KAI 10-Q
Kadant Inc (KAI)
10-Q
2023-11-08
For: 2023-09-30
View Original
Added on
April 10, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2023
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from ________ to _________
Commission file number 001-11406
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
(Address of principal executive offices, including zip code)
(978 ) 776-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 27, 2023, the registrant had 11,707,096 shares of common stock outstanding.
Kadant Inc.
Report on Form 10-Q
For the Quarterly Period Ended September 30, 2023
Table of Contents
| Page | ||||||||
| PART I: Financial Information | ||||||||
| PART II: Other Information | ||||||||
PART 1 – FINANCIAL INFORMATION
Item 1 – Financial Statements
KADANT INC.
Condensed Consolidated Balance Sheet
(Unaudited)
| September 30, 2023 | December 31, 2022 | |||||||||||||
| (In thousands, except share and per share amounts) | ||||||||||||||
| Assets | ||||||||||||||
| Current Assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Restricted cash | ||||||||||||||
Accounts receivable, net of allowances of $ | ||||||||||||||
| Inventories | ||||||||||||||
| Contract assets | ||||||||||||||
| Other current assets | ||||||||||||||
| Total Current Assets | ||||||||||||||
Property, Plant, and Equipment, net of accumulated depreciation of $ | ||||||||||||||
| Other Assets | ||||||||||||||
| Intangible Assets, Net | ||||||||||||||
| Goodwill | ||||||||||||||
| Total Assets | $ | $ | ||||||||||||
| Liabilities and Stockholders' Equity | ||||||||||||||
| Current Liabilities: | ||||||||||||||
| Short-term obligations and current maturities of long-term obligations (Note 5) | $ | $ | ||||||||||||
| Accounts payable | ||||||||||||||
| Accrued payroll and employee benefits | ||||||||||||||
| Customer deposits | ||||||||||||||
| Advanced billings | ||||||||||||||
| Other current liabilities | ||||||||||||||
| Total Current Liabilities | ||||||||||||||
| Long-Term Obligations (Note 5) | ||||||||||||||
| Long-Term Deferred Income Taxes | ||||||||||||||
| Other Long-Term Liabilities | ||||||||||||||
| Commitments and Contingencies (Note 11) | ||||||||||||||
| Stockholders' Equity: | ||||||||||||||
Preferred stock, $ | ||||||||||||||
Common stock, $ | ||||||||||||||
| Capital in excess of par value | ||||||||||||||
| Retained earnings | ||||||||||||||
Treasury stock at cost, | ( | ( | ||||||||||||
| Accumulated other comprehensive items (Note 7) | ( | ( | ||||||||||||
| Total Kadant Stockholders' Equity | ||||||||||||||
| Noncontrolling interest | ||||||||||||||
| Total Stockholders' Equity | ||||||||||||||
| Total Liabilities and Stockholders' Equity | $ | $ | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
KADANT INC.
Condensed Consolidated Statement of Income
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||||||||
| Revenue (Notes 1 and 10) | $ | $ | $ | $ | ||||||||||||||||||||||
| Costs and Operating Expenses: | ||||||||||||||||||||||||||
| Cost of revenue | ||||||||||||||||||||||||||
| Selling, general, and administrative expenses | ||||||||||||||||||||||||||
| Research and development expenses | ||||||||||||||||||||||||||
| Gain on sale and other costs, net (Note 2) | ( | |||||||||||||||||||||||||
| Operating Income | ||||||||||||||||||||||||||
| Interest Income | ||||||||||||||||||||||||||
| Interest Expense | ( | ( | ( | ( | ||||||||||||||||||||||
| Other Expense, Net | ( | ( | ( | ( | ||||||||||||||||||||||
| Income Before Provision for Income Taxes | ||||||||||||||||||||||||||
| Provision for Income Taxes (Note 4) | ||||||||||||||||||||||||||
| Net Income | ||||||||||||||||||||||||||
| Net Income Attributable to Noncontrolling Interest | ( | ( | ( | ( | ||||||||||||||||||||||
| Net Income Attributable to Kadant | $ | $ | $ | $ | ||||||||||||||||||||||
| Earnings per Share Attributable to Kadant (Note 3) | ||||||||||||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||||||||||||
| Weighted Average Shares (Note 3) | ||||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
KADANT INC.
Condensed Consolidated Statement of Comprehensive Income
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Net Income | $ | $ | $ | $ | ||||||||||||||||||||||
| Other Comprehensive Items: | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | ( | ( | ( | ( | ||||||||||||||||||||||
Post-retirement liability adjustments, net (net of tax of $ | ( | |||||||||||||||||||||||||
Deferred (loss) gain on cash flow hedges (net of tax of $( | ( | ( | ||||||||||||||||||||||||
| Other comprehensive items | ( | ( | ( | ( | ||||||||||||||||||||||
| Comprehensive Income | ||||||||||||||||||||||||||
| Comprehensive Income Attributable to Noncontrolling Interest | ( | ( | ( | ( | ||||||||||||||||||||||
| Comprehensive Income Attributable to Kadant | $ | $ | $ | $ | ||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
KADANT INC.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
| Nine Months Ended | ||||||||||||||
| September 30, 2023 | October 1, 2022 | |||||||||||||
| (In thousands) | ||||||||||||||
| Operating Activities | ||||||||||||||
| Net income attributable to Kadant | $ | $ | ||||||||||||
| Net income attributable to noncontrolling interest | ||||||||||||||
| Net income | ||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Stock-based compensation expense | ||||||||||||||
| Gain on sale of assets (Note 2) | ( | |||||||||||||
| Other items, net | ||||||||||||||
| Changes in assets and liabilities, net of effects of acquisitions: | ||||||||||||||
| Accounts receivable | ( | ( | ||||||||||||
| Contract assets | ( | |||||||||||||
| Inventories | ( | ( | ||||||||||||
| Other assets | ( | |||||||||||||
| Accounts payable | ( | ( | ||||||||||||
| Customer deposits | ( | |||||||||||||
| Other liabilities | ( | |||||||||||||
| 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 | ||||||||||||||
| Other investing activities | ||||||||||||||
| Net cash used in investing activities | ( | ( | ||||||||||||
| Financing Activities | ||||||||||||||
| Proceeds from issuance of short- and long-term obligations | ||||||||||||||
| Repayment of short- and long-term obligations | ( | ( | ||||||||||||
| Tax withholding payments related to stock-based compensation | ( | ( | ||||||||||||
| Dividends paid | ( | ( | ||||||||||||
| Dividend paid to noncontrolling interest | ( | |||||||||||||
| Other financing activities | ( | |||||||||||||
| Net cash used in financing activities | ( | ( | ||||||||||||
| Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash | ( | ( | ||||||||||||
| Decrease in Cash, Cash Equivalents, and Restricted Cash | ( | ( | ||||||||||||
| Cash, Cash Equivalents, and Restricted Cash at Beginning of Period | ||||||||||||||
| Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | $ | ||||||||||||
under the heading Supplemental Cash Flow Information for further details.
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
KADANT INC.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
| Three Months Ended September 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share and per share amounts) | Common Stock | Capital in Excess of Par Value | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Items | Noncontrolling Interest | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at July 1, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Dividend declared – Common Stock, $ | — | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Activity under stock plans | — | — | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive items | — | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share and per share amounts) | Common Stock | Capital in Excess of Par Value | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Items | Noncontrolling Interest | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared – Common Stock, $ | — | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Activity under stock plans | — | — | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive items | — | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
KADANT INC.
Condensed Consolidated Statement of Stockholders' Equity (continued)
(Unaudited)
| Three Months Ended October 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share and per share amounts) | Common Stock | Capital in Excess of Par Value | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Items | Noncontrolling Interest | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at July 2, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Dividend declared – Common Stock, $ | — | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Activity under stock plans | — | — | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividend paid to noncontrolling interest | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive items | — | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at October 1, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Nine Months Ended October 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share and per share amounts) | Common Stock | Capital in Excess of Par Value | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Items | Noncontrolling Interest | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared – Common Stock, $ | — | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Activity under stock plans | — | — | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividend paid to noncontrolling interest | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive items | — | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at October 1, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Kadant Inc. was incorporated in Delaware in November 1991 and trades on the New York Stock Exchange under the ticker symbol "KAI."
Kadant Inc. (together with its subsidiaries, the Company) is a global supplier of technologies and engineered systems that drive Sustainable Industrial Processing. Its products and services play an integral role in enhancing efficiency, optimizing energy utilization, and maximizing productivity in process industries while helping customers advance their sustainability initiatives with products that reduce waste or generate more yield with fewer inputs, particularly fiber, energy, and water. Producing more while consuming less is a core aspect of Sustainable Industrial Processing and a major element of the strategic focus of the Company's three reportable operating segments: Flow Control, Industrial Processing, and Material Handling.
Interim Financial Statements
The interim condensed consolidated financial statements and related notes presented have been prepared by the Company, are unaudited, and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the Company's financial position at September 30, 2023, its results of operations, comprehensive income, and stockholders' equity for the three- and nine-month periods ended September 30, 2023 and October 1, 2022 and its cash flows for the nine-month periods ended September 30, 2023 and October 1, 2022. Interim results are not necessarily indicative of results for a full year or for any other interim period.
The condensed consolidated balance sheet presented as of December 31, 2022 has been derived from the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (Annual Report). The condensed consolidated financial statements and related notes are presented as permitted by the rules and regulations of the Securities and Exchange Commission (SEC) for Form 10-Q and do not contain certain information included in the annual consolidated financial statements and related notes of the Company. The condensed consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and related notes included in the Annual Report.
