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

Show all filings for KADANT INC

Form 10-Q for KADANT INC


7-Nov-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.


KADANT INC.

Overview (continued)
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.
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 was 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 in cash 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. On November 6, 2013, we acquired all the outstanding shares of Carmanah Design and Manufacturing Inc. (Carmanah) for approximately Canadian dollars (CAD) 54 million in cash, or approximately $52 million, subject to a post-closing adjustment. Carmanah is a designer and manufacturer of stranders and related equipment used in the production of oriented strand board, an engineered wood panel product used primarily in home construction. At the closing date, CAD 7.0 million of the purchase price was deposited into an escrow fund to secure certain tax, environmental, and other indemnification obligations of the sellers. The escrow fund, less any claims made, will be released to the sellers in two installments on the 12-month and 18-month anniversaries of the closing. We recorded acquisition-related transaction costs of $0.3 million in selling, general, and administrative expenses in the third quarter of 2013 related to this acquisition. The acquisition of Carmanah will extend Kadant's presence into the forest products industry and advance our strategy of increasing our parts and consumables business.
International Sales
During both the first nine months of 2013 and 2012, approximately 61% 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.


KADANT INC.

Overview (continued)

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. The paper industry in North America has remained relatively consistent in the first three quarters of 2013 with good performance in some grades, such as containerboard, while demand for printing and writing grades continues to struggle. That said, the relatively strong containerboard sector saw downward pressure in operating rates at the end of the third quarter of 2013, finishing September at just under 94% compared to the year-to-date average operating rate of 97%. Our bookings in North America were $38 million in the third quarter of 2013, up 17% compared to the same period last year and 4% sequentially. Europe continues to be weak, but investments in upgrades to papermaking equipment are continuing, albeit at a moderate pace. Germany, the United Kingdom, and Eastern Europe are relatively strong, while the rest of Western Europe is somewhat weaker. Recently, financing has become a significant problem for paper and board producers in Russia, which has caused us to delay the booking of some pending orders. Our bookings in Europe were $19 million in the third quarter of 2013, up 31% compared to the prior year and 4% sequentially. In China, while the economy has seen a slight improvement in the third quarter of 2013, there continues to be over-capacity, which has a negative effect on new investments. Consequently, we are seeing a shift in customer focus towards machine optimization projects rather than capacity additions, which has created opportunities to sell our spare parts and consumables to help equipment run at peak levels. Our bookings in China were $14 million in the third quarter of 2013, up 12% compared to the third quarter of last year, but down 5% sequentially.

We expect to achieve GAAP (generally accepted accounting principles) diluted earnings per share (EPS) from continuing operations of $0.47 to $0.49 in the fourth quarter of 2013 on revenues of $86 to $88 million. Our fourth quarter guidance includes estimated restructuring costs of $0.01. For the full year, we expect revenues of $336 to $338 million, revised from our previous guidance of $340 to $345 million. We expect to achieve GAAP diluted EPS from continuing operations of $2.02 to $2.04 in 2013, which includes a gain of $0.12 on the sale of assets and restructuring costs of $0.13. This guidance does not include any results from the acquisition of Carmanah, which is expected to be dilutive in the fourth quarter of 2013 due to purchase accounting adjustments.


                                  KADANT INC.

Results of Operations

Third Quarter 2013 Compared With Third 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 third fiscal quarters of 2013 and 2012. The results of operations for
the fiscal quarter ended September 28, 2013 are not necessarily indicative of
the results to be expected for the full fiscal year.

