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EX-32 - KAI FORM 10-Q 3Q 2015 EXHIBIT 32 - KADANT INCkaiform10q3q2015exhibit32.htm
10-Q - KAI FORM 10-Q 3Q 2015 - KADANT INCkaiform10q3q2015asfiled.pdf
EX-31.1 - KAI FORM 10-Q 3Q 2015 EXHIBIT 31.1 - KADANT INCkaiform10q3q2015exhibit311.htm
EX-31.2 - KAI FORM 10-Q 3Q 2015 EXHIBIT 31.2 - KADANT INCkaiform10q3q2015exhibit312.htm


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 October 3, 2015


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 30, 2015
Common Stock, $.01 par value
 
10,779,807




PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Statements

KADANT INC.
Condensed Consolidated Balance Sheet
(Unaudited)

Assets

 
 
October 3,
2015
 
January 3,
2015
(In thousands)
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
56,142

 
$
45,378

Restricted cash (Note 1)
 
724

 
415

Accounts receivable, less allowances of $2,138 and $2,198 (Note 1)
 
56,898

 
58,508

Inventories (Note 1)
 
67,532

 
55,223

Unbilled contract costs and fees
 
7,741

 
5,436

Other current assets
 
21,162

 
18,598

Assets of discontinued operation
 
96

 
116

Total Current Assets
 
210,295

 
183,674

 
 
 
 
 
Property, Plant, and Equipment, at Cost
 
117,922

 
118,902

Less: accumulated depreciation and amortization
 
75,230

 
73,937

 
 
42,692

 
44,965

 
 
 
 
 
Other Assets
 
8,959

 
10,272

 
 
 
 
 
Intangible Assets, Net (Note 1)
 
39,933

 
46,954

 
 
 
 
 
Goodwill
 
121,007

 
127,882

 
 
 
 
 
Total Assets
 
$
422,886

 
$
413,747


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

 
 
October 3,
2015
 
January 3,
2015
(In thousands, except share amounts)
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
Short-term obligations (Note 5)
 
$
5,375

 
$
611

Accounts payable
 
27,199

 
27,233

Accrued payroll and employee benefits
 
17,561

 
19,943

Customer deposits
 
31,167

 
18,452

Other current liabilities
 
20,550

 
20,718

Liabilities of discontinued operation
 
100

 
213

Total Current Liabilities
 
101,952

 
87,170

 
 
 
 
 
Other Long-Term Liabilities
 
34,060

 
35,868

 
 
 
 
 
Long-Term Obligations (Note 5)
 
24,000

 
25,250

 
 
 
 
 
Commitments and Contingencies (Note 12)
 

 

 
 
 
 
 
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
 
99,271

 
98,769

Retained earnings
 
288,704

 
270,249

Treasury stock at cost, 3,844,352 and 3,760,019 shares
 
(93,829
)
 
(87,727
)
Accumulated other comprehensive items (Note 8)
 
(32,723
)
 
(17,146
)
Total Kadant Stockholders' Equity
 
261,569

 
264,291

Noncontrolling interest
 
1,305

 
1,168

Total Stockholders' Equity
 
262,874

 
265,459

 
 
 
 
 
Total Liabilities and Stockholders' Equity
 
$
422,886

 
$
413,747


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
 
 
October 3,
2015
 
September 27,
2014
(In thousands, except per share amounts)
 
 
 
 
 
 
 
Revenues
 
$
91,929

 
$
98,719

 
 
 
 
 
Costs and Operating Expenses:
 
 

 
 

Cost of revenues
 
48,261

 
54,607

Selling, general, and administrative expenses
 
29,200

 
31,872

Research and development expenses
 
1,787

 
1,555

Restructuring costs
 

 
534

 
 
79,248

 
88,568

 
 
 
 
 
Operating Income
 
12,681

 
10,151

 
 
 
 
 
Interest Income
 
54

 
42

Interest Expense
 
(239
)
 
(210
)
 
 
 
 
 
Income from Continuing Operations Before Provision for Income Taxes
 
12,496

 
9,983

Provision for Income Taxes
 
3,782

 
3,246

 
 
 
 
 
Income from Continuing Operations
 
8,714

 
6,737

Loss from Discontinued Operation (net of income tax benefit of $2 and $3)
 
(4
)
 
(4
)
 
 
 
 
 
Net Income
 
8,710

 
6,733

 
 
 
 
