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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended September 26, 2020
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from ________ to _________
Commission file number 001-11406
KADANT INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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52-1762325 |
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(State or other jurisdiction of incorporation or
organization) |
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(I.R.S. Employer Identification No.) |
One Technology Park Drive
Westford, Massachusetts 01886
(Address of principal executive offices, including zip
code)
(978) 776-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities
Exchange Act of 1934:
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Title of each class |
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Name of each exchange on which registered |
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Common Stock, $.01 par value |
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KAI |
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New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes
☒
No
☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes
☒
No
☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of "large accelerated filer", "accelerated filer",
"smaller reporting company", and "emerging growth company" in Rule
12b-2 of the Exchange Act.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large accelerated filer |
☒
|
|
Accelerated filer |
☐ |
|
Non-accelerated filer |
☐ |
|
Smaller reporting company |
☐ |
|
|
|
Emerging growth company |
☐ |
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act.
☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes
☐
No
☒
As of October 23, 2020, the registrant had 11,509,560 shares
of common stock outstanding.
Kadant Inc.
Quarterly Report on Form 10-Q
for the Period Ended September 26, 2020
Table of Contents
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Page |
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PART I: Financial Information |
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PART II: Other Information |
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PART 1 – FINANCIAL INFORMATION
Item 1 – Financial Statements
KADANT INC.
Condensed Consolidated Balance Sheet
(Unaudited)
|
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|
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|
|
|
|
|
|
September 26,
2020 |
|
December 28,
2019 |
|
(In thousands, except share and per share amounts) |
|
|
|
Assets |
|
|
|
|
|
Current Assets: |
|
|
|
|
|
Cash and cash equivalents |
|
$ |
53,554 |
|
|
$ |
66,786 |
|
|
Restricted cash |
|
2,650 |
|
|
1,487 |
|
|
Accounts receivable, net of allowances of $3,113
and $2,698
|
|
94,145 |
|
|
95,740 |
|
|
Inventories |
|
108,715 |
|
|
102,715 |
|
|
Unbilled revenue |
|
9,095 |
|
|
13,162 |
|
|
Other current assets |
|
15,382 |
|
|
17,686 |
|
|
Total Current Assets |
|
283,541 |
|
|
297,576 |
|
|
Property, Plant, and Equipment, net of accumulated depreciation of
$103,664 and $95,309
|
|
82,427 |
|
|
86,032 |
|
|
Other Assets |
|
40,565 |
|
|
45,851 |
|
|
Intangible Assets, Net (Note 1) |
|
164,359 |
|
|
173,896 |
|
|
Goodwill (Note 1) |
|
342,999 |
|
|
336,032 |
|
|
Total Assets |
|
$ |
913,891 |
|
|
$ |
939,387 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity |
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
Current maturities of long-term obligations (Note 6) |
|
$ |
1,538 |
|
|
$ |
2,851 |
|
|
Accounts payable |
|
32,588 |
|
|
45,852 |
|
|
Accrued payroll and employee benefits |
|
27,946 |
|
|
31,968 |
|
|
Customer deposits |
|
25,834 |
|
|
24,012 |
|
|
Advanced billings |
|
4,520 |
|
|
11,280 |
|
|
Other current liabilities |
|
35,436 |
|
|
30,206 |
|
|
Total Current Liabilities |
|
127,862 |
|
|
146,169 |
|
|
Long-Term Obligations (Note 6) |
|
259,049 |
|
|
298,174 |
|
|
Other Long-Term Liabilities |
|
64,735 |
|
|
67,965 |
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 13) |
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity: |
|
|
|
|
|
Preferred stock, $.01 par value, 5,000,000 shares authorized; none
issued
|
|
— |
|
|
— |
|
|
Common stock, $.01 par value, 150,000,000 shares authorized;
14,624,159 shares issued
|
|
146 |
|
|
146 |
|
|
Capital in excess of par value |
|
108,384 |
|
|
106,698 |
|
|
Retained earnings |
|
465,963 |
|
|
435,249 |
|
|
Treasury stock at cost, 3,114,599 and 3,214,888 shares
|
|
(76,320) |
|
|
(78,778) |
|
|
Accumulated other comprehensive items (Note 9) |
|
(37,232) |
|
|
(37,620) |
|
|
Total Kadant Stockholders' Equity |
|
460,941 |
|
|
425,695 |
|
|
Noncontrolling interest |
|
1,304 |
|
|
1,384 |
|
|
Total Stockholders' Equity |
|
462,245 |
|
|
427,079 |
|
|
Total Liabilities and Stockholders' Equity |
|
$ |
913,891 |
|
|
$ |
939,387 |
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
KADANT INC.
Condensed Consolidated Statement of Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 26,
2020 |
|
September 28,
2019 |
|
September 26,
2020 |
|
September 28,
2019 |
|
(In thousands, except per share amounts) |
|
|
|
|
|
Revenue (Notes 1 and 12) |
|
$ |
154,610 |
|
|
$ |
173,504 |
|
|
$ |
466,597 |
|
|
$ |
521,985 |
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Operating Expenses: |
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
86,294 |
|
|
99,257 |
|
|
263,510 |
|
|
302,852 |
|
|
Selling, general, and administrative expenses |
|
43,853 |
|
|
47,097 |
|
|
134,518 |
|
|
144,883 |
|
|
Research and development expenses |
|
2,658 |
|
|
2,597 |
|
|
8,532 |
|
|
7,980 |
|
|
Restructuring costs (Note 3) |
|
470 |
|
|
— |
|
|
926 |
|
|
— |
|
|
|
|
133,275 |
|
|
148,951 |
|
|
407,486 |
|
|
455,715 |
|
|
|
|
|
|
|
|
|
|
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|
Operating Income |
|
21,335 |
|
|
24,553 |
|
|
59,111 |
|
|
66,270 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income |
|
52 |
|
|
43 |
|
|
140 |
|
|
158 |
|
|
Interest Expense |
|
(1,670) |
|
|
(3,066) |
|
|
(6,060) |
|
|
(10,143) |
|
|
Other Expense, Net |
|
(32) |
|
|
(98) |
|
|
(95) |
|
|
(296) |
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Provision for Income Taxes |
|
19,685 |
|
|
21,432 |
|
|
53,096 |
|
|
55,989 |
|
|
Provision for Income Taxes (Note 5) |
|
4,705 |
|
|
5,219 |
|
|
13,738 |
|
|
12,310 |
|
|
Net Income |
|
14,980 |
|
|
16,213 |
|
|
39,358 |
|
|
43,679 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to Noncontrolling Interest |
|
(129) |
|
|
(98) |
|
|
(369) |
|
|
(360) |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to Kadant |
|
$ |
14,851 |
|
|
$ |
16,115 |
|
|
$ |
38,989 |
|
|
$ |
43,319 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share Attributable to Kadant (Note 4) |
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.29 |
|
|
$ |
1.43 |
|
|
$ |
3.40 |
|
|
$ |
3.87 |
|
|
Diluted |
|
$ |
1.28 |
|
|
$ |
1.41 |
|
|
$ |
3.38 |
|
|
$ |
3.79 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares (Note 4) |
|
|
|
|
|
|
|
|
|
Basic |
|
11,504 |
|
|
11,267 |
|
|
11,472 |
|
|
11,198 |
|
|
Diluted |
|
11,589 |
|
|
11,469 |
|
|
11,550 |
|
|
11,434 |
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
KADANT INC.
Condensed Consolidated Statement of Comprehensive
Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 26,
2020 |
|
September 28,
2019 |
|
September 26,
2020 |
|
September 28,
2019 |
|
(In thousands) |
|
|
|
|
|
Net Income |
|
$ |
14,980 |
|
|
$ |
16,213 |
|
|
$ |
39,358 |
|
|
$ |
43,679 |
|
|
Other Comprehensive Items: |
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
8,656 |
|
|
(9,091) |
|
|
824 |
|
|
(7,603) |
|
|
Pension and other post-retirement liability adjustments, net (net
of tax (benefit) provision of $(6), $12, $14 and $22)
|
|
(14) |
|
|
31 |
|
|
34 |
|
|
59 |
|
|
Effect of other post-retirement plan settlement |
|
— |
|
|
— |
|
|
(119) |
|
|
— |
|
|
Deferred gain (loss) on cash flow hedges (net of tax provision
(benefit) of $19, $(47), $(103) and $(190))
|
|
51 |
|
|
(123) |
|
|
(275) |
|
|
(524) |
|
|
Total other comprehensive items |
|
8,693 |
|
|
(9,183) |
|
|
464 |
|
|
(8,068) |
|
|
Comprehensive Income |
|
23,673 |
|
|
7,030 |
|
|
39,822 |
|
|
35,611 |
|
|
Comprehensive Income Attributable to Noncontrolling
Interest
|
|
(191) |
|
|
(24) |
|
|
(445) |
|
|
(276) |
|
|
Comprehensive Income Attributable to Kadant |
|
$ |
23,482 |
|
|
$ |
7,006 |
|
|
$ |
39,377 |
|
|
$ |
35,335 |
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
KADANT INC.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 26,
2020 |
|
September 28,
2019 |
|
(In thousands) |
|
|
|
Operating Activities |
|
|
|
|
|
Net income attributable to Kadant |
|
$ |
38,989 |
|
|
$ |
43,319 |
|
|
Net income attributable to noncontrolling interest |
|
369 |
|
|
360 |
|
|
|
|
|
|
|
Net income |
|
39,358 |
|
|
43,679 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
Depreciation and amortization |
|
23,260 |
|
|
24,304 |
|
|
Stock-based compensation expense |
|
5,126 |
|
|
5,125 |
|
|
Provision for losses on accounts receivable |
|
505 |
|
|
170 |
|
|
Gain on sale of property, plant, and equipment |
|
(4) |
|
|
(139) |
|
|
Other items, net |
|
(250) |
|
|
954 |
|
|
Changes in current assets and liabilities, net of effects of
acquisitions: |
|
|
|
|
|
Accounts receivable |
|
1,306 |
|
|
(1,124) |
|
|
Unbilled revenue |
|
4,332 |
|
|
1,957 |
|
|
Inventories |
|
(6,229) |
|
|
(10,294) |
|
|
Other current assets |
|
2,840 |
|
|
(4,093) |
|
|
Accounts payable |
|
(13,183) |
|
|
2,798 |
|
|
Other current liabilities |
|
(4,460) |
|
|
(5,171) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
52,601 |
|
|
58,166 |
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
Acquisitions, net of cash acquired (Note 2) |
|
(7,095) |
|
|
(177,058) |
|
|
Purchases of property, plant, and equipment |
|
(5,419) |
|
|
(6,236) |
|
|
Proceeds from sale of property, plant, and equipment |
|
55 |
|
|
527 |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
(12,459) |
|
|
(182,767) |
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
Repayment of short- and long-term obligations |
|
(69,034) |
|
|
(108,272) |
|
|
Proceeds from issuance of short- and long-term
obligations |
|
26,000 |
|
|
247,090 |
|
|
Dividends paid |
|
(8,141) |
|
|
(7,604) |
|
|
Tax withholding payments related to stock-based
compensation |
|
(2,596) |
|
|
(2,670) |
|
|
|
|
|
|
|
Proceeds from issuance of Company common stock |
|
1,614 |
|
|
2,006 |
|
|
|
|
|
|
|
Dividend paid to noncontrolling interest |
|
(525) |
|
|
— |
|
|
Other financing activities |
|
(189) |
|
|
(52) |
|
|
Net cash (used in) provided by financing activities |
|
(52,871) |
|
|
130,498 |
|
|
|
|
|
|
|
|
Exchange Rate Effect on Cash, Cash Equivalents, and Restricted
Cash |
|
660 |
|
|
(2,043) |
|
|
|
|
|
|
|
|
(Decrease) Increase in Cash, Cash Equivalents, and Restricted
Cash |
|
(12,069) |
|
|
3,854 |
|
|
Cash, Cash Equivalents, and Restricted Cash at Beginning of
Period |
|
68,273 |
|
|
46,117 |
|
|
Cash, Cash Equivalents, and Restricted Cash at End of
Period |
|
$ |
56,204 |
|
|
$ |
49,971 |
|
See
Note
1,
under the heading
Supplemental Cash Flow Information
for further details.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
KADANT INC.
