UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2005
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 1-11406
KADANT INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1762325
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
One Acton Place, Suite 202
Acton, Massachusetts 01720
(Address of Principal Executive Offices) (Zip Code)
(978) 776-2000
(Registrant's Telephone Number, Including Area Code)
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 [X] No [ ]
Indicate by check mark whether or not the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 3, 2005
---------------------------- -------------------------------
Common Stock, $.01 par value 13,736,203
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
KADANT INC.
Condensed Consolidated Balance Sheet
(Unaudited)
Assets
October 1, January 1,
(In thousands) 2005 2005
- --------------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 42,893 $ 82,089
Accounts receivable, less allowances of $2,226 and $1,678 44,859 30,022
Unbilled contract costs and fees 10,837 10,258
Inventories (Note 5) 37,481 27,316
Deferred tax asset 9,718 6,691
Other current assets 7,276 6,703
Assets of discontinued operation (Note 15) 14,508 15,650
--------- ---------
Total Current Assets 167,572 178,729
--------- ---------
Property, Plant, and Equipment, at Cost 86,111 68,224
Less: Accumulated depreciation and amortization 52,661 51,160
--------- ---------
33,450 17,064
--------- ---------
Other Assets 19,232 11,342
--------- ---------
Intangible Assets 36,918 3,694
--------- ---------
Goodwill (Note 6) 124,165 74,408
--------- ---------
Total Assets $ 381,337 $ 285,237
========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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KADANT INC.
Condensed Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
October 1, January 1,
(In thousands, except share amounts) 2005 2005
- --------------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Current maturities of long-term obligations (Note 7) $ 9,000 $ -
Accounts payable 22,543 21,327
Accrued payroll and employee benefits 12,653 11,261
Accrued restructuring costs (Note 10) 8,658 10,026
Accrued income taxes 5,680 886
Accrued warranty costs (Note 9) 2,994 3,582
Other current liabilities 16,714 10,419
Liabilities of discontinued operation (Note 15) 9,254 7,578
--------- ---------
Total Current Liabilities 87,496 65,079
--------- ---------
Deferred Income Taxes 21,378 4,370
--------- ---------
Long-Term Obligations (Note 7) 48,750 -
--------- ---------
Other Long-Term Liabilities 11,174 3,327
--------- ---------
Minority Interest 1,029 -
--------- ---------
Shareholders' Investment:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none issued - -
Common stock, $.01 par value, 150,000,000 shares authorized;
14,604,520 shares issued 146 146
Capital in excess of par value 97,422 98,450
Retained earnings 135,633 129,173
Treasury stock at cost, 868,317 and 689,407 shares (20,955) (18,158)
Deferred compensation (212) (50)
Accumulated other comprehensive items (Note 2) (524) 2,900
--------- ---------
211,510 212,461
--------- ---------
Total Liabilities and Shareholders' Investment $ 381,337 $ 285,237
========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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KADANT INC.
Condensed Consolidated Statement of Operations
(Unaudited)
Three Months Ended
------------------------------
October 1, October 2,
(In thousands, except per share amounts) 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $ 64,799 $ 48,883
--------- ---------
Costs and Operating Expenses:
Cost of revenues 38,557 29,721
Selling, general, and administrative expenses 20,267 14,236
Research and development expenses 1,315 807
Gain on sale of subsidiary - (149)
Restructuring and unusual items (Note 10) (78) -
--------- ---------
60,061 44,615
--------- ---------
Operating Income 4,738 4,268
Interest Income 337 356
Interest Expense (826) (2)
--------- ---------
Income from Continuing Operations Before Provision for
Income Taxes and Minority Interest 4,249 4,622
Provision for Income Taxes 1,519 1,423
Minority Interest Expense (Income) 96 (6)
--------- ---------
Income from Continuing Operations 2,634 3,205
Loss from Discontinued Operation (net of income tax benefit
of $1,213 and $1,991) (Note 15) (2,252) (3,698)
--------- ---------
Net Income (Loss) $ 382 $ (493)
========= =========
Basic Earnings (Loss) per Share (Note 3):
Continuing Operations $ .19 $ .23
Discontinued Operation (.16) (.27)
--------- ---------
Net Income (Loss) $ .03 $ (.04)
========= =========
Diluted Earnings (Loss) per Share (Note 3):
Continuing Operations $ .19 $ .22
Discontinued Operation (.16) (.25)
--------- ---------
Net Income (Loss) $ .03 $ (.03)
========= =========
Weighted Average Shares (Note 3):
Basic 13,861 13,977
========= =========
Diluted 14,167 14,281
========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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> KADANT INC.
Condensed Consolidated Statement of Operations
(Unaudited)
Nine Months Ended
-----------------------------
October 1, October 2,
(In thousands, except per share amounts) 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $ 180,629 $ 149,035
--------- ---------
Costs and Operating Expenses:
Cost of revenues 110,924 90,009
Selling, general, and administrative expenses 53,658 42,582
Research and development expenses 3,610 2,276
Gain on sale of subsidiary - (149)
Restructuring and unusual items (Note 10) (78) -
--------- ---------
168,114 134,718
--------- ---------
Operating Income 12,515 14,317
Interest Income 1,188 1,003
Interest Expense (1,301) (14)
--------- ---------
Income from Continuing Operations Before Provision for
Income Taxes and Minority Interest Expense 12,402 15,306
Provision for Income Taxes 3,376 4,776
Minority Interest Expense 158 8
--------- ---------
Income from Continuing Operations 8,868 10,522
Loss from Discontinued Operation (net of income tax benefit
of $1,297 and $2,447) (Note 15) (2,408) (4,544)
--------- ---------
Net Income $ 6,460 $ 5,978
========= =========
Basic Earnings per Share (Note 3):
Continuing Operations $ .64 $ .74
Discontinued Operation (.18) (.32)
--------- ---------
Net Income $ .46 $ .42
========= =========
Diluted Earnings per Share (Note 3):
Continuing Operations $ .63 $ .73
Discontinued Operation (.17) (.32)
--------- ---------
Net Income $ .46 $ .41
========= =========
Weighted Average Shares (Note 3):
Basic 13,893 14,139
========= =========
Diluted 14,186 14,480
========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Condensed Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
-----------------------------
October 1, October 2,
(In thousands) 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 6,460 $ 5,978
Loss from discontinued operation (Note 15) 2,408 4,544
--------- ---------
Income from continuing operations 8,868 10,522
Adjustments to reconcile income from continuing operations to net cash
provided by operating activities:
Depreciation and amortization 4,867 2,733
Provision for losses on accounts receivable 75 330
Loss (gain) on sale of property, plant, and equipment 30 (143)
Gain on sale of subsidiary - (149)
Minority interest expense 158 8
Other items 1,016 (389)
Changes in current accounts, net of effects of acquisition:
Accounts receivable (2,083) (3,918)
Unbilled contract costs and fees 353 355
Inventories 2,434 495
Other current assets 295 (310)
Accounts payable (2,479) (394)
Other current liabilities (2,384) (2,839)
--------- ---------
Net cash provided by operating activities 11,150 6,301
--------- ---------
Investing Activities:
Acquisition, net of cash acquired (Note 4) (103,113) -
Capitalized acquisition costs (Note 4) 1,916 -
Acquisition of minority interest in subsidiary (Note 6) (1,129) (318)
Purchases of property, plant, and equipment (1,919) (1,331)
Proceeds from sale of property, plant, and equipment 39 1,292
Proceeds from sale of subsidiary, net of cash divested - 126
Other, net (62) (225)
--------- ---------
Net cash used in investing activities (104,268) (456)
--------- ---------
Financing Activities:
Proceeds from issuance of short- and long-term obligations (Note 7) 60,000 -
Increase in short- and long-term obligations (Note 4) 4,000 -
Net proceeds from issuance of Company common stock 839 4,757
Purchases of Company common stock (5,437) (10,261)
Repayments of short and long-term obligations (3,284) (598)
Payment of debt issuance costs (652) -
--------- ---------
Net cash provided by (used in) financing activities 55,466 (6,102)
--------- ---------
Exchange Rate Effect on Cash (1,954) 219
--------- ---------
Net Cash Provided by Discontinued Operation 410 2,668
--------- ---------
(Decrease) Increase in Cash and Cash Equivalents (39,196) 2,630
Cash and Cash Equivalents at Beginning of Period 82,089 74,412
--------- ---------
Cash and Cash Equivalents at End of Period $ 42,893 $ 77,042
========= =========
Non-cash Investing Activities (Note 4):
Fair value of assets acquired $ 158,166 $ -
Cash paid for acquired business (105,644) -
Obligation to be paid for acquired business (4,000) -
--------- ---------
Liabilities assumed of acquired business $ 48,522 $ -
========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. General
The interim condensed consolidated financial statements and related notes
presented have been prepared by Kadant Inc. (also referred to in this document
as "we," "Kadant," "the Company," or "the Registrant") without audit and, in the
opinion of management, reflect all adjustments of a normal recurring nature
necessary for a fair statement of the Company's financial position at October 1,
2005, its results of operations for the three- and nine-month periods ended
October 1, 2005, and October 2, 2004, and cash flows for the nine-month periods
ended October 1, 2005, and October 2, 2004. Interim results are not necessarily
indicative of results for a full year.
The condensed consolidated balance sheet presented as of January 1, 2005,
has been derived from the consolidated financial statements that have been
audited by the Company's independent auditors. The condensed consolidated
financial statements and related notes are presented as permitted by
instructions to Form 10-Q and do not contain certain information included in the
annual consolidated financial statements and related notes of the Company. The
condensed consolidated financial statements and notes included herein should be
read in conjunction with the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K for the fiscal year ended
January 1, 2005, filed with the Securities and Exchange Commission.
All prior period information has been reclassified to reflect the
Company's composite building products business as a discontinued operation (Note
15).
2. Comprehensive Income (Loss)
Comprehensive income (loss) combines net income (loss) and "other
comprehensive items," which represent certain amounts that are reported as
components of shareholders' investment in the accompanying condensed
consolidated balance sheet, including foreign currency translation adjustments
and deferred gains and losses on swap and foreign currency contracts. The
components of comprehensive income (loss) are as follows:
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
October 1, October 2, October 1, October 2,
(In thousands) 2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 382 $ (493) $ 6,460 $ 5,978
------- ------- ------- -------
Other Comprehensive Items:
Foreign Currency Translation Adjustments 207 (721) (3,456) 366
Deferred Gain on Swap Contract 337 - 209 -
Deferred Gain (Loss) on Foreign Currency Contracts 61 (10) (177) (46)
------- ------- ------- -------
605 (731) (3,424) 320
------- ------- ------- -------
Comprehensive Income (Loss) $ 987 $(1,224) $ 3,036 $ 6,298
======= ======= ======= =======
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> KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share are calculated as follows:
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
October 1, October 2, October 1, October 2,
(In thousands, except per share amounts) 2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations $ 2,634 $ 3,205 $ 8,868 $10,522
Loss from Discontinued Operation (2,252) (3,698) (2,408) (4,544)
------- ------- ------- -------
Net Income (Loss) $ 382 $ (493) $ 6,460 $ 5,978
======= ======= ======== =======
Basic Weighted Average Shares 13,861 13,977 13,893 14,139
Effect of Stock Options 306 304 293 341
------- ------- ------- -------
Diluted Weighted Average Shares 14,167 14,281 14,186 14,480
======= ======= ======= =======
Basic Earnings (Loss) per Share:
Continuing Operations $ .19 $ .23 $ .64 $ .74
Discontinued Operation (.16) (.27) (.18) (.32)
------- ------- ------- -------
Net Income (Loss) $ .03 $ (.04) $ .46 $ .42
======= ======= ======= =======
Diluted Earnings (Loss) per Share:
Continuing Operations $ .19 $ .22 $ .63 $ .73
Discontinued Operation (.16) (.25) (.17) (.32)
------- ------- ------- -------
Net Income (Loss) $ .03 $ (.03) $ .46 $ .41
======= ======= ======= =======
Options to purchase approximately 201,700 and 217,600 shares of common
stock for the third quarters of 2005 and 2004, respectively, and 215,700 and
229,000 shares of common stock for the first nine months of 2005 and 2004,
respectively, were not included in the computation of diluted earnings per share
because the options' exercise prices were greater than the average market price
for the common stock and the effect of their inclusion would have been
anti-dilutive.
4. Acquisition
On May 11, 2005, the Company acquired all the outstanding stock of The
Johnson Corporation (Kadant Johnson), a leading supplier of steam and condensate
systems, components, and controls used primarily in the dryer section of the
papermaking process and during the production of corrugated boards, metals,
plastics, rubber, and textiles. Kadant Johnson was a privately held company
based in Three Rivers, Michigan, with approximately 575 employees and annual
revenues in 2004 of $76,092,000. The acquisition of Kadant Johnson expanded the
Company's range of products and services to include fluid handling systems and
equipment. The purchase price for the acquisition was $101,458,000 in cash,
subject to a further post-closing adjustment, and $4,186,000 of acquisition-
related costs, of which $1,916,000 was paid in 2004 and the remaining $2,270,000
was incurred in 2005. In addition to the consideration paid at closing, the
Company issued a letter of credit to the sellers for $4,000,000 related to
certain tax assets of Kadant Johnson, the value of which the Company expects to
realize. This amount is subject to adjustment based on The Johnson Corporation's
final tax returns for 2004 and 2005. This additional consideration, of which
$600,000 is included in other current liabilities and $3,400,000 is included in
other long-term liabilities in the accompanying condensed consolidated balance
sheet, is due over the next five years as follows: 15% in May of 2006, 2007,
2008 and 2009, and 40% in May 2010.
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> KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. Acquisition (continued)
The parties also agreed in the purchase agreement to an earn-out
provision, based on the achievement of certain revenue targets between the
closing date (May 11, 2005) and July 1, 2006, which could increase the purchase
price by up to $8,000,000. This contingent consideration will be accounted for
as an increase in goodwill, if and when the revenue targets are achieved.
To fund a portion of the purchase price, the Company entered into a term
loan and revolving credit facility (see Note 7 for further discussion).
Pursuant to the purchase agreement, at the closing of the acquisition
$12,750,000 of the purchase price was deposited into an escrow fund, primarily
to secure certain indemnification obligations of the sellers. On the 18-month
anniversary of the closing, the balance of the escrow fund in excess of
$2,000,000 and amounts held for unresolved claims will be distributed to the
sellers. The remainder of the escrow fund will be held until the fifth
anniversary of the closing to satisfy certain tax, environmental, and certain
other indemnity claims.
The following table summarizes the purchase method of accounting for the
acquisition and the estimated fair values of the assets acquired and the
liabilities assumed (in thousands):
Allocation of Purchase Price as of October 1, 2005:
Cash and Cash Equivalents $ 4,071
Accounts Receivable, Net 17,742
Notes Receivable 5,577
Inventory 13,276
Other Current Assets 5,243
Property, Plant, and Equipment 18,551
Long-Term Deferred Tax Assets 8,590
Other Assets 657
Intangible Assets 34,480
Goodwill 49,979
--------
Total Assets Acquired $158,166
--------
Accounts Payable $ 6,751
Other Current Liabilities 15,541
Short- and Long-Term Debt 3,286
Long-Term Deferred Tax Liabilities 17,087
Other Liabilities 4,727
Minority Interest 1,130
--------
Total Liabilities Assumed 48,522
--------
Net Assets Acquired $109,644
========
Consideration:
Cash $ 41,458
Debt 60,000
Short- and Long-Term Obligations 4,000
Acquisition Costs 4,186
--------
Total Consideration $109,644
========
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. Acquisition (continued)
The total consideration of $109,644,000 for Kadant Johnson, net of cash
acquired of $4,071,000, was $105,573,000. Shortly after the closing date, the
Company received $2,460,000 in cash related to the settlement of certain of
Kadant Johnson's net assets acquired, which had the effect of reducing the
"acquisition, net of cash acquired" amount in investing activities to
$103,113,000 in the accompanying condensed consolidated statement of cash flows.
