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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
FORM 10-K
(mark one)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number 001-11406
KADANT INC.
(Exact name of Registrant as specified in its charter)
Delaware
 
52-1762325
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

One Technology Park Drive
Westford, Massachusetts 01886
(Address of principal executive offices, including zip code)
(978) 776-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $.01 par value
 
KAI
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes        No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes        No   
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No   
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    Yes         No   
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No   
The aggregate market value of the voting and non-voting common equity held by nonaffiliates of the Registrant as of June 29, 2019 (based on the closing price per share as reported on the New York Stock Exchange on the last business day of the Registrant's most recently completed second fiscal quarter), was approximately $1,001,332,000. For purposes of the immediately preceding sentence, the term "affiliate" consists of each director and executive officer of the Registrant.
As of February 14, 2020, the Registrant had 11,422,466 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, to be used in connection with the Registrant's 2020 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.




Kadant Inc.
Annual Report on Form 10-K
for the Fiscal Year Ended December 28, 2019
Table of Contents

 
 
Page
PART I
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
PART II
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
PART III
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
PART IV
 
 
 
Item 15.
Item 16.
 


Kadant Inc.
 
 
 
 
 
 
 
 
 
 

PART I

Forward-Looking Statements
This Annual Report on Form 10-K 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 the section captioned "Risk Factors" in Part I, Item 1A, of this report.

Item 1.    Business
Throughout this Annual Report on Form 10-K, when we use the terms "we," "us," "our," "Registrant," and the "Company" we mean Kadant Inc., a Delaware corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates. Unless otherwise noted, references to 2019, 2018, and 2017 in this Annual Report on Form 10-K are to our fiscal years ended December 28, 2019, December 29, 2018, and December 30, 2017, respectively.

Description of Our Business
We are a global supplier of high-value, critical components and engineered systems used in process industries worldwide. In addition, we manufacture granules made from papermaking by-products. We have a diverse and large customer base, including most of the world's major paper producers and lumber and oriented strand board (OSB) manufacturers, as well as various mining and industrial processing companies that require bulk material handling solutions. Our products, technologies, and services play an integral role in enhancing process efficiency, optimizing energy utilization, and maximizing productivity in resource-intensive industries.
Our operations are comprised of three reportable operating segments, Papermaking Systems, Wood Processing Systems, and Material Handling Systems, and a separate product line, Fiber-based Products.
Through our Papermaking Systems segment, we develop, manufacture, and market a range of equipment and products for the global papermaking, paper recycling, recycling and waste management, and other process industries. Our principal products include custom-engineered stock-preparation systems and equipment for the preparation of wastepaper for conversion into recycled paper and balers and related equipment used in the processing of recyclable and waste materials; fluid-handling systems and equipment used in industrial piping systems to compensate for movement and to efficiently transfer fluid, power, and data; doctoring systems and equipment and related consumables important to the efficient operation of paper machines and other industrial processes; and filtration and cleaning systems essential for draining, purifying, and recycling process water and cleaning fabrics, belts, and rolls in various process industries.
Through our Wood Processing Systems segment, we develop, manufacture, and market debarkers, stranders, chippers, logging machinery, and related equipment used in the harvesting and production of lumber and OSB.
Through our Material Handling Systems segment, we develop, manufacture, and market material handling equipment and systems, including vibratory and conveying equipment, to various process industries, including mining, aggregates, food processing, packaging, and pulp and paper.
Through our Fiber-based Products business, we manufacture and sell biodegradable, absorbent granules derived from papermaking by-products. These materials are primarily used as carriers in agricultural, home lawn and garden, professional lawn, turf and ornamental applications, and for oil and grease absorption.

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 actively pursue additional acquisition opportunities. Our significant acquisition in 2019 is described below.

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On January 2, 2019, we acquired, directly and indirectly, all the outstanding equity interests of Syntron Material Handling Group, LLC and certain of its affiliates (SMH) for $176.9 million, net of cash acquired. SMH comprises our Material Handling Systems segment, as described above. This acquisition extended our current product portfolio, and we expect it will strengthen SMH's relationships in the pulp and paper markets. See Note 2, Acquisitions, in the accompanying consolidated financial statements for further details.

Papermaking Systems Segment
Our Papermaking Systems segment has a long and well-established history of developing, manufacturing, and marketing a range of equipment and products for the global papermaking, paper recycling, recycling and waste management, and other process industries. Some of our businesses or their predecessor companies have been in operation for more than 100 years. Our customer base includes major global paper manufacturers, and we believe we have one of the largest installed bases of equipment in the markets we serve within the pulp and paper industry. We manufacture our Papermaking Systems products in nine countries in Europe, North America, South America, and Asia.
Our Papermaking Systems segment consists of the following product lines: Stock-Preparation; Fluid-Handling; and Doctoring, Cleaning, & Filtration.

Stock-Preparation
We develop, manufacture, and market custom-engineered systems and equipment, as well as standard individual components, for baling, pulping, de-inking, screening, cleaning, and refining primarily recycled fiber for preparation for entry into the paper machine, and recausticizing and evaporation equipment and systems used in the production of virgin pulp. Our baling equipment is also used to compress a variety of other secondary materials to prepare them for transport or storage. Our principal stock-preparation products include:
 
Recycling and approach flow systems: Our equipment includes pulping, screening, cleaning, and de-inking systems that blend pulp mixtures and remove contaminants, such as ink, glue, metals, and other impurities, to prepare them for entry into the paper machine during the production of recycled paper.
 
Virgin pulping process equipment: Our equipment includes pulp washing, evaporator, recausticizing, and condensate treatment systems used to remove lignin, concentrate and recycle process chemicals, and remove condensate gases.
 
Balers and related equipment: Our equipment includes horizontal channel balers, vertical balers, conveyors, compactors, and bale wrapping machines used in the processing of recyclable and waste materials.

Fluid-Handling
We develop, manufacture and market fluid-handling systems and equipment used in industrial piping systems to compensate for movement and to efficiently transfer fluid, power, and data. Our products are used primarily in the dryer section of the papermaking process and during the production of corrugated packaging, metals, plastics, pharmaceuticals, energy, rubber, textiles, chemicals, and food. Expansion joints are used in industrial piping systems. Our principal fluid-handling systems and equipment include:
 
Rotary joints: Our mechanical devices, used with rotating shafts, allow the transfer of pressurized fluid from a stationary source into and out of rotating machinery for heating, cooling, or the transfer of fluid power.
 
Syphons: Our devices, installed inside rotating cylinders, are used to remove fluids from the rotating cylinders through rotary joints or unions located on either end of the cylinder.
 
Turbulator® bars: Our steel or stainless steel axial bars, installed on the inside of cylinders, are used to induce turbulence in the condensate layer to improve the uniformity and rate of heat transfer through the cylinders.
 
Expansion joints: Our rubber, metal, fabric and other materials are used to compensate for movement due to thermal expansion, vibration and other causes.
 
Engineered steam and condensate systems: Our steam systems control the flow of steam from the boiler to the paper drying cylinders, collect condensed steam, and return it to the boiler to improve energy efficiency during the paper drying process. Our systems and equipment are also used to efficiently and effectively distribute steam in a wide variety of industrial processing applications.


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Doctoring, Cleaning, & Filtration
We develop, manufacture, and market a wide range of doctoring, cleaning, and filtration systems and related consumables that continuously clean rolls to keep paper machines and other industrial processes running efficiently. Doctoring and cleaning systems are also used in other process industries such as carbon fiber, textiles and food processing. Our principal doctoring, cleaning, and filtration products include:
 
Doctor systems and holders: Our doctor systems clean papermaking rolls to maintain the efficient operation of paper machines and other equipment by placing a blade against the roll at a constant and uniform pressure. A doctor system consists of the structure supporting the blade and the blade holder.
 
Profiling systems: We offer profiling systems that control moisture, web curl, and gloss during paper converting.
 
Doctor blades: We manufacture doctor and scraper blades made of a variety of materials including metal, bi-metal, or synthetic materials that perform a variety of functions including cleaning, creping, web removal, flaking, and applying coatings. A typical doctor blade has a life ranging from eight hours to two months, depending on the application.
 
Shower and fabric-conditioning systems: Our shower and fabric-conditioning systems assist in the removal of contaminants that collect on paper machine fabrics used to convey the paper web through the forming, pressing, and drying sections of the paper machine. A typical paper machine has between three and 12 fabrics. These fabrics can easily become contaminated with fiber, fillers, pitch, and dirt that can have a detrimental effect on paper machine performance and paper quality. Our shower and fabric-conditioning systems assist in the removal of these contaminants.
 
Formation systems: We supply structures that drain, purify, and recycle process water from the pulp mixture during paper sheet and web formation.
 
Water-filtration systems: We offer a variety of filtration systems and strainers that remove contaminants from process water before reuse and recover reusable fiber for recycling back into the pulp mixture.

Wood Processing Systems Segment
We develop, manufacture, and market debarkers, stranders, chippers, logging machinery, and related equipment used in the harvesting and production of lumber and OSB. We manufacture our wood processing products principally in Canada, Finland and the United States. Our principal wood processing products include:
 
Ring and rotary debarkers: Our fixed and sliding ring debarkers utilize a rotating multi-tool to strip the bark off a non-rotating log. Our ring debarkers are used in lumber mills to remove the bark from the tree before further processing into lumber. Our rotary debarkers and related parts and consumables employ a combination of mechanical abrasion and log-to-log contact to efficiently remove bark from logs of all shapes and species.
 
Stranders: Our disc and ring stranders and related parts and consumables cut batch-fed logs into strands for OSB production and are used to manage strands in real time using our patented conveying and feeding equipment.
 
Chippers: Our disc, drum, and veneer chippers and related parts and consumables are high-quality, robust chipper systems for waste-wood and whole-log applications found in pulp woodrooms, chip plants, and sawmill and planer mill sites.
 
Logging machinery: Our feller bunchers, log loaders, and swing yarders are used to harvest and gather timber for lumber production.

Material Handling Systems Segment
We develop, manufacture, and market material handling equipment and systems to various process industries, including mining, aggregates, food processing, packaging, and pulp and paper. We manufacture our material handling products principally in the United States. Our principal material handling products include:
 
Vibratory equipment: feeders, screens, and flow aides utilized in the feeding of rugged and non-rugged materials as well as in mixing, blending, and packaging of fragile materials with speed and precision.

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Conveying equipment: transport idlers, power terminal units, and electric controls, used to transport bulk materials in harsh above- and below-ground mining environments; and screws, conveyors and bucket elevators used for material handling operations in agricultural, food, and paper markets.

Fiber-based Products
We manufacture and sell biodegradable, absorbent granules derived from papermaking by-products. These materials are primarily used as carriers in agricultural, home lawn and garden, professional lawn, turf and ornamental applications, and for oil and grease absorption. We manufacture our granules in the United States.

Research and Development
We develop a broad range of products for all facets of the markets we serve. We operate research and development facilities in the United States, Europe, and Canada, and focus our product innovations on process industry challenges and the need for improved fiber processing, heat transfer, roll and fabric cleaning, fluid handling, timber harvesting, wood processing, and secondary material handling. In addition to internal product development activities, our research centers allow customers to simulate their own operating conditions and applications to identify and quantify opportunities for improvement.
Our research and development expenses were $10.9 million in 2019, $10.6 million in 2018, and $9.6 million in 2017.

Raw Materials
The primary raw materials used in our Papermaking Systems segment are steel, stainless steel, ductile iron, brass, bronze, aluminum, and elastomers and in our Wood Processing Systems segment are steel and stainless steel. In our Material Handling Systems segment the primary raw materials used are steel, aluminum, and composites. These raw materials are generally purchased and available through a number of suppliers.
The raw material used in the manufacture of our fiber-based granules is a by-product from the production of paper that we obtain from two paper mills. If these mills were unable or unwilling to supply us with sufficient fiber, we would be forced to find one or more alternative suppliers for this raw material.
To date, our raw materials have generally been available and we have not needed to maintain raw material inventories in excess of our current needs.

Patents, Licenses, and Trademarks
We protect our intellectual property rights by applying for and obtaining patents when appropriate. We also rely on technical know-how, trade secrets, and trademarks to maintain our competitive position. We also enter into license agreements with others to grant and/or receive rights to patents and know-how. No particular patent, or related group of patents, is so important that its expiration or loss would significantly affect our operations.

Papermaking Systems Segment
We have numerous U.S. and foreign patents, including foreign counterparts to our U.S. patents, expiring on various dates ranging from 2020 to 2039. From time to time, we enter into licenses with other companies for products that serve the pulp, papermaking, converting, and paper recycling industries.

Wood Processing Systems Segment
We have numerous U.S. and foreign patents, including foreign counterparts to our U.S. patents, expiring on various dates ranging from 2020 to 2035, related to wood processing and debarking equipment.

Material Handling Systems Segment
We have numerous U.S. and foreign patents, including foreign counterparts to our U.S. patents, expiring on various dates ranging from 2020 to 2026, related to various aspects of conveyor belt systems and conveying apparatus. We also license one of our two significant product brand names, Link-Belt®, from a third party pursuant to a trademark license agreement. More than half of our Material Handling Systems segment revenue in 2019 was generated by sales of conveying equipment sold under the Link-Belt® name. Under the terms of the license agreement, we have a worldwide, exclusive, royalty-free, perpetual license to use the Link-Belt® trademark in connection with such products.


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Fiber-based Products
We currently hold several U.S. patents, expiring on various dates ranging from 2021 to 2034, related to various aspects of the processing of fiber-based granules and the use of these materials in agricultural, home lawn and garden, professional lawn, turf and ornamental applications, and for oil and grease absorption.

Seasonal Influences

Papermaking Systems Segment
There are no material seasonal influences on this segment's sales of products and services.

Wood Processing Systems Segment
Our Wood Processing Systems segment is subject to seasonal variations, with demand for many of our products tending to be greater during the building and timber harvesting season, which generally occurs in the second and third quarters in North America.

Material Handling Systems Segment    
Our Material Handling Systems segment may experience minor seasonal fluctuations in sales, with demand for our products tending to be greater in the second and third quarters due to the impact of weather and favorable outdoor working conditions at certain of its customers.

Fiber-based Products
Our Fiber-based Products business experiences fluctuations in sales, usually in the third quarter, when sales decline due to the seasonality of the agricultural and home lawn and garden markets.

Working Capital Requirements
There are no special inventory requirements or credit terms extended to customers that would have a material adverse effect on our working capital.

Dependency on a Single Customer
No single customer accounted for 10% or more of our consolidated revenues in any of the past three years. In addition, within our Papermaking Systems segment and Material Handling Systems segment, no customer accounted for more than 10% of each of the respective segment's revenue. As a percentage of revenues, the two largest customers in our Wood Processing Systems segment accounted for 20% in 2019, 16% in 2018, and 27% in 2017. Approximately 56% in 2019, 63% in 2018, and 65% in 2017, of our consolidated revenues were to customers outside the United States, principally in Europe, Asia and Canada.

Backlog
Our backlog of firm orders for the Papermaking Systems segment was $116.3 million at year-end 2019 and $126.7 million at year-end 2018. Our backlog of firm orders for the Wood Processing Systems segment was $32.7 million at year-end 2019 and $45.4 million at year-end 2018. Our backlog of firm orders for the Material Handling Systems segment was $20.0 million at year-end 2019. The total consolidated backlog of firm orders was $170.3 million at year-end 2019 and $173.0 million at year-end 2018. We anticipate that substantially all the backlog at year-end 2019 will be shipped or completed during 2020. Some of our capital orders can be canceled by the customer upon payment of a cancellation fee.

