EXHIBIT 13
Kadant Inc.
Consolidated Financial Statements
2002
KADANT INC. 2002 FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands except per share amounts) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Revenues (Notes 14 and 17) $ 185,674 $ 221,166 $ 234,913
----------- ----------- ----------
Costs and Operating Expenses:
Cost of revenues 115,234 138,425 145,111
Selling, general, and administrative expenses (Note 9) 50,323 58,960 60,901
Research and development expenses 4,819 6,612 7,687
Gain on sale of business and property (Note 4) - - (1,700)
Restructuring and unusual costs (income) (Note 12) 3,590 673 (506)
----------- ----------- ----------
173,966 204,670 211,493
----------- ----------- ----------
Operating Income 11,708 16,496 23,420
Interest Income 2,579 6,615 10,466
Interest Expense (Note 8) (4,741) (7,341) (7,503)
----------- ----------- ----------
Income Before Provision for Income Taxes, Minority Interest, Extraordinary Item,
and Cumulative Effect of Change in Accounting Principles 9,546 15,770 26,383
Provision for Income Taxes (Note 7) 3,619 6,642 10,947
Minority Interest (Income) Expense 4 (234) (576)
----------- ----------- ----------
Income Before Extraordinary Item and Cumulative Effect of Change in Accounting
Principles 5,923 9,362 16,012
Extraordinary Item (net of income taxes of $19 and $440; Note 8) 31 620 -
----------- ----------- ----------
Income Before Cumulative Effect of Change in Accounting Principles 5,954 9,982 16,012
Cumulative Effect of Change in Accounting Principles (net of income tax benefits
of $12,420 and $580; Note 17) (32,756) - (870)
----------- ----------- ----------
Net Income (Loss) $ (26,802) $ 9,982 $ 15,142
=========== =========== ==========
EARNINGS PER SHARE BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLES (Note 15)
Basic $ .46 $ .76 $ 1.31
=========== =========== ==========
Diluted $ .45 $ .76 $ 1.30
=========== =========== ==========
EARNINGS (LOSS) PER SHARE (Note 15)
Basic $ (2.07) $ .81 $ 1.24
========== =========== ==========
Diluted $ (2.04) $ .81 $ 1.23
=========== =========== ==========
WEIGHTED AVERAGE SHARES (Note 15)
Basic 12,945 12,266 12,260
=========== =========== ==========
Diluted 13,109 12,313 12,298
=========== =========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
2
KADANT INC. 2002 FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 44,429 $ 102,807
Available-for-sale investments, at quoted market value (amortized cost of
$16,625; Note 2) - 16,625
Accounts receivable, less allowances of $2,634 and $2,515 30,818 39,178
Unbilled contract costs and fees 6,002 10,126
Inventories 29,486 33,534
Deferred tax asset (Note 7) 6,668 6,991
Other current assets 2,974 3,198
---------- ----------
120,377 212,459
---------- ----------
Property, Plant, and Equipment, at Cost, Net (Notes 3 and 12) 25,461 28,485
---------- ----------
Other Assets (Notes 5 and 7) 13,458 10,441
---------- ----------
Goodwill (Notes 4, 11, and 17) 72,221 116,269
---------- ----------
$ 231,517 $ 367,654
========== ==========
3
KADANT INC. 2002 FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET (CONTINUED)
(In thousands except share amounts) 2002 2001
- -----------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Current maturities of long-term obligations (Notes 4 and 8) $ 585 $ 573
Accounts payable 18,093 18,661
Accrued payroll and employee benefits 9,445 7,990
Accrued warranty costs 4,310 4,598
Customer deposits 2,301 3,070
Accrued income taxes 1,403 2,120
Other current liabilities 9,539 13,240
Accrued merger consideration (Note 11) - 2,824
---------- ----------
45,676 53,076
---------- ----------
Deferred Income Taxes (Note 7) 940 8,983
---------- ----------
Other Long-Term Liabilities (Note 5) 2,763 2,474
---------- ----------
Long-Term Obligations:
Subordinated convertible debentures (Notes 8 and 13) - 118,138
Notes payable (Notes 4 and 8) 580 1,129
---------- ----------
580 119,267
---------- ----------
Minority Interest (Note 3) 301 297
---------- ----------
Commitments and Contingencies (Note 10)
Shareholders' Investment (Notes 5 and 6):
Preferred stock, $.01 par value, 5,000,000 shares authorized; none
issued - -
Common stock, $.01 par value, 150,000,000 shares authorized; 14,045,550 and
12,745,165 shares issued 140 127
Capital in excess of par value 98,567 81,229
Retained earnings 116,702 143,504
Treasury stock at cost, 495,265 and 505,146 shares (20,901) (21,345)
Deferred compensation (27) (5)
Accumulated other comprehensive items (Note 16) (13,224) (19,953)
---------- ----------
181,257 183,557
---------- ----------
$ 231,517 $ 367,654
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
4
KADANT INC. 2002 FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ (26,802) $ 9,982 $ 15,142
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Extraordinary item, net of income taxes (Note 8) (31) (620) -
Cumulative effect of change in accounting principles, net of income tax
benefit (Note 17) 32,756 - 870
Depreciation and amortization 5,177 9,296 9,540
Provision for losses on accounts receivable 818 1,146 1,197
Minority interest (income) expense 4 (234) (576)
Gain on sale of business and property (Note 4) - - (1,700)
Noncash restructuring and unusual items (Note 12) 2,399 - (506)
Deferred income tax (income) expense (1,019) 1,028 108
Other noncash items 891 158 (246)
Changes in current accounts, excluding the effects of acquisitions
and dispositions:
Accounts receivable 8,426 3,161 1,021
Unbilled contract costs and fees 4,821 (2,202) 1,069
Inventories 5,349 (803) (2,505)
Other current assets (640) 22 (3,791)
Accounts payable (1,610) (2,942) 1,049
Other current liabilities (3,545) (5,187) (2,234)
---------- ---------- ----------
Net cash provided by operating activities 26,994 12,805 18,438
---------- ---------- ----------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired (Note 4) - - (3,302)
Acquisition of capital equipment and technology (Note 3) - - (1,200)
Acquisition of minority interest in subsidiary (Note 11) (1,363) (1,761) -
Proceeds from sale of business and property, net of cash divested (Note 4) - - 4,109
Advances to former affiliates, net - 5,704 88,076
Purchases of available-for-sale investments - - (132,058)
Proceeds from maturities of available-for-sale investments 16,625 69,480 92,424
Purchases of property, plant, and equipment (3,344) (4,589) (6,355)
Proceeds from sale of property, plant, and equipment 512 177 252
Proceeds from repayment of notes receivable (Note 4) 200 2,400 800
Other (364) (55) (295)
---------- ---------- ----------
Net cash provided by investing activities $ 12,266 $ 71,356 $ 42,451
========== ========== ==========
5
KADANT INC. 2002 FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(In thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Redemption of subsidiary common stock (Note 11) $ (1,461) $ (13,140) $ (34,603)
Purchases of Company subordinated convertible debentures (Note 8) (117,545) (33,407) -
Purchases of Company and subsidiary common stock - (587) -
Net proceeds from issuance of Company common stock (Note 6) 17,655 - -
Net proceeds from issuance of Company and subsidiary common stock (Note 5) 516 2,584 1,204
Transfer from Thermo Electron - 1,309 -
Repayment of long-term obligations (537) (509) (313)
------------ ------------ ------------
Net cash used in financing activities (101,372) (43,750) (33,712)
------------ ------------ ------------
Exchange Rate Effect on Cash 3,734 (65) (3,970)
------------ ------------ ------------
Increase (Decrease) in Cash and Cash Equivalents (58,378) 40,346 23,207
Cash and Cash Equivalents at Beginning of Year 102,807 62,461 39,254
------------ ------------ ------------
Cash and Cash Equivalents at End of Year $ 44,429 $ 102,807 $ 62,461
============ ============ ============
CASH PAID FOR
Interest $ 6,853 $ 7,521 $ 7,041
Income taxes $ 4,978 $ 4,631 $ 11,779
NONCASH ACTIVITIES (Notes 3 and 4)
Fair value of assets of acquired companies, capital equipment, and technology $ - $ - $ 6,345
Cash paid for acquired companies, capital equipment, and technology - - (3,889)
Payable for acquired companies, capital equipment, and technology - - (795)
------------ ------------ ------------
Liabilities assumed of acquired companies $ - $ - $ 1,661
============ ============ ============
Amounts forgiven in exchange for the acquisition of 49% minority interest in
Kadant Composites Inc. (Note 3) $ - $ 2,053 $ -
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
6
KADANT INC. 2002 FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) AND
SHAREHOLDERS' INVESTMENT
(In thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS)
Net Income (Loss) $ (26,802) $ 9,982 $ 15,142
----------- ----------- -----------
Other Comprehensive Items (Note 16):
Foreign currency translation adjustment 6,528 (460) (8,465)
Deferred gain (loss) on foreign currency contracts 201 (19) -
Unrealized gain (loss) on available-for-sale investments, net of taxes - (21) 63
----------- ----------- -----------
6,729 (500) (8,402)
----------- ------------ -----------
$ (20,073) $ 9,482 $ 6,740
=========== =========== ===========
SHAREHOLDERS' INVESTMENT
Common Stock, $.01 Par Value:
Balance at beginning of year $ 127 $ 127 $ 127
Issuance of Company common stock (Note 6) 13 - -
----------- ----------- -----------
Balance at end of year 140 127 127
----------- ----------- -----------
Capital in Excess of Par Value:
Balance at beginning of year 81,229 77,231 77,919
Issuance of Company common stock (Note 6) 17,642 - -
Activity under employees' and directors' stock plans (304) 142 167
Tax benefit related to employees' and directors' stock plans - 1,058 512
Effect of majority-owned subsidiary's equity transactions (Note 11) - 2,798 (1,367)
----------- ----------- -----------
Balance at end of year 98,567 81,229 77,231
----------- ----------- -----------
Retained Earnings:
Balance at beginning of year 143,504 133,522 118,380
Net income (loss) (26,802) 9,982 15,142
----------- ----------- -----------
Balance at end of year 116,702 143,504 133,522
----------- ----------- -----------
Treasury Stock, at Cost:
Balance at beginning of year (21,345) (20,758) (21,239)
Purchases of Company common stock - (587) -
Activity under employees' and directors' stock plans 444 - 481
----------- ----------- -----------
Balance at end of year (20,901) (21,345) (20,758)
----------- ----------- -----------
Deferred Compensation:
Balance at beginning of year (5) (36) (66)
Issuance of restricted stock under directors' stock plans (Note 5) (106) - -
Amortization of deferred compensation 84 31 30
----------- ----------- -----------
Balance at end of year (27) (5) (36)
----------- ----------- -----------
Accumulated Other Comprehensive Items (Note 16):
Balance at beginning of year (19,953) (19,453) (11,051)
Other comprehensive items 6,729 (500) (8,402)
----------- ----------- -----------
Balance at end of year (13,224) (19,953) (19,453)
----------- ----------- -----------
$ 181,257 $ 183,557 $ 170,633
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
7
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Summary of Significant Accounting Policies
NATURE OF OPERATIONS
Kadant Inc. (the Company) operates in two segments: (1) Pulp and
Papermaking Equipment and Systems and (2) Composite and Fiber-based Products.
Through its Pulp and Papermaking Equipment and Systems segment, the Company
develops, manufactures, and markets a range of equipment and products for the
domestic and international papermaking and paper recycling industries. The
Company's principal products in this segment include custom-engineered
stock-preparation systems and equipment for the preparation of wastepaper for
conversion into recycled paper; papermaking machine accessory equipment and
related consumables important to the efficient operation of paper machines; and
water-management systems essential for draining, purifying, and recycling
process water. Through its Composite and Fiber-based Products segment, the
Company develops, manufactures, and markets composite products for the building
industry made from recycled fiber and plastic, and manufactures and sells
granules derived from pulp fiber primarily for use as agricultural carriers and
for home lawn and garden applications.
On July 12, 2001, the Company changed its name to Kadant Inc. from
Thermo Fibertek Inc. The Company's common stock trades under the ticker symbol
"KAI" on the American Stock Exchange.
COMPANY HISTORY AND FORMER RELATIONSHIP WITH THERMO ELECTRON CORPORATION
The Company was incorporated in November 1991 as a wholly owned
subsidiary of Thermo Electron Corporation and as the successor-in-interest to
several of Thermo Electron's subsidiaries. In November 1992, the Company
conducted an initial public offering of its common stock and became a
majority-owned public subsidiary of Thermo Electron. As part of a major
reorganization plan, Thermo Electron spun off its equity interest in the Company
as a dividend to Thermo Electron shareholders on August 8, 2001 (Spinoff Date),
on the basis of 0.0612 shares of the Company's common stock for each share of
Thermo Electron common stock outstanding. Following the distribution, Thermo
Electron ceased to hold any shares of the Company's common stock. Thermo
Electron received a favorable private letter ruling from the Internal Revenue
Service (IRS) that the distribution would generally qualify as a tax-free
distribution, with approximately 8% of the shares distributed being considered
"taxable" shares, subject to certain conditions.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the
Company, its wholly owned subsidiaries, and its 95%-owned Fiberprep, Inc.
subsidiary. In December 2001, Kadant Fibergen Inc., formerly Thermo Fibergen
Inc., a majority-owned public subsidiary, was merged into a wholly owned
subsidiary of the Company (Note 11). All material intercompany accounts and
transactions have been eliminated.
FISCAL YEAR
The Company has adopted a fiscal year ending the Saturday nearest
December 31. References to 2002, 2001, and 2000 are for the fiscal years ended
December 28, 2002, December 29, 2001, and December 30, 2000, respectively. The
Company's Kadant Lamort subsidiary, based in France, has a fiscal year ending on
November 30 to allow sufficient time for the Company to consolidate the
financial statements of that business.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period.
8
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Critical accounting policies are defined as those that entail
significant judgments and estimates, and could potentially result in materially
different results under different assumptions and conditions. The Company
believes that the most critical accounting policies upon which its financial
condition depends, and which involve the most complex or subjective decisions or
assessments, concern revenue recognition, accounts receivable, inventories,
warranties, and the valuation of intangible assets and goodwill. A discussion on
the application of these and other accounting policies is detailed throughout
Note 1.
Although the Company makes every effort to ensure the accuracy of the
estimates and assumptions used in the preparation of the financial statements or
in the application of accounting policies, if business conditions were
different, or if the Company used different estimates and assumptions, it is
possible that materially different amounts could be reported in the Company's
financial statements.
REVENUE RECOGNITION
Prior to 2000, the Company generally recognized revenues upon shipment
of its products. During the fourth quarter of 2000, effective January 2, 2000,
the Company adopted Securities and Exchange Commission (SEC) Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." Under SAB
No. 101, when the terms of sale include customer acceptance provisions, and
compliance with those provisions cannot be demonstrated until customer
acceptance, revenues are recognized upon such acceptance. Revenues for products
sold that require installation for which the installation is essential to
functionality, or is not deemed inconsequential or perfunctory, are recognized
upon completion of installation. Revenues for products sold where installation
is not essential to functionality, and is deemed inconsequential or perfunctory,
are recognized upon shipment with estimated installation costs accrued
(Note 17).
In addition, revenues and profits on certain long-term contracts are
recognized using the percentage-of-completion method. Revenues recorded under
the percentage-of-completion method were $35,403,000 in 2002, $53,508,000 in
2001, and $43,440,000 in 2000. The percentage of completion is determined by
relating the actual costs incurred to date to an estimate of total costs to be
incurred on each contract. If a loss is indicated on any contract in process, a
provision is made currently for the entire loss. The Company's contracts
generally provide for billing of customers upon the attainment of certain
milestones specified in each contract. Revenues earned on contracts in process
in excess of billings are classified as unbilled contract costs and fees, and
amounts billed in excess of revenues earned are classified as billings in excess
of contract costs and fees in the accompanying balance sheet. There are no
significant amounts included in the accompanying balance sheet that are not
expected to be recovered from existing contracts at current contract values, or
that are not expected to be collected within one year, including amounts that
are billed but not paid under retainage provisions.
WARRANTY OBLIGATIONS
The Company provides for the estimated cost of product warranties,
primarily using historical information and repair costs, at the time product
revenue is recognized. In the Papermaking Equipment segment, we typically
negotiate the terms regarding warranty coverage and length of warranty depending
on the products and applications. In the Composite and Fiber-based Products
segment, we offer a standard limited warranty on our decking and roofing
products restricted to repair or replacement of the defective product or refund
of the original purchase price. While the Company engages in extensive product
quality programs and processes, the Company's warranty obligation is affected by
product failure rates, repair costs, service delivery costs incurred in
correcting a product failure, and supplier warranties on parts delivered to the
Company. Should actual product failure rates, repair costs, service delivery
costs, or supplier warranties on parts differ from the Company's estimates,
revisions to the estimated warranty liability
9
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
would be required. The changes in the carrying amount of product warranties for
the year ended December 28, 2002, are as follows (in thousands):
2002
--------
Balance at December 29, 2001 $ 4,598
Provision charged to income 2,241
Usage (2,725)
Other, net (a) 196
--------
Balance at December 28, 2002 $ 4,310
========
(a) Primarily represents the effects of currency translation.
STOCK-BASED COMPENSATION PLANS
The Company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock-based compensation plans (Note 5). Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to shareholders' investment.
