Acquisitions

12 Months Ended

Dec. 28, 2019

2019

In September 2019, the Company acquired certain assets of a business in Brazil for its Papermaking Systems segment for approximately $407,000 in cash.

In January 2019, the Company acquired, directly and indirectly, all the outstanding equity interests of Syntron Material Handling Group, LLC and certain of its affiliates (SMH) pursuant to an equity purchase agreement, dated December 9, 2018, for $176,855,000, net of cash acquired. The Company funded the acquisition through borrowings under its revolving credit facility.

SMH, which comprises the Company's Material Handling Systems segment, has manufacturing operations in Mississippi, United States, and China. SMH is a leading provider of material handling equipment and systems to various process industries, including mining, aggregates, food processing, packaging, and pulp and paper. The Company expects several synergies in connection with this acquisition, including expansion of product sales into new markets by leveraging SMH's existing presence, strengthening of SMH's relationships in the pulp and paper industry, and sourcing efficiencies. Goodwill from the SMH acquisition was $78,592,000, of which $59,195,000 is expected to be deductible for tax purposes over 15 years. In addition, intangible assets acquired were $83,020,000, of which $69,969,000 is expected to be deductible for tax purposes over 15 years. For 2019, the Company recorded revenues of $83,364,000 and operating income of $3,132,000 for SMH from the date of acquisition, including amortization expense of $4,872,000 associated with acquired profit in inventory and backlog and $843,000 of acquisition transaction costs.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed and the purchase price for SMH. During the fourth quarter of 2019, the Company made an adjustment to reduce goodwill by $1,704,000, principally due to a reduction of long-term deferred income tax liabilities as a result of the tax attributes acquired.



	SMH
(In thousands)	January 2, 2019
Net Assets Acquired:
Cash, Cash Equivalents, and Restricted Cash	$	2,431
Accounts Receivable	10,275
Inventories	13,061
Property, Plant, and Equipment	7,383
Other Assets	12,054
Definite-Lived Intangible Assets
Customer relationships	58,300
Product technology	11,000
Other	4,220
Indefinite-Lived Intangible Assets
Tradenames	9,500
Goodwill	78,592
Total assets acquired	206,816

Accounts Payable	3,380
Other Current Liabilities	7,954
Long-Term Lease Liabilities	15,244
Long-Term Deferred Income Taxes	952
Total liabilities assumed	27,530
Net assets acquired	$	179,286

Purchase Price:
Cash Paid to Seller Borrowed Under Revolving Credit Facility	$	179,286

The weighted-average amortization period for the definite-lived intangible assets above is 14 years, including weighted-average amortization periods of 15 years for customer relationships, 14 years for product technology, and 8 years for other intangible assets.

Unaudited Supplemental Pro Forma Information

Had the acquisition of SMH been completed as of the beginning of 2018, the Company’s pro forma results of operations for 2019 and 2018 would have been as follows:



(In thousands, except per share amounts)	December 28, 2019		December 29, 2018
Revenues	$	704,644	$	719,142
Net Income Attributable to Kadant	$	56,409	$	56,511
Earnings per Share Attributable to Kadant
Basic	$	5.02	$	5.10
Diluted	$	4.92	$	4.96

The historical consolidated financial information of the Company and SMH has been adjusted in the pro forma information to give effect to pro forma events that are directly attributable to the acquisition and related financing arrangements, are expected to have a continuing impact on the Company, and are factually supportable.

Pro forma results include the following non-recurring pro forma adjustments that were directly attributable to the acquisition:


•	Pre-tax charge to SG&A expenses of $843,000 in 2018 and reversal of $843,000 in 2019 for acquisition transaction costs.


•	Pre-tax charge to cost of revenues of $3,549,000 in 2018 and reversal of $3,549,000 in 2019 for the sale of inventory revalued at the date of acquisition.


•	Pre-tax charge to SG&A expenses of $1,323,000 in 2018 and reversal of $1,323,000 in 2019 for intangible asset amortization related to acquired backlog.


•	Tax effects related to pro forma adjustments.

2017

On August 14, 2017, the Company acquired certain assets of Unaflex, LLC (Unaflex) for $31,274,000 in cash. The Company funded the acquisition through borrowings under its revolving credit facility. Unaflex, located principally in South Carolina, is a leading manufacturer of expansion joints and related products for process industries. This acquisition complemented the Company’s existing Fluid-Handling product line within its Papermaking Systems segment. The Company anticipated and continues to achieve several synergies in connection with this acquisition, including the expansion of sales by Unaflex through leveraging the Company’s sales efforts, as well as sourcing and manufacturing efficiencies. Goodwill from the Unaflex acquisition was $15,640,000, all of which is expected to be deductible for tax purposes over 15 years. In addition, intangible assets acquired were $11,200,000, all of which is expected to be deductible for tax purposes over 15 years. For 2017, the Company recorded revenues of $7,335,000 and operating income of $187,000 for Unaflex from its date of acquisition, including amortization expense of $176,000 associated with acquired profit in inventory, and $596,000 of acquisition transaction costs.

