Acquisitions

The Company’s acquisitions are accounted for using the purchase method of accounting and their results are included in the accompanying financial statements from their respective dates of acquisition. Historically, the Company’s acquisitions have been made at prices above the fair value of identifiable net assets, resulting in goodwill. Acquisition transaction costs are included in selling, general, and administrative expenses (SG&A) in the accompanying consolidated statement of income as incurred. The Company recorded acquisition transaction costs of $5,375,000 in 2017 and $1,832,000 in 2016.

2017

On August 14, 2017, the Company acquired certain assets of Unaflex, LLC (Unaflex) for $31,274,000 in cash, subject to a post-closing adjustment. 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. Revenues for Unaflex were $17,494,000 for the twelve months ended December 31, 2016. This acquisition complements the Company’s existing Fluid-Handling product line within the Company’s Papermaking Systems segment. The Company expects several synergies in connection with this acquisition, including expanding sales of products offered by Unaflex by leveraging the Company’s sales efforts, as well as sourcing and manufacturing efficiencies. Goodwill from the Unaflex acquisition was $15,657,000, all of which is expected to be deductible for tax purposes. For 2017, the Company recorded revenues of $7,335,000 and operating income of $187,000 for Unaflex from its date of acquisition. Included in operating income was amortization expense of $176,000 associated with acquired profit in inventory.

On July 5, 2017, the Company acquired the forest products business of NII FPG Company (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. Revenues for NII FPG were approximately $81,000,000 for the twelve months ended December 31, 2016. This acquisition extends the Company's presence deeper into the forest products industry and complements its existing Wood Processing Systems segment. The Company expects several synergies in connection with this acquisition, including expansion of product sales at the Company's existing businesses by leveraging NII FPG's geographic presence, as well as sourcing and manufacturing efficiencies. Goodwill from the NII FPG acquisition was $85,508,000, of which $33,228,000 is expected to be deductible for tax purposes. 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. Included in operating income was amortization expense of $6,399,000 associated with acquired profit in inventory and backlog.

In addition, the Company paid $2,500,000 in cash for another acquisition in the fourth quarter of 2017 within the Papermaking Systems segment.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed and the purchase price of the Company's 2017 acquisitions. The purchase price allocation is based upon preliminary information and is subject to change if additional information about the facts and circumstances that existed at the acquisition date becomes available. The final determination of fair value of the assets acquired and liabilities assumed may result in adjustments to the assets and liabilities, including goodwill. During the year ended December 30, 2017, the Company made certain adjustments to its purchase price allocation primarily to adjust working capital, which resulted in a $1,282,000 increase to goodwill initially recorded. Any subsequent measurement period adjustments are not expected to have a material impact on the Company's results of operations.



	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	25,246		1,704		—		26,950
Property, Plant, and Equipment	12,912		1,194		284		14,390
Other Assets	2,375		72		—		2,447
Definite-Lived Intangible Assets
Customer relationships	44,700		8,000		1,500		54,200
Product technology	17,100		2,300		—		19,400
Other	2,540		900		—		3,440
Indefinite-Lived Intangible Assets
Tradenames	8,500		—		—		8,500
Goodwill	85,508		15,657		716		101,881
Total assets acquired	207,642		31,906		2,500		242,048

Accounts Payable	4,970		358		—		5,328
Customer Deposits	7,396		100		—		7,496
Long-Term Deferred Income Taxes	16,668		—		—		16,668
Other Liabilities	5,597		174		—		5,771
Total liabilities assumed	34,631		632		—		35,263
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 and 2016 would have been as follows:



(In thousands, except per share amounts)	December 30, 2017		December 31, 2016
Revenues	$	565,710	$	508,832

Net Income Attributable to Kadant	$	44,159	$	30,638

Earnings per Share Attributable to Kadant:
Basic	$	4.02	$	2.82
Diluted	$	3.90	$	2.75

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


•	Pre-tax charge to SG&A expenses of $5,360,000 in 2016 and reversal in 2017, for acquisition transaction costs.


