Kadant Inc. - Kadant Reports 2019 Third Quarter Results

Kadant Reports 2019 Third Quarter Results

October 29, 2019 at 4:35 PM EDT

WESTFORD, Mass., Oct. 29, 2019 (GLOBE NEWSWIRE) -- Kadant Inc. (NYSE: KAI) reported its financial results for the third quarter ended September 28, 2019.

Third Quarter 2019 Highlights

Revenue increased 5% to $174 million
GAAP diluted EPS decreased 14% to $1.41
Adjusted diluted EPS decreased 8% to $1.41
Net income decreased 14% to $16 million
Adjusted EBITDA decreased 4% to $32 million and represented 18.6% of revenue
Gross margin was 42.8%
Bookings increased 4% to $171 million
Cash flow from operations increased 51% to $26 million

Note: Adjusted diluted EPS, adjusted EBITDA, and adjusted EBITDA margin are non-GAAP financial measures that exclude certain items as detailed later in this press release under the heading “Use of Non-GAAP Financial Measures.”

Management Commentary
“Following our strong first half of 2019, we had another quarter with excellent execution and we solidly beat our EPS guidance,” said Jeffrey L. Powell, president and chief executive officer of Kadant. “Strong operating performance in the third quarter across most of our segments led to one of our highest adjusted EBITDA results of $32 million, or 18.6 percent of revenue. We are particularly pleased with our cash flow from operations of $26 million, up 51 percent from the third quarter of 2018. Despite reduced project activity in China and softer demand for wood processing equipment in North America, our end-markets have remained stable with healthy demand for our parts and consumables.”

Third Quarter 2019 Results
Revenue increased five percent to $173.5 million compared to the third quarter of 2018, including $20.3 million from an acquisition and a $3.5 million decrease from the unfavorable effect of foreign currency translation. Excluding the impact of the acquisition and foreign currency translation, revenue decreased five percent compared to the third quarter of 2018. Gross margin was 42.8 percent. Net income was $16.1 million, or $1.41 per diluted share, in the third quarter of 2019 compared to $18.8 million, or $1.64 per diluted share in the third quarter of 2018. Adjusted diluted EPS decreased eight percent to $1.41 compared to $1.53 in the third quarter of 2018. Adjusted diluted EPS in the third quarter of 2018 excludes $0.03 of restructuring costs and a $0.14 discrete tax benefit.

Adjusted EBITDA decreased four percent to $32.3 million compared to $33.5 million in the third quarter of 2018. Adjusted EBITDA excludes $0.4 million of restructuring costs in the third quarter of 2018. Cash flows from operations increased 51 percent to $25.7 million compared to $17.0 million in the third quarter of 2018. Bookings increased four percent to $170.9 million compared to $165.0 million in the third quarter of 2018, including $18.2 million from an acquisition and a $3.4 million decrease from the unfavorable effect of foreign currency translation. Excluding the impact of the acquisition and foreign currency translation, bookings decreased five percent compared to the third quarter of 2018.

Summary and Outlook
“Our performance to date has positioned us well for another record year of financial performance,” Mr. Powell continued. “However, softening macroeconomic conditions and the strengthening U.S. dollar have tempered our revenue outlook for the year. For 2019, we are lowering our revenue guidance primarily due to a negative effect of foreign currency translation of $5 million. We now expect revenue of $694 to $698 million, revised from our previous guidance of $700 to $710 million.

“Since our announcement in late 2018 of our plan to terminate a defined benefit pension plan in the U.S., we have been executing the required termination steps and anticipate completing this process in the fourth quarter. We have lowered our GAAP diluted EPS guidance for an estimated pre-tax pension termination cost of $7.2 million, or $0.64 per diluted share. We now expect to achieve GAAP diluted EPS of $4.38 to $4.46 in 2019, revised from our previous guidance of $4.97 to $5.09. The 2019 guidance also includes pre-tax amortization expense associated with acquired profit in inventory and backlog of $4.9 million, or $0.32 per diluted share, pre-tax acquisition costs of $0.8 million, or $0.06 per diluted share, and a discrete tax benefit of $1.2 million, or $0.10 per diluted share. Excluding these items, we expect adjusted diluted EPS of $5.30 to $5.38 for 2019, revised from our previous guidance of $5.26 to $5.38.

