EX-99.4 5 kai20198-kaxexhibit994xpro.htm KAI FORM 8-KA EXHIBIT 99.4 PRO FORMA Exhibit

Exhibit 99.4
KADANT INC.

Unaudited Pro Forma Condensed Combined Financial Information

On January 2, 2019, Kadant Inc. ("Kadant" or the "Company") completed its acquisition of the equity interests of LLCP PCS Alternative Syntron, LLC and Syntron Material Handling Group, LLC (together with certain of its affiliates, "SMH") for approximately $179,000,000, subject to certain customary adjustments.
    
The unaudited pro forma condensed combined balance sheet as of September 29, 2018, and the unaudited pro forma condensed combined statement of income for the fiscal year ended December 30, 2017 and for the fiscal nine months ended September 29, 2018, are presented herein. The unaudited pro forma condensed combined balance sheet information as of September 29, 2018 gives effect to the acquisition by Kadant of SMH as if it had been completed on September 29, 2018. The unaudited pro forma condensed combined statements of income for the fiscal year ended December 30, 2017 and for the fiscal nine months ended September 29, 2018, combines the historical results of Kadant and SMH and gives effect to the acquisition as if it had occurred as of the beginning of fiscal 2017.

The unaudited pro forma condensed combined financial statements presented are based on the assumptions and adjustments described in the accompanying notes. The unaudited pro forma condensed combined financial statements are presented for illustrative purposes and do not purport to represent what the financial position or results of operations would actually have been if the acquisition occurred as of the dates indicated or what such financial position or results would be for any future periods. The unaudited pro forma condensed combined financial statements are based upon the respective historical consolidated financial statements of Kadant and the consolidated financial statements of SMH, consisting of its wholly-owned subsidiary, Syntron Material Handling Holdings, LLC, which represents the consolidated operating results of SMH, and should be read in conjunction with:

•
the accompanying notes to the unaudited pro forma condensed combined financial statements presented herein;

•
the separate historical audited consolidated financial statements and accompanying notes of Kadant as of and for the fiscal year ended December 30, 2017, included in the Company's annual report on Form 10-K;

•
the separate historical unaudited condensed consolidated financial statements and accompanying notes of Kadant as of and for the fiscal nine months ended September 29, 2018, included in the Company's quarterly report on Form 10-Q;

•
the separate historical audited consolidated financial statements and accompanying notes of SMH as of and for the year ended December 31, 2017, included in this Current Report as Exhibit 99.2; and

•
the separate historical unaudited condensed consolidated financial statements and accompanying notes of SMH as of and for the nine months ended September 30, 2018, included in this Current Report as Exhibit 99.3.

The following unaudited pro forma condensed combined financial statements illustrate Kadant's acquisition of SMH using the purchase method of accounting. In the unaudited pro forma condensed combined balance sheet, the purchase price to acquire SMH has been allocated to the assets acquired and liabilities assumed based upon management’s preliminary estimate of their respective fair values. Any differences between fair value of the consideration issued and the fair value of the assets and liabilities acquired are recorded as goodwill. The amounts allocated to acquired assets and liabilities in the unaudited pro forma condensed combined financial statements are based on preliminary valuation estimates. Definitive allocations will be performed and finalized based on certain valuations and other analyses that will be performed by Kadant with the assistance of outside valuation specialists. Accordingly, the purchase price allocation adjustments and related amortization reflected in the following unaudited pro forma condensed combined financial statements are preliminary, have been made solely for the purpose of preparing these statements, are subject to revision, and will be adjusted based on a final determination of the fair values.

The unaudited pro forma condensed combined statements of income also include certain purchase accounting adjustments, including items expected to have a continuing impact on the combined results, such as increased amortization expense on acquired intangible assets. The unaudited pro forma condensed combined statements of income do not include the impacts of any revenue and cost or other operating synergies that may result from the acquisition. The unaudited pro forma condensed combined statements of income do not reflect certain amounts resulting from the acquisition because we consider them to be of a non-recurring nature.
    

1

KADANT INC.

