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 OctoberJuly 2, 20212022
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 OctoberJuly 29, 2021,2022, the registrant had 11,604,06211,662,000 shares of common stock outstanding.
Kadant Inc.
Quarterly Report on Form 10-Q
for the Period Ended OctoberJuly 2, 20212022
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)
| | | October 2, 2021 | | January 2, 2021 | | July 2, 2022 | | January 1, 2022 |
(In thousands, except share and per share amounts) | (In thousands, except share and per share amounts) | | (In thousands, except share and per share amounts) | |
Assets | Assets | | | | | Assets | | | | |
Current Assets: | Current Assets: | | Current Assets: | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 82,600 | | | $ | 65,682 | | Cash and cash equivalents | | $ | 76,540 | | | $ | 91,186 | |
Restricted cash (Note 1) | Restricted cash (Note 1) | | 1,064 | | | 958 | | Restricted cash (Note 1) | | 1,486 | | | 2,975 | |
Accounts receivable, net of allowances of $2,874 and $2,977 | | 120,496 | | | 91,540 | | |
Accounts receivable, net of allowances of $2,980 and $2,735 | | Accounts receivable, net of allowances of $2,980 and $2,735 | | 124,704 | | | 117,209 | |
Inventories | Inventories | | 135,476 | | | 106,814 | | Inventories | | 156,426 | | | 134,356 | |
Unbilled revenue | | 7,915 | | | 7,576 | | |
Contract assets | | Contract assets | | 11,861 | | | 8,626 | |
Other current assets | Other current assets | | 28,477 | | | 17,250 | | Other current assets | | 22,975 | | | 29,530 | |
Total Current Assets | Total Current Assets | | 376,028 | | | 289,820 | | Total Current Assets | | 393,992 | | | 383,882 | |
Property, Plant, and Equipment, net of accumulated depreciation of $114,845 and $107,832 | | 110,088 | | | 84,642 | | |
Property, Plant, and Equipment, net of accumulated depreciation of $116,612 and $114,032 | | Property, Plant, and Equipment, net of accumulated depreciation of $116,612 and $114,032 | | 105,919 | | | 107,989 | |
Other Assets | Other Assets | | 42,777 | | | 40,391 | | Other Assets | | 56,666 | | | 44,111 | |
Intangible Assets, Net (Note 2) | | 205,328 | | | 160,965 | | |
Goodwill (Note 2) | | 398,907 | | | 351,753 | | |
Intangible Assets, Net | | Intangible Assets, Net | | 183,317 | | | 199,343 | |
Goodwill | | Goodwill | | 384,109 | | | 396,887 | |
Total Assets | Total Assets | | $ | 1,133,128 | | | $ | 927,571 | | Total Assets | | $ | 1,124,003 | | | $ | 1,132,212 | |
| Liabilities and Stockholders' Equity | Liabilities and Stockholders' Equity | | Liabilities and Stockholders' Equity | |
Current Liabilities: | Current Liabilities: | | Current Liabilities: | |
Short-term obligations and current maturities of long-term obligations (Note 5) | Short-term obligations and current maturities of long-term obligations (Note 5) | | $ | 5,574 | | | $ | 1,474 | | Short-term obligations and current maturities of long-term obligations (Note 5) | | $ | 4,543 | | | $ | 5,356 | |
Accounts payable | Accounts payable | | 53,476 | | | 32,264 | | Accounts payable | | 55,924 | | | 59,250 | |
Accrued payroll and employee benefits | Accrued payroll and employee benefits | | 34,680 | | | 31,168 | | Accrued payroll and employee benefits | | 31,688 | | | 37,203 | |
Customer deposits | Customer deposits | | 53,087 | | | 29,433 | | Customer deposits | | 66,088 | | | 59,262 | |
Advanced billings | Advanced billings | | 11,980 | | | 8,513 | | Advanced billings | | 11,663 | | | 11,894 | |
Other current liabilities | Other current liabilities | | 39,862 | | | 31,836 | | Other current liabilities | | 43,065 | | | 48,532 | |
Total Current Liabilities | Total Current Liabilities | | 198,659 | | | 134,688 | | Total Current Liabilities | | 212,971 | | | 221,497 | |
Long-Term Obligations (Note 5) | Long-Term Obligations (Note 5) | | 308,922 | | | 232,000 | | Long-Term Obligations (Note 5) | | 223,769 | | | 264,158 | |
Long-Term Deferred Income Taxes | Long-Term Deferred Income Taxes | | 36,842 | | | 21,669 | | Long-Term Deferred Income Taxes | | 36,919 | | | 34,944 | |
Other Long-Term Liabilities | Other Long-Term Liabilities | | 45,319 | | | 42,309 | | Other Long-Term Liabilities | | 44,180 | | | 45,997 | |
| Commitments and Contingencies (Note 11) | Commitments and Contingencies (Note 11) | | 0 | | 0 | Commitments and Contingencies (Note 11) | | 0 | | 0 |
| Stockholders' Equity: | Stockholders' Equity: | | | | | Stockholders' Equity: | | | | |
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued | Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued | | — | | | — | | 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 | Common stock, $.01 par value, 150,000,000 shares authorized; 14,624,159 shares issued | | 146 | | | 146 | | Common stock, $.01 par value, 150,000,000 shares authorized; 14,624,159 shares issued | | 146 | | | 146 | |
Capital in excess of par value | Capital in excess of par value | | 112,693 | | | 110,824 | | Capital in excess of par value | | 114,825 | | | 115,888 | |
Retained earnings | Retained earnings | | 530,596 | | | 479,400 | | Retained earnings | | 613,146 | | | 551,848 | |
Treasury stock at cost, 3,038,629 and 3,081,919 shares | | (74,459) | | | (75,519) | | |
Treasury stock at cost, 2,962,186 and 3,003,419 shares | | Treasury stock at cost, 2,962,186 and 3,003,419 shares | | (72,586) | | | (73,596) | |
Accumulated other comprehensive items (Note 7) | Accumulated other comprehensive items (Note 7) | | (27,089) | | | (19,492) | | Accumulated other comprehensive items (Note 7) | | (51,379) | | | (30,350) | |
Total Kadant Stockholders' Equity | Total Kadant Stockholders' Equity | | 541,887 | | | 495,359 | | Total Kadant Stockholders' Equity | | 604,152 | | | 563,936 | |
Noncontrolling interest | Noncontrolling interest | | 1,499 | | | 1,546 | | Noncontrolling interest | | 2,012 | | | 1,680 | |
Total Stockholders' Equity | Total Stockholders' Equity | | 543,386 | | | 496,905 | | Total Stockholders' Equity | | 606,164 | | | 565,616 | |
Total Liabilities and Stockholders' Equity | Total Liabilities and Stockholders' Equity | | $ | 1,133,128 | | | $ | 927,571 | | 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 | | Nine Months Ended | | | Three Months Ended | | Six Months Ended |
| | October 2, 2021 | | September 26, 2020 | | October 2, 2021 | | September 26, 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 10) | Revenue (Notes 1 and 10) | | $ | 199,789 | | | $ | 154,610 | | | $ | 568,063 | | | $ | 466,597 | | 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 | | 116,096 | | | 86,294 | | | 323,337 | | | 263,510 | | Cost of revenue | | 125,611 | | | 110,493 | | | 253,880 | | | 207,241 | |
Selling, general, and administrative expenses | Selling, general, and administrative expenses | | 52,316 | | | 43,853 | | | 151,014 | | | 134,518 | | Selling, general, and administrative expenses | | 55,319 | | | 49,267 | | | 114,487 | | | 98,698 | |
Research and development expenses | Research and development expenses | | 2,649 | | | 2,658 | | | 8,547 | | | 8,532 | | Research and development expenses | | 3,251 | | | 3,041 | | | 6,329 | | | 5,898 | |
Restructuring costs | | — | | | 470 | | | — | | | 926 | | |
Gain on sale and other expense, net (Note 2) | | Gain on sale and other expense, net (Note 2) | | — | | | — | | | (20,008) | | | — | |
| | | 171,061 | | | 133,275 | | | 482,898 | | | 407,486 | | | | 184,181 | | | 162,801 | | | 354,688 | | | 311,837 | |
Operating Income | Operating Income | | 28,728 | | | 21,335 | | | 85,165 | | | 59,111 | | Operating Income | | 37,468 | | | 33,010 | | | 93,441 | | | 56,437 | |
Interest Income | Interest Income | | 55 | | | 52 | | | 176 | | | 140 | | Interest Income | | 277 | | | 56 | | | 379 | | | 121 | |
Interest Expense | Interest Expense | | (1,320) | | | (1,670) | | | (3,497) | | | (6,060) | | Interest Expense | | (1,366) | | | (1,066) | | | (2,600) | | | (2,177) | |
Other Expense, Net | Other Expense, Net | | (23) | | | (32) | | | (71) | | | (95) | | Other Expense, Net | | (19) | | | (24) | | | (41) | | | (48) | |
Income Before Provision for Income Taxes | Income Before Provision for Income Taxes | | 27,440 | | | 19,685 | | | 81,773 | | | 53,096 | | Income Before Provision for Income Taxes | | 36,360 | | | 31,976 | | | 91,179 | | | 54,333 | |
Provision for Income Taxes (Note 4) | Provision for Income Taxes (Note 4) | | 6,742 | | | 4,705 | | | 21,252 | | | 13,738 | | Provision for Income Taxes (Note 4) | | 9,951 | | | 8,949 | | | 23,329 | | | 14,510 | |
Net Income | Net Income | | 20,698 | | | 14,980 | | | 60,521 | | | 39,358 | | Net Income | | 26,409 | | | 23,027 | | | 67,850 | | | 39,823 | |
Net Income Attributable to Noncontrolling Interest | Net Income Attributable to Noncontrolling Interest | | (237) | | | (129) | | | (635) | | | (369) | | Net Income Attributable to Noncontrolling Interest | | (239) | | | (163) | | | (488) | | | (398) | |
Net Income Attributable to Kadant | Net Income Attributable to Kadant | | $ | 20,461 | | | $ | 14,851 | | | $ | 59,886 | | | $ | 38,989 | | Net Income Attributable to Kadant | | $ | 26,170 | | | $ | 22,864 | | | $ | 67,362 | | | $ | 39,425 | |
| Earnings per Share Attributable to Kadant (Note 3) | Earnings per Share Attributable to Kadant (Note 3) | | | | | | Earnings per Share Attributable to Kadant (Note 3) | | | | | |
Basic | Basic | | $ | 1.77 | | | $ | 1.29 | | | $ | 5.18 | | | $ | 3.40 | | Basic | | $ | 2.24 | | | $ | 1.97 | | | $ | 5.78 | | | $ | 3.41 | |
Diluted | Diluted | | $ | 1.75 | | | $ | 1.28 | | | $ | 5.14 | | | $ | 3.38 | | Diluted | | $ | 2.24 | | | $ | 1.96 | | | $ | 5.77 | | | $ | 3.39 | |
| Weighted Average Shares (Note 3) | Weighted Average Shares (Note 3) | | | | | | Weighted Average Shares (Note 3) | | | | | |
Basic | Basic | | 11,580 | | | 11,504 | | | 11,571 | | | 11,472 | | Basic | | 11,660 | | | 11,579 | | | 11,645 | | | 11,566 | |
Diluted | Diluted | | 11,668 | | | 11,589 | | | 11,644 | | | 11,550 | | Diluted | | 11,689 | | | 11,650 | | | 11,672 | | | 11,631 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
KADANT INC.
