KADANT INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with the consolidated financial statements and related notes set forth in Item 8, "Financial Statements and Supplementary Data." The following discussion also contains forward-looking statements, including the outlook for our business, that involve a number of risks and uncertainties. See Part I, "Forward-Looking Statements," for a discussion of the forward-looking statements contained below and Part I, Item 1A, "Risk Factors," for a discussion of certain risks that could cause our actual results to differ materially from the results anticipated in such forward-looking statements.
Company Background We are a global supplier of technologies and engineered systems that drive Sustainable Industrial Processing. Our products and services play an integral role in enhancing efficiency, optimizing energy utilization, and maximizing productivity in process industries while helping our customers advance their sustainability initiatives with products that reduce waste or generate more yield with fewer inputs, particularly fiber, energy, and water. Producing more while consuming less is a core aspect of Sustainable Industrial Processing and a major element of the strategic focus of our businesses. Our financial results are reported in three 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; and the Material Handling segment consists of our conveying and vibratory, baling, and fiber-based product lines. See Note 1 2 , Business Segment and Geographical Information, in the accompanying consolidated financial statements for a description and financial information of our reportable operating segments.
Industry and business overview
We had record consolidated bookings of
$893.2 millionfor 2021 as our businesses rebounded from the impact of the COVID-19 pandemic, which adversely affected our bookings and revenue for a substantial part of 2020. Our consolidated 2021 bookings included $36.9 millionattributable to acquisitions and $27.0 millionfrom a favorable foreign currency effect, and consisted of record orders for both parts and consumables products and capital equipment. See Acquisitions below for further details. We ended the year with record consolidated backlog of $309.9 million, increasing 61% from the end of 2020. An overview of our business by segment is as follows: •Flow Control - Our Flow Control segment ended a strong year with record bookings for both parts and consumables products and capital equipment. In 2021, we acquired The Clouth Group of Companies(Clouth), which contributed $23.2 millionof bookings. Orders for both parts and consumables products and capital equipment at our existing Flow Control businesses have been bolstered by growth in the industries we serve, particularly the packaging and tissue markets. Our bookings in the earlier part of 2021 were also boosted by pent-up demand from depressed levels encountered during most of 2020. •Industrial Processing - Strong quarterly bookings, particularly in the latter half of 2021, contributed to record orders in 2021 for our Industrial Processing segment. Orders for our wood processing business products continue to be fueled by a robust U.S.housing market and high demand for lumber, oriented strand board and plywood, which has driven new capital equipment investment and high parts consumption by our customers. During the second half of 2021, maintenance requirements at many of our customers have augmented demand for our parts products, which we expect to continue into the first half of 2022. In the fourth quarter of 2021, wood processing capital equipment bookings were exceptionally strong, resulting in a backlog that will be fulfilled primarily through mid-2023. Bookings at our stock-preparation business increased 28% in 2021 largely due to a rebound in capital equipment orders compared with the depressed capital spending environment for most of 2020 and due to steady demand for our parts and consumables products. We expect the demand for our Industrial Processing segment products to moderate somewhat in 2022 compared to the record level in 2021. •Material Handling - Our Material Handling segment also ended the year with record bookings. In August 2021, we acquired East Chicago Machine Tool Corporation(Balemaster) and certain assets of affiliated companies, which contributed $13.2 millionof orders. Bookings for baling products at our European operations continue to be bolstered by improved business conditions, including the recovery of recycled commodity prices. Bookings for parts and consumables at our conveying and vibratory equipment business have rebounded from depressed 2020 levels due to the relaxation of pandemic-related restrictions and an increased demand from our mining customers, while bookings for capital equipment have moderated. 24 --------------------------------------------------------------------------------
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Kadant Inc.In 2021, many of our operations were impacted by labor availability and supply chain constraints, the latter of which resulted in inflationary pressure on material costs, longer lead times, and increased freight costs, as well as customer-requested delays in shipments. We believe these challenges will generally persist into 2022. Our businesses are alleviating supply chain constraints through various measures, including advance purchases of raw materials to prevent potential manufacturing disruptions and mitigating increased material and freight costs through price adjustments, when possible. We believe that the fundamentals of our business will remain positive, particularly given our high backlog levels, continued strong bookings, and ongoing strength in the markets we serve as we enter 2022. Despite this optimism, we expect our operating environment to continue to be challenging as a result of the factors impacting our business discussed above and the uncertainties and risks surrounding the COVID-19 pandemic. For more information on risks related to health epidemics to our business, including COVID-19, and other factors impacting our business discussed above, please see Part I, Item 1A , "Risk Factors." International Sales 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 foreign currency 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.