The following table represents the preliminary estimated allocation of the purchase price for Kadant's acquisition of SMH over the estimated fair value of the assets acquired and liabilities assumed. The Company is still in the process of assembling the information necessary to finalize the allocation of the total purchase price and will obtain a final supporting third party valuation for certain tangible and intangible assets. The allocation of the purchase price will likely change upon completion of this assessment process.

The allocation of the purchase price of SMH as of January 2, 2019 is as follows:
(In thousands)
 
Estimated Fair Value
 
 
 
Cash and Cash Equivalents
 
$
2,411

Accounts Receivable
 
10,566

Inventory
 
13,984

Other Current Assets
 
714

Property, Plant, and Equipment
 
7,718

Other Assets
 
9,474

Intangible Assets
 
77,140

Goodwill
 
85,207

Total Assets Acquired
 
$
207,214

 
 
 
Accounts Payable
 
$
4,894

Customer Deposits
 
2,958

Other Current Liabilities
 
3,194

Long-Term Deferred Income Taxes
 
2,893

Long-Term Lease Liability
 
15,556

Total Liabilities Assumed
 
$
29,495

Net Assets
 
$
177,719

 
 
 
Purchase Price:
 
 

Base Purchase Price
 
$
179,000

Working Capital and Other Adjustments
 
(1,281
)
Cash Paid to Seller Borrowed Under the Credit Agreement
 
$
177,719

The estimated values of current assets, excluding inventory, and current liabilities were based upon their historical costs on the date of acquisition due to their short-term nature. Inventory, property, plant, and equipment and other assets were recorded at estimated fair value based primarily on cost and market approaches.

The following are the identifiable intangible assets acquired and the respective periods over which the assets will be amortized based on the underlying economic benefits to be realized:
(In thousands)
 
Amount
 
Weighted- Average Life
Customer Relationships
 
$
52,900

 
15
Existing Technology
 
10,500

 
14
Tradenames
 
9,700

 
Indefinite
Other Intangibles
 
4,040

 
8
 
 
$
77,140

 
 
The amount assigned to identifiable intangible assets acquired was based on their respective fair values determined as of the acquisition date with assistance from an outside valuation consultant, using income and cost approaches. The excess of the purchase price over the tangible and identifiable intangible assets was recorded as goodwill and amounted to approximately $85,207,000.

2

KADANT INC.

PRO FORMA CONDENSED COMBINED BALANCE SHEET
(Unaudited)



 
 
September 29, 2018
(In thousands)
 
Kadant Historical
 
SMH Historical
 
Pro Forma Adjustments
 
Pro Forma Combined
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
57,384

 
$
1,273

 
$
(2,972
)
a
$
55,685

Restricted cash
 
675

 
—

 
—

 
675

Accounts receivable, net
 
96,326

 
10,948

 
—

 
107,274

Inventories
 
91,736

 
11,705

 
3,251

b
106,692

Other current assets
 
21,347

 
1,082

 
—

 
22,429

Total Current Assets
 
267,468

 
25,008

 
279

 
292,755

 
 
 
 
 
 
 
 
 
Property, Plant, and Equipment, Net
 
79,458

 
5,323

 
2,184

c
86,965

 
 
 
 
 
 
 
 
 
Other Assets
 
13,509

 
—

 
741

d
14,250

 
 
 
 
 
 
 
 
 
Intangible Assets, Net
 
119,246

 
36,687

 
40,453

e, f
196,386

 
 
 
 
 
 
 
 
 
Goodwill
 
262,081

 
18,153

 
67,151

e, f
347,385

 
 
 
 
 
 
 
 
 
Total Assets
 
$
741,762

 
$
85,171

 
$
110,808

 
$
937,741

 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 

Current Liabilities:
 
 
 
 
 
 
 
 

Short-term obligations
 
$
1,686

 
$
210

 
$
—

 
$
1,896

Accounts payable
 
34,761

 
6,031

 
—

 
40,792

Accrued payroll and employee benefits
 
28,677

 
—

 
—

 
28,677

Customer deposits
 
36,431

 
2,773

 
—

 
39,204

Other current liabilities
 
41,025

 
3,197

 
(996
)
g
43,226

Total Current Liabilities
 
142,580

 
12,211

 
(996
)
 
