Real Potential
2 0 0 6
K A D A N T I N C. A N N U A L R E P O R T
Recycled Fiber Realized
Twenty years ago, paper fiber was destined
for a one-way trip from tree to box to
landfill. Today, 95 million metric tons of
recovered paper worldwide are recycled
each year. Most fiber is now recycled many
times before reaching a landfill.
Similarly, fiber that was processed,
consumed, and disposed of domestically 20
years ago is now very well-traveled. In
today’s global market, fiber produced in
North America is often recycled via China
and returned to the US through interna-
tional trade.
Kadant has responded to these changes by
becoming more global to align with the
paper industry’s needs—and by developing
products that help customers recover
more fiber with greater efficiency.
Virgin Pulp
Papermill/
box maker
Recycled
Fiberboard
Goods
Manufacturer
Landfill/
incinerator
Consumer
goodsgoodsgoodsgoodsgoodsgoodsgoodsgoodsgoodsgoods realize
Stock Preparation
Pulping, cleaning, de-inking, and
screening systems that recover usable
fiber from recycled materials or
prepare virgin fiber for entry into the
paper machine.
Accessories
Doctor blades, holders, systems, and
consumables that clean roll surfaces
to enhance paper qualities and
minimize sheet breaks.
Fluid Handling
Rotary joints, syphons, and related
software controls for transferring
fluids, steam, or air between rotating
cylinders and fixed piping in a range
of industries.
Water Management
Shower, fabric-conditioning, formation,
and filtration systems that clean
papermaking fabrics, form the sheet,
and conserve water.
Other
Fiber-based granules made from
papermaking byproducts for agri-
cultural and home lawn and garden
applications, and grey and ductile iron
casting products.
350
300
250
200
150
100
50
0
$342 million
2004 2005 2006
Revenues
North America
45%
Asia
27%
Other 2%
Latin America 6%
Europe 20%
2006 Revenues
by Geographic Region
Kadant Inc. is a leading global
supplier of innovative products
and technologies that improve pro-
ductivity and quality during pulp
and paper production, including
stock-preparation systems, paper
machine accessories, and equip-
ment for fluid handling and water
management. Our products also
optimize production in a range of
other industries.
Stock Preparation
43%
Other 5%
Water Management 10%
Fluid Handling
25%
Accessories 17%
2006 Revenues
by Product Line
Ten years ago, 60% of Kadant employees were located in North America.
Today, almost four out of 10 reside in Asia.
2006
1996
Asia
N. America Europe S. America
Kadant Annual Report 2006
b
dear shareholders
We are pleased to report that 2006 was one of our best years yet. Kadant Johnson
made substantial contributions, and we enjoyed strong growth and record revenues
in China. Looking ahead, we intend to pursue opportunities for continued growth
by leveraging our presence in Asia and capitalizing on our ability to manufacture
products in low-cost regions.
In 2006, we established a set of key
goals intended to strengthen our global
position and lay the groundwork for
future success. During the course of
the year, we either achieved or made
progress on all of these goals:
(cid:79) Increase the number of components
we manufacture in low-cost regions
(cid:79) Complete the Kadant Jining acquisi-
tion and begin to integrate that
operation with our stock-preparation
business
The potential that surrounds us
During this first full year following our
acquisition of Kadant Johnson, we
worked to fully integrate the new com-
pany into our operations—and we
reaped rewards from these efforts.
Kadant Johnson’s energy-efficient fluid-
handling systems broadened our product
offerings and expanded our customer
base to include industries such as steel,
William A. Rainville - Chairman and CEO
textiles, and plastics. We plan to leverage Kadant Johnson’s
(cid:79) Develop technologies that reduce our customers’
position in these markets to introduce Kadant products
production cost per ton
and technologies into industries beyond paper. For exam-
(cid:79) Strengthen market share in water management and
ple, we recently received an order for more than 150 blade
accessories, and raise sales of higher-margin after-
holders from a steel mill in China.
market products
(cid:79) Pursue new growth opportunities outside of the
Moreover, Kadant Johnson’s Wuxi facility bolstered
paper industry
Kadant’s presence in Asia and created opportunities to
manufacture our accessories and water-management
For 2006, our annual revenues from continuing operations
products in China. This is an exciting opportunity because
rose by $98 million, or 40 percent, to a record-high of
we are a leading supplier of these products, our brand is
$342 million. These revenues included a 17 percent increase
highly respected, we have world-class technology and
from Kadant Johnson acquired in May 2005 and a 2 per-
expertise, and we have a strong market presence in the
cent increase from Kadant Jining acquired in June 2006.
region for other Kadant products. We now have a trained
sales force in place and have quoted several projects
Operating income from continuing operations increased
already. By mid-year, we plan to have our doctor blade
102 percent in 2006 to $29 million. Our diluted EPS from
production line up and running at our Wuxi facility.
continuing operations for the year increased 86 percent
to $1.30, including $.04 of restructuring costs, and our
A realization that shapes the future
EBITDA* increased 73 percent for the year due to a strong
Without question, China is currently the most important
performance by our papermaking segment, which generat-
paper-producing region in the world, accounting for most
ed $46 million in EBITDA.
*EBITDA is a non-GAAP financial measure as detailed
on page 12 of this annual report.
c
of the global capacity expansion. As its economy contin-
ues to expand and change, demand for paper—from
Kadant Annual Report 2006
linerboard to white grades and tissue—is expected to
realize compelling per-ton energy and cost savings. The
continue to rise, and the region is expected to add paper-
efficiencies created by Kadant products and systems
making capacity. Kadant has established itself as a leading
extend to industries beyond paper as well, and we will
supplier in China, and we look forward to
continued strong sales and new opportu-
nities. As our customers know, we not
only offer products that improve effi-
ciency and productivity, we also offer
application knowledge and expertise.
Our strong stock-preparation position
in China is reflected in our record-high
sales there of $63 million during 2006.
As for 2007, we are already off to an
excellent start. So far this year, Kadant
has received three major orders for
stock-preparation systems in China,
40
30
20
10
0
1.50
$37.2 million
$1.30
continue to seek opportunities to intro-
duce our products into these markets.
EBITDA* Earnings
per Share**
1.00
0.50
2004 2005 2006 2004 2005 2006
0
In fact, our expanding customer base has
helped raise awareness of Kadant.
According to the 2006 Brand Awareness
Study conducted by Litchfield Research
and sponsored by Paper360, Kadant is
the most recognized name in doctor
blades and steam systems. Among
papermakers who use doctor systems
and need doctor blades, close to 85 per-
cent expect to purchase (or continue
purchasing) these products from Kadant.
totaling $18 million. And as China prepares to expand into
By unifying our portfolio of products and services under
white grades for printing and writing, we will be well posi-
one brand name, we are leveraging our strengths through-
tioned to play a key role as one of the world’s leading sup-
out the paper industry and setting the stage to introduce
pliers of stock-preparation systems for white grades.
Kadant products into new industries.
This year, another acquisition—Kadant Jining—improved
I want to thank all of our investors and employees for
our position and augmented our stock-preparation manu-
their commitment and efforts during what has been an
facturing capabilities in China, leading to several additional
exceptional year. We have realized a great deal of our
opportunities. With local manufacturing, we believe we
potential in 2006—and we have identified a number of
can increase our spare parts business in Asia. We recently
new ways to extend our promise and build new potential
doubled the capacity of our screen baskets facility in
in the future. I look forward to many more good years.
China—a critical consumable stock-preparation part that is
typically replaced every nine to 12 months. Increased man-
Sincerely,
ufacturing in China also enables us to lower manufacturing
costs for Kadant products sold throughout the world.
And while the leading paper producers in China are build-
ing new mills and installing state-of-the-art equipment,
William A. Rainville
paper producers in North America and Europe are seeking
Chairman and Chief Executive Officer
ways to upgrade their systems and reduce their manufac-
turing cost per ton. Kadant plays a crucial role here, too, as
March 22, 2007
we supply energy-efficient solutions (such as low-friction
doctor blades and drying systems) that help companies
** Reflects diluted earnings per share from continuing operations.
Kadant Annual Report 2006
d
Kadant international customers realize benefits
“With Kadant’s new ID screening
technology, we have achieved our
highly demanding quality and
efficiency objectives for recycled
pulp—and we reduced our
operating costs.”
Volkan Turt, Production Manager,
OYKA Kagit Mill, Adana, Turkey
Letters & emails from Kadant
customers reflect our long-
standing reputation for high
quality products & excellent
service.
“Production and energy efficiency are up,
operations are smoother, and operator
time is reduced. Kadant’s DMS control
software simplifies the process and cuts
costs. Any mill seeking to optimize
drying should have it!”
Ryan Kluck, No. 26 PM Project Manager,
Stora Enso, Biron, Wisconsin, USA
“We are the first paper mill in Russia to install a de-inking line for
high quality printing and writing paper. Kadant’s de-inking line has
brought successful results beyond our expectations.”
Dmitry Dievsky, Director of Investments and Development,
Kamennogorsk Offset Paper Mill, Kamennogorsk, Russia
e
Kadant Annual Report 2006
“Thanks to Kadant, we were able to build
12,500 machines last year—a world record!
No other CNC manufacturer has ever done
this before.”
Tim Robbins, Purchasing Agent,
Haas Automation, Inc., Oxnard, California, USA
“On behalf of all the staff at Guangzhou PM8, I would like to
convey our sincere appreciation to Kadant. After the rebuild,
production increased and steam consumption decreased significantly.
The dryer section is now trouble free—thanks to Kadant.”
Ms. Wang Qiuchang, Director of PM8, Guangzhou Paper, People’s Republic of China
“The hard work of Kadant’s engineers and skilled tradesmen made
our machine rebuild safe, on budget, and successful. Currently, the
machine is producing more tons at a higher level of quality—and we
see great potential with this equipment in the future.”
Eric Foote, Michael Pope, Michael Langford, Caraustar Mill Group, Austell, Georgia, USA
Kadant Annual Report 2006
f
realizing potential: asia
As countries in Asia continue to remove barriers to free trade, business development
is booming. India’s economy grew 9% last year, and China’s economy—which exceeded
10% growth in 2006—is expected to hit double digits again in 2007. With leading
paper producers in the region preparing for major capacity expansion projects,
Kadant’s innovative fiber-processing products and technologies are in demand.
Global demand for paper and paper-
board is expected to reach 490 million
tons by the year 2020 (compared to 359
million tons in 2004), with China, India,
and Russia accounting for up to 70 per-
cent of the increase. In India, the paper
industry is projected to grow at about
7 percent annually, and India’s paper
consumption is projected to increase
by more than 30 percent to reach
19 pounds per capita by 2010. Given the
Asia’s paper and
paperboard future*
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150
s
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100
Apparent
Consumption
t
r Production
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11
Years
Kadant’s market-leading position in
China opens up significant opportunities
for long-term success in the Asian mar-
ket. As a respected leader with a highly
recognizable name, we are well posi-
tioned to leverage our stock-preparation
reputation. The capital equipment
orders we have received are expanding
our installed base throughout China,
laying the groundwork for potential
future sales in higher-margin aftermarket
fact that paper consumption in the US is currently about
products and service offerings. We plan to support acces-
660 pounds per capita, the Asian market has room for
sories and water-management products at our Wuxi fluid-
more growth.
handling facility, and Kadant Jining should enable us to
deliver stock-preparation systems, parts, and consumables
China’s rapidly expanding manufacturing base needs an
in a more cost-effective manner.
increasing supply of packaging materials for its export and
domestic markets. To date, most of China’s papermaking
Our applications expertise and technology continue to
capacity has focused on linerboard to support its booming
distinguish us in this market. Overall, 2006 was a record
export economy. More recently, the country’s communica-
revenue year for us in China, resulting in a total of $63 mil-
tions sector is showing signs of growth, sparking a need
lion of revenue for stock-preparation systems. In the first
for newsprint and white paper grades. China’s large-scale
quarter of 2007, we received three orders totaling $18 mil-
investments in new paper- and board-making capacity
lion for stock-preparation systems from a leading liner-
have established it as the world’s fastest-growing market
board producer in China.
for paper and board production, and Kadant is playing a
central supply role in this expansion.
With our proven track record of successful installations
We have been operating in China since the early 1980s.
er of choice for customers looking to add capacity in this
in China, we believe Kadant will continue to be the suppli-
Kadant now has nearly 700 employees there and is China’s
leading supplier of stock-preparation and fluid-handling
systems. With our acquisition of the Kadant Jining business
in 2006, we added significant stock-preparation manufac-
turing capabilities in China.
rapidly growing market.
g
Kadant Annual Report 2006
*Source: RISI (Resource Information System, Inc.)
In 1939, Kadant Black Clawson invented and patented the first pressure
screen—and we now offer some of the most advanced screen cylinders avail-
able. As the most important consumable in stock-preparation systems, Kadant
high-performance cylinders have multiple pulp and paper mill applications, and
they have made their way into other industries as well. Today, with an entire
facility in China dedicated to the manufacturing of screen baskets, we are real-
izing new opportunities for low-cost manufacturing and penetration into
untapped markets.
Paper technology began in China
and migrated westward over hun-
dreds of years. With four facilities
operating in Asia, Kadant is bringing
that technology back around the
globe as paper production ramps up
in this region.
o Kadant manufacturing facilities
t Migration of paper technology
Throughout the world, countries are expected to add 24 million tons of annual
recycled-fiber papermaking capacity between 2005 and 2009—and close to two-thirds
(16 million tons) of this is expected to be added in China.
Kadant Annual Report 2006
h
realizing potential: energy
Among today’s industries, improving efficiency is a high priority. Lower energy use can
result in lower costs, less pollution, and greater productivity. By minimizing waste and
streamlining operations, companies not only protect the surrounding environment—
they can also achieve a competitive edge. Kadant’s energy-saving products are proving
invaluable to a wide spectrum of companies seeking to become more efficient.
Global sensitivity to the depletion of
energy resources is increasing its impact
on business practices every year. The
pulp and paper industry is a massive
energy consumer, and paper producers
around the world need products that
will cut energy use and lower costs.
200
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Unigy™pumping system
saves over 60% energy
in forging operation
25 percent respectively. By replacing
conventional fiberglass blades with
Kadant’s Syntek™ blades and other low-
friction doctor blades, clients can clean
dryer rolls more effectively—using half
Before
as much energy.
For paper customers in the more mature
markets of North America and Europe,
increased efficiency helps them com-
0
Unigy
1 15 30 45 60
Time in seconds
Kadant products are playing an increas-
ingly important role in industries other
than papermaking. Hydraulic pumping
processes benefit from our Unigy™
pete with the newer, high-speed paper machines in Asia.
pumping system—one of the most efficient hydraulic
This makes the search for energy-efficient solutions even
drive systems on the market today. The patented Unigy
more critical in these high-energy-cost regions. Yet state-
technology, developed by Kadant AES, eliminates excess
of-the-art systems in Asia need to be energy efficient as
outputs produced by traditional hydraulic power systems.
well. For domestic and international customers alike,
Unigy pumping systems allow conventional pump/motor
Kadant is providing the expertise and technologies that
combinations to precisely and continuously match pump
help increase efficiency and boost productivity.
outputs to varying hydraulic application demands. This
minimizes the wasted energy, lost heat, and other compli-
In paper production, the drying stage consumes the most
cations created by excess outputs.
energy. Kadant Johnson’s fluid-handling equipment and
controls play a significant role in lowering the energy
Compatible with virtually any positive displacement
use—and therefore the energy costs—associated with
hydraulic system, the Unigy pumping system can extend
drying. Our Dryer Management System™ control software,
pump life and reduce power consumption by up to 60
rotary joints, and syphons all improve drying productivity
percent. Recently, a US-based forging operation improved
and increase drying efficiency.
press control, reduced noise, and realized a 69 percent
reduction in power consumption—all thanks to our Unigy
Other Kadant products that increase efficiency include
pumping system.
pulp-washing systems that require less water and chemi-
cals, low-friction doctoring systems, heat transfer equip-
The growing need for energy efficiency is creating demand
ment, and filters, formers, and showers that recycle
for Kadant’s energy-saving products and driving our
process water. In a linerboard mill in Finland and a news-
research and development efforts. As more manufacturers
print mill in the US, our advanced stationary syphon
around the globe invest in efficient new systems and
systems reduced steam consumption by 18 percent and
upgrades, Kadant continues to be the name they trust.
i
Kadant Annual Report 2006
Requiring high levels of electricity and steam, the drying process is the most
energy-intensive stage of paper production. Our innovative Dryer Management
System (DMS) software improves efficiency by automatically and continuously moni-
toring and adjusting all steam system set points.
The DMS software responds to operating changes on a machine, maintaining
the correct relationships between various set points and allowing the machine to
operate faster, more efficiently, and with fewer sheet breaks. With this Kadant
product, customers achieve both lower energy costs and better product quality.
40
30
20
10
0
)
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(
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w
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P
Better blades
use less energy
Conventional
fiberglass
blades
Less energy = lower costs
Kadant's Syntek™
& Carboflex™ blades
0 1 2 3 4 5 6
Speed (1000 FPM)
Assuming a typical machine speed of 4,000 fpm, a paper producer can spend up to $5,600
annually in additional energy consumed for each dryer cylinder it doctors. By using
Kadant blades to actively doctor 15 dryer cylinders, the producer could save up to
$84,000 in non-value added costs each year.
Kadant Annual Report 2006
j
realizing potential: retool & retrofit
Paper manufacturers are increasing efficiency and reducing manufacturing cost per ton
through machinery upgrades and rebuilds. Kadant offers a range of retrofits across all
product lines, bringing customers up to speed without major capital expenditures.
The paper and board industry has gone
through one of the largest consolidation
phases in its history, particularly in
Europe and North America. Paper pro-
ducers who are unable to purchase com-
plete new systems are seeking ways to
remain competitive by making better use
of their existing machinery.
Kadant supplies customers with bolt-in
retrofit packages that make their opera-
tions more efficient as well as easier to operate. We
design these parts to correspond to existing systems, mak-
Bearings:
replace every 3 yrs.
ing the upgrade process quick and simple. By retrofitting
their equipment, our customers enjoy benefits such as
energy savings, improved system performance, and
increased capacity—yet they avoid the substantial invest-
ment associated with buying and installing new machinery.
Our ability to rebuild and retrofit aging equipment—
including equipment not originally supplied by Kadant—
has expanded our customer base. Similarly, our leading
presence in the accessories market provides us with an
opportunity to capitalize on our large installed base, par-
ticularly in Europe and North America.
Doctor systems operate continuously in
a grueling environment. The systems are
usually in service for 20 years or more,
with more frequent replacement of their
components. Night or day, Kadant supplies
replacement parts and helps customers keep
their machines up and running.
Doctor blades:
replace every 2-8 wks.
Holder loading tubes:
replace every year.
Holders:
replace every 5 yrs.
Oscillators:
replace every 5 yrs.
Cylinders:
replace every 10 yrs.
Using Kadant products and technologies to replace worn
Because of the round-the-clock operation of paper
components or rebuild outdated equipment, customers
machines, steel mills, and the food processing industry,
are able to reduce installation and/or repair time (thus
our customers have an ongoing requirement to replace
the consumable products we sell. Products like doctor
reducing machine downtime), lower maintenance costs,
increase energy efficiency, and improve overall product
blades are typically changed every two weeks (and in
quality. This translates into a continuous demand for
certain applications as often as every eight hours) while
Kadant’s products, skills, and services.
bearings, holders, and seals are typically replaced every
three to five years.
1)
Kadant Annual Report 2006
realizing potential: beyond paper
Kadant’s innovations offer advantages beyond better paper production. Every year,
our products and services help manufacturers in a variety of industries around the
globe increase efficiency and improve productivity.
In today’s marketplace, any industry that
hopes to compete on a global level
needs to find solutions that help stream-
line operations, boost output, lower
energy consumption, and enhance prod-
uct quality. Kadant continues to gain
access to new industries as they look to
us for these solutions—and this creates
new opportunities for future growth.
Our technologies and products have
Kadant delivers
quality products
to industries you
might not expect.
equipment helps manufacturers control
paper curl. Our seals, syphons, and other
fluid-handling systems and controls are
lowering costs and improving productiv-
ity in industries ranging from rubber,
plastics, and steel to food and bever-
ages. These days, you can even find
Kadant products at the car wash.
Five years ago, less than 3 percent of
our revenues were earned in industries
many applications outside the paper industry. In North
other than paper production. Today, with the addition of
America, our rotary joints are being used to help extract
Kadant Johnson, non-paper revenues have grown to more
oil from shale and have become standard equipment for
than 10 percent, and we expect to continue finding new
the world’s largest manufacturer of Computer Numerical
industries to serve in the years ahead.
Control (CNC) machines. A client in South Africa ordered
four of our Chemi-Washer® horizontal belt washers for use
in textile production. In the converting industry, our
Applications in industries beyond paper
Kadant Products
≥
Air Unions
Cleaners
Doctors & Blades
Filters
Liqui-mover® Pumps
Pulpers
Rotary Unions
Screw Press
Showers / Nozzles
Steam Joints
Unigy Pumping
Water Joints
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Kadant Annual Report 2006
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1!
Non-GAAP Financial Measures
EBITDA
(In thousands)
EBITDA
2006
2005
2004
Operating Income
$ 29,442
$ 14,583
$ 6,840
Depreciation and Amortization
7,758
6,931
3,604
EBITDA
$ 37,200
$ 21,514
$ 10,444
Earnings before interest, taxes, depreciation, and amortization
(EBITDA) is a non-GAAP financial measure. Non-GAAP financial
measures are not meant to be considered superior to or a substi-
tute for the results of operations prepared in accordance with
GAAP. In addition, non-GAAP financial measures have limitations
associated with their use as compared to the most directly compa-
rable GAAP measures, in that they may be different from, and
therefore not comparable to, similar measures used by other com-
panies. We believe that the inclusion of such a measure helps
investors to gain a better understanding of our underlying oper-
ations and future prospects, consistent with how management
measures and forecasts Kadant's performance, especially when
comparing such results to previous periods or forecasts.
Performance Graph
This performance graph compares the
cumulative, five-year total shareholder
return assuming an investment of $100 (and
the reinvestment of dividends) in our com-
mon stock, the Standard & Poor’s 500 Stock
Index, and the Dow Jones US Paper Index.
Our common stock trades on the New York
Stock Exchange under the ticker symbol
“KAI.” Because our fiscal year ends on a
Saturday, the graph uses the last trading
day of our fiscal year.
$180
160
140
120
100
80
60
40
20
$0
Kadant Inc.
S&P 500
Dow Jones
US Paper
12/28/01 12/28/02 1/3/04 1/1/05 12/31/05 12/30/06
Comparison of five-year cumulative total returns
among Kadant Inc.,
the S&P 500 Index, and the Dow Jones US Paper Index
Kadant Inc.
S&P 500
Dow Jones US Paper
12/28/01
100.00
100.00
100.00
12/28/02
103.11
1/03/04
140.88
1/1/05
138.51
12/31/05
125.00
12/30/06
164.73
77.90
87.48
100.24
111.15
116.61
135.03
110.23
115.97
95.64
98.60
Officers
Board of Directors
William A. Rainville* Chairman of the Board, President,
William A. Rainville
Edward J. Sindoni*
Thomas M. O’Brien*
and Chief Executive Officer
Executive Vice President
and Chief Operating Officer
Executive Vice President
and Chief Financial Officer
Jonathan W. Painter*
Executive Vice President
Eric T. Langevin*
Senior Vice President
Edwin D. Healy*
Vice President
Sandra L. Lambert*
Vice President, General Counsel, and Secretary
Michael J. McKenney* Vice President, Finance
and Chief Accounting Officer
Wesley A. Martz
Vice President, Marketing
Daniel J. Walsh
Treasurer
John M. Albertine
John K. Allen
Thomas C. Leonard
Francis L. McKone
Chairman of the Board, President,
and Chief Executive Officer
Chairman and Chief Executive Officer,
Albertine Enterprises, Inc.
(Consulting and merchant-banking firm)
Partner, West Falmouth Associates
(Management consulting)
Vice President, CRA International
(Business consulting and litigation support)
Former Chairman of the Board and Chief
Executive Officer, Albany International Corp.
(Supplier of paper machine fabrics)
1@
Kadant Annual Report 2006
* Designates executive officer
2006 Kadant Inc. Annual Report on Form 10-K
c
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(mark one)
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2006
OR
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 1-11406
KADANT INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
52-1762325
(I.R.S. Employer Identification No.)
One Technology Park Drive
Westford, Massachusetts
(Address of principal executive offices)
01886
(Zip Code)
Registrant’s telephone number, including area code: (978) 776-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $.01 par value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ‘ No È
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ‘ No È
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 È No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of “accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ‘ Accelerated filer È Non-accelerated filer ‘
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ‘ No È
The aggregate market value of the voting and non-voting common equity held by nonaffiliates of the registrant as of July 1,
2006, was approximately $314,899,000.
As of March 1, 2007, the registrant had 14,094,824 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement pursuant to Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended, to be used in connection with the registrant’s 2007 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Form 10-K.
Kadant Inc.
Annual Report on Form 10-K
for the Fiscal Year Ended December 30, 2006
Table of Contents
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . .
Item 9A. Controls and Procedures
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10. Directors, Executive Officers, and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . .
Item 14.
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Page
1
8
13
14
14
14
15
16
17
36
37
37
37
38
38
38
39
39
39
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40
Kadant Inc.
2006 Annual Report
Forward-Looking Statements
PART I
This Annual Report on Form 10-K and the documents that 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, 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,” “should,” “likely,” “will,” “would,”
or similar expressions, we are making forward-looking statements.
Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and
assumptions. Our future results of operations may differ materially from those expressed in the forward-looking
statements. Many of the important factors that will determine these results and values are beyond our ability to
control or predict. You should not put undue reliance on any forward-looking statements. We undertake no
obligation to publicly update any forward-looking statement, whether as a result of new information, future
events, or otherwise. For a discussion of important factors that may cause our actual results to differ materially
from those suggested by the forward-looking statements, you should read carefully the section captioned “Risk
Factors” in Part I, Item 1A, of this Report.
Item 1. Business
General Development of Business
We were incorporated in Delaware in November 1991 to be the successor-in-interest to several papermaking
equipment businesses of Thermo Electron Corporation (Thermo Electron). In November 1992, we completed an
initial public offering of a portion of our outstanding common stock. On July 12, 2001, we changed our name to
Kadant Inc. from Thermo Fibertek Inc. In August 2001, Thermo Electron disposed of its remaining equity
interest in Kadant by means of a stock dividend to its shareholders. Our common stock is listed on the New York
Stock Exchange, where it trades under the symbol “KAI.”
The terms “we,” “us,” “our,” “Registrant,” or “Company” in this Report refer to Kadant Inc. and its
consolidated subsidiaries.
Description of Our Business
We are a leading supplier of equipment used in the global papermaking and paper recycling industries and
also a manufacturer of granules made from papermaking byproducts. Our continuing operations consist of one
reportable operating segment, Pulp and Papermaking Systems (Papermaking Systems), and two separate product
lines: Fiber-based Products and Casting Products, included in Other Businesses. In classifying operational
entities into a particular segment, we considered how our management assesses performance and makes
operating decisions, and aggregated businesses with similar economic characteristics, products and services,
production processes, customers, and methods of distribution. In addition, prior to its sale on October 21, 2005,
we operated a composite building products business (the composites business), which is presented as a
discontinued operation in the accompanying consolidated financial statements.
Papermaking Systems
Our Papermaking Systems segment has a long and well-established history of developing, manufacturing,
and marketing equipment for the global papermaking and paper recycling industries. Some of our businesses or
their predecessor companies have been in operation for approximately 100 years. Our customer base includes
major global paper manufacturers and, with our equipment found in most of the world’s pulp and paper mills, we
1
Kadant Inc.
2006 Annual Report
believe we have one of the largest installed bases of equipment in the pulp and paper industry. We manufacture
our products in nine countries in Europe, North and South America, and Asia.
On May 11, 2005, we acquired all the outstanding stock of The Johnson Corporation (Kadant Johnson), a
leading supplier of fluid-handling systems and equipment, including steam and condensate systems, components,
and controls. These products are used primarily in the dryer section of the papermaking process and during the
production of corrugated boxboard, metals, plastics, rubber, textiles, and food. Kadant Johnson was a privately
held company based in Three Rivers, Michigan, with approximately 575 employees. The purchase price for the
acquisition was approximately $114.0 million, including $101.5 million paid in cash at closing, $1.6 million paid
in the fourth quarter of 2006 in settlement of post-closing adjustments, $4.8 million paid for acquisition-related
costs, and $6.1 million of additional cash consideration we expect to pay in annual installments through 2010.
On June 2, 2006, our subsidiary Kadant Light Machinery (Jining) Co., Ltd. (Kadant Jining), assumed
responsibility for the operation of Jining Huayi Light Industry Machinery Co., Ltd. (Huayi) and, by
September 30, 2006, acquired substantially all of the assets of Huayi, including cash, inventory, machinery,
equipment, and buildings for $21.1 million, net of $2.3 million of assumed liabilities (Kadant Jining acquisition).
The remaining purchase obligation is $3.4 million, which we expect to pay through January 2008 as certain post-
closing and indemnification obligations are satisfied. Huayi was a supplier of stock-preparation equipment in
China.
Our Papermaking Systems segment consists of the following product lines: stock-preparation systems and
equipment, paper machine accessory equipment, water-management systems, and fluid-handling systems and
equipment.
Stock-preparation systems and equipment
We develop, manufacture, and market complete custom-engineered systems and equipment, as well as
standard individual components, for pulping, de-inking, screening, cleaning, and refining recycled and virgin
fibers to prepare them for entry into the paper machine during the production of recycled paper. Our principal
stock-preparation products include:
–
–
Recycling and approach flow systems: Our equipment includes pulping, screening, cleaning, and
de-inking systems that blend pulp mixtures and remove contaminants, such as ink, glue, metals, and
other impurities, to prepare them for entry into the paper machine during the production of recycled
paper.
Virgin pulping process equipment: Our equipment includes pulp washing, evaporator, recausticizing,
and condensate treatment systems used to remove lignin, concentrate and recycle process chemicals,
and remove condensate gases.
Paper machine accessory equipment
We develop, manufacture, and market a wide range of doctor systems and related consumables that
continuously clean papermaking rolls to keep paper machines running efficiently; doctor blades made of a
variety of materials to perform functions including cleaning, creping, web removal, and application of coatings;
and profiling systems that control moisture, web curl, and gloss during paper production. Our principal paper
machine accessory products include:
–
–
–
Doctor systems and holders: Our doctor systems clean papermaking rolls to maintain the efficient
operation of paper machines by placing a blade against the roll at a constant and uniform pressure. A
doctor system consists of the structure supporting the blade and the blade holder. A large paper
machine may have as many as 100 doctor systems.
Profiling systems: We offer profiling systems that control moisture, web curl, and gloss during paper
production.
Doctor blades: We manufacture doctor blades made of a variety of materials including metal, bi-metal,
or synthetic materials that perform a variety of functions including cleaning, creping, web removal, or
2
Kadant Inc.
2006 Annual Report
the application of coatings. A typical doctor blade has a life ranging from eight hours to two months,
depending on the application.
Water-management systems
We develop, manufacture, and market water-management systems and equipment used to continuously
clean paper machine fabrics, drain water from pulp mixtures, form the sheet or web, and filter the process water
for reuse. Our principal water-management systems include:
–
–
Shower and fabric-conditioning systems: Our shower and fabric-conditioning systems assist in the
removal of contaminants that collect on paper machine fabrics used to convey the paper web through
the forming, pressing, and drying sections of the paper machine. The average paper machine has
between 3 and 12 fabrics. These fabrics can easily become contaminated with fiber, fillers, pitch, and
dirt that can have a detrimental effect on paper machine performance and paper quality. Our shower
and fabric-conditioning systems assist in the removal of these contaminants.
Formation systems: We supply structures that drain, purify, and recycle process water from the pulp
mixture during paper sheet and web formation.
– Water-filtration systems: We offer a variety of filtration systems and strainers that remove
contaminants from process water before reuse and recover reusable fiber for recycling back into the
pulp mixture.