Condensed Consolidated Statement of Comprehensive Income
(Unaudited)
| | | | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | Six Months Ended |
| | October 2, 2021 | | September 26, 2020 | | October 2, 2021 | | September 26, 2020 | | July 2, 2022 | | July 3, 2021 | | July 2, 2022 | | July 3, 2021 |
(In thousands) | (In thousands) | | (In thousands) | |
Net Income | Net Income | | $ | 20,698 | | | $ | 14,980 | | | $ | 60,521 | | | $ | 39,358 | | 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 | | (7,326) | | | 8,656 | | | (7,987) | | | 824 | | Foreign currency translation adjustment | | (19,364) | | | 4,089 | | | (21,648) | | | (661) | |
Post-retirement liability adjustments, net (net of tax provision (benefit) of $9, $(6), $21 and $14) | | 24 | | | (14) | | | 57 | | | 34 | | |
Effect of post-retirement plan settlement | | — | | | — | | | — | | | (119) | | |
Deferred gain (loss) on cash flow hedges (net of tax provision (benefit) of $20, $19, $60 and $(103)) | | 66 | | | 51 | | | 244 | | | (275) | | |
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 | | (7,236) | | | 8,693 | | | (7,686) | | | 464 | | Other comprehensive items | | (19,187) | | | 4,159 | | | (21,185) | | | (450) | |
Comprehensive Income | Comprehensive Income | | 13,462 | | | 23,673 | | | 52,835 | | | 39,822 | | Comprehensive Income | | 7,222 | | | 27,186 | | | 46,665 | | | 39,373 | |
Comprehensive Income Attributable to Noncontrolling Interest | Comprehensive Income Attributable to Noncontrolling Interest | | (201) | | | (191) | | | (546) | | | (445) | | Comprehensive Income Attributable to Noncontrolling Interest | | (129) | | | (171) | | | (332) | | | (345) | |
Comprehensive Income Attributable to Kadant | Comprehensive Income Attributable to Kadant | | $ | 13,261 | | | $ | 23,482 | | | $ | 52,289 | | | $ | 39,377 | | 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)
| | | | Nine Months Ended | | | Six Months Ended |
| | October 2, 2021 | | September 26, 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 | | $ | 59,886 | | | $ | 38,989 | | Net income attributable to Kadant | | $ | 67,362 | | | $ | 39,425 | |
Net income attributable to noncontrolling interest | Net income attributable to noncontrolling interest | | 635 | | | 369 | | Net income attributable to noncontrolling interest | | 488 | | | 398 | |
| Net income | Net income | | 60,521 | | | 39,358 | | 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 | | 24,597 | | | 23,260 | | Depreciation and amortization | | 17,931 | | | 15,402 | |
Stock-based compensation expense | Stock-based compensation expense | | 6,230 | | | 5,126 | | Stock-based compensation expense | | 4,536 | | | 4,026 | |
Provision for losses on accounts receivable | | 116 | | | 505 | | |
Loss (gain) on sale of property, plant, and equipment | | 99 | | | (4) | | |
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 | | (1,852) | | | (250) | | 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 | | (22,305) | | | 1,306 | | Accounts receivable | | (12,336) | | | (15,321) | |
Unbilled revenue | Unbilled revenue | | (487) | | | 4,332 | | Unbilled revenue | | (3,694) | | | 1,005 | |
Inventories | Inventories | | (10,553) | | | (6,229) | | Inventories | | (26,816) | | | (7,312) | |
Other current assets | | (8,110) | | | 2,840 | | |
Other assets | | Other assets | | 686 | | (3,209) | |
Accounts payable | Accounts payable | | 19,822 | | | (13,183) | | Accounts payable | | (287) | | | 12,904 | |
Other current liabilities | | 33,332 | | | (4,460) | | |
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 | | 101,410 | | | 52,601 | | Net cash provided by operating activities | | 42,565 | | | 63,478 | |
| Investing Activities | Investing Activities | | | | | Investing Activities | | | | |
Acquisitions, net of cash acquired (Note 2) | | (141,538) | | | (7,095) | | |
Acquisitions, net of cash acquired | | Acquisitions, net of cash acquired | | (62) | | | (159) | |
Purchases of property, plant, and equipment | Purchases of property, plant, and equipment | | (7,688) | | | (5,419) | | 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 | | 102 | | | 55 | | Proceeds from sale of property, plant, and equipment | | 1,942 | | | 71 | |
| Other | Other | | 537 | | | — | | Other | | 41 | | | 537 | |
Net cash used in investing activities | Net cash used in investing activities | | (148,587) | | | (12,459) | | Net cash used in investing activities | | (7,894) | | | (3,869) | |
| Financing Activities | Financing Activities | | | | | Financing Activities | | | | |
Repayment of short- and long-term obligations | Repayment of short- and long-term obligations | | (72,723) | | | (69,034) | | Repayment of short- and long-term obligations | | (51,379) | | | (47,138) | |
Proceeds from issuance of long-term obligations (Note 5) | | 151,944 | | | 26,000 | | |
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) | | | (2,596) | | Tax withholding payments related to stock-based compensation | | (4,589) | | | (3,388) | |
Dividends paid | Dividends paid | | (8,559) | | | (8,141) | | Dividends paid | | (5,936) | | | (5,664) | |
| Dividend paid to noncontrolling interest | | (560) | | | (525) | | |
Proceeds from issuance of Company common stock | | — | | | 1,614 | | |
| Other | | — | | | (189) | | |
Net cash provided by (used in) financing activities | | 66,714 | | | (52,871) | | |
| 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 | | (2,513) | | | 660 | | Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash | | (5,418) | | | (803) | |
| Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash | | 17,024 | | | (12,069) | | |
(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 | | $ | 83,664 | | | $ | 56,204 | | 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 October 2, 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 July 3, 2021 | | 14,624,159 | | | $ | 146 | | | $ | 110,529 | | | $ | 513,036 | | | 3,043,854 | | | $ | (74,587) | | | $ | (19,889) | | | $ | 1,891 | | | $ | 531,126 | |
Net income | | — | | | — | | | — | | | 20,461 | | | — | | | — | | | — | | | 237 | | | 20,698 | |
Dividend declared – Common Stock, $0.25 per share | | — | | | — | | | — | | | (2,901) | | | — | | | — | | | — | | | — | | | (2,901) | |
Activity under stock plans | | — | | | — | | | 2,164 | | | — | | | (5,225) | | | 128 | | | — | | | — | | | 2,292 | |
Dividend paid to noncontrolling interest | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (560) | | | (560) | |
Noncontrolling interest acquired (Note 2) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 653 | | | 653 | |
Purchase of shares of noncontrolling interest (Note 2) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (686) | | | (686) | |
Other comprehensive items | | — | | | — | | | — | | | — | | | — | | | — | | | (7,200) | | | (36) | | | (7,236) | |
Balance at October 2, 2021 | | 14,624,159 | | | $ | 146 | | | $ | 112,693 | | | $ | 530,596 | | | 3,038,629 | | | $ | (74,459) | | | $ | (27,089) | | | $ | 1,499 | | | $ | 543,386 | |
| | | | | | | | | | | | | | | | | | |
| | Nine Months Ended October 2, 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 | | — | | | — | | | — | | | 59,886 | | | — | | | — | | | — | | | 635 | | | 60,521 | |
Dividends declared – Common Stock, $0.75 per share | | — | | | — | | | — | | | (8,690) | | | — | | | — | | | — | | | — | | | (8,690) | |
Activity under stock plans | | — | | | — | | | 1,869 | | | — | | | (43,290) | | | 1,060 | | | — | | | — | | | 2,929 | |
Dividend paid to noncontrolling interest | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (560) | | | (560) | |
Noncontrolling interest acquired (Note 2) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 653 | | | 653 | |
Purchase of shares of noncontrolling interest (Note 2) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (686) | | | (686) | |
Other comprehensive items | | — | | | — | | | — | | | — | | | — | | | — | | | (7,597) | | | (89) | | | (7,686) | |
Balance at October 2, 2021 | | 14,624,159 | | | $ | 146 | | | $ | 112,693 | | | $ | 530,596 | | | 3,038,629 | | | $ | (74,459) | | | $ | (27,089) | | | $ | 1,499 | | | $ | 543,386 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended July 2, 2022 |
(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 2, 2022 | | 14,624,159 | | | $ | 146 | | | $ | 112,651 | | | $ | 590,009 | | | 2,964,786 | | | $ | (72,649) | | | $ | (32,302) | | | $ | 1,883 | | | $ | 599,738 | |
Net income | | — | | | — | | | — | | | 26,170 | | | — | | | — | | | — | | | 239 | | | 26,409 | |
Dividend declared – Common Stock, $0.26 per share | | — | | | — | | | — | | | (3,033) | | | — | | | — | | | — | | | — | | | (3,033) | |
Activity under stock plans | | — | | | — | | | 2,174 | | | — | | | (2,600) | | | 63 | | | — | | | — | | | 2,237 | |
Other comprehensive items | | — | | | — | | | — | | | — | | | — | | | — | | | (19,077) | | | (110) | | | (19,187) | |
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 July 2, 2022 |
(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 1, 2022 | | 14,624,159 | | | $ | 146 | | | $ | 115,888 | | | $ | 551,848 | | | 3,003,419 | | | $ | (73,596) | | | $ | (30,350) | | | $ | 1,680 | | | $ | 565,616 | |
Net income | | — | | | — | | | — | | | 67,362 | | | — | | | — | | | — | | | 488 | | | 67,850 | |
Dividends declared – Common Stock, $0.52 per share | | — | | | — | | | — | | | (6,064) | | | — | | | — | | | — | | | — | | | (6,064) | |
Activity under stock plans | | — | | | — | | | (1,063) | | | — | | | (41,233) | | | 1,010 | | | — | | | — | | | (53) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Other comprehensive items | | — | | | — | | | — | | | — | | | — | | | — | | | (21,029) | | | (156) | | | (21,185) | |
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.
Condensed Consolidated Statement of Stockholders' Equity (continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 26, 2020 |
(In thousands, except share and per share amounts) | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Items | | Noncontrolling Interest | | Total Stockholders' Equity |
| Shares | | Amount | | | | Shares | | Amount | | | |
Balance at June 27, 2020 | | 14,624,159 | | | $ | 146 | | | $ | 107,202 | | | $ | 453,874 | | | 3,127,565 | | | $ | (76,638) | | | $ | (45,863) | | | $ | 1,638 | | | $ | 440,359 | |
Net income | | — | | | — | | | — | | | 14,851 | | | — | | | — | | | — | | | 129 | | | 14,980 | |
Dividend declared – Common Stock, $0.24 per share | | — | | | — | | | — | | | (2,762) | | | — | | | — | | | — | | | — | | | (2,762) | |
Dividend paid to noncontrolling interest | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (525) | | | (525) | |
Activity under stock plans | | — | | | — | | | 1,182 | | | — | | | (12,966) | | | 318 | | | — | | | — | | | 1,500 | |
Other comprehensive items | | — | | | — | | | — | | | — | | | — | | | — | | | 8,631 | | | 62 | | | 8,693 | |
Balance at September 26, 2020 | | 14,624,159 | | | $ | 146 | | | $ | 108,384 | | | $ | 465,963 | | | 3,114,599 | | | $ | (76,320) | | | $ | (37,232) | | | $ | 1,304 | | | $ | 462,245 | |
| | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 26, 2020 |
(In thousands, except share and per share amounts) | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Items | | Noncontrolling Interest | | Total Stockholders' Equity |
| Shares | | Amount | | | | Shares | | Amount | | | |
Balance at December 28, 2019 | | 14,624,159 | | | $ | 146 | | | $ | 106,698 | | | $ | 435,249 | | | 3,214,888 | | | $ | (78,778) | | | $ | (37,620) | | | $ | 1,384 | | | $ | 427,079 | |
Net income | | — | | | — | | | — | | | 38,989 | | | — | | | — | | | — | | | 369 | | | 39,358 | |
Dividends declared – Common Stock, $0.72 per share | | — | | | — | | | — | | | (8,275) | | | — | | | — | | | — | | | — | | | (8,275) | |
Dividend paid to noncontrolling interest | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (525) | | | (525) | |
Activity under stock plans | | — | | | — | | | 1,686 | | | — | | | (100,289) | | | 2,458 | | | — | | | — | | | 4,144 | |
Other comprehensive items | | — | | | — | | | — | | | — | | | — | | | — | | | 388 | | | 76 | | | 464 | |
Balance at September 26, 2020 | | 14,624,159 | | | $ | 146 | | | $ | 108,384 | | | $ | 465,963 | | | 3,114,599 | | | $ | (76,320) | | | $ | (37,232) | | | $ | 1,304 | | | $ | 462,245 | |
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 OctoberJuly 2, 2021,2022, its results of operations, comprehensive income, and stockholders' equity for the three- and nine-monthsix-month periods ended OctoberJuly 2, 20212022 and September 26, 2020July 3, 2021 and its cash flows for the nine-monthsix-month periods ended OctoberJuly 2, 20212022 and September 26, 2020.July 3, 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 ninesix months ended OctoberJuly 2, 2021.2022.