Sales and Marketing
We market and sell our engineered products, services, and systems to process industries using a combination of a direct sales force and independent sales agents and distributors depending on the market and product being sold. Technical service personnel, product specialists, and independent sales agents and distributors are utilized in certain markets and with certain product lines. Our application expertise is complimented by a consultative selling approach to ensure we meet the needs of our customers.


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Competition
We are a leading supplier of systems and equipment in each of our product lines within our Papermaking Systems segment and there are several global and numerous local competitors in each market. In our Wood Processing Systems segment, we compete with one primary global competitor in the OSB market for stranding equipment, a limited number of competitors in forest products for our debarkers, and several global and local competitors for our other products. In our Material Handling Systems segment, we compete with numerous global, regional and local competitors for our conveying equipment and strong regional competitors for our vibratory equipment. Because of the diversity of our products, we face many different types of competitors and competition. We compete primarily on the basis of technical expertise, product innovation, and product performance. We believe the reputation that we have established for high-performance, high-reliability products supported by our in-depth process knowledge and application expertise provides us with a competitive advantage. In addition, a significant portion of our business is generated from our worldwide customer base. To maintain this base, we have emphasized our global presence, local support, and a problem-solving relationship with our customers. Our success primarily depends on the following factors:
 
Technical expertise and process knowledge;
 
Product innovation;
 
Product quality, reliability, and performance;
 
Operating efficiency of our products;
 
Customer service and support;
 
Relative price of our products; and
 
Total cost of ownership of our products.
Environmental Protection Regulations
We are subject to a variety of U.S. and international environmental protection measures. We believe that our operations comply in all material respects with applicable laws and regulations. Our compliance with these requirements did not change during the past year, and is not expected to have a material adverse effect on our capital expenditures, earnings, or competitive position.
Employees
At year-end 2019, we had approximately 2,800 employees worldwide.
Available Information
We file annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (SEC) under the Exchange Act. The SEC maintains a website that contains reports, proxy and information statements, and other information that are filed electronically by issuers with the SEC. The public can obtain any documents that we file with the SEC at www.sec.gov. In addition, we make available free of charge through our website at www.kadant.com our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to these reports filed with or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file these materials with, or furnish them to, the SEC. We are not including the information contained on our website as part of this report nor are we incorporating the information on our website into this report by reference.
Information about our Executive Officers
The following table summarizes certain information concerning our executive officers as of February 14, 2020:
Name
 
Age
 
Present Title (Fiscal Year First Became Executive Officer)
Jonathan W. Painter
 
61
 
Executive Chairman of the Board (1997)
Jeffrey L. Powell
 
61
 
President and Chief Executive Officer (2009)
Eric T. Langevin
 
57
 
Executive Vice President and Chief Operating Officer (2006)
Michael J. McKenney
 
58
 
Executive Vice President and Chief Financial Officer (2002)
Deborah S. Selwood
 
51
 
Senior Vice President and Chief Accounting Officer (2015)
Peter J. Flynn
 
69
 
Vice President (2019)
Michael C. Colwell
 
54
 
Vice President (2019)
Stacy D. Krause
 
43
 
Vice President, General Counsel, and Secretary (2018)

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Mr. Painter has been the executive chairman of our board of directors since July 2019 and a member of our board of directors since January 2010. He previously served as our chief executive officer from January 2010 to June 2019 and also served as our president from September 2009 to March 2019. He served as chief operating officer from September 2009 to January 2010. Between 1997 and September 2009, Mr. Painter served as an executive vice president and from March 2007 through September 2009 had supervisory responsibility for our Stock-Preparation and Fiber-based Products businesses. He served as president of our Composite Building Products business from 2001 until its sale in 2005. He also served as our treasurer and the treasurer of Thermo Electron Corporation (Thermo Electron) from 1994 until 1997. Prior to 1994, Mr. Painter held various managerial positions with us and Thermo Electron.
Mr. Powell has been our chief executive officer and a director since July 2019 and our president since April 2019. He served as an executive vice president and a co-chief operating officer from March 2018 to March 2019. From March 2013 to March 2018, he was an executive vice president and had supervisory responsibility for our Stock-Preparation, Wood Processing Systems, and Fiber-based Products businesses. From September 2009 to March 2013, he was a senior vice president. From January 2008 to September 2009, Mr. Powell was vice president, new ventures, with principal responsibility for acquisition-related activities. Prior to joining us, Mr. Powell was the chairman and chief executive officer of Castion Corporation from April 2003 through December 2007.
Mr. Langevin served as executive vice president and chief operating officer since April 2019 and has supervisory responsibility for our Fluid-Handling and Doctoring, Cleaning, & Filtration businesses and our Material Handling Systems segment. From March 2018 to April 2019, he served as executive vice president and co-chief operating officer. From January 2010 to March 2018, he served as executive vice president and chief operating officer. Prior to January 2010, Mr. Langevin had been our senior vice president since March 2007 and had supervisory responsibility for our Fluid-Handling and Doctoring, Cleaning, & Filtration businesses. He served as vice president, with responsibility for our Doctoring, Cleaning, & Filtration business, from 2006 to 2007. From 2001 to 2006, Mr. Langevin was president of Kadant Web Systems Inc. (now our Kadant Solutions division) and before that served as its senior vice president and vice president of operations. Prior to 2001, Mr. Langevin managed several product groups and departments within Kadant Web Systems after joining us in 1986 as a product development engineer.
Mr. McKenney has been an executive vice president and our chief financial officer since March 2018. From June 2015 to March 2018, he was a senior vice president and our chief financial officer. He served as our vice president, finance and chief accounting officer from 2002 to 2015 and as corporate controller from 1997 to 2007. Mr. McKenney was controller of Kadant AES, our division acquired from Albany International Inc., from 1993 to 1997. Prior to 1993, Mr. McKenney held various financial positions at Albany International and Coopers & Lybrand LLP.
Ms. Selwood has been a senior vice president and our chief accounting officer since May 2019. From June 2015 to May 2019, she was a vice president and our chief accounting officer. She served as our corporate controller from 2007 to 2015 and as assistant controller from 2004 to 2007. Prior to 2004, Ms. Selwood held various financial positions at Arthur Andersen LLP and Genuity Inc.
Mr. Flynn has been a vice president since July 2019 and has supervisory responsibility for our Stock-Preparation product line. Prior to July 2019, Mr. Flynn was president of our Kadant Black Clawson LLC subsidiary, which manufactures stock-preparation equipment primarily for the pulp and paper industry, from 2003 to 2019.
Mr. Colwell has been a vice president since July 2019 and has supervisory responsibility for our Wood Processing Systems segment and our Fiber-based Products business. Prior to July 2019, Mr. Colwell served as the president of Kadant Carmanah Design, a division of our subsidiary Kadant Canada Corp., from 2013 to 2019. Mr. Colwell previously served as the president and chief executive officer of Carmanah Design and Manufacturing Inc. from April 2010 until its acquisition by us in November 2013.
Ms. Krause has been a vice president and our general counsel and secretary since July 2018. She served as our deputy general counsel from December 2017 to July 2018. Prior to joining us, Ms. Krause was head of commerce cloud commercial legal of salesforce.com, inc., a global SAAS software company, from 2016 to 2017. She previously served as an assistant general counsel of Demandware, Inc., a global SAAS software company, from 2014 to 2016, and assistant general counsel of Entegris, Inc., a multinational manufacturing company, from 2011 to 2014. Prior to 2011, Ms. Krause was a lawyer in the corporate transactional department of Wilmer Cutler Pickering Hale and Dorr LLP.
 

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Item 1A.    Risk Factors
Our business, results of operations and financial condition, and an investment in our securities, are subject to a number of risks. The risks and uncertainties described below are those that we have identified as material, but are not the only risks and uncertainties we face. Our business is also subject to general risks and uncertainties that affect many other companies, including overall economic and industry conditions. Additional risks and uncertainties not currently known to us or that we currently believe are not material also may impair our business, consolidated financial condition and results of operations.
Adverse changes in global and local economic conditions may negatively affect our industry, business and results of operations.
We sell products worldwide to global process industries and a significant portion of our revenue is from customers based in North America, Europe and China. Uncertainties in global and regional economic outlooks have negatively affected, and may in the future negatively affect, demand for our customers' products and, as a consequence, our products and services, especially our capital equipment systems and products, and our operating results. Also, uncertainty regarding economic conditions has caused, and may in the future cause, liquidity and credit issues for many businesses, including our customers in the pulp and paper industry as well as other process industries, and may result in their inability to fund projects, capacity expansion plans, and to some extent, routine operations and capital expenditures. These conditions have resulted, and may in the future result, in a number of structural changes in process industries, including decreased spending, mill closures, consolidations, and bankruptcies, all of which negatively affect our business, revenue, and profitability. Financial and economic turmoil affecting the worldwide economy or the banking system and financial markets, in particular due to political or economic developments, could cause the expectations for our business to differ materially in the future.
Revenues from the sale of large capital equipment and systems projects are often difficult to predict accurately, especially in periods of economic uncertainty, and large capital equipment projects require significant investment requiring our customers to secure financing, which may be difficult.
We manufacture capital equipment and systems used in process industries, including the paper, wood processing and material handling industries. Approximately 37% of our revenue in 2019 was from the sale of capital equipment to be used in process industries. The demand for capital equipment is variable and depends on a number of factors, including consumer demand for end products, existing manufacturing capacity, the level of capital spending by our customers and economic conditions. As a consequence, our bookings and revenues for capital projects tend to be variable and difficult to predict. It is especially difficult to accurately forecast our operating results during periods of economic uncertainty. Our customers curtail their capital and operating spending during periods of economic uncertainty and are cautious about resuming spending as market conditions improve. Levels of consumer spending on non-durable goods, demand for food and beverage packaging, and demand for new housing and remodeling are all factors that affect paper and wood processing companies' demand for our products. Expansion of bulk material handling capacity and infrastructure spending are factors that affect demand for material handling equipment. Reductions in demand levels in any of these areas can negatively impact our business. As companies in our customers' industries consolidate operations in response to market weakness, they frequently reduce capacity, increase downtime, defer maintenance and upgrades, and postpone or even cancel capacity additions or expansion projects. Capacity growth and investment can be uneven and the larger paper producers have delayed, and may in the future delay, additional new capacity start-ups in reaction to softer market conditions. In general, as significant capacity additions come online and the economic growth rate slows, paper producers have deferred and could in the future defer further investments or the delivery of previously-ordered equipment until the market absorbs the new production.
Large capital equipment projects require a significant investment and may require our customers to secure financing from external sources. Our financial performance will be negatively impacted if there are delays in customers securing financing or our customers become unable to secure such financing due to any number of factors, including a tightening of monetary policy or regime-based sanctions such as those imposed on Russia and China. Financing delays of our customers can cause us to delay booking pending orders as well as the shipment of some orders. The inability of our customers to obtain credit may affect our ability to recognize revenue and income, particularly on large capital equipment orders from new customers for which we may require letters of credit. We may also be unable to issue letters of credit to our customers, which are required in some cases to guarantee performance, during periods of economic uncertainty. This has negatively affected our bookings and revenues in the past, particularly in China, and may negatively affect our operating results in the future.
Our global operations subject us to various risks that may adversely affect our results of operations.
We are a leading global supplier of equipment and critical components used in process industries worldwide. We sell our products globally, including sales to customers in China, South America, Russia and India, and operate multiple manufacturing operations worldwide, including operations in Canada, China, Europe, Mexico, and Brazil. International revenues and operations are subject to a number of risks which vary by geographic region, including the following:

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agreements may be difficult to enforce and receivables difficult to collect through a foreign country's legal system;
 
foreign customers may have longer payment cycles;
 
foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs, adopt other restrictions on foreign trade, impose currency restrictions or enact other protectionist or anti-trade measures;
 
economic sanctions, trade embargoes, or other adverse trade regulations;
 
environmental and other regulations can adversely impact our ability to operate our facilities;
 
disruption from climate change, natural disaster, including earthquakes and/or tornadoes, fires, war, terrorist activity, and other force majeure events beyond our control;
 
changes in zoning laws that may require relocation of our manufacturing operations;
 
disruption from fast-spreading health epidemics which can result in widespread interruption of business operations;
 
worsening economic conditions may result in worker unrest, labor actions, and potential work stoppages;
 
political unrest may disrupt commercial activities of ours or our customers;
 
it may be difficult to repatriate funds, due to unfavorable domestic and foreign tax consequences or other restrictions or limitations imposed by foreign governments; and
 
the protection of intellectual property in foreign countries may be more difficult to enforce.
Operating globally subjects us to various risks that may adversely affect our results of operations in the future.
We have significant international sales and operations and face risks related to health epidemics which could adversely affect our business and results of operations.
Our business and operations could be materially and adversely affected by the effects of a widespread outbreak of a contagious disease and other adverse public health developments. These effects could include disruptions or restrictions on our employees’ and other service providers’ ability to travel, as well as temporary closures of our facilities or the facilities of our customers, suppliers, or other vendors in our supply chain, potentially including single source suppliers. In addition, an outbreak of a contagious disease could impact global trade that could reduce demand for our products that support packaging production, which represents 29% of our consolidated revenues in 2019. The full extent to which a health epidemic could affect our business, including its impact on the global economy and our employees, operations, suppliers, customers, operating and financial results, and/or our stock price depends on a number of factors, including duration and severity of the outbreak and nature of government response, which are highly uncertain and cannot be predicted.
In December 2019, the 2019 novel coronavirus (coronavirus) was first reported in China and in 2020, an outbreak of the virus was reported. In response to the outbreak, the Chinese government has placed restrictions on travel and mandated business closures. We have significant operations in China that manufacture and sell products to other of our businesses and customers all over the world, and since early February, our Chinese facilities have been subjected to government-mandated closures and other significant restrictions due to the outbreak. Given the uncertainties related to the outbreak, including its duration and the nature and timing of the Chinese government’s response to it, we cannot reasonably estimate the scope of its impact on a delay of the production of our products, which could lead to liquidated damages owed to our customers, and adversely affect our business and our stock price. In particular, if the current coronavirus outbreak continues and results in a prolonged period of travel, commercial and other similar restrictions, we could experience global supply disruptions and may incur costs to mitigate such disruptions, which could be significant. In addition, new information may emerge concerning the severity of the coronavirus, the pace and method through which it is transmitted, contained and/or treated, and the Chinese government’s approach to handling the outbreak, any of which could impact our employees, operations, suppliers, customers and/or operating and financial results, including our ability to determine our quarterly results. Although we are diligently working to ensure that our Chinese facilities can operate with minimal disruption, mitigate the impact of the outbreak on our employees’ health and safety, and address potential supply chain impact on ourselves and our customers, the full extent to which the coronavirus could affect the global economy and our results will depend on future developments and factors that cannot be predicted.
Operating globally subjects us to changes in government regulations and policies in multiple jurisdictions around the world, including those related to tariffs and trade barriers, taxation, exchange controls and political risks.
Changes in government policies, political unrest, economic sanctions, trade embargoes, or other adverse trade regulations can negatively impact our business. Non-U.S. markets contribute a substantial portion of our revenues, and we intend to continue expanding our presence in these regions. For example, we operate businesses in Mexico and Canada, and we benefit from the North American Free Trade Agreement (NAFTA), which is being replaced by the United States-Mexico-

