UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 3, 20212, 2022
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to _________
Commission file number 001-11406
KADANT INC.
(Exact name of registrant as specified in its charter)
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Delaware | | 52-1762325 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
One Technology Park Drive
Westford, Massachusetts 01886
(Address of principal executive offices, including zip code)
(978) 776-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, $.01 par value | | KAI | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒ | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 30, 2021,29, 2022, the registrant had 11,580,30511,662,000 shares of common stock outstanding.
Kadant Inc.
Quarterly Report on Form 10-Q
for the Period Ended July 3, 20212, 2022
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)
| | | | | | | | | | | | | | |
| | July 3, 2021 | | January 2, 2021 |
(In thousands, except share and per share amounts) | | |
Assets | | | | |
Current Assets: | | | | |
Cash and cash equivalents | | $ | 73,436 | | | $ | 65,682 | |
Restricted cash (Notes 1 and 11) | | 84,708 | | | 958 | |
Accounts receivable, net of allowances of $2,654 and $2,977 | | 106,791 | | | 91,540 | |
Inventories | | 114,316 | | | 106,814 | |
Unbilled revenue | | 6,481 | | | 7,576 | |
Other current assets | | 19,764 | | | 17,250 | |
Total Current Assets | | 405,496 | | | 289,820 | |
Property, Plant, and Equipment, net of accumulated depreciation of $112,428 and $107,832 | | 81,757 | | | 84,642 | |
Other Assets | | 40,370 | | | 40,391 | |
Intangible Assets, Net | | 151,582 | | | 160,965 | |
Goodwill | | 350,271 | | | 351,753 | |
Total Assets | | $ | 1,029,476 | | | $ | 927,571 | |
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Liabilities and Stockholders' Equity | | | | |
Current Liabilities: | | | | |
Current maturities of long-term obligations (Note 4) | | $ | 1,355 | | | $ | 1,474 | |
Accounts payable | | 44,087 | | | 32,264 | |
Accrued payroll and employee benefits | | 28,915 | | | 31,168 | |
Customer deposits | | 40,617 | | | 29,433 | |
Advanced billings | | 9,110 | | | 8,513 | |
Other current liabilities | | 37,096 | | | 31,836 | |
Total Current Liabilities | | 161,180 | | | 134,688 | |
Long-Term Obligations (Note 4) | | 272,370 | | | 232,000 | |
Other Long-Term Liabilities | | 64,800 | | | 63,978 | |
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Commitments and Contingencies (Note 10) | | 0 | | 0 |
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Stockholders' Equity: | | | | |
Preferred stock, $.01 par value, 5,000,000 shares authorized; NaN issued | | 0 | | | 0 | |
Common stock, $.01 par value, 150,000,000 shares authorized; 14,624,159 shares issued | | 146 | | | 146 | |
Capital in excess of par value | | 110,529 | | | 110,824 | |
Retained earnings | | 513,036 | | | 479,400 | |
Treasury stock at cost, 3,043,854 and 3,081,919 shares | | (74,587) | | | (75,519) | |
Accumulated other comprehensive items (Note 6) | | (19,889) | | | (19,492) | |
Total Kadant Stockholders' Equity | | 529,235 | | | 495,359 | |
Noncontrolling interest | | 1,891 | | | 1,546 | |
Total Stockholders' Equity | | 531,126 | | | 496,905 | |
Total Liabilities and Stockholders' Equity | | $ | 1,029,476 | | | $ | 927,571 | |
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| | July 2, 2022 | | January 1, 2022 |
(In thousands, except share and per share amounts) | | |
Assets | | | | |
Current Assets: | | | | |
Cash and cash equivalents | | $ | 76,540 | | | $ | 91,186 | |
Restricted cash (Note 1) | | 1,486 | | | 2,975 | |
Accounts receivable, net of allowances of $2,980 and $2,735 | | 124,704 | | | 117,209 | |
Inventories | | 156,426 | | | 134,356 | |
Contract assets | | 11,861 | | | 8,626 | |
Other current assets | | 22,975 | | | 29,530 | |
Total Current Assets | | 393,992 | | | 383,882 | |
Property, Plant, and Equipment, net of accumulated depreciation of $116,612 and $114,032 | | 105,919 | | | 107,989 | |
Other Assets | | 56,666 | | | 44,111 | |
Intangible Assets, Net | | 183,317 | | | 199,343 | |
Goodwill | | 384,109 | | | 396,887 | |
Total Assets | | $ | 1,124,003 | | | $ | 1,132,212 | |
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Liabilities and Stockholders' Equity | | | | |
Current Liabilities: | | | | |
Short-term obligations and current maturities of long-term obligations (Note 5) | | $ | 4,543 | | | $ | 5,356 | |
Accounts payable | | 55,924 | | | 59,250 | |
Accrued payroll and employee benefits | | 31,688 | | | 37,203 | |
Customer deposits | | 66,088 | | | 59,262 | |
Advanced billings | | 11,663 | | | 11,894 | |
Other current liabilities | | 43,065 | | | 48,532 | |
Total Current Liabilities | | 212,971 | | | 221,497 | |
Long-Term Obligations (Note 5) | | 223,769 | | | 264,158 | |
Long-Term Deferred Income Taxes | | 36,919 | | | 34,944 | |
Other Long-Term Liabilities | | 44,180 | | | 45,997 | |
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Commitments and Contingencies (Note 11) | | 0 | | 0 |
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Stockholders' Equity: | | | | |
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued | | — | | | — | |
Common stock, $.01 par value, 150,000,000 shares authorized; 14,624,159 shares issued | | 146 | | | 146 | |
Capital in excess of par value | | 114,825 | | | 115,888 | |
Retained earnings | | 613,146 | | | 551,848 | |
Treasury stock at cost, 2,962,186 and 3,003,419 shares | | (72,586) | | | (73,596) | |
Accumulated other comprehensive items (Note 7) | | (51,379) | | | (30,350) | |
Total Kadant Stockholders' Equity | | 604,152 | | | 563,936 | |
Noncontrolling interest | | 2,012 | | | 1,680 | |
Total Stockholders' Equity | | 606,164 | | | 565,616 | |
Total Liabilities and Stockholders' Equity | | $ | 1,124,003 | | | $ | 1,132,212 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
KADANT INC.
Condensed Consolidated Statement of Income
(Unaudited)
| | | | Three Months Ended | | Six Months Ended | | | Three Months Ended | | Six Months Ended |
| | July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 | | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 |
(In thousands, except per share amounts) | (In thousands, except per share amounts) | | (In thousands, except per share amounts) | |
Revenue (Notes 1 and 9) | | $ | 195,811 | | | $ | 152,860 | | | $ | 368,274 | | | $ | 311,987 | | |
Revenue (Notes 1 and 10) | | Revenue (Notes 1 and 10) | | $ | 221,649 | | | $ | 195,811 | | | $ | 448,129 | | | $ | 368,274 | |
| Costs and Operating Expenses: | Costs and Operating Expenses: | | | | | | Costs and Operating Expenses: | | | | | |
Cost of revenue | Cost of revenue | | 110,493 | | | 86,412 | | | 207,241 | | | 177,216 | | Cost of revenue | | 125,611 | | | 110,493 | | | 253,880 | | | 207,241 | |
Selling, general, and administrative expenses | Selling, general, and administrative expenses | | 49,267 | | | 45,073 | | | 98,698 | | | 90,665 | | Selling, general, and administrative expenses | | 55,319 | | | 49,267 | | | 114,487 | | | 98,698 | |
Research and development expenses | Research and development expenses | | 3,041 | | | 2,798 | | | 5,898 | | | 5,874 | | Research and development expenses | | 3,251 | | | 3,041 | | | 6,329 | | | 5,898 | |
Restructuring costs | | 0 | | | 456 | | | 0 | | | 456 | | |
Gain on sale and other expense, net (Note 2) | | Gain on sale and other expense, net (Note 2) | | — | | | — | | | (20,008) | | | — | |
| | | 162,801 | | | 134,739 | | | 311,837 | | | 274,211 | | | | 184,181 | | | 162,801 | | | 354,688 | | | 311,837 | |
Operating Income | Operating Income | | 33,010 | | | 18,121 | | | 56,437 | | | 37,776 | | Operating Income | | 37,468 | | | 33,010 | | | 93,441 | | | 56,437 | |
Interest Income | Interest Income | | 56 | | | 37 | | | 121 | | | 88 | | Interest Income | | 277 | | | 56 | | | 379 | | | 121 | |
Interest Expense | Interest Expense | | (1,066) | | | (1,931) | | | (2,177) | | | (4,390) | | Interest Expense | | (1,366) | | | (1,066) | | | (2,600) | | | (2,177) | |
Other Expense, Net | Other Expense, Net | | (24) | | | (31) | | | (48) | | | (63) | | Other Expense, Net | | (19) | | | (24) | | | (41) | | | (48) | |
Income Before Provision for Income Taxes | Income Before Provision for Income Taxes | | 31,976 | | | 16,196 | | | 54,333 | | | 33,411 | | Income Before Provision for Income Taxes | | 36,360 | | | 31,976 | | | 91,179 | | | 54,333 | |
Provision for Income Taxes (Note 3) | | 8,949 | | | 4,474 | | | 14,510 | | | 9,033 | | |
Provision for Income Taxes (Note 4) | | Provision for Income Taxes (Note 4) | | 9,951 | | | 8,949 | | | 23,329 | | | 14,510 | |
Net Income | Net Income | | 23,027 | | | 11,722 | | | 39,823 | | | 24,378 | | Net Income | | 26,409 | | | 23,027 | | | 67,850 | | | 39,823 | |
Net Income Attributable to Noncontrolling Interest | Net Income Attributable to Noncontrolling Interest | | (163) | | | (115) | | | (398) | | | (240) | | Net Income Attributable to Noncontrolling Interest | | (239) | | | (163) | | | (488) | | | (398) | |
Net Income Attributable to Kadant | Net Income Attributable to Kadant | | $ | 22,864 | | | $ | 11,607 | | | $ | 39,425 | | | $ | 24,138 | | Net Income Attributable to Kadant | | $ | 26,170 | | | $ | 22,864 | | | $ | 67,362 | | | $ | 39,425 | |
| Earnings per Share Attributable to Kadant (Note 2) | | | | | | |
Earnings per Share Attributable to Kadant (Note 3) | | Earnings per Share Attributable to Kadant (Note 3) | | | | | |
Basic | Basic | | $ | 1.97 | | | $ | 1.01 | | | $ | 3.41 | | | $ | 2.11 | | Basic | | $ | 2.24 | | | $ | 1.97 | | | $ | 5.78 | | | $ | 3.41 | |
Diluted | Diluted | | $ | 1.96 | | | $ | 1.00 | | | $ | 3.39 | | | $ | 2.09 | | Diluted | | $ | 2.24 | | | $ | 1.96 | | | $ | 5.77 | | | $ | 3.39 | |
| Weighted Average Shares (Note 2) | | | | | | |
Weighted Average Shares (Note 3) | | Weighted Average Shares (Note 3) | | | | | |
Basic | Basic | | 11,579 | | | 11,482 | | | 11,566 | | | 11,457 | | Basic | | 11,660 | | | 11,579 | | | 11,645 | | | 11,566 | |
Diluted | Diluted | | 11,650 | | | 11,552 | | | 11,631 | | | 11,530 | | Diluted | | 11,689 | | | 11,650 | | | 11,672 | | | 11,631 | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
KADANT INC.
Condensed Consolidated Statement of Comprehensive Income
(Unaudited)
| | | | Three Months Ended | | Six Months Ended | | | Three Months Ended | | Six Months Ended |
| | July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 | | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 |
(In thousands) | (In thousands) | | (In thousands) | |
Net Income | Net Income | | $ | 23,027 | | | $ | 11,722 | | | $ | 39,823 | | | $ | 24,378 | | Net Income | | $ | 26,409 | | | $ | 23,027 | | | $ | 67,850 | | | $ | 39,823 | |
Other Comprehensive Items: | Other Comprehensive Items: | | | | | | | | | Other Comprehensive Items: | | | | | | | | |
Foreign currency translation adjustment | Foreign currency translation adjustment | | 4,089 | | | 4,742 | | | (661) | | | (7,832) | | Foreign currency translation adjustment | | (19,364) | | | 4,089 | | | (21,648) | | | (661) | |
Post-retirement liability adjustments, net (net of tax provision of $2, $0, $12 and $20) | | 5 | | | (2) | | | 33 | | | 48 | | |
Effect of post-retirement plan settlement | | 0 | | | 0 | | | 0 | | | (119) | | |
Deferred gain (loss) on cash flow hedges (net of tax provision (benefit) of $21, $(3), $40 and $(122)) | | 65 | | | (24) | | | 178 | | | (326) | | |
Post-retirement liability adjustments, net (net of tax provision of $11, $2, $13 and $12) | | Post-retirement liability adjustments, net (net of tax provision of $11, $2, $13 and $12) | | 31 | | | 5 | | | 40 | | | 33 | |
Deferred gain on cash flow hedges (net of tax provision of $46, $21, $114 and $40) | | Deferred gain on cash flow hedges (net of tax provision of $46, $21, $114 and $40) | | 146 | | | 65 | | | 423 | | | 178 | |
Other comprehensive items | Other comprehensive items | | 4,159 | | | 4,716 | | | (450) | | | (8,229) | | Other comprehensive items | | (19,187) | | | 4,159 | | | (21,185) | | | (450) | |
Comprehensive Income | Comprehensive Income | | 27,186 | | | 16,438 | | | 39,373 | | | 16,149 | | Comprehensive Income | | 7,222 | | | 27,186 | | | 46,665 | | | 39,373 | |
Comprehensive Income Attributable to Noncontrolling Interest | Comprehensive Income Attributable to Noncontrolling Interest | | (171) | | | (140) | | | (345) | | | (254) | | Comprehensive Income Attributable to Noncontrolling Interest | | (129) | | | (171) | | | (332) | | | (345) | |
Comprehensive Income Attributable to Kadant | Comprehensive Income Attributable to Kadant | | $ | 27,015 | | | $ | 16,298 | | | $ | 39,028 | | | $ | 15,895 | | Comprehensive Income Attributable to Kadant | | $ | 7,093 | | | $ | 27,015 | | | $ | 46,333 | | | $ | 39,028 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
KADANT INC.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
| | | | Six Months Ended | | | Six Months Ended |
| | July 3, 2021 | | June 27, 2020 | | July 2, 2022 | | July 3, 2021 |
(In thousands) | (In thousands) | | (In thousands) | |
Operating Activities | Operating Activities | | | | | Operating Activities | | | | |
Net income attributable to Kadant | Net income attributable to Kadant | | $ | 39,425 | | | $ | 24,138 | | Net income attributable to Kadant | | $ | 67,362 | | | $ | 39,425 | |
Net income attributable to noncontrolling interest | Net income attributable to noncontrolling interest | | 398 | | | 240 | | Net income attributable to noncontrolling interest | | 488 | | | 398 | |
| Net income | Net income | | 39,823 | | | 24,378 | | Net income | | 67,850 | | | 39,823 | |
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | Depreciation and amortization | | 15,402 | | | 15,174 | | Depreciation and amortization | | 17,931 | | | 15,402 | |
Stock-based compensation expense | Stock-based compensation expense | | 4,026 | | | 3,516 | | Stock-based compensation expense | | 4,536 | | | 4,026 | |
(Benefit) provision for losses on accounts receivable | | (241) | | | 303 | | |
Loss on sale of property, plant, and equipment | | 91 | | | 0 | | |
Provision for losses (benefit) on accounts receivable | | Provision for losses (benefit) on accounts receivable | | 433 | | | (241) | |
Gain on the sale of assets (Note 2) | | Gain on the sale of assets (Note 2) | | (20,190) | | | — | |
Noncash impairment costs (Note 2) | | Noncash impairment costs (Note 2) | | 182 | | | — | |
Other items, net | Other items, net | | (1,054) | | | (565) | | Other items, net | | 6,964 | | | 1,752 | |
Changes in current assets and liabilities, net of effects of acquisitions: | | | | | |
Changes in assets and liabilities, net of effects of acquisitions: | | Changes in assets and liabilities, net of effects of acquisitions: | | | | |
Accounts receivable | Accounts receivable | | (15,321) | | | 4,761 | | Accounts receivable | | (12,336) | | | (15,321) | |
Unbilled revenue | Unbilled revenue | | 1,005 | | | 2,706 | | Unbilled revenue | | (3,694) | | | 1,005 | |
Inventories | Inventories | | (7,312) | | | (9,372) | | Inventories | | (26,816) | | | (7,312) | |
Other current assets | | (1,780) | | | 1,572 | | |
Other assets | | Other assets | | 686 | | (3,209) | |
Accounts payable | Accounts payable | | 12,904 | | | (5,032) | | Accounts payable | | (287) | | | 12,904 | |
Other current liabilities | | 15,935 | | | (9,233) | | |
Customer deposits | | Customer deposits | | 9,329 | | | 11,112 | |
Other liabilities | | Other liabilities | | (2,023) | | | 3,537 | |
| Net cash provided by operating activities | Net cash provided by operating activities | | 63,478 | | | 28,208 | | Net cash provided by operating activities | | 42,565 | | | 63,478 | |
| Investing Activities | Investing Activities | | | | | Investing Activities | | | | |
Acquisitions, net of cash acquired | Acquisitions, net of cash acquired | | (159) | | | (7,066) | | Acquisitions, net of cash acquired | | (62) | | | (159) | |
Purchases of property, plant, and equipment | Purchases of property, plant, and equipment | | (4,318) | | | (3,597) | | Purchases of property, plant, and equipment | | (9,815) | | | (4,318) | |
Proceeds from sale of property, plant, and equipment | Proceeds from sale of property, plant, and equipment | | 71 | | | 11 | | Proceeds from sale of property, plant, and equipment | | 1,942 | | | 71 | |
| Other | Other | | 537 | | | 0 | | Other | | 41 | | | 537 | |
Net cash used in investing activities | Net cash used in investing activities | | (3,869) | | | (10,652) | | Net cash used in investing activities | | (7,894) | | | (3,869) | |
| Financing Activities | Financing Activities | | | | | Financing Activities | | | | |
Repayment of long-term obligations | | (47,138) | | | (24,160) | | |
Proceeds from issuance of long-term obligations (Note 4) | | 88,888 | | | 7,000 | | |
Repayment of short- and long-term obligations | | Repayment of short- and long-term obligations | | (51,379) | | | (47,138) | |
Proceeds from issuance of short- and long-term obligations | | Proceeds from issuance of short- and long-term obligations | | 16,516 | | | 88,888 | |
Tax withholding payments related to stock-based compensation | Tax withholding payments related to stock-based compensation | | (3,388) | | | (2,318) | | Tax withholding payments related to stock-based compensation | | (4,589) | | | (3,388) | |
Dividends paid | Dividends paid | | (5,664) | | | (5,381) | | Dividends paid | | (5,936) | | | (5,664) | |
| Proceeds from issuance of Company common stock | | 0 | | | 1,445 | | |
| Net cash provided by (used in) financing activities | | 32,698 | | | (23,414) | | |
| Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | | (45,388) | | | 32,698 | |
| Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash | Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash | | (803) | | | (1,466) | | Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash | | (5,418) | | | (803) | |
| Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash | | 91,504 | | | (7,324) | | |
(Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash | | (Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash | | (16,135) | | | 91,504 | |
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | | 66,640 | | | 68,273 | | Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | | 94,161 | | | 66,640 | |
Cash, Cash Equivalents, and Restricted Cash at End of Period | Cash, Cash Equivalents, and Restricted Cash at End of Period | | $ | 158,144 | | | $ | 60,949 | | Cash, Cash Equivalents, and Restricted Cash at End of Period | | $ | 78,026 | | | $ | 158,144 | |
See Note 1, Nature of Operations and Summary of Significant Accounting Policies, under the heading Supplemental Cash Flow Information for further details.