The acquisition was recorded under the purchase method of accounting and
the operating results of Kadant Johnson have been included in the accompanying
condensed consolidated financial statements from the acquisition date of May 11,
2005. The allocation of the purchase price was based on estimates of the fair
value of the net assets acquired and is subject to adjustment upon finalization
of the purchase price allocation. The estimated fair values of current assets,
excluding inventory, and current liabilities approximate their historical costs
in the hands of the seller on the date of acquisition due to their short-term
nature. Inventory and property, plant, and equipment were recorded at estimated
fair value based primarily on cost and market approaches.
The following are the identifiable intangible assets acquired and the
respective periods over which the assets will be amortized on a straight-line
basis:
(In thousands) Amount Life
- --------------------------------------------------------------------------------
Existing technology $ 7,840 11 years *
Customer relationships 15,700 17 years *
Distribution network 2,400 17 years
Trade name 8,100 Indefinite
Licensing agreement 400 20 years
Non-compete agreement 40 3 years
--------
$ 34,480
========
* approximate weighted-average lives
The amounts assigned to identifiable intangible assets acquired were
based on their respective fair values determined as of the acquisition date by
an outside valuation consultant, using income and cost approaches. The excess of
the purchase price over the tangible and identifiable intangible assets was
recorded as goodwill and amounted to approximately $49,979,000, none of which is
deductible for tax purposes. In accordance with current accounting standards,
the goodwill will not be amortized and will be tested for impairment annually in
the fourth quarter of the Company's fiscal year, as required by Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets."
The amortization expense associated with the acquired intangibles was
$492,000 and $759,000 in the three- and nine-month periods ended October 1,
2005, respectively. The estimated future amortization expense associated with
these acquired intangible assets is $1,967,000 in 2006; $1,967,000 in 2007;
$1,952,000 in 2008; $1,943,000 in 2009; $1,943,000 in 2010; and the remaining
$15,357,000 thereafter.
The Company is evaluating potential restructuring actions that may be
undertaken at Kadant Johnson. Such actions may include rationalizing product
lines and consolidation of facilities. The Company will record the cost of
restructuring actions at Kadant Johnson as an increase to goodwill when
decisions are made as to the extent of such actions. The Company expects to
finalize its restructuring plan no later than one year following completion of
the Kadant Johnson acquisition.
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> KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. Acquisition (continued)
The following condensed consolidated statement of operations is presented
as if the acquisition of Kadant Johnson had been made at the beginning of the
periods presented. This information is not necessarily indicative of what the
actual condensed combined statement of operations of Kadant and Kadant Johnson
would have been for the periods presented, nor does it purport to represent the
future combined results of operations of Kadant and Kadant Johnson.
Nine Months Ended
----------------------------------------
(In thousands) October 1, 2005 October 2, 2004
- -----------------------------------------------------------------------------------------------------------------------------
Revenues $ 209,695 $ 206,450
--------- ---------
Operating Income * 1,844 19,080
--------- ---------
(Loss) Income from Continuing Operations (534) 10,592
Loss from Discontinued Operation (2,408) (4,544)
--------- ---------
Net (Loss) Income $ (2,942) $ 6,048
========= =========
Basic (Loss) Earnings per Share:
(Loss) Income from Continuing Operations $ (.04) $ .75
Net (Loss) Income $ (.21) $ .43
Diluted (Loss) Earnings per Share:
(Loss) Income from Continuing Operations $ (.04) $ .73
Net (Loss) Income $ (.21) $ .42
* Included in operating income for the first nine months of 2005 was $11.0 million in one-time bonuses and approximately
$3.1 million in acquisition-related costs that Kadant Johnson incurred prior to the acquisition.
5. Inventories
The components of inventories are as follows:
(In thousands) October 1, 2005 January 1, 2005
- -----------------------------------------------------------------------------------------------------------------------------
Raw Materials and Supplies $ 21,173 $ 12,849
Work in Process 5,904 6,047
Finished Goods (includes $392 and $611 at customer locations) 10,404 8,420
--------- ---------
$ 37,481 $ 27,316
========= =========
6. Goodwill
The changes in the carrying amount of goodwill for the nine-month period ended October 1, 2005 are as follows:
Nine Months Ended
-----------------
(In thousands) October 1, 2005
- -----------------------------------------------------------------------------------------------------------------------------
Balance at Beginning of Period $ 74,408
Increase due to Kadant Johnson acquisition 49,979
Increase due to purchase of minority interest in subsidiary 861
Currency translation adjustment (1,083)
---------
Balance at End of Period $ 124,165
=========
See Note 4 for further discussion of goodwill associated with the Kadant Johnson acquisition.
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> KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. Goodwill (continued)
During the third quarter of 2005, the Company acquired the remaining
minority interest in one of its Kadant Johnson subsidiaries for $1,129,000 in
cash and recorded $861,000 of goodwill.
7. Short- and Long-Term Obligations
The components of short- and long-term obligations are as follows:
(In thousands) October 1, 2005 January 1, 2005
- -----------------------------------------------------------------------------------------------------------------------------
Current Portion of Term Loan $ 9,000 $ -
Long-Term Portion of Term Loan 48,750 -
--------- ---------
Total Short- and Long-Term Obligations $ 57,750 $ -
========= =========
To fund a portion of the purchase price for the acquisition of Kadant
Johnson, the Company entered into a term loan and revolving credit facility (the
"Credit Agreement") effective May 9, 2005 in the aggregate principal amount of
up to $85,000,000, including a $25,000,000 revolver. The Credit Agreement is
among Kadant, as Borrower, the Foreign Subsidiary Borrowers from time to time
parties thereto, the several banks and other financial institutions or entities
from time to time parties thereto, and JPMorgan Chase Bank, N.A., as
Administrative Agent. On May 11, 2005, the Company borrowed $60,000,000 under
the term loan facility, which is repayable in quarterly installments over a
five-year period. The aggregate principal to be repaid each year is as follows:
$4,500,000, $9,000,000, $10,500,000, $13,500,000, $15,000,000, and $7,500,000 in
2005, 2006, 2007, 2008, 2009, and 2010, respectively. In the third quarter of
2005, the Company made a $2,250,000 principal payment.
Interest on the revolving loan and the term loan accrues and is payable
quarterly in arrears at one of the following rates selected by Kadant: (a) the
prime rate plus an applicable margin initially set at 0% for 2005, and up to
0.25% thereafter, or (b) a Eurocurrency rate plus an applicable margin initially
set at 1% for 2005, and between 0.625% and 1.25% thereafter. The applicable
margin is determined based upon Kadant's total debt to earnings before interest,
taxes, depreciation and amortization (EBITDA) ratio.
In connection with the Credit Agreement, Kadant agreed to pay a
commitment fee, payable quarterly, at an initial rate of 0.25% per annum of the
unused amount of revolving credit commitments, subject to adjustment based upon
Kadant's total debt to EBITDA ratio (resulting in a per annum rate of between
0.175% and 0.275%).
Debt issuance costs were approximately $652,000 and are included in other
assets in the accompanying condensed consolidated balance sheet. These costs are
being amortized to interest expense over five years based on the
effective-interest method. As of October 1, 2005, the unamortized debt issuance
costs were approximately $568,000.
The obligations of Kadant under the Credit Agreement may be accelerated
upon the occurrence of an event of default under the Credit Agreement, which
include customary events of default including, without limitation, payment
defaults, defaults in the performance of affirmative and negative covenants, the
inaccuracy of representations or warranties, bankruptcy- and insolvency-related
defaults, defaults relating to such matters as ERISA, uninsured judgments and
the failure to pay certain indebtedness, and a change of control default.
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> KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. Short- and Long-Term Obligations (continued)
In addition, the Credit Agreement contains negative covenants applicable
to Kadant and its subsidiaries, including financial covenants requiring Kadant
to comply with a maximum consolidated leverage ratio of 3.0, which is lowered to
2.5 in certain circumstances, and a minimum consolidated fixed charge coverage
ratio of 1.5, and restrictions on liens, indebtedness, fundamental changes,
dispositions of property, making certain restricted payments (including
dividends and stock repurchases), investments, transactions with affiliates,
sale and leaseback transactions, swap agreements, changing Kadant's fiscal year,
negative pledges, arrangements affecting subsidiary distributions, and entering
into new lines of business. As of October 1, 2005, Kadant was in compliance with
these covenants.
The loans under the Credit Agreement are guaranteed by certain domestic
subsidiaries of Kadant and secured by a pledge of 65% of the stock of the
Company's first-tier foreign subsidiaries and the Company's subsidiary
guarantors pursuant to a guarantee and pledge agreement effective May 9, 2005 in
favor of JPMorgan Chase Bank, N.A., as agent on behalf of the lenders.
8. Swap Agreement
Kadant entered into a swap agreement (the "Swap Agreement"), which was
effective May 17, 2005, to convert $36,000,000 of the principal balance of the
$60,000,000 term loan from a floating rate to a fixed rate of interest. The Swap
Agreement has a five-year term, the same quarterly payment dates as the hedged
portion of the term loan, and reduces proportionately in line with the
amortization of the term loan. Under the Swap Agreement, Kadant will receive a
three-month LIBOR rate and pay a fixed rate of interest of 4.125%. The net
effect on interest expense for the hedged portion of the term loan ($36,000,000)
is that Kadant will pay a fixed interest rate of up to 5.375% (the sum of the
4.125% fixed rate under the Swap Agreement and the applicable margin of up to
1.25% on the term loan). The guarantee provisions and the default and financial
covenants, as well as certain restrictions on the payment of dividends (included
in the Credit Agreement and outlined in Note 7) also apply to the Swap
Agreement.
The Swap Agreement has been designated as a cash flow hedge and is
carried at fair value. As of October 1, 2005, the unrealized gain associated
with the Swap Agreement was $349,000, which is included in other assets and
within accumulated other comprehensive items on a net of tax basis in the
accompanying condensed consolidated balance sheet. Management believes that any
credit risk associated with the swap is remote based on the creditworthiness of
the financial institution issuing the Swap Agreement.
9. Warranty Obligations
The Company provides for the estimated cost of product warranties at the
time of sale based on the actual historical return rates and repair costs. In
the Pulp and Papermaking Systems (Papermaking Systems) segment, the Company
typically negotiates the terms regarding warranty coverage and length of
warranty depending on the products and applications. While the Company engages
in extensive product quality programs and processes, the Company's warranty
obligation is affected by product failure rates, repair costs, service delivery
costs incurred in correcting a product failure, and supplier warranties on parts
delivered to the Company. Should actual product failure rates, repair costs,
service delivery costs, or supplier warranties on parts differ from the
Company's estimates, revisions to the estimated warranty liability would be
required.
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> KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
9. Warranty Obligations (continued)
The changes in the carrying amount of the Company's product warranties
for its continuing operations for the three- and nine-month periods ended
October 1, 2005 and October 2, 2004 are as follows:
Three Months Ended Nine Months Ended
------------------------------ -----------------------------
October 1, October 2, October 1, October 2,
(In thousands) 2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at Beginning of Period $ 3,766 $ 3,460 $ 3,582 $ 3,661
Provision (benefit) (147) 370 823 1,743
Usage (611) (632) (1,523) (2,225)
Acquired warranty obligation - - 232 -
Other, net (a) (14) (29) (120) (10)
------- ------- -------- --------
Balance at End of Period $ 2,994 $ 3,169 $ 2,994 $ 3,169
======= ======= ======== ========
(a) Represents the effects of currency translation.
The Company recorded a $147,000 benefit and a $370,000 provision for
warranty obligations in the third quarter of 2005 and 2004, respectively.
Contributing to the $147,000 benefit in the third quarter of 2005 was a
reduction of $616,000 in warranty reserves in our North American
stock-preparation equipment product line largely due to significantly improved
claims experience.
See Note 15 for warranty information related to the discontinued operation.
10. Restructuring and Unusual Items
In an effort to improve operating performance at the Papermaking Systems
segment's Kadant Lamort subsidiary in France, the Company approved a
restructuring of that subsidiary on November 18, 2004. This restructuring was
initiated to strengthen Kadant Lamort's competitive position in the European
paper industry. As required under French law, consultations with Kadant Lamort's
workers' council, which represents the employees, have been completed. The
restructuring involves the reduction of approximately 100 full-time positions
across all functions in France. As of the end of the third quarter of 2005,
approximately 60 employees had been notified of their termination, approximately
35 employees will be notified in the fourth quarter of 2005, and the remaining
employees will be notified by the end of the second quarter of 2006.
The Company accrued a restructuring charge of $9,235,000 in the fourth
quarter of 2004, in accordance with SFAS No. 112, "Employers' Accounting for
Postemployment Benefits - An Amendment of Financial Accounting Standards Board
(FASB) Statements No. 5 and 43," for severance and other termination costs in
connection with the workforce reduction. The Company estimates that an
additional restructuring charge of $875,000 will be incurred related to this
restructuring, the majority of which will be accrued for in the fourth quarter
of 2005. As a result of the restructuring, the Company expects to realize a
curtailment gain resulting in a reduction in the accrued liability associated
with Kadant Lamort's pension plan of approximately $450,000, which will be
primarily recognized in 2005 as the employees are notified of their termination.
During the third quarter of 2005, the Company recognized $78,000 of this
curtailment gain.
In addition, during the fourth quarter of 2004, the Company recorded
restructuring costs of $280,000, which were accounted for in accordance with
SFAS No. 112, related to severance costs of 11 employees at one of the
Papermaking Systems segment's U.S. subsidiaries.
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> KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
10. Restructuring and Unusual Items (continued)
A summary of the changes in accrued restructuring costs is as follows:
(In thousands) Severance
- ------------------------------------------------------------------------------
Balance at January 1, 2005 $ 10,026
Usage (598)
Currency translation (770)
--------
Balance at October 1, 2005 $ 8,658
========
The specific restructuring measures and associated estimated costs are
based on the Company's best judgments under prevailing circumstances. The
Company believes that the restructuring reserve balance is adequate to carry out
the restructuring activities formally identified and committed to during the
fourth quarter of 2004. In addition, the Company estimates that an additional
restructuring charge of $875,000 will be incurred primarily in the fourth
quarter of 2005 associated with additional severance costs not contemplated in
the original restructuring plan. The Company anticipates that substantially all
of the employees associated with the Kadant Lamort restructuring will be
notified of their terminations by the end of 2005, however, due to the long
notification periods, the related cash payments will extend into the first half
of 2006.
11. Business Segment Information
The Company has combined its operating entities into one reportable
operating segment, Pulp and Papermaking Systems. In addition, the Company has
two separate product lines; Fiber-based Products and Casting Products, which are
included in the "Other" category below. In classifying operational entities into
a particular segment, the Company considered how management assesses performance
and makes operating decisions and aggregated businesses with similar economic
characteristics, products and services, production processes, customers, and
methods of distribution.