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Canada Agreement (USMCA). If the United States were to withdraw from or materially modify NAFTA or the successor USMCA or impose significant tariffs or taxes on goods imported into the United States, the cost of our products could significantly increase or no longer be priced competitively, which in turn could have a material adverse effect on our business and results of operations. The United States and Mexico have ratified the USMCA, but Canada must still ratify the USMCA in its legal system before the three countries can take the final steps to implement it.
In addition, the Office of the United States Trade Representative (USTR) has imposed a duty of 25% on a wide variety of Chinese products, including pulp and paper machinery equipment, pursuant to Section 301 of the Trade Act of 1974. USTR imposed the additional duty on an initial tranche of $34 billion in Chinese products, including certain pulp and paper machinery equipment, effective July 6, 2018 (List 1). USTR then extended the duty to a second tranche of $16 billion in Chinese products effective August 23, 2018 (List 2). USTR then imposed an additional duty of 10% on a third tranche of Chinese products, covering approximately $200 billion in trade effective September 24, 2018 (List 3). USTR subsequently increased the List 3 duty to 25% effective May 10, 2019. Finally, USTR announced an additional 10% duty, which it subsequently increased to 15%, on approximately $300 billion in Chinese trade (List 4). USTR divided the List 4 products into two parts; the 15% duty on the first part became effective on September 1, 2019 and fell to 7.5% effective February 14, 2020. USTR has indefinitely postponed the duty on products covered by the second part of List 4. In addition, in March 2018, the U.S. Department of Commerce imposed tariffs of 25% on numerous categories of steel imports, and 10% on numerous categories of aluminum imports, from most countries under Section 232 of the Trade Expansion Act of 1962. While we are working to mitigate the impact of the existing and other proposed tariffs through pricing and sourcing strategies, we cannot be certain how our customers and competitors will react to the actions we take. The tariffs have and could in the future negatively affect our ability to compete against competitors who do not manufacture in China and/or are not subject to the tariffs.
The United States has tightened trade sanctions targeting countries like China and Russia. For example, in August 2017 and April 2018, the United States imposed new trade and economic sanctions targeting certain persons in, and certain types of business with, Russia, in addition to those that have been imposed since 2014. In 2019, our sales to Russia were $16.8 million, or 2% of our revenue. In 2019, the United States continued to expand export control restrictions applicable to certain Chinese firms and commenced its assessment of new controls for “emerging foundational technologies,” escalating U.S.-China tension over technology competition. In response, Russia and China have begun considering and, in some cases, implementing trade sanctions that could affect U.S.-owned businesses. The imposition of trade sanctions may make it generally more difficult to do business in Russia and China and cause delays or prevent shipment of products or services performed by our personnel, or to receive payment for products or services. Such restrictions could have a material adverse impact on our business and operating results going forward.
Operating globally subjects us to changes in government regulations and policies in multiple jurisdictions around the world, including those related to tariffs and trade barriers, taxation, exchange controls and political risks, and may negatively affect our operating results in the future.
Policies of the Chinese government may negatively impact our business.
We operate significant manufacturing facilities in and derive significant revenue from China. Changes in the policies of the Chinese government, devaluation of the Chinese currency, restrictions on the expatriation of cash, political unrest, unstable economic conditions, or other developments in China or in U.S.-China relations that are adverse to trade, including enactment of protectionist legislation or trade or currency restrictions, could negatively impact our business and operating results. Policies of the Chinese government to target slower economic growth may negatively affect our business in China if customers are unable to expand capacity or obtain financing for expansion or improvement projects. The president of the United States has indicated that he favors restricting investment by U.S. companies in China; if such restrictions were to become law, or if investment was otherwise restricted, our business would be significantly and adversely affected.
Policies of the Chinese government to advance internal political priorities may potentially negatively affect our business in any number of ways that we may not foresee. For example, China has imposed a ban on mixed waste paper imports and reported that all recovered paper imports have been and are limited to a 0.5% contaminant level after March 1, 2018, which is well below the level that suppliers consider feasible. In addition, the Chinese government has announced that it may ban all recovered paper imports by the end of 2020. According to Fastmarkets RISI, the Chinese government's actions have led to a severe shortage of recovered paper in China, which has forced mills to incur additional downtime. Chinese containerboard producers have been looking to build capacity for fiber in Southeast Asia, with the intent to ship pulp back to China for further processing. These policies have and could in the future continue to have a significant influence on the price, nature and availability of the type of paper imported into China, could have a negative effect on the operating capacity of our customers in China, and have and may in the future continue to affect the demand for our products and our operating results, both in China and in the surrounding region.

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Our sales of capital equipment in China tend to be more variable and are subject to a number of uncertainties.
Our bookings and revenues from China have tended to be more variable than in other geographic regions. The Chinese pulp and paper industry has experienced periods of significant capacity expansion to meet demand followed by periods of reduced activity while overcapacity is absorbed. These cycles result in periods of significant bookings activity for our capital products and increased revenues followed by a significant decrease in bookings or potential delays in shipments and order placements by our customers as they attempt to balance supply and demand.
Orders from customers in China, particularly for large stock-preparation systems that have been tailored to a customer's specific requirements, have credit risks higher than we generally incur elsewhere, and some orders are subject to the receipt of financing approvals from the Chinese government or can be impacted by the availability of credit and more restrictive monetary policies. We generally do not record bookings for signed contracts from customers in China for large stock-preparation systems until we receive the down payments for such contracts. The timing of the receipt of these orders and the down payments are uncertain and there is no assurance that we will be able to recognize revenue on these contracts. We may experience a loss if a contract is canceled prior to the receipt of a down payment if we have commenced engineering or other work associated with the contract. We typically have inventory awaiting shipment to customers and could incur a loss if contracts are canceled and we cannot re-sell the equipment. In addition, we may experience a loss if the contract is canceled, or the customer does not fulfill its obligations under the contract, prior to the receipt of a letter of credit or final payments covering the remaining balance of the contract, which could represent a significant portion of the total order. As a result of these factors, our revenues recognized in China have varied, and will in the future vary, greatly from period to period and be difficult to predict.
In addition, please also see “Risk Factors - Policies of the Chinese government may negatively impact our business” for further discussion of potential impact of policies of the Chinese government on our business.
We manufacture equipment used in the production of forest products, including lumber and OSB, and our financial performance may be adversely affected by decreased levels of residential construction activity.
We manufacture debarkers, stranders and related equipment used in the production of lumber and OSB, an engineered wood panel product used primarily in home construction. Our customers produce these products principally for new residential construction, home repair and remodeling activities. As such, the operating results for our Wood Processing Systems segment correlate to a significant degree to the level of this residential construction activity, primarily in North America and, to a lesser extent, in Europe. Residential construction activity is influenced by a number of factors, including the supply of and demand for new and existing homes, new housing starts, unemployment rates, interest rate levels, availability of mortgage financing, mortgage foreclosure rates, availability of construction labor and suitable land, seasonal and unusual weather conditions, general economic conditions and consumer confidence. A significant increase in long-term interest rates, changes in tax policy on the deductibility of mortgages, tightened lending standards, high unemployment rates and other factors that reduce the level of residential construction activity could have a material adverse effect on our financial performance.
The OSB market is highly concentrated and the market for building products is highly competitive. The loss of a significant customer or our customers' reductions in capital spending or OSB production could have a material adverse effect on our financial performance.
The OSB market is highly concentrated and there are a limited number of OSB manufacturers. As a percentage of our Wood Processing Systems segment revenues, the two largest OSB customers accounted for 18% in 2019, 14% in 2018, and 29% in 2017. The loss of one or more of these OSB customers to a competitor could adversely affect our revenues and profitability. In addition, the market for building products is highly competitive. Products that compete with OSB include other wood panel products and substitutes for wood building products, such as nonfiber-based alternatives. For example, plastic, wood/plastic or composite materials may be used by builders as alternatives to OSB products. Changes in component prices, such as energy, chemicals, wood-based fibers, and nonfiber alternatives can change the competitive position of OSB relative to other available alternatives and could increase substitution. Our customers' OSB production can be adversely affected by lower-cost producers of other wood panel products and substitutes for wood building products. Lower demand for OSB products or a decline in the profitability of one or more of our customers could result in a reduction in spending on capital equipment or the shutdown or closure of an OSB mill, which could have a material adverse effect on our financial performance.
Our Wood Processing Systems business can be materially impacted by changes to the global timber supply.
Changes in the environment that affect natural resources such as timber may have significant effects on the sales of wood processing equipment by our Wood Processing Systems business. Approximately 20% of our revenue in 2019 was from our Wood Processing Systems business. For example, wildfires and damage from pests such as the mountain pine beetle have affected tracts of land in Western Canada that could have otherwise been logged by the forestry industry. Reduction in availability of timber can result in decreased logging activity, mill closures, and lower operating rates at mills, as well as reduced capital expenditures. A reduction in capital expenditures by mills would likely lead to a decrease in demand for new

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wood processing equipment, which would in turn affect demand for parts, as our wood processing customers are likely to reduce utilization of equipment, reduce inventories, redistribute parts from closed mills and delay rebuilds and other maintenance during industry downturns. In addition to declining orders for wood processing products, adverse economic conditions for our wood processing customers may make it more difficult for us to collect accounts receivable in a timely manner, or at all, which may adversely affect our working capital.
Our Material Handling Systems business can be materially impacted by cyclical economic conditions affecting the global mining industry.
Changes in economic conditions affecting the global mining industry can occur abruptly and unpredictably, which may have significant effects on the sales of original equipment by our subsidiary, SMH, which comprises our Material Handling Systems segment. Approximately 6% of our revenue in 2019 was from SMH's mining customers. Cyclicality for original equipment sales is driven primarily by price volatility of the commodities that are mined using SMH’s equipment, including coal, salt, aggregates, potash, copper, iron ore and trona, or their substitutes, as well as product life cycles, competitive pressures and other economic factors affecting the mining industry, such as company consolidation, increased regulation and competition affecting demand for commodities, as well as the broader economy, including changes in government monetary or fiscal policies and from market expectations with respect to such policies. Falling commodity prices have in the past and may in the future lead to reduced capital expenditures by SMH’s customers, reductions in the production levels of existing mines, a contraction in the number of existing mines and the closure of less efficient mines. Reduced capital expenditures and decreased mining activity by SMH’s customers are likely to lead to a decrease in demand for new mining equipment, and may result in a decrease in demand for parts as SMH’s customers are likely to reduce utilization of equipment, reduce inventories, redistribute parts from closed mines and delay rebuilds and other maintenance during industry downturns. In addition to declining orders for SMH’s products, adverse economic conditions for SMH’s customers may make it more difficult for SMH to collect accounts receivable in a timely manner, or at all, which may adversely affect our working capital. As a result of this cyclicality in the global mining industry, SMH may experience significant fluctuations in its business, results of operations and financial condition, and we expect SMH’s business to continue to be subject to these fluctuations in the future.
The development and increasing use of digital media has had, and will continue to have, an adverse impact on our Papermaking Systems segment.
Developments in digital media have adversely affected demand for newsprint and for printing and writing grades of paper, particularly in North America and Europe, a trend which is expected to continue. Approximately 10% of our revenue in 2019 was from customers producing newsprint and printing and writing grades of paper. Significant declines in the production of printing and writing paper grades have also led to a drop in the construction of recycled tissue mills, as those mills use printing and writing grades of waste paper as their fiber source. The increased use of digital media has had, and will continue to have, an adverse effect on demand for our products in those markets.
Our results of operations may be adversely affected by currency fluctuations.
As a multinational corporation, we are exposed to fluctuations in currency exchange rates that impact our business in many ways. We are exposed to both translation as well as transaction risk associated with transactions denominated in currencies that differ from our subsidiaries' functional currencies. Although most of our subsidiaries' costs are denominated in the same currency as their revenues, changes in the relative values of currencies occur from time to time and can adversely affect our operating results. Some of the foreign currency translation risk is mitigated when foreign subsidiaries have revenue and expenses in the same foreign currency. Further, certain foreign subsidiaries may hold U.S. dollar assets or liabilities which, as the U.S. dollar strengthens versus the applicable functional currencies, will result in currency transaction gains on assets or losses on liabilities. While some foreign currency transaction risks can be hedged using derivatives or other financial instruments, or may be insurable, such attempts to mitigate these risks may be costly and may not always be successful.
When we translate the local currency results of our foreign subsidiaries into U.S. dollars during a period in which the U.S. dollar is strengthening, our financial results will reflect decreases due to foreign currency translation. In addition, our consolidated financial results are adversely affected when foreign governments devalue their currencies. Our major foreign currency translation exposures involve the currencies in Europe, China, Brazil, Canada and Mexico. For example, China's central bank devalued the renminbi to boost the Chinese economy in 2016, which had a negative translation impact on our consolidated revenues and may in the future have a negative translation impact if this recurs. The overall favorable or unfavorable effect of foreign currency translation on our financial results will vary by quarter. We do not enter into derivatives or other financial instruments to hedge this type of foreign currency translation risk.

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A sizable portion of our Material Handling Systems business is dependent on continued demand for coal, which is subject to economic and environmental risks.
Approximately 14% and 8% of SMH's 2019 revenues came from its thermal and metallurgical coal-mining customers, respectively. Many of these customers supply coal for the generation of electricity and/or steel production. Demand for electricity and steel is affected by the global level of economic activity and economic growth. The pursuit of the most cost-effective form of electricity generation continues to take place throughout the world and coal-fired electricity generation faces intense price competition from other fuel sources, particularly natural gas. In addition, coal combustion typically generates significant greenhouse gas emissions and governmental and private sector goals and mandates to reduce greenhouse gas emissions may increasingly affect the mix of electricity generation sources. Further developments in connection with legislation, regulations, international agreements or other limits on greenhouse gas emissions and other environmental impacts or costs from coal combustion, both in the United States and in other countries, could diminish demand for coal as a fuel for electricity generation. If lower greenhouse gas emitting forms of electricity generation, such as nuclear, solar, natural gas or wind power, become more prevalent or cost effective, or diminished economic activity reduces demand for electricity and steel, demand for coal will decline. Reduced demand for coal could result in reduced demand for SMH’s mining equipment and could adversely affect our overall business, financial condition and results of operations.
Price increases and shortages in raw materials and components and dependency upon certain suppliers for such raw materials and components could adversely impact our operating results.
We use a variety of raw materials, including a significant amount of stainless steel, carbon steel, commodities and critical components to manufacture our products. Increases in the prices of such raw materials, commodities and critical components could adversely affect our operating results if we were unable to fully offset the effect of these increased costs through price increases, productivity improvements, or cost reduction programs.
Some of our businesses depend on limited suppliers to provide critical components used in the manufacture of our products. If we could not obtain sufficient supplies of these components or these sources of supply ceased to be available to us, we could experience shortages in critical components or be unable to meet our commitments to customers. Alternative sources of supply could be more expensive or, in some cases, not available. We believe our sources of raw materials, commodities and critical components will generally be sufficient for our needs in the foreseeable future. However, our operating results could be negatively impacted if supply is insufficient for our operations.
Implementing our acquisition strategy involves risks, and our failure to successfully implement this strategy could have a material adverse effect on our business.
We expect that a significant driver of our growth over the next several years will be the acquisition of technologies and businesses that complement or augment our existing products and services or may involve entry into a new process industry, such as our January 2019 acquisition of SMH. We continue to actively pursue additional acquisition opportunities, some of which may be material to our business and financial performance, and involve significant cash expenditures and the incurrence of significant debt. Although we have been successful with this strategy in the past, we may not be able to grow our business in the future through acquisitions for a number of reasons, including:
 
difficulties identifying and executing acquisitions;
 
competition with other prospective buyers resulting in our inability to complete an acquisition or in our paying a substantial premium over the fair value of the net assets of the acquired business;
 
access to and availability of capital;
 
inability to obtain regulatory approvals, including antitrust approvals;
 
difficulty in integrating operations, technologies, products and the key employees of the acquired business;
 
inability to maintain existing customers of the acquired business or to sell the products and services of the acquired business to our existing customers;
 
inability to retain key management of the acquired business;
 
diversion of management's attention from other business concerns;
 
inability to improve the revenues and profitability or realize the cost savings and synergies expected of the acquisition;
 
assumption of significant liabilities, some of which may be unknown at the time of acquisition;
 
potential future impairment of the value of goodwill and intangible assets acquired; and
 
identification of internal control deficiencies of the acquired business.

