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 April 2, 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 of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One Acton Place, Suite 202
Acton, Massachusetts 01720
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (978) 776-2000
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 5, 2005
---------------------------- --------------------------
Common Stock, $.01 par value 13,899,900
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
KADANT INC.
Condensed Consolidated Balance Sheet
(Unaudited)
Assets
April 2, January 1,
(In thousands) 2005 2005
- --------------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 80,473 $ 82,089
Accounts receivable, less allowances of $1,703 and $1,678 30,772 30,022
Unbilled contract costs and fees 11,574 10,258
Inventories (Note 5) 29,499 27,316
Deferred tax asset 6,723 6,691
Other current assets 7,334 6,703
Assets of discontinued operation (Note 11) 16,201 15,650
-------- --------
Total Current Assets 182,576 178,729
-------- --------
Property, Plant, and Equipment, at Cost 67,950 68,224
Less: accumulated depreciation and amortization 51,658 51,160
-------- --------
16,292 17,064
-------- --------
Other Assets 15,104 15,036
-------- --------
Goodwill 74,147 74,408
-------- --------
Total Assets $288,119 $285,237
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Condensed Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
April 2, January 1,
(In thousands, except share amounts) 2005 2005
- --------------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 23,754 $ 21,327
Accrued payroll and employee benefits 8,288 11,261
Accrued restructuring costs (Note 6) 9,937 10,026
Accrued warranty costs 3,755 3,582
Other current liabilities 13,002 11,305
Liabilities of discontinued operation (Note 11) 7,004 7,578
-------- --------
Total Current Liabilities 65,740 65,079
-------- --------
Deferred Income Taxes 4,358 4,370
-------- --------
Other Long-Term Liabilities 3,304 3,327
-------- --------
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 98,188 98,450
Retained earnings 131,898 129,173
Treasury stock at cost, 664,920 and 689,407 shares (17,513) (18,158)
Deferred compensation (137) (50)
Accumulated other comprehensive items (Note 2) 2,135 2,900
-------- --------
214,717 212,461
-------- --------
Total Liabilities and Shareholders' Investment $288,119 $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 Income
(Unaudited)
Three Months Ended
---------------------------
April 2, April 3,
(In thousands, except per share amounts) 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $ 50,744 $ 47,500
-------- --------
Costs and Operating Expenses:
Cost of revenues 31,982 28,033
Selling, general, and administrative expenses 14,894 13,771
Research and development expenses 1,048 888
-------- --------
47,924 42,692
-------- --------
Operating Income 2,820 4,808
Interest Income 472 329
Interest Expense (2) (8)
-------- --------
Income from Continuing Operations Before Provision for
Income Taxes 3,290 5,129
Provision for Income Taxes (203) (1,795)
-------- --------
Income from Continuing Operations 3,087 3,334
Loss from Discontinued Operation (net of income tax benefit of $195 and
$326) (Note 11) (363) (606)
-------- --------
Net Income $ 2,724 $ 2,728
======== ========
Basic Earnings (Loss) per Share (Note 3):
Continuing Operations $ .22 $ .23
Discontinued Operation (.02) (.04)
-------- --------
Net Income $ .20 $ .19
======== ========
Diluted Earnings (Loss) per Share (Note 3):
Continuing Operations $ .22 $ .23
Discontinued Operation (.03) (.04)
-------- --------
Net Income $ .19 $ .19
======== ========
Weighted Average Shares (Note 3):
Basic 13,926 14,222
======== ========
Diluted 14,211 14,603
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Condensed Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
---------------------------
April 2, April 3,
(In thousands) 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 2,724 $ 2,728
Loss from discontinued operation (Note 11) 363 606
-------- --------
Income from continuing operations 3,087 3,334
Adjustments to reconcile income from continuing operations to net cash
provided by operating activities:
Depreciation and amortization 1,016 933
Provision for losses on accounts receivable 79 159
Loss (gain) on sale of property, plant, and equipment 31 (159)
Other items 433 166
Changes in current accounts:
Accounts receivable (741) (1,633)
Unbilled contract costs and fees (1,306) 3,698
Inventories (2,098) 436
Other current assets (769) (171)
Accounts payable 2,378 (1,423)
Other current liabilities (1,662) (3,055)
-------- --------
Net cash provided by operating activities 448 2,285
-------- --------
Investing Activities:
Acquisition of minority interest in subsidiary - (318)
Purchases of property, plant, and equipment (166) (362)
Proceeds from sale of property, plant, and equipment - 1,274
Increase in deferred acquisition costs (280) -
Other, net 61 (47)
-------- --------
Net cash (used in) provided by investing activities (385) 547
-------- --------
Financing Activities:
Net proceeds from issuance of Company common stock 207 3,780
Repayments of long-term obligations - (217)
-------- --------
Net cash provided by financing activities 207 3,563
-------- --------
Exchange Rate Effect on Cash (398) 1,349
-------- --------
Net Cash Used in Discontinued Operation (1,488) (1,459)
-------- --------
(Decrease) Increase in Cash and Cash Equivalents (1,616) 6,285
Cash and Cash Equivalents at Beginning of Period 82,089 74,412
-------- --------
Cash and Cash Equivalents at End of Period $ 80,473 $ 80,697
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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KADANT INC.
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 April 2,
2005, and its results of operations and cash flows for the three-month periods
ended April 2, 2005 and April 3, 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 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.
Results for the first quarter of 2004 have been reclassified to reflect
the Company's composite building products business as a discontinued operation
(Note 11).