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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| | Three Months Ended July 3, 2021 |
(In thousands, except share and per share amounts) | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Items | | Noncontrolling Interest | | Total Stockholders' Equity |
| Shares | | Amount | | | | Shares | | Amount | | | |
Balance at April 3, 2021 | | 14,624,159 | | | $ | 146 | | | $ | 108,064 | | | $ | 493,067 | | | 3,046,379 | | | $ | (74,649) | | | $ | (24,040) | | | $ | 1,720 | | | $ | 504,308 | |
Net income | | — | | | — | | | — | | | 22,864 | | | — | | | — | | | — | | | 163 | | | 23,027 | |
Dividend declared – Common Stock, $0.25 per share | | — | | | — | | | — | | | (2,895) | | | — | | | — | | | — | | | — | | | (2,895) | |
Activity under stock plans | | — | | | — | | | 2,465 | | | — | | | (2,525) | | | 62 | | | — | | | — | | | 2,527 | |
Other comprehensive items | | — | | | — | | | — | | | — | | | — | | | — | | | 4,151 | | | 8 | | | 4,159 | |
Balance at July 3, 2021 | | 14,624,159 | | | $ | 146 | | | $ | 110,529 | | | $ | 513,036 | | | 3,043,854 | | | $ | (74,587) | | | $ | (19,889) | | | $ | 1,891 | | | $ | 531,126 | |
| | | | | | | | | | | | | | | | | | |
| | Six Months Ended July 3, 2021 |
(In thousands, except share and per share amounts) | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Items | | Noncontrolling Interest | | Total Stockholders' Equity |
| Shares | | Amount | | | | Shares | | Amount | | | |
Balance at January 2, 2021 | | 14,624,159 | | | $ | 146 | | | $ | 110,824 | | | $ | 479,400 | | | 3,081,919 | | | $ | (75,519) | | | $ | (19,492) | | | $ | 1,546 | | | $ | 496,905 | |
Net income | | — | | | — | | | — | | | 39,425 | | | — | | | — | | | — | | | 398 | | | 39,823 | |
Dividends declared – Common Stock, $0.50 per share | | — | | | — | | | — | | | (5,789) | | | — | | | — | | | — | | | — | | | (5,789) | |
Activity under stock plans | | — | | | — | | | (295) | | | — | | | (38,065) | | | 932 | | | — | | | — | | | 637 | |
Other comprehensive items | | — | | | — | | | — | | | — | | | — | | | — | | | (397) | | | (53) | | | (450) | |
Balance at July 3, 2021 | | 14,624,159 | | | $ | 146 | | | $ | 110,529 | | | $ | 513,036 | | | 3,043,854 | | | $ | (74,587) | | | $ | (19,889) | | | $ | 1,891 | | | $ | 531,126 | |
| | | Three Months Ended June 27, 2020 | | Three Months Ended July 2, 2022 |
(In thousands, except share and per share amounts) | (In thousands, except share and per share amounts) | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Items | | Noncontrolling Interest | | Total Stockholders' Equity | (In thousands, except share and per share amounts) | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Items | | Noncontrolling Interest | | Total Stockholders' Equity |
| Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | | Shares | | Amount | |
Balance at March 28, 2020 | | 14,624,159 | | | $ | 146 | | | $ | 105,457 | | | $ | 445,027 | | | 3,154,644 | | | $ | (77,302) | | | $ | (50,554) | | | $ | 1,498 | | | $ | 424,272 | | |
Balance at April 2, 2022 | | Balance at April 2, 2022 | | 14,624,159 | | | $ | 146 | | | $ | 112,651 | | | $ | 590,009 | | | 2,964,786 | | | $ | (72,649) | | | $ | (32,302) | | | $ | 1,883 | | | $ | 599,738 | |
Net income | Net income | | — | | | — | | | — | | | 11,607 | | | — | | | — | | | — | | | 115 | | | 11,722 | | Net income | | — | | | — | | | — | | | 26,170 | | | — | | | — | | | — | | | 239 | | | 26,409 | |
Dividend declared – Common Stock, $0.24 per share | | — | | | — | | | — | | | (2,760) | | | — | | | — | | | — | | | — | | | (2,760) | | |
Dividend declared – Common Stock, $0.26 per share | | Dividend declared – Common Stock, $0.26 per share | | — | | | — | | | — | | | (3,033) | | | — | | | — | | | — | | | — | | | (3,033) | |
Activity under stock plans | Activity under stock plans | | — | | | — | | | 1,745 | | | — | | | (27,079) | | | 664 | | | — | | | — | | | 2,409 | | Activity under stock plans | | — | | | — | | | 2,174 | | | — | | | (2,600) | | | 63 | | | — | | | — | | | 2,237 | |
Other comprehensive items | Other comprehensive items | | — | | | — | | | — | | | — | | | — | | | — | | | 4,691 | | | 25 | | | 4,716 | | Other comprehensive items | | — | | | — | | | — | | | — | | | — | | | — | | | (19,077) | | | (110) | | | (19,187) | |
Balance at June 27, 2020 | | 14,624,159 | | | $ | 146 | | | $ | 107,202 | | | $ | 453,874 | | | 3,127,565 | | | $ | (76,638) | | | $ | (45,863) | | | $ | 1,638 | | | $ | 440,359 | | |
Balance at July 2, 2022 | | Balance at July 2, 2022 | | 14,624,159 | | | $ | 146 | | | $ | 114,825 | | | $ | 613,146 | | | 2,962,186 | | | $ | (72,586) | | | $ | (51,379) | | | $ | 2,012 | | | $ | 606,164 | |
| | | Six Months Ended June 27, 2020 | | Six Months Ended July 2, 2022 |
(In thousands, except share and per share amounts) | (In thousands, except share and per share amounts) | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Items | | Noncontrolling Interest | | Total Stockholders' Equity | (In thousands, except share and per share amounts) | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Items | | Noncontrolling Interest | | Total Stockholders' Equity |
| Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | | Shares | | Amount | |
Balance at December 28, 2019 | | 14,624,159 | | | $ | 146 | | | $ | 106,698 | | | $ | 435,249 | | | 3,214,888 | | | $ | (78,778) | | | $ | (37,620) | | | $ | 1,384 | | | $ | 427,079 | | |
Balance at January 1, 2022 | | Balance at January 1, 2022 | | 14,624,159 | | | $ | 146 | | | $ | 115,888 | | | $ | 551,848 | | | 3,003,419 | | | $ | (73,596) | | | $ | (30,350) | | | $ | 1,680 | | | $ | 565,616 | |
Net income | Net income | | — | | | — | | | — | | | 24,138 | | | — | | | — | | | — | | | 240 | | | 24,378 | | Net income | | — | | | — | | | — | | | 67,362 | | | — | | | — | | | — | | | 488 | | | 67,850 | |
Dividends declared – Common Stock, $0.48 per share | | — | | | — | | | — | | | (5,513) | | | — | | | — | | | — | | | — | | | (5,513) | | |
Dividends declared – Common Stock, $0.52 per share | | Dividends declared – Common Stock, $0.52 per share | | — | | | — | | | — | | | (6,064) | | | — | | | — | | | — | | | — | | | (6,064) | |
Activity under stock plans | Activity under stock plans | | — | | | — | | | 504 | | | — | | | (87,323) | | | 2,140 | | | — | | | — | | | 2,644 | | Activity under stock plans | | — | | | — | | | (1,063) | | | — | | | (41,233) | | | 1,010 | | | — | | | — | | | (53) | |
| Other comprehensive items | Other comprehensive items | | — | | | — | | | — | | | — | | | — | | | — | | | (8,243) | | | 14 | | | (8,229) | | Other comprehensive items | | — | | | — | | | — | | | — | | | — | | | — | | | (21,029) | | | (156) | | | (21,185) | |
Balance at June 27, 2020 | | 14,624,159 | | | $ | 146 | | | $ | 107,202 | | | $ | 453,874 | | | 3,127,565 | | | $ | (76,638) | | | $ | (45,863) | | | $ | 1,638 | | | $ | 440,359 | | |
Balance at July 2, 2022 | | Balance at July 2, 2022 | | 14,624,159 | | | $ | 146 | | | $ | 114,825 | | | $ | 613,146 | | | 2,962,186 | | | $ | (72,586) | | | $ | (51,379) | | | $ | 2,012 | | | $ | 606,164 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended July 3, 2021 |
(In thousands, except share and per share amounts) | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Items | | Noncontrolling Interest | | Total Stockholders' Equity |
| Shares | | Amount | | | | Shares | | Amount | | | |
Balance at April 3, 2021 | | 14,624,159 | | | $ | 146 | | | $ | 108,064 | | | $ | 493,067 | | | 3,046,379 | | | $ | (74,649) | | | $ | (24,040) | | | $ | 1,720 | | | $ | 504,308 | |
Net income | | — | | | — | | | — | | | 22,864 | | | — | | | — | | | — | | | 163 | | | 23,027 | |
Dividend declared – Common Stock, $0.25 per share | | — | | | — | | | — | | | (2,895) | | | — | | | — | | | — | | | — | | | (2,895) | |
Activity under stock plans | | — | | | — | | | 2,465 | | | — | | | (2,525) | | | 62 | | | — | | | — | | | 2,527 | |
Other comprehensive items | | — | | | — | | | — | | | — | | | — | | | — | | | 4,151 | | | 8 | | | 4,159 | |
Balance at July 3, 2021 | | 14,624,159 | | | $ | 146 | | | $ | 110,529 | | | $ | 513,036 | | | 3,043,854 | | | $ | (74,587) | | | $ | (19,889) | | | $ | 1,891 | | | $ | 531,126 | |
| | | | | | | | | | | | | | | | | | |
| | Six Months Ended July 3, 2021 |
(In thousands, except share and per share amounts) | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Items | | Noncontrolling Interest | | Total Stockholders' Equity |
| Shares | | Amount | | | | Shares | | Amount | | | |
Balance at January 2, 2021 | | 14,624,159 | | | $ | 146 | | | $ | 110,824 | | | $ | 479,400 | | | 3,081,919 | | | $ | (75,519) | | | $ | (19,492) | | | $ | 1,546 | | | $ | 496,905 | |
Net income | | — | | | — | | | — | | | 39,425 | | | — | | | — | | | — | | | 398 | | | 39,823 | |
Dividends declared – Common Stock, $0.50 per share | | — | | | — | | | — | | | (5,789) | | | — | | | — | | | — | | | — | | | (5,789) | |
| | | | | | | | | | | | | | | | | | |
Activity under stock plans | | — | | | — | | | (295) | | | — | | | (38,065) | | | 932 | | | — | | | — | | | 637 | |
Other comprehensive items | | — | | | — | | | — | | | — | | | — | | | — | | | (397) | | | (53) | | | (450) | |
Balance at July 3, 2021 | | 14,624,159 | | | $ | 146 | | | $ | 110,529 | | | $ | 513,036 | | | 3,043,854 | | | $ | (74,587) | | | $ | (19,889) | | | $ | 1,891 | | | $ | 531,126 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Kadant Inc. was incorporated in Delaware in November 1991 and trades on the New York Stock Exchange under the ticker symbol "KAI."
Kadant Inc. (together with its subsidiaries, the Company) is a global supplier of high-value, critical componentstechnologies and engineered systems used in process industries worldwide.that drive Sustainable Industrial Processing. Its products technologies, and services play an integral role in enhancing process efficiency, optimizing energy utilization, and maximizing productivity in resource-intensive industries.process industries while helping customers advance their sustainability initiatives with products that reduce waste or generate more yield with fewer inputs, particularly fiber, energy, and water. Producing more while consuming less is a core aspect of Sustainable Industrial Processing and a major element of the strategic focus of the Company's 3 reportable operating segments: Flow Control, Industrial Processing, and Material Handling.
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 July 3, 2021,2, 2022, its results of operations, comprehensive income, and stockholders' equity for the three- and six-month periods ended July 2, 2022 and July 3, 2021 and June 27, 2020 and its cash flows for the six-month periods ended July 2, 2022 and July 3, 2021 and June 27, 2020.2021. 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 January 2, 20211, 2022 has been derived from the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2021.1, 2022 (the Annual Report). The condensed consolidated financial statements and related notes are presented as permitted by the rules and regulations of the Securities and Exchange Commission (SEC) 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 January 2, 2021, filedReport.
Financial Statement Presentation
Certain reclassifications have been made to prior periods to conform with the SEC.current period presentation. Specifically, the Company reclassified the change in customer deposits within operating activities from other liabilities to a separate line item and the changes in long-term assets and liabilities from other items, net to other assets and other liabilities, respectively, in the Condensed Consolidated Statement of Cash Flows.
Use of Estimates and Critical Accounting Policies
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue 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.
Note 1 to the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2021 describes the significant accounting estimates and policies used in preparation of the consolidated financial statements. There have been no material changes in the Company’s significant accounting policies during the six months ended July 3, 2021.2, 2022.
Supplemental Cash Flow Information | | | | | | | | | | | | | | |
| | Six Months Ended |
(In thousands) | | July 3, 2021 | | June 27, 2020 |
| | | | |
| | | | |
| | | | |
| | | | |
Cash Paid for Interest | | $ | 1,968 | | | $ | 4,186 | |
Cash Paid for Income Taxes, Net of Refunds | | $ | 12,475 | | | $ | 7,036 | |
| | | | |
Non-Cash Investing Activities: | | | | |
Fair value of assets acquired | | $ | 197 | | | $ | 9,164 | |
Cash paid for acquired businesses | | (159) | | | (7,537) | |
Liabilities Assumed of Acquired Businesses | | $ | 38 | | | $ | 1,627 | |
| | | | |
Purchases of property, plant, and equipment in accounts payable | | $ | 169 | | | $ | 150 | |
| | | | |
Non-Cash Financing Activities: | | | | |
Issuance of Company common stock upon vesting of restricted stock units | | $ | 3,628 | | | $ | 4,027 | |
Dividends declared but unpaid | | $ | 2,895 | | | $ | 2,760 | |
| | | | | | | | | | | | | | |
| | Six Months Ended |
(In thousands) | | July 2, 2022 | | July 3, 2021 |
Cash Paid for Interest | | $ | 2,408 | | | $ | 1,968 | |
Cash Paid for Income Taxes, Net of Refunds | | $ | 19,167 | | | $ | 12,475 | |
| | | | |
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| | | | | | | | | | | | | | |
| | Six Months Ended |
(In thousands) | | July 2, 2022 | | July 3, 2021 |
Non-Cash Investing Activities: | | | | |
Fair value of assets acquired | | $ | (1,568) | | | $ | 197 | |
Cash paid for acquired businesses | | (62) | | | (159) | |
Liabilities Assumed of Acquired Businesses | | $ | (1,630) | | | $ | 38 | |
| | | | |
Purchases of property, plant, and equipment in accounts payable | | $ | 26 | | | $ | 169 | |
| | | | |
Non-Cash Financing Activities: | | | | |
Issuance of Company common stock upon vesting of restricted stock units | | $ | 5,040 | | | $ | 3,628 | |
Dividends declared but unpaid | | $ | 3,033 | | | $ | 2,895 | |
Restricted Cash
The Company's restricted cash generally serves as collateral for certain banker's acceptance drafts issued to vendors and for bank guarantees associated with providing assurance to customers that the Company will fulfill certain customer obligations entered into in the normal course of business. The majority of the bank guarantees will expire over the next twelve months. Restricted cash at July 3, 2021 also included $84,249,000 related to funds held in escrow for an acquisition that occurred in the third quarter of 2021. See Note 11, Subsequent Event, for further details. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company's condensed consolidated balance sheet that are shown in aggregate in the accompanying condensed consolidated statement of cash flows:
| (In thousands) | (In thousands) | | July 3, 2021 | | June 27, 2020 | | January 2, 2021 | | December 28, 2019 | (In thousands) | | July 2, 2022 | | July 3, 2021 | | January 1, 2022 | | January 2, 2021 |
Cash and cash equivalents | Cash and cash equivalents | | $ | 73,436 | | | $ | 57,499 | | | $ | 65,682 | | | $ | 66,786 | | Cash and cash equivalents | | $ | 76,540 | | | $ | 73,436 | | | $ | 91,186 | | | $ | 65,682 | |
Restricted cash | Restricted cash | | 84,708 | | | 3,450 | | | 958 | | | 1,487 | | Restricted cash | | 1,486 | | | 84,708 | | | 2,975 | | | 958 | |
Total Cash, Cash Equivalents, and Restricted Cash | Total Cash, Cash Equivalents, and Restricted Cash | | $ | 158,144 | | | $ | 60,949 | | | $ | 66,640 | | | $ | 68,273 | | Total Cash, Cash Equivalents, and Restricted Cash | | $ | 78,026 | | | $ | 158,144 | | | $ | 94,161 | | | $ | 66,640 | |
Inventories
The components of inventories are as follows:
| | | | July 3, 2021 | | January 2, 2021 | | | July 2, 2022 | | January 1, 2022 |
(In thousands) | (In thousands) | | (In thousands) | |
Raw Materials | Raw Materials | | $ | 48,879 | | | $ | 46,413 | | Raw Materials | | $ | 64,717 | | | $ | 59,177 | |
Work in Process | Work in Process | | 24,189 | | | 17,692 | | Work in Process | | 37,978 | | | 29,448 | |
Finished Goods | Finished Goods | | 41,248 | | | 42,709 | | Finished Goods | | 53,731 | | | 45,731 | |
| | $ | 114,316 | | | $ | 106,814 | | | $ | 156,426 | | | $ | 134,356 | |
Intangible Assets, Net
AcquiredGross intangible assets by major asset class are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Gross | | Accumulated Amortization | | Currency Translation | | Net |
July 3, 2021 | | | | | | | | |
Definite-Lived | | | | | | | | |
Customer relationships | | $ | 173,728 | | | $ | (72,364) | | | $ | (1,279) | | | $ | 100,085 | |
Product technology | | 56,111 | | | (33,465) | | | (1,093) | | | 21,553 | |
Tradenames | | 6,027 | | | (3,162) | | | (310) | | | 2,555 | |
Other | | 18,248 | | | (14,727) | | | (536) | | | 2,985 | |
| | 254,114 | | | (123,718) | | | (3,218) | | | 127,178 | |
Indefinite-Lived | | | | | | | | |
Tradenames | | 24,100 | | | — | | | 304 | | | 24,404 | |
Acquired Intangible Assets | | $ | 278,214 | | | $ | (123,718) | | | $ | (2,914) | | | $ | 151,582 | |
| | | | | | | | |
January 2, 2021 | | | | | | | | |
Definite-Lived | | | | | | | | |
Customer relationships | | $ | 173,728 | | | $ | (65,488) | | | $ | (1,316) | | | $ | 106,924 | |
Product technology | | 56,111 | | | (31,655) | | | (1,005) | | | 23,451 | |
Tradenames | | 6,027 | | | (2,946) | | | (282) | | | 2,799 | |
Other | | 18,248 | | | (14,369) | | | (515) | | | 3,364 | |
| | 254,114 | | | (114,458) | | | (3,118) | | | 136,538 | |
Indefinite-Lived | | | | | | | | |
Tradenames | | 24,100 | | | — | | | 327 | | | 24,427 | |
Acquired Intangible Assets | | $ | 278,214 | | | $ | (114,458) | | | $ | (2,791) | | | $ | 160,965 | |
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
were $340,947,000 at July 2, 2022 and January 1, 2022. Intangible assets are recorded at fair value at the date of acquisition. Subsequent impairment charges are reflected as a reduction in the gross balance, as applicable. Definite-lived intangible assets are stated net of accumulated amortization and currency translation in the accompanying condensed consolidated balance sheet. The Company amortizes definite-lived intangible assets over lives that have been determined based on the anticipated cash flow benefits of the intangible asset. Accumulated amortization was $146,117,000 at July 2, 2022 and $135,327,000 at January 1, 2022.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Goodwill
The changes in the carrying amount of goodwill by segment are as follows:
| (In thousands) | (In thousands) | | Flow Control | | Industrial Processing | | Material Handling | | Total | (In thousands) | | Flow Control | | Industrial Processing | | Material Handling | | Total |
Balance at January 2, 2021 | | | | | | | | | |
Balance at January 1, 2022 | | Balance at January 1, 2022 | | | | | | | | |
Gross balance | Gross balance | | $ | 101,437 | | | $ | 215,881 | | | $ | 119,944 | | | $ | 437,262 | | Gross balance | | $ | 123,589 | | | $ | 214,982 | | | $ | 143,825 | | | $ | 482,396 | |
Accumulated impairment losses | Accumulated impairment losses | | 0 | | | (85,509) | | | 0 | | | (85,509) | | Accumulated impairment losses | | — | | | (85,509) | | | — | | | (85,509) | |
Net balance | Net balance | | 101,437 | | | 130,372 | | | 119,944 | | | 351,753 | | Net balance | | 123,589 | | | 129,473 | | | 143,825 | | | 396,887 | |
2021 Adjustments | | | | | | | | | |
2022 Activity | | 2022 Activity | | | | | | | | |
Acquisitions (a) | | Acquisitions (a) | | (33) | | | — | | | (502) | | | (535) | |
Currency translation | Currency translation | | (858) | | | 432 | | | (1,253) | | | (1,679) | | Currency translation | | (5,905) | | | (3,271) | | | (3,067) | | | (12,243) | |
Acquisition | | 197 | | | 0 | | | 0 | | | 197 | | |
Total 2021 adjustments | | (661) | | | 432 | | | (1,253) | | | (1,482) | | |
Balance at July 3, 2021 | | | | | | | |
Total 2022 activity | | Total 2022 activity | | (5,938) | | | (3,271) | | | (3,569) | | | (12,778) | |
Balance at July 2, 2022 | | Balance at July 2, 2022 | | | | | | | | |
Gross balance | Gross balance | | 100,776 | | | 216,313 | | | 118,691 | | | 435,780 | | Gross balance | | 117,651 | | | 211,711 | | | 140,256 | | | 469,618 | |
Accumulated impairment losses | Accumulated impairment losses | | 0 | | | (85,509) | | | 0 | | | (85,509) | | Accumulated impairment losses | | — | | | (85,509) | | | — | | | (85,509) | |
Net balance | Net balance | | $ | 100,776 | | | $ | 130,804 | | | $ | 118,691 | | | $ | 350,271 | | Net balance | | $ | 117,651 | | | $ | 126,202 | | | $ | 140,256 | | | $ | 384,109 | |
|
(a)Relates to adjustments to the purchase price allocation for acquisitions completed in 2021, principally for inventory, machinery and equipment, and deferred taxes. Measurement period adjustments in 2022 were not material to the Company's results of operations.