Three Months Ended Nine Months Ended
------------------------------ -----------------------------
October 1, October 2, October 1, October 2,
(In thousands) 2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues:
Pulp and Papermaking Systems $ 62,879 $ 47,669 $ 172,978 $ 144,166
Other (b) 1,920 1,214 7,651 4,869
-------- -------- --------- ---------
$ 64,799 $ 48,883 $ 180,629 $ 149,035
======== ======== ========= =========
Income from Continuing Operations Before Provision
for Income Taxes and Minority Interest:
Pulp and Papermaking Systems (a) $ 6,166 $ 5,595 $ 15,476 $ 18,090
Corporate and Other (b,c) (1,428) (1,327) (2,961) (3,773)
-------- -------- --------- ---------
Total Operating Income 4,738 4,268 12,515 14,317
Interest (Expense) Income, Net (489) 354 (113) 989
-------- -------- ---------- ---------
$ 4,249 $ 4,622 $ 12,402 $ 15,306
======== ======== ========= =========
Capital Expenditures:
Pulp and Papermaking Systems $ 741 $ 291 $ 1,493 $ 1,126
Corporate and Other (b,c) 303 122 426 204
-------- -------- --------- ---------
$ 1,044 $ 413 $ 1,919 $ 1,330
======== ======== ========= =========
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> KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
11. Business Segment Information (continued)
October 1, 2005 January 1, 2005
- ---------------------------------------------------------------------------------------------------------------------------------
Total Assets:
Pulp and Papermaking Systems $ 338,283 $ 196,248
Corporate and Other (b,c) 28,546 73,339
--------- ---------
Total Assets from Continuing Operations 366,829 269,587
Total Assets from Discontinued Operations 14,508 15,650
--------- ---------
$ 381,337 $ 285,237
========= =========
(a) Includes pre-tax income of $78 in the three- and nine-month periods ending October 1, 2005 associated with restructuring
activities, a pre-tax gain on sale of subsidiary of $149 in the three- and nine-month periods ending October 2, 2004,
and a pre-tax gain of $970 in the nine-month period ending October 2, 2004, which resulted from renegotiating a series of
agreements with one of the Company's licensees.
(b) Other includes the results from the Fiber-based Products business and the Casting Products business.
(c) Corporate primarily includes general and administrative expenses.
12. Stock-Based Compensation Plans and Pro Forma Stock-Based Compensation
Expense
As permitted by SFAS No. 148, "Accounting for Stock-based Compensation -
Transition and Disclosure," and SFAS No. 123, "Accounting for Stock-based
Compensation" (SFAS No. 123), the Company has elected to continue to apply
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB Opinion No. 25), and related interpretations to account for its
stock-based compensation plans. No stock-based employee compensation cost
related to stock option awards is reflected in net income, as all options
granted under the plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. Had compensation cost for awards
granted after 1994 under the Company's stock-based compensation plans been
determined based on
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> KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
12. Stock-Based Compensation Plans and Pro Forma Stock-Based Compensation
Expense (continued)
the fair values at the grant dates consistent with the method set forth under
SFAS No. 123, the effect on certain of the Company's financial results would
have been as follows:
Three Months Ended Nine Months Ended
-------------------------- ---------------------------
October 1, October 2, October 1, October 2,
(In thousands, except per share amounts) 2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations $ 2,634 $ 3,205 $ 8,868 $ 10,522
Loss from Discontinued Operation (2,252) (3,698) (2,408) (4,544)
-------- -------- -------- ---------
Net Income (Loss) As Reported 382 (493) 6,460 5,978
Deduct: Total stock-based employee compensation expense
determined under the fair-value-based method for all
awards, net of tax (103) (557) (452) (1,686)
-------- -------- -------- ---------
Pro forma net income (loss) $ 279 $ (1,050) $ 6,008 $ 4,292
======== ======== ======== =========
Basic Earnings (Loss) per Share:
As reported:
Income from continuing operations $ .19 $ .23 $ .64 $ .74
Net income (loss) $ .03 $ (.04) $ .46 $ .42
Pro forma:
Income from continuing operations $ .18 $ .19 $ .61 $ .62
Net income (loss) $ .02 $ (.08) $ .43 $ .30
Diluted Earnings (Loss) per Share:
As reported:
Income from continuing operations $ .19 $ .22 $ .63 $ .73
Net income (loss) $ .03 $ (.03) $ .46 $ .41
Pro forma:
Income from continuing operations $ .18 $ .19 $ .59 $ .61
Net income (loss) $ .02 $ (.07) $ .42 $ .30
13. Employee Benefit Plans
One of the Company's U.S. subsidiaries has a noncontributory defined
benefit retirement plan. Benefits under the plan are based on years of service
and employee compensation. Funds are contributed to a trustee as necessary to
provide for actuarially determined costs, generally equal to the minimum amounts
required by the Employee Retirement Income Security Act (ERISA). The same
subsidiary has a post-retirement welfare benefits plan (reflected in the table
below in "Other Benefits"). No future retirees are eligible for the
post-retirement welfare benefits plan, and the plan includes a limit on the
subsidiary's contributions.
The Company's Kadant Lamort subsidiary sponsors a defined benefit pension
plan, which is included in the table below in "Other Benefits." Benefits under
this plan are based on years of service and projected employee compensation.
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> KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
13. Employee Benefit Plans (continued)
Kadant Johnson also offers a post-retirement welfare benefit plan
(reflected in the table below in "Other Benefits") to its U.S. employees upon
attainment of eligible retirement age. Kadant Johnson pays 75% of all plan costs
for retirees with a retirement date prior to January 1, 2005, and 50% of all
plan costs for retirees with a retirement date after January 1, 2005, with no
limits on its contributions. The accrued post-retirement benefit cost associated
with this plan was $4,808,000 at October 1, 2005, and is included in other
long-term liabilities in the accompanying condensed consolidated balance sheet.
The components of the net periodic benefit cost for the pension benefits
and other benefits plans in the three- and nine-month periods ended October 1,
2005 and October 2, 2004 are as follows:
Three Months Ended Three Months Ended
(In thousands) October 1, 2005 October 2, 2004
- ---------------------------------------------------------------------------------------------------------------------
Pension Other Pension Other
Benefits Benefits Benefits Benefits
-------- -------- -------- --------
Components of Net Periodic Benefit Cost:
Service cost $ 179 $ 92 $ 160 $ 17
Interest cost 252 110 242 28
Expected return on plan assets (351) - (343) -
Recognized net actuarial (gain) loss - (68) - 9
Amortization of prior service cost (11) (13) 12 (14)
-------- -------- -------- --------
Net periodic benefit cost $ 91 $ 121 $ 71 $ 40
======== ======== ======== ========
Nine Months Ended Nine Months Ended
October 1, 2005 October 2, 2004
------------------------------------- -------------------
Pension Other Pension Other
Benefits Benefits Benefits Benefits
-------- -------- -------- --------
Components of Net Periodic Benefit Cost:
Service cost $ 536 $ 210 $ 480 $ 55
Interest cost 755 229 726 87
Expected return on plan assets (1,053) - (1,027) -
Recognized net actuarial (gain) loss - (51) - 27
Amortization of prior service cost 35 (37) 34 (44)
-------- -------- -------- --------
Net periodic benefit cost $ 273 $ 351 $ 213 $ 25
======== ======== ======== ========
The weighted-average assumptions used to determine net periodic benefit cost are as follows:
Discount rate 6.00% 5.90% 6.25% 4.90%
Expected long-term return on plan assets 8.50% - 8.50% -
Rate of compensation increase 4.00% 2.50% 4.00% 2.50%
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> KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
13. Employee Benefit Plans (continued)
No cash contributions are expected for the U.S. subsidiary's
noncontributory defined benefit retirement plan and no cash contributions, other
than funding current benefit payments, are expected for the other pension and
post-retirement welfare benefit plans in 2005.
The Medicare Prescription Drug Improvement and Modernization Act of 2003
(the Act), enacted on December 8, 2003, provides for a Medicare prescription
drug benefit beginning in 2006 and federal subsidies to employers who provide
drug coverage to retirees. The Company's accumulated post-retirement benefit
obligation and net periodic post-retirement benefit cost do not reflect any
amount associated with the subsidy as those amounts are not material to the
Company's post-retirement benefit plans.
14. Recent Accounting Pronouncements
Share-Based Payment
On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004) "Share-
Based Payment" (SFAS No. 123R). SFAS No. 123R replaces SFAS No. 123, supersedes
APB Opinion No. 25, and amends SFAS No. 95 "Statement of Cash Flows." SFAS No.
123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. SFAS No. 123R is effective for the Company on January 1,
2006. The pro forma disclosures previously permitted under SFAS No. 123 will no
longer be an alternative to financial statement recognition. As permitted by
SFAS No. 123, the Company currently accounts for share-based payments to
employees using APB Opinion No. 25's intrinsic value method and, as such,
generally recognizes no compensation cost for employee stock options. Under SFAS
123R, companies must determine the appropriate fair value model to be used at
the date of adoption. The transition methods include prospective and
retrospective adoption options. Management is evaluating the requirements of
SFAS No. 123R. The impact of the adoption of SFAS No. 123R cannot be predicted
at this time because it will vary based on the levels of share-based payments
granted in the future and the options then outstanding.
Inventory Costs
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," which requires that abnormal amounts of
idle facility expense, freight, handling costs and wasted material be recognized
as current-period charges. This Statement also introduces the concept of "normal
capacity" and requires the allocation of fixed production overheads to inventory
based on the normal capacity of the production facilities. Unallocated overheads
must be recognized as an expense in the period in which they are incurred. SFAS
No. 151 will be effective for the Company on January 1, 2006. Management is
currently evaluating the requirements of SFAS No. 151 and the impact this
standard will have on its financial statements.
15. Discontinued Operation
On October 27, 2004, the Company's board of directors approved a plan and
management committed to sell the Company's composite building products business
(composites business) after making a determination that the business no longer
aligned with the Company's long-term strategy. The composites business was sold
on October 21, 2005 (see Note 16 for further discussion). The Company has
presented the composites business in the accompanying condensed consolidated
financial statements as a discontinued operation, as all the criteria under SFAS
No. 144 have been met. All prior periods have been restated to reflect the
composites business as a discontinued operation.
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> KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
15. Discontinued Operation (continued)
Operating results for the composites business are as follows:
Three Months Ended Nine Months Ended
-------------------------- ---------------------------
October 1, October 2, October 1, October 2,
(In thousands) 2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------------------
Revenues $ 4,409 $ 4,394 $ 15,193 $ 13,751
------- ------- -------- --------
Loss Before Income Tax Benefit (3,465) (5,689) (3,705) (6,991)
Income Tax Benefit 1,213 1,991 1,297 2,447
------- ------- -------- --------
Loss From Discontinued Operation $(2,252) $(3,698) $ (2,408) $ (4,544)
======= ======= ======== ========
The major classes of assets and liabilities of the discontinued operation included in the accompanying condensed
consolidated balance sheet are as follows:
October 1, January 1,
(In thousands) 2005 2005
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 227 $ 39
Accounts receivable, less allowances 834 2,252
Inventories 4,088 4,035
Other current assets 1,971 1,981
Property, plant, and equipment, at cost, net 6,805 6,760
Other assets 583 583
-------- --------
Total Assets 14,508 15,650
------- --------
Accounts payable 1,249 1,446
Accrued warranty costs 6,031 4,327
Other current liabilities 1,074 905
Other liabilities 900 900
-------- --------
Total Liabilities 9,254 7,578
-------- --------
Net Assets $ 5,254 $ 8,072
======== ========
The composites business offers a standard limited warranty to the
original owner of its decking and roofing products, limited to repair or
replacement of the defective product or a refund of the original purchase price.
The composites business records an estimate for warranty-related costs at the
time of sale based on actual historical return rates and repair costs, as well
as other analytical tools for estimating future warranty claims. These estimates
are revised for variances between actual and expected claims rates. The analysis
of expected warranty claims rates includes detailed assumptions associated with
potential product returns, including the type of product sold, temperatures at
the location of installation, density of boards, and other factors. Certain
assumptions, such as the effect of weather conditions and high temperatures on
the product installed, include inherent uncertainties that are subject to
fluctuation, which could impact future warranty provisions. Due to the highly
subjective nature of these assumptions, the Company has recorded its best
estimate of the cost of expected warranty claims. It is reasonably possible that
the ultimate settlement of such claims may exceed the amount recorded.
<
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> KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
15. Discontinued Operation (continued)
The composites business experienced warranty issues that affected its
profitability in 2003 and 2004. There was a substantial increase in warranty
claims in 2004, with the most significant increase occurring in the three-month
period ended October 2, 2004. During the first six months of 2004, the majority
of the claims were associated with contraction of certain decking products. In
the three-month period ended October 2, 2004, the increased claims were
associated with a new issue concerning excessive oxidation that affected the
integrity of the plastic used in some of the decking products manufactured prior
to October 2003. As a result of the increase in claims received and the estimate
for future potential claims, the Company's Kadant Composites LLC subsidiary
(Kadant Composites LLC) increased its warranty expense in the third quarter of
2004 compared to prior periods. Included in this increased warranty expense was
the cost of exchanging material held by the composites business' distributors
with new material and its best estimate of costs related to future potential
valid claims arising from installed products.
In the third quarter of 2005, the composites business experienced a
higher-than-expected level of warranty claims associated with the previously
identified product issues of excess oxidation and contraction. As a result of
the high level of claims, the Company recorded a warranty provision of
$3,973,000 in the third quarter of 2005, which represented a $3,746,000 increase
over the second quarter of 2005 and a $603,000 decrease over the third quarter
of 2004.
A summary of the changes in accrued warranty costs for the nine-month
periods ended October 1, 2005 and October 2, 2004 is as follows:
Nine Months Ended
---------------------------
October 1, October 2,
(In thousands) 2005 2004
- -----------------------------------------------------------------------------------------------------------------------------
Balance at Beginning of Period $ 4,327 $ 869
Provision 4,606 5,906
Usage (2,902) (1,688)
-------- --------
Balance at End of Period $ 6,031 $ 5,087
======== ========
16. Subsequent Events
Disposition of Discontinued Operation
On October 21, 2005, Kadant Composites LLC completed the sale of
substantially all of its assets pursuant to an asset purchase agreement (the
Purchase Agreement) with LDI Composites Co., a Minnesota corporation (Buyer),
and Liberty Diversified Industries, Inc., a Minnesota corporation and parent
corporation of the Buyer, to the Buyer for approximately $11,127,000 in cash and
the assumption of $1,444,000 of liabilities, subject to a post-closing
adjustment. Pursuant to the Purchase Agreement, approximately $629,000 of the
sale price was deposited in an escrow fund until May 1, 2007 and approximately
$629,000 of the sale price will be held by the Buyer for one year from the date
of sale to satisfy certain indemnification obligations. The sale price, net of
transaction costs, is slightly above the net book value of the assets sold and
the liabilities assumed, and as a result, the Company does not expect the
resulting gain on the sale to be material to its consolidated operating results
for the fourth quarter of 2005.
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> KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
16. Subsequent Events (continued)
Pursuant to the Purchase Agreement, Kadant Composites LLC has retained
warranty obligations for products manufactured prior to the sale. Kadant
Composites LLC deposited $3,500,000 of the sale proceeds into a special escrow
fund to satisfy these warranty claims. The warranty escrow fund will be
administered by the Buyer for five years or until the funds are exhausted, after
which time Kadant Composites LLC will administer any remaining warranty claims
associated with products manufactured prior to the sale date.
First Amendment to Credit Agreement
On October 21, 2005, the Company entered into a First Amendment to the
Credit Agreement with the lenders, permitting the issuance of letters of credit
denominated in foreign currencies.
