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EX-31.1 - KAI FORM 10-Q 2Q 2018 EXHIBIT 31.1 - KADANT INCkaiform10q2q2018exhibit311.htm
EX-32 - KAI FORM 10-Q 2Q 2018 EXHIBIT 32 - KADANT INCkaiform10q2q2018exhibit32.htm
EX-31.2 - KAI FORM 10-Q 2Q 2018 EXHIBIT 31.2 - KADANT INCkaiform10q2q2018exhibit312.htm
EX-10.1 - KAI FORM 10-Q 2Q 2018 EXHIBIT 10.1 - KADANT INCkaiform10q2q2018exhibit101.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 June 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to _________

Commission file number 001-11406

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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
 
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨    No 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 July 27, 2018
Common Stock, $.01 par value
 
11,098,493



Kadant Inc.
Quarterly Report on Form 10-Q
for the Period Ended June 30, 2018
Table of Contents

 
 
Page
PART I: Financial Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II: Other Information
 
 
 
 
 
 



PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Statements

KADANT INC.
Condensed Consolidated Balance Sheet
(Unaudited)
 
 
June 30,
2018
 
December 30,
2017
(In thousands, except share and per share amounts)
 
 
Assets
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
60,177

 
$
75,425

Restricted cash (Note 1)
 
975

 
1,421

Accounts receivable, less allowances of $3,120 and $2,879 (Note 1)
 
88,223

 
89,624

Inventories (Note 1)
 
96,261

 
84,933

Unbilled revenues
 
2,183

 
2,374

Other current assets
 
15,397

 
12,246

Total Current Assets
 
263,216

 
266,023

 
 
 
 
 
Property, Plant, and Equipment, at Cost
 
167,382

 
165,231

Less: accumulated depreciation and amortization
 
87,495

 
85,508

Property, Plant, and Equipment, at Cost, Net
 
79,887

 
79,723

 
 
 
 
 
Other Assets
 
14,353

 
14,311

Intangible Assets, Net (Note 1)
 
122,242

 
133,036

Goodwill (Note 1)
 
261,488

 
268,001

Total Assets
 
$
741,186

 
$
761,094

 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
Current Liabilities:
 
 
 
 
Current maturities of long-term obligations (Note 5)
 
$
665

 
$
696

Accounts payable
 
35,069

 
35,461

Customer deposits
 
41,601

 
30,103

Accrued payroll and employee benefits
 
25,500

 
29,616

Advanced billings
 
11,463

 
7,316

Other current liabilities
 
26,487

 
29,038

Total Current Liabilities
 
140,785

 
132,230

 
 
 
 
 
Long-Term Obligations (Notes 5 and 13)
 
206,231

 
241,384

Long-Term Deferred Income Taxes
 
26,484

 
29,085

Other Long-Term Liabilities
 
26,001

 
25,891

 
 
 
 
 
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
 
101,842

 
103,221

Retained earnings
 
361,262

 
342,893

Treasury stock at cost, 3,528,550 and 3,613,838 shares
 
(86,464
)
 
(88,554
)
Accumulated other comprehensive items (Note 8)
 
(36,853
)
 
(26,715
)
Total Kadant Stockholders' Equity
 
339,933

 
330,991

Noncontrolling interest
 
1,752

 
1,513

Total Stockholders' Equity
 
341,685

 
332,504

Total Liabilities and Stockholders' Equity
 
$
741,186

 
$
761,094


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
 
Six Months Ended
 
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
(In thousands, except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues (Notes 1 and 11)
 
$
154,913

 
$
110,242

 
$
304,106

 
$
213,099

 
 
 
 
 
 
 
 
 
Costs and Operating Expenses:
 
 

 
 

 
 
 
 
Cost of revenues
 
86,749

 
57,390

 
169,863

 
111,230

Selling, general, and administrative expenses
 
45,132

 
38,970

 
90,908

 
73,590

Research and development expenses
 
2,728

 
2,222

 
5,597

 
4,369

Restructuring costs (Note 2)
 
569

 

 
1,339

 

 
 
135,178

 
98,582

 
267,707

 
189,189

 
 
 
 
 
 
 
 
 
Operating Income
 
19,735

 
11,660

 
36,399

 
23,910

 
 
 
 
 
 
 
 
 
Interest Income
 
122

 
102

 
305

 
206

Interest Expense
 
(1,850
)
 
(392
)
 
(3,582
)
 
(740
)
Other Expense, Net (Note 7)
 
(245
)
 
(217
)
 
(491
)
 
(421
)
 
 
 
 
 
 
 
 
 
Income Before Provision for Income Taxes
 
17,762

 
11,153

 
32,631

 
22,955

Provision for Income Taxes (Note 4)
 
5,271

 
2,955

 
9,132

 
5,690

 
 
 
 
 
 
 
 
 
Net Income
 
12,491

 
8,198

 
23,499

 
17,265

 
 
 
 
 
 
 
 
 
Net Income Attributable to Noncontrolling Interest
 
(142
)
 
(102
)
 
(292
)
 
(218
)
 
 
 
 
 
 
 
 
 
Net Income Attributable to Kadant
 
$
12,349

 
$
8,096

 
$
23,207

 
$
17,047

 
 
 
 
 
 
 
 
 
Earnings per Share Attributable to Kadant (Note 3):
 
 

 
 

 
 
 
 
Basic
 
$
1.11

 
$
0.74

 
$
2.10

 
$
1.55

Diluted
 
$
1.08

 
$
0.72

 
$
2.04

 
$
1.52

 
 
 
 
 
 
 
 
 
Weighted Average Shares (Note 3):
 
 

 
 

 
 
 
 
Basic
 
11,092

 
11,001

 
11,067

 
10,976

Diluted
 
11,400

 
11,296

 
11,371

 
11,250

 
 
 
 
 
 
 
 
 
Cash Dividends Declared per Common Share
 
$
0.22

 
$
0.21

 
$
0.44

 
$
0.42


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






4


KADANT INC.
Condensed Consolidated Statement of Comprehensive (Loss) Income
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
 
