2 0 1 5 A N N U A L R E P O R T
D e a r S t o c k h o l d e r :
Kadant’s performance in 2015 was exceptional and we once again raised the bar by achieving
new records in gross margin, operating income, net income, adjusted EBITDA, and diluted
earnings per share. I’m particularly pleased we achieved these results despite the significant
negative foreign currency translation effects, which reduced our revenue and adjusted diluted
earnings per share by eight percent and 12 percent, respectively.
We finished 2015 with revenue of $390 million and our adjusted diluted earnings per share was
a record $3.13. Excluding an acquisition and the impact of foreign currency translation, our
internal growth was three percent compared to our record revenue performance in 2014. We had
strong cash flows from operations of $38 million and we returned approximately 50 percent of
our net income to shareholders in dividends and stock repurchases during the year.
Our strong financial results were driven by excellent contributions from our stock-preparation
product line in North America and Asia. Our stock-preparation product line in North America had
a solid increase in capital projects for recycled fiber and virgin pulp systems. In addition, we had
strong results for spare parts and consumables for this product line. In Asia, our stock-preparation
product line also had strong capital shipments in China and to other parts of Asia, such as Taiwan.
Our recent acquisitions all performed quite well and also contributed to our strong 2015 results.
We also continued to extend our current products and technologies into new applications and
process industries that can benefit from our highly specialized application expertise. Industrial
market segments such as carbon and synthetic fibers, food and beverage, and specialty
chemicals have grown in importance as we extend our product lines and develop new products
to address market needs.
As we expand our activities into new markets, we continue to seek complementary businesses
with a strong aftermarket revenue stream. We remain highly selective in pursuing companies that
are well-managed, profitable, and can reinforce our position as a global leader in supplying
high-value, critical components and systems to process industries.
Overall, Kadant is as strong as ever and is well-positioned to continue to grow profitably. I would
like to thank our 1,800 employees around the world for making 2015 an outstanding year. I have
every confidence that this talented group will deliver another solid performance in 2016.
Sincerely,
Jonathan W. Painter
President and Chief Executive Officer
March 18, 2016
* Revenue excluding the effect of acquisitions and foreign currency translation, adjusted diluted EPS (earnings per share) and adjusted EBITDA
(earnings before interest, taxes, depreciation, and amortization) are non-GAAP financial measures as detailed on the following page. A reconcilia-
tion to the most comparable GAAP number appears on the following page.
Non-GAAP Financial Measures
Adjusted Net Income and Adjusted Diluted EPS Reconciliation (non-GAAP)
Net Income and Diluted EPS Attributable to Kadant, as reported
Income from discontinued operation
Adjustments for the following:
Amortization of acquired profit in inventory and backlog, net of tax
Restructuring costs, net of tax
Adjusted Net Income and Adjusted Diluted EPS (a)
Adjusted EBITDA Reconciliation (non-GAAP)
Net Income Attributable to Kadant
Net Income attributable to noncontrolling interest
Income from discontinued operation
Provision for income taxes
Interest expense, net
Operating income
Restructuring costs
Amortization of acquired profit in inventory and backlog
Adjusted operating income
Depreciation and amortization
Adjusted EBITDA
Twelve Months Ended
Jan. 2, 2016
($ in millions) Diluted EPS
$ 34.4
(0.1)
$ 3.10
(0.01)
0.1
0.4
$ 34.8
0.01
0.03
$ 3.13
Twelve Months Ended
Jan. 2, 2016
(in millions)
$34.4
0.3
(0.1)
14.8
0.7
50.1
0.5
0.2
50.8
10.7
$61.5
(a) Adjusted diluted EPS was calculated using the reported weighted average diluted shares.
Revenue decreased 3% to $390 million in 2015 compared to $402 million in 2014, including a $7 million, or 2%,
increase from an acquisition and a $32 million, or 8%, decrease from the unfavorable effect of foreign currency
translation. Excluding the acquisition and foreign currency translation effect, revenue increased 3% in 2015
compared to 2014. We present increases or decreases in revenue excluding the effects of acquisitions and foreign
currency translation to provide investors insight into underlying revenue trends.
Revenue excluding acquisitions and the effect of foreign currency translation, adjusted operating income, adjusted
net income, adjusted diluted earnings per share (EPS), and adjusted earnings before interest, taxes, depreciation,
and amortization (EBITDA) are non-GAAP financial measures. Non-GAAP financial measures are not meant to be
considered superior to or a substitute for the results of operations prepared in accordance with 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 these non-GAAP financial measures, when taken together with the corresponding GAAP financial
measures, provide meaningful supplemental information regarding our performance by excluding certain items that
may not be indicative of our core business, operating results, or future outlook. We believe that the inclusion of
such measures helps investors to gain an understanding of our underlying operations and future prospects,
consistent with how management measures and forecasts our performance, especially when comparing such
results to previous periods or forecasts.
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)
Thomas C. Leonard
William P. Tully
Director, Former Chief Financial Officer and Chief Accounting Officer, Dynasil
Corporation of America (Manufacturer of detection and analysis technology,
precision instruments, and optical components)
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
Eric T. Langevin*
Executive Vice President and Chief Operating Officer
Jeffrey L. Powell*
Executive Vice President
Michael J. McKenney* Senior Vice President and Chief Financial Officer
Sandra L. Lambert*
Vice President, General Counsel, and Secretary
Wesley A. Martz
Vice President, Marketing
Dara F. Mitchell
Vice President, Corporate Development
Deborah S. Selwood* Vice President and Chief Accounting Officer
Daniel J. Walsh
Treasurer
* Designates executive officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-K
(mark one)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 2016
OR
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
No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the Registrant has submitted electronically 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
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, 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
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
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
No
The aggregate market value of the voting and non-voting common equity held by nonaffiliates of the Registrant as of July 4, 2015, was
approximately $501,385,000.
As of February 19, 2016, the Registrant had 10,773,380 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 2016 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 January 2, 2016
Table of Contents
PART I
Item 1.
Business ............................................................................................................................................................
Item 1A. Risk Factors ......................................................................................................................................................
Item 1B. Unresolved Staff Comments.............................................................................................................................
Properties ..........................................................................................................................................................
Item 2.
Legal Proceedings.............................................................................................................................................
Item 3.
Item 4. Mine Safety Disclosures ...................................................................................................................................
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities...........................................................................................................................................................
Item 6.
Selected Financial Data ....................................................................................................................................
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ...........................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..........................................................................
Financial Statements and Supplementary Data ................................................................................................
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........................
Item 9.
Item 9A. Controls and Procedures ...................................................................................................................................
Item 9B. Other Information .............................................................................................................................................
PART III
Item 10. Directors, Executive Officers, and Corporate Governance ..............................................................................
Item 11. Executive Compensation ..................................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ........
Item 13. Certain Relationships and Related Transactions, and Director Independence .................................................
Item 14. Principal Accountant Fees and Services ...........................................................................................................
PART IV
Page
1
7
15
15
15
15
16
18
18
33
34
34
34
35
35
35
36
36
36
Item 15. Exhibits and Financial Statement Schedules ....................................................................................................
37
Kadant Inc.
2015 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), an engineered wood panel product used primarily in home construction. 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 other process
industries. Through our Wood Processing Systems segment, we design, manufacture, and market stranders and related equipment
used in the production of OSB 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 markets we serve within the pulp and paper industry. We manufacture our
products in nine countries in Europe, North and South America, and Asia.
Our Papermaking Systems segment consists of the following product lines: Stock-Preparation; Doctoring, Cleaning, &
Filtration; and Fluid-Handling.
Stock-Preparation
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.
1
Kadant Inc.
2015 Annual Report
– 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
applying 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.
2
Kadant Inc.
Wood Processing Systems Segment
2015 Annual Report
We design and manufacture stranders and related equipment used in the production of OSB. We also supply debarking
and wood chipping equipment used in the forest products and the pulp and paper industries. Our principal wood-processing products
include:
– 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.
Fiscal Year
Typically, our fiscal quarters and fiscal year consist of 13 and 52 weeks, respectively, ending on the Saturday closest to
the end of the corresponding calendar quarter for our fiscal quarters and on the Saturday closest to December 31 for our fourth
fiscal quarter and fiscal year. As a result of the difference between the fiscal and calendar periods, a 53rd week is added to our
fiscal year every five or six years. In a 53-week fiscal year, our fourth fiscal quarter contains 14 weeks. Our fiscal year ended
January 2, 2016 (fiscal 2015) contained 52 weeks, our fiscal year ended January 3, 2015 (fiscal 2014) contained 53 weeks, and
our fiscal year ended December 28, 2013 (fiscal 2013) contained 52 weeks. Each quarter of fiscal 2015, 2014, and 2013 contained
13 weeks, except the fourth quarter of 2014, which contained 14 weeks.
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, Canada, 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, fluid handling, and engineered wood processing. 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, $6.2 million, and $6.7 million in 2015*, 2014, and 2013,
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 a by-product from the production of paper that
we obtain from two paper mills. 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.
___________________________________
*
January 2, 2016, January 3, 2015, and December 28, 2013, respectively.
Unless otherwise noted, references to 2015, 2014, and 2013 in this Annual Report on Form 10-K are for the fiscal years ended
3
Kadant Inc.
Papermaking Systems Segment
2015 Annual Report
We have numerous U.S. and foreign patents, including foreign counterparts to our U.S. patents, expiring on various dates
ranging from 2016 to 2034. 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 2017 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 2018 to 2027, 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 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
2015, 2014, and 2013, approximately 50%, 57%, and 63%, respectively, of our sales were to customers outside the United States,
principally in Europe and Asia.
Backlog
Our backlog of firm orders for the Papermaking Systems segment was $94.9 million and $115.0 million at year-end 2015
and 2014, respectively. The total consolidated backlog of firm orders was $102.6 million and $124.2 million at year-end 2015 and
2014, respectively. In 2015, we reduced our backlog for an order totaling $16.1 million due to uncertainty regarding financing for
a project in China, originally recorded in 2014. We anticipate that substantially all of the backlog at year-end 2015 will be shipped
or completed during 2016. Some of these orders can be canceled by the customer upon payment of a cancellation fee.
4
Kadant Inc.
Competition
2015 Annual Report
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 of 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 global presence, local support, and a problem-solving relationship
with our customers. Our success primarily depends on the following factors:
– 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 2015, we had approximately 1,800 employees worldwide.
Financial Information About Geographic Areas
Financial information concerning our segment and product lines is summarized in Note 11 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 11 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.
5
Kadant Inc.
Executive Officers of the Registrant
2015 Annual Report
The following table summarizes certain information concerning individuals who are our executive officers as of March
1, 2016:
Name
Age
Present Title (Fiscal Year First Became Executive Officer)
Jonathan W. Painter.............................................
Eric T. Langevin..................................................
Jeffrey L. Powell..................................................
Michael J. McKenney..........................................
Sandra L. Lambert ...............................................
Deborah S. Selwood ............................................
57
53
57
54
60
47
President and Chief Executive Officer (1997)
Executive Vice President and Chief Operating Officer (2006)
Executive Vice President (2009)
Senior Vice President and Chief Financial Officer (2002)
Vice President, General Counsel, and Secretary (2001)
Vice President and Chief Accounting Officer (2015)
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 departments within Kadant Web
Systems after joining us in 1986 as a product development engineer.
Mr. Powell has been an executive vice president since March 2013 and has supervisory responsibility for our stock-
preparation, wood processing, 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.
Mr. McKenney has been a senior vice president and our chief financial officer since June 2015. He served as our vice
president, finance and chief accounting officer from 2002 to 2015 and as corporate controller from 1997 to 2007. Mr. McKenney
was controller of Kadant AES, our division acquired from Albany International Inc., from 1993 to 1997. Prior to 1993, Mr.
McKenney held various financial positions at Albany International.
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.
Ms. Selwood has been a vice president and our chief accounting officer since June 2015. She served as our corporate
controller from 2007 to 2015 and as assistant controller from 2004 to 2007. Prior to 2004, Ms. Selwood held various financial
positions at Arthur Andersen LLP and Genuity Inc.
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Kadant Inc.
Item 1A. Risk Factors
2015 Annual Report
Our business, results of operations and financial condition, and an investment in our securities, are subject to a number
of risks. Among the risks that could materially negatively affect our results or cause our actual results to differ materially from
those projected or indicated in any forward-looking statements are the following.
Adverse changes in global and local economic conditions may negatively affect our industry, business and results of operations.
We sell products worldwide to global process industries and a significant portion of our revenues are from customers
based in North America, Europe and China. Uncertainties in 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 operating 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 process 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 process industries, 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.
Revenues from the sale of large capital equipment and systems projects are often difficult to predict accurately, especially in periods
of economic uncertainty.
We manufacture capital equipment and systems used in process industries, including the paper industry. The demand for
capital equipment is variable and depends on a number of factors, including consumer demand for end products, existing
manufacturing capacity, the level of capital spending by our customers and economic conditions. As a consequence, our bookings
and revenues for capital projects tend to be variable and difficult to predict. It is especially difficult to accurately forecast our
operating results during periods of economic uncertainty. Paper and OSB companies curtail their capital and operating spending
during periods of economic uncertainty and are cautious about resuming spending as market conditions improve. Levels of consumer
spending on non-durable goods, demand for food and beverage packaging, and demand for new housing and remodeling are all
factors that affect paper and OSB companies' demand for our products, and reductions in these demand levels can negatively
impact our business. As paper and OSB companies consolidate operations in response to market weakness, they frequently reduce
capacity, increase downtime, defer maintenance and upgrades, and postpone or even cancel capacity additions or expansion projects.
Capacity growth and investment can be 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 the past, particularly in China, and may negatively affect our operating results in the future.
Our sales of capital equipment in China tend to be more variable and are subject to a number of uncertainties.
Our bookings and revenues from China tend to be more variable than in other geographic regions, as the Chinese pulp
and paper industry experiences periods of significant capacity expansion to meet demand followed by periods of reduced 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.
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 example, we reversed a booking of $16 million in the fourth quarter of 2015 due to uncertainty regarding
financing for a project in China. We generally do not record bookings for signed contracts from customers in China for large stock-
preparation systems 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 canceled prior to the receipt of a down payment
if we have commenced engineering or other work associated with the contract. We typically have inventory awaiting shipment to
customers. We could incur a loss if contracts are canceled and we cannot re-sell the equipment. In addition, we may experience a
loss if the contract is canceled, 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.
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Kadant Inc.
2015 Annual Report
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 of these factors, our revenues recognized in China have varied, and will in the future vary,
greatly from period to period and be difficult to predict.
Our results of operations may be adversely affected by currency fluctuations.
As a multinational corporation, we are exposed to fluctuations in currency exchange rates that impact our business in
many ways. We are exposed to both translation as well as transaction risk associated with transactions denominated in currencies
that differ from our subsidiaries' functional currencies. Although in general our subsidiaries' costs are in the same currency as their
revenues, changes in the relative values of currencies occur from time to time and can adversely affect our operating results. Some
of the foreign currency translation risk is mitigated when foreign subsidiaries have revenue and expenses in the same foreign
currency. Further, certain foreign subsidiaries may hold U.S. dollar assets or liabilities which, as the U.S. dollar strengthens versus
the applicable functional currencies, will result in currency transaction gains on assets or losses on liabilities. While some foreign
currency 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.
When we translate the local currency results of our foreign subsidiaries into U.S. dollars during a period in which the
U.S. dollar is strengthening, our financial results will reflect decreases due to foreign currency translation. In addition, our
consolidated financial results are adversely affected when foreign governments devalue their currencies, and we expect our
consolidated financial results to be adversely affected in 2016 by the recent devaluation of the Chinese currency. Our major foreign
currency translation exposures involve the currencies in Europe, China, Brazil, and Canada. Foreign currency translation had a
negative effect on our financial results in 2015, and is expected to continue to adversely affect our operating results in 2016. We
do not enter into derivatives or other financial instruments to hedge this type of foreign currency translation risk.
The inability of our customers to obtain financing for capital equipment projects may affect our ability to recognize revenue and
income.
Approximately 35% of our revenue in 2015 was from the sale of capital equipment to be used in process industries. Large
capital equipment projects require a significant investment and may require our customers to secure financing from external sources.
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. For example, we reversed
a booking of $16 million in the fourth quarter of 2015 due to uncertainty regarding financing for a project in China, originally
recorded in 2014. Financing has been a significant problem for customers in Russia and China, and has caused us to delay the
booking of some pending orders, as well as the shipment of some orders currently in our backlog. 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.
Our global operations subject us to economic risk as our results of operations may be adversely affected by changes in government
regulations and policies.
Operating globally subjects us to changes in government regulations and policies in multiple jurisdictions around the
world, including those related to tariffs and trade barriers, taxation, exchange controls and political risks. Changes in government
policies, political unrest, economic sanctions, trade embargoes, or other adverse trade regulations can negatively impact our
business. For example, we operate significant manufacturing facilities in and derive significant revenue from China. Changes in
the policies of the Chinese government, devaluation of the Chinese currency, 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, could negatively impact our business and operating results. Policies of the Chinese government
to target slower economic growth may negatively affect our business in China if customers are unable to expand capacity or obtain
financing for expansion or improvement projects.
We manufacture equipment used in the production of OSB and our financial performance may be adversely affected by lower levels
of residential construction activity.
We manufacture stranders and related equipment used in the production of OSB, an engineered wood panel product used
primarily in home construction. Our customers produce OSB principally for new residential construction, home repair and
remodeling activities. As such, the operating results for our Wood Processing Systems segment 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. A significant increase in long-term interest
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2015 Annual Report
rates, tightened lending standards, high unemployment rates and other factors that reduce levels of residential construction activity
could have a material adverse effect on our financial performance.
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 our 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 our financial performance.
The development and increasing use of digital media has had, and will continue to have, an adverse impact on our Papermaking
Systems segment.
Developments in digital media have adversely affected demand for newsprint and for printing and writing grades of paper,
particularly in North America and Europe, a trend which is expected to continue. Approximately 12% of our revenue in 2015 was
to customers producing newsprint and printing and writing grades of paper. Significant declines in the production of printing and
writing paper grades has also led to a drop in the construction of recycled tissue mills, as those mills use printing and writing
grades of waste paper as their fiber source. The increased use of digital media has had, and will continue to have, an adverse effect
on demand for our products in those markets.
Price increases and shortages in raw materials and components could adversely impact our operating results.
We use a variety of raw materials and commodities to manufacture our products. Increases in the prices of such raw
materials and commodities could adversely affect our operating results if we were unable to fully offset the effect of these increased
costs through price increases, productivity improvements, or cost reduction programs.