Fluid-handling systems and equipment
We develop, manufacture and market rotary joints, precision unions, steam and condensate systems,
components, and controls used primarily in the dryer section of the papermaking process and during the
production of corrugated boxboard, metals, plastics, rubber, textiles, and food. Our principal fluid-handling
systems include:
–
–
–
–
Rotary joints: Our mechanical devices, used with rotating shafts, allow the transfer of pressurized fluid
from a stationary source into and out of rotating machinery for heating, cooling, or the transfer of fluid
power.
Syphons: Our devices, installed primarily inside the rotating cylinders of paper machines, are used to
force steam once it has cooled into a liquid state (condensate) out of the drying cylinders through rotary
joints located on either end.
TurbulatorR tube bars: Our steel or stainless steel axial bars, installed on the inside of dryers, are used
to induce turbulence in the condensate layer to improve the uniformity and rate of heat transfer (drying
rate) of the dryers.
Engineered steam and condensate systems: Our systems control the flow of steam from the boiler to the
paper drying cylinders, collect condensed steam, and return it to the boiler to improve energy-
efficiency during the paper drying process.
Other Businesses
Our other businesses include our Fiber-based Products business and our Casting Products business.
Our Fiber-based Products business produces biodegradable, absorbent granules from papermaking
byproducts for use primarily as carriers for agricultural, home lawn and garden, and professional lawn, turf and
ornamental applications, as well as for oil and grease absorption.
Our Casting Products business manufactures grey and ductile iron castings.
Discontinued Operation
On October 21, 2005, our Kadant Composites LLC subsidiary (Composites LLC) sold substantially all the
assets comprising its composites business to LDI Composites Co. (the Buyer). As part of the sale transaction,
3
Kadant Inc.
2006 Annual Report
Composites LLC retained the warranty obligations associated with products manufactured prior to the sale date.
As of December 30, 2006, the accrued warranty reserve associated with the composites business was $1.1
million, which represents the low end of the range of potential loss for products under warranty. Composites LLC
has calculated the potential range of loss to be between $1.1 million and approximately $15.6 million. (See
Warranty Obligations for Discontinued Operation in Part II, Item 7 of this Report for further information.) All
future activity associated with this warranty reserve will continue to be classified in the results of the
discontinued operation in our consolidated financial statements.
Research and Development
We develop a broad range of products for all facets of the markets we serve. We focus our research and
development efforts on the technological advancement of our stock-preparation, paper machine accessory, fluid-
handling, and water-management products.
Our research and development expenses from continuing operations were $6.2 million, $4.9 million, and
$3.1 million in 2006*, 2005, and 2004, respectively.
Raw Materials
Raw materials, components, and supplies for our significant products are available either from a number of
different suppliers or from alternative sources that we believe could be developed without a material adverse
effect on our business.
The raw material used in the manufacture of our fiber-based granules is obtained from two paper recycling
mills. The mills have the exclusive right to supply papermaking byproducts to our existing granulation plant in
Green Bay, Wisconsin, under a contract which expires in December 2007 and is renewable every two years by
mutual agreement. Although we believe that our relationships with the mills are good, the mills may not agree to
renew the contract upon its expiration. We have experienced some difficulty in obtaining sufficient raw material
to operate at optimal production levels. We continue to work with the mills to ensure a stable supply of raw
material. To date, we have been able to meet all of our customer delivery requirements, but there can be no
assurance that we will be able to meet future delivery requirements. If the mills were unable or unwilling to
supply us sufficient fiber, we would be forced to find an alternative supplier for this raw material.
Patents, Licenses, and Trademarks
We protect our intellectual property rights by applying for and obtaining patents when appropriate. We also
rely on technical know-how, trade secrets, and trademarks to maintain our competitive position. We also enter
into license agreements with others to grant and/or receive rights to patents and know-how.
Papermaking Systems
We have numerous U.S. and foreign patents, including foreign counterparts to our U.S. patents, expiring on
various dates ranging from 2007 to 2026. No particular patent, or related group of patents, is so important that its
loss would significantly affect our operations. From time to time, we enter into licenses of products with other
companies serving the pulp, papermaking, converting, and paper recycling industries.
* Unless otherwise noted, references to 2006, 2005, and 2004 in this Annual Report on Form 10-K are for the
fiscal years ended December 30, 2006, December 31, 2005, and January 1, 2005, respectively.
4
Kadant Inc.
Other Businesses
2006 Annual Report
We currently hold several U.S. patents, expiring on various dates ranging from 2008 to 2021, related to
various aspects of the processing of fiber-based granules and the use of these materials in the agricultural,
professional turf, home lawn and garden, general absorption, oil and grease absorption, and catbox filler markets.
We also have foreign counterparts to certain of these U.S. patents in Canada.
Seasonal Influences
Papermaking Systems
There are no material seasonal influences on this segment’s sales of products and services.
Other Businesses
Our fiber-based granular products business experiences fluctuations in sales, usually in the third quarter,
when sales decline due to the seasonality of the agricultural and home lawn and garden markets.
Working Capital Requirements
There are no special inventory requirements or credit terms extended to customers that would have a
material adverse effect on our working capital.
Dependency on a Single Customer
No single customer accounted for more than 10% of our consolidated revenues or more than 10% of the
Papermaking Systems segment’s revenues in any of the past three years. Revenues from China were $71.3
million, $29.2 million, and $29.4 million in 2006, 2005, and 2004, respectively.
Backlog
Our backlog of firm orders for the Papermaking Systems segment was $70.4 million and $52.5 million at
year-end 2006 and 2005, respectively. We anticipate that substantially all of the backlog at December 30, 2006,
will be shipped or completed during the next 12 months. Some of these orders may be canceled by the customer
upon payment of a cancellation fee.
Competition
We face significant competition in each of our principal markets. We compete primarily on the basis of
quality, price, service, technical expertise, and product performance and innovation. We believe the reputation
that we have established for quality products and in-depth process knowledge provides us with a competitive
advantage. In addition, a significant portion of our business is generated from our existing worldwide customer
base. To maintain this base, we have emphasized technology, service, and a problem-solving relationship with
our customers.
We are a leading supplier of stock-preparation equipment used for the preparation of recycled and virgin
fibers in the production of recycled paper. Several major competitors supply various pieces of equipment for this
process. Our principal competitors in this market are Voith Paper GmbH, Groupe Laperriere & Verrault Inc.,
Metso Corporation, and Maschinenfabrik Andritz AG. We compete in this market primarily on the basis of
technical expertise, product innovation, and price. Other competitors specialize in segments within the white- and
brown-paper markets.
5
Kadant Inc.
2006 Annual Report
We are a leading supplier of specialty accessory equipment for paper machines. Our principal global
competitors in this market are Joh. Clouth GmbH & Co. KG and Metso Corporation. Because of the high capital
costs of paper machines and the role of our accessories in maintaining the efficiency of these machines, we
generally compete in this market on the basis of service, technical expertise, performance, and price.
We are a leading supplier of fluid-handling systems and equipment, offering global sales and service,
application expertise, and an extensive rotary joint product line. There are numerous competitors in this market,
including Deublin Company, Barco Company, Christian Maier GmbH & Co. KG, and Duff-Norton Company. In
addition, due to the highly fragmented nature of the rotary joint market, we compete with numerous local
competitors. We generally compete based on process knowledge, technical competency, product and service
quality, and price.
In our water-management product line, various competitors exist in the formation, shower and fabric-
conditioning systems, and filtration systems markets. Principal competitors are IBS-Paper Performance Group in
formation and shower and fabric conditioning systems and Asten/Johnson Foils in formation tables. In addition, a
variety of smaller companies compete within the shower and fabric-conditioning systems and filtration systems
markets. In each of these markets we generally compete on the basis of process knowledge, application
experience, product quality, service, and price.
Environmental Protection Regulations
We believe that our compliance with federal, state, and local environmental protection regulations will not
have a material adverse effect on our capital expenditures, earnings, or competitive position.
Employees
As of December 30, 2006, we had approximately 2,000 employees worldwide.
Financial Information
Financial information concerning our segment and product lines is summarized in Part IV, Item 15, Exhibits
and Financial Statement Schedules, Note 11, which begins on page F-1 of this Report.
Financial information about exports by domestic operations and about foreign operations is summarized in
Part IV, Item 15, Exhibits and Financial Statement Schedules, Note 11, which begins on page F-1 of this Report.
Available Information
We file annual, quarterly, and current reports, proxy statements, and other documents with the Securities
and Exchange Commission (SEC) under the Exchange Act. The public may read and copy any materials that we
file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public
may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Also, the SEC maintains a website that contains reports, proxy and information statements, and other information
regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that
we file with the SEC at www.sec.gov. We also make available free of charge through our website at
www.kadant.com our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, and amendments to these Reports filed with or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act, as soon as reasonably practicable after we electronically file these materials with, or furnish them to, the
SEC. We are not including the information contained in our website as part of this Report nor are we
incorporating the information on our website into this Report by reference.
6
Kadant Inc.
Executive Officers of the Registrant
2006 Annual Report
The following table summarizes certain information concerning individuals who are our executive officers
as of March 1, 2007:
Name
Age
Present Title (Fiscal Year First Became Executive Officer)
William A. Rainville . . . . . . .
Edward J. Sindoni . . . . . . . . .
Thomas M. O’Brien . . . . . . .
Jonathan W. Painter . . . . . . .
Eric T. Langevin . . . . . . . . . .
Edwin D. Healy . . . . . . . . . . .
. . . . . . . .
Sandra L. Lambert
Michael J. McKenney . . . . . .
65 Chairman of the Board, President, and Chief Executive Officer (1991)
62 Executive Vice President and Chief Operating Officer (1994)
55 Executive Vice President and Chief Financial Officer (1994)
48 Executive Vice President (1997)
44
Senior Vice President (2006)
69 Vice President (2002)
51 Vice President, General Counsel, and Secretary (2001)
45 Vice President, Finance and Chief Accounting Officer (2002)
Mr. Rainville has been president and chief executive officer since our incorporation in 1991, a member of
our board of directors since 1992, and chairman of our board since 2001. Prior to our spin-off in 2001,
Mr. Rainville also held various managerial positions with Thermo Electron, including chief operating officer,
recycling and resource recovery, a position he held since 1998, and for more than five years prior to that, senior
vice president. Prior to joining Thermo Electron, Mr. Rainville held positions at Drott Manufacturing, Paper
Industry Engineering, and Sterling Pulp and Paper.
Mr. Sindoni was named an executive vice president and our chief operating officer in March 2006 and is
responsible for global operations. Prior to that, he served as a senior vice president from 2001 to 2006 with
responsibility for our paper machine accessory equipment and water-management systems product lines. From
1992 to 2001, he served as a vice president. Prior to joining us in 1987, he had a 21-year career with the General
Electric Company.
Mr. O’Brien has been an executive vice president since 1998 and our chief financial officer since 2001. He
served as our treasurer from 2001 to February 2005 and also as vice president, finance, from 1991 to 1998. Prior
to joining us, Mr. O’Brien held various finance positions at Racal Interlan, Inc., Prime Computer, Compugraphic
Corporation, and the General Electric Company.
Mr. Painter has been an executive vice president since 1997 and served as president of our composite
building products business from 2001 until its sale in 2005. He served as our treasurer and treasurer of Thermo
Electron from 1994 until 1997. Prior to 1994, Mr. Painter held various managerial positions with us and at
Thermo Electron.
Mr. Langevin was first named a vice president in March 2006 and was promoted to senior vice president on
March 1, 2007, with responsibility for our global paper machine accessory equipment and water-management
systems product lines. Mr. Langevin has been president of our Kadant Web Systems Inc. subsidiary since 2001,
and before that served as its senior vice president and vice president of operations. Prior to that, Mr. Langevin
managed several product groups and departments within Kadant Web Systems after joining us in 1986 as a
product development engineer.
Mr. Healy has been a vice president since October 2002 and is responsible for our stock-preparation
equipment business. He also served as the president of our Kadant Black Clawson Inc. subsidiary from 2000 to
mid-2003. He held various managerial positions at Kadant Black Clawson following its acquisition in 1997 and
before that, served as the president of our Fiberprep Inc. subsidiary from 1988 to 1997. Prior to joining us,
Mr. Healy had a 29-year career with Bird, Escher, Wyss and its predecessor, Bird Machinery.
Ms. Lambert has been a vice president and our general counsel since 2001, and our secretary since our
incorporation in 1991. Prior to joining us, she was a vice president and secretary of Thermo Electron since 1999
and 1990, respectively, and before that was a member of Thermo Electron’s legal department.
Mr. McKenney has been our vice president, finance and chief accounting officer since January 2002, and
served as our corporate controller since 1997. Mr. McKenney was controller of Kadant AES, our division
7
Kadant Inc.
2006 Annual Report
acquired from Albany International Inc., from 1993 to 1997. Prior to 1993, Mr. McKenney held various financial
positions at Albany International.
Item 1A. Risk Factors
In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we
wish to caution readers that the following important factors, among others, in some cases have affected, and in
the future could affect, our actual results and could cause our actual results in 2007 and beyond to differ
materially from those expressed in any forward-looking statements made by us, or on our behalf.
Our business is dependent on the condition of the pulp and paper industry.
We sell products primarily to the pulp and paper industry, which is a cyclical industry. Generally, the
financial condition of the global pulp and paper industry corresponds to the condition of the general economy, as
well as to a number of other factors, including pulp and paper production capacity relative to demand. In recent
years, the paper industry in certain geographic regions, notably Europe and North America, has undergone a
number of structural changes, including decreased spending, mill closures, consolidations, and bankruptcies, all
of which have adversely affected our business. In addition, paper producers have been and continue to be
negatively affected by higher operating costs, especially higher energy and chemical costs. We believe paper
companies are still cautious about increasing their capital and operating spending in the current market
environment. As paper companies consolidate in response to market weakness, they frequently reduce capacity
and postpone or even cancel capacity addition or expansion projects. These actions can adversely affect our
revenue and profitability globally or in a particular region or product line.
A significant portion of our international sales has, and may in the future, come from China. We operate several
manufacturing facilities in China.
In 2006, we experienced a significant increase in revenues from China and acquired another manufacturing
facility in Jining, China. Through our acquisition of Kadant Johnson in May 2005, we also have a manufacturing
operation in Wuxi, China. We plan to begin manufacturing accessory and water management products in China
for the Chinese market in 2007. During 2006 and 2005, approximately $71.3 million, or 21%, and $29.2 million,
or 12%, respectively, of our revenues were to customers in China. Our manufacturing facilities in China, as well
as the significant level of revenues from China, expose us to increased risk in the event of changes in the policies
of the Chinese government, political unrest, unstable economic conditions, or other developments in China or in
U.S.-China relations that are adverse to trade, including enactment of protectionist legislation or trade or
currency restrictions. In addition, orders from customers in China, particularly for large stock-preparation
systems that have been tailored to a customer’s specific requirements, have credit risks higher than we generally
incur elsewhere and some orders are subject to the receipt of financing approvals from the Chinese government.
For this reason, we do not record signed contracts from customers in China for large stock-preparation systems as
orders until the down payments for such contracts are received. The timing of the receipt of these orders and the
down payments are uncertain and there is no assurance that we will be able to recognize revenue on these
contracts. In addition, we may experience a loss if the contract is cancelled prior to the receipt of a down
payment in the event we commence engineering or other work associated with the contract.
8
Kadant Inc.
2006 Annual Report
Our business is subject to economic, currency, political, and other risks associated with international sales and
operations.
During 2006 and 2005, approximately 61% and 60%, respectively, of our sales were to customers outside
the United States, principally in China and Europe. In addition, we operate several manufacturing operations
worldwide, including in China, Mexico, and Brazil. International revenues and operations are subject to a number
of risks, including the following:
–
–
–
–
–
agreements may be difficult to enforce and receivables difficult to collect through a foreign country’s
legal system;
foreign customers may have longer payment cycles;
foreign countries may impose additional withholding taxes or otherwise tax our foreign income,
impose tariffs, or adopt other restrictions on foreign trade; and
it may be difficult to repatriate funds, due to unfavorable tax consequences or other restrictions or
limitations imposed by foreign governments.
the protection of intellectual property in foreign countries may be more difficult to enforce.
Although we seek to charge our customers in the same currency in which our operating costs are incurred,
fluctuations in currency exchange rates may affect product demand and adversely affect the profitability in U.S.
dollars of products we provide in international markets where payment for our products and services is made in
their local currencies. In addition, our inability to repatriate funds could adversely affect our ability to service our
debt obligations. Any of these factors could have a material adverse impact on our business and results of
operations.
We are subject to intense competition in all our markets.
We believe that the principal competitive factors affecting the markets for our products include quality,
price, service, technical expertise, and product innovation. Our competitors include a number of large
multinational corporations that may have substantially greater financial, marketing, and other resources than we
do. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the promotion and sale of their services and products.
Competitors’ technologies may prove to be superior to ours. Our current products, those under development, and
our ability to develop new technologies may not be sufficient to enable us to compete effectively. Competition,
especially in China, has increased as new companies enter the market and existing competitors expand their
product lines and manufacturing operations.
Our debt may adversely affect our cash flow and may restrict our investment opportunities.
In 2005, we entered into a Credit Agreement, as subsequently amended, consisting of a $60 million five-
year term loan and a $35 million revolver and borrowed $60 million to fund the acquisition of Kadant Johnson
under the term loan. We have also borrowed additional amounts to fund acquisitions and grow our business, and
may also obtain additional long-term debt and working capital lines of credit to meet future financing needs,
which would have the effect of increasing our total leverage.
Our leverage could have negative consequences, including:
–
–
–
–
increasing our vulnerability to adverse economic and industry conditions,
limiting our ability to obtain additional financing,
limiting our ability to pay dividends on or to repurchase our capital stock,
limiting our ability to acquire new products and technologies through acquisitions or licensing
agreements, and
limiting our flexibility in planning for, or reacting to, changes in our business and the industries in
which we compete.
–
9
Kadant Inc.
2006 Annual Report
Our existing indebtedness bears interest at floating rates and as a result, our interest payment obligations on
our indebtedness will increase if interest rates increase. To reduce the exposure to floating rates, $37.9 million, or
70%, of our outstanding floating rate debt as of December 30, 2006 was hedged through interest rate swap
agreements.
Our ability to satisfy our obligations and to reduce our total debt depends on our future operating
performance and on economic, financial, competitive, and other factors beyond our control. Our business may
not generate sufficient cash flows to meet these obligations or to successfully execute our business strategy. If we
are unable to service our debt and fund our business, we may be forced to reduce or delay capital expenditures or
research and development expenditures, seek additional financing or equity capital, restructure or refinance our
debt, or sell assets. We may not be able to obtain additional financing or refinance existing debt or sell assets on
terms acceptable to us or at all.
Restrictions in our Credit Agreement may limit our activities.
Our Credit Agreement contains, and future debt instruments to which we may become subject may contain,
restrictive covenants that limit our ability to engage in activities that could otherwise benefit us, including
restrictions on our ability and the ability of our subsidiaries to:
incur additional indebtedness,
pay dividends on, redeem, or repurchase our capital stock,
–
–
– make investments,
create liens,
–
sell assets,
–
enter into transactions with affiliates, and
–
consolidate, merge, or transfer all or substantially all of our assets and the assets of our subsidiaries.
–
We are also required to meet specified financial ratios under the terms of our Credit Agreement. Our ability
to comply with these financial restrictions and covenants is dependent on our future performance, which is
subject to prevailing economic conditions and other factors, including factors that are beyond our control such as
foreign exchange rates, interest rates, changes in technology, and changes in the level of competition.
Our failure to comply with any of these restrictions or covenants may result in an event of default under our
Credit Agreement and other loan obligations, which could permit acceleration of the debt under those
instruments and require us to repay the debt before its scheduled due date.
If an event of default occurs, we may not have sufficient funds available to make the required payments
under our indebtedness. If we are unable to repay amounts owed under our debt agreements, those lenders may
be entitled to foreclose on and sell the collateral that secures our borrowings under the agreements.
Future warranty claims associated with the discontinued operation may exceed the warranty reserve and the
assets of the discontinued operation.
On October 21, 2005, Composites LLC sold its composites business, but retained the warranty obligation
associated with products manufactured prior to the sale date. All future activity associated with this warranty
obligation is classified in the results of the discontinued operation in our consolidated financial statements. The
discontinued operation has experienced significant liabilities associated with warranty claims related to its
composite decking products manufactured prior to the sale date. Our consolidated results will continue to be
impacted by these warranty obligations and the claims may exceed the assets of the discontinued operation. The
assets and liabilities of the discontinued operation are held in our Composites LLC subsidiary.
During the third quarter of 2006, Composites LLC concluded that the highly subjective nature of the
assumptions used in estimating the warranty obligation were not accurately predicting the actual level of
warranty claims making it no longer possible to calculate a reasonable estimate of the future level of potential
warranty claims. Accordingly, as no amount within the total range of loss represents a best estimate of the
10
Kadant Inc.
2006 Annual Report
ultimate loss to be recorded, we are required under Statement of Financial Accounting Standards (SFAS) No. 5,
“Accounting for Contingencies” to record the minimum amount of the potential range of loss as the warranty
obligation in our consolidated results. The warranty obligation as of December 30, 2006 represents the low end
of the estimated range of warranty reserve required based on the level of claims processed to date. The total
potential warranty cost ranges from $1.1 million to approximately $15.6 million. The high end of the range
represents the estimated maximum level of warranty claims remaining based on the total sales of the products
under warranty. Going forward, adjustments to the warranty obligation will be recorded to reflect the minimum
amount of the potential range of loss for products under warranty which will adversely affect our consolidated
results.
Our inability to successfully identify and complete acquisitions or successfully integrate any new or previous
acquisitions could have a material adverse effect on our business.
Our strategy includes the acquisition of technologies and businesses that complement or augment our
existing products and services. Our most recent acquisition was the Kadant Jining acquisition in June 2006. Any
such acquisition involves numerous risks that may adversely affect our future financial performance and cash
flows. These risks include:
–
–
–
–
–
–
–
–
–
competition with other prospective buyers may result in our inability to complete an acquisition or in
us paying substantial premiums over the fair value of the net assets of the acquired business,
inability to obtain regulatory approval, including antitrust approvals,
difficulty in assimilating operations, technologies, products and the key employees of the acquired
business,
inability to maintain existing customers or to sell the products and services of the acquired business to
our existing customers,
diversion of management’s attention away from other business concerns,
inability to improve the revenues, profitability or realize the cost savings and synergies expected in the
acquisition,
assumption of significant liabilities, some of which may be unknown at the time,
potential future impairment of the value of goodwill and intangible assets acquired, and
identification of internal control deficiencies of the acquired business.
We may be required to reorganize our operations in response to changing conditions in the paper industry, and
such actions may require significant expenditures and may not be successful.
In the past few years, we have undertaken various restructuring measures in response to changing market
conditions in the paper industry. For example, in 2004 we incurred costs of approximately $9.2 million in
connection with the restructuring of our subsidiary in France. We may engage in additional cost reduction
programs in the future. We may not recoup the costs of programs we have already initiated, or other programs we
may decide to engage in the future, the costs of which may be significant. In connection with any future plant
closures, delays or failures in the transition of production from existing facilities to our other facilities in other
geographic regions could also adversely affect our financial operations. In addition, our profitability may decline
if our restructuring efforts do not sufficiently reduce our future costs while at the same time positioning us to
maintain or increase our sales.
Our fiber-based products business is subject to a number of factors that may adversely influence its profitability,
including high costs of natural gas and dependence on a few suppliers of raw materials.
We use natural gas in the production of our fiber-based granular products, the price of which is subject to
fluctuation. We seek to manage our exposure to natural gas price fluctuations by entering into short-term forward
contracts to purchase specified quantities of natural gas from a supplier. We may not be able to effectively
11
Kadant Inc.
2006 Annual Report
manage our exposure to natural gas price fluctuations. Although the cost of natural gas has fallen recently, we
may not realize the benefit of lower prices due to the short-term forward contracts we have entered into. Higher
costs of natural gas will adversely affect our consolidated results if we are unable to effectively manage our
exposure or pass these costs on to customers in the form of surcharges.
We are dependent on two paper mills for the fiber used in the manufacture of our fiber-based granular
products. These mills have the exclusive right to supply the papermaking byproducts used in the manufacturing
process. Due to process changes at the mills, we have experienced some difficulty obtaining sufficient raw
material to operate at optimal production levels. We continue to work with the mills to ensure a stable supply of
raw material. To date, we have been able to meet all of our customer delivery requirements, but there can be no
assurance that we will be able to meet future delivery requirements. Although we believe our relationship with
the mills is good, the mills could decide not to renew the contract when it expires at the end of 2007, or may not
agree to renew on commercially reasonable terms. If the mills were unable or unwilling to supply us sufficient
fiber, we would be forced to find an alternative supply for this raw material. We may be unable to find an
alternative supply on commercially reasonable terms or could incur excessive transportation costs if an
alternative supplier were found, which would increase our manufacturing costs and might prevent prices for our
products from being competitive.
Our inability to protect our intellectual property could have a material adverse effect on our business. In
addition, third parties may claim that we infringe their intellectual property, and we could suffer significant
litigation or licensing expense as a result.
We seek patent and trade secret protection for significant new technologies, products, and processes because
of the length of time and expense associated with bringing new products through the development process and
into the marketplace. We own numerous U.S. and foreign patents, and we intend to file additional applications,
as appropriate, for patents covering our products. Patents may not be issued for any pending or future patent
applications owned by or licensed to us, and the claims allowed under any issued patents may not be sufficiently
broad to protect our technology. Any issued patents owned by or licensed to us may be challenged, invalidated,
or circumvented, and the rights under these patents may not provide us with competitive advantages. In addition,
competitors may design around our technology or develop competing technologies. Intellectual property rights
may also be unavailable or limited in some foreign countries, which could make it easier for competitors to
capture increased market share. We could incur substantial costs to defend ourselves in suits brought against us,
including for alleged infringement of third party rights, or in suits in which we may assert our intellectual
property rights against others. An unfavorable outcome of any such litigation could have a material adverse
effect on our business and results of operations. In addition, as our patents expire, we rely on trade secrets and
proprietary know-how to protect our products. We cannot be sure the steps we have taken or will take in the
future will be adequate to deter misappropriation of our proprietary information and intellectual property. Of
particular concern are developing economies such as China, where the laws, courts, and administrative agencies
may not protect our intellectual property rights as fully as in other countries.
We seek to protect trade secrets and proprietary know-how, in part, through confidentiality agreements with
our collaborators, employees, and consultants. These agreements may be breached, we may not have adequate
remedies for any breach, and our trade secrets may otherwise become known or be independently developed by
our competitors or our competitors may otherwise gain access to our intellectual property.
12
Kadant Inc.
2006 Annual Report
Fluctuations in our quarterly operating results may cause our stock price to decline.
Given the nature of the markets in which we participate and the effect of Staff Accounting Bulletin (SAB)
No. 104, “Revenue Recognition,” we may not be able to reliably predict future revenues and profitability, and
unexpected changes may cause us to adjust our operations. A large proportion of our costs are fixed, due in part
to our significant selling, research and development, and manufacturing costs. Thus, small declines in revenues
could disproportionately affect our operating results. Other factors that could affect our quarterly operating
results include:
–
–
–
–
–
–
–
–
–
–
–
–
failure of our products to pass contractually agreed upon acceptance tests, which would delay or
prohibit recognition of revenues under SAB No. 104,
failure of a customer, particularly in China, to comply with an order’s contractual obligations,
adverse changes in demand for and market acceptance of our products,
competitive pressures resulting in lower sales prices of our products,
adverse changes in the pulp and paper industry,
delays or problems in our introduction of new products,
delays or problems in the manufacture of our products,
our competitors’ announcements of new products, services, or technological innovations,
contractual liabilities incurred by us related to guarantees of our product performance,
increased costs of raw materials or supplies, including the cost of energy,
changes in the timing of product orders, and
fluctuations in our effective tax rate.
Anti-takeover provisions in our charter documents, under Delaware law, and in our shareholder rights plan
could prevent or delay transactions that our shareholders may favor.
Provisions of our charter and bylaws may discourage, delay, or prevent a merger or acquisition that our
shareholders may consider favorable, including transactions in which shareholders might otherwise receive a
premium for their shares. For example, these provisions:
–
–
–
–
–
–
authorize the issuance of “blank check” preferred stock without any need for action by shareholders,
provide for a classified board of directors with staggered three-year terms,
require supermajority shareholder voting to effect various amendments to our charter and bylaws,
eliminate the ability of our shareholders to call special meetings of shareholders,
prohibit shareholder action by written consent, and
establish advance notice requirements for nominations for election to our board of directors or for
proposing matters that can be acted on by shareholders at shareholder meetings.
In addition, our board of directors has adopted a shareholder rights plan intended to protect shareholders in
the event of an unfair or coercive offer to acquire our company and to provide our board of directors with
adequate time to evaluate unsolicited offers. Preferred stock purchase rights have been distributed to our common
shareholders pursuant to the rights plan. This rights plan may have anti-takeover effects. The rights plan will
cause substantial dilution to a person or group that attempts to acquire us on terms that our board of directors
does not believe are in our best interests and those of our shareholders and may discourage, delay, or prevent a
merger or acquisition that shareholders may consider favorable, including transactions in which shareholders
might otherwise receive a premium for their shares.
Item 1B. Unresolved Staff Comments
Not applicable.
13
Kadant Inc.
Item 2. Properties
2006 Annual Report
We believe that our facilities are in good condition and are suitable and adequate for our present operations.
We do not anticipate significant difficulty in obtaining lease renewals or alternate space as needed. The location
and general character of our principal properties as of December 30, 2006, are as follows:
Papermaking Systems
We own approximately 1,856,000 square feet and lease approximately 144,000 square feet, under leases
expiring on various dates ranging from 2007 to 2012, of manufacturing, engineering, and office space. In
addition, in China we lease the land associated with our buildings under long-term leases, which expire on dates
ranging from 2044 to 2054. Our principal engineering and manufacturing facilities are located in
Vitry-le-Francois, France; Jining, China; Three Rivers, Michigan, U.S.A; Auburn, Massachusetts, U.S.A;
Yangzhou, China; Theodore, Alabama, U.S.A; Queensbury, New York, U.S.A; Weesp, The Netherlands; Wuxi,
China; Bury, England; Hindas, Sweden; Guadalajara, Mexico; Summerstown, Ontario, Canada; Sao Paulo,
Brazil; and Mason, Ohio, U.S.A.
Corporate and Other Businesses
We lease approximately 10,000 square feet in Westford, Massachusetts, for our corporate headquarters
under a lease expiring in 2013. We own approximately 26,000 square feet of manufacturing and office space
located in Green Bay, Wisconsin. We also lease approximately 25,000 square feet, under a lease which expired in
January 2007, of manufacturing space located in Green Bay, Wisconsin. We currently occupy this space on a
tenant-at-will basis. We also own 33,000 square feet of manufacturing and office space in Springport, Michigan.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
14
Kadant Inc.
2006 Annual Report
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
Market Price of Common Stock
Our common stock trades on the New York Stock Exchange under the symbol KAI.
The following table sets forth the high and low sales prices of our common stock for 2006 and 2005, as
reported in the consolidated transaction reporting system.
Quarter
2006
2005
High
Low
High
Low
First . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$23.32
27.10
26.55
27.98
$17.95
20.70
19.50
22.79
$21.22
22.65
23.18
20.54
$18.15
17.02
18.27
16.50
Holders of Common Stock
As of February 28, 2007, we had approximately 5,421 holders of record of our common stock. This does not
include holdings in street or nominee name. The closing market price on the New York Stock Exchange for our
common stock on February 28, 2007, was $23.42 per share.
Dividend Policy
We have never declared or paid cash dividends and we do not at this time expect to pay cash dividends in
the foreseeable future because our policy has been to use earnings to finance expansion and growth, as well as
repurchase our stock. Payment of dividends will rest within the discretion of the board of directors and will
depend upon, among other factors, our earnings, capital requirements, and financial condition. Our ability to pay
dividends is restricted by the terms of our Credit Agreement.
