Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 1, 2017
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from ________ to _________ |
Commission file number 1-11406
KADANT INC.
(Exact name of registrant as specified in its charter)
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| | |
Delaware | | 52-1762325 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
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One Technology Park Drive | | |
Westford, Massachusetts | | 01886 |
(Address of Principal Executive Offices) | | (Zip Code) |
Registrant's telephone number, including area code: (978) 776-2000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o | | Accelerated filer x |
Non-accelerated filer o | | Smaller reporting company o |
| | Emerging growth company o
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
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Class | | Outstanding at April 28, 2017 |
Common Stock, $.01 par value | | 11,000,647 |
Kadant Inc.
Quarterly Report on Form 10-Q
for the Period Ended April 1, 2017
Table of Contents
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PART I: Financial Information |
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PART II: Other Information |
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PART 1 – FINANCIAL INFORMATION
Item 1 – Financial Statements
KADANT INC.
Condensed Consolidated Balance Sheet
(Unaudited)
Assets
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| | April 1, 2017 | | December 31, 2016 |
(In thousands) | | |
| | | | |
Current Assets: | | | | |
Cash and cash equivalents | | $ | 71,540 |
| | $ | 71,487 |
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Restricted cash (Note 1) | | 1,543 |
| | 2,082 |
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Accounts receivable, less allowances of $2,497 and $2,395 (Note 1) | | 71,926 |
| | 65,963 |
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Inventories (Note 1) | | 59,841 |
| | 54,951 |
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Unbilled contract costs and fees | | 4,262 |
| | 3,068 |
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Other current assets | | 13,037 |
| | 9,799 |
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Total Current Assets | | 222,149 |
| | 207,350 |
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| | | | |
Property, Plant, and Equipment, at Cost | | 127,631 |
| | 124,424 |
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Less: accumulated depreciation and amortization | | 79,001 |
| | 76,720 |
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| | 48,630 |
| | 47,704 |
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Other Assets | | 12,421 |
| | 11,452 |
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Intangible Assets, Net (Note 1) | | 51,816 |
| | 52,730 |
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Goodwill (Note 1) | | 153,811 |
| | 151,455 |
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Total Assets | | $ | 488,827 |
| | $ | 470,691 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
KADANT INC.
Condensed Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Stockholders' Equity
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| | April 1, 2017 | | December 31, 2016 |
(In thousands, except share amounts) | | |
| | | | |
Current Liabilities: | | | | |
Current maturities of long-term obligations (Note 5) | | $ | 655 |
| | $ | 643 |
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Accounts payable | | 25,218 |
| | 23,929 |
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Customer deposits | | 25,337 |
| | 21,168 |
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Accrued payroll and employee benefits | | 17,231 |
| | 20,508 |
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Other current liabilities | | 22,175 |
| | 22,665 |
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Total Current Liabilities | | 90,616 |
| | 88,913 |
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| | | | |
Long-Term Deferred Income Taxes | | 15,526 |
| | 14,631 |
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Other Long-Term Liabilities | | 17,500 |
| | 17,100 |
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Long-Term Obligations (Note 5) | | 69,895 |
| | 65,768 |
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Commitments and Contingencies (Note 12) | |
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Stockholders' Equity: | | |
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Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued | | — |
| | — |
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Common stock, $.01 par value, 150,000,000 shares authorized; 14,624,159 shares issued | | 146 |
| | 146 |
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Capital in excess of par value | | 98,974 |
| | 101,405 |
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Retained earnings | | 327,691 |
| | 321,050 |
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Treasury stock at cost, 3,623,512 and 3,686,532 shares | | (88,791 | ) | | (90,335 | ) |
Accumulated other comprehensive items (Note 8) | | (44,542 | ) | | (49,637 | ) |
Total Kadant Stockholders' Equity | | 293,478 |
| | 282,629 |
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Noncontrolling interest | | 1,812 |
| | 1,650 |
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Total Stockholders' Equity | | 295,290 |
| | 284,279 |
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Total Liabilities and Stockholders' Equity | | $ | 488,827 |
| | $ | 470,691 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
KADANT INC.
Condensed Consolidated Statement of Income
(Unaudited)
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| | Three Months Ended |
| | April 1, 2017 | | April 2, 2016 |
(In thousands, except per share amounts) | | |
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Revenues (Note 11) | | $ | 102,857 |
| | $ | 96,538 |
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Costs and Operating Expenses: | | |
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Cost of revenues | | 53,865 |
| | 52,562 |
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Selling, general, and administrative expenses | | 34,799 |
| | 32,496 |
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Research and development expenses | | 2,147 |
| | 1,704 |
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Other income | | — |
| | (317 | ) |
| | 90,811 |
| | 86,445 |
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Operating Income | | 12,046 |
| | 10,093 |
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Interest Income | | 104 |
| | 55 |
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Interest Expense | | (348 | ) | | (269 | ) |
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Income Before Provision for Income Taxes | | 11,802 |
| | 9,879 |
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Provision for Income Taxes (Note 4) | | 2,735 |
| | 2,888 |
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Net Income | | 9,067 |
| | 6,991 |
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Net Income Attributable to Noncontrolling Interest | | (116 | ) | | (115 | ) |
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Net Income Attributable to Kadant | | $ | 8,951 |
| | $ | 6,876 |
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Earnings per Share Attributable to Kadant (Note 3): | | |
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Basic | | $ | 0.82 |
| | $ | 0.64 |
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Diluted | | $ | 0.80 |
| | $ | 0.62 |
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Weighted Average Shares (Note 3): | | |
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Basic | | 10,952 |
| | 10,793 |
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Diluted | | 11,205 |
| | 11,018 |
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Cash Dividend Declared per Common Share | | $ | 0.21 |
| | $ | 0.19 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
KADANT INC.
Condensed Consolidated Statement of Comprehensive Income
(Unaudited)
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| | Three Months Ended |
| | April 1, 2017 | | April 2, 2016 |
(In thousands) | | |
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Net Income | | $ | 9,067 |
| | $ | 6,991 |
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Other Comprehensive Items: | | |
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Foreign currency translation adjustment | | 5,032 |
| | 5,930 |
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Pension and other post-retirement liability adjustments (net of tax provision of $49 in 2017 and tax benefit of $236 in 2016) | | 82 |
| | (418 | ) |
Deferred gain (loss) on hedging instruments (net of tax provision of $15 in 2017 and tax benefit of $72 in 2016) | | 27 |
| | (126 | ) |
Other Comprehensive Items | | 5,141 |
| | 5,386 |
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Comprehensive Income | | 14,208 |
| | 12,377 |
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Comprehensive Income Attributable to Noncontrolling Interest | | (162 | ) | | (174 | ) |
Comprehensive Income Attributable to Kadant | | $ | 14,046 |
| | $ | 12,203 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
KADANT INC.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
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| | Three Months Ended |
| | April 1, 2017 | | April 2, 2016 |
(In thousands) | | |
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Operating Activities: | | | | |
Net income attributable to Kadant | | $ | 8,951 |
| | $ | 6,876 |
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Net income attributable to noncontrolling interest | | 116 |
| | 115 |
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Net income | | 9,067 |
| | 6,991 |
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Adjustments to reconcile net income to net cash provided by operating activities: | | |
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Depreciation and amortization | | 3,256 |
| | 2,564 |
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Stock-based compensation expense | | 1,295 |
| | 1,323 |
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Provision for losses on accounts receivable | | 129 |
| | 76 |
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Loss (gain) on the sale of property, plant, and equipment | | 41 |
| | (346 | ) |
Other items, net | | 180 |
| | 781 |
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Contributions to U.S. pension plan | | (90 | ) | | (270 | ) |
Changes in current assets and liabilities, net of effects of acquisition: | | |
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Accounts receivable | | (5,043 | ) | | 3,259 |
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Unbilled contract costs and fees | | (1,134 | ) | | 4,313 |
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Inventories | | (3,964 | ) | | (604 | ) |
Other current assets | | (1,886 | ) | | (1,808 | ) |
Accounts payable | | 805 |
| | (1,234 | ) |
Other current liabilities | | (973 | ) | | (9,527 | ) |
Net cash provided by operating activities | | 1,683 |
| | 5,518 |
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Investing Activities: | | |
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Purchases of property, plant, and equipment | | (1,722 | ) | | (524 | ) |
Issuance of note receivable | | — |
| | (2,813 | ) |
Proceeds from sale of property, plant, and equipment | | — |
| | 385 |
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Acquisition (Note 1) | | (165 | ) | | — |
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Other investing activities | | (2 | ) | | — |
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Net cash used in investing activities | | (1,889 | ) | | (2,952 | ) |
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Financing Activities: | | |
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Proceeds from issuance of debt | | 8,000 |
| | 41,046 |
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Repayment of debt | | (4,610 | ) | | (125 | ) |
Tax withholding payments related to stock-based compensation | | (2,182 | ) | | (1,980 | ) |
Dividends paid | | (2,078 | ) | | (1,831 | ) |
Payment of debt issuance costs | | (654 | ) | | — |
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Payment of contingent consideration | | — |
| | (1,091 | ) |
Change in restricted cash | | 590 |
| | (58 | ) |
Other financing activities | | (118 | ) | | — |
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Net cash (used in) provided by financing activities | | (1,052 | ) | | 35,961 |
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Exchange Rate Effect on Cash and Cash Equivalents | | 1,311 |
| | 460 |
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Increase in Cash and Cash Equivalents | | 53 |
| | 38,987 |
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Cash and Cash Equivalents at Beginning of Period | | 71,487 |
| | 65,530 |
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Cash and Cash Equivalents at End of Period | | $ | 71,540 |
| | $ | 104,517 |
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See Note 1 for supplemental cash flow information.