Condensed Consolidated Statement of Stockholders'
Equity
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 26, 2020 |
|
(In thousands, except share and per share amounts) |
|
Common
Stock |
|
Capital in
Excess of Par Value |
|
Retained Earnings |
|
Treasury
Stock |
|
Accumulated
Other
Comprehensive Items |
|
Noncontrolling Interest |
|
Total
Stockholders' Equity |
|
Shares |
|
Amount |
|
|
|
Shares |
|
Amount |
|
|
|
|
Balance at June 27, 2020 |
|
14,624,159 |
|
|
$ |
146 |
|
|
$ |
107,202 |
|
|
$ |
453,874 |
|
|
3,127,565 |
|
|
$ |
(76,638) |
|
|
$ |
(45,863) |
|
|
$ |
1,638 |
|
|
$ |
440,359 |
|
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
14,851 |
|
|
— |
|
|
— |
|
|
— |
|
|
129 |
|
|
14,980 |
|
|
Dividend declared – Common Stock, $0.24 per share
|
|
— |
|
|
— |
|
|
— |
|
|
(2,762) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(2,762) |
|
|
Dividend paid to noncontrolling interest |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(525) |
|
|
(525) |
|
|
Activity under stock plans |
|
— |
|
|
— |
|
|
1,182 |
|
|
— |
|
|
(12,966) |
|
|
318 |
|
|
— |
|
|
— |
|
|
1,500 |
|
|
Other comprehensive items |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
8,631 |
|
|
62 |
|
|
8,693 |
|
|
Balance at September 26, 2020 |
|
14,624,159 |
|
|
$ |
146 |
|
|
$ |
108,384 |
|
|
$ |
465,963 |
|
|
3,114,599 |
|
|
$ |
(76,320) |
|
|
$ |
(37,232) |
|
|
$ |
1,304 |
|
|
$ |
462,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 26, 2020 |
|
(In thousands, except share and per share amounts) |
|
Common
Stock |
|
Capital in
Excess of Par Value |
|
Retained Earnings |
|
Treasury
Stock |
|
Accumulated
Other
Comprehensive Items |
|
Noncontrolling Interest |
|
Total
Stockholders' Equity |
|
Shares |
|
Amount |
|
|
|
Shares |
|
Amount |
|
|
|
|
Balance at December 28, 2019 |
|
14,624,159 |
|
|
$ |
146 |
|
|
$ |
106,698 |
|
|
$ |
435,249 |
|
|
3,214,888 |
|
|
$ |
(78,778) |
|
|
$ |
(37,620) |
|
|
$ |
1,384 |
|
|
$ |
427,079 |
|
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
38,989 |
|
|
— |
|
|
— |
|
|
— |
|
|
369 |
|
|
39,358 |
|
|
Dividends declared – Common Stock, $0.72 per share
|
|
— |
|
|
— |
|
|
— |
|
|
(8,275) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(8,275) |
|
|
Dividend paid to noncontrolling interest |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(525) |
|
|
(525) |
|
|
Activity under stock plans |
|
— |
|
|
— |
|
|
1,686 |
|
|
— |
|
|
(100,289) |
|
|
2,458 |
|
|
— |
|
|
— |
|
|
4,144 |
|
|
Other comprehensive items |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
388 |
|
|
76 |
|
|
464 |
|
|
Balance at September 26, 2020 |
|
14,624,159 |
|
|
$ |
146 |
|
|
$ |
108,384 |
|
|
$ |
465,963 |
|
|
3,114,599 |
|
|
$ |
(76,320) |
|
|
$ |
(37,232) |
|
|
$ |
1,304 |
|
|
$ |
462,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 28, 2019 |
|
(In thousands, except share and per share amounts) |
|
Common
Stock |
|
Capital in
Excess of Par Value |
|
Retained Earnings |
|
Treasury
Stock |
|
Accumulated
Other
Comprehensive Items |
|
Noncontrolling Interest |
|
Total
Stockholders' Equity |
|
|
Shares |
|
Amount |
|
|
|
Shares |
|
Amount |
|
|
|
|
Balance at June 29, 2019 |
|
14,624,159 |
|
|
$ |
146 |
|
|
$ |
103,767 |
|
|
$ |
415,605 |
|
|
3,369,304 |
|
|
$ |
(82,562) |
|
|
$ |
(38,251) |
|
|
$ |
1,855 |
|
|
$ |
400,560 |
|
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
16,115 |
|
|
— |
|
|
— |
|
|
— |
|
|
98 |
|
|
16,213 |
|
|
Dividend declared – Common Stock, $0.23 per share
|
|
— |
|
|
— |
|
|
— |
|
|
(2,593) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(2,593) |
|
|
Activity under stock plans |
|
— |
|
|
— |
|
|
1,452 |
|
|
— |
|
|
(17,270) |
|
|
424 |
|
|
— |
|
|
— |
|
|
1,876 |
|
|
Other comprehensive items |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(9,109) |
|
|
(74) |
|
|
(9,183) |
|
|
Balance at September 28, 2019 |
|
14,624,159 |
|
|
$ |
146 |
|
|
$ |
105,219 |
|
|
$ |
429,127 |
|
|
3,352,034 |
|
|
$ |
(82,138) |
|
|
$ |
(47,360) |
|
|
$ |
1,879 |
|
|
$ |
406,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 28, 2019 |
|
(In thousands, except share and per share amounts) |
|
Common
Stock |
|
Capital in
Excess of Par Value |
|
Retained Earnings |
|
Treasury
Stock |
|
Accumulated
Other
Comprehensive Items |
|
Noncontrolling Interest |
|
Total
Stockholders' Equity |
|
Shares |
|
Amount |
|
|
|
Shares |
|
Amount |
|
|
|
|
Balance at December 29, 2018 |
|
14,624,159 |
|
|
$ |
146 |
|
|
$ |
104,731 |
|
|
$ |
393,578 |
|
|
3,514,163 |
|
|
$ |
(86,111) |
|
|
$ |
(39,376) |
|
|
$ |
1,603 |
|
|
$ |
374,571 |
|
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
43,319 |
|
|
— |
|
|
— |
|
|
— |
|
|
360 |
|
|
43,679 |
|
|
Adoption of
ASU No. 2016-02,
Leases
|
|
— |
|
|
— |
|
|
— |
|
|
(17) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(17) |
|
|
Dividends declared – Common Stock, $0.69 per share
|
|
— |
|
|
— |
|
|
— |
|
|
(7,753) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(7,753) |
|
|
Activity under stock plans |
|
— |
|
|
— |
|
|
488 |
|
|
— |
|
|
(162,129) |
|
|
3,973 |
|
|
— |
|
|
— |
|
|
4,461 |
|
|
Other comprehensive items |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(7,984) |
|
|
(84) |
|
|
(8,068) |
|
|
Balance at September 28, 2019 |
|
14,624,159 |
|
|
$ |
146 |
|
|
$ |
105,219 |
|
|
$ |
429,127 |
|
|
3,352,034 |
|
|
$ |
(82,138) |
|
|
$ |
(47,360) |
|
|
$ |
1,879 |
|
|
$ |
406,873 |
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Summary of
Significant Accounting Policies
Nature of Operations
Kadant Inc. was incorporated in Delaware in November 1991 and
trades on the New York Stock Exchange under the ticker symbol
"KAI."
Kadant Inc. (together with its subsidiaries, the Company) is a
global supplier of high-value, critical components and engineered
systems used in process industries worldwide. Its products,
technologies, and services play an integral role in enhancing
process efficiency, optimizing energy utilization, and maximizing
productivity in resource-intensive industries.
COVID-19
On March 11, 2020, the World Health Organization designated the
novel coronavirus (COVID-19) a global pandemic, and a national
emergency was subsequently declared by the U.S. government. The
pandemic has negatively affected the global economy, disrupted
global supply chains, and resulted in significant travel and
transport restrictions, which have adversely affected the Company’s
bookings and financial results. The impact of the COVID-19
pandemic, including the resulting economic impact, continues to
evolve and the Company is closely monitoring its impact on all
aspects of its business.
Interim Financial Statements
The interim condensed consolidated financial statements and related
notes presented have been prepared by the Company, are unaudited,
and, in the opinion of management, reflect all adjustments of a
normal recurring nature necessary for a fair statement of the
Company's financial position at September 26, 2020, its
results of operations, comprehensive income, and stockholders'
equity for the three- and nine-month periods ended
September 26, 2020 and September 28, 2019, and its cash
flows for the nine-month periods ended September 26, 2020 and
September 28, 2019. Interim results are not necessarily
indicative of results for a full year or for any other interim
period.
The condensed consolidated balance sheet presented as of
December 28, 2019 has been derived from the consolidated
financial statements contained in the Company's Annual Report on
Form 10-K for the fiscal year ended December 28, 2019. The
condensed consolidated financial statements and related notes are
presented as permitted by the rules and regulations of the
Securities and Exchange Commission (SEC) for Form 10-Q and do not
contain certain information included in the annual consolidated
financial statements and related notes of the Company. The
condensed consolidated financial statements and notes included
herein should be read in conjunction with the consolidated
financial statements and related notes included in the Company's
Annual Report on Form 10-K for the fiscal year ended
December 28, 2019, filed with the SEC.
Financial Statement Presentation
In the first quarter of 2020, the Company realigned its business
segments into three new reportable operating segments: Flow
Control, Industrial Processing, and Material Handling. The Company
previously reported its financial results by combining its
operating entities into three reportable operating segments:
Papermaking Systems, Wood Processing Systems, and Material Handling
Systems, and a separate product line, Fiber-based Products.
Financial information for 2019 has been recast to conform to the
new segment presentation. See
Note
12,
Business Segment Information, for further detail regarding the
Company's segments.
Use of Estimates and Critical Accounting Policies
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles (GAAP) requires management
to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenue and expenses during the reporting
period. Although the Company makes every effort to ensure the
accuracy of the estimates and assumptions used in the preparation
of its condensed consolidated financial statements or in the
application of accounting policies, if business conditions were
different, or if the Company were to use different estimates and
assumptions, it is possible that materially different amounts could
be reported in the Company's condensed consolidated financial
statements.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Notes 1 and 3 to the consolidated financial statements in the
Company's Annual Report on Form 10-K for the fiscal year ended
December 28, 2019 describe the significant accounting
estimates and policies used in preparation of the consolidated
financial statements. There have been no material changes in the
Company’s significant accounting policies during the nine months
ended September 26, 2020, except that the Company no longer
considers its policy with respect to accounting for pension
benefits to be a critical accounting policy due to the settlement
of its U.S. pension plan in December 2019.