2. Comprehensive Income
Comprehensive income combines net income and "other comprehensive items,"
which represents 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 foreign currency contracts. The components of comprehensive income are
as follows:
Three Months Ended
--------------------------
April 2, April 3,
(In thousands) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income $ 2,724 $ 2,728
Other Comprehensive Items:
Foreign Currency Translation Adjustments (665) 2,036
Deferred Loss on Foreign Currency Contracts (100) (22)
-------- --------
(765) 2,014
-------- --------
Comprehensive Income $ 1,959 $ 4,742
======== ========
3. Earnings per Share
Basic and diluted earnings per share are calculated as follows:
Three Months Ended
---------------------------
April 2, April 3,
(In thousands) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations $ 3,087 $ 3,334
Loss from Discontinued Operation (363) (606)
-------- --------
Net Income $ 2,724 $ 2,728
======== ========
Basic Weighted Average Shares 13,926 14,222
Effect of Stock Options 285 381
-------- --------
Diluted Weighted Average Shares 14,211 14,603
======== ========
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. Earnings per Share (continued)
Three Months Ended
--------------------------
April 2, April 3,
(In thousands, except per share amounts) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) per Share:
Continuing Operations $ .22 $ .23
Discontinued Operation (.02) (.04)
-------- --------
Net Income $ .20 $ .19
======== ========
Diluted Earnings (Loss) per Share:
Continued Operations $ .22 $ .23
Discontinued Operation (.03) (.04)
-------- --------
Net Income $ .19 $ .19
======== ========
Options to purchase approximately 227,500 and 238,800 shares of common
stock for the first quarters 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. Warranty Obligations
The Company provides for the estimated cost of product warranties,
primarily using historical information and repair costs at the time product
revenue is recognized. 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.
The changes in the carrying amount of the Company's product warranties
for the first quarters of 2005 and 2004 are as follows:
Three Months Ended
--------------------------
April 2, April 3,
(In thousands) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at Beginning of Period $ 3,582 $ 3,661
Provision charged to income 853 799
Usage (674) (582)
Other, net (a) (6) 43
-------- --------
Balance at End of Period $ 3,755 $ 3,921
======== ========
(a) Represents the effects of currency translation.
See Note 11 for warranty information related to the discontinued operation.
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
5. Inventories
The components of inventories are as follows:
April 2, January 1,
(In thousands) 2005 2005
- ---------------------------------------------------------------------------------------------------------------------------------
Raw Materials and Supplies $ 12,885 $ 12,849
Work in Process 7,773 6,047
Finished Goods (includes $435 and $611 at customer locations) 8,841 8,420
-------- --------
$ 29,499 $ 27,316
======== ========
6. Restructuring Costs
In an effort to improve operating performance at the Papermaking Systems
segment's Kadant Lamort subsidiary in France, the Company approved a proposed
restructuring of that subsidiary on November 18, 2004. This restructuring was
initiated to strengthen Kadant Lamort's competitive position in the European
paper industry. Under French law, the proposed restructuring requires
consultation with Kadant Lamort's workers' council, which consists of elected
employees supported by trade union representatives, before implementation. The
restructuring primarily includes the reduction of up to 136 full-time positions
across all functions in France, and is expected to be implemented in 2005. The
Company accrued a restructuring charge of $9,235,000 in the fourth quarter of
2004, in accordance with Statement of Financial Accounting Standard (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. As a result of the restructuring, the Company expects to realize a
curtailment resulting in a reduction in the accrued liability associated with
Kadant Lamort's pension plan of approximately $800,000, which will be recognized
in 2005 when the restructuring plan has been implemented. 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.
A summary of the changes in accrued restructuring costs is as follows:
(In thousands) Severance
- -----------------------------------------------------------------------------------------------
Balance at January 1, 2005 $ 10,026
Usage (67)
Currency translation (22)
---------
Balance at April 2, 2005 $ 9,937
=========
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, and anticipates that all actions related to these
liabilities will be completed in 2005.
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. Business Segment Information
The Company has combined its operating entities into one operating
segment, Papermaking Systems, and a separate product line, Fiber-based Products.
In classifying operational entities into a particular segment, the Company
aggregated businesses with similar economic characteristics, products and
services, production processes, customers, and methods of distribution.
Three Months Ended
---------------------------
April 2, April 3,
(In thousands) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues:
Pulp and Papermaking Systems $ 47,571 $ 45,564
Fiber-based Products 3,173 1,936
-------- --------
$ 50,744 $ 47,500
======== ========
Income from Continuing Operations Before Provision for Income Taxes:
Pulp and Papermaking Systems (a) $ 3,374 $ 6,343
Corporate and Other (b,c) (554) (1,535)
-------- --------
Total Operating Income 2,820 4,808
Interest Income, Net 470 321
-------- --------
$ 3,290 $ 5,129
======== ========
Capital Expenditures:
Pulp and Papermaking Systems $ 140 $ 330
Corporate and Other (b) 26 32
-------- --------
$ 166 $ 362
======== ========
(a) Includes a pre-tax gain of $970 in the 2004 period, which resulted from renegotiating a series of agreements with one of
the Company's licensees.
(b) Corporate and other includes the results from the Company's Fiber-based Products business and corporate.
(c) Corporate primarily includes general and administrative expenses.