The accompanying notes are an integral part of these condensed consolidated financial statements.
KADANT INC.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
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(In thousands, except share amounts) | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Items | | Noncontrolling Interest | | Total Stockholders' Equity |
| Shares | | Amount | | | | Shares | | Amount | | | |
| | | | | | | | | | | | | | | | | | |
Balance at January 2, 2016 | | 14,624,159 |
| | $ | 146 |
| | $ | 100,536 |
| | $ | 297,258 |
| | 3,850,779 |
| | $ | (94,359 | ) | | $ | (36,972 | ) | | $ | 1,336 |
| | $ | 267,945 |
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Net income | | — |
| | — |
| | — |
| | 6,876 |
| | — |
| | — |
| | — |
| | 115 |
| | 6,991 |
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Dividend declared | | — |
| | — |
| | — |
| | (2,063 | ) | | — |
| | — |
| | — |
| | — |
| | (2,063 | ) |
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Activity under stock plans | | — |
| | — |
| | (2,639 | ) | | — |
| | (80,942 | ) | | 1,983 |
| | — |
| | — |
| | (656 | ) |
| | | | | | | | | | | | | | | | | | |
Other comprehensive items | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,327 |
| | 59 |
| | 5,386 |
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Balance at April 2, 2016 | | 14,624,159 |
| | $ | 146 |
| | $ | 97,897 |
| | $ | 302,071 |
| | 3,769,837 |
| | $ | (92,376 | ) | | $ | (31,645 | ) | | $ | 1,510 |
| | $ | 277,603 |
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Balance at December 31, 2016 | | 14,624,159 |
| | $ | 146 |
| | $ | 101,405 |
| | $ | 321,050 |
| | 3,686,532 |
| | $ | (90,335 | ) | | $ | (49,637 | ) | | $ | 1,650 |
| | $ | 284,279 |
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Net income | | — |
| | — |
| | — |
| | 8,951 |
| | — |
| | — |
| | — |
| | 116 |
| | 9,067 |
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Dividend declared | | — |
| | — |
| | — |
| | (2,310 | ) | | — |
| | — |
| | — |
| | — |
| | (2,310 | ) |
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Activity under stock plans | | — |
| | — |
| | (2,431 | ) | | — |
| | (63,020 | ) | | 1,544 |
| | — |
| | — |
| | (887 | ) |
| | | | | | | | | | | | | | | | | | |
Other comprehensive items | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,095 |
| | 46 |
| | 5,141 |
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Balance at April 1, 2017 | | 14,624,159 |
| | $ | 146 |
| | $ | 98,974 |
| | $ | 327,691 |
| | 3,623,512 |
| | $ | (88,791 | ) | | $ | (44,542 | ) | | $ | 1,812 |
| | $ | 295,290 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Kadant Inc. (collectively, "Kadant," "the Company," or "the Registrant") was incorporated in Delaware in November 1991 and currently trades on the New York Stock Exchange under the ticker symbol "KAI."
The Company and its subsidiaries' continuing operations include two reportable operating segments, Papermaking Systems and Wood Processing Systems, and a separate product line, Fiber-based Products.
Through its Papermaking Systems segment, the Company develops, manufactures, and markets a range of equipment and products primarily for the global papermaking, paper recycling, recycling and waste management, and other process industries. The Company's principal products in this segment include custom-engineered stock-preparation systems and equipment for the preparation of wastepaper for conversion into recycled paper and balers and related equipment used in the processing of recyclable and waste materials; fluid-handling systems used primarily in the dryer section of the papermaking process and during the production of corrugated boxboard, metals, plastics, rubber, textiles, chemicals, and food; doctoring systems and equipment and related consumables important to the efficient operation of paper machines; and cleaning and filtration systems essential for draining, purifying, and recycling process water and cleaning paper machine fabrics and rolls.
Through its Wood Processing Systems segment, the Company develops, manufactures, and markets stranders and related equipment used in the production of oriented strand board (OSB), an engineered wood panel product used primarily in home construction. This segment also sells debarking and wood chipping equipment used in the forest products and the pulp and paper industries. Through this segment, the Company also provides refurbishment and repair of pulping equipment for the pulp and paper industry.
Through its Fiber-based Products business, the Company manufactures and sells granules derived from papermaking by-products primarily for use as agricultural carriers and for home lawn and garden applications, as well as for oil and grease absorption.
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 April 1, 2017 and its results of operations, comprehensive income, cash flows, and stockholders' equity for the three-month periods ended April 1, 2017 and April 2, 2016. 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 31, 2016 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 31, 2016. The condensed consolidated financial statements and related notes are presented as permitted by the Securities and Exchange Commission (SEC) rules and regulations for Form 10-Q and do not contain certain information included in the annual consolidated financial statements and related notes of the Company. The condensed consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the SEC.
Critical Accounting Policies
Critical accounting policies are defined as those that entail significant judgments and estimates, and could potentially result in materially different results under different assumptions and conditions. The Company believes that the most critical accounting policies upon which its financial position depends, and which involve the most complex or subjective decisions or assessments, concern revenue recognition and accounts receivable, warranty obligations, income taxes, the valuation of goodwill and intangible assets, inventories and pension obligations. A discussion of the application of these and other accounting policies is included in Notes 1 and 3 to the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.
Although the Company makes every effort to ensure the accuracy of the estimates and assumptions used in the preparation of its condensed consolidated financial statements or in the application of accounting policies, if business conditions were different, or if the Company were to use different estimates and assumptions, it is possible that materially different amounts could be reported in the Company's condensed consolidated financial statements.
Supplemental Cash Flow Information
The Company paid additional post-closing consideration of $165,000 in the first quarter of 2017 associated with the April 2016 acquisition of RT Holding GmbH, the parent corporation of a group of companies known as the PAALGROUP (PAAL).
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| | Three Months Ended |
(In thousands) | | April 1, 2017 | | April 2, 2016 |
Non-Cash Financing Activities: | | |
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Issuance of Company common stock | | $ | 2,640 |
| | $ | 2,854 |
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Dividends declared but unpaid | | $ | 2,310 |
| | $ | 2,063 |
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Restricted Cash
As of April 1, 2017 and December 31, 2016, the Company had restricted cash of $1,543,000 and $2,082,000, respectively. This cash serves as collateral for bank guarantees primarily associated with providing assurance to customers that the Company will fulfill certain customer obligations entered into in the normal course of business. The majority of the bank guarantees will expire by the end of 2018.
Banker's Acceptance Drafts
The Company's Chinese subsidiaries may receive banker's acceptance drafts from customers as payment for their trade accounts receivable. The banker's acceptance drafts are non-interest bearing obligations of the issuing bank and mature within six months of the origination date. The Company can 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 $9,229,000 and $7,852,000 at April 1, 2017 and December 31, 2016, respectively, are included in accounts receivable in the accompanying condensed consolidated balance sheet until the subsidiary sells the drafts to a bank and receives a discounted amount, transfers the banker's acceptance drafts in settlement of current accounts payable prior to maturity, or obtains cash payment on the scheduled maturity date.