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
(In thousands) |
|
September 26,
2020 |
|
September 28,
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid for Interest |
|
$ |
5,518 |
|
|
$ |
9,711 |
|
|
Cash Paid for Income Taxes, Net of Refunds |
|
$ |
9,953 |
|
|
$ |
18,037 |
|
|
|
|
|
|
|
|
Non-Cash Investing Activities: |
|
|
|
|
|
Fair value of assets acquired |
|
$ |
9,295 |
|
|
$ |
208,558 |
|
|
Cash paid for acquired businesses |
|
(7,565) |
|
|
(179,489) |
|
|
Liabilities Assumed of Acquired Businesses |
|
$ |
1,730 |
|
|
$ |
29,069 |
|
|
|
|
|
|
|
|
Non-cash additions to property, plant, and equipment |
|
$ |
101 |
|
|
$ |
304 |
|
|
|
|
|
|
|
|
Non-Cash Financing Activities: |
|
|
|
|
|
Issuance of Company common stock upon vesting of restricted stock
units |
|
$ |
4,557 |
|
|
$ |
3,908 |
|
|
Dividends declared but unpaid |
|
$ |
2,762 |
|
|
$ |
2,593 |
|
Restricted Cash
The Company's restricted cash serves as collateral for certain
banker's acceptance drafts issued to vendors and for bank
guarantees associated with providing assurance to customers that
the Company will fulfill certain customer obligations entered into
in the normal course of business. The majority of the bank
guarantees will expire over the next twelve months.
The following table provides a reconciliation of cash, cash
equivalents, and restricted cash reported within the Company's
condensed consolidated balance sheet that are shown in aggregate in
the accompanying condensed consolidated statement of cash
flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
September 26,
2020 |
|
September 28,
2019 |
|
December 28,
2019 |
|
December 29,
2018 |
|
Cash and cash equivalents |
|
$ |
53,554 |
|
|
$ |
48,650 |
|
|
$ |
66,786 |
|
|
$ |
45,830 |
|
|
Restricted cash |
|
2,650 |
|
|
1,321 |
|
|
1,487 |
|
|
287 |
|
|
Total Cash, Cash Equivalents, and Restricted Cash |
|
$ |
56,204 |
|
|
$ |
49,971 |
|
|
$ |
68,273 |
|
|
$ |
46,117 |
|
Inventories
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26,
2020 |
|
December 28,
2019 |
|
(In thousands) |
|
|
|
Raw Materials |
|
$ |
47,918 |
|
|
$ |
49,332 |
|
|
Work in Process |
|
17,089 |
|
|
15,344 |
|
|
Finished Goods |
|
43,708 |
|
|
38,039 |
|
|
|
|
$ |
108,715 |
|
|
$ |
102,715 |
|
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Intangible Assets, Net
Acquired intangible assets by major asset class are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Gross |
|
Accumulated
Amortization |
|
Currency
Translation |
|
Net |
|
September 26, 2020 |
|
|
|
|
|
|
|
|
|
Definite-Lived |
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
174,423 |
|
|
$ |
(62,018) |
|
|
$ |
(3,741) |
|
|
$ |
108,664 |
|
|
Product technology |
|
56,568 |
|
|
(30,674) |
|
|
(1,520) |
|
|
24,374 |
|
|
Tradenames |
|
6,753 |
|
|
(2,811) |
|
|
(362) |
|
|
3,580 |
|
|
Other |
|
18,248 |
|
|
(14,036) |
|
|
(565) |
|
|
3,647 |
|
|
|
|
255,992 |
|
|
(109,539) |
|
|
(6,188) |
|
|
140,265 |
|
|
Indefinite-Lived |
|
|
|
|
|
|
|
|
|
Tradenames |
|
24,100 |
|
|
— |
|
|
(6) |
|
|
24,094 |
|
|
Acquired Intangible Assets |
|
$ |
280,092 |
|
|
$ |
(109,539) |
|
|
$ |
(6,194) |
|
|
$ |
164,359 |
|
|
|
|
|
|
|
|
|
|
|
December 28, 2019 |
|
|
|
|
|
|
|
|
|
Definite-Lived |
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
171,583 |
|
|
$ |
(51,798) |
|
|
$ |
(4,141) |
|
|
$ |
115,644 |
|
|
Product technology |
|
56,011 |
|
|
(27,819) |
|
|
(1,709) |
|
|
26,483 |
|
|
Tradenames |
|
6,527 |
|
|
(2,421) |
|
|
(427) |
|
|
3,679 |
|
|
Other |
|
17,964 |
|
|
(13,295) |
|
|
(593) |
|
|
4,076 |
|
|
|
|
252,085 |
|
|
(95,333) |
|
|
(6,870) |
|
|
149,882 |
|
|
Indefinite-Lived |
|
|
|
|
|
|
|
|
|
Tradenames |
|
24,100 |
|
|
— |
|
|
(86) |
|
|
24,014 |
|
|
Acquired Intangible Assets |
|
$ |
276,185 |
|
|
$ |
(95,333) |
|
|
$ |
(6,956) |
|
|
$ |
173,896 |
|
Gross intangible assets include $3,907,000 for acquired intangible
assets from acquisitions that occurred in the second quarter of
2020. See
Note
2,
Acquisitions, for further details.
Intangible assets are initially recorded at fair value at the date
of acquisition. Subsequent impairment charges are reflected as a
reduction in the gross balance, as applicable. Definite-lived
intangible assets are stated net of accumulated amortization and
currency translation in the accompanying condensed consolidated
balance sheet. The Company amortizes definite-lived intangible
assets over lives that have been determined based on the
anticipated cash flow benefits of the intangible
asset.
Goodwill
The changes in the carrying amount of goodwill by segment are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Flow Control |
|
Industrial Processing |
|
Material Handling |
|
Total |
|
Balance at December 28, 2019 (a) |
|
|
|
|
|
|
|
|
|
Gross balance |
|
$ |
97,680 |
|
|
$ |
207,536 |
|
|
$ |
116,325 |
|
|
$ |
421,541 |
|
|
Accumulated impairment losses |
|
— |
|
|
(85,509) |
|
|
— |
|
|
(85,509) |
|
|
Net balance |
|
97,680 |
|
|
122,027 |
|
|
116,325 |
|
|
336,032 |
|
|
2020 Adjustments |
|
|
|
|
|
|
|
|
|
Acquisition (Note 2)
|
|
— |
|
|
3,985 |
|
|
— |
|
|
3,985 |
|
|
Currency translation |
|
804 |
|
|
493 |
|
|
1,685 |
|
|
2,982 |
|
|
Total 2020 adjustments |
|
804 |
|
|
4,478 |
|
|
1,685 |
|
|
6,967 |
|
|
Balance at September 26, 2020 |
|
|
|
|
|
|
|
|
|
Gross balance |
|
98,484 |
|
|
212,014 |
|
|
118,010 |
|
|
428,508 |
|
|
Accumulated impairment losses |
|
— |
|
|
(85,509) |
|
|
— |
|
|
(85,509) |
|
|
Net balance |
|
$ |
98,484 |
|
|
$ |
126,505 |
|
|
$ |
118,010 |
|
|
$ |
342,999 |
|
|
|
|
|
|
|
|
|
|
(a) Goodwill balances as of December 28, 2019 have been recast to
conform to the current period presentation. See
Note
12,
Business Segment Information, for further details regarding the
Company's change in reportable operating segments.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Impairment of Indefinite-Lived Assets
The Company evaluates the recoverability of goodwill and
indefinite-lived intangible assets as of the end of each fiscal
year or more frequently if events or changes in circumstances
indicate that it is more likely than not that the carrying value of
an asset might be impaired. Potential impairment indicators include
a significant decline in sales, earnings, or cash flows, material
adverse changes in the business climate, and a significant decline
in the Company's market capitalization due to a sustained decrease
in its stock price.
In March 2020, the Company experienced a significant decrease in
market capitalization due to a decline in the Company’s stock
price. During that time, the overall U.S. stock market also
declined significantly amid market volatility driven by the
uncertainty surrounding the COVID-19 pandemic. Based on these
occurrences, the Company concluded that a triggering event had
occurred related to the indefinite-lived assets within its material
handling reporting unit. As a result, the Company prepared a
quantitative impairment analysis (Step 1) for its material handling
reporting unit, which indicated that its fair value exceeded its
carrying value and the indefinite-lived assets were not impaired.
In the second and third quarters of 2020, the Company’s market
capitalization and the overall stock market, which are potential
impairment indicators, recovered from their decreased levels that
existed at the end of the first quarter of 2020. No other events
that would trigger an impairment analysis were identified during
the second and third quarters of 2020. The Company will continue to
monitor for impairment indicators and will conduct its annual
period impairment analysis as of the end of the fiscal
year.
Warranty Obligations
The Company's contracts covering the sale of its products include
warranty provisions that provide assurance to its customers that
the products will comply with agreed-upon specifications during a
defined period of time. The Company negotiates the terms regarding
warranty coverage and length of warranty depending on the products
and applications.
The Company's liability for warranties is included in other current
liabilities in the accompanying condensed consolidated balance
sheet. The changes in the carrying amount of product warranty
obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
(In thousands) |
|
September 26,
2020 |
|
September 28,
2019 |
|
Balance at Beginning of Year |
|
$ |
6,467 |
|
|
$ |
5,726 |
|
|
Provision charged to expense |
|
3,960 |
|
|
3,332 |
|
|
Usage |
|
(3,809) |
|
|
(2,778) |
|
|
Acquisition |
|
— |
|
|
303 |
|
|
Currency translation |
|
114 |
|
|
(175) |
|
|
Balance at End of Period |
|
$ |
6,732 |
|
|
$ |
6,408 |
|
Revenue Recognition
The Company recognizes revenue under Accounting Standards
Codification (ASC) Topic 606,
Revenue from Contracts with Customers.
Most of the Company’s revenue is recognized at a point in time for
each performance obligation under the contract when the customer
obtains control of the goods or service. Most of the Company’s
parts and consumables products and its capital products with
minimal customization are accounted for at a point in time. The
Company has made a policy election to not treat the obligation to
ship as a separate performance obligation under the contract and,
as a result, the associated shipping costs are reflected in cost of
revenue when revenue is recognized.
The remaining portion of the Company’s revenue is recognized on an
over time basis based on an input method that compares the costs
incurred to date to the total expected costs required to satisfy
the performance obligation. Contracts are accounted for on an over
time basis when they include products which have no alternative use
and an enforceable right to payment over time. Most of the
contracts recognized on an over time basis are for large capital
projects. These projects are highly customized for the customer
and, as a result, would include a significant cost to rework in the
event of cancellation.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table presents revenue by revenue recognition
method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 26, |
|
September 28, |
|
September 26, |
|
September 28, |
|
(In thousands) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
Point in Time |
|
$ |
137,679 |
|
|
$ |
151,101 |
|
|
$ |
403,568 |
|
|
$ |
457,093 |
|
|
Over Time |
|
16,931 |
|
|
22,403 |
|
|
63,029 |
|
|
64,892 |
|
|
|
|
$ |
154,610 |
|
|
$ |
173,504 |
|
|
$ |
466,597 |
|
|
$ |
521,985 |
|
The transaction price includes estimated variable consideration
where applicable. Such variable consideration relates to certain
performance guarantees and rights to return the product. The
Company estimates variable consideration as the most likely amount
to which it expects to be entitled based on the terms of the
contracts with customers and historical experience, where relevant.
