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KAI > SEC Filings for KAI > Form 10-Q on 7-Aug-2013All Recent SEC Filings

Show all filings for KADANT INC

Form 10-Q for KADANT INC


7-Aug-2013

Quarterly Report


Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q includes forward-looking statements that 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 II, Item 1A, of this Report.

Overview

Company Background
We are a leading supplier of equipment used in the global papermaking and paper recycling industries and a manufacturer of granules made from papermaking byproducts. Our continuing operations are comprised of one reportable operating segment: Papermaking 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, and process industries. We have a large customer base that includes most of the world's major paper manufacturers. We believe our large installed base provides us with a spare parts and consumables business that yields higher margins than our capital equipment business.

Through our Fiber-based Products business, we manufacture and sell granules derived from pulp fiber for use as carriers for agricultural, home lawn and garden, and professional lawn, turf and ornamental applications, as well as for oil and grease absorption.

Papermaking Systems Segment
Our Papermaking Systems segment consists of the following product lines:
Stock-Preparation; Fluid-Handling; and Doctoring, Cleaning, & Filtration.

- Stock-Preparation: custom-engineered systems and equipment, as well as standard individual components, for pulping, de-inking, screening, cleaning, and refining primarily recycled fiber for preparation for entry into the paper machine; recausticizing and evaporation equipment and systems used in the production of virgin pulp;

- Fluid-Handling: rotary joints, precision unions, steam and condensate systems, components, and controls used primarily in the dryer section of the papermaking process and during the production of corrugated boxboard, metals, plastics, rubber, textiles, chemicals, and food; and

- Doctoring, Cleaning, & Filtration: doctoring systems and related consumables that continuously clean rolls to keep paper machines running efficiently; doctor blades made of a variety of materials to perform functions including cleaning, creping, web removal, flaking, and the application of coatings; profiling systems that control moisture, web curl, and gloss during paper converting; and systems and equipment used to continuously clean paper machine fabrics and rolls, drain water from pulp mixtures, form the sheet or web, and filter the process water for reuse.

Fiber-based Products
We produce biodegradable, absorbent granules from papermaking byproducts for use primarily as carriers for agricultural, home lawn and garden, and professional lawn, turf and ornamental applications, as well as for oil and grease absorption.


KADANT INC.
Overview (continued)
Recent Acquisitions
On April 12, 2013, we acquired all the outstanding stock of Companhia Brasileira de Tecnologia Industrial (CBTI) for approximately $8.1 million in cash and $0.5 million in assumed liabilities owed to us. CBTI is a long-time licensee of our doctoring, cleaning, and filtration products and stock-preparation products and is also a supplier of industrial drying systems. This acquisition furthers our strategy of expanding our presence in emerging markets.
On May 3, 2013, we acquired certain assets of the Noss Group (Noss), a Sweden-based developer and supplier of high-efficiency cleaners and approach flow systems, for approximately $6.7 million paid at closing and subject to adjustment for redundancy and certain employee benefit payments. As part of the purchase agreement, we retained approximately $1.2 million to fund anticipated redundancy and certain employee benefit payments in Sweden. This acquisition expands our product offerings in our Stock-Preparation product line, particularly for virgin pulp and approach flow applications. In addition, Noss has a large installed base and a high proportion of its revenues are parts and consumables products.

International Sales
During the first six months of 2013 and 2012, approximately 58% and 59%, respectively, of our sales were to customers outside the United States, principally in Europe and China. 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 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. These contracts hedge transactions principally denominated in U.S. dollars.

Application of Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed 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 condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Our actual results may differ from these estimates.

Critical accounting policies are defined as those that reflect 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 condition depends and which involve the most complex or subjective decisions or assessments, are those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the section captioned "Application of Critical Accounting Policies and Estimates" in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended December 29, 2012, filed with the Securities and Exchange Commission (SEC). There have been no material changes to these critical accounting policies since fiscal year-end 2012 that warrant disclosure.

Industry and Business Outlook
Our products are primarily sold to the global pulp and paper industry. In North America, the paper industry has seen slow, but steady demand during the first half of 2013. While operating rates have remained strong for containerboard in the first half of 2013, printing and writing grades have continued to experience declines in demand. Our bookings in North America were $36 million in the second quarter of 2013, up 1% compared to the same period last year, but down 17% sequentially from the traditionally strong first quarter. In Europe, the market continues to be weak due to the general economic conditions and reduced demand for paper. Our bookings in Europe were $18 million in the second quarter of 2013, down 5% compared to the prior year and down 32% sequentially following a very strong first quarter that included two large stock preparation recycling system orders with a combined value of approximately $9 million. In China, overcapacity continues to be an issue due to new capacity that has recently come on the market combined with reduced growth in demand. Although the government recently announced an increase in the number of tons of capacity from older mills to be removed in 2013, new capacity coming online in 2013 from recycled containerboard machines is expected to add capacity thereby reducing the net effect of the capacity closure plans. Our bookings in China increased in the second quarter of 2013 to $15 million, up 54% compared to the second quarter of last year and 25% sequentially.


