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EX-10.3 - KAI FORM 10-Q 3Q 2014 EXHIBIT 10.3 - KADANT INCkaiform10q3q2014exhibit103.htm
10-Q - KAI FORM 10-Q 3Q 2014 - KADANT INCkaiform10q3q2014pdf.pdf
EX-10.1 - KAI FORM 10-Q 3Q 2014 EXHIBIT 10.1 - KADANT INCkaiform10q3q2014exhibit101.htm
EX-10.2 - KAI FORM 10-Q 3Q 2014 EXHIBIT 10.2 - KADANT INCkaiform10q3q2014exhibit102.htm
EX-10.4 - KAI FORM 10-Q 3Q 2014 EXHIBIT 10.4 - KADANT INCkaiform10q3q2014exhibit104.htm
EX-31.1 - KAI FORM 10-Q 3Q 2014 EXHIBIT 31.1 - KADANT INCkaiform10q3q2014exhibit311.htm
EX-31.2 - KAI FORM 10-Q 3Q 2014 EXHIBIT 31.2 - KADANT INCkaiform10q3q2014exhibit312.htm
EX-32 - KAI FORM 10-Q 3Q 2014 EXHIBIT 32 - KADANT INCkaiform10q3q2014exhibit32.htm
EXCEL - IDEA: XBRL DOCUMENT - KADANT INCFinancial_Report.xls


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2014


OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to _________

Commission file number 1-11406

KADANT INC.
(Exact name of registrant as specified in its charter)

Delaware
 
52-1762325
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
One Technology Park Drive
 
 
Westford, Massachusetts
 
01886
(Address of Principal Executive Offices)
 
(Zip Code)

Registrant's telephone number, including area code: (978) 776-2000

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 x    No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
  Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨    No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
 
Outstanding at October 24, 2014
Common Stock, $.01 par value
 
10,886,873




PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Statements

KADANT INC.
Condensed Consolidated Balance Sheet
(Unaudited)

Assets

 
 
September 27, 2014
 
December 28, 2013
(In thousands)
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
41,121

 
$
50,032

Restricted cash (Note 1)
 
598

 
168

Accounts receivable, less allowances of $2,715 and $2,689 (Note 1)
 
67,714

 
70,271

Inventories (Note 1)
 
57,707

 
62,805

Unbilled contract costs and fees
 
4,798

 
3,679

Other current assets
 
19,030

 
19,189

Assets of discontinued operation
 
123

 
144

Total Current Assets
 
191,091

 
206,288

 
 
 
 
 
Property, Plant, and Equipment, at Cost
 
118,017

 
117,997

Less: accumulated depreciation and amortization
 
74,565

 
73,112

 
 
43,452

 
44,885

 
 
 
 
 
Other Assets
 
10,148

 
11,230

 
 
 
 
 
Intangible Assets, Net (Note 1)
 
43,744

 
47,850

 
 
 
 
 
Goodwill
 
129,880

 
131,915

 
 
 
 
 
Total Assets
 
$
418,315

 
$
442,168


The accompanying notes are an integral part of these condensed consolidated financial statements.

2



KADANT INC.
Condensed Consolidated Balance Sheet (continued)
(Unaudited)

Liabilities and Stockholders' Equity

 
 
September 27, 2014
 
December 28, 2013
(In thousands, except share amounts)
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
Current maturities of long-term obligations (Note 6)
 
$
625

 
$
625

Accounts payable
 
27,873

 
28,388

Accrued payroll and employee benefits
 
18,421

 
19,116

Customer deposits
 
23,178

 
28,174

Other current liabilities
 
25,122

 
23,286

Liabilities of discontinued operation
 
213

 
213

Total Current Liabilities
 
95,432

 
99,802

 
 
 
 
 
Other Long-Term Liabilities
 
32,260

 
33,935

 
 
 
 
 
Long-Term Obligations (Note 6)
 
22,375

 
38,010

 
 
 
 
 
Commitments and Contingencies (Note 13)
 

 

 
 
 
 
 
Stockholders' Equity:
 
 

 
 

Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued
 

 

Common stock, $.01 par value, 150,000,000 shares authorized; 14,624,159 shares issued
 
146

 
146

Capital in excess of par value
 
97,241

 
96,809

Retained earnings
 
262,778

 
248,170

Treasury stock at cost, 3,737,286 and 3,524,742 shares
 
(86,386
)
 
(76,339
)
Accumulated other comprehensive items (Note 9)
 
(6,715
)
 
710

Total Kadant Stockholders' Equity
 
267,064

 
269,496

Noncontrolling interest
 
1,184

 
925

Total Stockholders' Equity
 
268,248

 
270,421

 
 
 
 
 
Total Liabilities and Stockholders' Equity
 
$
418,315

 
$
442,168



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
 
 
September 27, 2014
 
September 28, 2013
(In thousands, except per share amounts)
 
 
 
 
 
 
 
Revenues
 
$
98,719

 
$
91,315

 
 
 
 
 
Costs and Operating Expenses:
 
 

 
 

Cost of revenues
 
54,607

 
51,194

Selling, general, and administrative expenses
 
31,872

 
28,606

Research and development expenses
 
1,555

 
1,558

Restructuring costs (Note 3)
 
534

 
45

 
 
88,568

 
81,403

 
 
 
 
 
Operating Income
 
10,151

 
9,912

 
 
 
 
 
Interest Income
 
42

 
155

Interest Expense
 
(210
)
 
(239
)
 
 
 
 
 
Income from Continuing Operations Before Provision for Income Taxes
 
9,983

 
9,828

Provision for Income Taxes
 
3,246

 
3,327

 
 
 
 
 
Income from Continuing Operations
 
6,737

 
6,501

Loss from Discontinued Operation (net of income tax benefit of $3 and $8)
 
(4
)
 
(14
)
 
 
 
 
 
Net Income
 
6,733

 
6,487

 
 
 
 
 
Net Income Attributable to Noncontrolling Interest
 
(86
)
 
