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 1, 2006
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 (I.R.S. Employer
Jurisdiction of Incorporation Identification No.)
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 the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 4, 2006
---------------------------- --------------------------
Common Stock, $.01 par value 13,600,665
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
KADANT INC.
Condensed Consolidated Balance Sheet
(Unaudited)
Assets
April 1, December 31,
(In thousands) 2006 2005
- --------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 41,280 $ 40,822
Accounts receivable, less allowances of $2,467 and $2,221 43,335 41,822
Unbilled contract costs and fees 13,222 11,603
Inventories (Note 5) 35,575 35,115
Other current assets 12,637 11,969
Assets of discontinued operation (Note 13) 13,201 14,030
---------- ----------
Total Current Assets 159,250 155,361
---------- ----------
Property, Plant, and Equipment, at Cost 85,752 85,668
Less: accumulated depreciation and amortization 54,306 52,761
---------- ----------
31,446 32,907
---------- ----------
Other Assets 7,127 6,856
---------- ----------
Intangible Assets 35,606 36,262
---------- ----------
Goodwill 125,567 124,425
---------- ----------
Total Assets $ 358,996 $ 355,811
========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements.
< 2
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KADANT INC.
Condensed Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
April 1, December 31,
(In thousands, except share amounts) 2006 2005
- --------------------------------------------------------------------------------------------------------------
Current Liabilities:
Current maturities of long-term obligations (Note 6) $ 9,000 $ 9,000
Accounts payable 29,068 20,229
Accrued payroll and employee benefits 12,080 14,002
Billings in excess of contract costs and fees 4,223 8,032
Accrued restructuring costs (Note 8) 2,032 4,781
Other current liabilities 18,143 17,272
Liabilities of discontinued operation (Note 13) 6,640 6,599
---------- ----------
Total Current Liabilities 81,186 79,915
---------- ----------
Other Long-Term Liabilities 20,706 20,726
---------- ----------
Long-Term Obligations (Note 6) 44,250 46,500
---------- ----------
Minority Interest 1,142 1,045
---------- ----------
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 96,834 97,297
Retained earnings 138,701 136,050
Treasury stock at cost, 1,003,855 and 1,055,756 shares (23,061) (24,254)
Deferred compensation - (124)
Accumulated other comprehensive items (Note 2) (908) (1,490)
---------- ----------
211,712 207,625
---------- ----------
Total Liabilities and Shareholders' Investment $ 358,996 $ 355,811
========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements.
< 3
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KADANT INC.
Condensed Consolidated Statement of Income
(Unaudited)
Three Months Ended
------------------------------
April 1, April 2,
(In thousands, except per share amounts) 2006 2005
- --------------------------------------------------------------------------------------------------------------
Revenues $ 75,591 $ 50,744
---------- ----------
Costs and Operating Expenses:
Cost of revenues 46,974 31,982
Selling, general, and administrative expenses 22,121 14,894
Research and development expenses 1,545 1,048
Restructuring costs 138 -
---------- ----------
70,778 47,924
---------- ----------
Operating Income 4,813 2,820
Interest Income 259 472
Interest Expense (794) (2)
---------- ----------
Income from Continuing Operations Before Provision for
Income Taxes and Minority Interest 4,278 3,290
Provision for Income Taxes 1,455 203
Minority Interest Expense 58 -
---------- ----------
Income from Continuing Operations 2,765 3,087
Loss from Discontinued Operation (net of income tax benefit
of $77 and $195) (Note 13) (114) (363)
---------- ----------
Net Income $ 2,651 $ 2,724
========== ==========
Basic Earnings (Loss) per Share (Note 3):
Continuing Operations $ .20 $ .22
Discontinued Operation - (.02)
---------- ----------
Net Income $ .20 $ .20
========== ==========
Diluted Earnings (Loss) per Share (Note 3):
Continuing Operations $ .20 $ .22
Discontinued Operation (.01) (.03)
---------- ----------
Net Income $ .19 $ .19
========== ==========
Weighted Average Shares (Note 3):
Basic 13,580 13,926
========== ==========
Diluted 13,841 14,211
========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
>
KADANT INC.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
------------------------------
(Revised -
See Note 1)
April 1, April 2,
(In thousands) 2006 2005
- --------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 2,651 $ 2,724
Loss from discontinued operation (Note 13) 114 363
------- -------
Income from continuing operations 2,765 3,087
Adjustments to reconcile income from continuing operations to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,930 1,016
Provision for losses on accounts receivable 314 79
Stock-based compensation expense 124 -
Minority interest expense 58 -
Other, net 478 464
Changes in current accounts:
Accounts receivable (1,536) (741)
Unbilled contract costs and fees (1,614) (1,306)
Inventories (286) (2,098)
Other current assets (1,000) (769)
Accounts payable 8,730 2,378
Other current liabilities (8,281) (1,662)
------- -------
Net cash provided by continuing operations 1,682 448
Net cash provided by (used in) discontinued operation 65 (1,263)
------- -------
Net cash provided by (used in) operating activities 1,747 (815)
------- -------
Investing Activities:
Purchases of property, plant, and equipment (383) (166)
Capitalized acquisition costs (311) (280)
Proceeds from sale of property, plant, and equipment 13 -
Other, net 208 61
------- -------
Net cash used in continuing operations (473) (385)
Net cash provided by (used in) discontinued operation 746 (30)
------- -------
Net cash provided by (used in) investing activities 273 (415)
------- -------
Financing Activities:
Repayments of long-term obligations (2,250) -
Net proceeds from issuance of Company common stock 546 207
Other, net 57 -
------- -------
Net cash (used in) provided by continuing operations (1,647) 207
Net cash (used in) provided by discontinued operation - -
------- -------
Net cash (used in) provided by financing activities (1,647) 207
------- -------
Exchange Rate Effect on Cash 140 (398)
------- -------
Change in Cash from Discontinued Operation (55) (195)
-------- -------
Increase (Decrease) in Cash and Cash Equivalents 458 (1,616)
Cash and Cash Equivalents at Beginning of Period 40,822 82,089
------- -------
Cash and Cash Equivalents at End of Period $41,280 $80,473
======= =======
See Note 1 for supplemental cash flow information.
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
>
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 1,
2006, and its results of operations and cash flows for the three-month periods
ended April 1, 2006 and April 2, 2005. Interim results are not necessarily
indicative of results for a full year.
The condensed consolidated balance sheet presented as of December 31,
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
December 31, 2005, filed with the Securities and Exchange Commission.
Certain prior-period amounts have been reclassified to conform to the
2006 presentation.
Supplemental Cash Flow Information
Three Months Ended
--------------------------
April 1, April 2,
(In thousands) 2006 2005
- ---------------------------------------------------------------------------------------------------------------------------------
Non-Cash Financing Activities:
Issuance of Restricted Stock $ 227 $ 137
======== ========
In the first quarter of 2005, the Company separately disclosed the
operating, investing, and financing portions of the cash flows attributable to
its discontinued operation, which in prior periods were reported on a combined
basis as a single amount.
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 hedging instruments. The components of comprehensive income are as
follows:
Three Months Ended
--------------------------
April 1, April 2,
(In thousands) 2006 2005
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income $ 2,651 $ 2,724
Other Comprehensive Items:
Foreign Currency Translation Adjustments 428 (665)
Deferred Gain (Loss) on Hedging Instruments 154 (100)
-------- --------
582 (765)
-------- --------
Comprehensive Income $ 3,233 $ 1,959
======== ========
6
>
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. Earnings per Share
Basic and diluted earnings per share are calculated as follows:
Three Months Ended
--------------------------
April 1, April 2,
(In thousands) 2006 2005
- ---------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations $ 2,765 $ 3,087
Loss from Discontinued Operation (114) (363)
-------- --------
Net Income $ 2,651 $ 2,724
======== ========
Basic Weighted Average Shares 13,580 13,926
Effect of Stock Options 261 285
-------- --------
Diluted Weighted Average Shares 13,841 14,211
======== ========
Basic Earnings (Loss) per Share:
Continuing Operations $ .20 $ .22
Discontinued Operation - (.02)
-------- --------
Net Income $ .20 $ .20
======== ========
Diluted Earnings (Loss) per Share:
Continuing Operations $ .20 $ .22
Discontinued Operation (.01) (.03)
-------- --------
Net Income $ .19 $ .19
======== ========
Options to purchase approximately 241,600 and 227,500 shares of common
stock for the first quarters of 2006 and 2005, 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. Acquisitions
On May 11, 2005, the Company acquired all the outstanding stock of The
Johnson Corporation (Kadant Johnson), a privately held supplier of
fluid-handling systems and equipment based in Three Rivers, Michigan. The
purchase price for the acquisition was $101,458,000 in cash, subject to a
further post-closing adjustment, and $4,856,000 of acquisition-related costs. In
addition to the cash consideration, the Company issued a letter of credit to the
sellers for $4,000,000 related to certain tax assets of Kadant Johnson, the
value of which the Company expects to realize. This amount is subject to
adjustment based on The Johnson Corporation's final tax returns for 2005. This
additional consideration, of which $600,000 is included in other current
liabilities and $3,400,000 is included in other long-term liabilities in the
accompanying condensed consolidated balance sheet, is due over the next five
years as follows: 15% in May of 2006, 2007, 2008 and 2009, and 40% in May 2010.
The parties also agreed in the purchase agreement to an earn-out
provision, based on the achievement of certain revenue targets between the
closing date (May 11, 2005) and July 1, 2006, which could increase the purchase
price by up to $8,000,000. This contingent consideration will be accounted for
as an increase in goodwill, if and when the revenue targets are achieved. Based
on current forecasts, the Company does not believe that a significant payout
under the earn-out provision is likely.
7
>
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. Acquisitions (continued)
The acquisition was accounted for under the purchase method of
accounting. The total consideration through April 1, 2006 for Kadant Johnson was
$110,314,000 for acquired assets of $158,678,000, including goodwill of
$51,515,000 and intangible assets of $34,480,000, and assumed liabilities of
$48,364,000. Included in intangible assets is $8,100,000 associated with the
acquisition of the Johnson tradename, which has an indefinite life and is not
being amortized. The remaining intangible assets are being amortized using the
straight-line method over periods ranging from 3 to 20 years with a
weighted-average amortization period of 15 years.
