food, and waste management industries, among others. Our products include conveying and vibratory equipment and balers. In addition, we manufacture and sell biodegradable, absorbent granules used as carriers in agricultural applications and for oil and grease absorption. |
Business Outlook and COVID-19 Update
In March 2020, the World Health Organization designated the novel coronavirus as a global pandemic (COVID-19). From the onset of the outbreak, we have focused our efforts on:
protecting the health and safety of our employees though precautionary measures, including working remotely when employees are not required to be physically present, social distancing, wearing face coverings, adding safety and hygiene protocols within our facilities, restricting travel and other safeguards;
as a critical infrastructure company, serving the needs and expectations of our customers;
working closely with our supply chain to minimize any potential disruption; and
preserving our liquidity position.
The COVID-19 pandemic has resulted in significant worldwide economic disruption and has adversely affected our bookings and results of operations in the thirdsecond quarter of 20182020 primarily due to declines in project activity in China and lower bookings in our Wood Processing Systems segment.
Bookings for our capital equipment tend to be variable and are dependent on regional economic conditions and the level ofdelayed or reduced capital spending by our customers, among other factors. By comparison,as well as customer-requested delays on certain capital projects and service work. We also experienced a moderate decline in demand for our parts and consumables products tendsas the pandemic continued. To offset these adverse effects on our business, we decreased discretionary spending in such areas as travel-related costs and incentive compensation, applied for government-sponsored COVID-19 employee retention programs, and executed restructuring actions to be more predictable.reduce payroll-related costs at certain of our operations. We believeexpect the impact of COVID-19 on 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 $101 millioncontinue in the third quarter and possibly for the remainder of the year.
Consolidated bookings decreased 24% to $133.0 million in the second quarter of 2020 compared to $174.0 million in the second quarter of 2019, or 59%which included a 2% decrease from the unfavorable effect of total bookings, compared with $91 million, or 55% of total bookings, in the third quarter of 2018,foreign currency translation. Our business outlook by segment, including $14 million in bookings from an acquisition. Excludingupdates on the impact of the acquisition and a $2 million unfavorable effect from currency translation, our parts and consumables bookings decreased 3%.
Bookings by geographic region areCOVID-19, is as follows:
North America
The largest and most impactful regional market for our products is North America. Our bookings in North America increased to $89 million in the third quarter of 2019, including $17 million of bookings from an acquisition, compared with $78 million in the third quarter of 2018. Excluding the acquisition and unfavorable effect from foreign currency translation, bookings were down 7%. The packaging market in North America experienced weak demand during the third quarter of 2019, and as a result, major containerboard producers were reported to have taken market-related downtime. According to PPI Pulp & Paper Week, U.S. containerboard producers' operating rates were below 91% for the first nine months of 2019, compared with 97% for the first nine months of 2018.
We are experiencing reduced capital project activity in our Wood Processing segment compared to the high levels that occurred in 2018, as many producers increased their capacity and modernized their facilities last year. In addition, demand for our products decreased in the first nine months of 2019 compared to the 2018 period as this segment primarily serves the housing market in North America, which continues to be challenged by high prices and low inventory.
In our Material Handling Systems segment, which primarily serves the mining and aggregates markets, we experienced a good level of project activity during the first nine months of 2019 and expect that to continue in the last quarter of the year. While some markets in the segment are experiencing a slowdown, others such as the mining, aggregates and food sectors are showing signs of increased demand.
Europe
European packaging producers are being challenged by downward price pressure, due in part to weak demand for corrugated packaging in the Eurozone and reduced export activity that has negatively impacted Europe's overall industrial economy. Despite these negative influences, our bookings in Europe increased to $40 million in the third quarter of 2019 compared with $38 million in the third quarter of 2018, including a $2 million unfavorable effect from currency translation, primarily due to several large capital orders for high-performance balers and increased demand for our Fluid-Handling products.
Asia
Our bookings in Asia decreased to $25 million in the third quarter of 2019 compared with $30 million in the third quarter of 2018, including a $1 million increase from an acquisition and a $1 million unfavorable effect from currency translation. Containerboard project activity in China continued to show signs of weak demand in the third quarter of 2019. Uncertainties in trade relations with the United States and weaker domestic demand for packaging have negatively affected investment in new projects. In addition, containerboard producers have taken market-related downtime to limit excess inventory buildup and balance supply with demand. We expect weaker demand for capital equipment in China in 2019 compared to 2018 as a result of China's recovered paper import restrictions. We expect that lower operating rates at containerboard producers resulting from weaker market conditions in China will also impact our parts and consumables business in 2019 compared to 2018, although we expect the recent capacity build-out in other parts of Asia to have a positive impact on demand for our parts and consumables in those countries after the related installations become operational in the fourth quarter of this year and throughout 2020.
| |
• | Flow Control – Bookings decreased 19% in the second quarter of 2020 compared with the second quarter of 2019. Bookings for capital equipment declined due to delayed or reduced capital spending by our customers, as well as delayed repair work as a result of COVID-19. Bookings for parts and consumables products also declined as a result of decreased demand from industrial customers due to COVID-19 related production downtime, shutdowns and visitation restrictions at many customer facilities, while demand from our packaging, food processing, and tissue customers remained relatively stable. |
| |
• | Industrial Processing – Bookings decreased 29% in the second quarter of 2020 compared with the second quarter of 2019. Capital equipment bookings at our European stock-preparation operations and parts and consumables bookings at our North American and European stock-preparation operations declined due to a reduction in customer spending as a result of COVID-19. Additionally, our North American wood processing operations experienced decreased demand for our timber-harvesting equipment, as well as overall reduced capital spending by our customers largely due to the impact of COVID-19. Orders for parts and consumables products at our North American wood processing operations |
Overview (continued)
were impacted by idled mills in the early part of the quarter, but strengthened during the latter part of the quarter due to rebounds in lumber prices and improved U.S. housing starts, which increased mill run rates and parts consumption.
| |
• | Material Handling – Bookings decreased 20% in the second quarter of 2020 compared with the second quarter of 2019. Demand for our conveying and vibratory equipment and balers declined due to reduced customer spending primarily as a result of COVID-19 related shutdowns and visitation restrictions. |
Rest of World
Our bookingsliquidity position as of June 27, 2020 consisted of over $57 million of cash and cash equivalents, approximately $151 million of unused available borrowing capacity, and $265 million of uncommitted borrowing capacity. We currently do not have any material mandatory principal payments on our debt obligations until 2023. We continue to conserve cash by reducing operating expenses and capital spending and managing working capital. We intend to utilize legislative provisions related to COVID-19, such as employee retention programs and deferral of certain tax payments, where available and appropriate.
We continue to evaluate the impact of COVID-19 on our business and will take actions that are in the restbest interests of our employees, customers, and stakeholders or as mandated by governmental authorities. The impact on our results of operations, financial condition and cash flows will depend on certain developments, including the duration of the world decreasedpandemic and its impact on our customers and suppliers, which are uncertain at this time. Accordingly, we cannot predict the extent of the impact that COVID-19 may have on our business for the remainder of fiscal 2020.
For more information on risks related to $17 millionhealth epidemics to our business, including COVID-19, please see Risk Factors included in the third quarterPart II, Item 1A, of 2019 compared with a record third quarter in 2018 of $20 million primarily due to a large stock preparation order from a customer in Argentina in 2018. Despite this region having a near record bookings quarter in the third quarter of 2019, South America continues to experience a constrained investment environment as a result of geopolitical conditions, which impacted our results in this region. However, we have recently seen good project activity in our Wood Processing and Fluid Handling product lines in this region.report.
Global Trade
In 2018, the United States began imposing tariffs on certain imports from China, which has and will continue to increase the cost of some of the equipment that we import. Although we are working to mitigate the impact of tariffs through pricing and sourcing strategies, we cannot be sure how our customers and competitors will react to certain actions we take. For more information on risks associated with our global operations, including tariffs, please see the risk factors included within this filing and Part I, “ItemItem 1A. Risk Factors”Factors, included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2018,28, 2019, as further amended in Part II, Item 1A, within this report and as may be further amended and/or restated in subsequent filings with the SEC.
International Sales and Foreign Currency
Slightly more than half of our sales are to customers outside the United States, mainly in Europe, Asia, and Canada. As a result, our financial performance can be materially affected by currency exchange rate fluctuations between the U.S. dollar and foreign currencies. To mitigate the impact of currency rate fluctuations, we generally seek to charge our customers in the same currency in which our operating costs are incurred. Additionally, we may enter into forward currency exchange contracts to hedge certain firm purchase and sale commitments denominated in currencies other than our subsidiaries' functional currencies. We currently do not use derivative instruments to hedge our exposure to exchange rate fluctuations created by the translation into the U.S. dollar of our foreign subsidiaries' results that are in functional currencies other than the U.S. dollar.
Acquisitions
We expect that a significant driver of our growth over the next several years will be the acquisition of businesses and technologies that complement or augment our existing products and services or may involve entry into a new process industry. We continue to pursue acquisition opportunities. In 2020, we made an acquisition in our Industrial Processing segment for approximately $6.8 million, net of cash acquired. See Note 2, Acquisitions, for further details. Our significant acquisition in 2019 is described below. On January 2, 2019, we acquiredSyntron Material Handling Group, LLC and certain of its affiliates (SMH) for $176.9 million, net of cash acquired. SMH, which is included in our Material Handling segment, is a leading provider of conveying and vibratory equipment and systems to various process industries, including mining, aggregates, food processing, packaging, and pulp and paper. This acquisition extended our current product portfolio and we expect that it will strengthen SMH's relationships in the pulp and paper markets.
