2
0
1
3
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t
Dear Stockholder:
2013 was a good year for Kadant and our stockholders. We ended 2013 on a solid
note, setting a new gross margin record for the year and achieving near-record
performance in adjusted EBITDA. And just as important, our cash flows were strong
in 2013 and the second highest result achieved in our Company’s history.
We finished 2013 with revenues of $344 million, an increase of four percent over the
prior year, while gross margins increased to a record 45.8 percent.
Our adjusted diluted earnings per share* was down 10 percent from the record
earnings per share we had in 2012. Our efforts to return capital to our stockholders
were supported by the quarterly dividend initiated at the beginning of 2013 and
stock repurchases, which combined were nearly $10 million, or 41 percent of our net
income from continuing operations in 2013.
We made good progress on our strategic growth initiatives that include increasing our
penetration into emerging markets, expanding our parts and consumables revenue,
leveraging our low-cost manufacturing operations, and acquiring well-positioned
companies that offer premium, differentiated products to process industries.
We completed three acquisitions in 2013, including our former Brazilian licensee
Companhia Brasileira de Tecnologia Industrial, Noss Group out of Sweden, and
Carmanah Design and Manufacturing Inc. based in Canada. Each of these premiere
companies has a strong market position and will contribute to revenue growth in our
core packaging and tissue market segments, and adjacent markets such as
engineered wood panels used in construction and furniture production. These
acquisitions resulted in the expansion of our presence in emerging markets, and
their large aftermarket parts business is expected to increase our parts and
consumables revenue in 2014 and beyond.
Kadant remains a healthy company well-positioned for another solid year, despite a
relatively weak global economy. Our global platform allows us the ability to capitalize
on new business opportunities in every region of the world, and our recent
acquisitions and internal growth initiatives lead us to believe 2014 will be another
record-setting year.
Sincerely,
Jonathan W. Painter
President and Chief Executive Officer
March 15, 2014
* Adjusted diluted earnings per share is a non-GAAP financial measure as detailed on the following page.
A reconciliation to the most comparable GAAP number appears on the following page.
Non-GAAP Financial Measures
Adjusted Net Income and Adjusted Diluted EPS Reconciliation
Net Income and Diluted EPS Attributable to Kadant, as reported
Loss (income) from discontinued operation
Income and Diluted EPS from Continuing Operations, as reported
Adjustments for the following:
Other expense (a)
Benefit from discrete tax items (b)
Adjusted Net Income and Adjusted Diluted EPS (c)
Twelve Months Ended
Dec. 28, 2013
($ in millions) Diluted EPS
Twelve Months Ended
Dec. 29, 2012
($ in millions) Diluted EPS
$ 23.4
0.1
23.5
$ 2.07
-
2.07
$ 31.6
(0.7)
30.9
$ 2.73
(0.07)
2.66
-
-
$ 23.5
-
-
$ 2.07
0.3
(4.6)
$ 26.6
0.03
(0.40)
$ 2.29
(a) Reflects other expense of $0.3 million in the twelve-month period ended December 29, 2012 associated with accelerated depreciation
related to a facility consolidation.
(b) Reflects a benefit from discrete tax items of $4.6 million in the twelve-month period ended December 29, 2012 primarily due to the
reversal of valuation allowances on certain deferred tax assets in the U.S. based on a consideration of expected profitability and foreign
source income in future periods.
(c) Adjusted diluted EPS was calculated using the reported weighted average diluted shares for each period.
Adjusted Operating Income and Adjusted EBITDA Reconciliation ($ in millions)
Net Income Attributable to Kadant
Net Income Attributable to Noncontrolling Interest
Loss (Income) from Discontinued Operation, Net of Tax
Provision for Income Taxes
Interest Expense, net
Operating Income
Restructuring Costs and Other Income, net (a)
Acquired Backlog Amortization (b)
Acquired Profit in Inventory (c)
Adjusted Operating Income
Depreciation and Amortization
Adjusted EBITDA
Twelve
Months Ended
Dec. 28, 2013
Twelve Months
Ended
Dec. 29, 2012
$ 23.4
0.2
0.1
9.3
0.3
33.3
0.1
1.1
1.5
36.0
8.7
$ 44.7
$ 31.6
0.2
(0.7)
4.8
0.5
36.4
-
-
-
36.4
8.4
$ 44.8
(a) Reflects restructuring costs of $1.8 million, net of a gain of $1.7 million on the sale of assets, in the twelve-month period ended December
28, 2013.
(b) Represents intangible amortization expense associated with backlog acquired in 2013.
(c) Represents expense in 2013 associated with acquired profit in inventory.
Adjusted net income, adjusted diluted earnings per share (EPS), adjusted operating income, and adjusted EBITDA
are non-GAAP financial measures. These non-GAAP financial measures exclude items that are not indicative of our
normal operating results and are not comparable to other periods, which may have differing levels of acquired profit
in inventory and backlog, restructuring costs, other expense (income), or discrete tax items or none at all. We
provide these non-GAAP measures to give investors additional insight into our annual operating performance,
especially when compared to periods in which such items had greater or lesser effect or no effect. Non-GAAP
financial measures are not meant to be considered superior to or a substitute for the results of operations prepared in
accordance with generally accepted accounting principles (GAAP). In addition, the non-GAAP financial measures
have limitations associated with their use as compared to the most directly comparable GAAP measures, in that they
may be different from, and therefore not comparable to, similar measures used by other companies. We believe that
the inclusion of such measures helps investors to gain an understanding of our underlying operating performance
and future prospects, consistent with how management measures and forecasts our performance, especially when
comparing such results to previous periods or forecasts and to the performance of our competitors. Such measures
are also used by us in our financial and operating decision-making and for compensation purposes. We also believe
this information is responsive to investors’ requests and gives them an additional measure of our performance.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-K
(mark one)
X
(cid:133)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2013
OR
(cid:133)
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
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)
One Technology Park Drive
Westford, Massachusetts
(Address of principal executive offices)
52-1762325
(I.R.S. Employer Identification No.)
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
Common Stock, $.01 par value
Name of each exchange on which registered
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 (cid:133) No (cid:95)
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 (cid:133) No (cid:95)
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 (cid:95) No (cid:133)
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the Registrant was required to submit and post such files). Yes (cid:95) No (cid:133)
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. (cid:133)
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer", and "smaller reporting company"
in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:133)
Non-accelerated filer (cid:133) (Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes (cid:133) No (cid:95)
The aggregate market value of the voting and non-voting common equity held by nonaffiliates of the Registrant as of June 29,
2013, was approximately $328,122,000.
Accelerated filer(cid:95)
Smaller reporting company(cid:133)
As of February 14, 2014, the Registrant had 11,119,726 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 2014 Annual Meeting of Stockholders 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 28, 2013
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business ...................................................................................................................................................
Risk Factors .............................................................................................................................................
Unresolved Staff Comments ....................................................................................................................
Properties .................................................................................................................................................
Legal Proceedings ....................................................................................................................................
Mine Safety Disclosures ..........................................................................................................................
PART II
Item 5.
Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Equity Securities ..................................................................................................................................
Selected Financial Data ...........................................................................................................................
Management's Discussion and Analysis of Financial Condition and Results of Operations ...................
Quantitative and Qualitative Disclosures About Market Risk .................................................................
Financial Statements and Supplementary Data ........................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..................
Controls and Procedures ..........................................................................................................................
Other Information ....................................................................................................................................
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers, and Corporate Governance ......................................................................
Executive Compensation .........................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence .........................................
Principal Accountant Fees and Services ..................................................................................................
PART IV
Page
1
6
13
13
14
14
14
17
17
30
31
31
31
32
32
32
32
33
33
Item 15.
Exhibits and Financial Statement Schedules ...........................................................................................
33
Kadant Inc.
2013 Annual Report
PART I
Forward-Looking Statements
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," "seeks," "should," "likely," "will," "would," "may," "continue," "could," or similar expressions, we are making
forward-looking statements.
Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions.
Our future results of operations may differ materially from those expressed in the forward-looking statements. Many of the
important factors that will determine these results and values are beyond our ability to control or predict. You should not put
undue reliance on any forward-looking statements. We undertake no obligation to publicly update any forward-looking
statement, whether as a result of new information, future events, or otherwise. For a discussion of important factors that may
cause our actual results to differ materially from those suggested by the forward-looking statements, you should read
carefully the section captioned "Risk Factors" in Part I, Item 1A, of this Report.
Item 1. Business
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 global supplier of equipment used in process industries, including papermaking, paper recycling,
and oriented strand board (OSB). In addition, we manufacture granules made from papermaking byproducts. We have a large
customer base that includes most of the world's major paper and OSB 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.
Our continuing operations are comprised of two reportable operating segments, Papermaking Systems and Wood
Processing Systems, and a separate product line, Fiber-based Products. Through our Papermaking Systems segment, we
develop, manufacture, and market a range of equipment and products for the global papermaking, paper recycling, and
process industries. Through our Wood Processing Systems segment, we design, manufacture, and market stranders and
related equipment used in the production of OSB, an engineered wood panel product used primarily in home construction,
and sell debarking and wood chipping equipment used in the forest products and the pulp and paper industries. Through our
Fiber-based Products business, 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.
Papermaking Systems Segment
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 more than 100 years. Our customer base includes major global paper manufacturers
and we 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.
In 2013*, our Papermaking Systems segment acquired a long-time Brazilian licensee of our doctoring, cleaning,
filtration, and stock preparation products for approximately $8.1 million in cash and $0.5 million in assumed liabilities owed
to us. In addition, in 2013, our Papermaking Systems segment acquired certain assets of a Sweden-based developer and
supplier of high-efficiency cleaners and approach flow systems for approximately $7.1 million in cash. This acquisition
expanded our product offerings in our Stock-Preparation product line, particularly for virgin pulp and approach flow
applications.
Our Papermaking Systems segment consists of the following product lines: Stock-Preparation; Doctoring, Cleaning,
& Filtration; and Fluid-Handling.
__________________________________
* Unless otherwise noted, references to 2013, 2012, and 2011 in this Annual Report on Form 10-K are for the fiscal years ended
December 28, 2013, December 29, 2012, and December 31, 2011, respectively.
1
Kadant Inc.
Stock-Preparation
2013 Annual Report
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 primarily recycled fiber for preparation for
entry into the paper machine, and recausticizing and evaporation equipment and systems used in the production of virgin
pulp. 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.
Doctoring, Cleaning, & Filtration
We develop, manufacture, and market a wide range of doctoring, cleaning, and filtration systems and related
consumables that continuously clean rolls to keep paper machines running efficiently; doctor blades made of a variety of
materials to perform functions including cleaning, creping, web removal, flaking, and the application of coatings; profiling
systems that control moisture, web curl, and gloss during paper converting; and systems and equipment used to continuously
clean paper machine fabrics and rolls, drain water from pulp mixtures, form the sheet or web, and filter the process water for
reuse. Our principal doctoring, cleaning, and filtration products include:
– Doctor systems and holders: Our doctor systems clean papermaking rolls to maintain the efficient operation of paper
machines and other equipment 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 converting.
– Doctor blades: We manufacture doctor and scraper 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, flaking, and the
application of coatings. A typical doctor blade has a life ranging from eight hours to two months, depending on the
application.
– 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. A typical paper machine has between three 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
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, chemicals, 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 remove
condensate from the drying cylinders through rotary joints located on either end of the cylinder.
– Turbulator® bars: Our steel or stainless steel axial bars, installed on the inside of cylinders, are used to induce
turbulence in the condensate layer to improve the uniformity and rate of heat transfer through the cylinders.
– Engineered steam and condensate systems: Our steam 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. Our systems and equipment are also used to efficiently and effectively distribute steam in a wide
variety of industrial processing applications.
Wood Processing Systems Segment
On November 6, 2013, we acquired all the outstanding shares of Carmanah Design and Manufacturing Inc.
(Carmanah) for $51.6 million, subject to a post-closing adjustment. Carmanah, located in Surrey, British Columbia, Canada
is a global leader in the design and manufacture of stranders and related equipment used in the production of OSB, an
2
Kadant Inc.
engineered wood panel product used primarily in home construction. Carmanah also supplies debarking and wood chipping
equipment used in the forest products and the pulp and paper industries. The acquisition of Carmanah extends our presence
into the forest products industry and will advance our strategy of increasing our parts and consumables business. Our
principal wood-processing products include:
2013 Annual Report
– Stranders: Our disc and ring stranders cut tree length or batch fed logs into strands for OSB production and are used
to manage strands in real time using our patented conveying and feeding equipment.
– Rotary Debarkers: Our rotary debarkers employ a combination of mechanical abrasion and log-to-log contact to
efficiently remove bark from logs of all shapes and species.
– Chippers: Our disc, drum, and veneer chippers are high quality, robust chipper systems for waste-wood and whole-
log applications found in pulp woodrooms, chip plants, sawmill, and planer mill sites.
Fiber-based Products
We produce 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.
Discontinued Operation
In 2005, our Kadant Composites LLC subsidiary (Composites LLC) sold substantially all of its assets to a third
party. Under the terms of the asset purchase agreement, Composites LLC retained certain liabilities associated with the
operation of the business prior to the sale, including the warranty obligations related to 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.
On October 24, 2011, we, Composites LLC, and other co-defendants entered into an agreement to settle a
nationwide class action lawsuit related to allegedly defective composites decking building products manufactured by
Composites LLC between April 2002 and October 2003. In 2012, we paid $0.6 million with respect to approved claims under
the class action settlement.
Research and Development
We develop a broad range of products for all facets of the markets we serve. We operate research and development
facilities in Europe and the U.S., and focus our product innovations on process industry challenges and the need for improved
fiber processing, heat transfer, showering, filtration, doctoring, and fluid handling. In addition to internal product
development activities, our research centers allow customers to simulate their own operating conditions and applications to
identify and quantify opportunities for improvement.
Our research and development expenses were $6.7 million, $6.0 million, and $5.7 million in 2013, 2012, and 2011,
respectively.
Raw Materials
The primary raw materials used in our Papermaking Systems segment are steel, stainless steel, ductile iron, brass,
and bronze, which have generally been available through a number of suppliers. To date, we have not needed to maintain raw
material inventories in excess of our current needs to ensure availability.
The primary raw materials used in our Wood Processing Systems segment are steel and stainless steel, which have
generally been available through a number of suppliers.
The raw material used in the manufacture of our fiber-based granules is obtained from two paper mills. Although we
believe that our relationships with the mills are good, the mills may not continue to supply sufficient raw material. From time
to time, 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 one or more alternative suppliers
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. No particular patent, or related group of
patents, is so important that its expiration or loss would significantly affect our operations.
3
Kadant Inc.
Papermaking Systems Segment
2013 Annual Report
We have numerous U.S. and foreign patents, including foreign counterparts to our U.S. patents, expiring on various
dates ranging from 2014 to 2033. From time to time, we enter into licenses of products with other companies that serve the
pulp, papermaking, converting, and paper recycling industries.
Wood Processing Systems Segment
We currently hold several U.S. and Canadian patents, expiring on various dates ranging from 2014 to 2032, related
to wood processing and debarking equipment.
Fiber-based Products
We currently hold several U.S. patents, expiring on various dates ranging from 2015 to 2026, 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.
Seasonal Influences
Papermaking Systems Segment
There are no material seasonal influences on this segment's sales of products and services.
Wood Processing Systems Segment
Our newly acquired Wood Processing Systems business is subject to seasonal variations, with demand for many of
our products tending to be greater during the building season, which generally occurs in the second and third quarters in
North America.
Fiber-based Products
Our Fiber-based Products business experiences fluctuations in sales, usually in the third and fourth quarters, 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 in any of the past three years. In
addition, revenues in our Papermaking Systems and Wood Processing Systems segments were not dependent on any one
customer. During 2013, 2012, and 2011, approximately 63%, 61%, and 63%, respectively, of our sales were to customers
outside the United States, principally in Europe and China.
Backlog
Our backlog of firm orders for the Papermaking Systems segment was $84.5 million and $77.0 million at year-end
2013 and 2012, respectively. The total consolidated backlog of firm orders was $97.6 million and $77.5 million at year-end
2013 and 2012, respectively. We anticipate that substantially all of the backlog at year-end 2013 will be shipped or
completed during the next 12 months. Some of these orders can be canceled by the customer upon payment of a cancellation
fee.
Competition
We are a leading supplier of systems and equipment in each of our product lines within our Papermaking Systems
segment and there are several global and numerous local competitors in each market. In our Wood Processing Systems
segment, we compete with one primary global competitor in the OSB market for stranding equipment and several global and
local competitors for our other products. Because of the diversity in our products, we face many different types of
competitors and competition. We compete primarily on the basis of technical expertise, product innovation, and product
performance. We believe the reputation that we have established for high-performance, high-reliability products supported by
our in-depth process knowledge and application expertise provides us with a competitive advantage. In addition, a significant
portion of our business is generated from our worldwide customer base. To maintain this base, we have emphasized our
4
Kadant Inc.
global presence, local support, and a problem-solving relationship with our customers. Our success primarily depends on the
following factors:
2013 Annual Report
– Technical expertise and process knowledge;
– Product innovation;
– Product quality, reliability, and performance;
– Operating efficiency of our products;
– Customer service and support; and
– Relative price of our products.
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 year-end 2013, we had approximately 1,800 employees worldwide.
Financial Information
Financial information concerning our segment and product lines is summarized in Note 12 to the consolidated
financial statements, which begin on page F-1 of this Report.
Financial information about exports by domestic operations and about foreign operations is summarized in Note 12
to the consolidated financial statements, which begin 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 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. The public also 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. In addition, we
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, if applicable, 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 on our website as part of this
Report nor are we incorporating the information on our website into this Report by reference.
Executive Officers of the Registrant
The following table summarizes certain information concerning individuals who are our executive officers as of March
1, 2014:
Name
Jonathan W. Painter ........................
Eric T. Langevin .............................
Thomas M. O'Brien ........................
Jeffrey L. Powell .............................
Sandra L. Lambert ..........................
Michael J. McKenney .....................
Age
55
51
62
55
58
52
Present Title (Fiscal Year First Became Executive Officer)
President and Chief Executive Officer (1997)
Executive Vice President and Chief Operating Officer (2006)
Executive Vice President and Chief Financial Officer (1994)
Executive Vice President (2009)
Vice President, General Counsel, and Secretary (2001)
Vice President, Finance and Chief Accounting Officer (2002)
Mr. Painter has been our chief executive officer and a director since January 2010 and our president since September
1, 2009. Between 1997 and September 2009, Mr. Painter served as an executive vice president and from March 2007 through
September 2009 had supervisory responsibility for our stock-preparation and fiber-based products businesses. He served as
president of our composite building products business from 2001 until its sale in 2005. He also served as our treasurer and the
treasurer of Thermo Electron from 1994 until 1997. Prior to 1994, Mr. Painter held various managerial positions with us and
Thermo Electron.
Mr. Langevin has been an executive vice president and our chief operating officer since January 2010. Prior to
January 2010, Mr. Langevin had been a senior vice president since March 2007 and had supervisory responsibility for our
paperline business, consisting of our Fluid-Handling and our Doctoring, Cleaning, & Filtration product lines. He served as
vice president, with responsibility for our Doctoring, Cleaning, & Filtration product lines, from 2006 to 2007. From 2001 to
2006, Mr. Langevin was president of Kadant Web Systems Inc. (now our Kadant Solutions division) and before that served
as its senior vice president and vice president of operations. Prior to 2001, Mr. Langevin managed several product groups and
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Kadant Inc.
departments within Kadant Web Systems after joining us in 1986 as a product development engineer.
2013 Annual Report
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. Powell has been an executive vice president since March 2013 and has supervisory responsibility for our stock-
preparation and fiber-based products businesses. From September 2009 to March 2013, he was a senior vice president. From
January 2008 to September 2009, Mr. Powell was vice president, new ventures, with principal responsibility for acquisition-
related activities. Prior to joining us, Mr. Powell was the chairman and chief executive officer of Castion Corporation from
April 2003 through December 2007.
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 the secretary of Thermo Electron from 1999 and 1990, respectively,
to 2001 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 from 1997 to 2007. Mr. McKenney was controller of our Kadant AES division (now part of our
Kadant Solutions division) from 1993 to 1997. Prior to 1993, Mr. McKenney held various financial positions at Albany
International Corp.
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 2014 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 worldwide and local economic conditions as well as the condition of the pulp and paper
industry.
We sell products worldwide 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 general worldwide economic conditions, as well as to
a number of other factors, including pulp and paper production capacity relative to demand in the geographic markets in
which we compete. A significant portion of our revenues are from customers based in Europe and China. Economic
downturns and uncertainty in Europe, including recent uncertainties in Russia, can adversely affect our revenues and
bookings in Europe. In addition, slowing economic growth rates in China can adversely affect our business. The timing for
the addition of new capacity in the paper markets in China remains uncertain and is highly dependent on the markets' ability
to absorb existing capacity. These uncertainties in the global and regional economic outlooks have negatively affected, and
may in the future negatively affect, demand for our customers' products, and as a consequence, our products and services,
especially our capital equipment systems and products, and our financial results. Also, uncertainty regarding economic
conditions has caused, and may in the future cause, liquidity and credit issues for many businesses, including our customers
in the pulp and paper industry as well as other industries, and may result in their inability to fund projects, capacity expansion
plans, and to some extent, routine operations and capital expenditures. These conditions have resulted, and may in the future
result, in a number of structural changes in the pulp and paper industry, including decreased spending, mill closures,
consolidations, and bankruptcies, all of which negatively affect our business, revenue, and profitability. Financial and
economic turmoil affecting the worldwide economy or the banking system and financial markets, in particular, due to
political or economic developments could cause the expectations for our business to differ materially in the future.
Our financial performance will be negatively impacted if there are delays in customers securing financing or our
customers become unable to secure such financing, due to any number of factors including a tightening of monetary policy.
Recently, financing has become a significant problem for pulp and paper producers in Russia, which has caused us to delay
the booking of some pending orders. The inability of our customers to obtain credit may affect our ability to recognize
revenue and income, particularly on large capital equipment orders from new customers for which we may require letters of
credit. We may also be unable to issue letters of credit to our customers, which are required in some cases to guarantee
performance, during periods of economic uncertainty.
Paper producers have been, and may in the future be, negatively affected by higher operating costs. Paper companies
curtail their capital and operating spending during periods of economic uncertainty and are cautious about resuming spending
as market conditions improve. As paper companies consolidate operations in response to market weakness, they frequently
reduce capacity, increase downtime, defer maintenance and upgrades, and postpone or even cancel capacity addition or
expansion projects. It is especially difficult to accurately forecast our revenues and earnings per share during periods of
economic uncertainty.
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2013 Annual Report
A significant portion of our international sales has, and may in the future, come from China and we operate several
manufacturing facilities in China, which exposes us to political, economic, operational and other risks.
We have historically had significant revenues from China, operate significant manufacturing facilities in China, and
manufacture and source equipment and components from China. As a result, we are exposed to increased risk in the event of
economic slowdowns, 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. Policies of the Chinese government to target slower economic growth to avoid
inflation may negatively affect our business in China if customers are unable to expand capacity or obtain financing for
expansion or improvement projects.
Our bookings activity from China tends to be more variable than in other geographic regions, as the China pulp and
paper industry historically has experienced, and in the future may experience, periods of significant capacity expansion to
meet demand followed by a period of stagnant activity while overcapacity is absorbed. These cycles result in periods of
significant bookings activity for our capital products and increased revenues followed by a significant decrease in bookings
or potential delays in shipments and order placements by our customers as they attempt to balance supply and demand. As a
consequence, our bookings and revenues in China tend to be uneven and difficult to predict. Paper companies in China have
brought and are scheduled to bring online capacity additions; however, this capacity growth has been uneven and the larger
paper producers have delayed, and may in the future delay, additional new capacity start-ups in reaction to softer market
conditions. In general, as significant capacity additions come online and the economic growth rate slows, paper producers
have deferred and could in the future defer further investments or the delivery of previously-ordered equipment until the
market absorbs the new production. This has negatively affected our bookings and revenues in China in the past, and may
negatively affect our bookings and revenues in China in the future.
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 or can be impacted by the availability of credit and more
restrictive monetary policies. For this reason, we generally do not record signed contracts from customers in China for large
stock-preparation systems as orders until we receive the down payments for such contracts. 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. Delays in the receipt of payments and letters of credit affect when revenues can be recognized on these contracts,
making it difficult to accurately forecast our future financial performance. We may experience a loss if a contract is cancelled
prior to the receipt of a down payment in the event we commence engineering or other work associated with the contract. We
typically have inventory awaiting shipment to customers. We could incur a loss if contracts are cancelled and we cannot re-
sell the equipment. In addition, we may experience a loss if the contract is cancelled, or the customer does not fulfill its
obligations under the contract, prior to the receipt of a letter of credit or final payments covering the remaining balance of the
contract, which could represent 80% or more of the total order.
A significant portion of our revenue in China is recognized upon shipment once we have secured final payment. In
some cases, we will be unable to recognize any revenue on completed orders until after installation or acceptance of the
equipment. Furthermore, customers in China often demand that deliveries of previously-ordered equipment be delayed to
future periods for any number of reasons. As a result, our revenues recognized in China have varied, and will in the future
vary, greatly from period to period and be difficult to predict.
Carmanah manufactures equipment used in the production of OSB and its financial performance may be adversely affected
by lower levels of residential construction activity.
In November 2013, we acquired all the outstanding shares of Carmanah, a manufacturer of stranders and related
equipment used in the production of OSB, an engineered wood panel product used primarily in home construction.
Carmanah's customers produce OSB principally for new residential construction, home repair and remodeling activities.
Carmanah's operating results correlate to a significant degree to the level of this residential construction activity, primarily in
North America and to a lesser extent in Europe. Residential construction activity is influenced by a number of factors,
including the supply of and demand for new and existing homes, new housing starts, unemployment rates, interest rate levels,
availability of mortgage financing, mortgage foreclosure rates, seasonal and unusual weather conditions, general economic
conditions and consumer confidence. In the U.S., the residential housing industry has been in a prolonged down cycle that
began in 2006, although the housing market has shown signs of improvement beginning in the latter half of 2012. A
significant increase in long-term interest rates, tightened lending standards, continued high unemployment rates and other
factors that reduce levels of residential construction activity could have a material adverse effect on the financial performance
of Carmanah, and in turn, on our consolidated financial results.