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
8. 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 the fair value 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
-----------------------
April 2, April 3,
(In thousands, except per share amounts) 2005 2004
- -----------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations $ 3,087 $ 3,334
Loss from Discontinued Operation (363) (606)
-------- --------
Net Income As Reported 2,724 2,728
Deduct: Total stock-based employee compensation expense determined under the
fair-value-based method for all awards, net of tax (202) (506)
-------- --------
Pro forma net income $ 2,522 $ 2,222
======== ========
Basic Earnings per Share:
As reported:
Income from continuing operations $ .22 $ .23
Net income $ .20 $ .19
Pro forma:
Income from continuing operations $ .21 $ .20
Net income $ .18 $ .16
Diluted Earnings per Share:
As reported:
Income from continuing operations $ .22 $ .23
Net income $ .19 $ .19
Pro forma:
Income from continuing operations $ .20 $ .19
Net income $ .18 $ .15
9. Employee Benefit Plans
Defined Benefit Pension Plan
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)
9. Employee Benefit Plans (continued)
The components of the net periodic benefit cost for the pension benefits
and other benefits plans in the first quarters of 2005 and 2004 are as follows:
Three Months Ended Three Months Ended
(In thousands) April 2, 2005 April 3, 2004
- ----------------------------------------------------------------------------------------------------------------------
Pension Other Pension Other
Benefits Benefits Benefits Benefits
-------- -------- -------- --------
Components of Net Periodic Benefit Cost:
Service cost $ 175 $ 34 $ 162 $ 4
Interest cost 253 40 257 17
Expected return on plan assets (351) - (342) -
Recognized net actuarial loss 1 8 - 9
Amortization of prior service cost 12 (12) 11 (15)
-------- -------- -------- --------
Net periodic benefit cost $ 90 $ 70 $ 88 $ 15
======== ======== ======== ========
The weighted-average assumptions used to determine net periodic benefit cost are as follows:
Discount rate 6.00% 4.70% 6.25% 5.40%
Expected long-term return on plan assets 8.50% - 8.50% -
Rate of compensation increase 4.00% 2.50% 4.00% 2.50%
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 benefits plans in 2005.
10. Recent Accounting Pronouncement
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. Based on the level of stock options outstanding as of
April 2, 2005 and assuming the continued use of the Black Scholes fair value
method, the effect of adoption of SFAS No. 123R on January 1, 2006 would not be
material.
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
11. 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 Company intends to sell the
composites business as a going concern and has engaged an investment banking
firm to sell this business. The Company plans to sell this business in 2005 at a
price that is reasonable compared to its carrying value. As a result of the
decision to sell the composites business, the Company evaluated whether the
composites business should be classified as a discontinued operation under SFAS
No. 144. 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.
Operating results for the composites business are as follows:
Three Months Ended
-------------------------
April 2, April 3,
(In thousands) 2005 2004
- -----------------------------------------------------------------------------------------------------------------------------
Revenues $ 5,236 $ 4,227
-------- --------
Loss Before Income Tax Benefit (558) (932)
Benefit for Income Taxes 195 326
-------- --------
Loss From Discontinued Operation $ (363) $ (606)
======== ========
The major classes of assets and liabilities of the discontinued operation included in the accompanying condensed
consolidated balance sheet are as follows:
April 2, January 1,
(In thousands) 2005 2005
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 234 $ 39
Accounts receivable, less allowances 2,769 2,252
Inventories 3,861 4,035
Other current assets 1,963 1,981
Property, plant, and equipment, at cost, net 6,791 6,760
Other assets 583 583
-------- --------
Total Assets 16,201 15,650
-------- --------
Accounts payable 1,085 1,446
Accrued warranty costs 4,070 4,327
Other current liabilities 949 905
Other liabilities 900 900
-------- --------
Total Liabilities 7,004 7,578
-------- --------
Net Assets $ 9,197 $ 8,072
======== ========
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
11. Discontinued Operation (continued)
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.
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 increased its warranty expense in 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.
A summary of the changes in accrued warranty costs in the first quarters
of 2005 and 2004 is as follows:
Three Months Ended
-------------------------
April 2, April 3,
(In thousands) 2005 2004
- -----------------------------------------------------------------------------------------------------------------------------
Balance at Beginning of Period $ 4,327 $ 869
Provision 406 496
Usage (663) (364)
-------- --------
Balance at End of Period $ 4,070 $ 1,001
======== ========
The Company likely will not be able to transfer all of the liabilities of
the composites business in a sale. Any changes associated with the carrying
value of liabilities which are not assumed by a buyer would continue to impact
the Company's consolidated results after the sale is completed.
12. Subsequent Event
On May 11, 2005, the Company acquired all of the outstanding stock of The
Johnson Corporation (Johnson), a leading supplier of steam and condensate
systems, components, and controls used primarily in the dryer section of
papermaking and during the production of steel, plastics, rubber, and textiles.
Johnson was a privately held company based in Three Rivers, Michigan with
approximately 575 employees and 2004 revenues of $76 million based on the
December 31, 2004 audited financial statements provided by Johnson. The purchase
price for the acquisition was $102
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
12. Subsequent Event (continued)
million in cash (the Base Purchase Price), and is subject to post-closing
adjustments outlined in the Purchase Agreement. On May 11, 2005 the purchase
price was adjusted to $101.5 million, subject to a further post-closing
adjustment. 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 Base Purchase Price by
up to $8 million. In addition to the cash consideration, the Company issued a
letter of credit to the sellers for $4 million, subject to adjustment, related
to certain tax assets of Johnson, the value of which the Company expects to
realize.
Pursuant to the Purchase Agreement, at the closing of the Johnson
acquisition $12.75 million of the Base Purchase Price was deposited into an
escrow fund to secure certain indemnification obligations of the sellers and to
satisfy certain obligations of the sellers to adjust the Base Purchase Price.