Inventories
The components of inventories are as follows:
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| | April 1, 2017 | | December 31, 2016 |
(In thousands) | | |
Raw Materials and Supplies | | $ | 24,670 |
| | $ | 21,086 |
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Work in Process | | 13,104 |
| | 12,293 |
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Finished Goods | | 22,067 |
| | 21,572 |
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Total Inventories | | $ | 59,841 |
| | $ | 54,951 |
|
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Intangible Assets, Net
Intangible assets are as follows:
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| | April 1, 2017 | | December 31, 2016 |
(In thousands) | | |
Indefinite-Lived | | $ | 8,100 |
| | $ | 8,100 |
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Definite-Lived, Gross | | $ | 101,743 |
| | $ | 77,052 |
|
Acquisition | | — |
| | 24,691 |
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Accumulated amortization | | (50,759 | ) | | (49,040 | ) |
Currency translation | | (7,268 | ) | | (8,073 | ) |
Definite-Lived, Net | | $ | 43,716 |
| | $ | 44,630 |
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| | | | |
Total Intangible Assets, Net | | $ | 51,816 |
| | $ | 52,730 |
|
Goodwill
The changes in the carrying amount of goodwill by segment are as follows:
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| | | | | | | | | | | | |
(In thousands) | | Papermaking Systems Segment | | Wood Processing Systems Segment | | Total |
Balance at December 31, 2016 | | | | | | |
Gross balance | | $ | 219,699 |
| | $ | 17,265 |
| | $ | 236,964 |
|
Accumulated impairment losses | | (85,509 | ) | | — |
| | (85,509 | ) |
Net balance | | 134,190 |
| | 17,265 |
| | 151,455 |
|
Currency Translation | | 2,092 |
| | 264 |
| | 2,356 |
|
Total 2017 Adjustments | | 2,092 |
| | 264 |
| | 2,356 |
|
Balance at April 1, 2017 | | |
| | |
| | |
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Gross balance | | 221,791 |
| | 17,529 |
| | 239,320 |
|
Accumulated impairment losses | | (85,509 | ) | | — |
| | (85,509 | ) |
Net balance | | $ | 136,282 |
| | $ | 17,529 |
| | $ | 153,811 |
|
Warranty Obligations
The Company provides for the estimated cost of product warranties at the time of sale based on the actual historical occurrence rates and repair costs, as well as knowledge of any specific warranty problems that indicate that projected warranty costs may vary from historical patterns. The Company typically negotiates the terms regarding warranty coverage and length of warranty depending on the products and applications. While the Company engages in extensive product quality programs and processes, the Company's warranty obligation is affected by product failure rates, repair costs, service delivery costs incurred in correcting a product failure, and supplier warranties on parts delivered to the Company. Should actual product failure rates,
repair costs, service delivery costs, or supplier warranties on parts differ from the Company's estimates, revisions to the estimated warranty liability would be required.
The changes in the carrying amount of accrued warranty costs included in other current liabilities in the accompanying condensed consolidated balance sheet are as follows:
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
|
| | | | | | | | |
| | Three Months Ended |
(In thousands) | | April 1, 2017 | | April 2, 2016 |
Balance at Beginning of Year | | $ | 3,843 |
| | $ | 3,670 |
|
Provision charged to income | | 804 |
| | 560 |
|
Usage | | (570 | ) | | (526 | ) |
Currency translation | | 62 |
| | 81 |
|
Balance at End of Period | | $ | 4,139 |
| | $ | 3,785 |
|
Recent Accounting Pronouncements
Revenue from Contracts with Customers (Topic 606), Section A-Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40). In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. In March 2016, the FASB issued ASU No. 2016-08, which further clarifies the guidance on the principal versus agent considerations within ASU No. 2014-09. In April 2016, the FASB issued ASU No. 2016-10 to expand the guidance on identifying performance obligations and licensing within ASU 2014-09. In May 2016, the FASB issued ASU No. 2016-11, which rescinds certain previously-issued guidance, including, among other items, guidance relating to accounting for shipping and handling fees and freight services effective upon adoption of ASU No. 2014-09. Also in May 2016, the FASB issued ASU No. 2016-12, which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition. In December 2016, the FASB issued ASU No. 2016-20, which clarifies narrow aspects of Topic 606 and corrects unintended application of the guidance. These new ASUs are effective for the Company beginning in fiscal 2018. Early adoption is permitted in fiscal 2017. The Company is continuing to assess the potential effects of these ASUs on its condensed consolidated financial statements, business processes, systems and controls. While the assessment process is ongoing, the Company currently anticipates adopting these ASUs using the modified retrospective transition approach. Under this approach, this guidance would apply to all new contracts initiated in fiscal 2018. For existing contracts that have remaining obligations as of the beginning of fiscal 2018, any difference between the recognition criteria in these ASUs and the Company’s current revenue recognition practices would be recognized using a cumulative effect adjustment to the opening balance of retained earnings. The Company is also in the process of developing and implementing appropriate changes to its business processes, systems and controls to support the recognition criteria and disclosure requirements of these ASUs.
Inventory (Topic 330), Simplifying the Measurement of Inventory. In July 2015, the FASB issued ASU No. 2015-11, which requires that an entity measure inventory within the scope of this ASU at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Substantial and unusual losses that result from subsequent measurement of inventory should be disclosed in the financial statements. The Company adopted this ASU at the beginning of fiscal 2017. Adoption of this ASU did not have a material effect on the Company's condensed consolidated financial statements.
Leases (Topic 842). In February 2016, the FASB issued ASU No. 2016-02, which requires a lessee to recognize a right-of-use asset and a lease liability for operating leases, initially measured at the present value of the future lease payments, in its balance sheet. This ASU also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. This new guidance is effective for the Company in fiscal 2019. Early adoption is permitted. As part of the implementation of this new standard, the Company is in the process of reviewing current accounting policies and assessing the practical expedients allowed under this new guidance. The Company expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption, which is required using the modified retrospective transition method. The Company is currently evaluating the other effects that the adoption of this ASU will have on its condensed consolidated financial statements.
Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. In June 2016, the FASB issued ASU No. 2016-13, which significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining lives. This new
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
guidance is effective for the Company in fiscal 2020. Early adoption is permitted beginning in fiscal 2019. The Company is currently evaluating the effects that the adoption of this ASU will have on its condensed consolidated financial statements.
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. In August 2016, the FASB issued ASU No. 2016-15, which simplifies the diversity in practice related to the presentation and classification of certain cash receipts and cash payments in the statement of cash flows under Topic 230. This ASU addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This new guidance is effective for the Company in fiscal 2018. Early adoption is permitted. The Company does not believe that adoption of this ASU will have a material impact on its condensed consolidated financial statements.
Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory. In October 2016, the FASB issued ASU No. 2016-16, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory. This new guidance is effective for the Company in fiscal 2018 with adoption required on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Early adoption is permitted. The Company is currently evaluating the effect that the adoption of this ASU will have on its condensed consolidated financial statements.
Statement of Cash Flows (Topic 230), Restricted Cash. In November 2016, the FASB issued ASU No. 2016-18, which requires inclusion of restricted cash and restricted cash equivalents within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This new guidance is effective for the Company in fiscal 2018. Early adoption is permitted. As this ASU is presentation-related only, adoption of this ASU will not have a material impact on the Company's condensed consolidated financial statements.
Business Combinations (Topic 805), Clarifying the Definition of a Business. In January 2017, the FASB issued ASU No. 2017-01, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The revised definition of a business under this ASU will reduce the number of transactions that are accounted for as business combinations. This new guidance is effective on a prospective basis for the Company in fiscal 2018. Early adoption is allowed for certain transactions. The Company is currently evaluating the effects that the adoption of this ASU will have on its condensed consolidated financial statements.
Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. In January 2017, the FASB issued ASU No. 2017-04, which eliminates Step 2 in goodwill impairment testing, which requires that goodwill impairment losses be measured as the difference between the implied value of a reporting unit’s goodwill and its carrying amount. This ASU will reduce the cost and complexity of impairment testing by requiring goodwill impairment losses to be measured as the excess of the reporting unit’s carrying amount, including goodwill and related goodwill tax effects, over its fair value. This new guidance is effective on a prospective basis for the Company in fiscal 2020. Early adoption is permitted. The Company does not believe that adoption of this ASU will have a material effect on its condensed consolidated financial statements.
Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost. In March 2017, the FASB issued ASU No. 2017-07, which requires employers to include only the service cost component of net periodic pension cost and net periodic post-retirement benefit cost in operating expenses in the same income statement line item as the related employees' compensation costs. The other components of net benefit cost, including interest costs, amortization of prior service costs and settlement and curtailment effects, are to be included in non-operating expenses. The ASU also stipulates that only the service cost component of net benefit cost is eligible for capitalization. This new guidance is effective on a retrospective basis for the Company in fiscal 2018. Early adoption is permitted. The Company is currently evaluating the effects that adoption of this ASU will have on its condensed consolidated financial statements.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2. Other Income
In the first quarter of 2016, other income consisted of a pre-tax gain of $317,000 from the sale of real estate in Sweden for cash proceeds of $368,000.