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Kadant Inc.
2013 Annual Report
The OSB market is highly concentrated and the market for building products is highly competitive. The loss of a significant
customer or our customers' reductions in capital spending or OSB production could have a material adverse effect on our
financial performance.
The OSB market is highly concentrated and there are a limited number of OSB manufacturers. The loss of one or
more of these customers to a competitor could adversely affect Carmanah's revenues and profitability. In addition, the market
for building products is highly competitive. Competitive products with OSB include other wood panel products and
substitutes for wood building products, such as nonfiber-based alternatives. For example, plastic, wood/plastic or composite
materials may be used by builders as alternatives to OSB products. Changes in component prices, such as energy, chemicals,
wood-based fibers, and nonfiber alternatives can change the competitive position of OSB relative to other available
alternatives and could increase substitution. Our customers' OSB production can be adversely affected by lower-cost
producers of other wood panel products and substitutes for wood building products. Lower demand for OSB products or a
decline in the profitability of one or more of our customers could result in a reduction in spending on capital equipment or the
shutdown or closure of an OSB mill, which could have a material adverse effect on the financial performance of Carmanah,
and in turn, on our consolidated financial results.
Commodity or component price increases and significant shortages of commodities and component products may adversely
impact our financial results or our ability to meet commitments to customers.
We use steel, stainless steel, brass, bronze, and other commodities to manufacture our products. We also use natural
gas in the production of our fiber-based granular products. As a result, unanticipated increases in the prices of such
commodities could increase our costs more than expected and negatively impact our business, results of operations and
financial condition if we are unable to fully offset the effect of these increased costs through price increases, productivity
improvements, or cost reduction programs.
We rely on suppliers to secure commodity and component products required for the manufacture of our products. A
disruption in deliveries to or from suppliers or decreased availability of such components or commodities could have an
adverse effect on our ability to meet our commitments to customers or increase our operating costs. We believe our sources
of raw materials and component products will generally be sufficient for our needs in the foreseeable future. However, our
business, results of operations or financial condition could be negatively impacted if supply is insufficient for our operations.
We are dependent upon certain suppliers for components and raw materials.
We are dependent on two paper mills for the fiber used in the manufacture of our fiber-based granular products.
From time to time we have experienced, and may in the future experience, 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 relationships with the mills are good, the mills could decide not
to continue to supply sufficient papermaking byproducts, or may not agree to continue to supply such products on
commercially reasonable terms. If the mills were unable or unwilling to supply us sufficient fiber, we would be forced to find
one or more alternative sources of supply of this raw material. We may be unable to find alternative supplies 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 or require closure
of this business.
Our newly-acquired Carmanah business uses a single supplier for certain components used in its stranders.
Carmanah has entered into a long-term agreement with the supplier and has had no difficulty to date obtaining sufficient
supplies of these components. Although we believe our relationship with the supplier to be good, if the supplier were to
terminate the agreement, we would be forced to find an alternative source of supply. Alternative sources of supply could be
more expensive, which could have an adverse effect on our operating results.
Our business is subject to economic, currency, political, and other risks associated with international sales and operations.
During 2013 and 2012, approximately 63% and 61%, respectively, of our sales were to customers outside the United
States, principally in Europe and China. In addition, we operate several manufacturing operations worldwide, including
operations in China, Europe, Mexico, and Brazil. International revenues and operations are subject to a number of risks,
including the following:
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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, adopt
other restrictions on foreign trade, impose currency restrictions or enact other protectionist or anti-trade measures,
– worsening economic conditions may result in worker unrest, labor actions, and potential work stoppages,
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Kadant Inc.
2013 Annual Report
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political unrest may disrupt commercial activities of ours or our customers,
it may be difficult to repatriate funds, due to unfavorable domestic and foreign tax consequences or other restrictions
or limitations imposed by foreign governments, and
the protection of intellectual property in foreign countries may be more difficult to enforce.
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. Any such acquisition involves numerous risks that may adversely affect our future financial
performance and cash flows. These risks include:
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competition with other prospective buyers resulting in our inability to complete an acquisition or in us paying a
substantial premium over the fair value of the net assets of the acquired business,
inability to obtain regulatory approvals, 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,
inability to retain key management of the acquired business,
diversion of management's attention from other business concerns,
inability to improve the revenues and profitability or realize the cost savings and synergies expected of 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 are required to record transaction and acquisition-related costs in the period incurred. Once completed,
acquisitions may involve significant integration costs. These acquisition-related costs could be significant in a reporting
period and have an adverse effect on our results of operations.
Any acquisition we complete may be made at a substantial premium over the fair value of the net identifiable assets
of the acquired business. We are required to assess the realizability of goodwill and indefinite-lived intangible assets annually
as well as whenever events or changes in circumstances indicate that these assets may be impaired. These events or
circumstances would generally include operating losses or a significant decline in earnings associated with the acquired
business or asset, and our ability to realize the value of goodwill and indefinite-lived intangible assets will depend on the
future cash flows of these businesses. For example, in 2008, we recorded a $40.3 million impairment charge to write down
the goodwill associated with the stock-preparation reporting unit within our Papermaking Systems segment. We may incur
additional impairment charges to write down the value of our goodwill and acquired intangible assets in the future if the
assets are not deemed recoverable, which could have a material adverse effect on our operating results.
It may be difficult for us to implement our strategies for improving internal growth.
Some of the markets in which we compete are mature and have lower growth rates. We pursue a number of strategies
to improve our internal growth, including:
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strengthening our presence in selected geographic markets, including emerging markets and existing markets where
we see opportunities;
focusing on parts and consumables sales;
using low cost manufacturing bases, such as China and Mexico;
allocating research and development funding to products with higher growth prospects;
developing new applications for our technologies;
combining sales and marketing operations in appropriate markets to compete more effectively;
finding new markets for our products; and
continuing to develop cross-selling opportunities for our products and services to take advantage of our depth of
product offerings.
We may not be able to successfully implement these strategies and these strategies may not result in the expected
growth of our business.
We are exposed to fluctuations in currency exchange rates, which could adversely affect our cash flows and results of
operations.
As a multinational corporation, we are exposed to fluctuations in currency exchange rates that impact our business
in many ways. 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. Our subsidiaries occasionally invoice third-party customers in currencies other
than their functional currency. Movements in the invoiced currency relative to the functional currency could adversely impact
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our cash flows and results of operations. In addition, reported revenues made in non-U.S. currencies by our subsidiaries,
when translated into U.S. dollars for financial reporting purposes, fluctuate due to exchange rate movements. Any of these
factors could have a material adverse impact on our business and results of operations. Furthermore, while some risks can be
hedged using derivatives or other financial instruments, or may be insurable, such attempts to mitigate these risks may be
costly and not always successful.
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 performance and 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.
Adverse changes to the soundness of our suppliers and customers could affect our business and results of operations.
All of our businesses are exposed to risk associated with the creditworthiness of our key suppliers and customers,
including pulp and paper manufacturers and other industrial customers, many of which may be adversely affected by volatile
conditions in the financial markets, worldwide economic downturns, and difficult economic conditions. These conditions
could result in financial instability, bankruptcy, or other adverse effects at any of our suppliers or customers. The
consequences of such adverse effects could include the interruption of production at the facilities of our suppliers, the
reduction, delay or cancellation of customer orders, delays in or the inability of customers to obtain financing to purchase our
products or pay amounts due, and bankruptcy of customers or other creditors. Any adverse changes to the soundness of our
suppliers or customers may adversely affect our cash flow, profitability, and financial condition.
Changes in our effective tax rate may impact our results of operations.
We derive a significant portion of our revenue and earnings from our international operations, and are subject to
income and other taxes in the U.S. and numerous foreign jurisdictions. A number of factors may cause our effective tax rate
to fluctuate, including: changes in tax rates in various jurisdictions; unanticipated changes in the amount of profit in
jurisdictions with low statutory tax rates; the resolution of issues arising from tax audits with various tax authorities; changes
in the valuation of our deferred tax assets and liabilities; adjustments to income taxes upon finalization of various tax returns;
increases in expenses not deductible for tax purposes, including impairments of goodwill in connection with acquisitions;
changes in available tax credits or our ability to utilize foreign tax credits; and changes in tax laws or the interpretation of
such tax laws. Any of these factors could cause us to experience an effective tax rate significantly different from that of prior
periods or current expectations, which could have an adverse effect on our results of operations or cash flows.
We may be required to reorganize our operations in response to changing conditions in the worldwide economy and the pulp
and paper industry, and such actions may require significant expenditures and may not be successful.
We have undertaken various restructuring measures in the past in response to changing market conditions in the
countries in which we operate and in the pulp and paper industry in general, which have affected our business. 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 in which 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 results of operations. In addition, it is difficult to
accurately forecast our financial performance in periods of economic uncertainty in a region or globally, and the efforts we
have made or may make to align our cost structure may not be sufficient or able to keep pace with rapidly changing business
conditions. Our profitability may decline if our restructuring efforts do not sufficiently reduce our future costs and position us
to maintain or increase our sales.
Adverse changes to the soundness of financial institutions could affect us.
We have relationships with many financial institutions, including lenders under our credit facilities and insurance
underwriters, and from time to time, we execute transactions with counterparties in the financial industry, such as our interest
rate swap arrangement and other hedging transactions. In addition, our subsidiaries in China often hold banker's acceptance
drafts that are received from customers in the normal course of business. These drafts may be discounted or used to pay
vendors prior to the scheduled maturity date or submitted to an acceptance bank for payment at the scheduled maturity date.
These financial institutions or counterparties could be adversely affected by volatile conditions in the financial markets,
economic downturns, and difficult economic conditions. These conditions could result in financial instability, bankruptcy, or
other adverse effects at these financial institutions or counterparties. We may not be able to access credit facilities in the
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2013 Annual Report
future, complete transactions as intended, or otherwise obtain the benefit of the arrangements we have entered into with such
financial parties, which could adversely affect our business and results of operations.
Our debt may adversely affect our cash flow and may restrict our investment opportunities.
We entered into a five year unsecured revolving credit facility (2012 Credit Agreement) in the aggregate principal
amount of up to $100 million on August 3, 2012 and amended it on November 1, 2013. The 2012 Credit Agreement also
includes an uncommitted unsecured incremental borrowing facility of up to an additional $50 million. We have borrowed
amounts under the 2012 Credit Agreement and under another agreement to fund our operations. We 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 indebtedness 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 complete a merger or an acquisition,
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.
Our existing indebtedness bears interest at floating rates and as a result, our interest payment obligations on our
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indebtedness will increase if interest rates increase. As of December 28, 2013, a portion of our outstanding floating rate debt
was hedged through an interest rate swap agreement entered into in 2006. The unrealized loss associated with this swap
agreement was $0.8 million as of December 28, 2013. This unrealized loss represents the estimated amount for which the
swap agreement could be settled. The counterparty to the swap agreement could demand an early termination of the swap
agreement if we were in default under the 2012 Credit Agreement, or any agreement that amends or replaces the 2012 Credit
Agreement in which the counterparty is a member, and we were unable to cure the default. If this swap agreement were to be
terminated prior to the scheduled maturity date and if we were required to pay cash for the value of the swap, we would incur
a loss, which would adversely affect our financial results.
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. The 2012 Credit Agreement includes certain
financial covenants, and our failure to comply with these covenants could result in an event of default under the 2012 Credit
Agreement, the swap agreement, and our other credit facilities, and would have significant negative consequences for our
current operations and our future ability to fund our operations and grow our business. If we were unable to service our debt
and fund our business, we could be forced to reduce or delay capital expenditures or research and development expenditures,
seek additional financing or equity capital, restructure or refinance our debt, curtail or eliminate our cash dividend to
stockholders, or sell assets.
Restrictions in our 2012 Credit Agreement may limit our activities.
Our 2012 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,
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create liens,
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sell assets,
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enter into transactions with affiliates, and
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consolidate, merge, or transfer all or substantially all of our assets and the assets of our subsidiaries.
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We are also required to meet specified financial covenants under the terms of our 2012 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 currency 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 2012 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 were to occur, we might not have sufficient funds available to make the payments required 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.
Furthermore, our 2012 Credit Agreement requires that any amounts borrowed under the facility be repaid by the
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maturity date in 2018. If we are unable to roll over the amounts borrowed into a new credit facility and we do not have
sufficient cash in the United States to repay our borrowings, we may need to repatriate cash from our overseas operations to
fund the repayment and we would be required to pay taxes on the repatriated amounts. Such repatriation would have an
adverse effect on our effective tax rate and cash flows.
We have not independently verified the results of third-party research or confirmed assumptions or judgments on which they
may be based, and the forecasted and other forward-looking information contained therein is subject to inherent uncertainties.
We refer in this report and other documents that we file with the SEC to historical, forecasted and other forward-
looking information published by sources such as RISI, FEA (Forest Economic Advisors), and the U.S. Census Bureau that
we believe to be reliable. However, we have not independently verified this information, and with respect to the forecasted
and forward-looking information, have not independently confirmed the assumptions and judgments upon which such
information is based. Forecasted and other forward-looking information is necessarily based on assumptions regarding future
occurrences, events, conditions and circumstances and subjective judgments relating to various matters, and is subject to
inherent uncertainties. Actual results may differ materially from the results expressed or implied by, or based upon, such
forecasted and forward-looking information.
Our inability to protect our intellectual property or defend ourselves against the intellectual property claims of others could
have a material adverse effect on our business. In addition, litigation to enforce our intellectual property and contractual rights
or defend ourselves could result in significant litigation or licensing expense.
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. 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
countries, such as China, where the laws, courts, and administrative agencies may not protect our intellectual property rights
as fully as in the United States or Europe.
We seek to protect trade secrets and proprietary know-how, in part, through confidentiality and noncompetition
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.
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 or contractual rights against others. An
unfavorable outcome of any such litigation could have a material adverse effect on our business and results of operations.
Failure of our information systems or breaches of data security could impact our business.
We operate a geographically dispersed business and rely on the electronic storage and transmission of proprietary
and confidential information, including technical and financial information, among our operations, customers and suppliers.
In addition, for some of our operations, we rely on information systems controlled by third parties. As part of our ongoing
effort to upgrade our current information systems, we are implementing new enterprise resource planning software to manage
certain of our business operations. As we implement and add functionality, problems could arise that we have not foreseen.
System failures, network disruptions and breaches of data security could limit our ability to conduct business as normal,
including our ability to communicate and transact business with our customers and suppliers; result in the loss or misuse of
this information, the loss of business or customers, or damage to our brand or reputation; or interrupt or delay reporting our
financial results. Such system failures or unauthorized access could be caused by external theft or attack, misconduct by our
employees, suppliers, or competitors, or natural disasters. In addition, the cost and operational consequences of implementing
further data protection measures could be significant.
Our share price fluctuates and experiences price and volume volatility.
Stock markets in general and our common stock in particular experienced significant price and volume volatility
during the 2008 to 2009 economic recession and in the second half of 2011, and may experience significant price and volume
volatility from time to time in the future. The market price and trading volume of our common stock may continue to be
subject to significant fluctuations due not only to general stock market conditions but also to a change in sentiment in the
market regarding our operations, business prospects, or future funding. Given the nature of the markets in which we
12
Kadant Inc.
2013 Annual Report
participate and the volatility of orders, 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 share price and quarterly operating results
include:
–
failure of our products to pass contractually agreed upon acceptance tests, which would delay or prohibit recognition
of revenues under applicable accounting guidelines,
changes in the assumptions used for revenue recognized under the percentage-of-completion method of accounting,
fluctuations in revenues due to customer-initiated delays in product shipments,
failure of a customer, particularly in Asia, to comply with an order's contractual obligations or inability of a customer
to provide financial assurances of performance,
adverse changes in demand for and market acceptance of our products,
competitive pressures resulting in lower sales prices for 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,
changes in the estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, or expenses,
the impact of new acquisition accounting, including the treatment of acquisition and restructuring costs as period costs,
fluctuations in our effective tax rate,
the operating and share price performance of companies that investors consider to be comparable to us, and
changes in global financial markets and global economies and general market conditions.
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Anti-takeover provisions in our charter documents and under Delaware law 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.
Prior to July 2011, we had a shareholder rights plan, which may have had anti-takeover effects under certain
circumstances. This shareholder rights plan expired by its terms in July 2011 and was not renewed by our board of directors.
However, our board of directors could adopt a new shareholder rights plan in the future that could have anti-takeover effects
and might discourage, delay, or prevent a merger or acquisition that our board of directors does not believe is in our best
interests and those of our shareholders, including transactions in which shareholders might otherwise receive a premium for
their shares.
Item 1B. Unresolved Staff Comments
Not applicable.
Properties
Item 2.
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 alternative space as needed. The location and general
character of our principal properties as of year-end 2013 are as follows:
Papermaking Systems Segment
We own approximately 1,846,000 square feet and lease approximately 166,000 square feet, under leases expiring on
various dates ranging from 2014 to 2018, 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 2049 to 2061. Our principal
engineering and manufacturing facilities are located in Vitry-le-Francois, France; Jining, China; Valinhos, Brazil; Three
13
Kadant Inc.
2013 Annual Report
Rivers, Michigan, U.S.A; Auburn, Massachusetts, U.S.A; Theodore, Alabama, U.S.A; Weesp, The Netherlands; Wuxi,
China; Hindas, Sweden; Guadalajara, Mexico; Bury, England; Norrkoping, Sweden; Mason, Ohio, U.S.A; Huskvarna,
Sweden; and Summerstown, Ontario, Canada.
Wood Processing Systems Segment
We lease approximately 56,000 square feet of manufacturing and office space located in Surrey, British Columbia,
Canada.
Fiber-based Products
We own approximately 31,000 square feet of manufacturing and office space located in Green Bay, Wisconsin. We
also lease approximately 50,000 square feet of manufacturing space located in Green Bay, Wisconsin, on a tenant-at-will
basis.
Corporate
We lease approximately 12,000 square feet in Westford, Massachusetts, for our corporate headquarters under a lease
expiring in 2017.
Item 3. Legal Proceedings
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
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 closing market price on
the New York Stock Exchange for our common stock on February 14, 2014 was $35.90 per share.
The following table sets forth the high and low sales prices of our common stock for 2013 and 2012, as reported in
the consolidated transaction reporting system.
Quarter
First ............................................................................................
Second .......................................................................................
Third ..........................................................................................
Fourth.........................................................................................
$
High
Low
High
Low
28.74 $
32.20
35.04
41.95
24.10 $
24.15
30.32
31.11
26.00 $
27.10
25.19
26.97
21.49
21.00
20.50
21.59
We did not declare or pay any dividends on our common stock in 2012. The following table sets forth the per share
dividends declared on our common stock for 2013.
2013
2012
Quarter
First ...................................................................................................................................................................
Second ..............................................................................................................................................................
Third .................................................................................................................................................................
Fourth................................................................................................................................................................
0.125
0.125
0.125
0.125
On March 5, 2014, our board of directors raised our quarterly cash dividend to $0.15 per share and we expect to pay
2013
$
comparable cash dividends in the future. Nonetheless, the payment of dividends in the future will be at the discretion of the
board of directors and will depend upon, among other factors, our earnings, capital requirements, and financial condition. The
payment of cash dividends is subject to our compliance with the consolidated leverage ratio contained in our 2012 Credit
Agreement.
Holders of Common Stock
As of February 14, 2014, we had approximately 3,789 holders of record of our common stock. This does not include
holdings in street or nominee name.
14
Kadant Inc.
Issuer Purchases of Equity Securities
2013 Annual Report
The following table provides information about purchases by us of our common stock during the fourth quarter of
2013:
Issuer Purchases of Equity Securities
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
11,826,131
18,113,497
18,113,497
Average Price
Paid per
Share
Total Number of
Shares Purchased as
Part of Publicly
Announced
Plans (1)(2)
Total Number
of Shares
Purchased (1)(2)
–
50,000
–
50,000
Period
9/29/13 – 10/31/13 ...............................
11/1/13 – 11/30/13 ...............................
12/1/13 – 12/28/13 ...............................
Total .....................................................
___________________________________
(1) On October 29, 2012, our board of directors approved the repurchase by us of up to $20 million of our equity
– $
50,000 $
– $
50,000
–
37.73
–
37.73
$
$
$
securities during the period from November 7, 2012 to November 7, 2013. In the fourth quarter of 2013, no shares
were repurchased under this authorization.
(2) On November 4, 2013, our board of directors approved the repurchase by us of up to $20 million of our equity
securities during the period from November 8, 2013 to November 8, 2014. Repurchases may be made in public or
private transactions, including under Securities Exchange Act Rule 10b-5-1 trading plans. In the fourth quarter of
2013, we repurchased 50,000 shares of our common stock for $1.9 million under this authorization.
15
Kadant Inc.
Performance Graph
2013 Annual Report
This performance graph compares the cumulative, five-year total shareholder return assuming an investment of $100
(and the reinvestment of dividends) in our common stock, the Russell 3000 Stock Index and the Dow Jones U.S. Paper Total
Stock Market (TSM) 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 values are calculated using the last trading day prior to the end of our
fiscal year.
Kadant Inc. .....................................................
Russell 3000 ...................................................
Dow Jones U.S. Paper Total Stock Market .....
1/3/09
100.00
100.00
100.00
1/2/10
117.53
124.57
219.38
1/1/11
173.56
145.66
251.35
12/31/11
166.49
147.16
266.35
12/29/12 12/28/13
304.18
193.37
227.86
168.42
451.57
330.67
16
Kadant Inc.
2013 Annual Report
Item 6. Selected Financial Data
(In thousands, except per share amounts)
Statement of Operations Data
Revenues .............................................................
Operating Income (Loss) ...................................
2013 (a)
2012
2011 (b)
2010 (c)
2009 (d)
$
344,499 $
33,303
331,751 $
36,444
335,460 $
38,710
270,029 $
24,949
225,565
(474)
Amounts Attributable to Kadant:
Income (Loss) from Continuing Operations .......
(Loss) Income from Discontinued Operation .....
Net Income (Loss) .............................................
$
23,481
(62)
23,419 $
30,880
743
31,623 $
33,584
(9)
33,575 $
18,409
98
18,507 $
(5,906)
(18)
(5,924)
Earnings (Loss) per Share for Continuing
Operations:
Basic ..........................................................
Diluted .......................................................
$
$
2.11 $
2.07 $
2.70 $
2.66 $
2.77 $
2.74 $
1.49 $
1.48 $
(0.48)
(0.48)
Earnings (Loss) per Share:
Basic ..........................................................
Diluted .......................................................
$
$
2.10 $
2.07 $
2.76 $
2.73 $
2.77 $
2.74 $
1.50 $
1.48 $
(0.48)
(0.48)
Cash Dividend Declared per Common Share .....
$
0.50 $
– $
– $
– $
–
$
Balance Sheet Data
Working Capital (e) ...........................................
Total Assets ........................................................
Long-Term Obligations ......................................
Stockholders' Equity ...........................................
______________________
(a)
Reflects a $1.7 million pre-tax gain on the sale of real estate and $1.8 million of pre-tax restructuring costs.
(b) Reflects a $2.3 million pre-tax gain on the sale of real estate and $0.4 million of pre-tax restructuring costs.
(c)
78,499 $
358,398
11,750
223,630
106,486 $
442,168
38,010
270,421
100,301 $
358,948
6,250
249,967
79,006 $
336,772
17,250
207,301
Reflects a $1.0 million pre-tax gain on the sale of real estate, a $0.2 million pre-tax curtailment gain, and $0.2 million
of pre-tax restructuring costs.
66,917
307,656
22,750
194,031
(d) Reflects $4.4 million of pre-tax restructuring costs.
(e)
Includes ($0.1) million, $0.1 million, ($2.0) million, ($2.0) million, and ($1.9) million in 2013, 2012, 2011, 2010, and
2009, respectively, associated with the discontinued operation.
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 our consolidated financial statements beginning on page F-1 of this Report.
Overview
Company Overview
We are a leading global supplier of equipment used in process industries, including papermaking, paper recycling,
and OSB. In addition, we manufacture granules made from papermaking byproducts. We have a large customer base that
includes most of the world's major paper and OSB 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.
Our continuing operations are comprised of two reportable operating segments: Papermaking Systems and Wood
Processing Systems, and a separate product line, Fiber-based Products. Through our Papermaking Systems segment, we
develop, manufacture, and market a range of equipment and products for the global papermaking, paper recycling, and
process industries. Through our Wood Processing Systems segment, we design, manufacture, and market stranders and
related equipment used in the production of oriented strand board, an engineered wood panel product used primarily in home
construction, and sell debarking and wood chipping equipment used in the forest products and the pulp and paper industries.
The 2013 results for the Wood Processing Systems segment are included in "Other" within management's discussion and
analysis of financial condition and results of operations. Through our Fiber-based Products business, 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.
17
Kadant Inc.
2013 Acquisitions
2013 Annual Report
Our Papermaking Systems segment acquired all the outstanding stock of Companhia Brasileira de Tecnologia
Industrial (CBTI) for approximately $8.1 million in cash and $0.5 million in assumed liabilities owed to us. CBTI was a
long-time licensee of our doctoring, cleaning, filtration, and stock preparation products. In addition, our Papermaking
Systems segment acquired certain assets of a Sweden-based developer and supplier of high-efficiency cleaners and approach
flow systems for approximately $7.1 million in cash. This acquisition expanded our product offerings in our Stock-
Preparation product line, particularly for virgin pulp and approach flow applications.
We acquired all the outstanding shares of Carmanah for $51.6 million, subject to a post-closing adjustment.
Carmanah, located in Surrey, British Columbia, Canada is a global leader in the design and manufacture of stranders and
related equipment used in the production of oriented strand board. Carmanah also supplies debarking and wood chipping
equipment used in the forest products and the pulp and paper industries. The results for Carmanah are included in our Wood
Processing Systems segment.
International Sales
During 2013 and 2012, approximately 63% and 61%, respectively, of our sales were to customers outside the United
States, principally in Europe and China. 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 position 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 to the consolidated financial statements.