 
Net Income Attributable to Noncontrolling Interest
 
(67
)
 
(86
)
 
 
 
 
 
Net Income Attributable to Kadant
 
$
8,643

 
$
6,647

 
 
 
 
 
Amounts Attributable to Kadant:
 
 

 
 

Income from Continuing Operations
 
$
8,647

 
$
6,651

Loss from Discontinued Operation
 
(4
)
 
(4
)
Net Income Attributable to Kadant
 
$
8,643

 
$
6,647

 
 
 
 
 
Earnings per Share from Continuing Operations Attributable to Kadant (Note 3):
 
 

 
 

Basic
 
$
0.80

 
$
0.61

Diluted
 
$
0.78

 
$
0.60

 
 
 
 
 
Earnings per Share Attributable to Kadant (Note 3):
 
 

 
 

Basic
 
$
0.80

 
$
0.61

Diluted
 
$
0.78

 
$
0.60

 
 
 
 
 
Weighted Average Shares (Note 3):
 
 

 
 

Basic
 
10,861

 
10,898

Diluted
 
11,096

 
11,133

 
 
 
 
 
Cash Dividend Declared per Common Share
 
$
0.17

 
$
0.15


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
 
 
October 3,
2015
 
September 27,
2014
(In thousands, except per share amounts)
 
 
 
 
 
 
 
Revenues
 
$
282,507

 
$
296,921

 
 
 
 
 
Costs and Operating Expenses:
 
 

 
 

Cost of revenues
 
148,775

 
165,547

Selling, general, and administrative expenses
 
92,490

 
95,942

Research and development expenses
 
5,247

 
4,696

Restructuring costs (Note 2)
 
300

 
928

 
 
246,812

 
267,113

 
 
 
 
 
Operating Income
 
35,695

 
29,808

 
 
 
 
 
Interest Income
 
150

 
346

Interest Expense
 
(701
)
 
(766
)
 
 
 
 
 
Income from Continuing Operations Before Provision for Income Taxes
 
35,144

 
29,388

Provision for Income Taxes (Note 4)
 
10,964

 
9,468

 
 
 
 
 
Income from Continuing Operations
 
24,180

 
19,920

Income (Loss) from Discontinued Operation (net of income tax (provision) benefit of $(36) and $11)
 
56

 
(18
)
 
 
 
 
 
Net Income
 
24,236

 
19,902

 
 
 
 
 
Net Income Attributable to Noncontrolling Interest
 
(232
)
 
(344
)
 
 
 
 
 
Net Income Attributable to Kadant
 
$
24,004

 
$
19,558

 
 
 
 
 
Amounts Attributable to Kadant:
 
 

 
 

Income from Continuing Operations
 
$
23,948

 
$
19,576

Income (Loss) from Discontinued Operation
 
56

 
(18
)
Net Income Attributable to Kadant
 
$
24,004

 
$
19,558

 
 
 
 
 
Earnings per Share from Continuing Operations Attributable to Kadant (Note 3):
 
 

 
 

Basic
 
$
2.20

 
$
1.78

Diluted
 
$
2.15

 
$
1.74

 
 
 
 
 
Earnings per Share Attributable to Kadant (Note 3):
 
 

 
 

Basic
 
$
2.20

 
$
1.77

Diluted
 
$
2.16

 
$
1.74

 
 
 
 
 
Weighted Average Shares (Note 3):
 
 

 
 

Basic
 
10,900

 
11,026

Diluted
 
11,119

 
11,231

 
 
 
 
 
Cash Dividends Declared per Common Share
 
$
0.51

 
$
0.45


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
 
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
 
$
8,710

 
$
6,733

 
$
24,236

 
$
19,902

 
 
 
 
 
 
 
 
 
Other Comprehensive Items:
 
 

 
 

 
 

 
 

Foreign Currency Translation Adjustment
 
(6,263
)
 
(7,474
)
 
(16,101
)
 
(7,652
)
Pension and Other Post-Retirement Liability Adjustments (net of tax provision of $66 and $221 in the three and nine months ended October 3, 2015, respectively, and $57 and $118 in the three and nine months ended September 27, 2014, respectively)
 
124

 
105

 
412

 
215

Deferred Gain (Loss) on Hedging Instruments (net of tax (benefit) provision of ($43) and $35 in the three and nine months ended October 3, 2015, respectively, and $41 and $93 in the three and nine months ended September 27, 2014, respectively)
 