Issuer Purchases of Equity Securities
The following table provides information about purchases by us of our common stock during the fourth
quarter of 2006:
Period
Issuer Purchases of Equity Securities
Total Number
of Shares
Purchased (1)
Average Price Paid
per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans (1)
Approximate Dollar Value
of Shares that May Yet
Be Purchased
Under the Plans
10/1/06 – 10/31/06 . . . . . . . . . . .
11/1/06 – 11/30/06 . . . . . . . . . . .
12/1/06 – 12/30/06 . . . . . . . . . . .
–
20,300
147,200
Total
. . . . . . . . . . . . . . . . . . . . . .
167,500
–
$23.59
$24.37
$24.28
–
20,300
147,200
167,500
$11,885,514
$11,406,581
$ 7,818,695
(1) On May 3, 2006, our board of directors authorized the repurchase of up to $15 million of our equity
securities during the period from May 18, 2006 through May 18, 2007. Repurchases may be made in public
or private transactions, including under Securities Exchange Act Rule 10b-5-1 trading plans. As of
December 30, 2006, we had repurchased 135,300 shares of our common stock for $3.1 million in the third
quarter of 2006, and 167,500 shares of our common stock for $4.1 million in the fourth quarter of 2006
under this authorization.
15
Kadant Inc.
Item 6. Selected Financial Data
2006 Annual Report
(In thousands, except per share amounts)
2006 (a)
2005
2004 (b)
2003 (c)
2002(c,d,e)
Statement of Operations Data
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from Continuing Operations Before
Cumulative Effect of Change in Accounting
Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from Discontinued Operation, Net of Tax . . . . . .
Income Before Cumulative Effect of Change in
Accounting Principle . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative Effect of Change in Accounting Principle,
Net of Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$341,613
$243,713
$194,966
$191,507
$177,113
18,281
(1,184)
9,865
(2,988)
5,753
(5,099)
13,123
(1,306)
8,280
(2,326)
17,097
6,877
654
11,817
5,954
–
–
–
–
(32,756)
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 17,097
$
6,877
$
654
$ 11,817
$ (26,802)
Basic Earnings (Loss) per Share:
Continuing Operations Before Cumulative Effect
of Change in Accounting Principle . . . . . . . . .
Discontinued Operation . . . . . . . . . . . . . . . . . . . .
Cumulative Effect of Change in Accounting
$
$
1.32
(.08)
$
.71
(.21)
$
.41
(.36)
$
.96
(.09)
.64
(.18)
Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
–
–
–
–
(2.53)
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . .
$
1.24
$
.50
$
.05
$
.87
$
(2.07)
Diluted Earnings (Loss) per Share:
Continuing Operations Before Cumulative Effect
of Change in Accounting Principle . . . . . . . . .
Discontinued Operation . . . . . . . . . . . . . . . . . . . .
Cumulative Effect of Change in Accounting
$
$
1.30
(.09)
$
.70
(.21)
$
.40
(.35)
$
.94
(.09)
.63
(.18)
Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
–
–
–
–
(2.49)
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . .
$
1.21
$
.49
$
.05
$
.85
$
(2.04)
Balance Sheet Data (f)
Working Capital (g) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-Term Obligations . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ Investment . . . . . . . . . . . . . . . . . . . . . . .
$ 80,542
393,085
44,652
237,965
$ 75,446
355,811
46,500
207,625
$113,650
285,237
–
212,461
$114,935
271,713
–
211,758
$ 83,855
231,517
580
181,257
(a) Reflects $0.8 million of pre-tax restructuring costs.
(b) Reflects $9.5 million of pre-tax restructuring and other costs.
(c) Restated to reflect the composite building products business as a discontinued operation.
(d) Reflects $2.4 million of pre-tax restructuring and other costs, the redemption and repurchase of $118.1
million of our 4 1⁄ 2% subordinated convertible debentures, resulting in a pre-tax gain of $50.0 thousand, and
cumulative effect of a change in accounting principle of $32.8 million associated with the adoption of SFAS
No. 142.
(e) Annual results were revised to reclassify extraordinary gains from the redemption and repurchase of our
(f)
(g)
debentures in accordance with SFAS No. 145.
Includes the composite building products business, which is reflected as a discontinued operation.
Includes $3.0 million, $7.4 million, $8.1 million, $12.2 million, and $10.1 million in 2006, 2005, 2004,
2003, and 2002, respectively, associated with the discontinued operation.
16
Kadant Inc.
2006 Annual Report
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Reference is made throughout this Management’s Discussion and Analysis of Financial Condition and
Results of Operations to Notes included in the Consolidated Financial Statements, beginning on page F-1 of this
Report.
Overview
Company Overview
We are a leading supplier of equipment used in the global papermaking and paper recycling industries and
are also a manufacturer of granules made from papermaking byproducts. Our continuing operations are
comprised of one reportable operating segment: Pulp and Papermaking Systems (Papermaking Systems), and two
product lines, Fiber-based Products and Casting Products, included in Other Businesses. Through our
Papermaking Systems segment, we develop, manufacture, and market a range of equipment and products for the
global papermaking and paper recycling industries. We have a large, stable customer base that includes most of
the world’s major paper manufacturers. We believe our large installed base provides us with a spare parts and
consumables business that yields higher margins than our capital equipment business, and which should be less
susceptible to the cyclical trends in the paper industry.
Through our Fiber-based Products line, we manufacture and sell granules derived from pulp fiber for use as
carriers for agricultural, home lawn and garden, and professional lawn, turf and ornamental applications, as well
as for oil and grease absorption. We also manufacture and sell grey and ductile iron castings through our Casting
Products business.
In addition, prior to its sale on October 21, 2005, we operated a composites building products business,
which is presented as a discontinued operation in the accompanying consolidated financial statements.
International Sales
During 2006 and 2005, approximately 61% and 60%, respectively, of our sales were to customers outside
the United States, principally in China and Europe. We generally seek to charge our customers in the same
currency in which our operating costs are incurred. However, our financial performance and competitive position
can be affected by currency exchange rate fluctuations affecting the relationship between the U.S. dollar and
foreign currencies. We seek to reduce our exposure to currency fluctuations through the use of forward currency
exchange contracts. We may enter into forward contracts to hedge certain firm purchase and sale commitments
denominated in currencies other than our subsidiaries’ functional currencies. These contracts hedge transactions
principally denominated in U.S. dollars.
Application of Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenues
and expenses during the reporting period. Our actual results may differ from these estimates under different
assumptions or conditions.
Critical accounting policies are defined as those that entail significant judgments and uncertainties, and
could potentially result in materially different results under different assumptions and conditions. We believe that
our most critical accounting policies upon which our financial condition depends, and which involve the most
complex or subjective decisions or assessments, are those described below. For a discussion on the application of
these and other accounting policies, see Note 1 in the Notes to Consolidated Financial Statements.
17
Kadant Inc.
2006 Annual Report
Revenue Recognition and Accounts Receivable. We enter into arrangements with customers that have
multiple deliverables, such as equipment and installation, and we recognize revenues and profits on certain long-
term contracts using the percentage-of-completion method of accounting.
–
–
Percentage-of-Completion. Revenues recorded under the percentage-of-completion method of
accounting were $91.9 million in 2006, $55.6 million in 2005, and $43.7 million in 2004. The
percentage of completion is determined by comparing the actual costs incurred to date to an estimate of
total costs to be incurred on each contract. If a loss is indicated on any contract in process, a provision
is made currently for the entire loss. Our contracts generally provide for billing of customers upon the
attainment of certain milestones specified in each contract. Revenues earned on contracts in process in
excess of billings are classified as unbilled contract costs and fees, and amounts billed in excess of
revenues are classified as billings in excess of contract costs and fees. The estimation process under the
percentage-of-completion method affects the amounts reported in our consolidated financial
statements. A number of internal and external factors affect our percentage-of-completion and cost of
sales estimates, including labor rate and efficiency variances, estimates of warranty costs, estimated
future material prices from vendors, and customer specification and testing requirements. In addition,
we are exposed to the risk, primarily relating to our orders in China, that a customer will not comply
with the order’s contractual obligations to take delivery of the equipment. The contractual obligations
relating to the order may be difficult to enforce through a foreign country’s legal system, which could
result in a significant credit exposure in the period or periods that were to be affected by the breach of
contract. Although we make every effort to ensure the accuracy of our estimates in the application of
this accounting policy, if our actual results differed from our estimates, or if we were to use different
assumptions, it is possible that materially different amounts could be reported as revenues in our
consolidated financial statements.
SAB No. 104. Under SAB No. 104, “Revenue Recognition,” when the terms of sale include customer
acceptance provisions, and compliance with those provisions cannot be demonstrated until customer
acceptance, revenues are recognized upon such acceptance. When a sale arrangement involves multiple
elements (e.g., installation), we consider the guidance in Emerging Issues Task Force (EITF) No. 00-21
“Revenue Arrangements with Multiple Deliverables.” Such transactions are evaluated to determine
whether the deliverables in the arrangement represent separate units of accounting. If equipment and
installation do not meet the separation criteria under EITF No. 00-21, revenues for products sold that
require installation, for which the installation is essential to functionality or is not deemed
inconsequential or perfunctory, are recognized upon completion of installation. Revenues for products
sold where installation is not essential to functionality, and is deemed inconsequential or perfunctory,
are recognized upon shipment, with estimated installation costs accrued. We provide a reserve for the
estimated warranty and installation costs at the time revenue is recognized, as applicable. To the extent
that installation becomes a significant component of our business in the future, the judgment associated
with the determination of revenue recognition will increase. The complexity of all issues related to the
assumptions, risks, and uncertainties inherent in the application of SAB No. 104 affects the amounts
reported as revenues in our consolidated financial statements. Under SAB No. 104, we may not be able
to reliably predict future revenues and profitability due to the difficulty of estimating when installation
will be performed or when we will meet the contractually agreed upon performance tests, which can
delay or prohibit recognition of revenues. The determination of when we install the equipment or fulfill
the performance guarantees is largely dependent on our customers, their willingness to allow
installation of the equipment or performance of the appropriate tests in a timely manner, and their
cooperation in addressing possible problems that would impede achievement of the performance
guarantee criteria. Unexpected changes in the timing related to the completion of installation or
performance guarantees could cause our revenues and earnings to be significantly affected.
We exercise judgment in determining our allowance for bad debts, which is based on our historical
collection experience, current trends, credit policies, specific customer collection issues, and accounts receivable
18
Kadant Inc.
2006 Annual Report
aging categories. In determining this allowance, we look at historical writeoffs of our receivables. We also look
at current trends in the credit quality of our customer base as well as changes in our credit policies. We perform
ongoing credit evaluations of our customers and adjust credit limits based upon payment history and each
customer’s current creditworthiness. We continuously monitor collections and payments from our customers. In
addition, in some instances we utilize letters of credit as a way to mitigate credit exposure. While actual bad
debts have historically been within our expectations and the provisions established, we cannot guarantee that we
will continue to experience the same rate of bad debts that we have in the past, especially in light of business
conditions in the paper industry. A significant change in the liquidity or financial position of any of our
customers could result in the uncollectibility of the related accounts receivable and could adversely affect our
operating cash flows in that period.
Warranty Obligations for Continuing Operations. We offer warranties of various durations to our customers
depending upon the specific product and terms of the customer purchase agreement. We typically negotiate terms
regarding warranty coverage and length of warranty depending on the products and their applications. Our
standard mechanical warranties require us to repair or replace a defective product during the warranty period at
no cost to the customer. We record an estimate for warranty-related costs at the time of sale based on our actual
historical return rates and repair costs, as well as other analytical tools for estimating future warranty claims.
These estimates are revised for variances between actual and expected claims rates. While our warranty costs
have historically been within our expectations and the provisions established, we cannot guarantee that we will
continue to experience the same warranty return rates or repair costs that we have in the past.
A significant increase in warranty return rates or costs to repair our products would lead to an increase in the
warranty provision and could have a material adverse impact on our consolidated results for the period or periods
in which such returns or additional costs occur.
Warranty Obligations for Discontinued Operation. On October 21, 2005, our Kadant Composites LLC
subsidiary (Composites LLC) sold substantially all of its assets, comprising the composites business, to LDI
Composites Co. (the Buyer) for approximately $11.9 million in cash and the assumption of $1.4 million in
liabilities resulting in an $84,000 loss on sale. As part of the sale transaction, Composites LLC retained the
warranty obligations associated with products manufactured prior to the sale date. Activity associated with the
warranty reserve is classified in the results of the discontinued operation in our consolidated financial statements.
Through the sale date of October 21, 2005, Composites LLC offered a standard limited warranty to the owner of
its decking and roofing products, limited to repair or replacement of the defective product or a refund of the
original purchase price.
Prior to the sale of the composites business, Composites LLC recorded an estimate for warranty-related
costs at the time of sale based on its actual historical return rates and repair costs, as well as other analytical tools
for estimating future warranty claims. These estimates were revised for variances between actual and expected
claims rates. Composites LLC’s analysis of expected warranty claims rates included detailed assumptions
associated with potential product returns, including the type of product sold, temperatures at the location of
installation, density of boards, and other factors. Certain assumptions, such as the effect of weather conditions
and high temperatures on the product installed, included inherent uncertainties that were subject to fluctuation.
Through the second quarter of 2006, Composites LLC continued to record an estimate for warranty-related costs
based on this methodology.
During the third quarter of 2006, Composites LLC concluded that the highly subjective nature of the
assumptions noted above were not accurately predicting the actual level of warranty claims making it no longer
possible to calculate a reasonable estimate of the future level of potential warranty claims. Accordingly, as no
amount within the total range of loss represents a best estimate of the ultimate loss to be recorded, we are
required under SFAS No. 5, “Accounting for Contingencies” to record the minimum amount of the potential
range of loss. The warranty obligation as of December 30, 2006 represents the low end of the estimated range of
warranty reserve required based on the level of claims processed to date. The total potential warranty cost ranges
from $1.1 million to approximately $15.6 million. The high end of the range represents the estimated maximum
level of warranty claims remaining based on the total sales of the products under warranty. Going forward,
Composites LLC will record adjustments to the warranty obligation to reflect the minimum amount of the
19
Kadant Inc.
2006 Annual Report
potential range of loss. Our consolidated results in future reporting periods will be negatively impacted if the
future level of warranty claims exceeds the warranty reserve.
Stock-Based Compensation. Our adoption of SFAS No. 123 (revised 2004), “Share Based Payment” (SFAS
123R), in the first quarter of 2006 requires that we recognize stock-based compensation expense associated with
stock options in the statement of income, rather than disclose it in a pro forma footnote to our consolidated
financial statements. Determining the amount of stock-based compensation to be recorded requires us to develop
estimates to be used in calculating the grant-date fair value of stock options. We did not grant any stock options
in 2006. For options granted prior to January 1, 2006, we calculated the grant-date fair values using the Black-
Scholes valuation model. The use of valuation models requires us to make estimates of the following
assumptions:
Expected volatility—We derived the estimated stock price volatility based on a review of our actual historic
stock prices commensurate with the expected life of the award.
Expected option life—Our estimate of an expected option life was derived based on a review of our historic
option holding periods, including a consideration of the holding period inherent in currently vested but
unexercised options. We believe that this historical data is currently the best estimate of the expected term of a
new option.
Risk-free interest rate—We used the yield on zero-coupon U.S. Treasury securities for a period that is
commensurate with the expected term assumption as the risk-free interest rate.
The amount of stock-based compensation recognized during a period is based on the value of the portion of
the awards that are ultimately expected to vest. SFAS 123R requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term
“forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the
surrendered option. Similar to the analysis for the expected option life, we reviewed historical forfeiture data and
have applied an annual forfeiture rate of 2.5% to all unvested options as of December 31, 2005. We reevaluate
this analysis quarterly and adjust the forfeiture rate as necessary. Ultimately, we will recognize the actual
expense over the vesting period only for the shares that vest.
Income Taxes. We estimate the degree to which tax assets and loss carryforwards will result in a benefit
based on expected profitability by tax jurisdiction, and provide a valuation allowance for tax assets and loss
carryforwards that we believe will more likely than not go unused. If it becomes more likely than not the tax
asset or loss carryforward will be used, we would reverse the related valuation allowance. Our tax valuation
allowance totaled $2.8 million at year-end 2006. Should our actual future taxable income by tax jurisdiction vary
from our estimate, additional allowances or reversals thereof may be necessary.
We provide a liability for future income tax payments in the worldwide tax jurisdictions in which we
operate. Should tax return positions that we expect are sustainable not be sustained upon audit, we could be
required to record an incremental tax provision for such taxes. Should previously unrecognized tax benefits be
sustained, a reduction in our tax provision would result.
Inventories. We value our inventory at the lower of the actual cost (on a first-in, first-out; last-in, first-out;
or weighted average basis) or market value and include materials, labor, and manufacturing overhead. We
regularly review inventory quantities on hand and compare these amounts to historical and forecasted usage of
and demand for each particular product or product line. We record a charge to cost of revenues for excess and
obsolete inventory to reduce the carrying value of the inventories to net realizable value. Inventory writedowns
have historically been within our expectations and the provisions established. A significant decrease in demand
could result in an increase in the amount of excess inventory quantities on hand, resulting in a charge for the
writedown of that inventory in that period. In addition, our estimates of future product usage or demand may
prove to be inaccurate, resulting in an understated or overstated provision for excess and obsolete inventory.
Therefore, although we make every effort to ensure the accuracy of our forecasts of future product usage and
demand, any significant unanticipated changes in demand or technological developments could have a significant
impact on the value of our inventory and our reported operating results.
Derivatives. We use derivative instruments primarily to reduce our exposure to changes in currency
exchange rates and interest rates. When we enter into a derivative contract, we make a determination as to
20
Kadant Inc.
2006 Annual Report
whether the transaction is deemed to be a hedge for accounting purposes. For contracts deemed to be a hedge, we
formally document the relationship between the derivative instrument and the risk being hedged. In this
documentation, we specifically identify the asset, liability, forecasted transaction, cash flow, or net investment
that has been designated as the hedged item, and evaluate whether the derivative instrument is expected to reduce
the risks associated with the hedged item. To the extent these criteria are not met, we do not use hedge
accounting for the derivative.
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, requires that
all derivatives be recognized on the balance sheet at fair value. For derivatives designated as cash flow hedges,
the related gains or losses on these contracts are deferred as a component of accumulated other comprehensive
items. These deferred gains and losses are recognized in the period in which the underlying anticipated
transaction occurs. For derivatives designated as fair value hedges, the unrealized gains and losses resulting from
the impact of currency exchange rate movements are recognized in earnings in the period in which the exchange
rates change and offset the currency gains and losses on the underlying exposures being hedged. We perform an
evaluation of the effectiveness of the hedge both at inception and on an ongoing basis. The ineffective portion of
a hedge, if any, and changes in the fair value of a derivative not deemed to be a hedge, are recorded in the
consolidated statement of income.
We entered into interest rate swap agreements in 2006 and 2005 to hedge a portion of our variable rate debt
and have designated these agreements as cash flow hedges of the underlying obligations. The fair value of the
interest rate swap agreements are included in other assets for unrecognized gains and in other liabilities for
unrecognized losses with an offset in accumulated other comprehensive items (net of tax). We have structured
these interest rate swap agreements to be 100% effective and as a result, there is no current impact to earnings
resulting from hedge ineffectiveness.
We use forward currency exchange contracts primarily to hedge certain operational (“cash flow” hedges)
and balance sheet (“fair value” hedges) exposures resulting from fluctuations in currency exchange rates. Such
exposures primarily result from portions of our operations and assets that are denominated in currencies other
than the functional currencies of the businesses conducting the operations or holding the assets. We enter into
forward currency exchange contracts to hedge anticipated product sales and recorded accounts receivable made
in the normal course of business, and accordingly, the hedges are not speculative in nature.
Valuation of Goodwill and Intangible Assets. We evaluate the recoverability of goodwill and indefinite-
lived intangible assets annually in the fourth quarter, or more frequently if events or changes in circumstances,
such as a decline in sales, earnings, or cash flows, or material adverse changes in the business climate, indicate
that the carrying value of an asset might be impaired. We completed our annual impairment tests in the fourth
quarter of 2006 using estimates from our long-range forecasts. Intangible assets subject to amortization are
evaluated for impairment if events or changes in circumstances indicate that the carrying value of an asset might
be impaired. No adjustment was required to the carrying value of our goodwill or intangible assets based on the
analysis performed.
Goodwill is considered to be impaired when the net book value of a reporting unit exceeds its estimated fair
value. Fair values are primarily established using a discounted cash flow methodology (specifically, the income
approach). The determination of discounted cash flows is based on our long-range forecasts. The revenue growth
rates included in the forecasts are our best estimates based on current and anticipated market conditions, and the
profit margin assumptions are projected based on current and anticipated cost structures. Our judgments and
assumptions regarding the determination of the fair value of an intangible asset or goodwill associated with an
acquired business could change as future events impact such fair values. Any future impairment loss could have a
material adverse affect on our long-term assets and operating expenses in the period in which impairment is
determined to exist.
Industry and Business Outlook
Our products are primarily sold to the global pulp and paper industry. The paper industry in North America
and Europe has been in a prolonged down cycle for the past several years and has undergone important structural
21
Kadant Inc.
2006 Annual Report
changes during that time. In contrast, the paper industry in China has experienced strong growth over the last
several years. The performance of paper producers in North America and Europe has been generally improving
over the past year. However, paper producers in those regions continue to be negatively affected by higher
operating costs, especially higher energy and chemical costs. We believe paper companies are still cautious about
increasing their capital and operating spending in the current market environment. As the financial performance
of paper companies has improved, they have increased their capital and operating spending, which has had a
positive effect on paper company suppliers, such as our Company. We continue to concentrate our efforts on
several initiatives intended to improve our operating results, including: (i) increasing sales of paper machine
accessories and water-management products in China, (ii) increasing our use of low-cost manufacturing bases in
China and Mexico, (iii) penetrating new markets outside the paper industry, and (iv) increasing aftermarket sales
in China. In addition, we continue to focus our efforts on managing our operating costs, capital expenditures, and
working capital.
On May 11, 2005, we acquired all the outstanding stock of The Johnson Corporation (Kadant Johnson), a
leading supplier of fluid-handling systems and equipment, including steam and condensate systems, components,
and controls. These products are used primarily in the dryer section of the papermaking process and in the
production of corrugated boxboard, metals, plastics, rubber, textiles, and food. Kadant Johnson was a privately
held company based in Three Rivers, Michigan, with approximately 575 employees. The purchase price for the
acquisition was approximately $114.0 million, including $101.5 million paid in cash at closing, $1.6 million paid
in the fourth quarter of 2006 in settlement of post-closing adjustments, $4.8 million paid for acquisition-related
costs, and $6.1 million of additional cash consideration we expect to pay in annual installments through 2010.
The additional consideration of $6.1 million relates to certain tax assets of Kadant Johnson, the value of which
we expect to realize. We paid $0.9 million of this additional consideration in 2006, and the remaining amount is
due over the next four years as follows: $0.9 million in each of 2007, 2008 and 2009, and $2.5 million in 2010.
On June 2, 2006, our subsidiary Kadant Light Machinery (Jining) Co., Ltd. (Kadant Jining), assumed
responsibility for the operation of Jining Huayi Light Industry Machinery Co., Ltd. (Huayi) and, by
September 30, 2006, acquired the assets of Huayi, including cash, inventory, machinery, equipment, and
buildings for $21.1 million, net of $2.3 million of assumed liabilities (Kadant Jining acquisition). The remaining
purchase obligation, which has been accrued as of December 30, 2006, is $3.4 million which we expect to pay
through January 2008 as certain post-closing and indemnification obligations are satisfied. Huayi was a supplier
of stock-preparation equipment in China.
In the last several years, China has become a significant market for our stock-preparation equipment. A
large percentage of the world’s increases in paper production capacity are in China. Consequently, competition is
intense and there is increasing pricing pressure particularly for large systems. To capitalize on this growing
market, we plan to start manufacturing certain of our accessory and water-management products in our China
facilities in 2007. Currently, our revenues from China are primarily derived from large capital orders, the timing
of which is often difficult to predict. At times, our customers in China have experienced delays in obtaining
financing for their capital addition and expansion projects due to efforts by the Chinese government to control
economic growth, which are reflected in a slowdown in financing approvals in China’s banking system. These
delays and delays in receiving down payments, could delay our recognizing revenue on these projects to periods
later than originally anticipated. We plan to use Kadant Jining as a base for increasing our aftermarket business,
which we believe will be more predictable.
Our 2007 guidance reflects expected revenues and earnings per share from continuing operations, which
exclude the results from our discontinued operation. For the first quarter of 2007, we expect to earn between $.22
and $.24 per diluted share, on revenues of $77 to $79 million. For the full year, we expect to earn between $1.50
and $1.60 per diluted share (which includes a $.08 decline in profitability from our Fiber-based Products
business), on revenues of $360 to $370 million.
22
Kadant Inc.
Results of Operations
2006 Compared to 2005
2006 Annual Report
The following table sets forth our consolidated statement of income expressed as a percentage of total
revenue:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100%
100%
2006
2005
Costs and Operating Expenses:
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general, and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other costs (income), net
Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from Continuing Operations Before Provision for Income Taxes and Minority
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minority Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from Discontinued Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63
26
2
–
91
9
–
(1)
8
3
–
5
–
61
31
2
–
94
6
1
(1)
6
2
–
4
(1)
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5%
3%
Revenues
Revenues increased $97.9 million, or 40%, to $341.6 million in 2006 from $243.7 million in 2005.
Revenues in 2006 increased primarily due to a $40.4 million, or 84%, increase from Kadant Johnson acquired in
May 2005, a $39.4 million, or 165%, increase in stock-preparation equipment sales in China, which includes a
$6.0 million increase from Kadant Jining acquired in June 2006. Also contributing to the increase in 2006 was a
$2.8 million increase for an additional month of revenue recognized at our Kadant Lamort subsidiary to conform
to our fiscal year end and a $2.6 million increase from the favorable effects of currency translation.
Revenues for 2006 and 2005 for our Papermaking Systems segment and other businesses are as follows:
(In thousands)
Revenues:
2006
2005
Papermaking Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$327,501
14,112
$232,615
11,098
$341,613
$243,713
Papermaking Systems Segment. Revenues at the Papermaking Systems segment increased $94.9 million, or
41%, to $327.5 million in 2006 from $232.6 million in 2005. The increase in revenues in 2006 was primarily due
to a $38.9 million, or 85%, increase in revenues from Kadant Johnson acquired in May 2005, and a $39.4
million, or 165%, increase in stock-preparation equipment sales in China, which includes a $6.0 million increase
from Kadant Jining acquired in June 2006. Also contributing to the increase in 2006 was a $2.8 million increase
for an additional month of revenue recognized at our Kadant Lamort subsidiary to conform to our fiscal year end
and a $2.6 million increase from the favorable effects of currency translation.
23
Kadant Inc.
2006 Annual Report
The following table presents revenues at the Papermaking Systems segment by product line, the changes in
revenues by product line between 2006 and 2005, and the changes in revenues by product line between 2006 and
2005 excluding the effect of currency translation. The presentation of the changes in revenues by product line,
excluding the effect of currency translation, is a non-GAAP (generally accepted accounting principles) measure.
We believe this non-GAAP measure helps investors gain a better understanding of our underlying operations,
consistent with how management measures and forecasts our performance, especially when comparing such
results to prior periods.
(In millions)
Product Line:
2006
2005
Increase
Stock-Preparation Equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fluid-Handling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accessories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Water-Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
$146.2
84.4
60.6
33.8
2.5
$ 98.2
45.5
58.8
28.3
1.8
$48.0
38.9
1.8
5.5
0.7
$327.5
$232.6
$94.9
Increase
Excluding
Effect of
Currency
Translation
$48.2
36.9
1.2
5.3
0.7
$92.3
Revenues from the segment’s stock-preparation equipment product line increased $48.0 million, or 49%, in
2006 compared to 2005, including a $0.2 million decrease from the unfavorable effect of currency translation.
The increase was primarily due to a $39.4 million, or 165%, increase in capital equipment sales in China which
includes a $6.0 million increase from Kadant Jining acquired in June 2006. In addition, revenues in this product
line increased $4.6 million, or 15%, in 2006 at our European-based business primarily due to an increase in sales
of both capital and aftermarket products and the inclusion of an additional month of revenue at our Kadant
Lamort subsidiary to conform to our fiscal year end. Revenues in this product line also increased $4.0 million, or
9%, from sales in North America primarily due to stronger sales of both capital and aftermarket products.
Revenues from the segment’s fluid-handling product line increased $38.9 million, or 85%, in 2006
compared to 2005, including a $2.0 million increase from the favorable effect of currency translation. This
increase was primarily due to the inclusion of revenues from Kadant Johnson for the full 2006 period compared
to their inclusion from May 11, 2005 in the prior year period.
Revenues from the segment’s accessories product line increased $1.8 million, or 3%, in 2006 compared to
2005 primarily due to an increase in sales in Europe.
Revenues from the segment’s water-management product line increased $5.5 million, or 19%, in 2006
compared to 2005, due primarily to an increase in capital sales in North America and, to a lesser extent, in
Europe.
Other Businesses. Revenues from our other businesses increased $3.0 million, or 27%, to $14.1 million in
2006 from $11.1 million in 2005. Revenues from the Fiber-based Products business increased $1.5 million, or
18%, to $10.1 million in 2006 from $8.6 million in 2005 due to increased sales of our Biodac™ products.
Revenues from our Casting Products business increased $1.5 million, or 60%, to $4.0 million in 2006 compared
to $2.5 million in 2005 due to the inclusion of revenues from Kadant Johnson for the entire 2006 period
compared to their inclusion from May 11, 2005 in the prior year period. We expect lower revenues in the Fiber-
based Products business in 2007 due to increased competition in this market.
24
Kadant Inc.
Gross Profit Margin
2006 Annual Report
Gross profit margin for 2006 and 2005 for our Papermaking Systems segment and our other businesses are
as follows:
Gross Profit Margin:
Papermaking Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
2005
37%
28%
37%
39%
28%
39%
Gross profit margin was 37% and 39% in 2006 and 2005, respectively. The gross profit margin at the
Papermaking Systems segment decreased to 37% in 2006 from 39% in 2005. This decrease was primarily due to
lower margins in our stock-preparation equipment product line as a result of several large capital equipment
orders from China, which had lower than normal gross profit margin levels. Also contributing to the decrease
was an unfavorable product mix that shifted toward lower-margin capital products. Partially offsetting this were
improved gross margins at our fluid-handling product line. The gross profit margin at our other businesses was
28% in 2006 and 2005. We expect the gross profit margin in the Fiber-based Products business to be negatively
affected by lower revenue in 2007 due to increased competition in this market.
Operating Expenses
Selling, general, and administrative expenses as a percentage of revenues decreased to 26% in 2006 from
31% in 2005 primarily due to higher operating leverage associated with increased revenues. Selling, general, and
administrative expenses increased to $90.2 million in 2006 from $74.6 million in 2005, an increase of $15.6
million, or 21%. This increase was primarily due to a $9.7 million, or 51%, increase from Kadant Johnson
resulting from its inclusion for the full 2006 period compared to its inclusion from May 11, 2005 in the prior year
period. Also contributing to the increase was a $1.5 million increase from our Kadant Jining subsidiary acquired
in June 2006, a $1.4 million increase from our Kadant Lamort subsidiary due to the inclusion of an additional
month of selling, general, and administrative expenses to conform to our fiscal year end, and a $0.8 million
unfavorable effect of currently translation.
Research and development expenses increased to $6.2 million in 2006 million from $4.9 million in 2005, an
increase of $1.3 million, or 27%, and represented 2% of revenues in both periods. The increase in research and
development expenses was primarily due to a $0.7 million increase from Kadant Johnson resulting from its
inclusion for the full 2006 period compared to its inclusion from May 11, 2005 in the prior year period.