The following condensed consolidated statement of income is presented as
if the acquisition of Kadant Johnson had been made at the beginning of the
period presented. This information is not necessarily indicative of what the
actual condensed combined statement of income of Kadant and Johnson would have
been for the period presented, nor does it purport to represent the future
combined results of operations of Kadant and Johnson.
Three Months Ended
(In thousands) April 2, 2005
- ------------------------------------------------------------------------------------------------------------------------
Revenues $ 70,821
-----------
Operating Income * 2,689
-----------
Income from Continuing Operations 2,577
Loss from Discontinued Operation (363)
-----------
Net Income $ 2,214
===========
Basic Earnings per Share:
Income from Continuing Operations $ .19
Net Income $ .16
Diluted Earnings per Share:
Income from Continuing Operations $ .18
Net Income $ .16
* Included in operating income was $1.8 million in one-time bonuses and $0.3 million in acquisition-related costs that
Kadant Johnson incurred prior to the acquisition.
On January 21, 2006, on behalf of its wholly foreign owned enterprise
formed in China, the Company entered into an asset purchase agreement with
Jining Huayi Light Industry Machinery Co., Ltd. (Huayi) to acquire substantially
all of the assets of Huayi, excluding accounts receivable and certain
liabilities associated with the business, for approximately $20,000,000, subject
to adjustment (Huayi Acquisition). Huayi is a supplier of stock-preparation
equipment in China, with unaudited revenues of approximately $15,000,000 in
2005. Pursuant to the asset purchase agreement, at the closing 20% of the
purchase price, or approximately $4,000,000, will be issued in escrow in the
form of a standby letter of credit to secure certain post-closing and
indemnification obligations of the sellers. The letter of credit may be drawn
upon by the sellers over the next 18 months as certain obligations are
satisfied. The Company expects to finance the acquisition through a combination
of cash and borrowings in China or under its existing $35,000,000 revolver,
which is part of its credit facility entered into in May 2005 and as
subsequently amended. The closing of the acquisition is subject to customary
closing conditions, including regulatory approvals, and is expected to occur in
the second quarter of 2006.
8
>
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
5. Inventories
The components of inventories are as follows:
April 1, December 31,
(In thousands) 2006 2005
- ---------------------------------------------------------------------------------------------------------------------------------
Raw Materials and Supplies $ 19,909 $ 19,971
Work in Process 7,553 5,605
Finished Goods (includes $297 and $328 at customer locations) 8,113 9,539
---------- ----------
$ 35,575 $ 35,115
========== ==========
6. Long-Term Obligations and Other Financial Instruments
Long-term Obligations
Long-term obligations are as follows:
(In thousands) April 1, December 31,
2006 2005
- ---------------------------------------------------------------------------------------------------------------------------------
Variable Rate Term Loan, due from 2006 to 2010 $ 53,250 $ 55,500
Less: Current Maturities 9,000 9,000
---------- ----------
Long-Term Obligations $ 44,250 $ 46,500
========== ==========
To fund a portion of the purchase price for the acquisition of Kadant
Johnson, the Company entered into a term loan and revolving credit facility
(Credit Agreement) effective May 9, 2005 in the aggregate principal amount of up
to $85,000,000, including a $25,000,000 revolver. Pursuant to an amendment to
the Credit Agreement effective May 3, 2006, the revolver was increased from
$25,000,000 to $35,000,000. (See Note 14.) On May 11, 2005, the Company borrowed
$60,000,000 under the Credit Agreement, which is repayable in quarterly
installments over a five-year period.
The obligations of Kadant under the Credit Agreement may be accelerated
upon the occurrence of an event of default under the Credit Agreement, which
include customary events of default including, without limitation, payment
defaults, defaults in the performance of affirmative and negative covenants, the
inaccuracy of representations or warranties, bankruptcy- and insolvency-related
defaults, defaults relating to such matters as ERISA, uninsured judgments and
the failure to pay certain indebtedness, and a change of control default.
In addition, the Credit Agreement contains negative covenants applicable
to Kadant and its subsidiaries, including financial covenants requiring Kadant
to comply with a maximum consolidated leverage ratio of 3.0, which is lowered to
2.5 in certain circumstances including when the Company makes a material
acquisition, and a minimum consolidated fixed charge coverage ratio of 1.5.
Pursuant to an amendment to the Credit Agreement effective December 28, 2005,
this maximum consolidated leverage ratio is increased from 2.5 to 2.75 in the
quarter in which the Company completes the Huayi Acquisition, and in the
following quarter. In addition to the financial covenants, the Company is also
required to comply with covenants related to restrictions on liens,
indebtedness, fundamental changes, dispositions of property, making certain
restricted payments (including dividends and stock repurchases), investments,
transactions with affiliates, sale and leaseback transactions, swap agreements,
changing Kadant's fiscal year, negative pledges, arrangements affecting
subsidiary distributions, and entering into new lines of business. As of April
1, 2006, the Company was in compliance with these covenants.
9
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. Long-Term Obligations and Other Financial Instruments (continued)
Financial Instruments
The Company entered into a swap agreement (Swap Agreement), which was
effective May 17, 2005, to convert $36,000,000 of the principal balance of the
$60,000,000 term loan under the Credit Agreement from a floating rate to a fixed
rate of interest. The Swap Agreement has a five-year term with the same
quarterly payment dates as the hedged portion of the term loan and reduces
proportionately in line with the amortization of the term loan. Under the Swap
Agreement, the Company will receive a three-month LIBOR rate and pay a fixed
rate of interest of 4.125%. The net effect on interest expense for the hedged
portion of the term loan ($36,000,000) is that the Company will pay a fixed
interest rate of up to 5.375% (the sum of the 4.125% fixed rate under the Swap
Agreement and the applicable margin of up to 1.25% on the term loan). The
guarantee provisions and the default and financial covenants, as well as certain
restrictions on the payment of dividends included in the Credit Agreement also
apply to the Swap Agreement.
The Swap Agreement has been designated as a cash flow hedge and is
carried at fair value with unrealized gains or losses reflected within other
comprehensive items. As of April 1, 2006, the unrealized gain associated with
the Swap Agreement was $767,000, which is included in other assets and within
accumulated other comprehensive items on a net of tax basis in the accompanying
condensed consolidated balance sheet. Management believes that any credit risk
associated with the swap is remote based on the creditworthiness of the
financial institution issuing it.
On January 24, 2006, the Company entered into call option contracts to
hedge its exposure related to changes in the currency exchange rate between the
Chinese Renminbi and the U.S. dollar for a portion of the financial obligations
associated with the Huayi Acquisition. These contracts hedge the foreign
currency exposure related to a portion of the purchase price from the date of
the agreement through the closing date of the transaction, and through the
subsequent payment of certain post-closing and indemnification obligations (See
Note 4).
The option contracts are carried at fair value in other current assets in
the accompanying condensed consolidated balance sheet based on quoted market
prices. In addition, the Company paid total premiums of approximately $92,000 in
the first quarter of 2006 to purchase the option contracts, which are being
amortized ratably over the options' exercise periods. For the three-month period
ended April 1, 2006, the premium amortization expense of $46,000 and the net
unrealized gains of $27,000 are included in selling, general, and administrative
expenses in the accompanying condensed consolidated statement of income.
7. 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.
10
KADANT INC.
>
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. Warranty Obligations (continued)
The changes in the carrying amount of the Company's product warranties
included in other current liabilities in the accompanying condensed consolidated
balance sheet are as follows:
Three Months Ended
----------------------------
April 1, April 2,
(In thousands) 2006 2005
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at Beginning of Period $ 2,836 $ 3,582
Provision charged to income 233 853
Usage (290) (674)
Other, net (a) 8 (6)
-------- --------
Balance at End of Period $ 2,787 $ 3,755
======== ========
(a) Represents the effects of currency translation.
See Note 13 for warranty information related to the discontinued operation.
8. Restructuring Costs
2004 Restructuring Plan
In an effort to improve operating performance at the Papermaking Systems
segment's Kadant Lamort subsidiary in France, the Company approved a
restructuring of that subsidiary on November 18, 2004. This restructuring was
initiated to strengthen Kadant Lamort's competitive position in the European
paper industry. The restructuring primarily included the reduction of 97
full-time positions across all functions in France and was implemented in 2005.
The Company accrued a restructuring charge, in accordance with Statement of
Financial Accounting Standards (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 of $9,235,000 in the fourth quarter of
2004 and reduced the estimate by $71,000 in 2005.
2005 Restructuring Plan
The Company recorded restructuring costs of $317,000 during 2005
associated with the 2005 Restructuring Plan. These restructuring costs included
$221,000 for severance and associated costs related to the reduction of 14
full-time positions in the U.S. and $96,000 for equipment relocation costs, both
in our Papermaking Systems segment. The restructuring costs of $138,000 in the
first quarter of 2006 relate to additional equipment relocation costs associated
with the 2005 restructuring plan.
11
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
8. Restructuring Costs (continued)
A summary of the changes in accrued restructuring costs included in other
current liabilities in the accompanying condensed consolidated balance sheet is
as follows:
Severance
(In thousands) & Other
- -----------------------------------------------------------------------------
2004 Restructuring Plan
Balance at December 31, 2005 $ 4,658
Usage (2,683)
Currency translation 53
--------
Balance at April 1, 2006 $ 2,028
========
2005 Restructuring Plan
Balance at December 31, 2005 $ 123
Provision 138
Usage (257)
--------
Balance at April 1, 2006 $ 4
========
The estimated restructuring 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 as of April 1, 2006. Due to the
lengthy restructuring process in France and the long notification periods, the
related cash payments associated with the Kadant Lamort restructuring, which was
initiated at the end of 2004, will extend into the second half of 2006. For the
remaining restructuring activities, the Company anticipates that all actions
will be completed within a 12-month period from the date of initiation.