(40
)
 
 
 
 
 
Net Income Attributable to Kadant
 
$
6,647

 
$
6,447

 
 
 
 
 
Amounts Attributable to Kadant:
 
 

 
 

Income from Continuing Operations
 
$
6,651

 
$
6,461

Loss from Discontinued Operation
 
(4
)
 
(14
)
Net Income Attributable to Kadant
 
$
6,647

 
$
6,447

 
 
 
 
 
Earnings per Share from Continuing Operations Attributable to Kadant (Note 4):
 
 

 
 

Basic
 
$
0.61

 
$
0.58

Diluted
 
$
0.60

 
$
0.57

 
 
 
 
 
Earnings per Share Attributable to Kadant (Note 4):
 
 

 
 

Basic
 
$
0.61

 
$
0.58

Diluted
 
$
0.60

 
$
0.57

 
 
 
 
 
Weighted Average Shares (Note 4):
 
 

 
 

Basic
 
10,898

 
11,153

Diluted
 
11,133

 
11,365

 
 
 
 
 
Cash Dividends Declared per Common Share
 
$
0.15

 
$
0.125


The accompanying notes are an integral part of these condensed consolidated financial statements.

4



KADANT INC.
Condensed Consolidated Statement of Income
(Unaudited)

 
 
Nine Months Ended
 
 
September 27, 2014
 
September 28, 2013
(In thousands, except per share amounts)
 
 
 
 
 
 
 
Revenues
 
$
296,921

 
$
249,684

 
 
 
 
 
Costs and Operating Expenses:
 
 

 
 

Cost of revenues
 
165,547

 
133,597

Selling, general, and administrative expenses
 
95,942

 
85,001

Research and development expenses
 
4,696

 
5,114

Restructuring costs and other income, net (Note 3)
 
928

 
263

 
 
267,113

 
223,975

 
 
 
 
 
Operating Income
 
29,808

 
25,709

 
 
 
 
 
Interest Income
 
346

 
406

Interest Expense
 
(766
)
 
(635
)
 
 
 
 
 
Income from Continuing Operations Before Provision for Income Taxes
 
29,388

 
25,480

Provision for Income Taxes (Note 5)
 
9,468

 
7,786

 
 
 
 
 
Income from Continuing Operations
 
19,920

 
17,694

Loss from Discontinued Operation (net of income tax benefit of $11 and $33)
 
(18
)
 
(55
)
 
 
 
 
 
Net Income
 
19,902

 
17,639

 
 
 
 
 
Net Income Attributable to Noncontrolling Interest
 
(344
)
 
(148
)
 
 
 
 
 
Net Income Attributable to Kadant
 
$
19,558

 
$
17,491

 
 
 
 
 
Amounts Attributable to Kadant:
 
 

 
 

Income from Continuing Operations
 
$
19,576

 
$
17,546

Loss from Discontinued Operation
 
(18
)
 
(55
)
Net Income Attributable to Kadant
 
$
19,558

 
$
17,491

 
 
 
 
 
Earnings per Share from Continuing Operations Attributable to Kadant (Note 4):
 
 

 
 

Basic
 
$
1.78

 
$
1.57

Diluted
 
$
1.74

 
$
1.55

 
 
 
 
 
Earnings per Share Attributable to Kadant (Note 4):
 
 

 
 

Basic
 
$
1.77

 
$
1.57

Diluted
 
$
1.74

 
$
1.55

 
 
 
 
 
Weighted Average Shares (Note 4):
 
 

 
 

Basic
 
11,026

 
11,165

Diluted
 
11,231

 
11,321

 
 
 
 
 
Cash Dividends Declared per Common Share
 
$
0.45

 
$
0.375


The accompanying notes are an integral part of these condensed consolidated financial statements.

5



KADANT INC.
Condensed Consolidated Statement of Comprehensive Income
(Unaudited)

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
 
$
6,733

 
$
6,487

 
$
19,902

 
$
17,639

 
 
 
 
 
 
 
 
 
Other Comprehensive Items:
 
 

 
 

 
 

 
 

Foreign Currency Translation Adjustment
 
(7,474
)
 
4,678

 
(7,652
)
 
1,189

Pension and Other Post-Retirement Liability Adjustments (net of tax of $57 and $118 in the three and nine months ended September 27, 2014, respectively, and $58 and $198 in the three and nine months ended September 28, 2013, respectively)
 
105

 
105

 
215

 
362

Deferred (Loss) Gain on Hedging Instruments (net of tax of $41 and $93 in the three and nine months ended September 27, 2014, respectively, and $30 and $110 in the three and nine months ended September 28, 2013, respectively)
 
(66
)
 
61

 
(73
)
 
350

Other Comprehensive Items
 
(7,435
)
 
4,844

 
(7,510
)
 
1,901

Comprehensive (Loss) Income
 
(702
)
 
11,331

 
12,392

 
19,540

Comprehensive Income Attributable to Noncontrolling Interest
 
(8
)
 
(109
)
 
(259
)
 
(194
)
Comprehensive (Loss) Income Attributable to Kadant
 
$
(710
)
 
$
11,222

 
$
12,133

 
$
19,346


The accompanying notes are an integral part of these condensed consolidated financial statements.