•	Estimated pre-tax charge to cost of revenues of $5,137,000 in 2016 and reversal in 2017, for the sale of inventory revalued at the date of acquisition.


•	Estimated pre-tax charge to SG&A expenses of $1,669,000 in 2016 and reversal 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.

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 including its other acquisition would not have been materially different from the pro forma results presented above had it occurred at the beginning of 2016.

2016

On April 4, 2016, the Company acquired all the outstanding shares of RT Holding GmbH, the parent corporation of a group of companies known as the PAALGROUP (PAAL) for 49,713,000 euros, net of cash acquired, or $56,617,000, pursuant to a post-closing adjustment. The Company paid additional consideration of $165,000 to the sellers in 2017. In connection with the acquisition, the Company borrowed $29,866,000 as a euro-denominated borrowing under its revolving credit facility. The remainder of the purchase price was funded from the Company's internal overseas cash.

PAAL, which has operations in Germany, the United Kingdom, France and Spain, manufactures balers and related equipment used in the processing of recyclable and waste materials. This acquisition, which is included in the Company's Papermaking Systems segment's Stock-Preparation product line, broadened the Company's product portfolio and extended its presence deeper into recycling and waste management. The Company anticipated and continues to achieve several synergies in connection with this acquisition, including expanding sales of the products of the acquired business by leveraging the Company's geographic presence to enter or further penetrate existing markets, as well as sourcing and manufacturing efficiencies. Goodwill from the PAAL acquisition was $38,552,000, which is not deductible for tax purposes. For 2016, Company recorded revenues of $40,783,000 and operating income of $2,372,000 for PAAL from its date of acquisition. Included in operating income was amortization expense of $1,926,000 associated with acquired inventory and backlog.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed and the purchase price of PAAL.



	PAAL
(In thousands)	April 4, 2016

Net Assets Acquired:
Cash and Cash Equivalents	$	2,277
Accounts Receivable	5,441
Inventories	3,947
Property, Plant, and Equipment	7,179
Other Assets	2,882
Definite-Lived Intangible Assets
Customer relationships	15,831
Product technology	4,203
Tradenames	2,278
Other	2,379
Goodwill	38,552
Total assets acquired	84,969

Accounts Payable	5,536
Customer Deposits	2,471
Obligations Under Capital Lease	4,842
Long-Term Deferred Income Taxes	6,148
Other Liabilities	6,913
Total liabilities assumed	25,910
Net assets acquired	$	59,059

Purchase Price:
Cash	$	29,193
Cash Paid to Seller Borrowed Under the Revolving Credit Facility	29,866
Total purchase price	$	59,059

For the PAAL acquisition, the weighted-average amortization period for definite-lived intangible assets acquired is 12 years, including weighted-average amortization periods of 13 years for customer relationships, 9 years for product technology, 14 years for tradenames, and 7 years for other intangible assets.

Unaudited Supplemental Pro Forma Information

Had the acquisition of PAAL been completed as of the beginning of 2015, the Company’s pro forma results of operations for 2016 and 2015 would have been as follows:



(In thousands, except per share amounts)	December 31, 2016		January 2, 2016
Revenues	$	427,273	$	444,350

Net Income Attributable to Kadant	$	35,321	$	33,881

Earnings per Share Attributable to Kadant:
Basic	$	3.25	$	3.12
Diluted	$	3.17	$	3.05

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


•	Pre-tax charge to SG&A expenses of $1,832,000 in 2015 and reversal in 2016, for acquisition transaction costs.


•	Estimated pre-tax charge to cost of revenues of $458,000 in 2015 and reversal in 2016, for the sale of inventory revalued at the date of acquisition.


•	Estimated pre-tax charge to SG&A expenses of $1,468,000 in 2015 and reversal in 2016, for intangible asset amortization related to acquired backlog.


•	Reversal of $1,636,000 of interest expense in 2015 and $454,000 in 2016 related to pre-acquisition debt, which was settled in the acquisition.