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 Quarter Ended September 29, 2001
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-11406
KADANT INC.
(Exact name of Registrant as specified in its charter)
Delaware 52-1762325
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
245 Winter Street
Waltham, Massachusetts 02451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 370-1650
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 and (2) has been subject to such filing requirements for
the past 90 days. 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 October 29, 2001
---------------------------- -------------------------------
Common Stock, $.01 par value 12,227,147
PART I - Financial Information
Item 1 - Financial Statements
- -----------------------------
KADANT INC.
Consolidated Balance Sheet
(Unaudited)
Assets
September 29, December 30,
(In thousands) 2001 2000
- ---------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $147,446 $ 62,461
Available-for-sale investments, at quoted market value
(amortized cost of $16,755 and $86,104) 16,755 86,137
Advance to affiliate - 5,704
Accounts receivable, less allowances of $3,424 and $2,182 38,558 43,866
Unbilled contract costs and fees 10,849 8,029
Inventories:
Raw materials and supplies 14,169 13,218
Work in process 7,857 4,825
Finished goods (includes $2,029 and $3,765 at customer locations) 14,516 15,034
Deferred tax asset 10,483 8,879
Other current assets 4,495 3,625
-------- --------
265,128 251,778
-------- --------
Property, Plant, and Equipment, at Cost 71,786 67,646
Less: Accumulated depreciation and amortization 42,854 38,064
-------- --------
28,932 29,582
-------- --------
Other Assets 11,724 13,755
-------- --------
Goodwill (Note 6) 116,804 119,100
-------- --------
$422,588 $414,215
======== ========
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KADANT INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
September 29, December 30,
(In thousands except share amounts) 2001 2000
- ---------------------------------------------------------------------------------------------------------
Current Liabilities:
Current maturities of long-term obligations $ 562 $ 562
Accounts payable 24,468 21,921
Accrued payroll and employee benefits 8,859 7,727
Accrued income taxes 8,131 4,986
Accrued warranty costs 4,438 5,666
Deferred revenue 1,932 3,600
Customer deposits 2,352 3,476
Other accrued expenses 11,699 12,433
Common stock of subsidiary subject to redemption (at redemption value) 14,883 17,026
Due to Thermo Electron Corporation and its affiliated companies - 1,284
-------- --------
77,324 78,681
-------- --------
Deferred Income Taxes and Other Deferred Items 9,308 8,042
-------- --------
Long-term Obligations:
Subordinated convertible debentures 153,000 153,000
Notes payable 1,141 1,650
-------- --------
154,141 154,650
-------- --------
Minority Interest (Note 5) 296 2,209
-------- --------
Shareholders' Investment:
Common stock, $.01 par value, 150,000,000 shares authorized;
12,732,455 shares issued (Note 7) 127 127
Capital in excess of par value 79,801 77,231
Retained earnings 141,144 133,522
Treasury stock at cost, 505,308 and 455,146 shares (Note 7) (21,345) (20,758)
Deferred compensation (13) (36)
Accumulated other comprehensive items (Notes 2 and 6) (18,195) (19,453)
-------- --------
181,519 170,633
-------- --------
$422,588 $414,215
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
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KADANT INC.
Consolidated Statement of Income
(Unaudited)
Three Months Ended
-------------------------------
September 29, September 30,
(In thousands except per share amounts) 2001 2000
- ---------------------------------------------------------------------------------------------------------
Revenues $56,085 $58,315
------- -------
Costs and Operating Expenses:
Cost of revenues 35,458 36,293
Selling, general, and administrative expenses (Notes 9 and 11) 14,613 14,438
Research and development expenses 1,644 1,987
Restructuring costs (Note 16) 588 -
Gain on sale of property - (729)
------- -------
52,303 51,989
------- -------
Operating Income 3,782 6,326
Interest Income 1,574 2,868
Interest Expense (1,872) (1,866)
------- -------
Income Before Provision for Income Taxes and Minority Interest 3,484 7,328
Provision for Income Taxes 1,452 2,840
Minority Interest (Income) Expense (13) 156
------- -------
Net Income $ 2,045 $ 4,332
======= =======
Basic and Diluted Earnings per Share (Notes 3 and 7) $ .17 $ .35
======= =======
Weighted Average Shares (Notes 3 and 7):
Basic 12,273 12,261
======= =======
Diluted 12,348 12,284
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
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KADANT INC.
Consolidated Statement of Income
(Unaudited)
Nine Months Ended
-------------------------------
September 29, September 30,
(In thousands except per share amounts) 2001 2000
- ---------------------------------------------------------------------------------------------------------
Revenues $171,717 $176,802
-------- --------
Costs and Operating Expenses:
Cost of revenues 107,738 108,830
Selling, general, and administrative expenses (Notes 9 and 11) 45,054 46,018
Research and development expenses 5,307 5,803
Restructuring costs (Note 16) 588 -
Gain on sale of property and business - (1,700)
-------- --------
158,687 158,951
-------- --------
Operating Income 13,030 17,851
Interest Income 5,527 8,062
Interest Expense (5,616) (5,621)
-------- --------
Income Before Provision for Income Taxes, Minority
Interest, and Cumulative Effect of Change in Accounting Principle 12,941 20,292
Provision for Income Taxes 5,407 8,140
Minority Interest (Income) Expense (87) 350
-------- --------
Income Before Cumulative Effect of Change in Accounting Principle 7,621 11,802
Cumulative Effect of Change in Accounting Principle (net of
income taxes of $580) - (870)
-------- --------
Net Income $ 7,621 $ 10,932
======== ========
Basic and Diluted Earnings per Share Before Cumulative
Effect of Change in Accounting Principle (Notes 3 and 7) $ .62 $ .96
======== ========
Basic and Diluted Earnings per Share (Notes 3 and 7) $ .62 $ .89
======== ========
Weighted Average Shares (Notes 3 and 7):
Basic 12,276 12,255
======== ========
Diluted 12,311 12,301
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
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KADANT INC.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
------------------------------
September 29, September 30,
(In thousands) 2001 2000
- --------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 7,621 $ 10,932
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of change in accounting principle - 870
Depreciation and amortization 7,093 7,254
Provision for losses on accounts receivable 1,081 817
Minority interest (income) expense (Note 5) (87) 350
Gain on sale of business and property - (1,700)
Other noncash items (17) (184)
Changes in current accounts, excluding the effects of
acquisitions and dispositions:
Accounts receivable 4,046 13,719
Inventories and unbilled contract costs and fees (6,366) (5,938)
Other current assets (3,968) 264
Accounts payable 1,998 389
Other current liabilities (1,490) (10,809)
-------- --------
Net cash provided by operating activities 9,911 15,964
-------- --------
Investing Activities:
Acquisitions, net of cash acquired - (3,302)
Acquisition of capital equipment and technology - (1,200)
Proceeds from sale of property - 4,109
Advances from affiliate, net 5,704 87,693
Purchases of available-for-sale investments - (71,000)
Proceeds from maturities of available-for-sale investments 69,350 60,619
Purchases of property, plant, and equipment (3,750) (3,956)
Payments received on note for sale of property 1,800 200
Other, net 5 84
-------- --------
Net cash provided by investing activities 73,109 73,247
-------- --------
Financing Activities:
Transfer from Thermo Electron Corporation 1,309 -
Net proceeds from issuance of Company and subsidiary common stock 490 585
Purchase of Company common stock (587) -
Repayments of long-term obligations (509) -
-------- --------
Net cash provided by financing activities $ 703 $ 585
-------- --------
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KADANT INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
------------------------------
September 29, September 30,
(In thousands) 2001 2000
- --------------------------------------------------------------------------------------------------------
Exchange Rate Effect on Cash $ 1,262 $ (3,008)
-------- --------
Increase in Cash and Cash Equivalents 84,985 86,788
Cash and Cash Equivalents at Beginning of Period 62,461 39,254
-------- --------
Cash and Cash Equivalents at End of Period $147,446 $126,042
======== ========
Noncash Activities:
Fair value of assets of acquired companies $ - $ 6,345
Cash paid for acquired companies - (3,889)
Note payable for acquired companies - (795)
-------- --------
Liabilities assumed of acquired companies $ - $ 1,661
======== ========
Amounts forgiven in exchange for the 49% minority interest
in Kadant Composites Inc. (Note 5) $ 2,053 $ -
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
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KADANT INC.