On January 1, 2006, we adopted SFAS 123R using the modified prospective method. There were no stock
option awards granted in 2006. For stock option awards granted to employees prior to the effective date of SFAS
123R that remain unvested on the effective date, SFAS 123R under the modified prospective method allowed us
to recognize compensation cost beginning with the effective date based on the requirements of SFAS 123. For
these stock option awards, we calculated compensation cost on the date of grant using the fair value of the stock
options as determined by the Black-Scholes valuation model. In 2006, we recognized $0.3 million of pre-tax
stock-based compensation expense, or $.01 per diluted share, related to unvested stock option awards granted
prior to 2006 as a result of the adoption of SFAS 123R. Prior to the adoption of SFAS 123R, we accounted for
share based payments to employees using Accounting Principles Board Opinion No. 25’s (APB 25), “Accounting
for Stock Issued to Employees,” intrinsic value method and, as such, generally recognized no compensation cost
for employee stock options. As of December 30, 2006, the total compensation cost related to unvested stock
option awards not yet recognized in the consolidated statement of income was approximately $0.1 million, which
will be recognized over a weighted average period of 1.2 years. Under the modified prospective method, prior
periods are not restated for the effect of SFAS 123R.
25
Kadant Inc.
2006 Annual Report
Total stock-based compensation expense, including compensation expense associated with restricted stock
and the employee stock purchase plan, was $0.9 million and $0.3 million in 2006 and 2005, respectively, and is
included in selling, general, and administrative expenses.
Restructuring and Other Costs (Income), Net
During 2006, we recorded restructuring costs of $0.8 million, which included $0.7 million of severance and
associated costs due to a reduction of 15 full-time employees in Canada and France and $0.1 million of
equipment relocation costs associated with our 2005 restructuring actions. These costs related to our
Papermaking Systems segment. We estimate annualized savings of $0.5 million in selling, general, and
administrative expenses and $0.4 million in cost of revenues once these restructuring actions are completed.
During 2005, we recorded restructuring income of $0.1 million, which included $0.2 million of restructuring
costs and $0.3 million of curtailment gain. The restructuring costs of $0.2 million in 2005 included $0.1 million
of income resulting from the reduction in the estimated restructuring costs associated with the Kadant Lamort
restructuring initiated in 2004 and $0.3 million in restructuring costs associated with 2005 restructuring actions.
The 2005 restructuring costs include $0.2 million of severance and associated costs related to the reduction of 14
full-time positions in the U.S. and $0.1 million for equipment relocation costs, both in our Papermaking Systems
segment. Upon completion, the annualized savings from the restructuring were $0.7 million ($0.6 million in
selling, general, and administrative expenses and $0.1 million in cost of revenues). The $0.3 million curtailment
gain in 2005 resulted from a reduction in the accrued liability for Kadant Lamort’s pension plan associated with
the Kadant Lamort restructuring initiated in 2004.
Interest Income
Interest income decreased to $1.1 million in 2006 from $1.5 million in 2005 primarily due to lower average
cash balances as a result of the acquisitions of Kadant Johnson in May 2005 and Kadant Jining in June 2006.
Interest Expense
Interest expense increased to $3.3 million in 2006 from $2.1 million in 2005 primarily due to the increase in
interest expense associated with the $60.0 million in borrowings entered into in May 2005 to fund the Kadant
Johnson acquisition, the $10 million in borrowings entered into in May 2006, and the $5.1 million in borrowings
entered into in 2006 to fund the Kadant Jining acquisition.
Provision for Income Taxes
Our effective tax rate was 32% and 28% in 2006 and 2005, respectively. The 32% effective tax rate in 2006
consisted of our 33% recurring tax rate, slightly offset by a 1%, or $0.2 million, non-recurring tax benefit related
to reductions in tax reserves associated with the favorable resolution of a state tax audit. The 28% effective tax
rate in 2005 consisted of our 35% recurring tax rate, offset by a 6% non-recurring tax benefit resulting from a
payment of $0.9 million received from our former parent company under a tax agreement and a 1%
non-recurring tax benefit related to a reduction of $0.1 million in tax reserves. We expect our effective tax rate to
be in the range of 31% to 32% in 2007.
Income from Continuing Operations
Income from continuing operations increased to $18.3 million in 2006 from $9.9 million in 2005, an
increase of $8.4 million, or 85%. The increase in 2006 was primarily due to a $97.9 million, or 40% increase in
revenues which contributed to an increase in operating income of $14.9 million (see Revenues, Gross Profit
Margin and Operating Expenses discussed above), offset in part by an increase in interest expense of $1.2
million associated with an increase in borrowings in 2005 and 2006.
26
Kadant Inc.
Loss from Discontinued Operation
2006 Annual Report
The net loss from our discontinued operation decreased to $1.2 million in 2006 from $3.0 million in 2005.
Net losses in 2006 and 2005 were primarily due to $1.2 million and $5.5 million, respectively, of pre-tax
warranty provisions.
During the third quarter of 2006, Composites LLC concluded that the highly subjective nature of the
assumptions used in estimating the warranty obligation were not accurately predicting the actual level of
warranty claims making it no longer possible to calculate a reasonable estimate of the future level of potential
warranty claims. Accordingly, as no amount within the total range of loss represents a best estimate of the
ultimate loss to be recorded, we are required under SFAS No. 5, “Accounting for Contingencies” to record the
minimum amount of the potential range of loss. The warranty obligation as of December 30, 2006 represents the
low end of the estimated range of warranty reserve required based on the level of claims processed to date. The
total potential warranty cost ranges from $1.1 million to approximately $15.6 million. The high end of the range
represents the estimated maximum level of warranty claims remaining based on the total sales of the products
under warranty. Going forward, Composites LLC will record adjustments to the warranty obligation to reflect the
minimum amount of the potential range of loss for products under warranty. In 2006 and 2005, Composites LLC
paid $5.8 million and $4.6 million, respectively, in warranty claims. The accrued warranty obligation was $1.1
million and $5.3 million as of December 30, 2006 and December 31, 2005, respectively. Our consolidated results
in future reporting periods will be negatively impacted if the future level of warranty claims exceed the warranty
reserve.
2005 Compared to 2004
The following table sets forth our consolidated statement of income expressed as a percentage of total
revenue:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100%
100%
2005
2004
Costs and Operating Expenses:
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general, and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other costs (income), net
Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from Continuing Operations Before Provision for Income Taxes and Minority
Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minority Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from Discontinued Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61
31
2
–
94
6
1
(1)
6
2
–
4
(1)
3%
61
29
1
5
96
4
–
–
4
1
–
3
(3)
–%
27
Kadant Inc.
Revenues
2006 Annual Report
Revenues increased to $243.7 million in 2005 from $195.0 million in 2004, an increase of $48.7 million, or
25%. Revenues in 2005 include a $47.9 million, or 25%, increase from Kadant Johnson, and the favorable effects
of currency translation of $2.0 million, or 1%, due to a weaker U.S. dollar relative to most of the functional
currencies in countries in which we operate.
Revenues from our Papermaking Systems segment and other businesses for 2005 and 2004 are as follows:
(In thousands)
Revenues:
2005
2004
Papermaking Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$232,615
11,098
$188,320
6,646
$243,713
$194,966
Papermaking Systems. Revenues for the Papermaking Systems segment increased to $232.6 million in 2005
compared with $188.3 million in 2004, an increase of $44.3 million, or 24%. The increase in revenues in 2005
includes $45.5 million, or 24%, from Kadant Johnson, which comprises our fluid-handling product line, and a
1% increase from the favorable effect of currency translation.
Revenues at the Papermaking Systems segment by product line were as follows:
(In millions)
Product Line:
2005
2004
Increase
(Decrease)
Stock-Preparation Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accessories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fluid-Handling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Water-Management
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 98.2
58.8
45.5
28.3
1.8
$ 95.4
62.7
–
28.8
1.4
$ 2.8
(3.9)
45.5
(0.5)
0.4
$232.6
$188.3
$44.3
Increase
(Decrease)
Excluding
Effect of
Currency
Translation
$ 2.0
(4.7)
45.5
(0.8)
0.3
$42.3
Revenues from the segment’s stock-preparation equipment product line increased by $2.8 million, or 3%, in
2005, including a $0.8 million increase from the favorable effect of currency translation. Excluding the effect of
currency translation, revenues from the stock-preparation equipment product line increased $2.0 million, or 2%,
due to a $5.8 million, or 16%, increase in sales in North America due to strong demand for our capital
equipment, offset in part by a $4.1 million, or 12%, decrease in Europe due to weak demand.
Revenues from the segment’s accessories product line decreased by $3.9 million, or 6%, in 2005, including
a $0.8 million increase from the favorable effect of currency translation. Excluding the effect of currency
translation, revenues from the segment’s accessories product line decreased $4.7 million, or 7%, due to a $2.9
million, or 7%, decrease in sales in North America and a $1.8 million, or 8%, decrease in sales in Europe. The
decrease in sales was due to weaker demand in both North America and Europe, as well as a significant amount
of unscheduled downtime by one of our largest customers in the U.S.
Revenues from the fluid-handling product line were $45.5 million in 2005.
Revenues from the segment’s water-management product line decreased $0.5 million, or 2%, in 2005,
including a $0.3 million increase from the favorable effect of currency translation. Excluding the effect of
currency translation, revenues from the segment’s water-management product line decreased by $0.8 million, or
28
Kadant Inc.
2006 Annual Report
3%, due primarily to a $1.3 million, or 22%, decrease in sales in Europe due to a decrease in large capital orders
and lower levels of mill spending.
Other Businesses. Revenues from our Fiber-based Products business increased $2.0 million, or 29%, in
2005 to $8.6 million from $6.6 million in 2004 due to stronger sales of Biodac®, our line of biodegradable
granular products. Revenues from our Casting Products business were $2.5 million in 2005.
Gross Profit Margin
Gross profit margin for 2005 and 2004 were as follows:
Gross Profit Margin:
Papermaking Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
2005
2004
39%
28%
39%
39%
36%
39%
Gross profit margin was 39% in 2005 and 2004. The gross profit margin at the Papermaking Systems
segment remained constant at 39% in 2005 and 2004. The inclusion of the fluid-handling product line from May
2005 contributed to a 3% increase in gross profit margins in 2005, largely offset by lower margins at our stock-
preparation product line in 2005. The lower margins at our stock-preparation product line in 2005 primarily
resulted from a higher proportion of sales of lower-margin capital equipment in North America, which reduced
gross margins by 1%, as well as lower gross profit margins in Europe at our Kadant Lamort subsidiary, which
also reduced gross margins by 1%. The gross profit margin at our other businesses decreased to 28% in 2005
from 36% in 2004 due to the inclusion of lower margins from the Casting Products business and lower margins
in our Fiber-based granular product line due to an increase in the cost of natural gas used in the production of our
fiber-based granules.
Operating Expenses
Selling, general, and administrative expenses as a percentage of revenues were 31% and 29% in 2005 and
2004, respectively. Selling, general, and administrative expenses increased $18.3 million, or 32%, to $74.6
million in 2005 from $56.3 million in 2004. This increase included a $9.0 million, or 37%, increase in general
and administrative expenses and a $9.3 million, or 29%, increase in selling expenses.
The increase in general and administrative expenses included $9.9 million of general and administrative
expenses from Kadant Johnson and a $1.0 million increase associated with a gain which lowered general and
administrative expenses in 2004. The gain of $1.0 million in the first quarter of 2004 resulted from the
renegotiation of a series of agreements with one of our licensees. These increases were offset in part by a $1.3
million decrease due to expense reductions at the Papermaking Systems segment, a $0.7 million decrease in
severance costs associated with our European operations, and a $0.5 million decrease in bad debt expense.
The increase in selling expenses was due primarily to $9.1 million associated with Kadant Johnson and a
$0.4 million increase from the unfavorable effect of foreign currency translation.
Research and development expenses as a percentage of revenues were 2% and 1% in 2005 and 2004,
respectively. Research and development expenses increased $1.8 million to $4.9 million in 2005 compared to
$3.1 million in 2004 due to the inclusion of $1.0 million of research and development expenses associated with
Kadant Johnson and a $0.8 million increase in research and development projects at the Papermaking Systems
segment.
Restructuring and Other Costs (Income), Net
During 2005, we recorded restructuring income of $0.1 million, which included $0.2 million of restructuring
costs and $0.3 million of curtailment gain. The restructuring costs of $0.2 million in 2005 included $0.1 million
29
Kadant Inc.
2006 Annual Report
of income resulting from the reduction in the estimated restructuring costs associated with the Kadant Lamort
restructuring initiated in 2004 and $0.3 million in restructuring costs associated with 2005 restructuring actions.
The 2005 restructuring costs include $0.2 million of severance and associated costs related to the reduction of 14
full-time positions in the U.S. and $0.1 million for equipment relocation costs, both in our Papermaking Systems
segment. Upon completion, the annualized savings from the restructuring were $0.7 million ($0.6 million in
selling, general, and administrative expenses and $0.1 million in cost of revenues). The $0.3 million curtailment
gain in 2005 resulted from a reduction in the accrued liability for Kadant Lamort’s pension plan associated with
the Kadant Lamort restructuring initiated in 2004.
During 2004, we recorded restructuring costs of $9.5 million, which were accounted for in accordance with
SFAS No. 112, “Employers’ Accounting for Postemployment Benefits.” Restructuring costs of $9.2 million
related to severance and other termination costs for 97 employees across all functions at the Papermaking
Systems segment’s Kadant Lamort subsidiary. These actions were taken in an effort to strengthen Kadant
Lamort’s competitive position in the European paper industry. In addition, we recorded restructuring costs of
$0.3 million related to severance costs for 11 employees at one of the Papermaking Systems segment’s U.S.
subsidiaries. Upon completion, the annualized savings from the restructuring were $5.6 million ($3.6 million in
cost of revenues and $2.0 million in selling, general, and administrative expenses).
Interest Income
Interest income was $1.5 million in 2005 and 2004. During 2005, the increase in interest income due to
higher prevailing interest rates was largely offset by the decrease in average cash balances primarily resulting
from the May 2005 acquisition of Kadant Johnson.
Interest Expense
Interest expense increased to $2.1 million in 2005 from $23 thousand in 2004 primarily due to interest
expense associated with the $60.0 million in borrowings entered into in May 2005 to fund the Kadant Johnson
acquisition.
Provision for Income Taxes
Our effective tax rate was 28% and 30% in 2005 and 2004, respectively. The 28% effective tax rate in 2005
consisted of our 35% recurring tax rate, offset by a 6% non-recurring tax benefit resulting from a payment of
$0.9 million received from our former parent company under a tax agreement and a 1% non-recurring tax benefit
resulting from a reduction of $0.1 million in tax reserves. The 30% effective tax rate in 2004 was lower than the
statutory federal income tax rate primarily due to a reorganization of several of our foreign subsidiaries that
resulted in a more tax-efficient corporate structure.
Minority Interest
Minority interest expense in 2005 and 2004 represents minority investors’ share of earnings in our majority-
owned subsidiaries.
Income from Continuing Operations
Income from continuing operations increased to $9.9 million in 2005 from $5.8 million in 2004, an increase
of $4.1 million, or 71%. This increase includes a $1.9 million increase from the inclusion of Kadant Johnson and
a $6.1 million increase due to the decrease in after-tax restructuring costs.
30
Kadant Inc.
Loss from Discontinued Operation
2006 Annual Report
On October 21, 2005, our Composites LLC subsidiary sold substantially all of its assets, comprising the
composites business, to LDI Composites Co. As part of the sale transaction, Composites LLC retained the
warranty obligations associated with products manufactured prior to the sale date. All future activity associated
with this warranty reserve will continue to be classified in the results of the discontinued operation.
Loss from discontinued operation decreased to $3.0 million in 2005 from $5.1 million in 2004, a decrease of
$2.1 million, due primarily to a $1.2 million pre-tax decrease in warranty costs and a decrease in operating costs
prior to the sale.
Liquidity and Capital Resources
Consolidated working capital was $80.5 million at December 30, 2006, compared with $75.4 million at
December 31, 2005. Included in working capital are cash and cash equivalents of $39.6 million at December 30,
2006, compared with $40.8 million at December 31, 2005. At December 30, 2006, $29.5 million of cash and cash
equivalents was held by our foreign subsidiaries.
2006
Our operating activities provided cash of $8.2 million in 2006, including $12.3 million provided by
continuing operations and $4.1 million used by the discontinued operation. The cash provided by operating
activities in 2006 was primarily due to income from continuing operations of $18.3 million, an increase in
accounts payable of $11.3 million, and a non-cash charge of $7.8 million for depreciation and amortization
expense. Offsetting these sources of cash in 2006 was an increase in unbilled contract costs and fees of $12.1
million and an increase in accounts receivable of $6.9 million. These increases were primarily associated with an
increase in revenues in our stock-preparation equipment product line. An additional $8.4 million of cash was
used in 2006 due to a reduction of other current liabilities. The reduction of other current liabilities was due
primarily to a decrease of $6.7 million in billings in excess of contract costs and fees due to the timing of
contracts recognized under the percentage-of-completion method and a decrease of $4.0 million in accrued
restructuring costs due to payments made in 2006, offset by an increase in customer deposits of $5.1 million. The
$4.1 million of cash used by the discontinued operation in 2006 was primarily related to the payment of $5.8
million for warranty claims.
Our investing activities used cash of $18.1 million in 2006, including $22.4 million used by continuing
operations and $4.3 million provided by the discontinued operation. The cash used in continuing operations was
primarily due to the use of cash as consideration in acquisitions, including $15.1 million associated with the
Kadant Jining acquisition and $2.5 million associated with the Kadant Johnson acquisition. We also purchased
$4.1 million of property, plant, and equipment. The cash provided by the discontinued operation of $4.3 million
relates to the reduction of restricted cash of $3.5 million held in escrow to satisfy warranty claims and cash
proceeds of $0.8 million received in the first quarter of 2006 from the buyer of the assets of Composites LLC for
post-closing adjustments.
Our financing activities provided cash of $3.0 million in 2006 related entirely to our continuing operations.
We received $10.0 million in proceeds from a commercial real estate loan entered into in May 2006 and $5.1
million in loan proceeds in June 2006 associated with the Kadant Jining acquisition. In addition, we received
$9.4 million of proceeds from the issuance of common stock in connection with the exercise of employee stock
options and $2.5 million of excess tax benefits from share-based payments. We used cash of $16.6 million in
2006 for principal payments on our debt obligations and $7.2 million to repurchase our common stock on the
open market.
31
Kadant Inc.
2005
2006 Annual Report
Cash provided by operating activities was $17.7 million in 2005, including $19.1 million provided by
continuing operations and $1.4 million used by the discontinued operation. The cash provided by operating
activities in 2005 was primarily the result of $9.9 million of income from continuing operations, a non-cash
charge of $6.9 million for depreciation and amortization expense, and a decrease in inventory of $4.4 million,
offset in part by a decrease in accounts payable, which used cash of $4.5 million. The cash used by the
discontinued operation of $1.4 million resulted primarily from the net loss of $3.0 million due primarily to the
pre-tax warranty provision of $5.5 million and a decrease in accounts payable of $1.1 million due to payments
made prior to the sale date. These items were offset in part by a decrease in accounts receivable due to
collections made prior to the sale date, which provided cash of $1.2 million and an increase in other current
liabilities of $1.8 million due primarily to an increase in payments owed to the buyer as reimbursement for
claims paid on behalf of Composites LLC.
Cash used for investing activities was $100.9 million in 2005, including $106.4 million used by continuing
operations and $5.5 million provided by the discontinued operation. We used cash of $103.6 million in 2005 to
acquire the stock of The Johnson Corporation. We used $3.2 million in 2005 to purchase property, plant, and
equipment. We also used cash of $1.1 million in 2005 to acquire the remaining minority interest in one of our
Kadant Johnson subsidiaries. The cash provided by the discontinued operation of $5.5 million relates primarily to
the unrestricted cash proceeds received from the sale of the majority of the assets of the discontinued operation.
Our financing activities provided cash of $50.1 million in 2005 related entirely to our continuing operations.
In 2005, we received proceeds of $60.0 million from a term loan we entered into to fund a portion of the
purchase price for Kadant Johnson. We also increased our short- and long-term obligations by $4.0 million,
which represents additional consideration for Kadant Johnson to be paid through 2010. During 2005, we
purchased 486,400 shares of our common stock on the open market for $9.1 million and repaid $5.5 million of
long-term obligations.
Additional Liquidity and Capital Resources
We completed our acquisition of Kadant Johnson on May 11, 2005 for approximately $114.0 million, of
which $101.5 million was paid in cash at closing, $1.6 million was paid in the fourth quarter of 2006 in
settlement of post-closing adjustments, $4.8 million was paid for acquisition-related costs, and $6.1 million we
expect to pay in annual installments through 2010 related to certain tax assets of Kadant Johnson, the value of
which we expect to realize. In 2006, we paid $0.9 million of this additional consideration. The remaining
balance, of which $0.9 million is included in other current liabilities and $4.3 million is included in other long-
term liabilities in the accompanying consolidated balance sheet, is due over the next four years as follows: $0.9
million in each of 2007, 2008 and 2009, and $2.5 million in 2010. To fund $60 million of the purchase price, we
entered into a term loan and revolving credit facility (Credit Agreement) effective as of May 9, 2005, as
subsequently amended, in the aggregate principal amount of up to $95 million, including a $35 million revolver.
The Credit Agreement includes a $60 million term loan (Term Loan), which is repayable in quarterly
installments over a five-year period. The current remaining aggregate principal amount to be repaid each year is
as follows: $8.8 million, $11.4 million, $12.6 million and $6.3 million in 2007, 2008, 2009, and 2010,
respectively.
The amount we are able to borrow under the revolving line of credit is the total borrowing capacity less any
outstanding letters of credit and multi-currency borrowings issued under the Credit Agreement. As of
December 30, 2006, we had $13.6 million of borrowing capacity under the revolving line of credit.
Our obligations under the Credit Agreement may be accelerated upon the occurrence of an event of default
under the Credit Agreement, which include customary events of default including, without limitation, payment
defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or
warranties, bankruptcy- and insolvency-related defaults, defaults relating to such matters as ERISA, uninsured
judgments and the failure to pay certain indebtedness, and a change-of-control default.
32
Kadant Inc.
2006 Annual Report
In addition, the Credit Agreement contains negative covenants applicable to us and our subsidiaries,
including financial covenants requiring us to comply with a maximum consolidated leverage ratio of 3.0, which
is lowered to 2.5 in certain circumstances, including when we make a material acquisition or repurchase our
stock. Pursuant to an amendment to the Credit Agreement effective December 28, 2005, this maximum
consolidated leverage ratio was increased from 2.5 to 2.75 in the second and third quarters of 2006 as a result of
the Kadant Jining acquisition. We are also required to comply with a minimum consolidated fixed charge
coverage ratio of 1.5. In addition to the financial covenants, we are also required to comply with covenants
related to restrictions on liens, indebtedness, fundamental changes, dispositions of property, making certain
restricted payments (including dividends and stock repurchases), investments, transactions with affiliates, sale
and leaseback transactions, swap agreements, changing our fiscal year, negative pledges, arrangements affecting
subsidiary distributions, and entering into new lines of business. As of December 30, 2006, we were in
compliance with these covenants.
The loans under the Credit Agreement are guaranteed by certain of our domestic subsidiaries and secured by
a pledge of 65% of the stock of our first-tier foreign subsidiaries and our subsidiary guarantors pursuant to a
guarantee and pledge agreement effective May 9, 2005 in favor of JPMorgan Chase Bank, N.A., as agent on
behalf of the lenders.
To hedge exposure to movements in the variable interest rate on the Term Loan, we entered into a swap
agreement (the Swap Agreement), which was effective May 17, 2005, to convert $36 million of the principal
balance of the $60 million term loan from a floating rate to a fixed rate of interest. The Swap Agreement has a
five-year term, the same quarterly payment dates as the hedged portion of the term loan, and reduces
proportionately in line with the amortization of the Term Loan. Under the Swap Agreement, we will receive a
three-month LIBOR rate and pay a fixed rate of interest of 4.125%. The net effect on interest expense for the
hedged portion of the term loan is that we will pay a fixed interest rate of up to 5.375% (the sum of the 4.125%
fixed rate under the Swap Agreement and the applicable margin of up to 1.25% on the term loan). The guarantee
provisions and the default and financial covenants, as well as certain restrictions on the payment of dividends
included in the Credit Agreement, as amended, restated, modified or replaced from time to time, also apply to the
Swap Agreement.
On May 4, 2006, we borrowed $10 million under a promissory note (Loan) from Citizens Bank of
Massachusetts (Lender). The Loan is repayable in quarterly installments of $125 thousand over a ten-year period
with the remaining principal balance of $5 million due upon maturity. Interest on the Loan accrues and is payable
quarterly in arrears at one of the following rates selected by us (a) the prime rate or (b) the three-month London
Inter-Bank Offered Rate (LIBOR) plus a 1% margin. The Loan is guaranteed and secured by real estate and
related personal property of Kadant and certain of its domestic subsidiaries, located in Theodore, Alabama;
Auburn, Massachusetts; Three Rivers, Michigan; and Queensbury, New York, pursuant to mortgage and security
agreements dated May 4, 2006 (Mortgage and Security Agreements).
Our obligations under the Loan may be accelerated upon the occurrence of an event of default under the
Loan and the Mortgage and Security Agreements, which includes customary events of default including without
limitation payment defaults, defaults in the performance of covenants and obligations, the inaccuracy of
representations or warranties, bankruptcy- and insolvency-related defaults, liens on the properties or collateral
and uninsured judgments. In addition, the occurrence of an event of default under the Credit Agreement or any
successor credit facility would be an event of default under the Loan.
To hedge the exposure to movements in the variable interest rate on the Loan, on May 3, 2006, we entered
into a swap agreement with Citizens Bank of Massachusetts effective May 5, 2006, which converts the Loan
from a floating rate to a fixed rate of interest. The swap agreement has a ten-year term; the same quarterly
payment dates as the Loan, and reduces in line with the amortization of the Loan. The swap agreement
automatically terminates in the event there are no outstanding borrowings under the Credit Agreement (or
successor credit facility), the Loan, or any other borrowing under which Citizens Bank of Massachusetts is a
lender. Under the swap agreement, we will receive a three-month LIBOR rate and pay a fixed rate of interest of
5.63%. The net effect on interest expense for the Loan is that we will pay a fixed interest rate of 6.63% (the sum
of the 5.63% fixed rate under the swap agreement and the applicable margin of 1% on the Loan). The guarantee
33
Kadant Inc.
2006 Annual Report
and default provisions of the Credit Agreement (and any successor credit facility) and the Loan, including those
contained in the Mortgage and Security Agreements, also apply to the swap agreement.
On June 2, 2006, our Kadant Jining subsidiary assumed responsibility for the operation of Huayi and, by
September 30, 2006, acquired the assets of Huayi including cash, inventory, machinery, equipment, and
buildings for approximately $21.1 million, net of assumed liabilities of $2.3 million. Of the total consideration,
$17.7 million was paid in cash. To finance a portion of the acquisition, on June 6, 2006, Kadant Jining borrowed
40 million Chinese renminbi, or $5.1 million, under a 47-month interest-only loan with Bank of China Limited.
Interest on this loan accrues and is payable quarterly in arrears based on the interest rate published by Bank of
China Limited for a loan of the same term less 10%. We plan to finance the remaining purchase obligation of
$3.4 million, which we expect to pay through January 2008 as certain obligations are satisfied, through a
combination of cash and borrowings in China.
On May 3, 2006, our board of directors authorized the repurchase of up to $15.0 million of our equity
securities during the period from May 18, 2006 through May 18, 2007. Repurchases may be made in public or
private transactions, including under Securities Exchange Act Rule 10b-5-1 trading plans. As of December 30,
2006, we had purchased 302,800 shares for $7.2 million under this authorization.
It is our practice to reinvest indefinitely the earnings of our international subsidiaries, except in instances in
which we can remit such earnings without a significant associated tax cost. Through December 30, 2006, we
have not provided for U.S. income taxes on approximately $62.4 million of unremitted foreign earnings. We
believe that any U.S. tax liability due upon remittance of such earnings would be immaterial due to the
availability of U.S. foreign tax credits generated from such remittance. The related foreign tax withholding,
which would be required if we remitted the foreign earnings to the U.S., would be approximately $2.5 million.
On October 21, 2005, Composites LLC sold its composites business, presented as a discontinued operation
in the accompanying consolidated financial statements. As part of the transaction, Composites LLC retained the
warranty obligation associated with products manufactured prior to the sale date. At December 30, 2006, the
warranty reserve for the composites business was $1.1 million. Our liquidity and consolidated results will
continue to be impacted by future cash payments for warranty claims and any adjustments to this warranty
obligation. Adjustments to our results for these items will continue to be classified within the results for the
discontinued operation in our consolidated financial statements.
Although we currently have no material commitments for capital expenditures, we plan to make
expenditures of approximately $6 to $7 million during 2007 for property, plant, and equipment.
In the future, our liquidity position will be primarily affected by the level of cash flows from operations,
cash paid to satisfy the remaining purchase obligation for the Kadant Jining acquisition, debt repayments, capital
projects, stock repurchases, or additional acquisitions, if any. We believe that our existing resources, together
with the cash available from our Credit Agreement, cash proceeds from additional borrowings we anticipate
entering into in China to complete the Kadant Jining acquisition, and the cash we expect to generate from
continuing operations, will be sufficient to meet the capital requirements of our current operations for the
foreseeable future.
34
Kadant Inc.
2006 Annual Report
Contractual Obligations and Other Commercial Commitments
The following table summarizes our known contractual obligations and commercial commitments to make
future payments or other consideration pursuant to certain contracts as of December 30, 2006, as well as an
estimate of the timing in which these obligations are expected to be satisfied. Detailed information concerning
these obligations and commitments can be found in Notes 2, 7 and 8 to our consolidated financial statements.
(In millions)
Contractual Obligations and Other Commitments: (a)(b)
Long-term debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kadant Johnson acquisition consideration (d) . . . . . . . . . . . .
Kadant Jining acquisition consideration (e) . . . . . . . . . . . . . .
Letters of credit (f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total (g)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments Due by Period or Expiration of Commitment
Less than
1 Year
1-3
Years
4-5
Years
After
5 Years
Total
$ 9.3
2.8
3.2
0.9
2.1
10.0
$28.3
$25.0
3.8
3.1
1.8
1.3
3.3
$12.4
1.5
1.3
2.5
–
1.8
$38.3
$19.5
$ 7.3
2.0
0.8
–
–
–
$10.1
$54.0
10.1
8.4
5.2
3.4
15.1
$96.2
(a) We have purchase obligations related to the acquisition of raw material made in the ordinary course of
(b)
business that may be terminated with minimal notice and are excluded from this analysis.
In the ordinary course of business, we are required to issue limited performance guarantees, which do not
require letters of credit, relating to our equipment and systems. We typically limit our liability under these
guarantees to amounts that would not exceed the value of the contract. We believe that we have adequate
reserves for any potential liability in connection with such guarantees. These guarantees are not included in
this table.
(c) Amounts assume interest rates on variable rate debt remain unchanged from rates as of December 30, 2006.
In addition to the consideration paid at closing for Kadant Johnson, $5.2 million will be paid through 2010
(d)
related to certain tax assets of Kadant Johnson, the value of which we expect to realize.
In addition to the consideration paid at closing for Kadant Jining, $3.4 million will be paid through January
2008 as certain post-closing and indemnification obligations are satisfied.
(e)
(f) Primarily relates to guarantees of customer deposits. This total excludes letters of credit of $13.7 million,
which guarantee payment of amounts accrued on the balance sheet and reflected in the table within long-
term debt obligations, Kadant Johnson acquisition consideration, and Kadant Jining acquisition
consideration.
(g) This table excludes $1.0 million of accrued restructuring costs and $6.8 million of other long-term liabilities
related primarily to pension and other post-retirement plans, as these liabilities are not subject to fixed
payment terms. We expect that the accrued restructuring costs will be paid in 2007.
Provisions in financial guarantees or commitments, debt or lease agreements, or other arrangements could
trigger a requirement for an early payment, additional collateral support, amended terms, or acceleration of
maturity.
We do not have special-purpose entities nor do we use off-balance-sheet financing arrangements.
In the future, our liquidity position will be primarily affected by the level of cash flows from operations and
the amount of cash expended on debt repayments, capital projects, stock repurchases, or additional acquisitions,
if any. We believe that our existing resources, together with the cash available from our credit facility and the
cash we expect to generate from continuing operations, are sufficient to meet the capital requirements of our
current operations for the foreseeable future.
35
Kadant Inc.