97

 
(66
)
 
17

 
(73
)
Other Comprehensive Items
 
(6,042
)
 
(7,435
)
 
(15,672
)
 
(7,510
)
Comprehensive Income (Loss)
 
2,668

 
(702
)
 
8,564

 
12,392

Comprehensive Income Attributable to Noncontrolling Interest
 
(78
)
 
(8
)
 
(137
)
 
(259
)
Comprehensive Income (Loss) Attributable to Kadant
 
$
2,590

 
$
(710
)
 
$
8,427

 
$
12,133


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
 
 
October 3,
2015
 
September 27,
2014
(In thousands)
 
 
 
 
 
 
 
Operating Activities:
 
 
 
 
Net income attributable to Kadant
 
$
24,004

 
$
19,558

Net income attributable to noncontrolling interest
 
232

 
344

(Income) loss from discontinued operation
 
(56
)
 
18

Income from continuing operations
 
24,180

 
19,920

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

 
 

Depreciation and amortization
 
8,247

 
8,558

Stock-based compensation expense
 
4,495

 
4,251

Tax benefits from stock-based compensation awards
 
(875
)
 
(711
)
Provision for losses on accounts receivable
 
205

 
283

Loss (gain) on the sale of property, plant, and equipment
 
3

 
(158
)
Other items, net
 
(91
)
 
1,184

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

 
 

Accounts receivable
 
(2,052
)
 
935

Unbilled contract costs and fees
 
(2,601
)
 
(1,414
)
Inventories
 
(16,045
)
 
3,189

Other current assets
 
(1,529
)
 
(272
)
Accounts payable
 
813

 
459

Other current liabilities
 
11,641

 
(5,012
)
Net cash provided by continuing operations
 
25,581

 
30,402

Net cash (used in) provided by discontinued operation
 
(36
)
 
2

Net cash provided by operating activities
 
25,545

 
30,404

 
 
 
 
 
Investing Activities:
 
 

 
 

Acquisitions, net of cash acquired
 

 
(2,974
)
Purchases of property, plant, and equipment
 
(4,068
)
 
(3,145
)
Proceeds from sale of property, plant, and equipment
 
33

 
231

Net cash used in continuing operations for investing activities
 
(4,035
)
 
(5,888
)
 
 
 
 
 
Financing Activities:
 
 

 
 

Proceeds from issuance of long-term obligations
 
20,000

 
15,401

Repayments of short-and long-term obligations
 
(16,486
)
 
(30,709
)
Purchases of Company common stock
 
(8,920
)
 
(13,159
)
Dividends paid
 
(5,346
)
 
(4,706
)
Proceeds from issuance of Company common stock
 
285

 
639

Change in restricted cash
 
(368
)
 
(437
)
Tax benefits from stock-based compensation awards
 
875

 
711

Net cash used in continuing operations for financing activities
 
(9,960
)
 
(32,260
)
 
 
 
 
 
Exchange Rate Effect on Cash and Cash Equivalents from Continuing Operations
 
(786
)
 
(1,167
)
 
 
 
 
 
Increase (Decrease) in Cash and Cash Equivalents from Continuing Operations
 
10,764

 
(8,911
)
Cash and Cash Equivalents at Beginning of Period
 
45,378

 
50,032

Cash and Cash Equivalents at End of Period
 
$
56,142

 
$
41,121


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 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 3, 2015
 
14,624,159

 
$
146

 
$
98,769

 
$
270,249

 
3,760,019

 
$
(87,727
)
 
$
(17,146
)
 
$
1,168

 
$
265,459

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 
24,004

 

 

 

 
232

 
24,236

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends declared
 

 

 

 
(5,549
)
 

 

 

 

 
(5,549
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Activity under stock plans
 

 

 
(373
)
 

 
(120,427
)
 
2,818

 

 

 
2,445

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax benefits related to employees' and directors' stock plans
 

 

 
875

 

 

 

 

 

 
875

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases of Company common stock
 

 

 

 

 
204,760

 
(8,920
)
 

 

 
(8,920
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive items
 

 

 

 

 

 

 
(15,577
)
 
(95
)
 
(15,672
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at October 3, 2015
 
14,624,159

 
$
146

 
$
99,271

 
$
288,704

 
3,844,352

 
$
(93,829
)
 
$
(32,723
)
 
$
1,305

 
$
262,874


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. (collectively, "we," "Kadant," "the Company," or "the Registrant") was incorporated in Delaware in November 1991 and currently trades on the New York Stock Exchange under the ticker symbol "KAI."

