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 3, 2004 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number 1-11406
KADANT INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1762325
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
One Acton Place, Suite 202
Acton, Massachusetts 01720
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (978) 776-2000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether or not the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 5, 2004
---------------------------- --------------------------
Common Stock, $.01 par value 14,289,907
PART I - Financial Information
Item 1 - Financial Statements
KADANT INC.
Condensed Consolidated Balance Sheet
(Unaudited)
Assets
April 3, January 3,
(In thousands) 2004 2004
- --------------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 80,887 $ 74,451
Accounts receivable, less allowances of $1,801 and $1,680 34,583 32,507
Unbilled contract costs and fees 7,160 10,755
Inventories (Note 5) 32,156 33,203
Deferred tax asset 7,715 7,710
Other current assets 3,701 3,187
-------- --------
166,202 161,813
-------- --------
Property, Plant, and Equipment, at Cost 76,495 77,458
Less: Accumulated depreciation and amortization 52,253 51,631
-------- --------
24,242 25,827
-------- --------
Other Assets 10,191 10,537
-------- --------
Goodwill 73,801 73,536
-------- --------
$274,436 $271,713
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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KADANT INC.
Condensed Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
April 3, January 3,
(In thousands, except share amounts) 2004 2004
- --------------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Current maturities of long-term obligations $ 381 $ 598
Accounts payable 22,531 23,896
Accrued payroll and employee benefits 8,261 11,356
Accrued warranty costs 4,922 4,530
Customer deposits 3,550 2,406
Accrued income taxes 2,047 1,040
Other current liabilities 8,783 10,983
-------- --------
50,475 54,809
-------- --------
Deferred Income Taxes 1,280 1,617
-------- --------
Other Long-Term Liabilities 3,244 3,178
-------- --------
Minority Interest 48 351
-------- --------
Shareholders' Investment:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none issued - -
Common stock, $.01 par value, 150,000,000 shares authorized
and 14,497,800 and 14,309,892 shares issued 145 143
Capital in excess of par value 97,089 94,454
Retained earnings 131,247 128,519
Treasury stock at cost, 198,226 and 208,226 shares (8,366) (8,788)
Deferred compensation (201) (31)
Accumulated other comprehensive loss (Note 2) (525) (2,539)
-------- --------
219,389 211,758
-------- --------
$274,436 $271,713
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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KADANT INC.
Condensed Consolidated Statement of Income
(Unaudited)
Three Months Ended
-----------------------------
April 3, March 29,
(In thousands, except per share amounts) 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $51,727 $51,375
------- -------
Costs and Operating Expenses:
Cost of revenues 31,965 32,208
Selling, general, and administrative expenses 14,868 13,512
Research and development expenses 1,018 1,043
------- -------
47,851 46,763
------- -------
Operating Income 3,876 4,612
Interest Income 329 236
Interest Expense (8) (17)
------- -------
Income Before Provision for Income Taxes 4,197 4,831
Provision for Income Taxes (1,469) (1,836)
------- -------
Net Income $ 2,728 $ 2,995
======= =======
Basic and Diluted Earnings per Share $ 0.19 $ 0.22
======= ========
Weighted Average Shares (Note 3):
Basic 14,222 13,574
======= =======
Diluted 14,603 13,767
======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Condensed Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
-----------------------------
April 3, March 29,
(In thousands) 2004 2003
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 2,728 $ 2,995
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,226 1,285
Provision for losses on accounts receivable 159 175
Other noncash items 7 116
Changes in current accounts:
Accounts receivable (3,113) (265)
Unbilled contract costs and fees 3,698 (6,204)
Inventories 1,469 (2,080)
Other current assets (176) (282)
Accounts payable (1,680) 4,184
Other current liabilities (3,260) (964)
------- -------
Net cash provided by (used in) operating activities 1,058 (1,040)
------- -------
Investing Activities:
Purchases of property, plant, and equipment (443) (853)
Proceeds from sale of property, plant, and equipment 1,274 12
Acquisition of minority interest in subsidiary (318) -
Other, net (47) (64)
------- -------
Net cash provided by (used in) investing activities 466 (905)
------- -------
Financing Activities:
Net proceeds from issuance of Company common stock 3,780 306
Repayments of long-term obligations (217) (204)
------- -------
Net cash provided by financing activities 3,563 102
------- -------
Exchange Rate Effect on Cash 1,349 2,391
------- -------
Increase in Cash and Cash Equivalents 6,436 548
Cash and Cash Equivalents at Beginning of Period 74,451 44,429
------- -------
Cash and Cash Equivalents at End of Period $80,887 $44,977
======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements.
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. General
The interim condensed consolidated financial statements and related notes
presented have been prepared by Kadant Inc. (also referred to in this document
as "we," "Kadant," "the Company," or "the Registrant") without audit and, in the
opinion of management, reflect all adjustments of a normal recurring nature
necessary for a fair statement of the Company's financial position at April 3,
2004, and its results of operations and cash flows for the three-month periods
ended April 3, 2004, and March 29, 2003. Interim results are not necessarily
indicative of results for a full year.
The condensed consolidated balance sheet presented as of January 3, 2004,
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 financial
statements and related notes of the Company. The condensed consolidated
financial statements and notes included herein should be read in conjunction
with the financial statements and related notes included in the Company's Annual
Report on Form 10-K for the fiscal year ended January 3, 2004, filed with the
Securities and Exchange Commission.