Supplemental Cash Flow Information | | | | | | | | | | | | | | |
| | Nine Months Ended |
(In thousands) | | October 2, 2021 | | September 26, 2020 |
| | | | |
| | | | |
| | | | |
| | | | |
Cash Paid for Interest | | $ | 3,091 | | | $ | 5,518 | |
Cash Paid for Income Taxes, Net of Refunds | | $ | 19,320 | | | $ | 9,953 | |
| | | | |
Non-Cash Investing Activities: | | | | |
Fair value of assets acquired | | $ | 185,424 | | | $ | 9,295 | |
Cash paid for acquired businesses | | (149,961) | | | (7,565) | |
Liabilities Assumed of Acquired Businesses | | $ | 35,463 | | | $ | 1,730 | |
| | | | |
Purchases of property, plant, and equipment in accounts payable | | $ | 914 | | | $ | 101 | |
| | | | |
Non-Cash Financing Activities: | | | | |
Issuance of Company common stock upon vesting of restricted stock units | | $ | 3,841 | | | $ | 4,557 | |
Dividends declared but unpaid | | $ | 2,901 | | | $ | 2,762 | |
| | | | | | | | | | | | | | |
| | 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.
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) | | October 2, 2021 | | September 26, 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 | | $ | 82,600 | | | $ | 53,554 | | | $ | 65,682 | | | $ | 66,786 | | Cash and cash equivalents | | $ | 76,540 | | | $ | 73,436 | | | $ | 91,186 | | | $ | 65,682 | |
Restricted cash | Restricted cash | | 1,064 | | | 2,650 | | | 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 | | $ | 83,664 | | | $ | 56,204 | | | $ | 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:
| | | | October 2, 2021 | | January 2, 2021 | | | July 2, 2022 | | January 1, 2022 |
(In thousands) | (In thousands) | | (In thousands) | |
Raw Materials | Raw Materials | | $ | 57,616 | | | $ | 46,413 | | Raw Materials | | $ | 64,717 | | | $ | 59,177 | |
Work in Process | Work in Process | | 34,636 | | | 17,692 | | Work in Process | | 37,978 | | | 29,448 | |
Finished Goods | Finished Goods | | 43,224 | | | 42,709 | | Finished Goods | | 53,731 | | | 45,731 | |
| | $ | 135,476 | | | $ | 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 |
October 2, 2021 | | | | | | | | |
Definite-Lived | | | | | | | | |
Customer relationships | | $ | 215,366 | | | $ | (75,978) | | | $ | (2,613) | | | $ | 136,775 | |
Product technology | | 67,625 | | | (34,615) | | | (1,468) | | | 31,542 | |
Tradenames | | 7,427 | | | (3,278) | | | (346) | | | 3,803 | |
Other | | 20,110 | | | (15,463) | | | (552) | | | 4,095 | |
| | 310,528 | | | (129,334) | | | (4,979) | | | 176,215 | |
Indefinite-Lived | | | | | | | | |
Tradenames | | 29,059 | | | — | | | 54 | | | 29,113 | |
Acquired Intangible Assets | | $ | 339,587 | | | $ | (129,334) | | | $ | (4,925) | | | $ | 205,328 | |
| | | | | | | | |
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 | | — | | | (85,509) | | | — | | | (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 | | | | | | | | | |
Acquisitions (Note 2) | | 25,349 | | | — | | | 27,699 | | | 53,048 | | |
2022 Activity | | 2022 Activity | | | | | | | | |
Acquisitions (a) | | Acquisitions (a) | | (33) | | | — | | | (502) | | | (535) | |
Currency translation | Currency translation | | (2,417) | | | (1,351) | | | (2,126) | | | (5,894) | | Currency translation | | (5,905) | | | (3,271) | | | (3,067) | | | (12,243) | |
Total 2021 adjustments | | 22,932 | | | (1,351) | | | 25,573 | | | 47,154 | | |
Balance at October 2, 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 | | 124,369 | | | 214,530 | | | 145,517 | | | 484,416 | | Gross balance | | 117,651 | | | 211,711 | | | 140,256 | | | 469,618 | |
Accumulated impairment losses | Accumulated impairment losses | | — | | | (85,509) | | | — | | | (85,509) | | Accumulated impairment losses | | — | | | (85,509) | | | — | | | (85,509) | |
Net balance | Net balance | | $ | 124,369 | | | $ | 129,021 | | | $ | 145,517 | | | $ | 398,907 | | 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:
| | | | Nine Months Ended | | | Six Months Ended |
(In thousands) | (In thousands) | | October 2, 2021 | | September 26, 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 | | 3,289 | | | 3,960 | | Provision charged to expense | | 2,657 | | | 2,709 | |
Usage | Usage | | (3,106) | | | (3,809) | | Usage | | (2,548) | | | (2,255) | |
Acquisitions | | 429 | | | — | | |
Currency translation | Currency translation | | (210) | | | 114 | | Currency translation | | (429) | | | (74) | |
Balance at End of Period | Balance at End of Period | | $ | 7,466 | | | $ | 6,732 | | 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 over time 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 | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
| | October 2, | | September 26, | | October 2, | | September 26, | | 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 | | $ | 181,407 | | | $ | 137,679 | | | $ | 511,303 | | | $ | 403,568 | | Point in Time | | $ | 198,249 | | | $ | 175,479 | | | $ | 401,560 | | | $ | 329,896 | |
Over Time | Over Time | | 18,382 | | | 16,931 | | | 56,760 | | | 63,029 | | Over Time | | 23,400 | | | 20,332 | | | 46,569 | | | 38,378 | |
| | $ | 199,789 | | | $ | 154,610 | | | $ | 568,063 | | | $ | 466,597 | | | $ | 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 | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
| | October 2, | | September 26, | | October 2, | | September 26, | | 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 | Parts and consumables | | $ | 131,225 | | | $ | 102,729 | | | $ | 374,307 | | | $ | 305,087 | | Parts and consumables | | $ | 145,680 | | | $ | 124,975 | | | $ | 291,924 | | | $ | 243,082 | |
Capital | Capital | | 68,564 | | | 51,881 | | | 193,756 | | | 161,510 | | Capital | | 75,969 | | | 70,836 | | | 156,205 | | | 125,192 | |
| | $ | 199,789 | | | $ | 154,610 | | | $ | 568,063 | | | $ | 466,597 | | | $ | 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 | | $ | 105,384 | | | $ | 87,366 | | | 307,243 | | | 269,907 | | North America | | $ | 123,964 | | | $ | 106,767 | | | 248,300 | | | 201,859 | |
Europe | Europe | | 58,813 | | | 38,951 | | | 159,281 | | | 112,881 | | Europe | | 52,249 | | | 55,827 | | | 110,615 | | | 100,468 | |
Asia | Asia | | 25,504 | | | 18,847 | | | 72,046 | | | 50,992 | | Asia | | 30,851 | | | 24,729 | | | 62,838 | | | 46,542 | |
Rest of world | Rest of world | | 10,088 | | | 9,446 | | | 29,493 | | | 32,817 | | Rest of world | | 14,585 | | | 8,488 | | | 26,376 | | | 19,405 | |
| | $ | 199,789 | | | $ | 154,610 | | | $ | 568,063 | | | $ | 466,597 | | | $ | 221,649 | | | $ | 195,811 | | | $ | 448,129 | | | $ | 368,274 | |
See Note 10, Business Segment Information, for information on the disaggregation of revenue by reportable operating segment. The following table presents contract balances from contracts with customers:
| | | | October 2, 2021 | | January 2, 2021 | | | July 2, 2022 | | January 1, 2022 |
(In thousands) | (In thousands) | | (In thousands) | |
Accounts Receivable | | $ | 120,496 | | | $ | 91,540 | | |
Contract Assets | Contract Assets | | $ | 7,915 | | | $ | 7,576 | | Contract Assets | | $ | 11,861 | | | $ | 8,626 | |
Contract Liabilities | Contract Liabilities | | $ | 67,025 | | | $ | 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 $3,973,000$13,424,000 in the thirdsecond quarter of 2022 and $10,070,000 in the second quarter of 2021, $1,656,000 in the third quarter of 2020, $31,183,000$47,901,000 in the first ninesix months of 20212022 and $28,522,000$27,210,000 in the first ninesix months of 20202021 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 OctoberJuly 2, 20212022 was $38,135,000.$61,659,000. The Company will recognize revenue for these performance obligations as they are satisfied, approximately 70%52% of which is expected to occur within the next twelve months and the remaining 30% 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 $7,428,000$7,107,000 at OctoberJuly 2, 20212022 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. AcquisitionsGain on Sale and Other Expense, Net
The Company’s acquisitions have been accountedCompany 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 using the purchase method of accounting and the resultsapproximately $25,159,000. This subsidiary, which is part of the acquired businesses arestock-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 its condensed consolidated financial statements from the date of acquisition. Historically, acquisitions have been made at prices above the fair value of identifiable netother assets resulting in goodwill. Acquisition costs are included inselling, general, and administrative (SG&A) expenses in the accompanying condensed consolidated statementbalance sheet.
In addition, the Company recognized an impairment charge of income as incurred. The Company recorded acquisition costs of $2,619,000$182,000 in the first nine months of 2021 and $485,000 in the first nine months of 2020.
In the third quarter of 2021, the Company acquired all partnership interests and shares in The Clouth Group of Companies (Clouth), for $93,127,000, net of cash acquired plus 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, which the Company accounted for as a noncontrolling interest during the period from July 19, 2021 to August 10, 2021. The Company funded the purchase price with euro-denominated borrowings under its revolving credit facility and existing cash. Clouth, which is included within the Company's Flow Control segment, is a leading manufacturer of doctor blades and related equipment used in the production of paper, packaging, and tissue. The Company expects several synergies in connection with this acquisition, including deepening its 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 40,495,000 euros for the trailing twelve months ended June 30, 2021. Goodwill from the Clouth acquisition was $25,349,000, of which $6,240,000 is expected to be deductible for tax purposes over 15 years. In addition, intangible assets acquired were $34,113,000, of which $4,827,000 is expected to be deductible for tax purposes over 15 years. For the quarter ended October 2, 2021, the Company recorded revenue of $9,913,000 and an operating loss of $1,025,000 for Clouth from the date of acquisition, including amortization expense of $2,199,0002022 associated with acquired profit in inventory and backlog. The final purchase accounting and purchase price allocations remain subjectthe write-down of certain fixed assets that will not be moved to change as the new facility.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Company continues to refine its preliminary valuation of certain acquired assets and liabilities assumed and the valuation of acquired intangibles.
On August 23, 2021, the Company acquired all the outstanding equity securities in East Chicago Machine Tool Corporation (Balemaster) and certain assets of affiliated companies for $53,747,000, net of cash acquired. Balemaster, which is included within the Company's 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. The Company funded the purchase price with borrowings under its revolving credit facility. The Company expects several synergies in connection with the acquisition, including expansion of its presence in the secondary material processing market and creation of new opportunities for leveraging its high-performance balers produced in Europe. Balemaster's revenue for the trailing twelve months ended June 30, 2021 was approximately $22,166,000. Goodwill from the Balemaster acquisition was $27,699,000, none of which is deductible for tax purposes. In addition, intangible assets acquired were $27,260,000, none of which is deductible for tax purposes. For the quarter ended October 2, 2021, the Company recorded revenue of $2,845,000 and operating income of $221,000 for Balemaster from the date of acquisition, including amortization expense of $621,000 associated with acquired profit in inventory and backlog. The final purchase accounting and purchase price allocations remain subject to change as the Company continues to refine its preliminary valuation of certain acquired assets and liabilities assumed and the valuation of acquired intangibles.
The following table summarizes the estimated fair values of assets acquired and liabilities assumed and the purchase
price for Clouth and Balemaster.