3. Earnings per Share
Basic and diluted earnings per share (EPS) are calculated as follows:
|
| | | | | | | | |
| | Three Months Ended |
| | April 1, 2017 | | April 2, 2016 |
(In thousands, except per share amounts) | | |
Amounts Attributable to Kadant: | | | | |
Net Income | | $ | 8,951 |
| | $ | 6,876 |
|
| | | | |
Basic Weighted Average Shares | | 10,952 |
| | 10,793 |
|
Effect of Stock Options, Restricted Stock Units and Employee Stock Purchase Plan Shares | | 253 |
| | 225 |
|
Diluted Weighted Average Shares | | 11,205 |
| | 11,018 |
|
| | | | |
Basic Earnings per Share | | $ | 0.82 |
| | $ | 0.64 |
|
| | | | |
Diluted Earnings per Share | | $ | 0.80 |
| | $ | 0.62 |
|
Restricted stock units (RSUs) totaling 39,000 and 147,000 shares of common stock were not included in the computation of diluted EPS in the first quarters of 2017 and 2016, respectively, 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.
4. Provision for Income Taxes
The provision for income taxes was $2,735,000 and $2,888,000 in the first quarters of 2017 and 2016, respectively, and represented 23% and 29% of pre-tax income. The effective tax rate of 23% in the first quarter of 2017 was lower than the Company's statutory tax rate primarily due to the distribution of the Company's worldwide earnings and the net excess income tax benefits from stock-based compensation arrangements, offset in part by an increase in tax related to non-deductible expenses. The effective tax rate of 29% in the first quarter of 2016 was lower than the Company's statutory tax rate primarily due to the distribution of the Company's worldwide earnings and the net excess income tax benefits from stock-based compensation arrangements. These items were offset in part by an increase in tax related to non-deductible expenses and state taxes.
5. Long-Term Obligations
Long-term obligations are as follows:
|
| | | | | | | | |
| | April 1, 2017 | | December 31, 2016 |
(In thousands) | | |
Revolving Credit Facility, due 2022 | | $ | 65,625 |
| | $ | 61,494 |
|
Obligations Under Capital Lease, due 2017 to 2022 | | 4,359 |
| | 4,309 |
|
Other Borrowings, due 2017 to 2023 | | 566 |
| | 608 |
|
Total | | 70,550 |
| | 66,411 |
|
Less: Current Maturities of Long-Term Obligations | | (655 | ) | | (643 | ) |
Long-Term Obligations | | $ | 69,895 |
| | $ | 65,768 |
|
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
5. Long-Term Obligations (continued)
Revolving Credit Facility
On March 1, 2017, the Company entered into an Amended and Restated Credit Agreement (2017 Credit Agreement) which became effective on March 2, 2017. The 2017 Credit Agreement is a five-year unsecured revolving credit facility in the aggregate principal amount of up to $200,000,000. The 2017 Credit Agreement also includes an uncommitted unsecured incremental borrowing facility of up to an additional $100,000,000. The principal on any borrowings made under the 2017 Credit Agreement is due on March 1, 2022. Interest on any loans outstanding under the 2017 Credit Agreement accrues and generally is payable quarterly in arrears at one of the following rates selected by the Company: (i) the Base Rate, calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate as published by Citizens Bank, and (c) the thirty-day London Inter-Bank Offered Rate (LIBOR) rate, as defined, plus 0.50%; or (ii) the LIBOR rate (with a zero percent floor), as defined, plus an applicable margin of 1% to 2%. The applicable margin is determined based upon the ratio of the Company's total debt, net of certain cash, as defined, to earnings before interest, taxes, depreciation, and amortization (EBITDA), as defined in the 2017 Credit Agreement. For this purpose, total debt net of certain cash is defined as total debt less the sum of (i) unrestricted U.S. cash, and (ii) 65% of unrestricted cash outside of the United States, but no more than an aggregate amount of $30,000,000. Contemporaneously with the execution of the 2017 Credit Agreement, we borrowed $42,000,000 and 26,300,000 euros under the 2017 Credit Agreement and applied the proceeds to pay off the previous credit facility.
The obligations of the Company under the 2017 Credit Agreement may be accelerated upon the occurrence of an event of default under the 2017 Credit Agreement, which includes customary events of default including, without limitation, payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy- and insolvency-related defaults, defaults relating to such matters as the Employment Retirement Income Security Act (ERISA), unsatisfied judgments, the failure to pay certain indebtedness, and a change of control default. In addition, the 2017 Credit Agreement contains negative covenants applicable to the Company and its subsidiaries, including financial covenants requiring the Company to comply with a maximum consolidated leverage ratio of 3.5 to 1, a minimum consolidated interest coverage ratio of 3 to 1, and restrictions on liens, indebtedness, fundamental changes, dispositions of property, making certain restricted payments (including dividends and stock repurchases), investments, transactions with affiliates, sale and leaseback transactions, swap agreements, changing its fiscal year, arrangements affecting subsidiary distributions, entering into new lines of business, and certain actions related to the discontinued operation. As of April 1, 2017, the Company was in compliance with these covenants.
Loans under the 2017 Credit Agreement are guaranteed by certain domestic subsidiaries of the Company pursuant to an Amended and Restated Guarantee Agreement, dated as of March 1, 2017. In addition, one of the Company's foreign subsidiaries entered into a Guarantee Agreement limited to certain obligations of two foreign subsidiary borrowers pursuant to a Guarantee Agreement dated as of March 1, 2017.
As of April 1, 2017, the outstanding balance under the 2017 Credit Agreement was $65,625,000, of which $26,625,000 was a euro-denominated borrowing used to fund the PAAL acquisition. As of April 1, 2017, the Company had $134,960,000 of borrowing capacity available under the committed portion of its 2017 Credit Agreement.
The weighted average interest rate for the Revolving Credit Facility was 1.68% as of April 1, 2017.
Obligations Under Capital Lease
In connection with the acquisition of PAAL, the Company assumed a sale-leaseback financing arrangement for PAAL's facility in Germany. Under this arrangement, the quarterly lease payment includes principal and interest based on an interest rate which is reset, from time to time, to prevailing short-term borrowing rates in Germany. The interest rate at April 1, 2017 was 1.70%. The quarterly lease payment also includes a payment toward a corresponding loan receivable from the landlord. The loan receivable, which is included in other assets in the accompanying condensed consolidated balance sheet, was $288,000 at April 1, 2017. The lease arrangement provides for a fixed price purchase option, net of the loan receivable, of $1,428,000 at the end of the lease term in 2022. If the Company does not exercise the purchase option for the facility, the Company will receive cash from the landlord to settle the loan receivable. As of April 1, 2017, $4,243,000 was outstanding under this capital lease obligation. The Company also assumed capital lease obligations for certain equipment as part of the PAAL acquisition. These capital lease obligations bear a weighted average interest rate of 3.44% and have an average remaining term of 2.9 years. As of April 1, 2017, $116,000 was outstanding under these capital lease obligations.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
5. Long-Term Obligations (continued)
Other Borrowings
The Company's PAAL subsidiary sells certain equipment to an intermediary who leases the equipment to a third party. The revenue from the equipment sale is deferred due to risk of default and repurchase obligation provisions. Revenue is recognized and the borrowing reduced over the corresponding lease term with the remaining residual value of the equipment recognized when the default provisions lapse.
6. Stock-Based Compensation
The Company recognized stock-based compensation expense of $1,295,000 and $1,323,000 in the first quarters of 2017 and 2016, respectively, within selling, general, and administrative (SG&A) expenses in the accompanying condensed consolidated statement of income. The Company recognizes compensation expense for all stock-based awards granted to employees and directors based on the grant date estimate of fair value for those awards. The fair value of RSUs is based on the grant date trading price of the Company's common stock, reduced by the present value of estimated dividends foregone during the requisite service period. For time-based RSUs, compensation expense is recognized ratably over the requisite service period for the entire award net of forfeitures. For performance-based RSUs, compensation expense is recognized ratably over the requisite service period for each separately-vesting portion of the award net of forfeitures and remeasured at each reporting period until the total number of RSUs to be issued is known. Unrecognized compensation expense related to stock-based compensation totaled approximately $7,823,000 at April 1, 2017, and will be recognized over a weighted average period of 2.0 years.
On March 8, 2017, the Company granted to its executive officers performance-based RSUs, which represented, in aggregate, the right to receive 39,229 shares (the target RSU amount), subject to adjustment, with an aggregate grant date fair value of $2,234,000. The RSUs are subject to adjustment based on the achievement of the performance measure selected for the 2017 fiscal year, which is a specified target for adjusted EBITDA generated from continuing operations for the 2017 fiscal year. The RSUs are adjusted by comparing the actual adjusted EBITDA for the performance period to the target adjusted EBITDA. Actual adjusted EBITDA between 50% and 100% of the target adjusted EBITDA results in an adjustment of 50% to 100% of the RSU amount. Actual adjusted EBITDA between 100% and 115% of the target adjusted EBITDA results in an adjustment using a straight-line linear scale between 100% and 150% of the RSU amount. If actual adjusted EBITDA is below 50% of the target adjusted EBITDA for the 2017 fiscal year, these performance-based RSUs will be forfeited. In the first quarter of 2017, the Company recognized compensation expense based on the probable number of performance-based RSUs expected to vest, which was 100% of the target RSU amount. Following the adjustment, the performance-based RSUs will be subject to additional time-based vesting, and will vest in three equal annual installments on March 10 of 2018, 2019, and 2020, provided that the executive officer is employed by the Company on the applicable vesting dates. On March 8, 2017, the Company also granted time-based RSUs representing 38,331 shares to its executive officers and employees with an aggregate grant date fair value of $2,183,000. These time-based RSUs generally vest in three equal annual installments on March 10 of 2018, 2019, and 2020, provided the employee remains employed by the Company on the applicable vesting dates.