The Company and its subsidiaries' 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 machines used in papermaking and other process industries; and cleaning and filtration systems essential for draining, filtering, 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 October 3, 2015 and its results of operations, comprehensive income, cash flows, and stockholders' equity, for the three and nine month periods ended October 3, 2015 and September 27, 2014. 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 January 3, 2015 has been derived from the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended January 3, 2015. 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 January 3, 2015, 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 first three fiscal quarters and on the Saturday closest to December 31 for the Company's fourth fiscal quarter and fiscal year. As a result of the difference between the fiscal and calendar periods, a 53rd week is added to the Company's fiscal year every five or six years. In a 53-week fiscal year, the Company's fourth fiscal quarter contains 14 weeks. The Company's fiscal year ended January 3, 2015 (fiscal 2014) contained 53 weeks and the Company's fiscal year ending January 2, 2016 (fiscal 2015) contains 52 weeks. Each quarter of fiscal 2014 and 2015 contains 13 weeks, except the fourth quarter of 2014, which contained 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 January 3, 2015.

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.

Although the Company makes every effort to ensure the accuracy of the estimates and assumptions used in the preparation of its condensed consolidated financial statements and in the application of accounting policies, if business conditions were different, or if the Company were to use different estimates and assumptions, it is possible that materially different amounts could be reported in the Company's condensed consolidated financial statements.

Supplemental Cash Flow Information
 
 
Nine Months Ended
(In thousands)
 
October 3,
2015
 
September 27,
2014
 
 
 
 
 
Non-Cash Investing Activities:
 
 
 
 
Fair Value of Assets Acquired
 
$

 
$
5,635

Cash Paid for Acquired Businesses
 

 
(3,648
)
Liabilities Assumed of Acquired Businesses
 
$

 
$
1,987

Non-Cash Financing Activities:
 
 

 
 

Issuance of Company Common Stock
 
$
3,195

 
$
2,957

Dividends Declared but Unpaid
 
$
1,833

 
$
1,634


Certain reclassifications have been made to prior periods to conform with current reporting. On the condensed consolidated statement of cash flows the tax benefits from stock-based compensation awards within operating activities have been reclassified from other items, net and are now presented separately.

Restricted Cash
As of October 3, 2015 and January 3, 2015, the Company had restricted cash of $724,000 and $415,000, 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 $6,470,000 and $6,334,000 at October 3, 2015 and January 3, 2015, respectively, are included in accounts receivable in the accompanying condensed consolidated balance sheet until the subsidiary sells the drafts to a bank and receives

10


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

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


a discounted amount, transfers the banker's acceptance drafts in settlement of accounts payable prior to maturity, or obtains cash payment on the scheduled maturity dates.

Inventories
The components of inventories are as follows:
 
 
October 3,
2015
 
January 3,
2015
(In thousands)
 
 
 
 
 
 
 
Raw Materials and Supplies
 
$
24,781

 
$
24,403

Work in Process
 
18,093

 
11,259

Finished Goods
 
24,658

 
19,561

 
 
$
67,532

 
$
55,223


Intangible Assets, Net
Acquired intangible assets are as follows:
 
 
October 3,
2015
 
January 3,
2015
(In thousands)
 
 
 
 
 
 
 
Indefinite-Lived Intangible Asset
 
$
8,100

 
$
8,100

 
 
 
 
 
Definite-Lived Intangible Assets, Gross
 
$
77,052

 
$
77,052

Accumulated Amortization
 
(39,772
)
 
(35,901
)
Currency Translation
 
(5,447
)
 
(2,297
)
Definite-Lived Intangible Assets, Net
 
$
31,833

 
$
38,854

 
 
 
 
 
Total Intangible Assets, Net
 
$
39,933

 
$
46,954


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

The changes in the carrying amount of accrued warranty costs included in other current liabilities in the accompanying condensed consolidated balance sheet are as follows:
 
 
Nine Months Ended
(In thousands)
 
October 3,
2015
 
September 27,
2014
 
 
 
 
 
Balance at beginning of period
 
$
3,875

 
$
4,571

Provision
 
1,625

 
1,681

Usage
 
(1,813
)
 
(2,016
)
Currency translation
 
(226
)
 
(190
)
Balance at end of period
 
$
3,461

 
$
4,046



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. The Company adopted this ASU in the first quarter of 2015 and it did not have an impact on the Company's consolidated financial position, results of operations or cash flows.