For contracts with multiple performance obligations, the
transaction price is allocated to each performance obligation based
on the relative stand-alone selling price.
The Company disaggregates its revenue from contracts with customers
by reportable operating segment, product type and geography as this
best depicts how its revenue is affected by economic
factors.
The following table presents the disaggregation of revenue by
product type and geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 26, |
|
September 28, |
|
September 26, |
|
September 28, |
|
(In thousands) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
Revenue by Product Type:
|
|
|
|
|
|
|
|
|
|
Parts and Consumables |
|
$ |
102,729 |
|
|
$ |
105,513 |
|
|
$ |
305,087 |
|
|
$ |
330,280 |
|
|
Capital |
|
51,881 |
|
|
67,991 |
|
|
161,510 |
|
|
191,705 |
|
|
|
|
$ |
154,610 |
|
|
$ |
173,504 |
|
|
$ |
466,597 |
|
|
$ |
521,985 |
|
|
Revenue by Geography (based on customer location): |
|
|
|
|
|
|
|
|
|
North America |
|
$ |
87,366 |
|
|
$ |
92,041 |
|
|
269,907 |
|
|
291,584 |
|
|
Europe |
|
38,951 |
|
|
49,146 |
|
|
112,881 |
|
|
131,944 |
|
|
Asia |
|
18,847 |
|
|
20,971 |
|
|
50,992 |
|
|
61,745 |
|
|
Rest of World |
|
9,446 |
|
|
11,346 |
|
|
32,817 |
|
|
36,712 |
|
|
|
|
$ |
154,610 |
|
|
$ |
173,504 |
|
|
$ |
466,597 |
|
|
$ |
521,985 |
|
See
Note
12,
Business Segment Information, for information on the disaggregation
of revenue by reportable operating segment.
The following table presents contract balances from contracts with
customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26,
2020 |
|
December 28,
2019 |
|
(In thousands) |
|
|
|
Accounts Receivable |
|
$ |
94,145 |
|
|
$ |
95,740 |
|
|
Contract Assets |
|
$ |
9,095 |
|
|
$ |
13,162 |
|
|
Contract Liabilities |
|
$ |
31,847 |
|
|
$ |
37,216 |
|
Contract assets represent unbilled revenue associated with revenue
recognized on contracts accounted for on an over time basis, which
will be billed in future periods based on the contract terms.
Contract liabilities consist of customer deposits, advanced
billings, and deferred revenue. Deferred revenue is included in
other current liabilities in the accompanying condensed
consolidated balance sheet. Contract liabilities will be recognized
as revenue in future periods once the revenue recognition criteria
are met. The majority of the contract liabilities relate to advance
payments on contracts accounted for at a point in time. These
advance payments will be recognized as revenue when the Company's
performance obligations have been satisfied, which typically occurs
when the product has shipped and control of the asset has
transferred to the customer. The Company recognized revenue of
$1,656,000 in the third quarter of 2020, $4,780,000 in the third
quarter of 2019, $28,522,000 in the first nine months of 2020, and
$28,302,000 in the first nine months of 2019 that was included in
the contract liabilities balance at the beginning of 2020 and 2019,
respectively. The majority of the Company's contracts for capital
equipment have an original expected duration of one year or less.
For contracts with an original expected duration of over one year,
the aggregate amount of the transaction price allocated to the
remaining partially unsatisfied performance obligations as of
September 26,
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2020 was $5,295,000. The Company will recognize revenue for these
performance obligations as they are satisfied, all of which is
expected to be recognized within the next twelve
months.
Customers in China will often settle their accounts receivable with
banker's acceptance drafts, in which case cash settlement will be
delayed until the drafts mature or are settled prior to maturity.
For customers outside of China, final payment for the majority of
the Company's products is received in the quarter following the
product shipment. Certain of the Company's contracts include a
longer period before final payment is due, which is typically
within one year of final shipment or transfer of control to the
customer.
The Company includes in revenue amounts invoiced for shipping and
handling with the corresponding costs reflected in cost of revenue.
Provisions for discounts, warranties, returns and other adjustments
are provided for in the period in which the related sale was
recorded. Sales taxes, value-added taxes, and certain excise taxes
collected from customers and remitted to governmental authorities
are accounted for on a net basis and therefore are excluded from
revenue.
Accounts Receivable and Allowance for Credit Losses
The Company's accounts receivable arise from sales on credit to
customers, are recorded at the invoiced amount, and do not bear
interest. The Company establishes an allowance for credit losses to
reduce accounts receivable to the net amount expected to be
collected. The Company exercises judgment in determining its
allowance for credit losses, which is based on its historical
collection and write-off experience, adjusted for current
macroeconomic trends and conditions, credit policies, specific
customer collection issues, and accounts receivable aging. The
Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and each
customer's current creditworthiness. The Company continuously
monitors collections and payments from its customers. Account
balances are charged off against the allowance when the Company
believes it is probable the receivable will not be recovered. In
some instances, the Company utilizes letters of credit to mitigate
its credit exposure.
The changes in the allowance for credit losses are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
(In thousands) |
|
September 26,
2020 |
|
September 28,
2019 |
|
Balance at Beginning of Period |
|
$ |
2,698 |
|
|
$ |
2,897 |
|
|
Provision charged to expense |
|
505 |
|
|
170 |
|
|
Accounts written off |
|
(133) |
|
|
(138) |
|
|
Currency translation |
|
43 |
|
|
(103) |
|
|
Balance at End of Period |
|
$ |
3,113 |
|
|
$ |
2,826 |
|
Banker's Acceptance Drafts included in Accounts
Receivable
The Company's Chinese subsidiaries may receive banker's acceptance
drafts from customers as payment for their trade accounts
receivable. The drafts are noninterest-bearing obligations of the
issuing bank and mature within six months of the origination date.
The Company's Chinese subsidiaries may sell the drafts at a
discount to a third-party financial institution or transfer the
drafts to vendors in settlement of current accounts payable prior
to the scheduled maturity date. These drafts, which totaled
$4,423,000 at September 26, 2020 and $5,230,000 at
December 28, 2019, are included in accounts receivable in the
accompanying condensed consolidated balance sheet until the
subsidiary sells the drafts to a bank and receives a discounted
amount, transfers the banker's acceptance drafts in settlement of
current accounts payable prior to maturity, or obtains cash payment
on the scheduled maturity date.
Recently Adopted Accounting Pronouncements
Financial Instruments - Credit Losses (Topic 326), Measurement of
Credit Losses on Financial Instruments.
In June 2016, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) No. 2016-13, which changes
the way entities recognize impairment of financial assets, such as
accounts receivable, by requiring immediate recognition of
estimated credit losses expected to occur over their remaining
lives. During 2018 and 2019, the FASB issued additional guidance
and clarification. The Company adopted this ASU using a modified
retrospective method at the beginning of fiscal 2020 and its
adoption did not have a material impact on the condensed
consolidated financial statements. See
Accounts Receivable and Allowance for Credit Losses
in this section for information on the Company's allowance for
credit losses.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Recent Accounting Pronouncements Not Yet Adopted
Reference Rate Reform (Topic 848), Facilitation of the Effects of
Reference Rate Reform on Financial Reporting.
In March 2020, the FASB issued ASU No. 2020-04, which provides
optional expedients and exceptions for applying GAAP to contracts,
hedging relationships, and other transactions affected by the
discontinuation of reference rates, such as the London Interbank
Offered Rate (LIBOR), if certain criteria are met. Generally,
contract modifications related to reference rate reform may be
considered an event that does not require remeasurement or
reassessment of a previous accounting determination at the
modification date. The guidance in this ASU is applicable to the
Company's existing contracts and hedging relationships that
reference LIBOR and may be adopted prospectively through December
31, 2022. The Company is currently evaluating the effects that the
adoption of this ASU will have on its consolidated financial
statements.
Income Taxes (Topic 740), Simplifying the Accounting for Income
Taxes.
In December 2019, the FASB issued ASU No. 2019-12, which simplifies
the accounting for income taxes by removing certain exceptions to
the general principles in Topic 740 and by clarifying and amending
existing guidance, including the recognition of franchise tax, the
treatment of a step up in the tax basis of goodwill, and the timing
for recognition of enacted changes in tax laws or rates in the
interim period annual effective tax rate computation. This new
guidance is effective in fiscal 2021, with early adoption
permitted. The Company is currently evaluating the effects that the
adoption of this ASU will have on its consolidated financial
statements.
2. Acquisitions
The Company’s acquisitions have been accounted for using the
purchase method of accounting and the results of the acquired
businesses are included in its condensed consolidated financial
statements from the date of acquisition. Historically, acquisitions
have been made at prices above the fair value of identifiable net
assets, resulting in goodwill. Acquisition costs are included
in
selling, general, and administrative (SG&A) expenses in the
accompanying condensed consolidated statement of income as
incurred. The Company recorded acquisition costs of $485,000 in the
first nine months of 2020 and $843,000 in the first nine months of
2019.
On June 1, 2020, the Company’s Industrial Processing segment
acquired Cogent Industrial Technologies Ltd. (Cogent) for
approximately $6,866,000, net of cash acquired. The Company funded
the acquisition through borrowings under its revolving credit
facility. Intangible assets acquired totaled $3,350,000 and are
primarily related to customer relationships. Cogent, based in
British Columbia, Canada, is an industrial automation and controls
solution provider that offers expertise in process technology
integration, industrial automation and controls, industrial safety,
project management, and operational performance management
systems.
In the second quarter of 2020, the Company’s Industrial Processing
segment also acquired certain intellectual property from a company
in Austria for $416,000, of which $229,000 was paid in the second
quarter of 2020. The Company expects to pay the remaining amount no
later than the first quarter of 2022.
3. Restructuring Costs
The Company recorded restructuring costs of $470,000, consisting of
$276,000 in its Flow Control segment and $194,000 in its Industrial
Processing segment, in the third quarter of 2020 for severance
associated with headcount reductions of four employees within its
Flow Control segment and 20 employees in its Industrial Processing
segment. The Company took these additional cost-containment actions
to reduce future payroll-related overhead and operating costs in
response to the slowdown in the global economy, largely driven by
the COVID-19 pandemic.
The Company recorded total restructuring costs of $926,000,
consisting of $732,000 in its Flow Control segment and $194,000 in
its Industrial Processing segment, in the first nine months of 2020
for severance associated with headcount reductions of 34 employees
within its Flow Control segment and 20 employees in its Industrial
Processing segment. The Company also reduced its workforce by 21
employees within its Industrial Processing segment with no
associated severance costs.