12
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
9. Business Segment Information
The Company has combined its operating entities into one operating
segment, Papermaking Systems, and two separate product lines, Fiber-based
Products and Casting Products, which are reported in Other. 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 1, April 2,
(In thousands) 2006 2005
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues:
Pulp and Papermaking Systems $ 71,073 $ 47,571
Other (a) 4,518 3,173
--------- ----------
$ 75,591 $ 50,744
========= ==========
Income from Continuing Operations Before Provision for
Income Taxes and Minority Interest Expense:
Pulp and Papermaking Systems (b) $ 6,751 $ 3,621
Corporate and Other (a,b,c) (1,938) (801)
---------- ----------
Total Operating Income 4,813 2,820
Interest Income (Expense), Net (535) 470
--------- ----------
$ 4,278 $ 3,290
========= ==========
Capital Expenditures:
Pulp and Papermaking Systems $ 337 $ 140
Corporate and Other (a) 46 26
--------- ----------
$ 383 $ 166
========= ==========
(a) Other includes the results from the Company's Fiber-based Products business and Kadant Johnson's Casting Products business.
(b) In the first quarter of 2006, the Company changed its reporting of royalty income and associated expenses from Corporate
to the Pulp and Papermaking Systems segment. Information in the 2005 period has been reclassified to conform to this
presentation.
(c) Corporate primarily includes general and administrative expenses.
10. Stock-Based Compensation
The Company maintains stock-based compensation plans primarily for its
key employees and directors, although the plans permit awards to others expected
to make significant contributions to the future of the Company. The plans
authorize the compensation committee of the Company's board of directors (the
board committee) to award a variety of stock and stock-based incentives, such as
restricted stock, nonqualified and incentive stock options, stock bonus shares,
or performance-based shares. The award recipients and the terms of awards,
including price, granted under these plans are determined by the board
committee. Outstanding options granted under these plans prior to 2001 are
nonqualified options that are exercisable immediately, but are subject to
provisions similar to vesting that restrict transfer and afford the Company the
right to repurchase the shares at the exercise price upon certain events. The
restrictions and repurchase rights for these options generally lapse over five
to ten years and the terms of the options may range from five to twelve years.
Options granted under these plans in 2001 and after are nonqualified options
that vest over three years and are not exercisable until vested. To date, all
options have been granted at an exercise price
13
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
10. Stock-Based Compensation (continued)
equal to the fair market value of the Company's common stock on the date of
grant. Upon a change-of-control, as defined in the plans, all options or other
awards become fully vested and all restrictions lapse. The Company generally
issues shares of its common stock held in treasury to satisfy option exercises.
On December 16, 2004, the Financial Accounting Standards Board (FASB)
issued SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS 123R). SFAS 123R
replaces SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123),
supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB Opinion No. 25), and amends SFAS No. 95 "Statement of
Cash Flows." SFAS 123R requires all share-based payments to employees that are
ultimately expected to vest and do actually vest, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values. The pro forma disclosures previously permitted under SFAS 123 are no
longer an alternative to recognition of compensation expense in the income
statement under SFAS 123R. Effective January 1, 2006, the Company adopted SFAS
123R, using the modified prospective method. Under this method, beginning on
January 1, 2006, the Company recognized compensation cost for all share-based
payments to employees based on the grant date estimate of fair value for those
awards. The Company has used the Black-Scholes option-pricing model to determine
fair value for all share-based payments. Compensation expense is recognized over
the vesting period of the award. Prior-period financial information has not been
restated for the adoption of SFAS 123R.
As of Apri1 1, 2006, the Company had several share-based compensation
plans that are described below. The adoption of SFAS 123R on January 1, 2006 had
the following impact on the Company's results of operations for the quarter
ended April 1, 2006: income from continuing operations was lower by
approximately $124,000, net income was lower by approximately $82,000 and basic
and diluted earnings per share were lower by approximately $.01. The total
share-based compensation cost of $212,000, including compensation expense
associated with restricted stock, is included in selling, general, and
administrative expenses in the accompanying condensed consolidated statement of
income. The total income tax benefit recognized in the income statement for
share-based compensation agreements for the first quarter of 2006 was $85,000.
The adoption of SFAS 123R also resulted in the inclusion in cash flows from
financing activities of $67,000 of total tax benefits realized from stock
options exercised during the first quarter of 2006 that would have been
reflected in cash flows from operating activities prior to the adoption of SFAS
123R.
Stock Options - There were no stock options granted in the first quarter
of 2006. For the first quarter of 2005, the fair value of each option grant was
estimated on the grant date using the Black-Scholes option-pricing model,
assuming no expected dividends, with the following assumptions:
Three Months Ended
April 2, 2005
- -----------------------------------------------------------------------------
Options Granted 15,000
Weighted-average Exercise Price $ 20.69
Weighted-average Grant Date Fair Value $ 8.67
Expected Life (in years) 5
Volatility 42%
Risk-Free Interest Rate 3.78%
14
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
10. Stock-Based Compensation (continued)
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option-pricing models require the input
of highly subjective assumptions, including expected stock price volatility.
Expected stock price volatility was calculated based on a review of our actual
historic stock prices commensurate with the expected life of the award. The
expected option life was derived based on a review of our historic option
holding periods, including a consideration of the holding period inherent in
currently vested but unexercised options. The risk-free interest rate is based
on the yield on zero-coupon U.S. Treasury securities for a period that is
commensurate with the expected term of the option. The compensation
expense recognized for all equity-based awards is net of estimated forfeitures.
Forfeitures are estimated based on an analysis of actual option forfeitures.
A summary of the Company's stock option activity for the quarter ended
April 1, 2006 is as follows:
Weighted
Weighted Average
Average Remaining Aggregate
Shares Exercise Contractual Intrinsic Value
(In thousands) Price Term (In thousands)
- -------------------------------------------------------------------------------------------------------------------------------
Options Outstanding at December 31, 2005 1,699 $15.82
Granted - -
Exercised (42) $13.71
Forfeited / Expired (8) $37.70
-----
Options Outstanding at April 1, 2006 1,649 $15.76 2.9 $13,363
=====
Options Exercisable at April 1, 2006 1,497 $15.26 2.6 $12,804
=====
The total intrinsic value of options exercised (i.e., the difference
between the market price at exercise and the price paid by the employee to
exercise the options) during the quarters ended April 1, 2006 and April 2, 2005,
was $230,000 and $133,000, respectively. The aggregate intrinsic value of
options outstanding and options exercisable as of April 1, 2006, is based on the
difference between the closing price of our common stock on April 1, 2006, which
was $22.70, and the exercise price of the applicable option. In calculating the
aggregate intrinsic value, the Company excluded those options with an exercise
price greater than the closing price per share of our common stock as of April
1, 2006.
The Company received $546,000 from stock option exercises during the
quarter ended April 1, 2006. As of April 1, 2006, the Company had approximately
$284,000 of unrecognized compensation cost related to stock option awards that
it expects to recognize as expense over a weighted average period of 1.3 years.
Restricted Stock - The Company grants shares to outside directors, which
vest immediately, but are restricted from resale for three years from the date
of award. The Company recorded the fair value of the restricted stock awards at
the date of grant within deferred compensation, prior to the adoption of SFAS
123R, and within additional paid-in-capital upon adoption of SFAS 123R in the
accompanying condensed consolidated balance sheet. On April 1, 2006 and April 1,
2005, the Company awarded 10,000 shares and 7,500 shares, respectively, of its
restricted common stock with an aggregate value of $227,000 and $137,000,
respectively, to its outside directors pursuant to its Amended and Restated
Directors' Restricted Stock Plan.
15
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
10. Stock-Based Compensation (continued)
For periods prior to the adoption of SFAS 123R, the Company elected to
follow the accounting under APB Opinion No. 25 and related interpretations to
account for its stock-based compensation plans. For these prior periods, 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 price of the underlying common stock on the date of
grant.
The following table illustrates the impact on net income and earnings per
share as if the Company had applied the fair value recognition provisions of
SFAS 123 to the Company's stock-based employee compensation for the first
quarter of 2005.
Three Months Ended
(In thousands, except per share amounts) April 2, 2005
- -----------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations $ 3,087
Loss from Discontinued Operation (363)
----------
Net Income As Reported 2,724
Deduct: Total stock-based employee compensation expense determined
under the fair-value-based method for all awards, net of tax (202)
----------
Pro forma net income $ 2,522
==========
Basic Earnings per Share:
As reported:
Income from continuing operations $ .22
Net income $ .20
Pro forma
Income from continuing operations $ .21
Net income $ .18
Diluted Earnings per Share:
As reported:
Income from continuing operations $ .22
Net income $ .19
Pro forma:
Income from continuing operations $ .20
Net income $ .18
16
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
11. Employee Benefit Plans
Defined Benefit Pension Plans and Post-Retirement Welfare Benefit Plans
The Company's Kadant Web Systems subsidiary 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 current service and for any unfunded projected benefit
obligation over a reasonable period. Effective December 31, 2005, this plan was
closed to new participants. This same subsidiary has a post-retirement welfare
benefit plan (included in the table below in "Other Benefits"). No future
retirees are eligible for this post-retirement welfare benefit plan and the
plan includes limits 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.
The Company's Kadant Johnson subsidiary also offers a post-retirement
welfare benefit plan (included in the table below in "Other Benefits") to its
U.S. employees upon attainment of eligible retirement age.
The components of the net periodic benefit cost for the pension benefits
and other benefits plans in the first quarters of 2006 and 2005 are as follows:
Three Months Ended Three Months Ended
(In thousands) April 1, 2006 April 2, 2005
- ----------------------------------------------------------------------------------------------------------
Pension Other Pension Other
Benefits Benefits Benefits Benefits
-------- -------- -------- --------
Components of Net Periodic Benefit Cost:
Service cost $ 195 $ 59 $ 175 $ 34
Interest cost 264 91 253 40
Expected return on plan assets (353) - (351) -
Recognized net actuarial loss 17 8 1 8
Amortization of prior service cost (income) 12 (14) 12 (12)
-------- -------- -------- -------
Net periodic benefit cost $ 135 $ 144 $ 90 $ 70
======== ======== ======== =======
The weighted-average assumptions used to determine net periodic benefit cost are as follows:
Discount rate 5.75% 5.30% 6.00% 4.70%
Expected long-term return on plan assets 8.50% - 8.50% -
Rate of compensation increase 4.00% 2.00% 4.00% 2.50%
No cash contributions are expected for the Kadant Web Systems'
noncontributory defined benefit retirement plan. For the remaining pension and
post-retirement welfare benefit plans, no cash contributions, other than funding
current benefit payments, are expected in 2006.