On March 8, 2017, the Company granted 12,000 RSUs in the aggregate to its non-employee directors with a grant date fair value of $696,000. The RSUs will vest ratably on the last day of each fiscal quarter of 2017.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. Employee Benefit Plans
The Company sponsors a noncontributory defined benefit pension plan for eligible employees at one of its U.S. divisions and its corporate office. Three of the Company’s non-U.S. subsidiaries also sponsor defined benefit pension plans covering certain employees at those subsidiaries. Funds for the U.S. pension plan and one of the non-U.S. pension plans are contributed to a trustee as necessary to provide for current service and for any unfunded projected benefit obligation over a reasonable period. The remaining two non-U.S. pension plans are unfunded as permitted under their plans and applicable laws. Benefits under the Company’s pension plans are based on years of service and employee compensation.
The Company also provides other post-retirement benefits under two plans in the United States and at one of its non-U.S. subsidiaries. In addition, the Company provides a restoration plan for certain executive officers which fully supplements benefits lost under the noncontributory defined benefit retirement plan as a consequence of applicable Internal Revenue Service limits and restores benefits for the limitation of years of service under the retirement plan.
The components of net periodic benefit cost for the Company's U.S. and non-U.S. pension plans and other post-retirement benefit plans are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended April 1, 2017 | | Three Months Ended April 2, 2016 |
(In thousands, except percentages) | | U.S. Pension Benefits | | Non-U.S. Pension Benefits | | Other Post-Retirement Benefits | | U.S. Pension Benefits | | Non-U.S. Pension Benefits | | Other Post-Retirement Benefits |
Components of Net Periodic Benefit Cost: | | | | | | | | | | | | |
Service cost | | $ | 196 |
| | 32 |
| | $ | 35 |
| | $ | 181 |
| | 25 |
| | $ | 33 |
|
Interest cost | | 314 |
| | 24 |
| | 39 |
| | 318 |
| | 26 |
| | 38 |
|
Expected return on plan assets | | (335 | ) | | (8 | ) | | — |
| | (322 | ) | | (7 | ) | | — |
|
Recognized net actuarial loss | | 113 |
| | 9 |
| | 13 |
| | 124 |
| | 10 |
| | 12 |
|
Amortization of prior service cost | | 13 |
| | 1 |
| | 21 |
| | 14 |
| | 1 |
| | 23 |
|
Settlement loss | | — |
| | — |
| | — |
| | — |
| | — |
| | 114 |
|
Net Periodic Benefit Cost | | $ | 301 |
| | $ | 58 |
| | $ | 108 |
| | $ | 315 |
| | $ | 55 |
| | $ | 220 |
|
| | | | | | | | | | | | |
The weighted average assumptions used to determine net periodic benefit cost are as follows: | | | | |
|
| | | | | | | | | | | | |
Discount Rate | | 4.03 | % | | 3.39 | % | | 4.13 | % | | 4.22 | % | | 3.91 | % | | 4.26 | % |
Expected Long-Term Return on Plan Assets | | 5.00 | % | | 7.72 | % | | 7.72 | % | | 5.00 | % | | 6.90 | % | | 6.90 | % |
Rate of Compensation Increase | | 3.00 | % | | 3.40 | % | | 3.08 | % | | 3.00 | % | | 2.99 | % | | 3.01 | % |
The Company made cash contributions of $90,000 to its U.S. noncontributory defined benefit pension plan in the first quarter of 2017 and expects to make cash contributions of $990,000 over the remainder of 2017. For the remaining pension and post-retirement benefit plans, no cash contributions other than to fund current benefit payments are expected in 2017.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
8. Accumulated Other Comprehensive Items
Comprehensive income combines net income and other comprehensive items, which represent certain amounts that are reported as components of stockholders' equity in the accompanying condensed consolidated balance sheet, including foreign currency translation adjustments, unrecognized prior service cost and deferred losses associated with pension and other post-retirement benefit plans, and deferred gains (losses) on hedging instruments.
Changes in each component of accumulated other comprehensive items (AOCI), net of tax, in the accompanying condensed consolidated balance sheet are as follows:
|
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Foreign Currency Translation Adjustment | | Unrecognized Prior Service Cost on Pension and Other Post- Retirement Benefit Plans | | Deferred Loss on Pension and Other Post- Retirement Benefit Plans | | Deferred Gain (Loss) on Hedging Instruments | | Accumulated Other Comprehensive Items |
Balance at December 31, 2016 | | $ | (41,094 | ) | | $ | (397 | ) | | $ | (8,158 | ) | | $ | 12 |
| | $ | (49,637 | ) |
Other comprehensive income (loss) before reclassifications | | 4,986 |
| | (1 | ) | | (28 | ) | | 12 |
| | 4,969 |
|
Reclassifications from AOCI | | — |
| | 23 |
| | 88 |
| | 15 |
| | 126 |
|
Net current period other comprehensive income | | 4,986 |
| | 22 |
| | 60 |
| | 27 |
| | 5,095 |
|
Balance at April 1, 2017 | | $ | (36,108 | ) | | $ | (375 | ) | | $ | (8,098 | ) | | $ | 39 |
| | $ | (44,542 | ) |
| | | | | | | | | | |
Balance at January 2, 2016 | | $ | (27,932 | ) | | $ | (489 | ) | | $ | (8,322 | ) | | $ | (229 | ) | | $ | (36,972 | ) |
Other comprehensive income (loss) before reclassifications | | 5,871 |
| | (2 | ) | | (610 | ) | | (239 | ) | | 5,020 |
|
Reclassifications from AOCI | | — |
| | 24 |
| | 170 |
| | 113 |
| | 307 |
|
Net current period other comprehensive income (loss) | | 5,871 |
| | 22 |
| | (440 | ) | | (126 | ) | | 5,327 |
|
Balance at April 2, 2016 | | $ | (22,061 | ) | | $ | (467 | ) | | $ | (8,762 | ) | | $ | (355 | ) | | $ | (31,645 | ) |
Amounts reclassified from AOCI are as follows:
|
| | | | | | | | | | |
| | Three Months Ended | | |
(In thousands) | | April 1, 2017 | | April 2, 2016 | | Statement of Income Line Item |
Pension and Other Post-Retirement Plans: (a) | | | | |
Amortization of prior service costs | | $ | (35 | ) | | $ | (38 | ) | | SG&A expenses |
Amortization of actuarial losses | | (135 | ) | | (260 | ) | | SG&A expenses |
Total expense before income taxes | | (170 | ) | | (298 | ) | | |
Income tax benefit | | 59 |
| | 104 |
| | Provision for income taxes |
| | (111 | ) | | (194 | ) | | |
Cash Flow Hedges: (b) | | |
| | |
| | |
Interest rate swap agreements | | (12 | ) | | (89 | ) | | Interest expense |
Forward currency-exchange contracts | | — |
| | (61 | ) | | Revenues |
Forward currency-exchange contracts | | (11 | ) | | (23 | ) | | Cost of revenues |
Total expense before income taxes | | (23 | ) | | (173 | ) | | |
Income tax benefit | | 8 |
| | 60 |
| | Provision for income taxes |
| | (15 | ) | | (113 | ) | | |
Total Reclassifications | | $ | (126 | ) | | $ | (307 | ) | | |
| |
(a) | Included in the computation of net periodic benefit cost. See Note 7 for additional information. |
| |
(b) | See Note 9 for additional information. |
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
9. Derivatives
The Company uses derivative instruments primarily to reduce its exposure to changes in currency exchange rates and interest rates. When the Company enters into a derivative contract, the Company makes a determination as to whether the transaction is deemed to be a hedge for accounting purposes. For a contract deemed to be a hedge, the Company formally documents the relationship between the derivative instrument and the risk being hedged. In this documentation, the Company specifically identifies the asset, liability, forecasted transaction, cash flow, or net investment that has been designated as the hedged item, and evaluates whether the derivative instrument is expected to reduce the risks associated with the hedged item. To the extent these criteria are not met, the Company does not use hedge accounting for the derivative. The changes in the fair value of a derivative not deemed to be a hedge are recorded currently in earnings. The Company does not hold or engage in transactions involving derivative instruments for purposes other than risk management.
