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 $1,321,000 in 2018 (see Note 15, Subsequent Events), $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 expects to pay additional consideration of $397,000 to the sellers in 2019. 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. This acquisition complemented the Company’s existing Fluid-Handling product line within its Papermaking Systems segment. The Company anticipated and continues to achieve several synergies in connection with this acquisition, including the expansion of sales by Unaflex through leveraging the Company’s sales efforts, as well as sourcing and manufacturing efficiencies. Goodwill from the Unaflex acquisition was $15,640,000, 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, including 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. This acquisition extended the Company's presence deeper into the forest products industry and complemented its existing Wood Processing Systems segment. Goodwill from the NII FPG acquisition was $85,432,000, of which $33,993,000 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, including 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 within the Fluid-Handling product line in the Company's 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.



		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		25,304		2,033		—		27,337
Property, Plant, and Equipment		12,912		1,279		284		14,475
Other Assets		2,375		72		—		2,447
Definite-Lived Intangible Assets
Customer relationships		44,682		8,000		1,500		54,182
Product technology		17,100		2,300		—		19,400
Other		2,530		900		—		3,430
Indefinite-Lived Intangible Assets
Tradenames		8,500		—		—		8,500
Goodwill		85,432		15,640		716		101,788
Total assets acquired		207,596		32,303		2,500		242,399

Accounts Payable		4,970		358		—		5,328
Customer Deposits		7,396		100		—		7,496
Long-Term Deferred Income Taxes		16,622		—		—		16,622
Other Liabilities		5,597		174		—		5,771
Total liabilities assumed		34,585		632		—		35,217
Net assets acquired		$	173,011	$	31,671	$	2,500	$	207,182

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
Estimated Post-closing Adjustment	—	—		397		—		397
Total purchase price		$	173,011	$	31,671	$	2,500	$	207,182

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.


•	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.


•	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 above exclude its other 2017 acquisitions as those results would not have been materially different then the results presented above had they 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 of euro-denominated borrowings 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, which included 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.