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.
•
Revenue Recognition Methods. We recognize revenue under Accounting Standards Codification (ASC) 605,
"Revenue Recognition" (ASC 605), when the following criteria are met: persuasive evidence of an arrangement
exists, delivery has occurred or service has been rendered, the sales price is fixed or determinable, and
collectability is reasonably assured. Under ASC 605, when the terms of sale include customer acceptance
provisions, and compliance with those provisions cannot be demonstrated until customer acceptance, we
recognize revenues upon such acceptance. Provisions for discounts, warranties, returns, and other adjustments are
provided for in the period in which the related sales are recorded.
Most of our revenue is recognized in accordance with the accounting policies in the preceding paragraph.
However, when a sale arrangement involves multiple elements, such as equipment and installation, we consider
the guidance in ASC 605. Such transactions are evaluated to determine whether the deliverables in the
arrangement represent separate units of accounting based on the following criteria: the delivered item has value to
the customer on a stand-alone basis, and if the contract includes a general right of return relative to the delivered
item, delivery or performance of the undelivered item is considered probable and substantially under our control.
Revenue is allocated to each unit of accounting or element based on relative selling prices. We determine relative
selling prices by using either vendor-specific objective evidence (VSOE) if that exists, or third-party evidence of
selling price. When neither VSOE or third-party evidence of selling price exists for a deliverable, we use our best
estimate of the selling price for that deliverable. In cases in which elements cannot be treated as separate units of
accounting, the elements are combined into a single unit of accounting for revenue recognition purposes.
18
Kadant Inc.
2013 Annual Report
The complexity of all issues related to the assumptions, risks, and uncertainties inherent in the application
of ASC 605 affects the amounts reported as revenues in our consolidated financial statements. Under ASC 605, 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.
• Percentage-of-Completion. Revenues recorded under the percentage-of-completion method of accounting pursuant
to ASC 605 were $19.8 million in 2013, $42.2 million in 2012, and $29.2 million in 2011. We determine the
percentage of completion 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. Although we make every effort to ensure the
accuracy of our estimates in the application of this accounting policy, if our actual results were to differ 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.
• Completed Contract Method. For long-term contracts that do not meet the criteria under ASC 605-35 to be
accounted for under the percentage-of-completion method, we recognize revenue using the completed contract
method. When using the completed contract method, we recognize revenue when the contract has been substantially
completed, the product has been delivered, and, if applicable, the customer acceptance criteria have been met.
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 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 had in the past.
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 results and cash flows in that period.
Warranty Obligations. 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 occurrence 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 may not continue to
experience the same warranty return rates or repair costs that we have in the past.
A significant increase in warranty occurrence 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.
Income Taxes. We operate in numerous countries under many legal forms and, as a result, are subject to the
jurisdiction of numerous domestic and non-U.S. tax authorities, as well as to tax agreements and treaties among these
governments. Determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and
regulations and the use of estimates and assumptions regarding significant future events, such as the amount, timing and
character of deductions, permissible revenue recognition methods under the tax law and the sources and character of income
and available tax credits. Changes in tax laws, regulations, agreements and treaties, currency-exchange restrictions or our
level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of current and deferred
tax balances and our results of operations.
19
Kadant Inc.
2013 Annual Report
We estimate the degree to which our deferred tax assets on deductible temporary differences and tax loss or credit
carryforwards will result in an income tax benefit based on the expected profitability by tax jurisdiction, and provide a
valuation allowance for these deferred tax assets if it is more likely than not that they will not be realized in the future. If it
were to become more likely than not that these deferred tax assets would be realized, we would reverse the related valuation
allowance. Our tax valuation allowance was $13.9 million at year-end 2013. Should our actual future taxable income by tax
jurisdiction vary from our estimates, additional allowances or reversals thereof may be necessary. When assessing the need
for a valuation allowance in a tax jurisdiction, we evaluate the weight of all available evidence to determine whether it is
more likely than not that some portion or all of the deferred income tax assets will not be realized. As part of this evaluation,
we consider our cumulative three-year history of earnings before income taxes, taxable income in prior carryback years,
future reversals of existing taxable temporary differences, prudent and feasible tax planning strategies, and expected future
results of operations. As of year-end 2013, we continued to maintain a valuation allowance in the U.S. against our state
operating loss carryforwards due to the uncertainty of future profitability in state jurisdictions in the U.S. As of year-end
2013, we maintained a full valuation allowance in certain foreign jurisdictions because of the uncertainty of future
profitability. In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. It is our
policy to provide for uncertain tax positions and the related interest and penalties based upon our assessment of whether a tax
benefit is more likely than not to be sustained upon examination by tax authorities. At year-end 2013, we believe that we
have appropriately accounted for any liability for unrecognized tax benefits. To the extent we prevail in matters for which a
liability for an unrecognized tax benefit is established or are required to pay amounts in excess of the liability, our effective
tax rate in a given financial statement period may be affected.
We reinvest certain earnings of our international subsidiaries indefinitely, and accordingly, we do not provide for
U.S. income taxes that could result from the remittance of such foreign earnings. Through year-end 2013, we have not
provided for U.S. income taxes on approximately $145.9 million of unremitted foreign earnings. The U.S. tax cost has not
been determined due to the fact that it is not practicable to estimate at this time. The related foreign tax withholding, which
would be required if we were to remit these foreign earnings to the U.S., would be approximately $2.0 million.
Valuation of Goodwill and Intangible Assets. We evaluate the recoverability of goodwill and indefinite-lived
intangible assets as of the end of each fiscal year, or more frequently if events or changes in circumstances, such as a
significant 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. In 2011, we adopted an Accounting Standards Update (ASU) that allows for the
goodwill impairment analysis to start with an assessment of qualitative factors to determine whether it is more likely than not
that the fair value of a reporting unit is less than its carrying amount. At December 28, 2013 and December 29, 2012, we
performed a qualitative goodwill impairment analysis. These impairment analyses included an assessment of certain
qualitative factors including, but not limited to, the results of prior fair value calculations, the movement of our share price
and market capitalization, the reporting unit and overall financial performance, and macroeconomic and industry conditions.
We considered the qualitative factors and weighed the evidence obtained, and we determined that it is not more likely than
not that the fair value of any of the reporting units is less than its carrying amount. Although we believe the factors
considered in the impairment analysis are reasonable, significant changes in any one of the assumptions used could produce a
different result.
If, after assessing the qualitative factors, we were to determine that it is more likely than not that the fair value of a
reporting unit is less than its carrying amount, then we would perform a two-step impairment test (a quantitative analysis). In
the first step of the two-step impairment test, 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 and
requires assumptions related to revenue and operating income growth, asset-related expenditures, working capital levels, and
other market participant assumptions. The revenue growth rates included in the forecasts are our best estimates based on
current and anticipated market conditions, and the profitability assumptions are projected based on current and anticipated
cost structures. Long-range forecasting involves uncertainty which increases with each successive period. Key assumptions,
such as revenue growth rates and profitability, especially in the outer years involve a greater degree of uncertainty.
At December 28, 2013 and December 29, 2012, we performed a quantitative impairment analysis on our indefinite-
lived intangible asset and determined that the asset was not impaired.
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 indicators of impairment were identified in 2013 or 2012.
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. A prolonged economic downturn,
weakness in demand for our products, especially capital equipment products, or contraction in capital spending by paper
companies or OSB manufacturers in our key markets could negatively affect the revenue and profitability assumptions used
in our assessment of goodwill and intangible assets, which could result in additional impairment charges. Any future
impairment loss could have a material adverse effect on our long-term assets and operating expenses in the period in which
an impairment is determined to exist.
20
Kadant Inc.
2013 Annual Report
Inventories. We value our inventory at the lower of the actual cost (on a first-in, first-out; or weighted average basis)
or market value and include materials, labor, and manufacturing overhead. We regularly review inventory quantities on hand
and compare these amounts to historical and forecasted usage of and demand for each particular product or product line. We
record a charge to cost of revenues for excess and obsolete inventory to reduce the carrying value of the inventories to net
realizable value. Inventory writedowns have historically been within our expectations and the provisions established. A
significant decrease in demand for our products 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.
Pension and Other Retiree Benefits. We sponsor a noncontributory defined benefit retirement plan for the benefit of
eligible employees at our Kadant Solutions division and the corporate office. Our unfunded benefit obligation related to this
plan totaled $1.7 million at year-end 2013 and the fair value of plan assets totaled $26.1 million. In addition, several of our
U.S. and non-U.S. subsidiaries sponsor defined benefit pension and other retiree benefit plans with an aggregate unfunded
benefit obligation of $5.6 million at year-end 2013.
The cost and obligations of these arrangements are calculated using many assumptions to estimate the benefits that
the employee earns while working, the amount of which cannot be completely determined until the benefit payments cease.
Major assumptions used in accounting for these employee benefit plans include the discount rate, expected return on plan
assets and rate of increase in employee compensation levels. Assumptions are determined based on Company data and
appropriate market indicators in consultation with third-party actuaries, and are evaluated each year as of the plans'
measurement dates. The fair value of plan assets is determined based on quoted market prices and observable market inputs.
The unrecognized actuarial loss associated with these plans totaled $6.9 million at year-end 2013, $0.4 million of which we
expect to recognize in 2014. Should any of these assumptions change, they would have an effect on net periodic pension
costs and the unfunded benefit obligation. The projected benefit obligation and expense associated with these plans are
sensitive to changes in the discount rate. For the noncontributory benefit retirement plan at our Kadant Solutions division, a
50 basis point decrease in the 2013 discount rate would have resulted in an increase in pension expense of $0.2 million and
an increase in the projected benefit obligation of $2.1 million.
Industry and Business Outlook
Our products are primarily sold in global process industries, including papermaking, paper recycling, and OSB. Our
bookings were $343 million in 2013, including $25 million from acquisitions, compared to $300 million in 2012. The paper
industry in North America has remained relatively stable in 2013 with good performance in some grades, such as
containerboard, while demand for printing, writing, and newsprint grades continues to decline. Operating rates in the
relatively strong containerboard sector were 96% for 2013, while printing and writing grades in North America were 86%.
The housing market in North America continues to show signs of recovery. Our bookings in North America were $162
million in 2013, up 10% compared to 2012. The paper industry in Europe continues to be weak, but investments in upgrades
to papermaking equipment are continuing, albeit at a moderate pace. Our bookings in Europe were $84 million in 2013, up
12% compared to 2012. Our bookings in China were $50 million in 2013, up 27% compared to 2012; however, the overall
economy in China has been slowing with 2013 economic growth at 7.7% and over-capacity in the paper industry negatively
impacting investments. In South America, the Brazilian economy advanced slightly in 2013 and industrial production grew
only 1.2%. Despite this current slowdown, tissue and containerboard demand is expected to grow in Brazil at a rate of five to
seven percent per year over the next five years based on forecasts by Resource Information Systems Inc. analysts. Our
bookings in South America benefited from our acquisition of our Brazilian licensee in 2013 increasing 53% to $28 million in
2013 compared to $18 million in 2012.
We expect to achieve GAAP (generally accepted accounting principles) diluted earnings per share (EPS) from
continuing operations of $0.38 to $0.40 in the first quarter of 2014 on revenues of $94 to $96 million. Our first quarter
guidance includes estimated restructuring costs of $0.02 per share and estimated expense of $0.15 per share associated with
acquired profit in inventory and backlog from our acquisitions in 2013. For the full year, we expect to achieve GAAP diluted
EPS of $2.60 and $2.70 on revenues of $405 to $415 million. The full year guidance includes estimated restructuring costs of
$0.02 per share and estimated expense of $0.19 per share associated with acquired profit in inventory and backlog from our
acquisitions in 2013. We expect the first quarter of 2014 to be our weakest quarter of the year due to relatively lower
revenues and the impact of expenses associated with acquired profit in inventory and backlog. We are projecting improved
bookings in the first half of 2014 and expect an increase in revenues and earnings in the second quarter of 2014 and for the
remaining quarters of the year.
21
Kadant Inc.
Results of Operations
2013 Compared to 2012
2013 Annual Report
The following table sets forth our consolidated statement of income expressed as a percentage of total revenue:
Revenues ...............................................................................................................................
100%
100%
2013
2012
Costs and Operating Expenses:
Cost of revenues ..........................................................................................................
Selling, general, and administrative expenses..............................................................
Research and development expenses ...........................................................................
Restructuring costs and other expense (income), net ...................................................
Operating Income .................................................................................................................
Interest Income (Expense), Net.............................................................................................
Income from Continuing Operations Before Provision for Income Taxes ...........................
Provision for Income Taxes ..................................................................................................
Income from Continuing Operations ....................................................................................
Revenues
Revenues for 2013 and 2012 are as follows:
(In thousands)
Revenues:
Papermaking Systems ..................................................................................................
Other ............................................................................................................................
54
34
2
–
90
10
–
10
3
7%
56
31
2
–
89
11
–
11
2
9%
2013
2012
$
$
328,708 $
15,791
344,499 $
321,026
10,725
331,751
Papermaking Systems Segment. Revenues at the Papermaking Systems segment increased $7.7 million, or 2%, to
$328.7 million in 2013 from $321.0 million in 2012. The 2013 period included $20.8 million in revenues from acquisitions
and an increase of $3.8 million from the favorable effects of currency translation, largely offset by decreased demand for our
capital products in our Stock-Preparation product line.
Other. Revenues from our other businesses increased $5.1 million, or 47%, to $15.8 million in 2013 from $10.7
million in 2012 due to the inclusion of $4.6 million in revenues from our acquisition of Carmanah in the fourth quarter of
2013.
Papermaking Systems Segment by Product Line. The following table presents revenues for our Papermaking Systems
segment by product line, the changes in revenues by product line between 2013 and 2012, and the changes in revenues by
product line between 2013 and 2012 excluding the effect of currency translation. The increase (decrease) in revenues
excluding the effect of currency translation represents the increase (decrease) resulting from the conversion of 2013 revenues
in local currency into U.S. dollars at the 2012 exchange rates, and then comparing this result to the actual revenues in 2012.
The presentation of the changes in revenues by product line excluding the effect of currency translation and acquisitions is a
non-GAAP measure. We believe this non-GAAP measure helps investors gain an understanding of our underlying
operations, consistent with how management measures and forecasts our performance, especially when comparing such
results to prior periods or forecasts. This non-GAAP measure should not be considered superior to or a substitute for the
corresponding GAAP measure.
(In millions)
Papermaking Systems Product Lines:
Stock-Preparation............................................................
Doctoring, Cleaning, & Filtration ...................................
Fluid-Handling ................................................................
22
2013
2012
Increase
(Decrease)
Increase
(Decrease)
Excluding
Effect of
Currency
Translation
$
$
122.7 $
112.6
93.4
328.7 $
123.9 $
104.5
92.6
321.0 $
(1.2) $
8.1
0.8
7.7 $
(3.6)
7.1
0.4
3.9
Kadant Inc.
2013 Annual Report
Revenues in our Stock-Preparation product line in 2013 included $13.1 million in revenues from acquisitions and an
increase of $2.4 million from the favorable effect of currency translation compared to 2012. Excluding revenues from
acquisitions and the favorable effect of currency translation, revenues in our Stock-Preparation product line decreased $16.7
million, or 13%, due to lower demand for capital products at our North American, and to a lesser extent, Chinese operations.
Revenues in our Doctoring, Cleaning, & Filtration product line in 2013 included $6.4 million in revenues from acquisitions
and an increase of $1.0 million from the favorable effect of currency translation compared to 2012. Excluding revenues from
acquisitions and the favorable effect of currency translation, revenues from our Doctoring, Cleaning, & Filtration product line
in 2013 increased $0.7 million, or 1%, compared to 2012 primarily due to increased demand for our parts and consumables
products. Revenues in our Fluid-Handling product line increased $0.8 million, or 1%, in 2013 compared to 2012, including
$1.3 million from acquisitions and an increase of $0.4 million from the favorable effect of currency translation.
Gross Profit Margin
Gross profit margins for 2013 and 2012 are as follows:
Gross Profit Margin:
Papermaking Systems ................................................................................................
Other ..........................................................................................................................
2013
2012
46.1%
38.9%
45.8%
43.7%
50.1%
43.9%
Papermaking Systems Segment. The gross profit margin at the Papermaking Systems segment increased to 46.1% in
2013 from 43.7% in 2012 due to the sale of an increased proportion of parts and consumables products as well as higher
margins achieved on our parts and consumables products.
Other. The gross profit margin at our other businesses decreased to 38.9% in 2013 from 50.1% in 2012 primarily due
to the inclusion of a relatively low gross profit margin from our Carmanah acquisition in 2013 as a result of $1.1 million of
expense related to acquired profit in inventory.
Operating Expenses
Selling, general, and administrative expenses as a percentage of revenues were 34% and 31% in 2013 and 2012,
respectively. Selling, general, and administrative expenses increased $14.5 million, or 14%, to $117.6 million in 2013 from
$103.1 million in 2012, including increases of $11.2 million from selling, general, and administrative expenses from our
acquisitions as well as transaction-related expenses, and $1.0 million from the unfavorable effect of foreign currency
translation.
Total stock-based compensation expense was $5.2 million and $4.8 million in 2013 and 2012, respectively, and is
included in selling, general, and administrative expenses.
Research and development expenses increased $0.7 million, or 13%, to $6.7 million in 2013 from $6.0 million in
2012 and represented 2% of revenues in both periods. The increase in research and development expenses in 2013 primarily
related to product development costs in our Stock-Preparation product line.
Restructuring Costs and Other Expense (Income), Net
Restructuring costs and other expense (income), net were costs of $0.1 million and $0.3 million in 2013 and 2012,
respectively.
We recorded net costs of $0.1 million in 2013, including restructuring charges of $1.8 million, net of a pre-tax gain
of $1.7 million on the sale of assets in China. The restructuring costs included severance costs of $1.1 million associated with
the reduction of 22 employees in Brazil and severance costs of $0.5 million associated with the reduction of 25 employees in
Sweden. Also included in restructuring costs were facility-related costs of $0.2 million. We estimate annualized savings of
$1.3 million in selling, general, and administrative expenses and $1.7 million in cost of revenues once these restructuring
actions have been completed. These actions were taken to streamline our operations as a result of our recent acquisitions. All
of these items occurred in the Papermaking Systems segment.
We recorded other expense of $0.3 million in 2012 resulting from accelerated depreciation associated with the
disposal of equipment in China related to a facility consolidation.
Interest Income
Interest income increased $0.3 million, or 95%, to $0.6 million in 2013 from $0.3 million in 2012 primarily due to
higher average interest rates in 2013.
Interest Expense
Interest expense increased $0.1 million, or 8%, to $0.9 million in 2013 from $0.8 million in 2012 primarily due to
higher average outstanding borrowings in 2013.
23
Kadant Inc.
Provision for Income Taxes
2013 Annual Report
Our provision for income taxes was $9.3 million and $4.9 million in 2013 and 2012, respectively, and represented
28% and 14% of pre-tax income. The effective tax rate of 28% in 2013 included a recurring rate of 31%, offset in part by a
3% discrete tax benefit primarily due to the reduction of the 2012 U.S. tax cost of foreign earnings and a benefit from the
2012 U.S. research and development tax credit, both of which resulted from U.S. tax legislation enacted in January 2013. In
addition, our effective tax rate in 2013 benefited from the release of valuation allowances in the U.S. and several foreign
jurisdictions due to an increase in current year and projected future income. The effective tax rate of 14% in 2012 included a
recurring rate of 26%, offset in part by a 12% discrete tax benefit primarily associated with the reversal of the valuation
allowance related to U.S. foreign tax credits. The reversal of the valuation allowance related to a change in our judgment with
respect to the future utilization of the credits due to expected profitability and foreign source income in the U.S. We expect
our effective tax rate in 2014 will increase slightly compared to 2013, including increases related to the U.S. tax cost of
foreign earnings and research and development tax credits, both due to the expiration of U.S. tax legislation at the end of
2013, and the reversal of valuation allowances in 2013. These increases will be partially offset by tax benefits related to the
worldwide distribution of earnings, the reversal of certain tax reserves, and a decrease in nondeductible expenses.
Income from Continuing Operations
Income from continuing operations decreased $7.4 million, or 24%, to $23.7 million in 2013 from $31.1 million in
2012, including a decrease in operating income of $3.1 million and an increase in provision for income taxes of $4.5 million
(see Revenues, Gross Profit Margin, Operating Expenses, and Provision for Income Taxes discussed above).
(Loss) Income from Discontinued Operation
(Loss) income from the discontinued operation included a loss of $0.1 million in 2013 compared to income of $0.7
million in 2012. The 2012 period included pre-tax income of $1.2 million from the discontinued operation primarily due to a
benefit of $1.6 million from the reduction in the estimated claims associated with the class action lawsuit, partially offset by
legal and associated costs of $0.4 million.
Recent Accounting Pronouncements
Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward,
a Similar Tax Loss, or a Tax Credit Carryforward Exists. In July 2013, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) No. 2013-11. Currently, GAAP does not include explicit guidance on the
financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a
tax credit carryforward exists. This ASU clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax
benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss
carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss
carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the
applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the
tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax
asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should
not be combined with deferred tax assets. This ASU applies to all entities that have unrecognized tax benefits when a net
operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This ASU is effective
for fiscal years, and interim periods within those years, beginning after December 15, 2013, although early adoption is
permitted. This ASU will be applied prospectively to all unrecognized tax benefits that exist at the effective date. We have
not yet adopted this ASU and we are currently evaluating the effect it will have on our consolidated financial statements.
Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap
Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. In July 2013, the FASB issued ASU No. 2013-10. This
ASU permits the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting
purposes, in addition to the U.S. government treasury obligation rate and the London Interbank Offered Rate (LIBOR). This
ASU also removes the restriction on using different benchmark rates for similar hedges. This ASU is effective prospectively
for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. We adopted this ASU in the
third quarter of 2013 and the adoption did not have an effect on our consolidated financial statements. We will consider the
guidance in this ASU for future transactions in which we elect to apply hedge accounting of the benchmark interest rate.
Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon
Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. In
March 2013, the FASB issued ASU No. 2013-05. When a reporting entity (parent) ceases to have a controlling financial
interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity, the parent is
24
Kadant Inc.
2013 Annual Report
required to apply the guidance in subtopic 830-30 to release any related cumulative translation adjustment into net income.
Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in
the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided.
This ASU is effective prospectively for fiscal years and interim periods beginning after December 15, 2013. This ASU will
be applied prospectively to derecognition events occurring after the effective date. Early adoption is permitted. We do not
expect the adoption of this ASU to have a material effect on our consolidated financial statements.
2012 Compared to 2011
The following table sets forth our consolidated statement of income expressed as a percentage of total revenue:
Revenues ...............................................................................................................................
100%
100%
2012
2011
Costs and Operating Expenses:
Cost of revenues .........................................................................................................
Selling, general, and administrative expenses ............................................................
Research and development expenses .........................................................................
Restructuring costs and other expense (income), net .................................................
Operating Income .................................................................................................................
Interest Income (Expense), Net.............................................................................................
Income from Continuing Operations Before Provision for Income Taxes ...........................
Provision for Income Taxes ..................................................................................................
Income from Continuing Operations ....................................................................................
Revenues
Revenues for 2012 and 2011 are as follows:
(In thousands)
Revenues:
Papermaking Systems ................................................................................................
Fiber-based Products ..................................................................................................
56
31
2
–
89
11
–
11
2
9%
57
31
2
(1)
89
11
–
11
1
10%
2012
2011
$
$
321,026 $
10,725
331,751 $
324,865
10,595
335,460
Papermaking Systems Segment. Revenues at the Papermaking Systems segment decreased $3.8 million, or 1%, to
$321.0 million in 2012 from $324.8 million in 2011, including a decrease of $8.4 million from the unfavorable effects of
currency translation. Revenues in our Doctoring, Cleaning, & Filtration product line increased $12.2 million, or 13%,
primarily due to the sale of products from M-Clean, a European-based supplier of equipment used to clean paper machine
fabrics and rolls that we acquired in May 2011, and higher demand for our capital products. Offsetting this increase were
decreases in revenues of $8.0 million in our Fluid-Handling product line and $8.0 million in our Stock-Preparation product
line primarily due to decreased demand for our capital products.
Fiber-based Products. Revenues from our Fiber-based Products business increased slightly to $10.7 million in 2012
from $10.6 million in 2011.
Papermaking Systems Segment by Product Line. The following table presents revenues for our Papermaking Systems
segment by product line, the changes in revenues by product line between 2012 and 2011, and the changes in revenues by
product line between 2012 and 2011 excluding the effect of currency translation. The increase (decrease) in revenues
excluding the effect of currency translation represents the increase (decrease) resulting from the conversion of 2012 revenues
in local currency into U.S. dollars at the 2011 exchange rates, and then comparing this result to the actual revenues in 2011.
The presentation of the changes in revenues by product line excluding the effect of currency translation is a non-GAAP
measure. We believe this non-GAAP measure helps investors gain an understanding of our underlying operations, consistent
with how management measures and forecasts our performance, especially when comparing such results to prior periods or
forecasts. This non-GAAP measure should not be considered superior to or a substitute for the corresponding GAAP
measure.
25
Kadant Inc.
2013 Annual Report
(In millions)
Papermaking Systems Product Lines:
2012
2011
Increase
(Decrease)
Increase
(Decrease)
Excluding
Effect of
Currency
Translation
Stock-Preparation ............................................................
Doctoring, Cleaning, & Filtration ...................................
Fluid-Handling ................................................................
$
$
123.9 $
104.5
92.6
321.0 $
131.9 $
92.3
100.6
324.8 $
(8.0) $
12.2
(8.0)
(3.8) $
(5.6)
14.7
(4.5)
4.6
Revenues in our Stock-Preparation product line in 2012 decreased $5.6 million, or 4%, excluding a $2.4 million
unfavorable effect of currency translation, compared to 2011 due to lower demand for capital products at our Chinese
operations. Partially offsetting this decrease was an increase in demand for capital products at our European operations and
products at our North American operations. Revenues from our Doctoring, Cleaning, & Filtration product line in 2012
increased $14.7 million, or 16%, excluding a $2.5 million unfavorable effect of currency translation, compared to the prior
year period primarily due to the sale of products from our M-Clean business, which was acquired in May 2011, and increased
demand for our capital products. In our Fluid-Handling product line, revenues in 2012 decreased $4.5 million, or 5%,
excluding a $3.5 million unfavorable effect of currency translation, compared to 2011 primarily due to decreased demand for
capital products at our European operations.