17
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
12. Recent Accounting Pronouncement
Inventory Costs
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," which requires that abnormal amounts of
idle facility expense, freight, handling costs and wasted material be recognized
as current-period charges. This statement also introduces the concept of "normal
capacity" and requires the allocation of fixed production overheads to inventory
based on the normal capacity of the production facilities. Unallocated overheads
must be recognized as an expense in the period in which they are incurred. The
Company adopted SFAS No. 151 on January 1, 2006, and the adoption did not have a
material effect on the Company's condensed consolidated financial statements.
13. Discontinued Operation
On October 21, 2005, our Kadant Composites LLC subsidiary (Kadant
Composites LLC) sold substantially all of its assets to LDI Composites Co. (the
Buyer). As part of the sale transaction, Kadant Composites LLC retained the
warranty obligations associated with products manufactured prior to the sale
date. Kadant Composites LLC deposited $3,500,000 of the sale proceeds into a
special escrow fund to satisfy these warranty claims. This fund will be
administered by the Buyer for five years or until the funds are exhausted, after
which time Kadant Composites LLC will administer any remaining covered warranty
claims. Based on the claims paid by the Buyer through April 1, 2006, which the
Buyer is seeking reimbursement for from the special escrow fund, the special
escrow fund would be reduced from $3,500,000 to approximately $826,000. The
Company anticipates that the special escrow fund will be utilized and Kadant
Composites LLC will assume claims processing in the second quarter of 2006.
Operating results for the discontinued operation are as follows:
Three Months Ended
-------------------------
April 1, April 2,
(In thousands) 2006 2005
- -----------------------------------------------------------------------------------------------------------------------------
Revenues $ - $ 5,236
-------- --------
Operating Loss (292) (558)
Interest Income 101 -
-------- --------
Loss Before Income Tax Benefit (including $130 loss on disposal in 2006) (191) (558)
Benefit for Income Taxes 77 195
-------- --------
Loss From Discontinued Operation $ (114) $ (363)
======== ========
In the first quarter of 2006, Kadant Composites LLC received $786,000
from the Buyer for the settlement of post-closing adjustments resulting in a
$130,000 loss on disposal.
18
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
13. Discontinued Operation (continued)
The major classes of assets and liabilities of the discontinued operation
included in the accompanying condensed consolidated balance sheet are as
follows:
April 1, December 31,
(In thousands) 2006 2005
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 5,798 $ 5,743
Restricted cash 4,185 4,145
Other accounts receivable 629 1,545
Current deferred tax asset 2,110 2,110
Other assets 479 487
-------- --------
Total Assets 13,201 14,030
-------- --------
Accrued warranty costs 3,789 5,276
Other current liabilities 2,851 1,323
-------- --------
Total Liabilities 6,640 6,599
-------- --------
Net Assets $ 6,561 $ 7,431
======== ========
The restricted cash of $4,185,000 as of April 1, 2006 represents the
portion of the sale proceeds placed in escrow and associated interest. Other
accounts receivable of $629,000 represents the portion of the sales price held
by the Buyer for one year to satisfy certain indemnification obligations.
Included in other current liabilities is $2,674,000, which represents warranty
claims owed to the Buyer from the special escrow fund as reimbursement for
claims paid on Kadant Composites LLC's behalf through April 1, 2006.
All future activity associated with the warranty reserve will continue to
be classified in the results of the discontinued operation in the Company's
consolidated financial statements. As part of the sale transaction, Kadant
Composites LLC retained the warranty obligations associated with products
manufactured prior to the sale date. Through the sale date of October 21, 2005,
Kadant Composites LLC offered 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.
Prior to the sale of the composites business, Kadant Composites LLC
recorded an estimate for warranty-related costs at the time of sale based on its
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. Kadant Composites LLC's
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 Kadant Composites LLC's future
warranty provisions. Due to the highly subjective nature of these assumptions,
Kadant Composites LLC 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.
19
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
13. Discontinued Operation (continued)
A summary of the changes in accrued warranty costs in the first quarters
of 2006 and 2005 is as follows:
Three Months Ended
-------------------------
April 1, April 2,
(In thousands) 2006 2005
- -----------------------------------------------------------------------------------------------------------------------------
Balance at Beginning of Period $ 5,276 $ 4,327
Provision - 406
Usage (1,487) (663)
-------- --------
Balance at End of Period $ 3,789 $ 4,070
======== ========
14. Subsequent Events
Third Amendment to the Credit Agreement
On April 3, 2006, the Company entered into a third amendment to the
Credit Agreement to increase the total borrowing capacity under the revolving
line of credit from $25,000,000 to $35,000,000, increase the letter of credit
and multi-currency borrowing sublimit to the full amount of the facility
($35,000,000), and add an additional lending participant to the Credit Agreement
(Bank of China, New York branch). The amount the Company is able to borrow under
the revolving line of credit is the total borrowing capacity less any
outstanding letters of credit and multi-currency borrowings issued under the
Credit Agreement.
Promissory Note and Other Financing Arrangements
On May 4, 2006, the Company borrowed $10,000,000 under a promissory note
(Loan) from Citizens Bank of Massachusetts (Lender). The Loan is repayable in
quarterly installments of $125,000 over a ten-year period with the remaining
principal balance of $5,000,000 due upon maturity. Interest on the Loan accrues
and is payable quarterly in arrears at one of the following rates selected by
Kadant (a) the prime rate or (b) the three-month London Inter-Bank Offered Rate
(LIBOR) plus a 1% margin. The loan is guaranteed and secured by real estate and
related personal property of the Company and certain of its domestic
subsidiaries, located in Theodore, Alabama; Auburn, Massachusetts; Three Rivers,
Michigan; and Queensbury, New York, pursuant to mortgage and security agreements
dated May 4, 2006 (Mortgage and Security Agreements).
The obligations of the Company under the Loan may be accelerated upon the
occurrence of an event of default under the Loan and the Mortgage and Security
Agreements, which includes customary events of default including without
limitation payment defaults, defaults in the performance of covenants and
obligations, the inaccuracy of representations or warranties, bankruptcy and
insolvency related defaults, liens on the properties or collateral, and
uninsured judgments. In addition, the occurrence of an event of default under
the Credit Agreement or any successor credit facility would be an event of
default under the Loan.
On May 5, 2006, the Company used $7,750,000 of the proceeds from the Loan
to prepay a portion of its existing variable-rate debt under the Credit
Agreement.
20
KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
14. Subsequent Events (continued)
To hedge the exposure to movements in the variable interest rate on the
Loan, on May 3, 2006, the Company entered into a swap agreement with the Lender
effective May 5, 2006 which converts the Loan from a floating rate to a fixed
rate of interest. The swap agreement has a ten-year term, the same quarterly
payment dates as the Loan, and reduces in line with the amortization of the
loan. The Swap Agreement automatically terminates in the event there are no
outstanding borrowings under the Credit Agreement (or successor credit
facility), the Loan, or any other borrowing in which Citizens Bank of
Massachusetts is a lender. Under the swap agreement, the Company will receive a
three-month LIBOR rate and pay a fixed rate of interest of 5.63%. The net effect
on interest expense for the $10,000,000 loan is that the Company will pay a
fixed interest rate of 6.63% (the sum of the 5.63% fixed rate under the swap
agreement and the applicable margin of 1% on the loan). The guarantee and
default provisions of the Credit Agreement (and any successor Credit Facility)
and the Loan, including those contained in the Mortgage and Security Agreement,
also apply to the Swap Agreement.
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
Part II, Item 1A of this Report.
Overview
Company Background
We are a leading supplier of equipment used in the global papermaking and
paper recycling 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 two separate
product lines, Fiber-based Products and Casting 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 were incorporated in Delaware in November 1991. On July 12, 2001, we
changed our name to Kadant Inc. from Thermo Fibertek Inc. Our common stock is
listed on the New York Stock Exchange, where it trades under the symbol "KAI."
21
KADANT INC.
Overview (continued)
Pulp and Papermaking Systems Segment
Our Papermaking Systems segment designs and manufactures
stock-preparation systems and equipment, paper machine accessory equipment,
water-management systems, and fluid-handling systems and equipment for the paper
and paper recycling industries. Our principal products include:
- Stock-preparation systems and equipment: custom-engineered systems and
equipment, as well as standard individual components, for pulping,
de-inking, screening, cleaning, and refining recycled and virgin
fibers for preparation for entry into the paper machine during the
production of 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;
- Water-management systems: systems and equipment used to
continuously clean paper machine fabrics and to drain, purify,
and recycle process water during paper sheet formation; and
- Fluid handling systems and equipment: rotary joints, precision unions,
steam and condensate systems, components, and controls used primarily
in the dryer section of the papermaking process and during the
production of corrugated boxboard, metals, plastics, rubber, and
textiles.
Other
Our other business lines include our Fiber-based Products business and
our Casting Products business.
Our Fiber-based Products business produces biodegradable, absorbent
granules from papermaking byproducts for use primarily as carriers for
agricultural, home lawn and garden, and professional lawn, turf and ornamental
applications, as well as for oil and grease absorption.
Our Casting Products business manufactures grey and ductile iron
castings.
Discontinued Operation
On October 21, 2005, our Kadant Composites LLC subsidiary (Kadant
Composites LLC) sold substantially all the assets comprising the composites
business, to LDI Composites Co. (the Buyer). As part of the sale transaction,
Kadant Composites LLC retained the warranty obligations associated with products
manufactured prior to the sale date. Kadant Composites LLC deposited $3.5
million of the sale proceeds into a special escrow fund to satisfy these
warranty claims. This fund will be administered by the Buyer for five years or
until the funds are exhausted, after which time Kadant Composites LLC will
administer any remaining covered warranty claims. Based on the claims paid by
the Buyer through April 1, 2006, the special escrow fund would be reduced from
$3.5 million to approximately $0.8 million. Based on the claims activity and
payments processed after April 1, 2006, we anticipate that the special escrow
fund will be utilized and Kadant Composites LLC will assume claims processing
in the second quarter of 2006. As of April 1, 2006, the accrued warranty reserve
associated with the composites business was $3.8 million. All future activity
associated with this warranty reserve will continue to be classified in the
results of the discontinued operation in our consolidated financial statements.