$
12,491

 
$
8,198

 
$
23,499

 
$
17,265

 
 
 
 
 
 
 
 
 
Other Comprehensive Items:
 
 

 
 

 
 

 
 

Foreign currency translation adjustment
 
(15,776
)
 
8,655

 
(10,440
)
 
13,687

Pension and other post-retirement liability adjustments (net of tax provision of $75, $11, $109 and $60)
 
212

 
81

 
329

 
163

Deferred (loss) gain on cash flow hedges (net of tax (benefit) provision of ($55), $1, ($47) and $16)
 
(173
)
 
7

 
(80
)
 
34

Other Comprehensive Items
 
(15,737
)
 
8,743

 
(10,191
)
 
13,884

Comprehensive (Loss) Income
 
(3,246
)
 
16,941

 
13,308

 
31,149

Comprehensive Income Attributable to Noncontrolling Interest
 
(46
)
 
(219
)
 
(239
)
 
(381
)
Comprehensive (Loss) Income Attributable to Kadant
 
$
(3,292
)
 
$
16,722

 
$
13,069

 
$
30,768


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

5


KADANT INC.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
 
 
Six Months Ended
 
 
June 30,
2018
 
July 1,
2017
(In thousands)
 
 
 
 
 
 
 
Operating Activities
 
 
 
 
Net income attributable to Kadant
 
$
23,207

 
$
17,047

Net income attributable to noncontrolling interest
 
292

 
218

Net income
 
23,499

 
17,265

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
11,943

 
6,531

Stock-based compensation expense
 
3,610

 
2,736

Provision for losses on accounts receivable
 
438

 
84

Loss on the sale of property, plant, and equipment
 
54

 
30

Other items, net
 
(869
)
 
2,161

Contributions to U.S. pension plan
 

 
(540
)
Changes in current assets and liabilities, net of effects of acquisitions:
 
 

 
 

Accounts receivable
 
(974
)
 
(476
)
Unbilled revenues
 
2,228

 
(2,968
)
Inventories
 
(14,238
)
 
(6,147
)
Other current assets
 
(2,781
)
 
(2,652
)
Accounts payable
 
4,039

 
3,363

Other current liabilities
 
8,622

 
5,989

Net cash provided by operating activities
 
35,571

 
25,376

 
 
 
 
 
Investing Activities
 
 

 
 

Purchases of property, plant, and equipment
 
(10,211
)
 
(3,435
)
Proceeds from sale of property, plant, and equipment
 
213

 
50

Acquisition
 

 
(165
)
Net cash used in investing activities
 
(9,998
)
 
(3,550
)
 
 
 
 
 
Financing Activities
 
 

 
 

Repayment of debt
 
(46,838
)
 
(11,235
)
Proceeds from issuance of debt
 
16,000

 
8,000

Dividends paid
 
(4,756
)
 
(4,388
)
Tax withholding payments related to stock-based compensation
 
(3,641
)
 
(2,206
)
Proceeds from issuance of Company common stock
 
742

 

Payment of debt issuance costs
 

 
(1,147
)
Other financing activities
 
(258
)
 
(215
)
Net cash used in financing activities
 
(38,751
)
 
(11,191
)
 
 
 
 
 
Exchange Rate Effect on Cash, Cash Equivalents, and Restricted Cash
 
(2,516
)
 
3,777

 
 
 
 
 
(Decrease) Increase in Cash, Cash Equivalents, and Restricted Cash
 
(15,694
)
 
14,412

Cash, Cash Equivalents, and Restricted Cash at Beginning of Period
 
76,846

 
73,569

Cash, Cash Equivalents, and Restricted Cash at End of Period
 
$
61,152

 
$
87,981


See Note 1 – Supplemental Cash Flow Information and Recently Adopted Accounting Pronouncements, Statement of Cash Flows (Topic 230), Restricted Cash for further details.

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

6


KADANT INC.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
(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 31, 2016
 
14,624,159

 
$
146

 
$
101,405

 
$
321,050

 
3,686,532

 
$
(90,335
)
 
$
(49,637
)
 
$
1,650

 
$
284,279

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Net income
 

 

 

 
17,047

 

 

 

 
218

 
17,265

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Dividends declared
 

 

 

 
(4,621
)
 

 

 

 

 
(4,621
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Activity under stock plans
 

 

 
(1,104
)
 

 
(66,694
)
 
1,634

 

 

 
530

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Other comprehensive items
 

 

 

 

 

 

 
13,721

 
163

 
13,884

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at July 1, 2017
 
14,624,159

 
$
146

 
$
100,301

 
$
333,476

 
3,619,838

 
$
(88,701
)
 
$
(35,916
)
 
$
2,031

 
$
311,337

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 30, 2017
 
14,624,159

 
$
146

 
$
103,221

 
$
342,893

 
3,613,838

 
$
(88,554
)
 
$
(26,715
)
 
$
1,513

 
$
332,504

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Net income
 

 

 

 
23,207

 

 

 

 
292

 
23,499

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adoption of ASU No. 2014-09 (Note 1)
 

 

 

 
119

 

 

 

 

 
119

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adoption of ASU No. 2016-16 (Note 1)
 

 

 

 
(75
)
 

 

 

 

 
(75
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Dividends declared
 

 

 

 
(4,882
)
 

 

 

 

 
(4,882
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Activity under stock plans
 

 

 
(1,379
)
 

 
(85,288
)
 
2,090

 

 

 
711

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Other comprehensive items
 

 

 

 

 

 

 
(10,138
)
 
(53
)
 
(10,191
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2018
 
14,624,159

 
$
146

 
$
101,842

 
$
361,262

 
3,528,550

 
$
(86,464
)
 
$
(36,853
)
 
$
1,752

 
$
341,685


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

7

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




1.    Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations
Kadant Inc. was incorporated in Delaware in November 1991 and currently trades on the New York Stock Exchange under the ticker symbol "KAI."
    