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 consolidated financial statements requires us to make estimates and assumptions that affectthe reported amounts of assets and liabilities, revenue and expenses, and related disclosure of contingent liabilities. Our critical accounting policies are defined as those that entail significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. Management evaluates its estimates on an ongoing basis based on historical experience, current economic and market conditions, and other assumptions management believes are reasonable. Our actual results may differ from these estimates under different assumptions or conditions. We believe that our most critical accounting policies which are significant to our consolidated financial statements, 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 28, 2019. There have been no material changes to these critical accounting policies since the end of fiscal 2019 that warrant disclosure, except that management no longer considers our policy with respect to accounting for pension benefits to be a critical accounting policy due to the settlement of our U.S. pension plan in December 2019.
Results of Operations
ThirdSecond Quarter 20192020 Compared With ThirdSecond Quarter 20182019
RevenuesRevenue
The following table presents changesthe change in revenuesrevenue by segment and product line between the thirdsecond quarters of 2020 and 2019, and 2018, and thethose changes in revenues by segment and product line between the third quarters of 2019 and 2018 excluding the effect of currency translation and an acquisition. Currency translation is calculated by converting third quarter of 2019 revenues in local currency into U.S. dollars at third quarter of 2018 exchange rates and then comparing this result with actual revenues in the third quarter of 2019. The presentation of the changes in revenues excluding the effect offoreign currency translation and an acquisition which we refer to as change in organic revenue. The presentation of the change in organic revenue is a non-GAAP measure. We believe this non-GAAP measure helps investors gain an understanding of our underlying operations consistent with how management measures and forecasts its performance, especially when comparing such results to prior periods. This non-GAAP measure should not be considered superior to or a substitute for the corresponding GAAP measures.
measure.
Revenues forRevenue by segment in the thirdsecond quarters of 2020 and 2019 and 2018 werewas as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | Currency Translation | | | | (Non-GAAP) Adjusted |
(In thousands, except percentages) | | September 28, 2019 | | September 29, 2018 | | Total Increase (Decrease) | | % Change | | |
Acquisition | | Total Increase (Decrease) | | % Change |
Stock-Preparation | | $ | 56,128 |
| | $ | 62,983 |
| | $ | (6,855 | ) | | (11 | )% | | $ | (1,534 | ) | | $ | — |
| | $ | (5,321 | ) | | (8 | )% |
Fluid-Handling | | 32,734 |
| | 33,083 |
| | (349 | ) | | (1 | )% | | (731 | ) | | — |
| | 382 |
| | 1 | % |
Doctoring, Cleaning, & Filtration | | 29,641 |
| | 30,704 |
| | (1,063 | ) | | (3 | )% | | (686 | ) | | — |
| | (377 | ) | | (1 | )% |
Papermaking Systems | | 118,503 |
| | 126,770 |
| | (8,267 | ) | | (7 | )% | | (2,951 | ) | | — |
| | (5,316 | ) | | (4 | )% |
Wood Processing Systems | | 32,731 |
| | 37,042 |
| | (4,311 | ) | | (12 | )% | | (594 | ) | | — |
| | (3,717 | ) | | (10 | )% |
Material Handling Systems | | 20,282 |
| | — |
| | 20,282 |
| | — | % | | — |
| | 20,282 |
| | — |
| | — | % |
Fiber-based Products | | 1,988 |
| | 1,933 |
| | 55 |
| | 3 | % | | — |
| | — |
| | 55 |
| | 3 | % |
Consolidated Revenues | | $ | 173,504 |
| | $ | 165,745 |
| | $ | 7,759 |
| | 5 | % | | $ | (3,545 | ) | | $ | 20,282 |
| | $ | (8,978 | ) | | (5 | )% |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | (Non-GAAP) |
| | Three Months Ended | | | | | | Currency Translation | | Acquisition | | Change in Organic Revenue |
(In thousands, except percentages) | | June 27, 2020 | | June 29, 2019 | | Total (Decrease) Increase | | % Change | | | | (Decrease) Increase | | % Change |
Flow Control | | $ | 51,365 |
| | $ | 65,273 |
| | $ | (13,908 | ) | | (21 | )% | | (2,124 | ) | | $ | — |
| | $ | (11,784 | ) | | (18 | )% |
Industrial Processing | | 65,673 |
| | 76,396 |
| | (10,723 | ) | | (14 | )% | | (1,541 | ) | | 205 |
| | (9,387 | ) | | (12 | )% |
Material Handling | | 35,822 |
| | 35,496 |
| | 326 |
| | 1 | % | | (315 | ) | | — |
| | 641 |
| | 2 | % |
Consolidated Revenue | | $ | 152,860 |
| | $ | 177,165 |
| | $ | (24,305 | ) | | (14 | )% | | $ | (3,980 | ) | | $ | 205 |
| | $ | (20,530 | ) | | (12 | )% |
Consolidated revenues increased 5%revenue in the second quarter of 2020 decreased 14%, while consolidated organic revenue declined 12%, due to lower revenue at our Flow Control and Industrial Processing segments as described below. We expect a sequential decline in revenue in the third quarter of 20192020, largely driven by the impact of the COVID-19 pandemic.
Revenue at our Flow Control segment decreased 21% in the second quarter of 2020, while organic revenue declined 18%. Organic revenue from capital equipment at most of our operations declined primarily due to customer reductions in capital spending, as well as customer-requested delays in installation and repairs, due to COVID-19. Additionally, the 2019 period included relatively high demand for capital equipment at our acquisition, offsetNorth American operations. Organic revenue was also impacted by a decline in part by an unfavorable effect of currency translation. Excluding the acquisitiondemand for parts and unfavorable effect of currency translation, revenues decreased 5% in the third quarter of 2019 comparedconsumables at our North American and European operations due to the third quarter of 2018.
COVID-19 related production downtime and shutdowns at our customers, as well as visitation restrictions at many customer facilities.
Results of Operations (continued)
Papermaking Systems Segment
Revenues inRevenue at our Papermaking SystemsIndustrial Processing segment decreased 7%14% in the thirdsecond quarter of 2019, including an unfavorable effect of currency translation. Excluding2020, while organic revenue declined 12%. Organic revenue at our North American wood processing operations decreased due to the unfavorable effect of currency translation, revenuesweakness in the Papermaking Systems segment decreased 4% in the third quarterlumber and oriented strand board industries, primarily for capital equipment, and was further impacted by reduced spending as a result of 2019 compared to the third quarter of 2018, as described in the product line discussions below.
Revenues fromCOVID-19. Organic revenue at our Stock-Preparation product line decreased 11% in the third quarter of 2019, including an unfavorable effect of currency translation. Excluding the unfavorable effect of currency translation, Stock-Preparation revenues decreased 8% in the third quarter of 2019 largely due tostock-preparation business was negatively impacted by decreased demand for our products at our Chinese operations resulting from reduced containerboard project activity and weak market conditions primarily related to China's recovered paper import restrictions. This decrease was offset in part by increased demand for our parts and consumables products at our European operations.
Revenues from our Fluid-Handling product line decreased 1% in the third quarter of 2019, including an unfavorable effect of currency translation. Excluding the unfavorable effect of currency translation, Fluid-Handling revenues increased 1% in the third quarter of 2019.
Revenues from our Doctoring, Cleaning, & Filtration product line decreased 3% in the third quarter of 2019, including an unfavorable effect of currency translation. Excluding the unfavorable effect of currency translation, Doctoring, Cleaning, & Filtration revenues decreased 1% in the third quarter of 2019. Decreased demand for our capital equipment at our Chinese operations was largely offset by increased demand for our capital equipment at our European and North American operations.
Wood Processing Systems Segment
Revenues from our Wood Processing Systems segment decreased 12%due to overcapacity in the third quarter of 2019, including an unfavorable effect of currency translation. Excluding the unfavorable effect of currency translation, revenues from our Wood Processing Systems segment decreased 10% in the third quarter of 2019 due toAsian markets, and decreased demand for our productsparts and consumables at our North American operations resultingdue to reduced customer spending as a result of COVID-19. These declines were partially offset by increased organic revenue from reduced project activity.capital equipment at our North American stock-preparation operations due to several large orders that were received prior to the onset of the pandemic, and increased demand for parts and consumables at our Chinese operations due to the reopening of businesses we service.
Material Handling Systems Segment
Revenues fromRevenue and organic revenue at our Material Handling Systems segment were relatively unchanged in the thirdsecond quarter of 2019 were2020. Organic revenue from our SMH acquisition.
Fiber-based Products
Revenuesconveying and vibratory equipment business increased primarily due to capital equipment revenues associated with a large order that was received in late 2019, partially offset by a decline in demand for parts and consumables due to a reduction in customer spending primarily as a result of COVID-19 related shutdowns and visitation restrictions. Organic revenue from our Fiber-based Productsbaler business increased slightly in the third quarter of 2019 compareddeclined due to the third quarter of 2018.a continued weak European economy, which was further impacted by COVID-19.
Gross Profit Margin
Gross profit margins formargin by segment in the thirdsecond quarters of 2020 and 2019 was as follows:
|
| | | | | | |
| | Three Months Ended |
| | June 27, 2020 | | June 29, 2019 |
Flow Control | | 53.5 | % | | 51.0 | % |
Industrial Processing | | 40.9 | % | | 39.4 | % |
Material Handling | | 33.8 | % | | 30.9 | % |
Consolidated Gross Profit Margin | | 43.5 | % | | 42.0 | % |
Consolidated gross profit margin increased in the second quarter of 2020 primarily due to COVID-19 government-sponsored employee retention incentives of $1.3 million, which increased consolidated gross profit margin in the second quarter of 2020 by 0.8 percentage points, and 2018the amortization of acquired profit in inventory related to the SMH acquisition of $1.2 million, which lowered consolidated gross profit margin in the second quarter of 2019 by 0.7 percentage points.