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 operating results could
be negatively impacted if supply is insufficient for our operations.
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 to be unable
or unwilling to supply us sufficient fiber, we would be forced to find one or more alternative suppliers for this raw material.
We are dependent upon certain suppliers for components and raw materials.
Some of our businesses depend on certain suppliers to provide raw materials or other critical components of our equipment.
If we could not obtain sufficient supplies of these components or these sources of supply ceased to be available to us, we could
experience shortages in raw materials or be unable to meet our delivery commitments. Alternative sources of supply could be more
expensive. Such events would 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.
We operate multiple manufacturing operations worldwide, including operations in Canada, China, Europe, Mexico, and
Brazil, and sell our products globally. International revenues and operations are subject to a number of risks, including the following:
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Kadant Inc.
2015 Annual Report
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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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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.
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We operate manufacturing facilities throughout the world, which subjects us to varying risks of disrupted production.
We operate businesses with significant manufacturing facilities throughout the world. Our manufacturing facilities and
operations could be disrupted by natural disaster, failure of equipment and operating systems, labor strike, war, political unrest,
terrorist activity, or economic upheaval. Some of these conditions are more likely to occur in certain geographic regions in which
we operate. In addition, equipment and operating systems necessary for our manufacturing businesses may break down, perform
poorly, or fail. Any such disruption could cause losses in efficiencies, delays in shipments of our products and the loss of sales and
customers, and insurance proceeds may not adequately compensate us for our losses.
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 or may involve entry into a new process industry. 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 our 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 and
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. We
may incur 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 relatively low growth rates. We pursue a number of
strategies to improve our internal growth, including:
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2015 Annual Report
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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 subject to intense competition in all our markets.
We believe that the principal competitive factors affecting the markets for our products include technical expertise and
process knowledge, product innovation, product quality, and price. 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 flows,
profitability, or 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 we may engage in additional cost reduction programs in the future. The costs of these programs may be
significant and we may not recoup the costs of these programs. 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.
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2015 Annual Report
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 arrangements 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 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 other agreements 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:
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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
indebtedness will increase if interest rates increase. A portion of our variable rate interest payment obligations is hedged through
interest rate swap agreements entered into in May 2006 and January 2015. The counterparty to the swap agreements could demand
an early termination of the swap agreements if we were to be 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
either of these swap agreements 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 agreements, 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;
sell assets;
enter into transactions with affiliates; and
consolidate, merge, or transfer all or substantially all of our assets and the assets of our subsidiaries.
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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 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 U.S. 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.
Our future success is substantially dependent on the continued service of our senior management and other key employees.
Our future success is substantially dependent on the continued service of our senior management and other key employees.
The loss of the services of our senior management or other key employees could make it more difficult to successfully operate our
business and achieve our business goals. We also may be unable to retain existing management, product development, sales,
operational and other support personnel that are critical to our success, which could result in harm to key customer relationships,
loss of key information, expertise, or know-how, and unanticipated recruitment and training costs.
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 Resource Information Systems Inc., Forest Economic Advisors, the U.S. Census Bureau,
and various market news agencies 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 U.S. or Europe.
We seek to protect trade secrets and proprietary know-how, in part, through confidentiality and non-competition
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.
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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 usual, 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 experience significant price and volume volatility from time
to time. 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 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 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 process industries we serve;
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 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:
14
Kadant Inc.
2015 Annual Report
–
–
–
–
–
–
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.
Item 2.
Properties
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 2015 are as follows:
Papermaking Systems Segment
We own approximately 1,835,000 square feet and lease approximately 158,000 square feet, under leases expiring on
various dates ranging from 2016 to 2021, 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 Rivers, Michigan,
U.S.A; Auburn, Massachusetts, U.S.A; Theodore, Alabama, U.S.A; Weesp, The Netherlands; Wuxi, China; Guadalajara, Mexico;
Bury, England; Norrkoping, Sweden; Mason, Ohio, U.S.A; and Huskvarna, Sweden.
Wood Processing Systems Segment
We lease approximately 56,000 square feet of manufacturing and office space located in Surrey, British Columbia, Canada,
under a lease expiring in 2023.
Fiber-based Products
We own approximately 31,000 square feet of manufacturing and office space located in Green Bay, Wisconsin. We also
lease approximately 58,000 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.
15
Kadant Inc.
2015 Annual Report
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities
Market Price of Common Stock
Our common stock trades on the New York Stock Exchange under the symbol "KAI". The closing market price on the
New York Stock Exchange for our common stock on March 4, 2016 was $40.65 per share.
The following table sets forth the high and low sales prices of our common stock for 2015 and 2014, as reported in the
consolidated transaction reporting system.
Quarter
First ...................................................................................................
Second...............................................................................................
Third .................................................................................................
Fourth................................................................................................
$
2015
2014
High
Low
High
Low
$
55.20
56.29
47.95
44.37
$
39.53
44.67
37.72
38.99
$
41.46
39.45
40.99
44.39
33.37
33.30
36.97
36.15
The following table sets forth the per share dividends declared on our common stock for 2015 and 2014.
Quarter
First ......................................................................................................................................................
Second..................................................................................................................................................
Third.....................................................................................................................................................
Fourth...................................................................................................................................................
$
$
$
$
2015
2014
0.17
0.17
0.17
0.17
$
$
$
$
0.15
0.15
0.15
0.15
On March 8, 2016, our board of directors raised our quarterly cash dividend to $0.19 per share and we expect to pay
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 our earnings, capital requirements, and financial condition, among other factors. 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 19, 2016, we had approximately 3,255 holders of record of our common stock. This does not include
holdings in street or nominee name.
Issuer Purchases of Equity Securities
The following table provides information about purchases by us of our common stock during the fourth quarter of 2015:
Issuer Purchases of Equity Securities
Period
10/4/15 – 10/31/15 ...............................................
11/1/15 – 11/30/15................................................
12/1/15 – 1/2/16 ...................................................
Total......................................................................
___________________________________
Total Number
of Shares
Purchased (1)
Average Price
Paid per
Share
—
25,000
—
25,000
$
$
—
39.45
—
39.45
Total Number of
Shares
Purchased as
Part of Publicly
Announced
Plans (1)
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
— $
25,000
$
— $
25,000
15,120,043
14,133,790
14,133,790
(1) On May 20, 2015, we announced that our board of directors approved the repurchase by us of up to $20 million of our
equity securities during the period from May 20, 2015 to May 20, 2016. In the fourth quarter of 2015, we repurchased
25,000 shares of our common stock for $1.0 million under this authorization.
16
Kadant Inc.
Performance Graph
2015 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..
100.00
100.00
100.00
95.93
101.03
105.97
111.41
115.63
131.56
175.26
156.43
179.66
184.91
176.70
197.62
179.80
177.64
147.65
1/1/2011
12/31/2011
12/29/2012
12/28/2013
1/3/2015
1/2/2016
17
Kadant Inc.
Item 6.
Selected Financial Data
(In thousands, except per share amounts)
Statement of Income Data (a)
Revenues...................................................................
Operating Income .....................................................
Amounts Attributable to Kadant:
Income from Continuing Operations ........................
Income (Loss) from Discontinued Operation ...........
Net Income................................................................
Earnings per Share for Continuing Operations:
Basic .......................................................................
Diluted....................................................................
Earnings per Share:
Basic .......................................................................
Diluted....................................................................
Cash Dividends Declared per Common Share .........
Balance Sheet Data
Working Capital (f)...................................................
Total Assets...............................................................
Long-Term Obligations ............................................
Stockholders' Equity .................................................
______________________
2015 Annual Report
2015 (b)
2014 (b)
2013 (c)
2012 (d)
2011 (e)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
390,107
50,119
34,315
74
34,389
3.16
3.09
3.16
3.10
0.68
108,492
415,498
26,000
267,945
$
$
$
$
$
$
$
$
402,127
42,086
28,682
(23)
28,659
2.61
2.56
2.61
2.56
0.60
96,504
413,747
25,250
265,459
$
$
$
$
$
$
$
$
344,499
33,303
23,481
(62)
23,419
2.11
2.07
2.10
2.07
0.50
106,486
442,168
38,010
270,421
331,751
36,444
30,880
743
31,623
2.70
2.66
$
$
$
$
2.76
2.73
$
$
— $
335,460
38,710
33,584
(9)
33,575
2.77
2.74
2.77
2.74
—
$
100,301
358,948
6,250
249,967
78,499
358,398
11,750
223,630
(a) Fiscal year 2015 contained 52 weeks, fiscal year 2014 contained 53 weeks, and fiscal years 2013, 2012, and 2011 each
contained 52 weeks.
(b) Includes $0.5 million and $0.8 million of pre-tax restructuring costs in 2015 and 2014, respectively.
(c) Includes a $1.7 million pre-tax gain on the sale of real estate and $1.8 million of pre-tax restructuring costs.
(d) Includes a $4.6 million discrete tax benefit primarily due to the reversal of valuation allowances on certain deferred tax
assets.
(e) Includes a $6.2 million discrete tax benefit primarily due to the reversal of valuation allowances on certain deferred tax
assets, a $2.3 million pre-tax gain on the sale of real estate, and $0.4 million of pre-tax restructuring costs.
(f) Includes net deferred tax assets of $9.5 million, $10.1 million, $8.4 million, and $4.7 million in 2014, 2013, 2012, and
2011, respectively. We adopted Accounting Standards Update (ASU) No. 2015-07 for year-end 2015, which requires that
deferred tax assets and liabilities be classified as noncurrent. Prior period amounts have not been restated.
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
oriented strand board (OSB), an engineered wood panel product used primarily in home construction. 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 other process
industries. Through our Wood Processing Systems segment, we design, manufacture, and market stranders and related equipment
used in the production of OSB 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
18
Kadant Inc.
2015 Annual Report
for agricultural, home lawn and garden, and professional lawn, turf and ornamental applications, as well as for oil and grease
absorption.
2014 Acquisitions
In October 2014, our Papermaking Systems segment acquired certain assets of the screen cylinder business of a U.S.-
based company for approximately $9.2 million in cash. This technology-based acquisition enhances our stock-preparation
equipment product offerings to pulp and paper mills worldwide. At the beginning of 2014, our Papermaking Systems segment
acquired all the outstanding shares of a European producer of creping and coating blades for approximately $2.7 million in cash.
An additional 1 million euros, or approximately $1.1 million, of contingent consideration was paid to the sellers on January 4,
2016.
International Sales
During 2015 and 2014, approximately 50% and 57%, respectively, of our sales were to customers outside the United
States, principally in Europe and Asia. 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 and completed contract methods 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. The
Company includes in revenues 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. We include in revenue amounts invoiced for shipping and handling with the
corresponding costs reflected in cost of revenues. Sales taxes, value-added taxes and certain excise taxes collected
from customers and remitted to governmental authorities are accounted for on a net basis and are therefore excluded
from revenue.
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 and is recognized as each element is delivered or completed.
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
19
Kadant Inc.
2015 Annual Report
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.
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 $32.1 million in 2015, $19.1 million in 2014, and $19.8 million in 2013. 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 the 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 knowledge of any specific warranty problems that
indicate that projected warranty costs may vary from historical patterns. 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.
20
Kadant Inc.
2015 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 $11.5 million at year-end 2015. 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 2015, we
continued to maintain a valuation allowance in the U.S. against certain of our state operating loss carryforwards due to the uncertainty
of future profitability in state jurisdictions in the U.S. As of year-end 2015, we maintained valuation allowances 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 2015, 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 2015, we have not provided for
U.S. income taxes on approximately $168.2 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 $3.6 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. Testing goodwill for impairment involves a two-step quantitative process. However, prior to performing the two-step
quantitative goodwill impairment test, we have the option to first perform 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 January 2, 2016, we performed a qualitative goodwill impairment analysis. This impairment analysis included an
assessment of certain qualitative factors including 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 determined that it was not more likely than not that the
fair value of any of the reporting units was 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 have produced a different result.
At January 2, 2016, 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 2015.
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.
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
21
Kadant Inc.
2015 Annual Report
totaled $3.5 million at year-end 2015 and the fair value of plan assets totaled $27.8 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 $5.5 million at year-end 2015.
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 before
tax associated with these plans totaled $8.9 million at year-end 2015, $0.6 million of which we expect to recognize in 2016. 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 2015 discount rate would
have resulted in an increase in pension expense of $0.3 million and an increase in the projected benefit obligation of $2.4 million.
Industry and Business Outlook
Our products are primarily sold in global process industries and used to produce packaging, tissue, and OSB. In 2015,
approximately 64% of our revenue was from the sale of products that support packaging, tissue, and OSB production. Consumption
of packaging, which is primarily comprised of containerboard and boxboard, is driven by many factors, including regional economic
conditions, consumer spending on non-durable goods, demand for food and beverage packaging, and existing manufacturing
capacity. Consumption of tissue is fairly stable and in the developed world tends to grow with the population. For both tissue and
containerboard, growth rates in the developing world are expected to increase as per capita consumption of paper increases with
rising standards of living. In 2015, 12% of our revenue was related to products that support printing and writing paper grades as
well as newsprint, which have been negatively affected by the development and increased use of digital media. While we expect
the decline in the use of newsprint and writing paper grades to continue due to the use of digital media, we expect global
containerboard and tissue production to be stable or to increase. However, we also expect that declines in printing and writing
grades will have a negative impact on the construction of, or conversion to, new recycled tissue mills, as printing and writing
wastepaper is the fiber source for those mills. In 2015, 9% of our revenue was from sales to OSB producers who manufacture
engineered wood panels for the housing industry. The majority of OSB demand is in North America, as North American houses
are more often constructed of wood compared to other parts of the world. Demand for OSB is tied to new home construction and
remodeling. The remainder of our revenue was from sales to other process industries, which in general grow with the overall
economy.
Our results of operations were negatively affected by foreign currency translation in 2015 compared to 2014, and we
expect our results of operations to continue to be negatively affected in 2016. Recently, China's central bank has devalued the
renminbi to boost the Chinese economy, which will have a negative translation impact on our future consolidated revenues and
operating results if this trend continues. When we translate the local currency results of our foreign subsidiaries into U.S. dollars
during a period in which the U.S. dollar is strengthening, our financial results will reflect decreases due to foreign currency
translation. The negative effect on our financial results will continue if the U.S. dollar continues to strengthen relative to the
functional currencies of our foreign subsidiaries. Similarly, if the U.S. dollar weakens compared to the functional currencies of
our foreign subsidiaries, our financial results will reflect increases due to foreign currency translation. Some of this foreign currency
translation risk is mitigated when foreign subsidiaries have revenue and expenses in the same foreign currency. Further, certain
foreign subsidiaries may hold U.S. dollar assets or liabilities which, as the U.S. dollar strengthens versus the applicable functional
currencies, will result in currency transaction gains on assets and losses on liabilities. We have presented the material effects of
foreign currency translation on our financial results under Results of Operations below.
Our bookings decreased 13% to $376 million in 2015 compared to $433 million in 2014. This decrease included a $34
million, or 8%, decrease from the unfavorable effects of foreign currency translation and a $16 million, or 4%, decrease from the
reversal of a booking, originally recorded in 2014, due to uncertainty regarding financing for a project in China. These decreases
were offset in part by a $7 million, or 2%, increase from an acquisition. Our revenue and income tends to be variable as demand
for our capital equipment is dependent on regional economic conditions and the level of capital spending by our customers, among
other factors. Demand for our parts and consumables products tends to be more predictable. Bookings for our parts and consumables
products were $252 million, or 67% of total bookings, in 2015, compared to $258 million, or 60% of total bookings, in 2014.
The largest and most important regional market for our products in 2015 was North America, a trend we expect to continue
into 2016, although at lower revenue levels. Our bookings in North America were $213 million in 2015, down 8% compared to
2014. During 2015, demand for printing, writing, and newsprint grades all declined compared to 2014, while containerboard
shipments saw a modest increase according to Resource Information Systems Inc. (RISI) reports. RISI also reported that North
American capacity expansion in the containerboard segment is expected to slow from the 2.2% rate recorded in 2015 to 1.2% in
2016, which would be closely in line with demand growth. U.S. housing starts in December 2015 were at a seasonally adjusted
annual rate of 1.149 million, up 6.4% compared to December 2014, according to the U.S. Census Bureau and the Department of
22
Kadant Inc.
2015 Annual Report
Housing and Urban Development as reported by RISI. This growth is expected to have a positive impact on demand for U.S.
lumber and structural wood panels, which includes OSB. Our Stock-Preparation product line benefited in 2015 from virgin pulp
mill upgrades for containerboard, as well as the conversion of machines that produce printing and writing grades to the production
of containerboard used for packaging.
We saw steady business activity in Europe in 2015 compared to 2014. We expect the overall economy to remain stable
in Europe in 2016. Our bookings in Europe were $82 million in 2015, down 2% compared to $84 million in 2014. Excluding a
negative foreign currency translation effect of $16 million, our bookings in Europe were up 17%. Our bookings in Asia were $47
million in 2015, down 46% compared to 2014. This decrease includes a $16 million, or 19%, decrease from the reversal of a
booking, originally recorded in 2014, for a project in China and a $2 million decrease from the negative effects of foreign currency
translation. Weak demand and a relatively soft domestic economy affected most paper grades in China in 2015, a trend we expect
to continue in 2016. The most recent RISI forecasts of containerboard demand growth of approximately 3% per year for the next
few years suggest new capital project activity may remain at reduced levels in China in 2016. Our bookings in the rest of the world
increased 9% to $34 million in 2015 compared to 2014 but were, and continue to be, negatively affected by the recession in Brazil.
We expect to achieve diluted earnings per share (EPS) from continuing operations of $2.80 to $2.90 in 2016 on revenue
of $370 to $380 million. The 2016 guidance includes an unfavorable foreign currency translation effect of $10 million on revenue
and $0.11 on diluted EPS compared to 2015. Similar to 2015, we expect the first quarter of 2016 to be weaker with stronger
successive quarterly operating results for the remainder of the year. For the first quarter of 2016, we expect to achieve diluted EPS
from continuing operations of $0.55 to $0.58 on revenue of $89 to $91 million.
Results of Operations
2015 Compared to 2014
The following table sets forth our consolidated statement of income expressed as a percentage of total revenue:
Revenues...........................................................................................................................................
Costs and Operating Expenses:
Cost of revenues .............................................................................................................................
Selling, general, and administrative expenses................................................................................
Research and development expenses .............................................................................................
Restructuring costs .........................................................................................................................
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 2015 and 2014 are as follows:
(In thousands)
Revenues:
Papermaking Systems ....................................................................................................................