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 balance sheet, including foreign
currency translation adjustments and deferred gains and losses on foreign
currency contracts. During the first quarters of 2004 and 2003, the Company had
comprehensive income of $4,742,000 and $6,746,000, respectively. The components
of comprehensive income were as follows:
Three Months Ended
-------------------------
April 3, March 29,
(In thousands) 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Net Income $2,728 $2,995
------ ------
Other Comprehensive Income
Foreign Currency Translation Adjustments 2,036 3,747
Deferred (Loss) Gain on Foreign Currency Contracts (22) 4
------ ------
2,014 3,751
------ ------
Comprehensive Income $4,742 $6,746
====== ======
3. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended
-------------------------
April 3, March 29,
(In thousands, except per share amounts) 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Basic
Net Income $2,728 $2,995
------ ------
Weighted Average Shares 14,222 13,574
------ ------
Basic Earnings per Share $ 0.19 $ 0.22
====== ======
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. Earnings per Share (continued)
Three Months Ended
-------------------------
April 3, March 29,
(In thousands, except per share amounts) 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Diluted
Net Income $2,728 $2,995
------ ------
Weighted Average Shares 14,222 13,574
Effect of Stock Options 381 193
------ ------
Weighted Average Shares, as Adjusted 14,603 13,767
------ ------
Diluted Earnings per Share $ 0.19 $ 0.22
====== ======
Options to purchase approximately 238,800 and 393,400 shares of common
stock for the first quarters of 2004 and 2003, 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/or
their effect would have been antidilutive.
4. Warranty Obligations
The Company provides for the estimated cost of product warranties,
primarily using historical information and estimated repair costs, at the time
product revenue is recognized. In the Pulp and Papermaking Equipment and Systems
(Papermaking Equipment) segment the Company typically negotiates the terms
regarding warranty coverage and length of warranty depending on the products and
applications. In the Composite and Fiber-based Products segment, the Company
offers a standard limited warranty on its composite building products restricted
to repair or replacement of the defective product or refund of the original
purchase price. The composite building products business experienced an increase
in warranty claims versus historical claim rates in the latter half of 2003 and
the first quarter of 2004. The Company increased its estimated costs for product
warranties for this business and recorded related warranty expenses of $496,000
in the first quarter of 2004 compared to $133,000 in the first quarter of 2003.
While the Company engages in extensive product quality programs and processes,
its warranty obligation is affected by product failure rates, repair costs,
service delivery costs incurred in correcting product failures, and supplier
warranties on parts delivered to the Company. Should actual product failure
rates, repair costs, service delivery costs, or supplier warranties on parts
differ from the Company's estimates, revisions to the estimated warranty
liability would be required.
The changes in the carrying amount of the Company's consolidated product
warranties for the three months ended April 3, 2004 and March 29, 2003, are as
follows:
Three Months Ended
---------------------------
April 3, March 29,
(In thousands) 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Balance at Beginning of Period $4,530 $4,310
Provision charged to income 1,295 603
Usage (946) (470)
Other, net (a) 43 121
------ ------
Balance at End of Period $4,922 $4,564
====== ======
(a) Represents the effects of currency translation.
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
5. Inventories
The components of inventories are as follows:
April 3, January 3,
(In thousands) 2004 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Raw Materials and Supplies $12,838 $13,049
Work in Process 7,823 7,806
Finished Goods (includes $795 and $860 at customer locations) 11,495 12,348
------- -------
$32,156 $33,203
======= =======
6. Restructuring Items
During 2003, the Company recorded net restructuring and unusual income of
$23,000, including $626,000 of restructuring costs and $649,000 of unusual
income as detailed hereafter. During the second quarter of 2003, the Company
recorded restructuring costs of $469,000, which were accounted for in accordance
with Statement of Financial Accounting Standards (SFAS) No. 112, related to
severance costs for seven employees across all functions at the Papermaking
Equipment segment's Kadant Lamort subsidiary. During the third quarter of 2003,
the Company recorded an additional $157,000 of costs related to this
restructuring activity. These actions were taken in an effort to improve
profitability and were in response to a continued weak market environment and
reduced demand for the Company's products. During the second quarter of 2003,
unusual income resulted from a gain of $649,000 from the sale of property, for
approximately $921,000 in cash, at the same subsidiary.
A summary of the changes in accrued restructuring costs associated with
the 2003 Restructuring Plan, which are included in other current liabilities in
the accompanying condensed consolidated balance sheet, is as follows:
(In thousands) Severance
-------------------------------------------------------------------------------------
2003 Restructuring Plan
Balance at January 3, 2004 $ 200
Usage (46)
Currency translation 8
------
Balance at April 3, 2004 $ 162
======
The specific restructuring measures and associated estimated costs are
based on the Company's best judgments under prevailing circumstances. The
Company believes that the restructuring reserve balance is adequate to carry out
its restructuring activities and anticipates that all actions related to these
liabilities will be completed by the end of 2004.
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. Business Segment Information
Three Months Ended
---------------------------
April 3, March 29,
(In thousands) 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues:
Pulp and Papermaking Equipment and Systems $ 45,564 $ 45,557
Composite and Fiber-based Products 6,163 5,818
-------- --------
$ 51,727 $ 51,375
======== ========
Income Before Income Taxes:
Pulp and Papermaking Equipment and Systems (a) $ 6,343 $ 5,240
Composite and Fiber-based Products (b) (636) 412
Corporate (c) (1,831) (1,040)
-------- --------
Total Operating Income 3,876 4,612
Interest Income, Net 321 219
-------- --------
$ 4,197 $ 4,831
======== ========
Capital Expenditures:
Pulp and Papermaking Equipment and Systems $ 330 $ 202
Composite and Fiber-based Products 110 648
Corporate 3 3
-------- --------
$ 443 $ 853
======== ========
(a) Includes a gain of $971 in the 2004 period, which resulted from renegotiating a series of agreements with one of the
Company's licensees.
(b) Includes an operating loss of $932 in the 2004 period and operating income of $84 in the 2003 period from the composite
building products business.
(c) Primarily general and administrative expenses.