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Kadant Inc., (the Company, formerly Thermo Fibertek Inc.) (Note 7) without
audit and, in the opinion of management, reflect all adjustments of a normal
recurring nature necessary for a fair statement of the financial position at
September 29, 2001, the results of operations for the three- and nine-month
periods ended September 29, 2001, and September 30, 2000, and the cash flows for
the nine-month periods ended September 29, 2001, and September 30, 2000. Interim
results are not necessarily indicative of results for a full year.
Historical financial results have been restated to reflect the adoption of
Securities and Exchange Commission Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" effective as of January 2, 2000. The
consolidated balance sheet presented as of December 30, 2000, has been derived
from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 30,
2000, filed with the Securities and Exchange Commission.
2. Comprehensive Income
Comprehensive income combines net income and "other comprehensive items"
that represent certain amounts that are reported as components of shareholders'
investment in the accompanying balance sheet, including foreign currency
translation adjustments, unrealized net of tax gains and losses on
available-for-sale investments, and deferred gains and losses on foreign
currency contracts (Note 6). During the third quarters of 2001 and 2000, the
Company had comprehensive income of $4,041,000 and $2,992,000, respectively.
During the first nine months of 2001 and 2000, the Company had comprehensive
income of $8,900,000 and $4,381,000, respectively.
3. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 29, September 30, September 29, September 30,
(In thousands except per share amounts) 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------
Basic
Income Before Cumulative Effect of
Change in Accounting Principle $ 2,045 $ 4,332 $ 7,621 $11,802
Cumulative Effect of Change in Accounting
Principle (net of income taxes of $580) - - - (870)
------- ------- ------- -------
Net Income $ 2,045 $ 4,332 $ 7,621 $10,932
------- ------- ------- -------
Weighted Average Shares 12,273 12,261 12,276 12,255
------- ------- ------- -------
Basic Earnings per Share:
Income before cumulative effect of change
in accounting principle $ .17 $ .35 $ .62 $ .96
Cumulative effect of change in accounting
principle - - - (.07)
------- ------- ------- -------
$ .17 $ .35 $ .62 $ .89
======= ======= ======= =======
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KADANT INC.
3. Earnings per Share (continued)
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 29, September 30, September 29, September 30,
(In thousands except per share amounts) 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------
Diluted
Income Before Cumulative Effect of Change
in Accounting Principle $ 2,045 $ 4,332 $ 7,621 $11,802
Cumulative Effect of Change in Accounting
Principle (net of income taxes of $580) - - - (870)
------- ------- ------- -------
Net Income $ 2,045 $ 4,332 $ 7,621 $10,932
Effect of Majority-owned Subsidiary's
Dilutive Securities - (5) - (11)
------- ------- ------- -------
Income Available to Common Shareholders,
as Adjusted $ 2,045 $ 4,327 $ 7,621 $10,921
------- ------- ------- -------
Weighted Average Shares 12,273 12,261 12,276 12,255
Effect of Stock Options 75 23 35 46
------- ------- ------- -------
Weighted Average Shares, as Adjusted 12,348 12,284 12,311 12,301
------- ------- ------- -------
Diluted Earnings per Share:
Income before cumulative effect of change
in accounting principle $ .17 $ .35 $ .62 $ .96
Cumulative effect of change in accounting
principle - - - (.07)
------- ------- ------- -------
$ .17 $ .35 $ .62 $ .89
======= ======= ======= =======
Options to purchase 509,100 and 473,400 shares of common stock for the
third quarters of 2001 and 2000, respectively, and 447,000 and 281,800 shares of
common stock for the first nine months of 2001 and 2000, 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 their effect would have been antidilutive.
In addition, the computation of diluted earnings per share for each period
excludes the effect of assuming the conversion of the Company's $153,000,000
principal amount of 4 1/2% subordinated convertible debentures, convertible at
$60.50 per share, because the effect would be antidilutive.
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KADANT INC.
4. Business Segment Information
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
September 29, September 30, September 29, September 30,
(In thousands) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------
Revenues:
Pulp and Papermaking Equipment and Systems $ 55,174 $ 57,043 $165,847 $171,061
Composite and Fiber-based Products (a) 911 1,276 5,870 5,755
Intersegment sales elimination (b) - (4) - (14)
-------- -------- -------- --------
$ 56,085 $ 58,315 $171,717 $176,802
======== ======== ======== ========
Income Before Provision for Income Taxes, Minority
Interest, and Cumulative Effect of Change in
Accounting Principle:
Pulp and Papermaking Equipment and Systems (c) $ 6,773 $ 7,110 $ 20,156 $ 21,164
Composite and Fiber-based Products (a)(d) (2,204) (374) (4,440) (1,415)
Corporate (e) (787) (410) (2,686) (1,898)
-------- -------- -------- --------
Total Operating Income 3,782 6,326 13,030 17,851
Interest Income (Expense), Net (298) 1,002 (89) 2,441
-------- -------- -------- --------
$ 3,484 $ 7,328 $ 12,941 $ 20,292
======== ======== ======== ========
Capital Expenditures:
Pulp and Papermaking Equipment and Systems $ 399 $ 336 $ 1,131 $ 1,056
Composite and Fiber-based Products 961 931 2,619 2,900
-------- -------- -------- --------
$ 1,360 $ 1,267 $ 3,750 $ 3,956
======== ======== ======== ========
(a) Reflects the sale of the Company's fiber-recovery and water-clarification
services plant in September 2000. Operating income includes restructuring
costs of $18 and gain on the sale of property of $729 in the third quarter
and first nine months of 2001 and in the third quarter and first nine months
of 2000, respectively.