Restructuring Costs
We anticipate incurring restructuring and other one-time costs of
approximately $1,100,000 in the fourth quarter of 2005, including $700,000 in
the Papermaking Systems segment to restructure several of our North American
operations in response to continued weak market conditions and an additional
$400,000 of restructuring costs, net of an associated curtailment gain, in
connection with the previously announced restructuring at our Kadant Lamort
subsidiary.
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> KADANT INC.
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," "should," "likely," "will," "would," 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
this Report.
Overview
Company Background
We are a leading supplier of equipment used in the global papermaking and
paper recycling industry and also a manufacturer of granules made from
papermaking byproducts and grey and ductile iron castings. Our continuing
operations consist of one reportable operating segment, Pulp and Papermaking
Systems (Papermaking Systems), and two separate product lines: Fiber-based
Products and Casting Products. In classifying operational entities into a
particular segment, we considered how our management assesses performance and
makes operating decisions, and aggregated businesses with similar economic
characteristics, products and services, production processes, customers, and
methods of distribution. In addition, prior to its sale, we operated the
composite building products business (composites business), which is presented
as a discontinued operation in the accompanying condensed consolidated financial
statements. The composites business was sold on October 21, 2005.
We were incorporated in Delaware in November 1991 to be the
successor-in-interest to several papermaking equipment businesses of Thermo
Electron Corporation (Thermo Electron). In November 1992, we completed an
initial public offering of a portion of our outstanding common stock. On July
12, 2001, we changed our name to Kadant Inc. from Thermo Fibertek Inc. In August
2001, Thermo Electron disposed of its remaining equity interest in us by means
of a stock dividend to its shareholders. In May 2003, we moved the listing of
our common stock to the New York Stock Exchange, where it continues to trade
under the symbol "KAI."
Pulp and Papermaking Systems Segment
Our Papermaking Systems segment designs and manufactures
stock-preparation systems and equipment, paper machine accessory equipment, and
water-management systems for the paper and paper recycling industries. With the
acquisition of The Johnson Corporation (Kadant Johnson) in May 2005, we added
fluid handling systems, which improve dryer performance during the papermaking
process. Our principal products include:
- Stock-preparation systems and equipment: custom-engineered systems and
equipment, as well as standard individual components, for pulping,
de-inking, screening, cleaning, and refining recycled and virgin
fibers for preparation for entry into the paper machine during the
production of paper;
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> KADANT INC.
Overview (continued)
- Paper machine accessory equipment: doctoring systems and related
consumables that continuously clean papermaking rolls to keep paper
machines running efficiently; doctor blades made of a variety of
materials to perform functions including cleaning, creping, web
removal, and application of coatings; and profiling systems that
control moisture, web curl, and gloss during paper production;
- Water-management systems: systems and equipment used to continuously
clean paper machine fabrics and to drain, purify, and recycle process
water during paper sheet formation; and
- Fluid handling systems and equipment: 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, and
textiles.
Other
Our other business lines include our Fiber-based Products business and
our Casting Products business.
Our Fiber-based Products business produces 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.
Our Casting Products business manufactures grey and ductile iron
castings.
Discontinued Operation
Prior to the sale of the composites business, we produced composite
building products, including decking and railing systems and roof tiles, made
from recycled fiber, plastic, and other material, which were marketed through
distributors primarily to the building industry. On October 21, 2005, our Kadant
Composites LLC subsidiary (Kadant Composites LLC) sold substantially all of its
assets to LDI Composites Co. (the Buyer) for approximately $11.1 million in cash
and the assumption of $1.4 million of liabilities, subject to a post-closing
adjustment. The sale price, net of transaction costs, is slightly above the net
book value of the assets sold and the liabilities assumed, and as a result we do
not expect the resulting gain on the sale to be material to our consolidated
operating results for the fourth quarter of 2005.
As part of the sale transaction, Kadant Composites LLC retained the
warranty obligations associated with products manufactured prior to the sale
date. Kadant Composites LLC deposited $3.5 million of the sale proceeds into a
special escrow fund to satisfy these warranty claims. This fund will be
administered by the Buyer for five years or until the funds are exhausted, after
which time Kadant Composites LLC will administer any remaining covered warranty
claims. As of October 1, 2005, the accrued warranty reserve associated with the
composites business was $6.0 million. Kadant Composites LLC recorded a $4.0
million warranty provision in the third quarter of 2005 due to a
higher-than-expected level of warranty claims associated with the previously
identified product issues of excessive oxidation and contraction. All future
activity associated with this warranty reserve will continue to be classified in
the results of the discontinued operation in the accompanying condensed
consolidated financial statements.
International Sales
During the first nine months of 2005 and 2004, approximately 61% and 60%,
respectively, of our sales were to customers outside the United States,
principally in Europe and Asia. 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
<
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> KADANT INC.
Overview (continued)
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 under different assumptions or
conditions.
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 Item 7 of our
Annual Report on Form 10-K for the fiscal year ended January 1, 2005, filed with
the Securities and Exchange Commission. There have been no material changes to
these critical accounting policies since fiscal year-end 2004 that warrant
further disclosure.
Industry and Business Outlook
Our products are primarily sold to the pulp and paper industry. The paper
industry had been in a prolonged downcycle for the past several years. While the
performance of paper producers, especially in North America, had been gradually
improving in the first half of the year, the industry is continuing to
experience sluggish demand. The profitability of paper producers is still being
negatively affected by higher operating costs, especially for energy and
chemicals. In response, paper companies are still cautious about increasing
their capital and operating spending in the current market environment and have
continued to reduce capacity by keeping their paper machines idle or closing
paper mills. We expect, however, that if the market recovers, paper companies
will increase their capital and operating spending, which would have a positive
effect on paper company suppliers, such as Kadant, although the timing of such
effect is difficult to predict. We continue to concentrate our efforts on
several initiatives intended to improve our operating results, including: (i)
integrating the Kadant Johnson acquisition, (ii) increasing our manufacturing
capabilities in China, (iii) increasing aftermarket sales, (iv) completing the
Kadant Lamort restructuring, and (v) penetrating new markets outside the paper
industry. In addition, we continue to focus our efforts on managing our
operating costs, capital expenditures, and working capital.
In an effort to improve operating performance at our Kadant Lamort
subsidiary in France, we approved a restructuring of that subsidiary on November
18, 2004. This restructuring was initiated to strengthen Kadant Lamort's
competitive position in the European paper industry. As required under French
law, we have completed the consultations with Kadant Lamort's workers' council,
which represents the employees. The restructuring involves the reduction of
approximately 100 full-time positions in France and we expect substantially all
affected employees will be notified of their termination by the end of 2005. We
accrued a restructuring charge of $9.2 million in the fourth quarter of 2004 for
severance and other termination costs in connection with the workforce
reduction. We anticipate that an additional restructuring charge of $0.9 million
will be incurred related to this restructuring, the majority of which will be
accrued for in the fourth quarter of 2005. In addition, we expect to realize a
curtailment gain resulting
<
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> KADANT INC.
Overview (continued)
in a reduction in the accrued liability associated with Kadant Lamort's pension
plan of approximately $0.5 million, which will primarily be recognized in 2005
as the employees are notified of their termination. We expect that Kadant Lamort
will continue to experience operating losses in the fourth quarter of 2005 as
these restructuring actions are completed.
In response to continued weak market conditions in North America, we
anticipate incurring restructuring and other one-time costs in the Papermaking
Systems segment of approximately $0.7 million in the fourth quarter of 2005 to
restructure several of our North American operations in response to continued
weak market conditions. We anticipate annual savings of approximately $2.4
million as a result of these actions.
We continue to pursue market opportunities outside North America. In the
last several years, China has become a significant market for our
stock-preparation equipment. To capitalize on this growing market, as announced
in our earnings call on November 3, 2005, we plan to acquire a manufacturing and
assembly facility in China for our stock-preparation equipment and related
aftermarket products. Revenues from China are primarily derived from large
capital orders, the timing of which has been difficult to predict. For the past
several quarters, our customers in China have experienced delays in obtaining
financing for their capital addition and expansion projects, which we believe is
due to efforts by the Chinese government to control economic growth, which are
reflected in a slowdown in financing approvals in China's banking system. This
has caused delays in receiving orders and, as a result, will delay our
recognizing revenue on these projects to periods later than originally expected.
We plan to use the acquired business in China as a base for increasing our
aftermarket business, which we believe will be more predictable.
On May 11, 2005, we acquired all the outstanding stock of Kadant Johnson,
a leading supplier of steam and condensate systems, components, and controls
used primarily in the dryer section of the papermaking process and during the
production of steel, plastics, rubber, and textiles. Kadant Johnson was a
privately held company based in Michigan with approximately 575 employees at
operations in North and South America, Europe and Asia. Kadant Johnson's primary
products include rotary joints, syphons, and related steam and condensate
systems. The purchase price was $101.5 million in cash, subject to a further
post-closing adjustment as outlined in the purchase agreement for Kadant
Johnson, and $4.2 million in acquisition-related costs. In addition to the cash
consideration, we issued a letter of credit to the sellers for $4 million,
subject to adjustment, related to certain tax assets of Kadant Johnson, the
value of which we expect to realize. The parties also agreed in the purchase
agreement to an earn-out provision, based on the achievement of certain revenue
targets between the closing date and July 1, 2006, which could increase the
purchase price by up to $8 million. The majority of the results for Kadant
Johnson will be reported in the Pulp and Papermaking Systems segment within the
fluid handling product line. Results associated with the Casting Products
business will be reported in "Other."
Our 2005 guidance reflects expected revenues and earnings per share from
continuing operations, which excludes the results from our composites business
(accounted for as a discontinued operation). For the fourth quarter of 2005, we
expect to earn between $.04 to $.07 per diluted share, on revenues of $60 to $62
million. For the full year, we expect to earn between $.67 to $.70 per diluted
share, on revenues of $240 to $242 million, down from our previously announced
guidance of $.92 to $1.00 per diluted share, on revenues of $250 to $260
million. The factors contributing to the decrease of $.25 per diluted share at
the low end of our guidance include: delays in the receipt of several major
prospective orders from China; the delay in the receipt of an approximately $6
million order at our Kadant Lamort subsidiary, which will delay revenue
recognition until 2006; anticipated restructuring costs of $0.7 million at
several of our operations in North America; additional net restructuring costs
of $0.4 million at our Kadant Lamort subsidiary; and weaker-than-expected
performance in our North American accessory businesses, caused by sluggish order
rates in our capital equipment product lines.
<
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> KADANT INC.
Results of Operations
Third Quarter 2005 Compared With Third Quarter 2004
- ---------------------------------------------------
The following table sets forth our unaudited condensed consolidated
statement of operations expressed as a percentage of revenues from continuing
operations for the third fiscal quarters of 2005 and 2004. The results of
operations for the fiscal quarter ended October 1, 2005 are not necessarily
indicative of the results to be expected for the full fiscal year.
Three Months Ended
--------------------------------
October 1, October 2,
2005 2004
- -----------------------------------------------------------------------------------------------------------------------------
Revenues 100% 100%
--- ---
Costs and Operating Expenses:
Cost of revenues 60 61
Selling, general, and administrative expenses 31 29
Research and development expenses 2 1
--- ---
93 91
--- ---
Operating Income
7 9
Interest Income, net - 1
--- ---
Income from Continuing Operations Before Provision for
Income Taxes and Minority Interest 7 10
Provision for Income Taxes 3 3
Minority Interest Expense (Income) - -
--- ---
Income from Continuing Operations 4 7
Loss from Discontinued Operation (3) (8)
--- ---
Net Income (Loss) 1% (1)%
=== ===
Revenues
Revenues increased $15.9 million, or 33%, to $64.8 million in the third
quarter of 2005 from $48.9 million in the third quarter of 2004. Revenues in the
third quarter of 2005 include a $17.7 million, or 36%, increase from recently
acquired Kadant Johnson, and the favorable effect of currency translation of
$0.2 million due to a weaker U.S. dollar relative to the functional currencies
in countries in which we operate.
Revenues from our Papermaking Systems segment and other businesses for
the third quarters of 2005 and 2004 are as follows:
Three Months Ended
-----------------------------
October 1, October 2,
(In thousands) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues:
Pulp and Papermaking Systems $ 62,879 $ 47,669
Other 1,920 1,214
-------- --------
$ 64,799 $ 48,883
======== ========
<
27
> KADANT INC.
Results of Operations (continued)
Pulp and Papermaking Systems Segment. Revenues at the Papermaking Systems
segment increased $15.2 million, or 32%, to $62.9 million in the third quarter
of 2005 from $47.7 million in the third quarter of 2004. Revenues in the third
quarter of 2005 include a $16.7 million, or 35%, increase due to the inclusion
of a full quarter of revenues from recently acquired Kadant Johnson, which
comprises our fluid handling product line, and the favorable effect of currency
translation described above, all of which related to this segment.
Revenues at the Papermaking Systems segment by product line are as
follows:
Increase
(Decrease)
Three Months Ended Excluding
------------------------------- Effect of
October 1, October 2, Increase Currency
(In Millions) 2005 2004 (Decrease) Translation
- ---------------------------------------------------------------------------------------------------------------------------------
Product Line:
Stock-Preparation Equipment $ 24.2 $ 26.1 $ (1.9) $ (1.9)
Accessories 14.4 15.1 (0.7) (0.8)
Water-Management 7.1 6.1 1.0 0.9
Fluid Handling 16.7 - 16.7 16.7
Other 0.5 0.4 0.1 0.1
------- ------- ------- -------
$ 62.9 $ 47.7 $ 15.2 $ 15.0
======= ======= ======== =======
Revenues from the segment's stock-preparation equipment product line
decreased $1.9 million, or 7%, in the third quarter of 2005 compared to the
third quarter of 2004 due to a decrease in sales in Europe of $2.6 million, or
30%, in the third quarter of 2005 resulting from continued weakness in the
European market for stock-preparation capital equipment. This decrease was
offset in part by a $0.6 million, or 9%, increase in sales in China due to
strong sales of our capital equipment.
Revenues from the segment's accessories product line decreased $0.7
million, or 5%, in the third quarter of 2005 compared to the third quarter of
2004, including a $0.1 million increase from the favorable effect of currency
translation. Excluding the effect of currency translation, revenues from the
segment's accessories product line decreased $0.8 million, or 5%, due to a
decrease in sales in Europe and North America due to weaker demand for our
capital equipment.
Revenues from the segment's water-management product line increased $1.0
million, or 17%, in the third quarter of 2005 compared to the third quarter of
2004, including a $0.1 million increase from the favorable effect of currency
translation. Excluding the effect of currency translation, revenues from the
segment's water-management product line increased $0.9 million, or 15%, due to a
20% increase in sales of our capital equipment in North America, offset in part
by an 8% decrease in Europe.
Revenues from the recently acquired fluid handling product line were
$16.7 million in the third quarter of 2005.
Other. Revenues from the Fiber-based Products business decreased $0.3
million, or 26%, to $0.9 million in the third quarter of 2005 from $1.2 million
in the third quarter of 2004 due to the timing of Biodac(TM) orders from two
large customers. Biodac(TM) is our product family of biodegradable granules that
we produce from papermaking byproducts. Revenues from the Casting Products
business were $1.0 million in the third quarter of 2005.
<
28
> KADANT INC.
Results of Operations (continued)
Gross Profit Margin
Gross profit margin was 40% in the third quarter of 2005 compared to 39%
in the third quarter of 2004.