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
8. Stock-Based Compensation
As permitted by SFAS No. 148, "Accounting for Stock-based Compensation -
Transition and Disclosure," and SFAS No. 123, "Accounting for Stock-based
Compensation," the Company has elected to continue to apply Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations to account for its stock-based compensation plans. No
stock-based employee compensation cost related to stock option awards is
reflected in net income, as all options granted under the plans had an exercise
price equal to the market value of the underlying common stock on the date of
grant. Had compensation cost for awards granted after 1994 under the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates consistent with the method set forth under SFAS No. 123, the effect
on certain of the Company's financial results would have been as follows:
Three Months Ended
------------------------
April 3, March 29,
(In thousands, except per share amounts) 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------
Net Income:
As reported $ 2,728 $ 2,995
Deduct: Total stock-based employee compensation expense determined under the
fair-value-based method for all awards, net of tax (506) (669)
------- -------
Pro forma $ 2,222 $ 2,326
======= =======
Basic Earnings per Share:
As reported $ 0.19 $ 0.22
======= =======
Pro forma $ 0.16 $ 0.17
======= =======
Diluted Earnings per Share:
As reported $ 0.19 $ 0.22
======= =======
Pro forma $ 0.15 $ 0.17
======= =======
9. Employee Benefit Plans
Defined Benefit Pension Plan
One of the Company's U.S. subsidiaries has a noncontributory defined
benefit retirement plan. Benefits under the plan are based on years of service
and employee compensation. Funds are contributed to a trustee as necessary to
provide for current service and for any unfunded projected benefit obligation
over a reasonable period. The same subsidiary has a post-retirement welfare
benefits plan (reflected in the table below in "Other Benefits"). No future
retirees are eligible for the post-retirement welfare benefits plan, and the
plan includes a limit on the subsidiary's contributions.
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
9. Employee Benefit Plans (continued)
The following summarizes the components of the net periodic benefit cost
for the pension benefits and other benefits plans in the first quarter of 2004
and 2003.
Three Months Ended Three Months Ended
April 3, 2004 March 29, 2003
------------------------- ------------------------
(In thousands) Pension Other Pension Other
Benefits Benefits Benefits Benefits
- --------- --------
Components of Net Periodic Benefit Cost:
Service cost $ 162 $ - $ 156 $ -
Interest cost 257 13 257 19
Expected return on plan assets (342) - (317) -
Recognized net actuarial loss - 9 12 10
Amortization of prior service cost 11 (15) 11 (11)
-------- ------- -------- --------
Net periodic benefit cost $ 88 $ 7 $ 119 $ 18
======== ======= ======== ========
The weighted-average assumptions used to determine net periodic benefit cost were as follows:
Discount rate 6.25% 6.25% 6.75% 6.75%
Expected long-term return on plan assets 8.50% - 8.75% -
Rate of compensation increase 4.00% - 5.00% -
No cash contributions are expected for the pension and post-retirement welfare benefits plans in 2004.
10. Recent Accounting Pronouncements
Consolidation of Variable Interest Entities
In January 2003, the Financial Accounting Standards Board (FASB)
released Interpretation No. 46, "Consolidation of Variable Interest Entities."
FIN No. 46 requires that all primary beneficiaries of Variable Interest Entities
(VIE) consolidate such entities. FIN No. 46 was effective immediately for VIEs
created after January 31, 2003, and for VIEs in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to VIEs in which an enterprise holds a variable
interest it acquired before February 1, 2003. In December 2003, the FASB
published a revision to FIN No. 46 (FIN No. 46R) to clarify some of the
provisions of the interpretation and to defer the effective date of
implementation for certain entities. Under the guidance of FIN No. 46R, entities
that do not have interests in structures that are commonly referred to as
special purpose entities are required to apply the provisions of the
interpretation in financial statements for periods ending after March 14, 2004.
The Company does not have interests in special purpose entities and the adoption
of the provisions of FIN No. 46R in the first quarter of 2004 did not have an
effect on its condensed consolidated financial statements.
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KADANT INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
This Quarterly Report on Form 10-Q includes forward-looking statements
that are not statements of historical fact, and may include statements regarding
possible or assumed future results of operations. Forward-looking statements are
subject to risks and uncertainties and are based on the beliefs and assumptions
of our management, using information currently available to our management. When
we use words such as "believes," "expects," "anticipates," "intends," "plans,"
"estimates," "should," "likely," "will," "would," or similar expressions, we are
making forward-looking statements.
Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties, and assumptions. Our future results of operations
may differ materially from those expressed in the forward-looking statements.
Many of the important factors that will determine these results and values are
beyond our ability to control or predict. You should not put undue reliance on
any forward-looking statements. We undertake no obligation to publicly update
any forward-looking statement, whether as a result of new information, future
events, or otherwise. For a discussion of important factors that may cause our
actual results to differ materially from those suggested by the forward-looking
statements, you should read carefully the section captioned "Risk Factors" in
this Report.
Overview
Company Background
We operate in two segments: the Pulp and Papermaking Equipment and
Systems (Papermaking Equipment) segment and the Composite and Fiber-based
Products segment. Through our Papermaking Equipment segment, we develop,
manufacture, and market a range of equipment and products for the domestic and
international papermaking and paper recycling industries. We have a large,
stable customer base that includes most of the world's major paper
manufacturers. As a result, we have one of the largest installed bases of
equipment in the pulp and paper industry. Our installed base provides us with a
spare parts and consumables business that yields higher margins than our capital
equipment business and which, we believe, is less susceptible to the cyclical
trends in the paper industry.
Through our Composite and Fiber-based Products segment, we develop,
manufacture, and market composite products made from recycled fiber and plastic,
primarily for the building industry, and manufacture and sell granules derived
from pulp fiber for use as carriers for agricultural, home lawn and garden, and
professional lawn, turf and ornamental applications.