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Clouth | | Balemaster | | Total |
Net Assets Acquired: | | | | | | |
Cash and Cash Equivalents | | $ | 4,666 | | | $ | 3,757 | | | $ | 8,423 | |
Accounts Receivable | | 6,863 | | | 1,593 | | | 8,456 | |
Inventories | | 15,770 | | | 3,993 | | | 19,763 | |
Other Current Assets | | 1,467 | | | 36 | | | 1,503 | |
Property, Plant, and Equipment | | 24,508 | | | 4,232 | | | 28,740 | |
Other Assets | | 3,923 | | | 195 | | | 4,118 | |
Definite-Lived Intangible Assets | | | | | | |
Customer relationships | | 19,838 | | | 21,800 | | | 41,638 | |
Product technology | | 8,914 | | | 2,600 | | | 11,514 | |
Tradenames | | — | | | 1,400 | | | 1,400 | |
Other | | 402 | | | 1,460 | | | 1,862 | |
Indefinite-Lived Intangible Assets | | | | | | |
Tradenames | | 4,959 | | | — | | | 4,959 | |
Goodwill | | 25,349 | | | 27,699 | | | 53,048 | |
Total assets acquired | | 116,659 | | | 68,765 | | | 185,424 | |
| | | | | | |
Short-term Obligations and Current Maturities of Long-term Obligations | | 1,320 | | | — | | | 1,320 | |
Accounts Payable | | 1,452 | | | 743 | | | 2,195 | |
Other Current Liabilities | | 4,557 | | | 3,900 | | | 8,457 | |
Long-Term Deferred Income Taxes | | 10,060 | | | 6,423 | | | 16,483 | |
Long-Term Obligations | | 4,141 | | | — | | | 4,141 | |
Other Long-term Liabilities | | 2,797 | | | 195 | | | 2,992 | |
Total liabilities assumed | | 24,327 | | | 11,261 | | | 35,588 | |
Net assets acquired | | $ | 92,332 | | | $ | 57,504 | | | $ | 149,836 | |
| | | | | | |
Purchase Price: | | | | | | |
Cash Paid | | $ | 92,332 | | | $ | 57,504 | | | $ | 149,836 | |
The weighted-average amortization period for Clouth's definite-lived intangible assets is 19 years, including weighted-average amortization periods of 24 years for customer relationships and 10 years for product technology. The weighted-average amortization period for Balemaster's definite-lived intangible assets is 17 years, including weighted-average amortization periods of 18 years for customer relationships, 13 years for product technology, and 17 years for tradenames.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 nine-month periods ended October 2, 2021 and September 26, 2020 would have been as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | October 2, 2021 | | September 26, 2020 | | October 2, 2021 | | September 26, 2020 |
(In thousands, except per share amounts) | | | | |
Revenue | | $ | 201,372 | | | $ | 166,687 | | | $ | 593,500 | | | $ | 501,484 | |
Net Income Attributable to Kadant | | $ | 22,125 | | | $ | 17,013 | | | $ | 64,102 | | | $ | 37,106 | |
Earnings per Share Attributable to Kadant | | | | | | | | |
Basic | | $ | 1.91 | | | $ | 1.48 | | | $ | 5.54 | | | $ | 3.23 | |
Diluted | | $ | 1.90 | | | $ | 1.47 | | | $ | 5.51 | | | $ | 3.21 | |
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 (i) directly attributable to the acquisition and related financing arrangements, (ii) expected to have a continuing impact on the Company, and (iii) factually supportable.
Pro forma results include the following non-recurring pro forma adjustments:
•Pre-tax charge to cost of revenue of $3,098,000 in the nine months ended September 26, 2020 and reversal of $1,846,000 in the three and nine months ended October 2, 2021, for the sale of inventory revalued at the date of acquisition.
•Pre-tax charge to SG&A expenses of $2,143,000 in the nine months ended September 26, 2020 and reversal of $860,000 in the three months ended October 2, 2021 and $2,096,000 in the nine months ended October 2, 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.
The Company's pro forma results exclude the Balemaster acquisition as the inclusion of its results would not have been materially different from the pro forma results presented above had the acquisition occurred at the beginning of 2020.
3. Earnings per Share
Basic and diluted earnings per share (EPS) were calculated as follows:
| | | | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | Six Months Ended |
| | | October 2, 2021 | | September 26, 2020 | | October 2, 2021 | | September 26, 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 | | $ | 20,461 | | | $ | 14,851 | | | $ | 59,886 | | | $ | 38,989 | | Net Income Attributable to Kadant | | $ | 26,170 | | | $ | 22,864 | | | $ | 67,362 | | | $ | 39,425 | |
| Basic Weighted Average Shares | Basic Weighted Average Shares | | 11,580 | | | 11,504 | | | 11,571 | | | 11,472 | | 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 | | 88 | | | 85 | | | 73 | | | 78 | | 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 | | 11,668 | | | 11,589 | | | 11,644 | | | 11,550 | | Diluted Weighted Average Shares | | 11,689 | | | 11,650 | | | 11,672 | | | 11,631 | |
| Basic Earnings per Share | Basic Earnings per Share | | $ | 1.77 | | | $ | 1.29 | | | $ | 5.18 | | | $ | 3.40 | | Basic Earnings per Share | | $ | 2.24 | | | $ | 1.97 | | | $ | 5.78 | | | $ | 3.41 | |
| Diluted Earnings per Share | Diluted Earnings per Share | | $ | 1.75 | | | $ | 1.28 | | | $ | 5.14 | | | $ | 3.38 | | 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 3,0008,000 shares in the thirdsecond quarter of 2022 and 9,000 shares in the second quarter of 2021, 11,000 shares in the third quarter of 2020, 19,00013,000 shares in the first ninesix months of 2021,2022 and 30,000 shares27,000 in the first ninesix months of 20202021 were not included in the computation of diluted EPS for the respective periods as the effect would have been antidilutive or, for unvested performance-based RSUs, the performance conditions had not been met as of the end of the reporting periods.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. Provision for Income Taxes
The provision for income taxes was $21,252,000$23,329,000 in the first ninesix months of 20212022 and $13,738,000$14,510,000 in the first ninesix months of 2020.2021. The effective tax raterates of 26% and 27% in the first ninesix 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 26% inFor the first ninesix 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 earnings2022 and state taxes. 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.
5. Short- and Long-Term Obligations
Short- and long-term obligations are as follows: | | | | October 2, 2021 | | January 2, 2021 | | | July 2, 2022 | | January 1, 2022 |
(In thousands) | (In thousands) | | (In thousands) | |
Revolving Credit Facility, due 2023 | Revolving Credit Facility, due 2023 | | $ | 294,610 | | | $ | 217,963 | | Revolving Credit Facility, due 2023 | | $ | 210,450 | | | $ | 250,267 | |
Senior Promissory Notes, due 2023 to 2028 | Senior Promissory Notes, due 2023 to 2028 | | 10,000 | | | 10,000 | | Senior Promissory Notes, due 2023 to 2028 | | 10,000 | | | 10,000 | |
Finance Leases, due 2021 to 2026 | | 1,661 | | | 1,631 | | |
Other Borrowings, due 2021 to 2028 | | 8,225 | | | 3,880 | | |
Finance Leases, due 2022 to 2026 | | Finance Leases, due 2022 to 2026 | | 1,569 | | | 1,610 | |
Other Borrowings, due 2022 to 2028 | | Other Borrowings, due 2022 to 2028 | | 6,293 | | | 7,637 | |
Total | Total | | 314,496 | | | 233,474 | | Total | | 228,312 | | | 269,514 | |
Less: Short-term Obligations and Current Maturities of Long-Term Obligations | Less: Short-term Obligations and Current Maturities of Long-Term Obligations | | (5,574) | | | (1,474) | | Less: Short-term Obligations and Current Maturities of Long-Term Obligations | | (4,543) | | | (5,356) | |
Long-Term Obligations | Long-Term Obligations | | $ | 308,922 | | | $ | 232,000 | | Long-Term Obligations | | $ | 223,769 | | | $ | 264,158 | |
See Note 9, 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 zero 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 nine months of 2021, the Company borrowed an aggregate of $151,944,000 under the Credit Agreement, including $89,944,000 of euro-denominated borrowings, which were primarily used to fund the Company's acquisitions in the third quarter of 2021. See Note 2, Acquisitions, for further details. As of OctoberJuly 2, 2021,2022, the outstanding balance under the Credit Agreement was $294,610,000,$210,450,000, which included $106,610,000$70,450,000 of euro-denominated borrowings. As of OctoberJuly 2, 2021,2022, the Company had $104,912,000$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 1.46%2.49% as of OctoberJuly 2, 2021.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2022.See Note 8, 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 OctoberJuly 2, 2021,2022, 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 $1,374,000$1,414,000 at OctoberJuly 2, 2021.2022. The lease arrangement provides for a fixed price purchase option, net of the projected loan receivable, of $1,540,000$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, it will receive cash fromand issued a notice of intent to the landlord to settlepurchase the loan receivable.facility. As of OctoberJuly 2, 2021, $3,432,0002022, $2,920,000 was outstanding under this obligation.
Other borrowings also include $1,150,000$804,000 of short-term obligations and $3,629,000$2,563,000 of debt obligations outstanding at OctoberJuly 2, 20212022 assumed in the acquisition of The Clouth Group of Companies (Clouth), which mature on various dates ranging from 20212022 through 2028.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. Stock-Based Compensation
The Company recognized stock-based compensation expense of $2,204,000$2,276,000 in the thirdsecond quarter of 2022 and $2,527,000 in the second quarter of 2021, $1,610,000 in the third quarter of 2020, $6,230,000$4,536,000 in the first ninesix months of 2021,2022, and $5,126,000$3,516,000 in the first ninesix 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 $9,699,000$10,331,000 at OctoberJuly 2, 2021,2022, which will be recognized over a weighted average period of 1.71.8 years.
In May 2022, the Company granted an aggregate of 5,175 RSUs to its non-employee directors with a grant date fair value of $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, 2022 with the remaining RSUs to vest ratably on the last day of the third and fourth fiscal quarters of 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)
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 | | (7,898) | | | 27 | | | (12) | | | (7,883) | | Other comprehensive items before reclassifications | | (21,492) | | | 27 | | | 276 | | | (21,189) | |
Reclassifications from AOCI | Reclassifications from AOCI | | — | | | 30 | | | 256 | | | 286 | | Reclassifications from AOCI | | — | | | 13 | | | 147 | | | 160 | |
Net current period other comprehensive items | Net current period other comprehensive items | | (7,898) | | | 57 | | | 244 | | | (7,597) | | Net current period other comprehensive items | | (21,492) | | | 40 | | | 423 | | | (21,029) | |
Balance at October 2, 2021 | | $ | (25,792) | | | $ | (713) | | | $ | (584) | | | $ | (27,089) | | |
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 | | Nine Months Ended | | |
(In thousands) | | October 2, 2021 | | September 26, 2020 | | October 2, 2021 | | September 26, 2020 | | Statement of Income Line Item |
Post-retirement Benefit Plans | | | | | | | | | | |
Recognized net actuarial loss | | $ | (11) | | | $ | (14) | | | $ | (33) | | | $ | (43) | | | Other expense, net |
Amortization of prior service cost | | (3) | | | (2) | | | (9) | | | (5) | | | Other expense, net |
Total expense before income taxes | | (14) | | | (16) | | | (42) | | | (48) | | | |
Income tax benefit | | 4 | | | 4 | | | 12 | | | 132 | | | Provision for income taxes |
| | (10) | | | (12) | | | (30) | | | 84 | | | |
Cash Flow Hedges (a) | | | | | | | | | | |
Interest rate swap agreements | | (114) | | | (109) | | | (336) | | | (215) | | | Interest expense |
Forward currency-exchange contracts | | — | | | 47 | | | — | | | 24 | | | Cost of revenue |
Total expense before income taxes | | (114) | | | (62) | | | (336) | | | (191) | | | |
Income tax benefit | | 27 | | | 15 | | | 80 | | | 46 | | | Provision for income taxes |
| | (87) | | | (47) | | | (256) | | | (145) | | | |
Total Reclassifications | | $ | (97) | | | $ | (59) | | | $ | (286) | | | $ | (61) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 8, Derivatives, for additional information.
KADANT INC.
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.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 5, Short- and Long-Term Obligations, for further details.
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- and nine-monthsix-month periods ended OctoberJuly 2, 20212022 and September 26, 2020.July 3, 2021.