KADANT INC.
Overview (continued)

We expect to achieve GAAP (generally accepted accounting principles) diluted EPS from continuing operations of $0.47 to $0.49 in the third quarter of 2013 on revenues of $88 to $90 million. Our third quarter of 2013 guidance includes estimated restructuring costs of $0.01. For the full year, we expect revenues of $340 to $345 million, revised from our previous guidance of $336 to $343 million. We expect to achieve GAAP diluted EPS from continuing operations of $2.02 to $2.07, which includes a gain of $0.12 on the sale of assets and acquisition-related restructuring costs of $0.13. This compares to our previous GAAP diluted EPS guidance of $2.00 to $2.10, which included an estimated gain of $0.10 on the sale of assets. On an adjusted diluted EPS basis, excluding the restructuring costs and gain on sale, we are raising our guidance to $2.03 to $2.08 from our previous guidance of $1.90 to $2.00. Adjusted diluted EPS is a non-GAAP measure, which we believe helps investors to gain a more complete understanding of our underlying operations especially when comparing such results to prior periods. This non-GAAP measure should not be considered superior to or a substitute for the corresponding GAAP measure.

Results of Operations

Second Quarter 2013 Compared With Second Quarter 2012

The following table sets forth our unaudited condensed consolidated statement of
income expressed as a percentage of total revenues from continuing operations
for the second fiscal quarters of 2013 and 2012. The results of operations for
the fiscal quarter ended June 29, 2013 are not necessarily indicative of the
results to be expected for the full fiscal year.

                                                                   Three Months Ended
                                                                 June 29,         June 30,
                                                                     2013             2012

Revenues                                                              100 %            100 %

Costs and Operating Expenses:
  Cost of revenues                                                     52               56
  Selling, general, and administrative expenses                        36               31
  Research and development expenses                                     2                2
  Restructuring costs and other income, net                             -                -
                                                                       90               89

Operating Income                                                       10               11

Interest Income                                                         -                -
Interest Expense                                                        -                -

Income from Continuing Operations Before Provision for
Income Taxes                                                           10               11
Provision for Income Taxes                                              3                3

Income from Continuing Operations                                       7 %              8 %

Revenues
Revenues for the second quarters of 2013 and 2012 from our Papermaking Systems
segment and Fiber-based Products business are as follows:

                          Three Months Ended
                         June 29,      June 30,
(In thousands)               2013          2012

Revenues:
Papermaking Systems    $   79,253     $  79,961
Fiber-based Products        2,912         3,021
                       $   82,165     $  82,982


KADANT INC.
Results of Operations (continued)

Papermaking Systems Segment. Revenues decreased $0.7 million to $79.3 million in the second quarter of 2013 from $80.0 million in the second quarter of 2012 due to decreased demand for capital products at our North American and European operations offset in part by increases of $6.1 million from acquisitions and $0.6 million from the favorable effects of currency translation.

Fiber-based Products. Revenues decreased $0.1 million, or 4%, to $2.9 million in the second quarter of 2013 from $3.0 million in the second quarter of 2012 primarily due to decreased demand for our biodegradable granular products. Papermaking Systems Segment by Product Line. The following table presents revenues for our Papermaking Systems segment by product line, the changes in revenues by product line between the second quarters of 2013 and 2012, and the changes in revenues by product line between the second quarters of 2013 and 2012 excluding the effect of currency translation. The decrease in revenues excluding the effect of currency translation represents the decrease resulting from the conversion of second quarter of 2013 revenues in local currency into U.S. dollars at the second quarter of 2012 exchange rates, and then comparing this result to the actual revenues in the second quarter of 2012. The presentation of the changes in revenues by product line excluding the effect of currency translation is a non-GAAP measure. We believe this non-GAAP measure helps investors gain a more complete understanding of our underlying operations especially when comparing such results to prior periods. This non-GAAP measure should not be considered superior to or a substitute for the corresponding GAAP measure.