                                                                        Three Months Ended
                                                                 September 28,         September 29,
                                                                          2013                  2012

Revenues                                                                   100 %                 100 %

Costs and Operating Expenses:
  Cost of revenues                                                          56                    57
  Selling, general, and administrative expenses                             31                    30
  Research and development expenses                                          2                     2
  Restructuring costs                                                        -                     -
                                                                            89                    89

Operating Income                                                            11                    11

Interest Income                                                              -                     -
Interest Expense                                                             -                     -

Income from Continuing Operations Before Provision for
Income Taxes                                                                11                    11
Provision for Income Taxes                                                   4                     2

Income from Continuing Operations                                            7 %                   9 %

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

                               Three Months Ended
                         September 28,       September 29,
(In thousands)                    2013                2012

Revenues:
Papermaking Systems    $        89,465     $        85,211
Fiber-based Products             1,850               1,390
                       $        91,315     $        86,601


KADANT INC.

Results of Operations (continued)

Papermaking Systems Segment. Revenues increased $4.2 million, or 5%, to $89.4 million in the third quarter of 2013 from $85.2 million in the third quarter of 2012 primarily due to the inclusion of $7.0 million in revenues from acquisitions and a $1.5 million increase from the favorable effects of currency translation, offset in part by a decrease in revenues in both our Fluid-Handling and Stock-Preparation product lines.

Fiber-based Products. Revenues increased $0.5 million, or 33%, to $1.9 million in the third quarter of 2013 from $1.4 million in the third quarter of 2012 primarily due to increased 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 third quarters of 2013 and 2012, and the changes in revenues by product line between the third 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 third quarter of 2013 revenues in local currency into U.S. dollars at the third quarter of 2012 exchange rates, and then comparing this result to the actual revenues in the third 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.

                                                                                                            Increase
                                                                                                          (Decrease)
                                                                                                           Excluding
                                                    Three Months Ended                                     Effect of
                                             September 28,         September 29,          Increase          Currency
(In millions)                                         2013                  2012        (Decrease)       Translation

Papermaking Systems Product Lines:
Stock-Preparation                          $          38.8       $          34.5     $         4.3     $         3.2
Doctoring, Cleaning, & Filtration                     28.8                  27.1               1.7               1.5
Fluid-Handling                                        21.8                  23.6              (1.8 )            (2.0 )
                                           $          89.4       $          85.2     $         4.2     $         2.7

Revenues in our Stock-Preparation product line in the third quarter of 2013 increased $3.2 million, or 9%, excluding a $1.1 million favorable effect of currency translation, compared to the third quarter of 2012 primarily due to the inclusion of $4.9 million of revenues from acquisitions in 2013. These increases were offset in part by a decrease in demand for our products in China and North America. Revenues from our Doctoring, Cleaning, & Filtration product line in the third quarter of 2013 increased $1.5 million, or 5%, excluding a $0.2 million favorable effect of currency translation, compared to the prior year period. This increase was primarily due to the inclusion of $2.1 million in revenues from acquisitions and an increase in demand for our capital products in North America, offset in part by decreased demand for our capital products at our Chinese and European operations. Revenues from our Fluid-Handling product line in the third quarter of 2013 decreased $2.0 million, or 8%, excluding a $0.2 million favorable effect of currency translation, compared to the prior year period primarily due to decreased demand for our products at our Chinese and European operations.


                                  KADANT INC.

Results of Operations (continued)

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

                                Three Months Ended
                         September 28,         September 29,
                                  2013                  2012

Gross Profit Margin:
Papermaking Systems               44.3 %                43.6 %
Fiber-based Products              26.7                  30.4
                                  43.9 %                43.4 %

Papermaking Systems Segment. The gross profit margin in the Papermaking Systems segment increased to 44.3% in the third quarter of 2013 from 43.6% in the third quarter of 2012. The increase in the gross profit margin in the Papermaking Systems segment resulted from a higher proportion of parts and consumables products sold in the quarter, offset in part by lower gross profit margins for our capital products, particularly in our Stock-Preparation product line.

Fiber-based Products. The gross profit margin in our Fiber-based Products business decreased to 26.7% in the third quarter of 2013 from 30.4% in the third quarter of 2012 primarily due to an increase in revenues from lower-margin biodegradable granular products.