Kadant Inc. and its subsidiaries' (collectively, the Company) 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 for the global papermaking, paper recycling, recycling and waste management, and other process industries. The Company's principal products include custom-engineered stock-preparation systems and equipment for the preparation of wastepaper for conversion into recycled paper and balers and related equipment used in the processing of recyclable and waste materials; fluid-handling systems and equipment used in industrial piping systems to compensate for movement and to efficiently transfer fluid, power, and data; doctoring systems and equipment and related consumables important to the efficient operation of paper machines and other industrial processes; and filtration and cleaning systems essential for draining, purifying, and recycling process water and cleaning fabrics, belts, and rolls in various process industries.

Through its Wood Processing Systems segment, the Company develops, manufactures, and markets stranders, debarkers, chippers, and logging machinery used in the harvesting and production of lumber and oriented strand board. Through this segment, the Company also provides refurbishment and repair of pulping equipment for the pulp and paper industry.

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

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 June 30, 2018 and its results of operations and comprehensive (loss) income for the three- and six-month periods ended June 30, 2018 and July 1, 2017, and its cash flows and stockholders' equity for the six-month periods ended June 30, 2018 and July 1, 2017. 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 30, 2017 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 30, 2017. 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 30, 2017, filed with the SEC.

Financial Statement Presentation
Certain reclassifications have been made to prior periods to conform with current reporting. As a result of the adoption of the Financial Accounting Standards Board's (FASB) Accounting Standards Update (ASU) No. 2017-07, Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost, certain components of net benefit cost have been reclassified from operating income to non-operating expenses and included in other expense, net in the condensed consolidated statement of income in the 2017 period. In addition, as a result of the adoption of the FASB's ASU No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash, the change in restricted cash has been reclassified from financing activities and exchange rate effect on cash and included in cash, cash equivalents, and restricted cash in the condensed consolidated statement of cash flows in the 2017 period.
    
    

8

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

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

Effective at the beginning of fiscal 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (Topic 606), using a modified retrospective method. See Recently Adopted Accounting Pronouncements in this note for further discussion. Results for fiscal 2018 are presented under Topic 606, while prior period amounts are not adjusted and are reported under the Company's prior method of reporting revenue recognition in accordance with Accounting Standards Codification (ASC), Revenue Recognition (Topic 605) (Topic 605). The impact on any financial statement line item arising from the application of Topic 606 versus Topic 605 on the Company's results for the second quarter and first six months of 2018 is not material.

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

Critical accounting policies are defined as those that entail significant judgments and estimates, and could potentially result in materially different results under different assumptions and conditions. The Company believes that the most critical accounting policies upon which its financial position depends, and which involve the most complex or subjective decisions or assessments, concern revenue recognition, 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 30, 2017, and in Revenue Recognition and Recently Adopted Accounting Pronouncements, Revenue from Contracts with Customers (Topic 606), in this note.

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 or in the application of accounting policies, if business conditions were different, or if the Company were to use different estimates and assumptions, it is possible that materially different amounts could be reported in the Company's condensed consolidated financial statements.

Supplemental Cash Flow Information
 
 
Six Months Ended
(In thousands)
 
June 30,
2018
 
July 1,
2017
Cash Paid for Interest
 
$
4,268

 
$
366

Cash Paid for Income Taxes, Net of Refunds
 
$
14,808

 
$
7,076

 
 
 
 
 
Non-Cash Investing Activities:
 
 

 
 

Estimated post-closing adjustment (a)
 
$
237

 
$

 
 
 
 
 
Non-cash additions to property, plant and equipment
 
$
1,033

 
$
390

 
 
 
 
 
Non-Cash Financing Activities:
 
 

 
 

Issuance of Company common stock upon vesting of restricted stock units
 
$
3,264

 
$
2,814

Dividends declared but unpaid
 
$
2,442

 
$
2,311


(a) Represents an estimated post-closing purchase price adjustment related to the 2017 acquisition of certain assets of Unaflex, LLC, which is expected to be settled in 2018.

Restricted Cash
The Company's restricted 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. The majority of the bank guarantees will expire over the next twelve months.


9

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

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

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company's condensed consolidated balance sheet that are shown in aggregate in the accompanying condensed consolidated statement of cash flows:
(In thousands)
 
June 30,
2018
 
July 1,
2017
 
December 30,
2017
 
December 31,
2016
Cash and cash equivalents
 
$
60,177

 
$
85,840

 
$
75,425

 
$
71,487

Restricted cash
 
975

 
2,141

 
1,421

 
2,082

Total Cash, Cash Equivalents, and Restricted Cash
 
$
61,152

 
$
87,981

 
$
76,846

 
$
73,569


Banker's Acceptance Drafts included in Accounts Receivable
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 noninterest-bearing obligations of the issuing bank and mature within six months of the origination date. The Company's subsidiaries may 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 $10,735,000 at June 30, 2018 and $15,960,000 at December 30, 2017, are included in accounts receivable in the accompanying condensed consolidated balance sheet until the subsidiary sells the drafts to a bank and receives a discounted amount, transfers the banker's acceptance drafts in settlement of current accounts payable prior to maturity, or obtains cash payment on the scheduled maturity date.

Inventories
The components of inventories are as follows:
 
 
June 30,
2018
 
December 30,
2017
(In thousands)
 
 
Raw Materials and Supplies
 
$
45,522

 
$
38,952

Work in Process
 
24,722

 
18,203

Finished Goods
 
26,017

 
27,778

 
 
$
96,261

 
$
84,933


Intangible Assets, Net
Acquired intangible assets by major asset class are as follows:
(In thousands)
 
Gross
 
Currency
Translation
 
Accumulated
Amortization
 
Net
June 30, 2018
 
 
 
 
 
 
 
 
Definite-Lived
 
 
 
 
 
 
 
 
Customer relationships
 
$
113,283

 
$
(3,058
)
 
$
(33,555
)
 
$
76,670

Product technology
 
46,501

 
(1,351
)
 
(21,733
)
 
23,417

Tradenames
 
5,227

 
(345
)
 
(1,747
)
 
3,135

Other
 
13,744

 
(96
)
 