Note 1 to the consolidated financial statements in the Annual Report describes the significant accounting estimates and policies used in preparation of the consolidated financial statements. There have been no material changes in the Company’s significant accounting policies during the nine months ended September 30, 2023.
| Nine Months Ended | ||||||||||||||
| (In thousands) | September 30, 2023 | October 1, 2022 | ||||||||||||
| Cash Paid for Interest | $ | $ | ||||||||||||
| Cash Paid for Income Taxes, Net of Refunds | $ | $ | ||||||||||||
| Non-Cash Investing Activities: | ||||||||||||||
| Reduction in fair value of assets acquired | $ | ( | $ | ( | ||||||||||
Cash received for acquired businesses | ||||||||||||||
| Increase (decrease) in liabilities assumed | $ | $ | ( | |||||||||||
| Purchase of property with outstanding loan receivable | $ | |||||||||||||
| Purchases of property, plant, and equipment in accounts payable | $ | $ | ||||||||||||
9
| Nine Months Ended | ||||||||||||||
| (In thousands) | September 30, 2023 | October 1, 2022 | ||||||||||||
| Non-Cash Financing Activities: | ||||||||||||||
| Issuance of Company common stock upon vesting of restricted stock units | $ | $ | ||||||||||||
| Dividends declared but unpaid | $ | $ | ||||||||||||
Restricted Cash
The Company's restricted cash generally serves as collateral for bank guarantees associated with providing assurance to customers that the Company will fulfill certain customer obligations entered into in the normal course of business and for certain banker's acceptance drafts issued to vendors. The majority of the bank guarantees will expire over the next twelve months .
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company's condensed consolidated balance sheet that are shown in aggregate in the accompanying condensed consolidated statement of cash flows:
| (In thousands) | September 30, 2023 | October 1, 2022 | December 31, 2022 | January 1, 2022 | ||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | ||||||||||||||||||||||
| Restricted cash | ||||||||||||||||||||||||||
| Total Cash, Cash Equivalents, and Restricted Cash | $ | $ | $ | $ | ||||||||||||||||||||||
Inventories
The components of inventories are as follows:
| September 30, 2023 | December 31, 2022 | |||||||||||||
| (In thousands) | ||||||||||||||
| Raw Materials | $ | $ | ||||||||||||
| Work in Process | ||||||||||||||
| Finished Goods | ||||||||||||||
| $ | $ | |||||||||||||
Intangible Assets, Net
Gross intangible assets were $342,742,000 at September 30, 2023 and $343,130,000 at December 31, 2022. Intangible assets are recorded at fair value at the date of acquisition. Subsequent impairment charges are reflected as a reduction in the gross balance, as applicable. Definite-lived intangible assets are stated net of accumulated amortization and currency translation in the accompanying condensed consolidated balance sheet. The Company amortizes definite-lived intangible assets over lives that have been determined based on the anticipated cash flow benefits of the intangible asset. Accumulated amortization was $169,804,000 at September 30, 2023 and $155,834,000 at December 31, 2022.
10
Goodwill
The changes in the carrying amount of goodwill by segment are as follows:
| (In thousands) | Flow Control | Industrial Processing | Material Handling | Total | ||||||||||||||||||||||
| Balance at December 31, 2022 | ||||||||||||||||||||||||||
| Gross balance | $ | $ | $ | $ | ||||||||||||||||||||||
| Accumulated impairment losses | ( | ( | ||||||||||||||||||||||||
| Net balance | ||||||||||||||||||||||||||
| 2023 Activity | ||||||||||||||||||||||||||
| Acquisition adjustments | ||||||||||||||||||||||||||
| Currency translation | ( | ( | ( | ( | ||||||||||||||||||||||
| Total 2023 activity | ( | ( | ( | ( | ||||||||||||||||||||||
| Balance at September 30, 2023 | ||||||||||||||||||||||||||
| Gross balance | ||||||||||||||||||||||||||
| Accumulated impairment losses | ( | ( | ||||||||||||||||||||||||
| Net balance | $ | $ | $ | $ | ||||||||||||||||||||||
Warranty Obligations
The Company's contracts covering the sale of its products include warranty provisions that provide assurance to its customers that the products will comply with agreed-upon specifications during a defined period of time. The Company provides for the estimated cost of product warranties at the time of sale based on historical occurrence rates and repair costs, as well as knowledge of any specific warranty problems that indicate projected warranty costs may vary from historical patterns. The Company negotiates the terms regarding warranty coverage and length of warranty depending on the products and applications.
| Nine Months Ended | ||||||||||||||
| (In thousands) | September 30, 2023 | October 1, 2022 | ||||||||||||
| Balance at Beginning of Year | $ | $ | ||||||||||||
| Provision charged to expense | ||||||||||||||
| Usage | ( | ( | ||||||||||||
| Currency translation | ( | ( | ||||||||||||
| Balance at End of Period | $ | $ | ||||||||||||
Revenue Recognition
Most of the Company’s revenue relates to products and services that require minimal customization and is recognized at a point in time for each performance obligation under the contract when the customer obtains control of the goods or service. The remaining portion of the Company’s revenue is recognized over time based on an input method that compares the costs incurred to date to the total expected costs required to satisfy the performance obligation. Contracts are accounted for on an over time basis when they include products which have no alternative use and an enforceable right to payment over time. Most of the contracts recognized on an over time basis are for large capital equipment projects. These projects are highly customized for the customer and, as a result, would include a significant cost to rework in the event of cancellation.
11
The following table presents revenue by revenue recognition method:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| September 30, | October 1, | September 30, | October 1, | |||||||||||||||||||||||
| (In thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Point in Time | $ | $ | $ | $ | ||||||||||||||||||||||
| Over Time | ||||||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
The following table presents the disaggregation of revenue by product type and geography:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| September 30, | October 1, | September 30, | October 1, | |||||||||||||||||||||||
| (In thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
Revenue by Product Type: | ||||||||||||||||||||||||||
| Parts and consumables | $ | $ | $ | $ | ||||||||||||||||||||||
| Capital | ||||||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
| Revenue by Geography (based on customer location): | ||||||||||||||||||||||||||
| North America | $ | $ | ||||||||||||||||||||||||
| Europe | ||||||||||||||||||||||||||
| Asia | ||||||||||||||||||||||||||
| Rest of world | ||||||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
See Note 10, Business Segment Information, for information on the disaggregation of revenue by reportable operating segment.
The following table presents contract balances from contracts with customers:
| September 30, 2023 | December 31, 2022 | |||||||||||||
| (In thousands) | ||||||||||||||
| Contract Assets | $ | $ | ||||||||||||
| Contract Liabilities | $ | $ | ||||||||||||
The Company recognized revenue of $9,613,000 in the third quarter of 2023 and $11,912,000 in the third quarter of 2022, and $56,841,000 in the first nine months of 2023 and $59,813,000 in the first nine months of 2022 that was included in the contract liabilities balance at the beginning of 2023 and 2022, respectively. The majority of the Company's contracts for capital equipment have an original expected duration of one year or less. Certain capital equipment contracts require longer lead times and could take up to 24 months to complete. For contracts with an original expected duration of over one year, the aggregate amount of the transaction price allocated to the remaining unsatisfied or partially unsatisfied performance obligations was $47,568,000 as of September 30, 2023. The Company will recognize revenue for these performance obligations as they are satisfied, approximately 74 % of which is expected to occur within the next twelve months and the remaining 26 % after the third quarter of 2024.
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2. Gain on Sale and Other Costs, Net
A summary of the items included in gain on sale and other costs, net is as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| September 30, | October 1, | September 30, | October 1, | |||||||||||||||||||||||
| (In thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
Gain on Sale of Assets | $ | $ | $ | $ | ( | |||||||||||||||||||||
Relocation Costs | ||||||||||||||||||||||||||
| Restructuring Costs | ||||||||||||||||||||||||||
| Impairment Costs | ||||||||||||||||||||||||||
| $ | $ | $ | $ | ( | ||||||||||||||||||||||
Gain on Sale of Assets
The Company entered into several agreements with the local government in China to sell the existing manufacturing building and land use rights of one of its subsidiaries in China for $25,159,000 and relocate to a new facility (China Transaction). The agreements became effective in the first quarter of 2022 after a 31 % down payment was received, including 25 % in 2021 and 6 % in the first quarter of 2022, and a land use right in a new location was secured. As a result, the Company recognized a gain on the China Transaction of $20,190,000 , or $15,143,000 net of deferred taxes of $5,047,000 , in the first quarter of 2022. A receivable of $16,082,000 was recognized for the present value of the remaining amount of the sale proceeds, which is due the earlier of when the government sells the property or within two years from the effective date of the agreements. The subsidiary, which is part of the Industrial Processing segment, relocated to its new facility during the third quarter of 2023.
13
A summary of the change in the outstanding receivable on the China Transaction is as follows:
| (In thousands) | Total | |||||||
| Balance at Inception | $ | |||||||
| Present value discount | ( | |||||||
| Receivable recorded, net | ||||||||
| Accretion of interest income | ||||||||
| Currency translation | ( | |||||||
Balance at December 31, 2022 (included in other assets) | ||||||||
| Accretion of interest income | ||||||||
| Currency translation | ( | |||||||
Balance at September 30, 2023 (included in other current assets) | $ | |||||||
Other Costs
Relocation Costs
As part of the China Transaction, the Company incurred costs of $535,000 in the third quarter of 2023 and $609,000 in the first nine months of 2023 related to the relocation of machinery and equipment and administrative offices to the new manufacturing facility.