Warranty Obligations
The Company's contracts covering the sale of its products include warranty provisions that provide assurance to its customers that the products will comply with agreed-upon specifications during a defined period of time. The Company provides for the estimated cost of product warranties at the time of sale based on historical occurrence rates and repair costs, as well as knowledge of any specific warranty problems that indicate projected warranty costs may vary from historical patterns. The Company negotiates the terms regarding warranty coverage and length of warranty depending on the products and applications.
The Company's liability for warranties is included in other current liabilities in the accompanying condensed consolidated balance sheet.
The changes in the carrying amount of product warranty obligations are as follows:
| | | | Six Months Ended | | | Six Months Ended |
(In thousands) | (In thousands) | | July 3, 2021 | | June 27, 2020 | (In thousands) | | July 2, 2022 | | July 3, 2021 |
Balance at Beginning of Year | Balance at Beginning of Year | | $ | 7,064 | | | $ | 6,467 | | Balance at Beginning of Year | | $ | 7,298 | | | $ | 7,064 | |
Provision charged to expense | Provision charged to expense | | 2,709 | | | 2,675 | | Provision charged to expense | | 2,657 | | | 2,709 | |
Usage | Usage | | (2,255) | | | (2,721) | | Usage | | (2,548) | | | (2,255) | |
| Currency translation | Currency translation | | (74) | | | (67) | | Currency translation | | (429) | | | (74) | |
Balance at End of Period | Balance at End of Period | | $ | 7,444 | | | $ | 6,354 | | Balance at End of Period | | $ | 6,978 | | | $ | 7,444 | |
Revenue Recognition
Most of the Company’s revenue relates to products and services that require minimal customization and is recognized at a point in time for each performance obligation under the contract when the customer obtains control of the goods or service. The remaining portion of the Company’s revenue is recognized on an over time basis based on an input method that compares the costs incurred to date to the total expected costs required to satisfy the performance obligation. Contracts are accounted for on an over time basis when they include products which have no alternative use and an enforceable right to payment over time. Most of the contracts recognized on an over time basis are for large capital projects. These projects are highly customized for the customer and, as a result, would include a significant cost to rework in the event of cancellation.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table presents revenue by revenue recognition method:
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | July 3, | | June 27, | | July 3, | | June 27, | | July 2, | | July 3, | | July 2, | | July 3, |
(In thousands) | (In thousands) | | 2021 | | 2020 | | 2021 | | 2020 | (In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Point in Time | Point in Time | | $ | 175,479 | | | $ | 129,797 | | | $ | 329,896 | | | $ | 265,889 | | Point in Time | | $ | 198,249 | | | $ | 175,479 | | | $ | 401,560 | | | $ | 329,896 | |
Over Time | Over Time | | 20,332 | | | 23,063 | | | 38,378 | | | 46,098 | | Over Time | | 23,400 | | | 20,332 | | | 46,569 | | | 38,378 | |
| | $ | 195,811 | | | $ | 152,860 | | | $ | 368,274 | | | $ | 311,987 | | | $ | 221,649 | | | $ | 195,811 | | | $ | 448,129 | | | $ | 368,274 | |
The Company disaggregates its revenue from contracts with customers by reportable operating segment, product type and geography as this best depicts how its revenue is affected by economic factors.
The following table presents the disaggregation of revenue by product type and geography:
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended |
| | July 3, | | June 27, | | July 3, | | June 27, | | July 2, | | July 3, | | July 2, | | July 3, |
(In thousands) | (In thousands) | | 2021 | | 2020 | | 2021 | | 2020 | (In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Revenue by Product Type: | Revenue by Product Type: | | | | | | | | | Revenue by Product Type: | | | | | | | | |
Parts and Consumables | | $ | 124,975 | | | $ | 97,261 | | | $ | 243,082 | | | $ | 202,358 | | |
Parts and consumables | | Parts and consumables | | $ | 145,680 | | | $ | 124,975 | | | $ | 291,924 | | | $ | 243,082 | |
Capital | Capital | | 70,836 | | | 55,599 | | | 125,192 | | | 109,629 | | Capital | | 75,969 | | | 70,836 | | | 156,205 | | | 125,192 | |
| | $ | 195,811 | | | $ | 152,860 | | | $ | 368,274 | | | $ | 311,987 | | | $ | 221,649 | | | $ | 195,811 | | | $ | 448,129 | | | $ | 368,274 | |
Revenue by Geography (based on customer location): | Revenue by Geography (based on customer location): | | | | | | | | | Revenue by Geography (based on customer location): | | | | | | | | |
North America | North America | | $ | 106,767 | | | $ | 88,718 | | | 201,859 | | | 182,541 | | North America | | $ | 123,964 | | | $ | 106,767 | | | 248,300 | | | 201,859 | |
Europe | Europe | | 55,827 | | | 37,916 | | | 100,468 | | | 73,930 | | Europe | | 52,249 | | | 55,827 | | | 110,615 | | | 100,468 | |
Asia | Asia | | 24,729 | | | 16,237 | | | 46,542 | | | 32,145 | | Asia | | 30,851 | | | 24,729 | | | 62,838 | | | 46,542 | |
Rest of World | | 8,488 | | | 9,989 | | | 19,405 | | | 23,371 | | |
Rest of world | | Rest of world | | 14,585 | | | 8,488 | | | 26,376 | | | 19,405 | |
| | $ | 195,811 | | | $ | 152,860 | | | $ | 368,274 | | | $ | 311,987 | | | $ | 221,649 | | | $ | 195,811 | | | $ | 448,129 | | | $ | 368,274 | |
See Note 910, Business Segment Information, for information on the disaggregation of revenue by reportable operating segment. The following table presents contract balances from contracts with customers:
| | | | July 3, 2021 | | January 2, 2021 | | | July 2, 2022 | | January 1, 2022 |
(In thousands) | (In thousands) | | (In thousands) | |
Accounts Receivable | | $ | 106,791 | | | $ | 91,540 | | |
Contract Assets | Contract Assets | | $ | 6,481 | | | $ | 7,576 | | Contract Assets | | $ | 11,861 | | | $ | 8,626 | |
Contract Liabilities | Contract Liabilities | | $ | 52,031 | | | $ | 39,269 | | Contract Liabilities | | $ | 82,408 | | | $ | 77,004 | |
Contract assets represent unbilled revenue associated with revenue recognized on contracts accounted for on an over time basis, which will be billed in future periods based on the contract terms. Contract liabilities consist of short- and long-term customer deposits, advanced billings, and deferred revenue. Deferred revenue is included in other current liabilities and long-term customer deposits are included in other long-term liabilities in the accompanying condensed consolidated balance sheet. Contract liabilities will be recognized as revenue in future periods once the revenue recognition criteria are met. The majority of the contract liabilities relate to advance payments on contracts accounted for at a point in time. These advance payments will be recognized as revenue when the Company's performance obligations have been satisfied, which typically occurs when the product has shipped and control of the asset has transferred to the customer.
The Company recognized revenue of $13,424,000 in the second quarter of 2022 and $10,070,000 in the second quarter of 2021, $7,158,000$47,901,000 in the second quarterfirst six months of 2020,2022 and $27,210,000 in the first six months of 2021 and $26,866,000 in the first six months of 2020 that was included in the contract liabilities balance at the beginning of 2022 and 2021, and 2020.respectively. The majority of the Company's contracts for capital equipment have an original expected duration of one year or less. Certain capital contracts require long lead times and could take up to 24 months to complete. For contracts with an original expected duration of over one year, the aggregate amount of the transaction price allocated to the remaining unsatisfied or partially unsatisfied performance obligations as of July 3, 20212, 2022 was $12,994,000.$61,659,000. The Company will recognize revenue for these performance obligations as they are satisfied, approximately 39%52% of which is expected to occur within the next twelve months and the remaining 61% within48% after the following twelve months.
second quarter of 2023.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Banker's Acceptance Drafts Included in Accounts Receivable
The Company's Chinese subsidiaries may receive banker's acceptance drafts from customers as payment for their trade accounts receivable. The drafts are non-interest bearing obligations of the issuing bank and generally mature within six months of the origination date. The Company's Chinese subsidiaries may sell the drafts at a discount to a third-party financial institution or transfer the drafts to vendors in settlement of current accounts payable prior to the scheduled maturity date. These drafts, which totaled $10,793,000$7,107,000 at July 3, 20212, 2022 and $9,445,000$8,049,000 at January 2, 2021,1, 2022, are included in accounts receivable in the accompanying condensed consolidated balance sheet until the subsidiary sells the drafts to a bank and receives a discounted amount, transfers the banker's acceptance drafts in settlement of current accounts payable prior to maturity, or obtains cash payment on the scheduled maturity date.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2019-12, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and by clarifying and amending existing guidance, including the recognition of franchise tax, the treatment of a step up in the tax basis of goodwill, and the timing for recognition of enacted changes in tax laws or rates in the interim period annual effective tax rate computation. This new guidance is effective in fiscal 2021, and the transition requirements are primarily prospective. The Company adopted this ASU prospectively at the beginning of fiscal 2021 and its adoption did not have an impact on the condensed consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In March 2020, the FASBFinancial Accounting Standards Board (FASB) issued ASUAccounting Standards Update (ASU) No. 2020-04, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of reference rates, such as the London Interbank Offered Rate (LIBOR), if certain criteria are met. Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date. The guidance in this ASU is applicable to the Company's existing contracts and hedging relationships that reference LIBOR and may be adopted prospectively through December 31, 2022. The Company is currently evaluating the effectsdoes not expect that the adoption of this ASU will have an impact on its consolidated financial statements.
Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. In October 2021, the FASB issued ASU No. 2021-08, which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this ASU will generally result in the Company recognizing contract assets and contract liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date rather than at fair value. This new guidance is effective on a prospective basis in fiscal 2023, with early adoption permitted. The impact of the adoption of this ASU on the Company’s consolidated financial statements will be dependent on the contract assets and liabilities acquired in future business combinations.
2. Gain on Sale and Other Expense, Net
The Company entered into several agreements with the local government in China to sell the existing manufacturing building and land use rights of one of its subsidiaries in China for approximately $25,159,000. This subsidiary, which is part of the stock-preparation product line within the Company's Industrial Processing segment, will continue to occupy its current facility until construction of a new facility is complete. The agreements became effective in the first quarter of 2022 after a 31% down payment was received, including 25% in 2021 and 6% in the first quarter of 2022, and a land use right in a new location was secured. As a result, the Company recognized a gain on the sale of these assets of $20,190,000, or $15,143,000, net of deferred taxes of $5,047,000, in the first quarter of 2022. A receivable of $16,082,000 was recognized for the present value of the remaining amount of the sale proceeds, which is due the earlier of when the government sells the property or within two years from the effective date of the agreements. The amount of the receivable recorded at July 2, 2022 was $15,398,000. This receivable is included in other assets in the accompanying condensed consolidated balance sheet.
In addition, the Company recognized an impairment charge of $182,000 in the first quarter of 2022 associated with the write-down of certain fixed assets that will not be moved to the new facility.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. Earnings per Share
Basic and diluted earnings per share (EPS) were calculated as follows:
| | | | Three Months Ended | | Six Months Ended | | | Three Months Ended | | Six Months Ended |
| | | July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 | | | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 |
(In thousands, except per share amounts) | (In thousands, except per share amounts) | | (In thousands, except per share amounts) | |
| Net Income Attributable to Kadant | Net Income Attributable to Kadant | | $ | 22,864 | | | $ | 11,607 | | | $ | 39,425 | | | $ | 24,138 | | Net Income Attributable to Kadant | | $ | 26,170 | | | $ | 22,864 | | | $ | 67,362 | | | $ | 39,425 | |
| Basic Weighted Average Shares | Basic Weighted Average Shares | | 11,579 | | | 11,482 | | | 11,566 | | | 11,457 | | Basic Weighted Average Shares | | 11,660 | | | 11,579 | | | 11,645 | | | 11,566 | |
Effect of Stock Options, Restricted Stock Units and Employee Stock Purchase Plan Shares | Effect of Stock Options, Restricted Stock Units and Employee Stock Purchase Plan Shares | | 71 | | | 70 | | | 65 | | | 73 | | Effect of Stock Options, Restricted Stock Units and Employee Stock Purchase Plan Shares | | 29 | | | 71 | | | 27 | | | 65 | |
Diluted Weighted Average Shares | Diluted Weighted Average Shares | | 11,650 | | | 11,552 | | | 11,631 | | | 11,530 | | Diluted Weighted Average Shares | | 11,689 | | | 11,650 | | | 11,672 | | | 11,631 | |
| Basic Earnings per Share | Basic Earnings per Share | | $ | 1.97 | | | $ | 1.01 | | | $ | 3.41 | | | $ | 2.11 | | Basic Earnings per Share | | $ | 2.24 | | | $ | 1.97 | | | $ | 5.78 | | | $ | 3.41 | |
| Diluted Earnings per Share | Diluted Earnings per Share | | $ | 1.96 | | | $ | 1.00 | | | $ | 3.39 | | | $ | 2.09 | | Diluted Earnings per Share | | $ | 2.24 | | | $ | 1.96 | | | $ | 5.77 | | | $ | 3.39 | |
The effect of outstanding and unvested restricted stock units (RSUs) of the Company's common stock totaling 8,000 shares in the second quarter of 2022 and 9,000 shares in the second quarter of 2021, 36,00013,000 shares in the second quarterfirst six months of 2020,2022 and 27,000 in the first six months of 2021 and 39,000 in the first six months of 2020 waswere not included in the computation of diluted EPS for the respective periods as the effect would have been antidilutive or, for unvested performance-based RSUs, the performance conditions had not been met as of the end of the reporting periods.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3.4. Provision for Income Taxes
The provision for income taxes was $23,329,000 in the first six months of 2022 and $14,510,000 in the first six months of 2021 and $9,033,000 in the first six months of 2020.2021. The effective tax raterates of 26% and 27% in the first six months of 2022 and 2021, wasrespectively, were higher than the Company's statutory rate of 21% primarily due to the distribution of the Company's worldwide earnings, nondeductible expenses, and state taxes, and for the first six months of 2021, tax expense associated with the Global Intangible Low-Taxed Income (GILTI) provisions. These increases in tax expense were offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements. The effective tax rate of 27% inFor the first six months of 2020 was higher than the Company's statutory rate of 21% primarily due to nondeductible expenses, the distribution of the Company's worldwide earnings, state taxes,2022 and tax expense associated with GILTI provisions. These2021, these increases in tax expense were offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements.
4.5. Short- and Long-Term Obligations
Long-termShort- and long-term obligations are as follows:
| | | | | | | | | | | | | | |
| | July 3, 2021 | | January 2, 2021 |
(In thousands) | | |
Revolving Credit Facility, due 2023 | | $ | 258,722 | | | $ | 217,963 | |
Senior Promissory Notes, due 2023 to 2028 | | 10,000 | | | 10,000 | |
Finance Leases, due 2021 to 2025 | | 1,395 | | | 1,631 | |
Other Borrowings, due 2021 to 2023 | | 3,608 | | | 3,880 | |
Total | | 273,725 | | | 233,474 | |
Less: Current Maturities of Long-Term Obligations | | (1,355) | | | (1,474) | |
Long-Term Obligations | | $ | 272,370 | | | $ | 232,000 | |
| | | | | | | | | | | | | | |
| | July 2, 2022 | | January 1, 2022 |
(In thousands) | | |
Revolving Credit Facility, due 2023 | | $ | 210,450 | | | $ | 250,267 | |
Senior Promissory Notes, due 2023 to 2028 | | 10,000 | | | 10,000 | |
Finance Leases, due 2022 to 2026 | | 1,569 | | | 1,610 | |
Other Borrowings, due 2022 to 2028 | | 6,293 | | | 7,637 | |
Total | | 228,312 | | | 269,514 | |
Less: Short-term Obligations and Current Maturities of Long-Term Obligations | | (4,543) | | | (5,356) | |
Long-Term Obligations | | $ | 223,769 | | | $ | 264,158 | |
See Note 89, Fair Value Measurements and Fair Value of Financial Instruments, for the fair value information related to the Company's long-term obligations.
Revolving Credit Facility
The Company entered into an unsecured multi-currency revolving credit facility, dated as of March 1, 2017 (as amended and restated to date, the Credit Agreement)., which matures on December 14, 2023. Pursuant to the Credit Agreement, the Company has a borrowing capacity of $400,000,000, with an uncommitted, unsecured incremental borrowing facility of $150,000,000, with a maturity date of December 14, 2023.$150,000,000. Interest on borrowings outstanding accrues and is payable in arrears calculated at one of the following rates selected by the Company: (i) the Base Rate, as defined, plus an applicable margin of 0% to 1.25%, or (ii) LIBOREurocurrency Rate,
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
CDOR Rate and RFR (with a 0zero percent floor), as applicable and as defined, plus an applicable margin of 1% to 2.25%. The Base Rate is calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate as published by Citizens Bank, N.A. (Citizens Bank) and (c) thirty-day U.S. dollar LIBOR (USD LIBOR), as defined, plus 0.50%. The applicable margin is determined based upon the ratio of the Company's total debt, net of unrestricted cash up to $30,000,000 and certain debt obligations, to earnings before interest, taxes, depreciation, and amortization as defined in the Credit Agreement.
The obligations under the Credit Agreement may be accelerated upon the occurrence of an event of default, which includes customary events of default under such financing arrangements. In addition, the Credit Agreement contains negative covenants applicable to the Company and its subsidiaries, including financial covenants requiring the Company to maintain a maximum consolidated leverage ratio of 3.75 to 1.00, or, if the Company elects, for the quarter during which a material acquisition occurs and for the three fiscal quarters thereafter, 4.00 to 1.00, and limitations on making certain restricted payments (including dividends and stock repurchases).
Loans under the Credit Agreement are guaranteed by certain domestic subsidiaries of the Company.