Gross profit margins for the third quarters of 2005 and 2004 for our
Papermaking Systems segment and our other businesses are as follows:
Three Months Ended
----------------------------
October 1, October 2,
2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Profit Margin:
Pulp and Papermaking Systems 42% 39%
Other 7 31
--- --
40% 39%
The gross profit margin at the Papermaking Systems segment was 42% and
39% in the third quarter of 2005 and 2004, respectively. The fluid handling
product line contributed a 3% increase in gross profit margins in the third
quarter of 2005. A reduction of warranty reserves in our North American stock
preparation business due to significantly improved claims experience contributed
a 1% increase in gross margins. These increases were offset in part by lower
margins at our Kadant Lamort subsidiary, which reduced gross margins by 1%. The
gross profit margin at our other businesses decreased to 7% in the third quarter
of 2005 from 31% in the third quarter of 2004 due to the inclusion of lower
margins at the Casting Products business and to lower margins in our Fiber-based
granular product line. We expect the gross profit margin in the Fiber-based
granular product line to continue to be negatively affected by significantly
higher costs of natural gas used in the manufacturing process.
Operating Expenses
Selling, general, and administrative expenses as a percentage of revenues
were 31% and 29% in the third quarters of 2005 and 2004, respectively. Selling,
general, and administrative expenses increased to $20.3 million in the third
quarter of 2005 from $14.2 million in the third quarter of 2004, an increase of
$6.1 million, or 42%. The increase was primarily due to the inclusion of $7.1
million in selling, general, and administrative expenses from Kadant Johnson,
which was offset in part by a reduction of $1.1 million of selling, general, and
administrative expenses resulting from a reduction in incentive compensation
accruals and other expense reductions at the Papermaking Systems segment.
Research and development expenses were $1.3 million and $0.8 million in
the third quarters of 2005 and 2004, respectively, and represented 2% of
revenues in both periods, including $0.4 million from Kadant Johnson in 2005.
Interest Income
Interest income decreased slightly to $0.3 million in the third quarter
of 2005 from $0.4 million in the third quarter of 2004 primarily due to a
decrease in the average cash balance resulting from the May 2005 acquisition of
Kadant Johnson, partly offset by higher prevailing interest rates.
Interest Expense
Interest expense increased to $0.8 million in the third quarter of 2005
from $2 thousand in the third quarter of 2004 due to interest expense associated
with the $60.0 million in borrowings used to fund the Kadant Johnson acquisition
in May 2005.
<
29
> KADANT INC.
Results of Operations (continued)
Gain on Sale of Subsidiary
During the third quarter of 2004, we recognized a gain of $0.1 million
from the sale of a subsidiary in Latin America for $0.4 million.
Restructuring and Unusual Items
During the third quarter of 2005, we recognized a curtailment gain of
$0.1 million associated with the employees who had been terminated pursuant to
Kadant Lamort's restructuring plan and were no longer eligible for benefits
under Kadant Lamort's pension plan.
Income Taxes
Our effective tax rate was 36% and 31% in the third quarters of 2005 and
2004, respectively. The 36% effective tax rate in the third quarter of 2005
consisted of our 35% recurring tax rate, a 3% increase associated with an
adjustment to the effective tax rate for the first half of 2005 due to a recent
tax ruling related to the United Kingdom, offset in part by a 2% non-recurring
tax benefit resulting from a reduction of $0.1 million in tax reserves. The
effective tax rate for the third quarter of 2004 was 31%, which was based on our
35% recurring effective tax rate offset by a 4% non-recurring tax benefit
resulting from a reduction of $0.2 million in tax reserves for foreign tax
credits associated with the filing of the 2003 federal tax return.
Income from Continuing Operations
Income from continuing operations decreased to $2.6 million in the third
quarter of 2005 from $3.2 million in the third quarter of 2004, a decrease of
$0.6 million, or 18%. This decrease was due primarily to an increase in interest
expense of $0.8 million associated with the $60.0 million in borrowings
entered into in May 2005 to fund the Kadant Johnson acquisition, offset in part
by an increase of $0.5 million in pre-tax operating income (see Gross Profit
Margin and Operating Expenses above for further discussion).
Loss from Discontinued Operation
The discontinued operation had a net loss of $2.3 million in the third
quarter of 2005 compared to a net loss of $3.7 million in the third quarter of
2004, due primarily to a $2.2 million decrease in operating expenses, which was
offset by a $0.8 million decrease in the income tax benefit. The decrease in
operating expenses was primarily due to a $0.6 million decrease in the warranty
provision, a decrease in production costs of approximately $1.2 million, and a
$0.3 million decrease in depreciation expense.
<
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> KADANT INC.
Results of Operations (continued)
First Nine Months 2005 Compared With First Nine Months 2004
- -----------------------------------------------------------
The following table sets forth our unaudited condensed consolidated
statement of operations expressed as a percentage of revenues from continuing
operations for the first nine months of 2005 and 2004. The results of operations
for the first nine months of 2005 are not necessarily indicative of the results
to be expected for the full fiscal year.
Nine Months Ended
----------------------------
October 1, October 2,
2005 2004
- --------------------------------------------------------------------------------------------------------------------------
Revenues 100% 100%
--- ---
Costs and Operating Expenses:
Cost of revenues 61 60
Selling, general, and administrative expenses 30 29
Research and development expenses 2 1
--- ---
93 90
--- ---
Operating Income 7 10
Interest Income, net - -
--- ---
Income from Continuing Operations Before Provision for
Income Taxes and Minority Interest 7 10
Provision for Income Taxes 2 3
Minority Interest Expense - -
--- ---
Income from Continuing Operations
5 7
Loss from Discontinued Operation
(1) (3)
--- ---
Net Income 4% 4%
=== ===
Revenues
Revenues increased $31.6 million, or 21%, to $180.6 million in the first
nine months of 2005 from $149.0 million in the first nine months of 2004.
Revenues in the 2005 period include a $28.9 million, or 19%, increase due to the
inclusion of Kadant Johnson, acquired in May 2005, and the favorable effect of
currency translation of $2.5 million due to a weaker U.S. dollar relative to
most of the functional currencies in countries in which we operate.
<
31
> KADANT INC.
Results of Operations (continued)
Revenues from our Papermaking Systems segment and other businesses for
the first nine months of 2005 and 2004 are as follows:
Nine Months Ended
----------------------------
October 1, October 2,
(In thousands) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues:
Pulp and Papermaking Systems $ 172,978 $ 144,166
Other 7,651 4,869
--------- ---------
$ 180,629 $ 149,035
========= =========
Pulp and Papermaking Systems Segment. Revenues at the Papermaking Systems
segment increased $28.8 million, or 20%, to $173.0 million in the first nine
months of 2005 from $144.2 million in the first nine months of 2004. Revenues in
the first nine months of 2005 include a $27.3 million, or 19%, increase due to
the inclusion of revenue from recently acquired Kadant Johnson, which comprises
our fluid handling product line, and the favorable effect of currency
translation described above, all of which related to this segment.
Revenues at the Papermaking Systems segment by product line are as
follows:
Increase
(Decrease)
Nine Months Ended Excluding
------------------------------- Effect of
October 1, October 2, Increase Currency
(In Millions) 2005 2004 (Decrease) Translation
- ---------------------------------------------------------------------------------------------------------------------------------
Product Line:
Stock-Preparation Equipment $ 78.0 $ 74.7 $ 3.3 $ 2.2
Accessories 45.0 47.0 (2.0) (3.0)
Water-Management 21.4 21.4 - (0.3)
Fluid Handling 27.3 - 27.3 27.3
Other 1.3 1.1 0.2 0.1
------- ------- --------- ----------
$ 173.0 $ 144.2 $ 28.8 $ 26.3
======= ======= ========= ==========
Revenues from the segment's stock-preparation equipment product line
increased $3.3 million, or 5%, in the first nine months of 2005 compared to the
first nine months of 2004, including a $1.1 million increase from the favorable
effect of currency translation. Excluding the effect of currency translation,
revenues from the stock-preparation equipment product line increased $2.2
million, or 3%, due to a $10.0 million, or 42%, increase in sales from North
America. This increase was offset in part by a $4.3 million, or 18%, decrease in
sales in China in the first nine months of 2005 due to continued delays by
customers in securing their financing approvals from the Chinese government. In
addition, sales in Europe decreased $3.5 million, or 13%, in the first nine
months of 2005 due to continued weakness in the European market for
stock-preparation capital equipment.
<
32
> KADANT INC.
Results of Operations (continued)
Revenues from the segment's accessories product line decreased $2.0
million, or 4%, in the first nine months of 2005 compared to the first nine
months of 2004, including a $1.0 million increase from the favorable effect of
currency translation. Excluding the effect of currency translation, revenues
from the segment's accessories product line decreased $3.0 million, or 6%, due
to a decrease in sales of capital equipment in North America and Europe.
Revenues from the segment's water-management product line were $21.4
million in both the first nine months of 2005 and 2004, including $0.3 million
in 2005 from the favorable effect of currency translation. Excluding the effect
of currency translation, revenues from the segment's water-management product
line decreased $0.3 million, or 1%, due primarily to a decrease in capital sales
in Europe.
Revenues from the recently acquired fluid handling product line were
$27.3 million in the first nine months of 2005, which includes revenues from
Kadant Johnson from the acquisition date of May 11, 2005 to October 1, 2005.
Other. Revenues from the Fiber-based Products business increased $1.2
million, or 26%, to $6.1 million in the first nine months of 2005 from $4.9
million in the first nine months of 2004 primarily as a result of an increase in
sales to an existing customer of Biodac(TM), our product family of biodegradable
granules that we produce from papermaking byproducts. Revenues from the Casting
Products business were $1.5 million in the first nine months of 2005.
Gross Profit Margin
Gross profit margin was 39% in the first nine months of 2005 compared to
40% in the first nine months of 2004.
Gross profit margins for the first nine months of 2005 and 2004 for our
Papermaking Systems segment and our other businesses are as follows:
Nine Months Ended
----------------------------
October 1, October 2,
2005 2004
- -----------------------------------------------------------------------------------------------------------------------
Gross Profit Margin:
Pulp and Papermaking Systems 39% 39%
Other 32 37
-- --
39% 40%
The gross profit margin at the Papermaking Systems segment remained
constant at 39% in the first nine months of 2005 and 2004. The fluid handling
product line contributed a 3% increase in gross profit margin in the first nine
months of 2005, which was offset by lower margins at our Kadant Lamort
subsidiary. The gross profit margin at our other businesses decreased to 32% in
the first nine months of 2005 from 37% in the first nine months of 2004 due
primarily to the inclusion of lower margins from the Casting Products business.
Operating Expenses
Selling, general, and administrative expenses as a percentage of revenues
were 30% and 29% in the first nine months of 2005 and 2004, respectively.
Selling, general, and administrative expenses increased to $53.7 million in the
first nine months of 2005 from $42.6 million in the first nine months of 2004,
an increase of $11.1 million, or 26%. The increase included $11.2 million of
selling, general, and administrative expenses in the 2005 period associated with
Kadant Johnson. In addition, the first quarter of 2004 included a $1.0 million
gain from the renegotiation of a series of agreements with one of our licensees,
which lowered selling, general, and administrative expenses in that period.
Offsetting these increases was a $0.7 million decrease in severance costs
associated with our European operations and
<
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> KADANT INC.
Results of Operations (continued)
a decrease of $0.5 million associated with the costs to implement the internal
control requirements of the Sarbanes-Oxley Act of 2002.
Research and development expenses were $3.6 million and $2.3 million in
the first nine months of 2005 and 2004, respectively, and represented 2% of
revenues in both periods. Included in the $1.3 million increase in research and
development expenses were $0.6 million of research and development expenses
associated with Kadant Johnson.
Interest Income
Interest income increased to $1.2 million in the first nine months of
2005 from $1.0 million in the first nine months of 2004 primarily due to higher
prevailing interest rates, offset in part by lower average cash balances
resulting from the acquisition of Kadant Johnson in May 2005.
Interest Expense
Interest expense increased to $1.3 million in the first nine months of
2005 from $14 thousand in the first nine months of 2004 due to interest expense
associated with the $60.0 million in borrowings entered into in May 2005 to fund
the Kadant Johnson acquisition.
Gain on Sale of Subsidiary
During the first nine months of 2004, we recognized a gain of $0.1
million from the sale of a subsidiary in Latin America for $0.4 million.
Restructuring and Unusual Items
During the first nine months of 2005, we recognized a curtailment gain of
$0.1 million associated with the employees who had been notified of their
termination pursuant to Kadant Lamort's restructuring plan and are no longer
eligible for benefits under Kadant Lamort's pension plan.
Income Taxes
Our effective tax rate was 27% and 31% in the first nine months of 2005
and 2004, respectively. The 27% effective tax rate in the first nine months of
2005 consisted of our 35% recurring tax rate, offset by a 7% non-recurring tax
benefit associated with a reimbursement of $0.9 million received from our former
parent company, Thermo Electron, pursuant to our tax matters agreement for tax
years in which we were included in Thermo Electron's consolidated tax return.
Also offsetting the 35% recurring rate was a 1% non-recurring tax benefit
resulting from a reduction of $0.1 million in tax reserves. The 31% effective
tax rate in the first nine months of 2004 consisted of a 35% recurring tax rate,
offset by a 3% non-recurring tax benefit resulting from a reduction of $0.4
million in tax reserves primarily associated with our foreign operations, as the
reserves were no longer required, and a 1% non-recurring tax benefit resulting
from a $0.2 million reduction in tax reserves for foreign tax credits associated
with the filing of the 2003 federal tax return.
Income from Continuing Operations
Income from continuing operations decreased to $8.9 million in the first
nine months of 2005 from $10.5 million in the first nine months of 2004, a
decrease of $1.6 million, or 16%. The primary reasons for this decrease can be
attributed to a decrease in operating income of $1.8 million (see discussion
above on Gross Profit Margin and Operating Expenses) and an increase in interest
expense of $1.3 million in the first nine months of 2005 associated with the
$60.0 million in borrowings used to fund the Kadant Johnson acquisition in May
2005.
<
34
> KADANT INC.
Results of Operations (continued)
Loss from Discontinued Operation
The loss from our discontinued operation decreased to $2.4 million in the
first nine months of 2005 from $4.5 million in the first nine months of 2004,
due primarily to a $1.4 million increase in revenues and a $2.1 million decrease
in cost of sales, offset by a $1.2 million decrease in the income tax benefit.
The largest component of the decrease in cost of sales was a $1.3 million
decrease in the warranty provision.
Liquidity and Capital Resources
Consolidated working capital, including the discontinued operation, was
$80.1 million at October 1, 2005, compared with $113.7 million at January 1,
2005. Included in working capital are cash and cash equivalents of $42.9 million
at October 1, 2005, compared with $82.1 million at January 1, 2005. At October
1, 2005, $24.5 million of cash and cash equivalents were held by our foreign
subsidiaries.
Our operating activities provided $11.2 million and $6.3 million of cash
during the first nine months of 2005 and 2004, respectively. The most
significant components of the cash provided in the first nine months of 2005
were the cash provided by income from continuing operations of $8.9 million, a
non-cash charge for depreciation and amortization expense of $4.9 million, and a
decrease in inventories, which provided cash of $2.4 million. Partially
offsetting the cash provided in the first nine months of 2005 was a decrease
primarily in the Papermaking Systems segment in accounts payable, which used
cash of $2.5 million and a decrease in other current liabilities, which used
cash of $2.4 million.