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We are required to record transaction and acquisition-related costs in the period incurred. Once completed, acquisitions may involve significant integration costs. These acquisition-related costs could be significant in a reporting period and have an adverse effect on our results of operations.
Any acquisition we complete may be made at a substantial premium over the fair value of the net identifiable assets of the acquired business. We are required to assess the realizability of goodwill and indefinite-lived intangible assets annually, and whenever events or changes in circumstances indicate that goodwill and intangible assets, including definite-lived intangible assets, may be impaired. These events or circumstances would generally include operating losses or a significant decline in earnings associated with the acquired business or assets, and our ability to realize the value of goodwill and intangible assets will depend on the future cash flows of these businesses. We may incur impairment charges to write down the value of our goodwill and acquired intangible assets in the future if the assets are not deemed recoverable, which could have a material adverse effect on our operating results.
Failure of our information systems or breaches of data security and cybertheft could impact our business.
We operate a geographically dispersed business and rely on the electronic storage and transmission of proprietary and confidential information, including technical and financial information, among our operations, customers and suppliers. We also rely on information technology, or IT, including IT services from third parties, in certain of our solutions, products, and services for customers as well as our enterprise infrastructure. Despite our security measures and internal controls, our information technology and infrastructure may be vulnerable to unauthorized access or attacks by nation states, hackers or cyber criminals or breaches due to employee error, malfeasance or other disruptions, such as business email compromises, phishing and other cyber-related fraud. Our systems could be compromised by malware (including ransomware), cyberattacks, and other events, ranging from widespread, non-targeted, global cyber threats to targeted advanced persistent threats. These threats could be indicators of an increased risk to our products, solutions, services, manufacturing, and IT infrastructure. Recent global cyberattacks have been perpetuated by the compromise of software updates to widely-used software products, including some products that we use, which increases the risk that vulnerabilities or malicious content could be inserted into our products or IT infrastructure. We maintain a cybersecurity insurance policy that provides limited coverage for some, but not all potential risks and liabilities associated with cyberattacks and other events, which may not be fully insurable. While we continuously seek to improve the security attributes of our products, solutions, services and IT infrastructure, we cannot eliminate risk or ensure that we will not be harmed by cyberattacks or disruptions.
In some global cyberattacks, malware has been spread from one party to another via network connections that the parties had previously authorized. Our business uses IT resources on a dispersed, global basis for a wide variety of functions including development, engineering, manufacturing, sales, accounting, and human resources. Our vendors, partners, employees and customers have access to, and share, information across multiple locations via various digital technologies.  In addition, we rely on partners and vendors for a wide range of outsourced activities, including cloud providers, as part of our internal IT infrastructure and our commercial offerings. Secure connectivity is important to these ongoing operations. To a significant extent, the security of systems to which we connect depends on how such systems are designed, installed, protected, configured, updated and monitored, much of which is typically outside of our control. Also, our partners and vendors frequently have access to our confidential information as well as confidential information about our customers, employees, and others. We design our security architecture to reduce the risk that a compromise of our partners’ infrastructure, for example a cloud platform, could lead to a compromise of our internal systems or customer networks, but this risk cannot be eliminated and vulnerabilities at third parties could result in unknown risk exposure to our business.
As part of our ongoing effort to upgrade our current information systems, we are implementing enterprise resource planning software to manage certain of our business operations. As we implement and add functionality, problems could arise that we have not foreseen. System failures, network disruptions, and breaches of data security could limit our ability to conduct business as usual, including our ability to communicate and transact business with our customers and suppliers; result in the loss or misuse of this information, including credit card numbers or other personal information, the loss of business or customers, or damage to our brand or reputation; or interrupt or delay reporting of our financial results. Such system failures or unauthorized access could be caused by external theft or attack, misconduct by our employees, suppliers, or competitors, or natural disasters.
In addition, the cost and operational consequences of implementing further data protection measures, such as to comply with local privacy laws such as the European Union's General Data Protection Regulation, or various similar U.S. federal and state laws, could be significant.
The current cyber threat environment indicates increased risk for all companies. Like other global companies, we have experienced cyber threats and incidents, although none have been material or had a material adverse effect on our business or financial condition. Our information security efforts include major programs designed to address security governance, product security, identification and protection of critical assets, insider risk, third-party risk, and cyber defense operations. We believe these measures reduce, but cannot eliminate, the risk of an information security incident. Any significant security incidents

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could have an adverse impact on sales, harm our reputation and cause us to incur legal liability and increased costs to address such events and related security concerns.
We are required to comply with a wide variety of laws and regulations, and are subject to regulation by various federal, state and foreign agencies.
We are subject to various local, state, federal, foreign and transnational laws and regulations, particularly those relating to environmental protection, the importation and exportation of products, tariffs and trade barriers, taxation, exchange controls, current good manufacturing practices, data protection, health and safety and our business practices in the U.S. and abroad, such as anti-corruption and anti-competition laws, and, in the future, any changes to such laws and regulations could adversely affect us. Any noncompliance by us with applicable laws and regulations or the failure to maintain, renew or obtain necessary permits and licenses could result in criminal, civil and administrative penalties and could have an adverse effect on our results of operations.
It may be difficult for us to implement our strategies for improving internal growth.
Some of the markets in which we compete are mature and have relatively low growth rates. We pursue a number of strategies to improve our internal growth, including:
 
strengthening our presence in selected geographic markets, including emerging markets and existing markets where we see opportunities;
 
focusing on parts and consumables sales;
 
using low-cost manufacturing bases, such as China and Mexico;
 
allocating research and development funding to products with higher growth prospects;
 
developing new applications for our technologies;
 
combining sales and marketing operations in appropriate markets to compete more effectively;
 
finding new markets for our products and expanding into different verticals or process industries;
 
continuing to develop cross-selling opportunities for our products and services to take advantage of our depth of product offerings; and
 
corporate efficiency programs, such as Lean manufacturing and the “80/20” rule (the Pareto Principle).
We may not be able to successfully implement these strategies, or achieve cost savings or desired efficiencies, and these strategies may not result in the expected growth of our business.
We are subject to intense competition in all our markets.
We believe that the principal competitive factors affecting the markets for our products include technical expertise and process knowledge, product innovation, product quality, and price. Our competitors include a number of large multinational corporations that may have substantially greater financial, marketing, and other resources than we do. As a result, they may be able to adapt more quickly to new or emerging technologies, such as smart technology, and changes in customer requirements, or to devote greater resources to the promotion and sale of their services and products. Competitors' technologies may prove to be superior to ours. Our current products, those under development, and our ability to develop new technologies may not be sufficient to enable us to compete effectively. Competition, especially in China, has increased as new companies enter the market and existing competitors expand their product lines and manufacturing operations.
Adverse changes to the soundness of our suppliers and customers could affect our business and results of operations.
All our businesses are exposed to risk associated with the creditworthiness of our key suppliers and customers, including pulp and paper manufacturers, forest products and other industrial customers, many of which may be adversely affected by volatile conditions in the financial markets, worldwide economic downturns, variability in infrastructure spending levels, and difficult economic conditions. These conditions could result in financial instability, bankruptcy, or other adverse effects at any of our suppliers or customers. The consequences of such adverse effects could include the interruption of production at the facilities of our suppliers, the reduction, delay or cancellation of customer orders, delays in or the inability of customers to obtain financing to purchase our products or pay amounts due, and bankruptcy of customers or other creditors. Any adverse changes to the soundness of our suppliers or customers may adversely affect our cash flows, profitability, or financial condition.
Changes in our tax provision or exposure to additional income tax liabilities could affect our profitability.
We derive a significant portion of our revenue and earnings from our international operations, and are subject to income and other taxes in the United States and numerous foreign jurisdictions. Changes in U.S. and foreign income tax laws and regulations, or their interpretation, could result in higher or lower income tax rates assessed or changes in the taxability of

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certain revenues or the deductibility of certain expenses, thereby affecting our income tax expense and profitability. A number of factors may cause our effective tax rate to fluctuate, including: changes in tax rates in various jurisdictions; unanticipated changes in the amount of profit in jurisdictions in which the statutory tax rates may be higher or lower than the U.S. tax rate; the resolution of issues arising from tax audits with various tax authorities; changes in the valuation of our deferred tax assets and liabilities; adjustments to income taxes upon finalization of various tax returns; increases in expenses not deductible for tax purposes, including impairments of goodwill in connection with acquisitions; changes in available tax credits or our ability to utilize foreign tax credits; and changes in tax laws or the interpretation of such tax laws. Any of these factors could cause us to experience an effective tax rate significantly different from that of prior periods or current expectations, which could have an adverse effect on our results of operations or cash flows.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (2017 Tax Act) was enacted in the U.S. and significantly revised the Internal Revenue Code. The 2017 Tax Act reduced the U.S. federal corporate tax rate from 35% to 21% starting in 2018 and transitioned from a worldwide tax system to a territorial tax system imposing a one-time tax on all foreign unremitted earnings at reduced rates. The 2017 Tax Act introduced many new provisions that became effective in 2018, including but not limited to, Global Intangible Low-Taxed Income (GILTI), Base Erosion Anti-Abuse Tax (BEAT), Foreign Derived Intangible Income (FDII) deduction, limitation of the tax deduction for net interest expense to 30% of adjusted taxable income, immediate tax deductions for certain new fixed asset additions instead of depreciating assets over time and more restrictions on tax deductions for executive compensation. The impact of the 2017 Tax Act remains subject to developing interpretations of the relevant provisions in the regulations promulgated by the U.S. Treasury Department, as well as the conformity and application of these regulations in various states. We continue to assess the impact of the new provisions on the tax provision already included in our financial statements and guidance and we may need to make adjustments as the application of the law becomes clearer, which could adversely affect our business and financial condition.
If we are unable to successfully manage our manufacturing operations, our ability to deliver products to our customers could be disrupted and our business, financial condition and results of operations could be adversely affected.
Equipment and operating systems necessary for our manufacturing businesses may break down, perform poorly, or fail. Any such disruption could cause losses in efficiencies, delays in shipments of our products and the loss of sales and customers, and insurance proceeds may not adequately compensate us for our losses.
In order to enhance the efficiency and cost effectiveness of our manufacturing operations, and to better serve customers located in various countries, as we have in the past, we may in the future move several product lines from one of our plants to another and consolidate manufacturing operations in certain of our plants. Even if we successfully move our manufacturing processes, there is no assurance that the cost savings and efficiencies we anticipate will be achieved.
Changes in zoning laws in China may require us to relocate certain of our manufacturing facilities. For example, we received a request by local Chinese authorities to relocate one of our facilities, and have been negotiating with the Chinese government regarding the relocation of such facility. A relocation may increase our costs and could have a material impact on our manufacturing operations.
In addition, our manufacture of certain products is concentrated in specific geographic locations. As a result of such concentration, we may be disproportionately exposed to the impact of any disruptions (including natural disasters), regulations or delays that impact those geographic locations, which may negatively impact our ability to manufacture products produced in those locations and have an adverse effect on our business results.
We may be required to reorganize our operations in response to changing conditions in the worldwide economy and the industries we serve, and such actions may require significant expenditures and may not be successful.
We have undertaken various restructuring measures in the past in response to changing market conditions in the countries in which we operate and we may engage in additional cost reduction programs in the future. The costs of these programs may be significant and we may not recoup the costs of these programs. In connection with any future plant closures, delays or failures in the transition of production from existing facilities to our other facilities in other geographic regions could also adversely affect our results of operations. In addition, it is difficult to accurately forecast our financial performance in periods of economic uncertainty in a region or globally, and the efforts we have made or may make to align our cost structure may not be sufficient or able to keep pace with rapidly changing business conditions. Our profitability may decline if our restructuring efforts do not sufficiently reduce our future costs and position us to maintain or increase our sales.
Economic conditions and regulatory changes caused by the United Kingdom’s exit from the European Union could adversely affect our business.
The United Kingdom (U.K.) exit from the European Union (E.U.), referred to as Brexit, which was effective as of January 31, 2020, and the related ongoing transition has caused, and may from time to time cause:

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volatility in the global stock markets;
 
currency exchange rate fluctuations;
 
effects on cross border trade and labor; and
 
political and regulatory uncertainty in the U.K. and across Europe generally.
The global economic uncertainty that has occurred and may continue to occur at various periods throughout the lengthy withdrawal process may cause our customers to closely monitor their costs and reduce their spending budgets. Our revenues to customers in the U.K. represented approximately 3% of total revenues in 2019. All of these events, should they occur, could adversely affect our business, financial condition, operating results, and cash flows.
Our debt may adversely affect our cash flow and may restrict our investment opportunities.
We have borrowed amounts under our five-year, unsecured multi-currency revolving credit facility (Credit Agreement) and under other agreements to fund our operations and our acquisition strategy. As a result of the acquisitions of our forest products business in 2017 and the SMH acquisition completed in January 2019, we increased our U.S. and foreign-denominated borrowings under the Credit Agreement. While we increased our borrowing capacity under the Credit Agreement in December 2018 in connection with the SMH acquisition, our remaining borrowing capacity is limited. Our borrowing capacity under the Credit Agreement may further decrease as a result of the impact that foreign exchange rate fluctuations could have on our foreign-denominated borrowings.
In 2018, under the Credit Agreement, we increased our borrowing capacity from $300.0 million to $400.0 million and increased our uncommitted unsecured incremental borrowing facility from $100.0 million to $150.0 million. In 2018, we also issued $10.0 million in senior notes under our Multi-Currency Note Purchase and Private Shelf Agreement with PGIM, Inc., an affiliate of Prudential (Note Purchase Agreement). In addition, in 2018 we borrowed $21.0 million, pursuant to a promissory note secured by real estate and related personal property of certain of our domestic subsidiaries (Real Estate Loan). We may also in the future obtain additional long-term debt and working capital lines of credit to meet future financing needs, which would have the effect of increasing our total leverage. Our indebtedness could have negative consequences, including:
 
increasing our vulnerability to adverse economic and industry conditions;
 
limiting our ability to obtain additional financing;
 
limiting our ability to pay dividends on or to repurchase our capital stock;
 
limiting our ability to complete a merger or an acquisition or acquire new products and technologies through acquisitions or licensing agreements; and
 
limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we compete.
Our existing indebtedness bears interest at fixed and floating rates, and as a result, our interest payment obligations on our indebtedness will fluctuate if interest rates increase or decrease. From time to time, we hedge a portion of our variable rate interest payment obligations through interest rate swap agreements. The counterparty to the swap agreements could demand an early termination of the swap agreements if we were to be in default under the Credit Agreement, or any agreement that amends or replaces the Credit Agreement in which the counterparty is a member, and we were unable to cure the default. If our swap agreements were to be terminated prior to the applicable scheduled maturity date and if we were required to pay cash for the value of the swap, we could incur a loss, which could adversely affect our financial results.
In addition, the 2017 Tax Act places certain limitations on the deductibility of interest expense as a percentage of adjusted taxable income. If interest rates or the level of our debt increase, to the extent that the associated interest expense exceeds the limitation established by the 2017 Tax Act, the amount of interest expense that we would not be able to deduct for income tax purposes, if significant, could adversely affect our financial results and cash flows.
Our ability to satisfy our obligations and to reduce our total debt depends on our future operating performance and on economic, financial, competitive, and other factors beyond our control. Our business may not generate sufficient cash flows to meet these obligations or to successfully execute our business strategy. If we were unable to service our debt and fund our business, we could be forced to reduce or delay capital expenditures or research and development expenditures, seek additional financing or equity capital, restructure or refinance our debt, curtail or eliminate our cash dividend to stockholders, or sell assets.
Restrictions in our Credit Agreement and Note Purchase Agreement may limit our activities.
Our Credit Agreement and the Note Purchase Agreement contain, and future debt instruments to which we may become subject may contain, restrictive covenants that limit our ability to engage in activities that could otherwise benefit us, including restrictions on our ability (including the ability of our subsidiaries) to:

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Kadant Inc.
 