The United Statesimposes 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 these strategies will effectively mitigate the impact of these costs. For more information on risks associated with our global operations, including tariffs, please see Part I, Item 1A , "Risk Factors." 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 the third quarter of 2021, we acquired Clouth for $92.9 million, net of cash acquired plus debt assumed. Clouth, which is included in our Flow Control segment, is a leading manufacturer of doctor blades and related equipment used in the production of paper, packaging, and tissue. We expect several synergies in connection with this acquisition, including deepening our presence in the growing ceramic blade market and expansion of product sales at our existing businesses by leveraging Clouth's complementary global geographic footprint. Clouth has three manufacturing facilities in Germanyand one in Polandand generated revenue of approximately 40.5 million eurosfor the trailing twelve months ended June 30, 2021prior to its acquisition by us. In the third quarter of 2021, we also acquired Balemaster for $53.7 million, net of cash acquired. Balemaster, which is included in our Material Handling segment, is a leading U.S.manufacturer of horizontal balers and related equipment used primarily for recycling packaging waste at corrugated box plants and large retail and distribution centers. We expect several synergies in connection with this acquisition, including expanding our presence in the secondary material processing sector and creating new opportunities for leveraging our high-performance balers produced in Europe. Balemaster generated revenue of approximately $22.2 millionfor the trailing twelve months ended June 30, 2021prior to its acquisition by us. In the fourth quarter of 2021, we acquired a business in India, which is included in our Industrial Processing segment, for approximately $2.9 million. In 2020, we acquired a business in Canada, which is included in our Industrial Processing segment, for approximately $6.9 million, net of cash acquired. See Note 2 , Acquisitions, in the accompanying consolidated financial statements for further details. 25 --------------------------------------------------------------------------------
Table of Contents Kadant Inc. Results of Operations 2021 Compared to 2020 Revenue The following table presents changes in revenue by segment between 2021 and 2020, and those changes excluding the effect of foreign currency translation and acquisitions 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 2021 and 2020 was as follows: (Non-GAAP) Change in Organic Revenue (In thousands, except January 1, January 2, Currency percentages) 2022 2021 Total Increase % Change Translation Acquisitions Increase % Change Flow Control
$ 288,788 $ 225,444 $ 63,34428 % $ 6,425 $ 23,221 $ 33,69815 % Industrial Processing 328,762 261,577 67,185 26 % 13,012 589 53,584 20 % Material Handling 169,029 148,007 21,022 14 % 2,796 9,038 9,188 6 %
151,551 24 %
$ 22,233 $ 32,848 $ 96,47015 % Consolidated revenue in 2021 increased 24%, while consolidated organic revenue increased 15%, driven by higher demand for both parts and consumables products and capital equipment principally at our Industrial Processing and Flow Control segments as described below. Revenue at our Flow Control segment increased 28% in 2021, while organic revenue increased 15% due to higher demand for parts and consumables products and, to a lesser extent, capital equipment at substantially all locations. Increased demand for parts and consumables products in 2021 was due in part to customer maintenance requirements, pent-up demand, and orders in the latter part of the year to mitigate potential supply chain disruptions. Conversely, revenue during most of 2020 was depressed as a result of customer downtimes, shutdowns, and visitation restrictions related to the COVID-19 pandemic. Higher capital equipment revenue in 2021 resulted from improved market conditions and pent-up demand, while revenue in 2020 was adversely impacted by customer reductions in capital spending and deferrals of equipment installations as a result of the pandemic. Revenue at our Industrial Processing segment increased 26% in 2021, while organic revenue increased 20% due to higher demand for both capital equipment and parts and consumables products. Our wood processing business continues to experience high demand for its products, driven by near capacity mill rates resulting in increased capital investment and parts consumption. Additionally, demand for parts was augmented by maintenance requirements in the latter part of 2021 at many of our wood processing customers. Increased revenue at our stock-preparation business was led by increased demand for parts and consumables at our North American stock-preparation operation due to improved market conditions and pent-up demand coupled with a depressed 2020 period. Capital equipment revenue also increased as a result of large orders at our Chinese operation, offset in part by lower shipments at our North American and European operations due to the timing of orders and curtailed spending by our customers in 2020, which impacted revenue in the first half of 2021. Revenue at our Material Handling segment increased 14% in 2021, while organic revenue increased 6%. Demand for our European baling products was bolstered by improved business conditions in Europe, including the recovery of recycled commodity prices. This improvement was partially offset by lower capital equipment revenue at our conveying and vibratory equipment business in 2021.