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-based Compensation," which sets forth a fair-value-based method of
recognizing stock-based compensation expense. As permitted by SFAS No. 123, the
Company has elected to continue to apply APB No. 25 to account for its
stock-based compensation plans. No stock-based employee compensation cost
related to stock option awards is reflected in net income as all options granted
under the plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. Had compensation cost for awards
granted after 1994 under the Company's stock-based compensation plans been
determined based on the fair value at the grant dates consistent with the method
set forth under SFAS No. 123, the effect on certain of the Company's financial
results would have been as follows:
(In thousands except per share amounts) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
Net Income (Loss):
As reported $ (26,802) $ 9,982 $ 15,142
Deduct: Total stock-based employee compensation expense determined under the
fair-value-based method for all awards, net of tax (1,389) (602) (944)
---------- ---------- ----------
Pro forma $ (28,191) $ 9,380 $ 14,198
========== ========== ==========
Basic Earnings (Loss) per Share:
As reported (2.07) .81 1.24
Pro forma (2.18) .76 1.16
Diluted Earnings (Loss) per Share:
As reported (2.04) .81 1.23
Pro forma (2.15) .76 1.15
10
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
The weighted average fair value per share of options granted was $8.19,
$6.29, and $5.50, in 2002, 2001, and 2000, respectively. The fair value of each
option grant was estimated on the grant date using the Black-Scholes
option-pricing model, assuming an expected dividend yield of zero with the
following weighted-average assumptions:
2002 2001 2000
- ----------------------------------------------------------------------------
Volatility 46% 50% 42%
Risk-Free Interest Rate 4.3% 4.1% 4.9%
Expected Life of Options 7 years 5 years 1 year
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option-pricing models require the input
of highly subjective assumptions, including expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
INCOME TAXES
In accordance with SFAS No. 109, "Accounting for Income Taxes," the
Company recognizes deferred income taxes based on the expected future tax
consequences of differences between the financial statement basis and the tax
basis of assets and liabilities, calculated using enacted tax rates in effect
for the year in which the differences are expected to be reflected in the tax
return.
Prior to the spinoff from Thermo Electron, the Company and Thermo
Electron were parties to a tax allocation agreement under which the Company and
its subsidiaries, except its foreign operations, its Fiberprep subsidiary, and
in 2000, its Kadant Composites Inc. subsidiary, were included in the
consolidated federal and certain state income tax returns filed by Thermo
Electron. The tax allocation agreement provided that, in years in which these
entities had taxable income, the Company would pay to Thermo Electron amounts
comparable to the taxes it would have paid if the Company had filed separate tax
returns. The tax allocation agreement terminated as of the Spinoff Date, at
which time the Company and Thermo Electron entered into a tax matters agreement.
The tax matters agreement requires, among other things, that the Company
file its own income tax returns for tax periods beginning immediately after the
Spinoff Date. In addition, the tax matters agreement requires that the Company
indemnify Thermo Electron, but not the shareholders of Thermo Electron, against
liability for taxes resulting from (a) the conduct of the Company's business
following the distribution or (b) the failure of the distribution to Thermo
Electron shareholders of shares of the Company's common stock or of Viasys
Healthcare Inc. (another Thermo Electron spinoff) common stock to continue to
qualify as a tax-free spinoff under Section 355 of the Internal Revenue Code as
a result of certain actions that the Company takes following the distribution.
Thermo Electron has agreed to indemnify the Company against taxes resulting from
the conduct of Thermo Electron's business prior to and following the
distribution, or from the failure of the distribution of shares of the Company's
common stock to Thermo Electron shareholders to continue to qualify as a
tax-free spinoff other than as a result of some actions that the Company may
take following the distribution. Although not anticipated, if any of the
Company's post-distribution activities causes the distribution to become
taxable, the Company could incur liability to Thermo Electron and/or various
taxing authorities, which could adversely affect the Company's results of
operations, financial position, and cash flows.
11
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
EARNINGS PER SHARE
Basic earnings per share have been computed by dividing net income by
the weighted average number of shares outstanding during the year. Except where
the effect would have been antidilutive, diluted earnings per share have been
computed assuming the exercise of stock options, as well as their related income
tax effects. The conversion of the Company's convertible obligations and the
elimination of its related interest expense was antidilutive in all periods
presented.
STOCK SPLIT
All share and per share information, including the conversion price of
the Company's subordinated convertible debentures, has been restated to reflect
a one-for-five reverse stock split of the Company's common stock, effective July
12, 2001.
CASH AND CASH EQUIVALENTS
At year-end 2002 and 2001, the Company's cash equivalents included
investments in commercial paper and money market funds, and other marketable
securities of its domestic and foreign subsidiaries, which had maturities of
three months or less at the date of purchase. Cash equivalents are carried at
cost, which approximates market value.
INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out,
or weighted average basis) or market value and include materials, labor, and
manufacturing overhead. The components of inventories are as follows:
(In thousands) 2002 2001
- ------------------------------------------------------------------------------------------------
Raw Materials and Supplies $ 12,937 $ 13,625
Work in Process 6,126 6,962
Finished Goods (includes $954 and $1,917 at customer locations) 10,423 12,947
---------- ----------
$ 29,486 $ 33,534
========== ==========
The Company periodically reviews its quantities of inventories on hand
and compares these amounts to expected usage of each particular product or
product line. The Company records as a charge to cost of revenues any amounts
required to reduce the carrying value of inventories to net realizable value.
12
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
PROPERTY, PLANT, AND EQUIPMENT
The costs of additions and improvements are capitalized, while
maintenance and repairs are charged to expense as incurred. The Company provides
for depreciation and amortization using the straight-line method over the
estimated useful lives of the property as follows: buildings, 10 to 40 years;
machinery and equipment, 2 to 10 years; and leasehold improvements, the shorter
of the term of the lease or the life of the asset. Property, plant, and
equipment consists of the following:
(In thousands) 2002 2001
- -----------------------------------------------------------------------------------
Land $ 2,851 $ 2,784
Buildings 19,684 19,562
Machinery, Equipment, and Leasehold Improvements 47,685 49,364
---------- ----------
70,220 71,710
Less: Accumulated Depreciation and Amortization 44,759 43,225
---------- ----------
$ 25,461 $ 28,485
========== ==========
OTHER ASSETS
Other assets in the accompanying balance sheet includes intangible
assets, deferred charges, notes receivable (Note 4), and deferred debt expense.
Intangible assets includes the costs of patents, acquired intellectual property,
and noncompete agreements entered into in connection with acquisitions, which
are amortized using the straight-line method over periods of up to 15, 7, and 10
years, respectively. Acquired intangible assets are as follows:
Accumulated
(In thousands) Gross Amortization Net
- --------------------------------------------------------------------------------------
December 28, 2002
Patents $ 1,000 $ (542) $ 458
Noncompete agreements 3,079 (1,720) 1,359
Acquired intellectual property 6,410 (2,302) 4,108
---------- ------------ ----------
$ 10,489 $ (4,564) $ 5,925
========== ============ ==========
December 29, 2001
Patents $ 1,000 $ (458) $ 542
Noncompete agreements 3,079 (1,404) 1,675
Acquired intellectual property 6,410 (1,747) 4,663
---------- ------------ ----------
$ 10,489 $ (3,609) $ 6,880
========== ============ ==========
Amortization of acquired intangible assets was $955,000, $1,067,000, and
$1,214,000 in 2002, 2001, and 2000, respectively. The estimated future
amortization expense of acquired intangible assets is: $904,000 in 2003 through
2005, $865,000 in 2006, $452,000 in 2007, and $1,896,000 in 2008 and thereafter.
13
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
GOODWILL
Goodwill represents the excess of acquisition costs over the estimated
fair value of the net assets acquired and was amortized through year-end 2001
using the straight-line method principally over 40 years. Accumulated
amortization was $19,552,000 at year-end 2001. In June 2001, the FASB issued
SFAS No. 142, "Goodwill and Other Intangible Assets." The Company adopted SFAS
No. 142, effective December 30, 2001. SFAS No. 142 requires that amortization of
goodwill cease and that the Company evaluate the recoverability of goodwill and
other intangible assets annually, or more frequently if events or changes in
circumstances, such as a decline in sales, earnings or cash flows, or material
adverse changes in the business climate, indicate that the carrying value of an
asset might be impaired. Goodwill is considered to be impaired when the net book
value of a reporting unit exceeds its estimated fair value. Fair values are
established using a discounted cash flow methodology (specifically, the income
approach). The determination of discounted cash flows is based on the Company's
strategic plans and long-range forecasts. The revenue growth rates included in
the forecasts are the Company's best estimates based on current and anticipated
market conditions, and the profit margin assumptions are projected based on the
current and anticipated cost structures. In accordance with the SFAS No. 142
transition procedures, the Company recorded a goodwill impairment charge for the
cumulative effect of change in accounting principle of $32,756,000, net of
income tax benefit of $12,420,000, upon the adoption of SFAS No. 142, as further
described in Note 17.
Through year-end 2001, the Company assessed the future useful life and
recoverability of goodwill and other noncurrent assets whenever events or
changes in circumstances indicated that the current useful life had diminished,
or the carrying value had been impaired. Such events or circumstances generally
would have included the occurrence of operating losses or a significant decline
in earnings associated with the acquired business or asset. The Company
considered the future undiscounted cash flows of the acquired companies in
assessing the recoverability of this asset. The Company assessed cash flows
before interest charges and if impairment were indicated, would write the asset
down to fair value. If quoted market values were not available, the Company
estimated fair value by calculating the present value of future cash flows. If
impairment had occurred, any excess of carrying value over fair value would have
been recorded as a loss. At December 29, 2001, no goodwill impairment existed
under this method.
FOREIGN CURRENCY
All assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year in accordance with SFAS No. 52, "Foreign
Currency Translation." Resulting translation adjustments are reflected in the
accumulated other comprehensive items component of shareholders' investment
(Note 16). Foreign currency transaction gains and losses are included in the
accompanying statement of income and are not material for the three years
presented.
FORWARD CONTRACTS
Effective in the first quarter of 2001, the Company adopted SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133, as amended, requires that all derivatives, including forward currency
exchange contracts, be recognized on the balance sheet at fair value.
Derivatives that are not hedges must be recorded at fair value to earnings. If a
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of the derivative are either offset against the change in fair value of
the hedged item through earnings or are recognized in other comprehensive income
until the hedged item is recognized in earnings. The Company records to earnings
immediately the extent to which a hedge is not effective in achieving offsetting
changes in fair value. Adoption of SFAS No. 133 in the first quarter of 2001 did
not have a material effect on the Company's financial position and results of
operations.
The Company uses forward currency exchange contracts primarily to hedge
certain operational ("cash flow" hedges) and balance sheet ("fair value" hedges)
exposures resulting from fluctuations in currency exchange rates. Such exposures
primarily result from portions of the Company's operations and assets that are
denominated in currencies other than the functional currencies of the businesses
conducting the operations or holding the assets. The Company
14
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
enters into currency exchange contracts to hedge anticipated product sales and
recorded accounts receivable made in the normal course of business, and
accordingly, the hedges are not speculative in nature. The Company does not hold
or transact in financial instruments for purposes other than risk management.
The Company records its currency exchange contracts at fair value in its
consolidated balance sheet as other current assets or other current liabilities
and, for cash flow hedges, the related gains or losses on these contracts are
deferred as a component of other comprehensive items. These deferred gains and
losses are recognized in the period in which the underlying anticipated
transaction occurs. Unrealized gains and losses resulting from the impact of
currency exchange rate movements on fair value hedges are recognized in earnings
in the period in which the exchange rates change and offset the currency gains
and losses on the underlying exposure being hedged. The fair value of these
contracts at year-end 2002 and the net impact of the related gains and losses on
selling, general, and administrative expense, including the effect of the
underlying hedged items, were not material in 2002.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Asset Retirement Obligations
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143, effective in 2003, addresses accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The Company does
not expect the adoption of this new standard to have a material impact on its
consolidated financial statements.
Accounting for the Impairment or Disposal of Long-lived Assets
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets." This statement supercedes SFAS No.
121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to Be Disposed of," and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS No. 144 requires that one accounting
model be used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired, and it broadens the presentation of
discontinued operations to include more disposal transactions. The provisions of
this statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. Adoption of the standard during the first quarter of 2002 did not have an
effect on the Company's consolidated financial statements.
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Adoption of the standard is generally required in 2003. Under the
standard, transactions currently classified by the Company as extraordinary
items, such as gains and losses from the Company's early extinguishment of its
convertible debentures (Note 8), will no longer be treated as such, but instead
will be reported as other nonoperating income or expense. Prior periods will be
restated to conform to this presentation.
Accounting for Costs Associated with Exit or Disposal Activities
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which supersedes Emerging Issues
Task Force (EITF) Pronouncement No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)." The standard affects the accounting
for recognition of restructuring charges and related activities. The
15
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
provisions of this statement are required to be adopted for exit or disposal
activities that are initiated after 2002. The provisions of EITF No. 94-3 will
continue to apply with regard to the Company's previously announced
restructuring plans. The adoption of this statement is not expected to have a
material effect on the Company's results of operations.
Accounting for Revenue Arrangements with Multiple Deliverables
In November 2002, the EITF reached a final consensus on EITF No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." The provisions
of EITF No. 00-21 are required to be adopted for revenue arrangements entered
into by the Company after June 28, 2003, although early adoption is permitted.
EITF No. 00-21 addresses arrangements with customers that have multiple
deliverables, such as equipment and installation, and provides guidance as to
when recognition of revenue for each deliverable is appropriate. The Company is
currently evaluating the impact of the adoption of EITF No. 00-21 on its
consolidated financial statements.
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of FIN No. 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, while the disclosure requirements are applicable in 2002. The
Company is complying with the disclosure requirements of FIN No. 45 and is
evaluating the effect the other requirements may have on its consolidated
financial statements.
Accounting for Stock-Based Compensation - Transition and Disclosure
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which amends SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair-value-based
method of accounting for stock-based compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company has elected not to adopt the fair-value
recognition provisions as provided for in SFAS No. 123, but to continue to apply
APB No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock-based compensation plans. APB No. 25
does not require options to be expensed when granted with an exercise price
equal to fair market value. The Company has adopted the disclosure provisions of
SFAS No. 148 as of December 28, 2002 (Note 1).
2. Available-for-Sale Investments
Debt securities owned by the Company are considered available-for-sale
investments in the accompanying balance sheet and are carried at market value,
with the difference between cost and market value, net of related tax effects,
recorded in the accumulated other comprehensive items component of shareholders'
investment. At year-end 2001, the cost basis of the Company's available-for-sale
investments approximated market value. Therefore, there were no unrealized gains
or losses on these investments at December 29, 2001.
Available-for-sale investments, which consist of corporate bonds in the
accompanying 2001 balance sheet, have contractual maturities of one year or
less.
The cost of available-for-sale investments that were sold was based on
specific identification in determining the gross realized gains and losses in
the accompanying statement of income.
16
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Composites Venture
In October 1999, the Company created a subsidiary, Kadant Composites
Inc., to develop, produce, and market fiber-based composite products primarily
for the building industry. The Company capitalized Kadant Composites with
$3,200,000 in cash. Kadant Composites then purchased capital equipment and
technology related to the development of fiber-based composites, valued at
$5,275,000, in exchange for shares of its common stock equal to 49% of its
equity and $1,700,000 in cash, payable in installments, if certain conditions
were met. The Company paid $1,200,000 and $500,000 of the purchase price in 2000
and 1999, respectively.
The Company constructed a composites manufacturing facility in Green
Bay, Wisconsin, and began production at the facility in 2000.
In January 2001, the Company acquired the remaining 49% minority equity
interest in Kadant Composites from the minority investor (the Seller). In
exchange for the 49% equity interest, the Company agreed to forgive $2,053,000
due from the Seller related to its investment in Kadant Composites prior to the
purchase of the remaining 49% equity interest. The excess of assigned fair value
of net assets acquired from the buyout over the acquisition cost resulted in a
reduction in the intangible asset recorded at the time of the Company's initial
investment in Kadant Composites.
4. Acquisitions and Dispositions
ACQUISITIONS
In June 2000, the Company acquired Cyclotech AB - Stockholm, a Swedish
manufacturer of stock-preparation equipment, for $540,000 in cash. Of the total
purchase price, $478,000 was paid at closing and the remaining $62,000 was paid
in 2001. The cost of this acquisition exceeded the estimated fair value of the
acquired net assets by $541,000.
In February 2000, the Company acquired the assets of Gauld Equipment
Manufacturing Company, Inc., a manufacturer of stock-preparation equipment, for
$3,411,000 in cash and a $923,000 noninterest bearing contract with a
controlling shareholder of Gauld, payable in equal annual installments over four
years. The liability was initially recorded at its net present value of
$795,000. The cost of this acquisition exceeded the estimated fair value of the
acquired net assets by $2,128,000.
These acquisitions have been accounted for using the purchase method of
accounting, and their results of operations have been included in the
accompanying financial statements from their respective dates of acquisition.
Allocation of the purchase price for these acquisitions was based on estimates
of the fair value of the net assets acquired. Pro forma results have not been
presented, as the results of the acquired businesses were not material to the
Company's results of operations.
DISPOSITIONS
In September 2000, the Company sold substantially all of the assets of
its fiber-recovery and water-clarification services plant to the host mill for
$3,600,000. The purchase price consisted of an initial payment of $200,000 at
the date of closing and a note receivable to be paid in 17 monthly payments of
$200,000, plus interest at 9.5%, beginning September 28, 2000. The note
receivable was secured by an irrevocable letter of credit. The Company
recognized a pretax gain of $729,000 on the sale during 2000.
In June 2000, the Company sold its interest in a tissue mill in Maine
for $3,909,000 in cash, resulting in a pretax gain of $971,000.
17
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Employee Benefit Plans
STOCK-BASED COMPENSATION PLANS
General
The Company maintains stock-based compensation plans primarily for its
key employees and directors, although the plans permit awards to others expected
to make a significant contribution to the future of the Company. The plans
authorize the human resources committee of the Company's board of directors (the
board committee) to award a variety of stock and stock-based incentives, such as
restricted stock, nonqualified and incentive stock options, stock bonus shares,
or performance-based shares. The award recipients and the terms of awards,
including price, granted under these plans are determined by the board
committee. Options granted under these plans prior to 2001 were nonqualified
options that are exercisable immediately, but are subject to provisions similar
to vesting that restrict transfer and afford the Company the right to repurchase
the shares at the exercise price upon certain events. The restrictions and
repurchase rights for these options generally lapse over five to ten years and
the term of the option may range from five to twelve years. Options granted
under these plans in 2001 and after are nonqualified options that vest over
three years and are not exercisable until vested. To date, all options have been
granted at an exercise price equal to the fair market value of the Company's
common stock on the date of grant. Upon a change of control, as defined in the
plans, all options or other awards become fully vested and all restrictions
lapse.