153,795

 
 
 
 
 
 
 
 
 
Long-Term Deferred Income Taxes
 
25,168

 
—

 
2,441

h
27,609

 
 
 
 
 
 
 
 
 
Other Long-Term Liabilities
 
23,646

 
155

 
6,680

i
30,481

 
 
 
 
 
 
 
 
 
Long-Term Obligations
 
191,929

 
51,572

 
126,147

j, k
369,648

 
 
 
 
 
 
 
 
 
Total Kadant Stockholders' Equity and SMH Members' Equity
 
356,961

 
21,233

 
(23,464
)
a.iii, l
354,730

Noncontrolling interest
 
1,478

 
—

 
—

 
1,478

Total Stockholders' Equity
 
358,439

 
21,233

 
(23,464
)
 
356,208

 
 
 
 
 
 
 
 
 
Total Liabilities and Stockholders' Equity
 
$
741,762

 
$
85,171

 
$
110,808

 
$
937,741


The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.

3

KADANT INC.

PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(Unaudited)

 
 
Fiscal Year Ended December 30, 2017
(In thousands, except per share amounts)
 
Kadant Historical
 
SMH Historical
 
Pro Forma Adjustments
 
Pro Forma Combined
 
 
 
 
 
 
 
 
 
Revenues
 
$
515,033

 
$
81,992

 
$
—

 
$
597,025

Costs and Operating Expenses:
 
 
 
 
 
 

 
 
Cost of revenues
 
283,886

 
56,099

 
385

m
340,019

 
 
 
 
 
 
(351
)
n
 
Selling, general, and administrative expenses
 
159,756

 
14,264

 
73

m
174,571

 
 
 
 
 
 
(3,531
)
o
 
 
 
 
 
 
 
4,424

p
 
 
 
 
 
 
 
(67
)
n
 
 
 
 
 
 
 
(348
)
q
 
Research and development expenses
 
9,563

 
18

 
—

 
9,581

Other income
 
203

 
200

 
—

 
403

 
 
453,408

 
70,581

 
585

 
524,574

Operating Income
 
61,625

 
11,411

 
(585
)
 
72,451

Interest Income
 
447

 
—

 
—

 
447

Interest Expense
 
(3,547
)
 
(6,222
)
 
6,222

s
(10,798
)
 
 
 
 
 
 
(7,251
)
t
 
Other Expense, Net
 
(872
)
 
(460
)
 
—

 
(1,332
)
Income Before Provision for Income Taxes
 
57,653

 
4,729

 
(1,614
)
 
60,768

Provision for Income Taxes
 
26,070

 
7

 
1,361

u
27,438

Net Income
 
31,583

 
4,722

 
(2,975
)
 
33,330

Net Income Attributable to Noncontrolling Interest
 
(491
)
 
—

 
—

 
(491
)
Net Income Attributable to Kadant and SMH
 
$
31,092

 
$
4,722

 
$
(2,975
)
 
$
32,839

 
 
 
 
 
 
 
 
 
Earnings per Share Attributable to Kadant and SMH
 
 
 
 
 
 
 
 
Basic
 
$
2.83

 
 
 
 
 
$
2.99

Diluted
 
$
2.75

 
 
 
 
 
$
2.90

Weighted Average Shares
 
 
 
 
 
 
 


Basic
 
10,991

 
 
 
 
 
10,991

Diluted
 
11,312

 
 
 
 
 
11,312


The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.







4

KADANT INC.

PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(Unaudited)

 
 
Fiscal Nine Months Ended September 29, 2018
(In thousands, except per share amounts)
 
Kadant Historical
 
SMH Historical
 
Pro Forma Adjustments
 
Pro Forma Combined
 
 
 
 
 
 
 
 
 
Revenues
 
$
469,851

 
$
64,017

 
$
—

 
$
533,868

Costs and Operating Expenses:
 
 
 
 
 
 
 
 
Cost of revenues
 
262,515

 
43,029

 
289

m
305,570

 
 
 
 
 
 
(263
)
n
 
Selling, general, and administrative expenses
 
133,796

 
11,821

 
55

m
146,398

 
 
 
 
 
 
(2,649
)
o
 
 
 
 
 
 
 
4,287

p
 
 
 
 
 
 
 
(50
)
n
 
 
 
 
 
 
 
(207
)
q
 
 
 
 
 
 
 
(655
)
r
 
Research and development expenses
 
8,049

 
6

 
—

 
8,055

Restructuring and other costs
 
1,717

 
142

 
—

 
1,859

 
 
406,077

 
54,998

 
807

 
461,882

Operating Income
 
63,774

 
9,019

 
(807
)
 
71,986

Interest Income
 
335

 
—

 
—

 
335

Interest Expense
 
(5,320
)
 
(4,764
)
 
4,764

s
(10,758
)
 
 
 
 
 
 
(5,438
)
t
 
Other (Expense) Income, Net
 
(736
)
 
2

 
—

 
(734
)
Net Income Before Provision for Income Taxes
 
58,053

 
4,257

 
(1,481
)
 
60,829

Provision (Benefit) for Income Taxes
 
15,575

 
(205
)
 
1,626

u
16,996

Net Income
 
42,478

 
4,462

 
(3,107
)
 
43,833

Net Income Attributable to Noncontrolling Interest
 
(487
)
 
—

 
—

 
(487
)
Net Income Attributable to Kadant and SMH
 
$
41,991

 
$
4,462

 
$
(3,107
)
 
$
43,346

 
 
 
 
 
 
 
 
 
Earnings per Share Attributable to Kadant and SMH
 
 
 
 
 
 
 


Basic
 
$
3.79

 
 
 
 
 
$
3.91

Diluted
 
$
3.69

 
 
 
 
 
$
3.81

Weighted Average Shares
 
 
 
 
 
 
 


Basic
 
11,078

 
 
 
 
 
11,078

Diluted
 
11,388

 
 
 
 
 
11,388


The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.



5

KADANT INC.

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS


Note 1 - Unaudited Pro Forma Condensed Combined Balance Sheet

The unaudited pro forma condensed combined balance sheet information as of September 29, 2018 gives effect to the acquisition by Kadant of SMH as if it had taken place on September 29, 2018 and is based on the historical balance sheets of Kadant as of September 29, 2018 and SMH as of September 30, 2018.

The following pro forma adjustments are based on preliminary estimates, which may change as additional information is obtained and are as follows:
(a)
Adjustments to cash were as follows:
i.
Record additional borrowings of $177,719,000 to fund the acquisition consideration paid. These borrowings were financed through a revolving credit facility dated as of March 1, 2017, as amended (the "Credit Agreement"), in the aggregate principal amount of up to $400,000,000.
ii.
Record cash paid to the sellers of $177,719,000, which was paid after September 29, 2018.
iii.
Record cash paid of $2,231,000 for acquisition-related transaction costs, which were paid subsequent to September 29, 2018. The impact of the acquisition-related costs has been excluded from the pro forma condensed combined statement of income in the fiscal year ended December 30, 2017 as it is a non-recurring item.
iv.
Record cash paid for deferred debt issuance costs of $741,000 related to the financing of the acquisition which were paid subsequent to September 29, 2018.

(b)
Adjust SMH's inventory to fair value. The cost of revenues impact related to the write-up of inventory has been excluded from the pro forma condensed combined statement of income as it is a non-recurring item.

(c)
Adjust SMH's property, plant, and equipment to fair value.

(d)
Record deferred debt issuance costs of $741,000 incurred in connection with financing the acquisition that were paid subsequent to September 29, 2018.

(e)
Eliminate SMH's historical goodwill and intangible assets.

(f)
Record goodwill and intangible assets associated with the acquisition.