The gross profit margin by segment in 2021 and 2020 was as follows:
January 1, January 2, 2022 2021 Flow Control 51.0% 52.9% Industrial Processing 40.1% 41.3% Material Handling 34.4% 33.7% Consolidated Gross Profit Margin 42.9% 43.7% 26 --------------------------------------------------------------------------------
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Kadant Inc.Consolidated gross profit margin declined to 42.9% in 2021 compared with 43.7% in 2020. The 2021 period included $4.3 millionof amortization of acquired profit in inventory, which lowered consolidated gross profit margin by 0.5 percentage points, and lower benefits received from government employee retention assistance programs. Benefits received from these programs were $0.9 million, or 0.1 percentage points of consolidated gross profit margin, in 2021 and $3.7 million, or 0.6 percentage points of consolidated gross profit margin, in 2020. Gross profit margin at our Flow Control segment decreased to 51.0% in 2021 compared with 52.9% in 2020 due to the inclusion of $3.1 millionof amortization of acquired profit in inventory, which lowered gross profit margin in 2021 by 1.1 percentage points, and a lower gross profit margin profile for Clouth. We expect the lower gross profit margin profile for Clouth to continue to have a negative impact on our Flow Control gross profit margin in 2022. Gross profit margin at our Industrial Processing segment decreased to 40.1% in 2021 compared with 41.3% in 2020 due principally to lower benefits received from government employee retention assistance programs. Cost of revenue included benefits received of $0.7 millionin 2021 compared with $2.9 millionin 2020 related to these programs. The gross profit margin was also impacted by lower-margin capital equipment revenue at our Chinese stock-preparation business offset in part by a higher margin at our wood processing business. Gross profit margin at our Material Handling segment increased to 34.4% in 2021 compared with 33.7% in 2020 due to a higher gross profit margin profile for Balemaster and an improvement in gross profit margin for capital equipment at our existing baler business. This was offset in part by $1.2 millionof amortization of acquired profit in inventory, which lowered gross profit margin by 0.7 percentage points in 2021.
Selling, general and administrative expenses
Selling, general, and administrative (SG&A) expenses by segment in 2021 and 2020 were as follows: January 1, January 2, (In thousands, except percentages) 2022 % of Revenue 2021 % of Revenue Increase % Change Flow Control
$ 76,73027 % $ 63,38228 % $ 13,34821 % Industrial Processing 60,802 18 % 57,702 22 % 3,100 5 % Material Handling 38,575 23 % 33,526 23 % 5,049 15 % Corporate 32,680 N/A 27,295 N/A 5,385 20 % Consolidated SG&A Expenses $ 208,78727 % $ 181,90529 % $ 26,88215 % Consolidated SG&A expenses as a percentage of revenue decreased to 27% in 2021 compared with 29% in 2020 principally due to higher revenue. Consolidated SG&A expenses increased $26.9 millionas a result of the inclusion of $9.7 millionof SG&A expenses from acquisitions, higher incentive compensation resulting from our improved financial performance, $5.1 millionfrom the unfavorable effect of currency translation, and an incremental $4.0 millionof acquisition-related costs. SG&A expenses included benefits received from government employee retention assistance programs of $1.4 millionin 2021 and $2.2 millionin 2020. SG&A expenses at our Flow Control segment increased $13.3 millionprincipally due to the inclusion of $7.0 millionof SG&A expenses from Clouth, $3.1 millionof acquisition-related costs, and $1.7 millionfrom the unfavorable effect of foreign currency translation. The remaining increase is principally attributable to higher incentive compensation in 2021. SG&A expenses at our Industrial Processing segment increased $3.1 millionprincipally due to $2.7 millionfrom the unfavorable effect of foreign currency translation. SG&A expenses at our Material Handling segment increased $5.0 millionprincipally due the inclusion of $2.4 millionof SG&A expenses from Balemaster and an incremental $1.3 millionof acquisition-related costs. SG&A expenses at Corporate increased $5.4 millionprimarily due to higher incentive compensation and, to a lesser extent, increased professional service fees.