The following table summarizes the fair value of derivative instruments in the accompanying condensed consolidated balance sheet:
| | | | | | October 2, 2021 | | January 2, 2021 | | | | | July 2, 2022 | | January 1, 2022 |
| | Balance Sheet Location | | Asset (Liability) (a) | | Notional Amount (b) | | Asset (Liability) (a) | | Notional Amount | | Balance Sheet Location | | Asset (Liability) (a) | | Notional Amount (b) | | Asset (Liability) (a) | | Notional Amount |
(In thousands) | (In thousands) | | (In thousands) | |
Derivatives Designated as Hedging Instruments: | Derivatives Designated as Hedging Instruments: | | | | | | | | | Derivatives Designated as Hedging Instruments: | | | | | | | | |
Derivatives in an Asset Position: | | | | |
Forward currency-exchange contract | | Other Current Assets | | $ | — | | | $ | — | | | $ | 25 | | | $ | 842 | | |
Derivative in an Asset Position: | | Derivative in an Asset Position: | |
2018 Swap Agreement | | 2018 Swap Agreement | | Other Current Assets | | $ | 3 | | | $ | 15,000 | | | $ | — | | | $ | — | |
Derivatives in a Liability Position: | Derivatives in a Liability Position: | | Derivatives in a Liability Position: | |
Forward currency-exchange contract | | Other Current Liabilities | | $ | (25) | | | $ | 842 | | | $ | — | | | $ | — | | |
Forward currency-exchange contracts | | Forward currency-exchange contracts | | Other Current Liabilities | | $ | (56) | | | $ | 430 | | | $ | (44) | | | $ | 842 | |
2018 Swap Agreement | 2018 Swap Agreement | | Other Long-Term Liabilities | | $ | (745) | | | $ | 15,000 | | | $ | (1,099) | | | $ | 15,000 | | 2018 Swap Agreement | | Other Long-Term Liabilities | | $ | — | | | $ | — | | | $ | (550) | | | $ | 15,000 | |
| Derivatives Not Designated as Hedging Instruments: | Derivatives Not Designated as Hedging Instruments: | | | | | | | | | Derivatives Not Designated as Hedging Instruments: | | | | | | | | |
Derivatives in an Asset Position: | Derivatives in an Asset Position: | | | | | | | | | | | Derivatives in an Asset Position: | | | | | | | | |
Forward currency-exchange contracts | Forward currency-exchange contracts | | Other Current Assets | | $ | — | | | $ | — | | | $ | 12 | | | $ | 582 | | Forward currency-exchange contracts | | Other Current Assets | | $ | — | | | $ | — | | | $ | 14 | | | $ | 1,200 | |
Derivatives in a Liability Position: | | |
Forward currency-exchange contracts | | Other Current Liabilities | | $ | — | | | $ | — | | | $ | (7) | | | $ | 825 | | |
Derivative in a Liability Position: | | Derivative in a Liability Position: | |
Forward currency-exchange contract | | Forward currency-exchange contract | | Other Current Liabilities | | $ | (2) | | | $ | 189 | | | $ | — | | | $ | — | |
(a) See Note 9, Fair Value Measurements and Fair Value of Financial Instruments, for the fair value measurements relating to these financial instruments. (b) The 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 ninesix months ended OctoberJuly 2, 2021:2022:
| (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) | | 256 | | | — | | | 256 | | Loss reclassified to earnings (a) | | 147 | | | — | | | 147 | |
Gain (loss) recognized in AOCI | Gain (loss) recognized in AOCI | | 25 | | | (37) | | | (12) | | Gain (loss) recognized in AOCI | | 284 | | | (8) | | | 276 | |
Unrealized Loss, Net of Tax, at October 2, 2021 | | $ | (565) | | | $ | (19) | | | $ | (584) | | |
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 7, Accumulated Other Comprehensive Items, for the income statement classification.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As of OctoberJuly 2, 2021,2022, the Company expects to reclassify losses of $363,000$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.
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 October 2, 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 | | $ | 9,774 | | | $ | — | | | $ | — | | | $ | 9,774 | | Money market funds and time deposits | | $ | 15,729 | | | $ | — | | | $ | — | | | $ | 15,729 | |
| Banker's acceptance drafts (a) | Banker's acceptance drafts (a) | | $ | — | | | $ | 7,428 | | | $ | — | | | $ | 7,428 | | Banker's acceptance drafts (a) | | $ | — | | | $ | 7,107 | | | $ | — | | | $ | 7,107 | |
2018 Swap Agreement | | 2018 Swap Agreement | | $ | — | | | $ | 3 | | | $ | — | | | $ | 3 | |
| Liabilities: | Liabilities: | | | | | | | | | Liabilities: | | | | | | | | |
2018 Swap Agreement | | $ | — | | | $ | 745 | | | $ | — | | | $ | 745 | | |
Forward currency-exchange contract | | $ | — | | | $ | 25 | | | $ | — | | | $ | 25 | | |
| 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 | | | $ | — | | | $ | — | | | $ | 8,054 | |
Banker's acceptance drafts (a) | | $ | — | | | $ | 9,445 | | | $ | — | | | $ | 9,445 | |
Forward currency-exchange contracts | | $ | — | | | $ | 37 | | | $ | — | | | $ | 37 | |
Liabilities: | | | | | | | | |
2018 Swap Agreement | | $ | — | | | $ | 1,099 | | | $ | — | | | $ | 1,099 | |
Forward currency-exchange contracts | | $ | — | | | $ | 7 | | | $ | — | | | $ | 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 ninesix 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.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The carrying value and fair value of debt obligations, excluding lease obligations, are as follows:
| | | | October 2, 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 | | $ | 294,610 | | | $ | 294,610 | | | $ | 217,963 | | | $ | 217,963 | | Revolving credit facility | | $ | 210,450 | | | $ | 210,450 | | | $ | 250,267 | | | $ | 250,267 | |
Senior promissory notes | Senior promissory notes | | 10,000 | | | 11,179 | | | 10,000 | | | 11,157 | | Senior promissory notes | | 10,000 | | | 10,023 | | | 10,000 | | | 10,947 | |
Other | Other | | 4,779 | | | 4,779 | | | — | | | — | | Other | | 3,367 | | | 3,367 | | | 4,331 | | | 4,331 | |
| | $ | 309,389 | | | $ | 310,568 | | | $ | 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 end, which represent Level 2 measurements.
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 | | Nine Months Ended |
| | October 2, | | September 26, | | October 2, | | September 26, |
(In thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Revenue | | | | | | | | |
Flow Control | | $ | 76,253 | | | $ | 56,815 | | | $ | 210,769 | | | $ | 165,329 | |
Industrial Processing | | 81,620 | | | 62,086 | | | 233,455 | | | 192,468 | |
Material Handling | | 41,916 | | | 35,709 | | | 123,839 | | | 108,800 | |
| | $ | 199,789 | | | $ | 154,610 | | | $ | 568,063 | | | $ | 466,597 | |
| | | | | | | | |
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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| | Three Months Ended | | Nine Months Ended |
| | October 2, | | September 26, | | October 2, | | September 26, |
(In thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Income Before Provision for Income Taxes | | | | | | | | |
Flow Control (a) | | $ | 17,129 | | | $ | 13,770 | | | $ | 51,899 | | | $ | 37,360 | |
Industrial Processing | | 16,095 | | | 12,072 | | | 44,449 | | | 32,147 | |
Material Handling (b) | | 3,491 | | | 2,614 | | | 12,941 | | | 10,341 | |
Corporate (c) | | (7,987) | | | (7,121) | | | (24,124) | | | (20,737) | |
Total operating income | | 28,728 | | | 21,335 | | | 85,165 | | | 59,111 | |
Interest expense, net (d) | | (1,265) | | | (1,618) | | | (3,321) | | | (5,920) | |
Other expense, net (d) | | (23) | | | (32) | | | (71) | | | (95) | |
| | $ | 27,440 | | | $ | 19,685 | | | $ | 81,773 | | | $ | 53,096 | |
| | | | | | | | |
Capital Expenditures | | | | | | | | |
Flow Control | | $ | 1,128 | | | $ | 509 | | | $ | 1,830 | | | $ | 1,667 | |
Industrial Processing | | 1,725 | | | 785 | | | 4,720 | | | 2,460 | |
Material Handling | | 505 | | | 486 | | | 1,121 | | | 1,167 | |
Corporate | | 12 | | | 42 | | | 17 | | | 125 | |
| | $ | 3,370 | | | $ | 1,822 | | | $ | 7,688 | | | $ | 5,419 | |
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| | | | | | October 2, | | January 2, |
(In thousands) | | | | | | 2021 | | 2021 |
Total Assets | | | | | | | | |
Flow Control | | | | | | $ | 388,662 | | | $ | 263,141 | |
Industrial Processing | | | | | | 399,651 | | | 379,965 | |
Material Handling | | | | | | 333,535 | | | 273,909 | |
Corporate | | | | | | 11,280 | | | 10,556 | |
| | | | | | $ | 1,133,128 | | | $ | 927,571 | |
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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 | |
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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 $2,706,000$53,000 and $140,000 in the three and six months ended October 2,July 3, 2021, and $3,942,000 in the nine months ended October 2, 2021 and restructuring costs of $265,000 in the three months ended September 26, 2020 and $721,000 in the nine months ended September 26, 2020.respectively. Acquisition-related expenses include acquisition costs and amortization expense associated with acquired profit in inventory and backlog.
(b) (e)Includes acquisition-related expenses of $799,000$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 October 2,July 3, 2021, include a decrease in operating loss for Corporate of $364,000 and $1,411,000a 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 ninesix months ended October 2, 2021 and $248,000 in the three months ended September 26, 2020 and $256,000 in the nine months ended September 26, 2020.July 3, 2021.
(c) (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.
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 $11,432,000$11,080,000 at OctoberJuly 2, 20212022 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.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Litigation
From time to time, the Company is subject to various claims and legal proceedings covering a range of matters that arise in the ordinary course of business. Such litigation may include, but is not limited to, claims and counterclaims by and against the Company for breach of contract or warranty, canceled contracts, product liability, or bankruptcy-related claims. For legal proceedings in which a loss is probable and estimable, the Company accrues a loss based on the low end of the range of estimated loss when there is no better estimate within the range. If the Company were found to be liable for any of the claims or counterclaims against it, the Company would incur a charge against earnings for amounts in excess of legal accruals.
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations
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 consolidated bookings of $265.9 million in the second quarter of 2022 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 further 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
Industry and Business Overview
We had record consolidated bookings of $244.7 million in the third quarter of 2021, including bookings of $15.0 million attributable to our acquisitions. See Acquisitions below for further details. Our third quarter of 2021 bookings include record orders for capital equipment and continuedsee 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 three 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 thirdsecond quarter of 20212022 with record consolidated backlog of $299.5$379.2 million. An overview of our business by segment is as follows:
•Flow Control – DuringOur Flow Control segment had its second highest bookings quarter, following our record bookings in the thirdfirst quarter, increasing 36% compared to the second quarter of 2021, we acquired2021. This increase included a 19% increase from our acquisition of The Clouth Group of Companies (Clouth), which contributed $9.9 million and a 5% decrease from the unfavorable effect of bookings for the quarterforeign currency translation. . Orders for both parts and consumables products and capital equipment at our existing Flow Control businesses continue to be strong following recorddue to growth in the industries we serve. We expect bookings to moderate in the second half of 2022 compared with the record-setting booking performance achieved during the first half of 2021 due to improved market conditions and pent-up demand from depressed levels encountered during most of 2020.the year.
•Industrial Processing – Our Industrial Processing segment had record bookings for capital equipmentincreased 3% sequentially and continued8% compared to the second quarter of 2021 resulting from strong demand for parts and consumables products during the third quarter of 2021. Orders for bothour capital equipment and parts and consumables products at our wood processing business were fueled by an ongoingdue to the robust U.S. housing market and high demand for lumber, oriented strand board and plywood, which continues to result in high parts consumption and drive new capital equipment investment by our customers. More recently, maintenance requirements at many of our wood processing customers have augmented demand for our parts products, which we expect to continue for the remainder of the year. Increasedplywood. Capital bookings at our stock-preparation business was led by orders for fiber processing systems at our North American and European businesses. This followed strong bookings for capital equipment at our Chinese operationwere lower in the second quarter of 2022 compared to the record bookings levels in the 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 Industrial Processing segment in the third quarter of 2022 compared to prior quarter.quarters as customers assess new capital expenditures, and as the pace of capacity expansion moderates and new equipment is brought online. Orders for parts and consumables products forat our stock-preparation business moderated slightly following three quartersIndustrial Processing segment increased over the second quarter of strong bookings attributable2021 due to improvedcontinued improvement in market conditions and pent-up demand.conditions.