The Company was incorporated in Delaware in November 1991 to be the
successor-in-interest to several papermaking equipment businesses of Thermo
Electron Corporation (Thermo Electron). In November 1992, we completed an
initial public offering of a portion of our outstanding common stock. On July
12, 2001, the Company changed its name to Kadant Inc. from Thermo Fibertek Inc.
In August 2001, Thermo Electron disposed of its remaining equity interest in
Kadant by means of a stock dividend to its shareholders. In May 2003, we moved
the listing of our common stock to the New York Stock Exchange, where it
continues to trade under the symbol KAI.
Pulp and Papermaking Equipment and Systems Segment
Our Papermaking Equipment segment designs and manufactures
stock-preparation systems and equipment, paper machine accessory equipment, and
water-management systems for the paper and paper recycling industries. Principal
products include:
- Stock-preparation systems and equipment: custom-engineered systems
and equipment, as well as standard individual components, for
pulping, de-inking, screening, cleaning, and refining recycled and
virgin fibers for preparation for entry into the paper machine
during the production of recycled paper;
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KADANT INC.
Overview (continued)
- Paper machine accessory equipment: doctoring systems and related
consumables that continuously clean papermaking rolls to keep paper
machines running efficiently; doctor blades made of a variety of
materials to perform functions including cleaning, creping, web
removal, and application of coatings; and profiling systems that
control moisture, web curl, and gloss during paper production; and
- Water-management systems: systems and equipment used to continuously
clean paper machine fabrics and to drain, purify, and recycle
process water during paper sheet formation.
Composite and Fiber-Based Products Segment
Our Composite and Fiber-based Products segment consists of two product
lines: composite building products and fiber-based granular products. Our
principal products include:
- Composite building products: decking and railing systems and roof
tiles produced from recycled fiber, plastic, and other materials,
and marketed through distributors primarily to the building
industry; and
- Fiber-based granular products: biodegradable, absorbant granules
made from papermaking byproducts for use primarily as carriers in
agricultural, home lawn and garden, and professional lawn, turf and
ornamental applications.
International Sales
During the first quarter of 2004, approximately 54% 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 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
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from these estimates under
different assumptions or conditions.
Critical accounting policies are defined as those that reflect
significant judgments and uncertainties, and could potentially result in
materially different results under different assumptions and conditions. We
believe that our most critical accounting policies, upon which our financial
condition depends and which involve the most complex or subjective decisions or
assessments, are those described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" under the section captioned
"Application of Critical Accounting Policies and Estimates" in Item 7 of our
Annual Report on Form 10-K for the fiscal year ended January 3, 2004, filed with
the Securities and Exchange Commission. There have been no material changes to
these critical accounting policies since year-end 2003 that warrant further
disclosure.
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KADANT INC.
Overview (continued)
Industry and Business Outlook
Our products are primarily sold to the pulp and paper industry. Although
there are early signs that a recovery may be underway, particularly in North
America, the paper industry has been in a prolonged downcycle for the past
several years. Over this period of time, the industry has been characterized by
weak pulp and paper prices, decreased capital spending, and consolidation of
paper companies within the industry. As paper companies have consolidated in
response to market weakness, they have reduced capacity and postponed or even
cancelled capacity addition or expansion projects. This tendency, along with
paper companies' actions to quickly reduce operating rates and restrict capital
spending and maintenance programs, has adversely affected our business. Over the
long term, as the market recovers, we expect that consolidation in the paper
industry and improved capacity management will have a positive effect on paper
companies' financial performance and, in return, will be favorable to both paper
companies and their suppliers, such as Kadant.
There has been a significant amount of downtime at paper mills in North
America and Europe which, coupled with weak economic conditions in the paper
industry, has produced a difficult market environment resulting in deferrals of
capital projects by paper companies and pricing pressure in some of our product
lines. To mitigate the effects of these market conditions, we continue to
concentrate our efforts on several initiatives intended to improve our operating
results, including: (i) expanding our business in China, (ii) increasing our
higher-margin parts and consumables businesses across all our product lines,
(iii) sourcing the manufacture of non-proprietary components from third-party
suppliers, (iv) shifting more production to our lower-cost manufacturing
facilities, and (v) lowering our manufacturing overhead costs throughout the
business. In addition, we continue to focus our efforts on managing our
operating costs, capital expenditures, and working capital.
Despite the challenging industry environment in North America and Europe,
we are pursuing several market opportunities in other parts of the world. In the
last several years, China has become a significant market for our
stock-preparation equipment. To capitalize on this growing market, we have
established a wholly owned subsidiary that will operate a manufacturing and
assembly facility in China for this equipment and related aftermarket products,
as well as for our accessories and water-management products in the future.
Although we are making progress in growing our aftermarket sales in China,
revenues there are primarily derived from large capital orders, the timing of
which is often difficult to predict. We plan to use our new facility in China as
a base for increasing our aftermarket business, which we believe will be more
predictable.
We have also continued to invest in our composite building products
business which, we believe, provides us with another internal growth
opportunity. We believe that the market for composite building products will
continue to grow as consumer awareness of the advantages of these products
increases their acceptance as an alternative to traditional wood products. We
continue to focus on expanding our distribution network, with numerous wholesale
distribution centers, as well as retail lumber centers throughout the U.S., now
carrying our composite decking products.