Restructuring and Impairment Costs
The Company initiated restructuring plans within its Flow Control segment as follows:
•During the third quarter of 2023, the Company initiated a restructuring plan to consolidate a small manufacturing operation into a larger facility in Germany (2023 Restructuring Plan). The Company recorded total restructuring and impairment charges of $434,000 369,000 10 36,000 29,000
•During the fourth quarter of 2021, the Company initiated a restructuring plan to eliminate a redundant ceramic blade manufacturing operation in France (2021 Restructuring Plan). The Company recorded additional restructuring costs of $72,000 two
A summary of the changes in accrued restructuring costs included in other current liabilities in the accompanying condensed consolidated balance sheet, which are expected to be paid in the fourth quarter of 2023 and early 2024, are as follows:
(In thousands) | Severance Costs | Facility and Other Closure Costs | Total | |||||||||||||||||
| 2021 Restructuring Plan | ||||||||||||||||||||
Balance at December 31, 2022 | $ | $ | $ | |||||||||||||||||
| Usage | ( | ( | ( | |||||||||||||||||
| Currency translation | ( | ( | ( | |||||||||||||||||
Balance at September 30, 2023 | $ | $ | $ | |||||||||||||||||
2023 Restructuring Plan | ||||||||||||||||||||
| Provision | $ | $ | $ | |||||||||||||||||
| Usage | ( | ( | ||||||||||||||||||
| Currency translation | ( | ( | ( | |||||||||||||||||
Balance at September 30, 2023 | $ | $ | $ | |||||||||||||||||
14
3. Earnings per Share
Basic and diluted earnings per share (EPS) were calculated as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||||||||
| Net Income Attributable to Kadant | $ | $ | $ | $ | ||||||||||||||||||||||
| Basic Weighted Average Shares | ||||||||||||||||||||||||||
| Effect of Restricted Stock Units and Employee Stock Purchase Plan Shares | ||||||||||||||||||||||||||
| Diluted Weighted Average Shares | ||||||||||||||||||||||||||
| Basic Earnings per Share | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted Earnings per Share | $ | $ | $ | $ | ||||||||||||||||||||||
The effect of outstanding and unvested restricted stock units (RSUs) of the Company's common stock totaling 5,000 shares in the third quarter of 2023, 4,000 shares in the third quarter of 2022, 23,000 shares in the first nine months of 2023 and 10,000 shares in the first nine months of 2022 were not included in the computation of diluted EPS for the respective periods as the effect would have been antidilutive or, for unvested performance-based RSUs, the performance conditions had not been met as of the end of the respective reporting periods.
4. Provision for Income Taxes
5. Short- and Long-Term Obligations
| September 30, 2023 | December 31, 2022 | |||||||||||||
| (In thousands) | ||||||||||||||
| Revolving Credit Facility, due 2027 | $ | $ | ||||||||||||
| Senior Promissory Notes, due 2023 to 2028 | ||||||||||||||
| Finance Leases, due 2023 to 2026 | ||||||||||||||
| Other Borrowings, due 2023 to 2028 | ||||||||||||||
| Total | ||||||||||||||
| Less: Short-term Obligations and Current Maturities of Long-Term Obligations | ( | ( | ||||||||||||
| Long-Term Obligations | $ | $ | ||||||||||||
See Note 9, Fair Value Measurements and Fair Value of Financial Instruments, for the fair value information related to the Company's long-term obligations.
Revolving Credit Facility
The Company's unsecured multi-currency revolving credit facility, originally entered into on March 1, 2017 (as amended and restated to date, the Credit Agreement) matures on November 30, 2027 and has a borrowing capacity of $400,000,000 , in addition to an uncommitted, unsecured incremental borrowing facility of $200,000,000 . Interest on borrowings outstanding accrues and is payable in arrears calculated at one of the following rates selected by the Company: (i) the Base Rate, as defined, plus an applicable margin of 0 % to 1.25 %, or (ii) Eurocurrency Rate, Term SOFR (plus a 10 basis point credit spread adjustment), CDOR Rate, and RFR, as applicable and defined, plus an applicable margin of 1.0 % to 2.25 %.
15
The margin is determined based upon the ratio of the Company's total debt, net of unrestricted cash up to $50,000,000 , to earnings before interest, taxes, depreciation, and amortization as defined in the Credit Agreement. Additionally, the Credit Agreement requires the payment of a commitment fee payable in arrears on the available borrowing capacity under the Credit Agreement, which ranges from 0.125 % to 0.350 %.
Obligations under the Credit Agreement may be accelerated upon the occurrence of an event of default, which includes customary events of default under such financing arrangements. In addition, the Credit Agreement contains negative covenants applicable to the Company and its subsidiaries, including financial covenants requiring the Company to maintain a maximum consolidated leverage ratio of 3.75 to 1.00, or, if the Company elects, for the quarter during which a material acquisition occurs and for the three fiscal quarters thereafter, 4.25 to 1.00, and limitations on making certain restricted payments (including dividends and stock repurchases).
Loans under the Credit Agreement are guaranteed by certain domestic subsidiaries of the Company.
As of September 30, 2023, the outstanding balance under the Credit Agreement was $115,494,000 , which included $72,494,000 of euro-denominated borrowings. The Company had $284,911,000 of borrowing capacity available as of September 30, 2023, which was calculated by translating its foreign-denominated borrowings using the administrative agent's borrowing date foreign exchange rates, in addition to the $200,000,000 uncommitted, unsecured incremental borrowing facility.
The weighted average interest rate for the outstanding balance under the Credit Agreement was 5.43 % as of September 30, 2023 and 4.33 % as of year-end 2022.
See Note 8, Derivatives, under the heading Interest Rate Swap Agreement, for information relating to the swap agreement, which matured on June 30, 2023.
Senior Promissory Notes
In 2018, the Company entered into an uncommitted, unsecured Multi-Currency Note Purchase and Private Shelf Agreement (Note Purchase Agreement). Simultaneous with the execution of the Note Purchase Agreement, the Company issued senior promissory notes (Initial Notes) in an aggregate principal amount of $10,000,000 , with a per annum interest rate of 4.90 % payable semiannually, and a maturity date of December 14, 2028. The Company is required to prepay a portion of the principal of the Initial Notes beginning on December 14, 2023 and each year thereafter, and may optionally prepay the principal on the Initial Notes, together with any prepayment premium, at any time in accordance with the Note Purchase Agreement. The obligations of the Initial Notes may be accelerated upon an event of default as defined in the Note Purchase Agreement, which includes customary events of default under such financing arrangements.
The Initial Notes are pari passu with the Company’s indebtedness under the Credit Agreement, and any other senior debt of the Company, subject to certain specified exceptions, and participate in a sharing agreement with respect to the obligations of the Company and its subsidiaries under the Credit Agreement. The Initial Notes are guaranteed by certain of the Company’s domestic subsidiaries.
Debt Compliance
As of September 30, 2023, the Company was in compliance with the covenants related to its debt obligations.
6. Stock-Based Compensation
16
Non-Employee Director RSUs
In May 2023, the Company granted an aggregate of 4,340 RSUs to its non-employee directors with an aggregate grant date fair value of $849,000 , of which 50 % vested on June 1, 2023, 25 % vested on the last day of the third fiscal quarter of 2023 and the remaining 25 % are to vest on the last day of the fourth fiscal quarter of 2023.
Performance-based RSUs
On March 7, 2023, the Company granted performance-based RSUs to certain of its officers, which represented, in aggregate, the right to receive 21,009 shares (target RSU amount), with an aggregate grant date fair value of $4,528,000 . The RSUs are subject to adjustment based on the achievement of the performance measure selected for the fiscal year, which is a specified target for adjusted earnings before interest, taxes, depreciation, and amortization (target adjusted EBITDA) generated from operations for the fiscal year. The RSUs are adjusted by comparing the actual adjusted EBITDA for the performance period to the target adjusted EBITDA. Actual adjusted EBITDA between 50 % and 100 % of the target adjusted EBITDA results in an adjustment of 50 % to 100 % of the target RSU amount. Actual adjusted EBITDA between 100 % and 115 % of the target adjusted EBITDA results in an adjustment using a straight-line linear scale between 100 % and 150 % of the target RSU amount. Actual adjusted EBITDA in excess of 115 % results in an adjustment capped at 150 % of the target RSU amount. If actual adjusted EBITDA is below 50 % of the target adjusted EBITDA for the 2023 fiscal year, these performance-based RSUs will be forfeited. The Company recognizes compensation expense based on the probable number of performance-based RSUs expected to vest. Following the adjustment, the performance-based RSUs will be subject to additional time-based vesting, and will vest in equal annual installments on March 10 of 2024, 2025, and 2026, provided that the officer is employed by the Company on the applicable vesting dates.
Time-based RSUs
On March 7, 2023, the Company granted time-based RSUs representing 16,528 shares to certain of its officers and employees with an aggregate grant date fair value of $3,562,000 . These time-based RSUs vest in equal annual installments on March 10 of 2024, 2025, and 2026, provided that a recipient is employed by the Company on the applicable vesting dates.
7. Accumulated Other Comprehensive Items
Comprehensive income combines net income and other comprehensive items, which represent certain amounts that are reported as components of stockholders' equity in the accompanying condensed consolidated balance sheet.