In the first six months of 2021, the Company borrowed an aggregate of $88,888,000 under the Credit Agreement, including $85,888,000 of euro-denominated borrowings, which was primarily used to fund an acquisition that closed in the third quarter of 2021. See Note 11, Subsequent Event, for further details. As of July 3, 2021,2, 2022, the outstanding balance under the Credit Agreement was $258,722,000,$210,450,000, which included $113,722,000$70,450,000 of euro-denominated borrowings. As of July 3, 2021,2, 2022, the Company had $140,546,000$189,004,000 of borrowing capacity available under its Credit Agreement, which was calculated by translating its foreign-denominated borrowings using borrowing date foreign exchange rates.The weighted average interest rate for the outstanding balance under the Credit Agreement was 1.48%2.49% as of July 3, 2021.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2, 2022.See Note 78, Derivatives, under the heading Interest Rate Swap Agreement, for information relating to the swap agreement used to hedge the Company’s exposure to movements in the three-month USD LIBOR on its U.S. dollar-denominated debt borrowed under the Credit Agreement.agreement.
Senior Promissory Notes
In 2018, the Company entered into an uncommitted, unsecured Multi-Currency Note Purchase and Private Shelf Agreement (Note Purchase Agreement). Simultaneous with the execution of the Note Purchase Agreement, the Company issued senior promissory notes (Initial Notes) in an aggregate principal amount of $10,000,000, with a per annum interest rate of 4.90% payable semiannually, and a maturity date of December 14, 2028. The Company is required to prepay a portion of the principal of the Initial Notes beginning on December 14, 2023 and each year thereafter, and may optionally prepay the principal on the Initial Notes, together with any prepayment premium, at any time (in a minimum amount of $1,000,000, or the foreign currency equivalent thereof, if applicable) in accordance with the Note Purchase Agreement. The obligations of the Initial Notes may be accelerated upon an event of default as defined in the Note Purchase Agreement, which includes customary events of default under such financing arrangements.
In accordance with the Note Purchase Agreement, the Company may also issue additional senior promissory notes (together with theThe Initial Notes, the Senior Promissory Notes) up to an additional $115,000,000 until the earlier of December 14, 2021 or the thirtieth day after written notice to terminate the issuance and sale of additional notes pursuant to the Note Purchase Agreement. The Senior Promissory Notes are pari passu with the Company’s indebtedness under the Credit Agreement, and any other senior debt of the Company, subject to certain specified exceptions, and participate in a sharing agreement with respect to the obligations of the Company and its subsidiaries under the Credit Agreement. The Senior Promissory Notes are guaranteed by certain of the Company’s domestic subsidiaries.
Debt Compliance
As of July 3, 2021,2, 2022, the Company was in compliance with the covenants related to its debt obligations.
Finance Leases
The Company's finance leases primarily relate to contracts for vehicles.
Other Borrowings
Other borrowings include a sale-leaseback financing arrangement for a manufacturing facility in Germany. Under this arrangement, the quarterly lease payment includes principal, interest, and a payment to the landlord toward a loan receivable. The interest rate on the outstanding obligation is 1.79%. The secured loan receivable, which is included in other current assets in the accompanying condensed consolidated balance sheet, was $1,339,000$1,414,000 at July 3, 2021.2, 2022. The lease arrangement provides for a fixed price purchase option, net of the projected loan receivable, of $1,576,000$1,387,000 at the end of the lease term in August 2022. If2022, In the second quarter of 2022, the Company does not exercise theexercised its purchase option for the facility, the Company will receive cash fromand issued a notice of intent to the landlord to settlepurchase the loan receivable.facility. As of July 3, 2021, $3,573,0002, 2022, $2,920,000 was outstanding under this obligation.
Other borrowings also include $804,000 of short-term obligations and $2,563,000 of debt obligations outstanding at July 2, 2022 assumed in the acquisition of The Clouth Group of Companies (Clouth), which mature on various dates ranging from 2022 through 2028.
5.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. Stock-Based Compensation
The Company recognized stock-based compensation expense of $2,276,000 in the second quarter of 2022 and $2,527,000 in the second quarter of 2021, $1,877,000 in the second quarter of 2020, $4,026,000$4,536,000 in the first six months of 2021,2022, and $3,516,000 in the first six months of 20202021 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 price of the Company's common stock, reduced by the present value of estimated dividends foregone during the requisite service period. For time-based RSUs, compensation expense is recognized ratably over the requisite service period for the entire award based on the grant date fair value, and net of actual forfeitures recorded when they occur. For performance-based RSUs, compensation expense is recognized ratably over the requisite service period for each separately vesting portion of the award based on the grant date fair value, net of actual forfeitures recorded when they occur, and remeasured each reporting period until the total number of RSUs to be issued is known. Unrecognized compensation expense related to stock-based compensation totaled approximately $11,872,000$10,331,000 at July 3, 2021 and2, 2022, which will be recognized over a weighted average period of 1.91.8 years.
OnIn May 19, 2021,2022, the Company granted an aggregate of 5,0455,175 RSUs to its non-employee directors with a grant date fair value of $850,000. Half$935,000. Of these 5,175 RSUs, 4,705 were granted to its incumbent non-employee directors with the remaining 470 RSUs granted to the Company's new non-employee director who became a director effective as of May 1, 2022. For the incumbent non-employee directors, half of these RSUs vested on June 1, 2021 and2022 with the remaining RSUs willto vest ratably on the last day of the third and fourth fiscal quarters of 2021.2022. For the new non-employee director, half of the RSUs will vest on the last day of the third fiscal quarter and the other half on the last day of the fourth fiscal quarter of 2022.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6.7. Accumulated Other Comprehensive Items
Comprehensive income combines net income and other comprehensive items, which represent certain amounts that are reported as components of stockholders' equity in the accompanying condensed consolidated balance sheet.
Changes in each component of accumulated other comprehensive items (AOCI), net of tax, are as follows:
| (In thousands) | (In thousands) | | Foreign Currency Translation Adjustment | | Post-Retirement Benefit Liability Adjustments | | Deferred Loss on Cash Flow Hedges | | Total | (In thousands) | | Foreign Currency Translation Adjustment | | Post-Retirement Benefit Liability Adjustments | | Deferred Loss on Cash Flow Hedges | | Total |
Balance at January 2, 2021 | | $ | (17,894) | | | $ | (770) | | | $ | (828) | | | $ | (19,492) | | |
Balance at January 1, 2022 | | Balance at January 1, 2022 | | $ | (29,096) | | | $ | (792) | | | $ | (462) | | | $ | (30,350) | |
Other comprehensive items before reclassifications | Other comprehensive items before reclassifications | | (608) | | | 13 | | | 9 | | | (586) | | Other comprehensive items before reclassifications | | (21,492) | | | 27 | | | 276 | | | (21,189) | |
Reclassifications from AOCI | Reclassifications from AOCI | | 0 | | | 20 | | | 169 | | | 189 | | Reclassifications from AOCI | | — | | | 13 | | | 147 | | | 160 | |
Net current period other comprehensive items | Net current period other comprehensive items | | (608) | | | 33 | | | 178 | | | (397) | | Net current period other comprehensive items | | (21,492) | | | 40 | | | 423 | | | (21,029) | |
Balance at July 3, 2021 | | $ | (18,502) | | | $ | (737) | | | $ | (650) | | | $ | (19,889) | | |
Balance at July 2, 2022 | | Balance at July 2, 2022 | | $ | (50,588) | | | $ | (752) | | | $ | (39) | | | $ | (51,379) | |
| | | | | | | | | | |
Amounts reclassified from AOCI are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | |
(In thousands) | | July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 | | Statement of Income Line Item |
Post-retirement Benefit Plans | | | | | | | | | | |
Recognized net actuarial loss | | $ | (11) | | | $ | (14) | | | $ | (22) | | | $ | (29) | | | Other expense, net |
Amortization of prior service cost | | (3) | | | (1) | | | (6) | | | (3) | | | Other expense, net |
Total expense before income taxes | | (14) | | | (15) | | | (28) | | | (32) | | | |
Income tax benefit | | 4 | | | 4 | | | 8 | | | 128 | | | Provision for income taxes |
| | (10) | | | (11) | | | (20) | | | 96 | | | |
Cash Flow Hedges (a) | | | | | | | | | | |
Interest rate swap agreements | | (113) | | | (72) | | | (222) | | | (106) | | | Interest expense |
Forward currency-exchange contracts | | 0 | | | 0 | | | 0 | | | (23) | | | Cost of revenue |
Total expense before income taxes | | (113) | | | (72) | | | (222) | | | (129) | | | |
Income tax benefit | | 27 | | | 17 | | | 53 | | | 31 | | | Provision for income taxes |
| | (86) | | | (55) | | | (169) | | | (98) | | | |
Total Reclassifications | | $ | (96) | | | $ | (66) | | | $ | (189) | | | $ | (2) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | |
(In thousands) | | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 | | Statement of Income Line Item |
Post-retirement Benefit Plans | | | | | | | | | | |
Recognized net actuarial loss | | $ | (6) | | | $ | (11) | | | $ | (13) | | | $ | (22) | | | Other expense, net |
Amortization of prior service cost | | (2) | | | (3) | | | (5) | | | (6) | | | Other expense, net |
Total expense before income taxes | | (8) | | | (14) | | | (18) | | | (28) | | | |
Income tax benefit | | 2 | | | 4 | | | 5 | | | 8 | | | Provision for income taxes |
| | (6) | | | (10) | | | (13) | | | (20) | | | |
Cash Flow Hedges (a) | | | | | | | | | | |
Interest rate swap agreements | | (83) | | | (113) | | | (194) | | | (222) | | | Interest expense |
| | | | | | | | | | |
Income tax benefit | | 20 | | | 27 | | | 47 | | | 53 | | | Provision for income taxes |
| | (63) | | | (86) | | | (147) | | | (169) | | | |
Total Reclassifications | | $ | (69) | | | $ | (96) | | | $ | (160) | | | $ | (189) | | | |
(a)See Note 78, Derivatives, for additional information.
KADANT INC.
7.Notes to Condensed Consolidated Financial Statements
(Unaudited)
8. Derivatives
Interest Rate Swap Agreement
In 2018, the Company entered into an interest rate swap agreement (2018 Swap Agreement) with Citizens Bank to hedge its exposure to movements in USD LIBOR on its U.S. dollar-denominated debt. The 2018 Swap Agreement has a $15,000,000 notional value and expires on June 30, 2023. On a quarterly basis, the Company receives three-month USD LIBOR, which is subject to a zero percent floor, and pays a fixed rate of interest of 3.15% plus an applicable margin as defined in the Credit Agreement.
The Company designated its 2018 Swap Agreement as a cash flow hedge and structured it to be 100% effective. Unrealized gains and losses related to the fair value of the 2018 Swap Agreement are recorded to AOCI, net of tax. In the event of early termination, the Company will receive from or pay to the counterparty the fair value of the 2018 Swap Agreement, and the unrealized gain or loss outstanding will be recognized in earnings.
The counterparty to the 2018 Swap Agreement could demand an early termination of that agreement if the Company were to be in default under the Credit Agreement, or any agreement that amends or replaces the Credit Agreement in which the counterparty is a member, and if it were to be unable to cure the default. See Note 45, Short- and Long-Term Obligations, for further details.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Forward Currency-Exchange Contracts
The Company uses forward currency-exchange contracts that generally have maturities of twelve months or less to hedge exposures resulting from fluctuations in currency exchange rates. Such exposures result from assets and liabilities that are denominated in currencies other than the functional currencies of the Company's subsidiaries.
Forward currency-exchange contracts that hedge forecasted accounts receivable or accounts payable are designated as cash flow hedges and unrecognized gains and losses are recorded to AOCI, net of tax. Deferred gains and losses are recognized in the statement of income in the period in which the underlying transaction occurs. The fair values of forward currency-exchange contracts that are designated as fair value hedges and forward currency-exchange contracts that are not designated as hedges are recognized currently in earnings.
Gains and losses reported within SG&A expenses in the accompanying condensed consolidated statement of income associated with the Company's forward currency-exchange contracts that were not designated as hedges were not material for the three-andthree- and six-month periods ended July 2, 2022 and July 3, 2021 and June 27, 2020.2021.
The following table summarizes the fair value of derivative instruments in the accompanying condensed consolidated balance sheet:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | July 3, 2021 | | January 2, 2021 |
| | Balance Sheet Location | | Asset (Liability) (a) | | Notional Amount (b) | | Asset (Liability) (a) | | Notional Amount |
(In thousands) | | | | | |
Derivatives Designated as Hedging Instruments: | | | | | | | | |
Derivatives in an Asset Position: | | | | | | | | | | |
Forward currency-exchange contract | | Other Current Assets | | $ | 0 | | | $ | 0 | | | $ | 25 | | | $ | 842 | |
Derivatives in a Liability Position: | | | | | | | | | | |
Forward currency-exchange contract | | Other Current Liabilities | | $ | (6) | | | $ | 842 | | | $ | 0 | | | $ | 0 | |
2018 Swap Agreement | | Other Long-Term Liabilities | | $ | (850) | | | $ | 15,000 | | | $ | (1,099) | | | $ | 15,000 | |
| | | | | | | | | | |
Derivatives Not Designated as Hedging Instruments: | | | | | | | | |
Derivatives in an Asset Position: | | | | | | | | | | |
Forward currency-exchange contracts | | Other Current Assets | | $ | 0 | | | $ | 0 | | | $ | 12 | | | $ | 582 | |
Derivatives in a Liability Position: | | | | | | | | | | |
Forward currency-exchange contracts | | Other Current Liabilities | | $ | 0 | | | $ | 0 | | | $ | (7) | | | $ | 825 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | July 2, 2022 | | January 1, 2022 |
| | Balance Sheet Location | | Asset (Liability) (a) | | Notional Amount (b) | | Asset (Liability) (a) | | Notional Amount |
(In thousands) | | | | | |
Derivatives Designated as Hedging Instruments: | | | | | | | | |
Derivative in an Asset Position: | | | | | | | | |
2018 Swap Agreement | | Other Current Assets | | $ | 3 | | | $ | 15,000 | | | $ | — | | | $ | — | |
Derivatives in a Liability Position: | | | | | | | | |
Forward currency-exchange contracts | | Other Current Liabilities | | $ | (56) | | | $ | 430 | | | $ | (44) | | | $ | 842 | |
2018 Swap Agreement | | Other Long-Term Liabilities | | $ | — | | | $ | — | | | $ | (550) | | | $ | 15,000 | |
| | | | | | | | | | |
Derivatives Not Designated as Hedging Instruments: | | | | | | | | |
Derivatives in an Asset Position: | | | | | | | | |
Forward currency-exchange contracts | | Other Current Assets | | $ | — | | | $ | — | | | $ | 14 | | | $ | 1,200 | |
Derivative in a Liability Position: | | | | | | | | |
Forward currency-exchange contract | | Other Current Liabilities | | $ | (2) | | | $ | 189 | | | $ | — | | | $ | — | |
(a) See Note 89, Fair Value Measurements and Fair Value of Financial Instruments, for the fair value measurements relating to these financial instruments. (b) The 20212022 notional amounts are indicative of the level of the Company's recurring derivative activity.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 six months ended July 3, 2021:2, 2022:
| (In thousands) | (In thousands) | | Interest Rate Swap Agreement | | Forward Currency- Exchange Contract | | Total | (In thousands) | | Interest Rate Swap Agreement | | Forward Currency- Exchange Contract | | Total |
Unrealized (Loss) Gain, Net of Tax, at January 2, 2021 | | $ | (846) | | | $ | 18 | | | $ | (828) | | |
Unrealized Loss, Net of Tax, at January 1, 2022 | | Unrealized Loss, Net of Tax, at January 1, 2022 | | $ | (429) | | | $ | (33) | | | $ | (462) | |
Loss reclassified to earnings (a) | Loss reclassified to earnings (a) | | 169 | | | 0 | | | 169 | | Loss reclassified to earnings (a) | | 147 | | | — | | | 147 | |
Gain (loss) recognized in AOCI | Gain (loss) recognized in AOCI | | 32 | | | (23) | | | 9 | | Gain (loss) recognized in AOCI | | 284 | | | (8) | | | 276 | |
Unrealized Loss, Net of Tax, at July 3, 2021 | | $ | (645) | | | $ | (5) | | | $ | (650) | | |
Unrealized Gain (Loss), Net of Tax, at July 2, 2022 | | Unrealized Gain (Loss), Net of Tax, at July 2, 2022 | | $ | 2 | | | $ | (41) | | | $ | (39) | |
(a) See Note 67, Accumulated Other Comprehensive Items, for the income statement classification.
As of July 3, 2021,2, 2022, the Company expects to reclassify losses of $348,000$39,000 from AOCI to earnings over the next twelve months based on the estimated cash flows of the 2018 Swap Agreement and the maturity date of the forward currency-exchange contract.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
8.9. Fair Value Measurements and Fair Value of Financial Instruments
Fair value measurement is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
•Level 1—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 July 3, 2021 | | Fair Value as of July 2, 2022 |
(In thousands) | (In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | (In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | Assets: | | | | | | | | | Assets: | | | | | | | | |
Money market funds and time deposits | Money market funds and time deposits | | $ | 11,250 | | | $ | 0 | | | $ | 0 | | | $ | 11,250 | | Money market funds and time deposits | | $ | 15,729 | | | $ | — | | | $ | — | | | $ | 15,729 | |
| Banker's acceptance drafts (a) | Banker's acceptance drafts (a) | | $ | 0 | | | $ | 10,793 | | | $ | 0 | | | $ | 10,793 | | Banker's acceptance drafts (a) | | $ | — | | | $ | 7,107 | | | $ | — | | | $ | 7,107 | |
2018 Swap Agreement | | 2018 Swap Agreement | | $ | — | | | $ | 3 | | | $ | — | | | $ | 3 | |
| Liabilities: | Liabilities: | | | | | | | | | Liabilities: | | | | | | | | |
2018 Swap Agreement | | $ | 0 | | | $ | 850 | | | $ | 0 | | | $ | 850 | | |
Forward currency-exchange contract | | $ | 0 | | | $ | 6 | | | $ | 0 | | | $ | 6 | | |
| Forward currency-exchange contracts (b) | | Forward currency-exchange contracts (b) | | $ | — | | | $ | 58 | | | $ | — | | | $ | 58 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value as of January 2, 2021 |
(In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | |
Money market funds and time deposits | | $ | 8,054 | | | $ | 0 | | | $ | 0 | | | $ | 8,054 | |
Banker's acceptance drafts (a) | | $ | 0 | | | $ | 9,445 | | | $ | 0 | | | $ | 9,445 | |
Forward currency-exchange contracts | | $ | 0 | | | $ | 37 | | | $ | 0 | | | $ | 37 | |
Liabilities: | | | | | | | | |
2018 Swap Agreement | | $ | 0 | | | $ | 1,099 | | | $ | 0 | | | $ | 1,099 | |
Forward currency-exchange contracts | | $ | 0 | | | $ | 7 | | | $ | 0 | | | $ | 7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value as of January 1, 2022 |
(In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | |
Money market funds and time deposits | | $ | 13,458 | | | $ | — | | | $ | — | | | $ | 13,458 | |
Banker's acceptance drafts (a) | | $ | — | | | $ | 8,049 | | | $ | — | | | $ | 8,049 | |
Forward currency-exchange contracts | | $ | — | | | $ | 14 | | | $ | — | | | $ | 14 | |
Liabilities: | | | | | | | | |
2018 Swap Agreement | | $ | — | | | $ | 550 | | | $ | — | | | $ | 550 | |
Forward currency-exchange contract | | $ | — | | | $ | 44 | | | $ | — | | | $ | 44 | |
(a)Included in accounts receivable in the accompanying condensed consolidated balance sheet.