2006 Annual Report
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in interest rates and foreign currency exchange rates, which
could affect our future results of operations and financial condition. We manage our exposure to these risks
through our regular operating and financing activities. We entered into “receive-variable and pay-fixed” swap
agreements in 2006 and 2005 to hedge a portion of our variable rate long-term debt. Additionally, we use short-
term forward contracts to manage certain exposures to foreign currencies. We enter into forward foreign
exchange contracts to hedge firm purchase and sale commitments denominated in currencies other than our
subsidiaries’ local currencies. We do not engage in extensive foreign currency hedging activities; however, the
purpose of our foreign currency hedging activities is to protect our local currency cash flows related to these
commitments from fluctuations in foreign exchange rates. Our forward foreign exchange contracts principally
hedge transactions denominated in U.S. dollars. Gains and losses arising from forward contracts are recognized
as offsets to gains and losses resulting from the transactions being hedged. We do not use financial instruments
for trading purposes.
Interest Rates
Our cash and cash equivalents are sensitive to changes in interest rates. Interest rate changes would result in
a change in interest income due to the difference between the current interest rates on cash and cash equivalents
and the variable rates to which these financial instruments may adjust in the future. A 10% decrease in year-end
interest rates would have resulted in a negative impact on our net income of $0.1 million in both 2006 and 2005.
A portion of our outstanding debt is sensitive to changes in interest rates. We hedged $37.9 million and
$33.3 million of our debt at year end 2006 and 2005, respectively, with “receive-variable pay-fixed” swap
agreements. The fair values of the swap agreements are sensitive to changes in long-term swap rates. A 10%
decrease in the long-term swap rates would have resulted in an increase of unrealized losses of $0.1 million and
$0.3 million as of year-end 2006 and 2005, respectively. The remaining unhedged portion of the debt totaling
$16.1 million and $22.2 million as of year-end 2006 and 2005, respectively, is sensitive to changes in interest
rates. As of year-end 2006 the interest rate on the unhedged portion of our U.S. debt was based on LIBOR and
for our foreign debt based on rates established by the Bank of China Limited. As of year-end 2005, the interest
rate on the unhedged portion of the debt was based on LIBOR. A 10% increase in the year-end rates would have
resulted in a negative impact on our net income of $0.1 million in both 2006 and 2005.
Currency Exchange Rates
We generally view our investment in foreign subsidiaries in a functional currency other than our reporting
currency as long-term. Our investment in foreign subsidiaries is sensitive to fluctuations in foreign currency
exchange rates. The functional currencies of our foreign subsidiaries are principally denominated in euros,
British pounds sterling, Mexican pesos, Canadian dollars, Chinese renminbi and Brazilian reals. The effect of
changes in foreign exchange rates on our net investment in foreign subsidiaries is reflected in the “accumulated
other comprehensive items” component of shareholders’ investment. A 10% depreciation in functional currencies
at year-end 2006 and 2005, relative to the U.S. dollar, would have resulted in a reduction in shareholders’
investment of $13.3 million and $6.7 million, respectively.
The fair value of forward foreign exchange contracts is sensitive to fluctuations in foreign currency
exchange rates. The fair value of forward foreign exchange contracts is the estimated amount that we would pay
or receive upon termination of the contracts, taking into account the change in foreign currency exchange rates. A
10% depreciation in year-end 2006 and 2005 foreign currency exchange rates related to our contracts would have
resulted in an increase in unrealized losses on forward foreign exchange contracts of $0.5 million and
$0.3 million in 2006 and 2005, respectively. Since we use forward foreign exchange contracts as hedges of firm
purchase and sale commitments, the unrealized gain or loss on forward foreign currency exchange contracts
resulting from changes in foreign currency exchange rates would be offset by corresponding changes in the fair
value of the hedged items.
36
Kadant Inc.
2006 Annual Report
Item 8. Financial Statements and Supplementary Data
This data is submitted as a separate section to this Report. See Item 15, “Exhibits and Financial Statement
Schedules.”
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 30, 2006.
The term “disclosure controls and procedures,” as defined in Securities Exchange Act Rules 13a-15(e) and
15d-15(e), means controls and other procedures of a company that are designed to ensure that information
required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes
that any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-
benefit relationship of possible controls and procedures. Based upon the evaluation of our disclosure controls and
procedures as of December 30, 2006, our Chief Executive Officer and Chief Financial Officer concluded that as
of December 30, 2006, our disclosure controls and procedures were effective at the reasonable assurance level.
Evaluation of Changes in Internal Controls over Financial Reporting
There have not been any changes in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the fiscal quarter ended
December 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Management’s Report on Internal Control over Financial Reporting
We are continuing the process of evaluating Kadant Jining’s internal controls and, as of the date of this
report, have not yet completed our evaluation. As permitted, we have excluded this acquisition from our
reporting under Section 404 of the Sarbanes-Oxley Act of 2002 at December 30, 2006.
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Securities Exchange Act Rules 13a-15(f) and 15d-15(f). Our management
assessed the effectiveness of our internal control over financial reporting as of December 30, 2006, excluding the
internal controls at Kadant Jining. In making this assessment, our management used the criteria set forth in
“Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on our assessment, management believes that, as of December 30, 2006
our internal control over financial reporting, excluding the internal controls at Kadant Jining, is effective based
on the criteria issued by COSO.
Because of inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls
37
Kadant Inc.
2006 Annual Report
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Our independent registered public accountants, Ernst & Young LLP, have issued an audit report on our
assessment of our internal control over financial reporting, which is included herein on page F-3.
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
This information will be under the heading “Election of Directors” in our 2007 proxy statement for our 2007
Annual Meeting of Shareholders and is incorporated in this Report by reference, except as follows. The
information concerning executive officers is included under the heading “Executive Officers of the Registrant” in
Item 1 of Part I of this Report. The information concerning Section 16(a) reporting compliance appears below.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act, requires our directors and executive officers, and beneficial owners of
more than 10% of our common stock, to file with the SEC initial reports of ownership and periodic reports of
changes in ownership of our securities. Based upon a review of these filings, all Section 16(a) filing requirements
applicable to such persons were complied with during 2006 on a timely basis, except as follows. The Form 4s
reporting the award of 2,500 shares of restricted stock to each of our non-management directors on May 25, 2006
(Dr. Albertine, Dr. Allen, Mr. Leonard, and Mr. McKone) were filed late by 16 business days on June 19, 2006.
Corporate Governance
The information required under Item 406 of Regulation S-K will be included under the heading “Election of
Directors – Corporate Governance – Code of Business Conduct and Ethics” in our 2007 proxy statement and is
incorporated in this Report by reference.
Item 11. Executive Compensation
This information will be included under the headings “Executive Compensation”, “Compensation
Committee Interlocks and Insider Participation”, and “Compensation Committee Report” in our 2007 proxy
statement and is incorporated in this Report by reference.
38
Kadant Inc.
2006 Annual Report
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Except for the information concerning equity compensation plans, this information will be included under
the heading “Stock Ownership” in our 2007 proxy statement and is incorporated in this Report by reference.
The following table provides information about the securities authorized for issuance under our equity
compensation plans as of December 30, 2006:
Equity Compensation Plan Information
(a)
Number of Securities
to be Issued upon
Exercise of
Outstanding Options,
Warrants, and
Rights
(b)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants, and
Rights
(c)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a))
Plan Category
Equity compensation plans approved by
security holders . . . . . . . . . . . . . . . . . . . . . . . .
782,985(1)
$18.07(1)
1,441,106(2)
Equity compensation plans not approved by
security holders (3) . . . . . . . . . . . . . . . . . . . . .
117,001
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
899,986(1)
$14.26
$17.58(1)
12,002
1,453,108(2)
(1) Excludes an aggregate of 263,950 shares of common stock issuable under our employees’ stock purchase
plan in connection with current and future offering periods under the plan. Excludes 2,569 shares reserved
for issuance pursuant to our deferred compensation plan for directors.
Includes 263,950 shares of common stock issuable under our employees’ stock purchase plan in connection
with current and future offering periods under the plan. Excludes 2,569 shares reserved for issuance
pursuant to our deferred compensation plan for directors.
(2)
(3) The material features of our 2001 employee equity incentive plan are described in Part IV, Item 15, Exhibits
and Financial Statement Schedules, Note 3, which begins on page F-1 of this Report.
Item 13. Certain Relationships and Related Transactions, and Director Independence
This information will be included under the heading “Election of Directors” in our 2007 proxy statement
and is incorporated in this Report by reference.
Item 14. Principal Accountant Fees and Services
This information will be included under the heading “Independent Auditors” in our 2007 proxy statement
and is incorporated in this Report by reference.
39
Kadant Inc.
2006 Annual Report
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Report:
PART IV
(1) Consolidated Financial Statements (see Index on Page F-1 of this Report):
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
and Schedule
Report of Independent Registered Public Accounting Firm on Internal Control over Financial
Reporting
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Comprehensive Income and Shareholders’ Investment
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedule (see Index on Page F-1 of this Report):
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or not required, or because the required
information is shown either in the consolidated financial statements or in the notes thereto.
(3) Exhibits filed herewith or incorporated in this Report by reference are set forth in the Exhibit Index
beginning on page 42. This list of exhibits identifies each management contract or compensatory plan
or arrangement required to be filed as an exhibit to this Report.
(b) Exhibits
See the Exhibit Index beginning on page 42.
40
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Signatures
Date: March 13, 2007
KADANT INC.
By: /s/ WILLIAM A. RAINVILLE
William A. Rainville
Chairman of the Board, Chief Executive Officer,
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities indicated, on March 13, 2007.
Signature
Title
By:
/s/ WILLIAM A. RAINVILLE
William A. Rainville
Chairman of the Board, Chief Executive Officer, and
President
By:
/s/ THOMAS M. O’BRIEN
Executive Vice President, Chief Financial Officer
Thomas M. O’Brien
By:
/s/ MICHAEL J. MCKENNEY
Michael J. McKenney
Vice President, Finance and Chief Accounting
Officer
By:
/s/
JOHN M. ALBERTINE
John M. Albertine
By:
/s/
JOHN K. ALLEN
John K. Allen
By:
/s/ THOMAS C. LEONARD
Thomas C. Leonard
By:
/s/ FRANCIS L. MCKONE
Francis L. McKone
Director
Director
Director
Director
41
Exhibit
Number
2.1
2.2
2.3
2.4
3.1
3.2
4.1
10.1*
10.2*
10.3*
10.4*
Exhibit Index
Description of Exhibit
Purchase Agreement among the Registrant, Johnson Acquisition Corp., The Johnson Corporation and
the principal shareholders of Johnson identified in the Purchase Agreement (filed as Exhibit 99.2 to
the Registrant’s Current Report on Form 8-K [File No. 1-11406] filed with the Commission on
April 12, 2005 and incorporated in this document by reference). (1)
Purchase Agreement dated October 21, 2005, among the Registrant, its Kadant Composites LLC
subsidiary, LDI Composites Co., a Minnesota corporation, and Liberty Diversified Industries, Inc., a
Minnesota corporation, and parent corporation of the Buyer (filed as Exhibit 99.1 to the Registrant’s
Current Report on Form 8-K [File No. 1-11406] filed with the Commission on October 27, 2005 and
incorporated in this document by reference). (1)
Asset Purchase Agreement dated January 21, 2006 on behalf of Kadant Jining Light Machinery Co.
Ltd. by the Registrant (as Buyer) and Jining Huayi Light Industry Machinery Co., Ltd., (as Seller)
(filed as Exhibit 2.3 to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2005 [File No. 1-11406] filed with the Commission on March 16, 2006 and
incorporated in this document by reference). (1)
Business Transfer Agreement dated as of May 31, 2006 between Kadant Light Machinery (Jining)
Co., Ltd. and Jining Huayi Light Industry Machinery Company (filed as Exhibit 2.1 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2006 [File No. 1-11406]
filed with the Commission on August 10, 2006 and incorporated in this document by reference). (1)
Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 [File No. 1-11406] and
incorporated in this document by reference).
Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.2 to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001 [File No. 1-11406] and incorporated in this
document by reference).
Rights Agreement, dated as of July 16, 2001, between the Registrant and American Stock Transfer &
Trust Company, which includes as Exhibit A the Form of Certificate of Designations, as Exhibit B
the Form of Rights Certificate, and as Exhibit C the Summary of Rights to Purchase Preferred Stock
(filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K [File No. 1-11406] filed with the
Commission on July 17, 2001, and incorporated in this document by reference).
Form of Indemnification Agreement between the Registrant and its directors and officers (filed as
Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001
[File No. 1-11406] and incorporated in this document by reference).
Form of Change in Control Agreement between the Company and Mr. William A. Rainville,
chairman and chief executive officer of the Company (filed as Exhibit 99.1 to the Registrant’s
Current Report on Form 8-K [File No. 1-11406] filed with the Commission on December 8, 2006,
and incorporated in this document by reference).
Form of Change in Control Agreement between the Company and Other Senior Officers (filed as
Exhibit 99.2 to the Registrant’s Current Report on Form 8-K [File No. 1-11406] filed with the
Commission on December 8, 2006, and incorporated in this document by reference).
Amended and Restated Nonqualified Stock Option Plan of the Registrant (filed as Exhibit 10.6 to the
Registrant’s Annual Report on Form 10-K for the year ended December 28, 2002 [File No. 1-11406]
and incorporated in this document by reference).
42
Exhibit Index
Exhibit
Number
10.5*
10.6*
10.7*
10.8*
10.9*
Description of Exhibit
Amended and Restated Equity Incentive Plan of the Registrant (filed as Exhibit 10.7 to the
Registrant’s Annual Report on Form 10-K for the year ended December 28, 2002 [File No. 1-11406]
and incorporated in this document by reference).
2001 Employee Equity Incentive Plan of the Registrant (filed as Exhibit 10.11 to the Registrant’s
Annual Report on Form 10-K for the year ended December 28, 2002 [File No. 1-11406] and
incorporated in this document by reference).
Kadant Inc. 2006 Equity Incentive Plan (filed as Exhibit 99.1 to the Registrant’s Current Report on
Form 8-K [File No. 1-11406] filed with the Commission on May 31, 2006, and incorporated in this
document by reference).
Amended and Restated Deferred Compensation Plan for Directors of the Registrant (filed as
Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 3, 1999
[File No. 1-11406] and incorporated in this document by reference).
Amended and Restated Directors’ Restricted Stock Plan (filed as Exhibit 10.10 to the Registrant’s
Annual Report on Form 10-K for the year ended January 3, 2004 [File No. 1-11406] and
incorporated in this document by reference).
10.10*
Form of Nonqualified Stock Option Agreement for employees and executive officers of the
Registrant (filed as Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K for the year ended
January 1, 2005 [File No. 1-11406] and incorporated in this document by reference).
10.11*
Summary of Non-employee Director Compensation of the Registrant.
10.12*
Form of Restricted Stock Agreement for award of restricted shares to non-employee directors used
for restricted stock awards prior to February 27, 2007 (filed as Exhibit 99.1 to the Registrant’s
Current Report on Form 8-K [File No. 1-11406] filed with the Commission on June 13, 2005 and
incorporated in this document by reference).
10.13
10.14
10.15
10.16
Form of Restricted Stock Agreement for award of restricted shares to non-employee directors used
for restricted stock awards on and after February 27, 2007.
Credit Agreement among the Registrant, the Foreign Subsidiary Borrowers from time to time parties
thereto, the several banks and other financial institutions or entities from time to time parties thereto,
and JPMorgan Chase Bank, N.A., as Administrative Agent, dated May 9, 2005 (filed as Exhibit 99.1
to the Registrant’s Current Report on Form 8-K [File No. 1-11406] filed with the Commission on
May 11, 2005 and incorporated in this document by reference). (1)
First Amendment to Credit Agreement dated May 9, 2005 among the Registrant, the Foreign
Subsidiary Borrowers from time to time parties thereto, the several lenders from time to time parties
thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, dated October 21, 2005 (filed as
Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 1,
2005 [File No. 1-11406] and incorporated in this document by reference).
Second Amendment to Credit Agreement dated May 9, 2005 among the Registrant, the Foreign
Subsidiary Borrowers from time to time parties thereto, the several lenders from time to time parties
thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, effective December 28, 2005
(filed as Exhibit 99.1 to the Registrant’s Current Report on Form 8-K [File No. 1-11406] filed with
the Commission on January 4, 2006 and incorporated in this document by reference).
43
Exhibit
Number
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
Exhibit Index
Description of Exhibit
Guarantee and Pledge Agreement, dated May 9, 2005, in favor of JPMorgan Chase Bank, N.A., as
agent on behalf of the lenders (filed as Exhibit 99.2 to the Registrant’s Current Report on Form 8-K
[File No. 1-11406] filed with the Commission on May 11, 2005 and incorporated in this document by
reference). (1)
International Swap Dealers Association, Inc. Master Agreement dated May 13, 2005 between the
Registrant and Citizens Bank of Massachusetts and Swap Confirmation dated May 18, 2005 (filed as
Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 2, 2005
[File No. 1-11406] and incorporated in this document by reference).
Third Amendment to the Credit Agreement dated April 3, 2006, among Kadant, the Foreign
Subsidiary Borrowers from time to time parties thereto, the several lenders from time to time parties
thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, (filed as Exhibit 99.1 to the
Registrant’s Current Report on Form 8-K [File No. 1-11406] filed with the Commission on April 7,
2006 and incorporated in this document by reference).
Promissory Note in the principal amount of $10,000,000 dated May 4, 2006, between Kadant and
Citizens Bank of Massachusetts (filed as Exhibit 99.1 to the Registrant’s Current Report on
Form 8-K [File No. 1-11406] filed with the Commission on May 9, 2006 and incorporated in this
document by reference).
Limited Guaranty Agreement dated May 4, 2006 between Kadant Web Systems Inc., a
Massachusetts corporation, and Citizens Bank of Massachusetts (filed as Exhibit 99.2 to the
Registrant’s Current Report on Form 8-K [File No. 1-11406] filed with the Commission on May 9,
2006 and incorporated in this document by reference).
Limited Guaranty Agreement dated May 4, 2006 between Kadant Black Clawson Inc., a Delaware
corporation, and Citizens Bank of Massachusetts (filed as Exhibit 99.3 to the Registrant’s Current
Report on Form 8-K [File No. 1-11406] filed with the Commission on May 9, 2006 and incorporated
in this document by reference).
Limited Guaranty Agreement dated May 4, 2006 between Kadant Johnson Inc., a Michigan
corporation, and Citizens Bank of Massachusetts (filed as Exhibit 99.4 to the Registrant’s Current
Report on Form 8-K [File No. 1-11406] filed with the Commission on May 9, 2006 and incorporated
in this document by reference).
Mortgage and Security Agreement dated May 4, 2006 between Kadant and Citizens Bank of
Massachusetts relating to the real property and related personal property located in Queensbury, New
York (filed as Exhibit 99.5 to the Registrant’s Current Report on Form 8-K [File No. 1-11406] filed
with the Commission on May 9, 2006 and incorporated in this document by reference). (1)
Mortgage and Security Agreement dated May 4, 2006 between Kadant Web Systems Inc., a
Massachusetts corporation, and Citizens Bank of Massachusetts relating to the real property and
related personal property located in Auburn, Massachusetts (filed as Exhibit 99.6 to the Registrant’s
Current Report on Form 8-K [File No. 1-11406] filed with the Commission on May 9, 2006 and
incorporated in this document by reference). (1)
Mortgage and Security Agreement dated May 4, 2006 between Kadant Black Clawson Inc., a
Delaware corporation, and Citizens Bank of Massachusetts relating to the real property and related
personal property located in Theodore, Alabama (filed as Exhibit 99.7 to the Registrant’s Current
Report on Form 8-K [File No. 1-11406] filed with the Commission on May 9, 2006 and incorporated
in this document by reference). (1)
44
Exhibit
Number
10.27
10.28
10.29
10.30
10.31
10.32*
10.33
10.34
10.35
10.36
Exhibit Index
Description of Exhibit
Mortgage and Security Agreement dated May 9, 2006 between Kadant Johnson Inc., a Michigan
corporation, and Citizens Bank of Massachusetts relating to the real property and related personal
property located in Three Rivers, Michigan (filed as Exhibit 99.8 to the Registrant’s Current Report
on Form 8-K [File No. 1-11406] filed with the Commission on May 9, 2006 and incorporated in this
document by reference). (1)
Swap Confirmation dated May 9, 2006 between Kadant and Citizens Bank of Massachusetts (filed as
Exhibit 99.10 to the Registrant’s Current Report on Form 8-K [File No. 1-11406] filed with the
Commission on May 9, 2006 and incorporated in this document by reference). (1)
(Middle/Long-Term) RMB Loan Agreement dated as of June 6, 2006 between Kadant Light
Machinery (Jining) Co., Ltd. and Bank of China Limited, Jining Branch (filed as Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2006 [File No. 1-11406]
filed with the Commission on August 10, 2006 and incorporated in this document by reference).
Supplementary Agreement to (Middle/Long-Term) RMB Loan Agreement dated as of June 6, 2006
between Kadant Light Machinery (Jining) Co., Ltd. and Bank of China Limited, Jining Branch (filed
as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2006
[File No. 1-11406] filed with the Commission on August 10, 2006 and incorporated in this document
by reference).
Payment Guarantee Agreement dated as of June 6, 2006 between Kadant Light Machinery (Jining)
Co., Ltd. and Bank of China Limited, Jining Branch (filed as Exhibit 10.3 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended July 1, 2006 [File No. 1-11406] filed with the
Commission on August 10, 2006 and incorporated in this document by reference).
Employment Agreement dated April 7, 2005 between the Registrant and Rudolf A. Leerentveld (filed
as Exhibit 10.20 to the Registrant’s Annual Report on Form 10-K for the year ended December 31,
2005 [File No. 1-11406] and incorporated in this document by reference).
Joinder Agreement dated as of September 30, 2005, among Kadant Lamort SAS, the Registrant, and
JPMorgan Chase Bank, N.A., as administrative agent for the several banks and other financial
institutions from time to time parties to the Credit Agreement dated as of May 9, 2005.
Assumption Agreement dated as of May 23, 2005, made by Kadant Johnson Inc. in favor of
JPMorgan Chase Bank, N.A., as administrative agent for the banks and other financial institutions or
entities parties to the Credit Agreement dated as of May 9, 2005.
Assumption Agreement dated as of June 12, 2006 made by Fiberprep Inc., in favor of JPMorgan
Chase Bank, N.A., as administrative agent for the banks and other financial institutions or entities
parties to the Credit Agreement dated May 9, 2005 and as subsequently amended among the
Registrant, the Foreign Subsidiary Borrowers from time to time parties thereto, the several lenders
from time to time parties thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent.
Waiver and Release among Kadant Inc., the Foreign Subsidiary Borrowers from time to time parties
thereto, the several lenders from time to time parties thereto, and JPMorgan Chase Bank, N.A., as
Administrative Agent dated as of October 23, 2006 to (1) the Credit Agreement dated May 9, 2005
and as subsequently amended among the Registrant, the Foreign Subsidiary Borrowers from time to
time parties thereto, the several lenders from time to time parties thereto, and JPMorgan Chase Bank,
N.A., as Administrative Agent and the (2) Guarantee and Pledge Agreement, dated as of May 9, 2005
(as amended, supplemented or modified, from time to time) made by Kadant Inc. and certain of its
subsidiaries in favor of the Administrative Agent. (1)
45
Exhibit Index
Exhibit
Number
10.37
10.38
10.39
21
23.1
31.1
31.2
32
Description of Exhibit
Plan and Agreement of Distribution, dated as of August 3, 2001, between the Registrant and Thermo
Electron Corporation (filed as Exhibit 99.3 to the Registrant’s Current Report on Form 8-K
[File No. 1-11406] filed with the Commission on August 6, 2001, and incorporated in this document
by reference).
First Amendment to Plan and Agreement of Distribution, dated as of December 27, 2001, between
the Registrant and Thermo Electron Corporation (filed as Exhibit 10.4 to the Registrant’s Annual
Report on Form 10-K for the year ended December 29, 2001 [File No. 1-11406] and incorporated in
this document by reference).
Tax Matters Agreement, dated as of August 8, 2001, between the Registrant and Thermo Electron
Corporation (filed as Exhibit 99.4 to the Registrant’s Current Report on Form 8-K [File No. 1-11406]
filed with the Commission on August 6, 2001, and incorporated in this document by reference).
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Certification of the Principal Executive Officer of the Registrant Pursuant to Rule 13a-15(e) and Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended.
Certification of the Principal Financial Officer of the Registrant Pursuant to Rule 13a-15(e) and Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended.
Certification of the Chief Executive Officer and the Chief Financial Officer of the Registrant
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
*Management contract or compensatory plan or arrangement.
(1) The schedules to this document have been omitted from this filing pursuant to Item 601(b)(2) of Regulation
S-K. The Company will furnish copies of any of the schedules to the U.S. Securities and Exchange
Commission upon request.
46
Kadant Inc.
Annual Report on Form 10-K
Index to Consolidated Financial Statements and Schedule
The following Consolidated Financial Statements of the Registrant and its subsidiaries are required to be
included in Item 8:
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements and
Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting . .
Consolidated Statement of Income for the years ended December 30, 2006, December 31, 2005, and
January 1, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheet as of December 30, 2006 and December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . .
Page
F-2
F-3
F-4
F-5
Consolidated Statement of Cash Flows for the years ended December 30, 2006, December 31, 2005, and
January 1, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-6
Consolidated Statement of Comprehensive Income and Shareholders’ Investment for the years ended
December 30, 2006, December 31, 2005, and January 1, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-7
F-8
The following Consolidated Financial Statement Schedule of the Registrant and its subsidiaries is filed as
part of this Report as required to be included in Item 15(a):
Schedule II – Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-45
Page
F-1
Report of Independent Registered Public Accounting Firm
on Consolidated Financial Statements and Schedule
To the Board of Directors and Shareholders of Kadant Inc.:
We have audited the accompanying consolidated balance sheets of Kadant Inc. and subsidiaries as of
December 30, 2006 and December 31, 2005, and the related consolidated statements of income, comprehensive
income and shareholders’ investment, and cash flows for each of the three years in the period ended
December 30, 2006. Our audits also included the financial statement schedule listed in the index at Item 15(a)(2).
These financial statements and schedule are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Kadant Inc. and subsidiaries at December 30, 2006 and December 31, 2005,
and the consolidated results of their operations and their cash flows for each of the three years in the period
ended December 30, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 of the consolidated financial statements, effective January 1, 2006 the Company
adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment and, effective
December 30, 2006, the Company adopted Statement of Financial Accounting Standards No. 158, Employer’s
Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB statements
No. 87, 88, 106 and 132(R).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of Kadant Inc.’s internal control over financial reporting as of December 30,
2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March 7, 2007 expressed an
unqualified opinion thereon.
Boston, Massachusetts
March 7, 2007
Ernst & Young LLP
F-2
Report of Independent Registered Public Accounting Firm
on Internal Control over Financial Reporting
To the Board of Directors and Shareholders of Kadant Inc.:
We have audited management’s assessment, included in the accompanying Management’s Report on
Internal Control over Financial Reporting, that Kadant Inc. maintained effective internal control over financial
reporting as of December 30, 2006, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Kadant
Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, evaluating management’s
assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report of Internal Control over Financial Reporting,
management’s assessment of and conclusions on the effectiveness of internal control over financial reporting did
not include the internal controls of Kadant Jining, which is included in the 2006 consolidated financial statements
of Kadant Inc. and constituted 6% and 5% of total assets and net assets, respectively, as of December 30, 2006
and 2% of both revenues and net income for the year then ended. Our audit of internal control over financial
reporting of Kadant Inc. also did not include an evaluation of the internal control over financial reporting of
Kadant Jining.
In our opinion, management’s assessment that Kadant Inc. maintained effective internal control over
financial reporting as of December 30, 2006, is fairly stated, in all material respects, based on the COSO criteria.
Also, in our opinion, Kadant Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 30, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Kadant Inc. and subsidiaries as of December 30, 2006 and
December 31, 2005, and the related consolidated statements of income, comprehensive income and shareholders’
investment, and cash flows for each of the three years in the period ended December 30, 2006, and our report
dated March 7, 2007 expressed an unqualified opinion thereon.
Boston, Massachusetts
March 7, 2007
Ernst & Young LLP
F-3
Kadant Inc.
2006 Financial Statements
Consolidated Statement of Income
(In thousands, except per share amounts)
2006
2005
2004
Revenues (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$341,613
$243,713
$194,966
Costs and Operating Expenses:
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general, and administrative expenses . . . . . . . . . . . . . . . . . . . . . .
Research and development expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Restructuring and other costs (income), net (Note 8)
214,919
90,236
6,201
815
149,744
74,617
4,887
(118)
119,200
56,334
3,077
9,515
312,171
229,130
188,126
Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Expense (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,442
1,121
(3,328)
14,583
1,505
(2,114)
Income from Continuing Operations Before Provision for Income Taxes and
Minority Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for Income Taxes (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minority Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from Discontinued Operation (net of income tax benefit of $702,
27,235
8,688
266
18,281
13,974
3,925
184
9,865
6,840
1,468
(23)
8,285
2,524
8
5,753
$1,608, $2,966 in 2006, 2005, and 2004, respectively; Note 9)
. . . . . . . . . .
(1,184)
(2,988)
(5,099)
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 17,097
Basic Earnings per Share (Note 12)
Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted Earnings per Share (Note 12)
Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
1.32
(.08)
1.24
1.30
(.09)
1.21
$
$
$
$
$
6,877
.71
(.21)
.50
.70
(.21)
.49
$
$
$
$
$
654
.41
(.36)
.05
.40
(.35)
.05
Weighted Average Shares (Note 12)
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,816
13,829
14,071
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,097
14,104
14,398
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Kadant Inc.
2006 Financial Statements
(In thousands, except share amounts)
Assets
Current Assets:
Consolidated Balance Sheet
2006
2005
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, less allowances of $2,623 and $2,221 . . . . . . . . . . . . . . . . . . . .
Unbilled contract costs and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets of discontinued operation (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 39,634
49,963
24,087
41,679
8,575
4,461
$ 40,822
41,822
11,603
35,115
11,969
14,030
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
168,399
155,361
Property, Plant, and Equipment, at Cost, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40,939
11,983
34,686
32,907
6,856
36,262
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
137,078
124,425
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$393,085
$355,811
Liabilities and Shareholders’ Investment
Current Liabilities:
Current maturities of long-term obligations (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Billings in excess of contract costs and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued restructuring costs (Note 8)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities of discontinued operation (Note 9)
$
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Income Taxes (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Long-Term Liabilities (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-Term Obligations (Note 6)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minority Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and Contingencies (Note 7)
Shareholders’ Investment (Notes 3 and 4):
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued . . . . . . . . .
Common stock, $.01 par value, 150,000,000 shares authorized; 14,604,520 shares
issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock at cost, 616,737 and 1,055,756 shares . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive items (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,330
32,934
15,685
8,688
1,442
971
17,348
1,459
87,857
8,761
12,833
44,652
1,017
$
9,000
20,229
14,002
3,636
8,032
4,781
13,636
6,599
79,915
9,878
10,848
46,500
1,045
–
–
146
93,002
153,147
(14,401)
–
6,071
146
97,297
136,050
(24,254)
(124)
(1,490)
237,965
207,625
Total Liabilities and Shareholders’ Investment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$393,085
$355,811
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Kadant Inc.
2006 Financial Statements
(In thousands)
Operating Activities
Consolidated Statement of Cash Flows
2006
2005
2004
6,877
2,988
9,865
$
654
5,099
5,753
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from discontinued operation (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 17,097
1,184
$
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile income from continuing operations to net cash provided by
operating activities: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for losses on accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minority interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of property, plant, and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other items, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in current accounts, net of effects of acquisitions . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unbilled contract costs and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by continuing operations . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by discontinued operation . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . .
Investing Activities
Acquisitions, net of cash acquired (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition costs capitalized (paid), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of minority interest in subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property, plant, and equipment
Proceeds from sale of property, plant, and equipment
. . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in continuing operations . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) discontinued operation . . . . . . . . . . . .