Our investing activities used cash of $104.3 million and $0.5 million in
the first nine months of 2005 and 2004, respectively. During the first nine
months of 2005, we used cash of $103.1 million to acquire the stock of The
Johnson Corporation. In addition, during the first nine months of 2005, $1.9
million of deferred acquisition costs paid in 2004 associated with the Kadant
Johnson acquisition were capitalized to goodwill. We used cash of $1.1 million
in the first nine months of 2005 to acquire the remaining minority interest in
one of our Kadant Johnson subsidiaries. We also used $1.9 million in the first
nine months of 2005 to purchase property, plant and equipment.
Our financing activities provided cash of $55.5 million in the first nine
months of 2005 and used cash of $6.1 million in the first nine months of 2004.
During the first nine months of 2005, we received proceeds of $60 million from a
term loan we entered into to fund a portion of the purchase price for Kadant
Johnson. We also increased our short- and long-term obligations by $4 million,
which represents additional consideration for Kadant Johnson to be paid over the
next five years. In the first nine months of 2005, we used cash of $3.3 million
to repay short- and long-term obligations. In addition, we used cash of $5.4
million to purchase our common stock on the open market. In the first nine
months of 2004, we used cash of $10.3 million to purchase our common stock on
the open market and received $4.8 million from the issuance of common stock in
connection with the exercise of employee stock options.
Our discontinued operation provided cash of $0.4 million and $2.7 million
in the first nine months of 2005 and 2004, respectively. The cash provided of
$0.4 million in the first nine months of 2005 was primarily due to an increase
in accrued warranty costs of $1.7 million and a decrease in accounts receivable
of $1.4 million, partially offset by the net loss from discontinued operation of
$2.4 million. On October 21, 2005, Kadant Composites LLC sold substantially all
of its assets for approximately $11.1 million in cash and the assumption of $1.4
million in liabilities, subject to a post-closing adjustment. The net cash
proceeds, after selling costs, will be approximately $10.5 million. Of the net
cash proceeds, $3.5 million has been deposited into an escrow fund to satisfy
warranty claims and approximately $1.3 million was deposited in escrow and
similar accounts to satisfy potential indemnifications associated with the sale.
On October 22, 2004, the American Jobs Creation Act of 2004 (the Act) was
signed into law. The Act created a temporary incentive for U.S. multinationals
to repatriate accumulated income earned outside the U.S. at an effective tax
rate of 5.25%. After evaluating the effect of the law on our unremitted foreign
earnings, we have determined that
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> KADANT INC.
Liquidity and Capital Resources (continued)
due to various factors, there is no benefit to us. Therefore, it will remain our
practice to reinvest indefinitely the earnings of our international
subsidiaries, except in instances in which we can remit such earnings without a
significant associated tax cost. Through October 1, 2005, we have not provided
U.S. income taxes on approximately $53.7 million of unremitted foreign earnings.
We believe that any U.S. tax liability due upon remittance of such earnings
would be immaterial due to the availability of U.S. foreign tax credits
generated from such remittance. The related foreign tax withholding, which would
be required if we remitted the foreign earnings to the U.S., would be
approximately $1.9 million.
In May 2004, our board of directors authorized the repurchase of up to
$30 million of our equity securities in the open market or in negotiated
transactions through May 18, 2005. Prior to January 1, 2005, we had repurchased
460,400 shares of our common stock under this authorization for $9.3 million.
For the period from January 2, 2005 through May 18, 2005, we repurchased an
additional 109,700 shares of our common stock under this authorization for $2.1
million. On May 6, 2005, our board of directors authorized the repurchase of up
to $15 million of our equity securities in the open market or in negotiated
transactions for the period from May 18, 2005 through May 18, 2006. As of
October 1, 2005, we have repurchased 1,200 shares of our common stock for $25
thousand in the second quarter of 2005 and 171,500 shares of our common stock
for $3.4 million in the third quarter of 2005 under this authorization. As of
October 1, 2005, there was $11.6 million remaining under this authorization for
the repurchase of our common stock.
We completed our acquisition of Kadant Johnson on May 11, 2005 for $101.5
million in cash, subject to a further post-closing adjustment as outlined in the
purchase agreement for Kadant Johnson, and $4.2 million in acquisition-related
costs. In addition to the cash consideration, we issued a letter of credit to
the sellers for $4 million, subject to adjustment, related to certain tax assets
of Kadant Johnson, the value of which we expect to realize. We also agreed in
the purchase agreement to an earn-out provision, based on the achievement of
certain revenue targets between the closing date and July 1, 2006, which could
increase the purchase price by up to $8 million. To fund $60 million of the
purchase price, we entered into a term loan and revolving credit facility (the
Credit Agreement) effective as of May 9, 2005 in the aggregate principal amount
of up to $85 million, including a $25 million revolver. The Credit Agreement
includes a $60 million five-year term loan, which is repayable in equal
quarterly installments over a five-year period. The aggregate principal to be
repaid each year is as follows: $4.5 million, $9 million, $10.5 million, $13.5
million, $15 million, and $7.5 million in 2005, 2006, 2007, 2008, 2009, and
2010, respectively. Interest on the revolving loan and the term loan accrues and
is payable quarterly in arrears at one of the following rates selected by us:
(a) the prime rate plus an applicable margin initially set at 0% for 2005, and
up to 0.25% thereafter or, (b) a eurocurrency rate plus an applicable margin
initially set at 1% for 2005, and between 0.625% and 1.25% thereafter. The
applicable margin is determined based upon our total debt to earnings before
interest, taxes, depreciation and amortization (EBITDA) ratio, as defined in the
Credit Agreement.
Our obligations under the Credit Agreement may be accelerated upon the
occurrence of an event of default under the Credit Agreement, which include
customary events of default including, without limitation, payment defaults,
defaults in the performance of affirmative and negative covenants, the
inaccuracy of representations or warranties, bankruptcy- and insolvency-related
defaults, defaults relating to such matters as ERISA, uninsured judgments and
the failure to pay certain indebtedness, and a change of control default.
In addition, the Credit Agreement contains negative covenants applicable
to us and our subsidiaries, including financial covenants requiring us to comply
with a maximum consolidated leverage ratio of 3.0, which is lowered to 2.5 in
certain circumstances, and a minimum consolidated fixed charge coverage ratio of
1.5, and restrictions on liens, indebtedness, fundamental changes, dispositions
of property, making certain restricted payments (including dividends and stock
repurchases), investments, transactions with affiliates, sale and leaseback
transactions, swap agreements, changing our fiscal year, negative pledges,
arrangements affecting subsidiary
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> KADANT INC.
Liquidity and Capital Resources (continued)
distributions, and entering into new lines of business. As of October 2, 2005,
we were in compliance with the covenants in the Credit Agreement.
The loans under the Credit Agreement are guaranteed by certain of our
domestic subsidiaries and secured by a pledge of 65% of the stock of our
first-tier foreign subsidiaries and our subsidiary guarantors pursuant to a
guarantee and pledge agreement effective as of May 9, 2005 in favor of JPMorgan
Chase Bank, N.A., as agent on behalf of the lenders.
We anticipate incurring restructuring and other one-time costs of
approximately $1.1 million in the fourth quarter of 2005, including
approximately $0.7 million to restructure several of our North American
operations in response to continued weak market conditions and an additional
$0.4 million of restructuring costs, net of an associated curtailment gain, in
connection with our previously announced restructuring at our Kadant Lamort
subsidiary. We are also evaluating potential restructuring actions that may be
undertaken at Kadant Johnson. Such actions may include rationalizing product
lines and consolidation of facilities. We will record the cost of restructuring
actions at Kadant Johnson as an increase to goodwill when decisions are made as
to the extent of such actions. We expect to finalize the restructuring plan no
later than one year following completion of the Kadant Johnson acquisition.
On November 3, 2005, we signed a non-binding letter of intent to acquire
a Chinese supplier of components to our stock-preparation product line for
approximately $20 million, subject to change. We anticipate funding the
acquisition, if completed, with additional borrowings. This acquisition is
subject to a number of conditions, including the negotiation and signing of a
definitive purchase agreement, satisfaction of customary conditions and
regulatory approvals.
Although we currently have no material commitments for capital
expenditures, we plan to make expenditures during the remainder of 2005 for
property, plant, and equipment of approximately $1.6 million.
Our future liquidity position will be primarily affected by the level of
cash flows from operations and the amount of cash expended on debt repayments,
capital projects, stock repurchases, or additional acquisitions, if any. We
believe that our existing resources, together with the cash available from our
credit facility and the cash we expect to generate from continuing operations,
will be sufficient to meet the capital requirements of our operations for the
foreseeable future.
Risk Factors
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, we wish to caution readers that the following
important factors, among others, in some cases have affected, and in the future
could affect, our actual results and could cause our actual results in 2005 and
beyond to differ materially from those expressed in any forward-looking
statements made by us, or on our behalf.
Our business is dependent on the condition of the pulp and paper industry.
We sell products primarily to the pulp and paper industry, which is a
cyclical industry. Generally, the financial condition of the global pulp and
paper industry corresponds to the condition of the general economy, as well as
to a number of other factors, including pulp and paper production capacity
relative to demand. In recent years, the industry in certain geographic regions,
notably North America, has been in a prolonged downcycle, resulting in depressed
pulp and paper prices, decreased spending, mill closures, consolidations, and
bankruptcies, all of which have adversely affected our business. As paper
companies consolidate in response to market weakness, they frequently reduce
capacity and postpone or even cancel capacity addition or expansion projects.
These cyclical downturns can cause our sales to decline and adversely affect our
profitability.
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> KADANT INC.
Risk Factors (continued)
Our business is subject to economic, currency, political, and other risks
associated with international sales and operations.
During the first nine months of 2005 and 2004, approximately 61% and 60%,
respectively, of our sales were to customers outside the United States,
principally in Europe and Asia. International revenues are subject to a number
of risks, including the following:
- 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, or adopt other
restrictions on foreign trade; and
- the protection of intellectual property in foreign countries may be
more difficult to enforce.
Although we seek to charge our customers in the same currency in which
our operating costs are incurred, fluctuations in currency exchange rates may
affect product demand and adversely affect the profitability in U.S. dollars of
products we provide in international markets where payment for our products and
services is made in their local currencies. Any of these factors could have a
material adverse impact on our business and results of operations.
A significant portion of our international sales has, and may in the
future, come from China. Our sales in China, our operation of manufacturing
facilities in China, and our planned acquisition of a manufacturing facility in
China expose us to increased risk in the event of changes in the policies of the
Chinese government, 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 restrictions. Orders
from customers in China, particularly for large systems that have been tailored
to a customer's specific requirements, involve increased credit risk due to
payment terms that are applicable to doing business in China. In addition, the
timing of these orders is often difficult to predict. In the last year, we
believe that the timing of the recognition of orders has been adversely affected
by policies of the Chinese government designed to control economic growth and
have had the effect of slowing down or delaying financing approvals for our
customers. We are unable to predict the potential effect of these policies on
the receipt of financing by our customers resulting in unexpected and
uncontrollable delays in the recognition of orders, which adversely affects our
expected financial results.
We are subject to intense competition in all our markets.
We believe that the principal competitive factors affecting the markets
for our products include quality, price, service, technical expertise, and
product innovation. 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 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, could increase if new companies enter the market or if
existing competitors expand their product lines or intensify efforts within
existing product lines.
Our debt may adversely affect our cash flow and may restrict our investment
opportunities.
On May 9, 2005, we entered into a Credit Agreement, consisting of a $60
million five-year term loan and a $25 million revolver. On May 11, 2005, we
borrowed $60 million to fund the acquisition of Kadant Johnson under the term
loan. We may also 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.
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> KADANT INC.
Risk Factors (continued)
Our leverage 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 repurchase our capital
stock,
- limiting our ability to acquire new products and technologies through
acquisitions or licensing, and
- limiting our flexibility in planning for, or reacting to, changes in
our business and the industries in which we compete.
Our indebtedness bears interest at floating rates pursuant to the terms
of the Credit Agreement. As a result, our interest payment obligations on this
indebtedness will increase if interest rates increase. To reduce the exposure to
floating rates, we have converted $36 million, or 60%, of our indebtedness to a
fixed rate of interest through an interest rate swap.
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 are unable to service our debt and fund our business,
we may be forced to reduce or delay capital expenditures or research and
development expenditures, seek additional financing or equity capital,
restructure or refinance our debt or sell assets. We may not be able to obtain
additional financing or refinance existing debt or sell assets on terms
acceptable to us or at all.
Restrictions in our Credit Agreement may limit our activities.
Our Credit Agreement contains, 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 and the ability of our subsidiaries to:
- 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 ratios under the terms
of our Credit 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 foreign 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, which could permit
acceleration of the debt under that instrument and require us to repay that debt
before its scheduled due date.
If an event of default occurs, we may not have sufficient funds available
to make the required payments under our indebtedness. If we are unable to repay
amounts owed under our Credit Agreement, those lenders may be entitled to
foreclose on and sell the collateral that secures our borrowings under that
agreement.
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> KADANT INC.
Risk Factors (continued)
Our inability to successfully integrate Kadant Johnson into our business could
have a material adverse effect on our business.
On May 11, 2005, we acquired Kadant Johnson. The integration of Kadant
Johnson into our business will involve the merger of employees, products and
services over multiple U.S. and international locations. We may not be
successful in integrating this business into our current structure, or in
obtaining the anticipated cost savings or synergies from the acquisition. To
meet our quarterly certification requirements and in anticipation of
incorporating Kadant Johnson into our 2006 Sarbanes-Oxley compliance process, we
will also be performing a detailed review of Kadant Johnson's internal control
structure to ensure that its controls over financial reporting are consistent
with our policies and procedures. Given the multi-location structure of the
Kadant Johnson business, this review will take significant time and effort,
similar to our Sarbanes-Oxley compliance efforts in 2004, and will involve
significant cost. During this process, we may identify control deficiencies in
addition to those disclosed elsewhere in this periodic report. Our ability to
realize the value of the goodwill and other intangibles recorded for this
acquisition will depend on the future cash flows of the Kadant Johnson business.
If these future cash flows are below what we anticipated, we may incur future
impairment losses associated with goodwill and intangibles, which could have a
material adverse effect on our results of operations.
Our inability to successfully identify and complete acquisitions or successfully
integrate any new or previous acquisitions could have a material adverse effect
on our business.
Our strategy includes the acquisition of technologies and businesses that
complement or augment our existing products and services. Promising acquisitions
are difficult to identify and complete for a number of reasons, including
competition among prospective buyers and the need for regulatory, including
antitrust, approvals. We do incur costs from time to time associated with
potential acquisitions, which are deferred during the due diligence phase.
Future operating results could be negatively impacted in any quarter in which we
determine that a potential acquisition will not close and these associated costs
are expensed. Any acquisition we may complete may be made at a substantial
premium over the fair value of the net assets of the acquired company. We may
not be able to complete future acquisitions, integrate any acquired businesses
successfully into our existing businesses, make such businesses profitable, or
realize anticipated cost savings or synergies, if any, from these acquisitions.
In addition, we have previously acquired several companies and businesses. As a
result of these acquisitions, we have recorded significant goodwill on our
condensed consolidated balance sheet, and in conjunction with the adoption of
SFAS No. 142, "Goodwill and Other Intangible Assets," in 2002, we recorded a
transitional impairment charge upon the adoption of this standard. Any future
impairment losses identified will be recorded as reductions to operating income,
which could have a material adverse effect on our results of operations. Our
ability to realize the value of the goodwill that we have recorded will depend
on the future cash flows of these businesses. These cash flows depend, in part,
on how well we have integrated these businesses.