To fund a portion of the purchase price, the Company also 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 Kadant (a) the prime rate plus an
applicable margin (up to .25%) or (b) a eurocurrency rate plus an applicable
margin (up to 1.25%). The applicable margin is determined based upon Kadant's
total debt to earnings before interest, taxes, depreciation and amortization
(EBITDA) ratio.
The obligations of Kadant under the Credit Agreement may be accelerated
upon the occurrence of an event of default under the Credit Agreement, which
includes 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
Kadant and its subsidiaries, including financial covenants requiring Kadant to
comply with a maximum consolidated leverage ratio of either 2.5 or 3.0 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 its fiscal year, negative pledges, arrangements affecting
subsidiary distributions, entering into new lines of business, and amending the
documents relating to the Johnson acquisition.
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
first-tier foreign subsidiaries of Kadant and the 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.
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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 are also a manufacturer of granules made from
papermaking byproducts. Our continuing operations consist of one operating
segment, Pulp and Papermaking Systems (Papermaking Systems), and a separate
product line, Fiber-based Products. We aggregate into the Papermaking Systems
segment our businesses with similar economic characteristics, products and
services, production processes, customers, and methods of distribution. We also
manage a composite building products business, which is presented as a
discontinued operation in the accompanying condensed consolidated financial
statements as a result of our decision to sell that business.
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. 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 recycled paper;
- 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; and
- 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.
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KADANT INC.
Overview (continued)
Fiber-Based Products
We produce biodegradable, absorbent granules from papermaking byproducts
for use primarily as carriers for agricultural, home lawn and garden, and
professional lawn, turf and ornamental applications, as well as for oil and
grease absorption.
Discontinued Operation
We produce composite building products, including decking and railing
systems and roof tiles, made from recycled fiber, plastic, and other material,
which are marketed through distributors primarily to the building industry.
On October 27, 2004, our board of directors approved a plan and
management committed to sell our composites business after making a
determination that the business no longer aligned with our long-term strategy.
We intend to sell the composites business as a going concern and are working
with an investment banking firm to sell this business. We plan to sell the
composites business by the end of 2005 at a price that is reasonable compared to
its carrying value. The composites business had total assets and liabilities of
$16.2 million and $7.0 million, respectively, as of April 2, 2005, including
accrued warranty costs of $4.1 million, which we may not be able to transfer in
a sale. In addition, revenues and net loss for the first quarter of 2005 were
$5.2 million and $0.4 million, respectively. The composites business has been
presented as a discontinued operation in the accompanying condensed consolidated
financial statements for all periods presented.
International Sales
During the first quarters of 2005 and 2004, approximately 57% and 59%,
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
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.
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.
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KADANT INC.
Overview (continued)
Industry and Business Outlook
Our products are primarily sold to the pulp and paper industry. Although
the paper industry had been in a prolonged downcycle for the past several years,
the performance of paper producers, especially in North America, has been
gradually improving over the past few quarters. Increased operating rates and
improved pricing has helped to increase the profitability of paper producers
during this period, although their profitability is still being negatively
affected by higher operating costs, especially higher energy costs. We believe
paper companies are still cautious about increasing their capital and operating
spending in the current market environment. We expect, however, if the market
recovers, paper companies will increase their capital and operating spending,
which will 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) expanding our business in China, (ii) increasing our
higher-margin parts and consumables businesses across all our product lines,
(iii) sourcing the manufacture of non-proprietary components from third-party
suppliers, (iv) shifting more production to our lower-cost manufacturing
facilities, and (v) lowering our manufacturing overhead costs throughout the
business. 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 proposed restructuring of that subsidiary on
November 18, 2004. This restructuring is intended to strengthen Kadant Lamort's
competitive position in the European paper industry. Under French law, the
proposed restructuring requires consultation with Kadant Lamort's workers'
council, which represents the employees, before implementation. The
restructuring primarily includes the reduction of up to 136 full-time positions
in France, and is expected to be implemented in 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. Negotiations with
the workers' council are ongoing and Kadant Lamort has experienced intermittent
work stoppages by employees protesting the proposed restructuring. Kadant Lamort
has developed contingency plans to reduce the risk of the work stoppages
affecting its ability to meet its contractual commitments. We expect that Kadant
Lamort will continue to experience significant operating losses until these
restructuring actions are completed.
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, we plan to
build 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 is often 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 our new facility in China as a base for
increasing our aftermarket business, which we believe will be more predictable.
On May 11, 2005, we acquired all of the outstanding stock of The Johnson
Corporation (Johnson), a leading supplier of steam and condensate systems,
components, and controls used primarily in the dryer section of papermaking and
during the production of steel, plastics, rubber, and textiles. Johnson was a
privately held company based in Michigan with approximately 575 employees at
operations in North and South America, Europe and Asia. Johnson's primary
products include rotary joints, syphons, and related steam and condensate
systems. The Base Purchase price for the acquisition was $102 million in cash,
subject to post-closing adjustments. On May 11, 2005, the purchase price was
adjusted to $101.5 million, subject to a further post-closing adjustment as
outlined in the Purchase Agreement for Johnson. 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 Base Purchase Price by up to $8 million. In addition to the cash
consideration, we issued a letter of credit to the sellers for
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KADANT INC.
Overview (continued)
$4 million, subject to adjustment, related to certain tax assets of Johnson, the
value of which we expect to realize.
Our 2005 guidance reflects expected revenues and earnings per share from
continuing operations, which excludes the results from our composite building
products business (accounted for as a discontinued operation). For the second
quarter of 2005, we expect to earn between $.19 to $.21 per diluted share, on
revenues of $54 to $56 million. For the full year, we expect to earn between
$.86 to $.96 per diluted share, on revenues of $205 to $215 million. This
guidance does not include any impact from the acquisition of Johnson, including
the future amortization expense associated with acquired intangibles and the
future impact on interest income and expense due to the acquisition.