 
 
 
 
 
 
 
 
 

 
incur additional indebtedness;
 
pay dividends on, redeem, or repurchase our capital stock;
 
make investments;
 
create liens;
 
sell assets;
 
enter into transactions with affiliates; and
 
consolidate, merge, or transfer all or substantially all of our assets and the assets of our subsidiaries.
We are also required to meet specified financial covenants under the terms of our Credit Agreement and the Note Purchase Agreement. Our ability to comply with these financial restrictions and covenants is dependent on our future performance, which is subject to prevailing economic conditions and other factors, including factors that are beyond our control such as currency exchange rates, interest rates, changes in technology, and changes in the level of competition. Our failure to comply with any of these restrictions or covenants may result in an event of default under our Credit Agreement, the Note Purchase Agreement, our swap agreements and other loan and note obligations, which could permit acceleration of the debt under those instruments and require us to repay the debt before its scheduled due date. If an event of default were to occur, we might not have sufficient funds available to make the payments required under our indebtedness. In addition, our inability to borrow funds under our Credit Agreement would have significant consequences for our business, including reducing funds available for acquisitions and other investments in our business; and impacting our ability to pay dividends and meet other financial obligations.
Furthermore, our Credit Agreement requires that any amounts borrowed under the facility be repaid by the maturity date in 2023. If we are unable to roll over the amounts borrowed into a new credit facility and we do not have sufficient cash to repay our borrowings, we may default under the Credit Agreement. We may need to repatriate cash from our overseas operations, which may not be possible, to fund the repayment and we may be required to pay taxes on the repatriated amounts. Such repatriation would have an adverse effect on our effective tax rate and cash flows.
Our Credit Agreement has variable interest tied to London Interbank Offered Rate (LIBOR) and we could become subject to higher interest rates if the replacement rate we agree on with our banks is higher.
Borrowings under our Credit Agreement use the LIBOR as a benchmark for establishing the interest rate for our LIBOR Loans, as defined in the Credit Agreement. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressures will cause LIBOR to disappear entirely or to perform differently than in the past. We may need to amend the Credit Agreement and any other applicable financial or contractual obligations that use LIBOR, and we cannot predict what alternative index would be negotiated with our counterparties. We may incur additional expenses to amend such agreements to reference the alternative index, which may differ significantly from LIBOR. Accordingly, the use of an alternative index could result in increased costs, including increased interest expense on our Credit Agreement and increased borrowing costs in the future, and could adversely affect our available cash flow for general corporate requirements. At this time, no consensus exists as to what index or indices may become acceptable alternatives to LIBOR and we are unable to predict the effect of any such alternatives on our business, results of operations or financial condition.
Our future success is substantially dependent on the continued service of our senior management and other key employees and effective succession planning.
Our future success is substantially dependent on the continued service of our senior management and other key employees. The loss of the services or retirement of our senior management or other key employees could make it more difficult to successfully operate our business and achieve our business goals. We also may be unable to attract qualified personnel or retain existing management, product development, sales, operational and other support personnel that are critical to our success, which could result in harm to key customer relationships, loss of key information, expertise, or know-how, and unanticipated recruitment and training costs. In addition, effective succession planning is also a key factor for our future success. On February 13, 2019 our board of directors adopted a succession plan, pursuant to which Jeffrey L. Powell was appointed to succeed Jonathan W. Painter as president effective April 1, 2019 and as chief executive officer effective July 1, 2019 (Succession Plan). Mr. Painter became the executive chairman of the board of directors effective July 1, 2019. Our failure to continue to enable the effective transfer of knowledge and facilitate smooth transitions with regard to key management employees, including in connection with the Succession Plan, could adversely affect our long-term strategic planning and execution and negatively affect our business, financial condition, operating results, and prospects. If we fail to enable the effective transfer of knowledge and facilitate smooth transitions for key personnel, the operating results and future growth for our business could be adversely affected, and the morale and productivity of the workforce could be disrupted.

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Our inability to protect our intellectual property or defend ourselves against the intellectual property claims of others could have a material adverse effect on our business. In addition, litigation to enforce our intellectual property and contractual rights or defend ourselves could result in significant litigation or licensing expense.
We seek patent and trade secret protection for significant new technologies, products, and processes because of the length of time and expense associated with bringing new products through the development process and into the marketplace. We own numerous U.S. and foreign patents and we intend to file additional applications, as appropriate, for patents covering our products. Patents may not be issued for any pending or future patent applications owned by or licensed to us, and the claims allowed under any issued patents may not be sufficiently broad to protect our technology. Any issued patents owned by or licensed to us may be challenged, invalidated, or circumvented, and the rights under these patents may not provide us with competitive advantages. In addition, competitors may design around our technology, copy our technology or develop competing technologies. Intellectual property rights may also be unavailable or limited in some foreign countries, which could make it easier for competitors to capture increased market share. In addition, as our patents expire, we rely on trade secrets and proprietary know-how to protect our products. We cannot be sure the steps we have taken, or will take in the future, will be adequate to deter misappropriation of our proprietary information and intellectual property. Of particular concern are developing countries, such as China and India, where the laws, courts, and administrative agencies may not protect our intellectual property rights as fully as in the United States or Europe.
We seek to protect trade secrets and proprietary know-how, in part, through confidentiality and non-competition agreements with our collaborators, employees, and consultants. These agreements may be breached, we may not have adequate remedies for any breach, and our trade secrets may otherwise become known or be independently developed by our competitors, or our competitors may otherwise gain access to our intellectual property.
Others may assert intellectual property infringement claims against us or our customers. We may provide a limited intellectual property indemnity in connection with our terms and conditions of sale to our customers and in other types of contracts with third parties. Indemnification payments and legal expenses to defend claims could be costly.
We could incur substantial costs to defend ourselves in suits brought against us, including for alleged infringement of third-party rights, or in suits in which we may assert our intellectual property or contractual rights against others. An unfavorable outcome of any such litigation could have a material adverse effect on our business and results of operations.
Our SMH subsidiary holds numerous U.S. and foreign patents, including foreign counterparts to its U.S. patents, and licenses the trademarked brand name of one of its significant products, Link-Belt®, from a third party. If the third-party were to terminate that license agreement, we would lose the right to use the Link-Belt® trademark in the marketplace and cease to benefit from any of its associated goodwill.
Our share price fluctuates and experiences price and volume volatility.
Stock markets in general and our common stock in particular experience significant price and volume volatility from time to time. The market price and trading volume of our common stock may continue to be subject to significant fluctuations due not only to general stock market conditions but also to a change in sentiment in the market regarding our operations, business prospects, or future funding. Given the nature of the markets in which we participate and the volatility of orders, we may not be able to reliably predict future revenues and profitability, and unexpected changes may cause us to adjust our operations. A large proportion of our costs are fixed, due in part to our significant selling, research and development, and manufacturing costs. Thus, small declines in revenues could disproportionately affect our operating results. Other factors that could affect our share price and quarterly operating results include:
 
changes in the assumptions used for revenue recognized over time;
 
fluctuations in revenues due to customer-initiated delays in product shipments;
 
failure of a customer to comply with an order's contractual obligations or inability of a customer to provide financial assurances of performance;
 
adverse changes in demand for and market acceptance of our products;
 
failure of our products to pass contractually agreed upon acceptance tests, which could delay or prohibit recognition of revenues under applicable accounting guidelines;
 
competitive pressures resulting in lower sales prices for our products;
 
adverse changes in the process industries we serve;
 
delays or problems in our introduction of new products;
 
delays or problems in the manufacture of our products;
 
our competitors' announcements of new products, services, or technological innovations;
 
contractual liabilities incurred by us related to guarantees of our product performance;
 
increased costs of raw materials or supplies, including the cost of energy;

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Kadant Inc.
 
 
 
 
 
 
 
 
 
 

 
changes in the timing of product orders;
 
changes in the estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, or expenses;
 
the impact of acquisition accounting, including the treatment of acquisition and restructuring costs as period costs;
 
fluctuations in our outstanding indebtedness and associated interest expense;
 
fluctuations in our effective tax rate;
 
the operating and share price performance of companies that investors consider to be comparable to us; and
 
changes in global financial markets and global economies and general market conditions.
Adverse changes to the soundness of financial institutions could affect us.
We have relationships with many financial institutions, including lenders under our credit facilities and insurance underwriters, and from time to time we execute transactions with counterparties in the financial industry, such as our interest rate swap agreements and other hedging transactions. In addition, our subsidiaries in China often hold banker's acceptance drafts that are received from customers in the normal course of business. These drafts may be discounted or used to pay vendors prior to the scheduled maturity date or submitted to an acceptance bank for payment at the scheduled maturity date. These financial institutions or counterparties could be adversely affected by volatile conditions in the financial markets, economic downturns, and difficult economic conditions. These conditions could result in financial instability, bankruptcy, or other adverse effects at these financial institutions or counterparties. We may not be able to access credit facilities in the future, complete transactions as intended, or otherwise obtain the benefit of the arrangements we have entered into with such financial parties, which could adversely affect our business and results of operations.
We are subject to risks and costs associated with environmental laws and regulations.
The manufacturing of our products requires the use of hazardous materials that are subject to a broad array of environmental health and safety laws and regulations. Our failure to manage the use, transportation, emissions, discharge, storage, recycling, or disposal of hazardous materials could lead to increased costs or regulatory penalties, fines and legal liability. Our ability to expand, modify or operate our manufacturing facilities in the future may be impeded by environmental regulations, such as air quality and wastewater requirements. The Chinese government has pledged to tackle the country's hazardous smog, and authorities try to clear the skies ahead of high-profile events, which prompt authorities to impose strict pollution control measures. Regulators have in the past and may in the future temporarily restrict our manufacturing in a particular geographic location as a result of pollution levels in China. Environmental laws and regulations could also require us to acquire pollution abatement or remediation equipment, modify product designs, or incur other expenses. New regulations promulgated in reaction to climate change could result in increased manufacturing costs associated with air pollution control requirements, and increased or new monitoring, recordkeeping, and reporting of greenhouse gas emissions. We also see the potential for higher energy costs driven by climate change regulations. These risks could harm our business and results of operations.
Effects of climate change may adversely impact our business.
Climate change may pose environmental risks that could harm our results of operations and affect the way we conduct business. Many of our operations are located in regions that may become increasingly vulnerable due to climate change, which may cause extreme weather conditions such as more intense hurricanes, thunderstorms, tornadoes and snow or ice storms, winds, and rainfall, as well as rising sea levels and increased volatility in seasonal temperatures. Extreme weather conditions or weather-driven natural disasters could impact our ability to maintain our operations in those areas. For example, we have manufacturing locations in the southeastern United States, which region has experienced record hurricanes in recent years reportedly due to the effects of climate change. Climate change could also affect demand for our products by our customers that are affected by weather and weather-driven events, including seasonal changes in outdoor working conditions and rainfall levels. Climate change has also been cited as contributing to the increased likelihood around the world of hot and dry conditions in which wildfires thrive. As a result of increased wildfires, our customers in the forestry industry may face damage to assets and losses from business interruption, as wildfires can destroy timber, force the reduced operation or closure of mills, and disrupt supply chains of which we may be a part. These risks could harm our business and results of operations.

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Kadant Inc.
 
 
 
 
 
 
 
 
 
 

Environmental, health and mine safety laws and regulations impacting the mining industry may adversely affect demand for products manufactured by our Material Handling Systems business.
Our SMH subsidiary, which comprises our Material Handling Systems segment, supplies equipment to mining companies operating in major mining regions throughout the world. SMH’s customers’ operations are subject to or affected by a wide array of regulations in the jurisdictions where they operate, including those directly impacting mining activities and those indirectly affecting their businesses, such as applicable environmental and mine safety laws. New environmental and health legislation or administrative regulations relating to mining or affecting demand for mined materials or more stringent interpretations of existing laws and regulations, may require SMH’s customers to significantly change or curtail their operations. The mining industry has also encountered increased scrutiny as it relates to safety regulations, primarily due to high-profile mining accidents. New legislation or regulations relating to mine safety standards may induce customers to discontinue or limit their mining operations and may discourage companies from developing new mines or maintaining existing mines, which in turn could diminish demand for our products and services.
The high cost of compliance with such regulations and standards may discourage SMH’s customers from expanding existing mines or developing new mines and may also cause customers to limit or even discontinue their mining operations. As a result of these factors, demand for SMH’s mining equipment could be adversely affected by environmental and health regulations directly or indirectly impacting the mining industry. Any reduction in demand for SMH’s products as a result of environmental, health or mine safety regulations could have an adverse effect on SMH’s and our overall business, financial condition or results of operations.
Our insurance coverage may be inadequate or expensive.
We are subject to claims in the ordinary course of business. It is not always possible to prevent or detect activities giving rise to claims, and the precautions we take may not be effective in all cases. We maintain insurance policies that provide limited coverage for some, but not all, potential risks and liabilities associated with our business. We may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially, and in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. As a result, we may not be able to renew our existing insurance policies or procure other desirable insurance on commercially reasonable terms, if at all. In addition, certain risks generally are not fully insurable. Even where insurance coverage applies, insurers may contest their obligations to make payments. Our financial condition, results of operations and cash flows could be materially and adversely affected by losses and liabilities from uninsured or under-insured events, as well as by delays in the payment of insurance proceeds, or the failure by insurers to make payments.
Anti-takeover provisions in our charter documents and under Delaware law could prevent or delay transactions that our shareholders may favor.
Provisions of our charter and bylaws may discourage, delay, or prevent a merger or acquisition that our shareholders may consider favorable, including transactions in which shareholders might otherwise receive a premium for their shares. For example, these provisions:
 
authorize the issuance of "blank check" preferred stock without any need for action by shareholders;
 
provide for a classified board of directors with staggered three-year terms;
 
require supermajority shareholder voting to effect various amendments to our charter and bylaws;
 
eliminate the ability of our shareholders to call special meetings of shareholders;
 
prohibit shareholder action by written consent; and
 
establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by shareholders at shareholder meetings.
Our board of directors could adopt a shareholder rights plan in the future that could have anti-takeover effects and might discourage, delay, or prevent a merger or acquisition that our board of directors does not believe is in our best interest and those of our shareholders, including transactions in which shareholders might otherwise receive a premium for their shares.
We have not independently verified the results of third-party research or confirmed assumptions or judgments on which they may be based, and the forecasted and other forward-looking information based on this research is subject to inherent uncertainties.
We refer in this report and other documents that we file with the SEC to historical, forecasted and other forward-looking information published by sources such as Fastmarkets RISI, Forest Economic Advisors, the U.S. Census Bureau, and various market news agencies that we believe to be reliable. However, we have not independently verified this information, and with respect to the forecasted and forward-looking information, have not independently confirmed the assumptions and

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Kadant Inc.
 