Gross Profit Margin
Gross profit margins for 2012 and 2011 are as follows:
Gross Profit Margin:
Papermaking Systems ................................................................................................
Fiber-based Products ..................................................................................................
2012
2011
43.7%
50.1%
43.9%
43.1%
50.2%
43.3%
Papermaking Systems Segment. The gross profit margin at the Papermaking Systems segment increased to 43.7% in
2012 from 43.1% in 2011. This increase resulted primarily from higher gross profit margins in our Stock-Preparation product
line.
Fiber-based Products. The gross profit margin at our Fiber-based Products business decreased slightly to 50.1% in
2012 from 50.2% in 2011.
Operating Expenses
Selling, general, and administrative expenses as a percentage of revenues were 31% in both 2012 and 2011. Selling,
general, and administrative expenses increased $0.4 million, or less than 1%, to $103.1 million in 2012 from $102.7 million
in 2011. Selling, general, and administrative expenses in 2012 included an increase of $2.1 million from our M-Clean
business, which was acquired in May 2011, and an increase in compensation expense principally due to annual wage
increases. Partially offsetting these increases were decreases of $2.6 million from the favorable effect of foreign currency
translation and $1.3 million due to a lower provision for bad debts.
Total stock-based compensation expense was $4.8 million and $3.9 million in 2012 and 2011, respectively, and is
included in selling, general, and administrative expenses.
Research and development expenses increased $0.3 million, or 4%, to $6.0 million in 2012 from $5.7 million in 2011
and represented 2% of revenues in both periods.
Restructuring Costs and Other Expense (Income), Net
Restructuring costs and other expense (income), net included costs of $0.3 million in 2012 and other income of $1.9
million in 2011. Costs of $0.3 million in 2012 included accelerated depreciation associated with the anticipated disposal of
equipment in China related to a facility consolidation. Other income in 2011 included a gain of $2.3 million associated with
the sale of real estate in China, offset in part by restructuring costs of $0.4 million associated with the reduction of 73
employees in China to adjust our cost structure and streamline our operations. All of these items occurred in the Papermaking
Systems segment.
Interest Income
Interest income decreased $0.2 million, or 36%, to $0.3 million in 2012 from $0.5 million in 2011 primarily due to
lower average interest rates in 2012.
26
Kadant Inc.
Interest Expense
2013 Annual Report
Interest expense decreased $0.3 million, or 22%, to $0.8 million in 2012 from $1.1 million in 2011 primarily due to
lower average outstanding borrowings in 2012.
Provision for Income Taxes
Our provision for income taxes was $4.9 million and $4.3 million in 2012 and 2011, respectively, and represented
14% and 11% of pre-tax income. The effective tax rate of 14% in 2012 included a recurring rate of 26%, offset in part by a
12% discrete tax benefit primarily associated with the reversal of the valuation allowance related to U.S. foreign tax credits.
The reversal of the valuation allowance related to a change in our judgment with respect to the future utilization of the credits
due to expected profitability and foreign source income in the U.S. The effective tax rate of 11% in 2011 included a recurring
rate of 27%, offset in part by a 16% discrete tax benefit primarily associated with the reversal of certain tax reserves and
valuation allowances.
Income from Continuing Operations
Income from continuing operations decreased $2.8 million, or 8%, to $31.1 million in 2012 from $33.9 million in
2011, including a decrease in operating income of $2.3 million and an increase in provision for income taxes of $0.6 million
(see Revenues, Gross Profit Margin, Operating Expenses, Restructuring Costs and Other Expense (Income), Net, and
Provision for Income Taxes discussed above).
Income (Loss) from Discontinued Operation
Income (loss) from the discontinued operation included income of $0.7 million in 2012 compared to a loss of $9
thousand in 2011. Pre-tax income of $1.2 million from the discontinued operation in 2012 included a benefit of $1.6 million
from the reduction in the estimated claims associated with the class action lawsuit partially offset by legal and associated
costs of $0.4 million.
On October 24, 2011, we, Composites LLC, and other co-defendants entered into an agreement to settle a nationwide
class action lawsuit related to allegedly defective composites decking building products manufactured by Composites LLC
between April 2002 and October 2003. We paid $0.6 million with respect to approved claims under the class action
settlement in 2012.
Liquidity and Capital Resources
Consolidated working capital was $106.5 million and $100.3 million at year-end 2013 and year-end 2012,
respectively. Included in working capital are cash and cash equivalents of $50.0 million and $54.6 million at year-end 2013
and year-end 2012, respectively. At year-end 2013, $46.4 million of cash and cash equivalents was held by our foreign
subsidiaries.
2013
Our operating activities provided cash of $40.1 million in 2013, including $39.9 million provided by our continuing
operations and $0.2 million provided by our discontinued operation. Changes in working capital provided cash of $3.5
million in 2013, including $5.9 million from other current liabilities and $2.6 million from accounts payable. Cash provided
by an increase in other current liabilities primarily related to customer deposits on stock-preparation contracts. Cash provided
by an increase in accounts payable is primarily due to the timing of payments. These sources of cash were offset in part by
increases in accounts receivable and inventory, which used cash of $2.2 million and $2.0 million, respectively, primarily due
to the timing of payments and production in 2013.
Our investing activities used cash of $68.2 million in 2013, including $65.6 million for acquisitions and $6.3 million
for purchases of property, plant, and equipment. These uses of cash were offset in part by proceeds of $3.5 million from the
sale of property, plant, and equipment, primarily from the sale of real estate in China.
Our financing activities provided cash of $22.6 million in 2013 including $53.6 million of proceeds from
borrowings under our 2012 Credit Agreement. This source of cash was offset in part by cash used for principal payments on
our outstanding debt obligations of $21.8 million, repurchases of our common stock on the open market of $5.4 million, and
the payment of $4.2 million in cash dividends to stockholders.
2012
Our operating activities provided cash of $29.1 million in 2012, including $30.5 million provided by our continuing
operations and $1.4 million used by our discontinued operation. A decrease in other current liabilities used cash of $12.8
million in 2012 largely due to decreases in billings in excess of costs and fees and customer deposits both due to timing. A
decrease in accounts payable used cash of $5.9 million in 2012 primarily due to a reduction in raw material purchases.
Decreases in inventory and accounts receivable contributed cash of $10.3 million in 2012. The decrease in inventory resulted
primarily from lower inventory requirements in 2012 compared to the prior year period and the decrease in accounts
27
Kadant Inc.
2013 Annual Report
receivable resulted primarily from lower revenues. A decrease in the accrued liabilities of our discontinued operation used
cash of $1.4 million in 2012. This decrease was due to the payment of claims and associated costs related to the Composites
LLC class action settlement.
Our investing activities used cash of $3.4 million in 2012, including $4.3 million for purchases of property, plant,
and equipment, offset in part by proceeds of $0.8 million from the sale of property, plant, and equipment.
Our financing activities used cash of $19.3 million in 2012, including $14.5 million for the repurchase of our
common stock on the open market and $10.4 million for principal payments on our outstanding debt obligations. These uses
of cash were offset in part by borrowings of $5.0 million made under our revolving credit facility in 2012.
2011
Our operating activities provided cash of $34.3 million in 2011 primarily from our continuing operations. Increases
in accounts receivable and inventory used cash of $16.9 million in 2011 as a result of higher sales and increased order
activity compared to 2010. Increases in other current liabilities and accounts payable provided cash of $13.8 million in 2011.
The increase in other current liabilities in 2011 was largely due to increases in billings in excess of costs and fees due to the
timing of billings and accrued incentive and commission expenses related to improved operating performance worldwide.
The increase in accounts payable in 2011 primarily related to raw material purchases that resulted from an increase in
business volume.
Our investing activities used cash of $21.9 million in 2011. We used cash of $15.2 million for the acquisition of M-
Clean. We also used cash of $8.0 million for purchases of property, plant, and equipment. These uses of cash were offset in
part by proceeds of $2.4 million from the sale of property, plant, and equipment in 2011.
Our financing activities used cash of $27.0 million in 2011, including $16.1 million for the repurchase of our
common stock on the open market and $16.0 million for principal payments on our outstanding debt obligations. These uses
of cash were offset in part by borrowings of $5.0 million made under our revolving credit facility in 2011.
Revolving Credit Facility
We entered into a five-year unsecured revolving credit facility (2012 Credit Agreement) in the aggregate principal
amount of up to $100 million on August 3, 2012 and amended it on November 1, 2013. The 2012 Credit Agreement includes
an uncommitted unsecured incremental borrowing facility of up to an additional $50 million. The principal on any
borrowings made under the 2012 Credit Agreement is due on November 1, 2018. Interest on any loans outstanding under the
2012 Credit Agreement accrues and is payable quarterly in arrears at one of the following rates selected by us: (i) the highest
of (a) the federal funds rate plus 0.50% plus an applicable margin of 0% to 1%, (b) the prime rate, as defined, plus an
applicable margin of 0% to 1%, and (c) the Eurocurrency rate, as defined, plus 0.50% plus an applicable margin of 0% to 1%
or (ii) the Eurocurrency rate, as defined, plus an applicable margin of 1% to 2%. The applicable margin is determined based
upon the ratio of our total debt to EBITDA, as defined in the 2012 Credit Agreement. For this purpose, total debt is defined
as total debt less up to $25 million of unrestricted U.S. cash.
In November 2013, we borrowed 28.8 million Canadian dollars, or approximately $27.1 million, under the 2012
Credit Agreement to partially fund the acquisition of Carmanah.
Our obligations under the 2012 Credit Agreement may be accelerated upon the occurrence of an event of default
under the 2012 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 the Employment Retirement Income Security
Act (ERISA), unsatisfied judgments, the failure to pay certain indebtedness, and a change of control default. In addition, the
2012 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 3.5 to 1 and a minimum consolidated interest coverage
ratio of 3 to 1, and 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, arrangements affecting subsidiary distributions, entering into new
lines of business, and certain actions related to the discontinued operation. As of December 28, 2013, we were in compliance
with these covenants.
Loans under the 2012 Credit Agreement are guaranteed by certain of our domestic subsidiaries pursuant to a
Guarantee Agreement, effective August 3, 2012.
Commercial Real Estate Loan
On May 4, 2006, we borrowed $10 million under a promissory note (2006 Commercial Real Estate Loan). The 2006
Commercial Real Estate 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. As of December 28, 2013, the remaining balance on the 2006
Commercial Real Estate Loan was $6.4 million. Interest on the 2006 Commercial Real Estate 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 .75% margin.
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Kadant Inc.
2013 Annual Report
Our obligations under the 2006 Commercial Real Estate Loan may be accelerated upon the occurrence of an event
of default under the 2006 Commercial Real Estate 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 2012 Credit
Agreement or any successor credit facility would be an event of default under the 2006 Commercial Real Estate Loan.
Interest Rate Swap Agreement
We entered into a swap agreement in 2006 (2006 Swap Agreement) to convert the 2006 Commercial Real Estate
Loan from a floating to a fixed rate of interest. The 2006 Swap Agreement has the same terms and quarterly payment dates as
the corresponding debt, and reduces proportionately in line with the amortization of the 2006 Commercial Real Estate Loan.
Under the 2006 Swap Agreement, we receive a three-month LIBOR rate and pay a fixed rate of interest of 5.63%. As of
December 28, 2013, the interest rate swap agreement had an unrealized loss of $0.8 million. Our management believes that
any credit risk associated with the 2006 Swap Agreement is remote based on our financial position and the creditworthiness
of the financial institution issuing the swap agreement.
The counterparty to the 2006 Swap Agreement could demand an early termination of the swap agreement if we are
in default under the 2012 Credit Agreement, or any agreement that amends or replaces the 2012 Credit Agreement in which
the counterparty is a member, and we are unable to cure the default. An event of default under the 2012 Credit Agreement
includes customary events of default and failure to comply with financial covenants, including a maximum consolidated
leverage ratio of 3.5 to 1 and a minimum consolidated interest charge coverage ratio of 3 to 1. The unrealized loss of $0.8
million associated with the swap agreement as of December 28, 2013 represents the estimated amount that we would pay to
the counterparty in the event of an early termination.
Additional Liquidity and Capital Resources
On October 29, 2012, our board of directors approved the repurchase by us of up to $20 million of our equity
securities during the period from November 7, 2012 to November 7, 2013. We repurchased 319,733 shares of our common
stock for $8.2 million under this authorization. On November 4, 2013, our board of directors approved the repurchase by us
of up to $20 million of our equity securities during the period from November 8, 2013 to November 8, 2014. Through year-
end 2013, we had repurchased 50,000 shares of our common stock for $1.9 million under this authorization.
We paid cash dividends of $4.2 million in 2013 and on December 10, 2013, we declared a quarterly cash dividend
totaling $1.4 million, which was paid on February 6, 2014. In addition, on March 5, 2014, we declared a quarterly cash
dividend totaling approximately $1.7 million, which will be paid on May 7, 2014. Future declarations of dividends are
subject to our board of directors' approval and may be adjusted as business needs or market conditions change. The payment
of cash dividends is subject to our compliance with the consolidated leverage ratio contained in our 2012 Credit Agreement.
After year-end, 2013, we paid $2.6 million for the acquisition of a European producer of creping and coating blades.
As of year-end 2013, we had cash and cash equivalents of $50.0 million, of which $46.4 million was held by our
foreign subsidiaries. It is our intention to reinvest indefinitely the earnings of our international subsidiaries in order to support
the current and future capital needs of their operations. Through year-end 2013, we have not provided for U.S. income taxes
on approximately $145.9 million of unremitted foreign earnings. The U.S. tax cost has not been determined due to the fact
that it is not practicable to estimate at this time. The related foreign tax withholding, which would be required if we were to
remit the foreign earnings to the U.S., would be approximately $2.0 million.
It is our policy to provide for uncertain tax positions and the related interest and penalties based upon management's
assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. At December
28, 2013, we had a liability for unrecognized tax benefits and an accrual for the payment of interest and penalties totaling
$7.2 million. To the extent we prevail in matters for which a liability for an unrecognized tax benefit is established or are
required to pay amounts in excess of the liability, our effective tax rate in a given financial statement period may be affected.
Although we currently have no material commitments for capital expenditures, we plan to make expenditures of
approximately $9 to $10 million during 2014 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 debt repayments, capital projects, dividends, stock repurchases, or additional acquisitions. We believe that our existing
resources, together with the cash available from our credit facilities 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.
29
Kadant Inc.
2013 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 year-end 2013, 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, 6 and 7 to our consolidated financial statements.
(In millions)
Contractual Obligations and Other Commitments:
(a)(b)
Letters of credit and bank guarantees ..........
Retirement obligations on balance sheet .....
Long-term debt obligations ..........................
Operating lease obligations ..........................
Purchase obligations ....................................
Interest (c) ...................................................
Acquisition consideration ............................
Total (d)(e) ...........................................................
$
$
__________________________________________________________
Less than
1 Year
Payments Due by Period or Expiration of Commitment
4-5
Years
After
5 Years
2-3
Years
Total
8.6 $
1.3
0.6
3.1
0.6
1.1
3.3
18.6 $
1.9 $
1.3
5.7
3.1
0.6
2.0
–
14.6 $
– $
1.2
32.3
0.5
–
1.5
–
35.5 $
– $
3.5
–
–
–
–
–
3.5 $
10.5
7.3
38.6
6.7
1.2
4.6
3.3
72.2
(a) We have purchase obligations related to the acquisition of raw material made in the ordinary course of business that
(b)
may be terminated with minimal notice and are excluded from this table.
In the ordinary course of business, certain contracts contain 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 year-end 2013.
(d)
This table excludes $0.6 million of accrued restructuring costs. In addition, the table excludes an unrealized loss of
$0.8 million associated with our interest rate swap agreement as this amount would only be owed if the counterparty
were to demand an early termination of the agreement in the event of a default under our 2012 Credit Agreement.
This table excludes a liability for unrecognized tax benefits and an accrual for the related interest and penalties totaling
$7.2 million. Due to the uncertain nature of these income tax matters, we are unable to make a reasonably reliable
estimate as to if and when cash settlements with the appropriate taxing authorities will occur.
(e)
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.
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 pay-fixed" swap agreements in 2006 and 2008 to hedge
our exposure to variable rate long-term debt. Additionally, we use short-term forward contracts to manage certain exposures
to foreign currencies. We enter into forward currency-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 currency-exchange contracts hedge
transactions primarily denominated in U.S. dollars and euros. Gains and losses arising from forward contracts are recognized
as offsets to gains and losses resulting from the transactions being hedged. We do not hold or engage in transactions
involving derivative instruments for purposes other than risk management.
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 an immaterial impact on net income in both 2013 and 2012.
Our outstanding debt and interest rate swap agreements are sensitive to changes in interest rates. A portion of our
outstanding debt at year-end 2013 and all our outstanding debt at year-end 2012 was hedged with "receive-variable pay-
30
Kadant Inc.
2013 Annual Report
fixed" swap agreements. The fair values of the swap agreements are sensitive to changes in the 3-month LIBOR forward
curve. A 10% decrease in the 3-month LIBOR forward curve would have resulted in an immaterial impact on unrealized
losses at year-end 2013 and 2012.
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, Brazilian reals, and Swedish kroner. 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
stockholders' equity. A 10% decrease in functional currencies at year-end 2013 and 2012, relative to the U.S. dollar, would
have resulted in a reduction in stockholders' equity of $21.0 million and $18.3 million, respectively.
The fair value of forward currency-exchange contracts is sensitive to fluctuations in foreign currency exchange
rates. The fair value of forward currency-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% decrease in year-end
2013 and 2012 foreign currency exchange rates related to our contracts would have resulted in an increase in unrealized
losses on forward currency-exchange contracts of $0.3 million and $0.6 million in 2013 and 2012, respectively. Since we use
forward currency-exchange contracts as hedges of firm purchase and sale commitments, the unrealized gain or loss on
forward currency-exchange contracts resulting from changes in foreign currency exchange rates would be offset primarily by
corresponding changes in the fair value of the hedged items.
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 28, 2013. 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 28, 2013, our Chief Executive Officer and Chief Financial Officer concluded that as of December 28, 2013, our
disclosure controls and procedures were effective at the reasonable assurance level.
Management's Annual Report on Internal Control over Financial Reporting
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 28, 2013. In making this assessment, our
management used the criteria set forth in "Internal Control—Integrated Framework (1992)" issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, management believes that as of
December 28, 2013 our internal control over financial reporting is effective based on the criteria issued by COSO.
In 2013, we acquired all the outstanding shares of CBTI and Carmanah. Our audited consolidated financial
statements include the results of CBTI and Carmanah since the acquisition dates, including in aggregate total assets of $77.9
million as of December 28, 2013 and total revenues of $16.1 million in 2013, but management's assessment does not include
an assessment of the internal controls over financial reporting of CBTI and Carmanah.
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 may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Kadant Inc.
2013 Annual Report
Our independent registered public accountants, KPMG LLP, have issued an audit report on our internal control over
financial reporting, which is included herein on page F-4 and incorporated into this Item 9A by reference.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended) during the fiscal quarter ended December 28, 2013 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Not applicable.
Item 10. Directors, Executive Officers, and Corporate Governance
PART III
This information will be included under the heading "Election of Directors" in our 2014 proxy statement for our
2014 Annual Meeting of Shareholders and is incorporated in this Report by reference, except for the information concerning
executive officers, which is included under the heading "Executive Officers of the Registrant" in Item 1 of Part I of this
Report.
Section 16(a) Beneficial Ownership Reporting Compliance
The information required under Item 405 of Regulation S-K will be included under the heading "Stock Ownership–
Section 16(a) Beneficial Ownership Reporting Compliance" in our 2014 proxy statement and is incorporated in this Report
by reference.
Corporate Governance
The information required under Items 406 and 407 of Regulation S-K will be included under the heading "Corporate
Governance" in our 2014 proxy statement and is incorporated in this Report by reference.
Item 11. Executive Compensation
This information will be included under the headings "Executive Compensation", "Corporate Governance -
Compensation Committee Interlocks and Insider Participation", and "Compensation Discussion and Analysis" in our 2014
proxy statement and is incorporated in this Report by reference.
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 2014 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 28, 2013:
Equity Compensation Plan Information
Number of Securities
to be Issued upon
Exercise of
Outstanding Options,
Warrants, and
Rights
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants, and Rights
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
the First Column)
Plan Category
Equity compensation plans approved by
security holders ..........................................
735,476(1)
$
22.06(1)
386,435(2)
Equity compensation plans not approved by
security holders ..........................................
Total ..............................................................
$
–
735,476(1) $
–
22.06(1)
–
386,435(2)
__________________________________
(1)
Excludes an aggregate of 111,514 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 an aggregate of 111,514 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)
32
Kadant Inc.
2013 Annual Report
Item 13. Certain Relationships and Related Transactions, and Director Independence
This information will be included under the heading "Corporate Governance" in our 2014 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 Registered Public Accounting Firm" in our 2014
proxy statement and is incorporated in this Report by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)
The following documents are filed as part of this Report:
(1) Consolidated Financial Statements (see Index on Page F-1 of this Report):
Report of Independent Registered Public Accounting Firm
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 Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Comprehensive Income
Consolidated Statement of Cash Flows
Consolidated Statement of Stockholders' Equity
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
(3)
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.
Exhibits filed herewith or incorporated in this Report by reference are set forth in the Exhibit Index beginning on
page 35. 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 35.
33
Kadant Inc.
2013 Annual Report
Signatures
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.
Date: March 12, 2014
KADANT INC.
By:
/s/ Jonathan W. Painter
Jonathan W. Painter
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 12, 2014.
By:
By:
By:
By:
By:
By:
By:
By:
Signature
/s/ Jonathan W. Painter
Jonathan W. Painter
/s/ Thomas M. O'Brien
Thomas M. O'Brien
/s/ Michael J. McKenney
Michael J. McKenney
/s/ William A. Rainville
William A. Rainville
/s/ John M. Albertine
John M. Albertine
/s/ Scott P. Brown
Scott P. Brown
/s/ Thomas C. Leonard
Thomas C. Leonard
/s/ William P. Tully
William P. Tully
Title
Chief Executive Officer, President and Director
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Vice President, Finance and Chief Accounting Officer
(Principal Accounting Officer)
Director and Chairman of the Board
Director
Director
Director
Director
34
Exhibit
Number
2.1
2.2
2.3
2.4
3.1
3.2
Description of Exhibit
Exhibit Index
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)
First Amendment dated as of October 10, 2006 to the Asset Purchase Agreement dated as of 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 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 29, 2007 [File
No. 1-11406] and incorporated in this document by reference).
Second Amendment dated as of May 1, 2009 to the Asset Purchase Agreement dated as of 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 LDI Composites Co.
(filed as Exhibit 2.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 4, 2009 [File
No. 1-11406] and incorporated in this document by reference).
Share Purchase Agreement dated November 1, 2013, among Birch Hill Equity Partners II (QLP) L.P., Birch Hill
Equity Partners II (Entrepreneurs) L.P., Birch Hill Equity Partners II (Barbados) L.P., TD Capital Group
Limited, James Best, Robert McNicol, Ritchie McDonald, David Evans, Patrick Hinds, Michael Colwell,
Stephen Lee, Birch Hill Equity Partners II Ltd., and Kadant Canada Corp. (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).
10.1* 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).
10.2* Form of Amended and Restated Executive Retention Agreement (change in control agreement) between the
Company and its executive officers, as amended and restated on December 9, 2008 (filed as Exhibit 10.3 to the
Registrant's Annual Report on Form 10-K for the year ended January 3, 2009 [File No. 1-11406] and
incorporated in this document by reference).
10.3* Amended and Restated Equity Incentive Plan of the Registrant (filed as Exhibit 10.5 to the Registrant's Annual
Report on Form 10-K for the year ended January 3, 2009 [File No. 1-11406] and incorporated in this document
by reference).
10.4*
2001 Employees Equity Incentive Plan of the Registrant (filed as Exhibit 10.6 to the Registrant's Annual Report
on Form 10-K for the year ended January 3, 2009 [File No. 1-11406] and incorporated in this document by
reference).
10.5* Kadant Inc. Amended and Restated 2006 Equity Incentive Plan (filed as Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended April 3, 2011 [File No. 1-11406] and incorporated in this
document by reference).
10.6* Cash Incentive Plan of the Registrant (filed as Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for
the year ended January 3, 2009 [File No. 1-11406] and incorporated in this document by reference).
35
Exhibit
Number
Description of Exhibit
Exhibit Index
10.7* Summary of non-employee director compensation of the Registrant (filed as Exhibit 10.8 to the Registrant's
Annual Report on Form 10-K for the year ended December 29, 2012 [File No. 1-11406] and incorporated in this
document by reference).
10.8* Form of Restricted Stock Unit Award Agreement between the Company and its non-employee directors used for
change-in-control restricted stock unit awards (filed as Exhibit 10.18 to the Registrant's Annual Report on Form
10-K for the year ended January 2, 2010 [File No. 1-11406] and incorporated in this document by reference).
10.9* Form of Performance-Based Restricted Stock Unit Award Agreement between the Company and its executive
officers used for restricted stock unit awards granted in 2010 through 2013 (filed as Exhibit 10.20 to the
Registrant's Annual Report on Form 10-K for the year ended January 2, 2010 [File No. 1-11406] and
incorporated in this document by reference).
10.10* Notice of Amendment to Performance-Based Restricted Stock Unit Award Agreement between the Company
and its executive officers (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 28, 2013 [File No. 1-11406] and incorporated in this document by reference).
10.11* Form of Stock Option Agreement between the Company and its executive officers used for stock option awards
(filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the year ended January 2, 2010 [File
No. 1-11406] and incorporated in this document by reference).