Accounting Standards Codification (ASC) 815, Derivatives and Hedging, requires that all derivatives be recognized in the accompanying condensed consolidated balance sheet at fair value. For derivatives designated as cash flow hedges, the related gains or losses on these contracts are deferred as a component of AOCI. These deferred gains and losses are recognized in the accompanying condensed consolidated statement of income in the period in which the underlying anticipated transaction occurs. For derivatives designated as fair value hedges, the unrealized gains and losses resulting from the impact of currency exchange rate movements are recognized in earnings in the period in which the exchange rates change and offset the currency gains and losses on the underlying exposures being hedged. The Company performs an evaluation of the effectiveness of the hedge both at inception and on an ongoing basis. The ineffective portion of a hedge, if any, and changes in the fair value of a derivative not deemed to be a hedge are recorded in the accompanying condensed consolidated statement of income.
Interest Rate Swap Agreement
On January 16, 2015, the Company entered into a swap agreement (2015 Swap Agreement) to hedge its exposure to movements in the three-month LIBOR rate on future outstanding debt and has designated the 2015 Swap Agreement as a cash flow hedge. The 2015 Swap Agreement expires on March 27, 2020 and has a $10,000,000 notional value. Under the 2015 Swap Agreement, on a quarterly basis, the Company receives a three-month LIBOR rate and pays a fixed rate of interest of 1.50% plus an applicable margin. The fair value of the 2015 Swap Agreement is included in other long-term assets, with an offset to AOCI, net of tax, in the accompanying condensed consolidated balance sheet.
The Company has structured the 2015 Swap Agreement to be 100% effective and as a result there is no current impact to earnings resulting from hedge ineffectiveness. Management believes that any credit risk associated with the 2015 Swap Agreement is remote based on the Company's financial position and the creditworthiness of the financial institution that issued the 2015 Swap Agreement.
The counterparty to the 2015 Swap Agreement could demand an early termination of the 2015 Swap Agreement if the Company is in default under the 2017 Credit Agreement, or any agreement that amends or replaces the 2017 Credit Agreement in which the counterparty is a member, and the Company is unable to cure the default. An event of default under the 2017 Credit Agreement includes customary events of default and failure to comply with financial covenants, including a maximum consolidated leverage ratio of 3.5 to 1, a minimum consolidated interest coverage ratio of 3 to 1, and restrictions on liens, indebtedness, fundamental changes, dispositions of property, making certain restricted payments (including dividends and stock repurchases), investments, transactions with affiliates, sale and leaseback transactions, swap agreements, changing its fiscal year, arrangements affecting subsidiary distributions, entering into new lines of business, and certain actions related to the discontinued operation. As of April 1, 2017, the Company was in compliance with these covenants. The unrealized gain associated with the 2015 Swap Agreement was $82,000 as of April 1, 2017, which represents the estimated amount that the Company would receive from the counterparty in the event of an early termination.
Forward Currency-Exchange Contracts
The Company uses forward currency-exchange contracts primarily to hedge exposures resulting from fluctuations in currency exchange rates. Such exposures result primarily from portions of the Company's operations and assets and liabilities that are denominated in currencies other than the functional currencies of the businesses conducting the operations or holding the assets and liabilities. The Company typically manages its level of exposure to the risk of currency-exchange fluctuations by hedging a portion of its currency exposures anticipated over the ensuing 12-month period, using forward currency-exchange contracts that have maturities of 12 months or less.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
9. Derivatives (continued)
Forward currency-exchange contracts that hedge forecasted accounts receivable or accounts payable are designated as cash flow hedges. The fair value for these instruments is included in other current assets for unrecognized gains and in other current liabilities for unrecognized losses, with an offset in AOCI, net of tax. For forward currency-exchange contracts that are designated as fair value hedges, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item are recognized currently in earnings. The fair value of forward currency-exchange contracts that are not designated as hedges is recorded currently in earnings.
The Company recognized within SG&A expenses in the accompanying condensed consolidated statement of income a gain of $471,000 and a loss of $211,000 in the first quarters of 2017 and 2016, respectively, associated with forward currency-exchange contracts that were not designated as hedges. Management believes that any credit risk associated with forward currency-exchange contracts is remote based on the Company's financial position and the creditworthiness of the financial institutions issuing the contracts.
The following table summarizes the fair value of the Company's derivative instruments designated and not designated as hedging instruments, the notional value of the associated derivative contracts, and the location of these instruments in the accompanying condensed consolidated balance sheet:
|
| | | | | | | | | | | | | | | | | | |
| | | | April 1, 2017 | | December 31, 2016 |
| | Balance Sheet Location | | Asset (Liability) (a) | | Notional Amount (b) | | Asset (Liability) (a) | | Notional Amount |
(In thousands) | | | | | |
Derivatives Designated as Hedging Instruments: | | | | | | | | |
Derivatives in an Asset Position: | | | | | | | | | | |
Forward currency-exchange contracts | | Other Current Assets | | $ | 3 |
| | $ | 950 |
| | $ | — |
| | $ | — |
|
Interest rate swap agreement | | Other Long-Term Assets | | $ | 82 |
| | $ | 10,000 |
| | $ | 62 |
| | $ | 10,000 |
|
Derivatives in a Liability Position: | | | | | | | | | | |
Forward currency-exchange contracts | | Other Current Liabilities | | $ | (21 | ) | | $ | 946 |
| | $ | (41 | ) | | $ | 2,380 |
|
| | | | | | | | | | |
Derivatives Not Designated as Hedging Instruments: | | |
| | |
| | |
| | |
|
Derivatives in an Asset Position: | | | | |
| | |
| | |
| | |
|
Forward currency-exchange contracts | | Other Current Assets | | $ | — |
| | $ | — |
| | $ | 2 |
| | $ | 227 |
|
Derivatives in a Liability Position: | | | | | | | | | | |
Forward currency-exchange contracts | | Other Current Liabilities | | $ | (38 | ) | | $ | 16,592 |
| | $ | (237 | ) | | $ | 17,185 |
|
| |
(a) | See Note 10 for the fair value measurements relating to these financial instruments. |
| |
(b) | The total notional amount is indicative of the level of the Company's derivative activity during the first quarter of 2017. |
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
9. Derivatives (continued)
The following table summarizes the activity in AOCI associated with the Company's derivative instruments designated as cash flow hedges as of and for the three months ended April 1, 2017:
|
| | | | | | | | | | | | |
(In thousands) | | Interest Rate Swap Agreement | | Forward Currency- Exchange Contracts | | Total |
Unrealized Gain (Loss), Net of Tax, at December 31, 2016 | | $ | 40 |
| | $ | (28 | ) | | $ | 12 |
|
Loss reclassified to earnings (a) | | 8 |
| | 7 |
| | 15 |
|
Gain recognized in AOCI | | 4 |
| | 8 |
| | 12 |
|
Unrealized Gain (Loss), Net of Tax, at April 1, 2017 | | $ | 52 |
| | $ | (13 | ) | | $ | 39 |
|
(a) See Note 8 for the income statement classification.
As of April 1, 2017, the Company expects to reclassify $21,000 of the net unrealized loss included in AOCI to earnings over the next twelve months.
10. 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 April 1, 2017 |
(In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | |
Money market funds and time deposits | | $ | 10,418 |
| | $ | — |
| | $ | — |
| | $ | 10,418 |
|
Forward currency-exchange contracts | | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | 3 |
|
Interest rate swap agreement | | $ | — |
| | $ | 82 |
| | $ | — |
| | $ | 82 |
|
Banker's acceptance drafts (a) | | $ | — |
| | $ | 9,229 |
| | $ | — |
| | $ | 9,229 |
|
| | | | | | | | |
Liabilities: | | |
| | |
| | |
| | |
|
Forward currency-exchange contracts | | $ | — |
| | $ | 59 |
| | $ | — |
| | $ | 59 |
|
|
| | | | | | | | | | | | | | | | |
| | Fair Value as of December 31, 2016 |
(In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | |
Money market funds and time deposits | | $ | 10,855 |
| | $ | — |
| | $ | — |
| | $ | 10,855 |
|
Forward currency-exchange contracts | | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | 2 |
|
Interest rate swap agreement | | $ | — |
| | $ | 62 |
| | $ | — |
| | $ | 62 |
|
Banker's acceptance drafts (a) | | $ | — |
| | $ | 7,852 |
| | $ | — |
| | $ | 7,852 |
|
| | | | | | | | |
Liabilities: | | |
| | |
| | |
| | |
|
Forward currency-exchange contracts | | $ | — |
| | $ | 278 |
| | $ | — |
| | $ | 278 |
|
| |
(a) | Included in accounts receivable in the accompanying condensed consolidated balance sheet. |
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
10. Fair Value Measurements and Fair Value of Financial Instruments (continued)
The Company uses the market approach technique to value its financial assets and liabilities, and there were no changes in valuation techniques during the first quarter of 2017. The Company's financial assets and liabilities carried at fair value are comprised of cash equivalents, banker's acceptance drafts, and derivative instruments used to hedge the Company's foreign currency and interest rate risks. The Company's cash equivalents are comprised of money market funds and bank deposits which are highly liquid and readily tradable. These investments are valued using inputs observable in active markets for identical securities. The carrying value of banker's acceptance drafts approximates their fair value due to the short-term nature of the negotiable instrument. The fair value of the Company's interest rate swap agreement is based on LIBOR yield curves at the reporting date. The fair values of the Company's forward currency-exchange contracts are based on quoted forward foreign exchange rates at the reporting date. The forward currency-exchange contracts and interest rate swap agreement are hedges of either recorded assets or liabilities or anticipated transactions. Changes in values of the underlying hedged assets and liabilities or anticipated transactions are not reflected in the table above.