We did, however, experience some problems in the composite building
products business that affected our profitability in the first quarter of 2004
and will continue to hamper profitability in the second quarter of 2004. As
planned, we curtailed production in the first quarter of 2004 at our composites
facility in Green Bay, Wisconsin, as we had sufficient inventory to meet current
demand. In addition, in the first quarter of 2004, we experienced an increase in
warranty claims over the first quarter of 2003 associated with excessive
contraction of certain decking products, which had an adverse impact on
profitability. Although we believe this problem was corrected in the third
quarter of last year, we are still experiencing claims associated with product
produced and installed before the corrective action was implemented. Lower
production levels and the increase in warranty expense as a percentage of
revenues over last year will continue to have a significant adverse impact on
our profitability in the composite building products business in the second
quarter of 2004. These factors considered, we expect our composite building
products business to report, on a generally accepted
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KADANT INC.
Overview (continued)
accounting principles (GAAP) basis, an operating loss of $0.5 to $0.7 million,
on revenues of $4 to $4.5 million, for the second quarter of 2004. We are
maintaining our previously announced guidance for this business, and expect to
report an operating loss of $0.8 to $1.2 million, on revenues of $15 to $17
million for the full year.
For the total company we expect to earn, on a consolidated GAAP basis,
for the second quarter of 2004, from $0.21 to $0.23 per diluted share, on
revenues of $55 to $57 million. For the full year, we are maintaining our
previously announced guidance of $0.90 to $1.00 per diluted share on a GAAP
basis, on revenues of $205 to $215 million.
Results of Operations
First Quarter 2004 Compared With First Quarter 2003
- ---------------------------------------------------
The following table sets forth, for the first fiscal quarters of 2004 and
2003, our unaudited Condensed Consolidated Statement of Income expressed as a
percentage of total revenues. The results of operations for the fiscal quarter
ended April 3, 2004 are not necessarily indicative of the results to be expected
for the full fiscal year.
Three Months Ended
-----------------------------
April 3, March 29,
2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
Revenues 100.0% 100.0%
------ ------
Costs and Operating Expenses:
Cost of revenues 61.8 62.7
Selling, general, and administrative expenses 28.7 26.3
Research and development expenses 2.0 2.0
------ ------
92.5 91.0
------ ------
Operating Income 7.5 9.0
Interest Income, net 0.6 0.4
------ ------
Income Before Provision for Income Taxes 8.1 9.4
Provision for Income Taxes 2.8 3.6
------ ------
Net Income 5.3% 5.8%
====== ======
Revenues
Revenues increased slightly to $51.7 million in the first quarter of 2004 from $51.4 million in the first quarter of
2003, an increase of $0.3 million, or 1%. Revenues in 2004 include a favorable effect of currency translation of $3.0
million due to a weaker U.S. dollar relative to most of the functional currencies in countries in which we operate.
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KADANT INC.
Results of Operations (continued)
Revenues for the first quarter of 2004 and 2003 by segment were as follows:
Three Months Ended
-----------------------------
April 3, March 29,
(In thousands) 2004 2003
- ----------------------------------------------------- ---------------------------------------------------------------------------
Revenues:
Pulp and Papermaking Equipment and Systems $ 45,564 $ 45,557
Composite and Fiber-based Products 6,163 5,818
-------- --------
$ 51,727 $ 51,375
======== ========
Pulp and Papermaking Equipment and Systems Segment. Revenues at the
Papermaking Equipment segment were $45.6 million in both the first quarters of
2004 and 2003. Revenues in 2004 include the favorable effect of currency
translation described above, all of which occurred in this segment. Revenues
from the Papermaking Equipment segment's stock-preparation equipment product
line decreased by $2.7 million, or 11%. Revenues in the stock-preparation
equipment product line included a $1.3 million, or 6%, favorable effect from
currency translation in the first quarter of 2004 compared to the first quarter
of 2003. Revenues in this product line decreased as a result of continued market
weakness in North America and Europe and due to a decrease in export sales to
China. Revenues in the stock-preparation equipment product line from China were
$6.7 million in the first quarter of 2004 compared to $8.3 million in the first
quarter of 2003. Revenues from the segment's paper machine accessories product
line increased $2.1 million, or 14%, including a $1.3 million favorable effect
of currency translation, in the first quarter of 2004 compared to the first
quarter of 2003. Revenues from the segment's water-management product line
increased $0.6 million, or 9%, including a $0.3 million favorable effect of
currency translation, in the first quarter of 2004 compared to the first quarter
of 2003.
Composite and Fiber-Based Products Segment. Revenues at the Composite
and Fiber-based Products segment increased to $6.2 million in the first quarter
of 2004 from $5.8 million in the first quarter of 2003, as a result of an
increase of $0.5 million in sales of our fiber-based granular products due to
stronger sales of Biodac, our patented product family of biodegradable granules
that we produce from papermaking byproducts. This increase was slightly offset
by a decrease in revenues from our composite building products of $0.1 million
in the first quarter of 2004 compared with the first quarter of 2003.
Gross Profit Margin
Gross profit margin was 38% in the first quarter of 2004 compared to 37%
in the first quarter of 2003.
Gross profit margin for the first quarters of 2004 and 2003 by segment
was as follows:
Three Months Ended
---------------------------
April 3, March 29,
2004 2003
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Profit Margin:
Pulp and Papermaking Equipment and Systems 41.3% 38.2%
Composite and Fiber-based Products 15.6 32.0
----- -----
38.2% 37.3%
The gross profit margin at the Papermaking Equipment segment increased to
41% in the first quarter of 2004 from 38% in the first quarter of 2003 primarily
due to higher margins achieved on sales of capital equipment, strong aftermarket
revenues in China, and a favorable product mix. The gross profit margin at the
Composite and Fiber-based Products segment decreased to 16% in the first quarter
of 2004 from 32% in the first quarter of 2003 due to
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KADANT INC.
Results of Operations (continued)
significantly lower product margins in our composite building products business.
Lower production levels and an increase in warranty expense in the first quarter
of 2004 over the first quarter of 2003 contributed to the lower gross profit
margin in our composite building products business.