(b)Includes derivatives designated as hedging instruments of $56,000 and derivatives not designated as hedging instruments of $2,000.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 six months of 2021.2022. Banker's acceptance drafts are carried at face value, which approximates their fair value due to the short-term nature of the negotiable instrument. The fair values of the forward currency-exchange contracts are based on quoted forward foreign exchange rates at the reporting date. The fair value of the 2018 Swap Agreement is based on USD LIBOR yield curves at the reporting date. The forward currency-exchange contracts and the 2018 Swap Agreement are hedges of either recorded assets or liabilities or anticipated transactions and represent the estimated amount the Company would receive or pay upon liquidation of the contracts. Changes in values of the underlying hedged assets and liabilities or anticipated transactions are not reflected in the table above.
The carrying value and fair value of debt obligations, excluding lease obligations, and other borrowings, are as follows:
| | | | July 3, 2021 | | January 2, 2021 | | | July 2, 2022 | | January 1, 2022 |
| | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
(In thousands) | (In thousands) | | (In thousands) | |
Debt Obligations: | Debt Obligations: | | | | | | | | | Debt Obligations: | | | | | | | | |
Revolving credit facility | Revolving credit facility | | $ | 258,722 | | | $ | 258,722 | | | $ | 217,963 | | | $ | 217,963 | | Revolving credit facility | | $ | 210,450 | | | $ | 210,450 | | | $ | 250,267 | | | $ | 250,267 | |
Senior promissory notes | Senior promissory notes | | 10,000 | | | 11,095 | | | 10,000 | | | 11,157 | | Senior promissory notes | | 10,000 | | | 10,023 | | | 10,000 | | | 10,947 | |
Other | | Other | | 3,367 | | | 3,367 | | | 4,331 | | | 4,331 | |
| | $ | 268,722 | | | $ | 269,817 | | | $ | 227,963 | | | $ | 229,120 | | | $ | 223,817 | | | $ | 223,840 | | | $ | 264,598 | | | $ | 265,545 | |
The carrying value of the Company's revolving credit facility approximates the fair value as the obligation bears variable rates of interest, which adjust frequently, based on prevailing market rates. The fair value of the senior promissory notes is primarily calculated based on quoted market rates plus an applicable margin available to the Company at the respective period ends,end, which represent Level 2 measurements.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
9.10. Business Segment Information
The Company has combined its operating entities into 3 reportable operating segments: Flow Control, Industrial Processing, and Material Handling. The Flow Control segment consists of the fluid-handling and doctoring, cleaning, & filtration product lines; the Industrial Processing segment consists of the wood processing and stock-preparation product lines; and the Material Handling segment consists of the conveying and screening,vibratory, baling, and fiber-based product lines. A description of each segment follows.
•Flow Control – Custom-engineered products, systems, and technologies that control the flow of fluids used in industrial and commercial applications to keep critical processes running efficiently in the packaging, tissue, food, metals, and other industrial sectors. The Company's primary products include rotary sealing devices, steam systems, expansion joints, doctor systems, roll and fabric cleaning devices, and filtration and fiber recovery systems.
•Industrial Processing – Equipment, machinery, and technologies used to recycle paper and paperboard and process timber for use in the packaging, tissue, wood products and alternative fuel industries, among others. The Company's primary products include stock-preparation systems and recycling equipment, chemical pulping equipment, debarkers, stranders, chippers, and logging machinery. In addition, the Company provides industrial automation and digitization solutions to process industries.
•Material Handling – Products and engineered systems used to handle bulk and discrete materials for secondary processing or transport in the aggregates, mining, food, and waste management industries, among others. The Company's primary products include conveying and vibratory equipment and balers. In addition, the Company manufactures and sells biodegradable, absorbent granules used as carriers in agricultural applications and for oil and grease absorption.
The following table presents financial information for the Company's reportable operating segments:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | July 3, | | June 27, | | July 3, | | June 27, |
(In thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Revenue | | | | | | | | |
Flow Control | | $ | 70,762 | | | $ | 51,365 | | | $ | 134,516 | | | $ | 108,514 | |
Industrial Processing | | 82,681 | | | 65,673 | | | 151,835 | | | 130,382 | |
Material Handling | | 42,368 | | | 35,822 | | | 81,923 | | | 73,091 | |
| | $ | 195,811 | | | $ | 152,860 | | | $ | 368,274 | | | $ | 311,987 | |
| | | | | | | | |
Income Before Provision for Income Taxes | | | | | | | | |
Flow Control (a) | | $ | 19,324 | | | $ | 10,260 | | | $ | 34,770 | | | $ | 23,590 | |
Industrial Processing (b) | | 17,301 | | | 10,639 | | | 28,434 | | | 20,075 | |
Material Handling | | 5,592 | | | 3,593 | | | 10,035 | | | 7,727 | |
Corporate (c) | | (9,207) | | | (6,371) | | | (16,802) | | | (13,616) | |
Total operating income | | 33,010 | | | 18,121 | | | 56,437 | | | 37,776 | |
Interest expense, net (d) | | (1,010) | | | (1,894) | | | (2,056) | | | (4,302) | |
Other expense, net (d) | | (24) | | | (31) | | | (48) | | | (63) | |
| | $ | 31,976 | | | $ | 16,196 | | | $ | 54,333 | | | $ | 33,411 | |
| | | | | | | | |
Capital Expenditures | | | | | | | | |
Flow Control | | $ | 368 | | | $ | 337 | | | $ | 702 | | | $ | 1,158 | |
Industrial Processing | | 1,191 | | | 211 | | | 2,995 | | | 1,675 | |
Material Handling | | 495 | | | 283 | | | 616 | | | 681 | |
Corporate | | 5 | | | 80 | | | 5 | | | 83 | |
| | $ | 2,059 | | | $ | 911 | | | $ | 4,318 | | | $ | 3,597 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(a) Includes acquisition costs of $239,000 in the three months ended July 3, 2021 and $1,236,000 in the six months ended July 3, 2021 and restructuring costs of $456,000 in the three- and six-month periods ended June 27, 2020.
(b) Includes $435,000 of acquisition-related expense in the three- and six-month periods ended June 27, 2020. Acquisition-related expenses include amortization expense associated with backlog and acquisition costs.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table presents financial information for the Company's reportable operating segments:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | July 2, | | July 3, | | July 2, | | July 3, |
(In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Revenue | | | | | | | | |
Flow Control (a) | | $ | 85,220 | | | $ | 70,762 | | | $ | 171,046 | | | $ | 134,516 | |
Industrial Processing | | 84,402 | | | 82,681 | | | 177,487 | | | 151,835 | |
Material Handling (b) | | 52,027 | | | 42,368 | | | 99,596 | | | 81,923 | |
| | $ | 221,649 | | | $ | 195,811 | | | $ | 448,129 | | | $ | 368,274 | |
| | | | | | | | |
Income Before Provision for Income Taxes | | | | | | | | |
Flow Control (a,c) | | $ | 22,707 | | | $ | 19,324 | | | $ | 44,432 | | | $ | 34,770 | |
Industrial Processing (d,f) | | 15,285 | | | 17,248 | | | 53,444 | | | 28,354 | |
Material Handling (b,e,f) | | 8,701 | | | 5,281 | | | 14,545 | | | 9,450 | |
Corporate (g,f) | | (9,225) | | | (8,843) | | | (18,980) | | | (16,137) | |
Total operating income | | 37,468 | | | 33,010 | | | 93,441 | | | 56,437 | |
Interest expense, net (h) | | (1,089) | | | (1,010) | | | (2,221) | | | (2,056) | |
Other expense, net (h) | | (19) | | | (24) | | | (41) | | | (48) | |
| | $ | 36,360 | | | $ | 31,976 | | | $ | 91,179 | | | $ | 54,333 | |
| | | | | | | | |
Capital Expenditures | | | | | | | | |
Flow Control | | $ | 1,031 | | | $ | 368 | | | $ | 1,556 | | | $ | 702 | |
Industrial Processing (i) | | 5,073 | | | 1,191 | | | 7,025 | | | 2,995 | |
Material Handling | | 843 | | | 495 | | | 1,227 | | | 616 | |
Corporate | | — | | | 5 | | | 7 | | | 5 | |
| | $ | 6,947 | | | $ | 2,059 | | | $ | 9,815 | | | $ | 4,318 | |
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(a)Includes results in 2022 from Clouth, which was acquired between July 19, 2021 and August 10, 2021.
(b)Includes results in 2022 from the East Chicago Machine Tool Corporation (Balemaster), which was acquired on August 23, 2021.
(c)Includes acquisition costs of $62,000 in the six months ended July 2, 2022 and $239,000 and $1,236,000 in the three and six months ended July 3, 2021, respectively.
(d)Includes a gain on the sale of a facility of $20,190,000, non-cash charges for the write-off of an indemnification asset of $575,000, and the write-down of machinery and equipment of $182,000 in the six months ended July 2, 2022. Includes acquisition-related expenses of $53,000 and $140,000 in the three and six months ended July 3, 2021, respectively. Acquisition-related expenses include acquisition costs and amortization expense associated with acquired backlog.
(e)Includes acquisition-related expenses of $717,000 in the six months ended July 2, 2022 and $338,000 and $612,000 in the three and six months ended July 3, 2021, respectively.
(f)Includes a reclassification of acquisition costs from Corporate to the Industrial Processing and Material Handling segments in the three and six months ended July 3, 2021. The results in the three months ended July 3, 2021, include a decrease in operating loss for Corporate of $364,000 and a decrease in operating income of $53,000 and $311,000 for the Industrial Processing and Material Handling segments, respectively, and a decrease in operating loss for Corporate of $665,000 and a decrease in operating income of $80,000 and $585,000 for the Industrial Processing and Material Handling segments, respectively, in the six months ended July 3, 2021.
(g)Represents general and administrative expenses.
(d) (h)The Company does not allocate interest and other expense, net to its segments.
(i)Includes capital expenditures of $3,128,000 and $3,242,000 in the three and six months ended July 2, 2022, respectively, associated with the construction of a manufacturing facility and building relocation project in China. See Note2, Gain on Sale and Other Expense, Net.
10.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
11. Commitments and Contingencies
Right of Recourse
In the ordinary course of business, the Company's Chinese subsidiaries may receive banker's acceptance drafts from customers as payment for their trade accounts receivable. The drafts are non-interest bearing obligations of the issuing bank and generally mature within six months of the origination date. The Company's Chinese subsidiaries may use these banker's acceptance drafts prior to the scheduled maturity date to settle outstanding accounts payable with vendors. Banker's acceptance drafts transferred to vendors are subject to customary right of recourse provisions prior to their scheduled maturity dates. The Company had $9,723,000$11,080,000 at July 3, 20212, 2022 and $7,568,000$9,593,000 at January 2, 20211, 2022 of banker's acceptance drafts subject to recourse, which were transferred to vendors and had not reached their scheduled maturity dates. Historically, the banker's acceptance drafts have settled upon maturity without any claim of recourse against the Company.
Litigation
From time to time, the Company is subject to various claims and legal proceedings covering a range of matters that arise in the ordinary course of business. Such litigation may include, but is not limited to, claims and counterclaims by and against the Company for breach of contract or warranty, canceled contracts, product liability, or bankruptcy-related claims. For legal proceedings in which a loss is probable and estimable, the Company accrues a loss based on the low end of the range of estimated loss when there is no better estimate within the range. If the Company were found to be liable for any of the claims or counterclaims against it, the Company would incur a charge against earnings for amounts in excess of legal accruals.
11. Subsequent Event
Acquisition
In the third quarter of 2021, Kadant Germany Holding GmbH, a subsidiary of the Company, acquired all partnership interests and shares in The Clouth Group of Companies (Clouth), for approximately 78,000,000 euros, or $92,000,000, net of cash acquired and debt assumed. The majority of the Clouth companies were acquired on July 19, 2021 and the acquisition of the last legal entity occurred on August 10, 2021. The Company funded the purchase price with existing cash and borrowings of approximately $82,877,000 of euro-denominated funds under the Credit Agreement, of which $78,749,000 was borrowed in the second quarter of 2021. At July 3, 2021, $84,249,000 of the purchase price was held in escrow and was classified as restricted cash in the accompanying condensed consolidated balance sheet. Clouth is a leading manufacturer of doctor blades and related equipment used in the production of paper, packaging, and tissue and will be included within the Company's Flow Control segment. The Company expects several synergies in connection with this acquisition, including deepening the Company's presence in the growing ceramic blade market and expansion of sales at its existing businesses by leveraging Clouth's complementary global geographic footprint. Clouth has 2 manufacturing facilities in Germany and 1 in Poland and generated revenue of approximately 41,000,000 euros in 2020. The excess of the purchase price for the acquisition of Clouth over the net assets acquired will be recorded as goodwill. The purchase price allocation for this acquisition is not presented as the preliminary valuation of Clouth has not been completed.
Unaudited Supplemental Pro Forma Information
Had the acquisition of Clouth been completed as of the beginning of 2020, the Company’s pro forma results of operations for the three- and six-month periods ended July 3, 2021 and June 27, 2020 would have been as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 |
(In thousands, except per share amounts) | | | | |
Revenue | | $ | 207,740 | | | $ | 164,248 | | | $ | 392,128 | | | $ | 334,796 | |
Net Income Attributable to Kadant | | $ | 23,663 | | | $ | 10,276 | | | $ | 41,522 | | | $ | 20,147 | |
Earnings per Share Attributable to Kadant | | | | | | | | |
Basic | | $ | 2.04 | | | $ | 0.89 | | | $ | 3.59 | | | $ | 1.76 | |
Diluted | | $ | 2.03 | | | $ | 0.89 | | | $ | 3.57 | | | $ | 1.75 | |
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The historical consolidated financial information of the Company and Clouth has been adjusted in the pro forma information above to give effect to pro forma events that are directly attributable to the acquisition and related financing arrangements, are expected to have a continuing impact on the Company, and are factually supportable.
Pro forma results include the following non-recurring pro forma adjustments that were directly attributable to the acquisition:
•Estimated pre-tax charge to cost of revenue of $1,753,000 in the three months ended June 27, 2020 and $3,505,000 in the six months ended June 27, 2020, for the sale of inventory revalued at the date of acquisition.
•Estimated pre-tax charge to SG&A expenses of $239,000 in the three months ended June 27, 2020 and $1,673,000 in the six months ended June 27, 2020 and reversal of $239,000 in the three months ended July 3, 2021 and $1,236,000 in the six months ended July 3, 2021, for acquisition costs and intangible asset amortization related to acquired backlog.
•Estimated tax effects related to the pro forma adjustments.
These pro forma results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that would have resulted had the acquisition of Clouth occurred as of the beginning of 2020, or that may result in the future.
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations
When we use the terms “we,” “us,” “our,”"we," "us," "our," and the “Company,”"Company," we mean Kadant Inc., a Delaware corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.
This Quarterly Report on Form 10-Q and the documents we incorporate by reference in this report include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements are not statements of historical fact and may include statements regarding possible or assumed future results of operations. Forward-looking statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management, using information currently available to our management. When we use words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "seeks," "should," "likely," "will," "would," "may," "continue," "could," or similar expressions, we are making forward-looking statements.
Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions. Our future results of operations may differ materially from those expressed in the forward-looking statements. Many of the important factors that will determine these results and values are beyond our ability to control or predict. You should not put undue reliance on any forward-looking statements. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise. For a discussion of important factors that may cause our actual results to differ materially from those suggested by the forward-looking statements, you should read carefully Risk Factors included in Part II, Item 1A, of this report and Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended January 2, 2021, as filed with the Securities and Exchange Commission (SEC)1, 2022 (the Annual Report) and as may be further amended and/or restated in subsequent filings with the SEC.
Overview
Company Background
We are a global supplier of high-value, critical componentstechnologies and engineered systems used in process industries worldwide.that drive Sustainable Industrial Processing. Our products technologies, and services play an integral role in enhancing process efficiency, optimizing energy utilization, and maximizing productivity in resource-intensive industries.process industries while helping our customers advance their sustainability initiatives with products that reduce waste or generate more yield with fewer inputs, particularly fiber, energy, and water. Producing more while consuming less is a core aspect of Sustainable Industrial Processing and a major element of the strategic focus of our operating segments.
Our financial results are reported in three reportable operating segments: Flow Control, Industrial Processing, and Material Handling. The Flow Control segment consists of our fluid-handling and doctoring, cleaning, & filtration product lines; the Industrial Processing segment consists of our wood processing and stock-preparation product lines; and the Material Handling segment consists of our conveying and screening,vibratory, baling, and fiber-based product lines. A description of each segment is as follows:
•Flow Control – Custom-engineered products, systems, and technologies that control the flow of fluids used in industrial and commercial applications to keep critical processes running efficiently in the packaging, tissue, food, metals, and other industrial sectors. Our primary products include rotary sealing devices, steam systems, expansion joints, doctor systems, roll and fabric cleaning devices, and filtration and fiber recovery systems.
•Industrial Processing – Equipment, machinery, and technologies used to recycle paper and paperboard and process timber for use in the packaging, tissue, wood products, and alternative fuel industries, among others. Our primary products include stock-preparation systems and recycling equipment, chemical pulping equipment, debarkers, stranders, chippers, and logging machinery. In addition, we provide industrial automation and digitization solutions to process industries.
•Material Handling – Products and engineered systems used to handle bulk and discrete materials for secondary processing or transport in the aggregates, mining, food, and waste management industries, among others. Our primary products include conveying and vibratory equipment and balers. In addition, we manufacture and sell biodegradable, absorbent granules used as carriers in agricultural applications and for oil and grease absorption.
Industry and Business Overview
We had record consolidated bookings of $213$265.9 million in the second quarter of 2021, including2022 down slightly from our record bookings of $266.1 million in the first quarter of 2022. Our consolidated bookings in the second quarter of 2022 included $25.9 million attributable to our acquisitions. See Acquisitions below for capital equipment andfurther details. We also had a higher unfavorable foreign currency translation impact compared to prior quarters due to the strengthening U.S. dollar resulting in a $9.9 million, or 4%, decrease in bookings compared to the second quarter of 2021. Following our record first quarter 2022 bookings, we continued
to see strong demand for ourboth parts and consumables and capital equipment products. This follows previous consolidatedWe expect a lower level of bookings records set in the prior two quarters as our businesses continue to rebound from the impactsecond half of the COVID-19 pandemic, which adversely affected ouryear compared to the record bookings and revenue for a substantial partin the first half of 2020.2022 as end-market demand slows in response to actions taken by the central banks to control inflation. We ended the second quarter of 20212022 with a record consolidated backlog of $242$379.2 million. An overview of our business by segment is as follows:
•Flow Control – Orders for our parts and consumables products at ourOur Flow Control businesses began to recoversegment had its second highest bookings quarter, following our record bookings in the latter part of 2020 and this trend continued throughfirst quarter, increasing 36% compared to the second quarter of 2021. This was due in part to customer maintenance requirements and pent-up demand resultingincrease included a 19% increase from the adverse effect of pandemic-related downtimes and shutdowns, as well as visitation restrictions at many customer facilities earlier in 2020. Capital equipment bookings increased in 2021 from depressed levels during most of 2020 resulting from improved market conditions and pent-up demand for our products. We expect orders for our existing products to moderate in the second half of the year while revenues are expected to remain strong due to a record backlog at the end of the second quarter of 2021. The results related to our acquisition of The Clouth Group of Companies (Clouth) and a 5% decrease from the unfavorable effect of foreign currency translation. Orders for both parts and consumables products and capital equipment at our existing Flow Control businesses continue to be strong due to growth in the third quarterindustries we serve. We expect bookings to moderate in the second half of 2021 will be included in this segment going forward. See Acquisitions below for further details.2022 compared with the record-setting booking performance achieved during the first half of the year.
•Industrial Processing – We had recordOur Industrial Processing segment bookings inincreased 3% sequentially and 8% compared to the second quarter at our Industrial Processing segment, led by capital equipment orders at our Chinese stock-preparation business. Bookings for parts and consumables products continue to be strong across our stock-preparation businesses due to the ongoing recoveryof 2021 resulting from the downturn encountered in 2020. Additionally, we saw continued strong demand for our capital equipment at our wood processing products, which we expectbusiness due to continue through the second half of 2021. This demand was fueled by a robust U.S. housing market and high demand for lumber, oriented strand board and plywood, which has increased mill run rates resulting in higher parts consumption and capital equipment investment by our customers.