Results of Operations
First Quarter 2005 Compared With First Quarter 2004
- ---------------------------------------------------
The following table sets forth, for the first fiscal quarters of 2005 and
2004, our unaudited condensed consolidated statement of income expressed as a
percentage of total revenues. The results of operations for the fiscal quarter
ended April 2, 2005 are not necessarily indicative of the results to be expected
for the full fiscal year.
Three Months Ended
-------------------------
April 2, April 3,
2005 2004
- -----------------------------------------------------------------------------------------------------------------------------
Revenues 100.0% 100.0%
----- -----
Costs and Operating Expenses:
Cost of revenues 63.0 59.0
Selling, general, and administrative expenses 29.3 29.0
Research and development expenses 2.1 1.9
----- -----
94.4 89.9
----- -----
Operating Income 5.6 10.1
Interest Income, net 0.9 0.7
----- -----
Income from Continuing Operations Before Provision for
Income Taxes 6.5 10.8
Provision for Income Taxes 0.4 3.8
----- -----
Income from Continuing Operations 6.1 7.0
Loss from Discontinued Operation (0.7) (1.3)
----- -----
Net Income 5.4% 5.7%
===== =====
Revenues
Revenues increased to $50.7 million in the first quarter of 2005 from
$47.5 million in the first quarter of 2004, an increase of $3.2 million, or 7%.
Revenues in the first quarter of 2005 include a favorable effect of currency
translation of $1.0 million, or 2%, due to a weaker U.S. dollar relative to most
of the functional currencies in countries in which we operate.
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KADANT INC.
Results of Operations (continued)
Revenues for the first quarters of 2005 and 2004 from our Papermaking
Systems segment and our Fiber-based Products business are as follows:
Three Months Ended
---------------------------
April 2, April 3,
(In thousands) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues:
Pulp and Papermaking Systems $ 47,571 $ 45,564
Fiber-based Products 3,173 1,936
-------- --------
$ 50,744 $ 47,500
======== ========
Pulp and Papermaking Systems Segment. Revenues at the Papermaking Systems
segment increased to $47.6 million in the first quarter of 2005 from $45.6
million in the first quarter of 2004, an increase of $2.0 million, or 4%.
Revenues in the first quarter of 2005 include 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
April 2, April 3, Increase Currency
(In millions) 2005 2004 (Decrease) Translation
- --------------------------------------------------------------------------------------------------------------------------------
Product Line:
Stock-Preparation Equipment $ 24.5 $ 21.6 $ 2.9 $ 2.4
Accessories 15.3 16.0 (0.7) (1.1)
Water-Management 7.4 7.6 (0.2) (0.3)
Other 0.4 0.4 - -
-------- -------- ---------- -------
$ 47.6 $ 45.6 $ 2.0 $ 1.0
======== ======== ========== =======
Revenues from the segment's stock-preparation equipment product line
increased $2.9 million, or 13%, in the first quarter of 2005 compared to the
first quarter of 2004, including a $0.5 million increase from the favorable
effect of currency translation. Excluding the effect of currency translation,
revenues from the stock-preparation equipment product line increased $2.4
million, or 11%, due to a $2.2 million, or 34%, increase in sales in our North
American-based business and a $1.1 million, or 13%, increase in sales in Europe.
These increases were offset in part by a $0.9 million, or 15%, decrease in sales
in China in the first quarter of 2005 due to continued customer delays in
obtaining financing.
Revenues from the segment's accessories product line decreased $0.7
million, or 4%, in the first quarter of 2005 compared to the first quarter of
2004, including a $0.4 million increase from the favorable effect of currency
translation. Excluding the effect of currency translation, revenues from the
segment's accessories product line decreased $1.1 million, or 7%, due to a
decrease in sales in North America and Europe.
Revenues from the segment's water-management product line decreased $0.2
million, or 3%, in the first quarter of 2005 compared to the first 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 decreased $0.3 million, or 4%, due
primarily to a decrease in capital sales in North America.
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KADANT INC.
Results of Operations (continued)
Fiber-Based Product. Revenues from the Fiber-based Products business
increased $1.2 million, or 64%, to $3.2 million in the first quarter of 2005
from $1.9 million in the first quarter of 2004, primarily as a result of an
increase in sales to an existing customer of Biodac, our product family of
biodegradable granules that we produce from papermaking byproducts.
Gross Profit Margin
Gross profit margin was 37% in the first quarter of 2005 compared to 41%
in the first quarter of 2004.
Gross profit margins for the first quarters of 2005 and 2004 for our
Papermaking Systems segment and our Fiber-based Products business are as
follows:
Three Months Ended
---------------------------
April 2, April 3,
2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Profit Margin:
Pulp and Papermaking Systems 36.6% 41.3%
Fiber-based Products 42.9 34.3
---- ----
37.0% 41.0%
The gross profit margin at the Papermaking Systems segment decreased to
37% in the first quarter of 2005 from 41% in the first quarter of 2004 primarily
due to lower margins at our Kadant Lamort subsidiary, which is undergoing a
major restructuring of its business. Our product gross margins were also lower
due to an unfavorable product mix towards lower margin capital products
primarily in our stock-preparation equipment product-line from sales of capital
equipment in North America and China. The gross profit margin at the Fiber-based
Products business increased to 43% in the first quarter of 2005 from 34% in the
first quarter of 2004 due to greater operating efficiencies as a result of
higher production levels in 2005.