(b) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(c) Includes restructuring costs of $570 in the third quarter and first nine
months of 2001.
(d) Includes operating losses from our startup composite building products
business of $1,335, $530, $2,973, and $1,399 in the three months ended
September 29, 2001, the three months ended September 30, 2000, the nine
months ended September 29, 2001, and the nine months ended September 30,
2000, respectively.
(e) Primarily general and administrative expenses. Includes gain on sale of
business of $971 and a charge of $600 to provide for a customer dispute in
the first nine months of 2000.
5. Acquisition of Composites Venture Minority Interest
In January 2001, the Company's Thermo Fibergen subsidiary acquired the
outstanding 49% equity interest in Kadant Composites Inc. (formerly NEXT Fiber
Products Inc.) from the minority investor (the Seller). Kadant Composites was a
joint venture formed in 1999 to develop, produce, and market fiber-based
composite products primarily for the building industry. In exchange for the 49%
minority interest, Thermo Fibergen agreed to forgive
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KADANT INC.
5. Acquisition of Composites Venture Minority Interest (continued)
$2,053,000 due from the Seller which related to the Seller's investment in
Kadant Composites. The excess of assigned fair value of net assets acquired from
the buyout over the acquisition cost resulted in a reduction in the intangible
asset recorded at the time of Thermo Fibergen's initial investment in Kadant
Composites.
6. Recent Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
Effective in the first quarter of 2001, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended, requires that all
derivatives, including forward currency exchange contracts, be recognized on the
balance sheet at fair value. Derivatives that are not hedges must be recorded at
fair value through earnings. If a derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of the derivative are either offset
against the change in fair value of the hedged item through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The Company records in earnings immediately the extent to which a
hedge is not effective in achieving offsetting changes in fair value. Adoption
of SFAS No. 133 in the first quarter of 2001 did not have a material effect on
the Company's financial position and results of operations.
Forward currency exchange contracts are used primarily by the Company to
hedge certain operational ("cash-flow" hedges) and balance sheet ("fair value"
hedges) exposures resulting from changes in currency exchange rates. Such
exposures primarily result from portions of the Company's operations and assets
that are denominated in currencies other than the functional currencies of the
businesses conducting the operations or holding the assets. The Company enters
into currency exchange contracts to hedge anticipated product sales and recorded
accounts receivable made in the normal course of business, and accordingly, the
hedges are not speculative in nature. The Company does not hold or transact in
financial instruments for purposes other than risk management.
The Company records its currency exchange contracts at fair value in its
consolidated balance sheet as other current assets or other accrued expenses
and, for cash flow hedges, the related gains or losses on these contracts are
deferred as a component of other comprehensive items. These deferred gains and
losses are recognized in income in the period in which the underlying
anticipated transaction occurs. Unrealized gains and losses resulting from the
impact of currency exchange rate movements on fair value hedges are recognized
in earnings in the period in which the exchange rates change and offset the
currency gains and losses on the underlying exposure being hedged. As of
September 29, 2001, the amount of deferred unrealized gains and losses in other
comprehensive income was not material.
"Business Combinations" and "Goodwill and Other Intangible Assets"
In July 2001, the Financial Accounting Standards Board (FASB) released for
issuance SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
SFAS No. 142 changes the accounting for goodwill from an amortization method to
an impairment-only approach. Under SFAS No. 142, effective for the fiscal year
beginning December 30, 2001, amortization of goodwill to earnings will cease and
instead, the carrying value of goodwill will be evaluated for impairment on at
least an annual basis. Amortization of goodwill, on an after-tax basis, for the
three-month and nine-month periods ended September 29, 2001, was $584,000 and
$1,756,000, respectively. The Company is evaluating the impact of these
impairment standards and has not yet determined the effect, if any, of adoption
on its financial statements.
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KADANT INC.
6. Recent Accounting Pronouncements (continued)
Accounting for the Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supercedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." This
statement requires that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and it
broadens the presentation of discontinued operations to include more disposal
transactions. The provisions of this statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The Company is evaluating the impact
of this statement and has not yet determined the effect, if any, of adoption on
its financial statements.
7. Name Change and Reverse Stock Split
The Company changed its name to Kadant Inc., traded under the ticker
symbol "KAI" on the American Stock Exchange, and effected a one-for-five reverse
split of its common stock on July 12, 2001. The name change and reverse stock
split were approved by the Company's shareholders at the annual meeting of the
shareholders on May 15, 2001. All share and per share information, including the
conversion price of the Company's subordinated debt, has been restated to
reflect the reverse stock split.
8. Spin Off
On January 31, 2000, Thermo Electron announced that, as part of a major
reorganization plan, it planned to spin off its equity interest in the Company
as a dividend to Thermo Electron shareholders. In February 2001, Thermo Electron
received a favorable ruling from the Internal Revenue Service regarding the spin
off. The IRS required that the Company raise additional equity capital in a
public offering within one year of the spin off in the range of 10 to 20 percent
of its outstanding shares. The offering will also support the Company's current
business plan, which includes the repayment of debt, acquisitions, strategic
partnerships, and investment in additional capacity for its composites business.
On July 9, 2001, the Thermo Electron board of directors declared a dividend of
all of its equity interest in the Company. The dividend was distributed on
August 8, 2001 (Spinoff Date) to Thermo Electron shareholders of record on July
30, 2001. The distribution was on the basis of 0.0612 share of Company common
stock for each share of Thermo Electron common stock outstanding.
9. Corporate Services Agreement
Prior to the spin off, the Company and Thermo Electron were parties to a
corporate services agreement under which Thermo Electron's corporate staff
provided certain administrative services for which the Company was assessed an
annual fee equal to 0.8% of the Company's consolidated revenues. Effective April
2001, the fee under this agreement was reduced to 0.6% for the fiscal quarter
ending June 30, 2001, and effective July 1, 2001, the fee was reduced to 0.4% of
the Company's consolidated revenues for the fiscal quarter ending September 29,
2001. The corporate services agreement terminated as of the Spinoff Date and was
replaced by a transition services agreement (Note 11).
