When we use the terms "we," "us," "our," and the "Company," we mean Kadant Inc.,
a Delaware corporation, and its consolidated subsidiaries, taken as a whole,
unless the context otherwise indicates.
This Quarterly Report on Form 10-Q and the documents we incorporate by reference
in this report include forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended (Exchange Act), and
Section 27A of the Securities Act of 1933, as amended. These forward-looking
statements are not statements of historical fact and may include statements
regarding possible or assumed future results of operations. Forward-looking
statements are subject to risks and uncertainties and are based on the beliefs
and assumptions of our management, using information currently available to our
management. When we use words such as "believes," "expects," "anticipates,"
"intends," "plans," "estimates," "seeks," "should," "likely," "will," "would,"
"may," "continue," "could," or similar expressions, we are making
forward-looking statements.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties, and assumptions. Our future results of operations may
differ materially from those expressed in the forward-looking statements. Many
of the important factors that will determine these results and values are beyond
our ability to control or predict. You should not put undue reliance on any
forward-looking statements. We undertake no obligation to publicly update any
forward-looking statement, whether as a result of new information, future
events, or otherwise. For a discussion of important factors that may cause our
actual results to differ materially from those suggested by the forward-looking
statements, you should read carefully Risk Factors included in Part II,   Item
1A  , within this report and the section captioned Risk Factors, in Part I, Item
1A, of our Annual Report on Form 10-K for the fiscal year ended December 28,
2019, as filed with the Securities and Exchange Commission (SEC) and as may be
further amended and/or restated in subsequent filings with the SEC.

Overview



Company Background
We are a global supplier of high-value, critical components and engineered
systems used in process industries worldwide. Our products, technologies, and
services play an integral role in enhancing process efficiency, optimizing
energy utilization, and maximizing productivity in resource-intensive
industries.
We previously reported our financial results by combining operating entities
into three reportable operating segments: Papermaking Systems, Wood Processing
Systems, and Material Handling Systems, and a separate product line, Fiber-based
Products. During the first quarter of 2020, we changed our reportable operating
segments to better align with our strategic initiatives to grow both organically
and through acquisitions. See   Note 12  , Business Segment Information, in the
accompanying condensed consolidated financial statements for further detail
regarding our segments. Accordingly, our financial results are reported in three
new reportable operating segments: Flow Control, Industrial Processing, and
Material Handling. The Flow Control segment consists of our fluid-handling and
doctoring, cleaning, & filtration product lines; the Industrial Processing
segment consists of our wood processing and stock-preparation product lines
(excluding our baling products); and the Material Handling segment consists of
our conveying and screening, baling, and fiber-based product lines. Financial
information for 2019 has been recast to conform to the new segment presentation.
A description of each segment is as follows:
•Flow Control - Custom-engineered products, systems, and technologies that
control the flow of fluids used in industrial and commercial applications to
keep critical processes running efficiently in the packaging, tissue, food,
metals, and other industrial sectors. Our products include rotary sealing
devices, steam systems, expansion joints, doctor systems, roll and fabric
cleaning devices, and filtration and fiber recovery systems.
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Overview (continued)
•Industrial Processing - Equipment, machinery, and technologies used to recycle
paper and paperboard and process timber for use in the packaging, tissue, wood
products, and alternative fuel industries, among others. Our products include
stock-preparation systems and recycling equipment, chemical pulping equipment,
debarkers, stranders, chippers, and logging machinery. In addition, we provide
industrial automation and digitization solutions to process industries.
•Material Handling - Products and engineered systems used to handle bulk and
discrete materials for secondary processing or transport in the aggregates,
mining, food, and waste management industries, among others. Our products
include conveying and vibratory equipment and balers. In addition, we
manufacture and sell biodegradable, absorbent granules used as carriers in
agricultural applications and for oil and grease absorption.

Business Outlook and COVID-19 Update
In March 2020, the World Health Organization designated the novel coronavirus as
a global pandemic (COVID-19). In response to the ongoing COVID-19 pandemic, we
continue to focus our efforts on:
•protecting the health and safety of our employees though precautionary
measures, including working remotely when employees are not required to be
physically present, social distancing, wearing face coverings, adding safety and
hygiene protocols within our facilities, restricting travel and other
safeguards;
•as a critical infrastructure company, serving the needs and expectations of our
customers;
•working closely with our supply chain to minimize potential disruptions; and
•preserving our liquidity position.