 
 
 
 
 
 
 
 
 

judgments upon which such information is based. Forecasted and other forward-looking information is necessarily based on assumptions regarding future occurrences, events, conditions and circumstances and subjective judgments relating to various matters, and is subject to inherent uncertainties. Actual results may differ materially from the results expressed or implied by, or based upon, such forecasted and forward-looking information.

Item 1B.    Unresolved Staff Comments
Not applicable.

Item 2.    Properties
We believe that our facilities are in good condition and are suitable and adequate for our present operations. We do not anticipate significant difficulty in obtaining lease renewals or alternative space as needed.
The location and general character of our principal properties as of year-end 2019 are as follows:
Papermaking Systems Segment
We own approximately 1,923,000 square feet and lease approximately 452,000 square feet, under leases expiring on various dates ranging from 2020 to 2028, of manufacturing, engineering, and office space. In addition, in China, we lease the land associated with our buildings under long-term leases, which expire on dates ranging from 2050 to 2062. Our principal engineering and manufacturing facilities are located in Vitry-le-Francois, France; Jining, China; Valinhos, Brazil; Three Rivers, Michigan, United States; Lebanon, Ohio, United States; Anderson, South Carolina, United States; Georgsmarienhutte, Germany; Auburn, Massachusetts, United States; Weesp, The Netherlands; Alfreton, England; Wuxi, China; Guadalajara, Mexico; Bury, England and Huskvarna, Sweden.
Wood Processing Systems Segment
We own approximately 225,000 square feet and lease approximately 118,000 square feet, under leases expiring on various dates ranging from 2020 to 2026, of manufacturing, engineering, and office space. In addition, in Sidney, British Columbia, Canada, we lease the land associated with our building under a long-term lease, which expires in 2032. Our principal engineering and manufacturing facilities are located in Sidney, British Columbia, Canada; Lohja, Finland; Surrey, British Columbia, Canada; and Pell City, Alabama, United States.
Material Handling Systems Segment
We lease approximately 382,000 square feet, under leases expiring on various dates ranging from 2020 to 2034. Our principal manufacturing and office space is located in Saltillo, Mississippi, United States.
Fiber-based Products
We own approximately 31,000 square feet of manufacturing and office space located in Green Bay, Wisconsin, United States. We also lease approximately 58,000 square feet of manufacturing space located in Green Bay, Wisconsin, United States under a lease expiring in 2022.
Corporate
We lease approximately 18,000 square feet in Westford, Massachusetts, United States, for our corporate headquarters under a lease expiring in 2026.

Item 3.    Legal Proceedings
Not applicable.

Item 4.    Mine Safety Disclosures
Not applicable.


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Kadant Inc.
 
 
 
 
 
 
 
 
 
 

PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market Price of Common Stock
Our common stock trades on the New York Stock Exchange under the symbol "KAI". The closing market price on the New York Stock Exchange for our common stock on February 14, 2020 was $100.24 per share.
Holders of Common Stock
As of February 14, 2020, we had approximately 2,349 holders of record of our common stock. This does not include holdings in street or nominee name.
Issuer Purchases of Equity Securities
We did not repurchase any shares of our common stock during the fourth quarter of 2019.
Performance Graph
This performance graph compares the cumulative, five-year total shareholder return assuming an investment of $100 (and the reinvestment of dividends) in our common stock, the Russell 3000 Stock Index, and the Dow Jones U.S. Industrial Machinery TSM Index. Our common stock trades on the New York Stock Exchange under the ticker symbol "KAI." Because our fiscal year ends on a Saturday, the graph values are calculated using the last trading day prior to the end of our fiscal year.
chart-fcf6c266d992515ab2c.jpg
 
 
1/3/2015
 
1/2/2016
 
12/31/2016
 
12/30/2017
 
12/29/2018
 
12/28/2019
Kadant Inc.
 
100.00
 
97.23
 
148.90
 
247.08
 
201.46
 
265.46
Russell 3000
 
100.00
 
100.48
 
113.27
 
137.21
 
130.02
 
170.35
Dow Jones U.S. Industrial Machinery TSM
 
100.00
 
87.42
 
118.57
 
157.34
 
132.70
 
180.49
 

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Kadant Inc.
 
 
 
 
 
 
 
 
 
 

Item 6.    Selected Financial Data

The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and related notes, and other financial data included elsewhere in this Annual Report on Form 10-K. The consolidated statements of income data for the fiscal years 2019, 2018, and 2017 and the consolidated balance sheet data at fiscal year-end 2019 and 2018 are derived from our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. The consolidated statements of income data for fiscal years 2016 and 2015 and the consolidated balance sheet data at fiscal year-end 2017, 2016, and 2015 are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K.
(In thousands, except per share amounts)
 
December 28, 2019
 
December 29, 2018
 
December 30, 2017
 
December 31, 2016
 
January 2, 2016
Statement of Income Data 
 
 
 
 
 
 
 
 
 
 
Revenues (a)
 
$
704,644

 
$
633,786

 
$
515,033

 
$
414,126

 
$
390,107

Operating Income (b)
 
87,823

 
88,598

 
61,625

 
46,642

 
50,119

Amounts Attributable to Kadant:
 
 

 
 

 
 

 
 

 
 

Income from Continuing Operations (c)
 
52,068

 
60,413

 
31,092

 
32,074

 
34,315

Income from Discontinued Operation
 

 

 

 
3

 
74

Net Income (c)
 
$
52,068

 
$
60,413

 
$
31,092

 
$
32,077

 
$
34,389

Earnings per Share for Continuing Operations:
 
 

 
 

 
 

 
 

 
 

Basic
 
$
4.63

 
$
5.45

 
$
2.83

 
$
2.95

 
$
3.16

Diluted
 
$
4.54

 
$
5.30

 
$
2.75

 
$
2.88

 
$
3.09

Earnings per Share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
4.63

 
$
5.45

 
$
2.83

 
$
2.95

 
$
3.16

Diluted
 
$
4.54

 
$
5.30

 
$
2.75

 
$
2.88

 
$
3.10

 
 
 
 
 
 
 
 
 
 
 
Cash Dividends Declared per Common Share
 
$
0.92

 
$
0.88

 
$
0.84

 
$
0.76

 
$
0.68

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data
 
 

 
 

 
 

 
 

 
 

Working Capital
 
$
151,407

 
$
123,772

 
$
133,793

 
$
118,437

 
$
108,492

Total Assets
 
939,387

 
725,749

 
761,094

 
470,691

 
415,498

Long-Term Obligations (d)
 
298,174

 
174,153

 
241,384

 
65,768

 
26,000

Stockholders' Equity
 
427,079

 
374,571

 
332,504

 
284,279

 
267,945

______________________
(a)
Includes incremental revenues of $83.4 million in 2019, $64.6 million in 2018, $69.4 million in 2017, and $40.8 million in 2016 primarily from our acquisitions of SMH in 2019, the forest products business of NII FPG Company (NII FPG) and Unaflex, LLC (Unaflex) in 2017, and PAALGROUP (PAAL) in 2016.
(b)
Fiscal years 2017 and 2016 have been restated to conform to the current period presentation as a result of the adoption of Accounting Standards Update (ASU) No. 2017-07, Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost. Fiscal year 2015 was not restated as the amount was not material.
(c)
Includes pre-tax impairment and restructuring costs of $2.5 million in 2019 related to our Wood Processing Systems segment's timber-harvesting product line and pre-tax restructuring costs of $1.7 million in 2018 related to our Papermaking Systems segment's stock-preparation product line. Includes a pre-tax settlement loss of $5.9 million in 2019 and a pre-tax curtailment loss of $1.4 million in 2018. Includes a discrete tax benefit of $3.3 million in 2019 related to the exercise of employee stock options and $3.2 million in 2018 primarily related to the reversal of tax reserves associated with uncertain tax positions and the 2017 Tax Act, including amounts associated with the repatriation of foreign earnings. Includes a discrete tax expense of $10.3 million in 2017 primarily related to the 2017 Tax Act.
(d)
Includes additional borrowings related to the acquisitions of SMH in 2019, NII FPG and Unaflex in 2017, and PAAL in 2016.


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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
The following discussion of our financial condition and results of operations should be read together with the financial statements and the related notes set forth in Item 8. “Financial Statements and Supplementary Data.” The following discussion also contains forward-looking statements 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.

Overview
Company Overview
We are a global supplier of high-value, critical components and engineered systems used in process industries worldwide. In addition, we manufacture granules made from papermaking by-products. We have a diverse and large customer base, including most of the world's major paper producers and lumber and OSB manufacturers, as well as various mining and industrial processing companies that require bulk material handling solutions. Our products, technologies, and services play an integral role in enhancing process efficiency, optimizing energy utilization, and maximizing productivity in resource-intensive industries.
Our operations are comprised of three reportable operating segments: Papermaking Systems, Wood Processing Systems, and Material Handling Systems, and a separate product line, Fiber-based Products, as described below.
Through our Papermaking Systems segment, we develop, manufacture, and market a range of equipment and products for the global papermaking, paper recycling, recycling and waste management, and other process industries. Our principal products include custom-engineered stock-preparation systems and equipment for the preparation of wastepaper for conversion into recycled paper and balers and related equipment used in the processing of recyclable and waste materials; fluid-handling systems and equipment used in industrial piping systems to compensate for movement and to efficiently transfer fluid, power, and data; doctoring systems and equipment and related consumables important to the efficient operation of paper machines and other industrial processes; and filtration and cleaning systems essential for draining, purifying, and recycling process water and cleaning fabrics, belts, and rolls in various process industries.
Through our Wood Processing Systems segment, we develop, manufacture, and market debarkers, stranders, chippers, logging machinery and related equipment used in the harvesting and production of lumber and OSB.
Through our Material Handling Systems segment, we develop, manufacture, and market material handling equipment and systems to various process industries, including mining, aggregates, food processing, packaging, and pulp and paper. Our material handling and processing equipment, which includes idler rolls, conveyors, vibratory screens, and flow aids, allows for the transportation of bulk materials from source to point of processing.
Through our Fiber-based Products business, we manufacture and sell biodegradable, absorbent granules derived from papermaking by-products. These materials are primarily used as carriers in agricultural, home lawn and garden, professional lawn, turf and ornamental applications, and for oil and grease absorption.

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 actively pursue additional acquisition opportunities. Our significant acquisition in 2019 is described below.
On January 2, 2019, we acquired, directly and indirectly, all the outstanding equity interests of SMH, for $176.9 million, net of cash acquired. This acquisition extended our current product portfolio, and we expect it will strengthen SMH's relationships in the pulp and paper markets. See Note 2, Acquisitions, in the accompanying consolidated financial statements for further details.

International Sales
Our sales to customers outside the United States, mainly in Europe, Asia and Canada, were approximately 56% of total revenue in 2019 and 63% of total revenue in 2018. The decrease in the percentage of international sales in 2019 was primarily due to the acquisition of SMH, which predominantly sells to customers in the United States. We generally seek to charge our customers in the same currency in which our operating costs are incurred. However, our financial performance and competitive position can be affected by currency exchange rate fluctuations primarily affecting the relationship between the U.S. dollar and foreign currencies. We seek to reduce our exposure to currency fluctuations through the use of forward currency exchange contracts. We may enter into forward 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.

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Kadant Inc.
 
 
 
 
 
 
 
 
 
 

Application of Critical Accounting Policies and 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 accounting principles generally accepted in the United States (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 revenues and expenses during the reporting period. Our actual results may differ from these estimates under different assumptions or conditions.
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. We believe that our most critical accounting policies upon which our financial position depends, and which involve the most complex or subjective decisions or assessments, are those described below. For a discussion on the application of these and other accounting policies, see Note 1, Nature of Operations and Summary of Significant Accounting Policies, in the accompanying consolidated financial statements.
Revenue Recognition. We recognize revenue in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, as performance obligations are satisfied. Most of our revenue is recognized at a point in time for each performance obligation under the contract when the customer obtains control of the goods or service. Most of our parts and consumables products and capital products with minimal customization are accounted for at a point in time. The remaining portion of our revenue is recognized on an over time basis based on an input method that compares the costs incurred to date to the total expected costs required to satisfy the performance obligation. Contracts are accounted for on an over time basis when they include products which have no alternative use and an enforceable right to payment over time. Most of the contracts recognized on an over time basis are for large capital projects within our Stock-Preparation product line, and to a lesser extent, our Material Handling Systems segment and Fluid-Handling and Doctoring, Cleaning, & Filtration product lines. These projects are highly customized for the customer, and as a result, would include a significant cost to rework in the event of cancellation.
The transaction price includes estimated variable consideration where applicable. Such variable consideration relates to certain performance guarantees and rights to return the product. We estimate variable consideration as the most likely amount to which we expect to be entitled based on the terms of the contracts with customers and historical experience, where relevant. For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation based on the relative stand-alone selling price.
Our contracts covering the sale of our products include warranty provisions that provide assurance to our customers that the products will comply with agreed-upon specifications. We negotiate the terms regarding warranty coverage and length of warranty depending on the products and applications.
Income Taxes. The 2017 Tax Act was signed into law on December 22, 2017 and its provisions are generally effective for tax years beginning January 1, 2018. The most significant impacts of the 2017 Tax Act to us include a decrease in the federal corporate income tax rate from 35% to 21% and a one-time mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings. On December 22, 2017, the SEC staff issued SAB 118 to provide guidance on accounting for the 2017 Tax Act’s impact. In accordance with SAB 118, we recorded a provisional net income tax expense of $7.5 million, including the impact of state taxes, in the fourth quarter of 2017, which consisted of a provisional amount of the one-time mandatory transition tax of $10.3 million, offset in part by a provisional net tax benefit of $2.8 million for the remeasurement of our deferred income tax assets and liabilities at the 21% federal corporate income tax rate. During 2018, we completed our accounting for the 2017 Tax Act under the SAB 118 guidance and recorded a net reduction of $0.1 million to the 2017 provisional amount related to the one-time mandatory transition tax.
While the 2017 Tax Act provides for a territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provisions, GILTI and BEAT. We have elected to account for the GILTI tax in the period in which it is incurred and, therefore, have not provided the deferred income tax impact of GILTI in our consolidated financial statements. In addition, we are not subject to the minimum tax pursuant to the BEAT provisions, but may be subject to such provision in the future.
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 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. Our tax valuation allowance was $8.5 million at year-end 2019. 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

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Kadant Inc.
 