10.12* Notice of Amendment to Stock Option Agreements between the Company and its executive officers used for
stock option awards (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 28, 2013 [File No. 1-11406] and incorporated in this document by reference).
10.13 Credit Agreement dated August 3, 2012, among Kadant Inc., 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,
RBS Citizens, N.A., as Administrative Agent and Multi-currency Administrative Agent (filed as Exhibit 99.1 to
the Registrant's Quarterly Report on Form 10-Q [File No. 1-11406] filed with the Commission on August 8,
2012 and incorporated in this document by reference).
10.14 First Amendment to Credit Agreement dated November 1, 2013, among Kadant Inc., 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, RBS Citizens, N.A., as Administrative Agent and Multi-currency Administrative
Agent.
10.15 Guarantee Agreement dated August 3, 2012, among Kadant Inc. and the Subsidiary Guarantors, in favor of RBS
Citizens, N.A., as Administrative Agent for the several banks and other financial institutions or entities from time
to time parties to the Credit Agreement dated as of August 3, 2012 (filed as Exhibit 99.2 to the Registrant's
Quarterly Report on Form 10-Q [File No. 1-11406] filed with the Commission on August 8, 2012 and
incorporated in this document by reference).
10.16
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).
10.17 Promissory Note in the principal amount of $10,000,000 dated May 4, 2006, between the Registrant 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).
10.18 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).
36
Exhibit
Number
10.19
Exhibit Index
Description of Exhibit
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).
10.20 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).
10.21 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).
21
Subsidiaries of the Registrant.
23.1
Consent of KPMG LLP.
23.2
Consent of Ernst & Young LLP.
31.1
31.2
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.
32
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.
101.INS XBRL Instance Document.**
101.SCH XBRL Taxonomy Extension Schema Document.**
101.CAL XBRL Taxonomy Calculation Linkbase Document.**
101.LAB XBRL Taxonomy Label Linkbase Document.**
101.PRE XBRL Taxonomy Presentation Linkbase Document.**
101.DEF XBRL Taxonomy Definition Linkbase Document.**
__________________________________
*
** Submitted electronically herewith.
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.
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i)
Consolidated Balance Sheet as of December 28, 2013 and December 29, 2012, (ii) Consolidated Statement of Income for the
years ended December 28, 2013, December 29, 2012 and December 31, 2011, (iii) Consolidated Statement of Comprehensive
Income for the years ended December 28, 2013, December 29, 2012 and December 31, 2011, (iv) Consolidated Statement of
Cash Flows for the years ended December 28, 2013, December 29, 2012 and December 31, 2011, (v) Consolidated Statement
of Stockholders' Equity for the years ended December 28, 2013, December 29, 2012 and December 31, 2011, and (vi) Notes
to Consolidated Financial Statements.
37
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:
Page
Report of Independent Registered Public Accounting Firm ........................................................................................
F-2
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements and Schedule .....
F-3
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting ................
F-4
Consolidated Balance Sheet as of December 28, 2013 and December 29, 2012 .........................................................
F-5
Consolidated Statement of Income for the years ended December 28, 2013, December 29, 2012, and December 31,
2011 ........................................................................................................................................................................
Consolidated Statement of Comprehensive Income for the years ended December 28, 2013, December 29, 2012, and
December 31, 2011 .................................................................................................................................................
Consolidated Statement of Cash Flows for the years ended December 28, 2013, December 29, 2012, and December
31, 2011 ..................................................................................................................................................................
Consolidated Statement of Stockholders' Equity for the years ended December 28, 2013, December 29, 2012, and
December 31, 2011 .................................................................................................................................................
F-6
F-7
F-8
F-9
Notes to Consolidated Financial Statements ................................................................................................................
F-10
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)(2):
Schedule II—Valuation and Qualifying Accounts ......................................................................................................
Page
F-43
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Kadant Inc.:
We have audited the accompanying consolidated balance sheets of Kadant Inc. as of December 28, 2013 and
December 29, 2012, and the related consolidated statements of income, comprehensive income, cash flows, and stockholders'
equity for the years then ended. Our audit also included the financial statement schedule for the years ended December 28,
2013 and December 29, 2012 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. as of December 28, 2013 and December 29, 2012 and the consolidated results of its
operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule for the years ended December 28, 2013 and December 29, 2012,
when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Kadant Inc.'s internal control over financial reporting as of December 28, 2013, based on criteria established in
Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 12, 2014 expressed an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
/s/ KPMG LLP
Boston, Massachusetts
March 12, 2014
F-2
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 statements of income, comprehensive income, cash flows, and
stockholders' equity for the fiscal year ended December 31, 2011. Our audit also included the financial statement schedule for
the fiscal year ended December 31, 2011 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 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 the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
results of Kadant Inc.'s operations and its cash flows for the fiscal year ended December 31, 2011, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for the fiscal year
ended December 31, 2011, when considered in relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
Boston, Massachusetts
March 12, 2014
/s/ Ernst & Young LLP
F-3
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 Kadant Inc.'s internal control over financial reporting as of December 28, 2013, based on criteria
established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). 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 included in the
accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on 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, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included
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.
In our opinion, Kadant Inc. maintained, in all material respects, effective internal control over financial reporting as
of December 28, 2013, based on the criteria established in Internal Control—Integrated Framework (1992) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Kadant Inc. acquired Companhia Brasileira de Tecnologia Industrial (CBTI) and Carmanah Design and
Manufacturing Inc. (Carmanah) during 2013. Management excluded from its assessment of the effectiveness of Kadant Inc.'s
internal control over financial reporting as of December 28, 2013, CBTI's and Carmanah's internal control over financial
reporting associated with total assets of $77.9 million and total revenues of $16.1 million included in the consolidated
financial statements of Kadant Inc. as of and for the year ended December 28, 2013. Our audit of internal control over
financial reporting of Kadant Inc. also excluded an evaluation of the internal control over financial reporting of CBTI and
Carmanah.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the 2013 consolidated financial statements of Kadant Inc. and our report dated March 12, 2014 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Boston, Massachusetts
March 12, 2014
F-4
Kadant Inc.
2013 Financial Statements
Consolidated Balance Sheet
(In thousands, except share amounts)
2013
2012
Assets
Current Assets:
Cash and cash equivalents .............................................................................................
Restricted cash ..............................................................................................................
Accounts receivable, less allowances of $2,689 and $2,306 .........................................
Inventories.....................................................................................................................
Unbilled contract costs and fees ....................................................................................
Other current assets .......................................................................................................
Assets of discontinued operation ..................................................................................
Total Current Assets ................................................................................................................
Property, Plant, and Equipment, at Cost, Net ..........................................................................
Other Assets .............................................................................................................................
Intangible Assets ......................................................................................................................
Goodwill ..................................................................................................................................
Total Assets .............................................................................................................................
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term obligations (Note 6) ...................................................
Accounts payable ..........................................................................................................
Accrued payroll and employee benefits ........................................................................
Customer deposits .........................................................................................................
Accrued warranty costs .................................................................................................
Deferred revenue ...........................................................................................................
Other current liabilities .................................................................................................
Liabilities of discontinued operation .............................................................................
Total Current Liabilities...........................................................................................................
Long-Term Deferred Income Taxes (Note 5) .........................................................................
Other Long-Term Liabilities (Note 3) ....................................................................................
Long-Term Obligations (Note 6) ............................................................................................
$
$
$
50,032 $
168
70,271
62,805
3,679
19,189
144
206,288
44,885
11,230
47,850
131,915
442,168 $
54,553
–
59,359
42,077
2,800
16,291
513
175,593
39,168
10,145
26,095
107,947
358,948
625 $
28,388
19,116
28,174
4,571
4,402
14,313
213
99,802
17,457
16,478
38,010
625
23,124
16,358
14,811
4,462
3,918
11,615
379
75,292
8,793
18,646
6,250
Commitments and Contingencies (Note 7)
Stockholders' Equity (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; 14,624,159 shares issued
Capital in excess of par value ........................................................................................
Retained earnings ..........................................................................................................
Treasury stock at cost, 3,524,742 and 3,493,546 shares ...............................................
Accumulated other comprehensive items (Note 14) ....................................................
Total Kadant Stockholders' Equity ..........................................................................................
Noncontrolling interest .................................................................................................
Total Stockholders' Equity .......................................................................................................
Total Liabilities and Stockholders' Equity ...............................................................................
$
–
146
96,809
248,170
(76,339)
710
269,496
925
270,421
442,168 $
–
146
95,448
230,329
(74,025)
(3,315)
248,583
1,384
249,967
358,948
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Kadant Inc.
2013 Financial Statements
Consolidated Statement of Income
(In thousands, except per share amounts)
2013
2012
2011
Revenues (Note 12) .........................................................................................
Costs and Operating Expenses:
Cost of revenues .....................................................................................
Selling, general, and administrative expenses ........................................
Research and development expenses .....................................................
Restructuring and other expense (income), net (Note 8) .......................
Operating Income .............................................................................................
Interest Income .................................................................................................
Interest Expense ................................................................................................
Income from Continuing Operations Before Provision for Income Taxes .......
Provision for Income Taxes (Note 5) ...............................................................
Income from Continuing Operations ................................................................
(Loss) Income from Discontinued Operation (net of income tax benefit
(expense) of $34, $(451), and $1,511 in 2013, 2012, and 2011, respectively;
Note 9) ........................................................................................................
Net Income .......................................................................................................
Net Income Attributable to Noncontrolling Interest .........................................
Net Income Attributable to Kadant ..............................................................
Amounts Attributable to Kadant:
Income from Continuing Operations......................................................
(Loss) Income from Discontinued Operation .........................................
Net Income Attributable to Kadant ........................................................
Earnings per Share from Continuing Operations Attributable to Kadant
(Note 13)
Basic .......................................................................................................
Diluted ...................................................................................................
Earnings per Share Attributable to Kadant (Note 13)
Basic .......................................................................................................
Diluted ...................................................................................................
Weighted Average Shares (Note 13)
$
344,499 $
331,751 $
335,460
186,795
117,581
6,717
103
311,196
33,303
623
(900)
33,026
9,316
23,710
185,949
103,101
5,950
307
295,307
36,444
319
(833)
35,930
4,852
31,078
(62)
23,648
(229)
23,419 $
743
31,821
(198)
31,623 $
23,481 $
(62)
23,419 $
30,880 $
743
31,623 $
190,247
102,660
5,717
(1,874)
296,750
38,710
499
(1,066)
38,143
4,285
33,858
(9)
33,849
(274)
33,575
33,584
(9)
33,575
2.11 $
2.07 $
2.10 $
2.07 $
2.70 $
2.66 $
2.76 $
2.73 $
2.77
2.74
2.77
2.74
$
$
$
$
$
$
$
Basic .......................................................................................................
Diluted ...................................................................................................
11,153
11,340
11,456
11,590
12,124
12,261
Cash Dividend Declared per Common Share ...............................................
$
0.50 $
- $
-
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Kadant Inc.
2013 Financial Statements
Consolidated Statement of Comprehensive Income
(In thousands)
2013
2012
2011
Comprehensive Income
Net Income .....................................................................................................
Other Comprehensive Items:
$
23,648 $
31,821 $
33,849
Foreign currency translation gain (loss) ..............................................
Pension and other post-retirement liability adjustments, net (net of tax of
$1,564, $28, and $1,331 in 2013, 2012, and 2011, respectively) ..
Deferred gain (loss) on hedging instruments (net of tax of $1, $206, and
$89 in 2013, 2012, and 2011, respectively) ...................................
Other Comprehensive Items .................................................................
Comprehensive Income ........................................................................
Comprehensive Income Attributable to Noncontrolling Interest .........
Comprehensive Income Attributable to Kadant ...................................
$
838
4,324
(1,808)
2,817
(35)
(2,374)
413
4,068
27,716
(272)
27,444 $
387
4,676
36,497
(234)
36,263 $
(193)
(4,375)
29,474
(268)
29,206
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Kadant Inc.
2013 Financial Statements
Consolidated Statement of Cash Flows
(In thousands)
Operating Activities
Net income attributable to Kadant .......................................................
Net income attributable to noncontrolling interest ...............................
Loss (income) from discontinued operation .........................................
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 .............................................
Gain on sale of property, plant and equipment ............................
Provision (benefit) for losses on accounts receivable ..................
Deferred income tax benefit ........................................................
Other items, net ...........................................................................
Contributions to pension plan ......................................................
Changes in current assets and liabilities, 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 provided by (used in) discontinued operation ..
Net cash provided by operating activities .......................
2013
2012
2011
23,419 $
229
62
23,710
31,623 $
198
(743)
31,078
33,575
274
9
33,858
9,775
5,216
(2,012)
374
(1,061)
1,485
(1,080)
(2,197)
(840)
(2,005)
113
2,552
5,905
39,935
141
40,076
8,384
4,766
(214)
(14)
(4,868)
1,107
(960)
1,157
236
9,156
(696)
(5,868)
(12,808)
30,456
(1,348)
29,108
7,936
3,934
(2,294)
1,249
(1,886)
(809)
(900)
(9,909)
(1,753)
(6,966)
(1,897)
4,469
9,330
34,362
(47)
34,315
Investing Activities
Acquisitions, net of cash acquired .......................................................
Purchases of property, plant, and equipment .......................................
Proceeds from sale of property, plant, and equipment .........................
Dividend paid to noncontrolling interest ..............................................
Other, net .............................................................................................
Net cash used in continuing operations for investing
activities ..........................................................................
(65,594)
(6,261)
3,459
(731)
971
85
(4,250)
803
-
(3)
(15,694)
(8,030)
2,360
(579)
58
(68,156)
(3,365)
(21,885)
Financing Activities
Proceeds from issuance of long-term obligations ................................
Repayments of short- and long-term obligations .................................
Purchases of Company common stock ................................................
Dividends paid .....................................................................................
Change in restricted cash .....................................................................
Payment of debt issuance costs ............................................................
Proceeds from issuance of Company common stock ...........................
Excess tax benefits from stock-based compensation awards ...............
Net cash provided by (used in) continuing operations for
financing activities ..........................................................
Exchange Rate Effect on Cash and Cash Equivalents from Continuing
Operations .......................................................................................................
(Decrease) Increase in Cash and Cash Equivalents from Continuing
Operations .......................................................................................................
Cash and Cash Equivalents at Beginning of Year ..........................................
Cash and Cash Equivalents at End of Year .....................................................
53,609
(21,849)
(5,367)
(4,189)
(168)
(154)
337
351
5,000
(10,375)
(14,491)
-
700
(644)
358
132
5,000
(16,017)
(16,088)
-
(700)
-
390
371
22,570
(19,320)
(27,044)
989
1,180
(241)
(4,521)
54,553
50,032 $
7,603
46,950
54,553 $
(14,855)
61,805
46,950
$
See Note 1 for supplemental cash flow information.
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Kadant Inc.
2013 Financial Statements
Consolidated Statement of Stockholders' Equity
(In thousands, except share amounts)
Common Stock
Shares
Amount
Capital in
Excess of
Par Value
Retained
Earnings
Treasury Stock
Shares
Amount
Accumulated
Other
Comprehensive
Items
Noncontrolling
Interest
Total
Stockholders'
Equity
Balance at January 1, 2011 ............................ 14,624,159
$ 146 $ 92,935 $ 165,131
2,369,422
$ (48,786 ) $ (3,586)
$ 1,461
$ 207,301
Net income .....................................................
Activity under stock plans .............................
Tax benefits related to employees' and
directors' stock plans ..................................
Purchases of Company common stock ..........
Dividend paid to noncontrolling interest .......
Other comprehensive items ...........................
–
–
–
–
–
–
–
–
–
–
–
–
–
33,575
–
–
395
371
–
–
–
–
–
–
–
–
(133,411)
2,756
–
–
747,706
(16,088 )
–
–
–
–
–
–
–
–
–
(4,369 )
274
–
–
–
(579)
(6)
33,849
3,151
371
(16,088)
(579)
(4,375)
Balance at December 31, 2011 ...................... 14,624,159
$ 146 $ 93,701 $ 198,706
2,983,717
$ (62,118 ) $ (7,955 )
$ 1,150
$ 223,630
Net income .....................................................
Activity under stock plans .............................
Tax benefits related to employees' and
directors' stock plans ..................................
Purchases of Company common stock ..........
Other comprehensive items ...........................
–
–
–
–
–
–
–
–
–
–
–
31,623
–
–
1,615
132
–
–
–
–
–
–
(123,752)
2,584
–
–
633,581
(14,491)
–
–
4,640
–
–
–
–
198
–
–
–
36
31,821
4,199
132
(14,491)
4,676
Balance at December 29, 2012 ...................... 14,624,159
$ 146 $ 95,448 $ 230,329
3,493,546
$ (74,025) $ (3,315 )
$ 1,384
$ 249,967
Net income .....................................................
Dividends declared ........................................
Dividend paid to noncontrolling interest .......
Activity under stock plans .............................
Tax benefits related to employees' and
directors' stock plans ..................................
Purchases of Company common stock ..........
Other comprehensive items ...........................
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,010
351
–
–
23,419
(5,578 )
–
–
–
–
–
–
–
–
–
–
–
(143,804)
3,053
–
–
175,000
(5,367)
–
–
–
–
–
–
–
–
4,025
229
–
(731)
–
–
–
43
23,648
(5,578)
(731)
4,063
351
(5,367)
4,068
Balance at December 28, 2013 ...................... 14,624,159
$ 146 $ 96,809 $ 248,170
3,524,742
$ (76,339) $ 710
$ 925
$ 270,421
The accompanying notes are an integral part of these consolidated financial statements.
F-9
Kadant Inc.
2013 Financial Statements
1.
Nature of Operations and Summary of Significant Accounting Policies
Notes to Consolidated Financial Statements
Nature of Operations
Kadant Inc. was incorporated in Delaware in November 1991 and currently trades on the New York Stock Exchange
under the ticker symbol "KAI."
Kadant Inc. and its subsidiaries' (collectively, the Company) continuing operations include two reportable operating
segments, Papermaking Systems and Wood Processing Systems, and a separate product line, Fiber-based Products.
Through its Papermaking Systems segment, the Company develops, manufactures, and markets a range of
equipment and products primarily for the global papermaking and paper recycling and process 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; fluid-handling systems used primarily in the dryer section of the papermaking
process and during the production of corrugated boxboard, metals, plastics, rubber, textiles, chemicals, and food; doctoring
systems and equipment and related consumables important to the efficient operation of paper machines; and cleaning and
filtration systems essential for draining, purifying, and recycling process water and cleaning paper machine fabrics and rolls.
Through its Wood Processing Systems segment, the Company designs and manufactures stranders and related
equipment used in the production of oriented strand board (OSB), an engineered wood panel product used primarily in home
construction. This segment also supplies debarking and wood chipping equipment used in the forest products and the pulp
and paper industries.
Through its Fiber-based Products business, the Company manufactures and sells granules derived from papermaking
byproducts primarily for use as agricultural carriers and for home lawn and garden applications, as well as for oil and grease
absorption.
Discontinued Operation
In 2005, the Company's Kadant Composites LLC subsidiary (Composites LLC) sold substantially all of its assets to
a third party. Under the terms of the asset purchase agreement, Composites LLC retained certain liabilities associated with
the operation of the business prior to the sale, including 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.
On October 24, 2011, the Company, Composites LLC, and other co-defendants entered into an agreement to settle a
nationwide class action lawsuit related to allegedly defective composites decking building products manufactured by
Composites LLC between April 2002 and October 2003. In 2012, the Company paid $647,000 in approved claims under the
class action settlement.
Principles of Consolidation
The accompanying consolidated financial statements of the Company include the accounts of 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 on the Saturday nearest to December 31. References to 2013, 2012,
and 2011 are for the fiscal years ended December 28, 2013, December 29, 2012, and December 31, 2011, respectively.
Use of Estimates and Critical Accounting Policies
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP)
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities at the date of the financial statements, and the reported amounts of 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 position depends, and which involve the most complex or
subjective decisions or assessments, concern revenue recognition and accounts receivable, warranty obligations, income
taxes, the valuation of goodwill and intangible assets, inventories, and pension obligations. A discussion on the application of
these and other accounting policies is included in Notes 1 and 3.
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
F-10
Kadant Inc.
2013 Financial Statements
Notes to Consolidated Financial Statements
1.
Nature of Operations and Summary of Significant Accounting Policies (continued)
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 Accounting Standards Codification (ASC) 605, "Revenue Recognition,"
(ASC 605) when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or
service has been rendered, the sales price is fixed or determinable, and collectability is reasonably assured. 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. The Company includes in revenue amounts invoiced for
shipping and handling with the corresponding costs reflected in cost of revenues. Provisions for discounts, warranties, returns
and other adjustments are provided for in the period in which the related sales are recorded.
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, such as equipment and installation, the Company considers
the guidance in ASC 605. Such transactions are evaluated to determine whether the deliverables in the arrangement represent
separate units of accounting based on the following criteria: the delivered item has value to the customer on a stand-alone
basis, and if the contract includes a general right of return relative to the delivered item, delivery or performance of the
undelivered item is considered probable and substantially under the control of the Company. Revenue is allocated to each
unit of accounting or element based on relative selling prices. The Company determines relative selling prices by using either
vendor-specific objective evidence (VSOE) if that exists, or third-party evidence of selling price. When neither VSOE or
third-party evidence of selling price exists for a deliverable, the Company uses its best estimate of the selling price for that
deliverable. In cases in which elements cannot be treated as separate units of accounting, the elements are combined into a
single unit of accounting for revenue recognition purposes.
In addition, revenues and profits on certain long-term contracts are recognized using the percentage-of-completion
method or the completed contract method of accounting pursuant to ASC 605. Revenues recorded under the percentage-of-
completion method were $19,758,000 in 2013, $42,190,000 in 2012, and $29,207,000 in 2011. 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 estimated loss. The Company's
contracts generally provide for billing of customers upon the attainment of certain milestones specified in each contract.
Revenues earned on contracts in process in excess of billings are classified as unbilled contract costs and fees, and amounts
billed in excess of revenues earned are classified as billings in excess of contract costs and fees, which are included in other
current liabilities 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. For long-term contracts
that do not meet the criteria under ASC 605-35 to be accounted for under the percentage-of-completion method, the
Company recognizes revenue using the completed contract method. When using the completed contract method, the
Company recognizes revenue when the contract has been substantially completed, the product has been delivered, and, if
applicable, the customer acceptance criteria have been met.
Accounts receivable are recorded at invoiced amount and do not bear interest. 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. Account balances are charged off against the allowance when the Company
believes it is probable the receivable will not be recovered. In some instances, the Company utilizes letters of credit as a way
to mitigate its credit exposure.
The Company's Chinese subsidiaries may receive banker's acceptance drafts from customers as payment for their
trade accounts receivable. The banker's acceptance drafts are non-interest bearing and mature within six months of the
origination date. The Company has the ability to sell the drafts at a discount or transfer the drafts in settlement of current
accounts payable prior to the scheduled maturity date. These drafts, which totaled $10,765,000 and $9,794,000 at year-end
2013 and year-end 2012, respectively, are reflected in accounts receivable in the accompanying consolidated balance sheet
until the subsidiary discounts or transfers the banker's acceptance drafts in settlement of current accounts payable prior to
maturity or obtains cash payment on the scheduled maturity date.
F-11
Kadant Inc.
2013 Financial Statements
1.
Nature of Operations and Summary of Significant Accounting Policies (continued)
Notes to Consolidated Financial Statements
Warranty Obligations
The Company provides for the estimated cost of product warranties at the time of sale based on the actual historical
occurrence 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 accrued warranty costs are as follows:
(In thousands)
Balance at Beginning of Year ...............................................................................................
Provision charged to income ......................................................................................
Usage .........................................................................................................................
Acquired .....................................................................................................................
Currency translation ...................................................................................................
Balance at End of Year .........................................................................................................
2013
2012
$
$
4,462 $
1,565
(2,114)
567
91
4,571 $
4,129
1,775
(1,544)
–
102
4,462
Income Taxes
In accordance with ASC 740, "Income Taxes," (ASC 740), 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 these differences are expected to reverse. A tax
valuation allowance is established, as needed, to reduce deferred tax assets to the amount expected to be realized. In the
period in which it becomes more likely than not that some or all of the deferred tax assets will be realized, the valuation
allowance will be adjusted.
It is the Company's policy to provide for uncertain tax positions and the related interest and penalties based upon
management's assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax
authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for
income taxes. At December 28, 2013, the Company believes that it has appropriately accounted for any liability for
unrecognized tax benefits. To the extent the Company prevails in matters for which a liability for an unrecognized tax benefit
is established, the statute of limitations expires for a tax jurisdiction year, or the Company is required to pay amounts in
excess of the liability, its effective tax rate in a given financial statement period may be affected.
Earnings per Share
Basic earnings per share has been computed by dividing net income attributable to Kadant by the weighted average
number of shares outstanding during the year. Diluted earnings per share was computed using the treasury stock method
assuming the effect of all potentially dilutive securities, including stock options, restricted stock units and employee stock
purchase plan shares, as well as their related tax effects.
Cash and Cash Equivalents
At year-end 2013 and 2012, the Company's cash equivalents included investments in money market funds and other
marketable securities, 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.
Restricted Cash
At year-end 2013, the Company had approximately $168,000 of restricted cash. This cash serves as collateral for
bank guarantees primarily associated with providing assurance to customers that the Company will fulfill certain customer
obligations entered into in the normal course of business. All of the bank guarantees will expire in 2014.
F-12
Kadant Inc.
2013 Financial Statements
1.
Nature of Operations and Summary of Significant Accounting Policies (continued)
Notes to Consolidated Financial Statements
Supplemental Cash Flow Information
(In thousands)
Cash Paid for Interest ......................................................................................
Cash Paid for Income Taxes ...........................................................................
Non-Cash Investing Activities:
Fair Value of Assets Acquired .............................................................
Cash Paid for Acquired Businesses ......................................................
Liabilities Assumed of Acquired Businesses .......................................
Non-Cash Financing Activities:
Issuance of Company Common Stock .................................................
Dividends Declared but Unpaid ...........................................................