Wood Processing Systems..............................................................................................................
Fiber-based Products ......................................................................................................................
2015
2014
100%
100%
54
31
2
—
87
13
—
13
4
9%
56
32
2
—
90
10
—
10
3
7%
2015
2014
$
$
342,661
36,387
11,059
390,107
$
$
348,199
41,647
12,281
402,127
Papermaking Systems Segment. Revenues at our Papermaking Systems segment decreased $5.5 million, or 2%, to $342.7
million in 2015 from $348.2 million in 2014, including a $26.4 million decrease from the unfavorable effects of foreign currency
exchange. Excluding the effects of foreign currency exchange, revenues in our Papermaking Systems segment increased $20.9
million primarily due to increased demand for our parts and consumables products, especially in our Stock-Preparation product
line, and the inclusion of $6.7 million in revenue from an acquisition made in 2014.
23
Kadant Inc.
2015 Annual Report
Wood Processing Systems Segment. Revenues at our Wood Processing Systems segment decreased $5.2 million, or 13%,
to $36.4 million in 2015 from $41.6 million in 2014, including a $5.8 million decrease from the unfavorable effects of foreign
currency exchange. Excluding the effects of foreign currency translation, revenues in our Wood Processing Systems segment
increased $0.6 million, or 1%, primarily due to increased demand for our parts and consumables products.
Fiber-based Products. Revenues decreased $1.2 million, or 10%, to $11.1 million in 2015 from $12.3 million in 2014
due to decreased demand for our biodegradable granular products.
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 2015 and 2014, and the changes in revenues by product
line between 2015 and 2014 excluding the effect of currency translation. The increase in revenues excluding the effect of currency
translation represents the increase resulting from converting 2015 revenues in local currency into U.S. dollars at 2014 exchange
rates, and then comparing this result to the actual revenues in 2014. 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.
(In thousands)
Papermaking Systems Product Lines:
Stock-Preparation ...........................................................................
Doctoring, Cleaning, & Filtration ..................................................
Fluid-Handling ...............................................................................
2015
2014
Increase
(Decrease)
Increase
(Decrease)
Excluding
Effect of
Currency
Translation
$
$
148,341
101,523
92,797
342,661
$
$
127,496
117,389
103,314
348,199
$
$
$
20,845
(15,866)
(10,517)
(5,538) $
28,883
(7,409)
(603)
20,871
Revenues in our Stock-Preparation product line increased $20.8 million, or 16%, in 2015 compared to 2014, including
an $8.1 million decrease due to the unfavorable effect of foreign currency translation. Excluding the effect of foreign currency
translation, revenues from our Stock-Preparation product line increased $28.9 million, or 23%, in 2015 compared to 2014, due to
increased demand for our parts and consumables products at our North American and European operations, increased demand for
our capital products at our North American and Chinese operations, and the inclusion of $6.7 million in revenue from an acquisition
made in 2014. Revenues in our Doctoring, Cleaning, & Filtration product line in 2015 included a decrease of $8.5 million from
the unfavorable effect of foreign currency translation compared to 2014. Excluding the unfavorable effect of foreign currency
translation, revenues from our Doctoring, Cleaning, & Filtration product line in 2015 decreased $7.4 million, or 6%, compared to
2014, primarily due to decreased demand for our capital products at our European and North American operations. This decrease
was offset in part by increased demand for our parts and consumables products at our Chinese operations. Revenues in our Fluid-
Handling product line in 2015 included a decrease of $9.9 million from the unfavorable effect of foreign currency translation
compared to 2014. Excluding the unfavorable effect of foreign currency translation, revenues in our Fluid-Handling product line
decreased $0.6 million, or 1%, in 2015 compared to 2014, primarily due to decreased demand for our parts and consumables
products.
Gross Profit Margin
Gross profit margins for 2015 and 2014 are as follows:
Gross Profit Margin:
Papermaking Systems ....................................................................................................................
Wood Processing Systems..............................................................................................................
Fiber-based Products ......................................................................................................................
2015
2014
45.9%
47.9%
49.5%
46.2%
45.4%
35.4%
45.7%
44.4%
Papermaking Systems Segment. The gross profit margin at the Papermaking Systems segment increased to 45.9% in 2015
from 45.4% in 2014 primarily due to a higher proportion of parts and consumables products sold in 2015, which tend to have
higher gross margins.
24
Kadant Inc.
2015 Annual Report
Wood Processing Systems Segment. The gross profit margin at the Wood Processing Systems segment increased to 47.9%
in 2015 from 35.4% in 2014 primarily due to higher margins from our parts and consumables products. In addition, the gross profit
margin in 2014 was reduced by amortization expense associated with acquired profit in inventory totaling $2.1 million, which had
the effect of lowering the gross profit margin by 5.1 percentage points in 2014.
Fiber-based Products. The gross profit margin increased to 49.5% in 2015 from 45.7% in 2014 primarily due to the lower
cost of natural gas used in the production process.
Operating Expenses
Selling, general, and administrative expenses decreased $6.5 million, or 5%, to $122.8 million in 2015 from $129.3
million in 2014, due to a decrease of $9.4 million, or 7%, from the favorable effect of foreign currency translation, offset in part
by an increase of $1.6 million from selling, general, and administrative expenses from an acquisition made in 2014.
Total stock-based compensation expense was $5.7 million and $5.8 million in 2015 and 2014, respectively, and is included
in selling, general, and administrative expenses.
Research and development expenses increased $0.5 million, or 8%, to $6.7 million in 2015 from $6.2 million in 2014
and represented 2% of revenues in both periods. The increase in research and development expenses in 2015 primarily related to
product development costs at our Stock-Preparation product line.
Restructuring Costs
Restructuring costs were $0.5 million and $0.8 million in 2015 and 2014, respectively.
Restructuring costs in 2015 included severance costs of $0.3 million associated with the reduction of 25 employees in
Canada, and Brazil related to our 2015 restructuring plans. We estimate annualized savings of $0.5 million in cost of revenues and
$0.6 million in selling, general, and administrative expenses from this reduction. In addition, restructuring costs in 2015 also
included severance costs of $0.2 million associated with the reduction of four employees in Sweden related to our 2014 restructuring
plans.
The 2014 restructuring charges included severance costs of $0.3 million associated with the reduction of eight employees
in Brazil and $0.1 million associated with the reduction of three employees in Sweden. In addition, we recorded facility-related
costs of $0.4 million related to restructuring plans prior to 2014.
These actions were taken to streamline our operations. All of these actions occurred in the Papermaking Systems segment.
Interest Income
Interest income decreased $0.2 million, or 50%, to $0.2 million in 2015 from $0.4 million in 2014 primarily due to lower
average interest rates in 2015.
Interest Expense
Interest expense decreased to $0.9 million in 2015 from $1.0 million in 2014 primarily due to lower average outstanding
borrowings, offset in part by higher average interest rates in 2015.
Provision for Income Taxes
Our provision for income taxes was $14.8 million and $12.4 million in 2015 and 2014, respectively, and represented 30%
of pre-tax income in both periods. The effective tax rate of 30% in 2015 was lower than our statutory tax rate primarily due to the
distribution of our worldwide earnings, offset in part by tax expense associated with an increase in nondeductible expenses and
state income taxes. The effective tax rate of 30% in 2014 was lower than our statutory tax rate primarily due to the distribution of
our worldwide earnings, the release of tax reserves that resulted from the expiration of tax statutes of limitations, and the release
of state tax reserves in the U.S. These tax benefits in 2014 were offset in part by tax expense associated with an increase in
nondeductible expenses and a reduction in deferred tax assets. We expect our effective tax rate in 2016 to be approximately 31%
to 32% compared to 30% in 2015, primarily due to a shift in the geographic distribution of earnings.
Income from Continuing Operations
Income from continuing operations increased $5.5 million, or 19%, to $34.6 million in 2015 from $29.1 million in 2014,
including an increase in operating income of $8.0 million, offset in part by an increase in provision for income taxes of $2.3 million
(see Revenues, Gross Profit Margin, Operating Expenses, and Provision for Income Taxes discussed above).
25
Kadant Inc.
Recent Accounting Pronouncements
2015 Annual Report
Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) Reporting Discontinued
Operations and Disclosures of Disposals of Components of an Entity. In April 2014, the Financial Accounting Standards Board
(FASB) issued ASU No. 2014-08, which provides new guidance on reporting discontinued operations and disclosures of disposals.
Under the new guidance, only disposals representing a strategic shift in operations will be presented as discontinued operations.
The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of the company that
does not qualify for discontinued operations reporting. We adopted this ASU in the first quarter of 2015, and the adoption did not
have an impact on our consolidated financial position, results of operations or cash flows.
Revenue from Contracts with Customers (Topic 606) Section A-Summary and Amendments That Create Revenue from
Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40). In May
2014, the FASB issued ASU No. 2014-09, which requires an entity to recognize the amount of revenue to which it expects to be
entitled for the transfer of promised goods or services to customers. The new guidance provides a five-step analysis of transactions
to determine when and how revenue is recognized. The ASU will replace most existing revenue recognition guidance in GAAP
when it becomes effective. The new guidance is effective for us beginning in fiscal 2018. Early adoption is not permitted. The
standard permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the effect
that ASU No. 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a
transition method nor have we determined the effect of the standard on our ongoing financial reporting.
Compensation-Stock Compensation (Topic 718) Accounting for Share-Based Payments When the Terms of an Award
Provide That a Performance Target Could Be Achieved after the Requisite Service Period. In June 2014, the FASB issued ASU
No. 2014-12, which clarifies the proper method of accounting for share-based payments when the terms of an award provide that
a performance target could be achieved after the requisite service period. Under the new guidance, a performance target that affects
vesting and could be achieved after completion of the service period should be treated as a performance condition under FASB
ASC 718 and, as a result, should not be included in the estimation of the grant-date fair value of the award. An entity should
recognize compensation cost for the award when it becomes probable that the performance target will be achieved. In the event
that an entity determines that it is probable that a performance target will be achieved before the end of the service period, the
compensation cost of the award should be recognized prospectively over the remaining service period. The new guidance is effective
for us beginning in fiscal 2016. Adoption of this ASU is not expected to have a material impact on our consolidated financial
position, results of operations or cash flows.
Income Statement-Extraordinary and Unusual Items (Subtopic 225-20), Simplifying Income Statement Presentation by
Eliminating the Concept of Extraordinary Items. In January 2015, the FASB issued ASU No. 2015-01, which eliminates the concept
of extraordinary items in an entity’s income statement. Extraordinary classification of an item outside of income from continuing
operations was previously considered only when evidence clearly supported its classification as an extraordinary item. Extraordinary
items were events and transactions that were distinguished by their unusual nature and by the infrequency of their occurrence. The
ASU eliminates the need to separately classify, present, and disclose extraordinary events. The disclosure of events or transactions
that are unusual or infrequent in nature will be included in other guidance. This new guidance is effective for us beginning in fiscal
2016. Adoption of this ASU is not expected to have a material impact on our consolidated financial position, results of operations
or cash flows.
Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. In April 2015,
the FASB issued ASU No. 2015-03, which requires that debt issuance costs related to a recognized debt liability be presented in
the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In addition,
in June 2015, the FASB issued ASU No. 2015-15, which allows an entity to defer the requirements of ASU No. 2015-03 on deferred
issuance costs related to line-of-credit arrangements. The recognition and measurement guidance for debt issuance costs are not
affected by the amendments in these ASUs. These new disclosure items are effective for us beginning in fiscal 2016. Adoption of
these ASUs are not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
Compensation-Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined
Benefit Obligation and Plan Assets. In April 2015, the FASB issued ASU No. 2015-04, which provides a practical expedient that
permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal
year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently
to all plans if an entity has more than one plan. If a contribution or significant event (such as a plan amendment, settlement, or
curtailment that calls for a remeasurement in accordance with existing requirements) occurs between the month-end date used to
measure defined benefit plan assets and obligations and an entity’s fiscal year-end, the entity should adjust the measurement of
defined benefit plan assets and obligations to reflect the effects of those contributions or significant events. However, an entity
should not adjust the measurement of defined benefit plan assets and obligations for other events that occur between the month-
end measurement and the entity’s fiscal year-end that are not caused by the entity (for example, changes in market prices or interest
rates). This new guidance is effective for us beginning in fiscal 2016. Early adoption is permitted. We adopted this ASU for the
year ended January 2, 2016, and the adoption did not have a material impact on our consolidated financial position, results of
operations or cash flows.
26
Kadant Inc.
2015 Annual Report
Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Fees Paid in a
Cloud Computing Arrangement. In April 2015, the FASB issued ASU No. 2015-05, which provides guidance to customers about
whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license,
then the customer should account for the software license element of the arrangement consistent with the acquisition of other
software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the
arrangement as a service contract. This new guidance is effective for us beginning in fiscal 2016. Adoption of this ASU is not
expected to have a material impact on our consolidated financial position, results of operations or cash flows.
Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). In May
2015, the FASB issued ASU No. 2015-07, which removes the requirement to categorize within the fair value hierarchy all
investments for which fair value is measured using the net asset value per share practical expedient. This ASU also removes the
requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value
per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the
fair value using that practical expedient. This new guidance is effective for us beginning in fiscal 2016. As this ASU is disclosure-
related only, its adoption will not have an effect on our consolidated financial position, results of operations or cash flows.
Inventory (Topic 330), Simplifying the Measurement of Inventory. In July 2015, the FASB issued ASU No. 2015-11, which
requires that an entity measure inventory within the scope of this ASU at the lower of cost or net realizable value. Net realizable
value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal,
and transportation. Substantial and unusual losses that result from subsequent measurement of inventory should be disclosed in
the financial statements. This new guidance is effective for us beginning in fiscal 2017. Early adoption is permitted. We are currently
evaluating the effect that adoption of ASU No. 2015-11 will have on our consolidated financial position, results of operations or
cash flows.
Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments. In September
2015, the FASB issued ASU No. 2015-16, which requires that an acquirer recognize adjustments to provisional amounts that are
identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer
is required to record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or
other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed
at the acquisition date. In addition, an entity is required to present, separately on the face of the income statement or through
disclosure in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded
in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This new
guidance is effective for us beginning in fiscal 2016. Adoption of this ASU is not expected to have a material impact on our
consolidated financial position, results of operations or cash flows.
Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes. In November 2015, the FASB issued ASU
No. 2015-17, which simplifies the presentation of deferred income taxes as it requires that deferred tax assets and liabilities be
classified as noncurrent in a classified statement of financial position. This ASU applies to all entities that present a classified
statement of financial position and may be applied either prospectively to all deferred tax liabilities and assets or retrospectively
to all periods presented. This new guidance is effective for us beginning in fiscal 2017. Early adoption is permitted. We adopted
this ASU prospectively for the year ended January 2, 2016, and the adoption resulted in all deferred taxes being reported as non-
current on our consolidated balance sheet.
Leases (Topic 842). In February 2016, the FASB issued ASU No. 2016-02, which requires a lessee to recognize a right-
of-use asset and a lease liability for operating leases, initially measured at the present value of the future lease payments, in its
balance sheet. This ASU also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated
over the lease term, generally on a straight-line basis. This new guidance is effective for us in fiscal 2019. Early adoption is
permitted. We are currently evaluating the effects that the adoption of this ASU will have on our consolidated financial position,
results of operations and cash flows.
27
Kadant Inc.
2014 Compared to 2013
2015 Annual Report
The following table sets forth our consolidated statement of income expressed as a percentage of total revenue:
Revenues...........................................................................................................................................
Costs and Operating Expenses:
Cost of revenues .............................................................................................................................
Selling, general, and administrative expenses................................................................................
Research and development expenses .............................................................................................
Restructuring costs and other 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 ................................................................................................
2014
2013
100%
100%
56
32
2
—
90
10
—
10
3
7%
54
34
2
—
90
10
—
10
3
7%
Revenues
Revenues for 2014 and 2013 are as follows:
(In thousands)
Revenues:
Papermaking Systems ....................................................................................................................
Wood Processing Systems..............................................................................................................
Fiber-based Products ......................................................................................................................
2014
2013
$
$
348,199
41,647
12,281
402,127
$
$
328,708
4,573
11,218
344,499
Papermaking Systems Segment. Revenues at the Papermaking Systems segment increased $19.5 million, or 6%, to $348.2
million in 2014 from $328.7 million in 2013 primarily due to increased demand for our parts and consumables products in our
Fluid-Handling product line and the inclusion of $8.5 million in revenues from acquisitions. These increases were offset in part
by a decrease of $1.8 million from the unfavorable effects of currency translation.
Wood Processing Systems Segment. Revenues of $41.6 million in 2014 represent a full year of revenues compared to
approximately two months of post-acquisition revenues totaling $4.6 million in 2013.
Fiber-based Products. Revenues increased $1.1 million, or 9%, to $12.3 million in 2014 from $11.2 million in 2013
primarily due to increased demand for our biodegradable granular products.
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 2014 and 2013, and the changes in revenues by product
line between 2014 and 2013 excluding the effect of currency translation. The increase in revenues excluding the effect of currency
translation represents the increase resulting from converting 2014 revenues in local currency into U.S. dollars at 2013 exchange
rates, and then comparing this result to the actual revenues in 2013. 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.
28
Kadant Inc.
2015 Annual Report
(In thousands)
Papermaking Systems Product Lines:
Stock-Preparation ...........................................................................
Doctoring, Cleaning, & Filtration ..................................................
Fluid-Handling ...............................................................................
2014
2013
Increase
Increase
Excluding
Effect of
Currency
Translation
$
$
127,496
117,389
103,314
348,199
$
$
122,704
112,600
93,404
328,708
$
$
4,792
4,789
9,910
19,491
$
$
4,787
5,725
10,799
21,311
Revenues in our Stock-Preparation product line in 2014 increased $4.8 million, or 4%, due to the inclusion of $6.0 million
in revenues from acquisitions and increased demand for our products at our North American operations, offset in part by decreased
demand for our products at our South American and Chinese operations. Revenues in our Doctoring, Cleaning, & Filtration product
line in 2014 included $2.5 million in revenues from acquisitions and a decrease of $0.9 million from the unfavorable effect of
currency translation compared to 2013. Excluding revenues from acquisitions and the unfavorable effect of currency translation,
revenues from our Doctoring, Cleaning, & Filtration product line in 2014 increased $3.3 million compared to 2013, primarily due
to increased demand for our products at our North American operations. Excluding the unfavorable effect of currency translation,
revenues in our Fluid-Handling product line increased $10.8 million, or 12%, in 2014 compared to 2013, primarily due to increased
demand for our parts and consumables products at our European and North American operations.