The Company also had a separate stock option plan for directors that
provided for the annual grant of stock options to outside directors on the date
of the Company's annual meeting of shareholders, which was terminated in April
2002. Options outstanding under this plan are immediately exercisable and expire
three years after the date of grant.
Restricted Stock
In April 2002, the Company awarded 7,500 shares of its restricted common
stock to its outside directors. The shares had an aggregate value of $106,000
and are restricted from resale for five years.
The Company has recorded the fair value of the restricted stock awards
as deferred compensation in the accompanying consolidated balance sheet, and
amortizes these amounts over their respective vesting periods.
Spinoff Option Exchange
On the Spinoff Date, options to purchase shares of Thermo Electron
common stock held by the Company's employees were exchanged for options to
purchase 582,509 shares of the Company's common stock. The price and share
adjustments to the exchanged options were determined in accordance with FASB
Interpretation No. 44 and accordingly, no compensation expense resulted from
this transaction.
18
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Employee Benefit Plans (continued)
Stock Options
The Company had 178,000 options available for grant under these plans at
December 28, 2002. A summary of the Company's stock option activity is as
follows:
2002 2001 2000
------------------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
(Shares in thousands) Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------------------
Options Outstanding, Beginning of Year 2,299 $ 16.87 535 $ 33.85 611 $ 32.85
Granted 595 15.26 1,245 13.05 1 33.30
Exercised (4) 12.66 - - (30) 18.90
Forfeited (154) 21.62 (64) 38.78 (47) 30.65
Issued in Exchange - - 583 11.84 - -
---------- ---------- ----------
Options Outstanding, End of Year 2,736 $ 16.26 2,299 $ 16.87 535 $ 33.85
========== ========== ========== ========== ========== ==========
Options Exercisable 1,327 $ 18.67 1,054 $ 21.38 535 $ 33.85
========== ========== ========== ========== ========== ==========
A summary of the status of the Company's stock options at
December 28, 2002, is as follows:
Options Outstanding Options Exercisable
---------------------------------------------------- ------------------------------------------------
Weighted Weighted Number Weighted Weighted
Number Average Average of Average Average
Range of of Shares Remaining Exercise Shares Remaining Exercise
Exercise Prices (In thousands) Contractual Life Price (In thousands) Contractual Life Price
- ------------------------------------------------------------------------------------------------------------------------------------
$ 4.38 - $ 16.00 2,366 5.5 years $ 13.13 957 4.6 years $ 11.87
18.05 - 29.15 140 3.5 years 25.09 140 3.5 years 25.09
30.75 - 57.25 228 2.9 years 42.60 228 2.9 years 42.60
93.33 - 110.80 2 5.1 years 103.68 2 5.1 years 103.68
-------------- -------------
$ 4.38 - $ 110.80 2,736 5.2 years $ 16.26 1,327 4.2 years $ 18.67
============== =============
Employee Stock Purchase Plan
Substantially all of the Company's full-time U.S. employees are eligible
to participate in its employee stock purchase plan. Under the plan, shares of
the Company's common stock may be purchased at a 15% discount from the fair
market value at the beginning or end of the purchase period, whichever is lower.
Shares purchased under the plan are subject to a one-year resale restriction and
are purchased through payroll deductions of up to 10% of each participating
employee's gross wages. For the 2002, 2001, and 2000 plan years, the Company
issued 20,006 shares (issued in January 2003), 12,872 shares, and 6,304 shares,
respectively, of its common stock under this plan.
401(k) SAVINGS PLAN
Effective November 2000, the majority of the Company's U.S. subsidiaries
participate in the Company's 401(k) retirement savings plan and, prior to
November 2000, participated in Thermo Electron's 401(k) savings plan.
Contributions to the plan are made by both the employee and the Company. Company
contributions are based upon the level of employee contributions. The Company
contributed and charged to expense $674,000, $835,000, and $803,000 related to
the 401(k) plans in 2002, 2001, and 2000, respectively.
19
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Employee Benefit Plans (continued)
PROFIT-SHARING PLAN
One of the Company's U.S. subsidiaries has adopted a profit-sharing plan
under which the Company annually contributes approximately 10% of the
subsidiary's net income before profit-sharing expense. All contributions are
immediately vested. In addition, one of the Company's foreign subsidiaries
maintains a state-mandated profit sharing plan. Under this plan, the Company
contributes up to 11% of the subsidiary's net profit after taxes, reduced by 5%
of its shareholders' investment. For these plans, the Company contributed and
charged to expense $487,000, $880,000, and $812,000 in 2002, 2001, and 2000,
respectively.
DEFINED BENEFIT PENSION PLAN
One of the Company's U.S. subsidiaries has a noncontributory defined
benefit retirement plan. Benefits under the plan are based on years of service
and employee compensation. Funds are contributed to a trustee as necessary to
provide for current service and for any unfunded projected benefit obligation
over a reasonable period.
Net periodic benefit (income) expense includes:
(In thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------------------
Interest Cost $ 1,013 $ 957 $ 902
Service Cost 623 483 496
Expected Return on Plan Assets (1,584) (1,771) (1,884)
Amortization of Unrecognized (Gain) Loss 45 (203) (380)
---------- ----------- ------------
$ 97 $ (534) $ (866)
========== =========== ============
The Company's defined benefit pension plan activity is:
(In thousands) 2002 2001
- -------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation, beginning of year $ 13,973 $ 12,538
Interest cost 1,013 957
Service cost 623 483
Benefits paid (616) (547)
Actuarial gain 347 542
---------- ---------
Benefit obligation, end of year 15,340 13,973
---------- ---------
Change in Plan Assets:
Fair value of plan assets, beginning of year 17,382 19,404
Actual return on plan assets (1,962) (1,475)
Benefits paid (616) (547)
---------- ---------
Fair value of plan assets, end of year 14,804 17,382
---------- ---------
Funded (Unfunded) Status (536) 3,409
Unrecognized Net (Gain) Loss 2,830 (1,018)
---------- ---------
Prepaid Benefit Costs $ 2,294 $ 2,391
========== =========
20
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Employee Benefit Plans (continued)
Plan assets are primarily invested in equity securities, fixed-income
securities, cash, and cash equivalents. Prepaid benefit costs are included in
other assets in the accompanying balance sheet.
The weighted average actuarial assumptions used by the plan as of the
end of each of the following years were:
2002 2001 2000
- --------------------------------------------------------------------------------
Discount rate 6.75% 7.25% 7.50%
Expected return on plan assets 8.75% 9.25% 9.25%
Rate of salary increases 5.00% 5.50% 5.50%
OTHER RETIREMENT PLANS
Certain of the Company's subsidiaries offer other retirement plans. The
majority of these subsidiaries offer defined contribution plans. Company
contributions to these plans are based on formulas determined by the Company.
For these plans, the Company contributed and charged to expense $1,709,000,
$1,406,000, and $1,195,000 in 2002, 2001, and 2000, respectively. Other
long-term liabilities in the accompanying balance sheet represent liabilities
related to two of these plans at year end 2002 and 2001.
6. Preferred and Common Stock
PREFERRED STOCK
In May 2001, the Company's shareholders approved an amendment to its
Certificate of Incorporation to authorize 5,000,000 shares of preferred stock,
$.01 par value per share, for issuance by the Company's board of directors
without further shareholder approval. Subsequently, the board of directors
designated 15,000 shares of such preferred stock as Series A junior
participating preferred stock for issuance under the Company's Shareholder
Rights Plan (see below). No such preferred stock has been issued by the Company.
COMMON STOCK
In June 2002, the Company sold 1,300,000 shares of its common stock in a
public offering at $14.62 per share, for net proceeds of $17,655,000. The
Company sold approximately 10% of its outstanding common stock, which satisfied
an IRS ruling related to the spinoff of the Company from Thermo Electron
(Note 1).
In 2001, the Company's board of directors adopted a shareholder rights
plan. Under the plan, one right was distributed at the close of business on
August 6, 2001, for each share of the Company's common stock outstanding at that
time. The rights plan is designed to provide shareholders with fair and equal
treatment in the event of an unsolicited attempt to acquire the Company. The
rights were attached to the Company's outstanding common stock at the time of
distribution and are not separately transferable or exercisable. The rights will
become exercisable if a person acquires 15 percent or more of the Company's
common stock, or a tender or exchange offer is commenced for 15 percent or more
of the Company's common stock, unless, in either case, the transaction was
approved by the Company's board of directors. If the rights become exercisable,
each right will initially entitle the Company's shareholders to purchase .0001
of a share of the Company's Series A junior participating preferred stock, $.01
par value, at an exercise price of $75. In addition, except with respect to
transactions approved by the Company's board of directors, if the Company is
involved in a merger or other transaction with another company in which it is
not the surviving corporation, or the Company sells or transfers 50 percent or
more of its assets or earning power to another company, each right (other than
rights owned by the acquirer) will entitle its holder to purchase $75 worth of
the common stock of the acquirer at half the market value at that time. The
Company is entitled to redeem the rights at $.001 per right at any time prior to
the tenth business day (or later, if so determined by the board of directors)
after the acquisition of 15 percent or more of the Company's common stock.
Unless the rights are redeemed or exchanged earlier, they will expire on July
16, 2011.
21
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Preferred and Common Stock (continued)
At December 28, 2002, the Company had reserved 3,255,486 unissued shares
of its common stock for possible issuance under stock-based compensation plans.
7. Income Taxes
The components of income before provision for income taxes, minority
interest, extraordinary item, and cumulative effect of change in accounting
principles are as follows:
(In thousands) 2002 2001 2000
- ------------------------------------------------------------------------------
Domestic $ 196 $ 3,482 $ 13,914
Foreign 9,350 12,288 12,469
--------- --------- ---------
$ 9,546 $ 15,770 $ 26,383
========= ========= =========
The components of the provision for income taxes are as follows:
(In thousands) 2002 2001 2000
- ------------------------------------------------------------------------------
Current Provision:
Federal $ 550 $ 352 $ 5,594
Foreign 3,696 4,810 4,299
State 392 452 946
--------- --------- ---------
4,638 5,614 10,839
--------- --------- ---------
Net Deferred Provision (Benefit):
Federal (822) 923 569
Foreign (389) (233) (177)
State 192 338 (284)
--------- --------- ---------
(1,019) 1,028 108
--------- --------- ---------
$ 3,619 $ 6,642 $ 10,947
========= ========= =========
The Company receives a tax deduction upon the exercise of nonqualified
stock options by employees equal to the difference between the market price and
the exercise price of the Company's common stock on the date of exercise. The
current provision for income taxes does not reflect $1,058,000 and $512,000 of
such benefits from the exercise of stock options that have been allocated to
capital in excess of par value in 2001 and 2000, respectively.
22
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Income Tax (continued)
The provision for income taxes in the accompanying statement of
operations differs from the provision calculated by applying the statutory
federal income tax rate of 35% to income before provision for income taxes,
minority interest, extraordinary item, and cumulative effect of change in
accounting principles due to the following:
(In thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------
Provision for Income Taxes at Statutory Rate $ 3,341 $ 5,520 $ 9,234
Increases (Decreases) Resulting From:
State income taxes, net of federal tax 58 514 577
Foreign tax rate and tax regulation differential (406) 188 (242)
Nondeductible expenses 220 306 497
Change in valuation allowance 400 50 174
Other 6 64 707
--------- --------- ---------
$ 3,619 $ 6,642 $ 10,947
========= ========= =========
Net deferred tax asset (liability) in the accompanying balance sheet
consists of the following:
(In thousands) 2002 2001
- -------------------------------------------------------------------------------
Deferred Tax Asset (Liability):
Foreign and alternative minimum tax credits $ 3,952 $ -
Inventory basis difference 2,956 2,674
Reserves and accruals 2,410 1,327
Amortization of intangible assets 941 (8,155)
Operating loss carryforwards 496 2,298
Allowance for doubtful accounts 457 510
Accrued compensation 193 146
Depreciation (940) (827)
Other 1,148 512
----------- ----------
11,613 (1,515)
Less: Valuation allowance 877 477
----------- ----------
$ 10,736 $ (1,992)
=========== ==========
The long-term portion of the deferred tax asset of $5,008,000 is
included in other assets in the accompanying 2002 balance sheet.
The valuation allowance relates to uncertainty surrounding the
realization of state operating loss carryforwards of $6,500,000 and $4,400,000
at year-end 2002 and 2001, respectively, which begin to expire in 2003, and
foreign tax credits of $3,392,000 that expire in 2007. In addition, the Company
had federal operating loss carryforwards of $5,500,000 at year-end 2001, which
were fully utilized during 2002.
The Company has not recognized a deferred tax liability for the
difference between the book basis and the tax basis of its investment in the
stock of its domestic subsidiaries (this difference relates primarily to
unremitted earnings by subsidiaries) because it does not expect this basis
difference to become subject to tax at the parent level. The Company believes it
can implement certain tax strategies to recover its investment in its domestic
subsidiaries tax free.
23
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Income Taxes (continued)
The Company's practice is to reinvest indefinitely the earnings of
certain international subsidiaries. Accordingly, no U.S. income taxes have been
provided for approximately $53,200,000 of unremitted earnings of international
subsidiaries. The Company believes that any U.S. tax liability due upon
remittance of such earnings would be immaterial due to available U.S. foreign
tax credits. The related foreign tax withholding would be approximately
$2,800,000.
8. Long-Term Obligations
The Company's annual requirements for its long-term obligations are
$585,000 in 2003 and $580,000 in 2004, resulting from liabilities recorded in
connection with the two acquisitions described below.
In connection with the February 2000 acquisition of Gauld Equipment, the
Company agreed to pay $923,000 in equal annual installments over four years. The
liability was initially recorded at its net present value of $795,000 (Note 4).
In connection with the May 1999 acquisition of Arcline Products, the
Company agreed to pay $2,000,000 in equal annual installments over five years.
The liability was initially recorded at its net present value of $1,730,000.
In July 1997, the Company issued and sold at par $153,000,000 principal
amount of 4 1/2% subordinated convertible debentures, due 2004, for net proceeds
of approximately $149,800,000. The debentures were convertible into shares of
the Company's common stock at a conversion price of $60.50 per share, and were
guaranteed on a subordinated basis by Thermo Electron. During 2001, the Company
repurchased $34,862,000 principal amount of the debentures for $33,506,000 in
cash, resulting in an extraordinary gain of $620,000, net of deferred debt
charges and net of income tax provision of $440,000. From January through
September 2002, the Company repurchased $31,962,000 principal amount of the
debentures for $31,270,000 in cash, resulting in an extraordinary gain of
$291,000, net of deferred debt charges, and net of income tax provision of
$178,000. In December 2002, the Company redeemed the remaining $86,176,000
outstanding principal amount of the debentures for 100% par value, resulting in
an extraordinary loss of $260,000 from the writeoff of the remaining deferred
debt charges, net of income tax benefit of $159,000.
See Note 13 for fair value information pertaining to the Company's
long-term obligations.
9. Related-Party Transactions
STOCK HOLDING ASSISTANCE PLAN
Prior to 2002, Company had a stock holding policy that required certain
executive officers to hold a minimum number of shares of Company common stock,
and a stock holding assistance plan under which the Company could make
interest-free loans to executive officers to enable them to purchase Company
common stock in the open market to comply with the policy. Two executive
officers received loans in 1996 and 1997 under this plan. In December 2001, the
board of directors terminated the policy and the plan, and authorized the
Company to forgive the remaining outstanding balances of the loans, which
totaled $163,000, and to reimburse the executive officers for federal and state
income taxes due as a consequence of the loan forgiveness, effective January
2002. In connection with these actions, the Company recorded compensation
expense of $299,000 in 2001 to reflect the forgiveness of the notes and tax
reimbursements granted to the officers.
24
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Related-Party Transactions (continued)
CORPORATE SERVICES AND TRANSITION SERVICES AGREEMENTS
Prior to the spinoff, the Company and Thermo Electron were parties to a
corporate services agreement under which Thermo Electron's corporate staff
provided certain administrative services, including certain legal advice and
services, risk management, certain employee benefit administration, tax advice
and preparation of tax returns, centralized cash management, and certain
financial and other services, for which the Company paid Thermo Electron
annually an amount equal to 0.8% of the Company's consolidated revenues. In
2001, the fee under this agreement was reduced to 0.6% and 0.4% of the Company's
consolidated revenues for the fiscal quarters ending June 30, 2001, and
September 29, 2001, respectively. The corporate services agreement terminated as
of the Spinoff Date and was replaced by a transition services agreement.
The transition services agreement provided that Thermo Electron would
continue to provide the Company with certain administrative services until
December 29, 2001. The Company paid a fee under this agreement equal to 0.4% and
0.2% of the Company's consolidated revenues for the fiscal quarters ending
September 29, 2001, and December 29, 2001, respectively, plus out-of-pocket and
third-party expenses.
For services under these agreements, the Company was charged $1,135,000
and $1,879,000 in 2001 and 2000, respectively. The Company believed the charges
under these agreements were reasonable and the terms of the agreements were fair
to the Company.
10. Commitments and Contingencies
OPERATING LEASES
The Company occupies office and operating facilities under various
operating leases. The accompanying statement of income includes expenses from
operating leases of $2,544,000, $2,439,000, and $2,257,000 in 2002, 2001, and
2000, respectively. The future minimum payments due under noncancelable
operating leases as of December 28, 2002, are $2,386,000 in 2003; $1,752,000 in
2004; $1,289,000 in 2005; $780,000 in 2006; $273,000 in 2007; and $55,000 in
2008 and thereafter. Total future minimum lease payments are $6,535,000.