                                                                                                   Decrease
                                                                                                  Excluding
                                                Three Months Ended                                Effect of
                                             June 29,          June 30,          Increase          Currency
(In millions)                                    2013              2012        (Decrease)       Translation

Papermaking Systems Product Lines:
Stock-Preparation                          $     28.5       $      28.7     $        (0.2 )   $        (0.4 )
Doctoring, Cleaning, & Filtration (a)            27.7              27.6               0.1              (0.2 )
Fluid-Handling                                   23.1              23.7              (0.6 )            (0.7 )
                                           $     79.3       $      80.0     $        (0.7 )   $        (1.3 )

(a) Prior year amounts were formerly presented separately as Doctoring, Water-Management, and Other product lines and have been recast to conform to the current presentation.

Revenues in our Stock-Preparation product line in the second quarter of 2013 decreased $0.4 million, or 2%, excluding a $0.2 million favorable effect of currency translation, compared to the second quarter of 2012 due to decreased demand for our capital products at our North American and European operations, offset in part by an increase of $4.0 million from acquisitions. Revenues from our Doctoring, Cleaning, & Filtration product line in the second quarter of 2013 decreased $0.2 million, or 1%, excluding a $0.3 million favorable effect of currency translation, compared to the prior year period. An increase of $1.8 million from acquisitions in the second quarter of 2013 was offset by decreased demand for our capital products, especially at our European operations. In our Fluid-Handling product line, revenues in the second quarter of 2013 decreased $0.7 million, or 3%, excluding a $0.1 million favorable effect of currency translation, compared to the prior year period. Increases of $0.3 million from acquisitions and from demand for our capital products at our European and Chinese operations were offset by decreased demand for our products at our North American operations.


                                  KADANT INC.
Results of Operations (continued)

Gross Profit Margin
    Gross profit margins for the second quarters of 2013 and 2012 are as
follows:

                           Three Months Ended
                        June 29,         June 30,
                            2013             2012

Gross Profit Margin:
Papermaking Systems         48.7 %           43.4 %
Fiber-based Products        47.1             52.8
                            48.6 %           43.7 %

Papermaking Systems Segment. The gross profit margin in the Papermaking Systems segment increased to 48.7% in the second quarter of 2013 from 43.4% in the second quarter of 2012. Gross profit margins were higher in all of our product lines, especially our Stock-Preparation product line, compared to the second quarter of 2012. The increase in the gross profit margin in the Papermaking Systems segment resulted from higher gross profit margins for both capital and aftermarket products due to better pricing and, to a lesser extent, a higher proportion of parts and consumables products sold in the period.

Fiber-based Products. The gross profit margin in our Fiber-based Products business decreased to 47.1% in the second quarter of 2013 from 52.8% in the second quarter of 2012 as a result of decreased manufacturing efficiency due to lower production volumes.

Operating Expenses
Selling, general, and administrative expenses as a percentage of revenues were 36% and 31% in the second quarters of 2013 and 2012, respectively. Selling, general, and administrative expenses increased $3.9 million, or 16%, to $29.4 million in the second quarter of 2013 from $25.5 million in the second quarter of 2012 including increases of $2.9 million from acquisitions and $0.2 million from the unfavorable effect of currency translation.

Total stock-based compensation expense was $1.3 million and $1.2 million in the second quarters of 2013 and 2012, respectively, and is included in selling, general, and administrative expenses in the accompanying condensed consolidated statement of income.

Research and development expenses were $1.9 million and $1.4 million in the second quarters of 2013 and 2012, respectively, and represented 2% of revenues in both periods.

Restructuring Costs and Other Income, net Restructuring costs and other income, net was $0.2 million in the second quarter of 2013, including $1.9 million of restructuring costs and a $1.7 million gain on the sale of assets. The restructuring costs of $1.9 million included $1.3 million associated with the reduction of 22 employees in Brazil and $0.6 million associated with the reduction of 25 employees in Sweden. We estimate annualized savings of $1.3 million in selling, general, and administrative expenses and $1.7 million in cost of revenues once these restructuring actions have been completed. These actions were taken to streamline our operations as a result of our recent acquisitions. All of these items occurred in the Papermaking Systems segment.

Interest Income
Interest income was $0.1 million in the second quarters of 2013 and 2012.

Interest Expense
Interest expense was $0.2 million in the second quarters of 2013 and 2012.


