Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. KADANT INC (886346) 10-Q published on May 08, 2019 at 4:11 pm
Reporting Period: Mar 29, 2019
Leases (Topic 842). In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, which requires a lessee to recognize a right-of-use (ROU) asset and a corresponding lease liability for operating leases, initially measured at the present value of the future lease payments, on its balance sheet. This ASU also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. The Company adopted this ASU as of the beginning of fiscal 2019 using the cumulative-effect adjustment method. As a result, prior period amounts were not restated and continue to be under Topic 840, Leases, which did not require the recognition of operating leases on the balance sheet and is not comparative. As permitted under ASC 842, the Company elected the package of practical expedients for expired or existing contracts, which does not require the reassessment of prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected practical expedients relating to its ongoing accounting, including a short-term lease recognition exemption allowing lessees not to recognize ROU assets and liabilities with a term of 12 months or less and an election not to separate lease and non-lease components for all leases except vehicle leases.
SMH, which comprises the Company's new Material Handling Systems segment, has manufacturing operations in Mississippi, United States and in 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. Revenues for SMH were approximately $89,365,000 for the trailing twelve months ended October 31, 2018. 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 $86,502,000, of which $64,438,000 is expected to be deductible for tax purposes over 15 years. In addition, intangible assets acquired were $77,140,000, of which $66,725,000 is expected to be deductible for tax purposes over 15 years. For the quarter ended March 30, 2019, the Company recorded revenues of $20,584,000 and an operating loss of $1,353,000 for SMH from the date of acquisition, including amortization expense of $3,308,000 associated with acquired profit in inventory and backlog, and $843,000 of acquisition transaction costs.
On March 4, 2019, the Company granted to certain of its officers performance-based RSUs, which represented, in aggregate, the right to receive 27,422 shares (the target RSU amount), with an aggregate grant date fair value of $2,364,000. The RSUs are subject to adjustment based on the achievement of the performance measure selected for the 2019 fiscal year, which is a specified target for adjusted EBITDA generated from operations for the 2019 fiscal year. The RSUs are adjusted by comparing the actual adjusted EBITDA for the performance period to the target adjusted EBITDA. Actual adjusted EBITDA between 50% and 100% of the target adjusted EBITDA results in an adjustment of 50% to 100% of the RSU amount. Actual adjusted EBITDA between 100% and 115% of the target adjusted EBITDA results in an adjustment using a straight-line linear scale between 100% and 150% of the RSU amount. Actual adjusted EBITDA in excess of 115% results in an adjustment capped at 150% of the RSU amount. If actual adjusted EBITDA is below 50% of the target adjusted EBITDA for the 2019 fiscal year, these performance-based RSUs will be forfeited. In the first three months of 2019, the Company recognized compensation expense based on the probable number of performance-based RSUs expected to vest, which was 100% of the target RSU amount. Following the adjustment, the performance-based RSUs will be subject to additional time-based vesting, and will vest in three equal annual installments on March 10 of 2020, 2021, and 2022, provided that the officer is employed by the Company on the applicable vesting dates. On March 4, 2019, the Company also granted time-based RSUs representing 39,206 shares to its officers and employees with an aggregate grant date fair value of $3,385,000. These time-based RSUs generally vest in three equal annual installments on March 10 of 2020, 2021, and 2022, provided that a recipient remains employed by the Company on the applicable vesting dates.
The Company's operating lease ROU assets and operating lease liabilities with contract terms greater than 12 months are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. In determining the present value of future lease payments, the Company utilizes either the rate implicit in the lease if that rate is readily determinable or the Company’s incremental secured borrowing rate commensurate with the term of the underlying lease. In addition, the calculation may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company recognizes its operating lease expense for lease payments on a straight-line basis over the lease term. Variable lease costs are not included in fixed lease payments and as a result, are excluded from the measurement of the ROU assets and lease liabilities. The Company expenses all variable lease costs as incurred, which were not material for the quarter ended March 30, 2019.
The Company's lease agreements often contain lease and non-lease components. For real estate and equipment leases, the Company accounts for the lease and non-lease components as a single lease component. For vehicle leases, the Company does not combine lease and non-lease components.
Our bookings in Asia were $24 million in the first quarter of 2019 compared with $25 million in the first quarter of 2018, including a $2 million increase resulting from an acquisition and an unfavorable foreign currency translation effect of $1 million. The market in Asia continues to undergo a fundamental shift, as the Chinese government has restricted imports of recovered paper effective January 1, 2018, and further announced that it may ban waste paper imports altogether by 2020. In response to such actions, Chinese containerboard producers have invested in pulping capacity in Southeast Asia, particularly in Malaysia, to process recovered paper with the intent to either ship linerboard to China or ship the pulp to paper and paperboard mills in China. This capacity build-out increased demand for our capital equipment outside of China over the last several quarters. We expect demand for capital equipment in China in 2019 to decrease compared to 2018 as a result of recent capacity additions and the continued recovered paper restrictions. Lower operating rates as a result of softer market conditions in China will also impact our parts and consumables business.