6




KADANT INC.
Condensed Consolidated Statement of Cash Flows
(Unaudited)

 
 
Nine Months Ended
 
 
September 27, 2014
 
September 28, 2013
(In thousands)
 
 
 
 
 
 
 
Operating Activities:
 
 
 
 
Net income attributable to Kadant
 
$
19,558

 
$
17,491

Net income attributable to noncontrolling interest
 
344

 
148

Loss from discontinued operation
 
18

 
55

Income from continuing operations
 
19,920

 
17,694

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
8,558

 
6,730

Stock-based compensation expense
 
4,251

 
3,794

Provision (benefit) for losses on accounts receivable
 
283

 
(40
)
Gain on the sale of property, plant, and equipment
 
(158
)
 
(1,908
)
Other items, net
 
473

 
309

Contributions to pension plan
 
(810
)
 
(810
)
Changes in current assets and liabilities, net of effects of acquisitions:
 
 

 
 

Accounts receivable
 
935

 
3,563

Unbilled contract costs and fees
 
(1,414
)
 
(780
)
Inventories
 
3,189

 
(2,176
)
Other current assets
 
(272
)
 
(1,871
)
Accounts payable
 
459

 
2,276

Other current liabilities
 
(5,012
)
 
3,916

Net cash provided by continuing operations
 
30,402

 
30,697

Net cash provided by (used in) discontinued operation
 
2

 
(191
)
Net cash provided by operating activities
 
30,404

 
30,506

 
 
 
 
 
Investing Activities:
 
 

 
 

Acquisitions, net of cash acquired
 
(2,974
)
 
(14,209
)
Purchases of property, plant, and equipment
 
(3,145
)
 
(4,149
)
Proceeds from sale of property, plant, and equipment
 
231

 
3,320

Other, net
 

 
646

Net cash used in continuing operations for investing activities
 
(5,888
)
 
(14,392
)
 
 
 
 
 
Financing Activities:
 
 

 
 

Proceeds from issuance of long-term obligations
 
15,401

 
18,900

Repayments of long-term obligations
 
(30,709
)
 
(11,275
)
Purchases of Company common stock
 
(13,159
)
 
(3,481
)
Dividends paid
 
(4,706
)
 
(2,796
)
Proceeds from issuance of Company common stock
 
639

 
337

Change in restricted cash
 
(437
)
 
(166
)
Other, net
 
711

 
327

Net cash (used in) provided by continuing operations for financing activities
 
(32,260
)
 
1,846

 
 
 
 
 
Exchange Rate Effect on Cash and Cash Equivalents from Continuing Operations
 
(1,167
)
 
488

 
 
 
 
 
(Decrease) Increase in Cash and Cash Equivalents from Continuing Operations
 
(8,911
)
 
18,448

Cash and Cash Equivalents at Beginning of Period
 
50,032

 
54,553

Cash and Cash Equivalents at End of Period
 
$
41,121

 
$
73,001


See Note 1 for supplemental cash flow information.
The accompanying notes are an integral part of these condensed consolidated financial statements.

7



KADANT INC.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)

(In thousands, except share amounts)
 
Common
Stock
 
Capital in
Excess of Par Value
 
Retained Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive Items
 
Noncontrolling Interest
 
Total
Stockholders' Equity
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 29, 2012
 
14,624,159

 
$
146

 
$
95,448

 
$
230,329

 
3,493,546

 
$
(74,025
)
 
$
(3,315
)
 
$
1,384

 
$
249,967

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 
17,491

 

 

 

 
148

 
17,639

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends declared
 

 

 

 
(4,189
)
 

 

 

 

 
(4,189
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividend paid to minority shareholder
 

 

 

 

 

 

 

 
(206
)
 
(206
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Activity under stock plans
 

 

 
(276
)
 

 
(137,554
)
 
2,918

 

 

 
2,642

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax benefits related to employees' and directors' stock plans
 

 

 
327

 

 

 

 

 

 
327

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases of Company common stock
 

 

 

 

 
125,000

 
(3,481
)
 

 

 
(3,481
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive items
 

 

 

 

 

 

 
1,855

 
46

 
1,901

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 28, 2013
 
14,624,159

 
$
146

 
$
95,499

 
$
243,631

 
3,480,992

 
$
(74,588
)
 
$
(1,460
)
 
$
1,372

 
$
264,600

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 28, 2013
 
14,624,159

 
$
146

 
$
96,809

 
$
248,170

 
3,524,742

 
$
(76,339
)
 
$
710

 
$
925

 
$
270,421

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 
19,558

 

 

 

 
344

 
19,902

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends declared
 

 

 

 
(4,950
)
 

 

 

 

 
(4,950
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Activity under stock plans
 

 

 
(280
)
 

 
(142,591
)
 
3,112

 

 

 
2,832

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax benefits related to employees' and directors' stock plans
 

 

 
712

 

 

 

 

 

 
712

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases of Company common stock
 

 

 

 

 
355,135

 
(13,159
)
 

 

 
(13,159
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive items
 

 

 

 

 

 

 
(7,425
)
 
(85
)
 
(7,510
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 27, 2014
 
14,624,159

 
$
146

 
$
97,241

 
$
262,778

 
3,737,286

 
$
(86,386
)
 
$
(6,715
)
 
$
1,184

 
$
268,248


The accompanying notes are an integral part of these condensed consolidated financial statements.

8


KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


1
1.    Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations
Kadant Inc. and its subsidiaries' (collectively, "we," "Kadant," "the Company," or "the Registrant") continuing operations include two reportable operating segments, Papermaking Systems and Wood Processing Systems, and a separate product line, Fiber-based Products.

Through its Papermaking Systems segment, the Company develops, manufactures, and markets a range of equipment and products primarily for the global papermaking, paper recycling, and process industries. The Company's principal products in this segment include custom-engineered stock-preparation systems and equipment for the preparation of wastepaper for conversion into recycled paper; fluid-handling systems used primarily in the dryer section of the papermaking process and during the production of corrugated boxboard, metals, plastics, rubber, textiles, chemicals, and food; doctoring systems and equipment and related consumables important to the efficient operation of paper machines; and cleaning and filtration systems essential for draining, purifying, and recycling process water and cleaning paper machine fabrics and rolls.

Through its Wood Processing Systems segment, the Company designs and manufactures stranders and related equipment used in the production of oriented strand board, an engineered wood panel product used primarily in home construction. This segment also supplies debarking and wood chipping equipment used in the forest products and the pulp and paper industries.

Through its Fiber-based Products business, the Company manufactures and sells granules derived from papermaking byproducts primarily for use as agricultural carriers and for home lawn and garden applications, as well as for oil and grease absorption.