KADANT INC.
Results of Operations (continued)

Provision for Income Taxes
Our provision for income taxes was $2.5 million and $2.7 million in the second quarters of 2013 and 2012, respectively, and represented 30% and 29% of pre-tax income. The effective tax rate of 30% in the second quarter of 2013 was lower than our statutory tax rate primarily due to the release of a valuation allowance against deferred tax assets related to net operating loss carryforwards. The release of the valuation allowance was due to increased projected profitability associated with the CBTI acquisition. Also, the effective tax rate was lower due to a more favorable distribution of our worldwide earnings. The effective tax rate of 29% in the second quarter of 2012 was lower than our statutory tax rate primarily due to a more favorable distribution of our worldwide earnings and the expected utilization of foreign tax credits that were fully reserved in prior periods, due to an increase in estimated 2012 income in the U.S.

Income from Continuing Operations
Income from continuing operations decreased $0.8 million to $5.8 million in the second quarter of 2013 from $6.6 million in the second quarter of 2012. This decrease was primarily due to a decrease in operating income of $1.0 million offset in part by a $0.2 million decrease in our provision for income taxes (see Revenues, Gross Profit Margin, Operating Expenses, and Provision for Income Taxes discussed above).

Loss from Discontinued Operation
Loss from the discontinued operation was $12 thousand and $3 thousand in the
second quarters of 2013 and 2012, respectively.

First Six Months 2013 Compared With First Six Months 2012

The following table sets forth our unaudited condensed consolidated statement of
income expressed as a percentage of total revenues from continuing operations
for the first six months of 2013 and 2012. The results of operations for the
first six months of 2013 are not necessarily indicative of the results to be
expected for the full fiscal year.

                                                                      Six Months Ended
                                                                  June 29,           June 30,
                                                                      2013               2012

Revenues                                                               100 %              100 %

Costs and Operating Expenses:
Cost of revenues                                                        52                 55
Selling, general, and administrative expenses                           36                 31
Research and development expenses                                        2                  2
Restructuring costs and other (income) expense, net                      -                  -
                                                                        90                 88

Operating Income                                                        10                 12

Interest Income                                                          -                  -
Interest Expense                                                         -                  -

Income from Continuing Operations Before Provision for
Income Taxes                                                            10                 12
Provision for Income Taxes                                               3                  4

Income from Continuing Operations                                        7 %                8 %


                                  KADANT INC.
Results of Operations (continued)

Revenues
Revenues for the first six months of 2013 and 2012 from our Papermaking Systems
segment and Fiber-based Products business are as follows:

                          Six Months Ended
                        June 29,      June 30,
(In thousands)              2013          2012

Revenues:
Papermaking Systems    $ 151,650     $ 160,111
Fiber-based Products       6,719         6,984
                       $ 158,369     $ 167,095

Papermaking Systems Segment. Revenues decreased $8.4 million, or 5%, to $151.7 million in the first six months of 2013 from $160.1 million in the first six months of 2012 due to decreased demand for capital products at our North American and European operations offset in part by increases of $6.1 million from acquisitions and $0.9 million from the favorable effects of currency translation.

Fiber-based Products. Revenues decreased $0.3 million, or 4%, to $6.7 million in the first six months of 2013 from $7.0 million in the first six months of 2012 primarily due to decreased demand for our biodegradable granular products.

Papermaking Systems Segment by Product Line. The following table presents revenues for our Papermaking Systems segment by product line, the changes in revenues by product line between the first six months of 2013 and 2012, and the changes in revenues by product line between the first six months of 2013 and 2012 excluding the effect of currency translation. The increase in revenues excluding the effect of currency translation represents the increase resulting from the conversion of first six months of 2013 revenues in local currency into U.S. dollars at the first six months of 2012 exchange rates, and then comparing this result to the actual revenues in the first six months of 2012. The presentation of the changes in revenues by product line excluding the effect of currency translation is a non-GAAP measure. We believe this non-GAAP measure helps investors gain a more complete understanding of our underlying operations especially when comparing such results to prior periods. This non-GAAP measure should not be considered superior to or a substitute for the corresponding GAAP measure.

                                                                                                Increase
                                                                                              (Decrease)
                                                                                               Excluding
                                               Six Months Ended                                Effect of
                                             June 29,       June 30,          Increase          Currency
(In millions)                                    2013           2012        (Decrease)       Translation

Papermaking Systems Product Lines:
Doctoring, Cleaning, & Filtration (a)      $     53.6     $     52.6     $         1.0     $         0.4
Stock-Preparation                                51.5           61.4              (9.9 )           (10.2 )
Fluid-Handling                                   46.6           46.1               0.5               0.5
                                           $    151.7     $    160.1     $        (8.4 )   $        (9.3 )

(a) Prior year amounts were formerly presented separately as Doctoring, . . .

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