(11,277
)
 
2,371

 
 
178,755

 
(4,850
)
 
(68,312
)
 
105,593

Indefinite-Lived
 
 
 
 
 
 
 
 
Tradenames
 
16,600

 
49

 

 
16,649

Acquired Intangible Assets
 
$
195,355

 
$
(4,801
)
 
$
(68,312
)
 
$
122,242

 
 
 
 
 
 
 
 
 

10

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

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

(In thousands)
 
Gross
 
Currency
Translation
 
Accumulated
Amortization
 
Net
December 30, 2017
 
 

 
 

 
 

 
 

Definite-Lived
 
 
 
 
 
 
 
 
Customer relationships
 
$
113,301

 
$
(621
)
 
$
(28,789
)
 
$
83,891

Product technology
 
46,501

 
(737
)
 
(19,841
)
 
25,923

Tradenames
 
5,227

 
(262
)
 
(1,504
)
 
3,461

Other
 
13,754

 
(35
)
 
(10,863
)
 
2,856

 
 
178,783

 
(1,655
)
 
(60,997
)
 
116,131

Indefinite-Lived
 
 
 
 
 
 
 
 
Tradenames
 
16,600

 
305

 

 
16,905

Acquired Intangible Assets
 
$
195,383

 
$
(1,350
)
 
$
(60,997
)
 
$
133,036

    
Intangible assets are initially recorded at fair value at the date of acquisition and are stated net of accumulated amortization and currency translation in the accompanying condensed consolidated balance sheet. The Company amortizes definite-lived intangible assets over lives that have been determined based on the anticipated cash flow benefits of the intangible asset.

Goodwill
The changes in the carrying amount of goodwill by segment are as follows:
(In thousands)
 
Papermaking Systems Segment
 
Wood Processing Systems Segment
 
Total
Balance at December 30, 2017
 
 
 
 
 
 
Gross balance
 
$
247,014

 
$
106,496

 
$
353,510

Accumulated impairment losses
 
(85,509
)
 

 
(85,509
)
Net balance
 
161,505

 
106,496

 
268,001

2018 Adjustments
 
 
 
 
 
 
   Acquisitions (a)
 
(282
)
 
(75
)
 
(357
)
   Currency translation
 
(3,280
)
 
(2,876
)
 
(6,156
)
   Total 2018 adjustments
 
(3,562
)
 
(2,951
)
 
(6,513
)
Balance at June 30, 2018
 
 

 
 

 
 

Gross balance
 
243,452

 
103,545

 
346,997

Accumulated impairment losses
 
(85,509
)
 

 
(85,509
)
Net balance
 
$
157,943

 
$
103,545

 
$
261,488

(a) Relates to a purchase price allocation adjustment primarily for inventory valuation and a purchase price adjustment for acquisitions completed in 2017. The purchase price allocations for the Company's 2017 acquisitions were finalized in the second quarter of 2018, except for the purchase price allocation for the August 2017 acquisition of Unaflex, LLC, which will be finalized in the third quarter of 2018.


11

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

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

Warranty Obligations
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:
 
 
Six Months Ended
(In thousands)
 
June 30,
2018
 
July 1,
2017
Balance at December 30, 2017
 
$
5,498

 
$
3,843

Provision charged to expense
 
1,656

 
1,209

Usage
 
(881
)
 
(1,056
)
Currency translation
 
(192
)
 
224

Balance at June 30, 2018
 
$
6,081

 
$
4,220


Revenue Recognition
Effective at the beginning of fiscal 2018, the Company adopted Topic 606, using a modified retrospective method. See Recently Adopted Accounting Pronouncements in this note for further discussion. Results for fiscal 2018 are presented under Topic 606, while prior period amounts are not adjusted and are reported in accordance with Topic 605. The impact on any financial statement line item arising from the application of Topic 606 versus Topic 605 on the Company's results for the second quarter and first six months of 2018 is not material.

Approximately 94% in the second quarter of 2018 and 95% in the first six months of 2018 of the Company’s revenue was recognized at a point in time for each performance obligation under the contract when the customer obtains control of the goods or service. The majority of the Company’s parts and consumables products and capital products with minimal customization are accounted for at a point in time. The Company has made a policy election to not treat the obligation to ship as a separate performance obligation under the contract and, as a result, the associated shipping costs are accrued when revenue is recognized.

The remaining 6% in the second quarter of 2018 and 5% in the first six months of 2018 of the Company’s revenue was recognized on an over time basis based on an input method that compares the costs incurred to date to the total expected costs required to satisfy the performance obligation. Contracts are accounted for on an over time basis when they include products which have no alternative use and an enforceable right to payment over time. The majority of the contracts recognized on an over time basis are for large capital projects within the Company's Stock-Preparation product line and, to a lesser extent, its Fluid-Handling and Doctoring, Cleaning, and Filtration product lines. These projects are highly customized for the customer and, as a result, would include a significant cost to rework in the event of cancellation.

The Company's contracts covering the sale of its products include warranty provisions that provide assurance to its customers that the products will comply with agreed-upon specifications. The Company negotiates the terms regarding warranty coverage and length of warranty depending on the products and applications.