Gross profit margin at our Flow Control segment increased in the second quarter of 2020 due to improved margins on capital equipment, an increased proportion of higher-margin parts and consumables revenue, and employee retention incentives.
Gross profit margin at our Industrial Processing segment increased in the second quarter of 2020 due to employee retention incentives of $0.9 million, which improved the gross profit margin by 1.4 percentage points.
Gross profit margin at our Material Handling segment in the second quarter of 2019 was negatively affected by $1.2 million of amortization of acquired profit in inventory, which lowered the gross profit margin by 3.5 percentage points. Excluding the impact of amortization of acquired profit in inventory in the 2019 period, the gross profit margin decreased in the 2020 period primarily due to an increased proportion of lower-margin capital equipment revenue at our conveying and vibratory equipment business.
Selling, General, and Administrative Expenses
Selling, general, and administrative (SG&A) expenses by segment in the second quarters of 2020 and 2019 were as follows:
|
| | | | | | |
| | Three Months Ended |
| | September 28, 2019 | | September 29, 2018 |
Papermaking Systems | | 44.8 | % | | 44.6 | % |
Wood Processing Systems | | 41.8 | % | | 42.6 | % |
Material Handling Systems | | 32.0 | % | | — | % |
Fiber-based Products | | 46.7 | % | | 36.6 | % |
Consolidated Gross Profit Margin | | 42.8 | % | | 44.1 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
(In thousands, except percentages) | | June 27, 2020 | | % of Revenue | | June 29, 2019 | | % of Revenue | | Decrease | | % Change |
Flow Control | | $ | 15,798 |
| | 31 | % | | $ | 17,115 |
| | 26 | % | | $ | (1,317 | ) | | (8)% |
Industrial Processing | | 14,920 |
| | 23 | % | | 15,079 |
| | 20 | % | | (159 | ) | | (1)% |
Material Handling | | 8,094 |
| | 23 | % | | 9,257 |
| | 26 | % | | (1,163 | ) | | (13)% |
Corporate | | 6,261 |
| | N/A |
| | 7,016 |
| | N/A |
| | (755 | ) | | (11)% |
Consolidated SG&A Expenses | | $ | 45,073 |
| | 29 | % | | $ | 48,467 |
| | 27 | % | | $ | (3,394 | ) | | (7)% |
Results of Operations (continued)
Consolidated gross profit margin decreasedSG&A expenses as a percentage of revenue increased to 29% in the thirdsecond quarter of 2020 compared with 27% in the second quarter of 2019 due to lower revenues in the inclusion2020 period. Consolidated SG&A expenses decreased $3.4 million in the second quarter of 2020 compared with the second quarter of 2019 primarily due to a reduction in travel-related costs of $3.1 million. In addition, SG&A expenses decreased due to a favorable effect of foreign currency translation of $1.1 million and COVID-19 government-sponsored employee retention incentives of $0.8 million, which were offset in part by acquisition costs in the second quarter of 2020.
SG&A expenses as a percentage of revenue at our Flow Control segment increased to 31% in the second quarter of 2020 compared with 26% in the second quarter of 2019 due to lower revenues in the 2020 period. SG&A expenses decreased in the second quarter of 2020 compared with the second quarter of 2019 due to reduced travel-related costs of $1.1 million and a favorable effect of foreign currency translation of $0.6 million. These decreases in SG&A expenses were partially offset by incremental currency transaction losses of $0.6 million, primarily on Euro and U.S. dollar-denominated cash at our Swedish and Mexican operations.
SG&A expenses as a percentage of revenue at our Industrial Processing segment increased to 23% in the second quarter of 2020 compared with 20% in the second quarter of 2019 due to lower revenues in the 2020 period. SG&A expenses decreased in the second quarter of 2020 compared to the second quarter of 2019 due to reduced travel-related costs of $1.2 million and a favorable effect of foreign currency translation of $0.4 million. These decreases were offset in part by acquisition costs of $0.4 million in the second quarter of 2020.
SG&A expenses as a percentage of revenue at our Material Handling segment decreased to 23% in the second quarter of 2020 compared with 26% in the second quarter of 2019. The second quarter of 2019 included $0.3 million of amortization of acquired backlog associated with the SMH acquisition. Excluding the amortization of acquired backlog, SG&A expenses as a percentage of revenue decreased to 23% in the second quarter of 2020 from 25% in the second quarter of 2019 primarily due to reduced travel-related costs of $0.7 million.
SG&A expenses at Corporate decreased in the second quarter of 2020 compared with the second quarter of 2019 primarily due to lower incentive compensation cost.
Restructuring Costs
Restructuring costs of $0.5 million in the second quarter of 2020 represent severance costs for 30 employees within our Flow Control segment related to a restructuring plan implemented during the quarter. Additionally, we reduced our workforce by 21 employees within our Industrial Processing segment with no associated severance costs. We expect annualized payroll-related savings as a result of these actions of approximately $3.7 million, including $2.4 million at our Flow Control segment and $1.3 million at our Industrial Processing segment. These annualized savings consist of $1.8 million for cost of sales and $1.9 million for operating expenses. We may incur additional restructuring costs as we continue to evaluate the impact of COVID-19 and the resulting global economic downturn on our business.
Interest Expense
Interest expense decreased to $1.9 million in the second quarter of 2020 from $3.6 million in the second quarter of 2019 due to a lower weighted-average interest rate and lower outstanding debt. In July 2020, we prepaid the outstanding principal balance of $18.9 million on our Real Estate Loan using borrowings available under our revolving credit facility. We expect a decrease in interest expense in the second half of 2020 partially due to the lower gross margin profileinterest rate on our revolving credit facility.
Provision for Income Taxes
Our provision for income taxes increased to $4.5 million in the second quarter of 2020, or 28% of pre-tax income, from $3.1 million in the Material Handling Systems segment.second quarter of 2019, or 16% of pre-tax income. The effective tax rate for the second quarter of 2020 was higher than our statutory tax rate of 21% primarily due to nondeductible expenses, the distribution of our worldwide earnings, state taxes, and tax expense associated with Global Intangible Low-Taxed Income (GILTI) provisions. These increases in tax expense were offset in part by net excess income tax benefits from stock-based compensation arrangements. The effective tax rate for the second quarter of 2019 was lower than our statutory tax rate of 21% primarily due to a net tax benefit of 6% of pre-tax income associated with foreign exchange losses and tax costs recognized upon our repatriation of certain previously-taxed foreign earnings and a tax benefit related to the net excess income tax benefits from stock-based compensation arrangements. These tax benefits were offset in part by tax expense related to nondeductible expenses, GILTI, the distribution of our worldwide earnings, and unrecognized tax benefits.
Results of Operations (continued)
Papermaking Systems SegmentNet Income
The gross profit margin in our Papermaking Systems segment was essentially unchangedNet income decreased $4.7 million to $11.7 million in the thirdsecond quarter of 2019 compared to the third quarter of 2018, as the effect of an increase2020 from $16.4 million in the proportion of higher-margin parts and consumables revenues was largely offset by lower margins on our capital equipment.
Wood Processing Systems Segment
The gross profit margin in our Wood Processing Systems segment decreased in the thirdsecond quarter of 2019 due to lower margins on our parts and consumables products.
Material Handling Systems Segment
The gross profit margin in our Material Handling Systems segment in the third quarter of 2019 is from our SMH acquisition.
Fiber-based Products
The gross profit margin in our Fiber-based Products business increased in the third quarter of 2019 primarily due to the impact of manufacturing efficiencies that resulted from higher production volumes to meet expected demand.
Selling, General, and Administrative Expenses
Selling, general, and administrative (SG&A) expenses for the third quarters of 2019 and 2018 were as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
(In thousands, except percentages) | | September 28, 2019 | | September 29, 2018 | | Increase (Decrease) | | % Change |
Papermaking Systems | | $ | 28,491 |
| | $ | 28,379 |
| | $ | 112 |
| | — | % |
Wood Processing Systems | | 6,314 |
| | 6,652 |
| | (338 | ) | | (5 | )% |
Material Handling Systems | | 4,727 |
| | — |
| | 4,727 |
| | — | % |
Corporate and Fiber-based Products | | 7,565 |
| | 7,857 |
| | (292 | ) | | (4 | )% |
Consolidated SG&A | | $ | 47,097 |
| | $ | 42,888 |
| | $ | 4,209 |
| | 10 | % |
| | | | | | | | |
Consolidated SG&A as a Percentage of Revenues | | 27.1 | % | | 25.9 | % | | | | |
Consolidated SG&A expenses increased 10% in the third quarter of 2019 largely due to our acquisition, offset in part by a favorable effect of currency translation of $0.8 million. Excluding the acquisition and favorable effect of currency translation, SG&A expenses increased 1% in the third quarter of 2019 compared to the third quarter of 2018.
Papermaking Systems Segment
SG&A expenses in our Papermaking Systems segment were essentially unchanged in the third quarter of 2019 compared to the third quarter of 2018.
Wood Processing Systems Segment
SG&A expenses in our Wood Processing Systems segment decreased in the third quarter of 2019 primarily due to a$5.0 million decrease in selling expense associated with lower revenues.