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KADANT INC.
10. Plan and Agreement of Distribution
In connection with the spin off, the Company and Thermo Electron entered
into a plan and agreement of distribution. The agreement provides, among other
things, for restrictions relating to the Company's ability to use cash or incur
debt during the time that Thermo Electron continues to guarantee the Company's
$153,000,000, 4 1/2% subordinated convertible debentures due 2004. These
restrictions include financial covenants requiring (1) the ratio of the
Company's net indebtedness to net capitalization not to exceed 40% and (2) on a
rolling four quarter basis, the sum of the Company's (a) operating income
(excluding restructuring and other unusual items, such as gains on sales of
assets, included in operating income), (b) amortization of goodwill and other
intangible assets, and (c) interest income, to be at least four times greater
than interest expense. In the event that the Company fails to comply with the
financial covenants and has not cured its noncompliance within the applicable
cure period, the Company will be obligated to relieve Thermo Electron of its
obligations under all of its outstanding guarantees of the Company's performance
and payment in connection with the Company's debentures. If required to satisfy
this obligation to Thermo Electron, the Company could, among other things,
refinance the Company's debentures, conduct an exchange offer for the Company's
debentures, or repay in full the underlying obligation. In addition, in the
event that the Company undergoes a change in control, the Company has agreed to
fully cash collateralize or back with one or more letters of credit all of the
Company's obligations under the debentures. The Company is in compliance with
all covenants of the agreement.
11. Transition Services Agreement
In connection with the spin off, the Company and Thermo Electron entered
into a transition services agreement. The agreement provides that Thermo
Electron will continue to provide the Company with certain administrative
services until December 29, 2001. The Company will pay a fee under this
agreement equal to 0.4% and 0.2% of the Company's consolidated revenues for the
fiscal quarters ending September 29, 2001 and December 29, 2001, respectively,
plus out-of-pocket and third party expenses. The Company believes the charges
under the transition services agreement are reasonable and the terms of the
agreement are fair to the Company.
12. Tax Matters Agreement
Prior to the spin off, the Company and Thermo Electron were parties to a
tax allocation agreement under which the Company and its subsidiaries were
included in the consolidated federal and state income tax returns filed by
Thermo Electron. The tax allocation agreement provided that in years in which
these entities had taxable income, the Company would pay to Thermo Electron
amounts comparable to the taxes the Company would have paid if the Company had
filed separate tax returns. In years in which these entities include a loss,
Thermo Electron would reimburse the Company the amount that the Company would
have received if the Company had filed separate tax returns. The tax allocation
agreement terminated as of the Spinoff Date at which time the Company and Thermo
Electron entered into a tax matters agreement.
The tax matters agreement requires, among other things, that the Company
file its own income tax returns for tax periods beginning immediately after the
Spinoff Date. In addition, the tax matters agreement requires that the Company
indemnify Thermo Electron, but not the stockholders of Thermo Electron, against
liability for taxes resulting from (a) the conduct of the Company's business
following the distribution or (b) the failure of the distribution to Thermo
Electron stockholders of shares of the Company's common stock or of the Viasys
Healthcare Inc. common stock to continue to qualify as a tax-free spin-off under
Section 355 of the Internal Revenue Code as a result of certain actions that the
Company takes following the distribution. Thermo Electron has agreed to
indemnify the Company against taxes resulting from the conduct of Thermo
Electron's business prior to and following the distribution or from the failure
of the distribution of shares of the Company's common stock to the Thermo
Electron stockholders to continue to qualify as a tax-free spin off other than
as a result of some actions that the Company may take following the
distribution. Although not anticipated, if any of the Company's
post-distribution activities causes the distribution to become taxable, the
Company could incur liability to Thermo Electron and/or various taxing
authorities, which could adversely affect the Company's results of operations,
financial position and cash flows.
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KADANT INC.
13. Stock Option Exchange
In connection with the spin off, options to purchase shares of Thermo
Electron common stock held by the Company's employees were exchanged for options
to purchase 563,829 shares of the Company's common stock. The resulting options
in the Company's common stock maintained their intrinsic value, and their
original option periods and vesting provisions in accordance with the
methodology set forth in FASB Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation."
14. Preferred Stock
On May 15, 2001, at the annual meeting of the Company's shareholders, the
shareholders voted to approve an amendment, previously adopted by the Company's
board of directors, to the Company's Certificate of Incorporation to authorize
5,000,000 shares of preferred stock, $.01 par value per share, for issuance by
the Company's board of directors without further shareholder approval.
Subsequently, the board of directors designated 15,000 shares of such preferred
stock as Series A junior participating preferred stock for issuance under the
Company's Shareholder Rights Plan (see below). The charter amendment effecting
these actions was incorporated into the Company's restated Certificate of
Incorporation filed on August 7, 2001. No such preferred stock has been issued
by the Company.
15. Shareholder Rights Plan
In connection with the spin off, the Company's board of directors adopted
a shareholder rights plan. Under the plan, one right was distributed as of the
close of business on August 6, 2001, for each share of the Company's common
stock outstanding at that time. The rights plan is designed to provide
shareholders with fair and equal treatment in the event of an unsolicited
attempt to acquire the Company. At the time of distribution, the rights were
attached to the Company's outstanding common stock and are not separately
transferable or exercisable. The rights will become exercisable if a person
acquires 15 percent or more of the Company's common stock, or a tender or
exchange offer is commenced for 15 percent or more of the Company's common
stock, unless, in either case, the transaction was approved by the Company's
board of directors. If the rights become exercisable, each right will initially
entitle the Company's shareholders to purchase .0001 of a share of the Company's
Series A junior participating preferred stock, $.01 par value, at an exercise
price of $75. In addition, except with respect to transactions approved by the
Company's board of directors, if the Company is involved in a merger or other
transaction with another company in which it is not the surviving corporation,
or the Company sells or transfers 50 percent or more of its assets or earning
power to another company, each right (other than rights owned by the acquirer)
will entitle its holder to purchase $75 worth of the common stock of the
acquirer at half the market value at that time. The Company is entitled to
redeem the rights at $.001 per right at any time prior to the tenth business day
(or later, if so determined by the board of directors) after the acquisition of
15 percent or more of the Company's common stock. Unless the rights are redeemed
or exchanged earlier, they will expire on July 16, 2011.
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KADANT INC.