12

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

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

The Company disaggregates its revenue from contracts with customers by product line, product type, and geography as this best depicts how its revenue is affected by economic factors as shown below:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
July 1,
 
June 30,
 
July 1,
(In thousands)
 
2018
 
2017
 
2018
 
2017
Revenues by Product Line:
 
 
 
 
 
 
 
 
Papermaking Systems:
 
 
 
 
 
 
 
 
Stock-Preparation
 
$
56,376

 
$
46,178

 
$
101,859

 
$
87,331

Doctoring, Cleaning, & Filtration
 
29,543

 
27,033

 
56,765

 
52,383

Fluid-Handling
 
32,531

 
22,520

 
65,417

 
44,567

Papermaking Systems
 
$
118,450

 
$
95,731

 
$
224,041

 
$
184,281

Wood Processing Systems
 
33,152

 
11,393

 
72,293

 
21,336

Fiber-based Products
 
3,311

 
3,118

 
7,772

 
7,482

 
 
$
154,913

 
$
110,242

 
$
304,106

 
$
213,099

Revenues by Product Type:
 
 

 
 

 
 

 
 

Parts and Consumables
 
$
94,857

 
$
70,040

 
$
190,842

 
$
140,484

Capital
 
60,056

 
40,202

 
113,264

 
72,615

 
 
$
154,913

 
$
110,242

 
$
304,106

 
$
213,099

Revenues by Geography:
 
 

 
 

 
 

 
 

North America
 
$
75,375

 
$
51,557

 
$
152,991

 
$
101,723

Europe
 
45,032

 
33,952

 
86,525

 
66,703

Asia
 
25,502

 
16,545

 
45,650

 
28,443

Rest of World
 
9,004

 
8,188

 
18,940

 
16,230

 
 
$
154,913

 
$
110,242

 
$
304,106

 
$
213,099


The following table presents revenue by revenue recognition method:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
(In thousands)
 
2018
 
2018
Timing of Revenue Recognition:
 
 

 
 

Point in Time
 
$
145,998

 
$
288,003

Over Time
 
8,915

 
16,103

 
 
$
154,913

 
$
304,106


The following tables present the balances from contracts with customers:
 
 
June 30,
2018
 
December 30,
2017
(In thousands)
 
 
Balances from Contracts with Customers:
 
 
 
 
Accounts receivable
 
$
88,223

 
$
89,624

Contract assets
 
2,183

 
2,374

Contract liabilities
 
54,525

 
38,702


Contract assets represent unbilled revenue associated with revenue recognized on contracts accounted for on an over time basis. Unbilled amounts will be billed in future periods based on the contract terms. Contract liabilities consist of customer deposits and advanced billings in addition to deferred revenue, which is included in other current liabilities in the accompanying condensed consolidated balance sheet. Contract liabilities will be recognized as revenue in future periods once the revenue recognition criteria are met. The majority of the contract liabilities relate to advanced payments on contracts accounted for at a point in time. These advance payments will be recognized as revenue when the Company's performance obligations have been satisfied, which typically occurs when the product has been delivered and control of the asset has

13

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

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

transferred to the customer. The company recognized revenue of $2,788,000 in the second quarter of 2018 and $30,113,000 in the first six months of 2018 that was included in the contract liabilities balance at the beginning of fiscal 2018.

Customers in China will often settle their accounts receivable with a banker's acceptance draft, in which case cash settlement will be delayed until the banker's acceptance draft matures or is settled prior to maturity. For customers outside of China, final payment for the majority of the Company's products is received in the quarter following the product shipment. Certain of the Company's contracts include a longer period before final payment is due, which is typically within one year of final shipment or transfer of control to the customer.
    
Recently Adopted Accounting Pronouncements
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 Company adopted this ASU using the modified retrospective transition approach effective at the beginning of fiscal 2018. The guidance applies to all new contracts initiated in fiscal 2018. For existing contracts that have remaining obligations as of the beginning of fiscal 2018, any difference between the recognition criteria in this ASU and the Company's previous revenue recognition practices under Topic 605 was recognized using a cumulative-effect adjustment that increased retained earnings by $119,000. The increase in retained earnings primarily related to contracts, which meet the over time criteria under the new revenue standard and, as a result, the portion of the contract completed as of the beginning of fiscal 2018 was recognized immediately in retained earnings. Partially offsetting this increase was a reduction of retained earnings associated with certain contracts which were previously accounted for under the percentage-of-completion method of accounting, but do not meet the requirements for over time recognition under Topic 606. Amounts previously recognized in fiscal 2017 based on the percentage-of-completion method of accounting were deferred at the beginning of fiscal 2018 and will be recognized along with the remaining revenue and costs in fiscal 2018 when control of the asset has been transferred to the customer.

The Company has implemented certain modifications to its existing internal controls to support the recognition criteria and disclosure requirements of this ASU. See Revenue Recognition in this note for further disclosures required by this ASU.

Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. In August 2016, the FASB issued ASU No. 2016-15, which simplifies the diversity in practice related to the presentation and classification of certain cash receipts and cash payments in the statement of cash flows under Topic 230. The Company adopted this ASU at the beginning of fiscal 2018 with no impact on the Company's condensed consolidated statement of cash flows.
 
Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory. In October 2016, the FASB issued ASU No. 2016-16, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory. The Company adopted this ASU at the beginning of fiscal 2018 on a modified retrospective basis, which resulted in an immaterial adjustment to retained earnings. The impact of the adoption of this standard on future periods will be dependent on future asset transfers, which generally occur in connection with acquisitions and other business structuring activities.

Statement of Cash Flows (Topic 230), Restricted Cash. In November 2016, the FASB issued ASU No. 2016-18, which requires inclusion of restricted cash and restricted cash equivalents within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this ASU at the beginning of fiscal 2018. Prior period amounts related to the Company's cash flows from financing activities, exchange rate effect on cash, and cash, cash equivalents, and restricted cash were restated as required by this ASU, which did not have a material effect on the Company's statement of cash flows. See Restricted Cash in this note for further disclosures required by this ASU.

Business Combinations (Topic 805), Clarifying the Definition of a Business. In January 2017, the FASB issued ASU No. 2017-01, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The Company adopted this ASU on a prospective basis at the beginning of fiscal 2018. The adoption of this ASU will impact how the Company assesses acquisitions and disposals of businesses in the future.

14

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

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

Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost. In March 2017, the FASB issued ASU No. 2017-07, which requires employers to include only the service cost component of net periodic pension cost and net periodic post-retirement benefit cost in costs and operating expenses in the same income statement line item as the related employees' compensation costs. The other components of net benefit cost are to be included in non-operating expenses. The Company adopted this ASU at the beginning of fiscal 2018 and prior period amounts were reclassified with no impact on the Company’s condensed consolidated net income. As a result of the adoption, the Company reclassified $217,000 in the second quarter of 2017 and $421,000 in the first six months of 2017 from operating income to other expense, net in the accompanying condensed consolidated statement of income.