18,281
7,758
926
725
266
–
5,065
(1,403)
(6,941)
(12,137)
(3,126)
22
11,280
(8,383)
12,333
(4,172)
8,161
(17,639)
–
(701)
(4,097)
412
(316)
(22,341)
4,271
6,931
–
185
184
(166)
1,511
1,459
(35)
(493)
4,362
542
(4,465)
(817)
19,063
(1,360)
17,703
(103,614)
1,563
(1,129)
(3,245)
507
(501)
(106,419)
5,548
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
(18,070)
(100,871)
Financing Activities
Proceeds from issuance of short and long-term obligations (Note 6) . . . . . . . . . . . . . .
Increase in short and long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of Company common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of long-term obligations (Note 6)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from issuance of Company common stock (Note 3) . . . . . . . . . . . . . . . .
Excess tax benefits from stock option exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) continuing operations . . . . . . . . . . . . .
Net cash provided by (used in) discontinued operation . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . .
Exchange Rate Effect on Cash of Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in Cash from Discontinued Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,124
–
(7,181)
(16,642)
9,380
2,529
(173)
3,037
–
3,037
2,538
3,146
60,000
4,000
(9,116)
(5,522)
1,393
–
(652)
50,103
–
50,103
(2,498)
(5,704)
3,604
–
656
8
(149)
199
363
453
921
1,665
397
(2,630)
1,693
12,933
316
13,249
–
(1,916)
(318)
(2,189)
1,306
(90)
(3,207)
(314)
(3,521)
–
–
(10,261)
(598)
5,493
–
–
(5,366)
–
(5,366)
3,315
–
(Decrease) Increase in Cash and Cash Equivalents from Continuing Operations . . . . . . . .
Cash and Cash Equivalents at Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,188)
40,822
(41,267)
82,089
7,677
74,412
Cash and Cash Equivalents at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 39,634
$ 40,822
$ 82,089
See Note 1 for supplemental cash flow information.
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Kadant Inc.
(In thousands)
Consolidated Statement of Comprehensive Income and
Shareholders’ Investment
2006
2005
2004
2006 Financial Statements
Comprehensive Income
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 17,097
$
6,877
$
654
7,909
(4,564)
5,326
(1,272)
1,136
–
–
–
–
113
5,439
Other Comprehensive Items (Note 13):
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loss on pension and other post-retirement plans (net of tax of $849)
(Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized prior service income (net of tax of $757) (Note 3) . . . . . . . . . . . . . . . .
Deferred (loss) gain on hedging instruments (net of tax of $141, $133 and $59 in
2006, 2005, and 2004, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(212)
174
Other Comprehensive Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,561
(4,390)
Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 24,658
$
2,487
$
6,093
Shareholders’ Investment
Common Stock, $.01 Par Value:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Activity under employees’ and directors’ stock plans . . . . . . . . . . . . . . . . . . . . . . . . .
$
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
146
–
146
$
146
–
146
143
3
146
Capital in Excess of Par Value:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adoption of SFAS 123R . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Activity under employees’ and directors’ stock plans . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit related to employees’ and directors’ stock plans . . . . . . . . . . . . . . . . . . . .
97,297
(124)
(6,700)
2,529
98,450
–
(1,276)
123
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
93,002
97,297
94,454
–
3,288
708
98,450
Retained Earnings:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
136,050
17,097
129,173
6,877
128,519
654
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
153,147
136,050
129,173
Treasury Stock, at Cost:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of Company common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Activity under employees’ and directors’ stock plans . . . . . . . . . . . . . . . . . . . . . . . . .
(24,254)
(7,181)
17,034
(18,158)
(9,116)
3,020
(8,788)
(10,261)
891
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14,401)
(24,254)
(18,158)
Deferred Compensation:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adoption of SFAS 123R . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of restricted stock under directors’ stock plans (Note 3) . . . . . . . . . . . . . . . .
Amortization of deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(124)
124
–
–
–
(50)
–
(352)
278
(124)
(31)
–
(200)
181
(50)
Accumulated Other Comprehensive Items (Note 13):
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,490)
7,561
6,071
2,900
(4,390)
(1,490)
(2,539)
5,439
2,900
Shareholders’ Investment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$237,965
$207,625
$212,461
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Kadant Inc.’s (the Company) continuing operations include one operating segment, Pulp and Papermaking
Systems (Papermaking Systems), and two separate product lines, Fiber-based Products and Casting Products,
which are reported in Other. Through its Papermaking Systems segment, the Company develops, manufactures,
and markets a range of equipment and products for the global papermaking and paper recycling industries. The
Company’s principal products in this segment include custom-engineered stock-preparation systems and
equipment for the preparation of wastepaper for conversion into recycled paper; paper machine accessory
equipment and related consumables important to the efficient operation of paper machines; water-management
systems essential for draining, purifying, and recycling process water; and fluid-handling systems used primarily
in the dryer section of the papermaking process and during the production of corrugated boxboard, metals,
plastics, rubber, textiles, and food. Through its Fiber-based Products line, the Company manufactures and sells
granules derived from papermaking byproducts primarily for use as agricultural carriers and for home lawn and
garden applications. The Company also manufactures and sells grey and ductile iron castings through its Casting
Products business.
On October 21, 2005, the Company’s Kadant Composites LLC subsidiary (Composites LLC) sold
substantially all the assets comprising its composites business to LDI Composites Co. (the Buyer). As part of the
sale transaction, Composites LLC retained the warranty obligations associated with products manufactured prior
to the sale date. As of December 30, 2006, the accrued warranty reserve associated with the composites business
was $1,135,000, which represents the low end of the range of potential loss for products under warranty.
Composites LLC has calculated the potential range of loss to be between $1,135,000 and approximately
$15,600,000. (See Warranty Obligation for Discontinued Operation below for further information.) All future
activity associated with this warranty reserve will continue to be classified in the results of the discontinued
operation in the Company’s consolidated financial statements.
Company History and Former Relationship with Thermo Electron Corporation
The Company was incorporated in November 1991 to be the successor-in-interest to several papermaking
equipment businesses of Thermo Electron Corporation (Thermo Electron). In November 1992, the Company
completed an initial public offering of a portion of its common stock. On July 12, 2001, the Company changed its
name to Kadant Inc. from Thermo Fibertek Inc. Thermo Electron disposed of its remaining equity interest in the
Company by means of a dividend to Thermo Electron shareholders on August 8, 2001 (Spinoff Date). On
May 14, 2003, the Company began trading on the New York Stock Exchange under the ticker symbol “KAI.”
Previously, the Company’s common stock traded on the American Stock Exchange under the same symbol.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly
and majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest to December 31. References to 2006,
2005, and 2004 are for the fiscal years ended December 30, 2006, December 31, 2005, and January 1, 2005,
respectively. Prior to 2006, the Company’s Kadant Lamort subsidiary, based in France, had a fiscal year ending
on November 30 to allow sufficient time for the Company to consolidate the financial statements of that
F-8
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
business. In 2006, the Kadant Lamort subsidiary changed its fiscal year end to conform to the Company’s fiscal
year end. This change resulted in the inclusion of an additional month of operating results for Kadant Lamort,
which had an immaterial effect on the Company’s consolidated income from continuing operations and net
income in 2006.
Use of Estimates and Critical Accounting Policies
The preparation of financial statements in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period.
Critical accounting policies are defined as those that entail significant judgments and estimates, and could
potentially result in materially different results under different assumptions and conditions. The Company
believes that the most critical accounting policies upon which its financial condition depends, and which involve
the most complex or subjective decisions or assessments, concern revenue recognition, warranty obligations for
continuing operations and the discontinued operation, stock-based compensation, income taxes, accounts
receivable, inventories, derivatives, and the valuation of intangible assets and goodwill. A discussion on the
application of these and other accounting policies is included in Note 1.
Although the Company makes every effort to ensure the accuracy of the estimates and assumptions used in
the preparation of its consolidated financial statements or in the application of accounting policies, if business
conditions were different, or if the Company used different estimates and assumptions, it is possible that
materially different amounts could be reported in the Company’s consolidated financial statements.
Revenue Recognition and Accounts Receivable
The Company recognizes revenue under Securities and Exchange Commission (SEC) Staff Accounting
Bulletin (SAB) No. 104, “Revenue Recognition.” Revenue is generally recognized when products are delivered
or services are performed. The Company includes in revenue amounts invoiced for shipping and handling with
the corresponding costs reflected in cost of revenues. When the terms of the sale include customer acceptance
provisions, and compliance with those provisions cannot be demonstrated until customer acceptance, revenues
are recognized upon such acceptance.
Due to the significance of the Company’s capital goods and spare parts businesses, most of the Company’s
revenue is recognized in accordance with the accounting policies in the preceding paragraph. However, when a
sale arrangement involves multiple elements (e.g., installation), the Company considers the guidance in
Emerging Issues Task Force (EITF) 00-21, “Revenue Arrangements with Multiple Deliverables.” Such
transactions are evaluated to determine whether the deliverables in the arrangement represent separate units of
accounting. If equipment and installation do not meet the separation criteria under EITF 00-21, revenues for
products sold that require installation for which the installation is essential to functionality, or is not deemed
inconsequential or perfunctory, are recognized upon completion of installation. Revenues for products sold where
installation is not essential to functionality, and is deemed inconsequential or perfunctory, are recognized upon
shipment with estimated installation costs accrued.
In addition, revenues and profits on certain long-term contracts are recognized using the
percentage-of-completion method. Revenues recorded under the percentage-of-completion method were
$91,947,000 in 2006, $55,590,000 in 2005, and $43,742,000 in 2004. The percentage of completion is
determined by comparing the actual costs incurred to date to an estimate of total costs to be incurred on each
contract. If a loss is indicated on any contract in process, a provision is made currently for the entire loss. The
Company’s contracts generally provide for billing of customers upon the attainment of certain milestones
F-9
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
specified in each contract. Revenues earned on contracts in process in excess of billings are classified as unbilled
contract costs and fees, and amounts billed in excess of revenues earned are classified as billings in excess of
contract costs and fees in the accompanying balance sheet. There are no significant amounts included in the
accompanying balance sheet that are not expected to be recovered from existing contracts at current contract
values, or that are not expected to be collected within one year, including amounts that are billed but not paid
under retainage provisions.
The Company exercises judgment in determining its allowance for bad debts, which is based on its historical
collection experience, current trends, credit policies, specific customer collection issues, and accounts receivable
aging categories. In determining this allowance, the Company looks at historical writeoffs of its receivables. The
Company also looks at current trends in the credit quality of its customer base as well as changes in its credit
policies. 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. In addition, in some instances the Company utilizes letters of credit as a way to
mitigate credit exposure. While actual bad debts have historically been within its expectations and the provisions
established, the Company cannot guarantee that it will continue to experience the same rate of bad debts that it
had in the past, especially in light of business conditions in the paper industry. A significant change in the
liquidity or financial position of any of the Company’s customers could result in the uncollectibility of the related
accounts receivable and could adversely affect its operating cash flows in that period.
Warranty Obligations for Continuing Operations
The Company provides for the estimated cost of product warranties at the time of sale based on the actual
historical return rates and repair costs. The Company typically negotiates the terms regarding warranty coverage
and length of warranty depending on the products and applications. While the Company engages in extensive
product quality programs and processes, the Company’s warranty obligation is affected by product failure rates,
repair costs, service delivery costs incurred in correcting a product failure, and supplier warranties on parts
delivered to the Company. Should actual product failure rates, repair costs, service delivery costs, or supplier
warranties on parts differ from the Company’s estimates, revisions to the estimated warranty liability would be
required. The changes in the carrying amount of product warranties included in other current liabilities in the
accompanying consolidated balance sheet are as follows:
(In thousands)
2006
2005
Balance at Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision charged to income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,836
1,541
(1,352)
139
$ 3,582
1,214
(2,009)
49
Balance at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,164
$ 2,836
(a)
Includes $232 of acquired warranty obligation in 2005 and the effects of currency translation.
Warranty Obligations for Discontinued Operation
On October 21, 2005, the Company’s Kadant Composites LLC subsidiary (Composites LLC) sold
substantially all of its assets to LDI Composites Co. (the Buyer). As part of the sale transaction, Composites LLC
retained the warranty obligations associated with products manufactured prior to the sale date. Activity
associated with the warranty reserve is classified in the results of the discontinued operation in the Company’s
F-10
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
consolidated financial statements. Through the sale date of October 21, 2005, Composites LLC offered a
standard limited warranty to the owner of its decking and roofing products, limited to repair or replacement of
the defective product or a refund of the original purchase price.
Prior to the sale of the composites business, Composites LLC recorded an estimate for warranty-related
costs at the time of sale based on its actual historical return rates and repair costs, as well as other analytical tools
for estimating future warranty claims. These estimates were revised for variances between actual and expected
claims rates. Composites LLC’s analysis of expected warranty claims rates included detailed assumptions
associated with potential product returns, including the type of product sold, temperatures at the location of
installation, density of boards, and other factors. Certain assumptions, such as the effect of weather conditions
and high temperatures on the product installed, included inherent uncertainties that were subject to fluctuation.
Through the second quarter of 2006, Composites LLC continued to record an estimate for warranty-related costs
based on this methodology.
During the third quarter of 2006, Composites LLC concluded that the highly subjective nature of the
assumptions noted above were not accurately predicting the actual level of warranty claims making it no longer
possible to calculate a reasonable estimate of the future level of potential warranty claims. Accordingly, as no
amount within the total range of loss represents a best estimate of the ultimate loss to be recorded, the Company
is required under Statement of Financial Accounting Standards (SFAS) No. 5 (SFAS 5), “Accounting for
Contingencies” to record the minimum amount of the potential range of loss for products under warranty. The
warranty obligation as of December 30, 2006 represents the low end of the estimated range of warranty reserve
required based on the level of claims processed to date. The total potential warranty cost ranges from $1,135,000
to approximately $15,600,000. The high end of the range represents the estimated maximum level of warranty
claims remaining based on the total sales of the products under warranty. Going forward, Composites LLC will
record adjustments to the warranty obligation to reflect the minimum amount of the potential range of loss for
products under warranty.
Stock-Based Compensation
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised
2004), “Share-Based Payment” (SFAS 123R). SFAS 123R replaces SFAS No. 123, “Accounting for Stock-Based
Compensation” (SFAS 123), supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees” (APB Opinion No. 25), and amends SFAS No. 95 “Statement of Cash Flows.” SFAS 123R
requires all share-based payments to employees that are ultimately expected to vest and do actually vest, including
grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro
forma disclosures previously permitted under SFAS 123 are no longer an alternative to recognition of compensation
expense in the income statement under SFAS 123R. Effective January 1, 2006, the Company adopted SFAS 123R,
using the modified prospective method. Under this method, beginning on January 1, 2006, the Company recognized
compensation cost for all share-based payments to employees based on the grant date estimate of fair value for
those awards. The Company has used the Black-Scholes option-pricing model to determine fair value for all share-
based payments. Compensation expense is recognized over the vesting period of the award. Prior-period financial
information has not been restated for the adoption of SFAS 123R.
As a result of the adoption of SFAS 123R on January 1, 2006, the Company’s results of operations for 2006
included incremental share-based pre-tax compensation expense related to stock options of $296,000 and an
associated income tax benefit of $119,000. This incremental expense, net of related tax benefits, decreased basic
and diluted earnings per share by $.01 in 2006. As of December 30, 2006, the Company had approximately
$111,000 of unrecognized compensation cost related to stock option awards that it expects to recognize as
expense over a weighted average period of 1.2 years. The total share-based compensation cost, including
compensation expense associated with restricted stock and the employee stock purchase plan, is $926,000,
F-11
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
$278,000, and $181,000 in 2006, 2005, and 2004, respectively, and is included in selling, general, and
administrative expenses in the accompanying consolidated statement of income. The adoption of SFAS 123R in
2006 resulted in the inclusion in cash flows from financing activities of $2,529,000 of total tax benefits realized
from stock options exercised during 2006 that would have been reflected in cash flows from operating activities
prior to the adoption of SFAS 123R.
For periods prior to the adoption of SFAS 123R, the Company elected to follow APB Opinion No. 25 and
related interpretations to account for its stock-based compensation plans. For these prior periods, no stock-based
employee compensation cost related to stock option awards is reflected in net income, as all options granted
under the plans had an exercise price equal to the market price of the underlying common stock on the date of
grant.
The following table illustrates the impact on net income and earnings per share as if the Company had
applied the fair value recognition provisions of SFAS 123 to the Company’s stock-based employee compensation
for 2005 and 2004.
(In thousands, except per share amounts)
2005
2004
Income from Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from Discontinued Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,865
(2,988)
$ 5,753
(5,099)
Net Income As Reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct: Total stock-based employee compensation expense determined under the fair-value-
based method for all awards, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,877
654
(561)
(2,173)
Pro Forma Net Income (Loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,316
$(1,519)
Basic Earnings (Loss) per Share:
As reported:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted Earnings (Loss) per Share:
As reported:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
$
.71
.50
.67
.46
.70
.49
.66
.45
$
$
$
$
$
$
.41
.05
.25
(.11)
.40
.05
$
.25
$ (.11)
Income Taxes
In accordance with SFAS No. 109, “Accounting for Income Taxes,” (SFAS 109) the Company recognizes
deferred income taxes based on the expected future tax consequences of differences between the financial
statement basis and the tax basis of assets and liabilities, calculated using enacted tax rates in effect for the year
in which the differences are expected to reverse. A tax valuation allowance is established, as needed, to reduce
net deferred tax assets to the amount expected to be realized. In the event it becomes more likely than not that
some or all of the deferred tax asset allowances will not be needed, the valuation allowance will be adjusted.
F-12
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Prior to the spinoff from Thermo Electron, the Company and Thermo Electron were parties to a tax
allocation agreement under which the Company and its subsidiaries, except its foreign operations, its Fiberprep
subsidiary, and in 2000, its Kadant Composites Inc. subsidiary, were included in the consolidated federal and
certain state income tax returns filed by Thermo Electron. The tax allocation agreement provided that, in years in
which these entities had taxable income, the Company would pay to Thermo Electron amounts comparable to the
taxes it would have paid if the Company had filed separate tax returns. The tax allocation agreement terminated
as of the Spinoff Date, at which time the Company and Thermo Electron entered into a tax matters agreement.
The tax matters agreement requires, among other things, that the Company file its own income tax returns for tax
periods beginning immediately after the Spinoff Date. In addition, the tax matters agreement requires that the
Company indemnify Thermo Electron, but not the shareholders of Thermo Electron, against liability for taxes
resulting from (a) the conduct of the Company’s business following the distribution or (b) the failure of the
distribution to Thermo Electron shareholders of shares of the Company’s common stock or of Viasys Healthcare
Inc. (another Thermo Electron spinoff) common stock to continue to qualify as a tax-free spinoff under
Section 355 of the Internal Revenue Code as a result of certain actions that the Company takes following the
distribution. Thermo Electron has agreed to indemnify the Company against taxes resulting from the conduct of
Thermo Electron’s business prior to and following the distribution, or from the failure of the distribution of
shares of the Company’s common stock to Thermo Electron shareholders to continue to qualify as a tax-free
spinoff other than as a result of some actions that the Company may take following the distribution. Although not
anticipated, if any of the Company’s post-distribution activities cause the distribution to become taxable, the
Company could incur a liability to Thermo Electron and/or various taxing authorities, which could adversely
affect the Company’s results of operations, financial position, and cash flows.
Earnings per Share
Basic earnings per share have been computed by dividing net income by the weighted average number of
shares outstanding during the year. Except where the effect would have been antidilutive to income from
continuing operations, diluted earnings per share have been computed assuming the exercise of stock options, as
well as their related income tax effects.
Cash and Cash Equivalents
At year-end 2006 and 2005, the Company’s cash equivalents included investments in money market funds
and other marketable securities of its domestic and foreign subsidiaries, which had maturities of three months or
less at the date of purchase. The carrying amounts of cash equivalents approximate their fair values due to the
short-term nature of these instruments.
Supplemental Cash Flow Information
(In thousands)
2006
2005
2004
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Paid for Interest
Cash Paid for Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,232
$ 2,250
$
$
2,096
2,422
Non-Cash Investing Activities (Note 2):
Fair Value of Assets Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Paid for Acquired Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 26,249
(20,520)
$ 158,694
(106,146)
Liabilities Assumed of Acquired Business . . . . . . . . . . . . . . . . . . . . . . .
$ 5,729
$ 52,548
$
$
$
$
37
2,411
–
–
–
Non-Cash Financing Activities:
Issuance of Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
478
$
352
$
200
F-13
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out; last-in, first-out; or weighted average basis)
or market value and include materials, labor, and manufacturing overhead. The components of inventories are as
follows:
(In thousands)
2006
2005
Raw Materials and Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work in Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished Goods (includes $624 and $328 at customer locations) . . . . . . . . . . . . . . . . . . . . . . .
$22,418
9,916
9,345
$19,971
5,605
9,539
$41,679
$35,115
The Company periodically reviews its quantities of inventories on hand and compares these amounts to the
expected usage of each particular product or product line. The Company records as a charge to cost of revenues
any amounts required to reduce the carrying value of inventories to net realizable value.
The last-in, first-out inventory method is used to value approximately 11% and 15% of inventory at
year-end 2006 and 2005, respectively. If the first-in, first-out method had been used, it would have increased
inventory by $96,000 and $88,000 as of year-end 2006 and 2005, respectively.
Property, Plant, and Equipment
The costs of additions and improvements are capitalized, while maintenance and repairs are charged to
expense as incurred. The Company provides for depreciation and amortization primarily using the straight-line
method over the estimated useful lives of the property as follows: buildings, 10 to 40 years; machinery and
equipment, 2 to 10 years; and leasehold improvements, the shorter of the term of the lease or the life of the asset.
Property, plant, and equipment consists of the following:
(In thousands)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery, Equipment, and Leasehold Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated Depreciation and Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
2005
$ 5,002
36,275
56,718
97,995
57,056
$ 4,719
28,146
52,803
85,668
52,761
$40,939
$32,907
Depreciation and amortization expense was $4,960,000, $5,019,000, and $2,931,000 in 2006, 2005, and
2004, respectively.
Intangible Assets
Intangible assets in the accompanying balance sheet include the costs of acquired intellectual property,
tradename, patents, customer relationships, non-compete agreements and other specifically identifiable intangible
assets. An intangible asset of $8,100,000 associated with the acquisition of the Johnson tradename has an
indefinite life and is not being amortized. The remaining intangible assets are amortized using the straight-line
method over periods ranging from 1 to 20 years with a weighted-average amortization period of 14 years. The
F-14
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
intangible asset lives have been determined based on the anticipated period over which the Company will derive
future cash flow benefits from the intangible assets. The Company has considered the effects of legal, regulatory,
contractual, competitive, and other economic factors in determining these useful lives.
Acquired intangible assets are as follows:
(In thousands)
December 30, 2006
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intellectual property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tradename . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Licensing agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2005
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intellectual property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tradename . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Licensing agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross
Currency
Translation
Accumulated
Amortization
Net
$16,317
13,057
8,100
3,119
2,400
400
260
$43,653
$15,700
13,057
8,100
3,119
2,400
400
$42,776
$345
–
–
–
–
–
–
$345
$
$
–
–
–
–
–
–
–
$(1,779)
(4,163)
–
(2,976)
(231)
(33)
(130)
$14,883
8,894
8,100
143
2,169
367
130
$(9,312)
$34,686
$ (674)
(3,074)
–
(2,663)
(90)
(13)
$15,026
9,983
8,100
456
2,310
387
$(6,514)
$36,262
Amortization of acquired intangible assets was $2,798,000 in 2006, $1,912,000 in 2005 and $673,000 in
2004. The estimated future amortization expense of acquired intangible assets is $2,730,000 in 2007; $2,411,000
in 2008; $2,361,000 in 2009; $2,361,000 in 2010, $2,171,000 in 2011, and $14,552,000 thereafter.
Goodwill
The changes in the carrying amount of goodwill in 2006 and 2005 are as follows:
(In thousands)
Balance at Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase due to Kadant Johnson acquisition (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase due to Kadant Jining acquisition (Note 2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase due to Purchase of Minority Interest in Subsidiary . . . . . . . . . . . . . . . . . . . . . . . .
Currency Translation Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
2005
$124,425
4,389
5,267
344
2,653
$ 74,408
50,467
–
861
(1,311)
$137,078
$124,425
Goodwill as of year-end 2006 and 2005 relates entirely to the Company’s Papermaking Systems segment.
During 2006, the Company acquired the remaining minority interest in one of its Kadant Johnson
subsidiaries for $701,000 in cash and recorded $344,000 of goodwill. During 2005, the Company acquired the
remaining minority interest in one of its Kadant Johnson subsidiaries for $1,129,000 in cash, and recorded
$861,000 of goodwill.
F-15
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Impairment of Long-Lived Assets
The Company evaluates the recoverability of goodwill and intangible assets with indefinite useful lives
annually in the fourth quarter, or more frequently if events or changes in circumstances, such as a decline in
sales, earnings, or cash flows, or material adverse changes in the business climate, indicate that the carrying
value of an asset might be impaired. The Company completed its annual impairment test in the fourth quarter of
2006 using the estimates from its long-range forecasts. No adjustment was required to the carrying value of its
goodwill or indefinite-lived intangible assets based on the analysis performed.
The Company assesses its long-lived assets, other than goodwill and indefinite-lived intangible assets, for
impairment whenever facts and circumstances indicate that the carrying amounts may not be fully recoverable.
To analyze recoverability, the Company projects undiscounted net future cash flows over the remaining lives of
such assets. If these projected cash flows were to be less than the carrying amounts, an impairment loss would be
recognized, resulting in a write-down of the assets with a corresponding charge to earnings. The impairment loss
would be measured based upon the difference between the carrying amounts and the fair values of the assets.
Foreign Currency Translation
All assets and liabilities of the Company’s foreign subsidiaries are translated at year-end exchange rates, and
revenues and expenses are translated at average exchange rates for each quarter in accordance with SFAS No. 52,
“Foreign Currency Translation.” Resulting translation adjustments are reflected in the “accumulated other
comprehensive items” component of shareholders’ investment (see Note 13). Foreign currency transaction gains
and losses are included in the accompanying consolidated statement of income and are not material for the three
years presented.
Derivatives
The Company uses derivative instruments primarily to reduce its exposure to changes in currency exchange
rates and interest rates. When the Company enters into a derivative contract, the Company makes a determination
as to whether the transaction is deemed to be a hedge for accounting purposes. For contracts deemed to be a
hedge, the Company formally documents the relationship between the derivative instrument and the risk being
hedged. In this documentation, the Company specifically identifies the asset, liability, forecasted transaction,
cash flow, or net investment that has been designated as the hedged item, and evaluates whether the derivative
instrument is expected to reduce the risks associated with the hedged item. To the extent these criteria are not
met, the Company does not use hedge accounting for the derivative.
SFAS No. 133 (SFAS 133), “Accounting for Derivative Instruments and Hedging Activities,” as amended,
requires that all derivatives be recognized on the balance sheet at fair value. For derivatives designated as cash
flow hedges, the related gains or losses on these contracts are deferred as a component of accumulated other
comprehensive items. These deferred gains and losses are recognized in the period in which the underlying
anticipated transaction occurs. For derivatives designated as fair value hedges, the unrealized gains and losses
resulting from the impact of currency exchange rate movements are recognized in earnings in the period in which
the exchange rates change and offset the currency gains and losses on the underlying exposures being hedged.
The Company performs an evaluation of the effectiveness of the hedge both at inception and on an ongoing basis.
The ineffective portion of a hedge, if any, and changes in the fair value of a derivative not deemed to be a hedge,
are recorded in the consolidated statement of income.
The Company entered into interest rate swap agreements in 2006 and 2005 to hedge a portion of its variable
rate debt and has designated these agreements as cash flow hedges of the underlying obligations. The fair values
of the interest rate swap agreements are included in other assets for unrecognized gains and in other liabilities for
F-16
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
unrecognized losses with an offset in accumulated other comprehensive items (net of tax). The Company has
structured these interest rate swap agreements to be 100% effective and as a result, there is no current impact to
earnings resulting from hedge ineffectiveness.
The Company uses forward currency exchange contracts primarily to hedge certain operational (“cash flow”
hedges) and balance sheet (“fair value” hedges) exposures resulting from fluctuations in currency exchange rates.
Such exposures primarily result from portions of the Company’s operations and assets that are denominated in
currencies other than the functional currencies of the businesses conducting the operations or holding the assets.
The Company enters into forward currency exchange contracts to hedge anticipated product sales and recorded
accounts receivable made in the normal course of business, and accordingly, the hedges are not speculative in
nature.
Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in
Income Taxes—An Interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. FIN 48
prescribes a recognition and measurement method of a tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosures and transitions. FIN 48 will become effective in the first quarter of 2007. The Company is
currently evaluating the effect FIN 48 will have on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158 (SFAS 158), “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans—An Amendment of FASB Statements No. 87, 88, 106, and
132(R).” SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in
the year in which the changes occur through comprehensive income. The Company adopted this standard on the
effective date, December 30, 2006. As a result of the adoption the Company recorded a $91,000 increase to long-
term deferred tax asset, a $136,000 decrease to other comprehensive income, a $2,450,000 increase to its Kadant
Web Systems subsidiary’s accrued pension liability, and a $2,223,000 decrease to the accrued pension and post-
retirement liability associated with other benefit plans.
In September 2006, the FASB issued SFAS No. 157 (SFAS 157), “Fair Value Measurements.” SFAS 157
defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value
measurements. SFAS 157 is effective for the Company in the first quarter of 2008. The Company is currently
analyzing the effect that SFAS 157 will have on its consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the prior years’ presentations to conform to the 2006
presentation.
2. Acquisitions
On June 2, 2006, the Company’s subsidiary, Kadant Light Machinery (Jining) Co., Ltd. (Kadant Jining),
assumed responsibility for the operation of Jining Huayi Light Industry Machinery Co., Ltd. (Huayi), and, by
September 30, 2006, acquired substantially all of the assets of Huayi including cash, inventory, machinery,
equipment, and buildings for $21,109,000, net of assumed liabilities of $2,253,000 related primarily to acquired
customer deposits (Kadant Jining acquisition). Of the total consideration, $17,674,000 was paid in cash,
F-17
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
2. Acquisitions (continued)
including $988,000 for acquisition-related costs, of which $353,000 was paid in 2005. To finance a portion of the
purchase price Kadant Jining borrowed 40 million Chinese renminbi, originally translated at $5,072,000. The
remaining purchase obligation of $3,435,000, of which $2,081,000 is included in other current liabilities and
$1,354,000 is included in other long-term liabilities in the accompanying balance sheet, will be paid through
January 2008 as certain post-closing and indemnification obligations are satisfied. The Company expects to fund
the remaining purchase obligation through a combination of cash and borrowings in China. Pursuant to the asset
purchase agreement, Kadant Jining issued bank payment guarantees of $3,435,000 associated with the remaining
purchase obligation which may be drawn upon by the sellers through January 2008 as certain obligations are
satisfied. Huayi was a supplier of stock-preparation equipment in China. The Company believes that the
acquisition of this business will allow the Company to deliver its stock-preparation systems and aftermarket
products to customers in China more efficiently, supply parts and components to North America and Europe, and
extend the Company’s customer base to include more small-to-midsize mills in China.
This acquisition was accounted for under the purchase method of accounting and the operating results for
Kadant Jining have been included in the accompanying consolidated financial statements from the acquisition
date of June 2, 2006. The following table summarizes the preliminary purchase price allocation for this
acquisition and the estimated fair values of assets acquired and liabilities assumed (in thousands):
Allocation of Purchase Price as of December 30, 2006:
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, Plant, and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,180
2,442
415
8,928
3,253
877
5,267
Total Assets Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,362
Current Liabilities Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,253
Net Assets Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$21,109
Consideration:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short- and Long-Term Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,614
5,072
3,435
988
Total Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$21,109
The allocation of the purchase price was based on estimates of the fair value of the assets acquired and is
subject to adjustment upon finalization of the purchase price allocation. Intangibles of $877,000 relate primarily
to customer relationships with a 5 year useful life. The excess of the purchase price over the tangible and
identifiable intangible assets was recorded as goodwill and amounted to approximately $5,267,000, which is fully
deductible for tax purposes.