2013
2012
2011
961 $
8,375 $
856 $
9,326 $
1,106
6,677
88,398 $
(67,453)
20,945 $
– $
–
– $
21,808
(16,104)
5,704
2,677 $
1,389 $
2,106 $
– $
2,296
–
$
$
$
$
$
$
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out; or weighted average basis) or market value and
include materials, labor, and manufacturing overhead. The 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 components of inventories are as follows:
(In thousands)
Raw Materials and Supplies .................................................................................................
Work in Process ....................................................................................................................
Finished Goods (includes $2,941 and $2,310 at customer locations) ..................................
2013
2012
$
$
20,836 $
21,051
20,918
62,805 $
19,561
8,371
14,145
42,077
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. 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 consist of the following:
(In thousands)
Land ......................................................................................................................................
Buildings ...............................................................................................................................
Machinery, Equipment, and Leasehold Improvements .........................................................
Less: Accumulated Depreciation and Amortization .............................................................
2013
4,797 $
38,363
74,837
117,997
73,112
44,885 $
$
$
2012
3,968
36,823
68,255
109,046
69,878
39,168
Depreciation and amortization expense related to property, plant, and equipment was $5,088,000, $5,015,000, and
$4,953,000 in 2013, 2012, and 2011, respectively.
F-13
Kadant Inc.
2013 Financial Statements
1.
Nature of Operations and Summary of Significant Accounting Policies (continued)
Notes to Consolidated Financial Statements
Intangible Assets
Intangible assets in the accompanying balance sheet include the costs of acquired intellectual property, tradenames,
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 as part of the Company's acquisition of The
Johnson Corporation in 2005 has an indefinite life and is not being amortized. The remaining intangible assets have been
amortized as the underlying economic benefits are realized with a weighted-average amortization period of 11 years. The
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 28, 2013
Customer relationships ................................................
Intellectual property ....................................................
Tradenames .................................................................
Non-compete agreements ............................................
Distribution network ...................................................
Licensing agreements ..................................................
Other ...........................................................................
December 29, 2012
Customer relationships ................................................
Intellectual property ....................................................
Tradenames .................................................................
Non-compete agreements ............................................
Distribution network ...................................................
Licensing agreements ..................................................
Other ...........................................................................
Gross
Currency
Translation
Accumulated
Amortization
Net
$
$
$
$
37,964 $
20,350
10,198
3,388
2,400
400
2,809
77,509 $
19,054 $
15,690
8,879
3,362
2,400
400
689
50,474 $
1,074 $
(225)
(60)
(10)
–
–
(65)
714 $
1,433 $
(60)
(30)
(9)
–
–
(27)
1,307 $
(11,446) $
(12,276)
(252)
(3,203)
(1,238)
(173)
(1,785)
(30,373) $
(9,825) $
(10,838)
(125)
(3,159)
(1,094)
(153)
(492)
(25,686) $
27,592
7,849
9,886
175
1,162
227
959
47,850
10,662
4,792
8,724
194
1,306
247
170
26,095
Amortization of acquired intangible assets was $4,687,000 in 2013, $3,369,000 in 2012, and $2,983,000 in 2011.
The estimated future amortization expense of acquired intangible assets is $5,513,000 in 2014; $4,588,000 in 2015;
$4,296,000 in 2016; $4,058,000 in 2017; $3,979,000 in 2018; and $17,316,000 in the aggregate thereafter.
F-14
Kadant Inc.
2013 Financial Statements
Notes to Consolidated Financial Statements
1.
Nature of Operations and Summary of Significant Accounting Policies (continued)
Goodwill
The changes in the carrying amount of goodwill by segment are as follows:
(In thousands)
Balance as of December 31, 2011:
Gross Balance ......................................................................................
Accumulated Impairment Losses .........................................................
Net Balance ..........................................................................................
Increase due to acquisitions ............................................................................
Currency translation adjustment .....................................................................
Total 2012 Adjustments ..................................................................................
Balance at December 29, 2012:
Gross Balance ......................................................................................
Accumulated Impairment Losses .........................................................
Net Balance ..........................................................................................
Increase due to acquisitions ............................................................................
Currency translation adjustment .....................................................................
Total 2013 Adjustments ..................................................................................
Balance at December 28, 2013:
Papermaking
Systems
Segment
Wood
Processing
Systems
Segment
$
191,468 $
(85,509)
105,959
–
1,988
1,988
193,456
(85,509)
107,947
2,545
338
2,883
– $
–
–
–
–
–
–
–
–
21,480
(395)
21,085
Gross Balance ......................................................................................
Accumulated Impairment Losses .........................................................
Net Balance ..........................................................................................
196,339
(85,509)
110,830 $
21,085
–
21,085 $
$
Total
191,468
(85,509)
105,959
–
1,988
1,988
193,456
(85,509)
107,947
24,025
(57)
23,968
217,424
(85,509)
131,915
Impairment of Long-Lived Assets
The Company evaluates the recoverability of goodwill and intangible assets with indefinite useful lives as of the end
of each fiscal year, or more frequently if events or changes in circumstances, such as a significant 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. In 2011, the Company adopted Accounting Standards Update (ASU) No. 2011-08, Intangibles - Goodwill and
Other (Topic 350), Testing Goodwill for Impairment, that includes the option to first assess qualitative factors to determine
whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the
two-step impairment test as required in ASC 350, Intangibles – Goodwill and Other. At December 28, 2013 and December
29, 2012, the Company performed a qualitative goodwill impairment analysis. These impairment analyses included an
assessment of certain qualitative factors including, but not limited to, the results of prior fair value calculations, the
movement of the Company's share price and market capitalization, the reporting unit and overall financial performance, and
macroeconomic and industry conditions. The Company considered the qualitative factors and weighed the evidence obtained,
and determined that it is not more likely than not that the fair value of any of the reporting units is less than its carrying
amount. Although the Company believes the factors considered in the impairment analysis are reasonable, significant
changes in any one of the assumptions used could produce a different result. Additionally, at December 28, 2013 and
December 29, 2012, the Company performed a quantitative impairment analysis on our indefinite-lived intangible asset, the
Johnson tradename totaling $8,100,000, and determined that the asset was not impaired.
Goodwill by reporting unit is as follows:
(In thousands)
Stock-Preparation ....................................................................................................................
Doctoring, Cleaning, & Filtration ............................................................................................
Fluid-Handling .........................................................................................................................
Wood Processing Systems .......................................................................................................
2013
18,290 $
34,658
57,882
21,085
131,915 $
$
$
2012
17,583
33,081
57,283
-
107,947
F-15
Kadant Inc.
2013 Financial Statements
Notes to Consolidated Financial Statements
1.
Nature of Operations and Summary of Significant Accounting Policies (continued)
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 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. No indicators of impairment were identified in 2013 or 2012.
Foreign Currency Translation and Transactions
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 ASC 830, "Foreign
Currency Matters." Resulting translation adjustments are reflected in the "accumulated other comprehensive items"
component of stockholders' equity (see Note 14). Foreign currency transaction gains and losses are included in the
accompanying consolidated statement of income and are not material for the three years presented.
Stock-Based Compensation
The Company recognizes compensation cost for all stock-based awards granted to employees and directors based on
the grant date estimate of fair value for those awards. The Company uses the grant date trading price of the Company's
common stock to determine the fair value for restricted stock units (RSUs) and the Black-Scholes option-pricing model to
determine the fair value for stock option grants. For stock options and time-based RSUs, compensation expense is recognized
ratably over the requisite service period for the entire award net of forfeitures. For performance-based RSUs, compensation
expense is recognized ratably over the requisite service period for each separately-vesting portion of the award net of
forfeitures and remeasured at each reporting period until the total number of RSUs to be issued is known.
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 a contract 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. The changes in the
fair value of a derivative not deemed to be a hedge are recorded currently in earnings. The Company does not hold or engage
in transactions involving derivative instruments for purposes other than risk management.
ASC 815, "Derivatives and Hedging," 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 (AOCI). 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.
Recent Accounting Pronouncements
Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward,
a Similar Tax Loss, or a Tax Credit Carryforward Exists. In July 2013, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) No. 2013-11. Currently, GAAP does not include explicit guidance on the
financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a
tax credit carryforward exists. This ASU clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax
benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss
carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss
carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the
applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the
tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax
F-16
Kadant Inc.
2013 Financial Statements
Notes to Consolidated Financial Statements
1.
Nature of Operations and Summary of Significant Accounting Policies (continued)
asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should
not be combined with deferred tax assets. This ASU applies to all entities that have unrecognized tax benefits when a net
operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This ASU is effective
for fiscal years, and interim periods within those years, beginning after December 15, 2013, although early adoption is
permitted. This ASU will be applied prospectively to all unrecognized tax benefits that exist at the effective date. The
Company has not yet adopted this ASU and is currently evaluating the effect the adoption will have on its consolidated
financial statements.
Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap
Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. In July 2013, the FASB issued ASU No. 2013-10. This
ASU permits the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting
purposes, in addition to the U.S. government treasury obligation rate and the London Interbank Offered Rate (LIBOR). This
ASU also removes the restriction on using different benchmark rates for similar hedges. This ASU is effective prospectively
for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The Company adopted this
ASU in the third quarter of 2013 and the adoption did not have an effect on its consolidated financial statements. The
Company will consider the guidance in this ASU for future transactions in which the Company elects to apply hedge
accounting of the benchmark interest rate.
Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon
Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. In
March 2013, the FASB issued ASU No. 2013-05. When a reporting entity (parent) ceases to have a controlling financial
interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity, the parent is
required to apply the guidance in subtopic 830-30 to release any related cumulative translation adjustment into net income.
Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in
the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided.
This ASU is effective prospectively for fiscal years and interim periods beginning after December 15, 2013. This ASU will
be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early
adoption is permitted. The Company does not expect the adoption of this ASU to have a material effect on its consolidated
financial statements.
2.
Acquisitions
On April 12, 2013, the Company acquired all the outstanding stock of Companhia Brasileira de Tecnologia Industrial
(CBTI) for approximately $8,140,000 in cash and $484,000 in assumed liabilities owed to Kadant. CBTI was a long-time
licensee of the Company's doctoring, cleaning, filtration, and stock preparation products and is also a supplier of industrial
drying systems. This acquisition furthers the Company's strategy of expanding its presence in emerging markets. At the
closing date, approximately $3,550,000 of the purchase price was deposited into an escrow fund to secure certain
indemnification obligations of the sellers. Approximately $1,248,000 of the escrow fund was released to the sellers in
February 2014, and the balance will be released on various dates over a five-year period ending on the fifth anniversary of the
closing date, less the amount of any claims.
On May 3, 2013, the Company acquired certain assets of the Noss Group (Noss), a Sweden-based developer and
supplier of high-efficiency cleaners and approach flow systems, for approximately $7,094,000 in cash. This acquisition
expands the Company's product offerings in its Stock-Preparation product line, particularly for virgin pulp and approach flow
applications. In addition, Noss has a large installed base and a high proportion of its revenues are parts and consumables
products. At the closing date, approximately $1,970,000 of the purchase price was deposited into an escrow fund to secure
certain indemnification obligations of the sellers. The escrow fund, less any claims made, will be released to the sellers in
two installments on the first and second anniversaries of the closing date.
On November 6, 2013, the Company acquired all the outstanding shares of Carmanah Design and Manufacturing Inc.
(Carmanah) for approximately $51,564,000 in cash and $171,000 of assumed liabilities owed to Kadant. The purchase price
is subject to a post-closing adjustment. Carmanah is a designer and manufacturer of stranders and related equipment used in
the production of oriented strand board, an engineered wood panel product used primarily in home construction. At the
closing date, $6,705,000 of the purchase price was deposited into an escrow fund to secure certain tax, environmental, and
other indemnification obligations of the sellers. The escrow fund, less any claims made, will be released to the sellers in two
installments on the 12-month and 18-month anniversaries of the closing. The acquisition of Carmanah will extend Kadant's
presence into the forest products industry and advance the Company's strategy of increasing its parts and consumables
business.
F-17
Kadant Inc.
2013 Financial Statements
2.
Acquisitions (continued)
Notes to Consolidated Financial Statements
The following table summarizes the purchase method of accounting for the acquisitions made in 2013 and the
estimated fair values of assets acquired and liabilities assumed (in thousands):
Cash and cash equivalents ...........................................................................................................................
Accounts receivable .....................................................................................................................................
Inventories ...................................................................................................................................................
Other current assets ......................................................................................................................................
Property, plant & equipment ........................................................................................................................
Other assets ..................................................................................................................................................
Intangibles ...................................................................................................................................................
Goodwill ......................................................................................................................................................
Total assets acquired .........................................................................................................................
Accounts payable .........................................................................................................................................
Customer deposits ........................................................................................................................................
Long-term deferred tax liabilities ................................................................................................................
Other liabilities ............................................................................................................................................
Total liabilities assumed .....................................................................................................................
Net assets acquired .............................................................................................................................
Consideration:
Cash .............................................................................................................................................................
Cash paid to seller borrowed under the 2012 Credit Agreement .................................................................
Short-term obligations .................................................................................................................................
Total consideration ............................................................................................................................
$
$
$
$
1,966
8,523
18,169
1,726
5,891
1,063
27,035
24,025
88,398
2,238
7,064
6,062
5,581
20,945
67,453
39,717
27,081
655
67,453
The allocation of the purchase price for each acquisition 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 $27,035,000 relate primarily to
customer relationships and intellectual property and are being amortized over a weighted-average period of 10 years. The
excess of the purchase price for the acquisitions made in 2013 over the tangible and identifiable intangible assets was
recorded as goodwill and amounted to approximately $24,025,000, the majority of which is not deductible for tax purposes.
These acquisitions have been accounted for using the purchase method of accounting and the results have been
included in the accompanying financial statements from the dates of the acquisitions. The Company recorded acquisition
transaction costs of approximately $1,802,000 in 2013 in selling, general, and administrative expenses related to acquisitions.
The fair values are subject to adjustment upon finalization of the valuations, and therefore the current measurements of
intangible assets, acquired goodwill, and assumed assets and liabilities are subject to change.
On May 27, 2011, a subsidiary in the Company's Papermaking Systems segment acquired all of the stock of m-clean
papertech holding AB (M-Clean), a European-based supplier of equipment used to clean paper machine fabrics and rolls. The
aggregate purchase price for this acquisition was $16,072,000, net of post-closing adjustments. The purchase price included
$910,000 of cash acquired and $517,000 of debt assumed.
This acquisition has been accounted for using the purchase method of accounting and the results of M-Clean have
been included in the accompanying financial statements from the date of its acquisition. The Company recorded acquisition
transaction costs of approximately $249,000 in 2011 in selling, general, and administrative expenses. Allocation of the
purchase price for the acquisition was based on estimates of the fair values of the net assets acquired. The purchase price
allocation includes identifiable intangible assets acquired of $5,777,000, which are being amortized over a weighted-average
period of 8 years. The excess of the acquisition purchase price over the tangible and identifiable intangible assets was
recorded as goodwill and totaled $9,641,000, 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 expectations of synergies from combining the businesses. The Company anticipates several synergies in
connection with these acquisitions, including the use of the Company's existing distribution channels to expand sales of the
products of the acquired businesses.
Pro forma disclosures of the results of operations are not required, as the acquisitions are not considered material
business combinations as outlined in FASB ASC 805, "Business Combinations."
F-18
Kadant Inc.
2013 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, restricted stock units, 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. Upon a change of control, as defined in the plans, all options or other awards become
fully vested and all restrictions lapse. The Company had 274,921 shares available for grant under stock-based compensation
plans at year-end 2013. The Company generally issues its common stock out of treasury stock, to the extent available, for
share issuances related to its stock-based compensation plans.
The Company recognizes compensation cost for all stock-based awards granted to employees based on the grant
date estimate of fair value for those awards. Total stock-based compensation expense was $5,216,000, $4,766,000, and
$3,934,000 in 2013, 2012, and 2011, respectively, and is included in selling, general, and administrative expenses in the
accompanying consolidated statement of income.
The components of pre-tax stock-based compensation expense are as follows:
(In thousands)
Restricted Stock Unit Awards .........................................................................
Stock Option Awards ......................................................................................
Employee Stock Purchase Plan Awards .........................................................
Total ................................................................................................................
$
$
2013
2012
2011
4,102 $
1,015
99
5,216 $
3,731 $
954
81
4,766 $
3,212
628
94
3,934
The Company has elected to recognize excess income tax benefits from stock option exercises and the vesting of
restricted stock units in capital in excess of par value using the tax return ordering approach. The Company measures the tax
benefit associated with excess tax deductions related to stock-based compensation expense by multiplying the excess tax
deductions by the statutory tax rates. The Company recognized income tax benefits in capital in excess of par value of
$351,000, $132,000, and $371,000 in 2013, 2012, and 2011, respectively, associated with stock-based compensation.
Non-Employee Director Restricted Stock Units
In general, the Company grants 5,000 restricted stock units (RSUs) to each of its non-employee directors in the first
quarter of each fiscal year. The shares vest ratably on the last day of each fiscal quarter within the year. In addition, the
Company has granted 10,000 RSUs to each of its non-employee directors, which will only vest and compensation expense
will only be recognized upon a change in control as defined in the Company's 2006 equity incentive plan. These RSUs, which
total 50,000 outstanding in the aggregate and have a grant date fair value of $1,009,000, will be forfeited if a change in
control does not occur before the last day of the first quarter of 2015.
The Company grants restricted stock units to non-employee directors, and certain employees. Holders of restricted
stock units have no voting rights and are not entitled to receive cash dividends.
F-19
Kadant Inc.
2013 Financial Statements
Notes to Consolidated Financial Statements
3.
Employee Benefit Plans (continued)
Performance-Based Restricted Stock Units
The Company grants performance-based RSUs to executive officers of the Company. Each performance-based RSU
represents the right to receive one share of the Company's common stock upon vesting. The RSUs are subject to adjustment
based on the achievement of a performance measure selected for the fiscal year, which is a specified target for adjusted
earnings before interest, taxes, depreciation, and amortization (adjusted EBITDA) generated from continuing operations.
Following adjustment, the RSUs are subject to additional time-based vesting, and vest in three equal annual installments,
provided that the executive officer is employed by the Company on the applicable vesting dates.
The Company recognizes compensation expense associated with performance-based RSUs ratably over the requisite
service period for each separately-vesting portion of the award based on the grant date fair value. Compensation expense
recognized is net of forfeitures and remeasured each reporting period until the total number of RSUs to be issued is known.
Unrecognized compensation expense related to the unvested performance-based RSUs totaled approximately $1,441,000 at
year-end 2013, and will be recognized over a weighted average period of 1.4 years.
The performance-based RSU agreements provide for forfeiture in certain events, such as voluntary or involuntary
termination of employment, and for acceleration of vesting in certain events, such as death, disability or a change in control
of the Company. If death, disability, or a change in control occurs prior to the end of the performance period, the officer will
receive the target RSU amount; otherwise, the officer will receive the number of deliverable RSUs based on the achievement
of the performance goal, as stated in the RSU agreements.
Time-Based Restricted Stock Units
The Company grants time-based RSUs to certain employees of the Company. Each time-based RSU represents the
right to receive one share of the Company's common stock upon vesting. The Company is recognizing compensation expense
associated with these time-based RSUs ratably over the requisite service period for the entire award based on the grant date
fair value and net of forfeitures. The time-based RSU agreement provides for forfeiture in certain events, such as voluntary or
involuntary termination of employment, and for acceleration of vesting in certain events, such as death, disability, or a
change in control of the Company. Unrecognized compensation expense related to the time-based RSUs totaled
approximately $1,760,000 at year-end 2013, and will be recognized over a weighted average period of 1.7 years.
A summary of the activity of the Company's unvested restricted stock units for 2011, 2012, and 2013 is as follows:
Unvested Restricted Stock Units
Unvested RSUs at January 1, 2011 .......................................................................................
Granted .......................................................................................................................
Vested ........................................................................................................................
Forfeited / Expired .....................................................................................................
Unvested RSUs at December 31, 2011 .................................................................................
Granted .......................................................................................................................
Vested ........................................................................................................................
Forfeited / Expired .....................................................................................................
Unvested RSUs at December 29, 2012 .................................................................................
Granted .......................................................................................................................
Vested ........................................................................................................................
Forfeited / Expired .....................................................................................................
Unvested RSUs at December 28, 2013 .................................................................................
Weighted
Average
Grant-
Date Fair
Value
Units
(In thousands)
312 $
184 $
(159) $
(8) $
329 $
179 $
(144) $
(1) $
363 $
176 $
(182) $
(14) $
343 $
16.77
24.91
19.90
8.81
20.02
21.95
19.97
27.74
20.98
25.53
22.84
16.97
22.50
The total fair value of shares vested was $4,997,000, $3,321,000, and $4,071,000 in 2013, 2012, and 2011,
respectively.
F-20
Kadant Inc.
2013 Financial Statements
Notes to Consolidated Financial Statements
3.
Employee Benefit Plans (continued)
Stock Options
Options granted from 2011 through 2013 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. The stock options vest in three equal annual installments beginning on the
first anniversary of the grant date, provided that the recipient remains employed by the Company on the applicable vesting
dates. The Company is recognizing compensation expense associated with these stock options ratably over the requisite
service period for the entire award based on the grant date fair value and net of forfeitures. Unrecognized compensation
expense related to these stock options totaled approximately $1,219,000 at December 28, 2013, and will be recognized over a
weighted average period of 1.8 years.
The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model
with the following assumptions:
Weighted-average Exercise Price ............................................................
Weighted-average Grant Date Fair Value ................................................
Volatility ..................................................................................................
Expected Annual Dividend ......................................................................
Risk-Free Interest Rate ............................................................................
Expected Life of Options .........................................................................
$
$
2013
2012
25.98 $
11.33 $
51%
1.92%
1.25%
7.6 years
21.91 $
11.69 $
50%
–
1.38%
7.6 years
2011
24.90
12.85
45%
–
2.86%
7.4 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 consideration of the holding
period inherent in currently vested but unexercised options. The expected annual dividend rate was calculated by dividing the
Company's annual dividend by the closing stock price on the grant date. The risk-free interest rate is based on the yield on
zero-coupon U.S. Treasury securities for a 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 for 2011, 2012, and 2013 is as follows:
(In thousands, except per share amounts)
Options Outstanding at January 1, 2011 ....................................
Granted ............................................................................
Exercised .........................................................................
Options Outstanding at December 31, 2011 ..............................
Granted ............................................................................
Exercised .........................................................................
Options Outstanding at December 29, 2012 ..............................
Granted ............................................................................
Options Outstanding at December 28, 2013 ..............................
Vested and Unvested Expected to Vest, End of Year ................
Options Exercisable, End of Year ..............................................
Number
of
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value (a)
161 $
82 $
(8) $
235 $
83 $
(18) $
300 $
93 $
393 $
393 $
217 $
14.82
24.90
20.01
18.15
21.91
17.54
19.23
25.98
20.82 7.5 years $
20.82 7.5 years $
17.84 6.7 years $
7,841
7,841
4,992
(a)
The closing price per share on the last trading day prior to December 28, 2013 was $40.79.
F-21
Kadant Inc.
2013 Financial Statements
Notes to Consolidated Financial Statements
3.
Employee Benefit Plans (continued)
A summary of the Company's stock option exercises in 2013, 2012, and 2011 is as follows.
(In thousands)
Total intrinsic value of options exercised .......................................................
Cash received from options exercised ............................................................
$
$
2013
2012
2011
- $
- $
119 $
319 $
39
150
Employee Stock Purchase Plan
The Company's eligible U.S. employees may elect to participate in its employee stock purchase plan. Under the
plan, shares of the Company's common stock may be purchased at a 15% discount from the fair market value at the beginning
or end of the purchase period, whichever is lower. Shares purchased under the plan are subject to a one-year resale restriction
and are purchased through payroll deductions of up to 10% of each participating employee's gross wages. For the 2013, 2012,
and 2011 plan years, the Company issued 16,325, 17,490, and 12,509 shares, respectively, of its common stock under this
plan.
401(k) Savings and Other Defined Contribution Plans
The Company's U.S. subsidiaries participate in the Kadant Inc. 401(k) Retirement Savings Plan sponsored by the
Company. Contributions to the plan are made by both the employee and the Company and are immediately vested. Company
contributions are based upon the level of employee contributions.
Certain of the Company's subsidiaries offer other retirement plans, the majority of which are 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 $2,607,000, $2,466,000, and
$2,294,000 in 2013, 2012, and 2011, respectively.
Defined Benefit Pension Plan and Post-Retirement Welfare Benefits Plans
The Company sponsors a noncontributory defined benefit retirement plan for the benefit of eligible employees at its
Kadant Solutions division and the corporate office. 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. The
Company also has a post-retirement welfare benefits plan for the benefit of eligible employees at its Kadant Solutions
division (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 employer's contributions.
In March 2011, the Company approved a Restoration Plan (included in the table below in "Other Benefits") for the
benefit of certain executive officers who are also participants of the noncontributory defined benefit retirement plan. This
plan provides a benefit equal to the benefits lost under the noncontributory defined benefit retirement plan as a consequence
of applicable Internal Revenue Service limits on the levels of contributions and benefits.
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 plan was closed to
employees who did not meet its retirement eligibility requirements on January 1, 2012.
In accordance with ASC 715, "Compensation–Retirement Benefits," (ASC 715), an employer is required to
recognize the overfunded or underfunded status of a defined benefit post-retirement 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.
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 accumulated other
comprehensive items. The actuarial loss and prior service loss included in accumulated other comprehensive items and
expected to be recognized in net periodic pension cost in 2014 are $368,000 and $142,000, respectively.
F-22
Kadant Inc.
2013 Financial Statements
3.
Employee Benefit Plans (continued)
Notes to Consolidated Financial Statements
The following table summarizes the change in benefit obligation; the change in plan assets; the unfunded status; and
the amounts recognized in the balance sheet for the Company's 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:
Benefit obligation at beginning of year ..............................
Service cost ........................................................................
Interest cost ........................................................................
Actuarial (gain) loss ...........................................................
Benefits paid .......................................................................
Effect of currency translation .............................................
Benefit obligation at end of year ........................................