Operating Expenses
Selling, general, and administrative expenses as a percentage of revenues
remained constant at 29% in the first quarters of 2005 and 2004. Selling,
general, and administrative expenses increased to $14.9 million in the first
quarter of 2005 from $13.8 million in the first quarter of 2004, an increase of
$1.1 million, or 8%, primarily due to a gain of approximately $1.0 million in
the first quarter of 2004. The gain in the first quarter of 2004 resulted from
the renegotiation of a series of agreements with one of our licensees, which
lowered selling, general, and administrative expenses in that period. In
addition, an increase of $0.3 million in the first quarter of 2005 was due to
the unfavorable impact of foreign currency translation in the Papermaking
Systems segment compared to the first quarter of 2004.
Research and development expenses were $1.0 million and $0.9 million in
the first quarters of 2005 and 2004, respectively, and represented 2% of
revenues in both periods.
Interest Income
Interest income increased to $0.5 million in the first quarter of 2005
from $0.3 million in the first quarter of 2004 primarily due to higher
prevailing interest rates.
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KADANT INC.
Results of Operations (continued)
Income Taxes
Our effective tax rate was 6% and 35% in the first quarters of 2005 and
2004, respectively. The 6% effective tax rate in the first quarter of 2005
consisted of our 33% recurring tax rate, offset by a 27% 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.
The 33% effective tax rate in the first quarter of 2005 decreased compared with
the first quarter of 2004 primarily due to a decrease in the foreign blended
rate.
Income from Continuing Operations
Income from continuing operations decreased to $3.1 million in the first
quarter of 2005 from $3.3 million in the first quarter of 2004, a decrease of
$0.2 million, or 7%. This decrease was primarily due to a $2.0 million decrease
in pre-tax operating income, offset by a $0.9 million tax benefit associated
with a reimbursement 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.
Loss from Discontinued Operation
Loss from discontinued operation decreased to $0.4 million in the first
quarter of 2005 from $0.6 million in the first quarter of 2004, due primarily to
a $0.4 million decrease in pre-tax operating losses.
Liquidity and Capital Resources
Consolidated working capital, including the discontinued operation, was
$116.8 million at April 2, 2005, compared with $113.7 million at January 1,
2005. Included in working capital are cash and cash equivalents of $80.5 million
at April 2, 2005, compared with $82.1 million at January 1, 2005. At April 2,
2005, $19.4 million of cash and cash equivalents were held by our foreign
subsidiaries.
Our operating activities provided $0.4 million and $2.3 million of cash
during the first quarters of 2005 and 2004, respectively. Cash was provided by
income from continuing operations of $3.1 million and a non-cash charge for
depreciation and amortization expense of $1.0 million in the first quarter of
2005. In addition, in the first quarter of 2005, an increase in accounts payable
provided an increase in cash of $2.4 million. This increase in accounts payable
was primarily associated with the purchase of inventory for new orders at the
Papermaking Systems segment. In the first quarter of 2005 cash of $2.1 million
was used to purchase inventory, and a decrease in other current liabilities used
cash of $1.7 million, primarily due to a decrease in accrued payroll and
employee benefits as a result of employee incentive payments made in the first
quarter of 2005. In addition, an increase in unbilled contract costs and fees
used cash of $1.3 million in the first quarter of 2005 and an increase in
accounts receivable resulted in a use of cash of $0.7 million, primarily at the
Papermaking Systems segment, due to the timing of payments.
Our investing activities used cash of $0.4 million in the first quarter
of 2005 compared with providing $0.5 million of cash in the first quarter of
2004. During the first quarter of 2005, we purchased $0.2 million of property,
plant, and equipment and incurred $0.3 million of deferred acquisition costs
associated with the Johnson acquisition.
Our financing activities provided cash of $0.2 million and $3.6 million
in the first quarters of 2005 and 2004, respectively. During the first quarter
of 2005, we received proceeds of $0.2 million from the issuance of common stock
in connection with the exercise of employee stock options.
Our discontinued operation used cash of $1.5 million in the first
quarters of 2005 and 2004. The use of cash of $1.5 million in the first quarter
of 2005 was primarily due to the loss from discontinued operation of $0.4
million, an
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KADANT INC.
Liquidity and Capital Resources (continued)
increase in accounts receivable of $0.5 million, and a decrease in accounts
payable of $0.4 million.
On October 22, 2004, the American Jobs Creation Act of 2004 (the Act) was
signed into law. The Act creates a temporary incentive for U.S. multinationals
to repatriate accumulated income earned outside the U.S. at an effective tax
rate of 5.25%. On December 21, 2004, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position, "Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004" (FAS No. 109-2). FAS No. 109-2 allows companies additional time to
evaluate the effect of the law on unrepatriated foreign earnings, and whether
they continue to qualify for the exception in SFAS No. 109, "Accounting for
Income Taxes," to recognizing deferred tax liabilities and would require
explanatory disclosures from those who need the additional time. Through April
2, 2005, we have not provided U.S. income taxes on approximately $44.5 million
of unremitted foreign earnings because such earnings were intended to be
indefinitely reinvested outside the U.S. Whether we will ultimately utilize and
benefit from the provisions of the Act depends on a number of factors, including
the results of reviewing future Congressional guidance before a decision can be
made. Until that time, we will make no change in our current intention to
indefinitely reinvest accumulated earnings of our foreign subsidiaries, except
in instances in which we can remit such earnings without a significant
associated tax cost. We do not expect that this will have a material adverse
effect on our current liquidity. Absent the repatriation incentive of the Act,
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. As of April 2, 2005, we had repurchased
460,400 shares of our common stock under this authorization for $9.3 million.