•Material Handling – Our Material Handling segment also had record bookings inincreased 49% compared to the thirdsecond quarter of 2021. In August 2021, we acquiredincluding a 30% increase from our acquisition of East Chicago Machine Tool Corporation (Balemaster) and certain assets of affiliated companies, which contributed $5.1 million of orders for the period. Bookingsa 19% increase in capital bookings at our conveying and vibratory business. We expect demand for baling products at our European operations continue to be bolstered by improved business conditions, includingmoderate in the recoverysecond half of recycled commodity prices. Bookings at our conveying and screening business have begun to rebound from 2020 levels with ongoing improved demand for our parts and consumables products as a result of the relaxation of pandemic-related restrictions.2022.
While we have seen improved market conditions for our products and we expect our financial results for the remainder of 2021 to be strong, there is still some uncertainty regarding near-term economic growth due to ongoing risks surrounding the COVID-19 pandemic. Additionally, someMany of our operations have been and may continue to be impacted by labor availability and supply chain constraints, resultingthe latter of which resulted in inflationary pressure on material costs, longer lead times, and increased freight costs, as well as customer-requested delays in shipments. Also, in September 2021, China began limiting electricity usage within many of its provinces, requiring businesses in those regions to take downtime. We have been able to mitigate increased material costs through price adjustments on many of our products; however, we cannot be sure that we will be able to absorb future increases through price adjustments. While ourcosts. Our businesses are working to alleviatealleviating supply chain constraints through various measures, including advance purchases of raw materials to prevent potential manufacturing disruptions and mitigating increased material and freight costs through price adjustments, when possible. We believe that the fundamentals of our business will remain positive, particularly given our high backlog levels, continued strong bookings, and ongoing strength in the markets we are unableserve. Despite this optimism, we expect our operating environment to predictcontinue to be challenging as a result of the impact of these constraintsfactors impacting our business discussed above and the impact fromuncertainties and risks surrounding the COVID-19 pandemic, including China's energy use restrictions on the timing of revenue and operating costs on our business in the near future.zero-COVID policy. For more information on risks related to health epidemics to our business, including COVID-19,these challenges, and other factors impacting our business, discussed above,including recent geopolitical tensions, please see Risk Factorsincluded in Part II, Item1A, of this report, and Part I,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 $93.1$92.9 million, net of cash acquired plus debt assumed. Clouth, which 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. 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 40.5 million euros for the trailing twelve months ended June 30, 2021.Poland.
In the third quarter of 2021, we also acquired Balemaster for $53.7$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. Balemaster's revenue for the trailing twelve months ended June 30, 2021 was approximately $22.2 million.
See Note2, Acquisitions, in the accompanying condensed consolidated financial statements for further details.In June 2020, we made an acquisition in our Industrial Processing segment for approximately $6.9 million, net of cash acquired.
Results of Operations
ThirdSecond Quarter 20212022 Compared With ThirdSecond Quarter 20202021
Revenue
The following table presents the change in revenue by segment between the thirdsecond 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 thirdsecond quarters of 20212022 and 20202021 was as follows:
| | | (Non-GAAP) | | (Non-GAAP) |
| | Three Months Ended | | Currency Translation | | Acquisitions | | Change in Organic Revenue | | Three Months Ended | | Currency Translation | | Acquisitions | | Change in Organic Revenue |
(In thousands, except percentages) | (In thousands, except percentages) | | October 2, 2021 | | September 26, 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 | | $ | 76,253 | | | $ | 56,815 | | | $ | 19,438 | | | 34 | % | | $ | 1,332 | | | $ | 9,913 | | | $ | 8,193 | | | 14 | % | Flow Control | | $ | 85,220 | | | $ | 70,762 | | | $ | 14,458 | | | 20 | % | | $ | (2,949) | | | $ | 11,949 | | | $ | 5,458 | | | 8 | % |
Industrial Processing | Industrial Processing | | 81,620 | | | 62,086 | | | 19,534 | | | 31 | % | | 2,847 | | | — | | | 16,687 | | | 27 | % | Industrial Processing | | 84,402 | | | 82,681 | | | 1,721 | | | 2 | % | | (3,683) | | | 185 | | | 5,219 | | | 6 | % |
Material Handling | Material Handling | | 41,916 | | | 35,709 | | | 6,207 | | | 17 | % | | 419 | | | 2,845 | | | 2,943 | | | 8 | % | Material Handling | | 52,027 | | | 42,368 | | | 9,659 | | | 23 | % | | (2,431) | | | 7,778 | | | 4,312 | | | 10 | % |
Consolidated Revenue | Consolidated Revenue | | $ | 199,789 | | | $ | 154,610 | | | $ | 45,179 | | | 29 | % | | $ | 4,598 | | | $ | 12,758 | | | $ | 27,823 | | | 18 | % | Consolidated Revenue | | $ | 221,649 | | | $ | 195,811 | | | $ | 25,838 | | | 13 | % | | $ | (9,063) | | | $ | 19,912 | | | $ | 14,989 | | | 8 | % |
Consolidated revenue increased 13% in the thirdsecond quarter of 2021 increased 29%, while consolidated organic2022, including a 10% increase from acquisitions and a 5% decrease from the negative effect of foreign currency translation. Organic revenue increased 18%,8% due to higher demand for parts and consumables products, principally at our Flow Control segment and capital equipment principallyat our Material Handling and Industrial Processing segments as described below.
Revenue at our Flow Control segment increased 20% in the second quarter of 2022, while organic revenue increased 8%. Organic revenue increased due to higher 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 2022, while organic revenue increased 6%. Organic revenue increased due to higher demand for parts and Flow Control segments as described below.consumables products at our wood processing business due in part to maintenance spending by our customers. Also contributing to the organic revenue increase was an increase in demand for capital equipment at our 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 European baling operations due to improved business conditions.
Revenue at our Flow Control segment increased 34% in the third quarter of 2021, while organic revenue increased 14%. Organic revenue increased due to higher demand for parts and consumables products at substantially all locations resulting from improved market conditions and pent-up demand and due to increased capital equipment revenue at our North American business, which was attributable in part to customer reductions in spending and deferrals of equipment installations in the corresponding 2020 period.
Revenue at our Industrial Processing segment increased 31% in the third quarter of 2021, while organic revenue increased 27% due to higher demand for both capital equipment and parts and consumables products at our wood processing and stock-preparation businesses. 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 was primarily attributable to capital orders at our Chinese business, offset in part by lower capital equipment revenue at our North American business due to the timing of orders. Organic revenue for parts and consumables products at our North American stock-preparation business also increased due to improved market conditions and pent-up demand coupled with a depressed 2020 period as a result of the COVID-19 pandemic.
Revenue at our Material Handling segment increased 17% in the third quarter of 2021, while organic revenue increased 8%. Increased demand for products at our European baling operation due to improved business conditions in Europe, including the recovery of recycled commodity prices, was partially offset by lower capital equipment revenue at our conveying and screening business.
Gross Profit Margin
Gross profit margin by segment in the thirdsecond quarters of 20212022 and 20202021 was as follows:
| | | Three Months Ended | | Basis Point Change | | Three Months Ended | | Basis Point Change |
| | October 2, 2021 | | September 26, 2020 | | | July 2, 2022 | | July 3, 2021 | |
Flow Control | Flow Control | | 49.7 | % | | 52.9% | | (320) | bps | Flow Control | | 52.8% | | 52.8% | | 0 | bps |
Industrial Processing | Industrial Processing | | 39.7 | % | | 43.7% | | (400) | bps | Industrial Processing | | 38.4% | | 40.1% | | (170) | bps |
Material Handling | Material Handling | | 31.9 | % | | 31.1% | | 80 | bps | Material Handling | | 35.9% | | 34.9% | | 100 | bps |
Consolidated Gross Profit Margin | Consolidated Gross Profit Margin | | 41.9 | % | | 44.2% | | (230) | bps | Consolidated Gross Profit Margin | | 43.3% | | 43.6% | | (30) | bps |
Consolidated gross profit margin declineddecreased to 41.9%43.3% in the thirdsecond quarter of 20212022 compared with 44.2%43.6% in the thirdsecond quarter of 20202021 due to the inclusion of $2.2$0.5 million of amortization of acquired profit in inventory, which lowered consolidated gross profit margin in the 2021 period by 1.1 percentage points, and the inclusion of $1.6 million for benefits received from government employee retention assistance programs, which increased consolidated gross profit margin in the 2020 period by 1.1 percentage points.
Gross profit margin at our Flow Control segment decreased to 49.7% in the third quarter of 2021 compared with 52.9% in the third quarter of 2020 primarily due to the inclusion of $1.8 million of amortization of acquired profit in inventory for Clouth, which lowered gross profit margin in the 2021 period by 2.40.3 percentage points, and a lowerpoints.
Within our operating segments, gross profit margin profile for Clouth. Gross profit margin at our existing businesses increased principally duemargin:
•Decreased to higher margins on parts and consumables.
Gross profit margin38.4% from 40.1% at our Industrial Processing segment decreased to 39.7% in the third quarter of 2021 compared with 43.7% in the third quarter of 2020 due to the impact of lower-margin capital equipment revenue at our Chinese stock-preparation business and the inclusion of $1.4$0.4 million for benefits received from government employee retention assistance programs, which increased gross profit margin in the 20202021 period by 2.30.5 percentage points, and the impact of lower-margin capital equipment revenue at our Chinese stock-preparation business.points.
Gross profit margin•Increased to 35.9% from 34.9% at our Material Handling segment increased to 31.9% in the third quarter of 2021 compared with 31.1% in the third quarter of 2020 primarily due to a higher gross profit margin profile forfrom our Balemaster and an improved gross profit margin at our existing baler business resulting from a favorable product mix and higher revenue. These items were offsetacquired in part by $0.4 million of amortization of acquired profit in inventory for Balemaster, which lowered gross profit margin for this segment by 0.9 percentage points.
2021.
Selling, General, and Administrative Expenses
Selling, general, and administrative (SG&A) expenses by segment in the thirdsecond quarters of 20212022 and 20202021 were as follows:
| | | Three Months Ended | | | Three Months Ended | |
(In thousands, except percentages) | (In thousands, except percentages) | | October 2, 2021 | | % of Revenue | | September 26, 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 | | $ | 19,658 | | | 26 | % | | $ | 15,136 | | | 27 | % | | $ | 4,522 | | | 30% | Flow Control | | $ | 20,969 | | | 25% | | $ | 17,064 | | | 24% | | $ | 3,905 | | | 23% |
Industrial Processing | Industrial Processing | | 15,229 | | | 19 | % | | 13,759 | | | 22 | % | | 1,470 | | | 11% | Industrial Processing | | 15,614 | | | 18% | | 14,420 | | | 17% | | 1,194 | | | 8% |
Material Handling | Material Handling | | 9,465 | | | 23 | % | | 7,955 | | | 22 | % | | 1,510 | | | 19% | Material Handling | | 9,498 | | | 18% | | 8,993 | | | 21% | | 505 | | | 6% |
Corporate | Corporate | | 7,964 | | | N/A | | 7,003 | | | N/A | | 961 | | | 14% | Corporate | | 9,238 | | | N/A | | 8,790 | | | N/A | | 448 | | | 5% |
Consolidated SG&A Expenses | Consolidated SG&A Expenses | | $ | 52,316 | | | 26 | % | | $ | 43,853 | | | 28 | % | | $ | 8,463 | | | 19% | Consolidated SG&A Expenses | | $ | 55,319 | | | 25% | | $ | 49,267 | | | 25% | | $ | 6,052 | | | 12% |
Consolidated SG&A expenses as a percentage of revenue decreased to 26%remained flat at 25% in the thirdsecond quarter of 20212022 compared with 28% in the thirdsecond quarter of 2020 primarily due to higher revenue.2021. Consolidated SG&A expenses increased $8.5$6.1 million due to the inclusion of $3.4$5.0 million of SG&A expenses from acquisitions, an incremental $0.9 million of acquisition-relatedincreased selling-related costs $0.9 million from the unfavorable effect of currency translation, and a $0.7 million decrease in benefits received from government employee retention assistance programs. The remaining $2.6 million is principally due to increased incentive compensation, travel-related costs, and professional services fees resulting fromassociated with improved business conditions.
SG&A expenses at our Flow Control segment increased $4.5 million principally due toconditions, and the inclusion of $2.8 million of SG&A expenses from Clouth, $0.9 million of acquisition-related costs, and $0.4 million from the unfavorable effect of foreign currency translation.