 
 
 
 
 
 
 
 
 

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 2019, we continued to maintain a valuation allowance in the United States against certain of our state operating loss carryforwards due to the uncertainty of future profitability in these state jurisdictions in the United States. At year-end 2019, we maintained valuation allowances in certain foreign jurisdictions because of the uncertainty of future profitability. In the ordinary course of business there is inherent uncertainty 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. At year-end 2019, we believe that we have appropriately accounted for any liability for unrecognized tax benefits. 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 States, and during 2019, we recorded $0.8 million of net tax expense associated with these foreign earnings that we plan to repatriate in 2020. 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.
Valuation of Goodwill and Intangible Assets. 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, such as a significant decline in sales, earnings, or cash flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired.
At year-end 2019, we performed a qualitative impairment analysis (Step Zero) on our goodwill and indefinite-lived intangible assets and determined that the assets were not impaired, except for the indefinite-lived tradename associated with our timber-harvesting product line discussed below.
Intangible assets subject to amortization are evaluated for impairment if events or changes in circumstances indicate that the carrying value of an asset might be impaired. No indicators of impairment were identified in 2019, except for the definite-lived product technology associated with our timber-harvesting product line discussed below.     
We use assumptions and estimates in determining the fair value of assets acquired and liabilities assumed in a business combination. The determination of the fair value of intangible assets, which represent a significant portion of the purchase price in many of our acquisitions, requires the use of significant judgment regarding the fair value; and whether such intangibles are amortizable or non-amortizable and, if amortizable, the period and the method by which the intangible asset will be amortized. We estimate the fair value of acquisition-related intangible assets principally based on projections of cash flows that will arise from identifiable intangible assets of acquired businesses. The projected cash flows are discounted to determine the present value of the assets at the date of acquisition. Our judgments and assumptions regarding the determination of the fair value of an intangible asset or goodwill associated with an acquired business could change as future events impact such fair values. A prolonged economic downturn, weakness in demand for our products, especially capital equipment products, or contraction in capital spending by customers, including paper companies, lumber mills, sawmills or OSB manufacturers, and mining and industrial processing companies, in our key markets could negatively affect the revenue and profitability assumptions used in our assessment of goodwill and intangible assets, which could result in impairment charges. Any future impairment loss could have a material adverse effect on our long-term assets and operating expenses in the period in which an impairment is determined to exist.
During 2019, we experienced a decrease in revenue and operating results in our timber-harvesting product line included in our Wood Processing Systems segment, which we acquired in 2017 as part of our acquisition of the forest products business of NII FPG Company (NII FPG) (see Note 2, Acquisitions, in the accompanying consolidated financial statements for further details). The decrease was primarily driven by the deterioration of several market conditions in the Pacific Northwest, including a widespread timber shortage and high stumpage fees. These factors, along with a shift in demand for timber to the Southeastern part of the United States, resulted in sawmill closures in western Canada where our steep terrain equipment is generally used. Given the decline in demand for this business' products, which we expect to continue into 2020, we performed a quantitative analysis of the recoverability of the related intangible assets. As a result of this analysis in which the income approach discounted cash flow methodology was used, we determined that the fair values of certain of the timber-harvesting product line's intangible assets were less than their carrying values, and therefore, we recorded impairment charges in the fourth quarter of 2019 totaling $2.3 million. These impairment charges, which are included in impairment and restructuring costs in the accompanying consolidated statement of income, consist of $1.6 million related to the definite-lived product technology of the timber-harvesting product line and $0.7 million related to its indefinite-lived tradename. We reclassified the remaining carrying value of $1.3 million related to the indefinite-lived tradename associated with the timber-harvesting product line to definite-lived tradenames, as the indefinite use of the tradename is no longer certain.
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. We regularly review inventory quantities on hand and compare these amounts to historical and forecasted usage of and demand for each particular product or product line.

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Kadant Inc.
 
 
 
 
 
 
 
 
 
 

We record a charge to cost of revenues for excess and obsolete inventory to reduce the carrying value of the inventories to net realizable value. Inventory write-downs have historically been within our expectations and the provisions established. A significant decrease in demand for our products could result in an increase in the amount of excess inventory quantities on hand, resulting in a charge for the write-down of that inventory in that period. In addition, our estimates of future product usage or demand may prove to be inaccurate, resulting in an understated or overstated provision for excess and obsolete inventory. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product usage and demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.
Pension and Other Post-Retirement Benefits. Through year-end 2018, we sponsored a noncontributory defined benefit retirement plan for eligible employees at one of our U.S. divisions and our corporate office (Retirement Plan). In addition, we also maintained a restoration plan for certain executive officers (Restoration Plan), which fully supplemented benefits lost under the Retirement Plan as a consequence of applicable Internal Revenue Service limits and restored benefits for the limitation of years of service under the Retirement Plan. In October 2018, our board of directors and its compensation committee approved amendments to freeze and terminate the Retirement Plan and the Restoration Plan effective as of year-end 2018. As a result, we incurred a curtailment loss in the fourth quarter of 2018 of $1.4 million in connection with such terminations. In the fourth quarter of 2019, we settled our Retirement Plan obligation, which required adjustment based on the number of plan participants who elected to receive either a lump sum payment or an annuity, and the increased costs to purchase the annuity contracts due to changes in certain market conditions, including a decrease in long-term interest rates in 2019. As a result, we recognized a settlement loss of $5.9 million, which was calculated as the sum of the unrecognized actuarial loss and $3.8 million of additional cash to be paid, less our accrued pension liability. The unfunded benefit obligation related to the Restoration Plan was $2.4 million at year-end 2019, which we settled in early fiscal 2020 by paying a lump sum to the plan participants.
Several of our U.S. and non-U.S. subsidiaries also sponsor defined benefit pension and other post-retirement benefit plans with an aggregate unfunded benefit obligation of $6.9 million and a fair value of plan assets of $1.0 million at year-end 2019. The cost and obligations of these arrangements are calculated using many assumptions to estimate the benefits that the employee earns while working, the amount of which cannot be completely determined until the benefit payments cease. Assumptions are determined based on Company data and appropriate market indicators in consultation with third-party actuaries, and are evaluated each year as of the plans' measurement dates. Should any of these assumptions change, they would have an effect on net periodic benefit costs and the unfunded benefit obligation.

Industry and Business Outlook
Our products are sold worldwide to process industries, and are primarily used to produce packaging, OSB, lumber, and tissue, and handle bulk materials. Major markets for our products are as follows:
Packaging
Approximately 29% of our revenue in 2019 was from the sale of products that support packaging production. Consumption of packaging, which is primarily comprised of containerboard and boxboard, is driven by many factors, including regional economic conditions, consumer spending on non-durable goods, usage levels of e-commerce, demand for food and beverage packaging, and greater urbanization in developing regions. For balers and related equipment, demand is generally driven by rising standards of living and population growth, shortage and costs of landfilling, increasing recycling rates, and environmental regulation.
Wood Processing
Approximately 20% of our revenue in 2019 was from sales to manufacturers in the wood processing industries, including engineered wood panel producers, lumber mills, and sawmills, which use debarkers, stranders and related equipment to prepare logs to be converted into OSB or lumber, and use timber-harvesting equipment to cut, gather, and remove timber from forest plantations. Demand for OSB and lumber is primarily tied to new home construction and home remodeling. In addition, OSB is used in industrial applications such as crates and bed liners for shipping containers, as well as furniture. The majority of OSB and lumber demand is in North America, as houses built in North America are more often constructed of wood compared to those in other parts of the world.
Tissue and Specialty Paper
Approximately 14% of our revenue in 2019 was from the sale of products that support the manufacturing of tissue and specialty paper grades. Consumption of tissue is fairly stable and in the developed world tends to grow with the population. Growth rates in the developing world are expected to increase as per capita consumption of paper products increases with rising standards of living.

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Kadant Inc.
 
 
 
 
 
 
 
 
 
 

Material Handling
Approximately 12% of our revenue in 2019 was from sales of material handling equipment and systems to various process industries, including mining, aggregates, food processing, packaging, and pulp and paper. Demand for our products is largely driven by expansion of capacity generated by industrial growth, particularly by mineral and industrial processors, and by increased infrastructure spending and modernization, which drives demand for aggregates, including sand, gravel, and crushed stone.
Printing, Writing and Newsprint
Approximately 10% of our revenue in 2019 was related to products used to produce printing and writing paper grades as well as newsprint, the demand for which continues to be negatively affected by the development and increased use of digital media.
Other
Our remaining revenue was from sales to other process industries, which tend to grow with the overall economy. These industries include metals, food and beverage, chemical, petrochemical, and energy, among others.
Bookings
Our bookings increased 3% to $688 million in 2019 compared with $670 million in 2018, including $88 million from an acquisition and a $19 million unfavorable effect from currency translation. Excluding the acquisition and unfavorable effect from currency translation, our bookings in 2019 decreased 8% compared with 2018, primarily due to weaker demand for industrial products in 2019, as customers were hesitant to invest in major capital projects due to uncertainty in global trade relations among the United States and its major trading partners, and general softness in the global economy. This decrease was slightly offset by growth in parts and consumables bookings.
Bookings for our capital equipment tend to be variable and are dependent on regional economic conditions and the level of capital spending by our customers, among other factors. By comparison, demand for our parts and consumables products tends to be more predictable. We believe our large installed base provides us with a relatively stable parts and consumables business that yields higher margins than our capital equipment business. Bookings for our parts and consumables products increased to $441 million in 2019, or 64% of total bookings, compared with $379 million, or 56% of total bookings, in 2018, including $66 million in bookings from an acquisition. Excluding the impact of the acquisition and an $11 million unfavorable effect from currency translation, our parts and consumables bookings increased 2%.
    Bookings by geographic region are as follows:
North America
The largest and most impactful regional market for our products in 2019 was North America, and we expect this to continue to be the case in 2020. Our bookings in North America increased to $382 million in 2019, including $81 million of bookings from an acquisition and a $2 million unfavorable effect from currency translation, compared with $325 million in 2018. Excluding the acquisition and unfavorable effect from foreign currency translation, bookings decreased 7%.
We experienced reduced capital project activity in our Wood Processing Systems segment compared to the high levels that occurred in 2018, as many producers increased their capacity and modernized their facilities in 2018. In addition, demand for our wood processing capital products decreased in 2019 compared with 2018 due to a convergence of adverse environmental and related economic factors that has negatively affected the wood market and logging and sawmill activity in the Pacific Northwest. We expect these factors to continue to exist, and accordingly, to adversely affect demand for our wood processing capital products in 2020.
The packaging market in North America experienced weak demand during 2019, and as a result, major containerboard producers were reported to have taken market-related downtime. According to Fastmarkets RISI, U.S. containerboard producers' operating rates averaged 89% during the first three quarters of 2019 and increased to 91% during the fourth quarter of 2019, compared with an average of 97% in 2018. Fastmarkets RISI forecasted corrugated packaging demand to strengthen in the near-term based on a projected modest increase in industrial production of processed foods and other nondurable goods during the first half of 2020.    
In our Material Handling Systems segment, which primarily serves the mining, aggregates and industrial processing markets, we experienced a good level of project activity during 2019. Most of the end user markets we serve in this segment are signaling softer growth and a slight slowdown into the first half of 2020, with an upturn expected in the second half of the year. The mining market is expected to remain weak throughout 2020, while the aggregates market is expected to grow at a modest pace.

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Kadant Inc.
 
 
 
 
 
 
 
 
 
 

Europe
Our bookings in Europe decreased to $174 million in 2019 compared with $185 million in 2018, including a $10 million unfavorable effect from currency translation. Excluding the negative impact from foreign currency translation, bookings decreased slightly. The weakness in Europe's manufacturing sector and the slowdown in global trade continues to impact the region. As a result, we experienced softer demand for our products and less project activity in the latter part of 2019, and we expect the start of 2020 to be similar to the second half of 2019.
Asia
Our bookings in Asia decreased to $83 million in 2019 compared with $107 million in 2018, including a $5 million increase from an acquisition and a $4 million unfavorable effect from currency translation. Excluding the acquisition and unfavorable effect from foreign currency translation, bookings in Asia decreased 24%. There was weak demand for containerboard project activity in China in 2019 due to a number of factors. Such factors include uncertainties in trade relations with the United States, weaker domestic demand for packaging, and recovered paper import restrictions, all of which have negatively affected new containerboard capacity additions. We expect continued weak demand for capital equipment in China in 2020, although we expect the recent capacity build-out in other parts of Asia to positively impact demand for our parts and consumables as more of the related installations become operational throughout 2020.
Most recently, China has been impacted by the outbreak of the coronavirus, which has resulted in government-mandated travel restrictions and business closures that have impacted operations at our facilities in China. If the outbreak is prolonged or the government restrictions are extended, there could be an impact on our employees, operations, customers or suppliers, which could affect the timing of customer shipments and our financial results in the first quarter of 2020. For more information on our international sales and operations and risks related to health epidemics, including the coronavirus, please see the risk factors included in Part I, Item 1A, "Risk Factors."
Rest of World
Our bookings in the rest of the world decreased to $48 million in 2019 compared with $53 million in 2018 primarily due to fewer investments in large capital projects. South America continues to experience a constrained investment environment as a result of geopolitical conditions, which impacted our results in this region. We continue to see the largest economies in this region, specifically Brazil, struggling to gain positive momentum, with expectations of only modest growth in 2020.
Global Trade
In 2018, the United States began imposing tariffs on certain imports from China. These tariffs have increased 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 the risk factors included in Part I, Item 1A, "Risk Factors."

Results of Operations

2019 Compared to 2018

Revenues
The following table presents changes in revenues by segment and product line between 2019 and 2018, and the changes in revenues by segment and product line between 2019 and 2018 excluding the effect of currency translation and acquisitions. Currency translation is calculated by converting 2019 revenues in local currency into U.S. dollars at 2018 exchange rates and then comparing this result to actual revenues in 2019. The presentation of the changes in revenues excluding the effect of currency translation and acquisitions 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 measures.

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(Non-GAAP) Adjusted
 
(In thousands, except percentages)
 
December 28,
2019
 
December 29,
2018
 
Total Increase (Decrease)
 
% Change
 
Currency Translation
 
Acquisition
 
Total Increase (Decrease)
 
% Change
Stock-Preparation
 
$
215,091

 
$
221,933

 
$
(6,842
)
 
(3
)%
 
$
(7,183
)
 
$

 
$
341

 
 %
Fluid-Handling
 
132,501

 
131,830

 
671

 
1
 %
 
(3,817
)
 

 
4,488

 
3
 %
Doctoring, Cleaning, & Filtration
 
117,838

 
116,136

 
1,702

 
1
 %
 
(3,244
)
 

 
4,946

 
4
 %
Papermaking Systems
 
465,430

 
469,899

 
(4,469
)
 
(1
)%
 
(14,244
)
 

 
9,775

 
2
 %
Wood Processing Systems
 
143,187

 
151,366

 
(8,179
)
 
(5
)%
 
(4,363
)
 

 
(3,816
)
 
(3
)%
Material Handling Systems
 
83,364

 

 
83,364

 
 %
 

 
83,364

 

 
 %
Fiber-based Products
 
12,663

 
12,521

 
142

 
1
 %
 

 

 
142

 
1
 %
Consolidated Revenues
 
$
704,644

 
$
633,786

 
$
70,858

 
11
 %
 
$
(18,607
)
 
$
83,364

 
$
6,101

 
1
 %

Consolidated revenues increased 11% in 2019 largely due to an acquisition, offset in part by an unfavorable effect of currency translation. Excluding the acquisition and unfavorable effect of currency translation, revenues increased 1% in 2019 compared to 2018.