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 27, 2014 and its results of operations and comprehensive income for the three and nine month periods ended September 27, 2014 and September 28, 2013, and its cash flows and stockholders' equity for the nine month periods ended September 27, 2014 and September 28, 2013. Interim results are not necessarily indicative of results for a full year or for any other interim period.

The condensed consolidated balance sheet presented as of December 28, 2013 has been derived from the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2013. The condensed consolidated financial statements and related notes are presented as permitted by the Securities and Exchange Commission (SEC) rules and regulations for Form 10-Q and do not contain certain information included in the annual consolidated financial statements and related notes of the Company. The condensed consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2013, filed with the SEC.

Fiscal Year
Typically, the Company's fiscal quarters and fiscal year consist of 13 and 52 weeks, respectively, ending on the Saturday closest to the end of the corresponding calendar quarter for the Company's fiscal quarters and on the Saturday closest to December 31 for the Company's fourth fiscal quarter and fiscal year. As a result, a 53rd week is added to the Company's fiscal year every five or six years. In a 53-week fiscal year, the Company's fourth fiscal quarter contains 14 weeks. The Company's fiscal year ending January 3, 2015 (fiscal 2014) contains 53 weeks and the Company's fiscal year ending December 28, 2013 (fiscal 2013) contains 52 weeks. Each quarter of fiscal 2014 and 2013 contains 13 weeks, except the fourth quarter of 2014, which will contain 14 weeks.


9


KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


1.    Nature of Operations and Summary of Significant Accounting Policies (continued)


Critical Accounting Policies
Critical accounting policies are defined as those that entail significant judgments and estimates, and could potentially result in materially different results under different assumptions and conditions. The Company believes that the most critical accounting policies upon which its financial position depends, and which involve the most complex or subjective decisions or assessments, concern revenue recognition and accounts receivable, warranty obligations, income taxes, the valuation of goodwill and intangible assets, inventories and pension obligations. A discussion of the application of these and other accounting policies is included in Notes 1 and 3 to the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.

Supplemental Cash Flow Information
 
 
Nine Months Ended
(In thousands)
 
September 27, 2014
 
September 28, 2013
 
 
 
 
 
Non-Cash Investing Activities:
 
 
 
 
Fair Value of Assets Acquired
 
$
5,635

 
$
22,688

Cash Paid for Acquired Businesses
 
(3,648
)
 
(15,332
)
Liabilities Assumed of Acquired Businesses
 
$
1,987

 
$
7,356

Non-Cash Financing Activities:
 
 

 
 

Issuance of Company Common Stock
 
$
2,957

 
$
2,515

Dividends Declared but Unpaid
 
$
1,634

 
$
1,393


Restricted Cash
As of September 27, 2014 and December 28, 2013, the Company had restricted cash of $598,000 and $168,000, respectively. This cash serves as collateral for bank guarantees primarily associated with providing assurance to customers that the Company will fulfill certain customer obligations entered into in the normal course of business. All the bank guarantees will expire by the end of 2015.

Banker's Acceptance Drafts
The Company's Chinese subsidiaries may receive banker's acceptance drafts from customers as payment for their trade accounts receivable. The banker's acceptance drafts are non-interest bearing obligations of the issuing bank and mature within six months of the origination date. The Company has the ability to sell the drafts at a discount to a third-party financial institution or transfer the drafts to vendors in settlement of current accounts payable prior to the scheduled maturity date. These drafts, which totaled $9,988,000 and $10,765,000 at September 27, 2014 and December 28, 2013, respectively, are included in accounts receivable in the accompanying condensed consolidated balance sheet until the subsidiary obtains cash payment on the scheduled maturity date or upon the sale or transfer of the drafts prior to maturity.


10


KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


1.    Nature of Operations and Summary of Significant Accounting Policies (continued)


Inventories
The components of inventories are as follows:
 
 
September 27, 2014
 
December 28, 2013
(In thousands)
 
 
 
 
 
 
 
Raw Materials and Supplies
 
$
24,063

 
$
20,836

Work in Process
 
15,598

 
21,051

Finished Goods
 
18,046

 
20,918

 
 
$
57,707

 
$
62,805


Intangible Assets, Net
Acquired intangible assets are as follows:
 
 
September 27, 2014
 
December 28, 2013
(In thousands)
 
 
 
 
 
 
 
Indefinite-Lived Intangible Assets
 
$
8,100

 
$
8,100

 
 
 
 
 
Finite-Lived Intangible Assets, Gross
 
$
71,193

 
$
69,409

Accumulated Amortization
 
(34,668
)
 
(30,373
)
Currency Translation
 
(881
)
 
714

Finite-Lived Intangible Assets, Net
 
$
35,644

 
$
39,750

 
 
 
 
 
Total Intangible Assets, Net
 
$
43,744

 
$
47,850


Warranty Obligations
The Company provides for the estimated cost of product warranties at the time of sale based on the actual historical occurrence rates and repair costs. The Company typically negotiates the terms regarding warranty coverage and length of warranty depending on the products and applications. While the Company engages in extensive product quality programs and processes, the Company's warranty obligation is affected by product failure rates, repair costs, service delivery costs incurred in correcting a product failure, and supplier warranties on parts delivered to the Company. Should actual product failure rates, repair costs, service delivery costs, or supplier warranties on parts differ from the Company's estimates, revisions to the estimated warranty liability would be required.