•Material Handling – Bookingsplywood. Capital bookings at our Material Handling segment have improved from depressedstock-preparation business were lower in the second quarter of 2022 compared to the record bookings levels in mid-2020. Demand forthe second and third quarters of 2021. While we continue to experience robust capital project activity, we expect a lower level of capital bookings in our baling products continuesIndustrial Processing segment in the third quarter of 2022 compared to be bolstered by improved business conditions in Europe, includingprior quarters as customers assess new capital expenditures, and as the recoverypace of recycled commodity prices.capacity expansion moderates and new equipment is brought online. Orders for parts and consumables products at our Industrial Processing segment increased over the second quarter of 2021 due to continued improvement in market conditions.
•Material Handling – Our Material Handling segment bookings increased 49% compared to the second quarter of 2021, including a 30% increase from our acquisition of East Chicago Machine Tool Corporation (Balemaster) and a 19% increase in capital bookings at our conveying and screeningvibratory business. We expect demand for baling products at our European operations to moderate in the second half of 2022.
Many of our operations continue to be impacted by labor availability and supply chain constraints, the latter of which resulted in inflationary pressure on material costs, longer lead times, and increased freight costs. Our businesses are alleviating supply chain constraints through various measures, including advance purchases of raw materials to prevent potential manufacturing disruptions and mitigating increased material and freight costs through price adjustments, when possible. We believe that the fundamentals of our business have also rebounded from 2020will remain positive, particularly given our high backlog levels, duecontinued strong bookings, and ongoing strength in the markets we serve. Despite this optimism, we expect our operating environment to increased customer spendingcontinue to be challenging as a result of the relaxation of pandemic-related shutdownsfactors impacting our business discussed above and visitation restrictions, while bookings for capital equipment have moderated.
While we have seen improved market conditionsthe uncertainties and increased demand for our products and we expect our financial results for the remainder of 2021 to be strong, there is still some uncertainty surrounding near-term economic growth due to risks surrounding the COVID-19 pandemic, including the impact of the Delta variant. Additionally, we may also be impacted by supply chain constraints and inflationary pressure on material costs, as well as travel and visitation restrictions in certain regions of the world.China's zero-COVID policy. For more information on risks related to health epidemics tothese challenges, and other factors impacting our business, including COVID-19,recent geopolitical tensions, please see Risk Factors included in Part I,II, Item 1A, of this report, and Part 1, Item 1A, Risk Factors, included inof our Annual Report on Form 10-K forand subsequent filings with the fiscal year ended January 2, 2021.SEC.
International Sales
MoreSlightly more than half of our sales are to customers outside the United States, mainly in Europe, Asia, and Canada. As a result, our financial performance can be materially affected by currency exchange rate fluctuations between the U.S. dollar and foreign currencies. In the first half of 2022, we experienced a significant unfavorable foreign currency translation effect on our results of operations compared to 2021 due to the strengthening of the U.S. dollar against foreign currencies in countries in which we operate, especially the euro. We expect this trend to continue throughout the remainder of the year. We currently do not use derivative instruments to hedge our exposure to exchange rate fluctuations created by the translation into the U.S. dollar of our foreign subsidiaries' results that are in functional currencies other than the U.S. dollar. To mitigate the impact of foreign currency transaction fluctuations, we generally seek to charge our customers in the same currency in which our operating costs are incurred. Additionally, we may enter into forward currency exchange contracts to hedge certain firm purchase and sale commitments denominated in currencies other than our subsidiaries' functional currencies. We currently do not use derivative instruments to hedge our exposure to exchange rate fluctuations created by the translation into the U.S. dollar of our foreign subsidiaries' results that are in functional currencies other than the U.S. dollar.
Global Trade
The United States imposes tariffs on certain imports from China, which has and will continue to increase the cost of some of the equipment that we import. Although we have worked to mitigate the impact of tariffs through pricing and sourcing strategies, we cannot be sure these strategies will effectively mitigate the impact of these costs. For more information on risks associated with our global operations, including tariffs, please see Part I, Item 1A, Risk Factors, included in our Annual Report on Form 10-K forand subsequent filings with the fiscal year ended January 2, 2021.SEC.
Acquisitions
We expect that a significant driver of our growth over the next several years will be the acquisition of businesses and technologies that complement or augment our existing products and services or may involve entry into a new process industry. We continue to pursue acquisition opportunities.
In the third quarter of 2021, we acquired Clouth for approximately 78 million euros, or $92.0$92.9 million, net of cash acquired andplus debt assumed. The majority of Clouth, companies were acquired on July 19, 2021 and the acquisition of the last legal entity occurred on August 10, 2021. Clouthwhich is included in our Flow Control segment, is a leading manufacturer of doctor blades and related equipment used in the production of paper, packaging, and tissue and will be included in our Flow Control segment.tissue. We expect several synergies in connection with this acquisition, including deepening our presence in the growing ceramic blade market and expansion of product sales at our existing businesses by leveraging Clouth's complementary global geographic footprint. Clouth has twothree manufacturing facilities in Germany and one in Poland and generated revenue of approximately 41 million euros in 2020. See Note11, Subsequent Event, in the accompanying condensed consolidated financial statements for further details.Poland. In June 2020,the third quarter of 2021, we made an acquisition in our Industrial Processing segmentalso acquired Balemaster for approximately $6.9$53.5 million, net of cash acquired. Balemaster, which is included in our Material Handling segment, is a leading U.S. manufacturer of horizontal balers and related equipment used primarily for recycling packaging waste at corrugated box plants and large retail and distribution centers. We expect several synergies in connection with this acquisition, including expanding our presence in the secondary material processing sector and creating new opportunities for leveraging our high-performance balers produced in Europe.
Results of Operations
Second Quarter 20212022 Compared With Second Quarter 20202021
Revenue
The following table presents the change in revenue by segment between the second quarters of 20212022 and 2020,2021, and those changes excluding the effect of foreign currency translation and acquisitions which we refer to as change in organic revenue. The presentation of the change in organic revenue is a non-GAAP measure. We believe this non-GAAP measure helps investors gain an understanding of our underlying operations consistent with how management measures and forecasts its performance, especially when comparing such results to prior periods. This non-GAAP measure should not be considered superior to or a substitute for the corresponding U.S. generally accepted accounting principles (GAAP) measure.
Revenue by segment in the second quarters of 20212022 and 20202021 was as follows:
| | | (Non-GAAP) | | (Non-GAAP) |
| | Three Months Ended | | Currency Translation | | Change in Organic Revenue | | Three Months Ended | | Currency Translation | | Acquisitions | | Change in Organic Revenue |
(In thousands, except percentages) | (In thousands, except percentages) | | July 3, 2021 | | June 27, 2020 | | Total Increase | | % Change | | Increase | | % Change | (In thousands, except percentages) | | July 2, 2022 | | July 3, 2021 | | Total Increase | | % Change | | Increase | | % Change |
Flow Control | Flow Control | | $ | 70,762 | | | $ | 51,365 | | | $ | 19,397 | | | 38 | % | | $ | 3,787 | | | $ | 15,610 | | | 30 | % | Flow Control | | $ | 85,220 | | | $ | 70,762 | | | $ | 14,458 | | | 20 | % | | $ | (2,949) | | | $ | 11,949 | | | $ | 5,458 | | | 8 | % |
Industrial Processing | Industrial Processing | | 82,681 | | | 65,673 | | | 17,008 | | | 26 | % | | 6,213 | | | 10,795 | | | 16 | % | Industrial Processing | | 84,402 | | | 82,681 | | | 1,721 | | | 2 | % | | (3,683) | | | 185 | | | 5,219 | | | 6 | % |
Material Handling | Material Handling | | 42,368 | | | 35,822 | | | 6,546 | | | 18 | % | | 1,574 | | | 4,972 | | | 14 | % | Material Handling | | 52,027 | | | 42,368 | | | 9,659 | | | 23 | % | | (2,431) | | | 7,778 | | | 4,312 | | | 10 | % |
Consolidated Revenue | Consolidated Revenue | | $ | 195,811 | | | $ | 152,860 | | | $ | 42,951 | | | 28 | % | | $ | 11,574 | | | $ | 31,377 | | | 21 | % | Consolidated Revenue | | $ | 221,649 | | | $ | 195,811 | | | $ | 25,838 | | | 13 | % | | $ | (9,063) | | | $ | 19,912 | | | $ | 14,989 | | | 8 | % |
Consolidated revenue increased 13% in the second quarter of 2021 increased 28%, while consolidated organic2022, including a 10% increase from acquisitions and a 5% decrease from the negative effect of foreign currency translation. Organic revenue increased 21%, principally driven by8% due to higher demand for parts and consumables products, principally at our three segmentsFlow Control segment and higher demand for capital equipment at our Flow Control segmentMaterial Handling and Industrial Processing segments as described below.
Revenue at our Flow Control segment increased 38%20% in the second quarter of 2021,2022, while organic revenue increased 30%8%. The increase in organic revenue resulted from higher demand for both capital equipment and parts and consumables products at substantially all locations. Organic revenue for capital equipment increased in the second quarter of 2021 due to improved market conditions and pent-up demand for our products while the corresponding 2020 period was adversely impacted by customer reductions in capital equipment spending and deferrals of equipment installations. Increasedhigher demand for parts and consumables products in North America resulting from improved market conditions.
Revenue at our Industrial Processing segment increased 2% in the second quarter of 2021 was2022, while organic revenue increased 6%. Organic revenue increased due to higher demand for parts and consumables products at our wood processing business due in part to maintenance requirementsspending by our customers. Also contributing to the organic revenue increase was an increase in demand for capital equipment at manyour European stock-preparation business due to several large projects.
Revenue at our Material Handling segment increased 23% in the second quarter of 2022, while organic revenue increased 10% due to higher demand for capital equipment at our customerEuropean baling operations due to improved business conditions.
locations and pent-up demand, while the second quarter of 2020 was depressed as a result of customer downtimes and shutdowns as well as visitation restrictions due to the COVID-19 pandemic.
Revenue at our Industrial Processing segment increased 26% in the second quarter of 2021, while organic revenue increased 16%. Organic revenue increased due to higher demand for both parts and consumables products and capital equipment at our wood processing business, driven by continued near-capacity mill run rates resulting in higher parts consumption and increased capital investment. Organic revenue at our stock-preparation business was relatively flat with increased revenue due to pent-up demand for parts and consumables products and improved capital equipment revenue at our Chinese business, partially offset by lower capital equipment revenue at our North American business due to timing of orders.
Revenue at our Material Handling segment increased 18% in the second quarter of 2021, while organic revenue increased 14%. Organic revenue increased at our baling business due to improved business conditions in Europe, including the recovery of recycled commodity prices. Organic revenue at our conveying and screening business was relatively flat due to lower capital equipment revenue as a result of the completion of a multi-year project early in the second quarter of 2021, offset by the impact of pent-up demand for parts and consumables products, which was depressed in 2020 as a result of customer shutdowns and visitation restrictions due to the COVID-19 pandemic.
Gross Profit Margin
Gross profit margin by segment in the second quarters of 20212022 and 20202021 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Basis Point Change |
| | July 3, 2021 | | June 27, 2020 | |
Flow Control | | 52.8% | | 53.5% | | (70) | bps |
Industrial Processing | | 40.1% | | 40.9% | | (80) | bps |
Material Handling | | 34.9% | | 33.8% | | 110 | bps |
Consolidated Gross Profit Margin | | 43.6% | | 43.5% | | 10 | bps |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Basis Point Change |
| | July 2, 2022 | | July 3, 2021 | |
Flow Control | | 52.8% | | 52.8% | | 0 | bps |
Industrial Processing | | 38.4% | | 40.1% | | (170) | bps |
Material Handling | | 35.9% | | 34.9% | | 100 | bps |
Consolidated Gross Profit Margin | | 43.3% | | 43.6% | | (30) | bps |
Consolidated gross profit margin was relatively unchangeddecreased to 43.3% in the second quarter of 2022 compared with 43.6% in the second quarter of 2021 compared withdue to the second quarter of 2020. We received benefits from government employee retention assistance programsinclusion of $0.5 million or 0.3% of revenue, in the second quarter of 2021 compared with $1.3 million, or 0.8% of revenue, in the second quarter of 2020. Offsetting the impact of the decrease in benefits received from these programs was an increase in consolidated gross profit margin due to an improved gross profit margin at our Material Handling segment as described below. We do not anticipate significant benefits from government employee retention assistance programs in the future.
Gross profit margin at our Flow Control segment decreased to 52.8% in the second quarter of 2021 compared with 53.5% in the second quarter of 2020 primarily due to a lower proportion of higher-margin parts and consumables revenue. We expect gross profit margin for this segment to decline in the second half of the year due to the impact of the amortization of acquired profit in inventory related to the Clouth acquisition.
Gross profit margin at our Industrial Processing segment decreased to 40.1% in the second quarter of 2021 compared with 40.9% in the second quarter of 2020 due to a decrease in benefits received from government employee retention assistance programs.
Grossprograms, which increased gross profit margin in the 2021 period by 0.3 percentage points.
Within our operating segments, gross profit margin:
•Decreased to 38.4% from 40.1% at our Industrial Processing segment due to the impact of lower-margin capital equipment revenue at our Chinese stock-preparation business and the inclusion of $0.4 million for benefits received from government employee retention assistance programs, which increased gross profit margin in the 2021 period by 0.5 percentage points.
•Increased to 35.9% from 34.9% at our Material Handling segment increased in the second quarter of 2021 compared with the second quarter of 2020 primarily due to a greater proportion of higher-margin parts and consumables revenue athigher gross profit margin profile from our conveying and screening business.Balemaster business acquired in 2021.
Selling, General, and Administrative Expenses
Selling, general, and administrative (SG&A) expenses by segment in the second quarters of 20212022 and 20202021 were as follows:
| | | Three Months Ended | | | Three Months Ended | |
(In thousands, except percentages) | (In thousands, except percentages) | | July 3, 2021 | | % of Revenue | | June 27, 2020 | | % of Revenue | | Increase (Decrease) | | % Change | (In thousands, except percentages) | | July 2, 2022 | | % of Revenue | | July 3, 2021 | | % of Revenue | | Increase | | % Change |
Flow Control | Flow Control | | $ | 17,064 | | | 24 | % | | $ | 15,798 | | | 31 | % | | $ | 1,266 | | | 8% | Flow Control | | $ | 20,969 | | | 25% | | $ | 17,064 | | | 24% | | $ | 3,905 | | | 23% |
Industrial Processing | Industrial Processing | | 14,367 | | | 17 | % | | 14,920 | | | 23 | % | | (553) | | | (4)% | Industrial Processing | | 15,614 | | | 18% | | 14,420 | | | 17% | | 1,194 | | | 8% |
Material Handling | Material Handling | | 8,682 | | | 20 | % | | 8,094 | | | 23 | % | | 588 | | | 7% | Material Handling | | 9,498 | | | 18% | | 8,993 | | | 21% | | 505 | | | 6% |
Corporate | Corporate | | 9,154 | | | N/A | | 6,261 | | | N/A | | 2,893 | | | 46% | Corporate | | 9,238 | | | N/A | | 8,790 | | | N/A | | 448 | | | 5% |
Consolidated SG&A Expenses | Consolidated SG&A Expenses | | $ | 49,267 | | | 25 | % | | $ | 45,073 | | | 29 | % | | $ | 4,194 | | | 9% | Consolidated SG&A Expenses | | $ | 55,319 | | | 25% | | $ | 49,267 | | | 25% | | $ | 6,052 | | | 12% |
Consolidated SG&A expenses as a percentage of revenue remained flat at 25% in the second quarter of 2022 compared with the second quarter of 2021. Consolidated SG&A expenses increased $6.1 million due to the inclusion of $5.0 million of SG&A expenses from acquisitions, increased selling-related costs associated with improved business conditions, and the inclusion of benefits received from government employee retention assistance programs of $1.0 million in the second quarter of 2021. These increases were offset by a $2.1 million favorable effect of foreign currency translation and a decrease of $0.6 million in acquisition costs.
Within our operating segments, SG&A expenses:
•Increased $3.9 million at our Flow Control segment principally due to the inclusion of $3.5 million of SG&A expenses from Clouth, increased selling-related costs, and $0.5 million of benefits received from government employee retention assistance programs which lowered SG&A in the 2021 period. These increases were partially offset by a $0.8 million favorable effect of foreign currency translation and a $0.2 million decrease in acquisition costs.
•Increased $1.2 million at our Industrial Processing segment principally due to increased selling-related costs, partially offset by a $0.9 million favorable effect of foreign currency translation.
•Increased $0.5 million at our Material Handling segment principally due to the inclusion of $1.4 million of SG&A expenses from Balemaster, partially offset by a $0.4 million favorable effect of foreign currency translation and a $0.3 million decrease in acquisition costs.
Consolidated SG&A expenses as a percentage of revenue decreasedInterest Expense
Interest expense increased to 25% in the second quarter of 2021 compared with 29% in the second quarter of 2020 primarily due to higher revenue in the 2021 period. Consolidated SG&A expenses increased in the second quarter of 2021 compared with the second quarter of 2020 principally due to $2.6 million from the unfavorable effect of currency translation and incremental incentive compensation resulting from our improved financial performance. SG&A expenses included benefits received from government employee retention assistance programs of $1.0$1.4 million in the second quarter of 2021 and $0.8 million in the second quarter of 2020.
SG&A expenses at our Flow Control segment increased in the second quarter of 2021 compared with the second quarter of 2020 principally due to the unfavorable effect of foreign currency translation of $1.0 million and $0.2 million for acquisition transaction costs related to the July 2021 acquisition of Clouth.
SG&A expenses at our Industrial Processing segment decreased in the second quarter of 2021 compared with the second quarter of 2020 principally due to reduced professional service fees, including a reduction of $0.4 million for acquisition transaction costs, and $0.6 million of insurance proceeds received in the second quarter of 2021. These decreases were offset in part by an increase of $1.2 million2022 from the unfavorable effect of foreign currency translation.
SG&A expenses at our Material Handling segment increased in the second quarter of 2021 compared with the second quarter of 2020 principally due to the unfavorable effect of foreign currency translation.
SG&A expenses at Corporate increased in the second quarter of 2021 compared with the second quarter of 2020 primarily due to additional incentive compensation as a result of improved financial performance and, to a lesser extent, higher professional service fees.
Restructuring Costs
Restructuring costs were $0.5 million in the second quarter of 2020, which represented severance costs for 30 employees within our Flow Control segment related to a restructuring plan implemented in response to the slowdown in the global economy that was largely driven by the impact of the COVID-19 pandemic.
Interest Expense
Interest expense decreased to $1.1 million in the second quarter of 2021 from $1.9 milliondue to a higher weighted-average interest rate in the second quarter of 2020 due2022 as compared to lower outstanding debt and a lower weighted-average interest rate.the second quarter of 2021.
Provision for Income Taxes
Our provisionProvision for income taxes increased to $10.0 million in the second quarter of 2022 from $8.9 million in the second quarter of 2021 from $4.5 million2021. The effective tax rate of 27% in the second quarter of 20202022 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, state taxes, nondeductible expenses, and represented 28%the cost of pre-tax income in both periods.repatriating the earnings of certain foreign subsidiaries. The effective tax rate of 28% in the second quarter of 2021 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, nondeductible expenses, state taxes, and tax expense associated with Global Intangible Low-Taxed Income (GILTI) provisions. The effective tax rate in the second quarter of 2020 was higher than our statutory rate of 21% primarily due to nondeductible expenses, the distribution of our worldwide earnings, state taxes, and tax expense associated with GILTI. These increases in tax expense were offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements.
Net Income
Net income increased $11.3to $26.4 million toin the second quarter of 2022 from $23.0 million in the second quarter of 2021 from $11.7 million in the second quarter of 2020 primarily due to a $14.9$4.5 million increase in operating income, and a $0.9 million decrease in interest expense, offset in part by a $4.5$1.0 million increase in provision for income taxes (see discussions above for further details).