The COVID-19 pandemic has resulted in significant worldwide economic disruption
and adversely affected our bookings and results of operations primarily due to
delayed or reduced spending by our customers, as well as customer-requested
delays on certain capital projects and service work. While our businesses
continue to be impacted by COVID-19, we experienced an 8% sequential increase in
bookings in the third quarter of 2020 compared to the second quarter of 2020,
mainly attributable to improved capital equipment bookings at our Industrial
Processing segment's wood processing business. For the fourth quarter of 2020,
we expect a sequential increase in capital equipment bookings, and our parts and
consumables bookings to remain stable as our customers perform year-end
maintenance on their equipment.
Consolidated bookings decreased 16% to $143.3 million in the third quarter of
2020 compared to $170.9 million in the third quarter of 2019, offset by a 1%
increase from the favorable effect of foreign currency translation and an
acquisition. Our business outlook by segment, including an update on the impact
of COVID-19, is as follows:

•Flow Control - Bookings decreased 16% in the third quarter of 2020 compared
with the third quarter of 2019. Bookings for capital equipment at our North
American and European operations continue to be negatively impacted by delayed
or reduced capital spending by our customers. Bookings for parts and consumables
products at our North American and European operations declined slightly as a
result of decreased demand from industrial customers due to production downtime,
shutdowns and visitation restrictions at customer facilities related to
COVID-19, while demand from our packaging, food processing, and tissue customers
remained relatively stable.
•Industrial Processing - Bookings decreased 20% in the third quarter of 2020
compared with the third quarter of 2019. Bookings at our stock-preparation
business declined primarily due to delays or reductions in capital equipment
spending by our customers as a result of COVID-19 and uncertainty in the Asian
market surrounding the response to China's recovered paper import restrictions.
The decline at our stock-preparation business was partially offset by increased
capital equipment bookings at our wood processing business due to a robust U.S.
housing market and a rebound in lumber, oriented strand board and plywood
prices, which has driven increased capital investment by our customers. Our wood
processing business continues to experience steady bookings for parts and
consumables products due to an improved U.S. housing market and higher demand
for wood-based products, which have increased mill run rates resulting in higher
parts consumption by our customers.
•Material Handling - Bookings decreased 9% in the third quarter of 2020 compared
with the third quarter of 2019. Demand for our conveying and vibratory equipment
continues to be negatively impacted by reduced customer spending primarily as a
result of COVID-19 shutdowns and visitation restrictions. Despite a slight
decline in bookings in the third quarter of 2020 compared to a strong third
quarter of 2019, orders at our baler business improved significantly from the
first two quarters of 2020 as a result of increased economic activity and eased
COVID-19 restrictions in Europe in the third quarter, in addition to orders from
new markets.
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Overview (continued)

To mitigate the adverse effects of the pandemic on our business, we continue to
manage discretionary spending in such areas as capital expenditures and
travel-related costs, utilize government employee retention assistance programs,
and execute restructuring actions to reduce payroll-related costs at certain of
our operations. During the third quarter of 2020, we received benefits from
government employee retention assistance programs of $2.8 million. We expect the
benefits received from these programs to decrease in the fourth quarter of 2020.
Our liquidity position as of September 26, 2020 consisted of over $53 million of
cash and cash equivalents, $155 million of available borrowing capacity, and
$265 million of uncommitted borrowing capacity. We do not have any mandatory
principal payments on our long-term debt obligations until 2023.
We continue to evaluate the impact of COVID-19 on our business and will take
actions that are in the best interests of our employees, customers, and
stakeholders or as mandated by governmental authorities. While our global
presence and the diversity of our products have provided some stability during
the COVID-19 pandemic, there is continued uncertainty surrounding the trajectory
of the pandemic which has been impacted by a recent resurgence of infections in
many regions of the world, the timing of recovery in the markets in which we
operate, and the resulting impact on our results of operations, financial
condition and cash flows. Accordingly, we cannot predict the extent of the
impact that COVID-19 may have on our business for the remainder of fiscal 2020.
For more information on risks related to health epidemics to our business,
including COVID-19, please see Part I, Item 1A. Risk Factors, included in our
Annual Report on Form 10-K for the fiscal year ended December 28, 2019, as
further amended in subsequent filings with the SEC.