Gross Profit Margin
Gross profit margins for 2014 and 2013 are as follows:
Gross Profit Margin:
Papermaking Systems ....................................................................................................................
Wood Processing Systems..............................................................................................................
Fiber-based Products .....................................................................................................................
2014
2013
45.4%
35.4%
45.7%
44.4%
46.1%
20.0%
46.6%
45.8%
Papermaking Systems Segment. The gross profit margin at the Papermaking Systems segment decreased to 45.4% in 2014
from 46.1% in 2013 primarily due to lower margins achieved on our capital products.
Wood Processing Systems Segment. The gross profit margin at the Wood Processing Systems segment increased to 35.4%
in 2014, which included a full year of activity, compared to 20.0% in 2013, which included approximately two months of activity,
following the acquisition of this business in 2013. The gross profit margin in both periods was reduced by amortization expense
associated with acquired profit in inventory totaling $2.1 million and $1.1 million in 2014 and 2013, respectively. This expense
had the effect of lowering the gross profit margin by 5.1 percentage points and 24.5 percentage points in 2014 and 2013, respectively.
Fiber-based Products. The gross profit margin decreased to 45.7% in 2014 from 46.6% in 2013 primarily due to the
higher cost of natural gas used in the production process.
Operating Expenses
Selling, general, and administrative expenses increased $11.7 million, or 10%, to $129.3 million in 2014 from $117.6
million in 2013, including increases of $8.0 million from selling, general, and administrative expenses from our acquisitions as
well as transaction-related expenses, offset in part by $0.7 million from the favorable effect of foreign currency translation.
Total stock-based compensation expense was $5.8 million and $5.2 million in 2014 and 2013, respectively, and is included
in selling, general, and administrative expenses.
Research and development expenses decreased $0.5 million, or 8%, to $6.2 million in 2014 from $6.7 million in 2013
and represented 2% of revenues in both periods. The decrease in research and development expenses in 2014 primarily related to
a reduction in product development costs at our Stock-Preparation product line. This decrease was offset in part by an increase at
our Wood Processing Systems segment due to a full year of costs in 2014 compared to approximately two months in 2013.
29
Kadant Inc.
Restructuring Costs and Other Income, Net
2015 Annual Report
Restructuring costs and other income, net were costs of $0.8 million and $0.1 million in 2014 and 2013, respectively.
The 2014 restructuring charges included severance costs of $0.3 million associated with the reduction of eight employees
in Brazil and $0.1 million associated with the reduction of three employees in Sweden. In addition, we recorded facility-related
costs of $0.4 million related to restructuring plans prior to 2014.
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.
These actions were taken to streamline our operations as a result of our acquisitions in 2013 and 2014. All of these actions
occurred in the Papermaking Systems segment.
Interest Income
Interest income decreased $0.2 million, or 36%, to $0.4 million in 2014 from $0.6 million in 2013 primarily due to lower
average interest rates in 2014.
Interest Expense
Interest expense increased $0.1 million, or 7%, to $1.0 million in 2014 from $0.9 million in 2013 primarily due to higher
average outstanding borrowings offset in part by lower average interest rates in 2014.
Provision for Income Taxes
Our provision for income taxes was $12.4 million and $9.3 million in 2014 and 2013, respectively, and represented 30%
and 28% of pre-tax income. The effective tax rate of 30% in 2014 was lower than our statutory tax rate primarily due to the
distribution of our worldwide earnings, the release of tax reserves that resulted from the expiration of tax statutes of limitations,
and the release of state tax reserves in the U.S. These tax benefits in 2014 were offset in part by tax expense associated with an
increase in nondeductible expenses and a reduction in deferred tax assets. The effective tax rate of 28% in 2013 was lower than
our statutory tax rate 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.
Income from Continuing Operations
Income from continuing operations increased $5.4 million, or 23%, to $29.1 million in 2014 from $23.7 million in 2013,
including an increase in operating income of $8.8 million offset in part by an increase in provision for income taxes of $3.1 million
(see Revenues, Gross Profit Margin, Operating Expenses, and Provision for Income Taxes discussed above).
Liquidity and Capital Resources
Consolidated working capital was $108.5 million and $96.5 million at year-end 2015 and year-end 2014, respectively.
Included in working capital are cash and cash equivalents of $65.5 million and $45.4 million at year-end 2015 and year-end 2014,
respectively. At year-end 2015, $64.5 million of cash and cash equivalents was held by our foreign subsidiaries.
2015
Our operating activities provided cash of $37.9 million in 2015. We used cash of $12.2 million for accounts receivable
and unbilled contract costs and fees and $6.5 million for inventory. The cash used for accounts receivable and unbilled contract
costs and fees relates to increased project activity, especially in our Stock-Preparation product line. The cash used for inventory
was primarily due to an increase in inventory at our Wood Processing Systems segment and work in process at our Stock-Preparation
product line in China related to projects that are scheduled to ship in 2016. These uses of cash were offset in part by $9.2 million
of cash provided by other current liabilities primarily due to an increase in accrued income taxes due to the timing of payments
and an increase in customer deposits related to capital equipment projects.
Our investing activities used cash of $5.4 million in 2015 primarily for purchases of property, plant, and equipment.
Our financing activities used cash of $11.1 million in 2015. We used cash of $9.9 million for the repurchase of our common
stock on the open market and $7.2 million for cash dividends paid to stockholders. We received $24.0 million in proceeds from
borrowings under our 2012 Credit Agreement and used cash of $18.6 million for principal payments on our outstanding debt
obligations.
30
Kadant Inc.
2014
2015 Annual Report
Our operating activities provided cash of $48.9 million in 2014. Changes in working capital provided cash of $0.2 million
in 2014, including $8.4 million from accounts receivable and $5.1 million from inventory, primarily due to the timing of payments
and the shipment of several large stock-preparation equipment contracts. These sources of cash were offset in large part by uses
of cash of $11.1 million from other current liabilities due to a decrease in customer deposits and, to a lesser extent, $2.3 million
from unbilled contract costs and fees due to the timing of billings.
Our investing activities used cash of $18.5 million in 2014, including $12.0 million for acquisitions and $6.8 million for
purchases of property, plant, and equipment.
Our financing activities used cash of $32.3 million in 2014, including cash used for principal payments on our outstanding
debt obligations of $37.0 million, repurchases of our common stock on the open market of $15.1 million, and the payment of $6.3
million in cash dividends to stockholders. These uses of cash were offset in part by $24.5 million of proceeds from borrowings
under our 2012 Credit Agreement.
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 was 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.
Additional Liquidity and Capital Resources
On July 28, 2014, our board of directors approved the repurchase by us of up to $20 million of our equity securities during
the period from July 28, 2014 to July 28, 2015. We repurchased 136,518 shares of our common stock for $6.0 million under this
authorization. On May 20, 2015, our board of directors approved the repurchase by us of up to an additional $20 million of our
equity securities during the period from May 20, 2015 to May 20, 2016. Through year-end 2015, we had repurchased 143,242
shares of our common stock for $5.9 million under this authorization.
We paid cash dividends of $7.2 million and $6.3 million in 2015 and 2014, respectively. On November 18, 2015, we
declared a quarterly cash dividend totaling $0.17 per outstanding share of our common stock, or approximately $1.8 million, which
was paid on February 11, 2016. In addition, on March 8, 2016, we declared a quarterly cash dividend of $0.19 per outstanding
share of our common stock, which will be paid on May 12, 2016. 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.
As of year-end 2015, we had cash and cash equivalents of $65.5 million, of which $64.5 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 2015, we have not provided for U.S. income taxes on approximately
$168.2 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 $3.6 million.
Although we currently have no material commitments for capital expenditures, we plan to make expenditures of
approximately $7 to $8 million during 2016 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 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.
31
Kadant Inc.
Revolving Credit Facility
2015 Annual Report
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.
As of year-end 2015, the outstanding balance under the 2012 Credit Agreement was $26 million and we had $72.1 million
of borrowing capacity available under the committed portion of our 2012 Credit Agreement. The amount we are able to borrow
under the 2012 Credit Agreement is the total borrowing capacity of $100 million less any outstanding borrowings, letters of credit
and multi-currency borrowings issued under the 2012 Credit Agreement.
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 January 2, 2016, 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 (Commercial Real Estate Loan). The 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 in May 2016. As of January 2, 2016, the remaining balance on the Commercial Real
Estate Loan was $5.3 million. Interest on the 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.
Our obligations under the Commercial Real Estate Loan may be accelerated upon the occurrence of an event of default
under the 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 Commercial Real Estate Loan.
Interest Rate Swap Agreements
On January 16, 2015, we entered into a swap agreement (2015 Swap Agreement) to hedge our exposure to movements
in the three-month LIBOR rate on future outstanding debt. The 2015 Swap Agreement expires on March 27, 2020 and has a $10
million notional value. Under the 2015 Swap Agreement, on a quarterly basis we receive a three-month LIBOR rate and pay a
fixed rate of interest of 1.50% plus an applicable margin.
We entered into a swap agreement in 2006 (2006 Swap Agreement) to convert the Commercial Real Estate Loan from a
floating to a fixed rate of interest. The 2006 Swap Agreement matures in 2016, has the same terms and quarterly payment dates
as the corresponding debt, and reduces proportionately in line with the amortization of the 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% plus an applicable
margin.
As of January 2, 2016, the interest rate swap agreements had a net unrealized loss of $0.1 million. We believe that any
credit risk associated with the swap agreements is remote based on our financial position and the creditworthiness of the financial
institution issuing the swap agreements.
32
Kadant Inc.
2015 Annual Report
The counterparty to the swap agreements could demand an early termination of the swap agreements 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 coverage ratio of 3 to 1. The net unrealized loss of $0.1 million associated with the swap agreements
as of January 2, 2016 represents the estimated amount that we would pay to the counterparty in the event of an early termination.
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 2015, 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, 3, 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..............
Debt obligations ...................................................
Operating lease obligations..................................
Interest (c) ............................................................
Acquisition consideration ....................................
Total (d)(e)................................................................
$
$
_________________________________
Payments Due by Period or Expiration of Commitment
Less than
1 Year
2-3
Years
4-5
Years
After
5 Years
Total
12.1
1.4
5.3
2.2
0.6
1.1
22.7
$
$
3.0
2.6
26.0
2.2
0.9
—
34.7
$
$
— $
0.6
—
0.7
—
—
1.3
$
— $
4.4
—
0.8
—
—
5.2
$
15.1
9.0
31.3
5.9
1.5
1.1
63.9
(a) We have purchase obligations related to the acquisition of raw material made in the ordinary course of business that
may be terminated with minimal notice and are excluded from this table.
(b) 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 2015.
(d) This table excludes an unrealized loss of $0.1 million associated with our interest rate swap agreements as this amount
would only be owed if the counterparty were to demand an early termination of the agreements in the event of a
default under our 2012 Credit Agreement.
(e) This table excludes a liability for unrecognized tax benefits and an accrual for the related interest and penalties totaling
$6.3 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.
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 2015 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,
euros, and Chinese renminbi. Gains and losses arising from forward contracts are recognized as offsets to gains and losses resulting
33
Kadant Inc.
2015 Annual Report
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 2015 and 2014.
Our outstanding debt and interest rate swap agreements are sensitive to changes in interest rates. A portion of our
outstanding debt at year-end 2015 and 2014 was hedged with "receive-variable pay-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 not have had a material impact on unrealized losses at year-end 2015 and 2014.
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 krona. 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 2015 and 2014, relative to the U.S. dollar, would have resulted in a reduction in
stockholders' equity of $21.6 million and $21.1 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% adverse change in year-end 2015 and 2014
foreign currency exchange rates related to our contracts would have resulted in a decrease in unrealized gains on forward currency-
exchange contracts of $0.9 million and $1.7 million in 2015 and 2014, 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 and incorporated herein by reference. 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 January 2, 2016. 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 January 2, 2016, our Chief Executive Officer and Chief Financial Officer concluded that as of January 2,
2016, our disclosure controls and procedures were effective at the reasonable assurance level.
34
Kadant Inc.
2015 Annual Report
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 January 2, 2016. In making this assessment, our management used the criteria set
forth in "Internal Control—Integrated Framework (2013)" issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on our assessment, management believes that as of January 2, 2016 our internal control over financial
reporting was effective based on the criteria issued by COSO.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our independent registered public accountants, KPMG LLP, have issued an audit report on our internal control over
financial reporting, which is included herein on page F-3 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 January 2, 2016 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
This information will be included under the heading "Election of Directors" in our 2016 proxy statement for our 2016
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 2016 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 2016 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 2016 proxy statement and
is incorporated in this Report by reference.
35
Kadant Inc.
2015 Annual Report
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Except for the information concerning equity compensation plans, this information will be included under the heading
"Stock Ownership" in our 2016 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 January 2, 2016:
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)
574,205
(1)
—
574,205
(1)
$
$
$
27.69
(1)
724,767
(2)
—
—
27.69
(1)
724,767
(2)
Plan Category
Equity compensation plans approved by security
holders ......................................................................
Equity compensation plans not approved by
security holders ........................................................
Total..........................................................................
__________________________________
(1) Excludes an aggregate of 69,599 shares of common stock issuable under our employees' stock purchase plan in connection
with current and future offering periods under the plan.
(2) Includes an aggregate of 69,599 shares of common stock issuable under our employees' stock purchase plan in connection
with current and future offering periods under the plan.
Item 13. Certain Relationships and Related Transactions, and Director Independence
This information will be included under the heading "Corporate Governance" in our 2016 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 2016 proxy
statement and is incorporated in this Report by reference.
36
Kadant Inc.
2015 Annual Report
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Report:
PART IV
(1) Consolidated Financial Statements (see Index on Page F-1 of this Report):
Reports of Independent Registered Public Accounting Firm
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
All other schedules are omitted because they are not applicable or not required, or because the required information is
shown either in the consolidated financial statements or in the notes thereto.
(3) Exhibits filed herewith or incorporated in this Report by reference are set forth in the Exhibit Index beginning on page
39. 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 39.
37
Kadant Inc.
2015 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 16, 2016
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 16, 2016.
Signature
Title
By:
By:
By:
By:
By:
By:
By:
/s/ Jonathan W. Painter
Jonathan W. Painter
/s/ Michael J. McKenney
Michael J. McKenney
/s/ Deborah S. Selwood
Deborah S. Selwood
/s/ William A. Rainville
William A. Rainville
/s/ John M. Albertine
John M. Albertine
/s/ Thomas C. Leonard
Thomas C. Leonard
/s/ William P. Tully
William P. Tully
Chief Executive Officer, President and Director
(Principal Executive Officer)
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
Director and Chairman of the Board
Director
Director
Director
38
Exhibit
Number
Description of Exhibit
Exhibit Index
3.1
3.2
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
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 effective November 20, 2014 (filed as Exhibit 3.1 to the
Registrant's Form 8-K [File No. 1-11406] filed with the Commission on November 25, 2014 and incorporated
in this document by reference).
Form of Indemnification Agreement between the Registrant and its directors and officers (filed as Exhibit 10.1
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 [File No. 1-11406] and
incorporated in this document by reference).
Form of Amended and Restated Executive Retention Agreement (change in control agreement) between the
Company and its named 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).
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).
Amended and Restated 2006 Equity Incentive Plan of the Registrant effective as of May 20, 2014 (filed as
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 28, 2014 [File No.
1-11406] and incorporated in this document by reference).
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).
Restoration Plan of the Registrant (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended April 2, 2011 [File No. 1-11406] and incorporated in this document by reference).
Amendments to the Restoration Plan of the Registrant effective as of May 20, 2014 (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 28, 2014 [File No. 1-11406] and
incorporated in this document by reference).
10.8*
Summary of non-employee director compensation of the Registrant.
10.9*
Form of Cash-Settled Restricted Stock Unit Award Agreement between the Company and its non-employee
directors used for change-in-control (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended April 4, 2015 [File No. 1-11406] and incorporated in this document by reference).
10.10*
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).
39
Exhibit
Number
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20
10.21
Description of Exhibit
Exhibit Index
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).
Form of Performance-Based Restricted Stock Unit Award Agreement between the Company and its executive
officers used for restricted stock unit awards on or after March 5, 2014 (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March 29, 2014 [File No. 1-11406] and
incorporated in this document by reference).
Form of Time-Based Restricted Stock Unit Award Agreement between the Company and its executive
officers used for restricted stock unit awards on or after March 5, 2014 (filed as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March 29, 2014 [File No. 1-11406] and
incorporated in this document by reference).
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).
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).
Executive Transition Agreement between the Registrant and Thomas M. O'Brien as of September 15, 2014
(filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 27,
2014 [File No. 1-11406] and incorporated in this document by reference).
Notice dated September 15, 2014 of the termination of the Amended and Restated Executive Retention
Agreement dated December 8, 2008 between the Registrant and Thomas M. O'Brien (filed as Exhibit 10.2 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 27, 2014 [File No. 1-11406]
and incorporated in this document by reference).
Notice dated September 15, 2014 of the amendment to the restricted stock unit award agreements granted by
the Registrant to Thomas M. O'Brien (filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 27, 2014 [File No. 1-11406] and incorporated in this document by reference).
Notice dated September 15, 2014 of the amendment to the stock option agreements granted by the Registrant
to Thomas M. O'Brien (filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 27, 2014 [File No. 1-11406] and incorporated in this document by reference).
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).
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 (filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the year ended December
28, 2013 [File No. 1-11406] and incorporated in this document by reference).
40
Exhibit
Number
10.22
Exhibit Index
Description of Exhibit
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).
10.23
Swap Confirmation dated January 16, 2015 between the Registrant and Citizens Bank, National Association
(filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 4, 2015
[File No. 1-11406] and incorporated in this document by reference).
10.24
10.25
10.26
10.27
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).
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).
Limited Guaranty Agreement dated May 4, 2006 between Kadant Black Clawson Inc., a Delaware corporation,
and Citizens Bank of Massachusetts (filed as Exhibit 99.3 to the Registrant's Current Report on Form 8-K [File
No. 1-11406] filed with the Commission on May 9, 2006 and incorporated in this document by reference).
Limited Guaranty Agreement dated May 4, 2006 between Kadant Johnson Inc., a Michigan corporation, and
Citizens Bank of Massachusetts (filed as Exhibit 99.4 to the Registrant's Current Report on Form 8-K [File No.
1-11406] filed with the Commission on May 9, 2006 and incorporated in this document by reference).
10.28 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).
10.29 Mortgage and Security Agreement dated May 4, 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
23
31.1
31.2
32
Subsidiaries of the Registrant.
Consent of KPMG LLP.