22
KADANT INC.
Overview (continued)
International Sales
During the first quarters of 2006 and 2005 approximately 57% 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 December 31, 2005, filed
with the Securities and Exchange Commission. There have been no material changes
to these critical accounting policies since fiscal year-end 2005 that warrant
further disclosure, except for the adoption of SFAS 123R as noted below.
Our adoption of Statement of Financial Accounting Standards No. 123
(revised 2004), "Share Based Payment" (SFAS 123R) in the first quarter of 2006
requires that we recognize stock-based compensation expense associated with
stock options in the statement of income, rather than disclose it in a pro forma
footnote to our consolidated financial statements. Determining the amount of
stock-based compensation to be recorded requires us to develop estimates to be
used in calculating the grant-date fair value of stock options. We did not grant
any stock options in the first quarter of 2006. For options granted prior to
January 1, 2006, we calculated the grant-date fair values using the
Black-Scholes valuation model. The use of valuation models requires us to make
estimates of the following assumptions:
Expected volatility - We derived the estimated stock price volatility
based on a review of our actual historic stock prices commensurate with
the expected life of the award.
Expected option life - Our estimate of an expected option life was
derived based on a review of our historic option holding periods,
including a consideration of the holding period inherent in currently
vested but unexercised options. We believe that this historical data is
currently the best estimate of the expected term of a new option.
Risk-free interest rate - We used the yield on zero-coupon U.S.
Treasury securities for a period that is commensurate with the expected
term assumption as the risk-free interest rate.
23
KADANT INC.
Overview (continued)
The amount of stock-based compensation recognized during a period is
based on the value of the portion of the awards that are ultimately expected to
vest. SFAS 123R requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. The term "forfeitures" is distinct from "cancellations" or
"expirations" and represents only the unvested portion of the surrendered
option. Similar to the analysis for the expected option life, we reviewed
historical forfeiture data and have applied an annual forfeiture rate of 2.5% to
all unvested options as of December 31, 2005. We will reevaluate this analysis
quarterly and adjust the forfeiture rate as necessary. Ultimately, we will
recognize the actual expense over the vesting period only for the shares that
vest.
Industry and Business Outlook
Our products are primarily sold to the pulp and paper industry. The
paper industry had been in a prolonged downcycle for the past several years.
While the performance of paper producers, especially in North America, has been
gradually improving over the past year, the industry is continuing to experience
sluggish demand. The profitability of paper producers is still being negatively
affected by higher operating costs, especially higher energy costs. We believe
paper companies remain 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 would have a positive effect on paper company suppliers, such as Kadant,
although the timing of such effect is difficult to predict. We continue to
concentrate our efforts on several initiatives intended to improve our operating
results, including: (i) integrating Kadant Johnson, (ii) penetrating new markets
outside the paper industry, (iii) completing our acquisition of a
stock-preparation manufacturing company in China, and (iv) increasing
aftermarket sales. In addition, we continue to focus our efforts on managing our
operating costs, capital expenditures, and working capital.
On May 11, 2005, we acquired all the outstanding stock of The Johnson
Corporation (Kadant Johnson), a leading supplier of fluid-handling systems and
equipment, including steam and condensate systems, components, and controls.
These products are used primarily in the dryer section of the papermaking
process and during the production of corrugated boards, metals, plastics,
rubber, textiles, and food. Kadant Johnson was a privately held company based in
Three Rivers, Michigan, with approximately 575 employees. The purchase price for
the acquisition was approximately $101.5 million in cash, subject to a
post-closing adjustment, and $4.9 million of acquisition-related costs. In
addition to the consideration paid at closing, we issued a letter of credit to
the sellers for $4.0 million related to certain tax assets of Kadant Johnson,
the value of which we expect to realize. This amount is subject to adjustment
based on The Johnson Corporation's final tax return for 2005, and is due over
the next five years as follows: 15% per year in 2006, 2007, 2008 and 2009, and
40% in 2010. The parties also agreed to an earn-out provision, based on the
achievement of certain revenue targets between the closing date of May 11, 2005
and July 1, 2006, which could increase the purchase price by up to $8.0 million.
This contingent consideration will be accounted for as an increase in goodwill,
if and when the revenue targets are achieved. Based on our current forecasts, we
do not believe that a significant payout under the earn-out provision is likely.
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
acquire a manufacturing and assembly facility in China for this equipment and
related products, as well as for certain of our accessories and water-management
products in the future. Revenues from China are primarily derived from large
capital orders, the timing of which is often difficult to predict. At times our
customers in China have experienced delays in obtaining financing for their
capital addition and expansion projects 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. These delays can cause delays in receiving
orders and, as a result, could delay our recognizing revenue on these projects
to periods later than originally anticipated. We plan to use our new facility in
China as a base for increasing our aftermarket business, which we believe will
be more predictable.
24
KADANT INC.
Overview (continued)
On January 21, 2006, on behalf of our wholly foreign owned enterprise
formed in China, we entered into an asset purchase agreement with Jining Huayi
Light Industry Machinery Co., Ltd. (Huayi) to acquire substantially all of the
assets of Huayi, excluding accounts receivable and certain liabilities of the
business, for approximately $20 million, subject to adjustment (Huayi
Acquisition). Huayi is a supplier of stock-preparation equipment in China with
unaudited revenues of approximately $15.0 million in 2005. We expect to finance
the acquisition through a combination of cash and borrowings, in China or under
our existing $35 million revolver, which is part of our credit facility entered
into in May 2005 and as subsequently amended. The closing of the acquisition is
subject to customary closing conditions, including regulatory approvals, and is
expected to occur in the second quarter of 2006.
Our 2006 guidance reflects expected revenues and earnings per share from
continuing operations, which excludes the results from our discontinued
operation. For the second quarter of 2006, we expect to earn between $.34 and
$.36 per diluted share, on revenues of $85 to $87 million. For the full year, we
expect to earn between $1.18 and $1.25 per diluted share, an increase of $.03 at
the low end of the range, on slightly higher revenues of $300 to $310 million,
revised from our previous estimate of $290 to $300 million.
Results of Operations
First Quarter 2006 Compared With First Quarter 2005
- ---------------------------------------------------
The following table sets forth, for the first fiscal quarters of 2006 and
2005, our unaudited condensed consolidated statement of income expressed as a
percentage of total revenues. The results of operations for the fiscal quarter
ended April 1, 2006 are not necessarily indicative of the results to be expected
for the full fiscal year.
Three Months Ended
------------------------------
April 1, April 2,
2006 2005
- -----------------------------------------------------------------------------------------------------------------------------
Revenues 100% 100%
-------- --------
Costs and Operating Expenses:
Cost of revenues 62 63
Selling, general, and administrative expenses 29 29
Research and development expenses 2 2
Restructuring costs 1 -
-------- --------
94 94
-------- --------
Operating Income 6 6
Interest Income 1 1
Interest Expense (1) -
-------- --------
Income from Continuing Operations Before Provision for
Income Taxes 6 7
Provision for Income Taxes (2) (1)
-------- --------
Income from Continuing Operations 4 6
Loss from Discontinued Operation - (1)
-------- --------
Net Income 4% 5%
======== ========
25
KADANT INC.
Results of Operations (continued)
Revenues
Revenues increased to $75.6 million in the first quarter of 2006 from
$50.7 million in the first quarter of 2005, an increase of $24.9 million, or
49%. Revenues in 2006 include a $19.9 million, or 39%, increase from Kadant
Johnson, and the unfavorable effects of currency translation of $1.4 million, or
3%, due to a stronger U.S. dollar relative to some of the functional currencies
in countries in which we operate.
Revenues for the first quarters of 2006 and 2005 from our Papermaking
Systems segment and our other businesses are as follows:
Three Months Ended
--------------------------
April 1, April 2,
(In thousands) 2006 2005
- --------------------------------------------------------------------------------
Revenues:
Pulp and Papermaking Systems $ 71,073 $ 47,571
Other 4,518 3,173
-------- --------
$ 75,591 $ 50,744
======== ========
Pulp and Papermaking Systems Segment. Revenues at the Papermaking Systems
segment increased to $71.1 million in the first quarter of 2006 from $47.6
million in the first quarter of 2005, an increase of $23.5 million, or 49%. The
increase in revenues in 2006 includes $19.0 million, or 40%, from Kadant
Johnson, which comprises our fluid-handling product line, slightly offset by a
$1.4 million, or 3%, decrease from the unfavorable effect of currency
translation.
The following table presents revenues at the Papermaking Systems segment
by product line, the changes in revenues by product line between the first
quarter of 2006 and 2005, and the changes in revenues by product line between
the first quarter of 2006 and 2005 excluding the effect of currency translation.
The presentation of the changes in revenues by product line excluding the effect
of currency translation is a non-GAAP (generally accepted accounting principles)
measure. We believe this non-GAAP measure helps investors gain a better
understanding of our underlying operations, consistent with how management
measures and forecasts the Company's performance, especially when comparing such
results to prior periods.
Increase
(Decrease)
Three Months Ended Excluding
----------------------------- Effect of
April 1, April 2, Increase Currency
(In millions) 2006 2005 (Decrease) Translation
- -----------------------------------------------------------------------------------------------------------------------------------
Product Line:
Stock-Preparation Equipment $ 30.8 $ 24.5 $ 6.3 $ 7.3
Accessories 14.1 15.3 (1.2) (0.8)
Fluid-Handling 19.0 - 19.0 19.0
Water-Management 6.5 7.4 (0.9) (0.9)
Other 0.7 0.4 0.3 0.3
--------- -------- -------- -----------
$ 71.1 $ 47.6 $ 23.5 $ 24.9
========= ======== ======== ===========
26
KADANT INC.
Results of Operations (continued)
Revenues from the segment's stock-preparation equipment product line
increased $6.3 million, or 26%, in the first quarter of 2006 compared to the
first quarter of 2005, including a $1.0 million decrease from the unfavorable
effect of currency translation. Excluding the effect of currency translation,
revenues from the stock-preparation equipment product line increased $7.3
million, or 30%, due to a $3.9 million, or 43%, increase in sales in our North
American-based business and a $3.4 million, or 59%, increase in sales in China.