Change in Plan Assets:
Fair value of plan assets at beginning of year .....................
Actual return on plan assets ................................................
Employer contribution ........................................................
Benefits paid .......................................................................
Fair value of plan assets at end of year ...............................
Unfunded status .......................................................................
Accumulated benefit obligation as of year-end .......................
Amounts Recognized in the Balance Sheet Consist of:
Current liability ..................................................................
Non-current liability ...........................................................
Amounts Recognized in Accumulated Other Comprehensive
Items Before Tax Consist of:
Unrecognized net actuarial loss ..........................................
Unrecognized prior service cost .........................................
Total
Changes in Amounts Recognized in Accumulated Other
Comprehensive Items Before Tax:
Current year unrecognized net actuarial gain (loss) ..........
Amortization of unrecognized prior service cost ................
Amortization of unrecognized net actuarial loss ................
Effect of currency translation .............................................
Total ...................................................................................
$
$
$
$
$
$
$
$
$
$
$
$
Pension Benefits
Other Benefits
2013
2012
2013
2012
31,743 $
892
1,167
(4,617)
(1,394)
–
27,791 $
26,728 $
(358)
1,080
(1,394)
26,056 $
(1,735) $
23,494 $
31,594 $
991
1,313
1,046
(3,201)
–
31,743 $
26,393 $
2,576
960
(3,201)
26,728 $
(5,015) $
26,270 $
5,968 $
171
207
(551)
(299)
87
5,583 $
– $
–
299
(299)
– $
(5,583) $
1,876 $
5,402
143
225
425
(275)
48
5,968
–
–
275
(275)
–
(5,968)
1,777
– $
(1,735) $
– $
(5,015) $
(233) $
(5,350) $
(251)
(5,717)
(6,264) $
(218)
(6,482) $
(9,656) $
(273)
(9,929) $
(662) $
(799)
(1,461) $
(1,251)
(882)
(2,133)
2,859 $
55
533
–
3,447 $
(85) $
56
634
–
605 $
551 $
85
62
(26)
672 $
(425)
28
36
(7)
(368)
The weighted-average assumptions used to determine the benefit obligation as of year-end were as follows:
Discount rate ............................................................................
Rate of compensation increase ................................................
4.79%
3.50%
3.89%
3.50%
4.04 %
3.00 %
3.52%
3.15%
Pension Benefits
Other Benefits
2013
2012
2013
2012
F-23
Kadant Inc.
2013 Financial Statements
Notes to Consolidated Financial Statements
3.
Employee Benefit Plans (continued)
The projected benefit obligations and fair value of plan assets for the Company's pension plans with projected
benefit obligations in excess of plan assets were as follows:
(In thousands)
Pension Plans with Projected Benefit Obligations in Excess of
Plan Assets:
Projected benefit obligation ..................................................
Fair value of plan assets ........................................................
Pension Benefits
Other Benefits
2013
2012
2013
2012
$
$
27,791 $
26,056 $
31,743 $
26,728 $
2,469 $
– $
2,456
–
The accumulated benefit obligations and fair values of plan assets for the Company's pension plans with accumulated
benefit obligations in excess of plan assets were as follows:
(In thousands)
Pension Plans with Accumulated Benefit Obligations in Excess
of Plan Assets:
Accumulated benefit obligation ...............................................
Fair value of plan assets ...........................................................
$
$
Pension Benefits
Other Benefits
2013
2012
2013
2012
–
–
$
$
–
–
$
$
1,876
–
$
$
1,777
–
The components of net periodic benefit cost were as follows:
(In thousands)
Components of Net Periodic
Benefit Cost:
Service cost ....................... $
Interest cost .......................
Expected return on plan
assets .................................
Recognized net actuarial
loss ....................................
Amortization of prior
service cost ........................
Net periodic benefit cost .............. $
Pension Benefits
Other Benefits
2013
2012
2011
2013
2012
2011
998 $
1,167
991 $
1,313
855 $
1,298
171 $
207
143 $
225
(1,506)
(1,616)
(1,429)
533
634
433
–
62
–
36
55
1,247 $
56
1,378 $
55
1,212 $
85
525 $
28
432 $
187
237
–
28
15
467
The weighted-average assumptions used to determine net periodic benefit cost were as follows:
Discount rate ..............................
Expected long-term return on plan
assets .......................................
Rate of compensation increase ..
Pension Benefits
Other Benefits
2013
3.89%
2012
4.28%
2011
5.25%
2013
3.53%
2012
4.44%
2011
5.04%
5.75%
3.50%
6.25%
4.00%
6.25%
4.00%
–
–
3.25%
3.57%
–
3.28%
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 ASC 715.
F-24
Kadant Inc.
2013 Financial Statements
Notes to Consolidated Financial Statements
3.
Employee Benefit Plans (continued)
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 assumed rate reaches ultimate rate ........................................................................................
8.00%
0.00%
2018
8.00%
0.00%
2018
2013
2012
A one-percentage point increase or decrease in assumed healthcare cost trend rates would have had an immaterial
effect on service and interest cost components in 2013 and the post-retirement obligation at year-end 2013.
Plan Assets
The fair values of the Company's noncontributory defined benefit retirement plan assets at year-end 2013 and 2012
by asset category are as follows:
2013
Fair Value Measurement
Quoted Prices
in
Active
Markets
for Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
(In thousands)
Asset Category:
Mutual Funds:
U.S. Equity (a) ...............................................................
International Equity (a) ..................................................
Fixed Income (b) ...........................................................
Total Assets ....................................................................
$
$
3,205 $
817
14,374
18,396 $
– $
–
7,660
7,660 $
– $
–
–
– $
3,205
817
22,034
26,056
2012
Fair Value Measurement
Quoted Prices
in
Active
Markets
for Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
(In thousands)
Asset Category:
Mutual Funds:
U.S. Equity (a) ...............................................................
International Equity (a) ..................................................
Fixed Income (b) ...........................................................
Total Assets ....................................................................
$
$
3,331 $
848
14,641
18,820 $
– $
–
7,908
7,908 $
– $
–
–
– $
3,331
848
22,549
26,728
______________________________
(a)
(b)
Common stock index funds.
Investments in commingled funds that invest in a diversified blend of investment and non-investment grade fixed income
securities.
F-25
Kadant Inc.
2013 Financial Statements
Notes to Consolidated Financial Statements
3.
Employee Benefit Plans (continued)
Description of Fair Value Measurements
Level 1 – Quoted, active market prices for identical assets. Share prices of the funds, referred to as a fund's Net Asset Value
(NAV), are calculated daily based on the closing market prices and accruals of securities in the fund's total portfolio (total
value of the fund) divided by the number of fund shares currently issued and outstanding. Redemptions of the mutual funds
occur by contract at the respective fund's redemption date NAV.
Level 2 – Observable inputs other than Level 1 prices, based on model-derived valuations in which all significant inputs are
observable in active markets. The NAVs of the funds are calculated monthly based on the closing market prices and accruals
of securities in the fund's total portfolio (total value of the fund) divided by the number of fund shares currently issued and
outstanding. Redemptions of the mutual funds occur by contract at the respective fund's redemption date NAV.
Level 3 – Unobservable inputs based on the Company's own assumptions.
The Company has developed an investment policy for its 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 noncontributory defined benefit retirement 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
Equity securities................................................................................................
Debt securities ..................................................................................................
Total ..................................................................................................................
Minimum
Neutral
Maximum
10%
80%
15%
85%
100%
20%
90%
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
The Company expects to make cash contributions of $1,080,000 to its noncontributory defined benefit retirement
plan in 2014. For the remaining pension and post-retirement welfare benefits plans, no cash contributions other than to fund
current benefit payments are expected in 2014.
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 2013.
(In thousands)
2014 ........................................................................................................................................
2015 ........................................................................................................................................
2016 ........................................................................................................................................
2017 ........................................................................................................................................
2018 ........................................................................................................................................
2019-2023 ...............................................................................................................................
$
Pension
Benefits
Other
Benefits
1,143 $
1,237
1,286
2,668
2,034
11,269
234
425
202
753
433
1,977
F-26
Kadant Inc.
2013 Financial Statements
3.
Employee Benefit Plans (continued)
Notes to Consolidated Financial Statements
Information and Assumptions for the Post-Retirement Welfare Benefits Plan
All eligible retirees of the Company's Kadant Solutions division are currently participating in a post-retirement
welfare benefits plan, with no future retirees eligible to participate. Effective September 1, 2003, the monthly contribution to
the plan was capped 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 8% in 2014 and an
ultimate rate of 0% in 2018, at which time the plan caps on benefits are expected to apply to all benefits.
All eligible retirees of the Company's Kadant Johnson Inc. subsidiary are currently participating in a 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. This plan was closed to employees who did not meet its retirement eligibility
requirements on January 1, 2012. The medical healthcare cost trend rate no longer affects the amounts reported for the health
care benefits in this plan.
4.
Stockholders' Equity
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.
Common Stock
At year-end 2013, the Company had reserved 1,124,480 unissued shares of its common stock for possible issuance
under its stock-based compensation plans.
5.
Income Taxes
The components of income from continuing operations before provision for income taxes are as follows:
(In thousands)
Domestic .........................................................................................................
Foreign ............................................................................................................
2013
2012
2011
$
$
8,913 $
24,113
33,026 $
11,445 $
24,485
35,930 $
9,823
28,320
38,143
The components of the provision for income taxes from continuing operations are as follows:
(In thousands)
Current Provision:
2013
2012
2011
Federal .................................................................................................
Foreign .................................................................................................
State .....................................................................................................
$
1,986 $
7,955
436
10,377
1,798 $
7,363
559
9,720
Deferred (Benefit) Provision:
Federal .................................................................................................
Foreign .................................................................................................
State .....................................................................................................
1,325
(2,354)
(32)
(1,061)
9,316 $
(3,980)
(782)
(106)
(4,868)
4,852 $
$
123
5,575
473
6,171
(317)
(1,309)
(260)
(1,886)
4,285
F-27
Kadant Inc.
2013 Financial Statements
5.
Income Taxes (continued)
Notes to Consolidated Financial Statements
The provision for income taxes included in the accompanying statement of income is as follows:
(In thousands)
Continuing Operations ....................................................................................
Discontinued Operation ..................................................................................
2013
2012
2011
$
$
9,316 $
(34)
9,282 $
4,852 $
451
5,303 $
4,285
(1,511)
2,774
The Company receives a tax deduction upon the exercise of nonqualified stock options and the vesting of restricted
stock units. The current provision for income taxes in the consolidated statement of income does not reflect $351,000,
$132,000, and $371,000 of such excess tax benefits in 2013, 2012, and 2011, respectively, from the exercise of stock options
and vesting of restricted stock units.
The provision for income taxes from 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 due to the following:
(In thousands)
Provision for Income Taxes at Statutory Rate ..................................................
Increases (Decreases) Resulting From:
2013
2012
2011
$
11,559 $
12,576 $
13,350
State income taxes, net of federal tax .....................................................
U.S. tax (benefit) cost of foreign earnings .............................................
Foreign tax rate differential ....................................................................
Provision (reversal) of tax benefit reserves, net .....................................
Change in valuation allowance ..............................................................
Nondeductible expenses .........................................................................
Research and development tax credits ...................................................
Other ......................................................................................................
304
(119)
(2,681)
853
(968)
1,580
(638)
(574)
9,316 $
295
791
(2,298)
624
(7,051)
775
(623)
(237)
4,852 $
(140)
(53)
(3,094)
(1,596)
(4,183)
746
(324)
(421)
4,285
$
Net deferred tax (liability) asset in the accompanying consolidated balance sheet consists of the following:
(In thousands)
Deferred Tax Asset:
$
Foreign and alternative minimum tax credit carryforwards ...........................................
Reserves and accruals ....................................................................................................
Net operating loss carryforwards ...................................................................................
Inventory basis difference..............................................................................................
Research and development ............................................................................................
Employee compensation ................................................................................................
Allowance for doubtful accounts ...................................................................................
Revenue recognition ......................................................................................................
Other ..............................................................................................................................
Deferred Tax Asset, Gross .......................................................................................
Less: Valuation Allowance ......................................................................................
Deferred Tax Asset, Net ...........................................................................................
Deferred Tax Liability:
Goodwill and intangible assets ......................................................................................
Fixed asset basis difference ...........................................................................................
Reserves and accruals ....................................................................................................
Other ..............................................................................................................................
Deferred Tax Liability ..............................................................................................
Net Deferred Tax (Liability) Asset ..........................................................................
$
2013
2012
3,819 $
5,125
16,452
2,797
1,017
3,199
595
253
209
33,466
(13,905)
19,561
(20,923)
(3,619)
(207)
(65)
(24,814)
(5,253) $
5,659
6,493
15,147
2,468
1,193
2,229
486
286
88
34,049
(14,315)
19,734
(15,393)
(2,974)
(342)
(107)
(18,816)
918
F-28
Kadant Inc.
2013 Financial Statements
5.
Income Taxes (continued)
Notes to Consolidated Financial Statements
The deferred tax assets and liabilities are presented in the accompanying balance sheet within other current assets,
other assets, other current liabilities and long-term 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 domestic and foreign deferred tax assets on
deductible temporary differences, tax losses, and tax credit carryforwards. The valuation allowance at year-end 2013 was
$13,905,000, consisting of $950,000 in the U.S. and $12,955,000 in foreign jurisdictions. The decrease in the valuation
allowance in 2013 of $410,000 related primarily to the release of valuation allowances in the U.S. and several foreign
jurisdictions due to an increase in current year income and expected future income. Compliance with ASC 740 requires the
Company to periodically evaluate the necessity of establishing or adjusting a valuation allowance for deferred tax assets
depending on whether it is more likely than not that a related tax benefit will be realized in future periods. When assessing
the need for a valuation allowance in a tax jurisdiction, the Company evaluates the weight of all available evidence to
determine whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. As part of
this evaluation, the Company considers its cumulative three-year history of earnings before income taxes, taxable income in
prior carryback years, future reversals of existing taxable temporary differences, prudent and feasible tax planning strategies,
and expected future results of operations. As of year-end 2013, the Company continued to maintain a valuation allowance in
the U.S. against its state operating loss carryforwards due to the uncertainty of future profitability in state jurisdictions. As of
year-end 2013, the Company maintained valuation allowances in certain foreign jurisdictions because of the uncertainty of
future profitability.
At year-end 2013, the Company had domestic state and foreign net operating loss carryforwards of $28,963,000 and
$59,708,000, respectively, U.S. foreign tax credit carryforwards of $2,182,000, U.S. research and development tax credits of
$467,000, and U.S. alternative minimum tax credits of $1,154,000. The domestic state loss carryforwards will expire in the
years 2014 through 2032. Their utilization is limited to future taxable income from the Company's domestic subsidiaries. Of
the foreign net operating loss carryforwards, $11,790,000 will expire in the years 2014 through 2032, and the remainder do
not expire. The U.S. foreign tax credits will expire in the years 2018 through 2019. The research and development tax credits
will expire in the years 2030 through 2033 and the alternative minimum tax credits may be carried forward indefinitely.
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 intention to reinvest
indefinitely the earnings of its international subsidiaries in order to support the current and future capital needs of their
operations in the foreign jurisdictions. Through year-end 2013, the Company has not provided for U.S. income taxes on
approximately $145,926,000 of unremitted foreign earnings. The U.S. tax cost has not been determined due to the fact that it
is not practicable to estimate at this time. The related foreign tax withholding, which would be required if the Company were
to remit these foreign earnings to the U.S., would be approximately $2,000,000.
The Company operates within multiple tax jurisdictions and could be subject to audit in those jurisdictions. Such
audits can involve complex income tax 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.
F-29
Kadant Inc.
2013 Financial Statements
5.
Income Taxes (continued)
Notes to Consolidated Financial Statements
As of year-end 2013, the Company had $5,423,000 of unrecognized tax benefits which, if recognized, would reduce
the effective tax rate. A tabular reconciliation of the beginning and ending amount of unrecognized tax benefits at year-end
2013 and 2012 is as follows:
(In thousands)
Unrecognized tax benefits, beginning of year ......................................................................
Gross increases—tax positions in prior periods ....................................................................
Gross decreases—tax positions in prior periods ...................................................................
Gross increases—current-period tax positions .....................................................................
Settlements ............................................................................................................................
Lapses of statutes of limitations ............................................................................................
Currency translation ..............................................................................................................
Unrecognized tax benefits, end of year .................................................................................
2013
2012
$
$
4,194 $
449
-
1,086
(6)
(158)
(142)
5,423 $
3,308
185
(41)
1,231
(182)
(367)
60
4,194
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for
income taxes. The Company has accrued $1,776,000 and $1,196,000 for the potential payment of interest and penalties at
year-end 2013 and 2012, respectively. The interest and penalties included in the consolidated statement of income was an
expense (benefit) of $205,000 and $(6,000) in 2013 and 2012, respectively.
The Company is currently under audit in certain non-U.S. taxing jurisdictions. It is reasonably possible that over the
next fiscal year the amount of liability for unrecognized tax benefits may be reduced by up to $842,000 due to the re-
evaluation of current uncertain tax positions as a result of examinations or from the expiration of tax statutes of limitations.
The Company remains subject to U.S. Federal income tax examinations for the tax years 2010 through 2013, and to
non-U.S. income tax examinations for the tax years 2006 through 2013. In addition, the Company remains subject to state
and local income tax examinations in the U.S. for the tax years 2002 through 2013.
6.
Long-Term Obligations
Long-term obligations at year-end 2013 and 2012 are as follows:
(In thousands)
Revolving Credit Facility, due 2018 .....................................................................................
Variable Rate Term Loan, due from 2014 to 2016 ...............................................................
Total Long-Term Obligations ...............................................................................................
Less: Current Maturities .......................................................................................................
Long-Term Obligations, less Current Maturities ..................................................................
2013
2012
$
$
32,260 $
6,375
38,635
(625)
38,010 $
–
6,875
6,875
(625)
6,250
The annual payment requirements for long-term obligations are as follows:
(In thousands)
2014 .................................................................................................................................................................
2015 .................................................................................................................................................................
2016 .................................................................................................................................................................
2017 .................................................................................................................................................................
2018 .................................................................................................................................................................
$
625
500
5,250
-
32,260
The weighted average interest rate for long-term obligations was 2.74% and 6.38% at year-end 2013 and 2012,
respectively.
See Note 11 for the fair value information related to the Company's long-term obligations.
F-30
Kadant Inc.
2013 Financial Statements
Notes to Consolidated Financial Statements
6.
Long-Term Obligations (continued)
Revolving Credit Facility
The Company entered into a five-year unsecured revolving credit facility (2012 Credit Agreement) in the aggregate
principal amount of up to $100,000,000 on August 3, 2012 and amended it on November 1, 2013. The 2012 Credit
Agreement also includes an uncommitted unsecured incremental borrowing facility of up to an additional $50,000,000. The
principal on any borrowings made under the 2012 Credit Agreement is due on November 1, 2018. Interest on any loans
outstanding under the 2012 Credit Agreement accrues and is payable quarterly in arrears at one of the following rates selected
by the Company: (i) the highest of (a) the federal funds rate plus 0.50% plus an applicable margin of 0% to 1%, (b) the prime
rate, as defined, plus an applicable margin of 0% to 1% and (c) the Eurocurrency rate, as defined, plus 0.50% plus an
applicable margin of 0% to 1% or (ii) the Eurocurrency rate, as defined, plus an applicable margin of 1% to 2%. The
applicable margin is determined based upon the ratio of the Company's total debt to EBITDA, as defined in the 2012 Credit
Agreement. For this purpose, total debt is defined as total debt less up to $25,000,000 of unrestricted U.S. cash.
The obligations of the Company under the 2012 Credit Agreement may be accelerated upon the occurrence of an
event of default under the 2012 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 the Employment Retirement
Income Security Act (ERISA), unsatisfied judgments, the failure to pay certain indebtedness, and a change of control default.
In addition, the 2012 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 3.5 to 1, a minimum
consolidated interest coverage ratio of 3 to 1, and 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 its fiscal year, arrangements affecting subsidiary
distributions, entering into new lines of business, and certain actions related to the discontinued operation. As of December
28, 2013, the Company was in compliance with these covenants.
Loans under the 2012 Credit Agreement are guaranteed by certain domestic subsidiaries of the Company pursuant to
a Guarantee Agreement, effective August 3, 2012.
As of year-end 2013, the outstanding balance on the 2012 Credit Agreement was $32,260,000, which was primarily
used to fund the acquisition of Carmanah. As of December 28, 2013, the Company had $66,911,000 of borrowing capacity
available under the committed portion of its 2012 Credit Agreement. The amount the Company is able to borrow under the
2012 Credit Agreement is the total borrowing capacity of $100,000,000 less any outstanding borrowings, letters of credit and
multi-currency borrowings issued under the 2012 Credit Agreement.
2006 Commercial Real Estate Loan
On May 4, 2006, the Company borrowed $10,000,000 under a promissory note (2006 Commercial Real Estate
Loan), which 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 2006 Commercial Real Estate 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 .75% margin. The 2006 Commercial Real Estate 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; and Three Rivers, Michigan; pursuant to mortgage and security agreements dated May 4, 2006
(Mortgage and Security Agreements). As of year-end 2013, the outstanding balance on the 2006 Commercial Real Estate
Loan was $6,375,000.
The Company's obligations under the 2006 Commercial Real Estate Loan may be accelerated upon the occurrence
of an event of default under the 2006 Commercial Real Estate Loan and the Mortgage and Security Agreements, which
include 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 2012 Credit
Agreement or any successor credit facility would be an event of default under the 2006 Commercial Real Estate Loan.
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 year-end 2013, unamortized debt issuance costs, included in other assets in the accompanying
consolidated balance sheet, were approximately $668,000.
F-31
Kadant Inc.
2013 Financial Statements
Notes to Consolidated Financial Statements
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 $2,545,000, $2,137,000, and $2,043,000 in
2013, 2012, and 2011, respectively. The future minimum payments due under noncancelable operating leases at year-end
2013 are $3,058,000 in 2014; $2,015,000 in 2015; $1,116,000 in 2016; $396,000 in 2017; $113,000 in 2018 and $20,000
thereafter. Total future minimum lease payments are $6,718,000.
Letters of Credit and Bank Guarantees
Outstanding letters of credit and bank guarantees issued on behalf of the Company as applicant, principally relating
to performance obligations and customer deposit guarantees, totaled $10,533,000 at year-end 2013. Certain of the Company's
contracts, particularly for stock-preparation and systems orders, require the Company to provide a standby letter of credit or
bank guarantee to a customer as beneficiary, limited in amount to a negotiated percentage of the total contract value, in order
to guarantee warranty and performance obligations of the Company under the contract. Typically, these standby letters of
credit and bank guarantees expire without being drawn by the beneficiary.
Right of Recourse
In the ordinary course of business, the Company's subsidiaries in China may receive banker's acceptance drafts from
customers in payment of outstanding accounts receivable. These banker's acceptance drafts are non-interest bearing and
mature within six months of the origination date. The Company's subsidiaries in China may use these banker's acceptance
drafts prior to the scheduled maturity date to settle outstanding accounts payable with vendors. Banker's acceptance drafts
transferred to vendors are subject to customary right of recourse provisions prior to their scheduled maturity date. At year-
end 2013, the Company had $5,688,000 of banker's acceptance drafts subject to recourse, which were transferred to vendors
and had not reached their scheduled maturity date. Historically, the banker's acceptance drafts have settled upon maturity
without any claim of recourse against the Company.
Purchase Obligations
The Company has entered into an unconditional purchase obligation, in the ordinary course of business, for business
network services, which includes minimum purchase obligations of $600,000 in each of 2014 and 2015.
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.
Litigation
From time to time, the Company is subject to various claims and legal proceedings covering a range of matters that
arise in the ordinary course of business. Such litigation may include claims and counterclaims by and against the Company
for breach of contract or warranty, canceled contracts, product liability, or bankruptcy-related claims. For legal proceedings
in which a loss is probable and estimable, the Company accrues a loss based on the low end of the range of estimated loss
when there is no better estimate within the range. If the Company were found to be liable for any of the claims or
counterclaims against it, the Company would incur a charge against earnings for amounts in excess of legal accruals.
F-32
Kadant Inc.
2013 Financial Statements
Notes to Consolidated Financial Statements
8.
Restructuring Costs and Other Expense (Income), Net
Other Expense (Income)
In 2013, other income consisted of a pre-tax gain of $1,740,000 from the sale of real estate in China.
In 2012, other expense consisted of accelerated depreciation of $307,000 associated with the disposal of equipment
in China related to a facility consolidation.
In 2011, other income consisted of a pre-tax gain of $2,282,000 from the sale of real estate in China.
2013 Restructuring Plan
The Company recorded restructuring costs of $1,843,000, including severance costs of $1,158,000 associated with
the reduction of 22 employees in Brazil and severance costs of $508,000 associated with the reduction of 25 employees in
Sweden. Also included in restructuring costs were facility-related costs of $177,000. These actions were taken to streamline
the Company's operations as a result of the CBTI and Noss acquisitions. All of these items occurred in the Papermaking
Systems segment.
2011 Restructuring Plan
The Company recorded restructuring costs of $408,000 in 2011 in its Papermaking Systems segment consisting of
severance and associated costs related to the reduction of 73 employees in China to adjust our cost structure and streamline
our operations.
2008 Restructuring Plan
The Company recorded total restructuring costs of $4,507,000 in 2008 through 2012 associated with its 2008
Restructuring Plan. These restructuring costs included facility-related costs of $385,000 and severance and associated costs
of $4,122,000 related to the reduction of 329 employees in China, North America, Latin America, and Europe, all in its
Papermaking Systems segment. The Company took these actions to adjust its cost structure and streamline its operations in
response to the weak economic environment at the time.
F-33
Kadant Inc.
2013 Financial Statements
Notes to Consolidated Financial Statements
8.
Restructuring Costs and Other Expense (Income), Net (continued)
A summary of the changes in accrued restructuring costs are as follows:
(In thousands)
2013 Restructuring Plan
Provision ................................................................
Usage .....................................................................
Currency translation ...............................................
Balance at December 28, 2013 ....................................