LETTERS OF CREDIT
Outstanding letters of credit, principally relating to performance bonds
and customer deposit guarantees, totaled $8,832,000 at December 28, 2002.
CONTINGENCIES
In the ordinary course of business, the Company is at times required to
issue limited performance guarantees, some of which do not require the issuance
of letters of credit to customers in support of these guarantees, relating to
its equipment and systems. The Company typically limits its liability under
these guarantees to amounts that would not exceed the value of the contract. The
Company believes that it has adequate reserves for any potential liability in
connection with such guarantees.
INDEMNIFICATION
The Company is required to indemnify Thermo Electron, but not its
shareholders, against liability for taxes arising from the Company's conduct of
business after the spinoff, or the failure of certain distributions to continue
to qualify as a tax free spinoff, as described in Note 1 "Income Taxes."
25
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Redemption of Common Stock and Merger of Subsidiary
The Company's subsidiary, Kadant Fibergen, sold 4,715,000 units, each
consisting of one share of Kadant Fibergen common stock and one redemption
right, in an initial public offering in September 1996 at $12.75 per unit for
net proceeds of $55,781,000. The common stock and redemption rights subsequently
began trading separately. A holder of a redemption right had the option to
require Kadant Fibergen to redeem one share of Kadant Fibergen's common stock at
$12.75 per share in September 2000 (the initial redemption period) or September
2001 (the final redemption period). A redemption right could only be exercised
if the holder owned a share of Kadant Fibergen's common stock at the time of the
redemption.
In 2000, during the initial redemption period, holders of Kadant
Fibergen's common stock and common stock redemption rights surrendered 2,713,951
shares of Kadant Fibergen's common stock at a redemption price of $12.75 per
share, for a total of $34,603,000. Kadant Fibergen used available working
capital to fund the redemption payment and retired these shares immediately
following the redemption.
In 2001, during the final redemption period, holders of Kadant
Fibergen's common stock and common stock redemption rights surrendered 1,030,562
shares of Kadant Fibergen's common stock at a redemption price of $12.75 per
share, for a total of $13,140,000. Kadant Fibergen used a combination of
available working capital and a $6,000,000 loan from the Company to fund the
redemption payment and retired these shares immediately following the
redemption. Common stock redemption rights amounting to 970,487 were not
surrendered for redemption by the end of the final redemption period and
expired.
On December 27, 2001, the Company completed a short-form merger with
Kadant Fibergen, pursuant to which the Company acquired 359,587 shares of Kadant
Fibergen's common stock, representing all the outstanding shares of Kadant
Fibergen's common stock not already owned by the Company, for $12.75 per share
in cash. As a result, Kadant Fibergen's common stock ceased to be publicly
traded. The Company expended $4,585,000 in cash for the shares, with $1,761,000
paid in 2001, and $2,824,000 paid in 2002. The shares acquired included 114,487
shares not already owned by the Company that remained outstanding immediately
following the final redemption period, and 245,100 additional shares of Kadant
Fibergen's common stock issued after the final redemption period upon the
exercise of employee stock options. The Company had previously accelerated the
vesting provisions related to the unvested portion of these stock options. To
the extent an employee terminates employment before all the options would have
become fully vested under the original vesting provisions, the Company will
record a compensation charge for such options based on the intrinsic value at
the time of the acceleration of the vesting provisions. The Company recorded
goodwill of $783,000 in the Kadant Fibergen merger transaction.
12. Restructuring and Unusual Items
During 2002, the Company recorded restructuring and unusual costs of
$3,590,000. Restructuring costs of $1,129,000, which were accounted for in
accordance with EITF No. 94-3, related to severance costs for 68 employees
across all functions primarily at the Company's Papermaking Equipment segment,
all of whom were terminated as of December 28, 2002. These actions were taken in
an effort to improve profitability and were in response to a continued weak
market environment and reduced demand for our products. Unusual costs of
$2,461,000 include noncash charges of $2,399,000 for asset writedowns,
consisting of $953,000 for the impairment of a laboratory in Ohio held for sale
at the Papermaking Equipment segment, and $1,446,000 for the writedown of fixed
assets held for sale at the Composite and Fiber-based Products segment; and
$62,000 for related disposal and facility-closure costs.
During 2001, the Company recorded restructuring costs of $673,000, which
were accounted for in accordance with EITF No. 94-3, for severance costs
relating to 63 employees primarily in manufacturing and sales functions at the
Papermaking Equipment segment's domestic subsidiaries, all of whom were
terminated by December 29, 2001. These actions were taken in an effort to
improve profitability and were in response to a continued weak market
environment.
26
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Restructuring and Unusual Items (continued)
A summary of the changes in accrued restructuring costs, which are
included in other accrued expenses in the accompanying consolidated balance
sheet, follows:
(In thousands) Severance
- -----------------------------------------------------------------
2001 RESTRUCTURING PLAN
Provision $ 673
Usage (617)
----------
Balance at December 29, 2001 56
Provision -
Usage (56)
----------
Balance at December 28, 2002 $ -
==========
2002 RESTRUCTURING PLAN
Provision $ 1,129
Usage (1,107)
Currency translation 6
----------
Balance at December 28, 2002 $ 28
==========
The specific restructuring measures and associated estimated costs are
based on the Company's best judgments under prevailing circumstances. The
Company believes that the restructuring reserve balance is adequate to carry out
the restructuring activities formally identified and committed to as of December
28, 2002, and anticipates that all actions related to these liabilities will be
completed within a 12-month period.
13. Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, available-for-sale investments, accounts receivable, current
maturities of long-term obligations, accounts payable, subordinated convertible
debentures, notes payable, and forward foreign exchange contracts. The carrying
amounts of accounts receivable, current maturities of long-term obligations, and
accounts payable, approximate fair value due to their short-term nature.
Available-for-sale investments in 2001 are carried at fair value in the
accompanying balance sheet. The fair values were determined based on quoted
market prices. See Note 2 for fair value information pertaining to these
financial instruments.
27
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Fair Value of Financial Instruments (continued)
The carrying amount and fair value of the Company's subordinated
convertible debentures and other financial instruments are as follows:
2002 2001
----------------------- -----------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------------------
Subordinated Convertible Debentures $ - $ - $ 118,138 $ 111,640
Financial Instruments
Forward foreign exchange contracts receivable $ 385 $ 385 $ - $ -
Forward foreign exchange contracts payable $ 285 $ 285 $ 32 $ 32
The fair value of the Company's subordinated convertible debentures was
determined based on quoted market prices in 2001.
The notional amounts of forward foreign exchange contracts outstanding
totaled $21,344,000 and $3,248,000 at year-end 2002 and 2001, respectively. The
fair value of such contracts is the estimated amount that the Company would pay
upon termination of the contracts, taking into account the change in foreign
exchange rates, which is recorded in the accompanying balance sheet in
accordance with SFAS No. 133 (Note 1).
14. Business Segment and Geographical Information
The Company has combined its operating entities into two segments: Pulp
and Papermaking Equipment and Systems, and Composite and Fiber-based Products.
In classifying operational entities into a particular segment, the Company
aggregated businesses with similar economic characteristics, products and
services, production processes, customers, and methods of distribution.
The Company's Pulp and Papermaking Equipment and Systems segment
develops, manufactures, and markets stock-preparation systems and equipment,
papermaking machine accessory equipment, and water-management systems for paper
and paper recycling industries worldwide. Principal products manufactured by
this segment include: custom-engineered systems and equipment for the
preparation of wastepaper for conversion into recycled paper; accessory
equipment and related consumables important to the efficient operation of
papermaking machines; and water-management systems essential for draining,
purifying, and recycling process water. Revenues from the stock-preparation
systems and equipment product line were $81,995,000, $111,096,000, and
$112,976,000 in 2002, 2001, and 2000, respectively. Revenues from the
papermaking machine accessory equipment product line were $58,751,000,
$63,444,000, and $70,306,000 in 2002, 2001, and 2000, respectively. Revenues
from the water-management systems product line were $28,885,000, $37,789,000,
and $42,447,000 in 2002, 2001, and 2000, respectively.
The Composite and Fiber-based Products segment develops, manufactures,
and markets composite building products made from recycled fiber and plastic
used for applications such as decking and roofing. In addition, the Company
produces biodegradable absorbing granules from papermaking byproducts. These
granules are primarily used as agricultural carriers and for home lawn and
garden applications. Revenues from the composite building products business were
$8,561,000, $1,940,000, and $231,000 in 2002, 2001, and 2000, respectively.
Revenues from the fiber-based granular products business were $5,991,000,
$5,760,000, and $6,608,000 in 2002, 2001, and 2000, respectively. Prior to
September 2000, the Company owned and operated a plant that provided
fiber-recovery and water-clarification services to a host mill on a long-term
contract basis. The plant, which the Company began operating in July 1998,
cleaned and recycled water and long fiber for reuse in the papermaking process.
The Company sold this plant to the host mill in September 2000 (Note 4).
28
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Business Segment and Geographical Information (continued)
(In thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
BUSINESS SEGMENT INFORMATION
Revenues:
Pulp and Papermaking Equipment and Systems $ 171,122 $ 213,466 $ 227,133
Composite and Fiber-based Products (a) 14,552 7,700 7,794
Intersegment sales elimination (b) - - (14)
------------- ------------- -------------
$ 185,674 $ 221,166 $ 234,913
============= ============= =============
Income Before Provision for Income Taxes, Minority Interest,
Extraordinary Item, and Cumulative Effect of Change
in Accounting Principles:
Pulp and Papermaking Equipment and Systems (c) $ 18,156 $ 26,139 $ 29,209
Composite and Fiber-based Products (a)(d) (2,933) (5,968) (3,116)
Corporate (e) (3,515) (3,675) (2,673)
------------- ------------- -------------
Total operating income 11,708 16,496 23,420
Interest income (expense), net (2,162) (726) 2,963
------------- ------------- -------------
$ 9,546 $ 15,770 $ 26,383
============= ============= =============
Total Assets:
Pulp and Papermaking Equipment and Systems $ 198,839 $ 281,522 $ 280,655
Composite and Fiber-based Products (f) 17,239 25,632 38,465
Corporate (g) 15,439 60,500 95,095
------------- ------------- -------------
$ 231,517 $ 367,654 $ 414,215
============= ============= =============
Depreciation and Amortization:
Pulp and Papermaking Equipment and Systems $ 3,749 $ 7,480 $ 7,314
Composite and Fiber-based Products (a) 1,396 1,816 2,226
Corporate 32 - -
------------- ------------- -------------
$ 5,177 $ 9,296 $ 9,540
============= ============= =============
Capital Expenditures:
Pulp and Papermaking Equipment and Systems $ 1,433 $ 1,564 $ 2,550
Composite and Fiber-based Products 1,759 3,025 3,805
Corporate 152 - -
------------- ------------- -------------
$ 3,344 $ 4,589 $ 6,355
============= ============= =============
29
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Business Segment and Geographical Information (continued)
(In thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
GEOGRAPHICAL INFORMATION
Revenues (h):
United States $ 115,408 $ 142,425 $ 157,904
France 50,259 55,291 52,895
Other 27,814 33,845 33,427
Transfers among geographic areas (b) (7,807) (10,395) (9,313)
------------- ------------- -------------
$ 185,674 $ 221,166 $ 234,913
============= ============= =============
Long-lived Assets (i):
United States $ 18,816 $ 21,722 $ 22,213
France 3,131 2,933 3,291
Other 3,676 3,963 4,422
------------- ------------- -------------
$ 25,623 $ 28,618 $ 29,926
============= ============= =============
Export Revenues Included in United States Revenues Above (j) $ 19,377 $ 36,876 $ 37,926
============= ============= =============
(a) Reflects the sale of the Company's fiber-recovery and water-clarification
services plant in September 2000.
(b) Intersegment sales and transfers among geographic areas are accounted for
at prices that are representative of transactions with unaffiliated
parties.
(c) Includes $2.1 million and $0.6 million of restructuring and unusual costs
in 2002 and 2001, respectively, and $0.5 million of income related to
restructuring and unusual items in 2000.
(d) Includes $1.5 million and $0.1 million of restructuring and unusual costs
in 2002 and 2001, respectively, and a $0.7 million gain on sale of a plant
in 2000. Includes operating losses from the composite building products
business of $3.7 million, $4.1 million, and $2.4 million in 2002, 2001, and
2000, respectively.
(e) Includes gain on sale of property of $1.0 million in 2000.
(f) Reflects Kadant Fibergen's 2001 and 2000 redemptions of common stock for
$13.1 million and $34.6 million, respectively.
(g) Primarily cash, cash equivalents, and available-for-sale investments.
Reflects the repurchase of $32.0 million and $34.9 million principal amount
of our 4 1/2% subordinated convertible debentures for $31.3 million and
$33.5 million in cash in 2002 and 2001, respectively, and the December 2002
redemption of the remaining $86.2 million outstanding principal amount of
the debentures for 100% par value.
(h) Revenues are attributed to countries based on selling location.
(i) Includes property, plant, and equipment, net, and other long-term tangible
assets.
(j) In general, export revenues are denominated in U.S. dollars.
30
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
(In thousands except per share amounts) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
BASIC
Income Before Extraordinary Item and Cumulative Effect of Change
in Accounting Principles $ 5,923 $ 9,362 $ 16,012
Extraordinary Item (net of income taxes of $19 and $440) 31 620 -
Cumulative Effect of Change in Accounting Principles (net of
income tax benefit of $12,420 and $580) (32,756) - (870)
------------- ------------- -------------
Net Income (Loss) $ (26,802) $ 9,982 $ 15,142
------------- ------------- -------------
Weighted Average Shares 12,945 12,266 12,260
------------- ------------- -------------
Basic Earnings (Loss) per Share:
Income before extraordinary item and cumulative effect of change in
accounting principles $ .46 $ .76 $ 1.31
Extraordinary item - .05 -
Change in accounting principles (2.53) - (.07)
------------- ------------- -------------
$ (2.07) $ .81 $ 1.24
============= ============= =============
DILUTED
Income Before Extraordinary Item and Cumulative Effect of Change
in Accounting Principles $ 5,923 $ 9,362 $ 16,012
Extraordinary Item (net of income taxes of $19 and $440) 31 620 -
Cumulative Effect of Change in Accounting Principles (net of
income tax benefit of $12,420 and $580) (32,756) - (870)
------------- ------------- -------------
Net Income (Loss) (26,802) 9,982 15,142
Effect of Majority-Owned Subsidiary's Dilutive Securities - - (7)
------------- ------------- -------------
Income (Loss) Available to Common Shareholders, as Adjusted $ (26,802) $ 9,982 $ 15,135
------------- ------------- -------------
Weighted Average Shares 12,945 12,266 12,260
Effect of Stock Options 164 47 38
------------- ------------- -------------
Weighted Average Shares, as Adjusted 13,109 12,313 12,298
------------- ------------- -------------
Diluted Earnings (Loss) per Share:
Income before extraordinary item and cumulative effect of change in
accounting principles $ .45 $ .76 $ 1.30
Extraordinary item - .05 -
Change in accounting principles (2.49) - (.07)
------------- ------------- -------------
$ (2.04) $ .81 $ 1.23
============= ============== =============
31
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Earnings per Share (continued)
Options to purchase 480,800 shares, 462,200 shares, and 435,800 shares
of common stock were not included in the computation of diluted earnings per
share for 2002, 2001, and 2000, respectively, because the options' exercise
prices were greater than the average market price for the common stock, and the
effect would have been antidilutive.
In addition, the computation of diluted earnings per share for all
periods excludes the effect of assuming the conversion of the Company's 4 1/2%
subordinated convertible debentures, convertible at $60.50 per share, because
the effect would be antidilutive. The convertible debentures are no longer
outstanding as of December 28, 2002 (Note 8).
16. Comprehensive Income
Comprehensive income combines net income and other comprehensive items,
which represent certain amounts that are reported as components of shareholders'
investment in the accompanying balance sheet, including foreign currency
translation adjustments, unrealized net of tax gains and losses on
available-for-sale investments, and deferred gains and losses on foreign
currency contracts.
Accumulated other comprehensive items in the accompanying consolidated
balance sheet consist of the following:
(In thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Cumulative Translation Adjustment $ (13,406) $ (19,934) $ (19,474)
Net Unrealized Gain on Available-for-sale Investments - - 21
Deferred Gain (Loss) on Foreign Currency Contracts 182 (19) -
---------- ---------- ----------
$ (13,224) $ (19,953) $ (19,453)
========== ========== ==========
17. Cumulative Effect of Change in Accounting Principles
ADOPTION OF SFAS NO. 142
The Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," effective December 30, 2001. SFAS No. 142 requires that amortization of
goodwill cease and that the Company evaluate the recoverability of goodwill and
other intangible assets annually, or more frequently if events or changes in
circumstances indicate that the carrying value of an asset might be impaired.
Under SFAS No. 142, the Company was required to test all existing
goodwill for impairment (using a two-step method) as of December 30, 2001, on a
"reporting unit" basis. The Company's reporting units are as follows: (1) stock
preparation (2) accessories and water management (3) fiber-based granules and
(4) composite building products. In step 1, goodwill is considered to be
impaired when the net book value of a reporting unit exceeds its estimated fair
value. The fair values of the reporting units were determined utilizing a
discounted cash flow methodology and considered such assumptions as weighted
average cost of capital, revenue growth, profitability, capital expenditures,
and premium for control. For reporting units that failed step 1, the Company
proceeded to step 2. In step 2, the Company calculated the implied fair value of
goodwill by deducting the fair value of all tangible and intangible net assets
(including unrecognized intangible assets) of the reporting unit from the fair
value of the reporting unit as determined in step 1. The Company then compared
the implied fair value of goodwill as determined in step 2 above to the carrying
value of goodwill.