Changes in each component of accumulated other comprehensive items (AOCI), net of tax, are as follows:
| (In thousands) | Foreign Currency Translation Adjustment | Pension and Other Post-Retirement Benefit Liability Adjustments | Deferred Gain (Loss) on Cash Flow Hedges | Total | ||||||||||||||||||||||
| Balance at December 31, 2022 | $ | ( | $ | ( | $ | $ | ( | |||||||||||||||||||
| Other comprehensive items before reclassifications | ( | ( | ( | ( | ||||||||||||||||||||||
| Reclassifications from AOCI | ( | ( | ||||||||||||||||||||||||
Net current period other comprehensive items | ( | ( | ( | ( | ||||||||||||||||||||||
| Balance at September 30, 2023 | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
17
Amounts reclassified from AOCI are as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
| (In thousands) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | Statement of Income Line Item | |||||||||||||||||||||||||||
| Retirement Benefit Plans | ||||||||||||||||||||||||||||||||
Recognized net actuarial loss | $ | ( | $ | ( | $ | ( | $ | ( | Other expense, net | |||||||||||||||||||||||
Amortization of prior service cost | ( | ( | ( | ( | Other expense, net | |||||||||||||||||||||||||||
Total expense before income taxes | ( | ( | ( | ( | ||||||||||||||||||||||||||||
| Income tax benefit | Provision for income taxes | |||||||||||||||||||||||||||||||
| ( | ( | ( | ( | |||||||||||||||||||||||||||||
| Cash Flow Hedges (a) | ||||||||||||||||||||||||||||||||
| Interest rate swap agreement | ( | ( | Interest expense | |||||||||||||||||||||||||||||
Income tax benefit (provision) | ( | Provision for income taxes | ||||||||||||||||||||||||||||||
| ( | ( | |||||||||||||||||||||||||||||||
| Total Reclassifications | $ | ( | $ | ( | $ | $ | ( | |||||||||||||||||||||||||
8. Derivatives
Interest Rate Swap Agreement
In 2018, the Company entered into an interest rate swap agreement (2018 Swap Agreement) with Citizens Bank, N.A. to hedge its exposure to movements in USD LIBOR on its U.S. dollar-denominated debt. The 2018 Swap Agreement, which had a $15,000,000 notional value, matured on June 30, 2023. Prior to the maturity of the 2018 Swap Agreement, on a quarterly basis, the Company received three-month USD LIBOR, which was subject to a zero percent floor, and paid a fixed rate of interest of 3.15 % plus an applicable margin as was defined in the Credit Agreement.
The Company had designated its 2018 Swap Agreement as a cash flow hedge and structured it to be 100 % effective. Unrealized gains and losses related to the fair value of the 2018 Swap Agreement were recorded to AOCI, net of tax.
Forward Currency-Exchange Contracts
The Company uses forward currency-exchange contracts that generally have maturities of twelve months or less to hedge exposures resulting from fluctuations in currency exchange rates. Such exposures result from assets and liabilities that are denominated in currencies other than the functional currencies of the Company's subsidiaries.
Gains and losses reported within SG&A expenses in the accompanying condensed consolidated statement of income associated with the Company's forward currency-exchange contracts that were not designated as hedges were not material for the three- and nine-month periods ended September 30, 2023 and October 1, 2022.
18
The following table summarizes the fair value of derivative instruments in the accompanying condensed consolidated balance sheet:
| September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||
| Balance Sheet Location | Asset (Liability) (a) | Notional Amount (b) | Asset (Liability) (a) | Notional Amount | ||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Derivatives Designated as Hedging Instruments: | ||||||||||||||||||||||||||||||||
| Derivative in an Asset Position: | ||||||||||||||||||||||||||||||||
| 2018 Swap Agreement | Other Current Assets | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Derivatives in a Liability Position: | ||||||||||||||||||||||||||||||||
| Forward currency-exchange contract | Other Current Liabilities | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||
| Derivatives Not Designated as Hedging Instruments: | ||||||||||||||||||||||||||||||||
| Derivatives in an Asset Position: | ||||||||||||||||||||||||||||||||
| Forward currency-exchange contracts | Other Current Assets | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Derivatives in a Liability Position: | ||||||||||||||||||||||||||||||||
Forward currency-exchange contracts | Other Current Liabilities | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||
(a) See Note 9, Fair Value Measurements and Fair Value of Financial Instruments, for the fair value measurements relating to these financial instruments.
(b) The 2023 notional amounts are indicative of the level of the Company's recurring derivative activity.
The following table summarizes the activity in AOCI associated with the Company's derivative instruments designated as cash flow hedges as of and for the nine months ended September 30, 2023:
| (In thousands) | Interest Rate Swap Agreement | Forward Currency-Exchange Contract | Total | |||||||||||||||||
| Unrealized Gain (Loss), Net of Tax, at December 31, 2022 | $ | $ | ( | $ | ||||||||||||||||
| Gain reclassified to earnings (a) | ( | ( | ||||||||||||||||||
Loss recognized in AOCI | ( | ( | ||||||||||||||||||
Unrealized Loss, Net of Tax, at September 30, 2023 | $ | $ | ( | $ | ( | |||||||||||||||
As of September 30, 2023, the Company expects to reclassify losses of $49,000 from AOCI to earnings over the next twelve months based on the maturity date of the forward currency-exchange contract.
9. 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.
19
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis:
| Fair Value as of September 30, 2023 | ||||||||||||||||||||||||||
| (In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Money market funds and time deposits | $ | $ | $ | $ | ||||||||||||||||||||||
| Banker's acceptance drafts (a) | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Forward currency-exchange contracts | $ | $ | $ | $ | ||||||||||||||||||||||
| Fair Value as of December 31, 2022 | ||||||||||||||||||||||||||
| (In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Money market funds and time deposits | $ | $ | $ | $ | ||||||||||||||||||||||
| Banker's acceptance drafts (a) | $ | $ | $ | $ | ||||||||||||||||||||||
| 2018 Swap Agreement (b) | $ | $ | $ | $ | ||||||||||||||||||||||
| Forward currency-exchange contracts | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Forward currency-exchange contract | $ | $ | $ | $ | ||||||||||||||||||||||
(a)Included in accounts receivable in the accompanying condensed consolidated balance sheet.
(b)The 2018 Swap Agreement matured on June 30, 2023.
The carrying value and fair value of debt obligations, excluding lease obligations, are as follows:
| September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Debt Obligations: | ||||||||||||||||||||||||||
| Revolving credit facility | $ | $ | $ | $ | ||||||||||||||||||||||
| Senior promissory notes | ||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
10. Business Segment Information
20
A description of each segment follows:
•Flow Control – Custom-engineered products, systems, and technologies that control the flow of fluids used in industrial and commercial applications to keep critical processes running efficiently in the packaging, tissue, food, metals, and other industrial sectors. The Company's primary products include rotary sealing devices, steam systems, expansion joints, doctor systems, roll and fabric cleaning devices, and filtration and fiber recovery systems.
•Industrial Processing – Equipment, machinery, and technologies used to recycle paper and paperboard and process timber for use in the packaging, tissue, wood products and alternative fuel industries, among others. The Company's primary products include stock-preparation systems and recycling equipment, chemical pulping equipment, debarkers, stranders and chippers. In addition, the Company provides industrial automation and digitization solutions to process industries.
•Material Handling – Products and engineered systems used to handle bulk and discrete materials for secondary processing or transport in the aggregates, mining, food, and waste management industries, among others. The Company's primary products include conveying and vibratory equipment and balers. In addition, the Company manufactures and sells biodegradable, absorbent granules used as carriers in agricultural applications and for oil and grease absorption.
The following table presents financial information for the Company's reportable operating segments:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| September 30, | October 1, | September 30, | October 1, | |||||||||||||||||||||||
| (In thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||||
| Flow Control | $ | $ | $ | $ | ||||||||||||||||||||||
| Industrial Processing | ||||||||||||||||||||||||||
| Material Handling | ||||||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
Income Before Provision for Income Taxes | ||||||||||||||||||||||||||
| Flow Control (a) | $ | $ | $ | $ | ||||||||||||||||||||||
| Industrial Processing (b) | ||||||||||||||||||||||||||
| Material Handling (c) | ||||||||||||||||||||||||||
| Corporate (d) | ( | ( | ( | ( | ||||||||||||||||||||||
| Total operating income | ||||||||||||||||||||||||||
| Interest expense, net (e) | ( | ( | ( | ( | ||||||||||||||||||||||
| Other expense, net (e) | ( | ( | ( | ( | ||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
| Capital Expenditures | ||||||||||||||||||||||||||
| Flow Control | $ | $ | $ | $ | ||||||||||||||||||||||
| Industrial Processing (f) | ||||||||||||||||||||||||||
| Material Handling | ||||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
(a)Includes restructuring and impairment costs of $434,000 72,000 410,000 and $254,000 in the three and nine months ended October 1, 2022, respectively.
(b)Includes relocation costs of $535,000 and $609,000 in the three and nine months ended September 30, 2023, respectively. Includes a gain on the sale of a facility of $20,190,000 , impairment costs of $182,000 (see Note 2, Gain on Sale and Other Costs, Net), and a non-cash charge for the write-off of an indemnification asset of $575,000 in the nine months ended October 1, 2022.
(c)Includes acquisition-related expenses of $717,000 in the nine months ended October 1, 2022.
21
(d)Represents general and administrative expenses.
(e)The Company does not allocate interest and other expense, net to its segments.
11. Commitments and Contingencies
Right of Recourse
In the ordinary course of business, the Company's Chinese subsidiaries may receive banker's acceptance drafts from customers as payment for their trade accounts receivable. The drafts are non-interest bearing obligations of the issuing bank and generally mature within six months of the origination date. The Company's Chinese subsidiaries may use these banker's acceptance drafts prior to the scheduled maturity date to settle outstanding accounts payable with vendors. Banker's acceptance drafts transferred to vendors are subject to customary right of recourse provisions prior to their scheduled maturity dates. The Company had $9,954,000 at September 30, 2023 and $11,238,000 at December 31, 2022 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.