Certification of the Principal Executive Officer of the Registrant Pursuant to Rule 13a-14(a) 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-14(a) and Rule 15d-14(a)
of the Securities Exchange Act of 1934, as amended.
Certification of the Chief Executive Officer and the Chief Financial Officer of the Registrant pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document.**
41
Exhibit Index
Exhibit
Number
Description of Exhibit
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.**
*
**
Management contract or compensatory plan or arrangement.
Submitted electronically herewith.
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i)
Consolidated Balance Sheet as of January 2, 2016 and January 3, 2015, (ii) Consolidated Statement of Income for the years
ended January 2, 2016, January 3, 2015 and December 28, 2013, (iii) Consolidated Statement of Comprehensive Income for the
years ended January 2, 2016, January 3, 2015 and December 28, 2013, (iv) Consolidated Statement of Cash Flows for the years
ended January 2, 2016, January 3, 2015 and December 28, 2013, (v) Consolidated Statement of Stockholders' Equity for the
years ended January 2, 2016, January 3, 2015 and December 28, 2013, and (vi) Notes to Consolidated Financial Statements.
42
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
Reports of Independent Registered Public Accounting Firm..........................................................................................
F-2
Consolidated Balance Sheet as of January 2, 2016 and January 3, 2015........................................................................
F-4
Consolidated Statement of Income for the years ended January 2, 2016, January 3, 2015, and December 28, 2013....
Consolidated Statement of Comprehensive Income for the years ended January 2, 2016, January 3, 2015, and
December 28, 2013 .........................................................................................................................................................
Consolidated Statement of Cash Flows for the years ended January 2, 2016, January 3, 2015, and December 28,
2013.................................................................................................................................................................................
Consolidated Statement of Stockholders' Equity for the years ended January 2, 2016, January 3, 2015, and
December 28, 2013 .........................................................................................................................................................
F-5
F-6
F-7
F-8
Notes to Consolidated Financial Statements...................................................................................................................
F-9
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-42
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Kadant Inc.:
We have audited the accompanying consolidated balance sheets of Kadant Inc. and subsidiaries as of January 2, 2016 and
January 3, 2015, and the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity
for each of the years in the three-year period ended January 2, 2016. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule listed in the index at Item 15(a)(2). These consolidated financial
statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement 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 consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Kadant Inc. and subsidiaries as of January 2, 2016 and January 3, 2015, and the results of their operations and their
cash flows for each of the years in the three-year period ended January 2, 2016, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic
consolidated 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 January 2, 2016, based on criteria established in Internal Control-
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 16, 2016 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial
reporting.
/s/ KPMG LLP
Boston, Massachusetts
March 16, 2016
F-2
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Kadant Inc.:
We have audited Kadant Inc.'s internal control over financial reporting as of January 2, 2016, based on criteria established
in Internal Control—Integrated Framework (2013) 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
January 2, 2016, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Kadant Inc. and subsidiaries as of January 2, 2016 and January 3, 2015, and the related
consolidated statements of income, comprehensive income, cash flows and stockholders' equity for each of the years in the three-
year period ended January 2, 2016, and our report dated March 16, 2016 expressed an unqualified opinion on those consolidated
financial statements.
/s/ KPMG LLP
Boston, Massachusetts
March 16, 2016
F-3
Kadant Inc.
2015 Financial Statements
(In thousands, except share amounts)
2015
2014
Consolidated Balance Sheet
Assets
Current Assets:
Cash and cash equivalents..............................................................................................................
Restricted cash................................................................................................................................
Accounts receivable, less allowances of $2,163 and $2,198 .........................................................
Inventories ......................................................................................................................................
Current deferred tax asset (Note 5) ................................................................................................
Unbilled contract costs and fees.....................................................................................................
Other current assets ........................................................................................................................
Total Current Assets..........................................................................................................................
Property, Plant, and Equipment, at Cost, Net ...................................................................................
Other Assets......................................................................................................................................
Intangible Assets...............................................................................................................................
Goodwill ...........................................................................................................................................
Total Assets.......................................................................................................................................
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term obligations (Note 6) .....................................................................................................
Accounts payable ...........................................................................................................................
Accrued payroll and employee benefits .........................................................................................
Customer deposits ..........................................................................................................................
Accrued income taxes ....................................................................................................................
Other current liabilities...................................................................................................................
Total Current Liabilities....................................................................................................................
Long-Term Deferred Income Taxes (Note 5)...................................................................................
Other Long-Term Liabilities (Note 3) ..............................................................................................
Long-Term Obligations (Note 6)......................................................................................................
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, 3,850,779 and 3,760,019 shares ................................................................
Accumulated other comprehensive items (Note 13) ......................................................................
Total Kadant Stockholders' Equity ...................................................................................................
Noncontrolling interest...................................................................................................................
Total Stockholders' Equity................................................................................................................
Total Liabilities and Stockholders' Equity........................................................................................
$
$
$
$
65,530
1,406
64,321
56,758
—
6,580
10,525
205,120
42,293
11,002
38,032
119,051
415,498
5,250
24,418
19,583
20,123
5,333
21,921
96,628
8,992
15,933
26,000
—
146
100,536
297,258
(94,359)
(36,972)
266,609
1,336
267,945
415,498
$
$
$
$
45,378
415
58,508
55,223
9,536
5,436
9,178
183,674
44,965
10,272
46,954
127,882
413,747
611
27,233
19,943
18,452
2,240
18,691
87,170
18,960
16,908
25,250
—
146
98,769
270,249
(87,727)
(17,146)
264,291
1,168
265,459
413,747
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Kadant Inc.
2015 Financial Statements
(In thousands, except per share amounts)
2015
2014
2013
Consolidated Statement of Income
$
390,107
$
402,127
$
344,499
Revenues (Note 11)..................................................................................................
Costs and Operating Expenses:
Cost of revenues .....................................................................................................
Selling, general, and administrative expenses........................................................
Research and development expenses .....................................................................
Restructuring costs and other 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 ........................................................................
Income (Loss) from Discontinued Operation (net of income tax (expense) benefit
of $(43), $14, and $34 in 2015, 2014, and 2013, respectively) ................................
Net Income................................................................................................................
Net Income Attributable to Noncontrolling Interest.................................................
Net Income Attributable to Kadant ......................................................................
Amounts Attributable to Kadant:
Income from Continuing Operations......................................................................
Income (Loss) from Discontinued Operation.........................................................
Net Income Attributable to Kadant ........................................................................
Earnings per Share from Continuing Operations Attributable to Kadant
(Note 12)
Basic .......................................................................................................................
Diluted....................................................................................................................
Earnings per Share Attributable to Kadant (Note 12)
Basic .......................................................................................................................
Diluted....................................................................................................................
Weighted Average Shares (Note 12)
Basic .......................................................................................................................
Diluted....................................................................................................................
Cash Dividends Declared per Common Share.....................................................
$
$
$
$
$
$
$
$
209,982
122,814
6,677
515
339,988
50,119
200
(948)
49,371
14,762
34,609
74
34,683
(294)
34,389
34,315
74
34,389
3.16
3.09
3.16
3.10
10,867
11,094
0.68
$
$
$
$
$
$
$
$
223,754
129,319
6,163
805
360,041
42,086
398
(966)
41,518
12,447
29,071
(23)
29,048
(389)
28,659
28,682
(23)
28,659
2.61
2.56
2.61
2.56
10,988
11,210
0.60
$
$
$
$
$
$
$
$
186,795
117,581
6,717
103
311,196
33,303
623
(900)
33,026
9,316
23,710
(62)
23,648
(229)
23,419
23,481
(62)
23,419
2.11
2.07
2.10
2.07
11,153
11,340
0.50
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Kadant Inc.
(In thousands)
Consolidated Statement of Comprehensive Income
2015
2014
2013
2015 Financial Statements
Comprehensive Income
Net Income................................................................................................................
Other Comprehensive Items:
Foreign currency translation (loss) gain.................................................................
Pension and other post-retirement liability adjustments, net (net of tax provision
(benefit) of $107, $(792), and $1,564 in 2015, 2014, and 2013, respectively)......
Deferred gain (loss) on hedging instruments (net of tax provision of $84, $151,
and $1 in 2015, 2014, and 2013, respectively).......................................................
Other Comprehensive Items...................................................................................
Comprehensive Income..........................................................................................
Comprehensive Income Attributable to Noncontrolling Interest ...........................
Comprehensive Income Attributable to Kadant.....................................................
$
34,683
$
29,048
$
23,648
(20,687)
(16,436)
172
(1,407)
563
(19,952)
14,731
(168)
14,563
$
(159)
(18,002)
11,046
(243)
10,803
$
$
838
2,817
413
4,068
27,716
(272)
27,444
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Kadant Inc.
(In thousands)
Operating Activities
Consolidated Statement of Cash Flows
2015 Financial Statements
2015
2014
2013
Net income attributable to Kadant ..................................................................
Net income attributable to noncontrolling interest .........................................
(Income) loss from discontinued operation ....................................................
Income from continuing operations ................................................................
Adjustments to reconcile income from continuing operations to net cash
provided by operating activities:
$
$
34,389
294
(74)
34,609
$
28,659
389
23
29,071
23,419
229
62
23,710
Depreciation and amortization.................................................................
Stock-based compensation expense.........................................................
Tax benefits from stock-based compensation awards..............................
Loss (gain) on sale of property, plant and equipment..............................
Provision for losses on accounts receivable.............................................
Deferred income tax (benefit) provision..................................................
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 (used in) provided by discontinued operation ............
Net cash provided by operating activities .................................
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
Financing Activities
Proceeds from issuance of short- and 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......................................
Tax benefits from stock-based compensation awards.....................................
Net cash (used in) provided by continuing operations for
financing activities.....................................................................
Exchange Rate Effect on Cash and Cash Equivalents from Continuing Operations
Increase (Decrease) in Cash and Cash Equivalents from Continuing Operations....
Cash and Cash Equivalents at Beginning of Year.....................................................
Cash and Cash Equivalents at End of Year...............................................................
$
10,821
5,741
(881)
4
379
(1,706)
(287)
(1,080)
(10,640)
(1,534)
(6,486)
1,495
(1,752)
9,228
37,911
(38)
37,873
—
(5,479)
30
—
—
(5,449)
24,000
(18,611)
(9,906)
(7,179)
(1,066)
—
754
881
(11,127)
(1,145)
20,152
45,378
65,530
$
11,189
5,813
(771)
(118)
246
2,951
1,318
(1,080)
8,429
(2,277)
5,067
(563)
652
(11,060)
48,867
5
48,872
(11,984)
(6,755)
242
—
—
(18,497)
24,512
(36,953)
(15,136)
(6,339)
(299)
—
1,119
771
(32,325)
(2,704)
(4,654)
50,032
45,378
$
9,775
5,216
(351)
(2,012)
374
(1,061)
1,836
(1,080)
(2,197)
(840)
(2,005)
113
2,552
5,905
39,935
141
40,076
(65,594)
(6,261)
3,459
(731)
971
(68,156)
53,609
(21,849)
(5,367)
(4,189)
(168)
(154)
337
351
22,570
989
(4,521)
54,553
50,032
See Note 1 for supplemental cash flow information.
The accompanying notes are an integral part of these consolidated financial statements.
F-7
—
—
—
—
—
—
229
—
(731)
—
—
—
43
23,648
(5,578)
(731)
4,063
351
(5,367)
4,068
—
—
—
—
—
389
—
—
—
—
29,048
(6,580)
4,937
771
(15,136)
—
—
—
—
—
294
—
—
—
—
34,683
(7,380)
4,160
881
(9,906)
Kadant Inc.
2015 Financial Statements
Consolidated Statement of Stockholders' Equity
Capital in
Accumulated
Other
Total
Common Stock
Excess of
Retained
Treasury Stock
Comprehensive
Noncontrolling
Stockholders'
(In thousands, except share amounts)
Shares
Amount
Par Value
Earnings
Shares
Amount
Items
Interest
Equity
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 .....
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
23,419
(5,578)
—
—
—
—
—
—
—
1,010
— (143,804)
3,053
351
—
—
—
—
—
—
—
175,000
(5,367)
—
—
4,025
Balance at December 28, 2013
14,624,159
$
146
$ 96,809
$248,170
3,524,742
$(76,339) $
710
$
925
$
270,421
Balance at January 3, 2015......
14,624,159
$
146
$ 98,769
$270,249
3,760,019
$(87,727) $
(17,146) $
1,168
$
265,459
—
—
(17,856)
(146)
(18,002)
Net income ..............................
Dividends declared ..................
Activity under stock plans.......
Tax benefits related to
employees' and directors'
stock plans ...............................
Purchases of Company
common stock..........................
Other comprehensive items .....
—
—
—
—
—
—
—
—
—
—
—
—
—
—
28,659
(6,580)
—
—
—
—
1,189
— (169,858)
3,748
771
—
—
—
—
—
—
—
405,135
(15,136)
Net income ..............................
Dividends declared ..................
Activity under stock plans.......
Tax benefits related to
employees' and directors'
stock plans ...............................
Purchases of Company
common stock..........................
Other comprehensive items .....
—
—
—
—
—
—
—
—
—
—
—
—
—
—
886
881
—
—
34,389
(7,380)
—
—
—
—
— (139,000)
3,274
—
—
229,760
(9,906)
—
—
—
—
—
(19,826)
(126)
(19,952)
Balance at January 2, 2016......
14,624,159
$
146
$100,536
$297,258
3,850,779
$(94,359) $
(36,972) $
1,336
$
267,945
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
1.
Nature of Operations and Summary of Significant Accounting Policies
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, paper recycling and other 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.
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.
Financial Statement Presentation
Certain reclassifications have been made to prior periods to conform with current reporting. On the consolidated balance
sheet, the assets of discontinued operation have been combined with other current assets and the liabilities of discontinued operation
have been combined with other current liabilities. On the consolidated statement of cash flows, the tax benefits from stock-based
compensation awards within operating activities have been reclassified from other items, net and are now presented separately.
Fiscal Year
Typically, the Company's fiscal quarters and fiscal year consist of 13 and 52 weeks, respectively, ending on the Saturday
closest to the end of the corresponding calendar quarter for the Company's fiscal quarters and on the Saturday closest to December 31
for the Company's fourth fiscal quarter and fiscal year. As a result of the difference between the fiscal and calendar periods, a 53rd
week is added to the Company's fiscal year every five or six years. In a 53-week fiscal year, the Company's fourth fiscal quarter
contains 14 weeks. The Company's fiscal year ended January 2, 2016 (fiscal 2015) contained 52 weeks, the Company's fiscal year
ended January 3, 2015 (fiscal 2014) contained 53 weeks and the Company's fiscal year ended December 28, 2013 (fiscal 2013)
contained 52 weeks. Each quarter of fiscal 2015, 2014 and 2013 contained 13 weeks, except the fourth quarter of 2014, which
contained 14 weeks.
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.
F-9
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
1.
Nature of Operations and Summary of Significant Accounting Policies (continued)
Although the Company makes every effort to ensure the accuracy of the estimates and assumptions used in the preparation
of its consolidated financial statements or in the application of accounting policies, if business conditions were different, or if the
Company were to use 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 have been 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. Sales taxes, value-added taxes and certain excise taxes collected
from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenue.
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 and is recognized as each element is delivered or completed. 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 nor 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 $32,078,000 in 2015, $19,078,000 in 2014, and $19,758,000 in 2013. 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. Inventory included $274,000 and $2,171,000 at year-end 2015
and year-end 2014, respectively, associated with long-term contracts accounted for under the completed contract method. Customer
deposits included $2,374,000 and $3,248,000 of advance payments on long-term contracts accounted for under the completed
contract method at year-end 2015 and year-end 2014, respectively.
Accounts receivable are recorded at the 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 obligations of the issuing bank and mature within six
months of the origination date. The Company has the ability to sell the drafts at a discount to a third-party financial institution or
F-10
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
1.
Nature of Operations and Summary of Significant Accounting Policies (continued)
transfer the drafts to vendors in settlement of current accounts payable prior to the scheduled maturity date. These drafts, which
totaled $8,314,000 and $6,334,000 at year-end 2015 and year-end 2014, respectively, are included in accounts receivable in the
accompanying consolidated balance sheet until the subsidiary sells the drafts to a bank and receives a discounted amount, transfers
the banker's acceptance drafts in settlement of current accounts payable prior to maturity, or obtains cash payment on the scheduled
maturity date.
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, as well as knowledge of any specific warranty problems that indicate that projected warranty
costs may vary from historical patterns. 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......................................................................................................................
$
$
2015
2014
3,875
2,660
(2,559)
—
(306)
3,670
$
$
4,571
2,075
(2,562)
150
(359)
3,875
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
January 2, 2016, 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.
In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.
2015-17, "Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes," which simplifies the presentation of deferred
income taxes, as it requires that deferred tax assets and liabilities be classified as noncurrent in the consolidated balance sheet.
The Company early adopted this ASU prospectively for the year ended January 2, 2016, which resulted in all deferred taxes being
reported as non-current on its consolidated balance sheet. See Note 5, Income Taxes, for additional information.
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 (RSUs) and employee stock purchase
plan shares, as well as their related tax effects.
F-11
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
1.
Nature of Operations and Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
At year-end 2015 and 2014, 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 2015 and 2014, the Company had approximately $1,406,000 and $415,000 of restricted cash, respectively.
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 by
the end of 2017.
Supplemental Cash Flow Information
(In thousands)
Cash Paid for Interest................................................................................................
Cash Paid for Income Taxes, Net of Refunds...........................................................
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 .............................................................................
2015
2014
2013
616
11,497
$
$
1,081
10,035
— $
—
— $
14,771
(12,658)
2,113
3,423
1,831
$
$
3,220
1,630
$
$
$
$
$
$
961
8,375
88,398
(67,453)
20,945
2,677
1,389
$
$
$
$
$
$
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 regularly reviews its quantities of inventories on hand and compares
these amounts to the historical and forecasted usage of and demand for each particular product or product line. The Company
records a charge to cost of revenues for excess and obsolete inventory 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 $1,262 and $1,394 at customer locations) ..............................................
2015
22,324
13,819
20,615
56,758
$
$
2014
24,403
11,259
19,561
55,223
$
$
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.
F-12
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
1.
Nature of Operations and Summary of Significant Accounting Policies (continued)
Property, plant, and equipment consist of the following:
(In thousands)
Land ..................................................................................................................................................
Buildings...........................................................................................................................................
Machinery, Equipment, and Leasehold Improvements ....................................................................
Less: Accumulated Depreciation and Amortization.........................................................................