As a result of the impairment review, the Company recorded an after-tax
goodwill impairment charge of $32,756,000 ($45,176,000 pre-tax), which was
recorded as a cumulative effect of change in accounting principle in its
restated results in the first quarter of 2002. This after-tax charge consists of
$29,869,000 at the Papermaking Equipment segment (specifically at the
stock-preparation reporting unit) and $2,887,000 at the Composites and
Fiber-based Products segment (specifically at the fiber-based granules reporting
unit). The impairment charge recorded in
32
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Cumulative Effect of Change in Accounting Principles (continued)
2002 was primarily due to the change in the methodology from the undiscounted
cash flow method used in 2001 under the Company's previous accounting policy, to
the discounted cash flow method used in accordance with SFAS No. 142. Under the
Company's previous accounting policy, no goodwill impairment existed at
December 29, 2001 (Note 1).
The unaudited quarterly results reflecting the adoption of SFAS No. 142
have been restated as follows:
Three Months Ended
(In thousands except per share amounts) March 30, 2002
- ----------------------------------------------------------------------------
Net Loss
As previously reported (1,359)
As adjusted (34,115)
Basic and Diluted Loss per Share
As previously reported (.11)
As adjusted (2.79)
Pro forma results as if SFAS No. 142 had been adopted at the beginning
of 2000 are as follows:
(In thousands except per share amounts) 2001 2000
- ----------------------------------------------------------------------------
Net Income, as Reported $ 9,982 $ 15,142
Add back: Goodwill Amortization 2,340 2,359
---------- ----------
Net Income, as Adjusted $ 12,322 $ 17,501
========== ==========
Earnings per Share:
Basic, as Reported $ .81 $ 1.24
Add back: Goodwill Amortization .19 .19
---------- ----------
Basic, as Adjusted $ 1.00 $ 1.43
========== ==========
Diluted, as Reported $ .81 $ 1.23
Add back: Goodwill Amortization .19 .19
---------- ----------
Diluted, as Adjusted $ 1.00 $ 1.42
========== ==========
33
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Cumulative Effect of Change in Accounting Principles (continued)
Changes in goodwill are summarized below:
Composite and
Papermaking Fiber-Based
(In thousands) Equipment Segment Products Segment Total
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 30, 2000 $ 115,473 $ 3,627 $ 119,100
Acquisitions (98) 783 685
Amortization (3,213) (234) (3,447)
Currency translation (69) - (69)
----------------- ---------------- ---------------
Balance at December 29, 2001 112,093 4,176 116,269
Transitional impairment charge (41,000) (4,176) (45,176)
Acquisitions 61 - 61
Currency translation 1,067 - 1,067
----------------- ---------------- ---------------
Balance at December 28, 2002 $ 72,221 $ - $ 72,221
================= ================ ===============
ADOPTION OF SAB NO. 101
In December 1999, the SEC issued SAB No. 101, "Revenue Recognition in
Financial Statements," which establishes criteria for recording revenue when the
terms of the sale include customer acceptance provisions or an obligation of the
seller to install the product. In instances where these terms exist and the
Company is unable to demonstrate that the customer's acceptance criteria has
been met prior to customer use, or when the installation is essential to
functionality or is not deemed inconsequential or perfunctory, SAB No. 101
requires that revenue recognition occur at completion of installation and/or
upon customer acceptance. In accordance with the requirements of SAB No. 101,
the Company adopted the pronouncement as of January 2, 2000, and recorded the
cumulative effect of the change in accounting principle on periods prior to 2000
in the restated results for the first quarter of 2000. The cumulative effect on
net income for 2000 totaled $870,000, net of income tax benefit of $580,000.
Revenues of $3,004,000 in 2000 (as restated for the adoption of SAB No. 101) and
$846,000 in 2001, relate to shipments that occurred in 1999 but for which
installation and/or acceptance did not occur until 2000 or 2001. These revenues
were recorded in 1999 prior to the adoption of SAB No. 101 and thus, were a
component in the determination of the cumulative effect of change in accounting
principle for periods prior to 2000.
34
KADANT INC. 2002 FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Unaudited Quarterly Information
(In thousands except per share amounts)
2002 First (a,b) Second Third Fourth (b)
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues $ 43,340 $ 46,378 $ 50,084 $ 45,872
Gross Profit 16,153 18,000 18,508 17,779
Income (Loss) Before Extraordinary Item and Cumulative
Effect of Change in Accounting Principles (1,388) 2,292 2,702 2,317
Net Income (Loss) (c) (34,115) 2,549 2,707 2,057
Basic and Diluted Earnings (Loss) per Share Before
Extraordinary Item and Cumulative Effect of Change in
Accounting Principles (.11) .18 .20 .17
Basic and Diluted Earnings (Loss) per Share (c) (2.79) .20 .20 .15
2001 First Second Third (d) Fourth (d,e)
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues $ 58,900 $ 56,732 $ 56,085 $ 49,449
Gross Profit 22,704 20,648 20,627 18,762
Income Before Extraordinary Item 3,129 2,447 2,045 1,741
Net Income 3,129 2,447 2,045 2,361
Basic and Diluted Earnings per Share Before Extraordinary Item .25 .20 .17 .14
Basic and Diluted Earnings per Share .25 .20 .17 .19
(a) Restated to reflect the adoption of SFAS No. 142. The first quarter of 2002
reflects a charge for the cumulative effect of change in accounting
principle of $32.8 million, net of income tax benefit of $12.4 million
(Note 17).
(b) Includes $3.6 million of pretax charges and $0.1 million of pretax income
for restructuring and unusual items in the first and fourth quarters of
2002, respectively (Note 12).
(c) Includes extraordinary gains of $29, $257, and $5, net of taxes, in the
first, second, and third quarters of 2002, respectively, and an
extraordinary loss of $260, net of taxes, in the fourth quarter of 2002,
resulting from the repurchases and redemption of the Company's 4 1/2%
subordinated convertible debentures (Note 8).
(d) Includes pretax charges of $0.6 million and $0.1 million related to
restructuring costs in the third and fourth quarters of 2001, respectively
(Note 12).
(e) Includes extraordinary gain on repurchases of the Company's convertible
debentures of $0.6 million, net of taxes (Note 8).
35
KADANT INC. 2002 FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Kadant Inc.:
We have audited the accompanying consolidated balance sheet of Kadant
Inc. as of December 28, 2002 and the related consolidated statements of
operations, comprehensive income (loss) and shareholders' investment, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The consolidated financial
statements of Kadant Inc. as of December 29, 2001 and December 30, 2000, and for
the years then ended, were audited by other auditors who have ceased
operations and whose report dated February 8, 2002, expressed an unqualified
opinion on those statements before the restatement adjustments described in Note
17, and included an explanatory paragraph that disclosed the change in the
Company's method of accounting for revenue recognition discussed in Note 17 to
these financial statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 2002 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Kadant
Inc. at December 28, 2002, and the consolidated results of its operations and
its cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 17 to the financial statements, effective December
30, 2001, the Company adopted Statement of Financial Accounting Standards
(Statement) No. 142, "Goodwill and Other Intangible Assets." As discussed above,
the consolidated financial statements of Kadant Inc. as of December 29, 2001 and
December 30, 2000, and for the years then ended, were audited by other auditors
who have ceased operations. As described in Note 17, these consolidated
financial statements have been revised to include the transitional disclosures
required by Statement No. 142, which was adopted as of December 30, 2001. Our
audit procedures with respect to the disclosures in Note 17 related to 2001 and
2000 included (a) agreeing the previously reported net income to the previously
issued financial statements and the adjustments to reported net income
representing amortization expense (including any related tax effects) recognized
in those periods related to goodwill as a result of initially applying Statement
No. 142 (including any related tax effects) to the Company's underlying records
obtained from management, and (b) testing the mathematical accuracy of the
reconciliation of adjusted net income to reported net income, and the related
earnings per share amounts. In our opinion, the disclosures for 2001 and 2000 in
Note 17 are appropriate. However, we were not engaged to audit, review, or apply
any procedures to the consolidated financial statements of Kadant Inc. as of
December 29, 2001 and December 30, 2000, and for the years then ended, other
than with respect to such disclosures and, accordingly, we do not express an
opinion or any other form of assurance on the consolidated financial statements
as of December 29, 2001 and December 30, 2000, and for the years then ended,
taken as a whole.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 7, 2003
36
KADANT INC. 2002 FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP AND HAS NOT BEEN REISSSUED BY ARTHUR ANDERSEN LLP. SEE EXHIBIT 23.2 TO THE
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 28, 2002 FOR
FURTHER DISCUSSION.
AS DISCUSSED IN NOTE 17, KADANT INC. REVISED ITS FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 29, 2001, AND DECEMBER 30, 2000, TO INCLUDE THE
TRANSITIONAL DISCLOSURES REQUIRED BY STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS." THE REVISIONS TO THE 2001 AND
2000 FINANCIAL STATEMENTS RELATED TO THESE TRANSITIONAL DISCLOSURES WERE
REPORTED ON BY ERNST & YOUNG LLP, AS STATED IN THEIR REPORT APPEARING HEREIN.
To the Shareholders and Board of Directors of Kadant Inc.:
We have audited the accompanying consolidated balance sheet of Kadant
Inc. (formerly named Thermo Fibertek Inc., a Delaware corporation) and
subsidiaries as of December 29, 2001, and December 30, 2000*, and the related
consolidated statements of income, cash flows, and comprehensive income and
shareholders' investment for each of the three years in the period ended
December 29, 2001.* These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Kadant Inc.
and subsidiaries as of December 29, 2001, and December 30, 2000,* and the
results of its operations and its cash flows for each of the three years in the
period ended December 29, 2001,* in conformity with accounting principles
generally accepted in the United States.
As explained in Notes 1 and 17 to the consolidated financial statements,
effective January 2, 2000, the Company changed its method of accounting for
revenue recognition.
Arthur Andersen LLP
Boston, Massachusetts
February 8, 2002
* The Company's consolidated balance sheet as of December 30, 2000, and the
consolidated statements of income, cash flows, and comprehensive income and
shareholders' investment for the year ended January 1, 2000, are not included
in this Form 10-K.
37
KADANT INC. 2002 FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Throughout this Management's Discussion and Analysis of Financial
Condition and Results of Operations, we make forward-looking statements, which
include statements concerning possible or assumed future results of operations.
When we use words such as "believes," "expects," "anticipates," "intends,"
"plans," "estimates," "should," "likely," "will," or similar expressions, we are
making forward-looking statements. Forward-looking statements are not guarantees
of performance. They involve risks, uncertainties, and assumptions and are based
on the beliefs and assumptions of our management, using information currently
available to our management. 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. For a discussion of important factors that may cause
our actual results to differ materially from those suggested by the
forward-looking statements, you should read carefully the section captioned
"Risk Factors" immediately following this Management's Discussion and Analysis
of Financial Condition and Results of Operations.
Overview
INDUSTRY BACKGROUND
We operate in two segments: the Pulp and Papermaking Equipment and
Systems (Papermaking Equipment) segment and the Composite and Fiber-based
Products segment. Through our Papermaking Equipment segment, we develop,
manufacture, and market a range of equipment and products for the domestic and
international papermaking and paper recycling industries. We have a large,
stable customer base that includes most of the world's major paper
manufacturers. As a result, we have one of the largest installed bases of
equipment in the pulp and paper industry, which provides us with a higher-margin
spare parts and consumables business that we believe is less susceptible to the
cyclical trends in the paper industry.
Through our Composite and Fiber-based Products segment, we develop,
manufacture, and market composite products made from recycled fiber and plastic,
primarily for the building industry, and manufacture and sell granules derived
from pulp fiber for use as agricultural carriers and for home lawn and garden
applications.
Prior to our incorporation, we operated as a division of Thermo Electron
Corporation. We were incorporated in Delaware in November 1991 as a wholly owned
subsidiary of Thermo Electron, and as the successor-in-interest to several of
its subsidiaries. In November 1992, we conducted an initial public offering of
our common stock and became a majority-owned public subsidiary of Thermo
Electron. On July 12, 2001, we changed our name to Kadant Inc. from Thermo
Fibertek Inc., and on August 8, 2001, we were spun off from Thermo Electron and
became a fully independent public company (Note 1).
PULP AND PAPERMAKING EQUIPMENT AND SYSTEMS SEGMENT
Our Papermaking Equipment segment designs and manufactures
stock-preparation systems and equipment, papermaking machine accessories, and
water-management systems for the paper and paper recycling industries. Principal
products include:
. Stock-preparation systems and equipment: custom-engineered
systems and equipment for pulping, de-inking, screening,
cleaning, and refining waste fiber to prepare it for entry into
the paper machine during production of recycled paper;
. Papermaking machine accessory equipment: doctoring systems and
related consumables that clean papermaking rolls to keep paper
machines running efficiently, and profiling systems that control
moisture, web curl, and gloss during paper production; and
. Water-management systems: equipment that is essential for the
continuous cleaning of paper machine fabrics and the draining,
purifying, and recycling of process water for paper sheet and
web formation.
38
KADANT INC. 2002 FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview (continued)
COMPOSITE AND FIBER-BASED PRODUCTS SEGMENT
Our Composite and Fiber-based Products segment consists of two product
lines: composite building products and fiber-based granular products. Our
principal products include:
. Composite building products: decking and railing systems and
roof tiles that we develop and produce from a combination of
recycled fiber, plastic, and other materials, and market
primarily to the building industry; and
. Fiber-based granular products: biodegradable, absorbing granules
that we produce from papermaking byproducts for use as
agricultural carriers and for home lawn and garden applications.
In January 2001, we acquired the remaining 49% equity interest that we
did not already own in Kadant Composites Inc., which is responsible for our
composite building products business (Note 3). We established a composite
building products manufacturing facility in Green Bay, Wisconsin, and began
production at the facility in 2000.
Prior to September 2000, this segment owned and operated a plant that
provided water-clarification and fiber-recovery services to a host mill on a
long-term contract basis. The plant, which we began operating in July 1998,
cleaned and recycled water and long fiber for reuse in the papermaking process.
We sold this plant to the host mill in September 2000 (Note 4).
INTERNATIONAL SALES
During 2002, approximately 50% of our sales were to customers outside
the United States, principally in Europe. We generally seek to charge our
customers in the same currency in which our operating costs are incurred.
However, our financial performance and competitive position can be affected by
currency exchange rate fluctuations affecting the relationship between the U.S.
dollar and foreign currencies. We reduce our exposure to currency fluctuations
through the use of forward currency exchange contracts. We may enter into
forward contracts to hedge certain firm purchase and sale commitments
denominated in currencies other than our subsidiaries' functional currencies.
These contracts hedge transactions principally denominated in U.S. dollars.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from these estimates under
different assumptions or conditions.
Critical accounting policies are defined as those that entail
significant judgments and uncertainties, and could potentially result in
materially different results under different assumptions and conditions. We
believe that our most critical accounting policies upon which our financial
condition depends, and which involve the most complex or subjective decisions or
assessments, are those described below. For a discussion on the application of
these and other accounting policies, see Note 1 in the notes to consolidated
financial statements.
Revenue Recognition. Prior to 2000, we generally recognized revenues
upon shipment of our products. During the fourth quarter of 2000, effective
January 2, 2000, we adopted Securities and Exchange Commission (SEC) Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements"
(Note 17). In addition, we recognize revenues and profits on certain long-term
contracts using the percentage-of-completion method of accounting.
. Percentage-of-Completion. Revenues recorded under the
percentage-of-completion method of accounting were $35.4 million
in 2002, $53.5 million in 2001, and $43.4 million in 2000. The
percentage of completion is determined by comparing the actual
costs incurred to date to an estimate of total costs to be
incurred on each contract. If a loss is indicated on any
contract in process, a provision is made currently for the
entire
39
KADANT INC. 2002 FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview (continued)
loss. Our contracts generally provide for billing of customers
upon the attainment of certain milestones specified in each
contract. Revenues earned on contracts in process in excess of
billings are classified as unbilled contract costs and fees, and
amounts billed in excess of revenues are classified as billings
in excess of contract costs and fees. The complexity of the
estimation process under the percentage-of-completion method
affects the amounts reported in our financial statements. A
number of internal and external factors affect our
percentage-of-completion and cost of sales estimates, including
labor rate and efficiency variances, estimates of warranty
costs, estimated future material prices from vendors, and
customer specification and testing requirement changes. In
addition, we are exposed to the risk, primarily relating to our
orders in China, that a customer will not comply with the
order's contractual obligations or will not accept delivery of
the order, causing such customer to forfeit its deposit on the
order. The contractual obligations relating to the order may be
difficult to enforce through a foreign country's legal system,
which could result in a significant reversal of revenue in the
period or periods that were affected by the breach of contract.
Although we make every effort to ensure the accuracy of our
estimates in the application of this accounting policy, if our
business conditions were different, or if we used different
assumptions, it is possible that materially different amounts
could be reported as revenues in our financial statements.
. SAB No. 101. Under SAB No. 101, when the terms of sale include
customer acceptance provisions, and compliance with those
provisions cannot be demonstrated until customer acceptance,
revenues are recognized upon such acceptance. Revenues for
products sold that require installation where the installation
is essential to functionality or is not deemed inconsequential
or perfunctory are recognized upon completion of installation.
Revenues for products sold where installation is not essential
to functionality, and is deemed inconsequential or perfunctory,
are recognized upon shipment with estimated installation costs
accrued. We provide a reserve for the estimated warranty and
installation costs at the time revenue is recognized. The
complexity of all issues related to the assumptions, risks, and
uncertainties inherent in the application of SAB No. 101 affect
the amounts reported as revenues in our financial statements.
Under SAB No. 101, we cannot reliably predict future revenues
and profitability due to the difficulty of estimating when
installation will be performed or when we will meet the
contractually agreed upon performance tests, which can delay or
prohibit recognition of revenues. The determination of when we
install the equipment or fulfill the performance guarantees is
largely dependent on the customer, their willingness to allow
installation of the equipment or perform the appropriate tests
in a timely manner, and their cooperation in addressing possible
problems impeding achievement of the performance guarantee
criteria. Unexpected changes in the timing related to the
completion of installation or performance guarantees could
possibly cause our revenues and earnings to be significantly
affected.