Revenue from Contracts with Customers (Topic 606) Section A-Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40). In May 2014, the FASB issued ASU No. 2014-09, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new guidance is effective for the Company beginning in fiscal 2018. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

Compensation-Stock Compensation (Topic 718) Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. In June 2014, the FASB issued ASU No. 2014-12, which clarifies the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. Under the new guidance, a performance target that affects vesting and could be achieved after completion of the service period should be treated as a performance condition under FASB 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 adoption 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.

Income Statement-Extraordinary and Unusual Items (Subtopic 225-20), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. In January 2015, the FASB issued ASU No. 2015-01, which eliminates the concept of extraordinary items in an entity’s income statement. Extraordinary classification of an item outside of income from continuing operations was previously considered only when evidence clearly supported its classification as an extraordinary item. Extraordinary items were events and transactions that were distinguished by their unusual nature and by the infrequency of their occurrence. The ASU eliminates the need to separately classify, present, and disclose extraordinary events. The disclosure of events or transactions that are unusual or infrequent in nature will be included in other guidance. This new guidance is effective for the Company beginning in fiscal 2016. 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.

12


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

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


Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. In April 2015, the FASB issued ASU No. 2015-03, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. This new disclosure guidance is effective for the Company beginning in fiscal 2016. Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.

Compensation-Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets. In April 2015, the FASB issued ASU No. 2015-04, which provides a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan. If a contribution or significant event (such as a plan amendment, settlement, or curtailment that calls for a remeasurement in accordance with existing requirements) occurs between the month-end date used to measure defined benefit plan assets and obligations and an entity’s fiscal year-end, the entity should adjust the measurement of defined benefit plan assets and obligations to reflect the effects of those contributions or significant events. However, an entity should not adjust the measurement of defined benefit plan assets and obligations for other events that occur between the month-end measurement and the entity’s fiscal year-end that are not caused by the entity (for example, changes in market prices or interest rates). This new guidance is effective for the Company beginning in fiscal 2016. 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.

Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. In April 2015, the FASB issued ASU No. 2015-05, which provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This new guidance is effective for the Company beginning in fiscal 2016. Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.

Inventory (Topic 330), Simplifying the Measurement of Inventory. In July 2015, the FASB issued ASU No. 2015-11, which requires that an entity measure inventory within the scope of this ASU at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Substantial and unusual losses that result from subsequent measurement of inventory should be disclosed in the financial statements. This new guidance is effective for the Company beginning in fiscal 2017. The Company is currently evaluating the effect that adoption of ASU No. 2015-11 will have on the Company's consolidated financial position, results of operations or cash flows.

Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments. In September 2015, the FASB issued ASU No. 2015-16, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer is required to record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition, an entity is required to present, separately on the face of the income statement or through disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This new guidance is effective for the Company beginning in fiscal 2016. Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.






13


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

2.    Restructuring Costs

In the first nine months of 2015, the Company's Papermaking Systems segment recorded restructuring costs of $300,000 for severance costs associated with the reduction of nine employees in Canada and Sweden. These actions were taken to streamline the Company's operations in those locations.

In the first nine months of 2014, the Company's Papermaking Systems segment recorded total restructuring costs of $928,000, including facility-related costs of $553,000 and severance and associated costs of $375,000.

A summary of the changes in accrued restructuring costs are as follows:
(In thousands) 
 
Severance
Costs
 
 
 

 
 
Balance at January 3, 2015
 
$
103

Provision
 
300

Usage
 
(194
)
Currency translation
 
(15
)
Balance at October 3, 2015
 
$
194


The Company expects to pay the remaining accrued restructuring costs by the end of 2015.