16. Restructuring Costs
During the third quarter of 2001, the Company recorded restructuring costs
of $588,000, which were accounted for in accordance with Emerging Issues Task
Force Pronouncement No. 94-3, for severance costs relating to 52 employees
primarily in the manufacturing and sales functions at the Papermaking Equipment
segment's domestic subsidiaries, all of whom were terminated by September 29,
2001. These actions were taken in an effort to improve profitability and were in
response to a continued weak market environment. A summary of the changes in
accrued restructuring costs, which are included in other accrued expenses in the
accompanying balance sheet, follows:
(In thousands) Severance Other Total
- -----------------------------------------------------------------------------------------------------------
Balance at December 30, 2000 $ - $ 32 $ 32
Provision charged to expense 588 - 588
Usage (305) (32) (337)
----- ----- -----
Balance at September 29, 2001 $ 283 $ - $ 283
===== ===== =====
The Company expects to pay most of the remaining accrued restructuring
costs during the remainder of 2001.
17. Subsequent Event
Redemption of Thermo Fibergen Common Stock
During the period from September 1, 2001 through October 11, 2001, holders
of Thermo Fibergen common stock and common stock redemption rights surrendered
1,030,562 shares of Thermo Fibergen common stock at a redemption price of $12.75
per share in the final redemption period for the common stock redemption rights.
Common stock redemption rights amounting to 970,487 were not surrendered for
redemption by October 11, 2001, have expired, and are no longer listed for
trading on the American Stock Exchange. In October 2001, Thermo Fibergen
remitted $13,140,000 for the surrendered shares, using a combination of
available working capital and a $6,000,000 loan from the Company to fund the
redemption payment. The accrued liability for the payment is included in common
stock of subsidiary subject to redemption in the September 29, 2001 balance
sheet. Following the final redemption period, 10,522,087 shares of Thermo
Fibergen common stock remain outstanding, including 10,407,600 shares held by
the Company and 114,487 shares held by shareholders other than the Company.
Proposed Merger
In November 2001, the Company announced that it would acquire all of the
outstanding shares of Thermo Fibergen's common stock held by shareholders other
than the Company in exchange for $12.75 per share in cash, without interest. As
a result, Thermo Fibergen will become a wholly owned subsidiary of the Company.
The proposed transaction will require Securities and Exchange Commission
clearance of certain necessary filings, but will not require Thermo Fibergen
board or shareholder approval. This transaction is expected to be completed
during the fourth quarter of 2001.
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KADANT INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause our results
to differ materially from those indicated by such forward-looking statements,
including those detailed under the heading "Risk Factors" in the Information
Statement filed with the Securities and Exchange Commission as Exhibit 99.1 to
our Current Report on Form 8-K on August 6, 2001.
Overview
We operate in two segments: the Pulp and Papermaking Equipment and Systems
(Papermaking Equipment) segment and the Composite and Fiber-based Products
segment. We are a leading designer and manufacturer of stock-preparation systems
and equipment, papermaking machine accessories and water-management systems for
the pulp and paper industry. We have been in operation for more than 100 years
and have a large, stable customer base that includes most paper manufacturers in
the world. We also have one of the largest installed bases of equipment in the
pulp and paper industry, which provides us with a relatively stable, higher
margin, spare parts and consumables business. In addition, we manufacture and
market composite and fiber-based products, including composite building
products.
Prior to our incorporation, we operated as a division of Thermo Electron
Corporation. We were incorporated in Delaware in November 1991 as a wholly owned
subsidiary of Thermo Electron. We conducted an initial public offering of our
common stock in November 1992 and became a majority-owned public subsidiary of
Thermo Electron. On July 12, 2001, we changed our name from Thermo Fibertek Inc.
to Kadant Inc., and on August 8, 2001, we were spun off from Thermo Electron and
became a fully independent public company (Note 8).
Pulp and Papermaking Equipment and Systems Segment
Our Papermaking Equipment segment designs and manufactures
stock-preparation equipment, paper machine accessories and water-management
systems for the paper and paper recycling industries. Principal products
manufactured by this segment include:
- custom-engineered systems and equipment for the preparation of
wastepaper for conversion into recycled paper;
- accessory equipment and related consumables important to the efficient
operation of papermaking machines; and
- water-management systems essential for the continuous cleaning of
papermaking machine fabrics and the draining, purifying and recycling
of process water for paper sheet and web formation.
Composite and Fiber-based Products Segment
Our Composite and Fiber-based Products segment, represented by our Thermo
Fibergen subsidiary, consists of our composite building and fiber-based product
lines. We employ patented technology to produce biodegradable absorbing granules
from papermaking byproducts. These granules are primarily used as agricultural
carriers. We also develop, produce and market fiber-based composite building
products, primarily for the building industry, used for such applications as
soundwalls, privacy fencing, decking and roof tiles.
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KADANT INC.
Overview (continued)
In January 2001, we acquired the remaining 49% equity interest that we did
not already own in Kadant Composites Inc. (formerly NEXT Fiber Products Inc.),
which is responsible for our composite building products line (Note 5). We
established a composite building products manufacturing facility in Green Bay,
Wisconsin, and began limited production at the facility in 2000.
Prior to September 2000, this segment owned and operated a plant that
provided water-clarification and fiber-recovery services to a host mill on a
long-term contract basis. The plant, which we began operating in July 1998,
cleaned and recycled water and long fiber for reuse in the papermaking process.
We sold this plant to the host mill in September 2000, although we intend to
continue operating in this line of business and are pursuing other
fiber-recovery projects.
International Sales
During 2000, approximately 49% of our sales were to customers outside the
United States, principally in Europe. 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 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
principally hedge transactions denominated in U.S. dollars and French francs.
Industry Outlook
Our products are primarily sold to the pulp and paper industry. The paper
industry is currently in a relatively severe down cycle, characterized by
falling pulp and paper prices, decreased capital spending, and consolidation of
paper companies within the industry. As paper companies continue to consolidate,
they frequently reduce capacity and postpone or even cancel capacity addition or
expansion projects. This trend, along with paper companies' actions to quickly
reduce operating rates and restrict capital spending programs when they perceive
weakness in their markets, has adversely affected our business. There has been a
significant amount of downtime in the pulp and paper industry in 2001. This,
coupled with the weakening conditions in the world economy in general and the
strong U.S. dollar, will continue to produce a weak market environment that will
soften demand for our products in the foreseeable future. The slowdown in the
world economy and the paper industry is continuing and will delay any recovery
expected in 2002. Our results for 2001 and possibly 2002 will be adversely
affected by these conditions in the world economy and the pulp and paper
industry. In the longer term, we expect the consolidation in the paper industry
and improved capacity management will be favorable both to paper companies and
to their suppliers.