On May 11, 2005, the Company acquired all the outstanding stock of The Johnson Corporation (Kadant
Johnson), a leading supplier of fluid-handling systems and equipment, including steam and condensate systems,
components, and controls. These products are used primarily in the dryer section of the papermaking process and
during the production of corrugated boxboard, metals, plastics, rubber, textiles, and food. Kadant Johnson was a
F-18
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
2. Acquisitions (continued)
privately held company based in Three Rivers, Michigan, with approximately 575 employees. The acquisition of
Kadant Johnson allows the Company to offer Kadant Johnson’s complementary products and extends the
Company’s technology-based offerings in the paper industry, while allowing it to capitalize on Kadant Johnson’s
significant aftermarket business. The purchase price for the acquisition was $114,037,000, of which
$101,458,000 was paid in cash at closing, $1,576,000 was paid in the fourth quarter of 2006 in settlement of
post-closing adjustments, $4,856,000 was paid for acquisition-related costs, and $6,147,000 is additional cash
consideration that the Company expects to pay over four years. The additional consideration of $6,147,000
relates to certain tax assets of Kadant Johnson, the value of which the Company expects to realize. In 2006, the
Company paid $922,000 of this additional consideration. The remaining balance, of which $922,000 is included
in other current liabilities and $4,303,000 is included in other long-term liabilities in the accompanying
consolidated balance sheet, as of year end 2006, is due over the next four years as follows: $922,000 in each of
2007, 2008 and 2009, and $2,459,000 in 2010.
The parties also agreed in the purchase agreement to an earn-out provision, based on the achievement of
certain revenue targets between the closing date of May 11, 2005 and July 1, 2006, which could have increased
the purchase price by up to $8,000,000. This earn-out provision was not met as the revenue targets were not
achieved by Kadant Johnson.
To fund a portion of the purchase price, the Company entered into a term loan and revolving credit facility
(see Note 6 for further discussion).
F-19
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
2. Acquisitions (continued)
The acquisition was recorded under the purchase method of accounting and the operating results of Kadant
Johnson have been included in the accompanying consolidated financial statements from the acquisition date of
May 11, 2005. The following table summarizes the purchase method of accounting for the acquisition (in
thousands):
Allocation of Purchase Price as of December 30, 2006:
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Receivable, Net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, Plant, and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-Term Deferred Tax Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,071
17,585
5,577
12,552
5,538
17,892
7,976
657
34,480
54,856
Total Assets Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$161,184
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short- and Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-Term Deferred Tax Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minority Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
6,751
15,600
3,286
15,653
4,727
1,130
47,147
Net Assets Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$114,037
Consideration:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short- and Long-Term Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 43,034
60,000
6,147
4,856
Total Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$114,037
The following are the identifiable intangible assets acquired and the respective periods over which the assets
will be amortized on a straight-line basis:
(In thousands)
Intellectual property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tradename . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Licensing agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
Life
11 years*
17 years*
17 years
Indefinite
20 years
3 years
$ 7,840
15,700
2,400
8,100
400
40
$34,480
* approximate weighted-average lives
F-20
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
2. Acquisitions (continued)
The amounts assigned to identifiable intangible assets acquired were based on their respective fair values
determined as of the acquisition date by an independent valuation consultant, using income and cost approaches.
As part of the acquisition, the Company acquired the Johnson tradename valued at $8,100,000. The Company has
no plan or intention to stop using the Johnson tradename and does not foresee any legal, regulatory, contractual,
competitive, economic, or other factors that would limit the remaining useful life of the Johnson tradename, and
therefore has assigned it an indefinite useful life.
The excess of the purchase price over the tangible and identifiable intangible assets was recorded as
goodwill and amounted to approximately $54,856,000, none of which is deductible for tax purposes.
The Company’s acquisitions have historically been made at prices above the fair value of the acquired
assets, resulting in goodwill, due to the expectation of synergies of combining the businesses. The synergies
expected as a result of the acquisitions include the use of the Company’s existing infrastructure such as its sales
force, distribution channels and customer relations to expand sales of the acquiree’s products; use of the
acquiree’s infrastructure to cost effectively expand sales of the Company’s products; and elimination of
duplicative functions. In accordance with current accounting standards, the goodwill will not be amortized and
will be tested for impairment annually (in the fourth quarter of the Company’s fiscal year) as required by SFAS
No. 142, “Goodwill and Other Intangible Assets.”
Pro forma disclosure of the results of operations as if the Kadant Jining acquisition had occurred at the
beginning of 2006 is not required, as the acquisition did not meet the definition of a material business
combination outlined in SFAS No. 141, “Business Combinations.” The following condensed consolidated
statement of operations is presented as if the acquisition of Kadant Johnson had been made at the beginning of
the periods presented. This information is not necessarily indicative of what the actual condensed combined
statement of operations of the Company and Kadant Johnson would have been for the periods presented, nor does
it purport to represent the future combined results of operations of the Company and Kadant Johnson.
(In thousands)
2005
2004
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$272,778
$271,058
Operating Income * . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,912
10,339
Income from Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from Discontinued Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
462
(2,988)
4,902
(5,099)
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (2,526) $
(197)
Basic Earnings (Loss) per Share:
Income from Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted Earnings (Loss) per Share:
Income from Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
.03
$
(.18) $
.03
$
(.18) $
.35
(.01)
.34
(.01)
* Included in operating income in 2005 was $11.0 million in one-time bonuses and approximately $3.1 million in
acquisition-related costs that Kadant Johnson incurred prior to the acquisition.
F-21
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
3. Employee Benefit Plans
Stock-Based Compensation Plans
The Company maintains stock-based compensation plans primarily for its key employees and directors,
although the plans permit awards to others expected to make significant contributions to the future of the
Company. The plans authorize the compensation committee of the Company’s board of directors (the board
committee) to award a variety of stock and stock-based incentives, such as restricted stock, nonqualified and
incentive stock options, stock bonus shares, or performance-based shares. The award recipients and the terms of
awards, including price, granted under these plans are determined by the board committee. Outstanding options
granted under these plans prior to 2001 are nonqualified options that are exercisable immediately, but are subject
to provisions similar to vesting that restrict transfer and afford the Company the right to repurchase the shares at
the exercise price upon certain events. The restrictions and repurchase rights for these options generally lapse
over five to ten years and the terms of the options may range from five to twelve years. Options granted under
these plans in 2001 and after have been nonqualified options that vest over three years and are not exercisable
until vested. To date, all options have been granted at an exercise price equal to the fair market value of the
Company’s common stock on the date of grant. Upon a change-of-control, as defined in the plans, all options or
other awards become fully vested and all restrictions lapse.
Restricted Stock
The Company grants restricted shares to outside directors. For 2006 and prior periods, the restricted shares
vested immediately, but are restricted from resale for three years from the date of award. In 2006 and 2005, the
Company awarded 20,000 shares and 17,500 shares, respectively, of its restricted common stock with an
aggregate value of $478,000 and $352,000, respectively, to its outside directors.
Stock Options
The Company had 1,189,000 shares available for grant under these plans at December 30, 2006. There were
no stock options granted in 2006. For 2005 and 2004, the fair value of each option grant was estimated on the
grant date using the Black-Scholes option-pricing model, assuming no expected dividends, with the following
assumptions:
Options Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average Exercise Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average Grant Date Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-Free Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected Life of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005
2004
140,000
19.17
8.07
$
$
8,000
$ 19.84
8.38
$
42%
4.0%
44%
2.7%
5 years
5 years
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded
options, which have no vesting restrictions and are fully transferable. In addition, option-pricing models require
the input of highly subjective assumptions, including expected stock price volatility. Expected stock price
volatility was calculated based on a review of the Company’s actual historic stock prices commensurate with the
expected life of the award. The expected option life was derived based on a review of the Company’s historic
option holding periods, including a consideration of the holding period inherent in currently vested but
unexercised options. The risk-free interest rate is based on the yield on zero-coupon U.S. Treasury securities for a
F-22
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
3. Employee Benefit Plans (continued)
period that is commensurate with the expected term of the option. The compensation expense recognized for all
equity-based awards is net of estimated forfeitures. Forfeitures are estimated based on an analysis of actual
option forfeitures.
A summary of the Company’s stock option activity is as follows:
(Shares in thousands)
Options Outstanding, Beginning of Year
. . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options Outstanding, End of Year . . . . . . . . . . . . . . .
Options Exercisable . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
2005
2004
Number
of
Shares
1,699
–
(724)
(75)
900
865
Weighted
Average
Exercise
Price
$15.82
–
13.08
21.07
Number
of
Shares
1,771
140
(88)
(124)
Weighted
Average
Exercise
Price
$16.39
19.17
13.22
29.67
Number
of
Shares
2,135
8
(297)
(75)
Weighted
Average
Exercise
Price
$16.52
19.84
12.50
35.95
$17.58
1,699
$15.82
1,771
$16.39
$17.28
1,528
$15.28
1,565
$16.52
A summary of the status of the Company’s stock options at December 30, 2006, is as follows:
Options Outstanding
Options Exercisable
Range of
Exercise Prices
Number
of Shares
(In thousands)
9.14 . . . . . . . . . . . . . . .
$ 4.38 – $
16.00 . . . . . . . . . . . . . . .
11.62 –
28.15 . . . . . . . . . . . . . . .
18.65 –
56.40 –
57.25 . . . . . . . . . . . . . . .
93.33 – 110.80 . . . . . . . . . . . . . . .
$ 4.38 – $110.80 . . . . . . . . . . . . . . .
13
766
69
50
2
900
Weighted
Average
Remaining
Contractual
Life
1.3 years
2.2 years
4.2 years
2.4 years
1.0 years
Weighted
Average
Exercise
Price
$
6.43
14.66
21.66
56.74
103.68
2.3 years
$ 17.58
Number
of Shares
(In thousands)
13
766
39
45
2
865
Weighted
Average
Remaining
Contractual
Life
1.2 years
2.2 years
3.5 years
2.4 years
1.0 years
Weighted
Average
Exercise
Price
$ 6.31
14.66
22.93
56.74
103.68
2.2 years
$ 17.28
The total intrinsic value of options exercised (i.e., the difference between the market price at exercise and
the price paid by the employee to exercise the options) in 2006 and 2005, was $7,492,000 and $649,000,
respectively. The Company received $9,380,000 and $1,393,000 from stock option exercises during 2006 and
2005, respectively.
The aggregate intrinsic value of options outstanding and options exercisable as of December 30, 2006 was
$7,917,000 and $7,770,000, respectively. The aggregate intrinsic value of options outstanding and options
exercisable as of December 30, 2006 is based on the difference between the closing price of the Company’s
common stock on December 30, 2006, which was $24.38, and the exercise price of the applicable options. In
calculating the aggregate intrinsic value, the Company excluded those options with an exercise price greater than
the closing price per share of the Company’s common stock as of December 30, 2006.
Employee Stock Purchase Plan
Substantially all of the Company’s full-time U.S. employees are eligible to participate in its employee stock
purchase plan. Under the plan, shares of the Company’s common stock may be purchased at a 15% discount
F-23
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
3. Employee Benefit Plans (continued)
from the fair market value at the beginning or end of the purchase period, whichever is lower. Shares purchased
under the plan are subject to a one-year resale restriction and are purchased through payroll deductions of up to
10% of each participating employee’s gross wages. For the 2006, 2005, and 2004 plan years, the Company issued
22,007 shares (issued December 31, 2006), 14,775 shares, and 15,152 shares, respectively, of its common stock
under this plan.
Profit-Sharing and 401(k) Savings Plans
Several of the Company’s U.S. subsidiaries participate in the Company’s 401(k) retirement savings plan.
Contributions to the plan are made by both the employee and the Company. Company contributions are based
upon the level of employee contributions. The Company contributed and charged to expense approximately
$581,000, $603,000, and $634,000 related to the 401(k) plan in 2006, 2005, and 2004, respectively.
Through October 2, 2006, one of the Company’s U.S. subsidiaries had a 401(k) retirement savings plan with
a profit-sharing feature under which the Company annually contributed approximately 10% of the subsidiary’s
pre-tax income before profit-sharing expense. Effective October 2, 2006, the Company eliminated the profit-
sharing feature and replaced it with Company contributions based on the level of employee contributions. All
contributions related to this plan are immediately vested.
Through June 30, 2006, another of the Company’s U.S. subsidiaries had a 401(k) retirement savings plan
with a profit-sharing feature that required a minimum annual Company contribution of 3% of eligible employee
compensation and allowed for an additional contribution of up to 12% of eligible compensation at the discretion
of the Company. Effective July 1, 2006, the total Company contribution was reduced to 6% of eligible
compensation. Effective January 1, 2007, this plan was restated to eliminate the profit-sharing feature and to base
Company contributions on the level of employee contributions instead of eligible compensation. All
contributions to this plan are immediately vested.
The Company contributed and charged to expense approximately $1,883,000, $1,436,000, and $431,000 in
2006, 2005, and 2004, respectively, related to these plans.
Defined Benefit Pension Plan and Post-Retirement Welfare Benefits Plans
The Company’s Kadant Web Systems subsidiary has a noncontributory defined benefit retirement plan.
Benefits under the plan are based on years of service and employee compensation. Funds are contributed to a
trustee as necessary to provide for current service and for any unfunded projected benefit obligation over a
reasonable period. Effective December 31, 2005, this plan was closed to new participants. Effective January 1,
2007, the provision limiting lump sum distributions upon termination of employment to $10,000 was removed.
This same subsidiary also has a post-retirement welfare benefits plan (included in the table below in “Other
Benefits”). No future retirees are eligible for this post-retirement welfare benefits plan, and the plans include
limits on the subsidiary’s contributions.
The Company’s Kadant Lamort subsidiary sponsors a defined benefit pension plan, (included in the table
below in “Other Benefits”). Benefits under this plan are based on years of service and projected employee
compensation.
The Company’s Kadant Johnson subsidiary also offers a post-retirement welfare benefits plan (included in
the table below in “Other Benefits”) to its U.S. employees upon attainment of eligible retirement age. This post-
retirement benefit plan was amended to reduce the annual subsidy provided under the plan effective January 1,
2007. In addition, this plan will be closed to employees who will not meet its retirement eligibility requirements
on January 1, 2012.
F-24
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
3. Employee Benefit Plans (continued)
The following table summarizes the change in the benefit obligation; the change in plan assets; the funded
status; and reconciliation to the amounts recognized in the balance sheets for the pension benefits and other
benefits plans. The measurement date for all items set forth below is the last day of the fiscal year presented.
(In thousands)
Change in Benefit Obligation:
Pension Benefits
Other Benefits
2006
2005
2006
2005
Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . .
Benefit obligation acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Curtailment gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amendments/plan changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$18,952
–
752
1,048
–
(525)
591
(746)
–
$17,244
–
715
1,007
–
688
–
(702)
–
$ 6,740
–
190
323
–
346
(2,416)
(626)
203
$ 3,309
4,535
295
336
(828)
(206)
–
(421)
(280)
Benefit obligation at end of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20,072
$18,952
$ 4,760
$ 6,740
Change in Plan Assets:
Fair value of plan assets at beginning of year
. . . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17,038
2,005
–
(746)
$16,874
866
–
(702)
$
–
–
626
(626)
$
–
–
421
(421)
Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . .
$18,297
$17,038
$
–
$
–
Unfunded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (1,775) $ (1,914) $(4,760) $(6,740)
Items Not Yet Recognized as a Component of Net Periodic Benefit
Cost:
Unrecognized net actuarial (loss) gain . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized prior service (cost) income . . . . . . . . . . . . . . . . . . . .
(1,846)
(604)
(3,023)
(60)
(274)
2,497
37
405
Total Items Not Yet Recognized as a Component of Net Periodic
Benefit Cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (2,450) $ (3,083) $ 2,223
$
442
Amounts Recognized in the Balance Sheet Consist of:
Prepaid benefit cost (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued benefit cost (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
–
(1,775)
$ 1,169
–
$
– $
(4,760)
–
(7,182)
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (1,775) $ 1,169
$(4,760) $(7,182)
Accumulated benefit obligation as of year-end . . . . . . . . . . . . . . . . . . . .
$16,704
$15,787
$ 1,384
$ 1,326
(a) Included in other assets in the accompanying consolidated balance sheet.
(b) Included in other long-term liabilities in the accompanying consolidated balance sheet.
F-25
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
3. Employee Benefit Plans (continued)
The weighted-average assumptions used to determine the benefit obligation as of year-end were as follows:
Pension Benefits
Other Benefits
2006
2005
2006
2005
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.75% 5.75% 4.76% 4.95%
4.00% 4.00% 2.00% 2.00%
(In thousands)
Components of Net Periodic Benefit Cost:
Pension Benefits
Other Benefits
2006
2005
2004
2006
2005
2004
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . .
Recognized net actuarial loss . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost (income) . . . . . . . .
$
752
1,048
(1,414)
60
47
$
715
1,007
(1,404)
–
46
$
640
967
(1,370)
–
47
$ 190
323
–
33
(334)
$ 295
336
–
36
(58)
$ 107
144
–
36
(58)
Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
493
$
364
$
284
$ 212
$ 609
$ 229
The weighted-average assumptions used to determine net periodic benefit cost were as follows:
Pension Benefits
Other Benefits
2006
2005
2004
2006
2005
2004
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected long-term return on plan assets . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . .
5.75% 6.00% 6.25% 4.48% 5.25% 4.82%
8.50% 8.50% 8.50%
4.00% 4.00% 4.00% 2.00% 2.00% 2.50%
–
–
–
In developing the overall expected long-term return on plan assets assumption, a building block approach
was used in which rates of return in excess of inflation were considered separately for equity securities, debt
securities, and other assets. The excess returns were weighted by the representative target allocation and added
along with an appropriate rate of inflation to develop the overall expected long-term return on plan assets
assumption. The Company believes this determination is consistent with SFAS No. 87, “Employers’ Accounting
for Pensions” (SFAS 87).
Assumed weighted-average healthcare cost trend rates* as of year-end were as follows:
Healthcare cost trend rate assumed for next year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ultimate healthcare cost trend rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year that the assumed rate reaches ultimate rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.37% 7.65%
3.66% 4.72%
2011
2011
* See Information and Assumptions for the Post-Retirement Welfare Benefits Plan at the end of Note 3 for more
detail.
2006
2005
Assumed healthcare cost trend rates can have a significant effect on the amounts reported for healthcare
benefits. A one-percentage point change in assumed healthcare cost trend rates would have the following effects:
(In thousands)
1 Percentage
Point Increase
1 Percentage
Point Decrease
Effect on total of service and interest cost components - (expense) income . . . . . . .
Effect on post-retirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (15)
$(190)
$ 13
$166
F-26
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
3. Employee Benefit Plans (continued)
Plan Assets
For the Kadant Web Systems noncontributory defined benefit retirement plan, the weighted-average asset
allocation at December 30, 2006 and December 31, 2005, by asset category, is as follows:
Asset Category
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
2005
46% 46%
44% 44%
10% 10%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100% 100%
Kadant Web Systems has developed an investment policy for the noncontributory defined benefit retirement
plan. The investment strategy is to emphasize total return, that is, the aggregate return from capital appreciation
and dividend and interest income. The primary objective of the investment management for the plan’s assets is
the emphasis on consistent growth, specifically, growth in a manner that protects the plan’s assets from excessive
volatility in market value from year to year. The investment policy takes into consideration the benefit
obligations, including timing of distributions.
The primary objective for the plan is to provide long-term capital appreciation through investment in equity
and debt securities. The following target asset allocation has been established for the plan:
Asset Category
Minimum Neutral Maximum
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40%
30%
5%
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60%
50%
15%
50%
40%
10%
100%
All equity securities must be drawn from recognized securities exchanges. Debt securities must be weighted
to reflect a portfolio average maturity of not more than ten years, with average benchmark duration of five years.
The credit quality must equal or exceed high investment grade quality (“BAA” or better).
Cash Flows
Contributions
No cash contributions are expected for the Kadant Web Systems noncontributory defined benefit retirement
plan in 2007. For the remaining pension and post-retirement welfare benefits plans, no cash contributions other
than funding current benefit payments are expected in 2007.
Estimated Future Benefit Payments
The following benefit payments, which reflect future service as appropriate, are expected to be paid. The
benefit payments are based on the same assumptions used to measure the Company’s benefit obligation at
year-end 2006.
(In thousands)
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012-2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension
Benefits
$1,778
1,037
1,210
2,112
849
6,315
Other
Benefits
$ 384
309
351
394
376
2,098
F-27
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
3. Employee Benefit Plans (continued)
Adoption of SFAS 158
In September 2006, the FASB issued SFAS No. 158 (SFAS 158), “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans—An Amendment of FASB Statements No. 87, 88, 106, and
132(R).” SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in
the year in which the changes occur through comprehensive income. On December 30, 2006, the Company
adopted the recognition and disclosure provisions of SFAS 158. The effect of adopting SFAS 158 on the
Company’s balance sheet at December 30, 2006 has been included in the accompanying consolidated financial
statements. SFAS 158 did not have an effect on the Company’s consolidated financial statements in the prior
periods presented.
SFAS 158 required the Company to recognize the funded status (i.e., the difference between the fair value
of the plan assets and the project benefit obligations) of its pension and other post-retirement plans in the
December 30, 2006 consolidated balance sheet, with a corresponding adjustment to accumulated other
comprehensive income, net of tax. The adjustment to accumulated other comprehensive income at adoption
represents the net unrecognized actuarial gains (losses) and unrecognized prior service costs (income), all of
which were previously netted against the plan’s funded status on the Company’s consolidated balance sheet
pursuant to the provisions of SFAS 87. These amounts will be subsequently recognized as net periodic pension
cost pursuant to the Company’s historical accounting policy for amortizing such amounts. Further, actuarial gains
and losses that arise in subsequent periods and are not recognized as net periodic pension cost in the same
periods will be recognized as a component of other comprehensive income. These amounts will be subsequently
recognized as a component of net periodic pension cost on the same basis as the amount recognized in
accumulated other comprehensive income at adoption of SFAS 158.
The incremental effects of the adoption of the provisions of SFAS 158 on the Company’s consolidated
balance sheet at December 30, 2006 are presented in the following table. The adoption of SFAS 158 had no
effect on the Company’s consolidated statement of income for the year ended December 30, 2006 or for any prior
period presented, and it will not affect the Company’s consolidated operating results in future periods.
(In thousands)
At December 30, 2006
Prior to Adopting
SFAS 158
Effect of Adopting
SFAS 158
Prepaid asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kadant Web Systems’ accrued pension liability . . . . . . . . . . . . .
Accrued pension and post-retirement liability for other benefit
plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term deferred tax asset
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . .
$
$
675
–
$(6,983)
$ 2,391
–
$
$ (675)
$(1,775)
$ 2,223
$
91
136
$
As Reported
$
–
$(1,775)
$(4,760)
$ 2,482
136
$
Amounts included in accumulated other comprehensive income as a result of the adoption of SFAS 158
represent unrecognized prior service income and unrecognized actuarial losses on a net of tax basis. In
subsequent periods, accumulated other comprehensive income will be reduced by the amounts recognized in net
periodic pension cost on a pre-tax basis. Included in accumulated other comprehensive income at December 30,
2006 was $136,000 after-tax loss associated with the adoption of SFAS 158, which includes unrecognized prior
service income of $1,136,000 and unrecognized actuarial loss of $1,272,000. The corresponding pre-tax amount,
which will be recognized in net periodic pension cost in subsequent periods, is $227,000, which includes
unrecognized prior service income of $1,894,000 and unrecognized actuarial loss of $2,121,000. In 2007, we
expect that accumulated other comprehensive income will be reduced by $424,000, which includes prior service
F-28
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
3. Employee Benefit Plans (continued)
income of $444,000 and unrecognized actuarial loss of $20,000. In addition, in 2007 the net periodic pension cost
will be reduced by $706,000, which includes prior service income of $740,000 and unrecognized actuarial loss of
$34,000.
Information and Assumptions for the Post-Retirement Welfare Benefits Plan
Kadant Web Systems Post-Retirement Welfare Benefits Plan
All eligible retirees are currently participating in the Kadant Web Systems post-retirement welfare benefits
plan, with no future retirees eligible to participate. Effective September 1, 2003, Kadant Web Systems capped its
monthly contribution to the plan at $358 per participant. For the majority of the retirees in the plan, no healthcare
cost trend rate is assumed, as the Company cap applies. For the remainder, the healthcare cost trend rate is
assumed to be 9% in 2006, decreasing to an ultimate rate of 0% in 2012.
On December 8, 2003, Medicare reform legislation was enacted, providing a Medicare prescription drug
benefit beginning in 2006 and federal subsidies to employers who provide drug coverage to retirees. No change
in assumptions was required as a result of this legislation.
Kadant Johnson Post-Retirement Welfare Benefits Plan
All eligible retirees are currently participating in the Kadant Johnson post-retirement welfare benefits plan.
Kadant Johnson pays 75% of all plan costs for retirees with a retirement date prior to January 1, 2005, and 50%
of all plan costs for retirees with a retirement date after January 1, 2005, with no limits on its contributions up to
annual employee and plan stop loss limitations. On August 17, 2006, this post-retirement benefit plan was
amended to reduce the annual subsidy provided under the plan effective January 1, 2007. In addition, this plan
will be closed to employees who will not meet its retirement eligibility requirements on January 1, 2012. The
medical healthcare cost trend rate is assumed to be 7% in 2006, decreasing to an ultimate rate of 5% in 2011.
On December 8, 2003, Medicare reform legislation was enacted, providing a Medicare prescription drug
benefit beginning in 2006 and federal subsidies to employers who provide drug coverage to retirees. Kadant
Johnson applied for the federal subsidy during 2005 and 2006. The effect of the anticipated subsidy was
recognized as of December 31, 2005. Given the plan changes made during 2006, the Company anticipates that it
will not be eligible for the subsidy after 2009.
The following subsidy payments are expected to be received:
(In thousands)
Expected
Part D
Subsidy
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 33
34
37
Other Retirement Plans
Certain of the Company’s subsidiaries offer other retirement plans. The majority of these subsidiaries offer
defined contribution plans. Company contributions to these plans are based on formulas determined by the
Company. For these plans, the Company contributed and charged to expense approximately $982,000, $751,000,
and $323,000 in 2006, 2005, and 2004, respectively.
F-29
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
4. Preferred and Common Stock
Preferred Stock
The Company’s Certificate of Incorporation authorizes up to 5,000,000 shares of preferred stock, $.01 par
value per share, for issuance by the Company’s board of directors without further shareholder approval. The
board of directors has also designated 15,000 shares of such preferred stock as Series A junior participating
preferred stock for issuance under the Company’s Shareholder Rights Plan (see below). No such preferred stock
has been issued by the Company.
Common Stock
The Company has a Shareholder Rights Plan under which one right was distributed at the close of business
on August 6, 2001 for each share of the Company’s common stock outstanding at that time. The rights plan is
designed to provide shareholders with fair and equal treatment in the event of an unsolicited attempt to acquire
the Company. The rights were attached to the Company’s outstanding common stock at the time of distribution
and are not separately transferable or exercisable. The rights will become exercisable if a person acquires 15
percent or more of the Company’s common stock, or a tender or exchange offer is commenced for 15 percent or
more of the Company’s common stock, unless, in either case, the transaction was approved by the Company’s
board of directors. If the rights become exercisable, each right will initially entitle the Company’s shareholders to
purchase .0001 of a share of the Company’s Series A junior participating preferred stock, $.01 par value, at an
exercise price of $75. In addition, except with respect to transactions approved by the Company’s board of
directors, if the Company is involved in a merger or other transaction with another company in which it is not the
surviving corporation, or the Company sells or transfers 50 percent or more of its assets or earning power to
another company, each right (other than rights owned by the acquirer) will entitle its holder to purchase $75
worth of the common stock of the acquirer at half the market value at that time. The Company is entitled to
redeem the rights at $.001 per right at any time prior to the tenth business day (or later, if so determined by the
board of directors) after the acquisition of 15 percent or more of the Company’s common stock. Unless the rights
are redeemed or exchanged earlier, they will expire on July 16, 2011.
At December 30, 2006, the Company had reserved 2,355,663 unissued shares of its common stock for
possible issuance under stock-based compensation plans.
5.
Income Taxes
The components of income from continuing operations before provision for income taxes and minority
interest expense are as follows:
(In thousands)
2006
2005
2004
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14,813
12,422
$ 9,510
4,464
$12,791
(4,506)
$27,235
$13,974
$ 8,285
F-30
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
5.
Income Taxes (continued)
The components of the provision for income taxes for continuing operations are as follows:
(In thousands)
Current Provision:
2006
2005
2004
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 146
3,340
137
$
(5) $ 2,712
(797)
410
2,758
(339)
3,623
2,414
2,325
Deferred Provision:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,101
(296)
260
2,197
(1,538)
852
1,307
(1,560)
452
5,065
1,511
199
$8,688
$ 3,925 $ 2,524
The income tax provision (benefit) included in the accompanying statement of income is as follows:
(In thousands)
2006
2005
2004
Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$8,688
(702)
$ 3,925 $ 2,524
(2,966)
(1,608)
$7,986
$ 2,317 $ (442)
The Company generally receives a tax deduction upon the exercise of nonqualified stock options by
employees equal to the difference between the market price and the exercise price of the Company’s common
stock on the date of exercise. The current provision for income taxes does not reflect $2,529,000, $123,000, and
$708,000 of such benefits from the exercise of stock options that have been allocated to capital in excess of par
value in 2006, 2005, and 2004, respectively.
The provision for income taxes for continuing operations in the accompanying statement of income differs
from the provision calculated by applying the statutory federal income tax rate of 35% to income from
continuing operations before provision for income taxes and minority interest expense due to the following:
(In thousands)
Provision for Income Taxes at Statutory Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases (Decreases) Resulting From:
State income taxes, net of federal tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. tax cost of foreign affiliate dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign tax cost of foreign affiliate dividends . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign tax rate differential
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax reimbursement from former parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Extraterritorial income exclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nondeductible expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
2005
2004
$ 9,532
$ 4,891 $ 2,900
258
54
193
(1,825)
–
(23)
242
727
(470)
334
45
144
(1,544)
(882)
(25)
429
876
(343)
560
332
411
(1,259)
–
(221)
(385)
291
(105)
$ 8,688
$ 3,925
$ 2,524
F-31
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
5.
Income Taxes (continued)
Net deferred tax liability in the accompanying balance sheet consists of the following:
(In thousands)
Deferred Tax Asset (Liability):
Operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserves and accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign and alternative minimum tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory basis difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
2005
$ 10,510
7,346
6,241
888
865
367
508
$ 9,046
6,603
6,153
1,230
855
404
527
Deferred Tax Asset, Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Valuation Allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,725
(2,831)
24,818
(2,537)
Deferred Tax Asset, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,894
22,281
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed assets basis difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserves and accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenue recognition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(19,342)
(3,941)
(860)
(253)
(154)
(18,875)
(4,309)
(571)
(214)
(80)
Deferred Tax Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(24,550)
(24,049)
Net Deferred Tax Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(656) $ (1,768)
The deferred tax asset and liability are presented in the accompanying balance sheet within other current
assets, other assets, other current liabilities and deferred income taxes based on when the tax benefits are
expected to be realized and on a net basis by tax jurisdiction.
The Company has established valuation allowances related to certain foreign deferred tax assets and tax
credits. The valuation allowance at December 30, 2006 was $2,831,000. The increase in the valuation allowance
of $294,000 related primarily to an increase of foreign deferred tax assets. Included in the valuation allowance is
approximately $1,690,000 relating to the Kadant Johnson acquisition. In the event the tax assets from the Kadant
Johnson acquisition are realized and the corresponding valuation allowance is no longer required, goodwill of the
acquired business will be reduced accordingly.
At year-end 2006, the Company had domestic and foreign net operating loss carryforwards of $16,349,000
and $11,847,000, respectively, and foreign tax credits of $4,976,000. The domestic net operating loss
carryforwards will expire in the years 2024 through 2026 and their use is limited to future taxable earnings from
the Company’s domestic subsidiaries. Of the foreign net operating loss carryforwards, $1,499,000 expires in the
years 2008 through 2021, and the remainder do not expire. The foreign tax credits expire beginning in 2012.