3.    Earnings per Share

Basic and diluted earnings per share are calculated as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
(In thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
 
Amounts Attributable to Kadant:
 
 
 
 
 
 
 
 
Income from Continuing Operations
 
$
8,647

 
$
6,651

 
$
23,948

 
$
19,576

(Loss) Income from Discontinued Operation
 
(4
)
 
(4
)
 
56

 
(18
)
Net Income
 
$
8,643

 
$
6,647

 
$
24,004

 
$
19,558

 
 
 
 
 
 
 
 
 
Basic Weighted Average Shares
 
10,861

 
10,898

 
10,900

 
11,026

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

 
235

 
219

 
205

Diluted Weighted Average Shares
 
11,096

 
11,133

 
11,119

 
11,231

 
 
 
 
 
 
 
 
 
Basic Earnings per Share:
 
 

 
 

 
 

 
 

Continuing Operations
 
$
0.80

 
$
0.61

 
$
2.20

 
$
1.78

Discontinued Operation
 
$

 
$

 
$
0.01

 
$

Net Income per Basic Share
 
$
0.80

 
$
0.61

 
$
2.20

 
$
1.77

 
 
 
 
 
 
 
 
 
Diluted Earnings per Share:
 
 

 
 

 
 

 
 

Continuing Operations
 
$
0.78

 
$
0.60

 
$
2.15

 
$
1.74

Discontinued Operation
 
$

 
$

 
$
0.01

 
$

Net Income per Diluted Share
 
$
0.78

 
$
0.60

 
$
2.16

 
$
1.74


Unvested restricted stock units equivalent to approximately 5,000 and 6,000 shares of common stock for the third quarters of 2015 and 2014, respectively, and approximately 31,000 and 44,000 shares of common stock for the first nine months



14


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

3.    Earnings per Share (continued)



of 2015 and 2014, 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.

4.    Provision for Income Taxes

The provision for income taxes was $10,964,000 and $9,468,000, in the first nine months of 2015 and 2014, respectively, and represented 31% and 32% of pre-tax income. The effective tax rate of 31% in the first nine months of 2015 was lower than the Company's statutory tax rate primarily due to the distribution of the Company's worldwide earnings and an adjustment to increase deferred tax assets, which was offset in part by an increase in non-deductible expenses, state tax expense, and the U.S. tax cost of foreign operations. 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.

5.    Short- and Long-Term Obligations

Short- and long-term obligations are as follows:
 
 
October 3,
2015
 
January 3,
2015
(In thousands)
 
 
 
 
 
 
 
Revolving Credit Facility, due 2018
 
$
24,000

 
$
20,000

Variable Rate Term Loan, due from 2015 to 2016
 
5,375

 
5,750

Borrowings Under Overdraft
 

 
111

Total Short- and Long-Term Obligations
 
29,375

 
25,861

Less: Short-Term Obligations
 
(5,375
)
 
(611
)
Long-Term Obligations
 
$
24,000

 
$
25,250


The weighted average interest rate for the Company's long-term obligations was 2.61% as of October 3, 2015.

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 $24,000,000 of borrowings outstanding under the 2012 Credit Agreement at October 3, 2015.

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,

15


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

5.    Short- and Long-Term Obligations (continued)



and certain actions related to the discontinued operation. As of October 3, 2015, 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 October 3, 2015, the Company had $73,874,000 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.

6.    Stock-Based Compensation

The Company recognized stock-based compensation expense of $1,254,000 and $1,440,000 in the third quarters of 2015 and 2014, respectively, and $4,495,000 and $4,251,000 in the first nine months of 2015 and 2014, respectively, within selling, general, and administrative (SG&A) expenses in the accompanying condensed consolidated statement of income. The Company recognizes compensation cost for all stock-based awards granted to employees and directors based on the grant date estimate of fair value for those awards. The fair value of restricted stock units (RSUs) is based on the grant date trading price of the Company's common stock, reduced by the present value of estimated dividends foregone during the requisite service period. For time-based RSUs, compensation expense is recognized ratably over the requisite service period for the entire award net of forfeitures. For performance-based RSUs, compensation expense is recognized ratably over the requisite service period for each separately vesting portion of the award net of forfeitures and remeasured at each reporting period until the total number of RSUs to be issued is known. Unrecognized compensation expense related to stock-based compensation totaled approximately $4,998,000 at October 3, 2015, and will be recognized over a weighted average period of 1.7 years.

7.    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 under "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 under "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 under "Other Benefits").