Inventories. We value our inventory at the lower of the actual cost (on
a first-in, first-out, or weighted average basis) or market value and include
materials, labor, and manufacturing overhead. We regularly review inventory
quantities on hand and compare these amounts to historical and forecasted usage
of and demand for each particular product or product line. We record a charge to
cost of revenues for excess and obsolete inventory to reduce the carrying value
of the inventories to net realizable value. A significant decrease in demand
could result in an increase in the amount of excess inventory quantities on
hand, resulting in a charge for the writedown of that inventory in that period.
In addition, our estimates of future product usage or demand may prove to be
inaccurate, resulting in an understated or overstated provision for excess and
obsolete inventory. Therefore, although we make every effort to ensure the
accuracy of our forecasts of future product usage and demand, any significant
unanticipated changes in demand or technological developments could possibly
have a significant impact on the value of our inventory and our reported
operating results.
40
KADANT INC. 2002 FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview (continued)
Valuation of Goodwill and Intangible Assets. In June 2001, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 142,"Goodwill and Other Intangible Assets." We adopted SFAS
No. 142 effective December 30, 2001. SFAS No. 142 requires that amortization of
goodwill cease and that we evaluate the recoverability of goodwill and other
intangible assets annually, or more frequently if events or changes in
circumstances, such as a decline in sales, earnings or cash flows, or material
adverse changes in the business climate, indicate that the carrying value of an
asset might be impaired. Goodwill is considered to be impaired when the net book
value of a reporting unit exceeds its estimated fair value. Fair values are
primarily established using a discounted cash flow methodology (specifically,
the income approach). The determination of discounted cash flows is based on our
strategic plans and long-range forecasts. The revenue growth rates included in
the forecasts are our best estimates based on current and anticipated market
conditions, and the profit margin assumptions are projected based on the current
and anticipated cost structures.
In accordance with the SFAS No. 142 transition procedures, we recorded a
charge for the cumulative effect of change in accounting principle of $32.8
million, net of income tax benefit of $12.4 million, upon the adoption of SFAS
No. 142, as further described in Note 17.
Our judgments and assumptions regarding the determination of the fair
value of an intangible asset or goodwill associated with an acquired business
could change as future events impact such fair values. Any future impairment
loss could possibly have a material adverse impact on our long-term assets and
operating expenses in the period in which impairment is determined to exist.
Accounts Receivable. Judgments are used in determining our allowance for
bad debts and are based on our historical collection experience, current trends,
credit policies, specific customer collection issues, and accounts receivable
aging categories. In determining this allowance, we look at historical writeoffs
of our receivables. We also look at current trends in the credit quality of our
customer base as well as changes in our credit policies. We perform ongoing
credit evaluations of our customers and adjust credit limits based upon payment
history and each customer's current creditworthiness. We continuously monitor
collections and payments from our customers. While actual bad debts have
historically been within our expectations and the provisions established, we
cannot guarantee that we will continue to experience the same rate of bad debts
that we have in the past, especially in light of the prolonged downcycle in the
paper industry as evidenced by an increase in the amount of accounts receivable
written off in 2002 and 2001. A significant change in the liquidity or financial
position of any of our customers could result in the uncollectibility of the
related accounts receivable and could adversely impact our operating cash flows
in that period.
Warranties. In the Papermaking Equipment segment, we offer warranties of
various durations to our customers depending upon the specific product and terms
of the customer purchase agreement. We typically negotiate terms regarding
warranty coverage and length of warranty depending on the products and
applications. Our standard mechanical warranties require us to repair or replace
a defective product during the warranty period at no cost to the customer. In
the Composite and Fiber-based Products segment, we offer a standard limited
warranty to the original owner of our decking and roofing products, limited to
repair or replacement of the defective product or a refund of the original
purchase price. We record an estimate for warranty-related costs at the time of
sale based on our actual historical return rates and repair costs. While our
warranty costs have historically been within our expectations and the provisions
established, we cannot guarantee that we will continue to experience the same
warranty return rates or repair costs that we have in the past. A significant
increase in warranty return rates or costs to repair our products could possibly
have a material adverse impact on our operating results for the period or
periods in which such returns or additional costs occur.
41
KADANT INC. 2002 FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview (continued)
INDUSTRY AND BUSINESS OUTLOOK
Our products are primarily sold to the pulp and paper industry. The
paper industry has been in a prolonged downcycle, characterized by weak pulp and
paper prices, decreased capital spending, and consolidation of paper companies
within the industry. As paper companies continue to consolidate in response to
market weakness, they frequently reduce capacity and postpone or even cancel
capacity addition or expansion projects. This trend, along with paper companies'
actions to quickly reduce operating rates and restrict capital spending and
maintenance programs, has adversely affected our business. Over the long term,
as the markets recover, we expect that consolidation in the paper industry and
improved capacity management will have a positive effect on paper companies'
financial performance and, in return, will be favorable to both paper companies
and their suppliers, such as Kadant.
There has been a significant amount of papermaking downtime in the pulp
and paper industry in 2001 and 2002. This, coupled with weakened conditions in
the world economy, has produced a difficult market environment resulting in
deferrals of capital projects by paper companies and pricing pressure in some of
our product lines. The combination of these factors has caused a reduction in
our revenues throughout 2002, and resulted in lower operating results in 2002
versus 2001. To mitigate the effects of these difficult market conditions, we
are concentrating our efforts on several initiatives to improve our operating
results, including focusing on higher-margin parts and consumables businesses
across all our product lines, sourcing the manufacture of non-proprietary
components from third-party suppliers, shifting more production to our
lower-cost manufacturing facilities, and lowering our manufacturing overhead
costs throughout the business. In addition, we continue to focus our efforts on
managing our operating costs (which were reduced by $10.4 million in 2002,
including $3.4 million from the elimination of goodwill amortization), capital
expenditures, and working capital. In the last several years, most capacity
expansion has come from China, which has become a significant market for our
products. Revenues from China are primarily characterized by large capital
orders, the timing of which is often difficult to predict. To capitalize on this
growing market, we are currently planning to establish an assembly facility in
China for our stock-preparation equipment and related aftermarket products.
We have also continued to invest in our composite building products
business, which provides us with a solid growth opportunity. We have begun a
national marketing program for our composite building products and are expanding
our distribution network, with numerous distribution centers carrying our
products throughout the U.S. We believe that the market for composite building
products will grow as consumer awareness of the advantages of these products
increases their acceptance as an alternative to traditional wood products,
especially in light of the phase-out of widely used pressure-treated lumber that
contains chromated copper arsenate (CCA), a potentially harmful preservative.
With fourth quarter 2002 bookings in the composite building products
business reaching a record high of $6.5 million, we expect operating income in
2003 to be between $1.0 and $1.5 million, on revenues of $14 to $16 million. For
the first quarter of 2003, we expect operating income from this business to be
between breakeven and $0.1 million, on revenues of $4 to $5 million. For 2003,
we anticipate continued growth from our composite building products business,
and little or no revenue growth in our Papermaking Equipment segment. As a
result, we expect consolidated earnings in 2003 to be $.80 to $.90 per diluted
share, on revenues of $185 to $195 million. For the first quarter of 2003, we
expect consolidated earnings to be $.18 to $.20 per diluted share, on revenues
of $48 to $50 million.
Results of Operations
2002 COMPARED WITH 2001
Revenues
Revenues decreased to $185.7 million in 2002 from $221.2 million in
2001, a decrease of $35.5 million, or 16%. Revenues in 2002 include the
favorable effects of currency translation of $2.1 million due to a weaker U.S.
dollar relative to the functional currencies in countries in which we operate.
42
KADANT INC. 2002 FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2002 COMPARED WITH 2001 (CONTINUED)
Pulp and Papermaking Equipment and Systems Segment. Revenues at the
Papermaking Equipment segment decreased to $171.1 million in 2002 compared with
$213.5 million in 2001, a decrease of $42.4 million, or 20%. Revenues in 2002
include the favorable effects of currency translation described above. Revenues
from the Papermaking Equipment segment's stock-preparation equipment product
line decreased by $29.1 million (or 26%) in 2002 primarily as a result of a
decrease in export sales to China due to the timing of several large orders, as
well as a decrease in sales in North America and Europe due to adverse market
conditions. Revenues from the segment's water-management and accessories product
lines decreased in 2002 by $8.9 million (or 24%) and $4.7 million (or 7%),
respectively, primarily due to a decrease in demand in North America as a result
of machine shutdowns and mill closures caused by industry consolidation and
capacity rationalization, as well as pricing pressures.
Composite and Fiber-Based Products Segment. Revenues at the Composite
and Fiber-based Products segment increased to $14.6 million in 2002 from $7.7
million in 2001, primarily as a result of an increase of $6.6 million in sales
of our composite building products due to higher demand resulting from increased
marketing efforts and expansion of our distribution channels. In addition,
revenues from our fiber-based granular products increased by $0.2 million in
2002.
Gross Profit Margin
Gross profit margin increased to 38% in 2002 from 37% in 2001. The gross
profit margin at the Papermaking Equipment segment was 39% in both periods. The
gross profit margin at the Composite and Fiber-based Products segment increased
to 25% in 2002 from negative gross margins of 7% in 2001 primarily due to
positive gross profit margins from our composite building products resulting
from increased revenues. In addition, gross profit margins from our fiber-based
granular products increased primarily due to a decrease in 2002 in the cost of
natural gas used in the production process. The price of natural gas and plastic
used in the production process of our composite and fiber-based granular
products has increased dramatically in the last several months. We do not expect
such prices to remain at these levels throughout 2003, but if this were to
occur, the gross profit margins at this segment would be adversely affected.
Operating Expenses
Selling, general, and administrative expenses as a percentage of
revenues were 27% in 2002 and 2001. Selling, general, and administrative
expenses decreased to $50.3 million in 2002 from $59.0 million in 2001 primarily
due to cost-reduction efforts at the Papermaking Equipment segment, as well as
the absence in 2002 of $3.4 million of goodwill amortization that was recorded
in 2001.
Research and development expenses as a percentage of revenues were 3% in
2002 and 2001. Research and development expenses decreased to $4.8 million in
2002 compared with $6.6 million in 2001, primarily at the Papermaking Equipment
segment due to restructuring efforts taken in 2002 and the closure of a
redundant laboratory (Note 12).
Restructuring and Unusual Costs
During 2002, we recorded restructuring and unusual costs of $3.6
million. Restructuring costs of $1.1 million, which were accounted for in
accordance with Emerging Issues Task Force Pronouncement No. 94-3, related to
severance costs for 68 employees across all functions primarily at the
Papermaking Equipment segment, all of whom were terminated as of December 28,
2002. These actions were taken in an effort to improve profitability and were in
response to a continued weak market environment and reduced demand for our
products. Unusual costs of $2.5 million include noncash charges of $2.4 million
for asset writedowns, consisting of $1.0 million for the impairment of a
laboratory in Ohio held for sale at the Papermaking Equipment segment, and $1.4
million for the writedown of fixed
43
KADANT INC. 2002 FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2002 COMPARED WITH 2001 (CONTINUED)
assets held for sale at the Composite and Fiber-based Products segment; and $0.1
million for related disposal and facility-closure costs (Note 12). We estimate
annual savings of approximately $4.5 million ($1.7 million in cost of revenues,
$2.3 million in selling, general, and administrative expenses, and $0.5 million
in research and development expenses) from these actions beginning in the second
quarter of 2002.
During 2001, we recorded restructuring costs of $0.7 million for
severance costs relating to 63 employees primarily in the manufacturing and
sales functions at the Papermaking Equipment segment's domestic subsidiaries,
all of whom were terminated by December 29, 2001. Annual savings were
approximately $3.5 million ($1.7 million in cost of revenues, $1.5 million in
selling, general, and administrative expenses, and $0.3 million in research and
development expenses) from these actions beginning in the fourth quarter of
2001.
Interest Income and Expense
Interest income decreased to $2.6 million in 2002 from $6.6 million in
2001. Of the total decrease in interest income in 2002, approximately $2.7
million was due to lower prevailing interest rates, and $1.3 million was due to
lower average invested balances. The decrease in average invested balances
primarily relates to repurchases of our subordinated convertible debentures
(Note 8), the redemption in September 2001 of our Kadant Fibergen (formerly
Thermo Fibergen) subsidiary's common stock and, to a lesser extent,
consideration paid to Kadant Fibergen shareholders for the acquisition of their
minority interest (Note 11).
Interest expense decreased to $4.7 million in 2002 from $7.3 million in
2001 as a result of the redemption and repurchases of our subordinated
convertible debentures (Note 8). We expect interest expense to be significantly
lower in 2003 due to the redemption of the convertible debentures.
Income Taxes
Our effective tax rate was 38% in 2002 and 42% in 2001. The effective
tax rates exceeded the statutory federal income tax rate primarily due to the
impact of state income taxes and nondeductible expenses. The effective tax rate
decreased in 2002 primarily as a result of the elimination of goodwill
amortization, including nondeductible goodwill, under SFAS No. 142. We expect
our effective tax rate to be approximately 38% in 2003.
Minority Interest
Minority interest (income) expense in 2002 and 2001 represents minority
investors' share of earnings or losses in our majority-owned subsidiaries.
Extraordinary Item
From January through September 2002, we repurchased $32.0 million
principal amount of our 4 1/2 % subordinated convertible debentures for $31.3
million in cash, plus accrued interest, resulting in an extraordinary gain of
$0.3 million, net of deferred debt charges, and net of income tax provision of
$0.2 million. In December 2002, we redeemed the remaining $86.2 million
outstanding principal amount of the debentures for 100% par value, plus accrued
interest, resulting in an extraordinary loss of $0.3 million from the writeoff
of the remaining deferred debt charges, and net of income tax benefit of $0.2
million (Note 8).
During 2001, we repurchased $34.9 million principal amount of our
convertible debentures for $33.5 million in cash, plus accrued interest,
resulting in an extraordinary gain of $0.6 million, net of deferred debt charges
and net of income tax provision of $0.4 million (Note 8).
Cumulative Effect of Change in Accounting Principles
In accordance with the requirements of SFAS No. 142, "Goodwill and Other
Intangible Assets," we adopted the standard as of December 30, 2002, and
recorded a transitional goodwill impairment charge in our restated results in
the first quarter of 2002, representing the cumulative effect of change in
accounting principle of $32.8 million (consisting of $29.9 million at the
Papermaking Equipment segment and $2.9 million at the Composite and Fiber-based
Products segment), net of income tax benefit of $12.4 million (Note 17).
44
KADANT INC. 2002 FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2001 COMPARED WITH 2000
Revenues
Revenues decreased to $221.2 million in 2001 from $234.9 million in
2000, a decrease of $13.7 million, or 6%. Contributing to the decrease in
revenues were the unfavorable effects of currency translation of $3.6 million in
2001 due to a stronger U.S. dollar relative to other currencies in countries in
which we operate.
Pulp and Papermaking Equipment and Systems Segment. Revenues at the
Papermaking Equipment segment decreased to $213.5 million in 2001 compared with
$227.1 million in 2000, a decrease of $13.6 million, or 6%, of which $3.6
million related to the unfavorable effects of currency translation in 2001
discussed above. Revenues from the segment's accessories and water-management
product lines decreased $6.9 million (or 10%) and $4.7 million (or 11%),
respectively, primarily as a result of a decrease in demand in North America due
to adverse market conditions. Revenues from the Papermaking Equipment segment's
stock-preparation equipment product line decreased $1.9 million (or 2%)
primarily as a result of a decrease in sales in North America, largely offset by
increases in sales in Europe and export sales to China.
Composite and Fiber-Based Products Segment. Revenues at the Composite
and Fiber-based Products segment decreased to $7.7 million in 2001 from $7.8
million in 2000. Revenues decreased $1.0 million as a result of the sale of the
fiber-recovery and water-clarification services plant in September 2000, and to
a lesser extent, $0.8 million due to a decrease in revenues at our fiber-based
granular products business primarily resulting from a decrease in demand from
two large agricultural carrier customers. These decreases were largely offset by
a $1.7 million increase in sales of composite building products.
Gross Profit Margin
Gross profit margin decreased to 37% in 2001 from 38% in 2000. The gross
profit margin increased slightly to 39.0% in 2001 from 38.7% in 2000 at the
Papermaking Equipment segment. The gross profit margin decreased at the
Composite and Fiber-based Products segment due to an increase of approximately
$0.7 million in the cost of natural gas used in the production of fiber-based
granules and, to a lesser extent, underabsorbed manufacturing overhead as a
result of lower revenues and production at the granules business in 2001. In
addition, the gross margin decreased at this segment due to increased negative
gross margins as a result of startup efforts at its composite building products
business and the absence in 2001 of higher-margin revenues from the
fiber-recovery and water-clarification services plant.
Operating Expenses
Selling, general, and administrative expenses as a percentage of
revenues increased slightly to 27% in 2001 from 26% in 2000 due to the decrease
in revenues. Selling, general, and administrative expenses decreased to $59.0
million in 2001 from $60.9 million in 2000 primarily due to the effects of
foreign currency translation and cost reduction efforts at the Papermaking
Equipment segment.
Research and development expenses as a percentage of revenues remained
constant at 3% in both periods. Research and development expenses decreased to
$6.6 million in 2001 compared with $7.7 million in 2000, primarily at the
Papermaking Equipment segment due to cost reduction efforts.
Restructuring Costs
During 2001, we recorded restructuring costs of $0.7 million for
severance costs relating to 63 employees primarily in manufacturing and sales
functions at the Papermaking Equipment segment's domestic subsidiaries, all of
whom were terminated by December 29, 2001. These actions were taken in an effort
to improve profitability and were in response to a continued weak market
environment (Note 12). Annual savings were approximately $3.5 million ($1.7
million in cost of revenues, $1.5 million in selling, general, and
administrative expenses, and $0.3 million in research and development expenses)
from these actions beginning in the fourth quarter of 2001.