Revenues from the segment's accessories product line decreased $1.2
million, or 8%, in the first quarter of 2006 compared to the first quarter of
2005, including a $0.4 million decrease from the unfavorable effect of currency
translation. Excluding the effect of currency translation, revenues from the
segment's accessories product line decreased $0.8 million, or 5%, primarily due
to a decrease in sales in North America and Europe.
Revenues from the fluid-handling product line were $19.0 million in the
first quarter of 2006.
Revenues from the segment's water-management product line decreased $0.9
million, or 12%, in the first quarter of 2006 compared to the first quarter of
2005 due primarily to a decrease in capital sales in Europe.
Other. Revenues from the Fiber-based Products business increased $0.4
million, or 13%, to $3.6 million in the first quarter of 2006 from $3.2 million
in the first quarter of 2005. Revenues from our Casting Products business were
$0.9 million in the first quarter of 2006.
Gross Profit Margin
Gross profit margin was 38% in the first quarter of 2006 compared to 37%
in the first quarter of 2005.
Gross profit margins for the first quarters of 2006 and 2005 are as
follows:
Three Months Ended
---------------------------
April 1, April 2,
2006 2005
- --------------------------------------------------------------------------------
Gross Profit Margin:
Pulp and Papermaking Systems 38% 37%
Other 29 43
-- --
38% 37%
The gross profit margin at the Papermaking Systems segment increased to
38% in the first quarter of 2006 from 37% in the first quarter of 2005. The
inclusion of the fluid-handling product line contributed to a 5% increase in
gross profit margins in 2006, which was largely offset by a 2% decrease
associated with lower margins on spares and capital products and a 1% decrease
due to an unfavorable product mix toward capital products. The gross profit
margin in Other decreased to 29% in the first quarter of 2006 from 43% in the
first quarter of 2005 due to the inclusion of the relatively low-margin Casting
Products business and lower margins in our Fiber-based granular product line.
The gross profit margin in our Fiber-based granular product line has been
negatively affected by an increase in the cost of natural gas used in the
production of our fiber-based granules. We expect the gross profit margin in the
Fiber-based granular product line to continue to be negatively affected by the
higher costs of natural gas used in the manufacturing process.
27
KADANT INC.
Results of Operations (continued)
Operating Expenses
Selling, general, and administrative expenses as a percentage of revenues
were 29% in the first quarters of 2006 and 2005. Selling, general, and
administrative expenses increased to $22.1 million in the first quarter of 2006
from $14.9 million in the first quarter of 2005, an increase of $7.2 million, or
49%. This increase included a $4.6 million, or 74%, increase in general and
administrative expenses and a $2.6 million, or 30%, increase in selling
expenses. The increase in general and administrative expenses was due primarily
to the inclusion of $3.7 million of expenses from Kadant Johnson and a $0.9
million increase in corporate expenses. The increase in selling expenses was due
primarily to $3.6 million from Kadant Johnson, offset in part by a $0.5 million
decrease at Kadant Lamort primarily as a result of savings from the
restructuring efforts.
Research and development expenses increased $0.5 million to $1.5 million
in the first quarter of 2006 compared to $1.0 million in the first quarter of
2005 and represented 2% of revenues in both periods. The $0.5 million increase
related primarily to the inclusion of research and development expenses from
Kadant Johnson.
On January 1, 2006, we adopted SFAS 123R using the modified prospective
method. We calculate compensation cost on the date of grant using the fair value
of the options as determined by the Black-Scholes valuation model. In the first
quarter of 2006, we recognized $0.1 million, or $.01 per diluted share,
associated with stock-based compensation expense as a result of the adoption of
SFAS 123R. Prior to the adoption of SFAS 123R, we accounted for share-based
payments to employees using Accounting Principles Board Opinion No. 25's (APB
25), "Accounting for Stock Issued to Employees", intrinsic value method and, as
such, generally recognized no compensation cost for employee stock options. The
adoption of SFAS 123R under the modified prospective method allowed us to
recognize compensation cost beginning with the effective date (a) based on the
requirement of SFAS 123R for all share-based payments granted after the
effective date and (b) based on the requirements of SFAS 123 for all awards
granted to employees prior to the effective date of SFAS 123R that remain
unvested on the effective date. Under the modified prospective method, prior
periods are not restated for the effect of SFAS 123R.
As of April 1, 2006, the total compensation cost related to unvested
stock option awards not yet recognized in the condensed consolidated statement
of income was approximately $0.3 million, which will be recognized over a
weighted average period of 1.3 years.
Interest Income
Interest income decreased to $0.3 million in the first quarter of 2006
compared to $0.5 million in the first quarter of 2005 due primarily to the
decrease in average cash balances resulting from the May 2005 acquisition of
Kadant Johnson.
Interest Expense
Interest expense increased to $0.8 million in the first quarter of 2006
from $2 thousand in the first quarter of 2005 primarily due to interest expense
associated with the borrowings entered into in May 2005 to fund the Kadant
Johnson acquisition.
Provision for Income Taxes
Our effective tax rate was 34% and 6% in the first quarters of 2006 and
2005, respectively. The 6% effective tax rate in the first quarter of 2005
consisted of our 33% recurring tax rate, largely offset by a 27% non-recurring
tax benefit associated with a reimbursement of $0.9 million received from our
former parent company pursuant to our tax matters agreement for tax years in
which we were included in their consolidated tax return.
28
KADANT INC.
Results of Operations (continued)
Income from Continuing Operations
Income from continuing operations (after-tax) decreased to $2.8 million
in the first quarter of 2006 from $3.1 million in the first quarter of 2005, a
decrease of $0.3 million, or 10%. The $2.0 million increase in pre-tax operating
income was entirely offset by a $0.2 million decrease in interest income, a $0.8
million increase in interest expense and a $1.3 million increase in income
taxes. The increase in income taxes in the first quarter of 2006 compared to the
first quarter of 2005 was due primarily to a $0.9 million tax benefit in the
2005 period associated with a reimbursement received from our former parent
company pursuant to our tax matters agreement for tax years in which we were
included in their consolidated tax return.
Loss from Discontinued Operation
Loss from discontinued operation decreased to $0.1 million in the first
quarter of 2006 from $0.4 million in the first quarter of 2005, due primarily to
a decrease in operating losses as a result of the sale of the composites
business by Kadant Composites LLC.
Liquidity and Capital Resources
Consolidated working capital, including the discontinued operation, was
$78.1 million at April 1, 2006, compared with $75.4 million at December 31,
2005. Included in working capital are cash and cash equivalents of $41.3 million
at April 1, 2006, compared with $40.8 million at December 31, 2005. At April 1,
2006, $22.8 million of cash and cash equivalents were held by our foreign
subsidiaries.
First Quarter 2006
Our operating activities provided cash of $1.7 million in the first
quarter of 2006 related primarily to our continuing operations. The cash
provided by operating activities in the first quarter of 2006 was primarily the
result of $2.8 million of income from continuing operations, an increase in
accounts payable of $8.7 million, and a non-cash charge of $1.9 million for
depreciation and amortization expense. These sources of cash in the first
quarter of 2006 were offset in part by a decrease in other current liabilities
of $8.3 million, an increase in unbilled costs and fees of $1.6 million, and an
increase in accounts receivable of $1.5 million. The decrease in other current
liabilities of $8.3 million was primarily related to a decrease of $3.8 million
in billings in excess of contract costs and fees due to the timing of contracts
recognized under the percentage-of-completion method, a decrease of $2.7 million
in accrued restructuring costs due to payments made in the first quarter of
2006, and a decrease of $1.9 million in accrued payroll and employee benefits
primarily due to incentive payments made in the first quarter of 2006.
Our investing activities provided cash of $0.3 million in the first
quarter of 2006, including $0.5 million used by continuing operations and $0.8
million provided by the discontinued operation. We used $0.4 million in our
continuing operations to purchase property, plant, and equipment and we incurred
$0.3 million in acquisition-related costs. The cash provided by the discontinued
operation of $0.8 million relates primarily to the cash proceeds received in the
first quarter of 2006 from the Buyer of the assets of Kadant Composites LLC for
post-closing adjustments.
Our financing activities used cash of $1.6 million in the first quarter
of 2006 related entirely to our continuing operations. The use of cash in the
first quarter of 2006 relates primarily to the principal payment made on our
term loan of $2.3 million, offset in part by $0.5 million of proceeds we
received from the issuance of common stock in connection with the exercise of
employee stock options.
29
KADANT INC.
Liquidity and Capital Resources (continued)
First Quarter 2005
Our operating activities used cash of $0.8 million during the first
quarter of 2005, including $0.4 million provided by our continuing operations
and $1.2 million used by the discontinued operation. The cash provided by our
continuing operations was primarily due to income from continuing operations of
$3.1 million and a non-cash charge for depreciation and amortization expense of
$1.0 million. In addition, in the first quarter of 2005, an increase in accounts
payable provided 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. 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. The cash used in the discontinued
operation related primarily to the loss from the discontinued operation in the
first quarter of 2005 of $0.4 million, an increase in accounts receivable of
$0.5 million, and a decrease in accounts payable of $0.4 million.
Our investing activities used cash of $0.4 million in the first quarter
of 2005, related primarily to our continuing operations. 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 Kadant
Johnson acquisition.
Our financing activities provided cash of $0.2 million in the first
quarter of 2005, related entirely to our continuing operations. 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.
Additional Liquidity and Capital Resources
We completed our acquisition of Kadant Johnson on May 11, 2005 for
approximately $101.5 million in cash, subject to a post-closing adjustment, and
$4.9 million of acquisition-related costs. In addition to the cash
consideration, we issued a letter of credit to the sellers for $4.0 million,
subject to adjustment, related to certain tax assets of Kadant Johnson, the
value of which we expect to realize. The parties also agreed to an earn-out
provision, based on the achievement of certain revenue targets between the
closing date (May 11, 2005) and July 1, 2006, which could increase the purchase
price by up to $8.0 million. Based on our current forecasts, we do not believe
that a significant payout under the earn-out provision is likely.