The components of the net periodic benefit cost for the pension benefits and other benefits plans are as follows:
 
 
Three Months Ended 
 October 3, 2015
 
Three Months Ended 
 September 27, 2014
(In thousands)
 
Pension
Benefits
 
Other
Benefits
 
Pension
Benefits
 
Other
Benefits
 
 
 
 
 
 
 
 
 
Components of Net Periodic Benefit Cost:
 
 
 
 
 
 
 
 
Service cost
 
$
211

 
$
55

 
$
213

 
$
73

Interest cost
 
307

 
62

 
321

 
74

Expected return on plan assets
 
(356
)
 
(10
)
 
(370
)
 
(12
)
Recognized net actuarial loss
 
127

 
17

 
79

 
9

Amortization of prior service cost
 
15

 
22

 
14

 
22

Net periodic benefit cost
 
$
304

 
$
146

 
$
257

 
$
166

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

 
 
 
 
 
 
 
 
 
Discount rate
 
3.87
%
 
3.72
%
 
4.79
%
 
4.28
%
Expected long-term return on plan assets
 
5.25
%
 

 
5.75
%
 

Rate of compensation increase
 
3.00
%
 
2.98
%
 
3.50
%
 
3.23
%

16


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

7.    Employee Benefit Plans (continued)



 
 
Nine Months Ended 
 October 3, 2015
 
Nine Months Ended 
 September 27, 2014
(In thousands)
 
Pension
Benefits
 
Other
Benefits
 
Pension
Benefits
 
Other
Benefits
 
 
 
 
 
 
 
 
 
Components of Net Periodic Benefit Cost:
 
 
 
 
 
 
 
 
Service cost
 
$
633

 
$
167

 
$
639

 
$
223

Interest cost
 
921

 
190

 
963

 
220

Expected return on plan assets
 
(1,068
)
 
(31
)
 
(1,110
)
 
(36
)
Recognized net actuarial loss
 
381

 
52

 
237

 
27

Amortization of prior service cost
 
42

 
68

 
42

 
67

Net periodic benefit cost
 
$
909

 
$
446

 
$
771

 
$
501

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

 
 
 
 
 
 
 
 
 
Discount rate
 
3.87
%
 
3.74
%
 
4.79
%
 
4.28
%
Expected long-term return on plan assets
 
5.25
%
 

 
5.75
%
 

Rate of compensation increase
 
3.00
%
 
2.99
%
 
3.50
%
 
3.23
%
    
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 2015 and expects to make cash contributions of $270,000 over the remainder of 2015. 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.

8.    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.

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 January 3, 2015
 
$
(7,371
)
 
$
(589
)
 
$
(8,394
)
 
$
(792
)
 
$
(17,146
)
Other comprehensive (loss) income before reclassifications
 
(16,006
)
 
3

 
57

 
1,325

 
(14,621
)
Reclassifications from AOCI
 

 
70

 
282

 
(1,308
)
 
(956
)
Net current period other comprehensive  (loss) income
 
(16,006
)
 
73

 
339

 
17

 
(15,577
)
Balance at October 3, 2015
 
$
(23,377
)
 
$
(516
)
 
$
(8,055
)
 
$
(775
)
 
$
(32,723
)
 
 
 
 
 
 
 
 
 
 
 
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
)

17


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

8.    Accumulated Other Comprehensive Items (continued)



Amounts reclassified out of AOCI are as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
Statement of Income
(In thousands)
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
 
Line Item
Pension and Other Post-Retirement Plans: (1)
 
 
 
 
 
 
 
      
Amortization of prior service cost
 
$
(37
)
 
$
(36
)
 
$
(110
)
 
$
(109
)
 
SG&A expenses
Amortization of actuarial losses
 
(144
)
 
(88
)
 
(433
)
 
(264
)
 
SG&A expenses
Total expense before income taxes
 
(181
)
 
(124
)
 
(543
)
 
(373
)
 
 
Income tax benefit
 
64

 
28

 
191

 
115

 
Provision for income taxes
 
 
(117
)
 
(96
)
 
(352
)
 
(258
)
 
 
Cash Flow Hedges: (2)
 
 

 
 

 
 

 
 

 
      
Interest rate swap agreements
 
(106
)
 
(83
)
 
(317
)
 
(251
)
 
Interest expense
Forward currency-exchange contracts
 

 
31

 

 
31

 
Revenues
Forward currency-exchange contracts
 
237

 
701

 
1,743

 
423

 
SG&A expenses
Total income before income taxes
 
131

 
649

 
1,426

 
203

 
 
Benefit (provision) for income taxes
 
6

 
(74
)
 
(118
)
 
23

 
Provision for income taxes
 
 
137

 
575

 
1,308

 
226

 
 
Total reclassifications
 
$
20

 
$
479

 
$
956

 
$
(32
)
 
 

(1)
Included in the computation of net periodic benefit costs. See Note 7 for additional information.
(2)
See Note 9 for additional information.