First Six Months 20212022 Compared With First Six Months 20202021
Revenue
The following table presents changes in revenue by segment between the first six months of 20212022 and 2020,2021, and those changes excluding the effect of foreign currency translation and an acquisitionacquisitions which we refer to as change in organic revenue. The presentation of the change in organic revenue is a non-GAAP measure. We believe this non-GAAP measure helps investors gain an understanding of our underlying operations consistent with how management measures and forecasts its performance, especially when comparing such results to prior periods. This non-GAAP measure should not be considered superior to or a substitute for the corresponding GAAP measure.
Revenue by segment in the first six months of 2022 and 2021 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | (Non-GAAP) |
| | Six Months Ended | | | | | | Currency Translation | | Acquisitions | | Change in Organic Revenue |
(In thousands, except percentages) | | July 2, 2022 | | July 3, 2021 | | Total Increase | | % Change | | | | Increase | | % Change |
Flow Control | | $ | 171,046 | | | $ | 134,516 | | | $ | 36,530 | | | 27 | % | | $ | (4,377) | | | $ | 24,222 | | | $ | 16,685 | | | 12 | % |
Industrial Processing | | 177,487 | | | 151,835 | | | 25,652 | | | 17 | % | | (5,072) | | | 319 | | | 30,405 | | | 20 | % |
Material Handling | | 99,596 | | | 81,923 | | | 17,673 | | | 22 | % | | (3,494) | | | 15,371 | | | 5,796 | | | 7 | % |
Consolidated Revenue | | $ | 448,129 | | | $ | 368,274 | | | $ | 79,855 | | | 22 | % | | $ | (12,943) | | | $ | 39,912 | | | $ | 52,886 | | | 14 | % |
Consolidated revenue in the first six months of 2022 increased 22%, including an 11% increase from acquisitions and a 3% decrease from the negative effect of foreign currency translation. Organic revenue increased 14%, principally driven by higher demand for capital equipment at our Industrial Processing segment and, to a lesser extent, parts and consumables at our Flow Control and Industrial Processing segments, as described below.
Revenue at our Flow Control segment increased 27% in the first six months of 2022, while organic revenue increased 12%. Organic revenue increased due to higher demand for our parts and consumables products in North America and capital equipment in Europe, resulting from improved market conditions.
Revenue at our Industrial Processing segment increased 17% in the first six months of 2022, while organic revenue increased 20% due to higher demand for capital equipment, especially in Europe and, to a lesser extent, China and North America. Demand for our wood processing business products was driven by high mill activity resulting in increased capital investment and higher parts consumption. Increased demand for capital equipment at our stock-preparation business primarily occurred at our European and Chinese operations due to improved market conditions. Also contributing to the organic revenue increase was an increase in demand for parts and consumables products at our wood processing business due to maintenance spending by our customers.
Revenue at our Material Handling segment increased 22% in the first six months of 2022, while organic revenue increased 7% due to higher demand for capital equipment at our European baling operations due to improved business
Revenue by segment in the first six months of 2021conditions, and 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | (Non-GAAP) |
| | Six Months Ended | | | | | | Currency Translation | | Acquisition | | Change in Organic Revenue |
(In thousands, except percentages) | | July 3, 2021 | | June 27, 2020 | | Total Increase | | % Change | | | | Increase | | % Change |
Flow Control | | $ | 134,516 | | | $ | 108,514 | | | $ | 26,002 | | | 24 | % | | $ | 5,417 | | | $ | — | | | $ | 20,585 | | | 19 | % |
Industrial Processing | | 151,835 | | | 130,382 | | | 21,453 | | | 16 | % | | 9,240 | | | 509 | | | 11,704 | | | 9 | % |
Material Handling | | 81,923 | | | 73,091 | | | 8,832 | | | 12 | % | | 2,929 | | | — | | | 5,903 | | | 8 | % |
Consolidated Revenue | | $ | 368,274 | | | $ | 311,987 | | | $ | 56,287 | | | 18 | % | | $ | 17,586 | | | $ | 509 | | | $ | 38,192 | | | 12 | % |
Consolidated revenue in the first six months of 2021 increased 18%, while consolidated organic revenue increased 12%, driven principally by higher demand for parts and consumables products at our Industrial Processing and Flow Control segments and, toconveying business resulting from a lesser extent, capital equipment at our Flow Control segment as described below.
Revenue at our Flow Control segment increased 24%strong demand in the first six months of 2021, while organic revenue increased 19%. The increase in organic revenue resulted from higher demand for partsaggregate and consumables productsfood and to a lesser extent, capital equipment at substantially all locations. Increased demand for parts and consumables products was due in part to maintenance requirements at many of our customer locations and pent-up demand, while the 2020 period was depressed as a result of customer downtimes and shutdowns as well as visitation restrictions due to the COVID-19 pandemic. Organic revenue for capital equipment increased in the first six months of 2021 due to improved market conditions and pent-up demand for our products, particularly in the second quarter, while the corresponding 2020 period was adversely impacted by customer reductions in capital spending and deferrals of equipment installations due to the COVID-19 pandemic.
Revenue at our Industrial Processing segment increased 16% in the first six months of 2021, while organic revenue increased 9%. Organic revenue for our wood processing business increased due to higher demand for parts and consumables products and, to a lesser extent, capital equipment driven by continued near-capacity mill run rates resulting in higher parts consumption and increased capital investment. Additionally, organic revenue was positively impacted by pent-up demand for parts and consumables products at our stock-preparation business. These increases were offset in part by a decline in capital equipment revenue at our stock-preparation business, particularly in the first quarter of 2021, due to curtailed capital equipment spending by our customers in 2020, which impacted capital revenue in 2021.
Revenue at our Material Handling segment increased 12% in the first six months of 2021, while organic revenue increased 8% due to improved business conditions for our baling business, including the recovery of recycled commodity prices.packaging industries.
Gross Profit Margin
Gross profit margin by segment in the first six months of 20212022 and 20202021 was as follows: | | | Six Months Ended | | Basis Point Change | | Six Months Ended | | Basis Point Change |
| | July 3, 2021 | | June 27, 2020 | | | July 2, 2022 | | July 3, 2021 | |
Flow Control | Flow Control | | 53.0% | | 53.2% | | (20) | bps | Flow Control | | 52.6% | | 53.0% | | (40) | bps |
Industrial Processing | Industrial Processing | | 40.3% | | 39.7% | | 60 | bps | Industrial Processing | | 38.5% | | 40.3% | | (180) | bps |
Material Handling | Material Handling | | 34.8% | | 34.7% | | 10 | bps | Material Handling | | 36.1% | | 34.8% | | 130 | bps |
Consolidated Gross Profit Margin | Consolidated Gross Profit Margin | | 43.7% | | 43.2% | | 50 | bps | Consolidated Gross Profit Margin | | 43.3% | | 43.7% | | (40) | bps |
Consolidated gross profit margin increaseddecreased to 43.3% in the first six months of 2022 compared with 43.7% in the first six months of 2021 compared with 43.2% indue to the first six monthsinclusion of 2020. We$0.9 million of benefits received benefits from government employee retention assistance programs, of $0.9 million, or 0.2% of revenue,which increased gross profit margin in the first six months of 2021 compared with $1.3 million, or 0.4% of revenue, in the first six months of 2020. Offsettingperiod by 0.2 percentage points, and the impact of the decrease in benefits receivedlower margin capital equipment revenue.
Within our operating segments, gross profit margin:
•Decreased to 52.6% from these programs was an increase in consolidated53.0% at our Flow Control segment due to a lower gross profit margin primarily dueprofile from our recently acquired Clouth business.
•Decreased to an improved gross profit margin38.5% from 40.3% at our Industrial Processing segment as described below.
Grossdue to the impact of lower-margin capital equipment revenue at our Chinese stock-preparation business and the inclusion of $0.7 million for benefits received from government employee retention assistance programs, which increased gross profit margin at our Flow Control segment decreased slightly to 53.0% in the first six months of 2021 compared with 53.2% in the first six months of 2020.period by 0.4 percentage points.
Gross profit margin at our Industrial Processing segment increased•Increased to 40.3% in the first six months of 2021 compared with 39.7% in the first six months of 2020 due to improved margins at our wood processing business primarily resulting36.1% from manufacturing efficiencies related to higher production volumes.
Gross profit margin34.8% at our Material Handling segment was relatively unchangedprimarily due to a higher gross profit margin profile from our Balemaster business acquired in the first six months of 2021 compared with the first six months of 2020.
Selling, General, and Administrative Expenses
SG&A expenses by segment in the first six months of 20212022 and 20202021 were as follows:
| | | Six Months Ended | | | Six Months Ended | |
(In thousands, except percentages) | (In thousands, except percentages) | | July 3, 2021 | | % of Revenue | | June 27, 2020 | | % of Revenue | | Increase | | % Change | (In thousands, except percentages) | | July 2, 2022 | | % of Revenue | | July 3, 2021 | | % of Revenue | | Increase | | % Change |
Flow Control | Flow Control | | $ | 34,568 | | | 26 | % | | $ | 31,740 | | | 29 | % | | $ | 2,828 | | | 9% | Flow Control | | $ | 43,053 | | | 25 | % | | $ | 34,568 | | | 26 | % | | $ | 8,485 | | | 25% |
Industrial Processing | Industrial Processing | | 30,030 | | | 20 | % | | 28,740 | | | 22 | % | | 1,290 | | | 4% | Industrial Processing | | 31,983 | | | 18 | % | | 30,110 | | | 20 | % | | 1,873 | | | 6% |
Material Handling | Material Handling | | 17,468 | | | 21 | % | | 16,775 | | | 23 | % | | 693 | | | 4% | Material Handling | | 20,502 | | | 21 | % | | 18,053 | | | 22 | % | | 2,449 | | | 14% |
Corporate | Corporate | | 16,632 | | | N/A | | 13,410 | | | N/A | | 3,222 | | | 24% | Corporate | | 18,949 | | | N/A | | 15,967 | | | N/A | | 2,982 | | | 19% |
Consolidated SG&A Expenses | Consolidated SG&A Expenses | | $ | 98,698 | | | 27 | % | | $ | 90,665 | | | 29 | % | | $ | 8,033 | | | 9% | Consolidated SG&A Expenses | | $ | 114,487 | | | 26 | % | | $ | 98,698 | | | 27 | % | | $ | 15,789 | | | 16% |
Consolidated SG&A expenses as a percentage of revenue decreased to 26% in the first six months of 2022 compared with 27% in the first six months of 2021 compared with 29% in the first six months of 2020 principally due to higher revenue. Consolidated SG&A expenses increased in the first six months of 2021 compared with the first six months of 2020$15.8 million due to $4.3the inclusion of $11.1 million of SG&A expenses from the unfavorableacquisitions, increased compensation expense associated with existing and new personnel, and increased selling-related costs associated with improved business conditions. These increases were offset in part by a $3.1 million favorable effect of foreign currency translation, additional incentive compensation resulting fromtranslation.
Within our improved financial performance, and higher professional service fees, including an incremental $1.5 million of acquisition transaction costs.operating segments, SG&A expenses included benefits received from government employee retention assistance programs of $1.2expenses:
•Increased $8.5 million in the first six months of 2021 and $0.8 million in the first six months of 2020.
SG&A expenses at our Flow Control segment increased in the first six months of 2021 compared with the first six months of 2020 principally due to $1.5the inclusion of $7.8 million of SG&A expenses from the unfavorableClouth and increased personnel and selling-related costs. These increases were partially offset by a $1.2 million favorable effect of foreign currency translation and $1.2translation.
•Increased $1.9 million of acquisition transaction costs related to the July 2021 acquisition of Clouth.
SG&A expenses at our Industrial Processing segment increased in the first six months of 2021 compared with the first six months of 2020 principally due to $2.1increased selling-related costs and a $0.6 million fromreversal of an indemnification asset related to the unfavorablerelease of tax reserves. These increases were partially offset by a $1.2 million favorable effect of foreign currency translation, partially offset by reduced professional service fees in the 2021 period, including a reduction of $0.4translation.
•Increased $2.4 million of acquisition transaction costs.
SG&A expenses at our Material Handling segment increased in the first six months of 2021 compared with the first six months of 2020principally due to the unfavorableinclusion of $3.1 million of SG&A expenses from Balemaster, partially offset by a $0.7 million favorable effect of foreign currency translation.
•Increased $3.0 million at Corporate primarily due to increased incentive compensation and travel expense due to improved business conditions.
Gain on Sale and Other Expense, Net
We entered into several agreements with the local government in China to sell the existing manufacturing building and land use rights at one of our subsidiaries in China for $25.2 million. The agreements became effective in the first six monthsquarter of 2022 after a 31% down payment was received, including 25% in 2021 compared withand 6% in the first six monthsquarter of 2020 primarily due to additional incentive compensation as2022, and a land use right in a new location was secured. As a result, we recognized a gain on the sale of improved financial performance and, to a lesser extent, higher professional service fees.
Restructuring Costs
See Restructuring Coststhese assets of $20.2 million, or $15.1 million, net of deferred taxes of $5.1 million, in Resultsthe first quarter of Operations, "Second Quarter 2021 Compared With Second Quarter 2020"2022. A receivable of $16.1 million was recognized for a discussionthe present value of the restructuring actions taken duringremaining amount of the secondsale proceeds, which is due the earlier of when the government sells the property or within two years from the effective date of the agreements. The amount of the receivable recorded at July 2, 2022 was $15.4 million. Our subsidiary, which is part of our Industrial Processing segment, will continue to occupy its current facility until construction of its new facility is complete.
In the first quarter of 2020.2022, we recognized an impairment charge of $0.2 million related to the write-down of certain fixed assets that will not be moved to the new facility.
Interest Expense
Interest expense decreasedincreased to $2.6 million in the first six months of 2022 from $2.2 million in the first six months of 2021 from $4.4 million indue to a higher weighted-average interest rate for the first six months of 2020 due2022 compared to lower outstanding debt and a lower weighted-average interest rate.the first six months of 2021.
Provision for Income Taxes
Our provisionProvision for income taxes increased to $23.3 million in the first six months of 2022 from $14.5 million in the first six months of 2021 from $9.0 million2021. The effective tax rate of 26% in the first six months of 20202022 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, nondeductible expenses, and represented 27% of pre-taxstate taxes. These increases in tax expense were offset in part by a decrease in tax related to the net excess income in both periods.tax benefits from stock-based compensation arrangements. The effective tax rate of 27% in the first six months of 2021 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, nondeductible expenses, state taxes, and tax expense associated with GILTI. These increases in tax expense were offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements. The effective tax rate
Net Income
Net income increased to $67.9 million in the first six months of 2020 was higher than our statutory rate of 21% primarily due to nondeductible expenses, the distribution of our worldwide earnings, state taxes, and tax expense associated with GILTI. These increases in tax expense were offset in part by a decrease in tax related to the net excess income tax benefits2022 from stock-based compensation arrangements.
Net Income
Net income increased $15.4 million to $39.8 million in the first six months of 2021 from $24.4 million in the first six months of 2020 primarily due to an $18.7a $37.0 million increase in operating income, and a $2.2 million decrease in interest expense, offset in part by a $5.5$8.8 million increase in provision for income taxes (see discussions above for further details).
Non-GAAP Key Performance Indicators
In addition to the financial measures prepared in accordance with GAAP, we use certain non-GAAP financial measures, including organic revenue (defined as revenue excluding the effect of foreign currency translation and acquisitions), adjusted operating income, earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted EBITDA, adjusted EBITDA margin (defined as adjusted EBITDA divided by revenue), and free cash flow (defined as cash flow provided by operations less capital expenditures).
We use organic revenue in order to understand our trends and to forecast and evaluate our financial performance and compare revenue to prior periods (see discussion in Revenue above). Adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin exclude impairment costs, acquisition costs, amortization expense related to acquired profit in inventory and backlog, and certain gains or losses. These items are excluded as they are not indicative of our core operating results and are not comparable to other periods, which have differing levels of incremental costs, expenditures or income, or none at all. Additionally, we use free cash flow in order to provide insight on our ability to generate cash for acquisitions and debt repayments, as well as for other investing and financing activities.
We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our core business, operating results, or future outlook. We believe that the inclusion of such measures helps investors gain an understanding of our underlying operating performance and future prospects, consistent with how management measures and forecasts our performance, especially when comparing such results to previous periods or forecasts and to the performance of our competitors. Such measures are also used by us in our financial and operating decision-making
and for compensation purposes. We also believe this information is responsive to investors' requests and gives them an additional measure of our performance.
Our non-GAAP financial measures are not meant to be considered superior to or a substitute for the results of operations or cash flow prepared in accordance with GAAP. In addition, our non-GAAP financial measures have limitations associated with their use as compared to the most directly comparable GAAP measures, in that they may be different from, and therefore not comparable to, similar measures used by other companies.
A reconciliation of adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(In thousands, except percentages) | | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 |
Net Income Attributable to Kadant | | $ | 26,170 | | | $ | 22,864 | | | $ | 67,362 | | | $ | 39,425 | |
Net Income Attributable to Noncontrolling Interest | | 239 | | | 163 | | | 488 | | | 398 | |
Provision for Income Taxes | | 9,951 | | | 8,949 | | | 23,329 | | | 14,510 | |
Interest Expense, Net | | 1,089 | | | 1,010 | | | 2,221 | | | 2,056 | |
Other Expense, Net | | 19 | | | 24 | | | 41 | | | 48 | |
Operating Income | | 37,468 | | | 33,010 | | | 93,441 | | | 56,437 | |
Gain on Sale of Assets (a) | | — | | | — | | | (20,190) | | | — | |
Acquisition Costs | | — | | | 603 | | | 76 | | | 1,901 | |
Indemnification Asset Reversal (b) | | — | | | — | | | 575 | | | — | |
Impairment Costs | | — | | | — | | | 182 | | | — | |
Acquired Backlog Amortization (c) | | — | | | 27 | | | 703 | | | 87 | |
Acquired Profit in Inventory Amortization (d) | | — | | | — | | | (218) | | | — | |
Adjusted Operating Income (non-GAAP measure) | | 37,468 | | | 33,640 | | | 74,569 | | | 58,425 | |
Depreciation and Amortization | | 8,486 | | | 7,689 | | | 17,228 | | | 15,315 | |
Adjusted EBITDA (non-GAAP measure) | | $ | 45,954 | | | $ | 41,329 | | | $ | 91,797 | | | $ | 73,740 | |
Adjusted EBITDA Margin (non-GAAP measure) | | 20.7% | | 21.1% | | 20.5% | | 20.0% |
A reconciliation of free cash flow from cash flow provided by operating activities is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(In thousands) | | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 |
Cash Provided by Operating Activities | | $ | 18,797 | | | $ | 44,386 | | | $ | 42,565 | | | $ | 63,478 | |
Less: Capital Expenditures (e) | | (6,947) | | | (2,059) | | | (9,815) | | | (4,318) | |
Free Cash Flow (non-GAAP measure) | | $ | 11,850 | | | $ | 42,327 | | | $ | 32,750 | | | $ | 59,160 | |
(a) Consists of a $20.2 million gain on the sale of a Chinese facility in our Industrial Processing segment pursuant to a relocation plan.
(b) Represents an indemnification asset reversal related to the release of tax reserves associated with uncertain tax positions.
(c) Represents intangible amortization expense associated with acquired backlog.
(d) Represents income within the cost of revenue associated with amortization of acquired profit in inventory.
(e) Includes capital expenditures of $3.1 million and $3.2 million in the three and six months ended July 2, 2022, respectively, associated with the construction of a new manufacturing facility in China (as discussed below).
Liquidity and Capital Resources
Consolidated working capital was $244.3$181.0 million at July 3, 2021,2, 2022, compared with $155.1$162.4 million at January 2, 2021. Consolidated working capital at July 3, 2021 included restricted cash of $84.2 million which was used to fund the acquisition of Clouth in the third quarter of 2021. See Note 11, Subsequent Event, in the notes to the accompanying condensed consolidated financial statements for further details.1, 2022. Cash and cash equivalents were $73.4$76.5 million at July 3, 2021,2, 2022, compared with $65.7$91.2 million at January 2, 2021,1, 2022, which included cash and cash equivalents held by our foreign subsidiaries of $69.5$70.1 million at July 3, 20212, 2022 and $63.6$83.8 million at January 2, 2021.1, 2022.