To fund $60 million of the purchase price, we entered into a term loan
and revolving credit facility (Credit Agreement) effective as of May 9, 2005,
and as subsequently amended, in the aggregate principal amount of up to $95
million, including a $35 million revolver. The Credit Agreement includes a $60
million term loan, which is repayable in quarterly installments over a five-year
period. The current remaining aggregate principal amount to be repaid each year
is as follows: $9 million, $10.5 million, $13.5 million, $15 million, and $7.5
million in 2006, 2007, 2008, 2009, and 2010, respectively. Interest on the
revolving loan and the term loan accrues and is payable quarterly in arrears at
one of the following rates selected by us: (a) the prime rate plus an applicable
margin of between 0% and 0.25% or (b) a eurocurrency rate plus an applicable
margin between 0.625% and 1.25%. The applicable margin is determined based upon
our total debt to earnings before interest, taxes, depreciation and amortization
(EBITDA) ratio, as defined in the Credit Agreement.
On April 3, 2006, we entered into a third amendment to the Credit
Agreement to increase the total borrowing capacity under the revolving line of
credit from $25 million to $35 million, increase the letter of credit and
multi-currency borrowing sublimit to the full amount of the facility ($35
million), and add an additional lending participant to the Credit Agreement
(Bank of China, New York branch). The amount we are able to borrow under the
revolving line of credit is the total borrowing capacity less any outstanding
letters of credit and multi-currency borrowings issued under the Credit
Agreement.
<
30
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KADANT INC.
Liquidity and Capital Resources (continued)
Our obligations under the Credit Agreement may be accelerated upon the
occurrence of an event of default under the Credit Agreement, which include
customary events of default including, without limitation, payment defaults,
defaults in the performance of affirmative and negative covenants, the
inaccuracy of representations or warranties, bankruptcy- and insolvency-related
defaults, defaults relating to such matters as ERISA, uninsured judgments and
the failure to pay certain indebtedness, and a change-of-control default.
In addition, the Credit Agreement contains negative covenants applicable
to us and our subsidiaries, including financial covenants requiring us to comply
with a maximum consolidated leverage ratio of 3.0, which is lowered to 2.5 in
certain circumstances including when we make a material acquisition, and a
minimum consolidated fixed charge coverage ratio of 1.5. Pursuant to an
amendment to the Credit Agreement effective December 28, 2005, this maximum
consolidated leverage ratio is increased from 2.5 to 2.75 in the quarter in
which we complete the Huayi Acquisition and in the following quarter. In
addition to the financial covenants, we are also required to comply with
covenants related to restrictions on liens, indebtedness, fundamental changes,
dispositions of property, making certain restricted payments (including
dividends and stock repurchases), investments, transactions with affiliates,
sale and leaseback transactions, swap agreements, changing our fiscal year,
negative pledges, arrangements affecting subsidiary distributions, and
entering into new lines of business. As of April 1, 2006, we were in
compliance with these covenants.
The loans under the Credit Agreement are guaranteed by certain of our
domestic subsidiaries and secured by a pledge of 65% of the stock of our
first-tier foreign subsidiaries and our subsidiary guarantors pursuant to a
guarantee and pledge agreement effective May 9, 2005 in favor of JPMorgan Chase
Bank, N.A., as agent on behalf of the lenders.
On May 4, 2006, we borrowed $10 million under a promissory note (Loan)
from Citizens Bank of Massachusetts (Lender). The Loan is repayable in quarterly
installments of $125 thousand over a ten-year period with the remaining
principal balance of $5 million due upon maturity. Interest on the Loan accrues
and is payable quarterly in arrears at one of the following rates selected by us
(a) the prime rate or (b) the three-month London Inter-Bank Offered Rate (LIBOR)
plus a 1% margin. The Loan is guaranteed and secured by real estate and related
personal property of Kadant and certain of its domestic subsidiaries, located in
Theodore, Alabama; Auburn, Massachusetts; Three Rivers, Michigan; and
Queensbury, New York, pursuant to mortgage and security agreements dated May 4,
2006 (Mortgage and Security Agreements).
The obligations of Kadant under the Loan may be accelerated upon the
occurrence of an event of default under the Loan and the Mortgage and Security
Agreements, which includes customary events of default including without
limitation payment defaults, defaults in the performance of covenants and
obligations, the inaccuracy of representations or warranties, bankruptcy and
insolvency related defaults, liens on the properties or collateral and uninsured
judgments. In addition, the occurrence of an event of default under the Credit
Agreement or any successor credit facility would be an event of default under
the Loan.
On May 5, 2006, we used $7.8 million of the proceeds from the Loan to
prepay a portion of our existing variable-rate debt under the Credit Agreement.
31
>
KADANT INC.
Liquidity and Capital Resources (continued)
To hedge the exposure to movements in the variable interest rate on the
Loan, on May 3, 2006, we entered into a swap agreement with Citizens Bank of
Massachusetts effective May 5, 2006 which converts the Loan from a floating rate
to a fixed rate of interest. The swap agreement has a ten-year term, the same
quarterly payment dates as the Loan, and reduces in line with the amortization
of the Loan. The swap agreement automatically terminates in the event there are
no outstanding borrowings under the Credit Agreement (or successor credit
facility), the Loan, or any other borrowing under which Citizens Bank of
Massachusetts is a lender. Under the swap agreement, we will receive a
three-month LIBOR rate and pay a fixed rate of interest of 5.63%. The net effect
on interest expense for the Loan is that we will pay a fixed interest rate of
6.63% (the sum of the 5.63% fixed rate under the swap agreement and the
applicable margin of 1% on the loan). The guarantee and default provisions of
the Credit Agreement (and any successor credit facility) and the Loan, including
those contained in the Mortgage and Security Agreement, also apply to the swap
agreement.
On May 6, 2005, our board of directors authorized the repurchase of up to
$15.0 million of our equity securities in the open market or in negotiated
transactions for the period from May 18, 2005 through May 18, 2006. As of April
1, 2006, we had repurchased 376,700 shares of our common stock for $7.1 million
under this authorization. On May 3, 2006, our board of directors authorized the
repurchase of up to $15.0 million of our equity securities in the open market or
in negotiated transactions for the period from May 18, 2006 through May 18,
2007.
It is our practice to reinvest indefinitely the earnings of our
international subsidiaries, except in instances in which we can remit such
earnings without a significant associated tax cost. Through April 1, 2006, we
have not provided U.S. income taxes on approximately $56.6 million of unremitted
foreign earnings. We believe that any U.S. tax liability due upon remittance of
such earnings would be immaterial due to the availability of U.S. foreign tax
credits generated from such remittance. The related foreign tax withholding,
which would be required if we remitted the foreign earnings to the U.S., would
be approximately $2.4 million.
On October 21, 2005, Kadant Composites LLC sold its composites business,
presented as a discontinued operation in the accompanying condensed consolidated
financial statements. As part of the transaction, Kadant Composites LLC retained
the warranty obligation associated with products manufactured prior to the sale
date. At April 1, 2006, the warranty reserve for the composites business was
$3.8 million. Our liquidity and consolidated results will continue to be
impacted by future cash payments for warranty claims and any adjustments to this
warranty obligation. Adjustments to our results for these items will continue to
be classified within the results for the discontinued operation in our
consolidated financial statements.
On January 21, 2006, on behalf of our wholly foreign owned enterprise
formed in China, we entered into an asset purchase agreement with Huayi to
acquire substantially all of the assets of Huayi, excluding accounts
receivable and certain liabilities of the business, for approximately $20
million, subject to adjustment. Huayi is a supplier of stock-preparation
equipment in China with unaudited revenues of approximately $15 million in 2005.
We expect to finance the acquisition through a combination of cash and
borrowings in China or under our existing $35 million revolver, which is part of
our Credit Agreement entered into in May 2005, and as subsequently amended, with
a consortium of banks with JPMorganChase Bank as administrative agent. The
closing of the acquisition is subject to customary closing conditions, including
regulatory approvals, and is expected to occur in the second quarter of 2006.
Although we currently have no material commitments for capital
expenditures, we plan to make expenditures of approximately $3.7 million during
the remainder of 2006 for property, plant, and equipment.
In the future, our liquidity position will be primarily affected by the
level of cash flows from operations and the amount of cash expended on debt
repayments, capital projects, stock repurchases, or additional acquisitions, if
any. We believe that our existing resources, together with the cash available
from our Credit Agreement and the cash we expect to generate from continuing
operations, will be sufficient to meet the capital requirements of our current
operations for the foreseeable future.
<
32
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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
2005.
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 1, 2006. 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 of April
1, 2006, our Chief Executive Officer and Chief Financial Officer concluded that
as of April 1, 2006, 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 1, 2006 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
33
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KADANT INC.
PART II - OTHER INFORMATION
Item 1A - 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 2006 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.
A significant portion of our international sales has, and may in the future,
come from China.
During the first quarter of 2006 approximately $10.8 million, or 14%, of
our revenues were to customers in China. An increase in revenues, as well as our
proposed acquisition of Huayi, 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.
Our business is subject to economic, currency, political, and other risks
associated with international sales and operations.
During the first quarter of 2006 approximately 57% of our sales were to
customers outside the United States, principally in Europe and Asia.
International revenues are subject to a number of risks, including the
following:
- agreements may be difficult to enforce and receivables difficult to
collect through a foreign country's legal system;
- foreign customers may have longer payment cycles;
- foreign countries may impose additional withholding taxes or
otherwise tax our foreign income, impose tariffs, or adopt other
restrictions on foreign trade; and
- the protection of intellectual property in foreign countries may be
more difficult to enforce.
Although we seek to charge our customers in the same currency in which
our operating costs are incurred, fluctuations in currency exchange rates may
affect product demand and adversely affect the profitability in U.S. dollars of
products we provide in international markets where payment for our products and
services is made in their local currencies. Any of these factors could have a
material adverse impact on our business and results of operations.
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KADANT INC.