The changes in the carrying amount of accrued warranty costs included in other current liabilities in the accompanying condensed consolidated balance sheet are as follows:
 
 
Nine Months Ended
(In thousands)
 
September 27, 2014
 
September 28, 2013
 
 
 
 
 
Balance at beginning of period
 
$
4,571

 
$
4,462

Provision
 
1,681

 
969

Usage
 
(2,016
)
 
(1,366
)
Acquired
 

 
138

Currency translation
 
(190
)
 
62

Balance at end of period
 
$
4,046

 
$
4,265


11


KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


1.    Nature of Operations and Summary of Significant Accounting Policies (continued)


Recent Accounting Pronouncements
Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, which provides new guidance on reporting discontinued operations and disclosures of disposals. Under the new guidance, only disposals representing a strategic shift in operations will be presented as discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of the company that does not qualify for discontinued operations reporting. This guidance is effective for the Company beginning in fiscal 2015. Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.
Revenue from Contracts with Customers (Topic 606) Section A—Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40). In May 2014, the FASB issued ASU No. 2014-09, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new guidance is effective for the Company beginning in fiscal 2017. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

Compensation—Stock Compensation (Topic 718) Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. In June 2014, the FASB issued ASU No. 2014-12, which clarifies the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. Under the new guidance, a performance target that affects vesting and could be achieved after completion of the service period should be treated as a performance condition under FASB Accounting Standards Codification (ASC) 718 and, as a result, should not be included in the estimation of the grant-date fair value of the award. An entity should recognize compensation cost for the award when it becomes probable that the performance target will be achieved. In the event that an entity determines that it is probable that a performance target will be achieved before the end of the service period, the compensation cost of the award should be recognized prospectively over the remaining service period. The new guidance is effective for the Company beginning in fiscal 2016. Early adoption is permitted. Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.

Preparation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. In August 2014, the FASB issued ASU No. 2014-15, which states that under GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting. Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this ASU should be followed to determine whether to disclose information about the relevant conditions and events. The new guidance is effective for the Company beginning in fiscal 2017, and for annual periods and interim periods thereafter. Early application is permitted. The Company will evaluate the going concern considerations in this ASU; however, management does not currently believe that the Company will meet the conditions that would subject its financial statements to additional disclosure.

12


KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


2.
Acquisitions

In the first quarter of 2014, the Company acquired all the outstanding shares of a European producer of creping and coating blades for approximately $2,627,000 in cash, including $674,000 of cash acquired and $53,000 of debt assumed. The Company paid $40,000 of additional consideration in the third quarter of 2014. An additional 1,000,000 euros, or approximately $1,275,000 as of September 27, 2014, of contingent consideration is due to the sellers within two years of the closing date if certain conditions are met, as defined in the purchase agreement. The fair value of this contingent consideration was $1,175,000 as of September 27, 2014.

This acquisition has been accounted for using the purchase method of accounting and its results have been included in the accompanying financial statements from the date of the acquisition. The Company has made a preliminary fair value assessment of the assets acquired and liabilities assumed, including identifiable intangible assets acquired of $1,800,000, which are being amortized using the straight-line method over 12 years. The excess of the acquisition purchase price over the tangible and identifiable intangible assets was recorded as goodwill and totaled $1,459,000, which is not deductible for tax purposes. The fair values are subject to adjustment upon finalization of the valuation, and therefore the current measurements of intangible assets, acquired goodwill, and assumed assets and liabilities are subject to change.

Pro forma disclosures of the results of operations are not required, as the acquisition is not considered a material business combination as outlined in FASB ASC 805, "Business Combinations."

During the first nine months of 2014, the Company made post-closing adjustment payments of $981,000 related to other acquisitions.

3.    Restructuring Costs and Other Income, Net

In the third quarter of 2014, the Company recorded total restructuring costs of $534,000, including $493,000 related to its 2014 restructuring plans and $41,000 related to its 2013 restructuring plans.

In the first nine months of 2014, the Company recorded total restructuring costs of $928,000, including $493,000 related to its 2014 restructuring plans and $435,000 related to its 2013 restructuring plans. In the first nine months of 2013, the Company recorded total restructuring costs and other income, net of $263,000, including $2,003,000 of costs related to its 2013 restructuring plans and $1,740,000 of other income related to a pre-tax gain from the sale of real estate in China.

2014 Restructuring Plans
The Company recorded restructuring costs of $386,000 related to its 2014 restructuring plan for severance costs associated with the reduction of 9 employees in Brazil. This action was taken to further streamline the Company's operation in Brazil. In addition, the Company recorded $107,000 of facility-related costs associated with a recent acquisition in the U.S. These restructuring costs were included in the Papermaking Systems segment.

2013 Restructuring Plans
The Company recorded total restructuring costs of $2,278,000 related to its 2013 restructuring plans, including severance costs of $1,158,000 associated with the reduction of 22 employees in Brazil and severance costs of $497,000 associated with the reduction of 25 employees in Sweden. Also included in total restructuring costs were facility-related costs of $623,000. These actions were taken to streamline the Company's operations as a result of the acquisitions of Companhia Brasileira de Tecnologia Industrial and certain assets of the Noss Group in 2013. These restructuring charges all occurred in the Papermaking Systems segment.

The Company recorded total restructuring costs related to the 2013 restructuring plans of $435,000 in the first nine months of 2014, including additional facility-related costs of $446,000, net of income from a reduction in severance and associated costs of $11,000 in Sweden.

13


KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


3.    Restructuring Costs and Other Income, Net (continued)


A summary of the changes in accrued restructuring costs for the 2014 and 2013 restructuring plans included in other current liabilities in the accompanying condensed consolidated balance sheet is as follows:
(In thousands) 
 
Severance
Costs
 
Other
Costs
 
Total
Costs
 
 
 
 
 
 
 
2014 Restructuring Plans
 
 
 
 
 
 
Provision
 
$
386

 
$
107

 
$
493

Usage
 
(279
)
 
(107
)
 
(386
)
Currency translation
 
(26
)
 

 
(26
)
Balance at September 27, 2014
 
$
81

 
$

 
$
81

 
 
 
 
 
 
 
2013 Restructuring Plans
 
 
 
 
 
 
Balance at December 28, 2013
 
$
467

 
$

 
$
467

Provision
 
(11
)
 
446

 
435

Usage
 
(353
)
 
(445
)
 
(798
)
Currency translation
 
(41
)
 
(1
)
 
(42
)
Balance at September 27, 2014
 
$
62

 
$

 
$
62


The Company expects to pay the remaining accrued restructuring costs by the end of 2014.