Litigation
From time to time, the Company is subject to various claims and legal proceedings covering a range of matters that arise in the ordinary course of business. Such litigation may include, but is not limited to, claims and counterclaims by and against the Company for breach of contract or warranty, canceled contracts, product liability, or bankruptcy-related claims. For legal proceedings in which a loss is probable and estimable, the Company accrues a loss based on the low end of the range of estimated loss when there is no better estimate within the range. If the Company were found to be liable for any of the claims or counterclaims against it, the Company would incur a charge against earnings for amounts in excess of legal accruals.
22
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations
When we use the terms "we," "us," "our," and the "Company," we mean Kadant Inc., a Delaware corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.
This Quarterly Report on Form 10-Q and the documents we incorporate by reference in this report include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements are not statements of historical fact and may include statements regarding possible or assumed future results of operations. Forward-looking statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management, using information currently available to our management. When we use words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "seeks," "should," "likely," "will," "would," "may," "continue," "could," or similar expressions, we are making forward-looking statements.
Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions. Our future results of operations may differ materially from those expressed in the forward-looking statements. Many of the important factors that will determine these results and values are beyond our ability to control or predict. You should not put undue reliance on any forward-looking statements. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise. For a discussion of important factors that may cause our actual results to differ materially from those suggested by the forward-looking statements, you should read carefully Risk Factors included in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (Annual Report) and as may be further amended and/or restated in subsequent filings with the SEC.
Overview
Company Background
We are a global supplier of technologies and engineered systems that drive Sustainable Industrial Processing. Our products and services play an integral role in enhancing efficiency, optimizing energy utilization, and maximizing productivity in process industries while helping our customers advance their sustainability initiatives with products that reduce waste or generate more yield with fewer inputs, particularly fiber, energy, and water. Producing more while consuming less is a core aspect of Sustainable Industrial Processing and a major element of the strategic focus of our business.
Our financial results are reported in three reportable operating segments: Flow Control, Industrial Processing, and Material Handling. The Flow Control segment consists of our fluid-handling and doctoring, cleaning, & filtration product lines; the Industrial Processing segment consists of our wood processing and stock-preparation product lines; and the Material Handling segment consists of our conveying and vibratory, baling, and fiber-based product lines. A description of each segment is as follows:
•Flow Control – Custom-engineered products, systems, and technologies that control the flow of fluids used in industrial and commercial applications to keep critical processes running efficiently in the packaging, tissue, food, metals, and other industrial sectors. Our primary products include rotary sealing devices, steam systems, expansion joints, doctor systems, roll and fabric cleaning devices, and filtration and fiber recovery systems.
•Industrial Processing – Equipment, machinery, and technologies used to recycle paper and paperboard and process timber for use in the packaging, tissue, wood products, and alternative fuel industries, among others. Our primary products include stock-preparation systems and recycling equipment, chemical pulping equipment, debarkers, stranders and chippers. In addition, we provide industrial automation and digitization solutions to process industries.
•Material Handling – Products and engineered systems used to handle bulk and discrete materials for secondary processing or transport in the aggregates, mining, food, and waste management industries, among others. Our primary products include conveying and vibratory equipment and balers. In addition, we manufacture and sell biodegradable, absorbent granules used as carriers in agricultural applications and for oil and grease absorption.
Industry and Business Overview
Our consolidated bookings were $209.6 million in the third quarter of 2023, decreasing 3% sequentially and 1% compared to the third quarter of 2022. Our bookings declined in the second and third quarters of 2023 after the record bookings in the first quarter of 2023 following a general slowdown in industrial activity. We expect our bookings in the fourth quarter of 2023 to be consistent with the prior quarter as our customers assess and respond to the impact of differing market conditions around the world. We ended the third quarter with a strong backlog of $323.5 million, more than half of which was attributable to our Industrial Processing segment.
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An overview of our business by segment is as follows:
•Flow Control – Our Flow Control segment bookings decreased 2% compared to the third quarter of 2022 led by a decline in capital bookings. In North America, there was constrained capital spending as mills took downtime and paper and containerboard producers consolidated or moved locations to align capacity with demand. In Europe, there was continued uncertainty in the end markets we serve primarily due to elevated inflation and high interest rates. In addition, there has been a reduction in demand for paper across Europe as the supply chain focuses on reducing the volume of packaging materials used in shipments. However, many of the end markets in our Flow Control segment remain strong despite the general sluggishness in the manufacturing sector, and we expect bookings in the fourth quarter of 2023 to remain stable.
•Industrial Processing – Our Industrial Processing segment bookings decreased 10% compared to the third quarter of 2022 driven by weaker demand for our parts and consumables products. Demand for our wood processing products declined 12% compared to the third quarter of 2022 largely driven by a decrease in new construction activity. While there is still a healthy level of quote activity, there has been an increase in the quote to order times. In our stock-preparation business in the U.S., market-related downtime at our customers contributed to weaker demand for our parts and consumables products. This was offset in part by increased demand for our capital equipment as mills focused on replacement and refurbishment projects critical to keeping the mills operational. In China, there was an increase in stock-preparation capital equipment bookings driven by a large greenfield project, however, overall market conditions are sluggish as mills focus on bringing capacity online. Given the recent and anticipated capital project activity, we expect sequentially higher bookings in our Industrial Processing segment in the fourth quarter of 2023.
•Material Handling – Our Material Handling segment bookings increased 17% compared to the third quarter of 2022 led by our baling business. The growing need for efficient waste handling and packaging solutions across various industries has resulted in increased demand for our baling products. As more countries and industries prioritize waste reduction and recycling, the demand for baling equipment is expected to rise. Increased demand led by our parts and consumables products at our conveying and vibratory business in the third quarter of 2023 was due in part to new government legislation, which has positively impacted the aggregates industry. While we expect demand in our Material Handling segment to moderate in the near term, we continue to see growing project activity, particularly in North America.
Our global operations have been and continue to be impacted by complex market conditions fueled by inflationary pressures, geopolitical tensions, and softening markets. While the U.S economy has proven more resilient, growth in the European economy has slowed due to high interest rates and elevated inflation, and China's manufacturing activity has contracted. We expect our operating environment to continue to be challenging as central banks work to address inflationary pressures, which creates continued uncertainty for the remainder of 2023 and into 2024. However, we believe that the fundamentals of our business remain strong, particularly given our high backlog levels, solid global operations teams, and long-term strength of our end markets.
For more information related to these challenges, and other factors impacting our business, please see Risk Factors included in Part I, Item 1A, of our Annual Report and subsequent filings with the SEC.
International Sales
Slightly more than half of our sales are to customers outside the United States, mainly in Europe, Asia, and Canada. As a result, our financial performance can be materially affected by currency exchange rate fluctuations between the U.S. dollar and foreign currencies. To mitigate the impact of foreign currency transaction fluctuations, we generally seek to charge our customers in the same currency in which our operating costs are incurred. Additionally, we may enter into forward currency exchange contracts to hedge certain firm purchase and sale commitments denominated in currencies other than our subsidiaries' functional currencies. We currently do not use derivative instruments to hedge our exposure to exchange rate fluctuations created by the translation into the U.S. dollar of our foreign subsidiaries' results that are in functional currencies other than the U.S. dollar.
Global Trade
The United States imposes tariffs on certain imports from China, which has and will continue to increase the cost of some of the equipment that we import. Although we have worked to mitigate the impact of tariffs through pricing and sourcing strategies, we cannot be sure these strategies will effectively mitigate the impact of these costs. For more information on risks associated with our global operations, including tariffs, please see Risk Factors, included in Part I, Item 1A, of our Annual Report and subsequent filings with the SEC.
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Acquisitions
We expect that a significant driver of our growth over the next several years will be the acquisition of businesses and technologies that complement or augment our existing products and services or may involve entry into a new process industry. In recent years, we have acquired several businesses and continue to pursue acquisition opportunities.
Results of Operations
Third Quarter 2023 Compared With Third Quarter 2022
Revenue
The following table presents the change in revenue by segment between the third quarters of 2023 and 2022, and those changes excluding the effect of foreign currency translation and acquisitions which we refer to as change in organic revenue. Organic revenue excludes the effect of acquisitions for the four quarterly reporting periods following the date of the acquisition. The presentation of the change in organic revenue 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 its performance, especially when comparing such results to prior periods. This non-GAAP measure should not be considered superior to or a substitute for the corresponding U.S. generally accepted accounting principles (GAAP) measure.
Revenue by segment in the third quarters of 2023 and 2022 is as follows:
| Three Months Ended | Increase | Currency Translation | (Non-GAAP) Change in Organic Revenue | |||||||||||||||||||||||||||||||||||||||||
| (In thousands, except percentages) | September 30, 2023 | October 1, 2022 | % Change | Increase | % Change | |||||||||||||||||||||||||||||||||||||||
| Flow Control | $ | 90,798 | $ | 86,880 | $ | 3,918 | 5% | $ | 2,743 | $ | 1,175 | 1% | ||||||||||||||||||||||||||||||||
| Industrial Processing | 94,220 | 86,085 | 8,135 | 9% | (10) | 8,145 | 9% | |||||||||||||||||||||||||||||||||||||
Material Handling | 59,164 | 51,545 | 7,619 | 15% | 1,217 | 6,402 | 12% | |||||||||||||||||||||||||||||||||||||
| Consolidated | $ | 244,182 | $ | 224,510 | $ | 19,672 | 9% | $ | 3,950 | $ | 15,722 | 7% | ||||||||||||||||||||||||||||||||
Consolidated revenue increased 9% in the third quarter of 2023, including a 2% increase from the favorable effect of foreign currency translation. All our operating segments contributed to the 7% increase in organic revenue. The majority of the organic revenue increase was due to higher demand for our capital equipment at our Material Handling and Industrial Processing segments and, to a lesser extent, increased demand for our parts and consumables products at our Industrial Processing segment.