Cash Flows
Cash flow information in the first six months of 20212022 and 20202021 was as follows: | | | Six Months Ended | | Six Months Ended |
(In thousands) | (In thousands) | | July 3, 2021 | | June 27, 2020 | (In thousands) | | July 2, 2022 | | July 3, 2021 |
Net Cash Provided by Operating Activities | Net Cash Provided by Operating Activities | | $ | 63,478 | | | $ | 28,208 | | Net Cash Provided by Operating Activities | | $ | 42,565 | | | $ | 63,478 | |
Net Cash Used in Investing Activities | Net Cash Used in Investing Activities | | (3,869) | | | (10,652) | | Net Cash Used in Investing Activities | | (7,894) | | | (3,869) | |
Net Cash Provided by (Used in) Financing Activities | | 32,698 | | | (23,414) | | |
Net Cash (Used in) Provided by Financing Activities | | Net Cash (Used in) Provided by Financing Activities | | (45,388) | | | 32,698 | |
Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash | Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash | | (803) | | | (1,466) | | Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash | | (5,418) | | | (803) | |
Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash | | $ | 91,504 | | | $ | (7,324) | | |
(Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash | | (Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash | | $ | (16,135) | | | $ | 91,504 | |
Operating Activities
Cash provided by operating activities increaseddecreased to $42.6 million in the first six months of 2022 from $63.5 million in the first six months of 2021 from $28.2 million in the first six months of 2020.2021. Our operating cash flows are primarily generated from cash received from customers, offset by cash payments for items such as inventory, employee compensation, operating leases, income taxes and interest payments on outstanding debt obligations. The increase in cash provided by operating activities in the 2021 period was principally driven by improvements in both changes in working capital and net income.
Cash provided by working capital was $5.4 millionincome in the first six months of 2021.2022 was offset in part by investments in working capital. Increases in inventory and accounts receivable used cash of $39.2 million, including $26.8 million from inventory primarily related to capital equipment orders that will ship in the latter half of fiscal 2022 and early fiscal 2023. These uses of cash were offset in part by an increase in cash provided of $9.3 million from customer deposits.
Cash provided by income in the first six months of 2021 was offset in part by investments in working capital. Cash provided by working capital in 2021 included $12.9 million from accounts payable related to inventory purchases for increased order activity and $15.9$11.1 million from other current liabilities primarily due to an increase in customer deposits for capital equipment orders that will ship in the latter half of fiscal 2021 and early fiscal 2022.orders. These sources of cash were offset in part by cash used of $15.3$22.6 million for accounts receivable principally due toand inventory as a result of revenue growth and $7.3 million for inventories related to orders that will ship in the latter half of fiscal 2021 and early fiscal 2022.
Cash used for working capital was $14.6 million in the first six months of 2020. Cash used for working capital in 2020 included $9.4 million for inventories due to delayed shipments and purchases of safety stocks of critical parts, as well as other purchases to support capital projects; $9.2 million by other current liabilities primarily due to a reduction in advance billings due to the timing and reduced level of capital orders, as well as a final payment of $2.4 million to settle our post-retirement restoration plan; and $5.0 million by accounts payable primarily due to reduced spending levels in 2020. These uses of cash were offset in part by cash provided of $4.8 million from accounts receivable due to a decline in revenue in 2020 and timing of collections.increased demand.
Investing Activities
Cash used in investing activities was $7.9 million in the first six months of 2022, compared with $3.9 million in the first six months of 2021, compared with $10.7 million2021. Cash used in investing activities in the first six months of 2020. The 2020 period2022 included acapital expenditures of $9.8 million, which included $3.2 million for expenditures associated with the manufacturing facility and building relocation project in China. This use of cash was partially offset by proceeds received from the sale of $7.1 million for acquisitions.assets of $1.9 million. Cash used in investing activities in the first six months of 2021 included capital expenditures of $4.3 million.
Financing Activities
Cash used in financing activities was $45.4 in the first six months of 2022, compared with cash provided by financing activities wasof $32.7 million in the first six months of 2021, compared with cash used in financing activities2021. Repayment of $23.4short- and long-term obligations was $51.4 million in the first six months of 2020. Repayment of long-term obligations was $47.1 million in the first six months of 2021 and $24.2 million in the first six months of 2020. Borrowings2022, partially offset by borrowings under our revolving credit facility
were$16.5 million compared to borrowings under our revolving credit facility of $88.9 million in the first six months of 2021, including $78.7 millionpartially offset by repayment of short- and long-term obligations of $47.1 million. In addition, taxes paid related to partially fund the acquisitionvesting of Clouth, and $7.0equity awards was $4.6 million in the first six months of 2020.2022 compared to $3.4 million in the first six months of 2021.
Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash
The exchange rate effect on cash, cash equivalents, and restricted cash represents the impact of translation of cash balances at our foreign subsidiaries. The $0.8$5.4 million reduction in cash, cash equivalents, and restricted cash in the first six months of 20212022 was primarily attributable to the strengthening of the U.S. dollar against the euro. The $1.5 million reduction in cash, cash equivalents,euro and restricted cash inChinese renminbi and, to a lesser extent, the first six months of 2020 primarily related to the strengthening of the U.S. dollar against the Brazilian real, Canadian dollar, and Mexican peso.British pound sterling.
Borrowing Capacity and Debt Obligations
We entered into an unsecured multi-currency revolving credit facility, dated as of March 1, 2017 (as amended and restated to date, the Credit Agreement). As of July 3, 2021,2, 2022, the outstanding balance under the Credit Agreement was $210.5 million, which included $70.5 million of euro-denominated borrowings. As of July 2, 2022, we have a borrowing capacity of over $400 million, including $140.5 million available under the Credit Agreement an additional $150of $189.0 million in anaddition to a $150.0 million uncommitted, unsecured incremental
borrowing facility under the Credit Agreement, and $115 million of senior promissory notes available for issuance underfacility. Under our uncommitted Multi-Currency Note Purchase and Private Shelf Agreement (Note Purchase Agreement). Under thesedebt agreements, our leverage ratio must be less than 3.75, or, if we elect, for the quarter during which a material acquisition occurs and for the three fiscal quarters thereafter, must be less than 4.00. As of July 3, 2021,2, 2022, our leverage ratio was 1.711.05 and we were in compliance with our debt covenants. We do not have any mandatory principal payments onexpect to renew our long-term debt obligations untilCredit Agreement prior to its maturity date of December 14, 2023. See Note 45, Short- and Long-Term Obligations, in the accompanying condensed consolidated financial statements for additional information regarding our debt obligations.
Additional Liquidity and Capital Resources
On May 20, 2021,19, 2022, our board of directors approved the repurchase of up to $20$50 million of our equity securities during the period from May 20, 202119, 2022 to May 20, 2022.19, 2023. We have not repurchased any shares of our common stock under this authorization or under our previous $20 million authorization which expired on May 13, 2021.20, 2022.
We paid cash dividends of $5.7$5.9 million in the first six months of 2021.2022. On May 20, 2021,19, 2022, we declared a quarterly cash dividend of $0.25$0.26 per share totaling $2.9$3.0 million that will be paid on August 12, 2021.11, 2022. Future declarations of dividends are subject to our board of directors' approval and may be adjusted as business needs or market conditions change. The declaration of cash dividends is subject to our compliance with the covenant in our revolving credit facility related to our consolidated leverage ratio.
We plan to make expenditures of approximately $12$21 to $13$23 million during the remainder of 20212022 for property, plant, and equipment.equipment, including $9 million for a new manufacturing facility. One of our Chinese subsidiaries is building a new manufacturing facility and relocating over the next two years. Capital expenditures for the new facility are estimated to be approximately $20 million, including $12 million in 2022. The cost of the new facility will be offset by the proceeds received from the sale of our existing facility. See Note 2, Gain on Sale and Other Expense, Net, in the accompanying condensed consolidated financial statements for additional information regarding the relocation of our Chinese manufacturing facility. As of July 3, 2021,2, 2022, we had approximately $219.4$217.7 million of total unremitted foreign earnings. It is our intent to indefinitely reinvest $195.8$182.2 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments, if any. In the first six months of 2021,2022, we recorded withholding taxes on the earnings in certain foreign subsidiaries that we plan to repatriate in the foreseeable future. The foreign withholding taxes that would be required if we were to remit the indefinitely-reinvested foreign earnings to the United States would be approximately $5.9$3.0 million.
In the future, our liquidity position will be affected by the level of cash flows from operations, cash paid to service our debt obligations, acquisitions, capital projects, dividends, and stock repurchases. We believe that existing cash and cash equivalents, along with cash generated from operations, our existing resources, together with the borrowings available under our Credit Agreementborrowing capacity and available through our Note Purchase Agreement, and the cash we expectcontinued access to generate from operations,debt markets, will be sufficient to meet the capital requirements of our operations for the next 12 months and foreseeable future.
Contractual Obligations and Other Commercial Commitments
There have been no significantmaterial changes to our contractual obligations and other commercial commitments during the first six months of 20212022 compared with those disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended January 2, 2021, except for the commitments related to the acquisition of Clouth as described in Note 11, Subsequent Event, in the accompanying condensed consolidated financial statements.Report.
Application of Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent liabilities, and the reported amounts of revenue and expenses during the reporting period. Our critical accounting policies are defined as those that entail significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. Management evaluates its estimates on an ongoing basis based on historical experience, current economic and market conditions, and other assumptions management believes are reasonable. We believe that our most critical accounting policies which are significant to our consolidated financial statements, and which involve the most complex or subjective decisions or assessments, are those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the section captioned "Application of Critical Accounting Policies and Estimates" in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended January 2, 2021.Report. There have been no material changes to these critical accounting policies since the end of fiscal 20202021 that warrant disclosure.
Recent Accounting Pronouncements
See Note 1, under the headings Recently Adopted Accounting Pronouncements and Recent Accounting Pronouncements Not Yet Adopted, in the accompanying condensed consolidated financial statements for details.
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk from changes in interest rates and foreign currency exchange rates has not changed materially from our exposure as disclosed in Part II, Item 7A, of our Annual Report on Form 10-K for the fiscal year ended January 2, 2021.Report.
Item 4 – Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of July 3, 2021.2, 2022. The term "disclosure controls and procedures," as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon the evaluation of our disclosure controls and procedures as of July 3, 2021,2, 2022, our Chief Executive Officer and Chief Financial Officer concluded that as of July 3, 2021,2, 2022, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the fiscal quarter ended July 3, 20212, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1A – Risk Factors
CarefulIn addition to the revised risk factors below regarding "We have significant international sales and operations and face risks related to health epidemics and pandemics, including the COVID-19 pandemic, which has and continues to present challenges to our business and results of operations" and "Operating globally subjects us to changes in government regulations and policies in multiple jurisdictions around the world, including those related to tariffs and trade barriers, taxation, exchange controls and political risks," careful consideration should be given to the risk factors discusseddisclosed in Part I, Item 1A, Risk Factors, in our Annual Report, on Form 10-K for the fiscal year ended January 2, 2021, which could materially affect our business, financial condition or future results, in addition to the information set forth in this Quarterly Report on Form 10-Q.
We have significant international sales and operations and face risks related to health epidemics and pandemics, including the COVID-19 pandemic, which has and continues to present challenges to our business and results of operations.
Our business and operations have been and may continue to be challenged by the effects of the COVID-19 pandemic and may be challenged by other adverse public health developments, including disruptions or restrictions on our employees’ and other service providers’ ability to travel, reductions in our workforce, temporary closures of our facilities or the facilities of our customers, suppliers or other vendors in our supply chain, potentially including single source suppliers, and other disruptions in the supply chain. In addition, the COVID-19 pandemic has impacted and other disease outbreaks could impact global trade and reduce demand for our products, and adversely affect the U.S. or global economy and capital markets.
The COVID-19 pandemic has negatively affected the global economy, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place,” and initially created significant disruption of the financial markets. The COVID-19 pandemic has adversely affected, and may adversely affect in the future, our business and results of operations, as government authorities have imposed, and may in the future impose, temporary mandatory closures of our facilities, travel restrictions, work-from-home orders, vaccine or testing mandates and social distancing protocols and other restrictions that have impacted our ability to adequately staff and maintain our operations at normal levels. China’s zero-COVID strategy heightens the risk that our facilities in China may be closed by government authorities as a result of any COVID cases in a particular facility. Additionally, our financial results have been adversely
impacted and may be adversely impacted in the future by decreased levels of bookings, customer-requested delays on certain capital projects and service work, customer downtime and shutdowns, and visitation restrictions at many customer facilities, all of which have affected and may adversely affect in the future our ability to recognize revenue for sales of our products and services. We may also incur future costs related to COVID-19, such as increased employee benefit costs if a significant number of our employees contract COVID-19 and require hospitalization or other costly medical treatment, or expenses related to repeated cleaning and sanitizing of our facilities, which may also adversely affect our financial results. In March 2020, we experienced a significant decrease in market capitalization due to a decline in our stock price, and the overall U.S. stock market also declined significantly amid market volatility driven by the uncertainty surrounding the outbreak of COVID-19. The future impact of the COVID-19 pandemic could include further disruption and volatility in the global capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future.
The COVID-19 pandemic has evolved and continues to evolve rapidly. As a result, we cannot reasonably estimate the scope of the impact of the COVID-19 pandemic, including the potential impact of emerging variants or the response of government authorities to any such variants or other developments, on our business and the adverse effect and impact the COVID-19 pandemic may ultimately have on our business and our stock price. For instance, we may face additional requests from customers to delay the production or delivery of our products, particularly capital equipment products, which would affect our ability to recognize revenue for sales of such products. Other customers may decide not to proceed with large capital equipment orders in order to conserve their cash. A delay on our part of the production of our products may lead to liquidated damages owed to our customers. Further implementation, extension or renewal of government-mandated closures, “shelter-in-place” orders or vaccine or testing mandates related to the COVID-19 pandemic may create further disruption to our operations, our workforce, the supply chain, and our customer and vendor operations. The evolving effects of the COVID-19 pandemic on the global economy are uncertain, and we may be further adversely affected by general economic conditions, even if government mandates are repealed. The impact of COVID-19 could worsen if new and more virulent or transmissible variants emerge which result in a resurgence of COVID-19 infection in affected regions.
In addition, travel, commercial and other similar restrictions put in place by various government authorities in response to COVID-19 have contributed to global supply disruptions and we have, and may in the future, incur costs to mitigate such disruptions, which could be significant. New information may emerge concerning the severity of COVID-19 or any of its variants, the pace and method through which it is transmitted, contained and/or treated, and the nature of the approach of the local governments in the jurisdictions in which we operate to handling the outbreak, any of which could impact our employees, operations, suppliers, customers and/or operating and financial results, including our ability to determine our quarterly results. We operate in 20 countries and the government responses in each of those countries have differed and resulted in varying levels of containment of COVID-19, degree and duration of closures, and nature of safety precautions, all of which we have and will continue to manage. Although we have worked and continue to work diligently to ensure that our global facilities can operate with minimal disruption, mitigate the impact of the outbreak on our employees’ health and safety, and address the supply chain impact on ourselves and our customers, the full extent to which COVID-19 has affected and will affect the global economy and our results will depend on future developments and factors that cannot be predicted.
Operating globally subjects us to changes in government regulations and policies in multiple jurisdictions around the world, including those related to tariffs and trade barriers, taxation, exchange controls and political risks.
Changes in government policies, political unrest, economic sanctions, trade embargoes, or other adverse trade regulations can negatively impact our business. Non-U.S. markets contribute a substantial portion of our revenues, and we intend to continue expanding our presence in these regions. For example, we operate businesses in Mexico and Canada, and we benefited from the North American Free Trade Agreement, which has been replaced by the United States-Mexico-Canada Agreement (USMCA), from which we also benefit. If the United States were to withdraw from or materially modify the USMCA or impose significant tariffs or taxes on goods imported into the United States, the cost of our products could significantly increase or no longer be priced competitively, which in turn could have a material adverse effect on our business and results of operations.
In addition, the Office of the United States Trade Representative has imposed tariffs on a wide variety of products from China, including pulp and paper machinery equipment, pursuant to Section 301 of the Trade Act of 1974. The tariffs on pulp and paper machinery are set at 25%. In addition, the U.S. Department of Commerce has imposed tariffs of 25% on numerous categories of steel imports, and 10% on numerous categories of aluminum imports, from most countries under Section 232 of the Trade Expansion Act of 1962. While we try to mitigate the impact of the existing and other proposed tariffs through pricing and sourcing strategies, we cannot be certain how our customers and competitors will react to the actions we take. The tariffs have and could in the future negatively affect our ability to compete against competitors who do not manufacture in China and/or are not subject to the tariffs.
The United States has tightened trade sanctions targeting countries like China and Russia. For example, since 2018 the United States has imposed various trade and economic sanctions targeting certain persons in Russia and certain types of business with Russia. The United States has continued to expand export control restrictions applicable to certain Chinese firms and continued its assessment of new controls for “emerging foundational technologies,” escalating U.S.-China tension concerning technology. In response, Russia and China have begun considering and, in some cases, implementing trade sanctions that could affect U.S.-owned businesses. The imposition of trade sanctions may make it generally more difficult to do business in Russia and China and cause delays or prevent shipment of products or services performed by our personnel, or to receive payment for products or services.
Additionally, the military conflict between Russia and Ukraine and the global response to it could adversely impact our revenues, gross margins and financial results. The United States, the European Union, and many other countries have imposed sanctions on Russia, individuals in Russia and Russian businesses, including several large banks. In 2021, our sales to Russia were $10.7 million, or 1% of our revenue. It is not possible to predict the broader or longer-term consequences of this conflict, which could include further sanctions, embargoes, regional instability, geopolitical shifts and adverse effects on macroeconomic conditions, security conditions, currency exchange rates and financial markets. Such geopolitical instability and uncertainty has and could continue to have in the future a negative impact on our ability to sell to, ship products to, collect payments from, and support customers in certain regions based on trade restrictions, embargoes and export control law restrictions, and logistics restrictions, and could increase the costs, risks and adverse impacts from these new challenges. To the extent the current conflict between Russia and Ukraine adversely affects our business, it may also have the effect of heightening many other risks disclosed in our Annual Report, any of which could materially and adversely affect our business and results of operations. Such risks include, but are not limited to, adverse effects on macroeconomic conditions, including inflation and business and consumer spending; disruptions to our global technology infrastructure, including through cyberattack, ransomware attack, or cyber-intrusion; adverse changes in international trade policies and relations; our ability to maintain or increase our prices, including any fuel surcharges in response to rising fuel costs; our ability to implement and execute our business strategy; disruptions in global supply chains; our exposure to foreign currency fluctuations; and constraints, volatility, or disruption in the capital markets. Such restrictions could have a material adverse impact on our business and operating results going forward.
Item 6 – Exhibits
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Exhibit Number | | |
| Description of Exhibit |
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10.1 | | Fourth Amendment, dated as of May 4, 2021, to the Amended and Restated Credit Agreement, dated as of March 1, 2017, by and among the Registrant, the Foreign Subsidiary Borrowers from time to time parties thereto, the several banks and other financial institutions or entities from time to time parties thereto, and Citizens Bank, N.A., as Administrative Agent and Multicurrency Administrative Agent. |
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10.210.1* | | JoinderEmployment Agreement between Kadant Johnson Europe B.V. and Fredrik H. Westerhout dated as of May 4, 2021, to the Amended and Restated Credit Agreement, dated as of March 1, 2017, by and among the Registrant, the Foreign Subsidiary Borrowers from time to time parties thereto, the several banks and other financial institutions or entities from time to time parties thereto, and Citizens Bank, N.A., as Administrative Agent and Multicurrency Administrative Agent.16, 2022. |
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31.1 | | |
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31.2 | | |
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32 | | |
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101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
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101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* Indicates management contract or compensatory plan or arrangement.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| KADANT INC. |
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Date: August 11, 202110, 2022 | /s/ Michael J. McKenney |
| Michael J. McKenney |
| Executive Vice President and Chief Financial Officer |
| (Principal Financial Officer) |