Operating Expenses
Selling, general, and administrative expenses as a percentage of revenues
were 29% in the first quarter of 2004 compared with 26% in the first quarter of
2003. Selling, general, and administrative expenses increased to $14.9 million
in the first quarter of 2004 from $13.5 million in the first quarter of 2003, an
increase of $1.4 million, or 10%. Approximately half of the increase, or $0.8
million, was due to the unfavorable impact of foreign currency translation in
the Papermaking Equipment segment compared to the first quarter of 2003. The
remaining portion of the increase was due to higher expenses in the first
quarter of 2004 compared to the first quarter of 2003 which are partially offset
by two gains. Included in selling, general, and administrative expenses in the
first quarter of 2004 were increased expenses associated with several projects
that are underway to further streamline our international organization and the
initial expenses related to the establishment of our wholly owned subsidiary in
China. Partially offsetting these expenses is a gain of approximately $1.0
million, which resulted from renegotiating a series of agreements with one of
our licensees and a gain of approximately $0.1 million from the sale of a
building in one of our foreign subsidiaries.
Research and development expenses were $1.0 million in both the first
quarters of 2004 and 2003 and represented 2% of revenues in both periods.
Interest Income
Interest income increased to $0.3 million in the first quarter of 2004
from $0.2 million in the first quarter of 2003 primarily due to higher average
invested balances.
Income Taxes
Our effective tax rate was 35% and 38% in the first quarters of 2004 and
2003, respectively. The 38% effective tax rate in the first quarter of 2003
exceeded the statutory federal income tax rate primarily due to the impact of
state income taxes and nondeductible expenses. The 35% effective tax rate in
first quarter of 2004 decreased compared to the first quarter of 2003 primarily
due to a decrease in state income taxes and nondeductible expenses and a
decrease in the foreign blended rate.
Liquidity and Capital Resources
Consolidated working capital was $115.7 million at April 3, 2004,
compared with $107.0 million at January 3, 2004. Included in working capital are
cash and cash equivalents of $80.9 million at April 3, 2004, compared with $74.5
million at January 3, 2004. At April 3, 2004, $44.1 million of cash and cash
equivalents were held by our foreign subsidiaries.
Our operating activities provided $1.1 million of cash during the first
quarter of 2004 compared to $1.0 million used in operating activities during the
first quarter of 2003. Cash was provided by net income of $2.7 million and
depreciation and amortization expense of $1.2 million in the first quarter of
2004. In addition in the first quarter of 2004, cash of $3.7 million was
provided by a decrease in unbilled contract costs and fees due to the timing of
progress billings. An increase in accounts receivable resulted in a use of cash
of $3.1 million in 2004 primarily at the Papermaking Equipment segment due to
the timing of payments. In
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KADANT INC.
Liquidity and Capital Resources (continued)
addition, a use of $3.3 million in cash resulted from a decrease in other
accrued liabilities, primarily due to a decrease in accrued payroll and employee
benefits as a result of employee incentive payments made in the first quarter of
2004 and the timing of payroll payments.
Our investing activities provided $0.5 million of cash in the first
quarter of 2004 compared with a use of $0.9 million of cash in the first quarter
of 2003. During the first quarter of 2004, we received proceeds of $1.3 million
from the sale of property, plant, and equipment, offset partly by the purchase
of $0.4 million of property, plant, and equipment. In addition, in the first
quarter of 2004 we paid $0.3 million to acquire the remaining 5% minority
interest in one of our subsidiaries.
Our financing activities provided cash of $3.6 million and $0.1 million
in the first quarter of 2004 and 2003 respectively. During the first quarter of
2004, we received proceeds of $3.8 million from the issuance of common stock in
connection with the exercise of employee stock options, which was offset in part
by the repayment of $0.2 million of a long-term note payable.
At April 3, 2004, we had $52.6 million of unremitted foreign earnings
that could be subject to tax if remitted to the U.S. Our practice is to reinvest
indefinitely the earnings of certain of our international subsidiaries. We do
not expect that this will have a material adverse effect on our current
liquidity.
In May 2003, our board of directors authorized the repurchase of up to
$25.0 million of our equity securities in the open market or in negotiated
transactions through May 15, 2004. As of May 5, 2004, 23,000 shares had been
repurchased under this authorization.
Although we currently have no material commitments for capital
expenditures, we plan to make expenditures during the remainder of 2004 for
property, plant, and equipment of approximately $4.1 million, including $0.3
million for the composites building products business and $1.7 million for our
manufacturing and assembly facility in China.
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 capital
expenditures and stock repurchases, or acquisitions, if any. We believe that our
existing resources, together with the cash we expect to generate from
operations, are sufficient to meet the capital requirements of our current
operations for the foreseeable future.
Risk Factors
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, we wish to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, our actual results and could cause our actual results
in 2004 and beyond to differ materially from those expressed in any
forward-looking statements made by us, or on our behalf.
Our business is dependent on the condition of the pulp and paper industry.
We sell products primarily to the pulp and paper industry, which is a
cyclical industry. Generally, the financial condition of the global pulp and
paper industry corresponds to the condition of the general economy, as well as
to a number of other factors, including pulp and paper production capacity
relative to demand. In recent years, the industry in certain geographic regions,
notably North America, has been in a prolonged downcycle resulting in depressed
pulp and paper prices, decreased spending, mill closures, consolidations, and
bankruptcies, all of which have adversely affected our business. As paper
companies consolidate in response to market weakness, they frequently reduce
capacity and postpone or even cancel capacity addition or expansion projects.
These cyclical downturns can cause our sales to decline and adversely affect our
profitability.
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KADANT INC.
Risk Factors (continued)
Our business is subject to economic, currency, political, and other risks
associated with international sales and operations.