For the period from April 2, 2005 through May 5, 2005, we repurchased an
additional 39,700 shares of our common stock under this authorization for $0.7
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.
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 $3.8 million, including $1.2
million for our manufacturing and assembly facility in China to support our
stock-preparation equipment business.
Our future liquidity position will be primarily affected by the acquisition
of Johnson, 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 the 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.
We completed our acquisition of Johnson on May 11, 2005 for $101.5
million, subject to a further post-closing adjustment as outlined in the
Purchase Agreement for Johnson. 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. 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 Johnson, the value of which we expect to
realize. 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 Kadant (a) the prime rate plus an applicable margin
(up to .25%) or (b) a eurocurrency
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KADANT INC.
Liquidity and Capital Resources (continued)
rate plus an applicable margin (up to 1.25%). The applicable margin is
determined based upon Kadant's total debt to earnings before interest, taxes,
depreciation and amortization (EBITDA) ratio.
The obligations of Kadant under the Credit Agreement may be accelerated
upon the occurrence of an event of default under the Credit Agreement, which
includes 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
Kadant and its subsidiaries, including financial covenants requiring Kadant to
comply with a maximum consolidated leverage ratio of either 2.5 or 3.0 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 its fiscal year, negative pledges, arrangements affecting
subsidiary distributions, entering into new lines of business, and amending the
documents relating to the Johnson acquisition.
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
first-tier foreign subsidiaries of Kadant and the 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.
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.
Our business is subject to economic, currency, political, and other risks
associated with international sales and operations.
During the first quarters of 2005 and 2004, approximately 57% and 59%,
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;
< 23
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KADANT INC.
Risk Factors (continued)
- 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. An increase in revenues, as well as our planned
operation of a manufacturing and assembly facility in China, will 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.
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 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.
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.
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
< 24
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KADANT INC.
Risk Factors (continued)
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.
Our inability to successfully integrate Johnson into our business could have a
material adverse effect on our business.
On May 11, 2005, we acquired Johnson, for approximately $102 million in
cash, subject to post-closing and other adjustments outlined in the Purchase
Agreement. Over the coming months, we will be working to integrate Johnson into
our business. This integration will be complex, involving 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 Johnson into our 2006 Sarbanes-Oxley compliance
process, we will also be performing a detailed review of Johnson's internal
control structure to ensure that its controls over financial reporting are
consistent with Kadant's policies and procedures. Given the multi-location
structure of the Johnson business, this review will take significant time and
effort, similar to Kadant's Sarbanes-Oxley compliance efforts in 2004, and will
involve significant cost. We may identify control deficiencies during this
process. Our ability to realize the value of the goodwill and other intangibles
to be recorded for this acquisition will depend on the future cash flows of the
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.
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KADANT INC.
Risk Factors (continued)
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 proposed 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 proposed restructuring of that subsidiary on
November 18, 2004. This restructuring is intended to strengthen Kadant Lamort's
competitive position in the European paper industry. Under French law, the
proposed restructuring requires consultation with Kadant Lamort's workers'
council, which represents the employees, before implementation. The
restructuring primarily includes the reduction of up to 136 full-time positions
in France, and is expected to be implemented in 2005. Negotiations with the
workers' council are ongoing and Kadant Lamort has experienced intermittent work
stoppages by employees protesting the proposed restructuring. 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.
We may not be successful in selling our composite building products business.
On October 27, 2004, our board of directors approved a plan to sell our
composite building products business (the "composites business"). We cannot
predict on what terms we may sell the business or if we will be successful in
selling this business at all. There are certain liabilities associated with our
composites business, such as warranty obligations, which we will likely not be
able to transfer to a future buyer. If we are not able to transfer these
liabilities with the sale, it could have a material adverse effect on our future
results of operations. Under applicable accounting rules, the results of the
composites business will be reported as a discontinued operation; however, we
will continue to report these results in our consolidated financial statements.
For as long as we continue to own the composite building products business, our
consolidated performance will continue to be subject to the risks and
uncertainties related to that business, including the risks identified in the
following Risk Factors.
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KADANT INC.
Risk Factors (continued)
Our performance in the market for composite building products will depend on our
ability to manufacture and distribute our composite building products.
Development, formulation, manufacturing, and commercialization of our
composite building products require significant testing and technical expertise
and our efforts may not be successful. Growth of our composite building products
business requires ongoing market acceptance. Our composite building products
business is subject to intense competition, particularly in the decking market,
from traditional wood products and other composite lumber manufacturers, many of
whom have greater financial, technical, and marketing resources than we do. As a
result, we may be unable to compete successfully in this market. We have limited
experience manufacturing these products at volume, cost, and quality levels
sufficient to satisfy expected demand, and we have in the past and may continue
to encounter difficulties in connection with any large-scale manufacturing or
commercialization of these products. Our capacity may not be sufficient to meet
demand without significant additional investment. In addition, the majority of
our production is dependent upon a single piece of equipment. If that equipment
were to fail for an extended period of time, it would have a material adverse
effect on our revenues from this business in that period. We rely on
distributors in the building products industry to market, distribute, and sell
our products. We may be unable to produce our products in sufficient quantity to
interest or retain these distributors or to add new distributors. In addition,
the announcement of our proposed sale of the composites business and warranty
issues may impact our relationships with our existing and proposed new
distributors and may cause them to reduce or curtail their purchases of our
products. If we are unable to distribute our products effectively, our revenues
will decline and we will have to incur additional expenses to market these
products directly.
The failure of our composite building products to perform over long periods of
time could result in potential liabilities.