“For the fourth quarter of 2019, we expect GAAP diluted EPS of $0.59 to $0.67 on revenue of $172 to $176 million. The fourth quarter of 2019 guidance includes the pre-tax pension termination cost of $7.2 million, or $0.64 per diluted share. Excluding this expense, we expect adjusted diluted EPS of $1.23 to $1.31 for the fourth quarter of 2019.”

Conference Call
Kadant will hold a webcast with a slide presentation for investors on Wednesday, October 30, 2019, at 11:00 a.m. eastern time to discuss its third quarter performance, as well as future expectations. To access the webcast, including the slideshow and accompanying audio, go to www.kadant.com and click on “Investors.” To listen to the webcast via teleconference, call 888-326-8410 within the U.S., or 704-385-4884 outside the U.S. and reference participant passcode 8545699. Prior to the call, our earnings release and the slides used in the webcast presentation will be filed with the Securities and Exchange Commission and will be available at www.sec.gov. An archive of the webcast presentation will be available on our website until November 29, 2019.

Shortly after the webcast, Kadant will post its updated general investor presentation incorporating the third quarter results on its website at www.kadant.com in the “Investors” section.

Use of Non-GAAP Financial Measures
In addition to the financial measures prepared in accordance with generally accepted accounting principles (GAAP), we use certain non-GAAP financial measures, including increases or decreases in revenue excluding the effect of acquisitions and foreign currency translation, adjusted operating income, adjusted net income, adjusted diluted earnings per share (EPS), earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted EBITDA, and adjusted EBITDA margin.

We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding certain items that may not be indicative of our core business, operating results, or future outlook. We believe that the inclusion of such measures helps investors gain an understanding of our underlying operating performance and future prospects, consistent with how management measures and forecasts our performance, especially when comparing such results to previous periods or forecasts and to the performance of our competitors. Such measures are also used by us in our financial and operating decision-making and for compensation purposes. We also believe this information is responsive to investors' requests and gives them an additional measure of our performance.

The non-GAAP financial measures included in this press release are not meant to be considered superior to or a substitute for the results of operations prepared in accordance with GAAP. In addition, the non-GAAP financial measures included in this press release have limitations associated with their use as compared to the most directly comparable GAAP measures, in that they may be different from, and therefore not comparable to, similar measures used by other companies.

Revenue included $20.3 million and $61.1 million from an acquisition in the third quarter and first nine months of 2019, respectively. Revenue also included a $3.5 million and $16.3 million unfavorable foreign currency translation effect in the third quarter and first nine months of 2019, respectively. We present increases or decreases in revenue excluding the effect of acquisitions and foreign currency translation to provide investors insight into underlying revenue trends.

Our non-GAAP financial measures exclude restructuring costs, acquisition costs, amortization expense related to acquired profit in inventory and backlog, and discrete tax items. These items are excluded as they are not indicative of our core operating results and are not comparable to other periods, which have differing levels of incremental costs or income or none at all.

Third Quarter
Adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin exclude:

Pre-tax restructuring costs of $0.4 million in 2018.

Adjusted net income and adjusted diluted EPS exclude:

After-tax restructuring costs of $0.3 million ($0.4 million net of tax of $0.1 million) in 2018.
A discrete tax benefit of $1.5 million in 2018 related to the reversal of reserves associated with uncertain tax positions covering multiple tax years.

First Nine Months
Adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin exclude:

Pre-tax acquisition costs of $0.8 million in 2019.
Pre-tax expense related to amortization of acquired profit in inventory and backlog of $4.9 million in 2019.
Pre-tax restructuring costs of $1.7 million in 2018.
Pre-tax expense related to amortization of acquired backlog of $0.3 million in 2018.

Adjusted net income and adjusted diluted EPS exclude:

After-tax acquisition costs of $0.7 million ($0.8 million net of tax of $0.1 million) in 2019.
After-tax expense related to amortization of acquired profit in inventory and backlog of $3.7 million ($4.9 million net of tax of $1.2 million) in 2019.
A discrete tax benefit of $1.2 million in 2019.
After-tax restructuring costs of $1.3 million ($1.7 million net of tax of $0.4 million) in 2018.
After-tax expense related to amortization of acquired backlog of $0.2 million ($0.3 million net of tax of $0.1 million) in 2018.
A discrete tax benefit of $1.7 million in 2018.

Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are set forth in this press release.

Financial Highlights (unaudited)
(In thousands, except per share amounts and percentages)

			Three Months Ended						Nine Months Ended
Consolidated Statement of Income			Sept. 28, 2019			Sept. 29, 2018			Sept. 28, 2019			Sept. 29, 2018

Revenues			$	173,504		$	165,745		$	521,985		$	469,851
Costs and Operating Expenses:
	Cost of revenues		99,257			92,652			302,852			262,515
	Selling, general, and administrative expenses		47,097			42,888			144,883			133,796
	Research and development expenses		2,597			2,452			7,980			8,049
	Restructuring costs		—			378			—			1,717
			148,951			138,370			455,715			406,077
Operating Income			24,553			27,375			66,270			63,774
Interest Income			43			30			158			335
Interest Expense			(3,066		)	(1,738		)	(10,143		)	(5,320		)
Other Expense, Net			(98		)	(245		)	(296		)	(736		)

Income Before Provision for Income Taxes			21,432			25,422			55,989			58,053
Provision for Income Taxes			5,219			6,443			12,310			15,575
Net Income			16,213			18,979			43,679			42,478
Net Income Attributable to Noncontrolling Interest			(98		)	(195		)	(360		)	(487		)
Net Income Attributable to Kadant			$	16,115		$	18,784		$	43,319		$	41,991

Earnings per Share Attributable to Kadant:
		Basic	$	1.43		$	1.69		$	3.87		$	3.79
		Diluted	$	1.41		$	1.64		$	3.79		$	3.69

Weighted Average Shares:
		Basic	11,267			11,101			11,198			11,078
		Diluted	11,469			11,421			11,434			11,388

			Three Months Ended						Three Months Ended
Adjusted Net Income and Adjusted Diluted EPS (a)			Sept. 28, 2019			Sept. 28, 2019			Sept. 29, 2018			Sept. 29, 2018

Net Income and Diluted EPS Attributable to Kadant, as Reported			$	16,115		$	1.41		$	18,784		$	1.64
Adjustments for the Following:
	Restructuring Costs, Net of Tax		—			—			287			0.03
	Amortization of Acquired Profit in Inventory and Backlog, Net of Tax (e,f)		16			—			—			—
	Discrete Tax Items		—			—			(1,542		)	(0.14		)
Adjusted Net Income and Adjusted Diluted EPS (a)			$	16,131		$	1.41		$	17,529		$	1.53

			Nine Months Ended						Nine Months Ended
			Sept. 28, 2019			Sept. 28, 2019			Sept. 29, 2018			Sept. 29, 2018

Net Income and Diluted EPS Attributable to Kadant, as Reported			$	43,319		$	3.79		$	41,991		$	3.69
Adjustments for the Following:
	Restructuring Costs, Net of Tax		—			—			1,308			0.11
	Acquisition Costs, Net of Tax		699			0.06			—			—
	Amortization of Acquired Profit in Inventory and Backlog, Net of Tax (e,f)		3,687			0.32			189			0.02
	Discrete Tax Items		(1,186		)	(0.10		)	(1,672		)	(0.15		)
Adjusted Net Income and Adjusted Diluted EPS (a)			$	46,519		$	4.07		$	41,816		$	3.67

												Increase
												(Decrease)
												Excluding
			Three Months Ended									Acquisition
Revenues by Product Line			Sept. 28, 2019			Sept. 29, 2018			Increase (Decrease)			and FX (a,b)
Stock-Preparation			$	56,128		$	62,983		$	(6,855	)	$	(5,321	)
Fluid-Handling			32,734			33,083			(349		)	382
Doctoring, Cleaning, & Filtration			29,641			30,704			(1,063		)	(377		)
	Papermaking Systems		118,503			126,770			(8,267		)	(5,316		)
	Wood Processing Systems		32,731			37,042			(4,311		)	(3,717		)
	Material Handling Systems		20,282			—			20,282			—
	Fiber-Based Products		1,988			1,933			55			55
			$	173,504		$	165,745		$	7,759		$	(8,978	)