Bookings in the third quarter of 2001 were disappointing in North America
and Europe, although they remained strong in China. Our recycling business in
North America has been particularly affected by the consolidations in the paper
industry and high levels of machine shutdowns. As such, we expect earnings in
the fourth quarter of 2001 for the company overall to be in the range of $.14 to
$.17 per share, on revenues of $48 to $51 million. For the year 2001, we expect
earnings per share of $.76 to $.79, on revenues of $220 to $223 million. Looking
ahead to 2002, we estimate earnings for the year to increase to $.85 to $.95 per
share by focusing on a more favorable product mix that includes higher-margin
aftermarket sales, and reducing operating expenses in the Papermaking Equipment
segment, as well as lowering operating losses in the composite building products
business. The earnings estimate for 2002 excludes the favorable effect of
ceasing goodwill amortization of approximately $.19 per diluted share, and the
possible unfavorable effect of impairment charges resulting from the adoption of
FASB No. 141, 142, and 144 (Note 6). Revenues in 2002 are expected to be between
$215 and $225 million. Although startups are difficult to forecast, our estimate
of revenues from the composite building products business for the fourth quarter
of 2001 is $0.3 million to $0.5 million, and for the year 2001 just below $2
million. Revenues in 2002 are expected to be $4 to $6 million in this business.
In October 2001, the Company terminated for nonperformance its International
Distribution Agreement
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KADANT INC.
Overview (continued)
that granted a distributor exclusive rights to distribute certain of the
Company's composite building products in exchange for minimum purchase
commitments. Therefore, we are now rebuilding and expanding our distribution
network for composite building materials. We believe that the market for
composite building products will grow as consumer awareness of the advantages of
these products increases their acceptance as an alternative to traditional wood
products.
Results of Operations
Third Quarter 2001 Compared With Third Quarter 2000
- ---------------------------------------------------
Revenues
Revenues decreased to $56.1 million in the third quarter of 2001 from
$58.3 million in the third quarter of 2000. The unfavorable effects of currency
translation due to the strengthening in value of the U.S. dollar relative to
other currencies in countries in which we operate decreased revenues at the
Papermaking Equipment segment by $1.1 million in the third quarter of 2001.
Pulp and Papermaking Equipment and Systems Segment. Excluding the effects
of currency translation, revenues in our Papermaking Equipment segment decreased
$0.7 million, or 1%. Revenues from that segment's accessories and water
management product lines decreased $0.6 million and $0.3 million, respectively,
primarily as a result of a decrease in demand in North America due to adverse
market conditions. Revenues from the Papermaking Equipment segment's
stock-preparation equipment product line increased $0.2 million as a result of
an increase in export sales to China, largely offset by decreases in sales in
North America and Europe.
Composite and Fiber-based Products Segment. The Composite and Fiber-based
Products segment revenues decreased $0.4 million, primarily due to a $0.2
million decrease in sales from the fiber-based products business as a result of
a decrease in demand from several of its largest agricultural carrier customers
and a $0.2 million decrease in revenues as a result of the sale of the
fiber-recovery and water-clarification services plant in September 2000. These
decreases were slightly offset by an increase of approximately $0.1 million of
sales from its recently introduced composite building products.
Gross Profit Margin
The gross profit margin decreased to 37% in the third quarter of 2001 from
38% in the third quarter of 2000. The gross margin decreased at the Composite
and Fiber-based Products segment, primarily due to increased negative gross
margins as a result of startup efforts at its new composite building products
business, as well as under-absorbed manufacturing overhead as a result of lower
revenues and production, including an increase of $0.2 million in the cost of
natural gas used in the production process at the fiber-based products business.
The gross profit margin increased slightly to 39% from 38% at the Papermaking
Equipment segment in the third quarters of 2001 and 2000, respectively.
Other Operating Expenses
Selling, general, and administrative expenses as a percentage of revenues
increased slightly to 26% in the third quarter of 2001 from 25% in the third
quarter of 2000, primarily due to a decrease in revenues at both business
segments.
Research and development expenses decreased to $1.6 million in the third
quarter of 2001 compared with $2.0 million in the third quarter of 2000,
primarily at the Papermaking Equipment segment.
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KADANT INC.
Third Quarter 2001 Compared With Third Quarter 2000 (continued)
- ---------------------------------------------------
Restructuring Costs
During the third quarter of 2001, the Company recorded restructuring costs
of $0.6 million for severance costs relating to 52 employees primarily in the
manufacturing and sales functions at the Papermaking Equipment segment's
domestic subsidiaries, all of whom were terminated by September 29, 2001. These
actions were taken in an effort to improve profitability and were in response to
a continued weak market environment (Note 16).
Gain on Sale of Property
In September 2000, the Company sold its interest in a fiber-recovery and
water clarification services plant for $3.6 million, resulting in a pretax gain
of $0.7 million.
Operating Income
Operating income decreased to $3.8 million in the third quarter of 2001
from $6.3 million in the third quarter of 2000. Excluding restructuring costs in
2001, operating income increased to $7.3 million from $7.1 million, an increase
of 3%, at the Papermaking Equipment segment. Excluding restructuring costs in
2001 and gain on the sale of property in 2000, operating losses increased to
$2.2 million in 2001 from $1.1 million in 2000 at the Composite and Fiber-based
Products segment. Operating losses from the composite building products business
were $1.3 million and $0.5 million in the third quarters of 2001 and 2000,
respectively.
Interest Income and Expense
Interest income decreased to $1.6 million in the third quarter of 2001
from $2.9 million in the third quarter of 2000. Of the total decrease in
interest income in 2001, approximately $1.0 million was due to lower prevailing
interest rates and $0.3 million was due to lower average invested balances. We
expect interest income to decrease in the remainder of 2001 and into 2002 as a
result of the lower prevailing interest rates and lower investment balances due
to the 2000 and 2001 redemptions of Thermo Fibergen's common stock. Interest
expense was unchanged at $1.9 million in the third quarters of 2001 and 2000.
Income Taxes
The effective tax rate was 42% in the third quarter of 2001, compared with
39% in the third quarter of 2000. The effective tax rates exceeded the statutory
federal income tax rate primarily due to the impact of state income taxes and
nondeductible expenses.
Minority Interest
Minority interest income in the third quarter of 2001 represents the
minority investors' share of losses in our majority-owned subsidiaries. Minority
interest expense in the third quarter of 2000 primarily represents accretion of
Thermo Fibergen's common stock subject to redemption, offset in part by the
minority investor's share of losses in Thermo Fibergen's Kadant Composites
subsidiary.