4.    Earnings per Share

Basic and diluted earnings per share are calculated as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
(In thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
 
Amounts Attributable to Kadant:
 
 
 
 
 
 
 
 
Income from Continuing Operations
 
$
6,651

 
$
6,461

 
$
19,576

 
$
17,546

Loss from Discontinued Operation
 
(4
)
 
(14
)
 
(18
)
 
(55
)
Net Income
 
$
6,647

 
$
6,447

 
$
19,558

 
$
17,491

 
 
 
 
 
 
 
 
 
Basic Weighted Average Shares
 
10,898

 
11,153

 
11,026

 
11,165

Effect of Stock Options, Restricted Stock Units and Employee Stock Purchase Plan
 
235

 
212

 
205

 
156

Diluted Weighted Average Shares
 
11,133

 
11,365

 
11,231

 
11,321

 
 
 
 
 
 
 
 
 
Basic Earnings per Share:
 
 

 
 

 
 

 
 

Continuing Operations
 
$
0.61

 
$
0.58

 
$
1.78

 
$
1.57

Discontinued Operation
 
$

 
$

 
$

 
$

Net Income per Basic Share
 
$
0.61

 
$
0.58

 
$
1.77

 
$
1.57

 
 
 
 
 
 
 
 
 
Diluted Earnings per Share:
 
 

 
 

 
 

 
 

Continuing Operations
 
$
0.60

 
$
0.57

 
$
1.74

 
$
1.55

Discontinued Operation
 
$

 
$

 
$

 
$

Net Income per Diluted Share
 
$
0.60

 
$
0.57

 
$
1.74

 
$
1.55



14


KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


4.    Earnings per Share (continued)


Options to purchase approximately 93,000 and 99,000 shares of the Company's common stock in the third quarter and first nine months of 2013, respectively, were not included in the computation of diluted earnings per share as the effect of their inclusion would have been anti-dilutive. Unvested restricted stock units equivalent to approximately 6,000 shares of common stock in the third quarter of 2014 and 44,000 and 27,000 shares of common stock for the first nine months of 2014 and 2013, respectively, were not included in the computation of diluted earnings per share because either the effect of their inclusion would have been anti-dilutive, or for unvested performance-based restricted stock units, the performance conditions had not been met as of the end of the reporting period.

5.    Provision for Income Taxes

The provision for income taxes was $9,468,000 and $7,786,000, in the first nine months of 2014 and 2013, respectively, and represented 32% and 31% of pre-tax income. The effective tax rate of 32% in the first nine months of 2014 was lower than the Company's statutory tax rate primarily due to the distribution of the Company's worldwide earnings, the release of tax reserves that resulted from the expiration of tax statutes of limitations, and the release of state tax reserves in the U.S. These tax benefits were offset in part by tax expense associated with an increase in nondeductible expenses and a reduction in deferred tax assets. The effective tax rate of 31% in the first nine months of 2013 was lower than the Company's statutory tax rate primarily due to the reduction of the 2012 U.S. tax cost of foreign earnings and a benefit from the 2012 U.S. research and development tax credit, both of which were recognized in the first nine months of 2013 as a result of U.S. tax legislation enacted in January 2013. In addition, the Company's effective tax rate in the first nine months of 2013 benefited from the release of a valuation allowance against deferred tax assets related to net operating loss carryforwards. The release of the valuation allowance was due to increased projected profitability associated with the CBTI acquisition. Also contributing to the lower effective tax rate in the first nine months of 2013 were lower statutory tax rates in the Company's overseas operations and a more favorable distribution of the Company's worldwide earnings.

6.    Long-Term Obligations

Long-term obligations are as follows:
 
 
September 27, 2014
 
December 28, 2013
(In thousands)
 
 
 
 
 
 
 
Revolving Credit Facility, due 2018
 
$
17,000

 
$
32,260

Variable Rate Term Loan, due from 2014 to 2016
 
6,000

 
6,375

Total Long-Term Obligations
 
23,000

 
38,635

Less: Current Maturities
 
(625
)
 
(625
)
Long-Term Obligations, less Current Maturities
 
$
22,375

 
$
38,010


The weighted average interest rate for the Company's long-term obligations was 2.56% as of September 27, 2014.

The Company entered into a five-year unsecured revolving credit facility (2012 Credit Agreement) in the aggregate principal amount of up to $100,000,000 on August 3, 2012 and amended it on November 1, 2013. The 2012 Credit Agreement also includes an uncommitted unsecured incremental borrowing facility of up to an additional $50,000,000. The principal on any borrowings made under the 2012 Credit Agreement is due on November 1, 2018. Interest on any loans outstanding under the 2012 Credit Agreement accrues and is payable quarterly in arrears at one of the following rates selected by the Company: (i) the highest of (a) the federal funds rate plus 0.50% plus an applicable margin of 0% to 1%, (b) the prime rate, as defined, plus an applicable margin of 0% to 1% and (c) the Eurocurrency rate, as defined, plus 0.50% plus an applicable margin of 0% to 1% or (ii) the Eurocurrency rate, as defined, plus an applicable margin of 1% to 2%. The applicable margin is determined based upon the ratio of the Company's total debt to earnings before interest, taxes, depreciation, and amortization (EBITDA), as defined in the 2012 Credit Agreement. For this purpose, total debt is defined as total debt less up to $25,000,000 of unrestricted U.S. cash. There were $17,000,000 of borrowings outstanding under the 2012 Credit Agreement at September 27, 2014.