The carrying value and fair value of the Company's long-term debt obligations are as follows:
|
| | | | | | | | | | | | | | | | |
| | April 1, 2017 | | December 31, 2016 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
(In thousands) | | | | |
Long-term Debt Obligations: | | | | | | | | |
Revolving credit facility | | $ | 65,625 |
| | $ | 65,625 |
| | $ | 61,494 |
| | $ | 61,494 |
|
Capital lease obligations | | 3,893 |
| | 3,893 |
| | 3,857 |
| | 3,857 |
|
Other borrowings | | 377 |
| | 377 |
| | 417 |
| | 417 |
|
| | $ | 69,895 |
| | $ | 69,895 |
| | $ | 65,768 |
| | $ | 65,768 |
|
The carrying values of the Company's revolving credit facility and capital lease obligations approximate fair value as the obligations bear variable rates of interest, which adjust quarterly, based on prevailing market rates.
11. Business Segment Information
The Company has combined its operating entities into two reportable operating segments, Papermaking Systems and Wood Processing Systems, and a separate product line, Fiber-based Products. In classifying operational entities into a particular segment, the Company has aggregated businesses with similar economic characteristics, products and services, production processes, customers, and methods of distribution.
|
| | | | | | | | |
| | Three Months Ended |
| | April 1, | | April 2, |
(In thousands) | | 2017 | | 2016 |
Revenues: | | | | |
Papermaking Systems | | $ | 88,550 |
| | $ | 84,027 |
|
Wood Processing Systems | | 9,943 |
| | 8,707 |
|
Fiber-based Products | | 4,364 |
| | 3,804 |
|
| | $ | 102,857 |
| | $ | 96,538 |
|
| | | | |
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
11. Business Segment Information (continued)
|
| | | | | | | | |
| | Three Months Ended |
| | April 1, | | April 2, |
(In thousands) | | 2017 | | 2016 |
Income Before Provision for Income Taxes: | | |
| | |
|
Papermaking Systems | | $ | 14,258 |
| | $ | 13,497 |
|
Wood Processing Systems | | 2,504 |
| | 806 |
|
Corporate and Fiber-based Products (a) | | (4,716 | ) | | (4,210 | ) |
Total operating income | | 12,046 |
| | 10,093 |
|
Interest expense, net | | (244 | ) | | (214 | ) |
| | $ | 11,802 |
| | $ | 9,879 |
|
| | | | |
Capital Expenditures: | | |
| | |
|
Papermaking Systems | | $ | 1,484 |
| | $ | 518 |
|
Other | | 238 |
| | 6 |
|
| | $ | 1,722 |
| | $ | 524 |
|
| | | | |
(a) Corporate primarily includes general and administrative expenses.
12. Contingencies and Litigation
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 outstanding accounts receivable. These banker's acceptance drafts are non-interest bearing 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. As of April 1, 2017 and December 31, 2016, the Company had $6,500,000 and $4,824,000, respectively, of banker's acceptance drafts subject to recourse, which were transferred to vendors and had not reached their scheduled maturity dates. Historically, the banker's acceptance drafts have settled upon maturity without any claim of recourse against the Company.
Litigation
From time to time, the Company is subject to various claims and legal proceedings covering a range of matters that arise in the ordinary course of business. Such litigation may include, but is not limited to, claims and counterclaims by and against the Company for breach of contract or warranty, canceled contracts, product liability, or bankruptcy-related claims. For legal proceedings in which a loss is probable and estimable, the Company accrues a loss based on the low end of the range of estimated loss when there is no better estimate within the range. If the Company were found to be liable for any of the claims or counterclaims against it, the Company would incur a charge against earnings for amounts in excess of legal accruals.
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q includes forward-looking statements that are not statements of historical fact, and may include statements regarding possible or assumed future results of operations. Forward-looking statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management, using information currently available to our management. When we use words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "seeks," "should," "likely," "will," "would," "may," "continue," "could," or similar expressions, we are making forward-looking statements.
Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions. Our future results of operations may differ materially from those expressed in the forward-looking statements. Many of the important factors that will determine these results and values are beyond our ability to control or predict. You should not put undue reliance on any forward-looking statements. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise. For a discussion of important factors that may cause our actual results to differ materially from those suggested by the forward-looking statements, you should read carefully the section captioned "Risk Factors" in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (fiscal 2016), as filed with the Securities and Exchange Commission (SEC) and subsequent filings with the SEC.
Overview
Company Background
We are a leading global supplier of equipment and critical components used in process industries worldwide. In addition, we manufacture granules made from papermaking by-products. We have a diverse and large customer base, including most of the world's major paper and oriented strand board (OSB) manufacturers, and our products, technologies, and services play an integral role in enhancing process efficiency, optimizing energy utilization, and maximizing productivity in resource-intensive industries. We believe our large installed base provides us with a spare parts and consumables business that yields higher margins than our capital equipment business. In the first three months of 2017, approximately 68% of our revenue was from the sale of parts and consumables products.
On April 4, 2016, we acquired all the outstanding shares of RT Holding GmbH, the parent corporation of a group of companies known as the PAALGROUP (PAAL), for approximately 49.7 million euros, net of cash acquired, or approximately $56.6 million. We paid additional post-closing consideration of $0.2 million to the sellers in the first quarter of 2017. PAAL manufactures balers and related equipment used in the processing of recyclable and waste materials. This acquisition, which is included in our Papermaking Systems segment's Stock-Preparation product line, broadened our product portfolio and extended our presence deeper into recycling and waste management. PAAL, headquartered in Germany, also has operations in the United Kingdom, France and Spain.
Our continuing operations are comprised of two reportable operating segments: Papermaking Systems and Wood Processing Systems, and a separate product line, Fiber-based Products. Through our Papermaking Systems segment, we develop, manufacture, and market a range of equipment and products for the global papermaking, paper recycling, recycling and waste management, and other process industries. Through our Wood Processing Systems segment, we develop, manufacture, and market stranders and related equipment used in the production of OSB, and sell debarking and wood chipping equipment used in the forest products and the pulp and paper industries. Through this segment, we also provide refurbishment and repair of pulping equipment for the pulp and paper industry. Through our Fiber-based Products business, we manufacture and sell granules derived from pulp fiber for use as carriers for agricultural, home lawn and garden, and professional lawn, turf and ornamental applications, as well as for oil and grease absorption.
Overview (continued)
Papermaking Systems Segment
Our Papermaking Systems segment consists of the following product lines:
|
| | |
| - | Stock-Preparation: custom-engineered systems and equipment, as well as standard individual components, for baling, pulping, de-inking, screening, cleaning, and refining primarily recyclable fibers; balers and related equipment used in the processing of recyclable and waste materials; and filtering, recausticizing, and evaporation equipment and systems used in the production of virgin pulp; |
| - | Doctoring, Cleaning, & Filtration: doctoring systems and related consumables that continuously clean rolls to keep paper machines running efficiently; doctor blades made of a variety of materials to perform functions including cleaning, creping, web removal, flaking, and the application of coatings; profiling systems that control moisture, web curl, and gloss during paper converting; and systems and equipment used to continuously clean paper machine fabrics and rolls, drain water from pulp mixtures, form the sheet or web, and filter the process water for reuse. Doctoring and cleaning systems are also used in other industries, such as carbon fiber, textiles and food processing; and |
| - | Fluid-Handling: rotary joints, precision unions, steam and condensate systems, components, and controls used primarily in the dryer section of the papermaking process and during the production of corrugated packaging, metals, plastics, rubber, textiles, chemicals, and food. |
Wood Processing Systems Segment
Our principal wood-processing products and services include:
|
| | |
| - | Stranders: disc and ring stranders and related parts and consumables that cut batch-fed logs into strands for OSB production; |
| - | Rotary Debarkers: rotary debarkers and related parts and consumables that employ a combination of mechanical abrasion and log-to-log contact to efficiently remove bark from logs of all shapes and species; |
| - | Chippers: disc, drum, and veneer chippers and related parts and consumables that are high quality, robust chipper systems for waste-wood and whole-log applications found in pulp woodrooms, chip plants, and sawmill and planer mill sites; and |
| - | Repair: refurbishment and repair of pulping equipment used in the pulp and paper industry. |
Fiber-based Products
We produce and sell biodegradable, absorbent granules derived from papermaking by-products for use primarily as carriers for agricultural, home lawn and garden, and professional lawn, turf and ornamental applications, as well as for oil and grease absorption.