Revenue at our Flow Control segment increased 5% in the third quarter of 2023, while organic revenue increased 1%, with offsetting geographic impacts. Increased demand for our parts and consumables products in North America as mills took downtime and focused on maintenance spending was partially offset by softening demand in Europe due to more challenging market conditions. Higher demand for our capital equipment in Europe, especially from our customers seeking to mitigate high energy prices, were mostly offset by weaker demand in China due to depressed market conditions resulting in longer quote to order times.
Revenue at our Industrial Processing segment increased 9% in the third quarter of 2023 driven by increased demand for both our capital equipment and parts and consumable products. The higher demand for capital equipment occurred primarily in our stock-preparation business due to several large projects in Europe. Additionally, there was increased demand for parts and consumables products in our stock-preparation and wood processing businesses, primarily in North America, due to maintenance requirements at many of our customers.
Revenue at our Material Handling segment increased 15% in the third quarter of 2023, while organic revenue increased 12%. The increase in organic revenue was led by capital project activity at our conveying and vibratory business due to higher production rates. In addition, our baling business had increased demand for parts and consumables as more industries focus on waste reduction and recycling.
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Gross Profit Margin
Gross profit margin by segment in the third quarters of 2023 and 2022 is as follows:
| Three Months Ended | Basis Point Change | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | ||||||||||||||||||||||
| Flow Control | 52.2% | 51.6% | 60 | bps | |||||||||||||||||||
| Industrial Processing | 39.5% | 39.3% | 20 | bps | |||||||||||||||||||
| Material Handling | 35.7% | 32.3% | 340 | bps | |||||||||||||||||||
| Consolidated | 43.3% | 42.5% | 80 | bps | |||||||||||||||||||
Consolidated gross profit margin increased to 43.3% in the third quarter of 2023 compared with 42.5%`in the third quarter of 2022 due to higher margins achieved on our parts and consumables products, especially in our Material Handling segment. This increase was partially offset by a decrease in the proportion of higher-margin parts and consumables revenue, which decreased to 61% compared to 63% in the prior year period.
Within our operating segments, gross profit margin:
•Increased to 52.2% at our Flow Control segment from 51.6% in the 2022 period primarily due to higher margins achieved on our capital equipment partially offset by a decrease in margins for our parts and consumables products.
•Increased to 39.5% at our Industrial Processing segment from 39.3% in the 2022 period due to higher margins achieved on parts and consumable products partially offset by a decrease in margins achieved on our wood processing capital equipment products.
•Increased to 35.7% at our Material Handling segment from 32.3% in the 2022 period due to increased margins on our conveying and vibratory parts and consumable products partially offset by a decrease in margins achieved on our capital equipment products.
Selling, General, and Administrative Expenses
Selling, general, and administrative (SG&A) expenses by segment in the third quarters of 2023 and 2022 are as follows:
| Three Months Ended | ||||||||||||||||||||||||||
| (In thousands, except percentages) | September 30, 2023 | October 1, 2022 | Increase | % Change | ||||||||||||||||||||||
| Flow Control | $ | 21,538 | $ | 20,717 | $ | 821 | 4% | |||||||||||||||||||
| Industrial Processing | 15,968 | 14,660 | 1,308 | 9% | ||||||||||||||||||||||
| Material Handling | 10,332 | 9,321 | 1,011 | 11% | ||||||||||||||||||||||
| Corporate | 10,051 | 8,455 | 1,596 | 19% | ||||||||||||||||||||||
| Consolidated | $ | 57,889 | $ | 53,153 | $ | 4,736 | 9% | |||||||||||||||||||
| Consolidated as a Percentage of Revenue | 24% | 24% | ||||||||||||||||||||||||
Consolidated SG&A expenses as a percentage of revenue was 24% in both the third quarters of 2023 and 2022. Consolidated SG&A expenses increased $4.7 million in the third quarter of 2023 compared to the third quarter of 2022, including a $1.1 million unfavorable effect of foreign currency translation and increased compensation expense, professional service fees, and travel-related costs.
Within our operating segments, SG&A expenses:
•Increased $0.8 million at our Flow Control segment principally due to a $0.7 million unfavorable effect of foreign currency translation, foreign currency transaction losses, and increased travel costs. These increases were partially offset by a decrease in acquisition costs of $0.4 million.
•Increased $1.3 million at our Industrial Processing segment due to increased compensation expense associated with existing and new personnel and higher trade show costs.
•Increased $1.0 million at our Material Handling segment principally due to increased compensation expense associated with existing and new personnel and a $0.2 million unfavorable effect of foreign currency translation.
•Increased $1.6 million at Corporate due to higher professional service fees and compensation expense.
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Other Costs
Other Costs were $1.0 million in the third quarter of 2023 and $0.1 million in the third quarter of 2022 and included the following:
•Costs of $0.5 million in the third quarter of 2023 within our Industrial Processing segment were associated with the China Transaction (as defined below in the results of operations for the first nine months of 2023 compared with the first nine months of 2022) and related to the relocation of machinery and equipment and administrative offices to the new manufacturing facility.
•Restructuring and impairment costs of $0.4 million in the third quarter of 2023 within our Flow Control segment related to the consolidation of a small manufacturing operation into a larger facility in Germany (2023 Restructuring Plan). This charge consisted of severance costs for the termination of 10 employees, asset-write downs, and facility and other closure costs. We expect annualized savings of approximately $0.7 million, primarily in cost of sales, from these restructuring actions.
•Restructuring costs of $0.1 million in the third quarter of 2022 within our Flow Control segment related to a restructuring plan we initiated in the fourth quarter of 2021 to eliminate a redundant ceramic blade manufacturing operation in France (2021 Restructuring Plan). This charge consisted of severance costs associated with the termination of two employees.
Interest Expense
Interest expense increased to $2.1 million in the third quarter of 2023 from $1.7 million in the third quarter of 2022 due to a higher weighted-average interest rate, partially offset by lower average debt outstanding in the third quarter of 2023 compared to the third quarter of 2022.
Provision for Income Taxes
Provision for income taxes increased to $10.8 million in the third quarter of 2023 from $9.7 million in the third quarter of 2022. The effective tax rate of 26% in the third quarter of 2023 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings and state taxes. The effective tax rate of 26% in the third quarter of 2022 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, nondeductible expenses, and state taxes.
Net Income
Net income increased to $31.0 million in the third quarter of 2023 from $27.7 million in the third quarter of 2022 primarily due to a $4.7 million increase in operating income, offset in part by a $0.4 million increase in interest expense and a $1.1 million increase in provision for income taxes (see discussions above for further details).
First Nine Months 2023 Compared With First Nine Months 2022
Revenue
The following table presents changes in revenue and organic revenue by segment between the first nine months of 2023 and 2022. Organic revenue is a non-GAAP measure as defined above in the results of operations for the third quarter of 2023 compared with the third quarter of 2022.
Revenue by segment in the first nine months of 2023 and 2022 is as follows:
| Nine Months Ended | Currency Translation | (Non-GAAP) Change in Organic Revenue | ||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except percentages) | September 30, 2023 | October 1, 2022 | Increase | % Change | Increase | % Change | ||||||||||||||||||||||||||||||||||||||
| Flow Control | $ | 276,048 | $ | 257,926 | $ | 18,122 | 7% | $ | (59) | $ | 18,181 | 7% | ||||||||||||||||||||||||||||||||
| Industrial Processing | 267,729 | 263,572 | 4,157 | 2% | (6,156) | 10,313 | 4% | |||||||||||||||||||||||||||||||||||||
| Material Handling | 175,216 | 151,141 | 24,075 | 16% | 441 | 23,634 | 16% | |||||||||||||||||||||||||||||||||||||
| Consolidated | $ | 718,993 | $ | 672,639 | $ | 46,354 | 7% | $ | (5,774) | $ | 52,128 | 8% | ||||||||||||||||||||||||||||||||
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Consolidated revenue in the first nine months of 2023 increased 7%, including a 1% decrease from the unfavorable effect of foreign currency translation. All our operating segments contributed to the 8% increase in organic revenue with relatively equal contributions from sales of our capital equipment and parts and consumables products. The majority of the organic revenue increase was driven by higher demand in North America. In addition, modestly higher demand in Europe was offset by softening demand in China.
Revenue at our Flow Control segment increased 7% in the first nine months of 2023 primarily due to higher demand for parts and consumables and capital equipment products in North America driven by continued strength in the U.S. economy and underlying packaging industry. While there was increased demand for our capital equipment in Europe from customers seeking to mitigate high energy prices, demand for our parts and consumables products was modestly higher than the 2022 period reflecting the challenging market conditions. In China, there was softening demand for our capital equipment as manufacturing activity has slowed.
Revenue at our Industrial Processing segment increased 2% in the first nine months of 2023, while organic revenue increased 4%. Organic revenue increased primarily due to higher demand for our capital equipment products at our wood processing and stock-preparation businesses in North America where the U.S. economy and housing market continued to demonstrate resiliency against inflationary pressures. This increase was largely offset by softening demand at our stock-preparation businesses in China as manufacturing activity has contracted and mills focus on installing and optimizing capital equipment purchased in prior periods. Additionally, there was increased demand for parts and consumable products in our stock-preparation business in Europe and, to a lesser extent, North America due to maintenance requirements at many of our customers.