Risk Factors (continued)
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, as subsequently
amended, consisting of a $60 million five-year term loan and a $35 million
revolver. On May 11, 2005, we borrowed $60 million to fund the acquisition of
Kadant Johnson under the term loan. On May 4, 2006, we borrowed $10 million
under a ten-year variable-rate note. 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 and the $10 million note. As a result, our interest
payment obligations on this indebtedness will increase if interest rates
increase. To reduce the exposure to floating rates, we have converted 60% of the
original term loan and the $10 million note to fixed rates of interest through
interest rate swap agreements.
Our ability to satisfy our obligations and to reduce our total debt
depends on our future operating performance and on economic, financial,
competitive, and other factors beyond our control. Our business may not generate
sufficient cash flows to meet these obligations or to successfully execute our
business strategy. If we are unable to service our debt and fund our business,
we may be forced to reduce or delay capital expenditures or research and
development expenditures, seek additional financing or equity capital,
restructure or refinance our debt, or sell assets. We may not be able to obtain
additional financing or refinance existing debt or sell assets on terms
acceptable to us or at all.
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KADANT INC.
Risk Factors (continued)
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 and the Loan, which
could permit acceleration of the debt under those instruments and require us to
repay the 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 debt agreements, those lenders may be entitled to
foreclose on and sell the collateral that secures our borrowings under the
agreements.
Our Kadant Composites LLC subsidiary is responsible for certain continued
warranty obligations associated with its former composites business, even though
it has disposed of this business.
On October 21, 2005, Kadant Composites LLC sold its composites business.
As part of the transaction, Kadant Composites LLC retained the warranty
obligation associated with products manufactured prior to the sale date. Our
consolidated results will continue to be impacted by these warranty obligations
and we may be unable to accurately predict the potential liabilities related to
these product warranties. In 2003 and 2004, Kadant Composites LLC experienced a
significant increase in warranty claims and warranty expense related to its
composite decking products including, but not limited to, contraction of certain
deck boards and excessive oxidation that affects the integrity of the plastic
used in some of its decking products. Included in the increased warranty expense
was the cost of exchanging material held by its distributors with new material
that, we believe, is not susceptible to this oxidation issue, and our best
estimate of future potential costs related to valid claims arising from
installed products. In 2005, Kadant Composites LLC experienced a
higher-than-expected level of warranty claims associated with previously
identified product issues. Although Kadant Composites LLC increased the warranty
provisions accordingly, the reserve established may not be sufficient if Kadant
Composites LLC incurs warranty claims higher than anticipated. It is reasonably
possible that the ultimate settlement of such warranty claims may exceed the
amount of the warranty reserve. In addition, there can be no assurance that
other problems will not develop. A continued high level of warranty claims or
expenses would have an adverse impact on the warranty reserve and would
adversely affect our consolidated results.
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KADANT INC.
Risk Factors (continued)
Our inability to successfully integrate Kadant Johnson into our business could
have a material adverse effect on our business.
On May 11, 2005, we acquired Kadant Johnson. The integration of Kadant
Johnson into our business involves the merger of employees, products, and
services over multiple U.S. and international locations. We may not be
successful in integrating this business into our current structure, or in
obtaining the anticipated cost savings or synergies from the acquisition. To
meet our quarterly certification requirements and in anticipation of
incorporating Kadant Johnson into our 2006 Sarbanes-Oxley compliance process,
we will also be performing a detailed review of Kadant Johnson's internal
control structure to ensure that its controls over financial reporting are
consistent with our policies and procedures. Given the multi-location structure
of the Kadant Johnson business, this review will take significant time and
effort, similar to our Sarbanes-Oxley compliance efforts in 2004, and will
involve significant cost. During this process, we may identify control
deficiencies in addition to those disclosed elsewhere in this periodic
report. Our ability to realize the value of the goodwill and other intangibles
recorded for this acquisition will depend on the future cash flows of the Kadant
Johnson business. If these future cash flows are below what we anticipated, we
may incur future impairment losses associated with goodwill and intangibles,
which could have a material adverse effect on our results of operations.
Our inability to successfully complete the acquisition of a manufacturing
and assembly plant in China could adversely affect our business.
Our strategy includes the ability to manufacture components and equipment
in low-cost regions such as China. We recently entered into an asset purchase
agreement to acquire a Chinese supplier of stock-preparation equipment. The
closing of this acquisition is subject to a number of conditions, including the
satisfaction of customary conditions, including regulatory approvals, and there
is no assurance that we will be able to complete this acquisition on favorable
terms or on a timely basis. Our inability to successfully complete the
acquisition would delay the implementation of our strategy to manufacture parts
and components for stock-preparation equipment in a low-cost region, and could
adversely affect our ability to compete cost-effectively in Asia and other
markets.
In anticipation of completing this acquisition, we have terminated our
efforts to construct an assembly and manufacturing facility outside Beijing. We
may not be able to recoup our expenses to date associated with the formation of
our subsidiary to operate this facility, such as the design and construction of
the facility, and other costs incurred in connection with this effort.
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 such 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 and,
as a result, we have recorded significant goodwill and intangible assets on our
balance sheet. 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 and
intangibles that we have recorded will depend on the future performance and cash
flows of these businesses, which will depend, in part, on how well we have
integrated these businesses.
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KADANT INC.
Risk Factors (continued)
Our inability to obtain the anticipated benefits from the restructuring of our
Kadant Lamort subsidiary would have a negative effect on our future operating
results.
In an effort to improve operating performance at our Kadant Lamort
subsidiary in France, we approved a restructuring of that subsidiary on November
18, 2004. This restructuring was intended to strengthen Kadant Lamort's
competitive position in the European paper industry. 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. If we are unable
to obtain the anticipated benefits from this restructuring, our future operating
results will be negatively impacted.
Natural gas is a significant cost in the manufacture of our fiber-based granular
products, and our results from operations will be adversely affected by
continued high natural gas costs.
We use natural gas in the production of our fiber-based granular
products, the price of which is subject to fluctuation. We seek to manage our
exposure to natural gas price fluctuations by entering into short-term forward
contracts to purchase specified quantities of natural gas from a supplier. We
may not be able to effectively manage our exposure to natural gas price
fluctuations. Continued high costs of natural gas will adversely affect our
consolidated results if we are unable to effectively manage our exposure or pass
these costs on to customers in the form of surcharges.
We are dependent on two mills for the raw material used in our fiber-based
granules, and we may not be able to obtain raw material on commercially
reasonable terms.
We are dependent on two paper mills for the fiber used in the manufacture
of our fiber-based granular products. These mills have the exclusive right to
supply the papermaking byproducts used in the manufacturing process. Due to
manufacturing changes at the mills, we recently had some difficulty obtaining
sufficient raw material to operate at optimal production levels. We are working
with the mills to ensure a stable supply of raw material. To date, we have been
able to meet all of our customer delivery requirements, but there can be no
assurance that we will be able to meet future delivery requirements. Although we
believe our relationship with the mills is good, the mills could decide not to
renew the contract when it expires at the end of 2007, or may not agree to renew
on commercially reasonable terms. If the mills were unable or unwilling to
supply us sufficient fiber, we would be forced to find an alternative supply for
this raw material. We may be unable to find an alternative supply on
commercially reasonable terms or could incur excessive transportation costs if
an alternative supplier were found, which would increase our manufacturing costs
and might prevent prices for our products from being competitive.
Our inability to protect our intellectual property could have a material adverse
effect on our business. In addition, third parties may claim that we infringe
their intellectual property, and we could suffer significant litigation or
licensing expense as a result.
We place considerable emphasis on obtaining patent and trade secret
protection for significant new technologies, products, and processes because of
the length of time and expense associated with bringing new products through the
development process and into the marketplace. Our success depends in part on our
ability to develop patentable products and obtain and enforce patent protection
for our products both in the United States and in other countries. We own
numerous U.S. and foreign patents, and we intend to file additional
applications, as appropriate, for patents covering our products. Patents may not
be issued for any pending or future patent applications owned by or licensed to
us, and the claims allowed under any issued patents may not be sufficiently
broad to protect our technology. Any issued patents owned by or licensed to us
may be challenged, invalidated, or circumvented, and the rights under these
patents may not provide us with competitive advantages. A patent relating to our
fiber-based granular products expired in the second quarter of 2004. As a
result, we 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 share. 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
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KADANT INC.
Risk Factors (continued)
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;
- failure of a customer, particularly in China, to comply with an
order's contractual obligations;
- 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;
- delays or problems in the manufacture of our 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;
- changes in the timing of product orders; and
- fluctuations in our effective tax rate.
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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 2 - Unregistered Sales of Equity Securities and Use of Proceeds
- --------------------------------------------------------------------
On April 1, 2006, we issued an aggregate of 10,000 shares of our common
stock, $0.01 par value per share, to our outside directors nominated for
re-election at our 2006 annual meeting, pursuant to our Amended and Restated
Directors' Restricted Stock Plan. 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 first quarter of 2006:
Issuer Purchases of Equity Securities
-------------------------------------
Approximate Dollar
Total Number of Value of Shares that
Shares Purchased as May Yet Be
Total Number of Average Price Paid Part of Publicly Purchased
Period Shares Purchased (1) per Share Announced Plans (2) Under the Plans
- ----------------------------------------------------------------------------------------------------------------------------
1/1/06 - 1/31/06 - - - $ 7,944,105
2/1/06 - 2/28/06 - - - $ 7,944,105
3/1/06 - 4/1/06 - - - $ 7,944,105
Total: - - -
(1) During the first quarter of 2006, we did not repurchase any of our common stock.
(2) On May 6, 2005, our board of directors approved the repurchase by us of up to $15 million of our equity
securities in the open market or in negotiated transactions for the period from May 18, 2005 through
May 18, 2006. As of April 1, 2006, we had repurchased 376,700 shares of our
common stock for $7.1 million under this authorization.
Item 6 - Exhibits
- -----------------
See Exhibit Index on the page immediately preceding exhibits.
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KADANT INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 11th day of May, 2006.
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.
43
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 1, 2006 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 11, 2006 /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 1, 2006 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 11, 2006 /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 1, 2006 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 Annual
Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Dated: May 11, 2006 /s/ William A. Rainville
---------------------------
William A. Rainville
Chief Executive Officer
/s/ Thomas M. O'Brien
---------------------------
Thomas M. O'Brien
Chief Financial Officer