Acquisitions

3 Months Ended

Mar. 30, 2024

Business Combination and Asset Acquisition [Abstract]

The Company’s acquisitions have been accounted for using the acquisition method of accounting and the results of the acquired businesses are included in its condensed consolidated financial statements from the date of acquisition. Historically, acquisitions have been made at prices above the fair value of identifiable net assets, resulting in goodwill. Acquisition costs were $1,124,000 in the first quarter of 2024 and are included in selling, general, and administrative (SG&A) expenses in the accompanying condensed consolidated statement of income. The Company expects several synergies in connection with the acquisitions described below, including expansion of product sales into new markets by leveraging its global sales network and relationships, broadening its product portfolio, and strengthening its position in the wood processing and material handling markets. The Company funded the acquisitions primarily through borrowings under its revolving credit facility.

Key Knife, Inc.

On January 1, 2024, the Company acquired Key Knife Inc. and certain of its affiliates (collectively, Key Knife) pursuant to a securities purchase agreement dated December 22, 2023, for $153,386,000, net of cash acquired. The Company paid $156,925,000 at closing and $2,372,000 as a post-closing adjustment in the second quarter of 2024. Key Knife is a global supplier of engineered knife systems for custom chipping, planing, and flaking solutions for wood products industries, with revenue of approximately $65,000,000 for the twelve months ended September 30, 2023, and is part of the Company's Industrial Processing segment. Goodwill from the Key Knife acquisition was $34,058,000, of which $27,682,000 is expected to be deductible for tax purposes over 15 years. In addition, intangible assets acquired were $94,550,000, of which $79,600,000 is expected to be deductible for tax purposes over 15 years.

As part of the acquisition, the Company acquired a 45% interest in two of Key Knife's subsidiaries, increasing its noncontrolling interest liability by $9,319,000 based on the income valuation approach. Under a put and purchase option as outlined in the securities purchase agreement, the seller can demand the Company purchase, or the Company can demand that the seller sell to the Company, the remaining interest in these subsidiaries at any time after December 31, 2027. The purchase price would be based on a total enterprise value as defined in the original purchase agreement.

KWS Manufacturing Company, Ltd.

On January 24, 2024, the Company acquired all of the outstanding equity securities of KWS Manufacturing Company, Ltd. (KWS) for $81,247,000, subject to a post-closing adjustment. The Company paid $81,009,000 at closing and assumed a $238,000 overdraft. KWS is a leading manufacturer of conveying equipment for the bulk material handling industry, with revenue of approximately $45,000,000 for the twelve months ended September 30, 2023, and is part of the Company's Material Handling segment. Goodwill from the KWS acquisition was $38,468,000 and intangibles assets were $28,600,000, both of which are expected to be fully deductible for tax purposes over 15 years.

Purchase Price Allocation

The following table summarizes the aggregate estimated fair values of the net assets and noncontrolling interests acquired and purchase price for the Key Knife and KWS acquisitions:


(In thousands)	Total
Cash and Cash Equivalents	$	5,673
Accounts Receivable	10,021
Inventories	15,156
Other Current Assets	1,132
Property, Plant, and Equipment	33,648
Other Assets	4,755
Definite-Lived Intangible Assets
Customer relationships	99,300
Product technology	14,700
Tradenames	7,450
Acquired backlog	1,700
Goodwill	72,526
Total assets acquired	266,061

Accounts Payable	2,263
Customer Deposits	2,877
Other Current Liabilities	4,470
Long-Term Deferred Income Taxes	4,292
Other Long-Term Liabilities	4,534
Total liabilities assumed	18,436
Noncontrolling interests acquired	9,319
Net assets and noncontrolling interests acquired	$	238,306

Purchase Price:
Cash Paid at Closing	$	237,934
Post-closing Adjustments	372
	$	238,306

The final purchase accounting and purchase price allocations remain subject to change as the Company continues to refine its preliminary valuation of certain acquired assets and liabilities assumed and the valuation of acquired intangibles, which may result in adjustments to the assets and liabilities, including goodwill.

For the quarter ended March 30, 2024, the acquisitions had aggregate revenue of $24,296,000 and a net operating loss of $315,000 from the dates of acquisition, including amortization expense of $3,130,000 associated with acquired profit in inventory and backlog.

The weighted-average amortization period for the definite-lived intangible assets related to the 2024 acquisitions is 18 years, including weighted-average amortization periods of 19 years for customer relationships, 12 years for product technology, and 17 years for tradenames.

Unaudited Supplemental Pro Forma Information

Had the acquisitions of Key Knife and KWS been completed as of the beginning of 2023, the Company’s pro forma results of operations for the quarters ended March 30, 2024 and April 1, 2023 would have been as follows:


	Three Months Ended
	March 30, 2024		April 1, 2023
(In thousands, except per share amounts)
Revenue	$	251,640	$	257,391
Net Income Attributable to Kadant	$	27,310	$	24,824
Earnings per Share Attributable to Kadant
Basic	$	2.33	$	2.13
Diluted	$	2.33	$	2.12

The historical consolidated pro forma financial information of the Company, Key Knife and KWS above has been adjusted to give effect to pro forma events that are (i) directly attributable to the acquisition and related financing arrangements, (ii) expected to have a continuing impact on the Company, and (iii) factually supportable.

Pro forma results include the following non-recurring pro forma adjustments:

•Pre-tax charge to cost of revenue of $2,331,000 in 2023 and reversal in 2024, for the sale of inventory revalued at the date of acquisition.

•Pre-tax charge to SG&A expenses of $1,923,000 in 2023 and reversal in 2024, for acquisition costs and intangible asset amortization related to acquired backlog.

•Estimated tax effects related to the 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 occurred as of the beginning of 2023, or that may result in the future.