Depreciation and other costs, net
Impairments and other costs, net in 2021 included an impairment charge of
$0.5 millionrelated to the write down of an intangible asset and restructuring costs totaling $0.5 millionfor severance costs and the write down of certain assets associated with the closure of a redundant business in our Flow Control segment. Impairments and other costs, net in 2021 also included a gain on the sale of a building of $0.5 millionwithin our Industrial Processing segment. Impairments and other costs, net in 2020 included impairment charges of $1.9 millionrelated to the write down of intangible assets associated with our timber-harvesting products, which are included in our Industrial Processing segment, as a result of a continued decline in revenue and operating results for this business. Impairments and other costs, net in 2020 also included restructuring costs of $1.1 million, which consisted of severance costs of $0.7 millionat our Flow Control segment, $0.2 millionat our Industrial Processing segment, and $0.2 millionat our Material Handling segment. These restructuring costs 27 --------------------------------------------------------------------------------
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Kadant Inc.represent severance associated with a restructuring plan implemented in response to the slowdown in the global economy that was largely driven by the impact of the COVID-19 pandemic. See Note 1 , Nature of Operations and Summary of Significant Accounting Policies, under the heading Impairment of Long-Lived Assets, and Note 8 , Other Costs, Net in the accompanying consolidated financial statements for further details relating to the items discussed above.
Interest expense decreased to
Provision for income taxes
Our provision for income taxes increased to
$27.2 millionin 2021 from $17.9 millionin 2020 and represented 24% of pre-tax income in both periods. The effective tax rate in 2021 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, nondeductible expenses, and state taxes. These increases in tax expense were offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements. The effective tax rate in 2020 was higher than our statutory rate of 21% primarily due to nondeductible expenses, the distribution of our worldwide earnings, and state taxes. These increases in tax expense were offset in part by a decrease in tax related to the net reversal of tax reserves associated with uncertain tax positions, the net excess income tax benefits from stock-based compensation arrangements, and a tax benefit for the partial release of a valuation allowance. Net Income Net income increased $29.1 millionin 2021 from $55.7 millionin 2020 primarily due to a $35.6 millionincrease in operating income and a $2.6 milliondecrease in interest expense, offset in part by a $9.2 millionincrease in provision for income taxes (see discussions above for further details).
Non-GAAP Key Performance Indicators
In addition to the financial measures prepared in accordance with GAAP, we use certain non-GAAP financial measures, including organic revenue (defined as revenue excluding the effect of foreign currency translation and acquisitions), adjusted operating income, earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted EBITDA, adjusted EBITDA margin (defined as adjusted EBITDA divided by revenue), and free cash flow (defined as cash flow provided by operations less capital expenditures). We use organic revenue in order to understand our trends and to forecast and evaluate our financial performance and compare revenue to prior periods (see discussion in Revenue above). Adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin exclude impairment and restructuring costs, acquisition costs, amortization expense related to acquired profit in inventory and backlog, and certain gains or losses. These items are excluded as they are not indicative of our core operating results and are not comparable to other periods, which have differing levels of incremental costs, expenditures or income, or none at all. Additionally, we use free cash flow in order to provide insight on our ability to generate cash for acquisitions and debt repayments, as well as for other investing and financing activities. We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our core business, operating results, or future outlook. We believe that the inclusion of such measures helps investors gain an understanding of our underlying operating performance and future prospects, consistent with how management measures and forecasts our performance, especially when comparing such results to previous periods or forecasts and to the performance of our competitors. Such measures are also used by us in our financial and operating decision-making and for compensation purposes. We also believe this information is responsive to investors' requests and gives them an additional measure of our performance. Our non-GAAP financial measures are not meant to be considered superior to or a substitute for the results of operations or cash flow prepared in accordance with GAAP. In addition, our non-GAAP financial measures have limitations associated with their use as compared to the most directly comparable GAAP measures, in that they may be different from, and therefore not comparable to, similar measures used by other companies. 28 --------------------------------------------------------------------------------