Compensation - Stock Compensation (Topic 718), Scope of Modification Accounting. In May 2017, the FASB issued ASU No. 2017-09, which provides clarity on which changes to the terms or conditions of share-based payment awards require entities to apply the modification accounting provisions required in Topic 718. The Company adopted this ASU on a prospective basis at the beginning of fiscal 2018. The adoption of this ASU did not have a material impact on the Company's condensed consolidated financial statements.
    
Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. In March 2018, the FASB issued ASU No. 2018-05, an amendment to the December 2017 SEC Staff Accounting Bulletin No. 118 (SAB 118), which allowed SEC registrants to record provisional amounts in earnings due to the complexities involved in accounting for the December 22, 2017 enactment of The Tax Cuts and Jobs Act of 2017 (2017 Tax Act). While the Company’s accounting for certain tax effects is incomplete, it has determined reasonable estimates for those effects and has recorded provisional amounts in the condensed consolidated financial statements as of June 30, 2018 and December 30, 2017.

Recent Accounting Pronouncements Not Yet Adopted
Leases (Topic 842). In February 2016, the FASB issued ASU No. 2016-02, which requires a lessee to recognize a right-of-use asset and a lease liability for operating leases, initially measured at the present value of the future lease payments, in its balance sheet. This ASU also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. This new guidance is effective for the Company in fiscal 2019 using the modified retrospective transition method and early adoption is permitted. The Company is assessing the practical expedients allowed under this new guidance as well as reviewing the impact on its systems, processes and controls to account for its leases. The Company has not completed its evaluation but believes this standard will have a significant impact on its balance sheet, but is not expected to have a material impact on the Company’s results of operations or cash flows. As of the end of fiscal 2017, the Company had approximately $8.1 million of future lease payments due after fiscal 2018. The actual impact of this new standard will depend on the total amount of the Company’s lease commitments as of the adoption date.

Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. In June 2016, the FASB issued ASU No. 2016-13, which significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining lives. This new guidance is effective for the Company in fiscal 2020 with early adoption permitted beginning in fiscal 2019. The Company is currently evaluating the effects that the adoption of this ASU will have on its condensed consolidated financial statements.

Derivatives and Hedging (Topic 815), Targeted Improvements in Accounting for Hedging Activity. In August 2017, the FASB issued ASU No. 2017-12, which provides improvements to current hedge accounting to better portray the economic results of an entity’s risk management activities and to simplify the application of current hedge accounting guidance. This new guidance is effective on a prospective basis for the Company in fiscal 2019. Early adoption is permitted. The Company does not believe that adoption of this ASU will have a material effect on its condensed consolidated financial statements.
    
Income Statement - Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. In February 2018, the FASB issued ASU No. 2018-02, which allows a reclassification from accumulated other comprehensive items (AOCI) to retained earnings for stranded tax effects resulting from the 2017 Tax Act. The reclassification is elective and would allow the income tax effects on items that were originally recorded in AOCI be reclassified from AOCI to retained earnings. This ASU is effective for the Company in fiscal year 2019 and interim periods therein and should be applied either at the beginning of the period of adoption or retrospectively to each period in which the income tax effects of the 2017 Tax Act are recognized. Early adoption is permitted. The Company is currently evaluating the effects that the adoption of this ASU will have on its condensed consolidated financial statements.

15

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



2.    Restructuring Costs

In 2017, the Company constructed a 160,000 square foot manufacturing facility in the United States that integrates its U.S. and Swedish Papermaking stock-preparation product lines into a single manufacturing facility to achieve economies of scale and greater efficiencies. As a result of the consolidation and integration of these facilities, the Company developed a restructuring plan totaling approximately $1,745,000, primarily related to costs for the relocation of machinery and equipment and administrative offices, severance, and abandonment of leased facilities in the Papermaking Systems segment. As a result of this plan, the Company recorded restructuring charges of $203,000 in 2017 associated with severance costs for the reduction of four employees in the United States and six employees in Sweden. In the first six months of 2018, the Company recorded additional restructuring costs of $1,339,000 related to this plan, including $1,018,000 for the relocation of machinery and equipment and administrative offices, $376,000 associated with employee retention costs and abandonment of excess facility and other closure costs, and a reversal of $55,000 of severance costs no longer required. The Company expects to record additional restructuring charges of approximately $203,000 in the second half of 2018 primarily for relocation and moving expenses.
        
A summary of the changes in accrued restructuring costs included in other accrued expenses in the accompanying condensed consolidated balance sheet are as follows:
(In thousands) 
 
Severance
 
Relocation
 
Other (a)
 
Total
Balance at December 30, 2017
 
$
203

 
$

 
$

 
$
203

(Reversal) provision
 
(55
)
 
1,018

 
376

 
1,339

Usage
 

 
(1,015
)
 
(356
)
 
(1,371
)
Currency translation
 
(11
)
 
(3
)
 

 
(14
)
Balance at June 30, 2018
 
$
137

 
$

 
$
20

 
$
157


(a) Includes employee retention costs that are accrued ratably over the period through which employees must work to qualify for a payment and facility closure and clean-up costs associated with the U.S. and Sweden stock-preparation operations.

The Company expects to complete this restructuring plan and pay all accrued restructuring costs in 2018.

3.    Earnings per Share

Basic and diluted earnings per share (EPS) are calculated as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
2018
 
July 1,
2017
 
June 30,
2018
 
July 1,
2017
(In thousands, except per share amounts)
 
 
 
 
Amounts Attributable to Kadant:
 
 
 
 
 
 
 
 
Net Income
 
$
12,349

 
$
8,096

 
$
23,207

 
$
17,047

 
 
 
 
 
 
 
 
 
Basic Weighted Average Shares
 
11,092

 
11,001

 
11,067

 
10,976

Effect of Stock Options, Restricted Stock Units and Employee Stock Purchase Plan Shares
 
308

 
295

 
304

 
274

Diluted Weighted Average Shares
 
11,400

 
11,296

 
11,371

 
11,250

 
 
 
 
 
 
 
 
 
Basic Earnings per Share
 
$
1.11

 
$
0.74

 
$
2.10

 
$
1.55

 
 
 
 
 
 
 
 
 
Diluted Earnings per Share
 
$
1.08

 
$
0.72

 
$
2.04

 
$
1.52


Restricted stock units (RSUs) totaling 34,000 shares of common stock in the second quarter of 2018, 19,000 in the second quarter of 2017, 32,000 in the first six months of 2018 and 29,000 in the first six months of 2017 were not included in the computation of diluted EPS, as the effect would have been antidilutive or, for unvested performance-based RSUs, the performance conditions had not been met as of the end of the reporting periods.