The Company has not recognized a deferred tax liability for the difference between the book basis and the
tax basis of its investment in the stock of its domestic subsidiaries, related primarily to unremitted earnings of
subsidiaries, because it does not expect this basis difference to become subject to tax at the parent level. The
Company believes it can implement certain tax strategies to recover its investment in its domestic subsidiaries
tax-free.
It is the Company’s practice to reinvest indefinitely the earnings of its international subsidiaries, except in
instances in which the Company can remit such earnings without a significant associated tax cost. Through
December 30, 2006, the Company has not provided U.S. income taxes on approximately $62,400,000 of
F-32
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
5.
Income Taxes (continued)
unremitted foreign earnings. The Company believes that any U.S. tax liability due upon remittance of such
earnings would be immaterial due to the availability of U.S. foreign tax credits generated from such remittance.
The related foreign tax withholding, which would be required if the Company remitted the foreign earnings to the
U.S., would be approximately $2,500,000.
The Company’s Chinese subsidiary that was part of the Kadant Johnson acquisition has a tax holiday in
China, which reduces the income tax in that country. The holiday expires in 2007. Based on the currently enacted
regular corporate income tax rate in China, the benefit to the Company of the tax holiday for year-end 2006 was
approximately $163,000, or $.01 per diluted share.
The Company operates within multiple tax jurisdictions and could be subject to audit in these jurisdictions.
These audits can involve complex issues, which may require an extended period of time to resolve and may cover
multiple years. In management’s opinion, adequate provisions for income taxes have been made for all years
subject to audit.
6. Long-Term Obligations and Other Financing Arrangements
Long-term obligations at year-end 2006 and 2005 are as follows:
(In thousands)
2006
2005
Variable Rate Term Loan, due from 2007 to 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable Rate Term Loan, due from 2007 to 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable Rate Term Loan, due 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$39,108
9,750
5,124
$55,500
—
—
Total Long-Term Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Current Maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53,982
(9,330)
55,500
(9,000)
Long-Term Obligations, less Current Maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$44,652
$46,500
The annual payment requirements for long-term obligations are as follows:
(In thousands)
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,330
11,854
13,116
11,932
500
7,250
The weighted average interest rate for long-term obligations was 5.51% and 5.25% at year-end 2006 and
2005, respectively.
Term Loan and Revolving Credit Facility
To fund a portion of the purchase price for the acquisition of Kadant Johnson, the Company entered into a
term loan and revolving credit facility (the Credit Agreement) effective May 9, 2005 in the aggregate principal
amount of up to $95,000,000, including a $35,000,000 revolver. The Credit Agreement is among the Company,
F-33
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
6. Long-Term Obligations and Other Financing Arrangements (continued)
as Borrower; the Foreign Subsidiary Borrowers from time to time parties thereto; the several banks and other
financial institutions or entities from time to time parties thereto; and JPMorgan Chase Bank, N.A., as
Administrative Agent. On May 11, 2005, the Company borrowed $60,000,000 under the term loan facility, which
is repayable in quarterly installments over a five-year period.
Interest on the revolving loan and the term loan accrues and is payable quarterly in arrears at one of the
following rates selected by the Company: (a) the prime rate plus an applicable margin up to 0.25%, or (b) a
eurocurrency rate plus an applicable margin between 0.625% and 1.25%. The applicable margin is determined
based upon the Company’s total debt to earnings before interest, taxes, depreciation and amortization (EBITDA)
ratio.
In connection with the Credit Agreement, the Company agreed to pay a commitment fee, payable quarterly,
at an initial rate of 0.25% per annum of the unused amount of revolving credit commitments, subject to
adjustment based upon the Company’s total debt to EBITDA ratio (resulting in a per annum rate of between
0.175% and 0.275%). The unused portion of the revolving credit facility totaled $13,560,000 as of December 30,
2006.
The obligations of the Company under the Credit Agreement may be accelerated upon the occurrence of an
event of default under the Credit Agreement, which includes customary events of default including, without
limitation, payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of
representations or warranties, bankruptcy- and insolvency-related defaults, defaults relating to such matters as
ERISA, uninsured judgments and the failure to pay certain indebtedness, and a change-of-control default.
In addition, the Credit Agreement contains negative covenants applicable to the Company and its
subsidiaries, including financial covenants requiring the Company to comply with a maximum consolidated
leverage ratio of 3.0, which is lowered to 2.5 in certain circumstances, including when the Company makes a
material acquisition or repurchases its stock. Pursuant to an amendment to the Credit Agreement effective
December 28, 2005, this maximum consolidated leverage ratio was increased from 2.5 to 2.75 in the second and
third quarters of 2006 due to the acquisition of Kadant Jining. The Company is also required to comply with a
minimum consolidated fixed charge coverage ratio of 1.5. In addition to the financial covenants, the Company is
also required to comply with covenants related to restrictions on liens, indebtedness, fundamental changes,
dispositions of property, making certain restricted payments (including dividends and stock repurchases),
investments, transactions with affiliates, sale and leaseback transactions, swap agreements, changing the
Company’s fiscal year, negative pledges, arrangements affecting subsidiary distributions, and entering into new
lines of business. As of December 30, 2006, the Company was in compliance with these covenants.
The loans under the Credit Agreement are guaranteed by certain domestic subsidiaries of the Company and
secured by a pledge of 65% of the stock of the Company’s first-tier foreign subsidiaries and the Company’s
subsidiary guarantors pursuant to a guarantee and pledge agreement effective May 9, 2005 in favor of JPMorgan
Chase Bank, N.A., as agent on behalf of the lenders.
Commercial Real Estate Loan
On May 4, 2006, the Company borrowed $10,000,000 under a promissory note (Loan) from Citizens Bank
of Massachusetts (Lender). The Loan is repayable in quarterly installments of $125,000 over a ten-year period
with the remaining principal balance of $5,000,000 due upon maturity. Interest on the Loan accrues and is
payable quarterly in arrears at one of the following rates selected by the Company (a) the prime rate or (b) the
three-month London Inter-Bank Offered Rate (LIBOR) plus a 1% margin. The Loan is guaranteed and secured
by real estate and related personal property of the Company and certain of its domestic subsidiaries located in
Theodore, Alabama; Auburn, Massachusetts; Three Rivers, Michigan; and Queensbury, New York, pursuant to
mortgage and security agreements dated May 4, 2006 (Mortgage and Security Agreements).
F-34
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
6. Long-Term Obligations and Other Financing Arrangements (continued)
The obligations of the Company under the Loan may be accelerated upon the occurrence of an event of
default under the Loan and the Mortgage and Security Agreements, which includes customary events of default
including without limitation payment defaults, defaults in the performance of covenants and obligations, the
inaccuracy of representations or warranties, bankruptcy- and insolvency-related defaults, liens on the properties
or collateral, and uninsured judgments. In addition, the occurrence of an event of default under the Credit
Agreement or any successor credit facility would be an event of default under the Loan.
Kadant Jining Loan
On June 6, 2006, Kadant Jining borrowed 40 million Chinese renminbi, or approximately $5,124,000 at
December 30, 2006, under a 47-month interest-only loan with Bank of China Limited. Interest on this loan
accrues and is payable quarterly in arrears based on the interest rate published by Bank of China Limited for a
loan of the same term less 10%.
Debt Issuance Costs
Debt issuance costs are being amortized to interest expense over the corresponding debt term based on the
effective-interest method. As of December 30, 2006, unamortized debt issuance costs were approximately
$504,000.
Financial Instruments
The Company entered into a swap agreement (the Swap Agreement), which was effective May 17, 2005, to
convert $36,000,000 of the principal balance of the $60,000,000 term loan from a floating rate to a fixed rate of
interest. The Swap Agreement has a five-year term, the same quarterly payment dates as the hedged portion of
the term loan, and reduces proportionately in line with the amortization of the term loan. Under the Swap
Agreement, the Company will receive a three-month LIBOR rate and pay a fixed rate of interest of 4.125%. The
net effect on interest expense for the hedged portion of the term loan is that the Company will pay a fixed interest
rate of up to 5.375% (the sum of the 4.125% fixed rate under the Swap Agreement and the applicable margin of
up to 1.25% on the term loan). The guarantee provisions and the default and financial covenants, as well as
certain restrictions on the payment of dividends included in the Credit Agreement, as amended, restated,
modified or replaced from time to time, also apply to the Swap Agreement. The Swap Agreement has been
designated as a cash flow hedge and is carried at fair value with unrealized gains or losses reflected within other
comprehensive items. As of year end 2006 and 2005, the unrealized gain associated with the Swap Agreement
was $493,000 and $510,000, respectively, which is included in other assets and accumulated other
comprehensive items (net of tax) in the accompanying consolidated balance sheet. Management believes that any
credit risk associated with the Swap Agreement is remote based on the creditworthiness of the financial
institution issuing the Swap Agreement.
To hedge the exposure to movements in the variable interest rate on the Loan, on May 3, 2006, the
Company entered into a swap agreement with the Lender effective May 5, 2006, which converts the Loan from a
floating rate to a fixed rate of interest. This swap agreement has a ten-year term; the same quarterly payment
dates as the Loan, and reduces in line with the amortization of the Loan. This swap agreement automatically
terminates in the event there are no outstanding borrowings under the Credit Agreement (or successor credit
facility), the Loan, or any other borrowing in which Citizens Bank of Massachusetts is a lender. Under this swap
agreement, the Company will receive a three-month LIBOR rate and pay a fixed rate of interest of 5.63%. The
net effect on interest expense for the Loan is that the Company will pay a fixed interest rate of 6.63% (the sum of
the 5.63% fixed rate under this swap agreement and the applicable margin of 1% on the Loan). The guarantee
F-35
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
6. Long-Term Obligations and Other Financing Arrangements (continued)
and default provisions of the Credit Agreement (and any successor credit facility) and the Loan, including those
contained in the Mortgage and Security Agreements, also apply to this swap agreement. This swap agreement has
been designated as a cash flow hedge and is carried at fair value with unrealized gains or losses reflected within
other comprehensive items. As of December 30, 2006, the unrealized loss associated with this swap agreement
was $331,000, which is included in other liabilities and within accumulated other comprehensive items (net of
tax) in the accompanying consolidated balance sheet. Management believes that any credit risk associated with
this swap is remote based on the creditworthiness of the financial institution issuing it.
7. Commitments and Contingencies
Operating Leases
The Company occupies office and operating facilities under various operating leases. The accompanying
consolidated statement of income includes expenses from operating leases of $2,760,000, $2,960,000, and
$2,620,000 in 2006, 2005, and 2004, respectively. The future minimum payments due under noncancelable
operating leases as of December 30, 2006, are $3,242,000 in 2007; $2,245,000 in 2008; $832,000 in 2009;
$646,000 in 2010; $620,000 in 2011 and $770,000 thereafter. Total future minimum lease payments are
$8,355,000.
Letters of Credit
Outstanding letters of credit, principally relating to performance bonds and customer deposit guarantees,
totaled $13,557,000 at December 30, 2006. In addition, the Company had outstanding letters of credit of
$15,225,000 at December 30, 2006 associated with acquisition contingencies as outlined below.
Acquisition Contingencies
In connection with the Kadant Jining acquisition, the Company issued a letter of credit to Bank of China
Limited for $10,000,000 to guarantee the outstanding debt and remaining bank guarantees.
In connection with the Kadant Johnson acquisition, the Company issued a letter of credit to the sellers for
$6,147,000 related to additional cash consideration the Company expects to pay through 2010. The parties also
agreed in the purchase agreement to an earn-out provision, based on the achievement of certain revenue targets
between the closing date of May 11, 2005 and July 1, 2006, which could have increased the purchase price by up
to $8,000,000. This earn-out provision was not met as the revenue targets were not achieved by Kadant Johnson.
Contingencies
In the ordinary course of business, the Company is at times required to issue limited performance
guarantees, some of which do not require the issuance of letters of credit to customers in support of these
guarantees, relating to its equipment and systems. The Company typically limits its liability under these
guarantees to amounts that would not exceed the value of the contract. The Company believes that it has
adequate reserves for any potential liability in connection with such guarantees.
Indemnification
The Company is required to indemnify Thermo Electron, but not its shareholders, against liability for taxes
arising from the Company’s conduct of business after the spin-off, or the failure of certain distributions to
continue to qualify as a tax free spin-off, as described in Note 1 “Income Taxes.”
F-36
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
8. Restructuring and Other Costs (Income), Net
2004 Restructuring Plan
In an effort to improve operating performance at the Papermaking Systems segment’s Kadant Lamort
subsidiary in France, the Company approved a restructuring of that subsidiary on November 18, 2004. This
restructuring was initiated to strengthen Kadant Lamort’s competitive position in the European paper industry.
The restructuring primarily included the reduction of 97 full-time positions across all functions in France and was
implemented in 2005. The Company accrued a restructuring charge, in accordance with SFAS No. 112,
“Employers’ Accounting for Postemployment Benefits,” for severance and other termination costs in connection
with the workforce reduction of $9,235,000 in 2004 and reduced the estimate by $71,000 in 2005. The Company
realized a curtailment gain of $364,000 in 2005 resulting in a reduction in the accrued liability associated with
Kadant Lamort’s pension plan. In addition, during 2004, the Company recorded restructuring costs of $280,000,
related to severance costs of 11 employees at one of the Papermaking Systems segment’s U.S. subsidiaries.
2005 Restructuring Plan
The Company recorded restructuring costs of $317,000 in 2005 associated with its 2005 Restructuring Plan.
These restructuring costs included $221,000 of severance and associated costs related to the reduction of 14 full-
time positions in the U.S. and $96,000 for equipment relocation costs, both in its Papermaking Systems segment.
In 2006, the Company recorded restructuring costs of $138,000 related to additional equipment relocation costs
associated with the 2005 Restructuring Plan.
2006 Restructuring Plan
The Company recorded restructuring costs of $677,000 in 2006 associated with its 2006 Restructuring Plan.
These restructuring costs were comprised of severance and associated costs related to the reduction of 15 full-
time positions in Canada and France, all in its Papermaking Systems segment.
F-37
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
8. Restructuring and Other Costs (Income), Net (continued)
A summary of the changes in accrued restructuring costs is as follows:
(In thousands)
2004 Restructuring Plan
Severance
and Other
Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,515
(23)
534
Balance at January 1, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005 Restructuring Plan
Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 Restructuring Plan
Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,026
(71)
(4,158)
(1,139)
4,658
(4,847)
554
365
317
(194)
123
138
(261)
–
677
(65)
(6)
$
$
$
$
Balance at December 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
606
The specific restructuring measures and associated estimated costs are based on the Company’s best
judgments under prevailing circumstances. The Company believes that the restructuring reserve balance is
adequate to carry out the restructuring activities formally identified and committed to as of December 30, 2006.
Due to the lengthy restructuring process in France and the long notification periods, the related cash payments
associated with the Lamort restructuring, which was initiated at the end of 2004, will extend into the first half of
2007. For the remaining restructuring activities, the Company anticipates that all actions will be completed
within a 12-month period.
9. Discontinued Operation
On October 21, 2005, the Company’s Kadant Composites LLC subsidiary (Composites LLC) sold
substantially all of its assets to LDI Composites Co. (the Buyer) for approximately $11,913,000 in cash and the
assumption of $1,444,000 of liabilities resulting in an $84,000 loss on sale. As part of the sale transaction,
Composites LLC retained the warranty obligations associated with products manufactured prior to the sale date.
All activity related to this business is classified in the results of the discontinued operation in the accompanying
consolidated financial statements.
F-38
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
9. Discontinued Operation (continued)
Operating results for the composites business included in the results of the discontinued operation in the
accompanying consolidated statement of income are as follows:
(In thousands)
2006
2005
2004
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
–
(2,204)
318
$15,960
(4,649)
53
$16,957
(8,065)
–
Loss Before Income Tax Benefit (including $130 loss on disposal in 2006 and
$46 gain on disposal in 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit for Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,886)
702
(4,596)
1,608
(8,065)
2,966
Loss from Discontinued Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(1,184) $ (2,988) $ (5,099)
The major classes of assets and liabilities of the composites business included in the discontinued operation
in the accompanying consolidated balance sheet are as follows:
(In thousands)
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Tax Asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued Payroll and Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued Warranty Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
2005
$2,597
660
340
454
410
4,461
73
221
1,135
30
1,459
$ 5,743
4,145
1,545
2,110
487
14,030
19
103
5,276
1,201
6,599
Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,002
$ 7,431
The restricted cash of $660,000 at year-end 2006 represents the portion of the sale proceeds placed in
escrow to satisfy certain indemnification obligations and associated interest.
As part of the sale transaction, Composites LLC retained the warranty obligations associated with products
manufactured prior to the sale date. Through the sale date of October 21, 2005, Composites LLC offered a
standard limited warranty to the owner of its decking and roofing products, limited to repair or replacement of
the defective product or a refund of the original purchase price.
Prior to the sale of the composites business, Composites LLC recorded an estimate for warranty-related
costs at the time of sale based on its actual historical return rates and repair costs, as well as other analytical tools
for estimating future warranty claims. These estimates were revised for variances between actual and expected
claims rates. Composites LLC’s analysis of expected warranty claims rates included detailed assumptions
associated with potential product returns, including the type of product sold, temperatures at the location of
installation, density of boards, and other factors. Certain assumptions, such as the effect of weather conditions
and high temperatures on the product installed, included inherent uncertainties that were subject to fluctuation.
Through the second quarter of 2006, Composites LLC continued to record an estimate for warranty-related costs
based on this methodology.
F-39
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
9. Discontinued Operation (continued)
During the third quarter of 2006, Composites LLC concluded that the highly subjective nature of the
assumptions noted above were not accurately predicting the level of warranty claims making it no longer possible
to calculate a reasonable estimate of the future level of potential warranty claims. Accordingly, as no amount
within the total range of loss represents a best estimate of the ultimate loss to be recorded, the Company is
required under SFAS 5 to record the minimum amount of the potential range of loss for products under warranty.
The warranty obligation as of December 30, 2006 represents the low end of the estimated range of warranty
reserve required based on the level of claims processed to date. The total potential warranty cost ranges from
$1,135,000 to approximately $15,600,000. The high end of the range represents the estimated maximum level of
warranty claims remaining based on the total sales of the products under warranty. Going forward, Composites
LLC will record adjustments to the warranty obligation to reflect the minimum amount of the potential range of
loss.
The changes in the carrying amount of product warranties are as follows:
(In thousands)
2006
2005
Balance at Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision charged to income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,276
1,248
407
(5,796)
$ 4,327
5,525
–
(4,576)
Balance at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,135
$ 5,276
The reimbursement of $407,000 represents reimbursements from the Buyer to Composites LLC for a
portion of the claims paid as provided in the sales agreement.
10. Fair Value of Financial Instruments
The Company’s financial instruments consist mainly of cash and cash equivalents, accounts receivable,
current maturities of long-term obligations, accounts payable, long-term obligations, forward foreign exchange
contracts and swap agreements. The carrying amounts of accounts receivable, current maturities of long-term
obligations, and accounts payable approximate fair value due to their short-term nature. The carrying amounts of
long-term obligations approximate fair value as the obligations bear a variable rate of interest, which adjusts
quarterly based on prevailing market rates.
The carrying amount and fair value of the Company’s financial instruments are as follows:
(In thousands)
Long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrecognized gain on swap agreements . . . . . . . . . . . . . . . . . . .
. . . . . . . .
Forward foreign exchange contracts receivable (payable)
2006
2005
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$(44,652) $(44,652) $(46,500) $(46,500)
510
$
(79)
$
510
$
(79) $
162
94
162
94
$
$
$
$
The notional amounts of forward foreign exchange contracts outstanding totaled $4,093,000 and $3,766,000
at year-end 2006 and 2005, respectively. The fair value of such contracts is the estimated amount that the
Company would receive upon termination of the contracts, taking into account the change in foreign currency
exchange rates, which is recorded in the accompanying consolidated balance sheet in accordance with SFAS 133
(see Note 1).
The notional amount of the swap agreements was $37,865,000 and $33,300,000 at year-end 2006 and 2005,
respectively. The fair values of the agreements are the estimated amounts that the contracts could be settled for in
the open market based on prevailing market interest rates at year-end 2006 and 2005.
F-40
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
11. Business Segment and Geographical Information
The Company has combined its operating entities into one reportable operating segment, Papermaking
Systems, and two separate product lines, Fiber-based Products and Casting Products, which are reported in Other.
In classifying operational entities into a particular segment, the Company aggregated businesses with similar
economic characteristics, products and services, production processes, customers, and methods of distribution.
The Company’s Papermaking Systems segment develops, manufactures, and markets stock-preparation
systems and equipment, paper machine accessory equipment, water-management systems, and fluid-handling
systems and equipment for the pulp and paper industry worldwide. Principal products manufactured by this
segment include: custom-engineered systems and equipment for the preparation of wastepaper for conversion
into recycled paper; paper machine accessory equipment and related consumables important to the efficient
operation of paper machines; water-management systems essential for draining, purifying, and recycling process
water; and fluid-handling systems used primarily in the dryer section of the papermaking process and during the
production of corrugated boxboard, metals, plastics, rubber, textiles, and food. The Fiber-based Products line
produces biodegradable absorbent granules from papermaking byproducts. These granules are primarily used as
carriers for agricultural, home lawn and garden, and professional lawn, turf and ornamental applications, as well
as for oil and grease absorption. The Casting Products line produces grey and ductile iron castings.
(In thousands)
2005
Business Segment Information
Revenues:
2004
2006
Papermaking Systems (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenues by Product Line:
Papermaking Systems:
Stock-Preparation Equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fluid-Handling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accessories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Water-Management
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other:
Fiber-based Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Casting Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from Continuing Operations Before Provision for Income Taxes and
Minority Interest Expense:
Papermaking Systems (c,d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and Other (b,d)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets:
Papermaking Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and Other (b,e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets from Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets from Discontinued Operation . . . . . . . . . . . . . . . . . . . . . . . .
$327,501
14,112
$341,613
$232,615
11,098
$243,713
$188,320
6,646
$194,966
$146,275
84,388
60,588
33,787
2,463
$327,501
$ 98,226
45,450
58,794
28,325
1,820
$232,615
$ 95,352
–
62,655
28,822
1,491
$188,320
$ 10,124
3,988
$ 14,112
$
8,599
2,499
$ 11,098
$
$
6,646
–
6,646
$ 38,604
(9,162)
29,442
(2,207)
$ 27,235
$ 19,584
(5,001)
14,583
(609)
$ 13,974
$ 12,664
(5,824)
6,840
1,445
8,285
$
$385,842
2,782
388,624
4,461
$393,085
$331,347
10,434
341,781
14,030
$355,811
$196,248
73,339
269,587
15,650
$285,237
F-41
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
11. Business Segment and Geographical Information (continued)
(In thousands)
Business Segment Information
Depreciation and Amortization:
Papermaking Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and Other (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital Expenditures:
Papermaking Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and Other (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
2005
2004
$
$
$
$
7,171
587
7,758
3,579
518
4,097
$
$
$
$
6,227
704
6,931
2,683
562
3,245
$
$
$
$
3,136
468
3,604
1,968
221
2,189
Geographical Information
Revenues (f):
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers among geographic areas (g) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$210,499
61,261
95,487
(25,634)
$147,714
49,601
59,450
(13,052)
$120,545
53,155
31,918
(10,652)
$341,613
$243,713
$194,966
Long-lived Assets (h):
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
England . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 18,358
11,716
3,103
2,407
6,071
$ 22,454
2,813
2,494
2,401
3,819
$ 10,966
–
2,111
3,340
962
$ 41,655
$ 33,981
$ 17,379
Export Revenues Included in United States Revenues Above (i) . . . . . . . . . . .
$ 69,449
$ 44,958
$ 35,733
(a) Revenues from China were $71.3 million, $29.2 million, and $29.4 million in 2006, 2005, and 2004,
respectively.
(b) Other includes the results from the Fiber-based Products business and the Casting Products business.
(c)
Includes restructuring and other costs (income), net of $0.8 million, ($0.1) million, and $9.5 million in 2006,
2005, and 2004, respectively (see Note 8).
Information in the 2005 and 2004 periods has been reclassified to conform to the 2006 presentation.
(d)
(e) Primarily cash and cash equivalents and property, plant, and equipment.
(f) Revenues are attributed to countries based on selling location.
(g) Transfers among geographic areas are accounted for at prices that are representative of transactions with
unaffiliated parties.
Includes property, plant, and equipment, net, and other long-term tangible assets.
In general, export revenues are denominated in U.S. dollars.
(h)
(i)
F-42
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
12. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
(In thousands, except per share amounts)
2006
2005
2004
Income from Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from Discontinued Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$18,281
(1,184)
$ 9,865
(2,988)
$ 5,753
(5,099)
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17,097
$ 6,877
$
654
Basic Weighted Average Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,816
281
13,829
275
14,071
327
Diluted Weighted Average Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,097
14,104
14,398
Basic Earnings per Share:
Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income per Basic Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted Earnings per Share:
Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income per Diluted Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
1.32
(.08)
1.24
1.30
(.09)
1.21
$
$
$
$
.71
(.21)
.50
.70
(.21)
.49
$
$
$
$
.41
(.36)
.05
.40
(.35)
.05
Options to purchase 116,000 shares, 235,800 shares, and 231,200 shares of common stock were not included
in the computation of diluted earnings per share for 2006, 2005, and 2004, respectively, because the options’
exercise prices were greater than the average market price for the common stock, and the effect would have been
antidilutive.
13. Accumulated Other Comprehensive Items
Comprehensive income combines net income and other comprehensive items, which represent certain
amounts that are reported as components of shareholders’ investment in the accompanying consolidated balance
sheet, including foreign currency translation adjustments, deferred gains and losses and unrecognized prior
service income associated with pension and other post-retirement plans, and deferred gains and losses on hedging
instruments.
Accumulated other comprehensive items in the accompanying consolidated balance sheet consist of the
following:
(In thousands)
Cumulative Translation Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized Prior Service Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Loss on Pension and Other Post-Retirement Plans . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Gain on Hedging Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
2005
$ 6,108
1,136
(1,272)
99
$(1,801)
–
–
311
$ 6,071
$(1,490)
F-43
Kadant Inc.
2006 Financial Statements
Notes to Consolidated Financial Statements
14. Unaudited Quarterly Information
2006 (In thousands, except per share amounts)
First
Second
Third
Fourth
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$75,591
$89,567
$90,586
$85,869
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,617
32,720
32,220
33,137
Income from Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from Discontinued Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,765
(114)
5,597
(627)
5,824
(183)
4,095
(260)
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,651
$ 4,970
$ 5,641
$ 3,835
Basic Earnings per Share:
Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income per Basic Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted Earnings per Share:
Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income per Diluted Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
.20
–
.20
.20
(.01)
.19
$
$
$
$
.41
(.05)
.36
.40
(.05)
.35
$
$
$
$
.42
(.02)
.40
.41
(.01)
.40
$
$
$
$
.29
(.02)
.27
.29
(.02)
.27
2005 (In thousands, except per share amounts)
First
Second
Third
Fourth
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$50,744
$65,086
$64,799
$63,084
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,762
24,701
26,242
24,264
Income from Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) Income from Discontinued Operation . . . . . . . . . . . . . . . . . . . . .
3,087
(363)
3,147
207
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,724
$ 3,354
Basic Earnings per Share:
Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income per Basic Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted Earnings per Share:
Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income per Diluted Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
.22
(.02)
.20
.22
(.03)
.19
$
$
$
$
.23
.01
.24
.22
.02
.24
2,634
(2,252)
382
.19
(.16)
.03
.19
(.16)
.03
$
$
$
$
$
$
$
$
$
$
997
(580)
417
.07
(.04)
.03
.07
(.04)
.03
F-44
Kadant Inc.
Schedule II
Valuation and Qualifying Accounts
(In thousands)
Description
Allowance for Doubtful Accounts
Year Ended December 30, 2006 . . . . . . . . . . . . .
Year Ended December 31, 2005 . . . . . . . . . . . . .
Year Ended January 1, 2005 . . . . . . . . . . . . . . . .
Balance at
Beginning
of Year
Provision
Charged to
Expense
Accounts
Recovered
Accounts
Written
Off
Other (a)
Balance
at End
of Year
$2,221
$1,678
$1,650
$725
$185
$656
$ –
$29
$43
$(486)
$(479)
$(627)
$163
$808
$ (44)
$2,623
$2,221
$1,678
Description
Accrued Restructuring Costs (b)
Year Ended December 30, 2006 . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2005 . . . . . . . . . . . . . . . . . .
Year Ended January 1, 2005 . . . . . . . . . . . . . . . . . . . . .
Balance at
Beginning
of Year
Provision
Charged to
Expense
Activity
Charged to
Reserve
Currency
Translation
Balance
at End
of Year
$ 4,781
$10,026
200
$
$ 815
$ 246
$9,515
$(5,173)
$(4,352)
$ (223)
$
548
$(1,139)
534
$
$
971
$ 4,781
$10,026
(a)
Includes $912 of allowance for doubtful accounts acquired in 2005 from Kadant Johnson and the effect of
foreign currency translation.
(b) The nature of the activity in this account is described in Note 8 to the consolidated financial statements.
F-45
Shareholder Information
Shareholder Services
Shareholders who desire information about Kadant Inc. may contact us at One Technology Park Drive, Westford,
Massachusetts 01886, (978) 776-2000. We maintain an internal mailing list to enable shareholders whose stock is held
in street name, and other interested individuals, to receive quarterly reports, annual reports, press releases, and other
information as quickly as possible. Additional information is available on our Web site at www.kadant.com, under
“Investors.”
Stock Transfer Agent
American Stock Transfer & Trust Company is our stock transfer agent and maintains shareholder activity records. The
agent will respond to questions on issuance of stock certificates, change of ownership, lost stock certificates, and
change of address. For these and similar matters, please direct inquiries to: American Stock Transfer & Trust Company,
Shareholder Services Department, 59 Maiden Lane, New York, NY 10038, (718) 921-8200, (800) 937-5449,
www.amstock.com.
Annual Meeting
The annual meeting of shareholders will be held on Thursday, May 24, 2007, at 2:30 p.m., at the Boston Marriott
Burlington, One Mall Road, Burlington, Massachusetts.
Annual Report on Form 10-K
The accompanying Annual Report on Form 10-K for the fiscal year ended December 30, 2006, does not contain
exhibits. Exhibits have been filed with the Securities and Exchange Commission (SEC). To obtain a copy of these
exhibits, as well as periodic reports filed with the SEC, please contact Thomas M. O’Brien, Executive Vice President
and Chief Financial Officer, Kadant Inc., One Technology Park Drive, Westford, Massachusetts 01886, (978) 776-2000.
Certifications
The company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2006, contains the certifications
of the chief executive officer and chief financial officer provided to the Securities and Exchange Commission as
required by Section 302 of the Sarbanes-Oxley Act of 2002. These certifications are included as exhibits 31.1 and 31.2
to the Form 10-K.
The company’s chief executive officer submitted an annual certification to the New York Stock Exchange (NYSE) on
June 21, 2006, stating that he was not aware of any violation by the company of NYSE corporate governance listing
standards. Kadant’s common stock trades on the NYSE under the ticker symbol “KAI.”
Forward-Looking Statements
This annual report contains “forward-looking statements” within the meaning of Section 21E of the Securities
Exchange Act of 1934. Any statements contained herein that are not statements of historical fact may be deemed to
be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,”
“seeks,” “estimates,” “would,” and similar expressions are intended to identify forward-looking statements. While the
company may elect to update forward-looking statements in the future, it specifically disclaims its obligation to do so,
even if the company’s estimates change. A number of factors could cause the results of the company to differ material-
ly from those indicated by such forward-looking statements, including those detailed under the heading “Risk Factors”
in Part I, Item 1A in the accompanying Annual Report on Form 10-K for the fiscal year ended December 30, 2006.
The cover of our annual report is manufactured entirely from recovered materials: waste by-products of various aspects of the textile and cottonseed oil
industries. No cotton is grown specifically for this paper. 2 The editorial section and financials are printed on paper with 10% post-consumer waste.
The editorial section paper is elemental chlorine free.
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Kadant Inc. One Technology Park Drive Westford, MA 01886 Tel 978-776-2000 Fax 978-635-1593 www.kadant.com