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A reconciliation of adjusted operating income, adjusted EBITDA and adjusted EBITDA margin to net income attributable to
January 1, January 2, December 28, (In thousands, except percentages) 2022 2021 2019 Net Income Attributable to Kadant
$ 84,043 $ 55,196 $ 52,068Net Income Attributable to Noncontrolling Interest 838 543 496 Provision for Income Taxes 27,171 17,948 16,358 Interest Expense, Net 4,554 7,242 12,542 Other Expense, Net 104 195 6,359 Operating Income 116,710 81,124 87,823 Impairment and Restructuring Costs 980 2,979 2,528 Gain on Sale of Building (515) - - Acquisition Costs 3,655 485 843 Acquired Backlog Amortization 1,326 544 1,323 Acquired Profit in Inventory 4,284 - 3,549 Adjusted Operating Income 126,440 85,132 96,066 Depreciation and Amortization 32,976 30,790 31,067 Adjusted EBITDA $ 159,416 $ 115,922 $ 127,133Adjusted EBITDA Margin 20.3% 18.3% 18.0% As a percentage of revenue, adjusted EBITDA margin increased 200 basis points in 2021 and 30 basis points in 2020. The 2021 increase was primarily due to organic revenue growth without a proportionate increase in operating expenses. The 2020 increase was primarily due to cost reduction efforts, including the impact of benefits received from government employee retention assistance programs, to mitigate lower revenue and an increased proportion of higher margin parts and consumables revenue. A reconciliation of free cash flow from cash flow provided by operating activities is as follows: January 1, January 2, December 28, (In thousands) 2022 2021 2019
Cash flow from operating activities
$ 97,413Less: Capital Expenditures (12,771) (7,595) (9,957) Free Cash Flow $ 149,649 $ 85,289 $ 87,456Free cash flow increased to $149.6 millionin 2021 from $85.3 millionin 2020 primarily due to improvements in operating assets and liabilities and net income. See below for further discussion of cash provided by operating activities. Free cash flow decreased to $85.3 millionin 2020 from $87.5 millionin 2019 primarily due to a use of cash for working capital purposes, driven by a reduction in accounts payable as a result of reduced spending levels in 2020 for capital equipment orders. 2020 Compared to 2019 A detailed discussion of the year-over-year results of operations for 2020 compared with 2019 can be found in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended January 2, 2021, filed with the SEC.
Cash and capital resources
Consolidated working capital was
$162.4 millionat January 1, 2022, compared with $155.1 millionat January 2, 2021. Cash and cash equivalents were $91.2 millionat January 1, 2022, compared with $65.7 millionat January 2, 2021, which included cash and cash equivalents held by our foreign subsidiaries of $83.8 millionat January 1, 2022and $63.6 millionat January 2, 2021. 29 --------------------------------------------------------------------------------
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Kadant Inc.Cash Flows
The cash flow information is as follows:
January 1, January 2, (In thousands) 2022 2021 Net Cash Provided by Operating Activities
$ 162,420 $ 92,884Net Cash Used in Investing Activities (154,475) (14,545) Net Cash Provided by (Used in) Financing Activities 22,808 (84,556)
Effect of exchange rate on cash, cash equivalents and restricted cash
(3,232) 4,584 Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash
$ 27,521 $ (1,633)Operating Activities Cash provided by operating activities increased to $162.4 millionin 2021 from $92.9 millionin 2020. Our operating cash flows primarily consist of cash received from customers, offset by cash payments for items such as inventory, employee compensation, operating leases, income taxes and interest payments on outstanding debt obligations. The increase in cash provided by operating activities in 2021 was principally driven by improvements in operating assets and liabilities and net income. Cash provided by operating assets and liabilities was $29.3 millionin 2021, including sources of cash of $27.7 millionfrom customer deposits and $26.3 millionfrom accounts payable, reflecting the impact of increased capital equipment order activity. Other liabilities provided cash of $19.5 million, which includes a $6.2 milliondeposit received for the anticipated sale of a building in Chinaand an increase in our accrued incentive compensation, advance billings, and accrued income taxes resulting from our improved financial performance. These sources of cash were offset in part by cash used of $16.7 millionfor accounts receivable mostly due to revenue growth and timing of shipments, $15.0 millionfor other assets due in part to prepayments for raw materials and a land use right operating lease related to the relocation of our existing facility in China, and $11.2 millionfor a buildup of inventories for capital equipment orders and to mitigate potential supply chain issues. Cash used for operating assets and liabilities of $8.0 millionin 2020 included cash used of $15.6 millionfor accounts payable primarily due to reduced spending levels for capital equipment projects and $8.6 millionfor other liabilities due in part to a decrease in advance billings resulting from lower contract activity and a payment of $2.4related to the settlement of a post-retirement benefit plan. These uses of cash were offset by cash provided of $13.2 milliondue to a reduction in unbilled revenue and accounts receivable primarily as a result of lower capital equipment revenue during 2020.