16

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



4.    Provision for Income Taxes
    
The 2017 Tax Act was signed into law on December 22, 2017 and its provisions are generally effective for tax years beginning January 1, 2018. The most significant impacts of the 2017 Tax Act to the Company include a decrease in the federal corporate income tax rate from 35% to 21% and a one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings. On December 22, 2017, the SEC staff issued SAB 118 to provide guidance on accounting for the 2017 Tax Act’s impact. In accordance with SAB 118, the Company recognized the provisional tax impacts related to the remeasurement of its deferred income tax assets and liabilities and the one-time mandatory transition tax on deemed repatriation of unremitted foreign earnings in the three months ended December 30, 2017. In the first six months of 2018, the Company recorded an additional provisional net income tax expense of $792,000, which included the impact of state taxes for the one-time mandatory transition tax, primarily due to a 2018 tax law change associated with the 2017 Tax Act that impacted the provisional amount initially recorded.

Additional work is still necessary to finalize the provisional tax impacts of the 2017 Tax Act, including the completion of a more detailed analysis of the Company’s historical foreign earnings and the understanding and application of anticipated additional regulatory guidance regarding the provisions of the 2017 Tax Act that may be issued by the Internal Revenue Service and state and local jurisdictions. Any subsequent adjustment to the provisional amounts will be recorded to current tax expense in the quarter of 2018 in which the analysis is complete.

The provision for income taxes was $9,132,000 in the first six months of 2018 and $5,690,000 in the first six months of 2017. The effective tax rate of 28% in the first six months of 2018 was higher than the Company's 2018 statutory tax rate of 21% primarily due to the global intangible low-taxed income (GILTI) provisions of the 2017 Tax Act, the distribution of the Company's worldwide earnings, and a change in estimate to the federal and state provisional net income tax expense initially recorded in 2017 for the 2017 Tax Act. This incremental tax expense was offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements, the release of tax reserves, and a change in estimate for foreign income tax that the Company had previously accrued on certain distributed earnings. With the enactment of the 2017 Tax Act, the Company is now providing for the cost of repatriating the earnings of certain foreign subsidiaries on a recurring basis, resulting in $426,000 of incremental tax expense in the first six months of 2018. The effective tax rate of 25% in the first six months of 2017 was lower than the Company's 2017 statutory tax rate of 35% primarily due to the distribution of the Company's worldwide earnings and the net excess income tax benefits from stock-based compensation arrangements, offset in part by an increase in tax related to non-deductible expenses and unrecognized tax benefits.

The Company has elected to account for GILTI as a current period expense when incurred (the period cost method). Because of the complexity of the GILTI tax rules and the lack of legislative guidance, the Company continues to evaluate the provisions of the 2017 Tax Act and the application of ASC 740, Income Taxes. The final impact on the Company from the 2017 Tax Act’s GILTI tax legislation may differ from the estimate calculated by the Company. Such differences could be material, due to, among other things, changes in interpretations of the 2017 Tax Act, future legislative action to address questions that arise because of the 2017 Tax Act, changes in accounting standards for income taxes or related interpretations in response to the 2017 Tax Act, or any updates or changes to estimates the Company has utilized to calculate the GILTI inclusion.

5.    Long-Term Obligations

Long-term obligations are as follows:
 
 
June 30,
2018
 
December 30,
2017
(In thousands)
 
 
Revolving Credit Facility, due 2022
 
$
202,205

 
$
237,011

Obligations Under Capital Lease, due 2018 to 2022
 
4,362

 
4,633

Other Borrowings, due 2018 to 2023
 
329

 
436

Total
 
206,896

 
242,080

Less: Current Maturities of Long-Term Obligations
 
(665
)
 
(696
)
Long-Term Obligations
 
$
206,231

 
$
241,384

See Note 10 for the fair value information related to the Company's long-term obligations.

17

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

5.    Long-Term Obligations (continued)

Revolving Credit Facility
In 2017, the Company entered into an Amended and Restated Credit Agreement, as amended (the 2017 Credit Agreement), which is a five-year unsecured multi-currency revolving credit facility in the aggregate principal amount of up to $300,000,000. The 2017 Credit Agreement also includes an uncommitted unsecured incremental borrowing facility of up to an additional $100,000,000. The principal on any borrowings is due on March 1, 2022. Borrowing may be denominated in U.S. dollars or certain foreign currencies as defined in the 2017 Credit Agreement. Interest on any loans outstanding accrues and generally is payable quarterly in arrears at one of the following rates selected by the Company: (i) the Base Rate, calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate as published by Citizens Bank, and (c) the thirty-day London Inter-Bank Offered Rate (LIBOR) rate, as defined, plus 0.50%; or (ii) the LIBOR rate (with a zero percent floor), 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, net of certain cash and debt, as defined, to earnings before interest, taxes, depreciation, and amortization (EBITDA), as defined in the 2017 Credit Agreement. For this purpose, total debt net of certain cash and debt is defined as total debt less the sum of (i) unrestricted U.S. cash, and (ii) 65% of unrestricted cash outside of the United States, but no more than an aggregate amount of $30,000,000.
        