A summary of the changes in accrued restructuring costs related to
the 2020 restructuring plan included in other accrued expenses in
the accompanying condensed consolidated balance sheet are as
follows:
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Severance |
|
Provision |
|
$ |
926 |
|
|
Usage |
|
(430) |
|
|
Currency translation |
|
(11) |
|
|
Balance at September 26, 2020 |
|
$ |
485 |
|
The Company expects to pay the remaining accrued restructuring
costs primarily in the fourth quarter of 2020.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. Earnings per Share
Basic and diluted earnings per share (EPS) are calculated as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
|
September 26,
2020 |
|
September 28,
2019 |
|
September 26,
2020 |
|
September 28,
2019 |
|
(In thousands, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to Kadant |
|
$ |
14,851 |
|
|
$ |
16,115 |
|
|
$ |
38,989 |
|
|
$ |
43,319 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic Weighted Average Shares |
|
11,504 |
|
|
11,267 |
|
|
11,472 |
|
|
11,198 |
|
|
Effect of Stock Options, Restricted Stock Units and Employee Stock
Purchase Plan Shares
|
|
85 |
|
|
202 |
|
|
78 |
|
|
236 |
|
|
Diluted Weighted Average Shares |
|
11,589 |
|
|
11,469 |
|
|
11,550 |
|
|
11,434 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share |
|
$ |
1.29 |
|
|
$ |
1.43 |
|
|
$ |
3.40 |
|
|
$ |
3.87 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share |
|
$ |
1.28 |
|
|
$ |
1.41 |
|
|
$ |
3.38 |
|
|
$ |
3.79 |
|
The effect of outstanding and unvested restricted stock units
(RSUs) of the Company's common stock totaling 11,000 shares in the
third quarter of 2020, 8,000 shares in the third quarter of 2019,
30,000 shares in the first nine months of 2020, and 32,000 shares
in the first nine months of 2019 was not included in the
computation of diluted EPS for the respective periods as the effect
would have been antidilutive or, for unvested performance-based
RSUs, the performance conditions had not been met as of the end of
the reporting periods.
5. Provision for Income Taxes
The provision for income taxes was $13,738,000 in the first nine
months of 2020 and $12,310,000 in the first nine months of 2019.
The effective tax rate of 26% in the first nine months of 2020 was
higher than the Company's statutory rate of 21% primarily due to
nondeductible expenses, the distribution of worldwide earnings, and
state taxes. This incremental tax expense was offset in part by a
decrease in tax related to the net excess income tax benefits from
stock-based compensation arrangements. The effective tax rate of
22% in the first nine months of 2019 was higher than the Company's
statutory rate of 21% primarily due to the distribution of the
Company’s worldwide earnings, nondeductible expenses, tax expense
associated with the Global Intangible Low-Taxed Income (GILTI)
provisions of the Tax Cuts and Jobs Act of 2017, state taxes, and
the cost of repatriating the earnings of certain foreign
subsidiaries. This incremental tax expense was offset in part by a
decrease in tax related to the net excess income tax benefits from
stock-based compensation arrangements, a net tax benefit associated
with foreign exchange losses and tax costs recognized upon the
Company’s repatriation of certain previously taxed foreign
earnings, and the reversal of tax reserves associated with
uncertain tax positions.
6. Long-Term Obligations
Long-term obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26,
2020 |
|
December 28,
2019 |
|
(In thousands) |
|
|
|
Revolving Credit Facility, due 2023 |
|
$ |
245,010 |
|
|
$ |
265,419 |
|
|
Commercial Real Estate Loan |
|
— |
|
|
19,425 |
|
|
Senior Promissory Notes, due 2023 to 2028 |
|
10,000 |
|
|
10,000 |
|
|
Finance Leases, due 2020 to 2025 |
|
1,775 |
|
|
2,308 |
|
|
Other Borrowings, due 2020 to 2023 |
|
3,802 |
|
|
4,000 |
|
|
Unamortized Debt Issuance Costs |
|
— |
|
|
(127) |
|
|
Total |
|
260,587 |
|
|
301,025 |
|
|
Less: Current Maturities of Long-Term Obligations |
|
(1,538) |
|
|
(2,851) |
|
|
Long-Term Obligations |
|
$ |
259,049 |
|
|
$ |
298,174 |
|
See
Note
10,
Derivatives, for the fair value information related to the
Company's long-term obligations.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Revolving Credit Facility
The Company entered into a five-year, unsecured multi-currency
revolving credit facility, dated as of March 1, 2017 (as amended
and restated to date, the Credit Agreement). Pursuant to the Credit
Agreement, the Company has a borrowing capacity of $400,000,000,
with an uncommitted, unsecured incremental borrowing facility of
$150,000,000, and a maturity date of December 14, 2023. Interest on
borrowings outstanding accrues and is payable in arrears calculated
at one of the following rates selected by the Company: (i) the Base
Rate, plus an applicable margin of 0% to 1.25%, or (ii) LIBOR (with
a zero percent floor), as defined, plus an applicable margin of 1%
to 2.25%. The Base Rate is calculated as the highest of (a) the
federal funds rate plus 0.50%, (b) the prime rate as published by
Citizens Bank, N.A. (Citizens) and (c) thirty-day U.S. dollar LIBOR
(USD LIBOR), as defined, plus 0.50%. The applicable margin is
determined based upon the ratio of the Company's total debt, net of
unrestricted cash up to $30,000,000 and certain debt obligations,
to earnings before interest, taxes, depreciation, and amortization
as defined in the Credit Agreement.
Obligations under the Credit Agreement may be accelerated upon the
occurrence of an event of default, which includes customary events
of default under such financing arrangements. In addition, the
Credit Agreement contains negative covenants applicable to the
Company and its subsidiaries, including financial covenants
requiring the Company to maintain a maximum consolidated leverage
ratio of 3.75 to 1.00, or for the quarter during which a material
acquisition occurs and for the three fiscal quarters thereafter,
4.00 to 1.00, and limitations on making certain restricted payments
(including dividends and stock repurchases).
Loans under the Credit Agreement are guaranteed by certain domestic
subsidiaries of the Company. In addition, one of the Company’s
foreign subsidiaries entered into a separate guarantee agreement
limited to certain obligations of two foreign subsidiary borrowers.
As of September 26, 2020, the outstanding balance under the
Credit Agreement was $245,010,000, and included $50,656,000 of
euro-denominated borrowings and $14,354,000 of Canadian
dollar-denominated borrowings. As of September 26, 2020, the
Company had $154,790,000 of borrowing capacity available under the
Credit Agreement, which was calculated by translating its
foreign-denominated borrowings using borrowing date foreign
exchange rates.
See
Note
10,
Derivatives, under the heading
Interest Rate Swap Agreements,
for information relating to the swap agreements used to hedge the
Company’s exposure to movements in the three-month USD LIBOR on its
U.S. dollar-denominated debt borrowed under the Credit
Agreement.
The weighted average interest rate for the outstanding balance
under the Credit Agreement was 1.82% as of September 26,
2020.
Commercial Real Estate Loan
In 2018, the Company and certain domestic subsidiaries borrowed
$21,000,000 under a ten-year promissory note (Real Estate Loan),
which was repayable in quarterly principal installments of $262,500
with the remaining principal balance of $10,500,000 due July 6,
2028. Interest accrued and was payable quarterly in arrears at a
fixed rate of 4.45% per annum.
In July 2020, the Company prepaid the outstanding principal balance
on the Real Estate Loan of $18,900,000, together with accrued
interest and a prepayment fee of 1.00% of the outstanding principal
balance, resulting in a loss on the extinguishment of debt of
$189,000, which is included in selling, general, and administrative
expenses in the accompanying condensed consolidated statement of
income. To prepay the Real Estate Loan, the Company used
$19,000,000 of borrowings available under the Credit
Agreement.
Senior Promissory Notes
In 2018, the Company entered into an uncommitted, unsecured
Multi-Currency Note Purchase and Private Shelf Agreement (Note
Purchase Agreement). Simultaneous with the execution of the Note
Purchase Agreement, the Company issued senior promissory notes
(Initial Notes) in an aggregate principal amount of $10,000,000,
with a per annum interest rate of 4.90% payable semiannually, and a
maturity date of December 14, 2028. The Company is required to
prepay a portion of the principal of the Initial Notes beginning on
December 14, 2023 and each year thereafter, and may optionally
prepay the principal on the Initial Notes, together with any
prepayment premium, at any time (in a minimum amount of $1,000,000,
or the foreign currency equivalent thereof, if applicable) in
accordance with the Note Purchase Agreement. The obligations of the
Initial Notes may be accelerated upon an event of default as
defined in the Note Purchase Agreement, which includes customary
events of default under such financing arrangements.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In accordance with the Note Purchase Agreement, the Company may
also issue additional senior promissory notes (together with the
Initial Notes, the Senior Promissory Notes) up to an additional
$115,000,000 until the earlier of December 14, 2021 or the
thirtieth day after written notice to terminate the issuance and
sale of additional notes pursuant to the Note Purchase Agreement.
The Senior Promissory Notes are
pari passu
with the Company’s indebtedness under the Credit Agreement, and any
other senior debt, subject to certain specified exceptions, and
participate in a sharing agreement with respect to the obligations
of the Company and its subsidiaries under the Credit Agreement. The
Senior Promissory Notes are guaranteed by certain of the Company’s
domestic subsidiaries.
Debt Compliance
As of September 26, 2020, the Company was in compliance with
the covenants related to its debt obligations.
Finance Leases
The Company's finance leases primarily relate to contracts for its
vehicles.
Other Borrowings
Other borrowings include a sale-leaseback financing arrangement for
a manufacturing facility in Germany. Under this arrangement, the
quarterly lease payment includes principal, interest, and a payment
to the landlord toward a loan receivable. The interest rate on the
outstanding obligation is 1.79%. The secured loan receivable, which
is included in other assets in the accompanying condensed
consolidated balance sheet, was $1,127,000 at September 26,
2020. The lease arrangement provides for a fixed price purchase
option, net of the projected loan receivable, of $1,549,000 at the
end of the lease term in 2022. If the Company does not exercise the
purchase option for the facility, it will receive cash from the
landlord to settle the loan receivable. As of September 26,
2020, $3,704,000 was outstanding under this
obligation.
7. Stock-Based Compensation
The Company recognized stock-based compensation expense of
$1,610,000 in the third quarter of 2020, $1,658,000 in the third
quarter of 2019, $5,126,000 in the first nine months of 2020, and
$5,125,000 in the first nine months of 2019 within SG&A
expenses in the accompanying condensed consolidated statement of
income. The Company recognizes compensation expense for all
stock-based awards granted to employees and directors based on the
grant date estimate of fair value for those awards. The fair value
of RSUs is based on the grant date price of the Company's common
stock, reduced by the present value of estimated dividends foregone
during the requisite service period. For time-based RSUs,
compensation expense is recognized ratably over the requisite
service period for the entire award based on the grant date fair
value, and net of actual forfeitures recorded when they occur. For
performance-based RSUs, compensation expense is recognized ratably
over the requisite service period for each separately vesting
portion of the award based on the grant date fair value, net of
actual forfeitures recorded when they occur, and remeasured each
reporting period until the total number of RSUs to be issued is
known. Unrecognized compensation expense related to stock-based
compensation totaled approximately $6,913,000 at September 26,
2020 and will be recognized over a weighted average period of 1.7
years.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
8. Retirement Benefit Plans
The Company includes the service cost component of net periodic
benefit cost in operating income and all other components are
included in other expense, net in the accompanying condensed
consolidated statement of income.