SG&A expenses at our Industrial Processing segment increased $1.5 million principally due to the inclusion of $0.7 million in the 2020 period for benefits received from government employee retention assistance programs increased travel-related costs and professional service fees, and $0.5of $1.0 million fromin the unfavorablesecond quarter of 2021. These increases were offset by a $2.1 million favorable effect of foreign currency translation.translation and a decrease of $0.6 million in acquisition costs.
Within our operating segments, SG&A expensesexpenses:
•Increased $3.9 million at our Material HandlingFlow Control segment increased $1.5 million principally due to the inclusion of $0.6$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, increased travel-related costspartially offset by a $0.4 million favorable effect of foreign currency translation and professional service fees, and $0.2 million of incremental acquisition-related costs.
SG&A expenses at Corporate increased $1.0 million primarily due to additional incentive compensation as a result of our improved financial performance.
Restructuring Costs
Restructuring costs were $0.5 million in the third quarter of 2020, which represented severance costs of $0.3 million in our Flow Control segment and $0.2 million in our Industrial Processing segment.
Interest Expense
Interest expense decreased to $1.3 million in the third quarter of 2021 from $1.7 million in the third quarter of 2020 due to a lower weighted-average interest rate.
Provision for Income Taxes
Our provision for income taxes increased to $6.7 million in the third quarter of 2021 from $4.7 million in the third quarter of 2020. The effective tax rate of 25% in the third quarter of 2021 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 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 24% in the third quarter of 2020 was higher than our statutory rate of 21% primarily due to nondeductible expenses and the distribution of our worldwide earnings. These increases in tax expense were offset in part by a tax benefit related to final GILTI regulations issued by the U.S. Treasury Department during the third quarter of 2020 on an election to provide a high-tax exception to the GILTI tax retroactive to 2018.
acquisition costs.
Net Income
Net income increased to $20.7 million in the third quarter of 2021 from $15.0 million in the third quarter of 2020 primarily due to a $7.4 million increase in operating income, offset in part by a $2.0 million increase in provision for income taxes (see discussions above for further details).
Interest Expense
Interest expense increased to $1.4 million in the second quarter of 2022 from $1.1 million in the second quarter of 2021 due to a higher weighted-average interest rate in the second quarter of 2022 as compared to the second quarter of 2021.
Provision for Income Taxes
Provision for income taxes increased to $10.0 million in the second quarter of 2022 from $8.9 million in the second quarter of 2021. The effective tax rate of 27% in the second quarter of 2022 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, state taxes, nondeductible expenses, and the cost of 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.
Net Income
Net income increased to $26.4 million in the second quarter of 2022 from $23.0 million in the second quarter of 2021 primarily due to a $4.5 million increase in operating income, offset in part by a $1.0 million increase in provision for income taxes (see discussions above for further details).
First NineSix Months 20212022 Compared With First NineSix Months 20202021
Revenue
The following table presents changes in revenue by segment between the first ninesix months 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 GAAP measure.
Revenue by segment in the first ninesix months of 20212022 and 20202021 was as follows:
| | | (Non-GAAP) | | (Non-GAAP) |
| | Nine Months Ended | | Currency Translation | | Acquisitions | | Change in Organic Revenue | | Six Months Ended | | Currency Translation | | Acquisitions | | Change in Organic Revenue |
(In thousands, except percentages) | (In thousands, except percentages) | | October 2, 2021 | | September 26, 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 | | $ | 210,769 | | | $ | 165,329 | | | $ | 45,440 | | | 27 | % | | $ | 6,749 | | | $ | 9,913 | | | $ | 28,778 | | | 17 | % | Flow Control | | $ | 171,046 | | | $ | 134,516 | | | $ | 36,530 | | | 27 | % | | $ | (4,377) | | | $ | 24,222 | | | $ | 16,685 | | | 12 | % |
Industrial Processing | Industrial Processing | | 233,455 | | | 192,468 | | | 40,987 | | | 21 | % | | 12,087 | | | 509 | | | 28,391 | | | 15 | % | Industrial Processing | | 177,487 | | | 151,835 | | | 25,652 | | | 17 | % | | (5,072) | | | 319 | | | 30,405 | | | 20 | % |
Material Handling | Material Handling | | 123,839 | | | 108,800 | | | 15,039 | | | 14 | % | | 3,348 | | | 2,845 | | | 8,846 | | | 8 | % | Material Handling | | 99,596 | | | 81,923 | | | 17,673 | | | 22 | % | | (3,494) | | | 15,371 | | | 5,796 | | | 7 | % |
Consolidated Revenue | Consolidated Revenue | | $ | 568,063 | | | $ | 466,597 | | | $ | 101,466 | | | 22 | % | | $ | 22,184 | | | $ | 13,267 | | | $ | 66,015 | | | 14 | % | Consolidated Revenue | | $ | 448,129 | | | $ | 368,274 | | | $ | 79,855 | | | 22 | % | | $ | (12,943) | | | $ | 39,912 | | | $ | 52,886 | | | 14 | % |
Consolidated revenue in the first ninesix months of 20212022 increased 22%, while consolidated organicincluding 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 parts and consumables productscapital equipment at our Industrial Processing segment and, to a lesser extent, capital equipmentparts and consumables at our Flow Control and Industrial Processing segments, as described below.
Revenue at our Flow Control segment increased 27% in the first ninesix months of 2021,2022, while organic revenue increased 17%12%. The increase in organicOrganic revenue resulted fromincreased due to higher demand for our parts and consumables products in North America 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 related to the COVID-19 pandemic. Increased demand for capital equipment was due toEurope, resulting from improved market conditions and pent-up demand while the corresponding 2020 period was adversely impacted by customer reductions in capital spending and deferrals of equipment installations as a result of the COVID-19 pandemic.conditions.
Revenue at our Industrial Processing segment increased 21%17% in the first ninesix months of 2021,2022, while organic revenue increased 15%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 and stock-preparation businesses and capital equipment at our wood processing business. Demand for parts and consumables products and, to a lesser extent, capital equipment at our wood processing business was driven by high mill activity resulting in higher parts consumption and increased capital investment. Demand for parts and consumables at our North American stock-preparation business increased due to improved market conditions and pent-up demand coupled with a depressed 2020 period as a result of the COVID-19 pandemic. Conversely, lower capital equipment revenue at our North American and European stock-preparation businesses due to the timing of orders and curtailedmaintenance spending by our customers, which impacted revenue in the first half of 2021, was offset in part by revenue attributable to capital equipment orders at our Chinese business.customers.
Revenue at our Material Handling segment increased 14%22% in the first ninesix months of 2021,2022, while organic revenue increased 8%. Increased7% due to higher demand for productscapital equipment at our European baling operationoperations due to improved business conditions in Europe, including the recovery of recycled commodity prices, was partially offset by lower capital equipment revenue at our conveying and screening business.
Gross Profit Margin
Gross profit margin by segment in the first nine months of 2021 and 2020 was as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | Basis Point Change |
| | October 2, 2021 | | September 26, 2020 | |
Flow Control | | 51.8 | % | | 53.1% | | (130) | bps |
Industrial Processing | | 40.1 | % | | 41.0% | | (90) | bps |
Material Handling | | 33.8 | % | | 33.5% | | 30 | bps |
Consolidated Gross Profit Margin | | 43.1 | % | | 43.5% | | (40) | bps |
conditions, and parts and consumables at our conveying business resulting from a strong demand in the aggregate and food and packaging industries.
Gross Profit Margin
Gross profit margin by segment in the first six months of 2022 and 2021 was as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | Basis Point Change |
| | July 2, 2022 | | July 3, 2021 | |
Flow Control | | 52.6% | | 53.0% | | (40) | bps |
Industrial Processing | | 38.5% | | 40.3% | | (180) | bps |
Material Handling | | 36.1% | | 34.8% | | 130 | bps |
Consolidated Gross Profit Margin | | 43.3% | | 43.7% | | (40) | bps |
Consolidated gross profit margin declined slightlydecreased to 43.1%43.3% in the first ninesix months of 2022 compared with 43.7% in the first six months of 2021 compared with 43.5% indue to the first nine monthsinclusion of 2020. The 2021 period included $2.2$0.9 million of amortization of acquired profit in inventory, which lowered consolidated gross profit margin by 0.4 percentage points. Webenefits received benefits from government employee retention assistance programs, of $0.9 million, or 0.2% of revenue, in the first nine months of 2021 compared with $2.9 million, or 0.6% of revenue, in the first nine months of 2020.
Gross profit margin at our Flow Control segment decreased to 51.8% in the first nine months of 2021 compared with 53.1% in the first nine months of 2020 due to the inclusion of $1.8 million of amortization of acquired profit in inventory, which lowered theincreased gross profit margin in the 2021 period by 0.90.2 percentage points, and the impact of lower margin capital equipment revenue.
Within our operating segments, gross profit margin:
•Decreased to a lesser extent,52.6% from 53.0% at our Flow Control segment due to a lower gross profit margin profile for Clouth.from our recently acquired Clouth business.
Gross profit margin•Decreased to 38.5% from 40.3% at our Industrial Processing segment decreased to 40.1% in the first nine months of 2021 compared with 41.0% in the first nine months of 2020 due to lower benefits received from government retention assistance programs. We received benefits from government employee retention assistance programs of $0.7 million, or 0.3% of revenue, in the first nine months of 2021 compared with $2.4 million, or 1.2% of revenue, in the first nine months of 2020. Higher margins at our wood processing business primarily resulting from manufacturing efficiencies related to higher production volumes were offset by the impact of lower-margin capital equipment revenue at our Chinese stock-preparation business.business and the inclusion of $0.7 million for benefits received from government employee retention assistance programs, which increased gross profit margin in the 2021 period by 0.4 percentage points.
Gross profit margin•Increased to 36.1% from 34.8% at our Material Handling segment increased slightlyprimarily due to 33.8%a higher gross profit margin profile from our Balemaster business acquired in the first nine months of 2021 compared with 33.5% in the first nine months of 2020.2021.
Selling, General, and Administrative Expenses
SG&A expenses by segment in the first ninesix months of 20212022 and 20202021 were as follows:
| | | Nine Months Ended | | | Six Months Ended | |
(In thousands, except percentages) | (In thousands, except percentages) | | October 2, 2021 | | % of Revenue | | September 26, 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 | | $ | 54,226 | | | 26 | % | | $ | 46,876 | | | 28 | % | | $ | 7,350 | | | 16% | Flow Control | | $ | 43,053 | | | 25 | % | | $ | 34,568 | | | 26 | % | | $ | 8,485 | | | 25% |
Industrial Processing | Industrial Processing | | 45,339 | | | 19 | % | | 42,499 | | | 22 | % | | 2,840 | | | 7% | Industrial Processing | | 31,983 | | | 18 | % | | 30,110 | | | 20 | % | | 1,873 | | | 6% |
Material Handling | Material Handling | | 27,518 | | | 22 | % | | 24,730 | | | 23 | % | | 2,788 | | | 11% | Material Handling | | 20,502 | | | 21 | % | | 18,053 | | | 22 | % | | 2,449 | | | 14% |
Corporate | Corporate | | 23,931 | | | N/A | | 20,413 | | | N/A | | 3,518 | | | 17% | Corporate | | 18,949 | | | N/A | | 15,967 | | | N/A | | 2,982 | | | 19% |
Consolidated SG&A Expenses | Consolidated SG&A Expenses | | $ | 151,014 | | | 27 | % | | $ | 134,518 | | | 29 | % | | $ | 16,496 | | | 12% | 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 ninesix months of 2021 compared with 29% in the first nine months of 2020 principally due to higher revenue. Consolidated SG&A expenses increased $16.5$15.8 million principally due to $5.2 million from the unfavorable effect of currency translation, the inclusion of $3.7$11.1 million of SG&A expenses from acquisitions, additional incentiveincreased compensation resulting from our improved financial performance, an incremental $2.5 million of acquisition-related costs,expense associated with existing and new personnel, and increased professional service fees.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.
Within our operating segments, SG&A expenses included benefits received from government employee retention assistance programs of $1.4expenses:
•Increased $8.5 million in the first nine months of 2021 and $1.8 million in the first nine months of 2020.
SG&A expenses at our Flow Control segment increased $7.4 million principally due to the inclusion of $2.8$7.8 million of SG&A expenses from Clouth $2.1and increased personnel and selling-related costs. These increases were partially offset by a $1.2 million of acquisition-related costs, and $1.8 million from the unfavorablefavorable effect of foreign currency translation.