15


KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


6.    Long-Term Obligations (continued)


The obligations of the Company under the 2012 Credit Agreement may be accelerated upon the occurrence of an event of default under the 2012 Credit Agreement, which includes customary events of default including without limitation payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy- and insolvency-related defaults, defaults relating to such matters as the Employment Retirement Income Security Act, unsatisfied judgments, the failure to pay certain indebtedness, and a change of control default. In addition, the 2012 Credit Agreement contains negative covenants applicable to the Company and its subsidiaries including financial covenants requiring the Company to comply with a maximum consolidated leverage ratio of 3.5 to 1, a minimum consolidated interest coverage ratio of 3 to 1, and restrictions on liens, indebtedness, fundamental changes, dispositions of property, making certain restricted payments (including dividends and stock repurchases), investments, transactions with affiliates, sale and leaseback transactions, swap agreements, changing its fiscal year, arrangements affecting subsidiary distributions, entering into new lines of business, and certain actions related to the discontinued operation. As of September 27, 2014, the Company was in compliance with these covenants.

Loans under the 2012 Credit Agreement are guaranteed by certain domestic subsidiaries of the Company pursuant to a Guarantee Agreement, effective August 3, 2012.

As of September 27, 2014, the Company had $80,025,000 of borrowing capacity available under the committed portion of its 2012 Credit Agreement. The amount the Company is able to borrow under the 2012 Credit Agreement is the total borrowing capacity of $100,000,000 less any outstanding borrowings, letters of credit and multi-currency borrowings issued under the 2012 Credit Agreement.

7.    Stock-Based Compensation

The Company recognized stock-based compensation expense of $1,440,000 and $1,236,000 in the third quarters of 2014 and 2013, respectively, and $4,251,000 and $3,794,000 in the first nine months of 2014 and 2013, respectively, within selling, general, and administrative (SG&A) expenses in the accompanying condensed consolidated statement of income. Unrecognized compensation expense related to stock-based compensation totaled approximately $5,789,000 at September 27, 2014, and will be recognized over a weighted average period of 1.4 years.

8.    Employee Benefit Plans

The Company sponsors a noncontributory defined benefit retirement plan for the benefit of eligible employees at its Kadant Solutions division and its corporate office (included in the table below in "Pension Benefits"). The Company also sponsors a restoration plan for the benefit of certain executive officers who also participate in the noncontributory defined benefit retirement plan (included in the table below in "Other Benefits"). In addition, employees at certain of the Company's subsidiaries participate in defined benefit retirement and post-retirement welfare benefit plans (included in the table below in "Other Benefits").


16


KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


8.    Employee Benefit Plans (continued)


The components of the net periodic benefit cost for the pension benefits and other benefits plans are as follows:
 
 
Three Months Ended September 27, 2014
 
Three Months Ended September 28, 2013
(In thousands)
 
Pension
Benefits
 
Other
Benefits
 
Pension
Benefits
 
Other
Benefits
 
 
 
 
 
 
 
 
 
Components of Net Periodic Benefit Cost:
 
 
 
 
 
 
 
 
Service cost
 
$
213

 
$
73

 
$
245

 
$
54

Interest cost
 
321

 
74

 
289

 
69

Expected return on plan assets
 
(370
)
 
(12
)
 
(375
)
 
(13
)
Recognized net actuarial loss
 
79

 
9

 
127

 
23

Amortization of prior service cost
 
14

 
22

 
14

 
21

Net periodic benefit cost
 
$
257

 
$
166

 
$
300

 
$
154

 
 
 
 
 
 
 
 
 
The weighted average assumptions used to determine net periodic benefit cost are as follows:
 
 

 
 
 
 
 
 
 
 
 
Discount rate
 
4.79
%
 
4.28
%
 
3.89
%
 
3.90
%
Expected long-term return on plan assets
 
5.75
%
 

 
5.75
%
 

Rate of compensation increase
 
3.50
%
 
3.23
%
 
3.50
%
 
3.65
%
 
 
Nine Months Ended September 27, 2014
 
Nine Months Ended September 28, 2013
(In thousands)
 
Pension
Benefits
 
Other
Benefits
 
Pension
Benefits
 
Other
Benefits
 
 
 
 
 
 
 
 
 
Components of Net Periodic Benefit Cost:
 
 
 
 
 
 
 
 
Service cost
 
$
639

 
$
223

 
$
744

 
$
160

Interest cost
 
963

 
220

 
873

 
208

Expected return on plan assets
 
(1,110
)
 
(36
)
 
(1,128
)
 
(39
)
Recognized net actuarial loss
 
237

 
27

 
393

 
66

Amortization of prior service cost
 
42

 
67

 
42

 
63

Net periodic benefit cost
 
$
771

 
$
501

 
$
924

 
$
458

 
 
 
 
 
 
 
 
 
The weighted average assumptions used to determine net periodic benefit cost are as follows:
 
 

 
 
 
 
 
 
 
 
 
Discount rate
 
4.79
%
 
4.28
%
 
3.89
%
 
3.92
%
Expected long-term return on plan assets
 
5.75
%
 

 
5.75
%
 

Rate of compensation increase
 
3.50
%
 
3.23
%
 
3.50
%
 
3.66
%

The Company made cash contributions of $810,000 to its Kadant Solutions division's noncontributory defined benefit retirement plan in the first nine months of 2014 and expects to make cash contributions of $270,000 over the remainder of 2014. For the remaining pension and post-retirement welfare benefits plans, the Company does not expect to make cash contributions other than to fund current benefit payments.

9.    Accumulated Other Comprehensive Items

Comprehensive income combines net income and other comprehensive items, which represent certain amounts that are reported as components of stockholders' equity in the accompanying condensed consolidated balance sheet, including foreign currency translation adjustments, deferred losses and unrecognized prior service cost associated with pension and other post-retirement plans, and deferred losses on hedging instruments.