												Increase
												(Decrease)
												Excluding
			Nine Months Ended						Increase (Decrease)			Acquisition
			Sept. 28, 2019			Sept. 29, 2018			Increase (Decrease)			and FX (a,b)
Stock-Preparation			$	158,993		$	164,842		$	(5,849	)	$	332
Fluid-Handling			100,201			98,500			1,701			4,928
Doctoring, Cleaning, & Filtration			88,591			87,469			1,122			3,901
	Papermaking Systems		347,785			350,811			(3,026		)	9,161
	Wood Processing Systems		104,649			109,335			(4,686		)	(606		)
	Material Handling Systems		61,063			—			61,063			—
	Fiber-Based Products		8,488			9,705			(1,217		)	(1,217		)
			$	521,985		$	469,851		$	52,134		$	7,338

												Increase
												(Decrease)
												Excluding
			Three Months Ended									Acquisition
Revenues by Geography (c)			Sept. 28, 2019			Sept. 29, 2018			Increase (Decrease)			and FX (a,b)
North America			$	92,041		$	74,089		$	17,952		$	(892	)
Europe			49,146			44,912			4,234			6,507
Asia			20,971			32,887			(11,916		)	(11,892		)
Rest of World			11,346			13,857			(2,511		)	(2,701		)
			$	173,504		$	165,745		$	7,759		$	(8,978	)

												Increase
												(Decrease)
												Excluding
			Nine Months Ended						Increase (Decrease)			Acquisition
			Sept. 28, 2019			Sept. 29, 2018			Increase (Decrease)			and FX (a,b)
North America			$	291,584		$	227,080		$	64,504		$	10,693
Europe			131,944			131,437			507			8,645
Asia			61,745			78,537			(16,792		)	(15,670		)
Rest of World			36,712			32,797			3,915			3,670
			$	521,985		$	469,851		$	52,134		$	7,338

												Increase
												(Decrease)
												Excluding
			Three Months Ended						Increase (Decrease)			Acquisition
Bookings by Product Line			Sept. 28, 2019			Sept. 29, 2018			Increase (Decrease)			and FX (b)
Stock-Preparation			$	63,890		$	69,341		$	(5,451	)	$	(3,673	)
Fluid-Handling			32,038			29,671			2,367			3,066
Doctoring, Cleaning, & Filtration			26,779			27,788			(1,009		)	(458		)
	Papermaking Systems		122,707			126,800			(4,093		)	(1,065		)
	Wood Processing Systems		27,502			36,080			(8,578		)	(8,157		)
	Material Handling Systems		18,247			—			18,247			—
	Fiber-Based Products		2,474			2,120			354			354
			$	170,930		$	165,000		$	5,930		$	(8,868	)

												Decrease
												Excluding
			Nine Months Ended						Increase (Decrease)			Acquisition
			Sept. 28, 2019			Sept. 29, 2018			Increase (Decrease)			and FX (b)
Stock-Preparation			$	172,014		$	187,073		$	(15,059	)	$	(8,119	)
Fluid-Handling			100,786			107,363			(6,577		)	(3,080		)
Doctoring, Cleaning, & Filtration			83,460			86,603			(3,143		)	(506		)
	Papermaking Systems		356,260			381,039			(24,779		)	(11,705		)
	Wood Processing Systems		98,942			133,213			(34,271		)	(30,155		)
	Material Handling Systems		64,663			—			64,663			—
	Fiber-Based Products		8,637			9,088			(451		)	(451		)
			$	528,502		$	523,340		$	5,162		$	(42,311	)

			Three Months Ended						Nine Months Ended
Business Segment Information			Sept. 28, 2019			Sept. 29, 2018			Sept. 28, 2019			Sept. 29, 2018
Gross Margin:
		Papermaking Systems	44.8		%	44.6		%	44.4		%	45.1		%
		Wood Processing Systems	41.8		%	42.6		%	42.0		%	40.4		%
		Material Handling Systems	32.0		%	—			27.5		%	—
		Fiber-Based Products	46.7		%	36.6		%	48.5		%	50.1		%
			42.8		%	44.1		%	42.0		%	44.1		%