(g)
Eliminate SMH's historical deferred rent liability for a real estate lease obligation that was revalued at the acquisition date.

(h)
Record a net long-term deferred tax liability primarily related to intangible assets and property, plant, and equipment acquired, offset in part by a long-term deferred tax asset related to the above-market real estate lease obligation noted in (i) below.

(i)
Record a long-term liability related to SMH's above-market real estate lease obligation, which has a remaining contractual life of 16 years. On December 30, 2018, the Company adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), which resulted in the recognition of a right of use asset and lease liability for most of its leases. Under this standard, the unfavorable above-market real estate lease obligation acquired in the acquisition of SMH was recorded at fair value as a reduction to the right of use asset in the allocation of purchase price table as of January 2, 2019 presented herein. However, these pro forma condensed combined statements present the results of Kadant and SMH prior to the adoption of ASU No. 2016-02, and as a result, the Company recorded a lease liability as a pro forma adjustment related to this above-market real estate lease in accordance with its accounting policies effective during the period presented.

(j)
Eliminate debt obligations of SMH that were settled prior to the closing of the acquisition.

(k)
Record additional borrowings by Kadant under the Credit Agreement to fund the acquisition consideration paid.
 
(l)
Eliminate SMH's historical equity accounts.

6

KADANT INC.

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS


Note 2 - Unaudited Pro Forma Condensed Combined Statements of Income

The unaudited pro forma condensed combined statements of income for the fiscal year ended December 30, 2017, and fiscal nine months ended September 29, 2018, give effect to the acquisition of SMH by Kadant as if it had taken place as of the beginning of 2017 and are based on the historical statements of income of Kadant for the fiscal year ended December 30, 2017 and the fiscal nine months ended September 29, 2018 and SMH for the year ended December 31, 2017 and nine months ended September 30, 2018.

The following pro forma adjustments are based on preliminary estimates, which may change as additional information is obtained:
(m)
Record additional depreciation expense associated with fair value adjustments for property, plant, and equipment, which is amortized using the straight-line method over the estimated remaining useful lives of 3 to 14 years for machinery, equipment, and leasehold improvements.

(n)
Record amortization of an intangible liability for an above-market real estate lease, which is amortized using the straight-line method over the remaining contractual life of the lease obligation.

(o)
Eliminate SMH's historical amortization expense associated with its definite-lived intangible assets.

(p)
Record amortization expense associated with the definite-lived intangible assets. The impact of the write-up of acquired backlog of $1,242,000 and $358,000 has been excluded from the pro forma condensed combined statement of income for the fiscal year ended December 30, 2017 and the fiscal nine months ended September 29, 2018, respectively, as it is a non-recurring item.

(q)
Eliminate historical fees paid by SMH for management services under an agreement that terminated upon its acquisition by Kadant.

(r)
Eliminate SMH's historical acquisition transaction costs directly related to its acquisition by Kadant.

(s)
Eliminate SMH's historical interest expense related to debt that was settled prior to the closing of the acquisition.

(t)
Record an increase to interest expense to reflect the additional borrowings of $177,719,000 to fund the acquisition of SMH. Interest expense has been calculated based on interest rates available to Kadant under the Credit Agreement. The weighted average interest rates associated with these borrowings are approximately 4.08% for both the fiscal year ended December 30, 2017 and the fiscal nine months ended September 29, 2018. A variance of 1/8% in interest rates on these borrowings would change interest expense by $222,000 in the fiscal year ended December 30, 2017 and $167,000 in the fiscal nine months ended September 29, 2018.

(u)
Record the income tax effect of the pro forma adjustments and the effect of treating SMH as taxable within Kadant's consolidated U.S. group at an estimated effective tax rate of 45% in fiscal 2017 and 28% in the fiscal nine months ended September 29, 2018. The effective tax rate in fiscal 2017 excludes the impact of the Tax Cut and Jobs Act of 2017 for the remeasurement of SMH's deferred income tax assets and liabilities related to the decrease in the federal corporate income tax rate from 35% to 21% as it is a non-recurring item.



7