Revenue at our Material Handling segment increased 16% in the first nine months of 2023 due to higher demand for both capital equipment and parts and consumables products at our conveying and vibratory business in North America. This was due in part to expansion projects related to the mining of minerals that led to increased demand for our conveying systems. Revenue also increased, but to a lesser extent, at our baling business due to higher demand for our products as more industries focus on waste reduction and recycling.
Gross Profit Margin
Gross profit margin by segment in the first nine months of 2023 and 2022 is as follows:
| Nine Months Ended | Basis Point Change | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | ||||||||||||||||||||||
| Flow Control | 52.3% | 52.3% | 0 | bps | |||||||||||||||||||
| Industrial Processing | 39.8% | 38.8% | 100 | bps | |||||||||||||||||||
| Material Handling | 36.2% | 34.8% | 140 | bps | |||||||||||||||||||
| Consolidated | 43.7% | 43.1% | 60 | bps | |||||||||||||||||||
Consolidated gross profit margin increased to 43.7% in the first nine months of 2023 compared with 43.1% in the first nine months of 2022 due to higher margins achieved on both capital equipment and parts and consumable products, partially offset by a lower proportion of parts and consumables revenue, which decreased to 63% compared to 64% in the prior year period.
Within our operating segments, gross profit margin:
•Increased to 39.8% at our Industrial Processing segment from 38.8% in the 2022 period primarily due to higher margins achieved on our stock-preparation capital equipment and parts and consumable products, partially offset by a decrease in proportion of higher-margin parts and consumables revenue.
•Increased to 36.2% at our Material Handling segment from 34.8% in the 2022 period principally due to higher margins achieved for our parts and consumables products. This increase was partially offset by lower margins achieved on our capital equipment products and, to a lesser extent, a decrease in proportion of higher-margin parts and consumables revenue.
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Selling, General, and Administrative Expenses
SG&A expenses by segment in the first nine months of 2023 and 2022 were as follows:
| Nine Months Ended | ||||||||||||||||||||||||||
| (In thousands, except percentages) | September 30, 2023 | October 1, 2022 | Increase | % Change | ||||||||||||||||||||||
| Flow Control | $ | 65,955 | $ | 63,770 | $ | 2,185 | 3% | |||||||||||||||||||
| Industrial Processing | 48,943 | 46,643 | 2,300 | 5% | ||||||||||||||||||||||
| Material Handling | 32,070 | 29,823 | 2,247 | 8% | ||||||||||||||||||||||
| Corporate | 29,473 | 27,404 | 2,069 | 8% | ||||||||||||||||||||||
| Consolidated | $ | 176,441 | $ | 167,640 | $ | 8,801 | 5% | |||||||||||||||||||
| Consolidated as a Percentage of Revenue | 25% | 25% | ||||||||||||||||||||||||
Consolidated SG&A expenses as a percentage of revenue was 25% in both the first nine months of 2023 and 2022. Consolidated SG&A expenses increased $8.8 million in the first nine months of 2023 compared to the first nine months of 2022 and included a decrease of $1.2 million in acquisition-related costs, a $1.0 million favorable effect of foreign currency, and a decrease of $0.4 million in indemnification asset reversals related to the release of tax reserves. Excluding these favorable items, consolidated SG&A expenses increased $11.4 million, or 7%, primarily due to increased compensation expense and travel-related costs.
Within our operating segments, SG&A expenses:
•Increased $2.2 million at our Flow Control segment primarily due to increased compensation expense, travel costs, and foreign currency transaction losses. These increases were partially offset by a decrease in bad debt expense and acquisition costs.
•Increased $2.3 million at our Industrial Processing segment principally due to increased compensation expense associated with existing and new personnel and incremental trade show and travel-related costs. These increases were partially offset by a $1.2 million favorable effect of foreign currency translation and the inclusion of an indemnification asset reversal related to the release of tax reserves of $0.6 million in 2022.
•Increased $2.2 million at our Material Handling segment due to increased compensation expense associated with existing and new personnel and, to a lesser extent, the inclusion of an indemnification asset reversal related to the release of tax reserves of $0.2 million. These increases were partially offset by a decrease of $0.7 million in acquisition-related costs.
•Increased $2.1 million at Corporate due to increased compensation expense and professional service fees.
Gain on Sale and Other Costs, Net
Gain on Sale of Assets
We entered into several agreements with the local government in China to sell the existing manufacturing building and land use rights of one of our subsidiaries in China for $25.2 million and relocate to a new facility (China Transaction). The agreements became effective in the first quarter of 2022 after a 31% down payment was received, including 25% in 2021 and 6% in the first quarter of 2022, and a land use right in a new location was secured. As a result, we recognized a gain on the China Transaction of $20.2 million, or $15.1 million, net of deferred taxes of $5.0 million, in the first quarter of 2022. Our subsidiary, which is part of the Industrial Processing segment, relocated to its new facility during the third quarter of 2023. See Note 2, Gain on Sale and Other Costs, Net, in the accompanying condensed consolidated financial statements for further details.
Other Costs
Other Costs were $1.0 million in the first nine months of 2023 and $0.3 million in the first nine months of 2022 and included the following:
•Costs of $0.6 million in the first nine months of 2023 within our Industrial Processing segment were associated with the China Transaction and related to the relocation of machinery and equipment and administrative offices to the new manufacturing facility.
•Restructuring and impairment costs of $0.4 million in the first nine months of 2023 within our Flow Control segment related to the 2023 Restructuring Plan, which consisted of severance costs for the termination of 10 employees, asset-write downs, and facility and other closure costs.
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•Impairment costs of $0.2 million in the first nine months of 2022 within our Industrial Processing segment were associated with the China Transaction and related to the write-down of certain fixed assets that were not moved to the new manufacturing facility. Restructuring costs of $0.1 million in the first nine months of 2022 within our Flow Control segment under the 2021 Restructuring Plan consisted of severance costs for the termination of two employees.
Interest Expense
Interest expense increased to $6.7 million in the first nine months of 2023 from $4.3 million in the first nine months of 2022 due to a higher weighted-average interest rate, partially offset by lower average debt outstanding in the first nine months of 2023 compared to the first nine months of 2022.
Provision for Income Taxes
Provision for income taxes decreased to $31.8 million in the first nine months of 2023 from $33.1 million in the first nine months of 2022. The effective tax rate of 26% in the first nine months of 2023 and 2022 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, state taxes, and nondeductible expenses.
Net Income
Net income decreased to $89.2 million in the first nine months of 2023 from $95.5 million in the first nine months of 2022 primarily due to a decrease in operating income of $5.6 million and a $2.4 million increase in interest expense, offset in part by a $1.3 million decrease in provision for income taxes. Net income in the first nine months of 2022 included a $15.1
million after-tax gain on the sale of a building related to the China Transaction (see discussions above for further details).
Non-GAAP Key Performance Indicators
In addition to the financial measures prepared in accordance with GAAP, we use certain non-GAAP financial measures, including organic revenue (defined as revenue excluding the effect of foreign currency translation and acquisitions), adjusted operating income, earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted EBITDA, adjusted EBITDA margin (defined as adjusted EBITDA divided by revenue), and free cash flow (defined as cash flow provided by operations less capital expenditures).
We use organic revenue in order to understand our trends and to forecast and evaluate our financial performance and compare revenue to prior periods (see discussion in Revenue above). Adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin exclude relocation costs, restructuring and impairment costs, acquisition costs, amortization expense related to acquired profit in inventory and backlog, and other income or expense, as indicated. These items are excluded as they are not indicative of our core operating results and are not comparable to other periods, which have differing levels of incremental costs, expenditures or income, or none at all. Additionally, we use free cash flow in order to provide insight on our ability to generate cash for acquisitions and debt repayments, as well as for other investing and financing activities.
We believe 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 gain an understanding of our underlying operating performance and future prospects, consistent with how management measures and forecasts our performance, especially when comparing such results to previous periods or forecasts and to the performance of our competitors. Such measures are also used by us in our financial and operating decision-making and for compensation purposes. We also believe this information is responsive to investors' requests and gives them an additional measure of our performance.
Our non-GAAP financial measures are not meant to be considered superior to or a substitute for the results of operations or cash flow prepared in accordance with GAAP. In addition, our 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.
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A reconciliation of adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin is as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| (In thousands, except percentages) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||||
| Net Income Attributable to Kadant | $ | 30,864 | $ | 27,487 | $ | 88,673 | $ | 94,849 | ||||||||||||||||||
| Net Income Attributable to Noncontrolling Interest | 175 | 184 | 571 | 672 | ||||||||||||||||||||||
| Provision for Income Taxes | 10,816 | 9,746 | 31,761 | 33,075 | ||||||||||||||||||||||
| Interest Expense, Net | 1,669 | 1,450 | 5,669 | 3,671 | ||||||||||||||||||||||
| Other Expense, Net | 20 | 19 | 62 | 60 | ||||||||||||||||||||||
| Operating Income | 43,544 | 38,886 | 126,736 | 132,327 | ||||||||||||||||||||||
Gain on Sale (a) | — | — | — | (20,190) | ||||||||||||||||||||||
| Acquisition Costs | — | 410 | — | 486 | ||||||||||||||||||||||
Indemnification Asset (Provision) Reversals (b) | (50) | — | 127 | 575 | ||||||||||||||||||||||
Relocation Costs | 535 | — | 609 | — | ||||||||||||||||||||||
Restructuring and Impairment Costs | 434 | 72 | 434 | 254 | ||||||||||||||||||||||
Acquired Backlog Amortization (c) | — | — | — | 703 | ||||||||||||||||||||||
Acquired Profit in Inventory Amortization (d) | — | — | — | (218) | ||||||||||||||||||||||
Adjusted Operating Income (non-GAAP measure) | 44,463 | 39,368 | 127,906 | 113,937 | ||||||||||||||||||||||
| Depreciation and Amortization | 8,234 | 8,456 | 24,917 | 25,684 | ||||||||||||||||||||||
Adjusted EBITDA (non-GAAP measure) | $ | 52,697 | $ | 47,824 | $ | 152,823 | $ | 139,621 | ||||||||||||||||||
Adjusted EBITDA Margin (non-GAAP measure) | 21.6% | 21.3% | 21.3% | 20.8% | ||||||||||||||||||||||
(a) Represents a $20.2 million pre-tax gain on the China Transaction in our Industrial Processing segment.