Material Handling Systems Segment
SG&A expensesoperating income and a $1.3 million increase in our Material Handling Systems segment in the third quarter of 2019 are from our SMH acquisition.
Corporate and Fiber-based Products
SG&A expenses for Corporate and Fiber-based Products decreased in the third quarter of 2019 primarily due to lower incentive compensation expense.
Results of Operations (continued)
Restructuring Costs
Restructuring costs in the third quarter of 2018 of $0.4 million related to the integration of our U.S. and Swedish papermaking stock-preparation product lines into a single manufacturing facility to achieve economies of scale and greater efficiencies.
Interest Expense
Interest expense increased $1.4 million to $3.1 million in the third quarter of 2019 from $1.7 million in the third quarter of 2018 primarily due to interest expense on the additional borrowings related to our SMH acquisition.
Other Expense, Net
We expect other expense, net to increase to approximately $7.3 million in the fourth quarter of 2019 from $0.1 million in the third quarter of 2019, primarily related to settlement costs associated with our U.S. pension plan (Retirement Plan). In 2018, our board of directors and compensation committee approved amendments to freeze and terminate our Retirement Plan and restoration plan (Restoration Plan) as of December 29, 2018. In November 2019, we will finalize the settlement amount of the Retirement Plan obligation, which requires remeasurement based on the participants' elections to receive either a lump sum payment or an annuity, current discount rates, asset returns, and economic conditions. We expect to recognize a pre-tax settlement loss of approximately $7.2 million in the fourth quarter of 2019, which is calculated as the sum of the unrecognized actuarial loss and an estimated $5.1 million of additional cash to be paid, less the accrued pension liability.
Provision for Income Taxes
Our provision for income taxes, decreased to $5.2 million in the third quarter of 2019 from $6.4 million in the third quarter of 2018. The effective tax rate of 24% in the third quarter of 2019 was higher than our statutory tax rate of 21% primarily due to the distribution of our worldwide earnings, tax expense associated with the Global Intangible Low-Taxed Income (GILTI) provisions of the Tax Cuts and Jobs Act of 2017 (2017 Tax Act), nondeductible expenses, state taxes, and the cost of repatriating the earnings of certain foreign subsidiaries. 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 25% in the third quarter of 2018 was higher than our statutory tax rate of 21% primarily due to the GILTI provisions of the 2017 Tax Act, the distribution of our worldwide earnings, and the cost of repatriating earnings of certain foreign subsidiaries. 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. We expect our effective tax rate to increase to approximately 45% in the fourth quarter of 2019 due to incremental tax expense associated with the settlement of our Retirement Plan obligation.
Net Income
Net income decreased $2.8 million to $16.2 million in the third quarter of 2019 from $19.0 million in the third quarter of 2018 due to a $2.8 million decrease in operating income and an increase in interest expense of $1.4$1.6 million offset in part by a $1.2 million decrease in the provision for income taxes (see discussions above for further details).
First NineSix Months 20192020 Compared With First NineSix Months 20182019
RevenuesRevenue
The following table presents changes in revenuesrevenue by segment and product line between the first ninesix months of 2020 and 2019, and 2018, and thethose changes in revenues by segment and product line between the first nine months of 2019 and 2018 excluding the effect of foreign currency translation and acquisitions. Currency translation is calculated by converting first nine months of 2019 revenuesan acquisition which we refer to as change in local currency into U.S. dollars at first nine months of 2018 exchange rates and then comparing this result with actual revenues in the first nine months of 2019.organic revenue. The presentation of the changeschange in revenues excluding the effect of currency translation and acquisitionsorganic revenue is a non-GAAP measure. We believe this non-GAAP measure helps investors gain an understanding of our underlying operations consistent with how management measures and forecasts its performance, especially when comparing such results to prior periods. This non-GAAP measure should not be considered superior to or a substitute for the corresponding GAAP measures.measure.
Revenue by segment in the first six months of 2020 and 2019 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | (Non-GAAP) |
| | Six Months Ended | | | | | | Currency Translation | | Acquisition | | Change in Organic Revenue |
(In thousands, except percentages) | | June 27, 2020 | | June 29, 2019 | | Total Decrease | | % Change | | | | (Decrease) Increase | | % Change |
Flow Control | | $ | 108,514 |
| | $ | 126,417 |
| | $ | (17,903 | ) | | (14 | )% | | $ | (3,434 | ) | | $ | — |
| | $ | (14,469 | ) | | (11 | )% |
Industrial Processing | | 130,382 |
| | 148,670 |
| | (18,288 | ) | | (12 | )% | | (2,424 | ) | | 205 |
| | (16,069 | ) | | (11 | )% |
Material Handling | | 73,091 |
| | 73,394 |
| | (303 | ) | | — | % | | (676 | ) | | — |
| | 373 |
| | 1 | % |
Consolidated Revenue | | $ | 311,987 |
| | $ | 348,481 |
| | $ | (36,494 | ) | | (10 | )% | | $ | (6,534 | ) | | $ | 205 |
| | $ | (30,165 | ) | | (9 | )% |
Consolidated revenue in the first six months of 2020 decreased by 10%, while consolidated organic revenue declined 9% primarily due to lower revenue at our Industrial Processing and Flow Control segments as described below.
Revenue from our Flow Control segment decreased 14% in the first six months of 2020, while organic revenue declined 11%. Organic revenue from capital equipment at most of our operations declined primarily due to customer reductions in capital spending, as well as customer-requested delays in installation and repairs, due to COVID-19. Additionally, the 2019 period included relatively high demand for capital equipment at our North American operations. Organic revenue was also impacted by a decline in demand for parts and consumables at our North American and European operations due to COVID-19 related downtimes and shutdowns at our customers, as well as visitation restrictions at many customer facilities.
Revenue from our Industrial Processing segment decreased 12% in the first six months of 2020, while organic revenue declined by 11%. Organic revenue at our North American wood processing operations decreased due to the weakness in the lumber and oriented strand board industries, primarily for capital equipment, and was further impacted by reduced spending as a result of COVID-19. Organic revenue at our stock-preparation business was negatively impacted by decreased demand for parts and consumables at our North American operations, and lower demand for capital equipment at our European and Chinese operations due in part to reduced customer spending as a result of COVID-19. These declines were partially offset by increased organic revenue from capital equipment at our North American stock-preparation operations due to several large orders that were received prior to the onset of the pandemic.
Revenue and organic revenue at our Material Handling segment were relatively unchanged in the first six months of 2020. Organic revenue from our conveying and vibratory equipment business increased primarily due to capital equipment revenues associated with a large order that was received in late 2019, partially offset by a decline in demand for parts and consumables due to a reduction in customer spending largely as a result of COVID-19 shutdowns and visitation restrictions. Organic revenue from our baler business declined due to a continued weak European economy, which was further impacted by COVID-19.
Results of Operations (continued)
Revenues forGross Profit Margin
Gross profit margin by segment in the first ninesix months of 2020 and 2019 was as follows:
|
| | | | | | |
| | Six Months Ended |
| | June 27, 2020 | | June 29, 2019 |
Flow Control | | 53.2 | % | | 51.0 | % |
Industrial Processing | | 39.7 | % | | 39.2 | % |
Material Handling | | 34.7 | % | | 30.1 | % |
Consolidated Gross Profit Margin | | 43.2 | % | | 41.6 | % |
Consolidated gross profit margin increased in the first six months of 2020 largely due to the amortization of acquired profit in inventory related to the SMH acquisition of $3.5 million that lowered consolidated gross profit margin in the first six months of 2019 by 1.0 percentage points, and 2018 areCOVID-19 government-sponsored employee retention incentives received in the second quarter of 2020 of $1.3 million, which increased consolidated gross profit margin by 0.4 percentage points.
Gross profit margin at our Flow Control segment increased in the first six months of 2020 due to improved margins on capital equipment and an increased proportion of higher-margin parts and consumables revenue.
Gross profit margin at our Industrial Processing segment increased in the first six months of 2020 primarily due to employee retention incentives of $0.9 million, which improved the gross profit margin by 0.7 percentage points.
Gross profit margin at our Material Handling Systems segment was relatively unchanged in the first six months of 2020 compared to the 2019 period after excluding the effect of amortization of acquired profit in inventory of $3.5 million, which lowered the gross profit margin in 2019 by 4.8 percentage points.