Papermaking Systems Segment
Revenues from our Papermaking Systems segment decreased 1% in 2019, including an unfavorable effect of foreign currency translation. Excluding the unfavorable effect of foreign currency translation, revenues increased 2% in 2019 as described in the product line discussions below.
Revenues from our Stock-Preparation product line decreased 3% in 2019, including an unfavorable effect of foreign currency translation. Excluding the unfavorable effect of foreign currency translation, revenues were essentially flat in 2019. Decreased demand for our products at our Chinese operations resulted from reduced containerboard project activity due in part to China's recovered paper import restrictions. This decline was partially offset by increased demand for our capital equipment at our European and North American operations. Strong demand for our chemical pulping equipment drove the increase in North America. The overall decrease in capital equipment revenues was offset by increased demand for our parts and consumables products. An increase in demand for our parts and consumables products at our European and North American operations was partially offset by decreased demand at our Chinese operations.
Revenues from our Fluid-Handling product line increased 1% in 2019, including an unfavorable effect of foreign currency translation. Excluding the unfavorable effect of foreign currency translation, revenues increased 3% in 2019, primarily due to increased demand for our capital equipment at our North American operations and an increase in demand for our parts and consumables products across most geographic regions. These increases were partially offset by decreased demand for our capital equipment at our European operations.
Revenues from our Doctoring, Cleaning, & Filtration product line increased 1% in 2019, including an unfavorable effect of foreign currency translation. Excluding the unfavorable effect of foreign currency translation, revenues increased 4% in 2019, primarily due to increased demand at our North American operations.
    
Wood Processing Systems Segment
Revenues from our Wood Processing Systems segment decreased 5% in 2019, including an unfavorable effect of foreign currency translation. Excluding the unfavorable effect of foreign currency translation, revenues decreased 3% in 2019, primarily due to decreased demand for our capital equipment at our North American operations due to a reduction in our customers' capital spending during the year, as many producers had made significant improvements in 2018 to increase capacity and modernize their facilities. In addition, a convergence of adverse environmental conditions and related economic factors negatively affected the wood market and logging and sawmill activity in the Pacific Northwest, and particularly impacted our timber-harvesting product line. The decline in demand for our capital equipment was offset in part by a slight increase in demand for our parts and consumables products at our North American operations. The overall decrease in North America was partially offset by increased demand at our European operations due to a number of large capital orders.

Material Handling Systems Segment
Revenues from our Material Handling Systems segment in 2019 were from our SMH acquisition.

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Fiber-based Products
Revenues from our Fiber-based Products business increased slightly in 2019.

Gross Profit Margin
Gross profit margins for 2019 and 2018 were as follows:
 
 
December 28,
2019
 
December 29,
2018
Papermaking Systems
 
44.2
%
 
44.9
%
Wood Processing Systems
 
40.7
%
 
40.3
%
Material Handling Systems
 
28.3
%
 
%
Fiber-based Products
 
49.5
%
 
50.8
%
Consolidated Gross Profit Margin
 
41.7
%
 
43.9
%

Consolidated gross profit margin decreased in 2019 largely due to the inclusion of the lower gross margin profile of our Material Handling Systems segment, including $3.5 million of amortization of acquired profit in inventory, which lowered the consolidated gross profit margin by 0.5 percentage point.

Papermaking Systems Segment
The gross profit margin in our Papermaking Systems segment decreased in 2019 primarily due to lower margins on our capital equipment.

Wood Processing Systems Segment
The gross profit margin in our Wood Processing Systems segment increased in 2019 primarily due to an increase in the proportion of higher-margin parts and consumables revenues.

Material Handling Systems Segment
The gross profit margin in our Material Handling Systems segment in 2019 was negatively impacted by $3.5 million of amortization of acquired profit in inventory, which lowered the segment's gross profit margin by 4.3 percentage points.

Fiber-based Products
The gross profit margin in our Fiber-based Products business decreased in 2019 primarily due to an increase in the proportion of revenues from lower-margin products.

Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses for 2019 and 2018 were as follows:
 
(In thousands)
 
December 28,
2019
 
December 29,
2018
 
Increase (Decrease)
 
% Change
Papermaking Systems
 
$
116,493

 
$
117,680

 
$
(1,187
)
 
(1
)%
Wood Processing Systems
 
25,025

 
27,534

 
(2,509
)
 
(9
)%
Material Handling Systems
 
20,460

 

 
20,460

 
 %
Corporate and Fiber-based Products
 
30,547

 
32,200

 
(1,653
)
 
(5
)%
Consolidated SG&A
 
$
192,525

 
$
177,414

 
$
15,111

 
9
 %
 
 
 
 
 
 
 
 
 
Consolidated SG&A as a Percentage of Revenues
 
27.3
%
 
28.0
%
 
 
 
 

Consolidated SG&A expenses increased 9% in 2019 due to an acquisition, offset in part by a favorable effect of foreign currency translation of $4.7 million. Excluding the acquisition and favorable effect of foreign currency translation, SG&A expenses were essentially unchanged in 2019 compared to 2018.

Papermaking Systems Segment
SG&A expenses decreased in 2019 due to a $3.7 million favorable effect from foreign currency translation, offset in part by increased selling-related expense at our Fluid-Handling product line.

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Wood Processing Systems Segment
SG&A expenses decreased in 2019 primarily due to decreased selling expense at our European operations and a $1.0 million favorable effect from foreign currency translation.

Material Handling Systems Segment
SG&A expenses in our Material Handling Systems segment in 2019 were from our SMH acquisition, and included $1.3 million of amortization expense from acquired backlog.

Corporate and Fiber-based Products
SG&A expenses decreased in 2019 primarily due to $1.3 million in acquisition costs that were incurred in 2018 related to our SMH acquisition.

Impairment and Restructuring Costs
During 2019, we experienced significant decreases in our Wood Processing Systems segment's timber-harvesting product line's revenues and operating results, which we expect to continue into 2020. As a result of these declines, in the fourth quarter of 2019, we performed a quantitative analysis and determined that the fair values of certain of the intangible assets in the timber-harvesting product line were less than their carrying values, and therefore, recorded impairment charges totaling $2.3 million. These impairment charges consist of $1.6 million related to the definite-lived product technology of the timber-harvesting product line and $0.7 million related to its indefinite-lived tradename. 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.
We also undertook a restructuring plan in the fourth quarter of 2019 related to the Wood Processing Systems segment's timber-harvesting product line and incurred $0.2 million of severance costs associated with the reduction of six employees in Canada. We do not expect to incur additional charges related to this restructuring plan.
Restructuring costs in 2018 of $1.7 million related to the integration of our U.S. and Swedish papermaking stock-preparation product lines into a newly-constructed manufacturing facility in the United States to achieve economies of scale and greater efficiencies. The restructuring charges included $1.3 million for the relocation of machinery and equipment and administrative offices and $0.4 million primarily associated with employee retention costs and abandonment of excess facility and other closure costs.    
    
Interest Expense
Interest expense increased $5.7 million to $12.8 million in 2019 from $7.0 million in 2018 primarily due to interest expense on the additional borrowings related to our SMH acquisition.

Other Expense, Net
Other expense, net consists of expense related to the non-service component of our pensions and other post-retirement benefit plans. In 2019, other expense, net included a loss of $5.9 million for the settlement of our Retirement Plan obligation. In 2018, other expense, net included a curtailment loss of $1.4 million related to the freeze and termination of our Retirement and Restoration plans. See Note 3, Employee Benefit Plans, under the heading "Pension and Other Post-Retirement Benefits Plans" in the accompanying consolidated financial statements for further details.

Provision for Income Taxes
Our provision for income taxes was $16.4 million in 2019 and $18.5 million in 2018, and represented 24% and 23% of pre-tax income, respectively. The effective tax rate of 24% in 2019 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings, nondeductible expenses, and tax expense associated with the GILTI provisions of the 2017 Tax Act (see Note 5, Income Taxes, in the accompanying consolidated financial statements). This incremental tax expense was offset in part by a decrease in tax related to the net excess income tax benefits from stock-based compensation arrangements and a net tax benefit associated with foreign exchange losses. The effective tax rate of 23% in 2018 was higher than our statutory rate of 21% primarily due to the distribution of our worldwide earnings and tax expense associated with the GILTI provisions of the 2017 Tax Act. This incremental tax expense was offset in part by a decrease in tax related to the reversal of tax reserves associated with uncertain tax positions and the net excess income tax benefits from stock-based compensation arrangements. We currently expect our effective tax rate to be between 27.5% and 28.5% in 2020.



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Net Income
Net income decreased $8.5 million to $52.6 million in 2019 from $61.0 million in 2018 primarily due to an increase in interest expense of $5.7 million, an increase in other expense, net of $3.9 million, and a decrease of $0.8 million in operating income, offset in part by a decrease in provision for income taxes of $2.1 million (see discussions above for further details).

Recent Accounting Pronouncements
See Note 1, Nature of Operations and Summary of Significant Accounting Policies, under the heading “Recent Accounting Pronouncements,” in the accompanying consolidated financial statements for more information on recently implemented and issued accounting standards.

2018 Compared to 2017

A detailed discussion of the year-over-year results of operations for 2018 compared to 2017 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended December 29, 2018, filed with the SEC.    

Liquidity and Capital Resources
Consolidated working capital was $151.4 million at year-end 2019 and $123.8 million at year-end 2018. Included in working capital were cash and cash equivalents of $66.8 million at year-end 2019 and $45.8 million at year-end 2018. At year-end 2019, $58.9 million of cash and cash equivalents was held by our foreign subsidiaries.

Cash Flows

2019
Our operating activities provided cash of $97.4 million in 2019 primarily due to cash generated by our operating subsidiaries from product sales. Operating cash flows were also impacted by changes in working capital, which provided cash of $2.0 million in 2019. We had a net cash inflow of $9.1 million for accounts receivable and unbilled revenues, and $7.4 million for accounts payable. These sources of cash were partially offset by an increase of $5.6 million in other current assets primarily related to refundable income taxes, which we anticipate utilizing in 2020. We also made a final contribution to settle our Retirement Plan obligation of $3.8 million, which reduced other current liabilities in 2019, and used cash of $3.1 million to purchase inventory in 2019.
Our investing activities used cash of $187.4 million in 2019, including $176.9 million for the SMH acquisition, net of cash acquired, and $10.0 million for purchases of property, plant, and equipment.
Our financing activities provided cash of $112.5 million in 2019. We borrowed $247.2 million under our revolving credit facility, which included $179.3 million for our SMH acquisition and $56.1 million of euro-denominated borrowings to partially fund our cash repatriated from our European operations, and received $5.2 million as proceeds from the issuance of common stock in connection with stock option exercises and our employee stock purchase plan. These sources of cash were partially offset by cash used of $126.3 million for payments on our outstanding debt obligations, which included $71.1 million of cash repatriated from our European operations, $10.2 million for cash dividends paid to stockholders, and $2.7 million for tax withholding payments related to the vesting of employee stock-based compensation.

2018
Our operating activities provided cash of $63.0 million in 2018 primarily due to cash generated by our operating subsidiaries from product sales. Aside from cash generated from items which impacted net income, working capital used cash of $27.6 million in 2018. A large number of capital projects either in progress or completed and shipped in the second half of 2018 led to a net cash outflow of $13.6 million related to increases in accounts receivable and inventory, as well as an $11.4 million increase in unbilled revenues that was collected in 2019. We had a decrease of $11.9 million in other current liabilities primarily from a decrease in accrued income taxes as a result of tax payments, and to a lesser extent, a decrease in customer deposits.
Our investing activities used cash of $16.4 million in 2018 primarily related to purchases of property, plant, and equipment, including $6.4 million to complete the construction of a manufacturing facility in the United States.
Our financing activities used cash of $74.2 million in 2018. We used cash of $110.1 million for payments on our outstanding debt obligations, $9.6 million for cash dividends paid to stockholders, and $3.9 million for tax withholding payments related to stock-based compensation. These uses of cash were partially offset by proceeds received from borrowings of $21.0 million under the Real Estate Loan, $19.1 million under our revolving credit facility, and $10.0 million from the issuance of our senior notes issued pursuant to our Note Purchase Agreement.


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2017
A detailed discussion of cash flows for 2017 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended December 29, 2018, filed with the SEC.

Additional Liquidity and Capital Resources
On May 15, 2019, our board of directors authorized the repurchase of up to $20 million of our equity securities during the period from May 15, 2019 to May 15, 2020. We have not purchased any shares of our common stock under this authorization or under the previous authorization, which expired on May 16, 2019.
We paid quarterly cash dividends totaling $10.2 million in 2019. On February 6, 2020, we paid a quarterly cash dividend totaling $2.6 million that was declared on November 21, 2019. 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 made the final payment to plan participants to settle our Restoration Plan liability of $2.4 million subsequent to year-end 2019. See Note 3, Employee Benefit Plans, under the heading "Pension and Other Post-Retirement Benefits Plans" in the accompanying consolidated financial statements for further details.
As of year-end 2019, we had cash and cash equivalents of $66.8 million, of which $58.9 million was held by our foreign subsidiaries. During 2019, we repatriated $93.5 million of previously taxed foreign earnings to the United States and recognized an associated tax benefit of $1.2 million. As of year-end 2019, we had approximately $240.3 million of total unremitted foreign earnings. It is our intent to indefinitely reinvest $233.9 million of these earnings to support the current and future capital needs of our foreign operations, including debt repayments. In 2019, we recorded withholding taxes and the tax effect of foreign exchange losses 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 States would be approximately $5.8 million.
We plan to make expenditures of approximately $12 to $14 million during 2020 for property, plant, and equipment.
In the future, our liquidity position will be primarily affected by the level of cash flows from operations, cash paid to service our debt obligations, acquisitions, capital projects, dividends, and stock repurchases. We believe that our existing resources, together with the borrowing capacity available under our revolving credit facility and our Note Purchase Agreement and the cash we expect to generate from operations, will be sufficient to meet the capital requirements of our current operations for the foreseeable future.
 
Debt Obligations
Under our revolving credit facility, we have a borrowing capacity of $400 million, of which $135.1 million was available to borrow as of December 28, 2019, along with an additional uncommitted unsecured incremental borrowing facility of $150 million. In addition, under our Note Purchase Agreement, under which $10 million of senior promissory notes are currently outstanding, we may issue up to an additional $115 million of senior promissory notes. Under these agreements, our leverage ratio had to be less than 4.0 through our fiscal year-end 2019, and must be less than 3.75 thereafter. As of December 28, 2019, our consolidated leverage ratio was 2.03 as calculated under the terms defined in our revolving credit facility and we were in compliance with our debt covenants. See Note 6, Long-Term Obligations, in the accompanying consolidated financial statements for additional information regarding our debt obligations.


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