(b) Represents the provision for or reversal of indemnification assets related to the establishment or release of tax reserves associated with uncertain tax positions.
(c) Represents intangible amortization expense associated with acquired backlog.
(d) Represents income within cost of revenue associated with amortization of acquired profit in inventory.
A reconciliation of free cash flow from cash flow provided by operating activities is as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| (In thousands) | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||||
| Cash Provided by Operating Activities | $ | 46,967 | $ | 24,897 | $ | 106,311 | $ | 67,462 | ||||||||||||||||||
| Less: Capital Expenditures (a) | (8,848) | (6,376) | (22,094) | (16,191) | ||||||||||||||||||||||
Free Cash Flow (non-GAAP measure) | $ | 38,119 | $ | 18,521 | $ | 84,217 | $ | 51,271 | ||||||||||||||||||
(a) Includes $2.5 million and $5.8 million in the three and nine months ended September 30, 2023, respectively, and $2.2 million and $5.4 million in the three and nine months ended October 1, 2022, respectively, related to the China Transaction.
Liquidity and Capital Resources
Consolidated working capital was $222.6 million at September 30, 2023, compared with $201.9 million at December 31, 2022. Cash and cash equivalents were $76.8 million at September 30, 2023, compared with $76.4 million at December 31, 2022, which included cash and cash equivalents held by our foreign subsidiaries of $73.0 million at September 30, 2023 and $75.8 million at December 31, 2022.
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Cash Flows
Cash flow information in the first nine months of 2023 and 2022 is as follows:
| Nine Months Ended | ||||||||||||||
| (In thousands) | September 30, 2023 | October 1, 2022 | ||||||||||||
| Net Cash Provided by Operating Activities | $ | 106,311 | $ | 67,462 | ||||||||||
| Net Cash Used in Investing Activities | (20,060) | (13,923) | ||||||||||||
| Net Cash Used in Financing Activities | (85,671) | (62,112) | ||||||||||||
| Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash | (1,252) | (10,474) | ||||||||||||
| Decrease in Cash, Cash Equivalents, and Restricted Cash | $ | (672) | $ | (19,047) | ||||||||||
Operating Activities
Cash provided by operating activities increased to $106.3 million in the first nine months of 2023 from $67.5 million in the first nine months of 2022 primarily due to a reduction in cash used for working capital. Our operating cash flows are primarily generated from cash received from customers, offset by cash payments for items such as inventory, employee compensation, operating leases, income taxes, and interest payments on outstanding debt obligations.
During the first nine months of 2023, significant cash outflows associated with working capital related to accounts payable and accounts receivable. Decreases in accounts payable used cash of $12.9 million primarily due to the timing of payments. An increase in accounts receivable used cash of $10.7 million mainly due to our revenue growth and the timing of shipments. In addition, an increase in other liabilities provided cash of $5.9 million due in part to work performed by subcontractors and outside vendors.
During the first nine months of 2022, significant cash outflows associated with working capital related to inventory and accounts receivable. Increases in inventory and accounts receivable used cash of $54.5 million, including $33.8 million for inventory primarily related to capital equipment orders that shipped in 2022 and the first half of 2023. These uses of cash were offset in part by $16.2 million of cash received from customer deposits.
Investing Activities
Cash used in investing activities was $20.1 million in the first nine months of 2023, compared with $13.9 million in the first nine months of 2022. Capital expenditures were $22.1 million in the first nine months of 2023 and $16.2 million in the first nine months of 2022, including capital expenditures associated with the construction of our new manufacturing facility in China of $5.8 million in the first nine months of 2023 and $5.4 million in the first nine months of 2022.
Financing Activities
Cash used in financing activities was $85.7 million in the first nine months of 2023, compared with $62.1 million in the first nine months of 2022. Repayments of short- and long-term obligations were $71.9 million in the first nine months of 2023 compared to repayments of short- and long-term obligations of $69.5 million, partially offset by borrowings under our revolving credit facility of $21.6 million in the first nine months of 2022. Cash dividends paid to stockholders were $9.8 million in the first nine months of 2023 and $9.0 million in the first nine months of 2022. In addition, taxes paid related to the vesting of equity awards was $3.9 million in the first nine months of 2023 compared to $4.6 million in the first nine months of 2022.
Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash
The exchange rate effect on cash, cash equivalents, and restricted cash represents the impact of translation of cash balances at our foreign subsidiaries. The $1.3 million decrease in cash, cash equivalents, and restricted cash in the first nine months of 2023 was primarily attributable to the strengthening of the U.S. dollar against the Chinese renminbi, and to a lesser extent, the Euro and Swedish Krona.
Borrowing Capacity and Debt Obligations
Our unsecured multi-currency revolving credit facility originally entered into on March 1, 2017 (as amended and restated to date, the Credit Agreement) matures on November 30, 2027 and has a total borrowing capacity of $400 million. At September 30, 2023, we had $284.9 million of borrowing capacity available under our Credit Agreement, in addition to a $200 million uncommitted, unsecured incremental borrowing facility. Under our debt agreements, our leverage ratio must be less than 3.75 or, if we elect, for the quarter during which a material acquisition occurs and for the three fiscal quarters thereafter,
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must be less than 4.25. As of September 30, 2023, our leverage ratio was 0.38 and we were in compliance with our debt covenants. See Note 5, Short- and Long-Term Obligations, in the accompanying condensed consolidated financial statements for additional information regarding our debt obligations.
Additional Liquidity and Capital Resources
On May 18, 2023, our board of directors approved the repurchase of up to $50 million of our equity securities during the period from May 18, 2023 to May 18, 2024. We have not repurchased any shares of our common stock under this authorization or under our previous $50 million authorization that expired on May 19, 2023.
We paid cash dividends of $9.8 million in the first nine months of 2023. On September 7, 2023, we declared a quarterly cash dividend of $0.29 per share totaling $3.4 million that will be paid on November 9, 2023. Future declarations of dividends are subject to our board of directors' approval and may be adjusted as business needs or market conditions change. The declaration of cash dividends is subject to our compliance with the covenant in our Credit Agreement related to our consolidated leverage ratio.
We plan to make expenditures of approximately $16 to $18 million during the remainder of 2023 for property, plant, and equipment, including $2 to $3 million for our new manufacturing facility in China.
As of September 30, 2023, we had approximately $265.6 million of total unremitted foreign earnings. It is our intent to indefinitely reinvest $224.8 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments, if any. In the first nine months of 2023, we recorded withholding taxes on the earnings in certain foreign subsidiaries that we plan to repatriate in the foreseeable future. The foreign withholding taxes that would be required if we were to remit the indefinitely-reinvested foreign earnings to the United States would be approximately $4.2 million.
We believe that existing cash and cash equivalents, along with future cash generated from operations, our existing borrowing capacity, and continued access to debt markets, will be sufficient to meet the capital requirements of our operations for the next 12 months and foreseeable future.
Contractual Obligations and Other Commercial Commitments
There have been no material changes to our contractual obligations and other commercial commitments during the first nine months of 2023 compared with those disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations under the heading Liquidity and Capital Resources in Part II, Item 7, of our Annual Report.
Application of Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities, and the reported amounts of revenue and expenses during the reporting period. Our 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. Management evaluates its estimates on an ongoing basis based on historical experience, current economic and market conditions, and other assumptions management believes are reasonable. We believe that our most critical accounting policies which are significant to our consolidated financial statements, and which involve the most complex or subjective decisions or assessments, are those described in Management's Discussion and Analysis of Financial Condition and Results of Operations under the heading Application of Critical Accounting Estimates in Part II, Item 7, of our Annual Report. There have been no material changes to these critical accounting policies since the end of fiscal 2022 that warrant disclosure.
Recent Accounting Pronouncements
See Note 1, under the heading Recent Accounting Pronouncements Not Yet Adopted, in the accompanying condensed consolidated financial statements for details.
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk from changes in interest rates and foreign currency exchange rates has not changed materially from our exposure as disclosed in Part II, Item 7A, of our Annual Report.
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Item 4 – 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 September 30, 2023. 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 September 30, 2023, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2023, our disclosure controls and procedures were effective at the reasonable assurance level.
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 September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1A – Risk Factors
Careful consideration should be given to the factors discussed in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which could materially affect our business, financial condition or future results, in addition to the information set forth in this Quarterly Report on Form 10-Q.
Item 5 – Other Information
Director and Officer Trading Arrangements
None of our directors or officers adopted terminated
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Item 6 – Exhibits
| Exhibit Number | ||||||||
| Description of Exhibit | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32 | ||||||||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| KADANT INC. | |||||
Date: November 8, 2023 | /s/ Michael J. McKenney | ||||
| Michael J. McKenney | |||||
| Executive Vice President and Chief Financial Officer | |||||
| (Principal Financial Officer) | |||||
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