2015
3,792
36,547
77,675
118,014
75,721
42,293
$
$
$
$
2014
4,315
38,067
76,520
118,902
73,937
44,965
Depreciation and amortization expense related to property, plant, and equipment was $5,814,000, $5,661,000, and
$5,088,000 in 2015, 2014, and 2013, respectively.
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)
Indefinite-Lived Intangible Asset .....................................................................................................
Definite-Lived Intangible Assets, Gross...........................................................................................
Accumulated Amortization.............................................................................................................
Currency Translation ......................................................................................................................
Definite-Lived Intangible Assets, Net ..............................................................................................
Total Intangible Assets, Net..............................................................................................................
2015
2014
$
$
$
$
8,100
77,052
(40,908)
(6,212)
29,932
38,032
$
$
$
$
8,100
77,052
(35,901)
(2,297)
38,854
46,954
Acquired intangible assets by major asset class are as follows:
(In thousands)
January 2, 2016
Customer relationships...................................................................
Intellectual property .......................................................................
Tradenames ....................................................................................
Non-compete agreements ...............................................................
Distribution network ......................................................................
Licensing agreements .....................................................................
Other...............................................................................................
Gross
Currency
Translation
Accumulated
Amortization
Net
$
$
43,271
22,899
10,269
3,548
2,400
400
2,365
85,152
$
$
(3,916) $
(1,772)
(405)
(55)
—
—
(64)
(6,212) $
(17,314) $
(15,584)
(698)
(3,298)
(1,501)
(213)
(2,300)
(40,908) $
22,041
5,543
9,166
195
899
187
1
38,032
F-13
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
1.
Nature of Operations and Summary of Significant Accounting Policies (continued)
(In thousands)
January 3, 2015
Customer relationships...................................................................
Intellectual property .......................................................................
Tradenames ....................................................................................
Non-compete agreements ...............................................................
Distribution network ......................................................................
Licensing agreements .....................................................................
Other...............................................................................................
Gross
Currency
Translation
Accumulated
Amortization
Net
$
$
43,271
22,899
10,269
3,548
2,400
400
2,365
85,152
$
$
(1,022) $
(977)
(228)
(37)
—
—
(33)
(2,297) $
(14,180) $
(14,256)
(480)
(3,239)
(1,360)
(193)
(2,193)
(35,901) $
28,069
7,666
9,561
272
1,040
207
139
46,954
Amortization of acquired intangible assets was $5,007,000 in 2015, $5,528,000 in 2014, and $4,687,000 in 2013. The
estimated future amortization expense of acquired definite-lived intangible assets is $4,470,000 in 2016; $4,328,000 in 2017;
$4,193,000 in 2018; $3,815,000 in 2019; $3,481,000 in 2020; and $9,645,000 in the aggregate thereafter.
Goodwill
The changes in the carrying amount of goodwill by segment are as follows:
(In thousands)
Balance as of December 28, 2013
Papermaking
Systems
Segment
Wood
Processing
Systems
Segment
$
Gross Balance.................................................................................................
Accumulated Impairment Losses ...................................................................
Net Balance ....................................................................................................
Increase due to acquisitions ......................................................................................
Currency translation adjustment ...............................................................................
Total 2014 Adjustments............................................................................................
Balance at January 3, 2015
Gross Balance.................................................................................................
Accumulated Impairment Losses ...................................................................
Net Balance ....................................................................................................
Currency translation adjustment ...............................................................................
Total 2015 Adjustments............................................................................................
Balance at January 2, 2016
$
196,339
(85,509)
110,830
3,288
(6,348)
(3,060)
193,279
(85,509)
107,770
(5,559)
(5,559)
$
21,085
—
21,085
894
(1,867)
(973)
20,112
—
20,112
(3,272)
(3,272)
Total
217,424
(85,509)
131,915
4,182
(8,215)
(4,033)
213,391
(85,509)
127,882
(8,831)
(8,831)
Gross Balance.................................................................................................
Accumulated Impairment Losses ...................................................................
Net Balance ....................................................................................................
$
187,720
(85,509)
102,211
$
16,840
—
16,840
$
204,560
(85,509)
119,051
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. Testing
goodwill for impairment involves a two-step quantitative process. However, prior to performing the two-step quantitative goodwill
impairment test, the Company has the option to first perform 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 January 2, 2016, the Company performed a qualitative goodwill impairment analysis. This impairment analysis
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
F-14
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
1.
Nature of Operations and Summary of Significant Accounting Policies (continued)
determined that it was not more likely than not that the fair value of any of the reporting units was 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 have produced a different result.
At January 3, 2015, the Company performed a quantitative goodwill impairment assessment for all of its reporting units,
which indicated that the fair value of each reporting unit exceeded its carrying value and, as a result, the second step of the
quantitative process was not required.
At January 2, 2016 and January 3, 2015, the Company performed a quantitative impairment analysis on its 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................................................................................................................
2015
19,527
35,990
46,694
16,840
119,051
$
$
2014
20,081
38,381
49,308
20,112
127,882
$
$
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 or asset groups. If these projected
cash flows were to be less than the carrying amounts, an impairment loss would be recognized, resulting in a write-down of the
assets with a corresponding charge to earnings. The impairment loss would be measured based upon the difference between the
carrying amounts and the fair values of the assets. No indicators of impairment were identified in 2015 or 2014.
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 13). Foreign currency transaction gains and losses are included in the accompanying consolidated statement of income
and are not material for the three years presented.
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 fair value of RSUs is based on the grant date trading price of the Company's
common stock, reduced by the present value of estimated dividends foregone during the requisite service period. The fair value
of stock options is based on the Black-Scholes option-pricing model. 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. Compensation expense
related to any modified stock-based awards is based on the fair value for those awards as of the modification date with any remaining
incremental compensation expense recognized ratably over the remaining requisite service period.
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.
F-15
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
1.
Nature of Operations and Summary of Significant Accounting Policies (continued)
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
Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) Reporting Discontinued
Operations and Disclosures of Disposals of Components of an Entity. In April 2014, the FASB issued ASU No. 2014-08, which
provides new guidance on reporting discontinued operations and disclosures of disposals. Under the new guidance, only disposals
representing a strategic shift in operations will be presented as discontinued operations. The new guidance also requires disclosure
of the pre-tax income attributable to a disposal of a significant part of the company that does not qualify for discontinued operations
reporting. The Company adopted this ASU in the first quarter of 2015, and the adoption did not have an impact on the Company's
consolidated financial position, results of operations or cash flows.
Revenue from Contracts with Customers (Topic 606) Section A-Summary and Amendments That Create Revenue from
Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40). In May
2014, the FASB issued ASU No. 2014-09, which requires an entity to recognize the amount of revenue to which it expects to be
entitled for the transfer of promised goods or services to customers. The new guidance provides a five-step analysis of transactions
to determine when and how revenue is recognized. The ASU will replace most existing revenue recognition guidance in GAAP
when it becomes effective. The new guidance is effective for the Company beginning in fiscal 2018. Early adoption is not permitted.
The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating
the effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not
yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
Compensation-Stock Compensation (Topic 718) Accounting for Share-Based Payments When the Terms of an Award
Provide That a Performance Target Could Be Achieved after the Requisite Service Period. In June 2014, the FASB issued ASU
No. 2014-12, which clarifies the proper method of accounting for share-based payments when the terms of an award provide that
a performance target could be achieved after the requisite service period. Under the new guidance, a performance target that affects
vesting and could be achieved after completion of the service period should be treated as a performance condition under FASB
ASC 718 and, as a result, should not be included in the estimation of the grant-date fair value of the award. An entity should
recognize compensation cost for the award when it becomes probable that the performance target will be achieved. In the event
that an entity determines that it is probable that a performance target will be achieved before the end of the service period, the
compensation cost of the award should be recognized prospectively over the remaining service period. The new guidance is effective
for the Company beginning in fiscal 2016. Adoption of this ASU is not expected to have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
Income Statement-Extraordinary and Unusual Items (Subtopic 225-20), Simplifying Income Statement Presentation by
Eliminating the Concept of Extraordinary Items. In January 2015, the FASB issued ASU No. 2015-01, which eliminates the concept
of extraordinary items in an entity’s income statement. Extraordinary classification of an item outside of income from continuing
operations was previously considered only when evidence clearly supported its classification as an extraordinary item. Extraordinary
items were events and transactions that were distinguished by their unusual nature and by the infrequency of their occurrence. The
ASU eliminates the need to separately classify, present, and disclose extraordinary events. The disclosure of events or transactions
that are unusual or infrequent in nature will be included in other guidance. This new guidance is effective for the Company beginning
in fiscal 2016. Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial position,
results of operations or cash flows.
Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. In April 2015,
the FASB issued ASU No. 2015-03, which requires that debt issuance costs related to a recognized debt liability be presented in
the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In addition,
in June 2015, the FASB issued ASU No. 2015-15, which allows an entity to defer the requirements of ASU No. 2015-03 on deferred
issuance costs related to line-of-credit arrangements. The recognition and measurement guidance for debt issuance costs are not
affected by the amendments in these ASUs. These new disclosure items are effective for the Company beginning in fiscal 2016.
Adoption of these ASUs is not expected to have a material impact on the Company's consolidated financial position, results of
operations or cash flows.
F-16
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
1.
Nature of Operations and Summary of Significant Accounting Policies (continued)
Compensation-Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined
Benefit Obligation and Plan Assets. In April 2015, the FASB issued ASU No. 2015-04, which provides a practical expedient that
permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal
year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently
to all plans if an entity has more than one plan. If a contribution or significant event (such as a plan amendment, settlement, or
curtailment that calls for a remeasurement in accordance with existing requirements) occurs between the month-end date used to
measure defined benefit plan assets and obligations and an entity’s fiscal year-end, the entity should adjust the measurement of
defined benefit plan assets and obligations to reflect the effects of those contributions or significant events. However, an entity
should not adjust the measurement of defined benefit plan assets and obligations for other events that occur between the month-
end measurement and the entity’s fiscal year-end that are not caused by the entity (for example, changes in market prices or interest
rates). This new guidance is effective for the Company beginning in fiscal 2016. Early adoption is permitted. The Company adopted
this ASU for the year ended January 2, 2016, and the adoption did not have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Fees Paid in a
Cloud Computing Arrangement. In April 2015, the FASB issued ASU No. 2015-05, which provides guidance to customers about
whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license,
then the customer should account for the software license element of the arrangement consistent with the acquisition of other
software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the
arrangement as a service contract. This new guidance is effective for the Company beginning in fiscal 2016. Adoption of this ASU
is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.
Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). In May
2015, the FASB issued ASU No. 2015-07, which removes the requirement to categorize within the fair value hierarchy all
investments for which fair value is measured using the net asset value per share practical expedient. This ASU also removes the
requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value
per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the
fair value using that practical expedient. This new guidance is effective for the Company beginning in fiscal 2016. As this ASU
is disclosure-related only, its adoption will not have an effect on the Company’s consolidated financial position, results of operations
or cash flows.
Inventory (Topic 330), Simplifying the Measurement of Inventory. In July 2015, the FASB issued ASU No. 2015-11, which
requires that an entity measure inventory within the scope of this ASU at the lower of cost or net realizable value. Net realizable
value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal,
and transportation. Substantial and unusual losses that result from subsequent measurement of inventory should be disclosed in
the financial statements. This new guidance is effective for the Company beginning in fiscal 2017. Early adoption is permitted.
The Company is currently evaluating the effect that adoption of ASU No. 2015-11 will have on the Company's consolidated
financial position, results of operations or cash flows.
Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments. In September
2015, the FASB issued ASU No. 2015-16, which requires that an acquirer recognize adjustments to provisional amounts that are
identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer
is required to record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or
other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed
at the acquisition date. In addition, an entity is required to present, separately on the face of the income statement or through
disclosure in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded
in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This new
guidance is effective for the Company beginning in fiscal 2016. Adoption of this ASU is not expected to have a material impact
on the Company's consolidated financial position, results of operations or cash flows.
Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes. In November 2015, the FASB issued ASU
No. 2015-17, which simplifies the presentation of deferred income taxes, as it requires that deferred tax assets and liabilities be
classified as noncurrent in a classified statement of financial position. This ASU applies to all entities that present a classified
statement of financial position and may be applied either prospectively to all deferred tax liabilities and assets or retrospectively
to all periods presented. This new guidance is effective for the Company beginning in fiscal 2017. Early adoption is permitted.
The Company adopted this ASU prospectively for the year ended January 2, 2016, which resulted in all deferred taxes being
reported as non-current on its consolidated balance sheet. See Note 5, Income Taxes, for additional information.
Leases (Topic 842). In February 2016, the FASB issued ASU No. 2016-02, which requires a lessee to recognize a right-
of-use asset and a lease liability for operating leases, initially measured at the present value of the future lease payments, in its
balance sheet. This ASU also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated
F-17
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
1.
Nature of Operations and Summary of Significant Accounting Policies (continued)
over the lease term, generally on a straight-line basis. This new guidance is effective for the Company in fiscal 2019. Early adoption
is permitted. The Company is currently evaluating the effects that the adoption of this ASU will have on its consolidated financial
position, results of operations and cash flows.
2.
Acquisitions
The Company’s acquisitions have been accounted for using the purchase method of accounting and the acquired companies’
results have been included in the accompanying financial statements from the dates of the acquisitions. The Company incurred
acquisition transaction costs of approximately $326,000 and $1,802,000 in 2014 and 2013, respectively, which are included in
selling, general, and administrative expenses. The Company's acquisitions have historically been made at prices above the fair
value of the acquired net assets, resulting in goodwill, due to expectations of synergies from combining the businesses. The
Company is realizing 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.
2014
On October 31, 2014, the Company acquired certain assets of the screen cylinder business of a U.S.-based company for
approximately $9,174,000 in cash. This technology-based acquisition enhances the Company’s stock-preparation equipment
product offerings to pulp and paper mills worldwide.
On December 30, 2013, the Company acquired all the outstanding shares of a European producer of creping and coating
blades for approximately $2,666,000 in cash, including $674,000 of cash acquired. An additional 1,000,000 euros, or approximately
$1,091,000 of contingent consideration was paid to the sellers on January 4, 2016.
The following table summarizes the purchase method of accounting for the acquisitions made in 2014 and the estimated
fair values of assets acquired and liabilities assumed:
2014 Acquisitions (In thousands)
Net Assets Acquired:
Cash and cash equivalents...........................................................................................................................................
Inventories...................................................................................................................................................................
Other current assets .....................................................................................................................................................
Property, plant & equipment .......................................................................................................................................
Intangibles
Customer relationships....................................................................................................................................
Intellectual property ........................................................................................................................................
Other................................................................................................................................................................
Goodwill......................................................................................................................................................................
Total assets acquired .......................................................................................................................................
Total liabilities assumed..............................................................................................................................................
Net assets acquired ..........................................................................................................................................
Purchase Price:
Cash.............................................................................................................................................................................
Contingent consideration ............................................................................................................................................
Total purchase price...........................................................................................................................................
Total
674
1,064
324
847
4,700
2,600
360
3,463
14,032
1,001
13,031
11,840
1,191
13,031
$
$
$
$
The weighted-average amortization period for intangibles acquired in 2014 is 9 years, which includes weighted-average
amortization periods of 8 years for customer relationships and 11 years for intellectual property. The excess of the purchase price
for the acquisitions made in 2014 over the tangible and identifiable intangible assets was recorded as goodwill and amounted to
approximately $3,463,000, of which $2,004,000 is deductible for tax purposes.
During 2014, the Company made post-closing adjustment payments of $818,000 related to acquisitions completed prior
to 2014.
F-18
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
2.
Acquisitions (continued)
2013
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 furthered 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, $656,000 was released in April 2015,
and the balance will be released on various dates 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 $7,196,000 in cash, including $101,000 of additional
consideration paid as a post-closing adjustment in 2014. This acquisition expanded the Company's product offerings in its Stock-
Preparation product line, particularly for virgin pulp and approach flow applications. In addition, Noss had a large installed base,
and a high proportion of its revenues were 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. Substantially all of
the escrow fund was released to the sellers in 2015.
On November 6, 2013, the Company acquired all the outstanding shares of Carmanah Design and Manufacturing Inc.
(Carmanah) for approximately $52,281,000 in cash, including $717,000 of additional consideration paid as a post-closing
adjustment in 2014, and $171,000 of assumed liabilities owed to Kadant. Carmanah is a designer and manufacturer of stranders
and related equipment used in the production of OSB. 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. Half of the escrow fund was
released to the sellers in November 2014 and the remainder was released in May 2015. The acquisition of Carmanah extended
Kadant's presence into the forest products industry and advanced the Company's strategy of increasing its parts and consumables
business.
The components of the purchase price and net assets acquired for 2013 acquisitions, as revised for the finalization of
the valuation process and amounts paid in 2014, are as follows:
2013 Acquisitions (In thousands)
Net Assets Acquired:
Cash and cash equivalents...........................................................................................................................................
Accounts receivable ....................................................................................................................................................
Inventories...................................................................................................................................................................
Other assets .................................................................................................................................................................
Property, plant & equipment .......................................................................................................................................
Intangibles
Intellectual property ........................................................................................................................................
Customer relationships....................................................................................................................................
Other................................................................................................................................................................
Goodwill......................................................................................................................................................................
Total assets acquired .......................................................................................................................................
$
Long-term deferred tax liabilities ...............................................................................................................................
Other liabilities............................................................................................................................................................
Total liabilities assumed ..................................................................................................................................
Net assets acquired ..........................................................................................................................................
$
Total
1,966
8,523
17,757
3,237
5,891
18,786
5,340
2,893
24,744
89,137
6,032
14,834
20,866
68,271
Purchase Price:
Cash.............................................................................................................................................................................
$
68,271
The weighted-average amortization period for intangibles acquired in 2013 is 9 years, which includes weighted-average
amortization periods of 10 years for both intellectual property and customer relationships and 6 years for trademarks. 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 $24,744,000, the majority of which is not deductible for tax purposes.
Pro forma disclosures of the results of operations are not required, as the acquisitions are not considered material business
combinations.
F-19
Kadant Inc.
2015 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 (RSUs), 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 655,168 shares available for grant under stock-based compensation plans at
year-end 2015. 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. The fair value of RSUs is based on the grant date trading price of the Company's common
stock, reduced by the present value of estimated dividends foregone during the requisite service period. The fair value of stock
options is based on the Black-Scholes option-pricing model. Total stock-based compensation expense was $5,741,000, $5,813,000,
and $5,216,000 in 2015, 2014, and 2013, 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..........................................................................................................................