Selling, General, and Administrative Expenses
SG&A expenses in the first six months of 2020 and 2019 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | | | | | Currency Translation | | | | (Non-GAAP) Adjusted |
(In thousands, except percentages) | | September 28, 2019 | | September 29, 2018 | | Total Increase (Decrease) | | % Change | | |
Acquisition | | Total Increase (Decrease) | | % Change |
Stock-Preparation | | $ | 158,993 |
| | $ | 164,842 |
| | $ | (5,849 | ) | | (4 | )% | | $ | (6,181 | ) | | $ | — |
| | $ | 332 |
| | — | % |
Fluid-Handling | | 100,201 |
| | 98,500 |
| | 1,701 |
| | 2 | % | | (3,227 | ) | | — |
| | 4,928 |
| | 5 | % |
Doctoring, Cleaning, & Filtration | | 88,591 |
| | 87,469 |
| | 1,122 |
| | 1 | % | | (2,779 | ) | | — |
| | 3,901 |
| | 4 | % |
Papermaking Systems | | 347,785 |
| | 350,811 |
| | (3,026 | ) | | (1 | )% | | (12,187 | ) | | — |
| | 9,161 |
| | 3 | % |
Wood Processing Systems | | 104,649 |
| | 109,335 |
| | (4,686 | ) | | (4 | )% | | (4,080 | ) | | — |
| | (606 | ) | | (1 | )% |
Material Handling Systems | | 61,063 |
| | — |
| | 61,063 |
| | — | % | | — |
| | 61,063 |
| | — |
| | — | % |
Fiber-based Products | | 8,488 |
| | 9,705 |
| | (1,217 | ) | | (13 | )% | | — |
| | — |
| | (1,217 | ) | | (13 | )% |
Consolidated Revenues | | $ | 521,985 |
| | $ | 469,851 |
| | $ | 52,134 |
| | 11 | % | | $ | (16,267 | ) | | $ | 61,063 |
| | $ | 7,338 |
| | 2 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | | | |
(In thousands, except percentages) | | June 27, 2020 | | % of Revenue | | June 29, 2019 | | % of Revenue | | Decrease | | % Change |
Flow Control | | $ | 31,740 |
| | 29 | % | | $ | 34,382 |
| | 27 | % | | $ | (2,642 | ) | | (8)% |
Industrial Processing | | 28,740 |
| | 22 | % | | 30,256 |
| | 20 | % | | (1,516 | ) | | (5)% |
Material Handling | | 16,775 |
| | 23 | % | | 19,219 |
| | 26 | % | | (2,444 | ) | | (13)% |
Corporate | | 13,410 |
| | N/A |
| | 13,929 |
| | N/A |
| | (519 | ) | | (4)% |
Consolidated SG&A Expenses | | $ | 90,665 |
| | 29 | % | | $ | 97,786 |
| | 28 | % | | $ | (7,121 | ) | | (7)% |
Consolidated revenuesSG&A expenses as a percentage of revenue increased 11%to 29% in the first ninesix months of 2019 largely due to our acquisition, offset in part by an unfavorable effect of currency translation. Excluding the acquisition and unfavorable effect of currency translation, revenues increased 2%2020 compared with 28% in the first nine months of 2019 compared to the first nine months of 2018.
Papermaking Systems Segment
Revenues in our Papermaking Systems segment decreased 1% in the first nine months of 2019, including an unfavorable effect of currency translation. Excluding the unfavorable effect of currency translation, revenues in the Papermaking Systems segment increased 3% in the first nine months of 2019 compared to the first nine months of 2018, as described in the product line discussions below.
Revenues from our Stock-Preparation product line decreased 4% in the first nine months of 2019, including an unfavorable effect of currency translation. Excluding the unfavorable effect of currency translation, Stock-Preparation revenues were essentially flat in the first nine months of 2019. Increased demand for our capital equipment, and to a lesser extent, our parts and consumables products at our European and North American operations was largely offset by decreased demand for our capital equipment, and to a lesser extent, our parts and consumables products at our Chinese operations. The decreased demand in China resulted from reduced containerboard project activity and weak market conditions due in part to China's recovered paper import restrictions.
Revenues from our Fluid-Handling product line increased 2% in the first nine months of 2019, including an unfavorable effect of currency translation. Excluding the unfavorable effect of currency translation, Fluid-Handling revenues increased 5% in the first nine months of 2019, largely due to increased demand for our capital equipment at our North American operations and an increase in demand for our parts and consumables products across all geographic regions. These increases were partially offset by decreased demand for our capital equipment at our European operations.
Revenues from our Doctoring, Cleaning, & Filtration product line increased 1% in the first nine months of 2019, including an unfavorable effect of currency translation. Excluding the unfavorable effect of currency translation, Doctoring, Cleaning, & Filtration revenues increased 4% in the first ninesix months of 2019 due to increased demand for our capital equipment,lower revenues in the 2020 period. Consolidated SG&A expenses decreased $7.1 million in the first six months of 2020 compared with the first six months of 2019 due to reduced travel-related costs of $3.7 million, a favorable effect of foreign currency translation of $1.8 million, lower acquisition-related costs of $1.7 million, and toCOVID-19 government-sponsored employee retention incentives received in the second quarter of 2020 of $0.8 million.
SG&A expenses as a lesser extent, our parts and consumables productspercentage of revenue at our North American operations.Flow Control segment increased to 29% in the first six months of 2020 compared with 27% in the first six months of 2019 due to lower revenues in the 2020 period. SG&A expenses decreased in the first six months of 2020 compared with the first six months of 2019 due to reduced travel-related costs of $1.5 million and a favorable effect of foreign currency translation of $1.0 million.
SG&A expenses as a percentage of revenue at our Industrial Processing segment increased to 22% in the first six months of 2020 compared with 20% in the first six months of 2019 due to lower revenues in the 2020 period. SG&A expenses decreased in the first six months of 2020 compared with the first six months of 2019 due to reduced travel-related costs of $1.5 million and a favorable effect of foreign currency translation of $0.6 million. These increasesdecreases were partially offset by decreased demand for our capital equipment at our Chinese operations, and to a lesser extent, our parts and consumables products at our European operations.
acquisition costs of $0.4 million.
Results of Operations (continued)
Wood Processing Systems Segment
Revenues fromSG&A expenses as a percentage of revenue at our Wood Processing SystemsMaterial Handling segment decreased 4%to 23% in the first ninesix months of 2020 compared with 26% in the first six months of 2019. The first six months of 2019 including an unfavorable effectincluded amortization of currency translation.acquired backlog of $1.3 million and other acquisition-related costs associated with the SMH acquisition of $0.8 million. Excluding the unfavorable effectthese acquisition-related costs, SG&A expenses as a percentage of currency translation, revenues from our Wood Processing Systems segment decreased 1%revenue were unchanged at 23% in the first nine months of 2019. Decreased demand for our capital equipmentboth periods.
SG&A expenses at our North American operations was due to a reduction in our customers' capital spending, as many producers made significant improvements in 2018 to increase capacity and modernize their facilities. This decrease was partially offset by increased demand for our capital equipment at our European operations, and to a lesser extent, our parts and consumables products at our North American and European operations.
Material Handling Systems Segment
Revenues from our Material Handling Systems segment in the first nine months of 2019 were from our SMH acquisition.
Fiber-based Products
Revenues from our Fiber-based Products business decreased 13% in the first nine months of 2019, primarily due to adverse weather conditions in the first half of 2019 that led to widespread weakness in the agricultural industry.
Gross Profit Margin
Gross profit margins for the first nine months of 2019 and 2018 were as follows:
|
| | | | | | |
| | Nine Months Ended |
| | September 28, 2019 | | September 29, 2018 |
Papermaking Systems | | 44.4 | % | | 45.1 | % |
Wood Processing Systems | | 42.0 | % | | 40.4 | % |
Material Handling Systems | | 27.5 | % | | — | % |
Fiber-based Products | | 48.5 | % | | 50.1 | % |
Consolidated Gross Profit Margin | | 42.0 | % | | 44.1 | % |
Consolidated gross profit marginCorporate decreased in the first ninesix months of 2019 largely due to the inclusion of the lower gross margin profile of the Material Handling Systems Segment, as well as to $3.5 million of amortization of acquired profit in inventory, which lowered the consolidated gross profit margin by 0.7 percentage points.
Papermaking Systems Segment
The gross profit margin in our Papermaking Systems segment decreased in2020 compared with the first nine months of 2019 due to lower margins on our capital equipment.
Wood Processing Systems Segment
The gross profit margin in our Wood Processing Systems segment increased in the first nine months of 2019 primarily due to higher margins on our capital equipment compared to the 2018 period.
Material Handling Systems Segment
The gross profit margin in our Material Handling Systems segment in the first nine months of 2019 was negatively impacted by $3.5 million of amortization of acquired profit in inventory, which lowered its gross profit margin by 5.8 percentage points.
Fiber-based Products
The gross profit margin in our Fiber-based Products business decreased in the first nine months of 2019 primarily due to the combined impact of lower revenues and manufacturing inefficiencies that resulted from lower production volumes.
Results of Operations (continued)
Selling, General, and Administrative Expenses
SG&A expenses for the first nine months of 2019 and 2018 were as follows:
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended | | | | |
(In thousands) | | September 28, 2019 | | September 29, 2018 | | Increase (Decrease) | | % Change |
Papermaking Systems | | $ | 86,956 |
| | $ | 89,205 |
| | $ | (2,249 | ) | | (3 | )% |
Wood Processing Systems | | 19,448 |
| | 20,929 |
| | (1,481 | ) | | (7 | )% |
Material Handling Systems | | 15,861 |
| | — |
| | 15,861 |
| | — | % |
Corporate and Fiber-based Products | | 22,618 |
| | 23,662 |
| | (1,044 | ) | | (4 | )% |
Consolidated SG&A | | $ | 144,883 |
| | $ | 133,796 |
| | $ | 11,087 |
| | 8 | % |
| | | | | | | | |
Consolidated SG&A as a Percentage of Revenues | | 27.8 | % | | 28.5 | % | | | | |
Consolidated SG&A expenses increased 8% in the first nine months of 2019 due to our acquisition, offset in part by a favorable effect of currency translation of $4.1 million. Excluding the acquisition and favorable effect of currency translation, SG&A expenses were essentially unchanged in the first nine months of 2019 compared to the first nine months of 2018.
Papermaking Systems Segment
SG&A expenses in our Papermaking Systems segment decreased in the first nine months of 2019, primarily due to a $3.2 million favorable effect from currency translation that was offset in part by increased selling-related expense at our Fluid-Handling product line.
Wood Processing Systems Segment
SG&A expenses in our Wood Processing Systems segment decreased in the first nine months of 2019 primarily due to a $0.9 million favorable effect from currency translation.