In 2018, the Company's board of directors and its compensation
committee approved amendments to freeze and terminate its U.S.
pension plan (Retirement Plan) and its restoration plan
(Restoration Plan). In the fourth quarter of 2019, the Company
settled its Retirement Plan obligation. In the first quarter of
2020, the Company settled its Restoration Plan obligation of
$2,427,000 by paying a lump sum to its plan participants. No
benefit costs were incurred related to these plans in
2020.
The components of net periodic benefit cost are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 26, 2020 |
|
Three Months Ended
September 28, 2019 |
|
(In thousands, except percentages) |
|
Non-U.S. Pension |
|
Other Post-Retirement |
|
U.S. Pension |
|
Non-U.S. Pension |
|
Other Post-Retirement |
|
Service Cost |
|
$ |
45 |
|
|
$ |
2 |
|
|
$ |
— |
|
|
$ |
43 |
|
|
$ |
1 |
|
|
Interest Cost |
|
22 |
|
|
9 |
|
|
283 |
|
|
27 |
|
|
37 |
|
|
Expected Return on Plan Assets |
|
(14) |
|
|
(1) |
|
|
(248) |
|
|
(16) |
|
|
(1) |
|
|
Recognized Net Actuarial Loss |
|
10 |
|
|
4 |
|
|
8 |
|
|
5 |
|
|
3 |
|
|
Amortization of Prior Service Cost |
|
2 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
$ |
65 |
|
|
$ |
14 |
|
|
$ |
43 |
|
|
$ |
59 |
|
|
$ |
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average assumptions used to determine net periodic
benefit cost are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate |
|
2.05 |
% |
|
3.80 |
% |
|
4.10 |
% |
|
2.82 |
% |
|
4.44 |
% |
|
Expected Long-Term Return on Plan Assets |
|
7.21 |
% |
|
7.21 |
% |
|
4.10 |
% |
|
9.22 |
% |
|
9.22 |
% |
|
Rate of Compensation Increase |
|
3.14 |
% |
|
5.57 |
% |
|
— |
% |
|
2.99 |
% |
|
5.57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 26, 2020 |
|
Nine Months Ended
September 28, 2019 |
|
(In thousands, except percentages) |
|
Non-U.S. Pension |
|
Other Post-Retirement |
|
U.S. Pension |
|
Non-U.S. Pension |
|
Other Post-Retirement |
|
Service Cost |
|
$ |
131 |
|
|
$ |
5 |
|
|
$ |
— |
|
|
$ |
129 |
|
|
$ |
3 |
|
|
Interest Cost |
|
66 |
|
|
29 |
|
|
850 |
|
|
84 |
|
|
112 |
|
|
Expected Return on Plan Assets |
|
(45) |
|
|
(3) |
|
|
(745) |
|
|
(50) |
|
|
(3) |
|
|
Recognized Net Actuarial Loss |
|
31 |
|
|
12 |
|
|
24 |
|
|
15 |
|
|
9 |
|
|
Amortization of Prior Service Cost |
|
5 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
$ |
188 |
|
|
$ |
43 |
|
|
$ |
129 |
|
|
$ |
178 |
|
|
$ |
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average assumptions used to determine net periodic
benefit cost are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate |
|
2.12 |
% |
|
3.83 |
% |
|
4.10 |
% |
|
2.81 |
% |
|
4.44 |
% |
|
Expected Long-Term Return on Plan Assets |
|
7.21 |
% |
|
7.21 |
% |
|
4.10 |
% |
|
9.22 |
% |
|
9.22 |
% |
|
Rate of Compensation Increase |
|
3.17 |
% |
|
5.57 |
% |
|
— |
% |
|
2.99 |
% |
|
5.57 |
% |
Other than the payment made for the settlement of the Restoration
Plan obligation in January 2020, the Company does not plan to make
any material cash contributions to its other pension and
post-retirement plans in 2020.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
9. Accumulated Other Comprehensive
Items
Comprehensive income combines net income and other comprehensive
items, which represent certain amounts that are reported as
components of stockholders' equity in the accompanying condensed
consolidated balance sheet.
Changes in each component of accumulated other comprehensive items
(AOCI), net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Foreign
Currency
Translation
Adjustment |
|
Pension and Other Post-Retirement Benefit Liability
Adjustments |
|
Deferred Loss on Cash Flow Hedges |
|
Total |
|
Balance at December 28, 2019 |
|
$ |
(36,145) |
|
|
$ |
(831) |
|
|
$ |
(644) |
|
|
$ |
(37,620) |
|
|
Other comprehensive income (loss) before
reclassifications |
|
748 |
|
|
(1) |
|
|
(420) |
|
|
327 |
|
|
Reclassifications from AOCI |
|
— |
|
|
(84) |
|
|
145 |
|
|
61 |
|
|
Net current period other comprehensive items
|
|
748 |
|
|
(85) |
|
|
(275) |
|
|
388 |
|
|
Balance at September 26, 2020 |
|
$ |
(35,397) |
|
|
$ |
(916) |
|
|
$ |
(919) |
|
|
$ |
(37,232) |
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from AOCI are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
|
(In thousands) |
|
September 26,
2020 |
|
September 28,
2019 |
|
September 26,
2020 |
|
September 28,
2019 |
|
Statement of Income
Line Item |
|
Retirement Benefit Plans (a) |
|
|
|
|
|
|
|
|
|
|
|
Recognized net actuarial loss
|
|
$ |
(14) |
|
|
$ |
(16) |
|
|
$ |
(43) |
|
|
$ |
(48) |
|
|
Other expense, net |
|
Amortization of prior service cost
|
|
(2) |
|
|
— |
|
|
(5) |
|
|
— |
|
|
Other expense, net |
|
Total expense before income taxes
|
|
(16) |
|
|
(16) |
|
|
(48) |
|
|
(48) |
|
|
|
|
Income tax benefit |
|
4 |
|
|
4 |
|
|
132 |
|
|
12 |
|
|
Provision for income taxes |
|
|
|
(12) |
|
|
(12) |
|
|
84 |
|
|
(36) |
|
|
|
|
Cash Flow Hedges (b) |
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
(109) |
|
|
(10) |
|
|
(215) |
|
|
17 |
|
|
Interest expense |
|
Forward currency-exchange contracts
|
|
47 |
|
|
— |
|
|
24 |
|
|
(129) |
|
|
Cost of revenue |
|
Total expense before income taxes
|
|
(62) |
|
|
(10) |
|
|
(191) |
|
|
(112) |
|
|
|
|
Income tax benefit
|
|
15 |
|
|
2 |
|
|
46 |
|
|
35 |
|
|
Provision for income taxes |
|
|
|
(47) |
|
|
(8) |
|
|
(145) |
|
|
(77) |
|
|
|
|
Total Reclassifications |
|
$ |
(59) |
|
|
$ |
(20) |
|
|
$ |
(61) |
|
|
$ |
(113) |
|
|
|
(a)Included
in the computation of net periodic benefit cost. See
Note
8,
Retirement Benefit Plans, for additional information.
(b)See
Note
10,
Derivatives, for additional information.
10. Derivatives
Interest Rate Swap Agreements
The Company has entered into interest rate swap agreements to hedge
its exposure to movements in USD LIBOR on its U.S.
dollar-denominated debt. In 2018, the Company entered into an
interest rate swap agreement (2018 Swap Agreement) with Citizens,
which has a $15,000,000 notional value and expires on June 30,
2023. On a quarterly basis, the Company receives three-month USD
LIBOR, which is subject to a zero percent floor, and pays a fixed
rate of interest of 3.15% plus an applicable margin as defined in
the Credit Agreement. In 2015, the Company entered into an interest
rate swap agreement (2015 Swap Agreement) with Citizens which had a
$10,000,000 notional value and expired on March 27, 2020. Under the
2015 Swap
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Agreement, the Company received three-month USD LIBOR and paid a
fixed rate of interest of 1.5% plus an applicable margin as defined
in the Credit Agreement.
The interest rate swap agreements have been designated as cash flow
hedges and are structured to be 100% effective. Unrealized gains
and losses related to the fair values of the swap agreements are
recorded to AOCI, net of tax. In the event of early termination of
the 2018 Swap Agreement, the Company will receive from or pay to
the counterparty the fair value of the interest rate swap
agreement, and the unrealized gain or loss outstanding will be
recognized in earnings.
The counterparty to the 2018 Swap Agreement could demand an early
termination of that agreement if the Company were to be in default
under the Credit Agreement, or any agreement that amends or
replaces the Credit Agreement in which the counterparty is a
member, and if it were to be unable to cure the default. See
Note
6,
Long-Term Obligations, for further details.
Forward Currency-Exchange Contracts
The Company uses forward currency-exchange contracts that have
maturities of twelve months or less to hedge exposures resulting
from fluctuations in currency exchange rates. Such exposures result
from assets and liabilities that are denominated in currencies
other than the functional currencies.
Forward currency-exchange contracts that hedge forecasted accounts
receivable or accounts payable are designated as cash flow hedges
and unrecognized gains and losses are recorded to AOCI, net of tax.
Deferred gains and losses are recognized in the statement of income
in the period in which the underlying transaction occurs. The fair
values of forward currency-exchange contracts that are designated
as fair value hedges and forward currency-exchange contracts that
are not designated as hedges are recognized currently in
earnings.
The Company recognized within SG&A expenses in the accompanying
condensed consolidated statement of income gains of $27,000 in the
third quarter of 2020, losses of $14,000 in the third quarter of
2019, losses of $1,000 in the first nine months of 2020, and losses
of $46,000 in the first nine months of 2019 associated with forward
currency-exchange contracts that were not designated as
hedges.
The following table summarizes the fair value of derivative
instruments in the accompanying condensed consolidated balance
sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26, 2020 |
|
December 28, 2019 |
|
|
Balance Sheet Location |
|
Asset (Liability) (a) |
|
Notional Amount (b) |
|
Asset (Liability) (a) |
|
Notional Amount |
|
(In thousands) |
|
|
|
|
|
|
Derivatives Designated as Hedging Instruments: |
|
|
|
|
|
|
|
|
|
Derivatives in an Asset Position: |
|
|
|
|
|
|
|
|
|
|
|
Forward currency-exchange contract |
|
Other Current Assets |
|
$ |
4 |
|
|
$ |
1,311 |
|
|
$ |
— |
|
|
$ |
— |
|
|
2015 Swap Agreement |
|
Other Current Assets |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
11 |
|
|
$ |
10,000 |
|
|
Derivatives in a Liability Position: |
|
|
|
|
|
|
|
|
|
|
|
Forward currency-exchange contracts |
|
Other Current Liabilities |
|
$ |
(14) |
|
|
$ |
842 |
|
|
$ |
(75) |
|
|
$ |
4,825 |
|
|
2018 Swap Agreement |
|
Other Long-Term Liabilities |
|
$ |
(1,202) |
|
|
$ |
15,000 |
|
|
$ |
(770) |
|
|
$ |
15,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instruments: |
|
|
|
|
|
|
|
|
|
Derivatives in an Asset Position: |
|
|
|
|
|
|
|
|
|
|
|
Forward currency-exchange contracts |
|
Other Current Assets |
|
$ |
25 |
|
|
$ |
713 |
|
|
$ |
3 |
|
|
$ |
387 |
|
|
Derivatives in a Liability Position: |
|
|
|
|
|
|
|
|
|
|
|
Forward currency-exchange contracts |
|
Other Current Liabilities |
|
$ |
(5) |
|
|
$ |
686 |
|
|
$ |
(43) |
|
|
$ |
2,545 |
|
(a) See
Note
11,
Fair Value Measurements and Fair Value of Financial Instruments,
for the fair value measurements relating to these financial
instruments.