The obligations of the Company under the 2017 Credit Agreement may be accelerated upon the occurrence of an event of default under the 2017 Credit Agreement, which includes customary events of default including, without limitation, payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy- and insolvency-related defaults, defaults relating to such matters as the Employment Retirement Income Security Act (ERISA), unsatisfied judgments, the failure to pay certain indebtedness, and a change of control default. In addition, the 2017 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 a discontinued operation. As of June 30, 2018, the Company was in compliance with these covenants.
    
Loans under the 2017 Credit Agreement are guaranteed by certain domestic subsidiaries of the Company pursuant to an Amended and Restated Guarantee Agreement. In addition, one of the Company's foreign subsidiaries entered into a guarantee agreement limited to certain obligations of two foreign subsidiary borrowers.

As of June 30, 2018, the outstanding balance under the 2017 Credit Agreement was $202,205,000, including $44,856,000 of Canadian dollar-denominated borrowings and $40,349,000 of euro-denominated borrowings. As of June 30, 2018, the Company had $98,289,000 of borrowing capacity available under its 2017 Credit Agreement, which was calculated by translating its foreign-denominated borrowings using borrowing date foreign exchange rates.
    
The weighted average interest rate for the revolving credit facility was 2.97% as of June 30, 2018.

Obligations Under Capital Lease
The Company's obligations under capital leases include a sale-leaseback financing arrangement for a manufacturing facility in Germany. Under this arrangement, the quarterly lease payment includes principal, interest, and a payment to the landlord toward a loan receivable. The interest rate on the outstanding obligation is 1.79%. The secured loan receivable, which is included in other assets in the accompanying condensed consolidated balance sheet, was $590,000 at June 30, 2018. The lease arrangement provides for a fixed price purchase option, net of the projected loan receivable, of $1,550,000 at the end of the lease term in 2022. If the Company does not exercise the purchase option for the facility, the Company will receive cash from the landlord to settle the loan receivable. As of June 30, 2018, $4,282,000 was outstanding under this capital lease obligation and $80,000 was outstanding under other capital lease obligations.

Commercial Real Estate Loan
See Note 13, Subsequent Event, for further details.


18

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



6.    Stock-Based Compensation

The Company recognizes compensation expense for all stock-based awards granted to employees and directors based on the grant date estimate of fair value for those awards. The fair value of RSUs is based on the grant date 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 based on the grant date fair value, and net of actual forfeitures recorded when they occur. For performance-based RSUs, compensation expense is recognized ratably over the requisite service period for each separately-vesting portion of the award based on the grant date fair value, net of actual forfeitures recorded when they occur and remeasured each reporting period until the total number of RSUs to be issued is known. The Company recognized stock-based compensation expense of $2,146,000 in the second quarter of 2018, $1,441,000 in the second quarter of 2017, $3,610,000 in the first six months of 2018 and $2,736,000 in the first six months of 2017 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 $8,374,000 at June 30, 2018, and will be recognized over a weighted average period of 1.8 years.

On May 16, 2018, the Company granted 10,800 RSUs in the aggregate to its non-employee directors with a grant date fair value of $1,019,000. Half of these RSUs vested on June 1, 2018 and the remaining shares will vest ratably on the last day of the third and fourth fiscal quarters of 2018.

7.    Retirement Benefit Plans

Effective at the beginning of fiscal 2018, the Company retrospectively adopted ASU No. 2017-07. See Recently Adopted Accounting Pronouncements in Note 1 for further discussion. As a result, only the service cost component of net periodic benefit cost is included in operating income. All other components are included in other expense, net in the accompanying condensed consolidated statement of income. The components of net periodic benefit cost are as follows:
 
 
Three Months Ended 
 June 30, 2018
 
Three Months Ended 
 July 1, 2017
(In thousands, except percentages)
 
U.S. Pension
 
Non-U.S. Pension
 
Other Post-Retirement
 
U.S. Pension
 
Non-U.S. Pension
 
Other Post-Retirement
Service Cost
 
$
175

 
$
35

 
$
53

 
$
147

 
$
33

 
$
53

Interest Cost
 
298

 
30

 
43

 
302

 
26

 
45

Expected Return on Plan Assets
 
(322
)
 
(11
)
 
(1
)
 
(328
)
 
(9
)
 

Recognized Net Actuarial Loss
 
135

 
15

 
34

 
108

 
9

 
27

Amortization of Prior Service Cost
 

 
2

 
22

 
13

 
1

 
23

 
 
$
286

 
$
71

 
$
151

 
$
242

 
$
60

 
$
148

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

 
 
 
 
 
 
 
 
 
 
 
 
 
Discount Rate
 
3.51
%
 
3.80
%
 
3.64
%
 
4.03
%
 
3.47
%
 
4.11
%
Expected Long-Term Return on Plan Assets
 
4.50
%
 
7.43
%
 
7.43
%
 
5.00
%
 
7.72
%
 
7.72
%
Rate of Compensation Increase
 
3.00
%
 
3.69
%
 
3.07
%
 
3.00
%
 
3.44
%
 
3.06
%

19

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

7.    Retirement Benefit Plans (continued)


 
 
Six Months Ended 
 June 30, 2018
 
Six Months Ended 
 July 1, 2017
(In thousands, except percentages)
 
U.S. Pension
 
Non-U.S. Pension
 
Other Post-Retirement
 
U.S. Pension
 
Non-U.S. Pension
 
Other Post-Retirement
Service Cost
 
$
350

 
$
71

 
$
106

 
$
343

 
$
65

 
$
88

Interest Cost
 
596

 
60

 
86

 
616

 
50

 
84

Expected Return on Plan Assets
 
(644
)
 
(22
)
 
(2
)
 
(663
)
 
(17
)
 

Recognized Net Actuarial Loss
 
270

 
31

 
68

 
221

 
18

 
40

Amortization of Prior Service Cost
 

 
4

 
44

 
26

 
2

 
44

Net Periodic Benefit Cost
 
$
572

 
$
144

 
$
302

 
$
543

 
$
118

 
$
256

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

 
 
 
 
 
 
 
 
 
 
 
 
 
Discount Rate
 
3.51
%
 
3.80
%
 
3.64
%
 
4.03
%
 
3.43
%