SG&A expenses•Increased $1.9 million at our Industrial Processing segment increased $2.8 million principally due to $2.6increased 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 and a $0.7translation.
•Increased $2.4 million reduction in benefits received from government assistance programs.
SG&A expenses at our Material Handling segment increased $2.8 million principally due to $0.8 million from the unfavorable effect of foreign currency translation, an incremental $0.8 million of acquisition-related costs, and the inclusion of $0.6$3.1 million of SG&A expenses from Balemaster.
SG&A expenses at Corporate increased $3.5 million primarily due to additional incentive compensation as result of improved financial performance and, toBalemaster, partially offset by a lesser extent, higher professional service fees.
Restructuring Costs
Restructuring costs were $0.9 million in the first nine months of 2020, which represented severance costs of $0.7 million in our Flow Control segment and $0.2 million in our Industrial Processing segment.
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 quarter of 2022 after a 31% down payment was received, including 25% in 2021 and 6% in the first quarter of 2022, and a land use right in a new location was secured. As a result, we recognized a gain on the sale of these assets of $20.2 million, or $15.1 million, net of deferred taxes of $5.1 million, in the first quarter of 2022. A receivable of $16.1 million 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 $15.4 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 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 $3.5$2.6 million in the first ninesix months of 20212022 from $6.1$2.2 million in the first ninesix months of 20202021 due to a lowerhigher weighted-average interest rate and lower outstanding debt for the first ninesix months of 2022 compared to the first six months of 2021.
Provision for Income Taxes
Our provisionProvision for income taxes increased to $21.3$23.3 million in the first ninesix months of 20212022 from $13.7$14.5 million in the first ninesix months of 2020 and represented 26% of pre-tax income in both periods.2021. The effective tax rate of 26% in the first ninesix months of 2022 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, nondeductible expenses, and state taxes. 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% 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 in the first nine months of 2020 was higher than our statutory rate of 21% primarily due to nondeductible expenses, the distribution of our worldwide earnings, and state taxes. 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 to $60.5$67.9 million in the first ninesix months of 20212022 from $39.4$39.8 million in the first ninesix months of 20202021 primarily due to a $26.1$37.0 million increase in operating income, and a $2.6 million decrease in interest expense, offset in part by a $7.5$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 $177.4$181.0 million at OctoberJuly 2, 2021,2022, compared with $155.1$162.4 million at January 2, 2021.1, 2022. Cash and cash equivalents were $82.6$76.5 million at OctoberJuly 2, 2021,2022, 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 $78.6$70.1 million at OctoberJuly 2, 20212022 and $63.6$83.8 million at January 2, 2021.1, 2022.
Cash Flows
Cash flow information in the first ninesix months of 20212022 and 20202021 was as follows: | | | Nine Months Ended | | Six Months Ended |
(In thousands) | (In thousands) | | October 2, 2021 | | September 26, 2020 | (In thousands) | | July 2, 2022 | | July 3, 2021 |
Net Cash Provided by Operating Activities | Net Cash Provided by Operating Activities | | $ | 101,410 | | | $ | 52,601 | | Net Cash Provided by Operating Activities | | $ | 42,565 | | | $ | 63,478 | |
Net Cash Used in Investing Activities | Net Cash Used in Investing Activities | | (148,587) | | | (12,459) | | Net Cash Used in Investing Activities | | (7,894) | | | (3,869) | |
Net Cash Provided by (Used in) Financing Activities | | 66,714 | | | (52,871) | | |
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 | | (2,513) | | | 660 | | Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash | | (5,418) | | | (803) | |
Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash | | $ | 17,024 | | | $ | (12,069) | | |
(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 $101.4$42.6 million in the first ninesix months of 20212022 from $52.6$63.5 million in the first ninesix 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
Cash provided by income in the first six months of 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 by operating activities in the 2021 period was principally driven by improvements in net income and working capital.of $9.3 million from customer deposits.
Cash provided by working capital was $11.7 millionincome in the first ninesix months of 2021.2021 was offset in part by investments in working capital. Cash provided by working capital in 2021 included $33.3 million from other current liabilities primarily due to an increase in customer deposits and advance billings related to capital equipment orders that will be fulfilled over the next year and $19.8$12.9 million from accounts payable attributablerelated to inventory purchases for increased inventory purchases.order activity and $11.1 million in customer deposits for capital equipment orders. These sources of cash were offset in part by cash used of $22.3$22.6 million for accounts receivable mostly due toand inventory as a result of revenue growth and timing of shipments, $10.6 million for a buildup of inventories primarily for capital equipment orders and to mitigate potential supply chain issues, and $8.1 million for other current assets principally due to a prepayment for raw material at one of our Chinese businesses.
Cash used for working capital was $15.4 million in the first nine months of 2020. Cash used for working capital in 2020 included $6.2 million for inventories primarily related to the buildup of inventory for capital equipment and spare parts
that were shipped in late fiscal 2020 and early fiscal 2021 and $13.2 million from accounts payable primarily due to reduced spending levels in 2020.support increased demand.
Investing Activities
Cash used in investing activities was $148.6$7.9 million in the first ninesix months of 2021,2022, compared with $12.5$3.9 million in the first ninesix months of 2020.2021. Cash used in investing activities in the first six months of 2022 included consideration paidcapital expenditures of $9.8 million, which included $3.2 million for acquisitions, netexpenditures associated with the manufacturing facility and building relocation project in China. This use of cash acquired,was partially offset by proceeds received from the sale of $141.5 millionassets of $1.9 million. Cash used in investing activities in the first six months of 2021 period and $7.1 million in the 2020 period.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 was $66.7of $32.7 million in the first ninesix months of 2021, compared with cash used in financing activities2021. Repayment of $52.9short- and long-term obligations was $51.4 million in the first ninesix months of 2020. Borrowings2022, partially offset by borrowings under our revolving credit facility were $151.9of $16.5 million compared to borrowings under our revolving credit facility of $88.9 million in the first ninesix months of 2021, including $140.3 millionpartially offset by repayment of short- and long-term obligations of $47.1 million. In addition, taxes paid related to fund acquisitions, and $26.0the vesting of equity awards was $4.6 million in the first ninesix months of 2020, including $18.9 million used2022 compared to prepay the outstanding principal balance on our real estate loan. Repayment of long-term obligations was $72.7$3.4 million in the first ninesix months of 2021, and $69.0 million in the first nine months of 2020, including the $18.9 million prepayment of the real estate loan.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 $2.5$5.4 million reduction in cash, cash equivalents, and restricted cash in the first ninesix months of 20212022 was primarily attributable to the strengthening of the U.S. dollar against the euro.euro and Chinese renminbi and, to a lesser extent, the 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 OctoberJuly 2, 2021,2022, 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 $369.9 million, including $104.9 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), which expires on December 14, 2021. 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 OctoberJuly 2, 2021,2022, our leverage ratio was 1.691.05 and we were in compliance with our debt covenants. Except for $5.6 millionWe expect to renew our Credit Agreement prior to its maturity date of short-term obligations and current maturities of long-term obligations, we do not have any material mandatory principal payments on our debt obligations untilDecember 14, 2023. See Note 5, 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 $8.6$5.9 million in the first ninesix months of 2021.2022. On September 9, 2021,May 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 NovemberAugust 11, 2021.2022. 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 $5$21 to $7$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 OctoberJuly 2, 2021,2022, we had approximately $230.6$217.7 million of total unremitted foreign earnings. It is our intent to indefinitely reinvest $212.5$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 ninesix 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 $4.4$3.0 million.
In the future, our liquidity position will be affected by 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 material changes to our contractual obligations and other commercial commitments during the first ninesix 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 an increase of $81.0 million of short- and long-term obligations as of October 2, 2021 primarily related to our acquisitions. See Note 2, Acquisitions, and Note 5, Short- and Long-term Obligations, 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 OctoberJuly 2, 2021.2022. 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 OctoberJuly 2, 2021,2022, our Chief Executive Officer and Chief Financial Officer concluded that as of OctoberJuly 2, 2021,2022, 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 OctoberJuly 2, 20212022 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
In addition to the revised risk factors below regarding “Supply chain constraints, inflationary pressure, price increases "We have significant international sales and shortagesoperations 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 raw materialsgovernment regulations and components,policies in multiple jurisdictions around the world, including those related to tariffs and dependency upon certain suppliers for such raw materialstrade barriers, taxation, exchange controls and components could adversely impact our operating resultspolitical risks," ,” and “We are subject to risks and costs associated with environmental laws and regulations,” careful consideration should be given to the risk factors disclosed 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.
Supply chain constraints, inflationary pressure, price increasesOur business and shortages in raw materials and components, and dependency upon certain suppliers for such raw materials and components could adversely impact our operating results.
Some of our businessesoperations have been and may continue to be impactedchallenged 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, constraints, resultingpotentially including single source suppliers, and other disruptions in inflationary pressure on material costs, longer lead times, port congestion, and increased freight costs.the supply chain. In addition, current or future governmental policies may increase the risk of inflation whichCOVID-19 pandemic has impacted and other disease outbreaks could further increase the costs of raw materialsimpact global trade and componentsreduce demand for our businesses. If we are unableproducts, 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 mitigate“shelter-in-place,” and initially created significant disruption of the impact of supply chain constraintsfinancial markets. The COVID-19 pandemic has adversely affected, and inflationary pressure through price increases or other measuresmay adversely affect in the future, our business and results of operations, and financial condition could be negatively impacted.
We use a variety of raw materials, including a significant amount of stainless steel, carbon steel, commodities and critical components to manufacture our products. Increases in the prices of such raw materials, commodities and critical components could adversely affect our operating results if we were unable to fully offset the effect of these increased costs through price increases, productivity improvements, or cost reduction programs.
Some of our businesses depend on a limited number of suppliers to provide critical components used in the manufacture of our products. If we are unable to obtain sufficient supplies of these components or these sources of supply cease to be available to us, we could experience shortages in critical components or be unable to meet our commitments to customers. Alternative sources of supply could be more expensive, or in some cases, we could be unable to locate such alternative sources. We believe our current sources of raw materials, commodities and critical components will generally be sufficient for our needs in the foreseeable future. However, our operating results could be negatively impacted if supply is insufficient for our operations or if we are unable to expand supply as needed.
While our businesses are working to alleviate supply chain constraints through various measures, we are unable to predict the impact of these constraints on the timing of revenue and operating costs of our business in the near future.
We are subject to risks and costs associated with environmental laws and regulations.
The manufacturing of our products requires the use of hazardous materials that are subject to a broad array of environmental, health and safety laws and regulations. Our failure to manage the use, transportation, emissions, discharge, storage, recycling, or disposal of hazardous materials could lead to increased costs or regulatory penalties, fines and legal liability. Our ability to expand, modify or operate our manufacturing facilities in the future may be impeded by environmental regulations, such as air quality, wastewater requirements, and energy supply and use restrictions. The Chinese government has pledged to tackle the country's hazardous smog and improve air quality conditions ahead of high-profile events, such as the upcoming Winter Olympics in Beijing, which has prompted authorities to impose strict pollution control measures. Additionally, in September 2021, the Chinese government began limiting electricity usage within many of its provinces, requiring businesses in those regions to take unscheduled downtime.Regulators have in the pastimposed, and may in the future temporarily restrict the operationsimpose, temporary mandatory closures of our manufacturingfacilities, 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 a particular geographic locationChina may be closed by government authorities as a result of attempts to control pollution levels, or energy supply or use restrictionsany COVID cases in China. Environmental laws and regulations could also require us to acquire pollution abatement or remediation equipment, modify product designs, or incur other expenses. New regulations promulgated in reaction to climate change could result in increased manufacturing costs associated with air pollution control requirements, and increased or new monitoring, recordkeeping, and reporting of greenhouse gas emissions. We also see the potential for higher energy costs driven by climate change regulations. Implementation of such new regulations could increasea particular facility. Additionally, our costs or require us to modify our operations and negatively impact our business andfinancial results of operations.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*10.1* | | |
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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. |
| | |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
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.
| | | | | |
| KADANT INC. |
| |
Date: NovemberAugust 10, 20212022 | /s/ Michael J. McKenney |
| Michael J. McKenney |
| Executive Vice President and Chief Financial Officer |
| (Principal Financial Officer) |