International Sales
During the first three months of 2017 and 2016, approximately 58% and 53%, respectively, of our sales were to customers outside the United States, principally in Europe and Asia. The increase in the percentage of sales to customers outside the United States was primarily due to the acquisition of PAAL. We generally seek to charge our customers in the same currency in which our operating costs are incurred. However, our financial performance and competitive position can be affected by currency exchange rate fluctuations affecting the relationship between the U.S. dollar and foreign currencies. We seek to reduce our exposure to currency fluctuations through the use of forward currency exchange contracts. We may enter into forward contracts to hedge certain firm purchase and sale commitments denominated in currencies other than our subsidiaries' functional currencies.
Application of Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities
Overview (continued)
at the date of our condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Our actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that entail significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that our most critical accounting policies, upon which our financial position depends and which involve the most complex or subjective decisions or assessments, are those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the section captioned "Application of Critical Accounting Policies and Estimates" in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the SEC. There have been no material changes to these critical accounting policies since fiscal year-end 2016 that warrant disclosure.
Industry and Business Outlook
Our products are primarily sold in global process industries and used to produce packaging, tissue, and engineered wood. In the first quarter of 2017, approximately 57% of our revenue was from the sale of products that support packaging, tissue, and other paper production, other than printing and writing and newsprint paper grades. Consumption of packaging, which is primarily comprised of containerboard and boxboard, is driven by many factors, including regional economic conditions, consumer spending on non-durable goods, demand for food and beverage packaging, and greater urbanization in developing regions. Consumption of tissue is fairly stable and in the developed world tends to grow with the population. For both tissue and packaging, growth rates in the developing world are expected to increase as per capita consumption of paper increases with rising standards of living. For balers and related equipment, demand is generally driven by rising standards of living and population growth, shortage and costs of landfilling, increasing recycling rates, and environmental regulation. In the first quarter of 2017, 14% of our revenue was related to products that support printing and writing paper grades as well as newsprint, which have been negatively affected by the development and increased use of digital media. While we expect the decline in the use of printing and writing and newsprint paper grades to continue due to the use of digital media, we expect global packaging and tissue production to be stable or to increase. In the first quarter of 2017, 10% of our revenue was from sales to OSB producers who manufacture engineered wood panels for the housing industry. The majority of OSB demand is in North America, as North American houses are more often constructed of wood compared to other parts of the world. Demand for OSB is tied to new home construction and home remodeling. The remainder of our revenue was from sales to other process industries, which tend to grow with the overall economy.
Our results of operations in the first quarter of 2017 were negatively affected by foreign currency translation compared to the first quarter of 2016. When we translate the local currency results of our foreign subsidiaries into U.S. dollars during a period in which the U.S. dollar is strengthening, our financial results will reflect decreases due to foreign currency translation. The negative effect on our financial results will continue if the U.S. dollar continues to strengthen relative to the functional currencies of our foreign subsidiaries. Similarly, if the U.S. dollar weakens compared to the functional currencies of our foreign subsidiaries, our financial results will reflect increases due to foreign currency translation. Further, certain foreign subsidiaries may hold U.S. dollar assets or liabilities which, as the U.S. dollar strengthens versus the applicable functional currencies, will result in currency transaction gains on assets and losses on liabilities. We have presented the material effects of foreign currency translation on our financial results under Results of Operations below.
Our bookings increased 23% to $119 million in the first quarter of 2017 compared to the first quarter of 2016, primarily due to the inclusion of a $13 million, or 13%, increase in bookings from the PAAL acquisition offset in part by a $1 million, or 1%, decrease from the unfavorable effects of foreign currency translation. Our revenue, bookings, and income tend to be variable as demand for our capital equipment is dependent on regional economic conditions and the level of capital spending by our customers, among other factors. Demand for our parts and consumables products tends to be more predictable. Bookings for our parts and consumables products were $75 million, or 63% of total bookings, in the first quarter of 2017, compared to $62 million, or 64%, in the first quarter of 2016.
The largest and most impactful regional market for our products in the first quarter of 2017 was North America, and we expect this will continue to be the case for the remainder of 2017. Our bookings in North America were $57 million in the first quarter of 2017, up 5% compared to the first quarter of 2016 and 16% sequentially. According to Resource Information Systems Inc. (RISI) reports, U.S. containerboard production was up 2.1% in the first quarter of 2017 compared to the same period in 2016. Likewise, RISI reported that U.S. containerboard mill operating rates in the first quarter of 2017 were up nearly 300 basis points to 96.8%, while total U.S. containerboard inventory was down 313 tons during the same period as a result of
Overview (continued)
higher box shipments in the first quarter. RISI reported that demand for printing and writing grades in North America declined 5.8% in the first quarter of 2017 compared to the same period in 2016, while newsprint demand in North America declined 11.6%. U.S. housing starts in March 2017 were at a seasonally adjusted annual rate of 1.215 million, up 9.2% year-over-year, according to the U.S. Census Bureau. Continued growth in housing starts is expected to have a positive impact on demand for structural wood panels, which includes OSB.
We saw steady business activity in Europe in the first quarter of 2017 compared to the first quarter of 2016. We expect the overall economy to remain stable in Europe for the remainder of 2017. Our bookings in Europe were $32 million in the first quarter of 2017, up 66% compared to $19 million in the first quarter of 2016. This increase included $13 million in bookings from the PAAL acquisition. Excluding the acquisition and a negative foreign currency translation effect of $1 million, our bookings in Europe were up 6%. Bookings in Europe included $4 million of orders from customers in Russia, reflecting a $3 million increase compared to the first quarter of 2016, due to increased demand for our products. Our bookings in Asia were $21 million in the first quarter of 2017, up 19% compared to 2016, and included a $1 million decrease from the negative effect of foreign currency translation. We saw a continued strength in project activity in containerboard grades during the first quarter of 2017, particularly in China, which followed strong bookings in the fourth quarter of 2016. The most recent RISI outlook for containerboard demand in China forecasts growth rates of approximately 2.5% to 3.0% per year for the next few years. Our bookings in the rest of the world increased 47% to $9 million in the first quarter of 2017 compared to the first quarter of 2016; however, we expect that political uncertainty in Brazil will continue to have an adverse effect on our financial results in this region.
Based on our performance in the first quarter of 2017 and current visibility for the remainder of the year, we expect for the full year 2017 GAAP diluted earnings per share (EPS) of $3.27 to $3.37, revised from our previous guidance of $3.13 to $3.23. For 2017, we expect revenue of $427 to $437 million, revised from our previous guidance of $423 to $433 million. For the second quarter of 2017, we expect to achieve GAAP diluted EPS of $0.87 to $0.91 on revenue of $107 to $110 million.
Results of Operations
First Quarter 2017 Compared With First Quarter 2016
The following table sets forth our unaudited condensed consolidated statement of income expressed as a percentage of total revenues for the first fiscal quarters of 2017 and 2016. The results of operations for the fiscal quarter ended April 1, 2017 are not necessarily indicative of the results to be expected for the full fiscal year.
|
| | | | | | |
| | Three Months Ended |
| | April 1, 2017 | | April 2, 2016 |
| | | | |
Revenues | | 100 | % | | 100 | % |
| | | | |
Costs and Operating Expenses: | | |
| | |
|
Cost of revenues | | 52 |
| | 54 |
|
Selling, general, and administrative expenses | | 34 |
| | 34 |
|
Research and development expenses | | 2 |
| | 2 |
|
Other income | | — |
| | — |
|
| | 88 |
| | 90 |
|
Operating Income | | 12 |
| | 10 |
|
Interest Income (Expense), Net | | — |
| | — |
|
Income Before Provision for Income Taxes | | 12 |
| | 10 |
|
Provision for Income Taxes | | 3 |
| | 3 |
|
Net Income | | 9 | % | | 7 | % |
Results of Operations (continued)
Revenues
Revenues for the first quarters of 2017 and 2016 are as follows:
|
| | | | | | | | |
| | Three Months Ended |
| | April 1, 2017 | | April 2, 2016 |
(In thousands) | | |
Revenues: | | | |