$
$
2015
2014
2013
5,185
420
136
5,741
$
$
4,904
782
127
5,813
$
$
4,102
1,015
99
5,216
The Company has elected to recognize excess income tax benefits from stock option exercises and the vesting of RSUs
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 $881,000, $771,000, and $351,000 in 2015,
2014, and 2013, respectively, associated with stock-based compensation.
The Company grants RSUs to non-employee directors and certain employees. Holders of RSUs have no voting rights
and are not entitled to receive cash dividends.
Non-Employee Director Restricted Stock Units
In general, the Company grants 5,000 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, on March 9, 2015, the Company also
granted 10,000 RSUs to each of its non-employee directors, which totaled 50,000 in the aggregate and had a grant date fair value
of $2,279,000. These RSUs 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. If a change in control occurs, the directors would receive cash compensation equal
to the value of the RSUs at the trading price of the Company's common stock on the change in control date. During 2015, 10,000
RSUs were forfeited and the remaining 40,000 RSUs will expire and be forfeited if a change in control does not occur before the
last day of the first quarter of 2020.
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.
F-20
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
3.
Employee Benefit Plans (continued)
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 $1,241,000 at year-end 2015, 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 executive officers and other 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 recognizes
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
$2,475,000 at year-end 2015, and will be recognized over a weighted average period of 1.8 years.
A summary of the activity of the Company's unvested RSUs for 2015 is as follows:
Unvested Restricted Stock Units
Unvested RSUs at January 3, 2015...................................................................................................
Granted ...........................................................................................................................................
Vested.............................................................................................................................................
Forfeited / Expired .........................................................................................................................
Unvested RSUs at January 2, 2016...................................................................................................
Units
(In
thousands)
Weighted
Average
Grant-
Date Fair
Value
$
310
116
$
(160) $
(50) $
$
216
28.06
44.75
30.56
20.26
37.01
The weighted-average grant date fair value of RSUs granted was $44.75, $38.52, and $25.53 in 2015, 2014, and 2013,
respectively. The total fair value of shares vested was $7,502,000, $6,895,000, and $4,997,000 in 2015, 2014, and 2013, respectively.
Stock Options
The Company has granted nonqualified stock options to its executive officers. Stock options granted in 2013 were
nonqualified options that vest over three years and are not exercisable until vested. No stock options were granted in 2014 or 2015.
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 $51,000
at January 2, 2016, and will be recognized in the first quarter of 2016.
The Company did not grant stock options in 2015 and 2014. The fair value of each option granted in 2013 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
25.98
11.33
51%
1.92%
1.25%
7.6 years
F-21
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
3.
Employee Benefit Plans (continued)
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 2015 is as follows:
(In thousands, except per share amounts)
Options Outstanding at January 3, 2015 .........................................
Exercised.......................................................................................
Options Outstanding at January 2, 2016 .........................................
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)
$
374
(16) $
$
358
$
358
$
327
20.98
17.88
21.12
21.12
20.66
5.6 years
5.6 years
5.5 years
$
$
$
6,973
6,973
6,520
(a) The closing price per share on the last trading day prior to January 2, 2016 was $40.61.
A summary of the Company's stock option exercises in 2015, 2014, and 2013 is as follows.
(In thousands)
Total intrinsic value of options exercised.................................................................
Cash received from options exercised ......................................................................
$
$
2015
2014
2013
442
284
$
$
438
336
$
$
—
—
Modified Awards
On September 15, 2014, the Company entered into an executive transition agreement with its Chief Financial Officer in
connection with his retirement on June 30, 2015. This agreement included provisions for post-employment compensation and
modifications to outstanding equity awards. The Company recognized $360,000 of post-employment compensation ratably through
the retirement date. Pursuant to this agreement, any unvested stock options immediately vested on the retirement date and any
unvested RSUs at the retirement date vested on June 30, 2015 and were distributed on March 10, 2016. As of September 15, 2014,
5,201 stock options were remeasured at a grant date fair value of $17.96 per option based on the Black-Scholes option-pricing
model and 12,313 RSUs were remeasured at a fair value of $39.94 per unit. The remaining compensation expense associated with
the modified stock options and RSUs totaled $428,000 as of September 15, 2014, which was recognized ratably through the
retirement date.
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 2015, 2014, and 2013
plan years, the Company issued 13,573, 12,017, and 16,325 shares, respectively, of its common stock under this plan.
F-22
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
3.
Employee Benefit Plans (continued)
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 $2,749,000, $2,655,000, and $2,607,000
in 2015, 2014, and 2013, 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.
The Company sponsors a Restoration Plan (included in the table below in "Other Benefits") for the benefit of certain
executive officers who are also participants in 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 2016 are $561,000 and $146,000, respectively.
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. In accordance with the
adoption of ASU No. 2015-04, the Company has elected to measure its plan assets and benefit obligations as of December 31,
which is the closest month-end to its fiscal year-end.
F-23
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
3.
Employee Benefit Plans (continued)
(In thousands)
Change in Benefit Obligation:
Benefit obligation at beginning of year .......................................
Service cost ..................................................................................
Interest cost ..................................................................................
Actuarial (gain) loss.....................................................................
Benefits paid ................................................................................
Plan amendments .........................................................................
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 contributions................................................................
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 (loss) gain ....................
Amortization of unrecognized prior service cost.........................
Amortization of unrecognized net actuarial loss .........................
Effect of currency translation.......................................................
Total .............................................................................................
$
$
$
$
$
$
$
$
$
$
$
$
Pension Benefits
Other Benefits
2015
2014
2015
2014
32,213
842
1,229
(1,448)
(1,526)
—
—
31,310
$
$
$
28,986
(764)
1,080
(1,526)
27,776
$
(3,534) $
$
26,844
27,791
733
1,286
4,390
(1,987)
—
—
32,213
$
$
$
26,056
3,837
1,080
(1,987)
28,986
$
(3,227) $
$
27,738
6,139
187
175
(356)
(408)
—
(245)
5,492
$
$
— $
—
408
(408)
— $
(5,492) $
$
2,839
5,583
261
225
701
(390)
51
(292)
6,139
—
—
390
(390)
—
(6,139)
1,894
— $
(3,534) $
— $
(3,227) $
(320) $
(4,757) $
(394)
(5,745)
(8,094) $
(108)
(8,202) $
(7,865) $
(163)
(8,028) $
(793) $
(656)
(1,449) $
(1,272)
(751)
(2,023)
(737) $
55
508
—
(174) $
(1,916) $
55
315
—
(1,546) $
356
90
56
72
574
$
$
(701)
91
34
14
(562)
The weighted-average assumptions used to determine the benefit obligation as of year-end were as follows:
Pension Benefits
Other Benefits
2015
2014
2015
2014
Discount rate ..............................................................................................
Rate of compensation increase ...................................................................
4.22%
3.00%
3.87%
3.00%
3.38%
2.82%
3.03%
2.74%
The discount rates for pension and post-retirement plans are based on market yields on high-quality corporate bonds
currently available and expected to be available during the period to maturity of the benefits. For pension and post-retirement
plans, which have been closed to new participants thereby shortening the duration, the discount rate is determined based on
discounting the projected benefit streams against the Citigroup Pension discount curve.
F-24
Kadant Inc.
2015 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:
Pension Benefits
Other Benefits
2015
2014
2015
2014
Projected benefit obligation .....................................................................
Fair value of plan assets...........................................................................
$
$
31,310
27,776
$
$
32,213
28,986
$
$
2,080
$
— $
2,495
—
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:
Pension Benefits
Other Benefits
2015
2014
2015
2014
Accumulated benefit obligation...............................................................
Fair value of plan assets...........................................................................
$
$
— $
— $
— $
— $
1,575
$
— $
1,894
—
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
2015
2014
2013
2015
2014
2013
$
$
842
1,229
(1,421)
508
55
1,213
$
$
850
1,286
(1,480)
315
55
1,026
$
$
998
1,167
(1,506)
533
55
1,247
$
$
187
175
—
56
90
508
$
$
261
225
—
34
91
611
$
$
171
207
—
62
85
525
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........................
3.87%
5.25%
3.00%
4.79%
5.75%
3.50%
3.89%
5.75%
3.50%
3.27%
—
2.82%
4.07%
—
2.99%
3.53%
—
3.25%
Pension Benefits
Other Benefits
2015
2014
2013
2015
2014
2013
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.
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...........................................................................................
2015
2014
8.00%
8.00%
2015
8.00%
8.00%
2014
F-25
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
3.
Employee Benefit Plans (continued)
Plan Assets
The fair values of the Company's noncontributory defined benefit retirement plan assets at year-end 2015 and 2014 by
asset category are as follows:
2015
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................................................................................
$
$
3,271
817
15,397
19,485
$
$
— $
—
8,291
8,291
$
— $
—
—
— $
3,271
817
23,688
27,776
2014
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................................................................................
$
$
3,465
819
15,988
20,272
$
$
— $
—
8,714
8,714
$
— $
—
—
— $
3,465
819
24,702
28,986
______________________________
(a) Common stock index funds.
(b) Investments in commingled funds that invest in a diversified blend of investment and non-investment grade fixed income
securities.
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.
F-26
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
3.
Employee Benefit Plans (continued)
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
5%
70%
15%
85%
100%
30%
95%
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 2016. For the remaining pension and post-retirement welfare benefits plans, no cash contributions other than to fund current
benefit payments are expected in 2016.
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 2015.
(In thousands)
2016 ..................................................................................................................................................
2017 ..................................................................................................................................................
2018 ..................................................................................................................................................
2019 ..................................................................................................................................................
2020 ..................................................................................................................................................
2021-2025 .........................................................................................................................................
$
Pension
Benefits
Other
Benefits
$
1,170
2,640
2,090
1,446
4,540
11,919
320
221
219
185
155
3,343
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.
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 2015, the Company had reserved 1,298,972 unissued shares of its common stock for possible issuance under
its stock-based compensation plans.
F-27
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
5.
Income Taxes
The components of income from continuing operations before provision for income taxes are as follows:
(In thousands)
Domestic ...................................................................................................................
Foreign......................................................................................................................
2015
$
$
13,076
36,295
49,371
$
$
2014
10,951
30,567
41,518
The components of the provision for income taxes from continuing operations are as follows:
(In thousands)
Current Provision:
Federal ....................................................................................................................
Foreign ...................................................................................................................
State........................................................................................................................
$
Deferred (Benefit) Provision:
Federal ....................................................................................................................
Foreign ...................................................................................................................
State........................................................................................................................
$
2015
2014
4,693
10,623
1,152
16,468
45
(1,378)
(373)
(1,706)
14,762
$
$
1,080
7,703
713
9,496
2,179
418
354
2,951
12,447
The provision for income taxes included in the accompanying statement of income is as follows:
(In thousands)
Continuing Operations..............................................................................................
Discontinued Operation ............................................................................................
2015
$
$
14,762
43
14,805
$
$
2014
12,447
(14)
12,433
2013
8,913
24,113
33,026
2013
1,986
7,955
436
10,377
1,325
(2,354)
(32)
(1,061)
9,316
2013
9,316
(34)
9,282
$
$
$
$
$
$
The Company receives a tax deduction upon the exercise of nonqualified stock options and the vesting of RSUs. The
current provision for income taxes in the consolidated statement of income does not reflect $881,000, $771,000, and $351,000 of
such excess tax benefits in 2015, 2014, and 2013, respectively, from the exercise of stock options and vesting of RSUs.
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:
State income taxes, net of federal tax.....................................................................
U.S. tax cost (benefit) of foreign earnings .............................................................
Foreign tax rate differential....................................................................................
Provision for (reversal of) tax benefit reserves, net ...............................................
Change in valuation allowance ..............................................................................
Nondeductible expenses .........................................................................................
Research and development tax credits ...................................................................
Other.......................................................................................................................
2015
$
17,279
$
2014
14,531
2013
$
11,559
506
455
(3,852)
33
99
704
(210)
(252)
14,762
$
694
206
(3,026)
(1,017)
125
1,398
(274)
(190)
12,447
$
304
(119)
(2,681)
853
(968)
1,580
(638)
(574)
9,316
$
F-28
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
5.
Income Taxes (continued)
Net deferred tax liability in the accompanying consolidated balance sheet consists of the following:
(In thousands)
Deferred Tax Asset:
2015
2014
$
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...........................................................................................................
$
23
5,003
12,306
3,253
246
5,427
405
525
151
27,339
(11,493)
15,846
(17,450)
(3,234)
(32)
(284)
(21,000)
$
(5,154) $
725
5,206
13,937
3,150
422
4,664
555
299
94
29,052
(13,040)
16,012
(19,644)
(3,426)
(89)
(531)
(23,690)
(7,678)
In 2014, the deferred tax assets and liabilities are presented in the accompanying balance sheet within current deferred
tax asset, 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. In 2015, the deferred tax assets and liabilities are presented in the accompanying
balance sheet within other assets and long-term deferred income taxes on a net basis by tax jurisdiction.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of
Deferred Taxes, which simplifies the presentation of deferred income taxes as it requires that deferred tax assets and liabilities be
classified as noncurrent in the consolidated balance sheet. The Company early adopted this ASU for the year ended January 2,
2016, which resulted in all deferred taxes being reported as non-current in its consolidated balance sheet. The Company has elected
not to retrospectively restate its deferred tax assets and liabilities in prior periods.
The components of the net deferred tax liability are as follows:
(In thousands)
Current Deferred Tax Asset..............................................................................................................
Long-term Deferred Tax Asset.........................................................................................................
Current Deferred Tax Liability ........................................................................................................
Long-term Deferred Tax Liability....................................................................................................
Net Deferred Tax Liability ..........................................................................................................
$
$
2015
2014
— $
3,838
—
(8,992)
(5,154) $
9,536
1,780
(34)
(18,960)
(7,678)
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 2015 was $11,493,000,
consisting of $966,000 in the U.S. and $10,527,000 in foreign jurisdictions. The decrease in the valuation allowance in 2015 of
$1,547,000 related primarily to fluctuations in foreign currency exchange rates, tax rate changes, and expected future utilization
of net operating losses in certain state and foreign jurisdictions, and was offset partially by an increase in the valuation allowance
related to an increase in net operating losses in certain jurisdictions. 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 2015,
F-29
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
5.
Income Taxes (continued)
the Company continued to maintain a valuation allowance in the U.S. against a large portion of its state operating loss carryforwards
due to the uncertainty of future profitability in state jurisdictions. As of year-end 2015, the Company maintained valuation
allowances in certain foreign jurisdictions because of the uncertainty of future profitability.
At year-end 2015, the Company had domestic state and foreign net operating loss carryforwards of $28,740,000 and
$37,543,000, respectively. The domestic state loss carryforwards will expire in the years 2016 through 2035. Their utilization is
limited to future taxable income from the Company's domestic subsidiaries. Of the foreign net operating loss carryforwards,
$73,000 will expire in the years 2017 through 2022, and the remainder do not expire.
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 2015, the Company has not provided for U.S. income taxes on approximately $168,225,000 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 $3,557,000.
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.
As of year-end 2015, the Company had $5,052,000 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 2015 and
2014 is as follows:
(In thousands)
Unrecognized tax benefits, beginning of year ..................................................................................
Gross decreases—tax positions in prior periods...............................................................................
Gross increases—current-period tax positions .................................................................................
Lapses of statutes of limitations .......................................................................................................
Currency translation..........................................................................................................................
Unrecognized tax benefits, end of year ............................................................................................
$
$
2015
2014
5,006
(28)
476
(253)
(149)
5,052
$
$
5,423
(153)
960
(967)
(257)
5,006
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income
taxes. The Company has accrued $1,246,000 and $1,137,000 for the potential payment of interest and penalties at year-end 2015
and 2014, respectively. The interest and penalties included in the consolidated statement of income was an expense (benefit) of
$103,000 and $(648,000) in 2015 and 2014, 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 $364,000 primarily from the expiration
of tax statutes of limitations.
The Company remains subject to U.S. Federal income tax examinations for the tax years 2002 through 2015, and to non-
U.S. income tax examinations for the tax years 2004 through 2015. In addition, the Company remains subject to state and local
income tax examinations in the U.S. for the tax years 2000 through 2015.
6.
Short- and Long-Term Obligations
Short- and long-term obligations at year-end 2015 and 2014 are as follows:
(In thousands)
Revolving Credit Facility, due 2018.................................................................................................
Commercial Real Estate Loan, due 2016 .........................................................................................
Borrowings Under Overdraft............................................................................................................
Total Short- and Long-Term Obligations..........................................................................................
Less: Short-Term Obligations...........................................................................................................
Long-Term Obligations ....................................................................................................................
$
$
2015
26,000
5,250
—
31,250
(5,250)
26,000
$
$
2014
20,000
5,750
111
25,861
(611)
25,250
F-30
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
6.
Short- and Long-Term Obligations (continued)
The annual payment requirements for short- and long-term obligations are as follows:
(In thousands)
2016............................................................................................................................................................................ $
2018............................................................................................................................................................................ $
5,250
26,000
The weighted average interest rate for short-and long-term obligations was 2.58% and 2.38% at year-end 2015 and 2014,
respectively.
See Note 10 for the fair value information related to the Company's long-term obligations.
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 January 2, 2016, 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 2015, the outstanding balance under the 2012 Credit Agreement was $26,000,000. As of January 2, 2016,
the Company had $72,102,000 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.
Commercial Real Estate Loan
On May 4, 2006, the Company borrowed $10,000,000 under a promissory note (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 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 0.75%
margin. The 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 2015, the
outstanding balance on the Commercial Real Estate Loan was $5,250,000.
The Company's obligations under the Commercial Real Estate Loan may be accelerated upon the occurrence of an event
of default under the 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
F-31
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
6.
Short- and Long-Term Obligations (continued)
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 Commercial Real Estate Loan.
Debt Issuance Costs
Debt issuance costs associated with the Commercial Real Estate Loan are being amortized to interest expense over the
corresponding debt term based on the effective-interest method. Debt issuance costs associated with the 2012 Credit Agreement
are being amortized to interest expense based on the straight-line method. As of year-end 2015, unamortized debt issuance costs,
included in other assets in the accompanying consolidated balance sheet, were approximately $380,000.
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 $3,024,000, $3,135,000, and $2,545,000 in 2015, 2014, and 2013,
respectively. The future minimum payments due under noncancelable operating leases at year-end 2015 are $2,158,000 in 2016;
$1,374,000 in 2017; $847,000 in 2018; $359,000 in 2019; $328,000 in 2020 and $786,000 thereafter. Total future minimum lease
payments are $5,852,000.