Cash used in investing activities was
$154.5 millionin 2021 compared to $14.5 millionin 2020. Cash used in investing activities included consideration paid for acquisitions, net of cash acquired, of $144.0 millionin 2021 and $7.1 millionin 2020. Additionally, cash used in investing activities included purchases of property, plant, and equipment of $12.8 millionin 2021 and $7.6 millionin 2020, reflecting depressed capital expenditures in 2020 due to the impact of the COVID-19 pandemic.
Cash provided by financing activities was
$22.8 millionin 2021 compared with cash used in financing activities of $84.6 millionin 2020. Borrowings under our revolving credit facility were $151.9 millionin 2021, including $140.3 millionto fund acquisitions, and $26.0 millionin 2020, including $18.9 millionused to prepay the outstanding principal balance on our real estate loan. Repayment of short- and long-term obligations was $115.6 millionin 2021 and $99.5 millionin 2020, including the $18.9 millionprepayment of our real estate loan.
Effect of exchange rate on cash, cash equivalents and restricted cash
The exchange rate effect on cash, cash equivalents, and restricted cash represents the impact of translation of cash balances at our foreign subsidiaries. The
$3.2 millionnegative exchange rate effect in 2021 was primarily attributable to the strengthening of the U.S.dollar against the euro and the Swedish krona, offset in part by the weakening of the U.S.dollar against the Chinese renminbi. The $4.6 millionpositive exchange rate effect in 2020 primarily related to the weakening of the U.S.dollar against the euro and Chinese renminbi.
Borrowing capacity and borrowing obligations
We entered into an unsecured multi-currency revolving credit facility, dated as of
March 1, 2017(as amended and restated to date, the Credit Agreement). At year-end 2021, we have a borrowing capacity available under our Credit Agreement of $149.9 millionin addition to a $150 millionuncommitted, unsecured incremental borrowing facility. Under our debt 30 --------------------------------------------------------------------------------
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Kadant Inc.agreements, our leverage ratio must be less than 3.75 or, if we elect, for the quarter during which a material acquisition occurs and for the three fiscal quarters thereafter, must be less than 4.00. As of January 1, 2022, our leverage ratio was 1.3 and we were in compliance with our debt covenants. We expect to renew our Credit Agreement prior to its maturity date of December 14, 2023. See
Note 6, Short-term and long-term obligations, in the accompanying consolidated financial statements for additional information regarding our debt obligations.
Additional cash and capital resources
May 20, 2021, our board of directors approved the repurchase of up to $20 millionof our equity securities during the period from May 20, 2021to May 20, 2022. We have not repurchased any shares of our common stock under this authorization or our previous authorization, which expired on May 13, 2021. We paid cash dividends of $11.5 millionin 2021. On November 18, 2021, we declared a quarterly cash dividend of $0.25per share totaling $2.9 millionthat was paid on February 3, 2022. Future declarations of dividends are subject to our board of directors' approval and may be adjusted as business needs or market conditions change. The declaration of cash dividends is subject to our compliance with the covenant in our revolving credit facility related to our consolidated leverage ratio. We plan to make expenditures of approximately $18.0 millionduring 2022 for property, plant, and equipment. In addition, one of our Chinese subsidiaries expects to build a new facility and relocate over the next two years. Capital expenditures for the new facility are estimated to be approximately $20 million, which will be offset by the proceeds received from the sale of our existing facility. See Note 15 , Subsequent Event, in the accompanying consolidated financial statements for additional information regarding the anticipated relocation of our Chinese manufacturing facility. As of January 1, 2022, we had approximately $245.1 millionof total unremitted foreign earnings. It is our intent to indefinitely reinvest $223.0 millionof these earnings to support the current and future capital needs of our foreign operations, including debt repayments, if any. In 2021, we recorded withholding taxes on the earnings in certain foreign subsidiaries that we plan to repatriate in the foreseeable future. The foreign withholding taxes that would be required if we were to remit the indefinitely-reinvested foreign earnings to the United Stateswould be approximately $4.1 million. We believe that existing cash and cash equivalents, along with cash generated from operations, our existing borrowing capacity, and continued access to debt markets, will be sufficient to meet the capital requirements of our operations for the next 12 months and the foreseeable future.