During the first quarter of 2004, approximately 54% 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.
An increasing portion of our international sales has and may in the
future come from China. An increase in revenues, as well as our planned
operation of a manufacturing and assembly facility in China, will expose us to
increased risk in the event of changes in the policies of the Chinese
government, political unrest, unstable economic conditions, or other
developments in China or in U.S.-China relations that are adverse to trade,
including enactment of protectionist legislation or trade restrictions. Orders
from customers in China, particularly for large systems that have been tailored
to a customer's specific requirements, involve increased credit risk due to
payment terms that are applicable to doing business in China. In addition, the
timing of these orders is often difficult to predict.
We are subject to intense competition in all our markets.
We believe that the principal competitive factors affecting the markets
for our products include quality, price, service, technical expertise, and
product innovation. Our competitors include a number of large multinational
corporations that may have substantially greater financial, marketing, and other
resources than we do. As a result, they may be able to adapt more quickly to new
or emerging technologies and changes in customer requirements, or to devote
greater resources to the promotion and sale of their services and products.
Competitors' technologies may prove to be superior to ours. Our current
products, those under development, and our ability to develop new technologies
may not be sufficient to enable us to compete effectively. Competition,
especially in China, could increase if new companies enter the market or if
existing competitors expand their product lines or intensify efforts within
existing product lines. In addition, our composite building products business is
subject to intense competition, particularly in the decking market, from
traditional wood products and other composite lumber manufacturers, many of whom
have greater financial, technical, and marketing resources than we do. As a
result, we may be unable to compete successfully in this market.
Our success in the market for composite building products will depend on our
ability to manufacture and distribute our composite building products.
In 2000, we began to develop, produce, market, and sell composite
products primarily for the building industry. Development, manufacturing, and
commercialization of our composite building products require significant testing
and technical expertise in the formulation and manufacture of the products, and
our efforts may not be successful. Further, growth of our composite building
products business requires ongoing market acceptance. We expect to incur
significant branding and distribution expenses to successfully market and
distribute these products and our strategy
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KADANT INC.
Risk Factors (continued)
may not be successful. We have limited experience manufacturing these products
at volume, cost, and quality levels sufficient to satisfy expected demand, and
we may encounter difficulties in connection with any large-scale manufacturing
or commercialization of these new products. Our capacity may not be sufficient
to meet demand without significant additional investment. In addition, the
majority of our production is dependent upon a single piece of equipment. If
that equipment were to fail for an extended period of time, it would have a
material adverse effect on our revenues from this business in that period. We
rely on distributors in the building products industry to market, distribute,
and sell our products. We may be unable to produce our products in sufficient
quantity to interest or retain these distributors or to add new distributors. If
we are unable to distribute our products effectively, our revenues will decline
and we will have to incur additional expenses to market these products directly.
Economic conditions could adversely affect demand for our composite building
products.
Demand for our composite building products is affected by several factors
beyond our control, including economic conditions. Recent demand for our
products has been driven, in part, by the availability of low-interest mortgage
and home equity loans. An increase in interest rates or tightened credit could
adversely affect demand for home remodeling projects, including demand for our
products.
Seasonality and weather conditions could adversely affect our business.
In general, the building products industry experiences seasonal
fluctuations in sales, particularly in the fourth and first quarters, when
holidays and adverse weather conditions in some regions usually reduce the level
of home improvement and new construction activity. In addition, our composite
building products are used or installed in outdoor construction applications,
and our sales volume, bookings, gross margins, and operating income can be
negatively affected by adverse weather. Operating results will tend to be lower
in quarters with lower sales, which are not entirely offset by a corresponding
reduction in operating costs. In addition, we may also experience lower gross
profit margins in the fourth and first quarters due to seasonal incentive
discounts offered to our distributors. As a result of these factors, we believe
sequential period-to-period comparisons of our operating results are not
reliable indicators of future performance, and the operating results for any one
quarterly period may not be indicative of operating results to be expected for a
full year.
The failure of our composite building products to perform over long periods of
time could result in potential liabilities.
Our composite building products are new, have not been on the market
for long periods of time, and may be used for applications about which we may
have little knowledge or limited experience. Because we have limited historical
experience, we may be unable to predict the potential liabilities related to
product warranty or product liability issues. If our products fail to perform
over their warranty periods, we may not have the ability to protect ourselves
adequately against this potential liability, which could adversely affect our
operating results. In the second half of 2003, we experienced a significant
increase in warranty claims and warranty expense related to our composite
decking products. Although claims were down sequentially in the first quarter of
2004, we cannot predict if this will continue and a continued high level of
warranty claims or expenses and/or failure of our products to perform or to be
accepted in the marketplace would have an adverse impact on the profitability of
our business.
We are dependent on a single mill for the raw material used in our fiber-based
granules, and we may not be able to obtain raw material on commercially
reasonable terms; in addition, the manufacture of our composite building
products and fiber-based granules is subject to commodity price risks.
We are dependent on a single paper mill for the fiber used in the
manufacture of our fiber-based granules and composite building products. This
mill has the exclusive right to supply the papermaking byproducts used in our
process to manufacture the granules. Although we believe our relationship with
the mill is good, the mill could decide
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KADANT INC.
Risk Factors (continued)
not to renew its contract with us at the end of 2005, or may not agree to renew
on commercially reasonable terms. If this were to occur, we would be forced to
find an alternative supply for this raw material. We may be unable to find an
alternative supply on commercially reasonable terms or could incur excessive
transportation costs if an alternative supplier were found, which would increase
our manufacturing costs and might prevent prices for our products from being
competitive.