Contingency
Sequa Corporation has made a claim in arbitration against us for $3.5
million for alleged breach of the contract pursuant to which Sequa purchased the
stock of our subsidiary, Thermo Wisconsin Inc., in February 1999. We have denied
the charges and are defending the matter vigorously. Arbitration proceedings
related to this claim were held in October 2001, and the Company is currently
awaiting a decision. In the opinion of management, the ultimate resolution of
this matter will not materially affect our financial statements.
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KADANT INC.
First Nine Months 2001 Compared With First Nine Months 2000
- -----------------------------------------------------------
Revenues
Revenues decreased to $171.7 million in the first nine months of 2001 from
$176.8 million in the first nine months of 2000. The unfavorable effects of
currency translation due to the strengthening in value of the U.S. dollar
relative to other currencies in countries in which we operate decreased revenues
at the Papermaking Equipment segment by $4.2 million in the first nine months of
2001.
Pulp and Papermaking Equipment and Systems Segment. Excluding the results
of acquisitions and the effect of currency translation, revenues in our
Papermaking Equipment segment decreased $1.8 million, or 1%. Revenues from that
segment's accessories and water management product lines decreased $3.9 million
and $1.1 million, respectively, primarily as a result of a decrease in demand in
North America due to adverse market conditions. Revenues from the Papermaking
Equipment segment's stock-preparation equipment product line increased $3.6
million primarily as a result of increases in sales in Europe and export sales
to China, offset in part by a decrease in sales in North America.
Composite and Fiber-based Products Segment. The Composite and Fiber-based
Products segment revenues increased $0.1 million, primarily due to a $1.4
million increase in sales from its recently introduced composite building
products. This increase was largely offset by a $1.0 million decrease in
revenues as a result of the sale of the fiber-recovery and water-clarification
services plant in September 2000, and to a lesser extent, a $0.3 million
decrease in revenues at its fiber-based products business primarily due to a
decrease in demand from two of its largest agricultural carrier customers,
offset in part by a net increase in demand from other customers.
Gross Profit Margin
The gross profit margin decreased to 37% in the first nine months of 2001
from 38% in the first nine months of 2000. The gross profit margin decreased at
the Composite and Fiber-based Products segment due to an increase of
approximately $0.6 million in the cost of natural gas used in the production
process and, to a lesser extent, under-absorbed manufacturing overhead as a
result of lower revenues and production at the fiber-based products business in
2001. In addition, the gross margin decreased in that segment due to increased
negative gross margins as a result of startup efforts at its new composite
building products business and the absence in 2001 of higher-margin revenues
from the fiber-recovery and water-clarification services plant. The gross profit
margin was unchanged at 39% at the Papermaking Equipment segment in the first
nine months of 2001 and 2000.
Other Operating Expenses
Selling, general, and administrative expenses as a percentage of revenues
remained unchanged at 26% in the first nine months of 2001 and 2000. Selling,
general, and administrative expenses decreased to $45.1 million in 2001 from
$46.0 million in 2000 primarily due to the effects of foreign currency
translation.
Research and development expenses decreased slightly to $5.3 million in
the first nine months of 2001 compared with $5.8 million in the first nine
months of 2000, primarily at the Papermaking Equipment segment.
Restructuring Costs
During the third quarter of 2001, the Company recorded restructuring costs
of $0.6 million for severance costs relating to 52 employees primarily in the
manufacturing and sales functions at the Papermaking Equipment segment's
domestic subsidiaries, all of whom were terminated by September 29, 2001. These
actions were taken in an effort to improve profitability and were in response to
a continued weak market environment (Note 16).
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KADANT INC.
First Nine Months 2001 Compared With First Nine Months 2000 (continued)
- -----------------------------------------------------------
Gain on Sale of Property and Business
In June 2000, the Company sold its interest in a tissue mill for $3.9
million in cash, resulting in a pretax gain of $1.0 million.
In September 2000, the Company sold its interest in a fiber-recovery and
water clarification services plant for $3.6 million, resulting in a pretax gain
of $0.7 million.
Operating Income
Operating income decreased to $13.0 million in first nine months of 2001
from $17.9 million in the first nine months of 2000. Excluding restructuring
costs in 2001, operating income decreased to $20.7 million from $21.2 million, a
decrease of 2%, at the Papermaking Equipment segment. Excluding restructuring
costs in 2001 and gain on the sale of property in 2000, operating losses
increased to $4.4 million in 2001 from $2.1 million in 2000 at the Composite and
Fiber-based Products segment. Operating losses from the composite building
products business were $3.0 million and $1.4 million in the first nine months of
2001 and 2000, respectively.
Interest Income and Expense
Interest income decreased to $5.5 million in the first nine months of 2001
from $8.1 million in the first nine months of 2000. Of the total decrease in
interest income in 2001, approximately $1.6 million was due to lower prevailing
interest rates and $0.9 million was due to lower average invested balances.
Interest expense was unchanged at $5.6 million in the first nine months of 2001
and 2000.
Income Taxes
The effective tax rate was 42% in the first nine months of 2001 and 40% in
the first nine months of 2000. The effective tax rates exceeded the statutory
federal income tax rate primarily due to the impact of state income taxes and
nondeductible expenses.
Minority Interest
Minority interest income in the first nine months of 2001 represents the
minority investors' share of losses in our majority-owned subsidiaries. Minority
interest expense in the first nine months of 2000 primarily represents accretion
of Thermo Fibergen's common stock subject to redemption, offset in part by the
minority investor's share of losses in Thermo Fibergen's Kadant Composites
subsidiary.
Cumulative Effect of Change in Accounting Principle
In accordance with the requirements of Securities and Exchange Commission
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements,"
we adopted the pronouncement as of January 2, 2000, and recorded a charge in the
first quarter of 2000 representing the cumulative effect of the change in
accounting principle of $0.9 million, net of an income tax benefit of $0.6
million.
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KADANT INC.
Liquidity and Capital Resources
Consolidated working capital was $187.8 million at September 29, 2001,
compared with $173.1 million at December 30, 2000. Included in working capital
are cash, cash equivalents, and available-for-sale investments of $164.2 million
at September 29, 2001, compared with $148.6 million at December 30, 2000. In
addition, we had $5.7 million invested in an advance to an affiliate as of
December 30, 2000. Of the total cash, cash equivalents, and available-for-sale
investments at September 29, 2001, $16.2 million and $7.4 million was held by
our majority-owned Thermo Fibergen and Fiberprep Inc. subsidiaries,
respectively, and the remainder was held by us and our wholly owned
subsidiaries. At September 29, 2001, $51.4 million of our cash, cash
equivalents, and available-for-sale investments was held by our foreign
subsidiaries.