On July 5, 2017, the Company acquired NII FPG pursuant to a Stock and Asset Purchase Agreement dated May 24, 2017, for $170,792,000, net of cash acquired. In connection with the acquisition, the Company borrowed an aggregate $170,018,000 under its revolving credit facility, including $62,690,000 of Canadian dollar-denominated and $61,769,000 of euro-denominated borrowings. NII FPG, which has two primary manufacturing facilities located in Canada and Finland, is a global leader in the design and manufacture of equipment used by sawmills, veneer mills, and other manufacturers in the forest products industry. NII FPG also designs and manufactures logging equipment used in harvesting timber from forest plantations. This acquisition extended the Company's presence deeper into the forest products industry and complemented its existing Wood Processing Systems segment. Goodwill from the NII FPG acquisition was $85,432,000, of which $33,993,000 is expected to be deductible for tax purposes over 15 years. In addition, intangible assets acquired were $72,812,000, of which $10,044,000 is expected to be deductible for tax purposes over 15 years. For 2017, the Company recorded revenues of $48,363,000 and operating income of $1,238,000 for NII FPG from its date of acquisition, including amortization expense of $6,399,000 associated with acquired profit in inventory and backlog, and $4,764,000 of acquisition transaction costs.

In addition, the Company paid $2,500,000 in cash in 2017 for another acquisition within the Fluid-Handling product line in the Company's Papermaking Systems segment.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed and the purchase price for the Company's 2017 acquisitions.



	NII FPG		Unaflex		Other
(In thousands)	July 5, 2017		August 14, 2017		October 30, 2017		Total
Net Assets Acquired:
Cash and Cash Equivalents	$	2,219	$	—	$	—	$	2,219
Accounts Receivable	6,542		2,079		—		8,621
Inventories	25,304		2,033		—		27,337
Property, Plant, and Equipment	12,912		1,279		284		14,475
Other Assets	2,375		72		—		2,447
Definite-Lived Intangible Assets
Customer relationships	44,682		8,000		1,500		54,182
Product technology	17,100		2,300		—		19,400
Other	2,530		900		—		3,430
Indefinite-Lived Intangible Assets
Tradenames	8,500		—		—		8,500
Goodwill	85,432		15,640		716		101,788
Total assets acquired	207,596		32,303		2,500		242,399

Accounts Payable	4,970		358		—		5,328
Customer Deposits	7,396		100		—		7,496
Long-Term Deferred Income Taxes	16,622		—		—		16,622
Other Liabilities	5,597		571		—		6,168
Total liabilities assumed	34,585		1,029		—		35,614
Net assets acquired	$	173,011	$	31,274	$	2,500	$	206,785

Purchase Price:
Cash Paid	$	2,993	$	—	$	—	$	2,993
Cash Paid to Seller Borrowed Under the Revolving Credit Facility	170,018		31,274		2,500		203,792
Total purchase price	$	173,011	$	31,274	$	2,500	$	206,785

For NII FPG, the weighted-average amortization period for definite-lived intangible assets acquired is 12 years, including weighted-average amortization periods of 15 years for product technology, 11 years for customer relationships, and 4 years for other intangible assets. For Unaflex, the weighted average amortization period for definite-lived intangible assets acquired, including customer relationships, product technology and other intangible assets, is 10 years. For the other acquisition, the amortization period for customer relationships is 11 years.

Unaudited Supplemental Pro Forma Information

Had the acquisitions of NII FPG and Unaflex been completed as of the beginning of 2016, the Company’s pro forma results of operations for 2017 would have been as follows:



(In thousands, except per share amounts)	December 30, 2017
Revenues	$	565,710
Net Income Attributable to Kadant	$	44,159
Earnings per Share Attributable to Kadant
Basic	$	4.02
Diluted	$	3.90

Pro forma results include the following non-recurring pro forma adjustments that were directly attributable to the acquisitions:


•	Reversal of pre-tax charge to SG&A expenses of $5,360,000 in 2017 for acquisition transaction costs.


•	Reversal of pre-tax charge to cost of revenues of $5,137,000 in 2017 for the sale of inventory revalued at the date of acquisition.


•	Reversal of pre-tax charge to SG&A expenses of $1,438,000 in 2017 for intangible asset amortization related to acquired backlog.


•	Reversal of pre-tax income of $852,000 in 2017 related to NII FPG's gain on the sale of a building.


•	Tax effects related to pro forma adjustments.

These pro forma results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that would have resulted had the acquisitions of NII FPG and Unaflex occurred as of the beginning of 2016, or that may result in the future. The Company's pro forma results above exclude its other 2017 acquisition as those results would not have been materially different then the results presented above had they occurred at the beginning of 2016.