17


KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


9.    Accumulated Other Comprehensive Items (continued)


Changes in each component of accumulated other comprehensive items (AOCI), net of tax, in the accompanying condensed consolidated balance sheet are as follows:
(In thousands)
 
Foreign
Currency
Translation
Adjustment
 
Unrecognized
Prior Service
Cost
 
Deferred Loss
on Pension and
Other Post-
Retirement
Plans
 
Deferred Loss
on Hedging
Instruments
 
Accumulated
Other
Comprehensive
Items
Balance at December 28, 2013
 
$
8,919

 
$
(657
)
 
$
(6,919
)
 
$
(633
)
 
$
710

Other comprehensive (loss) income before reclassifications
 
(7,567
)
 
(64
)
 
21

 
153

 
(7,457
)
Reclassifications from AOCI
 

 
86

 
172

 
(226
)
 
32

Net current period other comprehensive  (loss) income
 
(7,567
)
 
22

 
193

 
(73
)
 
(7,425
)
Balance at September 27, 2014
 
$
1,352

 
$
(635
)
 
$
(6,726
)
 
$
(706
)
 
$
(6,715
)
 
 
 
 
 
 
 
 
 
 
 
Balance at December 29, 2012
 
$
8,124

 
$
(748
)
 
$
(9,645
)
 
$
(1,046
)
 
$
(3,315
)
Other comprehensive income (loss) before reclassifications
 
1,143

 

 
(6
)
 
(81
)
 
1,056

Reclassifications from AOCI
 

 
68

 
300

 
431

 
799

Net current period other comprehensive income
 
1,143

 
68

 
294

 
350

 
1,855

Balance at September 28, 2013
 
$
9,267

 
$
(680
)
 
$
(9,351
)
 
$
(696
)
 
$
(1,460
)

Amounts reclassified out of accumulated other comprehensive items are as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
Statement of Income
(In thousands)
 
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
 
Line Item
Pension and Other Post-retirement Plans: (1)
 
 
 
 
 
 
 
      
Amortization of prior service cost
 
$
(36
)
 
$
(35
)
 
$
(109
)
 
$
(105
)
 
SG&A expenses
Amortization of actuarial losses
 
(88
)
 
(150
)
 
(264
)
 
(459
)
 
SG&A expenses
Total expense before income taxes
 
(124
)
 
(185
)
 
(373
)
 
(564
)
 
 
Income tax benefit
 
28

 
65

 
115

 
196

 
Provision for income taxes
 
 
(96
)
 
(120
)
 
(258
)
 
(368
)
 
 
Cash Flow Hedges: (2)
 
 

 
 

 
 

 
 

 
      
Interest rate swap agreements
 
(83
)
 
(91
)
 
(251
)
 
(287
)
 
Interest expense
Forward currency-exchange contracts
 
31

 
(70
)
 
31

 
(153
)
 
Revenues
Forward currency-exchange contracts
 
701

 

 
423

 

 
SG&A expenses
Total income (expense) before income taxes
 
649

 
(161
)
 
203

 
(440
)
 
 
Income tax (expense) benefit
 
(74
)
 
56

 
23

 
9

 
Provision for income taxes
 
 
575

 
(105
)
 
226

 
(431
)
 
 
Total reclassifications
 
$
479

 
$
(225
)
 
$
(32
)
 
$
(799
)
 
 

(1)
Included in the computation of net periodic benefit costs. See Note 8 for additional information.
(2)
See Note 10 for additional information.

18


KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


10.    Derivatives

The Company uses derivative instruments primarily to reduce its exposure to changes in currency exchange rates and interest rates. When the Company enters into a derivative contract, the Company makes a determination as to whether the transaction is deemed to be a hedge for accounting purposes. For a contract deemed to be a hedge, the Company formally documents the relationship between the derivative instrument and the risk being hedged. In this documentation, the Company specifically identifies the asset, liability, forecasted transaction, cash flow, or net investment that has been designated as the hedged item, and evaluates whether the derivative instrument is expected to reduce the risks associated with the hedged item. To the extent these criteria are not met, the Company does not use hedge accounting for the derivative. The changes in the fair value of a derivative not deemed to be a hedge are recorded currently in earnings. The Company does not hold or engage in transactions involving derivative instruments for purposes other than risk management.

ASC 815, "Derivatives and Hedging," requires that all derivatives be recognized on the balance sheet at fair value. For derivatives designated as cash flow hedges, the related gains or losses on these contracts are deferred as a component of accumulated other comprehensive items. These deferred gains and losses are recognized in the period in which the underlying anticipated transaction occurs. For derivatives designated as fair value hedges, the unrealized gains and losses resulting from the impact of currency exchange rate movements are recognized in earnings in the period in which the exchange rates change and offset the currency gains and losses on the underlying exposures being hedged. The Company performs an evaluation of the effectiveness of the hedge both at inception and on an ongoing basis. The ineffective portion of a hedge, if any, and changes in the fair value of a derivative not deemed to be a hedge are recorded in the condensed consolidated statement of income.

Interest Rate Swaps
The Company entered into a swap agreement in 2006 (the 2006 Swap Agreement) to convert a portion of the Company's outstanding variable rate term loan from a floating to a fixed rate of interest. The swap agreement matures in 2016, has the same terms and quarterly payment dates as the corresponding debt, and reduces proportionately in line with the amortization of the debt. Under the 2006 Swap Agreement, the Company receives a three-month LIBOR rate and pays a fixed rate of interest of 5.63% plus an applicable margin. The fair value for this instrument as of September 27, 2014, is included in other long-term liabilities, with an offset to accumulated other comprehensive items (net of tax) in the accompanying condensed consolidated balance sheet. The Company has structured the interest rate swap agreement to be 100% effective and as a result, there is no current impact to earnings resulting from hedge ineffectiveness. Management believes that any credit risk associated with the outstanding swap agreement is remote based on the Company's financial position and the creditworthiness of the financial institution issuing the swap agreement.

The counterparty to the swap agreement could demand an early termination of the swap agreement if the Company is in default under the 2012 Credit Agreement, or any agreement that amends or replaces the 2012 Credit Agreement in which the counterparty is a member, and the Company is unable to cure the default. An event of default under the 2012 Credit Agreement includes customary events of default and failure to comply with financial covenants, including a maximum consolidated leverage ratio of 3.5 to 1, and a minimum consolidated interest coverage ratio of 3 to 1. As of September 27, 2014