(b) The total 2020 notional amounts are indicative of the level of
the Company's recurring derivative activity.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes the activity in AOCI associated with
derivative instruments designated as cash flow hedges as of and for
the nine months ended September 26, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Interest Rate Swap
Agreements |
|
Forward Currency-
Exchange
Contracts |
|
Total |
|
Unrealized Loss, Net of Tax, at December 28, 2019 |
|
$ |
(589) |
|
|
$ |
(55) |
|
|
$ |
(644) |
|
|
Loss (gain) reclassified to earnings (a) |
|
163 |
|
|
(18) |
|
|
145 |
|
|
(Loss) gain recognized in AOCI |
|
(487) |
|
|
67 |
|
|
(420) |
|
|
Unrealized Loss, Net of Tax, at September 26, 2020 |
|
$ |
(913) |
|
|
$ |
(6) |
|
|
$ |
(919) |
|
(a) See Note
9,
Accumulated Other Comprehensive Items, for the income statement
classification.
As of September 26, 2020, the Company expects to reclassify
losses of $351,000 from AOCI to earnings over the next twelve
months based on the estimated cash flows of the 2018 Swap Agreement
and the maturity dates of the forward currency-exchange
contracts.
11. Fair Value Measurements and Fair Value
of Financial Instruments
Fair value measurement is defined as the price that would be
received to sell an asset or paid to transfer a liability in the
principal or most advantageous market for the asset or liability in
an orderly transaction between market participants at the
measurement date. A fair value hierarchy is established, which
prioritizes the inputs used in measuring fair value into three
broad levels as follows:
•Level
1—Quoted prices in active markets for identical assets or
liabilities.
•Level
2—Inputs, other than quoted prices in active markets, that are
observable either directly or indirectly.
•Level
3—Unobservable inputs based on the Company's own
assumptions.
The following table presents the fair value hierarchy for those
assets and liabilities measured at fair value on a recurring
basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of September 26, 2020 |
|
(In thousands) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
Money market funds and time deposits |
|
$ |
10,561 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
10,561 |
|
|
|
|
|
|
|
|
|
|
|
Banker's acceptance drafts (a) |
|
$ |
— |
|
|
$ |
4,423 |
|
|
$ |
— |
|
|
$ |
4,423 |
|
|
Forward currency-exchange contracts |
|
$ |
— |
|
|
$ |
29 |
|
|
$ |
— |
|
|
$ |
29 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
2018 Swap Agreement |
|
$ |
— |
|
|
$ |
1,202 |
|
|
$ |
— |
|
|
$ |
1,202 |
|
|
Forward currency-exchange contracts |
|
$ |
— |
|
|
$ |
19 |
|
|
$ |
— |
|
|
$ |
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of December 28, 2019 |
|
(In thousands) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
Money market funds and time deposits |
|
$ |
9,920 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
9,920 |
|
|
Banker's acceptance drafts (a) |
|
$ |
— |
|
|
$ |
5,230 |
|
|
$ |
— |
|
|
$ |
5,230 |
|
|
2015 Swap Agreement |
|
$ |
— |
|
|
$ |
11 |
|
|
$ |
— |
|
|
$ |
11 |
|
|
Forward currency-exchange contracts |
|
$ |
— |
|
|
$ |
3 |
|
|
$ |
— |
|
|
$ |
3 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
2018 Swap Agreement |
|
$ |
— |
|
|
$ |
770 |
|
|
$ |
— |
|
|
$ |
770 |
|
|
Forward currency-exchange contracts |
|
$ |
— |
|
|
$ |
118 |
|
|
$ |
— |
|
|
$ |
118 |
|
(a)Included
in accounts receivable in the accompanying condensed consolidated
balance sheet.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company uses the market approach technique to value its
financial assets and liabilities, and there were no changes in
valuation techniques during the first nine months of 2020. Banker's
acceptance drafts are carried at face value which approximates
their fair value due to the short-term nature of the negotiable
instrument. The fair values of forward currency-exchange contracts
are based on quoted forward foreign exchange rates at the reporting
date. The fair values of interest rate swap agreements are based on
LIBOR yield curves at the reporting date. The forward
currency-exchange contracts and interest rate swap agreements are
hedges of either recorded assets or liabilities or anticipated
transactions and represent the estimated amount the Company would
receive or pay upon liquidation of the contracts. Changes in values
of the underlying hedged assets and liabilities or anticipated
transactions are not reflected in the table
above.
The carrying value and fair value of debt obligations, excluding
lease obligations and other borrowings, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26, 2020 |
|
December 28, 2019 |
|
|
|
Carrying Value |
|
Fair Value |
|
Carrying Value |
|
Fair Value |
|
(In thousands) |
|
|
|
|
|
Debt Obligations: |
|
|
|
|
|
|
|
|
|
Revolving credit facility |
|
$ |
245,010 |
|
|
$ |
245,010 |
|
|
$ |
265,419 |
|
|
$ |
265,419 |
|
|
Commercial real estate loan |
|
— |
|
|
— |
|
|
19,425 |
|
|
20,541 |
|
|
Senior promissory notes |
|
10,000 |
|
|
10,916 |
|
|
10,000 |
|
|
10,803 |
|
|
|
|
$ |
255,010 |
|
|
$ |
255,926 |
|
|
$ |
294,844 |
|
|
$ |
296,763 |
|
The carrying value of the Company's revolving credit facility
approximates the fair value as the obligation bears variable rates
of interest, which adjust frequently, based on prevailing market
rates. The fair values of the commercial real estate loan, which
was repaid in July 2020, and senior promissory notes are primarily
calculated based on quoted market rates plus an applicable margin
available to the Company at the respective period ends, which
represent Level 2 measurements.
12. Business Segment
Information
The Company previously reported its financial results by combining
its operating entities into three reportable operating segments:
Papermaking Systems, Wood Processing Systems, and Material Handling
Systems, and a separate product line, Fiber-based Products. During
the first quarter of 2020, the Company changed its reportable
operating segments to better align with its strategic initiatives
to grow both organically and through acquisitions. Such growth and
diversification resulted in a change in the internal organization
of the Company and how its chief operating decision maker makes
operating decisions, assesses the performance of the business, and
allocates resources. Accordingly, the Company's financial results
are reported in three new reportable operating segments: Flow
Control, Industrial Processing, and Material Handling. The Flow
Control segment consists of the Company’s fluid-handling and
doctoring, cleaning, & filtration product lines; the Industrial
Processing segment consists of the Company’s wood processing and
stock-preparation product lines (excluding baling products); and
the Material Handling segment consists of the Company’s conveying
and screening, baling, and fiber-based product lines. Financial
information for 2019 has been recast to conform to the new segment
presentation. A description of each segment follows.
•Flow
Control
– Custom-engineered products, systems, and technologies that
control the flow of fluids used in industrial and commercial
applications to keep critical processes running efficiently in the
packaging, tissue, food, metals, and other industrial
sectors. The Company's products include rotary sealing
devices, steam systems, expansion joints, doctor systems, roll and
fabric cleaning devices, and filtration and fiber recovery
systems.
•Industrial
Processing
– Equipment, machinery, and technologies used to recycle paper and
paperboard and process timber for use in the packaging, tissue,
wood products and alternative fuel industries, among
others. The Company's primary products include
stock-preparation systems and recycling equipment, chemical pulping
equipment, debarkers, stranders, chippers, and logging machinery.
In addition, the Company provides industrial automation and
digitization solutions to process industries.
•Material
Handling
– Products and engineered systems used to handle bulk and discrete
materials for secondary processing or transport in the aggregates,
mining, food, and waste management industries, among others. The
Company's primary products include conveying and vibratory
equipment and balers. In addition, the Company manufactures and
sells biodegradable, absorbent granules used as carriers in
agricultural applications and for oil and grease
absorption.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table presents financial information for the
Company's reportable operating segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 26, |
|
September 28, |
|
September 26, |
|
September 28, |
|
(In thousands) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
Revenue |
|
|
|
|
|
|
|
|
|
Flow Control |
|
$ |
56,815 |
|
|
$ |
62,375 |
|
|
$ |
165,329 |
|
|
$ |
188,792 |
|
|
Industrial Processing |
|
62,086 |
|
|
74,229 |
|
|
192,468 |
|
|
222,899 |
|
|
Material Handling |
|
35,709 |
|
|
36,900 |
|
|
108,800 |
|
|
110,294 |
|
|
|
|
$ |
154,610 |
|
|
$ |
173,504 |
|
|
$ |
466,597 |
|
|
$ |
521,985 |
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
Flow Control (a) |
|
$ |
13,770 |
|
|
$ |
15,103 |
|
|
$ |
37,360 |
|
|
$ |
43,220 |
|
|
Industrial Processing (b) |
|
12,072 |
|
|
13,107 |
|
|
32,147 |
|
|
38,830 |
|
|
Material Handling (c) |
|
2,614 |
|
|
3,525 |
|
|
10,341 |
|
|
5,515 |
|
|
Corporate (d) |
|
(7,121) |
|
|
(7,182) |
|
|
(20,737) |
|
|
(21,295) |
|
|
Total operating income |
|
21,335 |
|
|
24,553 |
|
|
59,111 |
|
|
66,270 |
|
|
Interest expense, net (e) |
|
(1,618) |
|
|
(3,023) |
|
|
(5,920) |
|
|
(9,985) |
|
|
Other expense, net (e) |
|
(32) |
|
|
(98) |
|
|
(95) |
|
|
(296) |
|
|
|
|
$ |
19,685 |
|
|
$ |
21,432 |
|
|
$ |
53,096 |
|
|
$ |
55,989 |
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures |
|
|
|
|
|
|
|
|
|
Flow Control |
|
$ |
509 |
|
|
$ |
636 |
|
|
$ |
1,667 |
|
|
$ |
1,814 |
|
|
Industrial Processing |
|
785 |
|
|
1,053 |
|
|
2,460 |
|
|
3,223 |
|
|
Material Handling |
|
486 |
|
|
397 |
|
|
1,167 |
|
|
1,145 |
|
|
Corporate |
|
42 |
|
|
7 |
|
|
125 |
|
|
54 |
|
|
|
|
$ |
1,822 |
|
|
$ |
2,093 |
|
|
$ |
5,419 |
|
|
$ |
6,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Includes restructuring costs of $265,000 in the three-month
period ended September 26, 2020 and $721,000 in the nine-month
period ended September 26, 2020.
(b) Includes restructuring costs of $205,000 in the three- and
nine-month periods ended September 26, 2020. Includes
acquisition-related expenses of $161,000 in the three-month period
ended September 26, 2020 and $596,000 in the nine-month period
ended September 26, 2020. Acquisition-related expenses include
amortization expense associated with backlog and acquisition
costs.