Material Handling Systems Segment
SG&A expenses in our Material Handling Systems segment in the first nine months of 2019 represents those of our SMH acquisition and include $1.3 million of amortization expense from acquired backlog.
Corporate and Fiber-based Products
SG&A expenses for Corporate and Fiber-based Products decreased in the first ninesix months of 2019 primarily due to lower incentive compensation expense and professional services fees.cost.
Restructuring Costs
See Restructuring costsCosts in Results of Operations, "Second Quarter 2020 Compared With Second Quarter 2019" for a discussion of the first nine monthsrestructuring actions taken during the second quarter of 2018 of $1.7 million 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, and included $1.3 million of costs for the relocation of machinery and equipment and administrative offices and $0.4 million primarily associated with employee retention costs and abandonment of excess facility and other closure costs.2020.
Interest Expense
Interest expense increased $4.8 milliondecreased to $10.1$4.4 million in the first ninesix months of 20192020 from $5.3$7.1 million in the first ninesix months of 2018 primarily2019 due to a lower weighted-average interest expense on the additional borrowings related to our SMH acquisition.rate and lower outstanding debt.
Provision for Income Taxes
Our provision for income taxes decreasedincreased to $12.3$9.0 million in the first ninesix months of 20192020 from $15.6$7.1 million in the first ninesix months of 2018.2019. The effective tax rate of 22%27% in the first ninesix months of 20192020 was higher than our statutory tax rate of 21% primarily due to nondeductible expenses, the distribution of our worldwide earnings, nondeductible expenses,state taxes, and tax expense associated with the GILTI provisions of the 2017 Tax Act, state taxes, and the cost of repatriating the earnings of certain foreign subsidiaries. This incrementalGILTI. These increases in tax expense waswere offset in part by a decrease in tax related to the net excess income tax benefits from stock-based
Results21% in the first six months of Operations (continued)
compensation arrangements,2019 was equal to our statutory tax rate. Included in our effective tax rate of 21% was a net tax benefit of 3% of pre-tax income associated with foreign exchange losses and tax costs recognized upon our repatriation of certain previously taxedpreviously-taxed foreign earnings and the reversal ofa tax reserves associated with uncertain tax positions. The effective tax rate of 27% in the first nine months of 2018 was higher than our statutory tax rate of 21% primarily due to the GILTI provisions of the 2017 Tax Act, the distribution of our 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. This incremental tax expense was offset in part by a decrease in taxbenefit related to the reversal of tax reserves associated with uncertain tax positions and the net excess income tax benefits from stock-based compensation arrangements. These tax benefits were offset by tax expense primarily related to nondeductible expenses, the distribution of our worldwide earnings, GILTI, and state taxes.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law and provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief. The enactment of the CARES Act did not have a material impact on our provision for income taxes for the first six months of 2020. We continue to monitor any effects that result from the CARES Act.
Net Income
Net income increased $1.2decreased $3.1 million to $43.7$24.4 million in the first ninesix months of 20192020 from $42.5$27.5 million in the first ninesix months of 20182019 primarily due to a $2.5$3.9 million increasedecrease in operating income and a $3.3$1.9 million decreaseincrease in provision for income taxes, offset in part by increaseda decrease in interest expense of $4.8$2.7 million (see discussions above for further details).
Recent Accounting Pronouncements
See Note 1, Nature of Operations and Summary of Significant Accounting Policies, under the headingsRecently Adopted Accounting Pronouncementsand Recent Accounting Pronouncements Not Yet Adopted, in the accompanying condensed consolidated financial statements for further details.
Liquidity and Capital Resources
Consolidated working capital was $147.6$139.3 million at September 28, 2019,June 27, 2020, compared with $123.8$151.4 million at December 29, 2018.28, 2019. Included in working capital were cash and cash equivalents of $48.7$57.5 million at September 28, 2019,June 27, 2020, compared with $45.8$66.8 million at December 29, 2018. At September 28, 2019, $48.3 million of cash2019. Cash and cash equivalents was held by our foreign subsidiaries.
In the third quarter of 2019, we repatriated $71.1 million of cash from our European operations, whichsubsidiaries was financed through an additional $56.1 million at June 27, 2020 and $58.9 million at December 28, 2019. The decrease in working capital at June 27, 2020 was largely impacted by the reclassification of euro-denominatedour Real Estate Loan to short-term obligations at June 27, 2020. Our Real Estate Loan was prepaid in July 2020 with borrowings under our revolving credit facility and $15.0 million of internally-generated cash. These repatriated funds were used to repay U.S.-dollar denominated borrowings outstanding under our revolving credit facility.
Cash Flows
First Nine Months of 2019 See Debt Obligations below for more detail.
Our operating activities provided cash of $58.2 million in the first nine months of 2019 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. Working capital used cash of $15.9 million in the first nine months of 2019, including $10.3 million for inventory primarily in our Wood Processing Systems segment and $5.2 million for other current liabilities primarily related to the payment of income taxes and incentive compensation, which was partially offset by cash received from customer deposits.
Our investing activities used cash of $182.8 million in the first nine months of 2019, including $176.9 million for the SMH acquisition, net of cash acquired, and $6.2 million for purchases of property, plant, and equipment.
Our financing activities provided cash of $130.5 million in the first nine months of 2019. We borrowed $247.1 million
under our revolving credit facility, which included $179.3 million for our SMH acquisition and $56.1 million of euro-denominated borrowings to partially fund our cash repatriated from Europe, and $2.0 million received as proceeds from the issuance of common stock in connection with stock option exercises and our employee stock purchase plan. These sources of cash were partially offset by cash used of $108.3 million for principal payments on our outstanding debt obligations, which includes $71.1 million of cash repatriated from Europe, $7.6 million for cash dividends paid to stockholders, and $2.7 million for tax withholding payments related to the vesting of employee stock-based compensation.
Liquidity and Capital Resources (continued)
Cash Flows
First Nine MonthsCash flow information in the first six months of 20182020 and 2019 was as follows:
|
| | | | | | | | |
| | Six Months Ended |
(In thousands) | | June 27, 2020 | | June 29, 2019 |
Net Cash Provided by Operating Activities | | $ | 28,208 |
| | $ | 32,488 |
|
Net Cash Used in Investing Activities | | (10,652 | ) | | (180,630 | ) |
Net Cash (Used in) Provided by Financing Activities | | (23,414 | ) | | 160,399 |
|
Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash | | (1,466 | ) | | (236 | ) |
(Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash | | $ | (7,324 | ) | | $ | 12,021 |
|
Operating Activities
Cash provided by operating activities provided cash of $52.6decreased to $28.2 million in the first ninesix months of 20182020 from $32.5 million in the first six months of 2019. Our operating cash flows are primarily from cash received from customers, offset by cash payments for such items as inventory, employee compensation, operating leases, income taxes and interest payments on outstanding debt obligations. The decrease in cash provided by operating activities in the first six months of 2020 compared with the first six months of 2019 was primarily due to cash generated by our operating subsidiaries from product sales, which is largely represented within operating cash flows inlower net income, excluding non-cash chargesoffset in part by lower cash used for depreciation and amortization and stock-based compensation. Aside fromworking capital. We received cash generated from items which impacted net income, operatingof $4.8 million for accounts receivable in the first six months of 2020 compared to cash flows were also impacted by changesused of $2.9 million in working capitalthe prior period, primarily due to the timing of collections and reduced project activity in 2020. We received cash receipts and payments.of $1.6 million from other current assets in the first six months of 2020 compared to cash used of $3.4 million in the 2019 period, primarily related to refundable income taxes. We used cash of $10.2$5.0 million to purchase inventory primarily associated with the shipment of capital orders in late 2018. We had an increase infor accounts receivable of $9.6 million related to a record level of revenuepayable in the third quarterfirst six months of 2018, which was collected2020 compared to cash received of $3.4 million in subsequent periods.the prior period primarily due to lower payables from reduced spending levels in 2020. We received $9.4used $9.2 million of cash fromfor other current liabilities in the first six months of 2020 compared to $5.6 million in the 2019 period primarily relateddue to customer depositsa reduction in advanced billings due to timing and advanced billings.amounts of capital orders.
Investing Activities
Our investing activities used cash of $12.6$10.7 million in the first ninesix months of 2018 primarily related to purchases2020 compared with $180.6 million in the first six months of property, plant, and equipment, including $6.42019. The 2020 period included a use of cash of $7.1 million for acquisitions and the 2019 period included a newly-constructed manufacturing facility inuse of cash of $176.9 million for the United States.acquisition of SMH.
Financing Activities
Our financing activities used cash of $55.8$23.4 million in the first ninesix months of 2018. We used2020 compared with cash provided of $82.0$160.4 million for principal paymentsin the first six months of 2019. U.S. dollar-denominated borrowings under our revolving credit facility, primarily relating to acquisitions, were $7.0 million in the 2020 period and $191.0 million in the 2019 period. Payments on our outstanding debt obligations $7.2were $24.2 million forin the 2020 period and $24.6 million in the 2019 period.
Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash
The exchange rate effect on cash, dividends paid to stockholders,cash equivalents, and $3.9restricted cash represents the impact of translation of cash balances at our foreign subsidiaries. The $1.5 million for tax withholding paymentsreduction in cash, cash equivalents, and restricted cash in the first six months of 2020 is primarily related to stock-based compensation. These usesthe strengthening of cash were partially offset by proceeds received from borrowingsthe U.S. dollar, particularly against the Brazilian real, Canadian dollar and Mexican peso.