In addition, we use natural gas in the production of our fiber-based
granular products. We manage our exposure to natural gas price fluctuations by
entering into short-term forward contracts to purchase specified quantities of
natural gas from a supplier. We may not be able to effectively manage our
exposure to natural gas price fluctuations.
Our composite building products also contain plastics, which are subject
to wide fluctuations in pricing and availability. Higher energy costs can
increase the price of plastic significantly and rapidly. We may be unable to
obtain sufficient quantities at reasonable prices, which would adversely affect
our profitability and ability to produce a sufficient quantity of our products
or to produce our products at competitive prices.
Our inability to 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. Any acquisition we may complete may be made at a
substantial premium over the fair value of the net assets of the acquired
company. We may not be able to complete future acquisitions, integrate any
acquired businesses successfully into our existing businesses, make such
businesses profitable, or realize anticipated cost savings or synergies, if any,
from these acquisitions.
In addition, we have previously acquired several companies and
businesses. As a result of these acquisitions, we have recorded significant
goodwill on our balance sheet, and in conjunction with the adoption of SFAS No.
142 in 2002, we recorded a transitional impairment charge upon the adoption of
this standard. Any future impairment losses identified will be recorded as
reductions to operating income, which could have a material adverse effect on
our results of operations. Our ability to realize the value of the goodwill that
we have recorded will depend on the future cash flows of these businesses. These
cash flows depend, in part, on how well we have integrated these businesses.
Our inability to 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 expires in the second quarter of 2004. As a
result, we could be subject to increased competition in this market, which could
have an adverse effect on this business. In addition, competitors may design
around our technology or develop competing technologies. Intellectual property
rights may also be unavailable or limited in some foreign countries, which could
make it easier for competitors to capture increased market position. We could
incur substantial costs to defend ourselves in suits brought against us or in
suits in which we may assert our patent rights against others. An unfavorable
outcome of any such litigation could have a material adverse effect on our
business and results of
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KADANT INC.
Risk Factors (continued)
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 No. 104, "Revenue Recognition" (SAB No. 104) 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;
- demand for and market acceptance of our products;
- competitive pressures resulting in lower sales prices of our
products;
- adverse changes in the pulp and paper industry;
- delays or problems in our introduction of new products;
- our competitors' announcements of new products, services, or
technological innovations;
- contractual liabilities incurred by us related to guarantees of our
product performance;
- increased costs of raw materials or supplies, including the cost of
energy; and
- changes in the timing of product orders.
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KADANT INC.
Risk Factors (continued)
Anti-takeover provisions in our charter documents, under Delaware law, and in
our shareholder rights plan could prevent or delay transactions that our
shareholders may favor.
Provisions of our charter and by-laws 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 by-laws;
- 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.
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
2003.
Item 4 - Controls and Procedures
- --------------------------------
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive
officer (CEO) and chief financial officer (CFO), evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended) as of April 3,
2004. Based on this evaluation, our CEO and CFO concluded that, as of April 3,
2004, our disclosure controls and procedures were (1) designed to ensure that
material information relating to us, including our consolidated subsidiaries, is
made known to our CEO and CFO by others within those entities, particularly
during the period in which this report was being prepared, and (2) effective, in
that they provide reasonable assurance that information required to be disclosed
by us in the reports that we file or submit under the Securities Exchange Act is
recorded, processed, summarized, and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.
(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 3, 2004 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
- ------------------------------------------------------------------------------
Securities
- ----------
On May 16. 2003, the Board of Directors announced the adoption of a
repurchase program, authorizing the repurchase of up to $25 million of the
Company's shares of common stock from time to time, depending on market
conditions. No shares were repurchased under this program during the quarter
ended April 3, 2004.
In April 2004, we issued an aggregate of 10,000 shares of our common
stock, $0.01 par value per share, to our outside directors pursuant to our
Directors Restricted Stock Plan, as amended. Under this plan, our outside
directors each receive 2,500 shares of restricted stock annually as compensation
for their service as a director. The shares issued to directors are restricted
from resale for three years, with certain exceptions. The shares were issued in
reliance on the exemption from registration contained in Section 4(2) of the
Securities Act of 1933, as amended.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
On February 19, 2004, we furnished a Current Report on Form 8-K
furnishing (pursuant to Item 12) the text of our press release dated February
18, 2004, announcing our financial results for the fiscal year ended January 3,
2004.
On April 29, 2004, we furnished a Current Report on Form 8-K furnishing
(pursuant to Item 12) the text of our press release dated April 28, 2004,
announcing our first quarter 2004 financial results.
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KADANT INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 12th day of May, 2004.
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.
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EXHIBIT 31.1
CERTIFICATIONS
--------------
I, William A. Rainville, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the fiscal quarter
ended April 3, 2004 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)) 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) [Paragraph omitted in accordance with SEC transition instructions
contained in SEC Release 34-47986]
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 12, 2004 /s/ William A. Rainville
-----------------------------
William A. Rainville
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATIONS
--------------
I, Thomas M. O'Brien, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the fiscal quarter
ended April 3, 2004 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)) 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) [Paragraph omitted in accordance with SEC transition instructions
contained in SEC Release 34-47986]
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 12, 2004 /s/ Thomas M. O'Brien
-------------------------
Thomas M. O'Brien
Chief Financial Officer
Exhibit 32
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
AND THE CHIEF FINANCIAL OFFICER
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 that:
The Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2004 of
the Company fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and the information contained in this
Quarterly Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Dated: May 12, 2004 /s/ William A. Rainville
--------------------------------------------
William A. Rainville
Chief Executive Officer
/s/ Thomas M. O'Brien
--------------------------------------------
Thomas M. O'Brien
Chief Financial Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C.
Section 1350 and is not being filed as part of a separate disclosure document.
A signed original of this written statement required by Section 906 has been
provided to Kadant Inc. and will be retained by Kadant Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.