(c) Includes acquisition-related expenses of $248,000 in the
three-month period ended September 26, 2020 and $256,000 in
the nine-month period ended September 26, 2020. Includes
acquisition-related expenses of $21,000 in the three-month period
ended September 28, 2019 and $5,695,000 in the nine-month
period ended September 28, 2019. Acquisition-related expenses
include amortization expense associated with acquired profit in
inventory and backlog, and acquisition costs.
(d) Corporate primarily includes general and administrative
expenses.
(e) The Company does not allocate interest and other expense, net
to its segments.
13. Commitments and
Contingencies
Right of Recourse
In the ordinary course of business, the Company's subsidiaries in
China may receive banker's acceptance drafts from customers as
payment for their trade accounts receivable. The drafts are
noninterest-bearing obligations of the issuing bank and mature
within six months of the origination date. The Company's
subsidiaries in China may use these banker's acceptance drafts
prior to the scheduled maturity date to settle outstanding accounts
payable with vendors. Banker's acceptance drafts transferred to
vendors are subject to customary right of recourse provisions prior
to their scheduled maturity dates. The Company had $7,702,000 at
September 26, 2020 and $7,003,000 at December 28, 2019 of
banker's acceptance drafts subject to recourse, which were
transferred to vendors and had not reached their scheduled maturity
dates. Historically, the banker's acceptance drafts have settled
upon maturity without any claim of recourse against the
Company.
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Litigation
From time to time, the Company is subject to various claims and
legal proceedings covering a range of matters that arise in the
ordinary course of business. Such litigation may include, but is
not limited to, claims and counterclaims by and against the Company
for breach of contract or warranty, canceled contracts, product
liability, or bankruptcy-related claims. For legal proceedings in
which a loss is probable and estimable, the Company accrues a loss
based on the low end of the range of estimated loss when there is
no better estimate within the range. If the Company were found to
be liable for any of the claims or counterclaims against it, the
Company would incur a charge against earnings for amounts in excess
of legal accruals.
Item 2 – Management's Discussion and Analysis of Financial
Condition and Results of Operations
When we use the terms “we,” “us,” “our,” and the “Company,” we mean
Kadant Inc., a Delaware corporation, and its consolidated
subsidiaries, taken as a whole, unless the context otherwise
indicates.
This Quarterly Report on Form 10-Q and the documents we incorporate
by reference in this report include forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (Exchange Act), and Section 27A of the Securities
Act of 1933, as amended. These forward-looking statements are not
statements of historical fact and may include statements regarding
possible or assumed future results of operations. Forward-looking
statements are subject to risks and uncertainties and are based on
the beliefs and assumptions of our management, using information
currently available to our management. When we use words such as
"believes," "expects," "anticipates," "intends," "plans,"
"estimates," "seeks," "should," "likely," "will," "would," "may,"
"continue," "could," or similar expressions, we are making
forward-looking statements.
Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties, and assumptions. Our future results
of operations may differ materially from those expressed in the
forward-looking statements. Many of the important factors that will
determine these results and values are beyond our ability to
control or predict. You should not put undue reliance on any
forward-looking statements. We undertake no obligation to publicly
update any forward-looking statement, whether as a result of new
information, future events, or otherwise. For a discussion of
important factors that may cause our actual results to differ
materially from those suggested by the forward-looking statements,
you should read carefully
Risk Factors
included in Part II,
Item
1A,
within this report and the section captioned
Risk Factors,
in Part I, Item 1A, of our Annual Report on Form 10-K for the
fiscal year ended December 28, 2019, as filed with the Securities
and Exchange Commission (SEC) and as may be further amended and/or
restated in subsequent filings with the SEC.
Overview
Company Background
We are a global supplier of high-value, critical components and
engineered systems used in process industries worldwide. Our
products, technologies, and services play an integral role in
enhancing process efficiency, optimizing energy utilization, and
maximizing productivity in resource-intensive
industries.
We previously reported our financial results by combining operating
entities into three reportable operating segments: Papermaking
Systems, Wood Processing Systems, and Material Handling Systems,
and a separate product line, Fiber-based Products. During the first
quarter of 2020, we changed our reportable operating segments to
better align with our strategic initiatives to grow both
organically and through acquisitions. See
Note
12,
Business Segment Information, in the accompanying condensed
consolidated financial statements for further detail regarding our
segments. Accordingly, our financial results are reported in three
new reportable operating segments: Flow Control, Industrial
Processing, and Material Handling. The Flow Control segment
consists of our fluid-handling and doctoring, cleaning, &
filtration product lines; the Industrial Processing
segment consists of our wood processing and stock-preparation
product lines (excluding our baling products); and the Material
Handling segment consists of our conveying and screening, baling,
and fiber-based product lines. Financial information for 2019 has
been recast to conform to the new segment presentation. A
description of each segment is as follows:
•Flow
Control
– Custom-engineered products, systems, and technologies that
control the flow of fluids used in industrial and commercial
applications to keep critical processes running efficiently in the
packaging, tissue, food, metals, and other industrial
sectors. Our products include rotary sealing devices, steam
systems, expansion joints, doctor systems, roll and fabric cleaning
devices, and filtration and fiber recovery systems.
Overview (continued)
•Industrial
Processing
– Equipment, machinery, and technologies used to recycle paper and
paperboard and process timber for use in the packaging, tissue,
wood products, and alternative fuel industries, among
others. Our products include stock-preparation systems and
recycling equipment, chemical pulping equipment, debarkers,
stranders, chippers, and logging machinery. In addition, we provide
industrial automation and digitization solutions to process
industries.
•Material
Handling
– Products and engineered systems used to handle bulk and discrete
materials for secondary processing or transport in the aggregates,
mining, food, and waste management industries, among others. Our
products include conveying and vibratory equipment and balers. In
addition, we manufacture and sell biodegradable, absorbent granules
used as carriers in agricultural applications and for oil and
grease absorption.
Business Outlook and COVID-19 Update
In March 2020, the World Health Organization designated the novel
coronavirus as a global pandemic (COVID-19). In response to the
ongoing COVID-19 pandemic, we continue to focus our efforts
on:
•protecting
the health and safety of our employees though precautionary
measures, including working remotely when employees are not
required to be physically present, social distancing, wearing face
coverings, adding safety and hygiene protocols within our
facilities, restricting travel and other safeguards;
•as
a critical infrastructure company, serving the needs and
expectations of our customers;
•working
closely with our supply chain to minimize potential disruptions;
and
•preserving
our liquidity position.
The COVID-19 pandemic has resulted in significant worldwide
economic disruption and adversely affected our bookings and results
of operations primarily due to delayed or reduced spending by our
customers, as well as customer-requested delays on certain capital
projects and service work. While our businesses continue to be
impacted by COVID-19, we experienced an 8% sequential increase in
bookings in the third quarter of 2020 compared to the second
quarter of 2020, mainly attributable to improved capital equipment
bookings at our Industrial Processing segment's wood processing
business. For the fourth quarter of 2020, we expect a sequential
increase in capital equipment bookings, and our parts and
consumables bookings to remain stable as our customers perform
year-end maintenance on their equipment.
Consolidated bookings decreased 16% to $143.3 million in the third
quarter of 2020 compared to $170.9 million in the third quarter of
2019, offset by a 1% increase from the favorable effect of foreign
currency translation and an acquisition. Our business outlook by
segment, including an update on the impact of COVID-19, is as
follows:
•Flow
Control
– Bookings decreased 16% in the third quarter of 2020 compared with
the third quarter of 2019. Bookings for capital equipment at our
North American and European operations continue to be negatively
impacted by delayed or reduced capital spending by our customers.
Bookings for parts and consumables products at our North American
and European operations declined slightly as a result of decreased
demand from industrial customers due to production downtime,
shutdowns and visitation restrictions at customer facilities
related to COVID-19, while demand from our packaging, food
processing, and tissue customers remained relatively
stable.
•Industrial
Processing
– Bookings decreased 20% in the third quarter of 2020 compared with
the third quarter of 2019. Bookings at our stock-preparation
business declined primarily due to delays or reductions in capital
equipment spending by our customers as a result of COVID-19 and
uncertainty in the Asian market surrounding the response to China's
recovered paper import restrictions. The decline at our
stock-preparation business was partially offset by increased
capital equipment bookings at our wood processing business due to a
robust U.S. housing market and a rebound in lumber, oriented strand
board and plywood prices, which has driven increased capital
investment by our customers. Our wood processing business continues
to experience steady bookings for parts and consumables products
due to an improved U.S. housing market and higher demand for
wood-based products, which have increased mill run rates resulting
in higher parts consumption by our customers.
•Material
Handling
– Bookings decreased 9% in the third quarter of 2020 compared with
the third quarter of 2019. Demand for our conveying and vibratory
equipment continues to be negatively impacted by reduced customer
spending primarily as a result of COVID-19 shutdowns and visitation
restrictions. Despite a slight decline in bookings in the third
quarter of 2020 compared to a strong third quarter of 2019, orders
at our baler business improved significantly from the first two
quarters of 2020 as a result of increased economic activity and
eased COVID-19 restrictions in Europe in the third quarter, in
addition to orders from new markets.
Overview (continued)
To mitigate the adverse effects of the pandemic on our business, we
continue to manage discretionary spending in such areas as capital
expenditures and travel-related costs, utilize government employee
retention assistance programs, and execute restructuring actions to
reduce payroll-related costs at certain of our operations. During
the third quarter of 2020, we received benefits from government
employee retention assistance programs of $2.8 million. We expect
the benefits received from these programs to decrease in the fourth
quarter of 2020.
Our liquidity position as of September 26, 2020 consisted of over
$53 million of cash and cash equivalents, $155 million of available
borrowing capacity, and $265 million of uncommitted borrowing
capacity. We do not have any mandatory principal payments on our
long-term debt obligations until 2023.
We continue to evaluate the impact of COVID-19 on our business and
will take actions that are in the best interests of our employees,
customers, and stakeholders or as mandated by governmental
authorities. While our global presence and the diversity of our
products have provided some stability during the COVID-19 pandemic,
there is continued uncertainty surrounding the trajectory of the
pandemic which has been impacted by a recent resurgence of
infections in many regions of the world, the timing of recovery in
the markets in which we operate, and the resulting impact on our
results of operations, financial condition and cash flows.
Accordingly, we cannot predict the extent of the impact that
COVID-19 may have on our business for the remainder of fiscal
2020.
For more information on risks related to health epidemics to our
business, including COVID-19, please see Part I, Item 1A.
Risk Factors,
included in our Annual Report on Form 10-K for the fiscal year
ended December 28, 2019, as further amended in subsequent filings
with the SEC.
Global Trade
In 2018, the United States began imposing tariffs on certain
imports from China, which has and will continue to increase the
cost of some of the equipment that we import. Although we are
working to mitigate the impact of tariffs through pricing and
sourcing strategies, we cannot be sure how our customers and
competitors will react to certain actions we take. For more
information on risks associated with our global operations,
including tariffs, please see Part I, Item 1A.
Risk Factors,
included in our Annual Report on Form 10-K for the fiscal year
ended December 28, 2019, as further amended in subsequent filings
with the SEC.
International Sales and Foreign Currency
Slightly more than half of our sales are to customers outside the
United States, mainly in Europe, Asia, and Canada. As a result, our
financial performance can be materially affected by currency
exchange rate fluctuations between the U.S. dollar and foreign
currencies. To mitigate the impact of currency rate fluctuations,
we generally seek to charge our customers in the same currency in
which our operating