Restructuring and unusual income of $0.5 million in 2000 represents the
reversal of a charge taken in 1999 related to the termination of a distributor
agreement, which we are no longer obligated to pay due to the breach of the
agreement by the third-party distributor.
45
KADANT INC. 2002 FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2001 COMPARED WITH 2000 (CONTINUED)
Gain on Sale of Business and Property
In September 2000, we sold our fiber-recovery and water-clarification
services plant for $3.6 million, resulting in a pretax gain of $0.7 million
(Note 4). In June 2000, we sold our interest in a tissue mill for $3.9 million
in cash, resulting in a pretax gain of $1.0 million (Note 4).
Interest Income and Expense
Interest income decreased to $6.6 million in 2001 from $10.5 million in
2000. Of the total decrease in interest income in 2001, approximately $2.4
million was due to lower prevailing interest rates, and $1.4 million was due to
lower average invested balances. The decrease in average invested balances
primarily related to Kadant Fibergen's 2001 and 2000 common stock redemption
payments (Note 11), and to a lesser extent, the repurchases of our subordinated
convertible debentures in the fourth quarter of 2001 (Note 8).
Interest expense decreased slightly to $7.3 million in 2001 from $7.5
million in 2000, primarily as a result of the repurchases of our subordinated
convertible debentures in 2001 (Note 8).
Income Taxes
Our effective tax rate was 42% in 2001 and 41% in 2000. The effective
tax rates exceeded the statutory federal income tax rate primarily due to the
impact of state income taxes and nondeductible expenses.
Minority Interest
Minority interest income in 2001 primarily represents minority
investors' share of losses in our Kadant Fibergen subsidiary. Minority interest
income in 2000 primarily represents the minority investor's share of losses in
our Kadant Composites subsidiary, offset in part by the accretion of Kadant
Fibergen's common stock subject to redemption.
Extraordinary Item
During 2001, we repurchased $34.9 million principal amount of our 4 1/2%
subordinated convertible debentures for $33.5 million in cash, plus accrued
interest, resulting in an extraordinary gain of $0.6 million, net of deferred
debt charges, and net of income tax provision of $0.4 million (Note 8).
Cumulative Effect of Change in Accounting Principles
In accordance with the requirements of SAB No. 101, "Revenue Recognition
in Financial Statements," we adopted the pronouncement as of January 2, 2000,
and recorded a charge in the first quarter of 2000 representing the cumulative
effect of change in accounting principle of $0.9 million, net of income tax
benefit of $0.6 million (Note 17).
Liquidity and Capital Resources
Consolidated working capital was $74.7 million at December 28, 2002,
compared with $159.4 million at December 29, 2001. Included in working capital
are cash, cash equivalents, and available-for-sale investments of $44.4 million
at December 28, 2002, compared with $119.4 million at December 29, 2001. Of the
total cash and cash equivalents at December 28, 2002, $7.6 million was held by a
majority-owned subsidiary, and the remainder was held by us and our wholly owned
subsidiaries. At December 28, 2002, $28.0 million of cash and cash equivalents
was held by our foreign subsidiaries.
During 2002, cash of $27.0 million was provided by operating activities,
compared with $12.8 million in 2001. A decrease in accounts receivable provided
cash of $8.4 million in 2002 primarily at the Papermaking Equipment segment,
largely due to a decrease in revenues and improved collection efforts. Cash of
$4.8 million was provided
46
KADANT INC. 2002 FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
by a decrease in unbilled contract costs and fees due to the timing of progress
billings on large contracts. A decrease in inventories provided cash of $5.3
million in 2002 primarily at the Papermaking Equipment segment as a result of
our efforts to match inventory levels with demand. A decrease in accounts
payable used cash of $1.6 million in 2002 primarily at the Papermaking Equipment
segment due to the timing of payments. In addition, a use of $3.5 million in
cash in 2002 resulted from a decrease in other accrued liabilities, primarily
accrued interest, deferred revenues and, to a lesser extent, accrued income
taxes.
Our investing activities, excluding available-for-sale investments and
advances to former affiliates, used $4.4 million of cash in 2002, compared with
$3.8 million in 2001. During 2002, we purchased property, plant, and equipment
for $3.3 million, including $1.6 million at our composite building products
business, the effects of which were partly offset by proceeds of $0.5 million
from the sale of property, plant, and equipment, and by our collection of $0.2
million from a note receivable related to the September 2000 sale of our
fiber-recovery and water-clarification services plant. In addition, we paid $1.4
million in 2002 in connection with the acquisition of the minority interest of
our Kadant Fibergen subsidiary (Note 11).
Our financing activities used cash of $101.4 million in 2002, compared
with $43.8 million in 2001. During 2002, we used $117.5 million to fund the
redemption and repurchases of our subordinated convertible debentures (Note 8),
as well as $0.5 million to fund the payment of other long-term obligations. In
addition, we paid $1.5 million in connection with the acquisition of common
stock of our Kadant Fibergen subsidiary (Note 11). These uses of cash were
offset in part by $17.7 million of cash provided from the June 2002 issuance of
1.3 million shares of our common stock in a public offering (Note 6).
In September 2001, our board of directors authorized the repurchase,
through September 24, 2002, of up to $50 million of our debt and equity
securities in the open market or in negotiated transactions. This authorization
has been fully utilized. In April 2002, our board of directors authorized the
repurchase, through April 9, 2003, of up to an additional $50 million of our
debt and equity securities in the open market or in negotiated transactions. As
of December 28, 2002, we had $34.6 million remaining under this authorization.
At December 28, 2002, we had $53.2 million of unremitted foreign
earnings that could be subject to tax if remitted to the U.S. Our practice is to
reinvest indefinitely the earnings of certain of our international subsidiaries.
We do not expect that this will have a material adverse effect on our current
liquidity.
Our net cash (calculated as cash, cash equivalents, and
available-for-sale investments less total short- and long- term debt) was $43.3
million at December 28, 2002, compared with net debt of $0.4 million at December
29, 2001.
Although we currently have no material commitments for capital
expenditures in 2003, we plan to make expenditures for property, plant, and
equipment of approximately $3.9 million, including $1.9 million at our composite
building products business. In addition, we are exploring our options regarding
significant capacity expansion for the composite building products business
either at our existing facility in Green Bay, Wisconsin, or at a new location.
We currently estimate that the cost of expansion of our Green Bay facility could
range from $3 to $5 million, while the cost of equipping a new facility could
range from $7 to $8 million (excluding land and building). In addition, we are
currently planning to establish an assembly facility in China to support our
stock-preparation equipment business. The establishment of this facility is
still in its planning stages, with several factors remaining undecided,
including structure and location. We estimate the costs to establish this new
facility could range from $2 to $3 million.
47
KADANT INC. 2002 FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
Contractual Obligations and Other Commercial Commitments
The table below is presented as of December 28, 2002, and as suggested
by the SEC in accordance with Financial Reporting Release (FRR)-61. FRR-61
suggests that it may be beneficial to aggregate information about our
contractual obligations and commercial commitments in a single location.
Detailed information concerning these obligations and commitments can be found
in Notes 8 and 10 of our consolidated financial statements.
Payments Due by Period or Expiration of Commitment
----------------------------------------------------------------------
Less than
(In millions) 1 Year 1-3 Years 4-5 Years After 5 Years Total
- -----------------------------------------------------------------------------------------------------------------------
Contractual Obligations and Other
Commercial Commitments:
Long-term debt obligations $ 0.6 $ 0.6 $ - $ - $ 1.2
Operating lease obligations 2.4 3.8 0.3 - 6.5
--------- --------- ---------- -------- -------
Total contractual cash obligations* 3.0 4.4 0.3 - 7.7
--------- --------- ---------- -------- -------
Other Commitments:**
Letters of credit 6.2 2.6 - - 8.8
--------- --------- ---------- -------- -------
$ 9.2 $ 7.0 $ 0.3 $ - $ 16.5
========= ========= ========== ======== =======
* There are no unconditional purchase obligations of significance other than
inventory and property, plant, and equipment purchases made in the
ordinary course of business, which are excluded from this analysis.
** In the ordinary course of business, we are required to issue limited
performance guarantees, which do not require letters of credit, relating to
our equipment and systems. We typically limit our liability under these
guarantees to amounts that would not exceed the value of the contract. We
believe that we have adequate reserves for any potential liability in
connection with such guarantees. Such guarantees are excluded from this
analysis.
Provisions in financial guarantees or commitments, debt or lease
agreements, or other arrangements could trigger a requirement for an early
payment, additional collateral support, amended terms, or acceleration of
maturity.
We do not have special-purpose entities or use off-balance-sheet
financing techniques, except for the operating leases and other commitments
disclosed in the above table.
In the future, our liquidity position will be primarily affected by the
level of cash flows from operations and the amount of cash expended on capital
expenditures, or on acquisitions, if any. We believe that our existing
resources, together with the cash we expect to generate from operations, are
sufficient to meet the capital requirements of our current operations for the
foreseeable future.
48
KADANT INC. 2002 FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Market Risk
We are exposed to market risk from changes in interest rates and foreign
currency exchange rates, which could affect our future results of operations and
financial condition. We manage our exposure to these risks through our regular
operating and financing activities. Additionally, we use short-term forward
contracts to manage certain exposures to foreign currencies. We enter into
forward foreign exchange contracts to hedge firm purchase and sale commitments
denominated in currencies other than our subsidiaries' local currencies. We do
not engage in extensive foreign currency hedging activities; however, the
purpose of our foreign currency hedging activities is to protect our local
currency cash flows related to these commitments from fluctuations in foreign
exchange rates. Our forward foreign exchange contracts principally hedge
transactions denominated in U.S. dollars. Gains and losses arising from forward
contracts are recognized as offsets to gains and losses resulting from the
transactions being hedged. We do not enter into speculative foreign currency
agreements.
Interest Rates
Our available-for-sale investments and subordinated convertible
debentures in the 2001 balance sheet are sensitive to changes in interest rates.
Interest rate changes would result in a change in the fair value of these
financial instruments due to the difference between the market interest rate and
the rate at the date of purchase or issuance of the financial instrument. A 10%
decrease in year-end 2001 market interest rates would have resulted in a
negative impact of $0.3 million on the net fair value of our interest-sensitive
financial instruments.
Our cash, cash equivalents, and available-for-sale investments maturing
within one year are sensitive to changes in interest rates. Interest rate
changes would result in a change in interest income due to the difference
between the current interest rates on cash and cash equivalents and the variable
rates that these financial instruments may adjust to in the future. A 10%
decrease in year-end interest rates would result in a negative impact on our net
income of $0.1 million in 2002 and $0.4 million in 2001.
Foreign Currency Exchange Rates
We generally view our investment in foreign subsidiaries in a functional
currency other than our reporting currency as long-term. Our investment in
foreign subsidiaries is sensitive to fluctuations in foreign currency exchange
rates. The functional currencies of our foreign subsidiaries are principally
denominated in Euros, British pounds sterling, Mexican pesos, and Canadian
dollars. The effect of changes in foreign exchange rates on our net investment
in foreign subsidiaries is reflected in the accumulated other comprehensive
items component of shareholders' investment. A 10% depreciation in year-end 2002
and 2001 functional currencies, relative to the U.S. dollar, would result in a
reduction of shareholders' investment of $7.4 million and $8.4 million,
respectively.
The fair value of forward foreign exchange contracts is sensitive to
fluctuations in foreign currency exchange rates. The fair value of forward
foreign exchange contracts is the estimated amount that we would pay or receive
upon termination of the contracts, taking into account the change in foreign
currency exchange rates. A 10% depreciation in year-end 2002 and 2001 foreign
currency exchange rates related to our contracts would result in an increase in
unrealized losses on forward foreign exchange contracts of $2.1 million and $0.3
million, respectively. Since we use forward foreign exchange contracts as hedges
of firm purchase and sale commitments, the unrealized gain or loss on forward
foreign currency exchange contracts resulting from changes in foreign currency
exchange rates would be offset by corresponding changes in the fair value of the
hedged items.
49
KADANT INC. 2002 FINANCIAL STATEMENTS
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, we wish to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, our actual results and could cause our actual results
in 2003 and beyond to differ materially from those expressed in any
forward-looking statements made by us, or on our behalf.
Our business is dependent on the condition of the pulp and paper industry, which
is currently in a downcycle. We sell products primarily to the pulp and paper
industry. Generally, the financial condition of the global pulp and paper
industry corresponds to the condition of the general economy, as well as to a
number of other factors, including pulp and paper production capacity relative
to demand. The global pulp and paper industry has been in a prolonged downcycle,
resulting in depressed pulp and paper prices, decreased spending, mill closures,
consolidations, and bankruptcies, all of which have adversely affected our
business. The North American pulp and paper industry has been particularly
adversely affected by higher energy prices and a slowing economy. As paper
companies continue to consolidate in response to market weakness, they
frequently reduce capacity and postpone or even cancel capacity addition or
expansion projects. This cyclical downturn has caused our sales to decline and
has adversely affected our profitability. The financial condition of the pulp
and paper industry may not improve in the near future, and the severity of the
downturn could expand to our European and Asian businesses.
Our business is subject to economic, currency, political, and other risks
associated with international sales and operations. During 2002, approximately
50% of our sales were to customers outside the United States, principally in
Europe and China. International revenues are subject to a number of risks,
including the following:
. agreements may be difficult to enforce and receivables difficult
to collect through a foreign country's legal system;
. foreign customers may have longer payment cycles;
. foreign countries may impose additional withholding taxes or
otherwise tax our foreign income, impose tariffs, or adopt other
restrictions on foreign trade; and
. the protection of intellectual property in foreign countries may
be more difficult to enforce.
Although we seek to charge our customers in the same currency in which our
operating costs are incurred, fluctuations in currency exchange rates may affect
product demand and adversely affect the profitability in U.S. dollars of
products we provide in international markets where payment for our products and
services is made in their local currencies. Any of these factors could have a
material adverse impact on our business and results of operations.
An increasing portion of our international sales has and may in the
future come from China. We are currently planning to establish an assembly
facility in China for our stock-preparation equipment and related aftermarket
parts. An increase in revenues, as well as operation of an assembly facility in
China, will expose us to increased risk in the event of changes in the policies
of the Chinese government, political unrest, unstable economic conditions, or
other developments in China or in U.S.-China relations that are adverse to
trade, including enactment of protectionist legislation or trade restrictions.
In addition, orders from customers in China, particularly for large systems that
have been tailored to a customer's specific requirements, involve increased risk
of cancellation prior to shipment due to payment terms that are applicable to
doing business in China. The timing of these orders is often difficult to
predict.
We are subject to intense competition in all our markets. We believe that the
principal competitive factors affecting the markets for our products include
quality, price, service, technical expertise, and product innovation. Our
competitors include a number of large multinational corporations such as Voith
Paper GmbH and Metso Corporation. Competition, especially in China, could
increase if new companies enter the market or if existing competitors expand
their product lines or intensify efforts within existing product lines.
Competitors' technologies may prove to be superior to ours. Many of these
competitors may have substantially greater financial, marketing, and other
resources than we do. As a result, they may be able to adapt more quickly to new
or emerging technologies and changes in customer requirements, or to devote
greater resources to the promotion and sale of their services and products. Our
current products, those under development, and our ability to develop new
technologies may not be sufficient to enable us to compete effectively. In
addition, our composite building products business is subject to intense
competition, particularly
50
KADANT INC. 2002 FINANCIAL STATEMENTS
RISK FACTORS
in the decking market, from traditional wood products and other composite lumber
manufacturers, many of whom have greater financial, technical, and marketing
resources than we do. As a result, we may be unable to compete successfully in
this market.
Our composite building products business is a relatively new entrant into a new
market. Our success will depend on our ability to manufacture and commercialize
our composite building products. In 2000, we began to develop, produce, market,
and sell composite products primarily for the building industry. Development,
manufacturing, and commercialization of our composite building products require
significant development and testing, and technical expertise in the formulation
and manufacture of the products, and our efforts may not be successful. Further,
growth of our composite building products business requires ongoing market
acceptance. We expect to incur significant branding and distribution expenses to
successfully market and distribute these products. Our ability to market these
products successfully depends on the willingness of consumers to purchase
fiber-based composite products as an alternative to traditional building
products. To penetrate the market and gain market share, we need to educate
consumers, including wood suppliers, distributors, contractors, and
homebuilders, regarding the benefits of our fiber-based composite products over
products made of wood, slate, and other traditional materials. This strategy may
not be successful. We have little experience manufacturing these products at
volume, cost, and quality levels sufficient to satisfy expected demand, and we
may encounter difficulties in connection with any large-scale manufacturing or
commercialization of these new products and our capacity may not be sufficient
to meet demand without significant additional investment. In addition, the
majority of our production is dependent upon a single piece of equipment. If
that equipment were to fail for an extended period of time, it would have a
material adverse effect on our revenues from this business in that period. If we
were to exit this business, we would incur significant losses.
Our composite building products business may not be able to obtain effective
distribution of its products. The composite building products business is
subject to intense competition, and we rely on distributors in the building
products industry to market, distribute, and sell our products. We may be unable
to produce our products in sufficient quantity to interest or retain these
distributors or to add new distributors. If we are unable to distribute our
products effectively, our revenues will decline and we will have to incur
additional expenses to market these products directly.
Higher interest rates could adversely affect demand for our composite
building products. Demand for our composite building products is affected by
several factors beyond our control, including weather conditions and economic
conditions. Recent demand for our products has been driven, in part, by the
availability of low-interest mortgage and home equity loans. An increase in
interest rates or tightened credit could adversely affect demand for home
remodeling projects, including demand for our products.