Important contractual obligations
The following table summarizes our material contractual obligations as of
January 1, 2022and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods. Detailed information concerning these obligations can be found in Notes 6, 7, and 9 in the accompanying consolidated financial statements. Less than 1 After 5 (In millions) Year 1-3 Years 3-5 Years Years Total Debt Obligations: Principal payments (a) $ 1.2 $ 255.2 $ 4.4 $ 3.8 $ 264.6Interest payments (b) 4.3 4.6 0.6 0.2 9.7 Operating and Finance Lease Obligations 5.4 7.0 4.0 9.8 26.2 Letters of Credit and Bank Guarantees 18.5 4.4 0.6 - 23.5 Total $ 29.4 $ 271.2 $ 9.6 $ 13.8 $ 324.0(a)Excludes $1.5 millionrelated to a net fixed price purchase option exercisable in 2022. (b)Includes interest expense on both variable and fixed rate debt assuming no prepayments. Variable interest rates have been assumed to remain constant through the end of the term at the rates that existed as of year-end 2021.
Application of critical accounting estimates
Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Our actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies and estimates are defined as those that entail significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. For a discussion on the application of these estimates and other accounting policies, see Note 1 , Nature of Operations and Summary of Significant 31 --------------------------------------------------------------------------------
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Kadant Inc.Accounting Policies, in the accompanying consolidated financial statements. We believe that our most critical accounting policies and estimates upon which our financial position depends, and which involve the most complex or subjective decisions or assessments, are those described below.
We operate in numerous countries under many legal forms and, as a result, are subject to the jurisdiction of numerous domestic and non-
U.S.tax authorities, as well as to tax agreements and treaties among these governments. Determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and assumptions regarding significant future events, such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources and character of income and available tax credits. Changes in tax laws, regulations, agreements and treaties, currency-exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of current and deferred tax balances and our results of operations. We compute our provision for income taxes using the asset and liability method, and we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for tax loss or credit carryforwards. We measure deferred tax assets and liabilities using the currently enacted tax rates that are expected to apply to taxable income in the years in which we expect to realize those deferred tax assets and liabilities. We estimate the degree to which our deferred tax assets on deductible temporary differences and tax loss or credit carryforwards will result in an income tax benefit based on the expected profitability by tax jurisdiction, and we provide a valuation allowance for these deferred tax assets if it is more likely than not that they will not be realized in the future. If it were to become more likely than not that these deferred tax assets would be realized, we would reverse the related valuation allowance. Should our actual future taxable income by tax jurisdiction vary from our estimates, additional valuation allowances or reversals thereof may be necessary. When assessing the need for a valuation allowance in a tax jurisdiction, we evaluate the weight of all available evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. As part of this evaluation, we consider our cumulative three-year history of earnings before income taxes, taxable income in prior carryback years, future reversals of existing taxable temporary differences, prudent and feasible tax planning strategies, and expected future results of operations. At year-end 2021, we continued to maintain a valuation allowance in the United Statesagainst certain of our state operating loss carryforwards due to the uncertainty of future profitability in these state jurisdictions in the United States, and we maintained valuation allowances in certain foreign jurisdictions because of the uncertainty of future profitability. Our tax valuation allowance was $9.2 millionat year-end 2021. In the ordinary course of business there are inherent uncertainties and judgements required in quantifying our income tax positions. It is our policy to provide for uncertain tax positions and the related interest and penalties based upon our assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. On a quarterly basis, we evaluate our uncertain tax positions against various factors, including changes in facts or circumstances, tax laws, or the status of audits by tax authorities. We believe that we have appropriately accounted for any liability for unrecognized tax benefits, and at year-end 2021, our liability for these unrecognized tax benefits, including an accrual for the related interest and penalties, totaled $11.4 million. To the extent we prevail in matters for which a liability for an unrecognized tax benefit is established or are required to pay amounts in excess of the liability, our effective tax rate in a given financial statement period may be affected. We intend to repatriate the distributable reserves of select foreign subsidiaries back to the United Statesand, during 2021, we recorded $0.6 millionof net tax expense associated with these foreign earnings that we plan to repatriate in 2022. Except for these select foreign subsidiaries, we intend to reinvest indefinitely the earnings of our international subsidiaries in order to support the current and future capital needs of their operations, including the repayment of our foreign debt.