Debt Obligations
Under our revolving credit facility, we have a borrowing capacity of $21.0$400 million, of which $150.8 million was available to borrow as of June 27, 2020, along with an additional uncommitted, unsecured incremental borrowing facility of $150 million. In addition, under our commercial real estate loanuncommitted Multi-Currency Note Purchase and $16.0Private Shelf Agreement (Note Purchase Agreement), we may issue up to an additional $115 million of senior promissory notes. Under these agreements, our leverage ratio must be less than 3.75. As of June 27, 2020, our leverage ratio was 2.01 and we were in compliance with our debt covenants.
Liquidity and Capital Resources (continued)
In July 2020, we prepaid the outstanding principal balance of $18.9 million on our Real Estate Loan, together with accrued interest and a prepayment penalty of $0.2 million using borrowings available under our revolving credit facility,facility.
We do not have any material mandatory principal payments on our debt obligations until 2023. See Note 6, Short- and $0.8 million received as proceeds fromLong-Term Obligations, and Note 14, Subsequent Event, in the issuanceaccompanying condensed consolidated financial statements for additional information regarding our debt obligations, including the prepayment of common stock under our employee stock purchase plan.Real Estate Loan.
Additional Liquidity and Capital Resources
On May 15, 2019,13, 2020, our board of directors approved the repurchase of up to $20 million of our equity securities during the period from May 15, 201913, 2020 to May 15, 2020.13, 2021. We have not repurchased any shares of our common stock under this authorization or under the previous authorization, which expired on May 16, 2019.
15, 2020.
We paid cash dividends of $7.6$5.4 million in the first ninesix months of 2019.2020. On September 11, 2019,May 13, 2020, we declared a quarterly cash dividend of $0.23$0.24 per share totaling $2.6$2.8 million that will be paid on November 7, 2019.August 6, 2020. Future declarations of dividends are subject to our board of directors' approval and may be adjusted as business needs or market conditions change. The declaration of cash dividends is subject to our compliance with the covenant in our revolving credit facility related to our consolidated leverage ratio.
We plan to make expenditures of approximately $3 million to $4 million during the remainder of 2020 for property, plant, and equipment. We will continue to monitor our capital expenditures for the remainder of 2020 as part of our effort to conserve global cash resources for any short-term cash needs that may develop as a result of the COVID-19 pandemic.
As of September 28, 2019, we had cash and cash equivalents of $48.7 million, of which $48.3 million was held by our foreign subsidiaries. As of September 28, 2019,June 27, 2020, we had approximately $226.1$253.9 million of total unremitted foreign earnings. It is our intent to indefinitely reinvest $217.2$243.9 million of these earnings to support the current and future capital needs of our foreign operations,
including debt repayments. Inrepayments, if any. For the first ninesix months of 2019,2020, we recorded withholding taxes and the tax effect of foreign exchange losses on the earnings in certain foreign subsidiaries that we plan to repatriate in the foreseeable future. The foreign withholding taxes that would be required if we were to remit the indefinitely reinvested foreign earnings to the United States would be approximately $5.4$6.1 million.
We plan to make expenditures of approximately $5 to $6 million during the remainder of 2019 for property, plant, and equipment.
As discussed above in Other Expense, Net in the third quarter of 2019 compared with the third quarter of 2018, we will finalize the settlement amount of our Retirement Plan obligation in November 2019, and we estimate paying $5.1 million prior to year end. We also expect to settle the liabilities under the Restoration Plan of $2.4 million in early 2020.
In the future, our liquidity position will be affected by the level of cash flows from operations, cash paid to service our debt obligations, acquisitions, capital projects, dividends, and stock repurchases. We believe that our existing resources, together with the borrowing capacityborrowings available under our revolving credit facility and available through 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.
Liquidity and Capital Resources (continued)
Debt Obligations
Under our revolving credit facility, we have a borrowing capacity of $400 million, of which $118.8 million was available to borrow as of September 28, 2019, along with an additional uncommitted unsecured incremental borrowing facility of $150 million. In addition, under our Note Purchase Agreement, of which $10 million of senior promissory notes are currently outstanding, we may issue up to an additional $115 million of senior promissory notes. Under these agreements, our leverage ratio must be less than 4.0 for the next fiscal quarter, and less than 3.75 thereafter. As of September 28, 2019, our consolidated leverage ratio was 2.07 as calculated under the terms defined in our revolving credit facility. See Note 5, Long-Term Obligations, in the accompanying condensed consolidated financial statements for additional information regarding our debt obligations.
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 ninesix months ended September 28, 2019,June 27, 2020 compared with those disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended December 29, 2018.
As of September 28, 2019,
except that we gave notice to the lender bank of our
borrowings underintent to prepay the
revolving credit facility, which matures on DecemberReal Estate Loan as disclosed in Note 6, Short- and Long-Term Obligations, and Note 14 2023, were $281.0 million, an increase of $139.9 million from December 29, 2018. The interest rate on these borrowings is based on the LIBOR rate (with a zero percent floor), plus an applicable margin. The additional borrowings increased our leverage ratio and resulted in a 25-basis-point increaseSubsequent Event, 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.accompanying condensed consolidated financial statements.
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 as disclosed in Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 29, 2018.28, 2019.
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 28, 2019.June 27, 2020. 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
Item 4 – Controls and Procedures (continued)
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 28, 2019,June 27, 2020, our Chief Executive Officer and Chief Financial Officer concluded that as of September 28, 2019,June 27, 2020, 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 28, 2019June 27, 2020 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
Except for the revised “risk factors below regarding “Our global operations subject us to various risks that may adversely affect our results of operations”operations,” "We have significant international sales and operations and face risks related to health epidemics and pandemics, including the coronavirus pandemic (COVID-19) which has and continues to adversely affect our business and results of operations," risk factor below,and “Operating globally subjects us to changes in government regulations and policies in multiple jurisdictions around the world, including those related to tariffs and trade barriers, taxation, exchange controls and political risks,” there have been no material changes from the risk factors disclosed in Part I, Item 1A of the Company’sour Annual Report on Form 10-K for the fiscal year ended December 29, 2018.28, 2019 (Form 10-K), as may be further amended and/or restated in subsequent filings with the SEC. The COVID-19 pandemic has led to general uncertainty and adverse changes in global economic conditions and heightened, and in some cases manifested, certain of the risks we normally face in operating our business, including those disclosed in the Form 10-K. The risk factor disclosure in the Form 10-K is qualified by the information relating to COVID-19 that is described in this Quarterly Report on Form 10-Q, including the revised risk factors set forth below.
Our global operations subject us to various risks that may adversely affect our results of operations.
We are a leading global supplier of equipment and critical components used in process industries worldwide. We sell our products globally, including sales to customers in China, South America, Russia, and India, and operate multiple manufacturing operations worldwide, including operations in Canada, China, Europe, Mexico, and Brazil. International revenues and operations are subject to a number of risks which vary by geographic region, including the following:
agreements may be difficult to enforce and receivables difficult to collect through a foreign country's legal system;
foreign customers may have longer payment cycles;
foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs, adopt other restrictions on foreign trade, impose currency restrictions or enact other protectionist or anti-trade measures;
economic sanctions, trade embargoes, or other adverse trade regulations;
environmental and other regulations can adversely impact our ability to operate our facilities;
disruption from climate change, natural disaster, including earthquakes and/or tornadoes, fires, war, terrorist activity, and other force majeure events beyond our control;
changes in zoning laws that may require relocation of our manufacturing operations;
disruption from fast-spreading health epidemics and pandemics which have and may continue to result in widespread interruption of our business operations and those of our customers, suppliers and vendors;
worsening economic conditions may result in worker unrest, labor actions, and potential work stoppages;
political and/or civil unrest may disrupt commercial activities of ours or our customers;
fluctuations in foreign currency exchange rates and foreign interest rates beyond our control;
it may be difficult or cost prohibitive to repatriate funds, due to unfavorable domestic and foreign tax consequences or other restrictions or limitations imposed by foreign governments; and
the protection of intellectual property in foreign countries may be more difficult to enforce.
Operating globally subjects us to various risks that may adversely affect our results of operations in the future.
| |
– | agreements may be difficult to enforce and receivables difficult to collect through a foreign country's legal system; |
| |
– | foreign customers may have longer payment cycles; |
| |
– | foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs, adopt other restrictions on foreign trade, impose currency restrictions or enact other protectionist or anti-trade measures; |
| |
– | environmental and other regulations can adversely impact our ability to operate our facilities; |
| |
– | disruption from climate change, natural disaster, including earthquakes and/or tornadoes, fires, war, terrorist activity, and other force majeure events beyond our control; |
| |
– | worsening economic conditions may result in worker unrest, labor actions, and potential work stoppages; |
| |
– | political unrest may disrupt commercial activities of ours or our customers; |
| |
– | it may be difficult to repatriate funds, due to unfavorable domestic and foreign tax consequences or other restrictions or limitations imposed by foreign governments; and |
| |
– | the protection of intellectual property in foreign countries may be more difficult to enforce. |
Item 1A – Risk Factors (continued)
We have significant international sales and operations and face risks related to health epidemics and pandemics, including the coronavirus pandemic (COVID-19) which has and continues to adversely affect our business and results of operations.
Our business and operations have been and may continue to be adversely affected by the effects of a widespread outbreak of a contagious disease and other adverse public health developments, including disruptions or restrictions on our employees’ and other service providers’ ability to travel, reductions in our workforce, temporary closures of our facilities or the facilities of our customers, suppliers, or other vendors in our supply chain, potentially including single source suppliers, and other disruptions in the supply chain. In addition, an outbreak of a contagious disease could impact global trade and reduce demand for our products, and adversely affect the U.S. or global economy and capital markets.