9.    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.


18


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

9.    Derivatives (continued)


Interest Rate Swaps
On January 16, 2015, the Company entered into a swap agreement (2015 Swap Agreement) to hedge its exposure to movements in the three-month LIBOR rate on outstanding debt. The 2015 Swap Agreement expires on March 27, 2020 and has a $10,000,000 notional value. Under the 2015 Swap Agreement, on a quarterly basis, the Company receives a three-month LIBOR rate and pays a fixed rate of interest of 1.50% plus an applicable margin. The Company has designated the 2015 Swap Agreement as a cash flow hedge.

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 2006 Swap Agreement matures in 2016, has the same terms and quarterly payment dates as the corresponding debt, and reduces proportionately in line with the amortization of the 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 these instruments as of October 3, 2015 is included in other current and other long-term liabilities, with an offset to AOCI (net of tax) in the accompanying condensed consolidated balance sheet. The Company has structured the interest rate swap agreements to be 100% effective and as a result, there is no current impact to earnings resulting from hedge ineffectiveness. Management believes that any credit risk associated with the outstanding swap agreements is remote based on the Company's financial position and the creditworthiness of the financial institution issuing the swap agreements.

The counterparty to the swap agreements could demand an early termination of the swap agreements if the Company is in default under the 2012 Credit Agreement, or any agreement that amends or replaces the 2012 Credit Agreement in which the counterparty is a member, and the Company is unable to cure the default. An event of default under the 2012 Credit Agreement includes customary events of default and failure to comply with financial covenants, including a maximum consolidated leverage ratio of 3.5 to 1, and a minimum consolidated interest coverage ratio of 3 to 1. As of October 3, 2015, the Company was in compliance with these covenants. The net unrealized loss of $295,000 as of October 3, 2015, represents the estimated amount that the Company would pay to the counter-party in the event of an early termination.
Forward Currency-Exchange Contracts
The Company uses forward currency-exchange contracts primarily to hedge exposures resulting from fluctuations in currency exchange rates. Such exposures result primarily from portions of the Company's operations and assets and liabilities that are denominated in currencies other than the functional currencies of the businesses conducting the operations or holding the assets and liabilities. The Company typically manages its level of exposure to the risk of currency-exchange fluctuations by hedging a portion of its currency exposures anticipated over the ensuing 24-month period, using forward currency-exchange contracts that have maturities of 24 months or less.

Forward currency-exchange contracts that hedge forecasted foreign currency exposures are designated as cash flow hedges. The fair values for these instruments are included in other current assets and other assets for unrecognized gains and in other current liabilities and other long-term liabilities for unrecognized losses, with an offset in accumulated other comprehensive items (net of tax). For forward currency-exchange contracts that are designated as fair value hedges, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item are recognized currently in earnings. The fair values of forward currency-exchange contracts that are not designated as hedges are recorded currently in earnings.

The Company recognized a gain of $46,000 and a loss of $2,000 in the third quarters of 2015 and 2014, respectively, and gains of $53,000 and $34,000 in the first nine months of 2015 and 2014, respectively, included in SG&A expenses, associated with forward currency-exchange contracts that were not designated as hedges. Management believes that any credit risk associated with forward currency-exchange contracts is remote based on the Company's financial position and the creditworthiness of the financial institutions issuing the contracts.


19


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

9.    Derivatives (continued)


The following table summarizes the fair values of the Company's derivative instruments designated and not designated as hedging instruments, the notional values of the associated derivative contracts, and the location of these instruments in the condensed consolidated balance sheet:
 
 
 
 
October 3, 2015
 
January 3, 2015
 
 
Balance Sheet Location
 
Asset (Liability) (a)
 
Notional Amount (b)
 
Asset (Liability) (a)
 
Notional Amount
(In thousands)
 
 
 
 
 
Derivatives Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
Derivatives in an Asset Position:
 
 
 
 
 
 
 
 
 
 
Forward currency-exchange contracts
 
Other Current Assets
 
$
1,997

 
$
14,907

 
$

 
$

Forward currency-exchange contracts
 
Other Assets
 
$
279

 
$
1,513

 
$
775

 
$
17,012

Derivatives in a Liability Position:
 
 
 
 
 
 
 
 
 
 
Forward currency-exchange contracts
 
Other Current Liabilities
 
$
(41
)
 
$
2,718

 
$