Our inability to successfully complete the restructuring of our Kadant Lamort
subsidiary would have a negative effect on our future operating results.
In an effort to improve operating performance at our Kadant Lamort
subsidiary in France, we approved a restructuring of that subsidiary in the
fourth quarter of 2004 intended to strengthen Kadant Lamort's competitive
position in the European paper industry. The restructuring required compliance
with various legal requirements in France before implementation, including
consultations with Kadant Lamort's workers' council, which represents the
employees. The restructuring involves the reduction of approximately 100
full-time positions in France and we expect that substantially all of the
employees will be notified of their termination by the end of 2005. We expect
that this subsidiary will continue to experience operating losses until these
restructuring actions are completed. If we were unable to complete this
restructuring, our future operating results would be negatively impacted. There
is no assurance that Kadant Lamort will be able to regain profitability
following the completion of the restructuring.
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> KADANT INC.
Risk Factors (continued)
Our Kadant Composites LLC subsidiary is responsible for certain continued
warranty obligations associated with its former composites business, even though
it has disposed of this business.
On October 21, 2005, Kadant Composites LLC sold its composites business.
As part of the transaction, Kadant Composites LLC retained the warranty
obligation associated with products manufactured prior to the sale date. Our
consolidated results will continue to be impacted by these warranty obligations
and we may be unable to accurately predict the potential liabilities related to
these product warranties. In 2003 and 2004, Kadant Composites LLC experienced a
significant increase in warranty claims and warranty expense related to its
composite decking products including, but not limited to, contraction of certain
deck boards and excessive oxidation that affects the integrity of the plastic
used in some of its decking products. Included in the increased warranty expense
was the cost of exchanging material held by its distributors with new material
that, we believe, is not susceptible to this oxidation issue, and our best
estimate of future potential costs related to valid claims arising from
installed products. In the third quarter of 2005, Kadant Composites LLC
experienced a higher-than-expected level of warranty claims associated with
previously identified product issues. Although Kadant Composites LLC increased
the warranty provisions accordingly, the reserve established may not be
sufficient if Kadant Composites LLC incurs warranty claims higher than
anticipated. It is reasonably possible that the ultimate settlement of such
warranty claims may exceed the amount of the warranty reserve. In addition,
there can be no assurance that other problems will not develop. A continued high
level of warranty claims or expenses would have an adverse impact on the
warranty reserve and would adversely affect our consolidated results.
Natural gas is a significant cost in the manufacture of our fiber-based granular
products, and our results from operations will be adversely affected by
continued high natural gas costs.
We use natural gas in the production of our fiber-based granular
products. As a result of the recent hurricanes in New Orleans, Texas and Florida
and other factors, the price of natural gas has increased dramatically. We seek
to manage our exposure to natural gas price fluctuations by entering into
short-term forward contracts to purchase specified quantities of natural gas
from a supplier. We may not be able to effectively manage our exposure to
natural gas price fluctuations. Continued high costs of natural gas will
adversely affect our consolidated results if we are unable to effectively manage
our exposure or pass these costs on to customers in the form of surcharges.
We are dependent on a single mill for the raw material used in our fiber-based
granules, and we may not be able to obtain raw material on commercially
reasonable terms.
We are dependent on a single paper mill for the fiber used in the
manufacture of our fiber-based granular products. This mill has the exclusive
right to supply the papermaking byproducts used in the manufacturing process.
Although we believe our relationship with the mill is good, the mill could
decide not to renew its contract with us at the end of 2005, or may not agree to
renew on commercially reasonable terms. If this were to occur, we would be
forced to find an alternative supply for this raw material. We may be unable to
find an alternative supply on commercially reasonable terms or could incur
excessive transportation costs if an alternative supplier were found, which
would increase our manufacturing costs and might prevent prices for our products
from being competitive.
Our inability to protect our intellectual property could have a material adverse
effect on our business. In addition, third parties may claim that we infringe
their intellectual property, and we could suffer significant litigation or
licensing expense as a result.
We place considerable emphasis on obtaining 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. Our success depends in part on our
ability to develop patentable products and obtain and enforce patent protection
for our products both in the United States and in other countries. We own
numerous U.S. and foreign patents, and we intend to file additional
applications, as appropriate, for patents
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> KADANT INC.
Risk Factors (continued)
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. A patent relating to our fiber-based granular products
expired in the second quarter of 2004. As a result, we are subject to increased
competition in this market, which could have an adverse effect on this business.
In addition, competitors may design around 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 position. We could incur substantial costs to defend ourselves
in suits brought against us or in suits in which we may assert our patent rights
against others. An unfavorable outcome of any such litigation could have a
material adverse effect on our business and results of operations. 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.
We seek to protect trade secrets and proprietary know-how, in part,
through confidentiality 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.
Third parties may assert claims against us to the effect that we are
infringing on their intellectual property rights. We could incur substantial
costs and diversion of management resources in defending these claims, which
could have a material adverse effect on our business, financial condition, and
results of operations. In addition, parties making these claims could secure a
judgment awarding substantial damages, as well as injunctive or other equitable
relief, which could effectively block our ability to make, use, sell,
distribute, or market our products and services in the United States or abroad.
In the event that a claim relating to intellectual property is asserted against
us, or third parties not affiliated with us hold pending or issued patents that
relate to our products or technology, we may seek licenses to such intellectual
property or challenge those patents. However, we may be unable to obtain these
licenses on commercially reasonable terms, if at all, and our challenge of the
patents may be unsuccessful. Our failure to obtain the necessary licenses or
other rights could prohibit the sale, manufacture, or distribution of our
products and, therefore, could have a material adverse effect on our business,
financial condition, and results of operations.
Fluctuations in our quarterly operating results may cause our stock price to
decline.
Given the nature of the markets in which we participate and the effect of
Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition," 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 quarterly
operating results include:
- failure of our products to pass contractually agreed upon acceptance
tests, which would delay or prohibit recognition of revenues under
SAB No. 104;
- adverse changes in demand for and market acceptance of our products;
- competitive pressures resulting in lower sales prices of our products;
- adverse changes in the pulp and paper industry;
- delays or problems in our introduction of new 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; and
- changes in the timing of product orders.
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> KADANT INC.
Risk Factors (continued)
Anti-takeover provisions in our charter documents, under Delaware law, and in
our shareholder rights plan 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.
In addition, our board of directors has adopted a shareholder rights plan
intended to protect shareholders in the event of an unfair or coercive offer to
acquire our company and to provide our board of directors with adequate time to
evaluate unsolicited offers. Preferred stock purchase rights have been
distributed to our common shareholders pursuant to the rights plan. This rights
plan may have anti-takeover effects. The rights plan will cause substantial
dilution to a person or group that attempts to acquire us on terms that our
board of directors does not believe are in our best interests and those of our
shareholders and may discourage, delay, or prevent a merger or acquisition that
shareholders may consider favorable, including transactions in which
shareholders might otherwise receive a premium for their shares.
Our inability to successfully complete the acquisition of a manufacturing and
assembly plant in China could adversely affect our business.
Our strategy includes the ability to manufacture components and equipment
in low-cost regions such as China. We recently signed a non-binding letter of
intent to acquire a Chinese supplier of components to our stock-preparation
product line. This acquisition is subject to a number of conditions, including
the negotiation and signing of a definitive purchase agreement, satisfaction of
customary conditions and regulatory approvals, and there is no assurance that we
will be able to complete this acquisition on favorable terms or on a timely
basis. Our inability to successfully complete the acquisition would delay the
implementation of our strategy to manufacture parts and components for
stock-preparation equipment in a low-cost region, and could adversely affect our
ability to compete cost-effectively in Asia and other markets.
In anticipation of the completion of the acquisition of this supplier,
we are abandoning efforts to construct an assembly and manufacturing facility
outside Beijing. We may not be able to recoup our expenses to date associated
with the formation of our subsidiary to operate this facility, the initial
deposits on the land or the design and construction of the facility, and other
costs incurred in connection with this effort. If we were unsuccessful, we would
incur a charge against earnings that would adversely affect our financial
performance.
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> KADANT INC.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
We are exposed to market risk from changes in interest rates and foreign
currency exchange rates, which could affect our results of operations and
financial condition.
We borrowed $60 million in May 2005 to fund a portion of the Kadant
Johnson acquisition. Through an interest rate swap $36 million, or 60%, of the
borrowing has been converted to a fixed rate of interest. The remaining portion
of the borrowing bears a variable rate of interest based on LIBOR. A
100-basis-point increase in LIBOR rates at October 1, 2005, would increase our
annual pre-tax interest expense by $0.2 million.
Except as described above, our exposure to market risk from interest
rates and foreign currency exchange rates has not changed materially from our
exposure at year-end 2004.
Item 4 - Controls and Procedures
- --------------------------------
(a) Evaluation of Disclosure Controls and Procedures
In May 2005 we acquired Kadant Johnson, a private company with internal
control procedures that had not been designed for public company reporting.
Prior to our acquisition, Kadant Johnson's independent certified public
accountants identified material weaknesses in Kadant Johnson's controls over the
inventory reserve calculation and financial close procedures. Kadant Johnson
adjusted their inventory obsolescence reserve before the acquisition date by
restating prior periods to increase their reserve in compliance with our policy
and generally accepted accounting principles. In addition, we added internal
control procedures designed to ensure that Kadant Johnson's disclosure controls,
as they relate to Kadant's consolidated financial reporting, were adequate and
in compliance with our policies and procedures. As a result, we made a number of
changes to internal controls over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended) during the second and third quarters of 2005 including:
- reviewing and strengthening Kadant Johnson's tax accounting process,
- reviewing and strengthening Kadant Johnson's intercompany
reconciliation process,
- enhancing the documentation relating to Kadant Johnson's reserve
calculations for accounts receivable, warranty liability and
inventory obsolescence to comply with its policies,
- accelerating and improving Kadant Johnson's financial close
procedures, and
- appointing a new Director of Finance
We are continuing the process of evaluating Kadant Johnson's internal
controls and, as of the date of this quarterly report, have not yet completed
our evaluation. We do not anticipate that our evaluation of the internal
controls of Kadant Johnson will be complete by December 31, 2005 and, as
permitted, we will be excluding this acquisition from our reporting under
Section 404 of the Sarbanes-Oxley Act of 2002 at December 31, 2005.
Our management, under the supervision and with the participation of our
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of our disclosure controls and procedures as of October 1, 2005. The term
"disclosure controls and procedures," as defined in Securities Exchange Act
Rules 13a-15(e) and 15d-15(e), means controls and other procedures of a company
that are designed to ensure that information required to be disclosed by the
company in the reports that it files or submits under the Securities Exchange
Act is recorded, processed, summarized, and reported, within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Securities Exchange Act is accumulated and communicated to
the company's management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving their objectives, and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible
<
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> KADANT INC.
controls and procedures. Based upon the evaluation of our disclosure controls
and procedures as of October 1, 2005, our Chief Executive Officer and Chief
Financial Officer concluded that as of October 1, 2005, our disclosure controls
and procedures were effective at the reasonable assurance level.
(b) Changes in Internal Control Over Financial Reporting
Other than the changes resulting from our acquisition of Kadant Johnson
outlined above, there have not been any changes in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended) during the fiscal quarter ended
October 1, 2005 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
- --------------------------------------------------------------------
The following table provides information about purchases by us of our
common stock during the three months ended October 1, 2005:
Issuer Purchases of Equity Securities
-------------------------------------
Approximate Dollar
Total Number of Value of Shares that
Shares Purchased as May Yet Be
Total Number of Shares Average Price Paid Part of Publicly Purchased
Period Purchased (1) per Share Announced Plans Under the Plans
- ----------------------------------------------------------------------------------------------------------------------------
7/3/05 - 7/31/05 - - - $ 14,975,285
8/1/05 - 8/31/05 43,700 $19.16 43,700 $ 14,137,991
9/1/05 - 10/1/05 127,800 $19.67 127,800 $ 11,623,747
------- -------
Total: 171,500 $19.54 171,500
(1) On May 6, 2005, our board of directors authorized the repurchase of up to
$15 million of our equity securities in the open market or in negotiated
transactions for the period from May 18, 2005 through May 18, 2006. As of
October 1, 2005, we had repurchased 1,200 shares of our common stock for
$25 thousand in the second quarter of 2005 and 171,500 shares of our common
stock for $3.4 million in the third quarter of 2005 under this
authorization.
Item 6 - Exhibits
- -----------------
See Exhibit Index on the page immediately preceding exhibits.
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> KADANT INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 10th day of November, 2005.
KADANT INC.
/s/ Thomas M. O'Brien
----------------------------------------------------
Thomas M. O'Brien
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
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> KADANT INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
10.1 First Amendment to Credit Agreement among the Registrant, the
Foreign Subsidiary Borrowers from time to time parties thereto,
the several lenders from time to time parties thereto, and JP
Morgan Chase Bank, N.A., as Administrative Agent, dated October
21, 2005.
31.1 Certification of the Principal Executive Officer of the
Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a) Of the
Securities Exchange Act of 1934, as amended.
31.2 Certification of the Principal Financial Officer of the
Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act of 1934, as amended.
32 Certification of the Chief Executive Officer and the Chief
Financial Officer of the Registrant Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
47
Exhibit 10.1
FIRST AMENDMENT TO CREDIT AGREEMENT
FIRST AMENDMENT TO CREDIT AGREEMENT, dated as of October 21,
2005 (this "Amendment"), to the Credit Agreement, dated as of May 9, 2005 (the
---------
"Credit Agreement"), among KADANT INC. (the "Borrower"), the Foreign Subsidiary
---------------- --------
Borrowers from time to time parties thereto, the several lenders from time to
time parties thereto and JPMORGAN CHASE BANK, N.A., as Administrative Agent (the
"Administrative Agent").
--------------------
WHEREAS pursuant to the Credit Agreement, the Lenders have
agreed to extend credit to the Borrower;
WHEREAS the Borrower has requested that the Lenders issue
Letters of Credit denominated in Foreign Currencies, from time to time as
specified by the Borrower and/or a Foreign Subsidiary Borrower in compliance
with the Credit Agreement; and
WHEREAS the Borrower has requested that the Credit Agreement
be amended in the manner provided for in this Amendment, and the Lenders are
willing to agree to such amendments as provided for herein;
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used and not defined
-------------
herein shall have the meanings given to them in the Credit Agreement.
2. Amendment to Section 1.1 (Defined Terms). Section 1.1
---------------------------------------
of the Credit Agreement is hereby amended by inserting, in proper alphabetical
order, the following new or substitute defined terms and related definitions:
"Dollar L/C Obligations": at any time, an amount equal to the sum
----------------------
of (a) the aggregate then undrawn and unexpired amount of the then
outstanding Dollar Letters of Credit and (b) the aggregate amount of
drawings under Dollar Letters of Credit that have not then been
reimbursed pursuant to Section 3.5.
"Dollar Letter of Credit": any Letter of Credit denominated in
-----------------------
Dollars.
"L/C Obligations": the collective reference to Dollar L/C
---------------
Obligations and Multicurrency L/C Obligations.
"Letters of Credit": any Dollar Letter of Credit or Multicurrency
-----------------
Letter of Credit, as defined in Section 3.1(a).
"Multicurrency L/C Obligations": at any time, an amount equal to
-----------------------------
the sum of (a) the aggregate then undrawn and unexpired amount of the
then outstanding Multicurrency Letters of Credit and (b) the aggregate
amount of drawings under Multicurrency Letters of Credit that have not
then been reimbursed pursuant to Section 3.5.