During the first nine months of 2001, cash of $9.9 million was provided by
operating activities compared with $16.0 million in the first nine months of
2000. A decrease in accounts receivable provided cash of $4.0 million, primarily
at the Papermaking Equipment segment due to improved collection efforts and the
timing of payments, and to a lesser extent, our overall decrease in revenues. An
increase in inventories and unbilled contract costs and fees used cash of $6.4
million, primarily at the Papermaking Equipment segment, including $3.7 million
related to an increase in work in process inventories, and $2.7 million related
to an increase in unbilled contract costs and fees due to the timing of
billings. Cash of $4.0 million was used for an increase in other current assets,
including an increase of $1.5 million in the deferred tax asset at the Composite
and Fiber-based Products segment. An increase in accounts payable provided $2.0
million of cash primarily in the Papermaking Equipment segment due to the timing
of payments.
Our investing activities, excluding available-for-sale investments and
advance to affiliate activity, used $1.9 million of cash in the first nine
months of 2001, compared with $4.1 million in the first nine months of 2000.
During the first nine months of 2001, we purchased property, plant, and
equipment for $3.8 million, including $2.6 million at Thermo Fibergen, offset in
part by the collection of $1.8 million from a note receivable related to Thermo
Fibergen's September 2000 sale of its fiber-recovery and water-clarification
systems plant.
Our financing activities provided cash of $0.7 million in the first nine
months of 2001, compared with $0.6 million in the first nine months of 2000.
During the first nine months of 2001, we used $0.5 million to fund the repayment
of a long-term obligation and $0.6 million to fund the purchase of our common
stock, offset in part by $0.5 million of cash provided by the issuance of our
common stock and subsidiary common stock through the exercise of stock options.
In September 2001, our board of directors authorized the repurchase, through
September 24, 2002, of up to $50 million of our debt and equity securities in
the open market, or in negotiated transactions. As of September 29, 2001, we had
$49.4 million remaining under this authorization. In addition, during the third
quarter of 2001, cash of $1.3 million was provided by a transfer of cash and
associated liability from Thermo Electron in connection with the spin off.
During the month of September 2000, the initial redemption period, holders
of Thermo Fibergen's common stock and common stock redemption rights surrendered
2,713,951 shares of Thermo Fibergen's common stock at a redemption price of
$12.75 per share, for a total of $34.6 million. In October 2000, Thermo Fibergen
used available working capital to fund the payment and retired these shares
immediately following the redemption. During the period from September 1, 2001
through October 11, 2001, holders of Thermo Fibergen common stock and common
stock redemption rights surrendered 1,030,562 shares of Thermo Fibergen common
stock at a redemption price of $12.75 per share in the final redemption period
for the common stock redemption rights. Common stock redemption rights amounting
to 970,487 were not surrendered for redemption by October 11, 2001, have
expired, and are no longer listed for trading on the American Stock Exchange. In
October 2001, Thermo Fibergen remitted $13.1 million for the surrendered shares,
using a combination of available working capital and a $6,000,000 loan from us
to fund the redemption payment. The accrued liability for the payment is
included in common stock of subsidiary subject to redemption in the September
29, 2001 balance sheet. Following the final redemption period, 10,522,087 shares
of Thermo Fibergen common stock remain outstanding, including 10,407,600 shares
held by us and 114,487 shares held by shareholders other than us.
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KADANT INC.
Liquidity and Capital Resources (continued)
In November 2001, we announced that we would acquire all of the
outstanding shares of Thermo Fibergen's common stock held by shareholders other
than us in exchange for $12.75 per share in cash, without interest. As a result,
Thermo Fibergen will become our wholly owned subsidiary. The proposed
transaction will require Securities and Exchange Commission clearance of certain
necessary filings, but will not require Thermo Fibergen board or shareholder
approval. This transaction is expected to be completed during the fourth quarter
of 2001.
At September 29, 2001, we had $78.6 million of undistributed foreign
earnings that could be subject to tax if remitted to the U.S. We do not
currently intend to repatriate undistributed foreign earnings into the U.S., and
do not expect that this will have a material adverse effect on our current
liquidity.
In compliance with the IRS ruling on the spin off, we intend to issue
equity in the range of 10 to 20 percent of our outstanding common stock within
one year of the distribution to support our current business plan, which
includes the repayment of debt, acquisitions, strategic partnerships and
investment in additional capacity for our composite building products business
(Note 8).
Our net debt (calculated as total short- and long-term debt and common
stock of subsidiary subject to redemption, less cash, cash equivalents, advance
to affiliate, and available-for-sale investments) was $5.4 million at September
29, 2001, compared with $17.9 million at December 30, 2000.
During the remainder of 2001, we plan to make expenditures for property,
plant, and equipment of approximately $1.3 million. Included in this amount is
$0.9 million for Thermo Fibergen, which intends to make capital expenditures to
develop and expand its composite building products business. Our ability to use
our cash and to incur additional debt will be limited by financial covenants in
our distribution agreement with Thermo Electron (Note 10). These financial
covenants require (1) the ratio of our net indebtedness to net capitalization
not to exceed 40% and (2) on a rolling four quarter basis, the sum of our (a)
operating income (excluding restructuring and other unusual items, such as gains
on sales of assets, included in operating income), (b) amortization of goodwill
and other intangible assets, and (c) interest income, to be at least four times
greater than interest expense. We are in compliance with all the financial
covenants of the agreement. We believe that our existing resources are
sufficient to meet the capital requirements of our existing operations for the
foreseeable future.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Our exposure to market risk from changes in interest rates, equity prices,
and foreign currency exchange rates has not changed materially from our exposure
at year-end 2000.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
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(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
On July 12, 2001, the Company filed a Current Report on Form 8-K with
respect to the spin off of the Company from Thermo Electron Corporation,
including a preliminary information statement.
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KADANT INC.
Item 6 - Exhibits and Reports on Form 8-K (continued)
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On July 17, 2001, the Company filed a Current Report on Form 8-K with
respect to the Company's Shareholder Rights Plan.
On July 20, 2001, the Company filed a Current Report on Form 8-K with
respect to the Company's financial results for the quarter ended June 30, 2001.
On August 6, 2001, the Company filed a Current Report on Form 8-K with
respect to the spin off of the Company from Thermo Electron Corporation,
including a definitive information statement.
On August 9, 2001, the Company filed a Current Report on Form 8-K with
respect to the completion of the spin off of the Company from Thermo Electron
Corporation.
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KADANT INC.
SIGNATURES
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 9th day of November 2001.
KADANT INC.
/s/ Thomas M. O'Brien
--------------------------------------------
Thomas M. O'Brien
Executive Vice President and Chief Financial and
Accounting Officer
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KADANT INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
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10 Amended and Restated Equity Incentive Plan.
99 Press Release dated November 9, 2001.