In December 2019, COVID-19 was first reported in China, and in March 2020, COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the U.S. government. The pandemic has negatively affected the global economy, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place,” and created significant disruption of the financial markets. The COVID-19 pandemic has adversely affected, and may continue to adversely affect in the future, our business and results of operations, as government authorities have imposed, and may in the future impose, temporary mandatory closures of our facilities, travel restrictions, work-from-home orders and social distancing protocols and other restrictions that have impacted our ability to adequately staff and maintain our operations at normal levels. Additionally, our financial results have been adversely impacted and may be adversely impacted in the future by decreased levels of bookings, customer-requested delays on certain capital projects and service work, customer downtime and shutdowns, and visitation restrictions at many customer facilities, all of which have affected and may adversely affect in the future our ability to recognize revenue for sales of our products and services. We may also incur future costs related to COVID-19, such as increased employee benefit costs if a significant number of our employees contract COVID-19 and require hospitalization or other costly medical treatment, or expenses related to repeated cleaning and sanitizing of our facilities, which may also adversely affect our financial results. In March 2020, we experienced a significant decrease in market capitalization due to a decline in our stock price, and the overall U.S. stock market also declined significantly amid market volatility driven by the uncertainty surrounding the outbreak of COVID-19. Although our stock price and the U.S. stock market have since recovered, they could decline again in the future due to uncertainty surrounding COVID-19.
The COVID-19 pandemic has evolved and continues to evolve rapidly. As a result, we cannot reasonably estimate the scope of the impact of COVID-19 on our business and the adverse effect and impact COVID-19 may ultimately have on our business and our stock price. For instance, we may face additional requests from customers to delay the production or delivery of our products, particularly capital equipment products, which would affect our ability to recognize revenue for sales of such products. Other customers may decide not to proceed with large capital equipment orders in order to conserve their cash. A delay on our part of the production of our products may lead to liquidated damages owed to our customers. Further implementation, extension or renewal of government-mandated closures, or “shelter-in-place” orders related to the COVID-19 pandemic may create further disruption to our operations, our workforce, the supply chain, and our customer and vendor operations. The effect of the COVID-19 pandemic on the global economy is uncertain, and we may be further adversely affected by general economic conditions, even if government mandates are repealed. The impact of COVID-19 could worsen if there is an extended duration of any COVID-19 outbreak or a resurgence of COVID-19 infection in affected regions after they have begun to recover. The future impact of COVID-19 could include further disruption and volatility in the global capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future.
In addition, if the current COVID-19 outbreak continues and results in a further prolonged period of travel, commercial and other similar restrictions, we could experience global supply disruptions and may incur costs to mitigate such disruptions, which could be significant. New information may emerge concerning the severity of COVID-19, the pace and method through which it is transmitted, contained and/or treated, and the nature of the approach of the local governments in the jurisdictions in which we operate to handling the outbreak, any of which could impact our employees, operations, suppliers, customers and/or operating and financial results, including our ability to determine our quarterly results. We operate in 20 countries and the government responses in each of those countries have differed and resulted in varying levels of containment of COVID-19, degree and duration of closures, and nature of safety precautions, all of which we have and will continue to manage. Although we have worked and continue to work diligently to ensure that our global facilities can operate with minimal disruption, mitigate the impact of the outbreak on our employees’ health and safety, and address the potential supply chain impact on ourselves and our customers, the full extent to which COVID-19 has affected and will affect the global economy and our results will depend on future developments and factors that cannot be predicted.
Item 1A – Risk Factors (continued)
Operating globally subjects us to changes in government regulations and policies in multiple jurisdictions around the world, including those related to tariffs and trade barriers, taxation, exchange controls and political risks.
Changes in government policies, political unrest, economic sanctions, trade embargoes, or other adverse trade regulations can negatively impact our business. Non-U.S. markets contribute a substantial portion of our revenues, and we intend to continue expanding our presence in these regions. For example, we operate businesses in Mexico and Canada, and we benefitbenefited from the North American Free Trade Agreement, (NAFTA), which is proposed to be revisedhas been replaced by the United States-Mexico-Canada Agreement (USMCA)., from which we also benefit. If the United States were to withdraw from or materially modify NAFTA or the successor USMCA or to impose significant tariffs or taxes on goods imported into the United States, the cost of our products could significantly increase or no longer be priced competitively, which in turn could have a material adverse effect on our business and results of operations. The USMCA does not contain an agreement on certain existing tariffs. The United States, Canada, and Mexico must each still ratify the USMCA in their respective legal systems before it becomes effective. In the United States, Congress will be required to pass implementing legislation, the timing of which is uncertain.
In addition, the Office of the United States Trade Representative (USTR) is imposing an additional duty of 25%has imposed tariffs on a wide variety of Chinese products from China, including certain pulp and paper machinery equipment, pursuant to an investigation of Chinese intellectual property practices under Section 301 of the Trade Act of 1974. USTR imposed the additional dutyThe tariffs on an initial tranche of $34 billion in Chinese products, including certain pulp and paper machinery equipment, effectiveare set at 25% and have been in effect since July 6, 2018 (List 1). USTR then extended the duty to a second tranche of $16 billion in Chinese products effective August 23, 2018 (List 2). USTR then imposed an additional duty of 10% on a third tranche of Chinese products, covering approximately $200 billion in trade effective September 24, 2018 (List 3). USTR subsequently increased the List 3 duty to 25% effective May 10, 2019. Finally, USTR announced an additional 10% duty, which it subsequently increased to 15%, on approximately $300 billion in Chinese trade (List 4). USTR has divided the List 4 products into two parts; the duty on the first part became effective on September 1, 2019, and the duty on the second part is scheduled to become effective on December 15, 2019.2018. In addition, in March 2018, the U.S. Department of Commerce imposed tariffs of 25% on numerous categories of steel imports, and 10% on numerous categories of aluminum imports, from most countries under Section 232 of the Trade Expansion Act of 1962. While we are working to assess and mitigate the impact of the existing and other proposed tariffs through pricing and sourcing strategies, we cannot be certain how our customers and competitors will react to the actions we take. The tariffs have and could in the future negatively affect our ability to compete against competitors who do not manufacture in China and/or are not subject to the tariffs.
Item 1A – Risk Factors (continued)
The United States has tightened export controlstrade sanctions targeting countries like China and Russia. For example, in August 2017 and April 2018, the United States imposed new trade and economic sanctions againsttargeting certain persons in, and certain types of business with, Russia, in addition to those previouslythat have been imposed insince 2014. In 2018,2019, our sales to Russia were $17.7$16.8 million, or 3%,2% of our revenue. In 2019 and through 2020, the United States has continued to expand export control restrictions applicable to certain Chinese firms and commenced its assessment of new controls for “emerging foundational technologies,” escalating U.S.-China tension over technology competition. In response, Russia may imposeand China have begun considering and, in some cases, implementing trade sanctions that could affect U.S.-owned businesses. The imposition of trade sanctions may make it generally more difficult to do business in Russia and China and cause delays or prevent shipment of products or services performed by our personnel, or to receive payment for products or services. Such restrictions could have a material adverse impact on our business and operating results going forward.
We operate significant manufacturing facilitiesOperating globally subjects us to changes in government regulations and derive significant revenue from China. Changespolicies in multiple jurisdictions around the policies of the United States or the Chinese government, devaluation of the Chinese currency, restrictions on investment and/or the expatriation of cash,world, including those related to tariffs and trade barriers, taxation, exchange controls and political unrest, unstable economic conditions, or other developments in China or in U.S.-China relations that are adverse to trade, including enactment of protectionist legislation or trade or currency restrictions, could negatively impact our businessrisks, and operating results. Policies of the Chinese government to target slower economic growth may negatively affect our business in China if customers are unable to expand capacity or obtain financing for expansion or improvement projects. The president of the United States has indicated that he favors restricting investment by U.S. companies in China; if such restrictions were to become law, or if investment was otherwise restricted, our business would be significantly and adversely affected.
Policies of the Chinese government to advance internal political priorities may potentially negatively affect our business in any number of ways that we may not foresee. For example, China has imposed a ban on mixed waste paper imports and reported that all recovered paper imports have been and are limited to a 0.5% contaminant level after March 1, 2018, which is well below the level that suppliers consider feasible. In addition, the Chinese government has announced that it may ban all recovered paper imports by 2020. According to Fastmarkets RISI, the Chinese government's actions have led to a severe shortage of recovered paper in China, which has forced mills to incur additional downtime. Chinese containerboard producers have been looking to build capacity for fiber in Southeast Asia, with the intent to ship pulp back to China for further processing. These policies could have a significant influence on the price, nature and availability of the type of paper imported into China, could have a negative effect on the operating capacity of our customers in China, and may affect the demand for our products and our operating results in the future, both in China and in the surrounding region.
future.
Item 6 – Exhibits
|
| | |
Exhibit Number | | |
| Description of Exhibit |
| | |
31.1*31.1 | | |
| | |
31.2*31.2 | | |
| | |
32** | | |
| | |
101.INS*101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| | |
101.SCH*101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
| | |
101.CAL*101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| | |
101.DEF*101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
101.LAB*101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| | |
101.PRE*101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| | |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
|
| | | |
| | | |
* | Filed herewith. |
** | Furnished herewith. |
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.
|
| |
| KADANT INC. |
| |
Date: November 6, 2019August 5, 2020 | /s/ Michael J. McKenney |
| Michael J. McKenney |
| Executive Vice President and Chief Financial Officer |
| (Principal Financial Officer) |