Operating Income:
		Papermaking Systems	$	22,798		$	25,919		$	61,368		$	61,402
		Wood Processing Systems	6,787			8,704			22,858			21,380
		Material Handling Systems	1,742			—			877			—
		Corporate and Other	(6,774		)	(7,248		)	(18,833		)	(19,008		)
			$	24,553		$	27,375		$	66,270		$	63,774

Adjusted Operating Income (a,d):
		Papermaking Systems	$	22,798		$	26,297		$	61,368		$	63,119
		Wood Processing Systems	6,787			8,704			22,858			21,632
		Material Handling Systems	1,763			—			6,572			—
		Corporate and Other	(6,774		)	(7,248		)	(18,833		)	(19,008		)
			$	24,574		$	27,753		$	71,965		$	65,743

Capital Expenditures:
		Papermaking Systems	$	1,376		$	1,348		$	3,890		$	9,837
		Wood Processing Systems	444			1,026			1,423			2,586
		Material Handling Systems	225			—			605			—
		Corporate and Other	48			232			318			394
			$	2,093		$	2,606		$	6,236		$	12,817

			Three Months Ended						Nine Months Ended
Cash Flow and Other Data			Sept. 28, 2019			Sept. 29, 2018			Sept. 28, 2019			Sept. 29, 2018
Cash Provided by Operations			$	25,678		$	16,979		$	58,166		$	52,550
Depreciation and Amortization Expense			7,763			5,796			24,304			17,739

Balance Sheet Data									Sept. 28, 2019			Dec. 29, 2018
Assets
Cash, Cash Equivalents, and Restricted Cash									$	49,971		$	46,117
Accounts Receivable, net									102,131			92,624
Inventories									108,377			86,373
Unbilled Revenues									13,571			15,741
Property, Plant, and Equipment, net									84,049			80,157
Intangible Assets									179,681			113,347
Goodwill									334,491			258,174
Other Assets									63,286			33,216
									$	935,557		$	725,749
Liabilities and Stockholders' Equity
Accounts Payable									$	40,391		$	35,720
Debt Obligations									310,514			171,434
Other Borrowings									6,310			4,387
Other Liabilities									171,469			139,637
	Total Liabilities								528,684			351,178
	Stockholders' Equity								406,873			374,571
									$	935,557		$	725,749

			Three Months Ended						Nine Months Ended
Adjusted Operating Income and Adjusted EBITDA Reconciliation			Sept. 28, 2019			Sept. 29, 2018			Sept. 28, 2019			Sept. 29, 2018
Consolidated
		Net Income Attributable to Kadant	$	16,115		$	18,784		$	43,319		$	41,991
		Net Income Attributable to Noncontrolling Interest	98			195			360			487
		Provision for Income Taxes	5,219			6,443			12,310			15,575
		Interest Expense, Net	3,023			1,708			9,985			4,985
		Other Expense, Net	98			245			296			736
		Operating Income	24,553			27,375			66,270			63,774
		Restructuring Costs	—			378			—			1,717
		Acquisition Costs	—			—			843			—
		Acquired Backlog Amortization (e)	21			—			1,303			252
		Acquired Profit in Inventory (f)	—			—			3,549			—
		Adjusted Operating Income (a)	24,574			27,753			71,965			65,743
		Depreciation and Amortization	7,742			5,796			23,001			17,487
		Adjusted EBITDA (a)	$	32,316		$	33,549		$	94,966		$	83,230

		Adjusted EBITDA Margin (a,g)	18.6		%	20.2		%	18.2		%	17.7		%

Papermaking Systems
		Operating Income	$	22,798		$	25,919		$	61,368		$	61,402
		Restructuring costs	—			378			—			1,717
		Adjusted Operating Income (a)	22,798			26,297			61,368			63,119
		Depreciation and Amortization	3,206			3,132			9,605			9,407
		Adjusted EBITDA (a)	$	26,004		$	29,429		$	70,973		$	72,526