Seasonality and weather conditions could adversely affect our business. In
general, the building products industry experiences seasonal fluctuations in
sales, particularly in the fourth and first quarters, when holidays and adverse
weather conditions in some regions usually reduce the level of home improvement
and new construction activity. In addition, our composite building products are
used or installed in outdoor construction applications, and our sales volume,
bookings, gross margins, and operating income can be negatively affected by
these adverse weather conditions. As our business grows, we would expect our
performance to reflect these seasonal variations. Operating results will tend to
be lower in quarters with lower sales, which are not entirely offset by a
corresponding reduction in operating costs. In addition, we may also experience
lower gross profit margins in the fourth and first quarters due to seasonal
incentive discounts offered to our distributors. As a result of these factors,
we believe sequential period-to-period comparisons of our operating results are
not reliable indicators of future performance, and the operating results for any
one quarterly period may not be indicative of operating results to be expected
for a full year.
The failure of our composite building products to perform over long periods of
time could result in potential liabilities. Our composite building products are
new, have not been on the market for long periods of time, and may be used in
applications for which we may have little knowledge or limited experience.
Because we have limited historical experience, we may be unable to predict the
potential liabilities related to product warranty or product liability issues.
If our products fail to perform over their warranty periods, we may not have the
ability to protect ourselves adequately against this potential liability, which
could adversely affect our operating results.
51
KADANT INC. 2002 FINANCIAL STATEMENTS
RISK FACTORS
We are dependent on a single mill for the raw material used in our composite
building products and fiber-based granules, and we may not be able to obtain raw
material on commercially reasonable terms; and the manufacture of our
fiber-based granules is subject to commodity price risks. We are dependent on a
single paper mill for the fiber used in the manufacture of our composite
building products and fiber-based granules. This mill has the exclusive right to
supply the papermaking byproducts used in our process to manufacture the
granules. Although we believe our relationship with the mill is good, the mill
could decide not to renew its contract with us at the end of 2003, or may not
renew on commercially reasonable terms, and we would be forced to find an
alternative supply for this raw material. We may be unable to find an
alternative supply on commercially reasonable terms or could incur excessive
transportation costs if an alternative supplier were found, which would increase
our manufacturing costs and may prevent our products from being competitive. Our
composite building products also contain plastics, which are subject to wide
fluctuations in pricing and availability. Due to higher energy costs, the price
of plastic has significantly increased over the last several months. We may be
unable to obtain sufficient quantities at reasonable prices, which would
adversely affect our ability to produce a sufficient quantity of our products or
produce our products at competitive prices.
In addition, we use natural gas in the production of our fiber-based
granular products. We manage our exposure to natural gas price fluctuations by
entering into short-term forward contracts to purchase specified quantities of
natural gas from a supplier. There can be no assurance that we will be effective
in managing our exposure to natural gas price fluctuations. Natural gas prices
have recently increased dramatically. If these high prices are sustained
throughout 2003, our results of operations will be adversely affected.
Our inability to successfully identify and complete acquisitions or successfully
integrate any new or previous acquisitions could have a material adverse effect
on our business. Our strategy includes the acquisition of technologies and
businesses that complement or augment our existing products and services.
Promising acquisitions are difficult to identify and complete for a number of
reasons, including competition among prospective buyers and the need for
regulatory, including antitrust, approvals. Any acquisition we may complete may
be made at a substantial premium over the fair value of the net assets of the
acquired company. We may not be able to complete future acquisitions, integrate
any acquired businesses successfully into our existing businesses, make such
businesses profitable, or realize anticipated cost savings or synergies, if any,
from these acquisitions.
In addition, we have previously acquired several companies and
businesses. As a result of these acquisitions, we have recorded significant
goodwill on our balance sheet, which amounts to approximately $72.2 million as
of December 28, 2002. In accordance with SFAS No. 142, we assess the carrying
value of the goodwill that we have recorded at least annually or whenever events
or changes in circumstances indicate that its current carrying value has
diminished. These events or circumstances generally would include operating
losses or a significant decline in earnings associated with the acquired
business or asset. SFAS No. 142 transition procedures state that an impairment
charge that is required to be recognized when adopting the standard will be
reflected as the cumulative effect of a change in accounting principle in the
restated results for the first quarter of 2002. We recorded a transitional,
after-tax goodwill impairment charge upon the adoption of this standard of $32.8
million, consisting of $29.9 million at the Papermaking Equipment segment and
$2.9 million at the Composite and Fiber-based Products segment. Any future
impairment losses identified after this transition period will be recorded as a
reduction to operating income, which could have a material adverse effect on our
results of operations. Our ability to realize the value of the goodwill that we
have recorded will depend on the future cash flows of these businesses. These
cash flows in turn depend, in part, on how well we have integrated these
businesses.
Our inability to protect our intellectual property could have a material adverse
effect on our business. In addition, third parties may claim that we infringe
their intellectual property, and we could suffer significant litigation or
licensing expense as a result. We place considerable emphasis on obtaining
patent and trade secret protection for significant new technologies, products,
and processes because of the length of time and expense associated with bringing
new products through the development process and into the marketplace. Our
success depends in part on our ability to develop patentable products and obtain
and enforce patent protection for our products both in the United
52
KADANT INC. 2002 FINANCIAL STATEMENTS
RISK FACTORS
States and in other countries. We own numerous U.S. and foreign patents, and we
intend to file additional applications, as appropriate, for patents covering our
products. Patents may not be issued for any pending or future patent
applications owned by or licensed to us, and the claims allowed under any issued
patents may not be sufficiently broad to protect our technology. Any issued
patents owned by or licensed to us may be challenged, invalidated, or
circumvented, and the rights under these patents may not provide us with
competitive advantages. A patent relating to our fiber-based granular products
expires in 2004. After that date, we could be subject to competition in this
market, which could have an adverse effect on this business. In addition,
competitors may design around our technology or develop competing technologies.
Intellectual property rights may also be unavailable or limited in some foreign
countries, which could make it easier for competitors to capture increased
market position. We could incur substantial costs to defend ourselves in suits
brought against us or in suits in which we may assert our patent rights against
others. An unfavorable outcome of any such litigation could materially adversely
affect our business and results of operations. In addition, as our patents
expire, we rely on trade secrets and proprietary know-how to protect our
products. We cannot be sure the steps we have taken or will take in the future
will be adequate to deter misappropriation of our proprietary information and
intellectual property.
We seek to protect trade secrets and proprietary know-how, in part,
through confidentiality agreements with our collaborators, employees, and
consultants. These agreements may be breached, we may not have adequate remedies
for any breach, and our trade secrets may otherwise become known or be
independently developed by our competitors.
Third parties may assert claims against us to the effect that we are
infringing on their intellectual property rights. We could incur substantial
costs and diversion of management resources in defending these claims, which
could have a material adverse effect on our business, financial condition, and
results of operations. In addition, parties making these claims could secure a
judgment awarding substantial damages, as well as injunctive or other equitable
relief, which could effectively block our ability to make, use, sell,
distribute, or market our products and services in the United States or abroad.
In the event that a claim relating to intellectual property is asserted against
us, or third parties not affiliated with us hold pending or issued patents that
relate to our products or technology, we may seek licenses to such intellectual
property or challenge those patents. However, we may be unable to obtain these
licenses on commercially reasonable terms, if at all, and our challenge of the
patents may be unsuccessful. Our failure to obtain the necessary licenses or
other rights could prevent the sale, manufacture, or distribution of our
products and, therefore, could have a material adverse effect on our business,
financial condition, and results of operations.
Fluctuations in our quarterly operating results may cause our stock price to
decline. Given the nature of the markets in which we participate and the effect
of Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB No. 101), which became effective in January 2000, we cannot
reliably predict future revenues and profitability, and unexpected changes may
cause us to adjust our operations. A significant proportion of our costs are
fixed, due in part to our significant selling, research and development, and
manufacturing costs. Thus, small declines in revenues could disproportionately
affect our operating results. Other factors that could affect our quarterly
operating results include:
. failure of our products to pass contractually agreed upon
acceptance tests, which would delay or prohibit recognition of
revenues under SAB No. 101;
. demand for and market acceptance of our products;
. competitive pressures resulting in lower sales prices of our
products;
. adverse changes in the pulp and paper industry;
. delays or problems in our introduction of new products;
our competitors' announcements of new products, services, or
technological innovations;
. contractual liabilities incurred by us related to guarantees of
our product performance;
. increased costs of raw materials or supplies, including the cost
of energy; and
. changes in the timing of product orders.
53
KADANT INC. 2002 FINANCIAL STATEMENTS
RISK FACTORS
Anti-takeover provisions in our charter documents and under Delaware law, our
shareholder rights plan, and the potential tax effects of our spinoff from
Thermo Electron could prevent or delay transactions that our shareholders may
favor. Provisions of our charter and by-laws may discourage, delay, or prevent a
merger or acquisition that our shareholders may consider favorable, including
transactions in which shareholders might otherwise receive a premium for their
shares. For example, these provisions:
. authorize the issuance of "blank check" preferred stock without
any need for action by shareholders;
. provide for a classified board of directors with staggered
three-year terms;
. require supermajority shareholder voting to effect various
amendments to our charter and by-laws;
. eliminate the ability of our shareholders to call special
meetings of shareholders;
. prohibit shareholder action by written consent; and
. establish advance notice requirements for nominations for
election to our board of directors or for proposing matters that
can be acted on by shareholders at shareholder meetings.
In addition, our board of directors has adopted a shareholder rights
plan intended to protect shareholders in the event of an unfair or coercive
offer to acquire our company and to provide our board of directors with adequate
time to evaluate unsolicited offers. Preferred stock purchase rights have been
distributed to our common shareholders pursuant to the rights plan. This rights
plan may have anti-takeover effects. The rights plan will cause substantial
dilution to a person or group that attempts to acquire us on terms that our
board of directors does not believe are in our best interests and those of our
shareholders and may discourage, delay, or prevent a merger or acquisition that
shareholders may consider favorable, including transactions in which
shareholders might otherwise receive a premium for their shares.
The tax treatment of the distribution of our common stock by Thermo
Electron under the Internal Revenue Code and regulations thereunder could also
serve to discourage an acquisition of our company. An acquisition of our company
within two years following the distribution, which took place in August 2001,
could result in federal tax liability being imposed on Thermo Electron and, in
more limited circumstances, on shareholders of Thermo Electron who received
shares of our common stock in the distribution. In addition, even acquisitions
occurring more than two years after the distribution could cause the
distribution to be taxable to Thermo Electron if the acquisitions were
determined to be pursuant to an overall plan that existed at the time of the
distribution. As part of the distribution, we have agreed to indemnify Thermo
Electron, but not the shareholders of Thermo Electron, for any resulting tax
liability if the tax liability is attributable to certain acts by us, including
an acquisition of our company. The prospect of that tax liability and our
indemnification obligation may have anti-takeover effects.
A number of actions following our spinoff from Thermo Electron could cause the
distribution to be fully taxable to shareholders of Thermo Electron who received
shares of our common stock in the distribution and/or to Thermo Electron, and to
us. The IRS has issued a ruling that no gain or loss will be recognized by us,
Thermo Electron, or its shareholders upon the distribution of our common stock
as of the date of the distribution, except with respect to cash received in lieu
of fractional shares of our common stock and distributions of our common stock
acquired by Thermo Electron within the past five years in taxable transactions.
However, the distribution could become fully taxable if we, Thermo Electron, or
the shareholders of Thermo Electron who received shares of our common stock in
the distribution, take any of a number of actions following the distribution. We
have entered into a tax matters agreement with Thermo Electron that restricts
our ability to engage in these types of actions. If any conditions of the IRS
ruling are not satisfied, the distribution could become taxable to the
shareholders of Thermo Electron who received shares of our common stock in the
distribution and/or Thermo Electron. As part of the distribution, we have agreed
to indemnify Thermo Electron, but not the shareholders of Thermo Electron, for
any resulting tax liability if the liability is attributable to certain acts by
us.
54
KADANT INC. 2002 FINANCIAL STATEMENTS
RISK FACTORS
Sales of substantial amounts of our common stock may occur from time to time,
which could cause our stock price to decline. Our shares were distributed pro
rata to the shareholders of Thermo Electron, and from time to time, these
shareholders have sold and may in the future sell substantial amounts of our
common stock in the public market if our shares no longer meet their investment
criteria or other objectives. Any sales of substantial amounts of our common
stock in the public market, or the perception that such sales might occur,
whether as a result of the distribution or otherwise, could cause the market
price of our common stock to decline.
We may have potential business conflicts of interest with Thermo Electron with
respect to our past and ongoing relationships that could harm our business
operations. Conflicts of interest may arise between Thermo Electron and us in a
number of areas relating to our past and ongoing relationships, including:
labor, tax, employee benefit, indemnification, and other matters arising from
our separation from Thermo Electron. We may not be able to resolve any of these
potential conflicts.
55
KADANT INC. 2002 FINANCIAL STATEMENTS
SELECTED FINANCIAL INFORMATION
(In thousands except per share amounts) 2002 (a) 2001 (b) 2000 (c) 1999 (d) 1998
- ----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Revenues $ 185,674 $ 221,166 $ 234,913 $ 228,036 $ 247,426
Income Before Extraordinary Item and Cumulative Effect
of Change in Accounting Principles 5,923 9,362 16,012 17,778 17,995
Net Income (Loss) (26,802) 9,982 15,142 17,778 17,995
Earnings per Share Before Extraordinary Item and
Cumulative Effect of Change in Accounting Principles (e):
Basic .46 .76 1.31 1.45 1.46
Diluted .45 .76 1.30 1.44 1.44
Earnings (Loss) per Share (e):
Basic (2.07) .81 1.24 1.45 1.46
Diluted (2.04) .81 1.23 1.44 1.44
BALANCE SHEET DATA
Working Capital (f) $ 74,701 $ 159,383 $ 173,097 $ 158,711 $ 193,446
Total Assets 231,517 367,654 414,215 442,577 427,100
Common Stock of Subsidiary Subject to Redemption - - - - 53,801
Long-term Obligations 580 119,267 154,650 154,350 153,000
Shareholders' Investment 181,257 183,557 170,633 164,070 150,948
(a) Reflects $3.6 million of pretax restructuring and unusual costs; the
redemption and repurchase of $118.1 million of the Company's 4 1/2%
subordinated convertible debentures, resulting in a net extraordinary gain
of $31, net of income tax provision of $19; and a charge for the cumulative
effect of a change in accounting principle of $32.8 million, net of income
tax benefit of $12.4 million.
(b) Reflects $0.7 million of pretax restructuring costs and the repurchase of
$34.9 million of the Company's debentures, resulting in an extraordinary
gain of $0.6 million, net of income tax provision of $0.4 million.
(c) Reflects a $1.7 million pretax gain on sale of property, $0.5 million of
pretax income related to restructuring and unusual items, and a charge for
the cumulative effect of change in accounting principle of $0.9 million,
net of income tax benefit of $0.6 million.
(d) Reflects an $11.2 million pretax gain on the February 1999 disposition of
Thermo Wisconsin, Inc., pretax restructuring costs and unusual items of
$6.2 million, and the reclassification of common stock of subsidiary
subject to redemption to current liabilities.
(e) Restated to reflect a one-for-five reverse stock split of our common stock,
effective July 12, 2001.
(f) Includes $17.0 million and $49.2 million reclassified from common stock of
subsidiary subject to redemption to current liabilities in 2000 and 1999,
respectively, and the 2001 and 2000 redemption of this common stock for
$13.1 million and $34.6 million, respectively.
56
KADANT INC. 2002 FINANCIAL STATEMENTS
COMMON STOCK MARKET INFORMATION
On July 12, 2001, we changed our name to Kadant Inc. from Thermo
Fibertek Inc., with our common stock now trading on the American Stock Exchange
under the symbol KAI. Our common stock was previously traded under the symbol
TFT. The following table sets forth the high and low sale prices of our common
stock for 2002 and 2001, as reported in the consolidated transaction reporting
system. Prices have been restated to reflect a one-for-five reverse stock split,
effective July 12, 2001.
2002 2001
---------------------- ------------------------
Quarter High Low High Low
- --------------------------------------------------------------------------
First $ 15.16 $ 12.55 $ 21.00 $ 15.31
Second 17.00 13.91 24.45 14.50
Third 16.30 12.51 18.50 11.10
Fourth 16.09 12.50 14.80 12.65
As of January 31, 2003, we had approximately 7,264 holders of record of
our common stock. This does not include holdings in street or nominee names. The
closing market price on the American Stock Exchange for our common stock on
January 31, 2003, was $16.53 per share.
SHAREHOLDER SERVICES
Shareholders who desire information about Kadant Inc. are invited to
contact us at One Acton Place, Suite 202, Acton, Massachusetts 01720, (978)
776-2000. We maintain an internal mailing list to enable shareholders whose
stock is held in street name, and other interested individuals, to receive
quarterly reports, annual reports, press releases, and other information as
quickly as possible. Additional information is available on our Web site at
www.kadant.com.
STOCK TRANSFER AGENT
American Stock Transfer & Trust Company is our stock transfer agent and
maintains our shareholder activity records. The agent will respond to questions
on issuance of stock certificates, change of ownership, lost stock certificates,
and change of address. For these and similar matters, please direct inquiries
to:
American Stock Transfer & Trust Company
Shareholder Services Department
59 Maiden Lane
New York, New York 10038
(718) 921-8200
DIVIDEND POLICY
We have never paid cash dividends and do not expect to pay cash
dividends in the foreseeable future because our policy has been to use earnings
to finance expansion and growth. Payment of dividends will rest within the
discretion of the board of directors and will depend upon, among other factors,
our earnings, capital requirements, and financial condition.
FORM 10-K REPORT
A copy of the Annual Report on Form 10-K for the fiscal year ended
December 28, 2002, as filed with the Securities and Exchange Commission, may be
obtained at no charge by contacting Kadant Inc., One Acton Place, Suite 202,
Acton, Massachusetts 01720, (978) 776-2000. The Form 10-K is also available on
our Web site at www.kadant.com, under "Investors."
ANNUAL MEETING
The annual meeting of shareholders will be held on Thursday, May 15,
2003, at 2:30 p.m. at the Boston Marriott Burlington, One Mall Road (at Routes
128 and 3A), Burlington, Massachusetts.
57