Approximately 90% of our revenue is recognized at a point in time following the transfer of control of the goods or service to the customer, primarily relating to our products that require minimal customization for the customer. The remaining portion of our revenue is recognized on an over time basis using an input method that compares the costs incurred to date to the total expected costs required to satisfy the performance obligation. Most revenue recognized on an over time basis is for large capital products that are highly customized for the customer and, as a result, would include significant cost to rework in the event of cancellation. The over time basis of accounting requires significant judgment in determining applicable contract costs and the corresponding revenue to be recognized, which could be different if there were to be changes to the circumstances of the contract. When adjustments to revenue and costs are required, the adjustments are included in earnings in the period of the change. Judgment is also required for contracts involving variable consideration and multiple performance obligations. 32 --------------------------------------------------------------------------------
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We use assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination, including the determination of the fair value of intangible assets acquired, which represents a significant portion of the purchase price in many of our acquisitions. We estimate the fair value of intangible assets primarily based on projections of discounted cash flows which we expect to arise from identifiable intangible assets of acquired businesses. The determination of the allocation of the purchase price for the fair value of intangible assets acquired requires significant judgment as does the determination as to whether such intangibles are amortizable or non-amortizable and, if amortizable, the amortization period of the intangible asset. We evaluate the recoverability of goodwill and indefinite-lived intangible assets as of the end of each fiscal year, or more frequently if events or changes in circumstances indicate that the carrying value of an asset might be impaired. Estimates of discounted future cash flows arising from intangible assets acquired require assumptions related to revenue and operating income growth rates, discount rates, and other factors. Different assumptions from those made in our analysis could materially affect projected cash flows and our evaluation of goodwill and indefinite-lived intangible assets for impairment. At year-end 2021 and 2020, we performed a qualitative impairment analysis (Step 0) for our reporting units, except for the material handling reporting unit for which we performed a quantitative impairment analysis (Step 1) at year-end 2020. Based on these analyses, we determined goodwill and indefinite-lived intangible assets were not impaired.
Goodwilltotaled $396.9 millionand indefinite-lived intangible assets totaled $28.9 millionat year-end 2021. Definite-lived intangible assets are evaluated for impairment if events or changes in circumstances indicate that the carrying value of an asset might be impaired, such as a significant reduction in cash flows associated with the assets. Actual cash flows arising from a particular intangible asset could vary from projected cash flows which could imply different carrying values from those established at the dates of acquisition and which could result in impairment of such asset. No indicators of impairment were identified in 2021 and 2020, except for impairment charges of $0.5 millionin 2021 related to the closure of a business in our Flow Control Segment and $1.9 millionin 2020 associated with our timber-harvesting product line, which is included in our Industrial Processing segment. Definite-lived intangible assets were $170.4 millionat year-end 2021. A material adverse change in the business climate including a prolonged economic downturn and weakness in demand for our products could negatively affect the revenue and profitability assumptions used in our assessment of goodwill and intangible assets, which may result in impairment charges. Any future impairment charges could have a material adverse effect on our results of operations in the period in which an impairment is determined to exist. See Note 1 , Nature of Operations and Summary of Significant Accounting Policies, under the heading Impairment of Long-Lived Assets, in the accompanying consolidated financial statements for further details regarding impairment costs recorded in 2021 and 2020. Inventories We value our inventory at the lower of the actual cost (on a first-in, first-out; or weighted average basis) or net realizable value and include materials, labor, and manufacturing overhead. The valuation of inventory requires us to make judgments, based on currently available information, about the forecasted usage of and demand for each particular product or product line. Assumptions about future dispositions of inventory are inherently uncertain and, although we make every effort to ensure the accuracy of our forecasts of future product usage and demand, any changes in those assumptions may result in a write-down of inventory in the period in which inventory is deemed excessive or obsolete, which could adversely affect our results of operations.
Recent accounting pronouncements
See Note 1, Nature of Transactions and Summary of Significant Accounting Policies, under the headings Recently adopted accounting pronouncements and Recent accounting pronouncements not yet adopted, in the accompanying consolidated financial statements for further details.
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