Operating Expenses
Selling, general, and administrative expenses as a percentage of revenues were 31% and 30% in the third quarters of 2013 and 2012, respectively. Selling, general, and administrative expenses increased $2.4 million, or 9%, to $28.6 million in the third quarter of 2013 from $26.2 million in the third quarter of 2012 primarily due to the inclusion of $3.2 million of operating, due diligence, and other expenses from acquisitions.

Total stock-based compensation expense was $1.2 million and $1.3 million in the third 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 $1.6 million and $1.5 million in the third quarters of 2013 and 2012, respectively, and represented 2% of revenues in both periods.

Restructuring Costs
Restructuring costs were $45 thousand in the third quarter of 2013 due to additional costs related to our 2013 restructuring plan.

Interest Income
Interest income increased to $0.2 million in the third quarter of 2013 from $0.1 million in the third quarter of 2012 primarily due to higher average interest rates, and to a lesser extent, higher invested cash balances in the third quarter of 2013.

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


KADANT INC.

Results of Operations (continued)

Provision for Income Taxes
Our provision for income taxes was $3.3 million and $2.1 million in the third quarters of 2013 and 2012, respectively, and represented 34% and 21% of pre-tax income. The effective tax rate of 34% in the third quarter of 2013 was lower than our statutory tax rate primarily due to lower statutory tax rates in our overseas operations and a more favorable distribution of our worldwide earnings. The effective tax rate of 21% in the third quarter of 2012 was lower than our statutory tax rate primarily due to the distribution of worldwide earnings and the expected utilization of foreign tax credits that were fully reserved in prior periods, the latter of which was due to an increase in estimated 2012 income and foreign source income in the U.S.

Income from Continuing Operations
Income from continuing operations decreased $1.2 million to $6.5 million in the third quarter of 2013 from $7.7 million in the third quarter of 2012. This decrease was primarily due to an increase in our provision for income taxes of $1.2 million (see Provision for Income Taxes discussed above).

(Loss) Income from Discontinued Operation Loss from the discontinued operation was $14 thousand in the third quarter of 2013 compared to income of $0.8 million in the third quarter of 2012. The income in the 2012 period was primarily due to adjustments associated with the reserve for the payment of claims under the class action settlement related to products manufactured by the discontinued operation.

First Nine Months 2013 Compared With First Nine 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 nine months of 2013 and 2012. The results of operations for the
first nine months of 2013 are not necessarily indicative of the results to be
expected for the full fiscal year.

                                                                         Nine Months Ended
                                                                 September 28,         September 29,
                                                                          2013                  2012

Revenues                                                                   100 %                 100 %

Costs and Operating Expenses:
Cost of revenues                                                            54                    56
Selling, general, and administrative expenses                               34                    30
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                     3

Income from Continuing Operations                                            7 %                   9 %


                                  KADANT INC.

Results of Operations (continued)

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

                                Nine Months Ended
                         September 28,       September 29,
(In thousands)                    2013                2012

Revenues:
Papermaking Systems    $       241,115     $       245,322
Fiber-based Products             8,569               8,374
                       $       249,684     $       253,696

Papermaking Systems Segment. Revenues decreased $4.2 million to $241.1 million in the first nine months of 2013 from $245.3 million in the first nine months of 2012. Increases due to the inclusion of $13.1 million in revenues from acquisitions and the favorable effects of currency translation of $2.4 million were more than offset by decreased demand for capital products primarily in our Stock-Preparation product line.

Fiber-based Products. Revenues increased $0.2 million, or 2%, to $8.6 million in the first nine months of 2013 from $8.4 million in the first nine months of 2012 primarily due to increased demand for our cat box filler 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 nine months of 2013 and 2012, and the changes in revenues by product line between the first nine 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 nine months of 2013 revenues in local currency into U.S. dollars at the first nine months of 2012 exchange rates, and then comparing this result to the actual revenues in the first nine 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.

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