2011 Restructuring Plan
Balance at January 1, 2011 ..........................................
Provision ................................................................
Balance at December 31, 2011 ....................................
Provision reversal ...................................................
Usage .....................................................................
Currency translation ...............................................
Balance at December 29, 2012 ....................................
Usage .....................................................................
Currency translation ...............................................
Balance at December 28, 2013 ....................................
2008 Restructuring Plan
Balance at January 1, 2011 ..........................................
Usage .....................................................................
Currency translation ...............................................
Balance at December 31, 2011 ....................................
Provision reversal ...................................................
Usage .....................................................................
Currency translation ...............................................
Balance at December 29, 2012 ....................................
Usage .....................................................................
Currency translation ...............................................
Balance at December 28, 2013 ....................................
$
$
$
$
$
$
$
$
$
$
Severance
Costs
Other
Costs
Total
Costs
1,666 $
(1,038)
(161)
467 $
177 $
(177)
–
– $
1,843
(1,215)
(161)
467
– $
408
408 $
(67)
(256)
3
88 $
(38)
2
52 $
433 $
(94)
15
354 $
(8)
(182)
2
166 $
(141)
6
31 $
– $
–
– $
–
–
–
– $
–
–
– $
– $
–
–
– $
–
–
–
– $
–
–
– $
–
408
408
(67)
(256)
3
88
(38)
2
52
433
(94)
15
354
(8)
(182)
2
166
(141)
6
31
The Company expects to pay the remaining accrued restructuring costs from 2014 to 2016.
9.
Discontinued Operation
In 2005, the Company's Kadant Composites LLC subsidiary (Composites LLC) sold substantially all of its assets to
a third party. 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. Under the terms of the asset purchase agreement, Composites LLC retained certain liabilities associated with the
operation of the business prior to the sale, including 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.
On October 24, 2011, the Company, Composites LLC, and other co-defendants entered into an agreement to settle a
nationwide class action lawsuit related to allegedly defective composites decking building products manufactured by
Composites LLC between April 2002 and October 2003. As of December 31, 2011, the Company had accrued $2,577,000 for
the estimated payment of claims, which was reduced by $1,574,000 in 2012. In 2012, the Company paid $647,000 in
approved claims under the class action settlement.
F-34
Kadant Inc.
2013 Financial Statements
Notes to Consolidated Financial Statements
9.
Discontinued Operation (continued)
The discontinued operation had a pre-tax operating loss of $96,000 in 2013, pre-tax operating income of $1,194,000
in 2012 and a pre-tax operating loss of $1,520,000 in 2011.
10. Derivatives
Interest Rate Swaps
The Company entered into interest rate swap agreements in 2008 and 2006 to hedge its exposure to variable-rate
debt and has designated these agreements as cash flow hedges. On February 13, 2008, the Company entered into a swap
agreement (2008 Swap Agreement) to hedge the exposure to movements in the three-month LIBOR rate on future
outstanding debt. The 2008 Swap Agreement had a five-year term and a $15,000,000 notional value, which decreased to
$10,000,000 on December 31, 2010, and to $5,000,000 on December 30, 2011. Under the 2008 Swap Agreement, on a
quarterly basis the Company received a three-month LIBOR rate and paid a fixed rate of interest of 3.265% plus the
applicable margin. The 2008 Swap Agreement expired on February 13, 2013.
The Company entered into a swap agreement in 2006 (the 2006 Swap Agreement) to convert a portion of the
Company's outstanding debt from a floating to a fixed rate of interest. The swap agreement has the same terms and quarterly
payment dates as the corresponding debt, and reduces proportionately in line with the amortization of the debt. Under the
2006 Swap Agreement, the Company receives a three-month LIBOR rate and pays a fixed rate of interest of 5.63% plus an
applicable margin. The fair value of the 2006 Swap Agreement as of December 28, 2013 is included in other liabilities, with
an offset to accumulated other comprehensive items (net of tax) in the accompanying consolidated balance sheet.
The Company has structured the interest rate swap agreements to be 100% effective, and as a result, there is no
current impact to earnings resulting from hedge ineffectiveness. Management believes that any credit risk associated with the
swap agreement is remote based on the Company's financial position and the creditworthiness of the financial institution
issuing the swap agreement.
The counterparty to the swap agreement could demand an early termination of the swap agreement if the Company
is in default under the 2012 Credit Agreement, or any agreement that amends or replaces the 2012 Credit Agreement in
which the counterparty is a member, and the Company is unable to cure the default. An event of default under the 2012
Credit Agreement includes customary events of default and failure to comply with financial covenants, including a maximum
consolidated leverage ratio of 3.5 to 1 and a minimum consolidated interest charge coverage ratio of 3 to 1. As of December
28, 2013, the Company was in compliance with these covenants. The unrealized loss associated with the swap agreement was
$773,000 as of December 28, 2013, which represents the estimated amount that the Company would pay to the counterparty
in the event of an early termination.
Forward Currency-Exchange Contracts
The Company uses forward currency-exchange contracts primarily to hedge exposures resulting from fluctuations in
currency exchange rates. Such exposures result primarily from portions of the Company's operations and assets and liabilities
that are denominated in currencies other than the functional currencies of the businesses conducting the operations or holding
the assets and liabilities. The Company typically manages its level of exposure to the risk of currency-exchange fluctuations
by hedging a portion of its currency exposures anticipated over the ensuing 12-month period, using forward currency-
exchange contracts that have maturities of 12 months or less.
Forward currency-exchange contracts that hedge forecasted accounts receivable or accounts payable are designated
as cash flow hedges. The fair values for these instruments are included in other current assets for unrecognized gains and in
other current liabilities for unrecognized losses, with an offset in accumulated other comprehensive items (net of tax). For
forward currency-exchange contracts that are designated as fair value hedges, the gain or loss on the derivative, as well as the
offsetting loss or gain on the hedged item are recognized currently in earnings. The fair values of forward currency-exchange
contracts that are not designated as hedges are recorded currently in earnings. The Company recognized gains of $146,000,
$12,000 and $4,000 in 2013, 2012 and 2011, respectively, included in selling, general, and administrative expenses
associated with forward currency-exchange contracts that were not designated as hedges. Management believes that any
credit risk associated with forward currency-exchange contracts is remote based on the Company's financial position and the
creditworthiness of the financial institutions issuing the contracts.
F-35
Kadant Inc.
2013 Financial Statements
Notes to Consolidated Financial Statements
10. Derivatives (continued)
The following table summarizes the fair value of the Company's derivative instruments designated and not
designated as hedging instruments, the notional values of the associated derivative contracts, and the location of these
instruments in the consolidated balance sheet:
(In thousands)
Derivatives Designated as Hedging
Instruments:
Balance Sheet
Location
Asset
(Liability) (a)
Notional
Amount (b)
Asset
(Liability) (a)
Notional
Amount (b)
2013
2012
Derivatives in an Asset Position:
Forward currency-exchange
contracts ............................................
Derivatives in a Liability Position:
Forward currency-exchange
contracts ............................................
Interest rate swap agreement .............
Interest rate swap agreement .............
Other Current
Assets
Other Current
Liabilities
Other Current
Liabilities
Other Long-Term
Liabilities
Derivatives Not Designated as Hedging
Instruments:
Derivatives in an Asset Position:
Forward currency-exchange
contracts ............................................
Derivatives in a Liability Position:
Forward currency-exchange
contracts ............................................
Other Current
Assets
Other Current
Liabilities
$
$
$
$
$
$
– $
– $
5 $
269
(22) $
1,340 $
(161) $
3,180
– $
– $
(19) $
5,000
(773) $
6,375 $
(1,029) $
6,875
97 $
1,419 $
24 $
1,013
(1) $
288 $
(12) $
815
(a)
(b)
See Note 11 for the fair value measurements relating to these financial instruments.
The total notional amount is indicative of the level of the Company's derivative activity during 2013 and 2012.
The following table summarizes the activity in accumulated other comprehensive items (OCI) associated with the
Company's derivative instruments designated as cash flow hedges as of and for the period ended December 28, 2013:
(In thousands)
Unrealized loss, net of tax, at December 29, 2012 ............................................
Loss reclassified to earnings (a) .......................................................................
Loss recognized in OCI ....................................................................................
Unrealized loss, net of tax, at December 28, 2013 ............................................
Interest Rate
Swap
Agreements
Forward
Currency-
Exchange
Contracts
$
$
939 $
(383)
62
618 $
107 $
(102)
10
15 $
Total
1,046
(485)
72
633
(a)
Included in interest expense for interest rate swap agreements and in revenues for forward currency-exchange
contracts in the accompanying consolidated statement of income.
As of December 28, 2013, $281,000 of the net unrealized loss included in OCI is expected to be reclassified to
earnings over the next twelve months.
F-36
Kadant Inc.
2013 Financial Statements
11. Fair Value Measurements and Fair Value of Financial Instruments
Notes to Consolidated Financial Statements
Fair value measurement is defined as the price that would be received to sell an asset or paid to transfer a liability in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at
the measurement date. A fair value hierarchy is established, which prioritizes the inputs used in measuring fair value into
three broad levels as follows:
•
•
•
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
Level 3—Unobservable inputs based on the Company's own assumptions.
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a
recurring basis:
(In thousands)
Assets:
Money market funds and time deposits .........................
Forward currency-exchange contracts ..........................
Banker's acceptance drafts (a) ......................................
Liabilities:
Forward currency-exchange contracts ..........................
Interest rate swap agreement .........................................
(In thousands)
Assets:
Money market funds and time deposits .......................
Forward currency-exchange contracts .........................
Banker's acceptance drafts (a) ....................................
Liabilities:
Forward currency-exchange contracts ..........................
Interest rate swap agreements .......................................
Fair Value as of December 28, 2013
Level 1
Level 2
Level 3
Total
17,090 $
– $
– $
– $
97 $
10,765 $
– $
– $
23 $
773 $
– $
– $
– $
– $
– $
17,090
97
10,765
23
773
Fair Value as of December 29, 2012
Level 1
Level 2
Level 3
Total
19,768 $
– $
– $
– $
29 $
9,794 $
– $
– $
173 $
1,048 $
– $
– $
– $
– $
– $
19,768
29
9,794
173
1,048
$
$
$
$
$
$
$
$
$
$
(a)
Included in accounts receivable in the accompanying consolidated balance sheet.
The Company uses the market approach technique to value its financial assets and liabilities, and there were no
changes in valuation techniques during 2013. The Company's financial assets and liabilities carried at fair value comprise
cash equivalents, banker's acceptance drafts, and derivative instruments used to hedge the Company's foreign currency and
interest rate risks. The Company's cash equivalents include money market funds and bank deposits which are highly liquid
and easily tradable. These investments are valued using inputs observable in active markets for identical securities. The
carrying value of banker's acceptance drafts approximates their fair value due to the short-term nature of the negotiable
instrument. The fair values of the Company's interest rate swap agreements are based on LIBOR yield curves at the reporting
date. The fair values of the Company's forward currency-exchange contracts are based on quoted forward foreign exchange
rates at the reporting date. The forward currency-exchange contracts and interest rate swap agreements are hedges of either
recorded assets or liabilities or anticipated transactions. Changes in values of the underlying hedged assets and liabilities or
anticipated transactions are not reflected in the table above.
The carrying amount and fair value of the Company's debt obligations are as follows:
(In thousands)
Long-term debt obligations ........................................................
2013
2012
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
$
38,010 $
38,010 $
6,250 $
6,250
The carrying amounts of long-term debt obligations approximate fair value as the obligations bear variable rates of
interest, which adjust quarterly based on prevailing market rates.
F-37
Kadant Inc.
2013 Financial Statements
Notes to Consolidated Financial Statements
12. Business Segment and Geographical Information
The Company has combined its operating entities into two reportable operating segments, Papermaking Systems and
Wood Processing Systems, and a separate product line, Fiber-based Products. In classifying operational entities into a
particular segment, the Company aggregated businesses with similar economic characteristics, products and services,
production processes, customers, and methods of distribution.
The Company's Papermaking Systems segment develops, manufactures, and markets stock-preparation systems and
equipment; fluid-handling systems; and doctoring, cleaning, and filtration systems and related consumables 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; fluid-handling systems used primarily in the
dryer section of the papermaking process and during the production of corrugated boxboard, metals, plastics, rubber, textiles,
chemicals, and food; doctoring systems and equipment and related consumables important to the efficient operation of paper
machines; and cleaning and filtration systems essential for draining, purifying, and recycling process water and cleaning
paper machine fabrics and rolls. The Wood Processing Systems segment designs and manufactures stranders and related
equipment used in the production of oriented strand board, an engineered wood panel product used primarily in home
construction. This segment also supplies debarking and wood chipping equipment used in the forest products and the pulp
and paper industries. The Fiber-based Products business 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.
(In thousands)
Business Segment Information
Revenues by Product Line:
Papermaking Systems:
2013
2012
2011
Stock-Preparation .................................................................................
Doctoring, Cleaning, & Filtration ........................................................
Fluid-Handling .....................................................................................
Papermaking Systems ..............................................................................
Wood Processing Systems .......................................................................
Fiber-based Products ...............................................................................
Income from Continuing Operations Before Provision for Income Taxes:
Papermaking Systems (a) .......................................................................
Wood Processing Systems .......................................................................
Corporate and Fiber-based Products ........................................................
Total operating income ............................................................................
Interest expense, net ................................................................................
$
$
$
$
$
122,704 $
112,600
93,404
328,708 $
4,573
11,218
344,499 $
123,952 $
104,493
92,581
321,026 $
–
10,725
331,751 $
47,144 $
(382)
(13,459)
33,303
(277)
33,026 $
48,618 $
–
(12,174)
36,444
(514)
35,930 $
131,914
92,333
100,618
324,865
–
10,595
335,460
50,869
–
(12,159)
38,710
(567)
38,143
F-38
Kadant Inc.
2013 Financial Statements
Notes to Consolidated Financial Statements
12.
Business Segment and Geographical Information (continued)
(In thousands)
Total Assets:
Papermaking Systems .............................................................................
Wood Processing Systems ......................................................................
Corporate and Fiber-based Products (b) ................................................
Total Assets from Continuing Operations ..............................................
Total Assets from Discontinued Operation.............................................
Depreciation and Amortization:
Papermaking Systems .............................................................................
Other .......................................................................................................
Capital Expenditures:
Papermaking Systems .............................................................................
Other .......................................................................................................
Geographical Information
Revenues (c):
United States ...........................................................................................
China ......................................................................................................
Other .......................................................................................................
Long-lived Assets (d):
United States ...........................................................................................
China ......................................................................................................
Other .......................................................................................................
Export Revenues Included in United States Revenues Above (e)
2013
2012
2011
364,102 $
63,493
14,429
442,024
144
442,168 $
347,540 $
-
10,895
358,435
513
358,948 $
340,227
-
16,496
356,723
1,675
358,398
8,434 $
1,341
9,775 $
5,843 $
418
6,261 $
7,903 $
481
8,384 $
3,982 $
268
4,250 $
7,455
481
7,936
7,751
279
8,030
129,131 $
50,678
164,690
344,499 $
128,663 $
53,242
149,846
331,751 $
123,614
62,615
149,231
335,460
14,118 $
14,603
16,164
44,885 $
9,685 $
13,702 $
15,136
10,330
39,168 $
20,871 $
14,578
15,789
9,728
40,095
16,512
$
$
$
$
$
$
$
$
$
$
$
__________________________________
(a)
Includes restructuring costs and other expense (income), net, including costs of $0.1 million and $0.3 million in 2013
and 2012, respectively, and income of $1.9 million in 2011 (see Note 8).
Primarily includes cash and cash equivalents and property, plant, and equipment.
Revenues are attributed to countries based on customer location.
(b)
(c)
(d) Represents property, plant, and equipment, net.
(e)
In general, export revenues are denominated in U.S. dollars.
F-39
Kadant Inc.
2013 Financial Statements
Notes to Consolidated Financial Statements
13. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
(In thousands, except per share amounts)
Amounts Attributable to Kadant:
Income from Continuing Operations ..............................................................
(Loss) Income from Discontinued Operation .................................................
Net Income .....................................................................................................
Basic Weighted Average Shares .....................................................................
Effect of Stock Options, Restricted Stock Units and Employee Stock Purchase
Plan ..............................................................................................................
Diluted Weighted Average Shares ..................................................................
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 ..............................................................
$
$
$
$
$
$
$
$
2013
2012
2011
23,481 $
(62)
23,419 $
11,153
30,880 $
743
31,623 $
11,456
187
11,340
134
11,590
2.11 $
(0.01) $
2.10 $
2.07 $
(0.01) $
2.07 $
2.70 $
0.06 $
2.76 $
2.66 $
0.06 $
2.73 $
33,584
(9)
33,575
12,124
137
12,261
2.77
–
2.77
2.74
–
2.74
Options to purchase 74,300 shares, 150,000 shares, and 67,500 shares of common stock were not included in the
computation of diluted earnings per share for 2013, 2012, and 2011, respectively, because the options' exercise prices were
greater than the average market price for the common stock and the effect would have been antidilutive. In addition, the
dilutive effect of restricted stock units totaling 20,400, 28,500, and 45,700 shares of common stock was not included in the
computation of diluted earnings per share in 2013, 2012, and 2011, respectively, as the effect would have been antidilutive
or, for unvested performance-based restricted stock units, the performance conditions had not been met as of the end of the
reporting periods during the year.
14. Accumulated Other Comprehensive Items
Comprehensive income combines net income and other comprehensive items, which represent certain amounts that
are reported as components of stockholders' equity in the accompanying consolidated balance sheet, including foreign
currency translation adjustments, deferred losses and unrecognized prior service cost associated with pension and other post-
retirement plans, and deferred losses on hedging instruments.
Changes in each component of accumulated other comprehensive items, net of tax are as follows:
(In thousands)
Balance at December 29, 2012 .........................
Other comprehensive income (loss) before
reclassifications .........................................
Reclassifications from AOCI ............................
Net current period other comprehensive income
Balance at December 28, 2013 .........................
Foreign
Currency
Translation
Adjustment
Unrecognized
Prior Service
Cost
Deferred Loss
on Pension
and Other
Post-
Retirement
Plans
Deferred Loss
on Hedging
Instruments
Accumulated
Other
Comprehensive
Items
$
8,124 $
(748) $
(9,645) $
(1,046) $
(3,315)
795
–
795
8,919 $
-
91
91
(657) $
2,320
406
2,726
(6,919) $
(72)
485
413
(633) $
3,043
982
4,025
710
$
F-40
Kadant Inc.
2013 Financial Statements
Notes to Consolidated Financial Statements
14. Accumulated Other Comprehensive Items (continued)
Amounts reclassified out of accumulated other comprehensive items were as follows:
(In thousands)
Pension and Other Post-retirement
Plans
Amortization of prior service costs
(1) .................................................
$
Amortization of actuarial losses (1)
Total expense before income taxes
Income tax benefit .........................
Cash Flow Hedges
Interest rate swap agreements (2) .
Forward currency-exchange
contracts (2) ..................................
Total expense before income taxes
Income tax benefit .........................
Total Reclassifications ..................
$
2013
2012
2011
Income Statement
Line Item
(141) $
(620)
(761)
264
(497)
(85) $
(683)
(768)
274
(494)
(72) Selling, General and Administrative
(467) Selling, General and Administrative
(539)
192
(347)
Provision for income taxes
(374)
(513)
(706)
Interest expense
(153)
(527)
42
(485)
(982) $
(396)
(909)
317
(592)
(1,086) $
253
(453)
36
(417)
(764)
Revenues
Provision for income taxes
(1)
(2)
Included in the computation of net periodic pension costs. See Note 3 for additional information.
See Note 10 for additional information.
F-41
Kadant Inc.
2013 Financial Statements
Notes to Consolidated Financial Statements
15. Unaudited Quarterly Information
2013 (In thousands, except per share amounts)
Revenues ..................................................................................
Gross Profit ..............................................................................
Amounts Attributable to Kadant:
Income from Continuing Operations .......................................
Loss from Discontinued Operation ..........................................
Net Income Attributable to Kadant ..........................................
Basic Earnings per Share:
Continuing Operations ..................................................
Net Income Attributable to Kadant ...............................
Diluted Earnings per Share:
Continuing Operations ..................................................
Net Income Attributable to Kadant ...............................
First
Second
Third
Fourth
$
76,204 $
36,026
82,165 $
39,940
91,315 $
40,121
94,815
41,617
5,313
(29)
5,284 $
5,772
(12)
5,760 $
6,461
(14)
6,447 $
5,935
(7)
5,928
0.48 $
0.47 $
0.47 $
0.47 $
0.52 $
0.52 $
0.51 $
0.51 $
0.58 $
0.58 $
0.57 $
0.57 $
0.53
0.53
0.52
0.52
$
$
$
$
$
Cash Dividend Declared per Common Share ..........................
$
0.125 $
0.125 $
0.125 $
0.125
2012 (In thousands, except per share amounts)
Revenues ..................................................................................
Gross Profit ..............................................................................
Amounts Attributable to Kadant:
Income from Continuing Operations .......................................
(Loss) Income from Discontinued Operation (a) ....................
Net Income Attributable to Kadant ..........................................
Basic Earnings per Share:
Continuing Operations ..................................................
Net Income Attributable to Kadant ...............................
Diluted Earnings per Share:
Continuing Operations ..................................................
Net Income Attributable to Kadant ...............................
$
$
$
$
$
$
First
Second
Third
Fourth
84,113 $
38,372
82,982 $
36,298
86,601 $
37,596
78,055
33,536
7,114
(61)
7,053 $
6,546
(3)
6,543 $
7,617
844
8,461 $
9,603
(37)
9,566
0.61 $
0.61 $
0.61 $
0.60 $
0.57 $
0.57 $
0.56 $
0.56 $
0.67 $
0.75 $
0.66 $
0.74 $
0.85
0.85
0.84
0.83
(a)
Includes a $1.5 million reduction to the estimated liability for the claims under the class action lawsuit in the third quarter
of 2012.
16.
Subsequent Event
On December 30, 2013, the Company acquired all of the outstanding shares of a European producer of creping and
coating blades for approximately $2,627,000. An additional 1,000,000 euros, or approximately $1,369,000, of contingent
consideration is due to the sellers within two years of the closing date if certain conditions are met, as defined in the purchase
agreement.
F-42
Kadant Inc.
Schedule II
Valuation and Qualifying Accounts
(In thousands)
Balance at
Beginning
of Year
Description
Allowance for Doubtful Accounts
Year Ended December 28, 2013 ....... $ 2,306 $
Year Ended December 29, 2012 ....... $ 2,308 $
Year Ended December 31, 2011 ....... $ 2,185 $
Provision
Charged to
Expense
(Income)
Accounts
Recovered
Accounts
Written
Off
Currency
Translation
Balance at
End
of Year
374 $
(14) $
1,249 $
109 $
30 $
92 $
(152 ) $
(56 ) $
(1,213 ) $
52 $
38 $
(5) $
2,689
2,306
2,308
Description
Accrued Restructuring Costs(a)
Year Ended December 28, 2013 .........................
Year Ended December 29, 2012 .........................
Year Ended December 31, 2011 .........................
_________________________________
(a)
Balance at
Beginning
of Year
Provision
Charged to
Expense
(Income)
Activity
Charged to
Reserve
Currency
Translation
Balance at
End
of Year
$
$
$
254 $
762 $
433 $
1,843 $
(75) $
408 $
(1,394) $
(438) $
(94) $
(153) $
5 $
15 $
550
254
762
The nature of the activity in this account is described in Note 8 to the consolidated financial statements.
F-43
Stockholder Information Requests
Stockholders who desire information about Kadant Inc. may contact us at One Technology Park Drive, Westford,
MA 01886 (telephone: 978-776-2000). Information of interest to stockholders and investors, such as our quarterly
reports, annual reports, press releases and other 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 stockholder 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, 6201 15th Avenue, Brooklyn, NY 11219 (telephone: 718-921-8124 or
800-937-5449) or visit www.amstock.com.
Annual Meeting
The annual meeting of stockholders will be held on Tuesday, May 20, 2014, at 2:30 p.m., at Kadant Inc., One
Technology Park Drive, Westford, Massachusetts.
Annual Report on Form 10-K
The accompanying Annual Report on Form 10-K for the fiscal year ended December 28, 2013, 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, MA 01886 (telephone:
978-776-2000).
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,” “intends,” “anticipates,”
“plans,” “expects,” “seeks,” “estimates,” “would,” “should,” “likely,” “will,” “may,” “continue,” “could,” or similar
expressions are intended to identify forward-looking statements. While we may elect to update forward-looking
statements in the future, we specifically disclaim any obligation to do so, even if our estimates change. A number of
factors could cause our results to differ materially from those indicated by such forward-looking statements,
including those detailed under the heading “Risk Factors” in Part 1, Item 1A in the accompanying Annual Report on
Form 10-K for the fiscal year ended December 28, 2013.
Board of Directors
William A. Rainville
Chairman of the Board, Former President and Chief Executive Officer, Kadant Inc.
John M. Albertine
Chairman and Chief Executive Officer, Albertine Enterprises, Inc. (Consulting and
merchant banking firm)
Scott P. Brown
Of Counsel, Nixon Peabody, LLP (Law firm); Former United States Senator
Thomas C. Leonard
Chief Financial Officer and Chief Accounting Officer, Dynasil Corporation of America
(Manufacturer of detection and analysis technology, precision instruments, and optical
components)
William P. Tully
Emeritus Provost, Vice President and Professor, State University of New York, College
of Environmental Science and Forestry, Syracuse, New York (Educational institution)
Jonathan W. Painter
President and Chief Executive Officer
Officers
Jonathan W. Painter*
President and Chief Executive Officer
Thomas M. O’Brien*
Executive Vice President and Chief Financial Officer
Eric T. Langevin*
Executive Vice President and Chief Operating Officer
Jeffrey L. Powell*
Executive Vice President
Sandra L. Lambert*
Vice President, General Counsel, and Secretary
Wesley A. Martz
Vice President, Marketing
Michael J. McKenney* Vice President, Finance and Chief Accounting Officer
Daniel J. Walsh
Treasurer
* Designates executive officer
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