"Multicurrency Letter of Credit": any Letter of Credit denominated
------------------------------
in one or more Foreign Currencies.
"Multicurrency Revolving Extensions of Credit": as to any
--------------------------------------------
Multicurrency Lender at any time, an amount equal to the sum of (a) the
aggregate principal amount (based on the Dollar Equivalent thereof) of
all Multicurrency Revolving Loans held by such Lender then outstanding
and (b) such Multicurrency Lender's Multicurrency Revolving Percentage
of the Multicurrency L/C Obligations then outstanding (based on the
Dollar Equivalent thereof).
"Multicurrency Revolving Subcommitment": as to any Lender, the
-------------------------------------
obligation of such Lender to make Multicurrency Revolving Loans and
participate in Multicurrency Letters of Credit in an aggregate
principal amount (based on the Dollar Equivalent thereof) not to exceed
the amount set forth under the heading "Multicurrency" opposite such
Lender's name on Schedule 1.1A or in the Assignment and Acceptance
pursuant to which such Lender became a party hereto, as the same may be
changed from time to time pursuant to the terms hereof. The original
amount of the Total Multicurrency Revolving Subcommitments shall equal
the Multicurrency Sublimit of the Revolving Facility.
"Multicurrency Sublimit": $15,000,000.
----------------------
"Outstanding Revolving Extensions of Credit": as to any Lender at
------------------------------------------
any time, an amount equal to the sum of (a) the aggregate principal
amount of all Revolving Loans (or the Dollar Equivalent thereof in the
case of Multicurrency Revolving Loans) held by such Lender then
outstanding, (b) such Lender's Revolving Percentage of the L/C
Obligations (or the Dollar Equivalent thereof in the case of
Multicurrency L/C Obligations) then outstanding, and (c) such Lender's
Revolving Percentage of the aggregate principal amount of Swingline
Loans then outstanding."
"Revolving Commitment": as to any Lender, the obligation of such
--------------------
Lender, if any, to make Revolving Loans (which includes Multicurrency
Revolving Loans) and participate in Swingline Loans and Letters of
Credit (which includes Multicurrency L/C Obligations) in an aggregate
principal and/or face amount not to exceed the amount set forth under
the heading "Revolver" opposite such Lender's name on Schedule 1.1A or
in the Assignment and Assumption pursuant to which such Lender became a
party hereto, as the same may be changed from time to time pursuant to
the terms hereof. The original amount of the Total Revolving
Commitments is $25,000,000.
3. Amendment to Section 2.4 (Revolving Commitments). (a)
-----------------------------------------------
Section 2.4(c) of the Credit Agreement is hereby amended by deleting clause (a)
in the first sentence thereof in its entirety and substituting in lieu thereof
the following:
"when added to such Multicurrency Lender's Multicurrency Revolving
Percentage of the other Multicurrency Revolving Extensions of Credit,
shall not exceed such Multicurrency Lender's Multicurrency Revolving
Subcommitment and"
(b) Section 2.4(c) of the Credit Agreement is hereby further
amended by deleting the phrase "Multicurrency Revolving Loans" in clause (ii)
thereof and substituting in lieu therefor the phrase "Multicurrency Revolving
Extensions of Credit".
4. Amendment to Section 2.12 (Mandatory Prepayments of
---------------------------------------------------
Multicurrency Revolving Loans). Section 2.12(a) of the Credit Agreement is
- -----------------------------
hereby amended by deleting such section in its entirety and substituting in lieu
thereof the following:
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"(a) If, on any Calculation Date, (i) the Outstanding Revolving
Extensions of Credit exceed the Revolving Commitments or (ii) the
Dollar Equivalent of the Multicurrency Revolving Extensions of
Credit outstanding, in each case, on such date exceeds 105% of the
Multicurrency Sublimit on such date, the Borrower and/or any
Foreign Subsidiary Borrower shall, without notice or demand,
immediately repay such of its outstanding Revolving Loans (or cash
collateralize its Letters of Credit in accordance with this
Section 2.12(a)) in an aggregate principal amount such that, after
giving effect thereto, (x) the Outstanding Revolving Extensions of
Credit do not exceed the Revolving Commitments and (y) the Dollar
Equivalent of the Multicurrency Revolving Extensions of Credit
outstanding on such date is equal to or less than the
Multicurrency Sublimit on such date, together with interest
accrued to the date of such payment or prepayment on the principal
so prepaid and any amounts payable under Section 2.21 in
connection therewith. The Borrower and/or any Foreign Subsidiary
Borrower may, in lieu of prepaying Revolving Loans in order to
comply with this paragraph, deposit amounts in a Cash Collateral
Account, for the benefit of the Lenders, equal to (A) the
aggregate principal amount of Revolving Loans required to be
prepaid or (B) the aggregate amount of such excess over the
Revolving Commitments or the Multicurrency Sublimit, as the case
may be. The Administrative Agent shall apply any cash deposited in
any Cash Collateral Account (to the extent thereof) to repay
Revolving Loans at the end of the Interest Periods therefor, as
the case may be, provided that (x) the Administrative Agent shall
--------
release to the Borrower and/or any applicable Foreign Subsidiary
Borrower from time to time such portion of the amount on deposit
in any Cash Collateral Account to the extent such amount is not
required to be so deposited in order for the Borrower and/or the
applicable Foreign Subsidiary Borrower to be in compliance with
this Section 2.12 and (y) the Administrative Agent may so apply
such cash at any time after the occurrence and during the
continuation of an Event of Default. "Cash Collateral Account"
-----------------------
means an account specifically established by the Borrower and/or
any Foreign Subsidiary Borrower with the Administrative Agent for
purposes of this Section 2.12 and hereby pledged to the
Administrative Agent and over which the Administrative Agent shall
have exclusive dominion and control, including the right of
withdrawal for application in accordance with this Section 2.12."
5. Amendment to Section 2.25 (Foreign Currency Exchange
----------------------------------------------------
Rate). (a) Section 2.25(a) of the Credit Agreement is hereby amended by adding
- ----
the following language after the phrase "pursuant to Section 2.5(b)" and before
the comma in the proviso contained in the first sentence:
"or the issuance of any Multicurrency Letter of Credit"
(b) Section 2.25(b) of the Credit Agreement is hereby amended
by deleting the phrase "Multicurrency Revolving Loans" where it appears therein
and substituting in lieu thereof, in each instance, the phrase "Multicurrency
Revolving Extensions of Credit".
6. Amendment to Section 3.1 (Letters of Credit). (a)
-------------------------------------------
Section 3.1(a) of the Credit Agreement is hereby amended by deleting the second
proviso in the first sentence thereof and substituting in lieu thereof the
following proviso:
"provided that such Issuing Lender shall not issue or extend any
--------
Letter of Credit if, after giving effect to such issuance or
extension, (i) the L/C Obligations would exceed the L/C
Commitment, (ii) the sum of Outstanding Revolving Extensions of
Credit would exceed
<
3
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the Total Revolving Commitments or (iii) the sum of the
Multicurrency Revolving Extensions of Credit would exceed the
Multicurrency Sublimit."
(b) Section 3.1(a) of the Credit Agreement is hereby further
amended by deleting the last sentence thereof in its entirety and substituting
in lieu thereof the following:
"Each Letter of Credit shall (i) be denominated in Dollars or any
one of the Foreign Currencies, as specified by the Borrower, and
(ii) expire no later than the earlier of (x) the first anniversary
of its date of issuance and (y) the date that is five Business
Days prior to the Revolving Termination Date, provided that any
--------
Letter of Credit with a one-year term may provide for the renewal
thereof for additional one-year periods (which shall in no event
extend beyond the date referred to in clause (y) above)."
7. Amendment to Schedule 1.1A. Schedule 1.1A of the Credit
--------------------------
Agreement is hereby amended by deleting such schedule in its entirety and
substituting in lieu thereof the document attached hereto as Schedule 1.1A.
8. No Other Amendments; Confirmation. Except as expressly
---------------------------------
amended hereby, the provisions of the Credit Agreement are and shall remain in
full force and effect. Nothing herein shall be deemed to entitle the Borrower to
a consent to, or a waiver, amendment, modification or other change of, any of
the terms, conditions, obligations, covenants or agreements contained in the
Credit Agreement or any Loan Document in similar or different circumstances.
9. Representations and Warranties. The Borrower hereby
------------------------------
represents and warrants to the Administrative Agent and the Lenders that, as of
the date hereof and after giving effect to the waivers and amendment contained
herein:
(a) each of the representations and warranties made by any
Loan Party in or pursuant to the Loan Documents shall be true and correct in all
material respects on and as of the date hereof, except where such
representations and warranties expressly relate to an earlier date, in which
case such representations and warranties shall have been true and correct in all
material respects as of such date;
(b) no Default or Event of Default has occurred and is
continuing; and
(c) the execution, delivery and performance by the Borrower of
this Amendment have been duly authorized by all necessary corporate and other
action and does not and will not require any registration with, consent or
approval of, notice to or action by, any person (including any Governmental
Authority) in order to be effective and enforceable.
10. Conditions Precedent to Effectiveness. This Amendment
-------------------------------------
shall become effective on the date on which the Administrative Agent shall have
received counterparts hereof duly executed and delivered by the Borrower and
each Lender.
11. Expenses. The Borrower agrees to promptly pay and/or
--------
reimburse the Administrative Agent for its invoiced out-of-pocket expenses in
connection with this Amendment (including the reasonable fees, charges and
disbursements of Simpson Thacher & Bartlett LLP, counsel for the Administrative
Agent).
12. Governing Law; Counterparts. (a) This Amendment and the
---------------------------
rights and obligations of the parties hereto shall be governed by, and construed
and interpreted in accordance with, the laws of the State of New York.
<
4
>
(b) This Amendment may be executed by one or more of the
parties to this Amendment on any number of separate counterparts, and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument. This Amendment may be delivered by facsimile transmission of the
relevant signature pages hereof.
<
5
>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their duly authorized officers as
of the day and year first above written.
KADANT INC.,
By: /s/ Thomas M. O'Brien
----------------------------------------
Name: Thomas M. O'Brien
Title: Executive Vice President and Chief
Financial Officer
JPMORGAN CHASE BANK, N.A. individually and
as Administrative Agent
By: /s/ Peter Killea
---------------------------------------------
Name: Peter M. Killea
Title: Vice President
<
6
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Signature page to the FIRST AMENDMENT TO THE CREDIT
AGREEMENT, dated as of October 21, 2005 (this
"Amendment"), to the Credit Agreement, dated as of May
---------
9, 2005 (the "Credit Agreement"), among KADANT INC.
----------------
(the "Borrower"), the FOREIGN SUBSIDIARY BORROWERS
--------
thereto, the LENDERS party thereto and JPMORGAN CHASE
BANK, N.A., as Administrative Agent (the
"Administrative Agent").
--------------------------------------------
BARCLAYS BANK PLC
By /s/ Vince Muldoon
-----------------------------------------
Title: Director
<
7
>
Signature page to the FIRST AMENDMENT TO THE CREDIT
AGREEMENT, dated as of October 21, 2005 (this
"Amendment"), to the Credit Agreement, dated as of May
---------
9, 2005 (the "Credit Agreement"), among KADANT INC.
----------------
(the "Borrower"), the FOREIGN SUBSIDIARY BORROWERS
--------
thereto, the LENDERS party thereto and JPMORGAN CHASE
BANK, N.A., as Administrative Agent (the
"Administrative Agent").
--------------------------------------------
CITIZENS BANK OF MASSACHUSETTS
By /s/ William E. Lingard
-----------------------------------------
Title: Senior Vice President
Signature page to the FIRST AMENDMENT TO THE CREDIT
AGREEMENT, dated as of October 21, 2005 (this
"Amendment"), to the Credit Agreement, dated as of May
---------
9, 2005 (the "Credit Agreement"), among KADANT INC.
----------------
(the "Borrower"), the FOREIGN SUBSIDIARY BORROWERS
--------
thereto, the LENDERS party thereto and JPMORGAN CHASE
BANK, N.A., as Administrative Agent (the
"Administrative Agent").
--------------------------------------------
LCL LE CREDIT LYONNAIS
By /s/ Mikael Andre
-----------------------------------------
Title: Directeur Regional Enterprises
Adjoint Champagne Aroenne
Signature page to the FIRST AMENDMENT TO THE CREDIT
AGREEMENT, dated as of October 21, 2005 (this
"Amendment"), to the Credit Agreement, dated as of May
---------
9, 2005 (the "Credit Agreement"), among KADANT INC.
----------------
(the "Borrower"), the FOREIGN SUBSIDIARY BORROWERS
--------
thereto, the LENDERS party thereto and JPMORGAN CHASE
BANK, N.A., as Administrative Agent (the
"Administrative Agent").
--------------------------------------------
NATIONAL CITY BANK
By /s/ Heather M. McIntyre
-----------------------------------------
Title: Vice President
Signature page to the FIRST AMENDMENT TO THE CREDIT
AGREEMENT, dated as of October 21, 2005 (this
"Amendment"), to the Credit Agreement, dated as of May
---------
9, 2005 (the "Credit Agreement"), among KADANT INC.
----------------
(the "Borrower"), the FOREIGN SUBSIDIARY BORROWERS
--------
thereto, the LENDERS party thereto and JPMORGAN CHASE
BANK, N.A., as Administrative Agent (the
"Administrative Agent").
--------------------------------------------
U.S. BANK, N.A.
By /s/ Derek S. Roudebush
-----------------------------------------
Title: Vice President
SCHEDULE 1.1A
Institution Total Allocated Term Loan A Revolver Multicurrency
- ------------------------------------------------------------------------------------------------------------------------------------
JPMorgan Chase Bank, N.A. $20,000,000.00 $14,117,647.06 $5,882,352.94 $3,529,411.76
US Bank, National Association 15,000,000.00 10,588,235.29 4,411,764.71 2,647,058.82
Credit Lyonnais SA 15,000,000.00 10,588,235.29 4,411,764.71 2,647,058.82
Citizens Bank of Massachusetts 12,500,000.00 8,823,529.41 3,676,470.59 2,205,882.35
National City Bank 12,500,000.00 8,823,529.41 3,676,470.59 2,205,882.35
Barclays Bank PLC 10,000,000.00 7.058,823.53 2,941,176.47 1,764,705.88
------------------------------------------------------------------------------------------
Total $85,000,000.00 $60,000,000.00 $25,000,000.00 $15,000,000.00
- ------------------------------------------------------------------------------------------------------------------------------------
EXHIBIT 31.1
CERTIFICATION
-------------
I, William A. Rainville, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the fiscal
quarter ended October 1, 2005 of Kadant Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: November 10, 2005 /s/ William A. Rainville
------------------------
William A. Rainville
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
-------------
I, Thomas M. O'Brien, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the fiscal
quarter ended October 1, 2005 of Kadant Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles ;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the
registrants internal control over financial reporting.
Date: November 10, 2005 /s/ Thomas M. O'Brien
-----------------------
Thomas M. O'Brien
Chief Financial Officer
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, the undersigned, William A. Rainville, Chief
Executive Officer, and Thomas M. O'Brien, Chief Financial Officer, of Kadant
Inc., a Delaware corporation (the "Company"), do hereby certify, to our best
knowledge and belief, that:
The Quarterly Report on Form 10-Q for the fiscal quarter ended October 1, 2005
of the Company fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and the information contained in this
Quarterly Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Dated: November 10, 2005 /s/ William A. Rainville
---------------------------
William A. Rainville
Chief Executive Officer
/s/ Thomas M. O'Brien
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Thomas M. O'Brien
Chief Financial Officer