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 $16,183,000 at year-end 2015. 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 dates. At year-end 2015, the Company had
$6,897,000 of banker's acceptance drafts subject to recourse, which were transferred to vendors and had not reached their scheduled
maturity dates. Historically, the banker's acceptance drafts have settled upon maturity without any claim of recourse against the
Company.
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.
2015 Financial Statements
Notes to Consolidated Financial Statements
8.
Restructuring Costs and Other Income, Net
In 2015, the Company recorded restructuring costs of $515,000 including $344,000 related to its 2015 restructuring plans
and $171,000 related to its 2014 restructuring plans.
In 2014, the Company recorded restructuring costs of $805,000, including $370,000 related to its 2014 restructuring plans
and $435,000 related to restructuring plans prior to 2014.
In 2013, the Company recorded restructuring costs and other income, net of $103,000, including $1,843,000 of costs
related to restructuring plans prior to 2014 and $1,740,000 of other income related to a pre-tax gain from the sale of real estate in
China.
2015 Restructuring Plans
In 2015, the Company developed plans to streamline operations in its Papermaking Systems Segment. The Company
recorded costs of $344,000 associated with the reduction of 25 employees in Canada and Brazil.
2014 Restructuring Plans
The Company recorded restructuring costs of $541,000 associated with its 2014 restructuring plans. In 2014, the Company
recorded severance costs of $321,000 associated with the reduction of eight employees in Brazil. The Company also recorded
severance costs of $220,000, including $49,000 and $171,000 in 2014 and 2015 respectively, associated with the reduction of
seven employees in Sweden. These actions were taken to further streamline the Company's operations in Brazil and Sweden and
all occurred in the Papermaking Systems segment.
Restructuring Plans prior to 2014
The Company recorded total restructuring costs of $2,278,000 in 2013 and 2014, including severance costs of $1,158,000
associated with the reduction of 22 employees in Brazil and severance costs of $497,000 associated with the reduction of 25
employees in Sweden. Also included in restructuring costs were facility-related costs of $623,000. These actions were taken to
streamline the Company's operations as a result of the CBTI and Noss acquisitions. All of these actions occurred in the Papermaking
Systems segment.
A summary of the changes in accrued restructuring costs are as follows:
(In thousands)
2015 Restructuring Plans
Provision ..............................................................................................................
Usage....................................................................................................................
Currency translation.............................................................................................
Balance at January 2, 2016.....................................................................................
2014 Restructuring Plans
Provision ..............................................................................................................
Usage....................................................................................................................
Currency translation.............................................................................................
Balance at January 3, 2015.....................................................................................
Provision ..............................................................................................................
Usage....................................................................................................................
Currency translation.............................................................................................
Balance at January 2, 2016.....................................................................................
$
$
$
$
$
F-33
Severance
Costs
Other
Costs
Total
Costs
$
344
(323)
(21)
— $
$
$
370
(267)
(56)
47
171
(214)
(4)
— $
— $
—
—
— $
— $
—
—
— $
—
—
—
— $
344
(323)
(21)
—
370
(267)
(56)
47
171
(214)
(4)
—
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
8.
Restructuring Costs and Other Income, Net (continued)
(In thousands)
Restructuring Plans Prior to 2014
Severance
Costs
Other
Costs
Total
Costs
Balance at December 29, 2012...............................................................................
Provision ..............................................................................................................
Usage....................................................................................................................
Currency translation.............................................................................................
Balance at December 28, 2013...............................................................................
Provision ..............................................................................................................
Usage....................................................................................................................
Currency translation.............................................................................................
Balance at January 3, 2015.....................................................................................
Provision ..............................................................................................................
Usage....................................................................................................................
Currency translation.............................................................................................
Balance at January 2, 2016.....................................................................................
$
$
$
$
88
1,666
(1,076)
(159)
519
(11)
(370)
(82)
56
—
(15)
(3)
38
$
$
$
$
— $
177
(177)
—
— $
446
(445)
(1)
— $
—
—
—
— $
88
1,843
(1,253)
(159)
519
435
(815)
(83)
56
—
(15)
(3)
38
The Company expects to pay the remaining accrued restructuring costs in 2016.
9.
Derivatives
Interest Rate Swaps
The Company entered into interest rate swap agreements in 2015 and 2006 and has designated these agreements as cash
flow hedges. On January 16, 2015, the Company entered into a swap agreement (2015 Swap Agreement) to hedge its exposure to
movements in the three-month LIBOR rate on future outstanding debt. The 2015 Swap Agreement expires on March 27, 2020 and
has a $10,000,000 notional value. Under the 2015 Swap Agreement, on a quarterly basis, the Company receives a three-month
LIBOR rate and pays a fixed rate of interest of 1.50% plus an applicable margin. The fair value of the 2015 Swap Agreement as
of January 2, 2016 is included in other assets, with an offset to accumulated other comprehensive items (net of tax) in the
accompanying consolidated balance sheet.
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 January 2, 2016 is included in other current 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
agreements is remote based on the Company's financial position and the creditworthiness of the financial institution issuing the
swap agreements.
The counterparty to the swap agreements could demand an early termination of the swap agreements 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 coverage ratio of 3 to 1. As of January 2, 2016, the Company was in compliance
with these covenants. The unrealized loss associated with the swap agreements was $53,000 as of January 2, 2016, which represents
the estimated amount that the Company would pay to the counterparty in the event of an early termination.
F-34
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
9.
Derivatives (continued)
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 losses of $386,000 and $14,000 in 2015
and 2014, respectively, and a gain of $146,000 in 2013 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.
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:
Derivatives in an Asset
Position:
Forward currency-
exchange contracts............
Interest rate swap
agreement..........................
Derivatives in a Liability
Position:
Forward currency-
exchange contracts............
Interest rate swap
agreement..........................
Interest rate swap
agreement..........................
Derivatives Not Designated as
Hedging Instruments:
Derivatives in an Asset
Position:
Forward currency-
exchange contracts............
Derivatives in a Liability
Position:
Forward currency-
exchange contracts............
Balance Sheet
Location
2015
2014
Asset
(Liability)
(a)
Notional
Amount
(b)
Asset
(Liability)
(a)
Notional
Amount
(b)
Other Long-Term
Assets
Other Long-Term
Assets
Other Current
Liabilities
Other Current
Liabilities
Other Long-Term
Liabilities
Other Current
Assets
Other Current
Liabilities
$
$
$
$
$
$
$
— $
— $
775
$
17,012
38
$
10,000
$
— $
—
(101) $
6,525
(91) $
5,250
$
$
— $
— $
—
—
— $
— $
(377) $
5,750
2,536
$
15,612
$
— $
—
— $
— $
(12) $
784
(a) See Note 10 for the fair value measurements relating to these financial instruments.
(b) The total notional amount is indicative of the level of the Company's derivative activity during 2015 and 2014.
F-35
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
9.
Derivatives (continued)
The following table summarizes the activity in accumulated other comprehensive items associated with the Company's
derivative instruments designated as cash flow hedges as of and for the period ended January 2, 2016:
(In thousands)
Unrealized loss, net of tax, at January 3, 2015 .........................................................
Loss (gain) reclassified to earnings (a).....................................................................
(Loss) gain recognized in AOCI...............................................................................
Unrealized loss, net of tax, at January 2, 2016 .........................................................
(a) See Note 13 for the income statement classification.
$
Interest Rate
Swap
Agreements
$
Forward
Currency-
Exchange
Contracts
(426) $
(1,379)
1,738
(67) $
Total
(792)
(1,109)
1,672
(229)
(366) $
270
(66)
(162) $
As of January 2, 2016, $294,000 of the net unrealized loss included in AOCI is expected to be reclassified to earnings
over the next twelve months.
10.
Fair Value Measurements and Fair Value of Financial Instruments
Fair value measurement is defined as the price that would be received to sell an asset or paid to transfer a liability in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the
measurement date. A fair value hierarchy is established, which prioritizes the inputs used in measuring fair value into three broad
levels as follows:
•
•
•
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
Level 3—Unobservable inputs based on the Company's own assumptions.
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring
basis:
(In thousands)
Assets:
Money market funds and time deposits..........................................
Forward currency-exchange contracts ...........................................
Interest rate swap agreement ..........................................................
Banker's acceptance drafts (a) ........................................................
Liabilities:
Forward currency-exchange contracts ...........................................
Interest rate swap agreement ..........................................................
Contingent consideration (b) ..........................................................
(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 ..........................................................
Contingent consideration (b) ..........................................................
Fair Value as of January 2, 2016
Level 1
Level 2
Level 3
Total
9,767
$
— $
— $
— $
— $
— $
— $
— $
$
$
$
2,536
38
8,314
— $
— $
— $
— $
$
101
91
$
— $
— $
— $
$
1,091
9,767
2,536
38
8,314
101
91
1,091
Fair Value as of January 3, 2015
Level 1
Level 2
Level 3
Total
9,264
$
— $
— $
— $
$
775
$
6,334
— $
— $
— $
— $
— $
— $
$
12
377
$
— $
— $
— $
$
1,133
9,264
775
6,334
12
377
1,133
$
$
$
$
$
$
$
$
$
$
$
$
$
(a) Included in accounts receivable in the accompanying consolidated balance sheet.
(b) Included in other current liabilities in the accompanying consolidated balance sheet.
F-36
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
10.
Fair Value Measurements and Fair Value of Financial Instruments (continued)
The Company uses the market approach technique to value its financial assets and liabilities, and there were no changes
in valuation techniques during 2015. The Company's financial assets and liabilities carried at fair value are comprised of 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 are comprised of money market funds and bank deposits which are highly liquid and readily
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 Company recorded contingent consideration as part of its acquisition of a European manufacturer on
December 30, 2013. The fair value of the contingent consideration is based on the present value of the estimated future cash flows.
Changes to the fair value of contingent consideration are recorded in selling, general, and administrative expenses.
The following table provides a rollforward of the fair value, as determined by Level 3 inputs, of the contingent
consideration:
(In thousands)
Balance at beginning of period........................................................................................................................
Current period expense....................................................................................................................................
Currency translation ........................................................................................................................................
Balance at end of period ..................................................................................................................................
$
$
2015
1,133
71
(113)
1,091
The carrying value and fair value of the Company's debt obligations are as follows:
(In thousands)
Long-term debt obligations...............................................................
2015
2014
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
$
26,000
$
26,000
$
25,250
$
25,250
The carrying value of long-term debt obligations approximates fair value as the obligations bear variable rates of interest,
which adjust quarterly based on prevailing market rates.
11.
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.
F-37
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
11.
Business Segment and Geographical Information (continued)
(In thousands)
Business Segment Information
Revenues by Product Line:
Papermaking Systems:
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 ...............................................................................................
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 ............................................................................................
Wood Processing Systems......................................................................................
Other.......................................................................................................................
Capital Expenditures:
Papermaking Systems ............................................................................................
Other.......................................................................................................................
2015
2014
2013
$
$
$
$
$
$
$
$
$
$
$
148,341
101,523
92,797
342,661
36,387
11,059
390,107
56,789
10,926
(17,596)
50,119
(748)
49,371
354,417
53,347
7,719
415,483
15
415,498
7,898
2,384
539
10,821
4,639
840
5,479
$
$
$
$
$
$
$
$
$
$
$
127,496
117,389
103,314
348,199
41,647
12,281
402,127
50,485
6,977
(15,376)
42,086
(568)
41,518
343,937
55,634
14,060
413,631
116
413,747
7,724
2,977
488
11,189
5,640
1,115
6,755
$
$
$
$
$
$
$
$
$
$
$
122,704
112,600
93,404
328,708
4,573
11,218
344,499
47,144
(382)
(13,459)
33,303
(277)
33,026
364,102
63,493
14,429
442,024
144
442,168
8,434
850
491
9,775
5,843
418
6,261
F-38
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
11.
Business Segment and Geographical Information (continued)
(In thousands)
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)...........................
2015
2014
2013
$
$
$
$
$
193,383
50,814
145,910
390,107
17,373
12,278
12,642
42,293
11,065
$
$
$
$
$
174,003
43,867
184,257
402,127
15,685
13,996
15,284
44,965
6,508
$
$
$
$
$
129,131
50,678
164,690
344,499
14,118
14,603
16,164
44,885
9,685
(a) Includes restructuring costs and other income, net, of $0.5 million, $0.8 million and $0.1 million in 2015, 2014 and
2013, respectively (see Note 8).
(b) Primarily includes cash and cash equivalents and property, plant, and equipment.
(c) Revenues are attributed to countries based on customer location.
(d) Represents property, plant, and equipment, net.
(e) In general, export revenues are denominated in U.S. dollars.
12.
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 ........................................................................
Income (Loss) 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 ................................................................................
2015
2014
2013
$
$
$
$
$
$
$
$
34,315
74
34,389
10,867
227
11,094
3.16
0.01
3.16
3.09
0.01
3.10
$
$
$
$
$
$
$
$
$
$
28,682
(23)
28,659
10,988
222
11,210
2.61
$
— $
$
2.61
2.56
$
— $
$
2.56
23,481
(62)
23,419
11,153
187
11,340
2.11
(0.01)
2.10
2.07
(0.01)
2.07
Options to purchase 74,300 shares of common stock were not included in the computation of diluted earnings per share
for 2013 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 RSUs totaling 23,100, 33,000, and 20,400 shares of common stock was
not included in the computation of diluted earnings per share in 2015, 2014, and 2013, respectively, as the effect would have been
antidilutive or, for unvested performance-based RSUs, the performance conditions had not been met as of the end of the reporting
periods during the year.
F-39
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
13.
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 January 3, 2015......................................
Other comprehensive (loss) income before
reclassifications .......................................................
Reclassifications from AOCI...................................
Net current period other comprehensive (loss)
income .....................................................................
Balance at January 2, 2016......................................
Deferred Loss
on Pension
and Other
Post-
Retirement
Plans
Unrecognized
Prior Service
Cost
Deferred Loss
on Hedging
Instruments
Accumulated
Other
Comprehensive
Items
(7,371) $
(589) $
(8,394) $
(792) $
(17,146)
Foreign
Currency
Translation
Adjustment
$
(20,561)
—
5
95
(307)
379
1,672
(1,109)
(19,191)
(635)
(20,561)
(27,932) $
$
100
(489) $
72
(8,322) $
563
(229) $
(19,826)
(36,972)
Amounts reclassified out of accumulated other comprehensive items were as follows:
(In thousands)
Pension and Other Post-retirement Plans (1)
Amortization of prior service costs.................
Amortization of actuarial losses .....................
Total expense before income taxes.................
Income tax benefit ..........................................
$
Cash Flow Hedges (2)
Interest rate swap agreements.........................
Forward currency-exchange contracts............
Forward currency-exchange contracts............
Total income (expense) before income taxes..
Income tax (provision) benefit........................
Total Reclassifications....................................
$
2015
2014
2013
(147) $
(576)
(723)
249
(474)
(420)
(12)
1,691
1,259
(150)
1,109
635
$
(148) $
(352)
(500)
175
(325)
(332)
31
1,247
946
(57)
889
564
$
(141)
(620)
(761)
264
(497)
(374)
(153)
—
(527)
42
(485)
(982)
Income Statement
Line Item
SG&A expenses
SG&A expenses
Provision for income taxes
Interest expense
Revenues
SG&A expenses
Provision for income taxes
(1) Included in the computation of net periodic pension costs. See Note 3 for additional information.
(2) See Note 9 for additional information.
F-40
Kadant Inc.
2015 Financial Statements
Notes to Consolidated Financial Statements
14.
Unaudited Quarterly Information
2015 (In thousands, except per share amounts)
Revenues...........................................................................................
Gross Profit.......................................................................................
Amounts Attributable to Kadant:
Income from Continuing Operations ................................................
Income (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 ................................................
Cash Dividends Declared per Common Share .................................
2014 (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 ................................................
Cash Dividends Declared per Common Share .................................
$
$
$
$
$
$
$
$
$
$
$
$
$
$
First
Second
Third
Fourth (a)
92,251
44,337
6,832
65
6,897
0.63
0.63
0.62
0.62
0.17
First
93,367
42,180
5,058
(5)
5,053
0.45
0.45
0.45
0.45
0.15
$
$
$
$
$
$
$
$
$
$
$
$
$
$
98,327
45,727
8,469
(5)
8,464
0.77
0.77
0.76
0.76
0.17
Second
104,835
45,082
7,867
(9)
7,858
0.71
0.71
0.70
0.70
0.15
$
$
$
$
$
$
$
$
$
$
$
$
$
$
91,929
43,668
8,647
(4)
8,643
0.80
0.80
0.78
0.78
0.17
Third
98,719
44,112
6,651
(4)
6,647
0.61
0.61
0.60
0.60
0.15
$
$
$
$
$
$
$
$
$
$
$
$
$
$
107,600
46,393
10,367
18
10,385
0.96
0.96
0.94
0.94
0.17
Fourth (a)
105,206
46,999
9,106
(5)
9,101
0.84
0.84
0.82
0.82
0.15
(a) The fourth quarters of 2015 and 2014 contained 13 and 14 weeks, respectively.
F-41
Kadant Inc.
Schedule II
Valuation and Qualifying Accounts
(In thousands)
Balance at
Beginning
of Year
Provision
Charged to
Expense
Accounts
Recovered
Accounts
Written
Off
Currency
Translation
Balance at
End
of Year
Description
Allowance for Doubtful Accounts
Year Ended January 2, 2016.............
Year Ended January 3, 2015.............
Year Ended December 28, 2013.......
$
$
$
2,198
2,689
2,306
$
$
$
379
246
374
Description
Accrued Restructuring Costs (a)
Year Ended January 2, 2016.....................................
Year Ended January 3, 2015.....................................
Year Ended December 28, 2013...............................
$
$
$
_________________________________
Balance at
Beginning
of Year
103
550
254
$
$
$
$
$
$
— $
$
15
$
109
(205) $
(590) $
(152) $
(209) $
(162) $
$
52
2,163
2,198
2,689
Provision
Charged to
Expense
Activity
Charged to
Reserve
Currency
Translation
Balance at
End
of Year
515
805
1,843
$
$
$
(552) $
(1,113) $
(1,394) $
(28) $
(139) $
(153) $
38
103
550
(a) The nature of the activity in this account is described in Note 8 to the consolidated financial statements.
F-42
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 Wednesday, May 18, 2016, 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 January 2, 2016, 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 Michael McKenney,
Senior 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 January 2, 2016.
KAD ANT INC. | 1 TE C HNOL O G Y PAR K D R. | WE ST FO RD , M A 01886 | TEL: 978.776.2000 | FA X: 978.635.159 3 | k a d a n t . c o m