Wood Processing Systems
		Operating Income	$	6,787		$	8,704		$	22,858		$	21,380
		Acquired Backlog Amortization (e)	—			—			—			252
		Adjusted Operating Income (a)	6,787			8,704			22,858			21,632
		Depreciation and Amortization	2,400			2,505			7,162			7,585
		Adjusted EBITDA (a)	$	9,187		$	11,209		$	30,020		$	29,217

Material Handling Systems
		Operating Income	$	1,742		$	—		$	877		$	—
		Acquisition Costs	—			—			843			—
		Acquired Backlog Amortization (e)	21			—			1,303			—
		Acquired Profit in Inventory (f)	—			—			3,549			—
		Adjusted Operating Income (a)	1,763			—			6,572			—
		Depreciation and Amortization	1,944			—			5,651			—
		Adjusted EBITDA (a)	$	3,707		$	—		$	12,223		$	—

Corporate and Other
		Operating Loss	$	(6,774	)	$	(7,248	)	$	(18,833	)	$	(19,008	)
		Depreciation and Amortization	192			159			583			495
		EBITDA (a)	$	(6,582	)	$	(7,089	)	$	(18,250	)	$	(18,513	)

(a)		Represents a non-GAAP financial measure.

(b)		Represents the increase (decrease) resulting from the exclusion of an acquisition and from the conversion of current period amounts reported in local currencies into U.S. dollars at the exchange rate of the prior period compared to the U.S. dollar amount reported in the prior period.

(c)		Geographic revenues are attributed to regions based on customer location.

(d)		See reconciliation to the most directly comparable GAAP financial measure under "Adjusted Operating Income and Adjusted EBITDA Reconciliation."

(e)		Represents intangible amortization expense associated with acquired backlog.

(f)		Represents expense within cost of revenues associated with amortization of acquired profit in inventory.

(g)		Calculated as adjusted EBITDA divided by revenue in each period.

About Kadant
Kadant Inc. is a global supplier of high-value, critical components and engineered systems used in process industries worldwide. The Company’s products, technologies, and services play an integral role in enhancing process efficiency, optimizing energy utilization, and maximizing productivity in resource-intensive industries. Kadant is based in Westford, Massachusetts, with approximately 2,800 employees in 20 countries worldwide. For more information, visit www.kadant.com.

Safe Harbor Statement
The following constitutes a “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995: This press release contains forward-looking statements that involve a number of risks and uncertainties, including forward-looking statements about our future financial and operating performance, demand for our products, and economic and industry outlook. These forward-looking statements represent our expectations as of the date of this press release. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause our actual results to differ materially from these forward-looking statements as a result of various important factors, including those set forth under the heading "Risk Factors" in Kadant’s annual report on Form 10-K for the year ended December 29, 2018 and subsequent filings with the Securities and Exchange Commission. These include risks and uncertainties relating to adverse changes in global and local economic conditions; the variability and difficulty in accurately predicting revenues from large capital equipment and systems projects; our customers’ ability to obtain financing for capital equipment projects; international sales and operations; the variability and uncertainties in sales of capital equipment in China; the oriented strand board market and levels of residential construction activity; development and use of digital media; currency fluctuations; cyclical economic conditions affecting the global mining industry and the continued demand for coal; price increases or shortages of raw materials; dependence on certain suppliers; our acquisition strategy; failure of our information systems or breaches of data security and cybertheft; changes in government regulations and policies and compliance with laws; our internal growth strategy; competition; soundness of suppliers and customers; changes in our tax provision or exposure to additional tax liabilities; our ability to successfully manage our manufacturing operations; disruption in production; future restructurings; economic conditions and regulatory changes caused by the United Kingdom’s exit from the European Union; our debt obligations; restrictions in our credit agreement and note purchase agreement; loss of key personnel and effective succession planning; protection of intellectual property; fluctuations in our share price; soundness of financial institutions; environmental laws and regulations; climate change; environmental, health and safety laws and regulations; adequacy of our insurance coverage; anti-takeover provisions; and reliance on third-party research.

Contacts
Investor Contact Information:
Michael McKenney, 978-776-2000
mike.mckenney@kadant.com
or
Media Contact Information:
Wes Martz, 269-278-1715
wes.martz@kadant.com

Source: Kadant Inc

News Release

Kadant Reports 2019 Third Quarter Results