Our composite building products are relatively new, have not been on the
market for long periods of time, and may be used in applications about which we
may have little knowledge or limited experience. Because we have limited
historical experience, we may be unable to predict the potential liabilities
related to product warranty or product liability issues. If our products fail to
perform over their warranty periods, we may not have the ability to protect
ourselves adequately against this potential liability, which could adversely
affect our operating results. In 2003 and 2004, we experienced a significant
increase in warranty claims and warranty expense related to our 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 our decking products. Included in the increased warranty expense is the
cost of exchanging material held by our distributors with new material that, we
believe, is not susceptible to this oxidation issue, and our best estimate of
costs related to future potential valid claims arising from installed product.
Although we increased the warranty provisions accordingly, we cannot guarantee
that the reserves established will be sufficient if we incur warranty claims
higher than anticipated. In addition, there can be no assurance that other
problems will not develop. A continued high level of warranty claims or expenses
and/or failure of our products to perform or to be accepted in the marketplace
would have an adverse impact on the profitability of our business and our
ability to sell the composites business on favorable terms.
Economic conditions could adversely affect demand for our composite building
products.
Demand for our composite building products is affected by several factors
beyond our control, including economic conditions. Recent demand for our
products has been driven, in part, by the availability of low-interest mortgage
and home equity loans. A further increase in interest rates or tightened credit
could adversely affect demand for home remodeling projects, including demand for
our products.
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KADANT INC.
Risk Factors (continued)
Seasonality and weather conditions could adversely affect our business.
In general, the building products industry experiences seasonal
fluctuations in sales, particularly in the fourth and first quarters, when
holidays and adverse weather conditions in some regions usually reduce the level
of home improvement and new construction activity. In addition, our composite
building products are used or installed in outdoor construction applications,
and our sales volume, bookings, gross margins, and operating income can be
negatively affected by adverse weather. Operating results will tend to be lower
in quarters with lower sales, which are not entirely offset by a corresponding
reduction in operating costs. In addition, we may also experience lower gross
profit margins in the fourth and first quarters due to seasonal incentive
discounts offered to our distributors. As a result of these factors, we believe
sequential period-to-period comparisons of our operating results are not
reliable indicators of future performance, and the operating results for any one
quarterly period may not be indicative of operating results to be expected for a
full year.
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. In addition, the manufacture of our composite building
products and fiber-based granules is subject to commodity price risks.
We are dependent on a single paper mill for the fiber used in the
manufacture of our fiber-based granules and composite building 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.
In addition, we use natural gas in the production of our fiber-based
granular products. We may 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.
Our composite building products also contain plastics, which are subject
to wide fluctuations in pricing and availability. Higher energy costs can
increase the price of plastic significantly and rapidly. We may be unable to
obtain sufficient quantities at reasonable prices, which would adversely affect
our profitability and ability to produce a sufficient quantity of our products
or to produce our products at competitive prices.
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 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
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KADANT INC.
Risk Factors (continued)
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 could be 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.
<
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KADANT INC.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Our exposure to market risk from changes in 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
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 April 2, 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 controls and procedures.
Based upon the evaluation of our disclosure controls and procedures as April 2,
2005, our Chief Executive Officer and Chief Financial Officer concluded that as
of April 2, 2005, our disclosure controls and procedures were effective at the
reasonable assurance level.
(b) Changes in Internal Control Over Financial Reporting
No change 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) occurred during the fiscal quarter ended April 2, 2005 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
<
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KADANT INC.
PART II - OTHER INFORMATION
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
- --------------------------------------------------------------------
In April 2005, we issued an aggregate of 7,500 shares of our common
stock, $0.01 par value per share, to our outside directors nominated for
re-election at our 2005 annual meeting, pursuant to our Directors Restricted
Stock Plan, as amended. Under this plan, our outside directors each receive
2,500 shares of restricted stock annually as compensation for their service as a
director. The shares issued to directors are restricted from resale for three
years, with certain exceptions. The shares were issued in reliance on the
exemption from registration contained in Section 4(2) of the Securities Act of
1933, as amended.
The following table provides information about purchases by us of our
common stock during the three months ended April 2, 2005:
Issuer Purchases of Equity Securities
-------------------------------------
Approximate Dollar Value
Total Number of Shares of Shares that May Yet Be
Purchased as Part of Purchased
Total Number of Shares Average Price Paid Publicly Announced Under the Plans
Period Purchased (1) per Share Plans (2)
- --------------------------------------------------------------------------------------------------------------------------------
1/2/05 - 1/31/05 - - - $ 20,650,526
2/1/05 - 2/28/05 - - - $ 20,650,526
3/1/05 - 4/2/05 - - - $ 20,650,526
Total: - - -
(1) During the first quarter of 2005, we did not repurchase any of our common stock.
(2) On May 18, 2004, our board of directors approved the repurchase by us of up to $30 million of our equity securities
through May 18, 2005. The epurchases may be made in the open market or in negotiated transactions, from time to time,
depending on market conditions. As of April 2, 2005, we had repurchased 460,400 shares of our common stock for $9.3
million under this authorization. For the period from April 2, 2005 to May 5, 2005, we repurchased an additional 39,700
shares of our common stock for $0.7 million.
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 12th day of May, 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
- --------------------------------------------------------------------------------
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.
34
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 April 2, 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 5d-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: May 12, 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 April 2, 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: May 12, 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 April 2, 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: May 12, 2005 /s/ William A. Rainville
------------------------
William A. Rainville
Chief Executive Officer
/s/ Thomas M. O'Brien
------------------------
Thomas M. O'Brien
Chief Financial Officer