Global Trade
In 2018, the United States began imposing tariffs on certain imports from China,
which has and will continue to increase the cost of some of the equipment that
we import. Although we are working to mitigate the impact of tariffs through
pricing and sourcing strategies, we cannot be sure how our customers and
competitors will react to certain actions we take. For more information on risks
associated with our global operations, including tariffs, please see Part I,
Item 1A. Risk Factors, included in our Annual Report on Form 10-K for the fiscal
year ended December 28, 2019, as further amended in subsequent filings with the
SEC.

International Sales and Foreign Currency
Slightly more than half of our sales are to customers outside the United States,
mainly in Europe, Asia, and Canada. As a result, our financial performance can
be materially affected by currency exchange rate fluctuations between the U.S.
dollar and foreign currencies. To mitigate the impact of currency rate
fluctuations, we generally seek to charge our customers in the same currency in
which our operating costs are incurred. Additionally, we may enter into forward
currency exchange contracts to hedge certain firm purchase and sale commitments
denominated in currencies other than our subsidiaries' functional currencies. We
currently do not use derivative instruments to hedge our exposure to exchange
rate fluctuations created by the translation into the U.S. dollar of our foreign
subsidiaries' results that are in functional currencies other than the U.S.
dollar.

Acquisitions


We expect that a significant driver of our growth over the next several years
will be the acquisition of businesses and technologies that complement or
augment our existing products and services or may involve entry into a new
process industry. We continue to pursue acquisition opportunities. In 2020, we
made an acquisition in our Industrial Processing segment for approximately $6.9
million, net of cash acquired. See   Note 2  , Acquisitions, for further
details. Our significant acquisition in 2019 is described below.
On January 2, 2019, we acquired Syntron Material Handling Group, LLC and certain
of its affiliates (SMH) for $176.9 million, net of cash acquired. SMH, which is
included in our Material Handling segment, is a leading provider of conveying
and vibratory equipment and systems to various process industries, including
mining, aggregates, food processing, packaging, and pulp and paper.

Application of Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of
operations is based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America (GAAP). The preparation of these consolidated
financial statements requires us to make estimates and
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Overview (continued)

assumptions that affect the reported amounts of assets and liabilities, revenue
and expenses, and related disclosure of contingent liabilities. Our critical
accounting policies are defined as those that entail significant judgments and
uncertainties, and could potentially result in materially different results
under different assumptions and conditions. Management evaluates its estimates
on an ongoing basis based on historical experience, current economic and market
conditions, and other assumptions management believes are reasonable. Our actual
results may differ from these estimates under different assumptions or
conditions. We believe that our most critical accounting policies which are
significant to our consolidated financial statements, and which involve the most
complex or subjective decisions or assessments, are those described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the section captioned "Application of Critical Accounting
Policies and Estimates" in Part II, Item 7, of our Annual Report on Form 10-K
for the fiscal year ended December 28, 2019. There have been no material changes
to these critical accounting policies since the end of fiscal 2019 that warrant
disclosure, except that management no longer considers our policy with respect
to accounting for pension benefits to be a critical accounting policy due to the
settlement of our U.S. pension plan in December 2019.

Results of Operations

Third Quarter 2020 Compared With Third Quarter 2019

Revenue


The following table presents the change in revenue by segment between the third
quarters of 2020 and 2019, and those changes excluding the effect of foreign
currency translation and an acquisition which we refer to as change in organic
revenue. The presentation of the change in organic revenue is a non-GAAP
measure. We believe this non-GAAP measure helps investors gain an understanding
of our underlying operations consistent with how management measures and
forecasts its performance, especially when comparing such results to prior
periods. This non-GAAP measure should not be considered superior to or a
substitute for the corresponding GAAP measure.
Revenue by segment in the third quarters of 2020 and 2019 was as follows:
                                                                                                                                                                                    (Non-GAAP)

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